City of Charlottesville, Va. v. Federal Energy Regulatory Commission, 80-1175

• Decision Date: 07 August 1981
• Docket Number: No. 80-1175,80-1175
• Citation: 661 F.2d 945
• Parties: CITY OF CHARLOTTESVILLE, VIRGINIA, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Columbia Gas Transmission Corporation, et al., Interstate Natural Gas Association of America, Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 945

661 F.2d 945

213 U.S.App.D.C. 33

CITY OF CHARLOTTESVILLE, VIRGINIA, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Columbia Gas Transmission Corporation, et al., Interstate Natural Gas Association of America, Intervenors.

No. 80-1175.

United States Court of Appeals District of Columbia Circuit.

Argued March 2, 1981.

Decided Aug. 7, 1981.

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

William T. Miller, Washington, D. C., with whom Stanley W. Balis, Washington, D. C., was on the brief, for petitioner.

Joshua Z. Rokach, Atty., Federal Energy Regulatory Commission, Washington, D. C., with whom Robert R. Nordhaus, General Counsel and Jerome M. Feit, Deputy Sol., Washington, D. C., were on the brief, for respondent.

Giles D. H. Snyder, Charleston, W. Va., with whom John H. Pickering, Timothy N. Black and Andrea Timko Sallet, Washington, D. C., were on the brief, for intervenors, Columbia Gas Transmission Corp., et al.

Dale A. Wright, James T. McManus, Lawrence V. Robertson, Jr. and John H. Cheatham, III, Washington, D. C., were on the brief, for intervenor, Interstate Natural Gas Association of America.

Stephen A. Wakefield and Irving Jacob Golub, Houston, Tex., were on the brief, for amicus curiae, United Gas Pipe Line Co. urging affirmance.

Ronald D. Jones, New York City, was on the brief, for amicus curiae, Edison Electric Institute urging affirmance.

David J. Muchow, Arlington, Va., and John A. Myler, Washington, D. C., were on the brief, for amicus curiae American Gas Association urging affirmance.

Edward Berlin and Frances S. Blake, Washington, D. C., were on the brief, for amicus curiae New England Power Co. urging affirmance.

Before MacKINNON and WALD, Circuit Judges and AUBREY E. ROBINSON, Jr., District Judge. ^*

Opinion for the Court filed by District Judge AUBREY E. ROBINSON, jr.

Concurring opinion filed by Circuit Judge WALD.

Opinion dissenting in part filed by Circuit Judge MacKINNON.

AUBREY E. ROBINSON, Jr., District Judge:

INTRODUCTION

Petitioner seeks review of Federal Energy Regulatory Commission orders issued in Opinion Nos. 47 ¹ and 47-A ² which increased rates for two interstate pipeline companies, Columbia Gas Transportation Corporation and Columbia Gulf Transmission Company. ³ The City of Charlottesville, Virginia ⁴ challenges a commission change in policy on the tax component of the cost of service. ⁵ The Commission allowed the Columbia pipeline companies to include in their rates the tax costs they would incur if they separately filed federal income tax returns ("stand-alone" tax costs). In fact, these companies do not separately file but are members of a corporate group that files a consolidated tax return. ⁶ The tax costs allowed these companies by the Commission are greater than their proportionate shares of the consolidated tax liability. ⁷

The Commission allowed the pipeline companies to include "stand-alone" tax costs in their rates so their parent company could retain the savings obtained from filing a consolidated tax return for use by the exploration and development affiliates ⁸ whose losses in part made possible the savings. In addition, the Commission found that the rate orders accounted for the method by which the affiliates acquired capital from their parent. ⁹ Finally, the Commission found that a one-time loss reducing the consolidated tax liability should not be used in computing a prospective rate order. ¹⁰ Petitioners challenge the authority and factual support for the orders that issued.

We find that the Commission failed to adequately specify the evidence on which the rate orders were premised. Therefore, we remand the case to the Commission for further consideration.

I. PROCEEDING BELOW

In 1975, Columbia Gulf and Columbia Gas filed for rate increases of $3.7 million and $87.9 million respectively. The Commission suspended the proposed rate increases and allowed a number of parties, including the Petitioner, to intervene. Settlement was reached on all issues except those of consolidated tax treatment and two other issues not relevant here. Hearings were conducted before an Administrative Law Judge, who ruled against the pipeline companies. ¹¹ Columbia argued that the pipelines should benefit from consolidated return savings. The Judge found that the consolidated tax liability for the Columbia system was lower than the aggregate of the tax liabilities if every company within the system had filed a separate return. ¹²

Tax losses used to lower consolidated tax liability were generated by three sources: (1) the parent company (which was always in a loss posture because it "lent" capital to affiliates at a loss yet did not have to report dividends paid to it by affiliates); ¹³ (2) by exploration and development companies (Columbia Gas Development Corp., Columbia Gas Development of Canada, Ltd., and Columbia Coal Gasification Corp.); and (3) by Columbia of West Virginia (whose losses Columbia argued were of a non-recurring nature and should be disregarded).

The ALJ found that for the test period, the pipeline companies' Federal income tax liability was $98.5 million (through consolidated returns). ¹⁴ Had the pipeline companies filed independent returns, their liability for the three-year test period would have been $159.4 million. ¹⁵ The principal basis for the ALJ's ruling disallowing the rate increase was his finding that a large portion of the consolidated tax savings retained by the parent company were not used for exploration and development (e & d), as contended by the pipeline companies but rather went for general corporate purposes. ¹⁶

This matter came before the Commission, which on June 29, 1978 reversed the initial decision of the Administrative Law Judge in its entirety. ¹⁷ The City lodged a petition for rehearing which was denied on December 20, 1979 in Opinion 47-A. ¹⁸ The City then filed its appeal in this Court.

II. STANDARD OF REVIEW

A. Historical Perspective

The issue of whether jurisdictional ratepayers or corporate shareholders should benefit from reduced consolidated tax liability resulting from non-jurisdictional losses has been a subject of controversy in ratemaking for almost two decades. ¹⁹ The first major consideration of this issue came in 1964 when the Tenth Circuit reversed the Federal Power Commission and ordered it to allow the corporation and not the ratepayers the benefit of a reduction in tax liability effected by consolidated returns. Cities Service Gas Co. v. FPC, 337 F.2d 97, 101 (10th Cir. 1964). ²⁰ The Court found that connecting the losses of non-jurisdictional businesses to the jurisdictional rates was a violation of a Congressional requirement that profits and losses of regulated and non-regulated companies be kept separate. Id. The Fifth Circuit followed the lead of Cities Service in United Gas Pipeline Co. v. FPC, 357 F.2d 230 (5th Cir. 1966), ²¹ by holding that the federal income tax allowance in a rate should have been computed on a separate return basis. ²²

The Supreme Court reversed the Fifth and Tenth Circuits in FPC v. United Gas Pipeline Co., 386 U.S. 237, 87 S.Ct. 1003, 18 L.Ed.2d 18 (1967). The Court declared that the Commission has the power to take into account consolidated tax savings-generated from whatever source-when determining a company's cost of service tax allowance. ²³ At the same time, however, the Court declared that there is no specific treatment mandated for the allocation of consolidated tax savings. ²⁴

United Gas Pipe Line Co. was a subsidiary of the United Gas Corporation. The parent corporation filed consolidated tax returns for the years 1957 to 1961. The losses of United's two oil and gas production exploration affiliates over this five year period reduced the group's consolidated tax liability. United Gas Pipeline claimed that its allowance for federal taxes in its rate should have been computed on a stand-alone basis at the full statutory rate (then 52 percent). The FPC denied the claimed allowance and spread the consolidated taxes among the affiliated companies in the United Group. United Pipe Line was allocated $9.9 million, which was.$2.1 million less than its stand-alone claim.

In upholding the Commission, the Supreme Court stated:

There is no frustration of the tax laws inherent in the Commission's action. The affiliated group may continue to file consolidated returns and through this mechanism set off system losses against system income. The tax law permits this, but it does not seek to control the amount of income which any affiliate may have. Nor does it attempt to set United's rates. This is the function of the Commission, a function performed here by rejecting that part of the claimed tax expense which was no expense at all, by reducing cost of service and therefore rate, and allowing United only a fair return on its investment.

386 U.S. at 246-47, 87 S.Ct. at 1009.

Despite endorsement by the Supreme Court of its tax cost treatment, the Federal Power Commission changed its policy in 1972. In Florida Gas Transmission Co., ²⁵ the Commission departed from its policy which required that ratepayers receive the benefits of consolidated tax savings. It declared that a "utility should be considered as nearly as possible on its own merits and not on those of affiliates." ²⁶ The Commission allowed the gas pipeline company in that case to include as its tax cost the amount it would pay on a stand-alone basis despite the fact that the company was part of a group filing a consolidated tax return. ²⁷ The Florida Gas decision was not appealed and the Commission policy has never been subjected to judicial scrutiny. ²⁸

The policy decision in this case must be examined on its own merits. The issues here on appeal, while analogous to those in the Florida Gas decision, are shaped by justifications not offered by the Commission in that earlier case. In Florida Gas, the losses reducing the consolidated tax liability...