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Alabama-Tennessee Natural Gas Co. v. Federal Power Commission .

decided: April 1, 1953.


Author: Hastie

Before GOODRICH, STALEY and HASTIE, Circuit Judges.

HASTIE, Circuit Judge.

This is the relevant history of the administrative action of the Federal Power Commission which we are asked to review in these cases. The starting point is an order of July 2, 1948, by which the Commission granted Alabama-Tennessee Natural Gas Company, hereinafter designated as the petitioner or the Company, a certificate of public convenience and necessity under Section 7(c) of the Natural Gas Act, 56 Stat. 84 (1942), 15 U.S.C.A. § 717f(c), authorizing it to build and operate certain extensions of a natural gas pipe line system on condition that a tariff satisfactory to the Commission be submitted six months before the beginning of the new operation.

On December 16, 1949, petitioner filed a tariff which it proposed to become effective about March 1, 1950, on the beginning of its deliveries and to continue forteen months thereafter. Objections were filed by certain communities which would be served by the new line.By order of February 10, 1950, the Commission rejected the proposed tariff saying that it did "not constitute satisfactory compliance" with the condition of the certificate and further directing that the certification proceedings "be reopened, and further public hearings held with respect to the matters involved in and necessary to the determination of a tariff satisfactory to the Commission".Hearings followed during the course of which conflicting evidence was received and various controversial contentions were advanced.

This reopening of the certification proceeding resulted in an order of June 16, 1950, wherein the Commission decided, in the light of serious and unresolved conflicts in the evidence and interpretation thereof, that it should and would postpone "determination of what constitutes a satisfactory tariff until such time as the uncertainty resulting from the conflicting estimates can be dispelled by data derived from operating and construction experience". To provide such experience the order further authorized the petitioner to begin and for fourteen months to continue operations under the tariff which had been proposed December 16, 1949 and rejected February 10, 1950. However, the order expressly provided that "Nothing contained in this order shall be construed as constituting approval of the Commission of any service, rate, charge * * * provided for in the above-described interim tariff * * *." Finally, this order also provided that thirty days prior to the expiration of the fourteen month period of operation under the interim tariff the petitioner "shall submit a tariff * * * satisfactory to the Commission, together with cost studies and other data in support thereof". All of this was in accordance with the Company's original December 16, 1949 submission, for that filing suggested that an interim tariff be permitted "in accordance with the Commission's decision In the Matter of Texas Eastern Transmission Corp. entered in Docket No. G-1089 on December 9, 1949" and the restrictive provisions of the June order are like those of the order in the Texas Eastern case.

In November 1950, the Company began operations under this June 16, 1950 order. Thirteen months later, at the end of November 1951, it proposed that the interim tariff now be accepted on an unrestricted basis as a satisfactory tariff. The Commission rejected this proposal and ordered further hearings to determine a satisfactory tariff, meanwhile continuing the interim tariff, first until January 31, 1952 and later until April 30, 1952, pending that determination. The hearings thus ordered began January 14, 1952. The same day the Company filed a schedule of increased rates which it proposed to make effective February 13, 1952 as a change in its tariff to meet certain increased costs.On February 1, 1952, the Commission entered an order rejecting this proposal as presenting issues comprehended by and properly to be decided in the hearings then in probress. This order is one of the matters now before us for review.

During the course of these hearings which began January 14, 1952 the Commission entertained a motion by counsel for its staff that the procedure of intermediate report and recommendation by the hearing officer be omitted in this case. Over petitioner's objection the Commission granted this motion by order issued February 25, 1952. That order is also here for review.

Finally, after completing the hearings, the Commission on May 1, 1952 issued an order deciding that neither the interim tariff nor the rate proposal of January 14, 1952 was satisfactory. Instead the Commission found that a tariff incorporating a "uniform straight rate of 31 1/2› per Mcf" was "just, reasonable * * * and satisfactory to the Commission in accordance with the rate condition issued to Alabama-Tennessee Natural Gas Company by order issued July 2, 1948". This is the third order which we have before us for review.

We first consider the order issued February 1, 1952 rejecting the filing by which petitioner attempted to accomplish a rate increase under the procedure set out in Section 4(d) of the Natural Gas Act, 52 Stat. 823 (1938), 15 U.S.C.A. § 717c(d). Petitioner does not deny that the territorial extension of its services and operations out of which this controversy arises required a certificate of public convenience and necessity under Section 7(c) of the Act. It does not deny that the rate condition originally incorporated in its certificate was within those "reasonable terms and conditions" which Section 7(e) says the Commission may "attach to the issuance of the certificate". 56 Stat. 84 (1942), 15 U.S.C.A. § 717f(e). Nor does it challenge the order of June 16, 1950. And that order, entered after hearings in the reopened certification proceeding, determined, as we already have summarized it, what should be done to arrive at such a satisfactory tariff as was a condition of the certificate itself. Indeed, petitioner could not very well challenge this order since its own December submission had suggested just such a procedure as the Commission sanctioned six months later, including the allowance of an interim rate to afford experiential basis for the postponed determination of a just and reasonable rate satisfactory to the Commission. In its brief, petitioner goes so far as to say that "Respondent's extended discussion of the power of the Commission to attach rate conditions to the certificates which it issues is an effort to obfuscate the real issues in this case". Accordingly, abjuring obfuscation, we treat this as a case where analysis has its agreed and proper starting point in the existence of a valid rate condition in the original certificate and a valid supplementary and modifying order of June 16, 1950 providing for a temporary modus operandi.

Thus, our only problem is whether in addition to the Company's right and duty under the June 16, 1950 order to work out and put into effect, as yet for the first time, a satisfactory rate, it also had the privilege, in the midst of this duly prescribed preliminary procedure, to invoke the mechanics of Section 4(d) to accomplish an increase in the charges which the Commission had permitted it to make during the interim period. To treat the "interim rate" permitted under the June 16, 1950 order as the kind of rate which is subject to change on the free initiative of the Company under Section 4(d) is to ignore the restrictive context in which it was allowed to become effective. For it is our premise that the Commission had power to impose the rate condition and it is clear that the June 16, 1950 order was in substance a relaxing modification of that condition in accordance with petitioner's own request. This conjunction of administrative power and the suitor's consent in our judgment effectively fixed the temporary pattern and terms of the operation during a preliminary period while a just and reasonable rate was being determined. Only after such an initial determination of a satisfactory rate in compliance with the June 16, 1950 order, could the Company properly claim that it was operating under the kind of tariff that is subject to change by Section 4(d) procedure.

Petitioner next complains that the order issued February 25, 1952 dispensing with the intermediate recommendation of the hearing officer was arbitrary and a violation of the Administrative Procedure Act. Section 8(a) of that Act permits omission of the intermediate decision procedure in this type of case if "the agency finds upon the record that due and timely execution of its functions imperatively and unavoidably so requires."*fn1 The Commission made such a finding of necessity. We have examined the record and can not say that the finding was arbitrary. Accordingly, we sustain it. Compare Kenny v. U.S., D.C.N.J. 1952, 103 F.Supp. 971. In this connection we have noted that at the Company's request the June 16, 1950 decision was made without preliminary recommendation of the examiner though there had been extended hearings before him on essentially the same issues as were again before an examiner. We have not been able to discover such difference between the two situations that what was reasonable when the Company requested it in 1950 became arbitrary when the Company opposed it in 1952.

This brings us to the merits of the rate fixing order issued May 1, 1952. The petitioner contends that reversible error appears in the Commission's determination of the rate base. First, it is complained that the Commission erroneously reduced the otherwise allowable working capital figure by deducting certain accruals for payment of federal income taxes. There is no dispute as to the propriety of including a working capital item in the rate base, nor as to what that figure should be, except insofar as the total otherwise arrived at may be affected by consideration of tax accruals.

Federal income tax is included as an item of expense in the computation of the rates which the Company will be permitted to charge during the taxable year.But under Section 56 of the Internal Revenue Code, the Company need not pay its tax until the year following that in which the liability is incurred.*fn2 Therefore, insofar as customer billings are attributable to the Company's income tax liability, current payments are being received in advance of the time when the Company must pay corresponding obligations. It follows that there is in the hands of the Company at all times a sum which reduces the amount which must otherwise be provided and left in the business in order to enable it to maintain a position liquid enough to meet current obligations. Should this situation be taken into account in determining the amount of working capital to be included in the total capital investment on which petitioner will be allowed a fair return?

"Working capital", in the context of public utility rate regulation, has been defined as the "allowance for the sum which the Company needs to supply from its own funds for the purpose of enabling it to meet its current obligations as they arise and to operate economically and efficiently". Barnes, The Economics of Public Utility Regulation (1942) 495. Since it is normally contemplated that all operating expenses will eventually be paid for out of revenues received by the Company, the need for working capital arises largely from the time lag between payment by the Company of its expenses and receipt by the Company of payments for service in respect of which the expenses were incurred. See City of Pittsburgh v. Pennsylvania Public Utilities Comm., 1952, 370 Pa. 305, 309-312, 88 A.2d 59, 61-63. But there are time lags which work in favor of the Company as well as those which work against it. The Company no more pays ...

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