Hatch v. Federal Energy Regulatory Commission
| Decision Date | 26 June 1981 |
| Docket Number | No. 80-1561,80-1561 |
| Citation | 654 F.2d 825,210 U.S. App. D.C. 110 |
| Parties | Edwin I. HATCH, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
James M. Brachman, New York City, of the bar of the Supreme Court of the United States pro hac vice by special leave of court with whom John P. Meade and Eliot J. Halperin, Washington, D. C., were on the brief for petitioner.
Jane C. Murphy, Atty., Federal Energy Regulatory Commission, Washington, D. C., with whom Jerome Nelson, Acting Gen. Counsel, Federal Energy Regulatory Commission, Washington, D. C., was on the brief for respondent. Joseph G. Stiles, Atty., Federal Energy Regulatory Commission, Washington, D. C., also entered an appearance for respondent.
Before BAZELON, Senior Circuit Judge, and WRIGHT and WALD, Circuit Judges.
Opinion for the Court filed by Circuit Judge WALD.
Petitioner Edwin I. Hatch ("Petitioner") asks this court to set aside the decision of the Federal Energy Regulatory Commission (the "Commission") denying Petitioner's application for authorization to hold interlocking directorships in certain corporations. 1 Petitioner contends that the Commission acted arbitrarily and in violation of its statutory mandate under section 305(b) of the Federal Power Act ("the Act"), 16 U.S.C. § 825d(b), 2 by refusing to allow him to hold simultaneously the positions of director of a public utility and director of an entity authorized to underwrite public utility securities. Petitioner also claims that the rejection of his application was procedurally defective: that it stemmed from the Commission's adoption, after the close of the evidentiary hearing, of a new legal standard of proof, which he was given no opportunity to meet. For the reasons stated below, we hold that the standard of proof adopted in this case is consistent with section 305(b) of the Act and thus that the Commission has the discretion to apply that standard if it proffers an adequate explanation for adopting the changed standard and gives adequate notice to affected parties. However, we believe that a remand is necessary because the Commission did not, in fact, afford any clear explanation of why after forty years it decided to change the standard of proof utilized in proceedings instituted pursuant to section 305(b), and because it did not provide Petitioner an opportunity to supplement the record with evidence relevant to the new standard.
Section 305(b) of the Act provides that no person can serve both as a director of a public utility and a corporation "authorized by law to underwrite or participate in the marketing of securities of a public utility" unless the Commission finds "upon due showing in form and manner prescribed by the Commission, that neither public nor private interests will be adversely affected thereby." In 1976 Petitioner filed an application with the Commission seeking authorization to hold directorships of both City Investing Company ("City Investing") and the Home Insurance Company ("Home Insurance") while continuing to serve as the Chairman of the Board of Directors and Chief Executive Officer of the Georgia Power Company ("Georgia Power"). A brief description of the corporate players follows:
1. Georgia Power, a subsidiary of The Southern Company ("Southern"), a registered holding company, is a public utility. It generates, purchases, distributes and sells electricity in the State of Georgia.
2. City Investing, through its subsidiaries, one of which is City Home Corporation, engages in diversified manufacturing, housing, insurance, and financial enterprises. In 1976, City Investing had consolidated assets of approximately $4.2 billion and revenues of approximately.$2.5 billion. City Investing is not a broker or dealer of securities and is not authorized to underwrite securities.
3. Home Insurance is a wholly owned subsidiary of City Home Corporation actively engaged in the insurance business, with consolidated assets in 1976 of approximately.$2.5 billion and revenues of approximately $1.3 billion. Home Insurance purchases and sells securities held for its own account, but neither engages in any activity that would make it an "underwriter" nor participates in the marketing of securities of any kind.
4. Home Capital Services, Inc. ("Home Capital") is a small corporate subsidiary of Home Insurance created in 1971 to permit Home Insurance and its affiliated companies to purchase newly owned securities at discount prices. Home Capital was, until June 1980, a broker/dealer registered with the Securities and Exchange Commission ("SEC") and is authorized to underwrite public utility securities. Home Capital's activities have been limited to selling and purchasing obligations on behalf of Home Insurance. It engaged in no transactions with the public. In 1976 Home Capital's sole underwriting venture involved New York State Housing Agency State University Construction Bonds. Home Capital's reported assets in 1976 were approximately $6.7 million and its revenues approximately $1.5 million. 3
Petitioner was not, and is not, an officer or director of Home Capital, the only company involved here authorized to underwrite securities. In fact, Petitioner first became aware of the existence of Home Capital in 1975, whereupon he "consulted counsel and made application to the Securities and Exchange Commission and subsequently to the Federal Power Commission for authorization to maintain ... positions with City, Home, and Georgia Power." (Tr. 27, 30). 4 Because Home Capital's investment activities were attributable to its parent, Home Insurance, and grandparent, City Investing, the Commission ruled that Petitioner's directorship of these two companies brought him within the ban of section 305(b) of the Act. 5 On the basis of his initial written application, the Commission found that Petitioner "has failed to demonstrate that approval of the application filed herein will not adversely affect public or private interests," and issued an order to show cause why the application should not be denied (Order to Show Cause, issued February 18, 1977, R. 423, J.A. 3). 6 A one day evidentiary hearing before an Administrative Law Judge ("ALJ") ensued.
Following the Order to Show Cause, the ALJ compiled an evidentiary record consisting of the testimony, related exhibits, and cross-examination of Petitioner and a single witness on behalf of the Commission. The evidence showed that while Petitioner had virtually no knowledge of or involvement in the underwriting activities of Home Capital, nonetheless prior to his 1976 application, Home Capital and Georgia Power, as well as Home Capital and other companies on whose boards Petitioner sat, engaged in securities transactions among themselves during his tenure as director of each corporation. 7 According to the ALJ:
It was (Petitioner's) understanding that since its formation in 1971, Home Capital has been a member (but never the lead underwriter) of seventeen syndicates underwriting municipal obligations and that participation in those underwritings has enabled Home Capital to make the purchase of new securities cheaper for other members of the Home Insurance Group by passing on to them the underwriter's discount obtained by Home Capital. It was his understanding, further, that no underwriting by Home Capital has related to Georgia Power or its subsidiaries in anyway (sic). In 1973 Home Capital participated, to the extent of $3,500,000 in the $17,250,000 offering of Jackson County, Mississippi Water Pollution Revenue Bonds, Series 1973, due November 1, 1978. The bonds were obligations of Jackson County, Mississippi, although the source of revenue for the bonds was the Mississippi Power Company, a subsidiary of Southern. As noted earlier, Southern is a public utility holding company which owns all of the common stock of Georgia Power. That underwriting was led by E. F. Hutton & Company, Inc., the winner of the competitive bidding.
Notwithstanding (Petitioner's) above-noted understanding, the record nevertheless shows that Home Capital has, on behalf of Home Insurance, participated in both the sale and purchase of stocks and bonds of companies of which (Petitioner) is a director, including securities of Georgia Power. For example, Home Capital participated in the sale of Southern stocks, the sale of Georgia Power bonds and in the purchase of Seaboard stocks (Petitioner was Director of Seaboard Coast Lines Industries, Inc.).
"Initial Decision of the ALJ," supra note 7, at 7 (R. 561, 567, J.A. 12, 18) (citations omitted). 8
The hearing revealed no evidence, however, that Petitioner exerted any influence in Georgia Power to let Home Capital participate in the underwriting of Georgia Power's securities or vice-versa. Nor was there any evidence that anyone connected with City Investing, Home Insurance, or Home Capital ever exerted any influence on Petitioner to advance Georgia Power's use of the underwriting services of Home Capital. The activities of Home Capital were not discussed at meetings of the Board of Directors of City Investing or Home Insurance. Furthermore, at the suggestion of the Commission, after Petitioner filed his application, City Investing, Home Insurance, and Home Capital entered into an agreement providing that while Petitioner maintained his various director positions, Home Insurance and Home Capital could retain their present holdings of securities of Georgia Power and Southern, but would not engage in transactions involving any other securities of Georgia Power or Southern. (Tr. 31-32). Initial Decision of the ALJ, supra.
The ALJ summarized his evidentiary findings as follows:
There is nothing in the record to indicate or even imply that (Petitioner) has abused any of his positions in the...
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