The Federal Power Commission, under the Natural Gas Act, ordered
reductions in petitioners' interstate wholesale rates. Though
separate companies, petitioners operated their properties as an
integrated system. Their business consisted of intrastate sales,
direct industrial sales, and interstate wholesales, of which only
interstate wholesales are subject to regulation by the
Commission.
Held:
1. In determining the amount of the reductions in the interstate
wholesale rates, the Commission was not bound to make a separation
of the properties used in the regulated business from those in the
unregulated, and its formula for allocation of costs between
regulable and nonregulable sales did not contravene the Act. P.
324 U. S.
586.
(a)
Minnesota Rate Cases, 230 U.
S. 352, and
Smith v. Illinois Bell Telephone
Co., 282 U. S. 133,
distinguished. P.
324 U. S.
589.
(b) Under the Act, the appropriateness of the allocation formula
used by the Commission is a question of fact, not of law. P.
324 U. S.
590.
(c) The Commission's formula did not ignore or fail to give full
effect to the priority -- recognized in the contracts with
industrial users and in municipal franchises -- which the wholesale
gas had over direct industrial sales. P.
324 U. S.
590.
(d) The Commission's treatment of the transmission line as a
unit -- though some laterals and equipment were used exclusively
for interstate wholesales, some exclusively for intrastate or
direct industrial sales, and some in common in varying degrees by
the several classes of business -- was not unfair. P.
324 U. S.
590.
(e) The Commission having found that, but for the direct
industrial market at Pueblo and the wholesale market at Denver, the
pipeline would not have been built, it was fair to determine
Page 324 U. S. 582
transmission costs for the pipeline as a whole, and not to
compute them on a mileage demand basis. P.
324 U. S.
591.
(f) Considerations of fairness, not mere mathematics, govern
allocation of costs. P.
324 U. S.
591.
(g) The contention that certain intrastate wholesales are
burdened with too large a share of transmission costs is rejected.
P.
324 U. S.
591.
(h) The Commission's inclusion in the total cost of petitioners'
service of a 6 1/2% return on the rate base was not inappropriate
inasmuch as the rate reduction ordered was based solely on the
excess of revenues over costs (including return) derived from the
regulated business. P.
324 U. S.
593.
(i) The 6 1/2% return allowed by the Commission on the rate base
does not limit the earnings of the whole enterprise to 6 1//2%, but
merely measures the earnings allowed from the regulated business.
P.
324 U. S.
594.
(j) The findings of the Commission on the allocation of costs,
though they leave much to be desired, are not so vague as to make
the judicial review contemplated by the Act a perfunctory process,
and the case need not be remanded for further findings. P.
324 U. S.
595.
2. Interstate sales of gas for resale, including that sold for
resale for industrial use, are subject to rate regulation under the
Act. P.
324 U. S.
595.
(a) In § 1(a) of the Act, the words "ultimate distribution to
the public" do not imply distribution to domestic users alone. P.
324 U. S.
596.
(b) The declaration of policy in § 1(a) of the Act may not be
construed as taking out of § 1(b) the express provision subjecting
to regulation gas sold for resale for "industrial use." P.
324 U. S.
596.
(c) From the proviso of § 4(e) of the Act that the Commission
shall not have authority to suspend the rate "for the sale of
natural gas for resale for industrial use only," it may not be
inferred that such rates are not subject to regulation by the
Commission. P.
324 U. S.
596.
(d) That the petitioners are treated as an integrated system for
the purpose of allocation of costs does not require that interstate
sales by one to the other for resale for industrial use be regarded
as nonregulable direct industrial sales. P.
324 U. S.
596.
3. The provision of § 1(b) that the Act shall not apply "to the
production or gathering of natural gas" does not preclude the
Page 324 U. S. 583
Commission from taking into account the production properties
and gathering facilities of natural gas companies in determining
the reasonableness of rates subject to its jurisdiction. Pp.
324 U. S. 597,
324 U. S.
604.
(a) The Commission is not precluded under the Act from including
production and gathering facilities in the rate base, and is not
required instead to make an allowance in operating expenses for the
fair field price of the gas as a commodity. P.
324 U. S.
600.
4. The Commission's inclusion of production properties in the
rate base at actual legitimate cost was not erroneous as matter of
law. Error in this respect could be determined only on
consideration of the end result of the rate order -- a question not
presented on the limited renew granted in this case. P.
324 U. S.
604.
5. Gas lease and producing properties which were transferred at
a write-up from one wholly owned subsidiary to another were
properly included in the rate base at the original cost to the
transferor, where no additional investment was shown to exist.
A. T. & T. Co. v. United States, 299 U.
S. 232, distinguished. P.
324 U. S.
607.
142 F.2d 943 affirmed.
Certiorari, 323 U.S. 807, to review the affirmance of rate
orders of the Federal Power Commission under the Natural Gas
Act.
Page 324 U. S. 584
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
The Federal Power Commission, after an investigation and
hearing, entered orders under § 5 of the Natural Gas Act of 1938,
52 Stat. 823, 15 U.S.C. § 717d, finding the interstate wholesale
rates of petitioners to be excessive by specified amounts per year
and requiring petitioners to reduce the rates accordingly. 43
P.U.R. (N.S.), 205. The Circuit Court of Appeals for the Tenth
Circuit affirmed the Commission's orders. 142 F.2d 943. The cases
are here on petitions for certiorari which we granted, limited to
the few questions to which we will presently advert.
Petitioners (to whom we will refer as Canadian and as Colorado
Interstate) had their origin in an agreement made in 1927 between
Southwestern Development Co. (Southwestern), Standard Oil Co.
(N.J.) (Standard) and Cities Service Co. (Cities Service). It was
the purpose of the agreement to bring natural gas from the
Panhandle field in Texas to the Colorado markets, including Denver
and Pueblo. Southwestern agreed to transfer through a wholly owned
subsidiary, Amarillo Oil Co. (Amarillo), certain gas leaseholds and
producing properties to a new subsidiary (Canadian) which it would
organize for that purpose. Standard agreed to form a new
corporation (Colorado Interstate) and to finance its construction
of pipeline facilities which would connect with Canadian's
facilities and transport gas from those points in the Panhandle
field to the Colorado markets. Cities Service agreed to use its
best efforts to obtain franchises through its subsidiaries under
which the natural gas could be distributed in certain cities in
Colorado including Denver and Pueblo. The gas was to be sold to
Colorado Interstate by Canadian at cost (as defined in the
contract) for at least 20 years from 1928. We will return
Page 324 U. S. 585
to other details of this tripartite agreement and of the
organization and financing of Canadian and Colorado Interstate. It
is sufficient here to say that the companies were incorporated, the
pipeline was built, and the business put into operation. Although
Canadian and Colorado Interstate are separate companies, the
Commission found that their properties have been operated as a
single enterprise.
Canadian produces from its own properties all the gas which it
sells. It has about 300,000 acres of natural gas leaseholds, and,
on December 31, 1939, was operating 94 wells. Its gathering system
consists of approximately 144 miles of pipe. It owns and operates a
transmission line which connects with its gathering system in the
Panhandle field and ends about 85 miles distant at a point near
Clayton, New Mexico. Canadian sells some of its gas at the wellhead
and along the Texas portion of its transmission line for
consumption in Texas. It also sells gas for resale in Clayton, New
Mexico. But the chief portion of the gas in its transmission line
is sold at that point to Colorado Interstate. The pipeline of
Colorado Interstate extends to Denver. It sells the gas to various
distributing companies for resale by them in Colorado and in a few
points in Wyoming. [
Footnote 1]
Colorado Interstate also sells gas from this pipeline direct to
industrial customers in Colorado for their own use.
It is thus apparent that the pipeline from Texas to Colorado
serves three different uses: (a) intrastate transportation and sale
in Texas; (b) interstate transportation
Page 324 U. S. 586
and sale to industrial customers, and (c) interstate
transportation to distributing companies for resale. Only some of
those activities are subject to the jurisdiction of the Commission.
For § 1(b) of the Act provides:
"The provisions of this chapter shall apply to the
transportation of natural gas in interstate commerce, to the sale
in interstate commerce of natural gas for resale for ultimate
public consumption for domestic, commercial, industrial, or any
other use, and to natural gas companies engaged in such
transportation or sale, but shall not apply to any other
transportation or sale of natural gas or to the local distribution
of natural gas or to the facilities used for such distribution or
to the production or gathering of natural gas."
It is around the meaning and implications of that provision that
most of the present controversy turns.
Allocation of Cost of Service. The questions raised by
Colorado Interstate and some of those raised by Canadian relate to
the failure of the Commission (1) to separate the physical property
used in common in the intrastate and interstate business; (2) to
separate that used in common in the sales of gas to industrial
consumers and the sales of gas for resale, and (3) to separate the
property used exclusively in intrastate business or exclusively for
industrial sales. The Commission thought it unnecessary to make
such a separation of the properties. It noted that nowhere in the
evidence presented by petitioners was there "a complete
presentation of the entire operations of the company broken down
between jurisdictional and nonjurisdictional operations." 43 P.U.R.
(N.S.), p. 232. And it concluded,
"All that can be accomplished by an allocation of physical
properties can be attained by allocating costs including the
return. The latter method is by far the most practical and
businesslike."
Id., p. 232. The Commission adopted the so-called
"demand and
Page 324 U. S. 587
commodity" method for allocating costs.
Cf. Arkansas
Louisiana Gas. Co. v. City of Texarkana, 96 F.2d 179, 185. It
took the costs and divided them into three classes -- volumetric,
capacity, distribution. [
Footnote
2] Costs relating to the production system were treated as
volumetric. [
Footnote 3] These
included rate of return and depreciation and depletion on leases
and wells. These volumetric costs were allocated to the customers
in proportion to the number of Mcf's delivered to each customer in
1939. The larger share of the transmission costs of the Denver
pipeline were classified as capacity costs. Supplies and expenses
of compressing systems, maintenance of compressing system equipment
and accruals for its depreciation were classed as volumetric. And
one-half of the return and income taxes on the Denver pipeline and
one-half of operating labor on the compressing system were classed
as volumetric, the other half being classed as capacity. Capacity
costs were allocated to the customers in the ratio that the Mcf
sales to each customer on the system peak day of February 9, 1939,
bore to the total sales to all customers on that day. Distribution
costs were composed in part of depreciation, taxes, and return on
investment in metering and regulating equipment through which gas
is delivered at individual stations to each customer. There were
allocated to each customer in the ratio which the investment for
each customer bore to the total investment in such facilities which
were available to serve all customers. Distribution costs also
included operating and maintenance expenses incurred in operating
the metering and regulating stations. These were allocated on the
basis of the number of stations.
Page 324 U. S. 588
The function which an allocation of costs (including return) is
designed to perform in a rate case of this character is clear. The
amount of gross revenue from each class of business is known. Some
of those revenues are derived from sales at rates which the
Commission has no power to fix. The other part of the gross
revenues comes from the interstate wholesale rates which are under
the Commission's jurisdiction. The problem is to allocate to each
class of the business its fair share of the costs. It is, of
course, immaterial that the revenues from the intrastate sales or
the direct industrial sales may exceed their costs, since the
authority to regulate those phases of the business is lacking. To
the extent, however, that the revenues from the interstate
wholesale business exceed the costs allocable to that phase of the
business, the interstate wholesale rates are excessive. The use of
that method in these cases produced the following results:
Canadian
Excess Revenue
Revenues Costs Over Costs
Regulated $2,151,000 $1,590,000 $ 561,000
Unregulated 242,000 188,000 54,000
Colorado Interstate
Excess Revenue
Revenues Costs Over Costs
Regulated $4,438,000 $2,373,000 $2,065,000
Unregulated 1,335,000 1,204,000 131,000
The Commission did not include in the rate reductions which it
ordered any of the excess revenues over costs from the unregulated
business. The reductions ordered were measured solely by the excess
revenues over costs in the regulated business --
viz.,
$2,065,000 in case of Colorado Interstate and $561,000 in case of
Canadian.
Colorado Interstate and Canadian make several objections to that
method. They maintain in the first place that a segregation of the
physical property based upon use is necessary so that the payment
due for the use of that
Page 324 U. S. 589
property which is in the public service may be determined.
Reliance for that position is rested on the
Minnesota Rate
Cases, 230 U. S. 352,
230 U. S. 435,
and
Smith v. Illinois Bell Telephone Co., 282 U.
S. 133,
282 U. S. 146.
Those were cases which involved state regulation of intrastate
rates of companies doing both an intrastate and interstate
business. But the rule fashioned by this Court for use in those
situations was not written into the Natural Gas Act. Congress
indeed prescribed no formula for determining how the interstate
wholesale business, whose rates are regulated, should be segregated
from the other phases of the business whose rates are not
regulated. Ratemaking is essentially a legislative function.
Munn v. Illinois, 94 U. S. 113.
Congress, to be sure, has provided for judicial review of the
Commission's orders. § 19. But that review is limited to keeping
the Commission within the bounds which Congress has created. 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. If Congress had prescribed a formula, it
would be the duty of the Commission to follow it. But we cannot say
that, under the Natural Gas Act, the Commission can employ only one
allocation formula, and that that formula must entail a segregation
of property. A separation of properties is merely a step in the
determination of costs properly allocable to the various classes of
services rendered by a utility. But where, as here, several classes
of services have a common use of the same property, difficulties of
separation are obvious. Allocation of costs is not a matter for the
slide-rule. It involves judgment on a myriad of facts. It has no
claim to an exact science. Hamilton, Cost as a Standard for Price,
4 Law & Cont. Prob. 321. But neither does the separation of
properties which are not in fact separable because they function as
an integrated whole. Mr. Justice Brandeis,
Page 324 U. S. 590
speaking for the Court in
Groesbeck v. Duluth, S.S. & A.
R. Co., 250 U. S. 607,
250 U. S.
614-615, noted that "it is much easier to reject
formulas presented as being misleading than to find one apparently
adequate." Under this Act, the appropriateness of the formula
employed by the Commission in a given case raises questions of
fact, not of law.
Colorado Interstate claims that the Commission's formula
ignored, or at least failed to give full effect to, the priority
which the wholesale gas has over direct industrial sales -- a
priority recognized in the contracts with industrial users and in
the municipal franchises. But, over the years, the interruptions or
curtailments in service to direct industrial customers appear to
have been slight. [
Footnote 4]
Moreover, to the extent that the priority accorded wholesale gas
was actually exercised during the test year (1939), the allocation
of costs made by the Commission gave full effect to it. As we have
seen, volumetric costs were allocated to the customers in
proportion to the number of Mcfs delivered to each customer during
the year; capacity costs were allocated in the ratio that the Mcf
sales to each customer on the system peak day bore to the total
sales on that day. The formula used reflected all actual
curtailments of load to each customer during the year and on the
system peak day.
Colorado Interstate objects because the Commission treated the
transmission line as a unit. It points out that some laterals and
equipment (such as metering stations) are used exclusively for
making wholesale sales, some are used exclusively for making
intrastate sales for direct industrial sales, and some are used in
common in varying degrees by the several classes of business. It is
pointed out, for example, that the line north of Pueblo is used
almost exclusively by the regulated business, but that, under the
Commission's formula, the pipeline was treated as
Page 324 U. S. 591
if all the gas went into the pipe in Texas and came out at the
Denver city gate. These objections are partially met by the manner
in which distribution costs, to which we have referred, were
allocated. But that is no more than a partial answer, since they
pertained only to metering and regulating equipment. The laterals
were not segregated. They, however, appear to be used more commonly
for direct industrial, rather than for wholesale sales, and we are
not convinced that the direct industrial sales were saddled with
greater costs than they would have been had the laterals been
segregated. The gravamen of this complaint is that the industrial
sales are being burdened with costs of a part of the system which
the direct industrial gas never uses. That contention points up our
earlier observation that judgment and discretion control both the
separation of property and the allocation of costs when it is
sought to reduce to its component parts a business which functions
as an integrated whole. The Commission found that, but for the
direct industrial market at Pueblo, Colorado, and the wholesale
market at Denver, the pipeline would not have been constructed. 43
P.U.R. (N.S.), p. 210. It is therefore obviously fair to determine
transmission costs for the pipeline as a whole, and not to compute
them on a mileage demand basis. In that way, the beneficiaries of
the entire project share equitably in the cost. To allow the costs
to accumulate the closer the gas gets to Denver would be to assume
that the extension to Denver was a separate project on which the
earlier customers were in no way dependent. These circumstances
illustrate that considerations of fairness, not mere mathematics,
govern the allocation of costs.
Cf. Wabash Valley Electric Co.
v. Young, 287 U. S. 488,
287 U. S. 499.
What we have said also answers Canadian's complaint that the
wholesale sales in Texas for consumption in the towns of Dalhart,
Hartley, and Texline, Texas, are burdened with too large a share of
transmission costs. We can see in
Page 324 U. S. 592
this situation no difference between those customers and the
ones located at more distant points on the pipeline. [
Footnote 5]
Colorado Interstate objects to that part of the Commission's
treatment of transmission costs whereby it assigned 50% of the
return to capacity costs and 50% to volumetric costs. The
contention is that the entire return on the transmission facilities
should be apportioned to capacity costs on the theory that the
volumetric costs have no relation to the property required for
meeting the maximum demands of the wholesale business, and that the
method employed departs from the requirements of a fair return on
the property devoted to the public service. But, as we have seen,
capacity costs were allocated to customers in the ratio that the
Mcf sales to each customer on the system peak day bore to the total
sales to all customers on that day. It is not apparent why direct
industrial sales should carry a lighter share of the costs merely
because their use of the pipeline may be less on the system peak
day. As the Commission points out, if the method advanced by
Colorado Interstate were used, the amount paid by the industrial
customer for transportation of the gas through the pipeline would
be measured not by the customer's use throughout the year, which
might be substantial, but by its use on the system peak day, which
might be slight. In that event, the industrial customer would
obtain, to an extent, free transportation of gas.
Colorado Interstate also makes objection to the selection and
use of February 9, 1939, as the system peak day and the allocation
of the capacity cost component of the transmission costs on the
basis of use on that day. It is argued that the mean temperature
for that day was 8 Fahrenheit above zero, that much lower mean
temperatures
Page 324 U. S. 593
are experienced in the Colorado area, that, as the temperature
drops, the load of resale gas rapidly increases, and that, if these
capacity costs were allocated on the basis of use during the
coldest day, the resale gas would carry a greater portion of them.
We do not stop to develop the point. We have carefully considered
Colorado Interstate's contention. As we read the record, if either
of the days selected by Colorado Interstate were taken as the
system peak days, there would be allocated to the industrial gas a
larger portion of these capacity costs than the Commission
allocated. On that showing, we cannot say that the choice of
February 9, 1939, was unfair.
Colorado Interstate and Canadian object to the Commission's use
of the return. The Commission included in the total cost of service
for these companies a 6 1/2 percent return on the rate base.
[
Footnote 6] In other words,
the 6 1/2 percent return was computed on the basis of all the
property used by petitioners in their various classes of business
-- intrastate sales, direct industrial sales, and interstate
wholesale sales. [
Footnote 7]
Now it is apparent that, if the reduction ordered was based on the
excess of revenues from all classes of business over the aggregate
costs, the result would be to reduce to a common level the profits
from each class. In that case, whenever a company was making a
higher return on its unregulated business than the rate of return
allowed for the regulated business, the excess earnings from the
unregulated part would be appropriated to the
Page 324 U. S. 594
entire business. When the unregulated business was being
operated at a loss or at less than the return which was allowed,
excess earnings from the regulated business would be appropriated
to the unregulated business. A low rate might therefore be
concealed by siphoning earnings from the unregulated business; a
high rate might be built up by making the regulated business share
the losses of the unregulated one.
It is said that that is what happened here. But that is not
true. As we have seen, the Commission ordered a rate reduction
based solely on the excess of revenues over costs (including
return) derived from the regulated business. None of the excess
revenues over costs (including return) from the unregulated
business was included in that reduction. If the Commission, in
determining costs of the unregulated business, had used a higher
rate of return, it would have increased the costs of that business
and reduced the excess revenues allocable to it. But since, under
the Commission's method of allocation, the amount of that excess
would not be reflected in the reduction ordered, there would be no
difference in result.
The cases are presented as if the 6 1/2 percent allowed by the
Commission on the rate base limits the earnings from the whole
enterprise to 6 1/2 percent. That also is not true. The return
merely measures the earnings allowed from the regulated business.
As we have noted, the excess of earnings which Colorado Interstate
makes from direct industrial sales (on the basis of 6 1/2 percent
return) is $131,000 annually. The Commission pointed out (43 P.U.R.
(N.S.), p. 230) that, if Colorado Interstate
"retains these earnings in excess of a 6 1/2 percent rate of
return on its sales to these customers, its rate of return on its
entire business is increased to approximately 8 percent
after
placing into effect the reductions in rates ordered
herein."
Of the other objections made by Canadian and Colorado Interstate
on this phase of the case, we need mention only
Page 324 U. S. 595
one. [
Footnote 8] It is
contended that the findings of the Commission on the allocation of
costs are inadequate, and that the cases should be remanded to the
Commission so that appropriate findings may be made. The findings
of the Commission in this regard leave much to be desired, since
they are quite summary, and incorporate by reference the
Commission's staff's exhibits on allocation of cost. But the path
which it followed can be discerned. And we do not believe its
findings are so vague and obscure as to make the judicial review
contemplated by the Act a perfunctory process.
Cf. United
States v. Chicago, M. St. P. & P. R. Co., 294 U.
S. 499;
United States v. Carolina Freight Carriers
Corp., 315 U. S. 475.
Canadian's Sales to Colorado Interstate. The Commission
ordered a blanket reduction of $561,000 in the sales price of all
types of gas sold by Canadian to Colorado Interstate. A substantial
part of that gas is sold to Colorado Interstate for resale to
direct industrial customers. Canadian maintains that the Commission
has no authority to fix the rate on the sale of that portion or
class of gas to Colorado Interstate. Sec. 1(b) of the Act, however,
provides, as we have noted, that the provisions of the Act apply
"to the sale in interstate commerce of natural gas for resale for
ultimate public consumption for domestic, commercial, industrial,
or any other use." Canadian however seeks support for its position
in the declaration in § 1(a) of the Act that "the business of
transporting and selling natural gas for ultimate distribution to
the public is
Page 324 U. S. 596
affected with a public interest." But we find no warrant for
saying that the words "ultimate distribution to the public" imply
distribution to domestic users alone. Industrial users are as much
a part of the "public" as domestic users and other commercial
users. And the distribution to one is as "ultimate" as the
distribution to the other. Moreover, that declaration of policy may
not be used to take out of § 1(b) of the Act the express provision
subjecting to regulation gas sold for resale for "industrial use."
Furthermore, the declaration of policy contained in § 1(a) is not
as narrow as Canadian suggests. For § 1(a) goes on to say that
federal regulation in matters relating to "the transportation of
natural gas and the sale thereof in interstate and foreign commerce
is necessary in the public interest." Sales for resale to
industrial users is embraced in the broad sweep of that language.
Canadian also seeks support for its position from the proviso in §
4(e) of the Act that the Commission shall not have authority to
suspend the rate "for the sale of natural gas for resale for
industrial use only." Canadian infers from that provision that such
rates are not subject to regulation by the Commission. The short
answer, however, is that the authority of the Commission to suspend
rates is restricted to rates over which it has jurisdiction. If the
Commission had no authority over the rates in question, the proviso
in § 4(e) would be unnecessary. Accordingly, it seems clear that
all of the gas sold by Canadian to Colorado Interstate for resale,
including that sold for resale for industrial use, is subject to
rate regulation by the Commission.
There is the further suggestion in Canadian's argument that,
since the Commission treated Canadian and Colorado Interstate as an
integrated system for purposes of allocation of costs, it should
have limited its rate reduction to those rates over which it would
have jurisdiction if the two companies were in fact one. It is
argued that, in such event, there would be no sales between
Canadian and
Page 324 U. S. 597
Colorado Interstate, and the latter's direct sales to industrial
users would not be subject to the jurisdiction of the Commission.
The difficulty is that Colorado Interstate purchases its gas from
Canadian, and the purchase price is the interstate wholesale rate,
which is an operating expense on which Colorado Interstate's resale
rates are computed. Moreover, Canadian, as required by § 4(c) of
the Act, has its rate to Colorado Interstate in a rate schedule on
file with the Commission. Unless and until a new rate schedule was
filed or the old schedule changed by the Commission, that rate
would have to be exacted by Canadian and paid by Colorado
Interstate. § 4(d). That rate therefore could hardly be maintained
if Colorado Interstate were allowed as an operating expense a
lesser amount for the gas it purchases from Canadian.
Producing and gathering facilities. Sec. 1(b), which we
have already quoted, states that the provisions of the Act "shall
not apply . . . to the production or gathering of natural gas." The
Commission determined a rate base which includes Canadian's
production and gathering properties, as well as its interstate
transmission system. The return allowed by the Commission was
limited to 6 1/2 percent of the rate base so computed. The
Commission made an allowance for working capital to enable Canadian
to carry on its production and gathering operations. The Commission
made an allowance for Canadian's operating expenses which included
the cost of producing and gathering natural gas. The Commission
applied its formula for allocation of costs to Canadian's
production and gathering properties, as well as to its other
facilities. Thus, Canadian contends that, contrary to the mandate
of § 1(b), the Commission has undertaken to regulate the production
and gathering of natural gas. Reliance for that position is sought
from other provisions of the Act. It is pointed out that § 1(a)
declares that "the business of transporting and selling natural
gas" for ultimate distribution
Page 324 U. S. 598
to the public is affected with a public interest, and that
federal regulation "in matters relating to the transportation of
natural gas and the sale thereof" in interstate commerce is
necessary in the public interest. Transportation and sale do not
include production or gathering. Other sections emphasize that
distinction. Thus, § 4 and § 5, the rate regulating provisions of
the Act, refer to charges for the "transportation or sale of
natural gas, subject to the jurisdiction of the Commission." Sec.
7(a) relates to the extension or improvement of "transportation
facilities;" § 7(b) to the abandonment of "facilities subject to
the jurisdiction of the Commission;" § 7(c) to the construction or
extension of facilities for the "transportation or sale of natural
gas, subject to the jurisdiction of the Commission." It is pointed
out that, apart from § 1(b), only a few sections of the Act refer
to "production." Sec. 5(b) gives the Commission power to
investigate
"the cost of the production or transportation of natural gas by
a natural gas company in cases where the Commission has no
authority to establish a rate governing the transportation or sale
of such natural gas."
This goes no further, it is said, than to aid state regulation.
Sec. 9(a) authorizes the Commission to ascertain and determine and
by order fix
"the proper and adequate rates of depreciation and amortization
of the several classes of property of each natural gas company used
or useful in the production, transportation, or sale of natural
gas."
Sec. 9(a) further provides that no natural gas company subject
to the jurisdiction of the Commission shall charge to operating
expenses
"any depreciation or amortization charges on classes of property
other than those prescribed by the Commission, or charge with
respect to any class of property a percentage of depreciation or
amortization other than that prescribed therefor by the
Commission."
These are said, however, to be no more than accounting
requirements, and distinct from the
Page 324 U. S. 599
fixing of rates to be charged for public utility or
transportation services. That distinction is emphasized, it is
said, by the proviso in § 9(a) that
"Nothing in this section shall limit the power of a State
commission to determine in the exercise of its jurisdiction, with
respect to any natural gas company, the percentage rates of
depreciation or amortization to be allowed, as to any class of
property of such natural gas company, or the composite depreciation
or amortization rate, for the purpose of determining rates or
charges."
The provisions of § 10(a) which give the Commission authority to
require reports from natural gas companies as to their assets and
liabilities, the "cost of maintenance and operation of facilities
for the production" of natural gas, and the like are said to be
mere information requirements quite consistent with the absence of
power to regulate the production and gathering of natural gas.
[
Footnote 9]
See Interstate
Commerce Commission v. Goodrich Transit Co., 224 U.
S. 194. And the authority given the Commission by §
14(b) is said merely to supplement the Commission's powers under
sections of the Act. Sec. 14(b) grants the Commission power to
determine "the adequacy or inadequacy of the gas reserves held or
controlled by any natural gas company" and
"the propriety and reasonableness of the inclusion in operating
expenses, capital, or surplus of all delay rentals or other forms
of rental or compensation for unoperated lands and leases."
This is said to supplement the Commission's authority over the
construction, extension, or abandonment of facilities or service
under § 7, the determination of amortization rates under § 9(a),
and the accounting requirements of § 8.
Support for Canadian's position is also sought in the
legislative history of the Act. It is pointed out that the
Page 324 U. S. 600
declared purpose of the legislation was to occupy the field in
which this Court had held the States might not act.
See Federal
Power Commission v. Hope Natural Gas Co., 320 U.
S. 591,
320 U. S.
609-610. And it is noted that Senator Wheeler, who
sponsored the legislation in the Senate, said during the debate in
answer to an inquiry whether the bill undertook to regulate the
production of natural gas or the producers of natural gas:
"It does not attempt to regulate the producers of natural gas or
the distributors of natural gas; only those who sell it wholesale
in interstate commerce."
81 Cong.Rec. p. 9312.
From these various materials, it is argued that the Commission
has no authority to include producing or gathering facilities in a
rate base or to include production or gathering expenses in
operating expenses. It is said that, when the Commission follows
that course, it regulates the production and gathering of natural
gas contrary to the provisions of § 1(b) of the Act. It is argued
that the correct procedure is for the Commission to allow in the
operating expenses of a natural gas company, whose rates it is
empowered to fix, the "fair field price" or "fair market value, as
a commodity, of the gas" which finds its way into the transmission
lines for interstate transportation and sale.
This is precisely the argument which West Virginia, appearing as
amicus curiae, advanced in the
Hope Natural Gas
Co. case. We rejected the argument in that case. 320 U.S. pp.
320 U. S.
607-615, particularly page
320 U. S. 614,
n. 25. We have reviewed it here at this length in view of the
seriousness with which it has been urged not only by Canadian, but
also by the Independent Natural Gas Association of America which
appeared
amicus curiae. But we adhere to our decision in
the
Hope Natural Gas Co. case, and will briefly state our
reasons.
A natural gas company, as defined in § 2(6) of the Act, is
"a person engaged in the transportation of natural
Page 324 U. S. 601
gas in interstate commerce, or the sale in interstate commerce
of such gas for resale."
Canadian is such a company. It is plain, therefore, that the
Commission has authority to fix its interstate wholesale rates. §
5. It is obvious that, when rates of a utility are fixed, the value
of its property is affected. For, as we stated in the
Hope
Natural Gas Co. case, value is "the end product of the process
of ratemaking not the starting point." 320 U.S. p.
320 U. S. 601.
When a natural gas company which owns producing properties or a
gathering system is restricted in its earnings by a rate order, the
value of all of its property is affected. Congress, of course,
might have provided that producing or gathering facilities be
excluded from the rate base, and that an allowance be made in
operating expenses for the fair field price of the gas as a
commodity. Some have thought that to be the wiser course. But we
search the Act in vain for any such mandate. 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, 75th Cong., 1st Sess., p. 3.
Certainly the use of a rate base which reflects the property of the
utility whose rates are being fixed has been customary. 2
Bonbright, Valuation of Property (1937), ch. XXX; Smith, The
Control of Power Rates in the United States and England (1932); 159
The Annals 101. Prior to the Act, that method was employed in the
fixing of the rates of gas, as well as electric, utilities.
See
Willcox v. Consolidated Gas Co., 212 U. S.
19;
Cedar Rapids Gas Co. v. Cedar Rapids,
223 U. S. 655;
Newark Natural Gas & Fuel Co. v. Newark, 242 U.
S. 405;
Railroad Commission v. Pacific Gas &
Electric Co., 302 U. S. 388;
Lone Star Gas Co. v. Texas, 304 U.
S. 224. We do not say that the Commission lacks the
authority to depart from the rate base method. We only hold that
the Commission is not precluded from using it. There are ample
indications throughout the Act to support
Page 324 U. S. 602
that view. Sec. 6(a) empowers the Commission to investigate and
ascertain the
"actual legitimate cost of the property of every natural gas
company, the depreciation therein, and, when found necessary for
ratemaking purposes, other facts which bear on the determination of
such cost or depreciation and the fair value of such property."
As we have noted, § 9(a) gives the Commission authority not only
to require natural gas companies to carry proper and adequate
depreciation and amortization accounts, but also to fix such rates
for "the several classes of property of each natural gas company
used or useful in the production, transportation, or sale of
natural gas." And § 14(b), as already stated, not only gives the
Commission authority to determine the adequacy or inadequacy of gas
reserves of a natural gas company, but also empowers it to
determine the
"propriety and reasonableness of the inclusion in operating
expenses, capital, or surplus of all delay rentals or other forms
of rental or compensation for unoperated lands and leases."
Sec. 9(a) and § 14(b), though designed not to limit the power of
state regulatory agencies, plainly were designed to aid the
Commission in its ratemaking functions. These provisions [
Footnote 10] all suggest that, when
Congress designed this Act it was thinking in terms of the
ingredients of a rate base, the deductions which might be made, and
the additions which were contemplated. No exclusion of property
used or useful in production of natural gas was made. That type of
property was not singled out for special treatment; it was treated
the same as all other property. We must read § 1(b) in the context
of the whole Act. It must be reconciled with the explicit
provisions which describe the normal conventions of ratemaking.
That does not mean that the part of § 1(b) which provides that
the Act shall not apply "to the production or gathering of natural
gas" is given no meaning. Certainly
Page 324 U. S. 603
that provision precludes the Commission from any control over
the activity of producing or gathering natural gas. For example, it
makes plain that the Commission has no control over the drilling
and spacing of wells and the like. It may put other limitations on
the Commission. We only decide that it does not preclude the
Commission from reflecting the production and gathering facilities
of a natural gas company in the rate base and determining the
expenses incident thereto for the purposes of determining the
reasonableness of rates subject to its jurisdiction.
That treatment of producing properties and gathering facilities
had, of course, an indirect effect on them. As we have said,
ratemaking, like other forms of price-fixing, may reduce the value
of the property which is being regulated.
Federal Power
Commission v. Hope Natural Gas Co., supra, p.
320 U. S. 601.
But that would be true whether or not a rate base was used.
Canadian would be the first to object if the gas which it owns was
given no valuation in these proceedings. Obviously it has value.
The Act does not say that the Commission would have to value it at
the fair field price if the Commission abandoned the rate base
method of regulation. We held in the
Hope Natural Gas Co.
case that, under the Act, it is
"the result reached, not the method employed, which is
controlling. . . . 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."
320 U.S. p.
320 U. S. 602.
If the Commission followed Canadian's method, excluded the
producing properties and gathering facilities from the rate base,
valued the gas at a price which would reduce the earnings to the
level of the present order, the effect on the producing properties
and gathering facilities would be precisely the same as in the
present case. Since there is no provision in the Act which would
require the Commission to value the gas
Page 324 U. S. 604
at the price urged by Canadian, the problem on review would be
whether the end result was unjust and unreasonable. The point is
that, whatever method for ratemaking is taken, the fixing of rates
affects the value of the underlying property. Hence, § 1(b) could
be read as petitioners read it only if Congress had put a floor
under producing properties and gathering facilities and fixed a
minimum return on them.
These considerations lead us to conclude that § 1(b) does not
prevent the Commission from taking into account the productions
properties and gathering facilities of natural gas companies when
it fixes their rates.
Original Cost of Production and Gathering Facilities.
The Commission found the actual legitimate cost of Canadian's
property, including its producing properties and gathering
facilities, to be $10,784,464 as of December 31, 1939. It deducted
$2,134,629 for accrued depreciation and depletion. It added
$150,738 for working capital and $571,923 for gross plant additions
to December 31, 1941. The result was a rate base of $9,372,496
which the Commission rounded to $9,375,000. The Commission rejected
estimates of reproduction cost new less observed depreciation
because they were "too conjectural to have probative value," and
adopted original cost as "the best and only reliable evidence as to
property values." 43 P.U.R. (N.S.), pp. 213, 214. Canadian
maintains that, if its leaseholds are to be included in the rate
base, it was improper to value them as the Commission did. Canadian
offered evidence that their present market value was much higher.
It also offered evidence of a commodity market value of natural gas
per Mcf which would give a much higher value to the production
phase of Canadian's business. We do not stop to develop the details
of these lines of evidence. We cannot say that the Commission was
under a duty to put the leaseholds into the rate base at the
valuation urged by Canadian unless we revise what we said in
Page 324 U. S. 605
Federal Power Commission v. Natural Gas Pipeline Co.,
315 U. S. 575,
315 U. S. 586,
and overrule
Federal Power Commission v. Hope Natural Gas Co.,
supra. We held in those cases that the Commission was not
bound to the use of any single formula in determining rates. And,
in the
Hope Natural Gas Co. case, we sustained a rate
order based on actual legitimate cost against an insistent claim
that the producing properties should be given a valuation which
reflected the market price of the gas. In those cases, we held that
the question for the courts when a rate order is challenged is
whether the order viewed in its entirety and measured by its end
results meets the requirements of the Act. That is not a standard
so vague and devoid of meaning as to render judicial review a
perfunctory process. It is a standard of finance resting on
stubborn facts. [
Footnote
11]
"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)."
Federal Power Commission v. Hope Natural Gas Co.,
supra, p.
320 U. S.
603.
Hence, we cannot say as a matter of law that the Commission
erred in including the production properties in the rate base at
actual legitimate cost. That could be determined
Page 324 U. S. 606
only on consideration of the end result of the rate order, a
question not here under the limited review granted the case.
Cost to Canadian's Affiliate. As we have seen, Canadian
and Colorado Interstate had their origin in an agreement made in
1927 between Southwestern, Standard, and Cities Service. Pursuant
to that agreement, Southwestern organized Canadian, a wholly owned
subsidiary, to which were transferred the gas leaseholds and
producing property owned by Amarillo, a wholly owned subsidiary of
Southwestern. The cash consideration for this transfer was
$5,000,000 which was advanced by Standard at 6 percent interest.
Colorado Interstate was organized by Standard to construct and
operate the pipeline to connect with Canadian's facilities and to
transport the gas to the Denver market and intermediate points.
Canadian issued $11,000,000 of 6% twenty-year bonds to finance
its portion of the total project. Colorado Interstate purchased
those bonds with part of the proceeds of $19,200,000 of its own 6%
twenty-year sinking fund bonds which Standard had purchased at par.
Canadian repaid the $5,000,000 advance made by Standard out of the
proceeds of the sale of its bonds to Colorado Interstate.
Canadian's stock was issued to Southwestern, and is carried on
Canadian's books at $1.00. Canadian entered into a "cost" contract
with Colorado Interstate whereby Canadian agreed to produce and
sell gas to Colorado Interstate at "cost" for twenty years which
might be extended by Colorado Interstate. Under the contract,
"cost" included Canadian's operating expenses, interest at 6%, and
amortization (in lieu of depreciation, depletion, and retirements)
of all of Canadian's indebtedness over the twenty-year period. It
was also provided that Canadian's "cost" under the contract should
be decreased by any profits which it might obtain from other
sources including any local sales. Thus, it was obvious that
Canadian, under
Page 324 U. S. 607
this "cost" contract, would have no profits available for
dividends on its stock.
But, in accordance with the agreement, Colorado Interstate
issued $2,000,000 par value 6% preferred stock and 1,250,000 shares
of no par common. Cities Services received 15% of the common stock.
The rest of the common stock and all of the preferred was divided
equally between Southwestern and Standard. The latter paid
$2,000,000 in cash for its share of preferred and common.
Southwestern received not only preferred and common stock, but also
$5,000,000 in cash from the proceeds of the $11,000,000 of bonds
which Canadian issued and which were to be amortized over
twenty-years as part of the "cost" of gas sold to Colorado
Interstate by Canadian.
Canadian contends that the Commission should have included
$5,000,000 in the rate base for the gas leases and producing
properties acquired from Amarillo. The original cost of the
properties to Amarillo was $1,879,504. That is all the Commission
allowed. It said,
"Any treatment which would permit the capitalization of such
amounts would open the door to the renewal of past practices of the
utility industry when properties were traded between affiliated
interests at inflated prices with the expectation that the public
would foot the bill."
43 P.U.R. (N.S.), p. 215. We agree. Southwestern owned the
producing properties at the beginning of the transaction through
one subsidiary; it owned them at the end of the transaction through
another subsidiary. As between Southwestern and its subsidiaries,
there was no more than an inter-company profit. If Amarillo, rather
than Canadian, had entered the project, had sold a bond issue to
Southwestern, and, with part of the proceeds, paid off a $5,000,000
loan to Standard, certainly the amount of that payment would not be
properly included in its rate base. We fail to see a difference in
substance when another wholly owned subsidiary is utilized by
Southwestern.
Page 324 U. S. 608
The fact that the negotiations between Southwestern and Standard
were at arm's length has no bearing on the present problem. The end
result is that property has been transferred at a write-up from one
of Southwestern's pockets to another. The impact on consumers of
utility service of write-ups and inflation of capital assets
through inter-company transactions or otherwise is obvious. The
prevalence of the practice in the holding company field gave rise
to an insistent demand for federal regulation.
See S.Doc.
No. 92, Pt. 84-A, 70th Cong., 1st Sess. Utility Corporations, Final
Report of the Federal Trade Commission (1936); Bonbright &
Means, The Holding Company (1932), ch. VI; Barnes, The Economics of
Public Utility Regulation (1942) p. 95
et seq.
American T. & T. Co. v. United States, 299 U.
S. 232, is not opposed to our position. It merely
indicates a proper treatment for an inter-company transaction where
in fact an additional investment is shown to exist.
Affirmed.
MR. JUSTICE ROBERTS and MR. JUSTICE REED dissent from so much of
the opinion as approves the allocation by the Commission of
investments and expenses to the nonregulable transmission
properties. They concur in the dissent of THE CHIEF JUSTICE in
Canadian River Gas Co. v. Federal Power Commission et
al.
* Together with No. 380,
Canadian River Gas Co. v. Federal
Power Commission et al., also on certiorari to the Circuit
Court of Appeals for the Tenth Circuit. Argued January 30,
1945.
[
Footnote 1]
The latter resales are made by Colorado-Wyoming Gas Co., which
transports the gas from a point near Littleton, Colorado, to
Cheyenne, Wyoming. The proceedings against this company were
consolidated with those against Canadian and Colorado Interstate.
The Commission also ordered a reduction in the rates charged by
Colorado-Wyoming Gas Co. That order is here for review on certain
points in No. 575,
post, p.
324 U. S. 626.
[
Footnote 2]
The Commission in its report characterized volumetric costs as
variable costs and capacity costs as fixed costs. 43 P.U.R. (N.S.),
p. 232.
[
Footnote 3]
A residual refining credit was determined and deducted from
production costs.
[
Footnote 4]
Fifteen times in some 12 years.
[
Footnote 5]
So far as appears, Canadian presented no evidence showing the
cost of these intrastate sales.
[
Footnote 6]
As we have said, the return on leases and wells was treated as
volumetric costs; 50 percent of the return on the Denver pipeline
was treated as volumetric and 50 percent as capacity costs, and
return on investment in metering and regulating equipment was
treated as distribution costs.
[
Footnote 7]
As respects the accounting for the cost of money invested in the
enterprise,
see Schlatter, Advanced Cost Accounting
(1939), ch. XII; Neuner, Cost Accounting (1942), p. 277; Lawrence,
Cost Accounting (1930), ch. 22.
[
Footnote 8]
It is objected that the allocation made by the Commission
results in discrimination between purchasers of gas from Colorado
Interstate, as indicated by the fact that costs allocated to one
customer who is distant from Denver are greater than costs
allocated to another customer at Denver. But all the Commission did
was to order an aggregate reduction in the wholesale rates of
$2,065,000, so as to produce a fair return. The adjustment of the
rate schedules for various delivery points has not yet been made.
See Federal Power Commission v. Natural Gas Pipeline Co.,
315 U. S. 575,
315 U. S.
584.
[
Footnote 9]
Another section of the Act which refers to "production" is §
11(a). It gives the Commission certain functions to perform where
two or more States propose compacts dealing with the conservation,
production, transportation, or distribution of natural gas.
[
Footnote 10]
Secs. 5(b), 6(a), 9(a), 10(a), and 14(b).
[
Footnote 11]
Cf. the British standards described in Smith, The
Control of Power Rates in the United States and England, 159
Annals, 101, 103, 104.
MR. JUSTICE JACKSON, concurring.
I concur in upholding orders of the Federal Power Commission in
this and companion cases. The Court cannot, consistently with
Federal Power Commission v. Hope Natural Gas Co.,
320 U. S. 591, do
otherwise.
The opinion in the
Hope case laid down fundamental
principles of decision in this language:
"Under the statutory standard of 'just and reasonable,' it is
the result reached, not the method employed, which is controlling.
. . .
Page 324 U. S. 609
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."
Federal Power Commission v. Hope Natural Gas Co.,
supra, p.
320 U. S. 602.
This case introduced into judicial review of administrative action
the philosophy that the end justifies the means. I had been taught
to regard that as a questionable philosophy, so I dissented, and
still adhere to the dissent. But it is the law of this Court, and I
do not understand that any majority is ready to reconsider it.
It is true that the Act excludes "production or gathering of
natural gas" from jurisdiction of the Commission. If the Commission
had imposed any direct regulation upon that activity, I would join
in holding it to have exceeded its jurisdiction. But the others in
question have no immediate "impact" upon production or gathering of
gas.
The statute commands the Commission to regulate the price of
natural gas transported and sold at wholesale in interstate
commerce for resale. The Commission has investigated the fiscal
aspects of production and gathering because of their bearing on the
reasonableness of interstate rates. I suppose a commission is free
to take evidence as to conditions and events quite beyond its
regulatory jurisdiction where they are thought to affect the cost
of that whose price it is directed to determine. This, as I see it,
is all that has been done here.
Of course, the Commission's order, whose primary impact is on
rates in the interstate markets, has a very important secondary
effect on production, and on producers, of gas. As the industry is
organized, the Commission could not fix an interstate price that
would not have some such reaction. Indeed, I think the Commission
cannot wisely
Page 324 U. S. 610
fix a reasonable price without considering its incidental effect
on production.
To let rate base figures, compiled on any of the conventional
theories of ratemaking, govern a rate for natural gas seems to me
little better than to draw figures out of a hat. These cases
confirm and strengthen me in the view I stated in the
Hope
case that the entire rate base method should be rejected in pricing
natural gas, though it might be used to determine transportation
costs. These cases vividly demonstrate the delirious results
produced by the rate base method. These orders in some instances
result in three different prices for gas from the same well. The
regulated company is a part owner, an unregulated company is a part
owner, and the land owner has a royalty share of the production
from certain wells. The regulated company buys all of the gas for
its interstate business. It is allowed to pay as operating expenses
an unregulated contract price for its co owner's share and a
different unregulated contract price for the royalty owner's share,
but for its own share it is allowed substantially less than either.
Any method of ratemaking by which an identical product from a
single well, going to the same consumers, has three prices,
depending on who owns it, does not make sense to me.
These cases furnish another example of the capricious results of
the rate base method in this kind of case. The Commission has put
five of the most important leaseholds, containing approximately
47,000 acres, in the rate base at $4,244.24, something under 10
cents per acre. Three such leases are put in the rate base at zero.
This is because original cost was used, and these were bought
before discovery of gas thereon. The Company which took the high
risk of wildcat exploration is thus allowed a return of 6 1/2
percent on nothing for the three leases, and a return of less than
$300 a year on the others. Their present
Page 324 U. S. 611
market value is shown by testimony to be over 3 million
dollars.
I cannot fairly say that the Commission exceeded its
jurisdiction in obtaining this evidence and making these
calculations, even though the evidence related to production and
gathering of gas. But I do think it is a fantastic method of fixing
a "just and reasonable" price for gas.* All of that, however, was
thrashed out in the
Hope case.
I do not recede from the views therein stated that
Hope
provides no workable basis of judicial review, no key by which
commissions can anticipate what rule, if any, will control our
review, and no guidance to counsel as to what issues they should
try or how they should try them. I think, however, that the
majority which promulgated that decision, or a majority of that
majority, should be permitted to continue to spell out its
application to specific problems until we see where it leads.
It is difficult for me in these cases, and in some it might be
impossible, to follow the rule of
Hope in reaching a
decision. I have no intuitive knowledge as to whether a given price
is reasonable, and my fundamental concept of reasonable price in
this industry and how to find it has been rejected by the Court.
But it happens that this case illustrates some aspects of the
problem of pricing gas, as will appear from the reasons I shall
state for the failure of the Company in this case to convince me
that it is wronged by the reduction of prices ordered by the
Commission.
Page 324 U. S. 612
Far-sighted gas rate regulation will concern itself with the
present and future, rather than with the past, as the rate base
formula does. It will take account of conditions and trends at the
source of the supply being regulated. It will use price as a tool
to bring goods to market -- to obtain for the public service the
needed amount of gas. Once a price is reached that will do that,
there is no legal or economic reason to go higher, and any rate
above one that will perform this function is unwarranted. If the
supply comes from a region where there is such overproduction that
owners are ready to sell for less than a fair return on their
investment, there is no reason why the public should pay more. On
the other hand, if the supply is not too plentiful and the price is
not a sufficient incentive to exploit it and fails to bring forth
the quantity needed, the price is unwisely low, even if it does
square perfectly with somebody's idea of return on a "rate base."
The problem, of course, is to know what price level will be
adequate to perform this economic function.
This case throws light on a subject which, in
Hope, I
was trying to discuss more abstractly. The evidence here shows
facts from which we can learn, in the way any practical buyer would
seek to learn at which price this company is able, willing, and
ready to bring gas into the interstate wholesale market. It is what
might be called the "most favored customer" test -- a test, of
course, not available in a fully regulated industry, but peculiarly
adapted to the conditions of the natural gas industry as it has
developed. This petitioner, Colorado Interest Gas Company, sells to
Colorado Fuel and Iron Company a large quantity of gas for
industrial use. Its consumption approximates that of all the
inhabitants of Denver. Colorado Fuel and Iron used in plants
7,257,379 m.c.f.'s, while Denver was supplied for public service
6,196,882 m.c.f.'s. The rates to the Fuel and Iron Company are not
and never have been regulated by public authority. In May,
1938,
Page 324 U. S. 613
the Gas Company contracted to extend the Fuel and Iron supply
contract for five years at 9 1/2 cents per m.c.f. for boiler fuel
and 16 cents per m.c.f. for other purposes. The same gas is sold
wholesale by the same company at the Denver city gate to the local
distributing company at 40 cents per m.c.f.
Of course, differences in conditions of delivery must be allowed
for. Gas from the field is transmitted roughly 200 miles from the
field to Colorado Fuel and Iron, and about another 100 miles to
Denver. If 50 percent more transportation added 50 percent to the
entire price of the Fuel and Iron Company gas, which would mean
attributing a zero value to it in the field and its entire selling
price to transportation, it would bring gas to the city gate of
Denver at about 14 cents based on boiler gas and 24 cents based on
other gas, instead of the 40 cents being charged.
Another difference must be allowed for. The Denver public
service has priority over the industrial gas in time of shortage.
This is an impressive legal advantage, but one whose real worth
depends on the number and duration of interruptions it causes in
actual practice. From the tabulation of reductions and suspensions
of service the Fuel and Iron Company appears to have suffered 5
interruptions from 1932 to December 31, 1940 -- the shortest for
fifteen hours, the longest for fifty hours. I do not belittle these
interruptions -- they may be very costly to an industrial customer
-- but nothing indicates that they account for any such difference
in price as we have here.
There is every indication that the Colorado Fuel and Iron price
was really a bargained one. The Gas Company's position seems to
have been the same as that stated by one of the witnesses in the
Panhandle case: "It may be heresy to say so, but we try to charge
our nonregulated customers all the traffic will bear." This may
have been candor; it is not heresy. Such is the normal spirit of
the marketplace. But the record shows that Colorado Fuel
Page 324 U. S. 614
and Iron was not at the mercy of the Gas Company, was bargaining
at arm's length, had a good bargaining position. It had been using
other fuels, and the Gas Company had to bid for its business as
against fuel competition. Under this pressure, the Gas Company was
able, ready, and willing to part with its gas, delivered 200 miles
from the field at 9 1/2 to 16 cents per m.c.f.
What about the Denver rate? There, the local distributing
company, which was the purchaser, was a subsidiary of Cities
Service, one of the three companies that owned the pipeline and gas
supply and were the sellers of the gas. That local company had been
distributing manufactured gas, by comparison with which 40-cent
natural gas would look cheap, and is cheap. It is not necessary to
draw any invidious inferences from intercorporate relationships to
conclude that the 40-cent rate at the Denver gate was not a
vigorously bargained one, and was not much influenced by
competitive considerations. The great economic advantages of
natural gas to householders and the relative wastefulness of its
industrial use are developed in my opinion in
Hope.
I strongly suspect from the history of this transaction that
there is an explanation of the difference in price -- one which is
not an uncommon argument used to justify a lower price to
industrial than to household users. To supply Denver required
laying a 20-inch pipeline, requires operating it, and requires most
of the overhead of the business. To carry the additional Fuel and
Iron business required only to lay the first 200 miles of pipe of
22-inch diameter instead of 20, and the additional revenue from
industrial sales does not add the same proportion of capital
investment, overhead, or operating expense. Thus, charging to
Denver and other wholesale purchasers for resale to the public no
more than would be charged if that service stood alone, the Company
may justify its industrial
Page 324 U. S. 615
sales at low rates as good business from petitioner's management
point of view.
But I do not think it can be accepted as a principle of public
regulation that industrial gas may have a free ride because the
pipeline and compressor have to operate anyway, any more than we
can say that a big consumer should have a free ride for his coal
because the trains run anyway. It is true that the Natural Gas Act
forbids discrimination only as between regulated rates, and does
not forbid discriminations between the regulated and unregulated
ones. 15 U.S.C. § 717c(b). But I do not think it precludes use of a
voluntary, fairly bargained selling price as a standard of what is
a "just and reasonable" price. By use of the unregulated price as a
basis for comparison, I think a reduction in the wholesale rates
for resale to the public is in order. If this makes low-price
industrial business less desirable, it will be in the long range
public interest for reasons more fully stated by me in
Hope.
I should like to reverse this case not because I think the rate
reduction is wrong, but because I think the real inwardness of the
gas business as affects the future has been obscured by the
Commission's preoccupation with bookkeeping and historical matter.
Such considerations may be relevant to rate base theories, but will
not be very satisfying to a coming generation that will look back
and judge our present regulatory method in the light of an
exhausted and largely wasted gas supply. But, as the matter stands,
I see no legal grounds for reversal.
* It does not help me to know what is a reasonable price for gas
to learn what it does to outstanding securities. Many gas companies
were organized and operated in care-free days when they issued
stocks and bonds without supervision. It does not prove that a gas
rate is too low to show that it does not pay dividends on inflated
values. Nor is a rate proved excessive by the fact that it pays a
large dividend upon an exceedingly conservative capitalization. I
think
Hope's use of return on stock or bond issues,
repeated in these cases, is one of the least reliable of possible
tests of rates.
MR. CHIEF JUSTICE STONE, dissenting in No. 380.
MR. JUSTICE ROBERTS, MR. JUSTICE REED, MR. JUSTICE FRANKFURTER
and I are of opinion that the Federal Power Commission, in making
the rate order here under attack, exceeded its jurisdiction and
reached a result which must be rejected because unauthorized by the
applicable statute.
Page 324 U. S. 616
In fixing rates for petitioner's interstate business of
transporting and selling natural gas for resale, the Commission
included petitioner's gas wells and gas gathering facilities
together with all its transportation and distribution facilities in
a single rate base. It valued the wells and gathering facilities at
their prudent investment cost of many years ago, a valuation
drastically less than their present market value. It then
restricted petitioner's return to 6 1/2% of the rate base,
including the wells and production facilities, constituting
approximately two-thirds of the total rate base. It thus subjected
petitioner's production and gathering property to the same
regulation as that which the statute imposes upon petitioner's
property used and useful in the interstate transportation and sale
of gas for resale. This we think the Natural Gas Act in plain terms
prohibits.
The Natural Gas Act of 1938, 52 Stat. 821, 15 U.S.C. § 717
et seq., as amended February 7, 1942, 56 Stat. 83,
declares, § 1(a):
"the business of transporting and selling natural gas for
ultimate distribution to the public is affected with a public
interest, and . . . Federal regulation in matters relating to the
transportation of natural gas and the sale thereof in interstate
and foreign commerce is necessary in the public interest."
In the execution of this policy, §§ 4 and 5 of the Act set up a
complete scheme of regulation of rates and charges for the
transportation and sale of natural gas by "natural gas companies"
at wholesale in interstate commerce. Section 2(6) defines a natural
gas company as "a person engaged in the transportation of natural
gas in interstate commerce, or the sale in interstate commerce of
such gas for resale." Section 1(b) provides:
"The provisions of this Act shall apply to the transportation of
natural gas in interstate commerce, to the sale in interstate
commerce of natural gas for resale . . . , but shall not apply to
any
Page 324 U. S. 617
other transportation or sale of natural gas . . . or to the
production or gathering of natural gas."
The Court rejects petitioner's contentions that these provisions
preclude the Commission from including the gas wells and gathering
facilities in the rate base for petitioner's regulated business;
that regulation begins only with the delivery of gas into
petitioner's transmission pipeline, and includes, as the statute
provides, only the interstate transportation and sale of the gas
for resale. Petitioner insists that, since the wells and gathering
facilities are not subject to Commission regulation, the cost or
value of the gas upon its delivery to petitioner's transmission
line must, for purposes of rate regulation of the regulated
business of transportation and sale, be taken at its fair market
value.
This issue is now for the first time presented to this Court for
decision. No such question was raised or decided in
Federal
Power Commission v. Hope Natural Gas Co., 320 U.
S. 591,
320 U. S.
610-614. Although it was mentioned in the
amicus brief of the West Virginia, which was not a party
to the suit, no such issue was raised by the parties in the case.
There, the gas wells and gathering property were included in the
rate base valued at its prudent investment cost, and the allowed
return was restricted to 6 1/2%. But no objection was taken to the
inclusion of the production property in the rate base, either in
the Circuit Court of Appeals or, so far as the record shows, in the
application to the Commission for rehearing. Section 19(b) provides
that no objection to the Commission's order may be considered by
the court unless raised in the application to the Commission for
rehearing. The production property having been included in the rate
base without objection, we could consider only the question which
was raised with respect to property admitted to be properly a part
of the rate base -- namely, whether its valuation by the Commission
and the allowed
Page 324 U. S. 618
rate of return were within constitutional limits.
Cf.
19 U. S.
Virginia, 6 Wheat. 264,
19 U. S.
399.
The Act speaks in terms of activities which are regulated and
those which are not. It subjects the interstate transportation and
sale of natural gas, an activity, to the jurisdiction of the
Commission, which includes the exercise of its ratemaking function
as prescribed by §§ 4 and 5, and which concededly extends to the
valuation of property used in interstate transportation and sale of
natural gas and to the determination of a fair rate of return upon
that value.
Even though production and gathering could be thought to be a
part of the regulated transportation and sale, that possibility is
precluded by the words of § 1(b) which say:
"The provisions of this Act [including those of §§ 4 and 5 which
prescribe ratemaking for the activity of transporting and selling
wholesale] . . . shall not apply"
to another activity, "the production or gathering of natural
gas."
It does not seem possible to say in plainer or more unmistakable
language that the one activity, interstate transportation and sale,
is to be subjected to, and that the other, production or gathering,
is to be excluded from, the valuation and ratemaking powers of the
Commission. To interpret the words "production or gathering" in §
1(b) in the only way which the Court or the Government is able to
suggest, as referring only to the physical activities of drilling
and spacing the gas wells, and thus excluding such activities alone
from regulation, seems hardly plausible. It is true that
"production or gathering" are activities which may include the
drilling and spacing of gas wells. But the "transportation or sale"
referred to in the phrase of § 1(b) "but shall not apply to any
other transportation or sale of natural gas . . . or to the
production or gathering of natural gas" is also an activity. Yet
the Court and the Government concede that, by the command of the
Act
Page 324 U. S. 619
that it "shall not apply" to the activity of "any other
transportation or sale," petitioner's property used in the
transportation and sale of gas to industrial consumers is excluded
from the rate base. They thus reach the surprising conclusion that
property used in one sort of activity to which the provisions of
the Act are declared not to apply may nevertheless be included in
the rate base, while holding that another sort of property, also
used in an activity to which the provisions of the Act are by the
same phrase declared not to apply is nevertheless excluded from the
rate base.
Nor is the plausibility of the Government's construction aided
by reference to the provisions of the Act [
Footnote 2/1] giving the Commission power to make
investigations, to regulate accounts, to gather information, and to
find values of property of natural gas companies and their
depreciation. These provisions are obviously directed at aiding the
Commission in the exercise of various powers which are conferred
upon it but which are unrelated to the regulation of the production
or gathering of natural gas. Section 5(b), for example, authorizes
the Commission to procure the information of costs of production or
transportation of
Page 324 U. S. 620
natural gas in aid of state commissions, and such was its
purpose. H.Rep. No. 709, p. 5, 75th Cong., 1st Sess., on H.R. 6586.
Sections 9(a) and 10(a) give authority essential to the
Commission's admitted power to regulate the interstate sale of gas
at wholesale, to determine whether the cost of or charge for the
gas acquired by a natural gas company, whose rates are regulated,
are excessive because unrelated to fair or market value, especially
where the relations between the producer and the interstate
wholesale distributor are not at arm's length.
United Fuel Gas
Co. v. Railroad Comm'n, 278 U. S. 300,
278 U. S. 320;
Smith v. Illinois Bell Tel. Co., 282 U.
S. 133,
282 U. S. 144;
Western Distributing Co. v. Public Service Comm'n,
285 U. S. 119;
Dayton Power & L. Co. v. Public Utilities Comm'n,
292 U. S. 290;
Natural Gas Co. v. Slattery, 302 U.
S. 300,
302 U. S.
306-308;
Arkansas Gas Co. v. Dept.,
304 U. S. 61;
cf. Interstate Commerce Comm'n v. Goodrich Transit Co.,
224 U. S. 194,
224 U. S. 211.
And the determination of the Commission permitted by § 14(a) with
respect to the amount of gas reserve is essential to the
determination of the rate of depreciation and amortization of the
gas company's regulated transmission line, since its useful life is
normally limited by the available gas supply.
No reason, founded upon the language of the statute or its
purpose, is advanced for disregarding the plain command of § 1(b)
excluding the production or gathering of the gas from those other
activities, the transporting and selling, which are subject to the
regulatory provisions of §§ 4 and 5. The language was well chosen
to accomplish exactly what the legislative history shows was
intended to be accomplished. The report of the House Committee
(H.Rep. No. 709, 75th Cong., 1st Sess.), recommending adoption of
the bill which became the Natural Gas Act, shows beyond doubt that
the purpose of the legislation was to bring under federal
regulatory control the interstate transportation and sale of
natural gas which had
Page 324 U. S. 621
been held not to be subject to state regulation, in
Missouri
v. Kansas Gas Co., 265 U. S. 298;
cf. Public Util. Commission v. Attleboro Steam & Electric
Co., 273 U. S. 83, but
to leave undisturbed all other matters which were then subject to
state regulation, which included ratemaking for production and
gathering.
See Illinois Natural Gas Co. v. Central Illinois
Public Service Co., 314 U. S. 498,
314 U. S. 506;
Federal Power Commission v. Hope Natural Gas Co., supra,
320 U. S. 609.
And, upon the floor of the Senate, the sponsor of the bill
declared:
"It does not attempt to regulate the production of natural gas
or the distributors of natural gas -- only those who sell it
wholesale in interstate commerce."
81 Cong.Rec. p. 9312. That the exemption of the production of
natural gas from regulation was thought by the regulatory
authorities themselves to exclude regulation, by the Commission, of
the price of gas in the producing field appears from the hearings
upon the predecessor bill, [
Footnote
2/2] which contained provisions identical with or substantially
equivalent to §§ 5(b), 6(a), 9(a), and 10(a) of the Act as finally
passed, and § 1(b) of which declared that the provisions of the
bill should not apply "to the production of natural gas."
Page 324 U. S. 622
The exclusion of production and gathering of natural gas from
the regulatory authority of the Commission is a command to the
Commission not to regulate that which is excluded. Otherwise,
powers reserved to the states would be encroached upon contrary to
the words and purpose of the Act, and a pretended government would
be set up by Commission action, without the authority of
Congress.
The Commission did not deny the command, but justified disregard
of it only by saying that
"Canadian's production and gathering operations are an integral
part of its total operations, including transportation in
interstate commerce and the sale of natural gas for resale in
interstate commerce."
And it added:
"The investigation of Canadian's production and gathering
property and operations is indispensable in regulating Canadian's
rates and charges for the sale of natural gas in interstate
commerce for resale."
Such an investigation was undoubtedly proper and necessary in
order to ascertain the fair unregulated value of the natural gas
produced in an unregulated field, on its delivery into petitioner's
transmission pipeline, in order to enable the Commission to
regulate appropriately the sales price of the gas.
But this does not mean that, in fixing rates for a regulated
business which derives its distributed product from an unregulated
business, that the property of the latter is not to be segregated
from the regulated property, or that there can rightly be applied
to it standards of valuation and rate of return which are
applicable only to a regulated business.
Interstate Commerce
Comm'n v. Goodrich Transit Co., supra, 224 U. S. 211;
Smith v. Illinois Bell Tel. Co., supra, 282 U. S. 151;
Western Distributing Co. v. Public Service Comm'n, supra,
285 U. S.
123-124. Otherwise, its exclusion from regulation would
be meaningless. The standards to be applied in order to make
certain that the regulated business is not paying too much for the
product are those which
Page 324 U. S. 623
currently apply in the unregulated business. This, as we have
pointed out, was recognized by the Solicitor of the Commission in
the hearings on proposed legislation culminating in the present
Act. He said that the unregulated field price was controlling upon
the Commission
"if the transaction is at arm's length. If the transaction is
not at arm's length, of course, its reasonableness may be inquired
into under the decisions of the Supreme Court. [
Footnote 2/3]"
It is one thing to say that such investigation is necessary to
ascertain the fair unregulated value of petitioner's gas when
produced. But it is quite another to say, and the Commission did
not say, that it is necessary or permissible for the Commission to
fix the value of petitioner's production property and the gas which
it produces far below their market value, and to restrict
petitioner's return from its unregulated business below that which
would be produced if the gas production were unregulated. Such
restrictions can be justified only by authorized rate regulation.
From such regulation petitioner's gas wells and production
facilities have been specifically exempted by command of the
statute.
Where a regulated utility procures from an unregulated source
the product which it distributes, the proper cost which the
regulated company should be allowed to pay for it, when the
Commission is not authorized to regulate the production, presents a
problem not free from difficulties. But here, the Commission has
made no effort to meet these difficulties, if such there be, except
by the one course which the statute forbids, by subjecting the
production property to regulation.
A familiar and permissible way of meeting them, as petitioner
points out, is by treating the property unregulable in law as
unregulable in fact and applying to it those standards of value and
return which currently
Page 324 U. S. 624
prevail in an unregulated business when it is conducted at arm's
length. Petitioner urges that there are other courses open to the
Commission which will not violate the statute, and that there is
uncontradicted evidence in the record showing that natural gas has
a market value at the wellhead and at the point of delivery into
petitioner's transmission line. Those conditions would indicate
that gas production property in the area in question has an
ascertainable market value on which, in the absence of regulation,
petitioner is free to receive the return currently produced by such
property.
Without an appropriate investigation, we cannot know the fact,
which is for the Commission, and not for us, to determine. If
investigation discloses difficulties which only legislation can
cope with, the answer is further legislation, not disregard of
existing legislation. But the Commission has made no such
determination or investigation, and, so far as appears, has given
no consideration to the evidence supporting petitioner's
contentions. It is the duty of the Commission so to conduct its
proceedings as to restrict its action within the jurisdiction
conferred upon it. It is plain that it has not performed that duty
here, and that it should be required to do so. Whether the
facilities for the production of natural gas should be regulated,
and, if so, whether the regulation should be left to the states, as
we think Congress has left it, are matters for Congress to
determine. If it be thought that petitioner's profits from
production of gas are too great because they are unregulated, and
if it be thought to be important that they be reduced, it is
immensely more important that that be not accomplished by lawless
action.
It is no answer to cite our authorities involving state
regulation, [
Footnote 2/4] in order
to prove that the Commission here
Page 324 U. S. 625
has acted within its statutory authority. In reviewing such
cases, we accept the state's construction of its statutes fixing
the jurisdiction of state regulatory bodies. Nor is it any
justification of the Commission's action to say, applying the
Hope case, that the end result of the Commission's action
is that petitioner's unregulated property is not being confiscated.
Authorized utility regulation may, of course, result in a
permissible diminution of property values and income, provided the
regulation does not so exceed constitutional limitations as to be
"confiscatory." Hence, loss or damage caused by authorized utility
regulation gives rise to no actionable wrong if the regulation is
within constitutional limitations. Such was the principle laid down
in the
Hope case.
But any such diminution in value or return, caused by
unauthorized regulation, is unlawful without reference to
constitutional principles. In the
Hope case there was no
contention that the utility's production property was not subject
to regulation. The only question was whether the return upon it, as
allowed by statutory authority, was confiscatory because it went
beyond the constitutional limits of the power to regulate. Here,
the question is only of the deprivation of petitioner's property by
the Commission's action in excess of its statutory power to
regulate. That power, in the case of petitioner's production
property, we think does not exist. So far as the unauthorized
regulation deprives petitioner of its property, the deprivation
cannot be justified by saying that, if authorized, it would not
violate the Constitution. Absence of confiscation by authorized
Commission regulation does not prove that the Commission has
legislative authority to regulate.
[
Footnote 2/1]
Section 5(b) authorizes investigation by the Commission of the
cost of production of natural gas, where the Commission has no
authority to establish a rate governing the transportation or sale
of such natural gas. Section 6(a) empowers the Commission to
ascertain the cost of the property of every natural gas company and
other facts bearing on the determination of such cost "when found
necessary for ratemaking purposes." Section 9(a) authorizes the
Commission to determine the proper "rates of depreciation and
amortization" of the several classes of property of each natural
gas company "used or useful in the production, transportation, or
sale of natural gas." Section 10(a) gives the Commission authority
to require reports from natural gas companies of their "cost of
maintenance and operation of facilities for the production" of
natural gas. Section 14(b) gives the Commission power to determine
the "adequacy or inadequacy of the gas reserves held or controlled"
by them.
[
Footnote 2/2]
In the hearings upon the earlier bill, Mr. DeVane, Solicitor of
the Federal Power Commission, stated: "§ 1(b) also provides that
the Commission shall have no jurisdiction over the gathering or
gathering rates for natural gas." "Gathering rates" he explained as
"The rates that are paid in the gathering field." He further
stated,
"There is no control of the gathering rate; the Commission would
not have jurisdiction. That price is fixed by competitive
conditions that exist in the field."
He said that the Commission does not have any power over the
price
"that is paid to the gatherer, the man that produces it; that is
binding if the transaction is at arm's length. If the transaction
is not at arm's length, of course, its reasonableness may be
inquired into, under the decisions of the Supreme Court."
There is nothing in the subsequent legislative history to
indicate that this understanding with respect to § 1(b) in the
earlier Act was changed at a later stage, and § 1(b), as finally
adopted, indicates no such change. Hearings on H.R. 11662, 74th
Cong., 2d Sess., pp. 28, 42-43.
[
Footnote 2/3]
See 324
U.S. 581fn2/2|>footnote 2,
supra.
[
Footnote 2/4]
Wilcox v. Consolidated Gas Co., 212 U. S.
19;
Cedar Rapids Gas Co. v. Cedar Rapids,
223 U. S. 655;
Newark Natural Gas & F. Co. v. Newark, 242 U.
S. 405;
Public Utilities Commission v. Landon,
249 U. S. 236;
Pennsylvania Gas Co. v. Public Service Commission,
252 U. S. 23;
Railroad Commission v. Pacific Gas & Electric Co.,
302 U. S. 388;
Lone Star Gas Co. v. Texas, 304 U.
S. 224.