U. S. Light & Heat Corp. v. Niagara Falls Gas & Electric Light Co.

23 F.2d 719, 1927 U.S. Dist. LEXIS 1685

• Court: District Court, W.D. New York
• Decided: November 4, 1927
• Status: Published

Opinion

HAZEL, District Judge.

The plaintiff, United States Light & Heat Corporation, is engaged in business at Niagara Falls, N. Y., producing storage batteries, a leaden structure which in tbe making requires fuel for melting tho lead. For that purpose, it uses a large quantity of fuel-oil as a substitute for gas, but, owing to the large expense of fuel oil, as compared with the cost of gas, it desires to secure the latter for fuel from the defendant Niagara Falls Gas & Electric Light Company, provided, however, that the gas fuel may be obtained at a reasonable rate and at the rate at which the gas company is willing to supply gas service, if permitted to do so by defendant the Public Service Commission of the state of New York. Although plaintiff does not use gas, it nevertheless asserts that the right to be served with gas at a fair rate is a property right, and failure to do so is practically a confiscation of its property without due process of law, and denial of the equal protection of the law.

The intervening plaintiff is a householder at Niagara Falls, N. Y., and a consumer of gas, and complains that the so-called flat rate is discriminatory against him. An injunction is asked to restrain the Public Service Commission from enforcing an order, requiring service of gas by the defendant gas company, which specifies a rate for a fixed quantity of gas, or any form of rate which does not fairly permit allocation of service cost rendered to all customers.

The defendant Niagara Falls Gas & Electric Company, in its answer, alleges that, under the established flat rate, it sustains a financial loss; that its costs and expenses are not paid; and that it is unable to make a fair return upon its investment, resulting-in a violation of its contractual rights and confiscation of its properly. The defendant city of Niagara Falls avers that the charge for gas in domestic and industrial use is excessive and violative of the contractual rights of its residents. The Public Service Commission, in its answer, denies the alleged invasion of rights, and, inter alia, that a service charge is necessary to profitable operation of the gas company.

When this action was begun, the defendant gas company, under order of the Public Service Commission, supplied gas to consumers of Niagara Falls at the rate of $2.30 per 1,000 cubic feet, or at the flat rate; but, being dissatisfied therewith, it filed a schedule of new rates, or a proposed rate, called a three-part rate, by which the rate charges were graded, and included a monthly service fee to each user to compensate for like service rendered to its consumers, regardless of the quantity of gas used by them, or the service extended, or whether any gas is taken or not. The proposed rate was based on an allocation of the exact cost to the gas company arising from'the demands of each consumer in addition to a fair return for the service rendered. It specifically included (1) a service fee covering office rent and expenses, meter installation and inspection, and repair service; (2) a demand charge covering expense of structural depreciation and operating .expense of physical property; and (3) a gas charge for supplying gas plus cost of maintaining system. The commission disallowed the proposed rate on the ground that a service charge is forbidden by chapter 898 of the Laws of 1923 of this state, which includes section 65, subd. 6, reading as follows;

“Service Charges Prohibited. . Every gas corporation shall charge for gas supplied a fair and reasonable price. No such corporation shall make or impose an additional charge or fee for service or for the installation of apparatus or the use of apparatus installed.”

This provision, it is urged by plaintiffs, is unconstitutional under the Fourteenth Amendment to the Constitution of the United States, and failure to permit the proposed rate, or the three-part rate, results in taking both plaintiffs’ and the gas company’s property in violation of their rights. In argument, they say that the existing rate allowed by the commission is excessive, and is for the benefit of one class of consumers against another to their loss; that as to larger us.ers, including plaintiff the United' States Light & Heat Corporation, the difference in cost between the established rate and the rejected rate amounts to a very large sum; that the intervener is" obliged to pay a rate beyond the value of the service rendered, and, in effect, is compelled to contribute to a deficit arising from failure of other consumers, using only a small amount of gas, or none, to proportionately meet the service expense. -

There also is evidence that the gas company, at the flat rate of $2.30 per 1,000 cubic feet, does not earn its operating or overhead costs, has not paid the interest on its first mortgage bonds for several years, and no interest has been paid on the second and third mortgage bonds, and, indeed, that a deficit of upwards of $450,000 has accumulated. The defendant gas company also contends that since a large number of consumers use little -or no gas, there is no reimbursement for its outlay as to them, and that equitable allocation of the costs of its service to its consumers is necessary.

The instant ease is, perhaps, unique in that the action was begun by a prospective user of gas, who later was joined by a domestic consumer, but both, nevertheless, have a right to gas service at a reasonable charge, without discrimination in favor of one user as against another, since defendant gas company was organized to supply the public at Niagara Falls with gps at a reasonable charge. For this service, of course, it is entitled to a fair return upon its investment. People, etc., ex rel. Woodhaven Gas Light Co. v. James Deehan, as Street Com’r, etc., 153 N. Y. 528, 47 N. E. 787. The-right of the gas company, as well as the right of its consumers, as a general proposition, is, I think, a property right which entitled the parties to equal protection and treatment — one to service at a reasonable rate, without advantage over others, and the other, the gas company, to a fair rate of compensation for its outlay, made necessary by its service to each consumer, as included in the proposed three-part rate, and a reasonable profit from its operations.

Sueh property rights are held to spring from the contract investing private property to a public use, and that it then “ceases to be juris privati only.” Smyth v. Ames, 169 U. S. 466, 18 S. Ct. 418, 42 L. Ed. 819. No essential difference is perceived between one who actually uses the gas, paying an inordinate rate, and one who in good faith desires to become a consumer but is estopped by an excessive exaction. In either case there is a deprivation of one’s property right without just compensation. It is no answer to say that he was not obliged to buy the gas, since the gas company has contributed its property to the public interest. The right of recovery is not limited to the municipality or the town where the gas company is located, for manifestly the franchise was granted by the state for the benefit of the public, and one sustaining injury to his property right by the misuse of a franchise, or by exacting an unjust rate, has a right to redress without awaiting the action of another (International Ry. Co. v. Rann, 224 N. Y. 88, 120 N. E. 153), except that the user, or one deprived of use, including, of course, the gas company, must abide regulations lawfully enacted by the state for the conduct and supervision of the business of supplying gas, and covering the authorized rates or charges, unless the enactment is confiscatory of the property either of him who serves, or the person entitled to service. Stone v. Trust Co., 116 U. S. 307, 6 S. Ct. 334, 388, 1191, 29 L. Ed. 636; Northern Pac. Ry. Co. v. N. Dakota, 238 U. S. 585, 35 S. Ct. 429, 59 L. Ed. 735, Ann. Cas. 1916A, 1, The question therefore is whether the Legislature has enacted a rate which operates as an encroachment upon the constitutional rights of the plaintiff consumers and of the defendant gas company, which, by its answer, joins with plaintiffs in asking for an injunction against the Public Service Commission, and also against the city of Niagara Palls to restrain interference with it in making a charge and collecting reasonable rates from the consumers.

The special master has found that the present rate — a rate excluding a service charge — or indeed any rate, which may be established under chapter 898 of the La,ws of 1923 of this state, denies to the plaintiffs the right of purchasing gas at a reasonable price, and to the defendant gas company the right to earn a reasonable rate and cost for its service to each consumer; that it is practically compelled to operate its plant at a yearly loss and without enabling it to obtain a fair return on its investment. This finding is substantiated by the evidence.

The proofs are that defendant gas company began supplying gas at Niagara Palls in the year 1900, has never been able to pay a dividend to its stockholders or interest on its bonded indebtedness, and in 1923 notified the Public Service Commission that it intended to discontinue service; but the commission prohibited such action, and on February 15, 1924, a schedule of rates was filed covering a three-part rate, including a service charge to each consumer, but the commission ruled that the proposed rate, including a service charge, was forbidden by the laws of the state. The testimony of a large number of witnesses was taken in various cities and in different states, but no useful purpose would be served by referring to it in detail. For the most part, it showed a variation of demand of different classes of consumers, and the various experts testified that, in their opinion, each consumer should be required to contribute towards reimbursing the gas company for costs and expenses necessary in serving him, or, on installation of meters, holding itself in readiness to do so; that the fiat meter rate (except in one or two instances) is not a reimbursement of costs and affords no fair return on the investment, while the three-part rate accomplishes this purpose and is derived, in the aggregate, from all the consumers or subscribers regardless of whether any gas is actually used or not. Of course, no one is compelled to use gas or retain meters in the anticipation of its use, but when apparatus is installed and connections made it is meet that there be a contribution to the cost of its maintenance.

It is strongly urged by counsel for the Public Service Commission that plaintiffs’ remedy under the statute was to complain to the commission, which has power to give relief to consumers and subscribers on their petition, joined with 25 other users, or on the petition of the gas company, as provided by sections 71, 72, of the Public Service Commission Law, whieh, in short, confers tfte right of investigation followed by hearing and establishing of just and reasonable rates; and further that relief is afforded under section 65, subd. 5, which reads as follows:

“5. Nothing in this chapter shall be taken to prohibit a gas corporation or electrical corporation from establishing classifications of service based upon the quantity used, the time when used, the purpose for which used, the duration of use or upon any other reasonable consideration, and providing schedules of just and reasonable graduated rates applicable thereto. No such classification, schedule, rate or charge shall be lawful unless it shall be filed with and approved by the commission, and every such classification, rate or charge shall be subject to change, alteration and modification by the commission.”

The affidavit of Mr. Rude, member of the bar and deputy commissioner of the legislative bill drafting commission of this state, was received in evidence by stipulation of the parties, and, in his opinion, subdivision 5 of section 65 was not repealed by the later enactment of chapter. 898 adding subdivision 6 to such section, either directly or by implication, and that they are not inconsistent with each other.

To repeal a statute by implication, the legislativo intent to do so must be clearly apparent, and, upon reading both subdivisions, I agree that no inconsistency is apparent. Even though subdivision 5 covers certain obtainable relief by the gas company, it is plainly limited, in my opinion, to classifications as to the use of gas and fixing graduated rates. It permits consideration of other reasonable conditions, but subdivision 6 is a bar to making an additional charge in the way of a service charge, for example, the installation of a meter, or its use. In view of the denial by the commission, on application of defendant gas company, to make a service charge, it would have been idle for plaintiff, or intervener, to complain or to associate other consumers with them in order to file a complaint under sections 71, 72.

In New York & Queens Gas Co. v. Prendergast (D. C.) 1 F.(2d) 351, it was ruled that a service charge, under subdivision 6, was not void because of inability to reconcile it with either provisions of chapter 898 of the Laws of 1923, but that, in fixing the form of rates for gas companies, it nevertheless is essential that the determined rate be 'not confiscatory, and since, in that ease, a flat rate was prescribed under chapter 899, it was necessary to resort to the evidence which showed that plaintiff could not make a profit under such rate without a service charge, and accordingly the material enactments were held to be in violation of its constitutional rights.

In this ease, it is true, the question of a statutory minimum rate is not involved; but I am satisfied by the evidence that a mere increase of the present rate would not be helpful to the defendant gas company, as, in all probability, a large percentage of its consumers and subscribers would resent an increase as excessive, and users would resort to other fuel substitutes. In New York & Richmond Gas Co. v. Prendergast (D. C.) 10 F.(2d) 167, the District Court composed of Mantón, Circuit Judge, and Campbell and Inch, District Judges, likewise ruled that chapters 898 and 899, prescribing a minimum charge for gas at $1 and $1.20 per thousand cubic feet and prohibiting a service charge for installment and use of apparatus, was confiscatory and in violation of the federal Constitution.

Although in these cases the bases for the conclusion reached were on somewhat different facts, or rate regulations, there is, nevertheless, analogy in principle in the instant case. As aptly said by the special master: “In the case before us, we are faced with an economic law instead of a statutory one,” and after pointing out, rightly, I think, that even after graduating the rates as to quantity, time when used, purpose, etc., there would still be many consumers who paid the gas company less than the cost of serving them. This would result from the fact that small users or nonusers of gas, though having meters and connections, would not be fairly contributing to the cost, hence necessitating a greater contribution from large users.

Counsel for the Public Service Commission contends that the evidence discloses that certain gas companies, located in different parts of this state, may be operated, and indeed are operated, successfully under a system of classification and grading of rates; but the weight of the evidence before me per-' suasively shows that conditions here are different, and that, without a service charge to consumers, there is unfairness, in its dealing, to a class of consumers using larger quantities of its gas than others.

According to the proofs, and the opinion of the special master, a three-part rate would be a practical application in the operation of the gas company’s business, and numerous witnesses (including two former members of the Public Service Commission), engineers and skilled officials of other gas companies, expressed the opinion that a statute which prohibits a service charge — or a rate based on a service charge, a demand charge, and a commodity charge, which would result in a proportional division of the cost among the consumers — would result in inequality and unfairness between the consumers and the gas company.

It is fully appreciated that the solemn enactment of the Legislature, regulating gas companies and authorizing the Public Service Commission to establish rates, should not be lightly nullified, and only in a clear case will' its action be held unconstitutional by the courts; but when it is proven that the adopted rates destroy guaranteed rights and result in taking property without due process of law, the court, before whom the action comes, cannot shirk its responsibility. In such a ease, as said in San Diego Land Co. v. National City, 174 U. S. 739, 19 S. Ct. 804, 43 L. Ed. 1154, it must meet the issue, taking care, however, not to encroach upon a lawmaking power. Here, as already stated, the evidence in its entirety warrants holding that in prohibiting the so-called service charge to consumers of gas at Niagara Falls, the gas company is estopped from allocating the cost of production to the consumers in equal proportions, and, moreover, is prevented from earning a reasonable profit upon its invested capital. The enforcement of the particular statute in controversy (subdivision 6 of section 65) must therefore be held to be confiscatory and in violation of the constitutional rights of both plaintiffs and of the defendant Niagara Falls Gas & Electric Light Company.

The report of the special master has fully and comprehensively passed upon the various questions involved, and he has given careful consideration thereto. In his opinion, submitted with his findings (to which reference may be had for more extended details), he recommends. that it be decreed that the statute in question, as applied to both plaintiffs and to the defendant gas company, is arbitrary and an impairment of contractual rights. My examination of the record leads to confirmation of the conclusions reached by him.

The defendant Public Service Commission has filed 41 exceptions to the special master’s report, but, for reasons stated, they must be overruled. A decree may he entered confirming the master’s report and granting the injunction relief prayed for. The suggestion advanced, at the opening of tho hearing, by counsel for the Public Service Commission, that a statutory court of three judges was required to pass upon the question of granting a permanent injunction, has been voluntarily withdrawn, there having been no application for a. preliminary injunction. See Smith v. Wilson, 273 U. S. 388, 47 S. Ct. 385, 71 L. Ed. 699; Mooro v. Fidelity & Deposit Co., 272 U. S. 317, 47 S. Ct. 105, 71 L. Ed. 273.

Decree may he settled on notice; it to restrain the Public Service Commission of this state from enforcing a rate which does not fairly allocate a part of the service cost to each consumer, so as to include an equitable return in compensation to the gas company for like services to each consumer, and also to reimburse tho gas company for its costs and expenses, based upon the consumer’s demand for service.