APPEAL FROM THE SUPREME COURT OF OHIO.
Hughes, McReynolds, Brandeis, Butler, Stone, Roberts, Cardozo; Van Devanter and Sutherland took no part in the consideration or decision of this case.
MR. JUSTICE CARDOZO delivered the opinion of the Court.
An ordinance of the City of Columbus, Ohio, approved by the electors at a referendum vote, provides that for five years from November 12, 1929, the price to be charged for natural gas shall be at the rate of 48 cents per thousand cubic feet with a minimum charge of 75 cents per month.
The appellant, the Columbus Gas & Fuel Company, supplies gas to consumers in the City of Columbus, purchasing the gas from the Ohio Fuel Gas Company, an
affiliated corporation. Part of the gas so supplied is produced by the Ohio Fuel Gas Company in its own gas fields, part is bought by it from another affiliated corporation, the United Fuel Gas Company, and part from independent producers. The three affiliated corporations, i. e., the appellant, the Ohio, and the United, are subsidiaries of one parent company, the Columbia Gas & Electric Corporation.
On December 31, 1929, the Columbus Gas & Fuel Company filed a complaint with the Public Utilities Commission of Ohio in which it prayed that the rate prescribed by the ordinance be declared to be inadequate and that such other rate be substituted as might be found to be just and reasonable. To dispose of that complaint there was need of an inquiry into the value of the complainant's property and into its operating expenses, which in turn necessitated an inquiry into the property and expenses of its affiliated corporations. Until some time in 1929, there had been a contract between the Columbus Company and the Ohio Fuel Gas Company whereby for gas delivered at the city gateway Columbus was to pay to Ohio 65% of the local retail rate, retaining 35% for itself as distributor. On the basis of a 48 cent retail rate, the gate rate would thus have amounted to 31.2 cents, and 16.8 cents would have been the return to the distributor. By consent, this agreement was canceled in 1929, and a gate rate of 45 cents was substituted. Most of this voluminous record grows out of a controversy as to the fairness of that charge. The Columbus Company and the Ohio being parts of a single affiliated system, their intercorporate agreement does not control the price to be paid by consumers if the rate thereby established is higher than a fair return. Dayton Power & Light Co. v. Public Utilities Comm'n of Ohio, ante, p. 290. The process of ascertaining that return did not end with an inquiry into the property and expenses of the affiliated seller.
It became necessary to examine the property and expenses of a second affiliated company, the United Fuel Gas Company, which produces gas in West Virginia and sells to the Ohio Company, delivery being made at the Ohio River. The price charged for this gas, which was afterwards mingled with the gas from other fields, is known as the "river rate," and is so described in the record. What was fairly due from Columbus for gas delivered at the gateway is not susceptible of ascertainment without tracing the supply to its sources far away.
The Commission followed these inquiries through all their elusive ramifications. Its members were in agreement as to the value of the appellant's property to be included in the base. They were also substantially in agreement as to all the items of operating expenses with the exception of the price to be paid to the affiliated seller. If that item was laid aside, a rate of 16 cents plus per thousand cubic feet would assure to the appellant the enjoyment of a fair return. Division of opinion came in estimating the price at the gateway and the river. As to that item of expense a majority held the view that a fair price to be paid to the affiliated seller was 39.02 cents per thousand cubic feet, which, added to a rate of 16.02 cents to be retained for distribution, would make the retail price in Columbus 55.04 cents, or 7.02 cents in excess of the rate established by the ordinance. A minority opinion fixed the price at the gateway at 31.70 cents per thousand cubic feet, and the total retail price at 47.95 cents. An order was made, in accordance with the report of the majority, whereby the ordinance rate of 48 cents was declared to be inadequate, and a rate of 55 cents, with an additional charge of 5 cents per thousand cubic feet if monthly bills were not paid within a fixed time, and a monthly minimum charge of 75 cents without discount, became a substituted schedule.
Cross-appeals followed to the Supreme Court of Ohio. The City of Columbus, which had intervened in the proceeding, appealed upon the ground that the ordinance rate should have been upheld as adopted by the city and approved by the electors. The Columbus Gas & Fuel Company appealed upon the ground that the substituted schedule was too low, and that nothing less than 69.59 cents per thousand cubic feet would yield a fair return. United States Constitution, Amendment XIV. The Supreme Court of Ohio held in favor of the city, adopting for the most part the conclusions of the minority commissioner, though going in some respects beyond them. It held that an adequate price at the gateway would be 31.70 cents or less. In arriving at that conclusion it set aside the finding of the Commission that the operating expenses of the affiliated seller should include a yearly allowance of $4,158,954, to amortize the depletion of the gas fields and appurtenant equipment. It held also that the "river price" paid by the Ohio Company to the United, which had been fixed by the majority commissioners at 22 cents, was too high to the extent of 4.21 cents, thus reducing that item to 17.79 cents per thousand cubic feet. Going farther, it held that all the members of the Commission had erred in appraising the gas fields known as class No. 1*fn1 at $25 an acre, and that the valuation of the leases should have been made on the basis of book cost, excluding all leases acquired as a reserve and not presently in use. Cf. Dayton Power & Light Co. v. Public Utilities Comm'n of Ohio, supra. It held also that in fixing the price of gas delivered at the gateway there should have been an additional reduction that would make appropriate allowance for the lower cost of transmission to Columbus as compared with points more distant, though the opinion does not furnish us with any workable formula whereby to put the precept into force.
As the upshot of the whole matter, the court arrived at the conclusion that the ordinance rate was valid, and remanded the proceeding. 127 Ohio St. 109; 187 N. E. 7. There was an appeal to this court, which was dismissed upon the ground that the order was not final. 291 U.S. 651. Thereupon the Supreme Court of Ohio amended its decree by striking out the remand, and substituting a direction that the rate be established in accordance with the ordinance. Upon an appeal from the decree as thus amended the cause is here again.
Many of the questions urged on this appeal have been considered very recently by this court in disposing of an appeal by an affiliated company. Dayton Power & Light Co. v. Public Utilities Comm'n of Ohio, ante, p. 290. In so far as the cases overlap, we refer to that opinion without repetition of its reasoning. But along with many features of identity there are important points of difference. The issue in the Dayton case was one as to the right of the gas company to put into effect a new schedule higher than the rate level previously prevailing. The issue in this case is one as to the right of the municipality to establish a new schedule lower than any level accepted by the company. All that the state court had to do in order to uphold the determination in the Dayton case was to reach the conclusion that adherence to the old rates would not result in confiscation. What it said as to the possibility of excluding an amortization allowance and several other contested items did not determine the result. "If the evidence would have been adequate to uphold a lower rate, a fortiori it was adequate to uphold the rate prescribed." Dayton Power & Light Co. v. Public Utilities Comm'n of Ohio, supra. Here, on the other hand, the decision of the state court reverses the determination of the Commission, and in so doing excludes important items, such as an amortization charge and others, which had received allowance there. Not a little that was put aside in the Dayton case as unrelated to the result
must have consideration and decision now. To those items we turn first, postponing for the moment what will have to be said later as to items less contentious.
1. Amortization, depletion and unoperated leases.
We have seen in the Dayton case that in determining the price to be paid for gas delivered at the gateway, the Commission included among the operating expenses of the affiliated seller an annual allowance of $4,158,954, to amortize the value of leaseholds No. 1 (the only leaseholds then in use) and of the well-structures and equipment used in connection therewith, and thus provide a fund that would restore the depleted capital when the gas had been exhausted. The same allowance was made here.
Upon the appeal by the City of Columbus to the Supreme Court of Ohio the item thus allowed was excluded altogether. The court did not deny that without the creation of a fund to replenish wasting assets the affiliated seller would be left with only a salvage value for leases, wells and fittings after the exhaustion of the gas. It put its judgment upon the ground that the statute of Ohio defining the powers of the Commission and the method of appraisal makes no provision for depletion (Ohio General Code, §§ 499-9 to 499-13), and that the statute, and nothing else, gives the applicable rule. We may assume in submission to the holding of that court that the amortization allowance must be rejected if the rate making process is to conform to the rule prescribed by statute, irrespective of any other. That assumption being made, the conclusion does not follow that the statutory procedure may set at naught restrictions imposed upon the states and upon all their governmental organs by the constitution of the nation.
To withhold from a public utility the privilege of including a depletion allowance among its operating expenses, while confining it to a return of 6 1/2% upon the value of its ...