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09/03/74 Memphis Light, Gas and v. Federal Power Commission

September 3, 1974

MEMPHIS LIGHT, GAS AND WATER DIVISION, PETITIONER

v.

FEDERAL POWER COMMISSION, RESPONDENT, UNITED GAS PIPELINE CO., INDEPENDENT NATURAL GAS ASSOCIATION OF AMERICA INTERVENORS 1974.CDC.202



Fahy, Senior Circuit Judge, Tamm and Leventhal, Circuit Judges.

UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

Petition for Review of an Order of the Federal Power Commission.

APPELLATE PANEL:

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE TAMM

Opinion for the Court filed by Circuit Judge TAMM.

TAMM, Circuit Judge:

This case is before the court on petition for review of an order of the Federal Power Commission ("the Commission") granting United Gas Pipe Line Company's ("United") request for an increase in its annual depreciation rate to 5 percent. Petitioner, Memphis Gas Pipe Line Company ("Memphis"), an intervenor in the Commission proceedings, is a large, municipally-owned gas distribution company which indirectly purchases *fn1 gas from United. Memphis challenges the new depreciation rate on the ground that it is insufficiently supported by factual evidence. We agree with petitioner and remand the matter to the Commission.

The instant proceedings began when United filed, *fn2 pursuant to Section 4(c) of the Natural Gas Act, *fn3 for an increase in its rates and charges for its sales of natural gas for resale in interstate commerce. After negotiations among the parties, a settlement was reached with respect to all issues involved in United's rate filing except the issue of the proposed change in depreciation rate. Hearings were held on that issue.

Prior to the rate filing, United had been utilizing a composite depreciation rate of 2.88 percent. This rate had been established in 1943, based on a physical life estimate of the service lives of United's systems. *fn4 United proposed an increase in depreciation rate to a uniform annual rate of 5 percent for the period 1971-1976 which would be reduced in succeeding 5 year periods, with a resulting twenty year (1971-1990) average of 3.88 percent.

On February 1, 1972 Chief Administrative Law Judge (then Presiding Examiner) Zwerdling issued his Initial Decision *fn5 denying United's proposed increase. The Commission, on January 11, 1973 reversed the Initial Decision *fn6 and held that the depreciation rate to be used by United from and after January 1, 1971 through December 31, 1975, *fn7 would be 5 percent. Petitioner's application for rehearing was denied, *fn8 and this appeal followed.

It may be helpful, before addressing the facts of this particular case to examine briefly the concept of depreciation and the Commission's articulated policies with respect thereto.

Depreciation is generally defined as "the loss, not restored by current maintenance, which is due to all the factors causing the ultimate retirement of the property." Lindheimer v. Illinois Bell Telephone Co., 292 U.S. 151, 167, 78 L. Ed. 1182, 54 S. Ct. 658 (1934). *fn9 The Supreme Court has long recognized that depreciation charges are a legitimate part of a utility's operating expenses. *fn10 In fact, the Commission enjoys an explicit grant of power from Congress to set depreciation rates for natural gas pipelines. Section 9 of the Natural Gas Act provides:

The Commission may, after hearing, require natural-gas companies to carry proper and adequate depreciation and amortization accounts in accordance with such rules, regulations, and forms of account as the Commission may prescribe. The Commission may from time to time ascertain and determine, and by order fix, the proper and adequate rates of depreciation and amortization of the several classes of property of each natural-gas company used or useful in the production, transportation, or sale of natural gas.

15 U.S.C. ยง 717h(a) (1970). Pursuant to the above-quoted provision of the Act, the Commission has adopted and published a Uniform System of Accounts for Natural Gas Companies which defines depreciation as:

the loss in service value not restored by current maintenance, incurred in connection with the consumption or prospective retirement of gas plant in the course of service from causes which are known to be in current operation and against which the utility is not protected by insurance. Among the causes to be given consideration are wear and tear, decay, action of the elements, inadequacy, obsolescence, changes in the art, changes in demand and ...


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