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interest on unpaid taxes, federal income tax, penses when traveling in the interests of the and expenses of the rate case in the federal plaintiff. The good management of the court, but allowed the expenses in the rate plaintiff having in my opinion been shown, I proceedings before the Public Service Com- consider it a fair presumption that those dismission, which he spread over a period of bursements were bona fide and legitimately years.

made for the benefit of the plaintiff and its While the special master's report in the consumers. last-mentioned case was confirmed by Judge Fifth. Insurance and Automobile ExWinslow upon final hearing, he expressed penses.—The defendants claim that the exthe view that “it may be debated as to penses charged to operation and incurred whether some of these eliminations were

for the payment of insurance premiums on proper," and, referring to the rate case ex- liability and compensation insurance, as alpenses, that, “if it had been necessary, this so the stable and garage expenses, should, as court would have directed that the expense to at least 25 per cent. thereof, be charged of such litigation be included in the year to fixed capital, and that to that extent such when incurred.”

items should be eliminated from the operatIn Brooklyn Union Gas Co. v. Prender- ing costs. This claim was asserted on the gast Case (D. C.) 7 F.(20) 628, decided June ground that, while at times 15 per cent. and 25, 1925, Judge Campbell, for the purposes at other times 25 per cent. of the cost of laof that suit, approved the special master's bor had been charged to construction account, findings, which did not include in the operat- it was not proper to charge 100 per cent. of ing expenses, for testing the constitutionality cost of insurance covering labor and 100 per of the act, the rate case expense which was cent, of the stable and garage expenses to charged in full to the year's operations. I

operating costs. feel, however, that the item of rate case ex

I am impressed with the justice of this penses in operating costs, as spread by the contention, and in view of the evidence preplaintiff, may properly be allowed.

sented I disallow from "Costs of Production Third. Uncollectible Bills.—The plain- and Distribution” one-fifth of the amount of tiff includes as part of its cost of produc- previous charge for liability and compensation and distribution the item of uncollecti- tion insurance, and one-fifth of the amount ble bills, being the amounts of consumers' of the stable and garage expenses included bills remaining due and unpaid, and accord- in the items respectively designated "Insuring to the designation of the item presum- ance” and “Stable and garage." Such elimably regarded by the plaintiff as uncollecti- ination reduces the costs of production and ble. This item in the year ending Decem- distribution of gas produced at 550 and 537 ber 31, 1922, amounted to $4,984.56 or per B.t.u., exclusive of federal income tax, for M cubic feet .00788 cents; for year ending the years 1922, 1923, and 1924, and on the December 31, 1923, $5,896.63, or per M cubic feet .00849 cents and for the nominal rate base of $1 to private consumers, shows year ending November 30, 1924, to $5,893.89, the following returns, after crediting miscel

laneous revenue: or per M cubic feet .8270 cents. I shall follow the practice established in this district in Year.

Cost. Return per M Cu. Ft. the other gas rate cases, and accordingly do 1922 .$1.102090 Deficit $.10289

1923

1.015050 Deficit .01650 not eliminate this item; no charge for in

1924

.938503 Profit .06063 terest on the uncollectible bills having been claimed.

On the basis of the $1 rate and 650 B. t. u. Fourth. Miscellaneous General Expenses.

gas: ---These expenses include the following

Year.

Cost. Return per M Cu. Ft. items, all of which I allow in cost of opera

1922

. $1.216490 Deficit $.21738 tion: Expenses incurred in connection with

1.087150 Deficit .08500 issue of preferred stock, and with listing the 1924

.992803 Profit .00633 plaintiffs' bonds on the New York Stock Exchange, services of trust company as trustee The defendant Attorney General also and as transfer agent; payment of $100 to urges the elimination of the real estate tax regular Democratic organization of Rich- on that portion of premises of plaintiff at mond County for advertising and tickets to the corner of Post avenue and Clove road, annual ball; cost of memberships in asso- which I have held was property not used ciations devoted to technical and commercial and useful in the making of gas, and theredevelopment of gas industry; directors' ex- fore not to be included in the rate base. I

1923

nue

10 F.(20) 167 am disposed to allow such claim, but no evi- Twelve Months Ending November 30, 1924. dence was presented to enable me to find the Gas Sold at 537 B. T. U. 712,671,000 Cu. Ft. amount of the tax to be so eliminated. The

Per M. Cu. Ft. Sold. defendant Attorney General's counsel states Cost of production

. $0.528307 in his brief that such tax amounts to $184, Cost of distribution and general ex

penses

.325899 and, assuming that to be correct, the amount Retirement expense

.035000 per 1,000 cubic feet of gas is insignificant, Taxes (exclusive of federal income and it may be disregarded.

tax)

.062024 Uncollectible bills.

.008270 Conclusions as to Operating Expenses and Total operating cost, exclusive of fedNet Revenues. eral income tax.

. $0.959500 I find the actual, reasonable and neces

Less miscellaneous operating reve

.020997 sary cost of the manufacture and distribution of the quality of gas supplied during Net cost, exclusive of federal income the following periods, together with taxes

tax

$0.938503 and other operating expenses, and after de- Federal income tax actually charged.. .041990 ducting miscellaneous operating revenue, but Actual net cost inclusive of federal exclusive of any return on property or in

income tax, aside from any return
on property...

. $0.980493 vestment, was as follows:

Accordingly, during the periods covered Year Ending December 31, 1922.

by the above statements, if the rate of $1 Gas Sold at 550 B. T. U. 632,599,200 Cu. Ft. per M cubic feet of gas to private consumers

Per M Cu. Ft. Sold. had been effective, there would have been, Cost of production

$0.68212 during the years 1922 and 1923, an operatCost of distribution and other general

ing deficit, so that there would have been expense

.33584 Renewals and replacements.

.03500

no return upon property or investment and Taxes, exclusive of federal income tax

no federal income tax payable, and for the and interest on unpaid taxes,. .06559 year ending November 30, 1924, the net Uncollectible bills

.00788

earnings would not have covered interest Total operating cost ...

$1.12643

charges, and consequently no federal income Less miscellaneous operating revenue.. .02434

tax would have been payable during that

period. Under such rate the operating reNetcost, exclusive of federal income

sults, inclusive of any return upon the proptax, aside from any return on prop

erty or investment, at the $1 rate to private erty

$1.10209 Federal income tax actually charged .. .01323. consumers, would have been as follows:

Year ending December 31, 1922, a deficit of Actual net cost, inclusive of federal

$.10298 per M cubic feet. income tax, aside from any return on

Year ending December 31, 1923, a deficit of property

$1.11532 $.0165 per M cubic feet.

Nominal year ending November 30, 1924, an Year Ending December 31, 1923.

earning of $.060828 per M cubic feet. Gas Sold at 537 B. T. U. 694,527,200 Cu. Ft. During the last period the company op

Per M. Cu. Ft. Sold. erated, for substantially the entire time, its Cost of production.

.$0.60800 11-foot generator set, claimed by the deCost of distribution and general ex

fendants as more economical than the operapenses ...

.32981 Renewals and replacements

.03500 tion of several of its smaller sets, and plainTaxes (exclusive of federal income

tiff was also enabled to purchase its gentax)

.06253 erator fuel, bciler fuel, and gas oil at unit Uncollectible bills

.00819

prices lower than in 1922 and 1923, per Total operating cost ....

$1.04383

thousand cubic feet of gas made, viz.: Less miscellaneous operating revenue. .02819

Generator Fuel. Boiler Fuel. Gas Oil. 1922

$.19807 $.06136 $.20737 Actual net cost, exclusive of federal in

1923

.18736 .05894 .15217 come tax, aside from any return on

1924

.103991 .050034 .119243 property

$1.01564 Federal income tax actually charged 0.02741

The quantity of gas oil used during these Actual net cost, including federal in

three periods was substantially the same. come tax aside from any return on

Had plaintiff attempted the manufacture of property

..$1.04305 650 B.t.u., as required by chapter 899, Laws of 1923, the net increase of cost of produc- Accordingly this plaintiff, on or about tion of gas would have been:

September 15, 1922, duly notified the Public 1922. 1923. 1924.

Service Commission in writing that the terms Gas made

$.1028 $.0685 $.0481 and conditions of the said order were aoGas sold

.1144 .0715 .0543 cepted by it and would be obeyed. Contem

poraneously with its order of August 30, Had the $1 rate and 650 B.t.u. standard 1922, the Public Service Commission made been applied to the plaintiff's net cost fig

an order in its case No. 108, finding that the ures above stated, such net cost per thous- 22 candle power standard theretofore preand cubic feet would have amounted, in the scribed by statute was unreasonable, unecoyear 1922, to $1.23; in the year 1923, to nomical, and improper, and that a standard $1.12; during the 12 months of 1924, to based upon heating power of gas should be $1.04—all of these figures being exclusive fixed, and that on and after October 1, 1922, of any return upon property or investment.

this plaintiff and others should furnish gas I accordingly find that the provisions of having a total heating value on a monthly chapters 898 and 899 of the Laws of 1923, average of not less than 537 B. t. u. per in so far as they attempt to fix a rate to cubic foot and a daily average of not less be charged by the plaintiff for gas, in the respective amounts of $1.20 and $1, are each consecutive calendar days in any month.

than 525 B. t. u. per cubic foot on any three confiscatory, and as such are in violation of

This order, which by its terms was to the Constitution of the United States. I

continue until changed, modified, or abrogatfurther find, from the evidence, that no mar. gin of reasonable doubt exists between reg- served on plaintiff, which on or about Sep

ed by the Commission, was thereafter duly ulation and confiscation in the instant case, tember 15, 1922, duly notified the commisbut that the effect of said statutes is sc clearly shown to be confiscatory that it would be tions of the said order in case No. 108 were

sion in writing that the terms and condiunreasonable to require the plaintiff to submit to further loss consequent on the re

accepted and would be obeyed by plaintiff.

In compliance with said orders in cases Nos. quirement of a period of test under such

79-S and 108, the plaintiff duly filed with statutes. New York & Queens Gas Co. v.

the commission and duly posted and pubPrendergast et al. (D. C.) 1 F.(20) 351.

lished its tariff schedules. The $1.20 Rate Left in Effect by Chapter mediately prior to June 1, 1923, the plain

It will accordingly be observed that, im898 of the Laws of 1923. Following the decision of the New York ice charge, in addition to a fixed commodity

tiff was duly authorized to make a fixed serySupreme Court in the action instituted by this plaintiff against the Public Service Com charge, and to furnish and supply gas of mission of the state of New York, which

a monthly average of not less than 537 B. held the Dollar Rate Law to have been un

t. u. for a definite period of time, which on constitutional, as hereinbefore referred to, June 1, 1923, had not expired. On June 1, the Public Service Commission, by order 1923, the state Legislature, by chapter 898 of entered August 30, 1922, in case No. 79-S, the Laws of 1923, assumed to abrogate such prescribed a calorific standard for gas to be service charge, with the result that this plainfurnished by this plaintiff and fixed its serv

tiff on June 1, 1923, was prohibited from ice charge at 21/2 cents per meter per day, making any service charge whatsoever, and cr 75 cents per month, which in conjunction was limited to a flat rate of $1.20 per M with the commodity charge of $1.20 per cubic feet of gas. M cubic feet of gas sold, was equivalent, If chapter 898 had not, on June 2, 1923, in revenue producing effect, to a flat rate of been so closely followed by chapter 899, this approximately $1.45 per M cubic feet of gas plaintiff could have revised its rates, so as sold. The Public Service Commission there to include in its commodity rate the amount upon, pursuant to law, served upon this fixed by the commission as a service charge; plaintiff a certified copy of its said order of but, as Judge Winslow says in the New York August 30, 1922, so fixing the service and & Queens Gas Case, which involved the con. commodity charge and the calorific standard, stitutionality of chapter 898: "The plainsuch charges and standard to remain in effect tiff, however, was precluded from increasfrom November 1, 1922, to and until October ing its commodity rates so as to make up the 30, 1923, and thereafter until said commis- revenue which would otherwise be realized sion should otherwise order.

from the service charge, by chapter 899 of

a

10 F.(20) 167 the Laws of 1923, in effect June 2, 1923, has found that they are inseparable, and I limiting the maximum rate to a flat $1 per accordingly follow the ruling of Judge WinsM cubic feet. No opportunity whatever low, who in his opinion in the Consolidated could be provided plaintiff for a revision of Gas Co. Case, 6 F.(20) 243, handed down its rates.” N. Y. & Queens Co. v. Prender- April 22, 1925, said: “This court is further gast (D. C.) 1 F.(20) 351, 374.

of the opinion, as heretofore expressed in Accordingly, for the period of one day N. Y. & Queens Gas Co. v. Prendergast [1 chapter 898 limited the plaintiff to a com- F.(20) 351] and Bronx Gas & Electric Co. modity charge of $1.20 per M cubic feet, v. Prendergast [1 F.(20) 377), supra, that without the opportunity to revise and adjust the rate and calorific standard prescribed its rates in reasonable conformity to its cost by the statute under consideration are insepof operation. Judge Winslow in the N. Y. arable.” & Queens Case, supra, very properly states in his opinion: “At the outset, it may be Binding Effect upon, or Estoppel of, Legconceded that confiscation of the property of

islature of Orders of Public Service the public utility takes place when the util

Commission. ity is limited to a rate which does not provide I now proceed to the consideration of the sufficient revenue to pay cost of production effect of chapters 898 and 899 on the plainand distribution and, in addition, a reason- tiff's status in regard to the rates and gas able return upon its investment. A rate standard theretofore fixed by the Public which yields an amount less than operating Service Commission, as hereinbefore mennxpenses and taxes in effect consumes capital. tioned. The plaintiff contended before me The confiscatory feature is further present that the fixing of a rate and standard of gas if the rate prevents a reasonable return upon for a specified period by order of the Pubthe investment.

The court is of lic Service Commission, the acceptance therethe opinion that both acts, in so far as they of by the plaintiff, the posting and publishlimit the rate, are confiscatory, and there- ing of same, in compliance with law, the exfore in violation of the United States Con- penditure of considerable sums of money by stitution.”

plaintiff in adjusting its plant and property As is hereinbefore shown the operating to comply with such standard, constituted a cost and expense to the plaintiff in its pro- valid, subsisting obligation between the plainduction and distribution of gas per cubic feet at the standard in effect at the state and its instrumentalities were legally

tiff and the state of New York, which the time of the enactment of chapter 898 and and morally estopped from repudiating, and during the brief period of its existence ex

the attempt to abrogate the same by the enclusive of any appreciable return on the in- actment of chapter 899 rendered such legisvestment was such that the rate of $1.20 lative act unconstitutional. per M cubic feet operated as a substantial

"It may be asserted that it is a well-esconfiscation of the plaintiff's property, and tablished rule of law that a state may make I accordingly find in the light of the evi

a contract with an individual or with a cordence presented that chapter 898, Laws of poration, and that such contract is entitled 1923, is unconstitutional in so far as it af- to the protection of the provisions of the fects this plaintiff.

United States Constitution as much as is

a contract between individuals. It was long Severability of Rate and Standard Pro

ago said by Chief Justice Marshall that visions of Statute.

a contract entered into between a state The consideration of chapter 899, Laws and an individual is as fully protected by of 1923, involves twu questions: (1) The the tenth section of the first article of the confiscatory effect of the requirement limit- Constitution as a contract between two indiing the rate for gas furnished or sold, to viduals.'

Providence Bank v. Billthe sum of $1 per M cubic feet which has ings, 4 Pet. 514, 560, 7 L. Ed. 939. been disposed of; and (2) whether its pro- I am of opinion that the circumstances disvision limiting the rate and providing for closed in this case, leading up to the making a calorific standard of 650 B. t. u. are to of the rate to take effect October 1, 1923, be regarded and taken together as insepara- and to continue for a year, and its acceptble.

ance by the corporation, followed by the exAs to the latter question, the District penditure of considerable sums of money, Court for the Southern District of New York constituted a valid contract for the period

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mentioned. Mobile Gas. Co. v. Patterson of South Glens Falls v. P. S. Comm., 225 (D. C.) 293 F. 208, at pages 219, 220. Its N. Y. 216, 121 N. E. 777. It has also been repudiation by the Legislature involves the held that neither the contract clause' nor the impairment of the contract, which is properly 'due process clause of the federal Constituthe subject of judicial review. The court tion has the effect of overriding the power of will not presume to comment upon the possi- the state to establish all the regulations reable question of business integrity and honor. sonably necessary to secure the health, safeIf the legislative body may deprive the plain- ty, or general welfare of the community. tiff of its property without due process, or

Atlantic Coast Line v. Goldsboro, 232 U. S. set at naught its, contract, then all constitu- 548, 34 S. Ct. 364, 58 L. Ed. 721." tional protection is gone for all persons." Judge Campbell concluded: "I therefore N. Y. & Queens Gas. Co. v. Prendergast hold that the statute in question does not (1924).

violate section 10 of article 1 of the ConJudge Winslow, in the Consolidated Gas stitution.Case, stated in his opinion (April 22, 1925): In view of the divergence of judicial opin. “I have expressed my views also in those ion of the federal courts in the Eastern Discases [N. Y. & Queens and Bronx Gas & trict of New York and the Southern District Electric Co.) as to the contractual obliga- of New York, I have declined the plaintiff's tion resulting from the rate established by request to make a finding that chapters 898 the Public Service Commission for the pe- and 899 of the Laws of New York of 1923 riod of one year and until thereafter modi- are violative of the provisions of the Constified. I see no reason in the instant case for tution of the United States, as impairing arriving at a different conclusion.”

subsisting obligations of a contract entered A contrary view of this question has, into between the state of New York and this however, been taken by Judge Campbell, in plaintiff establishing the service charge, gas the New York Eastern District Court, in the rate, and the certain gas standard named in case of Brooklyn Union Gas Co. v. Prender- the orders of the Public Service Commisgast, decided June 25, 1924, in which hesion in its cases No. 79-S and 108; but I said:

leave that question for any other or further A consideration of the authorities shows disposition by the court upon final hearing. that the power of the legislature to authorize the making of a contract as to rates is lim

Rate of Return. ited. The regulation of rates to be charged The fair return to which this plaintiff is by a public utility is an exercise of the po- constitutionally entitled is to be computed lice powers of the state (Munn v. Illinois, 94 on the present value of its used and useful U. S. 113, 24 L. Ed. 77), and contracts can- property, over and above all expenses of not be made which in any way impair or operation, including the cost of maintenance limit this power, nor can one Legislature lim- and taxes. Such return should be such as to it or control a subsequent one in its exercise yield net earnings sufficient to attract careful (B. E. S. R. Co. v. B. S. R. Co., 111 N. Y. and conservative investors, and should be at 132, 19 N. E. 63, 2 L. R. A. 284; Manigault least equal to the return ordinarily allowed v. Springs, 199 U. S. 473, 26 S. Ct. 127, 50 in similar lines of business activity and inL. Ed. 274). Contracts must be understood vestment. as made in reference to the possible exercise The parties hereto have submitted a numof the rightful authority of the government, ber of authorities in which the courts, in and no obligation of the contract can extend various parts of the country, have fixed rates to defeat the legitimate government author- varying considerably in amount. The state ity. Union Dry Goods Co. v. Georgia Pub- and federal courts, in the gas rate cases in lic Service Corporation, 248 U. S. 372, 39 this and the adjoining districts, have, howS. Ct. 117, 63 L. Ed. 309, 9 A. L. R. 1420. ever, held that a sufficient and proper rate

"It has likewise been held that the Leg- of return on the property used in this class islature, for the public welfare, may modi- of enterprise is not less than 8 per cent. of fy regulations regarding rates which munici- the value of the property used and useful in palities may impose in granting licenses or the manufacture of gas, and I feel it only fit permission to use its streets by public serv- and proper that this company should be ice corporations, without impairing the ob- placed on a parity with such other compaligation of a contract within the provisions nies to the extent of its rate of return. of the Constitution. People ex rel. Village I may add that the proofs in this case

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