People ex rel. Binghamton Light, Heat & Power Co. v. Stevens

Public service commissions were established in this state by chapter 429 of the Laws of 1907, to take effect J uly 1 of that year. The act was amended and revised

That part of the section quoted which is in italics was

The relator is a domestic corporation organized in 1902 for the purpose of generating and selling electricity for light, heat and power. On the last day of February, 1902, it acquired the property and franchises of the Binghamton General Electric Company, which company had on and prior to that day supplied electric light and power in the city of Binghamton. At the close of business on that day the balance sheet of the Binghamton General Electric Company showed so far as now material as follows:

Total fixed capital including franchises..... §585,951 92

Total floating capital...................... 21,201 66

§607,159 58

Liabilities.

Capital stock................. §280,000 00

Funded debt.................. 266,500 00

Bills payable................. 20,000 00

Accrued interest.............. 6,687 50

Surplus...................... 38,972 08

- $607,159 58

It is asserted by the petition hereinafter mentioned that the relator issued for the assets of said company its common stock to the amount of $500,000 and its refunding mortgage bonds presumably upon the property purchased to the amount of $325,000. It does not appear just how the sale was consummated, who were the stock and bondholders of the Binghamton General Electric Company or of the relator, how or upon what terms the bonds and

On February 17, 1909, the relator filed with the public service commission in the second district its petition alleging facts from which the most of those above were taken, and asked for an order under section 69 of the Public Service Commissions Law authorizing,

1. A mortgage to be dated April 1, 1909, to secure $1,000,000 of five per cent bonds with the right to issue forthwith, a, $500,000 of said bonds to enable the peti

2. $50,000 of its six per cent cumulative preferred stock.

It was stated in the petition that the petitioner proposed to use the proceeds of the $180,000 of bonds and of said proposed stock to pay and discharge its promissory notes outstanding, amounting to $158,000, and the balance in paying, to the extent thereof, its floating indebtedness.

It is alleged in a schedule attached to the petition that the petitioner was indebted to the extent of $244,315.76, not including the funded debt of $500,000, and such indebtedness is made up of notes payable not exceeding twelve months from date, amounting to $158,000, and open accounts amounting to $86,315.76.

A hearing was had before the commission, and on August 4, 1909, it made an order denying the application but continuing the proceeding to enable the petitioner to proceed therein upon the lines suggested in the written opinion filed by the commission, if it should so desire. A reference to the record shows that the commission was of the opinion that the indebtedness represented by the $158,000 of notes was incurred for construction purposes, but that it was further of the opinion that the construction was in whole or in part mere renewal or replacement of old and obsolete plant and it accompanied its order denying the application not only with a provision continuing the proceeding for the purposes stated but it stated in its opinion that “A mere denial of this part of the application does not fully meet the situation. The notes in question are lawful obligations and must be paid. The case should be continued for the purpose of ascertaining by full and detailed proof the sum at which the old plant is now carried in fixed capital. As above stated, the exact amount the commission has been unable to

Referring to the application of the relator and its indebtedness other than the $158,000 represented by said notes the commission further say: “ Of the proceeds only $158,000 would be required to pay the notes in question. What does it propose to do with the remainder of the proceeds ? It points out nothing which comes within any of the purposes enumerated in section G9 of the Public Service Commissions Law, for which it may be allowed to issue stock or bonds. It desires to acquire no property. It does not ask to extend or improve its plant or distributing system. It suggests nothing for the improvement or maintenance of its service. It names no obligation and no creditor to be paid.

“ Its floating indebtedness as shown by balance sheet submitted is as follows:

Bills payable............................. $158,000 00

Accounts payable..............:.......... 19,109 96

Dividends payable Jan. 15, 1909........... 6,000 00

Consumers’ deposits...................... 345 76

Accrued interest on bonds................. 6,250 00

Accrued taxes............................ 869 00

Total current liabilities................ $190,574 72

“Bills payable have been fully considered. Accounts payable are not proper subjects of capitalization, being in general mere operating expense and in this case are offset by accounts receivable to the amount of $25,127.87. Dividends, consumers’ deposits, accrued interest on bonds and accrued taxes should be paid out of income. ”

After conferences with the representatives of the petitioner a further order was made January 31, 1910, which recited among other things: “ The applicant is understood to have assented, so far as it is able to do so without a meeting of its stockholders, to a reduction of its capital

The order provided for the issue of bonds to the extent of $197,500 to be sold and disposed of at not less than 80% of their par value and the avails thereof used for the sole and only purpose of paying and discharging the indebtedness aggregating $158,000 represented by said notes and the order was accompanied with a condition as follows: “ Provided that this authorization is upon condition to be assented to by said Binghamton Light, Heat and Power Company that contemporaneously with issuing said bonds to said amount of $197,500 or any part thereof, it shall credit its fixed capital with the sum of $100,000 which may be accomplished by a reduction of the common capital stock of said company to a like amount, and this- authorization to issue bonds to said amount of $197,500 shall not become effective until said company shall have filed with this commission its written acceptance of said condition.”

Thereafter a further application was made to the commission by the relator for a rehearing of said application so far as the commission had denied the original request of the petitioner. On August 25, 1910, the application for a rehearing was denied. The relator on September 19, 1910, filed its petition with the Supreme Court asking for a writ of certiorari to the end that the three orders made by the commission be reviewed and reversed or so modified that the prayer of the original petition .be granted. The writ was allowed and the matter was heard in the Appellate Division, third department, where the orders of the commission were confirmed by a divided court. (People ex rel. Binghamton L., H. & P. Co. v. Stevens, 143 App. Div. 789 .)

By the report of the relator to the public service commission as of December 31, 1908, it appears that the fixed capital account as carried on the books of the company

Organization expenses...... $79,795 83

Franchise, land, old plant and

property account......... 781,136 99

Other fixed capital......... 441,792 90

- $1,302,725 72 •

As against this item the company showed that they had outstanding bonds to the extent of $500,000; preferred stock, $150,000; common stock, $500,000; making a total of stock and funded debt, $152,725.72, less than the amount of its fixed capital as shown by the report.

The item of $441,792.90 in fixed capital represents the expenditures on the plant after the purchase of the Binghamton General Electric Company. It further appears from the record that substantially all of the physical property purchased of the Binghamton General Electric Company has passed out of existence by the complete rebuilding of the plant. Nevertheless, it is all carried on the books of the company as capital without any part of the cost being charged off in any way because of the renewal or replacement of the generating station, equipment and tools constituting the relator’s plant.

It is noticeable that the $100,000 which the commission directed should be taken from the capital account of "the relator by a reduction of its capital stock as a condition of granting its consent to the issue of $195,000 of the.bonds of the relator is not based upon findings of the commission relating to its expenditures. There is nothing before us to show that the difference between such two amounts constitutes a legitimate increase of the capital account of the relator. A careful examination of the record satisfies us that the order of January 31, 1910, was an arbitrary one not based upon any determination in detail of the facts relating to the application, but a compromise based upon an assumption that the relator

The several owners of the capital stock of the relator as bona fide holders thereof had vested interests therein which the officers of the relator and the relator itself were powerless to take from them without compensation or in pursuance of a voluntary surrender.

The relator is not bound by the assumption of the commission even if the order was made in good faith relying upon it. On any determination of the reason that induced the commission to make the order of January 31, 1910, we agree with Justice Kellogg wherein he says in his dissenting opinion in the Appellate Division as follows: “Itis beyond the power of the Commission to permit the issue of improper securities upon the condition that the company cancel stock of about half the amount. Bead together, the two orders permit the company to issue unauthorized securities, but attempt to lessen the harm to the public which may result therefrom. The Commission has no power to thus barter away the public interests, or on its own terms to permit the issue of securities which the law prohibits. Its discretion cannot override the discretion of the officers of the company in the management of its affairs, or the provisions of the statute which prescribe the cases in which securities are permitted. Its duty in the premises is to determine whether the proposed issue is necessary for the proper purposes of the company, is authorized by law and is to be used in a proper manner. If such are the facts it cannot withhold" its certificate; otherwise it cannot grant it.” (p. 801.)

The condition imposed by the commission, unless perhaps to adjust the financial affairs of the corporation with the consent of the stockholders or stockholders and bondholders, was wholly unauthorized.

The language quoted was used in considering the action of the board of directors of the relator in that case in the purchase of the stock of another corporation and of certain real property.

There was not in that case before the commission or the court for consideration the question as to whether an outstanding indebtedness for which stocks and bonds were sought to be issued was incurred in purchasing property for or in making betterments and enlargements of the plant of the relator, or for renewals and replacements of the plant or any part of it as it had theretofore existed. The court in that case, in referring to the intent of the legislature, said that by its enactment the commissioners should have supervision over the issuing of long time bonds to the extent of determining whether they were issued under and in conformity with the provisions of the statute for the purposes mentioned therein, or whether

The amendment of the statute in 1910 gives to the commission authority to authorize the issue of stocks, bonds, notes or other evidences of indebtedness of a corporation payable at periods of more than twelve months after the date thereof for the discharge or lawful refunding of its obligations or for the reimbursement of moneys actually expended from income or from any other moneys in the treasury of the corporation not secured or obtained from the issue of stocks, bonds or other evidence of indebtedness of such corporation within five years next prior to the filing of the application, but it expressly excepts from such authority of the commission the right to authorize the issue of such stocks, bonds or other evidence of indebtedness for maintenance of service and for replacements. It also provides that the applicant for such permission must have kept accounts and vouchers in such manner as to enable the commission to ascertain the amount of money so expended and for the purposes for which the expenditure was made. The question as to what expenditures are a proper basis for permanent capitalization is an important one, always a proper and necessary subject for consideration, not alone by the

Wholly apart from the claim of the commission that this case must be determined upon the statute as it now exists, and assuming for the purpose of what we are here saying that the relator is right in claiming that this appeal must be determined upon the statute as it existed on the day when the original petition herein was filed, we are nevertheless of the opinion that it was the duty of the commission to determine whether the stock and bonds proposed by the relator were to secure money to pay floating indebtedness incurred in the ordinary running expenses of the corporation. Such determination by the commission would not be substituting the judgment of the commission for the judgment of the directors of the company in the management of its affairs at least if the directors of the company had wholly and intentionally ignored the self-evident proposition that except for special and extraordinary circumstances some part of the expenses of renewing machines and plant originally charged to capital account must be paid as a part of the operating expenses of a corporation from year to year. We refer to the necessity of a corporation providing for some part of the expenses of renewing machinery and plant from year to year as self evident, because it has been so considered and expressed by the courts in many cases. (People ex rel. Jamaica Water Supply Company v. Tax Commissioners, 196 N. Y. 39 , 57, 58; S. C., 128 App. Div. 13 , 17, 18; People ex rel. Third Avenue R. R. Co. v. Tax Commissioners, 136 App. Div. 155 , 159; affd., 198 N. Y. 608 ; City of Knoxville v. Knoxville Water Company, 212 U. S. 1 .)

In the Jamaica Water Supply Company case this court said: “ We suppose that judicial notice may be taken of the fact that in the conduct of many industrial

In that case in the Appellate Division it was said: ‘ ‘ The net income of a corporation for dividend purposes cannot be determined until all taxes, depreciation, maintenance and up-keep expenditures have been deducted. Otherwise the dividend is not paid from the earnings but by a depreciation of the capital account. To earn a dividend and be honest with itself, its stockholders, its creditors and the public it has to serve, a corporation cannot distribute earnings at the expense of its capital.” (p. 17.)

In the Third Avenue Railroad case it was said: “The annual ordinary expenditures for repairs, replacements and renewals upon such a property cannot be assumed to make it unnecessary to provide a fund which will replace its engines, electrical equipment and other physical property which at some time must be replaced.” (p. 159.)

In the City of Knoxville v. Knoxville Water Co. case it was said: “It is entitled to see that from earnings the value of the property invested is kept unimpaired, so that, at the end of any given term of years the original investment remains as it was at the beginning. It is not only the right of the company to make such a provision, but it is its duty to its bond and stockholders, and, in the case of a public service corporation at least, its plain duty to the public. If a different course were pursued the only method of providing for replacement of property which has ceased to be useful would be the investment of new capital and the issue of new bonds or

It is said by the relator that the Public Service Commissions Law as it existed in 1909 did not make any distinction between expenditures for operating purposes and expenditures for permanent improvements, but provided generally for the issue of stocks, bonds, notes or other evidence of indebtedness payable at periods of more than twelve tiionths 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.”

Omitting from that part of the statute just quoted the words in italics it would then clearly refer to the permanent improvement of the plant or distributing system, and not to mere renewals or replacements. The words in italics, although of broader meaning than those not in italics, should be construed in connection with them, and in view of one of the paramount purposes of the legislature in establishing the commissions, which was to protect and enforce the rights of the public. The contention of the relator would enable any corporation to pay for labor, fuel and other supplies constituting the most ordinary of all operating expenses by obligations extending less than twelve months and then apply from time to time to the commission for authority to issue stock or bonds for the payment of such obligations

It will not he denied that fuel and such other materials as are consumed from day to day and the labor incurred in daily maintenance should be paid for from the earnings of the corporation as a part of its running expenses prior to the payment of interest upon bonds or dividends upon capital stock. A reasonable consideration of the interests of a corporation and the ultimate good of its stock and bondholders, and a regard for the investing public and that fair dealing which should be observed in all business transactions, require that machines and tools paid for and charged to capital account but which necessarily become obsolete or wholly worn out within a period of years after the same are purchased or installed, should be renewed or replaced by setting aside from time to time an adequate amount in the nature of a sinking fund or that by some other system of financing the corporation put upon the purchaser from the corporation the expense not alone of the daily maintenance of the plant but a just proportion of the expense of renewing and replacing that part of the plant which although not daily consumed must necessarily be practically consumed within a given time. If that is not done and renewals and replacements are continually added to the capital account the capital account must necessarily become more and more out of proportion to the real value of the property of the corporation.

The amendment of the statute made in 1910 was, so far as it affects the determination of this appeal, a statement in clearer terms of the intention of the statute of 1907, and it did not in the respect now considered give to the commission new and theretofore non-existing power. There is a wide difference in the claim of the parties as to the amount of the relator’s floating debt, and some of the statements of fact in this opinion relating thereto may not meet with the approval of both parties. Such

The commission, with the assent of the relator, sent an accountant to examine its books and an engineer to examine and appraise its plant, but the details of the report of each need not be stated.

This court, in Village of Saratoga Springs v. Saratoga Gas, Electric Light & Power Company ( 191 N. Y. 123 , 148), referring to the power óf the state commission of gas and electricity under chapter 131 of the Laws of 1905 and the ex parte reports of inspectors and agents, say: “It is plain that no corporation could make its defense until it was clearly notified of what was charged against it and the proof to support such charge was given. While the commission might not be bound by technical rules of evidence, still it was plainly intended that the whole proceeding should assume a quasi-judicial aspect. This is necessarily so, for the Appellate Division is empowered to review the order of the commission, a review which requires something in the shape of a record of the proceedings of the commission. The commission being empowered to subpoena witnesses and take testimony, its inspectors or agents could be required to appear and verify any reports made by them, or if we assume that such reports could be received in the first instance without verification, the inspectors or agents could be compelled to attend at the instance of either party and be examined as to the truth of the statements in their reports and their knowledge of the facts therein contained. ” The language used in that case is applicable to this case so far as the reports of the engineer and accountant are concerned. It is not necessary to consider whether the relator is estopped

The order of the Appellate Division and the three orders made by the commission should be reversed, without costs, and in the discretion of the relator the proceeding should be held open for a further hearing herein or a new application and a new hearing may be had unprejudiced by the orders that'have already been made.

Cullen, Ch. J., Gray, Haight, Werner, Willard Bartlett and Collin, JJ., concur.

Order reversed, etc.