Jersey Cent. Power & Light Co. v. F.E.R.C.

• Citation: 768 F.2d 1500
• Decision Date: 02 August 1985
• Docket Number: No. 82-2004,82-2004
• Parties: JERSEY CENTRAL POWER & LIGHT COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Allegheny Electric Cooperative, Inc., et al., Intervenors.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

Page 1500

768 F.2d 1500

248 U.S.App.D.C. 67

JERSEY CENTRAL POWER & LIGHT COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Allegheny Electric Cooperative, Inc., et al., Intervenors.

No. 82-2004.

United States Court of Appeals District of Columbia Circuit.

August 2, 1985.

Rehearing En Banc Granted Oct. 18, 1985. ^*

Ginsburg, Circuit Judge, filed a concurring opinion.

Mikva, Circuit Judge, filed a dissenting opinion.

On Petitioner's Petition for Rehearing.

James B. Liberman, Leonard W. Belter and Daniel F. Stenger, Washington, D.C., were on petitioner's petition for rehearing.

Before MIKVA, GINSBURG, and BORK, Circuit Judges.

Opinion for the Court filed by Circuit Judge BORK.

Concurring Opinion filed by Circuit Judge GINSBURG.

Dissenting Opinion filed by Circuit Judge MIKVA.

BORK, Circuit Judge:

This is an appeal from orders issued by the Federal Energy Regulatory Commission ("FERC") summarily directing Jersey Central Power and Light Company ("Jersey Central") to file reduced rates without benefit of a hearing. In our initial opinion, we upheld the FERC orders, primarily because of our reliance on statements by FERC which we thought suggested that the "end result" test of FPC v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944) (Douglas, J.), did not apply to a utility overall but "only to those assets which valid Commission rules permit to be included in the rate base." Jersey Central Power & Light Co. v. FERC, 730 F.2d 816, 823 (D.C.Cir.1984). Subsequently, Jersey Central petitioned for rehearing and presented persuasive new arguments suggesting that this conclusion was in error. FERC filed two unhelpful responses to Jersey Central's petition and ultimately joined Jersey Central in requesting that we modify our opinion. Brief for Respondent FERC in Response to the Court's Order of July 16, 1984 at 6 n. 7. After carefully reconsidering the issue and the parties' briefs on rehearing, we are now persuaded that our initial opinion was in error. We therefore vacate that decision and remand the case to FERC for a full evidentiary hearing. Jersey Central should be allowed to present, at that hearing, all of its evidence suggesting that FERC's rate reduction orders violate the end result test by unreasonably denying investors a fair rate of return. If Jersey Central succeeds in proving the allegations it has made before us on appeal, it should promptly be granted a rate increase adequate to satisfy the requirements of Hope Natural Gas. ¹

I.

At the outset, we assume familiarity with the background information and reasoning set forth in our prior opinion. Jersey Central Power & Light Co. v. FERC, 730 F.2d 816 (D.C.Cir.1984). We repeat here only those facts and arguments which bear directly on the rehearing petition. From the beginning of this proceeding, Jersey Central has argued that it was entitled to a hearing to present evidence showing that FERC's orders denied it a reasonable rate of return. In its rehearing petition, Jersey Central has reemphasized the inadequacy of the rate of return allowed to its investors.

Jersey Central alleges that "for four years [it] has been unable to pay any dividends on its common stock." Petition for Rehearing and Suggestion for Hearing En Banc at 8. This is alleged to be the case even though under the rates it sought to charge, Jersey Central claims that it "would continue to provide safe, adequate and reliable service at rates less than those charged by many of its neighboring utilities." Id. (emphasis added). Jersey Central claims that in part as a consequence of FERC's orders it has been "repeatedly on the edge of being forced into bankruptcy." Id. at 14. Since 1979 it

has had no access to the long-term capital markets and has been wholly dependent upon a short-term revolving credit agreement which was subject to termination at a moment's notice. [The company] has been allowed sufficient cash flow to enable [it] to avoid bankruptcy (but not to provide earnings [sufficient] to enable [it] to attract capital or maintain credit).

Id. Accordingly, Jersey Central claims that FERC's rate reduction orders are denying investors a reasonable rate of return in order to maintain consumer rates at unusually low levels. These allegations, if true, would suggest that FERC's actions were illegal under the end result test of Hope Natural Gas.

II.

In our initial opinion, we reviewed the reasonableness of FERC's orders pursuant to Hope Natural Gas under the mistaken belief that the end result test only applies "to those assets which valid Commission rules permit to be included in the rate base." 730 F.2d at 823. We reached this conclusion in reliance on FERC's "rather terse explanation," id., that "the reasonableness of [the] end result cannot be evaluated without regard to the individual components which comprise a rate." Jersey Central Power & Light Co., 20 F.E.R.C. (CCH) p 61,083, at 61,181 (July 23, 1982) (Order Granting in Part and Denying in Part Application for Rehearing). Now FERC concedes that it did not intend its explanation "to convey that meaning." Brief for Respondent FERC in Response to the Court's Order of July 16, 1984 at 4. Instead, FERC agrees that "the end result stage of the ... proceedings provides the occasion ... to make appropriate adjustments to any of the previous determinations that went into the establishment of the rate." Id. at 6 (emphasis in original).

After re-examining the issue, we are now persuaded that the end result test applies to both the calculation of the rate of return on invested assets and to the calculation of the proper rate base. As Judge Bazelon explained in Washington Gas Light Co. v. Baker, 188 F.2d 11 (D.C.Cir.1950), cert. denied, 340 U.S. 952, 71 S.Ct. 572, 95 L.Ed. 686 (1951), "the Commission may adopt any method of valuation for rate base purposes so long as the end result of the rate order 'cannot be said to be unjust and unreasonable.' " 188 F.2d at 18 (emphasis added), quoting Hope Natural Gas, 320 U.S. at 602, 64 S.Ct. at 287. Thus, no matter how the rate base is determined, "the 'total effect,' 'impact' or 'end result' of the rate order" must satisfy the requirements of Hope Natural Gas. 188 F.2d at 14. Those requirements in turn demand that there be a "reasonable" balancing of consumer and investor interests.

Normally, we would defer to the balancing of consumer and investor interests arrived at by the Commission so long as the result reached falls within a "zone of reasonableness." Permian Basin Area Rate Cases, 390 U.S. 747, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1968). Judge Bazelon has described that zone as being "bounded at one end by the investor interest against confiscation and at the other by the consumer interest against exorbitant rates." ² Washington Gas Light Co., 188 F.2d at 15 (Bazelon, J.). Judicial protection of the investor interest is important because, as Justice Douglas explained,

the investor interest has a legitimate concern with the financial integrity of the company whose rates are being regulated. From the investor or company point of view it is important that there be enough revenue not only for operating expenses but also for the capital costs of the business. These include service on the debt and dividends on the stock. Cf. Chicago & Grand Trunk Ry. Co. v. Wellman, 143 U.S. 339, 345-346 [12 S.Ct. 400, 402, 36 L.Ed. 176]. By that standard the return of the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks. That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital. See Missouri ex rel. Southwestern Bell Tel. Co. v. Public Service Commission, 262 U.S. 276, 291 [43 S.Ct. 544, 547, 67 L.Ed. 981] (Mr. Justice Brandeis concurring).

Hope Natural Gas, 320 U.S. at 603, 64 S.Ct. at 288.

In this case, we must reconsider the "reasonableness" of FERC's orders in light of its concession that we misconstrued the end result test in our initial opinion. Specifically, we must decide whether FERC's orders fall outside the zone of reasonableness in denying investors a fair rate of return. Based on the totality of the circumstances alleged to exist by Jersey Central, we conclude that FERC's orders reducing rates without a hearing were unreasonable and ignored the requirements of Hope Natural Gas. Jersey Central claims that FERC is denying its investors any rate of return whatsoever on their investment in order to maintain "rates less than those charged by many of its neighboring utilities." These allegations, if true, would suggest that FERC has not achieved a reasonable balancing of investor and consumer interests in keeping with the requirement that rates be "reasonable, just, and non-discriminatory."

We noted in our prior opinion that it is, of course, true that FERC is not chartered to insure utilities against the hazard of not making a profit. Accordingly, under Hope Natural Gas "regulation does not insure that the business shall produce net revenues." Hope Natural Gas, 320 U.S. at 603, 64 S.Ct. at 288, quoting FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 590, 62 S.Ct. 736, 745, 86 L.Ed. 1037 (1942). In this case, however, Jersey Central claims that it can earn a rate of return sufficient to preserve the integrity of its capital without charging exploitative rates. Assuming that to be true, this is not a case where Jersey Central is asking FERC to guarantee it a profit at the consumers' expense. ³

Notwithstanding the foregoing arguments, FERC nonetheless objects that Jersey Central is somehow seizing on the end result test and asking us to use it here as a substantive rule of ratemaking. Brief for Respondent FERC in Response to the Court's Order of July 16, 1984 at 7. Nothing could be further from the truth. Under the end result test as we have described it, FERC is free to employ any ratemaking...