United Fuel Gas Co. v. Railroad Commission

delivered the opinion of the Court.

This is an appeal from a final decree of the District Court for eastern Kentucky denying an injunction restraining the appellee, the Railroad Commission of Kentucky, from Establishing an alleged confiscatory rate for the sale- of natural gas in the cities of Ashland, Catlettsburg, and Louisa, Kentucky, or in the alternative from preventing appellants from withdrawing their service in the sale and distribution of natural gas to consumers in those cities. 13 F. (2d) 510 . The case comes here on direct appeal under § 238 of the Judicial Code, the decree of the district court having been entered before the effective date of the Jurisdictional Act of February 13, 1925.

The case was argued here with No. 4, United Fuel Gas Co. v. Public Service Comm’n of W. Va., decided this date, post, p. 322, which involves some questions considered in the opinion in this case.

•Appellant, United Fuel Gas Company, a West Virginia corporation, also*' appellant in No. 4, is engaged in the business of producing' natural gas from gas fields located principally in West Virginia, which it sells to consumers in West Virginia, Kentucky and Ohio. A part of its business is the sale of gas wholesale to distributors in West' Virginia, and has not been subjected to regulation by any public body. Its local business in Kentucky is subjected to regulation by appellee. It formerly held* franchises for the sale and distribution of gas in the Kentucky cities - named, all of which had expired by July, 1918. Nevertheless, it continued its service in those cities until June, 1923, when it organized appellant Warfield Natural Gas

" Before the organization of the Warfield Company proceedings were had before the commission which resulted in its order directing a reduction of rates by the United Company to 80% of the former rate of 40 cents per 1,000 cubic feet, less 5 cents for prompt payment. Promptly on its organization the Warfield Company filed with the commission a new rate schedule for the cities named of 45 cents per 1,000 cubic feet, with a reduction of 5 cents for punctual payment, and petitioned the commission to establish' this rate as fair and reasonable or,, in the alternative, to permit it to withdraw its service from those cities. After an extensive hearing the commission denied the application and construed its earlier order as requiring a rate of 28 cents (80% of 35 cents).

The present suit was then brought in the district court. That court construed the order of the commission as fixing a 32 cent rate, which it upheld, and enjoined the commission from imposing any lower rate. From the latter part of the decree no appeal was taken.

The present appeal challenges' the constitutionality of the order of the commission, as construed by the court, under the Fourteenth Amendment of the federal Constitution, both because the rate is confiscatory and because the order, which under the Kentucky statutes is n'ot subject to judicial review, was not supported by findings of the commission. “The validity of the order is also assailed on the further grounds that the part of it which required appellants to continue to render service violates the Ken

The district court and this Court, having jurisdiction of the cause since questions are raised under the Constitution of the United States, may pass on all questions of state law involved, Risty v. Chicago, Rock Island & Pacific Ry. Co. 270 U. S. 378 , 387, and must do so so far as they are necessary to a decision.

Section 163 of the Kentucky constitution provides that gas companies may not procure franchises permitting them to lay pipes in and under public streets without the consent of the appropriate municipal governing bodies and | 164 limits all franchises to periods not exceeding twenty years. Section 23 of the Statutes of Kentucky, c. 61, Acts of 1920, p. 250, subjects any public service company .which has continued its service after the expiration of its franchise to the jurisdiction and authority of the Railroad Commission and forbids it to withdraw such service without permission of the commission so long as it remains in business in any part of the state. It is said that the action of the commission under this statute in effect operates as a renewal of the franchise of appellants in the cities named in a manner not in conformity with the provisions of the state constitution.

, But this objection, and that as well- to the constitutionality, on state grounds, of the statute creating the commission and defining its powers, are not available to appellants in the present suit. It is the rule of this. Court, consistently applied, that one who has invoked action by state courts or authorities under state statutes may not later, when dissatisfied -with the result, assail

Assuming as we do for present purposes the authority of the commission under state law to refuse its permis: sion to appellants to withdraw, we perceive no objection under the federal Constitution or otherwise, to withholding it. Appellants do not seriously deny that the War-field Company is but an agency organized by the United Company for the purpose of carrying on its public service business in Kentucky or that through that agency the latter is doing business in the cities named and elsewhere in the state. In these circumstances its continuance in those cities is neither forbidden nor illegal. It remained subject to state regulation, and control of it is, by state statute, vested in the commission with statewide authority. If a state may require a public service company subject to its control to make reasonable extensions of its service in order to satisfy a new or increased demand, present or anticipated, New York & Queens Gas Co. v. McCall, 245 U. S. 345 ; Woodhaven Gas Light Co. v. Pub. Serv. Comm’n, 269 U. S. 244 ; Missouri Pac. Ry.

The primary duty of a public utility is to serve on reasonable terms all those who desire the service it renders. This duty does not permit it to pick and choose and to serve only those portions of the territory which it finds most profitable, leaving the remainder to get along without the service which it alone is in a position to give. An important purpose of state supervision is to prevent such discriminations, see New York & Queens Gas Co. v. McCall, supra, at p. 351 , and if a public service company may not refuse to servé a territory where the return is reasonable, or even in some circumstances where the return is inadequate but that on its total related business is sufficient, Atlantic Coast Line v. N. Car. Corp’n, Comm., supra at p. 2 5; Missouri Pac. Ry. Co. v. Kansas, supra at p. 277 , it goes without saying that it may not use its privileged position, in conjunction with the demand which it has created, as a weapon to control rates by threatening to discontinue that part of its service if it does not receive the rate demanded. The powers of the state, so far as the federal Constitution is concerned, were not exceeded by the action of the commission, in compelling appellants to continue their service in the cities named so long as they continued to do business in other parts of the state, and to there avail of the extraordinary privileges extended to public utilities.

The contentions also that the commission was not lawfully created under provisions of the state constitution, and that its order was void because not supported by findings, have the same and no greater force than the

Gas is sold by the United Company to. the Warfield Company at the state line at 30 cents per 1,000 cubic feet, but in view of the history and intercorporate relations of the appellants it is not contended that this contract rate is of any controlling significance in determining the propriety of the rate fixed by the commission. For this purpose appellants do not deny that they, with respect to their entire' property and business, may be treated as' a unit, and we so treat them. They contend here, as in No. 4, that all their property used and useful in producing the gas in West Virginia and elsewhere and in transporting and distributing it to consumers in the' Kentucky cities should enter into the calculation of the rate base.

' Appellants, through ownership in fee and leases or contracts on a rental or royalty basis, control the produc-. tioh of natural gas from 814,910 acres of land. A part of' this area, the so-termed “proven” territory, is. at present being used in production; the remainder being

The valuations of the entire business in the two states made respectively, by the appellants and the court below as- of December 31, 1923, are as follows:

Value claimed by appellants:

Physical- property................................ $22,274,274.00

Gas lands, leaseholds and rights.................. 36,449,176.00

General overhead charges........................ 6,357,046.00

Working capital................................. 990,000.00

Going concern value.. .......................... 8,423,105.00

$74; 493,601.00

. Value as found or assumed by the court below:

Physical property................................ $22,274,274.00

Gas lands, leases and rights (book value)......... 6,732,920.00

Overheads...................................... 4,009,370.00

Working capital................................. 999,000.00

Going concern value...'........................... 3,000,000.00

$37,015,564.00

As will be observed the difference'in these estimates of value is due chiefly to the difference in value ascribed by each to the gas rights and leaseholds. Appellants, as will more fully appear, reached their claimed value by an estimate by experts of the profits to be derived from the sale, in an unregulated market, of the quantity of gas estimated to underlie the proven and probable areas. The court below found that the value of appellants’ gas ■field did not exceed its.“book cost” which it took to be $6,732,920. This figure, however, included oil production acreage amounting to $389,591 — leaving $6,343,329 as the book value of the entire gas field.

In assigning to their total property a value of $74,493,-601 and in concluding that the prescribed rate is confiscatory because of its effect on the regulated business alone, appellants make certain assumptions, all of which are challenged. In the view which' we take, and for present

Making these assumptions, it is apparent that the disposition of the present question must turn, as appellants argue, principally upon the value to be assigned to the gas rights, although in certain aspects of the case a minor consideration may be the proportion of profits from the sale of gasoline extracted from the gas which should properly be included in the net earnings of the regulated business.

The burden of proving the value of property on which they are constitutionally entitled to earn a fair return rests upon the appellants and, to justify judicial interference with the action of state officers in fixing the rate assailed, must be supported by clear and convincing evidence. Knoxville v. Water Co., 212 U. S. 1 , 16. Of the total of 814, 910 acres embraced in the gas field, controlled by appellants or subsidiaries, 41,969 acres are owned in

The actual cost on this basis of appellants’ gas field is not shown but it appears to have been substantially less than- the book value assigned to it. It was stated on the argument that these leases, not only singly but in blocks, are sold in open market, but their market price appears not to have been established.

Appellants do not accept either cost or market value as the basis of value'of their gas rights. Instead they urge that their assembled holdings of gas rights are unique in that they cannot be reproduced and that their value depends largely upon their peculiar nature and situation. They rest their claim- to a largely enhanced value over book value upon alternative theories supported by two classes of expert testimony. Appellants’ experts, on the basis of geological and mining engineering data, and especially by ascertaining the existing rock pressure of the gas in various pools and by comparing the rate of decrease of rock pressure with the amount of gas produced from these

These calculations are supplemented by testimony that in Pittsburgh there is an unregulated market for natural gas used for industrial purposes at 35 cents per 1,000 cubic, feet which would, on an estimated changing schedule of annual production, absorb in eighteen years the total estimated reserve of gas in appellants’ gas field. At this price, natural gas, it was said, could compete successfully in Pittsburgh, for industrial purposes, with gas produced from soft coal at the prevailing price of $2.75 a ton at the mine. After calculating the cost of getting this gas to the market, distant 130 miles from the nearest point on appellants’ mains, providing for all construction costs including the cost of plant and transmission fine, the gas when marketed, it was estimated, would pay a fair return upon investment, repay taxes and investment, and leave a balance, when discounted so as to give present value, of $32,458,129. A second witness, taking 30 cents as the market price of gas in Pittsburgh and deducting trans

Appellants’ second class of expert testimony is that of men experienced and interested in the production and marketing of natural gas, who purported to assign to appellants’ gas field what was described on the argument as its present exchange value or the price which the property would bring if sold by a willing seller to a willing buyer. Three such witnesses testified to a present value of appellants’ gas field in amounts varying from $30,000,000 to $35,000,000 and a fourth fixed the value at $45,000,000. Examination of their testimony discloses that these estimates were not based on prevailing prices for gas leases or on actual sales but, as in the case, of the geological and engineering experts, upon an estimated or assumed exhaustible, supply of gas available to appellants until exhausted, and upon a predictable price for natural gas in unregulated markets through a future period of about eighteen years. Common characteristics of both methods of valuation, therefore, are the estimation on uncertain bases of the volume of gas available and of the price at which it may be sold through a long future period.

A point considered below and argued here is that gas in the earth is not capable of ownership, but we assume that appellants’ leases and contracts give them complete legal power of control over the gas available beneath the surface of the area embraced in the gas field, so far as it may

On the record as made, appellants have failed to present any convincing evidence of value of their gas field which would enable us to assign to it any greater value than that which they appear to have assigned to it on their books. This book value, therefore, may be accepted not as evidence of the real value of the gas field, but as an assumed value named by the appellants, which, on the evidence presented cannot reasonably be fixed at any higher figure.

We likewise find no persuasive ground for not accepting as substantially correct the amount of $30',282,644 fixed by the court below as the maximum value to be assigned to those items of appellants’ property other than the gas reserve, rather than $38,044,425, appellants’ outside .figure for those items. But to avoid unnecessary discussion of them in detail and for present purposes, appellants’ valuation of all these items may be conceded to be correct. If we restate appellants’ claimed valuation of their property by substituting for their estimate of the

Appellants’ also contend that the court below erroneously included in the earnings of the regulated business the sum of $65,166, or 50% of the net proceeds of the sale of gasoline extracted, before'sale, from the gas sold in the regulated business, on the ground that this amount exceeded the profits from this branch of appellants’ business as reflected on their books.

In the process of extracting gasoline from natural gas, the gas flows from the field to the extraction plant, where the gasoline is taken out, the residual gas being returned to the transmission system for distribution to consumers. In the production of this gasoline, therefore, joint use is made of the gas, gas field and certain facilities of the gas company. This joint use requires a prorating of joint investment and expenses and of the return from the joint

We need not labor the point that a public service corporation may not make a rate confiscatory by reducing its net earnings through the device of a contract unduly favoring a subsidiary, or a corporation owned by its own stockholders. Cf. Chicago & Grand Trunk Ry. Co. v. Wellman, 143 U. S. 339 , 345. We recognize that a public service commission, under the guise of establishing a fair rate, may not usurp the functions of the company’s directors and in every cáse substitute its judgment for theirs as to the propriety of contracts entered into by the utility; and common ownership is not of itself sufficient ground for disregarding such intercorporate agreements when it appears that, although an affiliated corporation may be receiving the larger share of the profits, the regulated company is still receiving substantial benefits from

But this case is not of that class. It is not without significance that the West Virginia court in considering this question had before it previous findings of its commission, based upon actual contracts for gasoline exti action where the parties, dealing at arms length, had agreed upon a 50% division. Credible evidence was introduced below tending to show that expenses on property used jointly by the two companies and property allocable to the gasoline company had been borne by the gas companies to an amount in excess of the return received by them from the gasoline extraction. It likewise was shown, the evidence not being challenged by appellants, that the extracting company during the years 1917 to 1922 inclusive, after allowing appellants 50% of the net earnings for the ex-' traction privilege, would have earned not less than 102% of its capital investment in each year. The. average yearly profit during this period was 119.75%. In 1923 its net return on this basis was 80.40%. Making allowance for fluctuation in market prices and other common business hazards, we do not think it would be difficult to induce capital to seek investment on the basis of this division of net earnings. In such circumstances we think no adequate reason is shown for not including in the appellants’ earnings 50% of the net proceeds from the gasoline extraction.

Appellants’ computation of value and of earnings is assailed at many other points, but fully conceding, for present purposes only, every contention made by them except those which we have discussed, namely, the value of appellants’ gas rights and the division of return from gasoline extraction, the appellants have failed to show

Affirmed.

Mr. Justice McReynolds concurs in the result.