Railroad Commission v. Houston Natural Gas Corp.

• Decision Date: 21 March 1956
• Docket Number: No. A-5557,A-5557
• Citation: 155 Tex. 502,289 S.W.2d 559,13 P.U.R.3d 90
• Parties: , 13 P.U.R.3d 90 RAILROAD COMMISSION of Texas et al., Petitioners, v. HOUSTON NATURAL GAS CORPORATION, Respondent.
• Court: Texas Supreme Court

Page 559

289 S.W.2d 559

155 Tex. 502, 13 P.U.R.3d 90

RAILROAD COMMISSION of Texas et al., Petitioners, v. HOUSTON NATURAL GAS CORPORATION, Respondent.

No. A-5557.

Supreme Court of Texas.

March 21, 1956.

As Modified on Denial of Rehearing May 9, 1956.

John Ben Shepperd, Atty. Gen., Mert Starnes, Asst. Atty. Gen., and C. K. Richards, Austin, A. Guy Crouch, City Atty., Alvin, for appellants.

Fulbright, Crooker, Freeman, Bates & Jaworski, Hugh Q. Buck, Leon Jaworski, L. Keith Simmer, Jackson C. Hinds, Jr., and Jefferson D. Giller, Houston, Looney, Clerk &Moorhead, Everett Looney and R. Dean Moorhead, Austin, for appellee.

WILSON, Justice.

The problem here is to give the capital invested in public utilities the attributes of property protected by constitutional due process in a situation where there is in fact generally no competition, no true barter and sale, and the business operates under governmental regulation. During the last three-quarters of a century the judicial effort to cast this problem in legal terms which will meet the test of confiscation under the Federal Due Process clause has absorbed some of the best efforts of the great creative minds of our law. A few of these are Gray, Holmes, Hughes, Learned Hand, Brandeis, and Jackson.

Starting in 1877 with Munn v. Illinois, 94 U.S. 113, 24 L.Ed. 77, and coming down through Federal Power Commission v. Hope Natural Gas Company, 320 U.S. 591, 600, 64 S.Ct. 281, 88 L.Ed. 333, in 1943, the chain of cases reflects a basic shift in the content of the federal constitutional definition of the property rights of a public utility. The specific law questions for decision in this case are rather narrow. The questions: (1) when used for fixing a domestic gas utility rate, do the statutory words 'fair value' mean the original cost of the utility company's property or something else? (2) How is the rate of return determined? The questions may be narrow, but the dilemmas underlying the words are as puzzling as any in the law.

This suit was brought under the provisions of Art. 6059, Vernon's Ann.Civ.St., to set aside an order of the Railroad Commission of Texas fixing new domestic gas sales rates for the City of Alvin, Texas. Previously the company had applied to the city under Art. 1124, V.A.C.S., for an increase in domestic gas rates. The city refused the increase and the company appealed to the Commission under the provisions of Art. 6058, V.A.C.S. The Commission heard evidence from both the company and the city and then found that the rates theretofore in effect did not provide a fair return upon the fair value of the company's properties used and useful in servicing the public in the city. As the City of Alvin is a small city and as the plaintiff utility operartes over a large area containing many towns and cities, only a small fraction of the utility's operation is under scrutiny here. The city contended before the Commission that the fair value rate base should be $141,956.75. Upon evidence the Commission made a finding that the fair value of the company's property used and useful in the city was $154,288.55. Here the Railroad Commission has found the fair value to be largely equivalent to the book cost. These are taken from the company books and are original cost less depreciation reserve, plus a figure of about $12,518.60 for an appreciation in 1928. The company disagreed with this valuation claiming a fair value of $215,000 in 1951, $230,000 in 1952, $240,000 in 1953, and $250,000 in 1954. The Commission then promulgated a schedule of rates which would make an estimated return of 6.12% on its valuation. The utility claims that any rate paying a return of less than 7% on the present fair value is unjust and unreasonable. The utility brought this suit as plaintiff against the Railroad Commission as defendant and the City of Alvin intervened.

The company filed a motion for summary judgment which was contested by the Commission and the city. The trial court sustained the motion for summary judgment and granted a permanent injunction prohibiting the enforcement of the new rate order and the Railroad Commission and City of Alvin have elected to try a direct appeal to this court under § 3-b of Art. 5, Texas Constitution, Vernon's Ann.St., and Art. 1738a, V.A.C.S. They contend that the trial court erred in granting a summary judgment because 'There exist disputed issues of controlling material fact' which are: (1) the present fair value, and (2) a fair rate of return.

It is fundamental that in Texas the fixing of domestic utility rates is a legislative function of the state government and cities have no inherent power apart from statute to fix utility rates. Texa Louisiana Power Co. v. City of Farmersville, Tex.Com.App.1933, 67 S.W.2d 235. Utility rates as rules of conduct are prospective only and do not in any manner involve an 'adjudication' of a rights arising from a 'past' controversy. It is true that the fixing of rates requires a study of existing and past facts, but the rate as promulgated is not 'res adjudicata' of any fact so studied. Therefore our primary concern in this type of case is to examine, construe, and apply existing legislation.

A state legislature may fix the actual rate itself or it may delegate the fixing of the rate to a subordinate body. It may delegate the fixing of the rate while itself prescribing rules and standards to govern and guide the subordinate body. A host of authority supports this: We cite one: City of Knoxville v. Knoxville Water Co., 212 U.S. 1, 29 S.Ct. 148, 150, 53 L.Ed. 371, where the court said:

'* * * The purpose of this suit is to arrest the operation of a law on the ground that it is void and of no effect. It happens that in this particular case it is not an act of the legislature that is attacked, but an ordinance of a municipality. Nevertheless the function of ratemaking is purely legislative in its character, and this is true, whether it is exercised directly by the legislature itself or by some subordinate or administrative body, to whom the power of fixing rates in detail has been delegated. The completed act derives its authority from the legislature and must be regarded as an exercise of the legislative power. Prentis v. Southern R. Co., 211 U.S. 210, 29 S.Ct. 67 (53 L.Ed. 150); Honolulu Rapid Transit & Land Co. v. Hawaii, 211 U.S. 282, 29 S.Ct. 55, 53 L.Ed. 186. * * *'

In Texas the legislature has delegated the power to fix gas rates, in the first instance, to the cities with the provision that a dissatisfied party may transfer this legislative function from the city to the Texas Railroad Commission by an appellate process. While the idea of an appeal from one legislative body to another has novelty, its constitutionality has been upheld. Texas Natural Gas Utilities v. City of El Campo, Tex.Civ.App.1939, 135 S.W.2d 133, certiorari denied, 310 U.S. 629, 60 S.Ct. 977, 84 L.Ed. 1400. We hold that when the Railroad Commission promulgates a rate appealed to it from a city under Art. 6058, it is governed by and acts within the legislative delegation contained in Arts. 1119 and 1124, V. C.S.

Neither the Railroad Commission nor the city has issued any rules on this subject so the source of the legislation to be considered here is:

1. The acts of the legislature.

2. The actual rate prescribed and under attack.

Such a case then resolves itself into two major questions, which are:

1. Is the prescribed rate constitutional as legislation?

2. Did the ratemaking body stay within the scope of the legislative authority delegated to it?

In approaching the first question we apply the same constitutional test to a utility rate that we would to any other legislation. In discussing railroad freight rates, it was pointed out in 1928 in Missouri-Kansas & T. Ry. Co. v. Railroad Commission of Texas, Tex.Civ.App.1928, 3 S.W.2d 489, 494, affirmed Producers' Refining Co. v. Missouri, K. & T. Ry. Co., Tex.Com.App., 13 S.W.2d 679, that:

'Rate making is essentially a legislative function, and operates prospectively. Railroad Commission v. Weld & Neville, above (96 Tex. 405, 73 S.W. 532); Prentis v. Atlantic Coast Line Co., 211 U.S. 226, 29 S.Ct. 67, 53 L.Ed. 158, 159, and authorities there cited. And the same is true of many rules and regulations within the delegated powers of the commission. Rate making has been delegated to the Railroad Commission alone, and its acts in that regard have the force and effect of statutes, and are subject to review to the extent only that statutes of the same import are so subject, with the additional power which articles 6657 and 6658 confer upon the courts to determine whether a rate, etc., is unreasonable or unjust to the party complaining.'

In testing the constitutionality of a rate for other than procedural due process, we look to the end product of the legislation. We do not look to the factual inquiry made by the city or the Railroad Commission to any greater extent than we would look at the factual material and testimony given before a Committee of the House of Representatives if that body had elected to fix this very rate by statute instead of delegating this duty as it has done. Under certain limited circumstances, factual material introduced before a legislative body may be used to throw light upon legislative intent, but we wish to emphasize that the deliberations and end product of both the City Council and the Railroad Commission are legislative in character and not judicial. However, in the case at bar we have the testimony before the Commission filed as affidavits supporting and contesting the motion for summary judgment. We will consider them in that regard only.

The cases of United Gas Public Service Co. v. State, 303 U.S. 123, 625, 58 S.Ct. 483, 82 L.Ed. 702, and Lone Star Gas Company v. State, 304 U.S. 224, 58 S.Ct. 883, 82 L.Ed. 1304, have settled the proposition that the owner of property used in the public interest as a public utility is as a matter of law...