City of Chicago v. Federal Power Commission

• Decision Date: 08 September 1967
• Docket Number: 19836.,No. 19604,19604
• Citation: 128 US App. DC 107,385 F.2d 629
• Parties: CITY OF CHICAGO, a Municipal Corporation of the State of Illinois, and Public Service Commission of the State of Wisconsin, Petitioners, v. FEDERAL POWER COMMISSION, Respondent, Natural Gas Pipeline Company of America, Intervenor. NATURAL GAS PIPELINE COMPANY OF AMERICA, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

128 US App. DC 107, 385 F.2d 629 (1967)

CITY OF CHICAGO, a Municipal Corporation of the State of Illinois, and Public Service Commission of the State of Wisconsin, Petitioners, v. FEDERAL POWER COMMISSION, Respondent, Natural Gas Pipeline Company of America, Intervenor.

NATURAL GAS PIPELINE COMPANY OF AMERICA, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.

Nos. 19604, 19836.

United States Court of Appeals District of Columbia Circuit.

Argued October 28, 1966.

Decided September 8, 1967.

As Amended October 31, 1967.

Petition for Rehearing Denied October 31, 1967.

COPYRIGHT MATERIAL OMITTED

Mr. Mathias M. Mattern, Chicago, Ill., of the bar of the Supreme Court of Illinois, pro hac vice, by special leave of court, with whom Mr. William T. Torkelson, Madison, Wis., was on the brief, for petitioners in No. 19,604.

Mr. William W. Brackett, Chicago, Ill., for petitioner in No. 19,836.

Mr. Peter H. Schiff, Deputy Sol., F. P. C., with whom Messrs. Richard A. Solomon, Gen. Counsel, Howard E. Wahrenbrock, Sol. at the time of argument, and Abraham R. Spalter, Asst. Gen. Counsel, F. P. C., were on the brief, for respondent.

Before BURGER, TAMM and LEVENTHAL, Circuit Judges.

LEVENTHAL, Circuit Judge:

This case presents a cluster of issues concerning the proper treatment, for purposes of regulation by the Federal Power Commission of the rates of natural gas pipeline companies, of the higher deductions permitted in calculation of Federal income tax by the liberalized depreciation provisions of Section 167 of the Internal Revenue Code of 1954.¹ In addition to questions of general approach there are particular issues as to the effect of a rate settlement agreement.

I Procedural History.

The controversy before us began when rate increases were filed in 1960 by Natural Gas Pipeline Company (Natural),² the petitioner in No. 19836. On Natural's motion in the ensuing proceeding under Section 4(e) of the Natural Gas Act,³ the increased rates were put into effect on March 1, 1961, after the statutory suspension period expired, subject to Natural's obligation to make such refunds as the Commission might validly order. After a full hearing was had, but before briefs were submitted to the examiner, Natural, its customers, the City of Chicago (Chicago) and the Wisconsin Public Service Commission (Wisconsin), and the Commission staff, agreed upon a rate settlement. The customers agreed to accept an increase in rates yielding approximately $6,200,000 per annum, about half the increase Natural had proposed, and Natural agreed to refund amounts already collected above the agreed-upon increase.

The settlement left open two questions for future determination, one of which relates to liberalized depreciation, and Natural agreed to abide by a Commission refund order "if any" with regard to the reserved issue, subject to its right to judicial review. On October 25, 1962, the Commission approved this settlement.⁴

On February 3, 1964, the Commission issued Opinion 417, Alabama-Tennessee Natural Gas Co.,⁵ wherein it announced principles concerning rate treatment of liberalized depreciation, and the City of Chicago then moved the Commission to decide the liberalized depreciation issue with respect to Natural. On March 18, 1965, the Commission issued its Opinion 456,⁶ concluding that the principles of Alabama-Tennessee were applicable to Natural and making certain other rulings with respect to effective date and settlement agreements that will be discussed in due course.

Petitions for rehearing were filed and denied, and petitions for review under Section 19(b) of the Natural Gas Act⁷ were filed both by Chicago and Wisconsin as joint petitioners in No. 19604, and by Natural in No. 19836.

Consideration by this court was deferred pending judicial review of the Commission's Alabama-Tennessee decision. That decision was affirmed by the Fifth Circuit in Alabama-Tennessee Natural Gas Co. v. FPC, 359 F.2d 318 (1966). The Supreme Court denied certiorari, 385 U.S. 847, 87 S.Ct. 69, 17 L.Ed.2d 78 (1966).

II The Validity of the Commission's Requirement for "Flow Through" to Consumers of the Tax Reductions Achieved by Natural Through Use of Liberalized Depreciation.

1. The Federal Power Commission, with judicial approval, has been engaged under the Natural Gas Act in regulating the maximum rates of natural gas pipeline companies by permitting rates that will yield operating revenues sufficient to cover "cost of service," a term that in essence includes, in addition to operating costs, depreciation, etc., the "return" to the company which the Commission calculates by providing a fair rate of return on a rate base equal to the amount prudently invested in utility property, and the "expense" of Federal income tax payable on the allowed return.⁸ The objective is to allow a fair profit, after taxes, ascertained after taking into account "a variety of factors, such as the risks of the business, the necessity for attracting capital, and the desirability of lower cost of gas to the public."⁹

2. Focusing on the income tax element this is regarded by regulatory commissions as part of the "cost" of service, a terminology in line with the general thinking of businessmen, although for various purposes economists and accountants draw a distinction between tax burden and cost. The difference is largely one of nomenclature since in any event it is necessary to provide, obtain or permit revenues after taxes that are sufficient to cover all costs other than taxes.

The general rule followed by the Commission, and indeed most if not all regulatory commissions, is that the "consumers should be charged for only the actual liability for Federal income taxes."¹⁰ However, as the Commission pointed out, in some cases normalization of tax deferrals is required lest future consumers be compelled to subsidize present consumers being served by the operations accruing tax liabilities. The specific question of the proper regulatory treatment of the liberalized depreciation tax deduction is one on which the regulatory commissions are nearly equally divided.

A bare majority use the so-called "normalization" method by which the tax expense component of cost of service is calculated by using the higher income tax that would have been payable if depreciation were calculated on the "straightline" method almost universally utilized for tax purposes prior to the 1954 Code, without reduction for the amount of "deferred" taxes carried in a tax reserve on the books in contemplation of the future tax obligation. This approach focuses on the current tax reduction achieved by the utility as a tax "deferral," with liberalized deduction providing higher depreciation deductions and hence lower taxes in the early part of the property's usable life, and of lower deductions and higher taxes in later years.

The rejection of the normalization approach by respondent Commission, and others, rests on the view that the deferral conception is inappropriate in the absence of a reasonably foreseeable decline in depreciable plant account, and hence is inapplicable where a growing or stable plant is ascertainable for the foreseeable future. In Alabama-Tennessee the Commission determined that the deferral conception was inapplicable in view of the factual condition of growing or stable plant for the foreseeable future, a condition found to exist in general for the natural gas industry and natural gas pipeline companies. The finding of this condition followed a review of forecasts for energy supply and demand and other pertinent economic data, a forecast of continuous growth characteristics for the industry for some time, albeit at a more modest rate than the dramatically steep incline that has marked the industry in the post-war decades, and a relative assurance of at least stable plant for the foreseeable future.

In Alabama-Tennessee the Commission rejected normalization for the natural gas industry in general, but left open the possibility that a different ruling might be applicable to a particular company that showed its condition was different from the industry's in this regard. No such showing was attempted by Natural, and there is no serious effort in this case to dispute the factual finding underlying the flow-through determination, similar to that made for the company in Alabama-Tennessee, that "Natural will maintain a growing or stable plant for the foreseeable future."

3. We follow the decision of the Fifth Circuit in Alabama-Tennessee which sustained the Commission's findings as reasonable and supported by evidence and upheld the general validity and particular application of the policy determination requiring "flow-through" of the tax reduction ascribable to liberalized depreciation. Although in general the denial of certiorari is said to import no conclusion on the merits, it is not insignificant that in Alabama-Tennessee the writ was denied notwithstanding the concession of the Solicitor General that an important recurring question was involved.

In any event, Alabama-Tennessee is plainly in line with the principles expressed in FPC v. United Gas Pipe Line Co., 386 U.S. 237, 87 S.Ct. 1003, 18 L.Ed. 2d 18 (1967). In that case the Court held that where affiliated companies obtain a tax saving through consolidated returns, a regulatory commission can flow through the amount it calculates, by a reasonable allocation, to be the tax saving of a regulated company within the affiliated group. The Court pointed out that the tax law does not attempt to set rates, and stated (at 244-245, 87 S.Ct. at 1007):

When the out-of-pocket tax cost of the regulated affiliate is reduced, there is an immediate confrontation with the ratemaking principle that limits cost of service to expenses actually incurred. Nothing in Colorado Interstate Colorado Interstate Gas Co. v. FPC, 324 U.S. 581, 65 S.Ct. 829, 89 L.Ed. 1206 or Panhandle Panhandle Eastern Pipe Line Co. v. FPC, 324 U.S. 635, 65 S.Ct. 821, 89

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