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

Heading: Encouraging Exploration and Development

Text: 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 .