Opinion ID: 339939
Heading Depth: 2
Heading Rank: 7

Heading: Flow-Through of Rate Refunds

Text: 181 For some time the Commission appears to have allocated supplier refunds between pipelines and their customers by application of a simple principle. Entitlement depended upon whether the pipeline had increased its rates to accommodate the increase in the supplier rates. If it had, customers got the refund; if it had not, the pipeline was preferred. 600 That rule, so far as it goes, plainly harmonizes with the aims and philosophy of the Act, 601 and we encounter no difficulty in sustaining it as a major thesis in the allocative process. 182 In 1968, in its Opinions Nos. 540 and 540-A, as we have explained, the Commission superimposed upon that principle the requirement that a pipeline contending for a refund resulting from a supplier-rate increase later disallowed must have filed a tracking rate increase of its own. 602 The justification for this requirement is that the effect of absorption of the supplier increase on the pipeline's earnings position, and consequently on the relative equities of the pipeline and its customers in respect to the refund, can be suitably ascertained only when subjected to close scrutiny. 603 The Commission held that Texas Eastern, the pipeline there involved, could not retain a supplier refund where it had not filed a tracking rate increase and did not show that it had earned less than a reasonable margin of return during the period in question. 604 183 On review of that ruling in the Fifth Circuit, the Commission was sustained. 605 The court rejected Texas Eastern's primary argument that it was entitled to the refund as restitution for the sum it paid, as an increased cost, to its suppliers without passing that cost on to its customers: 184 Our view is that the Commission was authorized to see to disposition of the refunds in question on the basis of the purpose of the Act to protect ultimate consumers of natural gas. It must be borne in mind that the Commission created the refunds by disallowing supplier rate increases and by requiring that the sums in question be retained by the suppliers pending determination of entitlement. Texas Eastern could have filed rate increases to track the supplier increases. It chose not to do so for reasons of its own. One reason, no doubt, was that the Commission could have investigated the rates in the light of Texas Eastern's earnings. 185 Here the Commission afforded Texas Eastern the opportunity to justifying its entitlement to the refunds on a earnings basis without the concomitant risk of an investigation of its rates as would have been the case in the event of rate filings. This procedure was adopted to protect Texas Eastern in the face of the change in Commission policy as to disposition of refunds. This was a fair approach from the standpoint of protecting the interest of Texas Eastern and the consumer. To adopt Texas Eastern's position that it is, ipso facto, entitled to the refunds by virtue of having paid and absorbed them would be to countenance rate making by the producer-suppliers and Texas Eastern outside the protective ambit of Sec. 4(e). This approach would do violence to the statutory scheme by avoiding, to the extent the refunds exceed a fair return to Texas Eastern, any rate regulation whatever except under Sec. 5 of the Act. 606 186 We agree with the Fifth Circuit that the requirement of a tracking rate increase is amply supported by the goals sought by the Act. In Opinion No. 565, however, the Commission held that the fact that Texas Eastern did not file such an increase did not totally bar it from sharing in the refunds ordered by the producers. Disagreeing with the examiner, the Commission distinguished Opinions Nos. 540 and 540-A on grounds hardly characterizable as irrational. Instead of a supplier-rate increase which might have been tracked by a pipeline increase filing, there was a lease-sale transaction involving a large capital investment which was not itself susceptible of tracking. 607 The conventionalization of the lease-sale upon which the Commission decided was partial only--for purposes related to payment for Rayne Field gas, but not for all others. 608 With the Rayne Field investment remaining a capital item because unconventionalized, Texas Eastern could have tracked only the expense by-products of the investment--depreciation, depletion and amortization--together with Rayne Field expenses and taxes which were not capitalized. 609 Beyond that, the evidence, by the Commission's appraisal, established that Texas Eastern had passed on to its customers less than $14 million of some $76 million in Rayne Field expenditures--the excess of the actual per-Mcf cost of the gas under the lease-sale formula over a 20-cent in-line unit price. 610 187 On this analysis, the Commission in Opinion No. 565, required Texas Eastern to flow through nearly $14 million of the producers' refund, together with an aliquot portion of the interest thereon charged the producers, 611 and permitted Texas Eastern to apply the remainder of the refund in reduction of its investment. 612 This disposition of the refund issue encounters opposition from both pipeline and consumer viewpoints, and on divergent grounds. Texas Eastern, claiming the entire refund, asserts that capitalization of the bulk of its Rayne Field expenditures was not only a prudent decision 613 but also a sound accounting practice, particularly because of the resemblance of those expenditures to prepayments for gas in conventional purchases, 614 and that no part of the investment could have been passed on to customers through the medium of a tracking rate increase. PSC, on the other hand, claiming all of the refund for consumers, argues that as a matter of accounting capitalization of the expenditures was unauthorized by the Commission's regulations, 615 and that the Commission's computation of the amount of the customer overcharge was of dubious validity because no cost of service for the period in question was ever found. 616 188 By our assessment, we cannot compel the Commission to accept any of these claims. The question is not how we ourselves would dispose of these arguments but whether the disposition the Commission chooses is arbitrary or otherwise inconsistent with law. 617 Factual findings by the Commission, when supported by substantial evidence on the record as a whole, are conclusive upon the courts. 618 And [t]he judicial function is exhausted when there is found to be a rational basis for the conclusions approved by the administrative body. 619 We see nothing that would exempt this case from those rules. 189 Looking first to Texas Eastern's contentions, we start from the premise that a public utility's investors have a general right to recoup from consumers the full amount of the capital outlay they have devoted to the public service. 620 But investors have no right to a second recovery of so much of their investment as consumers have already repaid. 621 Here the Commission, in Opinion No. 565, found that Texas Eastern's customers had been charged nearly $14 million of its net investment balance of some $20 million through rates that were higher than they should have been. 622 The Commission also found that some of Texas Eastern's expenditures were expense items 623 --and not prepayments treatable as capital items 624 --for which a tracking rate increase might have been sought, 625 and allowed if the sought-after increase survived the test of reasonableness. 626 190 Our examination of the administrative record convinces us that these facts, upon which the Commission mainly rested the refund flow-through framed in Opinion No. 565, are well supported. Our appraisal of the conclusion which the Commission drew from those facts is that they are neither arbitrary nor unreasonable. We therefore are not at liberty to direct action which is at variance with the Commission's decision in Opinion No. 565 to require Texas Eastern to flow through to its customers a portion of the refund equal to the amount of Texas Eastern's investment recovery in the form of customer charges which were higher than they otherwise would have been. We recognize, of course, that the refunding aspects of Opinion No. 565 may have lost their vitality by reason of supersession by the suspension provisions of Opinion No. 565-A, notwithstanding the invalidity of the latter. 627 But the fact remains that as a court we cannot assume the Commission's prerogatives by ordering a course of action it is not legally obliged to take. 628 191 For similar reasons, and contrary to PSC's position, we cannot disregard the Commission's determination in Opinion No. 565 that the residue of the refund should be applied to reduce the net balance of Texas Eastern's investment in Rayne Field. Given the breadth of administrative authority to set practices which are matters purely of desirable accounting, 629 we perceive no basis for disturbing the Commission's conclusion that some $20 million of Texas Eastern's unrecovered Rayne Field expenditures have been properly capitalized. And given the expert testimony underlying the Commission's finding that a substantial portion of those expenditures had not been passed on to Texas Eastern's customers, 630 we are unable to say that ascertainment of Texas Eastern's cost of service was prerequisite to allocation to it of an equitable share of the refund. 631 As Commissioner O'Connor was later to observe,[t]o flow through the entire amount of the refund would preclude Texas Eastern from recovering its costs, 632 and [t]he effect would be that consumers for the past ten years would receive gas at a price below its cost to the pipeline and below the just and reasonable rate. 633 This, he declared, to me is unconscionable, 634 and it may well be to other commissioners too. 192 Were the only issue emerging the legal vulnerability of Opinion No. 565, we would affirm its treatment of refund flow-through. The litigation, however, is further complicated by the course the Commission subsequently took in Opinion No. 565-A. Producer refunds were deferred pending reconsideration of the area rate for Southern Louisiana, leaving nothing to flow through to Texas Eastern's customers. 635 The legal effect of that action is our final inquiry. 193 As we have previously ruled, the Commission erred in postponing refunds by the producers to Texas Eastern. 636 We need not duplicate our earlier analysis and discussion of relevant legislative policy, or of the substantial body of judicial precedent, demanding speedy refunding by natural gas companies for the protection of consumers. It suffices to point simply to the Supreme Court's admonition, specifically referable to customer refunding, that the Commission had the duty, where refunds are found due, to direct their payment at the earliest possible moment consistent with due process. 637 The postponement of producer refunds and, in consequence, of refund flow-through by Opinion No. 565-A was plainly a default in that responsibility and it follows that the facet of Opinion No. 565-A must be disapproved. In the case at bar, there must be producer refunds; 638 and with no apparent justification for total retention by Texas Eastern, its customers must share in them. 194 But notwithstanding that, and though we leave untouched the flow-through principles which the Commission applied in Opinion No. 565, we must reject the amounts which that opinion would have respectively allotted to Texas Eastern and its customers from the producer refund. The Commission, for part of the relevant period, calculated the refund on the basis of the in-line unit price of the gas delivered to Texas Eastern. 639 Since we have held that the proper basis for computation was the just and reasonable rate throughout that period, 640 the refund will be larger than the Commission believed it to be. 641 We must, then, remand the case to the Commission in order that the amount of the producers' refund and the portions thereof to be retained and to be flowed through by Texas Eastern, may be recalculated. 195