Lone Star Gas Co v. State of Texas

• Decision Date: 16 May 1938
• Docket Number: No. 313,313
• Citation: 82 L.Ed. 1304,58 S.Ct. 883,304 U.S. 224
• Parties: LONE STAR GAS CO. v. STATE OF TEXAS et al. *
• Court: U.S. Supreme Court

304 U.S. 224

58 S.Ct. 883

82 L.Ed. 1304

LONE STAR GAS CO.

v STATE OF TEXAS et al.^*

No. 313.

Argued March 28, 1938.

Decided May 16, 1938.

As Amended May 31, 1938.

[Syllabus from pages 224-226 intentionally omitted] Messrs. Charles L. Black, of Austin, Tex., and Marshall Newcomb, of Dallas, Tex., for appellant.

Messrs. Alfred M. Scott, of Austin, Tex., and Edward H. Lange, of Laredo, Tex., for appellees.

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

The Railroad Commission of Texas brought this action, under article 6059 of the Revised Civil Statutes of Texas, to enforce the Commission's order of September 13, 1933, prescribing the rate for domestic gas supplied by appellant, Lone Star Gas Company, to distributing companies in Texas. The rate was fixed at not to exceed 32 cents per thousand cubic feet instead of the existing charge of 40 cents. The district court of Travis county, upon the verdict of a jury finding the prescribed rate to be unreasonable, denied relief and enjoined the Commission and the state officials from enforcing the Commission's order. The Court of Civil Appeals reversed the judgment and held the order to be valid. 86 S.W.2d 484. Rehearing was denied. 86 S.W.2d 506. The Supreme Court of the State refused writ of error and the case comes here on appeal.

Appellant, a Texas corporation, operates about 4,000 miles of pipe lines located in Texas and Oklahoma through which it transports natural gas to the 'city gates' of about 300 cities and towns in those States and sells and delivers the gas in wholesale quantities to distributing companies. The latter companies, with two exceptions, are affiliated with appellant, being subsidiaries of the same parent corporation. One of appellant's pipe lines extends from a gas field in Wheeler county, Tex., a part of the Texas Panhandle field, crosses the southwestern corner of Oklahoma, is tapped for gas delivered at Hollis, Okl., and returning into Texas runs generally in a southeasterly direction to various Texas points. At Oklaunion, Tex., the line is tapped by a branch line which extends northward into Oklahoma and supplies certain cities in that State. At Petrolia, Tex., the line is joined by lines coming from Oklahoma.

The Commission dealt solely with the rate for the gas delivered in Texas. This consisted (1) of gas produced or purchased in Texas and transported and delivered entirely within that State, being upwards of 70 per cent. of the total; (2) that produced or purchased in Oklahoma and transported through appellant's lines into Texas which, on appellant's calculation, amounted at the average of the five-year period 1929-1933 to about 11 per cent. of the total; and (3) that produced or purchased in the Panhandle field in Wheeler county, Tex., amounting on the same computation to about 17 per cent. of the total.

The Commission gave a full hearing in which appellant participated. The Commission treated appellant's properties as an integrated system, and in that way 'considered the Oklahoma properties and operations and the efe ct thereof on the revenues and expenditures within Texas,' fixing the rate 'for application within the jurisdiction of Texas.' Appellant made no objection to that course. The Commission determined the rate base as of December 31, 1931, at $46,246,617.53, being $4,674,285.91 for production properties and $41,572,331.62 for transmission properties. The Commission considered appellant's revenues and expenses for a six-year period, 1927 to 1932, and made the rate on the basis of 6 per cent. as a minimum fair rate of return.

Appellant brought suit in the federal court, attacking the rate on constitutional grounds, but that court stayed its proceedings when the present action was brought by the Commission. In this action appellant first submitted pleas to the jurisdiction of the state court, and pleas in abatement, which were overruled. In its answer appellant attacked the rate order upon the grounds (1) that transportation and sales to local distributing companies through high-pressure lines 'of gas produced in Wheeler County, Texas, and transported into and through Oklahoma and back into Texas without interruption,' constituted interstate commerce, and that the order violated the commerce clause of the Federal Constitution, art. 1, § 8, cl. 3; and that the same was true of the gas produced or purchased by appellant in Oklahoma and transported in high-pressure lines to Texas for sale and delivery there; and (2) that the prescribed rate was confiscatory and repugnant to the due process clause of the Fourteenth Amendment.

The trial on the merits, before a jury, was begun on June 11, 1934, and was entirely de novo. The State introduced in evidence the Commission's order (to which appellant unsuccessfully objected as being void in its entirety because applicable to its interstate business), the stay order granted by the federal court, and a stipulation that the prescribed rate had not been put into effect. The record of evidence before the Commission was offered but was not received. On this formal proof the State rested. Appellant moved for a directed verdict which was denied and appellant then went forward with its evidence. The report and findings of the Commission upon which the order was based were introduced. In rebuttal of the Commission's findings, appellant submitted an appraisal of its properties as an integrated operating system as of January 1, 1933. That appraisal was voluminous, showing $73,983,405.57 as the cost of reproduction new. Evidence was offered as to the amount to be deducted for accrued depreciation and on that basis the fair value was claimed to be $69,738,021.16. The appraisal was later brought down to May 1, 1934, showing an increase in ma- terial and construction costs between January 1, 1933, and May 1, 1934, of $1,579,381.72. The book costs of the properties were also introduced, ranging from $47,776,749.63, on December 31, 1931, to $49,858,751.23 as of April 30, 1934. Appellant claimed that the books understated the actual costs. There was evidence with respect to the annual accruals to provide for depreciation, depletion and amortization. The operating expenses and revenues were shown for the years 1931, 1932 and 1933, and for the twelve months ending April 30, 1934. In this evidence there was no segregation of appellant's properties or operations as between Texas and Oklahoma or between intrastate and interstate business, appellant insisting that it was entitled to attack the Commission's order upon the same inclusive basis which the Commission had used.

The State insisted that, if appellant wished to maintain as a defense that the order was invalid because it sought to regulate operations which were exempt from state control, appellant should make a segregation, first as between its admittedly intrastate operations and those claimed to be interstate, and second, as between Texas and Oklahoma properties and operations. After the voluminous evidence above mentioned had been taken, appellant, still contending that such n issue was not properly raised as the action under the Texas statute was in the nature of an appeal from the Commission's order which was indivisible, presented evidence based upon 'a segregation of its 'integrated operating system' as between interstate and intrastate commerce.' Appellant states that this segregation was based 'upon the actual use of its properties in the two classes of commerce.' The fair value of its intrastate property was thus claimed to be $38,350,882.32 and the net amount available at the Commission's rate for return on intrastate deliveries of gas at less than 4 per cent. In this segregation appellant's line used in trans- porting gas from Wheeler county, Tex., in the Panhandle filed, through Oklahoma and thence into Texas, was allocated to interstate operations.

In rebuttal, the State offered evidence based upon a different method of segregating appellant's properties and operations. This method proceeded upon the basis of geographical location, that is, there were allocated to Oklahoma and Texas respectively the properties physically located in each State and the revenues and expenses were divided on the same geographical basis. In that way the properties allocated to Texas were valued at $40,256,862.39, and the net revenue which would be available at the Commission's rate was estimated to be, for the last two years of the accounting period, nearly 7 per cent. Appellant complains of this appraisal upon the ground that it excluded the production properties located in Texas which appellant claimed had an actual cost of $5,191,539,42 as of March 31, 1934, and that the State substituted therefor an arbitrary and inadequate annual allowance on the basis of the field price for the volume of gas produced.

When the evidence was closed, each party moved that a verdict be directed in its favor and both motions were denied. The court gave to the jury a series of instructions embracing definitions of the terms of 'fair return,' 'fair value,' 'used and useful'—as applying to the property actually used by appellant in the production, transportation, sale and delivery of natural gas to its customers and also to the property acquired in good faith and held by appellant for use in the reasonably near future in order to enable it to furnish adequate and uninterrupted service 'operating expenses,' 'annual depreciation,' 'reproduction cost new,' and 'going value.' The jury were instructed that the burden of proof was upon the defendant (appellant) 'to show by clear and satisfactory evidence' that the rate fixed by the Commission's order was 'un- reasonable and unjust as to it,' and the court explained that by that phrase was meant that the rate prescribed in the Commission's order 'was so low as to have not provided for a fair return upon the fair value of defendant's property used and useful in supplying the service furnished by said defendant...