Opinion ID: 353770
Heading Depth: 2
Heading Rank: 1

Heading: Vanceburg's Contention Regarding the Commission's Failure Properly to Use Net Benefits Formula

Text: 45 We need not analyze at length Vanceburg's argument that the Commission did not properly employ the sharing-of-net-benefits method, for it was not timely made. 46 Section 313(b) of the Federal Power Act provides that any party aggrieved by an order of the Commission may seek review in this court. 38 However, the statute further provides that no objection to an order of the Commission may be considered on review unless the same objection was first specifically raised in an application for rehearing directed to the Commission. 39 As the Supreme Court has stated, it is the purpose of this provision to give the Commission notice of its alleged errors so that it may have the opportunity to correct them. 40 This provision reflects the principle that one must exhaust administrative remedies before resorting to judicial review. 41 This court has consistently adhered to this requirement. 42 47 Vanceburg's contention concerning the Commission's improper application of the sharing-of-net-benefits method, was not specifically set forth in Vanceburg's applications for rehearing, original or supplemental, as required by Section 313(a) of the Act; nor was it even raised implicitly in these filings. There is simply nothing in Vanceburg's applications which could be expected to call the Commission's attention to this alleged error. Indeed, with the exception of the treatment of tax costs, Vanceburg implicitly approved the Commission's methodology by requesting the Commission to recalculate the dam-use charges according to its formula but using a 2% Tax factor. 43 We find, therefore, that this issue has not been timely raised, and this court may not now consider it on appeal. 48 B. Vanceburg's Contention Regarding the Commission's Treatment of Income Tax Costs in Computing Dam-Use Charges 49 The second, and most substantial, objection to the dam-use charges raised by Vanceburg in this appeal is the same one it urged before the Commission in its supplemental applications for rehearing. Essentially, Vanceburg argues that the Federal Power Act does not authorize the Commission, in computing dam-use charges for a tax-exempt municipality, to consider the magnifying effect which the municipality's non-payment of taxes has on the cost savings which the municipality will derive from use of a Government dam. Moreover, Vanceburg argues that by treating tax savings as part of the cost savings accruing to it from the use of Government dams, the Commission is levying a tax on Vanceburg a tax which is unauthorized by the Federal Power Act and violative of the doctrine of intergovernmental tax immunity. 50 We have carefully considered the language of Section 10(e) of the Act, the legislative history of that provision, and the relevant authorities and have concluded that the dam-use charges assessed thereunder are fees and not taxes; that the Commission is authorized to base such fees on the actual value of the benefit bestowed on the specific licensee ; and that, in measuring the actual value of such benefit, the Commission may consider real costs, including real tax costs. 51
52 In its Orders of Rehearing and on this appeal, the Commission has argued that it would be anomalous to consider Vanceburg's tax exempt status when determining the economic feasibility of the project (a treatment which magnifies the prospective cost savings and thus favors Vanceburg and its application), but then to ignore Vanceburg's tax-exempt status when determining annual charges (a treatment which reduces the prospective cost savings and thus benefits Vanceburg by lowering the charges). The contention seems to be that for the sake of consistency, the calculations used in determining economic feasibility must also be used in computing annual charges. However, this does not necessarily follow. Section 10(a) and Section 10(e) have distinct purposes. The object under Section 10(a) is to calculate the real cost savings which would result from the hydroelectric project. The object under Section 10(e) is to compute reasonable annual charges for the use of government dams. Thus, the validity of a particular set of charges must be ascertained by reference to the terms of Section 10(e), not to the terms of Section 10(a). In this case the Commission has used the real cost savings calculated under 10(a) as the basis for charges under 10(e). The issue presented, therefore, is precisely whether this was an appropriate basis for the charges assessed. This issue can only be resolved through careful analysis of the Commission's mandate under Section 10(e). 53 Section 10(e) of the Act clearly authorizes the Commission to exact certain charges from those granted licenses to use water power from Government dams. The theory behind such charges is that, by issuing the license, the Government has conferred a benefit on the licensee. However, this provision does not confer on the Commission unlimited discretion to levy any charge it sees fit regardless of the value of the benefit conferred on the licensee. Section 10(e) was not intended to be a general revenue-raising statute. The language of the Section expressly states that the licensee shall pay the Government annual charges for the purpose of recompensing it for the use, occupancy and enjoyment of its lands or other property, 44 and, adverting specifically to the use of Government dams, it states that the Commission shall fix annual charges for the use thereof. 45 We view this language as evidencing Congress' intent that charges assessed for the use of Government dams should be compensatory in nature. Thus, Section 10(e), as we read it, establishes a system of compensation; dam-use charges are to be levied for the purpose of compensating the Government for the benefit it has conferred on the licensee. The concept behind compensation is that the charge exacted should be equivalent, or at least proportionate to, the value of the benefit conferred. 54 In National Cable Television v. United States, 46 the Supreme Court made a distinction between taxes and fees: 47 55 Taxation is a legislative function, and Congress, which is the sole organ for levying taxes, may act arbitrarily and disregard benefits bestowed by the Government on a taxpayer and go solely on ability to pay, based on property or income. A fee, however, is incident to a voluntary act, e. g., a request that a public agency permit an applicant to practice law or medicine or construct a house or run a broadcast station. The public agency performing those services normally may exact a fee for a grant which, presumably, bestows a benefit on the applicant, not shared by other members of society. . . . A fee connotes a benefit . . . . 56 It is clear that the dam-use charges under Section 10(e) are not taxes but fees. 48 They are charges exacted against a licensee in exchange for a privilege which the licensee has requested or applied for and from which the licensee derives a special benefit. Our analysis above, however, indicates that Section 10(e) dam-use charges are not just fees; they are compensatory fees, and as such they must be proportionate to the value of the benefit for which they are exchanged. 57 To this point, we have relied solely on the statutory language itself in construing Section 10(e) as establishing a system of compensatory fees. However, the legislative history of Section 10(e) strongly supports our interpretation. During Congressional consideration of the Water Power Act of 1920, the matter of appropriate charges for hydroelectric project licenses was a central issue between the House and Senate. In the debates, a distinction was made between the case in which the licensee is granted permission to use water or water power from an existing Federal dam, on the one hand, and the case in which the licensee is merely granted permission to build from scratch its own dam for power purposes on a navigable waterway. In the former case, there appears to have been agreement between the House and Senate that compensatory charges were appropriate, for there was no question but that a substantial benefit was flowing from the Government to the licensee. 49 In the latter case, however, there was disagreement between the House and Senate as to the propriety of charges. The Senate took the position that, in such a case, there was no real benefit flowing from the Government to the licensee for which the Government could justly exact compensation, for in its view, the water rights were vested in the States and the Federal interest was only in protecting and controlling navigation. 50 This view was cogently stated by Senator Nelson during the floor debates: 51 58 There are two classes of dams. Where a dam is constructed by the Federal Government for purposes of navigation, and there is a surplus power to be disposed of that ought to be utilized, in that case the Federal Government having constructed the dam, and by the construction of it having created a water power, manifestly the Government is entitled to full compensation for the use of that power. But where the Government has simply issued a license to a man, giving him permission to build a dam with his own money, his own capital, his own resources; in that case I have always believed, and that has been the view of the majority of the Senate, that the Government is not fairly and equitably entitled to any pay for the use of the water. If any compensation is to be made for the use of the water, it belongs to the States or to the riparian owners. 59 The House, however, took the position that where Congress grants a right to obstruct navigation it has the right to impose as a condition such charges as it deems fit. 52 60 Reflecting this philosophy, the House version of the Water Power Act conferred virtually unlimited authority on the Commission to exact charges from licensees under Section 10(e). It read simply that licenses were issued on the condition 53 61 (e) That the licensee shall pay to the United States reasonable annual charges in an amount to be fixed by the commission. 62 The Senate criticized this provision in its report: 54 63 One substantial amendment relates to the power given the commission to impose charges upon the licensee to put in power development works. The House provision reads as follows: 64 'That the licensee shall pay to the United States reasonable annual charges in an amount to be fixed by the commission.' 65 Whether the charge is to be for Government land used, for the mere granting of the permit, or for something else is not stated. It is practically a grant of unlimited power to the commission to levy such tax as it sees fit to impose, and, while the charge must be reasonable, there is no rate laid down upon which its reasonableness is to be determined. It is a blanket power to tax that should be given to no administrative body. 66 The Senate adopted a version which attempted, first, to ensure that all charges under Section 10(e) would be limited to the purpose of reimbursing the Government for costs it incurred or compensating the Government for some property right or privilege from which the licensee derived a special benefit, and, second, to set a ceiling on the charges which could be exacted. The Senate's language read: 55 67 That the licensee shall pay for the license herein granted such reasonable annual charges as may be fixed by the commission for the purpose of reimbursing the United States for the cost of administration of the act in relation to water powers developed under its jurisdiction, in the proportion that the water power developed by the project covered by said license bears to the total water power developed by all projects licensed under the act, and for that purpose such charges may be readjusted from time to time, not oftener than once in two years; the licensee shall also pay for the use, and occupation of any public lands and lands in reservations, except tribal lands embraced within Indian reservations, necessary for the development of the project covered by the license such reasonable annual charges based upon the actual value of the Government lands used as may be fixed by the commission; but in no event shall the annual charge for the foregoing exceed 25 cents per developed horsepower: Provided, That when licenses are issued involving the use of Government dams or other structures owned by the United States, or tribal lands embraced within Indian reservations the commission shall fix a reasonable annual charge for the use thereof and such charges may be readjusted at the end of 20 years after the beginning of operations and at periods of not less than 10 years thereafter in a manner to be described in each license. 68 The conferees did not accept in full either the Senate or House provisions in their report, but recommended a substitute. The compromise was adopted and is reflected in the existing statute. 56 Although the Senate did not succeed in placing ceilings on charges, the present provision does reflect the Senate's view that charges should be compensatory in nature and, hence, proportionate to the value of the benefit conferred. 69
70 Because compensatory fees must be proportionate to the value of the benefit conferred, the valuation of the benefit is an essential predicate to fixing proper charges for the use of a Government dam under Section 10(e). Methods of valuation, of course, must vary with the nature of the benefit under consideration, for there are many ways in which the value of a particular benefit can be measured. The cost to the benefactor, the value to the beneficiary, the market or replacement value all of these are appropriate measures of value in certain circumstances. 71 Section 10(e) requires the Commission to make valuations for several different kinds of benefits. For example, the Commission must fix charges to recompense the Government for any occupancy of its lands. In the absence of special circumstances, one might suspect a national average rental value to be an appropriate measure of the benefits conferred on the licensee through occupancy of the land, and the Commission has recognized this in its regulations. 57 However, Section 10(e) also calls upon the Commission to make more difficult valuations. For example, as in the instant case, it is required to place some value on a licensee's use of water from a dam. Here, the Commission is not seeking to measure the benefit derived from occupancy of a fungible tract of real estate; rather, it is required to measure the value of the licensee's use of the water from a specific dam. 58 Moreover, it is not the value of the use for any purpose that the Commission must ascertain, but the value of use for a particular purpose, namely, generating electric-power. 59 72 The central issue presented in this case by Vanceburg's claim really concerns the problem of valuation. It is this: what is the proper basis for dam-use charges under Section 10(e) is it the actual value of dam use for power purposes to each specific licensee, public or private, as the Commission contends, or is it a more general standard such as the value of dam use for power purposes to the average investor-owned utility in the region, as Vanceburg contends? 73 The Commission's interpretation that Section 10(e) authorizes dam-use charges based on the actual value of dam use to the specific licensee is a reasonable one, and as such is entitled to great weight. 60 We find nothing in the Act which militates against this construction. Moreover, we believe that this interpretation is most consistent with the notion of compensation in that each licensee is to be charged in direct proportion to the fiscal benefit it actually receives. When Congress has failed to provide a formula for the Commission to follow, a court is not warranted in rejecting the one which the Commission employs unless it plainly contravenes the statutory scheme of regulation. 61 Therefore, we conclude that a proper basis for dam use charges under Section 10(e) is the actual value of dam use to the specific licensee. 74 The analogy of a lease in a shopping center might serve to illustrate the arguments and position of the parties here. Assume that two similar type stores lease space identical in size and desirability of location in the same shopping center, the two stores might pay the same or different rental depending on the terms of the leases. If ABC Stores and XYZ Shops each have a lease under which the rental is calculated at a percentage of gross sales, and ABC's dollar volume is twice that of XYZ's, then ABC will pay twice the rent of XYZ. This would be justified on the basis that the benefit conferred on ABC by occupancy of the space is twice the benefit conferred on XYZ. This is the Commission's argument here. 75 On the other hand, ABC might anticipate this situation developing, and argue during negotiation with the shopping center that its greater sales volume will be due to superior salesmanship, better products, a larger expenditure on advertising, a longer established reputation in that community, etc., and that a flat fee rental only should be charged. This is the argument of Vanceburg here, i. e., its tax exempt municipality status enables it to achieve a much greater saving from hydro power instead of fossil fuel, compared to that achieved by an investor-owned taxpaying utility, hence it should pay only a flat fee comparable to that charged private utilities. 76 There is nothing inherently right or wrong, fair or unfair, with either method of calculating rentals. In the commercial example, the rental formula negotiated will be determined by the commercial negotiating strength of the parties. In our case here, the Commission has a discretion within the statute in fixing reasonable annual charges, and thus conceivably might use any one of several methods in calculating the charge, actual value of dam use to the specific licensee being one of them. 77 Tax costs are real costs and tax savings are real savings, and we find nothing in Section 10(e) or in the other provisions of the Water Power Act which precludes the Commission from considering tax costs and tax savings in ascertaining the real value of a dam-use license to a specific licensee. We do not believe that the Commission need close its eyes to tax consequences in order to effectuate the policies of the Water Power Act; nor do we believe that the Commission's consideration of tax consequences frustrates the policies of the Internal Revenue Code. In short, Vanceburg's exemption from federal income tax under Section 115(a) of the Internal Revenue Code does not exempt it from paying compensatory fees under Section 10(e) of the Federal Power Act. 78 Finally, we do not suggest that the Commission is free automatically to assess as charges the full amount of the value conferred on a licensee. Section 10(e) sets a maximum and a minimum charge, and directs the Commission to exercise its discretion and expert judgment in fixing a reasonable charge somewhere within this range. The maximum charge is the fully compensatory charge represented by the full value, or net benefit, of the dam-use license. The second proviso of Section 10(e) sets the minimum charge: . . . but in no case shall a license be issued free of charge for use of a Government dam. 62 Within this range, the Commission must set a reasonable charge by considering all relevant factors and arriving at a charge which minimizes consumer costs, encourages power development, but at the same time, compensates the Government to some extent for the benefit it has conferred on the licensee. This appears to be precisely what the Commission has done in the instant case. The sharing-of-net-benefits formula, it seems strikes a balance which satisfies the statutory requirements that the general public be reasonably compensated by a licensee for its use of a particular Government dam, while at the same time minimizing consumer costs and encouraging power development by providing licensees with net benefits equal to the annual charge. 79 C. Vanceburg's Contention Regarding the Discriminatory Impact of the Assessed Charges 80 Vanceburg's third and final contention, raised inferentially in its supplemental applications for rehearing, is that the tax-exempt utility will always pay higher annual dam-use charges than a similarly situated investor-owned utility under the sharing-of-net-benefits method unless a hypothetical tax liability is imputed to it. 63 Therefore, Vanceburg asserts, (t)he charges thus assessed by the Commission that result in a prohibited discrimination against a class of licensees must, necessarily, be 'unreasonable' charges. . . . 64 Such discriminatory charges, Vanceburg argues further, deter State and municipal participation in water-power development and, thereby, frustrate the policy of the Federal Power Act. 65 81 Annual charges for the use of Government dams fixed under Section 10(e) of the Act are the product of the expert judgment of the Commission. The Commission has a range of discretion in fixing such charges so that it may balance all the relevant factors, including the impact of charges on consumer costs, the compensation of the Government, and the course of power development. 66 A licensee challenging the reasonableness of annual dam-use charges carries the heavy burden of making a convincing showing that the charges are unreasonable or otherwise unauthorized. 67 Vanceburg has simply not met this burden with respect to its contention that the assessed charges are to have a discriminatory or deterrent impact. Vanceburg has not undertaken to explain precisely in what way the charges at issue are discriminatory. This court is confronted only with an unsupported assertion that the charges are necessarily discriminatory. Without further elucidation by petitioner, we simply do not understand how this could be so. Merely because charges for municipal licensees are significantly higher than those assessed for similarly situated investor-owned licensees does not necessarily mean that municipalities are discriminated against. Charges which are proportionate to the actual value of the benefit conferred on a licensee are not discriminatory. If one class of licensees derives greater benefits from its licenses than another class of licensees, there is no discrimination when the first class is required to pay higher charges than the second. The net benefits formula measures the actual benefit conferred upon a licensee, whether public or private, and provides for an equitable sharing of the benefits by the licensee and the Government. All licensees receive net benefits after the Government fee equal to the annual charges, and Vanceburg is no exception. Its charges are higher than an investor-owned utility's would be, but it receives an equally greater benefit from its license. 82 Similarly, Vanceburg has not provided any support for its contention that the assessed charges deter municipalities from developing water power; nor do we see how this deterrent effect could exist. Under the sharing-of-net-benefits formula only one half of the cost savings resulting from the hydroelectric option would be assessed as charges. This means that there are still substantial cost advantages in pursuing that option, cost advantages equivalent to the charges themselves. Indeed, higher charges signify that the particular user finds greater advantages to hydroelectric development. 83 Finding, as we do, Vanceburg's challenges to the dam-use charges assessed by the Commission to be either untimely or not well founded, we affirm the Commission's orders of 29 March and 21 June 1976.