10 F.(2d) 167 tion, which may include some payment for the going value up to 1901, care should be taken to avoid any duplication, in calculating the present worth of all the elements now possessed, from whatever source derived. This I have been careful to do, in reaching the sum of $644,000, instead of the larger sums shown by the uncontradicted evidence. I am impressed, however, with the fact that there is not, and cannot be, any mathematical formula or method for computing the amount and present worth of going value. In the absence of demonstration through an actual purchase and sale transaction, under fair conditions, its ascertainment must be a matter of competent business judgment as to what a purchaser would be willing to pay for such elements and properties, rather than undergo the costs of acquiring them anew. It is the common necessity and tice, in the business world, to make estimates of the present worth of intangible properties which are no less difficult than any estimate in this case. The courts often have to make such ascertainments, as best they can, from all of the evidence, when dispute arises. prac Present Value of Plaintiff's Property-Original Cost. Judge Sewell found, from the books of account of the plaintiff, after consolidation in 1901, that an item appeared therein "Plant and Property" $2,337,234.24, which I take as an approximation of the original cost of the property to the plaintiff. Judge Sewell found that the cost to the plaintiff of all fixed capital acquired by it, exclusive of working capital, per the books of account on January 1, 1920, amounted to $3,393,720.89; adding net additions to October 31, 1924, $900,089.44-total cost of fixed capital to plaintiff, $4,293,810.33. Reproduction Cost Found in the Prior Suit. Judge Sewell found that the reproduction cost of the plaintiff's property, exclusive of land and working capital, was as follows: January 1, 1914, not less than....$2,425,000.00 The plaintiffs in this action claim for reproduction cost as of June 1, 1923, excluding land, working capital, undistributed structural costs, and going value, $3,511,496.00. As above discussed in detail, the testimony before me justifies a finding by me of re- .... Mains and services To which should be added: Minimum reproduction cost, with- .$ 197,836.55 2,354,152.78 604,300.00 150,000.00 225,000.00 32,014.00 275,000.00 644,000.00 .$4,482,303.33 The testimony presented by the plaintiff shows that the property is maintained in good condition and is 100 per cent. efficient in performing its functions in the manufacture and distribution of gas. This testimony, however, shows that an additional cost would be necessary for the purpose of putting the properties "in the condition that they were in when new in a plant which was in full practical operation," or the "cost to put the present buildings as they now exist into a condition equal to new," as explained by Mr. Burt and by Col. Miller. The aggregate of such cost amounts to the sum of $18,281.91, which must be deducted from the reproduc As that the properties were maintained in a high state of operating efficiency, through the making of repairs, renewals, and replacements as needed. If any further depreciation had in fact taken place as to this plant and distributing system, the defendant public officers would doubtless have presented evidence as to its existence and amount. Judge Campbell said in the Brooklyn Union Gas Co. Case, they had "a large corps of experts under their control," and "could have easily shown the fact, if such it be." They must be deemed to have furnished to this court proof of any facts, within their knowledge, which would tend to refute or diminish any of the plaintiff's claims. In the prior case of the plaintiff before Judge Sewell, up on the facts there found, the court does not appear to have made any deduction for theoretical or accruing depreciation. Counsel for the plaintiff do not concede that even the admitted costs of restoration to condition new should be deducted. They say that these sums represent only the amount of deferred maintenance at any time observable and not yet made good in the normal course. Nevertheless, under the decisions, I deduct the sums so testified to, and point out that no proofs were presented which showed the existence of any depreciation not counteracted by the continuous process of repair and replacement. The mere lapse of time since this plant was established or the units have been installed has not been shown to have decreased the value of the property as a whole as it stands to-day. Undistributed Structural Costs. This leaves for consideration undistributed structural costs, which the plaintiff claims amounts to the sum of $1,114,814. This amount was estimated by Col. Miller and rested largely upon his opinion as an expert in the light of his experience and qualifications, but was not charged to specific accounts in the plaintiff's books or sustained by any mathematical calculation of the expenditures comprising that amount. While it is probably not essential to establish the fact that the plaintiff itself expended such an amount and charged it to capital, for, as I understand it, the undistributed structural costs represent costs which would normally be incurred in the creation of a plant and physical property similar in all respects to those of the plaintiff, nevertheless I feel that, in an action such as this, instituted to determine the confiscatory effect of certain statutes, it is desirable, within reason, possibly to understate rather than overstate the element of value described in the proofs in this case as undistributed structural costs. Taking into consideration the range of percentages which have been allowed for this item in the various cases cited in the briefs of the parties, in view of all the probative evidence before me, I have concluded to fix and do hereby fix as a proper allowance for such undistributed structural costs the sum of $700,000. I accordingly find from the evidence presented that the reproduction cost new as of June 1, 1923, of the plaintiff's property used and useful in the manufacture and distribution of gas of every kind and description, with proper allowance for all items after depreciation, is: Total as of June 1, 1923..... $5,164,021.42 In addition to such sum, the plaintiff has made further expenditures of money for additions to its plant applicable to the present value of its used and useful property as follows: The net sum of $34,212.46 during the period from June 1, 1923, to December 31, 1923, and the further net sum of $448,869.79 during the period from January 1, 1924, to October 31, 1924. I therefore further find that such costs for additions should be added to the reproduction cost of June 1, 1923, as above found, and that accordingly the total reproduction cost of the plaintiff's property is as follows: As of December 31, 1923. ..... $5,198,233.88 5,647,103.67 Upon the trial, the plaintiff offered to prove that there exists an aggregate deficiency in the plaintiff's earnings, under the period when the plaintiff was prevented by rates charged by the plaintiff during the the acts of public authorities from establishing just and reasonable rates, that is, from at least January 1, 1917, to December 31, 1921, below an 8 per cent. return upon the reproduction value of the plaintiff's used and useful property, as of June 1, 1923, after taking into account additions thereto and withdrawals therefrom at actual cost, amounting to at least $1,947,733.29. The plaintiff offered further to prove that such deficiency below an 8 per cent. return upon the minimum investment in the plaintiff's property used and useful in the gas business, amounted, during such period, to at least $665,845.60. The plaintiff urged that it is entitled to have such deficiency added to the value of its property upon which it is entitled to a return, until such time as such deficiency shall have been amortized through earnings under rates making proper provision therefor. For reasons stated by me upon the trial, and upon the authority of the ruling in New York & Queens Gas Co. v. Prendergast (D. C.) 1 F. (2d) 351, I declined to receive such proof as relevant. Conclusions as to Value. Taking all the above factors into consideration, that is to say, original cost to 10 F.(2d) 167 plaintiff, investment, reproduction cost, cost judicious As of June 1, 1923, not less than $4,750,000.00 As of October 31, 1924, not less 4,785,000.00 5,233,869.00 That such amounts on such respective dates constitute the rate base on which the plaintiff is entitled to a fair and reasonable return. Operating Expenses. The operating cost and taxes for the years ending December 31, 1922, December 31, 1923, and the nominal year ending November 30, 1924, were established by the plaintiff's witnesses and books of account and were not controverted by the defendants. The defendants, however, claim that certain items should be eliminated from these operating expenses, which I will now consider: First. Salary paid to Mr. Davidson, the company's comptroller, it being urged by defendants that such services were of such questionable nature as not to inure to the benefit of the company's consumers; also that the company was not operated, in the opinion of the defendants, in the most economical manner in so far as relates to the size and number of the company's gas sets. These two objections involve substantially the same question, namely: Did the management conduct its affairs with proper discretion and sound business judgment? In the absence of evidence to that effect, I assume that the management conducted its affairs discreetly and with the sound business judgment that the ordinarily prudent business man would exercise in the conduct of his own affairs. In Consolidated Gas Co. v. Newton, Judge Learned Hand said: "As to the necessity of having 7 cars, I will rule here, as elsewhere, in the absence of some evidence showing that they were unnecessary, or that the officers abused their powers that their judgment must stand prima facie. As in analogous situations, given the discretion, its exercise must be shown to have been in as in other cases where the matter rests in their discretion, I think that a presumption exists that it is well exercised until the contrary is shown." Consolidated Gas v. Newton (D. C.) 267 F. 255; State Pub. Utilities v. Springfield Gas, 291 Ill. 234, 125 N. E. 891; Southwestern Bell Telephone Co. v. P. S. C. Missouri, 262 U. S. 276, 43 S. Ct. 544, 67 L. Ed. 981, 31 A. L. R. 807. Therefore, under the evidence, I have not eliminated from the costs of operation the salary paid to Mr. Davidson, or any portion of the costs of operation which may be asserted by some to have been paid by virtue of operating the enterprise in an alleged uneconomical manner. The Public Service Commission has the power to order improvements in the property and operations of the plaintiff, if any feature of them be shown to be unreasonable, improper, inefficient, or unsafe. Mr. Welsh testified that the commission had not issued any order to the plaintiff other than the rate and standard orders which were placed in evidence before me. The men who are skilled in the operation of a gas company must be presumed to have done their best, conscientiously and effectively, until the contrary is shown by competent evidence. Items of actual outlay may not be eliminated by the court merely because one or both of the defendants wish to cut out something. A case of this sort does not call for minute paring of items protested but not attacked by proofs. This is particularly true as to items to which the defendant commission has raised no question in the course of its continuous supervision of the company's operations. Second. The expenses of rate litigation ("regulatory commission expenses") have been apportioned by the plaintiff to the operating costs for 1923, and defendants assert that they should be eliminated in a confiscation suit. Judge Learned Hand, in Consolidated Gas v. Newton (D. C.) 267 F. 255, allowed these expenses and spread them. Judge Mayer, in N. Y. & Queens v. Newton (D. C.) 269 F. 290, while admitting that he should follow Judge Hand, did not allow them in a suit involving confiscation. On the other hand, in the Brooklyn Borough Gas Co. Case, 17 N. Y. State Dept. Rep. 81, 113, Ex-Justice Hughes, sitting as a referee to hear and determine, allowed the rate case expenses and spread them over a period of years, and in the latest New York & Queens Gas Co. Case (D. C.) 1 F. (2d) 351, the master eliminated certain costs, such as interest on unpaid taxes, federal income tax, and expenses of the rate case in the federal court, but allowed the expenses in the rate proceedings before the Public Service Commission, which he spread over a period of years. While the special master's report in the last-mentioned case was confirmed by Judge Winslow upon final hearing, he expressed the view that "it may be debated as to whether some of these eliminations were proper," and, referring to the rate case expenses, that, "if it had been necessary, this court would have directed that the expense of such litigation be included in the year when incurred." In Brooklyn Union Gas Co. v. Prendergast Case (D. C.) 7 F. (2d) 628, decided June 25, 1925, Judge Campbell, for the purposes of that suit, approved the special master's findings, which did not include in the operating expenses, for testing the constitutionality of the act, the rate case expense which was charged in full to the year's operations. I feel, however, that the item of rate case expenses in operating costs, as spread by the plaintiff, may properly be allowed. Third. Uncollectible Bills.-The plaintiff includes as part of its cost of production and distribution the item of uncollectible bills, being the amounts of consumers' bills remaining due and unpaid, and according to the designation of the item presumably regarded by the plaintiff as uncollectible. This item in the year ending December 31, 1922, amounted to $4,984.56 or per M cubic feet .00788 cents; for year ending December 31, 1923, $5,896.63, or per M cubic feet .00849 cents and for the nominal year ending November 30, 1924, to $5,893.89, or per M cubic feet .8270 cents. I shall follow the practice established in this district in the other gas rate cases, and accordingly do not eliminate this item; no charge for interest on the uncollectible bills having been claimed. Fourth. Miscellaneous General Expenses. -These expenses include the following items, all of which I allow in cost of operation: Expenses incurred in connection with issue of preferred stock, and with listing the plaintiffs' bonds on the New York Stock Exchange, services of trust company as trustee and as transfer agent; payment of $100 to regular Democratic organization of Richmond County for advertising and tickets to annual ball; cost of memberships in associations devoted to technical and commercial development of gas industry; directors' ex penses when traveling in the interests of the plaintiff. The good management of the plaintiff having in my opinion been shown, I consider it a fair presumption that those disbursements were bona fide and legitimately made for the benefit of the plaintiff and its consumers. Fifth. Insurance and Automobile Expenses.-The defendants claim that the expenses charged to operation and incurred for the payment of insurance premiums on liability and compensation insurance, as also the stable and garage expenses, should, as to at least 25 per cent. thereof, be charged to fixed capital, and that to that extent such items should be eliminated from the operating costs. This claim was asserted on the ground that, while at times 15 per cent. and at other times 25 per cent. of the cost of labor had been charged to construction account, it was not proper to charge 100 per cent. of cost of insurance covering labor and 100 per cent. of the stable and garage expenses to operating costs. 1 am impressed with the justice of this contention, and in view of the evidence presented I disallow from "Costs of Production and Distribution" one-fifth of the amount of previous charge for liability and compensation insurance, and one-fifth of the amount of the stable and garage expenses included in the items respectively designated "Insurance" and "Stable and garage." Such elimination reduces the costs of production and distribution of gas produced at 550 and 537 B.t.u., exclusive of federal income tax, for the years 1922, 1923, and 1924, and on the rate base of $1 to private consumers, shows the following returns, after crediting miscel laneous revenue: 10 F.(2d) 167 am disposed to allow such claim, but no evidence was presented to enable me to find the amount of the tax to be so eliminated. The defendant Attorney General's counsel states in his brief that such tax amounts to $184, and, assuming that to be correct, the amount per 1,000 cubic feet of gas is insignificant, and it may be disregarded. Twelve Months Ending November 30, 1924. Gas Sold at 537 B. T. U. 712,671,000 Cu. Ft. Per M. Cu. Ft. Sold. $0.528307 Cost of production Cost of distribution and general ex penses Retirement expense Taxes (exclusive of federal income tax) ... Uncollectible bills.. Conclusions as to Operating Expenses and Total operating cost, exclusive of fed Net Revenues. eral income tax... Less miscellaneous operating reve nue tax .325899 .035000 .062024 .008270 .$0.959500 .020997 Net cost, exclusive of federal income .$0.938503 Federal income tax actually charged.. .041990 Actual net cost inclusive of federal income tax, aside from any return on property.... .$0.980493 Accordingly, during the periods covered by the above statements, if the rate of $1 per M cubic feet of gas to private consumers had been effective, there would have been, during the years 1922 and 1923, an operating deficit, so that there would have been no return upon property or investment and no federal income tax payable, and for the year ending November 30, 1924, the net earnings would not have covered interest charges, and consequently no federal income tax would have been payable during that period. Under such rate the operating results, inclusive of any return upon the property or investment, at the $1 rate to private consumers, would have been as follows: Year ending December 31, 1922, a deficit of $.10298 per M cubic feet. Year ending December 31, 1923, a deficit of $.0165 per M cubic feet. Nominal year ending November 30, 1924, an earning of $.060828 per M cubic feet. During the last period the company operated, for substantially the entire time, its 11-foot generator set, claimed by the defendants as more economical than the operation of several of its smaller sets, and plaintiff was also enabled to purchase its generator fuel, boiler fuel, and gas oil at unit prices lower than in 1922 and 1923, per thousand cubic feet of gas made, viz.: penses Renewals and replacements Taxes (exclusive of federal income tax) Uncollectible bills Total operating cost .... .$1.04383 Less miscellaneous operating revenue. .02819 1922 Actual net cost, exclusive of federal income tax, aside from any return on property 1923 1924 Federal income tax actually charged .. ..$1.01564 .02741 The quantity of gas oil used during these three periods was substantially the same. Had plaintiff attempted the manufacture of 650 B.t.u., as required by chapter 899, Laws |
