Alabama Power Co. v. F.E.R.C.

• Decision Date: 13 November 1998
• Docket Number: No. 97-1725,97-1725
• Parties: ALABAMA POWER COMPANY, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 7

160 F.3d 7

333 U.S.App.D.C. 77

ALABAMA POWER COMPANY, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

No. 97-1725.

United States Court of Appeals District of Columbia Circuit.

Argued Oct. 9, 1998.

Decided Nov. 13, 1998.

Dan H. McCrary argued the cause for petitioners. With him on the briefs were Rodney O. Mundy, Lyle D. Larson and Andrew W. Tunnell.

Larry D. Gasteiger, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were Jay L. Witkin, Solicitor, and Susan J. Court, Special Counsel.

Edward H. Comer and Henri D. Bartholomot were on the brief for amicus curiae Edison Electric Institute. William L. Fang entered an appearance.

Before: SILBERMAN, ROGERS and GARLAND, Circuit Judges.

SILBERMAN, Circuit Judge:

Under the Federal Power Act, federally regulated electric utilities must obtain FERC's approval before changing the rates they charge to wholesale and retail consumers. This case presents the question whether a different provision of the Act requires utilities to obtain similar "pre-approval" before modifying the depreciation rates they use for accounting purposes. Petitioners contended unsuccessfully before the Commission that the statutory provision does not impose such an obligation. We agree with petitioners that the Commission unreasonably read the statute, and accordingly we vacate the orders under review.

I.

Electric utilities incur expenses in producing power, but regulators do not permit every sort of expense to be recovered immediately--nor should they. It would make no sense to allow a utility that constructs a power plant for $100 million to set rates high enough to recover that expense over the course of one year. Although the plant will deteriorate from use from year to year, the plant might last for 20 years or more, and its cost should be recovered over the course of that useful life.

Depreciation charges are the means by which a utility recovers over time the capital invested in the facilities or plant used in producing power. Because a higher depreciation charge implies that the utility should be permitted a higher rate (and conversely a lower depreciation charge implies that the utility should be allowed a lower rate), ¹ one would expect both the Commission and the utilities it regulates to have a keen interest in the accurate measurement of depreciation. It is not surprising, then, that as a by-product of its authority under §§ 205 and 206 of the Federal Power Act (FPA) (codified as amended at 16 U.S.C. §§ 824d, 824e (1994)) to regulate the rates utilities can charge to consumers, the Commission has regulated depreciation accounting by utilities. See, e.g., Cities of Aitkin v. FERC, 704 F.2d 1254, 1255-56 (D.C.Cir.1982) (rejecting challenge to FERC order granting a utility's proposed rate increase in part because the utility had adequately justified increasing the rate of depreciation claimed for steam and hydraulic generating equipment); South Carolina Elec. & Gas Co., 76 F.E.R.C. p 61,338 (1996) (rejecting proposed rate change because the utility had improperly shifted depreciation reserves from one asset to another).

Where depreciation accounting is not implicated in a ratemaking proceeding, however, it appears that the Commission has not attempted to regulate it. That is not to say that the Commission lacks the statutory authority to do so. Apart from its duties regarding the rates utilities may charge for their service, the Commission has been delegated authority over accounting procedures per se. Section 301 of the Act addresses record keeping generally, requiring utilities to keep "such accounts ... as the Commission may by rules and regulations prescribe as necessary or appropriate for the purposes of the administration of this chapter" and authorizing the Commission to inspect such accounts at all times. 16 U.S.C. § 825(a)-(b) (1994). Pursuant to this authority, the Commission adopted in 1960 the Uniform System of Accounts, 18 C.F.R. pt. 101 (1998), a comprehensive classification and enumeration of revenue and expense items that utilities must use in keeping their books. Yet although the Uniform System of Accounts defines "depreciation," 18 C.F.R. pt. 101, Definition 12, and sets forth the components of the depreciation account, id. at Item 108, nowhere does it prescribe a depreciation method or fix depreciation rates. See OFFICE OF CHIEF ACCOUNTANT, FEDERAL ENERGY REGULATORY COMMISSION, ELECTRIC UTILITY DEPRECIATION PRACTICES, 1976, at 1 (1980) ("The Uniform System of Accounts requires depreciation accounting but prescribes no particular depreciation method.").

Section 302, unlike section 301, reflects a specific focus on depreciation and depreciation rates. 16 U.S.C. § 825a (1994). Section 302(a) grants the Commission the authority, "after hearing," to prescribe "rules, regulations, and forms of account" to govern the depreciation accounting of regulated utilities. Id. at § 825a(a). The Commission is also authorized to "ascertain and determine, and by order fix, the proper and adequate rates of depreciation of the several classes of property of each licensee and public utility." Id. Section 302(b) obliges the Commission to notify State commissions having jurisdiction with respect to any public utility involved "before prescribing any rules or requirements as to accounts, records, or memoranda, or as to depreciation rates." Id. at § 825a(b). Yet while § 302 would seem to authorize the Commission to promulgate rules and regulations governing depreciation accounting, it has lain dormant in the United States Code since Congress added it to the FPA in the Public Utility Act of 1935, ch. 687, Title II, sec. 213, § 302, 49 Stat. 803, 855 (1935).

Section 302's dormancy ended in 1994, however, when the Commission, responding to Midwest Power's unsolicited letter informing the Commission of its intention to change its depreciation rates, declared that it was "inappropriate for [Midwest Power] to reduce its depreciation rates for accounting purposes without a corresponding change in the depreciation rates embedded in its wholesale and retail electric rates." Midwest Power Sys. Inc., 67 F.E.R.C. p 61,076, at 61,207 (April 19, 1994) (quoting 1994 Letter Order from FERC's Chief Accountant) (internal quotation marks omitted) (alteration in original). ² The Commission reasoned that the plain language of § 302--especially the part of § 302(a) providing that public utilities shall not charge "with respect to any class of property a percentage of depreciation other than that prescribed therefor by the Commission," 16 U.S.C. § 825a(a) (emphasis added)--implies that a utility may not unilaterally choose its depreciation rates, for rates so chosen would not be "prescribed by the Commission." Midwest Power, 67 F.E.R.C. at 61,208, 61,209. The Commission concluded that utilities must henceforth seek prior approval from the Commission before changing their depreciation rates. See id. at 61,209-10.

When Midwest Power obeyed this order and filed a request for authorization to reduce its annual composite depreciation rate, the Commission dismissed the request as moot--changes made before April 19, 1994 (the date of FERC's Midwest Power order) were retroactively accepted if based on sound accounting practices--but did not offer further justification for the new pre-approval system. MidAmerican Energy Co., 79 F.E.R.C. p 61,169, at 61,794 (May 15, 1997). ³ Because Midwest Power's request for a rate change was granted, it did not seek rehearing of the May 1997 order. But Southern Company Services, Inc., acting as agent for its subsidiary companies including Alabama Power Company, was granted permission to intervene and requested rehearing. MidAmerican Energy Co., 81 F.E.R.C. p 61,081 (October 22, 1997). Southern argued that § 302 is an enabling statute that is not self-executing, and therefore does not require public utilities to seek pre-approval from the Commission but only to conform to rates that the Commission has already fixed. Id. at 61,326. Southern also asserted that the May 1997 order was procedurally invalid because the Commission had neither given notice to the State commissions as § 302(b) requires nor followed the notice and comment procedure of 5 U.S.C. § 553 (1994) in promulgating what Southern claimed was a substantive rule. Id. at 61,327.

The Commission rejected Southern's arguments and denied the request for rehearing. Pointing to the same language in § 302(a) that it had emphasized in its April 1994 order, the Commission concluded that § 302 is not merely an enabling provision, but rather expressly imposes a pre-approval requirement. Id. at 61,328. The Commission responded to Southern's APA objection by characterizing the May 1997 order as an "interpretative" rule exempt from the APA's notice and comment procedures; in the Commission's view, the May 1997 order "did little more than reiterate the statutory obligation imposed on public utilities and licensees by Congress in 1935." Id. As for Southern's claim that the Commission violated § 302(b) by not providing notice to the State commissions prior to issuing the May 1997 order, the Commission maintained that it did send the May 1997 order to the State commissions after issuance and that no State commission had responded or indicated any objection to the order. Id. at 61,327 n. 11. Southern and the other intervenors before the Commission now petition us for review of the May 1997 and October 1997 orders.

II.

Before deciding whether § 302(a) requires utilities to gain the Commission's approval before changing their depreciation rates for accounting purposes, we see an initial weakness in the Commission's position: its apparent failure to comply with § 302(b). Section 302(b) provides:

The Commission, before prescribing any rules or requirements as to accounts, records, or memoranda, or as to depreciation rates, shall notify each State...