Opinion ID: 398885
Heading Depth: 3
Heading Rank: 3

Heading: Rate Determination in R-8.

Text: 117 In Opinion 49-A, FERC contrasted its evaluation of NEP's rate of return in R-8 with its evaluation in R-10. Because the former employed only NEP-operating information, it was not necessary in R-8 to deduce NEP-operating's rate of return from NEP-composite's value as was done in R-10. NEP argues that the R-8 determination was actually based on NEP-composite data and therefore the R-10 methodology should be applied to R-8. 118 Neither NEP nor FERC point to definitive support in Opinion 803 for their respective views regarding the methodology employed in R-8. The repeated distinction in Opinion 803 between NEP and NEES data, and the specific exclusion therein of the Yankee investment from NEP's common equity, are, however, consistent with FERC's view that only NEP-operating information was employed in R-8. 119 As noted above, one who seeks to overturn a FERC determination bears a heavy burden of demonstrating error therein. FPC v. Hope Natural Gas, supra, 320 U.S. at 602, 64 S.Ct. at 287. NEP has not met that burden. Indeed the evidence to the contrary is more convincing. Accordingly, we affirm FERC's rejection of NEP's suggestion that the R-8 rate of return determination be subjected to the method employed in R-10. 120 (6) NEES Debentures 121 The question in this section is whether FERC, in Opinion 49, properly rejected the Committee's proposal to adjust NEP's capital structure to reflect proceeds of a NEES-issued debenture. 122 The proposed debenture adjustment rests on the contention that about $30 million of NEP equity was derived from debentures issued by NEES, at an interest rate of 3.25%. The Committee argues that that portion of NEP's equity should be treated as long term debt for ratemaking purposes. FERC viewed that argument as directed to the sources of funds invested by NEES in NEP equity, and noted that NEES' 3.25% interest cost was well below the 9.26% cost ascribed to NEP's common equity. 123 The ALJ, in originally denying the proposed adjustment, observed that the meagre and conflicting testimony on the source of the funds is subject to varying interpretations. In commenting on the Committee's proposed adjustment, FERC stated its intention to use NEP's (not NEES') capital structure where NEP's structure would produce a reasonable end result, and indicated that any adjustment based on NEES' debt holding would require a compensating adjustment to reflect NEES' expenses. FERC found the record inadequate to establish that adjustment but concluded that the net effect of the proposed adjustment to NEP's capitalization would not be substantial, and rejected the proposal. 124 FERC's rejection of the proposed adjustment must be upheld: (1) the Committee cites no precedent for its proposed methodology; (2) FERC's overall capital structure determination is reasonable and based on substantial evidence in the record; (3) FERC's factual assumption on sources of capital structure violates no statutory mandate; (4) that assumption is not arbitrary, capricious, or an abuse of discretion, New Mexico, supra, at 689; and (5) FERC's approach to determination of capital structure should not be judicially reversed in favor of another that produces substantially the same result. Indiana Municipal, supra. 125 (7) Narragansett Tax Expense 126 The Narragansett tax expense arose from application of liberalized tax depreciation to generating facilities of Narragansett Electric Company (Narragansett), a retail affiliate of NEP. Those generating facilities, during the early 1970's, passed the so-called cross-over point and straight line book depreciation thereafter exceeded the depreciation available for tax deduction purposes. Before 1967, Narragansett used the facilities primarily in intrastate service, selling their output at rates set by the Rhode Island Division of Public Utilities and Carriers (Division). Those rates resulted in a flow through of the liberalized depreciation benefit to Narragansett's Rhode Island customers. 127 In 1967, Narragansett and NEP entered an agreement under which NEP controlled Narragansett's generating and transmitting facilities and supplied all of Narragansett's power requirements. In effect, NEP rented Narragansett's generating and transmission facilities, paying rent in the form of a credit on the monthly purchased power bill it submits to Narragansett. The rent becomes a part of NEP's overall wholesale or interstate cost of service; and all NEP customers, including Narragansett, pay a proportionate share of the rental amount. The agreement had the effect of integrating Narragansett with NEP as a supplier of power to customers both intrastate and interstate. 128 In a recent retail rate case, Narragansett sought to allocate to its retail customers the additional tax expense arising from an excess of book depreciation over guideline tax depreciation. 27 Narragansett claimed that its retail customers in Rhode Island had derived benefits from a flow-through during the earlier period when its facilities were dedicated to intrastate service. The Division rejected the requested allocation, but held that the portion of increased tax expense attributable to facilities actually providing intrastate service was properly allocatable to Narragansett's intrastate operations. Re Narragansett Electric Co., Docket No. 1172, slip op. at 38-39. (R.I. DPUC 1975), aff'd sub nom., Narragansett Electric Co. v. Harsch, 117 R.I. 395, 368 A.2d 1194, 1204-06 (1977). The Rhode Island Supreme Court affirmed that decision as being within the Division's discretion. 368 A.2d at 1205-06. 129 Thereafter, NEP attempted to allocate the nonallocated interstate portion of the additional tax expense arising from the excess of book over guideline depreciation to its interstate operations in the R-10 proceeding, relying on the integration of Narragansett's facilities with NEP's wholesale power supply system serving all NEP customers. NEP also maintained that its inability to allocate all of the tax expense to intrastate operations, among other factors, made equitable the allocation of the remaining tax expense to interstate operations. 130 In Opinion 49, FERC rejected NEP's proposed allocation, citing NEP's pre-1967 normalization of the tax effect of the difference between book and guidelines depreciation of Narragansett's facilities. Under that normalization, NEP's interstate wholesale customers did not benefit from the additional tax deduction when guideline exceeded book depreciation. FERC reasoned that it would be inappropriate for interstate wholesale customers to be burdened with additional expense when the tables were turned and book exceeded guideline depreciation. Asserting that the increased tax expense should be treated as any other cost of service item associated with NEP's interstate service, NEP says FERC's reliance on the past allocation method is an abuse of discretion, resulting in a patently inequitable situation in which NEP is unable to recover the additional tax expenses from either wholesale or retail customers. 131 NEP cites no support for its assumption that FERC lacks authority to consider previous related incomes and sources in determining the proper treatment to be given current liabilities and expenses. NEP further assumes that FERC's lack of discussion of several grounds cited in support of NEP's position affirmatively demonstrates a failure to consider those grounds. Neither assumption has merit. We cannot fault FERC's allocation of increased tax expense to NEP, which had reaped the benefits of the corresponding tax credit. FERC reached that result on undisputed evidence concerning the dollar amounts and allocation of service between wholesale and retail customers. As noted above, FERC is not bound to the service of any single methodology. FPC v. Natural Gas Pipeline Co., supra; FPC v. Memphis Light, Gas and Water Division, 411 U.S. 458, 78 S.Ct. 430, 2 L.Ed.2d 420 (1973). We find no basis for overturning FERC's resolution of the tax expense allocation issue. 132 (8) Inclusion of Bond Issue in NEP's Capital Structure 133 The question in this section is whether FERC confused actual with estimated data in approving NEP's capital structure. NEP acknowledges that it included a $50 million bond issue in its estimate of year-end (December 31, 1976) capital structure, but notes that the bonds themselves did not issue until January 27, 1977, five days before the rate period ended. NEP contends that FERC intended to approve a capital structure based only on actual data as of December 31, 1976, which would not have included the bonds issued. Alternatively, NEP contends that if inclusion of the bonds was intended, the inclusion is arbitrary and irrational because it does not accurately reflect the cost of capital and interest expense deductions available during the period the rate was in effect. 134 In Opinion 49, FERC indicated that it was using NEP's actual capital structure as of December 31, 1976 adjusted to reflect (its) determination on deferred taxes, the Yankee investments, the NEES debentures, and the $50 million bond issue .... (Emphasis supplied.) Thus it cannot be said that FERC, having adjusted the actual capital structure to reflect a number of items, including the bond issue, intended to approve a capital structure based only on actual data. 135 Nor can we agree that the inclusion of the bonds was arbitrary or irrational. NEP's arguments are an attempt to abandon its original estimate, which included the bond issue, in favor of actual data which did not. As indicated above, use of estimated data, once substantiated, is proper unless the estimate was unreasonable when made, or where subsequent events would cause the estimates to yield unreasonable results. Indiana Municipal, supra at 485. NEP has made no such showing. Accordingly, FERC's inclusion of NEP's bond issue in capital structure must be affirmed. 136 (9) Consolidated Tax Benefits 137 The question presented here is whether FERC erred in ignoring tax benefits associated with the NEES debenture. In so claiming, the Committee envisions a benefit to consumers of $794,000. 138 In his original determination, the ALJ identified a tax savings to NEP of $794,000 arising out of the consolidated tax return filed by NEES. 28 To conform NEP's authorized tax expense, the ALJ suggested elimination of the excess. 139 In its Opinion 49, FERC purported to resolve the matter in summary fashion, stating: 140 NEP is directed to revise its calculations on this issue in accordance with Columbia Gulf Transmission Company, et al., Docket Nos. RP75-105 and RP75-106, Opinion No. 47, issued July 2, 1979. 29 141 Although FERC and the Committee disagree here on the impact of Columbia Gulf on the present facts, FERC has chosen to apply an interpretation denying the consumer any benefits from the alleged consolidated tax savings. 142 In City of Charlottesville, supra, n. 29, this court remanded FERC's determination in Columbia Gulf because the order in that proceeding denied the consumer any benefit of a tax saving on the basis of a purported investment incentive effect, which effect was without the support of substantial evidence in the record. Nothing presented in the case before us fills the evidentiary void that required remand in City of Charlottesville, or in any manner supports FERC's benefit-denying interpretation in light of the ALJ's determination. 143 FERC allocated consolidated tax savings to shareholders in Columbia Gulf because those savings were generated by exploration and development investments, and because a need exists to encourage such investments. Remand was necessitated by the lack of evidence that such allocation would produce such investments. Nothing of record here indicates that the present tax savings were generated by such investments, or that allocation of those savings to shareholders would produce such investments. Accordingly, we remand to FERC the question of allocation of consolidated tax savings. 30 144 (10) Subtransmission Expenses 145 NEP contests FERC's allocation of certain subtransmission expenses in light of certain settlement agreements, contending for an opportunity to recover costs not recovered as a result of a settlement agreement filed in an earlier rate proceeding (R-9). 31 The ALJ described the situation:It appears that this rate design dispute has resulted, in part, from varying interpretations of the R-9 Settlement Agreement, in which it was stipulated that the former monthly surcharge of 46cents per kilowatt for subtransmission service would be reduced to 5cents. 146 NEP contends that by agreeing to this reduced surcharge, it did not agree to forego recovery of the full amount of the lease costs it has incurred as the result of use of Mass Electric facilities. Thus, NEP's proposed revised rates are designed to charge the deficiency between this cost and the proceeds from the 5cents surcharge, against all NEP customers, whereas (Committee) would charge this deficiency against only subtransmission customers. This (Committee) proposal would have the effect of a second or an additional charge against Mass Electric customers. 147 FERC viewed the omission of any provision in the R-9 settlement agreement on subtransmission expenses not recovered by the surcharge as a waiver of those expenses. NEP argues that the R-9 settlement was limited to setting the surcharge and has no effect on its right to recover its additional subtransmission expenses, pointing to an earlier settlement agreement (R-5) on subtransmission expenses which included a specific clause waiving NEP's recovery of the remaining expenses. 148 Though the interpretation of the agency which approved the settlement cannot be discounted, that interpretation must have some rational basis beyond a mere omission of a clause to the contrary. The question here is one of contract interpretation, a function peculiarly within the expertise of courts. Interpretation of the R-9 settlement contract on this appeal, however, is precluded by the absence from the record of the circumstances and acts of the parties in the making and performance of that contract. At the same time, to affirm the administrative interpretation on the present record would be to substitute judicial abdication for judicial review. See National Labor Relations Board v. Truck Drivers, etc., 630 F.2d 505, 507 (7th Cir. 1980); cert. denied sub nom., Gilmer v. Truck Drivers, etc., 450 U.S. 1030, 101 S.Ct. 1740, 68 L.Ed.2d 225 (1981); Northwest Publications Inc. v. National Labor Relations Board, 656 F.2d 461 (9th Cir. 1981). Accordingly, we vacate FERC's determination on NEP's subtransmission expenses and remand that question for further consideration. 149 (11) Tax Normalization 150 As noted above, FERC was directed by this court's remand order in R-8 to reconsider the tax normalization issue in light of this court's previous opinion in Public Systems v. FERC, supra. FERC admits, however, that it did not on remand decide that issue, because normalization rulemaking was still pending, and that it did not, as a consequence, determine the remanded issue of the justness and reasonableness of finally allowed rates in the light of its conclusions on normalization. 151 Precluded from review of an inchoate tax normalization determination, and of its effect on the justness and reasonableness of the overall rate of return, we remand those issues to FERC. 32