Court Opinion

ID: 5349909
Source: CourtListenerOpinion
Date Created: 2022-01-08 06:35:04.182703+00
Date Added: 2024-06-11T08:29:42.937283
License: Public Domain

Hill, P. J. (dissenting).
On the former appeal in this matter we annulled (242 App. Div. 319) a determination made by a divided Commission wherein the rate base was just under $2,000,000. The dissenting members of the Commission fixed the value several hundred thousand dollars higher. Some of the same errors for which we annulled the first determination appear in this decision, and the rate base as to property considered on the first hearing has been reduced about $500,000. Each decision fixed the value of the property as of December 31, 1930. This decision fixes the “ reproduction costs (new) ” of petitioner’s property as slightly in excess of $3,000,000. The items of property value making up this total are stated. It also fixes a value by items, which is designated “ rate base cost (not depreciated).” This is $800,000 less than the reproduction new value. Neither the computations nor the factors used in arriving at the “ rate base cost (not depreciated) ” are disclosed. Certain items are *211valued at the same amount in each of the tables, but in most instances the values fixed as “ rate base cost (not depreciated) ” are markedly lower than those fixed as “ reproduction cost (new).” I quote the values of a few items as fixed respectively by the two tables:
Beproduction cost (new).
Bate base cost (not depreciated).
Grading.................................. $82,667 $70,000
Ties...................................... 118,603 105,000
Rails, fastenings and joints................. 353,467 310,000
Special work.............................. 138,116 100,000
Car house................................ 405,055 340,000
Engineering and superintendence............ 102,951 89,883
Depreciation was computed on a straight line basis. It was applied to the values designated “ rate base cost (not depreciated) ” not to “reproduction cost (new).” “Broadly speaking, depreciation is the loss, not restored by current maintenance, which is due to all the factors causing the ultimate retirement of the property. These factors embrace wear and tear, decay, inadequacy, and obsolescence. Annual depreciation is the loss which takes place in a year.” (Lindheimer v. Illinois Bell Telephone Co., 292 U. S. 151, 167.) “ This naturally calls for expenditures equal to the cost of the worn out equipment at the time of replacement; and this for all practical purposes, means present value. It is the settled rule of this court that the rate base is present value, and it would be wholly illogical to adopt a different rule for depreciation.” (United Railways v. West, 280 U. S. 234, 254.)
Straight fine depreciation is an “ accounting practice.” (Lindheimer Case, supra, p. 168.) Thereunder the life of an item of property is estimated. Its salvage value at the end of its useful life is also estimated. If this accounting practice is being followed, when an item of property is purchased, the cost is known and by subtracting the amount of the estimated salvage therefrom, the remainder represents the value which is consumed during the estimated useful life. Dividing the usable value by the number of years gives the annual depreciation. For example, it is estimated that a telephone pole costing $25 will have a useful life of ten years as a pole, that at the end of that time it will have a salvage value for kindling wood of $2.50. Thus $22.50 of its cost will be used in the service of the public in ten years and the annual depreciation will be $2.25. At the end of the useful life of *212the pole, the company will have $22.50 in its reserve for depreciation which, with the $2.50 from salvage, will purchase a new pole, and as the new pole is to be purchased at present-day prices, it is “ wholely illogical,” as stated in the West Case (supra), to adopt a different rule than present value for the purpose of applying depreciation. In the Lindheimer Case (supra), straight line depreciation is defined as an “ accounting practice ” and it is stated that it may be relied upon “ if the predictions of service life were entirely accurate and retirements were made when and as these predictions were precisely fulfilled ” (p. 168), and further, “ the predictions must meet the controlling test of experience ” (p. 170). In that case straight line depreciation as computed by the company was not accepted, the depreciation being computed by the court under another method at some $3,500,000 less than the straight line depreciation claimed. The rejection of the straight line computation was decisive of the case. “ The questionable amounts annually charged to operating expenses for depreciation are large enough to destroy any basis for holding that it has been convincingly shown that the reduction in income through the rates in suit would produce confiscation ” (p. 175). There is but a residuum of proof, if any, as to the actual and observed depreciation to sustain the computation made by the Commission in this case. The methods used by the Commission in arriving at its “ straight line ” depreciation have never been approved by a court of last resort. Depreciation is to be computed as provided in the West Case (supra) by applying the percentages of reduction to present value, not to “ rate base cost (not depreciated) ” an arbitrary figure $800,000 less than present cost. The Commission has reduced its estimated rate base cost by more than $1,400,000 using percentages of depreciation varying from 23.1 to. about 80. Every factor used by the Commission was estimated and the cost item was in direct contravention of the rule I have quoted. The prediction as to the number of years any item of property will be useful is always uncertain, but as used by the Commission here, there were additional elements of uncertainty. As all of the property had been used for a time, how long could not be known .definitely; this had to be estimated, as well as its additional life. The speculative and arbitrary result which necessarily came from the use of the erroneous figure as to cost, and the other estimates founded on estimates, was not submitted to the “ controlling test of experience ” by examination of the physical property.
Considering the evidence in support of the finding made by the Commission in connection with that offered by the petitioner, there is such a preponderance of proof against the Commission’s *213finding as to depreciation that had it been the verdict of a jury rendered in the Supreme Court it would be set aside by the court as against the weight of evidence. (Civ. Prac. Act, § 1304, subd. 5.)  And further, the Commission, by computing depreciation upon an arbitrary amount called “ rate base cost ” which was $800,000 less than its own figure as to present cost, violated a rule of law to petitioner’s prejudice. (Civ. Prac. Act, § 1304, subd. 3.) 
Petitioner and several other urban and interurban transportation lines in Westchester county are controlled through stock ownership by the Third Avenue Railway of New York city, and are managed and operated by interlocking directorates. The entire system had been in receivership and was reorganized shortly after 1910, and after the statute was passed which gave the Public Service Commission supervisory powers as to the securities to be issued. The reorganization and the issuance of securities was controlled by the Commission and the courts. (People ex rel. Third Avenue R. Co. v. P. S. Comm., 203 N. Y. 299; People ex rel. Westchester Street R. R. Co. v. P. S. Comm., 210 id. 456.) The system has met legal obstacles in connection with such efforts as it has made to adopt present-day methods of transportation. Permission for the joint operation of buses over seven of its lines was obtained only after a decision by the Court of Appeals. (Matter of Westchester Electric R. R. Co. v. Maltbie, 245 App. Div. 435; 271 N. Y. 648.) It has also been denied leave to abandon unprofitable lines. (Matter of Westchester Electric R. R. Co. v. Maltbie, 245 App. Div. 782.) It is unquestioned that trolley lines are being supplanted by newer methods of transportation, and from a practical standpoint it is difficult to fix the present value of the engineering, superintendence and interest during construction, as well as the present value of tracks, car barns, real estate incumbered thereby, and cars. The Commission has fixed the present value of the cars at slightly more than $1,600 each (about the amount paid for a medium-priced automobile). This may well be the real value, but it should be fixed after proof and not by means of an “ accounting practice.” A question as to the reasonableness of the valuation under consideration is raised by the fact that the same three Commissioners, a brief time earlier, found the value to be $500,000 greater. Each of the figures fixed the value as of December 31,1930. The suggestion on the argument that economical operation required petitioner to change the old cars for new and modern ones seems fanciful and to raise the question where the purchase price would be procured. In view of the past experience of petitioner and the *214present-day value of its securities and those of the parent company, it will do well if the old cars are kept in a safe condition for use by the public. This was pictured by Judge Rhodes in his concurring opinion for annulment on the first appeal. “ The inexorable facts are that the company has never paid any dividends and, with the apparent and probably real deficit in surplus above stated, it seems apparent that the company has demonstrated that the rates are confiscatory.” (242 App. Div. 326.)
We may not fix values or rates, but may annul and remit for errors of law or where there is such a preponderance of evidence against a finding that it would be set aside if made by a jury.
I vote to annul and remit.
Grabber, J., concurs.