Consolidated Gas Co. of New York v. Newton

• Decision Date: 04 August 1920
• Citation: 267 F. 231
• Parties: CONSOLIDATED GAS CO. OF NEW YORK v. NEWTON, Atty. Gen., et al.
• Court: U.S. District Court — Southern District of New York

267 F. 231

CONSOLIDATED GAS CO. OF NEW YORK v. NEWTON, Atty. Gen., et al.

United States District Court, S.D. New York.

August 4, 1920

Supplemental Opinion, August 11, 1920.

A master was appointed on May 16, 1919, to take testimony, make computations, and report back to the court with all convenient speed. Over 15,000 printed pages of testimony were taken, upon which the master has filed a report. More than 100 exceptions have been filed to the report, and the cause now comes on for hearing on these exceptions.

The suit is in sequence to a former suit under the same statute begun on May 1, 1906, against the predecessors of these defendants and the city of New York. This was also tried before a master and argued before the Circuit Court, which granted a decree in favor of the plaintiff. Consol. Gas Co v. New York (C.C.) 157 F. 849. The defendants appealed to the Supreme Court, which reversed the decree and dismissed the bill, giving leave to the plaintiff, however, to file a new bill at any subsequent time, when experience might have demonstrated that the rate fixed by the statute was inadequate to a fair return upon the value of its property. Willcox v. Con. Gas Co., 212 U.S. 19, 29 Sup.Ct. 192, 53 L.Ed. 382, 48 L.R.A. (N.S.) 1134, 15 Ann.Cas. 1034. This decision was rendered on the 2d day of January, 1909, so that the defendant allowed 10 years to elapse, during which it operated under the statutory rate, before beginning this suit.

The bill is of the usual sort in rate cases, alleging that the rate is confiscatory, in that it prevents a fair return upon the property of the company, that the penalties imposed by the statute are so large as to crush it in the event of disobedience, and that it has no means of testing the constitutionality of the act, except by a suit in equity. The jurisdiction of this court and the equity of the bill, if the allegations are maintained, is not disputed, and is amply supported by prior adjudications in similar cases.

The plaintiff is a corporation organized under the laws of the state of New York under chapter 367 of the Laws of 1884 which permitted the consolidation of six gas companies then doing business in New York City, all of which had been in existence for a long time, one of them as far back as 1823. At the time of the consolidation the value of the stock of the six companies as then quoted on the Stock Exchange of that city was close to $40,000,000. The stockholders agreed upon a plan of consolidation in accordance with the statute in which they fixed the value of their franchises as $7,781,000, and the value of their other property at about $30,000,000. For this, stock in the amount of $37,785,000 was issued, of which over $2,000,000 was held in the treasury and the other $35,000,000 issued directly to the stockholders of the constituent companies. The company began business in November, 1884, and the stock was increased in April, 1900 to $54,595,000, and later in July of that year to $80,000,000. At the present time there is outstanding $100,000,000 of capital stock and $25,000,000 of 7 per cent. convertible bonds.

The master found the value of the assets of the company, including its franchises, at about $75,000,000, and its annual sale of gas at the present time about 19,000,000,000 cubic feet. Upon this he found a probable income for the current year of about $900,000, representing not more than 1.2 per cent. on the value of the property as found. He further found that the necessary rate of return at the present time was 8 per cent., requiring an income of about $6,000,000 upon the same value.

The master found the net cost of delivering gas to consumer by the company was 75.18 cents per 1,000 cubic feet. This finding he based upon the full year 1918 and the first 8 months of the year 1919, contenting himself with the statement that the prices of labor and materials since August 31, 1919, and become higher than during the period of 20 months which he had considered.

In view of the voluminous testimony and the great number of issues which are concerned, it would serve no purpose to recite in detail more of the finding or any of the evidence.

William L. Ransom, John A. Charles A. Vilas, and Jacob H. Goetz, all of New York City, for plaintiff.

John P. O' Brien, James A. Donnelly, and Harry Hertzoff, all of New York City, for defendant corporation counsel.

Wilber W. Chambers and Clarence R. Cummings, both of Albany, N.Y., for defendant Attorney General.

William Hayward, John Holley Clark, Jr., and Ely Neumann, all of New York City, for defendant Public Service Commission.

LEARNED HAND, District Judge (after stating the facts as above).

This bill was filed under the leave given in Willcox v. Consolidated Gas Co., 212 U.S. 19, 29 Sup.Ct. 192, 53 L.Ed. 382, 48 L.R.A.

(N.S.) 1134, 15 Ann.Cas. 1034, to begin a new suit of the same kind after a period of probation should have tested the adequacy of the rate established by the statute. Ten years passed before this was done, and the experience gained meanwhile would, under ordinary circumstances, have been sufficient. However, during that period there occurred the extraordinary rise of prices due to the Great War, which has made the future harder to forecast upon the basis of 10 years' past experience than could have been apprehended in 1909, and as a result we are not in so good a position at the present time to judge of the future effect of the statutory rate as we should normally have been; i.e., the experience of the first 7 of the 10 years is of little present value.

The Proper Period for a Test.

The defendants wish me for this reason to take an average over the whole period, both for cost of production and capital valuation. Now, whatever may be the proper method, that certainly is wrong. The case is not one in which an average can safely be made, because the variations in prices which the whole period covers are not normally recurrent. Averages presuppose that the resulting figure will cover variations, which, though certain, or nearly certain, within the period taken, are impossible of exact prediction in their occurrence. They may therefore be spread over a period precisely as an insurance loss is spread. The recent rise in prices is not of this kind, because there is no reason whatever to suppose that during the next period of say 5 years, which is long enough to justify some present action, the same causes will operate in reverse as have operated in the past. An average would be therefore meaningless. Either the evidence of the last 3 years is sufficient basis for a forecast or it is not. If not, ante bellum values should be used merely for lack of any better; if so, the average of the last 3 years is the proper basis.

It is quite true that, if these prices could fairly be regarded as such temporary aberrations as the rate was meant to cover, this would not be so. Persons who embark their money in such enterprises must take the bitter with the sweet, and the lean years with the fat. Rates, when established, are not intended to make a nice adjustment to all ensuing conditions; they are too long and costly to fix, especially in court. In such cases it is fair to take a period of years as the defendants wish and to compare that with the rate. But if, as I think, we have now fair warrant for supposing that we are in a condition not contemplated at all when the rate was fixed, all such considerations disappear.

Several reasons lead me to believe that present price levels are not merely transitory, though I recognize the danger of any prophecy. Whatever their precise cause, it is universally conceded to be due to the Great War, and by that I mean, of course, not to the prosecution of hostilities, but to the economic exhaustion and inflation of the circulating medium which these involved. In general, it is a safe inference to suppose that Europe will not be able to resume its ante bellum production for a time measured rather by years than by months, and that the recovery of a sound financial condition will take longer. We in this country are not only influenced by conditions in Europe, but we are subject to our own local inflation and disorganization of industry, from which no one can know when we shall recover. The question is a practical one, and comes, I think, down to this:

The plaintiff is faced with a condition which permits it to receive much less than the return which the statute contemplated, and which the Constitution is thought to insure it. So far as human foresight can see, that condition, though probably not permanent-- certainly in its present exaggerated form-- is bound to exist over a period of some years, at least in such things as coal, oil, and labor, which are the plaintiff's chief costs. There is, then the certainty of a continued loss for an indefinite, but substantial, time, due to causes which were not in existence and could not possibly have been apprehended 14 years ago, when the rate was fixed. Does this prospect justify the court in abandoning the inertia which it properly feels when the complaint is based upon temporary variations? Is it fair to continue to impose a rate which has clearly ceased to correspond with the underlying presuppositions upon which it was based? I think that the prospect does justify the court, and that the rate has become unfair, at least until the conditions change.

Three reasons justify this assumption now, each of them serving to protect the public against the consequences of a mistake. The first is that at worst the rate will not be finally declared insufficient. As in all such cases, the defendant will have leave at any time to vacate the decree upon showing that the old price levels have been reached, or nearly enough to put again into...