Brief for the Respondents in Opposition — California Oregon Power Co. v. Federal Power Commission

Opinions below

Jurisdiction

Questions presented

Statute involved

Statement

oan onn = =

CITATIONS

Cases:

Alabama Power Company, Licensee, 1 F. P. C. 25, P. U. R.

1932D, 345

Alabama Power Company, Licensee, 2 F. P. C. 432, 41

P. U. R. (NS) 449

Alabama Power Company, Licensee, 2 F. P. C. 479, 43

P. U. R. (NS) 37

Alabama Power Company v. Federal Power Commission, 128

F. 2d 280, certiorari denied, 317 U. S. 652

9, 12, 15, 16, 17, 22

California Oregon Power Company, et al. (Pub. Serv. Comm.

of Ore.), 8 P. U. R. (NS) 412

Chelan Electric Co., Licensee, 1 F. P. C. 102, P. U. R.

Clarion River Power Co., Licensee, 1 F. P. C. 269

Colorado Interstate Gas Co. v. Federal Power Commission,

8. 8,9, 10, 11,17

Federal Power Commission v. Hope Natural Gas Company,

320 U.S. 591

Florida Power Corporation, Licensee, 1 F. P. C. 390

Hartford Electric Light Company v. Federal Power Com-

mission, 131 F. 2d 953, certiorari denied, 319 U. S. 741__

Indiana Hydro-Electric Power Company, 3 F. P. C. 510,

51 P. U. R. (NS) 55

Jefferson Electric Co. v. National Labor Relations Board,

102 F. 2d 949

67506 1—45 ——-1

Il

Cases—Continued Page

Jersey Central Power & Light Company v. Federal Power

CINOIN: BED UF Biink Choke. co ccs Seeks we eke 12,13

Kansas City S. R. Co. v. United States, 231 U. S. 423____- 22

Lexington Water Power Company, Licensee, 1 F. P. C. 430_. 8

Louisville Gas & Electric Co. v. Federal Power Commission,

129 F. 2d 126, certiorari denied, 318 U. S. 761___.____- 9, 25

Louisville Hydro-Electric Company, Licensee, 1 F. P. C. 130,

RE ls Wee LRU BO Cte co Sei. wentun eecaeane stones 8

Minnesota Power-& Light Company, 3 F. P. C. 388, 48

DP. liv Bes LONE Rice ee Ganods Gabicnetbeuecuseetetcasass 8

Mississippi Power & Light Company, 3 F. P. C. 521, 51

Ps A, Bet SE ME ai bwe Se iec cans ok aabuskabones uae 8

National Labor Relations Board v. Algoma Plywood &

Fee Ts Sar. Oe Wee we nas aoe cciowsuccesdcuccs 23

National Labor Relations Board v. American Potash &

C. Corporation, 98 F. 2d 488, certiorari denied, 306 U.

Ge RR Ue boko silo cc tos ak nedeaekecu map cnbatannd 23

New York Edison Co. v. Maltbie, 244 App. Div. 685; id.,

Bt ie Fe RE Neenah bb erbA os cc KembeRsaemen anaes 16

Niagara Falls Power Company, Licensee, 3 F. P. C. 206, 44

Fis Be ee) RGEC acne eka se alan beckceunknoctes 8

Niagara Falls Power Company, Licensee, 3 F. P. C. 249, 45

Pais Bek AEN) EMOTE pene ek pnedeseudecabdccacuaades 8

Niagara Falls Power Company v. Federal Power Commission,

137 F. 2d 787, certiorari denied, 320 U.S. 792____.__--- 9

Norfolk & Western Ry. v. United States, 287 U.S. 1384___-_- 22

Northern States Power Company, Licensee, 1 F. P. C. 329__-- 8

Northern States Power Co. v. Federal Power Commission, 118

Bs Me READ SRR a SoS ALE keke Kc kGee cade humane 9

Northwestern Electric Co. v. Federal Power Commission, 134

Pe Sere micke cic awe anmon as Gases ecekenen keane 21

Northwestern Electric Company, et al. v. Federal Power

Comsenen, GBR U.S. 880. se a cn ede on 3, 10, 15, 17, 22

Pacific Power & Light Company, 3 F. P. C. 329, 46 P. U. R.

[SRR atn hn neh kena dich ativan abecebenkarieo 8

Pacific Power & Light Company v. Federal Power Com-

SORNNONE. CGR Fe Ws ann adie ckeud owenccanas, 9, 11, 15, 18

Panhandle Eastern Pipe Line Co. v. Federal Power Com-

III, 206 ee Beis ec es suas bo cake Gneneeeseeces 25

Panhandle Eastern Pipe Line Company v. Federal Power

Consipieaion, 204.0. GS. GBB i nook ono h scene asia’ 11, 17, 25

Pennsylvania Power & Light Company, Licensee, 3 F. P. C.

RR BE etc ee RD Bas cn xcda is kaccenennenseecuns 8

Pennsylvania Power & Light Company v. Federal Power

Commission, 139 F. 2d 445, certiorari denied, 321 U. S.

Puget Sound Power & Light Company, Licensee, 3 F. P. C.

Bet Gb eo es 2G UNO Es a kneren ceudaesecausschauce 8.

_— -

Ill

Cases—Continued Page

Puget Sound Power & Light Company v. Federal Power

Conant, BET Fo BR Fe sok can nk nec Scanceusnckand S

Rochester Tel. Corp. v. United States, 307 U. 8S. 125__----- 22

Safe Harbor Water Power Corporation, Licensee, 1 F. P. C.

Di io rc Sccceecedcala beck ces dob eee whee 8

Safe Harbor Water Power Corporation, Licensee, 1 F. P. C.

Fa ck eoeimacete koma beat hal ee cektnbac weeds Ss

St. Croix Falls Minnesota Improvement Co., et al., 3 F. P. C.

a3 G8: 2D. A) Pid. eee eek nee 8,9

Superior Water, Light & Power Company, 3 F. P. C. 254, 45

PU le, CD Seeks cceviheweseeuedscsckucawaneeeden 8

United States, et al. v. New York Telephone Company, 56 F.

DOD MOO cote ke pee h lx cccmk ewe h be einaaneuee 9

United States, et al. v. New York Telephone Company, No. 55,

TOUR TINE, FOR. s. cone wns eneecccancasbuctecenccee 9,10

Utah Light and Traction Co., F. P. C. Opinion No. 108,

Gueitied Movewer Be, LOGS. eo oc. nn ec ince ecuceces 9

Utah Power & Light Compony, 3 F. P. C. 532, 53 P. U. R.

Cj RL! RRR ge se eae AEs eee ae ng epee 8

Federal Power Act (Act of June 10, 1920, c. 285, 41 Stat.

1063, amended August 26, 1935. c. 687, 49 Stat. 838, 16

U. S. C. 791a-825r):

FN oo Soka dain tvcsanenok bantilagc ou emen amen 12, 26

OR. Ben abe oun ee abUkAGeceek oc knachasd been ke 27

ee | ROR Rapa taper e ap eee yore ue Sagem 4, 20, 28

RRs BE ks ob nea Cecs Kut hatetstpkncimnkasesee 29

Pk: DR cakcackaddancbnen sakae cbs oumahnaeneneoe 31

PSE oii whos CUE Caneel kha eeedemieeun eben ke 32

Re, RNG. ais Scdb keane heed peksunwa saamaans meee 32

ie. BIB a 6 Sct cece dnneackhnneneeakonstlamsoague 13, 33

Miscellaneous:

18 C. F. R.:

9OT DO Di vc khsdcacomeedihdch ccntinbaeenaniaens “4

UE ES Sik dak is Seen ecatabdngaee he nune 4

Federal Power Commission, Sizteenth Annual Report to

Congress (1008), pp. 0, 10): 20 oc ac wnce cece nce 3

Kester, Principles of Accounting, (1939), p. 573...-------. 22

3

22

Moody’s Public Utilities (1945), p. a48...---------------

Sherwood and Hornberger, Fundamentals of Auditing

Inthe Supreme Court of the Gnited States

Octoser TERM, 1945

No. 582

THE CALIFORNIA OREGON PowER COMPANY, A

CALIFORNIA CORPORATION, PETITIONER

¢.

FEpERAL PowrerR CoMMISSION

ON PETITION FOR A WRIT OF CERTIORARI TO 1HE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE NINTH

CIRCUIT

BRIEF FOR THE FEDERAL POWER COMMISSION IN

OPPOSITION

OPINIONS BELOW

The opinion of the circuit court of appeals (IV

R, 1245) is reported in 150 F. 2d 25. The opinion

and order of the Federal Power Commission

(I R. 23-38) are reported in 3 F. P. C. 368, 47

P. U.R. (N. 8.) 193.

JURISDICTION

The judgment of the circuit court of appeals

was entered on June 15, 1945 (IV R. 1245-1250).

Rehearing was denied on August 6, 1945 (IV R.

(1)

2

1251). The petition for a writ of certiorari was

filed on November 5, 1945. The jurisdiction of

this Court is invoked under Section 313 (b) of

the Federal Power Act (49 Stat. 860, 16 U.S. C.

8251), and Section 240 (a) of the Judicial Code,

as amended by the Act of February 13, 1925.

QUESTIONS PRESENTED

1. Whether the Federal Power Commission’

properly required that an amount of $636,237.23

in petitioner’s plant accounts, which it found to

represent profits paid to an affiliated service com-

pany, be classified as a “‘write-up”’ and eliminated

by a charge to surplus.

2. Whether the Commission properly required

that an amount of $828,684.97 in petitioner’s plant

accounts, representing the cost of acquisition of

admitted intangibles which the Commission found

to be “‘nuisance value, going value, franchise

value, monopoly value, and other similar intan-

gibles’’, be amortized by annual charges to in-

come over a ten-year period.

3. Whether the petitioner was accorded a fair

hearing.

STATUTE INVOLVED

The relevant provisions of the Federal Power

Act (Tune 10, 1920, ¢. 285, 41 Stat. 1063, amended

August 26, 1935, c. 687, 49 Stat. 838, 16 U. S. C.

*The respondent, Federal Power Commission, is some-

times referred to herein as “Commission” and the petitioner,

The California Oregon Power Company, as “Copco.”

3

79la-825r) are set forth in the Appendix, infra,

pp. 26-35.

STATEMENT

Petitioner is, admittedly, a “‘public utility’’

within the meaning of the Federal Power Act

and subject to its provisions, by reason of its

ownership and operation of facilities for the

transmission and sale at wholesale of electric

energy in interstate commerce (I R. 25-26, 106-

107, IIIT R. 911-914). On December 29, 1939, it

filed with the Commission a proposed reclassifica-

tion of its electric plant accounts pursuant to the

Commission’s Uniform System of Accounts,’ and

on March 21, 1941, filed a revised reclassification

(I R. 23-24; III R. 797).

After a joint audit by the staffs of the Federal

Power Commission, the Public Utilities Commis-

sioner of Oregon, and the Railroad Commission

of California, a joint staff report (Ex. 5, IIT R.

? The validity of this system of accounts was sustained by

this Court in Northwestern Electric Company, et al. v. Fed-

eral Power Commission, 321 U.S. 119, 122-123. Its prepara-

tion and promulgation was the result of close cooperation

with a committee of the National iation of Railroad

and Utilities Commissioners cxaip) and other State

and Federal agencies, and a consideration of views and

criticisms of State commissions and representatives of elec-

tric utilities. Federal Power Commission, Sizteenth Annual

Report to Congress (1936), pp. 9, 10, 11. Out of 42 regu-

latory commissions having jurisdiction over electric com-

panies, 36 have prescribed the Federal Power Commission’s

system or the substantially identical NARUC system, and

six, modifications of the two systems. Moody's Public

Utilities (1945), p. a48.

908-960) was prepared and served on petitioner.’

The staff took the position that, in addition to

making the adjustments reflected in petitioner’s

revised reclassification, petitioner should transfer

from its electric plant accounts to Account 107,

Electric Plant Adjustments,‘ capitalized profits

paid to the affiliated Byllesby Engineering and

Management Corporation.’ The staff also took the

position that petitioner should submit a plan for

the disposition of such profits, and a ‘“‘plan of dis-

position”? of the amounts it had classified in

Account 100.5, Electric Plant Acquisition Adjust-

ments,® ‘‘consistent with the facts and cireum-

*The Oregon Commissioner and the California Commis-

sion have prescribed substantially the same system of ac-

counts as the Federal Power Commission. Section 301 (a)

of the Federal Power Act expressly provides that “nothing

in this Act shall relieve any public utility from keeping any

accounts, memoranda, or records which such public utility

may be required to keep by or under authority of the laws of

any State.”

* The text of Account 107 provides that “Write-ups of elec-

tric plant prior to the effective date of this system of accounts

shall be recorded herein” and “shall be disposed of as the

Commission may approve or direct.” 18 CFR 101.107.

* Byllesby Engineering and Management Corporation is

sometimes referred to as “Byllesby.”

* The text of Account 100.5 provides that the difference

between “the cost to the accounting utility of electric plant

acquired as an operating unit or system” and the “original

cost” (cost to the person first devoting to public service)

is to be classified therein “according to the character of the

amounts” and “shall be depreciated, amortized, or otherwise

disposed of, as the Commission may approve or direct.” 18

CFR 101.100: 5.

5

stanees under which the amounts were established

in the account’’ (Ex. 46, III R. 841-843, 954).

Upon petitioner’s failure to do so (III R. 844—

846), the Commission, on July 15, 1945, set the

matter for hearing on August 11, 1941 (I R. 1-5),

but the hearing was delayed by reason of numerous

postponements granted by the Commission at the

request of the petitioner (I R. 11-15, 25).

The hearing was held in San Francisco from

February 26 to March 4, 1942 (I R. 25)." Just

before its conclusion, petitioner made an oral mo-

tion for a continuance (III R. 1177-1180), and,

shortly thereafter, filed a petition for further

hearing with the Commission (I R. 16-20), The

trial examiner (III R. 1179) and the Commission

(I R. 21-22) denied these requests for further

time.

The Commission, on February 3, 1943, entered

its opinion (I R. 23-36) and order (I R. 36-38).

It found that the amount of $636,237.23, which

had been classified by petitioner in Aceount 100.1,

Electrie Plant in Service, represented the profit

portion of payments Copeo had made to Byllesby

under a contract which was not at arm’s length

(I R. 32, 164-170) and was between two com-

panies under the common control of Standard Gas

* The Oregon Commissioner was granted leave to intervene

in the hearing (I R. 10) and he presided jointly with the

Tria) Examiner of the Federal Power Commission (I R. 103).

The California Commission did not intervene but it had an

observer present (I R. 104).

6

and Electric Company,* and that no part thereof

represented actual cost to Byllesby of any serv-

ices rendered to Copeo. It ordered that the

amount be reclassified in Account 107, Electric

Plant Adjustments, as a “‘write-up’”’ (I R. 31-33)

and disposed of (paragraphs (2) and (7), I R.

38) in the manner petitioner had proposed for the

disposition of amounts ‘‘properly”’ classified in

Account 107, viz., by a charge to capital surplus if

created for that purpose, otherwise to earned sur-

plus (I R. 118-119).

The Commission found from the evidence, in-

cluding letters and reports contemporaneous with

the acquisition of operating properties, that the

amount of $828,684.97, classified by petitioner in

Account 100.5 as excess of acquisition cost over

original cost, represented “‘payments for nuisance

value, going value, franchise value, monopoly

value and other similar intangibles’? (I R. 27-29).

Upon the basis of expert accounting testimony it

further found that such intangibles ‘represent

basically a capitalization of’’ potential earning

power, that ‘‘their ephemeral nature’’ requires

that ‘‘although they may properly be established

in the plant accounts at the outset they should

then be removed quickly therefrom,’’ and that

*The contract was made and payments rendered while

Byllesby was a 100% subsidiary of Standard Gas and Elec-

tric Company which owned all of Copco’s common and some

of its preferred stock (IIT R. 801, 820-821; I R. 164-179; III

R. 1067, 1070, 1172).

7

“rapid amortization of the cost of intangibles is

sound and prudent accounting.’? Having so

found, the Commission ordered that the amount

of $828,684.97 be amortized by charges to Account

537, Miscellaneous Amortization, an income ac-

count, and, in the light of expert testimony in the

record, it fixed the period for such amortization

at ten years (paragraph (1), I R. 36-37). In

doing so it referred to the fact that most (over

90% )° of the amount had already been retained

in the plant account for some thirty years without

amortization. (I R. 30-31.)

On proceedings, under Section 313 (b) of the

Federal Power Act, to review the order of the

Commission in these respects, the Circuit Court

of Appeals for the Ninth Circuit affirmed the chal-

lenged portions of the order (IV R. 1245-1250),

denied petitioner’s motion for leave to adduce ad-

ditional evidence (IV R. 1249-1250), and denied a

petition for rehearing (IV R. 1251).

ARGUMENT

1. In asking this Court to bring up for review

the lower court’s affirmance of paragraphs (2)

and (7) of the Commission’s order (1 R. 37-38),

which required a transfer from plant accounts to

Account 107, and charge to surplus, of the

$636,237.23 found to be a ‘‘write-up’’, petitioner

seeks to reopen a question settled by an unbroken

®TIIT R. 808-812, 875-877, 929. Another 9% had been

carried for some 20 years without amortization (III R. 933;

810, 878-889).

8

line of court decisions upholding the Commis-

sion’s consistent” exclusion of profits to affiliates

from plant accounts. Colorado Interstate Gas Co.

v. Federal Power Commission, 324 U.S. 581, 606-

608; Alabama Power Company v. McNinch, et al.,

94 F. 2d 601, 616-618 (App. D. C.); Alabama

Power Company v. Federal Power Commission,

134 F. 2d 602, 609 (C. C. A. 5); Puget Sound

Power & Light Company v. Federal Power Com-

0” Alabama Power Co., Licensee, 1 F. P. C. 25, 31, P. U. R.

1932 D 345, 352; Chelan Electric Co., Licensee, 1 F. P. C. 102,

108, P. U. R. 1933 E, 332, 337; Louésville Hydro-Electric Co.,

Licensee, 1 F. P. C. 130, 186, 1 P. U. R. (N.S.) 454, 461; Safe

Harbor Water Power Corp., Licensee, 1 F. P. C. 230, 237;

Clarion River Power Co., Licensee, 1¥F. P. C. 269, 281; North-

ern States Power Co., Licensee, 1 F. P. C. 329, 344; Safe

Harbor Water Power Corp., Licensee, 1 F. P. C. 367, 371;

Florida Power Corp., Licensee, 1 F. P. C. 390, 399; Lewington

Water Power Co., Licensee, 1 F. P. C. 480, 469, 473; Alabama

Power Company, Licensee, 2 F. P. C. 312, 37 P. U. R. (N.S.)

35; Alabama Power Company, Licensee, 2 F. P. C. 482, 41

P. U. R. (N. S.) 449; Alabama Power Company, Licensee,

2 F. P. C. 479, 43 P. U. R. (N. S.) 37; St. Croia Falls Minne-

sota Improvement Co., et al., 8 F. P. C. 13, 48 P.U. R. (N.S.)

1; Pennsylvania Power & Light Co., Licensee, 3 F. P. C. 89, 44

P. U. R. (N. 8.) 344; Niagera Falls Power Co., Licensee, 3

F. P. C. 206, 44 P. U. R. (N.S.) 291; Puget Sound Power &

Light Company, Licensee, 3 F. P. C. 231, 45 P. U. R. (N.S.)

237; Niagara Falls Power Co., Licensee, 3 F, P. C. 249, 45

P. U. R. (N.S.) 129; Superior Water, Light & Power Co.,3

F. P. C. 254, 45 P. U. R. (N.S.) 358; Pacific Power & Light

Co., 3 F. P. C. 329, 46 P. U. R. (N.S.) 181; Minnesota Power

& Light Co., 3 F. P. C. 388, 48 P. U. R. (N. S.) 1; Zndiana

Hydro-Electric Power Co.,3 F. P. C. 510, 51 P. U. R. (N.S.)

55; Mississippi Power & Light Oo.,3 F. P. C. 521, 51 P. U. R.

(N. S.) 157; Utah Power & Light Co., 3 F. P. C. 582, 58

9

mission, 137 F. 2d 701, 703 (App. D. C.) ; Niagara

Falls Power Company v. Federal Power Commis-

ston, 137 F. 2d 787 (C. C. A. 2), certiorari denied,

320 U. S. 792; Pennsylvania Power & Light Com-

pany v. Federal Power Commission, 139 F. 2d

445, 450 (C. C. A. 3), certiorari denied, 321 U. S.

798; see also Pacific Power & Light Company v.

Federal Power Commission, 141 F. 2d 602

(C. C. A. 9)." As this Court pointed out in the

P.U. R. (N.S.) 164; Utah Light and Traction Co., Op. No.

108, decided November 23, 1943. Three of the foregoing

decisions involve the elimination of the profit portion of

Byllesby fees similar to those in the case at bar from the plant

accounts of other subsidiaries of Standard Gas and Electric

Company. In each case, the Commission’s decision in this

respect was accepted without seeking a review in the courts.

Louisville Gas & Electric Co. v. Federal Power Commission,

129 F, 2d 126, 129 (C. C. A. 6), certiorari denied, 318 U. S.

761; Northern States Power Co. v. Federal Power Commis-

sion, 118 F. 2d 141, 143 (C. C. A. 7) ; St. Crow Falls Minne-

sota Improvement Co., 3 F. P. C. 18, 48, P. U. R. (N.S.) 1.

* In United States, et al. v. New York Telephone Company

(No. 55, this Term), currently awaiting decision, the lower

court’s opinion (56 F. Supp. 932-938), reliedlon by petitioner

(Pet. Br. 38-41) but announced before the decision of this

Court in Colorado Interstate Gas Co. v. Federal Power Com-

mission, supra, distinguishes the cases cited in the text on the

basis of a difference between the respective systems of accounts

by reason of the administrative construction filed by the Com-

munications Commission in American Telephone & Tele-

graph Company v. United States, 299 U. S. 232,241. More-

over, the present case, unlike the Vew York Telephone Co.

case, does not involve a question as to the adequacy of the

depreciation reserve to absorb affiliated company profits

theretofore charged to the reserve, and, in oral argument,

Telephone Company counsel conceded that the portion of

10

Colorado Interstate Gas Co. case (324 U. S. 581,

607-608), the end result of a transfer from one

subsidiary of a holding company to another at an

inter-company profit is a write-up or inflation of

assets, and it was the prevalence of just such

practices that gave rise to an insistent demand for

the Federal Power Act.

Not merely ascertainment and classification of

write-ups, but their complete elimination from

the public utility’s books is authorized by that

Act, and is constitutional. Northwestern Electric

Company v. Federal Power Commission, 321 U.S.

119, 123; Colorado Interstate Gas Company V.

Federal Power Commission, 324 U. 8. 581, 606-

608.

In the Northwestern Electric Company case it

was contended, as it is here (Pet. Br. 22 et seq.,

43 et seq.), that the Commission’s power over the

company’s accounts is exhausted when it has

ascertained the existence of write-ups and caused

them to be segregated and classified as such, and

that an order of the Commission for their disposi-

tion ‘‘goes beyond the Commission’s statutory

affiliated company profits associated with properties still car-

ried in the plant accounts would be “subject to revision.” See

also Appellee’s Brief, No. 55, this Term, pp. 15, 31. If there

is a valid distinction between the Power Commission cases

cited in the text and the Vew York Telephone Co. case, no

decision in the latter case is pertinent here, and in any event,

the cases cited in the text are controlling.

ae

11

mandate [and] constitutional limitations’ (321

U.S. at p. 123). The contention was unanimously

overruled. The Court, noting that a mere write-up

cannot properly appear’ in any account ‘‘on the

asset side of the’’ ledger and that “the Commis-

sion’s form of accounting does not permit the car-

rying of any such item in the asset account since its

system is a cost system of accounting’’ (p. 123),

upheld the disposition there ordered, as ‘‘sustained

by expert evidence’ (p. 124). The decision has

been considered, rightly, as settling any question

as to the Commission’s authority to require write-

ups to be charged off to income or surplus. See

Pacific Power & Light Company v. Federal Power

Commission, 141 F. 2d 602 (C. C. A. 9).

The decision in the Colorado Interstate Gas

Co. case” set at rest any possible doubt when

it upheld an order fixing rates on a base from

which over $3,000,000 of affiliated company profits

-. had been eliminated by the Commission. If, as

there held, the elimination of such write-ups

from the rate base does not violate due process,

then clearly the requirement that such write-ups

be eliminated from a company’s accounts cannot

12 Other decisions upholding rates fixed by the Commission

through utilization of cost figures derived under its system

of accounts are Federal Power Commission v. Hope Natural

Gas Company, 320 U. S. 591, and Panhandle Eastern Pipe

Line Company v. Federal Power Commission, 324 U. S.

635, 649.

=

12

be unconstitutional. They are but a “‘fictitious

or paper increment”’ in the capital accounts which

the opinion in the American Telephone & Tele-

graph Co. case (299 U. 8. 232, 240) recognized

could be required to be written off.”

Petitioner’s further contentions, that a require-

ment that a write-up be eliminated by a charge

to surplus is beyond the Commission’s jurisdic-

tional powers as an invasion of the fields of state

. regulation (Pet. Br. 78-80)“ and managerial

functions (Pet. Br. 81-84), are the same conten-

tions as were said by this Court to be ‘‘without

merit”? in the Northwestern Electric Company

ease (321 U. S. 119, 124).

The findings required under the well settled

principles of those decisions—affiliation, profit,

and the appropriate accounting treatment of the

$636,237.23—are clearly set forth in the Commis-

138 The Court construed the accounting provision there held

valid as providing that “* * * such amount will be

written off as appears, upon an application for appropriate

directions, to be a fictitious or paper increment” (299 U.S.

at p. 240).

14 Petitioner’s reliance (Pet. Br. 72-73) upon the language

of the last clause of Section 201 (a) of the Act (“* * *

such Federal regulation, however, to extend only to those

matters which are not subject to regulation by the States”)

was disposed of when this Court held that “this limitation

is directed at generation, transmission and sale rather than

the corporate financial arrangements of the utilities engaged

in such production and distribution.” Jersey Central Power

& Light Company v. Federal Power Commission, 319 U.S.

61, 74.

_ ema

13

sion’s opinion (I R. 31-33, 35) and are amply

supported by the evidence.”

As to Byllesby being an affiliate of Copco, in

addition to. the evidence of common control to

which reference has already been made (supra,

pp. 5-6), counsel for Copco stipulated that Copco

and Byllesby were so closely affiliated ‘‘that, for

all intents and purposes, [they are] one corpo-

ration’’ (III R. 1055-1056, and Ex. 49, III R.

1057-1058).

As to the amount in question being profit to

Byllesby, petitioner makes no complaint of lack

of support for the Commission’s finding (I R. 32-

33) that $636,237.23 represents profits paid to

Byllesby. Nor would any such complaint be

availing, if sought to be advanced. Of the $636,-

237.23, approximately two-thirds ($416,896.62 **)

represented payment by Copco of a 714% fee

under a contract for engineering services (I R.

164-170), on construction work which Copco did

for itself.“ An additional $188,942.14 represented

* Section 313 (b) of the Federal Power Act expressly pro-

vides that “the finding of the Commission as to the facts, if

supported by substantial evidence, shall be conclusive.”

Jersey Central Power & Light Company v. Federal Power

Commission, 319 U.S. 61, 67.

% A total of $442,938.95 in fees was charged on “Local

Work Orders”, and of this amount, $26,042.31 had been

previously retired, leaving a balance of $416,896.62 (III R.

799).

Thus, Byllesby received a 714% engineering fee on pe-

titioner’s purchase of a horse (II R. 496), installation of

675061—45——-3

14

the profit portion of Byllesby’s 714% fees for

work performed by Byllesby under the same

contract (IIT R. 798, 806), while $15,544.85 repre-

sented profits on legal fees paid by Copeo to Bylles-

by’s legal department (III R. 799) and was con-

ceded by petitioner properly to have been classified

as a write-up in Account 107 (I R. 397).”

As to the proper accounting treatment of such

affiliated company profits, expert accounting wit-

nesses for the Commission, whose qualifications

were unquestioned (III R. 790-793; 963-965),

testified that they were not ‘“‘cost’’ within the

meaning of that term as used in the System of

Accounts, but should be classified in Account

107 as ‘“‘write-ups’’ (III R. 800-802; 966-967;

1099, 1402-1117; 1141-1147, 1166) and charged

to earned surplus unless a capital surplus is

created to which the amount can be charged (IIT

R. 817, 971-972). That was the disposition pro-

posed by petitioner for amounts ‘‘properly’’ re-

classified in Account 107 (I R. 118-119, II R.

619-626).

glass windows in the office of petitioner’s district manager

(II R. 485-488), installation of a wood furnace in the house,

occupied by petitioner’s district manager (II R. 489-490),

installation of screens on doors and windows in the office

of petitioner’s superintendent (II R. 490-491), payment

of a sewer assessment (II R. 492-493), and construction of a

substation fence (II R. 499).

** The remaining $14,853.62 represented capitalized inter-

est during construction applicable to Byllesby profits (III

R. 799-800, 1186).

oC

15

2. The lower court’s affirmance of paragraph

(1) of the Commission’s order, which directed

amortization of the amount of $828,684.97 (I R.

36) classified by petitioner in Account 100.5 and

admittedly representing payment for intangi-

bles, is also in accord with the applicable de-

cisions. Northwestern Electric Company Vv.

Federal Power Commission, 321 U. 8. 119; Amer-

ican Telephone & Telegraph Co. v. United States,

299 U. S. 232; Pacific Power & Light Company,

et al. v. Federal Power Commission, 141 F. 2d 602

(C. C. A. 9).

The question sought to be reviewed in this con-

nection, like that considered in the Northwestern

Electric Company case (321 U.S. 119, 123), is one

of proper accounting, namely, whether amounts

paid in arm’s-length transactions for intangibles

should be permitted to remain in _petitioner’s

plant accounts indefinitely, as it contends (Pet.

Br. 24), or gradually eliminated, as directed by

the Commission, through an accounting treatment

which parallels (III R. 1034) depreciation ac-

counting for tangible physical structures.” The

Commission’s opinion makes it clear that the

character of the items making up the amount of

$828,684.97 and not the mere fact that they are ex-

eesses over original cost, as petitioner assumes

“The label is unimportant, whether depreciation or

amortization * * *.” American Telephone & Telegraph

Co. v. United States, 299 U.S, 232, at p. 244,

a

16

(e. 9» Pet. and Br., 8, 22, 47-48), is the basis of

its order (I R. 29-31).

That the Commission’s action was a permissible

accounting regulation under statutory provisions

similar to those of the Federal Power Act and

within applicable constitutional limitations, is

clear from a consideration of the American Tele-

phone & Telegraph Co. case, supra, in the light

of subsequent decisions. There the Court recog-

nized that there might be objection to an inflexible

accounting provision of general applicability, like

that involved in New York Edison Co. v. Maltbie

(244 App. Div. 685; id., 271 N. Y. 108), which

made it mandatory that all amounts classified in

the adjustment account be written off out of sur-

plus. But the Court upheld the provisions for the

adjustment account in the Communications Com-

mission’s system of accounts because those pro-

visions were construed as not prescribing final

accounting treatment of items classified therein

until the character of the particular items should

be determined. The opinion indicates the kinds

of further accounting treatment which the Court

contemplated the Commission might require, and

it is one of these which the present case presents.

Here the Power Commission’s order for amor-

tization, by charges to income, of the $828,684.97

reclassified by petitioner in the acquisition adjust-

ment accounts, specifies one of the methods of

disposition referred to in the expert testimony,

— . —

17

upon which the Court relied in that case, the

amount to be “disposed of, after the character of

the item[s has] been determined, in a manner

consistent with the general rules underlying the

uniform system of accounts for the distribution

of expenditures, according to their character,

to * * © jmoome * ° © (200-0. 6. at pp

240-241).

Furthermore, the administrative construction

submitted by counsel for the Communications

Commission and accepted by the Court provided

that ‘‘after a fair consideration of all the circum-

stances’? provision would be made for amortiza-

tion of assets which it referred to as the kind

that ‘“‘cease to exist or are retired’”’ (t. ¢., assets

that are not permanent as is land, for example).”

“Amounts included in account 100.4 that are deemed,

after a fair consideration of all the circumstances, to repre-

sent an investment which the accounting company has made

in assets of continuing value will be retained in that account

until such assets cease to exist or are retired ; and, in accord-

ance with paragraph (C) of account 100.4, provision will be

made for their amortization” (299 U. S. at p. 241, emphasis

supplied). The references to “value” in the A. T. & T. opinion

are, of course, to be read in the light of the Court's subse-

quent approval of a purely cost system of accounts (North-

western Electric Company v. Federal Power Commission,

321 U. S. 119, 123) and of the approach to regulation of rates

on a “cost” basis. Federal Power Commission v. Hope

Natural Gas Company, 320 U. S. 591; Colorado Interstate

Gas Co. v. Federal Power Commission, 324 U. S. 581; Pan-

handle Eastern Pipe Line Co. v. Federal Power Commission,

$24 U. S, 635,

Re ES PN we ciated

18

Again, referring to the objection that the ulti-

mate disposition of an item classified in the ad-

justment account would be ‘‘uncertain until the

Commission has given particular directions with

reference thereto,’”’ the opinion says the item is

**subject to be taken out of that account and given

a different character if investigation by the Com-

mission shows it to be deserving of that treat-

ment,’’ with its ultimate disposition dependent

‘upon evidentiary circumstances, difficult to define

or catalogue in advance of the event’’ (299 U.S.

at p. 242).

Thus, the A. T. & T. opinion makes the deter-

mination of the ‘‘character of the item,’’ the ‘‘fair

consideration of all the circumstances,’’ and the

“evidentiary circumstances difficult to define or

catalogue in advance of the event’’ the criteria by

which the disposition of a particular item is to be

determined. In the present case, therefore, ‘‘the

decisive inquiry is whether the Commission’s order

has substantial support in the record.’’ Pacific

Power & Light Company v. Federal Power Com-

misston, 141 F’, 2d 602, 604 (C. C. A. 9).

There is such support in this record. In fact,

petitioner does not appear to contest the finding

that the $828,684.97 represents intangibles, but

merely asserts, without evidentiary support in

the record, that the intangibles are of a some-

what different nature than found by the Commis-

sion (I R. 27-28; Pet. Br. 37-38). The major

portion of the $828,684.97 classified in Account

—

19

100.5 as “‘nuisance value, going value, franchise

- value, monopoly value, and other similar intangi-

bles’’ consists of the $614,429.66 excess over orig-

inal cost which petitioner’s predecessor, Siskiyou

Electric Power & Light Company, paid to acquire

the electric operating properties of the so-called

“Ray interests” in 1911 (III R. 927-929, 809, 811-

812, 875-877). As correspondence from the com-

pany’s files introduced in evidence shows, the pur-

pose of this purchase was to end competition which

was developing between the parties at the time of

the purchase. The Siskiyou Company had set

aside a fund for the construction of an electric

“line into the territory’? of the other company

(Ex, 24, IIT R. 875-876). Although the amount

paid represented ‘‘an exceptionally high price”’

of $333 per horsepower, although the Siskiyou

Company had ‘‘an abundance of power”’ available

at a cost of $30 per horsepower for use ‘‘in com-

petition,’ and although the power plant purchased

was “in very bad condition’? and ‘“‘nothing had

ever been set aside for depreciation’’, the “‘top

notch price’? was paid for the Ray properties and

the threat of competition eliminated (III R.

876-877).

The evidence is equally clear that petitioner’s

| payment of $71,120.63 in excess of original cost

\ for the electric properties of Douglas County

Light and Water Company in 1923 also repre-

sented payment for “intangibles.’’ Two months

He

20

prior to this purchase, petitioner’s Vice Presi-

dent and General Manager wrote to its President

that he feared that petitioner would ‘“‘be forced

to pay an amount considerably in excess of the

present day physical value of the system itself—

in other words, the whole question as to whether

or not we should purchase these properties will

hinge upon the value that we wish to place upon

the intangibles, including the value of the strategic

position, the possibilities of the territory, etc.”’

( Ex: 25, ITI R. 878, emphasis supplied).

The expert accounting witnesses for the Com-

mission testified that the life of intangible assets

such as those here involved (an elimination of a

threat of competition, and acquisition of a “‘stra-

tegic position,’’ ete.) is questionable and uncer-

tain, but in any event not permanent, and that

provision for the retirement of such intangibles

is sound accounting and practiced by both com-

mercial enterprises and public utilities. They

testified that, in the light of the length of time

these intangibles already had been on the books

without provision for disposition thereof, amorti-

zation of the amounts by charges to Account 537,

Miscellaneous Amortization, an income account,

over the next ten-year period, was a satisfactory

and practicable accounting disposition. (IIT R.

812-813, 968-970.)

Moreover, as petitioner admits, it had the bur-

den of proof under Section 301(a) of the Act

Da P nn eneey AMAT, ) senuieinaall

|

(Pet. Br. 19) and it failed and refused to submit

any plan for disposition of the $828,684.97 (I R.

110,121). Having failed to propose any “‘possible

alternative * * * although the opportunity to

do so has been long open,” petitioner is not in a

position to object to the corrective accounting pre-

scribed by the Commission.”

Furthermore, as stated in the Commission’s

opinion (I R. 30), all the expert accounting wit-

nesses, including those of petitioner, were ‘‘in

agreement that rapid amortization of the cost of

intangibles is sound and prudent accounting.”’

Petitioner’s accounting witness, Lewis Lilly, testi-

fied that he assumed, and he had ‘‘never seen it

questioned,’’ that a regulatory body “‘has the au-

thority to require, as a matter of course, the

amortization of” intangibles by a public utility

(II R. 596). Petitioner’s expert accounting wit-

ness, William A. Paton, testified that he did not .

| ‘“‘see anything unsound about a reasonable pro-

gram of amortization” of intangibles (II R. 444)

and in The Accountants’ Handbook, Third Edi-

tion (1943), of which he was editor, it is clearly

recognized that it is in accordance with correct

———ny

2 As held in Northwestern Electric Company v. Federal

Power Commission, 134 F. 2d 740, 743 (C. C. A. 9), Section

301(a) of the Act imposes upon the utility whose account-

| ing entries are in question, the “burden of going forward”

| with “substantial evidence” to “justify” such entries.

| 2 Alabama Power Company v. Federal Power Commission,

128 F. 2d 280, 295-296 (App. D. C.), certiorari denied, 317

U. S. 652.

22

principles of accounting to amortize the cost of

intangibles (pp. 850-851)." See also Sherwood

and Hornberger, Fundamentals of Auditing

(1933), p. 146; Kester, Principles of Accounting

(1939), p. 573.

Since the amortization requirement of the Com-

mission’s order was, therefore, clearly not ‘‘so

entirely at odds with fundamental principles of

correct accounting’™“ nor so ‘‘arbitrary’’™

‘‘and outrageous’’™ as to be the ‘‘expression of

a whim rather than an exercise of judgment,”’’ it

was properly affirmed by the court below which

was not ‘“‘at liberty to substitute its own discre-

tion for that of administrative officers who have

kept within the bounds of their administrative

powers’’* and for whose judgment there was

‘‘warrant in the record.’’*

3. Petitioner sought a continuance and reopen-

ing of the hearing to enable it to obtain evidence

* While the Handbook speaks of “good will”, that in-

tangible includes ‘‘all the favorable attitudes impinging

upon the concern” so that the discussion of that intangible

serves for the group of intangibles (p. 845).

* Kansas City S. R. Co. v. United States, 231 U.S. 423, 444.

*® Northwestern Electric Company v. Federal Power Com-

mission, 321 U.S. 119, 124.

2° Norfolk & Western Ry. v. United States, 287 U. S. 134,

143.

** American Telephone & Telegraph Co. v. United States,

299 U. S. 232, 236-287.

* Rochester Tel. Corp. v. United States, 307 U. S. 125,

145-146,

SE SRE ES RRA ME RUSS oT :

23

as to the “reasonableness of the Byllesby fees”’

and the ‘‘nature and value”’ of the services (I R.

300; IL R. 574-575; ITI R. 1179-1180). Irre-

spective of the relevancy or materiality of such

evidence, the denial of petitioner’s request was

not arbitrary or an abuse of discretion. National

Labor Relations Board v. American Potash &

C. Corp., 98 F. 2d 488, 491-492 (C. C. A. 9), certio-

rari denied, 306 U. 8. 643; Nationai Labor Rela-

tions Board v. Algoma Plywood & Veneer Co.,

121 F. 2d 602, 605 (C. C. A. 7); Jefferson Elec-

tric Co. v. National Labor Relations Board, 102

F. 2d 949, 955 (C. C. A. 7).

Petitioner had been formally notified of this

issue by the joint staff report served on June 14,

1941 (III R. 841, 908, 941, et seq.). Even before

that, in April, 1941, it had been apprised of the

substance of the issue when it was supplied with

the results of the staff audit of the Byllesby fees

(III R. 1166). More than a year before that, peti-

tioner had been first notified of the deficiencies in

its reclassification and original cost studies filed

in 1939, and in response thereto, on March 21,

1941, it had filed its revised studies (I R. 1-2).

The hearing, after having been set to commence on

August 11, 1941 (I R. 1-5), was postponed five

times at petitioner’s request for a total of over

six months (I R. 11-15). In seeking the last post-

ponement, counsel for petitioner wired (I R. 14-

15): ‘Continuance to February 26 is respectfully

aa ee

ps

24

requested to allow time to eomplete preparation.

We do not anticipate that hearing will require

more than a week’s time.’’ When the hearing

commenced on February 26, 1942, petitioner’s

counsel went forward without objection or reser-

vation (I R. 105-129). The request for delay to

obtain witnesses to testify with respect to the

services performed by Byllesby was made in the

face of the fact that petitioner’s witnesses Boyle

and Bosworth had testified on that subject (1 R.

161-223; IT R. 452-530) and that W. J. Hagenah,

the president of Byllesby, who had testified on the

subject in another case,” was present in the hear-

ing room throughout the proceedings, without be-

ing called as a witness (III R. 1180). These

facts alone are sufficient to show that there was no

abuse of discretion in denying a further continu-

ance, and that the court below was right in so

finding (IV R. 1249).

In addition, as the Trial Examiner held (III

R. 1180), the evidence which petitioner proposed

to obtain during the continuance was irrelevant.

The profits to affiliates being properly classified,

per se, as write-ups and excluded from plant

accounts under the Commission’s cost system of

accounts (supra, pp. 7-14), it was immaterial

and irrelevant to the decision of that issue what

* The California Oregon Power Company, et al. (Pub.

Util. Comm. of Ore.), 8 P. U. R. (N. S.) 412 (Nov. 1, 1984) ;

II R. 470-472, 475, III R. 1088, 1067.

_ rs

25

the ‘‘value’’ may have been of the services in

connection with which the profits were paid, the

only relevant inquiry being the cost to the affili-

ated company rendering the services. Panhandle

Eastern Pipe Line Co. v. Federal Power Com-

mission, 143 F. 2d 488 (C. C. A. 8), affirmed, 324

U. S. 635; ef. Hartford Electric Light Company

v. Federal Power Commission, 131 F. 2d 953, 966

(C. C. A. 2), certiorari denied, 319 U. 8S. 741.

There being no showing that the additional evi-

dence was material, or that there were reasonable

grounds for failure to addtcte it at the hearing

before the Commission, the court below properly

denied petitfoner’s motion (IV R. 1249-1250).

Louisville Gas"& Blectric Co. v. Federal Power

Commission, 129 F. 2d 126, 134 (C. C. A. 6), cer-

tiorari denied, 318 U. S. 761. ao

CONCLUSION

\ The decision below is correct and there is no

conflict of decisions. We respectfully submit that

the petition for a writ of certiorari should be

denied.

J. Howarp McGratH,

Solicitor General.

Howarp E. WAHRENBROCK,

Assistant General Counsel,

Louis W. McKErRNan,

REUBEN GOLDBERG,

Attorneys,

Federal Power Commission.

| DECEMBER 1945.

ee EIR ALN LTE SLT BETES BASIN CH