Central Kentucky Natural Gas Co. v. Railroad Commission

• Decision Date: 11 July 1932
• Citation: 60 F.2d 137
• Parties: CENTRAL KENTUCKY NATURAL GAS CO. v. RAILROAD COMMISSION OF KENTUCKY et al.
• Court: U.S. District Court — Eastern District of Kentucky

60 F.2d 137 (1932)

CENTRAL KENTUCKY NATURAL GAS CO. v. RAILROAD COMMISSION OF KENTUCKY et al.

District Court, E. D. Kentucky.

July 11, 1932.

Allen, Botts & Duncan, of Lexington, Ky., and D. L. Hazelrigg, of Frankfort, Ky., for Gas Company.

Robt. H. Winn, of Mt. Sterling, Ky., and D. C. Hunter and C. M. Harbison, both of Lexington, Ky., for City of Lexington.

J. A. Edge, of Lexington, Ky., for interveners.

Before MOORMAN and HICKENLOOPER, Circuit Judges, and DAWSON, District Judge.

PER CURIAM.

The plaintiff in this cause seeks an injunction, enjoining the enforcement of an order of the Railroad Commission fixing a flat rate of 45 cents per thousand cubic feet as a just and reasonable rate for the natural gas service which the plaintiff furnishes to consumers of natural gas in the city of Lexington. The case is submitted on the evidence heard by the Railroad Commission. Much of this evidence is conjectural. In so far as it relates to the capital value of that part of the plaintiff's plant allocable to Lexington, it is directed to December 31, 1926. We are asked to determine the capital base as of that date.

The several estimates of value of the property differ widely. Kimball, a witness for the plaintiff, fixed the reproduction value new, less depreciation, of that part of the Central Kentucky Natural Gas Company plant allocable to Lexington at $2,028,069. Carter, a witness for the defendant, fixed the value at $1,189,489. Cirgal found the historic cost of the entire plant to be $2,653,035, without giving consideration to any going concern value and some other items, such as gas pumped and stored in the Menifee field and working capital.

It is apparent from an examination of the figures of each of the three witnesses referred to that no one of them proceeded in all particulars upon the correct basis. Kimball's estimates of overhead, costs of financing, etc., appear to us to be entirely too high. On the other hand, Carter left out altogether some of the items that should be considered in arriving at a fair reproduction cost new of a utility plant for rate-making purposes. The proofs show that about 55.1 per cent. of the entire value should be allocated to Lexington. Allocating to Lexington this percentage, that part of the historic cost of the property actually owned by the plaintiff and allocable to Lexington would be $1,461,822, exclusive of going concern value and some other minor items not reflected by the books of the company. It appears, too, in the proofs that in 1928 the Columbia Gas & Electric Company bought 1199/1200 of the entire capital stock of the Central Kentucky Natural Gas Company. The price paid was at the rate of $48 per share, at which rate the total sale value was $2,880,000. This was a voluntary sale, and the purchasers obviously were informed of the values represented by the property. Both parties were more or less expert on the value of such properties. Proceeding on this sales basis, the value of that part of the plaintiff's plant allocable to Lexington in the early part of 1928 would be $1,586,880.

Counsel devote considerable space in their briefs to the Menifee field. The plaintiff claims that this field had a value of $2,000,000 as a storage plant. We are not impressed with this claim, nor can we attach great importance to much of plaintiff's evidence as to the reproduction cost new of the main transmission line. This latter evidence in some of its aspects is purely conjectural. Nor can any useful purpose be served by discussing the conflicting statements of the witnesses as to the several items that ordinarily go to make up capital value. Taking into consideration all the evidence touching the different methods of arriving at such value, we find that the sum of $1,586,880 represents a fair and just value of that part of the plant actually owned by plaintiff and allocable to Lexington.

Another item to be considered in connection with the capital base is the distributing system in the city of Lexington. This system does not belong to the plaintiff. It is the property of the Lexington Utilities Company. The plaintiff has leased it from the Lexington Utilities Company and is using it exclusively in the distribution of gas in the city. There is a dispute as to whether the fair value of this property shall be considered as a part of the rate base, or its value be disregarded and the rental paid for its use by the plaintiff be treated as a part of the expense of operation. Probably a correct application of the principles of ratemaking would require that the latter alternative be adopted. An analysis of the result in the way of returns to the company, whether we accept the valuation of the Lexington utilities plant, as fixed by Carter or as fixed by Kimball, discloses that it would be more advantageous to the consumers in Lexington to treat the value of the distributing system as a part of the rate base, and disregard the rental contract between the two companies, than it would be to treat the sum required to be paid under the rental contract as operating expense and disregard the valuation in the rate base. Inasmuch as the plaintiff is insisting that this be done, there can be no objection to adopting this method. A careful consideration of the figures of Kimball and Carter and of their testimony with reference to the fair reproduction cost of the Lexington Utilities property as of December 31, 1926, as depreciated to its then condition, convinces us that we should accept the value of $611,227 fixed by Kimball, especially as this does not take into consideration any going concern value. This makes the rate base, as of December 31, 1926, which is the date as of which both parties desire the valuation to be fixed, $1,586,880 plus $611,227, or a total of $2,198,107.

In 1912 a contract was made between the United Fuel Gas Company and the Central Kentucky Natural Gas Company, generally by the terms of which the United Fuel should sell and deliver gas to the Central Kentucky Gas, at a price equal to one-half of the retail price realized by the latter company. This contract was for a period of twenty years and was in full force and effect on December 31, 1926. The Columbia Gas & Electric Company owns all of the stock of the United Fuel Gas Company, and, as heretofore indicated, in the early part of 1928 it acquired substantially all the stock of the Central Kentucky Natural Gas Company. The city contends that by reason of this fact the plaintiff is not entitled to charge as an expense the price paid for gas under its contract with the United Fuel without evidence of its reasonableness. We cannot agree with this contention. On this point the case is unlike Western Distributing Co. v. Publ. Service Com. of Kansas, 285 U. S. 119, 124, 52 S. Ct. 283, 76 L. Ed. 655. Here the contract was made at arm's length, and so far as the record discloses, the United Fuel and the Central Kentucky Natural Gas Company had no relation to each other by reason of common ownership of stock at that time. That relationship did not exist prior to 1928, and inasmuch as we are asked to fix the rate base and determine the income as of December 31, 1926, we are of opinion that for such purposes we should accept the contract price of...