New York & Queens Gas Co. v. Prendergast, 1 F.2d 351 (S.D.N.Y. 1924)

*352 *353 *354 *355 *356 *357 *358 *359 *360 *361 *362 *363 *364 *365 *366 *367 *368 *369 *370 *371 Shearman & Sterling, of New York City (John A. Garver, William L. Ransom, and Jacob H. Goetz, all of New York City, and George G. Bogert, of Ithaca, N. Y., of counsel), for plaintiff.

Charles G. Blakeslee, of Binghamton, N. Y. (Edward M. Deegan, of New York City, Sherman C. Ward, of Albany, N. Y., and Melvin L. Krulewitch, of New York City, of counsel), for defendants Prendergast and others.

James A. Donnelly, of New York City (Judson Hyatt, of New York City, of counsel), for defendant Sherman.

WINSLOW, District Judge.

This is a motion made by the plaintiff for a permanent injunction, based upon the report and opinion of the special master.

This action is brought by the plaintiff for an adjudication as to the constitutionality of chapter 898 and chapter 899 of the Laws of New York of 1923, relating to the price and quality of gas furnished by the plaintiff, and for a permanent injunction restraining the enforcement of these statutes. The motion brings on for final hearing in this court the report filed herein by the special master heretofore appointed to consider the questions of law and fact. This report contains a carefully prepared recital of the questions of fact and law and the master's findings, together with a well-considered opinion. The report recommends the entry of final decree in favor of the plaintiff.

The plaintiff, however, prays that certain exceptions filed by the plaintiff to the findings of the special master be sustained by this court, and that his report be modified accordingly, and then confirmed, as modified, and that final decree be entered in favor of the plaintiff, as recommended in the report, and as modified. The defendants have filed numerous exceptions to portions of the report. The master's report is so complete in detail that it is unnecessary here to refer to the facts, except in so far as it may be necessary to more clearly define and limit the opinion of this court.

Chapter 898 of the Laws of 1923, entitled "An act to amend the Public Service Commission Law, in relation to charges by gas corporations," added a new subdivision by way of amendment to the existing statute, as follows:

"6. Service Charges Prohibited. Every gas corporation shall charge for gas supplied a fair and reasonable price. No such corporation shall make or impose an additional charge or fee for service or for the installation of apparatus or the use of apparatus installed."

This act became effective June 1, 1923.

Chapter 899 of the Laws of 1923, the second statute involved in this litigation, entitled "An act to amend the Public Service *372 Commission Law, in relation to the charge for illuminating gas in cities containing a population of one million or over," amended the existing statute by inserting a new section, as follows:

"67-a. Charge for Gas in Cities of One Million or More. A gas corporation engaged in the business of manufacturing, furnishing or selling illuminating gas in a city containing a population of one million or over shall not charge or receive for gas furnished or sold in such city a sum per one thousand cubic feet in excess of one dollar, nor furnish in such city gas of a standard less than six hundred and fifty British thermal units per cubic foot, measured under normal conditions of temperature and atmospheric pressure. The Public Service Commission, notwithstanding any other provision of this chapter, shall not allow a rate or charge in the case of such cities in excess of such sum."

This act became effective June 2, 1923.

The special master began his hearings promptly, shortly after his appointment, on or about July 25, 1923, and continued thereafter five days a week until November 28, 1923, holding morning and afternoon sessions. The number of seriously controverted questions of fact necessary to the determination of the issue are few. The real questions involved requiring careful consideration by the court are questions of law. At the outset, it is most important to emphasize what has been set forth in unmistakable terms by this court in N. Y. & Queens Gas Co. v. Newton, 269 Fed. 277, and affirmed by the Supreme Court, that this court is not a rate-making body. In this connection and at this juncture it is also most pertinent to call attention to the fact, undisputed on the record, that the Public Service Commission, whose present members are defendants herein, on August 30, 1922, prescribed a flat rate plus a "service charge" for gas, to be charged by the plaintiff, the total approximating $1.38 per 1,000. That rate was to continue for one year from October 1, 1922. Contemporaneously with the rate order, the commission prescribed the thermal content. Such action by the commission, fixing the rate and prescribing its continuance for one year, was pursuant to the authority of section 72 of the Public Service Commission Law (Consol. Laws, c. 48). These rates were duly accepted in writing by the plaintiff, to continue in effect, as stated, for one year.

The sole question now to be determined by this court is not one of rates, but whether or not the statutes are unconstitutional, because they are confiscatory, or for other reasons. In the opinion of the special master, both of the statutes, in so far as they limit the price charged for gas, are held to be unconstitutional, solely upon the ground that they are confiscatory.

Chapter 898, which became effective as of June 1, 1923, abolished the "service charge," and, as found by the master, thereby in effect reduced the rate of $1.38 theretofore fixed by the Public Service Commission to $1.15 per 1,000 cubic feet of gas. This statute was effective but one day, for the reason that chapter 899 became effective on June 2, 1923. This act prohibited the plaintiff and all other gas companies in cities of 1,000,000 or more i. e., New York City from charging a rate in excess of $1 per 1,000 cubic feet for gas of a calorific standard of not less than 650 B. t. u. per cubic foot, etc. It is therefore necessary to determine whether the $1 rate provided in chapter 899 is confiscatory, and whether the $1.15 rate temporarily limited by chapter 898 is confiscatory. The statute prescribing a maximum rate for gas of $1 per 1,000 cubic feet affects every gas company in the city of New York, and must be read in connection with the statute abolishing the "service charge," which, while in terms applicable to all gas corporations in the state of New York, when so read really affects only one in this jurisdiction, viz. the plaintiff.

The complaint prays for a permanent injunction against (1) the enforcement of chapter 899, viz. the $1 rate and the 650 B. t. u. standard, contending that both the rate and the thermal standard are integral and inseparable parts of that rate; and (2) chapter 898, which practically reduces the rate charged by plaintiff temporarily to $1.15. Plaintiff asks that chapter 898, in so far as it be construed as meaning anything more than the prohibition of a so-called "service charge," be held null and void.

As to the contentions of the plaintiff, the special master's report recommends (1) that the $1 rate be permanently enjoined. (2) That the 650 B. t. u. standard is separable from the rate, and that it be enjoined for a period of time, nine months, which time it is said will be required for the plaintiff to adjust all appliances, etc., for the safe use of gas of this thermal standard. (3) That chapter 898, abolishing the service charge, be enjoined in so far as it limits the plaintiff to a rate of $1.15 per 1,000, but not enjoining its enforcement in any other particular.

*373 The learned special master has held that the Legislature is free to fix rates and the form thereof, whether such rate be a flat rate, or a flat rate plus a "service charge." In either event, the rate must not be confiscatory. In regard to the flat rate prescribed by the other statute and fixing the thermal content, the special master has, in substance, held that the flat rate there provided is confiscatory, but that it is within the power of the Legislature to prescribe the thermal content, provided, however, that the gas corporation have a reasonable opportunity within which to adjust its appliances, so that the gas of the different thermal unit from that now furnished may be safely manufactured, transported, and consumed. In his opinion, the statute contains two separable provisions one fixing a flat $1 rate, which he finds is confiscatory, and therefore unconstitutional, and the other separable provision regarding the thermal unit which he finds is a valid exercise of legislative power.

At the outset, it may be conceded that confiscation of the property of the public utility takes place when the utility is limited to a rate which does not provide sufficient revenue to pay cost of production and distribution and, in addition, a reasonable return upon its investment. A rate which yields an amount less than operating expenses and taxes in effect consumes capital. The confiscatory feature is further present if the rate prevents a reasonable return upon the investment. The master has found that for the year ended December 31, 1922, the actual net cost of manufacture and distribution, together with taxes and other operating expenses, but exclusive of any return upon the investment property, exceeded the rate now prescribed. It is obvious that such a condition would shortly wipe out all invested capital. For the year ended August 31, 1923, the master in the same finding found that the actual net cost of gas (aside from any return whatever) exceeded the rate prescribed. It is obvious that the deficiency in net operating expenses which would result from the $1 rate renders superfluous, even if it were proper here so to inquire, what a reasonable return upon investment may be.

The actual costs found by the special master are, of course, based upon the standards of light and heat observed during the periods mentioned. The master, however, found, and the record sustains that finding, that a thermal standard of 650 B. t. u. during the periods mentioned would have resulted in a net increase in the cost of production of gas, varying from 2.25 cents per 1,000 cubic feet, to 4 cents per 1,000 cubic feet of gas sold. Therefore, if both the $1 rate and the 650 B. t. u. standard were applied to the operations of the plaintiff during the periods mentioned, there would have been a very substantial deficiency in the bare operating expenses alone. The question of any return upon the investment in the instant case becomes academic.

In arriving at his conclusion, the special master eliminated certain items which the plaintiff contended entered into actual costs. It may be debated as to whether some of these eliminations were proper, but the findings, however, are conservative, and the net actual cost to plaintiff of gas sold by it during 1922 and the year ended August 31, 1923, finds ample support in the record; or, to put it another way, any production cost less than the figures stated would have been counter to uncontroverted facts in evidence. The master might have allowed certain elements of cost to be added, and thus increase the result, and justification for such increase might with some degree of reason be argued.

In arriving at a just determination of the questions involved, it is quite necessary to consider the relations of the two statutes to each other. Considering chapter 898, which has reference to a "service charge," the special master is of the opinion, in which the court concurs, that it is entirely within the discretion of the Legislature to prescribe the form of the rate for gas, provided the legislative provision for the form does not in effect inflict a confiscatory rate. As chapter 899, prescribing the flat $1 rate, must be considered in the instant case while considering chapter 898, it follows, from the facts proven in the present instance, that the legislative enactments are both violative of the constitutional rights of the plaintiff.

The rate fixed for the plaintiff by the Public Service Commission on August 30, 1922, effective October 1, 1922, to which reference has been made, followed the litigation as to the validity of a statutory rate theretofore prescribed of no more than $1 per 1,000 cubic feet. That rate, theretofore prescribed by the Legislature and applicable to this plaintiff, had been adjudged insufficient to pay even the plaintiff's bare operating costs. 258 U.S. 178, 42 Sup. Ct. 268, 66 L. Ed. 549 (March 6, 1922). A similar adjudication had been reached in the New York state courts in regard to another gas company operating under very similar conditions to the plaintiff. The rate from October 1, 1922, *374 thus fixed by the Public Service Commission, and now abrogated and superseded by the legislative enactments under attack, fixed the service charge in conjunction with the commodity charge, as heretofore indicated.

The enactment of chapter 898, prohibiting the service charge, changed the form of the rate structure, and in theory left the plaintiff free to revise its rate schedules immediately, and, if revised, the same total revenue might be earned under a flat rate system as would have been earned under a service charge plus a commodity charge. The plaintiff, however, was precluded from increasing its commodity rates, so as to make up the revenue which would otherwise be realized from the service charge, by chapter 899 of the Laws of 1923, in effect June 2, 1923, limiting the maximum rate to a flat $1 per 1,000 cubic feet. No opportunity whatever could be provided plaintiff for a revision of its rates. For the brief period of time before the flat $1 rate became effective, the rate of the plaintiff was limited to $1.15. This rate the special master has found, as heretofore indicated, was also confiscatory.

The plaintiff contends that chapter 898 is unconstitutional on additional grounds. In view of the finding of the learned special master, with which I am in accord, it is unnecessary to discuss the additional grounds urged against the validity of this statute.

As to chapter 899 of the Laws of 1923, the learned special master has, in substance, held that the fixing of the flat rate of $1 is confiscatory, and this court is in full accord with that conclusion. But the master is of the opinion that this statute is separable into parts, one part of which, namely, the rate part, is confiscatory, and the other part, namely, the fixing of the calorific unit, is a valid exercise of power. Accordingly he recommends that the change to 650 B. t. u. be held in abeyance for nine months by a proper restraining order, to the end that a reasonable opportunity may be afforded plaintiff to adjust its appliances and plant and distributing agency to accomplish the desired result, and that the consuming public may be protected by such adjustment against the very obvious and serious dangers to human life and property. This phase of the problem and the conclusion of the learned special master require a most careful consideration of the statute and the application of the principles of statutory construction applied to legislative enactment.

The plaintiff has not put into effect the rates or standard of quality of gas prescribed by chapter 899. It has done away with the service charge forbidden by chapter 898, which, as we have seen, was equivalent to 22½ cents per 1,000, which was allowed as part of the rate prescribed by the Public Service Commission's order. On June 8, 1923, the plaintiff, pursuant to the temporary restraining order granted by this court, promulgated and put into effect a flat rate of $1.38, which yields approximately the same revenue as the form of rate fixed by the commission. Interference with this rate pendente lite was restrained by the special statutory court. This court concurs in the master's finding that chapter 898 of the Laws of 1923, in so far as it operates to prohibit the plaintiff from charging more than $1.15 per 1,000 feet, or in excess of the commission's graduated rates prescribed by its order, is illegal and void.

It would seem to be unnecessary to consider, in this case, the absence of a test period sufficiently long to arrive at a different conclusion, for the reason that in the instant case the overwhelming proof is to the effect that the statutory rate would not even cover operating charges, let alone the question of sufficient revenue to approximate a reasonable return on its investment whether that investment be considered either upon the theory of original cost or present value conditions.

In the previous trial of the suit by this plaintiff against the members of the then Public Service Commission, the special master found, and his decision was approved by both this court and the Supreme Court, that the fair present value of plaintiff's property was at least the amount of its original investment therein. In view of the fact that the statutory rate in the instant case is insufficient to cover operating charges and distribution, the question of a fair and reasonable return on capital is not one for the court to speculate upon. I do not believe that it is now the function of the court to determine a rate base, and hence the findings and opinion of the special master, so far as they relate to valuation on a reproduction cost basis, will be disregarded by this court in the instant case. This is in full accord with the expressed conviction of this court. Opinion by Mayer, J., N. Y. & Queens Gas Co. v. Newton, 269 Fed. 277. Whatever might be necessary in some other case, it would seem that the question of a rate base in the case at bar is a matter for the Public Service Commission, in the performance of its regulatory functions. It was quite proper, *375 however, for the master to make the inquiry regarding the various questions before him, in view of the direction of this court providing for his appointment.

In arriving at his conclusions that the statutes are confiscatory, the special master has eliminated, for the purpose of this suit only, many items said by the plaintiff to enter into the cost of manufacture and distribution of gas, which the plaintiff urges should be included in operating expenses. He has, for illustration, spread the expenses of the rate case proceedings over a period of five years, assigning only one-fifth thereof to the expenses of the year under consideration. Ordinarily this would, without question, be accepted as a wise and conservative adjustment. It would not be assumed that confiscatory legislative action would become a habit. The present enactment follows close on the heels of court decision. The excessive cost of litigating the intricate and complex questions involved in the case at bar, and in similar cases, will fall, as usual ultimately upon the individual consumer, and not upon the collective owners, whom we denominate the corporation. If it had been necessary, this court would have directed that the expense of such litigation be included in the year when incurred.

It would seem that a distinct advance had been made in the control of public utility corporations when a Public Service Commission was created, having facilities for investigation, deliberation, and regulatory control of these bodies, functioning with the aid of experts throughout the year, as contrasted with a legislative body, functioning for a brief period and concerned with the complex multiplicity of questions affecting the state and its divisions and citizens. The existence of the Public Service Commission, and the fact that it had established a rate for plaintiff by order of August 30, 1922, of $1.15, and a service rate of 2½ cents a day, or 75 cents per month, to continue for one year from October 1, 1922, equivalent to a flat rate of $1.38, did not deter the enactment of the statute under consideration.

By section 72 of the Public Service Commission Law, the Legislature empowered the commission to fix the rate to be charged by a gas corporation, and also to establish a period, not exceeding three years, during which the rate so fixed shall at all events continue in effect, and thereafter until the commission shall fix a different rate. The Court of Appeals of the state of New York, in Saratoga Springs v. Saratoga Gas Co., 191 N.Y. 123, 83 N.E. 693, 18 L. R. A. (N. S.) 713, 14 Ann. Cas. 606, referring to this statute, says that it contemplates the fixing of "a period of repose during which the rate should remain stable." This view has been generally accepted throughout the history of commission regulation, to the end that for a limited time the rate so fixed may not be disturbed, over the objection, on the one hand, of the company, or, on the other hand, of any party to the proceeding which resulted in the order.

The Public Service Commission fixed the rate and thermal content, to take effect October 1, 1922, and to continue until the 30th day of September, 1923. A certified copy of this order was served upon the plaintiff, and the plaintiff accepted, in writing, the terms and conditions of the order, and in compliance therewith filed and published, as required by law, its tariff schedules, setting forth its rates, etc., and otherwise complied with the terms and conditions of the Public Service Commission's order. This order effected a reduction of rates theretofore in effect. The acceptance and compliance with the order necessitated changes in its manufacturing plant and distributing system and in the methods of manufacturing and distribution of gas to consumers. It also necessitated changes in the adjustment of the various appliances used by the plaintiff's consumers in order to adapt them to the safe and efficient use of gas of the standard prescribed in the order referred to. This involved the expenditure of a large amount of money.

Before the expiration of this "period of repose" the Legislature by the enactment of the statutes in question, repudiated utterly the action of its agent, the Public Service Commission, acting pursuant to duly delegated power, and disregarded these terms and conditions, which had been accepted and acted upon by the plaintiff. The plaintiff contends that the fixing of the rate by the Public Service Commission and its acceptance by the plaintiff, accompanied by its expenditure of money to adjust its appliances accordingly, was a contract between the state and the plaintiff, and that the Legislature may not impair the obligation of this contract. It may be asserted that it is a well-established rule of law that a state may make a contract with an individual or with a corporation, and that such contract is entitled to the protection of the provisions of the United States Constitution as much as is a contract between individuals. It was long *376 ago said by Chief Justice Marshall "that a contract entered into between a state and an individual is as fully protected by the tenth section of the first article of the Constitution as a contract between two individuals. * * *" Providence Bank v. Billings, 4 Pet. 514, 560 (7 L. Ed. 939).

The court might be content to rest its decision sustaining the report of the special master on the conclusion that the legislation fixing the rate was confiscatory. The delegation to the Public Service Commission of certain powers of the Legislature was based upon an enlightened opinion, which recognized the fact that a body of experts, created expressly for the purpose, could better exercise a supervisory power and prescribe rates than could a legislative body with its multiplicity of responsibilities. This view does not conflict with the elemental power of the Legislature to abolish the commission or fix rates not violative of constitutional provisions.

I am of the opinion that the circumstances disclosed in this case, leading up to the making of the rate to take effect October 1, 1923, and to continue for a year, and its acceptance by the corporation, followed by the expenditure of considerable sums of money, constituted a valid contract for the period mentioned. Mobile Gas Co. v. Patterson (D. C.) 293 Fed. 208, at pages 219, 220. Its repudiation by the Legislature involves the impairment of the contract, which is properly the subject of judicial review. The court will not presume to comment upon the possible question of business integrity and honor. If the legislative body may deprive the plaintiff of its property without due process, or set at naught its contract, then all constitutional protection is gone for all persons.

In regard to chapter 899, the special master held that its provisions were separate, part of which were valid and part invalid. To this finding the plaintiff has excepted. An analysis of this statute shows that there are three correlated provisions, but there is but one object: (a) It fixes a charge for gas of a prescribed quality. (b) It establishes a standard of quality for the gas to be sold at that price. (c) It prohibits the Public Service Commission from increasing this statutory rate for gas of the prescribed quality.

It is quite apparent that but a single result was sought by the Legislature; that is to say, the fixing of a standard of gas at 650 B. t. u. supplied in New York City at an unchangeable rate. If the object was to fix the rate of gas only, and were so stated, then it would have been possible for gas of many standards and qualities, and necessarily of varying costs of manufacture, to have been furnished. But the avowed purpose of the Legislature is indicated by the establishment, without interference of the Public Service Commission, of a rate of $1 per 1,000 cubic feet of a fixed and determined thermal unit.

It is unnecessary to cite cases in support of the well-known rule of statutory construction that the title of the statute may be considered for ascertaining the legislative intent. In this case the title refers to a "charge" for gas. If the 650 B. t. u. requirement is not an integral part of the "charge for gas," then the title of the act is incomplete and misleading. The last sentence of section 67-a prohibits the Public Service Commission, "notwithstanding any other provision of this chapter," from changing the rate. If the standard were a matter intended to be dealt with separately from the rate, the Public Service Commission would, notwithstanding the prohibition, have power, under section 66, subd. 3, Public Service Commission Law, to change the statutory standard of 650 minimum B. t. u. and in that way could possibly obviate the effect of the $1 rate, by making the production of gas cost less by lowering the minimum B. t. u. The language of the statute under discussion clearly did not contemplate leaving such power separately from the rate with the Public Service Commission.

The effect really of the legislation is to return to the candle power requirement of a former statute, whereas the uncontradicted evidence shows that the modern standard should be thermal, because of the present almost universal use of gas for heating, rather than for illuminating purposes. When, therefore, a thermal standard is prescribed, it is necessarily part of the rate.

It is unnecessary further to refer to the facts regarding the enactment of these statutes, which matters are set forth in great detail in the master's opinion. The court is of the opinion that both acts, in so far as they limit the rate, are confiscatory, and therefore in violation of the United States Constitution; that the statute, chapter 899, by reason of its repudiation of the order of the Public Service Commission fixing the rate and establishing the thermal content for a year beginning October 1, 1922, further violates the provisions of the Constitution; and that chapter 899, as worded, is not separable *377 in parts, but in its entirety offends the provisions of the 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.