City Of Charleston v. Pub. Serv. Comm'n.

• Decision Date: 27 November 1923
• Citation: 95 W.Va. 91
• Court: West Virginia Supreme Court
• Parties: City of Charleston v. Public Service Commission.

95 W.Va. 91

City of Charleston

v.Public Service Commission.

Supreme Court of Appeals of West Virginia.

Submitted September 11, 1923.

Decided November 27, 1923.

1. Gas Company Entitled to Fair Return on Fair Value of Property.

A public service company, furnishing natural gas to the public, is entitled to a fair return upon the present fair value of its property used and useful in the public service. Such fair value is to be ascertained as of the time the service is rendered. (p. 106).

2. Same Company Entitled to Appreciation in Leaseholds Over Investment Costs.

Consequently it is entitled to have included in its present fair value, as a rate base for rate making purposes, appreciation in the value of its gas leaseholds over investment cost. (p. 119).

3. Same Evidence of Appreciated Value of Leaseholds Must be Based on Evidence Independent of Earnings.

But in a rate making case evidence of the appreciated value of such leaseholds to be competent must not be based upon, but must be independent of, the rates of return or earnings. (p. 107).

4. Same Accrued Depreciation and Depletion Considered in Rate Case.

In estimating the present fair value of a natural gas company's property in a rate proceeding, proper consideration should be given to accrued depreciation and depletion. (p. 109).

5. Same Utility's Sale to Itself for Less Than Market Value Unauthorized.

A natural gas utility should not be permitted to sell the use of its gas to itself for a private enterprise for less than its fair market value, or the price that could be obtained

upon the open market. (p. 125).

6. Same Value of Use of Natural Gas for Manufacture of Gasoline Determined.

The reasonable value of the use of the natural gas production of a public service company for the purpose of the manufacture of gasoline therefrom, as shown in the present case, is fifty per cent of the net income derived from the production and sale of the gasoline. (p. 126).

7. Same Transfer of Property to Corporation Formed by Gas Utility Ignored in Rate Case.

Where in a rate case it is shown that a natural gas utility company has caused a corporation to be formed and has transferred to it, with other property, the exclusive right to use all its natural gas for the purpose of extracting gasoline therefrom and receives therefor all the capital stock of the new corporation and is to receive as royalty one-eighth of the gross proceeds of the gasoline as it is produced and sold, and it appears that half the net proceeds therefrom annually amount approximately to three times the eighth of the gross proceeds, such a sale, so far as the gas consuming public is concerned, is unfair; it is a sale made by the company, with the company, and for the benefit of the company and should be ignored in determining the proportion of the income from gasoline which should be charged to the utility. (p. 127).

8. Same Sale of Gas by Utility to Parent Companies at Less Than Market Value Unauthorized.

A natural gas utility should not be allowed to sell its gas to its parent companies at less than its fair market value and where it does so, in a proceeding to determine gas rates for the utility, it should be treated as receiving a fair market rate for the gas delivered to the parent companies. (p. 127).

9. Same Income Taxes of Utility Chargeable as Operating Expenses.

Federal corporate income taxes of a public utility are properly chargeable as operating expense. (p. 129).

10. Same Federal Corporate Excess Profits Taxes of Utility Not Chargeable to Operating Expenses.

Federal corporate excess profits taxes of a public utilityshould be paid by the corporation, not by its patrons; they are not chargeable to operating expense in a rate case. (p. 129).

11. Same Discount in Marketing Securities of Utility Not Chargeable to Capital.

Discount paid by a utility in marketing its securities is not a proper charge to capital, but is an adjustment of interest, which should be amortized during the life of the securities. (p. 129).

On Petition for Suspension of an Order of the Public Service Commission.

Proceeding by the City of Charleston and others against the Public Service Commission and others. On petition for suspension of an order of defendant granting an increase in gas rates to the United Fuel Gas Company.

Findings of defendant reversed, and cause remanded.

II. D. Rummel and R. S. Spilman, C. W. Strickling, Paul W. Scott, W. W. Smith, Harry Scheer, W. T. Lovins, S. P. Bell, W. R. Lilly, LI. 0. Warth, T. J. Sayre, F. B. Morgan, Geo. S. Wallace, and Donald 0. Blagg, for petitioners.

Fitzpatrick, Brown & Davis, and R. G. Altizer for respondents.

Meredith, Judge:

This is an appeal of the cities of Charleston, Williamson, Kenova, Spencer and Logan; the towns of Ceredo, Barboursville, Ripley and Ravenswood; Jobbers and Manufacturers Bureau of Huntington; Manufacturers Club of Huntington; Huntington Chamber of Commerce; The Warner-Klipstein Chemical Company, and others, from an order of the Public Service Commission entered August 9, 1923, upon the application of the United Fuel Gas Company for authority to increase its rates for furnishing natural gas to all its consumers, both domestic and industrial, in the several communities above named and elsewhere in the State of West Virginia.

The order complained of grants the applicant an increase of five cents per thousand cubic feet on each of its rates then in effect, except as to gas supplied by it in Nitro, West Virginia, the rates at that point being then under consideration by the commission in a separate proceeding, the increased rate to go into effect as to domestic consumers after the meter readings in June, 1923, and as to industrial consumers on and after August 15, 1923, and to continue in effect until March 1, 1924, and until the further order of the commission. It also requires the applicant to file with the commission, on or before March 20, 1924, a statement setting forth its revenue, operating expenses and taxes for the period from September 1, 1923, to March 1, 1924, the revenue derived from gasoline and what changes, if any, the applicant shall have made in any of its rates to other consumers.

Upon filing the petition of appellants an order was entered by one of the judges of this Court on their motion fixing a day for hearing their application for suspension of the aforesaid order. On the.... day of September, 1923, a hearing was had thereon and the order allowing the rate increase was suspended. At a later day in the present term, upon extended oral argument and voluminous briefs, the case was submitted for final decision. Some of the questions presented are novel; many are of such vital importance both to the applicant and to the public as to merit the fullest consideration. In reaching a conclusion we have been required to consider a great variety of data comprising the financial history of applicant for its twenty years existence; reports of expert accountants compiled from its books; the oral testimony and opinions of various witnesses; the orders and opinions of the commission on former applications of the utility for increase in rates; and many other matters bearing on the questions at issue. The utility and the public are entitled to know the facts we have considered as well as the reasons for our de- cision; for, however sound the legal principles announced in an opinion may be, the opinion itself is of little value unless the vital facts on which the opinion is based are clearly set forth in proper order. For these reasons it is necessary to carry this opinion to greater length than would ordinarily be advisable.

This proceeding was begun June 29, 1921, by the company filing its application for an increase in rates and in effect asking for a rehearing of practically the same questions that were involved in its two former applications, reported as Case No. 585, 1 W. Va. P. S. C. 504, P. U. R. 1918-C, p. 193; and Case No. 845, decided December 19, 1919, 1 W. Va. P. S. C. 561, P. U. R. 1920-C, p. 583. On April 28, 1922, an order was entered granting a substantial increase for certain blocks of its industrial gas and allowing the company to charge schools, hotels, churches and other public institutions the regular domestic rates instead of the preferential rates they had formerly enjoyed.

The Commission in an opinion then filed reiterated its former holdings denying the company's claim for appreciation in its leaseholds, and restricted the leasehold value to investment cost. In case No. 845 it had fixed the rate base at $30,-000, 000, and found the company was entitled to earn thereon annually $5,000, 000, after paying operating expenses, to provide a return upon the investment, calculated at 8%, a depreciation reserve fund, and a fund for the amortization of its leaseholds, the allowance for the last named fund being calculated at $500,000. This amounted to 16 2/3% of the rate base. In its opinion, it found that since December 19, 1919, the company had invested in additions to its property in round figures $3,000, 000 and that during this period it had apparently earned in excess of its operating expenses, taxes and return upon its investment, revenues applicable to depletion and depreciation amounting to $2,500, 000, so that the net additions to the fair value of the company's property was about $500,000. It therefore found the fair value of the company's property as of April 28, 1922, for. the "purpose of return upon the investment" to be $30,500, 000. It further said:

"The sum upon which depreciation and depletion must be calculated should be increased to the extent the applicant has added to its depreciable property since the decision in Case No. 845, but when depreciation and depletion have been earned and set aside for the amortization of applicant's investment, the applicant is no longer entitled to earn a return upon the sum so earned and set aside, upon the theory that this fund will be either paid out to the stockholders in...