Court Opinion

ID: 6915565
Source: CourtListenerOpinion
Date Created: 2022-07-23 22:40:00.235209+00
Date Added: 2024-06-11T16:06:39.060433
License: Public Domain

PARKER, Chief Judge
(concurring in part and dissenting in part).
These are petitions to review an order of the Federal Power Commission reducing rates on electric energy furnished by the South Carolina Generating Company to the Georgia Power Company pursuant to a long term contract which prescribed the rates. There is no question but that the energy was furnished in interstate commerce. The order is attacked on the ground that the Commission was without power to enter the order in the absence of a finding that the contract rates will result in impairing the ability of one of the parties thereto to render public service or will impose an excessive financial burden upon its customers, and upon the further ground that the rates prescribed by the order are not supported by the record before the Commission. I do not think that either ground of attack can be sustained. The facts may be briefly summarized as follows :
The Generating Company is a wholly owned subsidiary of the South Carolina Electric and Gas Company, hereafter referred to as E & G, which is engaged in generating and distributing electric energy in the State of South Carolina, and which in 1950 was contemplating an addition to its generating capacity. About that time the construction of the Hydrogen Bomb Project in South Carolina by E. I. duPont de Nemours and Company was commenced and the Generating Company was organized by E & G to supply the electric energy, required by the project, a separate corporation being organized because of the restriction which existed on the amount of E & G’s mortgage indebtedness and the necessity of acquiring additional capital for the new construction at a low rate if the energy was to be supplied to duPont at a rate to which duPont would agree. The Generating Company was accordingly financed on a ratio of 90% debt to 10% of common stock, and proceeded to construct at Urquhart *on the Savannah River a power plant of 150,000 KW capacity, which was large enough to take care of the needs of E & G and duPont and provide additional energy, which was sold to the Georgia Power Company.
Prior to the construction of the Urquhart plant, the Georgia Power Company, which had been contemplating additions to its own generating system, determined that it could save money by purchasing energy from the Generating Company instead of building an additional plant of its own. It accordingly entered into a twenty-five year contract with the Generating Company by the terms of which that company undertook to furnish and Georgia Power agreed to purchase the full capacity of one of the two 75,000 KW units to be installed by the Generating Company at Urquhart. The 75,000 KW capacity of the other unit was sold to duPont and E & G, 30,000 KW being sold to duPont and 45,000 KW to E & G.
The charge to all three of the customers of the Generating Company, i. e. Georgia Power, duPont and E & G, was divided into an energy charge and a capacity charge. The energy charge is not in dispute. The capacity charge to Georgia Power was $22.50, to duPont $19.00 and to E & G $15.30. The $22.50 capacity charge to Georgia Power embraced an item of $15.30, corresponding to the capacity charge to E & G and an additional item of $7.20. The $15.30 item was and is made up of two components. The first is a finance component designed to provide interest and amortization of the 90% debt in twenty-five years and an 8% return on equity, and results in a figure of $10.50 per KW per annum. The second is an operations component including operating, administrative, and general expenses not included in the energy charge, which amounts to $4.80 per KW per annum. The remaining $7.20 added to the capacity charge in the rate fixed by the contract *767with Georgia Power does not relate to any costs on the books of the Generating Company but was designed to divide equally between that company and Georgia Power the estimated savings to Georgia Power from the agreement as compared with the construction and operation of a generating station of its own, the estimated saving being around $600,-000 per year. The contract provided for termination on notice, and contained escalation clauses under which both the energy charge and the capacity charge were related to certain costs. Under the escalation clause relating to the capacity charge, that charge to Georgia Power had been increased to $25.11 per KW.
The Commission held that the reasonableness of the rate should be determined by cost of service to the utility furnishing the energy and not by the value of the service to the purchaser, and upon its findings as to the cost of service to the Generating Company ordered that the capacity charge be reduced to $21,948 per KW. It ordered also that the escalation provision for change in the capacity charge be eliminated for the future, except with respect to increase or decrease in the federal income tax rate.
I think that the entry of the order based upon cost of service, and without reference to the use value of the current to the purchaser or the provisions of the contract under which it was furnished, was well within the power of the Commission. The manifest purpose of the of the Federal Power Act is the regulation of rates for the benefit of ultimate consumers (16 U.S.C.A. § 824(a)), and there can be no question but that the Commission has been vested with ample power of rate regulation to accomplish this purpose. Section 206(a) of the Act, 16 U.S.C.A. § 824e(a) provides:
“(a) Whenever the Commission, after a hearing had upon its own motion or upon complaint, shall find that any rate, charge, or classification, demanded, observed, charged, or collected by any public utility for any transmission or sale subject to the jurisdiction of the Commission, or that any rule, regulation, practice, or contract affecting such rate, charge, or classification is unjust, unreasonable, unduly discriminatory or preferential, the Commission shall determine the just and reasonable rate, charge, classification, rule, regulation, practice, or contract to be thereafter observed and in force, and shall fix the same by order.”
And it is well settled that the Commission is given wide discretion as to the adoption and application of standards in the exercise of the power thus vested in it. In Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 586, 62 S.Ct. 736, 743, 80 L.Ed. 1037, the Supreme Court, speaking through Chief Justice Stone, said:
“The Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas. Agencies to whom this legislative power has been delegated are free, within the ambit of their statutory authority, to make the pragmatic adjustments which may be called for by particular circumstances. Once a fair hearing has been given, proper findings made and other statutory requirements satisfied, the courts cannot intervene in the absence of a clear showing that the limits of due process have been overstepped. If the Commission’s order, as applied to the facts before it and viewed in its entirety, produces no arbitrary result, our inquiry is at an end.”
And in the later case of Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 287, 88 L.Ed. 333, the Court, speaking through Mr. Justice Douglas, said:
“We held in Federal Power Commission v. Natural Gas Pipeline Co., supra, that the Commission was not bound to the use of any single formula or combination of formulae in determining rates. Its rate-making function, moreover, involves the making of ‘pragmatic adjustments.’ Id., 315 U.S. at page 586, 62 S.Ct. at *768page 743, 86 L.Ed. 1037. And when the Commission’s order is challenged in the courts, the question is whether that order ‘viewed in its entirety’ meets the requirements of the Act. Id., 315 U.S. at page 586, 62 S.Ct. at page 743, 86 L.Ed. 1037. Under the statutory standard of ‘just and reasonable’ it is the result reached not the method employed which is controlling. Cf. Los Angeles Gas & Electric Corp. v. Railroad Commission, 289 U.S. 287, 304-305, 314, 53 S.Ct. 637, 643, 644, 647, 77 L.Ed. 1180; West Ohio Gas Co. v. Public Utilities Commission (No. 1), 294 U.S. 63, 70, 55 S.Ct. 316, 320, 79 L.Ed. 761; West v. Chesapeake & Potomac Tel. Co., 295 U.S. 662, 692-693, 55 S.Ct. 894, 906, 907, 79 L.Ed. 1640 (dissenting opinion) . It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end. The fact that the method employed to reach that result may contain infirmities is not then important. Moreover, the Commission’s order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate order under the Act carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences.” (Italics supplied).
The rate order cannot be held unjust or unreasonable in its consequences on the ground that in prescribing just and reasonable rates based on cost of service it ignores the value of the service to the purchaser, which is the basis of the contract rate. As was well said by the Commission in its opinion:
“The value-of-service approach advocated by Generating Company would result in a chaotic structure based in part upon the cost to the buyer of supplying substitute power. Such ‘regulation’ would, in fact, be no regulation at all and would completely disregard the public interest and the ultimate consumer which the Act is designed to protect. Cf. Phillips Petroleum Co. v. [State of] Wisconsin, 347 U.S. 672 [74 S.Ct. 794, 98 L.Ed. 1035]. Mississippi River Fuel Corp. v. Federal Power Commission, 8 Cir., 1941, 121 F.2d 159.
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“The mild prediction by Generating Company that it might exercise the recapture or cancellation provision in its contract unless it is permitted the higher rate only serves to emphasize the importance of our adherence to the cost-of-service test. The manifest purpose of the Act is the regulation of rates for the benefit of the ultimate consumer. Section 201(a). Federal Power Commission v. Hope Natural Gas Company, 320 U.S. 591 [64 S.Ct. 281, 88 L.Ed. 333]. If we were to approve the rate contained in the contract solely upon the basis that the two contracting utilities have struck a bargain, and that one of the parties would cancel the contract unless we did approve it, we would be remiss in our duty to protect the ultimate consumer. Such a rationale could lead only to approval of all contract rates irrespective of the public interest involved contrary to the provisions and purposes of the Federal Power Act.”
Petitioners rely particularly upon United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332, 76 S.Ct. 373, 100 L.Ed. 373, and Federal Power Commission v. Sierra Pacific Power Co., 350 U.S. 348, 76 S.Ct. 368, 100 L.Ed. 388; but there is nothing in either of these decisions that supports their position. They hold merely that rates prescribed by contract cannot be raised by unilateral filing of higher rates in the absence of a finding that the public interest is affected by the lower rates — “as where it *769might impair the financial ability of the public utility to continue its service”,— a consideration which can manifestly have no application to a case where the rates are found to be too high in application of the cost of service principle. That the holding in these cases does not impair the regulatory power of the Commission over contract rates in a case such as this was made perfectly clear by the Supreme Court in the Mobile Gas case, supra, 350 U.S. at page 344, 76 S.Ct. at page 380, where the court said:
“Our conclusion that the Natural Gas Act does not empower natural gas companies unilaterally to change their contracts fully promotes the purposes of the Act. By preserving the integrity of contracts, it permits the stability of supply arrangements which all agree is essential to the health of the natural gas industry. * * * On the other hand, denying to natural gas companies the power unilaterally to change their contracts in no way impairs the regulatory powers of the Commission, for the contracts remain fully subject to the paramount power of the Commission to modify them when necessary in the public interest. The Act thus affords a reasonable accommodation between the conflicting interests of contract stability on the one hand and public regulation on the other.” (Italics supplied).
There is nothing in the record to sustain a holding that the action of the Commission in fixing the rate in its order is “arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law” when the cost of service principle is applied.1 The attack here clearly relates to matters involving the exercise of the discretion vested in the Commission by Congress; and it is too well set-tied to admit of argument that as to such matters we may not substitute our judgment for that of the Commission.
The principal contention made in this connection is that, because of the circumstances under which the Generating Company was organized as a subsidiary of E & G, the entire tax deduction to which it is entitled for interest paid on bonded debt should not be deducted in computing its income but only such part as corresponds to its part of the total indebtedness of E & G and its subsidiaries. The effect of this, of course, would be to decrease the showing of income earned by the Generating Company; but such decreased showing would be contrary to fact and contrary to the established practice of the Commission in such cases. The Generating Company is a corporation separate and distinct from its parent company, E & G, and it is engaged in a separate and distinct business undertaking. The Commission cannot be held to have acted arbitrarily or to have been guilty of an abuse of discretion in holding that the income of the subsidiary, whose rates alone were being reviewed by it, should be computed on the basis of its own operations and expenses without reference to those of the parent company. With respect to this matter the Commission said:
“With regard to the income tax allowance, Generating Company uses a hypothetical system capitalization ratio instead of its own actual ratio in order to erase the effect of higher tax costs which E & G Co. may incur as a result of the heavy debt financing of Generating Company. This is an attempt to enjoy the benefits of the high-debt financing, i. e., the construction of low cost capacity and the consequent sale to duPont, while making Georgia Power Company and ultimately the consumers in *770Georgia assume fictitious costs. As such, the allowance proposed by Generating Company is unreasonable.
“We have consistently held that the allowance for taxes should not exceed taxes paid. Eg., in the Matters of Michigan-Wisconsin Pipe Line Company, Docket Nos. G-1678 and G-1996, Opinion No. 275, issued July 30, 1954. Accordingly, the income tax allowance in this proceeding should be based upon the actual interest deduction of the Generating Company for that is the basis upon which it will pay its taxes.”
And I do not think that the Commission’s action in this respect can be held arbitrary or unreasonable or an abuse of discretion because, in determining the rate of return to be allowed on invested capital, it looked to the capital structure of E & G rather than to that of the Generating Company; but, if there is inconsistency between this and the treatment of interest on debt, it does not follow that the determination of the Commission with respect to the treatment of interest is to be condemned. The condemnation would rest rather upon allowing a return upon a greater equity invested capital than the Generating Company actually had. If this was error, however, it was error favorable to the Generating Company of which it cannot and does not complain. Certainly, the Commission cannot be held guilty of abuse of discretion in requiring that the income of the Generating Company be computed with accuracy merely because, in the company’s interest, it allowed the rate of return to be based upon the E & G system capital ratio rather than upon that of the company itself.
 Other attacks upon the Commission’s order merit but brief consideration. The fixing of the rate of return at 5.55%, instead of at 6% as contended by the company, the allowance of 6% interest on funds used during construction, instead of 10%, and the allowance of a depreciation rate of 2.75% instead of 3%, — all of these were peculiarly matters for determination by the informed judgment of the Commission. See Safe Harbor Water Power Corp. v. Federal Power Comm., 3 Cir., 179 F.2d 179, 200-201; State Corp. Comm. of Kansas v. Federal Power Comm., 8 Cir., 206 F.2d 690, 713-714; Market Street Ry. Co. v. Railroad Commission of State of California, 324 U.S. 548, 559-561, 65 S.Ct. 770, 89 L.Ed. 1171. The same is true with respect to the Commission's elimination of the escalation clause from the capacity charge of the contract. It is to be noted that the escalation clause was allowed with respect to the energy charge, which does not reflect any return on a rate base. As the Commission was not required to adopt any specific formula in determining rates (Federal Power Comm. v. Hope Natural Gas Co. supra), abuse of discretion could not possibly be predicated of elimination of the escalation clause, which, when applied to the capacity charge, necessarily involves the “cost of reproduction” or the “prudent investment” principle as to some of the matters embraced within the charge. It is well settled that “prudent investment” and “cost of reproduction” are not to be accepted as exclusive tests but-are merely matters to be considered in the fixing of rates. Los Angeles Gas & Electric Corp. v. Railroad Comm. of California, 289 U.S. 287, 304-308, 53 S.Ct. 637, 77 L.Ed. 1180.
In considering whether the Commission has abused its discretion in ordering the rate reduction in this case, it must be borne in mind that the basic capacity charge on the sale in interstate commerce to the Georgia Power Company was $22.50 per kilowatt, whereas the charge to duPont was $19.00 and to E & G $15.30.2 While the question of discrimination is not before us, these figures were pertinent as bearing upon the reasonableness of the basic capacity rate, *771which could be sustained as to Georgia Power only on the value of service theory, which the Commission very properly refused to adopt. In the light of the entire record before us, I see no basis upon which the action of the Commission can be said to be “unjust or unreasonable in its consequences” or be set aside as an abuse of discretion. See Federal Power Comm. v. Hope Natural Gas Co., supra, 320 U.S. 591, 602, 64 S.Ct. 281, 88 L.Ed. 333. I think, therefore, that the decision of the Commission should be affirmed.

. We are authorized to set aside agency “action, findings and conclusions” in a case such as this only where they are found to be “(1) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; (2) contrary to constitutional right, power, privilege, or immunity; (3) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right; (4) without observance of procedure required by law; (5) unsupported by substantial evidence”. 5 U.S.C.A. § 1009(e).

. Even when the duPont charge is increased under the escalation clause to $21.61 per KW, the rate is less than the $21.94 per KW rate prescribed by the Commission for Georgia Power.