Story Case

The public service commission of the State of New York fixed the rate of charging for electricity by the Cataract Power Company to its consumers. In doing this, it determined the value of the company's property. The attorneys for the company demanded that the commission consider the earning power of the plant. The attorneys for the people contended that the question in determining the value is not how much has been or can be gotten out of the property, but how much has been put into it. Which contention is correct?

Ruling Court Case No. 1. Public Service Gas Co. Vs. Board Of Public Utility Commissioners, Volume 87 Atlantic Reporter, Page 651; Supreme Court Of New Jersey

The board of public utility commissioners of New Jersey made an order reducing the rate for gas supplied to the cities of Passaic and Patterson, from the Patterson works of the Public Service Gas Co. The charge which had been $1.00 per 1,000 cubic feet was reduced to $.90. Pursuant to the remedy given by the statute creating the commission, the gas company brought this suit to have the order of the commissioners set aside and to have the old rate re-instated. Their contention was that the rate of $.90 was too low to be a reasonable rate, and that the authority of the board of commissioners extended only to prohibiting unreasonable rates and to fixing rates which should be reasonable. The rate had been fixed after a valuation of the property of the gas company and was designed to permit a profit of 8 per cent. It was not denied that this was a reasonable return, and there was no disagreement about the cost of operating the plant or the amount that would be realized under the new rate, so that the amount of the profit was not in dispute. But the gas company insisted that owing to an erroneous computation of the value of the property, the proportion of profit would be much less than 8 per cent. The objections made to the method of valuation made by the commissioners were separately decided by the court, in an opinion by Mr. Justice Swayze.

The court said: "A rate, to be just and reasonable, can never exceed the value of the service to the consumer, or, perhaps, rarely can it equal this value. On the other hand it can never be made by compulsion of public authority so low as to amount to confiscation. A just and reasonable rate must certainly fall somewhere between two extremes. Many of the cases in the federal courts and in the courts of our sister states have involved a determination of the confiscatory character of the rate under the fourteenth amendment or similar constitutional provisions. "We are not called upon to deal with this constitutional question; we have only to do with the question submitted to our judgment by the statute authorizing the commissioners to fix just and reasonable rates. In cases involving the constitutional question, the whole property used in the particular public service and the net return upon the whole must be considered; and if the whole net return is a fair return for whole property there is no confiscation, although some individual rates may be unremun-erative.

"But in this case, we must find that this particular rate is just and reasonable. This is necessarily a question of business judgment rather than one of legal formula, and must be settled by the good sense of the tribunal it comes before. The real test seems to be that it should be as low as possible and yet sufficient to induce the investment of capital, and its continuance in the business. For this the mere assurance that the investment will not be confiscated, as given in the constitutional guarantee that property shall not be taken without due process of law, will not suffice; there must be some hope of gain commensurate with that realizable in other business. In the present case, in order to determine the value of the investment and the profit which might fairly be expected, the commissioners undertook to find the present value of the property. There are difficulties and valid objections to any standard, whether actual investment, cost of reproduction, or present value. We think it enough to say that the great weight of authority is in favor of the standard of present value. That standard has the sanction of the United States Supreme Court in cases involving the constitutional question of confiscation. The controversy here turns mainly on the allowance for going value and the refusal to allow anything for the value of the franchise. We think both on weight of authority and on reason there should be an allowance for going value. There is interest on the cost of the plant while it is in construction and while a paying business is being built up, there is the cost of securing and retaining customers and of encouraging the greater use of gas, the necessary loss attending experiments that promise improvement, and the organization of a great industry with a view to economical production. These items constitute a going value upon which the company is entitled to a return if the individual rate is to be just and reasonable. To exclude this item would deny any recompense for the skill shown in developing and conducting the business or even for the value of experience, which is proverbially expensive. It is true, that in condemnation cases, where the question involved is that of "exchange value" and not, as in rate cases, the question of fair and reasonable value of the investment, the basis of valuation may well be different and may even more properly include going value. To a purchaser, the assurance of an immediate return is worth paying for, and the probability that existing rates will continue enters into and affects the value. In a rate case, the question is to what extent an existing rate may be lowered. But we think an assembled and united plant may be greater in value than the separate parts, and the getting together of property may create a real value which may fairly be allowed for in what is called going value. Another important point of controversy is with reference to the allowance for the value of the special franchises. That they are property is well settled, and they would undoubtedly have considerable influence in determining an exchange value for the business. They are, however, property of a peculiar kind, qualified by the right of the state to fix rates. Where the rate is fixed, and the franchise is exclusive, the value of the franchise may be calculated upon the assumption of that rate. But where, as in this case, the rate is to be changed, there is no stable basis upon which to calculate the value of the franchise, since that value is dependent upon the rate. To assume a value for the franchise in order to determine the reasonableness of the rate is to reason in a circle. Further, in the absence of an exclusive right, the municipality might at any time supply itself, and the value of the franchise would be thereby destroyed. The value of the privilege given to this company might be destroyed by a similar gift to a new company or to other individuals ; and it is obvious, that in considering investing in the enterprise the newcomers would not be required to seek a return upon the franchise for which they were to pay nothing. It is therefore in the power of the state to bring about a supply through a company which would not compel the public to pay a profit upon the franchise valuation. This would destroy the value of the special franchise of the existing company. These considerations lead us to conclude that no allowance should be made for the value of the special franchise where it is not legally exclusive, and where the state retains the power to fix rates. That is the present case."

The court found that the commissioners had fairly estimated the present value of the plant of the gas company, that the allowance made for going value was adequate, and the franchise had properly been excluded in the valuation. The rate fixed was, therefore, just and reasonable, and consequently within the authority of the commissioners. The application of the gas company was refused, and the order of the board affirmed.