FPC v. Hope Nat. Gas Co.
320 U.S. 591 (1944)

Annotate this Case

U.S. Supreme Court

FPC v. Hope Nat. Gas Co., 320 U.S. 591 (1944)

Federal Power Commission v. Hope Natural Gas Co.

No. 34

Argued October 20, 21, 1943

Decided January 3, 1944*

320 U.S. 591

CERTIORARI TO THE CIRCUIT COURT OF APPEALS

FOR THE FOURTH CIRCUIT

Syllabus

1. The validity of an order of the Federal Power Commission fixing rates under the Natural Gas Act is to be determined on judicial review by whether the impact or total effect of the order is just and reasonable, rather than by the method of computing the rate base. P. 320 U. S. 602.

2. One who seeks to have set aside an order of the Federal Power Commission fixing rates under the Natural Gas Act has the burden of showing convincingly that it is unjust and unreasonable in its consequences. P. 320 U. S. 602.

3. An order of the Federal Power Commission reducing respondent's rates for sales of natural gas in interstate commerce held valid under the Natural Gas Act. P. 320 U. S. 603.

The rate base determined by the Commission was found by it to be the "actual legitimate cost" of the company's interstate property, less depletion and depreciation, plus allowances for unoperated acreage, working capital, and future net capital additions. "Reproduction cost new" and "trended original cost" were given no weight. Accrued depletion and depreciation and the annual allowance for depletion and depreciation were determined by application of the "economic service life" method to "actual legitimate cost."

4. Considering the amount of the annual return which the company would be permitted to earn on its property in interstate service, and the various factors which that return reflects, this Court is unable to say that the rates fixed by the Commission are not "just and reasonable" under the Act. P. 320 U. S. 604.

5. Rates which enable a natural gas company to operate successfully, to maintain its financial integrity, to attract capital, and to compensate its investors for the risks assumed cannot be condemned as unjust and unreasonable under the Natural Gas Act, even though

Page 320 U. S. 592

they might produce only a meager return on a rate base computed on the "present fair value" method. P. 320 U. S. 605.

6. The rationale of the decision renders it unnecessary to determine whether the Commission's exclusion from the rate base of well drilling and other costs, previously charged to operating expenses, was consistent with the "prudent investment" theory as developed and applied in particular cases. P. 320 U. S. 605.

7. United Railway Co. v. West,280 U. S. 234, so far as it rejects cost as the basis of depreciation allowances, is disapproved. P. 320 U. S. 606.

8. The requirements of the Constitution in respect of rates are not more exacting than the standards of the Act, and a rate order valid under the latter is consistent with the former. P. 320 U. S. 607.

9. In fixing "just and reasonable" rates under §§ 4 and 5 of the Natural Gas Act, for natural gas sold in interstate commerce by a private operator through an established distribution system, the Commission was not required to take into consideration the indirect benefits -- affecting the economy, conservation policies, and tax revenues -- which the producing State might derive from higher valuations and rates. P. 320 U. S. 609.

10. The suggestion that the Commission did not allow for gas production a return sufficient to induce private enterprise to perform completely and efficiently its functions for the public is unsupported. P. 320 U. S. 615

11. The Commission is not empowered by the provisions of §§ 4 and 5, which authorize it to fix "just and reasonable" rates, to fix rates calculated to discourage intrastate resales for industrial use. P. 320 U. S. 616.

12. The question whether the rates charged by the company discriminate against domestic users and in favor of industrial users is not presented. P. 320 U. S. 617.

13. Findings of the Commission as to the lawfulness of past rates held not reviewable under §19(b) of the Act. P. 320 U. S. 618.

134 F.2d 287 reversed.

Certiorari, 319 U.S. 735, to review a decree setting aside an order of the Federal Power Commission, 44 P.U.R.(N.S.) 1, under the Natural Gas Act.

Page 320 U. S. 593

MR. JUSTICE DOUGLAS delivered the opinion of the Court.

The primary issue in these cases concerns the validity under the Natural Gas Act of 1938, 52 Stat. 821, 15 U.S.C. § 717 et seq., of a rate order issued by the Federal Power Commission reducing the rates chargeable by Hope Natural Gas Co., 44 P.U.R.,N.S., 1. On a petition for review of the order made pursuant to § 19(b) of the Act, the

Page 320 U. S. 594

Circuit Court of Appeals set it aside, one judge dissenting. 134 F.2d 287. The cases are here on petitions for writs of certiorari which we granted because of the public importance of the questions presented. City of Cleveland v. Hope Natural Gas Co., 319 U.S. 735.

Hope is a West Virginia corporation organized in 1898. It is a wholly owned subsidiary of Standard Oil Co. (N.J.). Since the date of its organization, it has been in the business of producing, purchasing and marketing natural gas in that state. [Footnote 1] It sells some of that gas to local consumers in West Virginia. But the great bulk of it goes to five customer companies which receive it at the West Virginia line and distribute it in Ohio and in Pennsylvania. [Footnote 2] In July, 1938, the cities of Cleveland and Akron filed complaints with the Commission charging that the rates collected by Hope from East Ohio Gas Co. (an affiliate of Hope which distributes gas in Ohio) were excessive and unreasonable. Later in 1938, the Commission, on its own motion, instituted an investigation to determine the reasonableness of all of Hope's interstate rates. In March,

Page 320 U. S. 595

1939, the Public Utility Commission of Pennsylvania filed a complaint with the Commission charging that the rates collected by Hope from Peoples Natural Gas Co. (an affiliate of Hope distributing gas in Pennsylvania) and two non-affiliated companies were unreasonable. The City of Cleveland asked that the challenged rates be declared unlawful, and that just and reasonable rates be determined from June 30, 1939 to the date of the Commission's order. The latter finding was requested in aid of state regulation and to afford the Public Utilities Commission of Ohio a proper basic for disposition of a fund collected by East Ohio under bond from Ohio consumers since June 30, 1939. The cases were consolidated, and hearings were held.

On May 26, 1942, the Commission entered its order and made its findings. Its order required Hope to decrease its future interstate rates so as to reflect a reduction, on an annual basis of not less than $3,609,857 in operating revenues. And it established "just and reasonable" average rates per m.c.f. for each of the five customer companies. [Footnote 3] In response to the prayer of the City of Cleveland, the Commission also made findings as to the lawfulness of past rates, although concededly it had no authority under the Act to fix past rates or to award reparations. 44 P.U.R.(N.S.) p. 34. It found that the rates collected by Hope from East Ohio were unjust, unreasonable, excessive, and therefore unlawful, by $830,892 during 1939, $3,219,551 during 1940, and $2,815,789 on an annual basis since 1940. It further found that just, reasonable, and lawful rates for gas sold by Hope to East Ohio for resale for ultimate public consumption were those required

Page 320 U. S. 596

to produce $11,528,608 for 1939, $11,507,185 for 1940, and $11.910,947 annually since 1940.

The Commission established an interstate rate base of $33,712,526 which, it found, represented the "actual legitimate cost" of the company's interstate property less depletion and depreciation and plus unoperated acreage, working capital and future net capital additions. The Commission, beginning with book cost, made certain adjustments not necessary to relate here, and found the "actual legitimate cost" of the plant in interstate service to be $51,957,416, as of December 31, 1940. It deducted accrued depletion and depreciation, which it found to be $22,328,016 on an "economic service life" basis. And it added $1,392,021 for future net capital additions, $566,105 for useful unoperated acreage, and $2,125,000 for working capital. It used 1940 as a test year to estimate future revenues and expenses. It allowed over $16,000,000 as annual operating expenses -- about $1,300,000 for taxes, $1,460,000 for depletion and depreciation, $600,000 for exploration and development costs, $8,500,000 for gas purchased. The Commission allowed a net increase of $421,160 over 1940 operating expenses, which amount was to take care of future increase in wages, in West Virginia property taxes, and in exploration and development costs. The total amount of deductions allowed from interstate revenues was $13,495,584.

Hope introduced evidence from which it estimated reproduction cost of the property at $97,000,000. It also presented a so-called trended "original cost" estimate which exceeded $105,000,000. The latter was designed

"to indicate what the original cost of the property would have been if 1938 material and labor prices had prevailed throughout the whole period of the piecemeal construction of the company's property since 1898."

44 P.U.R.(N.S.), pp. 8, 9. Hope estimated by the "percent condition" method accrued depreciation at about 35% of

Page 320 U. S. 597

reproduction cost new. On that basis, Hope contended for a rate base of $66,000,000. The Commission refused to place any reliance on reproduction cost new, saying that it was "not predicated upon facts," and was "too conjectural and illusory to be given any weight in these proceedings." Id., 44 P.U.R.(N.S), p. 8. It likewise refused to give any "probative value" to trended "original cost," since it was "not founded in fact," but was "basically erroneous" and produced "irrational results." Id., 44 P.U.R.(N.S.), p. 9. In determining the amount of accrued depletion and depreciation, the Commission, following Lindheimer v. Illinois Bell Telephone Co.,292 U. S. 151, 292 U. S. 167-169; Federal Power Commission v. Natural Gas Pipeline Co.,315 U. S. 575, 315 U. S. 592-593, based its computation on "actual legitimate cost." It found that Hope, during the years when its business was not under regulation, did not observe "sound depreciation and depletion practices," but "actually accumulated an excessive reserve" [Footnote 4] of about $46,000,000. Id., 44 P.U.R.(N.S.), p. 18. One member of the Commission thought that the entire amount of the reserve should be deducted from "actual legitimate cost" in determining the rate base. [Footnote 5] The majority of the

Page 320 U. S. 598

Commission concluded, however, that where, as here, a business is brought under regulation for the first time, and where incorrect depreciation and depletion practices have prevailed, the deduction of the reserve requirement (actual existing depreciation and depletion), rather than the excessive reserve, should be made so as to lay "a sound basis for future regulation and control of rates." Id., 44 P.U.R.(N.S.), p. 18. As we have pointed out, it determined accrued depletion and depreciation to be $22,328,016; and it allowed approximately $1,460,000 as the annual operating expense for depletion and depreciation. [Footnote 6]

Hope's estimate of original cost was about $69,735,000 -- approximately $17,000,000 more than the amount found by the Commission. The item of $17,000,000 was made up largely of expenditures which, prior to December 31, 1938, were charged to operating expenses. Chief among those expenditures was some $12,600,000 expended

Page 320 U. S. 599

in well drilling prior to 1923. Most of that sum was expended by Hope for labor, use of drilling rigs, hauling, and similar costs of well drilling. Prior to 1923, Hope followed the general practice of the natural gas industry and charged the cost of drilling wells to operating expenses. Hope continued that practice until the Public Service Commission of West Virginia, in 1923, required it to capitalize such expenditures, as does the Commission under its present Uniform System of Accounts. [Footnote 7] The Commission refused to add such items to the rate base, stating that

"No greater injustice to consumers could be done than to allow items as operating expenses and at a later date include them in the rate base, thereby placing multiple charges upon the consumers."

Id., 44 P.U.R.(N.S.), p. 12. For the same reason, the Commission excluded from the rate base about $1,600,000 of expenditures on properties which Hope acquired from other utilities, the latter having charged those payments to operating expenses. The Commission disallowed certain other overhead items amounting to over $3,000,000 which also had been previously charged to operating expenses. And it refused to add some $632,000 as interest during construction, since no interest was in fact paid.

Hope contended that it should be allowed a return of not less than 8%. The Commission found that an 8% return would be unreasonable, but that 6 1/2% was a fair rate of return. That rate of return, applied to the rate base of $33,712,526, would produce $2,191,314 annually, as compared with the present income of not less than $5,801,171.

The Circuit Court of Appeals set aside the order of the Commission for the following reasons. (1) It held that the rate base should reflect the "present fair value" of the

Page 320 U. S. 600

property, that the Commission, in determining the "value," should have considered reproduction cost and trended original cost, and that "actual legitimate cost" (prudent investment) was not the proper measure of "fair value" where price levels had changed since the investment. (2) It concluded that the well drilling costs and overhead items in the amount of some $17,000,000 should have been included in the rate base. (3) It held that accrued depletion and depreciation and the annual allowance for that expense should be computed on the basis of "present fair value" of the property, not on the basis of "actual legitimate cost."

The Circuit Court of Appeals also held that the Commission had no power to make findings as to past rates in aid of state regulation. But it concluded that those findings were proper as a step in the process of fixing future rates. Viewed in that light, however, the findings were deemed to be invalidated by the same errors which vitiated the findings on which the rate order was based.

Order Reducing Rates. Congress has provided in § 4(a) of the Natural Gas Act that all natural gas rates subject to the jurisdiction of the Commission "shall be just and reasonable, and any such rate or charge that is not just and reasonable is hereby declared to be unlawful." Sec. 5(a) gives the Commission the power, after hearing, to determine the "just and reasonable rate" to be thereafter observed and to fix the rate by order. Sec. 5(a) also empowers the Commission to order a "decrease where existing rates are unjust . . . unlawful, or are not the lowest reasonable rates." And Congress has provided in § 19(b) that, on review of these rate orders, the "finding of the Commission as to the facts, if supported by substantial evidence, shall be conclusive." Congress, however, has provided no formula by which the "just and reasonable" rate is to be determined. It has not filled in the

Page 320 U. S. 601

details of the general prescription [Footnote 8] of § 4(a) and § 5(a). It has not expressed in a specific rule the fixed principle of "just and reasonable."

When we sustained the constitutionality of the Natural Gas Act in the Natural Gas Pipeline Co. case, we stated that the

"authority of Congress to regulate the prices of commodities in interstate commerce is at least as great under the Fifth Amendment as is that of the states under the Fourteenth to regulate the prices of commodities in intrastate commerce."

315 U.S. p. 315 U. S. 582. Ratemaking is indeed but one species of price-fixing. Munn v. Illinois,94 U. S. 113, 94 U. S. 134. The fixing of prices, like other applications of the police power, may reduce the value of the property which is being regulated. But the fact that the value is reduced does not mean that the regulation is invalid. Block v. Hirsh,256 U. S. 135, 256 U. S. 155-157; Nebbia v. New York,291 U. S. 502, 291 U. S. 523-539, and cases cited. It does, however, indicate that "fair value" is the end product of the process of ratemaking, not the starting point, as the Circuit Court of Appeals held. The heart of the matter is that rates cannot be made to depend upon "fair value" when the value of the going enterprise depends on earnings under whatever rates may be anticipated. [Footnote 9]

Page 320 U. S. 602

We held in Federal Power Commission v. Natural Gas Pipeline Co., supra, that the Commission was not bound to the use of any single formula or combination of formulae in determining rates. Its ratemaking function, moreover, involves the making of "pragmatic adjustments." Id., p. 315 U. S. 586. And when the Commission's order is challenged in the courts, the question is whether that order, "viewed in its entirety," meets the requirements of the Act. Id., p. 315 U. S. 586. Under the statutory standard of "just and reasonable," it is the result reached, not the method employed, which is controlling. Cf. Los Angeles Gas & Electric Corp. v. Railroad Commission,289 U. S. 287, 289 U. S. 304-305, 289 U. S. 314; West Ohio Gas Co. v. Public Utilities Commission (No. 1),294 U. S. 63, 294 U. S. 70; West v. Chesapeake & Potomac Tel. Co.,295 U. S. 662, 295 U. S. 692-693 (dissenting opinion). It is not theory, but the impact of the rate order, which counts. 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. Moreover, the Commission's order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate order under the Act carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences. Cf. Railroad Commission v. Cumberland Tel. & T. Co.,212 U. S. 414; Lindheimer v. Illinois Bell Tel. Co., supra, pp. 292 U. S. 164, 292 U. S. 169; Railroad Commission v. Pacific Gas & Elec. Co.,302 U. S. 388, 302 U. S. 401.

Page 320 U. S. 603

The ratemaking process under the Act, i.e., the fixing of "just and reasonable" rates, involves a balancing of the investor and the consumer interests. Thus, we stated in the Natural Gas Pipeline Co. case that "regulation does not insure that the business shall produce net revenues." 315 U.S. p. 315 U. S. 590. But, such considerations aside, the investor interest has a legitimate concern with the financial integrity of the company whose rates are being regulated. From the investor or company point of view, it is important that there be enough revenue not only for operating expenses, but also for the capital costs of the business. These include service on the debt and dividends on the stock. Cf. Chicago & Grand Trunk R. Co. v. Wellman,143 U. S. 339, 143 U. S. 345-346. By that standard, the return to the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks. That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital. See Missouri ex rel. Southwestern Bell Tel. Co. v. Public Service Commission,262 U. S. 276, 262 U. S. 291 (Mr. Justice Brandeis concurring). The conditions under which more or less might be allowed are not important here. Nor is it important to this case to determine the various permissible ways in which any rate base on which the return is computed might be arrived at. For we are of the view that the end result in this case cannot be condemned under the Act as unjust and unreasonable from the investor or company viewpoint.

We have already noted that Hope is a wholly owned subsidiary of the Standard Oil Co. (N.J.). It has no securities outstanding except stock. All of that stock has been owned by Standard since 1908. The par amount presently outstanding is approximately $28,000,000, as compared with the rate base of $33,712,526 established by

Page 320 U. S. 604

the Commission. Of the total outstanding stock, $11,000,000 was issued in stock dividends. The balance, or about $17,000,000, was issued for cash or other assets. During the four decades of its operations, Hope has paid over $97,000,000 in cash dividends. It had, moreover, accumulated by 1940 an earned surplus of about $8,000,000. It had thus earned the total investment in the company nearly seven times. Down to 1940, it earned over 20% per year on the average annual amount of its capital stock issued for cash or other assets. On an average invested capital of some $23,000,000, Hope's average earnings have been about 12% a year. And, during this period, it had accumulated in addition reserves for depletion and depreciation of about $46,000,000. Furthermore, during 1939, 1940, and 1941, Hope paid dividends of 10% on its stock. And in the year 1942, during about half of which the lower rates were in effect, it paid dividends of 7 1/2%. From 1939-1942, its earned surplus increased from $5,250,000 to about $13,700,000, i.e., to almost half the par value of its outstanding stock.

As we have noted, the Commission fixed a rate of return which permits Hope to earn $2,191,314 annually. In determining that amount, it stressed the importance of maintaining the financial integrity of the company. It considered the financial history of Hope and a vast array of data bearing on the natural gas industry, related businesses, and general economic conditions. It noted that the yields on better issues of bonds of natural gas companies sold in the last few years were "close to 3 percent," 44 P.U.R.(N.S.), p. 33. It stated that the company was a "seasoned enterprise whose risks have been minimized" by adequate provisions for depletion and depreciation (past and present) with "concurrent high profits," by "protected established markets, through affiliated distribution companies, in populous and industrialized areas," and by a supply of gas locally to meet all requirements,

Page 320 U. S. 605

"except on certain peak days in the winter, which it is feasible to supplement in the future with gas from other sources." Id., 44 P.U.R.(N.S.), p. 33. The Commission concluded,

"The company's efficient management, established markets, financial record, affiliations, and its prospective business place it in a strong position to attract capital upon favorable terms when it is required."

Id., 44 P.U.R.(N.S.), p. 33.

In view of these various considerations, we cannot say that an annual return of $2,191,314 is not "just and reasonable" within the meaning of the Act. Rates which enable the company to operate successfully, to maintain its financial integrity, to attract capital, and to compensate its investors for the risks assumed certainly cannot be condemned as invalid, even though they might produce only a meager return on the so-called "fair value" rate base. In that connection, it will be recalled that Hope contended for a rate base of $66,000,000 computed on reproduction cost new. The Commission points out that, if that rate base were accepted, Hope's average rate of return for the four-year period from 1937-1940 would amount to 3.27%. During that period, Hope earned an annual average return of about 9% on the average investment. It asked for no rate increases. Its properties were well maintained and operated. As the Commission says, such a modest rate of 3.27% suggests an "inflation of the base on which the rate has been computed." Dayton Power & Light Co. v. Public Utilities Commission,292 U. S. 290, 292 U. S. 312. Cf. Lindheimer v. Illinois Bell Tel. Co., supra, p. 292 U. S. 164. The incongruity between the actual operations and the return computed on the basis of reproduction cost suggests that the Commission was wholly justified in rejecting the latter as the measure of the rate base.

In view of this disposition of the controversy, we need not stop to inquire whether the failure of the Commission to add the $17,000,000 of well drilling and other costs to

Page 320 U. S. 606

the rate base was consistent with the prudent investment theory as developed and applied in particular cases.

Only a word need be added respecting depletion and depreciation. We held in the Natural Gas Pipeline Co. case that there was no constitutional requirement "that the owner who embarks in a wasting-asset business of limited life shall receive at the end more than he has put into it." 315 U.S. p. 315 U. S. 593. The Circuit Court of Appeals did not think that that rule was applicable here, because Hope was a utility required to continue its service to the public and not scheduled to end its business on a day certain, as was stipulated to be true of the Natural Gas Pipeline Co. But that distinction is quite immaterial. The ultimate exhaustion of the supply is inevitable in the case of all natural gas companies. Moreover, this Court recognized in Lindheimer v. Illinois Bell Tel. Co., supra, the propriety of basing annual depreciation on cost. [Footnote 10] By such a procedure, the utility is made whole and the integrity of its investment maintained. [Footnote 11] No more is required. [Footnote 12] We cannot approve the contrary holding

Page 320 U. S. 607

of United Railways Co. v. West,280 U. S. 234, 280 U. S. 253-254. Since there are no constitutional requirements more exacting than the standards of the Act, a rate order which conforms to the latter does not run afoul of the former.

The Position of West Virginia. The State of West Virginia, as well as its Public Service Commission, intervened in the proceedings before the Commission and participated in the hearings before it. They have also filed a brief amicus curiae here, and have participated in the argument at the bar. Their contention is that the result achieved by the rate order "brings consequences which are unjust to West Virginia and its citizens" and which

"unfairly depress the value of gas, gas lands and gas leaseholds, unduly restrict development of their natural resources, and arbitrarily transfer their properties to the residents of other states without just compensation therefor."

West Virginia points out that the Hope Natural Gas Co. holds a large number of leases on both producing and unoperated properties. The owner or grantor receives from the operator or grantee delay rentals as compensation for postponed drilling. When a producing well is successfully brought in, the gas lease customarily continues indefinitely for the life of the field. In that case, the operator pays a stipulated gas well rental, or in some cases a gas royalty equivalent to one-eighth of the gas marketed. [Footnote 13] Both the owner and operator have valuable property interests in the gas which are separately taxable under West Virginia law. The contention is that the reversionary interests in the leaseholds should be represented in the rate proceedings, since it is their gas which is being sold in interstate

Page 320 U. S. 608

commerce. It is argued, moreover, that the owners of the reversionary interests should have the benefit of the "discovery value" of the gas leaseholds, not the interstate consumers. Furthermore, West Virginia contends that the Commission, in fixing a rate for natural gas produced in that State, should consider the effect of the rate order on the economy of West Virginia. It is pointed out that gas is a wasting asset with a rapidly diminishing supply. As a result, West Virginia's gas deposits are becoming increasingly valuable. Nevertheless the rate fixed by the Commission reduces that value. And that reduction, it is said, has severe repercussions on the economy of the State. It is argued, in the first place, that, as a result of this rate reduction, Hope's West Virginia property taxes may be decreased in view of the relevance which earnings have under West Virginia law in the assessment of property for tax purposes. [Footnote 14] Secondly, it is pointed out that West Virginia has a production tax [Footnote 15] on the "value" of the gas exported from the State. And we are told that, for purposes of that tax, "value" becomes, under West Virginia law, "practically the substantial equivalent of market value." Thus, West Virginia argues that undervaluation of Hope's gas leaseholds will cost the State many thousands of dollars in taxes. The effect, it is urged, is to impair West Virginia's tax structure for the benefit of Ohio and Pennsylvania consumers. West Virginia emphasizes, moreover, its deep interest in the conservation of its natural resources, including its natural gas. It says that a reduction of the value of these leasehold values will jeopardize these conservation policies in three respects: (1) exploratory development of new fields will be discouraged; (2) abandonment of low-yield high-cost marginal wells will be hastened; and (3) secondary recovery of oil will be hampered.

Page 320 U. S. 609

Furthermore, West Virginia contends that the reduced valuation will harm one of the great industries of the State, and that harm to that industry must inevitably affect the welfare of the citizens of the State. It is also pointed out that West Virginia has a large interest in coal and oil, as well as in gas, and that these forms of fuel are competitive. When the price of gas is materially cheapened, consumers turn to that fuel in preference to the others. As a result, this lowering of the price of natural gas will have the effect of depreciating the price of West Virginia coal and oil.

West Virginia insists that, in neglecting this aspect of the problem, the Commission failed to perform the function which Congress entrusted to it, and that the case should be remanded to the Commission for a modification of its order. [Footnote 16]

We have considered these contentions at length in view of the earnestness with which they have been urged upon us. We have searched the legislative history of the Natural Gas Act for any indication that Congress entrusted to the Commission the various considerations which West Virginia has advanced here. And our conclusion is that Congress did not.

We pointed out in Illinois Natural Gas Co. v. Central Illinois Public Service Co.,314 U. S. 498, 314 U. S. 506, that the purpose of the Natural Gas Act was to provide,

"through the exercise of the national power over interstate commerce, an agency for regulating the wholesale distribution to public service companies of natural gas moving interstate, which this Court had declared to be interstate commerce not subject to certain types of state regulation."

As stated in the House Report, the "basic purpose" of this legislation was "to occupy" the field in which such cases as Missouri v.

Page 320 U. S. 610

Kansas Natural Gas Co.,265 U. S. 298, and Public Utilities Commission v. Attleboro Steam & Electric Co.,273 U. S. 83, had held the States might not act. H.Rep. No. 709, 75th Cong., 1st Sess., p. 2. In accomplishing that purpose, the bill was designed to take "no authority from State commissions," and was "so drawn as to complement, and in no manner usurp, State regulatory authority." Id., p. 2. And the Federal Power Commission was given no authority over the "production or gathering of natural gas." § 1(b).

The primary aim of this legislation was to protect consumers against exploitation at the lands of natural gas companies. Due to the hiatus in regulation which resulted from the Kansas Natural Gas Co. case and related decisions state commissions found it difficult or impossible to discover what it cost interstate pipeline companies to deliver gas within the consuming states; and thus they were thwarted in local regulation. H.Rep., No. 709, supra, p. 3. Moreover, the investigations of the Federal Trade Commission had disclosed that the majority of the pipeline mileage in the country used to transport natural gas, together with an increasing percentage of the natural gas supply for pipeline transportation, had been acquired by a handful of holding companies. [Footnote 17] State commissions, independent producers, and communities having or seeking the service were growing quite helpless against these combinations. [Footnote 18] These were the types of problems with which those participating in the hearings were preoccupied. [Footnote 19] Congress addressed itself to those specific evils.

Page 320 U. S. 611

The Federal Power Commission was given broad powers of regulation. The fixing of "just and reasonable" rates (§ 4) with the powers attendant thereto [Footnote 20] was the heart of the new regulatory system. Moreover, the Commission was given certain authority by § 7(a), on a finding that the action was necessary or desirable "in the public interest," to require natural gas companies to extend or improve their transportation facilities and to sell gas to any authorized local distributor. By § 7(b), it was given control over the abandonment of facilities or of service. And by § 7(c), as originally enacted, no natural gas company could undertake the construction or extension of any facilities for the transportation of natural gas to a market in which natural gas was already being served by another company, or sell any natural gas in such a market, without obtaining a certificate of public convenience and necessity from the Commission. In passing on such applications for certificates of convenience and necessity, the Commission was told by § 7(c), as originally enacted, that it was

"the intention of Congress that natural gas shall be sold in interstate commerce for resale for ultimate public consumption for domestic, commercial, industrial, or any other use at the lowest possible reasonable rate consistent with the maintenance of adequate service in the public interest."

The latter provision was deleted from § 7(c) when that subsection was amended by the Act of February 7, 1942, 56 Stat. 83. By that amendment, limited grandfather rights were granted companies desiring to extend their facilities and services over the routes or within the area which they were already serving. Moreover, § 7(c) was broadened so as to require certificates

Page 320 U. S. 612

of public convenience and necessity not only where the extensions were being made to markets in which natural gas was already being sold by another company, but in other situations as well.

These provisions were plainly designed to protect the consumer interests against exploitation at the hands of private natural gas companies. When it comes to cases of abandonment or of extensions of facilities or service, we may assume that, apart from the express exemptions [Footnote 21] contained in § 7, considerations of conservation are material to the issuance of certificates of public convenience and necessity. But the Commission was not asked here for a certificate of public convenience and necessity under § 7 for any proposed construction or extension. It was faced with a determination of the amount which a private operator should be allowed to earn from the sale of natural gas across state lines through an established distribution system. Secs. 4 and 5, not § 7, provide the standards for that determination. We cannot find in the words of the Act or in its history the slightest intimation or suggestion that the exploitation of consumers by private operators through the maintenance of high rates should be allowed to continue provided the producing states obtain indirect benefits from it. That apparently was the Commission's view of the matter, for the same arguments advanced here were presented to the Commission and not adopted by it.

We do not mean to suggest that Congress was unmindful of the interests of the producing states in their natural gas supplies when it drafted the Natural Gas Act. As we have said, the Act does not intrude on the domain traditionally reserved for control by state commissions, and the Federal Power Commission was given no authority over

Page 320 U. S. 613

"the production or gathering of natural gas." § 1(b). In addition, Congress recognized the legitimate interests of the States in the conservation of natural gas. By § 11, Congress instructed the Commission to make reports on compacts between two or more States dealing with the conservation, production and transportation of natural gas. [Footnote 22] The Commission was also directed to recommend further legislation appropriate or necessary to carry out any proposed compact and "to aid in the conservation of natural gas resources within the United States and in the orderly, equitable, and economic production, transportation, and distribution of natural gas." § 11(a). Thus, Congress was quite aware of the interests of the producing states in their natural gas supplies. [Footnote 23] But it left the protection of

Page 320 U. S. 614

those interests to measures other than the maintenance of high rates to private companies. If the Commission is to be compelled to let the stockholders of natural gas companies have a feast so that the producing states may receive crumbs from that table, the present Act must be redesigned. Such a project raises questions of policy which go beyond our province.

It is hardly necessary to add that a limitation on the net earnings of a natural gas company from its interstate business is not a limitation on the power of the producing state either to safeguard its tax revenues from that industry [Footnote 24] or to protect the interests of those who sell their gas to the interstate operator. [Footnote 25] The return which the Commission

Page 320 U. S. 615

allowed was the net return after all such charges.

It is suggested that the Commission has failed to perform its duty under the Act in that it has not allowed a return for gas production that will be enough to induce private enterprise to perform completely and efficiently its functions for the public. The Commission, however, was not oblivious of those matters. It considered them. It allowed, for example, delay rentals and exploration and development costs in operating expenses. [Footnote 26] No serious attempt has been made here to show that they are inadequate. We certainly cannot say that they are, unless we are to substitute our opinions for the expert judgment of the administrators to whom Congress entrusted the decision. Moreover, if, in light of experience, they turn out to be inadequate for development of new sources of supply, the doors of the Commission are open for increased allowances. This is not an order for all time. The Act contains machinery for obtaining rate adjustments. § 4.

But it is said that the Commission placed too low a rate on gas for industrial purposes as compared with gas for domestic purposes, and that industrial uses should be discouraged. It should be noted in the first place that the rates which the Commission has fixed are Hope's interstate wholesale rates to distributors not interstate rates to industrial users [Footnote 27] and domestic consumers. We hardly

Page 320 U. S. 616

can assume, in view of the history of the Act and its provisions, that the resales intrastate by the customer companies which distribute the gas to ultimate consumers in Ohio and Pennsylvania are subject to the ratemaking powers of the Commission. [Footnote 28] But, in any event, those rates are not in issue here. Moreover, we fail to find in the power to fix "just and reasonable" rates the power to fix rates which will disallow or discourage resales for industrial use. The Committee Report stated that the Act provided "for regulation along recognized and more or less standardized lines," and that there was "nothing novel in its provisions." H.Rep.No.709, supra, p. 3. Yet if we are now to tell the Commission to fix the rates so as to discourage particular uses, we would indeed be injecting into a rate case a "novel" doctrine which has no express statutory sanction. The same would be true if we were to hold that the wasting-asset nature of the industry required the maintenance of the level of rates so that natural gas companies could make a greater profit on each unit of gas sold. Such theories of ratemaking for this industry may or may not be desirable. The difficulty is that § 4(a) and § 5(a) contain only the conventional standards of ratemaking for natural gas companies. [Footnote 29] The

Page 320 U. S. 617

Act of February 7, 1942, by broadening § 7 gave the Commission some additional authority to deal with the conservation aspects of the problem. [Footnote 30] But § 4(a) and § 5(a) were not changed. If the standard of "just and reasonable" is to sanction the maintenance of high rates by a natural gas company because they restrict the use of natural gas for certain purposes, the Act must be further amended.

It is finally suggested that the rates charged by Hope are discriminatory as against domestic users and in favor of industrial users. That charge is apparently based on § 4(b) of the Act, which forbids natural gas companies from maintaining

"any unreasonable difference in rates, charges, service, facilities, or in any other respect, either as between localities or as between classes of service."

The power of the Commission to eliminate any such unreasonable differences or discriminations is plain. § 5(a). The Commission, however, made no findings under § 4(b). Its failure in that regard was not challenged in the petition to review. And it has not been raised or argued here by any party. Hence, the problem of discrimination has no proper place in the present decision. It will be time enough to pass on that issue when it is presented to us. Congress has entrusted the administration of the Act to the Commission, not to the courts. Apart from the requirements of judicial review, it is not

Page 320 U. S. 618

for us to advise the Commission how to discharge its functions.

Findings as to the Lawfulness of Past Rates. As we have noted, the Commission made certain findings as to the lawfulness of past rates which Hope had charged its interstate customers. Those findings were made on the complaint of the City of Cleveland and in aid of state regulation. It is conceded that, under the Act, the Commission has no power to make reparation orders. And its power to fix rates admittedly is limited to those "to be thereafter observed and in force." § 5(a). But the Commission maintains that it has the power to make findings as to the lawfulness of past rates even though it has no power to fix those rates. [Footnote 31] However that may be, we do not think that these findings were reviewable under § 19(b) of the Act. That section gives any party "aggrieved by an order" of the Commission a review "of such order" in the circuit court of appeals for the circuit where the natural gas company is located or has its principal place of business or in the United States Court of Appeals for the District of Columbia. We do not think that the findings in question fall within that category.

The Court recently summarized the various types of administrative action or determination reviewable as orders under the Urgent Deficiencies Act of October 22,

Page 320 U. S. 619

1913, 28 U.S.C. §§ 45, 47a, and kindred statutory provisions. Rochester Telephone Corp. v. United States,307 U. S. 125. It was there pointed out that where

"the order sought to be reviewed does not of itself adversely affect complainant, but only affects his rights adversely on the contingency of future administrative action,"

it is not reviewable. Id., 307 U.S. p. 307 U. S. 130. The Court said,

"In view of traditional conceptions of federal judicial power, resort to the courts in these situations is either premature or wholly beyond their province."

Id., p. 307 U. S. 130. And see United States v. Los Angeles & S.L. R. Co.,273 U. S. 299, 273 U. S. 309-310; Shannahan v. United States,303 U. S. 596. These considerations are apposite here. The Commission has no authority to enforce these findings. They are "the exercise solely of the function of investigation." United States v. Los Angeles & S.L. R. Co., supra, p. 273 U. S. 310. They are only a preliminary, interim step towards possible future action -- action not by the Commission, but by wholly independent agencies. The outcome of those proceedings may turn on factors other than these findings. These findings may never result in the respondent feeling the pinch of administrative action.

Reversed.

MR. JUSTICE ROBERTS took no part in the consideration or decision of this case.

* Together with No. 35, City of Cleveland v. Hope Natural Gas Co., also on writ of certiorari to the Circuit Court of Appeals for the Fourth Circuit.

[Footnote 1]

Hope produces about one-third of its annual gas requirements and purchases the rest under some 300 contracts.

[Footnote 2]

These five companies are the East Ohio Gas Co., the Peoples Natural Gas Co., the River Gas Co., the Fayette County Gas Co., and the Manufacturers Light & Heat Co. The first three of these companies are, like Hope, subsidiaries of Standard Oil Co. (N.J.). East Ohio and River distribute gas in Ohio, the other three in Pennsylvania. Hope's approximate sales in m.c.f. for 1940 may be classified as follows:

Local West Virginia sales . . . 11,000,000

East Ohio . . . . . . . . . . . 40,000,000

Peoples . . . . . . . . . . . . 10,000,000

River . . . . . . . . . . . . . 400,000

Fayette . . . . . . . . . . . . 860,000

Manufacturers . . . . . . . . . 2,000,000

Hope's natural gas is processed by Hope Construction & Refining Co., an affiliate, for the extraction of gasoline and butane. Domestic Coke Corp., another affiliate, sells coke oven gas to Hope for boiler fuel.

[Footnote 3]

These required minimum reductions of 7

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