Court Opinion

ID: 7815209
Source: CourtListenerOpinion
Date Created: 2022-09-07 17:33:39.455491+00
Date Added: 2024-06-11T16:28:36.750379
License: Public Domain

George Rose Smith, J., dissenting. In this case the Gas Company asks for an increase in its rates. That request carries with it the burden of proving that a higher rate schedule is necessary to afford the company a fair return on its investment. “When a utility seeks an increase of existing rates, the burden is, of course, on the utility not only to offer all evidence to justify such increase, but also to comply with all reasonable requests of the Commission for full disclosures. The Commission, in such instances, has not only the prerogative but also the duty to make requirements for full disclosure, since the Commission acts under valid Legislative authority to see that the interests of the public are fully protected. ’ ’ City of Fort Smith v. Southwestern Bell Tel. Co., 220 Ark. 70, 247 S. W. 2d 474. The Gas Company, which is wholly owned (except for three qualifying shares) by W. E. Stephens, owns no gas wells and buys more than 97 per cent of its gas from Stephens Production Company, a partnership which is also controlled by W. E. Stephens. These purchases, which in substance are made by Stephens as buyer from Stephens as seller, constitute roughly five eighths of the Gas Company’s costs of service and therefore represent what is by far the most important factor in the determination of the company’s proper allowance for operating1 expense. The purchases in question are made at a price of between twelve and thirteen cents per thousand cubic feet of gas. This price was fixed by a contract which in substance was entered into between Stephens as seller and Stephens as purchaser in 1954. When the Gas Company filed its present application for an increase in rates the protesting consumers, on the basis of facts that I have merely outlined, asked the Public Service Commission to require the utility company to justify the reasonableness of the price it was paying for its gas. That the Commission had the authority to make this inquiry and to allow only a fair price as an operating expense, even though the gas was being sold in interstate commerce, was expressly decided in Western Distributing Co. v. Public Service Commission, 285 U. S. 119, 52 Sup. Ct. 283, 76 L. Ed. 655. The consumers’ request for a full disclosure of the facts was vigorously opposed by the Gas Company. Its position was sustained by the Commission, which refused to require the Gas Company to justify the price it was paying for gas, refused to require the Stephens affiliated companies to allow the protestants access to the pertinent books and records, and refused to permit the Gas Company’s witnesses to be cross-examined about the reasonableness of the price being paid for gas. In short, the Gas Company was relieved of the burden of proving the most vital element affecting its application for a rate increase, and the consumers were denied the right of cross-examination as an aid to their attempt to sustain a burden of proof that was not really theirs. In my opinion the only issue on this appeal is whether the Commission erred in accepting the Gas Company’s contract price and in effectively shutting the door to any inquiry on the subject. The majority opinion, as I read it, upholds the Commission’s ruling on two grounds. First, it is indicated that the present record supports the view that the contract price is in fact a reasonable one. Bearing in mind that this issue or fact has never been explored in an adversary proceeding, I think it a sufficient answer to make these observations: (a) The price was fixed not at arm’s length but in a transaction in which the buyer and the seller were essentially the same person. As the buyer Stephens was under a duty to the consuming public to obtain the gas as cheaply as possible. As the seller Stephens was naturally inclined to obtain as high a price as possible. This conflict of interest is the same as that which rigidly precludes a trustee from selling to himself and certainly suggests that this contract price should be open to scrutiny. (b) The uncontradicted evidence shows that the contract price was not determined primarily by the market value of the gas. In a somewhat complex transaction Stephens in effect borrowed, without personal liability, $4,335,000 from the Northwestern Mutual Life Insurance Company in order to finance the purchase of the gas-producing properties. The contract price now in dispute was fixed at a rate sufficient to retire this indebtedness within a certain number of years, the exact period apparently not being shown by this record. This means that if, for example, the gas reserves have an expected life of fifty years and the term of the loan is only twenty-five years, the consuming public will pay the full purchase price, in the form of excessive gas rates, during the first twenty-five years, and Stephens Production Company will emerge as the owner of the gas, which presumably will then again be sold to the public. The majority’s suggestion that the extent of the gas reserves is “only speculative” does not seem wholly convincing. I am not persuaded, especially without proof, that a life insurance company would advance more than four million dollars without being certain that the security actually exists and that its value exceeds the amount of the loan. (c) At every step of this proceeding the Gas Company has strenuously opposed the consumers’ efforts to investigate the fairness of the contract price. I am unable to reconcile this attitude on the part of the utility with its simultaneous insistence that the price is really less than the Commission would be required to fix if the facts were fully disclosed. (d) Finally, in my judgment the issue is not whether this incomplete record shows the price to be reasonable but, rather, whether the Gas Company should be required to meet the burden of proof imposed by law. It seems to me idle to speculate upon a question of fact when the proof is admittedly undeveloped. Secondly, the majority relies upon the fact that the transaction by which Stephens acquired the assets of the Arkansas-Oldahoma Gas Company was approved by the Arkansas Public Service Commission, the Oklahoma Public Service Commission, and the Federal Power Commission. It is of course not contended that those rulings are res judicata, for that doctrine does not apply in rate-making matters, which are always open to re-examination. The trouble with this second ground for affirmance is that the Gas Company has not met the burden of showing that the earlier proceedings were adversary contests in which the reasonableness of the contract price was at issue. As a public utility the Arkansas-Oklahoma Gas Company was required to obtain the consent of the three commissions before it disposed of its assets and went out of business. That was the issue in those proceedings, which was resolved by a finding that the proposed transfer of ownership was not contrary to the public interest. There was no reason for the Arkansas Public Service Commission to investigate the contract price, since it was not a rate-making case, and in fact the Commission merely found that the price was “necessary in order to finance the acquisition of the producing properties of the Arkansas-Oklahoma Gas Company, ’ ’ and that it ‘ ‘ appears to be reasonable.” We were told in the oral argument, without contradiction, that no representative of the consumers was a party to the proceedings, and indeed there was no reason why they should have been represented. As far as the consumers are concerned that proceeding was an uncontested ex parte case in which no one involved had the slightest inclination or motive to attack the fairness of the contract price now at issue. In these circumstances the public evidently has had no opportunity to be heard on the question of whether the price is reasonable, and I am firmly of the opinion that that opportunity should have been granted in the present proceeding.