Petitioners assert that an order of the Federal Power Commission made pursuant to its authority to prescribe a uniform system of accounts for electric utilities is invalid because in excess of the Commission's statutory power and in violation of the Fifth and Tenth Amendments to the Constitution.
Northwestern Electric Company is an operating utility all of whose common shares are owned by American Power & Light Company. Shortly after organization Northwestern issued 100,000 shares of $100 par common stock to promoters. Later the transaction was entered on its books as 'Land and Water Rights' with a corresponding credit to 'Common Capital Stock'. Northwestern received no cash or property for the stock so issued. The company prospered and its common stock became valuable. In 1925 American purchased all the common stock for $5,095,946.48. In 1936 Northwestern was permitted by the regulatory authorities of the States of Oregon and Washington, in which it operates, to reduce the par value of its common stock from $100 to $35, thus reducing the outstanding common to $3,500,000. This reduction was made in order that the stock might then represent the fair value of the company's assets. Entries on the asset side were written down $6,500,000 to offset the reduction in common stock liability.
Acting under § 301(a) of the Federal Power Act of 1935 the Commission prescribed a uniform system of accounts for utilities and ordered reclassification of their electric plant accounts with necessary adjusting entries to reflect such new classification as of January 1, 1937. Northwestern submitted a classification and the Commission, after investigation, issued a report thereon and requested Northwestern to submit a plan for disposition of the item of $3,500,000 upon its books and recommended that the amount should be transferred to Account 107-Electric Plant Adjustments pending submission of such a plan. Northwestern failed to comply with these requests and an order to show cause was issued upon which a hearing was held. The Commission found that the cost of the physical property was all represented by obligations issued by the company and that the common stock did not represent money or property received. The Commission further found that in the interest of consumers, investors, and the public, the $3,500,000 write-up to be entered in Account 107 should be disposed of by applying net income above preferred stock dividend requirements to its elimination, and added that this disposition would insure the company's receiving value to balance common stock liability and that dividends ought not to be paid on the common stock until it had an equivalent paid-in value. An order was entered requiring Northwestern to comply with the finding.
The Commission granted a rehearing only as respects the required disposition of the asset item of $3,500,000, but refused a rehearing on all other matters involved in the case. Northwestern obtained a review in the Circuit Court of Appeals, which sustained the order as against Northwestern's contentions that the Commission was without power to make an order for the keeping of its accounts, because of existing State regulation; that the Commission's action was not sustained by the proofs before it, was an abuse of discretion, and constituted a denial of due process of law, since the system of accounts prescribed was to show the company's plant at the amount it cost rather than at its present fair value. Inasmuch as the rehearing was pending before the Commission on the disposition to be made of the write-up, the Circuit Court of Appeals declined to pass upon that matter.
In connection with the rehearing, the Commission requested the company to suggest any disposition of the $3,500,000 item it thought appropriate. The company refused to make any suggestion, its position being that the entry should remain in Account No. 107. The result of permitting it thus to remain in the plant and property accounts of the company would be a continuance of a showing on its books of actual asset value to balance the outstanding common stock liability. The Commission reaffirmed its order and Northwestern again sought review in the Circuit Court of Appeals. American, which had been permitted to intervene, joined in the application for court review. The Circuit Court of Appeals refused to disturb the Commission's order.