315 U.S. 575 (1942), 265, Federal Power Commission v. Natural Gas Pipeline Co.

Docket Nº:No. 265
Citation:315 U.S. 575, 62 S.Ct. 736, 86 L.Ed. 1037
Party Name:Federal Power Commission v. Natural Gas Pipeline Co.
Case Date:March 16, 1942
Court:United States Supreme Court

Page 575

315 U.S. 575 (1942)

62 S.Ct. 736, 86 L.Ed. 1037

Federal Power Commission


Natural Gas Pipeline Co.

No. 265

United States Supreme Court

March 16, 1942

Argued February 10, 11, 1942




1. Provisions of the Natural Gas Act of 1938, for regulating the prices at which natural gas originating in one State and transported to another shall be sold to distributors at wholesale held consistent with the due process clause of the Fifth Amendment, and within the commerce power. P. 582.

2. Under §§ 5(a) and 16 of the Natural Gas Act of 1938, the Federal Power Commission, when, upon due hearing, it has found the existing rates of an interstate gas pipeline company to be unjust and unreasonable, may make an interim order requiring the utility to file a new schedule of rates which shall effect a prescribed decrease in operating revenues. P. 583.

3. The Natural Gas Act of 1938 commands that the rates of natural gas companies subject to it shall be just and reasonable; declares that rates which are not just and reasonable are unlawful; provides that the Federal Power Commission shall determine the just and reasonable rate to be observed and fix the same by order and that the Commission may order a decrease where existing rates are unjust, unlawful, or are not the "lowest reasonable rates." §§ 4(a) and 5(a). On review of the Commission's orders by a Circuit Court of Appeals, as authorized by 19(b), the Commission's findings of fact, if supported by substantial evidence, "shall be conclusive."

Held: 1,

(1) "Lowest reasonable rate" is the lowest rate which may be fixed without being confiscatory in the constitutional sense. P. 585.

(2) The Congressional standard prescribed by this statute coincides with that of the Constitution, and the courts are without authority under the statute to set aside as too low any "reasonable rate" adopted by the Commission which is consistent with constitutional requirements. P. 586.

4. Ratemaking bodies are not required by the Constitution to follow any single formula or combination of formulas. Once a full hearing

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has been given, proper findings made and the statutory requirements satisfied, the courts cannot intervene in the absence of a clear showing that the limits of due process have been overstepped. If the Commission's order, as applied and viewed in its entirety, produces no arbitrary result, the Court's inquiry is at an end. P. 586.

5. There is no constitutional requirement that going concern value, even when it is an appropriate element to be included in a rate base, must be separately stated and appraised as such. Pp. 586-589.

6. Where a valuation for rate purposes is of the business as a whole, without separate appraisal of the going concern element, the burden rests on the regulated utility to show that this item has not been included in the rate base, and that it was not recouped from prior earnings of the business. P. 589.

7. The property of a utility is not confiscated by denial of the privilege of capitalizing the maintenance cost of excess plant capacity during a period before the rates were regulated, which would allow it to earn a return and amortization allowance upon such costs during the entire subsequent life of the business. P. 590.

8. Regulation does not insure that the business shall produce net revenues, nor does the Constitution require that the losses of the business in one year shall be restored from future earnings by the device of capitalizing the losses and adding them to the rate base on which a fair return and depreciation allowance are to be earned. P. 590.

9. Denial of the right to earn for the future a "fair return" and amortization on the costs of maintaining initial excess capacity, and of advertising and acquiring new business, which they failed to show had not been recouped from earnings, did not deprive the utilities concerned in this case of their property. P. 590.

10. Where the business the rates of which are regulated could exist for only a limited period, an amortization base computed at cost and including property already retired, the allowances on which would restore the undepreciated capital investment, less salvage at the end of that period, involved no deprivation of property, even though, during the period, the cost of reproducing the property might be more than its actual cost. The Constitution does not require 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. P. 592.

11. In the case of a wasting business, the rates of which were first regulated after it had operated for a number of years, held proper and consistent with due process, in determining its fair return, to adopt as the amortization period the entire estimated life of the

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business, including the period of earlier operation, and to require that there be credited in the amortization account so much of the earning of that period as would be appropriately allocable to it. P. 592.

12. A provision for annual amortization allowances which, if accumulated at a 6 1/2% compound interest rate during the estimated life of the business, will be sufficient to restore the total investment less salvage, and which leaves the allowances in the business as a sinking fund reserve but permits the utility to earn each year, in addition to the allowance, 6 1/2% on both the amortized and unamortized portions of the rate base -- held not objectionable upon the ground that the rate of interest used should have been lower -- comparable to that obtainable if the allowances were to be invested in securities in a separate sinking fund -- or upon the ground that the arrangement adopted subjects the utility to greater business risks. P. 595.

13. The Federal Power Commission's finding that 6 1/2% is a fair annual rate of return upon the rate base allowed in this case is supported by substantial evidence. P. 596.

14. The question of proper disposition of the excess charges impounded under a stay order of the court below is not presented for determination upon the record before this Court. P. 598.

120 F.2d 625 reversed.

Certiorari, 314 U.S. 593, to review a judgment vacating an order of the Federal Power Commission, on a petition to review, under § 19(b) of the Natural Gas Act of 1938.

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STONE, J., lead opinion

MR. CHIEF JUSTICE STONE delivered the opinion of the Court.

This is a rate case involving numerous questions which arise out of the Federal Power Commission's regulation, under §§ 5(a) and 13 of the Natural Gas Act of 1938, 52 Stat. 821, 15 U.S.C. § 717 et seq., of the rates to be charged for the sale of natural gas by cross-petitioners, Natural Gas Pipeline Company of America and Texoma Natural Gas Company.

The two companies are engaged in business as a single enterprise. They produce natural gas from their own reserves in the Panhandle gas fields in Texas, and purchase gas produced there by others. They transport the gas by their own pipeline in interstate commerce to Illinois, where they sell the bulk of it at wholesale to utilities, which distribute and sell it for domestic, commercial, and industrial uses.

The companies began operations in 1932 with a capital structure of $60,000,000 of six percent bonds, later increased by $999,000, and $3,500,000 of common stock, of which $500,000 is stock of the Texoma Company, a nonprofit corporation paying no dividends on its stock. During the first seven years of operation, beginning January 1, 1932, and extending through 1938, the companies charged against gross income various depreciation and depletion deductions aggregating $13,077,488,1 and, in addition,

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charged $6,481,322 for "retirements" of property. In that period, they paid dividends amounting in all to $9,150,000. Although there were book deficits in earnings for the first two years, the total "net profit" available for dividends and surplus after payment of interest on the bonds was $8,224,436,2 or an annual average of $1,174,919, which is 33.6% per annum on the $3,500,000 stock. The earnings available during the period for return on the capital investment of both stockholders and bondholders -- after taking out of income $19,558,810 for depreciation, depletion, and retirements -- totalled $34,040,883; this makes an average of $4,862,983 annually, which [62 S.Ct. 740] is about 8% on the book figures for investment undepreciated, or 8.8% after deducting from investment the average depreciation and depletion reserves actually charged to earnings by the companies.3 At the time of the hearing, over one-fourth of the bonds issued had been retired out of earnings.

On complaint of the Illinois Commerce Commission, and on its own motion, the Power Commission began separate investigations of the companies' rates. These proceedings were consolidated, and, after extensive hearings, the Commission, for the purpose of issuing an interim order, accepted the companies' statement that the book cost of their property existing at the end of 1938 was $60,172,843, including working capital of $975,000.

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Likewise for the purpose of the order, it accepted the companies' estimate that the value of all physical property -- calculated at reproduction cost new (except for gas reserves taken on the companies' statement to have a present value of $13,334,775) -- was $74,420,424, which the Commission adopted as the rate base. It took the companies' own estimate of twenty-three years ending in 1954 as the life of the business, and, for the amortization base, used their cost figure of $78,284,009 for the total past and estimated future investment after...

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