Rochester Gas & Electric Corp. v. Maltbie

Hill, P. J.

Rochester Gas & Electric Corporation petitioned under article 78 of the Civil Practice Act for this review of a determination made by the Public Service Commission of the State of New York. Its parent company, General Public Utilities Corporation, has been permitted to intervene. The petitioner applied to the Commission under section 69 of the Public Service Law for authorization to issue and sell $16,677,000 first mortgage bonds, 50,000 shares of preferred stock and sufficient shares of its no-par common stock to realize $2,000,000 to the company, and further asked the Commission’s approval and consent as prescribed by the Stock Corporation Law, to amend its certificate of incorporation in connection with the increase of stock. (§§ 36, 38.)

The Public Service Law (§ 69) outlines the powers of the Commission in connection with the issuance of stock, bonds and other certificates of indebtedness. “ A gas corporation or electric corporation organized or existing, or hereafter incorporated, under and by virtue of the laws of the state of New York may issue stocks, bonds, or other evidences of indebtedness * * * when necessary for the acquisition of property, the construction, completion, extension or improvement of its plant or distributing system, or for the improvement or maintenance of its service or for the discharge or lawful refunding of its obligations * * *; provided and not otherwise that there shall have been secured from the commission an order authorizing such issue, and the amount thereof, and stating the purposes to which the issue or proceeds; thereof are to be applied, and that, in the opinion of the commission, the money, property or labor to be procured or paid for by the issue of such stock, bonds, notes or other evidences of indebtedness is or has been reasonably required for the purposes specified in the order * * *. For the purpose of enabling it to determine whether it should issue such an order, the commission shall make such inquiry or investigation, hold such hearings and examine such witnesses, books, papers, documents or contracts as it may deem of importance in enabling it to reach a determination. # * *. ”

The Commission has determined that the moneys are needed for the construction and improvement of petitioner’s plant, distributing system and for the maintenance of its service and in part for the discharge of outstanding obligations. The determination of the Commission as to these matters is not at issue before this court, as appears by its brief on this review. “ The petitioner desired to sell the securities and to use the proceeds thereof, approximately $23,500,000, to finance the construction of about $16,000,000 of new plant facilities and to refund outstanding obligations of about $7,500,000. It is agreed that these are proper corporate purposes for the issuance and sale of securities under Section 69 and there is no issue in this case in that regard.” Thus it has been determined that the new issue will not be unfair or inequitable to the present bond or security holders and stockholders of the company, and that the public of Rochester and vicinity needs the service which it is proposed to furnish through the increased facilities which will be constructed with a portion of the proceeds, but the Commission has refused to indorse the amended certificate of incorporation and finally approve the issuance of the first mortgage bonds and stocks unless and until the petitioner consents to change, modify and charge off entries in its books of account to reflect a claimed deficiency of $10,700,000 in depreciation reserve, and so-called “ impairments ” in plant utility accounts amounting to $6,658,171. Against such diminution of assets, according to the books of the company, it is required to set aside $75,000 a month from earnings until the aggregate thereof amounts substantially to $7,750,000, and further, to pay into the depreciation reserve account $2,100,000 a year from earnings. The petitioner and intervener refused to comply with these requirements and seek a review of the Commission’s determination.

The Commission has determined at least two unrelated matters, making its approval of the necessary issuance of new securities dependent upon petitioner’s consent to change its books of account to show a deficit rather than a surplus. Such requirement seems of doubtful legality. The public in and about Rochester is interested in the extension of petitioner’s plant to accommodate increased demands. The Commission recognizes that the enlargement is necessary and approves the financing plan proposed by petitioner, but it attaches conditions that book entries as to surplus for depreciation and value of the plant be eliminated from petitioner’s books and requires that the deficiency created by the elimination of the items be reduced by the application for nearly a decade of $900,000 a year from petitioner’s income, and further the approval is conditioned that “ straight line ” instead of the present observed depreciation be adopted, with a required annual contribution of $2,100,000. Section 69 (Public Service Law) is entitled, “ Approval of issues of stock, bonds and other forms of indebtedness; approval of mergers or consolidations.” No reference is contained therein to the keeping of accounts in accordance with prescribed uniform methods, but section 66 (Public Service Law) entitled, “ General powers of commission in respect to gas and electricity ” enacts that the Commission shall “ 4. Have power, in its discretion, to prescribe uniform methods of keeping accounts, records and books to be observed by gas corporations and electric corporations and by municipalities engaged in the manufacture, sale and distribution of gas and electricity for light, heat or power. It may also in its discretion prescribe, by order, forms of accounts, records and memoranda to be kept by such persons, corporations and municipalities. Notice of alterations by the commission in the required method or form of keeping a system of accounts shall be given to such persons or corporations by the commission at least six months before the same shall take effect. Any other and additional forms of accounts, records and memoranda kept by such corporations shall be subject to examination by the commission.”

The Public Service Commission has various and divergent powers in connection with the gas and electric business within this State. It may enforce safe and adequate service, just and reasonable charges, inspection of gas and electric meters and approve of incorporation and franchises, transfer of franchises or stocks, determine complaints as to quality of gas and electricity and fix rates to be charged. (Public Service Law, art. 4.) For a violation of any, supervisory order a penalty of $1,000 a day is prescribed.

A reasonable exercise of the powers of the Commission would seem to require it to pass upon this wide variety of subjects separately rather than to grant a proper request of a utility company only upon its consent to observe the Commission’s order concerning an extraneous matter. The penalty in the statute seems adequate to enforce performance by the utility of proper orders without recourse to coercive or punitive conditions attached to the granting of reasonable requests.

Concerning the claimed deficiency of $10,700,000 in the reserve for depreciation, the petitioner presented testimony of two of its officers or employees that there was no deficiency; the finding was made upon the testimony of a single employee of the Commission. The opinion of the Commissioner in this regard states: “ In making this estimate as well as his previous studies he adopted the straight-line group method of depreciation accounting. He explained that in the limited time available he was unable to make a careful restudy of the property, which eventually he expects to do, but he had available the background of the prior gas, electric and common property studies which he had made.” The Court of Appeals and this court have passed upon the validity of “ straight line ” depreciation. In Matter of New York Edison Co. v. Maltbie (244 App. Div. 685; 245 App. Div. 897, affd. 271 N. Y. 103, 106) the following question was answered in the negative by the Court of Appeals: “Are the provisions of the said orders of the Commission which require corporations to adopt the 6 straight-line ’ method of accounting for depreciation, as therein provided, valid under the laws and Constitutions of the State of Hew York and of the United States of America? ”

The balance of the more than $17,000,000 claimed “ impairment ” of petitioner’s capital is made up of two items; one substantially $3,800,000 which the Commission in an earlier order directed to be charged off as representing the excess of the book entry over the actual cost of water power and other items purchased by petitioner from a predecessor. The Commission’s order in this regard was annulled by this court (271 App. Div. 202). Ho appeal has been taken from that decision. The other item is substantially $2,800,000 and of the same general character as the last previous one. An earlier order has likewise been made by the Commission as to this item and an appeal was taken to this court. The matter was not considered by us on its merits (272 App. Div. 162) because of the statement by the Commission that it had granted a rehearing. Ho rehearing has ever been had. Substantially all of the transactions involved in the last two items took place nearly forty years ago, and the entries in the books made at that time have been unquestioned until recently. In the earlier appeal to the Court of Appeals (271 N. Y. 103,105) that court answered in the negative the following question: “ Are the provisions of the said orders of the Commission which direct corporations to rewrite their Operating Property (Fixed Capital) Accounts upon the basis of ‘ original cost,’ which is defined as ‘ the actual money cost (or the current money value of any consideration other than money) of property at the time when it was first devoted to the public service, whether by the accounting company or by a predecessor public utility,’ valid under the laws and Constitutions of the state of New York and the United of America? ”

The Federal courts have disapproved of “ straight line ” calculations as to- depreciation. In McCarclle v. Indianapolis Water Go. (272 F. S. 400, 416) the opinion states: “ The deduction was not based'on an inspection of the property. It was the result of a ‘ straight line ’ calculation based on age and estimated or assumed useful life of perishable elements. * * *

The testimony of competent valuation engineers who examined the property and made estimates in respect of its condition is to be preferred to mere calculations based on averages and 'assumed probabilities.” Consolidated Gas Co. of New York v. Newton (267 F. 231, 265) contains this statement concerning the testimony of a witness as to depreciation figured under “ straight line ” methods, “ This was necessarily a conjecture, based upon the supposed life of the plant; it has no application while the plant is kept up. ’ ’

A frequently quoted authority in this State is People ex rel. Iroquois Gas Corp. v. Public Service Comm. (264 N. Y. 17, 20). The Commission had there approved the purchase of a natural gas plant but only upon the condition that a portion of the purchase price should be charged to surplus. The opinion states concerning the powers of the Commission: “ The most that can be urged is that it may impose conditions which will insure efficient operation in the public interest in those matters which fall within the general field of its powers. It cannot make its consent dependent upon conditions which are unreasonable or which do not change the terms of the transfer of the franchise, works or systems, or which encroach upon the right of the relator to administer its corporate affairs according to its own judgment in matters in which the Legislature has not given the Public Service Commission any regulatory or supervisory powers.” It may not be said in this case that a requirement dealing with future increase of surplus for depreciation will presently add anything to the marketability or stability of the securities which petitioner seeks to issue. Should adjustments appear to be necessary in connection with surplus for depreciation after a legal and proper inspection and appraisal as to observed depreciation has been made, the Commission has full power to act. The Iroquois opinion (p. 21) contains a statement which seems to apply to the other two so-called “ impaired ” items: “ The power vested in the Commission to prescribe uniform methods of keeping accounts and records * * * does not include the power to compel a corporation to write off from its book value a loss which it has not sustained, or to give up a part of its constitutional rights.” The opinion cites upon that general subject Los Angeles Gas & Electric Corp. v. Railroad Commission of California (289 U. S. 287).

The determination should be annulled and the matter remitted to the Commission for further consideration.