Memphis Light, Gas and Water Div. v. Federal Power Com'n
| Decision Date | 26 June 1974 |
| Docket Number | Nos. 24517,24632,s. 24517 |
| Citation | 163 U.S.App.D.C. 130,500 F.2d 798 |
| Parties | , 74-2 USTC P 9531 MEMPHIS LIGHT, GAS AND WATER DIVISION, Petitioner, v. FEDERAL POWER COMMISSION, Respondent, Texas Gas Transmission Corporation and Tennessee Valley Municipal Gas Association, etc., Intervenors. PUBLIC SERVICE COMMISSION OF the STATE OF NEW YORK, Petitioner, v. FEDERAL POWER COMMISSION, Respondent, Texas Gas Transmission Corporation, Intervenor. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Richard A. Solomon, Washington, D.C., for petitioner in No. 24632.
George E. Morrow, Memphis, Tenn., with whom Reuben Goldberg, Washington, D.C., was on the brief, for petitioner in No. 24517.
Charles E. Bullock, Atty., F.P.C., with whom Leo E. Forquer, Gen. Counsel, and George W. McHenry, Jr., Sol., F.P.C., were on the brief, for respondent.
Christopher T. Boland, Washington, D.C., with whom Melvin Richter, Washington, D.C., was on the brief for intervenor, Texas Gas Transmission Corp. George J. Meiburger, Washington, D.C., also entered an appearance for intervenor, Texas Gas Transmission Corp.
Reuben Goldberg, Washington, D.C., entered an appearance for intervenors Tennessee Valley Municipal Gas Assn., et al.
Before FAHY, Senior Circuit Judge, ROBINSON and WILKEY, Circuit judges.
This case reaches us on remand from the Supreme Court, which held that section 441 of the Tax Reform Act of 1969 1 does not limit the authority of the Federal Power Commission (FPC) under the Natural Gas Act 2 to permit a regulated utility to change for ratemaking purposes its method of depreciation on pre-1970 and replacement property from flow-through to normalization. 3 This court must now review on other grounds the validity of the EPC's decision to allow Texas Gas Transmission Corporation (Texas Gas) to make such a shift in depreciation practices.
In June 1969 Texas Gas filed a rate increase with the FPC. 4 In its accompanying statement of reasons for the requested change Texas Gas attributed as a cause of the increase its proposed discontinuance of the use of liberalized depreciation and reversion to straight-line depreciation. 5 At the ensuing hearing the Presiding Examiner segregated the issues involved into two phases, Phase I to consist of questions of rate of return, associated income taxes, and reversion to straight-line depreciation. After settlement of many issues by the parties the FPC was left with the depreciation question to resolve. Following briefing by the parties, but without oral argument, the FPC issued in June 1970 an order permitting Texas Gas to change its method of liberalized depreciation for rate-making purposes from flow-through to normalization with respect to pre-1970 and post-1969 non-expansion property. 6 This decision was reaffirmed by the FPC in its Opinion and Order Denying
Rehearing in July 1970. 7
An appeal to this court was then taken. We held that the Tax Reform Act had deprived the FPC of the authority to allow such a change in depreciation methods. 8 However, the Supreme Court then held that the FPC retained such authority 9 and remanded the case to this court to decide the merits pursuant to section 19(b) of the Natural Gas Act. 10
Two primary aspects of the FPC decision are challenged in this appeal. First, was there substantial evidence on which the FPC based its decision? Second, were the parties sufficiently apprised of the possible remedy of a shift to normalization, as opposed to straight-line depreciation?
Memphis Light, Gas and Water Division (Memphis Light) and Public Service Commission of the State of New York (Public Service) challenge as lacking substantial evidence the FPC's decision allowing Texas Gas to normalize 11 its federal income taxes in computing its rates. Specifically they attack the FPC's findings that liberalized depreciation on non-expansion property 12 will no longer produce permanent tax savings, and that tax savings on expansion property 13 will not be available to offset declining depreciation on older properties.
At the outset we note that the scope of our review is limited, for Congress has ordained that the FPC is to be granted broad discretion in the regulation of the natural gas industry. The Supreme Court has acknowledged the presumption of validity accorded the FPC:
Section 19(b) of the Natural Gas Act provides without qualification that the 'finding of the Commission as to the facts, if supported by substantial evidence, shall be conclusive.' More important, we have heretofore emphasized that Congress has entrusted the regulation of the natural gas industry to the informed judgment of the Commission, and not to the preferences of reviewing courts. A presumption of validity therefore attaches to each exercise of the Commission's expertise, and those who would overturn the Commission's judgment undertake 'the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences.' FPC v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, at 228, 88 L.Ed. 333 (1944). We are not obliged to examine each detail of the Commission's decision; if the 'total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end.' Ibid. 14
This general principle of deference has been carried over to the particular area of depreciation for ratemaking purposes. Prior to 1966 the various circuit courts acceded to the FPC view 15 that liberalized depreciation provided only a tax deferral and not a tax savings. 16 Hence companies were allowed to take liberalized depreciation for tax purposes but to normalize for ratemaking purposes, to ensure that current consumers would pay their fair share and not burden future consumers. However, when in 1966 the FPC completely changed its view and concluded that liberalized depreciation would result in a permanent tax saving where there was a growing or stable plant, the courts applauded the FPC's flexibility and affirmed the requirement that companies flow-through the tax savings to current consumers. 17 Given the traditional wide discretion of the FPC, petitioners must meet a heavy burden to sustain their challenge. 18
The portion of the FPC order challenged here is the approval of Texas Gas' abandonment of flow-through for accounting and ratemaking purposes. This decision, which represents a change from the position of the FPC in Alabama-Tennessee Natural Gas Co., 19 was based on the FPC's determination that, given the current situation in the gas industry and the particular facts as to Texas Gas, Texas Gas would no longer obtain a tax savings from the use of liberalized depreciation on pre-1970 and post-1969 non-expansion property.
In capsule form, the FPC analysis proceeded as follows:
(a) Because of Texas Gas' election under the Tax Reform Act, depreciation on post-1969 expansion property would be subject to normalization, not flow-through. 20
(b) Therefore, tax depreciation on post-1969 expansion property would not be available to offset declining tax depreciation on other, older property.
(c) Excluding such expansion property, the continued use of liberalized depreciation on non-expansion property would not create a tax saving; there would not be a stable basis of tax depreciation because the permissible tax depreciation life of natural gas property is much shorter than the actual physical life.
(d) It follows that normalization for ratemaking purposes will provide a greater potential for stable rates for consumers, and a better chance for the company to earn a fair rate of return without future rate increases.
(e) Additionally, normalization will improve the company's before tax coverage of interest, thus improving the company's securities, and will also help alleviate current shortages of cash.
Petitioners attack several steps in this rationale as lacking substantial evidence, and indeed as lacking any evidence whatever. We find the objections unpersuasive and affirm the decision of the FPC as based on substantial evidence. Not only do we find evidence supporting the FPC, but much of this evidence is uncontradicted in the record, briefs, and oral argument.
First, we find that there is sufficient evidentiary support for the FPC determination that the pre-1970 plant will not remain stable, in the sense that the basis of tax depreciation will decline. 21 Contrary to Memphis Light's assertion that there is no relevant evidence, 22 a senior vice-president of Texas Gas testified at the hearings that tax depreciation on the existing plant would fall by $1.1 million between 1970 and 1971. 23 Investment of $33 million in new plant would be necessary to maintain the same dollar differential between tax and book depreciation. Thus, if annual replacement investment were less than $33 million, the amount of tax depreciation on the pre-1970 plant would decline, and liberalized depreciation would no longer produce a tax saving 24 which could be passed on to the consumer in the form of lower current rates.
The FPC looked to the annual reports of Texas Gas previously filed with the agency, and determined that annual plant retirements from 1965 to 1969 averaged.$2.7 million, valued at original cost. 25 While Memphis Light is technically correct that this evidence was not in the record as such, nevertheless courts have traditionally permitted the FPC to go to materials such as filed company reports which are dehors the record. 26 Hence, there are adequate grounds for the FPC to conclude that it is unlikely that replacement investment will be sufficient to maintain a stable plant, 27 in the sense that the basis of tax depreciation related thereto will decline. We believe that this evidence meets the requirements set forth long ago by Chief Justice Hughes, that...
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