Fort Worth Gas Co. v. City of Fort Worth

• Decision Date: 05 November 1929
• Docket Number: No. 542.,542.
• Citation: 35 F.2d 743
• Parties: FORT WORTH GAS CO. v. CITY OF FORT WORTH et al.
• Court: U.S. District Court — Northern District of Texas

35 F.2d 743 (1929)

FORT WORTH GAS CO. v. CITY OF FORT WORTH et al.

No. 542.

District Court, N. D. Texas, Fort Worth Division.

November 5, 1929.

Slay, Simon & Shannon and Thompson & Barwise, all of Fort Worth, Tex., and Karl F. Griffith, of Dallas, Tex., for complainant.

R. E. Rouer, of Fort Worth, Tex., and F. G. Coates, of Houston, Tex., for respondents.

Before FOSTER, Circuit Judge, and ATWELL and DAWKINS, District Judges.

ATWELL, District Judge.

On June 9, 1920, the gas company and the city of Fort Worth contracted that the rate for domestic gas should be 75 cents per M cubic feet, less a discount of 10 per cent. for prompt payment. On August 11, 1927, the company applied to the proper officials of the city for an increase, accompanying such application by a schedule of proposed rates. The city did not act upon the application within 60 days, nor thereafter, and on the 19th day of January, 1928, the company appealed to the Railroad Commission of Texas, which body has jurisdiction to fix rates charged by such utilities. Article 6058, R. S. of Tex. 1925. On July 16, 1928, after a full hearing, the commission denied the application and found that the rate base of the company for the year 1928 was $4,000,000, and that the rates under which the company was operating enabled it to earn 9 per cent. thereon, which afforded 2 per cent. for a depreciation reserve and 7 per cent. compensation.

The gas company came into court to enjoin the city from interfering with its desired increase. The District Judge denied restraint. After the action of the Railroad Commission, this three-judge court denied a preliminary injunction upon an amended bill, which alleged that the rates were confiscatory. Reference was made to a master, charged to take testimony and report findings and legal conclusions.

In 1909 the company, which had theretofore been a distributor of artificial gas, made a contract with the Lone Star Gas Company, expiring January 1, 1930, for natural gas. In 1924 the company's stock was taken over by the Lone Star Gas Corporation, which also holds 99 per cent. of the stock of the Lone Star Gas Company. This is legally uninteresting, because at the time of the making of the contract the stock was not so merged.

The reference was for the purpose of assisting the court to make specific findings as to value, reasonable rate of return, and net earnings. Value and net earnings, instead of being elusive and difficult of discovery, should await, merely, the calculation of the reliable auditor. Books should not be riddles. They should be photographs of that which has actually happened. The quandary of the student of rates is the resultant of the intricacies, and difficulties often, of the books. After value and net earnings have been discovered, a reasonable rate of return is as simple as the turning of the next page.

After taking testimony for five months, the master found the fair value of the company's plants, property, and business, on January 1, 1928, to be $3,846,878.10, and for the year 1928, $4,134,378.10. He found that 2 per cent. thereon is a reasonable depreciation reserve and that 7 per cent. is not confiscatory.

In reaching the rate base, the parties offered testimony covering the years 1923 to 1927, inclusive, during which period the return to the company was in excess of 10 per cent. Evidence was also offered covering the year 1928, ending June 30, and the same year ending September 30, which showed that less than 9 per cent. on the rate base had been available for return and depreciation. Evidence also disclosed that for the calendar year 1928 the amount available for depreciation and return was less than 9 per cent. Such diminution was not due to a loss of gross revenue, nor to a change in price levels, but was due to an unusually large increase in capital additions, and in the ratio of expenses to revenues.

The commission excluded 1927 in its determining the 2 and 7 per cent. return, on the ground that there had been less consumption of gas, by reason of the mildness of the winter, than usual, and that the year was therefore abnormal. The master excluded the year 1928, because he found that it was abnormal in capital additions and expense increase. If either or both years are considered, the finding of the commission and the conclusion of the master are faulty, and the result would be a confiscation of the plaintiff's property, within the meaning of the national constitutional guaranty.

A rate depends upon the property value at the time of the effective date of the order and for a reasonable time thereafter. The present and the future must be considered. The court's eye is fixed upon permanent levels, and not minor fluctuations. Having reached figures that give the present value the past is finished. The rise or fall in the value is the fortune of the owners, and that the present value is greater than the original cost is immaterial. Cost, plus betterments, less depreciation, is only a rule for the purpose of getting at a present value, and is not proof of it beyond refutation. As an illustration of the wilderness in which the experts wandered in their quest for facts, we may cite some of their differences. For the company, Connor found entire reproduction cost new to be $6,252,387, and reproduction cost new, less depreciation, $5,631,610; Smith and Biddison, on the same side, and under the same heads, figured, respectively, $6,979,362, $6,297,976, $6,555,618, and $6,045,423; while Black and Learned and Bowen, for the city, under the same heads, found, respectively, $3,925,967, $3,484,051, $4,016,733, $3,564,103, $3,914,334, and $3,426,570. The master found $4,314,600.75 and $3,846,878.10.

There entered into these findings 30 different articles, namely:

(1) Land (2) Structures (3) Steel and C. I. mains (4) Main line fittings (5) Services (6) Paving over mains and services; (7) Concrete and gravel backfill; (8) Steam and interurban crossings; (9) Street railroad crossings; (10) Measuring stations; (11) District regulator stations; (12) Industrial meter installations; (13) Special domestic installations; (14) Domestic meters in service; (15) Meter boxes and fittings; (16) Transportation equipment; (17) Office furniture and fixtures; (18) Shop and garage.

(These first 18 comprising the physical property, except materials and supplies, and meters in stock, which aggregate, according to Connor, Smith, and Biddison, respectively, the company's witnesses, $4,300,927.17, $4,414,925, and $4,480,242.38; and according to the three city witnesses, Black, Learned, and Bowen, respectively, $3,247,500, $3,235,916.93, and $3,198,656; and according to the master, $3,524,583.30.)

(19) Engineering and supervision; (20) Administration and legal; (21) Preliminary and organization; (22) Interest during construction; (23) Taxes during construction; (24) Omissions and contingencies; (25) Materials and supplies; (26) Meters in stock; (27) Working capital; (28) Going value; (29) Salvage on pipe not in use; (30) Cost of obtaining capital.

In a footnote¹ the exact figures of each of the witnesses, together with the master's findings, after having heard such witnesses, are shown.

The figures of the master, resulting from the testimony under these 30 heads, are attacked by the company under the first, third, fifth, sixth, seventh, twenty-first, twenty-second, twenty-third, twenty-seventh, twenty-eighth, and thirtieth headings, by exceptions. These exceptions are directed at both fact and law. The exceptions at fact findings are five in number, and there are two at legal findings. These exceptions refer to the numbers given by the master to his findings of fact and to his conclusions of law. There were 17 findings under the first head and 3 under the second. The exceptions are directed at the tenth, eleventh, thirteenth, sixteenth, and seventeenth findings of fact, and to the first and second conclusions of law. These findings are as follows:

(10) "I further find from the testimony adduced before me that the fair value of the company's public service plant, property, and business, on January 1, 1928, was $3,846,878.10, and that the average fair value thereof for the year 1928 was $4,134,378.10."

(11) "I further find that 2 per cent. of the fair value of its public service plant, property, and business is a reasonable annual charge for depreciation reserve, and is sufficient to enable the company to maintain its property intact."

(The company has made a mistake in excepting to the thirteenth finding, for as a matter of fact it is the twelfth finding to which it excepts.)

(12) "I further find that a rate of return of 7 per cent. on the fair value of the company's public service plant, property, and business, in the light of all of the circumstances, is not confiscatory."

(16) "I further find that the decrease in 1928 on the ratio which the amount available for depreciation and return bears to the fair value of the company's public service plant, property, and business was not due to diminution of gross revenue, nor to a change in price levels, but was due (a) to the unusually large increase in capital additions, which has not yet been productive of proportionate increase in revenue; and (b) to an unusual increase in the ratio of expenses to revenue."

(17) "I further find that the periods ending in 1928 and the calendar year 1928 are abnormal, for the reasons mentioned, and are not as reliable a criterion of the sufficiency of the existing rates as the years immediately preceding."

First conclusion of law: "That the existing rate for domestic gas as established by the contract of June 9, 1920, is sufficient to enable the company to earn a reasonable return upon the fair value of its public service plant, property, and business, over and above its expenses, and the annual charge for depreciation required to maintain its property intact."

Second conclusion of law: "That the...