6. Domestic Production Activity Deduction

Federal tax law allows qualified taxpayers an economic stimulus deduction as a part of the American Jobs Creation Act of 2004. We find below that Suburban as a stand-alone tax payer would be eligible for the deduction when calculating its federal income tax expense in this rate case and therefore we include this deduction in calculating the adopted 2012 test year revenue requirement.

6.1. Suburban's Position

Suburban does not include the deduction arguing that the consolidated federal income tax return filed by its parent company does not qualify for the deduction. It does not dispute that on its own, it would qualify. Suburban argues that in its last general rate case the Commission did not include this deduction because Suburban's parent was operating at a consolidated loss and was therefore ineligible. Suburban also argues that the Commission found in that decision, D.09-03-007, (rehearing denied in D.10-04-053) Suburban did not have to include a deduction which its parent company could not use in a consolidated return. (Suburban (Sub) Opening Brief at 4 -5.)

6.2. DRA's Position

DRA argues that D.09-03-007 is incorrect: the proper ratemaking practice for all industries regulated by this Commission is to treat the utility's tax position as a stand-alone entity for ratemaking purposes regardless of the profits or losses encountered on a consolidated return from affiliated companies. DRA argues that the continued poor performance of Suburban's parent is not the concern of California ratepayers, and the ratepayers should not therefore be burdened by the loss of the deduction. DRA cites to a long-standing decision, D.84-05-036, as supporting the policy of stand-alone rate making treatment. (DRA Opening Brief at 6-7.)

6.3. Discussion

The Commission generally follows its own decisions but is not strictly bound to precedent: this is apparent when we see D.09-03-007 depart from D.84-05-036,⁴ by not using a tax deduction Suburban could qualify for on its own, but is then lost to the consolidated filer.

In D.84-05-036 the Commission made the two following Findings of Fact:

1. The current practice in the development of income taxes for rate fixing is to exclude as a tax deduction the interest expense associated with nonutility plant and investment.

12. It is the practice of the Commission, in calculating test-year income tax expenses, to assume a separate return basis considering solely utility operations.

The same decision reached Conclusion of Law No. 3:

The separate return method is the more reasonable basis for calculating test-year income tax expense.

The reason for treating the utility as a stand-alone taxpayer is to ensure that ratepayers are not harmed nor benefited by the tax position of unregulated affiliates. For example, in this proceeding, Suburban does not propose to pass along any share of the parent's tax loss to otherwise offset the tax allowance it seeks to impose on California ratepayers. Under Suburban's approach, California ratepayers would have the disadvantages but none of the advantages of treating Suburban's tax expenses on a consolidated basis. If we logically and fully apply taxes for ratemaking on a consolidated basis Suburban would have to show whether the parent company incurred any actual federal tax expense, or had a loss, in its consolidated filing and Suburban would have to allocate that expense or loss across all affiliates. Suburban chose not to do that. Instead, Suburban cherry-picked a ratemaking proposal which includes a pro forma allowance for federal taxes, but deliberately excludes a deduction which would lower that allowance. Suburban did so only because its parent's consolidated federal tax return is not eligible for the deduction, not because Suburban is not eligible on its own.

We find now it would be wrong to continue to follow D.09-03-007 because to do so here would unreasonably impose an excessive tax burden on ratepayers as if Suburban actually paid the federal government the full ratemaking allowance. Suburban fails to include all deductions to minimize the ratemaking tax obligation. Suburban cannot pick and chose to recover taxes in a way that maximizes cash flow to its parent without regard to the allowances that otherwise reduce the tax expense imposed on ratepayers.

⁴ D.84-05-036 is the Commission's seminal decision on the ratemaking treatment of federal income taxes. No subsequent decision has ever displaced it as the overarching statement on tax policy. (1984 Cal. PUC LEXIS 1325, *; 15 CPUC2d 42.)