RESPONDENT: Memphis Light, Gas & Water Division
LOCATION: University of Washington Law School
DOCKET NO.: 72-486
DECIDED BY: Burger Court (1972-1975)
LOWER COURT: United States Court of Appeals for the District of Columbia Circuit
CITATION: 411 US 458 (1973)
ARGUED: Mar 27, 1973
DECIDED: May 07, 1973
Christopher T. Boland - for Texas Gas Transmission Corp
George E. Morrow -
Richard A. Solomon - for Public Service Comm. of New York
Samuel Huntington - for F.P.C
Facts of the case
Media for Federal Power Commission v. Memphis Light, Gas & Water Division
Audio Transcription for Oral Argument - March 27, 1973 in Federal Power Commission v. Memphis Light, Gas & Water Division
Warren E. Burger:
We’ll hear arguments next in 72-486 and 488, Federal Power against Memphis Light and Texas Gas Transmission against Memphis Light consolidated.
Mr. Huntington, you may proceed whenever you’re ready.
Mr. Chief Justice and may it please the Court.
These consolidated cases are here in writ of certiorari to the United States Court of Appeals to the District of Columbia Circuit.
The basic question presented is whether the Federal Power Commission is barred by Section 441 of the Tax Reform Act of 1969 from permitting a company subject to its jurisdiction to seize flowing through to the company’s customers in the form of lower rates.
The benefits derived from the use of accelerated depreciation on certain property.
If the Tax Reform Act is not by such action, the question arises whether the Commission’s action in this case was improper.
Before I discuss the facts of this case, some introduction is appropriate.
It has wrong been established that Federal Income Taxes are includable as an expense under the cost of service method used by the Federal Power Commission in ratemaking.
Accelerated tax depreciation was first authorized by in 1954 with the adoption of Section 167 of the Internal Revenue Code.
Under accelerated tax depreciation, deductions for a particular asset are relatively high in its early years and relatively low in its later years compared to what they would have been had straight-line tax depreciation been used.
When the matter first came before the Commission in a ratemaking context, the Commission determined that the use of accelerated tax depreciation simply resulted in a tax deferral.
Accordingly, the Commission decided that for ratemaking purposes a company’s taxes should be normalized, that --
William H. Rehnquist:
When you say the matter first came, you’re talking historically not about this particular proceeding?
That’s right, historically; it back was in 1956 or so.
The Commission decided that the -- for ratemaking purposes, the tax should be normalized and by normalized, it means that they should be calculated as if the company had used straight-line tax depreciation.
The difference between the taxes actually paid and the higher normalized taxes claimed as cost of service was required to be placed in a special tax reserve account for the payment of future taxes.
Several years later, the Commission in the Alabama-Tennessee case reconsidered the matter.
It concluded there that the use of accelerated tax depreciation resulted in a permanent tax savings.
This conclusion was squarely based on the Commission’s finding that the natural gas industry would continue to expand rapidly for the foreseeable future, an assumption which is certainly not true today.
The Commission noted that when an expanding company uses accelerated tax depreciation sufficient tax depreciation deductions on new property are available to all set declining tax depreciation deductions on all property.
The Commission does ordered natural gas companies using accelerated depreciation for tax purposes.
To also use accelerated tax depreciation for ratemaking purposes.
In this way, the benefits of accelerated tax depreciation would be flowed through to the company’s customers.
It’s important to note that both the Commission’s normalization order and its flow-through order were upheld by various Courts of Appeals as being within the Commission’s discretion.
Other regulatory agencies are sharply divided on this issue.
In short, the matter is in technical one turns in large part on an analysis of particular facts pertaining to give an industry and is precisely the type of question which falls within the broad discretion that regulatory agencies have over ratemaking.
This brings us to Section 441 of the Tax Reform Act of 1969.
As the legislative history of the Act makes clear, Congress was concerned with the lost of revenues to the Government resulting from the use of accelerated tax depreciation by public utilities.
Rather than prohibit the use of accelerated tax depreciation all together, Congress chose simply to bar future shifts to faster methods of depreciation.