Foster, P. J.,
In this proceeding under article 78 of the Civil Practice Act we are asked to review and annul two orders of the Public Service Commission, which in effect denied the application of the New York Telephone Company for an increase in telephone rates amounting annually to $68,850,000. The issue raised is one of principle, and not of detail with regard to rates. Petitioner’s claim of error is that the commission refused to receive evidence of the alleged present value of its property actually used in the public service. This claim of error is based entirely on statutory language.
The statute involved is subdivision 1 of section 97 of the Public Service Law which in substance directs the commission to determine just and reasonable rates for telephone corporations, upon its own motion or on the complaint of a utility. The determination of such rates is to be made, according to the language of the statute “ with due regard, among other things, to a reasonable average return upon the value of the property [30]*30actually used in the public service ”. Petitioner contends that this language was an imperative mandate to the commission, and required it to adopt what is commonly called a present fair value rate basis in passing upon petitioner’s request for a rate increase; and the exclusion of evidence which would have been material in the computation of such a rate base was reversible error. The commission on the other hand regards the language quoted as more or less of an historical accident, and without the significance petitioner ascribes to it; and further, that when the concept of present fair value as a rate base was abandoned as a constitutional requirement by the Supreme Court of the United States (Power Comm. v. Hope Gas Co., 320 U. S. 591 [1944]) the commission was free to disregard it.
In 1898, and prior to the enactment of the Public Service Law in this State, the Supreme Court of the United States decided the case of Smyth v. Ames (169 U. S. 466). It there held that a public utility was entitled to receive “ a fair return upon the value of that which it employs for the public convenience ” (p. 547). That it meant present fair value was made clear in Willcox v. Consolidated Gas Co. (212 U. S. 19). Such was the celebrated concept which was the sine qua non of public utility rate making for over forty years, and remained so until the Hope case (supra) was decided in 1944. That case merely decided that it was no longer necessary for regulatory bodies to use the concept as a constitutional requirement but of course it did not bar its use, or attempt to dictate legislative policy as to rate making for the individual States beyond the requirement that rates should be fair and reasonable. This is the rule applied to other forms of price fixing.
But what was meant by the term ‘1 value ’ ’ as used in Smyth v. Ames? It did not mean market value, or exchange value, in the ordinary sense of those terms. Property dedicated to the public service is not ordinarily considered to have an exchange value, for it can neither be freely bought or sold like ordinary commodities, nor withdrawn from the public use. Chief Justice Hughes recognized this semantic difficulty when he said in Los Angeles Gas Corp. v. Railroad Comm. (289 U. S. 287, 305): “In determining that basis, the criteria at hand for ascertaining market value, or what is called exchange value, are not commonly available. The property is not ordinarily the subject of barter and sale and, when rates themselves are in dispute, earnings produced by rates do not afford a standard for decision. The value of the property, or rate base, must be determined under these inescapable limitations.”
[31]*31The decision in Smyth v. Ames did not undertake to define value, nor was any definition attempted by the Supreme Court thereafter. Some of the elements that had to be considered in arriving at a figure of value were stated, and among them reproduction cost as well as original cost, but fair value itself defied precise definition. It was said however in another case that a determination of value must rest on “ ‘ * * * a reasonable judgment having its basis in a proper consideration of all relevant facts ’ (Los Angeles Gas Corp. v. Railroad Comm., supra, p. 306). In other words fair value was a special value for rate cases alone, supposed to be arrived at by considering various elements of value, in such weights and proportions as might be just and right in the individual case.
Almost from the date of its announcement this doctrine, which amounted to a constitutional mandate, was heavily criticized by economists and students of utility regulations. (See 2 Bonbright on Valuation of Property [1st ed.], chs. 31, 32.) Some critics advanced the view that a public utility should be limited to a fair return on capital invested irrespective of present value, others advocated the somewhat narrower prudent investment theory. In the Supreme Court itself there were powerful dissents as to method by Justice Brandéis in two cases, although in both cases he concurred in the result. (Southwestern Tel. Co. v. Public Serv. Comm., 262 U. S. 276; St. Joseph Stock Yards Co. v. United States, 298 U. S. 38.) Nevertheless a majority of the Supreme Court adhered to the doctrine until the Hope case was decided in 1944, and of course the various commissions and courts in this State followed it. It would serve no useful purpose here to cite the long line of administrative and judicial decisions on the subject, for they neither added to nor subtracted anything from the fundamental directive of the Supreme Court. Even when a section of the New York statute was cited it is clear that the over-riding authority was the Supreme Court ruling. Hence I think but little weight can be given to the assertion that the commission and the courts of this State have consistently construed section 97 of the Public Service Law to require a fair value rate base. Prom 1898 to 1944 they had no other choice.
Such was the constitutional law of the land when in 1910 the Legislature enacted section 97 of the Public Service Commissions Law (L. 1910, ch. 673) relating to telephone companies. (Law now known as Public Service Law, L. 1930, ch. 782.) Earlier, railroads and street railroads, common carriers, gas and electric corporations, had been brought within the purview of the Public Service Law by legislation enacted in 1907 (L. 1907, ch. [32]*32429). The standard of just and reasonable rates was prescribed for them without further specification at that time. Prior to that the Railroad Law prohibited any reduction of rates which would reduce profits to less than 10% on capital actually expended. In 1910 section 49 of the Public Service Law was amended to add the provisions that railroad rates should be fixed “ with due regard among other things to a reasonable average return upon capital actually expended”. At the same time a similar provision was added to section 72 relating to gas and electric corporations (L. 1910, ch.
Free access — add to your briefcase to read the full text and ask questions with AI
Foster, P. J.,
In this proceeding under article 78 of the Civil Practice Act we are asked to review and annul two orders of the Public Service Commission, which in effect denied the application of the New York Telephone Company for an increase in telephone rates amounting annually to $68,850,000. The issue raised is one of principle, and not of detail with regard to rates. Petitioner’s claim of error is that the commission refused to receive evidence of the alleged present value of its property actually used in the public service. This claim of error is based entirely on statutory language.
The statute involved is subdivision 1 of section 97 of the Public Service Law which in substance directs the commission to determine just and reasonable rates for telephone corporations, upon its own motion or on the complaint of a utility. The determination of such rates is to be made, according to the language of the statute “ with due regard, among other things, to a reasonable average return upon the value of the property [30]*30actually used in the public service ”. Petitioner contends that this language was an imperative mandate to the commission, and required it to adopt what is commonly called a present fair value rate basis in passing upon petitioner’s request for a rate increase; and the exclusion of evidence which would have been material in the computation of such a rate base was reversible error. The commission on the other hand regards the language quoted as more or less of an historical accident, and without the significance petitioner ascribes to it; and further, that when the concept of present fair value as a rate base was abandoned as a constitutional requirement by the Supreme Court of the United States (Power Comm. v. Hope Gas Co., 320 U. S. 591 [1944]) the commission was free to disregard it.
In 1898, and prior to the enactment of the Public Service Law in this State, the Supreme Court of the United States decided the case of Smyth v. Ames (169 U. S. 466). It there held that a public utility was entitled to receive “ a fair return upon the value of that which it employs for the public convenience ” (p. 547). That it meant present fair value was made clear in Willcox v. Consolidated Gas Co. (212 U. S. 19). Such was the celebrated concept which was the sine qua non of public utility rate making for over forty years, and remained so until the Hope case (supra) was decided in 1944. That case merely decided that it was no longer necessary for regulatory bodies to use the concept as a constitutional requirement but of course it did not bar its use, or attempt to dictate legislative policy as to rate making for the individual States beyond the requirement that rates should be fair and reasonable. This is the rule applied to other forms of price fixing.
But what was meant by the term ‘1 value ’ ’ as used in Smyth v. Ames? It did not mean market value, or exchange value, in the ordinary sense of those terms. Property dedicated to the public service is not ordinarily considered to have an exchange value, for it can neither be freely bought or sold like ordinary commodities, nor withdrawn from the public use. Chief Justice Hughes recognized this semantic difficulty when he said in Los Angeles Gas Corp. v. Railroad Comm. (289 U. S. 287, 305): “In determining that basis, the criteria at hand for ascertaining market value, or what is called exchange value, are not commonly available. The property is not ordinarily the subject of barter and sale and, when rates themselves are in dispute, earnings produced by rates do not afford a standard for decision. The value of the property, or rate base, must be determined under these inescapable limitations.”
[31]*31The decision in Smyth v. Ames did not undertake to define value, nor was any definition attempted by the Supreme Court thereafter. Some of the elements that had to be considered in arriving at a figure of value were stated, and among them reproduction cost as well as original cost, but fair value itself defied precise definition. It was said however in another case that a determination of value must rest on “ ‘ * * * a reasonable judgment having its basis in a proper consideration of all relevant facts ’ (Los Angeles Gas Corp. v. Railroad Comm., supra, p. 306). In other words fair value was a special value for rate cases alone, supposed to be arrived at by considering various elements of value, in such weights and proportions as might be just and right in the individual case.
Almost from the date of its announcement this doctrine, which amounted to a constitutional mandate, was heavily criticized by economists and students of utility regulations. (See 2 Bonbright on Valuation of Property [1st ed.], chs. 31, 32.) Some critics advanced the view that a public utility should be limited to a fair return on capital invested irrespective of present value, others advocated the somewhat narrower prudent investment theory. In the Supreme Court itself there were powerful dissents as to method by Justice Brandéis in two cases, although in both cases he concurred in the result. (Southwestern Tel. Co. v. Public Serv. Comm., 262 U. S. 276; St. Joseph Stock Yards Co. v. United States, 298 U. S. 38.) Nevertheless a majority of the Supreme Court adhered to the doctrine until the Hope case was decided in 1944, and of course the various commissions and courts in this State followed it. It would serve no useful purpose here to cite the long line of administrative and judicial decisions on the subject, for they neither added to nor subtracted anything from the fundamental directive of the Supreme Court. Even when a section of the New York statute was cited it is clear that the over-riding authority was the Supreme Court ruling. Hence I think but little weight can be given to the assertion that the commission and the courts of this State have consistently construed section 97 of the Public Service Law to require a fair value rate base. Prom 1898 to 1944 they had no other choice.
Such was the constitutional law of the land when in 1910 the Legislature enacted section 97 of the Public Service Commissions Law (L. 1910, ch. 673) relating to telephone companies. (Law now known as Public Service Law, L. 1930, ch. 782.) Earlier, railroads and street railroads, common carriers, gas and electric corporations, had been brought within the purview of the Public Service Law by legislation enacted in 1907 (L. 1907, ch. [32]*32429). The standard of just and reasonable rates was prescribed for them without further specification at that time. Prior to that the Railroad Law prohibited any reduction of rates which would reduce profits to less than 10% on capital actually expended. In 1910 section 49 of the Public Service Law was amended to add the provisions that railroad rates should be fixed “ with due regard among other things to a reasonable average return upon capital actually expended”. At the same time a similar provision was added to section 72 relating to gas and electric corporations (L. 1910, ch. 480). At the same session of the Legislature telephone companies were brought within the regulatory jurisdiction of the commission and the commission was directed in fixing rates for them to give “ due regard, among other things, to a reasonable average return upon the value of the property actually used in the public service ”. (L. 1910, ch. 673). These seemingly inconsistent directives in statutes adopted at the same legislative session were peculiar enough, but in 1911 section 49 of the Public Service Law relating to railroads was again amended, and 1 ‘ the value of the property actually used ’ ’ was substituted for ‘ ‘ capital actually expended ’ ’ (L. 1911, ch. 546). The apparent inconsistency between the standard set up in section 72 of the statute relating to gas and electric corporations, and that set up in sections 49 and 97 relating to railroads and telephone companies, was pointed out by the then Governor and he suggested a correction by the Legislature, but nothing was done about it.
Thereafter the Legislature brought steam corporations, omnibus companies, motor carriers and water corporations under regulation by the Public Service Commission, but in none of the enactments concerning these utilities was the term “ value ” mentioned as a factor in rate making. The “ reasonable average return upon capital actually expended ’ ’ was directed for all except motor carriers and as to these ‘ ‘ a reasonable profit ’ ’ was provided for. (Public Service Law, §§ 63-b, 63-s, 85, 89-j.)
In 1921 the telephone section 97 of the Public Service Law was re-enacted in substantially the same language as that used in the 1910 enactment with regard to an average return upon the value of property actually used in the public service (L. 1921, ch. 335). In 1929 a legislative commission was created to inquire into public utility regulations generally in the State (L. 1929, ch. 673). It seems fair to say that every conceivable economic and legal approach to rate making was explored by that body (Report of Commission on Revision of Public Service Commissions Law [Yol. 1], 1930). After its report the Legislature came up with [33]*33a bill which in substance provided that rates should be fixed according to the law of the land (Senate Int. No. 1433 [March 17, 1930]). This measure was vetoed.
I do not regard those legislative episodes as of decisive significance here. With the mandate of the Supreme Court still extant the hands of the Legislature were fettered during that period, and hence its inaction meant little. Related to the situation as it existed after 1944 however I think the report of the legislative commission has decided significance. It must be assumed that the Legislature was then entirely familiar with all of the economic theories concerning rate making because every conceivable method of rate making was discussed before the legislative commission, on which sat some eminent authorities in the field of utility regulation. Hence the failure of the Legislature to act after the Hope case was decided in 1944 is of decisive importance. It was then completely free to adopt some other standard that would apply to telephone and railroad companies, other than the concept of a return on the fair value of the property used in the public service. However eleven legislative sessions have come and gone since the Hope case was decided, and yet the language of sections 49 and 97 of the Public Service Law, insofar as pertinent here, remains the same. Stronger proof cannot be found to support the conclusion that the Legislature was and is satisfied with such language.
When the Public Service Law was enacted the Legislature was not obliged to use any language with reference to any utility which had to do with either the value of property used or capital expended. In fact in its earliest enactments it merely provided for fair and reasonable rates. The constitutional mandate of present fair value then in vogue was necessarily implied in every section of the statute dealing with rate fixing, whether mentioned or not. The Legislature could have contented itself by continuing to direct merely that rates fixed for any utility should be fair and reasonable, and left the rest of rate fixing to the constitutional mandate, as it had done earlier. It chose not to take that course and its choice must be given significance.
In sections dealing with railroad and telephone companies it used language so closely paralleling the language of Smyth v. Ames (169 U. S. 466, supra) that the only natural, reasonable and logical conclusion one can draw, so it seems to me, is that it adopted the Supreme Court concept in those sections. Its motives for so doing, whether by compulsion or otherwise, I believe to be irrelevant. The question is one of intent, not the motive which may have impelled the intent.
[34]*34Thus it would seem the words 1 ‘ value of the property actually used in the public service ” were used with deliberate intention and design when section 97 of the statute was enacted and reenacted, and continued with the same force and effect after the Hope case was decided by the failure of the Legislature to change them. No other conclusion seems reasonably plausible.
It is argued that the Legislature could have had in mind the use of the terms “ value ” and “ capital expended ’ ’ interchangeably to mean original cost less depreciation. To accept this argument would be a very convenient way of disposing of the inconsistency between the sections dealing with railroad and telephone companies, and those dealing with other utilities. But it seems very unlikely that the Legislature had any such intent. The cost of property is not the test of its value — it may be worth more or less, or worth and cost may at times coincide (Cleveland etc. Ry. Co. v. Backus, 154 U. S. 439, 446). This self-evident truth is recognized in common speech irrespective of the decision cited. It must be presumed that the Legislature was aware of the simple distinction. Moreover from the context of the telephone section it is clear that the Legislature in using the word property did not refer to capital. Property is used but capital is expended.
It is true that the word “value ” as used in the section under consideration presents a semantic difficulty. Obviously it was not, and is not used in the sense envisaged in ordinary speech, nor can it be accurately and precisely defined. Nevertheless it is a term well understood and applied by rate makers for over forty years. Hence its lack of precision as a term of measurement constituted no bar to following the directive of the section. At least nine other States are now using it as a rate base.
Fairly construed the words “ value of the property used in the public service ” can only mean present value. The verb “ used ” in that context is a verb of continuing meaning. It could not refer in any grammatical or logical sense merely to the past. Hence [35]*35whether we take the language of section 97 as an adaptation of the Supreme Court rule before the Hope case was decided, or language which the Legislature framed entirely on its own, reproduction cost less depreciation is an indispensable ingredient to be considered in fixing the present value of property actually used in the public service. This is so because it is not possible, or at least not practicable, to prove market or exchange value. Eeproduction cost can only be shown by opinion evidence, and it is that type of evidence which the commission rejected.
The commission regarded the inconsistency between the “ capital actually expended ” language of section 72 (gas and electric companies) and the “ value ” language of sections 49 and 97 (railroad and telephone companies) as of decisive importance. It said in its opinion: “ It is inconceivable, at least to this Commission, that the legislature of this state intended that telephone rates should be fixed at any different standard than those of electric, gas or water utilities.” The diEculty with this statement and the argument implied, is that on the face of it the Legislature has done the very thing the commission deems to be inconceivable. The history of the railroad section 49 emphasizes this point. In 1910 the Legislature directed that rates should be fixed with due regard to “ capital actually expended”. A year later the section was amended and “ the value of the property actually used ” ivas substituted for “ capital actually expended”. That substitution does not suggest an historical accident. Unless the Legislature was toying with words it is impossible to escape the conclusion that it intended to set up a different standard for some utilities.
On the other hand to adopt the commission’s view means reading into section 97 language that is not there, i.e. “ capital actually expended ” and discarding language that is actually there, i.e. “ value of the property actually used in the public service”. This, in my opinion, is beyond the power of the commission and the courts, for it amounts to legislation, not construction. The quoted language in section 97 must be given a rational meaning. It cannot be discarded altogether unless one takes the view that with the decision in the Hope case the Legislature abandoned it. Such an extreme position has no precedent judicial or otherwise to support it; and the lack of such support cannot be overcome by books and treatises on rate making, however learned and persuasive they may be. Manifestly if the Legislature changed its mind with the decision in the Hope case it would have so indicated in a fashion that would be unmistakable. A
[36]*36Therefore we begin and end on this phase of the matter with the proposition that the Legislature has apparently treated utilities differently for rate-making purposes. Whether it had power to do so is an issue not now before us. So far as this review is concerned we are only called upon to determine the obligation of the commission under section 97 of the Public Service Law. The issue as to what duties the commission may have under other sections of the statute, which do not in terms refer to a return upon value, must be reserved for another day.
The commission also took the view that the language of section 97 is not mandatory, although it concedes that some rate base or formula is necessarily implied. I feel impelled to differ from this view for I cannot see how a mandate could be more clearly stated. The commission undoubtedly has rather wide discretionary power as to rate making even under section 97, as the statutory language indicates, but it could not give “ due regard ” to the value of property actually used in the public service if some proof of that measure were not before it. Opinion testimony from an expert on utility regulation cannot serve to determine an issue of legislative intent where the language of a statute is reasonably clear.
The commission also cites the reorganization provisions of the statute (§§ 101-a, 60-a) to show that when the Legislature wished to direct a fair valuation rate base it did so in unequivocal terms. These sections provide in substance, although at greater length than section 97, that fair value shall be the standard for recapitalization. I see nothing in them that supports the position of the commission. It is not reasonable to assume that the legislative intent was to deny a fair value standard for rate making, and yet direct such a standard to be used for reorganization and recapitalization purposes. If any intent is to be drawn from these sections it tends to support the position of petitioner rather than the commission.
Two other enactments are cited by the commission to support its contention that the legislative intent was merely to direct a fair return on capital actually expended. One is the abolition of a bureau of Valuation and Research, formerly a part of the commission (L. 1950, ch. 465, repealing former section 4-a of the Public Service Law); and the other has to do with amendments to the Condemnation Law (L. 1952, chs. 508, 515). The legislative background for the bill abolishing the Bureau of Valuation and Research appears scant, but in any event the abolition of a bureau in 1950 can hardly serve any constructive purpose in [37]*37ascertaining the legislative intent of an act passed in 1910. For what it may be worth it should be pointed out that no change was made in section 18-a of the Public Service Law which requires a utility to pay for valuations made by the commission.
The 1952 amendments to the Condemnation Law do not seem at all germane to the problem involved in this proceeding. It may also be said of them that they serve no useful purpose in construing legislative intent as it existed in 1910. Moreover, the legislative findings and intent preceding the amendments plainly state that they were enacted to prevent excessive condemnation awards, and “ without attempting to mandate the base of valuation to be followed ”, to point out the desirability of capitalizing1 the income which a private company could be expected to earn from rates fixed “ among other things ” to a reasonable return upon capital actually expended. (See note, McKinney’s Cons. Laws of N. Y., Book 9-A, Condemnation Law, § 5-a.) I can see no connection between this language of an entirely different statute and section 97 of the Public Service Law. Again, at the risk of repetition, it is suggested that if the Legislature wanted to change the apparent meaning of section 97 it would not have taken any such obscure and uncertain method of indicating its intent.
In view of the foregoing I think petitioner’s contention is sound and cannot be justly disregarded from a legal viewpoint. The issue is not whether the section in dispute provides the best method for rate making in accordance with the views of economists, but rather the intention of the Legislature as expressed in a specific section. Courts should not feel impelled to give a strained construction to statutory language in order to serve some particular economic viewpoint, however forward looking such a veiwpoint may appear to be. If there is doubt that statutory language is up to and in conformity with the spirit of the time the resolutive remedy is absurdly simple — the Legislature can affirm, amend or repeal it. In a field that is primarily a legislative function, such as rate making, the choice should be left to the Legislature and not imposed by judicial construction in the absence of a constitutional requirement.
It is not necessary to go into detail with regard to the proof offered and rejected because the commission concedes that if petitioner’s major premise is correct its conclusion may be said to follow.
The orders should be annulled, with $50 costs and disbursements, and the matter remitted to the commission.
Pennsylvania, North Dakota, Indiana, Ohio, Maryland, Illinois, Maine, North Carolina and Delaware.