New York Tel. Co. v. Public Service Commission

• Decision Date: 24 May 1955
• Citation: 142 N.Y.S.2d 68,286 A.D. 28
• Parties: , 8 P.U.R.3d 229 Matter of the Application of NEW YORK TELEPHONE COMPANY, Petitioner, for an order pursuant to Article 78 of the Civil Practice Act, v. The PUBLIC SERVICE COMMISSION of the State of New York, Respondent, and The City of New York, Abraham & Strauss, and Others, Intervenors-Respondents.
• Court: New York Supreme Court — Appellate Division

Page 68

142 N.Y.S.2d 68

286 A.D. 28, 8 P.U.R.3d 229

Matter of the Application of NEW YORK TELEPHONE COMPANY Petitioner, for an order pursuant to Article 78 of the Civil Practice Act, v. The PUBLIC SERVICE COMMISSION of the State of New York Respondent, and The City of New York, Abraham &amp Strauss, and Others, Intervenors-Respondents.

Supreme Court, Appellate Division, Third Department.

May 24, 1955.

Ralph W. Brown and Eric B. Nelson, New York City (Henry J. Friendly, New York City, of counsel, Robert W. Doyle, Edward L. Friedman, Jr., Jack A. Haner, New York City, with him on the brief), for petitioner New York Tel. Co.

Kent H. Brown, Albany (George H. Kenny, Joseph J. Doran, Lawrence M. DeVore, Charles R. Gibson, Albany, Martin L. Barr, Newburgh, of counsel and with him on the brief), for Public Service Commission.

Peter Campbell Brown, New York City (Leo A. Larkin, Morris Handel, James J. Thornton, and Morris Einhorn, New York City, of counsel on the brief), for City of New York, intervenors-respondents.

Ira M. Millstein, Frank L. Weil and Milton Haselkorn, New York City, for Abraham & Straus and others, intervenors-respondents.

Naylon, Foster, Dean, Shepard & Aronson, New York City (Edmund B. Naylon, George Foster, Jr., and Edward F. Huber, New York City, of counsel on the brief), for Long Island Water Corp., amici curiae.

Before FOSTER, P. J., and BERGAN, COON, HALPERN, and IMRIE, JJ.

FOSTER, Presiding Justice.

In this proceeding under Article 78 of the Civil Practice Act we are asked to review and annul two orders of the Public Service Commission, which in effect denied the application of the New York Telephone Company for an increase in telephone rates amounting annually to $68,850,000. The issue raised is one of principle, and not of detail with regard to rates. Petitioner's claim of error is that the Commission refused to receive evidence of the alleged present value of its property actually used in the public service. This claim of error is based entirely on statutory language.

The statute involved is Section 97, subdivision 1, of the Public Service Law, which in substance directs the Commission to determine just and reasonable rates for telephone corporations, upon its own motion or on the complaint of a utility. The determination of such rates is to be made, according to the language of the statute 'with due regard, among other things, to a reasonable average return upon the value of the property actually used in the public service'. Petitioner contends that this language was an imperative mandate to the Commission, and required it to adopt what is commonly called a present fair value rate basis in passing upon petitioner's request for a rate increase; and the exclusion of evidence which would have been material in the computation of such a rate base was reversible error. The Commission on the other hand regards the language quoted as more or less of an historical accident, and without the significance petitioner ascribes to it; and further, that when the concept of present fair value as a rate base was abandoned as a constitutional requirement by the Supreme Court of the United States, Federal Power Commission v. Hope Natural Gas Co., 1944, 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333, the Commission was free to disregard it.

In 1898, and prior to the enactment of the Public Service Law in this state, the Supreme Court of the United States decided the case of Smyth v. Ames, 169 U.S. 466, 547, 18 S.Ct. 418, 434, 42 L.Ed. 819. It there held that a public utility was entitled to receive 'a fair return upon the value of that which it employs for the public convenience.' That it meant present fair value was made clear in Willcox v. Consolidated Gas Co., 212 U.S. 19, 29 S.Ct. 192, 53 L.Ed. 382. Such was the celebrated concept which was the sine qua non of public utility rate making for over forty years, and remained so until the Hope case, supra, was decided in 1944. That case merely decided that it was not longer necessary for regulatory bodies to use the concept as a constitutional requirement but of course it did not bar its use, or attempt to dictate legislative policy as to rate making for the individual states beyond the requirement that rates should be fair and reasonable. This is the rule applied to other forms of price fixing.

But what was meant by the term 'value' as used in Smyth v. Ames? It did not mean market value, or exchange value, in the ordinary sense of those terms. Property dedicated to the public service is not ordinarily considered to have an exchange value, for it can neither be freely bought or sold like ordinary commodities, nor withdrawn from the public use. Chief Justice Hughes recognized this semantic difficulty when he said in the Los Angeles Gas case, Los Angeles Gas & Electric Corp. v. Railroad Commission of California, 289 U.S. 287, at page 305, 53 S.Ct. 637, at page 644, 77 L.Ed. 1180: 'In determining that basis, the criteria at hand for ascertaining market value, or what is called exchange value, are not commonly available. The property is not ordinarily the subject of barter and sale and, when rates themselves are in dispute, earnings produced by rates do not afford a standard for decision. The value of the property, or rate base, must be determined under these inescapable limitations.'

The decision in Smyth v. Ames did not undertake to define value, nor was any definition attempted by the Supreme Court thereafter. Some of the elements that had to be considered in arriving at a figure of value were stated, and among them reproduction cost as well as original cost, but fair value itself defied precise definition. It was said however in another case that a determination of value must rest on "* * * a reasonable judgment, having its basis in a proper consideration of all relevant facts." Los Angeles Gas case, supra, 289 U.S. at page 306, 53 S.Ct. at page 644. In other words fair value was a special value for rate cases alone, supposed to be arrived at by considering various elements of value, in such weights and proportions as might be just and right in the individual case.

Almost from the date of its announcement this doctrine, which amounted to a constitutional mandate, was heavily criticized by economists and students of utility regulations. See Bonbright on Valuation of Property, Vol. 2, 1st ed., chs. 31 and 32. Some critics advanced the view that a public utility should be limited to a fair return on capital invested irrespective of present value, others advocated the somewhat narrower prudent investment theory. In the Supreme Court itself there were powerful dissents as to method by Justice Brandeis in two cases, although in both cases he concurred in the result. Southwestern Bell Telephone Co. v. Public Service Commission of Missouri, 262 U.S. 276, 43 S.Ct. 544, 67 L.Ed. 981; St. Joseph Stock Yards Co. v. U. S., 298 U. S. 38, 56 S.Ct. 720, 80 L.Ed. 1033. Nevertheless a majority of the Supreme Court adhered to the doctrine until the Hope case was decided in 1944, and of course the various Commissions and Courts in this state followed it. It would serve no useful purpose here to cite the long line of administrative and judicial decisions on the subject, for they neither added to nor subtracted anything from the fundamental directive of the Supreme Court. Even when a section of the New York statute was cited it is clear that the over-riding authority was the Supreme Court ruling. Hence I think but little weight can be given to the assertion that the Commission and the Courts of this state have consistently construed Section 97 of the Public Service Law to require a fair value rate base. From 1898 to 1944 they had no other choice. Such was the constitutional law of the land when in 1910 the Legislature enacted Section 97 of the Public Service Commissions Law, L.1910, ch. 673, relating to telephone companies. Law now known as Public Service Law, L.1930, ch. 782. Earlier, railroads and street railroads, common carriers, gas and electric corporations, had been brought within the purview of the Public Service Law by legislation enacted in 1907, L.1907, c. 429. The standard of just and reasonable rates was prescribed for them without further specification at that time. Prior to that the Railroad Law prohibited any reduction of rates which would reduce profits to less than ten per cent on capital actually expended. In 1910 Section 49 of the Public Service Law was amended to add the provisions that railroad rates should be fixed, 'with due regard among other things to a reasonable average return upon capital actually expended'. At the same time a similar provision was added to Section 72 relating to gas and electric corporations, L.1910, c. 480. At the same session of the Legislature telephone companies were brought within the regulatory jurisdiction of the Commission and the Commission was directed in fixing rates for them to give 'due regard, among other things, to a reasonable average return upon the value of the property actually used in the public service'. L.1910, c. 673, § 97. These seemingly inconsistent directives in statutes adopted at the same legislative session were peculiar enough, but in 1911 Section 49 of the Public Service Law relating to railroads was again amended, and 'the value of the property actually used' was substituted for 'capital actually expended'. L.1911, c. 546. The apparent inconsistency between the standard set up in Section 72 of the statute relating to gas and electric corporations, and that set up in Sections 49 and 97 relating to railroads and telephone companies, was pointed out by the then Governor and he suggested a correction by the Legislature, but nothing was done about it.

Thereafter the Legislature brought steam corporations, omnibus companies, motor carriers and water corporations under regulation by the Public Service Commission, but in none of the enactments concerning these utilities was the term 'va...