Mississippi River Fuel Corp. v. Federal Power Com'n

• Decision Date: 28 May 1947
• Docket Number: No. 9181.,9181.
• Citation: 163 F.2d 433,82 US App. DC 208
• Parties: MISSISSIPPI RIVER FUEL CORPORATION v. FEDERAL POWER COMMISSION et al.
• Court: U.S. Court of Appeals — District of Columbia Circuit

82 US App. DC 208, 163 F.2d 433 (1947)

MISSISSIPPI RIVER FUEL CORPORATION v. FEDERAL POWER COMMISSION et al.

No. 9181.

United States Court of Appeals District of Columbia.

Argued November 19, 1946.

Decided May 28, 1947.

Rehearing Denied July 28, 1947.

COPYRIGHT MATERIAL OMITTED

Mr. William A. Dougherty, of New York City, with whom Messrs. Max O'Rell Truitt, of Washington, D. C., and James Lawrence White, of Pittsburgh, Pa., were on the brief, for petitioner.

Mr. Charles E. McGee, Assistant General Counsel, Federal Power Commission, of New York City, pro hac vice, by special leave of Court, with whom Mr. William Bradford Ross, General Counsel, Federal Power Commission, of Washington, D. C., and Mr. Alvin A. Kurtz, Attorney, Federal Power Commission, of Alexandria, Va., were on the brief, for respondent Federal Power Commission. Mr. Milford Springer, Principal Attorney, Federal Power Commission, of Washington, D. C., also entered an appearance for respondent Federal Power Commission.

Before GRONER, Chief Justice, and CLARK and PRETTYMAN, Associate Justices.

PRETTYMAN, Associate Justice.

This is a rate case and is before us on a petition to review and set aside an order of the Federal Power Commission.¹ Petitioner is a natural gas pipeline company.

Petitioner's first point relates to the 6% rate of return found by the Commission to be reasonable. It claims that this finding does not accord with the precepts of fair play, because, it says, the whole hearing procedure was upon an assumed 6½% rate of return, and a 6% rate was first mentioned in the principal brief of Commission counsel before the Commission. It further says that in eleven prior natural gas cases since the Natural Gas Act was passed, 6½% was allowed, and that the general financial picture as to utilities has not changed since those cases. It further says that the finding as to the rate of return is not based upon substantial evidence and that the Commission did not consider the evidence of petitioner on the point.

The order of investigation which inaugurated the proceeding, and likewise the order setting the hearing, recited that the inquiry would concern petitioner's rates and charges. This was sufficient notice that the rate of return would be considered. At the hearing, both the Commission staff and the company introduced evidence upon the matter. That produced by the Commission staff included voluminous economic and statistical data. That evidence showed that the price of long-term money generally, and similarly such costs to utilities, including natural gas companies, had declined in the period preceding the test year 1943 used in the case at bar. The earnings-price ratios of common stocks of natural gas companies held by the public were, so far as this evidence showed, in some cases up and in some cases down between 1937 and 1943, and no general pattern in that respect is discernible. Those ratios varied in 1943 from 7.29% to 29.71%, and the trend between 1937 and 1943 varied, among companies, from a decline of four points to an increase of eighteen points.

We have examined the eleven cases to which petitioner refers. Four of them were consent orders. Two companies had common stock only. One had $8,000,000 of 5½% debentures outstanding against a rate base of $48,000,000, the balance being represented by common stock. Another had about half its rate base represented by long-term debt of which the cost was 2.88%, and a little less than a fourth represented by preferred stock at 5.86%. In another, the Commission based its 6½% allowance upon a theoretical capitalization of 40% bonds at 3½%, 20% preferred stock at 5¾%, and 40% common stock at 8%. All of those cases were decided in 1943 or earlier and rested upon data antedating that year. The great differences between the financial circumstances in those cases and in this create a wide difference between the overall rate of return allowable in so far as the court is concerned.

Under the rule laid down by the Supreme Court in the Hope Natural Gas Company case,² the court is restricted in its review of a Commission rate of return allowance to a test of the end result of the order and, of course, the adequacy of the findings and the sufficiency of the evidence supporting the findings. About half of the capital of this petitioner is represented by 2½% long-term notes and the other half by equity capital. From the standpoint of the cost-of-capital rule, the 6% rate of return allowed would meet the obligation of the 2½% notes and allow about 9½% on the common stock and surplus. The record does not furnish any other statistical test of the end result of the allowance on the equity capital. The average yield of electric utilities on common stock for 1943 was found to be 7.3%, and the evidence shows that natural gas companies are regarded by the public as less desirable and therefore require higher yields. But petitioner does not point to any evidence of the extent of the margin between the two industries in common stock yield requirements. Petitioner asserts certain risks in its business but gives us no statistical measure of those risks by which to test the conclusion of the Commission.

Upon this evidence we cannot say that the rate of return allowed by the Commission was beyond the limit of its power, either as unreasonable, insufficient, or unsupported by substantial evidence.

Petitioner's next point relates to the determination of certain costs of the company's regulable³ business. Its business consists in part of the sale of natural ags to public utilities for resale, and in part of sales to industrial consumers. The former part is subject to regulation by the Federal Power Commission; the latter is not.⁴ In order to determine fair and reasonable rates for those sales which are under its jurisdiction, the Commission must of course, determine the costs involved in those sales. This necessitates an allocation of costs as between those sales which are subject to this regulation and those which are not.

The regulated sales in this case, being the sales to utility companies for resale, are easily identified. The problem is to ascertain the costs incurred prerequisite to such sales, and so to be borne by those customers. This is a question of fact. Expenses (using that term in its broad sense to include not only operating expenses but depreciation and taxes) are facts. They are to be ascertained, not created, by the regulatory authorities. If properly incurred, they must be allowed as part of the composition of the rates. Otherwise, the so-called allowance of a return upon the investment, being an amount over and above expenses, would be a farce. Costs incurred for specific sales are easily assigned to them. But since many supplies are purchased, salaries and wages paid, expenses incurred, and facilities used to serve all customers, it is necessary to apportion such costs in order to ascertain the costs applicable to certain customers. A number of methods are available. One is the demand-commodity method.

There is nothing new or novel about the demand-commodity formula. It has long been used, by both utilities and regulatory authorities, in the composition of rate structures.⁵ Customers desire different types of service. If the costs necessitated by the several services differ, different rates are justified, if not required. Functional analyses of costs are therefore made. The cost of each class of service is considered to be the composite of the costs of its functional elements. The basis of the demand-commodity formula is the difference between costs which occur by reason of required plant and equipment capacity and costs which occur directly in the handling of the gas. The company must have the capacity to supply certain demands when made. That capacity must be available whether or not it is being used at any particular moment. Thus, such costs do not vary from time to time but, generally speaking, continue constant, or substantially so. They are demand, or capacity, or fixed costs. Other costs are incurred only when, as and if gas is being made, transported or sold. They relate to the commodity itself. They are commodity, or volumetric, or variable costs. They obviously vary with the sales.

There are three steps in the employment of the demand-commodity method of finding the costs necessitated by the type of service afforded individual users. The first step is the ascertaining of the individual dollar amounts of the various items of cost, i. e., depreciation, taxes, cost of gas, engineering, etc. This is rarely controversial, since it is a routine accounting operation. Second, it must be determined for each item of cost whether by its nature it is a demand cost or a commodity cost, or if not classifiable wholly in either of these categories, the proportions thereof to be assigned as demand and as commodity. The third step is the apportionment of total demand cost and of total commodity cost to each customer or class of customers — in the instant case, to customers comprising petitioner's regulable business and to those constituting the non-regulable business.

The apportionment of commodity cost among the customers is relatively simple; the proportion of this cost which must be borne by any customer or class of customers is that which the customer's use of gas is of the total use of gas during the period for which the costs have been determined. The commodity cost chargeable to a customer bears the same ratio to the total commodity cost for the period as the amount of gas consumed by him bears to the total quantity of gas sold by the utility to the aggregate of all of its customers during that same period.

Apportionment of demand cost among customers is a more elusive problem. The end result must be such that each user will shoulder his share of the cost of providing and maintaining plant capacity. Each customer should pay for the capacity necessitated by his service demands....