dissenting:

While Judge Hufstedler writes a more persuasive case for affirming the FERC than the agency presented in its briefs or argument, I dissent.

Like the majority, I look to see whether the accounting treatment contested here is “the expression of a whim rather than the exercise of judgment.” American Telephone & Telegraph Co. v. United States, 299 U.S. 232, 237 , 57 S.Ct. 170, 172 , 81 L.Ed. 142 (1936). See also Northwestern Electric Co. v. FPC, 321 U.S. 119 , 64 S.Ct. 451 , 88 L.Ed. 596 (1944). Since Mr. Justice Cardozo laid down this general guideline, other cases have sharpened the test, indicating specific factors we look for to satisfy ourselves that discretion, not whimsy, produced the action complained of. I do not find these factors present here.

*302 The courts must, of course, accord an administrative agency considerable latitude to set policy in the areas in which it has statutory responsibilities. This truism does not mean, however, that courts should hesitate to intervene when the agency has clearly failed to make a reasoned decision.

More succinctly stated, the courts fulfill the review function assigned them by statute only when they “hold the agency to its duty to give reasoned consideration to the facts and issues material to its determinations.” Public Service Commission v. FPC, 167 U.S.App.D.C. 100, 116 , 511 F.2d 338 , 354 (1975) (footnote omitted).

The FERC has articulated no rationale for applying its accounting rule to this acquisition, nor can it show that its own cases or accounting standards have consistently applied the rule. Moreover, the agency has not addressed a crucial issue here: the effects of its rule on public utilities’ future acquisition decisions.

I.

The FERC’s brief bristles with claims that its decision in this case was rational. The Commission argues forcefully that its accounting order prevents utility customers from paying twice 1 , an argument that the majority does not consider “very persuasive”. The argument is, in fact, nonsense. Those v/ho paid for the line were railroad customers, a very small number among the many ratepayers of the electric utility. In other words, few of the utility’s customers have paid once, but the FERC claims its rule is needed to prevent their paying twice.

The Commission also claims it based its decision on “an evaluation of the public interest as a whole.” In support of that claim, however, it cites only cases in which sellers artificially wrote up the value of their acquisitions to increase the size of their rate base. E. g., California Oregon Power Co. v. FPC, 150 F.2d 25, 27 (9th Cir. 1945), cert. denied, 326 U.S. 781 , 66 S.Ct. 339 , 90 L.Ed. 473 (1946). The Commission admits that no such irregularity has occurred here. Indeed, Montana Power could have paid $6 million elsewhere for the sort of line it acquired for some $3 million from the railroad, and quite legitimately included the entire $6 million in its rate base. It chose instead not to include that amount in its rate base, a choice for which the Commission now penalizes it.

Third, the accounting order is defended as preventing “possible abuse” of a type the Federal Power Act, 16 U.S.C. § 824 et seq., was promulgated to stop. Nowhere does the FERC show ús that Congress felt that inter-industry acquisitions presented the likelihood of abuse that intra-industry transfers may once have presented. The FERC does not contend that any such abuse is present here, or even that it is a problem generally in inter-industry sales: 2 The Commission does not even attempt to justify the rule on the grounds of administrative *303 efficiency in reviewing such transfers. We thus find ourselves in the awkward position of upholding a per se rule on the basis of conduct that (as far as we know from the FERC) has not occurred, is not likely to, and could be policed with a less drastic and more sensible rule if it did.

II.

The FERC next argues that established Commission precedent and policy support its rule. Mere incantation of the phrase “established precedent and policy”, without an affirmative showing that precedent and policy sustain the Commission’s action, does not satisfy the test of rationality. City of Willcox v. FPC, 185 U.S.App.D.C. 287 , 299 n. 8, 567 F.2d 894 , 406 n. 8 (1977), cert. denied, 484 U.S. 1012 , 98 S.Ct. 724 , 54 L.Ed.2d 755 (1978); American Smeiting and Refining Co. v. FPC, 494 F.2d 925, 944-45 (D.C. Cir.), cert. denied, 419 U.S. 882 , 95 S.Ct. 148 , 42 L.Ed.2d 122 (1974). Here, the case law and accounting regulations to which the FERC points are confused and contradictory.

If anything, the case law is more supportive of Montana Power than of the Commission. As the majority notes, in the cases where the question has been presented the FERC has permitted utilities acquiring transmission lines from nonutilities to accrue the entire cost to the rate-base account. Black Hills Power & Light Co., 40 FPC 166 (1968); Virginia Electric & Power Co., 38 FPC 487 (1967).

The FERC claims that this is a special case because the seller, while not a power utility, had already devoted the line to “public service”. But this was true in Virginia Electric & Power Co., in which the seller was the federal government. Its line was more engaged in “public service” than the line used by the privately owned railroad here. I therefore cannot agree with the majority’s view that the FERC has consistently interpreted its regulations to require original-cost accounting when a line was previously devoted to public service.

Finally, the FERC defends the accounting rule as consistent with the agency’s Uniform System of Accounts, 18 C.F.R. pt. 101 (1978). That depends on which section of the regulations one looks at. Under Electric Plant Instruction 2A, Montana Power should be entitled to include the line in its rate base at the full acquisition cost, as the seller was not a power utility:

On the other hand, Instruction 1C can be read as requiring that the line be included, not at cost, but at original cost as the Commission maintains. The FERC is wrong, therefore, in claiming that its rule is consistent with the Uniform System, because the regulations are themselves inconsistent. 3

III.

None of the purported rationales offered by the FERC for its rule makes sense to me; nor do I find useful precedent in either the agency decisions or its accounting standards. More telling, however, is the agency’s lack of consideration of the rule’s longer-run effects.

This should be the most critical issue for the FERC. The case is one of first impression. The result next time will be the scrapping of a perfectly good transmission line and the construction of a new one for double or triple the cost. The FERC, for all its avowed concern about some consumers’ possible double payment, ignores the probability of saddling all future consumers with a larger single payment.

Economists have found that, because utilities are allowed a return only on their rate *304 base, they have developed an “edifice complex”, padding their rate bases. See, e. g., Averch & Johnson, Behavior of the Firm Under Regulatory Constraint, 52 Amer. Econ.Rev. 1052 (1962). Fear of utilities’ inflating the rate base led to the per se original-cost rule in intra-industry sales. The FERC would now extend the rule to a truly arm’s-length sale when the obvious effect of extension in the future will be greater inflation of rate bases.

Adoption of a rule which produces a result precisely opposite to that supposedly intended is the ultimate caprice. It would be one thing if the case law bound us. But, as Judge Hufstedler’s opinion correctly states, the relevant line of precedent includes cases that support Montana Power. The FERC could easily live with rules that better fit both the cases and the realities of producing electricity.

The case underscores, too, a curious notion of the “public interest” that the FERC claims to be protecting. Society as a whole will only be worse off for the FERC’s rule. In a comparable future situation, the electric utility will have an incentive to let the railroad scrap a line that the utility will then replace by consuming $6 million worth of society’s scarce resources. Despite its protestations that it is serving the public interest, the FERC’s wooden accounting rule will defeat that interest.

Congress has delegated much authority to the Commission, but to avoid the bureaucratic arrogance that tends to infect unbridled authority, it has also ordered us to review Commission orders. 18 U.S.C. § 825 / (b). We may not ask that the Commission always be correct — but we must insist that it not be capricious. By affirming here, where the FERC has offered no plausible reason for its decision and invokes only confused precedent and inconsistent regulations, the majority makes me wonder how we can justify the reliance Congress placed on us.

. “[T]he public had already been paying the railroad a return upon investment * * *. [I]t would be inappropriate to burden the public a second time with paying a rate of return * * * ”

. None of the reasons for the original-cost rule given in United Gas Pipeline Co., 25 FPC 26 (1961), which the FERC says is its definitive statement on the need for the rule in intra-in-dustry sales, is present in this case.

. The Commission urges that “cost” as used in Instruction 2A really means “original cost”, so that Instructions 2A and 1C would be consistent. This is an unlikely reading. Definitions 8 (“Cost”) and 20 (“Original cost”) appearing before the Electric Plant Instructions make a clear distinction between the two concepts.