Commonwealth Natural Gas Corporation v. United States

• Citation: 266 F. Supp. 298
• Decision Date: 22 December 1966
• Docket Number: Civ. A. No. 3690,4309,3691 and 4310.
• Parties: COMMONWEALTH NATURAL GAS CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant. COMMONWEALTH GAS DISTRIBUTION CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

266 F. Supp. 298

COMMONWEALTH NATURAL GAS CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant.

COMMONWEALTH GAS DISTRIBUTION CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. Nos. 3690, 4309, 3691 and 4310.

United States District Court E. D. Virginia, Richmond Division.

December 22, 1966.

H. Brice Graves, E. Milton Farley, III, Hunton, Williams, Gay, Powell & Gibson, Richmond, Va., for plaintiffs.

Mitchell Rogovin, Asst. Atty. Gen., Myron C. Baum, Arthur L. Biggins, Attys., Tax Division, Dept. of Justice, Washington, D. C., C. Vernon Spratley, Jr., U. S. Atty., S. W. Phillips, Jr., Asst. U. S. Atty., Richmond, Va., for defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

BUTZNER, District Judge.

Four cases for refund of taxes were consolidated for trial by the court without the intervention of a jury. The cases present these issues: First, whether easements for transmission of natural gas are depreciable; and second, the allocation of costs between the pipeline and the easements.

Commonwealth Natural Gas Corporation is a Virginia corporation organized in 1947 to sell natural gas to retail distributors. Its gas is transported in its own pipelines. Commonwealth completed construction of its original transmission line in 1950 from a connection with lines owned by the Atlantic Seaboard Corporation in Greene County, Virginia to terminals at Norfolk and Newport News, Virginia. By the end of 1960 Commonwealth had constructed a loop adjacent to the first line. It owns 350 miles of pipeline.

Commonwealth buys its entire supply of natural gas from the Atlantic Seaboard Corporation. It sells this gas on a wholesale basis to public utilities, large industries, and its wholly owned subsidiary, Commonwealth Gas Distribution Corporation.

Commonwealth Gas Distribution Corporation is a Virginia corporation organized in 1955 to retail gas. It has fifteen miles of pipeline.

We will first consider the question of depreciation of the easements for transmission of natural gas.

The parties have stipulated that all gas reserves and resources which are available or discovered east of the Rocky Mountains are a source of supply for the taxpayers' pipelines. The parties have also stipulated that the taxpayers will receive their fair share of these gas resources. For that reason it is unnecessary to explore in detail the plaintiffs' contractual arrangements with producers.

Natural gas reserves exist in nature in a finite amount. The term "proved reserves" refers to the quantities of natural gas in the ground which are known to exist with the greatest degree of certainty. These reserves are estimated annually by the Reserves Committee of the American Gas Association. They are the only annually reported reserve figures compiled from individual fields. These estimates are used by the gas industry and by agencies such as the Federal Power Commission.

The "reserves-production ratio," sometimes referred to as the "life index," is the ratio of proved reserves at the end of a given year to the net production during that year. Net production, also reported annually by the Reserves Committee of the American Gas Association, represents total production reduced by the small quantity of gas that is reinjected into the earth after production. Net production, reduced by the quantity of the gas that is wasted or lost, is equivalent to demand.

There are other kinds of reserves of natural gas referred to as "probable" and "possible" reserves. There is no uniform definition for these terms, but they refer to quantities of gas that are known to exist with less certainty than the proved reserves. Estimates of probable and possible reserves frequently are made for individual fields, but never has there been any compilation of these reserves on a state, regional, or national basis. Gas in the ground exists in two additional categories. The first is gas that is known for a fact to exist but which is considered unrecoverable at this time due to physical, geographical, or economic circumstances. The other is gas that can be presumed to exist although it has not yet been discovered.

The "resource base" is the entire quantity of gas that exists in the earth's crust beneath the United States. This term embraces the reserves mentioned above, known but unrecoverable resources and undiscovered resources. Proved reserves constitute but a small portion of the resource base.

The reserves-production ratio for all the states east of the Rocky Mountains for the years in question was: 1957, 21.3:1; 1958, 21.7:1; 1959, 21.1:1; 1960, 20.4:1. This ratio is only a rough measure of the relation between production in a given year and the reserves behind that production. It does not measure the absolute life of the reserves. Because of the physical circumstances surrounding the occurrence and production of natural gas, it is not possible for any individual field or reservoir to maintain its initial rate of production to the terminal year. The duration of the ability to maintain production at the initial level is known as the "deliverability life." The exact relation between the deliverability life and the reserves-production ratio varies from reservoir to reservoir, but as a rule of thumb a reserves-production ratio of 20 to 1 is equivalent to a deliverability life of 12 to 14 years. Another overstatement of the reserves-production ratio is that it does not take into account the growth in demand and production. On the other hand, the proved reserves contain a highly conservative element. There are other categories of known reserves, and there are also quantities of gas that undoubtedly will be discovered.

Natural gas reserves are depleted by use, and such reserves will be available for a limited time which can be estimated with reasonable accuracy. A life of twenty to twenty-one years based on the reserves-production ratio offers the appeal of a mathematical computation, but it is entirely too limited. It does not take into consideration the fact that gas has been discovered in the past and the expectation that gas will be discovered in the future. The minimum period of time, therefore, is approximately twenty years, but this is an unrealistic minimum. The maximum period of time, based on the resource base and the expectation that gas will be discovered and utilized in accordance with past trends is in excess of 100 years, but this is a speculative and unrealistic maximum.

Closely related to the production and consumption of gas is the technology that influences its discovery, production, and consumption. A general life of technology occurs over a span of approximately twenty to twenty-five years, and if we go very far beyond that period all possibilities are open and we have almost nothing to go on. Technology, considered along with the other factors which the court has mentioned, assists in the estimation of the time that natural gas reserves will last with reasonable accuracy. Evidence before the court demonstrates that thirty years is a reasonable measure of the life of the natural gas...