Dayton Power Light Co v. Public Utilities Commission of Ohio

• Citation: 78 L.Ed. 1267,292 U.S. 290,54 S.Ct. 647
• Decision Date: 30 April 1934
• Docket Number: No. 609,609
• Parties: DAYTON POWER & LIGHT CO. v. PUBLIC UTILITIES COMMISSION OF OHIO
• Court: United States Supreme Court

292 U.S. 290

54 S.Ct. 647

78 L.Ed. 1267

DAYTON POWER & LIGHT CO.

v PUBLIC UTILITIES COMMISSION OF OHIO.

No. 609.

Argued March 13, 14, 1934.

Decided April 30, 1934.

On Appeal from the Supreme Court of the State of Ohio.

[Syllabus from pages 290-292 intentionally omitted] Messrs. John E. Mullin, of Kane, Pa., and Edwin P. Matthews, of Dayton, Ohio, for appellant.

Messrs. Donald C. Power, and John W. Bricker, both of Columbus, Ohio, for appellee.

Mr. Justice CARDOZO delivered the opinion of the Court.

The Dayton Power & Light Company, an Ohio corporation, is here as appellant challenging the validity of an order of the Public Utilities Commission of Ohio, affirmed by the Supreme Court of that state, which prescribes the rates chargeable to consumers of natural gas.

The appellant is a distributing company, producing no gas and owning no wells. The gas that it distributes it buys from the Ohio Fuel Gas Company, an affiliated corporation, delivery being made to it by the seller at the gateways of the towns and cities where its mains and service pipes are laid. Both seller and buyer are subsidiaries of the Columbia Gas & Electric Corporation, which owns the entire capital stock of each of them as well as that of other companies producing in other fields or distributing in other cities.

On June 17, 1929, the appellant filed with the commission a new schedule of 'rates and prices' to take effect 30 days later unless suspended or annulled. The average rate of increase was 5.67 cents per thousand cubic feet. Under the authority of statute (Pence Law, 110 Ohio Laws, p. 366, General Code, § 614-20), the commission suspended the operation of the new schedule for 120 days, and at the same time initiated an inquiry of its own motion as to the fairness of the increase. The proceedings being undetermined at the end of the period of suspension, the statute permitted the appellant to put the schedule into effect at once upon filing a bond securing the repayment to the consumers of such portion of the increased rate as the commission, upon final hearing, might determine to have been unreasonable or excessive. Such a bond was given on October 9, 1929. The proceeding was then continued, but a decision was not announced till November 3, 1932. There had been a pause in the hearings to await the final submission of the testimony in the case of the Columbus Gas & Fuel Company, an affiliated corporation serving other territory. Much of the testimony in that case was read into the record by stipulation as testimony in this. Upon the record thus supplemented, the commission announced its decision that the revenues under the earlier schedule were sufficient to yield a yearly net return of 6 1/2 per cent. upon the fair value of the property, that this return was reasonable, and that more must not be charged. An order was therefore made striking the new schedule from the files of the commission restraining the appellant from collecting the higher rates, and directing as to the past that the difference between the old rates and the new ones, with 6 per cent. interest, be refunded to consumers in accordance with the bond. Upon appeal to the Supreme Court of Ohio, the order was affirmed (127 Ohio St. 137, 187 N.E. 18) against the protest of the appellant that there had been an infringement of its privileges and immunities under the Constitution of the United States. Amendment 14; Article 1, § 10. Upon appeal to this court (Judicial Code, § 237(a), 28 U.S.C. § 344(a), 28 USCA § 344(a), the protest is renewed.

At the threshold there is a controversy as to the scope of the problem before us for solution. The appellee argues that the only question for the commission was one as to the reasonableness of the new schedule in the very form proposed: Let the rates be excessive by ever so little, the schedule, it is said, was to be rejected altogether, and no other could be substituted. In opposition the appellant urges that this is too narrow a construction of the function and powers of the commission under the applicable statute: If the proposed schedule was too high and the earlier one too low, there was a duty to fix a rate between, and thereby make the compensation adequate. We accept this broader view in the absence of a ruling to the contrary by the courts of the state. It is borne out by the terms of the bond and by the requirements of the statute under which the bond was given: Such part of the new collections as shall be found to be unreasonable, that and no more is to be refunded to the customers. It is borne out again by the findings and the order: The rate is to be returned to what it had been before the change, and the difference repaid. Finally it is borne out by the opinion of the state court, which considers upon the merits the objections enumerated by the appellant in its petition to review the order of the commission, and finds them all to be untenable.

With the field of inquiry thus charted, we turn to the objections in the effort to determine whether separately or collectively they support the claim of confiscation.

They fall into three classes: (1) Objections to the computation of operating expenses; (2) objections to the valuation of the property making up the rute base; and (3) objections to the rate itself.

First. Objections to the computation of operating expenses.

The chief item of controversy under this head is the price payabel to the affiliated seller for gas delivered at the gates.

The contract between the appellant and the Ohio Fuel Gas Company called for payment at the rate of 45 cents per thousand cubic feet; the commission found this price to be excessive to the extent of 6 cents, thereby reducing to 39 cents the allowance to be made as a proper operating expense.¹ There is no doubt under the decisions of the court that the commission was not concluded by the price fixed in the agreement. This results from the relation of intimate alliance between the buyer and the seller. They were not dealing with each other at arm's length, and the prices that they fixed in their intercompany transactions were of no concern to the consumer unless kept within the bounds of reason. Western Distributing Co. v. Public Service Commission of Kansas, 285 U.S. 119, 52 S.Ct. 283, 76 L.Ed. 655; Smith v. Illinois Bell Telephone Co., 282 U.S. 133, 51 S.Ct. 65, 75 L.Ed. 255; United Fuel Gas Co. v. Railroad Commission of Kentucky, 278 U.S. 300, 320, 49 S.Ct. 150, 73 L.Ed. 390. Whether the bounds were overpassed or heeded is next to be considered.

1. First in order of importance is the value of the gas fields.

The Ohio company, the seller, does not own its fields in fee. It does own leases covering nearly 3,000,000 acres in Ohio and elsewhere. Some of these it uses as a source of supply to meet the present needs of customers. Others are held as a standby for the future. Are all to be included in determining the base on which a fair price is to be reckoned? Are some to be ruled out until the wells now in use are wholly depleted, or until depletion is near at hand? If some or all are to be included, what shall be the principle of appraisal? Shall it be market value, or value as shown by the books, or some compromise between them?

These and like questions have been much debated in the opinions below and in the arguments of counsel. They suggest interesting and important problems in the process of rate making for companies with wasting assets. When regard is had, however, to what has been done by the commission and the state court, as distinguished from what has been said, the case assumes another aspect. Much of the debate is then perceived to be irrelevant to the issue of confiscation vel non—confiscation, that is to say, of the property interests of the appellant—which in ultimate analysis is the only issue to be determined. To bring this out more clearly there is need to amplify the statement of the subject-matter to be valued and the mode of valuation.

The leaseholds, operated and unoperated, are grouped into four classes. Class No. 1 (291,396 acres) is made up of 'tracts of land having producing gas wells drilled thereon from which gas is being furnished to the public.' Class No. 2 (164,739 acres, unoperated) is made up of 'tracts of land proved by actual developments and operations in the immediate vicinity thereof to be good gas-producing lands, but which do not have any producing wells drilled thereon.' Class No. 3 (312,631 acres, unoperated) is made up of tracts of land shown by sur- rounding or neighboring developments of operations, geological considerations, etc., to be reasonably certain to be good gas land, at least as to large portions thereof, but not yet demonstrated to be such by actual drilling.' Class No. 4 (2,065,421 acres, unoperated) is made up of 'tracts of land situate within the areas of territory where gas sands are known or assumed to exist from general geological conditions, but which are so remote from actual gas-producing wells or territory that they are merely prospective gas lands.'

The commission has stated in its opinion that the leases in class No. 1 are the only ones that are presently 'used and useful' in the public business of the owner, and hence the only ones to be valued in estimating a fair return. ² The commission has also stated in effect that there was no satisfactory evidence before it either of market or of intrinsic value for any portion of the acreage. This is what was said, but what was done was different. The value of the 291,396 acres in class No. 1 was $1,569,479 on the basis of their original cost with certain overheads and expenses added; the book value of the other classes, after deducting what is found to have been an arbitrary write-up of about $3,700,000, was $3,160,765, a total for all classes of $4,730,244.³ Instead of resorting to those tests, the commission made an allowance of $25 per acre for the 291,396 acres in class No. 1, selecting that figure because it...