Court Opinion

ID: 7840181
Source: CourtListenerOpinion
Date Created: 2022-09-08 16:58:56.369814+00
Date Added: 2024-06-11T16:00:31.945395
License: Public Domain

ROBB, Circuit Judge,
dissenting:
I cannot agree with the majority that the substantial evidence standard of review should be applied to these orders of the Federal Power Commission. Moreover, I believe the orders should be upheld as rational exercises of the Commission’s rule-making power under the appropriate standard of review, that is, was the Commission’s action arbitrary or capricious? Accordingly, I dissent.
The Commission has twice before considered the issue of normalization as against flow-through. It concluded once that normalization was the preferable policy, and was upheld on a later appeal. See Amere Gas Utilities, 15 F.P.C. 760 (1956); El Paso Natural Gas Co. v. FPC, 281 F.2d 567 (5th Cir. 1960). On subsequent consideration it required utilities to flow-through their tax savings to their customers, and was again upheld on appeal. See Alabama-Tennessee Natural Gas Co., 31 F.P.C. 208 (1964), aff’d sub nom. Alabama-Tennessee Natural Gas Co. v. FPC, 359 F.2d 318 (5th Cir.), cert. denied, 385 U.S. 847, 87 S.Ct. 69, 17 L.Ed.2d 78 (1966). Now, it has returned to a policy favoring normalization, and, for the first time, its conclusion as to which policy is preferable in light of current economic conditions has been successfully challenged.
I.
The Commission expressed this most recent conclusion in a series of orders issued after notice-and-comment rulemaking which proceeded according to the statutory mandate of the Administrative Procedure Act (APA). Technically, the subject of these orders was a change in the Commission’s Uniform Systems of Account regulations. See 18 C.F.R. Chpt. I Pt. 101. Commission activity more appropriately characterized as rulemaking, rather than adjudication, is difficult to imagine.
The APA dictates review of such informal rulemaking to determine whether it is “arbitrary, capricious, [or] an abuse of discretion.” 5 U.S.C. § 706(2)(A) (1976). This standard of review should govern the action taken here, unless it is displaced by section 19(b) of the Natural Gas Act, which requires that “substantial evidence” support Commission “findings of fact.” 15 U.S.C. § 717r(b) (1976). The court today imposes the substantial evidence test on informal rulemaking pursuant to the Natural Gas Act.
The court reaches its conclusion by asserting that “substantial evidence” must support the “factual predicate” on which the Commission rule is promulgated. It then invalidates the rule on the ground that it lacks adequate support in the record. To *77invalidate the Commission’s order on this ground is, in effect, to reject the ordinary procedures of notice-and-comment rulemaking. Informal rulemaking does not necessarily involve either the creation of a record sufficient to withstand review under a substantial evidence standard or findings of the kind most susceptible to judicial review. See K. Davis, Administrative Law of the Seventies, § 29.-01-6 (1976).
The thesis of the majority is untenable in light of the Supreme Court’s recent decision in Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, 435 U.S. 519, 98 S.Ct. 1197, 55 L.Ed.2d 460 (1978). There, addressing the imposition of procedural safeguards not mandated by statute, the Supreme Court stated:
this sort of review fundamentally misconceives the nature of the standard for judicial review of an agency rule. . If the agency is compelled to support the rule which it ultimately adopts with the type of record produced only after a full adjudicatory hearing, it simply will have no choice but to conduct a full adjudicatory hearing prior to promulgating every rule.
Id. at 547-48, 98 S.Ct. at 1214.
Of course, a threshold issue of reviewability arises whenever appellate examination of an agency order is sought. On the issue of reviewability the court will consider the nature of the record upon which the rule in question was promulgated. Thus, as this court has stated, “[rjecent cases have emphasized that the ‘determining factor’ in connection with the reviewability of Commission orders is whether the record is sufficient to allow meaningful review.” American Public Gas Co. v. FPC, 178 U.S.App.D.C. 217, 220, 546 F.2d 983, 986 (1976). Although review does encompass an inquiry “into the factual predicate for the rule, i. e., the existence or non-existence of the condition advanced as the basis for the rule”, id. at 221, 546 F.2d at 987, the inquiry, as its phrasing indicates, will be satisfied by less than the substantial evidence required in a record in a formal adjudication under the APA. Nevertheless, the court today combines the jurisdictional provision of the Natural Gas Act with language in earlier opinions addressing the initial question of whether an order is reviewable at all, and imposes an obligation on the Commission to support with substantial evidence its orders issued pursuant to informal rulemaking.
II.
The accounting rules prescribed in the Commission’s orders withstand appellate scrutiny under the correct standard of review, testing only whether they are arbitrary and capricious. Although the Natural Gas Act requires that the Commission establish “just and reasonable” rates, see 15 U.S.C. § 717c(a) (1976), it'allows the Commission great latitude in reaching that result. See Permian Basin Rate Cases, 390 U.S. 747, 776-77, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1967); FPC v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 88 L.Ed. 333 (1943). Here, the Commission’s orders involved a rational exercise of its regulatory authority, well within its administrative discretion. I see no reason to fault the Commission’s conclusion that
The adoption of normalization of income taxes for rate purposes will contribute to the health of the electric and natural gas industries by increasing cash flow and by reducing external financing requirements. In addition, normalization will contribute to the financial stability of companies and improve fixed charge coverages.
(J.A.340)
The validity and utility of the challenged accounting rules in the Commission’s work of determining just and reasonable rates will only be shown in case-by-case ratemaking proceedings. Accordingly, as the Commission said in Order No. 530, it
contemplates that in each rate proceeding, where an applicant utility (electric or *78gas) seeks to avail itself of these normalization procedures, it shall present a factual showing appropriate to sustain its claim; and that any entity opposing the requested procedures shall present a factual showing appropriate to sustain its counterclaim. It is contemplated that these showings shall be in the nature of an obligation of coming forward with evidence to support the respective claims advanced. The Commission’s ultimate findings and conclusions on these and all other questions shall reflect the substantial evidence rule of the Federal Power Act and Natural Gas Act.
(J.A.341)1
It is certainly not inevitable that normalization will lead to the inflation of any utility’s rate base or a return to investors on capital that they did not contribute to the utility. Consequently, the imposition of a substantial evidence standard of review is premature until the results of those rate adjudications are before an appellate court. At that time, the results of the ratemaking, but not the rules under which it was conducted, must be supported by substantial evidence. “Under the statutory standard of ‘just and reasonable’ it is the result reached not the method employed which is controlling.” FPC v. Hope Natural Gas Co., supra, 320 U.S. at 602, 64 S.Ct. at 287.
The Commission decided to defer consideration of the potential anticompetitive consequences of normalization until individual ratemaking proceedings are conducted. The majority states that this procedure lacks a rational basis. Yet even the petitioner acknowledges that the potential anti-competitive “price squeeze” to which it alludes would arise only under certain state regulatory regimes. (Pet.Br. at 53) And extreme deference is owed to the Commission in its choice of administrative procedures. See Alabama-Tennessee Natural Gas Co. v. FPC, 359 F.2d 318 (5th Cir.), cert. denied, 385 U.S. 847, 87 S.Ct. 69, 17 L.Ed.2d 78 (1966). The Commission’s decision to delay consideration of a potential problem in the coordination of state and federal regulatory programs until the program ac*79tually arises is self-explanatory, an example of administrative economy. The lack of an articulated justification for this choice of regulatory procedures is not ground for a remand unless such a decision in notice-and-comment rulemaking must be supported by substantial evidence on a record created in proceedings far more extensive than those mandated by the APA. This indirect imposition of additional procedural requirements, beyond those that the APA imposes, is not permissible. See Vermont Yankee Power Co. v. Natural Resources Defense Council, supra.
CONCLUSION
The choice between normalization and flow-through is for the Commission. If it selects its policy in notice-and-comment rulemaking, this court’s review of that choice is limited to determining whether that choice was rational. This court is not authorized to reject the Commission’s reasoning because the court does not agree with it or thinks better explanations might have been made. Nor can the court substitute its policies for those of the Commission. In my opinion the record here is sufficient to show that the Commission’s choice was rational. When the Commission applies its rules in ratemaking, the Commission and the court will require that substantial evidence support the results reached in those proceedings. Because the court today prematurely demands a record more elaborate than that required by the statute, I respectfully dissent.

. In Order No. 530 the Commission did not elaborate upon the nature of the “appropriate factual showings” that would be required. Elucidation followed in Order No. 530-B, from which the majority culls certain language. (Majority Op. n. 41) As I read Order 530-B it limits and defines, but does not abandon, the requirement of a factual showing. Thus the Order states:
In Order No. 530 the Commission reviewed the changes in circumstances which supported the implementation in general of normalization, stated that normalization would be in the public interest and that “the Commission, as a matter of general policy, would favor ratemaking treatment upon a normalization basis, provided appropriate factual showings are developed in each instance.” The nature of these factual showings was not elucidated in Order No. 530, and in fact, reflected some ambivalence on the part of the Commission concerning both the legal permissibility and the policy desirability of allowing normalization when its use resulted in what is variously described as a tax deferral or a tax savings. In Order No. 530-A the Commission asserted that “courts have required a finding that a tax deferral will occur rather than a permanent tax savings” in order to permit normalization of liberalized depreciation. And it stated that it would “of course . . . require a showing by the utility requesting normalization that a tax deferral rather than a tax savings would occur .”
Upon reconsideration, we find this reasoning to have been incorrect. For the reasons set forth below we find that there is no legal bar to the Commission either permitting or denying normalization of the tax effect associated with timing differences in the recognization of expenses for tax purposes and for book purposes. The principles of setting just and reasonable rates forbid the normalization of tax effects only when there will in fact be a permanent difference between treatment of items for tax purposes and book purposes. Examples of such permanent differences , include treatment of municipal bond interest, political contributions, or depletion allowances permitted by statute.
In light of this conclusion, we reiterate our finding in Order No. 530 that the use of normalization for rate purposes would be beneficial and in the public interest, and announce that it would be our policy to permit such normalization upon a showing simply that the tax effect being normalized relates only to timing differences rather than to permanent differences between book and tax treatment. (J.A.845) [Emphasis in original]