Jersey Cent. Power & Light Co. v. F.E.R.C., 82-2004

• Decision Date: 30 March 1984
• Docket Number: No. 82-2004,82-2004
• Citation: 730 F.2d 816
• Parties: JERSEY CENTRAL POWER & LIGHT COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Allegheny Electric Cooperative, Inc., et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 816

730 F.2d 816

235 U.S.App.D.C. 54

JERSEY CENTRAL POWER & LIGHT COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Allegheny Electric Cooperative, Inc., et al., Intervenors.

No. 82-2004.

United States Court of Appeals District of Columbia Circuit.

Argued May 31, 1983.

Decided March 30, 1984.

Petition for Review of an Order of the Federal Energy Regulatory commission.

Leonard W. Belter, Washington, D.C., with whom James B. Liberman and Daniel F. Stenger, Washington, D.C., were on the brief, for petitioner.

Joseph S. Davies, Jr., Atty., F.E.R.C., Washington, D.C., with whom Charles A. Moore, Gen. Counsel, and Barbara J. Weller, Deputy Sol., F.E.R.C., Washington, D.C., were on the brief, for respondent.

William C. Wise and Robert Weinberg, Washington, D.C., were on the brief, for intervenors.

Before MIKVA, GINSBURG and BORK, Circuit Judges.

Opinion for the Court filed by Circuit Judge BORK.

BORK, Circuit Judge:

This is an appeal from orders issued by the Federal Energy Regulatory Commission concerning electric rate increases filed by Jersey Central Power and Light Company. The first order modified a rate schedule to exclude from the rate base Jersey Central's investment in a cancelled nuclear plant and, as a consequence, ordered the utility to file reduced rates. The second order denied a petition for rehearing. We affirm the Commission in both instances.

I.

On March 31, 1982, Jersey Central filed with the Commission proposed rate schedules for service to six wholesale customers. The schedules proposed a two-step rate increase. Phase A has gone into effect and is not at issue here. Phase B amounted to a 19% rate of return on common equity, which would have resulted in an overall rate of return of 12.62%, and represented an annual increase of about $2 million. In Phase B, Jersey Central proposed to amortize over a fifteen-year period a $397 million investment lost when it suspended construction of a nuclear generating station at Forked River. Jersey Central also sought a return over the amortization period to cover the carrying charges on the debt and preferred stock portions of the unamortized investment in the cancelled plant.

Jersey Central's wholesale customers petitioned the Commission, urging it to reject that part of Jersey Central's Phase B request which sought a return on the unamortized portions of the loss in the cancelled nuclear plant by including the loss in the rate base. Consistent with its policy of such abandoned investments, the Commission granted the wholesalers' petition for summary disposition, relying on New England Power Co., 8 F.E.R.C. (CCH) p 61,054 (July 19, 1979), aff'd sub nom. NEPCO Municipal Rate Committee v. FERC, 668 F.2d 1327 (D.C.Cir.1981), cert. denied, 457 U.S. 1117, 102 S.Ct. 2928, 73 L.Ed.2d 1329 (1982) ("NEPCO"). The Commission thus allowed Jersey Central to recover the expense of building the cancelled project, but denied the company any return on the unamortized portion of that investment sufficient to cover the carrying charges on the debt and preferred stock portions of the unamortized investment. This is the only return on investment involved here. Though Jersey Central is not seeking a return of the unamortized portion of that part of its investment allocable to the common equity investors, the return it does seek would, of course, ease the burden on those investors.

On June 24, 1982, Jersey Central petitioned for rehearing, relying primarily on the "end result" standard enunciated in FPC v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 287, 88 L.Ed. 333 (1944). That test, the company argued, requires that "a hearing be held in order to assess the end result of the Commission's summary disposition order, in the event that Jersey Central be required to reduce its Phase B rates." Application of Jersey Central Power & Light Co. for Rehearing, Joint Appendix ("J.A.") at 105. Jersey Central claimed to be "in extremely precarious financial circumstances" and "unable to attract additional capital other than capital supplied through a very restrictive revolving credit agreement." Id. at 107. The company maintained it was automatically entitled to a hearing, since application of the Commission's policy would produce a rate having an unreasonable "end result." Jersey Central also argued that exclusion of its entire investment in the cancelled plant from the rate base was inconsistent with prior judicial and Commission precedent, especially those cases dealing with rate base treatment of abandoned gas pipelines.

The Commission denied rehearing with respect to that part of its order refusing to allow Jersey Central to include in its rate base the investment in the cancelled nuclear facility. It held that the "reasonableness" of an end result under the Hope test could not be evaluated "without regard to the individual components which comprise a rate." Jersey Central Power & Light Co., 20 F.E.R.C. (CCH) p 61,083, at 61,181 (July 23, 1982) (Order Granting in Part and Denying in Part Application for Rehearing) ("Commission Order"). And where, as here, the Commission has an established policy, no hearing was required "to implement this policy determination." Commission Order at 61,182. The Commission also distinguished the gas pipeline decisions, which Jersey Central tried to use to establish that the policy had been inconsistently applied, on the grounds that the gas utilities had, in those cases, employed a different method of financing. Id. Finally, the Commission refused to allow Jersey Central to "inflat[e] the rate of return to recover dollars equal to those attributable to its impermissible rate base inclusion," because Jersey Central's case-in-chief did not support a higher rate of return, and because FERC "has long held that utilities may not present a 'moving target' by offering alternative justifications for previously filed rates." Id.

In this court, Jersey Central advances several arguments for overturning the Commission's result. It will be convenient to the discussion to divide these into two groups. The first consists of arguments that directly attack the application of a rule against including in the rate base the cost of investments in abandoned projects for electricity generation. The second group is made up of arguments that, whatever the validity of that rule, the company was entitled to a hearing to alter the results here.

II.

Jersey Central first attacks the decision on the ground that the Commission's ruling is not mandated by any established policy, or, at least, no policy that ought to be followed here. This argument has two aspects. The existence of a policy is conceded, as it must be. The Commission in this case relied upon New England Power Co., 8 F.E.R.C. (CCH) p 61,054 (July 19, 1979), aff'd sub nom. NEPCO Municipal Rate Committee v. FERC, 668 F.2d 1327 (D.C.Cir.1981), cert. denied, 457 U.S. 1117, 102 S.Ct. 2928, 73 L.Ed.2d 1329 (1982). NEPCO demonstrates that FERC has articulated a valid policy against permitting a utility a return on the unamortized portion of that utility's investment in an abandoned electrical generating station. The Supreme Court long ago upheld the general principle underlying this policy--namely, that utilities are not entitled to have included in their rate base properties not "used and useful" in providing service to ratepayers. Denver Union Stock Yard Co. v. United States, 304 U.S. 470, 475, 58 S.Ct. 990, 994, 82 L.Ed. 1469 (1938) (Under the Constitution, a utility "is entitled to rates, not per se excessive and extortionate, sufficient to yield a reasonable rate of return upon the value of the property used, at the time it is being used, to render the services. But it is not entitled to have included any property not used and useful for that purpose.") (emphasis added) (citations omitted). ¹

In NEPCO, the New England Power Company proposed to recover over a five-year period an investment loss of approximately $13 million in a partially constructed, but later cancelled, electric generating facility. The company also proposed to include, in an interim rate, the unamortized portion of its investment loss in its rate base. Under the New England Power Company's proposal, the investors would have been made 100% whole by receiving back their entire investment over a five-year period, including the time value of their money. The Commission, as it did here, allowed the company to recover only its expenditures on the project, and denied rate base treatment for the unamortized portion of the loss. 668 F.2d at 1332-33. We upheld the Commission's ruling on the ground that, inter alia:

The general rule recognized by this court is that expenditure for an item may be included in a public utility's rate base only when the item is "used and useful" in providing service; that is, current rate payers should bear only legitimate costs of providing service to them.

668 F.2d at 1333.

The Commission has since applied this policy to other utility losses resulting from cancellation or abandonment. For example, in Northern States Power Co., 17 F.E.R.C. (CCH) p 61,196, at 61,380-81 (Dec. 3, 1981), FERC denied the utility the same rate base treatment requested here. Also, in that case, as Jersey Central concedes, "FERC made clear that its intention was that the investors receive back their entire investment but be denied all return on that investment during the amortization period." Initial Brief of Jersey Central at 19. Other cases also establish that this has been the Commission's policy. ²

Jersey Central attempts to avoid the impact of that showing by contending that the Commission does not apply the policy consistently and that, in any event, it is irrational to apply the policy to the facts here. We are not persuaded by either argument.

The claim of policy inconstancy is based upon certain gas pipeline decisions-- Ozark Gas Transmission System, 16 F.E.R.C. (CCH) p 61,099 (July 28,...