141 N.Y.S. 677 | N.Y. App. Div. | 1913
The Kings County Lighting Company was incorporated May 25, 1904, with an authorized capital stock of $2,000,000, and on July 1, 1904, was merged with the previously existing Kings County Gras and Illuminating Company which had been incorporated December 18, 1889, and had supplied gas since October, 1891.
Upon complaint duly lodged the Public Service Commission undertook an investigation as to the reasonableness of the rates charged, and finally fixed certain rates for the future. The Commission determined that the fair value of the property of the company, for the' purpose of rate making, was about $2,480,000, and certainly. not in excess of .$2,500,000, upon December 31, 1910, and that a fair rate of return upon the property should not exceed seven and one-half per cent. It, therefore, fixed the rate from and including November 1,1911, to and including December 31, 1912, at eighty-five cents per 1,000 cubic feet; from and including January 1, 1913, to and including December 31, 1913, eighty cents per 1,000 cubic feet. It is the contention of the company that the fair value of its property was at least $2,000,000 in excess of the amount fixed.
. Section 12 of the Public Service Commissions Law (Consol. Laws, chap. 48; Laws of 1910, chap. 480) provides that “In
The Commission attempted to conform to the accepted rule of valuation. In Smyth v. Ames (169 U. S. 466) Harlan, J., said: “We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public. And in order to ascertain that value, 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 particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. -On the other hand, what the public is entitled to demand is that no more be exacted from it for the use of a public highway than the services rendered by it are reasonably worth.”
In San Diego Land Co. v. National City (174 U. S. 757) Harlan, J., said: “What the company is entitled to demand in order that it may have just compensation is a fair return upon the reasonable value of the property at the time it is being used for the public.”
In Knoxville v. Water Co. (212 U. S. 1) Moody, J., said: “ The first fact essential to the conclusion of the court below is the valuation of the property devoted to the public uses, upon which the company is entitled to earn a return.”
The Commission found as follows:
• Contractors’ profits, engineering, administration,
contingencies and incidentals................... 341,149
Cost to reproduce new.......................... $1,902,777
Depreciation................................... 415,198
$1,487,579
Land, present value............................ 650,000
Present value of plant, etc................ $2,137,579
Preliminary and development.................. 260,000
Working capital.............. 80,000
Total....-.....................'...■......... $2,477,579
The company challenges this valuation in several respects. We deem it necessary to consider only the following:
I. Going value. It claims that as an established business there should have been added an item for “going value” of $600,000, the smaller of the estimates given by its two expert witnesses. In condemnation cases this has been settled by the Supreme Court of the United. States.
In Omaha v. Omaha Water Company (218 U. S. 180) the question was as to the amount to be paid by a municipality on taking over a system of water works. Nearly $600,000 had been allowed by the appraisers for going value. .The court said: “The option to purchase excluded any value on account of unexpired franchise; but it did not limit the value to the bare bones • of the plant, its physical, properties, such as its lands, its machinery, its water pipes or settling reservoirs, nor to what it would take to reproduce each of its physical features. The value in equity and- justice must include whatever is contributed by the fact of the • connection of the items making a complete and operating plant. The difference between a dead plant and a live one is a real value, and is independént of any franchise to go On, or any mere good will as between such a plant and its customers. * * * That there is a difference between even the cost of duplication, less depreciation, of the elements making up the water company plant, and the commercial value of the business as a going con
It is true the question has not been directly decided in a rate case in the United.States Supreme Court. In the Knoxville Case {supra) Mr. Justice Moody said of the valuation: “ It was made up by adding to'the appraisement, in minuté detail of all the tangible property, the sum of $10,000 for ‘ organization, promotion, etc.,’ and $60,000 for (going concern.’ The latter sum we understand to be an expression of the added value of the plant as a whole over the sum of the values of its component parts, which is attached to it because it is in active and successful operation and earning a return. We express no opinion, as. to the propriety of including these two items in the valuation of the plant, for the purpose for which it is valued in this case, but leave that question to -be considered when it necessarily arises. We assume, without deciding, that these items were properly added in this case.”
And the United States Supreme Court again left the question undecided .in Cedar Rapids Gas Co. v. Cedar Rapids (223 U. S. 655, 669), Holmes, J., saying: “Then again, although it is argued that the court excluded going value, the court expressly took into account the fact' that the plant was in successful operation. What it excluded was the good will or advantage incident to the possession of a monopoly, so far as that might be supposed to give the plaintiff the power to charge more than a reasonable price. * * * In this case the court fixed a value on the plant that considerably exceeded its cost and estimated that under the ordinance the return would be over 6 per cent. Its attitude was fair and we do not feel called upon to follow the plaintiff into a nice discussion of details.”
I am unable to perceive a logical difference between allowing “ going valuation ” in the valuation of a plant.when it is to be taken entirely by the public and allowing the same element when valuing the same plant for rate-making purposes. In each case the thing to be done is the fair appraisement of present value. What difference in principle can there be because in one instance all is taken for the use of the public and in the other the public limits the earnings ?
In the case at bar the Commission says it “ disallowed this claim in determining fair value, * but did consider it in fixing the: rate of return. ” If so there is no proof of that fact in the record. ’
II. The present value of the citypaving over mains and services. While as to other items of physical property the Commission professed to appraise at its full value, and to apply the rule of cost of reproduction new, less accrued depreciation, it refused to include in the value of mains under paved streets more than the original cost of repaving when the mains were laid. When the mains were laid the streets were unpaved, sandy tracts in an unbuilt-up community. Mr. Connette, the engineer for the Commission, placed the cost for restoring pavement as it existed when the mains and services were laid, at $12,717. That amount was allowed by the Commission in its valuation. Mr. Baehr estimated the cost of reproducing the existing paving over mains and services as they existed January 1, 1911, at $264,666. Mr. Connette’s figures upon that basis were $212,808. The relator claims that- the valuation should have included this amount to the extent of at least $200,000.
In Consolidated Gas Co. v. City of New York (157 Fed. Rep. 849) the difference between book value or original cost and the replacement cost or cost of reproduction of mains and services was about $5,560,000. Judge Hough said: “The complainant demands a fair return upon the reproductive value thereof, which is the same thing as the present value prop
It seems to me that we ought to regard that question as settled. The fact that these streets have been paved and the region generally improved has caused sales of land, the building of houses, and the increase in population, which has enabled the company within the last few years to make profits and declare dividends which for many years it was unable to do. The argument that streets paved or unpaved make no difference in the earning power of a gas company is unsound. The earning power of a gas plant depends upon its constituency. If it has nobody to sell gas to it can make no profits; and if there are no decent streets there will be few people. The value of a plant of any kind is certainly affected by its location and the demand for its products. íf a new company undertook to install a duplicate plant the cost of repaving under the present .streets would properly be allowed for. Hence it is a necessary element of reproduction value. It is a valuable advantage which the present owner has which a prospective buyer would have to pay for. Like increased land values, a school of thought might condemn it as “unearned increment,” but the law does not yet refuse to include it in its definition of property capable of ownership and entitled to protection.
III. Depreciation. The Commission said: “Cost of reproduction new is not necessarily an indication of present value. Depreciation and deferred maintenance are important factors.” It held that the proper method to ascertain the value of the tangible property was to take the amount obtained by subtracting from the cost of reproduction its accrued depreciation, and, therefore, from its estimate of reproduction cost new, subtracted $115,198 for depreciation.
The relator contends that this method is fundamentally unsound; that said sum should not be deducted, but that the
Mr. Mathewson as amicus curias files an interesting brief presenting an elaborate argument in support of the proposition that as it is conceded that the plant of the relator operates at 100 per cent of efficiency there should be no deduction for so-called “ accrued depreciation.” This term is used to designate somewhat inartificially the liability presently accrued toward the ultimate cost of replacement of still efficient apparatus. He, therefore, repudiates the concession to scrap value and claims that as the company, being a public service corporation, must always keep its plant up to efficiency and must replace property when worn out, it is entitled to a rate based upon 100 per cent efficiency because it will never be allowed to capitalize replacement but must provide it when necessary. It, therefore, must be allowed to provide a replacement fund out of its earnings. He argues that it makes no difference to the consumer whether that fund is actually accumulated and on hand or not because the replacement must be made if there is such a fund from it; if not, by the stockholders directly. If on the other hand the valuation of the tangibles is reduced by a percentage, in this case twenty-one per cent, it can never be provided for in the only proper way —• out of earnings.
We are unable to adopt Mr. Mathewson’s interesting theories for these reasons:
1. It seems to be thoroughly established that the value of the tangible property upon which the company is entitled to a rate which will procure a fair and just return is the present value, that is, at the time of the appraisement for rate-making purposes.
2. That in the absence of accurate evidence as to actual value, the cost of reproduction new takes the place thereof.
3. That, as the property being valued is not new, in order
4. That this represents the amount required to replace apparatus still in use, but in process of wearing out, at the end of useful service.
5. That this allowance for depreciation has been made in various kinds of cases where present value is required to be estimated.
In condemnation or contract cases, where a city has reserved the right to take a plant at the end of a given number of years at a fair and just appraisement. (Omaha v. Omaha Water Co., 218 U. S. 180.) In special franchise tax cases. (People ex rel. Jamaica Water Supply Co. v. Tax Comrs., 196 N. Y. 39; People ex rel. Manhattan R. Co. v. Woodbury, 203 id. 231; People ex rel. Third Ave. R. R. Co. v. Tax Comrs., 136 App. Div. 155; affd., 198 N. Y. 608.) And in rate cases. (San Diego Land Co. v. National City, 174 U. S. 739; San Diego Land & Town Co. v. Jasper, 189 id. 439; Stanislaus County v. San Joaquin & C. & I. Co., 192 id. 201; Knoxville v. Water Co., 212 id. 1.)
In the special franchise tax cases the proper valuation of the present value of the tangible property of the company was directly involved and of the utmost importance. The formula worked out by the Court of Appeals in the Jamaica Water Supply Co. Case (196 N. Y. 39) was as follows: “The net earnings rule contemplates a valuation upon the basis of the net earnings of the corporation which are attributable to its enjoyment of the special franchise. The method is thus applied: 1, ascertain the gross earnings; 2, deduct the operating expenses; 3, deduct a fair and reasonable return on that portion of the capital of the corporation which is invested intangible property. The resulting balance gives the earnings attributable to the special franchise. If this balance be capitalized at a fair rate we have the value of the special franchise.”
It thus appears that a fair and reasonable return on that portion of the capital of the corporation .which is invested in tangible property required the determination of how that capital, so invested, should be fixed.
In considering the cases, in' the Supreme Court of the United States it must be borne in mind that they were suits in equity to restrain the enforcement of rates fixed by ordinance or statute, and that the sole question presented to that court was whether the effect of such ordinance or statute was confiscatory, and, hence, in- violation of the Constitution. Having determined the main fact for or against the constitutionality of the ordinance or statute under consideration, as applied to the facts before it, the court has paid scant attention to matters of detail not necessarily involved in the precise question before it.
So that, while in the rate cases cited supra it has mentioned, without discussing, reproduction cost new, less depreciation, in only one of them has it expressed its views in extenso. But in Knoxville v. Water Co. (212 U. S. 1) the court said, referring to the value of the tangible property: “This valuation was determined by the master by ascertaining what it would cost, at the date of the ordinance, to reproduce the existing plant as a new plant. The cost of reproduction is one way
This quotation completely answers the contention on the part of the relator that no allowance should be made for depreciation, because the evidence is that the efficiency of the relator’s plant continued to be equal to 100 per cent; since it is manifest that deterioration to some extent must precede the loss of efficiency, and the mere fact that the efficiency remains stable does not necessarily contravene the other fact that deterioration has set in.
In the case at bar the Commission followed the rule laid
We are of opinion that upon the other matters going to make up the item of capital invested upon which a fair and reasonable return is to be calculated the decision of the Commission is right. In its calculation of income, however, it has included an item of $35,000 as the annual increase in the value of the land of the company. This we regard as erroneous. The land is used for the business of the company and is appropriate therefor. So long as the land is held and used for such purpose increase in value cannot be considered as income or as available for the payment of debts, taxes or dividends.
Upon the argument both sides suggested that this court should make a final determination fixing the rate. This we are unwilling to do, preferring to confine, ourselves to the determination of the principles to be applied, leaving the readjustment of the calculations of figures' to the administrative board fully equipped for that purpose. Nor are we prepared to say that the valuation of the two items which we think should have been taken into consideration by the Commission is conclusively. established. Upon the whole case we are of opinion that the Commission might well have adopted the rate offered to be consented to by the company.
The writ should be sustained and the determination reversed, with fifty dollars costs and disbursements to the relator, and the matter remitted to the Public Service Commission for action in accordance with this opinion.
Ingraham, P. J., McLaughlin, Laughlin and Scott, JJ., concurred.