Court Opinion

ID: 9637483
Source: CourtListenerOpinion
Date Created: 2023-08-22 15:07:35.105187+00
Date Added: 2024-06-11T18:09:56.483169
License: Public Domain

DOBIE, Circuit Judge
(dissenting).
I regret that I must dissent from the majority opinion. The importance of this case, and the wide interest in the vital questions involved, prompt me to set out, very briefly, the reasons for my dissent.
Under the majority opinion, the decision of the Federal Power Commission is reversed on three principal grounds: (1) The adoption by the Commission of the Prudent Investment Theory in fixing the rate-base; (2) The use by the Commission of the Economic Service Life Method in arriving at depreciation; (3) The-refusal by the Commission to allow as capital outlay the well-drilling costs which Hope had previously charged to operating expenses. A t ’
(1) The Prudent Investment Theory.
The Commission, in arriving at the proper rate-base, frankly and openly adopted the Prudent Investment Theory and paid no attention to the present valúe of the properties of Hope. Mr. Justice Brandéis, in his classic concurring opinion (Mr. Justice Holmes joined in the opinion) in State of Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Commission of Missouri, 262 U.S. 276, 43 S.Ct. 544, 67 L.Ed. 981, 31 A.L.R. 807, has set forth, with his customary incisive clarity, the Prudent Investment Theory, together with the reasons for his belief in that theory. To my mind, the arguments he therein advances have never been convincingly refuted.
Nearly twenty years have slipped by since that opinion was handed down. During this period, the pronouncements of the United States Supreme Court in this field have been many, varied and quite confusing. This fact has been pointed out by writers whose names are thrice legion. The recent case (involving the Natural Gas Act, with which we are also concerned) of Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 62 S.Ct. 736, 86 L.Ed. 1037, however, does call for some comment.
The majority opinion in that case (written by Chief Justice Stone) contains no express discussion of the Prudent Investment Theory and certainly does not in precise terms sanction the use of that theory alone. Interesting, though, in this connection is the oft-quoted statement of Chief Justice Stone (315 U.S. at page 586, 62 S.Ct. at page 743, 86 L.Ed. 1037):
“The Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas. Agencies to whom this legislative power has been delegated are free, within the ambit of their statutory authority, to make the pragmatic adjustments which may be called for by particular circumstances. Once a fair hearing has been given, proper findings made and other statutory requirements satisfied, the courts cannot intervene in the absence of a clear showing that the limits of due process have been, overstepped. If the Commission’s order, as applied to the facts before it and viewed in its entirety, produces no arbitrary result, our inquiry is at an end.”
' But the concurring opinion of Justices-Black, Douglas and Murphy, on the specific-point under discussion, is as clear as-crystal and as crisp as bacon; for this-opinion flatly and squarely upholds the validity of the application of the Prudent Investment Theory, to the exclusion of any other theory (315 U.S. at page 606, 62 S. Ct. 752, 86 L.Ed. 1037) in three sentences so free from ambiguity that they cannot be misunderstood:
“As we read the opinion of the Court,, the Commission is now freed from the-compulsion of admitting evidence on reproduction cost or of giving any weight, to that element of ‘fair value’. The Commission may now adopt, if it chooses, prudent investment as a rate base — the base-long advocated by Mr. Justice Brandéis. And for the reasons stated by Mr. JusticeBrandéis in the Southwestern Bell Telephone case, there could be no constitutional objection if the Commission adhered to that formula and rejected all others.”' (Italics ours.)
It is difficult for me to believe that the-majority of the Supreme Court, believing; otherwise, would leave such a statement, unchallenged.
*313A careful study of the Natural Gas Act (particularly the precise wording of Section 6) convinces me that Congress intended to give to the Federal Power Commission a wider latitude and a more extended discretion than had been given to any other federal board or commission under any previous statute in the field of rate making.
Further, I think that the methods adopted by the Commission under the Prudent Investment Theory, in arriving at a rate-base in the instant case, were neither fanciful nor arbitrary. It seems to me, too, that there was substantial evidence to support the opposite findings of the Commission.
Accordingly, I see here no adequate reasons for reversing on this score the decision and findings of the Commission.
(É) The Economic Life Service Method of Computing Depreciation.
In computing depreciation and depletion, the Commission employed the Economic Life Service Method. This formula has long been known to, and has been frequently applied by, economists and accountants. It seems to have been often used in connection with depreciation under the federal income tax. I cannot find in this formula any active germs of constitutional invalidity, as it is applied to the instant case.
The Commission based its determination of existing, depletion and depreciation upon actual legitimate cost of the properties of Hope. An apparently competent engineer inspected this property to obtain information that would serve as a guide for estimating the property’s service life "and the amount of money required annually to reimburse Hope for so much of this property as might be consumed in rendering service to the public.
Incidentally, the amount deducted by the Commission fell short by many millions of dollars of the amount accrued and set up by Hope for depreciation and depletion. In his partially dissenting opinion, Commissioner Scott expressed the view that the Commission had been, in fixing the amount for depreciation and depletion, far too lenient with Hope.
Again I feel that there was substantial evidence to sustain the Commission’s findings under a formula which was neither unrealistic nor capricious.
(3) Disregard of Drilling Costs Charged by Hope to Operating Expenses.
The Commission refused to allow as capital the amount of drilling cost which Hope had in the past charged to operating expenses. The Commission found (and I think this finding is supported by the evidence) that these costs had been considered by Hope in fixing its rates in previous years and that these costs had already been paid by the consumers. On this ground, the Commission declined to include these costs in arriving at the rate-base.
It was the practice of Hope, prior to 1923, to charge well-drilling costs to operating expenses rather than to' capital account. In so doing, Hope seems to have followed the then general procedure of the natural gas industry. It changed this practice under a requirement of the Public Service Commission of West Virginia. The present system of accounting prescribed by the Federal Power Commission also follows the West Virginia practice. It is my considered opinion that the present procedure is the proper one.
It is to be noted that this is not a mere mathematical error in book-keeping, which of course, should be corrected. It is rather an accounting policy. It does not seem to me to be vital whether the decision of the Commission here is based upon technical estoppel, equity or fair dealing. And once more, I think the Commission should be here sustained. Under its present claim, Hope seeks to impeach its books, which were competently kept for a long period of years under the older method. And Hope itself, in a previous rate case before the Public Service Commission of West Virginia, claimed these well-drilling costs as operating expenses, its contention was allowed, and its rates were fixed accordingly.
The holding of the Commission here is sustained by the great weight of authority. In the Commission’s brief, these authorities are set out at great length, and include decisions of federal courts, decisions of state courts, and decisions of State Utility Commissions. Quite striking here, I think, is an extract from the majority opinion in the recent Natural Pipe Line case, 315 U.S. at pages 590, 591, 62 S.Ct. at page 745, 86 L.Ed. 1037:
“Here the companies, though unregulated, always treated their entire original investment, together with subsequent addi*314tions, as capital on which profit was to be earned. They charged the out-of-pocket cost of maintenance of plant, whether used to capacity or not, as operating expenses deductible from earnings before arriving at net profits. They have thus treated the items now sought to he capitalised in the rate hose as operating expenses to he compensated from earnings, as in the case of regulated companies. * * * We cannot say that the Commission has deprived the companies of their property hy refusing to permit them to earn for the future a fair return and amortisation on the costs of maintenance of initial excess capacity— costs which the companies fail to show have not already been recouped from earnings before computing the substantial 'net profits’ earned during the first seven years.” (Italics ours.)
For the reasons stated, I think the decision and findings of the Commission should be affirmed.