Citation Numbers： 286 A.D. 28, 142 N.Y.S.2d 68, 1955 N.Y. App. Div. LEXIS 3978
Judges： Bergan, Foster, Halpern
Filed Date： 5/24/1955
Status： Precedential
Modified Date： 10/28/2024
(dissenting). The general constitutional background of the problem is set forth in the opinions of Presiding Justice Poster and Justice Bergan but, in view of the fact that we are here concerned with the construction of a statute enacted in 1910, it may be useful to trace the development of the “fair
In 1898, in Smyth v. Ames (169 U. S. 466, 547) the United States Supreme Court, in an opinion by Mr. Justice Harlan, held that, under the due process clause of the United States Constitution, a public utility company was entitled to a fair return upon the “fair value” of its property and that in determining the “ fair value ” both “ the original cost of construction ” and “ the present cost as compared with the original cost of construction ” (which came to be known as reproduction cost) were to be considered, together with other factors. The court did not specify the weight to be given the original cost and the present cost respectively. Each of the factors was “to be given such weight as may be just and right in each case”. It may be noted, however, that original cost was listed first in the factors to be considered. In practice, under the “ fair value ” rule, as first formulated, original cost was considered the principal measure of value and evidence of reproduction cost was received chiefly as a check upon the reasonableness of the figures claimed by the company to represent the original cost. Compare San Diego Land Co. v. National City (174 U. S. 739, 757 [1899]) per Harlan, J.: “ The property may have cost more than it ought to have cost, and its outstanding bonds for money borrowed and which went into the plant may be in excess of the real value of the property”. Items of actual expenditure which were not reflected in “ real value ”, i.e., property of usefulness in the public service, were to be rejected.
In the days when book records were inadequate and when wasteful and extravagant expenditures were freely made, proof of reproduction cost was regarded as a good way to determine what the actual cost was. ‘ ‘ Estimates of reproduction costs were then offered, largely as a means, either of supplying lacks in the proof of actual cost and investment, or of testing the credibility of evidence adduced, or of showing that the cost of installation had been wasteful ” (Brandeis, J., Southwestern Tel. Co. v. Public Serv. Comm., 262 U. S. 276, 298-299).
It had been argued on behalf of the consumers in Smyth v. Ames that, where the reproduction cost was less than the original cost, by reason of a decline in the general level of prices, the lower figure should be taken as the sole factor in determining the rate base (cf. Steenerson v. Great Northern Ry. Co., 69 Minn. 353 [1897]). But this was rejected by the court and the court
While the price level remained fairly stable from 1900 to 1910, there were occasional instances in which the current cost of reproduction was in excess of the original cost and in those cases the parties changed sides and the utilities were the ones who insisted upon consideration being given to reproduction cost. Claims of this character were touched upon in Willcox v. Consolidated Gas Co. (212 U. S. 19, 52 [1909]). While it upheld the gas rates prescribed by the New York State Legislature, the court in a dictum said that, as a general rule, “ If the property * * * has increased in value since it was acquired, the company is entitled to the benefit of such increase ”, but the court continued: “We do not say there may not possibly be an exception to it, where the property may have increased so enormously in value as to render a rate permitting a reasonable return upon such increased value unjust to the public. How such facts should be treated is not a question now before us ”.
This is the stage of development which the “ fair value ” doctrine had reached in 1910, when the statutory provision relied upon by the petitioner was adopted. The prevailing doctrine was that, as a matter of constitutional law, a public utility company was entitled to a return upon “ fair value ”, which was to be determined as a matter of judgment, after consideration of all factors. Original cost was recognized as one of the principal factors to be considered. Ordinarily, an increase in value subsequent to the construction or acquisition of the property was also to be given consideration but the question was still open as to whether such an increase might not be disre
The leading text of that period was Whitten on Valuation of Public Service Corporations published in 1912. At page 40, Mr. Whitten stated: “ there is as yet no authoritative determination of what constitutes fair value. The entire subject is in a developmental stage.”
In the period of sharply rising prices, during and after the first World War, the utility companies demanded that reproduction cost be treated as “ the dominant element ” in the determination of “ fair value ” and, to a large extent, the United States Supreme Court yielded to this demand, notwithstanding its refusal to adopt that view in a period of depressed prices in 1898.
The apotheosis of the reproduction cost theory was reached in McCardle v. Indianapolis Co. (272 U. S. 400 [1926]). The language of the court in that case indicated that reproduction cost was to be considered as virtually the sole element in determining “ fair value ”. But the court retreated from this extreme position in subsequent cases, reverting to the view that ‘1 fair value ’ ’ was a judgment figure to be arrived at in accordance with what seemed just in each case, taking into consideration both original cost and reproduction cost. (Los Angeles Gas Co. v. Railroad Comm., 289 U. S. 287 [1933]; Railroad Comm. v. Pacific Gas Co., 302 U. S. 388 [1938]; cf. Minnesota Rate Cases, 230 U. S. 352 [1913], and Georgia Ry. v. Railroad Comm., 262 U. S. 625 [1923].)
The “ fair value ” formula, throughout its history, was the subject of wide-spread criticism by economists, legal scholars and other students of public utility regulation. A sampling of these criticisms is given in Justice Bergan’s opinion. It was pointed out that, insofar as the doctrine allowed the utility company a return upon a higher cost of reproduction, attributable to a rise in the general price level, it was unjust to the consumers, since it required them to pay more than a fair return upon the actual investment which had been made by the utility company. It gave the owners of the common stock, or the equity in the enterprise, a return upon an unrealized, hypothetical capital gain, in disregard of the fact that the property had been dedicated to the public use at the time of its original construction, and at its then value. This windfall profit inured solely to the benefit of the holders of the common stock; other investors, the holders of the bonds and preferred stock, were
Furthermore, if the utility companies’ reproduction cost theory were strictly carried out, all the investors would be put in jeopardy, since in a period of declining prices the reproduction cost might be far below the actual investment and, if the earnings of the company were limited to a return upon the lower amount, the company might be unable to pay the carrying charges upon the investment and might even be forced into bankruptcy. Utility companies nevertheless insisted upon dominant consideration being given to reproduction cost in periods of rising prices, confident that in a period of decline a return would be allowed upon the original cost or actual investment, notwithstanding the lower reproduction cost. In their thinking, the ‘ ‘ fair value ’ ’ formula thus became one of ‘1 reproduction cost of the utility or prudent investment, whichever is the higher ” (Southwestern Tel. Co. v. Public Serv. Comm., 262 U. S. 276, 311, supra, Brandeis, J.).
The worst feature of the “ fair value ” formula was that it made every rate case a battle of experts who offered widely-differing opinions as to the reproduction cost of the plant at current prices. The rate base thus became a fluctuating and uncertain one and its determination was productive of such prolonged litigation that regulation was hamstrung.
Throughout this period, the overwhelming majority of economists and legal scholars favored the exclusive use of original cost in determining the rate base, pointing out that it was fair to both the investor and the consumer and that it provided a stable, readily, ascertainable rate base, which greatly facilitated effective regulation. It was further pointed out that, insofar as an increase in the public utility company’s margin of profit might be required, because of inflation or other economic factors, in order to enable the company to attract additional capital, an appropriate adjustment might be made in the percentage rate of return, without affecting the stability and certainty of the rate base.
Finally, on January 3, 1944, in Power Comm. v. Hope Gas Co. (320 U. S. 591) the United States Supreme Court squarely overruled Smyth v. Ames and all its progeny and held that a rate base valuation determined solely upon the basis of original cost complied fully with the requirements of due process.
Upon the basis of original cost, the Public Service Commission in the present case found that the company’s intrastate rate base was about $1,230,000,000. Using this rate base, the commission
The petitioner claims to be entitled to this additional return because of the presence in subdivision 1 of section 97 of the Public Service Law of the provision that in determining just and reasonable rates, the Public Service Commission shall give “ due regard, among other things, to a reasonable average return upon the value of the property actually used in the public service ”. The petitioner does not ask this court to hold that the fixing of its rates upon the basis of original cost is unconstitutional or that it is unfair or unreasonable. Neither does it ask us to find that rate making on that basis interferes with the successful operation of its business or with the attracting of necessary additional capital. (Cf. Power Comm. v. Hope Gas Co., 320 U. S. 591, 605, supra.) The argument is a wholly legalistic one, based solely upon the petitioner’s construction of the quoted words. It is these words which the petitioner claims entitle it to receive about $47,000,000 per year more than it has been allowed by the Public Service Commission. Similar
The petitioner contends that, by the use of the word “ value ” in the telephone and railroad articles, the Legislature froze into the New York statutory law the requirement that reproduction cost be considered in determining the rate base, without regard to the fate of the constitutional doctrine from which this requirement is alleged to have been derived. Under the petitioner’s reasoning, this statutory requirement would be applicable only to telephone and railroad companies, the statutory provisions governing other public utilities clearly authorizing the use of an original cost rate base.
The issue in this case is thus a narrow one. Did the Legislature, by using the word ‘ ‘ value ’ ’ in 1910 in section 97 of the Public Service Law, intend to adopt as a statutory standard the requirement that reproduction cost be considered in determining the rate base, so that the requirement would remain in effect even though the United States Supreme Court should repudiate it? And did the Legislature intend to bring about this result for telephone and railroad companies, notwithstanding the fact that it had specifically approved, so far as the State law was concerned, an original cost rate base for all other utility companies ?
I
Value and Original Cost
The use of the word ‘1 value ” as a word of the English language is obviously not sufficient of itself to bring about the result asserted by the petitioner. “ Value is a word of many meanings ” (Southwestern Tel. Co. v. Public Serv. Comm., 262 U. S. 276, 310, supra, Brandeis, J.). The word “ value ” has so many meanings that it can fairly be said that it includes ‘ ‘ any monetary statement about property ’ ’. (May on Financial Accounting, p. 86; Bonbright on Valuation of Property [1st ed.], Vol. I, p. 38, Vol. II, pp. 1083-1084.)
Certain concepts of value are obviously inapplicable to public utility property. Exchange or sale value is not applicable to a public utility plant since such plants are not ordinarily bought and sold with sufficient frequency to establish a market or
The principal measure of the value of an unregulated business is its earning power but this is obviously not available as a method of determining the value of a public utility plant for rate-making purposes. The earnings of a public utility depend upon the rates allowed by the regulatory authority and any attempt to determine the value of the public utility’s property upon an earnings basis is therefore a circular process; value for rate-maldng purposes cannot depend upon earnings since earnings are in turn dependent upon the rate base valuation. In order to escape from this circular process, some element of cost must be considered in determining the value of public utility property for rate-making purposes, although it must be recognized that cost has no necessary relation to value in any commercial sense and property which may have cost a great deal to build and which could be reproduced only at a still higher cost may be worthless commercially, if it is unable to produce earnings. We must, therefore, take some form of cost as the measure of value of a public utility plant for rate-making purposes, even though for other purposes, such as tax assessment, it may be said, as the Supreme Court said in the case cited in Presiding Justice Foster’s opinion, “ the cost of a thing ” is not “ the test of its value ” (Cleveland etc. Ry. Co. v. Backus, 154 U. S. 439, 446).
Starting with the premise that we must take some form of cost as the measure of value, it is clearly permissible to take the original cost or the actual cost of construction as the standard. The word “ value ”, as applied to a public utility plant, is certainly broad enough to embrace original cost as the standard of value. The actual cost of a utility plant is its value, at the time of its construction, provided that the construction was carried out prudently and that there was no wasteful expenditure of funds. The cost of reproducing the plant in the light of changed price levels may also be a permissible measure of value. Thus it cannot be gainsaid that, considering the word ‘ ‘ value ’ ’ simply as a word of the English language, either original cost
Neither is the use of the word “ value ” in conjunction with the other words in the phrase “ the value of the property actually used in the public service ”, inconsistent with an original cost rate base. The phrase “ used in the public service ” is the equivalent of “ dedicated to the public use ”. The property of a public utility company is dedicated to the public service when construction of the property is completed and it is first used in such service. The property must be deemed to have been dedicated at its value at the time of dedication. The value of the property at that time is ordinarily the cost of its construction. Hence, the phrase “ the value of the property actually used in the public service ” may reasonably be construed to mean “ the value of the property at the time of its dedication to the public service ”, which would be determined ordinarily by its actual or original cost.
Certainly, in 1910,
Once it is recognized that an original cost rate base falls within the range of the permissible meanings of the term1 ‘ value of the property ’ ’, as used in section 97, it follows readily that the Public Service Commission had the right to adopt that interpretation. Where words of broad meaning are used in a regulatory statute, the administrative agency charged with the enforcement of the statute has the right to interpret them and the agency’s interpretation is binding if it has a rational basis (Matter of Mounting & Finishing Co. v. McGoldrick, 294 N. Y. 104).
Furthermore, apart from the weight to be given to the commission’s determination, the interpretation which authorizes the use of an original cost rate base is the only one which renders the telephone and railroad sections consistent with the rest of the Public Service Law and with the settled rate-making policy of the State. (See discussion of this point in part III below.)
It is suggested in the majority opinion that the word “value” in section 97 means “ current value ” or “ present value ” but if the Legislature had intended this, it could easily have said so. There is no reference in the statute to present value or current value, nor is there any reference to reproduction cost. There is no provision in the statute that value shall be determined in any particular way or as of any particular time. There is no provision that value shall be determined with due regard to reproduction cost or to current price levels.
The emphasis in the statute is upon the fixing of “ just and reasonable rates ”, with due regard to a reasonable return upon the value of the property of the company used in the public service. How the value is to be arrived at is left to the Public Service Commission to determine, subject only to the requirement that its determination be a just and reasonable one so that the resulting rates will be just and reasonable.
The gist of the statutory provision is that in fixing rates the Public Service Commission is to proceed by the rate base method, that is to say, it is to determine the return or the profit to which the company is entitled upon the basis of a return upon a rate
There can be no question as to the intrinsic reasonableness of an original cost rate base. A system of rate making which is based upon the principle that the investors should at all times receive a fair return upon the amount of their actual investment is obviously fair and reasonable (Power Comm. v. Hope Gas Co., supra).
Putting aside for the moment the theory that the use of the word “ value ” constituted an adoption by the Legislature of the doctrine of Smyth v. Ames, it is clear that the words of the statute do not of themselves mandate the consideration of reproduction cost or forbid the adoption of a rate base determined solely upon the basis of original cost.
II
The alleged adoption of Smyth v. Ames.
This brings us to the heart of petitioner’s case, the contention that, by using the word “ value ” in the statute, the Legislature necessarily adopted the content of the then prevailing constitutional doctrine of Smyth v. Ames as a part of the statutory law of this State, without regard to the fate of that doctrine in the
First. As has already been pointed out, the meaning of the doctrine of Smyth v. Ames was far from settled in 1910. In the words of the leading authority of the time, it was “ in a developmental stage ” (Whitten, op. cit., supra, p. 40). If, by reason of the use of the word “ value ”, the Legislature is deemed to have adopted a doctrine which was in a developmental stage, it must be deemed to have adopted it with all its potentialities for development. The ultimate development, as we have seen, was the decision in the Hope case holding that an original cost rate base fully complied with the requirements of due process.
Second. The crucial term in Smyth v. Ames was “ fair value ”, not simply “ value ”, which is the word used in the New York statute. “ Fair value ” is the term of art which represented and symbolized the constitutional doctrine laid down in Smyth v. Ames. Under that doctrine, a public utility was entitled as a matter of constitutional right to a fair return upon the “ fair value ” of its property. In the term “ fair value ” as used in Smyth v. Ames, the key word is the word “ fair ”. The word “ fair ” as used in the phrase means that the rate-making authority is to arrive at a judgment figure, after giving consideration to both original cost and reproduction cost. The word thus has a very special significance.
It is only when the adjective “ fair ” is interposed before the word “ value ” that we can derive from the phrase, in the light of its history, a requirement that the “ value ” be arrived at in any particular way. It is only the complete phrase ‘ ‘ fair value ’ ’ that can even arguably be said to give rise to a requirement that reproduction cost be considered. “ Fair value ” was the term used in Smyth v. Ames to designate the final conclusion which was to be reached by the rate-making authority in the exercise of its judgment, after having received evidence of different kinds of “ value ”, including the “ value ” at the time of dedication (the original cost) and the “value” at current prices (the reproduction cost). The use of the neutral word “ value ” cannot of itself constitute an adoption of the doctrine of Smyth v. Ames.
The absence of the complete phrase “ fair value ” from the New York statute is thus fatal to the petitioner’s contention. Recognizing this deficiency in its case, the petitioner seizes upon passages in the opinion in Smyth v. Ames in which the word “ value ” is used alone, but it is obvious that in the context these
Third. Even if we should assume for the purpose of argument that the Legislature intended to refer to the constitutional doctrine of Smyth v. Ames, in using the word “ value ” in the 1910 statute, it does not follow that the doctrine remained in effect as a matter of State law, after its repudiation as a matter of constitutional law by the United States Supreme Court.
A close analysis of the petitioner’s argument will readily disclose the fallacy inherent in it. The petitioner first assumes that Smyth v. Ames defined the word “ value ” as a word, independently of the requirements of due process of law, and then, upon this premise, the petitioner invokes the canon of statutory construction that when words which have been judicially defined are used by the Legislature, they are deemed to have been used in the sense given them by the judicial definition. But Smyth v. Ames does not contain a definition of the word “ value ” (or even of the phrase “ fair value ”), independently of the requirements of due process. On the contrary, the doctrine of the case constituted a definition, not of “ value ”, but of “ due process ”. It is true that the word “ value ” was used in stating the doctrine but the doctrine was not based upon the presence of the word “value” in the Constitution; that word does not appear in the Constitution. Neither did the doctrine rest upon the construction of the word 1 ‘ value ’ ’ in any Federal or State statute or in any common-law rule; the doctrine was not in anyway related to the words of any statute or rule but was laid down as a matter of constitutional law as a definition of the requirements of due process of law. The statement in Smyth v. Ames with respect to the meaning of ‘ ‘ fair value ” is an integral part of the holding by the court as to the requirements of due process and it cannot be divorced from it.
Once this is recognized, there is little left of the petitioner’s argument. Then, even if we should assume that the Legislature meant to refer to the constitutional doctrine, in using the word “ value ”, the reference would be to the Federal doctrine as such. All that we would then have, reading this reference into the statute, would be a direction to the commission to give ‘ ‘ due regard to the value of the utility company’s property, as determined in accordance with the requirements of due process of law under the United States Constitution ”. Such a direction
A helpful analogy may be found in the use of the words ‘ ‘ just and reasonable ’ ’ in statutes regulating public utility rates. This was recently discussed by the Utah Supreme Court in an opinion by Chief Justice Wolfe which has already become a classic. As the Chief Justice pointed out, at the time of the adoption of various State statutes using the words “ just and reasonable ”, the only rates which could be considered “ just and reasonable ”, under the due process clause as interpreted in Smyth v. Ames, were those fixed upon a rate base which took reproduction cost into account. But the words “ just and reasonable ” did not freeze the constitutional doctrine into the State statutes as a matter of State law. When the doctrine was abandoned, the State regulatory agencies and the State courts were free to find that rates fixed upon original cost were “ just and reasonable ”. ‘6 It would be contrary to common sense to hold that the legislature meant ‘ just and reasonable ’ only as defined by the courts at the time of Smyth v. Ames and to hold that the legislature would, in order to authorize the Commission to use prudent investment, be required to re-enact the statute saying that it meant ‘ just and reasonable ’ as that term is construed today. To the contrary, it must be assumed that the legislature contemplated that the concept of that which is ‘ just and reasonable ’ might change with social trends.” (Utah Power & Light Co. v. Public Service Comm., 107 Utah 155, 190-191 [1944].)
This statement is equally applicable to the word ‘ ‘ value ’ ’, a word which is similar to the words “ just and reasonable ” in the breadth and flexibility of its meaning. The word “ value ”, *‘ Like 1 reasonableness ’ * * * is often used as a term of
It happens that, in this case, reproduction cost is the element of “ value ” under the Federal constitutional doctrine which is in controversy but, at various times during the history of the doctrine, other elements, for which even the petitioner does not now make claim, were considered to be essential elements of “ value ” under the due process clause. For example, Public Service Commissions were at one time required to make an allowance for ‘ ‘ franchise value ’ ’ under the due process clause. In fact, this was squarely held in Willcox v. Consolidated Gas Co. (212 U. S. 19, 43, 44, 48 [1909], supra) which is the case relied upon by the petitioner as stating the “ fair value ” doctrine in the form in which the petitioner claims it was adopted by the New York State Legislature in 1910. Under the petitioner’s reasoning, the holding of the Willcox case upon this point was frozen into the New York State law, even though the Supreme Court later held it to be erroneous (Georgia Ry. v. Railroad Comm., 262 U. S. 625, 632 [1923], supra; cf. Public Service Law, § 101). Similarly, there was a time when the Supreme Court required an allowance to be made for “ going concern value ” as a separate item in the rate base, under the due process clause (McCardle v. Indianapolis Co., 272 U. S. 400, 413-415 [1926], supra). According to the petitioner’s reasoning, this, too, would have been frozen into the State law, if a statute using the word ‘ ‘ value ’ ’ had been adopted while this doctrine prevailed. Later, the Supreme Court held that a separate allowance need not be made for “ going concern value ” (Dayton P. & L. Co. v. Comm., 292 U. S. 290 [1934]; Power Comm. v. Pipeline Co., 315 U. S. 575, 589 [1942]).
This exposes the basic fallacy in the petitioner’s reasoning. Under its reasoning, every mistaken notion as to the meaning of the term ‘ ‘ value ’ ’ under the due process clause, which happened to prevail at a time when a rate-making statute using that word was adopted, would be frozen into the State law, even though the Supreme Court should later hold that the notion was erroneous. The obvious answer to the petitioner’s reasoning is that, if the word “ value ” in the State statute is deemed to have referred to the Federal constitutional doctrine, it must be deemed to have referred to it with all its potentialities for change. The Supreme Court decisions as to the meaning of the word “ value ” in due process cases cannot be torn from their context and used as definitions apart from the changing concepts of due process.
in
The Legislative Intent
If we put aside artificial canons of construction and look to the actual intention of the Legislature, it is clear beyond question that there was no intention on the part of the Legislature in 1910 to freeze the reproduction cost theory into the New York State law so that it would remain in force, even in the event that the United States Supreme Court should some day abandon it as a constitutional doctrine. There is not a shred of legislative history to support the finding of such an intention. The evidence is all the other way.
The phrase in section 97 upon which the petitioner focuses attention should not be considered as an isolated phrase; it should be interpreted in the light of the spirit and purpose of the Public Service Law and the settled public policy of the State with respect to public utility regulation.
(A.) From the beginning, the New York State Legislature has made it clear that, if it were free from Federal constitutional restrictions, it would choose actual cost as the basis of rate making. Way back in 1850, when the Legislature adopted the first general statute providing for the formation of railroad corporations and for their regulation (L. 1850, ch. 140), it provided in section 33 of the statute: 6 ‘ The legislature may * * * from time to time, alter or reduce the rate of freight, fare, or other profits upon such road; but the same shall not, without the consent of the corporation, be so reduced as to produce with said profits less than ten per centum per annum on the capital actually expended ” (Italics added). This provision was continued verbatim in the Railroad Law of 1890 (L. 1890, ch. 565, § 38).
Subsequently, after the Public Service Commission had been created and rate making had been placed under its jurisdiction, sections 49 and 72 of the Public Service Commissions Law were amended by chapter 480 of the Laws of 1910 so as to provide that rates for railroad, gas and electric companies should be pre
(B.) The long struggle of successive Legislatures and of the Governors of the State to escape from the unfortunate consequences of the reproduction cost theory is wholly incompatible with the inferring of an intention on the part of the Legislature to freeze that theory into the State law. In the 1920’s, rate regulation in this State had been virtually brought to a standstill by long drawn out litigation with respect to the reproduction cost of the properties involved. The situation became so bad that in 1929 the Legislature created a temporary commission1 ‘ to make a thorough survey, examination and study of the public service commission laws of this and other states, for the purpose of ascertaining whether the public service commission law of this state accomplishes the objects for which the system of state regulation was established, and for determining what amendment or revision of the public service commission law is essential to guarantee to the public safe and-adequate service at just and reasonable rates, to the stockholders of public service corporations, a fair return upon their investments, and to bondholders and other creditors, protection against impairment of the security of their loans (L. 1929, ch. 673, § 3.)
In approving the bill creating the temporary commission, Governor Boosevelt said: <£ The theory of twenty years ago that the return to public service corporations should not exceed a fair profit on the money actually invested is constantly and flagrantly violated. Some method must be found to return to the
It will be noted that the statute states that one of the objects for which the system of utility regulation had been established was the assuring to the stockholders of public service corporations of “ a fair return upon their investments ”. There is no suggestion of an assurance of a return upon the reproduction cost of the property or upon revaluations made in the light of changing price levels. Certainly, the Legislature which adopted this statute did not believe that by any prior statute it had frozen into the State law the requirement of the consideration of reproduction cost.
Finally, in 1934, the Legislature found a method of restoring a measure of effectiveness to rate regulation. By chapter 287 of the Laws of 1934, the Legislature added section 114 to the Public Service Law, which required all public utility companies to keep their books <£ in such manner as to show currently the original cost ” of their property and authorized the Public Service Commission to fix temporary rates “ to provide a return of not less than five per centum upon the original cost, less accrued depreciation, of the physical property of said public utility company used and useful in the public service ”. The Legislature thus expressed its desire to have rate making put upon an original cost basis but it recognized that, under the doctrine of Smyth v. Ames then prevailing, the commission would have to consider reproduction cost in fixing the final rates and it
A similar statute adopted in Pennsylvania was upheld by the United States Supreme Court in Driscoll v. Edison Co. (307 U. S. 104 [1939]). Mr. Justice Frahkfubteb, in a concurring opinion, recognized the legislative motivation in a significant statement, at page 123: “ The statute under which the present case arose represents an effort to escape Smyth v. Ames at least as to temporary rates. It is the result of a conscientious and informed endeavor to meet difficulties engendered by legal doctrines which have been widely rejected by the great weight of economic opinion, by authoritative legislative investigations, by utility commissions throughout the country, and by impressive judicial dissents.” (See, also, New England Tel. & Tel. Co. v. State, 95 N. H. 353 [1949].)
(C.) The strongest evidence against the inferring, from the use of the term ‘ ‘ value of the property ’ ’, of an intention to freeze the reproduction cost theory into New York State law, is found in the fact that the Legislature did not use this term for all public utilities but used it only with respect to railroad and telephone companies and used the term “ capital actually expended ’ ’ with respect to all other public utilities. Whatever plausibility the petitioner’s argument might have had if the Legislature had used the term ‘ ‘ value of the property ’ ’ in prescribing the rate base for all public utility companies, it has none in this situation.
If the Legislature had intended to freeze reproduction cost into the State law, it certainly would have done so for all public utilities alike. No rational basis can be found for differentiating the rate base principle of telephone companies from that of gas, electric, steam and water companies. No effort has been made by the petitioner to sustain the rationality of such a distinction. All the economic and legal arguments which can be advanced for the use of reproduction cost in determining the rate base
The Legislature is presumed to have acted rationally (Matter of Breen v. New York Fire Dept. Pension Fund, 299 N. Y. 8, 19) and it must, therefore, be presumed that the Legislature intended that all public utility companies should be on the same footing.
The words “ capital actually expended ” used with respect to gas, electric, steam and water companies have a fixed meaning. There is no possibility of construing those words as mandating consideration of reproduction cost at current prices. As to the public utilities governed by statutes using the words “ capital actually expended ’ ’, there can be no question but that, so far as State law is concerned, the Public Service Commission is authorized to adopt an original cost rate base. On the other hand, the words “ value of the property ” have a broad and flexible meaning and are susceptible to different constructions. The construing of those words as mandating the consideration of reproduction cost results in an irrational distinction between telephone and railroad companies on the one hand and gas, electric, steam and water companies on the other. This unreasonable result can be avoided only by construing the words “ value of the property ” as permitting the use of an original cost rate base. As we have seen, the words are susceptible to that construction and, since the construction is the only one which makes it possible to put telephone and railroad companies and all other utility companies on the same footing, it is the construction which should be adopted.
We have here a situation in which words of fixed meaning are used as to the rate base of some public utility companies and words of broad and flexible meaning are used as to the rate base of others and there appears to be no rational basis for distinguishing between the different kinds of public utility companies. The only reasonable solution in this situation is to take the words of fixed meaning as the controlling ones.
As a matter of fact, on occasion, the Legislature has used the terms “ value of the property” and “ capital actually expended ” interchangeably, with respect to the same type of public utility, indicating that it regarded the two terms as having
That the Legislature did not intend to give the term “value of the property ” in section 97 the significance contended for by the petitioner, further appears from chapter 508 of the Laws of 1952, amending the Condemnation Law, which is discussed in part IV below. The Legislature there described the rate-making process for all public utility companies, including telephone companies, as being based upon the “ capital actually expended ”. Obviously, the Legislature did not regard the words “value of the property ” in section 97 as having any contrary significance or as forbidding the Public Service Commission to use an original cost rate base for telephone companies.
The explanation of the Legislature’s use of the word “ value ” in the telephone and railroad sections rather than the words “ capital actually expended ” which it used in the gas and electric sections, is lost in obscurity. It appears that a comprehensive study had been made of telephone and telegraph companies by a legislative commission and that the commission had recommended that these companies be brought under regulation by the Public Service Commission (Eeport of Joint Committee to Investigate Telephone and Telegraph Companies [1910]).
If the word “ value ” is given its ordinary significance as a broad term authorizing the regulatory agency to adopt any reasonable method of arriving at a conclusion as to “ value ”, there is no difficulty in reconciling the two phrases. The word “ value ” so construed is broad enough to authorize the commission to use an original cost rate base, and the words 56 ‘ capital actually expended ” specifically authorize the same kind of rate base.
Inconsistency between the term “ value ” in one type of statute and the term “ capital actually expended ” in the other type arises only if the term 1 ‘ value ’ ’ is construed as mandating the consideration of reproduction cost, even after the abandonment of the constitutional doctrine. As has already been pointed out, no rational basis for such an inconsistent result can be found and it is not a necessary or unavoidable result of the language used by the Legislature. We must, therefore, reject the construction which produces the irrational result and adopt the construction which reconciles all the statutes into a single and harmonious whole.
W
The controlling force of chapter 508 of the Laws of 1952
The Public Service Commission of this State had long advocated the use of an original cost rate base but it had been required, under the decisions of the United States Supreme Court, to receive evidence of reproduction cost as well. After the constitutional requirement was repudiated in the Hope case in 1944, the Public Service Commission was free to use original cost as the sole standard of value in rate cases. The Public Service Commission thereafter fixed rates upon the basis of
A new section was added to the Condemnation Law, known as section 5-a, providing that “ In any proceeding to condemn property owned by a person or corporation subject to the jurisdiction, supervision and regulation of the public service commission ”, the commission shall certify “ the annual earnings which might reasonably be anticipated by the present owner thereof pursuant to just and reasonable rates, with due regard among other things to a reasonable average return upon capital actually expended ”.
Section 14 of the Condemnation Law was amended so as to require the commissioners in the condemnation proceeding to give “ due regard, in the case of a company subject to the jurisdiction, supervision and regulation of the public service commission, to the anticipated earnings of such company as certified to the court by such commission ”. The quoted language was amended by chapter 414 of the Laws of 1953 without change of meaning so far as is here relevant.
The 1952 statute really puts an end to speculation as to the intention of the Legislature in 1910. Whatever argument may be made as to the intention of the Legislature in 1910, it is clear from the latest expression of the Legislature in 1952 that rate making upon the basis of an original cost rate base meets with the approval of the Legislature. That this applies to telephone companies as well as to other public utility companies appears from the portion of section 1 of the session law quoted above. Section 1 refers to companies subject to regulation pursuant to article 5 of the Public Service Law; this is the article governing the regulation of telephone companies, of which section 97 is a part.
The statute refers to the fact that the earnings of public utility companies are being determined by the Public Service Commission, upon the basis of a fair return on the “ capital actually expended ’ ’. This language approves an original cost rate base. Apart from this specific language, the prevailing administrative construction of the rate-making statutes known to the Legisla
What is plain enough on the face of the statutes is made crystal clear in the memorandum submitted to the Governor by the Public Service Commission in support of its recommendation that he approve the bill. The memorandum, prepared by Mr. L. E. Walsh, then Counsel to the Public Service Commission and now a United States District Court Judge, read in part as follows: “ The recitals of fact in Section 1 of the bill show the reasons for its enactment; make clear that it does not impose a mandatory basis of valuation; show legislative recognition of (a) the effect on value of public utility property of its regulated nature and previous dedication to the public use and (b) the general desirability in valuing that unique type of property by a capitalization of its earnings; and legislative approval of the fixing of public utility rates with due regard to a reasonable ■return on capital actually expended, as heretofore practiced by the Public Service Commission in the case of railroads, street railroads and common carriers, gas and electric corporations, steam corporations, water corporations and telephone and telegraph corporations ”. (Italics added.) (Governor’s Bill Jacket for L. 1952, ch. 508, New York State Library, Legislative Reference Section, Albany, N. Y.)
For a comprehensive and illuminating discussion of the impact of the 1952 statute on condemnation proceedings, see the recent decision of the Appellate Division, Fourth Department, in Onondaga Co. Water Auth. v. New York Water Service Corp. (285 App. Div. 655). The Appellate Division reversed the condemnation award upon the ground, among others, that the commissioners had failed to give due regard to the prospective earnings and rate base certified by the Public Service Commission under the 1952 statute. (See, also, Condemnation of Public Utilities: A New York Statute and a New Approach, 54 Col. L. Rev. 916.)
There is a reference in Presiding Justice Foster’s opinion to the fact that, in the 1952 statute, the Legislature stated that it was not “ attempting to mandate the basis of valuation to be followed ”. This obviously refers to the valuation in condemnation proceedings, not to the valuation for rate-making purposes. The Legislature recognized that the method of valuation for rate-making purposes was well established and that rates of public utility companies were being fixed upon the basis of a “ return upon capital actually expended ”. But the Legislature
The Legislature apparently saw no need to amend the rate-making statutes in order to enable the Public Service Commission to take advantage of the new freedom of action conferred upon it by the overruling of Smyth v. Ames. The Legislature was familiar with the fact that the Public Service Commission, ever since the Hope case, had fixed rates solely upon the basis of original cost and it was obviously in agreement with that practice. It saw no inconsistency between that practice and the terms of any of the rate-making sections of the Public Service Law.
Even if we should assume that the Legislature was wrong in its belief and that the only reasonable construction of section 97 was the one requiring consideration of reproduction cost, the statute adopted by the Legislature in 1952, specifically approving the use of an original cost rate base, would nevertheless be controlling. It would have the effect of overriding the assumed construction. A subsequent declaration by the Legislature as to the meaning which should be given to a prior statute is binding with respect to the future operation of the statute. “ The Legislature may likewise declare by statute the true meaning of a previous statute, and while such a declaration will have no controlling effect in causes which had already arisen, it will lay down a new rule of construction for the future ” (McKinney’s Cons. Laws of N. Y., Book 1 Statutes [1942 ed.], § 75; cf. Matter of Chatlos v. McGoldrick, 302 N. Y. 380, 388).
The 1952 statute is the only expression by the Legislature on the subject since the United States Supreme Court in 1944 released its grip upon the rate-making process. We ought to follow that expression rather than to strain to find in the equivocal language of a 1910 statute, a meaning which resurrects and reimposes an outmoded rate-making theory, which had hamstrung public utility regulation for a generation.
The determination of the Public Service Commission should be confirmed, with costs.
Determination and orders of the Public Service Commission annulled, with $50 costs and disbursements, and matter remitted to the commission.
The alleged increase in current value referred to above relates only to the portion of the petitioner’s property allocable to intrastate business. Presumably a corresponding increase would be claimed in the current value of the property allocated to interstate business but the petitioner can make no claim for a higher rate base on account of that increase, because its rates for interstate business are fixed by the Federal Communications Commission upon an original cost rate base. The statute (U. S. Code, tit. 47, §§ 201, 205) provides that telephone rates are to be “ just and reasonable ”, The company’s books are required to be maintained upon the basis of original cost (United States v. New York Tel. Co., 326 U. S. 638). Section 213 of the Federal statute authorizes the commission to require a telephone company to file an inventory of its property showing the “estimated cost of reproduction” and also to file a statement showing “ the original cost at the time of dedication to the public use” (subds. [b], [e]). The rate making and valuation provisions are similar to the provisions with respect to gas companies in the Natural Gas Act, which were before the court in Power Comm. v. Hope Gas Co. (320 U. S. 591, 601, footnote 8). Under that statute, it was held that the commission had the right to fix rates on the basis of original cost.
We are concerned here with the meaning of a statutory provision adopted in 1910. The subsequent re-enactments of the statute in 1921 are of no materiality (L. 1921, chs. 134, 335). Chapter 134 of the Laws of 1921 was a general revision of the Public Service Commission Law, as it was then known. The amendment to subdivision 1 of section 97 is of no materiality here. The principal change was the addition of a provision for temporary rates which was subsequently held to be unconstitutional (Prendergast v. New York Tel. Co., 262 U. S. 43). Chapter 335 of the Laws of 1921 re-enacted subdivision 1 of section 97 without any change, except to rescind certain verbal changes which had been made by the earlier chapter of the laws of the same year and to restore the language to its original form. Throughout this process of amendment, the words relied upon by the petitioner remained unchanged. Under section 95 of the General Construction Law, “ The provisions of a law repealing a prior law, which are substantial re-enactments of provisions of the prior law, shall be construed as a continuation of such provisions of such prior law, modified or amended according to the language employed, and not as new enactments”. As was held long ago, “A re-enactment of a previous statute is both by the settled law of adjudged cases as well as by the provisions of the General Construction Law (Consolidated Laws, chap. 22, * * * § 95) deemed not a new law but the continuation of the former law. In determining its meaning it must be found out what was intended by the prior enactment ”. (People ex rel. Donegan v. Dooling, 141 App. Div. 31, 32-33.)
Subsequently enacted statutes may properly be considered in determining the meaning of a statute. “Acts in pari materia, passed before or after, may be referred to, in order to ascertain the intent of the Legislature in the use of particular terms” (Chase v. Lord, 77 N. Y. 1, 18; New York Central & Hudson Riv. R. R. Co. v. Williams, 199 N. Y. 108, 113-114; McKinney’s Cons. Laws of N. Y., Book 1, Statutes [1942 ed.], § 223).
It is noteworthy that, in none of the cases in other jurisdictions cited in the majority opinion in which the reproduction cost theory was adhered to, was a situation presented comparable to ours. In no State in the country has it ever been held, upon the basis of statutory construction, that reproduction cost must be considered as to certain specified types of utilities, while, as to other utilities, it need not be considered and an original cost rate base may be used.
The railroad bill amending section 49 of the Public Service Law (L. 1911, ch. 546), to which special attention is directed in the majority opinion, had a curious history. A bill was introduced at the 1911 session of the Legislature to amend section 49 so as to authorize the Public Service Commission to regulate excursion, family, commutation, half fare or other forms of reduced rate tickets. In the bill in its original form, the rate-making provisions of section 49 were repeated without change, as they had been last amended in the general revision of the Public Service Commissions Law by chapter 480 of the Laws of 1910, using the words “ capital actually expended ”. During the course of passage in the Legislature, the bill was amended to substitute the words “ value of the property actually used in the public service ” for the words “ capital actually expended ”. So far as the record shows, no special significance was attached to the change. The bill was passed as a bill to provide for the regulation of reduced fare tickets. In these circumstances, it is certainly not reasonable to read into the equivocal term “ value of the property” a deliberate decision by the Legislature to alter the fundamental rate-making policy of the State. It is noteworthy that when Governor Dix signed the bill, he treated the difference in phraseology as a purely verbal one which did not deter him from signing the bill, although he expressed the view that, in the interests of verbal consistency, the gas and electric and the telephone and railroad statutes ought to be made uniform (Public Papers of Governor Dix [1911], pp. 339-340).
Matter of Consolidated Edison Co., 96 P. U. R. (N. S.) 194 (1952); Matter of Rochester Tel. Corp., 92 P. U. R. (N. S.) 33 (1952); Matter of New York Tel. Co., 84 P. U. R. (N. S.) 267 (1950); Matter of Ripley Water Supply Co., 74 P. U. R. (N. S.) 446 (1948); Matter of Rochester Tr. Corp., 72 P. U. R. (N. S.) 455 (1948); Matter of Kings Co. Lighting Co., 70 P. U. R. (N. S.) 374 (1947); Matter of Staten Island Edison Corp., 60 P. U. R. (N. S.) 385 (1945).