Harding Glass Co. v. Ark. Public Service Commission

Citations: 229 Ark. 153; 313 S.W.2d 812; 1958 Ark. LEXIS 726Docket: 5-1542

Court: Supreme Court of Arkansas; June 2, 1958; Arkansas; State Supreme Court

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On October 5, 1956, the Port Smith Gas Corporation filed an application to raise gas rates for industrial consumers from 16.38 cents per Mcf to 20.62 cents. After hearings, the Commission approved the new rates on May 17, 1957. Following this, appellants appealed to the Pulaski Circuit Court, which affirmed the Commission's decision, prompting a further appeal to this Court. The appellants argue that the Commission improperly accepted the contract price between the Gas Company and Stephens Production Company as a legitimate operating expense, asserting that Stephens is an affiliate of the Gas Company and therefore the contract should have been scrutinized. 

Historically, W. R. Stephens acquired a controlling interest in the Gas Company in 1945, which primarily sourced gas from Arkansas-Oklahoma Gas Corporation until its liquidation in 1953. Concerned about the continuity of gas supply after the liquidation, Stephens arranged for the Port Smith Gas Company to purchase Arkansas-Oklahoma’s distribution system and partnered with the Northwestern Mutual Life Insurance Company to acquire its production properties. Stephens assumed significant obligations to maintain and develop these properties, entering into a contract to supply gas to the Gas Company at a lower cost of 12.7819 per Mcf, compared to the previous price of 17.38 per Mcf paid to Arkansas-Oklahoma. The transactions were disclosed to and approved by relevant regulatory commissions, including the Arkansas and Oklahoma Public Service Commissions and the Federal Power Commission.

On March 2, 1954, the Gas Company and Stephens entered into a contract approved by the Arkansas Commission, following a December 1953 finding that a price of 12.7819 cents per Mcf was reasonable. In its May 17, 1957, order in Docket No. U-1169, the Commission reiterated its earlier approval of the contract, emphasizing the necessity of dedicating large gas reserves for the Fort Smith area. This dedication was deemed essential for public interest, leading to the approval of both the contract and its rate. Northwestern Mutual Life Insurance Company, which owned a Production Payment backed by these gas reserves, relied on the Commission's orders for the transaction's feasibility. Although the Commission acknowledged it lacked jurisdiction over Stephens Production Company, it affirmed its authority over the Gas Company's customer rates. The Commission maintained that the contract price remained fair and reasonable, despite a subsequent wellhead price of 16 cents per Mcf for local gas. Appellants argued that proof was needed to show the $4,333,000 spent was wise and necessary, yet this expenditure had been approved by multiple regulatory bodies. Further, they contended that the relationship between Fort Smith and Stephens indicated a lack of arm's-length bargaining, suggesting the appropriate cost for gas should reflect production costs rather than the contract price. However, based on undisputed evidence, the calculated price for the gas, using the formula from appellants’ expert, resulted in 13.185 cents per Mcf, supporting the Commission's decision.

Appellants argue that Stephens should have procured gas reserves for the Gas Company, suggesting that if the Gas Company owned these reserves valued at $4,333,000, it would influence the rate base supporting a price of 13.185 per Mcf. They raise concerns that if the gas were depleted before sufficient production, it would unfairly burden customers. The fairness of the current rate of 20.62 per Mcf is acknowledged if the wellhead price of 12.7819 is considered reasonable. The Commission's prior order in Docket No. U-902 indicates a thorough examination of the situation, noting that Stephens has contracted to purchase approximately 82% of Arkansas-Oklahoma Gas Company's stock to secure gas reserves for the Port Smith Gas Corporation. Alongside this, gas production properties will be transferred to Arkansas Valley Mineral Company, Inc. and Wiltex Corporation, which will supply gas at the wellhead for the agreed price. Although the Arkansas Commission is not obligated to accept the contract price as part of the rate base, it previously deemed the price reasonable without any evidence of changing conditions justifying a reduction. Stephens is required to explore and drill for gas to maintain supply, with current production costs higher than in 1953 when the contract price was established. The increase in rates is attributed to rising business costs unrelated to the fixed gas price from the 1953 contract. The evidence shows that the price of 12.7819 paid by the Gas Company is not excessive, especially in light of Arkansas-Oklahoma's receipt of $4,333,000 for its gas production properties.

The price of gas sold by Stephens to the Gas Company is based on a cost of $4,333,000, resulting in a calculated price of 13.185 per Mcf, which is higher than the current rate of 12.7819 paid by the Gas Company. The Arkansas Commission has authority to set the rates for the Gas Company, although it cannot dictate the price at which Stephens sells gas due to its interstate commerce status. Despite this authority, the Commission is not obligated to disregard the established contract price. While it can potentially deny a rate increase by ignoring the contract, doing so would conflict with prior approvals from the Commission and the Federal Power Commission concerning the gas properties, as well as the actual purchase price of $4,333,000.

The suggestion that the distribution system was sold for less than its value to offset the gas price is dismissed. The Commission previously assessed the fairness of the distribution system's price, which was based on its depreciated book value. If the distribution system was undervalued, it would negatively impact the rate base. Appellants argue that the Commission should reject the contract price between affiliates, citing various legal precedents. However, those cases generally lack evidence of the affiliate's cost of gas, unlike the current situation where the Commission is aware of the actual costs involved. The Amere case, cited by appellants, lacks clarity regarding the Commission's findings and is not comparable to the current facts.

The Court affirms that the Commission possesses extensive powers and discretion, with its orders upheld if supported by substantial evidence, free from fraud, and not arbitrary. The precedent set in Dept. of Public Utilities v. Arkansas-Louisiana Gas Co. emphasizes that courts should not substitute their judgment for that of the Commission, even if they disagree with its decisions. The Commission, serving as a fact-finding body, administers Act 324, with judicial review limited to ensuring the Commission acted within its authority and did not violate constitutional rights. The review focuses on the record before the Commission, and if substantial evidence supports its findings, the order stands. The Court highlights that the only significant issue is the reasonableness of the gas price of 12.7819 per Mcf, which the Commission determined to be fair and reasonable based on the substantial evidence of the gas's cost. Justice George Rose Smith dissents.