Opinion ID: 396140
Heading Depth: 2
Heading Rank: 3

Heading: the commission record

Text: 35 The Commission fails to meet the substantial evidence test on two of the three major justifications offered in support of Orders 47 and 47-A. First, apparently recognizing that ratepayers should receive the consolidated tax benefits resulting from the Columbia parent's peculiar method of distributing capital to affiliates, the Commission maintains that its rate order will insure the ratepayers the benefits; however, the record is sketchy. Second, the one-time losses of the Columbia West Virginia affiliate which reduced tax liability for the test period should not be reflected in a prospective rate order according to FERC; the Commissions findings in this regard were based on substantial evidence. Finally, the Commission urges that the rate order will encourage exploration for the development of natural gas resources; here, the Commission is on weakest ground.
36 Almost half of the consolidated tax benefits stem from the relationship between the parent company and the subsidiaries, whereby the parent borrows money at high rates and lends it at low rates, resulting in a balance sheet loss. This loss reduces Columbia's consolidated tax liability. There is no principled basis for giving Columbia, and denying the ratepayers, the benefit of this tax savings. No policy of the Natural Gas Act would be furthered by allowing Columbia to keep the benefits of this bookkeeping device. FERC does not contest this point. 37 The Commission claims that the stand-alone tax liability reflects a reduction in the subsidiaries' taxable income resulting from the deduction of the parent's cost of capital, the real cost, as an expense. Alternatively, the book cost (calculated at the lower rate at which the parent lent to the affiliate) could have been used as a deduction, which would have resulted in a larger stand-alone tax liability than that reflected in the rate order. FERC explains that the calculation of stand-alone tax liability passes through the benefits of the parent's capital distribution losses to the ratepayers. The Commission concluded that the reduction in stand-alone taxable income results in an income tax exactly equal to that calculated by using a higher taxable income (arrived at by deducting the affiliates' book interest expense) and then subtracting the tax benefit of the losses attributable to the affiliates' use of the parent's capital. 38 The City of Charlottesville challenges the Commission's conclusion that ratepayers receive the tax benefit of this capital distribution plan. Petitioner alleges that the rate base of each affiliate is calculated using the parent's capital costs. Accordingly, with an increased rate base, there is an increase in income which must be recouped from ratepayers, which diminishes the prior adjustment to taxable income. Under this analysis, the tax benefit is passed-through to ratepayers in the tax cost component of the affiliates' rates but is concurrently recouped by the Company through higher affiliate rates premised on a rate base reflecting the parent's higher cost of capital. 39 An evaluation of Petitioner's claim requires an examination of the interaction between the tax calculation and other portions of the ratemaking formula not briefed to the Court. The record before the Court is incomplete on the relationship between the tax costs and capital costs included in the rate base. On remand, the Commission should consider whether the capital distribution tax benefits are in fact passed-through to ratepayers or whether the pass-through is vitiated by rates premised on a rate base which is inflated by the parent's cost of capital.
40 The losses incurred by Columbia of West Virginia during the test period on which the rates at issue were based were the result of a temporary rate moratorium imposed by state regulators. The Commission found, based upon substantial evidence, that the losses would be non-recurring and that the West Virginia affiliate would not generate tax benefits during the term of the prospective rate order. The Commission adjusted the base-period expenses by ignoring the losses and their associated tax benefits before estimating future tax liabilities. 41 This aspect of the contested rate order is affirmed. The Commission's treatment of losses of the West Virginia affiliate was a wholly sensible solution to a problem that frequently arises in ratemaking. Ratemakers must project future expenses from past expenses. 36 When there is evidence that past expenses are inaccurate predictors, the Commission may ignore them. 37 The Commission is affirmed on its treatment of the one-time losses incurred by Columbia of West Virginia.
42 The Commission is not obligated to follow any particular formula for the apportionment of consolidated tax savings. 38 The United ruling allowed flow-through to ratepayers but did not mandate it. FPC v. United Gas Pipe Line Co., 386 U.S. at 246, 87 S.Ct. at 1008. The Commission had authority to allow Columbia the benefits of consolidated tax savings as an incentive to exploration and development 39 by adjusting the tax cost component of affiliates' rates. Adjustment of rates to encourage exploration for and development of natural gas is a proper Commission activity. Permian Basin Area Rate Case, 390 U.S. 747, 798, 88 S.Ct. 1344, 1376, 20 L.Ed.2d 312 (1968); City of Detroit, 230 F.2d at 817. While the Commission has legal authority to do what it did in this case, 40 it lacked factual support for Orders 47 and 47-A. 43 In Opinion No. 47, the Commission declared: 44 To require Columbia to pay its pipeline customers the tax savings from losses incurred in the search for new gas supplies will operate as a disincentive to continued gas supply development activities by pipelines and other regulated utilities. 41 45 Thus, as justification for allowing the parent corporation to keep tax savings created by e & d companies by attributing stand-alone tax costs to the affiliates, the Commission suggests that retention will result in greater e & d. 42 While the Commission did not fully explain its incentive theory, it appears that the incentive to invest may take effect in two ways: (1) a company may initially invest in e & d with the knowledge that some of the investment will be returned through a tax benefit for general use; or (2) a company may reinvest money returned by e & d losses. Under the first form of incentive, it would not matter to what use the returned investment is put since a company would spend more in the first place knowing that some of the money would be returned. Under the alternative formulation, the money returned via a tax benefit would have to be reinvested for the incentive to work. 46 The Commission's reliance on the incentive effect of retained tax benefits is not supported by evidence in the record. 43 There is no indication that Columbia's e & d investments were any greater after FERC's change in tax cost policy 44 than before the supposed incentive was created. And it appears that there was only a partial incentive to reinvest. The FERC ALJ found that only a portion of the tax savings were routed to e & d companies, with the remainder being used for general corporate purposes. 45 47 The Commission was obviously aware of the conflict between the evidence of record and the Commission declaration on the incentive effect of retained tax savings. Commission counsel attempted to excuse the disparity between the savings retained and tax savings devoted to e & d. The Commission urged in its brief that tax savings not directly reinvested eventually find their way to the e & d companies since the parent company finances exploration and development. 46 The Commission cites no evidence that tax savings trickle down from the parent e & d affiliates. FERC asks this Court to take it on faith that such funneling of tax savings does occur. 47 48 For this Court to uphold the Commission, we must determine that the rate order was premised on substantial evidence. We find evidence of the incentive effect offered as justification for corporate retention of tax savings insubstantial. Moreover, there is substantial evidence that retained tax savings go for general corporate purposes. 49 When the Commission acts in its ratemaking role, it must act with statutory authority and factual support. Having determined that the Commission had the statutory authority in this case, we reverse because the Commission's orders were not based upon substantial evidence 48 .