Opinion
Decided April 7, 1936.
The primary concern in ascertaining the public interest for the purpose of capitalization of a utility is the protection of the consuming public; hence, if it appears that the proposed capitalization is so high that the utility cannot give its consumers reasonable rates and with the income therefrom meet operating costs, depreciation and fixed charges then the primary public interest would not be subserved. On a petition by a utility to issue securities in replacement of those previously retired, some of which had represented expenditures for additions or working capital and all of which had received the approval of the commission when issued, the petitioner is not entitled, as matter of law, to a finding that the proposed issue is consistent with the public good. Where securities have been retired the commission may withhold permission to issue securities in replacement thereof, to the extent that such proposed securities, together with those outstanding, exceed in amount the difference between the fair cost and the depreciation of the properties against which the retired securities were issued. In determining the amount of depreciation the present value of the property may have probative value. On a finding of certain facts the petitioner was held entitled as matter of law to capitalize its fair expenditures for additions and improvements made since 1924 less those deductions allowed by statute for depreciation and withdrawals from plant. A valid administrative judgment has the same force of obligation and finality as a judicial judgment. A determination of facts by the commission in former proceedings by a petitioner or its predecessors for the issuance of securities is conclusive as to the existence of such facts. Appropriate weight is to be given by the commission to the question, whether the type or types of securities sought to be issued will affect injuriously the public interest either in rates or service; but the commission is authorized to pass only upon the issues petitioned for and cannot of its own motion propose a plan of capital structure.
PETITION to the Public Service Commission for authority to issue negotiable bonds in the principal amount of $1,394,000 and negotiable income notes in the principal amount of $500,000, the interest on the latter to be cumulative and no dividends to be paid on the common stock as long as any interest payments are in arrears.
In 1926 the petitioner borrowed on open account from an affiliated holding company the sum of $1,894,000 and with the proceeds retired its bonds of the principal amount of $1,394,000 and its preferred stock of the par value of $500,000. Two years before this transaction, in 1924, the control of the petitioner's common stock then amounting to $1,500,000 had been acquired by the Associated Gas Electric Company, a parent company, for a price which was not discovered upon inquiry. The securities retired in 1926 had been proved by the commission. On March 26, 1919, the commission found that plant additions had been made entailing expenditures exceeding the amount sought to be issued by such sum as doubtless would be more than sufficient to enable the petitioner to credit its plant account with property items displaced. Consequently it was found to be for the public good that $500,000 of preferred stock and $250,000 of bonds should be issued.
On March 5, 1924, the commission made a further order upon petition of the company. The capitalization outstanding at that time consisted of $1,000,000 of common stock, $500,000 of preferred stock and $1,000,000 of five per cent bonds. Authority was sought to issue $1,400,000 of six per cent bonds maturing in 1945, but redeemable 105 before June 1, 1943. From the proceeds of the proposed bonds the outstanding five per cent bonds were to be retired and the balance of the proceeds, together with those of $500,000 of additional common stock for which authority was sought, were to be used for the payment of indebtedness incurred by the petitioner in making additions to plant and providing for working capital. The commission found that the expenditures for additions and working capital had been made as claimed and authorized the issues as consistent with the public good.
Late in 1926 the New England Gas Electric Association was organized as an affiliate of the Associated Gas Electric Company, and in 1927 the Association acquired the common stock and the open account indebtedness of the petitioner.
All of the securities retired in 1926 had been approved for issuance by the commission. As to the preferred stock and $644,000 of the bonds, the commission had found that they were supported by expenditures for additions or working capital. It does not appear whether there was any finding prior to 1919 as to the sufficiency of expenditures on capital account to support the remainder of the bonds.
If the issuance of the securities now proposed be authorized, their proceeds are to be used for the reduction of the open account indebtedness incurred in 1926 and never yet approved by the commission.
In 1930 the petitioner attempted to acquire at foreclosure sale the properties of the Derry Electric Company, but that sale has never been approved by the commission. With the Derry property eliminated, the balance sheet of the petitioner shows a book value of plant investment amounting to $4,206,698, while the total of capital stock and bonds for which authority is sought is $3,394,000. There is no other evidence of the present value of the property, and no evidence of its condition or of the proportion of the property now useful in utility operations. Exclusive of the debt incurred for the purchase of the property of the Derry Electric Company, the liabilities of the petitioner include $392,579.70 on short term notes and $2,284,473.12 of open account. There are outstanding shares of common stock of the par value of $1,500,000 upon which no dividends have been paid since August 30, 1926.
Since the last authorized issuance of securities, the petitioner claims to have made additions to plant costing about $1,115,880.95 and to have paid for them out of earnings and borrowings from affiliated companies. These additions are not sought to be capitalized in the present proceedings, and the petitioner declined to state when, if ever, it would seek authority to capitalize these additions, claiming that such capitalization is immaterial to the present proceeding and that it is entitled as a matter of law to issue the proposed securities in the place of those retired.
The commission, being in doubt as to the law applicable to the situation, has reserved and certified the following questions:
(1) Is the issuance of the proposed securities consistent with the public good?
(2) Should the proposed issue of securities be approved as a matter of law?
(3) To what extent are matters determined in former proceedings for the issuance of securities, such as the cost of additions, extensions and improvements, now open to inquiry?
(4) If any part of the capital stock and other securities of the petitioner, issued with commission approval, have been retired, may the commission, if it finds the public good so to require, withhold permission to issue similar securities to the extent that said proposed issue, taken together with the petitioner's then outstanding securities and indebtedness, exceeds the fair value of petitioner's properties?
(5) May the commission consider what type or types of securities are sought to be issued in determining whether the proposed issuance of securities is for the public good?
(6) If the commission find it for the public good that securities be issued, may it determine what type or types of securities may be issued?
(7) Independently of the outcome of this petition, is the petitioner entitled as a matter of law to capitalize its expenditures for additions and improvements made since 1924?
(8) If question 7 is answered in the affirmative, may the commission, in determining whether the issuance of the securities now petitioned for is in the public good, properly consider the possible effect of future additions and increases to petitioner's capital structure?
Laurence I. Duncan and Robert W. Upton (Mr. Upton orally), for the petitioner.
Francis W. Johnston, Attorney-General, and Louis E. Wyman (Mr. Wyman orally), for the State.
The former opinion in this case is withdrawn.
(1) (2) The first two questions may be considered together. The petitioner contends that the proposed issues must be found consistent with the public good as a matter of law. All of the securities retired in 1926 were valid because approved by the commission after findings that they were supported by expenditures for plant, less allowances for property items displaced, and that the issues were consistent with the public good. It is urged that, while the commission has made no finding that the issues now proposed are consistent with the public good, such a finding is required because of the valid character of the securities retired in 1926, so that as a matter of law the commission must approve the present issue of securities equivalent, dollar for dollar, to those retired, the proposed securities being used to repay to the lender holding company so much of the loan as represented the par of the retired securities.
On the other hand, the state contends that, along with other facts and circumstances, the commission may now consider the present value of the capitalizable property of the petitioner. It is not contended that present value must, as a matter of law, be conclusive as to the question of public good which the commission is bound to determine in the present proceeding.
The petitioner is understood to rely principally upon the claim. that P. L., c. 241, ss. 1-4 requires the commission to determine the question of public good solely upon the cost of acquiring property. Those sections read as follows:
"1. Purposes. A public utility or railroad corporation lawfully engaged in business in this state may, with the approval of the public service commission, but not otherwise, issue its stock, bonds, notes and other evidences of indebtedness payable more than twelve months after the date thereof, for the purpose of defraying the cost of acquiring property of any kind which is reasonably requisite for present or future use in the conduct of its business in this state, or of constructing, completing, extending or improving its plant, equipment or facilities for doing such business, or of maintaining or improving its service to the public within this state, or of providing itself with working capital, or for any other purpose authorized by law, including the payment or refunding of any outstanding indebtedness or securities issued for any such purpose.
"2. Application. Any such public utility or railroad corporation which may apply to the public service commission for authority to issue such securities shall file with its application a statement in reasonable detail, showing the actual amount of items of expense already incurred and the estimated amount of items of expense to be incurred for any of the purposes defined in the preceding section which it may desire to capitalize.
"3. Authorization. The commission, after hearing and such reasonable investigation and inquiry as it may deem proper, shall determine the actual or probable cost of such items; and, if in its judgment the issue of such securities upon the terms proposed is consistent with the public good, it shall authorize the same to an amount sufficient, at the price fixed in accordance with the laws applicable thereto, to provide funds for defraying the cost as so determined.
"4. Evidence Considered. Upon consideration of any such application, the commission may take into account all facts and circumstances which may be relevant to the question whether the proposed issue of securities may be made consistently with the public good . . . .
"6. Depreciation. Upon any application for authority to issue securities for the purpose of providing funds for discharging any indebtedness incurred by a public utility in good faith prior to July 1, 1914, in acquiring property or accomplishing any of the other purposes specified in section 1, no deduction shall be made from the cost thereof, as determined by the commission, on account of any estimated depreciation of plant and properties, beyond the portion, if any, of such cost which it may appear has been paid out of the depreciation reserve of said public utility, if any, or out of earnings, to make good depreciation."
There is no question that the object of the statute is to avoid over-capitalization contrary to the public interest. Grafton c. Co. v. State, 78 N.H. 330. A prime test is not to permit the capital issues to exceed, at least so much as to affect the public interest materially, the fair cost of the property reasonably requisite for present or future use, plus necessary working capital and any other authorized requirements.
But some limitation of this is apparent in section 6, which was originally enacted as part of section 2 of Laws 1915, c. 115, which put the statute above quoted substantially into its present form. In that act, what is now section 6 is appended to what now appears as P. L., c. 241, s. 4.
Here the legislative intent was expressed to permit the commission to capitalize securities issued for the purpose of providing funds for discharging indebtedness (except that incurred in good faith prior to July 1, 1914) at such a figure as represented the difference between actual cost and estimated depreciation. The date of July 1, 1914, was apparently fixed upon in view of the fact that it was the last date when utilities had been required to report to the commission. Besides that, depreciation accounts had not been required prior to Laws 1913, c. 98. The provision was not retroactive, but thereafter utilities must take proper depreciation at their peril with respect to later capitalization.
That the intent of the legislature was as stated is to be gathered from the original draft of House Bill No. 331, session of 1915, which contained no provision for consideration by the commission of "all facts and circumstances which may be relevant to the question" of public good. On the contrary, it required the commission, in every case, to authorize the issue at actual cost, but with permission to deduct therefrom the amount of the depreciation reserve account accumulated by the utility during the period covered. The act, as finally passed, permitted the commission to "take into account all facts and circumstances," and forbade their deducting, in refunding indebtedness incurred in good faith prior to July 1, 1914, any sum for depreciation beyond what had actually been paid out of depreciation reserve or earnings to make good the depreciation.
It is clear enough that the legislature intended, when giving to the commission the power to consider "all facts and circumstances," to include the right to take into account the estimated depreciation that had occurred during the period since the indebtedness to be funded, or refunded, had been incurred; and that only as to indebtedness incurred in good faith prior to July 1, 1914, was the deduction to be limited to what had actually been paid out of depreciation reserve or earnings in order to make good the depreciation. As before suggested, each utility must, beginning with its next return, protect itself as to all future security issues, by building up sufficient depreciation reserves to cover actual depreciation, so that the chance of future over-capitalization would be guarded against to the largest practical degree possible.
The idea expressed by the legislature in 1915 was not entirely new. A little more than a year earlier, the public service commission had discussed in Petition of Laconia Gas Electric Company, 4 N.H. P. S.C. 52, 60, a capitalization case, the bearing of the act of 1913 (P. L., c. 240, ss. 9-13) making mandatory the carrying of adequate depreciation accounts by all public utilities. The commission thought that the legislature might have intended by the original commission act of 1911 to prevent capitalization of moneys expended in additions and improvements to utility properties "beyond an amount sufficient to represent the increased value of such properties, taking into account accrued depreciation. If utilities are allowed to pay out practically all of their earnings in dividends, paying for all improvements and extensions with the proceeds of new securities, and making no adequate reserve provision for replacement, the time will come when substantial replacements will be necessary, and the treasury of the utility will be empty. When that time arrives either the service will suffer for lack of important replacements, or such replacements must be paid for by an issue of new securities, which, added to securities issued to pay for original construction, will result in over-capitalization with the attendant incentive to unreasonable rates."
The argument for power under the original act has some cogency. But, even though that construction of the act of 1911 were not sustainable, it seems clear enough that the attitude of the commission afforded the rationale of the act of 1915. One of the commission's earliest orders regarding capitalization entered after the passage of the act of 1915 permitted capitalization of an extension at cost, less so much of it as had been paid out of the depreciation fund in a period partly prior to July 1, 1914. Petition of Exeter Hampton Electric Co., 5 N.H. P. S.C. 287. In connection with capitalizing this petitioner's property, the commission once took into account withdrawals and replacements. Petition of Rockingham County Light Power Co., 7 N.H. P. S.C. 96.
Its related utility, the Derry Electric Company, (8 N.H. P. S.C. 336), was once permitted a small issue when in emergent need of funds, before completion of an appraisal of its physical property to discover "the net value of the plant after proper deductions have been made." It was added: "If this petition is granted, there is danger that the securities outstanding will exceed the value of the physical property, which is very undesirable." The emergency permission to issue the bonds was given with the stipulation that all earnings in excess of interest charges and dividends on the preferred stock must be invested in the plant until the commission otherwise ordered. The legislative policy, and commission practice, since 1915, have been to restrict capitalization of indebtedness by consideration of both actual cost and depreciation. Stated otherwise, it is a policy of keeping such a capitalization and "cost less depreciation" (present value) in reasonable balance.
The petitioner seeks to issue securities for the payment of an indebtedness incurred since July 1, 1914. It does not matter whether this indebtedness is legal capital or not. Reasons might be found for calling it a legal debt of a capital nature, but without character as legal capital. Whichever it is, it is to be funded or refunded in such manner as will result in a legal capitalization consistent with the public good. The commission is empowered to inquire into the actual cost of the property to be represented by the proposed capital issues, and also into its actual depreciation. Upon the latter inquiry, the present value of the property may have probative value. If so, that may be investigated.
The primary concern of the commission in ascertaining the public interest for purposes of capitalization is the protection of the consuming public. An undercapitalization desired by the utility will probably not adversely affect the public interest in the usual case. But if it appears, upon all of the evidence, that the capitalization sought is so high that the utility, because of inability to earn operating costs, depreciation and other charges, will not be able to give its consumers at reasonable rates the service to which they are entitled, then the primary public interest may be found to be affected injuriously. Whether there is any secondary interest of the public requiring protection (State v. Company, 86 N.H. 16, 24), such as that of investors, we are not called upon by the questions presented to decide. But the effect of capitalization on the credit of the utility, as bearing upon its ability to command the means of reasonable service, may be a factor. State v. Company, supra, at page 25; Pittsburghc. Co. v. Interstate Commerce Commission, 293 Fed. 1001, 1004.
From this discussion we conclude that, upon the record before us, it cannot be said as a matter of law either that the issuance of the proposed securities is consistent with the public good or that it should be approved. The propriety of the granting of the petition is in the first instance a question of fact for the commission to determine after such hearing and investigation as will develop the pertinent facts and circumstances.
(3) Determinations of facts in former proceedings for the issuance of securities by the petitioner and its predecessors, such as the cost of additions, extensions and improvements, are final and conclusive as to the existence of such facts. In such matters the commission has acted judicially, and "a valid administrative judgment has the same force of obligation and finality as a judicial one." Opinion of the Justices, 87 N.H. 492.
(4) The answer to the fourth inquiry is that the commission may withhold permission to issue securities similar to those retired in 1926 to the extent that such securities, taken together with the other outstanding securities exceeds the difference between (a) the fair cost of the properties against which the retired securities were issued and (b) the actual depreciation of those properties. Upon element (b) the commission may give proper weight to evidence of present values within the limits already indicated.
(5) The commission may consider what type or types of securities are sought to be issued, and if they find that the type or types will probably affect injuriously the public interest in rates and service, or either, may give appropriate weight to that fact in its decision.
(6) If the commission finds it for the public good that securities be issued, it may not directly determine and impose upon the utility a financial structure of its own devising. It may approve all, none or a part of the securities sought, in accordance with its findings of what the public good requires, but the statute permits it to act only upon the issues prayed for. P. L., c. 241, ss. 1-4. As a practical matter, the judgment of the petitioner that it is not good business policy to issue the securities permitted by the commission's order may result in one or more successive petitions and in the end the utility may bow to the will of the commission. However, the utility may "take or leave" what the commission permits, and the commission may not order it to take it and not leave it. The utility may still try to find an alternative of which the commission can approve.
(7) Independently of the outcome of this petition, the petitioner is entitled as a matter of law to capitalize its fair expenditures for additions and improvements made since 1924, less deductions for depreciation and withdrawals from plant permitted by statute. It is obvious, however, that the problem would be simplified, and made completely practical and less expensive to all concerned, if the petitioner should amend its petition and seek capitalization of the whole property as it stands.
(8) The answer to the eighth question is, no.
Remanded.
All concurred.