Court Opinion

ID: 9449180
Source: CourtListenerOpinion
Date Created: 2023-08-04 00:00:09.250558+00
Date Added: 2024-06-11T17:31:44.961077
License: Public Domain

BAZELON, Chief Judge.
In a rate proceeding under § 4(e) of the Natural Gas Act,1 the Federal Power Commission allowed Panhandle Eastern Pipe Line Company an over-all return of 6.25 per cent on its total rate base, reflecting a rate of return of 1.5 percent on $11,000,000 of investment from its reserves for deferred income taxes. In this petition for review, Panhandle’s only complaint relates to the rate allowed on the reserves.
*661These reserves are generated by Panhandle’s use of § 167 of the Internal Revenue Code2 which authorizes taxpayers to write off depreciable property more quickly than is permitted under the “straight-line” method of depreciation. The liberalized method provides higher depreciation deductions and therefore lower taxes during the early part of the life of a given property, and lower deductions and higher taxes in the later years of the life of the property. The total depreciation deductions available to a company over the entire life of a facility are the same using either method. The comparative advantage provided by liberalized depreciation is that it defers to the later life of a given property a portion of the taxes on income that would be payable in the early years under straight-line depreciation, and gives the company the use of such moneys in the interval. Liberalized depreciation under § 167 is thus said to result in tax deferrals rather than tax savings. Cf. City of Detroit, Mich. v. Federal Power Comm., 97 U.S.App.D.C. 260, 230 F.2d 810 (1955); El Paso Natural Gas Co. v. Federal Power Comm., 281 F.2d 567, 573 (5th Cir.1960). But see Eisner, Depreciation under the New Tax Law, 33 Harv.Bus.Rev.No. 1, pp. 66-74.
In City of Detroit, we sustained the •Commission’s action in permitting Panhandle (1) to use the straight-line method of depreciation in fixing its .rates, while using the accelerated method for computing its tax expense, .and (2) to include reserves for deferred taxes in its rate base. We rejected -a rate-payer’s objection that such treatment did not produce the “lowest reason.able rates” required by § 5(a) of the Natural Gas Act.3 But the question of what return, if any, should be allowed •on reserve funds included in the rate base was not before us in City of Detroit. It is the sole question presented in this case.
Here the Commission, following its •decision in Northern Natural Gas Co., 25 F.P.C. 431 (1961), “divided the benefits of liberalized depreciation between the regulated company and the rate-payer” giving the “major portion of the benefits to the rate-payer.” It permitted Panhandle “only so much of [a return on funds generated by the use of liberalized depreciation] as is necessary to provide it with a sufficient incentive to continue to use liberalized depreciation.” Thus, a substantially lower rate of return was attributed to those funds than to other capital.
Panhandle insists that Congress intended all the benefits of liberalized depreciation for the taxpayer and none for the rate-payer. Accordingly, it urges that the tax statute assures a “full return” on the deferred tax reserves equivalent to the rate of return of 6.46 percent which the Commission allowed on other investment.
In their briefs, the Commission and some of the State Commissions suggest that the regulatory treatment of tax benefits is entirely a matter of discretion and policy within the administrative competence of the agencies charged with regulating rates, and that consequently the Commission would have power to deny the company any return on the funds generated by liberalized depreciation and to require the companies to continue to utilize such depreciation. But the Commission did not follow that course. Instead, it sought to give “such effect to the purposes of the tax statute as is appropriate within the principles of regulatory law expressed in the Natural Gas Act.” We therefore intimate no opinion concerning the validity of the course proposed in the briefs, and consider only the Commission’s action under review.
In reviewing that action, we must first decide whether the congressional purposes underlying the tax and gas acts are effectuated by permitting a rate of return on the funds generated by the use of liberalized depreciation no higher than that required to provide the company with “a sufficient incentive to continue *662to use liberalized depreciation.” And if they are, we must then decide whether 1.5 per cent constitutes such a rate of return.
We now briefly consider the policy underlying § 167 of the tax statute. Nothing in the language or legislative history indicates that Congress considered its regulatory consequences. Thus, to infer that the statute materially altered fundamental principles of rate regulation — which require rates to reflect actual costs of capital — it must clearly appear that Congress intended to benefit producers to the exclusion of consumers. It does not so appear: the legislative history reveals that Congress intended the statute “to have far-reaching economic effects” extending to “all segments of the American economy."4 Liberalized depreciation was seen as a means toward a broad economic goal; it was expected to “assist modernization and expansion of industrial capacity, with resulting economic growth, increased production, and a higher standard of living.” (House and Senate Reports accompanying Internal Revenue Code of 1954, reprinted in U.S.Code Cong. & Ad. News, 83d Cong., 2d Sess. Vol. 3, 4046-48, 4655, 4835.)
To set this economic spiral in motion, producers must, of course, be willing to invest in plant and incur the attendant risks. Congress permitted “acceleration in the speed of the tax-free recovery of costs [because it considered this] of critical importance in the decision of management to incur [such], risks.” Ibid. The Commission’s decision does not disturb this acceleration; it relates only to the rate of return allowed a regulated company on the reinvestment of the money thus recovered. Although Congress was not directly concerned with this rate, it may be argued that to the extent that this rate influences the company’s initial decision to invest in plant, it does touch upon the congressional purpose underlying the tax act. But even under this view, the congressional purpose could not be adversely affected unless the regulated companies were prevented from re-employing recovered funds at a sufficient profit to provide incentive to initial investment.
The Commission explicitly rested its determination on the judgment that the rate of return it allowed on the recovered funds, taken with the other “material advantages,”5 would provide the company “with a sufficient incentive to con*663tinue to use liberalized depreciation * * *_» This implicitly recognizes that, since the recovered funds were acquired at no cost to the company, and since the risks involved in their reinvestment are minimal as compared with the risks generally encountered by non-regulated producers, a return of 1.5 per cent provides sufficient profit incentive for the company to continue generating these funds by investing in plant and utilizing accelerated depreciation.
Since there is no indication that •Congress intended to bestow upon the producers qua producers any benefits beyond those necessary to provide incentives to investment, we conclude that, if a return of 1.5 per cent taken with the other advantages does provide such incentive, the Commission’s decision would be •consistent with the congressional policy underlying the tax statute.
Next we consider “the principles of regulatory law expressed in the Natural Gas Act,” which impelled the Commission to allow no more of a return on these funds than that necessary to effectuate the tax act. These principles include the requirement that a public •utility must operate on the most economical basis consistent with good service and sound finance. Implicit in this requirement is the rule that the rates •charged must reflect the company’s actual total costs, including its cost of capital. Since the capital represented by the funds generated by accelerated depreciation cost the company nothing, sound principles of rate regulation support the Commission’s decisions to permit the company no more of a return on these funds than that necessary to effectuate the congressional policy underlying the tax statute. See Cities of Lexington, et al. v. Federal Power Comm., 295 F.2d 109 (4th Cir.1961); El Paso Natural Gas Co. v. Federal Power Comm., 281 F.2d 567 (5th Cir.1960).
The Commission, “[a]fter careful consideration of the various factors involved” decided that a specific return of 1.5 per cent on the recovered funds, coupled with the other advantages derived from the use of liberalized depreciation, provides sufficient incentive for the continued use of liberalized depreciation. This conclusion was “largely a matter of judgment based upon such factors as [the Commission’s] knowledge of the money market, and [its] estimate as to what course most regulated companies will elect to pursue in the future.” Since these evaluations are within the expert competence of the Commission, we do not disturb the conclusions derived from them.
Affirmed.

. 15 U.S.C. § 717c (e).

. 26 U.S.C. § 167.

. 15 U.S.C. § 717d(a).

. Insofar as the opinion in City of Detroit, supra, indicates tliat the intent of Congress in the revenue act was to benefit taxpaying producers and not their consumers, we may regard it as limited to the circumstances of that case, where the petitioning consumer sought to have the amounts recovered as depreciation expense deducted entirely from the producer’s rate base. We held that the Commission properly included such reserves in the rate base. The present case is distinguishable. Here the Commission seeks only to limit the rate of return on such reserves. And since the opinion in City of Detroit uses language broader than required for the decision on this aspect of the case, we are not constrained to read the case as deciding that in all circumstances and in the light of greater experience with the operation of § 167 the greatest possible benefit should inure to the producer and none at all permitted to the consumer. Furthermore, the additional advantages to the taxpaying producer in using accelerated depreciation urged in this case appear to be more substantial than those discussed in City of Detroit. See note 5, infra.

. The other “material advantages” which the Commission found would result from “the use of deferred taxes to supply a portion of the company’s capital requirements,” are as follows:
“The substantial sums involved are readily available without resort to the market, and such additions to capital serve to reduce the company’s debt ratio. The acquisition of plant by use of deferred taxes provides additional security not subject to lien on which new loans can be based, perhaps at lower interest rates than would otherwise be possible. Furthermore, deferred tax funds accumulated between rate cases and invested in plant may, during that period, increase the company’s earnings. Finally, the accumulation of deferred taxes increases the company’s funds available for expansion without issuing additional common stock.”