1. The validity of an order of the Federal Power Commission
fixing rates under the Natural Gas Act is to be determined on
judicial review by whether the impact or total effect of the order
is just and reasonable, rather than by the method of computing the
rate base. P.
320 U. S.
602.
2. One who seeks to have set aside an order of the Federal Power
Commission fixing rates under the Natural Gas Act has the burden of
showing convincingly that it is unjust and unreasonable in its
consequences. P.
320 U. S.
602.
3. An order of the Federal Power Commission reducing
respondent's rates for sales of natural gas in interstate commerce
held valid under the Natural Gas Act. P.
320 U. S.
603.
The rate base determined by the Commission was found by it to be
the "actual legitimate cost" of the company's interstate property,
less depletion and depreciation, plus allowances for unoperated
acreage, working capital, and future net capital additions.
"Reproduction cost new" and "trended original cost" were given no
weight. Accrued depletion and depreciation and the annual allowance
for depletion and depreciation were determined by application of
the "economic service life" method to "actual legitimate cost."
4. Considering the amount of the annual return which the company
would be permitted to earn on its property in interstate service,
and the various factors which that return reflects, this Court is
unable to say that the rates fixed by the Commission are not "just
and reasonable" under the Act. P.
320 U. S.
604.
5. Rates which enable a natural gas company to operate
successfully, to maintain its financial integrity, to attract
capital, and to compensate its investors for the risks assumed
cannot be condemned as unjust and unreasonable under the Natural
Gas Act, even though
Page 320 U. S. 592
they might produce only a meager return on a rate base computed
on the "present fair value" method. P.
320 U. S.
605.
6. The rationale of the decision renders it unnecessary to
determine whether the Commission's exclusion from the rate base of
well drilling and other costs, previously charged to operating
expenses, was consistent with the "prudent investment" theory as
developed and applied in particular cases. P.
320 U. S.
605.
7.
United Railway Co. v. West, 280 U.
S. 234, so far as it rejects cost as the basis of
depreciation allowances, is disapproved. P.
320 U. S.
606.
8. The requirements of the Constitution in respect of rates are
not more exacting than the standards of the Act, and a rate order
valid under the latter is consistent with the former. P.
320 U. S.
607.
9. In fixing "just and reasonable" rates under §§ 4 and 5 of the
Natural Gas Act, for natural gas sold in interstate commerce by a
private operator through an established distribution system, the
Commission was not required to take into consideration the indirect
benefits -- affecting the economy, conservation policies, and tax
revenues -- which the producing State might derive from higher
valuations and rates. P.
320 U. S.
609.
10. The suggestion that the Commission did not allow for gas
production a return sufficient to induce private enterprise to
perform completely and efficiently its functions for the public is
unsupported. P.
320 U. S.
615
11. The Commission is not empowered by the provisions of §§ 4
and 5, which authorize it to fix "just and reasonable" rates, to
fix rates calculated to discourage intrastate resales for
industrial use. P.
320 U. S.
616.
12. The question whether the rates charged by the company
discriminate against domestic users and in favor of industrial
users is not presented. P.
320 U. S. 617.
13. Findings of the Commission as to the lawfulness of past
rates
held not reviewable under §19(b) of the Act. P.
320 U. S.
618.
134 F.2d 287 reversed.
Certiorari, 319 U.S. 735, to review a decree setting aside an
order of the Federal Power Commission, 44 P.U.R.(N.S.) 1, under the
Natural Gas Act.
Page 320 U. S. 593
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
The primary issue in these cases concerns the validity under the
Natural Gas Act of 1938, 52 Stat. 821, 15 U.S.C. § 717
et
seq., of a rate order issued by the Federal Power Commission
reducing the rates chargeable by Hope Natural Gas Co., 44
P.U.R.,N.S., 1. On a petition for review of the order made pursuant
to § 19(b) of the Act, the
Page 320 U. S. 594
Circuit Court of Appeals set it aside, one judge dissenting. 134
F.2d 287. The cases are here on petitions for writs of certiorari
which we granted because of the public importance of the questions
presented.
City of Cleveland v. Hope Natural Gas Co., 319
U.S. 735.
Hope is a West Virginia corporation organized in 1898. It is a
wholly owned subsidiary of Standard Oil Co. (N.J.). Since the date
of its organization, it has been in the business of producing,
purchasing and marketing natural gas in that state. [
Footnote 1] It sells some of that gas to
local consumers in West Virginia. But the great bulk of it goes to
five customer companies which receive it at the West Virginia line
and distribute it in Ohio and in Pennsylvania. [
Footnote 2] In July, 1938, the cities of Cleveland
and Akron filed complaints with the Commission charging that the
rates collected by Hope from East Ohio Gas Co. (an affiliate of
Hope which distributes gas in Ohio) were excessive and
unreasonable. Later in 1938, the Commission, on its own motion,
instituted an investigation to determine the reasonableness of all
of Hope's interstate rates. In March,
Page 320 U. S. 595
1939, the Public Utility Commission of Pennsylvania filed a
complaint with the Commission charging that the rates collected by
Hope from Peoples Natural Gas Co. (an affiliate of Hope
distributing gas in Pennsylvania) and two non-affiliated companies
were unreasonable. The City of Cleveland asked that the challenged
rates be declared unlawful, and that just and reasonable rates be
determined from June 30, 1939 to the date of the Commission's
order. The latter finding was requested in aid of state regulation
and to afford the Public Utilities Commission of Ohio a proper
basic for disposition of a fund collected by East Ohio under bond
from Ohio consumers since June 30, 1939. The cases were
consolidated, and hearings were held.
On May 26, 1942, the Commission entered its order and made its
findings. Its order required Hope to decrease its future interstate
rates so as to reflect a reduction, on an annual basis of not less
than $3,609,857 in operating revenues. And it established "just and
reasonable" average rates per m.c.f. for each of the five customer
companies. [
Footnote 3] In
response to the prayer of the City of Cleveland, the Commission
also made findings as to the lawfulness of past rates, although
concededly it had no authority under the Act to fix past rates or
to award reparations. 44 P.U.R.(N.S.) p. 34. It found that the
rates collected by Hope from East Ohio were unjust, unreasonable,
excessive, and therefore unlawful, by $830,892 during 1939,
$3,219,551 during 1940, and $2,815,789 on an annual basis since
1940. It further found that just, reasonable, and lawful rates for
gas sold by Hope to East Ohio for resale for ultimate public
consumption were those required
Page 320 U. S. 596
to produce $11,528,608 for 1939, $11,507,185 for 1940, and
$11.910,947 annually since 1940.
The Commission established an interstate rate base of
$33,712,526 which, it found, represented the "actual legitimate
cost" of the company's interstate property less depletion and
depreciation and plus unoperated acreage, working capital and
future net capital additions. The Commission, beginning with book
cost, made certain adjustments not necessary to relate here, and
found the "actual legitimate cost" of the plant in interstate
service to be $51,957,416, as of December 31, 1940. It deducted
accrued depletion and depreciation, which it found to be
$22,328,016 on an "economic service life" basis. And it added
$1,392,021 for future net capital additions, $566,105 for useful
unoperated acreage, and $2,125,000 for working capital. It used
1940 as a test year to estimate future revenues and expenses. It
allowed over $16,000,000 as annual operating expenses -- about
$1,300,000 for taxes, $1,460,000 for depletion and depreciation,
$600,000 for exploration and development costs, $8,500,000 for gas
purchased. The Commission allowed a net increase of $421,160 over
1940 operating expenses, which amount was to take care of future
increase in wages, in West Virginia property taxes, and in
exploration and development costs. The total amount of deductions
allowed from interstate revenues was $13,495,584.
Hope introduced evidence from which it estimated reproduction
cost of the property at $97,000,000. It also presented a so-called
trended "original cost" estimate which exceeded $105,000,000. The
latter was designed
"to indicate what the original cost of the property would have
been if 1938 material and labor prices had prevailed throughout the
whole period of the piecemeal construction of the company's
property since 1898."
44 P.U.R.(N.S.), pp. 8, 9. Hope estimated by the "percent
condition" method accrued depreciation at about 35% of
Page 320 U. S. 597
reproduction cost new. On that basis, Hope contended for a rate
base of $66,000,000. The Commission refused to place any reliance
on reproduction cost new, saying that it was "not predicated upon
facts," and was "too conjectural and illusory to be given any
weight in these proceedings."
Id., 44 P.U.R.(N.S), p. 8.
It likewise refused to give any "probative value" to trended
"original cost," since it was "not founded in fact," but was
"basically erroneous" and produced "irrational results."
Id., 44 P.U.R.(N.S.), p. 9. In determining the amount of
accrued depletion and depreciation, the Commission, following
Lindheimer v. Illinois Bell Telephone Co., 292 U.
S. 151,
292 U. S.
167-169;
Federal Power Commission v. Natural Gas
Pipeline Co., 315 U. S. 575,
315 U. S.
592-593, based its computation on "actual legitimate
cost." It found that Hope, during the years when its business was
not under regulation, did not observe "sound depreciation and
depletion practices," but "actually accumulated an excessive
reserve" [
Footnote 4] of about
$46,000,000.
Id., 44 P.U.R.(N.S.), p. 18. One member of
the Commission thought that the entire amount of the reserve should
be deducted from "actual legitimate cost" in determining the rate
base. [
Footnote 5] The majority
of the
Page 320 U. S. 598
Commission concluded, however, that where, as here, a business
is brought under regulation for the first time, and where incorrect
depreciation and depletion practices have prevailed, the deduction
of the reserve requirement (actual existing depreciation and
depletion), rather than the excessive reserve, should be made so as
to lay "a sound basis for future regulation and control of rates."
Id., 44 P.U.R.(N.S.), p. 18. As we have pointed out, it
determined accrued depletion and depreciation to be $22,328,016;
and it allowed approximately $1,460,000 as the annual operating
expense for depletion and depreciation. [
Footnote 6]
Hope's estimate of original cost was about $69,735,000 --
approximately $17,000,000 more than the amount found by the
Commission. The item of $17,000,000 was made up largely of
expenditures which, prior to December 31, 1938, were charged to
operating expenses. Chief among those expenditures was some
$12,600,000 expended
Page 320 U. S. 599
in well drilling prior to 1923. Most of that sum was expended by
Hope for labor, use of drilling rigs, hauling, and similar costs of
well drilling. Prior to 1923, Hope followed the general practice of
the natural gas industry and charged the cost of drilling wells to
operating expenses. Hope continued that practice until the Public
Service Commission of West Virginia, in 1923, required it to
capitalize such expenditures, as does the Commission under its
present Uniform System of Accounts. [
Footnote 7] The Commission refused to add such items to
the rate base, stating that
"No greater injustice to consumers could be done than to allow
items as operating expenses and at a later date include them in the
rate base, thereby placing multiple charges upon the
consumers."
Id., 44 P.U.R.(N.S.), p. 12. For the same reason, the
Commission excluded from the rate base about $1,600,000 of
expenditures on properties which Hope acquired from other
utilities, the latter having charged those payments to operating
expenses. The Commission disallowed certain other overhead items
amounting to over $3,000,000 which also had been previously charged
to operating expenses. And it refused to add some $632,000 as
interest during construction, since no interest was in fact
paid.
Hope contended that it should be allowed a return of not less
than 8%. The Commission found that an 8% return would be
unreasonable, but that 6 1/2% was a fair rate of return. That rate
of return, applied to the rate base of $33,712,526, would produce
$2,191,314 annually, as compared with the present income of not
less than $5,801,171.
The Circuit Court of Appeals set aside the order of the
Commission for the following reasons. (1) It held that the rate
base should reflect the "present fair value" of the
Page 320 U. S. 600
property, that the Commission, in determining the "value,"
should have considered reproduction cost and trended original cost,
and that "actual legitimate cost" (prudent investment) was not the
proper measure of "fair value" where price levels had changed since
the investment. (2) It concluded that the well drilling costs and
overhead items in the amount of some $17,000,000 should have been
included in the rate base. (3) It held that accrued depletion and
depreciation and the annual allowance for that expense should be
computed on the basis of "present fair value" of the property, not
on the basis of "actual legitimate cost."
The Circuit Court of Appeals also held that the Commission had
no power to make findings as to past rates in aid of state
regulation. But it concluded that those findings were proper as a
step in the process of fixing future rates. Viewed in that light,
however, the findings were deemed to be invalidated by the same
errors which vitiated the findings on which the rate order was
based.
Order Reducing Rates. Congress has provided in § 4(a)
of the Natural Gas Act that all natural gas rates subject to the
jurisdiction of the Commission "shall be just and reasonable, and
any such rate or charge that is not just and reasonable is hereby
declared to be unlawful." Sec. 5(a) gives the Commission the power,
after hearing, to determine the "just and reasonable rate" to be
thereafter observed and to fix the rate by order. Sec. 5(a) also
empowers the Commission to order a "decrease where existing rates
are unjust . . . unlawful, or are not the lowest reasonable rates."
And Congress has provided in § 19(b) that, on review of these rate
orders, the "finding of the Commission as to the facts, if
supported by substantial evidence, shall be conclusive." Congress,
however, has provided no formula by which the "just and reasonable"
rate is to be determined. It has not filled in the
Page 320 U. S. 601
details of the general prescription [
Footnote 8] of § 4(a) and § 5(a). It has not expressed in
a specific rule the fixed principle of "just and reasonable."
When we sustained the constitutionality of the Natural Gas Act
in the Natural Gas Pipeline Co. case, we stated that the
"authority of Congress to regulate the prices of commodities in
interstate commerce is at least as great under the Fifth Amendment
as is that of the states under the Fourteenth to regulate the
prices of commodities in intrastate commerce."
315 U.S. p.
315 U. S. 582.
Ratemaking is indeed but one species of price-fixing.
Munn v.
Illinois, 94 U. S. 113,
94 U. S. 134.
The fixing of prices, like other applications of the police power,
may reduce the value of the property which is being regulated. But
the fact that the value is reduced does not mean that the
regulation is invalid.
Block v. Hirsh, 256 U.
S. 135,
256 U. S.
155-157;
Nebbia v. New York, 291 U.
S. 502,
291 U. S.
523-539, and cases cited. It does, however, indicate
that "fair value" is the end product of the process of ratemaking,
not the starting point, as the Circuit Court of Appeals held. The
heart of the matter is that rates cannot be made to depend upon
"fair value" when the value of the going enterprise depends on
earnings under whatever rates may be anticipated. [
Footnote 9]
Page 320 U. S. 602
We held in
Federal Power Commission v. Natural Gas Pipeline
Co., supra, that the Commission was not bound to the use of
any single formula or combination of formulae in determining rates.
Its ratemaking function, moreover, involves the making of
"pragmatic adjustments."
Id., p.
315 U. S. 586.
And when the Commission's order is challenged in the courts, the
question is whether that order, "viewed in its entirety," meets the
requirements of the Act.
Id., p.
315 U. S. 586.
Under the statutory standard of "just and reasonable," it is the
result reached, not the method employed, which is controlling.
Cf. Los Angeles Gas & Electric Corp. v. Railroad
Commission, 289 U. S. 287,
289 U. S.
304-305,
289 U. S. 314;
West Ohio Gas Co. v. Public Utilities Commission (No. 1),
294 U. S. 63,
294 U. S. 70;
West v. Chesapeake & Potomac Tel. Co., 295 U.
S. 662,
295 U. S.
692-693 (dissenting opinion). It is not theory, but the
impact of the rate order, which counts. If the total effect of the
rate order cannot be said to be unjust and unreasonable, judicial
inquiry under the Act is at an end. The fact that the method
employed to reach that result may contain infirmities is not then
important. Moreover, the Commission's order does not become suspect
by reason of the fact that it is challenged. It is the product of
expert judgment which carries a presumption of validity. And he who
would upset the rate order under the Act carries the heavy burden
of making a convincing showing that it is invalid because it is
unjust and unreasonable in its consequences.
Cf. Railroad
Commission v. Cumberland Tel. & T. Co., 212 U.
S. 414;
Lindheimer v. Illinois Bell Tel. Co.,
supra, pp.
292 U. S. 164,
292 U. S. 169;
Railroad Commission v. Pacific Gas & Elec. Co.,
302 U. S. 388,
302 U. S.
401.
Page 320 U. S. 603
The ratemaking process under the Act,
i.e., the fixing
of "just and reasonable" rates, involves a balancing of the
investor and the consumer interests. Thus, we stated in the
Natural Gas Pipeline Co. case that "regulation does not
insure that the business shall produce net revenues." 315 U.S. p.
315 U. S. 590.
But, such considerations aside, the investor interest has a
legitimate concern with the financial integrity of the company
whose rates are being regulated. From the investor or company point
of view, it is important that there be enough revenue not only for
operating expenses, but also for the capital costs of the business.
These include service on the debt and dividends on the stock.
Cf. Chicago & Grand Trunk R. Co. v. Wellman,
143 U. S. 339,
143 U. S.
345-346. By that standard, the return to the equity
owner should be commensurate with returns on investments in other
enterprises having corresponding risks. That return, moreover,
should be sufficient to assure confidence in the financial
integrity of the enterprise, so as to maintain its credit and to
attract capital.
See Missouri ex rel. Southwestern Bell Tel.
Co. v. Public Service Commission, 262 U.
S. 276,
262 U. S. 291
(Mr. Justice Brandeis concurring). The conditions under which more
or less might be allowed are not important here. Nor is it
important to this case to determine the various permissible ways in
which any rate base on which the return is computed might be
arrived at. For we are of the view that the end result in this case
cannot be condemned under the Act as unjust and unreasonable from
the investor or company viewpoint.
We have already noted that Hope is a wholly owned subsidiary of
the Standard Oil Co. (N.J.). It has no securities outstanding
except stock. All of that stock has been owned by Standard since
1908. The par amount presently outstanding is approximately
$28,000,000, as compared with the rate base of $33,712,526
established by
Page 320 U. S. 604
the Commission. Of the total outstanding stock, $11,000,000 was
issued in stock dividends. The balance, or about $17,000,000, was
issued for cash or other assets. During the four decades of its
operations, Hope has paid over $97,000,000 in cash dividends. It
had, moreover, accumulated by 1940 an earned surplus of about
$8,000,000. It had thus earned the total investment in the company
nearly seven times. Down to 1940, it earned over 20% per year on
the average annual amount of its capital stock issued for cash or
other assets. On an average invested capital of some $23,000,000,
Hope's average earnings have been about 12% a year. And, during
this period, it had accumulated in addition reserves for depletion
and depreciation of about $46,000,000. Furthermore, during 1939,
1940, and 1941, Hope paid dividends of 10% on its stock. And in the
year 1942, during about half of which the lower rates were in
effect, it paid dividends of 7 1/2%. From 1939-1942, its earned
surplus increased from $5,250,000 to about $13,700,000,
i.e., to almost half the par value of its outstanding
stock.
As we have noted, the Commission fixed a rate of return which
permits Hope to earn $2,191,314 annually. In determining that
amount, it stressed the importance of maintaining the financial
integrity of the company. It considered the financial history of
Hope and a vast array of data bearing on the natural gas industry,
related businesses, and general economic conditions. It noted that
the yields on better issues of bonds of natural gas companies sold
in the last few years were "close to 3 percent," 44 P.U.R.(N.S.),
p. 33. It stated that the company was a "seasoned enterprise whose
risks have been minimized" by adequate provisions for depletion and
depreciation (past and present) with "concurrent high profits," by
"protected established markets, through affiliated distribution
companies, in populous and industrialized areas," and by a supply
of gas locally to meet all requirements,
Page 320 U. S. 605
"except on certain peak days in the winter, which it is feasible
to supplement in the future with gas from other sources."
Id., 44 P.U.R.(N.S.), p. 33. The Commission concluded,
"The company's efficient management, established markets,
financial record, affiliations, and its prospective business place
it in a strong position to attract capital upon favorable terms
when it is required."
Id., 44 P.U.R.(N.S.), p. 33.
In view of these various considerations, we cannot say that an
annual return of $2,191,314 is not "just and reasonable" within the
meaning of the Act. Rates which enable the company to operate
successfully, to maintain its financial integrity, to attract
capital, and to compensate its investors for the risks assumed
certainly cannot be condemned as invalid, even though they might
produce only a meager return on the so-called "fair value" rate
base. In that connection, it will be recalled that Hope contended
for a rate base of $66,000,000 computed on reproduction cost new.
The Commission points out that, if that rate base were accepted,
Hope's average rate of return for the four-year period from
1937-1940 would amount to 3.27%. During that period, Hope earned an
annual average return of about 9% on the average investment. It
asked for no rate increases. Its properties were well maintained
and operated. As the Commission says, such a modest rate of 3.27%
suggests an "inflation of the base on which the rate has been
computed."
Dayton Power & Light Co. v. Public Utilities
Commission, 292 U. S. 290,
292 U. S. 312.
Cf. Lindheimer v. Illinois Bell Tel. Co., supra, p.
292 U. S. 164.
The incongruity between the actual operations and the return
computed on the basis of reproduction cost suggests that the
Commission was wholly justified in rejecting the latter as the
measure of the rate base.
In view of this disposition of the controversy, we need not stop
to inquire whether the failure of the Commission to add the
$17,000,000 of well drilling and other costs to
Page 320 U. S. 606
the rate base was consistent with the prudent investment theory
as developed and applied in particular cases.
Only a word need be added respecting depletion and depreciation.
We held in the
Natural Gas Pipeline Co. case that there
was no constitutional requirement "that the owner who embarks in a
wasting-asset business of limited life shall receive at the end
more than he has put into it." 315 U.S. p.
315 U. S. 593.
The Circuit Court of Appeals did not think that that rule was
applicable here, because Hope was a utility required to continue
its service to the public and not scheduled to end its business on
a day certain, as was stipulated to be true of the Natural Gas
Pipeline Co. But that distinction is quite immaterial. The ultimate
exhaustion of the supply is inevitable in the case of all natural
gas companies. Moreover, this Court recognized in
Lindheimer v.
Illinois Bell Tel. Co., supra, the propriety of basing annual
depreciation on cost. [
Footnote
10] By such a procedure, the utility is made whole and the
integrity of its investment maintained. [
Footnote 11] No more is required. [
Footnote 12] We cannot approve the contrary
holding
Page 320 U. S. 607
of
United Railways Co. v. West, 280 U.
S. 234,
280 U. S.
253-254. Since there are no constitutional requirements
more exacting than the standards of the Act, a rate order which
conforms to the latter does not run afoul of the former.
The Position of West Virginia. The State of West
Virginia, as well as its Public Service Commission, intervened in
the proceedings before the Commission and participated in the
hearings before it. They have also filed a brief
amicus
curiae here, and have participated in the argument at the bar.
Their contention is that the result achieved by the rate order
"brings consequences which are unjust to West Virginia and its
citizens" and which
"unfairly depress the value of gas, gas lands and gas
leaseholds, unduly restrict development of their natural resources,
and arbitrarily transfer their properties to the residents of other
states without just compensation therefor."
West Virginia points out that the Hope Natural Gas Co. holds a
large number of leases on both producing and unoperated properties.
The owner or grantor receives from the operator or grantee delay
rentals as compensation for postponed drilling. When a producing
well is successfully brought in, the gas lease customarily
continues indefinitely for the life of the field. In that case, the
operator pays a stipulated gas well rental, or in some cases a gas
royalty equivalent to one-eighth of the gas marketed. [
Footnote 13] Both the owner and
operator have valuable property interests in the gas which are
separately taxable under West Virginia law. The contention is that
the reversionary interests in the leaseholds should be represented
in the rate proceedings, since it is their gas which is being sold
in interstate
Page 320 U. S. 608
commerce. It is argued, moreover, that the owners of the
reversionary interests should have the benefit of the "discovery
value" of the gas leaseholds, not the interstate consumers.
Furthermore, West Virginia contends that the Commission, in fixing
a rate for natural gas produced in that State, should consider the
effect of the rate order on the economy of West Virginia. It is
pointed out that gas is a wasting asset with a rapidly diminishing
supply. As a result, West Virginia's gas deposits are becoming
increasingly valuable. Nevertheless the rate fixed by the
Commission reduces that value. And that reduction, it is said, has
severe repercussions on the economy of the State. It is argued, in
the first place, that, as a result of this rate reduction, Hope's
West Virginia property taxes may be decreased in view of the
relevance which earnings have under West Virginia law in the
assessment of property for tax purposes. [
Footnote 14] Secondly, it is pointed out that West
Virginia has a production tax [
Footnote 15] on the "value" of the gas exported from the
State. And we are told that, for purposes of that tax, "value"
becomes, under West Virginia law, "practically the substantial
equivalent of market value." Thus, West Virginia argues that
undervaluation of Hope's gas leaseholds will cost the State many
thousands of dollars in taxes. The effect, it is urged, is to
impair West Virginia's tax structure for the benefit of Ohio and
Pennsylvania consumers. West Virginia emphasizes, moreover, its
deep interest in the conservation of its natural resources,
including its natural gas. It says that a reduction of the value of
these leasehold values will jeopardize these conservation policies
in three respects: (1) exploratory development of new fields will
be discouraged; (2) abandonment of low-yield high-cost marginal
wells will be hastened; and (3) secondary recovery of oil will be
hampered.
Page 320 U. S. 609
Furthermore, West Virginia contends that the reduced valuation
will harm one of the great industries of the State, and that harm
to that industry must inevitably affect the welfare of the citizens
of the State. It is also pointed out that West Virginia has a large
interest in coal and oil, as well as in gas, and that these forms
of fuel are competitive. When the price of gas is materially
cheapened, consumers turn to that fuel in preference to the others.
As a result, this lowering of the price of natural gas will have
the effect of depreciating the price of West Virginia coal and
oil.
West Virginia insists that, in neglecting this aspect of the
problem, the Commission failed to perform the function which
Congress entrusted to it, and that the case should be remanded to
the Commission for a modification of its order. [
Footnote 16]
We have considered these contentions at length in view of the
earnestness with which they have been urged upon us. We have
searched the legislative history of the Natural Gas Act for any
indication that Congress entrusted to the Commission the various
considerations which West Virginia has advanced here. And our
conclusion is that Congress did not.
We pointed out in
Illinois Natural Gas Co. v. Central
Illinois Public Service Co., 314 U. S. 498,
314 U. S. 506,
that the purpose of the Natural Gas Act was to provide,
"through the exercise of the national power over interstate
commerce, an agency for regulating the wholesale distribution to
public service companies of natural gas moving interstate, which
this Court had declared to be interstate commerce not subject to
certain types of state regulation."
As stated in the House Report, the "basic purpose" of this
legislation was "to occupy" the field in which such cases as
Missouri
v.
Page 320 U. S. 610
Kansas Natural Gas Co., 265 U.
S. 298, and
Public Utilities Commission v. Attleboro
Steam & Electric Co., 273 U. S. 83, had
held the States might not act. H.Rep. No. 709, 75th Cong., 1st
Sess., p. 2. In accomplishing that purpose, the bill was designed
to take "no authority from State commissions," and was "so drawn as
to complement, and in no manner usurp, State regulatory authority."
Id., p. 2. And the Federal Power Commission was given no
authority over the "production or gathering of natural gas." §
1(b).
The primary aim of this legislation was to protect consumers
against exploitation at the lands of natural gas companies. Due to
the hiatus in regulation which resulted from the
Kansas Natural
Gas Co. case and related decisions state commissions found it
difficult or impossible to discover what it cost interstate
pipeline companies to deliver gas within the consuming states; and
thus they were thwarted in local regulation. H.Rep., No. 709,
supra, p. 3. Moreover, the investigations of the Federal
Trade Commission had disclosed that the majority of the pipeline
mileage in the country used to transport natural gas, together with
an increasing percentage of the natural gas supply for pipeline
transportation, had been acquired by a handful of holding
companies. [
Footnote 17]
State commissions, independent producers, and communities having or
seeking the service were growing quite helpless against these
combinations. [
Footnote 18]
These were the types of problems with which those participating in
the hearings were preoccupied. [
Footnote 19] Congress addressed itself to those specific
evils.
Page 320 U. S. 611
The Federal Power Commission was given broad powers of
regulation. The fixing of "just and reasonable" rates (§ 4) with
the powers attendant thereto [
Footnote 20] was the heart of the new regulatory system.
Moreover, the Commission was given certain authority by § 7(a), on
a finding that the action was necessary or desirable "in the public
interest," to require natural gas companies to extend or improve
their transportation facilities and to sell gas to any authorized
local distributor. By § 7(b), it was given control over the
abandonment of facilities or of service. And by § 7(c), as
originally enacted, no natural gas company could undertake the
construction or extension of any facilities for the transportation
of natural gas to a market in which natural gas was already being
served by another company, or sell any natural gas in such a
market, without obtaining a certificate of public convenience and
necessity from the Commission. In passing on such applications for
certificates of convenience and necessity, the Commission was told
by § 7(c), as originally enacted, that it was
"the intention of Congress that natural gas shall be sold in
interstate commerce for resale for ultimate public consumption for
domestic, commercial, industrial, or any other use at the lowest
possible reasonable rate consistent with the maintenance of
adequate service in the public interest."
The latter provision was deleted from § 7(c) when that
subsection was amended by the Act of February 7, 1942, 56 Stat. 83.
By that amendment, limited grandfather rights were granted
companies desiring to extend their facilities and services over the
routes or within the area which they were already serving.
Moreover, § 7(c) was broadened so as to require certificates
Page 320 U. S. 612
of public convenience and necessity not only where the
extensions were being made to markets in which natural gas was
already being sold by another company, but in other situations as
well.
These provisions were plainly designed to protect the consumer
interests against exploitation at the hands of private natural gas
companies. When it comes to cases of abandonment or of extensions
of facilities or service, we may assume that, apart from the
express exemptions [
Footnote
21] contained in § 7, considerations of conservation are
material to the issuance of certificates of public convenience and
necessity. But the Commission was not asked here for a certificate
of public convenience and necessity under § 7 for any proposed
construction or extension. It was faced with a determination of the
amount which a private operator should be allowed to earn from the
sale of natural gas across state lines through an established
distribution system. Secs. 4 and 5, not § 7, provide the standards
for that determination. We cannot find in the words of the Act or
in its history the slightest intimation or suggestion that the
exploitation of consumers by private operators through the
maintenance of high rates should be allowed to continue provided
the producing states obtain indirect benefits from it. That
apparently was the Commission's view of the matter, for the same
arguments advanced here were presented to the Commission and not
adopted by it.
We do not mean to suggest that Congress was unmindful of the
interests of the producing states in their natural gas supplies
when it drafted the Natural Gas Act. As we have said, the Act does
not intrude on the domain traditionally reserved for control by
state commissions, and the Federal Power Commission was given no
authority over
Page 320 U. S. 613
"the production or gathering of natural gas." § 1(b). In
addition, Congress recognized the legitimate interests of the
States in the conservation of natural gas. By § 11, Congress
instructed the Commission to make reports on compacts between two
or more States dealing with the conservation, production and
transportation of natural gas. [
Footnote 22] The Commission was also directed to
recommend further legislation appropriate or necessary to carry out
any proposed compact and "to aid in the conservation of natural gas
resources within the United States and in the orderly, equitable,
and economic production, transportation, and distribution of
natural gas." § 11(a). Thus, Congress was quite aware of the
interests of the producing states in their natural gas supplies.
[
Footnote 23] But it left
the protection of
Page 320 U. S. 614
those interests to measures other than the maintenance of high
rates to private companies. If the Commission is to be compelled to
let the stockholders of natural gas companies have a feast so that
the producing states may receive crumbs from that table, the
present Act must be redesigned. Such a project raises questions of
policy which go beyond our province.
It is hardly necessary to add that a limitation on the net
earnings of a natural gas company from its interstate business is
not a limitation on the power of the producing state either to
safeguard its tax revenues from that industry [
Footnote 24] or to protect the interests of
those who sell their gas to the interstate operator. [
Footnote 25] The return which the
Commission
Page 320 U. S. 615
allowed was the net return after all such charges.
It is suggested that the Commission has failed to perform its
duty under the Act in that it has not allowed a return for gas
production that will be enough to induce private enterprise to
perform completely and efficiently its functions for the public.
The Commission, however, was not oblivious of those matters. It
considered them. It allowed, for example, delay rentals and
exploration and development costs in operating expenses. [
Footnote 26] No serious attempt has
been made here to show that they are inadequate. We certainly
cannot say that they are, unless we are to substitute our opinions
for the expert judgment of the administrators to whom Congress
entrusted the decision. Moreover, if, in light of experience, they
turn out to be inadequate for development of new sources of supply,
the doors of the Commission are open for increased allowances. This
is not an order for all time. The Act contains machinery for
obtaining rate adjustments. § 4.
But it is said that the Commission placed too low a rate on gas
for industrial purposes as compared with gas for domestic purposes,
and that industrial uses should be discouraged. It should be noted
in the first place that the rates which the Commission has fixed
are Hope's interstate wholesale rates to distributors not
interstate rates to industrial users [
Footnote 27] and domestic consumers. We hardly
Page 320 U. S. 616
can assume, in view of the history of the Act and its
provisions, that the resales intrastate by the customer companies
which distribute the gas to ultimate consumers in Ohio and
Pennsylvania are subject to the ratemaking powers of the
Commission. [
Footnote 28]
But, in any event, those rates are not in issue here. Moreover, we
fail to find in the power to fix "just and reasonable" rates the
power to fix rates which will disallow or discourage resales for
industrial use. The Committee Report stated that the Act provided
"for regulation along recognized and more or less standardized
lines," and that there was "nothing novel in its provisions."
H.Rep.No.709,
supra, p. 3. Yet if we are now to tell the
Commission to fix the rates so as to discourage particular uses, we
would indeed be injecting into a rate case a "novel" doctrine which
has no express statutory sanction. The same would be true if we
were to hold that the wasting-asset nature of the industry required
the maintenance of the level of rates so that natural gas companies
could make a greater profit on each unit of gas sold. Such theories
of ratemaking for this industry may or may not be desirable. The
difficulty is that § 4(a) and § 5(a) contain only the conventional
standards of ratemaking for natural gas companies. [
Footnote 29] The
Page 320 U. S. 617
Act of February 7, 1942, by broadening § 7 gave the Commission
some additional authority to deal with the conservation aspects of
the problem. [
Footnote 30]
But § 4(a) and § 5(a) were not changed. If the standard of "just
and reasonable" is to sanction the maintenance of high rates by a
natural gas company because they restrict the use of natural gas
for certain purposes, the Act must be further amended.
It is finally suggested that the rates charged by Hope are
discriminatory as against domestic users and in favor of industrial
users. That charge is apparently based on § 4(b) of the Act, which
forbids natural gas companies from maintaining
"any unreasonable difference in rates, charges, service,
facilities, or in any other respect, either as between localities
or as between classes of service."
The power of the Commission to eliminate any such unreasonable
differences or discriminations is plain. § 5(a). The Commission,
however, made no findings under § 4(b). Its failure in that regard
was not challenged in the petition to review. And it has not been
raised or argued here by any party. Hence, the problem of
discrimination has no proper place in the present decision. It will
be time enough to pass on that issue when it is presented to us.
Congress has entrusted the administration of the Act to the
Commission, not to the courts. Apart from the requirements of
judicial review, it is not
Page 320 U. S. 618
for us to advise the Commission how to discharge its
functions.
Findings as to the Lawfulness of Past Rates. As we have
noted, the Commission made certain findings as to the lawfulness of
past rates which Hope had charged its interstate customers. Those
findings were made on the complaint of the City of Cleveland and in
aid of state regulation. It is conceded that, under the Act, the
Commission has no power to make reparation orders. And its power to
fix rates admittedly is limited to those "to be thereafter observed
and in force." § 5(a). But the Commission maintains that it has the
power to make findings as to the lawfulness of past rates even
though it has no power to fix those rates. [
Footnote 31] However that may be, we do not
think that these findings were reviewable under § 19(b) of the Act.
That section gives any party "aggrieved by an order" of the
Commission a review "of such order" in the circuit court of appeals
for the circuit where the natural gas company is located or has its
principal place of business or in the United States Court of
Appeals for the District of Columbia. We do not think that the
findings in question fall within that category.
The Court recently summarized the various types of
administrative action or determination reviewable as orders under
the Urgent Deficiencies Act of October 22,
Page 320 U. S. 619
1913, 28 U.S.C. §§ 45, 47a, and kindred statutory provisions.
Rochester Telephone Corp. v. United States, 307 U.
S. 125. It was there pointed out that where
"the order sought to be reviewed does not of itself adversely
affect complainant, but only affects his rights adversely on the
contingency of future administrative action,"
it is not reviewable.
Id., 307 U.S. p.
307 U. S. 130.
The Court said,
"In view of traditional conceptions of federal judicial power,
resort to the courts in these situations is either premature or
wholly beyond their province."
Id., p.
307 U. S. 130.
And see United States v. Los Angeles & S.L. R. Co.,
273 U. S. 299,
273 U. S.
309-310;
Shannahan v. United States,
303 U. S. 596.
These considerations are apposite here. The Commission has no
authority to enforce these findings. They are "the exercise solely
of the function of investigation."
United States v. Los Angeles
& S.L. R. Co., supra, p.
273 U. S. 310.
They are only a preliminary, interim step towards possible future
action -- action not by the Commission, but by wholly independent
agencies. The outcome of those proceedings may turn on factors
other than these findings. These findings may never result in the
respondent feeling the pinch of administrative action.
Reversed.
MR. JUSTICE ROBERTS took no part in the consideration or
decision of this case.
* Together with No. 35,
City of Cleveland v. Hope Natural
Gas Co., also on writ of certiorari to the Circuit Court of
Appeals for the Fourth Circuit.
[
Footnote 1]
Hope produces about one-third of its annual gas requirements and
purchases the rest under some 300 contracts.
[
Footnote 2]
These five companies are the East Ohio Gas Co., the Peoples
Natural Gas Co., the River Gas Co., the Fayette County Gas Co., and
the Manufacturers Light & Heat Co. The first three of these
companies are, like Hope, subsidiaries of Standard Oil Co. (N.J.).
East Ohio and River distribute gas in Ohio, the other three in
Pennsylvania. Hope's approximate sales in m.c.f. for 1940 may be
classified as follows:
Local West Virginia sales . . . 11,000,000
East Ohio . . . . . . . . . . . 40,000,000
Peoples . . . . . . . . . . . . 10,000,000
River . . . . . . . . . . . . . 400,000
Fayette . . . . . . . . . . . . 860,000
Manufacturers . . . . . . . . . 2,000,000
Hope's natural gas is processed by Hope Construction &
Refining Co., an affiliate, for the extraction of gasoline and
butane. Domestic Coke Corp., another affiliate, sells coke oven gas
to Hope for boiler fuel.
[
Footnote 3]
These required minimum reductions of 7� per m.c.f. from the
36.5� and 35.5� rates previously charged East Ohio and Peoples,
respectively, and 3� per m.c.f. from the 31.5� rate previously
charged Fayette and Manufacturers.
[
Footnote 4]
The book reserve for interstate plant amounted at the end of
1938 to about $18,000,000 more than the amount determined by the
Commission as the proper reserve requirement. The Commission also
noted that
"twice in the past, the company has transferred amounts
aggregating $7,500,000 from the depreciation and depletion reserve
to surplus. When these latter adjustments are taken into account,
the excess becomes $25,500,000, which has been exacted from the
ratepayers over and above the amount required to cover the
consumption of property in the service rendered, and thus to keep
the investment unimpaired."
44 P.U.R.(N.S.), p. 22.
[
Footnote 5]
That contention was based on the fact that "every single dollar
in the depreciation and depletion reserves" was taken
"from gross operating revenues whose only source was the amounts
charged customers in the past for natural gas. It is, therefore, a
fact that the depreciation and depletion reserves have been
contributed by the customers, and do not represent any investment
by Hope."
Id., 44 P.U.R.(N.S.), p. 40.
And see Railroad
Commission v. Cumberland Tel. & T. Co., 212 U.
S. 414,
212 U. S.
424-425; 2 Bonbright, Valuation of Property (1937), p.
1139.
[
Footnote 6]
The Commission noted that the case was
"free from the usual complexities involved in the estimate of
gas reserves because the geologists for the company and the
Commission presented estimates of the remaining recoverable gas
reserves which were about one percent apart."
44 P.U.R.(N.S.), pp. 19, 20.
The Commission utilized the "straight-line-basis" for
determining the depreciation and depletion reserve requirements. It
used estimates of the average service lives of the property by
classes based in part on an inspection of the physical condition of
the property. And studies were made of Hope's retirement experience
and maintenance policies over the years. The average service lives
of the various classes of property were converted into depreciation
rates and then applied to the cost of the property to ascertain the
portion of the cost which had expired in rendering the service.
The record in the present case shows that Hope is on the lookout
for new sources of supply of natural gas, and is contemplating an
extension of its pipe line into Louisiana for that purpose. The
Commission recognized in fixing the rates of depreciation that much
material may be used again when various present sources of gas
supply are exhausted, thus giving that property more than scrap
value at the end of its present use.
[
Footnote 7]
See Uniform System of Accounts prescribed for Natural
Gas Companies effective January 1, 1940, Account No. 332.1.
[
Footnote 8]
Sec. 6 of the Act comes the closest to supplying any definite
criteria for ratemaking. It provides in subsection (a) that,
"The Commission may investigate the 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."
Subsection (b) provides that every natural gas company, on
request, shall file with the Commission a statement of the
"original cost" of its property and shall keep the Commission
informed regarding the "cost" of all additions, etc.
[
Footnote 9]
We recently stated that the meaning of the word "value" is to be
gathered
"from the purpose for which a valuation is being made. Thus, the
question in a valuation for ratemaking is how much a utility will
be allowed to earn. The basic question in a valuation for
reorganization purposes is how much the enterprise in all
probability can earn."
Institutional Investors v. Chicago, M., St. P. & P. R.
Co., 318 U. S. 523,
318 U. S.
540.
[
Footnote 10]
Chief Justice Hughes said in that case (292 U.S. pp.
292 U. S.
168-169):
"If the predictions of service life were entirely accurate and
retirements were made when and as these predictions were precisely
fulfilled, the depreciation reserve would represent the consumption
of capital, on a cost basis, according to the method which spreads
that loss over the respective service periods. But if the amounts
charged to operating expenses and credited to the account for
depreciation reserve are excessive, to that extent, subscribers for
the telephone service are required to provide, in effect, capital
contributions, not to make good losses incurred by the utility in
the service rendered, and thus to keep its investment unimpaired,
but to secure additional plant and equipment upon which the utility
expects a return."
[
Footnote 11]
See Mr. Justice Brandeis (dissenting) in
United
Railways & Electric Co. v. West, 280 U.
S. 234,
280 U. S.
259-288, for an extended analysis of the problem.
[
Footnote 12]
It should be noted that the Act provides no specific rule
governing depletion and depreciation. Sec. 9(a) merely states that
the Commission
"may from time to time 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."
[
Footnote 13]
See Simonton, The Nature of the Interest of the Grantee
Under an Oil and Gas Lease (1918), 25 W.Va.L.Quar. 295.
[
Footnote 14]
West Penn Power Co. v. Board of Review, 112 W.Va. 442,
164 S.E. 862.
[
Footnote 15]
W.Va.Rev.Code of 1943, ch. 11. Art. 13, §§ 2a, 3a.
[
Footnote 16]
West Virginia suggests as a possible solution (1) that a "going
concern value" of the company's tangible assets be included in the
rate base and (2) that the fair market value of gas delivered to
customers be added to the outlay for operating expenses and
taxes.
[
Footnote 17]
S.Doc. 92, Pt. 84-A, ch. XII, Final Report, Federal Trade
Commission to the Senate pursuant to S.Res.No. 83, 70th Cong., 1st
Sess.
[
Footnote 18]
S.Doc. 92, Pt. 84-A, chs. XII, XIII,
op. cit., supra,
note 17
[
Footnote 19]
See Hearings on H.R. 11662, Subcommittee of House
Committee on Interstate & Foreign Commerce, 74th Cong., 2d
Sess.; Hearings on H.R. 4008, House Committee on Interstate &
Foreign Commerce, 75th Cong., 1st Sess.
[
Footnote 20]
The power to investigate and ascertain the "actual legitimate
cost" of property (§ 6), the requirement as to books and records (§
8), control over rates of depreciation (§ 9), the requirements for
periodic and special reports (§ 10), the broad powers of
investigation (§ 14) are among the chief powers supporting the
ratemaking function.
[
Footnote 21]
Apart from the grandfather clause contained in § 7(c), there is
the provision of § 7(f) that a natural gas company may enlarge or
extend its facilities with the "service area" determined by the
Commission without any further authorization.
[
Footnote 22]
See Act of July 7, 1943, 57 Stat. 383 containing an
"Interstate Compact to Conserve Oil and Gas" between Oklahoma,
Texas, New Mexico, Illinois, Colorado, and Kansas.
[
Footnote 23]
As we have pointed out, § 7(c) was amended by the Act of
February 7, 1942, 56 Stat. 83, so as to require certificates of
public convenience and necessity not only where the extensions were
being made to markets in which natural gas was already being sold
by another company, but to other situations as well. Considerations
of conservation entered into the proposal to give the Act that
broader scope. H.Rep.No. 1290, 77th Cong. 1st Sess., pp. 2, 3.
And see Annual Report, Federal Power Commission (1940) pp.
79, 80; Baum, The Federal Power Commission and State Utility
Regulation (1942), p. 261.
The bill amending § 7(c) originally contained a subsection (h)
reading as follows:
"Nothing contained in this section shall be construed to affect
the authority of a State within which natural gas is produced to
authorize or require the construction or extension of facilities
for the transportation and sale of such gas within such State:
Provided, however, that the Commission, after a hearing upon
complaint or upon its own motion, may by order forbid any
intrastate construction or extension by any natural gas company
which it shall find will prevent such company from rendering
adequate service to its customers in interstate or foreign commerce
in territory already being served."
See Hearings on H.R. 5249, House Committee on
Interstate & Foreign Commerce, 77th Cong., 1st Sess., pp. 7,
11, 21, 29, 32, 33. In explanation of its deletion, the House
Committee Report stated, pp. 4, 5:
"The increasingly important problems raised by the desire of
several States to regulate the use of the natural gas produced
therein in the interest of consumers within such States, as against
the Federal power to regulate interstate commerce in the interest
of both interstate and intrastate consumers, are deemed by the
committee to warrant further intensive study, and probably a more
retailed and comprehensive plan for the handling thereof than that
which would have been provided by the stricken subsection."
[
Footnote 24]
We have noted that in the annual operating expenses of some
$16,000.000 the Commission included West Virginia and federal
taxes. And in the net increase of $421,160 over 1940 operating
expenses allowed by the Commission was some $80,000 for increased
West Virginia property taxes. The adequacy of these amounts has not
been challenged here.
[
Footnote 25]
The Commission included in the aggregate annual operating
expenses which it allowed some $8,500,000 for gas purchased. It
also allowed about $1,400,000 for natural gas production, and about
$600,000 for exploration and development.
It is suggested, however, that the Commission, in ascertaining
the cost of Hope's natural gas production plant, proceeded contrary
to § 1(b), which provides that the Act shall not apply to "the
production or gathering of natural gas." But such valuation, like
the provisions for operating expenses, is essential to the
ratemaking function as customarily performed in this country.
Cf. Smith, The Control of Power Rates in the United States
and England (1932), 159 The Annals 101. Indeed § 14(b) of the Act
gives the Commission the power 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."
[
Footnote 26]
See note 25
supra.
[
Footnote 27]
The Commission has expressed doubts over its power to fix rates
on "direct sales to industries" from interstate pipelines, as
distinguished from "sales for resale to the industrial customers of
distributing companies." Annual Report, Federal Power Commission
(1940), p. 11.
[
Footnote 28]
Sec. 1(b) of the Act 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 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."
And see § 2(6), defining a "natural gas company," and
H.Rep.No. 709,
supra, pp. 2, 3.
[
Footnote 29]
The wasting-asset characteristic of the industry was recognized
prior to the Act as requiring the inclusion of a depletion
allowance among operating expenses.
See Columbus Gas & Fuel
Co. v. Public Utilities Commission, 292 U.
S. 398,
292 U. S.
404-405. But no such theory of ratemaking for natural
gas companies as is now suggested emerged from the cases arising
during the earlier period of regulation.
[
Footnote 30]
The Commission has been alert to the problems of conservation in
its administration of the Act. It has indeed suggested that it
might be wise to restrict the use of natural gas "by functions
rather than by areas." Annual Report (1940) p. 79.
The Commission stated in that connection that natural gas was
particularly adapted to certain industrial uses. But it added that
the general use of such gas "under boilers for the production of
steam" is, "under most circumstances, of very questionable social
economy."
Ibid.
[
Footnote 31]
The argument is that § 4(a) makes "unlawful" the charging of any
rate that is not just and reasonable. And § 14(a) gives the
Commission power to investigate any matter "which it may find
necessary or proper in order to determine whether any person has
violated" any provision of the Act. Moreover, § 5(b) gives the
Commission power to investigate and determine the cost of
production or transportation of natural gas in cases where it has
"no authority to establish a rate governing the transportation or
sale of such natural gas." And § 17(c) directs the Commission
to
"make available to the several State commissions such
information and reports as may be of assistance in State regulation
of natural gas companies."
For a discussion of these points by the Commission,
see
44 P.U.R.(N.S.), pp. 34, 35.
Opinion of MR. JUSTICE BLACK and MR. JUSTICE MURPHY.
We agree with the Court's opinion and would add nothing to what
has been said but for what is patently a wholly gratuitous
assertion as to Constitutional law in the dissent of MR. JUSTICE
FRANKFURTER. We refer to the statement that "Congressional
acquiescence to date in the doctrine of
Chicago, M. & St.
P. Ry. Co. v. Minnesota, supra, may fairly be claimed." That
was the case in which a majority of this Court was finally induced
to expand the meaning
Page 320 U. S. 620
of "due process" so as to give courts power to block efforts of
the state and national governments to regulate economic affairs.
The present case does not afford a proper occasion to discuss the
soundness of that doctrine, because, as stated in MR. JUSTICE
FRANKFURTER's dissent, "That issue is not here in controversy." The
salutary practice whereby courts do not discuss issues in the
abstract applies with peculiar force to Constitutional questions.
Since, however, the dissent adverts to a highly controversial due
process doctrine and implies its acceptance by Congress, we feel
compelled to say that we do not understand that Congress
voluntarily has acquiesced in a Constitutional principle of
government that courts, rather than legislative bodies, possess
final authority over regulation of economic affairs. Even this
Court has not always fully embraced that principle, and we wish to
repeat that we have never acquiesced in it, and do not now.
See
Federal Power Commission v. Natural Gas Pipeline Co.,
315 U. S. 575,
315 U. S.
599-601.
MR. JUSTICE REED, dissenting.
This case involves the problem of ratemaking under the Natural
Gas Act. Added importance arises from the obvious fact that the
principles stated are generally applicable to all federal agencies
which are entrusted with the determination of rates for utilities.
Because my views differ somewhat from those of my brethren, it may
be of some value to set them out in a summary form.
The Congress may fix utility rates in situations subject to
federal control without regard to any standard except the
constitutional standards of due process and for taking private
property for public use without just compensation.
Wilson v.
New, 243 U. S. 332,
243 U. S. 350.
A Commission, however, does not have this freedom of action. Its
powers are limited not only by the constitutional standards, but
also by the standards of the delegation. Here, the standard added
by the Natural Gas Act is that the rate be "just
Page 320 U. S. 621
and reasonable." [
Footnote 2/1]
Section 6 [
Footnote 2/2] throws
additional light on the meaning of these words.
When the phrase was used by Congress to describe allowable
rates, it had relation to something ascertainable. The rates were
not left to the whim of the Commission. The rates fixed would
produce an annual return, and that annual return was to be compared
with a theoretical just and reasonable return, all risks
considered, on the fair value of the property used and useful in
the public service at the time of the determination.
Such an abstract test is not precise. The agency charged with
its determination has a wide range before it could properly be said
by a court that the agency had disregarded statutory standards or
had confiscated the property of the utility for public use.
Cf.
Chicago, M. & St. P. R. Co. v. Minnesota, 134 U.
S. 418,
134 U. S.
461-466, dissent. This is as Congress intends. Rates are
left to an experienced agency particularly competent by training to
appraise the amount required.
The decision as to a reasonable return had not been a source of
great difficulty, for borrowers and lenders reached such agreements
daily in a multitude of situations; and although the determination
of fair value had been troublesome, its essentials had been worked
out in fairness to investor and consumer by the time of the
enactment
Page 320 U. S. 622
of this Act.
Cf. Los Angeles Gas & Electric Corp. v.
Railroad Commission, 289 U. S. 287,
289 U. S. 304
et seq. The results were well known to Congress, and had
that body desired to depart from the traditional concepts of fair
value and earnings, it would have stated its intention plainly.
Helvering v. Griffiths, 318 U. S. 371.
It was already clear that, when rates are in dispute, "earnings
produced by rates do not afford a standard for decision." 289 U.S.
at
289 U. S. 305.
Historical cost, prudent investment and reproduction cost [
Footnote 2/3] were all relevant factors in
determining fair value. Indeed, disregarding the pioneer investor's
risk, if prudent investment and reproduction cost were not
distorted by changes in price levels or technology, each of them
would produce the same result. The realization from the risk of an
investment in a speculative field, such as natural gas utilities,
should be reflected in the present fair value. [
Footnote 2/4] The amount of evidence to be admitted
on any point was, of course, in the agency's reasonable discretion,
and it was free to give its own weight to these or other factors
and to determine from all the evidence its own judgment as to the
necessary rates.
Page 320 U. S. 623
I agree with the Court in not imposing a rule of prudent
investment alone in determining the rate base. This leaves the
Commission free, as I understand it, to use any available evidence
for its finding of fair value, including both prudent investment
and the cost of installing at the present time an efficient system
for furnishing the needed utility service.
My disagreement with the Court arises primarily from its view
that it makes no difference how the Commission reached the rate
fixed, so long as the result is fair and reasonable. For me, the
statutory command to the Commission is more explicit. Entirely
aside from the constitutional problem of whether the Congress could
validly delegate its ratemaking power to the Commission,
in
toto and without standards, it did legislate in the light of
the relation of fair and reasonable to fair value and reasonable
return. The Commission must therefore make its findings in
observance of that relationship.
The Federal Power Commission did not, as I construe their
action, disregard its statutory duty. They heard the evidence
relating to historical and reproduction cost and to the reasonable
rate of return and they appraised its weight. The evidence of
reproduction cost was rejected as unpersuasive, but, from the other
evidence, they found a rate base, which is to me a determination of
fair value. On that base, the earnings allowed seem fair and
reasonable. So far as the Commission went in appraising the
property employed in the service, I find nothing in the result
which indicates confiscation, unfairness or unreasonableness. Good
administration of ratemaking agencies under this method would avoid
undue delay and render revaluations unnecessary except after
violent fluctuations of price levels. Ratemaking under this method
has been subjected to criticism. But until Congress changes the
standards for the agencies, these ratemaking bodies should continue
the conventional theory of ratemaking.
Page 320 U. S. 624
It will probably be simpler to improve present methods than to
devise new ones.
But a major error, I think was committed in the disregard by the
Commission of the investment in exploratory operations and other
recognized capital costs. These were not considered by the
Commission, because they were charged to operating expenses by the
company at a time when it was unregulated. Congress did not direct
the Commission in ratemaking to deduct from the rate base capital
investment which had been recovered during the unregulated period
through excess earnings. In my view, this part of the investment
should no more have been disregarded in the rate base than any
other capital investment which previously had been recovered and
paid out in dividends or placed to surplus. Even if prudent
investment throughout the life of the property is accepted as the
formula for figuring the rate base, it seems to me illogical to
throw out the admittedly prudent cost of part of the property
because the earnings in the unregulated period had been sufficient
to return the prudent cost to the investors over and above a
reasonable return. What would the answer be under the theory of the
Commission and the Court if the only prudent investment in this
utility had been the seventeen million capital charges which are
now disallowed?
For the reasons heretofore stated, I should affirm the action of
the Circuit Court of Appeals in returning the proceeding to the
Commission for further consideration, and should direct the
Commission to accept the disallowed capital investment in
determining the fair value for ratemaking purposes.
[
Footnote 2/1]
Natural Gas Act, § 4(a), 52 Stat. 821, 822, 15 U.S.C. §
717c(a).
[
Footnote 2/2]
52 Stat. 821, 824, 15 U.S.C. § 717e:
"(a) The Commission may 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."
"(b) Every natural gas company upon request shall file with the
Commission an inventory of all or any part of its property and a
statement of the original cost thereof, and shall keep the
Commission informed regarding the cost of all additions,
betterments, extensions, and new construction."
[
Footnote 2/3]
"Reproduction cost" has been variously defined, but, for
ratemaking purposes, the most useful sense seems to be the minimum
amount necessary to create at the time of the inquiry a modern
plant capable of rendering equivalent service.
See I
Bonbright, Valuation of Property (1937) 152. Reproduction cost as
the cost of building a replica of an obsolescent plant is not of
real significance.
"Prudent investment" is not defined by the Court. It may mean
the sum originally put in the enterprise, either with or without
additional amounts from excess earnings reinvested in the
business.
[
Footnote 2/4]
It is of no more than bookkeeping significance whether the
Commission allows a rate of return commensurate with the risk of
the original investment or the lower rate based on current risk and
a capitalization reflecting the established earning power of a
successful company and the probable cost of duplicating its
services.
Cf. A.T. & T. Co. v. United States,
299 U. S. 232. But
the latter is the traditional method.
MR. JUSTICE FRANKFURTER, dissenting.
My brother JACKSON has analyzed with particularity the economic
and social aspects of natural gas, as well as
Page 320 U. S. 625
the difficulties which led to the enactment of the Natural Gas
Act, especially those arising out of the abortive attempts of
States to regulate natural gas utilities. The Natural Gas Act of
1938 should receive application in the light of this analysis, and
MR. JUSTICE JACKSON has, I believe, drawn relevant inferences
regarding the duty of the Federal Power Commission in fixing
natural gas rates. His exposition seems to me unanswered, and I
shall say only a few words to emphasize my basic agreement with
him.
For our society, the needs that are met by public utilities are
as truly public services as the traditional governmental functions
of police and justice. They are not less so when these services are
rendered by private enterprise under governmental regulation. Who
ultimately determines the ways of regulation is the decisive aspect
in the public supervision of privately owned utilities.
Foreshadowed nearly sixty years ago,
Railroad Commission
Cases, 116 U. S. 307,
116 U. S. 331,
it was decided more than fifty years ago that the final say under
the Constitution lies with the judiciary, and not the legislature.
Chicago, M. & St. P. Ry. Co. v. Minnesota,
134 U. S. 418.
While legal issues touching the proper distribution of
governmental powers under the Constitution may always be raised,
Congressional acquiescence to date in the doctrine of
Chicago,
M. & St. P. Ry. Co. v. Minnesota, supra, may fairly be
claimed. But, in any event, that issue is not here in controversy.
As pointed out in the opinions of my brethren, Congress has given
only limited authority to the Federal Power Commission, and made
the exercise of that authority subject to judicial review. The
Commission is authorized to fix rates chargeable for natural gas.
But the rates that it can fix must be "just and reasonable." § 5 of
the Natural Gas Act, 15 U.S.C. § 717d. Instead of making the
Commission's rate determinations final, Congress
Page 320 U. S. 626
specifically provided for court review of such orders. To be
sure, "the finding of the Commission as to the facts, if supported
by substantial evidence" was made "conclusive," § 19 of the Act, 15
U.S.C. § 717r. But obedience of the requirement of Congress that
rates be "just and reasonable" is not an issue of fact of which the
Commission's own determination is conclusive. Otherwise, there
would be nothing for a court to review except questions of
compliance with the procedural provisions of the Natural Gas Act.
Congress might have seen fit so to cast its legislation. But it has
not done so. It has committed to the administration of the Federal
Power Commission the duty of applying standards of fair dealing and
of reasonableness relevant to the purposes expressed by the Natural
Gas Act. The requirement that rates must be "just and reasonable"
means just and reasonable in relation to appropriate standards.
Otherwise, Congress would have directed the Commission to fix such
rates as in the judgment of the Commission are just and reasonable;
it would not have also provided that such determinations by the
Commission are subject to court review.
To what sources then are the Commission and the courts to go for
ascertaining the standards relevant to the regulation of natural
gas rates? It is at this point that MR. JUSTICE JACKSON's analysis
seems to me pertinent. There appear to be two alternatives. Either
the fixing of natural gas rates must be left to the unguided
discretion of the Commission so long as the rates it fixes do not
reveal a glaringly bad prophecy of the ability of a regulated
utility to continue its service in the future, or the Commission's
rate orders must be founded on due consideration of all the
elements of the public interest which the production and
distribution of natural gas involve just because it is natural gas.
These elements are reflected in the Natural Gas Act, if that Act be
applied as an entirety.
See, for
Page 320 U. S. 627
instance, §§ 4(a)(b)(c)(d), 6, and 11, 15 U.S.C. §§
717c(a)(b)(c)(d), 717e, and 717j. Of course, the statute is not
concerned with abstract theories of ratemaking. But its very
foundation is the "public interest," and the public interest is a
texture of multiple strands. It includes more than contemporary
investors and contemporary consumers. The needs to be served are
not restricted to immediacy, and social, as well as economic, costs
must be counted.
It will not do to say that it must all be left to the skill of
experts. Expertise is a rational process, and a rational process
implies expressed reasons for judgment. It will little advance the
public interest to substitute for the hodge-podge of the rule in
Smyth v. Ames, 169 U. S. 466, an
encouragement of conscious obscurity or confusion in reaching a
result, on the assumption that, so long as the result appears
harmless, its basis is irrelevant. That may be an appropriate
attitude when state action is challenged as unconstitutional.
Cf. Driscoll v. Edison Light & Power Co., 307 U.
S. 104. But it is not to be assumed that it was the
design of Congress to make the accommodation of the conflicting
interests exposed in MR. JUSTICE JACKSON's opinion the occasion for
a blind clash of forces or a partial assessment of relevant
factors, either before the Commission or here.
The objection to the Commission's action is not that the rates
it granted were too low, but that the range of its vision was too
narrow. And since the issues before the Commission involved no less
than the total public interest, the proceedings before it should
not be judged by narrow conceptions of common law pleading. And so
I conclude that the case should be returned to the Commission. In
order to enable this Court to discharge its duty of reviewing the
Commission's order, the Commission should set forth with
explicitness the criteria by which it is guided
Page 320 U. S. 628
in determining that rates are "just and reasonable," and it
should determine the public interest that is in its keeping in the
perspective of the considerations set forth by MR. JUSTICE
JACKSON.
By MR. JUSTICE JACKSON.
Certainly the theory of the court below that ties ratemaking to
the "fair value reproduction cost" formula should be overruled as
in conflict with
Federal Power Commission v. Natural Gas
Pipeline Co. [
Footnote 3/1]
But the case should, I think, be the occasion for reconsideration
of our ratemaking doctrine as applied to natural gas, and should be
returned to the Commission for further consideration in the light
thereof.
The Commission appears to have understood the effect of the two
opinions in the
Pipeline case to be at least authority,
and perhaps direction, to fix natural gas rates by exclusive
application of the "prudent investment" rate base theory. This has
no warrant in the opinion of THE CHIEF JUSTICE for the Court,
however, which released the Commission from subservience to "any
single formula or combination of formulas" provided its order,
"viewed in its entirety, produces no arbitrary result." 315 U.S. at
315 U. S. 586.
The minority opinion I understood to advocate the "prudent
investment" theory as a sufficient guide in a natural gas case. The
view was expressed in the court below that, since this opinion was
not expressly controverted, it must have been approved. [
Footnote 3/2] I disclaim this imputed
Page 320 U. S. 629
approval with some particularity, because I attach importance at
the very beginning of federal regulation of the natural gas
industry to approaching it as the performance of economic
functions, not as the performance of legalistic rituals.
I
Solutions of these cases must consider eccentricities of the
industry which gives rise to them, and also to the Act of Congress
by which they are governed.
The heart of this problem is the elusive, exhaustible, and
irreplaceable nature of natural gas itself. Given sufficient money,
we can produce any desired amount of railroad, bus, or steamship
transportation, or communications facilities, or capacity for
generation of electric energy, or for the manufacture of gas of a
kind. In the service of such utilities, one customer has little
concern with the amount taken by another, one's waste will not
deprive another, a volume of service and be created equal to
demand, and today's demands will not exhaust or lessen capacity to
serve tomorrow. But the wealth of Midas and the wit of man cannot
produce or reproduce a natural gas field. We cannot even reproduce
the gas, for our manufactured product has only about half the
heating value per unit of nature's own. [
Footnote 3/3]
Natural gas in some quantity is produced in twenty-four states.
It is consumed in only thirty-five states, and is
Page 320 U. S. 630
available only to about 7,600,000 consumers. [
Footnote 3/4] Its availability has been more
localized than that of any other utility service because it has
depended more on the caprice of nature.
The supply of the Hope Company is drawn from that old and rich
and vanishing field that flanks the Appalachian mountains. Its
center of production is Pennsylvania and West Virginia, with a
fringe of lesser production in New York, Ohio, Kentucky, Tennessee,
and the north end of Alabama. Oil was discovered in commercial
quantities at a depth of only 69 1/2 feet near Titusville,
Pennsylvania, in 1859. Its value then was about $16 per barrel.
[
Footnote 3/5] The oil branch of
the petroleum industry went forward at once, and with unprecedented
speed. The area productive of oil and gas was roughed out by the
drilling of over 19,000 "wildcat" wells, estimated to have cost
over $222,000,000. Of these, over 18,000 or 94.9 percent, were "dry
holes." About five percent, or 990 wells, made discoveries of
commercial importance, 767 of them resulting chiefly in oil and 223
in gas only. [
Footnote 3/6]
Prospecting for many years was a search for oil, and to strike gas
was a misfortune. Waste during this period and even later is
appalling. Gas was regarded as having no commercial value until
about 1882, in which year the total yield was valued only at about
$75,000. [
Footnote 3/7] Since then,
contrary to oil, which has become cheaper, gas in this field has
pretty steadily advanced in price.
While for many years natural gas had been distributed on a small
scale for lighting, [
Footnote 3/8]
its acceptance was slow,
Page 320 U. S. 631
facilities for its utilization were primitive, and not until
1885 did it take on the appearance of a substantial industry.
[
Footnote 3/9] Soon, monopoly of
production or markets developed. [
Footnote 3/10] To get gas from the mountain country,
where it was largely found, to centers of population, where it was
in demand, required very large investment. By ownership of such
facilities, a few corporate systems, each including several
companies, controlled access to markets. Their purchases became the
dominating factor in giving a market value to gas produced by many
small operators. Hope is the market for over 300 such operators. By
1928, natural gas in the Appalachian field commanded an average
price of 21.1 cents per m.c.f. at points of production, and was
bringing 45.7 cents at points of consumption. [
Footnote 3/11] The companies which controlled
markets, however, did not rely on gas purchases alone. They
acquired and held in fee or leasehold great acreage in territory
proved by "wildcat" drilling. These large marketing system
companies, as well as many small independent owners and operators,
have carried on the commercial development of proved territory. The
development risks appear from the estimate that, up to 1928,
312,318 proved area wells had been sunk in the Appalachian field,
of which 48,962, or 15.7 percent, failed to produce oil or gas in
commercial quantity. [
Footnote
3/12]
Page 320 U. S. 632
With the source of supply thus tapped to serve centers of large
demand like Pittsburgh, Buffalo, Cleveland, Youngstown, Akron, and
other industrial communities, the distribution of natural gas fast
became big business. Its advantages as a fuel and its price
commended it, and the business yielded a handsome return. All was
merry, and the goose hung high for consumers and gas companies
alike until about the time of the first World War. Almost unnoticed
by the consuming public, the whole Appalachian field passed its
peak of production and started to decline. Pennsylvania, which, to
1928, had given off about 38 percent of the natural gas from this
field, had its peak in 1905; Ohio, which had produced 14 percent,
had its peak in 1915; and West Virginia, greatest producer of all,
with 45 percent to its credit, reached its peak in 1917. [
Footnote 3/13]
Western New York and Eastern Ohio, on the fringe of the field,
had some production, but relied heavily on imports from
Pennsylvania and West Virginia. Pennsylvania, a producing and
exporting state, was a heavy consumer, and supplemented her
production with imports from West Virginia. West Virginia was a
consuming state, but the lion's share of her production was
exported. Thus, the interest of the states in the North Appalachian
supply was in conflict.
Competition among localities to share in the failing supply and
the helplessness of state and local authorities in the presence of
state lines and corporate complexities is a part of the background
of federal intervention in the industry. [
Footnote 3/14] West Virginia took the boldest measure.
It legislated a priority in its entire production in favor of its
own inhabitants. That was frustrated by an injunction
Page 320 U. S. 633
from this Court. [
Footnote
3/15] Throughout the region, clashes in the courts and
conflicting decisions evidenced public anxiety and confusion. It
was held that the New York Public Service Commission did not have
power to classify consumers and restrict their use of gas.
[
Footnote 3/16] That Commission
held that a company could not abandon a part of its territory and
still serve the rest. [
Footnote
3/17] Some courts admonished the companies to take action to
protect consumers. [
Footnote
3/18] Several courts held that companies, regardless of failing
supply, must continue to take on customers, but such compulsory
additions were finally held to be within the Public Service
Commission's discretion. [
Footnote
3/19] There were attempts to throw up franchises and quit the
service, and municipalities resorted to the courts with conflicting
results. [
Footnote 3/20] Public
service commissions of consuming states were handicapped, for they
had no control of the supply. [
Footnote 3/21]
Page 320 U. S. 634
Shortages during World War I occasioned the first intervention
in the natural gas industry by the Federal Government. Under
Proclamation of President Wilson, the United States Fuel
Administrator took control, stopped extensions, classified
consumers, and established a priority for domestic over industrial
use. [
Footnote 3/22] After the
war, federal control was abandoned. Some cities once served with
natural gas became dependent upon mixed gas of reduced heating
value and relatively higher price. [
Footnote 3/23]
Utilization of natural gas of highest social as well as economic
return is domestic use for cooking and water
Page 320 U. S. 635
heating, followed closely by use for space heating in homes.
This is the true public utility aspect of the enterprise, and its
preservation should be the first concern of regulation. Gas does
the family cooking cheaper than any other fuel. [
Footnote 3/24] But its advantages do not end with
dollars and cents cost. It is delivered without interruption at the
meter as needed, and is paid for after it is used. No money is tied
up in a supply, and no space is used for storage. It requires no
handling, creates no dust, and leaves no ash. It responds to
thermostatic control. It ignites easily, and immediately develops
its maximum heating capacity. These incidental advantages make
domestic life more liveable.
Industrial use is induced less by these qualities than by low
cost in competition with other fuels. Of the gas exported from West
Virginia by the Hope Company, a very substantial part is used by
industries. This wholesale use speeds exhaustion of supply and
displaces other fuels. Coal miners and the coal industry, a large
part of whose costs are wages, have complained of unfair
competition from low-priced industrial gas produced with relatively
little labor cost. [
Footnote
3/25]
Gas rate structures generally have favored industrial users. In
1932, in Ohio, the average yield on gas for domestic consumption
was 62.1 cents per m.c.f. and on industrial,
Page 320 U. S. 636
38.7. In Pennsylvania, the figures were 62.9 against 31.7. West
Virginia showed the least spread, domestic consumers paying 36.6
cents; and industrial, 27.7. [
Footnote 3/26] Although this spread is less than in
other parts of the United States, [
Footnote 3/27] it can hardly be said to be
self-justifying. It certainly is a very great factor in hastening
decline of the natural gas supply.
About the time of World War I, there were occasional and
short-lived efforts by some hard-pressed companies to reverse this
discrimination and adopt graduated rates, giving a low rate to
quantities adequate for domestic use and graduating it upward to
discourage industrial use. [
Footnote
3/28]
Page 320 U. S. 637
These rates met opposition from industrial sources, of course,
and since diminished revenues from industrial sources tended to
increase the domestic price, they met little popular or commission
favor. The fact is that neither the gas companies nor the consumers
nor local regulatory bodies can be depended upon to conserve gas.
Unless federal regulation will take account of conservation, its
efforts seem, as in this case, actually to constitute a new threat
to the life of the Appalachian supply.
II
Congress, in 1938, decided upon federal regulation of the
industry. It did so after an exhaustive investigation of all
aspects, including failing supply and competition for the use of
natural gas intensified by growing scarcity. [
Footnote 3/29] Pipelines from the Appalachian area
to markets were in the control of a handful of holding company
systems. [
Footnote 3/30] This
created a highly concentrated control of the producers' market and
of the consumers' supplies. While holding companies dominated both
production and distribution, they segregated those activities in
separate
Page 320 U. S. 638
subsidiaries, [
Footnote 3/31]
the effect of which, if not the purpose, was to isolate some end of
the business from the reach of any one state commission. The cost
of natural gas to consumers moved steadily upwards over the years,
out of proportion to prices of oil, which, except for the element
of competition, is produced under somewhat comparable conditions.
The public came to feel that the companies were exploiting the
growing scarcity of local gas. The problems of this region had much
to do with creating the demand for federal regulation.
The Natural Gas Act declared the natural gas business to be
"affected with a
public interest," and its regulation
"necessary in the
public interest." [
Footnote 3/32] Originally, and at the time this
proceeding was commenced and tried, it also declared
"the intention of Congress that natural gas shall be sold in
interstate commerce for resale for ultimate public consumption for
domestic, commercial, industrial, or any other use at the lowest
possible reasonable rate
consistent with the maintenance of
adequate service in the public interest. [
Footnote 3/33]"
While this was later dropped, there is nothing to indicate that
it was not and is not still an accurate statement of purpose of the
Act. Extension or improvement of facilities may be ordered when
"necessary or desirable in the public interest," abandonment of
facilities may be ordered when the supply is
"depleted to the extent that the continuance of service is
unwarranted, or that the
present or future public convenience
or necessity
Page 320 U. S. 639
permit"
abandonment and certain extensions can only be made on finding
of "the
present or future public convenience and
necessity." [
Footnote 3/34] The
Commission is required to take account of the ultimate use of the
gas. Thus, it is given power to suspend new schedules as to rates,
charges, and classification of services except where the schedules
are for the sale of gas "for resale for industrial use only,"
[
Footnote 3/35] which gives the
companies greater freedom to increase rates on industrial gas than
on domestic gas. More particularly, the Act expressly forbids any
undue preference or advantage to any person or "any unreasonable
difference in rates . . . either as between localities or as
between classes of service." [
Footnote 3/36] And the power of the Commission
expressly includes that to determine the "just and reasonable rate,
charge, classification, rule, regulation, practice, or contract to
be thereafter observed and in force." [
Footnote 3/37]
In view of the Court's opinion that the Commission, in
administering the Act, may ignore discrimination, it is interesting
that, in reporting this bill, both the Senate and the House
Committees on Interstate Commerce pointed out that, in 1934, on a
nationwide average, the price of natural gas per m.c.f. was 74.6
cents for domestic use, 49.6 cents for commercial use, and 16.9 for
industrial use. [
Footnote 3/38] I
am not ready to think that supporters of a bill called attention to
the striking fact that householders were being charged five times
as much for their gas as industrial users only as a situation which
the Bill would do nothing to remedy. On the other hand, the Act
gave to the Commission what the Court aptly describes as "broad
powers of regulation."
Page 320 U. S. 640
III
This proceeding was initiated by the Cities of Cleveland and
Akron. They alleged that the price charged by Hope for natural
gas
"for resale to domestic, commercial and small industrial
consumers in Cleveland and elsewhere is excessive, unjust,
unreasonable, greatly in excess of the price charged by Hope to
nonaffiliated companies at wholesale for resale to domestic,
commercial and small industrial consumers, and
greatly in
excess of the price charged by Hope to East Ohio for resale to
certain favored industrial consumers in Ohio, and therefore is
further unduly discriminatory between consumers and between classes
of service."
(Italics supplied). The company answered admitting differences
in prices to affiliated and nonaffiliated companies and justifying
them by differences in conditions of delivery. As to the allegation
that the contract price is "greatly in excess of the price charged
by Hope to East Ohio for resale to certain favored industrial
consumers in Ohio," Hope did not deny a price differential, but
alleged that industrial gas was not sold to "favored consumers" but
was sold under contract and schedules filed with and approved by
the Public Utilities Commission of Ohio, and that certain
conditions of delivery made it not "unduly discriminatory."
The record shows that, in 1940, Hope delivered for industrial
consumption 36,523,792 m.c.f. and for domestic and commercial
consumption, 50,343,652 m.c.f. I find no separate figure for
domestic consumption. It served 43,767 domestic consumers directly,
511,521 through the East Ohio Gas Company, and 154,043 through the
Peoples Natural Gas Company, both affiliates owned by the same
parent. Its special contracts for industrial consumption, so far as
appear, are confined to about a dozen big industries.
Page 320 U. S. 641
Hope is responsible for discrimination as exists in favor of
these few industrial consumers. It controls both the resale price
and use of industrial gas by virtue of the very interstate sales
contracts over which the Commission is exercising its
jurisdiction.
Hope's contract with East Ohio Company is an example. Hope
agrees to deliver, and the Ohio Company to take,
"(a) all natural gas requisite for the supply of the domestic
consumers of the Ohio Company; (b) such amounts of natural gas as
may be requisite to fulfill contracts made with the consent and
approval of the Hope Company by the Ohio Company, or companies
which it supplies with natural gas, for the sale of gas upon
special terms and conditions for manufacturing purposes."
The Ohio company is required to read domestic customers' meters
once a month and meters of industrial customers daily and to
furnish all meter readings to Hope. The Hope Company is to have
access to meters of all consumers and to all of the Ohio Company's
accounts. The domestic consumers of the Ohio Company are to be
fully supplied in preference to consumers purchasing for
manufacturing purposes, and
"Hope Company can be required to supply gas to be used for
manufacturing purposes only where the same is sold under special
contracts which have first been submitted to and approved in
writing by the Hope Company and which expressly provide that
natural gas will be supplied thereunder only in so far as the same
is not necessary to meet the requirements of domestic consumers
supplied through pipelines of the Ohio Company."
This basic contract was supplemented from time to time, chiefly
as to price. The last amendment was in a letter from Hope to East
Ohio in 1937. It contained a special discount on industrial gas and
a schedule of special industrial contracts, Hope reserving the
right to make eliminations therefrom and agreeing that others might
be added from time to
Page 320 U. S. 642
time with its approval in writing. It said,
"It is believed that the price concessions contained in this
letter,
while not based on our costs, are, under certain
conditions, to our mutual advantage in maintaining and building up
the volumes of gas sold by us [italics supplied]. [
Footnote 3/39]"
The Commission took no note of the charges of discrimination,
and made no disposition of the issue tendered on this point. It
ordered a flat reduction in the price per m.c.f. of all gas
delivered by Hope in interstate commerce. It made no limitation,
condition, or provision as to what classes of consumers should get
the benefit of the reduction. While the cities have accepted and
are defending the reduction, it is my view that the discrimination
of which they have complained is perpetuated and increased by the
order of the Commission, and that it violates the Act in so
doing.
The Commission's opinion aptly characterizes its entire
objective by saying that "
bona fide investment figures now
become all-important in the regulation of rates." It should be
noted that the all-importance of this theory is not the result of
any instruction from Congress. When the Bill to regulate gas was
first before Congress it contained
Page 320 U. S. 643
the following:
"In determining just and reasonable rates, the Commission shall
fix such rate as will allow a fair return upon the actual
legitimate prudent cost of the property used and useful for the
service in question."
H.R. 5423, 74th Cong., 1st Sess. Title III, § 312(c). Congress
rejected this language.
See H.R. 5423, § 213 (211(c)), and
H.R.Rep. No. 1318, 74th Cong., 1st Sess. 30.
The Commission contends, nevertheless, that the "all-important"
formula for finding a rate base is that of prudent investment. But
it excluded from the investment base an amount actually and
admittedly invested of some $17,000,000. It did so because it says
that the Company recouped these expenditures from customers before
the days of regulation from earnings above a fair return. But it
would not apply all of such "excess earnings" to reduce the rate
base as one of the Commissioners suggested. The reason for applying
excess earnings to reduce the investment base roughly from
$69,000,000 to $52,000,000 but refusing to apply them to reduce it
from that to some $18,000,000 is not found in a difference in the
character of the earnings or in their reinvestment. The reason
assigned is a difference in bookkeeping treatment many years before
the Company was subject to regulation. The $17,000,000, reinvested
chiefly in well drilling, was treated on the books as expense. (The
Commission now requires that drilling costs be carried to capital
account.) The allowed rate base thus actually was determined by the
Company's bookkeeping, not its investment. This attributes a
significance to formal classification in account keeping that seems
inconsistent with rational rate regulation. [
Footnote 3/40] Of
Page 320 U. S. 644
course, the Commission would not and should not allow a rate
base to be inflated by bookkeeping which had improperly capitalized
expenses. I have doubts about resting public regulation upon any
rule that is to be used or not depending on which side it
favors.
Page 320 U. S. 645
The Company, on the other hand, has not put its gas fields into
its calculations on the present-value basis, although that, it
contends, is the only lawful rule for finding a rate base. To do so
would result in a rate higher than it has charged or proposes as a
matter of good business to charge.
The case before us demonstrates the lack of rational
relationship between conventional rate base formulas and natural
gas production and the extremities to which regulating bodies are
brought by the effort to rationalize them. The Commission and the
Company each stands on a different theory, and neither ventures to
carry its theory to logical conclusion as applied to gas
fields.
IV
This order is under judicial review not because we interpose
constitutional theories between a State and the business it seeks
to regulate, but because Congress put upon the federal courts a
duty toward administration of a new federal regulatory Act. If we
are to hold that a given rate is reasonable just because the
Commission has said it was reasonable, review becomes a costly,
time-consuming pageant of no practical value to anyone. If, on the
other hand, we are to bring judgment of our own to the task, we
should for the guidance of the regulators and the regulated reveal
something of the philosophy, be it legal or economic or social,
which guides us. We need not be slaves to a formula, but, unless we
can point out a rational way of reaching our conclusions, they can
only be accepted as resting on intuition or predilection. I must
admit that I possess no instinct by which to know the "reasonable"
from the "unreasonable" in prices, and must seek some conscious
design for decision.
The Court sustains this order as reasonable, but what makes it
so, or what could possibly make it otherwise,
Page 320 U. S. 646
I cannot learn. It holds that: "it is the result reached, not
the method employed, which is controlling"; "the fact that the
method employed to reach that result may contain infirmities is not
then important," and it is not
"important to this case to determine the various permissible
ways in which any rate base on which the return is computed might
be arrived at."
The Court does lean somewhat on considerations of capitalization
and dividend history and requirements for dividends on outstanding
stock. But I can give no real weight to that, for it is generally,
and I think deservedly, in discredit as any guide in rate cases.
[
Footnote 3/41]
Our books already contain so much talk of methods of
rationalizing rates that we must appear ambiguous if we announce
results without our working methods. We are confronted with
regulation of a unique type of enterprise which I think requires
considered rejection of much conventional utility doctrine and
adoption of concepts of "just and reasonable" rates and practices
and of the "public interest" that will take account of the
peculiarities of the business.
The Court rejects the suggestions of this opinion. It says that
the Committees, in reporting the bill which became the Act, said it
provided "for regulation along recognized and more or less
standardized lines," and that there was "nothing novel in its
provisions." So saying it sustains a rate calculated on a novel
variation of a rate base theory which itself had at the time of
enactment of the legislation been recognized only in dissenting
opinions. Our difference seems to be between unconscious
innovation, [
Footnote 3/42] and
the purposeful and deliberate innovation I
Page 320 U. S. 647
would make to meet the necessities of regulating the industry
before us.
Hope's business has two components of quite divergent character.
One, while not a conventional common carrier undertaking, is
essentially a transportation enterprise consisting of conveying gas
from where it is produced to point of delivery to the buyer. This
is a relatively routine operation not differing substantially from
many other utility operations. The service is produced by an
investment in compression and transmission facilities. Its risks
are those of investing in a tested means of conveying a discovered
supply of gas to a known market. A rate base calculated on the
prudent investment formula would seem a reasonably satisfactory
measure for fixing a return from that branch of the business whose
service is roughly proportionate to the capital invested. But it
has other consequences which must not be overlooked. It gives
marketability, and hence "value," to gas owned by the company, and
gives the pipeline company a large power over the marketability,
and hence "value," of the production of others.
The other part of the business -- to reduce to possession an
adequate supply of natural gas -- is of opposite character, being
more erratic and irregular and unpredictable in relation to
investment than any phase of any other utility business. A thousand
feet of gas captured and severed from real estate for delivery to
consumers is recognized under our law as property of much the same
nature as a ton of coal, a barrel of oil, or a yard of sand. The
value to be allowed for it is the real battleground between the
investor and consumer. It is from this part of the business that
the chief difference between the parties as to a proper rate base
arises.
It is necessary to a "reasonable" price for gas that it be
anchored to a rate base of any kind? Why did courts in the first
place begin valuing "rate bases" in order to "value" something
else? The method came into vogue
Page 320 U. S. 648
in fixing rates for transportation service which the public
obtained from common carriers. The public received none of the
carriers' physical property, but did make some use of it. The
carriage was often a monopoly, so there were no open market
criteria as to reasonableness. The "value" or "cost" of what was
put to use in the service by the carrier was not a remote or
irrelevant consideration in making such rates. Moreover, the
difficulty of appraising an intangible service was thought to be
simplified if it could be related to physical property which was
visible and measurable and the items of which might have market
value. The court hoped to reason from the known to the unknown. But
gas fields turn this method topsy-turvy. Gas itself is tangible,
possessible, and does have a market and a price in the field. The
value of the rate base is more elusive than that of gas. It
consists of intangibles -- leaseholds and freeholds -- operated and
unoperated -- of little use in themselves except as rights to reach
and capture gas. Their value lies almost wholly in predictions of
discovery, and of price of gas when captured, and bears little
relation to cost of tools and supplies and labor to develop it. Gas
is what Hope sells, and it can be directly priced more reasonably
and easily and accurately than the components of a rate base can be
valued. Hence, the reason for resort to a roundabout way of rate
base price fixing does not exist in the case of gas in the
field.
But if found, and by whatever method found, a rate base is
little help in determining reasonableness of the price of gas.
Appraisal of present value of these intangible rights to pursue
fugitive gas depends on the value assigned to the gas when
captured. The "present fair value" rate base, generally in ill
repute, [
Footnote 3/43] is not
even urged by the gas company for valuing its fields.
Page 320 U. S. 649
The prudent investment theory has relative merits in fixing
rates for a utility which creates its service merely by its
investment. The amount and quality of service rendered by the usual
utility will, at least roughly, be measured by the amount of
capital it puts into the enterprise. But it has no rational
application where there is no such relationship between investment
and capacity to serve. There is no such relationship between
investment and amount of gas produced. Let us assume that Doe and
Roe each produces in West Virginia for delivery to Cleveland the
same quantity of natural gas per day. Doe, however, through luck or
foresight or whatever it takes, gets his gas from investing $50,000
in leases and drilling. Roe drilled poorer territory, got smaller
wells, and has invested $250,000. Does anybody imagine that Roe can
get or ought to get for his gas five times as much as Doe because
he has spent five times as much? The service one renders to society
in the gas business is measured by what he gets out of the ground,
not by what he puts into it, and there is little more relation
between the investment and the results than in a game of poker.
Two-thirds of the gas Hope handles it buys from about 340
independent producers. It is obvious that the principle of
ratemaking applied to Hope's own gas cannot be applied, and has not
been applied, to the bulk of the gas Hope delivers. It is not
probable that the investment of any two of these producers will
bear the same ratio to their investments. The gas, however, all
goes to the same use, has the same utilization value and the same
ultimate price.
To regulate such an enterprise by undiscriminatingly
transplanting any body of rate doctrine conceived and
Page 320 U. S. 650
adapted to the ordinary utility business can serve the "public
interest" as the Natural Gas Act requires, if at all, only by
accident. Mr. Justice Brandeis, the pioneer juristic advocate of
the prudent investment theory for man-made utilities, never, so far
as I am able to discover, proposed its application to a natural gas
case. On the other hand, dissenting in
Pennsylvania v. West
Virginia, he reviewed the problems of gas supply and said,
"In no other field of public service regulation is the
controlling body confronted with factors so baffling as in the
natural gas industry, and in none is continuous supervision and
control required in so high a degree."
262 U. S. 262 U.S.
553,
262 U. S. 621.
If natural gas rates are intelligently to be regulated, we must fit
our legal principles to the economy of the industry, and not try to
fit the industry to our books.
As our decisions stand, the Commission was justified in
believing that it was required to proceed by the rate base method
even as to gas in the field. For this reason, the Court may not
merely wash its hands of the method and rationale of ratemaking.
The fact is that this Court, with no discussion of its fitness,
simply transferred the rate base method to the natural gas
industry. It happened in
Newark Natural Gas & Fuel Co. v.
City of Newark, Ohio, 242 U. S. 405
(1917), in which the company wanted 25 cents per m.c.f. and, under
the Fourteenth Amendment, challenged the reduction to 18 cents by
ordinance. This Court sustained the reduction because the court
below "gave careful consideration to the questions of the value of
the property . . . at the time of the inquiry," and whether the
rate "would be sufficient to provide a fair return on the value of
the property." The Court said this method was "based upon
principles thoroughly established by repeated decisions of this
court," citing many cases, not one of which involved natural gas or
a comparable wasting natural resource. Then came issues as to state
power to
Page 320 U. S. 651
regulate as affected by the commerce clause.
Public
Utilities Commission v. Landon, 249 U.
S. 236 (1919);
Pennsylvania Gas Co. v. Public
Service Commission, 252 U. S. 23
(1920). These questions settled, the Court again was called upon in
natural gas cases to consider state ratemaking claimed to be
invalid under the Fourteenth Amendment.
United Fuel Gas Co. v.
Railroad Commission of Kentucky, 278 U.
S. 300 (1929);
United Fuel Gas Company v. Public
Service Commission of West Virginia, 278 U.
S. 322 (1929). Then, as now, the differences were "due
chiefly to the difference in value ascribed by each to the gas
rights and leaseholds."
278 U. S. 278 U.S.
300,
278 U. S. 311.
No one seems to have questioned that the rate base method must be
pursued and the controversy was at what rate base must be used.
Later, the "value" of gas in the field was questioned in
determining the amount a regulated company should be allowed to pay
an affiliate therefor -- a state determination also reviewed under
the Fourteenth Amendment.
Dayton Power & Light Co. v.
Public Utilities Commission of Ohio, 292 U.
S. 290 (1934);
Columbus Gas & Fuel Co. v. Public
Utilities Commission of Ohio, 292 U.
S. 398 (1934). In both cases, one of which sustained and
one of which struck down a fixed rate the Court assumed the rate
base method, as the legal way of testing reasonableness of natural
gas prices fixed by public authority, without examining its real
relevancy to the inquiry.
Under the weight of such precedents, we cannot expect the
Commission to initiate economically intelligent methods of fixing
gas prices. But the Court now faces a new plan of federal
regulation based on the power to fix the price at which gas shall
be allowed to move in interstate commerce. I should now consider
whether these rules devised under the Fourteenth Amendment are the
exclusive tests of a just and reasonable rate under the federal
statute, inviting reargument directed to that point
Page 320 U. S. 652
if necessary. As I see it now, I would be prepared to hold that
these rules do not apply to a natural gas case arising under the
Natural Gas Act.
Such a holding would leave the Commission to fix the price of
gas in the field as one would fix maximum prices of oil or milk or
coal, or any other commodity. Such a price is not calculated to
produce a fair return on the synthetic value of a rate base of any
individual producer, and would not undertake to assure a fair
return to any producer. The emphasis would shift from the producer
to the product, which would be regulated with an eye to average or
typical producing conditions in the field.
Such a price-fixing process on economic lines would offer little
temptation to the judiciary to become back seat drivers of the
price fixing machine. The unfortunate effect of judicial
intervention in this field is to divert the attention of those
engaged in the process from what is economically wise to what is
legally permissible. It is probable that price reductions would
reach economically unwise and self-defeating limits before they
would reach constitutional ones. Any constitutional problems
growing out of price-fixing are quite different than those that
have heretofore been considered to inhere in ratemaking. A producer
would have difficulty showing the invalidity of such a fixed price
so long as he voluntarily continued to sell his product in
interstate commerce. Should he withdraw and other authority be
invoked to compel him to part with his property, a different
problem would be presented.
Allowance in a rate to compensate for gas removed from gas
lands, whether fixed as of point of production or as of point of
delivery, probably best can be measured by a functional test
applied to the whole industry. For good or ill, we depend upon
private enterprise to exploit these natural resources for public
consumption. The function which an allowance for gas in the field
should perform
Page 320 U. S. 653
for society in such circumstances is to be enough and no more
than enough to induce private enterprise completely and efficiently
to utilize gas resources, to acquire for public service any
available gas or gas rights, and to deliver gas at a rate and for
uses which will be in the future, as well as in the present, public
interest.
The Court fears that,
"if we are now to tell the Commission to fix the rates so as to
discourage particular uses, we would indeed be injecting into a
rate case a 'novel' doctrine. . . ."
With due deference, I suggest that there is nothing novel in the
idea that any change in price of a service or commodity reacts to
encourage or discourage its use. The question is not whether such
consequences will or will not follow; the question is whether
effects must be suffered blindly or may be intelligently selected,
whether price control shall have targets at which it deliberately
aims or shall be handled like a gun in the hands of one who does
not know it is loaded.
We should recognize "price" for what it is -- a tool, a means,
an expedient. In public hands, it has much the same economic
effects as in private hands. Hope knew that a concession in
industrial price would tend to build up its volume of sales. It
used price as an expedient to that end. The Commission makes
another cut in that same price, but the Court thinks we should
ignore the effect that it will have on exhaustion of supply. The
fact is that, in natural gas regulation, price must be used to
reconcile the private property right society has permitted to vest
in an important natural resource with the claims of society upon it
-- price must draw a balance between wealth and welfare.
To carry this into techniques of inquiry is the task of the
Commissioner, rather than of the judge, and it certainly is no task
to be solved by mere bookkeeping, but requires the best economic
talent available. There would doubtless be inquiry into the price
gas is bringing in the
Page 320 U. S. 654
field, how far that price is established by arms' length
bargaining, and how far it may be influenced by agreements in
restraint of trade or monopolistic influences. What must Hope
really pay to get and to replace gas it delivers under this order?
If it should get more or less than that for its own, how much and
why? How far are such prices influenced by pipeline access to
markets and, if the consumers pay returns on the pipelines, how far
should the increment they cause go to gas producers? East Ohio is
itself a producer in Ohio. [
Footnote
3/44] What do Ohio authorities require Ohio consumers to pay
for gas in the field? Perhaps these are reasons why the Federal
Government should put West Virginia gas at lower or at higher
rates. If so, what are they? Should East Ohio be required to
exploit its half million acres of unoperated reserve in Ohio before
West Virginia resources shall be supplied on a devalued basis of
which that State complains and for which she threatens measures of
self keep? What is gas worth in terms of other fuels it
displaces?
A price cannot be fixed without considering its effect on the
production of gas. Is it an incentive to continue to exploit vast
unoperated reserves? Is it conducive to deep drilling tests the
result of which we may know only after trial? Will it induce
bringing gas from afar to supplement or even to substitute for
Appalachian gas? [
Footnote 3/45]
Can it be had from distant fields as cheap or cheaper? If so, that
competitive potentiality is certainly a relevant consideration.
Wise regulation must also consider, as a private buyer would, what
alternatives the producer has
Page 320 U. S. 655
if the price is not acceptable. Hope has intrastate business and
domestic and industrial customers. What can it do by way of
diverting its supply to intrastate sales? What can it do by way of
disposing of its operated or reserve acreage to industrial concerns
or other buyers? What can West Virginia do by way of conservation
laws, severance or other taxation, if the regulated rate offends?
It must be borne in mind that, while West Virginia was prohibited
from giving her own inhabitants a priority that discriminated
against interstate commerce, we have never yet held that a good
faith conservation act, applicable to her own, as well as to
others, is not valid. In considering alternatives, it must be noted
that federal regulation is very incomplete, expressly excluding
regulation of "production or gathering of natural gas," and that
the only present way to get the gas seems to be to call it forth by
price inducements. It is plain that there is a downward economic
limit on a safe and wise price.
But there is nothing in the law which compels a commission to
fix a price at that "value" which a company might give to its
product by taking advantage of scarcity, or monopoly of supply. The
very purpose of fixing maximum prices is to take away from the
seller his opportunity to get all that otherwise the market would
award him for his goods. This is a constitutional use of the power
to fix maximum prices,
Block v. Hirsh, 256 U.
S. 135;
Marcus Brown Holding Co. v. Feldman,
256 U. S. 170;
International Harvester Co. v. Kentucky, 234 U.
S. 216;
Highland v. Russell Car & Snow Plow
Co., 279 U. S. 253,
just as the fixing of minimum prices of goods in interstate
commerce is constitutional although it takes away from the buyer
the advantage in bargaining which market conditions would give him.
United States v. Darby, 312 U. S. 100;
Mulford v. Smith, 307 U. S. 38;
United States v. Rock Royal Co-operative, Inc.,
307 U. S. 533;
Sunshine Anthracite Coal Co. v. Adkins, 310 U.
S. 381. The Commission has power to fix
Page 320 U. S. 656
a price that will be both maximum and minimum, and it has the
incidental right, and I think the duty, to choose the economic
consequences it will promote or retard in production and also more
importantly in consumption, to which I now turn.
If we assume that the reduction in company revenues is
warranted, we then come to the question of translating the allowed
return into rates for consumers or classes of consumers. Here, the
Commission fixed a single rate for all gas delivered irrespective
of its use despite the fact that Hope has established what amounts
to two rates -- a high one for domestic use and a lower one for
industrial contracts. [
Footnote
3/46] The Commission can fix two prices for interstate gas as
readily as one -- a price for resale to domestic users and another
for resale to industrial users. This is the pattern Hope itself has
established in the very contracts over which the Commission is
expressly given jurisdiction. Certainly the Act is broad enough to
permit two prices to be fixed instead of one, if the concept of the
"public interest" is not unduly narrowed.
The Commission's concept of the public interest in natural gas
cases which is carried today into the Court's opinion was first
announced in the opinion of the minority in the
Pipeline
case. It enumerated only two "phases of the public interest: (1)
the investor interest; (2) the consumer interest," which it
emphasized to the exclusion of all others.
315 U. S. 315 U.S.
575,
315 U. S. 606.
This will do well enough in dealing with railroads or utilities
supplying manufactured gas, electric, power, a communications
service or transportation, where utilization of facilities does not
impair their future usefulness. Limitation of supply, however,
brings into a natural gas case another phase of the public interest
that, to my mind, overrides both the owner
Page 320 U. S. 657
and the consumer of that interest. Both producers and industrial
consumers have served their immediate private interests at the
expense of the long-range public interest. The public interest, of
course, requires stopping unjust enrichment of the owner. But it
also requires stopping unjust impoverishment of future generations.
The public interest in the use by Hope's half million domestic
consumers is quite a different one from the public interest in use
by a baker's dozen of industries.
Prudent price fixing, it seems to me, must at the very threshold
determine whether any part of an allowed return shall be permitted
to be realized from sales of gas for resale for industrial use.
Such use does tend to level out daily and seasonal peaks of
domestic demand, and to some extent permits a lower charge for
domestic service. But is that a wise way of making gas cheaper
when, in comparison with any substitute, gas is already a cheap
fuel? The interstate sales contracts provide that, at times when
demand is so great that there is not enough gas to go around,
domestic users shall first be served. Should the operation of this
preference await the day of actual shortage? Since the propriety of
a preference seems conceded, should it not operate to prevent the
coming of a shortage, as well as to mitigate its effects? Should
industrial use jeopardize tomorrow's service to householders any
more than today's? If, however, it is decided to cheapen domestic
use by resort to industrial sales, should they be limited to the
few uses for which gas has special values or extend also to those
who use it only because it is cheaper than competitive fuels?
[
Footnote 3/47] And how much
cheaper should industrial
Page 320 U. S. 658
gas sell than domestic gas, and how much advantage should it
have over competitive fuels? If industrial gas is to contribute at
all to lowering domestic rates, should it not be made to contribute
the very maximum of which it is capable, that is, should not its
price be the highest at which the desired volume of sales can be
realized?
If I were to answer, I should say that the household rate should
be the lowest that can be fixed under commercial conditions that
will conserve the supply for that use. The lowest probable rate for
that purpose is not likely to speed exhaustion much, for it still
will be high enough to induce economy, and use for that purpose has
more nearly reached the saturation point. On the other hand, the
demand for industrial gas at present rates already appears to be
increasing. To lower further the industrial rate is merely further
to subsidize industrial consumption and speed depletion. The impact
of the flat reduction
Page 320 U. S. 659
of rates ordered here admittedly will be to increase the
industrial advantages of gas over competing fuels and to increase
its use. I think this is not, and there is no finding by the
Commission that it is, in the public interest.
There is no justification in this record for the present
discrimination against domestic users of gas in favor of industrial
users. It is one of the evils against which the Natural Gas Act was
aimed by Congress, and one of the evils complained of here by
Cleveland and Akron. If Hope's revenues should be cut by some
$3,600,000, the whole reduction is owing to domestic users. If it
be considered wise to raise part of Hope's revenues by industrial
purpose sales, the utmost possible revenue should be raised from
the least consumption of gas. If competitive relationships to other
fuels will permit, the industrial price should be substantially
advanced, not for the benefit of the Company, but the increased
revenues from the advance should be applied to reduce domestic
rates. For, in my opinion, the "public interest" requires that the
great volume of gas now being put to uneconomic industrial use
should either be saved for its more important future domestic use
or the present domestic user should have the full benefit of its
exchange value in reducing his present rates.
Of course, the Commission's power directly to regulate does not
extend to the fixing of rates at which the local company shall sell
to consumers. Nor is such power required to accomplish the purpose.
As already pointed out, the very contract the Commission is
altering classifies the gas according to the purposes for which it
is to be resold and provides differentials between the two
classifications. It would only be necessary for the Commission to
order that all gas supplied under paragraph (a) of Hope's contract
with the East Ohio Company shall be
Page 320 U. S. 660
at a stated price fixed to give to domestic service the entire
reduction herein and any further reductions that may prove possible
by increasing industrial rates. It might further provide that gas
delivered under paragraph (b) of the contract for industrial
purposes to those industrial customers Hope has approved in writing
shall be at such other figure as might be found consistent with the
public interest as herein defined. It is too late in the day to
contend that the authority of a regulatory commission does not
extend to a consideration of public interests which it may not
directly regulate and a conditioning of its orders for their
protection.
Interstate Commerce Commission v. Railway Labor
Executives Ass'n, 315 U. S. 373;
United States v. Lowden, 308 U. S. 225.
Whether the Commission will assert its apparently broad
statutory authorization over prices and discriminations is, of
course, its own affair, not ours. It is entitled to its own notion
of the "public interest," and its judgment of policy must prevail.
However, where there is ground for thinking that views of this
Court may have constrained the Commission to accept the rate base
method of decision and a particular single formula as "all
important" for a rate base, it is appropriate to make clear the
reasons why I, at least, would not be so understood. The Commission
is free to face up realistically to the nature and peculiarity of
the resources in its control, to foster their duration in fixing
price, and to consider future interests in addition to those of
investors and present consumers. If we return this case, it may
accept or decline the proffered freedom. This problem presents the
Commission an unprecedented opportunity if it will boldly make
sound economic considerations, instead of legal and accounting
theories, the foundation of federal policy. I would return the case
to the Commission, and thereby be clearly quit of what now may
appear to be some responsibility for perpetrating a shortsighted
pattern of natural gas regulation.
[
Footnote 3/1]
315 U. S. 315 U.S.
575.
[
Footnote 3/2]
Judge Dobie, dissenting below, pointed out that the majority
opinion in the
Pipeline case "contains no express
discussion of the Prudent Investment Theory," and that the
concurring opinion contained a clear one, and said,
"It is difficult for me to believe that the majority of the
Supreme Court, believing otherwise, would leave such a statement
unchallenged. The fact that two other Justices had, as matter of
record in our books, long opposed the reproduction cost theory of
rate bases, and had commented favorably on the prudent investment
theory, may have influenced that conclusion.
See opinion
of MR. JUSTICE FRANKFURTER in
Driscoll v. Edison Light &
Power Co., 307 U. S. 104,
307 U. S.
122, and my brief as Solicitor General in that case. It
should be noted, however, that these statements were made not in a
natural gas case, but in an electric power case -- a very important
distinction, as I shall try to make plain."
[
Footnote 3/3]
Natural gas from the Appalachian field averages about 1050 to
1150 B.T.U. content, while byproduct manufactured gas is about 530
to 540. Moody's Manual of Public Utilities (1943) 1350; Youngberg,
Natural Gas (1930) 7.
[
Footnote 3/4]
Sen.Rep. No. 1162, 75th Cong., 1st Sess., 2.
[
Footnote 3/5]
Arnold and Kemnitzer, Petroleum in the United States and
Possessions (1931) 78.
[
Footnote 3/6]
Id. at 62-63.
[
Footnote 3/7]
Id. at 61.
[
Footnote 3/8]
At Fredonia, New York, in 1821, natural gas was conveyed from a
shallow well to some thirty people. The lighthouse at Barcelona
Harbor, near what is now Westfield, New York, was at about that
time and for many years afterward lighted by gas that issued from a
crevice. Report on Utility Corporations by Federal Trade
Commission, Sen.Doc. 92, Pt. 84-A, 70th Cong., 1st Sess., 8-9.
[
Footnote 3/9]
In that year Pennsylvania enacted "An Act to provide for the
incorporation and regulation of natural gas companies." Penn.Laws
1885, No. 32, 15 P.S. § 1981 et seq.
[
Footnote 3/10]
See Steptoe and Hoffheimer's Memorandum for Governor
Cornwell of West Virginia (1917), 25 West Virginia Law Quarterly
257;
see also Report on Utility Corporations by Federal
Trade Commission, Sen.Doc. No. 92, Pt. 84-A, 70th Cong., 1st
Sess.
[
Footnote 3/11]
Arnold and Kemnitzer, Petroleum in the United States and
Possessions (1931) 73.
[
Footnote 3/12]
Id. at 63.
[
Footnote 3/13]
Id. at 64.
[
Footnote 3/14]
See Report on Utility Corporations by Federal Trade
Commission, Sen.Doc. No. 92, Pt. 84-A, 70th Cong., 1st Sess.
[
Footnote 3/15]
Pennsylvania v. West Virginia, 262 U.
S. 553. For conditions there which provoked this
legislation,
see 25 West Virginia Law Quarterly 257.
[
Footnote 3/16]
People ex rel. Pavilion Natural Gas Co. v. Public Service
Commission, 188 App.Div. 36, 176 N.Y.S. 163.
[
Footnote 3/17]
Village of Falconer v. Pennsylvania Gas Company, 17
State Department Reports (N.Y.) 407.
[
Footnote 3/18]
See, for example, Public Service Commission v. Iroquois
Natural Gas Co., 108 Misc. 696, 178 N.Y.S. 24;
Park Abbott
Realty Co. v. Iroquois Natural Gas Co., 102 Misc. 266, 168
N.Y.S. 673;
Public Service Commission v. Iroquois Natural Gas
Co., 189 App.Div. 545, 179 N.Y.S. 230.
[
Footnote 3/19]
People ex rel. Pennsylvania Gas Co. v. Public Service
Commission, 196 App.Div. 514, 189 N.Y.S. 478.
[
Footnote 3/20]
East Ohio Gas Co. v. Akron, 81 Ohio St. 33, 90 N.E. 40;
Village of Newcomerstown v. Consolidated Gas Co., 100 Ohio
St. 494, 127 N.E. 414;
Gress v. Village of Ft. Laramie,
100 Ohio St. 35, 125 N.E. 112;
City of Jamestown v.
Pennsylvania Gas Co., 263 F. 437;
id., 264 F. 1009.
See also United Fuel Gas Co. v. Railroad Commission,
278 U. S. 300,
278 U. S.
308.
[
Footnote 3/21]
The New York Public Service Commission said:
"While the transportation of natural gas through pipe lines from
one state to another state is interstate commerce . . . , Congress
has not taken over the regulation of that particular industry.
Indeed, it has expressly excepted it from the operation of the
Interstate Commerce Commissions Law (Interstate Commerce
Commissions Law, section 1). It is quite clear, therefore, that
this Commission cannot require a Pennsylvania corporation producing
gas in Pennsylvania to transport it and deliver it in the State of
New York, and that the Interstate Commerce Commission is likewise
powerless. If there exists such a power, and it seems that there
does, it is a power vested in Congress, and by it not yet
exercised. There is no available source of supply for the Crystal
City Company at present except through purchasing from the Porter
Gas Company. It is possible that this Commission might fix a price
at which the Potter Gas Company should sell if it sold at all, but,
as the Commission can not require it to supply gas in the State of
New York, the exercise of such a power to fix the price, if such
power exists, would merely say, sell at this price or keep out of
the State."
Lane v. Crystal City Gas Co., 8 New York Public Service
Comm.Reports, Second District, 210, 212.
[
Footnote 3/22]
Proclamation by the President of September 16, 1918; Rules and
Regulations of H. A. Garfield, Fuel Administrator, September 24,
1918.
[
Footnote 3/23]
For example, the Iroquois Gas Corporation, which formerly served
Buffalo, New York, with natural gas ranging from 1050 to 1150
b.t.u. per cu. ft., now mixes a by-product gas of between 530 and
540 b.t.u. in proportions to provide a mixed gas of about 900
b.t.u. per cu. ft. For space heating or water heating, its charges
range from 65 cents for the first m.c.f. per month to 55 cents for
all above 25 m.c.f. per month. Moody's Manual of Public Utilities
(1943) 1350.
[
Footnote 3/24]
The United States Fuel Administration made the following cooking
value comparisons, based on tests made in the Department of Home
Economics of Ohio State University:
Natural gas at 1.12 per M. is equivalent to coal at $6.50 per
ton.
Natural gas at 2.00 per M. is equivalent to gasoline at 27� per
gal.
Natural gas at 2.20 per M. is equivalent to electricity at 3�
per k.w.h.
Natural gas at 2.40 per M. is equivalent to coal oil at 15� per
gal.
Use and Conservation of Natural Gas, issued by U.S. Fuel
Administration (1918) 5.
[
Footnote 3/25]
See Brief on Behalf of Legislation Imposing an Excise
Tax on Natural Gas, submitted to N.R.A. by the United Mine Workers
of America and the National Coal Association.
[
Footnote 3/26]
Brief of National Gas Association and United Mine Workers,
supra, 320
U.S. 591fn3/26|>note 26, pp. 35, 36, compiled from Bureau of
Mines Reports.
[
Footnote 3/27]
From the source quoted in the preceding note, the spread
elsewhere is shown to be:
State Industrial Domestic
Illinois 29.2 1.678
Louisiana 10.4 59.7
Oklahoma 11.2 41.5
Texas 13.1 59.7
Alabama 17.8 1.227
Georgia 22.9 1.043
[
Footnote 3/28]
In Corning, New York, rates were initiated by the Crystal City
Gas Company as follows: 70� for the first 5,000 cu. ft. per month;
80� from 5,000 to 12,000; $1 for all over 12,000. The Public
Service Commission rejected these rates and fixed a flat rate of
58� per m.c.f.
Lane v. Crystal City Gas Co., 8 New York
Public Service Comm. Reports, Second District, 210.
The Pennsylvania Gas Company (National Fuel Gas Company group)
also attempted a sliding scale rate for New York consumers, net per
month as follows: first 5,000 feet, 35�; second 5,000 feet, 45�;
third 5,000 feet, 50�; all above 15,000, 55�. This was eventually
abandoned, however. The company's present scale in Pennsylvania
appears to be reversed to the following net monthly rate; first 3
m.c.f., 75�; next 4 m.c.f., 60�; next 8 m.c.f., 55�; over 15
m.c.f., 50�. Moody's Manual of Public Utilities (1943) 1350. In New
York, it now serves a mixed gas.
For a study of effect of sliding scale rates in reducing
consumption
see 11 Proceedings of Natural Gas Association
of America (1919) 287.
[
Footnote 3/29]
See Report on Utility Corporations by Federal Trade
Commission, Sen. Doc. 92, Pt. 84-A, 70th Cong., 1st Sess.
[
Footnote 3/30]
Four holding company systems control over 55 percent of all
natural gas transmission lines in the United States. They are
Columbia Gas and Electric Corporation, Cities Service Co., Electric
Bond and Share Co., and Standard Oil Co. of New Jersey. Columbia
alone controls nearly 25 percent, and fifteen companies account for
over 80 percent of the total. Report on Utility Corporations by
Federal Trade Commission, Sen.Doc. 92, Pt. 84-A, 70th Cong., 1st
Sess., 28.
In 1915, so it was reported to the Governor of West Virginia, 87
percent of the total gas production of that state was under control
of eight companies. Steptoe and Hoffheimer, Legislative Regulation
of Natural Gas Supply in West Virginia, 17 West Virginia Law
Quarterly 257, 260. Of these, three were subsidiaries of the
Columbia system and others were subsidiaries of larger systems. In
view of inter-system sales and interlocking interests, it may be
doubted whether there is much real competition among these
companies.
[
Footnote 3/31]
This pattern with its effects on local regulatory efforts will
be observed in our decisions.
See United Fuel Gas Co. v.
Railroad Commission, 278 U. S. 300;
United Fuel Gas Co. v. Public Service Commission,
278 U. S. 322;
Dayton Power & Light v. Public Utilities Commission,
292 U. S. 290;
Columbus Gas & Fuel Co. v. Public Utilities
Commission, 292 U. S. 398, and
the present case.
[
Footnote 3/32]
15 U.S.C. § 717(a). (Italics supplied throughout this
paragraph.)
[
Footnote 3/33]
§ 7(c), 52 Stat. 825.
[
Footnote 3/34]
15 U.S.C. § 717f.
[
Footnote 3/35]
Id., § 717c(e).
[
Footnote 3/36]
Id., § 717c(b).
[
Footnote 3/37]
Id., § 717d(a).
[
Footnote 3/38]
Sen.Rep. No. 1162, 75th Cong., 1st Sess. 2.
[
Footnote 3/39]
The list of East Ohio Gas Company's special industrial contracts
thus expressly under Hope's control and their demands are as
follows:
Republic Steel Corporation . . . . . 15,000,000 cu.ft.
Otis Steel Company . . . . . . . . . 10,000,000
Timken Roller Bearing Co. . . . . . 7,500,000
Youngstown Sheet & Tube Co. . . . . 7,000,000
U.S. Steel Corp. -- Subsidiaries . . 6,500,000
General Electric Company . . . . . . 2,500,000
Pittsburgh Plate Glass Co. . . . . . 2,000,000
Niles Rolling Mill Company . . . . . 1,500,000
Chase Brass & Copper Company . . . . 700,000
U.S. Aluminum Company. . . . . . . . 400,000
Mahoning Valley Steel Company. . . . 400,000
Babcock & Wilcox Company . . . . . . 400,000
Canton Stamping & Enameling Co. . . 350,000
[
Footnote 3/40]
To make a fetish of mere accounting is to shield from
examination the deeper causes, forces, movements, and conditions
which should govern rates. Even as a recording of current
transactions, bookkeeping is hardly an exact science. As a
representation of the condition and trend of a business, it uses
symbols of certainty to express values that actually are in
constant flux. It may be said that, in commercial or investment
banking, or any business extending credit, success depends on
knowing what not to believe in accounting. Few concerns go into
bankruptcy or reorganization whose books do not show them solvent,
and often even profitable. If one cannot rely on accountancy
accurately to disclose past or current conditions of a business,
the fallacy of using it as a sole guide to future price policy
ought to be apparent. However, our quest for certitude is so ardent
that we pay an irrational reverence to a technique which uses
symbols of certainty, even though experience again and again warns
us that they are delusive. Few writers have ventured to challenge
this American idolatry,
but see Hamilton, Cost as a
standard for Price, 4 Law and Contemporary Problems 321, 323-25. He
observes that "As the apostle would put it, accountancy is all
things to all men. . . . Its purpose determines the character of a
system of accounts." He analyzes the hypothetical character of
accounting and says,
"It was no eternal mold for pecuniary verities handed down from
on high. It was -- like logic or algebra, or the device of analogy
in the law -- an ingenious contrivance of the human mind to serve a
limited and practical purpose. . . . Accountancy is far from being
a pecuniary expression of all that is industrial reality. It is an
instrument, highly selective in its application, in the service of
the institution of moneymaking."
As to capital account, he observes,
"In an enterprise in lusty competition with others of its kind,
survival is the thing and the system of accounts has its focus in
solvency. . . . Accordingly, depreciation, obsolescence, and other
factors which carry no immediate threat are matters of lesser
concern, and the capital account is likely to be regarded as a
secondary phenomenon. . . . But in an enterprise, such as a public
utility, where continued survival seems assured, solvency is likely
to be taken for granted. . . . A persistent and ingenious attention
is likely to be directed not so much to securing the upkeep of the
physical property as to making it certain that capitalization fails
in not one whit to give full recognition to every item that should
go into the account."
[
Footnote 3/41]
See 2 Bonbright, Valuation of Property (1937) 1112.
[
Footnote 3/42]
Bonbright says,
". . . the vice of traditional law lies not in its adoption of
excessively rigid concepts of value and rules of valuation, but
rather in its tendency to permit shifts in meaning that are inept,
or else that are ill-defined because the judges that make them will
not openly admit that they are doing so."
Id., 1170.
[
Footnote 3/43]
"The attempt to regulate rates by reference to a periodic or
occasional reappraisal of the properties has now been tested long
enough to confirm the worst fears of its critics. Unless its place
is taken by some more promising scheme of rate control, the days of
private ownership under government regulation may be numbered."
2 Bonbright, Valuation of Property (1937) 1190.
[
Footnote 3/44]
East Ohio itself owns natural gas rights in 550,600 acres,
518,526 of which are reserved and 32,074 operated, by 375 wells.
Moody's Manual of Public Utilities (1943) 5.
[
Footnote 3/45]
Hope has asked a certificate of convenience and necessity to lay
1140 miles of 22-inch pipeline from Hugoton gas fields in southwest
Kansas to West Virginia to carry 285 million cu. ft. of natural gas
per day. The cost was estimated at $51,000,000. Moody's Manual of
Public Utilities (1943) 1760.
[
Footnote 3/46]
I find little information as to the rates for industries in the
record and none at all in such usual sources as Moody's Manual.
[
Footnote 3/47]
The Federal Power Commission has touched upon the problem of
conservation in connection with an application for a certificate
permitting construction of a 1500-mile pipeline from southern Texas
to New York City, and says:
"The Natural Gas Act, as presently drafted, does not enable the
Commission to treat fully the serious implications of such a
problem. The question should be raised as to whether the proposed
use of natural gas would not result in displacing a less valuable
fuel and create hardships in the industry already supplying the
market, while at the same time rapidly depleting the country's
natural gas reserves. Although, for a period of perhaps 20 years,
the natural gas could be so priced as to appear to offer an
apparent saving in fuel costs, this would mean simply that social
costs which must eventually be paid had been ignored."
"Careful study of the entire problem may lead to the conclusion
that use of natural gas should be restricted by functions, rather
than by areas. Thus, it is especially adapted to space and water
heating in urban homes and other buildings and to the various
industrial heat processes which require concentration of heat,
flexibility of control, and uniformity of results. Industrial uses
to which it appears particularly adapted include the treating and
annealing of metals, the operation of kilns in the ceramic, cement,
and lime industries, the manufacture of glass in its various forms,
and use as a raw material in the chemical industry. General use of
natural gas under boilers for the production of steam is, however,
under most circumstances, of very questionable social economy."
Twentieth Annual Report of the Federal Power Commission (1940)
79.