Appendix — Federal Power Commission v. Hope Natural Gas Co. 320 U.S. 591 (1943) (No. 34-35)

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"PENNSYLVANIA PUBLIC:

‘UNITED STATES OF AMERICA

FEDERAL POWER COMMISSION

: a.

. UTILITY

COMMISSION, «

‘& mplainant,-

reef " V8.

NATURAL

HOVE (FAS

Defendant.

In the Matter of :

HOPE NATURAL GAS COMPANY.

COMPANY,

Chairman,

Do CKET No.

( Pocket No. G-11

“ye

; »

) fe. Fi ‘

} ‘

e .

FINDINGS AS TO LAWFULNESS

‘

> .

OF PAST RATES.

Upor_consideration of the City ‘of Cleveland's corplaimt

and agmendment, the Company

*s answers,

the petitions

: bs ° . . - ° "

and or ters previous sly entered. in these proceedings,

the oviderieg of reeord, the

<l P=,

briefs and

oral arguimests,

abLevaxp Onpsl! Chatpe LL...

e os Draver,- Basipd Masnty and Criype’ DB.

C OPLIMISSTONCTS 2s a P ws

peavey. Joun WL Scorr. dissenting ‘in

(part. “ . :

: Mtry 26, 1942

CITY OF CL EVEL AND, ;

¢ , : a, ‘uu plainaut, ] .

Vs. Docket No. G 100

HOPE NATURAL GAS “COMPANY, :

a . Defendayt. :

CITY: OF AKRON, .

“ Conplamant, ,

Vs. Docker No, G10)

HOPE NATURAL GAS COMPANY. 3 43

fondant. -

ss?

ar.

Ht 90)

‘and the Commission, having on this date entered and

issued. its OpitrioneNo. 76 and ordery which Opinion.is

Tiereby incorporated by reference and the appropriate

portions are made a part hereof; : .

The (' ommission: finds that: “4

‘() The City of Clev eland raised thé issue of the | aw

(D)

(6)

fulivess” of .the: rate charged The East Ohio Gus

Company by Hope Natural Gas Company, and re-

quested this Commission to find the just, rewson-”’

able and lawful rate from June 30, 1939, to the

date—et: this determination, as an aid to Strte

regulation ; \ 8

The C ommission has jurisdiction end authority to

make such findings which are in the “public it

terest;

Hope Natural Gas Company: is a corpor ation

organized and existing under the laws of the State

of West Virginia;

Hope. Natural Gas Company, purchases, and pre

duces natural gas within the State of West Vi

Sista 5 au Fh . te

Hepe Natural Gas Company transports, delivers

and sells large -quanfities ofethe natural gas re

ferred to in Finding (4). to The East Ohio Gas

Compahy at points on and along thre interstate

boundary between the States of West Virginia and

Ohio, which gas is so transported and: sold at

Wliclesale for the purpose of resale for, ultimate

public consumption af points outside tie State o!

West Virginia ;

The transportation and ‘sale’ of ialural gas by

Hope Natural Gas-Company stated in F inding (5)

constitute the transportation and safe of natura!

gas in‘interstate commerce within the purview ot

the Natural Gas Act, and ‘the rates charged and

collected by Hope for the gas so transported and

solid have been subject to the exclusive jurisdiction

of this Commission since June 21, 1938;

(7) Mies evidence of reproduction . cost bew—v the

Hope Company's property ‘used and useful in the

(8)

(9)

(11)

(12)

(10)

\ )} + ‘y tlh

_ production, transportation, delivery and ‘sale of

‘\ natural gas to its five ingerstate wholesale. pur-

‘ thasers (as of Dece mber 34, 1938). as presented by

\the Company iné these. proceedings is hypothetic al,

tonjeetural and inherently fallacious and cannot be

considered as having probative value in the deter

mination of. the allowable rate; base ;

The evidence of the trended ‘original pent? “of

Hope Gompany: Ss property (as of December 31,

1958), .as presented by the Company, is “basically

erroneous and cannot be considered as having pro-

bative value in the determ} ination of the allow auble

rate base; <A,

The Hone Company's restated “original cost’

its praperty (as of December 31, 193s4 seuameae

~ includes items and amounts in exeess of the actual

legitimate cost: the ‘reof as sueh cost is controlled

“by fundamental principles of ost determination,

and as defined in the Federal Power Commission's

Uniform System of Aecounts and hy decisions of

this Commission; > ; ei .

Equity and- justice require the elimination of such

erroncousty: Included items and amounts referred

to in F inding (9) im determining the rate base

upon which the C ompany is entitled to earn a fair

rate of. return ;

The actual lexitimate ¢ cost Of Hope Natural Gas.

Company's property, exeliding distribution prop

erty, property used to. transport céke-oven was,

and uneperated acreage, Was SO1,019585 for 1939

and $51,957,416 for 19405 .

The actual existing depletion. and depreciation in.

Hope’Natural Gas € oOmpany’s property was $21).

737,823 for 1939 and $22,228,016 for 1940, and the

resulting actual ‘legitimate cost, less actual exist.

~ing depletion and depreciation, and exehiding dis-

tribution -property, property used -to tratisport .

coke-oven -gas and unoperated acreage, wiis S20,

281,762 for F989 and $2 2,629,400 for 1940;

The unoperated acreage was nseful ot imminently

useful wn: a the avtual le eitimate costeof such eres -

e¢

: naa goat & a ‘

* age Wn the amounts of $567,152 for 1939) and

4 " S5d6,105. for 1940 sheuld be included nn tite rate.

> birses: ; :

. J . ‘ : ; .

é (04) Matentals amd supplies ane cash working capital ‘

’ \ Were neeessary in the ayiounts of SL, TA0Q,000) for

? TSS and $2,725,000 for 40, ahd should be al

‘ , lowed ins thee rates “hase mS : ; ; .

j {16 or, the perpese Of determuning what rates were

"7 just) veasonably and lawtul-sinee une 30, 189, thie:

ek eyerave rate base represeuted by the aetnal leita

as idaite eost of TJape Naturist! Citi~ (lompany "s pray

cevty Used and usefalin rendering interstate. serv.

: yo Rindineg (123), plus the cost ot unoperated

. weteawe and the neeessars working capital” was

P52 VHS bor 1959, S$32.1584.710 for Pot “anid

Oe PLo26 sinee 1946

10) A rateof roturneft @! wits lihersl for the perioel

of Pune OO LODO, to chate ; ‘3 ;

; ; fla) The. aerial operiitions for POA famed Mao are the .

Pensonable arial PPenpyey tegen peor abe Perrine ;

‘ I. rittes in those years, and ESO operations ihe Ze

: athiusted. are cthe reasomable and: Proves bits

for dete mining lawful: rate treet: PED \

nh CES) The operating revenues fromi interstate sates wi We

- SLA SOB SSS for L938 and S1296,755 for 1 40 on

(1%) The: proper credit. to Thome Natural ine (oe/ ;

bans *. coperating eXpehses far Mii. exes. voit “

tram the, gasoline and iritaure eXtracted tron

~ gatssby its affiliate, Hope Construction & Retnin

(onpany. and tor steam and totler fielturnisties

the affiliate, was $352,516 tor 1939, S504,697 fo

. PMO and SOO4,6097 annually sinee P46: ¥

(20) Reasonable and proper, allowiness for operas i

ee. expenses Cinelndme MnoTtization of recdassitte:

fTon gat rate case expenses) and after adlocaty

: af costs to local West Virgen stiles, museceliie

. dis gas revenues and the anount ofstax reise

“es 7 ¢ under lawful rates, are as-toliows: ,

ms s i

1939 1940 Since i B40 :

. Ope rating Expenses , $4242 454 $15,775,195 #16 ‘970934

> Miseetlannous (asx . : :

* Revenues. — *(68695)-° 2 (83.275) (83,275)

Allocation of Costs

oe te Locud West

Virginin Sales (2,328,110 (2,694,075 VHUENTS |

“4 rillntssiacuiliicsgitaaetedioainetis cnscaligieecasaibictiinianate. eatit ee ne enenqen

Total Dé duetions from” . : é

- ; Interstate Revenues FIISH5849 | 812,997,845 815,495,584

(21) The rates chireed dic received hy the Company

for the teumspertation and sale of ratural eas in

Interstate commierhoe for resale for Seaale lle

JCONSQINption were UUs, Unreasonable aud? ex

€Cessive, and therefore unlawful, te the exten at

SUZOUZ9 Yor the vear 1939, $4,210,154 for the vear

P40, aind SOO 857 - Sines 1540 fob an anual

-basts), determined as follaws:

1939 : 19140 ‘Sance 1940

Revenues from Titer . 5

: State: Sates FLESH NS £10 200 75 $10,296,7

Operiting Deduetions Pisa gies PS PQ TSAS TS ADD SNA

Net Operativy bieam oa9 *

from Interstate Sites 30S LSet 6,208 914 SULT

~ a. Hlge Returi on Inte: .

state Rate Base + 2. cab me SS. cat ree eR

7 . o

Excess $ Path ee 4°10.154 Sp SAP

(22) Dhe total required refeiue for all Interstate serve &

, Jive of thre Oman Was SIRO46, 865°" for. 15a,

STO,086,001 Por HAO andl S1O.G86,808 mentary Ake

I ae | e

2) Cost, conditions and: characteristics of service

shaw . the just, reasonable aneb lawful pate. tor

natural gis sold by Hope Natural Gas | company mn

interstate commerce to The Kast thaie Ces (oom

paeny for resale for ultimate publi consiniption,

were those required ice produce? COMMON SE tion: hi:

the amount of SELO2SG0S for 1989s 81 Laredo tore

oe and SPL SMO94e annually since 140:

rates charged and receive a bs the Hays Naf

‘

1s, Ur atl (ris © OnipaT for tine transportat lon ane sale

of natural eas in interstate commerce to The "Bast.

Ohio Gas Company tor resale for ultimate public

° consumption Were unjust, Unreasonable, exvessive,

2 oF

and therefore unlawful to the extent of $830,892 |

during 1939, $3,219,551 during 1940, and $2,815,759.

on an annual basis since 1940.

~ ©

By the Commission. ve

ne Leon M. Fuevay,

Secretary.

‘

”

UNITED STATES OF AMERICA

FEDERAL POWER COMMISSION

‘ OPINION NO. 76.

CITY OF: CLES ELAND,

7 (' omplainant,

Vs. : Dé6eKET No. G 14)"

™uore NATURAL GAS COMPARY,

De fendant.

i ge

. fy OF AKRON,

: Complainant,

: Vs. we og 2 ~ SS. Docker No. G-101 +”

-HOPE NATURAL GAS COMPANY, |

eee Defendant. aie

PENNSYLVANTA. PUBLIC UTILITY \,

_ COMMISSION,

* Complainant, : : :

. Docker No, G-12%

Vs. (

HOPE NATURAL GAS COMPANY,

sa Defendant.

IN THE Mz 0 as *

THE MATTER OF } Docket No. G-113

Ms ‘4 E NATURAL GAS CORP ANY. ).-

Aseanasicen

For the City of Cleveland:

| Hon. Harold: H. Burton

¢ ° Thomas A. Burke, Jr., Esq.

- Spéneer W. Reeder, Esq. -

Robert EK. May, Esq.

William 8S. Burton, Esq.

For the City of Akron:

Wade, De Woody, -Esq.

(. B. MeRae, Esq.

— Harold L: Mull, Esq.

For the ‘Pennsylvania Public Utility, Cammission:

Harry M. Showalter, Esq. :

“2 Frederick P. Glick, Esq.

~ Samuel G. Miller, Esq.

Herbert S. Levy, Esq.

For Hope Natural Gas Company:

William B, Cockley, Esq.

William A. Dougherty, Esq.

Walter J. Milde, hsq.

Theodore R. Colhorn, Nsq. ~ Sethian ©

Edward M. Borger, Bea. . a

For the State of West V oe >.

: and the

SPuldic Service Commission of Weet Virginia:

Hon. Churence’ Wo Meadows

Hon. Jobn #. D. Preston

Hon. B. Bo Penaypacker

Hon.) B. Nethken

— Ton, A. Mo Mahhooil

Krank M. Powell, Esq.

W. OW. Goldsanith, Esq. Mar.

» Patrick D. Koontz, Esq.

For the (Coty oat Yi ole ders.

Joseph ; Nathanson, sisi mie , °

For the Federal. Power C OMYNISSION:

Richard oI. Connor, Esq.”

Milford Springer, Esa,

George Slaff, Ksq. ,

Vhustin R. Wolt, k sy

i OPINION

Bava rake Coxtwissios : ay a

. These-proeéedings gtew out of ‘compl 1ints tiled bs the

erties of Cleve lane and. Akron, Ohio, and were enfarged MM

; the © olumission” s Order of Ovtober 14, 19: iS. for an pve ‘e

vatior of the re aisonab leness of all-the interstate wholes:

_rates of Hope Natural —- Company under the provisions”

of the Natural Gas Act?

- The e:ties of Cleveland and Als ron, Ohio, filed with the

* Commission complaints alleging that the prtee charged |

Hope Natural Gas Co: npary to East Ohie Gas ecaa:

for natural gas was unreasonable and unduly diserimina

tory. The Pennsylvania Public U tility Commiission as:

filed a complaint asserting that the rates charged by ot

Ni ature al Gas ¢ winpany to Peoples Am, Natural Gas OnIpAany,

Favetie County Gas-C ompany and the Mimufaefurers

Licht and Heat Company were unlawful,

. The three complaint proceedings and the proceeding

lustituted by the Commission were censulidated foi pur

paises of hearing, U pon petifion, the Publie Ne ry ice Coy

mission. of West Virginia, the Staté of West Virsini: tine

‘Cits-of Toledo, Ohio, were permitted to become inter

Veners in < consolidated proceedings, ,

Hearings were held, pursuant to order and notles, sat

intervals during 1940 at Which THopepresented its ease in

chief. After wWretten and oral argument’ the motion of the

‘vitiess of Cleveland and Akron for an imitniediate ar

‘

reduting -rates. to Kast Ohio Gas Company was deaied

for insufficieney of evidence, »Aitional hearings Pere

eohdutted “during the first half of 144] ‘and coneluded in *

duly. The evidence fore sented during the 7 days Of fiend

ings’ covered all issues. and —cmbriced neaghy a gross. of

sO XTONS EVE exhibits: ane stbvout 700) puiges of Irikgsecript,

Mach party to these proceédi nes Was Cognizant of the

vex and wae afforded. ample Opportunity To present

. * : . ‘2 “& ws +s P .

dence? miprehensive briefs haves heen filed aid the ¢

. - ° . -4 .

NiUSSTOnS sitting «nm bane oe hits -heard O<MensIVe Ob idt Geb thti-

"ment, a eee a ‘

ection - ‘ - 5 a ¥

The termi ‘interstate wholesale" When used in this Openion

Means the sale of atural gas in inte rstate commeree far resale |

timate publietonsuy uption for domestic, commercial, industera!

OF any other hee é : 7

i JURISDICTION

The jurisdiction of the Commission was not challetiged

in these proceedings. ‘The facts show and counsel for Hope

Natural Gas Company have stipulated that Hope trans-

ports and sells natural gas in interstate commerce to five

companies for resale for ultimate public consumption.’

Hope i is a natural gas company within the purview of the

Natural Gas Act and w o proceed with the determina-

tion of the lawfulness of ifs interstate wholesale rates. “Sce.

Illineis Natural Gas Co. v. Central Illinois Public Se rrice

Co., 314 U.S. 498; Fede ral Power Commission: v. Natural

Gas Pipeline C 0. , 315 U.S.

OPERATIONS OF THE COMPANY

The “‘Tlope Natural Gas. Company was organized i

ISOS in West Virginia and is a subsidiary ot Bidadard

i] Coripany (N. J.). Its property, composed of approxi-

mately 5,000 miles of pipe lines and 3,000 gas wells in

West- Virginia, is an integral part of the intercorinerted

Standard -Oil System: which serves the Appalachian: area

with natural gas. The major” customers of Hope are its .

affiliates, The East Ohio Gas Company and The: Peoples

Natural Gas. Company, which serve a large area including

Cleveland, <Akroy, Youngstown, Massillon, Canton, Pitts-

burgh and: Altoona. Hope’ algo sells gas to- its affiliate,

The River Gas Company, ard4o two non-affiliates, Fayette

County Gas Company and The Manufacturers Light and

je . : : ry

, (

* Hope's pipe lines interconnect with those of its five wholesale

customers and the gas whieh it sells to thoke companies flows 1

interstate commerce without interruption and is resol in Ohio and

Pentisylvania. ‘Hope sells and delivers gas (1) tol the’ East Ohio

Gas Conrpany and the River Gas Company at several points ; along

the West Virgimia-Ohio state boundary ; (2) to the Reoples < Nafur’

(iaxs Company and the Fayette County’ Gas Company at pol nts Ob

the. West Virginia-Pe nnsylvania State bowidary: and—+3) tu th

Manufacturers Light and Heat Company in northern West Vi

ginia, which transports and sells such gas in Pennsylvania fa: ilti-

mate publie consumption,

Heat Company. Hope produces about one-third of its

4otal annual gas requirements and purchases the rem: in-

ing two-thirds. under more than 300 contracts.*

In 1940, Hope handled aloue 74,000,900 mcf. of gas

and sold: (1) more than 40,000,000 m.¢.f. to East Ohio

Gas Companys (2) about 10,006,000 m.c.f. to Pe eoples Nat-

ural Gas (* ompany ; (38 more than 2 000,000 m.e.f. to Manu-

facturers ‘Light and .Heat Company ; (4) approximately

860,000 m.e:f. to Fayette County Gas C ompany; (5)-nearly

400,000 m cF, to River Gas Company ; and (6) more than

11,000,000 m:e.f. to local consumers in’ West Virginia. The’

remainder totaling about 9,000,000 m.e.f. was. gas lost or

used in Company operations. - ee

Hope’s natural gas ig processed a an affiliate, Hope

Construction & Refining € ‘ompany, for’ the purpose of ex-

tracting the-natural gasoline and butane. Another affiliate,

the Domestic Coke Corporation, sells its by-product coke-

oven. gas. to Hope for use as boiler fuel in Hope's’ main

compressor station.4 oe aes aye

CORPORATE AND FINANCIAL HISTORY

Hope Natural (ias Company. is a large, seasoned ‘and .

successful utility, and “during its corporate history of more

than forty Years its ¢apital structure has been sole lv in the

form of common stock. Since 1908,-it has been 2 subsidiary:

of Standard Oil C ompany (N. J.) and all of its outstanding

‘apital stock, having an aggregate par value of approxi-

"mately #2 5,000,000, is owned -by Standard.

_——

: : ra

Stope purchases coke-oven | vas from the affiliated Dome stié

Coke Corp. and transports the gas to Hastings for use as compre s-

sor station fuel. It is agreed that the property a d costs relating *-

ty that transaction be-eliminated and the e juivalent m.e.f.-of natu

val gas ‘be substituted at Hastings compressor station at a cost of

22¢ p fee mcf. ae a eee

-—-—- ——

——

TT pe » Natural Gas Company -in’ December 1939 merged the

. former Reserve Gas Company, but by agreeme nt between counse!

that’ property and income have been segregated ‘and excluded for

the | PUrposes of the ‘se proceedings.

‘9.

pays

. During Hope’ s existence it has paid more than $108,-

000,000 in dividends, $11,000,000 of which weré stock

dividends. From 1898-to 1941 the average annual ‘cash *

dividends to stockholders exeéeded 20% on the average

annual pont of capital stock issued. for ¢ ag or. other

assets.

The Company presel nte d its balance sheet as an e hibit,

Which shows an owner's equity in assets, at the end

1938, of more than $33,000,000, comprising $28,000,000 of

capital stock and $5,000,000° of surplus. This ‘equity is_

represented in assets principally by gas. plant in the net

“amount vf $15,500,000, Government bonds $11,000,000,

and cash and investments of $95,500,000, - " + $15,500,000

net investment: per.books in the Uompatiy’s gas plant,

including distribution property, ‘is actually about $8,00U;-

000, Deeause the. Company had previously trapsferred

$i, DOH OOO “from depletion and depreciation, re serves “to?!

earned surplus. >,

We will now proceed to the, pragmati¢ ‘de ‘termination.

of the lawt til, rates, within the ambit. of ‘our statutory au

thority.

o -

“RATE BASE

The Hope. ( ompany clain ied a rate base of $ $66,000,000

and case nilated that if was earning a rate of return of

about 3% from its inte state business on that base. The

hi aimed ve ate base Was mol le d trom an estimate of the cost

r “Souree: Eo v 4. *%. Pp. “An and D4 : Ex. 61. [- 7

P an r. Deir, Bt: 1938, per books faneluy ling Dis-

vution P Prope riv of about $2,795,000) " $56.215.454

Diepiree dtion-and depletion reserve, per books, * 40.6 582

Less adjustments in 1934 ($5,901,000) and -in

10s ($1,650,000) transferring these amounts

from dey rec] atic m and. depletion reserve tu

‘earned sarttus’ ; . _

Net Investment - $ S.ULS Ne

10"

to reproduce the property less oliserved depreciation, plus

working capital.- The derived rate of return was hased

upen the Company’s p esentation of revenues and expenses

«av wetaged for 1937, 193 and 1935.

The Sia Estimates of Reprodiction

Cost and Trended ‘‘Original Cost’’

: The estimate of the Company approximated $97,000,000

for the cost to reproduce the property.” Phat result: was.

reached by applying unit. prices for material and labor

‘to alk inventory and adding about 177 to'that ‘total.for un-

_alistributed construction costs. ae |

Many: hypotheses were employed for this reprodue

_ tion: cost estimate and gach of them disre eaiata the develap

"trie nt and experience of the Hope Company. Quoted: prices

. for pipe and. other material, rather than actual current

_ prices, were: ‘used and obsolete compressor station equip-

went was priced by applying quoted prices for modern

equiipme nt: The record demonstrates that, the quoted.

price for pipe is not-in fact the price that is paid. Ae-

tual prices are the result of negotiation. The caleulat ed

construction_costs exeeeded the actual piper tine const rie.

tion costs experienced by the Hope Company during -a

receyt period. This appraisal of the cost to reproduce

‘the system included “$14,000,000 for undistributed -con-

struction costs or overbeads which ignored the: experience

of the Con mpany | with respect to such costs and the fact

that Hope has charged all overhead ‘i expe nditures: (with

rydrie ®.xceptions) to operating ONteMSES AT thw mist Tt is.”

yuproper and inequitable to capitalize items formerly

charged, to operating expenses. and mm rate making the an

ciusion of Syck. expenses in the rate hase would compel

the.

oo |r ‘ : P -

rate paver ‘to retnsburse the Compativ more than once

tor the same item, .We will diseuss this point extetisive

nh Connect ran

with the Company's claimes) ‘original co-

The Company's hypothetieal. reproduction Cat est)

Nate. is. néarly ‘double the actual legitimate cost of thi

«’ » - o fe .

. rv) . .

Lv?

property, although, as the record shows, the greater part

- of the property was constructed during the high-price |

period of 1917-1920. | ocala

After full considetation of the estimate of repro-

duction cost new presented by the Company, -we find that if”

is not predicated upon facts and that it is too conjectural

eS illusory to be given any weight in these proceedings.

See Railroad Commission v. Pacific Gas & Electric, Co.,

302 U. S. 388, 397; Re Canadian River Gas Co. et al., F.-P

C..Op. 73.

+ The Company also presented a treaded ‘‘original. cost” |

estimate which -exceeded $105,000,000. The objective of :

that estimate, according to the witness, was to reflect

changes in price leyels and to indicate what the original |

cost of the property would have been if 1938 material and

labor prices had prevailed throughout the whole period of |

the © piecemeal construction of the Company’ s property

since 1898. At.the outset this estimate includes a multi-

million dollar error because the trend factors were applied

to an inflated ‘‘original-cost’’ claim of the Company, which

we will discass fully under the subject of actual Jegiti-

“mate cost. The evidence discloses fundamental errors in

the trending process used. No consideration was given

by the Company's witness to -the great advantes in the

science of construction and the improv ement in the quality

of pipe and equipment in the natural. gas industry, during

the long history of the Company. tar anes

‘Hope Company's own experience demonstrates that. |

man-hour produétivity. has increased ‘greatly ‘thronghout —

the years during which the Company’s propérty wits cou-

structed. Yet the Company's witness gave no considera:

tioti to that fact, but utilized high 1938 hourly wage-rafes 10

price the slower obselete construction methods of .the past

on attime basis... It is undisputed that service. qualities of

pipe, includitig -increased tensile” strength and reduced

weight, have been improved in recent yéars. Pipe is sold

on the basis of weight and the heavier and inferior pipe

ras

in the Hepe System was priced at 1938 prices for modern’

pipe, in disregard of the known i improvements in the prod-

uct. Another basic gefect in the trending was the adoption

of the arithmetical average of the cost per ton of smaller

sizes of pipe when 95% of the cost-of pipe in the Company's

transmission lines represented pipe. -having greater: diam-

eters. That sich*a pipe trend is not representative is

obvious. Furthermore, the 1938 prices upon, which the

trends were based, being representative of only slightly

more than 1%. of the total plant, furnished no dependable

vardstick. °

In the light of the evidence the conclusion is jnes:

capable that the Company's ‘trended ‘original cost”? esti-

mate is not founded in fact, but it is basically. erroneous

and produces irrational results. + ~

The reproduction cost studies and the: ‘$0- ealled trended

“original eost’’ studies were thre typical, hypothetical con-

/ jectures which have plagued rate régulation for more than |

forty years. The actual dev elopment and experienc? of

the Hope. Company were ignored.. In addition, assump-

tion upon assumption as to: material and labor costs, and.

magnified imagination as to overheads were indulyed ” in

‘lavishly. The° results have no _ probative value and ace

cordingly must be condemned. — ~~

The estimates of reproducti lon cost tnd teeniied ‘“orlg-

inal cost’? lack: reliability, so° Wwe turn to the ev idence’ of .

- actual cost of Hope’ S property.

“Under the reeent decision of the Supreme Court involving

the Natural Gas Aet in Federal Power Commission ¢. Natural Gas

Pipeline Co. 315 U.S. .... and the decision of this Commission

‘in. Re Chicago District Electric Generating Corporation, 39 Po U.

* R.ON.S.) 263, involving the companion part of the Federal Power

Act, such estimates of reproduction cost and trended ‘original

cost ** need not have been admitted in evidlenee.

Mig

Actual Legitimate Cost

. The Company and the Commission's Staff, submitted

exhibits: and supplied testimony on the cost of gas plant

used in “thie Company's interstate service. The C ompany

‘ claimed that cost, as of December 31, 1938, amounted to

$69,735,638, the Staff indicated a figure of $51,984,153,

while the books diselosed an investment of approximately

- $52,730,666. ° ’

Hope’s vouc hers, books and records are adequate for

. eXamination, analysis and audit. Hope kept complete reec-

ords of ‘its expenditures throughout its existence, so no

estimates are, required to ascertain the actual cost.

Table A appearing on page 18 compares the cast of

facilities used in interstate service as claimed by the Com-

pany, as shown by the books of account, and according to

our findings, as ot December 31, 1938. ~

nt, -

The Company’ S Estimated Si

‘*Original Cost’’ |

' The first step in the Companys determination was the

taking of an inventory. The inventory. units. were then

priced at estimated cost, including - arbitrary overheads.

The amounts shown: as plant costs by the books were Ig-

nored, except for the purpose of. aiding in estimating unit

aie

costs.. As is shown by Table A, the Company's method

resulted in a-claimed net increase of $17,004,972 over the

* The book cost of the interstate facilities is derived as follows:

Total Plast Investment per books — - $56,215,454

ee Less: .

‘Distribution Property $2,795,083

Unfinished Construetion ~ + 81,392

Intangible Plant . 30,156 |

Property Used to Transport ; ae ;

Coke-oven Gas 976,127 3.482.088

Plant Investment, per. books, of

Interstate Facilities — ie $52.05

> Mans x

amount recorded ‘as investment i in the interstate properties

on its books of account. ~The Company claims, in other

words, that its books ‘fail to show the true cost -of such

properties in that amount. The items of that’ amount

which are identifiable Tepresent -expenditures previ: mushy

‘charged to expense acgounts. Seine of the alleged expendi--—

tures were not incurred at all. For e: xample, claimed

- interest during construction of $632,000 was not actually

paid. Obviously to the extent: that thé plant costs are

. understated,’ if ‘they are, the’ difference must represent

.tharges to other accounts, particularly expense accounts,

in the books. .

The claimed: additional ¢osts are divisible into two

groups—one relating to. properties constructed by the

Company, and the other relating to property acquired fr om

other utilities. -Table B on page 19 shows the ge ‘neral na-

ture of the $17, 004 972. os

sified (without ch@Rge

tem of Accounts

this basis also.

10)

TABLE A

‘Gost of Plant as of December 3, 1838

Claimed Amt. Shown

by,Company Bal

Natural Gas Production Plant

Natural Gaz Producing Lands ......

Natural Gas Producing Leaseholds.

hk & eae

Other Land and Land Rights ......

Field Measuring and ee

Station Stractures ;

Other Prod. Svstem Structures’ .

Gas Wells: Construction ..........

_ Equipment

Field Lines: Construction ..:..... :

Equipment

Field Meas, and Reg. Station Baquip-

ment

Drilling and Cleaning Equipment ..

Other Praduction Equipment ....,

@ereeece

‘Total Production Plant .....

BME: scassncrsce Me Oas et eeedes penta

Rights of Way

Compressor Station Structures _....

Trans. Meas. and [ Reg. —. Strue-

tures

Mains

Compressor Station Equipment ....

Trans. System Meas. and Reg. Equip-

ment :

Other Transmission System Equip..

“wVErERY ERUPT EEYRSRER ST ES Oe ft f oy

Totai Transmission Plant .

General Plant

Land and Land Rights ...... heats

Structures and Iniprovements .....

Offices Furniture and Equipment ...

Transportation Equipment

Stores Equipment

Shop Equipment

Laboratory Equipment

Tools and. Work Equipment .......

Communication Equipment

Miscellaneous Equipment

eee ee eee

ee ee |

TEcecurceeorterL eee sn

Total General Plant ....... R

Gas Plant for Interstate Service ....

Unoperated Aereage..... See ee

Wells and Field Lines not in Service

‘Total Gas Wlant «Exclusive of Dis-

tribution Plant and Property used

to transport Coke-oven Gas} .....

*-For comparative purposes the amounts in this column ‘have been

in the total) In accordance

2370 ¢

. Natural Gas Companies.

with our Uniform

The Company ’s study

¢ 3320 ¢ 3,320

1,684,636 1,331,101 1,599,005

701,556 529,400 645,391

* 92.196 24,602 21,008

. 40,77 28,617 21,139

291,872 213,164 . 191,189.

17,783,637 4,366,934 4,089.78

8,168,192° 7, 885.581 7.610.516

4,056,915 3,028,847 2,622,489

8,244,966. 7.099.997 7,674,252

267,099" 249.842 184,385

604,936 543,740 595,693

89,102 45,031 75.532

41,958,180 26,180,196 26,3233.391

* 164,105 158,122 143.972

442,394 491,784 391,243

1,725,945 1,661,573 1,441,882

11,988 11,399 8,207,

41,509 7,348 | 6J76

15,180,596 14,413,516 14,132,075

8,313,531 7,979,316 7,683,672

96,713 | 29,463 17.616

23,042 15,188 21,016

25,899,823, 24,767,709 23,865,399

98,188 126,678 96,981

247,427 237,323 995 888

195.911 . 239,989 178,683

148,540 161,431 142.3}

9,466" 3,321 5.107

114,706 63,169 104,185

1,070 1,003 1.003

4,634 200,761 4.545

347,639 249,121 248,976

1,172 20,484 1,148

1,195,753 1,303,280 * 1,008,831.

69,053,756 52,251,095 9 51,207.621

681,882 479,571 584,382

Sree Us Sree eee 192,150

$69,735,638 $52,730,666 . $51,984,155

«las

SYS

is On

107

‘TABLE B

__. ___.__Inventory, Transfer and Correcting Ad. : :

justments $(1,821,581)*

Direct Material and Labor Costs. not Tere.

Capitalized © 38,580,814

: Unloading, Hauling and Warehouse - :

Handling Costs ‘ 383,454

Indirect Field Costs’ : ° ” 396,141

Overhead Costs =<. ; 2.866.414 |

ap tN Bs.

Total Claimed Adjustments to Con-

structed Property $13,405:242

Claimed Adjustments to Properties Pur- :

chased from Gther Utilities 1,599,730

Total $17,004,972

The Company's cost study was made by'an engineer-.

ing firm. » The witness for the Company, a valuation engi-

neer, indicated clearly that he was not, concerned with the *

Company’s past practices in determining costs and in de-

termining expenses. To him it was of no concern whether, .

an item had been charged to expense and the cost thereof

‘ recouped in rates, or even whether: an item represented

an expense under the wide discretion of management al-

‘lowed by accepted principles of accounting. The realities,

“us to past practices and determinations received no con-

sideration. Evidently the object of the study was to deter-

Mine thé ‘maximum cost which could be assigned to the

properties under any theory. or principle of cost determina-

tion, regardless of the fact that the Hope Natural Gas Com-

pany had been in bisiness more than forty years and-had

made determinations in its regular course of business as to

which of its expenditures constituted investment in piant

and which constituted operating expenses. _

The first proposed adjustments to book cost ($1,821,-

381), reflecting inventory, transfer and correcting ad just-

ments; will be disenssed hereinafter. net es ; ,

nae

_——. > é >

* Parentheses indicate decrease.

___ previously charged to expense and_not capitalized in the-—

-. The evidence shows that the Natural Gas Association of -

Siete 42 Fed. (2d) 83 ; ion! Meee of internal Revenue .

108

The second adjustment. ($13,580, 814) represents items *

books or items which cannot be identified in the books and

‘records and, therefore, may not have been incurred at all.

The amount of $13,580,814 may be subdivided as follows:

Well Drilling * : $11,279,554

Other Direct Materia! and alee Cost “996,545

Labor Costs in Laying Mains, Constructing

Compressor Stations,-ete., During ‘Years

1918 to 1922, Inclusive 1,295,953

Leasehold Cost. ———— i (ee

Total a : _ $13,580,814

The largest item of claimed additional cost relates to

labor and drilling equipment.used in drilling wells. The

additjonal amount claimed ($11,279, 554) is associated with

2,633 wells. It is the Company’s contention that these ex-

penditures, which were charged to operating expenses when

incurred, should now be included jirthe rate base.

It was the consistent practice of the Hope’Company

up to 1923 to charge the cost of drilling wells to oper- .

ating expense. This likewise was the general ‘practice of

*the natural gas industry. It followed the well-established

practice of extractive industries of charging items to ex-

pense which. in less venturesome enterprises were ordi-

narily charged to the plant account. The. theory. underly-

ing the practice was that additional wells were constantly

needed 46 keep the Company in business, hence the cost in-

curred’ was not for the purpose of adding to. the property’

‘but rathér for the purpose of maintaining the business.

America opposed a provision in the first uniform system

of accounts for natural gas companies issued by a State

® Re Hope Natural Gas Ge 1921 E 4186, 439-440 ; United states

Roden Coal 39 Fed! (2d) 425;-Marsh. Fork Coal Co. v.

Brier Hill Collieries, 50 Fed. (2d) 777.

109g

commission which required ‘capitalization of well drilling

. expenditures. “That Association took the view that such ex

penditures were necessary operating expenses. In fact,

Hoye’ did not change its practice in this respect until it was

required to do so by the provisions -of the system of ac-

counts for natural gas companies promulgated by the

Public ‘Service Commission of West V ifwinia, effective in

1922 » It is significant that West Vi irginia’s sv stem of ae

counts did not require and. evidently did not permit the

—Hope Company to re-account for its past expenditures, but

merely-required a chanye as to’ treatment of well drilling

expenditures beginning with its effective date.

The Company's practice of charging well drilling ex-

—

pe nditures to operating expenses, therefore, conformed |

to the principles and practices of the. time. One of the

obvicus purposes of keeping books of account is to inform .

management so that proper managerial decisions inay be

made.. One of the first functions of management, of course, .

is to endeavor to fix prices so that revenues will cover

operating expenses and yield a profit. Where it is the

xeneral practice ‘of the industry to treat’ certain expendi-

lures as operating ‘expenses,-it is manifest that such ex-

_ penditures will be considered as expenses in its rate nego-

tiations and determinations. ;

- If there were any doubt about this matter, it would be

dispelled by the action of the Hope Company itself. ¢In’ -

1921 the Hope Company was involved in a rate proceeding —

Kefore the Public Service Commission af West Virginia.

It was a proceeding i in which Hope sought to ineredse its

rates. In that. proceeding the Company: claimed: well

drilling and other expenditures now sought to be included

in the rate base, as aperating expenses. They were allowed

as such by the Public Service Commission of West Vir-

ginia.” No further proof is neéded to show: that Hope

_——.

Re Hope Natural Gas Co., P. U. R. 1921-E 418, 433, 439-440."

5 wees Oi el

; considered the expenditures i in question as operating tather

‘than plant items, in its efforts to recover full operating -

costs plus a profit i in the conduct of its business.

‘No greater injustice to consumers could be done than ».

‘to allow items as operating expenses and at a later date in- :

clude them-in the rate base, thereby placing —_—

-* charges mer: the consumers.

The other direct material and labor costs of $996,543.

appear, to the extent they can be identified, fo have been

charged in the past to maintenance and _ repairs. Geer

The adjustments for cost of labor in laying mains, con:

_ structing compressor stations and other property totaling

$1,295,953, and the adjnstment of $8,764 to the cost of

leases are treated later. -*

In addition to well drilling ainnltiimin, other items

now sought to be included in the.plant accounts which were -

previously included in expenses, if they were incurred at

all (the Company’s method makes it”impossible to deter-

_ mine whether or not certain of the expenditures were in

curred) are as follows:

‘Unloading, Hauling and Warehouse

Handling Costs $ 383,454

. Indirect’ Field Costs 396,141

Other Overhead Costs _ 2,866,414

As to these items, here again: the Company followed

a consistent practice, and the practice of the industry, in

charging such expenditures to expense accounts. It was

not customary for the natural gas industry or. other ex-

tractive industries to load the plant accounts with overhead

items, such as shown above. | Even, under the relatively

| ‘definite requirements of the Commission’s present Uni-

form System of Accounts, considerable discretion and

latitude are allowed management in accounting for, over-

head expenditures. . Accordingly, the allowance of the items

mentioned would not represent the correction of pas'

\ -

. , P =, ee - ;

errors, but merely the substitution of present judgment for

_ the judgment exercised ‘at the time the’ expenditures were.

incurred, whi covered a period of forty years. The im-

portant rulp’is that once discretion has been exercised, sub-

sequent @¢tion must be-consistent with the decisions pre-

_ Niously reached. There is no settled principle controlling

the determination of the exact amount of overheads, if any,

which should be applied to the cost of. plant items.

J Besides claiming large additional costs for property.

constructed by the Company, Hope claims a net sum of

$1,599,730 representing alleged additional original cost of

property acquired from other utilities. These properties,

acquired chiefly from affiliated utilities, were accounted for

by Hope at the cost to it, which was the cost to the predeces-

sors. Hope now claims that the costs accounted for as plant

by the predecessors were in error in that the predecessors

followed the same allegedly erroneous practices that Hope

followed. It, therefore, claims that well drilling costs in

the amount of $1,364,087, other direct material. and labor

costs of .$286,173, " unloading, hauling and warehouse -

_ handling ¢osts of $18,557, indircet field costs of $38,519,

other overhead costs: of $122,043 and leaschold costs of .

$6,388, all of which, if incurred at all, the predecessors

had charged to expense, should be added to its plant invest-

ment figure and included in the rate base." ‘Since these

predecessor companies kept their books and records ex-

actly as did Hope, in accordance with the general practice

of the industry, the proposed adjustments, except for lease-

hold costs, are in the same category as the items which

Hope now attempts to restate in its plant accounts. °

In the course’ of its study, the Hope Company deter

mined that considerable property which was recorded in

its plant accounts, was no longer: in existence. In-other

1! There were also. inventory, transfer and correcting adjust-

ments which deerease the book cost by $236,037, and they are. dis-

cussed hereinafter. se

412

words, there were unrecorded retirements. Offsetting the

,-unrecorded retirements. were’ éertain ‘items of existing °

"jaa for which the Company found ‘io costs in its plant

accounts. ‘More than likely, certain of the latter merely

represented the failure to identify items which were deter-

‘ mined to be unrecorded retirements. - The: net effect is a

substantial _ adjustment. ($1,821,581 for constructed prop- |

erty, and $2 32,930 and_ $3,107 for acquired property) for

unrecorded retirements and miscellaneous corrections: The

adjustment is not controverted and should be made.

° . ,

Impropriety of Including in Rate Base. .*

Items Previously Charged to Expense |

It has been shown that the Compafiy’s claim of al-’

ditional plant cost over and above what is recorded ‘on its:

books as plant investment répresents. targely expenditures

previously charged to expense in accordance with the. dis--

cretion of mahagement. The Company, in other words,

now impeaches its books and -its former financial state-.

ments to regulatory bodies, tax apthorities, investors, and

others, It impeaches. the decisions of management made

at the time the expenditures were incurred.” It does this

in spite of the fact. that its past decisions conformed to its

‘own consistent. practices, until required to change them by-

a regulatory agency, and’ to the general practice ‘of the

natural gas industry; aswell as the extractive. industry.

The adjustments proposed, therefore, dé not fFeflect the

correction of errors in the past. Errors as to these ite ms”

were not made. (i i

The past determinations of the items constituting |

plant investment were deliberate, conscious acts on tlie. |

part of management at the fime of the transactions. A ~

decision obviously must be made when an expenditure

‘occurs as to whether it represents an inv estment in plant

or an expense. There must also be some finality’ ‘to these

a i

11% .

| Sicinbonan: 12 If they are treated as expenses at’ one time and

as plant investment subsequently, chaos in rate- making and

- in corporate finance will. prevail. It is: no answer that:

to the effective date of a prescribed uniform system of

accounts. The Company kept plant and expense accounts

throughout its history and conformed to the general

business practices of the industry and like business in-

stitutions. It was evidently thoroughly convinced as to the

propriety of its decisions, as witness its claim before the

tures in question Were operating expenses. The Company

is now estopped from re-accounting for those expenditures.

_ value” as the only mode of public utility rate regulation,

_vestment figures iow become all important in‘the regula-

tidn of rates. Immediately, however, we find an effort to

taniper with these. There is, in. ‘progress an attempt to

make the reproduction cost proeess ‘Survive in the deter-

in this ease an inventory was .taken and then units were

be condemned at the threshold. For in addition to being.

permeated with conjectural estimates, it gives no heed to

the realities of past events. Consistent treatnient of ex-

penses and plant intestment costs is indisper isable to the

successful operation of the nepuintory * system.

ee ee

2 Costs of exploration for and development of futare gas re-

serves are considered current operating. costs by the industry and

. Hope has ineluded such costs in its current operating expenses. If

retroactive accounting were allowed then the’ Company might re-

State these costs as capital investment in the future productiye

acreage. The Commission ‘will allow $600,000 in annual operating

expenses for exploration and: development costs in fixing rates. If

this item were permitted’ to be restated in plant cost ten years from

now $6,000,000 would be added to the rate base resulting in. mul-

tiple charges to consumers. =~

many of the expenditures in questién were incurred prior

West Virginia Commission in 1921, that the very expendi: .

With the decline in. favor of the-doctrine of “fair.

mination of actual cost-of or investment in plant. Thus,

priced at the estimated ‘‘actual cost.”’ “The method should |

Pt ;

“2

its keystone, reproduction: cost, crumbles. Bona fide in-

a a

ee 1)

This is not to say that genuine errors in the investment |

sa accounts should not be corrected and the true figures. ‘given

recognition in the rate base. Where real errors are made,

they probably should bécoxrected- A distinction must be

made, however, ‘between genuine errors and a changt in

point of view, whereby past, deliberate decisions within the

scope of an accepted principle are. sought to be impeached

to the pecuniary. benefit of the Company. |

The courts and commissions which have considered

this matter have. generally refused to include in the rate

_ base amounts previously charged to expense in accordance

with discretion of management. In the instant case, large

parts of the. claimed additions to book costs relate to well.

drilling expenditures and alleged overheads. The very

question at issue has been passed upon twicé by the Su-

preme Court of Appeals of West Virginia. In the first

case in 1924, the Natural Gas Company of West Virginia: -

‘sought to inelude such expenditures i in the rate base after. |

they had been charged to expense. The Public Service

Commission of West Virginia refused to allow them. The

Supreme‘ Court of Appeals sustained the Commission."

The question was raised again in. 1934 by the Natural (ias

Company of: West Virginia. The Publie Service Commis-

sion of W ést Virginia then concluded that the inélusion of :

- sueh expenditures i in thé rate base was required as a mat-

ter of law. The City’of Wheeling, West Virginia, appealed

the Commission’s decision. The Court reversed the Com-

| mission and again held- that” items previonsly charged to

operating expenses should not be included in the rate-

base. =~ “

‘Thus, by far the weight of authority i in court and com-

mission decisions sustains the principle, sound in equity

= Natural Gas Company v. Public Service Commisswon, 95 W.

4 Va., 557, 121.8. E. 716, 720, P. U. R. 1924 D 346, 361.

_ 34 Wheeling v. Natural Gas Company, 115 W. Va: 149, 175

S. E) 339, S434, 5 PUR, (N.S.) 471, 479, app. dis. 296 U. S. 659.

. “i o

3 : 115. :

and justice, Atiat ite items previously cuarged to operating ex;

penses .under the allowable discretion of management

. should not later be included in the base on which customers

are required to pay a return and depletion and deprecia;

tion allowances." . a fe

: The Hope Company’s earnings ‘over the years have.

been ample to provide for all operating expenses, including

the $17,800,000. which it attempts to add to actual cost, an

excessive resérve for depletion and depreciation, taxes, and

large: returns to-investors. During the ‘period 1898 to 1923 —

for which the Company seeks to re- account and expand its’

recorded plant costs by approximately $12,600,000 for well |

drilling costs alone, the average rate of earnings on the ~

was more than 15%:

Actual Legitimate Cost Or

Gross Plant Investment

Accordingly, we begin with the heck cost in the deter-.

‘mination of the actual legitimate cost or inv estment in’ the

facilities used in the Company’s interstate business. We

have already found+that such book cost at/the end of 1938

amounted to $52,730,666. There must | deducted from,

the book! cost the unrecorded retirements, | or inventory ad-

justm¢nts in the amount of $2,057, 618. There is added to .

the bopk é¢ost the amount of $15 9,152 ($8,764 for constructed |

“ngroperty and $6,388 for acquired property) representing ~~

13 Re Los “Angeles Gas &é Electric: Corp., P. U. R. 1931 A, 132,

143-4) aff. 58 Fed: (2d) 256, 261, 267, 289° U. S. 287: Re' Peoples

Gas Light & Coke Co., V9 Pe U, R. (N. S.) 177, 196-8, aff. 373 Hi.

31, 25 N. E. (2d) 482, 493, 31 P. U. R.(N. 8.) 193, 207. app. dis.

» 309° U.S. 634;.Re West Virginia @entrd Gas Co. P.U. R. 1918 €,

. 453, 464.6; Re Mondovi Telephone Co., P.ULR 1933 B, 319,321-3 :

See Re Northwestern Electric Co., 36 P.U. R. (N.S.) 202, 208-213.

“all. 125 Fed. (2d) 882: Re Canadian River Gas Co, ot a. F. FX.

»- Op. 73. ef. Chicago.d N. W. RCo. v. Com’r. Int. Rev 4 "Fed.

“2d } 882, 886, cert. den. 312-U. 5. 692. | fe

a °

annual average invested capital (capital stock and surplus) ee

116

adjustments due to errors in stating the cost of leases, and _

an amount of $1,295,953, representing plant costs properly

capitalized and then arbitrarily charged off to operating

expenses,

There is considerable question as to whether fhe latter.

amount should be restored to book cost in determining the

rate: base. The amount arises as follows. From 191s to

1925 Hope followed the peculiar practice of capitalizing the

cost of direct labor incurred in laving pipe lines, construct-

ing compressor stafions and in installing equipment, but

at the end of each year, arbitrarily charged off the amount

‘thus capitalized during the year. This’ practice was pe-

culiar to the Hope Company and was not a general prac-

tice of the industry. It did not conform to sound aceount- “4

ing principles. Hope followed the correct practice durjng ~

all of its existence except for the few years mentioned.

Under the cireumstanees, the amount is restored to: the in-

Vestment figure and is allowed in the rate base. ‘The allow-.

ance in-this instanee, howe. er, is net to be construed 3 asa

precedent.

As of December 31, 1938, the cost of unoperated acre-

age ($584,382) and the cost of certain wells and field lines

($192,150) then not in service were contained in the ac-

counts. These items are eliminated from gas plant in Serv

ice as of December 31, L938, and appropriate adjustments

for the use of such . property and facilities are made subse

quently. :

.After considering the evidence based ' upon the vou

ers, books and records of the C ompany, and as a re sey of

the application of fundamental principles of atcounting

‘cost: determination and ‘equity, the Commission finds, |

the words of Section 6(a) of. the Act, the actual acitiects

cost as of December 31, 1938 in plant used in. the interstate

business Was $51,207,621, composed as follows:

~ O

Book Cost -12/31/38 oad _ $52,730,666

Less Inventory adjustments (unre-

corded retirements) ; 2,057,618

Less Wells and Field ane Not _ ery

Service 192,150 ©

Less Unoperated Acreage ~~ 584,382

Sub- total - + 49,896,516 —

Plus Correction to Cost W ee 15,152

Plus Capitalized Costs Charged Off .

’ in Error . es 1,295,953

Actual Legitimate Cost of Plant in .

interstate Servi ice a _ $51,207,621

There were more retirements than additiors in 1939, so

- the actual legitimate cost was $51,099,024 at the end of 1939,

The reeord shows net additions of $965,532 in 1940 to pro-

~ duce a total actual legitimate cost of $92,064,557. Certain

inactive wells with the connected field lines became .active

in 1940 and the cost of this property is $110,316. We find

that the actual legitimate cost, ineluding: such currently

used property, Ene $52,174,873 as. of Decemher 31,

This actual legitimate cost is predicated upon Pethes

and it is the best evidence in these proceedings, so we will

employ it for det termining the proper and allowable rate.

base, are

Depletion and Depreciation

In determining the allowable rate base in these pro-

ceedings the actual existing ‘depletion “and depreciation

Should he deducted from the actual legitimate cost of the

property devoted to the interstate service. See Los An-

geles-Gas & Electric Corp. v. R. R. Comm., 289 U. S. 287,

312. Actual existing depletion.and depreciation is tlte ex-

tent to which the service life, that'is the economic life, of

the property has been consumed due to such forces as ex-

haustion of the natural gas supply, wear, inadequacy, and

$4917 0 .43-

118.

obsolescence."* Annual depletion and depreciation measure >

the economi¢ service life consumed in one year, actual exist-

ing depletion and depreciation are the accrued consump-

tion of the oe he Sg service life on a certain date;

the annual allo for depletion and depreciation must,

therefore, be correlated with the actual existing amount to ~

ayoid injustice to the utility or rate payer. Re Canadian.

River. Gas Co., et al., F. P. C. Op. 73; Re Chicago District

. Electric Generating Corp., 39 P. U. R. (N: S.) 263, 275;

Re Interstate Power Co.; 32 P. U. R. (N. 8.) 1, 10.

- The (Company: presented faconsistent claims in this re-

spect. It alleged a relatively small amount. of accrued or

existing depletion and depreciation to be deducted-in fixing:

the rate base, but claimed nrge annual amounts for future

operating expenses.

The Company contends that the accrued depletion and

depreciation in its property equaled approximately 35% of

_ the reproduction cost at the end of 1938._ We have weighed

the estimate of reproduction cost and found it wanting. In

addition, it i is mequitable to predicate depletion and depre-

ciation upon the delusive reproduction cost. The integrity

‘of the investment will be ‘maintained by basing depletion

and depreciation upon actual legitimate cost and the Su-

preme Court has approved ‘that method."

The Company determined-ccrued depreciation - pri-

marily by the obs¢rvation process and obtained what is

called a ‘‘per cent condition” of the property. For annual

expense purposes, it weighted the observed depreviation

with retirement of property up to the date of the study.

The fallacy of the ‘‘per.cent condition’’ theory of acericd

‘6 Lindhewer v. Illinois Bell Tel. Co., 292 U. S. 151, 167; Re

Canadian Rwwer Gas Co.. ef al., FP. P. C. Op. 73; ef. Depreciation

Charges of Telephone and Steam Railroad Companies, 177 1. ©. ©

351, 408, 422.

17 Lindheimer v. Illinois Bell Tel. Co.; 292 U. S. 151,- lei

176; Federal Power Commission v. Natural Gas Pipeline Co., 13

he ae .

11g

depreciation is plain here. To illustrate, under the hy-

pothesis of the Company’ s witness, in determining the ‘‘ per

cent condition’’ of certain compressor station equipment,

the property would be found to have’ depreciated only 25%

throughout its life or be in 75 ‘‘per cent. condition,’’ and

_ then suffer a precipitous loss in the brief final stage of

service. Such a theory is opposed by reason and facts.

“Los Angeles v. Southern California Telephone Co., 14

P. U. R. (N. S.) 252, 273-4. The Company’s estimate of

existing depreciation was based primarily upon a sporadic

- visual inspection of physical deterioration. Most of Hope’s

production and transmission property.is not visible and

the extent to which the service life has been consumeti can

not be determined from observation alone. Also, the fune-

tional causes of the retirement 6f property are given little

consideration *by the Company’s visual method which

samples physical causes. Re Rochester Gas & Electric

Corp., 33 P. U. R. (N. S.) 393, 468-490. The Commission

concludes that the so-called accrued: depletjon and deprecia-

tron claimed by ‘the Company does not give full or proper

consideration to all factors. contributing to the retirement

of property, and that it does not reflect the actual existing

depletion and depreéiation or ne « service life of the

-property in serv ice.

The Required Reserve For

Depletion and Depreciation .

‘The same factors that cause annual depletion and de-

preciation eause the actual existing depletion and deprecia-

tion to be deducted’ from ‘the property in fixing the rate

base. In our opinion, where reasonable and proper deple-

tion and depreciation accounting practices have been ob.

served by a nature! gas company, the resulting reserve’ is

the best measure of the deple tion and depreciation existing

inthe property, ie., the ace umulated cost of property hich,

has been consumed in service.

120

It is-well known that many, electric and gas utilities

have not observed sound depreciation and depletion prac-

tices. The Hope Company is in this category. For-many .

years most of Hope’s business was not under regulation.

Its practices as to depreciation and depletion, like the prac-

‘tices of many other utilities, were inconsistent and hap- -

_hazard.. Its book reserve does not measure the actual exist-

ing depreciation and depletion. °

: : — ® -- .

This’'Company has actually accumulated an excessive

reserve. We are confronted, therefore, with the question

as to whether that excessive reserve, or the reserve re-

quirement (actual existing depreciation and depletion),

should pe deducted in determining the rate base."* We

_ have formerly indicated that public utilities ought to ‘set up

proper depreciation (and depletion) expense and that the

resulting reserve should be deducted from the gross cost in

the rate base determination.’” We reiterate that view

We believe, however, that under such circumstances

as exist in this ease, where a large part. of the Company's

business j is brought under regulation for the first time and

where incorrect depreciation and depletion practices have

prevailed, the best procedure is to deduct the reserve re-

quirement in computing the rate base. This procedure wil!

permit us to be consistent in those cases where utilities have:

deliberately failed to observe sound practices and as a res

sult have deficient reserves. Thus, in the Interstate Powsr

—_——Cumpany, case, where the company’ had been negligent in

accounting for depreciation and had a deficient reserve,

. * . .

18 There are those who argue that excessive reserves should be

dedueted. Pennsylvania Public Utility Comm. v. The Peopl+s

Natura! Gas Co., Nos. 11380, 12683 (1942) Buchanan, dissenting:

See Chesapeake & Potomac Tel. Co. v. Whitman, 3 Fed. (2d) %3s,

951-953; New York Telephone Co. v. Prendérgast, 36 Fed. (2:

oe . .

i9 Re Interstate Power Co., 32 P. U. R. (N. S.) 1, 10; Ke

Chicago Distriv¢ Electric Generating beac 339 P. U. BR. (N. 8:

263, 275. . . ,

—

———_— ai — o> , -

we deducted the higher reserve requirement, as the meas-

ure of actual existing depreciation. a .

It should be borne : in mind, however, that the deduction

‘of the reserve. requirement, rather than the actual book re-

serve, is for the purpose of getting a sound basis for future

regulation and control of rates. Hereafter, the Company,

in accordance with this Opinion and under our System of

Accounts, is required to record proper depreciation and

_ depletion expense. Hence, the books of this Company, as

well as the beoks of others subject to. our. jurisdiction,

after once having the reserve requirement determined,

should’ reflect in substantial degree the proper depreécia-

bemand depletion, Useof the reserve requirqnent in this

“case will produce a proper starting figure so thNt the book _

reserve can be deducted hereafter as the propeP measure

of the actual depréciation and depletion. This treatment

will then be consistent with the view that the book reserve

is the proper Ueduction fram the gross cost in deterniining

the rate base. i vie,

Tt. becomes necessary, therefore, is viaetil the best

measure of the reserve requirement. The. ‘purpose of dé-

plétion “and depreciation accounting is to offset diminution ~

in service value®? of praperty being used in ‘service, and

to determine -as accurately as possible another element of

the cost of service for a particular periéd. All of Hope’ s

phvsieal property, except certain land, will be depleted or

‘depreciated completely when it reaches the end of its use-

ful or economic life. Physical and functional forces,

Whether their- effects are visible or hot, “are constantly

‘reducing the’service life of the C ompany's property. Serv-

ive life is the equivalent of economic life or the utility of

the property. paige ¢ incurs plant costs to prov ide for future

e. :

-20““Serviee- value’? is the difference bet ween original cost and

the net salvage value of gas plant. Depletion and depreciation

signify the consumption of service life of property and when that

is translated into wre: it shows the loss in service value.

122 -

service and to make production possible. As natural gas

service is rendered, the economic value of property is grad-

ually consumed, and the property is finally retired at the

end of its service life. The cost of the property consumed .

‘annually in rendering that service should be charged. to

operating. expenses to reflect the — and deprecia-

tion incurred.

The Commission’s Staff presented a depletion and de- |

_ preciation reserve requirement study in these proceedings.

- Estimates were made of the over-all service lives of the

properties by classes; those average service lives were con-

verted into depreciation rates, and then applied to the cost

of properties to determine the portion of the cost which |

had expired, that is, which related to the consumed service

lives. The study covers the operations of the Company

from its beginning in 1898 to December 31, 1940. It shows

annual amounts for each group of property from the date

installed to the date of retirement, and it concurrently. pro-

vides the necessary reserves for property. retired and for

the ultimate retirement of existing property. The funda-.

‘mental principle that annual expense for depletion and de ’

preciation must be harmonized with accrued depletion and

‘depreciation has been applied here. The straight-line serv. |

ice life method was used to compute the reserve require-

ment for all of the material, equipment and structures of

the Company, and the unit-of-production method was ap-

plied to plant.costs which are associated with the gas sup-

ply, i.e., gas producing lands and leases, field line and gas°,°

well construction, rights-of-way, and costs of abandoning

gas wells.2'. The service life study was made by-a prop-

erly qualified Staff engineer who analyzed Hope’s past ex- |

perience, including the retirement of. property .over the .

years. He gave consideration to relevant service life data -

on other pipe lines. He also considered the functional and

physical aspects of depreciation. As an aid in the -<deter-

21 As defined in the Uniform System of Accounts.

123

mination of service lives he made a field inspection of the

Company’s physical properties. The anit-of-prodnetion

method used by the Staff was related to the gas reserves

of the active wells of the Company. This case is free from

_. the usual complexities involved’in the estimate of gas re-—

serves because the geologists for the Company and ‘the

o ommission presented estimates of the remaining recover-

able gas - reserves which were about one per cent apart.

The permeability and porosity characteristics af | the region

cause isolated pools of natural gas, and the Company’ S gas

production properties are intermingled with non-productive

areas and other companies’ properties. . This situation ne-

cessitated the segregation of Hope’s property into gas pro-

_ ducing areas for the depletion and depreciation reserve re-

quirement study. Gas rights, well construction arid con-

‘nected field line construction costs are consumed in service

- proportionately with the depletion of the associated gas

supply. Well equipment and field pipe line material are

_ Tecovered and used again when the various sources of gas

’ supply-are exhausted. These facts of opération have been

recognized in the ascertainment of the required r reserve for —

' depletion and depreciation.

The Staff recommended the depletion and deprecia:

tion reserve requirement for Hope’s production, transmis-

sion and general plant in the amount of $23,520,561 as of

December 31, 1940.7 After a careful analysis of the evi-

dence we have accepted certain adjustments advocated by

-the Company and find that the depreciation and depletion

Teserve should be not less than $22,328,016 as of December

31, 1940. These adjustments are as follows: (1) Due to

22 "That revesimended required reserve is after a deduction of

$1, 162,710 for cost of abandoning property. The depreciation rates

used in the reserve requirement study make proper provisions for

the inevitable cost of. -abandonixg property. But during the period

1898-1931 Hope charged the cost of abandoning property to main.

tenance expense, rather than to the depreciation reserve as a pert

of the net salvage: ona °

124

the plant inventory adjustment made by the Company; as

of December 31, 1938, and accepted by all part ies, a net re-

duction in the plant accounts was made which represents

“property retired prior to’ December .31, 1938, but- not so:

recorded on the books. The Company. contends that 10.

years is a fair approximation -of. the average period by

which these retirements have been aceumulating, lience the

_pMepreciation provisions should be reduced for the 10-year

period. Had the-retirements been made on the books :is

soon.as the property was retired’ the depreciation base -

would be reduced and the annual provisions would be less.

It is impossible. to determine the actuat-dates the prop. -

ert was retired and we accept the 10-year period as.a rea-

sonable estimate of the average time from the date the

mroperty was retired to December 31, 1988. This ad jis!

nient results in a reduction of $31, 106 in annual deprecia-

tion expense foreach year and a reduction of $311,060. in

the reserve requirement as of December 31, 1938. (2) In

the case of lines lifted, Hope has usually retired lagpor ehst

and charged it to the-depreciation reserve. But in the cae

of pipe retir@l in connection with a replacement the original

labor was not always retired and the ‘renewal labor was

charged to operating expense. Th depreciation rates 2p-

plied by the Staff include provisions for the retirement of

all labor and mater ials, hence its reserve requirement com

‘putation ineludes accruals for construction labor cost on

the main pipe lines which has been rtired and not chareed

to the depreciation reserve. The Company has. éstimated

“an amount of $272,693 representing the additional retire

ments of labor cost whieh we will allow as a reduction in

- the reserve requirement. (3) The xroup depreciation rate

of 2.5% employed by the Staff in its <tudy should be re-

“duced to 2.22% for gas well equipment. As revised the

rate for gas well material is the same ‘is for field line

“+ Total pro isions from 1898 to 1938, inclusive, amount to

$5,060,456 at a 2.5% depreciation raie and $4,493,685 at a 222%

depreciation rate ‘for gas well equipment.

material, although the evidencg indicates that 4 somewhat.

shorter average life has been experienced for gas well mate-

125

2.22% the

rial than for field line material. At the raté of

annual depreciation expense will be reduced $21, 110 for -

1939 and $20,911 for 1940. C onsistent with the ‘reduction

in the annual depreciation expense the reserve requirement

-at the end of 1938, 1939 and 1940 will be reduced $566,771,

- for the vears subsequent to that date.

Amount Recommended’ by Staff 22,338,646 22,909,457 2358

- Less: Unrecorded - Retirements - 311,060 311,060 311,050.

Unretired Labor on Trans- ; . \

mission Line Replacements 272,693 272,693 - 272 693

Change in Depreciation Rate

for Gas Well Equipment . 566,771 587,881 608,792

Total Adjustments , 1,150,524 1,17 1038 1,192,545

Bovkived Dep reciation and Deple-

" tron Reserve 21,737,823 = $22,328,016

$587,881, and $608, 792, respectively.

-The first two of the above- mentioned ad Sustments are

the result of certain accounting. practices of Hope prior to-

December 31, .1928 and do not affect depreciation expense

The reserve require-

ment which the Commission finds to be reasonable and .

proper is’ summarized as follows: |

” ta . *

: Depietion and Depreciation Reserve Requirement

. Dec. 31, Dec. 31, Dec. $1,

1938 1939 1949

: \ — —sa 0 a — pa 3 -

. Amount Computed by Staff 23,501,356 $24,072,167 - $24 63 )271°

Less Staff Adjustment for Cost of

-Abandoning Property 1,162,710 1,162,710

—— a ———— -

1,162,710

——= «

20,561

$21,188,122

The required depletion and depreciation, reserve, as we

have determined it upon the record, is the best evidence of ~

the measure of actual existing depletion and depreciation,

- and it will be deducted from the actual legitimate cost of the

“od P.

Company’s property for rate-making.** The reserve re-

_ %4 See Re Long Island Lighting Co., 18 P. U. R.-(N. S.) 65,

146.151, 189-191; aff. 249 App. Div. 918, 292.N. Y. S. 807, 809,

18 P. U. R. (N.S.) 225, 226;-Re Rochester Gas & Electric Corp.,

.R. (N.S. 393,489; 502-3 "National Association of Rail-

rag Ane Utilities Comniissioners, Proc eedings of Fiftieth Annual

Convention (1935) pp. 473-4. :

126

v ¢,

quirement on any selected date is the total of the annual —

provisions: for depletion and depreciation less the actual

retirements of property. The method used here determines

the amount required annually to reimburse the Company.

_for property consumed in service, and it results in a cor-

relation of the annual expense and the accumulated re-

‘serve. .The method is just and consistent. for each operat-

ing period because. the costs utilized are matched with the.

revenues produced. by the property in service.

As we have noted, the Company has ‘built up an exces-_

sive reserve by charging large annual allowances for deple-

tion and depreciation to operating expenses in the past. .

The book reserve for interstate plant at the end of 1938 -

amounted to-about.$39,000,000 which is $18,000,000 in ex-

cess of the amount we determined as the reserve require-

ment. : In addition, twice in the past the Company has trans-

ferred amounts aggregating $7,000,000 from the dépreci la-

_ tion and depletion resefve. to surplus. When these latter

adjustments are taken. into account, the excess becomes

$25,500,000, which has-been exacted from the rate payers

_ over and above the amount required to cover the consump-

tion of property yn the service rendered. and thus to keep

: the investment unitipaired. | Eindheimer v. Illinois Bell Fel.

Co., 292 U. S. 151, 169, 174.

Estimated Additional Fixed Capital ‘Expenditures.

To make the rate base figures "current, the Company

présented an estimate of $8,956,500 in ‘capital expendi-

tures’’ which it planned for production, transmission and

general plant during 1941, 1942 and 1943. Obviously: these

proposed gross additions should increase the allowable rate —

base only to the extent that net actual legitimate cost

will ‘be increased. Also, $1,270,000 was: estimated for 1943

additions to meet the demands of new or increased business.

The Commission has not. given direct effect to thése es-

127

pected 1943 additional revenues in the forecast of revenues

for rate-making, so that $1,270,000 will not be included in

the rate base. The determination of the estimated increase

in net plant cost requires the consideration of additions

and retirements of plant and the effect on the depletion and

depreciation reserve of future accruals and canon gaa

Giving due weight to all these factors the increased :

actual legitimate cost, averaged for the period 1941- nae

is $1,392,021. Zz

' - The Company presented a general plan which it ina :

for the construction of a pipe line from West Virginia to.

. Louisiana to supplement its present source of supply of gas’

and to meet predictable increased demands for natural gas.

Due mainly to the shortage of materials ¢aused by this war,

the status of that proposed line is so uncertain that it need

not be considered in. these proceedings. When the pro--

_posed line is constricted .and definite information is pre-

sented concerning its effect on the rate base and net income, ,”

the Commission will give the matter timely. and appropriate ;

consideration. |

%s Estimated Fixed Capital A ee 1941-1943 $8,956 500

Less: Expenditures, in. Expectation of ~

New or Increased Business $1,270,000

Gross Property Retirements '. 2,700,000 3,970,000

Betimated Net Change i in Plant ff 4,986,500

Deduct: Estimated Net Change in De-

pletion and Depreciation Re-

' serve—Depletion and Depre-

ciation Accruals 1941, 1942, me

1943 - 4,362,500

Less: Retirement Losses - Chargeable :

against Reserve : * 2,160,042 2.202.458

Estimated Increase in Net Actual Legiti- om fo

mate Cost: - 2,784,042

Average for the period ($2,784,042 + 2) $1,392,021:

Pod

. °

« , .

2 , oh

: 128

Other Used and Useful Property

- The Company’s geologist grouped the unoperated acre-

age’ into three classes: (1) protective acreage within a

mile of producing wells comprised 64% ; .(2) prospective

" acreage for shallow-sand production within ‘three miles ‘of

producing wells comprised 14% ; and (3) prospective acre-

ae production within three miles of pro-

Ys P ’ ; : ° . . :

ducing wells comprised the remaining 224.. The total

unoperated acreage as of December 31, 1940, was’ 539,285

acres. The C ompany has undertaken an extensive, drilling

program, including -deep- test, wells, and. it is a reasonable

expectation that within a few vears nearly all of this un-

- operated acreage will become productive, or will be proved

unproductive and. cancelled. There is no evidence that Hope

has acquired large blocks of unoperated acreage to obtain —

a monopoly on the source of supply, and there is evidence

that ali of its"wnoperated acreag¢ is necessary and useful,

or imminently usetul, in rendering gas service. The cost of

-unoperated acreage will be included i in the rate base. The

Commission finds that the actual degitimate cost of unoper-

ated acreage was $584,382 as of December 31, 1938, % 967,152

for the end of 1939, and $566,105 as of December 31, 1940,

Materials and Supplies Plus Cash Working Capital

There is no controversy over the amount of materials

and supplies required by the C ompany. The monthly aver-

age of materials and supplies on hand is the most accurate

measure of the Company’s requirements. .The Commission

finds that $1,228,599 is the necessary average amount for

materials and supplies in 1939, 1940 and the futute. This

is sufficient, on the average, to meet requirements for ‘more

-Shanayeer. © / ,: |-. ¢. Hs Y :

‘

26 (Operated gas acreage is any. acreage that is being drained

-oy prodieing gas wells and all other acreage is considered as llr

operated. ‘Hope has held less than two unoperated: acres to: 6ne’

operated acre caring the last ten Sears. ,

129

A withess for the Caiman used a period of 45 days

as the lag in the receipt of revenues. He stated that 45

days of operating. expenses, including gas purchased, Avould

measure the cash working eapital required ‘by the Company

on a practical operating basis and he computed the amount

to be $1,754,008... oe ;

_A period of 45 days is: ample’ to measure the amount

of cash required for-payment of operating expenses. Cost ’

of- gas purchased must be excluded frony the coniputation

because revenues from gas sales ure received before the

payment for purchased gas is due. The ( ompany bas ap-

proximately $500,000 on hand at ail times representing tuxes

_ Which are not paid uftil many months after they are ac.’

erued and these tax funds are available-for bank ‘balahe os

and working capital requirements. The Commission will

allow cash working’ capital in the amount of $87),401 for

7 “1939 and $896,401 for 1940. Thi ist the maximum allow-

able amount computed on 45 days of operating expe Hses,

excluding cost of gas purchased, and allowing prepaid ex

penses in full., ot |

~The Commission finds that $2,100,000 was re oArire ( for

materials and supplies and cash working capital in- 1939,

and that $2,125,000 was necessary for 1940 and will be: ade

quate. for the future. ‘a

“7

Conclusions With Respect to the Rate Base ae

There. isa further matter with respect to ‘plant invest

ment which the C ommission will.consider before making the

fial determination of ‘the. rate base. - Prior to “han War

4939, the Gompany charged all wdministrative and genera

costs to operating expense. Beginning January 1, 1929, tf

Company tentatively adopted the practice of eapitalizi:

portion of its adminis trative and general > XPelses at

di. cretion by the management is permisstble ke the Coys

Mission’ s Uniform System of Accounts, Tis tentative

gapit ilization of adminis trative and vene ral eNpel les Wiis

/ a

te,

_—

Se -

reconsidered by the Company and it has informed the Com-

mission fhat it wishes to resume the regular practice of

including all’ general and.administrative costs in operat-

ing €xpenses. This change in the’tentative accounting pol-

icy is reflected in the verified annual report for 1941 filed

with this Commission. The amounts of $79,439 for: 1939

— $138,018 for 1940 are: removed from plant costs and

indluded in operating expense for the respective years.

Theoretically, adjustments to annual depreciation expense

and to the reserve requirement should be made on. account

‘of the foregoing, but the amounts are so insignificant .in a pee

ease of this magnitude that no inequity will result. from not

“making them. eh

The analysis of the evidence which we have discussed

with respect to the components of the rate base and our

conclusions may be summarized ‘thus:

Dec. 31, . Dec. 31, .

“1938 1939 1940 Future

Gross Investment in Gas Plant in’ ‘ : ¥ ee.

Service © $51,207,621 $51,019,585 $51,957,416 $51,957.

' (Exclusive of Distribution Plant, : / ;

and Property Used to Trans-

port Coke-oven Gas) .

Less: Actual Existing Depletion ; + —

and Depreciation 21,188,122 (21,737,823 22,328,016 99,2981

Net Investment 30,019,499 29,281,762 29,629,400 29,6294

Add: Net Capital Additions 1941, :

1942, 1943 z 1.382.

Useful Unoperated Acreage 584,382 567,152 566,105 =

Working Capital “= 2,100,000 2,100,000 2,125,000 2,125,

Interstate Rate -Base $32,703,881 $32,948,914 $32,320,505 $33,712

. The Commission, therefore, adopts. the foregoing

amounts as the interstate rate base for the dates indicated,

for the Company's property assembled as a whole and do-

ing business as part. of an integrated system. The Com;

missiqn finds tliat the rate-base for 1939 was the dherave

of the rate base amounts at the beginning and the end of

thar@bar or $32,826,398, that the rate base fer 1940 was

‘the average of the rate base. amounts at the beginning and

the end of that year or $932.1 34, 710, and that the rate base

for fature ,

fixing rates is $35 712,526.

13) ‘

OPERATING REVENUES AND EXPENSES .

For rate-making purposes the Commission has given

consideration to the actual operating revenues and ex-

penses of the Company for 1937-1940, inclusive, and has

also considered the income. statements since 1898. In test-.

ing the reasonableness of existing rates the latest experi-

ex ence. of the Company, as disclosed by the record, is the |

closest reflection of the present:and future operations.

Interstate Gas Service Revenues |

There is no controversy over the volume of gas sold

or the revenues received by Hope. The Commission finds

" that during the years'1939 and 1940 the interstate gas sales

to the five. customer companies were as follows: |

1939 1940

; M.c.f <= > Wes. .- :

’ _billed. Revenues. . billed Revenues .

Ohio Gas Company : 33,907,672 5 $32,359,500 40,376,091 $14,726,736

ws Natural Gas Company ‘3,864,104 1,371,757 9,738,612 3,457,207

* Gas Company ; : * 237,640 83,174 | SRR THO 136,063

tte County Gas Company 840,398 264,725 859,106 _ 270,618

wacturers Light and Heat . . :

mpany 2,500,755 787,738 2241684 706,131-

en nee —_—s.. nee ee eres ee on

41,350,569 $14,866,894. 53,604,242 $19,296,755

Interstate Operating Expenses ,

The Commission has eonsidered the Company's operat-

ug expenses as recorded on its books, as elaimed for rate-

case purposes, and as recommended by the Staff. “The sub-

sequently discussed adjustments to the Company's operat-

ing expenses are made to the amounts as actually recorded

on its books for the years 1939 and 1940.

Depletion and Depreciation Expenses. |

Fhe annual allowance for depletion and depreciation

eluded in operating expenses is determined. by tht sanie

tates and méthods used to determine the depletion and

depreciation actually existing in plant. ;

. 132

The Commission finds that $392,500 for 1939 arid $624,-

440 for 1940 is the propér allowance for depletion expense.

The present and prospective demands upon the production

system indicate that. production fer the year 1940 is the

proper guide for future depletion expense and we will allow

$624,440 as the average cost of depleti ion in our determina- .

tion. of the cost of serviée. (Depletion expense is com-

puted ¢ on the it-8-geudintion: hence it varies with the

actual production of gas.) ~ |

The record shows that Hope ‘Company's annual depre-

ciation expense. has remained relatiyely ste " le, the proper

amounts tor 1939 and 1940 being as follows

“ \ as . 1939 1940

. at : cn cali patie Si

Production Plant $351,811 $349,676

Transmission Plant ~ | 460, 267 460,245

General Plant . Bais 29.676

Total Depreciation Expense $837,803 $835,587 *

The Commission finds that the anwnal depletion and

depreciation allowance required for fiture operating, eX-

pelises Is " 460, 037.

37 Determined by- applying the following straight-line depre-

ciation rates ‘to the average Weprec ‘iahle investment ‘for the year:

_ Production Plant: — : 4 oe Rate

Structures —— a. 4.17%

Field Line Material, Meas. & Reg.

Station Equipment a 2.22%

Gas Well Equipment "2.22%

Transanission Plant:-

Main Lines, Rights-of-Way and Meas.

" & Reg. Station Equipment ; 165°.

Structures : 2.50%

_ Compressor Station Equipment 2 ABE

- Genera! Plant: es . =4

Structures | ~ Fare

Office Furniture & Equip: “$M

Other Equipment ~ Baise’ «ot

Communication, Equipment +3

- .

Exploration and Development. Costs

Section 14(b) of the } Natural Gas Act authorizes the °

Commission to determine the ‘*propriety and reasonable-

ness of the inclusion in operating expenses, ¢: ipital, or sur-

plus of all delay rentals or other forms of rental or com-.

pensation for unoperated lands ‘and leases.”’ ‘Delay rent-

als paid periodically on natura] gas lands to reserve the gas

rights for a future supply of Fas are included in explors-

tion and development costs. | The other costs included

are these associated . with the| drilling of non-productive

- wells, the abandonment of non- produttive leases and the

abandonment of projects on which preliminary expendi-

tures were made to determine the § gas prospects of avail-

‘able acreage. - . ,

The Hope Company, like other companies in the nat-

ural gas industry, -has followed the conservative practice

of charging all exploration and development costs to op-

erating expenses. Exploration and de velopment costs are

necessary to replenish the Company's. gas supply im order

to maintain continue d gas service. The Commissicen has in-

cluded ilope's “gas producing acreage and its useful ui-

operated acreage at cost in the rate base. The annual

depletion allowance is based upon the actual legitimat e Cost

of gas prodacing leases so there is no margin in that an-

nuat allowance to cover exploration and dev elopment costs

In fairness to the itfvestors and the rate payers the Com

Mission wil] make an allowance for delay rentals related

to the ymoperated acreage and the other exploration and

development costs In operating expenses, Hope® incor

rectly stated the cost of ‘abandoned and surrendered leases

n-i9: and 1940-and we tind that the eost of leases aban

toned should-be ineluded in exploration and. development

Costs im the respective amounts of $45,164 for 1959 and

S12422 for 1940, The Conspany’s exploration and de

Yelopment coSts were $500,544 in 1939 and $407,920 in 140,

In view of the Company's extensive program for drilling

dMUYI;, O 43

134

wells in the next few years and its recent experience with .

respect to exploration and development costs, the Com-

mission finds that the proper and reasonable dutuie annua!

allowance for such costs is $600,000 for rate- making pur-

poses.

Reclassification and Rate Case Expenses

‘The Hope Company. presented evidence to show. that

it has spent $675,000 in making reelassification studies in

order to comply with the recent Systems of Accounts pre-

' seribed by the West Virginia Commission and the-Federal

Power Commission. The. Company also showed .expendi--

tures totaling $825,000 as its expensés in this rate case. A-

contention is made by the Company that _it should be

allowed an interest rate of 8% on the ‘‘unamortized baj-

ance’’ of its reclassification and rate case expenses. -In

_ fact, however, the Company has charged all these costs to

operating expenses as they were incurred during the years

1938-1941 and the rate payers have already paid enough

to.reimburse the Company. The Company’s interstate

wholesale rates have been excessive for several years and

the unusually ‘large amount of rate case expénses would

ordinarily prompt: the Commission to disallow any Such _

expenses te be amortized in the future under the rates the

Commission will prescribe because it results in a duplica-

tion of charges. But in view of the Supreme Court’s state-

ment that even whére rates in effect are excessive the

utility. should be allowed its reasonable expenses for pre-

senting: its side to the Commission, the Commission con:

cludes that the ra‘e ¢ase expenses and the reclassification

expenses, totaling $1,500,000 should be spread over a 10-

year period beginning January‘1, 1939, by .the inclusion

of $150,000 annually in operating expenses?* The Com-

pany has charged -rate case and. property reclassification

28 Priscoll v. Edison Light & Power Co., 307 U.S. 104, 120-121.

135 . .

expenses to operating expenses as incurréd in the amounts

“of $543;121 for 1939 and $624,041 for 1940. Those amounts -

will be éliminated from operating expenses for rate-making,

and the allowance of $150,000 annually for ten years will

be made instead. |

Affiliate’s Excess Profits From —

Processing Hope Company’s Gas

: Hope Construction & Refining Company, an affiliate;

extracts gasoline and other by-products from the natural

gas of Hope Natural Gas Company. The extraction of gaso-

line and butane is profitable and is ‘necessary to make the

natural gas marketable and transportable. The process

of extracting gasoline and butané réduces the heating value .

of the natural gas and. consumes a certain volume of Hope’s

natural gas, thus. imposing a burden upon the gas _busi-

ness.2° Much of the gasoline extracted from Hope’s natural’

gas has been sold to the Standard Oil Company at abdut

one-half the price’ received from sales to others. It is

significant that the Hope Natural Gas Company processed

its own gas before 1920. The natural gas customers are

entitled to be credited with a share of the profit from the

processing of Hope’s gas, even as they would pay the deficit

if that essential processing were not. profitable. It is

agreed that it is proper to make. a-credit for a‘portion of

the profits realized by Hope Construction & Refining Com-

pany from the-processing of Hope’s gas, but there is a dis-

pute over the amount of the credit. The Commission coin-

cludes that the credit pruposed by the Company, being a

royalty of 14 of the gross eachings from the gasoline. and

butane extracted, is not suppor by sufficient evidence,

The excess -profits of the affiliated company above the cost -

of processing Hope’s gas and a fair rate of return. on its,

investment is the proper. credit to Hope Natural Gas

eens

** Re Hope Natural Gas Co., P. U. R. 1921E 418, 428-430.

“>a, S$. 296, 295.

' Depreciation Reserve Requireme nt

136 ;

Company. See United Fuel Gas Co. v. Comm'n, 278 U.S.

300, 319-321; Dayton Power & Light Co. v. Comm’n, 292

all of the affiliated company’s related operating expenses,

including depreciation expense, taxes, and a liberal’ 615%

Yate of return on the net investment, plus working capital,

devotal to’ the processing function. The affiliated com:

-pany'’s extraction plants are usually located near Hope's”

compressor stations. The Commission finds that Hope

should “have received payments of $117,641 in 19389 and

$119,592 .in 1940 for the steam and boiler fuel which it

furnished its affiliate at the extraction plants, and that the

gas vapors which are returtied to Hope after. processing

belong to Hope as part of its naturel gas.

working capital devoted to proeessing Hope’s natural ga’:

1939 1940

——_-, — ——. 0 eee oe —

$1,716,145 $1,606510

1,208,739 1.260.312

(ross Investment

Net bavemanne . . 507.406. 436,195

Working Capital | - ‘ 80,000 80,000

Average Net Investment -= . $ 587.406 -.$ 516,198

The Conmission finds that-Hope’s affiliate has edrnitigs

from the processing of gas in excess of a fair return and-

- that these “excess profits are applicable as reductions of

Hope’ s operat lig expenses. For 1939 and 1940) these,

excess protits are determined as foliows:

1939 ° = 1940

Gasoline and Butane: Revenues’ $791,451 © $770,028

Kelated Operating Expetises, D15,a94 551.370

Net. Proeessing Ineonie | © 273,057 PIS.658

Return at 612°C on Net Investment Plus cree :

Working Capital 38,151 Jd

iiagideecl mceumape! i

$234,876. °

o @ ald .

E XC USS Protits °

The cost of processing Hope’s gas includes

From the

record we.tind that Hope Construction & Refining Company ~

liad the: tollowing average net investment and required

—

137

‘ Se

In prescribing future rates the affiliate’ s-eXcess prof-

its for 1940 will be employed as a conservative measure of

Hope’ s portion of the profits from the gasdline and butane

extracted from its gas. oe ;

Other Adjustments to Operating Behan

Hope furnishes Management services to several affili-

ated companies at cost, and credits the proceeds te miscel-

laneous gas revenues thereby pepe. the cost of those ‘

services to ‘others t6 remain in. its’ operating expenses,

The Commission, therefore, finds that operating expenses

should be reduced $192,415 for 1929 and $109,194 for 1940,

for the cost of services billed to others in order to reflect

‘actual net operating expenses, :

Hope furnishes natural gas to. Hone Cc onstruction &

Refining Company ‘for use in repressuring oil wells. The

gas is returned to Hope's s system at reduced pressures,

’ An amount of 21: 2 per m.e. a is regarded as the vost. of

recompressing the natural gas returned to the Hope C om: °

pany... Hope reeords these transactions as sales and pur-

chases of natural gas and that practice overstates both rev-

enites and expenses. The Commission finds that ‘operat-

ing expenses and revenues sould be reduced $72,388 for

1939 and $73,644 for 1940 to eliminate duplication of’ cost

in production ahd transmission expebses, + .

‘The Company -has eliminated the property and cex-

penses relating to the transportation of coke-oven gas used

as fuel at its - Hastings Compressor Station and in‘ its

figures has. substituted the cost of an equivalent amount

of natural gas priced. at 22¢ per m.c.f.- The Confmission

agrees with. the C ompany and finds that $295,158 for 1930

and $333,036 for 1940 shoul 1 be eliminated from oper rating |

expenses, and that” $107, 798 for 1939 and $126,000 for 1946

should be included, in operating expenses to reflect. the

equiv alent cost of natural! gas for the quantity. of coke- oven

gas ‘used as fuel in the Hastings. Station, ;

Hope furnishes steam from its. compressor stations -

Without chitrge. to Hope C onstruct ion & Retining Company

i re rn ee ee o---y

138

for use in the extraction plants, with the exception of the

’ steam furnished from Goff Compressor Station, and does

‘ . not record this transaction on its books. The. necessary ad-

justment for this free steam has been: made by the Com- _

mission. The Company credits revenue instead of expenses

with the value of steam furnished by its Goff Station,

thereby overstating both gas service revenues and the cost

' of compressing natural gas. The Commission, therefore,

finds that operating expenses should be reduced $4,404 for

— 1939 and $6,000 for 1940 t to state the actual cost of opera-

tion.

Hope bills the Peoples Natural Gas Company at the -

rate of 38.5¢4° per m.c.f. for fhe natural (Bas sold and in:

cludes the gross amount of the billings: in revenues. The

Peoples Company must compress that gas ‘to transport it

to market, so Hope refunds 3¢ per m.c.f. to Peoples under

the provision of the sales contract and includes this amount

in its operating expenses as a cost of compressing gas.

This accounting practice followed by Hope overstates the

actual revenues and overstates ‘the actual operating eX-

- penses. The Commission finds that the cost of compress-

ing gas has been stated incorrectly and_ that operating

expenses should be reduced $115,923 for 1939 atid — 58

for 1940. cate

Certain donations were included bi the. unde in

Administrative and General Expenses. ~The Commission .

finds that donations amounting to $5,183 for 1939 and $3,496

for 1940 are not allowable costs for purposes of rate-mak-

ing and should be deducted from operating expenses.

The Company has included $10,926 for the settlement

- of a claim for damages+and $16,318 to meet a deéficiency

in its insurance plan for enployees in general expenses for

the year 1939. ‘These expenses are applicable to prior.

years’ operations and therefore not allow able for 1939.

Hope -recorded the salvage received from an experi-

* mental liquefying gas plantas revenues in ‘the amount

of $23 1896. That amount should have been applied as a

139

reduction: of the cost of the experiment, which cost was

charged to 1940. operating expenses, Therefore, the Com-

mission finds that’ 1940 operating expense’ should be re-

duced $23, 896. 2

State and Miscellaneous Federal] Taxes

The Company has included in taxes for the years 1939

_ and 1940 certain amounts which should not have been

included, and has failed to include certain other amounts

which should have been included. The following table

shows the amounts:

Taxes Not Applicable — “1939 1940 -

Taxes applicable to prior years $23,349 $17,099

W. Va. taxes billed others ©; - . 10,768 . © 41,334

Taxes not applicable to gas operations 2,741 3,218 -

| -- $6858 = 61,651

Taxes Applicable _ | aot | 7

Underacerual of taxes 16,548 . + - 313; .

be e . © os » ' ; a : 4

’. Net Tax Adjustment 7 oS * OBR SIO - $61,338

The Company has over-accrued Federal Income taxes .

on its: books and the Commission has made a deduction of.

$33,479 for 1939 aid $16,480 for 1940 to reflect the taxes

actually paid which were $1914521 for 1939 and tentatively

/ —— to he $912,313 fer 1940,

Specific Distribution Expenses

The Commission finds that certain amounts included

in depreciation, administrative and general expenses, and |

taxes are specific distribution costs, as follows:

pee. | 1939 - 1940

? Bebesitatio 4 + $ 82,006 —s $89,345.

tg i é ve 126,981 141,640

Administrative and General . ie 417,237 13,231

Total —_ , Seas $244,216

“140: : 5

paper ee Expenses Simmary

_ Phe total of the ‘Commission's adjustments to oper-

atiiig expenses per books results in a reduction of $1,186,-

002 for the year 1939 and a redyction of $1,199,958 for the

vear 1940, ane they sare summarized as follows:

°°? oe

é 1939 eid 1940

Decréases in Operating Expenses:

Excess Profits on Gasoline and

Butane By “$ 234876 $ 184,103

Steam Furnished H.C. & RCo. - 117;640 119.502

ae és se —Goff : : ;

Station f 4.404 6.800

*Refiind to the Peoples N at. Gas Co. . S .

for com pressing gas 115,923 20:41 58

Gas used in repressuring oil wells 72.388 ' 73.644

* Managemet it. Fees and Expenses s Pe ee 192,415 109.194

’ Excess (oat of ( ‘oke- oven gas _ 187,400 ° 207 046

Donations \, - + 5,183 3.406

| Salvage from) Liquefying Gas Ex- :

periment ' - — 23.806

‘Taxes > f 20,319 61.338

Income. Tax . : 33,479 . 16,450.

Reclassification and)Rate Case Ex- oc"

_ - penses ; _ 543,121 624.047

Expenses applicable t to’ Reserve Gas ee

Co. 125. sae

Expenses applicable to por pas 27,244 —

Total Decreases - sy : 1.554.508° 1,721,078

eee nee 1940

% : ; , * : \ ————— . ; ae

Increases in Operating Expenses: \. . ing SS Le

Abandoned Leases -. - \. $ 45,164 3 }2,422

Adm. & General Expenses © api- .

. talized in error es 79.439 L3s.01s

_* Depletion and Depree jation _ \: 93,903 221.550

Reclassification and Rate Case aa pti.

| " penses”_ - | 130,000 * © _156,009-

Total Increases 368,906 . 522.020

Total Ax Tm Sar ; $1,186,002 > 41, 10 nis

oe "te 141 , F as o

The ‘funetional elassifieatjory ot operating “eXpepaGs

per books and after the application of the foree

Loeey

justments follows: = ze -

1939 ‘ - 1940 —

sphanicttes ses datas secalhe oa

Operating Expenses per i Books - Allowed ' Per Books © ; Allowed

— a a eee

ite Operating Expenses: oe at ; . gee

(sas Production : E 4 11.439.971,. ¢ L1S86578 - $ 1,427 594 $.1,2°7°.930

Purchased iets 177 746,854 + reverse tie S.GU5 MS] §.5.45.779

sston Expenses ¥ . 105,093 * PAST SSS 2 437,38) LAIS 235

vostratye and General Ex fs

Se. LOGS S44 + “Die * 4,632,623 - ).IS7 O26

dts . A Sots af ; i ee Pe) San TS.084 eta

aAsOn as - , 1200008 =~ SBF wos TT 300 418 « 825 5 505

‘iyation (others f ere 6.360 a BOG. 58

tion ahd De ve opiate nt ki te Pe :

oe ABAD OG A. 407 O20

Stateand Mice! Federal 2 § Dire 5 i. SIL7 3548 11005 4 1,135-862. -

, Income Tax rive fore Tax ; ° f a . -,

ou PO mee E . se. a me [ie “ ‘ ;

CS ON . times 1 * 5 « lies of

° < = oe ae : eee 7

“Distribution Expenses : ; 2 ? edt ; eae

hom ; 21 O20 basa ° ¥ a

’ , > le i Py

ners Sectg.,- Coil. ' : me ee TER

# - “ . au’ -

* thy. and General ‘ ‘ , :

tlior ae _ a 7 . 14.64

4‘, .

”~ ° = *

: PMstribution ; us Dae ae eee ae 4. t

I "Ai Cyne fating Expenses’ $16.1 ives an os y sedis \ $}& 7 Ise $17 rf.

. fe Q

‘uture Operating Expenses. ees ;

ae operattug vp enses” ns determined for the mmur

; » 7 a

vse ot estimating the ‘future Corl of interstate Ser ter are ;

ased primarily on the aetual operating eost’ for thy vear

“40, the latest available datdoin the record: That vear

alan ane. nerease of $2500.00. “Over the « ope ra tine eX-

cst < of 192 9 and isthe best cuide to present and future

bitin: i a 4 i; ; i o,

The ¢ ‘ommissiog finds that the following ad jis tment.

P1940 COSTS are reasonable aud: “proper tor the purpose of

timating future ct ie ating e Xpenses for rate fixing:

é ; :

‘

oN pn nee ee

; 142

a Increase 4 in wages not reflected in 1940 op-

‘erating costs _ ie $202,172

Increase’ in West. Virginia property texes ‘s ‘

ndét- reflected in 1940 operating costs . 81,751

_ Decrease due to the following non-recurring . .

costs which were ineluded in administra ee ae

tive and general expenses for 1940:

Cost. of moving* Company office from — -

Pittsburgh, Pa. to Clarksburg, W: Va. $41,750

ff Experimental liquefying gas plant, 8,492

/ Pennsylvania State income tax * 4,601

4 —————

Decrease’ Me is »— BAS43

Increase in Exploration and Development

costs to allow am average amount of *

" $600,000 annually ia the future costs . - "492-050

Total net increase over 1940 operating. ee

—— a . 421,160

‘Federal Income Tax

In accord with ‘practice, Hope’s income tax return for

1940 was prepared on a tentative basis: The evidence in

the record shows that the net,taxable income was APPTONI-

—

cause that amount is determined by the administration 0!

the federal Revenue Acts. The complete effeet of all Com-

mately $3,801,304 for 1940 and was: $1,160,733. for 1999,

that the tax rate was 24% for 1949 and 16.5% for 1035,

and that the income tax was.approximately $912,313 for.

1940 and, was $191,524 for 1939. ~ cleo

_.. The Company does not report opgrating revenue dedue-

tions for tax purposés the same as it records them on its

books." 0 Adjustments for rate- making. and accounting pur

poses do not affeet operating expenses for tax purposes, le-

mission adjustments is shown by any increase or decrease

in revenues which results from a rate order. In order fo

‘determine a reasonable an for income taxes jt |

a The net income per books. in 1940 was $5,234,175 after bs

income taxes of #02 8.793 or ¥6,162,968 before income taxes. ‘|!

net taxable incomefor that year was $3, 801, 304 showing that Hv;

claimed $2,561,664 for tax deductions not reflected in operate

expenses on its books.

bed 4

143 em

necessary only: to apply the » proper tax tate to the net bis:

able income applicable to the test year and fo give effect

fo any tax saving or increase by reason of a change in

re venue due to a rate order. ee

A combined normal and surtax rate of 40% is s being

‘ discussed in Congress: We will use ‘that rate for. the pur-

pose of computing the future income tax allowance. Based

‘on 1940 net taxable income of $3,801,304 the income tax

would be $1,520,522 at a 40% tax rate.

Each dollar of the indicated reduction in gross reve-

. nies will result in, a reduction of forty, cents in income

‘taxes, The following computation shows the indieated re-

due ‘tion in rates and the amount of income taxes by, apply-:

ing the rate of return found to be’ fair and which is dis-

cussed i in the subsequent section: Ye

“

. Tax Saving’ — Tax Saving

Operating Revenues from. Interstate

Sales _—-- $19,296,755 $15,686,898 -

-Deduetions: . : BT iene rn

Interstate Operating hideiiie -

(Exeluding income taxes) -* - 16,196,355 - 16,196,355

Other Gas Revenues (. 83,275) (. 83,275)

‘Allocation of costs to local ‘West, a:

Va. Sales*! ( 2,694,075) ( 2,694,075)

_ Federal Income Tax at 40% % 1,920,522 16,579

Net Operating Revenue from Inter- ae

‘state Sales | ae. ‘$B 4,357,228 #2 AIT a ;

Return at’614% on ‘Interstate Rate j

Base of $33,712,526 . 2,191,314

Excess Earnings before Income Tax ar

Saving. is . 2,165,914

Income. Tax Saving i : 1,443,943

Excess Earnings after Income (; ae ;

/ Saving ' $ 3,609,857

= 8 ,

eee

*1 Computed ‘as follows :

- West Virginia Operating Revenues : $3,435,675

‘Specific Distribution Expenses _ 8 620,252 —

Return at 644% on Distribution’: . ; -

Property ia 121,318. 741,600

pee Allocation of éosts to W. Va. Sales #2,694,075

Before Income After Income » ‘

The Comission finds that the amount of $76,579 isan

adequate allowance for Federal Income taxes for the fn-

tnre??

. .

The ope rating expensts allow ed for the future are

shewn by the functional ¢l; issifigation in the f following tabu

lation: ‘ear .

: eae ' Adjustments

‘ is For Future As

‘eee :' "Operating Adjusted

1940 Changes.. For Future

Interstate Operating Expenses: -

Natural Gas Prod iVtiog ; : $ 1,097 one 7 203,1;2 $14

Gras Purchased . 8,533.77 aN er

Transmission Expenses 1L.S183 5 ¥ . 1.s1s

Administrative and General Ey- :

pense : 1187 336 St 9.49. DUT Ns

Poegile tie tt 5 v4.44 '

LJeereeatror . S50 .

Anverh, thon othe : Ste

sition Wag 1 purent Costs yo79 Teen

t interstate i‘ wST US ‘ated le

. rs ee

Specific Distribution Expenses

Jiis i “ boils . ‘

(Custofiers: Acetg., Coll, & Sales : 4

Promotie Teh Cas .

4A, t + ¢ on JAgeenhs » ] ot, -

i at ° sid. . _

] es ei 4 :

, lis ’ At e

‘ — si :

Operating baxpenses S17 107 760 $ 414.5004) Fi

2 . .

ae | ‘omputed as follows :

Ns Taxable ineome Tor 1440 $3,801 304

\ . ‘ -=

Reduction in révenues HOOT So 4

. i ; . Pak ie NS eeu

Revised. Net taxable income ‘ W1.4di

' . ° <

lax Rate 40%

Sats . RR ee

Allowance torslneome Tax S TboOTo

Ps A 4 :

145 . ;

RATE OF RETURN wr

~ Many factors enter into the determination of what con-

stitutes a fair rate of return in each rate case. The Su-

preme Court has stated the a factors in Bluefield

Water, ay orks & Improvement Co. v. Pub. Serv. Comm.,-

262.U.S. 479, 592.3. They are that me return of a public

: atility shall be-equal to that generally being made at the

same time and in the same region on investments in other

enterprises attended. by corresponding risks and, that the

return should be suffiei ent to assure confidence in the tinan-

cial soundness of the utility and ‘to maintain its eredit and

enable it to attract the capital necessary for the “proper

discharge of it® publie duties.

The record coytains an abundance’ of ev “idle mee on the

subject of rate of return, The jnformation includes in

vestors’ appraisal of the natural gas industry, comparative

risk data, iatterest rates gnd vields on seeurifies of natural

eas and electric utilities, statiNties showing the growth ane

stability of the natural gas industry, the trend of the cost

of money and its eurrent cost, commodity price indices, in

dustrial production, efployment, and, payroll indices, ted

eral reserve bank rediseotint rates, national. ineome pay-

ments and other economic data, idle money statistics, the

financial history of the. Hope Company and the tacts about

recent financing by its parent Standard Oil C ‘ompany. That

cevidence. reve: als unmistakably that, compared to indus-.

- trial and railroad enterprises, the utility business has rela: é

tively greater stability. Moreover, it shows also that: in-

terest rates generally are now lower than the vy have ever

heen inthis century; it discloses that the vields ou better-

Jssues of natural gas company, bonds sold in the last Vvear

‘or two are close to 3%.

rate of return not less than .&&% is unreasonable. The ree-

ord shows that the Hope Company is a seasoned enterprise

Whose risks have been minimized by (1) amplé-past ‘and ..

resent provisions for depletion and depreciation witli con-

The Company’s canteution that it should be allowed ay -

146

eurrent high profits; (2) protected established markets,

through affiliated distribution companies, in populous anil

industrialized areas; and (3) available supplies of gas ‘o-

cally to meet requirements, except on certain peak, days.

in the winter, which it is feasible to supplement in the

future with gas from other sources. «During the forty-two

vears of its history, to 1941, Hope has earned on its owners’

equity an annual average profit of 12% and, in addition,

has built up through annual provisions charged to expense,

depletion and depreciation reserves far in excess of requite-

ments, Hope faeces no hardship with respect to increased

taxes, operating expenses, and inflation, greater than {hose

faced by similar enterprises. The Company's efficient man

agement, established markets, financial record, afliliatioi-.

and its prospective busitiess place it in a strong position

to attract eapital upon favorable terms when it is —

Inmaking the findings on rate of return, the nation

and international situations ‘have commanded eur atten

tion and entered our-deliberations. The Cor Mission

aware of the inéreased demands made upon Hope tor, wil

.due to.the war program. Considering these matters, the

underlying factors, and all of the evideneesin the record,

the Commission finds that 642% is the fair rate of return

_for the Hope: Natural. Gas Company. This rate of return

bemg tor the future, has been sét only after endeaveri

to weigh all known and predictable elements; i setting f

we have sade allowance for presently. unforeseeable coy

tineencies. Our views on the subject of rate of returt.

consonant with recent decisions hw the SHpreme Conrts

other: conrts and comumisstons involving natural eas c

"panies,

Fe aderal Paige PC omission e).. Natural! pm P pul “Ae

)

i. 3s 2.22 Peoples Gas L ant ol Coke Ca. v. Slatte Wye « |

25 N. E.°(2d) 482, 500-5085 21 PU. R.(N, S.) 198, 217-2

lis au i; & 6 sf : bast Ohio Gas Co. vv. Clerelh vt: ee dee ee

N.S.) 387, 412, AM US7 OLS, wv. BS NL Eo (2d) 209, 6)

PUR ON. S.eT58) 1-179: Re Montana D rat

Pe 8 li x. S 121, 328: S Re Canadian BR (;

' |: 0

147

' LAWFULNESS OF PAST RATES . "

In 1938 the Cities of Cleveland and Akron, Ohio, filed

complaints with the Federal Power Commission alleging

that the rate which Hope charged East Ohio Gas Company

was unjust, unreasonable and unlawful. These complaints

were registered before Hope filed its five interstate whole-

sale rate schedules Which are involved in these proceedings.

“The aceept ance of a rate schedule for filing does not mean

that the Commission approves it, and does not establish the

justness er reasonableness of thetrate. Re "Home Gas Co.,

39 PL UL R.N. SS.) 102, 109. On October 14, 1958, this.

» Comniission instituted an investigation of the reasonable-_

ness of all of Hope’s interstate rates. Tf it had been ‘pos:

sible to adduce the volume of-evidence required for the dis

position of such a complex matter Within a few months, the.

Commission would have preséribed thie reasonable inter-

<tate Wholesale rates for 1939 ‘hud subsequent years. The

City of Cleveland raised the issue of the howfulness of the

rate charged by Hope to the Kast Ohio Gas Company and

asked -this Commission, ‘as an aid to State regulation, to.

make a separate dete rovination of the reasonable rates since

June 30, 1989.7 Originally the City of Cleveland reque sted

this Commission to tind the lawful Hope Eaet Ohio rates

since June 21, INS, but if now represents that’ the subject

ix idle for rates prior to June 30, L988, Been se thase rates:

Vhieh Cleveland consumers were oblivion od to bi dust

hie have-been settled. “The Cornissiori does not have the

‘authority to fix rates’ for the past anal to aware reparations.

But Congress did empower and instruct the Commission in

a3 \ F i ’ ‘ ‘ ‘> a 00 4 *)

Scetion d¢a) of the Natural Gas Net to ti biudbua : irl

‘ ‘ {>} 1? thrert ) yo \ . 1}~? ) ryly . ,tgo? three

as GQ STOP Ut thal Petes We NUst MEeCessa) yi tC} tit

. ‘ . . : . .

reasonableness of past and existing rates, When theo isstre

. 2

raised and The gudtlie interest will he served. Woes

. behery YS UNECCESSALN pearl oft that (duit The power I Youre

: ; . . i 2

hye ey } ! } ots i rive Ved reat To ‘ itis , ’

. .

fers \ f \ | 4.7 tots \ f So (} 14 ! ‘

\ aay rae" 4 ,

Which it finds necessary in order to determine whether Hapre

has violated any provision of the Natural Gas Act. Fur-,

thermore, the Commission has power to perform any act,

pursuant to Seetion 16, whieh is necessary or appropriate

to carry out the provisions of the Act. Uiader Section 4(a)

of the Aet any interstate wholesale rate that is not jus!

and reasonable is unlawful. Federal Power Commission

Natural Gas Pipeline (o., 315 U.S. ..... Hope’s rate

collected from Kast Ohio Gas Company was lawful after

June 21, 195s, the effective date ofthe Act, only to the ex.

tent that it was just and reasonable. Thre City of Cleve.

land states that fhe Ohio’ Commission is iivestigating the

reasonableness of the last Ohie® Gas: Company's bonded

retail rates in Cleveland for the period since June 20, 105.0,

and that the dawtulness at ttope’s rate as an Lmportant fae’

tor in the CUO. Sinee-the enactnient of the L938 Natura

Gas’ Net this C on Htisston lies hal exclusive jurisdietion to

deftertagnie the La wruh jess of the inte ‘Tstate Wholesale rates

charged | aN ae and other natural gas companie Ft

Jn response’ to the request af the City of Clevel: and. 1

Comiunisston will make the appropriate findings of fact as =

the lawfulness of the rates charged: East Ohio ly Hope

since une 30, 1939. The Inte rstate Commerce Commis

sion hag furnished*precedents for the performantee of this

publie duty” Congress intended that this Cotnmissie:

cooperate with State Commissions-:and municipalities, and

the. provisions of Sections 5(b) and 17 are special evidenc:

of such intent. ; ;

‘+ Sections 1, 2, 4 and Sa). See VWissourt vo Kansas Native

Gas Co, 265 US, 298, 308: Ilinois Natural Gras’ Co. a. Centra’

Hilinors Publie Service Co. 304 UL S. 498, 506: Kentucky Nat. ¢

Corp. ve. POS. C., 28 F: Supp. 509°513..aff. 119 Fed. (2d) 417.

“Woo. Barrows Porcelain Enamel Co. ve Cushman Motor -

Delivery Co., LM: ®: C363: st Bare Mercerizing, Co. %. E71 a

WAC Motor Transp. Co, 21 M. C. CE491, 492. Sees 0 nited Stu!

v, Moriyan, sue U. 8. 183, 313 U. S. 409: Lima Ted.:Co. ov. P. Ut

98 9. S. 110, 120 N. E. 330.

ee rl ol

: 149

REASONABLE EARNINGS AND.RATES FOR THE FUTURE

Future reasonable’ earnings and rates must be fixed

with consideration of a forecast of operating revenues and.

expenses. The most recent experience of the Company js

the best guide for prognostications, The President of the

Company predicted a great increase in sales for’ 1941 over

1940, € omparative income figures for the first quarters of

1940, and 1941 show an‘iner ‘ease of $592,000 in net operating

income, oF about 20%. The i increasing demands fer natural

gas in the industrialized areas of Hope’s markets are com-

non knowledge. It seems certain that “1940 will: be the

lowest year, on at earnings basis, of the 1940-1944 period.

Upon'a consideration ‘of ail the relevant facts in the record

dud the future prospects, the Commission fitds that 1940 is

a conservative “‘average”’ vear and should he used in rite- ~

miuking in, these proceedings. This is a conservative lhasis

because allowance will be made for all probable future in-

“ Creases in the rate base and operating expenses While the

operating revennes for the relatively. low year of 1940 ere

wuployed.as the test in fixiag rates fof the future.

Applying the 61. rate of return to the rate base for

_- the future of $33,712,526, produces $2,191,514 as the

amount of annual return which the Company is entitled to

earn in the future. Hope’s-income available for return is

not less than $9,801,171, so the excess -of $3,609,857 is the

sum by which existing revenues must be reduced.

Hope's S gas sales revenues are classified between in-

trastate sales and interstate sales for purposes ‘of «deter-

mining the sales and rates subject to the jurisdiction of

this: Commission. ’ : a.

Hope’s entire properties are located within the State

of West Virginia .and_ production, transmission, com

pressing and’ general ‘facilities are used jointly for mtra-

state av local sales and interstate or export sales, There-

fore, a classification or alloc atiow! is necessary to deter.

40517, 43. 10 |

® 8

as 150

mine operating expenses and return applicable to the inter-

state business. Certain direct costs pertaining to dis:

tribution property and sales in West Virginia are easily -

segregated from the joint costs. The allocation of the re-

maining joint costs is made ‘in accordance with the follot-

ing faets and principles which are undisputed in-the reeord |

and aecepted by all parties to these proceedings. aaa

The Company’s local retail business:in West Virginia

is incidental to its major business of exporting gas. from

West Virginia. In determining the allocation-of joint ex-

penses to the local West Virginia business, this fact was

viven consideration, with the result that a Staller amount

of expenses was-allocated to that business than would have

resulted by the application of one of the eustomary alloca-

tion methods. Briefly, the amouht-of joint expenses (in-

cluding return) alloeated to the local business’ was that

amount which, together with the specific loeal expenses,

would give the Company a 615° return on- the net invest

ment in property used exelusively in the local business:

As indicated above, a more orthodox allocation’ probably

would have fesulted in assigning a-larger share of the

joint costs to the West Virginia sales and a greater amount

of the excess. profit, alfhough fhe amount would not be ma-

terial, to the interstate sales! The method used wa-

"proposed bv representatives of the Conipany. and Was gol

controverted. ;

The following schedule (Col: (e)) shows the exces: t

future net operating revenue over 616° retarn on the i

‘terstate rate base. and (Columns (ch) and (e) show the Pp!

“seribed rates and x Venues after giving effeet to the ru

reduction:

(a)

QNerating Revenues from Interstate

Sales:

East Ohio Gas Company

Peoples Natural Gas Company

River Gas Company

Payette County Gas Company

Manufacturers Light . and

Company |

Total Interstate Revenues ,

Deductions:

Operating Expenses

Other Gas Revenues

Allocation of Costs to Local West

Virginia Sales

Tota! Deductions: from Interstate

Revenues . ’

et Operating Income! from Inter-

state Sales

“% Return on Interstate Rate, Base

ieess of Future Net Operating In-

come over 612° Return on Inter-

tate Rafe Base

Heat.

M.c.f.

(b}

40,376,091

9,738,612

388,750

859,106

2,241,684

53,604,243

The Campany’s intrastate_ rates are under the

dretion of the Public Scfvice Conimission of West Virgirfia.

The West Virginia Commission and the State of

Virginia are interve ners in these proceedings and no, 6b jee

tion was made by them to the method used here in for thie

Allocation of cost to local oper: itions in West Virgina.

The evide hee) on the COAt of: service allocatedl. :

the five customer compan siek and the conditions of ser ice

Net Operating Income Available For Return

Rate Base for Interstate Sales 9

$33,712,526

Before

Reduction After Reduction

‘Prescribed

' Rates .

™. c.f.—cents Amount

_ $14,726,736 29.50 #11, 910,947

34575207 88.50 2 775.504

136,063 35.00 1 36.06:

to 18 28.50 244845

706,131 28.50 628.880

$19,296, 755 $15,706,239

16,272,934 16,272,934

(83,27: »)° (83,275)

(2,694,075) : (2,694,075)

13,495,584 13,405,584

“5.800171 2 910655

"2.191.314 2 10T 314

$ 3.609, 857 as = 19,341"

juris

West

a Mehe

tor the: respective companies disclose that no reduce! r

rates is applicable to the affiliated River Gas Compan

“6 1t is not. considered) necessany to refine average rates per

Hef, more than the preseribed rates shown sabove and the resai

is the margin of S1i9S41.

Amog other reasons for this determination, is’ the. fact

that the River Gas. Company: is a small‘company and has

a, poor ‘load factor. Accordingly, the total ‘amount of the

reduction tir Jnter state rutes (+ : giuifeable to the East: Ohio.

‘Gas Company, Peoples Natural Cias Company, Fayette.

County Gas Company and the Manufacturers Light and

Heat C ompiny. The present average rates per m.@f. are

36.5¢ for East Ohio Gas Company, 39. 5¢ for the Peoples

Natural Gas Company, 35¢e for the River Gas Company,

cand 31.5¢ for Fay ette County Gas Company and the Mann-

facturers Light and Heat Company.

The conditions and characteristics of service; required

by the contracts, are similar for the Kast Ohio Gas Com-

pany and the Peoples Natural. Gas Conipany With: respect

to obligations and priorities by ¢lasses of consumers, Init

_there is a-great difference with regard to delivery pres-

sures. Hoye Conipany delivers gas to the Kast Ohio Com. -

pany at ‘sufficiently high pressures so*that no additional

compression is required by the East Ohid Company for.

delivery of the gas to the ultimate consumers. On the

other hand, Hope delivers: gas to the Peoples Natural Gas |

Company, at various pressures, .into that ‘company’s Brave

‘Compressor Station and the Peoples Company must com-

press the gas for transportation to the ultimate consumers.

From the evidence we conclude that the différential of one

cent between the average price per m.c.f. for gas sold to

the East-Ohio and the Peoples Companies is reasonable.

and it reflects, the difference in the cost, conditions and,

characteristies.of service. ;

Considering the cost of ° rendiinr service to. “the

Fayette County Gas Company and the - Manufacturer~

Light and Heat Company, and the conditions and charac:

teristics of servicé to tliose companies, the fact that Hope

knows precisely what deliveries it must make to them from

day to day. and the fact that those two companies buy le=s -

than 6% of the total gas oid by Hope, the Commissior .

finds that the rate for these companies should not he dif

ferent from the rate paid by the Peoples Natural Gas Com:

pany. Inthe absence of conipelling reasons to the contrary,

it is good and desirable practice to fix rates that are ni

form. . Applying this principle in these proceedings the

a ‘omission Will preseribe griform Fates for the Peoples

8 vaturat Gas Company, Fayette County Gas € olny) nan) ane

the Manufacturers Licht and Heat. Company,

After cousidering all, the “evidence with ‘respect to

Hope's interstate wholesale rates and the proper average:

crates per mc. f. for the five customer companies at tie:

respective pojnts of delivery, the Commission tind. th

_tollowing rates to be just and reasonable :

r . Average Rate

= Per Mc f -Cents

East Ohio Grae ‘ ait trey “ty »

Devropy les Natitral ¢+ » Cony puny ® pt

Faye Ite oun a (aut Ly mn Pm .

: Manufacturers Light a He “at Compan v ny

hiver Gian de ripe irik : 9)

In jassing, it might be woted that the overall rate 61

return for T1940 would have been Soe if the new rates had

been in etfeet that vear and af the earnings from the d

‘yibutionpreperts had reinained unchanged. “Phie rat

turn is regtrie dtat! oe. beeline ate siimiaited ines ne

expenses atid iherense on rate hage Which We hate allow ce

tor the future. Bs

Ap propriate findings ane order will be entered iMate

ordance with thi Is bie ay

SS ms qo LVR D Q)t.ps, Chamrmay

Chay IL: By Drapvens Comagnisstoies

BAstt. VI. SL) = ( way) hi pss tany ]

/ " ; < ° J

Dated al \v sali takin. 4). he : ,

this Yoth day OT mas, 108 ee : :

Lox M. big Ay

Secve havi,

155 ,

pt NiteD STATES ET AL. Vs. HOPE-NATURAL GAS CO. /

September 15, 1942: brief on behalf of the petitioner is filed. /

Same day, supplement to brief. on behalf of the petitioner is

filed.

September 21,. 1942, motion of respondent; City of Akron, to

dismiss.Part B of the Petition for Review is filed. ' i

Notr.—The motion to.dismiiss is in thre words 1 and figures fol ow-

ing; to- wit: “\:

United States Circuit Court of Appeals, _

FOR THE FOURTH CIREUIT se

No. 4979 ©

OCTOBER TERM, 1942

HOPE NATURAL GAS COMPANY,

Peditioner, ;

‘. i

FEBERAL -POWER COMMISSYON

CITY OF CLEVELAND,

CITY ak ANRON,

PENNSYLVANIA: PUBLEC UTLLITY ‘COMMISSION

’

Ri 5

‘ }

MOTION OF RESPONDENT, THE CITY. OF AKRON.

TO DISMISS PART B OF PETITION FOR REVIEW.

United States Circuit Court of Appeals

FOR* THE FOURTH CIRCUIT

No. 4979 .

OCTOBER TERM. 1942

HOPE NATURAL GAS COMPANY,

Petitioner,

° YS. -

FEDERAL POWER COMMISSION, -

CITY OF CLEVELAND,

| CITY: OF AKRON,

PENNSYLVANIA PUBLIC UTILITY COMMISSION.

| Respondents. ae . .

MOTION OF RESPONDENT, THE CITY OF AKRON.

TO DISMISS PART B OF PETITION FOR REVIEW.

Ceara

The City of Akron, a respondent in the above entitled

cause, moves this Honorable Court to dismiss Part B oof

the Petition for Review filed herein on ‘the ground ‘that

the Court\ has no jurisdiction under Section ‘19 (b)-of the

Natural Gas Act (52 Stat. 831; 15 U.S.C.A, tlir ‘(b))- to.

review the ‘Findings as ta Lawfulness of Past Rates"

entered by respondent, Federal Power Commission, on

May 26, 1942. These ‘‘findings’’ do not’ constitute. an

‘order

Natural Gas Act.

within’ the meaning ot Section 19 (») of the

A. LF. oO Nett,

Director of Law of The City of Akron,

NOTICE

Crype B. MacpoxnaLp,.

Asststant Director of Law,

Attor neys for Re sponde nt,

The ( aia of Akron.

OF Morioy,

dene take notice that this Motion of Respondent, The

Citv'of Akron, to Dismiss Part B of P etition for Review

will — Sp ect on for hearing befére this Honorabte Court

on the Oth day of Qetober,

1942, or as soon thereafter as

the Court may hear the same in the Post Office. Building

in the Citw of Richmond,

Director « of Lau oI The City of « Akron.

SPATE OF OHIO,

SUMMIT COUNTY, SS.

Clyde BL Macdonald.

Virginia:

dik F, NEIL.

Ciyse B. Macpvoyatp,

Asststant Director of Lau, .

alttorneys for Respondent,

The City of Akron.

hos

¥ =

PROOF OF SERVICE.

attorney for respondent, Phe

“City 6f Akron, being first duly sworn, deposes and says

that on the 19th. ‘day: ‘of r September , 1942, he duly served

en 2

1633 ay ' - ‘

a copy of the within motion and brief in support thereof.

-upon counsel for petitioner, Hope Natural Gas Com.

pany, by depositing the samie on such date in the United

States Post Office at Akron, Ohio, in a sealed’ eavelope,

with postage prepaid, addressed to William RB. Coekley,

Attorney ‘for Hope. Natural “Gas: Company, at his ost

office address, J7p9 Union Commerce Building, Cleveland:

Chio: that on the Ith day of September, 1842) he duly’

served a COPA of the within motion. and brief in support

hereof pen counsel for respondent, Federal Power Poe

“tnission, by depositing the same on.such date inthe Uited

States Post Orfice at. Akron, Ohio, ina seated emcelope, with

postage prepaid, addressed to Richard .T. Connor, Geners!

Counsel, Federak Power Commission, Washington, ct Age:

that on the 1%th dav of Septenber, 1942,-he duly ‘setved

acopy of the withi metion and bried in support thereer

pon counsel for. respondent, City of Cleveland, hy: de

positing the same oon snel. date. in the United Stites

“Post Offices at Akron, Ohio, in a sealed énvelope, with post.

age prepaid, aderessed to Thomas A. Burke, Jr. Director

of Law, 204 Citw Hall, Cleveland, Ohio that) on the

With dev of Sentenber, 1942, he dials served’ a com mt

the within motion and brief In support thereof upon counsel

for respondent, Pennsylvania Public Utility Commis-for

DS depositing the same on gue) date in the United Stated

Post Office, at Akron, Ohio, ina sented en vetope,

postage prepaid, addressed to Claude T. Reto, Att

Generals Perinsvivania Pubhe-bt-tilite Coouussion, Pn

burgh? Rennsv Waa. : ,

; eal

' Se ge (CLyp! Bo-\facne 4

Sworn to before me and Subsertbed im ome pres

ethis f9th day of September, 142,

: Ho Grapys NSorps

| Norantar j i ‘ ~~ \ fary P AY,

SEal | be : AL COI ~sjOn weY Tres Nor 3 one oe

8 re

“7

United States Circuit Court of Appeals

POR THE FOURTH CIRCUIT

164

No. 4979 |

OCTOBER TERM, 1942

“HOPE NATURAL GAS COMPANY, |

Petitioner,

ye.

Vs. \.

FEDERAL POWER COMMISSION,

CITY. OF CLEVELAND,

| CITY OF AKRON,

PENNSYLVANIA PUBLIC UTILITY COMMISSION,

ee Ot tn ey

Respond: nts,

ADOPTION BY .THE RESPONDENT CITY OF AKRON.

OF THE BRIEF OF RESPONDENT CITY OF CIEVE- |

LAND IN SUPPORT OF MOTION TO DISMISS PART

_ B OF PETITION FOR REVIEW.

The respondent, The Catv of Akron, affirms and ad

? ’ 4 . » > ° - - .

in fall the brief ot the respondent Catv of ¢ levelane

° » ° - . . s

support of ifs motion to dishitss Part Boof the Pett

‘ TP eed - » ° “oP : tat s , , ‘ ;

for Review, together with the Staterwent of Facts, Aru

165.

ment, ‘and, Appendix and respee tfully prays that said brief

in support of the motion of the respondent City of. Cleve--

land to dismiss Part B of the Petition for Review be con-

sidered in connection with and. as part of the motion

herein, made by the respondent -The City of Akron.

A. F. O’Netn, 7 .

Director of Law of The City

of Akron, ~

ws 304 Municipal. Building, .

_ Akron, Ohio,

CLYDE B. Mac DONALD,

Assistant Director of Law,

304 Municipal Building,

‘Akron, Ohio,

Attorneys for Respondent,

The City of Akron.

17 : Sie

UNITED STATES ET AL. VS. HOPE NATURAL GAS CO.

September 29, 1942, motion of respondent, City of: Cle veland,

to enlarge time for filing brief ts filed.

Same day, motion of respondent, City of Akron, to tnlatge time

for filing brief is tiled. ,

Same day, motion of respondent, r ederal Power Commission,

‘to enlarge time for filing brief is filed.

“Same day, joinder of respondent, Pennsylvania Pi thlie U tility

Commission, in motions to enlarge time. for filing br iefs is filed.

September 23, 1942; applreation of respondent.’ Pennsyivanta

Pibhe U tility C ommMission, for e xtension of time for filing brief

is filed: , : é . : ‘ _ ae

September 24, 1942, order granting special permission to re-

spondent, Federal Power Commission, to file a brief in excess

Of 50 printed pages but not exceeding 150 printed pages’ is filed.

Same day, order granting special’ permission to respondent,

Pennsylvania Public Utility Commission, to-file a brief in excess

of 50) printed pages but not exceeding 100 printed’ pages is filed.

Same day, order extending time to October 15, 142, for, the

filing of the briefs of the respective respondents is tiled.

September 30, 1942, brief on behalf of the petit roner on the

motions to dismiss ‘Part K of the Petition to “Review js tiled.

- October 5, 1942, motion of respondents to exte nad the time for

filing eepondeate brief~ from October 15, Le, and to continue

the case for oral argument to the Nove mber te ris Is tiled in Open

Court. 5 .

Argument on motions

October 5, 1942 (October.term, 1942), cause came on to be heard

on the motion of respondents to extend the time for tiling. re-

‘pondents’ briefs and to’continue: and oh the motions of the re-

-porderts to dismiss Part. B ef the Pétition for. Review, before

Parker: Soper and Dobie. ‘Circuit Judges, and was argued by

counsyl and submitted,

was argued by.counsel and submitted,

16S

UNITED STATES ET AL. VS. HOPE HASURAL GAS CO.

Order continuing hearing on motions to dismiss part B of thi

’ petition for review; continuing case-to’ the Nove mabe? term, and

_ as to briefs. Filed and entered October 5, 1942

(Style of Court and Title Omitted)

‘This cause came on to be heard on the motions of the respond.

ents City of Cleveland and City of Akron to dismiss Part B of *

‘the Petition ‘for Review : ;

- For reasons appearing to the court, re

It is ordered, by this te that the hearing on the motions ~

“to dismiss Part B of the ition for Review be continued to Me

hearing on the merits: that this cause be, and it is hereby/con

tinued to the November term of this Court. to be placed atthe foot

‘of the argument docket for that term; that the briefs on behalf, of

the respondents be filed on or before October 31,1942, and that the

reply brief, if any, on behaif,of the petitioner, be filed not later

than three days prior to the argument of the cause.

Joun J. Parker,

. Nenior ‘treuit Sudge.

- Ocroner sth, 1942. 4 *.

October 31, 1942. bri f on behalf of respondent. Federal Power

Commission, ts filed, :

Same day. volumes T and Il of itppendix to briefs « OL. behalf

of ‘respondents are filed,

Same day, brief on behalf ‘of responde nts other: than Federal

Power Commission is fileel. A

— November 11, 1942, apiplication of hetitioner ‘for spec ial per -

-Anission to file a reply /rief exeveding- Se-pririted pages is filed

November 16, 1942, reply brief on” behalf of the petitioner is

filed. oe, ; 7 38 & j

plrguinent of cuuse : .

j :

November 1s, 1942° “(November tiin. 1942). cause came on to

be beard before Parker, Soper, and Dobie, Circuit Judges, and

UNITED STATES ET-AL. 5 HOPE. NATURAL GAS CO.

United States Circuit Court of Appeals, Fourth Cirenit

+ No. 4979 |

Hore Naturat Gas Company, PETITIONER

VETBUR -

| - Jee ;

/ Feperat Power Commission, City or CrevELaNp, City oF AKRON;

_ AND Penns¥ivania Pusiic.Urmity ComMission, RESPONDENTS.

On Pefition for Review of Orders of ihe Federal Power .

aor Commission E

(Argited November 18, 1942. Dedided February 16, 1943)

Opinion oo

Filed February 16, 1943. |

Before Pilenen: Sorrr and Dorr, Cireujt Faden

_ William B. Cockley (Walter J. Milde. Theodore BR. Colborn,

William A. Dougherty, Kemble White and Antiioay F. McCue on

} brief) for Petitioner, and Miiford Springer, Couhsel for the Fed-

4 etal Power Commission, and Spencer W. Reeder Assistant Diree-

tor of Law in Charge of Utility Controversies for the City of

Cleveland, (Charles V. Shannon, Louis W. McKernan and Howell

Purdue, of counsel for the Federal Power Cormniission; Thomas A:

. Burke, Jr., Director of Law for the City of Cleveland; Robert E,.

May; Alexander W. Parker and Joseph M.. Winston, Jr.. At.

torneys for City of Cleveland; A. F. O'Neil, Director of Law, and:

» . Clyde B. Macdonald, Assistant Direetor of Law for'the City of

’ Akron, Aitorneys for City of Akron: Claude T. Reno, Attorney

General. of the State of Pennsylvania; Harry M. Showalter,

Counsel; and Samuel-Graff Miller, Assistant Counsel, Attorneys

for Pennsylvania Public Utility Commission, on biief) for Re-

spondents. . ¢ > .

Parker, Circuit Judge: This is a petition by the Hope Natural

| Gas Company, hereafter referred toas “Hope”, to review an order ‘

of the Federal Power Commission-under the provisions of: sec.

19 (b) of: the Natural Gas Act-of June 21. 193s. 52\ Stat. &31, 15

USCA 717¥ (b). Hope, a subsidiary corporation of the Standard

Oil Company of New Jersey, was organized under the laws of.

West Virginia in the year 189% and since that time has been en-

gaged in the production, transportation and sale of natural: gas.

S07 of its sales are in interstate Commerce and are subject to the

‘

sie a oe

- UNITED STATES ET AL. VS. HOPE NATURAL GAS CO.

jurisdiction of the Commission, but its interstate rates had not

been regulated prior to this proceeding. In 1938 the cities of

‘Cleveland and Akron, ORio, filed complaints with the Commission

alleging that the rates charged by Hope to the East Ohio Gas

Company were unreasonable. The Pennsylvania Public Utility

Commission filed complaints that the rates gharged to the Peoples

Natural Gas Company, the Fayette County Gas Company and the

Manufacturers Light atid Heat Company were also unreAsonable.

The Commission. then instituted an. investigation, on its own

motion, into the reasonableness of all of Hope's interstate whole-

‘sale rates; and all of the proceedings ‘relating to these rates were -

consolidated for hearing before the Comnmission.

On May 26, 1942, the Commission filed its opinion, findings and

order holding that the rates charged since June 30, 1939 Were un-

reasonable and establishing reduced rates for the future, the.

reductgon ordered being approximately 20¢¢ in the rates charged

‘the East Ohio Gas Company and the Peoples Natural Gas Com-

pany, both Standard Oil affiliates, to which by far the larger part

of it¢sales were made, The rates to these companies were reyluced

from 36.5 and 35.5 cts. per moc. f. to 29.5:and 28.5 cts, per mee. £.

respectively, Rates to two other companies, Fayette and Manu-

factureys, representing a small volume of the total sales, were

reduced from 31.5 ets. to 28.5-cts. | : a: ch

* The reductions in‘ rates were ordered on the basis of findings

made as.te the value of Hope’s property used in connection with

its interstate business, the estimated operating expenses of the

business and a rate of return upon investnént of 642". Hope

complains of the findings with respect ‘to all of these matters but

particularly with respect to the valuation of the property adopted

sas the rate base. The valuation adopted by the Commission as

tlie pate base was arrived at by taking the-cost of the propiérty as °

shown by the books of the company, corrected for bookkeeping

errors but without. allowance for price imereases or consideration

of capital items theretofore charged to expenses, and deducting,

therefrom: acerued depreciation based upon the estimated useful

life of the property employed. Withowd referenceste evidence as

to its present condition based’ upon tests and observation. This

method was applied to property taken over from other companies

as well-as to property originally purchased by Hope. The cer--

rected) book cost of the property was found to be S51.857.416, and

depreciation was found to be $22,325,016 as of December 31, 1940.

lerving a net investment of S2s029400, To this: was added

S129z.021 for pet capital additions up until the effective date of

thre order, $506 105 for aseftl uhoperated acreage and &2.125,000

for working capital This gave arate base of S83.712.520.

} dat nD

ik ~ WP.

UNITED STATEa ET AL. VS. HOPE NATURAL GAS CO.

2 ~ soit

Hope introduced evidence to the effect that prior to 1923 labor °

_ costs in. well drilling-as well as the portion of the overhead éxperise +

of the company allocable thereto had been treated as expense in’

its bookkeeping entries, instead ‘of. being charged to cipital aé-

count; that these items were a legitimate part of the cost of the

property and present expenditures of like character were required

to be so treated in the ‘system of accounting prescribed by the

Commission ; that the items representing such expenditures prior

to 1923 should be considered by the Commission asa part. of the

legitimate cost of the property notwithstanding they had been

charged to expense; .and that, when they were so considered,

the cost of the property was shown to be $69,735,000, instead of

S51057;410, - See

It was shown that the property used by Hope in its interstate

business had:been constructed over ‘a forty year period during

which there had‘ been great fluctuations in prices and that prices

_ at the time of hearing were at a far higher level than they were

‘during the years preceding the first world war. The’ Public

Utilities Commission of Ohio had found: the reproduction -cost

new of the property, as of .Fune 30, 1937, to be $100.257,000 and-

its present value after depreciation to be $66,160,382.* Hope in-

troduced an. estimate of cost of reproduction new amounting to

$97,340,000 and w statement showing that the application of price

trends to: original cost would result in a figure of $105,101,000. |

This price trend statement showed that for property placed in

.. public’ service between 1891 and 1916 at an original cost of

$25,249,550 the price-trends gave a figure of $52,451,675, whereas

» for property placed in service between 1917 and 1938 ata cost of -

~" $45,303.889 the tiended vilue ‘was only $53.788.551. Hope con-

~ tended that the allowance for depreciation should have been based

- on the actual condition of the property as determined by observe:

tion with allowance for cbsolescence;-and that the depreciation

‘allowance resulting. was 34.510. Applying this rate.of deprecia-

tion to the estimate of the cost of reproduction new of its property,

. it arrived at a rate base as of December 31, 1938, of $66,360,000,

The Commission found that Hope's estimates of reproduction

cost and trended original cost were without probative value and

_ disregarded them, as it did also Hove's evidence as to the observed

condition of the property. No carisideration was given to the

change in price levels which was shown by the estimates and which,

~ even im their absence, might have been noticed as matters of genera]

and common knowledge. . . .

*Fast Ohio Gas Co. v. City*of Cleveland, 27 P..U. Ro (N.S) B87 417. See also

table 6 appended to report of Commission in that case but not published in Public

Utilities Reports. « ‘

"property constituting the base: (1) the Commission did not find

172

‘. UNPTED STATES ET AL. VS. HOPE NATURAL GAS CO.

The vital questions in the case relate to the determination of the.

‘rate base; and, in view of the low rate of return allowed and the

consequent lack of margin to take care of error 4n the base, the

‘rates allowed must be condenined as unreasonable and confiscatory

because of the following errors with respect to the valuation of the

the present’ fair value of the property and took no account of the

change of price levels in. determining the rate base; (2) the Com-

mission ignored items of. well drilling costs and overhead, aggre-

gating in excess of $17,000,000, which entered into the oiginal

cost of the property, basing this action on the fact that, under

the system of accounting that prevailed at the time, these items

had been charged on the company’s books to expense; and (3) the

Commission ignored evidence as to the present condition of the

property and computed accrued depreciation theoretically on the

straight-line service-life method. We shall discuss these matters.

separately in the order named.. .

- . ‘ e°

PRESENT VALUE

The-report of the Commission shows, not only that it gave no

consideration to rise in-price levels in determining the amount of

- the rate base, but also that ‘it made no attempt to ascertain the

present fair value of the property involved. It adopted as the

rate base the original-cost of the property as shown by the com-

pany’s books, adjusted to correct bookkeeping errors and depre-

ciated as above indicated. ‘It took the view that this depreciated .

book cost could properly be taken as,the base without reference to

whether it ‘did or did not represent the present fair value of the

property, saying: “With the decline in favor of ‘fair value’ .as

the only mode of public ‘utility rate’ regulation; its’ keystone.

reproduction cost, crumbles. Bona fide investment figures now

become all important in the regulation of rates.” :

’ Much is to be said in favor of the prudent investment theory of

determining the rate base. It is simple; it is expeditious; and it

avoids the necessity of resorting to unsatisfactory estimates of the

cost of reconstructing a system that no one would now reconstruct. .

Where there has been no great change in price levels, prudent

investment cost can -be taken, subject to appropriate depreciation,

as representing the present fair value of the property for rate, .

making purposes. And gen where there have been.changes in

price'levels, it can be thus taken, we think, if such basis has been

established by legislative authority prior to the dedication of the

property to public ise or if statutory provision has been made for

valuation of the property-on the basis of present fair -value and

the use 6f prudent investment cost in the future, and the property

173 '

UNITED STATES ET AL. Vs. HOPE NATURAL GAS CO.

has been so valued. See Bauer & Gold, “Public Utilit y Valuation .

for Purposes of Rate Control” (1934) pp. 424 et seq. In the absence

of such legislation and valuation, however, such depreciated

original cost cannot be taken as the rate base where there has been

a change in the level of prices and the investment in the utility

has been made while the “fair value” theory was prevailing. "As is

well said4in Bauer & Gold, supra, pp. 424 and 425: . |

“If the rights and obligations of future investors are exactly

set forth, and if systematic provisions are made for enforcement,

they would doubtless be Hfeld subject to the conditions. If they

furnish capital under a policy explicitly enunciated, they. can

have no grounds for claiming that they are deprived of ‘due

process.” For’ all future dealing, legislatures are probably free

to establish any policy that seems desirable from the public stand- -

point. They are probably not required to continue the indefinite

basis of dealing-with all future investments merely because no, .

definite policies and standards were established in the past.

“The situation, however, is different with regard to properties

_ constructed or installed in the past. As to these, the funds. were

contributed under the general law of the land, without exact

limitations upon the return. Except for the undefined rule that

they were entitled to fair return on fair -value, they were not

placed under precise and systematic control. If prices increased

- after the date of investment, the companies have been entitled to

’ have the advance recognized in new valuations. This right prob-

ably cannot be abrogated on grounds of publi¢ policy unless a

proper equivalent is pravided. While the right itself is vague

and variable, it nevertheless exists and presumably cannot be

modified except through replacement by a definite substitute that

is feir and reasonable.” ane ;

And the same authors, in dealing withthe method of establish-

ing.a fixed rate base “through outright adoption of investment as .

rate base, starting with existing book value of the properties on

the basis of present accounting methods”, point out as an objec-

tion to it that fluctuation in prices may not be ignored. At pp.

432 and 433 they say: . se ec,

“Besides: doubts, as to reliability of present. book figures, the

proposal also raises the question as to,how the shift in price level

should now be'treated in the light of falketi prices. Under the’

law of the land there is no doubt but that the public is entitled

to have fair value determined according to present and prospec-

tive prices. If ‘faig value’ does not rest exclusively upon repro-

duction cost levels, it certainly must be determined nevertheless - . -

largely with consideration to the price changes that have taken |

place. Properties installed during the pre-1929 era back to about

es,

UNITFD STATES ET Al. VS. HOPE NATURAL GAS CO.

1914, would ‘have to be repriced on the basis of the new level. -—

Furthermore, the- public issentitled also to have considered the

advances. in technology which resulted in reduced. unit cost of

construction. These adjustments would be entirely ignored in

. outright adoption of beck value as the starting point: of a fixed

_rate base. ors

“These are matters of important consideration in planning and

establishing thé tew policy of control. For the future, the pur-

pose is, of course, to eliminate the factor of price fluctuations .

from consideration in the rate base.” In the past,-however, under

present law, this has been the domitiint element in valuation and

primarily: wresponsible forthe unsatisfactory conditions of regu-

lation. But. if a.fired rate base ig. to be stablixhed, the question

. Shauld not be ignored as to how the price changes that have taken ~

place should he proe vided for in the adoption of initial rate bas a

| Italies supplied. ] \ :

There is nothing in the Natural Gas Act which justifies the

thought that, Congress was providing therein for the exclusiv:

use of the prudent investment theory of property valuation. No,

“fixed” rate bise” as allvocated by Bauer & Geld is referred to.

and no provision is made for initial valuation of properties with

addition of subsequent; investment costs as the base. On’ the

contrary, the usual general provision for “just and reasonable”’

rates is made iti sec. 4 (a) of the Act;.and, as we shall point out

hereafter, it is well settled fn existing iaw that, to be considered

‘just and reasonable”, rates must be such as_to yield a fair retorn

upon the fair value of the property used in rendering the service.

In sec. 6 (a) provision is made for the Commission to ascertain

the actual legitimate cost of the property and, the depreciation

therein, “and, when fotind necessary for rate making purposes, °

other facts which bear on the determination of such cost or de-

preciation and the fair value of such prope rty” {Stalies

supplied. | -

The pertinent sections of the Natural Gas Act, 52 Stat. 821, 15

USCA Tlie (a) i1id (a), Tive (a) (bd), are as follows:

“Sec. 4. (a) All rates and charges made, demanded, ‘Of received. ‘

by any natural-gas.company for er in connettion witht the trans-

portation or sale of nataral gas. wanapert to the Jurisdiction of the

Commission, and all rules and regulations affecting or pertaming:

to such rates or charges; shall be just and reasOnable, and any

such. rate or charge that is not just and reasnable is hereby

edeclared to-be unlawful.” \

“Spo. 5. (a) Whenever thé Cosamission, after hearing had

upon its own motion or upen complaint of any Statesmunicipality, .

State commission, or gas distributing company, shall” find. that

any rate, charge, or classification. demanded, observed, charged.

W5 . .

UNITED STATES ET AL. VS. HOPE NATU RAL GAS co.

or collected by any natural- -gas company in ‘connection with any

transportation or sale of natural gas, subject to the jurisdiction of

the Commission,-or that any rule, regulation, practice, or contract

affecting such rate, charge, ar classification is unjust, unreasonable,

unduly discriminatory, or preferential, the Commission shall de-

termine’ the just and reasonable rate, charge, classification, rule,

Tegulation, practice,or contract ta be thereafter observed and in

force, and shall fix the-same by order: Provided, however; That the

Commission shall have no power to order any increase in any

rate contained: in the currently effective schedule of such natural

gas company on file with the Commission, unless such increase is

in accordance with a new schedule filed by such natutal gas com-

pany; but the Commission may order a decrease where existing

rates are unjust, unduly discriminatory, preferential, otherwi ise

uhlawful, or dre not the lowest reasonable rates.” .

“Sec. 6. (a) 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 deprecidtion and the fair value of such property.

“(b) Every natural- “gas company upon request shull file with the

Commission an inventory Of all or any part of its property and a

Statement of*the original cost thereof, and shall keep the Commis-

sion informed regarding the cost of all additions, bettermpents,

extensions, and new construction.”

It was clearly the intention of Congress that urrler these sections

the Commission might investigate and ascert@in cost and deprecia-

tion of properties of natural gas companies. irrespective .of

whether a rate inquiry was involved or not, and that, where rate’

making was involved, the .inivestigation. might extend to other

facts which bear on cost or depreciation and the, fagr value of the

property. Instead of preseribing a change in the method of de-

termining the rate base, it is clear that the statute contemplates

that the base should be’ determined in accordance with existing

legal rules: and it is basic in these rules that the present fair.

value of the property: be ascertained so that rates ma$ be estab-

lished which wili afford a fair return upon fair value and so will

not be confistatory in the constitutional sense. This we under-,

stand to be: the construction given-the Act in the recent case of

Federal Power Commission v, Natural Gas Pipeline Co.. 315 U. Sy

575, 585, 586. where the Court, speaking through Mr. C hief Justice

Stone, said:

“By long standing usage in the field of rate regulation, the

‘lowest: reasonable rate’ is‘one which js not confiscatory in the

constitutional sense. Los Angeles Gas Co. v. Railroad Commis .

sion, 289 U. S>2s7,-305; Railroad ase ae ¥, Pac ifie Gas Co.,

° J °

. 17 ‘ 6 rg .

UNITED STATES ET AL. VS. HOPE NATURAL GAS CO.

supra, 394, 395; Denver Stock Yard Co. v. United States, 304 U.S.

470, 475. Assuming that there is a zone of reasonableness within

which thé Commission is free fo fix a rate varying in amount and

_ higher than a.confiscatory rate, see Banton v. Belt Line Ry. Corp., .

" 968 U. S. 413, 422, 423; Columbus Gas Co. v. Commission, 2927

U. S. 398, 414; Denver Stock-¥ard Co. v. United States, supra,

~483, the Commission is also free under sec. 5 (a) to decrease any.

rate which-is not the ‘lowest reasonable rate.” /¢ 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 setenaking hedien’ to the

service of any single formula or combination of formulas. . Agen-

cies to whom this legislative power has been delegated are free,

‘within the ambit of their statutory-authority, to make the pr ag

matic adjustments. which may be called for by particular cir-

cumstances.” [Italics supplied. ] °

The conception that, not to be confiscatory, rates must yield a

fair return upon the present fair value of the property has long

been well settled by Supreme Court decisions. Munn v. Illinois,

94 U.S. 113, established the principle that rates of public utilities

were subject to regulation by the state. Mr. Chief Justice Waite,

who wrote the opinion in that case, laid down the limitation, how-_

ever, in Stone v. Farmers Loan& Trust Co., 116 U.S. 307, 331, tha

the power could not be exercised to confiscate the property invest

in the utility, saying, “From ‘what has.thus been said, it is not to be

. inferred that this power of limitation or reguiation is itself with-~

out limit: This power to regulate is not a power to destroy, and ~

limitation is-not the equivalent of confiscation. Under pretense

of. regulating fares and freights, the State cannot require a rail-

road corporation to carry persons of property without reward ;

neither can it do that which in law amounts to a taking of private ~

property for og use without just compensation, or without due-

process of law.” lation of rates of public utilities. differs

from pores price ag such as was involved in Nebbia v. New .

York, 291 U.S. 502, in that, in the case of « public utility, property

has been dedicated to the use of the public and the state can require

“its continued operation, whereas in the case of ordinary property

subject to price regulation the owner is not required to sell.) By

dedicating his property to public use the owner-impliedly consents —

to regulation of its rates by the state; but this consent is condi-

tioned upon his property's not being taken from him under the

guise of regulation, i i. e. that the rates fixed allow hima fair return

UNITED STATES ET AL. VS. HOPE NATURAL GAS CO.

upon its fair value. The rule is thus stated in the Minnesota Rate ° .

> Cases, 230 U. S. 352, 434: Agee

“The basis of calculation is the ‘fair value of the property’ used

_for the eenvenience of the public. Smyth v. Ames, supra (p. 546).

Or, as it was put in San Diego Land & Town Co. v. National City,

supra (p. 757), ‘What the company is entitled to demand, in order

that it may have just compensation, is a fair return upon the

reasonable value of the property. at the time it is being used for

- the public.’ ” ; ars... x

In Los Angeles Gas Co. v. R. R. Com’n, 289 U.'S. 287,305, cited

with approval by Mr. Chief Justice Stone in Federal Power Com-

. mission v. Natural Gas Pipeline Co., supra, Mr: Chief Justice

- - Hughes laid down the criterion in the following language :

“As the property remains in the ownership of the complainant,

the- question is whether the complainant has been deprived of a

. fair return for the service rendered to the public in the use of the

property. -This Court has repeatedly held that the basis of cal-

culation is the fair value ef the property, that is, that what the

complainant is entitled to demand, in order that:it may have

the property at the time it ix being used for the public. -In de:

termining that basis, the criteria at hand for ascertaining market |

value, or what is called exchange value, are not commonly ayail-

able. The property is not ordinarily.the subject of barter and sale \

and, when rates themselves_are,in dispute, earnings produced by?‘

- rates do not afford a standard for decision. The value of the prop-

erty, or rate base, must be determined under these inescapable

limitations. And mindful of its distinctive function in the en-

forcement of constitutional rights, the Court has refased to be

‘bound by any artificial rule or formula which changed conditions

might upset.” We have said that the judicial ascertainment of

value forthe purpose of deciding whether rates are confiscatory

‘is net.a matter of formulas, but there must be a reasonable judg,

ment having its basis in a proper consideration of all relevant

facts.’ Minnesota Rate Cases, 230 U. S. 352, 434; Georgia Railway

& Power Co. v. Railroad Commission, 262 U. S. 625, 630; Bluefield

Water Works Co. v. Public Service Commission, 262 U. S. 679,

690.” ; [Italics supplied. ] - a a

Under this rule, in the absence.of some such statutory provision —

- as indicated at the Beginning of this discussion, the determination

_ of fair present value as the rate base is inescapable if there is to

be a “fair return ypon fair value”. What has declined in favor is —

hot, as the Commission thought, the “doctrine” of fair value, but

tlie cumbersome and misleading’ reproduction - cost theory as a

means of determining ‘it. Property has no value except present

: rae a, ’

\ * 178 : bf

UNITED STATES Bt “AL. VS. HOPE ATU RAL GAS CO..

value. Past value exists only Hi memory or in history, future

value only in estimate or expectation. It is the property presently

existing which belongs to the utslity and is used by the public.

" sary replacements at current .prices-with a fair return upon the

_be replaced at a cost

It is that property which is depree iated through use an@ which is

gradually+being sold through, eprecjation to the public. > And it

is the value of that property as. used which must be considered in

fixing rates that will reintburse the company for its partial sale

through use and provide an adequate return upon investment.

If a piece of property/which cost $10,000 originally but can only

in.carrying on its/usiness, be treated-asbeing-worth only $16,900

for the purpose of depreciation and return, the company is de-

prived of property by the rate in‘exactly the same fay as a

merchant who is required to sell for $5 a pair, of $10 shoes. It must

not be forgotten that it is the property owned by the utility, and

not the cash invested by stockholders in its stock, that.is devoted to |

public use; that this property is worn out in furnishing the service

_ Which the public receives and which the utility is bound to render;

and that, unless the utility receives a rate.pufficient to make neres-

present fair value of its investment, its property: is being taken

from it and given to its customers.

‘The task of arriving at fair present value is a difficult one and

necessarily involves exercise of judgment of a high order. The

problem is easily over-simplified by those seeking to maintain a

thesis. In times of falling prices, thosé representing the utilities

emphasize the’ importance of original investment cost, while those

seeking lower rates point at the folly of fixing rates on the basis

of a value which no jotigel exits and demand that reproduction

cost be taken qs.the criterion. In periods of rising prices, the

position of the advocates is reversed. To fix value on original

investment cost without reference to change in -price levels may

easily lead to absurdly high or low valuations, with an undue

durden won the public in the case of falling prices and wit

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