Alabama-Tennessee Natural Gas Co. v. Federal Power Com'n

• Decision Date: 25 March 1966
• Docket Number: No. 21610.,21610.
• Citation: 359 F.2d 318
• Parties: ALABAMA-TENNESSEE NATURAL GAS COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

359 F.2d 318 (1966)

ALABAMA-TENNESSEE NATURAL GAS COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.

No. 21610.

United States Court of Appeals Fifth Circuit.

March 25, 1966.

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Christopher T. Boland, Stanley M. Morley, Francis H. Caskin, May, Shannon & Morley, Washington, D. C., for petitioner.

Lawrence H. Gall, Harry L. Albrecht, Washington, D. C., for Independent Nat. Gas Ass'n of America, amicus curiae.

G. R. Redding, Baker & Daniels, Indianapolis, Ind., Raymond N. Shibley, Patterson, Belknap & Farmer, Washington, D. C., for Panhandle Eastern Pipe Line Co., amicus curiae.

J. J. Danaher, Fort Lauderdale, Fla., Chas. F. Wheatley, Jr., Gen. Counsel, American Public Gas Ass'n, Washington, D. C., Mathias M. Mattern, Asst. Corp. Counsel, Chicago, Ill., for American Public Gas Ass'n and City of Chicago, amici curia.

George Spiegel, Reuben Goldberg, Washington, D. C., for Tennessee Valley Municipal Gas Ass'n, intervenor.

W. P. Gilbert, Stephen L. Seftenberg, Wilson & McIlvaine, Chicago, Ill., for Arthur Andersen & Co., amicus curiae.

Howard E. Wahrenbrock, Sol., Richard A. Solomon, Gen. Counsel, Abraham R. Spalter, Asst. Gen. Counsel, Leonard E. Poryles, Washington, D. C., Atty., F. P. C., for respondent.

J. Calvin Simpson, Senior Counsel, Richard E. Tuttle, Chief Counsel, Sheldon Rosenthal, Associate Counsel, San Francisco, for People of State of California and Public Utilities Commission of State of California, amici curiae.

Before WISDOM and GEWIN, Circuit Judges, and BREWSTER, District Judge.

WISDOM, Circuit Judge:

Alabama-Tennessee Natural Gas Company, a federally regulated pipeline company, petitions the Court to review and set aside an about-face order of the Federal Power Commission.¹ This order establishes ratemaking principles reflecting the economic benefits the petitioner derives from using liberalized (accelerated) depreciation allowed the business community generally by Section 167 of the Internal Revenue Code of 1954.²

In a rate increase proceeding by Alabama-Tennessee, the Commission ruled that the company may no longer "normalize"³ accelerated depreciation, accumulate reserves for the deferred tax liability, and receive a return on the amounts already accumulated. In addition, the Commission required Alabama-Tennessee to flow through to customers in the form of reduced rates the benefits resulting from liberalized depreciation. This ruling reverses the Commission's earlier ratemaking treatment of liberalized depreciation.⁴ Fundamental to the Commission's decision is its finding that in a stable or expanding industry, such as the natural gas industry, accelerated depreciation results in true tax savings for the foreseeable future.

Alabama-Tennessee makes two main points. First, the petitioner contends that the challenged order⁵ conflicts with the intent of Congress as expressed in Section 167 and therefore arbitrarily deprives the company of the benefits of congressionally sanctioned accelerated depreciation. Second, the petitioner contends that the Commission's procedures were unfair not only to the petitioner but to the entire natural gas industry. We reject these contentions. (1) Giving full weight to the Commission's broad responsibilities under the Natural Gas Act and its special competency to choose between competing theories of accounting for ratemaking purposes, on balance we must uphold the order. (2) The approach and methods the Commission adopted in this case invited adverse criticism, but we cannot say that the procedure was so unfair and prejudicial as to have deprived the petitioner or the natural gas industry of a fair hearing.

* * *

Alabama-Tennessee is one of the smallest interstate gas pipeline companies subject to the Commission's jurisdiction. Its pipeline system extends 140 miles from an interconnection with its sole supplier, Tennessee Gas Transmission Company, at a point near Selmer, Tennessee to its terminus at Huntsville, Alabama. Alabama-Tennessee serves five direct sales customers and fifteen small resale customers; all but one are municipal distributors. As of December 31, 1959, the company's net plant in service had a value of about $5,000,000 and an accumulated reserve for deferred taxes of $100,000.

The proceedings originated in four rate increase filings between 1954 and 1959 under Section 4(d) of the Act. Each of the filings was suspended by the Commission under Section 4(e). After suspension for five months, each became effective, subject to refund, until superseded. The Commission consolidated the four cases for a hearing that commenced July 13, 1960. The Tennessee Valley Municipal Gas Association intervened in opposition to each of the four increased rates. The intervenor introduced evidence to show that the excess of normalized taxes over actual taxes constitutes tax savings and not merely tax deferrals. Alabama-Tennessee did not object to this evidence and offered no evidence in rebuttal. The Commission introduced no evidence on this point.

Alabama-Tennessee, in its application for a rehearing, explained that it did not introduce rebuttal evidence because at the time the hearing was held it had "no possible reason to contemplate the unprecedented action which the Commission has taken in this case". Indeed, both "Alabama-Tennessee and the Commission's staff made their evidentiary presentations on the assumption that the principles which the Commission had established with respect to liberalized depreciation could be relied upon. The Commission's rulings had been consistent since 1956".⁶

September 25, 1961, the Examiner issued his decision. He disallowed about $500,000 of $1,500,000 of proposed increases, but rejected the intervenor's contentions. He allowed normalization of income taxes and a 1.5 per cent return on the deferred tax reserve.⁷ The intervenor excepted to this ruling and asked the Commission to reexamine its position on liberalized depreciation.

June 1, 1962, the Commission issued an order severing the issue of liberalized depreciation from other matters in the case and setting down that issue for special oral argument for July 10, 1962. The severance order provided, in part, that:

"Specifically, we desire to hear arguments directed toward the several possibilities for handling this matter, namely, use of the present procedure with rates of return at 0, 1.5, or such higher rate as may be deemed to be in the public interest, or alternatively, use of the so-called `flow-through\' principle under which the reduction in taxes through the use of liberalized depreciation instead of straightline depreciation, would be reflected in income taxes included in the pipeline\'s cost of service. We believe we would be aided in our consideration of this problem by the participation as amici either in the oral argument, or by the filing of written briefs, by any person, company, association or governmental authorities having an interest in the problem. * * *"

June 13, 1962, the Commission issued its order and Opinion No. 360, 27 F.P.C. 1180, adopting the Examiner's decision on most issues but reserving for later decision the liberalized depreciation issue. Any change of policy on depreciation would be "applicable to Alabama-Tennessee's rates herein prescribed from and after the date of such decision."

The petitioner did not seek court review of that order; the petitioner objected, in an "Application for Rehearing", to the severance and special argument of the liberalized depreciation issue that would affect rates from April 4, 1960. The petitioner points out that these proceedings began in 1954; that they were not heard until 1960 in spite of strenuous efforts to have its applications disposed of expeditiously; that the matters were submitted to the Commission in October 1961 and were not finally ruled upon until June 13, 1962; that since the Commission has decided the rate-increase case, petitioner no longer has any matter pending before the Commission. The petitioner contends that the Commission has "no authority to continue this proceeding in an open-ended manner as a vehicle for instituting what is tantamount to a rulemaking proceeding concerning an issue of widespread interest and importance to the entire gas and electric industry but having applicability to a single company — Alabama-Tennessee." The petitioner challenges the validity of the Commission orders, the fairness of its procedures, and the propriety of converting this minor rate case into a cause celebre in which "any person * * * having an interest" in the subject of the treatment of liberalized depreciation was "invited" into the proceeding. Without delay, the Commission denied the petition.⁸

May 16, 1963, after several delays, Alabama-Tennessee, the intervenor, and thirty-four amici participated in the oral argument on the liberalized depreciation issue. February 3, 1964, the Commission, by a bare majority,⁹ issued Opinion No. 417 and the order here under review. In its opinion the Commission emphasized that for Alabama-Tennessee, the decision is "the final element in determining a just and reasonable level of return"; for the various other pipeline companies, the decision is only "a proposed" or "tentative decision". See F.P.C. Rules of Practice and Procedure § 1.30(b), 18 C.F.R. § 1.30(b).

The Commission made the following findings. (1) The use of liberalized depreciation under Section 167 of the Internal Revenue Code results in a "permanent reduction" of federal income taxes by natural gas pipelines maintaining either "a growing or stable plant." Alabama-Tennessee will "maintain a growing or stable plant for the foreseeable future". (2) "Congress did not attempt to prescribe the manner in which the Commission should reflect such tax benefits in rates established under the Natural Gas Act." (3) Rate flow-through will "effectively" meet "the fundamental objective of Section 167 to...