On Petition to Review Orders of the Federal Power Commission.
Before MARIS and GOODRICH, Circuit Judges, and BARD, District Judge.
The Pennsylvania Power & Light Company constructed the Wallenpaupack Power Project in Pennsylvania under license issued by the Federal Power Commission by authority of the Federal Water Power Act, 41 Stat. 1063. The project was begun in 1924 and completed in 1926. Pursuant to Section 4(a) of the Federal Water Power Act, 41 Stat. 1065, to Article 17 of the license and to Regulation 20, Section 2, of the Federal Power Commission's Rules and Regulations, the licensee filed with the Commission on October 24, 1928, its statement of actual legitimate original cost of the project to December 31, 1927, and subsequently filed annual statements of additions, betterments and retirements to December 31, 1934. In these statements the licensee claimed $9,148,755.88 as the total actual legitimate original cost of the project, additions and betterments.
By order of April 14, 1942, as amended September 29, 1942, the Commission determined the actual legitimate original cost of the Wallenpaupack project as of December 31, 1934, to be $8,579,186.15. The Commission arrived at this figure by disallowing a number of the items claimed by the licensee as cost. It directed the licensee to conform its books of account to reflect such determination. By the present petition filed under authority of Section 313(b) of the Federal Power Act,*fn1 49 Stat. 860, 16 U.S.C.A. § 825 l (b), the licensee seeks to have the order of the Commission set aside or modified so as to have included in the actual legitimate original cost of the project several of the items disallowed by the Commission and to eliminate from the Commission's order the direction that the disallowed items be written out of the licensee's capital accounts and transferred to its earned surplus. If it succeeds in having the order modified so as to have any or all of the disallowed items included in cost the licensee also seeks to have the interest during the construction period recomputed in accordance with such adjustment.
The items which were disallowed by the Commission and as to which the licensee seeks review were the following:
Phonenix Utility Company construction fee $197,596.35
Electric Bond and Share Company engineering charges 93,629.87
Accounting and hearing expenses 28,118.41
Flow Line Bands and Shoes 15,167.99
We shall discuss them in the order stated.
Phoenix Utility Company Construction Fee
Construction work upon the project was done by Phoenix Utility Company under a cost plus fixed fee contract. The fee of 3% amounting to $197,596.35 paid by the licensee to Phoenix under this contract was disallowed by the Commission because of the affiliation which existed between Phoenix and the licensee through Electric Bond and Share Company. In doing so the Commission applied its "no profit to affiliates" rule. The rule was stated in Louisville Hydro-Electric Company, 1 F.P.C. 130 (1933). In that case the Commission was called upon to determine actual legitimate original cost as that term was used in the Federal Water Power Act. The Commission there said (p. 136): "In making a determination of the actual legitimate original cost of the project constructed under this contract, the Commission is not blinded by legal technicalities nor misled by attenuated theories. Where there is admitted control of both the licensee and the service company and where, as here, the two companies are virtually departments of an integrated system, the Commission must, under the provisions of the Federal Water Power Act, disregard the contract and hold that cost to the licensee can be no more, though it may under certain circumstances be less, than the cost of such service to the service company. Since the relationship of these two companies so unmistakably points to the existence of a superimposed power arbitrarily to dictate contracts and fix charges for services, the Commission cannot be bound by the terms of such contract, but must demand evidence of the cost to the Byllesby Service Co. of the services rendered."
Congress was informed of this interpretation of the statutory phrase "actual legitimate original cost" by the Commission in its Fourteenth Annual Report transmitted December 1, 1934, in which the Commission said (p. 2): "* * * the Commission has sought to protect the public interest by denying claims of costs for services to the licensee, performed by holding companies or affiliated service corporations, pending production by the licensed operating company of the original records of cost. In considering such claims the Commission holds that ...