Panhandle Eastern Pipe Line Co. v. Federal Power Com'n

• Citation: 316 F.2d 659
• Decision Date: 15 March 1963
• Docket Number: No. 16479.,16479.
• Parties: PANHANDLE EASTERN PIPE LINE CO., Petitioner, v. FEDERAL POWER COMMISSION, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

316 F.2d 659 (1963)

PANHANDLE EASTERN PIPE LINE CO., Petitioner, v. FEDERAL POWER COMMISSION, Respondent.

No. 16479.

United States Court of Appeals District of Columbia Circuit.

Argued December 17, 1962.

Decided March 15, 1963.

Mr. Harry S. Littman, Washington, D. C., with whom Messrs. Dale A. Wright, and Richard Littell, Washington, D. C., were on the brief, for petitioner.

Miss Josephine H. Klein, Atty., F. P. C., with whom Messrs. Richard A. Solomon, Gen. Counsel, Howard E. Wahrenbrock, Sol., Abraham R. Spalter, Asst. Gen. Counsel, F. P. C., and Ralph S. Spritzer, Gen. Counsel, F. P. C., at the time the brief was filed, were on the brief, for respondent. Mr. John C. Mason, Gen. Counsel, F. P. C., at the time the record was filed, also entered an appearance for respondent.

Mr. Jerome Maslowski, Lansing, Mich., filed a brief on behalf of Michigan Public Service Commission, as amicus curiae, urging reversal.

Mr. Lawrence H. Gall, Washington, D. C., filed a brief on behalf of Independent Natural Gas Association, as amicus curiae, urging reversal.

Mr. William E. Torkelson, Madison, Wis., filed a brief on behalf of Public Service Commission of Wisconsin, as amicus curiae.

Mr. William M. Bennett, San Francisco, Cal., filed a brief on behalf of Public Utilities Commission of the State of California, as amicus curiae.

Before BAZELON, Chief Judge, and EDGERTON, WILBUR K. MILLER, FAHY, WASHINGTON, DANAHER, BASTIAN, BURGER and J. SKELLY WRIGHT, Circuit Judges, sitting en banc.

BAZELON, Chief Judge.

In a rate proceeding under § 4(e) of the Natural Gas Act,¹ the Federal Power Commission allowed Panhandle Eastern Pipe Line Company an over-all return of 6.25 per cent on its total rate base, reflecting a rate of return of 1.5 percent on $11,000,000 of investment from its reserves for deferred income taxes. In this petition for review, Panhandle's only complaint relates to the rate allowed on the reserves.

These reserves are generated by Panhandle's use of § 167 of the Internal Revenue Code² which authorizes taxpayers to write off depreciable property more quickly than is permitted under the "straight-line" method of depreciation. The liberalized method provides higher depreciation deductions and therefore lower taxes during the early part of the life of a given property, and lower deductions and higher taxes in the later years of the life of the property. The total depreciation deductions available to a company over the entire life of a facility are the same using either method. The comparative advantage provided by liberalized depreciation is that it defers to the later life of a given property a portion of the taxes on income that would be payable in the early years under straight-line depreciation, and gives the company the use of such moneys in the interval. Liberalized depreciation under § 167 is thus said to result in tax deferrals rather than tax savings. Cf. City of Detroit, Mich. v. Federal Power Comm., 97 U.S.App.D.C. 260, 230 F.2d 810 (1955); El Paso Natural Gas Co. v. Federal Power Comm., 281 F.2d 567, 573 (5th Cir.1960). But see Eisner, Depreciation under the New Tax Law, 33 Harv.Bus.Rev.No. 1, pp. 66-74.

In City of Detroit, we sustained the Commission's action in permitting Panhandle (1) to use the straight-line method of depreciation in fixing its rates, while using the accelerated method for computing its tax expense, and (2) to include reserves for deferred taxes in its rate base. We rejected a rate-payer's objection that such treatment did not produce the "lowest reasonable rates" required by § 5(a) of the Natural Gas Act.³ But the question of what return, if any, should be allowed on reserve funds included in the rate base was not before us in City of Detroit. It is the sole question presented in this case.

Here the Commission, following its decision in Northern Natural Gas Co., 25 F.P.C. 431 (1961), "divided the benefits of liberalized depreciation between the regulated company and the rate-payer" giving the "major portion of the benefits to the rate-payer." It permitted Panhandle "only so much of a return on funds generated by the use of liberalized depreciation as is necessary to provide it with a sufficient incentive to continue to use liberalized depreciation." Thus, a substantially lower rate of return was attributed to those funds than to other capital.

Panhandle insists that Congress intended all the benefits of liberalized depreciation for the taxpayer and none for the rate-payer. Accordingly, it urges that the tax statute assures a "full return" on the deferred tax reserves equivalent to the rate of return of 6.46 percent which the Commission allowed on other investment.

In their briefs, the Commission and some of the State Commissions suggest that the regulatory treatment of tax benefits is entirely a matter of discretion and policy within the administrative competence of the agencies charged with regulating rates, and that consequently the Commission would have power to deny the company any return on the funds generated by liberalized depreciation and to require the companies to continue to utilize such depreciation. But the Commission did not follow that course. Instead, it sought to give "such effect to the purposes of the tax statute as is appropriate within the principles of regulatory law expressed in the Natural Gas Act." We therefore intimate no opinion concerning the validity of the course proposed in the briefs, and consider only the Commission's action under review.

In reviewing that action, we must first decide whether the congressional purposes underlying the tax and gas acts are effectuated by permitting a rate of return on the funds generated by the use of liberalized depreciation no higher than that required to provide the company with "a sufficient incentive to continue to use liberalized depreciation." And if they are, we must then decide whether 1.5 per cent constitutes such a rate of return.

We now briefly consider the policy underlying § 167 of the tax statute. Nothing in the language or legislative history indicates that Congress considered its regulatory consequences. Thus, to infer that the statute materially altered fundamental principles of rate regulation — which require rates to reflect actual costs of capital — it must clearly appear that Congress intended to benefit producers to the exclusion of consumers. It does not so appear: the legislative history reveals that Congress intended the statute "to have far-reaching economic effects" extending to "all segments of the American economy."⁴ Liberalized depreciation was seen as a means toward a broad economic goal; it was expected to "assist modernization and expansion of industrial capacity, with resulting economic growth, increased production, and a higher standard of living." (House and Senate Reports accompanying Internal Revenue Code of 1954, reprinted in U.S.Code Cong. & Ad. News, 83d Cong., 2d Sess. Vol. 3, 4046-48, 4655, 4835.)

To set this economic spiral in motion, producers must, of course, be willing to invest in plant and incur the attendant risks. Congress permitted "acceleration in the speed of the tax-free recovery of costs because it considered this of critical importance in the decision of management to incur such risks." Ibid. The Commission's decision does not disturb this acceleration; it relates only to the rate of return allowed a regulated company on the reinvestment of the money thus recovered. Although Congress was not directly concerned with this rate, it may be argued that to the extent that this rate influences the company's initial decision to invest in plant, it does touch upon the congressional purpose underlying the tax act. But even under this view, the congressional purpose could not be adversely affected unless the regulated companies were prevented from re-employing recovered funds at a sufficient profit to provide incentive to initial investment.

The Commission explicitly rested its determination on the judgment that the rate of return it allowed on the recovered funds, taken with the other "material advantages,"⁵ would provide the company "with a sufficient incentive to continue to use liberalized depreciation * * *." This implicitly recognizes that, since the recovered funds were acquired at no cost to the company, and since the risks involved in their reinvestment are minimal as compared with the risks generally encountered by non-regulated producers, a return of 1.5 per cent provides sufficient profit incentive for the company to continue generating these funds by investing in plant and utilizing accelerated depreciation.

Since there is no indication that Congress intended to bestow upon the producers qua producers any benefits beyond those necessary to provide incentives to investment, we conclude that, if a return of 1.5 per cent taken with the other advantages does provide such incentive, the Commission's decision would be consistent with the congressional policy underlying the tax statute.

Next we consider "the principles of regulatory law expressed in the Natural Gas Act," which impelled the Commission to allow no more of a return on these funds than that necessary to effectuate the tax act. These principles include the requirement that a public utility must operate on the most economical basis consistent with good service and sound finance. Implicit in this requirement is the rule that the rates charged must reflect the company's actual total costs, including its cost of capital. Since the capital represented by the funds generated by accelerated depreciation cost the company nothing, sound principles of rate regulation support the Commission's decisions to permit the company no more of a return on these funds than that necessary to effectuate the congressional policy underlying the tax statute. See Cities of Lexington, et al. v. Federal Power Comm., 295 F.2d 109 (4th Cir.1961); El Paso Natural Gas Co. v. Federal Power Comm., 281 F.2d 567 (5th...