acreage and production from the Monroe field. The evidence also shows close contractual and operating arrangements between Interstate and United Gas Pipe Line Company that have extended over a period of many years. It is clear from the evidence that as a practical operating matter Interstate does not consider its transportation lines as something separate from its field lines. Interstate's pipe lines are operated as a unit. A large portion of the gas, sold by Interstate in northern Louisiana to the three pipe line companies mentioned above, is purchased and received by Interstate from other companies operating in the Monroe field, which first gather and transport the gas to specified central delivery points for sale to Interstate. Interstate transports the gas which it buys from such companies in the Monroe field and commingles that gas with gas which it has produced and gathered in the Monroe field, and then transports this commingled gas to the points of sale and delivery in Louisiana to the Mississippi River Fuel Corporation, Southern Natural Gas Company, and United Gas Pipe Line Company for the account of Memphis Natural Gas Company. The gas transported and sold by Interstate to these three pipe line companies continues its flow in interstate commerce and, as an established course of business well known to Interstate, is destined for resale for ultimate public consumption in Memphis, St. Louis, Birmingham, Atlanta, and other markets outside Louisiana. In resisting regulation by the Louisiana Public Service Commission, the Interstate Natural Gas Company successfully contended in a Federal court that over 99% of its total sales of gas, which include sales made to the three pipe line companies, were sales in interstate commerce and beyond the reach of the Louisiana Commission. Interstate Natural Gas Co. v. Louisiana Public Service Commission, 33 F. Supp. 50; 34 F. Supp. 980. Interstate does not now deny that the sales of natural gas to the three pipe line companies constitute sales of natural gas in interstate commerce for resale, but it contends that each of these sales constitutes a sale in the "production and gathering" of gas and falls within the claimed exemption stated in 1 (b) of the Natural Gas Act. Section 1 (b) of the Natural Gas Act provides: The provisions of this act shall apply to the transportation of natural gas in interstate commerce, to the sale in interstate commerce of natural gas for resale for ultimate public consumption for domestic, commercial, industrial, or any other use, and to natural-gas companies engaged in such transportation or sale, but shall not apply to any other transportation or sale of natural gas or to the local distribution of natural gas or to the facilities used for such distribution or to the production or gathering of natural gas. The above-described sales to the three pipe line companies come within the scope of the specific affirmative provisions of section 1 (b) of the Natural Gas Act and are clearly sales "in interstate commerce of natural gas for resale for ultimate public consumption for do mestic, commercial, industrial, or any other use." It was such interstate wholesale sales which the United States Supreme Court had ruled were beyond the reach of the state commissions, that Congress intended to regulate by the Natural Gas Act. The negative language in section 1 (b) upon which the Interstate Company relies for its claimed exemption involving these sales provides that the Commission shall not have jurisdiction over "the production or gathering of natural gas." When the distinction between production and gathering of natural gas, and the sale of such gas in interstate commerce is kept in mind, effect is given to the Congressional objective.3 The Commission is bound to obey the command of Congress to regulate these sales in interstate commerce for resale to the three pipe line companies. Such is clearly the implication of the decision of the Circuit Court of Appeals in Peoples Natural Gas Co. v. Federal Power Commission, 127 F. (2d) 153, cert. den. 316 U. S. 700. We conclude, therefore, that the transportation and the sale of gas by Interstate to Mississippi River Fuel Corporation, Southern Natural Gas Company, and United Gas Pipe Line Company for the account of Memphis Natural Gas Company constitute the transportation of natural gas in interstate commerce and the sale in interstate commerce of natural gas for resale for ultimate public consumption for domestic, commercial, industrial, and other uses, and that such transportation and sales are subject to the jurisdiction of this Commission. CORPORATE AND FINANCIAL HISTORY Interstate Natural Gas Company was organized in 1926 for the purpose of producing and transporting natural gas. The primary market to be served directly by Interstate was the refinery of the Standard Oil Company of Louisiana, and certain industrial companies south of Baton Rouge, Louisiana. Contracts also were made with other industrial consumers, distributing gas utilities, and other natural gas pipe line companies. The original securities issued were 600,000 shares of capital stock at $5.00 per share, or a total of $3,000,000 (later increased to $6,529,530) and $11,500,000 of First Mortgage 10-Year, 6% Sinking Fund Gold Bonds. Interstate has paid off its bonds, has paid cash dividends exceeding $10,000,000 and has accumulated a surplus of more than $5,800,000 in the period 1926 to 1941. 2 H. Rept. No. 709, 75th Cong., 1st Sess., pp. 1-2; S. Rept. No. 1162, 75th Cong., 1st Sess., pp. 1-2; Illinois Natural Gas Co. v. Central Illinois Public Service Co., 314 U. S. 498, 503-506; Federal Power Commission v. Natural Gas Pipeline Co., 315 U. S. 575, 582; Kentucky Natural Gas Corp. v. Pub. Serv. Comm., 28 F. Supp. 509, 512, aff. 119 F. (2d) 417. For the distinction between production of a commodity and sales of such commodity in interstate commerce, see Carter v. Carter Coal Co., 298 U. S. 238, 302-4. Control of the Interstate Company from its inception has been in the Standard Oil Company (N. J.) through the ownership of a majority of the capital stock. We now proceed to the determination of the lawful rates within the scope of our statutory authority. This will include a determination of rate base, rate of return, operating revenues and expenses, allocation of cost of service and reasonable earnings for the future. RATE BASE Upon consideration of all aspects of this case in the light of our authority under the Natural Gas Act, we conclude that the rate base is the actual legitimate cost of the property (including construction work in progress) used and useful in furnishing service, less the existing depletion and depreciation, plus necessary working capital. We find that it is not necessary for the purposes of this case to investigate and ascertain any other facts in order to determine the proper rate base. Interstate claimed a rate base of $19,167,290 which was composed of the actual legitimate cost of gas plant in service, less observed deterioration and accrued depletion, plus future capital additions, construction work in progress, and estimated working capital. Reproduction cost was not claimed as an element in the rate base determination. Instead, it was conceded that actual legitimate cost was the proper starting point in that determination. The allowable rate base is $15,583,975. We will now discuss the components thereof. Actual legitimate cost.-There is no dispute as to actual legitimate original cost. It is agreed that this amounted to $21,387,159 at the end of 1941. That undisputed amount represents the actual outlay to establish the utility; it is the gross investment the owners have made in the gas plant in service. Existing depletion and depreciation.-The evidence as to the existing depreciation and depletion (hereinafter referred to as depreciation) in the properties may be summarized as follows: Company witness. Books of account__ $3,845, 619 Interstate used the "observed deterioration" process to arrive at the figure of $3,845,619. In its previous decisions in the Canadian River and Hope cases, the Commission has dealt at length with the fallacy of the "observed deterioration" method of determining accrued depreciation. In the Matter of Canadian River Gas Co., 43 P. U. R. (N. S.) 205, 218, supra, p. 32; Cleveland v. Hope Natural Gas Co., 44 P. U. R. (N. S.) 1, 17, supra, p. 150. We have pointed out that it results in arbitrary conclusions, based on a consideration of superficial evidence of physical deterioration only, while disregarding more important factors, such as the remaining life of the gas reserves, obsolescence and the economic life of the property. The method is inherently fallacious in that it confuses the appearance or physical condition of property with true depreciation, which is the using up of its economic or service life. It does not give consideration to all factors contributing to the retirement of property; hence it cannot reflect the actual existing depreciation. The method employed by the company to determine existing or accrued depreciation is inconsistent with the method used to determine annual depreciation expense. Annual depreciation expense and accrued depreciation are merely two phases of the same phenomenon. They must be determined consistently or grave injustices will result. The annual depreciation expense claimed by the company was determined according to the economic or service life principle. This is the general practice, and is proper. In determining accrued depreciation, however, the company objects to the service life principle, and insists upon a scheme which cannot result in disclosing the full amount of depreciation which has been suffered. Thus, the company seeks to employ a double standard: one which results in high annual allowances to it for depreciation expense, and another which discloses little depreciation to be deducted in determining the rate base. The annual allowance claimed by the company would in 64 years total more than the amount which it contends has accrued during 15 years of actual operations. In other words, the dual standard advocated is a pincers operation which always results in squeezing too much from the rate payer. As indicated previously, annual depreciation expense and accrued depreciation are merely two aspects of the same phenomenon which require consistent treatment in their determination. The Commission's staff presented in these proceedings a depletion and depreciation reserve requirement study, that is, a computation of the proper reserve which should have been accrued. A qualified staff engineer, who analyzed the company's past experience, relevant service life data on other pipe lines, and who made a field inspection of the company's physical properties, estimated the over-all service lives of the properties by classes. His study included a careful consideration of both functional and physical aspects of depreciation. In this case the economic service life of Interstate's property is limited and controlled by the available gas supply which is estimated to be exhausted by 1960 and before certain of the physical elements of the property will deteriorate completely. There is no controversy over the amount of the company's gas reserves and known available supply, which are esti mated to have an over-all life of 35 years from their first utilization in 1926. The depreciation rates which the staff used in computing both the annual expense and the reserve requirement were derived from the average service lives of the various classes of properties. The equitable principle that annual expenses for depreciation must be harmonized with accrued depreciation was recognized and applied. The reserve requirement at any given time is the accumulated amount of proper annual provision for depreciation, less the cost of property retired. The method used by the staff follows our previous decisions. Under it, there is determined the amount required annually to reimburse the company for property consumed in service, thus assuring the company it will be fully reimbursed for its capital investment by the end of the economic life of its wasting-asset enterprise. Federal Power Commission v. Natural Gas Pipeline Co., 315 U. S., 575, 593. The Commission finds that the required depletion and depreciation reserve as computed by the staff is the best measure of actual existing depletion and depreciation in the properties. At the end of 1941 the reserve requirement, by functional classifications, was: This required reserve, totaling $6,328,934, will be deducted from the actual legitimate cost of the Company's property. As indicated hereinbefore, Interstate had accrued on its books a reserve for depreciation, depletion, and amortization aggregating $10,981,720 by the end of 1941. The company's book reserve exceeds the reserve requirement, which the Commission finds to be the measure of actual existing depletion and depreciation, by more than $4,600,000. For the reasons set forth at length in the Hope case, the Commission has deducted from actual cost only what it has determined to be the reserve requirement which reflects the depletion and depreciation ac The unit-of-production method (unit equals 1,000 cubic feet of gas) was used to determine the annual depletion and depreciation and the reserve requirement for natural gas producing lands, leaseholds, and rights, wells, field lines, field measuring and regulating structures and equipment, and other structures and equipment associated with operations in the Monroe gas field. The straight-line service life method was used to determine annual depreciation and the reserve requirement for all other plant items. There is no dispute over the use of the service lives in this case for determining the depreciation rates upon which the annual allowance for depreciation is based. See: Re Long Island Lighting Co., 18 P. U. R. (N. S.) 65, 146-151, 189-191, aff. 249 App. Div. 918, 292 N. Y. S. 807, 809, 18 P. U. R. (N. S.) 225, 226; Re Rochesteer Gas & Electric Corp., 33 P. U. R. (N. S.) 393, 489, 502-3; National Association of Railroad and Utilities Commissioners, Proceedings of Fiftieth Annual Convention (1938), pp. 473–4. |