Kings County Lighting Co. v. Prendergast, 7 F.2d 192 (E.D.N.Y. 1925)

US District Court for the Eastern District of New York - 7 F.2d 192 (E.D.N.Y. 1925)
June 30, 1925

7 F.2d 192 (1925)

KINGS COUNTY LIGHTING CO.
v.
PRENDERGAST et al.

District Court, E. D. New York.

June 30, 1925.

*193 *194 *195 *196 *197 *198 *199 *200 *201 *202 *203 *204 *205 *206 *207 *208 *209 *210 *211 *212 *213 *214 *215 Samuel F. Moran and John D. Monroe, both of New York City, for plaintiff.

Charles G. Blakeslee, of Binghamton, N. Y., and Sherman C. Ward, of Albany, N. Y., for Public Service Commission.

William Hayward, John Holley Clark, Jr., and Anthony P. Ludden, all of New York City, for the Attorney General.

Before MANTON, Circuit Judge, and CAMPBELL and INCH, District Judges, holding court pursuant to section 266 of the Judicial Code (Comp. St. § 1243).

MANTON, Circuit Judge.

This suit seeks to have declared as unconstitutional and void chapter 899 of the Laws of 1923, which reads as follows:

"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 atmosphere pressure. *216 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 became effective June 2, 1923. It fixed the maximum price of $1 per 1,000 cubic feet, and a minimum standard of 650 British thermal units per cubic foot, for gas supplied in the territory served by the plaintiff. A temporary restraining order was granted by the District Court on the plaintiff's application on June 6, 1923, and, after issue was joined, the special master took testimony and reported that the act was unconstitutional: (1) Because the rate fixed by the statute, if held enforceable, would result in confiscation of plaintiff's property; and (2) because the standard set by the statute of 650 British thermal units per cubic foot was impracticable and unsafe, and contrary to the power of the Legislature to pass legislation under its police power.

The special master took considerable testimony as to values of land and plant, working capital, and going value, and reached the conclusion that on December 31, 1923, the fair value of plaintiff's business was $11,200,657. He found that the operating expense of manufacturing gas for this plant was 91.38 per 1,000 feet of gas sold, and he ruled that to sell gas at $1 per 1,000 cubic feet, as provided by the statute, amounted to a confiscation. He found that the standard of gas actually furnished was 537 British thermal units, and recommended that an 8 per cent. return on the fair value should be allowed in fixing the rate at which the gas should be sold. He held that the provisions for a rate and standard in the statute was intended to be inseparable, and that the Legislature intended, in fixing the rate, to fix a standard of gas to be charged for at that rate. He held that to fix such a rate was unreasonable, arbitrary, and a destructive enactment, not warranted by the police power of the state. These conclusions are challenged by both the Attorney General and the Public Service Commission, by exceptions which each have filed against the special master's report. Plaintiff has also filed exceptions, which are now withdrawn.

The principal objections urged are (1) that the plaintiff has not sustained the burden of proof of establishing that the rate fixed by the Legislature amounts to a confiscation of property, and that the requirement of 650 British thermal units is impossible of performance and impracticable in giving service to the public in the territory served by it; (2) that error was committed in fixing the fair value of the property invested and used by the plaintiff in its business at $11,200,656, and (3) in failing to make proper reductions for depreciation; (4) that it was error in the calculations to make an allowance of $800,000 for going value; (5) that it was error to find that the rate and standard provisions of the chapter were dependent upon each other; and that the court erred in failing to declare them separable, so that the standard provision may remain as constitutional, even though the rate provision be declared unconstitutional by the court.

We have examined this record, which is voluminous, and are satisfied that the master's conclusion of the fair and reasonable value of the land, manufacturing plant, distributing system, and other property, both tangible and intangible, used and owned by the plaintiff in its gas business, except its franchises, was properly fixed at $11,200,656 as of December 31, 1923. As stated by the Supreme Court: "The ascertainment of that value [fair value] is not controlled by artificial rules. It is not a matter of formulas, but there must be a reasonable judgment, having its basis in a proper consideration of all relevant facts." Minnesota Rate Cases, 230 U.S. 352, 33 S. Ct. 729, 57 L. Ed. 1511, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18; Willcox v. Consolidated Gas. Co., 212 U.S. 19, 29 S. Ct. 192, 53 L. Ed. 382, 48 L. R. A. (N. S.) 1134, 15 Ann. Cas. 1034; Georgia Ry. & Power Co. v. R. R. Com'n, 262 U.S. 625, 43 S. Ct. 680, 67 L. Ed. 1144. And it is now settled by many authorities that rates which are not sufficient to yield a reasonable return upon the value of property used, at the time it is being used to render the services, are unjust, unreasonable, and confiscatory, and their enforcement deprives the public utility company of its property, in violation of the Fourteenth Amendment.

The master has found that the cost of reproduction of the structural property owned and used by the plaintiff as of June 1, 1923, at the prices then prevailing, exclusive of the restoring pavement over mains and services, was at least the sum of $8,059,417. He found from the evidence that the property had been well maintained and was in an efficient state of repair and operating condition, and that it would require an expenditure of only $18,413.43 to put it in condition which was substantially as good as new. To this conclusion exception is taken. The argument is that it is wrong to say that by so slight a repair the property would have a value as if new. The plaintiff offered proof as to these values; the defendants did not. The master has not accepted the full value *217 as the proof of the plaintiff indicates, but has said: "I have endeavored to ascertain, and the figures found by me attempt to reflect, what it would have cost the plaintiff to build and develop its plant and property as it was built and developed, had the same level of prices for materials and labor prevailed throughout the whole period of its construction as prevailed in June, 1923; in other words, to measure and state the investment in the property in the dollar of the present." And he pointed out that the uncontradicted evidence was to the effect that, to organize a corporation, secure the necessary working capital, and construct the plaintiff's plant and property as it existed on June 1, 1923, but excluding going concern value, it would have cost $13,694,371.

As to the argument on depreciation, answering the argument of the defendants as to failure of the master to consider the depreciation in value, it will be observed that the plaintiff called a witness who testified quite fully on the subject of actual depreciation. He testified as to the condition of the property and plant, stating that it was in as good condition as a new plant, and that with this small expenditure referred to the property would be in as good a condition as if new, and as an operating plant, he stated, it would be better than new. There is testimony as to the observed depreciation and the defendants' witness made no deduction for accrued depreciation. While he said he had not time to examine every item of the property, as would be necessary for him to make an estimate of actual depreciation, it does appear that he had been through the plant, and he said there was new property, and that every repair reasonably required had been made. He said that the gasworks, holders, and shop buildings were well preserved and very well maintained. Other than this, we find that the defendants offered no evidence of depreciation.

It is conceded that the plaintiff conducted its business with unusual skill and care. Under this condition of the proof, we agree with the master that, in fixing the amount of fair value as he did, sufficient has been allowed for depreciation. Denver v. Denver Water Co., 246 U.S. 178, 38 S. Ct. 278, 62 L. Ed. 649; Des Moines Gas Co. v. Des Moines, 238 U.S. 153, 35 S. Ct. 811, 59 L. Ed. 1244. Enhanced cost of construction, due to the general increase of costs after the erection of a plant, are to be considered in finding fair value. Bluefield Water Works Co. v. Public Service Commission, 262 U.S. 679, 43 S. Ct. 675, 67 L. Ed. 1176; Galveston Elec. Co. v. City of Galveston, 258 U.S. 388, 42 S. Ct. 351, 66 L. Ed. 678.

The master, in fixing value of the plaintiff's business, allowed an item of $800,000 for going concern. In rate-fixing cases, such as we are considering here, the element of going concern is regarded as a property right, independent of the franchise or any mere good will. It must be considered in determining the value of the property upon which the owner has a right to make a fair return. Omaha v. Omaha Water Co., 218 U.S. 180, 30 S. Ct. 615, 54 L. Ed. 991, 48 L. R. A. (N. S.) 1084; Denver v. Denver Water Co., supra; Des Moines Gas Co. v. Des Moines, supra. This going value of its property cannot be taken from it, except by due process of law. Plaintiff is entitled to the enjoyment thereof, and where it exists it must be considered in determining the reasonableness or unreasonableness of a rate charge, or where it is proposed to be charged.

The evidence fully warrants the conclusions of the master as to the amount of money required as a working capital.

We think the language of the statute fixing the rate and fixing the standard are inseparable. They should be read together. To fix a standard which is not practicable, and, indeed, unsafe, is arbitrary and unreasonable exercise of the police power. The phrase, "nor furnish in such city gas of a standard less than 650 British thermal units per cubic foot, measured under normal conditions of temperature and atmospheric pressure," describes the character of the gas which is to be furnished at the rate of $1 per 1,000 feet. The rate fixed is the compensation for supplying this standard of gas. Four witnesses, thoroughly competent and experienced in the gas industry, gave testimony which in substance points out that there is danger or hazard in increasing the content of 650 British thermal units. The danger is pointed out as follows:

"Q. Occasioned by what circumstances? A. By the difficulty of maintaining a uniform quality, when you get into the high B. t. u. values; for instance, a sudden change in temperature, a hailstorm on a holder full of gas, would knock the B. t. u.'s down. If you were living up to a 650 B. t. u. standard, you would have to make immediately something much higher, and deliver adjacent to the plant a good deal more than 650, while on the outlying districts the variation would be very great; and close to the holder station it would be equally great, I think, because you cannot make gas and mix it thoroughly in a holder. It stratifies and short *218 circuits between inlet and outlet pipes, and some consumers close to the works might be getting 700 B. t. u. gas, and then within 24 hours they might be getting 600, and there is the danger."

They pointed out that there would be danger from the weak gas, but there would be more of a chance from the explosion in a variation of the quality of the high gas, and that it would not be practicable, so far as distribution is concerned, because of the necessary changes in the appliances. In view of this testimony, we think the conclusion of the master, holding that the standard prescribed is unreasonable and arbitrary, and that therefore the enactment is destructive, and not warranted by the police power of the state, finds support in the evidence and justifies our confirmation.

After the entry of the decree adjudging the statute to be in violation of the Constitution, the commission order of August 30, 1922, fixing a maximum rate of $1.30 "on and after the 1st day of November, 1922, and until the 31st of October, 1923, and thereafter until the commission shall otherwise order, will continue to control the plaintiff. The plaintiff, of course, if so advised, may file its schedules with the Public Service Commission and petition for an increase in rate. But under Public Service Commission Law, § 66, subd. 12, it might charge a higher rate until the commission permits it. The master has suggested, as a reasonable rate of return, not less than 8 per cent. The master had in mind that any rate lower than 8 per cent. return would be confiscatory. But the master's report deals with present fair values. Of course, if, when the new rate is fixed, values have changed, the Public Service Commission may make such new rate based upon evidence, and will be wholly unhampered by the findings or recommendations of the master. Lincoln v. Lincoln, 250 U.S. 268, 39 S. Ct. 454, 63 L. Ed. 968. But we approve the values arrived at by the master, and likewise the recommendation as to the rate of return, below which, if a rate be fixed, would be confiscatory. It is upon these conclusions as to values that the master has found the statute confiscatory, and in this we agree.

The report is therefore approved and affirmed.

[Signed] MARTIN T. MANTON, Circuit Judge. MARCUS B. CAMPBELL, District Judge. ROBERT A. INCH, District Judge.