United Fuel Gas Co. v. Railroad Commission of Kentucky, 3436.

• Decision Date: 22 April 1925
• Docket Number: No. 3436.,3436.
• Citation: 13 F.2d 510
• Parties: UNITED FUEL GAS CO. et al. v. RAILROAD COMMISSION OF KENTUCKY et al.
• Court: U.S. District Court — Eastern District of Kentucky

13 F.2d 510 (1925)

UNITED FUEL GAS CO. et al. v. RAILROAD COMMISSION OF KENTUCKY et al.

No. 3436.

District Court, E. D. Kentucky.

April 22, 1925.

COPYRIGHT MATERIAL OMITTED

S. S. Willis, of Ashland, Ky., and Harold A. Ritz, of Charleston, W. Va., for plaintiffs.

Frank E. Daugherty, Atty. Gen., and Overton S. Hogan, Asst. Atty. Gen., of Kentucky, and John T. Diederich and Vernon A. Dinkle, both of Ashland, Ky., for defendants.

HICKENLOOPER, District Judge (for the Southern District of Ohio, sitting by designation in the Eastern District of Kentucky).

This is an action brought by the United Fuel Gas Company and the Warfield Natural Gas Company, both corporations, created, respectively, under the laws of West Virginia and Kentucky, to enjoin an order of the Railroad Commission of Kentucky fixing the rates at which natural gas shall be sold in the municipalities of Ashland, Catlettsburg, and Louisa, all in Kentucky. Before discussing the several points raised by counsel, it might be of interest and assistance to observe the relationship of the interested parties at the time of the order in question, and the proceedings and events prior to the making of that order. The filing of the bill in the instant case marks the culmination of one branch of a widely extended series of attempts on behalf of the complainant United Fuel Gas Company to secure increases in the rates for natural gas in Kentucky, Ohio, and West Virginia.

The complainant United Fuel Gas Company was organized on March 2, 1903, and was reorganized and obtained its principal gas-producing territory in 1909, when the properties of the United States Natural Gas Company were acquired. At the present time the capital stock of the United Fuel Gas Company is owned in substantially equal amounts by the Ohio Fuel Supply Company and the Columbia Gas & Electric Company, hereinafter called the parent companies. Additional gas acreage was secured on June 30, 1910, from the Hope Natural Gas Company, and since that date additional leases have been continuously acquired, and large numbers of old leases renewed or abandoned, from time to time. On December 31, 1923, the company controlled 68,900 acres of operated gas-producing property, and likewise possessed leases giving them the right to explore for and extract natural gas in a reserve territory of 746,010 acres. Only a very small portion of either acreage was owned in fee simple, the great bulk being held under the so-called leases giving simply the right to explore for and extract gas and oil. The books of the company have been kept so as to show in the minutest detail the cost of securing such acreage from time to time and the book value thereof. Bonus payments, the cost of securing new leases, the cost of renewals, and other charges necessary for the retention of the unoperated or reserve acreage, and all royalties paid upon leases in the operated area, have been properly charged to expense from year to year. The present book value of operated and reserve acreage is $6,732,920, although the probable cash consideration expended in securing such acreage was not in excess of half this sum. The new reserve acreage, which has been acquired continuously from time to time since 1910, to and including 1923, was so procured at costs ranging from as low as 8 cents per acre in Kentucky fields to 83 cents per acre between 1921 and 1923 in the West Virginia field. Over this period the average cost for obtaining new leases for reserve acreage was 34 cents per acre.

Commencing in 1910, the expansion of the field of operation of the United Fuel Gas Company was very marked. This company constructed and operated a natural gas transportation system, by which gas was taken from the West Virginia and Kentucky fields into and through Kentucky, and by its system, or that of its allied corporations, ultimately found its way to points as far distant as Louisville, Ky., and Cincinnati, Ohio. Passing through the municipalities of Ashland, Catlettsburg, and Louisa, Ky., the United Fuel Gas Company installed distribution systems, and for a period operated under franchises from these municipalities, which franchises, however, have now expired.

By the Act of March 22, 1920 (Acts 1920, c. 61), the Legislature of Kentucky undertook to place natural gas companies under the regulatory supervision of the Railroad Commission of Kentucky. Among the powers given to the Railroad Commission by this act is "the power to issue an order fixing just and reasonable rates to be charged for service," upon finding by the commission that rates, classifications, and charges in force by such company were extortionate. This act also provides, in section 23, that, "if the franchise of any public service company embraced in this act shall have expired, and the service is continued without obtaining a new franchise the said public service company shall be subject to the jurisdiction and authority of the Railroad Commission, and shall not withdraw its service from any municipality, county or community without first obtaining the permission of the said Railroad Commission so long as it remains in business in this commonwealth, or any part thereof."

This act is claimed to be unconstitutional under section 51 of the Kentucky Constitution, which provides that "no law enacted by the General Assembly shall relate to more than one subject, and that shall be expressed in the title, and no law shall be revised, amended, or the provisions thereof extended or conferred by reference to its title only, but so much thereof as is revised, amended, extended or conferred, shall be reenacted and published at length." It is claimed that the enactment here involved relates to more than one subject, and that in so far as regulation of public utilities is concerned, and their duties and obligations prescribed, the act pertains to a subject-matter which is not expressed in its title.

On January 18, 1922, in the matter of a complaint lodged with the Railroad Commission that the then existing rates in the cities of Ashland, Catlettsburg, and Louisa were extortionate, the commission issued its order, after hearing, reducing rates to 80 per cent. of the then existing rates, such order to be effective on February 11, 1922. The then existing rates were 40 cents per 1,000 cubic feet, with a reduction of 5 cents per 1,000 if bills were paid within the discount period. The company interpreted this order to prescribe a maximum rate of 80 per cent. of the then existing 40-cent maximum, with the privilege of allowing such discount as the company pleased, in order to insure prompt payment. The company thereupon established a maximum rate of 32 cents per 1,000 cubic feet, with a discount of 1 cent per 1,000 if bills were paid within the discount period established. The order of the commission made no provision as to the amount of discount or the length of the discount period. This interpretation of the company was communicated to the commission, and the commission acquiesced therein until the making of its order of December 11, 1923, to be presently noted.

In the interim between the orders of January 18, 1922, and December 11, 1923, the United Fuel Gas Company, becoming dissatisfied with the rates, created the complainant Warfield Natural Gas Company, a Kentucky corporation, and conveyed to this company all that portion of the properties of the United Fuel Gas Company which were located in Kentucky, upon the assumption by the Warfield Natural Gas Company of certain bonded indebtedness. The entire capital stock of the Warfield Natural Gas Company, exclusive of directors' qualifying shares, is owned by the United Fuel Gas Company. A contract was then entered into between the United Fuel Gas Company and the Warfield Natural Gas Company for the sale by the former to the latter of natural gas at the Kentucky state line for 30 cents per 1,000 cubic feet, there delivered and measured. In the case of the Columbia Gas & Electric Company and the Ohio Fuel Supply Company, parent companies of the United Fuel Gas Company, natural gas is wholesaled at much less than the cost of production; the United Fuel Gas Company taking the position that, inasmuch as its entire capital stock is owned by the other two companies in practically equal proportions, the price fixed for sales to such parent companies made no ultimate or substantial difference. But in the case of the Warfield Natural Gas Company the sale purports to have been made by the parent company, owning all the capital stock of the subsidiary, to the subsidiary company, and the quite apparent purpose of such a contract was the creation of a plausible basis for an application to increase rates. Because of the intercorporate relationship of the companies, and the manifest purpose in creating the Warfield Natural Gas Company and executing the contract just mentioned, no reliance is placed by the complainants upon this contract between the United Fuel Gas Company and the Warfield Natural Gas Company, although the price is claimed to be reasonable; nor is it claimed that sales to the Columbia Gas & Electric Company or the Ohio Fuel Supply Company should be considered as sales in a competitive market, or as returning only the price paid. In other words, it is conceded that, as to the several parent companies and this subsidiary company, the gas may be considered as sold at whatever price may be determined to be reasonable, and the contracts and sales between such parent and subsidiary companies are to be disregarded in determining the reasonableness of the charges. As regards the complainants herein, the Warfield Natural Gas Company is to be considered the instrumentality of the United Fuel Gas Company, and the combined properties are to be regarded as a unit in determining the rate base.

Shortly after the creation of the Warfield Natural Gas Company, that company filed a petition with the Railroad Commission of Kentucky, praying the vacation of the...