Public Service Ry. Co. v. Board of Public Utility Commissioners

• Decision Date: 12 October 1921
• Citation: 276 F. 979
• Parties: PUBLIC SERVICE RY. CO. v. BOARD OF PUBLIC UTILITY COMMISSIONERS.
• Court: U.S. District Court — District of New Jersey

276 F. 979

PUBLIC SERVICE RY. CO. v. BOARD OF PUBLIC UTILITY COMMISSIONERS.

United States District Court, D. New Jersey.

October 12, 1921

Frank Bergen, of Newark, N.J., for Public Service Ry. Co.

L Edward Herrmann, of Jersey City, N.J., for Board of Public Utility Com'rs.

Bleakly & Stockwell, of Camden, N.J., for city of Camden.

Albert O. Miller, Jr., of Passaic, N.J., for city of Passaic.

Randal B. Lewis, of Paterson, N.J., for city of Paterson.

Thomas J. Brogan, of Jersey City, N.J., for city of Jersey City.

Jerome T. Congleton, of Newark, N.J., for city of Newark.

Before WOOLLEY and DAVIS, Circuit Judges, and RELLSTAB, District judge.

WOOLLEY Circuit Judge.

This action concerns the lawfulness of a rate fixed for a public utility under authority of a state statute.

The plaintiff is the Public Service Railway Company, a corporation organized under agreements of consolidation between many street railway companies, entered into by virtue of an act of the legislature of the State of New Jersey providing for the formation of traction companies and their regulation, approved March 14, 1893 (P.L.p. 302).

The defendant is the Board of Public Utility Commissioners created by an act of the legislature of the State of New Jersey, establishing such a board and conferring upon it power fully to regulate and control public utilities approved April 21, 1911 (P.L.p. 374). O'Brien v. Board of Public Utility Commissioners, 92 N.J.Law, 44, 105 A. 132; Id., 92 N.J.Law, 587, 106 A. 414.

The intervening defendants are the cities of Jersey City, Newark, Passaic, Paterson, Elizabeth, and Camden, municipalities through whose streets the plaintiff Railway Company operates certain lines and between whom and the Company there exists, it is alleged, rights and duties arising from ordinances, franchises, and contracts, which in their relation to the subject matter of this litigation, are separate and apart from any interests represented by the Board of Public Utility Commissioners and the Attorney General.

Given in bare outline, the events which lead up to this controversy are the following:

Public Service Railway Company controls, through consolidations, stock ownership and leases, sundry street railway corporations, which in turn control other railway corporations, and they in turn still others running back to the day of horse railways, through whose lines, on being connected and combined into an unitary system, it operates 2,649 passenger cars over 850 miles of track in 146 municipalities in the State of New Jersey, including interurban lines in several counties, serving, without limitation by municipal boundaries, a population of more than two million.

Speaking always in round numbers, the capital stock of the Company issued and outstanding is $48,700,000, of which $39,200,000 was issued in exchange and payment for stock of underlying railway corporations, and $9,500,000 was issued and sold for cash at par.

Prior to the consolidations by which the Company was created, the constituent or lessor companies had mortgaged their properties for the payment of bonds to the amount of $80,600,000. By virtue of the consolidation agreements these bonds, as well as the rentals reserved by the several leases, became direct obligations of the Company, requiring it to pay interest amounting to $3,700,000 and rentals amounting to $1,160,000 annually.

The Company pays annually more than $21,700,000 in maintenance and operating expenses, about $5,000,000 in fixed charges for interest on its bonded obligations and rentals for leased properties, and more than $2,000,000 for taxes. It now pays no dividend on its stock.

Prior to 1916, the Company charged a 5 cent fare throughout its system, a rate commonly regarded as just and reasonable for the service rendered. For a year or two prior to 1917 there was, as every one knows, a progressive increase in the cost of maintenance and operation of street railways growing out of the greatly increased cost of materials and increased wages and taxes, due to war.

Under this increased cost of maintenance and operation a surplus of $1,180,000 which the Company has accumulated up to the year 1917 was in 1918 changed into a deficit of $300,000. This deficit increased until 1920 it amounted to $743,000. The difference between income and outgo during these later years, the Company says, was not sufficient for it to meet its operating expenses, pay its fixed charges, and maintain its property in a state of efficiency. It was therefore compelled, during the years from 1917 to 1920, to borrow more than $2,348,000 for the purchase of new rolling stock.

Believing it impossible further to maintain and operate its property on a 5 cent fare, the Company, in March, 1918, filed with the Board a rate of 7 cents and charges for transfer. In July, 1918, the Board, refusing the increase, continued the base rate at 5 cents but allowed 1 cent for each initial transfer. Finding the income still inadequate, the Board, in September, 1918, fixed a rate of 7 cents and 1 cent for a transfer for a period limited to March, 1919. In May, 1919, the Board reinstated the rate of 7 cents plus 1 cent, where it remained until July 14, 1921.

The validity of the increase of this rate was reviewed by the Supreme Court and the Court of Errors and Appeals of the State of New Jersey in an action brought by Charles F. X. O'Brien, a citizen and rider, with the result that the courts sustained the increase and held that the Board may raise the rate of a public utility without evidence of the value of the property of the utility when the justice and reasonableness of the rate can be determined without first ascertaining the value of the property. 92 N.J.Law, 44, 105 A. 132; Id., 92 N.J.Law, 587, 106 A. 414.

During the controversy between the Board and Company with reference to the fixation of rates which would give a fair return on the property devoted to the public service, the legislature of the State of New Jersey passed an act entitled 'An Act providing for the valuation of street railway property in this State. ' Laws of 1920, chapter 351. By this act the Governor, State Treasurer, and State Comptroller were constituted a commission for the purpose of ascertaining and determining the value of all properties of street railway companies of New Jersey. The act required the commission to select a competent electrical or mechanical engineering concern, equipped and organized for and experienced in the work of valuing street railway properties. The act, as later amended by the Act of 1921 (P.L.p. 954), also provided that the report of the engineering concern and 'the value of the property as set forth in said report shall be accepted by the Board of Public Utility Commissioners of this State as presumptive evidence of the value of said property, as of the date specified in said report in any rate proceeding under any law of this State to the extent that the value of said property is a factor in the fixing of a rate.'

Pursuant to the Act of 1920 the Commission retained the engineering firm of Ford, Bacon & Davis, of New York, who at once set about the valuation of the Company's properties. By their report, in April 1921, they placed the valuation at $125,000,000 based, it is claimed, largely on pre-war prices.

Prior to the official valuation made by Ford, Bacon & Davis, the Company, for its own information, employed Mortimer E. Cooley, Dean of the College of Engineering and Architecture of the University of Michigan, to inventory and appraise its properties. This expert, aided by Professor H. C. Anderson, with a force of one hundred and fifty assistants, arrived at a valuation as of May 31, 1921, based on post-war prices, amounting so far as the property alone is concerned to $149,900,000 to which was added 30 per cent. for going value, or $44,900,000, making a total of $194,900,000.

Without reciting all the moves made by the Company and the Board in this protracted controversy, the next important step was the Company's act of filing with the Board a 10 cent rate. The Board declined to allow this rate. The matter went to the Supreme Court, which, on July 1, 1921, 114 A. 323 set aside the action of the Board and remanded the proceeding in order that the Board might fix a just and reasonable rate on the evidence. The evidence then before the Board was the newly filed report and valuation of Ford, Bacon & Davis, as well as the valuation of Cooley. Thereupon the Board proceeded to make its own valuation of the Company's properties as a basis on which to grant the Company an increase of fare. It began by making an estimate of the cost of the physical property new. In doing this it excluded 'intangibles and everything else except pure physical cost. ' Physical costs (with the same matters excluded), had been estimated by the experts as follows:

Cooley, cost new, approximately ..........................	$69,000,000
Ford, Bacon & Davis, cost new, approximately ..............	70,000,000
Wolff (expert for municipalities) cost new (historical)...	72,700,000

The Board valued the property (on a cost new basis) at $70,000,000 reckoned on pre-war prices. From this basic figure it made one deduction and to it three additions, as follows:

Physical cost or value ..	$70,000,000
Loss depreciation ........	13,500,000
	-----------
Sub-total ..........	$56,500,000
Add appreciation .........	12,000,000
Add working capital .......	1,500,000
Add going value ..........	12,000,000
	-----------
Total ..............	$82,000,000

With $82,000,000 as its estimate of the present-day value of the Company's properties devoted to the public...