Natural Gas Pipeline Co. v. Federal Power Commission

• Decision Date: 14 April 1941
• Docket Number: No. 7454.,7454.
• Citation: 120 F.2d 625
• Parties: NATURAL GAS PIPELINE CO. OF AMERICA et al. v. FEDERAL POWER COMMISSION et al.
• Court: U.S. Court of Appeals — Seventh Circuit

120 F.2d 625 (1941)

NATURAL GAS PIPELINE CO. OF AMERICA et al. v. FEDERAL POWER COMMISSION et al.

No. 7454.

Circuit Court of Appeals, Seventh Circuit.

April 14, 1941.

J. J. Hedrick, of Chicago, Ill., S. A. L. Morgan, of Amarillo, Tex., and Geo. I. Haight, of Chicago, Ill., for petitioner.

Wm. S. Youngman, Jr., Richard J. Connor, Geo. Slaff, and Daryal A. Myse, all of Washington, D. C., and Geo. F. Barrett, of Chicago, Ill., for respondent.

Before EVANS and SPARKS, Circuit Judges, and LINDLEY, District Judge.

EVANS, Circuit Judge.

Presented for review is an interim order of the Federal Power Commission, directing the petitioners to reduce their rates on natural gas, so as to reflect an annual reduction in their operating revenues of not less than $3,750,000.

Petitioners own natural gas reserves in Texas. They produce the natural gas and transport it through their own pipe lines to the State of Illinois, where it is sold wholesale — 90% to one customer. They produce 75% of the gas they sell and purchase the remaining 25% from another producer. They were in business for nearly eight years before the Natural Gas Act, 15 U.S.C.A. § 717, et seq.,¹ became effective, June 21, 1938.

The interim order,² complained of, was entered by the Commission, July 23, 1940, accompanied by a detailed memorandum showing the basis for the order. There were also specific findings. It was made upon a motion by respondent, Illinois Commerce Commission, for an "immediate order." This motion was followed by petitioners' plea to the jurisdiction and an answer. The motion for the interim order was made before termination of a complete investigation, but after fifty-five days of hearing. The order was entered six months later.

Briefly stated, the Commission ordered the $3,750,000 reduction in revenues on the following fact assumptions:

                  Investment for rate base purposes ..  $74,420,424
                    (this was made up of reproduction
                      cost, value of gas
                      reserves, capital additions
                      and working capital.)
                  A return of 6½% was allowed                     6½
                                                        ___________
                                                        $ 4,837,328
                  Annual amortization was added           1,557,852
                    (The amount allowed for
                      amortization covered a period
                      of 23 years, from 1932
                      to 1954.)
                           Total deductions ..........    6,395,180
                  The adjusted average annual
                    net income was ...................    9,362,032
                  The above determined required
                    amount was .......................    6,395,180
                                                         __________
                          Excess .....................    2,966,852
                

The lessening of petitioners' income by this amount would result in an income tax saving. Hence the total reduction ordered was increased from $2,966,852 to $3,750,000.

A many sided attack on the order is made by the petitioners.

First, they challenge the Commission's jurisdiction to enter this order because:

(a) The only authority given by the Act is to enter a final order.

(b) There is only authority to enter orders determining rates (Sec. 5, 15 U.S.C.A. § 717d), whereas here the order directed reduction of income and left the company to determine the rates, which burden is doubled because they have contracts with varying rates, and they are not instructed how to apportion the reduction.

(c) The constitutionality of the Act is attacked because the companies' business is a private business and this Act, contrary to the Fifth Amendment, makes it subject to regulation as a public utility, and they have not even an opportunity to withdraw from business.

(d) The companies are not the kind of companies meant to be covered by the Act.

(e) There has been a denial of due process because there has been no full hearing.

(f) Since the companies' existing rates are presumably reasonable, the Commission has the burden of showing the contrary, and it has not sustained its burden. It has merely provided for a return, barely non-confiscatory, rather than reasonable, and ignored the fact that the profits arose from the operator's engineering skill and the fact that the profits accruing are but a reasonable reward for the risk involved.

(g) The Illinois Commerce Commission has no legislative authority to move for such an order, and the Federal Power Commission in moving for such order is acting as prosecutor and court.

Second, they challenge the interim order of the Commission on its accounting theories:

(a) The "base" taken by the Commission is wrong because it excluded the item of going concern value of $8,500,000; it permitted only $3,808,399, instead of $6,046,286, for future capital expenditures, and it refused to exclude from the base $2,866,758, for "viewed" depreciation. So, the base taken by the Commission ($74,420,424) was $7,771,129, less than the base contended for by the companies, — i. e., $82,291,553.

(b) The 6½% return used by the Commission was unreasonably insufficient, and unsupported by the evidence. Not less than an 8% return should have been allowed.

(c) The period taken for amortization was wrong, namely, it should have started from the effective date of the Act, and not from the beginning of the companies' business.

(d) The base used for amortization, i. e., $78,284,009, was too low; it should have been $84,341,218.

(e) The amortization reserve should have been figured on a straight line basis with the interest at the rate of 2% semi-annually, instead of on the sinking fund basis with interest at 6½% compounded annually. The annual amortization allowance should have been $5,100,732, instead of $1,557,852.

I. Constitutionality of Act as applied to petitioners. The argument supporting this view runs like this: (a) Petitioners are not in fact, or law,³ a public utility, and the legislative declaration that they are, is unconstitutional⁴ and ineffective to make them such. They do not sell to the public. 98% of their product is sold to wholesale customers. The price they charge has small effect on the consumer's cost because the service company's fixed charges are the dominant factor in ultimate cost to the public. Their gas is but an element in the product the public purchases, which also contains artificial gas. The fact that gas is widely used by the public is not important, for, they argue, so are meat, groceries, and many other unregulated commodities.⁵ (b) The Act changes an existing, wholly private industry into a public utility, burdened with many iron-bound mandates — all this without giving petitioners a right to withdraw from the harshness of such supervision, and is therefore a violation of the Fifth Amendment.⁶ They cite the fact that the Act delegates to the Power Commission the power to choose their customers for them (Sec. 7, 15 U.S.C.A. § 717f) and prohibits their dropping a customer, — unsatisfactory though he may be.

We conclude, without much doubt, that the Natural Gas Act is constitutional. It falls within the Commerce Clause of the Federal Constitution, article 1, § 8. The necessity for its enactment was legislatively declared in Sec. 1 (a) (above quoted), and "it may not be annulled unless palpably in excess of legislative power."⁷ Condemnation on this last-named ground lacks factual support in the instant case.

We appreciate, and may concede, the force of petitioners' factual distinction of the Nebbia, the Sunshine and Appalachian Cases. They all involved, it is true, critical economic conditions which demanded legislative solution, and such critical condition and urgent necessity of immediate control are here absent. But, where a legislative determination is based upon a very extended administrative investigation, which concluded that an industry was affected with a public interest and that Federal regulation thereof was necessary and that said business or industry is producing and transporting natural gas to be sold to gas companies engaged in public utility businesses in cities and villages, there exists no basis for a successful attack on such determination.

The natural gas industry controls the source of a commodity of great public importance and widespread consumption, and therefore its regulation by Congress may well be required. At least, Congress, in its wisdom, may so conclude. Courts cannot, and should not, assume a greater wisdom than Congress, and find otherwise. The court's function, at most, would be limited to an inquiry as to the existence of facts which would support legislative determination.

II. Form of Order, i. e., ordering a reduction of income of a designated amount, and not determining precise rates to be charged. Petitioners challenge, and respondents do not discuss the challenge, that the Commission's authority is only to "determine the just and reasonable rate * * and shall fix the same by order." Sec. 5, Title 15 U.S.C.A. Sec. 717d.

The order of the Commission found the existing rates unreasonable and excessive, and ordered that they be reduced to reflect a decrease of $3,750,000 in operating revenues. This order did not "determine" the rates. But it evidenced the conclusion that the existing rates were too high and should be lowered such an amount as would reflect a specific reduction in profits.

The resulting rate might vary, depending upon which class of purchasers should be favored. It failed to name the customer (the utility, the commercial, or the industrial purchasers) and the degree of reduction to be allocated inter se. The Commission determined the underlying factors determinative of a rate sufficient to produce a fair and reasonable profit. The order left the companies free to apportion the reduction among the customers.

This action, while irregular and unusual, we believe, in rate determining commissions, was in no way harmful or prejudicial to the companies. In fact, it was favorable to them. It lodges a discretion — or play — in them whereby they might adjust the rates in the various...