Nepco Municipal Rate Committee v. Federal Energy Regulatory Commission, s. 80-1343

• Decision Date: 15 October 1981
• Docket Number: 80-1363,80-1364,80-1745 and 81-1283,Nos. 80-1343,s. 80-1343
• Citation: 668 F.2d 1327,215 U.S.App.D.C. 295
• Parties: NEPCO MUNICIPAL RATE COMMITTEE and the Electric Departments and Plants of Ashburnham, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, New England Power Company, Dennis J. Roberts, II, Attorney General of Rhode Island, Intervenors. NEW ENGLAND POWER COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Dennis J. Roberts, II, Attorney General of Rhode Island, et al., NEPCO Municipal Rate Committee, et al., Intervenors. NEW ENGLAND POWER COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, NEPCO Municipal Rate Committee, et al., Massachusetts Department of Public Utilities, et al., Fitchburg Gas and Electric Light Co., Intervenors. NEW ENGLAND POWER COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, NEPCO Municipal Rate Committee, et al., Intervenors. NEW ENGLAND POWER COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Dennis J. Roberts, II, Attorney General of Rhode Island, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1327

668 F.2d 1327 215 U.S.App.D.C. 295 NEPCO MUNICIPAL RATE COMMITTEE and the Electric Departments
and Plants of Ashburnham, et al., Petitioners,
v.
FEDERAL ENERGY REGULATORY COMMISSION, Respondent,
New England Power Company, Dennis J. Roberts, II, Attorney
General of Rhode Island, Intervenors.
NEW ENGLAND POWER COMPANY, Petitioner,
v.
FEDERAL ENERGY REGULATORY COMMISSION, Respondent,
Dennis J. Roberts, II, Attorney General of Rhode Island, et
al., NEPCO Municipal Rate Committee, et al., Intervenors.
NEW ENGLAND POWER COMPANY, Petitioner,
v.
FEDERAL ENERGY REGULATORY COMMISSION, Respondent,
NEPCO Municipal Rate Committee, et al., Massachusetts
Department of Public Utilities, et al., Fitchburg
Gas and Electric Light Co., Intervenors.
NEW ENGLAND POWER COMPANY, Petitioner,
v.
FEDERAL ENERGY REGULATORY COMMISSION, Respondent,
NEPCO Municipal Rate Committee, et al., Intervenors.
NEW ENGLAND POWER COMPANY, Petitioner,
v.
FEDERAL ENERGY REGULATORY COMMISSION, Respondent,
Dennis J. Roberts, II, Attorney General of Rhode Island, et
al., Intervenors. Nos. 80-1343, 80-1363, 80-1364, 80-1745 and 81-1283. United States Court of Appeals,
District of Columbia Circuit. Argued June 22, 1981.
Decided Oct. 15, 1981.

Page 1330

Petitions for Review of Orders of the Federal Energy Regulatory commission.

Thomas N. McHugh, Jr., Washington, D. C., with whom Robert C. McDiarmid, Robert Harley Bear, and Gary J. Newell, Washington, D. C., were on the brief, for NEPCO Municipal Rate Committee, et al., petitioners in No. 80-1343 and intervenors in Nos. 80-1363, 80-1364 and 80-1745.

John Michael Adragna, Washington, D. C., also entered an appearance for NEPCO Municipal Rate Committee, et al.

Leonard W. Belter, Washington, D. C., with whom William A. Kehoe, III and Cheryl Lynn Williams, Washington, D. C., were on the brief, for New England Power Co., petitioner in Nos. 80-1363, 80-1364 and 80-1745.

Edward Berlin, Washington, D. C., entered an appearance for New England Power Co., petitioner in 81-1283.

F. Joseph Gentili was on the brief for Massachusetts Department of Public Utilities, et al., intervenors in Nos. 80-1343, 80-1363, 80-1364 and 81-1283.

Stephen R. Melton, Atty., Federal Energy Regulatory Commission, Washington, D. C., with whom Robert R. Nordhaus, Gen. Counsel, and Jerome Nelson, Sol., Federal Energy Regulatory Commission, Washington, D. C., were on the brief, for respondent.

Barbara J. Weller and John A. Cameron, Jr., Attys., Federal Energy Regulatory Commission, Washington, D. C., also entered appearances for respondent.

Harry H. Voigt, Washington, D. C., entered an appearance for Fitchburg Gas and Electric Light Co., intervenor in No. 80-1364.

Before TAMM and WALD, Circuit Judges, and HOWARD T. MARKEY, ^* Chief Judge of the United States Court of Customs and Patent Appeals.

Opinion for the court filed by Chief Judge MARKEY.

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MARKEY, Chief Judge:

The proceedings consolidated here for review were initiated by three separate rate increase filings of New England Power Company (NEP), an investor owned electric utility, under section 205 of the Federal Power Act. In each instance, the Federal Energy Regulatory Commission (FERC) suspended the rate filing and ordered an investigation. NEPCO Municipal Customer Rate Committee (Committee) and numerous other intervenors participated in the extensive proceedings before FERC. ¹ In two proceedings (R-8 and R-10), FERC approved portions of the rate increases requested. The third proceeding (W-2) has not reached hearing stage, but is final in certain respects discussed below. ² We remand three and affirm the remainder of FERC's determinations.

The R-10 rate investigation is the major proceeding among those on review. The initial determination of an Administrative Law Judge (ALJ) was modified by FERC, in its Opinion 49. ³ That Opinion affirmed the ALJ's exclusion of NEP's expenditures on a cancelled Salem Harbor construction project from the rate base. FERC departed in Opinion 49 from the ALJ's determination: reducing NEP's rate of return on common equity from 13.5% to 13.12%; modifying NEP's capital structure to deduct the Yankee investment from NEP's common equity; deducting the tax expense arising from an excess of book over guideline depreciation on the NEP/Narragansett facility; and reducing NEP's charge for subtransmission service.

The R-8 rate determination ⁴ was before this court in New England Power Company v. FERC, et al. (D.C.Cir.1979) (unreported memorandum opinion), 605 F.2d 572, where the result was a remand for: (1) further review of FERC's decision to exclude from the rate base NEP's investment in four nuclear power companies (the Yankees); (2) for consideration of NEP's income tax normalization in light of this court's opinion in Public Systems v. FERC, 196 U.S.App.D.C. 66, 606 F.2d 973 (D.C.Cir.1979); and (3) to consider the justness and reasonableness of the rates allowed in view of FERC's final determination on (1) and (2).

Because R-8 was subjected to judicial review, FERC's final determination was reached in R-8 after its determination in R-10 and included revision of some conclusions reached in R-10. On the remand of R-8, ⁵ FERC reaffirmed its exclusion of the Yankee investments from the rate base, and revised the rate base to provide NEP a 13.28% return on common equity. FERC stated that its previous rate of return calculation did take into account the effects of tax normalization, but indicated that tax normalization rulemaking was still pending. An overall 9.26% rate of return was found just and reasonable in light of market costs of common equity, returns on similar risk investments, and NEP's ability to attract capital.

In W-2, FERC made a final decision on only certain aspects of the rate change, and issued an order applying Opinion 49. In so

Page 1332

doing, FERC excluded from the rate base NEP's investment in two other cancelled projects (Units 1 and 2); adjusted the depreciation treatment of certain facilities; and allocated investment tax credit funds to the cost of service.

NEP objects primarily to FERC's excluding from its rate base its unamortized expenditures on the cancelled Salem Harbor project and on NEP Units 1 and 2; to the amount of return assigned to investment tax credit funds; to the depreciation treatment of the Narragansett facility; and to FERC's refusal to make certain upward adjustments to NEP's test year cost of service.

The Committee claims that FERC gave too much to NEP for the cancelled project, and should have made further downward adjustments to the test year cost of service. In addition, the Committee argues for a lower working capital allowance and rate of return, disputing FERC's adjustment for the Yankee investments, and claiming consumers should benefit from a $30,000,000 debenture issued by NEP's parent, New England Electric System (NEES).

ISSUES ⁶

(1) Did FERC properly exclude NEP's cancelled project expenditures from the rate base?

(2) Was FERC's treatment of NEP's tax credit funds proper?

(3) Did FERC err in calculating NEP's interest deduction?

(4) Did FERC abuse its discretion in its treatment of test year estimates?

(5) Did FERC employ a permissible method in determining NEP's reasonable rate of return on common equity?

(6) Did FERC err in rejecting an adjustment to NEP's capital structure to reflect a debenture issued by NEES?

(7) Did FERC err in denying NEP's proposed allocation of a Narragansett tax expense?

(8) Was a NEP bond issue properly included in its capital structure?

(9) Was FERC's denial of consolidated tax benefits to consumers supported in the record?

(10) Did FERC err in interpreting a settlement agreement on subtransmission expenses?

(11) What is the appropriate disposition on the issue of NEP's tax normalization and its effect on justness and reasonableness of NEP's rates?

OPINION

(1) Cancelled Project Expenditures

In 1971, NEP decided to construct an 850 megawatt oil-fired electric generating facility, a project called Salem Harbor No. 5, in view of then current load forecasts of a need for additional generating capacity by 1977. Initial preparations, including site location, procurement, engineering, and licensing activity, were undertaken. In 1973, NEP's plans for the project received a fatal blow when the Organization of Petroleum Exporting Countries imposed an oil embargo. Sky rocketing fuel costs and resultant energy conservation measures affected a major change in NEP's anticipated load growth. Those and other factors persuaded NEP to cancel the project in 1975. A similar scenario led to cancellation of plans to build two nuclear power projects called NEP Units 1 and 2.

FERC found NEP's expenditures for the Salem project to have been prudent in all respects and recoverable from ratepayers over a five-year amortization period. FERC denied NEP's request to include unamortized expenditures on the Salem and Units 1 and 2 projects in the rate base because those expenditures did not result in

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an operation of facilities "used and useful" in providing electric service. ⁷

The question in this section is whether FERC's refusal to include project expenditures in the rate base, while allowing their recovery as costs over time, is a valid approach to allocating the risks of project cancellation. NEP contends that FERC's approach denies the opportunity to earn a return on prudent investments in the cancelled projects and thus deprives NEP of property without just compensation in violation of the Fifth Amendment.

NEP says capital prudently invested in a generating facility is taken for public use and therefore must be included in the rate base. That view had its genesis in a dissenting opinion of Mr. Justice Brandeis in Pacific Gas & Electric Co. v. San Francisco, 265 U.S. 403, 44 S.Ct. 537, 68 L.Ed. 1075 (1924). This court has recognized, however, that "Justice Brandeis' formula for ascertaining rate base-the amount of capital prudently invested-was...