Brooklyn Union Gas Co. v. Prendergast

7 F.2d 628 | E.D.N.Y | 1925

7 F.2d 628 (1925)

BROOKLYN UNION GAS CO.
v.
PRENDERGAST et al.

No. 1269.

District Court, E. D. New York.

June 24, 1925.

Cullen & Dykman, of Brooklyn, N. Y. (William N. Dykman and Jackson A. Dykman, both of Brooklyn, N. Y., of counsel), for plaintiff.

Charles G. Blakeslee, of Binghamton, N. Y. (Edward M. Deegan and Melvin L. Krulewitch, both of New York City, of counsel), for defendants William A. Prendergast and others.

John Holley Clark, Jr., of New York City (William Hayward and Charles E. Buchner, both of New York City, of counsel), for defendant Albert Ottinger.

CAMPBELL, 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 of the state of New York, which prescribes a maximum rate, in cities containing a population of 1,000,000 or over, of $1 per 1,000 cubic feet of gas of a standard of not less than 650 B. t. u. per cubic foot, 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 which contains a population of over 1,000,000.

This case comes before the court on the motion of the plaintiff for an order sustaining the plaintiff's exceptions to the special master's report, filed herein, and confirming the said report in all other respects, and for a final decree.

The motion came on to be heard on the 15th day of April, 1925, and was, at the request of the attorney for the Attorney General of the state of New York, adjourned to May 5, 1925, when it was argued and all briefs finally submitted.

I agree with all the counsel in this case that the provisions of the Act Feb. 13, 1925 (43 Stat. 938), amending section 238 of the Judicial Code, which went into effect May 13, 1925, do not apply, inasmuch as the case was finally submitted before a court consisting of three judges could be called, and that, having been finally submitted before such statute went into effect, this court has power to determine this motion and enter a decree.

A preliminary injunction was granted to the plaintiff herein on July 2, 1923, by the statutory court in this District, composed of Circuit Judge Mayer and District Judges Garvin and Campbell, which enjoined the enforcement of the statute, chapter 899, supra, upon the condition, among others, that the plaintiff, pending final decree or until the further order of the court, continue to furnish gas at the rates theretofore fixed and of the thermal content theretofore prescribed by the Public Service Commission as a basis for said rates.

By an order dated October 11, 1923, granted by me, the matter was referred to Almet Reed Latson, Esq., as special master, which order directed him to hear the evidence, make all computations, find the facts and report with recommendations.

The hearing commenced promptly after the master's appointment and proceeded with due diligence. The special master has fully complied with that order, and filed a report which contains a careful and thorough recital of the questions of law and fact, and his findings, together with a well-considered opinion, in which report he recommends the entry of a final decree in favor of the plaintiff.

Plaintiff and defendants have filed numerous exceptions to portions of the master's report.

Chapter 899 of the Laws of 1923 of the Laws of the state of New York, entitled "An act to amend the Public Service Commission Law, in relation to the charge for illuminating gas in cities containing a population of one million or over," became effective on June 2, 1923, and amended the existing statute by adding a new section 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."

Plaintiff contends that the said act is unconstitutional on two grounds:

(1) That it impairs the obligation of a valid subsisting contract, in violation of the provisions of section 10 of article 1 of the federal Constitution.

(2) That it is confiscatory, and deprives the plaintiff of its property without due process of law, in violation of section 1 of article 14 of the federal Constitution.

I will consider these contentions in that order.

After the former Eighty-Cent Law had been declared unconstitutional, the Public Service Commission instituted two proceedings, which resulted in two orders dated August 30, 1922 — one of which fixed a maximum rate of $1.15 per thousand cubic feet of gas to be charged by the plaintiff and its subsidiary companies, and provided that this rate should remain in operation for one year from October 1, 1922; the other order, which became effective October 1, 1922, changed the standard of gas to be furnished by the plaintiff and its subsidiary companies from 22 candle power to a minimum of 537 B. t. u.

The plaintiff proceeded to comply with these orders, and during the year 1923 expended $108,668.23 in making adjustments of consumers' appliances and those in process of manufacture, in order to make it safe to burn gas of the standard so fixed, instead of 22 candle power gas as prescribed by the former statute. The act complained of became effective on June 2, 1923, while these orders were still in force.

Plaintiff cites, in support of its contention, New York & Queens Gas Co. v. Prendergast, 1 F.(2d) 351, decided by Judge Winslow in the United States District Court for the Southern District of New York.

The act complained of applies to all the gas companies of the city of New York, and I realize how important it is not to have any conflict in the decisions of the courts in adjoining districts of the same circuit on any question, whenever it can be avoided, but the special master in this case has reported adversely to this contention of the plaintiff, and in his opinion has set forth his reasons for such report, with a citation of authorities.

The question is one of the utmost importance, because, if plaintiff's contention should be sustained, further consideration of the many other questions presented might not be necessary.

A consideration of the authorities shows that the power of the Legislature to authorize the making of a contract as to rates is limited. The regulation of rates to be charged by a public utility is an exercise of the police powers of the state (Munn v. Illinois, 94 U.S. 113, 24 L. Ed. 77); and contracts cannot be made which in any way impair or limit this power, nor can one Legislature limit or control a subsequent one in its exercise (B. E. S. R. Co. v. B. S. R. Co., 111 N.Y. 132, 19 N.E. 63, 2 L. R. A. 284; Manigault v. Springs, 199 U.S. 473, 26 S. Ct. 127, 50 L. Ed. 274). Contracts must be understood as made in reference to the possible exercise of the rightful authority of the government, and no obligation of the contract can extend to defeat the legitimate government authority. Union Dry Goods Co. v. Georgia Public Service Corporation, 248 U.S. 372, 39 S. Ct. 117, 63 L. Ed. 309, 9 A. L. R. 1420.

It has likewise been held that the Legislature, for the public welfare, may modify regulations regarding rates which municipalities may impose in granting licenses or permission to use its streets by public service corporations, without impairing the obligation of a contract within the provisions of the Constitution. People ex rel. Village of South Glens Falls v. P. S. Comm., 225 N.Y. 216, 121 N.E. 777.

It has also been held that neither the "contract clause" nor the "due process clause" of the federal Constitution has the effect of overriding the power of the state to establish all the regulations reasonably necessary to secure the health, safety, or general welfare of the community. Atlantic Coast Line v. Goldsboro, 232 U.S. 548, 34 S. Ct. 364, 58 L. Ed. 721. As thus limited the Legislature had authority to empower the Public Service Commission to contract on behalf of the state.

The authority of the Public Service Commission to contract on behalf of the state must be found in some express grant, as such authority will not be implied. Milwaukee Elec. Ry. v. Wisconsin R. R. Com., 238 U.S. 174, 35 S. Ct. 820, 59 L. Ed. 1254; Home Telephone Co. v. Los Angeles, 211 U.S. 265, 29 S. Ct. 50, 53 L. Ed. 176.

The Public Service Commission Law of New York State (Laws of 1910, c. 480), created a commission, and by general provisions fixed its jurisdiction, power, and procedure.

Section 22 of the law, among other things, provided:

"After an order has been made by a commission any corporation or person interested therein shall have the right to apply for a rehearing in respect to any matter determined therein, and the commission shall grant and hold such a rehearing if in its judgment sufficient reason therefor be made to appear. * * * If, after such rehearing and a consideration of the facts, including those arising since the making of the order, the commission shall be of opinion that the original order or any part thereof is in any respect unjust or unwarranted, or should be changed, the commission may abrogate or change the same. * * *"

Section 65 of that law provides:

"* * * All charges made or demanded by any such gas corporation, * * * for gas * * * shall be just and reasonable and not more than allowed by law or by order of the commission having jurisdiction. * * *"

Section 66 of that law, among other things, provided:

"The commission shall * * *

"3. Have power by order to fix and change from time to time standards of the purity, illuminating power and heating power, and standards for the measurement thereof, of gas to be manufactured, distributed or sold. * * *"

Section 72 of that law, among other things, provided:

"* * * After a hearing and after such an investigation as shall have been made by the commission * * * the commission may, by order, fix just and reasonable prices, rates and charges for gas * * * to be charged by such corporation or person, for the service to be furnished notwithstanding that a higher or lower price has been theretofore prescribed by a general or special statute, contract, grant, franchise condition, consent or other agreement. * * * The price fixed by the commission under this section or under subdivision five of section sixty-six shall be the maximum price to be charged by such * * * corporation * * * for gas * * * for the service to be furnished within the territory and for a period to be fixed by the commission in the order, not exceeding three years except in the case of a sliding scale, and thereafter until the commission shall, upon its own motion or upon the complaint of any corporation, person or municipality interested, fix a higher or lower maximum price of gas * * * to be thereafter charged. * * *"

The Public Service Commission Law must be considered as a whole, and from it we find that the commission was empowered to fix the standard of purity from time to time, and to fix the maximum rates by order for a term not exceeding three years, but the act also empowered the commission to change or abrogate both classes of orders upon a rehearing.

The commission could not have greater power than the Legislature from which it received its power, and, had the rate been fixed by an act of the Legislature, it could have been modified or repealed by the same or a succeeding Legislature. Village of Saratoga Springs v. Saratoga Gas, etc., Co., 191 N.Y. 123, 83 N.E. 693, 18 L. R. A. (N. S.) 713, in which case the situation created by an order fixing the price of gas for a stated period of time was described as a "period of repose," and in which a prior statute was under consideration and held unconstitutional, on other grounds, but contained the 3 years' provision, Chief Justice Cullen, writing for the court, said, at page 149 (83 N.E. 701): "We have no difficulty in upholding the provision that the rate shall remain as established for the term of three years."

And at page 150 (83 N.E. 701) said: "The learned court below said that the company would be in no worse condition than if the Legislature had itself fixed rates, for in such case the rates would be permanent until the statute enacting them had been modified or repealed. This is doubtless true; but statutory rates would operate equally on both parties."

The evidence shows that the plaintiff, after such orders were made by the commission, and relying on them made substantial expenditures in adjusting appliances to meet the conditions created by the change in the standard; but, even under the statute which gave the commission the power to fix standards, the commission was given power to change them from time to time and not to establish them for any definite time; and, as has already been shown, the order fixing the price of gas for one year was subject to change or abrogation by the commission and to repeal by the Legislature.

In any event the plaintiff, by the making of such expenditures, could not prevent or postpone the exertion by the state of the power to regulate the rate to be charged. Producers' Transp. Co. v. R. R. Com'n, 251 U.S. 228, 40 S. Ct. 131, 64 L. Ed. 239.

The contract, if there be one, must be found in the orders and the acceptance. The acceptance is provided for in section 23 of the Public Service Commission Law, but its sole purpose is to indicate whether the corporation will comply with or contest the order in the courts.

A contract binding the succeeding Legislature cannot arise as the result of the acceptance of the order, where the commission was without power to make such a contract. Whatever may be the construction placed upon section 72 of the Public Service Commission Law, supra, the commission clearly had no power to fix the standard for any definite period of time; therefore, if there was a contract, it must be found in the order of the commission fixing the rate, dated August 30, 1922, the parts of which material to this issue read as follows: "That this order shall take effect October 1, 1922, and shall continue in force until September 30, 1923, and thereafter until the commission shall otherwise order."

And the following paragraph: "Further ordered that this order shall be without prejudice to the right of any interested party to apply to the commission for a continuance of the hearings in these proceedings for the purpose of presenting the evidence relating to the subject-matter of this order."

The plaintiff notified the commission "that the said order of August 30, 1922, and the terms and conditions thereof, are accepted and will be obeyed," but qualified the acceptance as follows: "This acceptance and statement of readiness to obey the said order dated August 30, 1922, is not intended as a concession by the Brooklyn Union Gas Company that the rates therein prescribed are adequate or reasonable or that such rates and classifications of service will yield a proper return upon the value of the property, used and useful, in its business. Such acceptance and statement of readiness to obey is not intended as a waiver of any right at any time in the future to claim a return upon the value of its property at the time or any other right which it may have with reference to the rates, past, present or future."

It thus appears that neither the commission nor the plaintiff agreed without reservation that the rates should continue for a definite time, but each reserved the right to recede from the provisions of the order.

In my opinion, Mobile Gas Co. v. Patterson (D. C.) 293 F. 208, the authority cited in New York & Queens Gas Co. v. Prendergast, supra, seems to me to be clearly distinguishable. In that case the state of Alabama had provided that the value of the property of a public utility corporation should, on its application and payment of expenses, be determined by the Alabama Public Service Commission, and that the value so fixed should constitute the permanent basic valuation of the property as of the date of the valuation for all future rate-making purposes.

By that method a fact — the value of the property as of a certain date — was established for future rate-making purposes, and the court held that, by the acceptance of the state's offer by the public utility corporation, and the payment by it of the expenses, a contract had been consummated.

By the contract there sustained no attempt was made to fix a rate or to contract away the exercise of the police power of the state, while in the case at bar plaintiff seeks to establish a contract which would fix a rate and prevent the state from exercising its police power for the term of one year from October 1, 1922.

I therefore hold that the statute in question does not violate section 10 of article 1 of the Constitution.

This brings us to a consideration of the question whether the act should be declared unconstitutional on the ground that it is confiscatory.

Plaintiff contends that there is no presumption in favor of the validity of the statute, and cites in support of its contention what was said by Circuit Judge Mayer, of the statutory court, on the application for an interlocutory injunction. I do not understand, however, that the statutory court denied the presumption of validity to the act complained of, but on that application, where the decision was necessarily made on affidavits, the weight of evidence necessary to overcome that presumption, and warrant granting a preliminary injunction, was of course a matter for consideration, and to determine that question attention could be given to the fact that there was no showing of any investigation of the subject by the Legislature before the passage of the act, and to the further fact that the Public Service Commission had, within 10 months prior to that time, concluded an investigation and fixed a higher rate, viz. $1.15 per thousand cubic feet, for a period which would not have expired for about 4 months after the date on which the statute was enacted, and had established a lower standard of 537 B. t. u.

Of course it may well be said, Why have a Public Service Commission to fix rates and standards, and then override their determinations based on expert investigation? But that is not a question for this court to decide.

The Legislature alone was charged with the duty of determining the policy of the state, and its action cannot be reviewed if the enactment was constitutional; therefore it seems to me that on this hearing the law is well settled that the Legislature is presumed to have acted within its power in enacting a particular statute, and that, in the absence of unequivocal and convincing evidence, the act of the Legislature in fixing rates will be presumed to be valid and fair (Chicago, Milwaukee & St. Paul Railway v. Tompkins, 176 U.S. 167, 20 S. Ct. 336, 44 L. Ed. 417; Ex parte Young, 209 U.S. 123, 28 S. Ct. 441, 52 L. Ed. 714, 13 L. R. A. [N. S.] 932, 14 Ann. Cas. 764; Des Moines Gas Co. v. Des Moines, 238 U.S. 153, 35 S. Ct. 811, 59 L. Ed. 1244), and the burden is cast upon the plaintiff to prove the unconstitutionality of the act beyond a reasonable doubt (Fletcher v. Peck, 6 Cranch, 87, 3 L. Ed. 162; Ogden v. Saunders, 12 Wheat. 212, 6 L. Ed. 606; Phœnix Ry. v. Geary, 239 U.S. 277, 36 S. Ct. 45, 60 L. Ed. 287).

Plaintiff has not attempted to comply with the statute, but is operating under an injunction issued out of this court, and furnishing gas at the rate and of the standard prescribed in the orders of the Public Service Commission which were in force at the time the said act became effective.

The defendants contend that the act should not be declared confiscatory until the plaintiff has experimented with the statutory rate, and cite Louisiana Railroad Commission v. Cumberland Telephone Co., 212 U.S. 414, 29 S. Ct. 357, 53 L. Ed. 577, City of Knoxville v. Knoxville Water Co., 212 U.S. 1, 29 S. Ct. 148, 53 L. Ed. 371, and other cases.

There is, however, a well-recognized exception to that rule laid down by the United States Supreme Court in 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, where, on a challenge of the constitutionality of chapter 125 of the Laws of 1906, the court denied the relief sought, without prejudice to the institution of a new action should the result of experience indicate necessity therefor. The court said, at page 42 (29 S. Ct. 196): "Of course, there may be cases where the rate is so low, upon any reasonable basis of valuation, that there can be no just doubt as to its confiscatory nature, and in that event there should be no hesitation in so deciding and in enjoining its enforcement without waiting for the damage which must inevitably accompany the operation of the business under the objectionable rate."

And in Knoxville v. Knoxville Water Co., supra, cited by the defendants, in which, at page 17 (29 S. Ct. 153), Mr. Justice Moody, writing for the court said: "It cannot be doubted that in a clear case of confiscation it is the right and duty of the court to annul the law."

Plaintiff contends that it has brought itself within the exception. On June 2, 1923, when the statute in question went into effect, the plaintiff was furnishing gas of 587 B. t. u., and evidence has been produced to show the actual cost of furnishing that gas, and the estimated cost of furnishing gas of 537 B. t. u., the standard fixed by the commission, and of 650 B. t. u., the standard prescribed by the Legislature; and that at $1 for 1,000 cubic feet, the prescribed rate for gas of any of those standards, the return would be insufficient. Plaintiff contends that such figures are the result of experience.

The statute in question, not only provided the rate to be charged, but also fixed the standard of gas to be furnished at 650 B. t. u., the cost of manufacturing which, evidence was produced to show, would be greatly increased.

All the parties apparently tried the case before the master, so far as the taking of testimony was concerned, upon the theory that both provisions as to price and standard took effect immediately, whatever change there may have been in their attitude in argument after all the testimony was taken.

Evidence was also produced showing that a readjustment of the appliances used by the consumers could not be effected at once, and that to furnish gas of 650 B. t. u. without first readjusting the appliances of the consumers to utilize the same would endanger the health, if not the life, of the community.

Reluctant as any court should be to declare a statute of this character confiscatory until it has been demonstrated so to be during a test period, I am of the opinion that plaintiff in the action at bar has brought itself within the exception to the general rule which is laid down in Willcox v. Consolidated Gas Co., supra.

Further consideration will be given to the construction of the statute, after consideration of the evidence which it is alleged tends to show its confiscatory nature.

The master has so thoroughly examined and reported as to the facts that I shall content myself with stating only such facts as may be necessary in the determination of the questions raised by the exceptions.

Prior to and at the time of the incorporation of the plaintiff in September, 1895, under the Transportation Corporations Law of the state of New York, for the purpose of manufacturing and supplying gas in what is now the borough of Brooklyn, New York City, there were, in the portion of that territory known as the city of Brooklyn, seven corporations engaged in serving gas, to wit: The Nassau Gaslight Company, the People's Gaslight Company, the Metropolitan Gaslight Company, the Williamsburg Gaslight Company, the Brooklyn Gaslight Company, the Fulton Municipal Gas Company, and the Citizens' Gas Company. These companies were in active competition, in some instances invading each other's territory, 2, 3, and even 4 mains existing in some streets, and engaged in a rate war.

Apparently the plaintiff corporation was organized for the express purpose of acquiring the properties of these corporations, and the purpose was consummated on November 4, 1895, by the simple process of the plaintiff purchasing the assets of the several corporations, for which it paid in stocks and bonds of the plaintiff.

The purchase price paid to the several corporations was the result of negotiations after investigation by committees of the various companies' reports to their boards of directors, and resolutions of such boards regularly adopted.

The plaintiff took possession of all the assets, tangible and intangible, of said vendor corporations, except the stocks and bonds forming the purchase price, which they had distributed to their stockholders, and thereafter the plaintiff served the community with gas and continues so to do.

The plaintiff contends that the franchises possessed by the said vendor corporations, which were acquired by it and entered on its books on November 4, 1895, as capital assets, at a valuation of $3,050,000, should be included among the other assets of the plaintiff, used and useful in its business, and that the fair value of the same should be included in arriving at a rate base for the purpose of this action. The master reported adversely to this contention, and the plaintiff excepted.

It may be conceded, as urged by the plaintiff, that these franchises constituted property which would survive the dissolution of the corporation possessing the same (People v. O'Brien, 111 N.Y. 1, 18 N.E. 692, 2 L. R. A. 255, 7 Am. St. Rep. 684), and that they were property the acquisition of which would support the issue of capital stock (Rafferty v. Buffalo City Gas Co., 37 A.D. 618, 56 N. Y. S. 288), and that they were property which might be the subject-matter of a special franchise tax under the Tax Law of the state of New York (People ex rel. Metropolitan Street Railway Co. v. State Tax Commission, 199 U.S. 1, 25 S. Ct. 705, 50 L. Ed. 65, 4 Ann. Cas. 381); yet the fact remains that nothing was paid by any of the vendor companies for such franchises to the franchise-granting power, and therefore no valuation on the same can be included in the rate base (Spring Valley Waterworks Co. v. City of San Francisco [C. C.] 192 F. 137; Cumberland T. & T. Co. v. City of Louisville [C. C.] 187 F. 637; Cedar Rapids Gaslight Co. v. Cedar Rapids, 223 U.S. 655, at page 669, 32 S. Ct. 389, 56 L. Ed. 594).

The test in the action at bar is not what plaintiff paid for them, nor what may be their present value, but what did the vendor companies pay for them?

I can find no authority supporting plaintiff's contention. I cannot agree with plaintiff that 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, can be considered as authority for the inclusion of the value of said franchises in the rate base in the action at bar.

In that case, chapter 367 of the Laws of the state of New York of 1884, passed after the incorporation of the Consolidated Gas Company, which authorized corporations engaged in manufacturing to consolidate, and permitted the issuance of capital stock by the consolidated corporation not "larger in amount than the fair, aggregate value of the property, franchises and rights of the several companies thus to be consolidated," was in force.

That statute further prescribed a means of ascertaining the fair aggregate value of those properties, franchises, and rights, viz., through the action of the directors of the various companies, supplemented by the approval of the stockholders in each instance. The Consolidated Gas Company of New York availed itself of this statute, and six gas companies in the city of New York were consolidated into the Consolidated Gas Company of New York, and the franchises and rights of the constituent companies were, by the method prescribed by the statute, valued at $7,781,000, and capital stock of the consolidated corporation was issued accordingly.

In 1885 the capitalization of the corporation was investigated by a committee of the Legislature of the state of New York appointed for that purpose, which concluded that "this state of facts cannot be called a violation of the law that expressly authorized it to be done."

The Supreme Court of the United States, in that case, accepted the valuation of the franchises fixed and agreed upon under the act of 1884 as conclusive at that time, because the agreement regarding it has been always recognized as valid, and the stock had been largely dealt in for more than 20 years before that time on the basis of the validity of the valuation and of the stock issued by the company, and the court made it clear in its opinion that the decision was founded upon the peculiar facts of that case and is not to be regarded as a precedent in cases involving the valuation of franchises generally.

That the decision of the Supreme Court in that case was limited to the peculiar facts therein shown, and not intended to change the rule, seems to have been generally accepted. Lincoln Gas & Electric Light Co. v. City of Lincoln (C. C.) 182 F. 926; Bronx Gas & Electric Co. v. Public Service Commission, 190 A.D. 13, 180 N. Y. S. 38.

That it was not intended by the decision in that case to invade or modify the general rule further appears by the decision of the Supreme Court itself in Georgia Railway & Power Co. v. Railroad Commission of the State of Georgia, 262 U.S. 625, at page 632, 43 S. Ct. 680, 67 L. Ed. 1144.

Chapter 367 of the Laws of 1884, referred to by the Supreme Court, was repealed by chapters 563 and 567 of the Laws of 1890 before the plaintiff in the case at bar was incorporated, and therefore plaintiff can claim no right under that statute.

At the time the plaintiff acquired the assets of the seven corporations in November, 1895, there were three different methods which it could have pursued; the procedure prescribed and the rights given being different in each statute.

Section 13 of chapter 567, Laws of 1890 (Business Corporation Law), authorized a consolidation under which a new corporation would have entirely supplanted the consolidated corporations, and that this was not done is shown by the decrees of dissolution of the vendor corporations, granted in actions brought by the Attorney General of the state of New York for that purpose in the following year.

Section 58 of chapter 564, Laws of 1890 (Stock Corporation Law), as added by Laws 1896, c. 932, § 1, authorized a merger under which there would have been the survival of one and the obliteration of the others. Irvine v. New York Edison Co., 207 N.Y. 425, 101 N.E. 358, Ann. Cas. 1914C, 441. This likewise was not accomplished.

Section 33 of chapter 564, Laws of 1890 (Stock Corporation Law), as added by Laws 1893, c. 638, § 1, authorized a simple purchase, and this was the method pursued by the plaintiff, which acquired by conveyance the property, franchises, and rights of seven other corporations; all eight corporations remaining in existence. No method of procuring a valuation upon the franchises conveyed was provided in the statute, nor did it authorize the issue of capital stock in the manner provided in chapter 367 of the Laws of 1884.

In only two particulars can I find any analogy between the facts in the instant case and that of the Consolidated Gas Company as to franchises, and those are that in neither were special stocks issued for the franchises, and in both the stock issued had been largely dealt in for more than 20 years past, and these are not sufficient to bring the case at bar under the exceptions to the rule laid down in the Consolidated Gas Company Case.

I therefore sustain the master, and hold that the value of the franchises cannot be included in the case at bar in making up the rate base of the plaintiff.

It is not the province of this court to prescribe rates; the question with which we are concerned is to determine whether the rates prescribed by the Legislature are confiscatory.

The rule to be followed in the case at bar is to ascertain the fair value of the property used and useful by the plaintiff in serving the public, as it is upon that fair value that the plaintiff is entitled to a fair return.

That fair value cannot be determined by considering only the costs of replacement less depreciation, but we must also consider, if they can be ascertained, the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under the particular rates prescribed by the statute, and the sum required to meet operating expenses, together with such other relevant facts as may be available, giving such weight as may be just and right in each case. Smyth v. Ames, 169 U.S. 546, 18 S. Ct. 418, 42 L. Ed. 819; The Minnesota Rate Cases, 230 U.S. 434, 33 S. Ct. 729, 57 L. Ed. 1511, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18; San Diego Land Co. v. National City, 174 U.S. 757, 19 S. Ct. 804, 43 L. Ed. 1154; 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; State of Missouri ex rel. Southwestern Bell Telephone Co. v. Public Service Commission, 262 U.S. 276, 43 S. Ct. 544, 67 L. Ed. 981, 31 A. L. R. 807; Bluefield Waterworks & Improvement Co. v. Public Service Commission, 262 U.S. 679, 43 S. Ct. 675, 67 L. Ed. 1176; Georgia Railway & Power Co. v. Railroad Commission of Georgia, 262 U.S. 625, 43 S. Ct. 680, 67 L. Ed. 1144.

Original cost to the vendor companies was not shown notwithstanding the industrious efforts of the plaintiff, supplemented by the efforts of the defendants, and in my opinion it is incapable of proof. The ledger balances of such companies and the opening entries in the plaintiff's books of the same date were, however, produced in evidence. These ledger balances of the vendor companies carried the assets acquired by the plaintiff at $16,524,095.35, included in which was an item of $1,250,000 for franchises and rights, carried on the books of the Citizens' Gas Company of Brooklyn, one of the vendor corporations. Deducting this item leaves $15,274,095.35, at which sum the physical assets conveyed to plaintiff were carried by the vendor corporations.

The original journal entries of the plaintiff on their purchase of the same properties indicated an aggregate valuation of $28,799,731.92, in which was included $3,050,000, the valuation of "Franchises" and "Rights." The last item had not appeared upon the books of the vendor corporations with the exception of $1,250,000, hereinbefore referred to. Deducting $3,050,000, the valuation given by plaintiff to the physical property so acquired was $25,749,731.93.

It having been found to be impossible to establish the actual original cost of the vendors, plaintiff called an expert who testified on the basis of incomplete books of the vendor corporations, the general trend of prices during the corporate lives of such corporations to the date of conveyance, and, because of being unable to ascertain the dates of actual construction applying index values throughout the period, that the cost of that property should have been $23,976,790, excluding land, franchises, working capital, and going concern value. This same witness testified that in his opinion the reproducible value of these properties in November, 1895, was $17,996,216, excluding land, franchises, working capital, and going concern value. The vendors carried on their books the land sold to plaintiff at a valuation of $2,619,226. The plaintiff, in its opening journal entries, valued the same property at $5,349,400.

At the time the purchase was consummated the aggregate par value of the outstanding stock of the vendor companies was $9,970,000 and of bonds $3,900,000, making in all $13,870,000, and the approximate market value was $20,000,000.

Defendants contend that in attempting to arrive at cost or book value, there should be deducted from $28,799,731.92, the valuation at which the purchased properties were originally entered on the books of the plaintiff, the sum of $10,475,636.57, in addition to the sum of $3,050,000, the valuation of franchises and rights, which the master has already deducted, which would leave $15,274,095.35, the sum which defendants contend should be taken as showing cost or book value at that time.

To support this, defendants point to the testimony of a vice president of the plaintiff before a legislative committee in 1905, when, in substance, he said, in reply to questions about the difference between the closing entries in the books of the vendor companies and the opening entries in plaintiff's books, that $3,050,000 represented franchises and rights, $4,000,000 was added to the street main account, and $5,000,000 was added to the plant account for the right to do business, a total of about $12,000,000.

This does not, however, seem to me to be conclusive, because the witness in his testimony before the committee was evidently in error when he said that $5,000,000 was added to the plant account, as the evidence shows that the closing entry on the books of the vendor corporations was "Plant and Patents," $9,731,384.83, and the plaintiff's opening entry was $10,687,853.31, a difference of less than a million instead of five. Furthermore, substantially all of the items seem to have been written up, and, while there is a large increase in the valuation of street mains, there is also an increase of approximately $2,700,000 in the value of land.

The transaction between the plaintiff and the vendor companies was not a consolidation nor a merger but a simple purchase, preceded by negotiations, and I see no reason to believe that the plaintiff paid to the vendor companies more than it considered a fair price for their assets.

In any event, however, it is the property, and not the original cost, of which the owner may not be deprived, and our object is to determine the value of the property in present money; original cost being but one of the elements to be considered. Monroe Gaslight & Fuel Co. v. Michigan Public Utilities Commission et al. (D. C.) 292 F. 139; New York Telephone Co. v. Prendergast (D. C.) 300 F. 822.

Historical cost may be more readily traced after December 31, 1908, because on January 1, 1909, a uniform system of accounts was promulgated by the Public Service Commission.

By stipulation the withdrawals from fixed capital between November 4, 1895, and December 31, 1908, were fixed at $4,000,000. Between November 4, 1895, and December 31, 1908, the plaintiff purchased the Equity Gas Works, and paid therefor $568,066. During the same time the plaintiff had also acquired the entire capital stock of five subsidiary corporations, viz. Jamaica Gaslight Company, Richmond Hill & Queens County Gaslight Company, the Woodhaven Gaslight Company, the Newtown Gaslight Company, and the Flatbush Gas Company.

These corporations, while maintaining a separate corporate existence, manufacture no gas, but purchase the gas from the plaintiff which they distribute to their consumers, and certain properties owned by the plaintiff are used by these subsidiaries. The actual cost of such properties so allocated cannot be definitely determined, but I agree with the master's estimate that the cost of the properties used by the subsidiaries should be 10 per cent. of the value of plaintiff's property.

I agree with the master's statement that an analysis of the books of the plaintiff would indicate (though not establish) the net cost of the physical properties, including the Equity Gas Works, and excluding property utilized by the subsidiaries on June 1, 1923, was $38,517,199.94.

On June 1, 1923, the outstanding stock at par and bonds at face value of the plaintiff aggregated $46,579,000, and their market value was $48,750,000. On that day the fixed capital of the plaintiff, as the same appeared upon its books of account, was $46,149,133.93, excluding any value for franchises and rights.

The plaintiff is a large company, and on June 1, 1923, operated six manufacturing plants, having an aggregate daily capacity of nearly 125,000,000 cubic feet; its maximum daily send-out during the winter of 1923 and 1924 was nearly 95,000,000 cubic feet. Its properties are fully described by the master.

Exception has been taken to the findings of the master as to the various items which go to make up the cost of replacement.

The defendants contend that the master erred by failing to deduct from the amounts as found by him a proper amount for depreciation of the several items, and ask this court to deduct depreciation from what it may find to be the cost of replacement of the several items, but no evidence was offered by the defendants to show that there was any depreciation or what was the amount thereof, either in rate based on percentages or in any fixed sum.

As I understand the contention of the defendants, it is that the court should take judicial notice of the fact that all things depreciate in value, and cite Knoxville v. Water Co., 212 U.S. 1, 29 S. Ct. 148, 53 L. Ed. 371.

Plaintiff contends that the most recent decisions hold that depreciation can be found only if it exists in fact, based on definite testimony of competent experts who have examined the structural units and speak concerning observed conditions, and cite Pacific Gas & Electric Co. v. San Francisco, 265 U.S. 403, 44 S. Ct. 537, 68 L. Ed. 1075; New York Telephone Co. v. Prendergast (D. C.) 300 F. 822, Westinghouse Electric & Mfg. Co. v. Denver Tramway Co. (D. C.) 3 F. (2d) 285.

Even in Knoxville v. Water Co., supra, cited by the defendants as supporting their contention, we find that testimony was given showing depreciation, because at page 14 of 212 U. S. (29 S. Ct. 152) the court said: "After the company had closed its case the city undertook to determine the present value of the company's property by the plain method of ascertaining the cost of reproduction, diminished by depreciation."

Not only did the defendants fail to call any witnesses to show depreciation, but the witnesses for the plaintiff, as to nearly all items, testified that there was none.

The properties of the plaintiff are maintained in a high order of efficiency, and that they might have been as good as new for the purposes of the company on June 1, 1923, is not improbable when you consider the narrow line between replacements and repairs, and it must be that parts are being replaced daily and charged as repairs, so that, the plant being kept in a high order of efficiency by such replacements, the plaintiff's witnesses do not consider that there is any depreciation. The witnesses do in some instances testify to sums necessary to put portions of the property in condition equal to new, and these deductions must be made.

The defendants now claim that the master erred in not making deductions for depreciation as to the several items making up the cost of replacement, but I cannot agree with them because, if they desired such a finding, the defendants, with the large corps of experts under their control, could have easily shown the fact, if such it be, and the basis on which depreciation should be figured, and, having failed to make any such showing, they cannot complain because the master failed to make such findings, as it appears to me that in his finding of a fair value much lower than the cost of replacement as found by him, he must have made all the allowance for depreciation that was warranted by the evidence.

Plaintiff seems to contend that, because no evidence was offered by any experts called by the defendants as to values, this court is bound to accept the testimony of the plaintiff's expert witnesses and allow the amounts testified to by such experts, and cites Ohio Utilities Co. v. Public Utilities Commission of Ohio, decided by the United States Supreme Court March 2, 1925, 267 U.S. 359, 45 S. Ct. 259, 69 L. Ed. 656. But that case does not seem to be in point, because in that case there was a valuation by the engineers of the commission, which was acquiesced in by the company, and no substantial evidence was found in the record to the contrary.

In the case at bar, while the defendants called no expert witnesses, they did cross-examine the plaintiff's experts, and the court has a right to consider the testimony given in the light of the cross-examination, and accord to it such weight as it deems proper. Head v. Hargrave, 105 U.S. 45, 26 L. Ed. 1028; The Conqueror, 166 U.S. 110, 17 S. Ct. 510, 41 L. Ed. 937.

The defendants or one of them have excepted to the finding of the master as to nearly if not all of the elements that go to make up the cost of replacement as found by the master, and the plaintiff has likewise excepted to his findings as to some of them.

As I understand the law, it is my duty to give my individual judgment in this matter. I have therefore examined the evidence as to each of such items.

The evidence on which the findings must be based is largely that given by the plaintiff's witnesses, as the defendants called but few witnesses to contradict them.

The defendants contend that allowances should be made for depreciation as to many of the items, but there is no evidence in the record which fixes any basis for determining depreciation. The defendants cross-examined the plaintiff's witnesses, but such cross-examination does not furnish a basis for any specific deductions other than those made by the master.

The amount for repaving under the item for services was not for replacing paving for the whole system, nor in any cases where no pavement existed at the time, or where an improved pavement had been laid since the services were originally installed, but the witness testified that it was for the same kind of pavements which were cut and replaced when the services were originally installed.

No finding deducting anything from the item for services when the same were laid on the consumers' property inside the building line can be based on the fact that some consumers had contributed an amount which was not definitely shown on account of the whole expense of installing services, because that would not be a proper deduction, the only deduction that could properly be made would be the value of the property, if any, included in that item which belonged to the consumers, and no testimony was offered to prove that title to any was in the consumer. The testimony shows that all replacements of services were made at the expense of the company, and there is no proof of their intention to give them to the consumer when they were laid on the consumer's property at his invitation and with his license.

From the master's opinion, it would seem that he had intended to find that $7,000,000 was the cost of reproducing buildings and structures other than manufacturing plant and stations, after deducting $20,756, the amount which the expert had testified it would be necessary to expend to restore these buildings to a condition equal to new, and that he had also intended to find that $14,500,000 was the cost of reproducing manufacturing plant, stations, and gas holders, after deducting $528,368, the amount which the expert has testified it would be necessary to expend to restore those properties to a condition equal to new; but, inasmuch as he made specific findings Nos. 76 and 77, that said several sums should be deducted from the reproduction cost, he must be held to have meant that they were to be deducted from such sums.

The plaintiff contends, and I believe properly, that the assessed values for the purpose of real estate taxation of the land and buildings as of October 1, 1922, were improperly received over its objection. No assessor was called to testify and qualified as an expert, and, as I read the record, the concession of the plaintiff was only as to the fact of the assessment and not as to its admissibility.

Even if the assessed values were admissible they would not furnish a safe guide either as to land or buildings, and that is especially true as to buildings, because too many elements enter into an assessment for real estate taxation which have no place in the determination of the value of real estate, either in the case of private sale, condemnation or confiscation.

However, the cross-examination of the experts showed that in some instances the sales on which they relied, or which they claimed assisted them, warranted the master in reducing their valuations, and I therefore accept the valuation found by him.

I do not agree in every instance with the reasoning of the master, but it does seem to me that the evidence supports his findings of the reproduction cost, and, while he may have made a slight sacrifice to round numbers, the result would not be changed by carrying them out. The amounts found by him are as follows:

  Land ................................... $ 3,000,000
  Manufacturing plants, stations, and
   holders ...............................  14,500,000
  Buildings and structures other than
   manufacturing plants and stations
   .......................................   7,000,000
  Mains ..................................  18,000,000
  Services ...............................   6,250,000
  Meters .................................   4,000,000
  Overhead and financing .................  11,000,000
  Equipment ..............................     600,000
                                           ___________
                                           $64,350,000
  From which must be deducted the
   amounts deducted by the master
   in findings Nos. 76 and 77 as necessary
   to restore buildings and
   structures other than manufacturing
   plants and stations to a
   condition equal to new         $ 20,756
  And to restore manufacturing
   plant, stations
   and gas-holders to a
   condition equal to new          528,368
  Amounting in all to ....................     549,124
                                           ___________
     Total reproduction cost ............. $63,800,876

From this total there must be deducted the value of the property owned by the plaintiff but used by the subsidiaries, as reported by the master, amounting to $6,498,090, and there remains the sum of $57,302,786, which I find to be the reproduction cost as of June 1, 1923.

The following elements must be considered to determine fair value. Original cost not established but indicated by an analysis of the books of the plaintiff, $38,517,199.14; book value, $46,149,133.33; capitalization about $46,500,000, represented by outstanding stocks and bonds with a market value of $48,750,000; reproduction cost, $57,302,786.

All the properties are serviceable and in excellent condition, although some are half a century old; some being more serviceable than others because they are more modern. Original cost in this instance is at best but an estimate, and cannot be a fair measure of value because it is too remote, and it does not seem to me that reproduction cost, as found, can be the fair value of the property, because no one would purchase physical property of the age of this property at the same price they would pay for new; therefore, taking into consideration all the elements which must be considered (Smyth v. Ames, supra, Georgia Railway & Power Co. v. Railway Commission of Georgia, supra, and Bluefield Land & Water Co. v. Commission, supra), I agree with the master that the fair value of these properties can be fixed at $50,000,000 as of June 1, 1923.

What we are to find is the fair value of the property which the plaintiff was devoting to the public service, and not the value of what the defendants may have considered an efficient substitute.

In my opinion Pacific Gas & Electric Co. v. San Francisco, 265 U.S. 403, 44 S. Ct. 537, 68 L. Ed. 1075, is not an authority in support of defendants' contention, because in that case the court was dealing with an established fact, while in this case it would be a matter of speculation.

I am of the opinion that there is a going value to the property of the plaintiff, and, while it may be greater, I do not feel that on the evidence offered in the case at bar it could be fixed at more than $6,000,000, if on the evidence it could be fixed at any specific sum; and, if there was something for going value included in the price paid by the plaintiff, in its stocks and bonds, to the vendor corporations in November, 1895, it is more than covered in this amount.

Therefore it seems to me that the master was right in eliminating any allowance for going value in the case at bar, in ascertaining reproduction cost or in adopting a rate base, and I shall follow that course, in the belief that by so doing the rate base as found by me is established beyond a reasonable doubt.

I agree with the master and allow $5,000,000 for working capital. Adding this to $50,000,000, which I have found to be the fair value, a rate base of $55,000,000 is established as of June 1, 1923.

Between June 1, 1923, and December 31, 1923, additions were made to the capital, after deducting withdrawals of the net amount in the aggregate of $3,856,971, and deducting therefrom the amount of $764,458, allocated to the use of subsidiaries. leaves $3,092,513, which, added to $55,000,000, makes the rate base $58,092,513 as of December 31, 1923.

No argument was presented, either orally or by brief, on behalf of the defendants constituting the Public Service Commission against the findings of the master as to the cost of manufacturing and distributing gas of any of the standards described, nor as to the relations of plaintiff with and charges to the subsidiary companies. It may therefore be assumed that the actions of the plaintiff with reference to those subjects, as found by the master, are approved by the commission charged by law with the regulation of all matters relating to plaintiff. The only argument against said finding was made, both orally and by brief, on behalf of the defendant Attorney General.

The subsidiary companies do not manufacture any gas, but all the gas sold by them is manufactured by the plaintiff and sold to the subsidiaries, and the books of the plaintiff properly show the cost of gas distributed to its consumers.

The plaintiff's methods in making purchases were efficient, and the prices paid reasonable, as exemplified in the reduced price at which oil was obtained, and this is not controverted by any evidence offered by the defendants.

The relations between the plaintiff and its subsidiaries and their methods of fixing the prices to be paid by the subsidiaries are not properly subject to criticism. The difference between the amount of gas that had been served during the year, as found by a calculation at the close of the year, and the amount estimated at the beginning of the year as the amount that would be required, was too small to justify recasting the system of accounting, and I see no reason for requiring it.

The plaintiff is operating several plants and the costs are not uniform, but all of these plants are efficiently operated, although they are not equally well equipped. In some instances the costs of manufacture were higher because certain repairs were in progress during the period under consideration, but the consumer cannot get the benefit of lower cost and more efficient service unless the plants are kept in repair, and the attainment of greater efficiency is the motive for making the repairs, which will reduce the cost of operation. The making of repairs must be going on each year in one plant or another, if efficiency is to be preserved, and the plaintiff should not be penalized for keeping its plants efficient.

The plant where the cost of operation was the highest was the Equity, which serves a remote section of the territory in which plaintiff furnishes gas, and I find nothing in the evidence which warrants a finding that this plant could be dispensed with, or that cost of operation of this plant should be standardized on the basis of the cost of operation of a large plant which can serve the territory adjacent to it, and which is more favorably located.

Therefore, in the face of the uncontroverted evidence of Col. Miller, that he had compared the operating costs of the plaintiff with the operating costs of the companies throughout the Metropolitan district, and that these costs of the plaintiff were reasonable, and the results of such comparisons did not indicate any unusual feature, I can see no reason or justice in establishing one or a number of them as a standard, or in refusing to base the cost of operation on the cost of producing the entire amount of gas sold by the plaintiff, no matter where manufactured.

I agree with the master that the books and records of the company are properly kept and the plants are efficiently operated, and the plaintiff offered evidence to show the actual results of operation for 1922 and 1923.

To calculate repairs on the basis of the average for 5 years shows but a negligible difference from a calculation as made by the plaintiff, but it might properly entail a consideration of varying costs of material and labor, without producing a result which would be as nearly accurate as that which was made by the plaintiff and approved by the master, as the evidence shows that we may reasonably assume that present prices will continue for some time. I therefore approve of the method pursued as proper.

The Attorney General contends that unaccounted for gas, that is due to leakage, condensation, expansion, and contraction, among other things should be allowed at an arbitrary figure of 5 per cent., but I do not agree with him, because in my opinion the proper method is to allow it on the basis of the companies' own records, which show the results of experience.

In this action, where the question to be determined is whether or not the rate is confiscatory, I do not think we should allow the sum of $108,668.23 spent by plaintiff in making adjustments to conform to the order of the commission which went into effect October 1, 1922, nor the sum of $94,524.89, estimated as the cost of maintaining this action, because they are abnormal and should not be regarded as a part of the cost of manufacture for this purpose.

The item of uncollectible bills was properly allowed by the master, and the gross earnings tax was properly allowed at $105,625.33.

Counsel for the Attorney General contends that the reasonable and necessary cost of making and distributing gas should not have exceeded 77.96 cents per thousand cubic feet sold.

The calculation and argument presented in its support show industry on the part of the attorneys who appeared on the argument, but did not, in my opinion, find support in the evidence taken on the trial; and this case, like all others, must be determined on the evidence and not on the argument of counsel.

The principal points of objection taken by the Attorney General to the evidence of cost of manufacture and distribution offered by the plaintiff — namely, that the cost of operation should not be based on the costs of all the plants, but on that of four of the plants which he deems the most efficient, that unaccounted for gas should not be allowed on the basis of experience of the company, but at an arbitrary figure of 5 per cent., and as to gross earnings taxes — have already been discussed and decided.

The miscellaneous objections seem to have been considered and properly determined by the master, and but one of them need be mentioned.

Some years ago a holder was built on the lands of, and in the name of, the Newtown Gas Company. Plaintiff loaned the Newtown Gas Company all of the money to build the same, and charges the Newtown Gas Company 6 per cent. interest for said loan. The plaintiff uses the holder which it maintains, and pays 8 per cent. for its use.

This transaction does not present to my mind anything requiring correction, especially when you consider the statement from the attorney for the defendant Attorney General that the Newtown Gas Company had no need of such holder, from which I understand that it was built for the use of plaintiff, the tenant, but it simply represents the established difference between interest rates and rental value economically figured.

I therefore approve the finding of the master that the reasonable and necessary cost to furnish gas of a standard of not less than 650 B. t. u., as required by the statute, would be at least 93.56 cents per thousand cubic feet.

The plaintiff, in 1923, received from the sale of residuals and gas appliances $343,943, which is equivalent to 2.24 cents per thousand cubic feet of gas sold.

Modifying the entire operating income of the plaintiff by the lower price at which it sells gas to the city of New York, it equals $1.0206 per thousand cubic feet of gas sold, at a cost of 93.56 cents per thousand cubic feet.

In order to furnish gas to the consumer at 537 B. t. u., it is necessary that the gas at the works should contain 550 B. t. u. Taking the lower cost of oil in 1923 rather than the price actually paid in 1922 and 1923, the cost of manufacture and delivery of 537 B. t. u. gas would be approximately 86.85 cents per thousand cubic feet, disregarding any increase in the required quantity of coal and the loss of volume from the decrease in the quantity of oil.

On the question of the rate of return to which plaintiff is entitled, the only evidence given was that of the expert witness called by the plaintiff, who placed it at 8 per cent., which was approved by the master in his opinion.

The defendants, by way of argument only, because they called no witness, contend that the act cannot be held to be confiscatory if plaintiff receives a return of 6 per cent.

Whatever force there might be to the argument of the defendants under some circumstances, it seems to be lost in the instant case, when you consider that bonds issued by this plaintiff while under the regulation of the defendant Public Service Commission, and with its approval, bear interest at the rate of 7 per cent. per annum, showing clearly that the lending public did not consider 6 per cent. as an adequate return.

Therefore, on the evidence in the instant case and on consideration of the opinions of the courts in New York & Queens Gas Co. v. Prendergast (D. C.) 1 F.(2d) 351, Bronx Gas & Electric Co. v. Prendergast (D. C.) 1 F.(2d) 377, New York Telephone Co. v. Prendergast (D. C.) 300 F. 822, Bluefield Waterworks & Imp. Co. v. Public Service Com., 262 U.S. 679, 43 S. Ct. 675, 67 L. Ed. 1176, and Consolidated Gas Co. v. Prendergast (D. C. S. D. N. Y.) 6 F.(2d) 243, decided April 22, 1925, I see no reason to disagree with the opinion of the master.

In the case at bar, however, at the rate of $1 per thousand cubic feet, the plaintiff cannot obtain a return even approximating 6 per cent. at any standard, even of 537 B. t. u.

As I construe this statute the plaintiff is required to deliver to the consumer gas containing the statutory thermal content. To do this, the gas at the point of manufacture must contain a greater thermal content than prescribed by the statute, as there is a loss in the transmission of gas due, among other things, to condensation.

The sales of gas by the plaintiff aggregate 15,300,373 thousand cubic feet. The yield to the plaintiff in the several alternatives would be as follows:

The cost of manufacture and distribution of 650 B. t. u. gas being 93.56 cents per thousand cubic feet, and the income from the sale of gas, gas appliances, and residuals aggregating $1,0206, the yield would be 8.5 cents per thousand cubic feet or $1,300,531.71 per annum, the equivalent of 2.365 per cent. upon $55,000,000, the rate base as of June 1, 1923, or of 2.24 per cent. upon $58,092,513, the rate base as of December 31, 1923.

If plaintiff should continue to manufacture and distribute 587 B. t. u. gas, its 1923 standard, the cost would be 90.49 cents per thousand cubic feet, and, at the rate nominated in the statute, it would yield, $1,770,253.16 per annum, or 3.22 per cent. upon $55,000,000, the rate base as of June 1, 1923, or 3.05 per cent. upon $58,092,513, the rate base as of December 31, 1923.

If the statute was so construed as to permit plaintiff to manufacture and distribute 537 B. t. u. gas, the cost would be 86.85 cents per thousand cubic feet, and, at the price prescribed in the statute, the yield would be $2,327,187 per annum, or 4.23 per cent. upon $55,000,000, the rate base as of June 1, 1923, or 4 per cent. upon $58,092,513, the rate base as of December 31, 1923.

The property of the plaintiff will be confiscated by the operation of the statute in question. In fact, if the plaintiff be required to manufacture and distribute 650 B. t. u. gas at the rate prescribed by statute, the yield would not be sufficient to pay the sum of $1,640,530, the yearly interest on the face value of the bonds issued by the plaintiff, to say nothing about paying any dividend on the capital stock.

The face value of bonds issued by the plaintiff is less than the amount which the defendants contend is the fair value of plaintiff's said property used and useful for the service of the public.

The defendant Attorney General seems to have dropped the contention he made before the master that there could be no confiscation until the plaintiff had exhausted its contingency account in making good any losses incurred by operating under the statute, and therefore the question needs no further discussion, and I will content myself with saying that I am in entire accord with the opinion of the master that to take any of this account is to take the property of the plaintiff and would be confiscation.

The only subject remaining for consideration is the construction of the statute. The master has found it unconstitutional in its entirety. The defendant Attorney General contends that the provisions of the act are severable, and that, if the standard provision be found unconstitutional, the rate should still stand.

The statute, to my mind, clearly had but one purpose, which was to compel the gas companies of the city of New York to furnish gas of a standard of 650 B. t. u. at the unchangeable rate of $1 per thousand cubic feet.

However you may attempt to construe the provisions of the act, they are found to be correlated, because, while the first provision is as to price, clearly it can only be gas of the standard described in the section which is permitted to be sold for that price, and the second provision establishes the standard of quality of gas to be sold at that price, while the third provision prohibits the Public Service Commission from increasing the statutory rate for gas permitted to be sold under said section.

The last provision was undoubtedly inserted to repeal so much of section 72 of the Public Service Commission Law, supra, as gave the Public Service Commission the right to change the rate which had been fixed by statute.

The title of the act is "An act to amend the Public Service Commission Law, in relation to the charge for illuminating gas in cities containing a population of one million or over." The sole purpose, as expressed in the title of the act, being to amend in relation to a charge for gas, the requirement as to standard of necessity must be an integral part of the charge for gas describing what standard of gas must be furnished for the specified rate.

To read the act as suggested by the defendant Attorney General would lead to a condition never contemplated by the Legislature, because, instead of obtaining better gas, the consumer would not be able to obtain gas of as good a quality as was possible before the passage of the act.

In the case at bar, it appears that the act is confiscatory, even if gas of the standard of 537 B. t. u. is required to be furnished for $1 per thousand cubic feet; therefore, if the standard be declared unconstitutional and the provision as to rate sustained, the Public Service Commission would be obliged to establish a standard which they could constitutionally require to be furnished for the prescribed rate, and that would mean gas of a much lower standard than that required at the time of the passage of the statute.

The defendant Attorney General seems to contend that, if the standard be declared invalid and the rate sustained, the former order of the Public Service Commission, dated August 30, 1922, fixing the standard at 537 B. t. u., will at once be restored; but that does not seem to me so, because that order was abrogated by the commission's order dated June 4, 1923, which in part reads as follows:

"Ordered: That each and every gas corporation engaged in the business of manufacturing, furnishing, or selling illuminating gas in the city of New York be and hereby is required forthwith to comply with such statute, and be and hereby is authorized to file and publish a new schedule of its rates for gas effective forthwith in accordance with said statute."

The act further provides, "This act shall take effect immediately," and that it applied to standard and rate, and was so construed by the Public Service Commission, appears from their order of June 4, 1923, supra.

If this language is to be construed as it reads, it means that it was intended to have the act take effect on the day of its passage. If this construction be correct, then the evidence clearly shows that it was impossible to make the necessary changes in appliances to comply with the act, and to have attempted to furnish 650 B. t. u. gas without making such changes would have been inimical to the property and even to the lives of the consumers, and it was impossible to comply therewith.

There was no place described in the act where the standard was to be measured, and, if it was held this meant the place of delivery to the consumer, it would have meant at least 665 B. t. u. at the place of manufacture.

The Attorney General advances the theory that there should be read into the statute an intention by the Legislature to allow a reasonable time to the plaintiff and other gas companies thereby affected to make the necessary adjustments of appliances. I can find no authority for any such construction, because, even the inclusion of express language to that effect in the statute would leave the plaintiff in a position where it could not know in advance whether or not its act was in violation of the statute.

The criminality of an act cannot depend upon whether a jury might think it reasonable or unreasonable. Tozer v. United States (C. C.) 52 F. 917; Chicago & N. W. Railway Co. v. Dey (C. C.) 35 F. 866, 1 L. R. A. 744. This theory advanced by the Attorney General cannot be sustained. The provisions of the statute as to rate and standard are not severable. New York & Queens Gas Co. v. Prendergast (D. C.) 1 F.(2d) 351.

The rate provided in the statute would deprive the plaintiff of its property without due process of law, if the gas required to be furnished be of the standard prescribed in the statute, or even of the standard required by the order of the Public Service Commission of August 30, 1922, and the provision of the statute with reference to standard is incapable of performance.

Chapter 899 of the Laws of New York 1923, as worded, is not separable into parts, but in its entirety violates section 1 of article 14 of the federal Constitution.

The parties may submit a proposed decree and findings in the form of final decree, in accordance with the views herein indicated, modifying the report, and, as so modified by such decree, the report will be in all respects confirmed.

Case Details

Case Name: Brooklyn Union Gas Co. v. Prendergast

Court Name: District Court, E.D. New York

Date Published: Jun 24, 1925

Citation: 7 F.2d 628

Docket Number: 1269

Court Abbreviation: E.D.N.Y