New England Telephone Co. can enjoy the benefits of accelerated tax depreciation in seeking rate increases from customers in Maine, the Maine Supreme Court ruled this week.
In a 150-page opinion, the state's highest court decided that the Public Utility Commission had acted arbitrarily in a tax ruling. The Maine PUC disallowed as a legitimate expense for rate-making purposes federal income taxes deferred for the phone company's use of accelerated depreciation, ordering straight-line depreciation instead. This placed the telephone company in jeopardy of losing the right to take such accelerated depreciation, the court said.
The court found the adjustment contrary to the national economic policy established by Congress.
The New England Telephone Co. sought a $21 million rate increase from Maine customers in 1974 but was granted a $9 million increase by the PUC. The phone company appealed and the Supreme Court in 1976 or- [TEXT OMMITTED FROM SOURCE]
On Sept. 10, 1976, the phone company filed for a $27 million increase. The commission consolidated both applications and, following lengthy hearings, determined last June 10 that the phone company not only was not entitled to an increase but should decrease its annual revenues by $1.9 million. The phone company thereupon appealed.
In addition to ruling that PUC was in error in deciding that the phone company must use straight-line rather than accelerated depreciation in rate making, the court also ruled that the commission was in error when it reduced the phone company's rate of return to account for "double leverage."
The commission found that, because 36 percent of New England Telephone Co. stock is owned by American Telephone and Telegraph Co., its rate of return should be reduced to reflect this ownership. The court disallowed this ruling, however, and said the commission failed to take into account the effect of the double-leverage adjustment upon the 14 percent of New England Telephone stock owned by the general public.
Double leveraging occurs when a parent company (in this case, AT&T) uses debt which has a relatively low cost to purchase the common stock of its subsidiary upon which it expects a higher rate of return than it must pay to its debt creditors. This allows the parent's stockholders to earn a greater return than if they had invested directly in the subsidiary because their investment in the subsidiary's stock is leveraged by low-cost debt.
The court upheld the PUC in allocating a portion of the interest paid by the Consolidated Bell System on debt owned by AT&T and determined that New England Telephone Co.'s cost of debt is 6.99 percent. It also upheld the PUC when it disallowed as an expense chargeable to phone users the company's charitable contributions and lobbying expenditures.
Telephone company officials said they anticipate they will be permitted a $9 million rate increase based upon provisions of the court's decision.