Montana Power Co. v. Federal Energy Regulatory Commission, 76-2726
| Citation | 599 F.2d 295 |
| Decision Date | 22 June 1979 |
| Docket Number | No. 76-2726,76-2726 |
| Parties | MONTANA POWER COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. |
| Court | U.S. Court of Appeals — Ninth Circuit |
William J. Madden, Jr., Debevoise & Liberman, Washington, D. C., for petitioner.
Drexel D. Journey, Gen. Counsel, FERC, Lynn N. Hargis, FERC, Washington, D. C., for respondent.
On Petition to Review Orders of The Federal Energy Regulatory Commission.
Before HUFSTEDLER, GOODWIN, and WALLACE, Circuit Judges.
This case presents the novel question whether the Federal Power Commission (now the Federal Energy Regulatory Commission) may prevent an electric utility from including in its rate base, for accounting purposes, the total cost of acquiring an electric transmission line from a railroad. The Montana Power Company petitions for review, pursuant to 16 U.S.C. § 825L (b), of an order issued by the Federal Power Commission ("FPC") on April 19, 1976, which approved the company's purchase of a railroad's 100 kv transmission line, while rejecting the Company's proposed accounting treatment of the transaction. The FPC order permitted Montana Power to include in its rate base account only the portion of the purchase price that represented the depreciated original cost of the line to the railroad that had built it. The difference between the acquisition cost and depreciated original cost was ordered placed in a non-rate base account to be amortized to operating expense. Following the Commission's denial of a rehearing, Montana Power petitioned for review, challenging the accounting treatment ordered by the FPC.
The transmission line acquired by Montana Power was built in 1916 by the Chicago, Milwaukee, St. Paul & Pacific Railroad to provide power for its electrified railroad operations in a remote area of western Montana. Montana Power furnished all electricity used on the 350-mile transmission line, which was owned, maintained, and operated entirely by the railroad. As the population of western Montana grew, the railroad permitted Montana Power to tap into the transmission line to provide electricity to its retail customers in the area. Montana Power was permitted to use the line free of charge, while the railroad continued to bear all costs of maintenance and operation.
On June 16, 1974, the railroad shifted from electric to diesel locomotives along the route served by the transmission line. The railroad proposed to dismantle the transmission line, unless the power company purchased it. At that time, Montana Power was using the line to transmit electricity to approximately 6,500 customers and one rural electric cooperative. Rather than construct a new transmission line, at an estimated cost of $6,000,000, Montana Power chose to purchase the existing line from the railroad for $3,250,000. 1 The transaction was completed on July 15, 1974, after Montana Power had informed the FPC of its intention to purchase the line and its belief that the transaction did not require FPC approval. 2
On December 11, 1974, Montana Power requested the FPC to permit it to record the full $3,250,000 purchase price of the transmission line in its rate base account, from which the company is entitled to earn a return on its investment. The company noted that because it was the first electric utility to own the transmission line, the capital cost of the line had never been borne by electric utility customers. The company also argued that if it had constructed a new, and more expensive transmission line, it would have been entitled to place the full cost of construction in its rate base account.
On September 26, 1975, the FPC ordered Montana Power to show cause why the Commission should not find that the acquisition of the transmission line required FPC approval under section 203 of the Federal Power Act. 3 The FPC reserved consideration of the accounting treatment of the transaction until the jurisdictional issues were resolved. On January 5, 1976, Montana Power applied to the Commission for an order disclaiming jurisdiction over the acquisition or, alternatively, an order approving the acquisition. On April 19, 1976 the FPC approved the acquisition, but required Montana Power to exclude all but the depreciated original cost of the transmission line from its rate base account. The effect of the FPC order is that only $156,117 of the total of $3,250,000 purchase price may be included in the rate base account. The bulk of the purchase price was recorded in an account that is amortized over the remaining life of the transmission line as an annual operating expense.
Congress has granted the FPC broad authority to prescribe accounting procedures for public utilities. Section 301(a) of the Federal Power Act, 16 U.S.C. § 825, requires public utilities to "make, keep, and preserve . . . such accounts . . . as the Commission may by rules and regulations prescribe as necessary or appropriate . . . ." This legislation authorizes the FPC to "determine by order the accounts in which particular outlays and receipts shall be entered, charged, or credited." (16 U.S.C. § 825(a).)
Pursuant to its statutory authority, the FPC has adopted a Uniform System of Accounts Prescribed for Public Utilities. (18 C.F.R. Part 101 (1978).) The FPC accounting regulations require utilities to record the value of their electric plant on an "original cost" basis. "Original cost" is defined as "the cost of such property to the person first devoting it to public service." (18 C.F.R. Part 101, "Definitions" (1978).) Thus, when a utility constructs a new transmission line, the cost of construction is recorded as the original cost and may be included in a rate base account. When a utility acquires property already devoted to public service, the original cost principle again governs the accounting treatment of the transaction. Thus, regardless of the acquisition cost, the acquiring utility can include in its rate base account only that portion of the purchase price that represents the depreciated original cost of the property to the previous owners. Because the transmission line Montana Power acquired had already been devoted to public service by the railroad, the FPC permitted Montana Power to include in its rate base only the railroad's depreciated original cost of the line.
Montana Power argues initially that the FPC order is inconsistent with the FPC's accounting regulations and previous decisions of the Commission. Montana Power notes that while the Uniform System of Accounts defines "original cost" as "the cost of such property to the person first devoting it to Public service," another portion of the regulations (Electric Plant Instruction 2A) instructs the utilities to record plant acquisitions "at the cost incurred by the person who first devoted the property to Utility service." (18 C.F.R. Part 101 (emphasis supplied).) Moreover, Montana Power observes that in two previous cases (Virginia Electric & Power Co. (1967) 38 FPC 487; Black Hills Power & Light Co. (1968) 40 FPC 166) the FPC permitted utilities that acquired transmission lines from non-utilities to include the full acquisition costs in their rate base accounts.
Despite the apparent conflict in the wording of the accounting regulations, the FPC has consistently interpreted them to require that acquisitions be recorded at the cost to the person first devoting the property to public service. The FPC's interpretation of the accounting regulations is controlling. As the Supreme Court noted in Bowles v. Seminole Rock Co. (1945) 325 U.S. 410, 414, 65 S.Ct. 1215, 1217, 89 L.Ed. 1700, "the ultimate criterion is the administrative interpretation, which becomes of controlling weight unless it is plainly erroneous or inconsistent with the regulation." The Commission has consistently adhered to its interpretation of the regulations. In both Virginia Electric & Power Co., supra, and Black Hills Power & Light Co., supra, the acquiring utility was permitted to include its entire acquisition cost in its rate base account only because "the line (had) not previously been devoted to the public service." (38 FPC at 488; 40 FPC at 166.) 4 Thus, the only question before us is the validity of the FPC's accounting regulations.
In reviewing the validity of FPC accounting regulations, we must bear in mind that we cannot disturb the FPC's order unless it is so arbitrary and capricious as to constitute an abuse of discretion. (American Telephone & Telegraph Co. v. United States (1936) 299 U.S. 232, 57 S.Ct. 170, 81 L.Ed. 142; Pacific Power & Light Co. v. FPC (9th Cir. 1944) 141 F.2d 602.) To constitute an abuse of discretion (American Telephone & Telegraph Co. v. United States, supra, 299 U.S. at 236-37, 57 S.Ct. at 172, citations omitted.)
Montana Power argues that it is arbitrary and irrational to prevent it from including the entire acquisition cost of the transmission line in its rate base account. The power company notes that there is no allegation that the purchase price of the transmission line was artificially high or that the transaction was designed to inflate the utility's rate base. Montana Power's customers have never paid for the transmission line. If Montana Power had chosen to construct a new and more expensive transmission line, the entire cost of construction would have been recorded in their rate base account. Thus, the power company argues that the FPC accounting order encourages utilities to make wasteful and duplicative capital investments, instead of using existing transmission facilities.
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