Opinion ID: 1752589
Heading Depth: 1
Heading Rank: 6

Heading: Disallowance as Operating Expense of Supplier's FPC Filed and Bonded Rate Increases

Text: United is a multi-state corporation engaged in distributing and selling at retail natural gas. United has two wholly owned subsidiaries, Union Producing Company (Union) and United Gas Pipe Line Company (Pipe Line). Union is engaged in natural gas and oil production operations. It is subject to the rate making powers of the Federal Power Commission (FPC) under the Natural Gas Act of 1938. 15 U.S.C.A., Sec. 717-717w; Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035 (1954). The FPC has the power and duty to fix well-head prices for natural gas. Union sells approximately 85 percent of its natural gas to its affiliate, Pipe Line, and the remainder to non-affiliates. Union explores for and produces oil and gas. The gas sold to Pipe Line is sold at the same price paid by non-affiliated purchasers in the same field. The FPC has asserted and is continuing to exercise jurisdiction over the price at which Union and any other producer sells to Pipe Line or any other pipe line company. Pipe Line engages in the purchase, gathering and transportation of natural gas and its sale at wholesale. Its operations are in interstate commerce. It purchases gas from the producing field and transports it to various markets through its pipe lines in Texas, Louisiana, Mississippi, Alabama, and Florida. The 85 percent of the gas found and produced by Union which is purchased by Pipe Line constitutes only 15 percent of the total gas purchased by Pipe Line. The remaining 85 percent is purchased from various producers unaffiliated with United and Union. Pipe Line's operations in Mississippi are in interstate commerce. It sells at wholesale to gas distribution companies such as United and sells industrial gas to large industrial consumers, which latter sales are not regulated by the FPC. However, the price at which gas is sold by Pipe Line in Mississippi to distribution companies, including appellant, is regulated by the FPC. In short, the price of gas sold by Union to pipe line companies engaged in interstate commerce is regulated by the FPC, and also Pipe Line, which purchases only 15 percent of its total gas acquisitions from Union, charges to distribution companies a price which is regulated and fixed by the FPC. The rate charged by Pipe Line to appellant is the same rate at which gas is sold by Pipe Line to other distributors in Mississippi. Moreover, while Pipe Line sells United all the gas distributed by United in Mississippi, approximately 90 percent of Pipe Line's sales are to other distributing companies and purchasers, in no way connected with appellant. The rates fixed by FPC are the same in each geographical area. The Mississippi Public Service Commission regulates only the rates of the local distributing corporation, in this instance, those at which United sells to its consumers in Mississippi. Under Sec. 4 of the Natural Gas Act, every natural gas company, such as Pipe Line, must file with the FPC rate schedules, and no change can be made in any such schedule except after 30 days notice to FPC and the public. 15 U.S.C.A., Sec. 717c(a)-(d). The Commission may suspend for five months a proposed, filed schedule rate increase, but, if the proceeding has not been concluded by that time, the proposed change of rate, charge, classification, or service shall go into effect. Where increased rates are thus made effective, the Commission may require the natural gas company to furnish a bond to refund any amounts ordered by the Commission at a later date. 15 U.S.C.A., Sec. 717c(e); Natural Gas Act, Sec. 4(e). As of December 1958, Pipe Line had been collecting from its purchasers three rate increases filed with FPC under bond, since the following dates: April 1, 1956, November 16, 1956, and December 1, 1957. These bonded rate increases became effective pursuant to the Natural Gas Act of 1938. The FPC, at the time of the order of the Mississippi Public Service Commission, had not held a hearing to determine the reasonableness of these rate increases. If it should ultimately disallow any of them, Pipe Line will be required to make appropriate refunds to the affected purchasers of natural gas, including appellant. The FPC has a large back-log of filed and bonded rate increases, concerning which it has been impossible to hold separate hearings. There are several thousand rate increase filings awaiting hearings and decisions. It is estimated that it will take many years for the agency to hear, adjudicate and decide these matters. See Landis, Report on Regulatory Agencies to the President-Elect (Dec. 1960), 86th Cong., 2d Sess., Senate Jud. Comm., pp. 5-7, 54-58, 85. Appellee found that the aggregate of these bonded rate increases included in the operating expenses of appellant in Mississippi was $409,666.00 in 1957, and $457,902.00 during the six months ended June 30, 1958. Nevertheless, it refused to allow them as operating expenses. It denied these gas purchase expenses for two reasons: (1) They were at the time of a conjectural, speculative and contingent character. The FPC has not yet found them to be just and reasonable. Every item of expense included in the cost of utility service must be known and certain. (2) The Commission is without jurisdiction under the Mississippi act to allow them. Under Sec. 10, Miss. Laws 1956, Ch. 372, it can suspend United's rates only for six months from the date of filing the schedule, which period would expire on December 15, 1958. Thereafter the rates fixed in the order would belong irrevocably to the utility. If at a later date the FPC finds Pipe Line's rate increases are unreasonable, any refund would belong to United. The Commission claimed it could not require United to make refund to its Mississippi gas consumers of amounts received from Pipe Line, because this would require a retroactive, illegal rate order. The Commission erred in both of the reasons assigned by it. (Hn 17) The Mississippi Public Service Commission has no control over the rates of Pipe Line. Under the Natural Gas Act the FPC has exclusive jurisdiction over them. United Gas Pipeline Co. v. Willmut Gas & Oil Co., 231 Miss. 700, 97 So.2d 530 (1957). The rates which are filed by Pipe Line with FPC are collected under bond, are the filed rates, and remain such unless and until altered by FPC order. Northwestern Public Service Co. v. Montant-Dakota Utilities Co., 181 F.2d 19 (U.S.C.A. 8th 1950), affirmed in Montana-Dakota Utilities Company v. Northwestern Public Service Company, 341 U.S. 246, 71 S.Ct. 692, 95 L.Ed. 912 (1951); Citizens Gas Users Association v. Public Utilities Comm. of Ohio, 165 Ohio St. 536, 138 N.E.2d 383 (1956); City of Chicago v. Illinois Commerce Comm., 13 Ill.2d 607, 150 N.E.2d 776 (1958). During the hearing one of the two principal witnesses for the Commission, Van Scoyoc, stated he would disallow the increases in gas costs, principally on the theory that the decision of the U.S. Court of Appeals in United Gas Pipeline Company v. Memphis Light, Gas and Water Division, 102 App. D.C. 77, 250 F.2d 402 (C.A.D.C. 1957), precluded recognition of Pipe Line's filed rates. After the hearing but a week before entry of the Mississippi Commission's order on December 15, 1958, the U.S. Supreme Court reversed the Court of Appeals in Memphis. 358 U.S. 103, 79 S.Ct. 194, 3 L.Ed.2d 153 (1958). There were agreements between a pipeline and distributors establishing a price under the seller's rate schedules or any effective superseding rate schedules on file with the FPC. The pipeline company, proceeding under Sec. 4(d) of the Natural Gas Act, Sec. 717c(d) of 15 U.S.C.A., filed new rate schedules with the FPC. It refused to reject the filings. The Court of Appeals held the FPC lacked jurisdiction to consider the new filed schedules, since Sec. 4(e) applied only to rate changes whose specific amounts had been mutually agreed upon between seller and purchaser. The Supreme Court reversed. It said the procedures provided in Sec. 4(d) were applicable to the filing and review of rate changes, even in the absence of an agreement between seller and buyer, provided the change did not conflict with the rate clauses of a subsisting agreement. Memphis clearly recognized the right of a pipeline company to make filings of new rate schedules under Sec. 4. The decision in Memphis eliminated the major reason given by Van Scoyoc for disallowing appellant its increased gas costs. Miss. River Fuel Corp. v. Federal Power Comm., 252 Fed.2d 619 (U.S.C.A., D.C. 1957) is not in point. There it was held the FPC erred in testing the reasonableness of interaffiliate prices by the use of fair field prices, without more; and the Commission, before approving Pipe Line's increase, should inquire into the justification for the price increase paid by Pipe Line to Union. The prices charged by Pipe Line were not disallowed by the FPC. The court recognized the exclusive jurisdiction over rates of the FPC, which subsequently approved the Union rates. In the instant case appellee has no jurisdiction over the rates of Pipe Line or Union. Appellee argues the mere fact that Pipe Line and Union are wholly owned subsidiaries of appellant authorized it to disregard the interstate rates filed with the FPC. There is no evidence indicating any abuse of the inter-affiliate prices asserted as costs of the affiliate-purchaser. The Commission made no such finding. The subsidiary-parent company relationship between appellant, Pipe Line and Union warrants regulatory scrutiny of the contracts and dealings between them. However, the jurisdiction to do this and to regulate the price of gas sold by Pipe Line to appellant is clearly defined under the Natural Gas Act. It is vested exclusively in the FPC. Pipe Line must charge and United must pay the filed rates. That price may not be reasonable and is subject to disallowance. There is nothing to suggest that the FPC will not closely scrutinize this relationship, for the statutory purpose of protecting the public and consumers from exploitation. City of Chicago v. Illinois Commerce Comm., supra, 150 N.E.2d at 780; City of Norfolk v. Virginia Electric & Power Co., 197 Va. 505, 90 S.E.2d 140 (1955); Citizens Gas Users Assn. v. Public Utilities Comm. of Ohio, supra . Since 90 percent of Pipe Line's sales are to strangers and only 10 percent to appellant, we can assume the other purchasers would protest to the FPC over an unreasonable rate increase. (Hn 18) Hence the filed, bonded rate increases in the cost of gas to appellant constitute an operating expense. The Commission's duty was to allow it as such. Such allowance was appellant's statutory and constitutional right. (Hn 19) Since the Commission must allow appellant's increased cost of gas from Pipe Line, the remaining question is how it may protect consumers consistent with its statutory powers and duties. The obvious method of taking care of this problem is to insert in appellant's rate schedule a clause which apparently has been used in other instances in this state, and which is a recognized provision elsewhere. It is called, variously, and automatic adjustment clause in a utility rate schedule, or gas cost adjustment clause, or escalator clause. We hold the Commission has the power to direct use of such a clause. It would provide for an automatic adjustment from time to time of appellant's sale price for gas, to reflect changes in the wholesale cost to appellant of natural gas purchased. It would provide for increases or decreases in the charges for gas sold by United to the extent of increases or decreases in the wholesale price of such gas. City of Chicago v. Illinois Commerce Commission, 13 Ill.2d 607, 150 N.E.2d 776 (1958). The escalator clause approved in City of Norfolk v. Virginia Electric & Power Company, 197 Va. 505, 90 S.E.2d 140 (1955), fell into two parts. The first related to the treatment of changes  up or down  in the cost of purchased gas to the company; the second related to the reduction of rates as a result of refunds received by the company, when certain changes occur in its wholesale cost of gas, by which the company is required to reduce its rates in the amount of refunds received by it from its supplier. Chicago and Norfolk both affirmed the validity of gas cost adjustment clauses. Numerous other cases have reached the same result as to electric costs. Foy, Cost Adjustment in Utility Rate Schedules, 13 Vand. L. Rev. 663 (1960). (Hn 20) The Commission also has the power, as an alternative, to require appellant to make a bond to reimburse the individual consumers for any increased gas costs which may be disallowed to Pipe Line by the FPC. Appellant offered to make appropriate refunds to affected gas consumers, in the event the FPC rejects in whole or in part Pipe Line's charges. Neither procedure would constitute retroactive rate making. The Public Utilities Act of 1956, Ch. 372, gives the Commission exclusive original jurisdiction over appellant's intrastate operations. Sec. 4. Sec. 9 provides that, under such reasonable rules and regulations as the Commission may prescribe, every public utility must file its rates and schedules showing all rates and charges. Sec. 13 gives the Commission power to promulgate such rules and regulations which may be reasonably necessary or appropriate to carry out the provisions of this act. Manifestly the Commission, under its rule-making power, has the right to prescribe conditions and terms in the promulgation of all or parts of a rate schedule. Sec. 10 provides a specific procedure for changes in any rate, unless the Commission otherwise orders. The agency may extend the period of suspension for not more than six months, but the utility may put the suspended rates into effect by filing a bond conditioned upon a refund to consumers. Sec. 10 further states that there may be substituted for such bond, other arrangements satisfactory to the Commission for the protection of the parties interested. The last sentence of Sec. 10 contains a similar clause. See also Secs. 26(d), 27, and 28. (Hn 21) Rate-making is prospective and not retroactive. Miss. Public Service Commission v. Home Telephone Co., Inc., supra; Laws 1956, Ch. 372, Sec. 11. However, as the Virginia Court held in City of Norfolk v. Virginia Electric & Power Co., supra, 90 S.E.2d at 148, a gas cost adjustment clause does not fix rates retroactively. It simply authorizes a fixed mathematical formula to be inserted in the schedules of the company for determining future rates. Obviously, since appellant is entitled to assert as an operating expense the increased gas cost, the Commission under these statutes has the power and duty to make arrangements for the protection of the public, and to insert in appellant's rate schedules a gas cost adjustment clause, or the alternative under bond. City of Chicago v. Illinois Commerce Commission, supra ; City of Norfolk v. Virginia Electric & Power Company, supra . The end result would be an equitable protection of the consumers, and of appellant in its legitimate operating expenses, including wholesale gas costs. Foy, Cost adjustment in Utility Rate Schedules, 13 Vand. L. Rev. 663 (1960). The selection of the details of a method for protecting the consumer in the event of a subsequent disallowance by the FPC of Pipe Line's rate increases is an administrative problem to be decided by the Commission. On remand the Commission will determine the best method. In view of our adjudication that appellant is entitled to be allowed as an operating expense its supplier's FPC filed and bonded rate increases. Appellant asserts the Commission has used in other recent instances gas cost adjustment clauses. Appellee does not deny this. Parenthetically, United's filed rate schedules, which have been in effect under bond since August 1, 1958 (in the three pertinent parts), contain gas cost adjustment clauses. In the interim since appellee's order under appeal, the FPC may have taken further action on Pipe Line's filed rates. In that event, the Commission on remand can make appropriate adjustments.