324 Mass. 80 | Mass. | 1949
This is a bill in equity under G. L. (Ter. ■Ed.) c. 25, § 5, to annul a rate order of the department of public utilities on the ground that it is “confiscatory and unlawful.” The plaintiff was incorporated by St. 1849, c. 234, “for the purpose of manufacturing and disposing of gas, in the city of Lowell, and its immediate vicinity,” and has for many years supplied gas in that area. On December 12, 1946, it filed with the department a schedule
The bill alleges, with supporting factual allegations, that the rate order “is confiscatory and unlawful in that it prevents the plaintiff from receiving a reasonable return on the fair value of its property and has the effect of depriving the plaintiff of property without due process'of law contrary to arts. 10 and 12 of the Declaration of Rights and to the Fourteenth Amendment to the Constitution of the United States.” Other allegations are that the order contains errors in computation and an error in law in including the anticipated amount of revenue to be received by the plaintiff on its merchandise business. The prayers are that the order be annulled, and that, pending final disposition, the order be stayed.
The department’s answer, which was filed without waiving its demurrer, in part alleged that “all allegations as to the fair value of the company’s plant are not material in that a court is not bound to consider evidence of the fair or historical value of the company’s plant in the determina
The demurrer.
The demurrer was general to the whole bill, and properly was overruled if any case for relief is stated in the bill. Lydia E. Pinkham Medicine Co. v. Gove, 298 Mass. 53, 57. Bleck v. East Boston Co. 302 Mass. 127, 129. O’Connor v. Brockton, 308 Mass. 34, 36. In overruling it there was no error. Of the grounds now relied on, grounds 2 and 3 referred respectively to two paragraphs of the bill which were later amended, and those paragraphs as they stood before amendment are not in the record. Notwithstanding the department’s contention, the demurrer in no event could raise any question of a “variance” between the bill and the master’s findings. Likewise of no avail are those grounds which, in general (ground 10) or in particular respects (grounds 4 to 7, inclusive), set up that the bill fails to summarize the evidence before the department upon issues of which the plaintiff seeks redetermination. The department mistakenly relies upon the last paragraph of Equity Rule 34 (252 Mass. 610), which specifically refers only to review of orders of the department relating to the promotion and sale of securities. St. 1921, c. 499; see now G. L. (Ter. Ed.) c. 110A, § 13, as appearing in St. 1932, c. 290, § 1, as amended
The remaining grounds are (ground 11) that the “bill erroneously seeks to review findings of fact of the department”; and (ground 8) that the bill contemplates a trial de nova of the facts on the issues of confiscation and unlawfulness, and fails to show that these issues should not be determined upon the evidence received by the department. In so far as ground 8 seeks to delimit the scope of admissible evidence, it could not furnish a valid reason for sustaining the demurrer. Both grounds could be dismissed by saying that the allegations of the bill, which contains no copy of the order, do not disclose that the order does not show on its face that it is confiscatory. Even on these contentions of the department the case could proceed to hearing for the purpose of introducing the department’s order in evidence. Inasmuch, however, as these two grounds involve the principles underlying the general subject of review in this court of rate regulation by the department, it is convenient at this point to consider all questions they seek to raise. These questions and related matters seem to be: (1) whether the reviewable questions include those arising under the State and Federal constitutions; (2) if constitutional questions are open here, whether the findings of the department are conclusive; and (3) if the findings are not conclusive, whether, under the statute, the questions reviewed are to be determined exclusively upon the evidence introduced before the department, or are to be determined also upon such additional evidence as may be introduced by either party.
This court is given “jurisdiction in equity to review, modify, amend or annul any ruling or order” of the department, “but only to the extent of the unlawfulness of such ruling or order.” G. L. (Ter. Ed.) c. 25, § 5. This, we have said in cases involving no constitutional question respecting rates, does not enable us to review or revise pure findings of
The Donham case presented a situation which this court regarded as unique (pages 318-319). The receiver of a street railway company filed in abnormal times a schedule of rates which for the immediate future would not yield a “compensatory return upon the investment” (page 319). The public service commissioners disapproved that schedule and ordered the receiver to file another one (to be effective during a short trial period) which this court thought that there was good ground to believe would be as profitable
The statement, that under G. L. (Ter. Ed.) c. 25, § 5, this court cannot review or revise facts, has no application where constitutional rights respecting rates are involved. In such cases the statute must be understood to confer plenary equity jurisdiction. That comprises the power to enjoin the confiscation of property, used and useful in the public service. Prentis v. Atlantic Coast Line Co. 211 U. S. 210, 230-231. Louisville & Nashville Railroad v. Garrett, 231 U. S. 298, 311. San Joaquin & King’s River Canal & Irrigation Co. v. County of Stanislaus, 233 U. S. 454. Missouri v. Chicago, Burlington & Quincy Railroad, 241 U. S. 533, 538. Oklahoma Operating Co. v. Love, 252 U. S. 331. Prendergast v. New York Telephone Co. 262 U. S. 43, 49. New York v. Maltbie, 303 U. S. 158, 160. .Staten Island Edison Corp. v. Maltbie, 296 N. Y. 374. Otherwise, the statute would not be broad enough for the enforcement of the rights guaranteed by. the Declaration of Rights, and, according to many pronouncements • of the Supreme Court of the United States, by the Fourteenth Amendment. An order imposing confiscatory rates is manifestly unlawful.
The Supreme Court has often said that, in all cases where there is an order, legislative in character, prescribing a complete schedule of maximum future rates, “if the owner claims confiscation of his property will result, the State must provide a fair opportunity for submitting that issue to. á judicial tribunal for determination .upon its own in
Although the “subject of rate making by the Legislature or by public officers or boards has not been discussed in many decisions in this Commonwealth” (Opinion of the Justices, 251 Mass. 569, 610; see Donham v. Public Service Commissioners, 232 Mass. 309, 315), similar statements are to be found in our own reports. In Opinion of the Justices, supra, at pages 610-611, it was said, “A fundamental principle of rate making by public authority is that in general the rate so established must be sufficient to yield a fair return on the reasonable value of the property used or invested for doing the business after paying costs and carrying charges. Rates not sufficient to yield such return are unjust, unreasonable and confiscatory. That is the general rule. The making of rates may be treated as a legislative or executive function.” Here followed the sentence quoted above from the Ben Avon case, with the comment, “That statement is equally interpretative of arts. 1, 10, and 11 of the Declaration of Rights of the Constitution of this Commonwealth. . . . Whenever heretofore the General Court has made provision for the fixing of rates by public
It must, therefore, be taken to be the law of this Commonwealth, not often stated, to be sure, but nevertheless unanimously, that the Declaration of Rights guarantees to an owner, who alleges that confiscation of his property will result from a rate order of the department, a fair opportunity for submitting that issue to a court for determination upon its own independent judgment as to both law and facts, and that G. L. (Ter. Ed.) c. 25, § 5, affords him a remedy adequate to enforce that right. We see no occasion for embarkation on a different course at this time. At a later point in this opinion we shall return to the statement that the rates must yield a fair return upon the value of
It is unnecessary for us to undertake to estimate the effect upon the doctrine of the Ben Avon case of certain relatively recent cases in the Supreme Court of the United States. See, for example, Federal Power Commission v. Natural Gas Pipeline Co. 315 U. S. 575; Federal Power Commission v. Hope Natural Gas Co. 320 U. S. 591; Colorado Interstate Gas Co. v. Federal Power Commission, 324 U. S. 581; Panhandle Eastern Pipe Line Co. v. Federal Power Commission, 324 U. S. 635. Compare Market Street Railway v. Railroad Commission of California, 324 U. S. 548, 567. We do not rest our decision upon a violation of the Fourteenth Amendment to the Constitution of the United States.
Our conclusion means that inquiry here on the issue of confiscation is not confined to the findings of the department or to the evidence introduced before the department. See Crowell v. Benson, 285 U. S. 22, 63. A determination of rates is necessarily made in large part upon a view taken through the dim lenses of prophecy. When a rate order is challenged on constitutional grounds in this court, our observations must be undertaken with the improved vision of intervening experience. And such, for many years at least, was the position of the Supreme Court. Galveston Electric Co. v. Galveston, 258 U. S. 388, 390-391, 401. Smith v. Illinois Bell Telephone Co. 282 U. S. 133, 161-162. McCart v. Indianapolis Water Co. 302 U. S. 419, 421-122. United Gas Public Service Co. v. Texas, 303 U. S. 123,145-146.
The appointment of a master.
The department’s contention that there was no jurisdiction to appoint a master, and that the “appointment was void,” obviously cannot be upheld. It raises no question not hereinbefore considered. The rule directed the master “to hear the parties and their'evidence, to find the facts and report the same to the court.” In this there was no error.
The exceptions to the master’s report and to the supplemental report call for no extended discussion.. Of the fifty exceptions to the report, a great many were to findings of fact. These are wholly nugatory. They ignore the elementary rule that an exception to a master’s report can achieve nothing unless error appears on the face of the report itself. Leventhal v. Jennings, 311 Mass. 622, 624. Minot v. Minot, 319 Mass. 253, 258. Findings purporting to be based upon unreported evidence must stand where there is nothing in the subsidiary findings inconsistent with general findings. Sprague v. Rust Master Chemical Corp. 320 Mass. 668, 675, and cases cited. Weltshe v. Graf, 323 Mass. 498, 500. Of no importance now are those exceptions charging the master with making erroneous rulings of law. The only questions now properly open are as to the rights of the plaintiff on the facts found. Adams v. Young, 200 Mass. 588, 590. Anglim v. Brockton, 278 Mass. 90, 94. Gadreault v. Hillman, 317 Mass. 656, 663. Exceptions to statements of the contentions of the parties require no comment. Exceptions asserting that the report does not disclose the theories of law upon which the master proceeded are not justified. Statement of the grouiids of the remaining exceptions would serve no useful purpose. We have considered all the exceptions, and we think them to be totally lacking in merit.
The supplemental report merely presents facts to enable the court to pass upon the correctness of four rulings relating to the admission and exclusion of evidence as to which the department filed objections, which have become exceptions. The department did not follow the proper method of raising the questions intended. The remedy was by motion to recommit if the department was not satisfied with the master’s statements of facts bearing upon the rulings upon evidence. Carleton & Hovey Co. v. Burns, 285 Mass. 479, 484.
The exceptions to the master’s report and to the supplemental report were properly overruled.
The department’s six motions, four to recommit to the master, one to reopen the hearing, and one to amend the order of reference to require the master to append to his report a transcript of the testimony before him, were all rightly denied. Three of the motions to recommit and the motion to reopen the hearing were for the purpose of reporting evidence. Their denial shows no abuse of discretion. Pearson v. Mulloney, 289 Mass. 508, 513. Zytka v. Dmochowski, 302 Mass. 63, 67. Another motion sought to strike out forty-five findings from the report. These were in the nature of exceptions, and “no additional exceptions may be filed without a special order of the court.” Equity Rule 26 (252 Mass. 608). Respro, Inc. v. Worcester Backing Co. 291 Mass. 467, 472. Ingram v. Eichel’s Spa, Inc. 313 Mass. 109, 113-114. The remaining motion, to amend the order of reference, was filed after the filing of the master’s report. This was too late. Cook v. Scheffreen, 215 Mass. 444, 448. American Agricultural Chemical Co. v. Robertson, 273 Mass. 66, 80. The only suggestion of error as to any of the motions seems to be that the master’s report discloses that he proceeded upon incorrect principles of law. As we have already indicated, this contention is unsound.
Determination of the proper decree.
As there was no error in confirming the master’s reports, it remains for us to determine what decree justice and equity require. The report contains a copy of the department’s order.
The order of the department.
We shall make a concise statement of the salient parts of the order. The schedule filed December 12, 1946, is estimated to increase revenues $168,000. On that date the company was operating under a schedule which had been in effect since January 1, 1942. The total plant in
The order, thus summarized in detail, is virtually barren of findings which reveal the principles underlying the department’s conclusions or which would enable the public or the company intelligently to take future action in conformity with those principles. To be sure, the order states, “It has been the practice in Massachusetts since the inception of public regulation of utility rates (see Customers v. Northampton Electric Lighting Co. D. P. U. 4370,
The department’s brief contains such statements as: “its so called 'prudent investment theory’ ... in plain language means the net cost of investment less depreciation as the base upon which rates should be granted subject, of course, to the particular circumstances and conditions that prevail in the particular utility concerned ”; “ the amount on which a fair return should be allowed is the authorizable capital stock”; “the regulation of rates should be guided by the amount of capital stock honestly and prudently invested by the stockholders rather than the value of the property employed”; and “a fair return upon the capital actually invested is required.”
The department has professed to adhere to its rule notwithstanding the statements of the Supreme Court of the United States and of this court that the rates must be sufficient to
The master’s report.
The master’s report contains findings on three theories as to rate base. (1) The cost of plant and equipment now in use and useful is $4,827,000, exclusive of working capital in the amount of $340,302. Depreciation is $850,786.76. (2) The “amount of the prudent investment in the used and useful property” is not less than $4,590,000. (3) The fair value of the property is $4,827,000 exclusive of working capital.
Since the order mentioned prudent investment, we shall repeat only the detailed findings which the master made as to this theory. Up to December 31, 1946, the investment in the property was as shown in the following table:
Capital stock at par .... $1,524,050
Premiums paid for stock . . . 778,687
Bonds and long term notes . . 1,075,000
Notes payable..... 140,000
Surplus....... 473,8651
Paid out of earnings .... 990,5511
$4,982,153
By August 31, 1947, the investment had increased to $5,126,746. This larger total took into account certain. capitalizable expenditures for which the department had authorized additional bonds; the inception of the additions
The master’s report also contained findings showing the amount of earnings necessary to assure confidence in the financial integrity of the enterprise and to enable the company to maintain its credit and attract new capital. This right, as has already been noted, is conceded by the department in its answer. The department also contends for it in its brief. These findings are bond interest, $44,406; non-interest bearing obligations, $16,000; preferred stock dividends, $25,000;
The master stated, “If the determination of a reasonable rate of return upon such rate base as may be adopted is a
The master further found that the annual earnings available, before interest, for the return on its capital, without including income from the merchandise and jobbing business and not deducting as an expense the reserve for Federal income taxes or the annual amount payable on certain noninterest bearing obligations, are reasonably expected to be for the calendar year 1947, approximately $165,000, and for the twelve months beginning May 1, 1947, approximately $138,500. If the reserve for Federal income tax may properly be charged to earnings, he found that these figures would be reduced, for the calendar year 1947, to $137,433, and for the twelve months beginning May 1, 1947, to $118,946. Finally, the master found that the estimates for the calendar year 1947 show the balance, after the Federal tax reserve and after interest ($44,406), available for dividends and noninterest bearing obligations ($16,000 a year) to be $93,027, and for the twelve months beginning May 1, 1947, $72,909.
The hearings before the master took place in the latter part of 1947, and the estimates of earnings made at the time of the hearing before the department could be tested by the actual experience of the company for the first eight months in 1947. In his estimates of sales, the amount through August, 1947, is that actually made, and for the months beginning September, 1947, he assumed that the amount would be no greater than for the corresponding months of 1946. This assumption was made because of economic conditions in Lowell and a very definite falling off in the demand for heating and the loss of heating customers. Although there was a considerable increase in sales in the early part of 1947 over the corresponding months of 1946, there was a rapid decline in the increase each month from June through August, 1947, and in September, 1947,
Other findings of the master were that the department’s estimate of $125,000 in earnings after bond interest included earnings from the merchandise and jobbing business,
The merchandise and jobbing business.
The income from the merchandise and jobbing business is not to be included in the company’s income for the purpose of rate making. The department does not permit losses on such business to be included in expenses in determining net earnings for that purpose, nor does it allow capital devoted to that business to serve as a basis for the issue of securities or to be counted as part of the investment for rate making. The sale and servicing of gas appliances constitute a separate business from the supplying of gas. See MacRae v. Selectmen of Concord, 296 Mass. 394, 398; Opinion of the Justices, 300 Mass. 591, 593. It would not be fair, on the one hand, to charge all customers with higher rates so that some might buy appliances and have them serviced at less than cost, or, on the other hand, to lower the cost of gas service because of a profit on those items. The treatment of these revenues in the order of the department was not only inconsistent with its own practice, but was erroneous in law.
Payments on noninterest bearing obligations.
The annual payment on noninterest bearing obligations, which the master found that the department “failed to allow as an expense” in its estimate that the rates would produce annual earnings of $125,000, must be made for seven
The Federal income tax reserve.
The company argues that the Federal income tax reserve was improperly disallowed as an expense by the department. It appears from the master’s report that while the holding company and the company are allowed to file a consolidated return, the interest on the debt of the holding company exceeds the income of the company “and therefore it may be that no tax is payable”; and that the company nevertheless has adopted the practice of setting up a reserve for this
Reasonable rate of return.
The annual earnings for the calendar year 1947 upon the schedule of rates authorized by the department, according to the master’s findings, are reasonably expected to be $165,000, exclusive of the merchandise and jobbing business. Deducting the bond interest of $44,406 and $16,000 for payment on noninterest bearing obligations
This opinion is that of a majority of the court.
Conclusion.
The interlocutory decrees reported are affirmed. A final decree is to be entered annulling the order of the department dated April 15, 1947.
So ordered.
On July 31, 1947, an interlocutory decree temporarily enjoined the department.from enforcing the order. The rates allowed by that order were in effect in May, June, and July, 1947, and the rates in the schedule filed December 12, 1946, have been in effect since August 1, 1947.
It appears from the master’s report that there had been such an account, made up of payments by subscribers to capital stock, but that it had been charged off, partly in compliance with a conditional order of the department approving an issue of bonds, and partly to eliminate an item of indebtedness resulting from a loan to the holding company which was disapproved by the department.
The rate was reduced from four and one half per cent by refinancing in 1946.
See U. S. C. (1946 ed.) Title 26, § 141.
The $20,248 accrued in 1941 was paid, but the $33,750 (due in 1943) accrued in 1942 was carried as a liability until the three year limitation for review of that year’s return had expired. In 1946, $33,750 was credited to surplus.
It is not apparent what this amount is. It obviously must be much smaller than the figure obtained by deducting from the amount found to be the plant investment ($4,007,428.74) the amount found to be the depreciation reserve ($850,786.76).
36 P. U. R (N. S.) 353.
22 P. U. R (N. S.) 138.
Mr. Justice Brandéis refers to the “undepreciated reproduction cost on the historical basis — which seems to be substantially equivalent to what is often termed the prudent investment . .
These citations are to a dissenting opinion of Mr. Justice Brandéis who, at page 295 note, said, “Historical cost, i. e., the proper cost of the existing plant and business, estimated on the basis of the price levels existing at the respective dates when the plant and the additions were constructed. This is often called prudent investment. . . . Historical cost ... is the amount which normally should have been paid for all the property which is usefully devoted to the public service. It is, in effect, what is termed the prudent investment.” Compare the department’s answer in the case at bar, where it is alleged that “a court is not bound to consider evidence of the fair or historical value of the company’s plant in the determination of rates.” See also dissenting opinion of Commissioner Eastman in San Pedro, Los Angeles & Salt Lake Railroad case, 75 I. C. C. 463, 523; Bauer, Effective Regulation of Public Utilities, 244-245; Bauer, “The Establishment and Administration of a ‘Prudent Investment’ Rate Base,” 53 Yale L. J. 495, 506-507.
Public Utility Commissioners v. New York Telephone Co. 271 U. S. 23, 31, 32. United States v. Public Utilities Commission of District of Columbia, 158 Fed. (2d) 533, 537 (C. A. D. C.), certiorari denied 331 U. S. 816. See Fall River Gas Works Co. v. Gas & Electric Light Commissioners, 214 Mass. 529, 539. In Mayor of Springfield v. United Electric Light Co. 39 P. U. R. (N. S.) 135, 139, the department said that “plant acquired by the use of surplus as properly belongs in the rate base as plant acquired with the proceeds of a stock issue.”
The master also said, “Although it seems reasonable to suppose that the remaining $500,000 will also be required in the not too distant future, that additional amount is not taken into account.”
On July 17, 1947, the department approved an issue of twenty thousand shares of preferred stock with $25 par value, to carry a dividend rate not in excess of five per cent, and to be sold at not less than par.
When issued these new shares would bring the total of common stock up to seventy thousand nine hundred sixty-two shares.
We cannot say on this record at what figure such earnings were included. There were findings of the master as follows: For 1946 the revenue from this business was $40,058, which was due to the tremendous demand for appliances following the war and was many times larger than for any year since 1930. Out of the seventeen years which were considered, there were losses, often substantial, in all but four years. The net loss for the period was $25,068, even including the substantial profit in 1946. The revenue from this business is neither permanent nor stable. For 1947 it will not exceed $10,000.
Whether part of the prudent investment or not, this item, representing legal obligations having precedence over dividends, cannot be disregarded in estimating the amount of earnings necessary to assure confidence in the financial integrity of the enterprise so as to maintain its credit and attract new capital.