Federal Power Commission v. Niagara Mohawk Power Corp

• Decision Date: 15 March 1954
• Docket Number: No. 28,28
• Citation: 347 U.S. 239,98 L.Ed. 666,74 S.Ct. 487
• Parties: FEDERAL POWER COMMISSION v. NIAGARA MOHAWK POWER CORP
• Court: U.S. Supreme Court

347 U.S. 239

74 S.Ct. 487

98 L.Ed. 666

FEDERAL POWER COMMISSION

v NIAGARA MOHAWK POWER CORP.

No. 28.

Argued Oct. 15 and 16, 1953.

Decided March 15, 1954.

Mr.

[Syllabus from pages 239-240 intentionally omitted] Willard W. Gatchell, Washington, D.C., for petitioner.

Mr. John W. Davis, New York City, for respondent.

Mr. Justice BURTON delivered the opinion of the Court.

The most significant issue raised by this case is whether the Federal Water Power Act of 1920¹ has abolished pri- vate proprietary rights, existing under state law, to use waters of a navigable stream for power purposes. We agree with the Court of Appeals that it has not. We agree also that in computing a federal licensee's amortization reserve, required by § 10(d) of that Act, as amended,² the Federal Power Commission was not justified in disallowing the expenses paid or incurred by the licensee in this case for the use of such rights.

March 2, 1921, Niagara Falls Power Company, a New York corporation, predecessor in interest of Niagara Mohawk Power Corporation, a New York corporation, respondent herein, secured from the Federal Power Commission the federal license with which we are concerned. It was the first such license issued under the Federal Water Power Act of 1920. Its term was 50 years. It authorized the diversion of water for power purposes from the Niagara River, above the Falls, and the return of it below the Falls, all in New York. The daily diversion, in the aggregate, could not exceed 19,500 cubic feet per second (c.f.s.).³ Section 10(d) of the Act requires each licensee, after 20 years of operation under such a license, to establish and maintain amortization reserves out of any surplus thereafter earned and accumulated in excess of a reasonable return upon the licensee's net investment. Section 14 makes such net investment, plus severance damages, a principal measure of the price the Government is to pay when and if it takes over all or part of the property.⁴ In 1942, the Commission expressly held that § 14 applied to this licensee.⁵

In 1947, Article 11 of the license was amended so as to specify a 6% rate of return and to require 50% of the licensee's surplus earnings to be paid into its amortization reserves. As so amended, the article read:

'After the first twenty (20) years of operation of the project under this license, namely after March 1, 1941, six (6) per cent per annum shall be the specified rate of return on the net investment in the project for determining surplus earnings in accordance with the provisions of Section 10(d) of the Act for the establishment and maintenance of amortization reserves to be held until termination of the license, or in the discretion of the Commission, to be applied from time to time in reduction of the net investment in the project, and one-half of all surplus earnings in excess of six (6) per cent per annum received in any calendar year shall be paid into and held in such amortization reserves.'⁶

In 1948, the Commission began this proceeding to determine the licensee's amortization reserve liability. It was the Commission's first such effort under § 10(d). In 1949, pursuant to a revised staff report, the Commission directed the holder of this license to show cause why one-half of its surplus earnings from March 2, 1941, through December 31, 1946, in the amount of $994,521.33, should not be set aside in an amortization reserve, and why a like proportion of its subsequent surplus earnings should not be set aside annually upon a comparable basis. In 1950, the Commission's presiding examiner recommended that the licensee's initial reserve be $914,432.04, and the Commission approved that figure in preference to $515,432.04 proposed by the licensee. One Commissioner filed a concurring statement and one dissented. 9 F.P.C. 228. However, the Court of Appeals for the District of Columbia Circuit, one judge dissenting, upheld the licensee and remanded the case to the Commission with instructions to modify its order accordingly. 91 U.S.App.D.C. 395, 202 F.2d 190.⁷ The decision turned primarily upon the court's conclusion that neither the Federal Water Power Act nor the issuance of a license thereunder had abolished the licensee's private proprietary rights to use the waters of Niagara River for power purposes. That issue was inescapable because the Commission, in computing the licensee's required amortization reserve, had found that certain annual payments and discounts made by the license for its use of private water rights, existing under state law, along the Niagara River, were not allowable expenses for the reason that the Commission considered those rights no longer existent. The Court of Appeals held precisely the contrary and we granted certiorari because of the important bearing of the decision upon the Federal Water Power Act. 345 U.S. 955, 73 S.Ct. 939, 97 L.Ed. 1376.

The immediate issue thus presented is whether the licensee's amortization reserve under § 10(d), for the period from March 2, 1941, through December 31, 1946, should be $914,432.04 or $515,432.04.⁸ That difference of $399,000 is one-half of the $798,000 which the Commission believes should be included in the surplus earnings of the licensee for the period. It consists of—

1. $577,500 paid by the licensee, at the rate of $99,000 a year, for its use, for power purposes, of 730 c.f.s. of the 'International Paper water rights,' and

2. $220,500 allowed by the licensee as a discount, at the rate of $37,800 a year, on certain sales of electric power in consideration of permission to use, for power purposes, 262.6 c.f.s. of the 'Pettebone-Cataract water rights.'

The Court of Appeals held that although respondent's predecessor, in 1921, had received a federal license for this project, it nevertheless was justified in continuing to meet the financial obligations which it had assumed in return for permission to use water rights originally granted and still existing under the law of New York. That court, accordingly, approved each of the foregoing items of expense and fixed the licensee's initial amortization reserve at $515,432.04.

It was not questioned in the Court of Appeals or here that the licensee originally had acquired, in return for the above-stated payments and discounts, some kind or degree of private proprietary rights under the law of New York to use water from the Niagara River for power purposes. Accordingly, we do not consider it necessary to review here the intricate transactions which resulted in the above-described payments and discounts. We accept the conclusion of the Court of Appeals 'that the International Paper and Pettebone-Cataract water rights are valid under the law of New York.' 202 F.2d at page 202.⁹ For further recognition of these water rights under state law, see Water Power & Control Commission v. Niagara Falls Power Co., 262 App.Div. 460, 30 N.Y.S.2d 371, affirmed, 289 N.Y. 353, 45 N.E.2d 907; Niagara Falls Power Co. v. Duryea, 185 Misc. 696, 57 N.Y.S.2d 777.

Neither is it necessary for us to discuss the licensee's expenses in 1947 or thereafter. They must be treated in the same way as those above mentioned, except to note that the discounts allowed in return for the Pettebone-Cataract water rights ceased with the licensee's purchase of those rights in 1947. See 202 F.2d at page 196.

We are not required to determine the nature of the rights claimed by respondent except to recognize that they are usufructuary rights to use the water for the generation of power, as distinguished from claims to the legal ownership of the running water itself. They are rights to use the force of the fall of the water, coupled with an obliga- tion to return the water to the river under specified conditions.¹⁰ The rights under consideration originally were attached to riparian lands above and below the Falls. However, they long have been separated from such lands and, thus separated, they have been transferred or leased to respondent. Under the law of New York, they constitute a form of real estate known as corporated hereditaments.¹¹ The Commission does not how contest the pur- chase prices which have been paid for any of these rights. The Commission's present objection is limited to respondent's deduction, in the computation of its amortization reserves, of the annual payments and discounts it has made and which it proposes to make for the use of such rights. The Commission contends (1) that Congress not only may constitutionally abolish such local water rights without compensation but that it already has done so, and (2) that, although the licensee's contested expenditures may be lawful, or even obligatory, between the parties, they must be disallowed in computing the licensee's amortization reserve under § 10(d).

We conclude, as did the Court of Appeals, that, even though respondent's water rights are of a kind that is within the scope of the Government's dominant servitude, the Government has not exercised its power to abolish them.¹²

While we recognize the dominant servitude, in favor of the United States, under which private persons hold physical properties obstructing navigable waters of the United States and all rights to use the waters of those streams, ¹³ we recognize also that the exercise of that servitude, without making allowances for preexisting rights under state law, requires clear authorization. A classic example of such a clear authorization appears in United States v. Chandler-Dunbar Water Power Co., 229 U.S. 53, 33 S.Ct. 667, 669, 57 L.Ed. 1063. The Act of March 3, 1909, there authorized the exercise of the dominant right of the United States to take all of a navigable river's flow for purposes of interstate commerce. It did so in explicit terms. It said:

'Sec. 11. * * * the ownership in fee simple absolute by the United States of all lands and property of every kind and description north of the present Saint Marys Falls Ship Canal throughout its entire length and lying between...