Lone Star Gas Co. v. Texas

delivered the opinion of the Court.

The Railroad Commission of Texas brought this action, under Article 6059 of the Revised Civil Statutes of Texas, to enforce the Commission’s order of September 13, 1933, prescribing the rate for domestic gas supplied by appellant, Lone Star Gas Company, to distributing companies in Texas. The rate was fixed at not to exceed 32 cents per thousand cubic feet instead of the existing charge of 40 cents. The District Court of Travis County, upon the verdict of a jury finding the prescribed rate to be unreasonable, denied relief and enjoined the Commission and the state officials from enforcing the Commission’s order. The Court of Civil Appeals reversed the judgment and held the order to be valid. 86 S. W. (2d) 484 . Rehearing was denied. 86 S. W. (2d) 506 . The Supreme Court of the State refused writ of error and the case comes here on appeal.

Appellant, a Texas Corporation, operates about. 4,000 miles of pipe lines located in Texas and Oklahoma through which it transports natural gas to the “city gates” of about 300 cities and towns in those States and sells and delivers the gas in wholesale quantities to distributing companies. The latter companies, with two exceptions, are affiliated with appellant, being subsidiaries of the same parent corporation. One' of appellant’s pipe lines extends from a gas field in Wheeler County, Texas, a part

The Commission dealt solely with the rate for the gas delivered in Texas. This consisted (1) of gas produced or purchased in Texas and transported and delivered entirely within that State, being upwards of 70 per cent, of the total; (2) that produced or purchased in Oklahoma and transported through appellant’s lines into Texas which, on appellant’s calculation, amounted at the average of the five-year period 1929-1933 to about 11 per cent, of the total; and (3) that produced or purchased in the Panhatidle field in Wheeler County, Texas, amounting on the same computation to about 17 per cent, of the total.

The Commission gave a full hearing in which appellant participated. The Commissiofi treated appellant’s properties as an integrated system, and in that way “considered the Oklahoma properties and operations and the effect' thereof on the revenues and expenditures within Texas,” fixing the rate “for application within'the jurisdiction of Texas.” Appellant made no objection to that course. The Commission determined the rate base as of December 31, 1931, at $46,246,617.53, being $4,674,285.91 for production properties and $41,572,331.62 for transmission properties. The Commission considered appellant’s revenues and expenses for a six-year period, 1927 to 1932, and made the rate on the basis of six per cent, as a minimum fair rate of return.

Appellant brought suit in the federal court, attacking the rate on constitutional grounds, but that court stayed its proceedings when the present action was brought by

The trial on the merits, before a jury, was begun on June 11, 1934, and was entirely de novo. The State introduced in evidence the Commission’s order (to which appellant unsuccessfully objected as being void in its entirety because applicable to its interstate business), the stay order granted by the federal court, and a stipulation that the prescribed rate had not been put into effect. The record of evidence before the Commission was offered but was not received. On this formal proof the State rested. Appellant moved for a directed verdict which was denied and appellant then went forward with its evidence. The report and findings of the Commission upon which the order was based were introduced. In rebuttal of the Commission’s findings, appellant submitted an appraisal of its properties as an integrated operating system as of January 1, 1933. That appraisal was voluminous, showing $73,983,405:57 as the cost of reproduction new. Evidence was offered as to the amount to be deducted for accrued depreciation and on that basis the fair value was claimed to be $69,738,021.16. The appraisal was later brought down to May 1, 1934, showing an increase in ma

The State insisted that if appellant wished to maintain as a defense that the order was invalid because it sought to regulate operations which were exempt from state control, appellant should make a segregation, first as between its admittedly intrastate operations and those claimed to be interstate, and second, as between Texas and Oklahoma properties and operations. After the voluminous evidence above mentioned had been taken, appellant, still contending that such an issue was not properly raised as the action undjer the Texas statute was in the nature of an appeal from the Commission’s order which was indivisible, presented evidence based upon “a segregation of its ‘integrated operating system’ as between interstate and intrastate commerce.” Appellant states that this segregation was based ‘‘upon the actual use of its properties in the two classes of commerce.” The fair value of its intrastate property was thus claimed to be $38,350,882.32 and the net amount available at the Commission’s rate for return on intrastate deliveries of gas as less than four per cent. In this segregation appellant’s line used in trans

In rebuttal, the State offered evidence based.upon a different method of segregating appellant’s properties and operations. This method proceeded upon the basis of geographical location, that is, there were allocated to Oklahoma and Texas respectively the properties physi-. cally located in each State and the revenues and expenses were divided on the'same geographical basis. In that way the properties allocated to Texas were valued at 140,256,862.39, and the net revenue which would be available at the Commission’s rate was estimated to be, for the last two years of the accounting period, nearly seven per cent. Appellant complains of this appraisal upon the ground that it excluded the production properties .located in Texas which appellant claimed had an actual cost of $5,191,539.42 as of March 31, 1934, and that the State substituted therefor' an arbitrary and inade- ' quate annual allowance on the basis of the field price for the volume of gas produced.

When the evidence was closed, each party moved that a verdict be directed in its favor and both motions were denied. The court .gave to the jury a series of instructions embracing definitions of the terms of “fair return,” “fair value,” “used and useful” — as applying to the property actually used by appellant in the production, trans- ' portation, sale and delivery of natural gas to its customers and also to the property acquired in good faith and held by appellant for use in the reasonably near future in order to enable it to furnish adequate and uninterrupted service — “operating expenses,” “annual depreciation,” “reproduction cost new,” and “going value.” The jury were instructed that the burden of proof was upon the defendant (appellant) “to show by clear and satisfactory evidence” that the rate fixed by the Commission’s order was “un

“Do you find from the evidence in this case that, as applied to points in Texas, the order of the Railroad Commission of Texas, bearing date of September 13,1933, providing for a rate of not exceeding 32 cents per thousand cubic feet of gas sold to the distributing companies at the gates of points served, is unreasonable and unjust as to the defendant, Lone Star Gas Company? Answer this- question 'yes’ or ‘no’ ”•

The jury answered the question “yes.” Judgment was entered accordingly enjoining the enforcement of the Commission’s rate.

In view of the definition of “fair return” and “unreasonable and unjust” in the court’s instructions, we are of the opinion that the issue for the jury to determine was in substance whether the rate was confiscatory. We so regarded a like submission in the case of United Gas Public Service Co. v. Texas, 303 U. S. 123 . There the jury’s, verdict sustained the rate but that fact does not alter the nature of the issue submitted.

Under the state practice the issues of fact were deters mined in the trial court and on the appeal the Court of Civil Appeals had no authority to make.findings of fact. “Where the evidence is "without conflict, it may render 'judgment. But where there is any conflict in the evidence on a material issue, it has no authority to substitute its findings of fact for those of the trial court.” Post v. State, 106 Tex. 500 , 501; 171 S. W. 707 ; United Gas Public Service Co. v. Texas, supra.

Holding that the rate fixed by the Commission was presumed to be valid, and referring to the authorities as to the scope of judicial review, the court set forth the five primary factors essential to the correct determination of the issue, viz., -the present fair value of the property of the Company used in the public .service, the reasonable annual allowance for depreciation, the reasonably necessary operating expenses, the reasonable' operating revenues, and the reasonable rate of return.

But in dealing with the evidence upon these questions, the court applied a different criterion from that adopted by the Commission. The court held that it-was necessary

“Since appellee [appellant here] was engaged in the integrated business of producing, purchasing, transporting and selling natural gas to the distributing companies at the city gates of some 300 cities and towns in Texas and Oklahoma, it became necessary to allocate or segregate the property used in Texas as well as that used conjointly in both states, in order to determine the fair value of the property used in the Texas public service, the annual depreciation thereof and the Texas operating expenses and revenue.”

The court then set forth the different methods of segregation which the parties had adopted. The court said that the State’s method allocated “to Texas operations, or to intrastate commerce the value of all property located within the physical boundary of Texas.” The “short section” of pipe line “from Texas Panhandle field across the corner of Oklahoma and back into Texas was also allocated to Texas operations.” “Gas sales adjustment” was made by which “Texas or intrastate operations” were charged with the net amount of Oklahoma produced gas for the six-year period 1929 to 1934. * The court obsérved that “no charge against Oklahoma or interstate operations was made for the use of the transmission lines and for equipment within Texas; the effect of which was to give free transportation in Texas of all Oklahoma produced gas.” Texas and Oklahoma expenses and revenues “were allocated in general accord with the segregation of the physical properties.” The court stated that under that method the fair value “of the property undepreciated used in Texas public service was $40,256,862.39” according to the calculations.of the State’s experts; and that after deducting operating expenses and annual depreciation “there remained for the last two years of the aCcounting/ period,

The court then referred to the method of segregation used by the Company by which all the gas. produced or purchased in the Texas Panhandle field and transported into Texas, and all Oklahoma produced gas, were allocated to interstate commerce; that the allocation was. made by a determination of the specific gravity of the Oklahoma and Texas Panhandle gas on the one hand and the West Texas gas with which it was commingled in pipe lines on the other; that the Company had allocated operating expenses and revenue between the two States upon substantially the same basis; and that in this manner the fair value of the property used in the Texas public service on the basis of reproduction cost new, less depreciation, was said to be $38,350,882.32. The court held that gas from the Texas Panhandle field did not move in interstate commerce and hence that the testimony of the Company’s experts was based upon an erroneous assumption and “proved nothing material to this case”; that the Company had offered no other proof upon a correct segregation or allocation of the property, and that the trial court had erred in refusing the State’s motion for an instructed verdict and for a judgment declaring the rate order “to be valid in every respect.”

The court’s specific ruling upon this point is shown by the following statement of its conclusion:

“The burden was upon appellee to show by clear, and satisfactory evidence a proper segregation of interstate and intrastate properties and business, and to show the value of the property employed in intrastate business or commerce and the compensation it would receive under the rate complained of upon such valuation. Having failed to make a proper segregation of interstate and intrastate properties, appelleé did not adduce the quantum

and character of proof necessary to establish the invalidity of the rate as being confiscatory, or unreasonable and unjust.”

The court adverted to the effect of the difference in theory in the two methods of segregation “with respect to the fair value of the property used in Texas public service, the annual depreciation thereof, and particularly as to the operating expenses and revenues.” The court characterized the annual depreciation allowances as speculative and plainly excessive. The court said that with respect to operating expenses, except as to a few controverted items, and with respect to revenues, there was no substantial difference in the testimony “as to totals of both Texas and Oklahoma for the years of the accounting period” but that .the same controversy arose “as to a proper segregation of such expenses and revenues to each State”; and since, as already pointed out, the Company had “failed to make proper segregation of the expenses and revenues, it failed to prove its case.”

The court then criticised certain items of operating expenses as contrary to the actual experiences of the Company or so large as to be excessive upon their face, referring in particular to the items of “federal taxes,” management-fees charged by the holding corporation, new business expenses, canceled and surrendered leases, regulatory commission and general expenses, and going value. The court also took the view that no reason existed why a six per cent, rate of return should be declared confiscatory.

That the judgment of reversal was rested upon the proposition that there was a failure of proof on the issue of confiscation by reason of the fact that the Company had failed to make a proper segregation of its interstate and intrastate properties and operations is fully confirmed by the further opinion of the. court in denying the Company’s motion for a rehearing, when the court said:

“We held that as a matter of law appellee failed to establish by clear and satisfactory evidence the ultimate

fact issue, to wit: Whether the rate fixed by the Commission was so low as not to afford a reasonable return on the fair value of the property used in the Texas public service. Appellee was afforded a seven months hearing before the Commission and a three months trial on appeal to the court. It made no segregation as between its Texas and Oklahoma properties and operations; and did not prove the fair value of the property used in the Texas public-service. The question of the value of such property determines the reasonableness of the rate and probably, in the ultimate analysis, adequacy of service and principles of financing.”

The . Court added that the valuation of such public service property was in the main a matter of estimate or opinion; that a scientific standard of absolute value was unattainable; and that because of this uncertainty, except where, the evidence clearly shows gross over or under valuation, or “mistake, inequality or fraud” in the appraisal, the-finding of value by an administrative commission is generally given finality and that this especially was the rule in the absence of an actual test under the new rate.

First. We agree with the state court that the Commission’s order did not violate the constitutional rights of appellant under the commerce clause.

The Commission did not attempt to regulate the interstate transportation of gas. Compare Hanley v. Kansas City Southern Ry. Co., 187 U. S. 617 ; Western Union Telegraph Co. v. Speight, 254 U. S. 17 ; Missouri Pacific R. Co. v. Stroud, 267 U. S. 404 . Nor, in view of the circumstances-in the instant case, can it be said that the Commission was undertaking to regulate sales and deliveries of gas in interstate commerce. Compare Missouri v. Kansas Natural Gas Co., 265 U. S. 298 ; Peoples Natural Gas Co. v. Public Service Commission, 270 U. S. 550 ; East Ohio Gas Co. v. Tax Commission, 283 U. S. 465 ; State Tax Commission v. Interstate Natural

We think that the value of the pipe line from the Texas Panhandle field was properly included by the Commission in the rate base.

With respect to the gas produced or purchased by appellant in Oklahoma and transported by its pipe lines to Texas, the state court observed that the Oklahoma gas was run through extraction plants in Texas, leaving the residue gas changed in its composition and with its heating value lowered; that large amounts of the Oklahoma gas were run through and stored in wells in Texas; that, passing into appellant’s pipe line system, that gas was commingled with Texas gas and divided and redivided until it was impossible to trace or identify it by

It is in.this light -that the inclusion by the Commission in its calculations of appellant’s producing properties in Oklahoma and its transmission lines to Texas must be considered. The purpose of these calculations was to give proper credit to appellant for its investment and operating expenses in determining a rate for the gas sold and delivered in Texas. The Commission did not attempt to fix a rate for gas supplied to Oklahoma communities and did not impinge upon the jurisdiction of Oklahoma. There is no ground for concluding that the Commission’s

Second. Concluding that appellant had no tenable objection’to the method adopted by the Commission in treating appellant’s property as an integrated operating system, and making its findings as to value, expenses, and revenues accordingly, for the purpose of determining the fair rate for the gas sold and delivered in Texas, we come to the issue of confiscation.

The Commission’s .order was presumptively valid, as the state court held, but it was open to attack in this action under the state statute. Appellant was entitled to present evidence to rebut the’ Commission’s findings of value, operating expenses, revenues and' return,, upon which the order rested. Appellant presented much testimony and elaborate statistical data for that purpose, treating its property and business as the Commission had treated -them. Appellant claimed that this evidence showed a far higher value for its properties than the Commission had allowed and that the rate imposed was confiscatory. The trial court submitted that evidence to the jury, under a proper instruction as to the burden of proof resting upon appellant, and the jury found in appellant’s favor. .

The Court of Civil Appeals reversed the judgment upon a distinct ground. That was that appellant had not sus

We think that this ruling as to the necessity of segregation, and that the sufficiency of appellant’s evidence should be determined by that criterion, was erroneous. This was not a case where the segregation of properties and business was essential in order to confine the exercise of state power to its own proper province. Compare Smith v. Illinois Bell Telephone Co., 282 U. S. 133 , 148, 149. Here, as we have seen, the Commission in its method of dealing with the property and business of .appellant as an integrated operating system did not transcend the limits of the state’s jurisdiction or apply an improper criterion , in its determinations. But if in the circumstances shown the Commission was entitled to make its findings with respect to appellant’s property and business upon the basis it adopted in order to fix a fair rate for the sales and deliveries in Texas, appellant was entitled to assail those findings upon the same basis. If the findings of the Commission as- to value and other basic elements were to be taken as presumptively correct and appellant could not succeed save by overcoming those determinations by clear and convincing proof, appellant could not be denied the right to introduce evidence as to its property and- business as an integrated system and to have the sufficiency of its evidence ascertained by the criterion which the Commission, had prop

The judgment of the Court of Civil Appeals is reversed and the cause is remanded for further proceedings not inconsisten ó with this opinion.

Reversed.

Mr. Justice Black dissents.

Mr. Justice Cardozo took no part in the consideration and decision of this case.