New York & Richmond Gas Co. v. Prendergast, 10 F.2d 167 (E.D.N.Y. 1925)

*168 *169 *170 *171 *172 *173 *174 *175 *176 *177 *178 *179 *180 *181 *182 *183 *184 *185 *186 *187 *188 *189 *190 *191 *192 *193 *194 *195 *196 *197 *198 *199 *200 *201 *202 *203 *204 *205 *206 *207 William L. Ransom and Jacob H. Goetz, both of New York City, and Frank H. Innes, of New Brighton, N. Y. (Frank H. Innes, of New Brighton, N. Y., of counsel), for plaintiff.

Charles G. Blakeslee, of Binghamton, N. Y. (Melvin L. Krulewitch, of New York City, of counsel), for defendants constituting Public Service Commission.

John Holly Clark, Jr., of New York City, for Albert Ottinger as Attorney General.

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

PER CURIAM.

This application is to confirm the report of the special master, who, after hearings and full consideration of the issues presented in this cause, in a carefully considered opinion, held that the plaintiff was entitled to judgment adjudging unconstitutional and void the provisions of chapters 898 and 899 of the Laws of 1923.

Chapter 898 provides: "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."

Chapter 899 provides: "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 provisions of this chapter, shall not allow a rate or charge in the case of such cities in excess of such sum."

After these enactments became effective, and on July 2, 1923, a temporary restraining order was granted by the District Court on the plaintiff's application and after issue was joined. The claim of unconstitutionality as to both statutes is based upon the argument that, if the rate fixed by the statute were enforced and the service charge eliminated, it would result in a confiscation of plaintiff's property. At the hearing before the master, the plaintiff, in support of its claim, offered proof as to its operating cost for the quality of gas actually manufactured. It also offered proof as to the reproduction *208 cost and present value of its property. The master found the actual net cost, inclusive of the federal income tax, aside from any return on the property, to be .9804 cents per 1,000 feet of gas sold, for 12 months ending November 30, 1924, 1.04 cents for 1923, and 1.115 cents for 1922. The fair value of the property, including the working capital and going value as of June 1, 1923, was fixed at $4,750,000, $4,785,000 as of December 31, 1923, and $5,233,869, as of October 31, 1924. In reaching these figures, the master also took into consideration the valuations of the manufacturing plant, holders, land values, buildings, mains, meters, general equipment of tools and implements.

Exceptions have been filed by both the plaintiff and defendants. The plaintiff takes exception to the failure of the master to reach a higher sum, to wit, $5,895,247 as of June 1, 1923; its contention is that this was the reproduction cost of the property of the plaintiff and that the master was in error at fixing the reproduction cost at $5,164,021, and then the value at $4,750,000. It also complains of the master fixing $700,000 for undistributed structural costs, and says that the uncontradicted evidence required an allowance for such elements of reproduction cost of at least $1,114,814; that the plaintiff should have been allowed reasonably $344,146 as working capital. The defendant Public Service Commission filed exceptions to the finding that (1) the respective acts were unconstitutional; (2) that the master has found an excessive amount as to the cost to reproduce plaintiff's property; (3) that the master failed to make deduction for accrued depreciation of plaintiff's property; and (4) that no amount should have been allowed for going concern. In addition to this, the Attorney General excepts to the master accepting as the cost to the plaintiff, as a basis, the finding in a prior rate-fixing case wherein the plaintiff's property was valued by judgment entered January 10, 1921.

The ascertainment of the fair value has been often stated not to be controlled by artificial rules. As has been said, it is not a matter of formulas, but represents the reasonable judgment having its basis in the proper consideration of all the material facts. Minn. Rate Cases, 230 U.S. 352, 33 S. Ct. 729, 57 L. Ed. 1511, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18; Ga. Ry. & Power Co., 262 U.S. 625, 43 S. Ct. 680, 67 L. Ed. 1144. The master, in arriving at the figure of the fair value, considered the plaintiff's investment reproduction cost, the cost of the fixed capital as shown by the books of account, including additions up to October 31, 1924. He took into consideration from the plaintiff's books of account an approximation of the original cost of the property, and in doing so considered what was found by the judgment of January 10, 1921, in the state Supreme Court as the fixed capital owned by the plaintiff and excluded the working capital there determined upon. To this he added the additions and betterments since that date. It was proper to add to this as part of the capital upon which a fair return should be earned the item of going concern.

The issue which was presented in the former suit was passed upon by a court of competent jurisdiction. It was between the same parties, at least it was between the plaintiff and the defendants or persons in privity with them, for an incumbent of an office is in privity with his predecessor in the same office, and he is concluded by any judgment for or against his predecessor in any suit touching the powers and privileges or duties of his office. New Orleans v. Citizens' Bank, 167 U.S. 371, 17 S. Ct. 905, 42 L. Ed. 202; Starr v. Chicago Rock Island R. R. Co. (C. C.) 110 F. 3. A fair valuation was arrived at in the proceeding before the state Supreme Court as of the date therein fixed. This issue of fact presented in the prior litigation having been tried and determined, parties to such trial are estopped, even in the second suit and in a different cause of action, where the same question is presented from contending to the contrary, and from what was thus found and determined. Cromwell v. Sac. County, 94 U.S. 353, 24 L. Ed. 195; Last Mining Co. v. Tyler Mining Co., 157 U.S. 683, 15 S. Ct. 733, 39 L. Ed. 859. The exception to the receipt of this judgment and its consideration by the master is overruled.

In fixing the fair value, the master properly allowed a suitable sum for going concern. That this may be taken into consideration as an element of property value is now settled. Omaha v. Omaha, 218 U.S. 180, 30 S. Ct. 615, 54 L. Ed. 991, 48 L. R. A. (N. S.) 1084. And this is a property which cannot be taken, except by due process of law.

The allowances fixed by the master for undistributed structural costs and for working capital are low. The uncontradicted testimony places this item at $1,114,814. The master fixed the sum of $700,000. These costs are for actual expenditures. They are inescapable outlays of money. They were principally construction overhead charges, *209 but they were actual costs, and go into the fair value, as would any material or labor costs. There is no testimony or fair inference leading to the conclusion that $700,000 only should be allowed. There must, therefore, be a modification of this allowance.

We have heretofore held that this statute fixing the rate and the standard of gas are inseparable, and that they must be read together, and that to fix a standard which may not be used with safety is an arbitrary and unreasonable exercise of police power. Kings Co. Lighting Co. v. Prendergast (D. C.) 7 F.(2d) 192, decided June, 1925. We adhere to that decision and its application to the facts disclosed by this record. Approving, as we do, with the above modifications, the valuations arrived at by the master, we likewise approve the recommendation of the master that the rate of return fixed by the statute here challenged, if applied to this plaintiff, would be confiscatory of its property. The enforcement of chapters 898 and 899 of the Laws of 1923, prohibiting a charge by the plaintiff for its gas above the respective amounts of $1.20 and $1, and forbidding a service charge, are each confiscatory, and as such are in violation of the provisions of the federal Constitution.

In Kings County Light & Gas Co. v. Prendergast, supra, we approved a rate of return of not less than 8 per cent. as a reasonable rate of annual return. We think that return on the property of the plaintiff would be a fair return on an investment, and approve the conclusion of the master as to it also.

The master's report will be modified as indicated, and then confirmed.

I. Plaintiff's exception numbered (6) to the report and opinion of the special master, dated July 3, 1925, as filed herein, is sustained, and findings numbered 74, 76, and 80, in the report of the special master, and the portion of his opinion at printed pages 30 to 32 of the report (10 F.[2d] 177) under the caption "Working Capital," and at printed page 38 of the report (10 F.[2d] 179) under the caption "Reproduction Cost Established before Me," made a part of the report and findings, are modified, so as to find, and it is the finding of this court, that the reasonable and necessary working capital of the plaintiff in its gas business as of June 1, 1923, and as of the time of the report, was at least the sum of $344,146.

II. Plaintiff's exception numbered (8) to the said report and opinion of the special master, as filed herein, is sustained; and findings numbered 73 and 76 in the report of the special master, and the portion of his opinion at printed pages 40 to 41 of the report (10 F.[2d] 180) under the caption "Undistributed Structural Costs," made a part of the report and findings, are modified, so as to find, and it is the finding of this court, that the cost to reproduce the property elements described as the undistributed structural costs, of the plaintiff, as of June 1, 1923, and as of the time of the report, amounted to at least the sum of $1,114,815, made up as follows:

  Omissions and contingencies ............  $  30,215.00
  Organization and development prior
    to construction ......................    245,000.00
  Financing ..............................    250,000.00
  Engineering and superintendence
    and general contractor's expenses
    and profit............................    351,532.00
  Interest during construction ...........    160,809.00
  Taxes during construction ..............        867.00
  Administrative, legal, and miscellaneous
    general expense during
    construction .........................     76,391.00

III. Plaintiff's exception numbered (10) to the said report and opinion of the special master, as filed herein, is sustained to the extent hereinafter stated, and finding numbered 76 in the report of the special master, and the portion of his opinion at printed page 41 of the report (10 F.[2d] 180) under the caption "Undistributed Structural Costs," made a part of the report and findings, are modified, so as to find, and it is the finding of this court, that the reproduction cost of the property owned by the plaintiff and used and useful in its gas business, but exclusive of working capital and going value, was, as of June 1, 1923, at least the sum of $4,659,835.42; as of December 31, 1923, at least the sum of $4,694,047.88; and as of October 31, 1924, at least the sum of $5,142,917.67 and that such reproduction cost, inclusive of working capital and going value, was, as of June 1, 1923, at least the sum of $5,647,981.42; as of December 31, 1923, at least the sum of $5,682,193.88; and as of October 31, 1924, at least the sum of $6,131,063.67.

IV. Plaintiff's exception numbered (11) to the said report and opinion of the special master, as filed herein, is sustained, to the extent hereinafter stated, and findings numbered 77 and 79 in the report of the special master, and the portion of his opinion at printed page 42 of the report (10 F.[2d] 180) under the caption "Conclusions as to Value," *210 made a part of the report and findings, are modified, so as to find, and it is the finding of this court, that the present value of the plaintiff's property used and useful in its gas business was, as of June 1, 1923, at least the sum of $5,233,960; as of December 31, 1923, at least the sum of $5,268,960; and as of October 31, 1924, at least the sum of $5,717,829 and that upon such sums, respectively, the plaintiff was entitled to earn, through rates chargeable by it for gas, a fair return.

V. Plaintiff's exception numbered (13) to the said report and opinion of the special master, as filed herein, is sustained to the extent hereinafter stated, and finding numbered 80 in the report of the special master is modified, so as to find, and it is the finding of this court, that the cost to the plaintiff of all of the fixed capital required by it, as shown by its books of account, together with working capital in the amount of $344,146, and going value in the amount of $644,000, was, as of December 31, 1922, $4,661,498.86; as of June 1, 1923, $4,727,697.30; as of December 31, 1923, $4,937,427.55; and as of October 31, 1924, $5,281,824.33.

VI. The other exceptions filed herein by the plaintiff, and all the exceptions filed by the respective defendants to the said report and opinion of the special master, are hereby severally overruled.

VII. The report and opinion of the special master, filed herein July 3, 1925, as modified in the respects and to the extent herein indicated, are hereby confirmed.

VIII. A maximum rate of $1 per 1,000 cubic feet of gas sold by the plaintiff, in conjunction with or apart from the standard of 650 minimum British thermal units per cubic foot, is illegal and void, because in contravention of the Fourteenth Amendment of the Constitution of the United States, and the provisions of chapter 480 of the Laws of 1910 of the state of New York, known as the Public Service Commission Law, as amended and supplemented, and of chapter 899 of the Laws of 1923, in so far as they prohibit the plaintiff from charging or receiving for gas manufactured and sold in the borough of Richmond, county of Richmond, city of New York, a sum per 1,000 cubic feet in excess of the rate of $1 per 1,000 cubic feet, in conjunction with or apart from the said standard, are each likewise illegal and void.

IX. A maximum rate of $1.20 per 1,000 cubic feet of gas sold by the plaintiff is illegal and void, because in contravention of the Fourteenth Amendment of the Constitution of the United States, and the provisions of the said chapter 480 of the Laws of 1910, as amended and supplemented, and of the order of the Public Service Commission of August 30, 1922 (both as amended and modified by chapter 898 of the Laws of 1923), only in so far as they operated to prohibit the plaintiff from making or imposing a charge for gas supplied in excess of a rate of $1.20 per 1,000 cubic feet or in excess of the graduated rates prescribed by the said order of the Commission of August 30, 1922, are each likewise illegal and void.

X. A standard of gas, required to be furnished by the plaintiff, of not less than 650 British thermal units per cubic foot, in conjunction with a rate not exceeding $1 per 1,000 cubic feet of gas, is likewise illegal and void, and the provisions of the said chapter 480 of the Laws of 1910, as amended and supplemented, and of chapter 899 of the Laws of 1923, in so far as they prohibit the plaintiff from furnishing gas of a standard less than 650 British thermal units per cubic foot, measured under normal conditions of temperature and atmospheric pressure, in conjunction with the rate prescribed thereby, are likewise illegal and void.

XI. The provisions of chapter 480 of the Laws of 1910, as amended and supplemented, and of chapter 899 of the Laws of 1923, in so far as they prohibited or prohibit the plaintiff from furnishing gas of a standard less than 650 British thermal units per cubic foot, without affording the plaintiff an opportunity and a reasonable time within which to make, or to have its consumers make, such readjustment of and changes in the gas appliances of the consumers as might be necessary in order to adapt them for the safe and efficient use of gas of such standard and to protect the consuming public against the very obvious and serious dangers to human life and property, or in so far as they denied to the plaintiff a safe and adequate judicial review of the legality thereof without incurring the penalties provided by the said statutes, are likewise illegal and void.

XII. The said chapter 480 of the Laws of 1910, as amended and supplemented, or any other provisions of law, or any regulation prescribed thereunder, in so far as it prohibits the plaintiff from putting into effect forthwith a rate for gas distributed or sold by it less than that which will afford to it just compensation therefor, is likewise illegal and void.

XIII. The plaintiff has no adequate remedy at law for the injury which will result *211 from the enforcement of the said acts, and such injury will be irreparable.

XIV. The defendants William A. Prendergast, William R. Pooley, Charles Van Voorhis, George R. Van Namee, and George R. Lunn, constituting the Public Service Commission of the state of New York, and Albert Ottinger, as Attorney General of the state of New York, and each of them, and each of their successors in office, their deputies and attorneys, and their and each of their successors, servants and employees, and any and every person acting or purporting to act under or by virtue of the authority of chapter 480 of the Laws of the state of New York of 1910, as amended and supplemented, or any other or different provisions of law, be, and each of them is, hereby restrained and enjoined:

(1) From in any way enforcing or attempting to enforce against the plaintiff a rate for gas furnished by the plaintiff to its general consumers of not more than $1 per 1,000 cubic feet of gas sold, under the provisions of the said acts or otherwise.

(2) From in any way enforcing or attempting to enforce against the plaintiff the provisions of the said acts, in so far as they prohibit the plaintiff from charging or receiving for gas furnished in the borough of Richmond, county of Richmond, city of New York, a sum per 1,000 cubic feet in excess of $1, in conjunction with or apart from the said standard of gas.

(3) From in any way enforcing or attempting to enforce against the plaintiff a rate for gas furnished by the plaintiff to its general consumers of not more than $1.20 per 1,000 cubic feet of gas sold, under the provisions of the said acts or otherwise, and from in any way enforcing or attempting to enforce, against the plaintiff, the provisions of the said chapter 480 of the Laws of 1910, as amended and supplemented (and chapter 898 of the Laws of 1923), and the order of the Public Service Commission of August 30, 1922, only in so far as they operated to prohibit the plaintiff from making or imposing a charge for gas supplied in excess of a rate of $1.20 per 1,000 cubic feet, or in excess of the graduated rates prescribed by the order of the commission of August 30, 1922.

(4) From enforcing or attempting to enforce against the plaintiff a standard of gas furnished by the plaintiff of not less than 650 British thermal units per cubic foot, or the provisions of the said acts in so far as they prohibit the plaintiff from furnishing a gas of a standard less than 650 British thermal units per cubic foot, measured under normal conditions of temperature and atmospheric pressure.

(5) From bringing any action or proceeding to enforce the said penalties against the plaintiff, or by mandamus or injunction or otherwise, to compel compliance by the plaintiff with the provisions of the said acts, or any of them, relative to the said maximum rates or charges.

(6) From doing any act or thing interfering with the right or authority of the plaintiff forthwith to furnish gas of any standard which it may lawfully furnish, and to charge or receive for gas furnished by it any rate which it may lawfully charge or receive, any provisions of the said acts or of any regulations prescribed thereunder relative to the rate to be charged and received or to the standard of gas to be furnished by the plaintiff to the contrary notwithstanding.

XV. At any time while the injunction herein granted remains in force, any party hereto, or his or its successors or assigns, may apply by notice at the foot hereof, to vacate, modify, or extend the foregoing injunction because of any change of circumstances since the entry hereof, or for any additional relief to which he or it may deem himself or itself entitled by reason of any acts or events occurring after the date of this decree.

XVI. Nothing contained herein shall be construed to limit, prejudice, or restrict the exercise of the jurisdiction and power of the Public Service Commission of the state of New York under chapter 480 of the Laws of 1910, as amended and supplemented, known as the Public Service Commission Law, or any other provisions of law, not inconsistent with the provisions of this decree.

XVII. The plaintiff shall recover of and from the defendants its taxable costs and disbursements, including the sum fixed and allowed as the compensation of the special master herein, to be equally borne and paid by the defendants, in accordance with the rules of the Supreme Court of the United States on this subject.