delivered the opinion of the Court.
The question here is whether the Federal Power Commission, in the course of determining just and reasonable rates for United Gas Pipé Line Company (United) under .§ 4 (e) of the Natural Gas Act, 52 Stat. 822, 15 U. S. C. § 717c (e), made a proper allowance for federal income taxes in calculating the company’s cost of service. United claimed that in determining the cost of service its al-lowánce for federal income taxes should be at the full 52% rate, or $12,751,454, for the test year. The Commission disagreed because United w;as a member of an affiliated group which during the five-year period of 1957-1961 had elected to file consolidated returns for federal income tax purposes,1 a fact which in the Commission’s *239view required a reduced tax allowance in the company’s cost of service. Had consolidated returns not been filed during the .five-year period and had each company in the affiliated group instead filed separate returns, the total tax for the group would have been several million dollars more than was paid on a consolidated basis. This was so because on a consolidated basis consolidated losses serve to reduce consolidated income and because two members of the group, Union and Overseas, had net losses over the five-year period, thereby reducing taxes by $2,092,038 over those years.
To determine what the Commission considered the proper tax allowance for United’s rate base, it allocated the actual, consolidated taxes paid during the five-year period among the members of the group in accordance with a formula it had developed in Cities Service Gas Co., 30 F. P. C. 158, the order in which was set aside after issuance of the order in the instant case, 337 F. 2d 97. As so allocated, United’s annual share of the consolidated tax was 50.04% of its taxable income. Using this rate, the Commission allowed United $9,940,892 for federal income taxes instead of the $12,751,454 claimed by United. 31 F. P. C. 1180, 1191.
The Court of Appeals, relying on the decision of the Court of Appeals for the Tenth Circuit. in Cities Service Gas Co. v. FPC, 337 F. 2d 97, held “the tax allocation as made by the Commission’s order was contrary to the requirements which Congress had imposed,” 357 F. 2d 230, 231, and hence vacated and set áside the order. We reverse and remand to the Court of Appeals for further proceedings.
*240I.
In the Cities Service case the affiliated group filing the consolidated return was composed of both regulated and unregulated companies. Some of the unregulated companies had taxable income, others had even larger losses, and, therefore, as a group the unregulated companies showed a net loss over the representative years used by the Commission to forecast the future federal'income tax element of cost of service. The regulated companies as a group, on the other hand, had taxable income in the same period. On an unconsolidated basis the individual members of the affiliated group would have paid a considerably larger total tax than was actually paid on the consolidated basis. The gas company whose tax allowance for rate purposes was being determined claimed that it was entitled to the full 52% of its own taxable income. Its position was that the Commission had no power at all to apply any of the losses of unregulated companies to reduce its tax allowance and hence its rates. The tax allowance was thus to be figured at 52% without regard to the taxes actually paid by the affiliated group on a consolidated basis, seemingly even if the group paid no tax at all.
For the Commission, however, the only real cost to the regulated company was related to the consolidated tax actually paid and incurred in connection'with the other companies in the group. In the. Commission’s view, it was unacceptable to determine the cost of service on a hypothetical figure — to -fix jurisdictional'rates “on the basis of converting a hypothetical tax payment into a prudent operating expense.” 30 F. P. C., at 162. It refused to accept the argument that “Gas Company ratepayers should make Cities Service stockholders whole for *241the tax losses of nonregulated enterprises even though this means an allowance for taxes over and beyond that which the consolidated system as a whole actually paid.” Ibid. The Commission’s function, it said, was to fix just and reasonable rates, not to insure that other affiliates would be made whole for their tax losses out of income from regulated enterprises. Thus the task was “to. determine the proportion of the consolidated tax which is reasonably attributable to the Gas Company vis-a-vis the other Cities Service affiliates.” Ibid.
To make this determination, the Commission devised a formula which in effect applied the losses of unregulated companies first to the gains of other unregulated companies.2 If a net taxable income remained in the un*242regulated group, the regulated companies would not share .in the savings from the consolidated return and would be deemed to have paid a tax at the full 52% rate. But if losses of the unregulated companies exceeded their net income and hence reduced the taxes of the regulated group below what they would have paid had they filed separate returns, the consolidated tax paid would be allocated among the regulated companies in proportion to their taxable incomes. As applied to the facts in the Cities Service case, the formula resulted in a tax allowance of $5,866,847 rather than the $7,055,981 claimed by the Cities Service Gas Company.
The Court of Appeals set aside the Commission’s order. In its view, the addition of the gas company’s income to the consolidated return cost the affiliated group exactly 52% of the taxable income of the gas company, either in taxes paid or in. a reduction of loss carry-forwards or carrybacks. The Commission’s, formula as applied was therefore held to appropriate losses of unregulated companies and to exceed the Commission’s “jurisdictional limits which require an effective separation of regulated and nonregulated activities for the determination of the ingredients of the rate base . . . mean[ingj a separation of profits and losses between regulated and nonregulated businesses in determining the tax allowance includible in the cost of service of the regulated company.” 337 F. 2d 97, 101. Hence the court, relying on Colorado Interstate Gas Co. v. FPC, 324 U. S. 581, and Panhandle Eastern Pipe Line Co. v. FPC, 324 U. S. 635, set aside the Commission’s order.
*243i — i HH
In our view ^hat the Commission did here did not exceed the powers granted to it by Congress. One of its statutory duties is to determine just and reasonable rates which will be sufficient to permit the company to recover its costs of service and a reasonable return on its investment. Cost of service is therefore a major focus of inquiry. Normally included as a cost of service is a proper allowance for taxes, including federal income taxes. The determination of this allowance, as a general proposition, is obviously within the jurisdiction of the Commission. Ratemaking is, of course, subject to the. rule that the income and expense of unregulated and regulated activities should be segregated. But there is no suggestion in these cases that in arriving at the net taxable income of United the Commission violated this rule. Nor did it in our view in determining the tax allowance. United had not filed its own separate tax return. Instead it had joined with others in the filing of a consolidated return which resulted in the affiliated group’s paying a lower total tax than would have been due had the affiliates filed on a separate-return basis. The question for the Commission was what portion of the singlé consolidated tax liability belonged to United. Other members of the _group should not be required to pay any part of United’s tax, but neither should United pay the tax of others. A proper allocation had to be made by the Commission. Respondents insist that in making the allocation the Commission would violate the statute unless in every conceivable circumstance, including this one, United is' allowed an amount for taxes equal to what it would have paid had it filed a separate return. In their view United should never share in the tax savings inherent in a consolidated return, even if on a consolidated basis system *244losses exceed system gains and neither the affiliated group nor any member in it has any tax liability. This is an untenable position and we reject it. Rates fixed on this basis would give the pipeline company and its stockholders not only the fair return to which they are entitled but also the full amount of an expense never in fact incurred. In such circumstances, the Commission could properly disallow the hypothetical tax expense and hold that rates based on such an unreal cost of service would not be just and reasonable.
It is true that the avoidance of tax and the reduction of the tax alíbwance are accomplished only by applying losses of unregulated companies to the income of the regulated entity.. But the Commission is not responsible for the use of consolidated returns. It is the tax law which permits an election by an appropriate group to file on a consolidated basis. The members of a group, as in these cases, themselves chose not to file separate returns and hence, for tax purposes, to mingle profits and losses of both regulated and unregulated concerns, apparently deeming it more desirable to attempt to turn the losses óf some companies into immediate cash through tax savings rather than to count on the loss companies themselves having future profits against which prior losses could be applied,- Such a private decision made by the affiliates, including the regulated member, has the practical and.intended consequence of reducing the group’s federal income taxes, perhaps to zero, as was true of one of the years ¡involved in the Cities Service case. But when the out-of-pocket tax cost of the regulated affiliate is reduced, there is an immediate confrontation with the ratemaking principle that limits cost of service to expenses actually incurred. Nothing in Colorado Interstate or Panhandle forbids the Commission to recognize the actual tax saving impact of a private election to file con*245solidated returns. On the contrary, both cases support the power and the duty of the Commission to limit cost of service to real expenses.3
We think that in the proper circumstances the Commission has the power to reduce cost of service, and hence rates, based on the application of non jurisdictional losses to jurisdictional income. Hence, the question becomes one of when and to what extent the tax savings flowing from the filing of a consolidated return are to be shared by the regulated'company. Or, to put it in the Commission's words the issue is one of determining “the proportion of the consolidated tax which is reasonably attributable to the gas company vis-a-vis [its] other . . . affiliates.” 30 F. P. C., at 162.
Viewing these cases in this light, we cannot say that the method the Commission chose to allocate the tax liability among the group members was erroneous or contrary to its statutory authority. Under its formula, the net losses and net income of unregulated companies are first set off one against the other, and the tax savings made possible by losses of unregulated enterprises are thus first allocated to the unregulated companies. Only if “unregulated” losses exceed “unregulated” income is the regulated company deemed to have enjoyed a reduction in its taxes as a result of the consolidated return. If there is more than one regulated company in the group, they will share the tax liability or tax saving in proportion to their taxable income.
*246It is true that the Commission includes in the regulated group companies which are regulated not by it but by state or local authorities and that under the Commission’s formula enterprises not subject to its jurisdiction may be required to share the tax saving with the federally regulated concern. But we know of nothing in the decisions or the statutes governing the ratemaking activities of the Commission which dictates priority for the state-regulated company or which provides that the jurisdictional company may share in the tax saving only if the saving exceeds the separate-return tax liability of the state-regulated company. One could as well argue-that for ratemaking purposes the company subject to federal regulation should have the first benefit of the tax saving. The Commission’s formula, of course, prefers neither concern but allocates the tax liability equitably between each regulated member, without regard to the source of the regulation.4 “When Congress, as here, fails to provide a formula for the Commission to follow, courts are not warranted in rejecting the one which the Commission employs unless it plainly contravenes the statutory scheme of regulation.” Colorado Interstate Gas Co. v. FPC, 324 U. S. 581, 589. “If the total effect of -the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end. The fact that'the method employed to reach that result may contain infirmities is not then important.” FPC v. Hope Natural Gas Co., 320 U. S. 591, 602.
There is no frustration of the tax laws inherent in the Commission’s action. The affiliated group may continue *247to file consolidated returns and through this mechanism set off system losses against system income, including United’s fair return income. The tax law permits this, but it does not seek to control the amount of income which any affiliate will have. Nor does it attempt to set United’s rates. This is the function of the Commission, a function performed here by rejecting that part of the claimed tax expense which was no expense at all, by reducing cost of service and therefore rates, and by allowing United only a: fair return on its investment.
Nor did the Commission “appropriate” or extinguish the losses of any member of the affiliated group, regulated or unregulated. Those losses may still be applied to system gains and thereby be turned into instant cash. United may, of course, have less income than it did. If so, this will correspondingly reduce the opportunity of the affiliated group to use the losses of unregulated companies to appropriate United’s income for the benefit of non-jurisdictional activities because United’s income will no longer offset the same amount of losses which it once did. But the losses of unregulated companies are in no way destroyed. They remain with the system, readily available to reduce the taxes of the profitable affiliates to the maximum extent allowed by the tax law.
Another matter deserves some comment. It is said here that the Commission, in applying its tax allowance formula, erroneously failed to recognize and to take account of the fact that United has both jurisdictional and non jurisdictional activities and income. Although this is a matter which might affect the results achieved in application of the Commission’s formula, it is one to which the Court of Appeals has not addressed itself, and we think it appropriate for the issue to be raised there if the parties are so inclined.
*248For the reasons stated herein, the judgment of the Court of Appeals is reversed and the cases remanded for further proceedings consistent with this opinion.
It is so ordered.
Mr. Justice Fortas took no part in the consideration or decision of these cases.The election was pursuant to the privilege granted in § 1501 of the Internal Revenue Code of 1954, 26 U. S. C. § 1501. The other members of the affiliated group are United Gas Corporation, which wholly owns United and which is a gas distribution company subject to state and local regulation, and-two other wholly owned subsidiaries of United Gas Corporation — Union Producing Company *239(Union), a domestic oil and gas producer whose interstate sales of gas are subject to the jurisdiction of the Federal Power Commission, and United Overseas Production Company (Overseas) which engaged in oil exploration in foreign countries.
“[T]he proper method to be applied in computing the Federal income taxes to be, included in the cost of service of a regulated company where that company has joined in a consolidated tax return with affiliates is (1) separate the companies into regulated and unregulated groups, (2) determine the net aggregate taxable income of each group, and (3) apportion the net total consolidated tax liability over a representative period of time between the two groups, and among the companies in the regulated group, on the'basis of their respective taxable incomes; provided that the allowance so computed for the regulated company shall not exceed what its tax liability would be for rate making purposes, if computed on a separate return basis.” 30 F. P. C. 158, 164.
As the Commission noted, id., at 162, it could draw little from the experience of state and local regulatory bodies dealing with the question whether the losses of affiliates should be taken into account in determining the tax allowance for regulated enterprises since the state and local solutions had not been consistent. It does not appear that the Commission drew on its own experience, although with a single exception the Commission seems to have accounted for consolidated tax' savings in past ratemaking proceedings. See Penn-York Natural Gas Corp., 5 F. P. C. 33, 39 (1946); Hope Natural Gas Co., 10 F. P. C. 583, 612, aff’d, 10 F. P. C. 625 (1951); Atlantic Seaboard Corp., 11 F. P. C. 486, 515, aff’d, *24211 F. P. C. 43, remanded on other grounds, 200 F. 2d 108 (1952); United Fuel Gas Co., 12 F. P. C. 251 (1953); Hope Natural Gas Co., 12 F. P. C. 342, 347 (1953); Home Gas Co., 13 F. P. C. 241, 246 (1954); United Fuel Gas Co., 23 F. P. C. 127, 134 (1960). But see Olin Gas Transmission Corp., 17 F. P. C. 685 (1956).
See Colorado Interstate Gas Co. v. FPC, 324 U. S. 581, 604-605; Panhandle Eastern Pipe Line Co. v. FPC, 324 U. S. 635, 648-649; El Paso Natural Gas Co. v. FPC, 281 F. 2d 567, 573, cert. denied sub nom. California v. FPC, 366 U. S. 912; Alabama-Tennessee Natural Gas Co. v. FPC, 359 F. 2d 318, 331, cert. denied, 385 U. S. 847.
That some sharing of the tax savings with nonfederally regulated companies was in order seems to have been recognized by the members of the affiliated group. Under the internal allocation formula employed by the group, the tax liability assigned to United represented an effective tax rate of 48.8%.