Gulf State Utilities Corporation applied to the Louisiana Public Service Commission for an increase in its electric rates. By these proceedings, Gulf States seeks judicial review of the regulatory agency’s denial of its application. The district court essentially affirmed the Commission’s ruling, although (after a remand to fix the amount) it ordered the Commission to allow an additional $1,253,000 increase in rates to allow for the increase in expenses due to inflation subsequent to the 1975 test year.
Gulf States appeals, urging three principal errors. The Commission answers the appeal, praying that this court disallow the “attrition adjustment” ordered by the district court. Certain industrial firms (“Stauffer” et al.), which had intervened both before the Commission and the district court in support of the denial of a rate increase, likewise answered the appeal to request certain ancillary relief in the event that any rate increase is authorized.
We will discuss below the respective contentions of (I) Gulf States, (II) the Commission, and (III) the intervenors.
Preliminarily, however, we deem it appropriate to reiterate once again the standard of judicial review of determinations of the regulatory commission with regard to rate applications by utilities. As recently summarized by us in South Central Bell Telephone Company v. Louisiana Public Service Comm’n., 352 So.2d 964 (La.1977), the principles of judicial review applicable are, 352 So.2d 968-69 (omitting the extensive citation of authority):
In reviewing the rate-making process the inquiry of the judiciary is generally confined to a determination of whether the regulatory agency acted unreasonably or arbitrarily in establishing rates for the utility. * * * The United States Supreme Court, in assessing the Federal Power Commission’s performance of its statutory duty to fix “just and reasonable” rates, elaborated on this principle:
“ * * * If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end. The fact that the method employed to reach that result may contain infirmities is not then important. Moreover, the Commission’s order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate *1268order under the Act carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences. * * * ” Id. [Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944)] 320 U.S. at 602, 64 S.Ct. at 288.
The Louisiana Public Service Commission is authorized to fix “just and reasonable” rates to be charged by public utilities. La.R.S. 45:1176. In Louisiana rate cases this Court has articulated various descriptions of its role in reviewing the regulatory determinations of the public service commission. We have said the orders of the Commission are entitled to great weight and are not to be overturned unless shown to be arbitrary, capricious or abusive of its authority; * * * ; that courts should act slowly in substituting their views for those of the expert body charged with the legislative function of rate making, and should not disturb the Commission’s decision in the absence of a clear showing of an abuse of power; * * * ; that Commission decisions will not be disturbed unless found to be clearly erroneous or unsupported by evidence. * * *.
The Facts
Based upon a 1975 test year, the utility applied for an increase in its electric rates to produce additional revenues of $23,750,-000. After extensive hearings, the Commission denied any electric rate increase.
In so doing, the Commission found: The rates were to be determined on the basis of (a) a rate base (the total amount of investment in a utility employed in providing its service) of $697,296,000; and (b) a net operating income of Gulf States for the test year calculated at $55,651,000.
Based upon these figures, the Commission found that the utility enjoyed a “rate of return” (the ratio of return to rate base) of 9.15 per cent, which resulted in a return on the investor’s equity of 13.84 per cent.
For reasons that are supported by the record, in rejecting higher figures contended for by the utility,1 the Commission found that a range of return on equity of 10.5 to 11.5 per cent would be within a reasonable range sufficient to maintain the utility’s financial integrity, to attract capital, and to compensate its investors for the risks assumed, as required under accepted rate-regulation principles. Hope Natural Gas, cited above, at 320 U.S. 605, 64 S.Ct. 289; South Central Bell (1977), cited above, at 352 So.2d 967. The Commission indicated that, with the “cost” of (fair and reasonable return on) equity determined at 10.5-11.5%, a rate of return of 8.7% of the rate base would be a fair and reasonable rate of return, i.e., one sufficient to cover expenses, service debt, and provide the 10.5-11.5% return on the investor’s equity.
Therefore — since under existing rates the revenues produced by the rate of return resulted in return of 13.84 per cent on equity, or in excess of that deemed necessary to maintain the utility’s financial integrity-— the Commission denied Gulf State’s application for a rate increase.
I. Gulf States’ Contentions
As we apprehend Gulf States’ position, it principally argues that the “net operating income” computed by the Commission for the test year should have been lower. (A lower income figure for the test year would necessitate additional revenues to be gener*1269ated by a rate increase in order to produce the 8.7% rate of return on the rate base deemed to be the fair rate required.)
In this regard, Gulf States principally contends:
(A) The allowance as capitalized “income” of amount for funds devoted to construction work in progress (AFUDC) had the effect of adding the sum of $13,519,000 as “phantom” income, thus fictitiously decreasing the need for additional revenues to produce the 8.7% fair rate of return required. Gulf States suggests that, instead, the AFUDC “income” entry should be capitalized at $7.7 million, and that actual revenues should be provided by a rate increase so as to assure the utility a fair rate of return.
(B) The “expense” items for state and federal income taxes should have been increased by $2,242,000 by permitting the utility to show its tax liability for the year in question by the accepted accounting method of the “normalization” of income. This would necessitate a rate increase to provide revenues to balance this additional expense item.
Gulf States further argues, more comprehensively:
(C) That the net effect or end result of the Commission’s various rulings on these and other issues is that, in cumulation, insufficient present revenues are allowed to the utility for it to maintain its financial integrity and to attract the immense capital funds (estimated at $650,000,000 during 1977-78 alone) necessary for it to convert to fuel oil, coal, and nuclear generating facilities, due to the energy crisis presented by the unavailability in the future of natural gas. The utility further suggests that the fictitious “income” figure of $13,519,000 AFUDC (or at least that in excess of $7.7 million suggested as appropriate by the utility) has resulted in a cash flow crisis, by which the utility is forced to borrow money to pay dividends to its stockholders.
These contentions will be discussed under subheadings A, B, and C of this part (I) of this opinion.
A. Issues Related to the Allowance in “Income” of a Return for Funds Devoted to Work in Progress (“AFUDC”, see below).
A general rule of utility regulation is that ratepayer-consumers should only pay the utility company a fair return on facilities and capital actually used and useable for production of service to these ratepayers. Under this principle, the utility has not usually been permitted in the past to include in its rate base, or to expense, the cost of construction work in progress (“CWIP”). (However, when the new construction is placed in service, the utility is entitled to earn a fair rate of return on and recover through depreciation (from then current ratepayers) all of its capital expenditures so incurred, including the cost of capital.)
Arguably, however, the cost of such construction represents an expenditure for the ultimate benefit of present consumers, so that charging them in current rates for such costs is not unreasonable, especially insofar as the expenditures are for pollution-control or other social reasons not directly resulting from the intention to increase revenues. A minority of regulatory commissions do adopt this approach urged upon us by Gulf States. Gulf States strongly contends that, with the huge capital demands occasioned by the enormously expensive cost of converting generation facilities to nuclear and other sources of energy, this previously minority approach is the only fair one under the present energy-crisis conditions.
The issue is not, however, what accounting approach seems most reasonable to the courts upon judicial review. It is, rather, whether the regulatory commission has adopted an unreasonable or arbitrary approach which prevents the utility company from receiving a fair return upon its investment. See South Central Bell (1977) quoted at length above, and authorities cited therein.
A substantial number, probably a majority, of regulatory commissions do not permit *1270the utilities to recover from present consumers the present cost of construction work in progress (CWIP) of facilities which will be devoted to the service of future consumers. In a number of American jurisdictions, the courts have upheld the actions of some of these regulatory commissions in completely excluding CWIP from the rate base.2
Yet others of these regulatory commissions (i.e., those which do not require present consumers to pay for CWIP for future plant) follow, as does the Louisiana Public Service Commission, the widely accepted practice of permitting the utility to include CWIP in its rate base for purposes of calculating the rate of return, yet making an adjustment to income (“AFUDC”, or Allowance for Funds Used During Construction) to offset the inclusion of CWIP in income.3
In the present case, for instance, the Commission permitted the utility to include within its rate base of $608,296,000 the sum of $155,395,000 of CWIP. The allowable 8.7 per cent fair rate of return upon this figure would require a return of $13,519,000 in additional revenues occasioned by the inclusion of CWIP in the rate base. To offset the inclusion of CWIP in the rate base (and thus to prevent present ratepayers from being charged for future plant not yet in service), the Commission calculated the offsetting AFUDC in the income column at the same figure — i.e., $13,519,000, or 8.7% of the CWIP allowed in the rate base column.4 This also approximates the 8.6% present interest-cost of acquiring capital by the issuance of bonds to accomplish the construction work, see Tr. 1758.
Gulf States does not contest in principle the allowance in question (AFUDC), but only the inclusion of $2,002,000 of it as occasioned by construction work in progress related to non-revenue producing mandatory pollution control facilities — which (as a social requirement for both present and future ratepayers) should, the utility argues, be expensed and charged to current ratepayers, instead of being capitalized and added to the rate base only after the construction work is completed (at which time only the ratepayers whom the facilities are actually serving will pay for them). The *1271utility also contends that the Commission arbitrarily used the rate of return of 8.7% upon such funds (as fictitious income) instead of 7.5%, the rate previously used by the Commission; using this lower percentage would additionally reduce the AFUDC “income” by $1,864,000.
Considering the purposes of AFUDC to compensate for the inclusion of CWIP in the rate base — as well as the widely if not universally accepted regulatory principle that regulatory commissions may within their discretion prevent the utilities from charging present ratepayers for the cost of CWIP for plant not yet in service — it seems apparent that the Commission did not act arbitrarily in its treatment of the CWIP-AFUDC issue. In accordance with accepted principles applicable within its discretion, it did not require present ratepayers to pay for plant not yet in use (whether constructed for pollution-control or for other purpose). Further, it was not arbitrary in calculating AFUDC based on the present cost of capital and fair rate of return of 8.7%, rather than on the basis of the 7.5% allowed as to this utility in the past based on the cost and return allowable in the past under the then -current market conditions.
Ultimately, the issue is one of regulatory policy within the constitutional choice of the Commission and not of the courts. As the Commission stated, in explaining its choice (made accordingly to widely accepted regulatory principles), Tr. 1740:
“The question of whether to capitalize AFUDC, which represents the capital costs associated with CWIP, then, is philosophical in nature: should a present-day ratepayer be required to pay for all or part of the capital costs associated with a plant not used or useful to him, or should these costs be capitalized and depreciated later, which has the effect of passing those costs along to future ratepayers who will actually use that plant? The principle of capitalizing AFUDC reflects the latter type of treatment.
“The Commission believes that it is appropriate to adhere to the accepted regulatory principle that ratepayers should pay only for that plant which presently benefits them. Future ratepayers will benefit from construction work in progress and from the capital costs associated with this construction. In the absence of special circumstances, these costs should be deferred until the plant is in service and recouped by the company at that time; therefore, capitalization of AFUDC is appropriate.”
B. “Normalization” of Income Tax Liability
Gulf States contends that the Commission was arbitrary in refusing to allow it to use, for rate-making purposes, an accepted accounting procedure which “normalizes” (i.e., hypothesizes tax liability as if incurred on such a basis) tax liability in accordance with straight-line depreciation of the utility’s property. Instead, the Commission required the utility to show as an expense the lesser tax liability which actually resulted from the utility’s actual use, for tax purposes, of the accelerated depreciation of capital items permitted by tax regulation to lessen the actual tax liability for the period in question.
What Gulf States proposed to do — and was overruled by the Commission — was to take the accelerated depreciation for tax purposes (thus decreasing the actual taxes paid), but to charge ratepayers by including only normal depreciation in the expenses for purposes of calculating net income — as if it had paid greater taxes on this latter basis. Again, we have a choice of policy by the regulatory Commission which is in accord with the practice of a number of other regulatory agencies and which does not appear to be an unreasonable choice of accounting method for rate-making purposes. See'Appendix 1, for full quotation from the Commission’s reasons in its order.
Under accepted principles of judicial review of regulatory agency determinations within its expertise and constitutionally entrusted to its authority, we cannot set aside the Commission’s determination as unreasonable or arbitrary.
*1272C. The “End Result” of Commission Order Allegedly Fails to Take into Account the Deteriorating Financial Condition of the Utility and its Necessity for a Rate Increase to Maintain its Financial Integrity.
More comprehensively, Gulf States argues that, whatever the individual merits of the Commission’s various rulings, in cumulation they did not produce as an end result a fair and equitable rate of return. It cites the principle enunciated by the United States Supreme Court, In re Permian Basin Rate Cases, 390 U.S. 747, 791-92, 88 S.Ct. 1344, 1372-73, 20 L.Ed.2d 312 (1968):
“The Commission cannot confine its inquiries either to the computation of costs of service or to conjectures about the prospective responses of the capital market; it is instead obliged at each step of its regulatory process to assess the requirements of the broad public interests entrusted to its protection by Congress. Accordingly, the ‘end result’ of the Commission’s orders must be measured as much by the success with which they protect those interests as by the effectiveness with which they ‘maintain * * * credit and * * * attract capital.’
“It follows that the responsibilities of a reviewing court are essentially three. First, it must determine whether the Commission’s order, viewed in light of the relevant facts and of the Commission’s broad regulatory duties, abused or exceeded its authority. Second, the court must examine the manner in which the Commission has employed the methods of regulation which it has itself selected, and must decide whether each of the order’s essential elements is supported by substantial evidence. Third, the court must determine whether the order may reasonably be expected to maintain financial integrity, attract necessary capital, and fairly compensate investors for the risks they have assumed, and yet provide appropriate protection to the relevant public interests, both existing and foreseeable. The court’s responsibility is not to supplant the Commission’s balance of these interests with one more nearly to its liking, but instead to assure itself that the Commission has given reasoned consideration to each of the pertinent factors.” (Italics supplied by us.)
Gulf States argues that, unless a rate increase is ordered, it cannot perform its legal obligation to provide reliable electric service to meet the future needs of Louisiana consumers. Due to the energy crisis and the shortage and approaching unavailability of natural gas supplies, the utility must convert its generating facilities to those fueled by heavy oil, coal, and nuclear power — far more expensive generating facilities than needed under past conditions, requiring much longer construction periods (and thus tying up much greater proportions of capital, upon which no revenues may be generated through utility rates) than in the past.
In brief, the utility points out: “In order to fulfill that obligation, and based upon conservative projections of future demand growth, the Company has had to undertake a construction program that will require the raising of $1.6 billion over the next 5 to 6 years. This monumental capital undertaking, which is an amount equal to the total assets of this 50 year-old company, translates into external financing of $950,000,000 through the sale of long-term debt, preferred stock, and common stock, with the remaining $650,000,000 of funds to be internally generated through depreciation, retained earnings, and deferred taxes.”
Gulf States points out a number of indi-cia of its deteriorating financial condition. See Appendix 2 for listing. It argues that it is in a “cash flow crisis” (instanced, for example, allegedly by the utility’s necessity to borrow funds to pay dividends), largely resulting from the immense construction in progress required to provide for future needs — and resulting also from the allowance as “phantom” income of AFUDC credits to decrease rate-generated revenues to an extent and in a proportion unimaginable under past social conditions.
Gulf States forcefully argues that, because of these factors, its deteriorating fi*1273nancial position will make it impossible for it to attract the equity investors and bond-buyers necessary to raise the huge amount of capital outlay immediately required in order for Gulf States to provide for the future needs of Louisiana consumers of electricity.
Forceful as these arguments are, neither the present record nor the statistics concerning other utilities indicate that Gulf States is in any immediate financial crisis or that in the immediate future it will have difficulty in raising funds needed for the capital outlay necessary to construct the generating facilities required. Gulf State’s financial condition, while perhaps less strong than formerly, is not shown to have suffered adverse effects not comparable to those experienced by similar utilities under the conditions of energy crisis and inflation of the Seventies.
Gulf States, for instance, still enjoys an AA bond rating, enabling it and the minority of other electric utilities so rated to borrow money at a lower rate (the record shows 8.6% for the test year) than the other 73 electric utilities with a lower rating. Under analysis, the claim that Gulf States had to borrow money to pay its dividends is unimpressively based on the circumstance that the company’s borrowing, during the test year that the amount of dividends were paid, exceeded the net “income” (or cost of (return on) equity) allocable for rate-making purposes for that purpose. This condition, however, was shared by 22 of the 40 comparable electric utilities.
The argument fails to take into consideration that, for rate-making purposes, many non-cash items (available in fact for distribution as dividends) are likewise treated as an “expense” item, in determining the fair rate of return on the rate base. The return on equity allowed as a cost in computing net operating income for rate-making purposes, being the amount necessary to attract new capital and to compensate present investors fairly, does not necessarily coincide with the actual dividends paid, which may additionally be based upon profits reflected (for rate-making purposes) as non-cash “expensed” items or from past profits. The borrowing of the utility during the year was no more for the purpose of paying dividends than it was for the purpose of paying wages; indeed, the sums were simply borrowed in the ordinary course of the utility’s business, in accordance with customary practices of other utilities and large corporations.
The Commission found that during the test year Gulf States enjoyed a rate of return of 9.15% on its rate base and a return of 13.84% on equity, at rates more than sufficient to attract the capital needed for expansion.5 These findings are supported by the record, under the Commission’s reasonable evaluation of the evidence. We find no reason to disturb these findings, under accepted principles of judicial review of a regulatory agency’s determinations.
In so holding, we note the Commission’s concern, see Tr. 1744, 1759, and our own, over the large construction outlays required of Gulf States and that these outlays may, at some point in the future, require the Commission to reevaluate its traditional treatment of Construction Work in Progress (CWIP) and Allowance for Funds Used During Construction (AFUDC), so as to require present consumers to pay at least a portion of such costs. Ultimately, we are *1274unable under the present record to find that the Commission was unreasonable or arbitrary in its determination that such point in time has not yet been reached.
II. The Commission’s Answer to the Appeal: An “Attrition” Adjustment
A regulatory lag occurs between the time a utility applies for a rate increase and the time the rate application is finally determined. This lag may cause an attrition in the actual rate of return, after the test year. This may be caused by a growth in the utility’s rate base or in its operating expenses (such as increases in expenses due to inflation), or both, by reason of which insufficient revenues are produced to accord the utility the fair rate of return to which the- regulatory agency’s order entitles it. An “attrition adjustment” is sometimes made, when the evidence so justifies, to allow rates imposed to take this attrition factor into consideration.
On its initial hearing, the district court in which judicial review was sought remanded the proceeding to the Commission to determine an attrition adjustment predicated on the rate of inflation on operation and maintenance expenses. Applying the 11.1% inflation that had occurred in 1976 and 1977 (i.e., following the 1975 test year), the Commission determined that, under the district court’s ruling, the attrition adjustment should be $1,253,000.6
However, the Commission pointed out several reasons why an attrition adjustment was inappropriate under the facts of this case.
Nevertheless, the district court ordered a rate increase in the amount of $1,253,000, in order to effectuate this attrition adjustment.
By answer to the appeal, the Commission prays that this court disallow the rate increase for an attrition adjustment which had been allowed by the district court. In so praying, the Commission points out that by its original order it had allowed for known changes in expenses after 1975 as proposed by Gulf States at the original hearings, that it had to some extent allowed for attrition by using a year-end rate base without at the same time adjusting revenues to the year-end level, and that Gulf States had not requested any attrition allowance until the Commission order was appealed to the district court.
Perhaps more central to the Commission’s complaint is that the allowance of the attrition adjustment of $1,253,000 (with increase in net income, after allowing for taxes, of $623,000) would be a court-mandated “windfall” rate increase beyond what is needed to assure the utility a fair rate of return and a fair and reasonable return on equity.
As previously indicated by the Commission and approved by the court, during the test year the utility enjoyed a rate of return of 9.15% on the rate base, which would provide a return on equity of 13.84%. The Commission further indicated that a rate of return of 8.7% and a return on equity of 10.5%-11.5% would be fair and reasonable.
' The Commission points out that, even if the attrition allowance of the district court were permitted to increase the expense factor of the rate base, nevertheless Gulf States would receive a rate of return on its rate base of 9.05% and a return on equity of 13.55%, or well in excess of the rates the Commission had found to be necessary to be fair and reasonable.
Since a rate increase is justified only if the rate of return of the utility is less than a fair rate of return, the Commission did not, in our view, abuse its discretion by failing to allow the attrition adjustment ordered by the district court. Accordingly, we disallow the attrition adjustment and rate increase ordered by the district court.
*1275III. The Intervenov’s Answer to the Appeal
The intervenors, certain industrial users of electricity (Stauffer Chemical et ah), answered the appeal, primarily to assure that any rate increase ordered (including that made by the district court) be allocated based on the cost of service as determined by the “peak responsibility” method for rate structuring, as ordered by the Commission and approved by the district court.
Since no rate increase has been ordered, it is unnecessary to comment further upon this issue.
Decree
For the reasons stated, the judgment of the district court allowing a rate increase of $1,253,000 is amended so as to delete this increase, and judgment is entered by this court affirming the Louisiana Public Service Commission’s order of February 4, 1977, its docket no. U-12976, which denied the plaintiff utility’s application for any rate increase. The plaintiff utility is further ordered to refund to the ratepayers those amounts collected pursuant to the rate increase allowed by the district court during the pendency of the appeal from its judgment, with such refunds to be made in a manner and on terms as determined by the Commission within its reasonable discretion, including (if deemed appropriate by the Commission) by credits to be allowed against future charges. All costs of these proceedings are assessed against the plaintiff-appellant, the Gulf States Utility Company.
DISTRICT COURT AMENDMENT OF RATE ORDER DISALLOWED INSOFAR AS IT FIXED A RATE INCREASE OF $1,253,000; THE COMMISSION ORDER DENYING A RATE INCREASE AFFIRMED.
SANDERS, C. J., concurs in part and dissents in part with written reasons.
SUMMERS, J., dissents for the reasons assigned.
Appendix 1
In its Order dated February 4, 1977, Docket no. U-12976, the Commission discussed the Gulf States’ proposal for “normalization” of income tax and rejected it, as follows: Tr. 1736-38:
The company proposed to deduct from net operating revenue, by showing as an “expense” in the test year, certain taxes that were not actually paid in the test year. These “phantom” taxes, which amount to $1,918,000, were not deducted from income on the books of Gulf States in its presentation to the Commission but the company proposes that we permit it to do so for rate making purposes. In addition, the Commission must determine whether the inclusion of state deferred income taxes as an expense by Gulf States was proper. These state taxes amount to $324,000.
There is a difference between taxes actually paid to the taxing authorities and the taxes Gulf States proposes to show or has shown on its books. This difference relates to differences in expenses reported for book purposes as compared to expenses used to compute income taxes. The difference in taxes resulting from these differences are reported and shown on the company’s books as deferred taxes. For instance, in computing income taxes, Gulf States may reduce actual taxes paid by taking advantage of liberalized depreciation tax provisions. However, Gulf States proposes to “normalize” these taxes for purposes of regulation by determining income tax expense as if it had not taken advantage of these provisions. Of course, this treatment has the effect of reducing the income of the company in the test year below what was actually received by allowing for “phantom” taxes. The theory normally asserted in favor of this treatment is that the “deferred” taxes must ultimately be paid. However, this conclusion can only be reached by considering an individual asset and by failing to consider the taxpaying entity as a whole.
We are in agreement with Professor Sidney Davidson where, after a comprehensive analysis of the situation, he states:
Many firms use an accelerated depreciation method for calculating the depreciation deduction to be made on the income tax return, but employ the straightline depreciation method for calculating the depreciation expense figure for financial statements. In considering the effect of this action on income tax expense and income tax liability, attention must be centered on the taxpaying entity, the firm as a whole. For a static or growing firm, current tax savings from this source will not adversely affect income tax charges of future years. In fact, the growing firm can look forward to an ever-increasing annual tax savings continuing year after year. Only a moribund firm with declining investment in capital assets is likely to be faced by a substantial deferred tax liability, *1276and then only if its dying years are profitable ones.
“Accelerated Depreciation and the Allocation of Income Taxes,” 33 The Accounting Review 173, 179-80 (1958).
Gulf States can hardly be described as a “moribund” operation. The Commission believes that the taxes proposed to be normalized will for all intents and purposes never be paid and that requiring taxpayers to pay this phantom expense would be inconsistent with sound regulation. These principles have been recognized in this and other jurisdictions. Ex parte Application of South Central Bell Telephone Co., Docket No. U-12785 (1976); City and County of San Francisco v. California Public Utilities Commission, 98 Cal.Rptr. 286, 490 P.2d 798, 91 PUR 3d 209, 211 (1971); Davenport Water Co. v. Iowa State Commerce Commission, 92 PUR 3d 1, 33 (1972).
The Commission rejects the proposal of Gulf States to “normalize” income taxes in the amount of $1,918,000. In addition, pursuant to the determination of the Commission in Ex parte South Central Bell Telephone Company, Docket No. U-12785 (1976), that state law permits the flow-through to consumers of tax savings attributable to state deferred taxes, the Commission will adjust net operating income upward by $324,000 to reflect the savings on deferred state income taxes enjoyed by Gulf States in the test year.
Appendix 2
In brief, Gulf States cites a number of statistics to document the argument that a rate increase is necessary to preserve its financial integrity:
1. During the period of 1965 to February of 1976, the embedded cost of long-term debt increased from 3.86% to 6.67%; an increase of almost 70%.
2. During the period 1965 to 1975, the embedded cost of preferred stock increased from 4.59% to 5.73%; an increase of 25%.
3. From 1965 to 1975, the Company’s pre-tax interest coverage declined from 5.61x to 2.71x (It is important to note that Gulf States Utilities cannot legally issue long-term debt if the pre-tax interest coverage drops below 2.0x).
4. At the end of 1975, the preferred stock coverage was 1.8x, and Gulf States Utilities is legally precluded from financing with preferred stock if it drops below 1.5x.
5. During the period 1965-1974, Gulf States Utilities’ market price of common stock declined 50.9%, whereas the market price of Moody’s 125 Industrials and Standard and Poor’s 425 Industrials declined 4.9% and .6% respectively.
6. In 1965, the income of Gulf States Utilities available to common stock was represented by only 3% AFUDC; in 1971, AFUDC constituted 20% of income; in 1975, the test year, AFUDC represented 40% of income (Note that AFUDC is a non-cash accounting entry representing no current revenue).
7. For the twelve months ending September 1976, AFUDC represented 48% of income.
8. In 1971, total interest cost was $27.5 million; for test year 1975, total interest cost is $47.0 million or an increase of 68%.
9. From 1971 to test year 1975, production, transmission, and distribution expenses, labor, and materials increased approximately 60%.
10. Gulf States Utilities was forced to invest $90 million in pollution control and fuel conversion facilities which are non-revenue producing plant.
11. Actual returns on book equity declined from 12.67% in 1973 to 10.25% at the time of the rate filing.
12. Actual Louisiana return on book equity dropped to 8.43% at June 30, 1977.
13. Earnings per share have decreased from $1.70 in 1973 to $1.54 in 1976.
14. During the pendency of the rate proceeding, Gulf States Utilities was paying out more in cash dividends than it received in cash earnings. Gulf States Utilities actually borrowed money to pay dividends. This is a result of the almost 50% AFUDC “income” available for common stock.