In the cited case, the Commission observed that:

[We are concerned here with accounting rules which are not necessarily dispositive of the manner in which expenditures will be treated in a proceeding to determine the reasonable level of particular rates.

Thus, the question arises as to whether the depreciation expense recognized for present purposes should be different from that allowed in WBPL's annual reports.

The only alternative that has been suggested is the use of a depreciation schedule based on the property's original cost, and reflecting all past depreciation charges on the property. However, this approach would eventually result in much of WBPL's property being completely depreciated for rate making purposes, while substantial depreciation expense on this property continues to be reported in its annual reports. We can see no reasonable basis for following an actual investment concept in our reporting requirements, while using an original cost concept in determining expenses for rate making purposes. Nor does the record suggest any other feasible alternative, for ratemaking purposes, to the use of a depreciation schedule based on the property value recorded in the carriers' books. Thus, WBPL's reported depreciation charges are accepted herein as its depreciation expense for rate making purposes.

There are several other respects in which the shippers consider WBPL's expenses to be overstated. These concern rate case expenses, lease payments to a subsidiary for a terminal, and payments to the parent Williams Brothers Company for administrative services. The shippers' contentions on these points were discussed in the report of division 2 (see pages 122-125) and we agree with the division that no amortization, modification, or disallowance of these expenses is shown to be warranted.

Income taxes.-An issue of substantial importance in this proceeding is the amount of the allowance for income taxes that should be made in determining WBPL's earnings. Because of tax benefits arising from the purchase, WBPL paid no income taxes in the years 1966 through 1970, and had low but increasing taxes through 1973. WBPL's actual taxes were below a statutory rate of 48 percent on income reported to the Commission, primarily because of the deferral of taxes arising from the use of accelerated depreciation, and because of the investment tax credit.

If only the amount of actual taxes paid is considered, WBPL's earnings would be in excess of a 10-percent return on valuation for

the years here under consideration. On the other hand, if the calculation of WBPL's earnings is based on a "normalized" tax figure, using the 48-percent statutory tax rate, then its return is consistent with the 10-percent standard.

The factors favoring tax normalization are that deferred taxes must eventually be paid, at least to some extent, and that investment will be encouraged if the tax benefits arising from accelerated depreciation and from the investment tax credit are retained by the carrier rather than "flowed through" to the carrier's customers. In Memphis Light, Gas & Water Div. v. Federal Power Com'n. 500 F. 2d 798 (1974), a U.S. Court of Appeals upheld the Federal Power Commission's decision to permit a gas transmission company to use normalized accounting for rate making purposes. Public Law 92-178, which restored the investment tax credit in 1971, precludes a regulatory agency from immediately reducing the cost of service of a utility (not including carriers) by the full amount of the investment tax credit. The stated intent of that law is to provide an incentive for the modernization and growth of private industry.

The Shipper Group indicates opposition to the use of the statutory tax rate in its statement of argument on reconsideration. However, in its reply to WBPL's statement of argument, the Shipper Group states that it would not oppose the normalization of taxes by inclusion of the tax benefits resulting from the purchase, as long as the purchase price is reflected neither in the rate base nor in the depreciation expense. WBPL argues that normalization of taxes is necessary to avoid the uneven effects of accelerated depreciation on its tax liability over the life of its property, and will result in a more stable basis for determining the reasonablenss of its rates.

In 1963, the Commission, following the traditional method of accounting at that time, required that only actual taxes be recorded in the carriers' books of accounts and financial statements. Accounting for Federal Income Taxes, 318 I.C.C. 803. However, the use of deferred tax accounting was subsequently approved as a generally accepted accounting principle by the accounting profession in Accounting Principles Board Opinion No. 11, "Accounting for Federal Income Taxes." The Commission thereupon modified its accounting rules for all carriers, including pipelines, in docket No. 34178 (Sub-No. 2) to require the carriers to account for income taxes using the deferred tax method. The question remains as to whether similar treatment should be employed in computing earnings for rate making purposes. As noted by division 2, consideration of this question will be appropriate in the broadened proceeding in Ex Parte No. 308.

Because the proper treatment of income taxes for rate making purposes is an open question at the present time, we feel that a rigid adherence to the flow-through approach in this proceeding would not be justified on the record before us. The consequences of such an approach could be the disapproval of WBPL's rates for several of the years here under consideration, and the requirement that WBPL make large reparation payments to shippers. This result does not appear warranted at a time when deferred tax accounting has increasingly gained acceptance. Accordingly, upon careful consideration of the matter, we agree with division 2 that the use of the statutory tax rate is preferable in this proceeding.

Reasonableness of earnings.-The foregoing discussion provides the basis for computing WBPL's earnings for the years in question, and for measuring those earnings against a standard of reasonableness, namely, a 10-percent return on valuation.

Set forth below is the computation of WBPL's earnings and rate of return on valuation for the years 1970, 1971, 1972, and 1973. This table goes back to 1970 because the complaint brings the reasonableness of WBPL's rates into question as far back as August 20, 1970. It extends through 1973 because the record and the pleadings have concerned themselves with 1973 as well as the earlier years. Since the increased rates here under investigation became effective at about the beginning of 1972, the table encompasses a sufficient time period to show the reasonableness of WBPL's earnings under the increased rates as well as under the previous level.

Operating revenues, less operating expenses and less interest expense, times statutory rate of 48 percent.

COperating revenues less operating expenses and less income tax.

dFinal valuation for 1970 and tentative valuations for 1971, 1972, and 1973, from Valuation Docket No. 1423.

As may be seen, WBPL's return on valuation was below the 10percent level for each of the years in question. Accordingly, we conclude that WBPL's earnings were not excessive for any of these years, and that its overall rate level for these years was just and reasonable.

Before concluding our discussion of this issue, we take note of the fact that the Shipper Group adduced comparisons of WBPL's rates with those of other pipelines, as additional support of its allegation that WBPL's rates were unreasonably high. Such comparisons indicate that WBPL's rates were higher than those of most other pipelines for movements of comparable distances. However, there are important differences in operating conditions that limit the usefulness of such comparisons. WBPL is an independent carrier, while most of the other pipelines are owned by the shippers that use them; WBPL's facilities consist of multiple small-diameter lines of pipe, in contrast to the potentially more efficient larger diameter pipelines of many other carriers; and WBPL provides common carrier terminal services at a large number of destinations, unlike the other carriers. These rate comparisons were given no attention by the parties in their arguments on reconsideration. We find them to be of little importance in view of the showing that WBPL's earnings did not exceed a reasonable level during the period at issue.

Preference and prejudice.-The remaining issues in this proceeding have to do with the initial joint rates filed by Explorer and WBPL, and the relationship of such rates to the corresponding combinations of local rates. The joint rates apply between Explorer origins at Lake Charles, La., Pasadena and Port Arthur, Tex., and destinations on the WBPL system. These rates were 9.5 cents a barrel lower than the combinations of local rates between the same points via Tulsa, Okla.

The Shipper Group originates shipments at Tulsa and other points on the WBPL system for movement under local rates. It contends that the disparity between the proposed joint rates and the corresponding local rates is preferential to Gulf Coast shippers and prejudicial to shippers in the midcontinent area. It argues that the disparity is not accounted for by differing transportation conditions, that the local rates should bear the same relationship to distance and to the cost of service as the joint rates, and that WBPL can remedy the disparity by lowering the local rates or, impliedly, by withdrawing from the joint rates. The Shipper Group also contends

that the joint rates favor the shipper owners of Explorer, who are competitors of the complaining shippers, in that Explorer allegedly receives an advantageous division of the joint rates. This is alleged to be a violation of the prohibition against personal discrimination in section 2 of the act.

WBPL and Explorer reply that no preference and prejudice is shown. They argue that there is no legal requirement that joint rates equal the combination of local rates or that all rates be on the same per-mile basis, citing St. Louis Southwestern Ry. v. United States, 245 U.S. 136, 139 (1917). They further contend that neither carrier has control over both rates so as to be able to end the disparity by either raising one rate or lowering the other, as contemplated in Texas & Pacific Ry. Co. v. United States, 289 U.S. 627, 650 (1933), and in New York v. United States, 331 U.S. 284, 342 (1947). Further, they note that the shippers concede the compensatoriness of the joint rates and do not seek to have them raised. For this reason, the carriers contend that the allegation of preference and prejudice must be considered as withdrawn, under the doctrine of City of Moorehead v. Great Northern Ry. Co., 172 I.C.C. 38 (1931).

In addition, the carriers argue that the Shipper Group has not shown competitive injury from the rate disparity. They note that the Gulf Coast shippers must still pay at least 13.5 cents a barrel more than the midcontinent shippers to reach the same destinations, and that the midcontinent shippers did not experience a reduction in the volume shipped under the local rates after the Gulf Coast joint rates took effect.

Finally, the carriers argue that the lower level of the joint rates is justified by their purpose of generating additional traffic and increasing the utilization of the facilities of both carriers.

With respect to the discrimination argument, the carriers contend that no credible evidence of the carriers' divisions of the joint revenues was introduced, and that their divisions are not properly in issue in this proceeding. They state that no discrimination is shown, in that particular shippers are not being charged different rates for like services. Division 2 found that the Shipper Group had failed to prove either preference and prejudice or discrimination. Consistent with the division's viewpoint are the arguments of WBPL and Explorer, as summarized above. We agree with those arguments, and with the conclusions of division 2. For the reasons stated, the necessary element of preference and prejudice, and of discriminatior, have not been shown.