320 U.S. 591 (1944), 34, Federal Power Commission v. Hope Natural Gas Co.

Docket Nº:No. 34
Citation:320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333
Party Name:Federal Power Commission v. Hope Natural Gas Co.
Case Date:January 03, 1944
Court:United States Supreme Court

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320 U.S. 591 (1944)

64 S.Ct. 281, 88 L.Ed. 333

Federal Power Commission


Hope Natural Gas Co.

No. 34

United States Supreme Court

Jan. 3, 1944

Argued October 20, 21, 1943




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. 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. 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. 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. 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

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they might produce only a meager return on a rate base computed on the "present fair value" method. P. 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. 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. 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. 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. 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. 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. 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. 617.

13. Findings of the Commission as to the lawfulness of past rates held not reviewable under §19(b) of the Act. P. 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.

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DOUGLAS, J., lead opinion

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

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Circuit Court of Appeals set it aside, one judge dissenting. 134 F.2d 287. The cases are here on petitions for writs [64 S.Ct. 284] 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.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.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,

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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.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

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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 [64 S.Ct. 285] 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

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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...

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