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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Brief for the Respondents in Opposition
- **Published:** January 1, 1946
- **Citation:** 326 U.S. 781

## Text

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386416_0386%3A3. Public record. Not legal advice.