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Conclusions as to Operating Expenses and Total operating cost, exclusive of fed

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eral income tax....

Less miscellaneous operating reve

nue

Net cost, exclusive of federal income

tax

.325899 .035000

.062024

.008270

.$0.959500

.020997

.$0.938503 .041990

Federal income tax actually charged.. 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.:

Cost of production..

Per M. Cu. Ft. Sold. .$0.60800

Cost of distribution and general ex

penses

Renewals and replacements

.....

Taxes (exclusive of federal income tax)

Uncollectible bills

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Had the $1 rate and 650 B.t.u. standard been applied to the plaintiff's net cost figures above stated, such net cost per thousand cubic feet would have amounted, in the year 1922, to $1.23; in the year 1923, to $1.12; during the 12 months of 1924, to $1.04-all of these figures being exclusive of any return upon property or investment. I accordingly find that the provisions of chapters 898 and 899 of the Laws of 1923, in so far as they attempt to fix a rate to be charged by the plaintiff for gas, in the respective amounts of $1.20 and $1, are each confiscatory, and as such are in violation of the Constitution of the United States. I further find, from the evidence, that no margin of reasonable doubt exists between regulation and confiscation in the instant case, but that the effect of said statutes is sc clear

ly shown to be confiscatory that it would be unreasonable to require the plaintiff to submit to further loss consequent on the requirement of a period of test under such statutes. New York & Queens Gas Co. v. Prendergast et al. (D. C.) 1 F. (2d) 351.

The $1.20 Rate Left in Effect by Chapter

898 of the Laws of 1923.

Following the decision of the New York Supreme Court in the action instituted by this plaintiff against the Public Service Commission of the state of New York, which held the Dollar Rate Law to have been unconstitutional, as hereinbefore referred to, the Public Service Commission, by order entered August 30, 1922, in case No. 79-S, prescribed a calorific standard for gas to be furnished by this plaintiff and fixed its service charge at 22 cents per meter per day, cr 75 cents per month, which in conjunction with the commodity charge of $1.20 per M cubic feet of gas sold, was equivalent, in revenue producing effect, to a flat rate of approximately $1.45 per M cubic feet of gas sold. The Public Service Commission thereupon, pursuant to law, served upon this plaintiff a certified copy of its said order of August 30, 1922, so fixing the service and commodity charge and the calorific standard, such charges and standard to remain in effect from November 1, 1922, to and until October 30, 1923, and thereafter until said commission should otherwise order.

Accordingly this plaintiff, on or about September 15, 1922, duly notified the Public Service Commission in writing that the terms and conditions of the said order were accepted by it and would be obeyed. Contemporaneously with its order of August 30, 1922, the Public Service Commission made an order in its case No. 108, finding that the 22 candle power standard theretofore prescribed by statute was unreasonable, uneconomical, and improper, and that a standard based upon heating power of gas should be fixed, and that on and after October 1, 1922, this plaintiff and others should furnish gas having a total heating value on a monthly average of not less than 537 B. t. u. per cubic foot and a daily average of not less than 525 B. t. u. per cubic foot on any three consecutive calendar days in any month.

continue until changed, modified, or abrogatThis order, which by its terms was to ed by the Commission, was thereafter duly served on plaintiff, which on or about September 15, 1922, duly notified the commission in writing that the terms and condi

tions of the said order in case No. 108 were accepted and would be obeyed by plaintiff. In compliance with said orders in cases Nos. 79-S and 108, the plaintiff duly filed with the commission and duly posted and published its tariff schedules.

It will accordingly be observed that, immediately prior to June 1, 1923, the plaintiff was duly authorized to make a fixed serv

ice charge, in addition to a fixed commodity charge, and to furnish and supply gas of a monthly average of not less than 537 B. t. u. for a definite period of time, which on June 1, 1923, had not expired. On June 1, 1923, the state Legislature, by chapter 898 of the Laws of 1923, assumed to abrogate such service charge, with the result that this plaintiff on June 1, 1923, was prohibited from making any service charge whatsoever, and was limited to a flat rate of $1.20 per M cubic feet of gas.

If chapter 898 had not, on June 2, 1923, been so closely followed by chapter 899, this plaintiff could have revised its rates, so as to include in its commodity rate the amount fixed by the commission as a service charge; but, as Judge Winslow says in the New York & Queens Gas Case, which involved the constitutionality of chapter 898: "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

10 F.(2d) 167

the Laws of 1923, in effect June 2, 1923, limiting the maximum rate to a flat $1 per M cubic feet. No oppertunity whatever could be provided plaintiff for a revision of its rates." N. Y. & Queens Co. v. Prendergast (D. C.) 1 F. (2d) 351, 374.

Accordingly, for the period of one day chapter 898 limited the plaintiff to a commodity charge of $1.20 per M cubic feet, without the opportunity to revise and adjust its rates in reasonable conformity to its cost of operation. Judge Winslow in the N. Y. & Queens Case, supra, very properly states in his opinion: "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 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."

As is hereinbefore shown the operating cost and expense to the plaintiff in its production and distribution of gas per M cubic feet at the standard in effect at the time of the enactment of chapter 898 and during the brief period of its existence exclusive of any appreciable return on the investment was such that the rate of $1.20 per M cubic feet operated as a substantial confiscation of the plaintiff's property, and I accordingly find in the light of the evidence presented that chapter 898, Laws of 1923, is unconstitutional in so far as it affects this plaintiff.

Severability of Rate and Standard Pro

visions of Statute.

The consideration of chapter 899, Laws of 1923, involves two questions: (1) The confiscatory effect of the requirement limiting the rate for gas furnished or sold, to the sum of $1 per M cubic feet which has been disposed of; and (2) whether its provision limiting the rate and providing for a calorific standard of 650 B. t. u. are to be regarded and taken together as inseparable.

As to the latter question, the District Court for the Southern District of New York

has found that they are inseparable, and I accordingly follow the ruling of Judge Winslow, who in his opinion in the Consolidated Gas Co. Case, 6 F. (2d) 243, handed down April 22, 1925, said: "This court is further of the opinion, as heretofore expressed in N. Y. & Queens Gas Co. v. Prendergast [1 F. (2d) 351] and Bronx Gas & Electric Co. v. Prendergast [1 F.(2d) 377], supra, that the rate and calorific standard prescribed by the statute under consideration are inseparable."

Binding Effect upon, or Estoppel of, Leg

islature of Orders of Public Service

Commission.

I now proceed to the consideration of the effect of chapters 898 and 899 on the plaintiff's status in regard to the rates and gas standard theretofore fixed by the Public Service Commission, as herein before mentioned. The plaintiff contended before me that the fixing of a rate and standard of gas for a specified period by order of the Public Service Commission, the acceptance thereof by the plaintiff, the posting and publishing of same, in compliance with law, the expenditure of considerable sums of money by plaintiff in adjusting its plant and property to comply with such standard, constituted a valid, subsisting obligation between the plaintiff and the state of New York, which the state and its instrumentalities were legally and morally estopped from repudiating, and the attempt to abrogate the same by the enactment of chapter 899 rendered such legislative act unconstitutional.

"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 cor

poration, 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 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. I am of 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

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mentioned. Mobile Gas. Co. v. Patterson (D. C.) 293 F. 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." N. Y. & Queens Gas. Co. v. Prendergast (1924).

Judge Winslow, in the Consolidated Gas Case, stated in his opinion (April 22, 1925): "I have expressed my views also in those cases [N. Y. & Queens and Bronx Gas & Electric Co.] as to the contractual obligation resulting from the rate established by the Public Service Commission for the period of one year and until thereafter modified. I see no reason in the instant case for arriving at a different conclusion."

A contrary view of this question has, however, been taken by Judge Campbell, in the New York Eastern District Court, in the case of Brooklyn Union Gas Co. v. Prendergast, decided June 25, 1924, in which he said:

"A consideration of the authorities shows that the power of the legislature to authorize the making of a contract as to rates is limited. The regulation of rates to be charged by a public utility is an exercise of the police powers of the state (Munn v. Illinois, 94 U. S. 113, 24 L. Ed. 77), and contracts cannot be made which in any way impair or limit this power, nor can one Legislature limit or control a subsequent one in its exercise (B. E. S. R. Co. v. B. S. R. Co., 111 N. Y. 132, 19 N. E. 63, 2 L. R. A. 284; Manigault v. Springs, 199 U. S. 473, 26 S. Ct. 127, 50 L. Ed. 274). Contracts must be understood as made in reference to the possible exercise of the rightful authority of the government, and no obligation of the contract can extend to defeat the legitimate government authority. Union Dry Goods Co. v. Georgia Public Service Corporation, 248 U. S. 372, 39 S. Ct. 117, 63 L. Ed. 309, 9 A. L. R. 1420. "It has likewise been held that the Legislature, for the public welfare, may modify regulations regarding rates which municipalities may impose in granting licenses or permission to use its streets by public service corporations, without impairing the obligation of a contract within the provisions of the Constitution. People ex rel. Village

of South Glens Falls v. P. S. Comm.. 225 N. Y. 216, 121 N. E. 777. It has also been held that neither the 'contract clause' nor the 'due process clause' of the federal Constitution has the effect of overriding the power of the state to establish all the regulations reasonably necessary to secure the health, safety, or general welfare of the community. Atlantic Coast Line v. Goldsboro, 232 U. S. 548, 34 S. Ct. 364, 58 L. Ed. 721."

Judge Campbell concluded: "I therefore hold that the statute in question does not violate section 10 of article 1 of the Constitution."

In view of the divergence of judicial opinion of the federal courts in the Eastern District of New York and the Southern District of New York, I have declined the plaintiff's request to make a finding that chapters 898 and 899 of the Laws of New York of 1923 are violative of the provisions of the Constitution of the United States, as impairing subsisting obligations of a contract entered into between the state of New York and this plaintiff establishing the service charge, gas rate, and the certain gas standard named in the orders of the Public Service Commission in its cases No. 79-S and 108; but I leave that question for any other or further disposition by the court upon final hearing.

Rate of Return.

The fair return to which this plaintiff is constitutionally entitled is to be computed on the present value of its used and useful property, over and above all expenses of operation, including the cost of maintenance and taxes. Such return should be such as to yield net earnings sufficient to attract careful and conservative investors, and should be at least equal to the return ordinarily allowed in similar lines of business activity and investment.

The parties hereto have submitted a number of authorities in which the courts, in various parts of the country, have fixed rates varying considerably in amount. The state and federal courts, in the gas rate cases in this and the adjoining districts, have, however, held that a sufficient and proper rate of return on the property used in this class of enterprise is not less than 8 per cent. of the value of the property used and useful in the manufacture of gas, and I feel it only fit and proper that this company should be placed on a parity with such other companies to the extent of its rate of return.

I may add that the proofs in this case

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10 F.(2d) 167

fully confirm the fact, which is well within the common knowledge of residents of the borough of Richmond, as to the urgent need that this plaintiff gas company shall be permitted to earn at all times an adequate rate of return, to the end that it may be able to attract freely the substantial quantities of new capital which are necessary for its normal growth. The welfare of this company and of the communities which it serves are shown to have been seriously prejudiced, at times, by the inability of the company to charge rates yielding net earnings which induce ready contributions of new capital for additions to plant and extensions of mains and facilities. Curtailment of the company's earnings below an adequate return would be no boon to this Richmond territory.

For the purpose of this case, I fix 8 per cent. as a moderate and reasonable rate of annual return, if figured upon the present value of the plaintiff's property as hereinabove found. Whether a larger return should be allowed by the rate-making body, I express no opinion here.

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To the Honorable Judges of the United
States District Court for the Eastern
District of New York:

I, the undersigned, the special master appointed by Hon. Marcus B. Campbell, District Judge, by an order entered October 11, 1923, directing such special master "to take the testimony and evidence upon the issues herein, make all needed computations and fully hear the facts, and to report to the court his findings of fact and conclusions of law, together with the evidence for the advisement of the court," do hereby respectfully report that, having been attended by counsel as below stated, I proceeded to take the proofs submitted and filed, together with a stipulation signed by the various solicitors waiving the signatures of the various witnesses to their several depositions and fur

ther waiving the filing of the original exhibits marked in evidence.

There appeared before me the following: For the plaintiff: Frank H. Innes, solicitor, by Frank H. Innes, William L. Ransom, and Jacob H. Goetz, of counsel.

For the defendants William A. Prendergast, William R. Pooley, Charles Van Voorhis,, Oliver C. Semple, and George R. Van Namee (who was substituted in place of James A. Parsons), constituting the Public Service Commission of the state of New York: Charles G. Blakeslee, solicitor, by Melvin Krulewich, of counsel.

For the defendant Albert Ottinger (who was substituted in place of Carl Sherman), as Attorney General of the state of New York: John Holley Clark (who was substituted in place,of James A. Donnelly), solicitor, by Harry Hertzoff, of counsel.

Upon the proofs as taken I find and report as follows:

1. The plaintiff, New York & Richmond Gas Company, was incorporated under and pursuant to the provisions of article 6 of the Transportation Corporations Law of the state of New York (Laws 1890, c. 566) by a certificate dated June 15, 1901, and filed June 17, 1901, in the office of the secretary of state of the state of New York, and in the office of the clerk of the county of Richmond, for the purpose, among other things, of manufacturing and supplying gas for public and private consumers in the borough of Richmond, county of Richmond, city and state of New York.

2. The Richmond County Gaslight Company was a gaslight corporation organized June 25, 1856, pursuant to an act of the Legislature of the state of New York passed February 16, 1848, entitled "An act to authorize the formation of gaslight companies." Laws 1848, c. 37. The Richmond County Gaslight Company built a coal gas plant and started supplying gas to its consumers in and about the year 1858.

3. The Consumers' Gaslight Company of Richmond County was a gaslight corporation, organized February 17, 1887, pursuant to the last above mentioned act of the Legislature of the state of New York, and thereafter acquired, possessed, and used certain property, consisting of mains and appurtenances and franchises.

4. The Staten Island Gaslight Company was a gaslight corporation organized June 25, 1884, pursuant to the last above mentioned act of the Legislature of the state of New York. Shortly after its organization,

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