Opinion ID: 2284798
Heading Depth: 1
Heading Rank: 10

Heading: proceeds from the arco litigation

Text: In 1973, WGL and the Atlantic Richfield Company (ARCO) entered into a contract whereby ARCO would supply naphtha feed-stock to WGL for use in the production of synthetic natural gas. [66] In 1975, WGL filed a lawsuit against ARCO alleging an anticipatory breach of that contract; ARCO then lodged a counterclaim. At about the same time, WGL abandoned the synthetic gas project for economic reasons. In November, 1976, the two companies reached a settlement under which ARCO paid WGL $2,750,000. WGL recorded this amount in Account 434, Extraordinary Income, on the ground that the settlement was a nontypical, noncustomary, infrequently recurring gain[]. 18 C.F.R. Pt. 201, Account 434 (1980); see WGL Exh. H, at 1-2. The Commission, however, assigned all proceeds that were allocable to the District of Columbia to the ratepayers, amortizing that amount over a three-year period. [67] Order 6051, at 49-52 & Appendix A, Sch. 2. WGL contends that the Commission's action was unreasonable and unlawfully confiscatory since, in the Company's view, the investors had borne the risks of the litigation. We disagree. The precise issue presented here is apparently a novel one in this jurisdiction. Nevertheless, we are of the opinion that the governing law on review should be the same here as it was with respect to the gains realized on WGL's disposal of propane reserves, discussed in Part IX supra: the benefits of a particular utility endeavor should inure to those who have borne the risks and burdens associated with that undertaking. See Democratic Central Committee v. Washington Metropolitan Area Transit Commission, supra 158 U.S.App. D.C. at 27-32, 485 F.2d at 806-11. None of the parties disputes that this is the applicable legal principle; their disagreement stems from differing perceptions on the part of WGL, on the other hand, and People's Counsel and the Commission, on the other, as to who actually bore the risks and burdens in the ARCO litigation. We again find no basis on which to reverse the Commission's decision. In analyzing the equities, it is instructive initially to note just what the settlement proceeds involved represent. Theoretically, the sum of $2.75 million represents the increased costs suffered by WGL as a result of ARCO's failure to perform the contract. These costs, had the synthetic gas project achieved fruition, eventually would have been passed on to the ratepayers. The project originally was embarked upon for the benefit of the ratepayers. The ratepayers funded the design stages of the project and inevitably would have borne the burden of financing the least costly alternative to the ARCO contract in the event that WGL had not abandoned the project. It appears, then, that the ratepayers bore the primary burdens associated with the underlying synthetic gas project. The Company makes much of the fact that it eliminated all expenses associated with the ARCO litigation from its cost of service in this proceeding. WGL's witness Heim testified that the Company made a conscious decision long before settlement negotiations were undertaken with ARCO that the stockholders would bear all costs and risks in the lawsuit. Therefore, WGL urges, it was the stockholders who carried the burdens and risks of the litigation. The Commission found this argument unpersuasive, as do we. On cross-examination, Heim acknowledged that WGL routinely records legal judgments against the Company above the line. As for the litigation expenses (attorneys' fees, etc.), the Commission expressed skepticism that the Company actually decided early in the litigation to exclude these fees from its costs of service. [68] Regardless of whether the Commission's skepticism was warranted, we do not think that the issue of who paid the legal fees is a particularly relevant one in allocating the settlement proceeds in this case. Under the Commission's decision, the settlement award is to be reduced by the amount of litigation expenses before it is allocated to the ratepayers; in other words, the shareholders will be reimbursed for these fees before the proceeds are moved above the line. Thus, there is no chance that the shareholders will have financed the ratepayers' gain. Two additional factors favor affirmance of the Commission's decision on this point. First, the decision is consistent with the Commission's treatment of losses on another attempted but abandoned supplemental gas supply project. In Order No. 5522 in Formal Case No. 567, the Commission charged WGL's ratepayers with the unrecovered costs of the Company's abandoned Brandywine storage project. See Order 6051, at 51 n. 1. The situation here is sufficiently analogous to support a similar above-the-line treatment of the settlement proceeds. Second, the Maryland Public Service Commission has found that ratepayers should receive the Maryland-allocable portion of the ARCO litigation proceeds. Washington Gas Light Co., Order No. 62783 (Md.P.S.C., Dec. 15, 1977), at 10. The Maryland PSC reasoned that such treatment was consistent with the handling of the Company's loss on the Brandywine project. We think that the District of Columbia Commission was justified in following the same approach in this case. Therefore, the Commission's ruling with respect to the ARCO litigation proceeds is affirmed.