Cities Service Gas Co. v. Federal Power Com'n

• Decision Date: 05 July 1946
• Docket Number: No. 2813.,2813.
• Parties: CITIES SERVICE GAS CO. v. FEDERAL POWER COMMISSION et al. (STATE CORPORATION COMMISSION OF KANSAS et al., Interveners).
• Court: U.S. Court of Appeals — Tenth Circuit

155 F.2d 694 (1946)

CITIES SERVICE GAS CO. v. FEDERAL POWER COMMISSION et al. (STATE CORPORATION COMMISSION OF KANSAS et al., Interveners).

No. 2813.

Circuit Court of Appeals, Tenth Circuit.

April 30, 1946.

Rehearing Denied July 5, 1946.

COPYRIGHT MATERIAL OMITTED

Donald C. McCreery, of Denver, Colo. (Paul W. Lee, George H. Shaw, Wm. A. Bryans, III, and Charles J. Kelly, all of Denver, Colo., Glenn W. Clark, of Oklahoma City, Okl., and Robert D. Garver, of Kansas City, Mo., on the brief), for petitioner.

Harry S. Littman, of Washington, D. C. (Charles V. Shannon and Stanley M. Morley, both of Washington, D. C., John Randolph, of Saint Joseph, Mo., William E. Kemp and Jerome M. Joffee, both of Kansas City, Mo., Louis E. Clevenger, of Topeka, Kan., and Floyd Green, of Oklahoma City, Okl., on the brief), for respondents.

Before PHILLIPS, HUXMAN and MURRAH, Circuit Judges.

MURRAH, Circuit Judge.

This appeal brings here for review under Section 19(b) of the Natural Gas Act of 1938, 15 U.S.C.A. § 717r(b), an order of the Federal Power Commission entered July 28, 1943, directing the Cities Service Gas Company (herein called petitioner) to file on or before September 1, 1943, new schedules of rates and charges for natural gas sold in interstate commerce for resale, which would effect a reduction of "not less than" $4,445,871, as applied to its regulable sales for the test year 1941.

Petitioner is a wholly owned subsidiary of the Empire Gas and Fuel Company, which is in turn controlled by the Cities Service Company. Organized February 1, 1922 as the Natural Gas Pipe Line Company, petitioner acquired the properties of a number of other producing and transportation companies; was reorganized in November 1926 under its present name, and acquired the properties of still other producing and transportation companies, all the latter of which were owned or controlled by its parent, the Cities Service Company. As a result of these and other transactions with affiliated companies, petitioner, at all times presently material, was one integrated natural gas system, devoted to the production, transportation and sale of natural gas for resale for ultimate public consumption, and direct sales to industrial customers. As such, it owned extensive proven and producing gas reserves in the Panhandle Field of Texas, the Hugoton Field in Kansas and Oklahoma, and numerous other fields in Oklahoma and Kansas. It owned a pipe line system consisting of 4300 miles of main branch and field lines, with interconnections and connections with other pipe line companies, together with appurtenant and ancillary facilities, including 33 compressor stations, 3 dehydrating plants, a purification plant, 4 principle gas storage fields, meter stations, and about 1800 miles of telephone lines and circuits. The pipe line system is connected to its producing wells in the Panhandle and other fields in Kansas and Oklahoma, and these lines extend to and connect with local distribution systems, which serve about 265 cities, towns and communities in Kansas, Oklahoma, Missouri and Nebraska, including the metropolitan areas of Kansas City, St. Joseph, Joplin and Springfield, Missouri, and Kansas City, Lawrence, Topeka, Leavenworth, Wichita, and Hutchinson, Kansas. At these points, the gas is sold at the distribution gates under various contracts of "sale for resale", and to a considerable number of industrial and other direct sale customers.

During the test year of 1941, petitioner sold for resale 61,425,000 M.c.f. of natural gas, for which it received $12,903,500, and sold direct 40,700,000 M.c.f. for $4,335,500. The petitioner produced from its own wells in the Panhandle of Texas, Kansas and Oklahoma, 43% of its total natural gas requirements, and the remainder was purchased in the states of Kansas and Oklahoma, for which it actually paid the total sum of $2,716,722, or an average of $.0458 per M.c.f.

In arriving at a rate base for the purpose of determining the reasonableness of petitioner's regulable interstate wholesale rates, the Commission adopted and used the prudent investment formula, or actual legitimate cost, less existing depreciation and depletion, plus working capital. After adjustments to the Company's plant account as of December 31, 1941¹ the Commission found from the evidence that the actual legitimate cost of all the properties used and useful in the production and transmission of all the natural gas sold by it to be $66,977,654. From this amount, it deducted $20,779,558 for existing depreciation, and $1,024,891 for depletion of reserves, added $1,576,357 to cover construction work in progress, and $1,818,194 as a reasonable allowance for working capital, thus arriving at "the reasonable rate base for Cities Service Gas Company as an assembled whole and a natural gas utility" in the sum of $48,567,756.² The Commission allowed an annual rate of 6½% on this rate base or a return of $3,156,904, which it found to be "fair and liberal."

For the year 1941, petitioner's books showed operation, exploration and development cost in the sum of $10,625,724. Of this sum, the Commission disallowed $380,000 as excessive profits realized by one of petitioner's affiliates, Cities Service Oil Company, under a contract for the extraction of natural gasoline and other residuals, for the asserted reason that the affiliate's profits under the contract exceeded by that amount a fair return on the property devoted to the process. It also adjusted the Federal income tax liability allowable as an expense to eliminate $1,822,148, leaving $7,810,137 as allowable operating, exploration and development costs for 1941.³ Thus the Company was allowed to earn its expenses in this sum, plus the allowable return of $3,156,904, or a total of $10,967,041. Rents and other miscellaneous gas revenues totalling $121,782 was credited against this cost, leaving a net of $10,845,259, which the Commission denominated as "total cost of service including return". From total operating revenues (including regulable and nonregulable sales for the year 1941), the Commission deducted the allowable operating expense of $7,810,137, and the annual 6½% return on the rate base, $3,156,904, to arrive at $6,393,889, which it called excess earnings before allocation to jurisdictional and non-jurisdictional sales.

In order to arrive at the cost of service for the jurisdictional sales, the Commission allocated the total cost of service between jurisdictional and non-jurisdictional sales, and by applying the so-called "demand and commodity" method, it found that $7,264,986 represented the total cost of service, including a fair return, for the jurisdictional sales, while $3,580,273 represented the cost of service for direct or non-jurisdictional sales. By subtracting the allocated cost of service for the jurisdictional sales from the gross revenue for such sales ($12,764,651), the Commission concluded that the petitioner's rates were excessive by the sum of $5,499,665. However, it made an additional allowance of $1,053,794 for cost of service for the petitioner's gas sales, subject to its jurisdiction, from a proposed transmission line connecting its properties in the Hugoton Field to its other marketing facilities, thus arriving at the ordered reduction in the wholesale rates.

The petition for rehearing contains thirty-three specifications of error, and they are brought forward in the petition for review under Section 19(b) of the Act. However, these objections have been regrouped for briefing and argument here, and they will be treated substantially in the order presented.

Jurisdiction of the Commission and scope of review — It is of first importance to take account of the respective provinces assigned to the Commission and the courts on review in order that we may perform the functions assigned to us without trespass upon the administrative prerogatives. The primary aim of the Natural Gas Act of 1938, 15 U.S.C.A. § 717 et seq., was to "protect consumers against exploitation at the hands of natural gas companies." Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 610, 64 S.Ct. 281, 291, 88 L.Ed. 333. To effectuate that purpose, the Act provides that all rates and charges subject to the jurisdiction of the Power Commission shall be just and reasonable, and declares that any charge which is not just and reasonable is unlawful. Sec. 4(a). To that end, the Commission is specifically authorized, after hearing, to determine "the just and reasonable rate", and to fix the same by order. Sec. 5(a). Any aggrieved party to an order of the Commission may obtain a review to the appropriate circuit court of appeals, which is vested with "exclusive jurisdiction to affirm, modify, or set aside such order in whole or in part. * * *" But, "the finding of the Commission as to the facts, if supported by the substantial evidence, shall be conclusive." Sec. 19(b). In delineating the scope of review, the courts have left no doubt of their disposition to give the Commission a free rein in the effectuation of the Congressional purpose. The administrative process is no longer fettered by judicial notions of the "economic merits" of the rate order.

It hardly seems necessary or appropriate to reiterate what has already been so emphatically said concerning the "broad area of discretion" committed to the Commission in the exercise of its statutory jurisdiction, to determine just and reasonable rates for the transportation and sale of natural gas subject to its jurisdiction, or to remind ourselves that if the Commission's order prescribing "just and reasonable rates", when viewed in its entirety, produces no arbitrary result, judicial inquiry is at an end. It is said that a finding of reasonableness made after a full hearing by the Commission is the product of "expert judgment", which carries with it a strong presumption that it meets the statutory requirements. And since the constitutional requirements...