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Opinion of the Court.

347 U.S.

Section 10 (d) of the Act requires each licensee, after 20 years of operation under such a license, to establish and maintain amortization reserves out of any surplus thereafter earned and accumulated in excess of a reasonable return upon the licensee's net investment. Section 14 makes such net investment, plus severance damages, a principal measure of the price the Government is to pay when and if it takes over all or part of the property.*

1910, limited the diversion from the United States side to 20,000 and from the Canadian side to 36,000 c. f. s. 36 Stat. 2448, 2450. As to additional emergency and temporary diversions, see 55 Stat. 1276, 1380; 1 U. S. Treaties and Other International Agreements 694.

449 Stat. 844-845, 16 U. S. C. § 807. See also, § 16 as to compensation to be paid for temporary use of the property by the Government, 41 Stat. 1072, 16 U. S. C. § 809; § 20 as to rate fixing, 41 Stat. 1073-1074, 16 U. S. C. § 813; and § 26 as to a purchase by the Government at a judicial sale, 41 Stat. 1076, 16 U. S. C. § 820. "Net investment" is defined in § 3 as follows:

"(13) 'net investment' in a project means the actual legitimate original cost thereof as defined and interpreted in the 'classification of investment in road and equipment of steam roads, issue of 1914, Interstate Commerce Commission,' plus similar costs of additions thereto and betterments thereof, minus the sum of the following items properly allocated thereto, if and to the extent that such items have been accumulated during the period of the license from earnings in excess of a fair return on such investment: (a) Unappropriated surplus, (b) aggregate credit balances of current depreciation accounts, and (c) aggregate appropriations of surplus or income held in amortization, sinking fund, or similar reserves, or expended for additions or betterments or used for the purposes for which such reserves were created. . . ." 49 Stat. 839, 16 U. S. C. § 796 (13). In the instant case the Commission explains that

"Section 10 (d) is part of a larger pattern of fairness set up by the act to induce water-power development. Licensees are assured a 'fair return,' but the public is safeguarded against. profiteering by a licensee through profits beyond a fair return. At the end of the license period and upon 'recapture' by the Federal Government, earnings throughout the license period are to be tested against a fair return standard set up in section 3 (13)." 9 F. P. C., at 248.

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In 1942, the Commission expressly held that § 14 applied to this licensee."

In 1947, Article 11 of the license was amended so as to specify a 6% rate of return and to require 50% of the licensee's surplus earnings to be paid into its amortization reserves. As so amended, the article read:

"After the first twenty (20) years of operation of the project under this license, namely after March 1, 1941, six (6) per cent per annum shall be the specified rate of return on the net investment in the project for determining surplus earnings in accordance with the provisions of Section 10 (d) of the Act for the establishment and maintenance of amortization reserves to be held until termination of the license, or in the discretion of the Commission, to be applied from time to time in reduction of the net investment in the project, and one-half of all surplus earnings in excess of six (6) per cent per annum received in any calendar year shall be paid into and held in such amortization reserves." "6

This resulted from the decision that the "fair value" provisions of § 23 (a), 49 Stat. 846, 16 U. S. C. § 816, applied to licenses to use water rights previously held under permits from the Federal Government, whereas this licensee's prior water rights, if any, arise under the law of New York. In re Niagara Falls Power Co., 3 F. P. C. 206, aff'd by the Court of Appeals for the Second Circuit in Niagara Falls Power Co. v. Federal Power Commission, 137 F. 2d 787.

"A proceeding seeking the Commission's approval of a further amendment to Article 11 was consolidated with the show-cause proceedings in the instant case. In response, the Commission, in 1950, ordered that article amended to read:

"After the first 20 years of operation of the project under this license, 6 percent per annum shall be the specified rate of return on the net investment in the project for determining surplus earnings and for the establishment and maintenance of amortization reserves, pursuant to section 10 (d) of the act; one-half of all earnings in excess of 6 percent per annum shall be paid into such amorti

Opinion of the Court.

347 U.S.

In 1948, the Commission began this proceeding to determine the licensee's amortization reserve liability. It was the Commission's first such effort under § 10 (d). In 1949, pursuant to a revised staff report, the Commission directed the holder of this license to show cause why onehalf of its surplus earnings from March 2, 1941, through December 31, 1946, in the amount of $994,521.33, should not be set aside in an amortization reserve, and why a like proportion of its subsequent surplus earnings should not be set aside annually upon a comparable basis. In 1950, the Commission's presiding examiner recommended that the licensee's initial reserve be $914,432.04, and the Commission approved that figure in preference to $515,432.04 proposed by the licensee. One Commissioner filed a concurring statement and one dissented. 9 F. P. C. 228. However, the Court of Appeals for the District of Columbia Circuit, one judge dissenting, upheld the licensee and remanded the case to the Commission with instructions to modify its order accordingly. 91 U. S. App. D. C. 395, 202 F. 2d 190. The decision turned primarily upon the court's conclusion that neither the Federal Water Power Act nor the issuance of a license thereunder had abolished the licensee's private proprietary rights to use the waters of Niagara River for power purposes. That issue was inescapable because the Commission, in computing the licensee's required amortization reserve, had found that certain annual payments and discounts made by the

zation reserves and such amortization reserves shall be established, maintained and disposed of in accordance with the terms of the act and such rules, regulations and orders of the Commission as may be adopted pursuant thereto." 9 F. P. C., at 259.

Under the above amendment, the method of setting aside the amortization reserves may be prescribed by the Commission. 9 F. P. C., at 232-233, 239.

7 Per curiam. Kimbrough Stone, Circuit Judge, retired, from the Eighth Circuit, sitting by designation; Wilbur K. Miller, Circuit Judge. Dissenting, Bazelon, Circuit Judge.

239

Opinion of the Court.

licensee for its use of private water rights, existing under state law, along the Niagara River, were not allowable expenses for the reason that the Commission considered those rights no longer existent. The Court of Appeals held precisely the contrary and we granted certiorari because of the important bearing of the decision upon the Federal Water Power Act. 345 U. S. 955.

8

The immediate issue thus presented is whether the licensee's amortization reserve under § 10 (d), for the period from March 2, 1941, through December 31, 1946, should be $914,432.04 or $515,432.04. That difference of $399,000 is one-half of the $798,000 which the Commission believes should be included in the surplus earnings of the licensee for the period. It consists of

1. $577,500 paid by the licensee, at the rate of $99,000 a year, for its use, for power purposes, of 730 c. f. s. of the "International Paper water rights," and

2. $220,500 allowed by the licensee as a discount, at the rate of $37,800 a year, on certain sales of electric power in consideration of permission to use, for power purposes, 262.6 c. f. s. of the "PetteboneCataract water rights."

The Court of Appeals held that although respondent's predecessor, in 1921, had received a federal license for this project, it nevertheless was justified in continuing to meet the financial obligations which it had assumed in return for permission to use water rights originally granted and still existing under the law of New York. That court, accordingly, approved each of the foregoing items of expense and fixed the licensee's initial amortization reserve at $515,432.04.

It was not questioned in the Court of Appeals or here that the licensee originally had acquired, in return

For computations, see Appendix, infra, p. 257.

Opinion of the Court.

347 U.S.

for the above-stated payments and discounts, some kind or degree of private proprietary rights under the law of New York to use water from the Niagara River for power purposes. Accordingly, we do not consider it necessary to review here the intricate transactions which resulted in the above-described payments and discounts. We accept the conclusion of the Court of Appeals "that the International Paper and Pettebone-Cataract water rights are valid under the law of New York." 91.U. S. App. D. C., at 406, 202 F. 2d, at 202. For further recognition of these water rights under state law, see Water Power & Control Commission v. Niagara Falls Power Co., 262 App. Div. 460, 30 N. Y. S. 2d 371, aff'd, 289 N. Y. 353, 45 N. E. 2d 907; Niagara Falls Power Co. v. Duryea, 185 Misc. 696, 57 N. Y. S. 2d 777.

Neither is it necessary for us to discuss the licensee's expenses in 1947 or thereafter. They must be treated in the same way as those above mentioned, except to note that the discounts allowed in return for the PetteboneCataract water rights ceased with the licensee's purchase of those rights in 1947. See 91 U. S. App. D. C., at 400– 401, 202 F. 2d, at 196.

We are not required to determine the nature of the rights claimed by respondent except to recognize that they are usufructuary rights to use the water for the generation of power, as distinguished from claims to the legal ownership of the running water itself. They are rights to use the force of the fall of the water, coupled with an obliga

? Respondent's corporate history and the devolution of the title to the International Paper and the Pettebone-Cataract water rights are described by the Court of Appeals in 91 U. S. App. D. C. 395, at 398-402, 402-407, 202 F. 2d 190, at 194-197, 198-202. See also, Niagara Falls Power Co. v. Federal Power Commission, 137 F. 2d 787. For a detailed examination of the facts and issues of the instant case, see Schwartz, Niagara Mohawk v. FPC: Have Private Water Rights Been Destroyed by the Federal Power Act?, 102 U. of Pa. L. Rev. 31.

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