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

This is a proceeding by certiorari to review the determination of the Public Service 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 oí bonds, (b) The acquisition of property situate in the city of New York upon which to erect power houses and substations, (c) The construction of power houses and substations, (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, 1906, 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 , 102 N. Y. Supp. 242 ; Id., 188 N. Y. 361 , 80 N. E. 1101 . 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

“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 stating that, in the opinion of the commissioners the use of the capital to be secured by the issue of such stocks, bonds, notes or other evidence of indebtedness is reasonably required for the said purposes of said 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 10 reasons were assigned why the application should be denied in toto. They were as follows:

“(1) No 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 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 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 respect 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 said stock, bonds, notes, or other evidence of indebtedness is reasonably required for the said purposes of said corporation.”

“We understand that the paramount purpose of the enactment of the Public Service Commission law was the protection and enforcement of the rights of the public. * * * Por a generation or more the public has frequently been imposed upon by the issue of stocks and bonds_ of public service corporations for improper purposes, without actual consideration therefor, by company officers seeking to enrich themselves at 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 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 enumerated 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 that 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 (chapter 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

“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 but 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 granted in 1887. Does it fall within the second class? It appears from the evidence and the report of the commissioner who reported upon the application that the American Electric Illuminating Company, the first owner of the franchise, 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 New York. So the franchise under which the relator 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 relators’ 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 (chapter 737), which reads as follows:

“Sec. 12. 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 and bonds reasonably required for the purposes of the corporation. Stock and bonds of the 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 does 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

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 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 court and 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 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 a corporation as to the wisdom- of a transaction.”

This brings us to the last four reasons, which are elaborately argued in the commissioners’ 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) I£ a competing company were allowed to begin operation, it is not likely that it would continue to opérate independently for any considerable period. (9) Competition would cause inconvenience and expense to the public, would cause duplications 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.”

These reasons for refusing consent to the issue of stock and bonds are fundamental, and go to the exrtent 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 to' be' one company already performing that service acceptably. It it said that it is the general policy of the state to prevent such competition, and to encourage in such matters beneficent monopoly; the rights of the public and the consumers being protected by this 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, 108 N. Y. Supp. 823 ; People ex rel. N. Y. Elec. Lines Co. v. Ellison, 188 N. Y. 523 -531; 81 N. E. 447 . 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 Commission. 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.'' Üpon this question it is interesting and significant to note

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 be 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 questions 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 determination of the commissioners annulled, with $50 cost's and disbursements, and

CLARKE and DOWLING, JJ., concur.

I dissent. I expressed my opinion as to the right of the relator to exercise this franchise in my dissenting opinion in 117 App. Div. 92 , 102 N. Y. Supp. 242 . I do not understand that the right of the relator to exercise this franchise was passed upon by the Court of Appeals upon the appeal to that court reported in 188 N. Y. 364 , 80 N. E. 1101 , except so far as it held that objections could be taken by the people or the city and not by the defendant in that proceeding. The Public Service Commission, the defendants here, are a commission organized by the state as what the Court of Appeals calls “the guardians of the public,” to prevent the issue of stock for other than statutory purposes. People ex rel. D. & H. Co. v. Stevens, 197 N. Y. 1 , 90 N. E. 160 . It is the state that is now being proceeded against, to compel its officials, with whom it has vested certain discretionary powers, to consent to the exercise by the relator of such powers; and it seems to me that, if the state has a right to question the right of the relator to this franchise, or its right to use the franchise, the defendants as state officers had such right. Entertaining the views I formerly expressed in 117 App. Div. 92 , 102 N. Y. Supp. 242 , and which have been confirmed by a subsequent examination, I do not think this court should reverse the determination of the defendants.

I also disagree with the opinion of Mr. Justice SCOTT as to the necessity of this corporation obtaining a certificate from the defendants of their predecessor, the commissioner of gas and electricity, before it could exercise any right or privilege under the franchise heretofore granted by the state and the city of New York. It is apparent that this franchise has never been actually exercised. A pretended use of the streets for a short period many years ago over a small territory does not, I think, bring this case within section 81 of the public service law (chapter 429, Laws 1907). Whatever franchise the American Electric Illuminating Company claimed to have had in 1889 or 1890, it then abandoned any attempt to exercise a franchise, and for 20 years has been practically extinct. It seems to me to be a violation of the spirit as well as the letter of this, statute to claim that such a franchise can be revived after such a period of time, and allow the exercise of the powers then granted without the consent of the defendants.

I also think that the second reason assigned by the commissioners justified them in refusing this consent. I think the bonds already issued, and which this issue is to be used to retire, was clearly illegal, ■not issued for any corporate purpose, and for which the corporation received no real consideration. It is quite clear that the stock of this alleged corporation was issued without real consideration, and has never been approved by the commis'sioner of gas and electricity or this defendant. Here is a corporation without property, with a franchise the legality of which is doubtful, with stocks and bonds that

McLaughlin, j., concurs.