Court Opinion

ID: 7846232
Source: CourtListenerOpinion
Date Created: 2022-09-08 17:11:05.879179+00
Date Added: 2024-06-11T16:21:36.922176
License: Public Domain

MacKINNON, Circuit Judge,
dissenting in part:
While generally concurring in the majority opinion, I dissent from the conclusion that the Commission lacked a sufficient basis for permitting the pipeline to retain the benefit of consolidated tax savings attributable to the losses of affiliated exploration and development (e & d) companies.1
The rule of decision applied by the Commission in this case was first stated as *44dictum in Florida Gas Transmission Co., 47 F.P.C. 341 (1972):
At the present time, we seek to avoid a determination that will tend to defeat efforts to acquire additional gas supplies or constitute a disincentive to exploration and development. Since 1968, all industry data indicate that gas is being consumed at a greater rate than it is being discovered .... Therefore, if a case were before us where an affiliated, regulated or non-regulated, producer of oil or gas showed a tax loss, and this loss company were joined in a consolidated return with a pipeline, . . . [we would not] reduce the rates of a regulated pipeline because of such affiliated exploration and development activities [for such reduction] would be discouraging to the very enterprise we now want to encourage.
Id. at 362. Summarizing this policy into a general principle, which it applied in the case before it, the Commission said, “In our opinion a utility should be regulated on the basis of its being an independent utility; that is[,] a utility should be considered as nearly as possible on its own merits and not on those of its affiliates.” Id. at 363. In subsequent decisions the Commission has reaffirmed the rationale of Florida Gas, see Southern California Edison Co., No. 821, 13 Fed. Power Serv. 5-163, 5-169 (September 22, 1977), although this is the first occasion of judicial review.
In the present case the Commission announced its continuing adherence to the Florida Gas doctrine.
In Florida Gas the Commission explained that time had eroded the force of its precedents on the consolidated tax issue, that those authorities were “no longer .. . persuasive,” and that “to reduce the rates of a regulated pipeline because of affiliated exploration and development activities would be discouraging to the very enterprise we now want to encourage-” [] We see nothing that has happened since Florida Gas to suggest that the need to stimulate the search for new domestic energy supplies is less pressing in 1979 than it was in 1972. The Department of Energy Organization Act of 1977 and the Natural Gas Policy Act of 1978 express legislative judgments that the Nation’s energy needs are more acute than ever.[2] The latter statute is very much to the point here.[3] The Congress obviously attached greater weight to inducing companies to go out to look for gas than it did to the previous consumer-protection objective of narrowly-defined cost-based rates for discovering and producing gas supplies.
... To require [the pipelines] to pay [their] 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.
J.A. 276-77.
The majority finds this reliance on the Florida Gas rule inadequate because the *45Commission adduced insufficient evidence to show (1) that any part of the pipelines’ investment in the e & d companies was actually induced by the Commission’s adoption of its Florida Gas policy or (2) that more than a portion (about one-third) of the consolidated tax savings was directly reinvested in those companies. Maj. op. at notes 42-48 and accompanying text. In my view, the majority misunderstands the nature of the Commission’s decision, and, consequently, the type of evidence needed to show that the decision was “arbitrary or capricious” and the extent to which it must be supported by “substantial evidence.”
Agency action must be affirmed unless it is beyond statutory authority, procedurally defective, arbitrary or capricious, an abuse of discretion, or unsupported by substantial evidence necessary to the decision. E. g., National Small Shipments Traffic Conf., Inc. v. CAB, 618 F.2d 819, 826 (D.C.Cir. 1980). The majority agrees that the action taken here was within statutory authority and free of material procedural defect. This leaves only the questions whether the agency had an adequate factual basis and exercised a reasoned discretion.
The application of this standard of review is influenced to a large extent by the nature of the decision made by the agency. The “facts” supporting a prediction of where the public interest lies are not susceptible to the same degree of proof as are the facts supporting, say, a decision to revoke a license, and the standard of review — whether it is labelled arbitrary or capricious, substantial evidence, or abuse of discretion— must take that reality into account.4
The “facts” underlying the Commission’s decision here are that depriving the pipelines of the benefits of consolidated tax savings would provide a disincentive to natural gas production, by making investment in production activities less attractive or by depriving the pipelines of investment capital derived from profits. These are the sort of judgmental or predictive facts for which courts have traditionally declined to require specific record support. For example, in FPC v. Transcontinental Gas Corp., 365 U.S. 1, 81 S.Ct. 435, 5 L.Ed.2d 377 (1961), the Supreme Court rejected a substantial evidence challenge to the Commission’s denial of a request to buy interstate natural gas directly, at a high, unregulated price. The Commission had reasoned that
widespread direct sales at high prices would probably result in price increases. Respondents appear to be claiming that the Commission should have adduced testimonial and documentary evidence to the effect that this forecast would come true. However, we do not think that the Commission is so limited in its formulation of policy considerations. Rather, we think that a forecast of the direction in which future public interest lies necessarily involves deductions based on the expert knowledge of the agency. ... It should also be noted that there has been a considerable showing made by the petitioners and the state regulatory commissions appearing as amici curiae to the effect that the Commission’s forecast is well founded. . . . Moreover, as a matter of common sense, it would seem difficult to deny that the channeling of vast quantities of a wasting resource into unregulated transactions at a high price will result in scarcity to other consumers and a general price increase.
Id. at 29-30, 81 S.Ct. at 450. The Supreme Court followed Transcontinental Gas in FCC v. National Citizens Committee, 436 U.S. 775, 813-14, 98 S.Ct. 2096, 2121-2122, 56 L.Ed.2d 697 (1978):
to the extent that factual determinations were involved in the Commission’s decision to grandfather most existing [broadcaster-newspaper] combinations, they were primarily of a judgmental or predictive nature — e. g., whether a divestiture requirement would result in trading of stations with out-of-town owners; whether new owners would perform as well as existing crossowners, either in the short run or in the long run; whether losses to existing owners would result from forced sales; whether such losses *46would discourage future investment in quality programming; and whether new owners would have sufficient working capital to finance local programming. In such circumstances complete factual support in the record for the Commission’s judgment or prediction is not possible or required; “a forecast of the direction in which future public interest lies necessarily involves deductions based on the expert knowledge of the agency."
Id. (quoting FPC v. Transcontinental Gas Pipe Line Corp., 365 U.S. 1, 29, 81 S.Ct. 435, 450, 5 L.Ed.2d 377 (1961) (emphasis added).5
Given the nature of the Commission’s decision in this case, involving as it does a matter clearly within the recognized expertise of the agency, I would require only that its prediction have a rational basis and that the Commission show that its policy logically applies to the facts before it. The latter requirement, all would agree, has been satisfied in that (1) the pipelines had affiliates engaged in exploration for new energy supplies; (2) these affiliates incurred losses during the relevant period; and (3) these losses contributed to the consolidated tax savings of the pipelines. Given these facts, the Florida Gas rule applies to the consolidated tax savings attributable to the losses incurred by the affiliated e & d companies.
The requirement that the prediction be rationally based is also met, in my judgment. The Commission has decided it will not reduce the rates of a regulated pipeline where the group of companies with which it is affiliated pays less tax on a consolidated basis because of losses incurred by e & d affiliates. This decision simply recognizes the profit motive that influences business decisions. If a pipeline’s rates are to be reduced, and its income lowered, because of its affiliation with such e & d companies, the prospect of that affiliation is made less desirable. And the less capital available for e & d companies, the less exploration and the less production there will be.
Regardless of whether we find the agency’s judgment persuasive, we must affirm it if it is rationally based.6 Where, as here, we have “deductions based on the expert knowledge of the agency” that are plausible “as a matter of common sense,” FPC v. Transcontinental Gas Corp., supra, 365 U.S. at 28, 29, 81 S.Ct. at 449-450, in my judgment it is our duty to affirm. It is no objection to the application of the agency’s judgment that the agency has not adduced facts on this particular record to defend the appropriateness of its Florida Gas decision. If there is reason to conclude that depriving pipelines of e & d-based consolidated tax savings will discourage exploration and development as a general matter, then it was not error to apply the decision here even in the absence of proof that the policy is actually necessary to avoid discouragement of production in this particular case.7
I find the Commission’s decision particularly reasonable in light of its rationale, developed in its opinion on rehearing, that its Florida Gas rule of treating the utilities *47independently was supported not only by a policy favoring production but also by the equities of the situation. With a consolidated tax return, the Commission explained, the affiliated group uses the losses of affiliates to reduce overall taxes currently. This is an alternative to filing separate returns which would permit the loss affiliates to use the loss carry-back and carry-forward provisions in the tax law. J.A. 341.
The Commission reasoned that the tax •allowances of the loss affiliates belonged to the investors in those affiliates:
Charlottesville erroneously equates [the pipelines’] use of earned shareholder equity (derived from net profits reasonably and fairly earned, in part, from jurisdictional operations) to finance E & D operations . . . with consumer paid expenses which create a loss deduction. These two sources are not the same. One is derived from the shareholder, the other from the consumer. Charlottesville would have us deprive the consolidated enterprise of the tax savings from loss affiliates despite the fact that the incurrence of the losses placed no burden on [the] pipeline customers. Those customers are being charged no more than they would if a consolidated return had not been filed.
J.A. 341-42. This reasoning follows the Commission’s decision in Southern California Edison, No. 821, 13 Fed. Power Service 5-163 (September 22, 1977), holding that where a utility’s customers did not pay for the expense leading to the losses, they were not entitled to a rate reduction based on those losses. The reasoning is also consonant with the persuasive comment of Judge Leventhal in American Public Gas Ass’n v. FPC, supra, 567 F.2d at 1040 n.33: “But beyond that, we are not aware of any principled basis for saying that natural gas consumers should pay less for gas simply because the unlikely hypothesis materializes and, say, Mobil Oil loses money in its Montgomery Ward investment.” See also Democratic Central Committee v. Washington Metropolitan Area Transit Commission, 485 F.2d 786, 796 (D.C.Cir.1973) (gain on sale of depreciated property belongs to either investors or consumers, depending on who bore the risk of loss), cert. denied, 415 U.S. 935, 94 S.Ct. 1451, 39 L.Ed.2d 493 (1974).
For the foregoing reasons, it is my conclusion that the Commission, empowered to set rates that are “just and reasonable,” did not act irrationally in declining to reduce the pipelines’ income tax allowance to the extent that they had achieved consolidated tax savings attributable to the losses of affiliated exploration and development-companies. While otherwise concurring, I respectfully dissent from the majority’s decision to reverse and remand on this issue.

. Section 4(e) of the Natural Gas Act, 15 U.S.C. § 717c(e), directs the Commission to determine “just and reasonable” rates for natural gas companies, including interstate pipelines. The Commission traditionally has done this by fixing a rate of return on costs recognized for ratemaking purposes. Included in those costs is an allowance for federal income taxes. FPC v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1964). The pipelines here, *44by filing a consolidated income tax return with affiliated exploration and development companies, paid less total tax than they would have paid had each company stood alone. It is by using their “stand alone” tax figure (rather than their smaller, apportioned share of consolidated taxes) to compute the tax allowance that the pipelines are said to be retaining the benefit of consolidated tax savings.
The majority acknowledges that “[t]he Commission is not obligated to follow any particular formula for the apportionment of consolidated tax savings,” at p. 952 supra, “there [being in ratemaking] no mystique requiring that expenses actually be ‘paid’.” American Pub. Gas Ass’n v. FPC, 567 F.2d 1016, 1038 (D.C.Cir.1977), cert. denied, 435 U.S. 907, 98 S.ct. 1456, 55 L.Ed.2d 499 (1978). The issue here is whether the Commission has articulated an adequate basis for the “stand alone” tax treatment.

. The Commission said in footnote:
At the moment, the natural gas supply situation seems better than it has been for a long time. But that is no cause for complacency. By now, the folly of looking at these matters from short-run perspective should be apparent to all.

. The Commission in footnote said, “Of course, that is not so as a matter of law. But it is so as a matter of policy.”

. See generally Davis, Facts in Lawmaking, 80 Colum.L.Rev. 930 (1980).

. Accord, National Small Shipments Traffic Conf., Inc. v. CAB, 618 F.2d 819, 830 (D.C.Cir.1980) (CAB’s decision to lift tariff filing requirement based on prediction that this would encourage price competition “does not seem irrational”); Missouri-Kansas-Texas RR. Co. v. United States, 632 F.2d 392, 407 (5th Cir. 1980) (ICC, in considering anticompetitive effects of proposed railroad merger, not required to make specific findings about tendency of merger to encourage other future mergers; “an agency is not required to make specific findings in the course of making future projections”), cert. denied, 451 U.S. 1017, 101 S.Ct. 3004, 69 L.Ed.2d 388 (1981).

. Were this court to construct a methodology for national ratemaking, we might find it more elegant and theoretically proper to in-elude such incentives for exploration solely within the factor for rate of return. But that is not our task, and we cannot say that the Commission was arbitrary or capricious in taking account of this public need within the context of its calculation of the tax component.
American Public Gas Ass’n v. FPC, 567 F.2d 1016, 1036 (D.C.Cir. 1977), cert. denied, 435 U.S. 907, 98 S.Ct. 1456, 55 L.Ed.2d 499 (1978).

.In engaging in an important policy decision such as it did in Florida Gas it might have been preferable for the Commission to have proceeded by industry-wide rulemaking. There is no argument presented here, however, that the Commission abused its discretion in proceeding as it did.