Jersey Central Power & Light Company v. Federal Energy Regulatory Commission, Allegheny Electric Cooperative, Inc., Intervenors

768 F.2d 1500, 248 U.S. App. D.C. 67

• Court: Court of Appeals for the D.C. Circuit
• Decided: October 18, 1985
• Docket: 82-2004
• Status: Published

Opinions

Opinion for the Court filed by Circuit Judge BORK.

Concurring Opinion filed by Circuit Judge GINSBURG.

Dissenting Opinion filed by Circuit Judge MIKVA.

BORK, Circuit Judge:

This is an appeal from orders issued by the Federal Energy Regulatory Commission (“FERC”) summarily directing Jersey Central Power and Light Company (“Jersey Central”) to file reduced rates without benefit of a hearing. In our initial opinion, we upheld the FERC orders, primarily because of our reliance on statements by FERC which we thought suggested that the “end result” test of FPC v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944) (Douglas, J.), did not apply to a utility overall but “only to those assets which valid Commission rules permit to be included in the rate base.” Jersey Central Power & Light Co. v. FERC, 730 F.2d 816, 823 (D.C.Cir.1984). Subsequently, Jersey Central petitioned for rehearing and presented persuasive new arguments suggesting that this conclusion was in error. FERC filed two unhelpful responses to Jersey Central’s petition and ultimately joined Jersey Central in requesting that we modify our opinion. Brief for Respondent FERC in Response to the Court’s Order of July 16, 1984 at 6 n. 7. After carefully reconsidering the issue and the parties’ briefs on rehearing, we are now persuaded that our initial opinion was in error. We therefore vacate that decision and remand the case to FERC for a full evidentiary hearing. Jerséy Central should be allowed to present, at that hearing, all of its evidence suggesting that FERC’s rate reduction orders violate the end result test by unreasonably denying investors a fair rate of return. If Jersey Central succeeds in proving the allegations it has made before us on appeal, it should promptly be granted a rate increase adequate to satisfy the requirements of Hope Natural Gas.1

I.

At the outset, we assume familiarity with the background information and reasoning set forth in our prior opinion. Jersey Central Power & Light Co. v. FERC, 730 F.2d 816 (D.C.Cir.1984). We repeat here only those facts and arguments which bear directly on the rehearing petition. From the beginning of this proceeding, Jersey Central has argued that it was entitled to a hearing to present evidence showing that FERC’s orders denied it a reasonable rate of return. In its rehearing petition, Jersey Central has reemphasized the inadequacy of the rate of return allowed to its investors.

Jersey Central alleges that “for four years [it] has been unable to pay any dividends on its common stock.” Petition for Rehearing and Suggestion for Hearing En Banc at 8. This is alleged to be the case even though under the rates it sought to charge, Jersey Central claims that it “would continue to provide safe, adequate and reliable service at rates less than those charged by many of its neighboring utilities.” Id. (emphasis added). Jersey Central claims that in part as a consequence of FERC’s orders it has been “repeatedly on the edge of being forced into bankruptcy.” Id. at 14. Since 1979 it

has had no access to the long-term capital markets and has been wholly dependent upon a short-term revolving credit agreement which was subject to termination at a moment’s notice. [The company] has been allowed sufficient cash flow to enable [it] to avoid bankruptcy (but not to provide earnings [sufficient] to enable [it] to attract capital or maintain credit).

Id. Accordingly, Jersey Central claims that FERC’s rate reduction orders are denying investors a reasonable rate of return in order to maintain consumer rates at unusually low levels. These allegations, if true, would suggest that FERC’s actions were illegal under the end result test of Hope Natural Gas.

II.

In our initial opinion, we reviewed the reasonableness of FERC’s orders pursuant to Hope Natural Gas under the mistaken belief that the end result test only applies “to those assets which valid Commission rules permit to be included in the rate base.” 730 F.2d at 823. We reached this conclusion in reliance on FERC’s “rather terse explanation,” id., that “the reasonableness of [the] end result cannot be evaluated without regard to the individual components which comprise a rate.” Jersey Central Power & Light Co., 20 F.E.R.C. (CCH) ¶ 61,083, at 61,181 (July 23, 1982) (Order Granting in Part and Denying in Part Application for Rehearing). Now FERC concedes that it did not intend its explanation “to convey that meaning.” Brief for Respondent FERC in Response to the Court’s Order of July 16, 1984 at 4. Instead, FERC agrees that “the end result stage of the ... proceedings provides the occasion ... to make appropriate adjustments to any of the previous determinations that went into the establishment of the rate.” Id. at 6 (emphasis in original).

After re-examining the issue, we are now persuaded that the end result test applies to both the calculation of the rate of return on invested assets and to the calculation of the proper rate base. As Judge Bazelon explained in Washington Gas Light Co. v. Baker, 188 F.2d 11 (D.C.Cir.1950), cert. denied, 340 U.S. 952, 71 S.Ct. 572, 95 L.Ed. 686 (1951), “the Commission may adopt any method of valuation for rate base purposes so long as the end result of the rate order ‘cannot be said to be unjust and unreasonable.’” 188 F.2d at 18 (emphasis added), quoting Hope Natural Gas, 320 U.S. at 602, 64 S.Ct. at 287. Thus, no matter how the rate base is determined, “the ‘total effect,’ ‘impact’ or ‘end result’ of the rate order” must satisfy the requirements of Hope Natural Gas. 188 F.2d at 14. Those requirements in turn demand that there be a “reasonable” balancing of consumer and investor interests.

Normally, we would defer to the balancing of consumer and investor interests arrived at by the Commission so long as the result reached falls within a “zone of reasonableness.” Permian Basin Area Rate Gases, 390 U.S. 747, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1968). Judge Bazelon has described that zone as being “bounded at one end by the investor interest against confiscation and at the other by the consumer interest against exorbitant rates.”² Washington Gas Light Co., 188 F.2d at 15 (Bazelon, J.). Judicial protection of the investor interest is important because, as Justice Douglas explained,

the investor interest has a legitimate concern with the financial integrity of the company whose rates are being regulated. From the investor or company point of view it is important that there be enough revenue not only for operating expenses but also for the capital costs of the business. These include service on the debt and dividends on the stock. Cf. Chicago & Grand Trunk Ry. Co. v. Wellman, 143 U.S. 339, 345-346 [12 S.Ct. 400, 402, 36 L.Ed. 176]. By that standard the return of the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks. That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital. See Missouri ex rel. Southwestern Bell Tel. Co. v. Public Service Commission, 262 U.S. 276, 291 [43 S.Ct. 544, 547, 67 L.Ed. 981] (Mr. Justice Brandéis concurring).

Hope Natural Gas, 320 U.S. at 603, 64 S.Ct. at 288.

In this case, we must reconsider the “reasonableness” of FERC’s orders in light of its concession that we misconstrued the end result test in our initial opinion. Specifically, we must decide whether FERC’s orders fall outside the zone of reasonableness in denying investors a fair rate of return. Based on the totality of the circumstances alleged to exist by Jersey Central, we conclude that FERC’s orders reducing rates without a hearing were unreasonable and ignored the requirements of Hope Natural Gas. Jersey Central claims that FERC is denying its investors any rate of return whatsoever on their investment in order to maintain “rates less than those charged by many of its neighboring utilities.” These allegations, if true, would suggest that FERC has not achieved a reasonable balancing of investor and consumer interests in keeping with the requirement that rates be “reasonable, just, and non-discriminatory.”

We noted in our prior opinion that it is, of course, true that FERC is not chartered to insure utilities against the hazard of not making a profit. Accordingly, under Hope Natural Gas “regulation does not insure that the business shall produce net revenues.” Hope Natural Gas, 320 U.S. at 603, 64 S.Ct. at 288, quoting FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 590, 62 S.Ct. 736, 745, 86 L.Ed. 1037 (1942). In this case, however, Jersey Central claims that it can earn a rate of return sufficient to preserve the integrity of its capital without charging exploitative rates. Assuming that to be true, this is not a case where Jersey Central is asking FERC to guarantee it a profit at the consumers’ expense.³

Notwithstanding the foregoing arguments, FERC nonetheless objects that Jersey Central is somehow seizing on the end result test and asking us to use it here as a substantive rule of ratemaking. Brief for Respondent FERC in Response to the Court’s Order of July 16, 1984 at 7. Nothing could be further from the truth. Under the end result test as we have described it, FERC is free to employ any ratemaking methodology it pleases.⁴ The only requirement is that the methodology used must result in a reasonable balance between consumer and investor interests.

FERC also objects that we cannot reverse its orders because it “rejected inclusion of the cancelled plant as a component of the rate base in reliance on this Court’s decision in NEPCO Municipal Rate Committee v. FERC, 668 F.2d 1327 (D.C.Cir.1981), cert. denied, 457 U.S. 1117 [102 S.Ct. 2928, 73 L.Ed.2d 1329] (1982).” Brief for Respondent FERC in Response to the Court's Order of July 16, 1984 at 7. We think the Commission misgauges the import of our decision in NEPCO. Under Hope Natural Gas, we cannot decline to review the reasonableness of FERC’s balancing of consumer and investor interests merely because FERC adopted one of several methods of computing a rate base we previously approved. Pursuant to Hope Natural Gas, it does not matter that some of the determinations that go into the making of a rate order are correctly made if the end result is unreasonable.⁵

Unlimbering the ultimate malediction of legal debate, the dissent accuses us of regressing to the jurisprudence of Lochner v. New York, 198 U.S. 45, 25 S.Ct. 539, 49 L.Ed. 937 (1905). Had we committed any such enormity, we would of course deserve the anathema pronounced upon us. But this seems disproportionate since our sin consists in nothing more than taking seriously the admonition of Hope Natural Gas, which is quite a different thing from reviving Lochner. (The dissent must represent the first recorded instance of anyone confusing the philosophy of Justice Rufus W. Peckham and that of Justice William O. Douglas with respect to economic regulation.) We can make nothing of the dissent's argument unless it means that we should never review rate orders at all, in which case our jurisdiction is drastically limited, indeed non-existent. Apparently, the dissent reads Hope Natural Gas to accomplish just that even when investor interests are confiscated or when consumers are made to pay exorbitant rates. Nothing in Justice Douglas’ opinion suggests such an extreme hostility to judicial review, and we refuse to join the dissent in equating deference with abdication.⁶

We remand this case to the Commission for a hearing at which Jersey Central can present its evidence on the inadequacy of the rates allowed it.⁷ If Jersey Central succeeds in proving a violation of the requirements of Hope Natural Gas, FERC should promptly grant a rate increase adequate to satisfy Hope. Our prior decision reported at 730 F.2d 816 is hereby vacated, and the cause is remanded for further proceedings.

So Ordered.

1 . We have considered the argument advanced by the intervenors that this case is moot, and we conclude that it is without merit. As both FERC and Jersey Central correctly note, the settlement agreement of May 31, 1983, expressly preserved Jersey Central's right to appeal the issues here at stake.

2 . The standard of judicial review is not one that is “so vague and devoid of meaning as to render judicial review a perfunctory process. It is a standard of finance resting on stubborn facts.” Colorado Interstate Gas Co. v. FERC, 324 U.S. 581, 605, 65 S.Ct. 829, 840, 89 L.Ed. 1206 (1945) (Douglas, J.). The question is whether investors are allowed a rate of return sufficient to maintain credit and capital without being exploitative of consumers.

3 . Obviously, in cases where no rate, exploitative or otherwise, could restore profitability, the Hope Natural Gas criteria cannot be used to undo the operation of the marketplace. In this case, however, we face no such dilemma since Jersey Central has made some very successful investments in addition to the Forked River project.

4 . For example, we have long held that the Commission is free to use various methods of computing a rate base so long as the end result of the rate order falls within the zone of reasonableness. Thus, we have previously upheld use of both the so-called "used and useful” method, first set out in Smyth v. Ames, 169 U.S. 466, 546, 18 S.Ct. 418, 42 L.Ed. 819 (1898), and the far more sensible "prudent investment” method, developed by Justice Brandeis in Southwestern Bell Telephone Co. v. Public Service Commission, 262 U.S. 276, 289, 43 S.Ct. 544, 547, 67 L.Ed. 981 (1923) (Brandeis, J., dissenting), and approved by this court in Washington Gas Light Co. v. Baker, 188 F.2d 11. The "prudent investment” method has some advantages over the “used and useful” method because it treats utilities more like other businesses by allowing them to start recovering future development costs as they are incurred. Nonetheless, use of either method is certainly permissible so long as a reasonable balancing of consumer and investor interests is achieved as the end result.

5 . We also reject FERC's analogy to NEPCO because (1) NEPCO differed significantly from this case in that it involved a much shorter amortization period with a much less significant loss in interest to the utility; (2) the end result test precludes FERC from adopting a blanket policy on an abandoned plant if that policy would preclude judicial review of the reasonableness of a given ratemaking order under Hope Natural Gas; (3) in any event, we seriously doubt whether the blanket policy which FERC claims to have adopted in NEPCO is rational, since for no apparent reason it allocates loss to investors as a direct function of the length of an amortization period.

6 . The dissent also reprimands us for rehearing this case notwithstanding the fact that we had seriously misapprehended the controlling case law and notwithstanding the fact that both parties to this appeal had requested that we modify our original opinion. The dissent seems to believe that rehearing petitions should be summarily denied even in such circumstances. If petitions for rehearing are to serve any useful purpose, however, we think that view must be rejected.

7 . It should be noted that the Hope Natural Gas end result test secures Jersey Central’s constitutional right that its property not be taken without just compensation. Thus, the utility has . raised a constitutional as well as statutory claim in this case as a result of FERC’s ratemaking order. Before an alleged taking may occur, it seems likely that FERC should have conducted a due process hearing to determine the merits of the utility’s case. Thus, even aside from Jersey Central’s statutory right to a hearing, the utility might well have had a valid constitutional due process claim.