207 Opinion of the Court. affiliated Massachusetts gas companies 376 F. 2d, at 114. But, as the Commission has noted, the court's computation that the separated companies would realize a return of only 4.1% contained a serious error, for it overlooked the allowance to be made for income tax deductions generated by the projected losses. The actual rate of return taking such deductions into account would be a significantly higher 5.2%.13 13 In any event, we may agree that the ratios of losses of revenues, expenses, and income are necessarily affected 13 Rate of return is the percentage of net operating income to the rate base, which is fixed by a formula tied generally to the value of capital assets. The source of the 4.1% figure appears to have been the Court of Appeals. The 4.1% was apparently derived as follows: (a) $ 3,050,988 (1959 net oper. income after taxes) =6.4% rate of return However, the $1,100,000 projected loss would generate income tax deductions of roughly 50%, increasing the numerator of fraction (c) from $1,952,388 to $2,501,688, and the rate of return to 5.2%. The NEES brief relies on the 4.1% figure, but NEES has not challenged the Commission's recalculation. The 1959 rates of return for the comparable nonaffiliated Massachusetts companies were as follows: Opinion of the Court. 390 U.S. by differences in capital structure, management, market position, and other factors. But it by no means follows that the Commission's comparisons are for that reason irrelevant to the determination whether a projected loss of economies is so important as to cause a serious impairment of the separated system. It was well within the range of the Commission's administrative discretion to use the loss ratios, as it did, "as a guide in adjudicating the pending case." Philadelphia Co., 28 S. E. C. 35, 50, n. 24. The Commission in its expert judgment may so employ evaluative factors it considers relevant.14 Indeed, NEES apparently recognized that its burden to establish that its situation comes within Clause A included the burden of showing that the projected loss of economies would be more serious for its separated system than the comparable level of losses in the other cases already decided by the Commission. Respondent attempted to prove that the gas system's distance from sources of supply gives it only a very narrow competitive advantage over oil as a fuel, and, further, that the system's growth potential is more limited by a lack of new housing expansion in the area serviced by the gas companies. As we shall see below, the Commission found that NEES had not made a case in either respect insofar as those matters bore on whether the projected loss of economies threatened serious impairment of the separated system. II. The Commission's resort to data concerning the operations of the nonaffiliated Massachusetts gas companies was a response to NEES' argument, supported by the 14 Although the parties are in dispute as to the validity of some of the data drawn from the previous cases, we do not consider it necessary to become involved in that controversy. Suffice it to say that we do not think the Commission in looking to the data for guidance exceeded the bounds of reason or administrative discretion. 207 Opinion of the Court. Massachusetts Department of Public Utilities, that the projected loss of economies from separation of the gas system would require the gas companies to seek rate increases which might seriously impair or destroy any hope of a successful operation. Natural gas in 1959 enjoyed in New England the smallest price advantage over oil of any section of the country. The annual differential was $7 over oil for a typical New England house compared with $27 to $118 in favor of gas in the rest of the country.15 NEES contended that the predicted rate increase would substantially or entirely eliminate the gas system's already narrow price advantage over oil competitors. The Commission's answer was to inquire about the economic health of the already nonaffiliated Massachusetts gas companies. The Commission found that these companies were apparently able to earn a fair return although not enjoying the supposed advantages of affiliation with electric utilities; and it could find no evidence that they did not face the same competitive conditions as NEES.16 The Commission found further that, despite NEES' insistence that its market conditions differed from the nonaffiliated companies because of relatively stagnant franchise areas offering less sales growth, there was no evidence that this would pre 17 15 Gas to New England was piped all the way from Texas, whereas oil was shipped in by tanker. NEES estimated the average home heating cost to be $166 for gas, $173 for oil; and it was in residential space heating that NEES found its chief market. 16 NEES calculated the composite rate of return for its gas system at 6.6% for 1958 and 6.4% for 1959. (Resp. Ex. 114; R. 1431.) The average for seven comparable independents was 6.3% in 1958 and 5.9% in 1959. (Resp. Ex. 117; R. 1436.) 17 NEES cites as prime evidence in this regard the testimony of Robert Cahal, an Ebasco marketing consultant who had to some extent analyzed the marketing conditions NEES faced. The substance of his testimony was that (a) gas and oil are highly competitive in the State, with oil being well entrenched in many areas Opinion of the Court. 390 U.S. vent the separated gas system-which would emerge as the second largest independent in the State-from competing as effectively as the smaller independents who had long held their own. Finally, the Commission noted that after severance the gas system's operating ratio would be more favorable or only slightly higher than the ratios of nine independents and therefore concluded that it "would be entering the realm of speculation at this time to assume that rate increases would ensue from severance." 41 S. E. C., at 899.18 The Court of Appeals rejected the comparison of these operating ratios, again on the ground that such ratios fail to take account of special characteristics of individual companies. The court observed that since all New England gas companies operated on a "small cushion so that the major source of growth has to be in new residence construction; (b) in Massachusetts growth is in the suburbs with towns proper being relatively stagnant; (c) gas companies are limited by their franchise area, prisoners of the characteristics of their particular communities; (d) the independents are not necessarily comparable with NEES because they may be in areas of higher growth; (e) independents having such areas are Haverhill, Lowell, Springfield, Worcester, Brockton-Taunton; all of them having growth greater (but unspecified as to degree) than any NEES gas company except Norwood. The Commission noted, without comment, that the population increase in NEES' franchise areas between 1950 and 1960 was only 11% as compared with 18% in the areas of seven independents. 41 S. E. C., at 899, n. 23. 18 The operating ratio is "the percentage of total operating revenue deductions (other than depreciation, amortization of conversion costs, and Federal income taxes) to total operating revenues." 41 S. E. C., at 899, n. 25. The ratio "affords a measure for determining the efficiency with which the enterprise is conducted and while its value is greater in comparing the year to year trend it has a limited use in comparing very similar enterprises." Moody's Public Utility Manual ix (1967). NEES' ratio was fixed at 76.41% and compared with the composite ratio of nine independents of 79.14%, as well as their median and mean ratios of 74.87% and 76.35% respectively. Individual ratios are cited at 41 S. E. C., at 899, n. 26. 207 Opinion of the Court. [t]he significance of this is not negated by observing that non-NEES companies in Massachusetts seem to be surviving, for the focus must be on the specific characteristics of the NEES companies, the only ones affected by the Commission's order." 376 F. 2d, at 113. The court further held "irrelevant the comparison of operating ratios, since a business may operate relatively efficiently, yet at a level too low to attract investors." 376 F. 2d, at 114, n. 6. For the reasons already stated for our disagreement with the Court of Appeals' view of the Commission's use of other ratios, we disagree that this comparison was either irrelevant or outside the limits of the Commission's administrative discretion. The dissection and evaluation of an economic projection is a function Congress committed to the Commission, not the courts. A court may believe it would have done the job differently and better; but judicial inquiry must be addressed to whether what the Commission did is fatal to its ultimate conclusion that the holding company failed to carry its burden of showing a loss of "substantial" economies within the meaning of Clause A. In assessing NEES' forecast of the need for rate increases because of the projected loss of economies, it was proper for the Commission to consider the performance of other Massachusetts gas companies which were already operating independently. NEES was afforded every opportunity to sustain its burden of showing that the separated gas system would wither into critical health despite the contrary inferences suggested by the comparison made by the Commission. It cannot be a basis for finding error that the Commission found the attempt unpersuasive, given the gas system's size,19 and the 19 The Commission may properly regard size of operation to be a relevant factor. One of Congress' concerns in providing the exception involved here was to protect small companies likely to fail if separated from the parent holding company. Cf. NEES 1, 384 U. S., at 181; North Amer. Co. v. SEC, 327 U. S. 686, 697. See also H. R. Rep. No. 1903, 74th Cong., 1st Sess., 68-71; S. Doc. |