Public Service Co. v. Federal Energy Regulatory Commission

653 F.2d 681, 209 U.S. App. D.C. 426
CourtCourt of Appeals for the D.C. Circuit
DecidedJune 2, 1981
DocketNos. 80-1200, 80-1424
StatusPublished
Cited by1 cases

This text of 653 F.2d 681 (Public Service Co. v. Federal Energy Regulatory Commission) is published on Counsel Stack Legal Research, covering Court of Appeals for the D.C. Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Public Service Co. v. Federal Energy Regulatory Commission, 653 F.2d 681, 209 U.S. App. D.C. 426 (D.C. Cir. 1981).

Opinion

HARRY T. EDWARDS, Circuit Judge:

This appeal is brought by the Public Service Company of New Mexico (PNM) from orders issued by the Federal Energy Regulatory Commission (FERC). PNM challenges the manner in which FERC treated, for ratemaking purposes, Accumulated Deferred Investment Tax Credits (ADITC).

As a result of the investment tax credit of the Internal Revenue Code (I.R.C. or Code), a utility is permitted to retain funds collected from the utility’s customers for the payment of federal income taxes. I.R.C. §§ 38, 46. At issue here is the rate-making treatment to be accorded to the balance of such funds, known as Accumulated Deferred Investment Tax Credits or ADITC, that has not been passed on to ratepayers in accordance with section 46(f) of the Code. In particular, petitioner challenges rulings of the Commission concerning: (1) the rate of return to be assigned to the ADITC balance, and (2) whether the ADITC balance should be included in the utility’s capital structure for purposes of computing the amount of federal tax expense recoverable in the utility’s rates. A third question presented by petitioner is whether the Commission’s summary disposition of these substantive issues was proper.

In section 46(f) of the Code, Congress enacted an explicit scheme under which both the investors and the customers of a regulated utility may share the benefits of the investment tax credit. Furthermore, in the legislative history of that section, Congress expressed an intent that the credit should be shared. Consistent with regulations issued by the Internal Revenue Service implementing section 46(f), FERC has treated ADITC funds in a manner that guarantees that investors and consumers will share the benefits of the credit. Since we believe that the Commission’s treatment of ADITC is consistent with the Code, we affirm the orders at issue in. this case. We also hold that the Commission’s disposition of the proceedings below was proper.

I. BACKGROUND

The orders under review arise from two ratemaking proceedings initiated by PNM. The appeal in No. 80-1200 arises from a request for a rate increase filed by PNM on [428]*428June 28,1979. For reasons discussed below, FERC rejected PNM’s proposed treatment of ADITC in the ratemaking process, and ordered PNM to refile its rate request. Joint Appendix (J.A.) 1. The Commission later denied PNM’s application for reconsideration of this issue, J.A. 9, and PNM petitioned for review of these orders. The appeal in No. 80-1424 arises from a petition for a rate increase filed on April 28, 1978. As a result of PNM’s proposed treatment of ADITC, the Commission ordered PNM to refile its rate request, J.A. 21, and later denied PNM’s application for a rehearing. J.A. 31. PNM petitioned for review of these orders, and the proceedings were consolidated.

As a general proposition, a regulated utility is allowed to recover from ratepayers all expenses incurred, including income taxes, plus a reasonable return on capital invested in the enterprise and allocated to public use. Primarily at issue in this case is the return that PNM may earn on capital. The Commission computes this return by multiplying a “rate base” by an “overall rate of return.” The capital allocated to public use and permitted to earn a return forms the rate base. The rate of return allowed on that rate base varies according to the capital structure of the utility.

Capital is usually derived by a utility in three ways: the issuance of bonds (long term debt), the issuance of preferred stock, and the issuance of common stock (common equity). Each type of capital is permitted to earn a separate rate of return, depending upon its cost. Capital derived from debt normally is allowed to earn the interest rate fixed in the bond; capital derived from preferred stockholders is allowed to earn the rate of return fixed in the stock certificate; and capital derived from common stockholders is allowed to earn a specified higher rate of return consistent with the greater risk associated with that investment. To determine the overall rate of return, an average of these three rates is taken, weighted by the relative amounts of each type of capital present. As stated above, this overall rate of return is multiplied by the rate base to determine the return on capital that may be charged to ratepayers.

In 1971, Congress reenacted the investment tax credit. I.R.C. §§ 38, 46. In order to stimulate investment in new plant and equipment, Congress provided as a credit against tax liability a set percentage of the investment in qualifying property during the tax year.1 Since utility rates are determined in part on the basis of tax liability, which is computed without deducting the investment tax credit, the effect of the credit is to generate “capital” from ratepayers in the form of funds ostensibly collected for the payment of federal income taxes. The principal issues presented in this case concern the manner in which these funds, known as Accumulated Deferred Investment Tax Credits or ADITC, are to be treated in future ratemaking determinations of the utility.

In filing its applications for increased rates, PNM added ADITC to its capital structure and rate base as part of common equity. Thus, PNM would treat ADITC as if it was capital contributed solely by common stockholders, on which PNM would be entitled to earn the rate of return applicable to common equity.2 This proposed treatment of ADITC was not accepted, however, by the Commission.

In the proceedings below, FERC agreed that ADITC could be included in PNM’s rate base, and that PNM could earn a return on ADITC. Applying its earlier decision in Carolina Power & Light Co., Opinion No. 19 (Aug. 2,1978), however, the Commission determined that ADITC should be allowed to earn only the previously established overall rate of return. As more fully explained below, since the Commission determined that ADITC should earn the over[429]*429all rate of return, it included ADITC in the rate base but not in PNM’s capital structure.3 PNM challenges this determination, claiming that ADITC should have been included in capitalization as part of common equity, and allowed to earn the higher rate of return attributed to that type of capital.

In section 46(f) of the Code, Congress explicitly set forth the manner in which the investment tax credit is to be treated by regulated utilities. To resolve the issue raised in this case, therefore, it is necessary to examine carefully the language of section 46(f) and the accompanying legislative history.

II. SECTION 46(f) OF THE INTERNAL REVENUE CODE

In the Revenue Act of 1964, Pub.L. No. 88-272, 78 Stat. 19 (1964), Congress moved to correct a problem that had arisen in the application of the investment tax credit enacted in 1962. Prior to the adoption of the 1964 amendment, federal regulatory agencies had required the entire value of the credit to be passed on immediately to consumers in the form of lower rates. See S.Rep. No. 830, 88th Cong., 2d Sess. 43 (1964). Believing this immediate “flow through” to consumers to be inconsistent with the purpose of the credit, which was to stimulate investment by reducing the net cost of acquiring depreciable assets, id. at 42, Congress imposed a limit on the amount of the credit that a federal regulatory agency could require to be flowed through to customers.

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653 F.2d 681, 209 U.S. App. D.C. 426, Counsel Stack Legal Research, https://law.counselstack.com/opinion/public-service-co-v-federal-energy-regulatory-commission-cadc-1981.