Commonwealth Natural Resources, Inc. v. Com.

• Citation: 219 Va. 529,248 S.E.2d 791
• Decision Date: 22 November 1978
• Docket Number: 771842,Nos. 771193,s. 771193
• Parties: COMMONWEALTH NATURAL RESOURCES, INC., CNG Transmission Company and Allied Chemical Corporation v. COMMONWEALTH of Virginia and State Corporation Commission. Record
• Court: Supreme Court of Virginia

Page 791

248 S.E.2d 791

219 Va. 529

COMMONWEALTH NATURAL RESOURCES, INC., CNG Transmission Company and Allied Chemical Corporation v. COMMONWEALTH of Virginia and State Corporation Commission.

Record Nos. 771193, 771842.

Supreme Court of Virginia.

Nov. 22, 1978.

John W. Riely, Richmond (H. Brice Graves, Vincent D. Sapp, A. C. Epps, Charles F. Midkiff, Hunton & Williams, Christian, Barton, Epps, Brent & Chappell, Richmond, on brief), for appellants.

Richard D. Rogers, Jr., Lewis S. Minter, Richmond (Edward L. Flippen, Richmond, on brief), for appellees.

Before I'ANSON, C. J., and CARRICO, HARRISON, COCHRAN, HARMAN, POFF and COMPTON, JJ.

I'ANSON, Chief Justice.

This is an appeal by Commonwealth Natural Gas Corporation (CNG) ¹, from two orders of the State Corporation Commission (Commission) entered on June 10, 1977 and December 7, 1977, respectively, denying in part CNG's application for a refund of franchise taxes assessed on gross receipts and special taxes. The taxes in issue here are those imposed and paid under protest in 1976 on CNG's 1975 gross receipts on its sales of natural and synthetic natural gas to Allied Chemical Corporation (Allied). Allied was permitted to intervene in the hearing before the Commission.

CNG was organized in 1947 under the laws of Virginia as a public service corporation. At that time, CNG was subject to the jurisdiction of the Federal Power Commission (FPC). It received a certificate from the FPC authorizing it to construct a pipeline from a point near Stanardsville in Greene County to a point in the city of Norfolk, wholly within this State.

In 1954, the Natural Gas Act was amended by Congress (Hinshaw Bill, 15 U.S.C. § 717(c)) removing from the jurisdiction of the FPC natural gas pipelines that were located within the boundaries of a single state and acknowledging regulation by the state in which such lines were located.

Following passage of the Hinshaw Bill, the State Corporation Commission assumed jurisdiction over facilities of CNG, its terms and conditions of service, except sales to Allied (and municipalities exempt under Code § 56-232). The exception for Allied was predicated upon representations made to the Commission's General Counsel that all gas sold to Allied would be used as a raw product in a manufacturing process and that none of the gas would be used for heat, light or power. Based upon this understanding, the Commission determined that such gas sales between Allied and CNG were not subject to regulation by the Commission. Consequently, all CNG's sales to Allied were based on negotiated contracts between the parties, rather than regulated tariffs.

On April 1, 1954, the Commission granted CNG a certificate of public convenience and necessity. The certificate authorized the operation of the facilities previously approved by the FPC, and further authorized CNG to "furnish public utility service within Virginia to customers adjacent to said transmission line." The certificate also specifically authorized the gas transmission line and its facilities to serve Allied.

CNG purchases most of the natural gas it transmits from two companies having interstate pipelines passing through the state. Since 1974, some additional gas has been produced by CNG at its synthetic natural gas plant and transmitted through its pipeline facilities. The synthetic natural gas is produced from liquid propane and liquid butane imported by CNG to a marine terminal adjacent to its Chesapeake plant.

CNG sells gas for resale to the city of Richmond (exempt from Commission regulation by Code § 56-232), and to four gas distributing companies. CNG also sells gas to Virginia Electric and Power Company (VEPCO) for the operation of two electric generating installations. From April 1954 to April 1976 Allied purchased gas from CNG.

Occasionally Allied purchased gas from supplemental sources which was then transferred or transported by CNG as agent for Allied under a transportation tariff as distinguished from a sales tariff. No sale of gas by CNG to Allied occurs with respect to these transfers.

Allied has used a substantial portion of the natural gas purchased from CNG as a feedstock, rather than as a fuel. The gas is used in the integrated production by chemical processes of caprolactam and ammonium sulphate (the latter being sold as agricultural fertilizer in Virginia, other states, and foreign countries). Allied has also used the gas in the production of ammonia. This process is so sensitive that temperature must be rigidly controlled.

In 1975 Allied disclosed for the first time that part of the gas sold to it by CNG from the beginning of such sales in 1954 had been used for heat in the ammonia production process. The figures presented for the years 1961 through 1975 show the percentage of gas used for heat ranged from 43% To 23%.

Before 1976 CNG never reported any of the gross receipts from supplying gas to Allied as subject to the franchise tax on gross receipts imposed by Code § 58-597. In 1976 at the specific direction of the Public Service Taxation Division of the Commission, CNG reported 10% Of its gross receipts from supplying gas to the Allied plant in the years 1972 through 1974. The Taxation Division attributed that percentage to the critical temperature control process involved in the production of ammonia. Also, gross receipts derived from all gas sales to Allied during 1975 were reported to the Taxation Division's director.

In 1976 the Commission assessed taxes only on 10% Of CNG's gross receipts for the years 1972 through 1974 because the parties conceded that at least 10% Of the gas sold to Allied during that period had been used for heat, it was assumed that the remainder was used by Allied as a feedstock to produce chemicals.

The taxes assessed by the Commission against CNG in 1976 on its gross receipts for the year 1975 were based upon gross receipts from all sales of gas to Allied without regard to its use. The franchise tax and the special tax assessed against CNG on gross receipts for the year 1975 amounted to $400,581.95, of which $391,829.59 pertained to all gas sales to Allied, including synthetic natural gas.

CNG and Allied contend:

(1) That CNG is not obligated to pay the franchise tax based on gross receipts received from its sales to Allied or is exempt:

(a) because the tax is levied only on gross receipts "derived from the business of distributing and selling natural gas in this State" (Code § 58-597) and, contrary to the Commission's finding, it is not engaged in the business of distributing and selling natural gas to Allied; or in the alternative,

(b) to the extent that the gas is used by Allied as a raw material and not to produce heat, the franchise tax is inapplicable because it is levied only on corporations "furnishing water or heat, light and power" (Code § 58-602);

(2) That the gross receipts from sales of manufactured (synthetic) gas should not be included in the tax base since the tax is imposed only on gross receipts derived from selling "natural gas";

(3) That the Commission improperly imposed retroactively the tax on 1975 gross receipts when it did not assume any jurisdiction over sales to Allied until January 1976; and

(4) That the Commission was incorrect in imposing the special tax (Code § 58-661) on receipts received after February 11, 1976, from all sales And transfers of gas by CNG to Allied.

The issues presented involve principally the interpretation of Code §§ 58-597 and 58-603.

Code § 58-597, in pertinent part, provides that pipeline transmission companies "shall pay the State franchise tax on gross receipts imposed by § 58-603 to the extent that its receipts are derived from the business of distributing and selling natural gas in this State."

Code § 58-603 levies a franchise tax on corporations engaged in the business of furnishing water or heat, light and power whether by means of electricity or gas (Code § 58-602). Code § 58-603 also provides that water or heat, light and power companies "shall pay to the State for each tax year an annual State franchise tax . . . of its gross receipts from all sources . . . ."

CNG argues that it is not distributing natural gas to Allied because the word "distribute" as defined by Webster's Third New International Dictionary, means "(t)o divide among several or many. . . ." It thus asserts that since Allied is its only customer consuming the gas sold to it except an insignificant amount CNG sells to VEPCO for use in firing combustion turbines, it is not engaged in the business of distributing and selling gas for heat, light and power. Hence, it concludes that since the word distribute means delivery to a number of utilities, not just one or two, it is not engaged in the business of distributing and selling gas to Allied within the intendment of Code § 58-597.

CNG also relies upon Memphis Gas Company v. McCanless, 180 Tenn. 688, 177 S.W.2d 841 (1944), and Utilities Natural Gas Co. v. State, 133 Tex. 313, 128 S.W.2d 1153 (1939), as authority for the proposition that a sale to one or two customers does not constitute distribution.

Neither case relied upon presents the same issue involved herein. Each is clearly distinguishable under the facts from the case at bar.

Moreover, the Tennessee Supreme Court in Tennessee Natural Gas Line, Inc. v. Atkins, 199 Tenn. 468, 476-77, 287 S.W.2d 67, 70 (1956), a case not cited in either brief, distinguishes McCanless, supra, on the facts. Atkins involved a natural gas transmission company which operated entirely within the state. The corporation was engaged in buying natural gas from an interstate pipeline company and reselling a portion of that gas to a large industrial user in the state as well as to a wholly owned subsidiary corporation which sold gas to consumers in the state. The court held that the complainant was liable for taxes assessed under a gross receipts taxing statute which imposed a gross receipts tax on complainant's...