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Natural Gas Pipeline Co. v. Federal Power Commission

April 14, 1941


Petition for Review of Interim Order of the Federal Power Commission.

Author: Evans

Before EVANS and SPARKS, Circuit Judges, and LINDLEY, District Judge.

EVANS, Circuit Judge.

Presented for review is an interim order of the Federal Power Commission, directing the petitioners to reduce their rates on natural gas, so as to reflect an annual reduction in their operating revenues of not less than $3,750.000.

Petitioners own natural gas reserves in Texas. They produce the natural gas and transport it through their own pipe lines to the State of Illinois, where it is sold wholesale - 90% to one customer. They produce 75% of the gas they sell and purchase the remaining 25% from another producer. They were in business for nearly eight years before the Natural Gas Act, 15 U.S.C.A. § 717, et seq.,*fn1 became effective, June 21, 1938.

The interim order,*fn2 complained of, was entered by the Commission, July 23, 1940, accompanied by a detailed memorandum showing the basis for the order. There were also specific findings. It was made upon a motion by respondent, Illinois Commerce Commission, for an "immediate order." This motion was followed by petitioners' plea to the jurisdiction and an answer. The motion for the interm order was made before termination of a complete investigation, but after fifty-five days of hearing. The order was entered six months later.

Briefly stated, the Commission ordered the $3,750,000 reduction in revenues on the following fact assumptions:

Investment for rate base purposes . . . $74,420,424

(this made up of reproduction cost, value of gas reserves,


additions, and working capital.)

A return of 6 1/2% was allowed 6 1/2


Annual amortization was added 1,557,582

(The amount allowed for amortization covered a period of 23

years, from 1932 to 1954.)

Total deductions . . . 6,395,180

The adjusted average annual net income was . . . 9,362,032

The above determined required amount was . . . 6,395,180

Excess . . . 2,966,852

The lessening of petitioners' income by this amount would result in an income tax saving. Hence the total reduction ordered was increased from $2,966,852 to $3,750,000.

A many sided attack on the order is made by the petitioners.

First, they challenge the Commission's jurisdiction to enter this order because:

(a) The only authority given by the Act is to enter a final order.

(b) There is only authority to enter orders determining rates (Sec. 5, 15 U.S.C.A. § 717d), whereas here the order directed reduction of income and left the company to determine the rates, which burden is doubled because they have contracts with varying rates, and they are not instructed how to apportion the reduction.

(c) The constitutionality of the Act is attacked because the companies' business is a private business and this Act, contrary to the Fifth Amendment, makes it subject to regulation as a public utility, and they have not even an apportunity to withdraw from business.

(d) The companies are not the kind of companies meant to be covered by the Act.

(e) There has been a denial of due process because that has been no full hearing.

(f) Since the companies' existing rates are presumably reasonable, the Commission has the burden of showing the contrary, and it has not sustained its burden. It has merely provided for a return, barely non-confiscatory, rather than reasonable, and ignored the fact that the profits arose from the operator's engineering skill and the fact that the profits accruing are but a reasonable reward for the risk involved.

(g) The Illinois Commerce Commission has no legislative authority to move for such an order, and the Federal Power Commission in moving for such order is acting as prosecutor and court.

Second, they challenge the interim order of the Commission on its accounting theories:

(a) The "base" taken by the Commission is wrong because it excluded the item of going concern value of $8,500,000; it permitted only $3,808,399, instead of $6,046,286, for future capital expenditures, and it refused to exclude from the base $2,866,758, for "viewed" depreciation. So, the base taken by the Commission ($74,420,424) was $7,771,129, less than the base contended for by the companies, - i.e., $82,291,553.

(b) The 6 1/2% return used by the Commission was unreasonably insufficient, and unsupported by the evidence. Not less than an 8% return should have been allowed.

(c) The period taken for amortization was wrong, namely, it should have started from the effective date of the Act, and not from the beginning of the companies' business.

(d) The base used for amortization, i.e., $78,284,009, was too low; it should have been $84,341,218.

(e) The amortization reserve should have been figured on a straight line basis with the interest at the rate of 2% semi-annually, instead of on the sinking fund basis with interest at 6 1/2% compounded annually. The annual amortization ...

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