61,638

Cited as "33 FERC ¶ . . . ."

* Filed out of time .

[¶ 61,327]

Williams Pipe Line Company, Docket Nos . OR79-1-026, -027, -028, -029, -030

and -031

Opinion No. 154-C; Order Denying Rehearing in Part, Modifying Opinion No .

154-B in Part, Clarifying That Opinion, and Denying Stay

(issued December 5, 1985)

Before Commissioners : Raymond J. O'Connor, Chairman; A. G . Sousa, Charles

G. Stalon, Charles A . Trabandt and C . M. Naeve.

[Note: Opinion No. 154-B, issued June 28, 1985, appears at 31 FERC ¶ 61,377 .]

[Opinion No. 154-C Text]

On June 28, 1985, the Commission issued Opinion No . 154-B . 1 In that Opinion,

the Commission established principles pursuant to which it will test the reasonableness

of oil pipeline rates . On July 26, 1985, Marathon Pipe Line Company (Marathon) filed

a request for rehearing . On July 29, 1985, the Association. of Oil Pipe Lines (AOPL), 2

ARCO Pipe Line Company (ARCO), and the United States Department of justice

(Justice) filed requests for rehearing . Justice also asked for clarification of the order . a

On July 29, 1985, the Mid-Continent Shippers petitioned for reconsideration . Most of

the arguments raised by the petitioners are not new and have been fully addressed in

Opinion No . 154-B . Except for those matters dealt with herein, the Commission finds

262 1-3-86

¶ 61,326 Federal Energy Guidelines

034-25

United Gas Pipe Line Company 11-20-85

C186-45-000 The Process Gas Consumers Group 11-15-85

Tenngasco Corporation, et a]. 11-18-85

Natural Gas Pipeline Company of America 11-20-85

Transcontinental Gas Pipe Line Corporation 11-20-85

Consolidated Gas Transmission Corporation 11-20-85

United Gas Pipe Line Company 11-20-85

Tenneco Oil Company, et a]. 11-20-85

* Public Utilities Commission of The State

of California 11-21-85

C186-51-000 The Process Gas Consumers Group 11-15-85

Tenngasco Corporation, et a] . 11-18-85

Natural Gas Pipeline Company of America 11-20-85

Transcontinental Gas Pipe Line Corporation 11-20-85

Consolidated Gas Transmission Corporation 11-20-85

Tenneco Oil Company, et a]. 11-20-85

United Gas Pipe Line Company 11-20-85

CI86-53-000 The Process Gas Consumers Group 11-15-85

Tenngasco Corporation, et a]. 11-18-85

Tenneco Oil Company, et a]. 11-20-85

Transcontinental Gas Pipe Line Corporation 11-20-85

Consolidated Gas Transmission Corporation 11-20-85

United Gas Pipe Line Company 11-20-85

C186-56-000 The Process Gas Consumers Group 11-21-85

Consolidated Gas Transmission Corporation 11-22-85

Tenngasco Corporation, et a] . 11-22-85

Tenneco Oil Company, et a]. 11-22-85

United Gas Pipe Line Company 11-22-85

Transcontinental Gas Pipe Line Corporation 11-22-85
262 1-3-86

FERC Reports

005-21

Commission Opinions, Orders and Notices

61,639

that no facts or principles of law have been presented which warrant modification of

Opinion No . 154-B .

Summary of Opinion No. 154-B

In Opinion No . 154-B, the Commission :

(1) adopted net depreciated trended original cost (TOC) as the form of rate base

and stated that only the equity portion thereof would be trended ;

(2) concluded that rate of return should be determined on a case-by-case basis by

the usual approach of using embedded debt costs and setting a risk-related equity rate

of return ;

(3) stated that as a general policy the proper capital structure to use was the

pipeline's or its parent's actual capital structure, depending on how capital was

raised 4 ;

(4) adopted a starting rate base for existing assets consisting of the sum of a

pipeline's debt ratio times book net depreciated original cost and the equity ratio times

the reproduction cost portion of the valuation rate base depreciated by the same

percentage as the book original cost rate base has been depreciated ;

(5) ruled that oil pipelines should use their actual interest expense in computing

their income tax allowance in their cost-of-service ;

(6) adopted normalization as the proper treatment for book and tax timing

differences in the recognition of certain expenses and noted that oil pipelines must

exclude all deferred tax amounts from their rate bases ; and

(7) removed the previously imposed limitations on the suspension of unprotested

oil pipeline rate filings and on the participation of Commission staff in oil pipeline rate

cases . Interest Expense Deduction

ARCO and justice object to the method adopted in Opinion No . 154-B for

determining the interest expense deduction in calculating a pipeline's income tax

allowance .

In Opinion No. 154-B, the Commission held :

[One] . . . tax issue is the determination of the interest expense deduction to use in

calculating a pipeline's tax allowance . The usual method is to multiply the

company's weighted cost of debt times its rate base . This will not work for oil

pipelines . This is so because under the TOC [Trended Original Cost] methodology

adopted in this opinion the rate base includes an equity write-up . The Commission

holds, therefore, that oil pipelines should use their actual interest expense . 5

Both ARCO and justice argue that the interest expense deduction for determining the

tax allowance should be the same as the interest produced by the capital structure

adopted for rate of return purposes . The Commission agrees that, as a general rule, tax

and return interest should be the same . The problem here, as stated in Opinion No.

154-B and as recognized by ARCO, is that the TOC methodology adopted in Opinion

No. 154-B includes an equity write-up . Hence, the usual method of multiplying the

company's weighted cost of debt times its rate base will not produce a proper interest

expense deduction . The Commission's solution to this problem was to require the use of

61,327
61,640

Cited as "33 FERC ¶ . . . ."

¶ 61,327

262 1-3-86

a pipeline's actual interest expense . The Commission is now persuaded that the better

solution is to use the same actual capital structure for both the interest expense

deduction and the allowed interest return . This is in accord with our decision in

Arkansas Louisiana Gas Company, a Division of Arkla, Inc .,6 in which we expressed a

general preference for using actual capital structures rather than hypothetical capital

structures when determining gas pipelines' rates of return . That decision assumed that

the interest expense deduction would be the same as the debt return produced by the

capital structure . We see no reason why this should not also be the case for oil

pipelines, if the equity write-up can be eliminated . At this time, therefore, subject to

re-examination on a case-by-case basis, it appears appropriate for an oil pipeline to

determine its interest expense deduction by multiplying its weighted cost of debt times

its net depreciated original cost rate base .

Capita] Structure, Rate of Return and Depreciation

Justice asks for clarification or modification of several aspects of the capital

structure principles established by Opinion No . 154-B . The first clarification concerns

the date to be used in determining the capital structure . For pipelines whose rates are

not currently under investigation by the Commission or whose rates may have been set

for investigation after issuance of Opinion No. 154-B, the capital structure to be used

in determining the starting base is as of the date of Opinion No . 154-B (June 28, 1985) .

If a pipeline has a case pending before the Commission in which rates are being

collected subject to refund, the capital structure to be used is that in existence on the

date the rates under investigation became effective . 7

The second issue raised by justice is whether the parent's actual capital structure

includes or excludes non-guaranteed debt issued by subsidiaries . We believe this

question should be resolved on a case-by-case basis .

8

Third, justice argues that the capital structure used to determine the starting

rate base should be permanent for the service life of the property . If changes to the

debt-equity ratios are permitted, states justice, pipelines will • be able to manipulate

their returns . We disagree . The starting rate base freezes only the dollars in that base .

As with other regulated companies, capital structure may change from time to time .

Fourth, justice asks whether the Commission intended that a real rate of return,

once determined, would be used without change unless altered in a later rate case .

Justice is correct . Our reference to changes in the real rate was meant to indicate that

the risks of the pipeline could be reexamined . One mechanism for doing this would be

to derive a new nominal rate and subtract therefrom the inflation rate using whatever

inflation index is finally established .

Fifth, justice requests clarification on how equity depreciation for existing

pipelines will be treated . While it is true, as stated by justice, that under TOC, the

original cost of equity is not a component of the starting rate base, we intend that the

equity, as well as the debt, depreciation component for cost-of-service purposes will be

based on original cost . 9

Last, justice asks us to place on pipelines the burden of going forward with

evidence that a pipeline's investors had relied on the future recovery of deferred

earnings under the valuation methodology . Opinion No. 154-B permitted participants

challenging the starting rate base to prove that investors had not relied upon the

previous rate base method . Justice states that participants raising such challenge

would have to engage in years of discovery to prove that there was no reliance .

Federal Energy Guidelines

003-23
262 1-3-86

Commission Opinions, Orders and Notices61,641

However, justice then implicitly contradicts itself when it argues that prima facie

evidence of earnings in past years, higher than those allowed under valuation, should

be sufficient to require the pipeline to come forward with evidence of its reliance .

Evidence of such earnings obviously does not take years of discovery to obtain and is

clearly one avenue for participants to pursue in showing that a pipeline was not relying

on future earnings under the valuation methodology .

The other issues raised by justice, such as the appropriate inflation index, are

better addressed and resolved in the context of particular cases .

This is also true for the question raised by the Mid-Continent Shippers of whether

a parent should be compensated for its guarantees of a pipeline's debt when the

parent's capital structure is used for rate of return purposes . 10 Opinion No . 154- B has

provided the basic framework for oil pipeline ratemaking ; certain matters, however,

are more appropriately fleshed-out in a specific pipeline setting .

Request for Stay

The AOPL asks that the Commission stay the effectiveness of Opinion No . 154-B

pending judicial review . The AOPL states that it has made a strong showing that it is

likely to prevail on the merits of its appeal and is concerned about the potential waste

of resources if the court of appeals vacates Opinion No . 154-B . The Mid-Continent

Shippers oppose the AOPL's request . They state that under the criteria established in

Washington Metropolitan Area Transit Commission v . Holiday Tours, Inc., 559 F .2d

841 (D.C . Cir . 1977), the petitioner for stay is required to show that without such

relief, it will be irreparably injured . They state that the AOPL has not identified the

nature or extent of any injury . Hence, the AOPL has not shown irreparable injury . The

Mid-Continent Shippers also observe that the Commission has left some matters to a

case-by-case determination . Thus, application of the principles of Opinion No . 154-B

will clarify and elaborate those principles . Furthermore, since Opinion No . 154-C

provides guidance as to the methodology the Commission intends to apply in all

pending and future rate cases, but allows changes to this methodology on a case-bycase basis, the members of AOPL will not be harmed if the stay is denied .

The Commission agrees with the Mid-Continent Shippers . Although the

Commission will grant a stay when "justice so requires," 11 here the public interest is

best served by letting the oil pipeline industry begin the business of applying the

generic principles enumerated in Opinion No. 154- B without further delay . Moreover,

the Commission believes that moving forward in those cases will have the salutary

effect of enabling the Commission to fine-tune those principles .

The Commission orders :

(A) All requests for rehearing and clarification are denied except as described in

the body of this order .

(B) AOPL's request for a stay is denied .

-Footnotes -

1 Williams Pipe Line Co ., 31 FERC 161,377

(1985) .

2 The AOPL included in its filing verified

statements of certain individuals as matters relied

upon in its request for rehearing . FERC Reports

054-25

3 The AOPL and Phillips Pipe Line Company

filed responses in opposition to the motion for

clarification by justice .

4 If a parent guarantees debt issued by its

pipeline subsidiary, the parent may be considered to

be the issuer of the debt .

¶ 61,327
61,642

Cited as "33 FERC ¶ . .

5 31 FERC at p. 61,837 .

6 31 FERC ¶ 61,318 (1985) .

7 31 FERC at p. 61,839, nn . 43 and 45 . The

reason the Commission referenced 1983 valuations is

that the only cases in which rates are currently

subject to refund concern pipelines whose tariff filings

were made prior to 1983 .

[¶ 61,328]

Michiana Hydro-Electric Power Corp ., Project No . 7848-002

Order Denying Appeal

(Issued December 10, 1985)

Before Commissioners : Raymond J . O'Connor, Chairman ; A . G. Sousa, Charles

G. Stalon, Charles A. Trabandt and C . M. Naeve .

By letter dated August 29, 1985, the

Director, Office of Hydropower Licensing

(Director), dismissed the accepted license

application of Michiana Hydro-Electric Power

Corporation (Michiana) for the proposed

Bainter Town Water Power Project No . 7848,

to be located on the Elkhart River in the Town

of Bainter, in Elkhart County, Indiana . The

Director dismissed Michiana's application

because Michiana had failed to respond to the

Director's letter of April 25, 1985, requiring

Michiana to file within 90 days (July 24, 1985)

additional information described therein .

Michiana has filed a timely appeal of the

Director's action dismissing its application,

requesting reinstatement of its application . For

the reasons discussed below, we deny the

appeal .

Background

Under Section 4 .32(f) of the Commission's

regulations, the Director has authority to

require license applicants to provide the

Commission with any additional information

he considers relevant for informed Commission

decisions on the applications . 1 In addition,

that section permits the Director, at his

discretion, to dismiss license applications for

the failure of the applicants to adequately

provide the Commission with such

information . 2 In reviewing such actions taken

by the Director, the Commission overturns his

decisions only if he acted arbitrarily or

unreasonably . 3

In his April 25, 1985 letter, the Director

requested that Michiana provide, inter alia :

(1) evidence showing that it had been granted

a water quality certificate or that certification

had been denied or waived, or in the

alternative, if the responsible state agency had

not yet acted upon Michiana's request for such

certification, copies of any correspondence

between Michiana and that agency ; (2) a

¶ 61,327

262 1-3-86

8 See Tennessee Gas Pipeline Co ., a Division of

Tenneco Inc ., 33 FERC ¶ 61,005 (1985)-

9 Id. n . 41 .

10 See, id. n . 50 .

11 Administrative Procedures Act, 5 U .S .C . § 705

(1982) .

description of water quality in the Elkhart

River in the vicinity of the project; (3) a

description of the impacts of Michiana's

proposed 50 cubic feet per second (cfs)

minimum flow on temperature and dissolved

oxygen in the proposed bypassed reach of the

river; (4) a map showing the location and

extent of wetlands within the vicinity of the

proposed project ; and (5) a copy of a report

documenting the results of a cultural resources

inventory of the project impact areas . With

respect to items (2), (3) and (4) above,

Michiana was instructed to provide comments

from the appropriate consulting agencies .

Michiana was instructed that it "should make

written requests for these comments ; if the

agencies do not reply, [Michiana] should

provide the Commission with copies of the

letters of request . The letters of request should

be dated no later than 45 days from the date of

[the Director's April 25 letter], and must allow

a minimum of 30 days for agency response ."

The letter stated that, if the requested

information was not submitted within 90 days,

Michiana's application might be dismissed .

On January 10, 1985, the Director,

Division of Project Management, had

requested Michiana to respond to agency

letters commenting on its application within

30 days. However, since the United States Fish

and Wildlife Service and the Indiana

Department of Natural Resources had

requested Michiana to provide certain

hydrologic data (fishery and flow analyses) in

order for them to be able to comment on the

application, Michiana requested, by letter filed

with the Commission on April 25, 1985, that it

be granted an extension of time to comply with

the January 10, 1985 request . The Director

granted that request by letter dated May 9,

1985, in which he stated that "[y]ou are

hereby granted an extension of time until July

31, 1985, to submit your response to any

Federal Energy Guidelines

017-52