217 Cal. App. 4th 784, 2013 Cal. App. LEXIS 522 (June 13, 2013)

The Court of Appeal (Fourth District, Division Three) affirmed a Commission Decision with regard to expenses related to Federal income tax of a regulated pipeline corporation. The pipeline, a limited partnership, had sought to recover income tax expenses in rates notwithstanding the fact that the partnership itself paid no income tax; the tax was paid by the pipeline’s upstream owners, the individual partners.  The ratemaking treatment sought by the pipeline was consistent with that employed by the Federal Energy Regulatory Commission (“FERC”) as well as many states.  Indeed, the Commission itself had allowed income tax expenses for limited partnerships noting that the Commission’s customary practice was to calculate income tax liability on a stand-alone basis.  The Court, however, elected to treat the decision to disallow federal income tax expense as one of “policy choice” and stated that in the event SFPP disagreed, it should seek a remedy with the Legislature.  The Court also rejected SFPP’s challenge to the Commission’s adoption of a return on equity lower than that sought by SFPP.  Reviewing the customary standards for return on equity (set by the U.S. Supreme Court 90 years ago) the Court again found that the Commission possessed broad discretion in the area and found that the Commission had not “abused its discretion” in concluding that a rate of return of 12.8% was appropriate.  The Supreme Court denied review.  As noted in Para 66, the issue of how tax benefits are to be passed on to ratepayers is again before the Commission through two pending applications for rehearing addressing the propriety of imputing income taxes for Sub-Chapter S utilities and partnerships.

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