Court Opinion

ID: 9647861
Source: CourtListenerOpinion
Date Created: 2023-08-23 13:53:21.610568+00
Date Added: 2024-06-11T18:11:54.275645
License: Public Domain

PHILLIPS, Circuit Judge.
The Cities Service Gas Company, a Delaware corporation, is engaged in the business of producing and transporting gas from Texas and Oklahoma and delivering it to distributing companies along its line, among which are the following in the state of Kansas : The Wichita Gas Company, the Hutchinson Gas Company, the Pittsburg Gas Company, the Capital Gas & Electric Company, the Newton Gas Company, the Girard Gas Company, the Wyandotte County Gas Company, the Union Public Service Company, and the Western Distributing Company.
The common stock of each of such distributing companies, except the qualifying directors’ shares, is owned by the Gas Service Company, a corporation. The stock of the Gas Service Company, except the qualifying directors’ shares, is owned by the Cities Service Company, a Delaware coiporation. The stock of the Cities Service Gas Company, -except the qualifying directors’ shares, is owned by the Empire Gas & Fuel Company. The stock of the Empire Gas & Fuel Company, except the qualifying directors’ shares, is owned by the Cities Service Company.
The Western Distributing Company is a West "Virginia corporation and a citizen of that state. The Union Public Service Company is a Delaware corporation and a citizen of that state. The other distributing companies {ire Kansas corporations.
The Cities Service Gas Company furnishes gas to the distributing companies at the city gates under day to day contracts, which are oral, at 40 cents per thousand cubic feet. Each of the distributing companies has contracted to pay Henry L. Doherty & Company 1% per cent, of the gross revenue, a per diem charge and expenses for certain specific services, and an engineering fee of 5 per cent, of the cost of new construction, in consideration of which. Henry L. Doherty & Company maintains legal, managerial, engineering, accounting, and purchasing staffs whose services are available to the distributing companies.
Each of the distributing companies has also entered into a contract with the Gas Service Company under which the latter furnishes and the former pays for certain services. This contract has been approved by the commission and is not in controversy here.
On July 2, 3931, the Public Service Commission commenced a proceeding against the corporations hereinbefore named, except the Cities Service Company and the Cities Service Gas Company. It found that the reasonableness of the contracts hereinbefore referred to, and the charges made for services and commodities furnished thereunder, should be inquired into and a determination made of the amounts which properly should he set up as operating expense of the distributing companies on account of expenditures made for such commodities and services under such contracts, and entered an order on such findings for. a hearing to inquire into the reasonableness of such contracts and charges, and directed that respondents in such proceeding furnish such information concern* ing such contracts as the commission might desire, and “show cause why such holding *794company contracts, or service or commodity charges, should they be/ found to be unreasonable, should not be disallowed as operating expense of the distributing companies, and adjustment made in this respect as to charges made to the consumers.”
After a hearing, the commission on July 20, 1932, made findings to the effeet that any amounts paid by the distributing companies under their contracts with Henry L. Doherty & Company were unreasonable, and that any amounts paid by the distributing companies to the Cities Service Gas Company for gas in excess of 2,9.5 cents per thousand cubic feet at the city gates were unreasonable, and ordered that o.n and after August 1,1932, the distributing companies (1) cease setting up on their books as operating expenses the 1% per cent, payments to Henry L. Doherty & Company and any payments for. gas to the Cities Service Gas Company in excess of 29.5 cents per thousand cubic feet, (2) give no consideration to any such payments in fixing their rates to domestic consumers, (3) reduce their rates to their consumers proportionately, pending a final determination of their rates; and show cause on September ,1, 1932, why such reduction should not be made permanent.
A petition for rehearing was filed by the respondents setting up 51 grounds. A rehearing limited to one of such grounds was granted. After such rehearing, the commission increased its finding of a reasonable charge for gas at the city gates from 29.5 to 30 cents, and with that modification and the necessary changes in dates, on August 31, 1932, re-entered its order of July 20 in the form of two orders.
The material portions of the first of such orders is as follows:
“That on and after the 1st day of September, 1932, the distributing companies, respondents above named, shall cease to set up on their books as an expense item any payments made to Henry, L.' Doherty & Company under the contract above mentioned, because of the one and three-fourths per cent, charge and also any payments made to Cities Service Gas Company for main line town border gas in excess of 30 cents per M. C. F., and should give no consideration to any such payments in fixing a rate for the domestic consumer.
“That on the 17th day of October, 1932, the distributing companies, respondents above named, appear before the Public Service Commission, at 10:00 o’clock a. m., and show cause to the commission why the reduction in expenses as above set forth should not be passed on to the consumers with such other reductions as may be found reasonable.”
■ The material portions of the second of such orders is as follows:
“It is therefore by the commission ordered, that effective September 1, 1932, and until a hearing is held and an order issued, that the distributing companies, respondents-s above named, shall charge rates to the consumers as follows:
“All distributing companies paying a gate-rate in excess of 30 cents per M. C. F. shall deduct the difference between what the distributing company is now paying at the city gate and 30 cents per M. C. F. and pass on this difference to the consumer.”
The nine distributing companies and the Cities Service Gas Company brought separate suits in equity to enjoin the enforcement of' the two orders of August 31, 1932.
The Newton Gas Company filed a cross-bill in each of the suits brought by the distributing companies in which it challenged the right of the commission to join it with the other utilities in one joint proceeding. Counsel for the Newton Gas Company have advised the court that they do not .desire to press these cross-bills.
These actions were commenced on September 19, 1932, within the thirty-day period required by section 66 — 118, R. S. Kan. 1923.
The several bills alleged diversity of citizenship as to the Cities Service Gas Company, the Western Distributing Company and the Union Public Service Company, and alleged that the orders are confiscatory of plaintiffs’ property, impair the obligations, of their contracts, deny to them the equal protection of the laws, and unconstitutionally interfere with interstate commerce. The bills of the distributing companies also alleged that the Governor had directed the Attorney-General to bring suits to have them placed in the hands of receivers for the purpose of avoiding a judicial review of the orders of August 31,1932.
An application was made for a temporary injunction. At the hearing thereon, the commission confessed that the second order made on August 31, 1932, was in conflict with section 66 — -118, R. S. Kan. 1923, which prescribes that an order cannot become effective until thirty days after it is entered, and consented that the enforcement of such second order might be permanently enjoined. We granted a temporary injunction against the enforcement of both orders.
The eases were consolidated for trial. Up*795on the trial the evidence introduced before the commission was received in evidence, supplemented by an agreed abstract of such ■evidence, and by stipulations and other evidence.
Counsel for the commission contend that the first order is not subject to any of the constitutional objections urged by the plaintiffs, namely, that it confiscates their property, interferes with their right to contract, and interferes with interstate commerce, because all that it does is to find that the contracts under inquiry are unreasonable, and the extent of sueh unreasonableness. They urge that the order does not take any property from the Cities Service G-as Company, that it still may continue to collect the 40-eent gate rate, that it does not take any property from the distributing companies, that they may still continue to charge their present rates until a valid order is made requiring them to make a decrease in their charges to their consumers, that it does not require the distributing companies to discontinue the contracts nor to discontinue any payments thereunder, and that such contracts remain in full force and effect.
There are two answers to this contention. The first order, entered August 31, 3932, expressly prohibits the distributing companies from giving consideration to tho payments made to Henry L. Doherty & Company and to the Cities Service Gas Company for gas at the city gates in excess of 30 cents per thousand cubic feet “in fixing a rate for the domestic consumer” on and after September 1, 1932. These are two of tho important items which enter into the cost upon which the distributing companies’ rates a.re predicated, and the elimination thereof o.n September 1, 1932, from the rates charged the domestic consumers would have necessarily effected a substantial reduction in rates. Hence, the order is in substance and effect a rate-reducing order.
But, if it is only an order adjudging the contracts unreasonable and determining tho proper amount which may be set up for expenditures thereunder as proper operating expense in determining rates for local consumers, and is only a preliminary step in a rate determination, the order is subject to review. Had the distributing compames failed to appeal from sueh order or seek a judicial review thereof within thirty days from August 1, 1932, it would have become final on September 1, 1932 (section 66 — 118, R. S. Kan. 1923), and tho facts therein found would have become res adjudica,ta, and, in that event, at the hearing under tho last paragraph of the second order, the companies could not have defended against an elimination of sueh items as a part of their operating cost in fixing their rates.
If the construction of counsel for the commission is correct, the order is plainly an attempt to avoid a judicial review in this court of the matters therein determined, and to deprive the distributing companies of their constitutional rights. This cannot be tolerated.
The power of a public service commission to inquire into contracts between the company furnishing the service or commodity, the rates for which are under inquiry, and its parent or holding company, has been tho subject of judicial inquiry in recent cases. See Note 1.
Note 1. In Southwestern Bell Tele. Co. v. Public Service Commission, 262 U. S. 276, 43 S. Ct. 544, 547, 67 L. Ed. 981, 31 A. L. R. 807, the court said:
“Tho commission is not the financial manager of the corporation, and it is not empowered to substitute its judgment for that of the directors of the corporation; nor can it ignore items charged by the utility as operating expenses, unless there is an abuse of discretion in that regard by the corporate officers.”
Again, in United Fuel Gas Co. v. Railroad Commission of Kentucky, 278 U. S. 300, 49 S. Ct. 150, 156, 73 L. Ed, 390, the court said:
“We recognize that a public service commission, under the guise of establishing a fair rate, may not usurp the functions of the company’s directors and in every caso substituto its judgment for theirs as to the propriety of contracts entered into' by the utility; and common ownership is not of itself sufficient ground for disregarding such intercorporate agreements when it appears that, although an affiliated corporation may be receiving tho larger share of the profits, the regulated company is still receiving substantial benefits from tho contract and probably could not have secured better terms elsewhere.”
But in Smith v. Illinois Bell Telephone Co., 282 U. S. 133, 51 S. Ct. 65, 70, 75 L. Ed. 255, the court said:
“The Western Electric Company not only manufactured apparatus for tho licensees of the Boll system but engaged in other large operations and it cannot bo merely assumed or conjectured that the net earnings on the entire business represent the net. earnings from the sales to the Bell licensees generally or from those to the Illinois Company. Nor is the argument of the appellants answered by a mere comparison of tho prices charged by the Western Electric Company to the Illinois Company with the higher prices charged by other manufacturers for comparable material, or by the Western Electric Company to independent telephone companies. The point of the appellants’ contention is that the Western Electric Company, through tho organization and control of the American Company, occupied a special position with particular advantages in relation to the manufacture and sale of equipment to the licensees of the Bell system, including the Illinois Company, that is, that it was virtually the manufacturing department for that system, and the question is as to the net earnings of the Western Electric Company realized in that department and the extent to which, if at all, such profit figures in the estimates upon which the charge of confiscation is predicated. Wo think that there should be findings upon this point.”
Again, in the recent case of Western Distributing Company v. Public Service Commission of Kansas, *796285 U. S. 119, 52 S. Ct. 283, 285, 76 L,. Ed. 655, the court said:
“The appellant adverts to the fact that in its bill of complaint are included a number of averments not denied by the appellees. In brief, these are that the company does not own or produce any natural gas; that the only source of supply for the city of Eldorado is the main of the Cities Service Gas Company; that no supply at a lower price can be obtained from any other source; that the same rate is being charged to other distributing companies along the lines of the Cities Service Gas Company, and was being charged by another independent pipe line to another city; that an ineffectual effort had been made to find local gas available to Eldorado; and that appellant had attempted to get a lower rate from Cities Service Gas Company but could not do so. It is urged that, as these averments were uncontradicted, they constitute, when taken with the facts previously stated, a prima facie case for the reasonableness of tbe rate charged. This might well he true were it not for the fact of unity of ownership and control of the pipe line and the distribution system. An averment of negotiation and effort to procure a reduction in the wholesale rate means little in the light of the fact that the negotiators are both acting in the same interest — that of the holding company which controls’both. All of these facts so averred in the pleadings would be far more persuasive with respect to the propriety of the rate if the parties were independent of each other and dealing at arm’s length. Where, however, they constitute but a single interest, and involve the embarkation of the total capital in what is in effect one enterprise, the elements of double profit and of the reasonableness of inter-company chargee must necessarily be the subject of inquiry and scrutiny before the question as to the lawfulness of the retail rate based thereon can be satisfactorily answered.’’
We think there ean be no doubt, under the decision in Smith v. Illinois Bell Tel. Co., supra, and Western Distributing C'o. v. Public Service Commission, supra, that tbe commission has power to inquire’ into tbe reasonableness of such contracts. The extent of such inquiry, however, has not been settled.
Counsel for plaintiffs contend that, while tbe commission may determine whether tbe contracts are fair and reasonable, and such as ordinarily prudent business men, dealing at arm’s length, free from domination of a parent corporation, under tbe existing facts and circumstances would enter into, or whether they exact an unfair and unconscionable charge for a commodity or service, it may not determine and fix tbe interstate rate charged for sueb commodity or service.
It has been settled by repeated decisions of tbe Supreme Court that a state commission has no power to fix and regulate interstate gas rates. Hence, a state commission cannot fix tbe price to be charged for natural gas transported from one state to another and sold and delivered in bulk to an independent distributing company. Missouri ex rel. Barrett v. Kansas Natural Gas Co., 265 U. S. 298, 44 S. Ct. 544, 68 L. Ed. 1027; People’s Natural Gas Co. v. Public Service Comm., 270 U. S. 550, 46 S. Ct. 371, 70 L. Ed. 726; Public Utilities Comm. v. Attleboro S. & E. Co., 273 U. S. 83, 47 S. Ct. 294, 71 L. Ed. 549; Pennsylvania Gas Co. v. Public Service Comm., 252 U. S. 23, 40 S. Ct. 279, 64 L. Ed. 434; Public Utilities Co. v. Landon, 249 U. S. 236, 39 S. Ct. 268, 63 L. Ed. 577.
On tbe other baud, a state does have tbe power to regulate tbe price of gas brought into a state and sold directly to tbe consumer, because “tbe business of supplying, on demand, local consumers is a local business, even though the gas be brought from another state and drawn for distribution directly from interstate mains; ,and this is so whether the local distribution be made by tbe transporting company or by independent distributing companies.” Missouri ex rel. Barrett v. Kansas Natural Gas Co., 265 U. S. 298, 309, 44 S. Ct. 544, 546, 68 L. Ed. 1027; Penna. Gas Co. v. Public Service Com., 252 U. S. 23, 40 S. Ct. 279, 64 L. Ed. 434; East Ohio Gas Co. v. Tax Commission, 283 U. S. 465, 51 S. Ct. 499, 75 L. Ed. 1171.
We are of tbe opinion that tbe facte here justify tbe conclusion ’ that the-Cities Service Company, together with tbe Gas Service Company, tbe distributing companies, the Empire Cas & Fuel Company, and tbe Cities Service Gas Company are engaged in a common enterprise, namely, tbe transporting and furnishing of gas to local consumers; that tbe Cities Service Company" exercises sueb complete dominion and control over tbe Cities Service Gas Company and tbe distributing companies that, under tbe general rules of agency, tbe Cities Service Gas Company and tbe distributing companies are mere agencies or instrumentalities of tbe Cities Service Company; and that, in substance and effect, tbe Cities Service Company is, through sueb agencies, supplying gas to local consumers on demand and is engaged in a local business. If this be true, tbe commission bad tbe power to determine tbe reasonableness of tbe charge set up as operating expense for gas at tbe city gates in fixing tbe local rate. That could only be done by determining a reasonable return to the Cities Service Gas Company for producing, transporting and delivering such gas at tbe city gates.
However, if we grant that tbe commission ean only scrutinize and inquire into tbe reasonableness of such contracts, we are of tbe opinion that tbe samé result necessarily follows. Since tbe Cities Service Company enjoys a monopoly and'affords tbe only reliable source for supplying gas to tbe distributing companies, the only method of de*797termining the fairness and reasonableness of the charge at the city gates is to determine the reasonableness of the return to the Cities Service Gas Company on their property used and useful iu the business. Any charge in excess of that for gas at the city gates, under the contract between two subsidiary corporations who have the same parent or holding corporation, would he unfair and unreasonable.
It follows that we must determine the value of the property of the Cities Service Gas Company used and useful in the business of producing, transporting, a,nd delivering gas, the amount of its earnings, and a fair return on such property. The case has been tried so that the facts necessary to make these determinations axe before us.
Wo have made and filed findings of fact, and in foot-notes thereto expressed our reasons therefor, and in this opinion will only state the ultimate facts so found.
 In determining these facts, we have kept in mind that the findings of the commission ace presumed to he correct [Banton v. Belt Lino Ry. Corp., 268 U. S. 413, 422, 45 S. Ct. 534, 69 L. Ed. 1020; Cotting v. Kansas City Stock Yards Co., 183 U. S. 79, 22 S. Ct. 30, 46 L. Ed. 92; Denver Union Stock Yard Co. v. United States (D. C. Colo.) 57 F.(2d) 735, 739], but that, on the question of confiscation, the plaintiffs are entitled to the independent judgment of a judicial tribunal as to the law and facts. United Railways & E. Co. v. West, 280 U. S. 234, 251, 50 S. Ct. 123, 74 L. Ed. 390; Bluefield W. W. & Imp. Co. v. Public Service Commission, 262 U. S. 679, 689, 43 S. Ct. 675, 67 L. Ed. 1176; Ohio Valley W. Co. v. Ben Avon Borough. 253 U. S. 287, 40 S. Ct. 527, 64 L. Ed. 908; Lincoln Gas & Elec. Light Co. v. Lincoln, 223 U. S. 349, 32 S. Ct. 271, 56 L. Ed. 466; Crowell v. Benson, 285 U. S. 22, 60, 52 S. Ct. 285, 296, 76 L. Ed. 598.
In the ease last cited, the court said:
“In cases brought to enforce constitutional rights, the judicial power of the United States necessarily extends to the independent determination of all questions, both of fact and law, necessary to the performance of that supreme function. The case of confiscation is illustrative, the ultimate conclusion almost invariably depending npon the decisions of questions of fact. This court has held the owner to be entitled to ‘a fair opportunity for submitting that issue to a judicial tribunal for determination upon its own independent judgment as to both the law and facts.’ ”
 The value of the property of the Cities Service Gas Company, used and useful in its business of producing, transporting, and supplying gas-to the distributing companies at the city gates, was found by the commission to be $73,170,510. We find such value to be at least $82,380,582. The net available annual return from such property was found by the commission to be $7,161,793. We find such return to be $5,860,327, or a return of 7.11 per cent, on the present value of the property.
If the charge made by the Cities Service Gas Company for gas at the city gales was reduced to 30 cents per thousand cubic feet, it would result in a reduction of $1,926,145.07 in its net income. This would reduce its return to 4.8 per cent, on the present value of its property used and useful in the business.
We are of the opinion that a return of approximately 8 per cent, upon present values is necessary under present conditions to assure confidence in the financial soundness of the Cities Service Cas Company, to maintain its credit, and to enable it to raise money necessary for the discharge, of its public duties, and that any return substantially lower than 8 per cent, would bo confiscatory. United Railways & E. Co., v. West, 280 U. S. 234, 253, 50 S. Ct. 323, 74 L. Ed. 390; Smith v. Ill. Bell Telephone Co., 282 U. S. 133, 161, 51 S. Ct. 65, 75 L. Ed. 255.
The undisputed evidence shows that if the distributing companies are compelled to pay 40 cents per thousand cubic feet for gas at the city gates and to base their rates to consumers on the price fixed as reasonable by the commission iu its order of August 31, 1932, they will have no earnings in excess of operating expenses to cover depreciation and afford any return on the value of their property used and useful in the business. Upon the trial, it was stipulated that the Cities Service Gas Company could not continue its business without the patronage of the distributing companies.
We conclude, therefore, that 40 cents per thousand cubic feet for gas at the city gates is a reasonable charge; that to compel the Cities Service Gas Company to furnish such gas at 30 cents per thousand cubic feet will result in confiscation of its property, and that to compel the distributing companies to pay 40 cents per thousand cubic feet for gas at the city gates and permit them to set up only 30 cents thereof in their operating expense, iu fixing their rates to local consumers, will result in confiscation of the properties of the distributing companies.
*798 We have found that the distributing companies in their proof before the commission failed to establish that the payments of 1%. per cent, under the Henry L. Doherty & Company contracts were fair and reasonable, and therefore proper items of expense to be considered .in determining local rates for gas.
We set out the applicable provisions of the Kansas statute in Note 2.
Henry L. Doherty, doing business under the name of Henry L. Doherty & Company, has built up and maintains a complete organization for the designing, construction, operation, development, and management of public utilities, oil and natural gas properties. This organization consists of 1,687 employees, among whom are included experienced executives, financial advisers, construction, valuation, electrical and oil and gas engineers, geologists, technicians, rate experts, accountants and operators. Henry L. Doherty & Company also maintains a department for the purchase, sale, promotion, and transfer of stocks of the various subsidiary corporations of the Cities Service Company, a foreign oil department, a steamship and tank-car department, an oil producing and refining department, and a real estate division chiefly eoneeméd with New York real estate.
As stated in our findings, the activities of Henry L. Doherty & Company embrace many matters not covered by such contracts, the expense of which cannot properly be charged to the distributing companies.
The evidence before the commission consisted of proof that Henry L. Doherty & Company is not operated for profit, of the services rendered to the distributing companies by it, and of the cost and expense of maintaining the Henry L. Doherty & Company organization. There was no separate proof of the expense which might properly be allocated to the services rendered under such contracts. Therefore, we have eoncluded that the distributing companies failed to meet the requirements of the Kansas statute by showing in detail the items of service rendered under such contracts and the cost thereof. Furthermore, it was impossible to determine from the evidence before the commission whether the charge for the services rendered by the distributing companies was fair and reasonable, because the proof was of the total cost and expense of maintaining Henry L. Doherty & Company, which included many activities unrelated to and of no benefit to the distributing companies; and there was no proper allocation of the cost and expense of such unrelated activities.
Notb 2, Section 7é — 602o, 1931 Supp. R. S. Kan. 1923, is as follows:
"Showing required for fixing or charging rates. In ascertaining the reasonableness of a rate or charge to be made by a public utility, no charge for services rendered by a holding or affiliated company, or charge for material or commodity furnished or purchased from a holding or affiliated company, shall be given consideration in determining a reasonable rate or charge unless there be a showing made by the utility affected by the rate or charge as to the actual cost to the holding or affiliated company furnishing such service and material or commodity. Such showing shall consist of an itemized statement furnished by the utility setting out in detail the various items, cost for services rendered and material or commodity furnished by the holding or affiliated company.”
We are of the opinion that the burden of proof, both under the Kansas statute and jmder general principles, was upon the distributing companies. Smith v. Illinois Bell Tel. Co., supra; Michigan Law Review, Nov. 1932, pp. 16-24. ‘
Counsel for the commission contend that the services rendered by Henry L. Doherty & Company are a duplication pf the serv-ices rendered by the Gas Service Company, and are therefore not necessary or useful to the distributing companies. With this we cannot agree. The Gas Service Company is equipped to render such services only in minor and relatively unimportant matters.
The expense of each distributing company maintaining a separate organization like that of Henry L. Doherty & Company would be prohibitive. For that reason it is in keeping with sound business principles for it to contract with Henry L. Doherty & Company, or some similar organization, for such services. We therefore conclude that, while the services contracted for are necessary and useful to the distributing companies and that the contracts in that respect are proper, the proof adduced was insufficient to meet the requirements of the Kansas statute or to enable the commission to determine whether the charges for such services were fair and reasonable.
Certain incidental matters require a limited discussion.
The commission held that certain gas leases claimed to be held by the Cities Service Gas Company for gas reserves were in excess of the required reserves, and that they were in fact being held for speculative purposes. The evidence established, and we have found, that the officers and directors of the Cities Service Gas Company, who are men of broad experience in the natural gas business, in the exercise of an honest and, we think, sound business judgment, determined that such leases were necessary to afford it an adequate gas *799reserve, and that such leases were acquired and are held by it as bona fide reserves, and not for speculation.
The commission was not empowered to substitute its judgment for that of the officers and directors of the Cities Service Gas Company as to the amount of leases necessary to afford an adequate gas reserve, in the absence of a showing of abuse of discretion by such officers in that regard. Southwestern Bell Tel. Co. v. Public Service Com., 262 U. S. 276, 289, 43 S. Ct. 544, 67 L. Ed. 981, 31 A. L. R. 807; State Public Utilities Com. v. Springfield Gas & Elec. Co., 291 Ill. 209, 234, 125 N. E. 891; People v. Stevens, 203 N. Y. 7, 96 N. E. 114, 117; Idaho Power Co. v. Thompson (D. C. Idaho) 19 F.(2d) 547, 580; Kansas City, K. V. & W. Ry. Co. v. Bristow, 101 Kan. 557, 167 P. 1138, 1140, L. R. A. 1918E, 342; Denver Union Stock Yard Co. v. United States (D. C. Colo.) 57 F.(2d) 735, 748.
Counsel for plaintiffs contend that there should be included in the valuation of the Cities Service Gas Company $3,422,512 to cover initial cost of financing. This item was wholly disallowed by the commission. We are of the opinion that the commission’s decision was right under the authority of Galveston Elec. Co. v. Galveston, 258 U. S. 388, 397, 42 S. Ct. 351, 66 L. Ed. 678, and Denver Union Stock Yard Co. v. United States, supra, page 742 of 57 F.(2d).
We conclude that that portion of the first order of the commission, made August 31, 1932, that the distributing companies should give no consideration to the payments for gas at the city gates in excess of 30 cents per thousand cubic feet in fixing the rate for the domestic consumer, and the whole of the second order, made August 31, 1932, should be permanently enjoined; and that the temporary injunction against the Attorney-General, being no longer necessary, should be dissolved.
Lot decrees in accordance with the foregoing ho prepared and submitted.
HOPKINS, District Judge, dissenting.
Supplemental Memorandum.
PHILLIPS and MeDERMOTT, Circuit Judges.
We are advised that a misunderta&ding exists among counsel as to the scope of the opinion and findings as to a reasonable return, a misundei’standing doubtless contributed to in part because the court acceded to the suggestion of counsel that findings be made as to all controverted issues, and m part by differing conceptions as to the elasticity of the words “substantially” and “approximately.” While supplemental memoranda often confuse instead of clarify, an interpretative resume may not be amiss.
A “reasonable rate” is not a particular decimal. A “reasonable rate” is one that falls within the zone of reason; it is a field, and not a mathematical point. The lower limit of the zone of reason is confiscation, that is, a denial of a net return sufficient to preserve the property and to attract capital necessary to enable the utility to discharge its public duties. A finding that a particular rate is reasonable is not. therefore, a finding that every other rate is either unreasonable or confiscatory.
With the determination of the proper rate within that zone of reason, the eonrts are not concerned, for that is a legislative matter. As jurisdiction is invoked here, and generally in such cases, the courts decide but one question: Does the prescribed rate fall below the lower limit of the zone? The rate order in this ease allowed a return of 4.8 per cent, on the fair value of the property. The issue tendered is the validity of that order. We have held, and hold, that such order is confiscatory. Except in rough approximation, and by way of recital of evidence in the record, we have not undertaken to fix with precision the low'er limit of this zone of reason.
Findings of Fact.
I.
The citizenship and official position of the parties are as stated in the bills of complaint. There is diversity of citizenship in 1646-N, 1644r-N and 1645-N, in which eases the Cities Service Gas Company, the Union Pffblie Service Company and the Western Distributing Company are respectively plaintiffs. All of the eases involve a substantial federal question and in each of the cases there is more than $3,000 in controversy.
II.
On July 2, 1931, an order was entered by the PubJie Service Commission of Kansas, on its own initiative, directed to the plaintiffs herein except the Cities Service Gas Company, finding’ that the reasonableness of all contracts with, and charges made to, the respondents, by corporations owning the stock of the respondents, and of the contracts between Henry L. Doherty & Company and respondents, should be inquired into; tho respondent distributing companies were or*800dered to show cause why payments made under such contracts, if found to be unreasonable, should not be disallowed as operating expenses. A copy of said order is Exhibit “A” to the bills of complaint of the distributing companies.
III.
Pursuant to such order, extensive hearings were held. The properties of the Cities Service Gas Company, situated in five states, were appraised by engineers for both sides, and valued by tbe commission. Tbe testimony and exhibits comprise many volumes; the expense of tbe trial, including the appraisement of the engineers, exceeded $300,000. On July 20, 1932, the Commission found that the payment of 1% per cent, of gross revenues made by tbe distributing companies to Henry L. Doherty & Company were unreasonable; that •any rate paid by the distributing companies to tbe pipe line company (the Cities Service Gas Company) in excess of 29.5c per thousand cubic feet for natural gas delivered to the mains of the distributing companies was unreasonable! (Note 1.) Tbe distributing companies were ordered (1) to cease setting np on their books the payments of 1% per cent, to Henry L. Doherty & Company, and any payment for gas in excess of 29.5c per thousand cubic feet, and (2) to give no consideration to any such payments in fixing 'their rates to tbe domestic consumers, and (3) to reduce their rates to tbe consumers proportionately, pending- a final determination of their rates; notice was given to show cause why such reductions should not be made permanent. A copy of such findings and order with an elaborate supporting opinion are attached to the bills by reference.
IV.
A petition for rehearing on 51 grounds was filed, and allowed as to one. Upon rehearing, a slight addition was made to the value of tbe properties of the pipe line company, and the city gate rate was increased from 29.5c to 30c per thousand cubic feet. Tbe order entered in July was again entered, this time as two orders.; part (3) of the July 20th order, requiring a reduction in rates pending further hearing, was incorporated in a separate order. Upon the hearing of the application . for a temporary injunction, counsel for the commission confessed, that part of the order to he invalid.
Note 1. The city-gate rate is referred to throughout the record, and in these findings, as the "40o rate.” That is the usual charge per thousand cubic feet for gas delivered to the mains of the distributing companies; local conditions lowered that rate to certain cities supplied by the pipe line company, bringing the average down to the 39.5 cents referred to in the opinion and order of the commission.
V.
Except for qualifying shares, the common stock of the distributing companies is owned by tbe Gas Service Company, tbe stock of which jn turn is owned by tbe Cities Service Company. The common stock of the Cities Service Gas Company is owned by tbe Empire Gas & Fuel Company, tbe voting stock of which in turn is o.-wned by the Cities Service Company. The Empire Gas & Fuel Company has a preferred stock issue outstanding in the hands of the public. Henry L. Doherty & Company is Henry L. Doherty, who owns 35 per cent, of the voting stock of tbe Cities Service Company. Tie Cities Service Company, by stock ownership, legally controls tbe policies of tbe distributing companies and tbe pipe line company; and Henry L. Doherty in fact controls the policies of tbe Cities Service Company. Tbe distributing companies do not deal at arm’s length with either tbe Cities Service Gas Company or Henry L. Doherty & Company.
VI.
Tbe distributing companies, plaintiffs, are engaged in tbe distribution and sale of natural gas to domestic and industrial consumers. They operate in 128 'cities and towns in Kansas. Their only dependable source of supply is tbe other plaintiff, tbe Cities Service Gas Company. Except for a few local gas fields of uncertain life, tbe distance of tbe gas fields from tbe localities served, and tbe cost of pipe line construction, are such that the Cities Sex-vice Gas Company has a practical monopoly on the sale of gas-to the distributing companies. There is no agreement between tbe Cities Service Gas Company and tbe distributing companies as to tbe amount of gas that will be purchased; the oral arrangement is simply that the pipe line company will supply the present needs of the distributing companies at 40e per thousand cubic feet delivered to their mains.
VII.
Prior to 1910 and during the years since then Henry L. Doherty, doing business under the name of Henry L. Doherty & Company, has built up and now maintains a complete organization for tbe design, construction, operation and development of public utilities, oil and natural gas properties. This organization is composed of experienced executives, financial advisers, construction, valuation, electrical, oil and gas engineers, geologists, chemists, technicians, experts, accountants *801and operators. There are approximately 1,887 employees.
The same organization maintains departments for the purchase, sale, promotion and transfer of stocks of the various companies allied with the Cities Sexvieo Company; a foreign oil department; steamship and tank-ear department; an oil production and refining department; a veal estate division chiefly concerned with New York real estate.
Each of the plaintiffs has entered into a contract with Henry L. Doherty & Company, by which the latter agrees to furnish the following services, subject to the control of the Board of Directors of the plaintiff's:
“I. Personnel. In so far as your corporation may desire, it is proposed to supply you with experienced executives and operators necessary for your business.
“II. Executive Service. Our staff! of executives, financial advisers, engineers and accountants will advise and assist in franchises, rates, matters of public relations, and all matters of insurance, supervise expansion of territory and business, acquisition of additional properties, etc.
“III. General Accounting Services. Our Accounting Department will periodically audit the books of your corporation and generally advise in accounting problems and in the developments in accounting practices and procedure, and furnish the services of certified public accountants where special audits are required.
“IV. Statistical Services. Our Statistical Department will supply comparative statements of operating results of the various companies under our supervision and will also superviso or furnish statistical reports to (financial institutions, government bureaus, and similar organizations.
“V. Purchasing Services. We will give you the benefit oí! the services of our Purchasing Department with regard to the purchase of equipment, supplies, generally advise as to the desirable equipment, etc.
“VI. Designing and Construction Engineering. Our engineering staff will be available at all times to carry out all preliminary investigations requisite to determining the advisability of any proposed construction, will cheek the details of engineering design, perform engineering work where requested, and generally check the efficiency of your plant.
“VII. Financial Services. The Financial Department will provide plans for financing and for funds for capital requirements, including construction and additions to properties and acquisition of new properties; for the refunding of maturing obligations; will act as paying agent for coupons and dividends, and assist in the arranging of bank loans. Also the Financial Department will furnish your corporation with a budget system for the advanced determination of financial requirements and operating results.
“VIII. Securities Department. The Securities Department will provide plans for the sale and distribution of various securities, and will formulate and carry out campaigns for sales under customer ownership plans, etc.
“IX. Valuation. The Valuation Department will, when required, prepare inventories and appraisals of property, and will advise as to experts who may be required to testify in valuation eases, and will generally assist in the preparation of the same.
“X. Tax Department. The Tax Department will prepare or supervise the preparation of federal and other lax returns and generally keep in touch with taxation problems.
“XI. New Business Department. The New Business Department will serve in the purchase and sale of appliances and equipment for resalo, the determination of sales policies, promotion programs and sales personnel, in research and laboratory tests on domestic appliances, etc.
“XII. Technical and Research Department. The Technical and Research Department will furnish a consulting service on all technical problems encountered by your corporation.
“Compensation. For the above services your corporation will pay as follows:
“1. A management fee equal to one and three-foynths per cent. (1%%) of its gross revenues, after deducting intercompany sales for resale.
“2. An engineering fee equal to five p,er cent. (5%) of the cost of construction.
“3. For the services of our Securities Department to purchase outright blocks of securities issued by your corporation or to distribute such securities to investors, we will charge a fee to be mutually agreed upon, depending on the character of security offered and general market conditions when the oiler is made.
“In addition, your corporation will pay the expenses, disbursements and reasonable per diem charge for our representatives while at the properties of your corporation or traveling for it on special matters.”
Payments received under these contracts are paid over to Cities Service Company, *802which in turn pays all the expenses of Henry L. Doherty & Company, without profit to Henry L. Doherty. The 1% per cent, payment is not made on intercompany sales; that is, the Kansas consumer pays the 1% per cent, hut once.
VIII.
The Gas Service Company, with offices at Kansas City, Missouri, renders certain services to the distributing companies, for which a payment is made that is not here under review. While the same type of service is rendered under each of such contracts, there is no unreasonable duplication of service. Henry L. Doherty & Company furnish services which the Gas Service Company is not equipped to furnish. Por example, the counsel and engineer employed by Gas Service Company can and do adequately handle the routine matters involving rates and service that arise in ordinary operations; they are not equipped to handle matters of the magnitude of this litigation; in such cases, the engineering and legal staffs of Henry L. Doherty & Company are employed. We find that this contract places at the disposal of the distributing companies engineering, legal, accounting, geological, and business services of value, and of a character and extent which could not as economically he availed of by separate distributing companies or by any small group of them; that similar contracts are made by other public utilities with similar organizations, such as Pord, Bacon & Davis, and Stone & Webster; that the propriety of such contracts is for the owners of the companies to determine.
IX.
The activities of Henry L. Doherty & Company embrace many matters not' covered by the 1% per cent, contract, the expense of which is not a proper operating charge of the distributing companies. These activities are: The promotion, sale, and transfer of securities of the Cities Service Company and its affiliates. No securities of the distributing companies have been marketed by Henry L. Doherty & Company, and if they are, the contract provides for a separate fee for such services. The production, sale and transportation of oil, and the handling of New York real estate, are" unrelated activities. The record discloses no reason for these distributing companies maintaining a London office.
The following activities of Henry L. Doherty & Company are or may be of direct benefit to the distributing companies:
Activities tending to increase the consumption of natural gas, by advertising and by development and marketing of gas-burning appliances; the geological department; the technical and research division; the tax, valuation and rate divisions; the purchasing department; the public utilities operating department; the department dealing with the training of personnel; the natural gas department; the corporate records department; the legal, engineering, accounting, auditing, finance and construction divisions.
!x.
The record discloses that the expenses of Henry L. Doherty & Company exceeded its receipts, over a ten-year period, in the amount of $1,768,440.26>, the deficit being made up by the Cities Service Company. The expenses for one year are classified, and from that classification a rough approximation of the expenses properly chargeable to the natural gas business is possible; something less than one-half of the 1931 expenses appears to have been incurred in activities not contemplated by the contract and not properly chargeable to operating expenses; certain large items, such as executive and office service, include the expense of both related and unrelated services. But the receipts are not classified. The utility business pays 1% per cent.; the oil business 1 per cent.; the securities business apparently pays nothing directly, except that Cities Service Company makes up the deficit. But whether this is a fair division, the record does not disclose, except that the deficit, over a ten-year period ending in 1930, has been about 7 per cent., while the expenses of the securities business for 1931 were close to 35 per cent. ■ It is therefore impossible to tell, from this record, anything about tho pivotal question of whether the payments made by the distributing companies hear any fair relation to the expenditures properly made on their behalf. We cannot therefore find whether 1% per cent, is too much or too little; it is probable that, until some segregation is made of departments, and perhaps a segregation of expenses within some of the departments, no accurate finding on this point can be made. If the entire 1% per cent, is eliminated, the reduction of the average gas bill would he about ten cents a month. The record discloses that a part, at least, of such payment is proper. A finding of the amount thereof should be made, in the first instance, by the commission.
XI.
We find that it is of value to the distributing companies to have available a central organization equipped to render services of the *803character described by the contract, on demand; that the payment of the per diem charge, the percentage on construction contracts, and the fee for the sale of securities, does not meet the expenses of such service, since much of the service is rendered without such specific charges. That whether such contract is advisable is for the officers of the distributing companies to determine. That the actual expenses of such services, if fairly allocated, is a proper operating charge.
We find it is not practicable to allocate with precision the cost of such general services to each distributing company, except so far as it is now allocated by the per diem and per cent, charge in the contract. We find it practicable to segregate the cost of the services rendered to the public service companies, engaged in selling gas, and perhaps electricity, to the public, from the cost of services rendered to companies engaged in the oil business, and from the expenses incurred in the promotion and sale of securities. The consumers q£ natural gas and electricity have no interest in the oil or stock business, and such private businesses ought not to be thrown into a common pot with the business of serving the public, the expenses of all hopelessly intercninglod, and then proportioned back to the public by those interested in the private business.
XII.
The Cities Service Gas Company was organized in 3926. It took over the physical properties of five pipe line companies, having a plant investment account, at that time, of $52,182,525.98. Those pipe line companies served many communities in Oklahoma, Kansas and Missouri. The companies taken over were integrated, so that gas could be run from the mains of one system into that of another, and the supply thereby made more dependable and economical. Natural gas had long been used for lighting and cooking in most of these cities and towns. Years ago, gas had been freely used for heating, but the uncertainty of the supply, caused in part by lack of capacity of the wells to meet the peak demands and in part by the frailties of the pipe line system, had driven the ordinary householder back to coal. The discovery of the extensive and prolific gas field at Amarillo, and later at Hugoton, Kansas, removed the first obstacle; large sums expended in new mains, and in repair oE old ones, largely removed the second. The supply becoming again dependable, a vigorous compaign was waged for household heating, and for industrial uses to absorb the excess in off-peak seasons. The Cities Service Gas Company now has an adequate and dependable supply of gas, available at all times at the city gates. The Cities Service Company acquired the distributing companies in order to insure adequate service to the ultimate consumer, on the theory, doubtless, that a chain is no stronger than its weakest link. The service to the public is now sufficient and efficient. While these improvements in service were being made, electricity supplanted gas for lighting, and is making serious inroads on the cooking, while fuel oil is proving a formidable competitor for heating. The original cost', or prudent investment, in the pipe lino company’s properties is somewhat obscure; the properties were acquired by a merger of other companies, whose original investment accounts cannot now be thoroughly checked. The probabilities are that the book cost of the properties is around $90,000,000. The system consists of 4,400 miles of pipe lines, 31 compressor stations, and 3,225,000 acres of gas leases, and gas wells on a part there-of XIII
There is no substantial dispute a.s to the inventory; the disagreement is over the present values of the properties. The valuations made by engineers for both sides, and by the commission, is on the basis of cost of reproduction new, loss accrued depreciation. The present values aro, on the extensive constructions of the last few years, less than the prudent investment therein. Both engineers arrived at the present per cent, condition by inspection, although the amount of properties inspected differed somewhat. The engineers for the plaintiffs value the properties at $105,000,000; the engineers for the commission, and the commission, a,t $73,000,000. Approximately $22,000,000 of this difference is in four items, gas leases, going concern value, cost of financing, and interest during construction. The remaining difference grows out of differences in valuations of the numerous items in the inventory. While this court has made an independent investigation of the facts, it has done so with the knowledge that the commission had the benefit of hearing the witnesses, and that there is a presumption that its findings are correct. Unless, therefore, the record discloses some substantial reason to the contrary, the findings of the commission have not been disturbed. The commission apparently gave little or no weight to the factor of original cost, although when present values wore higher than cost, great weight was accorded that factor by commissions generally. We have found it unnee*804essary to explore the question of what weight should he given to that factor.
In the following findings of value, the commission's finding is adopted, because presumptively correct, except .where there is an explanatory note.
XIV.
The properties of the Cities Service Gas Company, used and useful in the public service as of September 1,1931, are as follows:

1307-1327. (Mr. Black was the engineer for the commission; Mr. Hamilton for the plaintiffs. Both are engineers, of standing.) The commission allowed $1.40 a rod for right of way. It used $1.08 as a basis, that figure being the average cost, as shown by the books of the company, of 31 per cent, of its rights of way. To this the commission added 22e per rod for expense of acquisition, and 10c a rod for abstracts and recording fees. The evidence clearly developed that the figure of $1.08 did not purport to represent all of the costs, and is not a dependable figure. The most dependable evidence is that of the man who negotiated for these rights of way during the past four years. His offering price, to all landowners, was 50e per rod for the land and 50c per rod for damages; sometimes he paid as much as $2.00 per rod for the land alone; the average damage paid was 65e. He did not state the average cost for the land, but it cannot be assumed that he acquired all of it at his offering price. It should not he figured lower than 65c, the average he paid for damages for which his offer was likewise 50c. These items make $1.30 per rod paid the landowner; adding to that the 32e allowed by the commission for overhead, gives the figure of $1.62 which we have used. The company’s figure of around $3.00 includes aerial surveys which were not used, and if used, probably would have been worth their cost in a saving not reflected in its present valuation. Apparently, the company also included certain construction costs elsewhere accounted for.
1312-1313. We have added two items to this joint account. The commission deducted $57,235 from its engineer’s valuation on a purely legal ground. It appears that in the Craig and Augusta fields, the company uses dry holes, or played out wells, for storage; that is, exeess gas from producing wells is turned into the dry holes, and the gas thereby stored for future use. It is not denied that the wells are properly used for storage, and for a public purpose; the claim is that the landowner has the property interest in the hole in the ground. Upon the trial before this court, it was conclusively proven that the company has entered into gas leases, with royalties paid in advance, for the use of these wells. Its rights thereto are the same as in producing leases. The assumption of fact made by the commission is erroneous; the legal conclusion need not be examined.
The other item is $84,318 growing out of the cost of gas well construction. The company’s figures were considerably below actual cost, and below the cost of adjacent wells drilled by other companies to the same depth. The engineer for the commission omitted certain items in his calculations, which may account for his figures being so much below the actual cost of such construction. The commission’s figures are so far below the cost of' these wells, or any other well *805in the vicinity, that they approach the arbitrary.
Counsel for the commission suggests that the commission’s valuation is too high, because the per cent, condition was computed on a straight line basis, whereas in fact, as ho says, the gas wells depreciate moro rapidly during their early years. None of the witnesses support this theory; it introduces a highly speculative element into an already troublesome problem; it is of no practical significance in tbis ease, because the number of wells is largo and of varying ages, and any theoretical error as to a single well is leveled out by the law of average.
1314. Wo have added $397,017 to this account. The commission adopted Mr. Black’s estimate, which was based on assump - tion that field lines were buried, on tho average, to one-half the depth of main lines. The company’s valuation was based upon tbe facts. Black testified his figures would have been more accurate if he had had time to gather tho facts. It clearly appears, also, that field lines are more expensive to construct than main Hues; they are in smaller units; more hand-labor is involved, and more connections are necessary; also the cost of field lines cannot be decreased by taking advantage of topography, as may generally he done with main lines. The company’s figures are strongly buttressed by an analysis of actual cost of field lines utilizing 20,600 tons of pipe. The assumptions of tho commission and its engineers cannot stand against the facts.
1315-1332. These accounts are treated together, and we find nothing from which, to resolve the conflict between the engineers. The commission rejected Hamilton’s value because without supporting dala»; on rehearing the data was furnished, several volumes of' it. It still leaves tho conflict. We therefore use the commission’s valuation.
1325. We . have added $2,000, the value of the land at the Hogshooter compressor station. The commission eliminated this land, and the structure and equipment, on the ground that it was an abandoned station. The station is an old one, and has not been in use since 1925, because tho gas fields supplying it were exhausted, and it was not so located as to serve other fields. In February, 1931, it was returned for taxes as an abandoned structure, at junk value. Since that date, new gas fields have been discovered, and it is undisputed that the station is now' strategically located, and plans and requisitions have been prepared to make the necessary alterations to put it back into immediate service. This undisputed evidence, corroborated by the physical facts, cannot be ignored because a tax return was made that at an earlier date it was abandoned. It is not now in service, except as an emergency station, but it is a component part of the system as it now exists. If eliminated now, a readjustment of the rate base would be necessary as soon as the work now requisitioned for is completed. We have restored this station to the rate base, using the valuation of the commission’s engineer.
1328. We have added the Hogshooter structure at Black’s value of $49,560. We have not added the compressor stations at Owasso or Hominy. There is a difference of about $700,000 in tho value of tho structures at other compressor stations. Each engineer is corroborated by contractors who estimated the cost of reproduction. The engineers and contractors testifying aro all reputable and capable men. We therefore hold that the presumption of correctness attaching to the finding of the commission has not been overcome.
1331. We have added the Hogshooter equipment at Black’s valuation.
1333. Tho difference between the engineers’ valuations of this item is about $4,000,-000. The dispute narrows down to threo items: (1) Tho commission found tho property to be in 90.1 per cent, condition. Tho company asserts it to be in 92.93 per cent, condition. Tho commission’s finding is supported by tho testimony of its engineer, and a consulting engineer called by tho company. We approve tho commission’s finding as to per cent, condition. (2) The cost of rock-excavation. There was a dispute among the experts, but tho commission’s finding is supported by the testimony of its engineer and a contractor who had done much of this work. Elaborate comparisons of costs of selected linos are introduced to show tho error in the commission’s cost figure. But the results depend largely on .the lines selected. While not entirely satisfied with the figure used, we are not disposed to disapprove the finding as to the enbie yard cost. (3) There is a difference between the engineers as to the amount of rock excavation in the lines. After the hearings before the commission, engineers for both sides drilled a hole every quarter of a mile along a main 125 miles long. That extensive investigation developed that the percentage of rock excavation was 20.94 per cent, instead of 10.46 per cent, used by Black. If overcuts are included, the percentage is 28. We are inclined to believe that overcuts should be excluded; it is probable *806that contracts for trenches would be predicated ou the trench depth, and would-not call for overcuts caused by the inability to blast to- a neat line. This additional evidence convinces us that Black’s estimate of the amount of rock excavation is_ too low. His estimate on the line used for the test was 24,000 yards; Hamilton’s was 72,482 yards. The test showed, on Black’s own figures, exclusive of overeuts, 46,790 yards. The subject is not capable of exact proof, but we are of the opinion that Black’s amounts of excavation should be materially increased. Mr. Hamilton’s valuation of rock excavation is $4,211,120; Mr. Black’s $1,270,-115, of which $1,154,503 is in this account. Applying Black’s price to an increased amount indicated by the test results in an increase of this item from $39,432,331 to $40,-232,331.
Engineering and Superintendence is stipulated by the parties to be 5 per cent, of the Value of the properties excepting accounts Nos.'1316, 1380, 1381,1382,1383,1384,1385, 1387 and 1388. The parties have stipulated that this and other overheads should not be depreciated. Accordingly we have computed overheads by applying the commission’s- percentage to the undepreciated values of the •property, using $66,425,000.
Preliminary and Organization Expense. We adopt the commission’s finding of % per cent, of the values of the physical properties; and for Administration and Legal Expense, % per cent, on physical values including engineering; for Miscellaneous Construction Expenditures, 1 per cent., on same values. (Note 2.)
Interest during Construction. The commission used a rate of 6 per cent.; the company, 8 per cent. It is customary to calculate this item at the prevailing rate charged a person with good credit for temporary advances, which is now 6 per cent. This throws upon the borrower, the owner of the property, the hazard of the borrowed money during the construction period, which must he considered. Two per cent, is a reasonable allowance for that hazard, but it is customary and preferable to make this allowance as -a part of Going Concern Value. The parties have -agreed that this item, as well as taxes, should not be depreciated. We have taken the commission’s figure, increased by 6 per cent, ou the difference in values found, approximately $200,000.
' Note 2. We accept the commission's finding:, instead of the stipulation of the parties, because the commission's finding is in accord with the record, and there is an acknowledged error in the stipulation.
Materials and Supplies: Commission’s figure plus its allowance of $119,275 on rehearing.
Going Concern Value. Mr. Hamilton’s estimate of going concern value is $8,898,532. Ford, Bacon & Davis valued this item from $8,500,000 to $9,000,000. The engineer for the Commission valued it at $3,820,000. The commission allowed $2,000,000. Counsel for the commission urges that nothing be allowed.
That such a value exists is acknowledged by all engineers and appraisers, and is a matter of common knowledge. That aEowanee therefor cannot be denied because of difficulty in evaluation is settled by decisions of the Supreme Court of the United States and of the Supreme Court of Kansas. Many items enter into it. There is a value to records that have been built up, and to a personnel that has been trained. The period of construction was two years. Physical deterioration went on during that period when there were no earning-s to offset it. The owner’s money was embarked in a hazardous enterprise during the construction period; the commission allowed only 6 per cent, for interest during construction on the theory that an owner, with good credit, could borrow money at that rate. But the owner should be compensated for the risk involved in putting his credit back of the enterprise. If 8 per cent, is a fair return on moneys embarked in this business, as we elsewhere find, that hazard was present during the construction period. The difference between 6 per cent, interest during construction and an 8 per eent. return in a business venture during construction is $1,450,645, based on the commission’s valuation. During the construction period, there are no revenues, and depreciation and return (less interest during . construction) must be capitalized in going concern value. After construction is completed, and some business is attached, there is an idle investment until the available business is fully attached, even under the most efficient management. It would be foolish, of course, to construct a pipe line capable only of taking care of the needs of today, with no provision for the reasonably anticipated needs of tomorrow. The commission recognized this in another part of its opinion, when it stated:
“Further, as pipe line extensions were developed, they neeessarüy were not fully productive until the volume of sales had been buEt up to the capacity of such extension. A *807large proportion of the investment each year was unproductive, although, the investment has been included in the plant investment values included in the above, and will be included in the future. This discussion relative to idle plant is merely for the purpose of illustrating that tho company has been earning a high return not only on its production property hut on its idle and non-productive property.”
The commission’s theory that rates for the future should be discounted because of the profits of the past is not sound law. Values cannot be increased by capitalizing past losses (Georgia Ry. & Power Co. v. R. R. Comm., 262 U. S. 625, 632, 43 S. Ct., 680, 67 L. Ed. 1144) ; the corollary that they cannot be decreased by reason of past profits is equally well settled (Board of Pub. Utility Comm’rs v. N. Y. Tel. Co., 271 U. S. 23, 32, 46 S. Ct. 363, 70 L. Ed. 808). Counsel for the commission assumes, contrary to the finding of the commission, that the business existed when the lines were constructed. The towns existed ; the distributing companies existed; there was a market for some gas. But, like every other utility, the market had to be and was developed. Vigorous campaigns, in part successful, have b.een and now are being carried on to develop the market, particularly for house heating and for industrial gas to utilize tho surplus in off-peak periods. It is no answer to say that these campaigns are carried on by the distributing companies; no matter who developed the market, the fact is, as testified to by the engineer for the commission, and as found by the commission, a part of tho plant was necessarily idle while the market was being developed. The commission’s engineer testified:
“I have taken as the best measure of certain items of that going value the company’s operating experience, and briefly I ha.vo allowed in arriving at this figure used herein, $15,000.00 for the hooks and records of the company, I have allowed $1,02,0,000.00 for organization of the operating company, that is the organization of the company, and I have allowed interest and depreciation on idle plant, plant that would be idle during the period this company is acquiring its business, that is between the end of the construction period and the time all business is attached, in the amount of $2,784.645.00, added to the two other amounts of $15,000.00 and $1,020,-000.00, gives $3,819,645.00, which I have applied as $3,820,000.00.”
While Mr. Black allowed depreciation and return on idle plant while the company was acquiring its business, in the amount of $2,-784,645, no similar allowance apparently was made during the construction period. The difference between 6 per cent, interest allowed and an 8 per cent, return is $1,450,000. The parties agree on the commission’s figure of 2.96 per cent, annual allowance for depreciation. Allowing half of that for the two-year construction period adds approximately $2,-175,000. Without undertaking any precise evaluation of this intangible asset, it is difficult to see how it can be fairly approximated at less than $5,000,000, which, is about 6 per cent, of the tangible values, a much lower percentage than the percentage customarily allowed.
Cost of Financing, valued by the company at $3,422,512, was disallowed by the commission; wo approve, on the authority of Galveston Elec. Co. v. Galveston, 258 U. S. 388, 42 S. Ct. 351, 67 L. Ed. 678, and Denver Union Stock Yard Co. v. United States (D. C. Colo.) 57 F.(2d) 735, 742, and cases there cited.
Gas Leases. The company owns the gas rights in about 1,261,000 acres, of which., 42,-207 acres are developed; 196,170 acres are proven; 25,607 are in probable territory; and 998,287 acres are classed as of prospee-; tive value only.
Many experienced witnesses, testifying' for the plaintiffs, valued these leases at figures, the average of which is $12,914,189, of which $1,996,574 represents the 998,287 prospective acreage. Mr. Holl testified for tho commission as to values; he was a practical geologist and oil man with no personal knowledge of the fields in question, and no particular experience with gas leases. His testimony was predicated on a trip ho made to the fields for the purpose of testifying, and inquiries made on that trip. He valued the leases at about one-third of the company’s value. The commission valued them at $6,-279,237, of which $998,287 was for prospective acreage. The commission valued the Amarillo holdings at $4,281,894; tho Hugo-ton holdings at $556,116. The cost of the leases, after deducting those bought for the Toxoma Company, was $5,727,272.
The commission excluded all but 71,267 acres from the rate base. The holdings of the company at Amarillo alone are 94,820 acres. Tho acreage allowed is valued by the commission at $2,874,390. The commission arrived at this result by finding the amount of gas left in the Amarillo holdings, based upon the estimate of geologists; it deducted from the company’s requirements, gas now being purchased by the company from other pro**808dueers; and found that the gas in the acreage allowed would serve the customers for twenty-two years.
The commission found that the remaining leases were acquired for speculative purposes, a finding'based upon one fact: the Texoma Company was formed by the Cities Service Gas Company and other interests to build a pipe line to Eastern states; leases were acquired by the Cities Service Gas Company for its affiliate, and later transferred to it. On the other hand, in this court, is the uncontradicted sworn statement of responsible officials that all the acreage was acquired as gas reserves for this pipe line. There is also the significant circumstance that not a single lease, acquired for that purpose, has been sold. We hold, therefore, that these leases were acquired, and are held, in good faith, for this pipe line,- and that the finding that they are held for speculative purposes is contrary to all the evidence.
We further find there was error in eliminating these leases from the properties of the company because the company is now contracting some gas, and conserving its own. The first duty of the company is to see to it that its patrons have an adequate supply of gas. To insure this, it must own the gas. Contracts for gas are well enough when gas is"'plentiful, but when the shortage comes, contracts are not adequate safeguards. Broken contracts will support verdicts for damage», but they will not heat the houses no.r cook the breakfasts of the patrons in Kansas. The company has not only the right, but is under the duty, to own enough gas to meet the needs of its customers.
Who shall determine what reserves are adequate? A commission, with no moneys invested, or the owners of this pipe line which, without gas, is worse than useless? Within the limits of reason,, undoubtedly that determination must be left with the owners. Perhaps they have been over-cautious, hut if error is to be made, it should be on the side of ample reserves. The owners of this property had seen the gas exhausted from field after 'field; they had seen their customers .lost because the supply had failed; they had seen fields of great promise belie their expectations. They had seen geologists wrong before. In recent years, they had seen the state prorate the taking of gas. The commission’s figures axe predicated on a 20 per cent, recovery; within two weeks of its order, the Texas Railroad Commission cut this to 4 per cent. What the future may hold, by way of state action, no one knows. We cannot say the owners did not, in good faith, acquire this acreage to protect their great investment and to insure their patrons a dependable gas supply. They invested around $4,500,000 in 200,000 acres in proven or probable territory, and about a million more in a million acres in prospective territory. Upon this five and a half million investment depends the entire value of $75,000,000 of pipe lines and many more millions in the properties of affiliated distributing companies. The Hu go-ton field is not now connected with the pipe line; but it is a field of great potential supply, is favorably situated, and the investment therein is not large. We find that all the acreage owned is used and useful in the public service.
The value of it is problematical, as is true of all gas properties. If the Amarillo field stands up, it is probably worth the value placed on it by witnesses for the company; if it stands up, then that field is adequate for the needs of twenty years; it may not stand up, and the company acquired Hugo ton and other acreage against that eventuality; if it does not, it is not worth so much. Its value depends upon a future market, and on the actions of state commissions. The overwhelming weight of the competent evidence sustains the valuation of "the company, around $12,000,000. That is about twice its cost. Eor the purpose of this case, and upon the authority of United Fuel Gas Co. v. Railroad Commission, 278 U. S. 300, 320, 49 S. Ct. 150, 73 L. Ed. 390, we have put the gas leases in at cost. The figure is arrived at by subtracting from the cost of all the leases, the cost of those transferred to Texoma, which leaves the cost of those now held.
XV.
Equally Efficient Substitute. The chief engineer for Eord, Bacon & Davis testified that .the present cost of a pipe line from the gas fields at Amarillo to the cities served by the Cities Service Gas Company, together with the cost of acquiring adequate gas reserves, would be $91,500,000. That in making this estimate he had assumed that the lines could be constructed as the crow flies, and he did not take into account the actual topography of the country; that the lines were designed as cheaply as could be, and that such a system would not furnish the same quality of service as is now furnished by the present pipe line. Applying the 90 per cent, condition of the present system to the physical properties of this hypothetical substitute would reduce this figure approximately $7,-000,000 (computing $70,000,000 as cost of *809depreciable properties in hypothetical line), or a present value of $84,500,000.
XVI.
The revenues which can reasonably be anticipated from the properties of the Cities Service Gas Company under the present rate are as follows:
Annual net operating income*.............. $8,401,680
Depreciation of physical properties, at agreed figure oí 2.96%* $1,966,180
Rentals on non-producing1 leases'1 829,917
Dry Hole Expense*................ 374,747
Depletion of producing leases (agreed) ......................... 70,509 2,541,353
Net available for return or 7.13%....... $5,860,327
Operating Income. Except for two items hereafter noticed, operating expenses are not questioned. The record discloses operating income for the two years ending June 30, • 3931, and June 30, 1932; and also for the year ending December 30, 3930, but this year involves a six months overlap into the June 30, 1931, year, with no way to apportion it. We have accordingly taken the two separate years shown. The income for 1932 was $880,-000 short of 1931. We agree with the commission that 1932 should not be taken as a test year, for it marks, it is hoped, the low of the depression through which we are passing. ’ The 1932 figure of $7,861,536 includes an item of $52,297.33 paid under the 1% per cent, contract, which the commission disallowed. It also includes an item of $50,000, being a portion of rate ease expense of $250,-000, amortized to that year. The commission taxed $66,936.08 as costs to the respondents. The commission, not challenging the amount, deducted it as a nonrecurring expense. But the court records show that rate eases constantly recur. The city-gate rate for gas, serving the cities involved in this ease, has been almost constantly in court for nearly twenty years. Extraordinary rate expenses should be amortized and allowed for the reasons set out in Denver Union Stock Yard Co. v. United States (D. C. Colo.) 57 F.(2d) 735. The $50,000 calculated in hut one of the test years is an estimate that $25,000 a year of such expenso may be expected. We have averaged the two years shown (adding the 1% per cent, payment to each year) and adopted $8,401,680 as the anticipated revenues for the future.
The commission still further increased this, by assuming that the income of 1931 was earned upon a lesser investment in the properties; accordingly, the commission deducted from its value as of September 1,193.1, net additions to capital as disclosed by the company hooks from January 1, 1930, to Septernber 1, 1933. But this is shown to he inaccurate, because additions were not charged to capital until long after the addition was in service; a lag of from one to> three years was customary, in order to close up all claims growing out of a particular job. During 1931 there was almost no construction; there was some during 1930, but part of that was .to replace existing facilities. There is evidence that there were not to exceed $2,000,000 additions to plant in the test period; and this would be more than offset in the decline of values between 1930 and the date of the valuation. The properties upon which a reform is allowable are those actually in public service at the time of the valuation, and not an average of values theretofore existing. Income for the past, used as a guide for the future, should be figured against property in service when the income was earned; hut the facts are, without contradiction, opposed to the commission’s assumption in this regard.
To this income the commission added .a sum for construction credit which it is now stipulated is in error; and also an item of $23,310 for income tax accruals in the calendar year 1930, the origin of which is not clear. Income tax is an operating expense. Galveston Electric Co. v. Galveston, 258 ü. S. 388, 42 S. Ct. 351, 67 L. Ed. 678.' This appears to be an excess accrual over the amount finally determined to be owing for the year; if .so, it means the operating expenses for the year are too high; bnt the record does not show whether it is already deducted in arriving at the stipulated “net income.” If it was not deducted, the stipulated figure is not “net income,” as it says it is. The item is not of particular significance; only half of it is applicable to the last six months of 1931; and averaging that with 1932 reduces the item to about $5,000'; we have assumed the stipulation speaks the fact, and have dropped it out.
Addition was also made because of payments on account of the 1% per cent, contract on gas sold to others than the plaintiffs. Part of this expense is justifiable, partieularly since the Cities Service Ga.s Company has no such agreement as the distributing companies have with the Gas Service Company. But tho justifiable amount is not proven, and wo accordingly add this payment to the operating income of each of the two years.
Depreciation Allowance. The commission found the weighted average per cent, for depreciation of physical properties to bo 2.96 per cent. This percentage should he applied to the undepreciated values of the physical *810properties' for the reasons set out in State v. Southwestern Bell Tel. Co., 115 Kan. 236, 292, 223 P. 771; we have treated as depreei•;able properties those which the parties stipulated as the base for computing engineering and superintendence, $66,425,000., No allowance is made for overheads which the parties -agree should go into the rate base undepreciated, for manifestly no annual allowance is necessary for non-depreeiable properties. In so doing, we express no opinion as to whether the parties applied ' correct principles in arriving at their agreement.
Rentals on Non-Producing Leases. The company claims a general development expense of $532,530.77, which includes rentals on non-producing leases, and scouting .and geological expense. The latter items enter into the rate base, and there is no proof that such expense will be necessary in the future to increase the already ample reserve supply of gas. Lease rentals are proper, and the commission .allowed rentals on 1,060 acres of nonproducing leases. Having determined that the company properly owns a large reserve, the lease rentals must be allowed.
Amortization of Non-Producing Leases. This point can be best illustrated by an example: Assuming a bonus of $1,000 is paid for a'.lease not yet producing. We have allowed its value in the rate base, and rentals paid thereon as an expense of operation. When it produces, depletion is allowed. . The company amortizes the $1,000 over the life of the lease, presumably about five years, because producing leases are of indeterminate life. If a non-producing lease, like a motor car, is a depreciable item, the cost should be amortized. But a non-producing lease is not depreciating, any more than any other real estate, save that it may be surrendered if found to be non-productive. When and if it is surrendered, the cost must then be charged to operations or amortized. But should it be amortized before it is developed or surrendered? The question is very doubtful; there is no clear evidence that the 1930 figure of $314,981.68 is apt to be a necessary expense for 1933, and 1934. Accordingly, with hesitation, we disallow the item.
Dry Hole Expense. The commission assumed that one dry hole a year would be all that would be suffered in an orderly development of this vast property. The actual expenditure in the test year was $174,747.74, a sum representing the cost of ten or eleven dry holes,' The facts must govern. The company is' not needlessly drilling dry holes, and geology has not reached, the point where only one dxy-hole a year can reasonably be anticipated by a company owning nearly a million acres of prospective leases, scattered in three states and many fields.
XVII.
Under the present rates, the Cities Service Gas Company is earning 7.11 per cent, a year upon the present value of its properties.
XYIII.
A return of approximately 8 per cent, upon present values is necessary, under present conditions, to assure confidence in the financial soundness of the Cities Service Gas Company, to maintain its credit, and to enable it to raise money necessary for the discharge of its public -duties. Any return substantially lower than that would be confiscatory. United Railways & E. Co. v. West, 280 U. S. 234, 252, 50 S. Ct. 123, 74 L. Ed. 390.
Rate of Return. The pipe line company is subject to the hazards attendant upon the production of gas, and its transportation to distant markets. The amount of gas it may take from its own wells, and the price it may charge for its product, is subject to regulation by public authority. It must find a market in a highly competitive field. It competes with coal and fuel oil in household heating and for industrial purposes; the competition of fuel oil is particularly formidable for household heating; improved oil burners are automatic, approved by the National Board of Eire Underwriters for safety, are as clean as gas, and dependable. Eleotrieity has absorbed the household lighting and is making serious inroads on eooking. In short, it must search for and find its gas; transport it hundreds of miles without an hour’s interruption; then find and satisfy its customers. The law contemplates that it make no more than a fair return in good times; it should not be forced to take less when times are hard. There is evidence that in years past the profits of the company exceeded 10 per cent. We do not analyze those figures; in rate making, the past must bury its dead; a confiscatory rate cannot be ordered for the future, because an exorbitant profit was made in the past. Georgia Ry. & Power v. R. R. Comm., 262 U. S. 625, 632, 43 S. Ct. 680, 67 L. Ed.. 1144. Board of Pub. Utility Commrs. v. N. Y. Tel. Co., 271 U. S. 23, 32, 46 S. Ct. 363, 70 L. Ed. 808.
What is a proper return is a question of fact in which the elements of time and place play an important part. In this part of the Middle West, it is a recognized fact that in normal times, public utilities must promise a return of approximately 8 per cent., if capital *811for construction and extensions is to be attracted from other investments. The Kansas statutes recognize 8 per cent, as a minimum return for a waterworks property (section 13 — 1202, K. S. Kan. 1923) and provide for a recapture of a portion of the earnings over 10 per cent, of gas and electric companies (section 13 — 1204, Id.). The Kansas Supreme Court has held that earnings from 8 to 9 per cent, on telephone properties are reasonable. State ex rel. v. Southwestern Bell Telephone Co., 115 Kan. 236, 223 P. 771. The witness for the commission testified that 8 per cent, would not he an unreasonable return in normal times, hut testified that these times are abnormal, as they are. But if abnormality is considered, the return must be increased, not decreased. In these times, when stock of the best utilities can bo purchased on a 9 per cent, basis or better, certainly an 8 per cent, return on this hazardous enterprise is not unreasonable.
XIX.
The order of the commission would reduce the net revenues of the Cities Service Cas Company by $1,926,145.07. (The amount is stipulated.) Under that order, the return upon the properties dedicated to the public use would be 4.8 per cent., which rate is confiscatory.
XX.
If the distributing companies are compelled to pay 40 cents per thousand cubic feet for gas at the city gates, and to base their rates to the consumers upon the price fixed as reasonable by tbe commission, no one of them will have earnings in excess of operating expenses, applicable to depreciation and return.
XXI.
The distributing companies could not continue their business and pay the Cities Service Gas Company 40 cents per thousand cubic feet, and predicate their rates to the consumers upon 30 cents; the Cities Service Gas Company could not continue its business without the patronage of the distributing companies.

 No opinion filed.