People ex rel. Long Acre Electric Light & Power Co. v. Public Service Commission

137 A.D. 810, 122 N.Y.S. 641

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: April 23, 1910
• Status: Published

Opinions

Scott, J.:

This is a proceeding by certiorari to review the. determination of the Public Sei-vice Commission, first district, denying an application of the relator for permission to issue stock and bonds, and to execute a mortgage of all of relator’s properties, franchises and rights. The purposes to which the relator seeks to apply the capital to be derived from the sale of the stock and bonds are set forth in its petition as follows :

(a) To secure or retire the present issue of bonds.

(b) The acquisition of property situate in the city of Mew York upon which to erect power houses and sub-stations.

(c) The construction of power houses and sub-stations.

(d) The purchase and laying of underground cables, paying for subsidiary connections and ducts.

(e) The payment of corporate expenses in the conduct of its business..

' The record presented by the return is very voluminous and indicates that the Commissioners arrived at their, determination, which was wholly adverse to the relator, after a most" careful and thorough examination into all the facts, and after patiently hearing every one who could show the slightest claim of interest in favor of or in opposition to the application. The determinative facts, although perhaps somewhat complicated, are not in dispute.

The relator was incorporated on April 24, 1903, and by its charter, as amended on June 7, 1907, it is authorized to generate and distribute electricity for light, heat, power, and other purposes in the boroughs of Manhattan and the Bronx. Until March 22, 19G6, it held no secondary- franchise or consent from the local authorities to place, construct and use wires, conduits and conductors for electrical purposes in, over and under the streets of the city. On ‘the last-mentioned date it acquired such a" secondary franchise or consent, which had been granted in May, 1887, to a corporation known as the American Electric Manufacturing Company. The devolution of the title to this secondary franchise has already been passed Upon by this court and the Court of Appeals, and it is unnecessary to restate it here. (Matter of Long Acre Electric L. & P. Co., 117 App. Div. 80 ; 188 N. Y. 361.) The result of these decisions was to affirm the title of relator to the said secondary franchise, subject only to avoidance, if at all, by the State or city. Being thus legally entitled to pursue the business for which it was incorporated the relator applied to the Public Service Commission for leave to issue stock and bonds for the' purposes' above stated. The application was made under the provisions of section 69 of the Public Service Commissions Law (Laws of 1907, chap. 429) which provides as follows : “ A gas corporation or electrical corporation organized or existing, or hereafter incorporated, under or by virtue of the laws of the State of New York, may issue stocks, bonds, notes or other evidence of indebtedness, payable at periods of more than twelve months after the date thereof, 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 proper commission an order authorizing such issue, and the amount thereof, and stating that, in the opinion of the Commissioner,-the use of the capital to be secured by the issue of such stock, bonds, notes or other evidence of indebtedness is reasonably required for the said purposes of the corporation.” The relator, being an electrical corporation organized and existing before the passage of the foregoing act, was entitled to apply for the approval of the Commission to its proposed issue of stock and bonds, and the purposes for which it desired to make such issue were within those specified in the act. The Commissioner who heard the application in behalf of the Commission made a long report which was adopted and approved by the Commission, and- in which ten reasons were assigned why the application should be denied in toto. They Were as follows: “(1) Ho certificate to begin construction has been obtained from this Commission or its predecessor, the Commission of Gas and Electricity. (2) It is probable that the bonds already issued are illegal and there is grave doubt of the legality of the stock, neither issue having been approved by the Commission of Gas and Electricity. (3) It is doubtful whether the title of the Long Acre Company to the franchise which it claims is perfect. (4) If the bonds already issued are illegal, the approval of the application would authorize the capitalization of a franchise, which is contrary to law. (5) The amount of bonds of the new issue is very much too large as compared with the amount of voting stock. (6) The construction contract does not adequately protect the interests of the Long Acre Company or of the public. (7) The applicant has not proved'that the existing companies are.not properly conserving the public interest and convenience and that it would be to the advantage of the community to have a new company authorized to enter the field. (8) If a competing company were allowed to begin operation, it is not likely that it would continue to operate independently for any considerable period. (9) Competition would cause inconvenience and expense to the public, would, cause dupli- ■ cation of plant, would lead to waste and ultimately be urged as a reason why rates should not be reduced to consumers. (10) Practically all of the advantages claimed by the applicant as to the probable results of competition can be secured through the powers of this Commission,., and until it has been demonstrated that these are ineffective it would be unwise to adopt a method which has proved to be ineffective in the past.” "

• Before proceeding to consider these reasons in detail it may be useful to consider the extent of the authority given,' by the statute to the Public Service Commission with réspéct to the issue'of .corporate securities. ' The certificate of' opinion required to be made by the Commission in authorizing such an issue is to be that “ the use of the capital to be secured by the issue of such stock,' bonds, notes or other evidence of indebtedness is reasonably required -for the said purposes of' the corporation.” The Court of Appeals has recently had occasion to define the duties and powers of the Commission under section 55 of the' Public Service Commissions' Law, which is identical with section 69 except that it applies to common carriers and railroad and street railroad corporations instead of gas and electrical corporations. (People ex rel. D. & H. Co. v. Stevens, 197 N. Y. 1.) In that case the court said : “ We understand that the paramount purpose of tlie enactment.of the Public Service Commission's Law was the protection and' enforcement of the rights of the public. * * * Eor a generation or more the public has been frequently imposed upon by the issues of stocks and bonds of public service corporations for improper purposes, without actual consider-, ation therefor, by,company officers seeking to enrich themselves a’t the expense of innocent and confiding investors. One of the legislative • purposes in the enactment of this statute was to correct this evil by enabling the Commission to prevent the: issue of. such stock and. bonds, if upon an investigation of the facts it is found that they were not for the purposes- of the corporation enumerated by the statute and reasonably. required therefor.”

It would seem to follow (and this I understand is not questioned) that the Commission, when application is made to.it to approve of an issue of securities, is .not'Obliged to consent or refuse consent' to the whole application as presented, but- may authorize the issue of such securities as it deems to be reasonably required for the- enu-. meráted purposes of the corporation, and refuse its .consent to the remainder of the issue desired to be made. The court in the case cited further said: “ We do not think the legislation alluded to was designed to make the Commissioners the financial managers of the corporation, or that it empowered them to substitute their judgment for that of the board of directors or stockholders of the corporation as to the wisdom of a transaction, but that it was designed to make the Commissioners the guardians of the public by enabling them to prevent the issue of stock and bonds for other than statutory purposes.” The purposes for which the relator seeks to issue its stock and bonds are all within the purposes enumerated by statute unless, for reasons to be hereinafter discussed, the refunding of outstanding bonds is without the statute. The question before the -Commission, therefore, was whether or not the issues sought to be made, or any part thereof, were reasonably necessary for such purposes. We may now proceed to consider in detail the reasons assigned by the Commission for wholly denying the application of the relator. The first reason is: That “ no certificate to begin construction has been obtained from this Commission or its predecessor, the Commission of Gas and Electricity.” This objection requires a reference to the Gas Commission Act of 1905. (Chap. 737). Before the passage of that.act any corporation having a charter from the State and the consent of the city could commence and carry on the electric lighting business. By section 11 of the act of 1905 it was provided that any corporation “ hereafter incorporated” for lighting purposes might not exercise any power or transact any business until it had obtained a permit from the Gas Commission created by the act. The relator was not covered or affected by this section because it was incorporated before 1905. By section 81 of chapter 429 of the Laws of 1907, the powers and duties of the so-called Gas Commission were transferred to the Public Service Commissions, and section 68 of the act provides as follows: “No gas corporation or electrical corporation incorporated under the laws of this or any other State shall begin construction, or exercise any right or privilege under any franchise hereafter granted, or under any franchise heretofore granted hut not heretofore actually exercised, without first having obtained the permission and approval of the proper Commission.”

It is quite apparent from an examination of this section and of section 70 that the word “ franchise ” as used in these sections refers to the secondary franchise or consent of the local authorities, and not to the primary franchise to be a corporation, and carry on business as such, derived from the. fact of incorporation. It will be seen that the section above quoted refers to two classes of franchises, under which construction cannot be ■ begun or rights exercised without the permission and approval of the Commission,- viz., (1) Franchises hereafter granted, and (2) franchises heretofore granted but not heretofore actually exercised. .The relator’s franchise does not fall within the first class, having been.gran ted in 1887. Does it fall- within the second class ? It appears from the evidence and the report of the Commissioner who reported upon the applic-ation that the American Electric Illuminating Company, the owner of the franchise through mesne assignments, actually exercised it, and supplied electricity to customers in 1889 and 1890, when it was practically driven out of business by the abolition of overhead wires in the city- of Hew York. So the franchise under which the rélator seeks to operate its -business' did not fall within the class of franchises “not heretofore actually exercised.” We think, therefore, that the first-reason given for denying the relator’s application is untenable. The second reason is,- “It is probable that the bonds already issued are illegal and there is grave■ doubt of the legality, of ■ the stock, neither-issue having been approved by the Commission-of Gas and Electricity.” This reason calls for the consideration of section 12 of the Gas Commission Act of 1905 (Chap. 737), which- reads as follows : “ §. 12. Approval of issue of stock and bonds.—Stock or bonds shall not be issued by any corporation hereafter incorporated which is subject to the supervision of. the Commission, until the-certificate of authority has. been issued as required in the preceding section, and until such Commission shall further certify in writing as to the amount of stock or bonds reasonably required for. the purposes.of the corporation. Stock and bonds of such corporation shall not be issued in excess of the amount so certified. Any such corporation heretofore or - hereafter incorporated shall not increase its capital stock or its bonded indebtedness without the consent in writing of such Commission, stating the amount of the authorized increase.”

This section provides for two classes of corporations, viz., those “ hereafter incorporated ” and those- “ heretofore or -hereafter incorporated.” - As to the first class (within which the- relator .tides not fall) no issue of stock-or bonds could be-issued without consent of the Commission. This, of course, includes an .initial issue as well-as an increased issue. As to the second class (within which the relator does fall), the consent of the Commission is requisite only to an “ increase ” of capital stock or bonded indebtedness, which, of course, implies that there must have been an initial issue to be increased. Although the relator was incorporated before 1905, its initial issue of stock and bonds was not made until 1906. By the letter of the statute above quoted the relator, having been incorporated before 1905, required no consent from the Gas Commission for its initial issue of securities, and such issue can not be said to be illegal because no consent therefor was obtained.. The argument to the contrary, as urged by the learned counsel to the Commission, is that it was the evident purpose of the Legislature to forbid all further issues of stock or bonds without the consent of the Gas Commission, and that the reason for the peculiar wording of the section which appears to relieve the relator from the necessity of obtaining consent for its initial issue is that it was not contemplated that any corporation organized before the passage of the. act would not have issued stock or bonds before that time. The question is not a vital one at present. The bonds which it is desired to issue for the purpose of refunding the bond's now said to be illegal, constitute but a fraction of the whole proposed bond issue, and it is within the power of the Commission to authorize the issue of bonds for purposes clearly legal, and to refuse to authorize an issue to take up the original bonds, the validity of which is questioned. That question can then be passed upon by itself. The same considerations apply to the fourth reason, which is : “ If the bonds already issued are illegal, the approval of the application would authorize the capitalization of a franchise, which is contrary to law.” Both of these last-mentioned reasons relate only to the use to which it is proposed to put a part of the bond issue, and affect only the question as to how large an issue should -be authorized, and do not support a refusal to authorize any issue at all. The same may be said of the fifth reason, which is: That “ the amount of bonds of the new issue is very much too large as compared with the amount of-voting stock.” The third reason, that “ It is doubtful whether the title of the Long Acre Company to the franchise which it claims is perfect,” is answered by the decision of this courtand the.' Court of - Appeals above referred to, and is abandoned by- counsel for the respondent upon his brief. The sixth reason for refusing consent to the issue of any securities at all is that: “ The construction Contract does not adequately protect the interests of the Long Acre Company or of the public.” ■ The assignment of this reason indicates a disposition on the part of the Commission to do precisely what the Court of Appeals has said that they are not authorized to do, viz.,. “ to substitute their judgment for that of the board of directors or stockholders of the corporation as to the wisdom of a transaction.” We do not, of course, mean to be- understood as saying that a .case might not occur wherein, a proposed contract by a corporation was . so obviously objectionable that the Commission would be-justified in ■ refusing its assent to an issue of securities to carry it out. But. no such case is presented here. ■ The objection to it seems to be wholly arbitrary, and. is unsupported by any argument in the report to the Commission or on the brief, of counsel. Our own examination discloses nothing apparently so objectionable as to warrant condemnation. This brings us to the last four reasons, which are elaborately argued in the Commissioner’s report, and which, if valid, justify the refusal to approve any issue of securities at all. They are the. following: “ (7) The applicant has not proved that the existing companies are. not properly conserving the' public interest and convenience and that -it'would be to the advantage of the community to have a new company authorized to enter the field. (8) If a competing company were allowed to begin operation, it is not likely that it would continue to operate independently for any considerable •period. (9) Competition would cause inconvenience and expense to" the public, would cause duplication of plant, would lead to waste and ultimately be urged as a reason why rates should not be reduced to consumers. (10) Practically all of the advantages claimed bythe applicant as to the probable'results of competition can be secured through the powers of this Commission, and until it has been demonstrated that these are ineffective it would, be unwise to adopt a method which, has proved to be ineffective in the -past.”

These reasons for fefiising consent to tile issue of stock and bonds are fundamental, and go to the extent of holding that the relator, although.authorized by its charter and franchise to manufacture and distribute electricity, should not be permitted to do so, because it is manifest that if it. may not issue any stock and bonds at all it cannot exercise its corporate rights and franchises. These reasons are all based upon the underlying proposition that there should be no competition in the business of electrical lighting, providing that there is to be found one company already performing that service acceptably. It is said that it is the general policy of the State to prevent such competition and to encourage in such matters benefieient monopoly, the rights of the public and the consumers being protected by the reserved right of the Legislature to regulate •charges and methods of operation. That such has been the general policy of the State is undoubted. (Matter of Attorney-General, 124 App. Div. 401, 406 ; People ex rel. New York Electric Lines Co. v. Ellison, 188 N. Y. 523, 531.) In the case last cited the grounds upon which this general policy rests are clearly pointed out.

The right to determine whether such competition should be permitted, and when, rests, however, with the Legislature and has not been delegated to the Public Service Commissions. The relator had acquired legislative authority to transact its business before the Commission was created, and we can find nothing in the act which permits the Commission to say, upon its own mere ipse dixit that a duly chartered and authorized corporation may not transact business merely because it may compete with another corporation engaged in the .same business. Upon this question it is interesting and significant to note the difference in the powers granted to the Commission respecting railroad corporations and those respecting gas and electrical corporations. By section 53 of the act railroad corporations, street railroad corporations and common carriers, which had not before the creation of the Public Service Commission obtained a consent from the Board of Railroad Commissioners, or which had not then become entitled to begin construction by virtue of compliance with the Railroad Law, are forbidden to begin the construction of a railroad, or any extension thereof, without first having obtained the permission and approval of the proper Public Service Commission, and such permission is to be1 given only,after the Commission has determined “ that such construction • or such exercise of the franchise or privilege is necessary or convenient for the public service.” Under this provision it seems that the Comrnissioh could properly withhold its permission if the proposed railroad appeared to be unnecessary because the territory to- be served was already sufficiently served by an existing line of railway. (People ex rel. Potter v. Board of Railroad Commissioners, 124 App. Div. 47; People ex rel. D. & H. Co. v. Board of Railroad Commissioners, 126 id. 492.) The provisions regarding gas and electrical companies are quite different and provide for ho certificate of necessity. or convenience. Section 68, which requires the approval of-the Commission before, certain gas and electrical corporations may begin construction or exercise rights and franchises, merelyrequires that before such certificate of approval is issued a certified copy of -, the charter of the corporationshall be filed in'the. office of the Commission, together with proof that it lias obtained the required con- • sent of the proper municipal authorities. Section 69, requiring the . consent of the Commission to an issue of stock or bonds of a gas Or electrical corporation, merely requires that the Commission shall be ■satisfied that the money .to be derived.from, such issue is reasonably ■ required for the enumerated purposes of the corporation. The specific requirement of a certificate of “necessity and convenience ” in-the-case of a railroad company,' and the omission of any such require- . ment in the case of a gas and electrical corporation, indicates' that, as to the latter, it was not the intention .of the Legislature to delegate' to the Commission the power to prevent the exercise of corporate rights merely because such exercise would involve competition. The last four reasons, therefore, rest upon a mistaken view as to the ' scope of the Commission’s authority and are consequently insufficient It will be seen, that the reasons given by the Commission for withholding its approval to the relator’s application divide themselves into two classes. The first class • comprises those which go to the . question whether any securities at all should be issued. These we' find to bé inadequate! The second class comprises those which relate to the question as to what amount of securities should be permitted to be issued and to what purposes their proceeds should be applied. These, qúestions the Commission has not undertaken to decide, relying' upon the supposed force of their objections- to any-issue at all.

It follows that the writ should be sustained and the determina-”, tion of the Commissioners annulled, with fifty dollars costs and disbursements, and the relator’s application referred back to the Commission for consideration and action within the limits of its authority.

Clarke and Dowling, JJ., concurred; Ingraham, P. J., and McLaughlin, J., dissented.