New York & Queens Gas Co. v. Newton

MAYER, District Judge. The bill prays for a decree which shall declare confiscatory, and therefore unconstitutional, so much of chapter 125 of Daws of New York of 1906 as prohibits the charging of [288] more than $1 per 1,000 cubic feet of gas sold, for gas furnished to the inhabitants of the Third ward of the borough of Queens, commonly known as Blushing and its environs. As a necessary accompaniment, the bill further prays that defendant public authorities shall be enjoined from enforcing the rate prescribed by the statute. The special master has submitted a full report, dealing, as he was requested and as he properly should, with the various questions of fact, and law presented for his consideration, so that the court should be advised in respect of any question which it might deem necessary for decision. [1] At the outset, however, it is desirable to make clear that this court is not a rate-making body, and that, on final decree, the question on the pleadings and the propf is whether the statutory rate is confiscatory, and therefore whether the defendant' public officers should be enjoined from enforcing it. Questions which might be pertinent, where it is sought to fix a rate which shall be as nearly accurate as possible, may prove academic in a case where the basic question is the constitutionality of the statute prescribing the rate. It is, of _ course, elementary that a court approaches the consideration of a case of this kind with an attitude of cautious inquiry, always mindful of certain fundamental canons of construction; e. g., the presumption of constitutionality, the conviction beyond a fair doubt that the statute is unconstitutional, and the like. In that spirit of caution, the court may eliminate for the purposes of the case some contentions which might be successfully pressed in a rate case pure and simple. The subject is delicate, in the sense that it affects a large number of persons, who, if possible, should be led to understand that the result which may place a heavier burden on them is just, and that, after making every fair allowance, it nevertheless appears that there is no escape from relieving a public utility corporation from the operation of a statute which has become unconstitutional by reason of conditions and facts never contemplated nor susceptible of prophecy 14 years ago. During those 14 years the definite trend of legislation, national and state, has been in the direction of regulation by responsible public agencies. The necessity of thus dealing with the subject has been accentuated by the unexpected and radical economic changes due to the war. But, in addition, there are constant changes, which no one can, safely predict. It will suffice to illustrate with the price of oil. Increased demand for oil for use in industries, and purposes not realized in 1904, has been perhaps the greatest factor in enhancing its price. No change in this regard seems to be in sight. These plain conclusions, based on experience simple to understand, point to the desirability of confining a court decision within the limits of the relief asked for in the bill, leaving to the Legislature the task of providing the machinery whereby rates may be flexible, and may be made higher or lower from time to time, as facts and conditions may warrant. Examining, then, this record and the special master’s report, it is apparent that discussion is necessary only in respect of the more important feature's. Many of the details have been carefully and [289] correctly disposed of by the master in his comprehensive report, which fully, though concisely, has dealt with the essential features of the testimony. Repetition, in this opinion, of certain findings and of the reasons in support thereof is not requisite, and it is enough to indicate approval of those findings. [2] 1. The year 1919 is in this case “a sufficient basis for the calculation of the cost of production and the ‘rate base’ for a future long enough to call for some judicial action.” Municipal Gas Co. v. Public Service Commission, 225 N. Y. 89, 121 N. E. 772; Consolidated Gas Co. of New York v. Newton et al. (D. C.) 267 Fed. 231; Kings County Lighting Co. v. Nixon et al., 268 Fed. 143. The opinions of Judge Cardozo, Judge Learned Hand, and Judge Hough, in the cases just cited, fully set forth the reasons for this conclusion, and with those reasons on this point I am in full accord. [3] 2. The Admissibility of the Books of Account.—This subject is fully dealt with in the opinions of Judge Learned Hand and of Judge Plough, in the cases supra. Common-law proof of each and every of the thousands of items of the plaintiff’s books of account would result in a practical denial of justice. The defendants had full facility to examine into and test the accuracy of the books. Capable cross-examination rarely fails to disclose errors, omissions, and inaccuracies, and injustice is rarely, done in a case like this, where there has been such full opportunity for examination. 3. The first inquiry is as to the cost of production of gas; the second, as to cost of distribution. If the cost of production and distribution exceeds the statutory rate, that is the end of the case. The Cost of Production.—Some attack has been made in respect of the cost of oil. An examination of the record shows clearly that the oil accounts were carefully kept and checked. Most of the slight errors during the course of a month were corrected, and the most generous acceptance of the contentions of the defendants would result in a variance of a few gallons, which, translated into money, would be equivalent to a fraction so negligible as to amount to an infinitesimal part of a mill. The cost of other materials and of labor is attacked, not on the basis of evidence adduced, but, as it were, on general principles. The suggestion is that certain increased costs are suspicious. Yet there is nothing suspicious in the testimony, and it is a matter of common knowledge that during the year 1919 the cost of materials such as are here concerned, and of labor, rose materially in this and other industries. An examination of the testimony, including the exhibits, leads readily to the conclusion that the special master was right in his figures. It was made entirely plain that these costs, in the main, were greater in the first five months of 1920 than in 1919. The point of the inquiry in respect of 1920 was to ascertain whether there was any likelihood that the cost of 1919 had decreased, or would decrease, and no such hope was realized. 4. Unaccounted-for Gas.—There is, however, one item which, by way of extra caution, should be reduced. The “unaccounted-for” gas, so called, for 1919, was 11.03 per cent. This percentage varies. [290] Some years it may be more; others, less. Therefore the estimate of an expert like Mr. Woods is valuable. This plant, in his opinion, should show a loss.of about 10 per cent., and I accept that figure, for the purposes of this case, instead of 11.03 per cent. In his finding No. 25, the master found that “during the year 1919 this cost of water gas manufacture was 71.73 cents per 1,000 cubic feet of gas sold.” This figure was made up of 63.45 cents for cost of production, plus 8.28 cents, cost attributable to loss by way of “unaccounted-for” gas. My figure of 10 per cent, instead of the master’s 11.03 per cent., changes the 8.28 cents to 7.45 cents. Therefore. the total as found by me, under this head, is 70.9 cents, instead of the master’s figure of 71.73 cents. [4] 5. Cost of Distribution.—(a) Defensive Emergency Service.— The master excluded this item. In my opinion, he is right. See, also, Judge Learned Hand’s opinion in the Consolidated Gas Case, supra. [5] (b) Expenses of Litigation.—These were also excluded by the master, but were allowed by the court in the Consolidated Gas Case. I should follow the decision on this point in the Consolidated Gas Case, were it not that I am firm in the conviction that, while this item may properly be considered in fixing a rate, it is not to be included in determining whether the rate is confiscatory. I agree with the master, both in this conclusion and his reasons therefor. [6] (c) Interest on Unpaid Taxes.—I am of the opinion that this is not a proper charge in this case under the head of cost of distribution and other expenses, and I have excluded it. [7] (d) The federal tax on bondholders’ income should not be charged as an expense; nor was it included by thfe master. (e) Whether or not the amount of income from insurance participation should be charged as an expense is a debatable question, and for the purposes solely of this decision I have resolved the doubt in favor of the defendants. (f) The items (c) and (e) figure out 0.09 cents; i. e. 9/ioo of one cent. The total cost of distribution and other expenses, as worked out on Mr. Teele’s sheet, was 32 cents. From this total must be deducted an aggregate of 4.93 cents. This last figure is made up as follows: 0.09 for the two items (c) and (e); 0.22 for item (a); and 4.62 for item (b). Added together, the total of- these is 4.93 cents. Deducting, then, from 32 cents, the sum of 4.93 cents, leaves, under the heading of cost of distribution and other expenses, 27.07 cents. Add to this the item for replacement of 3 cents, and for taxes 7.07 cents, and the total is 37.14 cents. 6. If then the 70.9 cents and 37.14 cents be added together, expressed in dollars, the total is' $1.0804, instead of $1.0880, as found by the master in finding No. 30. Deducting from $1.0804 the figure of .0675 (for miscellaneous operating revenue as found in finding No. 30), the net cost of gas delivered to the consumer in 1919 was $1.0129. In other words, after making the various allowances, supra, in favor of defendants, to an extent greater than found by the master, it appears that in 1919 the net cost of gas delivered to the consumer was [291] approximately 1.29 cents in excess of the rate of $1 provided for by the statute. In arriving at this figure it will be appreciated that I have stripped the constituent items down to their lowest minimum. [8-10] 7. If the figure of 99.51 cents, representing the average selling price of gas, be taken, then the deficiency is 1.78 cents per 1,000 cubic feet of gas delivered. The figure of 99.51 cents results from the fact that under the, statute plaintiff is required to deliver gas to the city of New York as a municipality at the rate of 75 cents. This rate has not been attacked by suit. The city in its corporate capacity is entitled to have gas furnished to it at a lesser rate than the private consumer. This fact, however, does not afford any reason why the private consumer should make up the deficiency caused by the lower rate of 75 cents to which the city of New York is entitled. In other words, the fact that the average selling price of plaintiff’s gas is 99.51 cents is irrelevant to the ultimate question in the case. In determining whether the statute is confiscatory, the inquiry must start with the proposition that plaintiff under the statute may charge the private consumer (as distinguished from the municipality) $1, and then the question is whether the cost of production a.nd distribution is in excess of that $1. 8. It having appeared, supra, that the cost of production and distribution in 1919 was in excess of the statutory rate, even though to a slight extent, and that conditions in the early months of 1920 showed no prospect for a' lesser cost, but, on the contrary, indicated increased cost, it makes little difference what elements are included or eliminated from the rate base, or what theories shall obtain in respect thereof. If every debatable figure and question involved in the rate base were resolved in favor of defendants, plaintiff, under the statute, would still fail to receive the return to which it is entitled. For the purposes of this case, it does not make any difference whether the correct rule is reproduction value, with or without so-called theoretical depreciation, or actual cost, with or without theoretical depreciation; nor does it make any difference whether the rate of return shall be 6, 7, or 8 per cent. Any expression of opinion which goes beyond the requirements of the case would be mere dictum, and in the circumstances would announce little more than an individual opinion. Besides, these questions of reproduction value, actual cost, and theoretical depreciation, and the like, are as much, and perhaps more, in the nature of economic questions than questions of law, and there is no need of discussing them, when their determination is not required for the purposes of the case. For the reasons outlined, plaintiff is entitled to be relieved from the operation of the statute, so far as it requires the furnishing of gas at the $1 rate to private consumers.