W. Okla. Gas & Fuel Co. v. State
| Citation | 239 P. 588,113 Okla. 126,1925 OK 546 |
| Decision Date | 23 June 1925 |
| Docket Number | Case Number: 14999 |
| Parties | WESTERN OKLAHOMA GAS & FUEL CO. v. STATE et al. |
| Court | Oklahoma Supreme Court |
¶0 1. Corporation Commission--Order Fixing Rates of Public Utilities--Reasonableness--Review.
Where the evidence fairly shows that a rate fixed by the Corporation Commission will bear a reasonable net return on the investment, this court will not disturb the findings and order of the Corporation Commission made thereon.
2. Same--"Present Fair Value" of Property--Determination.
The value of the property for rate-making purposes is a reasonable fair value of the property as the same exists at the time the inquiry is made, and in determining the present fair value of the property, neither original cost nor reproduction cost new, considered separately, is determinative, but that consideration must be given both to original cost and present reproduction cost, less depreciation, together with all the other facts and circumstances which would have a bearing upon the property, and from a consideration of all these a fair present value is to be determined.
3. Same--Order Fixing Gas Rates Sustained.
Record examined; held, that the evidence reasonably tends to support the order and judgment of the Corporation Commission.
Appeal from Order of Corporation Commission.
From order fixing gas rates, the Western Oklahoma Gas & Fuel Company appeals. Affirmed.
Robert D. Garver, for plaintiff in error.
J. W. Marshall, City Atty. of Duncan, and E. S. Ratliff, Counsel for Corporation Commission, for defendants in error.
¶1 This case is appealed from an order of the Corporation Commission. On the 21st day of May, 1921, the Western Oklahoma Gas & Fuel Company made an application to the Corporation Commission for an increase in rates for natural gas sold and distributed by it to the inhabitants of the cities of Duncan and Marlow, Okla. Plaintiff in error owns and operates the gas distributing system in said cities, while the Southwestern Oklahoma Gas & Fuel Company owns and operates the pipe line by which the gas is delivered from the pipe line of the Oklahoma Natural Gas Company, from which the gas is purchased, to the city gates. Both companies, however, are owned by the same interests and are treated by the parties as a single entity or corporation, and will be so treated here.
¶2 On the 3rd day of July, 1923, the case came on to be heard by the commission, and on the 30th day of November, 1923, it made an order fixing the rate at 65c per M cu. ft. for the first 150,000 cu. ft. per month; 45c per M cu. ft. for the next 350,000 cu. ft. per month, and 35c per M. cu. ft. for all over and above 500,000 cu. ft. per month, which was an increase of 10c per M cu. ft. from the top rate, the 45c and 35c remaining unchanged, and from this order, plaintiff in error has appealed and assigns error. The percentage of gas sold and distributed at the 45c and 35c rate is so small and reflects so slightly the conclusions to be reached that they will not be considered further. It is only necessary to consider the first assignment of error, as it raises all the questions involved, and is as follows:
"The rates prescribed in order No. 2302 are insufficient to allow a sufficient return to pay costs of operation and adequately allow for depreciation and return upon the fair value of the property used and useful in the service rendered."
¶3 The matter would not be difficult of determination if the engineers for the company and for the Corporation Commission, who were called by the respective parties to testify as experts, had adopted the same basis of calculation, but where the views of experts are so widely diverse and their theories so irreconcilable as in the instant case, the court will adopt such middle ground as will come nearer harmonizing the whole record in the case and lead to affair and just conclusion. No one contends that plaintiff in error is not entitled to a fair return on its investment, and in fixing a rate that will be adequate to such return it is necessary to determine the present fair value of the property used and useful and the reasonable cost of operation, together with a sufficient allowance for depreciation. In fixing the present fair value of the property, the engineers for both parties base the same on a cost of reproduction new, which is an incorrect premise.
¶4 In Oklahoma Natural Gas Co. v. Corporation Commission et al., 90 Okla. 84, 216 P. 917, this court, speaking through Mr. Justice Nicholson, announced the true rule to be as follows:
"The value of the property for rate-making purposes is the reasonable fair value of the property as the same exists at the time the inquiry is made; and that in determining the present fair value of the property neither original cost nor reproduction cost new, considered separately, is determinative, but that consideration must be given both to original cost and present reproduction cost, less depreciation, together with all the other facts and circumstances which would have a bearing upon the value of the property, and from a consideration of all these a fair present value is to be determined."
¶5 And the rule thus announced has been approved in McAlester Coal & Coke Co. v. Corporation Commission, 102 Okla. 118, 227 P. 83; American Indian Oil & Gas Co. v. City of Poteau et al., 108 Okla. 215, 235 P. 906; and Pressure Oil & Gas Co. v. Tri-City Gas Co., 108 Okla. 248, 236 P. 41. This rule cannot be followed in the case at bar for the reason that the original cost of the property does not appear in the record. Mr. Eastman, engineer for the Company, fixed the cost of reproduction new of the physical property at $ 250,750, and to this sum he added 43.9 per cent. of the same, or $ 110,100, for intangibles and overheads, making a total cost of $ 360,880. He then depreciated the same at an average rate of 24.8 per cent., leaving a value for rate-making purposes of $ 271,583. Mr. Stockwell, engineer for the Corporation Commission, fixed the cost for reproduction new of the physical property at $ 152,384.21. He then depreciated this sum at an average rate of 38.2 per cent., making the depreciated cost of reproduction new $ 94,255.98, and to this he adds 20 per cent. of the same for overhead and intangibles, making a total cost for rate-making purposes of $ 113,107.20, and this is the value fixed by the Corporation Commission in its order of November 30, 1923.
¶6 It will be seen that there is a difference between the two engineers of $ 158,476 as to the value of the property for rate-making purposes. The engineer for the gas company has included in his valuation of $ 360,880 an item of $ 110,100 for overhead and intangibles, and an item of $ 75,000 for a pipe line not now in use or useful to the company in the service rendered, and deducting these two items leaves an undepreciated valuation of the physical property in the sum of $ 175,780. The engineer for the Corporation Commission failed to include in his valuation of $ 152,384.21 an item of $ 3,961 for material and supplies on hand, which, when added, makes a total undepreciated valuation of the physical property of $ 156,345.21. The difference between the undepreciated valuation of the physical property as fixed by the gas company's engineer and as fixed by the engineer of the Corporation Commission is $ 19,434.79, which difference of opinion may easily arise over the question of relative value. The difference to the extent that it becomes irreconcilable arises when we come to deal with intangibles and depreciation, and we are not unmindful in the outset that these belong largely to the realm of speculation and opinion. They are based on estimate and the estimated result is not based on basic evidence, but reflects the particular opinion of the person giving expression thereon, hence the irreconcilability. Depreciate the undepreciated valuation of the physical property as fixed by the engineer of the gas company 25 per cent., which was the average rate employed by him in round numbers, and add to it 20 per cent. for overheads and intangibles, the rate used by the Corporation Commission, and it results in a value of $ 158,202 for rate-making purposes. Depreciate the undepreciated valuation of the physical property as fixed by the engineer of the Corporation Commission, after adding the $ 3,961 for materials and supplies, 25 per cent. and add to it 20 per cent. for overheads and intangibles, and the valuation for rate-making purposes is found to be $ 140,700.69.
¶7 In order to arrive at what would be a fair return on the investment, it is necessary to ascertain under the rate fixed by the Corporation Commission what will be the probable future operating revenue of the gas company and its probable future operating expenses, and in order to do this, it is necessary to look to what they have been in the past.
¶8 In 1920, the gas...
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