Court Opinion

ID: 9652828
Source: CourtListenerOpinion
Date Created: 2023-08-23 17:33:06.132447+00
Date Added: 2024-06-11T18:12:54.442207
License: Public Domain

MURRAH, Circuit Judge.
This appeal brings here for review under Section 19(b) of the Natural Gas Act of 1938, 15 U.S.C.A. § 717r(b), an order of the Federal Power Commission entered July 28, 1943, directing the Cities Service Gas Company (herein called petitioner) to file on or before September 1, 1943, new schedules of rates and charges for natural gas sold in interstate commerce for resale, which would effect a reduction of “not less than” $4,445,871, as applied to its regulable sales for the test year 1941.
Petitioner is a wholly owned subsidiary of the Empire Gas and Fuel Company, which is in turn controlled by the Cities Service Company. Organized February 1, 1922 as the Natural Gas Pipe Line Company, petitioner acquired the properties of a number of other producing and transportation companies; was reorganized in November 1926 under its present name, and acquired the properties of still other producing and transportation companies, all the latter of which were owned or controlled by its parent, the Cities Service Company. As a result of these and other transactions with affiliated companies, petitioner, at all times presently material, was one integrated natural gas system, devoted to the production, transportation and sale of natural gas for resale for ultimate public consumption, and direct sales to industrial customers. As such, it owned extensive proven and producing gas reserves in the Panhandle Field of Texas, the Hugo ton Field in Kansas and Oklahoma, and numer*697ous other fields in Oklahoma and Kansas. It owned a pipe line system consisting of 4300 miles of main branch and field lines, with interconnections and connections with other pipe line companies, together with appurtenant and ancillary facilities, including 33 compressor stations, 3 dehydrating plants, a purification plant, 4 principle gas storage fields, meter stations, and about 1800 miles of telephone lines and circuits. The pipe line system is connected to its producing wells in the Panhandle and other fields in Kansas and Oklahoma, and these lines extend to and connect with local distribution systems, which serve about 265 cities, towns and communities in Kansas, Oklahoma, Missouri and Nebraska, including the metropolitan areas of Kansas City, St. Joseph, Joplin and Springfield, Missouri, and Kansas City, Lawrence, Topeka, Leavenworth, Wichita, and Hutchinson, Kansas. At these points, the gas is sold at the distribution gates under various contracts of “sale for resale”, and to a considerable number of industrial and other direct sale customers.
During the test year of 1941, petitioner sold for resale 61,425,000 M.c.f. of natural gas, for which it received $12,903,500, and sold direct 40,700,000 M.c.f. for $4,335,500. The petitioner produced from its own wells in the Panhandle of Texas, Kansas and Oklahoma, 43% of its total natural gas requirements, and the remainder was purchased in the states of Kansas and Oklahoma, for which it actually paid the total sum of $2,716,722, or an average of $.0458 per M.c.f.
In arriving • at a rate base for the purpose "of determining the reasonableness of petitioner’s regulable interstate wholesale rates, the Commission adopted and used the prudent investment formula, or actual legitimate cost, less existing depreciation and depletion, plus working capital. After adjustments to the Company’s plant account as of December 31, 19411 the Commission found from the evidence that the actual legitimate cost of all the properties used and useful in the production and transmission of all the natural gas sold by it to be $66,977,654. From this amount, it deducted $20,779,558 for existing depreciation, and $1,024,891 for depletion of reserves, added $1,576,357 to cover construction work, in progress, and $1,818,194 as a reasonable allowance for working capital, thus arriving at “the reasonable rate base for Cities Service Gas Company as an assembled whole and a natural gas utility” in the sum of $48,567,756.2 The Commission allowed an annual rate of 6%% on this rate base or a return of $3,156,904, which it found to be “fair and liberal.”
For the year 1941, petitioner’s books showed operation, exploration and development cost in the sum of $10,625,724. Of this sum, the Commission disallowed $380,000 as excessive profits realized by one of petitioner’s affiliates, Cities Service Oil Company, under a contract for the extraction of natural gasoline and other residuals, for the asserted reason that the affiliate’s profits under the contract exceeded by that amount a fair return on the property devoted to the process. It also *698adjusted the Federal income tax liability allowable as an expense to eliminate $1,-822,148, leaving $7,810,137 as allowable operating, exploration and development costs for 1941.3 Thus the Company was allowed to earn its expenses in this sum, plus the allowable return of $3,156,904, or a total of $10,967,041. Rents and other miscellaneous gas revenues totalling $121,-782 was credited against this cost, leaving a net of $10,845,259, which the Commission denominated as “total cost of service including return”. From total operating revenues (including regulable and non-rcgulable sales for the year 1941), the Commission deducted the allowable operating expense of $7,810,137, and the annual 6%% return on the rate base, $3,156,904, to arrive at $6,393,889, which it called excess earnings before allocation to jurisdictional and non-jurisdictional sales.
In order to arrive at the cost of service for the jurisdictional sales, the Commission allocated the total cost of service between jurisdictional and non-jurisdictional sales, and by applying the so-called “demand and commodity” method, it found that $7,-264,986 represented the total cost of service, including a fair return, for the jurisdictional sales, while $3,580,273 represented the cost of service for direct or non-jurisdictional sales. By subtracting the allocated cost of service for the jurisdictional sales from the gross revenue for such sales ($12,764,651), the Commission concluded that the petitioner’s rates were excessive by the sum of $5,499,665. However, it made an additional allowance of $1,053,794 for cost of service for the petitioner’s gas sales, subject to its jurisdiction, from a proposed transmission line connecting its properties in the Hugoton Field to its other marketing facilities, thus arriving at the ordered reduction in the wholesale rates.
The petition for rehearing contains thirty-three specifications of error, and they are brought forward in the petition for review under Section 19(b) of the Act. However, these objections have been regrouped for briefing and argument here, and they will be treated substantially in the order presented.
Jurisdiction of the Commission and scope of review — It is of first importance to take account of the respective provinces assigned to the Commission and the courts on review in order that we may perform the functions assigned to us without trespass upon the administrative prerogatives. The primary aim of the Natural Gas Act of 1938, 15 U.S.C.A. § 717 et seq., was to “protect consumers against exploitation at the hands of natural gas companies.” Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 610, 64 S.Ct. 281,'291, 88 L.Ed. 333. To effectuate that purpose, the Act provides that all rates and charges subject to the jurisdiction of the Power Commission shall be just and reasonable, and declares that any charge which is not just and reasonable is unlawful. Sec. 4(a). To that end, the Commission is specifically authorized, after hearing, to determine “the just and reasonable rate”, and to fix the same by order. Sec. 5(a). Any aggrieved party to an order of the Commission may obtain a review to the appropriate circuit court of appeals, which is vested with “exclusive jurisdiction to affirm, modify, or set aside such order in whole or in part. * * *” But, “the finding of the Commission as to the facts, if supported' by the substantial evidence, shall be conclusive.” Sec. 19(b). In delineating the scope of review, the courts have left no doubt of their disposition to give the Commission a free rein in the effectuation of the Congressional purpose. The administrative process is no longer fettered by judicial notions of the “economic merits” of the rate order.
It hardly seems necessary or appropriate to reiterate what has already been so emphatically said concerning the “broad area of discretion” committed to the Commission in the exercise of its statutory jurisdiction, to determine just and rea*699sonable rates for the transportation and sale of natural gas subject to its jurisdiction, or to remind ourselves that if the Commission’s order prescribing “just and reasonable rates”, when viewed in its entirety, produces no arbitrary result, judicial inquiry is at an end. It is said that a finding of reasonableness made after a full hearing by the Commission is the product of “expert judgment”, which carries with it a strong presumption that it meets the .statutory requirements. And since the constitutional requirements are no more exacting than the statutory standards of the Act, there is an almost conclusive presumption that an order which meets the statutory standards does not exceed the bounds of due process. Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 575, 586, 62 S.Ct. 736, 86 L.Ed. 1037; Federal Power Commission v. Hope Natural Gas Co., supra, 320 U.S. at page 602, 64 S.Ct. at page 287, 88 L.Ed. 333; Colorado Interstate Gas Co. v. Federal Power Commission, 10 Cir., 142 F.2d 943, 945. Thus, the Commission is statutorily and constitutionally free to use any rate-making formula it chooses, so long as the end result it produces will allow the regulated company to operate successfully, maintain its financial integrity, attract capital, and compensate its investors for the risk assumed. Federal Power Comm. v. Hope Natural Gas Co., supra; Colorado Interstate Gas Co. v. Federal Power Comm., supra; Federal Power Comm. v. Natural Gas Pipeline Co., supra.
Regulation of Producing and gathering .of natural gas — Petitioner contends chat in arriving at its rate order, the Commission exceeded its statutory authority by •exercising regulatory jurisdiction over the production and gathering of natural gas.
It is true that the adopted rate base includes all of the production and gathering facilities of the petitioner, and it is also true that the Natural Gas Act specifically provides that its provisions “shall not apply * * * t0 (-ijg production or gathering of natural gas.” Sec. 1(b). But the objections to the inclusion of these properties in the rate base for the purpose of determining just and reasonable rates for natural gas transported and sold interstate for resale has already been squarely met and conclusively decided. In the Colorado Interstate Gas case, the Commission included in the adopted rate base the production and gathering properties of the Canadian River Gas Company because, as here, they were an integral part of a natural gas utility. In that case we failed to find anything in the Act which prohibited the Commission from inquiring into and considering the production and gathering properties in respect to depreciation, operating expense, and revenues insofar as they had bearing upon the exercise of its jurisdiction to determine just and reasonable rates of natural gas transported interstate for resale for public consumption. On cer-tiorari, the Supreme Court, after review and discussion of the applicable provisions of the Act, was of the opinion that it did not “preclude the Commission from reflecting the production and gathering facilities of a natural gas company in the rate base, and determining * * * the reasonableness of rates subject to its jurisdiction.” 4 The late Mr. Chief Justice Stone, speaking for the minority, succinctly stated and upheld the contentions of the Company there and here, to the effect that the regulatory authority of the Commission began only with the delivery of gas into the petitioner’s transmission pipe lines, and included only the interstate transportation and sale of the gas for resale; “That, since the wells and gathering facilities are not subject to Commission regulation, the cost or value of the gas upon its delivery to petitioner’s transmission line must, for purposes of rate regulation of the regulated business of transportation and sale, be taken at its fair market value.” Colorado *700Interstate Gas Co. v. Federal Power Commission, 324 U.S. 581, 617, 65 S.Ct. 829, 846, 89 L.Ed. 1206.
It is thus clear that under the prevailing view, the Commission did not exceed its jurisdiction by the inclusion of the production and gathering facilities in the rate base for purposes of determining just and reasonable rates for the transportation for resale of natural gas.
Rate Base — As we have seen, the Commission’s adopted rate base for the purpose of calculating the allowable return is predicated solely upon actual legitimate cost of all properties devoted to the enterprise.5 All proffered evidence of fair value was rejected for the asserted reason that the actual cost was accurately ascertainable from the books and records of the Company; that reproduction cost was at best “synthetic” and not taken from the books, did not purport to represent cost of actual investment, therefore the consideration of fair value or reproduction cost was unnecessary. The petitioner argues that fair value is inherent in rate-making as the end product of the process, and that evidence of it is certainly admissible and its rejection reversible error. In particular, petitioner complains not only of the Commission’s inclusion of its leaseholds and natural gas rights in the rate base at their nominal cost to its predecessors before they were first devoted to public service, but also of its disallowance of certain items which it contends represents actual legitimate cost.
Petitioner owned 720,252 acres of proven leaseholds and natural gas rights, consisting of approximately 113,000 acres in the Panhandle Field of Texas, 180,000 acres in the Hugoton Field in Oklahoma, and approximately 425,000 acres located in other parts of Oklahoma and Texas. As of December 31, 1941, these producing properties were carried on petitioner’s books at a capital cost of $2,207,758, and petitioner contends that the actual legitimate cost of these leases as of the above date was $2,-174,122. The Commission included all these leaseholds in the rate base as used and useful in rendering gas service, but found that only $1,644,349 of the amount claimed should be included in the rate base as actual cost of the leasehold. The balance of $529,733, representing past operating expenses, cost of abandoned leases, and capitalized interest thereon, was disallowed for the stated reason that since these expenses had been treated as operating expenses by the affiliated company which had acquired them, they could not be brought forward as capital cost in the rate base.
Most of the leaseholds and natural gas rights were originally acquired by petitioner’s affiliates (especially those in the Texas Panhandle), while exploring for oil, and at a time when gas was considered a nuisance, and enormous quantities were being wasted because there was no marketable use for it. Consequently, large blocks of acreage (including 63,000 acres in one block in the Texas Panhandle), were acquired at a nominal cost, and in consideration of covenants to develop and pay royalties. When in 1935 these leases were sold and transferred to petitioner as a reservoir for markets which had been tapped in metropolitan areas, by the construction of large transmission lines from the producing area, they had of course become exceedingly valuable to the enterprise.
The Commission rejected proffered evidence of the fair value of these leaseholds-as an essential part of the natural gas-utility, on the grounds that it was wholly “immaterial and irrelevant” to the determination of just and reasonable rates,, based upon actual investment of the properties devoted to the regulated business. The Texas Panhandle leases, on which was-located 98 producing wells, and which in. 1941 supplied 43% of the gas sold by petitioner, were included in the rate base at an. actual legitimate cost of $392,610.84 (including top ground equipment). These leases were transferred by the Empire Gas- and Fuel Company to the Cities Service Pipe Line Company in 1928, and in 1935 *701they were sold to petitioner for the sum of $1,056,000, actually paid.
In substance, the petitioner argues that although actual legitimate cost may be a permissible rate-making formula under the Natural Gas Act, yet it is not an inexorable rule which binds the Commission in the face of fundamental considerations of fairness to the contrary. It is pointed out that the allowance of the actual cost of the acquisition of the leases to the petitioner’s predecessor at a time when natural gas was worthless at the point of production, is to overlook and fail to compensate for the going concern value of a complete natural gas utility, and fails to recognize the risk involved in the speculative field of exploring and developing adequate reserves, and transmitting the same to market.
 There are some who hold to the principle that “realization from the risk of an investment in a speculative field, such as natural gas utilities, should be reflected in the present fair value.” See Mr. Justice Reed dissenting in the Hope Gas case, supra, 320 U.S. at page 622, 64 S.Ct at page 297, 88 L.Ed. 333. But if, under the prevailing view, the economic merits of a rate base is of no judicial concern (see special concurring opinion in Federal Power Commission v. Natural Gas Pipeline Co., supra, 315 U.S. at page 606, 62 S.Ct. at page 752, 86 L.Ed. 1037, and concurring opinion in Driscoll v. Edison Light & Power Co., 307 U.S. 104, 122, 59 S.Ct. 715, 83 L.Ed. 1134), we have not the right to intercede unless it is conclusively shown that failure to give consideration to the fair value of properties, including the valuable leasehold estates, will prevent the company from operating successfully as a public utility. It is said that “rates cannot be made to depend upon ‘fair value’ when the value of the going enterprise depends on earnings under whatever rates may be anticipated.” Hope Natural Gas Co. case, supra, 320 U.S. at page 601, 64 S.Ct. at page 287, 88 L.Ed. 333. In other words, fair value is the end product and not the means of the rate-making process.6 Fair value is no longer deemed an essential ingredient of an economic rate base for rate-making purposes. Federal Power Commission v. Natural Gas Pipeline Co., supra; Hope Natural Gas Co. case, supra; Colorado Interstate Gas Co. v. Federal Power Commission, 324 U.S. 581, 65 S.Ct. 829, 89 L.Ed. 1206.
In the Colorado Interstate Gas Company case, vast acres of gas producing properties of the Canadian Gas Company, located in the same Texas Panhandle Field, were put in the rate base of an integrated gas utility at their nominal cost to the utility’s predecessors. We approved the action of the Commission in disallowing the difference between the actual original cost of the leases, and the sale price of the same to the utility first devoting them to public use, on the grounds that the difference between the actual cost and their cash sale price to an affiliated company was a “synthetic inflation”, which had no place in the field of rate making. In support of certiorari, the Canadian River Gas Company, as the owner of the properties devoted to the integrated enterprise, strenuously complained of the refusal of the Commission to include the producing properties in the rate base at the cash sale price paid by the company first devoting them to public use. That point was taken on certiorari, 323 U. S. 807, 65 S.Ct. 427, 89 L.Ed. 644, and specifically treated on appeal. 324 U.S. at page 604, 65 S.Ct. at page 840, 841, 89 L.Ed. 1206. The majority of the court could not “say as a matter of law that the Commission erred in including the production properties in the rate base at actual legitimate cost”. 320 U.S. at page 605, 65 S.Ct. at page 841, 89 L.Ed. 1206. But see Mr. Justice Jackson concurring, 320 U.S. at page 610, 65 S.Ct. at page 843, 89 L.Ed. 1206, and dissent of the late Mr. Chief Justice Stone, 320 U.S. at page 616, 65 S. Ct. at page 845, 89 L.Ed. 1206. A like contention was made and rejected in Panhandle Eastern Pipe Line Co. v. Federal Power Commission, 324 U.S. 635, 648, 65 S.Ct. 821, 89 L.Ed. 1241.
In view of these pronouncements, we regard the question no longer a debat*702able one in this court. Moreover, petitioner has offered no evidence from which we would be justified in concluding that the failure of the Commission to base the allowable return upon the fair value of the leaseholds at the time they were first devoted to public use results in the impairment of the financial integrity of the company as a public utility.
The exclusion of $529,723, representing past operating expenses, cost of abandoned leases, and capitalized interest, from the rate base, is fully supported by the Hope Gas case, wherein the majority of the Court expressed its views in the words of the Commission, “No greater injustice to consumers could be done than to allow items as operating expenses and at a later date include them in the rate base, thereby placing multiple charges upon the consumers.” 320 U.S. at page 599, 64 S.Ct. at page 286, 88 L.Ed. 333.
Existing depreciation and depletion — As we have seen, the Commission deducted from the actual legitimate cost of the properties $20,779,558 for accrued and existing depreciation, and $1,024,891 for depletion of the producing properties. In so doing, it followed the recommendations of its staff, which computed both the annual and accrued depreciation on the average ascertained service life of the various classes of property included in the rate base. The accrued depreciation was calculated as the sum of the annual depreciation expense from the beginning of the property, less total net cost of the property retired. This formula was used and approved both in the Hope Gas case and the Colorado Interstate Gas case, and has been acclaimed by the American Public Utility Bureau as the most practical and reasonable method of determining accrued depreciation under the actual legitimate cost formula of rate-making.7
We do not understand that the petitioner finds fault with the so-called “straight line economic life” method of determining annual and accrued depreciation, but it does contend that depreciation is a fact, not a mere book entry or accounting concept, and that in arriving at its depreciation reserve, the staff witness forsook actualities for pure theory.
The staff witness who, for the guidance of the Commission, prepared an exhibit setting forth the estimated average service life of all the depreciable properties of the petitioner as of December 31, 1941, and the scope of his study, method used, source of material, and descriptions of field inspections, testified that in accordance with the Commission’s uniform system of accounts, he took into consideration “wear and tear, decay, action of the elements, inadequacy, obsolescence, changes in the art, changes in demand, and requirements of public authorities” ; that although the recommendations are not based on observed depreciation or percent condition, he did make a field inspection of the company’s properties for the purpose of observing physical deterioration, measure of protection afforded by maintenance, actual existence of items of property, and other conditions which would affect his judgment of the service life of the property. The witness further testified that he studied the records of the petitioner and its predecessors, and considered the history of development of these companies, obtained dates of installation of the property, and where the property was reclaimed, the information concerning the “reclaim”. He made a detailed study of 2,020 pipe inspection reports which the Company had made in the fall of 1940. He testified that his estimates of the service life of each class of property, and the annual rate of depreciation assigned thereto, coincided with those used by the Company in setting up its annual depreciation on its books. The pipe used in the transmission lines represents approximately 70% of the petitioner’s investment, and the petitioner complains of the witness’ failure to make any actual inspection of this pipe for the purpose of observing the deterioration in use. The witness counters that he was prevented from doing so by the refusal of petitioner to dig the “bell holes”, and that instead his inspection of the retired pipe, and his examination of the Company’s *703inspection reports, enabled him to form a reliable opinion concerning the average service life of this particular class of property.
From the evidence before it, the Commission found that the petitioner had more than recovered its depreciation reserve through annual charges to depreciation expense prior to December. 31, 1941. The petitioner offered no evidence concerning the economic service life or depreciation rates, and as against its objections that the staff witness made no examination of much of the property, including the pipe lines, to determine actual wear and tear or deterioration, and failed to give consideration to the actual condition of the property involved, we must conclude that the evidence is sufficient to support the Commission’s ultimate findings and conclusions.
Natural gasoline operations of the Cities Service Oil Company — Under a contract with the petitioner, the Cities Service Oil Company, an affiliate, extracts natural gasoline, butane, propane and other residuals from the natural gas in petitioner’s pipe lines, and for that purpose owns and operates processing plants at Tallant, Oklahoma, and Wichita, Kansas. For the products thus extracted, the Oil Company pays to petitioner “7^-per M.c.f. of 1,100 BTU, equivalent gas for the loss in the heat value of the gas resulting from the extraction”. The Commission found that since the extraction process rendered the natural gas more readily marketable and transportable, but reduced its heat content and consumed a certain volume of it, and was profitable, the gas customers were entitled to a “fair proportion of the net earnings derived from the processing operation”. Following what it considered a comparable situation in the Hope Gas Company case, the Commission credited the petitioner’s operating expense with the profits of the Oil Company under its contract in excess of the cost of processing, plus a 6%% return on the ascertained actual cost of the properties devoted to the process, less depreciation, plus working capital. Thus, it found that th<” average excess profits for the years 1939 to 1942 was $380,000, and that this amount constituted a fair guide for the future.
While conceding the Commission’s authority to scrutinize the contract between the two affiliates for the purpose of determining its reasonableness, petitioner insists that the Commission was unauthorized to segregate these two particular plants from the Oil Company’s other properties, and to treat them as if they belonged to the petitioner, thereby ignoring the separate corporate entity of the two companies, and denying them the right to contract with respect to a function which was not in fact a part of the petitioner’s business as a public utility. Petitioner challenges the authority of the Commission to fix a return of 6%% on properties not within its jurisdiction, and argues that in any event, it failed to take into consideration the character and risk of the business involved.
In the Hope Natural Gas Company case, 4 Cir., 134 F.2d 287, 307, the court sustained the procedure employed by the Commission, on the theory that the extraction process in that case was “in reality a part of Hope’s natural gas business, although carried on by an affiliate.” If the extraction process is in reality an essential part of the business of transporting and marketing the natural gas, the Commission was justified in ignoring the contract between the two affiliates for the purpose of determining just and reasonable rates. Otherwise, a regulated gas utility would be permitted to syphon off its profits to affiliates through the guise of contracts for the performance of essential functions of the integrated business.
In our case, a staff witness testified to the effect that the extraction process was a necessary function of the business of transporting and delivering natural gas to market by means of a pipe line system, and that such process was essential to the transportation and sale of the natural gas. As against countervailing evidence, the Commission chose to adopt the views of its staff witness, and we are unable to say as a matter of law that the Commission’s findings on this technical point are legally erroneous.
*704Federal income taxes — The Commission refused to allow as a part of the deductible cost of service or expense for the year 1941 Federal income tax paid by the Company in the sum of $1,882,148.26. The dis-allowance is based on the thesis that if the rates and charges on the regulable sales had not exceeded an amount sufficient to return 6%% on the adopted rate base, the tax liability would not have been incurred, consequently it cannot be allowed as an expense. In other words, the petitioner may not charge as an expense that which it cannot lawfully earn. The effect of the disallowance was to assign all Federal income tax liability for the year 1941 to non-regulable sales, and the petitioner argues that to saddle this liability on the non-jurisdictional earnings amounts to a regulation and substantial curtailment of the non-regulable earnings by setting up a “tax priority” against such earnings.
If, as the Commission found, there would be no Federal income tax liability under the 1941 rates on a permissible return from the adopted rate base, the Commission was certainly justified in refusing to allow the item as an expense, because if it had permitted the item to remain in the total cost of service before allocation, it would have been justified in allocating the entire amount to the jurisdictional. sales. The petitioner challenges the Commission’s computations, which show that the permissible earnings would not result in tax liability, but offers no affirmative computations tending to show its tax liability upon the permissible rate. The Commission did no more than allocate to the non-jurisdictional sales the cost of earnings which were solely attributable to it. We must therefore assume on this record that the Commission’s statement in that regard is correct, and that it was legally justified in eliminating the Federal tax liability as an item of cost.
Allocation of cost of service — Petitioner complains of the Commission’s failure to separate the physical properties of petitioner devoted to interstate transportation and sale for resale, from the properties and facilities devoted to the transportation and direct sale of natural gas, over which it admittedly has no jurisdiction. The Commission recognized that the Company’s facilities and operations were devoted in part to natural gas service which was not subject to its jurisdiction, and that this service consisted principally of gas sales made directly to large industrial consumers. Accordingly, it recognized the necessity of effecting a separation of the jurisdictional from the non-jurisdictional. This it did by adopting its staff’s proposed method of dividing the total cost of allowable expenses and return into two categories, (1) costs related to production and purchase of gas, and (2) those related to transportation and delivery. Costs predominately related to production and purchase were classified as commodity or variable costs (sometimes called volumetric), while those relating to transportation and delivery were classified as “commodity, demand and customers cost”. In general, costs which varied with the volume of gas delivered were classified as variable or commodity costs. Costs which did not vary with the volume of gas sales, but which were predominately fixed, were classified as demand or capacity costs; those incurred predominately in proportion to the number of meters in service were classified as customer costs. The total commodity costs thus determined were allocated to regulable and non-regulable sales in a ratio that the customers’ annual consumption bore to the total M.c.f. sales from the system in the year 1941. The demand costs were allocated between the regulable and non-regulable sales in the ratio that the customers’ consumption on the peak day (January 3, 1942) bore to the total system M.c.f. sales on that day. The petitioner contends that the Commission’s allocation of the cost of service as a method of effecting a separation of the regulable from the non-regulable is erroneous in both principle and application.
The Commission used the allocation of cost of service as “the most practical and businesslike method” of effecting a separation of the regulated and non-regulated business in the Colorado Interstate case under circumstances not unlike the present, and we approved the use of *705that method in those circumstances as an appropriate means of “effectuating a separateness of the property and capital used in the integrated business”. On review of this point, the Supreme Court stated the problem as one of allocating to each class of the business its fair share of the total cost of service; that since Congress had prescribed no formula for the separation of the regulable from the non-regulable sales, and since rate-making is essentially a legislative function, the courts were not warranted in rejecting the method selected by the Commission “unless it plainly contravenes the statutory scheme of regulation.” Colorado Interstate Gas Co. case, 324 U.S. at page 589, 65 S.Ct. at page 833, 89 L.Ed. 1206. The appropriateness of the formula raises questions of fact, not of law, Colorado Interstate Gas Co. case, 324 U.S. at page 590, 65 S.Ct. 833, 89 L.Ed. 1206, and involves the exercise of informed judgment and discretion by those whose duty it is to make the “pragmatic adjustments * * * called for by the particular circumstances.” Natural Gas Pipe Line Company case, 315 U. S. at page 586, 62 S.Ct. at page 743, 86 L.Ed. 1037. Indeed, in the Panhandle case, 324 U.S. 635, 65 S.Ct. 821, 89 L.Ed. 1241, the Supreme Court sustained the action of the Commission in refusing to make any allocation of cost of service as between regulable and non-regulable sales, for the asserted reason that in those circumstances no allocation was necessary. See Panhandle Eastern Pipe Line Co. v. Federal Power Commission, 45 P.U.R.,N.S., 203.
In making the allocation of cost of service, the Commission followed the recommendations of its staff, who approached the problem as an engineering and economic one, and who gave a detailed analysis of the method of allocation for the record. One member of the staff described the problem of allocation of joint costs as one “that engineers and economists have been studying for many years, not only in the utility industry, but in all other industries in which joint costs are present”, and observed that allocations “require the exercise of informed judgment and use of procedures which appear to be reasonable in view of the particular operations and circumstances of the system in each case”.
It would serve no useful purpose for us to further detail or itemize the cost allocations. If some of the specific allocations appear to be illogical and unfair, they necessarily pose technological problems of accounting and finance upon which the administrative judgment has been declared virtually supreme. We shall not criticize that which we are powerless to correct. If allocation of cost of service is a fundamentally correct and permissible method of effecting a separation of the regulable from the non-regulable sales, we cannot say on this record that the application of the formula is so wholly unrelated to the facts as to produce an illegal or reversible result. '
The judgment is affirmed.

 The Company’s plant account on its books as of December 31, 1941, was $86,-134,828.57, but at the hearing, the Company conceded $10,793,370 as “write-up” on its books as the unretired portion of a $17,000,000 “write-up”. The Commission also eliminated from the plant account as “intangibles” of affiliated predecessor companies $6,280,190, which is not contested on the record.

 Actual Legitimate Cost:
Natural gas rights and leaseholds .............$ 1,644,349
Storage gas rights and leaseholds ............. 346,931
Transmission and gathering lines, compressor stations, gas wells and all other property in service 64,986,374
Total actual legitimate cost ............... 66,977,654
Less existing depreciation and depletion .......... ■ 21,804,449
Total investment in plant in service..... 45,173,205
Construction work in progress .................. 1,576,357
Working capital ......... 1,818,194
Rate Base 48,567,756

 Operating expenses.......$ 4,666,232
Annual depreciation ...... 1,709,060
Annual depletion ......... 70,871
Taxes ................... 1,068,535
Exploration and develop-inent costs 295,439
Total $ 7,810,137

 Mr. Justice Jackson, concurring specially, expressed üe view that the Commission “is free to take evidence as to conditions and events quite beyond its regulatory jurisdiction where they are thought to affect the cost of that whose price it is directed to determine. This” he said “as I see it, is all that has been done here. * * * the Commission cannot wisely fix a reasonable price without considering its incidental effect on production.” 324 U.S. 581, 609, 65 S.Ct 829, 842, 89 L.Ed. 1206.

 In its summary of actual legitimate cost, the Commission observed, “we have included in the rate base every dollar actually invested by the Company and its affiliates in the property devoted to public service.”

 See Status of Regulatory Commissions under the Hope Gas Case decisions, 32 Georgetown Law Journal, 1943.

 See John Bauer, Director of American Public Utility Bureau, Depreciation and Effective Rate Control, 54 Yale L. J., p. 92.