The company's intrastate rates are under the jurisdiction of the Public Service Commission of West Virginia. The West Virginia commission and the State of West Virginia are intervenors in these proceedings and no objection was made by them to the method used herein for the allocation of cost to local operations in West Virginia. The evidence on the cost of service allocated among the five customer companies and the conditions of service for the respective companies disclose that no reduction in rates is applicable to the affiliated River Gas Company. Among 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 in interstate rates is applicable to the East Ohio Gas Company, Peoples Natural Gas Company, Fayette County Gas Company and the Manufacturers Light and Heat Company. The present average rates per M. c. f. are 36.5¢ for East Ohio Gas Company, 35.5¢ for the Peoples Natural Gas Company, 35¢ for the River Gas Company, and 31.5¢ for Fayette County Gas Company and the Manufacturers Light and Heat Company.

The conditions and characteristics of service, required by the con tracts, are similar for the East Ohio Gas Company and the Peoples Natural Gas Company with respect to obligations and priorities by classes of consumers, but there is a great difference with regard to delivery pressures. Hope Company delivers gas to the East Ohio Company at sufficiently high pressures so that no additional compression is required by the East Ohio 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 compress the gas for transportation to the ultimate consumers. From the evidence we conclude that the differential 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 characteristics of service.

Considering the cost of rendering service to the Fayette County Gas Company and the Manufacturers Light and Heat Company, and the conditions and characteristics of service to those 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 less than 6% of the total gas sold by Hope, the Commission finds that the rate for these companies should not be different from the rate paid by the Peoples Natural Gas Company. In the absence of compelling reasons to the contrary, it is good and desirable practice to fix rates that are uniform. Applying this principle in these proceedings the Commission will prescribe uniform rates for the Peoples Natural Gas Com

pany, Fayette County Gas Company and the Manufacturers Light and Heat Company.

After considering all the evidence with respect to Hope's interstate wholesale rates and the proper average rates per M. c. f. for the five customer companies at the respective points of delivery, the Commission finds the following rates to be just and reasonable:

In passing, it might be noted that the over-all rate of return for 1940 would have been 8% if the new rates had been in effect that year and if the earnings from the distribution property had remained unchanged. This rate of return is reduced to 612%, because of estimated increase in expenses and increase in rate base which we have allowed for the future.

Appropriate findings and order will be entered in accordance with this opinion.

MANLY, Commissioner, concurring:

I have joined in the majority opinion of the Commission in this case, with respect to the deduction of the "depreciation reserve requirement" in preference to the depreciation reserves carried on the books of the company, because such action seems to be required by the precedent established by the unanimous decision of the Commission in the Interstate Power case.35

In that case the depreciation reserves carried on the books of the Interstate Power Company were obviously deficient, as a result of "unsatisfactory" and "haphazard" accounting practices. They amounted to only about 22 percent of the electric plant account. If these utterly deficient book reserves had been accepted as the proper deduction for depreciation in arriving at the rate base, it would have given the company an advantage to which it was not entitled and would have resulted in imposing an unfair burden on the consuming public.

as In the Matter of Interstate Power Co., 32 P. U. R. (N. S.) 1, 10, 2 F. P. C. 71. 582231-44-vol. 3-13

The Commission, therefore, in that case as in the present case, determined on the record what the proper "depreciation reserve requirement" should be and deducted that amount in arriving at the rate base. In the Interstate case such requirement was found to be approximately 28 percent of the electric plant account, or more than ten times the proportion carried on the company's books. In the instant case the reserves carried on the books are in excess of what the Commission has determined to be a proper reserve requirement, but the principle is exactly the same. We cannot, without discrimination, apply one principle in cases where the reserves are deficient and another where they are excessive. To do so would undermine the very foundation of utility regulation.

It may be noted also that, while many of the natural gas companies have built up excessive depreciation reserves, largely because they had no sound basis for determining the probable service life of their properties, this is not true in the electric utility industry. There it is probable, although no exact determination has been made, that a majority of the companies have established inadequate depreciation reserves. To apply the principle of deducting book reserves to the electric utility industry would therefore be grossly unfair to a large part of the consuming public.

Attention should also be directed to the fact that, until the passage of the Federal Power Act in 1935 and the Natural Gas Act in 1938, the depreciation policies of both the electric utilities and the natural gas companies, as regards their interstate operations, were not subject to regulation. Under such conditions, while it is true that the amounts set up on the books as depreciation reserves were derived from revenues collected from customers, they did not, as under regulation, play a determining part in fixing the level of rates and the consequent amount of the revenues. Without regulation, the good old rule of "What the traffic will bear" is controlling and depreciation policies are an afterthought, determined by the management and board of directors. It follows therefore that, during the pre-regulatory period, the customers would not have contributed any more or less to the company's revenues, regardless of what depreciation program was pursued.

Finally, it may be noted that if the Hope company in the instant. case had been improvident and dissipated its earnings to such an extent that its depreciation reserves should now be grossly deficient, the utmost that the Commission could do would be to direct the deduction of a proper "depreciation reserve requirement." It is difficult, therefore, to understand how it can be argued that, because it has prudently set aside for depreciation an amount greater than such requirement, it should now be penalized in fixing its rate base. Such

a policy, it seems, would place a premium on improvident and wasteful management because, until the Commission has made its official determination of the reserve requirement, no one can say with assurance what it should be.

If the Commission, in the years that lie ahead, consistently requires proper reserve requirements to be set up on the books of interstate electric utilities and natural gas companies, and proper annual depreciation to be set aside, the time will soon come when all such companies will be on a uniform basis and the book reserves may properly be deducted in arriving at the correct rate base. If such consistent policies are not followed, regulation will inevitably collapse under the unequal strains which have been imposed.

DISSENTING OPINION

SCOTT, Commissioner, dissenting in part:

This proceeding poses such a basic problem of regulation that I am constrained to dissent in part.

The majority has found a rate base in the amount of approximately $33,712,526, and has predicated the rates which it has prescribed upon the basis of allowing the Hope company a return of 62% upon that base.

Upon the record in this proceeding, I believe that the rate base for Hope Natural Gas Company can be reasonably determined not to exceed the sum of $17,662,792.36 Using this figure as a predicate, a further reduction of some $1,040,000 in net revenue to Hope is clearly indicated.

It seems to me that this case is an appropriate one in which to establish the concept that true prudent investment in property of the utility dedicated to the public service is a fair and proper rate base. this regard, the recent decision of the Supreme Court in the Natural Gas Pipeline Company of America case 37 affords ample authority for the use of prudent investment. The problem, then, is to determine what is the amount prudently invested by the Hope Compilij In tie properties now devoted to public service. This problem does not appear too difficult.

The total cost of plant used and useful in the public service has been found by the Commission to be approximately $52,000,000. 000009999019 The depreciation and depletion reserves as of December 81, 1940, as shown on Hope's books, attributable to this, property was approxi

212

30 It might even be set at a lower amount; see discussion fallegt yd bavot an Federal Power Commission, et al. v. Natural Gas Pipeline' pany America, et al.,

315 U. S. 575, 62 S. Ct. 736.

39

mately $38,377,750.38 In addition, it should be noted that Hope has in the past transferred $7,552,919 from depreciation and depletion reserves to earned surplus. It is unquestioned that every single dollar in the depreciation and depletion reserves (as well as the $7,552,919 transferred from those reserves to surplus) has been taken from gross operating revenues whose only source was the amounts charged customers in the past for natural gas. It is, therefore, a fact that the depreciation and depletion reserves have been contributed by the customers and do not represent any investment by Hope. Indeed, J. C. Chisler, vice president and treasurer of Hope, testified that it had been the company policy to retain revenues obtained through the medium of depreciation to finance and to develop its property.

The funds accumulated by such charges to operating expenses, the net total of which is represented by the amount in these reserves, have been used to build property now in service.

As was pointed out in the Lindheimer case: 40

* According to the practice of the Company, the depreciation reserve is not held as a separate fund but is invested in plant and equipment. As the allowances for depreciation, credited to the depreciation reserve account, are charged to operating expenses, the depreciation reserve invested in the property thus represents, at a given time, the amount of the investment which has been made out of the proceeds of telephone rates for the ostensible purpose of replacing capital consumed.

It is proper, of course, that depreciation and depletion reserves should be accumulated from consumer payments for service to assure that the capital embarked in the enterprise by the utility owner shall remain unimpaired. But it is an equitable corollary of the duty which rests upon the consumer that he shall not be required to pay a return on amounts which, in fact, he, rather than the owner of the utility, has contributed.

The majority has very properly pointed out that property which has been constructed by past charges to operating expense, such as well drilling and overhead charges, should not be permitted to be

38 The depreciation and depletion reserve per books at December 31, 1940, totals $46.654,691. $4,819,640 of this amount is attributable to the property.of the Reserve Gas Company merged into Hope in 1939, but, as is pointed out by the majority in a footnote, the property and income of Reserve have been segregated and excluded for purposes of these proceedings. $1,866,887 of the reserve is applicable to distribution property with which we, of course, are not here concerned. $1,590,414 represents charges to the reserve by reason of adjustments made in plant accounts at December 31, 1938, but not recorded on the books. The book reserve, therefore, applicable to Hope's property with which we are concerned is thus $38,377,750. The deduction of this reserve from $51,957,416, cost as found by the majority, leaves $13,579,666, to which is added (per the majority opinion) $4,083,126 for net capital additions 1941, 1942, and 1943, useful unoperated acreage and working capital, making a total of $17,662,792.

39 If correction be made for this transfer, the rate base would not exceed $10,109,873. 40 Lindheimer v. Illinois Bell Telephone Company, 292 U. S. 151, 168.