1. In fixing the rates of a gas distributing company, the State
is not bound to allow as operating expenses the full amounts paid
for gas supplied the distributor under a contract between it and a
closely affiliated seller, but may inquire into the reasonableness
of the contract price. P. 292 U. S.
2. To prove that a lower allowance, found reasonable by the
state authorities, resulted in a confiscatory rate, the distributor
in this case was under the burden of showing that, in its
transactions with the affiliated seller, which was itself subject
to rate regulation, the contract price was no higher than would
fairly be payable in a regulated business by a buyer unrelated to
the seller and dealing at arms length. Pp. 292 U. S. 295
292 U. S.
3. Where a gas distributing company claimed that a rate fixed by
a State was confiscatory, upon the ground that the allowance made
for purchase of its gas supply from an affiliated producing company
and chargeable to its operating expenses was inadequate, and this
question turned upon the value of leases of gas land held by the
affiliate, which were appraised by the state authorities at more
than book value, held
that the burden of proving such
appraisal so inadequate as to result in confiscation through its
effect upon the rate was not sustained by evidence consisting (a)
of testimony of friendly experts who gave widely variant estimates
based on forecasts of production capacity and on the assumption
that the product would be sold in an unregulated market, and (b)
actual sales of other gas leaseholds in sporadic transactions,
Page 292 U. S. 291
time and place, and at prices too disparate to supply a helpful
test of value. United Fuel Gas Co. v. Railroad Comm'n,
278 U. S. 200
292 U. S.
4. Allowance for amortization and depletion of operated gas
leaseholds and of the well structures and equipment used in
connection therewith held
not only adequate, but
excessive, due to an overestimate of the value of such leaseholds
and an underestimate of the life expectancy of the supply from the
wells and from other sources not as yet tapped but available for
the future. P. 292 U. S.
5. Estimate made by the state commission of accrued depreciation
of wells and equipment of the affiliated gas producing company, and
allowances for maintenance of its other plant and for depreciation
of property of the distributing company considered and upheld. P.
292 U. S.
6. Any excess in estimated accrued depreciation of gas wells and
equipment in this case is offset by excess in allowance for
amortization and depletion. P. 292 U. S.
7. "Delay rentals" paid by a producing gas company to keep alive
leases of gas land held in reserve should not be charged to
operating expenses when an annual amortization allowance makes
provision whereby new leases can be acquired and paid for out of
current earnings. P. 292 U. S.
8. In deciding upon the reasonableness of a price for gas
charged by a producing company to an affiliated distributing
company, the state commission was not concluded by evidence of
prices between producers and distributors in other cities when the
prices were not uniform and the conditions affecting cost of
transportation and delivery were not shown and, for all that
appeared, the buyers and sellers were parts of the same system of
affiliated companies. P. 292 U. S.
9. The burden is upon the public utility to sustain the fairness
of payments for the managerial service of an affiliated company,
which it makes to the affiliate and charges to its own operating
expenses, and which have been found excessive by the public
ratemaking authority in fixing its rates. P. 292 U. S.
10. Failure to make an allowance for going value in addition to
the valuation of the assets upon the basis of a plant in successful
operation, was not unreasonable or arbitrary in this case in view
of the smallness of the company and the simplicity of its
organization. P. 292 U. S.
11. Refusal of a state commission to make allowances for
conjectural organization or pre-construction costs, and costs of
Page 292 U. S. 292
the business, as part of the hypothetical expense of
no ground for declaring rates
confiscatory in this case. P. 292 U. S.
12. Rate of return of 6 1/2% for a distributing gas company
adequate in view of business conditions judicially
noticed. P. 292 U. S.
13. When a gas company, resisting a rate reduction, adduces
valuations purporting to show that the rates which it has been
receiving and those which it seeks to put into effect, as well as
the prices at which it buys gas from an affiliate, are all greatly
below the level of a fair return, the argument proves too much, and
the valuation are discredited by the test of experience, since, in
the absence of extraordinary conditions, not proved to exist,
business is not voluntarily transacted at confiscatory rates. P.
292 U. S.
127 Oh.St. 137, 187 N.E. 18, affirmed.
Appeal from a judgment which affirmed an order of the Public
Utilities Commission of Ohio by which a schedule of increased rates
filed by the appellant Gas Company was stricken and the Company was
enjoined from putting it into effect.
MR. JUSTICE CARDOZO delivered the opinion of the Court.
The Dayton Power & Light Company, an Ohio corporation, is
here as appellant challenging the validity of an order of the
Public Utilities Commission of Ohio, affirmed by the Supreme Court
of that state, which prescribes the rates chargeable to consumers
of natural gas.
The appellant is a distributing company, producing no gas and
owning no wells. The gas that it distributes it buys from the Ohio
Fuel Gas Company, an affiliated corporation, delivery being made to
it by the seller at the
Page 292 U. S. 293
gateways of the towns and cities where its mains and service
pipes are laid. Both seller and buyer are subsidiaries of the
Columbia Gas & Electric Corporation, which owns the entire
capital stock of each of them, as well as that of other companies
producing in other fields or distributing in other cities.
On June 17, 1929, the appellant filed with the commission a new
schedule of "rates and prices" to take effect 30 days later unless
suspended or annulled. The average rate of increase was 5.67 cents
per thousand cubic feet. Under the authority of statute (Pence Law,
110 Ohio Laws, p. 366, General Code, § 614-20), the Commission
suspended the operation of the new schedule for 120 days, and at
the same time initiated an inquiry of its own motion as to the
fairness of the increase. The proceedings being undetermined at the
end of the period of suspension, the statute permitted the
appellant to put the schedule into effect at once upon filing a
bond securing the repayment to the consumers of such portion of the
increased rate as the Commission, upon final hearing, might
determine to have been unreasonable or excessive. Such a bond was
given on October 9, 1929. The proceeding was then continued, but a
decision was not announced till November 3, 1932. There had been a
pause in the hearings to await the final submission of the
testimony in the case of the Columbus Gas & Fuel Company, an
affiliated corporation serving other territory. Much of the
testimony in that case was read into the record by stipulation as
testimony in this. Upon the record thus supplemented, the
Commission announced its decision that the revenues under the
earlier schedule were sufficient to yield a yearly net return of 6
1/2% upon the fair value of the property, that this return was
reasonable, and that more must not be charged. An order was
therefore made striking the new schedule from the files of the
Page 292 U. S. 294
restraining the appellant from collecting the higher rates, and
directing as to the past that the difference between the old rates
and the new ones, with 6% interest, be refunded to consumers in
accordance with the bond. Upon appeal to the Supreme Court of Ohio,
the order was affirmed, 127 Ohio St. 137, 187 N.E. 18, against the
protest of the appellant that there had been an infringement of its
privileges and immunities under the Constitution of the United
States. Amendment XIV; Article I, § 10. Upon appeal to this Court,
Judicial Code, § 237(a), 28 U.S.C. § 344, the protest is
At the threshold, there is a controversy as to the scope of the
problem before us for solution. The appellee argues that the only
question for the Commission was one as to the reasonableness of the
new schedule in the very form proposed: let the rates be excessive
by ever so little, the schedule, it is said, was to be rejected
altogether, and no other could be substituted. In opposition, the
appellant urges that this is too narrow a construction of the
function and powers of the Commission under the applicable statute:
if the proposed schedule was too high and the earlier one too low,
there was a duty to fix a rate between, and thereby make the
compensation adequate. We accept this broader view in the absence
of a ruling to the contrary by the courts of the state. It is borne
out by the terms of the bond and by the requirements of the statute
under which the bond was given: such part of the new collections as
shall be found to be unreasonable -- that and no more -- is to be
refunded to the customers. It is borne out again by the findings
and the order: the rate is to be returned to what it had been
before the change, and the difference repaid. Finally, it is borne
out by the opinion of the state court, which considers upon the
merits the objections enumerated by the appellant in its petition
to review the order of the Commission and finds them all to be
Page 292 U. S. 295
With the field of inquiry thus charted, we turn to the
objections in the effort to determine whether separately or
collectively they support the claim of confiscation.
They fall into three classes: (1) objections to the computation
of operating expenses, (2) objections to the valuation of the
property making up the rate base, and (3) objections to the rate
First. Objections to the computation of operating
The chief item of controversy under this head is the price
payable to the affiliated seller for gas delivered at the
The contract between the appellant and the Ohio Fuel Gas Company
called for payment at the rate of 45 cents per thousand cubic feet;
the Commission found this price to be excessive to the extent of 6
cents, thereby reducing to 39 cents the allowance to be made as a
proper operating expense. [Footnote
] There is no doubt under the decisions of the court that the
Commission was not concluded by the price fixed in the agreement.
This results from the relation of intimate alliance between the
buyer and the seller. They were not dealing with each other at
arm's length, and the prices that they fixed in their inter-company
transactions were of no concern to the consumer unless kept within
the bounds of reason. Western Distributing Co. v. Public
Service Commission of Kansas, 285 U.
; Smith v. Illinois Bell Telephone Co.,
282 U. S. 133
United Fuel Gas Co. v. Railroad Commission of Kentucky,
278 U. S. 300
278 U. S. 320
Whether the bounds were overpassed or heeded is next to be
1. First in order of importance is the value of the gas
Page 292 U. S. 296
The Ohio company, the seller, does not own its fields in fee. It
does own leases covering nearly 3,000,000 acres in Ohio and
elsewhere. Some of these it uses as a source of supply to meet the
present needs of customers. Others are held as a standby for the
future. Are all to be included in determining the base on which a
fair price is to be reckoned? Are some to be ruled out until the
wells now in use are wholly depleted, or until depletion is near at
hand? If some or all are to be included, what shall be the
principle of appraisal? Shall it be market value, or value as shown
by the books, or some compromise between them?
These and like questions have been much debated in the opinions
below and in the arguments of counsel. They suggest interesting and
important problems in the process of ratemaking for companies with
wasting assets. When regard is had, however, to what has been done
by the Commission and the state court, as distinguished from what
has been said, the case assumes another aspect. Much of the debate
is then perceived to be irrelevant to the issue of confiscation
-- confiscation, that is to say, of the property
interests of the appellant -- which, in ultimate analysis, is the
only issue to be determined. To bring this out more clearly, there
is need to amplify the statement of the subject matter to be
valued, and the mode of valuation.
The leaseholds, operated and unoperated, are grouped into four
classes. Class No. 1 (291,396 acres) is made up of "tracts of land
having producing gas wells drilled thereon from which gas is being
furnished to the public." Class No. 2 (164,739 acres, unoperated)
is made up of
"tracts of land proved by actual developments and operations in
the immediate vicinity thereof to be good gas-producing lands, but
which do not have any producing wells drilled thereon."
Class No. 3 (312,631 acres, unoperated) is made up of
"tracts of land shown by surrounding
Page 292 U. S. 297
or neighboring developments of operations, geological
considerations, etc., to be reasonably certain to be good gas land
at least as to large portions thereof, but not yet demonstrated to
be such by actual drilling."
Class No. 4 (2,065,421 acres, unoperated) is made up of
"tracts of land situate within the areas of territory where gas
sands are known or assumed to exist from general geological
conditions, but which are so remote from actual gas-producing wells
or territory that they are merely prospective gas lands."
The Commission has stated in its opinion that the leases in
class No. 1 are the only ones that are presently "used and useful"
in the public business of the owner, and hence the only ones to be
valued in estimating a fair return. [Footnote 2
] The Commission has also stated, in effect,
that there was no satisfactory evidence before it either of market
or of intrinsic value for any portion of the acreage. This is what
was said, but what was done was different. The value of the 291,396
acres in class No. 1 was $1,569,479 on the basis of their original
cost, with certain overheads and expenses added; the book value of
the other classes, after deducting what is found to have been an
arbitrary write-up of about $3,700,000, was $3,160,765, a total for
all classes of $4,730,244. [Footnote 3
] Instead of resorting to those tests, the
Commission made an allowance of $25 per acre for the 291,396 acres
in class No. 1, selecting that figure because it had been approved
by the Supreme Court
Page 292 U. S. 298
of Ohio in another litigation affecting part of the same lands.
Logan Gas Co. v. Public Utilities Comm'n,
124 Ohio St.
248, 177 N.E. 587. The result was an appraisal of $7,284,900, which
was about $2,500,000 more than the book value of all the leases in
classes 1 to 4, inclusive. On appeal, this method of valuation did
not pass without impeachment. The Supreme Court of Ohio said in its
opinion (Columbus Gas & Fuel Co. v. Public Utilities
Commission of Ohio,
127 Ohio St. 109, 187 N.E. 7; Dayton
Power & Light Co. v. Public Utilities Commission of Ohio,
127 Ohio St. 137, 187 N.E. 18) that the appraisal at the rate of
$25 per acre was too high, and that the limit of the allowance
should have been the book value of the leases in class No. 1. Once
more there must be a distinction between what was said and what was
done. Criticizing the appraisal of the Commission as overliberal to
the company, the court affirmed the order which had been made on
the assumption that there should be an allowance of $7,284,900
because of the ownership of leases. The appellant may not prevail
unless there has been error in the result, as well as error in the
reasoning. Is the appraisal of the leases at over $7,000,000 an
arbitrary act, which in turn has brought about an arbitrary
rejection of the contract for gas delivered at the gates, and hence
an infringement of constitutional immunities?
As to that issue, the burden of proof rests heavily on the
appellant. Los Angeles Gas & Electric Corp. v. Railroad
Commission of California, 289 U. S. 287
289 U. S.
-305. In the endeavor to sustain it, there has been
an attempt to establish market and intrinsic values by the
estimates of experts as well as by actual sales.
Webber, a witness for the appellant, placed the value of the
leases in class No. 1 at $11,473,717; Meals at $17,483,760; Wittmer
at $21,825,000, and Dally at $26,225,640. For class No. 2, the
estimates were: (Webber) $10,440,300;
Page 292 U. S. 299
(Meals) $9,884,340; (Wittmer) $12,300,000; (Dally) $16,473,900.
For class No. 3: (Webber) $10,504,320; (Meals) $1,250,524;
(Wittmer) $3,120,000; (Dally) $6,252,620. For class No. 4: (Webber)
$6,196,263; (Meals) $8,261,684; (Wittmer) $6, 195,000; (Dally)
$4,130,842. Variations so wide are sufficient of themselves to
disprove the existence of a market in the strict or proper sense.
Sinclair Refining Co. v. Jenkins Petroleum Process Co.,
289 U. S. 689
289 U. S.
-699. If they have any probative effect, it is that
of expressions of opinion by men familiar with the gas business and
its opportunities for profit. But plainly opinions thus offered,
even if entitled to some weight, have no such conclusive force that
there is error of law in refusing to follow them. This is true of
opinion evidence generally, whether addressed to a jury, Head
v. Hargrave, 105 U. S. 45
105 U. S. 49
to a judge, The Conqueror, 166 U.
, 166 U. S.
-133; or to a statutory board, Uncasville Mfg.
Co. v. Commissioner,
55 F.2d 893, 897; Tracy v.
53 F.2d 575, 577; Anchor Co., Inc. v.
42 F.2d 99, 100; Gloyd v. Commissioner,
63 F.2d 649, 650. There are reasons why the principle has special
application here. In the first place, the intrinsic value of the
leases is dependent upon the capacity of the lands to yield
productive wells, a capacity seldom to be judged with even a fair
approach to certainty until tested by experience. Natural Gas
Co. of W.Va. v. Public Service Comm'n,
95 W.Va. 557, 569, 121
S.E. 716. In the second place, the profits to be earned in a
regulated business must vary with the rates established by the
supervising agencies of government, with the result that
prophecies, however, radiant, may be upset over night by the
publication of a lower schedule. The witnesses for the appellant
were alive to these possibilities of surprise and disappointment,
and there are admissions that their chief interest was in an
unregulated market. To these perturbing tendencies, all operating
Page 292 U. S. 300
the persuasive force of their opinions, there must be added
still another -- that of interest or bias, conscious or
unconscious. Webber, a broker, was a stockholder in the Columbia
Gas & Electric Company, the parent corporation. For fifteen
years, he had been in the service of the Ohio Fuel Supply Company,
the predecessor of the Ohio Fuel Gas Company. He had been a witness
for the appellant in other litigations. Meals was the president of
a gas company, had been engaged in the gas business for over forty
years, and had testified in other suits. Wittmer was the owner of
gas fields, and sold his gas to the Ohio Fuel Gas Company and
affiliated corporations. Dally was in the same position. The
testimony of all is subject to the infirmities that were pointed
out by this Court in another rate controversy involving fields in
West Virginia. United Fuel Gas Co. v. Railroad Commission of
Kentucky, 278 U. S. 300
278 U. S. 316
It is not based, at least to a controlling extent, "on prevailing
prices for gas leases or on actual sales." It is based upon
"an estimated or assumed exhaustible supply of gas available to
appellants until exhausted, and upon a predictable price for
natural gas in unregulated markets"
through a future period of years. Cf. City of Charleston v.
Public Service Comm'n,
110 W.Va. 245, 159 S.E. 38. How
uncertain are the data can be gathered from the variant
The appellant has attempted to correct these uncertainties by
supplementing the opinions of its experts with testimony of actual
sales. But they were sporadic transactions, separate in time and
space, and at prices too disparate to supply a helpful test of
value. Thus, in 1929, Wittmer sold 101,600 acres of Ohio leaseholds
to the Penn-Ohio Gas Company for $1,085,000, and in the same year
bought 7,000 acres for $100,000. About the same time, Meals made a
sale of 21,000 acres for $2,500,000. Dally had made purchases at
prices ranging from $2 an acre for leaseholds of the quality of
class No. 4 up to $50 or $75 an acre
Page 292 U. S. 301
for leaseholds of a higher grade. Over against the evidence of
these prices must be set the evidence that class No. 1 leases,
acquired by the appellant in 1927, 1928, and 1929, had been bought
at an average price of $2.05 an acre, and, if three leases be
excluded, at an average of 62 1/4 cents an acre. Then too, there
are quantitative considerations that are not to be ignored. For the
most part, the prices stated by the appellant's witnesses had been
paid for small tracts, if comparison be made with the vast and
often unproved acres in controversy here. Nor is there any such
uniformity of price as to suggest the existence of a standard.
Meals sold 21,000 acres for more than Wittmer sold a tract almost
five times as large. Indeed, the truth becomes obvious when one
reads the testimony as a whole that the prices upon sales were
playing a subordinate role, and that the ultimate appraisal was a
forecast of productive power. Granting even that the testimony had
an evidential value, it had that and nothing more. It had no such
commanding quality as to apply coercion to the judgment of the
appointed triers of the facts, and exclude every choice but
We do not attempt to determine upon this record whether the
Commission and the state court were in error in expressing the
opinion that only class No. 1 leases should have a place in the
appraisal. On the one side, it is argued (cf. Wichita Gas Co.
v. Public Service Comm'n, 2 F. Supp.
, 799) that the discretion of the owner as to the extent of
the reserve essential for prudent management ought not to be
overridden by a court unless proved by convincing testimony to have
been fraudulent or arbitrary. On the other side, it is argued
(cf. Wichita Gas Co. v. Public Service Comm'n, supra,
816; United Fuel Gas Co. v. Public Service
Comm'n, 14 F.2d
, 221) that the value of reserve leases acquired by the
owner to supply the needs of a remote future are not a part of the
rate base upon which profits are presently to be earned at
Page 292 U. S. 302
the cost of the consuming public, though they may be brought
into the base afterwards when the time to use them is at hand.
Moreover, the very reason for including in operating expenses a
depletion allowance that will amortize wasting assets is to make
provision for a fund out of which capital may be replenished by the
purchase of other leases if that use is thought to be preferable to
dividing the fund among the shareholders and winding up the
business. These and other arguments we put aside without expression
of a choice, and this for the reason that the case, as it has
shaped itself, does not require us to weigh them. Again we
emphasize the distinction between dictum and decision. If that
distinction is observed, the upshot of the case is seen to be that
the Supreme Court of Ohio, with authority to revise the findings of
the Commission in respect of fact and law (Hocking Valley Ry.
Co. v. Public Utilities Comm'n,
100 Ohio St. 321, 326, 327,
126 N.E. 397), has disapproved the appraisal of the No. 1
leaseholds at $25 an acre, has found the testimony insufficient to
establish a value beyond that shown by the books, but has
nonetheless upheld an order whereby rates have been fixed upon the
basis of the book value of leases of every class (numbers 1 to 4,
inclusive), and $2,500,000 besides. If the evidence would have been
adequate to uphold a lower rate, a fortiori
adequate to uphold the rate prescribed. Plainly in all this there
has been no infringement of constitutional immunities unless a
higher value has been made out by evidence too strong to be
rejected. But, for reasons already stated, the evidence is lacking
in that high coercive power. Court and Commission were free in
their discretion to reject as unsatisfactory the conflicting
opinions of a group of friendly experts. They were free in their
discretion to refuse to draw an inference of value from the prices
stated to have been paid upon a few purchases and sales. If those
data were unacceptable, the only
Page 292 U. S. 303
others left were the entries in the books, and these perforce
were followed for lack of anything better. The result is to
reproduce the situation that was found and commented on in a suit
by the United Fuel Gas Company, an affiliated corporation.
United Fuel Gas Co. v. Railroad Commission of Kentucky,
278 U. S. 300
278 U. S.
"On the record as made, appellants have failed to present any
convincing evidence of value of their gas field which would enable
us to assign to it any greater value than that which they appear to
have assigned to it on their books. This book value therefore may
be accepted not as evidence of the real value of the gas field, but
as an assumed value named by the appellants which, on the evidence
presented, cannot reasonably be fixed at any higher figure."
Cf. United Fuel Gas Co. v. Public Service Commission of West
Virginia, 278 U. S. 322
278 U. S.
2. Amortization and depletion.
In determining the price to be paid by the appellant for gas
delivered at the gates, the Commission included among the operating
expenses of the affiliated seller an annual allowance of $4,158,954
to amortize the value of leaseholds No. 1 (the only leaseholds then
in use) and of the well structures and equipment used in connection
therewith, and thus provide a fund that would restore the depleted
capital when the gas had been exhausted.
The Supreme Court of Ohio expressed the view in its opinion that
this allowance was not permissible under the statutes of the state.
Nonetheless, it affirmed the order of the Commission which fixed
the rate of gas on the assumption that a charge for amortization
was properly included in the operating expenses. In such
circumstances, the appellant is not aggrieved through the
expression of a belief that the rate would have been lawful if the
charge had been omitted.
The amount of the allowance is adequate, and even liberal. It
was made on the assumption (1) that the value
Page 292 U. S. 304
of the gas fields in class No. 1 was $25 an acre, and (2) that
the life expectancy of the contents of the wells and of the
appurtenant structures and equipment was only three years and two
months. Both assumptions are erroneous, though the error results to
the appellant's benefit. As to assumption (1), the state court has
held that there is no satisfactory evidence of the value of the
leases in class No. 1 in excess of the value assigned to them upon
the books. A depletion allowance must therefore be excessive if it
is made in the belief that a value of $25 per acre is the amount to
be restored. As to assumption (2), there has been an underestimate
of the life expectancy of the gas content of the wells, resulting
once more in an exaggerated allowance for inroads upon capital. The
prediction may have been correct in respect of the wells already
driven and in use, though this is far from certain, but it was
certainly too low if expectancy is to be measured by sources of
supply in the 291,000 acres that had never been tapped and were
available for the future.
The effect of these errors, and indeed of the first of them
alone, without attempting to estimate the consequences of the
second, is to make the amortization charge excessive to the extent
of $761,098.50. In figuring the charge, the present value of the
leases was treated as 41.8874% of $7,284,900, or $3,051,455; that
of the gas well construction as $5,944,692, and that of the gas
well equipment as $4,069,434 -- a total of $13,065,581. The actual
present value of the leases in class No. 1 was not more than
41.8874% of $1,569,479, or $657,414. The fund to be restored
through amortization was thus overestimated to the extent of
$2,394,041, or 18 3/10%, which would reduce the annual charge,
without change of the life expectancy, from $4,158,954 to
We have assumed in what has been written that, for the purpose
of amortization, the leases in class No. 1 are
Page 292 U. S. 305
to be taken at the value shown on the books. The appellant will
be little helped, however, if another standard is accepted. No
method of valuation supported by the record will lay a basis for a
holding that the allowance is inadequate to the point of
confiscation. The truth seems to be, as was stated by a witness for
the appellant, that the percentage of depletion appropriate for gas
fields is "the wildest sort of guess." This results from many
circumstances, not the least of which is the probability of
improved methods of production. In an industry subject to these
rapid changes, the prophecies of one year are likely to be
overturned by the experience of the next.
We think the allowance for depletion, instead of being too
small, is so manifestly excessive as to supply a margin for the
correction of other contested items that may approach the border
line. Los Angeles Gas & Electric Corp. v. Railroad
Commission of California, supra,
p. 289 U. S.
3. Reserve for depreciation.
The Commission allowed as a charge against the operating
expenses of the affiliated seller an annual reserve of $667,612 to
be placed in a sinking fund and devoted to the maintenance of the
plant, with the exception of the wells and their equipment which
had been separately cared for in the allowance for depletion.
The appellant has failed to show in any conclusive or convincing
way that this reserve will be inadequate.
The Commission also allowed as a charge against the appellant's
operating expenses an annual reserve in the amount of 2% of the
"depreciable property" employed by the appellant in the business of
The percentage so fixed is stated to be in accord with the
practice of the appellant as disclosed in its annual reports on
file with the Commission.
The contention that the percentage of allowance should have been
4% instead of 2 has no basis in the evidence.
Page 292 U. S. 306
4. Accrued Depreciation.
In determining the price to be paid for gas delivered at the
gateways, the Commission appraised the wells and equipment of the
affiliated seller as having suffered a depreciation of 58.1126%.
The appellant insists that the depreciation is excessive.
There is evidence that the method of computation adopted by the
Commission is in accordance with the accepted practice of mining
engineers. The practice is to ascertain the rock pressure at the
initial flow of the gas and again at the time of the appraisal, and
to measure the depreciation by the reduction thus disclosed. The
wells and their equipment have only a scrap value after the
exhaustion of the gas, and contents and containers thus depreciate
The appellant, though complaining that the percentage of
depreciation is excessive, has had a benefit, more than equivalent
to any injury, in the enhancement of the allowance for amortization
5. The disallowance of the "delay rentals" for unoperated
To keep alive the leases acquired as a reserve, the affiliated
seller paid the annual carrying charges (known as "delay rentals"),
and there is objection to the exclusion of the payments from
We think it a sufficient answer that the annual amortization
allowance of $4,158,954 has made provision for a fund whereby new
leases can be acquired and paid for out of current earnings.
Operating expenses are magnified unduly if they cover both the fund
and the payments that are made out of it.
6. The rate of 45 cents per thousand cubic feet viewed in the
aspect of a customary charge.
An attempt is made to show that the price paid by the appellant
to the affiliated seller was the current or market rate in
contracts between producers and distributors in
Page 292 U. S. 307
other towns and cities. To bolster up that argument, a schedule
of contracts was marked as an exhibit. Twenty-five contracts are
listed. There is a concession that, in all but two, the seller is
the Ohio Fuel Gas Company or an affiliated corporation. There is no
evidence as to the relation between the seller and the buyers. For
all that appears, the buyers in most instances are parts of the
same system. The prices are not uniform; many are higher than 45
cents, but some are lower, one of them being as low as 39 cents.
Distances and other geographical conditions affecting the cost of
transportation and delivery are undescribed and unexplained.
The Commission did not err in its determination that this was
7. The general administrative expenses incurred by the appellant
in the conduct of its business.
These, as claimed by the appellant, were $38,395; the Commission
reduced them to $32,432.
A contract had been made with the Columbia Engineering &
Management Corporation, an affiliated company, for services as
manager in return for a percentage of the gross earnings. This item
($13,741) was found by the Commission to be excessive to the extent
of $5,963, and the compensation was reduced accordingly. In view of
the close relation between the affiliated companies, the burden was
upon the appellant to sustain the fairness of the contract. We
cannot hold that it did so in opposition to the judgment of a
Commission acquainted with prices and other conditions in the
We have now considered the objections to the allowance and
disallowance of operating expenses.
To determine whether 39 cents per thousand cubic feet is a fair
price to be paid for gas delivered at the gates, there has been
need to consider the assets and expenses of the affiliated seller,
for only thus has it been possible to estimate a fair return.
Page 292 U. S. 308
We have kept in mind the principle that
"rates substantially higher than the line between validity and
unconstitutionality properly may be deemed to be just and
reasonable, and not excessive or extortionate."
Banton v. Belt Line Ry. Corp., 268 U.
, 268 U. S.
Even so, the burden of proof was on the buyer of the gas to show
that, in these transactions with the affiliated seller, the price
was no higher than would fairly be payable in a regulated business
by a buyer unrelated to the seller and dealing at arm's length.
Western Distributing Co. v. Public Service Commission of
Kansas, 285 U. S. 119
285 U. S.
State court and Commission did not act in an arbitrary fashion
when they held upon the evidence before them that the burden had
not been borne.
There are certain other objections that have relation to the
value of the appellant's property, and not to its expenses of
operation or to the value of the property of the affiliated
To these we now turn.
Second. The value of appellant's property.
(a) Objection is made that the going value of the appellant's
business should have been included in the base.
The decisions of this Court show what going value means (Los
Angeles Gas & Electric Corp. v. Railroad Commission of
289 U. S. 313
), distinguish it from goodwill, and hold
that, upon proof of its existence, it may have a place in the base
upon which rates are to be computed. The Commission was of opinion
that there was here no constituent of property that called for
separate appraisal apart from the recognition that had been given
it as a contributory factor in other elements of value.
The appellant is a new company, engaged in business for a few
years. The value of its physical assets is less than a million
dollars. In the brief term of its existence, it professes to have
added to that value from $125,000 to
Page 292 U. S. 309
$140,000 by combining the parts into an organism and causing
them to work together. The Commission took the view that whatever
increment of value had emerged from these sources was sufficiently
reflected in the allowance of the cost of developing "new business"
and in the appraisal of the physical assets as parts of an
assembled whole. A like conclusion has been reached by this Court
in very similar conditions. Los Angeles Gas & Electric
Corp. v. Railroad Commission of California, supra,
289 U. S. 314
Going value is not something to be read into every balance sheet as
a perfunctory addition. "It calls for consideration of the history
and circumstances of the particular enterprise." Los Angeles
Gas & Electric Corp. v. Railroad Commission of California,
p. 289 U. S. 314
Here, the company was a small one and its organization simple.
There was no diversified and complex business with ramifying
subdivisions. We cannot in fairness say that, after valuing the
assets upon the basis of a plant in successful operation, there was
left an element of going value to be added to the total. Even if
the addition might have been made without departure from accepted
principles, the omission to make it does not appear to have been so
unreasonable or arbitrary as to overleap discretion and reach the
zone of confiscation. "It is necessary again, in this relation, to
distinguish between the legislative and judicial functions."
p. 289 U. S. 314
Much that the framers of a schedule are at liberty to do this
Court, in the exercise of its supervisory jurisdiction, may not
require them to do. For the legislative process, at least equally
with the judicial, there is an indeterminate penumbra within which
choice is uncontrolled.
(b) A number of other objections may conveniently be grouped
The appellant complains of the refusal to make allowance for
organization or pre-construction costs. There is no evidence that
any were incurred, though this, of itself,
Page 292 U. S. 310
is indecisive. Ohio Utilities Co. v. Public Utilities
Comm'n, 267 U. S. 359
267 U. S. 362
It is conjectural whether they would be incurred in the
hypothetical event of a reproduction of the business, and, if
incurred, in what amount. The appellant's position as a member of
an affiliated system would have a tendency to reduce such expenses
to a minimum. We think the ruling is supported by decisions of this
Court. Los Angeles Gas & Electric Corp. v. Railroad
Commission of California, supra,
p. 289 U. S. 310
Wabash Valley Electric Co. v. Young, 287 U.
, 287 U. S. 500
To this it is to be added that the item is of negligible
importance. Its presence or absence would not make the difference
between confiscation and a fair return. We do not figure to so fine
a point in determining the application of the constitutional
restraints of power. [Footnote
] An intelligent estimate of probable future values
(Southwestern Bell Telephone Co. v. Public Service Comm'n,
262 U. S. 276
262 U. S.
), and even indeed of present ones, is, at best, an
approximation. The like is true of a forecast of the extent of
future revenues. There is left in every case a reasonable margin of
fluctuation and uncertainty.
The appellant complains also of the failure to include the
hypothetical expense of financing the business as part of the cost
Considering the absence of evidence that any such expense had
been incurred when the business was established and the uncertainty
that it would be incurred if the plant were destroyed and
reproduced, we think this item under recent decisions was properly
rejected as remote and conjectural. Wabash Valley Electric Co.
v. Young, supra,
p. 287 U. S. 500
Los Angeles Gas & Electric Corp.
Page 292 U. S. 311
v. Railroad Commission of California, supra,
289 U. S. 310
We are to remember that the cost of reproduction is a guide, but
not a measure. Los Angeles Gas & Electric Corp. v. Railroad
Commission of California, supra,
p. 289 U. S.
What has been said of the foregoing items applies with little
variation to the reduction of "general overheads," or undistributed
expenses during the period of construction, from 17%, the amount
claimed by the appellant, to 14%, the amount allowed by the
The cost in imaginary conditions of cutting and restoring
pavements was not an increment of value. Des Moines Gas Co. v.
Des Moines, 238 U. S. 153
The amount necessary for working capital was carefully computed,
and has not been proved to be too small for the requirements of the
Third. The rate of return on the investment.
The appellant contends that, to avoid confiscation, the rate of
return should be 8% instead of 6 1/2, which was allowed.
In view of business conditions, of which we take judicial notice
(Atchison, Topeka & Santa Fe Ry. Co. v. United States,
284 U. S. 248
284 U. S.
), the rate allowed was adequate (Los Angeles Gas
& Electric Corp. v. Railroad Commission of California,
p. 289 U. S.
Whether a lower rate could be upheld is a question not before
Dissection of the several items that have been criticized in the
appellant's argument has thus brought us to the conclusion that the
order of the Commission, whether generous or ungenerous, is at all
events not confiscatory, and hence not subject to revision here.
But the conclusion has reinforcements that come to it from other
avenues of approach. In a statement put in evidence by the
appellant, the rate of return under the new schedule is said to be
1 28/100% of the fair value of the property. Under the earlier
schedule, the revenue was even less. So modest
Page 292 U. S. 312
a rate suggests an inflation of the base on which the rate has
been computed. It is a strain on credulity to argue that the
appellant, when putting into effect a new schedule of charges, was
satisfied with one productive of so meager a return. The same
surprise is excited when we consider what it claims as to the fair
value of the gas delivered at the gates. All that the affiliated
seller asks is 45 cents per thousand cubic feet, yet, according to
the appellant's figures, nearly 7 cents more, or a price of about
52 cents, is necessary to protect the seller against the wrong of
confiscation. The argument proves too much; the valuations are
discredited by the teachings of experience. Men do not transact
business without protest at confiscatory rates, at all events in
the absence of extraordinary circumstances making submission to the
loss expedient. If such circumstances exist, the appellant has not
proved them. Nothing in the record lays the basis for a belief that
the natural gas business in Ohio is unable to pay its way. That
being so, what the public utility has done belies what it has said.
We shall hardly go astray if we prefer the test of conduct.
Upon the submission of the cause, the appellant made a motion to
amend its assignments of error, which motion is now granted. The
decree of the Supreme Court of Ohio affirming the order of the
Public Utilities Commission does not impair any privileges or
immunities secured to the appellant by the Constitution of the
United States, and must therefore be
MR. JUSTICE VAN DEVANTER and MR. JUSTICE SUTHERLAND took no part
in the consideration or decision of this case.
MR. JUSTICE McREYNOLDS and MR. JUSTICE BUTLER concur in the
The appraisal of the appellant's property at the amount fixed by
the Commission will allow a return of 6 1/2 percent if operating
expenses are lowered by this reduction of the gateway price. At the
contract price of 45 cents, the return will be less.
Under the Ohio law, a corporation selling its entire product to
public utilities which in turn sell that product to consumers is
itself a public utility if the shares are owned by the same
persons. Ohio Mining Co. v. P.U. Comm'n,
106 Ohio St. 138,
146, 150, 140 N.E. 143.
The Ohio Fuel Gas Company took over in June, 1929, the leases of
an affiliated company, the Logan Gas Company and its predecessor,
the Logan Natural Gas & Fuel Company. These leases, after being
carried on the Logan books at about $2,500,000, were marked up in
1919 so as to show an increase in value of $3,748,036.48.
The appellant's yearly revenues during the period of inquiry
were $666 in excess of the amount of money needed to yield a return
of 6 1/2% on the value fixed by the Commission. If pre-construction
costs were to be added to the full extent claimed, the rate of
return would be about .064.