8. Gas 14(1) Conclusion that prescribed standard was unreasonable supported by evidence. Master's finding that standard for gas pre scribed by Laws N. Y. 1923, c. 899, 650 British thermal units per cubic foot, measured under normal conditions of temperature and atmospheric pressure, was unreasonable and ar modified 172479 bitrary, and so unwarranted by police power, 712 Ed.421. 47. Slip by. 199. 47-Sup KINGS COUNTY LIGHTING CO. v. PREN DERGAST et al. held to have support in evidence. 9. Gas 14(1)—Reasonable rate of return held 8 per cent. A reasonable rate of return for a gas com (District Court, E. D. New York. June 30, pany, at present time, is not less than 8 per 1925.) 3. Gas 14(1)-In fixing value of property, allowance for depreciation held sufficient, under evidence. In fixing fair value of gas company's property for purpose of determining reasonableness of statutory rates, held, under the evidence, sufficient was allowed for depreciation. 4. Public service commissions 7-Enhanced cost of construction of plant considered on fair value for rates. Enhanced cost of construction of public utility's plant is to be considered in finding fair value for determining reasonableness of statutory rate. 5. Public Service Commissions 7 - Going concern property for purpose of rate fixing. In fixing rate for public utilities, the ele ment of going concern is regarded as property right, independent of the franchise or any good will. 6. Gas 14(1)-Rate and thermal unit standard prescribed for gas companies inseparable. Rate and thermal unit standard prescribed by Laws N. Y. 1923, c. 899, for gas companies in New York City, are inseparable. 7. Gas 14(1)—Fixing impracticable and unsafe thermal unit standard for gas is unreasonable exercise of police power. It is an arbitrary and unreasonable exercise cent. 10. Gas 14(1)-Rate limited for gas companies held confiscatory as to plaintiff. Maximum rate of $1 per 1,000 feet, prescribed by Laws N. Y. 1923, c. 899, for New York City gas companies, held confiscatory as to plaintiff, under conclusions as to value of its property. In Equity. Suit by the Kings County Lighting Company against William A. Prendergast and others, constituting the Public Service Commission of New York, and another, to have declared unconstitutional and void an act of the Legislature of the state of New York, fixing the rate to be charged for gas, within chapters 898 and 899 of the Laws of 1923. On exceptions to the report of the special master. Report approved and affirmed. The opinion of Special Master Almeth W. Hoff, dated April 15, 1925, is as follows: "This is a suit in equity, brought by the plaintiff, challenging the constitutionality of an act of the Legislature of the state of New York, known as chapter 899 of the Laws of 1923, relating to the price and quality of gas furnished in cities of 1,000,000 or more. The plaintiff is one of the corporations affected by the said act, and the defendants are public officers charged with duties in respect to the enforcement thereof. "Upon the institution of the suit, the plaintiff applied for and obtained from the court an injunction pendente lite. This action was referred to me, as special master, by an order of Hon. Marcus B. Campbell, United States District Judge for the Eastern District of New York, dated October 11, 1923, directing me to take the testimony and evidence upon the issues herein, make all needed computations, and fully hear the facts and report findings of fact and conclusions of law, together with the evidence. "In accordance with the order and fol of police power for statute to fix an impractica- lowing conferences with the District Judge, ble and unsafe thermal unit standard for gas to be furnished by gas company. for the purpose of arranging hearings, so as not to conflict with sessions in other like 7 F.(2d) 192 cases, it was agreed that hearings should be held two days a week, and in accordance therewith, and by agreement of counsel, hearings were begun on December 4, 1923, and continued until June 10, 1924, in which there were taken more than 4,000 typewritten pages of testimony and 142 exhibits introduced by the parties. With my report I file a typewritten copy of transcript of the testimony, together with the exhibits. "In accordance with the requirements of the order of my appointment and the practice and trial of rate suits in equity, I submitted to the counsel for all parties on February 26, 1925, a preliminary draft of my report and findings. On March 5, 1925, I received from counsel written and verbal suggestions and criticisms regarding such preliminary drafts. Thereafter I completed and now submit and file my report and opinion in its present form, which should be deemed to embody my findings and conclu sions. "Prior to the taking of testimony and during its progress, through their representatives, defendants were afforded by the plaintiff full opportunity to inspect and examine the property, works, accounts, and records of the plaintiff, and therefore the defendants were in a position to secure and present to me any matters they deemed of importance on the questions before me. In addition, accompanied by counsel and engineers of the parties, I visited and inspected the manufacturing plant, shops, and holder station and territory served by the plain tiff. "This is a suit to test the constitutionality of chapter 899 of the Laws of 1923, approved by the Governor June 2, 1923, which inserted in the Public Service Commission Law (chapter 480 of the Laws of 1910) a new section, as follows: ""Sec. 67-a. Charge for Gas in Cities of One Million or More. A gas corporation engaged in the business of manufacturing, furnishing or selling illuminating gas in a city containing a population of one million or over shall not charge or receive for gas furnished or sold in such city a sum per one thousand cubic feet in excess of one dollar, nor furnish in such city gas of a standard less than six hundred and fifty British thermal units per cubic foot, measured under normal conditions of temperature and atmospheric pressure. The Publie 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.' 7 F. (2d)-13 "Preliminary to the passage of this act, the Legislature did not cause any investigation to be made by a special legislative committee or otherwise, or a report concerning the facts to be made by the Public Service Commission, the legislative agency charged with the duty, among others, to keep informed with respect to utilities under its jurisdiction. At the time of the enactment of this statute, the plaintiff was charging $1.30 per 1,000 cubic feet, as a maximum rate, in compliance with an order of the Public Service Commission, made on August 30, 1922, after an investigation and hearings by the commission, and was supplying gas of a standard fixed by the order of such commission at 537 British thermal units per cubic foot, with a minimum of 525, and has so continued under the temporary injunction herein granted. "The plaintiff bases its case on the contention that the statute, if enforced, would be confiscatory, and deprive it of its property without due process of law, contrary to the Fourteenth Amendment to the Constitution of the United States. The primary question herein is whether the rate so prescribed will yield the plaintiff a fair return upon the fair and reasonable value of its property A further employed in the public service. question relates to the standard attempted to be fixed by the statute in question. "As to the rate question, there need to be determined what is a fair return, what is the fair and reasonable value of the property, what are the proper operating expenses, and whether such expenses will leave a sufficient margin out of the proposed rate of $1 per 1,000 to afford a fair return on the fair and reasonable value of the property used and useful in the public service. "As to the standard, it is to be determined whether it may be considered independent of and as separable from the rate provisions of the statute, and, if so, whether it is reasonable and within the police power of the Legislature to enact, or whether it is an arbitrary enactment, not justified on any of the grounds comprehended within the legitimate police powers of the state. "Territory, Plant, and Property of Plain tiff. "The plaintiff is a corporation organized under the Transportation Corporations Law of New York and engaged in manufacturing and selling gas for public and private use in the Thirtieth ward and a small portion of the Thirty-first ward in the borough of Brooklyn. This territory constitutes a substantial portion of Brooklyn, and, because of the extension of rapid transit facilities has, since the war, had exceptional residential development, which is likely to continue for some years. "Plaintiff's gasworks or manufacturing plant is located on a parcel of land fronting on the New York Bay, extending to First avenue, between Fifty-Fourth and Fifty-Fifth streets, having a total area of 462,208 square feet, of which 286,454 square feet are used in the conduct of its business. The balance is leased to the Morse Dry Dock & Repair Company, no consideration being asked or given for such leased portion in making any determinations in this suit. At the works or plant site there are seven gas generators of a combined rated capacity of 17,400,000 cubic feet of gas per 24 hours, together with other buildings and equipment incidental to the operation of a gas plant. Its gas holders, shops, yards, and booster station are located on four parcels of land at or near Ninth avenue and Sixty-Fifth street, having a combined area of 139,843 square feet. Its gas storage holders have a capacity of 2,500,000 cubic feet. It was brought out on the hearing before me that, in order to meet the demands upon it and to adequately serve its customers, the plaintiff had contracted for and was erecting a new storage holder of 5,000,000 cubic feet capacity, but in making the findings and determinations herein no consideration is given or allowance made for the new holder. This applies likewise to a new office building and to a new booster station in course of construction. On June 1, 1923, plaintiff had approximately 205 miles of gas mains laid in the public streets, connected with the premises of its consumers by 26,168 service pipes, and had installed on such premises 50,717 gas meters. The evidence shows, and it was admitted before me, that the plant, machinery, and equipment of the plaintiff have been well maintained and are in efficient operating condition for the economical production and distribution of gas. "Rate of Return. "The development of the plaintiff's territory and the consequent demands for new and additional service have required and will continue to require the company to raise and invest substantial amounts of new capital in enlargement and extensions of its facilities. The situation peculiarly, therefore, is one where an adequate return is essential to the company and to the public. Additional capital must be provided to enable the company to meet the demands arising from the growth of population, but this capital will be difficult to raise if the rates charged do not afford a sufficient return to pay the annual charges of present investors and to afford confidence that such charges will continue to be paid. It appears to be settled that a utility is entitled to such rates as will afford a return sufficient to keep and attract capital, giving consideration to the risks of the business and to the return that capital, through open competition, can secure in other channels. The Supreme Court of the United States has said in Bluefield Waterworks & Improvement Co. v. Public Service Commission, 262 U. S. 679, 692, 693, 43 S. Ct. 675, 679 (67 L. Ed. 1176): "A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties; but it has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures. The return should be reasonably sufficient to assure confidence in the financial soundness of the utility, and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties.' "While the Supreme Court, in 1909 (Willcox v. Con. Gas Co., 212 U. S. 19, 50, 29 S. Ct. 192, 53 L. Ed. 382, 48 L. R. A. [N. S.] 1134, 15 Ann. Cas. 1034), held that the Consolidated Gas, Company of New York was entitled to 6 per cent. as a fair return, it is generally recognized that, since the World War, the return expected and obtained by capital has materially increased. As said by the Supreme Court in a more recent case (Lincoln Gas Co. v. Lincoln, 250 U. S. 256, 267, 268, 39 S. Ct. 454, 458, 63 L. Ed. 968), after noting that costs of labor and supplies had materially advanced, 'annual returns upon capital and enterprise the world over have materially increased, so that what would have been a proper rate of return for capital invested in gas plants and similar public utilities a few years ago furnishes no safe criterion for the present or for the future.' 7 F.(2d) 192 "The plaintiff called Edward F. Hayes, who is a member of Blair & Co., bankers, with experience in the sale to investors of securities, including utilities, and who handled the last issue of bonds of the plaintiff. He gave it as his opinion that, by comparison with other undertakings in New York City and the current requirements for capital, it was necessary for the plaintiff to show earnings of at least 8 per cent. in order to maintain and support its credit and to enable it to secure new capital in competition with the requirements for capital. He further stated that, unless the company had such earnings as to afford an 8 per cent. return, the smallness of the margin over its fixed charges would adversely affect the confidence of new investors. The bonds sold for the company by the witness yielded 62 per cent. to the investor. In 1921, and following, the plaintiff sold to investors 8 per cent. cumulative preferred stock, and in the early part of 1924 it offered and sold 7 per cent. cumulative preferred stock. While the defendants called no witnesses on rate of return, they introduced tabulations showing offerings in utility securities and transactions in such securities on the New York Stock Exchange in 1924. Consideration of these tabulations indicates that the testimony of Mr. Hayes was sound, and I therefore conclude that 8 per cent. is a fair and proper return to adopt in this case for the plain tiff. "Ascertainment of Value. "This case presents the question of alleged confiscation of property and therefore involves a determination upon the elements or items of that property and the value to be adopted therefor. A company, such as the plaintiff, is entitled to earn a fair return upon the fair value of its property, and it is entitled to protection against unjust or unreasonable interference with such right by statute, or administrative or other governmental ruling. In Cotting v. Kansas City Stockyards Co., 183 U. S. 79, 91, 22 S. Ct. 30, 35 (46 L. Ed. 92), Justice Brewer said: "As to parties engaged in performing a public service, while the power to regulate has been sustained, negatively the court has held that the Legislature may not prescribe rates which, if enforced, would amount to a confiscation of property. But it has not held affirmatively that the Legislature may enforce rates which stop only this side of confiscation and leave the property in the hands and under the care of the owners without any remuneration for its use. It has declared that the present value of the property is the basis by which the test of reasonableness is to be determined, although the actual cost is to be considered, and that the value of the services rendered to each individual is also to be considered. It has also ruled that the determination of the Legislature is to be presumed to be just, and must be upheld unless it clearly appears to result in enforcing unreasonable and unjust rates.' "In Willcox v. Consolidated Gas Co., 212 U. S. 19, 52, 29 S. Ct. 192, 200 (53 L. Ed. 382, 48 L. R. A. [N. S.] 1134, 15 Ann. Cas. 1034), the court said: "And we concur with the court below in holding that the value of the property is to be determined as of the time when the inquiry is made regarding the rates. If the property, which legally enters into the consideration of the question of rates, has increased in value since it was acquired, the company is entitled to the benefit of such increase.' "And in Bluefield Co. v. Public Service Commission, 262 U. S. at page 690, 43 S. Ct. 678 (67 L. Ed. 1176) the court said: ""Rates which are not sufficient to yield a reasonable return upon the value of the property used at the time it is being used to render the service are unjust, unreasonable, and confiscatory, and their enforcement deprives the public utility company of its property in violation of the Fourteenth Amendment.' "It appears to be the settled rule that protection will be afforded against a rate that does not afford a fair or reasonable return upon the fair value of property as of the time of the inquiry. This may well mean that a new valuation must be ascertained whenever and as often as a change of rate or other interference is proposed. It might be more satisfactory of prompt determination if value were a matter of fixed accounts, capable of immediate conclusion whenever a rate question involves ascertainment of valSuch a method, however, has not been recognized, and therefore, under the rulings, it is necessary to determine each time the value of the property as of the time when it is alleged that confiscation is threatened. ue. "In the Minnesota Rate Cases, 230 U. S. 352, at page 434, 33 S. Ct. 729, 754 (48 L. R. A. [N. S.] 1151, Ann. Cas. 1916A, 18), the court has said: ""The basis of calculation is the "fair value of the property" used for the convenience of the public. The ascertainment of that value is not controlled by artificial rules. It is not a matter of formulas, but there must be a reasonable judgment having its basis in a proper consideration of all relevant facts. "The parties herein have presented the facts as to what may be termed the historical or investment cost of the physical properties, and the plaintiff has presented in detail the reproduction value of such properties as of June 1, 1923. The defendants have not aided the inquiry by evidence of such reproduction value, other than through cross-examination of the plaintiff's witnesses. Each side also produced an expert witness as to fluctuations in prices and price levels, and probable future tendencies thereof, to aid in ascertaining the present value of the property that is fair or reasonable as a rate base. In the opinion of both of these experts there is likely to be little recession from the price levels at the time of their testimony, either in respect to labor or materials, and I have accepted this theory in consideration of values herein and of continuation of operating expenses. "The Supreme Court has indicated the elements that should be considered in arriving at a present rate basis, from Smyth v. Ames, 169 U. S. 466, 18 S. Ct. 418, 42 L. Ed. 819, to the many cases that have reached that court within recent years. The tendency has been to give increased consideration to reproduction cost new as a basis for determining fair value. As a fixed rule has not as yet been laid down, I have given consideration to the historical or investment cost of the property, to the reproduction cost new, and I have undertaken to find a present fair value, as well as a finding as to going concern value, in order that the court may have before it these facts upon any determination of the principles that may be urged by the parties. With respect to these values, I have also given consideration to the degree of maintenance, present conditions, the range of price levels, as well as the fact that a considerable portion of the property has been installed during the period of high prices. "Historical Cost of Structures. "The defendants contend that the fair value should be based upon the historical costs, exclusive of land, which it is conceded should be accepted at its present value. While the cases do not justify any such strict limitation in ascertaining value, nevertheless it is a proper inquiry, in seeking to base a prop er judgment, to examine original or historical costs, as well as all matters which may aid in striving to arrive at a fair determination. "The plaintiff company, on or about July 1, 1904, merged with and became the successor of the Kings County Gas & Illuminating Company. The books and exhibits show that the total cost to the predecessor company of property existing on July 1, 1904, exclusive of land, was $2,302,997; that between July 1, 1904, and December 31, 1923, net additions to fixed capital amounted to $4,198,604, making $6,501,601, which may be said to be the original or historical cost of the structural property and plant of the plaintiff, so far as the same may be fairly ascertained, exclusive of land and working capital. "Reproduction Cost New of Structures. "The plaintiff produced evidence of the reproduction cost new of its property as of June, 1923. It called witnesses who testified at length and submitted exhibits giving full details of their appraisals. "Buildings.-Henry R. Burt, with a long experience in the construction of buildings in and around New York City, testified that the reproduction cost new of the buildings was $752,134. "Gas Mains and Service Pipes.—John H. Duncan, who for several years has had the contract with the plaintiff for the laying of mains and services, testified with respect to the distribution system, basing his testimony upon his actual experience in the laying of a considerable part of such distribution system. He testified that the reproduction cost new of mains was $2,898,617, and of service pipes $1,109,686. The size and length of mains and services were testified to by the former superintendent of distribution of the company, who through his long service with the company was personally familiar with the entire distribution system. Mr. Duncan further estimated that the cost of restoring present street paving over gas mains and services was $1,444,347. A very great part of such paving, however, was laid after the installation of the distribution system, and, while cost of restoring existing paving over mains might conceivably be a part of reproduction cost new of a distribution system as of a particular date, the plaintiff has asked that there be included in the value of the company's property only the cost actually incurred by the plaintiff, from time to time, in restoring such paving as had actu |