Source: https://supreme.justia.com/cases/federal/us/411/458/
Timestamp: 2019-04-22 04:25:30+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 411 › FPC v. Memphis Light, Gas & Water Div.
Section 441 of the Tax Reform Act of 1969 does not deprive the Federal Power Commission of the authority to permit a utility that is subject to its jurisdiction under the Natural Gas Act to change the depreciation method that it uses for purposes of ratemaking from accelerated depreciation with "flow through" of the utility's tax savings to customers to accelerated depreciation with normalization (where the income tax expense allowed in the cost of service is computed on a straight-line depreciation basis) with respect to pre-1970 property as well as replacement property. Pp. 411 U. S. 465-474.
149 U.S.App.D.C. 238, 462 F.2d 853, reversed and remanded.
We granted certiorari in these cases to determine whether § 441 of the Tax Reform Act of 1969, 26 U.S.C. § 167(l), circumscribes the authority of the Federal Power Commission under the Natural Gas Act, 52 Stat. 821, as amended, 15 U.S.C. § 717 et seq., to permit a regulated utility to change its method of computing depreciation for ratemaking purposes from "flow-through" to "normalization" with respect to property acquired prior to 1970 as well as "replacement" property.
jurisdiction to prescribe the depreciation method to be used by regulated utilities in calculating their federal income tax expense for ratemaking purposes. [Footnote 2] Initially, the Commission required utilities to compute their cost of service, which includes federal income taxes, as if they were using straight-line depreciation. This method, referred to as "normalization," was designed to avoid giving the present customers of a utility the benefits of tax deferral attributable to accelerated depreciation. If a utility used accelerated depreciation in determining its actual tax liability, the difference between the taxes actually paid and the higher taxes reflected as a cost of service for ratemaking purposes was required to be placed in a deferred tax reserve account. See Amere Gas Utilities Co., 15 F.P.C. 760.
F.P.C. 61, aff'd sub nom. Midwestern Gas Transmission Co. v. FPC, 388 F.2d 444 (CA7).
"(1) If straight line depreciation is presently being taken, then no faster depreciation is to be permitted as to that property."
"(2) If the taxpayer is taking accelerated depreciation and is 'normalizing' its deferred taxes, then it must go to the straight line method unless it continues to normalize as to that property."
"(3) If the taxpayer is taking accelerated depreciation and flowing through to its customers the benefits of the deferred taxes, then the taxpayer must continue to do so, unless the appropriate regulatory agency permits a change as to that property."
"to shift from the flow-through to the straight-line method, with or without the permission of the appropriate regulatory agency, or . . .
with the permission of the regulatory agency, to shift to the normalization method. . . . [Footnote 6]"
(§ 167(l)(1)). With respect to post-1969 property, a utility may use (1) straight-line depreciation, (2) accelerated depreciation with normalization, or (3) accelerated depreciation with flow-through if the utility used flow-through prior to August, 1969 (§ 167(l)(2)). In addition, under § 167(l)(4)(A), a utility may elect to abandon accelerated depreciation with flow-through with respect to post-1969 expansion property.
The proceedings in issue here involve Texas Gas Transmission Corp., the operator of a major interstate pipeline system certificated by the federal Power Commission. Although Texas Gas utilized accelerated depreciation with flow-through prior to the adoption of the Tax Reform Act, it filed a proposed rate increase with the Commission on June 27, 1969, based upon "the proposed discontinuance of the use of liberalized depreciation and the reversion to a straight-line method of tax depreciation." After § 167(l) was enacted, Texas Gas advised the Commission that it intended to exercise the election provided in § 167(l)(4)(A), and sought permission to use accelerated depreciation with normalization with respect to its post-1969 expansion property. [Footnote 9] It also sought assurance, before it made the election, that it would be able to change from flow-through to straight-line or, preferably, accelerated depreciation with normalization with respect to its pre-1970 property and post-1969 replacement property.
enhancing the quality of its securities, and that it will help alleviate present day cash shortages."
The Court of Appeals, on petitions for review, reversed the Commission's order. [Footnote 11] 149 U.S.App.D.C. 238, 462 F.2d 853, rehearing denied, id. at 250, 462 F.2d at 865. Although the Court recognized that the version of the Tax Reform Act passed by the House would have supported the Commission's order, it held that the limited nature of the election provision as finally passed deprived the Commission of authority to permit regulated utilities to abandon flow-through with respect to their existing and replacement property. We reverse and remand to the Court of Appeals for further proceedings consistent with this opinion.
The present cases concern solely the depreciation methods used by utilities in calculating their federal income tax expenses for ratemaking purposes.
and second was the aim to promote the "financial integrity" of the natural gas companies as measured not only by revenues sufficient to recover operating expenses and capital costs, id. at 320 U. S. 603, but also by revenues "sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital." Ibid. We mention those matters because (1) the treatment of depreciation bears on rates, and (2) there is no indication in the legislative history of this tax measure that Congress desired to modify, as respects the precise issue involved here, the broad discretion of the Commission delineated in Hope Natural Gas and in other rate cases.
"require natural gas companies to carry proper and adequate depreciation and amortization accounts in accordance with such rules, regulations, and forms of account as the Commission may prescribe."
proposition, is obviously within the jurisdiction of the Commission."
The lower courts have allowed the Commission broad discretion in determining proper depreciation methods for ratemaking purposes. See, e.g., Alabama-Tennessee Natural Gas Co. v. FPC, 359 F.2d 318; Midwestern Gas Transmission Co. v. FPC, 388 F.2d 444.
"[i]n the case of any pre-1970 public utility property, the taxpayer may use the applicable 1968 method for such property if -- (i) the taxpayer used a flow-through method of accounting"
"Your committee's bill provides that, in the case of existing property, the following rules are to apply: "
The word "existing" property, as used in that Report, included "replacement" property in the mind of the Court of Appeals.
The Senate version of the bill [Footnote 13] would have permitted Texas Gas to shift from liberalized depreciation with flow-through either to straight-line depreciation or, with the Commission's approval, to liberalized depreciation with normalization. 149 U.S.App.D.C. at 247 462 F.2d at 862.
"The House bill provides that, in the case of certain listed regulated industries (the furnishing or sale of . . . gas through a local distribution system, . . . and transportation of gas by pipeline), a taxpayer is not permitted to use accelerated depreciation unless it 'normalizes' the current income tax reduction resulting from the use of such accelerated depreciation."
"This rule is not to apply in the case of a taxpayer that is at present flowing through the tax reduction to earnings for purposes of computing its allowable expenses on its regulated books of account. Also, if the taxpayer is now using straight line depreciation as to any public utility property, it may not change to accelerated depreciation as to that property."
"The Senate amendment makes the following changes in the House bill: . . . (d) an election is permitted to be made within 180 days after the date of enactment by a company at present on flow-through to come under the rules of the bill. . . ."
"The conference substitute (sec. 1 of the substitute and sec. 167(l) of the code) follows the Senate amendment except that the special provision referred to in (e) above is stricken, and the 180-day election (item (d), above) is modified to apply to new property and not to replacement property.
Even in the case of new property, however, the right to change over from the flow-through method is to be available only to the extent the new property increases the productive or operational capacity of the company."
From these four paragraphs, the Court of Appeals concluded that the second paragraph of the Conference Report prohibits Texas Gas from abandoning liberalized depreciation with flow-through, and that the right of election was restricted to post-1969, expansion property only.
authorizing precisely what the Commission allowed in this case. The second paragraph, read in the context of the Conference Report, does not state that the Commission lacks authority to permit a company on flow-through to abandon it with respect to existing property. It only states that a company on flow-through may remain on flow-through. Thus, it is solely a limitation on the requirement that a company must normalize if it wants to continue accelerated depreciation with respect to pre-1970 property. This is entirely consistent with the structure of § 167(l)(1).
"the applicable 1968 method, if, with respect to its pre-1970 public utility property of the same (or similar) kind most recently placed in service, the taxpayer used a flow-through method of accounting for its July, 1969, accounting period."
But § 167(l)(4)(A) provides that, where the taxpayer makes an election within the 180-day period, paragraph (2)(C) shall not apply with respect to any post-1969 public utility property "to the extent that such property constitutes property which increases the productive or operational capacity of the taxpayer" and does not represent "the replacement of existing capacity."
and flowing through to its customers the benefits of the deferred taxes as of August 1, 1969, then the taxpayer would continue to do so (except for a special election procedure discussed below), unless the appropriate regulatory agency permits a change as to that property."
This document goes on to state [Footnote 19] that, as respects new property, a utility on flow-through must remain on flow-through "unless the regulatory agency permits it to change (or unless the election below applies)."
This document provides a compelling contemporary indication that the Federal Power Commission was not deprived of its authority to permit abandonment of flow-through, even though utilities had the right not to have flow-through apply to their expansion property.
Tax Reform Act of 1969 would be in the public interest as envisaged by the Natural Gas Act, even though it might increase rates. The "freeze" certainly was designed to cover changes to faster methods of tax depreciation, but not changes to slower methods of tax depreciation that the Commission might permit.
"It is clear, however, that such consumer interests would not be furthered by permitting Texas Gas to abandon flow-through in the circumstances presented by the case at bar."
Appeals is the tribunal where review must be sought; and we remand the cases to it for proceedings consistent with this opinion. We note in closing, however, that the judgment of the Court of Appeals is reversed in toto. Its holding that the consumer interests were not furthered by the Commission's action is short of the application of the appropriate standard for review. As already noted, under Hope Natural, as rates are "just and reasonable" only if consumer interests are protected and if the financial health of the pipeline in our economic system remains strong.
"[t]here shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)"
of qualified property. Section 167(b) defines "reasonable allowance" to include an allowance computed under the declining balance method and the "sum of the years digits" method, as well as the straight-line method. Under the declining balance and "sum of the years digits" method, both commonly referred to as accelerated or liberalized depreciation methods, depreciation allowances in the early years are higher than under the straight-line method, but steadily decrease over the useful life of the asset. Under the straight-line method, the depreciation allowance for an asset remains equal over its useful life.
Federal income taxes are properly included as an expense under the cost of service ratemaking utilized by the Commission in the regulation of rates for sales of natural gas subject to its jurisdiction under the Natural Gas Act, 15 U.S.C. § 717 et seq. See FPC v. United Gas Pipe Line Co., 386 U. S. 237, 386 U. S. 243.
See H.R.Rep. No. 9113, pt. 1, pp. 131-132; S.Rep. No. 91-552, p. 172.
See H.R.Rep. No. 91-413, pt. 1, pp. 132-133; S.Rep. No. 91-552, p. 172.
H.R.Rep. No. 91-413, pt. 1, p. 133.
S Rep No. 91-552, p. 173.
See H.R.Conf.Rep. No. 91-782, p. 313.
"The term 'public utility property' means property used predominantly in the trade or business of the furnishing or sale of -- "
"(i) electrical energy, water, or sewage disposal services,"
"(ii) gas or steam through a local distribution system,"
"(iii) telephone services, or other communication services if furnished or sold by the Communications Satellite Corporation for purposes authorized by the Communications Satellite Act of 1962 (47 U.S.C. [§] 701), or"
"(iv) transportation of gas or steam by pipeline,"
"if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof."
In Order No. 404, 43 F.P.C. 740, rehearing denied, 44 F.P.C. 16, the Commission announced that, as a general policy, it would permit utilities making the election under § 167(l)(4)(A) to use accelerated depreciation with normalization with respect to their expansion property. The Court of Appeals, in the same decision under review here, affirmed this order. 149 U.S.App.D.C. 238, 250, 462 F.2d 853, 865. That part of the court's decision is not before us.
"(A) In the computation of its Federal Income Tax allowance for ratemaking purposes as well as for accounting purposes, Texas Gas is permitted to use liberalized depreciation with normalization with respect to its property other than that subject to election under Section 167(l)(4)(A) of the Internal Revenue Code as amended by Section 441 of the Tax Reform Act of 1969. Such election applies to property constructed or acquired on or after January 1, 1970, to the extent it increases the productive or operational capacity of the company and does not represent the replacement of existing capacity. Texas Gas may reflect any such change in its rates, as well as any change in costs arising from its proposed election. In computing its cost of service for ratemaking purposes, balances in Account 282 [deferred tax reserve account] should continue to be deducted from the rate base."
Memphis Light, Gas & Water Division, a municipally owned distributor of natural gas and a city-gate customer of Texas Gas, and the Public Service Commission of the State of New York petitioned the Court of Appeals for review of the Commission's Opinion No. 578. Each had filed an application for rehearing before the Commission which was denied in Opinion No. 578-A. Both the Federal Power Commission (in No. 72-486) and Texas Gas (in No. 72-488) petitioned this Court for a writ of certiorari.
"The [Senate] committee amendments, while in most respects the same as the House provisions, differ in one principal area. The amendments permit an election to be made within 180 days after the date of enactment of the bill for a utility covered by this provision to shift from the flow-through to the straight-line method, with or without the permission of the appropriate regulatory agency, or permit it with the permission of the regulatory agency to shift to the normalization method (that is, to come under general rules of the bill)."
"This election applies both as to new and existing property. . . . Since the company would no longer be permitted to use accelerated depreciation (unless the agency later permits it to normalize), the agency would not be able to impute the use of accelerated depreciation with flow-through."
H.R.Conf.Rep. No. 91-782, pp. 312-313.
"If the taxpayer is taking accelerated depreciation and is 'normalizing' its deferred taxes, then it must go to the straight line method unless it continues to normalize as to that property."
"If the taxpayer is taking accelerated depreciation and flowing through to its customers the benefits of the deferred taxes, then the taxpayer must continue to do so unless the appropriate regulatory agency permits a change as to that property."
General Explanation of the Tax Reform Act of 1969, H.R. 13270, 91st Cong., p. 151.
H.R.Rep. No. 91-413, pt. 1, pp. 132-133.
"Any party to a proceeding under this chapter aggrieved by an order issued by the Commission in such proceeding may obtain a review of such order in the court of appeals of the United States for any circuit wherein the natural gas company to which the order relates is located or has its principal place of business, or in the United States Court of Appeals for the District of Columbia [Circuit]. . . ."

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