Colorado Interstate Gas Co v. Federal Power Commission Canadian River Gas Co v. Same

• Decision Date: 02 April 1945
• Docket Number: 380,Nos. 379,s. 379
• Citation: 324 U.S. 581,65 S.Ct. 829,89 L.Ed. 1206
• Parties: COLORADO INTERSTATE GAS CO. v. FEDERAL POWER COMMISSION et al. CANADIAN RIVER GAS CO. v. SAME
• Court: U.S. Supreme Court

324 U.S. 581

65 S.Ct. 829

89 L.Ed. 1206

COLORADO INTERSTATE GAS CO.

v FEDERAL POWER COMMISSION et al.

CANADIAN RIVER GAS CO.

v. SAME.

Nos. 379, 380.

Argued Jan. 29, 30, 1945.

Decided April 2, 1945.

Motion to Dismiss Writ of Certiorari Denied April 23, 1945.

See 324 U.S. 831, 65 S.Ct. 1019.

[Syllabus from pages 581-583 intentionally omitted]

In No. 379:

Mr. William A. Dougherty, of New York City, for petitioner.

Mr. Charles V. Shannon, of Washington, D.C., for respondents.

In No. 380:

Messrs. John P. Akolt, of Denver, Colo., and Charles H. Keffer, of Amarillo, Tex., for petitioner.

Messrs. Chester T. Lane and Charles U. Shannon, both of Washington, D.C., for respondents.

Mr. Carl J. Wheat, of San Francisco, Cal., for Independent Natural Gas Ass'n of America, as amicus curiae by special leave of court.

Mr. Justice DOUGLAS delivered the opinion of the Court.

The Federal Power Commission after an investigation and hearing entered orders under § 5 of the Natural Gas Act of 1938, 52 Stat. 823, 15 U.S.C. § 717d, 15 U.S.C.A. § 717d, finding the interstate wholesale rates of petitioners to be excessive by specified amounts per year and requiring petitioners to reduce the rates accordingly. 43 P.U.R.,N.S., 205. The Circuit Court of Appeals for the Tenth Circuit affirmed the Commission's orders. 142 F.2d 943. The cases are here on petitions for certiorari which we granted, limited to the few questions to which we will presently advert.

Petitioners (to whom we will refer as Canadian and as Colorado Interstate) had their origin in an agreement made in 1927 between Southwestern Development Co. (Southwestern), Standard Oil Co. (N.J.) (Standard) and Cities Service Co. (Cities Service). It was the purpose of the agreement to bring natural gas from the Panhandle field in Texas to the Colorado markets, including Denver and Pueblo. Southwestern agreed to transfer through a wholly owned subsidiary, Amarillo Oil Co. (Amarillo), certain gas leaseholds and producing properties to a new subsidiary (Canadian) which it would organize for that purpose. Standard agreed to form a new corporation (Colorado Interstate) and to finance its construction of pipeline facilities which would connect with Canadian's facilities and transport gas from those points in the Panhandle field to the Colorado markets. Cities Service agreed to use its best efforts to obtain franchises through its subsidiaries under which the natural gas could be distributed in certain cities in Colorado including Denver and Pueblo. The gas was to be sold to Colorado Interstate by Canadian at cost (as defined in the contract) for at least 20 years from 1928. We will return to other details of this tripartite agreement and of the organization and financing of Canadian and Colorado Interstate. It is sufficient here to say that the companies were incorporated, the pipeline was built, and the business put into operation. Although Canadian and Colorado Interstate are separate companies, the Commission found that their properties have been operated as a single interprise.

Canadian produces from its own properties all the gas which it sells. It has about 300,000 acres of natural gas leaseholds and on December 31, 1939, was operating 94 wells. Its gathering system consists of approximately 144 miles of pipe. It owns and operates a transmission line which connects with its gathering system in the Panhandle field and ends about 85 miles distant at a point near Clayton, New Mexico. Canadian sells some of its gas at the wellhead and along the Texas portion of its transmission line for consumption in Texas. It also sells gas for resale in Clayton, New Mexico. But the chief portion of the gas in its transmission line is sold at that point to Colorado Interstate. The pipeline of Colorado Interstate extends to Denver. It sells the gas to various distributing companies for resale by them in Colorado and in a few points in Wyoming.¹ Colorado Interstate also sells gas from this pipeline direct to industrial customers in Colorado for their own use.

It is thus apparent that the pipeline from Texas to Colorado serves three different uses: (a) intrastate transportation and sale in Texas; (b) interstate transportation and sale to industrial customers; and (c) interstate transportation to distributing companies for resale. Only some of those activities are subject to the jurisdiction of the Commission. For § 1(b) of the Act 15 U.S.C.A. § 717(b) provides:

'The provisions of this chapter shall apply to the transportation of natural gas in interstate commerce, to the sale in interstae commerce of natural gas for resale for ultimate public consumption for domestic, commercial, industrial, or any other use, and to natural-gas companies engaged in such transportation or sale, but shall not apply to any other transportation or sale of natural gas or to the local distribution of natural gas or to the facilities used for such distribution or to the production or gathering of natural gas.'

It is around the meaning and implications of that provision that most of the present controversy turns.

Allocation of Cost of Service. The questions raised by Colorado Interstate and some of those raised by Canadian relate to the failure of the Commission (1) to separate the physical property used in common in the intrastate and interstate business; (2) to separate that used in common in the sales of gas to industrial consumers and the sales of gas for resale; and (3) to separate the property used exclusively in intrastate business or exclusively for industrial sales. The Commission thought it unnecessary to make such a separation of the properties. It noted that nowhere in the evidence presented by petitioners was there 'a complete presentation of the entire operations of the company broken down between jurisdictional and nonjurisdictional operations.' 43 P.U.R.,N.S., p. 232. And it concluded, 'All that can be accomplished by an allocation of physical properties can be attained by allocating costs including the return. The latter method is by far the most practical and businesslike.' Id., p. 232. The Commission adopted the so-called 'demand and commodity' method for allocating costs. Cf. Arkansas Louisiana Gas. Co. v. City of Texarkana, 8 Cir., 96 F.2d 179, 185. It took the costs and divided them into three classes—volumetric, capacity, distribution.² Costs relating to the production system were treated as volumetric.³ These included rate of return and depreciation and depletion on leases and wells. These volumetric costs were allocated to the customers in proportion to the number of Mcf's delivered to each customer in 1939. The larger share of the transmission costs of the Denver pipeline were classified as capacity costs. Supplies and expenses of compressing systems, maintenance of compressing system equipment and accruals for its depreciation were classed as volumetric. And one-half of the return and income taxes on the Denver pipeline and one-half of operating labor on the compressing system were classed as volumetric, the other half being classed as capacity. Capacity costs were allocated to the customers in the ratio that the Mcf sales to each customer on the system peak day of February 9, 1939, bore to the total sales to all customers on that day. Distribution costs were composed in part of depreciation, taxes, and return on investment in metering and regulating equipment through which gas is delivered at individual stations to each customer. There were allocated to each customer in the ratio which the investment for each customer bore to the total investment in such facilities which were available to serve all customers. Distribution costs also included operating and maintenance expenses incurred in operating the metering and regulating stations. These were allocated on the basis of the number of stations.

The function which an allocation of costs (including return) is designed to perform in a rate case of this character is clear. The amount of gross revenue from each class of business is known. Some of those revenues are derived from sales at rates which the Commission has no power to fix. The other part of the gross revenues comes from the interstate wholesale rates which are under the Commission's jurisdiction. The problem is to allocate to each class of the business its fair share of the costs. It is of course immaterial that the revenues from the intrastate sales or the direct industrial sales may exceed their costs, since the authority to regulate those phases of the business is lacking. To the extent, however, that the revenues from the interstate wholesale business exceed the costs allocable to that phase of the business, the interstate wholesale rates are excessive. The use of that method in these cases produced the following results:

Canadian

Excess Revenue

Revenues Costs Over Costs

Regulated $2,151,000 $1,590,000 $561,000

Unregulated 242,000 188,000 54,000

Colorado Interstate

Excess Revenue

Revenues Costs Over Costs

Regulated $4,438,000 $2,373,000 $2,065,000

Unregulated 1,335,000 1,204,000 131,000

The Commission did not include in the rate reductions which it ordered any of the excess revenues over costs from the unregulated business. The reductions ordered were measured solely by the excess revenues over costs in the regulated business, viz., $2,065,000 in case of Colorado Interstate and $561,000 in case of Canadian.

Colorado Interstate and Canadian make several objections to that method. They maintain in the first place that a segregation of the physical property based upon use is necessary so that the payment due for the use of that property which is in the public service may be determined. Reliance for that position is rested on the Minnesota Rate Cases, 230 U.S. 352, 435, 33 S.Ct. 729, 755, 57 L.Ed. 1511, 48 L.R.A.,N.S., 1151, Ann.Cas.1916A, 18, and Smith v. Illinois Bell Telephone Co., 282 U.S. 133, 146, 51 S.Ct. 65, 68, 75 L.Ed. 255. Those were cases which...