Consolidated Gas Co. v. Prendergast, 6 F.2d 243 (S.D.N.Y. 1925)
April 22, 1925
PRENDERGAST et al.
District Court, S. D. New York.
*244 *245 *246 *247 *248 *249 *250 *251 *252 *253 *254 *255 *256 *257 *258 *259 *260 *261 *262 *263 *264 *265 *266 *267 *268 *269 *270 *271 *272 *273 *274 *275 *276 *277 *278 *279 Shearman & Sterling, of New York City (John A. Garver, William L. Ransom, Jacob H. Goetz, and Sanford H. E. Freund, all of New York City, of counsel), for plaintiff.
Charles G. Blakeslee, of Binghamton, N. Y. (Harry Myron Chamberlain and Charles F. Murphy, both of New York City, of counsel), for defendants Prendergast, Pooley, Van Voorhis, Semple, and Van Namee.
John Holley Clark, Jr., of New York City (Charles E. Buchner, of New York City, of counsel), for defendant Ottinger.
WINSLOW, District Judge.
This is an action in equity, the object of which is to have declared unconstitutional, as confiscatory and void, chapter 899 of the Laws of 1923, state of New York, which prescribes a maximum rate in cities of 1,000,000 or more of $1 per 1,000 cubic feet of gas of not less than 650 British thermal units per cubic foot, and and for an injunction restraining the defendants from enforcing or attempting to enforce the provisions of said act. New York City is the only city of the state of over 1,000,000.
The special statutory court in this district composed of Rogers and Hough, Circuit Judges, and Bondy, District Judge, granted a preliminary injunction on July 6, 1923, as to this plaintiff and all other gas companies in the Southern district of New York, enjoining the enforcement of the statute under attack, on condition that the gas companies continue in effect, pendente lite, the rates theretofore fixed by the Public Service Commission, and on the further condition that they continue to furnish gas of the thermal content which the commission had authorized as the basis for such rates.
The defendants are members of the Public Service Commission of the state of New York, and the Attorney General of the state of New York.
The matter was referred by me to Hon. James G. Graham, as special master, by an order dated July 24, 1923, and later amended August 7, 1923, which order directed the special master to hear the evidence, make all computations, find the facts, and report with recommendations. The present motion brings on for final hearing in this court the report herein filed by the special master. This report, which is in full compliance with the direction of the court in appointing the special master, is most exhaustive on the questions of law and fact.
The report recommends the entry of a final decree in favor of the plaintiff. The plaintiff, however, prays that certain exceptions filed by it be sustained by this court, and that the report be modified accordingly, and then confirmed, as modified, and that a final decree be made in favor of the plaintiff.
The defendant Attorney General filed numerous exceptions to the findings in portions of the report, and now prays that the report be overruled, and that the constitutionality of the statute in question be sustained. The defendant Public Service Commission, while arguing in favor of the constitutionality of the statute, contends, however, that, if the court sustain the master's findings of fact as to operating costs and original cost of the property, it is not necessary or proper for the court to inquire further as to the value of the property for ratemaking purposes, or the rate of return which the plaintiff might be entitled to in a rate case.
The act in question became effective June 2, 1923, and provided as follows:
"Sec. 67-a. Charge for Gas in Cities of One Million or More. A gas corporation engaged in the business of manufacturing, furnishing or selling illuminating gas in a city containing a population of one million or over shall not charge or receive for gas furnished or sold in such city a sum per one thousand cubic feet in excess of one dollar, nor furnish in such city gas of a standard less than six hundred and fifty British thermal units per cubic foot, measured under normal conditions of temperature and atmospheric pressure. The Public Service Commission, notwithstanding any other provision of this chapter, shall not allow a rate or charge in the case of such cities in excess of such sum."
This statute has been under consideration by this court in New York & Queens Gas Co. v. Prendergast, 1 F.(2d) 351, and 371, and Bronx Gas & Electric Co. v. Prendergast, 1 F.(2d) 385.
By section 72 of the Public Service Commission Law, chapter 480 of the Laws of 1910 (N. Y.), as amended by chapter 134, § 49, of the Laws of 1921, the Legislature empowered the commission to fix rates to be charged by a gas corporation, and also to establish a period, not exceeding three years, during which the rate so fixed should continue in effect, and thereafter until the commission should fix a different rate. Subdivision 3 of section 66 of the same law authorized the commission to fix a standard of quality of gas to be furnished to consumers.
*280 The Public Service Commission, pursuant to these provisions of the Public Service Commission Law, by orders adopted by it on or about August 30, 1922, effective October 1, 1922, provided for a rate applicable to the plaintiff of $1.15 per 1,000 cubic feet (except as to consumers of very large quantities of gas) of a total heating value of not less than 537 British thermal units (monthly average) per cubic foot. This rate and thermal unit, it was provided by the orders, were to continue for one year from October 1, 1922. The rate was accepted by the plaintiff herein, and the various requirements of the statute complied with. Large sums of money were expended by the gas company in adjusting its appliances and those of its customers to conform to the thermal unit prescribed. Before the expiration of the year during which the rate so prescribed by the Public Service Commission was in effect, the statute now under attack was enacted.
In the prior cases under consideration (New York & Queens Gas Co. v. Prendergast and Bronx Gas & Elec. Co. v. Prendergast, supra), the question of rates was of secondary importance, for the reason that the facts were conclusive that the cost of production and distribution alone in those cases exceeded the rate fixed by the statute, without providing any reasonable return upon the investment.
In pursuing his inquiry in the instant case as to whether or not the statute under consideration is confiscatory, the learned special master considered the case from three possible viewpoints, and upon all the evidence arrived at (1) investment cost; (2) reproduction cost; and (3) present value of the property of the plaintiff, for the year ending December 31, 1922, and similarly for the period to June 1, 1923, and to December 31, 1923. For the stated periods, at past or present prices, whatever base be taken, whether investment cost, reproduction cost, or present value, the return as ascertained by the special master for gas of the quality actually furnished is very much less than 6 per cent. If the proposed 650 B.t.u. gas had been furnished, assuming that could have been done, the return would have been still lower. The master's conclusion is that an actual test of the statute, to demonstrate its confiscatory character, is unnecessary. I believe that conclusion is amply justified by the record. There is no narrow line in this case between confiscation and nonconfiscation. I concur in the master's conclusion that the enforcement of the proposed $1 rate, if applied to actual operation of the plaintiff during the periods under consideration, would be equivalent to the confiscation of its property, whatever rate base be the starting point.
In arriving at the several bases upon which the rate of return may be computed, the master has resolved very many questions against the plaintiff, which the court deems should have been resolved in its favor. In determining operating expenses, items open to controversy are eliminated, and operating expense is reduced to its lowest terms. It would have been proper, for illustration, to include the cost of constantly recurring rate litigation in the year when incurred, instead of eliminating those expenses altogether. But, in view of the court's conclusion that the Act is unconstitutional, confiscatory, and void, even with these debatable items decided by the master against the plaintiff, it is not necessary for this court to pass on these specific matters.
It may not be amiss, however, to make some observations concerning this and other litigation of like character. At the outset, it must be emphasized that it is the property, and not the original cost, which the owner may not be deprived of without due process. The present value of the property must therefore, be the goal of investigation, and present value must be expressed in terms of present money. While reproduction cost, less depreciation (if proven), is the dominant element in determining a rate base, it is not, of course, exclusive of other elements. Monroe Gaslight & Fuel Co. v. Michigan Public Utilities Commission et al. (D. C.) 292 F. 139; N. Y. Tel. Co. v. Prendergast, (D. C. S. D. N. Y.) July 26, 1924, 300 F. 822.
It is also the court's conclusion that at the present time a reasonable rate of return, according to well-recognized custom in a regulated business like this, is not less than 8 per cent. The rate of return on the property is not to be confounded with the amount of dividends that a corporation might pay on its capital stock. Indeed, according to all successful business experience, a corporation paying out in dividends all or even the major part of its net earnings is courting speedy disaster. "The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties." Bluefield Waterworks & Imp. Co. v. Public Service Comm. of West Va., *281 262 U.S. 679, 692, 693, 43 S. Ct. 675, 679 (67 L. Ed. 1176). For the reasons stated, it is unnecessary for the court to further analyze the elements considered in the several bases.
This court is further of the opinion, as heretofore expressed in N. Y. & Queens Gas Co. v. Prendergast and Bronx Gas & Elec. Co. v. Prendergast, supra, that the rate and the calorific standard prescribed by the statute under consideration are inseparable. I have expressed my views, also, in those cases as to the contractual obligation resulting from the rate established by the Public Service Commission for the period of one year and until thereafter modified. I see no reason in the instant case for arriving at a different conclusion. The power of the Legislature to change the rate after the expiration of the "period of repose," subject to constitutional restriction, is, of course, conceded as elementary.
The referee's report will be confirmed. The parties may submit a proposed decree and findings in the form of a final decree in accordance with the views herein expressed.