Federal Power Commission v. Natural Gas Pipeline Co of America Natural Gas Pipeline Co of America v. Federal Power Commission

Decision Date16 March 1942
Docket Number268,Nos. 265,s. 265
Citation62 S.Ct. 736,315 U.S. 575,86 L.Ed. 1037
CourtU.S. Supreme Court

Messrs. Francis Biddle, Atty. Gen., Charles Fahy, Sol. Gen., and Richard H. Demuth, of Washington, D.C., for Federal Power Commission.

Mr. Albert E. Hallett, Jr., of Chicago, Ill., for Illinois Commerce Commission.

Mr. Chief Justice STONE delivered the opinion of the Court.

This is a rate case involving numerous questions which arise out of the Federal Power Commission's regulation, under §§ 5(a) and 13 of the Natural Gas Act of 1938, 52 Stat. 821, 15 U.S.C. § 717 et seq., 15 U.S.C.A. § 717 et seq., of the rates to be charged for the sale of natural gas by cross-petitioners, Natural Gas Pipeline Company of America and Texoma Natural Gas Company.

The two companies are engaged in business as a single enterprise. They produce natural gas from their own reserves in the Panhandle gas fields in Texas, and purchase gas produced there by others. They transport the gas by their own pipeline in interstate commerce to Illinois, where they sell the bulk of it at wholesale to utilities, which distribute and sell it for domestic, commercial and industrial uses.

The companies began operations in 1932 with a capital structure of $60,000,000 of six per cent bonds, later increased by $999,000, and $3,500,000 of common stock, of which $500,000 is stock of the Texoma Company, a non-profit corporation paying no dividends on its stock. During the first seven years of operation, beginning January 1, 1932, and extending through 1938, the companies charged against gross income various depreciation and depletion deductions aggregating $13,077,488,1 and in addition charged $6,481,322 for 'retirements' of property. In that period they paid dividends amounting in all to $9,150,000. Although there were book deficits in earnings for the first two years, the total 'net profit' available for dividends and surplus after payment of interest on the bonds was $8,224,436,2 or an annual average of $1,174,919, which is 33.6% per annum on the $3,500,000 stock. The earnings available during the period for return on the capital investment of both stockholders and bondholders—after taking out of income $19,558,810 for depreciation, depletion and retirements totalled $34,040,883; this makes an average of $4,862,983 annually, which is about 8% on the book figures for investment undepreciated, or 8.8% after deducting from investment the average depreciation and depletion reserves actually charged to earnings by the companies.3 At the time of the hearing, over one-fourth of the bonds issued had been retired out of earnings.

On complaint of the Illinois Commerce Commission, and on its own motion, the Power Commission began separate investigations of the companies' rates. These proceedings were consolidated and after extensive hearings the Commission, for the purpose of issuing an interim order, accepted the companies' statement that the book cost of their property existing at the end of 1938 was $60,172,843, including working capital of $975,000. Likewise for the purpose of the order, it accepted the companies' estimate that the value of all physical property—calculated at reproduction cost new (except for gas reserves taken on the companies' statement to have a present value of $13,334,775)—was $74,420,424, which the Commission adopted as the rate base. It took the companies' own estimate of twenty-three years ending in 1954 as the life of the business, and for the amortization base used their cost figure of $78,284,009 for the total past and estimated future investment after deduction of estimated salvage. It calculated the 'annual amortization expense' on that amount for the twenty-three year period, at a 6 1/2% sinking fund interest rate, as $1,557,852, which it allowed.

The Commission also accepted, for the purpose of its interim order, the companies' estimate of prospective income available for amortization and return for the period 1939 to 1942, inclusive, as averaging $9,511,454 per annum. But making allowance for higher income tax rates under the Revenue Act of 1940, 26 U.S.C.A. Int.Rev. Acts, it found that the income available for amortization and return would be decreased to $9,362,032. It concluded that the companies' estimate of return, less the amortization allowance ($9,362,032 less $1,557,852),—or $7,804,180—exceeded the fair return, $4,837,328 (which is 6 1/2% of the rate base of $74,420,424), by $2,966,852, which amount was available for reduction of net revenues. Taking into account the decrease of $783,909 in federal income taxes which would result from such a decline in revenues, the Commission decided there was a total of $3,750,000 annually available for reduction of rates. It found the existing rates were 'unjust, unreasonable and excessive', and made its interim order directing the companies to file a new schedule of rates and charges effective after September 1, 1940, which would bring about an annual reduction of $3,750,000 in operating revenues. The order also provided that the record should 'remain open' for such further proceedings as the Commission may deem necessary or desirable.

On the companies' petition for review of the order pursuant to § 19(b) of the Act, the Court of Appeals for the Seventh Circuit, 120 F.2d 625, 635, upheld the validity of the rate regulation provisions of the Act, and the Commission's authority under the statute to issue the interim order directing reduction of the rates and requiring respondents to file new schedules reflecting that reduction. But the court vacated the Commission's order on the sole grounds that 'going concern value' to the extent of $8,500,000 should have been included in the rate base, and that the amortization period for the entire property, instead of the full twenty-three year estimated life of the business taken by the Commission, should have been dated from the passage of the Act or the time of the Commission's order.

We granted certiorari, 314 U.S. 593, 62 S.Ct. 91, 86 L.Ed. -, because of the novelty and importance of the questions presented upon the Commission's petition challenging the grounds of reversal below, and on the companies' cross petition assailing the constitutionality of the Act, the authority of the Commission to make the interim order the prescribed 6 1/2% return, the computation of the amortization allowance on the same rate of interest as the fair rate of return, and other features of the Commission's order presently to be discussed.

The Natural Gas Act declares that 'the business of transporting and selling natural gas for ultimate distribution to the public is affected with a public interest', and that federal regulation of interstate commerce in natural gas 'is necessary in the public interest'. § 1(a). The Act directs that all rates and charges in connection with the transportation or sale of natural gas, subject to the jurisdiction of the Commission, shall be 'just and rea- sonable' and declares to be unlawful any rate or charge which is not just and reasonable. § 4(a). By § 5 the Commission, on its own motion or the complaint of a state, municipality, state commission or gas distributing company, is empowered to investigate the rates charged by any natural gas company in connection with any transportation or sale of any natural gas subject to the jurisdiction of the Commission, and after a hearing to determine just and reasonable rates.

Constitutionality of the Act. The argument that the provisions of the statute applied in this case are unconstitutional on their face is without merit. The sale of natural gas originating in one state and its transportation and delivery to distributors in any other state constitutes interstate commerce, which is subject to regulation by Congress. Illinois Natural Gas Co. v. Central Illinois Pub. Serv. Co., 314 U.S. 498, 62 S.Ct. 384, 86 L.Ed. —-. It is no objection to the exercise of the power of Congress that it is attended by the same incidents which attend the exercise of the police power of a state. The authority of Congress to regulate the prices of commodities in interstate commerce is at least as great under the Fifth Amendment as is that of the states under the Fourteenth to regulate the prices of commodities in intrastate commerce. Compare United States v. Carolene Products Co., 304 U.S. 144, 58 S.Ct. 778, 82 L.Ed. 1234; United States v. Rock Royal Co-op., 307 U.S. 533, 569, 59 S.Ct. 993, 1010, 83 L.Ed. 1446; Sunshine Coal Co. v. Adkins, 310 U.S. 381, 393-397, 60 S.Ct. 907, 912-914, 84 L.Ed. 1263; United States v. Darby, 312 U.S. 100, 657, 61 S.Ct. 451, 85 L.Ed. 609, 132 A.L.R. 1430; with Nebbia v. New York, 291 U.S. 502, 54 S.Ct. 505, 78 L.Ed. 940, 89 A.L.R. 1469; Olsen v. Nebraska, 313 U.S. 236, 61 S.Ct. 862, 85 L.Ed. 1305, 133 A.L.R. 1500.

The price of gas distributed through pipelines for public consumption has been too long and consistently recognized as a proper subject of regulation under the Fourteenth Amendment to admit of doubts concerning the propriety of like regulation under the Fifth. Willcox v. Consolidated Gas Co., 212 U.S. 19, 29 S.Ct. 192, 53 L.Ed. 382, 48 L.R.A.,N.S., 1134, 15 Ann.Cas. 1034; Cedar Rapids Gas Co. v. City of Cedar Rapids, 223 U.S. 655, 32 S.Ct. 389, 56 L.Ed. 594; Railroad Commission v. Pacific Gas Co., 302 U.S. 388, 58 S.Ct. 334, 82 L.Ed. 319. And the fact that the distribution here involved is by wholesale rather than retail sales presents no differences of significance to the protection of the public interest which is the object of price regulation. Cf. Illinois Nat. Gas Co. v. Central Illinois...

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