Panhandle Eastern Pipe Line Co. v. FEDERAL POW. COM'N

• Decision Date: 06 June 1944
• Docket Number: No. 12466.,12466.
• Citation: 143 F.2d 488
• Parties: PANHANDLE EASTERN PIPE LINE CO. et al. v. FEDERAL POWER COMMISSION et al.
• Court: U.S. Court of Appeals — Eighth Circuit

143 F.2d 488 (1944)

PANHANDLE EASTERN PIPE LINE CO. et al. v. FEDERAL POWER COMMISSION et al.

No. 12466.

Circuit Court of Appeals, Eighth Circuit.

June 6, 1944.

COPYRIGHT MATERIAL OMITTED

D. H. Culton, of Amarillo, Tex., Robert J. Bulkley, of Washington, D. C., Arthur G. Logan, of Wilmington, Del., and John S. L. Yost, of Washington, D. C. (Glenn W. Clark, of Kansas City, Mo., and Ira Lloyd Letts, of Providence, R.I., on the briefs), for petitioners.

Harry S. Littman, Asst. Gen. Counsel, Federal Power Commission, of Washington, D. C., and Harold Goodman, Sp. Asst. Pros. Atty., of Detroit, Mich., County of Wayne, Michigan (Charles V. Shannon, Gen. Counsel, Federal Power Commission, and Robert L. Russell, Atty., Federal Power Commission, both of Washington, D. C., Paul E. Krause, Corporation Counsel, James H. Lee, Asst. Corp. Counsel, City of Detroit, Mich., and William E. Dowling, Pros. Atty., County of Wayne, Mich., all of Detroit, Mich., and Park Chamberlain, of Philadelphia, Pa., and Henry A. Montgomery and A. V. McRee, both of Detroit, Mich., on the briefs), for respondents.

Before SANBORN, WOODROUGH, and RIDDICK, Circuit Judges.

SANBORN, Circuit Judge.

The petitioners, pursuant to § 19(b) of the Natural Gas Act,¹ seek a review and reversal of an interim rate reduction order made by the Federal Power Commission on September 23, 1942. The case was argued and submitted at the May, 1943, term of this Court. Decision was deferred awaiting the determination by the Supreme Court of the United States of the cases of Federal Power Commission et al. v. Hope Natural Gas Company, and City of Cleveland v. Hope Natural Gas Company. After the opinion in those cases was rendered (January 3, 1944, 320 U.S. 591, 64 S.Ct. 281), a resubmission of the instant case at the March, 1944, term of this Court, upon supplemental briefs and a reargument, was ordered, so that we might have the benefit of the views of counsel as to the impact of the opinion of the Supreme Court in the Hope Natural Gas Company cases upon the questions here involved.

The petitioners are Panhandle Eastern Pipe Line Company and its wholly owned subsidiaries, Illinois Natural Gas Company and Michigan Gas Transmission Corporation. Their separate holdings constitute a single system for the gathering, transportation, and sale of natural gas, and appropriately may be regarded and referred to as though jointly owned and operated by the petitioners. The respondents are Federal Power Commission, City of Detroit, Michigan, County of Wayne, Michigan, Michigan Consolidated Gas Company, and Michigan Public Service Commission.

The petitioners gather, through production and purchase, natural gas in the Amarillo gas field of the Texas Panhandle and in the Hugoton gas field in southwestern Kansas. This gas is transported to markets through a main transmission pipeline which extends for a distance of about 860 miles from a point in Moore County, Texas, across the states of Oklahoma, Kansas, Missouri and Illinois, to a point near Dana, Indiana, close to the Illinois-Indiana boundary, where the line connects with a transmission pipeline extending from Dana, Indiana, to a point near Zionsville, Indiana, where the line branches. One branch runs to Detroit, Michigan, and the other to Muncie, Indiana. Lateral pipelines extend from petitioners' main transmission line in Illinois. Through their system of pipelines, natural gas is marketed by the petitioners, mainly for resale, in Texas, Kansas, Missouri, Illinois, Indiana, Michigan and Ohio. The petitioners serve more than 200 communities and upwards of 700,000 consumers of gas and have the longest natural gas pipeline in existence.

On February 28, 1941, the City of Detroit and the County of Wayne, Michigan, filed a petition with the Federal Power Commission, asserting that the rates and charges of petitioners Panhandle Eastern Pipe Line Company and Michigan Gas Transmission Corporation for natural gas sold to Michigan Consolidated Gas Company, for resale in that City and County, were unjust, unreasonable and unduly discriminatory. On May 22, 1941, the Commission, of its own motion, instituted an investigation of the wholesale rates and charges of those two petitioners for natural gas. The investigation was later enlarged to include the Illinois Natural Gas Company. The two proceedings before the Commission, known as Docket No. G-200 and Docket No. G-207, were consolidated for hearing. The Michigan Consolidated Gas Company and the Michigan Public Service Commission were permitted to intervene. The hearing was begun on July 15, 1941, before a trial examiner, and continued from time to time thereafter until April 23, 1942. More than 10,000 pages of testimony was taken, and more than 250 exhibits were received in evidence.²

On April 23, 1942, the trial examiner adjourned the hearing pending the disposition of motions filed by counsel for the Federal Power Commission and by the City of Detroit, the County of Wayne, and Michigan Consolidated Gas Company for an interim order directing a reduction of petitioners' rates pending further hearing and investigation. It appears that the complainants before the Commission were contending that petitioners' rates should immediately be reduced by $6,800,479 per annum, and that counsel for the Commission and the Michigan Consolidated Gas Company were urging a rate reduction of approximately $5,500,000 per annum.

The Commission filed its opinion on September 23, 1942. It took the year 1941 as the appropriate test period. It found that the "Actual Cost of Gas Plant in Service at December 31, 1941," was $78,814,292; that accrued depreciation was $12,596,987; that the actual cost less accrued depreciation was $66,217,305. To this amount the Commission added $920,000 for working capital; and this produced a rate base of $67,137,305. The Commission determined that a fair annual rate of return was 6½% of that amount, or $4,363,925; that the net operating revenue of petitioners for 1941 ("Available for Return") was $9,458,309, which was $5,094,384 in excess of the return found by the Commission to be reasonable. The Commission concluded that to that extent the rates and charges of petitioners were unjust, unreasonable, unlawful, and violative of the provisions of the Natural Gas Act. The order of the Commission, filed September 23, 1942, required that: "The rates and charges made, demanded, or received by the respondents petitioners here for or in connection with their transportation and sale of natural gas in interstate commerce for resale for ultimate public consumption shall be so reduced as to reflect, when applied to respondents' petitioners' 1941 transportation and sales, a reduction of not less than $5,094,384 per annum below their 1941 consolidated gross operating revenues of $17,789,573; * * *."

The petitioners contend that the order of the Commission is invalid because: (1) The trial examiner excluded relevant and material evidence of the value of their property; (2) the Commission erred in assuming jurisdiction over the petitioners' production and gathering of natural gas; (3) the Commission erred in assuming jurisdiction over the petitioners' revenues from direct sales of gas to customers for their own use; (4) the return allowed by the Commission is unjust, unreasonable and confiscatory.

These contentions will be considered in their order.

1. The petitioners state that the evidence offered by them and rejected by the trial examiner showed that the present reproduction or replacement cost of Panhandle Eastern's physical properties as of June 30, 1941, less observed and determined depreciation, was $7,892,174 greater than original cost less book reserves; that the present reproduction cost of the physical properties of the Michigan Gas Transmission Corporation, similarly ascertained, was $2,933,808 in excess of actual cost less book reserves; and that Panhandle Eastern's leaseholds have a present market value $7,384,626 greater than the net investment therein as shown by its books. The rejected evidence tended to establish a reproduction cost or replacement value, less observed depreciation, for all of the petitioners' property of $83,957,083.

The ruling of the trial examiner excluding this evidence was approved by the Commission in its opinion of September 23, 1942. The reasons given by the Commission for its approval of the exclusion of the evidence of reproduction cost are, in substance: that § 6(a) of the Natural Gas Act, 15 U.S.C.A. § 717e(a), provides that "The Commission may investigate and ascertain the actual legitimate cost of the property of every natural-gas company, the depreciation therein, and when found necessary for rate-making purposes, other facts which bear on the determination of such cost or depreciation and the fair value of such property"; that there is no need for estimating the cost of petitioners' property; that petitioners' cost records are accurate, complete and properly maintained; that their plant was constructed in recent years and there is no difficulty in ascertaining from petitioners' books the actual legitimate cost of or investment in their property; that the Commission has held that reproduction cost evidence is inherently fallacious and should be disregarded under the statute; that the defects of such evidence have been pointed out by the Supreme Court of the United States; that it seems evident that Congress recognized the fallacy of the reproduction cost doctrine and sought by the enactment of § 6(a) to do away with that concept of rate-making; that the Supreme Court, in Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 586, 62 S.Ct. 736, 743, 86 L.Ed. 1037, said: "The Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas. Agencies to whom this legislative power has been delegated are free, within the ambit of their statutory authority, to make the pragmatic...