Federal Power Commission v. Natural Gas Pipeline Company of America/Opinion of the Court

by Harlan F. Stone

United States Supreme Court

315 U.S. 575

Federal Power Commission  v.  Natural Gas Pipeline Company of America

 Argued: Feb. 10, 11, 1942. --- Decided: March 16, 1942

This is a rate case involving numerous questions which arise out of the Federal Power Commission's regulation, under §§ 5(a) and 13 of the Natural Gas Act of 1938, 52 Stat. 821, 15 U.S.C. § 717 et seq., 15 U.S.C.A. § 717 et seq., of the rates to be charged for the sale of natural gas by cross-petitioners, Natural Gas Pipeline Company of America and Texoma Natural Gas Company.

The two companies are engaged in business as a single enterprise. They produce natural gas from their own reserves in the Panhandle gas fields in Texas, and purchase gas produced there by others. They transport the gas by their own pipeline in interstate commerce to Illinois, where they sell the bulk of it at wholesale to utilities, which distribute and sell it for domestic, commercial and industrial uses.

The companies began operations in 1932 with a capital structure of $60,000,000 of six per cent bonds, later increased by $999,000, and $3,500,000 of common stock, of which $500,000 is stock of the Texoma Company, a non-profit corporation paying no dividends on its stock. During the first seven years of operation, beginning January 1, 1932, and extending through 1938, the companies charged against gross income various depreciation and depletion deductions aggregating $13,077,488, ^[1] and in addition charged $6,481,322 for 'retirements' of property. In that period they paid dividends amounting in all to $9,150,000. Although there were book deficits in earnings for the first two years, the total 'net profit' available for dividends and surplus after payment of interest on the bonds was $8,224,436, ^[2] or an annual average of $1,174,919, which is 33.6% per annum on the $3,500,000 stock. The earnings available during the period for return on the capital investment of both stockholders and bondholders-after taking out of income $19,558,810 for depreciation, depletion and retirements totalled $34,040,883; this makes an average of $4,862,983 annually, which is about 8% on the book figures for investment undepreciated, or 8.8% after deducting from investment the average depreciation and depletion reserves actually charged to earnings by the companies. ^[3] At the time of the hearing, over one-fourth of the bonds issued had been retired out of earnings.

On complaint of the Illinois Commerce Commission, and on its own motion, the Power Commission began separate investigations of the companies' rates. These proceedings were consolidated and after extensive hearings the Commission, for the purpose of issuing an interim order, accepted the companies' statement that the book cost of their property existing at the end of 1938 was $60,172,843, including working capital of $975,000. Likewise for the purpose of the order, it accepted the companies' estimate that the value of all physical property-calculated at reproduction cost new (except for gas reserves taken on the companies' statement to have a present value of $13,334,775)-was $74,420,424, which the Commission adopted as the rate base. It took the companies' own estimate of twenty-three years ending in 1954 as the life of the business, and for the amortization base used their cost figure of $78,284,009 for the total past and estimated future investment after deduction of estimated salvage. It calculated the 'annual amortization expense' on that amount for the twenty-three year period, at a 6 1/2% sinking fund interest rate, as $1,557,852, which it allowed.

The Commission also accepted, for the purpose of its interim order, the companies' estimate of prospective income available for amortization and return for the period 1939 to 1942, inclusive, as averaging $9,511,454 per annum. But making allowance for higher income tax rates under the Revenue Act of 1940, 26 U.S.C.A. Int.Rev. Acts, it found that the income available for amortization and return would be decreased to $9,362,032. It concluded that the companies' estimate of return, less the amortization allowance ($9,362,032 less $1,557,852),-or $7,804,180-exceeded the fair return, $4,837,328 (which is 6 1/2% of the rate base of $74,420,424), by $2,966,852, which amount was available for reduction of net revenues. Taking into account the decrease of $783,909 in federal income taxes which would result from such a decline in revenues, the Commission decided there was a total of $3,750,000 annually available for reduction of rates. It found the existing rates were 'unjust, unreasonable and excessive', and made its interim order directing the companies to file a new schedule of rates and charges effective after September 1, 1940, which would bring about an annual reduction of $3,750,000 in operating revenues. The order also provided that the record should 'remain open' for such further proceedings as the Commission may deem necessary or desirable.

On the companies' petition for review of the order pursuant to § 19(b) of the Act, the Court of Appeals for the Seventh Circuit, 120 F.2d 625, 635, upheld the validity of the rate regulation provisions of the Act, and the Commission's authority under the statute to issue the interim order directing reduction of the rates and requiring respondents to file new schedules reflecting that reduction. But the court vacated the Commission's order on the sole grounds that 'going concern value' to the extent of $8,500,000 should have been included in the rate base, and that the amortization period for the entire property, instead of the full twenty-three year estimated life of the business taken by the Commission, should have been dated from the passage of the Act or the time of the Commission's order.

We granted certiorari, 314 U.S. 593, 62 S.Ct. 91, 86 L.Ed. -, because of the novelty and importance of the questions presented upon the Commission's petition challenging the grounds of reversal below, and on the companies' cross petition assailing the constitutionality of the Act, the authority of the Commission to make the interim order the prescribed 6 1/2% return, the computation of the amortization allowance on the same rate of interest as the fair rate of return, and other features of the Commission's order presently to be discussed.

The Natural Gas Act declares that 'the business of transporting and selling natural gas for ultimate distribution to the public is affected with a public interest', and that federal regulation of interstate commerce in natural gas 'is necessary in the public interest'. § 1(a). The Act directs that all rates and charges in connection with the transportation or sale of natural gas, subject to the jurisdiction of the Commission, shall be 'just and reasonable' and declares to be unlawful any rate or charge which is not just and reasonable. § 4(a). By § 5 the Commission, on its own motion or the complaint of a state, municipality, state commission or gas distributing company, is empowered to investigate the rates charged by any natural gas company in connection with any transportation or sale of any natural gas subject to the jurisdiction of the Commission, and after a hearing to determine just and reasonable rates.

Constitutionality of the Act. The argument that the provisions of the statute applied in this case are unconstitutional on their face is without merit. The sale of natural gas originating in one state and its transportation and delivery to distributors in any other state constitutes interstate commerce, which is subject to regulation by Congress. Illinois Natural Gas Co. v. Central Illinois Pub. Serv. Co., 314 U.S. 498, 62 S.Ct. 384, 86 L.Ed. --. It is no objection to the exercise of the power of Congress that it is attended by the same incidents which attend the exercise of the police power of a state. The authority of Congress to regulate the prices of commodities in interstate commerce is at least as great under the Fifth Amendment as is that of the states under the Fourteenth to regulate the prices of commodities in intrastate commerce. Compare United States v. Carolene Products Co., 304 U.S. 144, 58 S.Ct. 778, 82 L.Ed. 1234; United States v. Rock Royal Co-op., 307 U.S. 533, 569, 59 S.Ct. 993, 1010, 83 L.Ed. 1446; Sunshine Coal Co. v. Adkins, 310 U.S. 381, 393-397, 60 S.Ct. 907, 912-914, 84 L.Ed. 1263; United States v. Darby, 312 U.S. 100, 657, 61 S.Ct. 451, 85 L.Ed. 609, 132 A.L.R. 1430; with Nebbia v. New York, 291 U.S. 502, 54 S.Ct. 505, 78 L.Ed. 940, 89 A.L.R. 1469; Olsen v. Nebraska, 313 U.S. 236, 61 S.Ct. 862, 85 L.Ed. 1305, 133 A.L.R. 1500.

The price of gas distributed through pipelines for public consumption has been too long and consistently recognized as a proper subject of regulation under the Fourteenth Amendment to admit of doubts concerning the propriety of like regulation under the Fifth. Willcox v. Consolidated Gas Co., 212 U.S. 19, 29 S.Ct. 192, 53 L.Ed. 382, 48 L.R.A.,N.S., 1134, 15 Ann.Cas. 1034; Cedar Rapids Gas Co. v. City of Cedar Rapids, 223 U.S. 655, 32 S.Ct. 389, 56 L.Ed. 594; Railroad Commission v. Pacific Gas Co., 302 U.S. 388, 58 S.Ct. 334, 82 L.Ed. 319. And the fact that the distribution here involved is by wholesale rather than retail sales presents no differences of significance to the protection of the public interest which is the object of price regulation. Cf. Illinois Nat. Gas Co. v. Central Illinois Pub. Serv. Co., supra. The business of cross-petitioners is not any the less subject to regulation now because the Government has not seen fit to regulate it in the past. Cf. Nebbia v. People of New York, supra, 291 U.S. pages 538, 539, 54 S.Ct. page 516, 78 L.Ed. 940, 89 A.L.R. 1469.

Validity of the Interim Order. The companies contend that the Federal Power Commission has no authority under the Act to enter the type of order now under review, and that the order is invalid because the Commission did not itself fix reasonable rates as required by the Act but instead merely directed the companies to file a new rate schedule which would result in the prescribed reduction in operating revenues. Section 5(a) of the Act provides: 'Whenever the Commission, after a hearing * * *, shall find that any rate * * * is unjust, unreasonable, unduly discriminatory, or preferential, the Commission shall determine the just and reasonable rate * * * and shall fix the same by order'. It also contains a proviso that the Commission shall not have power to order an increase of rates on file unless in accordance with a new schedule filed by the company. But without mention of new rate schedules the proviso adds that the Commission 'may order a decrease where existing rates are unjust * * * or are not the lowest reasonable rates'. And § 16 gives the Commission 'power to * * * issue * * * such orders * * * as it may find necessary or appropriate to carry out the provisions of this Act (chapter)'.

The first prerequisite to an order by the Commission is that it shall be preceded by a hearing and findings. In this case, while the proceedings were not ended by the interim order, the companies had full opportunity to offer all their evidence both direct and in rebuttal, and full opportunity to cross-examine every witness offered by both the Federal Power Commission and the Illinois Commerce Commission. All the evidence tendered was received and considered by the Commission, and before the interim order was entered counsel for the companies stated to the Commission that they had concluded the direct testimony in support of their case. So far as the order is supported by the evidence the companies cannot complain that they were denied a full hearing because they had not been able to examine on redirect their own witnesses who had not been cross-examined, or because they had no opportunity to cross-examine or rebut witnesses who were not offered by the Commission. The right to a full hearing before any tribunal does not include the right to challenge or rely on evidence not offered or considered. See New England Divisions Case (Akron, C. & Y.R. Co. v. United States), 261 U.S. 184, 201, 43 S.Ct. 270, 277, 67 L.Ed. 605.

The establishment of a rate for a regulated industry often involves two steps of different character, one of which may appropriately precede the other. The first is the adjustment of the general revenue level to the demands of a fair return. The second is the adjustment of a rate schedule conforming to that level so as to eliminate discriminations and unfairness from its details. Such an orderly procedure for establishing the rates prescribed by the Act would seem to be an appropriate means of carrying out its provisions. Section 5 of the Act was modelled on the provisions of the Transportation Act, 49 U.S.C. §§ 13, 15, 49 U.S.C.A. §§ 13, 15, which have been interpreted as giving to the Interstate Commerce Commission authority to establish a general level of rates and divisions in advance of a schedule to be filed by the carriers. See New England Divisions Case, supra, 261 U.S. page 201, 202, 203, n. 21, 43 S.Ct. pages 277, 278, 67 L.Ed. 605. Cf. Sharfman, The Interstate Commerce Commission, vol. 2, pp. 381, 382; Driscoll v. Edison Co., 307 U.S. 104, 59 S.Ct. 715, 83 L.Ed. 1134.

We think that the proviso of § 5 already quoted contemplates that, when existing rates are found to be unjust and unreasonable, an order decreasing revenues may be filed without establishing a specific schedule of rates. Since such an order may be in the interests of the public, as well as the regulated company, and is in harmony with the purposes of the Act, it is one which the Commission has discretion to make under § 16 as appropriate to carry out the provisions of the Act.

The Scope of Judicial Review of Rates Prescribed by the Commission. The ultimate question for our decision is whether the rate prescribed by the Commission is too low. The statute declares, § 4(a), that the rates of natural gas companies subject to the Act 'shall be just and reasonable, and any such rate or charge that is not just and reasonable is hereby declared to be unlawful'. Section 5(a) directs the Commission to 'determine the just and reasonable rate' to be observed and requires the Commission to 'fix the same by order'. It also provides that 'the Commission may order a decrease where existing rates are unjust * * * unlawful, or are not the lowest reasonable rates'. On review of the Commission's orders by a Circuit Court of Appeals as authorized by § 19(b), the Commission's findings of fact 'if supported by substantial evidence, shall be conclusive'.

By long standing usage in the field of rate regulation the 'lowest reasonable rate' is one which is not confiscatory in the constitutional sense. Los Angeles Gas Corp. v. Railroad Commission, 289 U.S. 287, 305, 53 S.Ct. 637, 643, 77 L.Ed. 1180; Railroad Commission v. Pacific Gas Co., supra, 302 U.S. pages 394, 395, 58 S.Ct. page 338, 82 L.Ed. 319; Denver Stock Yard Co. v. United States, 304 U.S. 470, 475, 58 S.Ct. 990, 994, 82 L.Ed. 1469. Assuming that there is a zone of reasonableness within which the Commission is free to fix a rate varying in amount and higher than a confiscatory rate, see Banton v. Belt Line Ry., 268 U.S. 413, 422, 423, 45 S.Ct. 534, 537, 69 L.Ed. 1020; Columbus Gas Co. v. Public Utilities Commission, 292 U.S. 398, 414, 54 S.Ct. 763, 770, 78 L.Ed. 1327; Denver Stock Yard Co. v. United States, supra, 304 U.S. page 483, 58 S.Ct. page 998, 82 L.Ed. 1469, the Commission is also free under § 5(a) to decrease any rate which is not the 'lowest reasonable rate'. It follows that the Congressional standard prescribed by this statute coincides with that of the Constitution, and that the courts are without authority under the statute to set aside as too low any 'reasonable rate' adopted by the Commission which is consistent with constitutional requirements.

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 adjustments which may be called for by particular circumstances. Once a fair hearing has been given, proper findings made and other statutory requirements satisfied, the courts cannot intervene in the absence of a clear showing that the limits of due process have been overstepped. If the Commission's order, as applied to the facts before it and viewed in its entirety, produces no arbitrary result, our inquiry is at an end.

Going Concern Value. The companies insist that their business has a going concern value of $8,500,000 which the Commission did not include in the rate base and on which they are entitled to earn a return. In establishing the rate base for the purposes of the interim order the Commission 'reluctantly' accepted the estimates of value, presented by the companies' own witnesses, as follows:

(exclusive of Gas Reserves)...................$56,302,250 ^[4]

June 1, 1939.................................. 13,334,

1, 1939, to December 31,

1942.......................................... 3,808,399 ^[5]

Working Capital................................ 975,

Notes

1. These charges against income are slightly in excess of the accumulated reserves for depreciation and depletion-$12,557,892 shown by the books at the end of 1938. The excess of $519,596 is apparently due to the fact that during the period $7,000,918 of property, on the basis of book cost, was retired, while the annual retirement charges had aggregated only $6,481,322. The balance of the retirements, $519,596, apparently had been charged to the depreciation and depletion accounts.
2. This includes a negligible item, 'non-operating income', which for the seven-year period came to only $194,600.
3. The book figures (which are on a cost basis) for invested capital average slightly under $61,000,000 if working capital is included. The depreciation and depletion reserves are taken from the accounts for which the aggregate figure, $12,557,892, is given in note 1, supra.
4. The estimates submitted by the companies stated that there should be deducted from this figure for "viewed depreciation" $2,866,758. However, in setting a rate base for the interim order, the Commission did not make this conceded deduction- perhaps because it held, contrary to the companies' contention, that the properties should be amortized over the entire life of the business.
5. The companies estimated that the cost of additional property, not including property, not including

replacements, during the future life of the enterprise, subsequent to June 1, 1939, would be $9,145.083. On this basis, they claimed that there should be included in the rate base $6,046,286, which they said would be the estimated average investment. The Commission included in the rate base only $3,808,399 which was the companies' estimated outlay for capital additions through the end of 1942. This reduction does not appear to be challenged. In any event, the refusal to include in the rate base capital expenditures not yet made can not involve confiscation.