Opinion for the Court filed by BAZELON, Circuit Judge.
Dissenting opinion filed by ROBB, Circuit Judge.
BAZELON, Circuit Judge:
Petitioners, municipally-owned utilities, challenge a rule promulgated by the Federal Power Commission (FPC) permitting "comprehensive interperiod tax allocation" (CITA) for interstate suppliers of gas and electricity. The rule allows suppliers to "normalize" an unspecified number of tax benefits,
The dispute over normalization versus "flow-through" of tax benefits arises when utilities have the opportunity to defer current
Advocates of flow-through, however, contend that under normalization the consumer pays "phantom" taxes. Unless tax benefits are passed on to the taxpayer, the argument goes, the utility will reap a permanent tax saving, since so long as the expenses subject to normalization remain stable or increase, the benefits of postponing present tax liabilities will more than offset previously deferred taxes that currently fall due.
The question of normalization versus flow-through first arose before the Commission following the 1954 enactment of § 167 of the Internal Revenue Code, permitting the use of accelerated depreciation for tax purposes.
The Tax Reform Act of 1969 partially reversed Commission policy. It allowed a utility to use accelerated depreciation on
The instant case, a rulemaking proceeding begun in 1971, is the most recent episode in the ongoing saga of normalization versus flow-through. After receiving public comments, the agency issued Order No. 530 on June 18, 1975, announcing a "general policy" in favor of permitting CITA following "appropriate factual showings" in individual rate proceedings.
Greater use of normalization, the agency said, would improve the regulated firms' cash flow and reduce their need for external financing.
In response to petitioners' request for rehearing, the Commission modified its rule in Order 530-A, on January 19, 1976. The new order attempted to define the "appropriate factual showings" needed to qualify for CITA. The Commission said that a utility seeking normalization would have to demonstrate that CITA would result in only a tax deferral, not a permanent tax saving. Cash flow needs would be relevant to such a showing, but normalization would not be permitted without proof that no tax saving would result.
Again the FPC granted rehearing, this time at the request of a group of utilities, and on July 6, 1976, the Commission issued Order 530-B, rejecting the tax saving/tax deferral distinction and adopting a general policy of permitting normalization. The Commission proclaimed that normalization would be acceptable so long as it involved only "timing differences rather than . . permanent differences between book and tax treatment."
Petitioners say that the Commission improperly discarded the distinction between tax deferral and tax saving in its final orders.
Until now, normalization has been upheld when there was at least a very low probability of tax saving.
That this case presents a rule, announced in an order, with direct impact on ratemaking, raises questions about the proper standard of review. We will proceed under § 19(b) of the Natural Gas Act, which prescribes a "substantial evidence" standard for findings of fact in orders.
In response to these considerations, this court began to review FPC rulemaking under § 19(b) so long as (1) the rule had a direct and immediate effect on the appellants, and (2) there was a sufficient evidentiary record to permit review by an appellate court.
Although the initial orders in this proceeding relied on factual findings of economic conditions in the power industry, the orders now before us rest on general policy considerations.
The orders provide no indication of the impact on consumers or utilities of adopting CITA. Not only is there no statement as to the financial resources at issue in the proceeding,
Moreover, the discussion of the seven examples in Order 530-B is incomplete. The order first deals with the normalization of pension costs, taxes, and other expenses incurred during plant construction, all of which can be deducted from current taxes. The order finds normalization "especially appropriate" in these instances, which are, in financial terms, the most significant categories covered by the order. "[I]n any year in which plant construction slackens," the Commission claims, "a company's deferred taxes amortized could exceed its new deferrals." J.A. 851. But there is nothing in the order to support this implicit conclusion that fluctuation in construction activity will prevent utilities from gaining a tax saving. Indeed, the protracted nature of the large-scale construction projects that characterize the power industry suggests that fluctuations in building activity may not be very great. In addition, if the Commission correctly based Orders 530 and 530-A on its view that both the natural gas and electric industries must expand, then the conditions for a tax saving, rather than a mere deferral, may be present if construction-related tax benefits are normalized.
The other, less significant, examples cited in Order 530-B receive summary treatment. We do not pass on the accuracy of the agency's assessment that there is little danger of a tax saving with respect to these items, because there is insufficient explanation of the Commission's position for effective review.
Perhaps more notable than the inadequacy of the Commission's estimate of the impact of CITA is the failure to explain the goals of its policy. Order 530-B states only that the purpose of the Commission's action is to reduce uncertainty about utility revenues so the utilities will be better able to attract capital, "with resultant lower costs to consumers"; that both utilities and consumers will benefit from easier financial planning under a blanket rule in favor of normalization; and that rate cases should be shortened.
Petitioners also allege that Order 530-B may have serious anticompetitive impact in states that require flow-through of deferred tax benefits. Wholesalers in such states could be subject to a "price squeeze": they might have to pay the deferred taxes to interstate suppliers while state regulators would require that such benefits be flowed through in retail rates. We remand to the Commission for further action on this issue as well.
On numerous occasions the Supreme Court has recognized both the importance of competition in regulated industries and the responsibility of regulatory agencies to encourage competitive forces.
The question before us is whether the Commission's determination to review the
Consequently, the orders are remanded to the Commission for further action not inconsistent with this opinion.
ROBB, Circuit Judge, dissenting:
I cannot agree with the majority that the substantial evidence standard of review should be applied to these orders of the Federal Power Commission. Moreover, I believe the orders should be upheld as rational exercises of the Commission's rulemaking power under the appropriate standard of review, that is, was the Commission's action arbitrary or capricious? Accordingly, I dissent.
The Commission has twice before considered the issue of normalization as against flow-through. It concluded once that normalization was the preferable policy, and was upheld on a later appeal. See Amere Gas Utilities, 15 F.P.C. 760 (1956); El Paso Natural Gas Co. v. FPC, 281 F.2d 567 (5th Cir. 1960). On subsequent consideration it required utilities to flow-through their tax savings to their customers, and was again upheld on appeal. See Alabama-Tennessee Natural Gas Co., 31 F.P.C. 208 (1964), aff'd sub nom. Alabama-Tennessee Natural Gas Co. v. FPC, 359 F.2d 318 (5th Cir.), cert. denied, 385 U.S. 847, 87 S.Ct. 69, 17 L.Ed.2d 78 (1966). Now, it has returned to a policy favoring normalization, and, for the first time, its conclusion as to which policy is preferable in light of current economic conditions has been successfully challenged.
The Commission expressed this most recent conclusion in a series of orders issued after notice-and-comment rulemaking which proceeded according to the statutory mandate of the Administrative Procedure Act (APA). Technically, the subject of these orders was a change in the Commission's Uniform Systems of Account regulations. See 18 C.F.R. Chpt. I Pt. 101. Commission activity more appropriately characterized as rulemaking, rather than adjudication, is difficult to imagine.
The APA dictates review of such informal rulemaking to determine whether it is "arbitrary, capricious, [or] an abuse of discretion." 5 U.S.C. § 706(2)(A) (1976). This standard of review should govern the action taken here, unless it is displaced by section 19(b) of the Natural Gas Act, which requires that "substantial evidence" support Commission "findings of fact." 15 U.S.C. § 717r(b) (1976). The court today imposes the substantial evidence test on informal rulemaking pursuant to the Natural Gas Act.
The court reaches its conclusion by asserting that "substantial evidence" must support the "factual predicate" on which the Commission rule is promulgated. It then invalidates the rule on the ground that it lacks adequate support in the record. To
The thesis of the majority is untenable in light of the Supreme Court's recent decision in Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, 435 U.S. 519, 98 S.Ct. 1197, 55 L.Ed.2d 460 (1978). There, addressing the imposition of procedural safeguards not mandated by statute, the Supreme Court stated:
Id. at 547-48, 98 S.Ct. at 1214.
Of course, a threshold issue of reviewability arises whenever appellate examination of an agency order is sought. On the issue of reviewability the court will consider the nature of the record upon which the rule in question was promulgated. Thus, as this court has stated, "[r]ecent cases have emphasized that the `determining factor' in connection with the reviewability of Commission orders is . . . whether the record is sufficient to allow meaningful review." American Public Gas Co. v. FPC, 178 U.S.App.D.C. 217, 220, 546 F.2d 983, 986 (1976). Although review does encompass an inquiry "into the factual predicate for the rule, i. e., the existence or non-existence of the condition advanced as the basis for the rule", id. at 221, 546 F.2d at 987, the inquiry, as its phrasing indicates, will be satisfied by less than the substantial evidence required in a record in a formal adjudication under the APA. Nevertheless, the court today combines the jurisdictional provision of the Natural Gas Act with language in earlier opinions addressing the initial question of whether an order is reviewable at all, and imposes an obligation on the Commission to support with substantial evidence its orders issued pursuant to informal rulemaking.
The accounting rules prescribed in the Commission's orders withstand appellate scrutiny under the correct standard of review, testing only whether they are arbitrary and capricious. Although the Natural Gas Act requires that the Commission establish "just and reasonable" rates, see 15 U.S.C. § 717c(a) (1976), it allows the Commission great latitude in reaching that result. See Permian Basin Rate Cases, 390 U.S. 747, 776-77, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1967); FPC v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 88 L.Ed. 333 (1943). Here, the Commission's orders involved a rational exercise of its regulatory authority, well within its administrative discretion. I see no reason to fault the Commission's conclusion that
The validity and utility of the challenged accounting rules in the Commission's work of determining just and reasonable rates will only be shown in case-by-case ratemaking proceedings. Accordingly, as the Commission said in Order No. 530, it
It is certainly not inevitable that normalization will lead to the inflation of any utility's rate base or a return to investors on capital that they did not contribute to the utility. Consequently, the imposition of a substantial evidence standard of review is premature until the results of those rate adjudications are before an appellate court. At that time, the results of the ratemaking, but not the rules under which it was conducted, must be supported by substantial evidence. "Under the statutory standard of `just and reasonable' it is the result reached not the method employed which is controlling." FPC v. Hope Natural Gas Co., supra, 320 U.S. at 602, 64 S.Ct. at 287.
The Commission decided to defer consideration of the potential anticompetitive consequences of normalization until individual ratemaking proceedings are conducted. The majority states that this procedure lacks a rational basis. Yet even the petitioner acknowledges that the potential anticompetitive "price squeeze" to which it alludes would arise only under certain state regulatory regimes. (Pet.Br. at 53) And extreme deference is owed to the Commission in its choice of administrative procedures. See Alabama-Tennessee Natural Gas Co. v. FPC, 359 F.2d 318 (5th Cir.), cert. denied, 385 U.S. 847, 87 S.Ct. 69, 17 L.Ed.2d 78 (1966). The Commission's decision to delay consideration of a potential problem in the coordination of state and federal regulatory programs until the program actually
The choice between normalization and flow-through is for the Commission. If it selects its policy in notice-and-comment rulemaking, this court's review of that choice is limited to determining whether that choice was rational. This court is not authorized to reject the Commission's reasoning because the court does not agree with it or thinks better explanations might have been made. Nor can the court substitute its policies for those of the Commission. In my opinion the record here is sufficient to show that the Commission's choice was rational. When the Commission applies its rules in ratemaking, the Commission and the court will require that substantial evidence support the results reached in those proceedings. Because the court today prematurely demands a record more elaborate than that required by the statute, I respectfully dissent.
Accounting for Premium, Discount, and Expense of Issue, Gains and Losses on Refunding and Reacquisition of Long-Term Debt, and Interperiod Allocation of Income Taxes, 53 F.P.C. 2123, 2125 (1975) (Order No. 530); J.A. 336-37.
See Superior Oil Co. v. FERC, 463 F.2d 191, 200 (5th Cir. 1977).
Id., 191 of 325 U.S.App.D.C., at 1027 of 590 F.2d. See Pacific Legal Foundation v. Dept. of Transportation, 193 U.S.App.D.C. 184 at 189, n. 35, 593 F.2d 1338 at 1343, n. 35, Nos. 77-1797, et al., at 10, n. 35 (D.C.Cir. Feb. 1, 1979).
When considering this case on remand, the Commission would have to meet the § 19(b) "substantial evidence" requirement insofar as a subsequent order had a factual predicate. As a rule directly applicable to ratemaking as soon as it takes effect, Order 530-B clearly would have a "direct and immediate effect" on consumers. The adequacy of the factual record would have to be established by the agency.
The dissent also relies on the statement in Order 530 that the Commission will grant normalization upon an "appropriate" factual showing by the utility, Dissent, at 4-6. But this procedure was also abandoned by the Commission in later orders. In Order 530-B, the agency reviewed its previous position, concluding, "Upon reconsideration, we find this reasoning to have been incorrect." Order No. 530-B, supra note 20, at 2; J.A. 845. The Commission then announced "there is no need for a specific factual showing supporting normalization in each rate proceeding, and the Commission's policy favoring normalization should be implemented in each case." Id. at 9; J.A. 852. This is hardly a case-by-case approach, as the dissent contends.