Title: Public Service Com'n v. Montana-Dakota Utilities Co.
Citation: 100 N.W.2d 140
Docket Number: 7845, 7846
State: north-dakota
Issuer: north-dakota Supreme Court
Date: December 10, 1959

100 N.W.2d 140 (1959) PUBLIC SERVICE COMMISSION OF STATE of North Dakota, Appellant, v. MONTANA-DAKOTA UTILITIES COMPANY, Respondent (two cases). Nos. 7845, 7846. Supreme Court of North Dakota. December 10, 1959. *141 Gerald G. Glaser, Commerce Counsel, Bismarck, for appellant. Cox, Pearce &amp; Engebretson, Bismarck, Earl H. A. Isensee, Minneapolis, Minn., for respondent. TEIGEN, Judge. This is an appeal by the Public Service Commission of the State of North Dakota from two judgments entered by the District Court of Ward County, Second Judicial District. *142 The judgments are identical as to relief granted and involve the same parties and the same subject matter before the Commission and they have, accordingly, been consolidated for this opinion. The Montana-Dakota Utilities Company, hereinafter called the Utility, filed two applications with the Public Service Commission of the State of North Dakota, hereinafter called the Commission. In one it asked that it be determined that no certificate of public convenience and necessity was necessary to construct and operate a natural gas transmission line from Tioga to Minot, to construct and operate natural gas distribution systems to be served by such transmission line in the communities of White Earth, Ross, Stanley, Palermo, Berthold, Des Lacs, and Burlington, or in the alternative that if certificates of public convenience and necessity are required to construct and operate the proposed facilities that the same be issued and that rate schedules proposed by the Utility be approved as rates for rendering natural gas service to the communities of Tioga, White Earth, Ross, Palermo, Berthold, Des Lacs, Burlington and Minot. The second application prayed that the Commission determine that public convenience and necessity require the construction and operation of natural gas distribution systems in the municipalities of Epping, Wheelock, and Ray. That the Utility is not required to secure a certificate of public convenience and necessity to construct and operate a natural gas transmission pipe line from Tioga to the City of Williston and the construction and operation of the distribution system in the municipality of Springbrook or in the alternative that if the Commission determines that a certificate of public convenience and necessity is necessary that the same be issued and that certain rate schedules proposed by the Utility be approved for the municipalities of Ray, Wheelock, Epping, Springbrook, Williston and East Fairview. The applications proposed rate changes in the municipalities of Minot, Tioga, Williston and East Fairview, which municipalities the Utility already was serving either through its existing natural gas transmission and distribution systems or propane airgas distribution systems. The Commission held hearings on the applications and five final orders were issued by the Commission. The Utility immediately appealed therefrom to the District Court. Upon petition for remand by the Commission the District Court remanded the two cases for further hearings before the Commission. Further hearings were held and new final orders were issued by the Commission voiding and setting aside the original five orders and issued new orders in each of the two cases. The Utility appealed from these orders to the District Court. The District Court in each case entered judgment upon appeal and decreed: 1. That no certificate of public convenience and necessity was or is required for the construction and operation of a natural gas transmission pipe line by the Utility from Tioga to Williston or the distribution system in any of the communities to be served by said pipe line in one judgment and that no certificate of public convenience and necessity was necessary for the construction and operation of natural gas pipe line from Tioga to Minot or for the construction and operation of distribution systems of any of the communities to be served by the said pipe line in the other, and based its decisions upon the exceptions provided in sub-section 3 of Section 49-0301, NDRC of 1943 as amended. 2. That the rate schedules and charges filed by the Utility in each of the proceedings are the only legal schedules of rates and charges for gas service in the communities. 3. That the proceedings in the cases be remanded to the Public Service Commission for disposition in accordance with the decision of the court. These judgments were contrary to the final orders of the Commission which had determined, *143 1. That certificates of public convenience and necessity were necessary under the law, 2. That public convenience and necessity existed, 3. That the rate schedules filed by the Utility for the communities of Williston, and East Fairview be approved but that the rate schedules for the remaining communities were excessive and ordered a reduction in those rates, and 4. That the Secretary of the Commission be authorized and directed to issue certificates of public convenience and necessity conditioned, however, upon receipt of written consent from the Utility agreeing to comply with the provisions of the rate orders issued by the Commission. The Commission in its appeal to this court sets up the following issues: 1. Was the Utility required to obtain certificates of public convenience and necessity before (a) constructing the pipe line and distribution facilities from Tioga to Minot, and (b) constructing distribution facilities in the community served by the line constructed from Williston to Tioga? 2. Is there substantial evidence to support the Commission's findings that the rates proposed by the Utility were unreasonable, unnecessary and discriminatory? 3. Did the District Court, and does the Supreme Court, have the jurisdictional power to interfere in this proceeding, with the Commission's orders prescribing uniform rates? The application, insofar as it related to the pipe line proposed to be built from Tioga to Williston, was dropped from the proceedings because it was agreed it would be interstate in character and therefore under the jurisdiction of the Federal Power Commission. The law provides that on an appeal from an order of the Public Service Commission the court shall try and hear the appeal "after such hearing, the court shall affirm the decision of the agency unless it shall find that such decision or determination is not in accordance with law, * * *" Sec. 28-3219, NDRC 1943. The Utility in its applications prayed in the alternative, first, that it be determined that a certificate of public convenience and necessity was not necessary, and second, that if it was found to be necessary that the same be issued. The Commission found in its opinion the issuance of a certificate was necessary, that public convenience and necessity existed and that certificates be issued. However, the objectionable part of the Commission's orders to the Utility was the fact that the issuance was conditioned upon the requirement that the Utility file in writing its agreement to comply with the provisions of the order establishing a lower rate schedule. The Public Service Commission is a constitutional body having only such powers and duties as are prescribed by law. Sections 82 and 83 of the North Dakota Constitution. A careful examination of the statutes fails to disclose any language indicative of a legislative intention to confer upon the Commission the power to order the issuance of a certificate of public convenience and necessity conditioned upon prior receipt of a written consent to comply with a rate schedule ordered by the Commission. Chapter 49-03, NDRC 1943 and amendments thereto establishes the Commission's powers relative to the issuance of certificates of public convenience and necessity. Section 49-0302 sets forth the prerequisites to issuance and a careful examination of that section does not disclose such power. We determine the power does not exist by implication for the reason that the statutes give the Commission ample power to enforce its lawful orders in the courts. See Section 49-0202, 1957 Supplement to NDRC of 1943. The condition, therefore, made a prerequisite to the issuance of a certificate being outside of the scope and powers of the Commission is, in our opinion, void; *144 it falls beyond the purview of the statutes, and is not in accordance with law. Petition of Village Board of Wheatland, 77 N.D. 194, 42 N.W.2d 321; Chrysler Light &amp; Power Co. v. City of Belfield, 58 N.D. 33, 224 N.W. 871, 63 A.L.R. 1337; Williams Electric Cooperative, Inc. v. Montana-Dakota Utilities Co., N.D., 79 N.W.2d 508; City of Grafton v. Otter Tail Power Co., N.D., 86 N.W.2d 197, 42 Am.Jur. Public Administrative Law, Section 26. The orders of the Commission authorizing and directing the issuance of the certificates of public convenience and necessity, stripped of their void conditions, leaves the issue of whether or not the Utility is required to obtain a certificate of public convenience and necessity in these cases moot and academic. An opinion thereon would be merely advisory and this court will not give an advisory opinion. The point no longer fairly arises from the record. Constitution, Section 101; In re Novak's Estate, 73 N.D. 41, 11 N.W.2d 64; Moug v. North Dakota Workmen's Compensation Bureau, 70 N.D. 656, 297 N.W. 129; Boelter v. Crist, 33 N.D. 331, 157 N.W. 115; Northwestern Mutual Savings &amp; Loan Ass'n v. White, 31 N.D. 348, 153 N.W. 972; Heald v. Strong, 24 N.D. 120, 138 N.W. 1114, and, In re Kaeppler, 7 N.D. 307, 75 N.W. 253. The judgment of the District Court must therefore be modified in this respect to comply with this opinion. The second issue raised by the appellant Commission is stated as follows: In general, the governing principle for determining rates to be charged by a utility is the right of the public on one hand to be served at a reasonable charge, and the right of the Utility on the other to a fair return on the value of its property used in the service. After the value or rate base of the property used and useful in the public utility business is ascertained, next to be ascertained is the amount of the operating expenses as compared with the gross income, after which a conclusion can be drawn as to the rates necessary for a fair return on the property. 43 Am.Jur. Public Utilities, Section 156, page 674. In its appeal from the order of the Commission the Utility challenged the right of the Commission to examine into the area of profits to Amerada Petroleum Corporation and Signal Oil and Gas Company as the suppliers of residue gas to the Utility pursuant to contracts entered into between the Utility and the said suppliers when the said suppliers are not owned or controlled directly or indirectly by the Utility or any affiliate, subsidiary, parent company, associate or a corporation whose controlling stockholders are also controlling stockholders in such Utility as provided in Section 49-0202(6), 1957 Supp. to NDRC of 1943, and the contracts between the Utility and the said suppliers were negotiated at arm's length. The Commission on the other hand contends that it had a right to examine into the profits of the suppliers by virtue of Section 49-0604, NDRC 1943 making it the duty of the Commission in determining proper rates to disallow advanced or fictitious prices or prices in excess of fair market value paid for any commodity, by the Utility. The Commission makes no claim that the price agreed to be paid by the Utility for residue gas from its contract suppliers is a "fictitious or advanced" price as set forth in the section above cited but they found and determined that the price agreed to be paid by the Utility to its suppliers for "firm" gas pursuant to the contracts entered into between them provided prices in excess of the fair market value in the amount of seven cents per thousand cubic feet and that this was one of the major factors determined by the Commission from which they concluded *145 the rates as proposed by the Utility were unreasonable. The only processor of natural gas to the residue gas form in North Dakota is the Signal Oil &amp; Gas Company which in turn obtains a major portion of the natural gas it processes from Amerada Petroleum Corporation with whom it has a working arrangement or contract for the processing of natural gas. If the Utility were to serve the areas and communities in question in this proceeding it would have to elect to purchase gas from these suppliers for transmission and distribution or to transport gas into North Dakota from its out of state facilities. The Utility elected to negotiate for the purchase of gas from the North Dakota suppliers and according to the testimony introduced before the Commission, negotiations extending over a period of some four years took place before contracts finally were negotiated. In the final form, two contracts were entered into between the Utility and each of the said suppliers, one for the purchase of "firm" gas and the other for "dump" gas. The price to be paid for the "firm" gas was considerably higher than the price agreed to be paid for the "dump" gas. All gas to be supplied the Utility through the Signal Oil &amp; Gas Company facilities. The Utility agreed to purchase under the "firm" gas contract all gas necessary for distribution in the proposed "new market area" of the Utility or, in other words, all gas necessary to serve the communities within North Dakota, located north and east of the Missouri River except for the communities of Williston and Bismarck and such gas would be charged the Utility under the "firm" gas contract rate. The "dump" gas to be transported by the Utility through its pipe lines from the Signal plant at Tioga, westerly into the Utility's system in Montana for storage or other uses, and thus could by the Utility be transported back into North Dakota for distribution and sale within the state through other facilities of the Utility in three existing transmission lines of the Utility presently serving communities in southwestern North Dakota, south and west of the Missouri River plus Bismarck and Williston, and in the event of deficiency of "firm" gas, the "new market area" during periods of such deficiency. Both the "firm" gas and "dump" gas were provided by the contracts to be of the same quality. The Utility in computing its proposed rates for the proposed new distribution area and the communities of Williston and East Fairview used the "firm" gas contract rate. As previously stated the Commission found that this price was in excess of fair market value and premised that decision on the fact as found by the Commission that the suppliers, to wit, Amerada Petroleum Corporation and Signal Oil &amp; Gas Company would make excessive profits therefrom. In determining the facts upon which this conclusion was based the Commission examined officers, employees and records of the suppliers and also official records filed with state officials by the suppliers. They found that in processing the wet gas gathered by the Signal plant from the wellheads, several by-products were produced by extraction, a necessary operation to produce residue gas to supply the Utility under the contract. That such by-products consist of sulphur, butane, propane, casing-head gasoline and crude oil of marketable nature. These by-products when sold by the suppliers would produce substantial income. This income, plus the anticipated income from the sale of residue gas to the Utility at "firm" gas contract rates will result in excessive profits to the suppliers, and therefore the Utility had agreed in its "firm" gas contract to a price for residue gas in excess of fair market value or price as contemplated by Section 49-0604, NDRC 1943. The Utility challenges this method of arriving at a fair market value or price of a commodity they purchase and say it is error. Thus one question for us to determine upon this appeal is whether or not the Commission may examine into the question of profits of suppliers of a commodity to a utility when such suppliers are not in any *146 manner connected with the Utility as provided by Section 49-0202(6) of the 1957 Supplement to the NDRC of 1943 as a method of determining fair market value for the commodity in question in carrying out the Commission's duty as provided in Section 49-0203, NDRC of 1943. Sub-section 6 of Section 49-0202, 1957 Supplement to NDRC 1943, reads as follows: It is admitted that this section does not apply in the instant case. Section 49-0604, NDRC of 1943 reads as follows: The suppliers, Amerada Petroleum Corporation and Signal Oil &amp; Gas Company own the only source of residue gas suitable and in sufficient supply in North Dakota to meet the utility's requirements. Thus there were no competitors vying to meet the Utility's needs. Market value is defined in Webster's New International Dictionary, Second Edition Unabridged as: The same dictionary defines market price as follows: Research by this court has failed to produce any case which has determined market value or market price on a basis of the profit to the seller. Ordinarily fair market value or a reasonable fair market price are synonymous. We believe the Commission was in error in determining fair market value of a commodity by finding that the suppliers of the commodity to the Utility were making an unreasonable profit from the overall operations of its plant when it produced and sold several products which through its skill of operation and efficiency of management utilized and produced and made available for sale all of the various component parts contained in the wet gas produced at the well-head. This is not the proper method for determining whether or not the price which the suppliers negotiated with the Utility for the *147 sale of the residue gas is fair market price or fair market value. On the basis of this reasoning the Commission could have found that the residue gas had only nominal value or no value at all, because the suppliers were making a reasonable profit on the marketing of the by-products, and on the other hand if the suppliers' management was poor its methods of operation inefficient, the value of the residue gas might be determined to be an amount considerably in excess of the amount determined to be the value by the normal methods of price determination in commerce. As stated heretofore we find no precedent anywhere which establishes fair market value or reasonable and fair market price on the basis of the profit to the seller. The relationship of the corporations involved do not come within the provisions of Sections 49-0202, (6) of the 1957 Supplement to the NDRC of 1943 and this statute is not applicable to the instant case and the Commission upon its own motion could not adopt it as a regulation. The Public Service Commission has only such powers in the regulation of public utilities as have been conferred upon it by the legislature, NDRC 1957 Supplement, 49-0301 and 49-0202; NDRC 1943, 49-0201, 49-0203, Constitution, Sections 82 and 83. See Williams Electric Co-operative, Inc. v. Montana-Dakota Utilities Co., N.D., 79 N.W.2d 508; City of Grafton v. Otter Tail Power Co., N.D., 86 N.W.2d 197. We think the Commission was in error in using as a basis, the profit to the seller, as a method of determining fair market value or fair market price under Section 49-0604, NDRC of 1943 when none of the requisites provided by Sec. 49-0202(6), 1957 Supplement to NDRC of 1943 exist. The Commission also challenges the District Court in its findings of fact when it found as follows: The Commission had found relative thereto as follows: The Commission in its findings also stated: *148 That the Commission from the foregoing findings of fact drew the following conclusions of law: The Commission argues that the finding of the Court set forth above overruling the Commission's findings are error. The evidence, we believe, clearly points up the reason for the larger capacity pipe line. The President of the Utility testified when asked to explain why the Utility proposed to construct a 12-inch pipe line from Tioga to Minot, on direct examination as follows: And when asked under direct examination whether the 12-inch pipe line was of sufficient size to transport the gas necessary to provide natural gas service in the eastern portion of North Dakota he answered in the affirmative. In further explanation of the company's obligation in connection with the construction of the pipe line he testified: This is followed by testimony correcting the return on its investment at 6½ percent. The Vice President, Treasurer of the Utilities Company in part testified: He was then asked the question: When the witness was asked if he had anything further to offer he stated in part: On cross examination the following question and answer of this witness is shown: It is argued that the additional investment of about $750,000 for the construction of the larger pipe line should be included in the rate base by the Commission for the reason that the pipe line itself before extension would provide some storage cushion against fluctuations in the supply of gas or short term breakdown. The line being purely an intrastate line without any other storage facilities available and this reasoning is supported in the testimony of the President of the Utility as follows: The evidence shows another service is provided in the event of emergency which is clearly set forth in the evidence given by the Assistant Vice President and Gas Engineer of the Utility. He testified as follows: In other words the Utility proposed to build two pipe lines both commencing at the same source of gas, one line to run west to connect with the Utility's interstate facilities at Williston and would be an interstate line and the other line to run east is proposed to be a purely intrastate line. That, however, a connecting line six inches in diameter is proposed to connect these two lines and which line will contain a valve which will remain plugged or closed and opened only in case of emergency. Normally the gas from the Signal plant will flow west in the interstate line running to Williston and beyond, and east in the intrastate line running to Minot. However, in a case of emergency the valve would be opened and the flow of gas in the interstate line running to Williston would be reversed and made to flow east through the connecting line and thus it would serve the new market area located between Tioga and Minot and the intervening communities. The testimony also shows that the excess size of the proposed pipe line from the Signal plant in Minot will create storage facilities for about a one-day service only to the communities served by this pipe line. We believe the evidence is all but conclusive that the excessive size of the pipe line proposed from the Signal plant at Tioga to Minot is not necessary to serve the communities proposed and not at the present actually to be used nor be made useful for the purpose of rendering its public service to Minot and the intervening communities. It may be a prudent investment to provide for possible future growth by expansion into other and new communities to the east at some future date providing sufficient gas is made available. The anticipated patrons of the company under the present proposal cannot be burdened in order to provide for possible needs of other patrons in other communities some time in the future. We feel the Commission was right in its determination and the Court in error in reversing it, 43 Am. Jur. Public Utilities, and Service. Section 106, page 647. Section 49-0601 of NDRC 1943 provides within the limitations therein set forth that the Commission shall investigate and determine the value of the property of the Utility used and useful for the service and convenience of the public. In San Diego Land &amp; Town Co. v. Jasper, 189 U.S. 439, 446, 23 S. Ct. 571, 574, 47 L. Ed. 892, a water plant had been overbuilt to irrigate an area of 6,000 acres which it did not, in fact, supply. The rates were fixed on the theoretical assumption that this business did exist to fit the valuation of the plant, but of course no revenue *151 was derived from the assumed but actually non-existent business. The United States Supreme Court held the rates were not confiscatory, saying, "If a plant is built, as probably this was, for a larger area than it finds itself able to supply, or, apart from that, if it does not, as yet, have the customers contemplated, neither justice nor the Constitution requires that, say, two thirds of the contemplated number should pay a full return." The effect of this was to allow the Utility a fair return only on a rate base sufficient to supply the existing demand. In the case of Cedar Rapids Gaslight Co. v. City of Cedar Rapids, 144 Iowa 426, 120 N.W. 966, 969, 48 L.R.A.,N.S., 1025, the Court stated: In Columbus Gas &amp; Fuel Co. v. Public Utilities Commission of Ohio et al. and the City of Columbus, 292 U.S. 398, 54 S. Ct. 763, 767, 78 L. Ed. 1327, the United States Supreme Court, in holding that there was no need in the computation of the rate base to include the value of gas fields not presently in use but owned by the Utility unless the time for using them is so near that they may be said at least by analogy to have a quality of working capital and stated: And in Consolidated Gas Co. v. City of New York, C.C., 157 F. 849, it was held: And in State ex rel. City of St. Louis v. Public Service Commission et al. (State ex rel. Laclede Gaslight Co. v. Same), 341 Mo. 920, 110 S.W.2d 749, it was held: In the Cedar Rapids Gaslight Co. v. City of Cedar Rapids case, supra, on page 970 of 120 N.W., the court said: We feel these cases support our position. We hold the District Court was in error in making this finding. However, we believe it pertinent to point out the following: The Commission did not find a rate base, it did find the rate base as submitted by the Utility was excessive by $750,000. The rate base submitted by the Utility equalled $4,274,016. The pro-forma estimated earnings at the end of the third year of operation was estimated by the Utility at $139,109 indicating a rate of return of 3.25 percent. The Commission in its first orders found a return of 3.25 percent was not excessive. We agree. Deducting $750,000, excessive construction cost, from $4,274,016 equals $3,524,016. The pro-forma estimated income account would not change because of the reduction of the rate base. The estimated earnings at the end of the third year would on the reduced rate base indicate a rate of return of 3.95 percent which we do not deem excessive, as long as the rates are competitive with other fuels available and used in the area served. The evidence indicates the rates are competitive. The Commission shall supervise the rates of all public utilities, and have the power, after notice and hearing, to originate, establish, modify, adjust, promulgate, and enforce rates in accordance with the provisions of law. Sec. 49-0203, NDRC 1943. This is a continuing duty to supervise, coupled with the necessary regulatory power. Therefore, when the pro-forma estimated earnings are proven or disproven by experience such adjustments or modifications may be made in the rate structure necessary and proper under the facts and the law. The final contention of the appellant is that the courts do not have jurisdiction. The amended orders of the Commission in each of these cases are final orders. They provide the rate permitted to be charged by the Utility for natural gas service in the various communities under consideration in these cases by reference to rate numbers already established in other cases before it, except for two communities. The Commission approved rate number 60.1-N-1 which the Utility had requested for the communities of Williston, and East Fairview. It ordered that rate number 60-N-1, which was a rate schedule previously approved by the Commission in another case establishing the rates to be charged by this Utility in communities along its so-called Bismarck line, as the rate schedule to be charged by the applicant in the communities of Epping, Wheelock, Ray and Springbrook in one case and the communities of Tioga, Berthold, Burlington, Des Lacs, Palermo, Ross, White *153 Earth, Stanley and Minot in the other case. These are final orders of the Commission establishing the rates that may be charged by the Utility for its natural gas service in the communities in question in these two cases. Because the Commission adopted rates already in existence in another part of the Utility's system serving communities in the State of North Dakota, it contends it is an order providing for the uniformity of rates. We find it is more than that, it is clearly a new rate order affecting the Utility's natural gas service in a new area. It is the final order of the Commission and appealable. Section 49-0512, NDRC of 1943 provides: Chapter 32 of the title, Judicial Procedure, Civil, is the Administrative Agencies, Uniform Practice Act. This Act also provides the judgment of the District Court may be reviewed in the Supreme Court on appeal in the same manner as any case tried to the Court without a jury may be reviewed. See Section 28-3221, NDRC of 1943. The purpose of the review is not to substitute the court's judgment for that of the Commission, but to review the record and if the record is insufficient, or the order thereon made illegal or without warrant, the court may take such action as is proper to secure a proper record and a proper order. State ex rel. Hughes v. Milhollan, 50 N.D. 184, 195 N.W. 292; North Dakota State Highway Commission v. Great Northern Railway Co., 51 N.D. 680, 684, 200 N.W. 796. The case is therefore remanded to the District Court with instructions to return the case to the Commission in order to give it an opportunity to reconsider the evidence and amended findings and order herein in the light of the rules laid down in this opinion. The judgment of the District Court is modified accordingly. Each party shall pay its own costs of this appeal. SATHRE, C. J., and TEIGEN, BURKE, MORRIS and STRUTZ, JJ., concur.