Opinion
Argued November 29, 1955
Decided February 17, 1956
Appeal from the Supreme Court, Appellate Division, Third Department.
Kent H. Brown, George H. Kenny, Joseph J. Doran, Lawrence M. De Vore, Charles R. Gibson and Martin L. Barr for appellant. Peter Campbell Brown, Corporation Counsel ( Morris Handel, Leo A. Larkin and Morris Einhorn of counsel), for City of New York, intervenor-appellant. Ira M. Millstein, Frank L. Weil and Milton Haselkorn for Abraham Straus and others, intervenors-appellants.
Jacob K. Javits, Attorney-General ( James O. Moore, Jr., John R. Davison and Sidney Kelly, Jr., of counsel), amicus curice, in support of appellant's position. Henry J. Friendly, Ralph W. Brown, Eric B. Nelson, Robert W. Doyle, Edward L. Friedman, Jr., and Jack A. Haner for respondent. Edmund B. Naylon, George Foster, Jr., and Edward F. Huber, for Long Island Water Corporation, amicus curiae, in support of respondent's position.
The single narrow issue presented on this appeal is whether or not the Public Service Commission, in a telephone rate proceeding under section 97 of the Public Service Law, erred in refusing to receive evidence offered by petitioner of the reproduction cost less depreciation of its physical plant. The weight to be given such evidence, as we shall indicate later, is quite another matter.
Until the 1944 decision of the Supreme Court of the United States in Federal Power Comm. v. Hope Natural Gas Co. ( 320 U.S. 591), the resolution of the issue before us would have required consideration of constitutional principles as enunciated in the frequently cited case of Smyth v. Ames ( 169 U.S. 466) decided in 1898. There the Supreme Court held that in determining reasonable rates upon the fair value of a utility's property used in the public service, regulatory bodies must take into consideration various factors, including both original costs and reproduction value. However, in 1944, that court determined that the Constitution did not mandate consideration of reproduction cost or any other specific factor in fixing rates, provided the end result — the rate fixed — be just and reasonable ( Federal Power Comm. v. Hope Natural Gas Co., supra).
With the constitutional barrier thus removed, public utility rate making in this State remained nonetheless subject to our statutory mandate. Section 97 of the Public Service Commission Law, which is the governing statute in telephone rate proceedings, provides: "the commission shall, with due regard, among other things, to a reasonable average return upon the value of the property actually used in the public service and to the necessity of making reservation out of income for surplus and contingencies, determine the just and reasonable rates". (Emphasis supplied.)
The telephone company contends that the above language requires the commission to give due regard to a reasonable return upon a rate base consisting of the present value of its plant, and has offered evidence before the commission as to its current reproduction cost. The commission, however, has refused to receive the "bulk" of such evidence, taking the position that it would use a "so-called investment rate base: one based on original cost less the actual depreciation reserve", and that the language of the statute is not mandatory, or that, even if it were, it would not require the commission to accept proof of reproduction cost. The majority of the Appellate Division has rejected the position of the commission, and ruled that the proffered evidence of reproduction cost was improperly refused. In our view, this conclusion is inescapable in light of the history and clear language of the Public Service Law.
The legislative history of section 97 and related sections is set forth adequately in the prevailing opinion below, and it will serve no useful purpose to review it here. In sum, it clearly obviates any mere accident of language in the various statutes whence the commission derives its authority to fix rates for specific utilities. There can be no doubt that the Legislature, in enacting the Public Service Law, intended the difference between those factors which the commission shall consider "among other things" when determining (1) telephone and railroad rates [a just and reasonable return "upon the value of the property actually used in the public service" (telephone corporations: § 97; railroad corporations: § 49, both of which embrace large territories in the State)] and (2) those of other utilities [a just and reasonable return upon "capital actually expended" (omnibus corporations: § 63-b; gas and electric corporations: § 72; steam corporations: § 85; waterworks corporations: § 89-j, utilities more local in scope)].
There is additional evidence that the language of section 97 was deliberately chosen. By chapter 134 of the Laws of 1921, the Legislature amended sections 49 and 97 of the Public Service Law which then provided that the commission "shall, with due regard, among other things, to a reasonable average return upon the value of the property actually used in the public service * * * determine the just and reasonable "rates, by causing "shall" to read "may" and by inserting the words "in its discretion" before "determine". However, promptly following requests made by Governor Miller (his Papers, 1921, pp. 92-94), the Legislature, among other things, deleted the amendments and restored sections 49 and 97 to their previous mandatory form (L. 1921, ch. 335), which is also their present form.
Indeed, for many years, the commission construed section 97 as requiring a finding of "value", and recognized that, under the statute, aside from constitutional considerations, "value" was something very different from original cost, as, e.g., Matter of Stone v. New York Tel. Co. (26 N.Y. St. Dept. Rep. 235 [1921]); Matter of Buck v. New York Tel. Co. (26 N.Y. St. Dept. Rep. 455 [1921]); Matter of New York Tel. Co. (29 N.Y. St. Dept. Rep. 1 [1923]); Matter of New York Tel. Co. (34 N.Y. St. Dept. Rep. 621 [1926]).
Moreover, in its rule IV governing rate proceedings, after providing that "the utility shall establish by competent evidence the original cost of the property used and useful in the service * * * and the accrued depreciation thereon" (subd. 8), the commission also provided: " Evidence of reproduction cost need not be submitted but if presented it shall be shown by * * * [a prescribed method] and the corresponding original cost and book cost of the property" is also required to be shown if the book cost differs from the original cost (subd. 10). Subdivision 11 further provides: " If evidence of reproduction cost is submitted, the accrued depreciation * * * shall be shown * * *. Reproduction cost without accrued depreciation is not an element in determining the value of the property for the purpose of computing a return and will not be accepted as such" (Rules of Procedure of Public Service Comm., eff. July 1, 1943, as amd., rule IV; 4 N.Y. Official Compilation of Codes, Rules Regulations, pp. 6-7; all emphasis supplied). Thus, by its own rules, it clearly indicates that such evidence may be submitted.
Despite its interpretation of section 97 over the years, and its own rules which were in effect prior to the Hope case ( supra), and still are, the commission now takes the view that the same statute and said rules authorize it to bar proof of reproduction cost less depreciation as some evidence of the value of the company's property actually used in the public service. It took this view, it says, for the first time in 1945, one year after the Hope case, in Matter of Staten Is. Edison Corp. (60 P.U.R. [N.S.] 385, 421).
But the Hope case, of course, could not amend our statute. Only the Legislature may do that. Since it has not chosen to do so, although well over a decade has elapsed since the Supreme Court removed the aforesaid constitutional barrier, section 97 continues to require that the commission shall "determine the just and reasonable rates" "with due regard, among other things", to a reasonable average return upon the present value of the company's plant, i.e., "property actually used in the public service" (emphasis supplied).
The concept of value, of course, is quite different from that of cost, and the expression "actually used" connotes a present use. Thus the commission is required to receive proof of reproduction cost less depreciation as some evidence of present value in the case of utility property which, due to the unique restrictions placed upon it by law, cannot readily be valued by other usual methods, such as so-called "market", "sales" or "exchange" value.
This is not to say that the rates must be based upon reproduction cost less depreciation. As the commission itself states, it is under no statutory or other obligation to confine itself to consideration of any particular one of the various alternative rate bases. All that the statute says is that the commission shall "determine the just and reasonable rates" with "due regard, among other things, to a reasonable average return upon the value of the property actually used in the public service". "Due regard" to one factor "among other things" requires consideration of that factor. It is by no means controlling. While price indices rise in some periods, in others the general level of prices declines. What consideration is to be given to "value" "among other things" is for the commission to decide, having in mind that the overriding principle governing its primary duty is that it shall determine "just and reasonable rates".
"Due regard", as the Supreme Court of the United States has said, "calls for the exercise of discretion" ( Opp Cotton Mills v. Administrator, 312 U.S. 126, 151). "To give due consideration to a particular factor necessarily means to give such weight or significance to it as under the circumstances it seems to merit, and this, of course, involves discretion" ( United States ex rel. Maine Potato Growers Shippers Assn. v. Interstate Commerce Comm., 88 F.2d 780, 783, certiorari denied 300 U.S. 684). In Railroad Comm. v. Pacific Gas Co. ( 302 U.S. 388), Chief Justice HUGHES said (p. 398): "While the Court has frequently declared that `in order to determine present value, the cost of reproducing the property is a relevant fact which should have appropriate consideration,' we have been careful to point out that `the Court has not decided that the cost of reproduction furnishes an exclusive test' and in that relation we have `emphasized the danger in resting conclusions upon estimates of a conjectural character.'" (See, also, People ex rel. Consolidated Water Co. v. Maltbie, 275 N.Y. 357, appeal dismissed on the ground that "no substantial federal question is presented", 303 U.S. 158.)
If, then, as we believe, the statute has a clear and definite meaning by its plain language and in the light of its legislative history, neither the commission nor the courts may presume to say that its meaning must now be changed because it reflects an approach to rate making which may currently be unpopular with some experts. Although it is urged that the language of the statute represents the survival of a theory of rate making which is unsound and outmoded, it may here be noted that the element of reproduction cost, which was introduced for the protection of the public as a means of avoiding rates based upon an excessive and unreasonable capital structure, may also serve as a potential safeguard for the public in times of recession. Nor is it without some significance that, after much debate, the 1938 Constitutional Convention recommended, and the People of the State subsequently approved — forty years after Smyth v. Ames ( supra) — a provision guaranteeing to municipally owned utilities a fair return on "the value of the property used and useful in such public utility service" (N.Y. Const., art. III, § 18; emphasis supplied).
In any event, if indeed the advocates for a prudent investment or any other theory are correct and it is time for a change, that decision is not ours to make. The function of the judiciary is not to choose between different theories of rate making on the sole basis of their alleged merits. All arguments concerning such matters should properly be addressed to the Legislature which, within constitutional limits, may adopt or favor one over the other — as it did in 1934 (L. 1934, ch. 287) in section 114 of the Public Service Law, relating to the fixing of temporary rates — or may rely upon the expertise of the commission by empowering them to employ methods and procedures reflecting current trends in economic thought. Neither we, nor any other court, have the power to amend the law as written ( Meltzer v. Koenigsberg, 302 N.Y. 523).
The department stores, intervenors-appellants, urge that we uphold the commission on the basis on the alleged invalidity of rates for business service, as proposed by the telephone company, in that the company failed to sustain its proposed rates as to business service. Since the question of allocation of rates was never reached below, this is a matter which must be reserved for the commission upon rehearing.
The order below should be affirmed.
I dissent and vote to reverse the order of the court below and to confirm and reinstate the determination of the Public Service Commission, with costs in all courts, on the ground that the cost of reproducing the petitioner's multimillion dollar plant is not material or relevant in the computation of a value rate base. Subdivision 1 of section 97 of the Public Service Law, as I read it, does not mandate the Public Service Commission to employ any exclusive method or process for the determination of a just and reasonable value rate basis, nor does it require such commission to deal differently with separate types of utilities, but rather it requires it to use any fair and reasonable method or process to ascertain a just and reasonable value base, as long as it gives "due regard * * * to a reasonable average return upon the value of the property actually used in the public service" (§ 97, subd. 1). Upon this record, I am satisfied it did so here, particularly as the petitioner does not claim that the rates allowed are either unjust or unreasonable. (See Federal Power Comm. v. Hope Natural Gas Co., 320 U.S. 591.)
CONWAY, Ch. J., DESMOND and VAN VOORHIS, JJ., concur with FROESSEL, J.; DYE, J., dissents in a memorandum; FULD and BURKE, JJ., taking no part.
Order affirmed.