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Niagara Falls Power Co. v. Federal Power Commission.

July 29, 1943


On Petition to Review Orders of Federal Power Commission.

Author: Hand

Before L. HAND, AUGUSTUS N. HAND, and FRANK, Circuit Judges.

L. HAND, Circuit Judge.

The petitioner seeks to set aside two orders of the Federal Power Commission by petition filed under § 313(b) of the Federal Power Act 16 U.S.C.A. § 825 l (b): the first order, entered on June 9th, 1942, ordering the petitioner to reduce its capitalization to $24,680,680.22; "the actual legitimate original cost" of its properties on March 2, 1921, exclusive of some items not here in question: the second order vacating a stay of the first. The specific controversy is over the elimination of three items from the petitioner's capital account, all carried over from the capital accounts of three companies, out of which it was formed by a consolidation under Chapter 596 of the Laws of New York of 1918. The fist of these three companies to be formed was the Niagara Falls Hydraulic Power and Manufacturing Company, organized as a New York corporation in 1878 by one, Schoellkopf, and others. It acquired from the State of New York the right to divert waters of the Niagara River about a mile above the Falls, through a canal to a basin below the Falls. Originally it used the power mechanically only; but in 1895, it began the substantial development of electric power. After 1907, when it became subject to regulation by the New York Public Service Commission, its owners, on March 15, 1909, organized the second company, the Cliff Electrical Distributing Company, which we shall call the "Cliff Company," and transferred to that company the distributing parts of its property, on January 1, 1910. On March 24th of that year the Niagara Falls hydraulic and Manufacturing Company was merged in the Hydraulic Power Company of Niagara Falls, which had been incorporated three days earlier, and which we shall call the "hydraulic Company." The third company, the niagara Falls Power Company, which we shall call the "Tunnel Company," was organized on March 31, 1886, and also got rights from the State of New York to divert the waters of the Niagara River at a point above the intake of the "Hydraulic Company." Later the "Tunnel Company" was taken over by the Cataract Construction Company, which we shall call the "Cataract Company," by the acquisition of all its stocks and bonds. Chapter 596 of the Laws of 1918 of New York, which consolidated these three companies (not including the "Cataract Company") "into a single new corporation," declared that its capital might equal, but should not exceed, the "aggregate of the outstanding capital stocks and the surpluses as, unimpaired reserves and undivided profits" of the three constituents. When the "Cliff Company" took over the distributing property of Niagara Falls Hydraulic Power and Manufacturing Company, it increased its own capital account by $328,471.51. When the Niagara Falls Hydraulic Power and Manufacturing Company was merged in the "Hydraulic Company" in 1910, the capital account of "Hydraulic Company" was increased by $11,800,482.24. When the "Cataract Company" took over the "Tunnel Company" in 1889, the capitalization of the "Tunnel Company" was increased by $3,307,974.83, substantially allk of which was profit on three transactions between the "Cataract Company" and the "Tunnel Company" in the sale of lands land in the construction of plant and transmission lines.

The consolidation of 1918 was an amalgamation of two separate groups: One called the "Stetson Group," which owned the "Tunnel Company"; and the other the "Schoellkopf Group," which owned the "Hydraulic" and "Cliff Companies." Each group turned its property over to the petitioner in exchange for the petitioner's shares: the "Tunnel Company" receiving $11,515,400 par value in preferred stock, and $984,566.70 par value, of common stock; the "Hydraulic" and Cliff Companies" receiving together $13,500,000 of common stock. Ahead of all the stock were $26,241,000 in bonds of the three constituent companies; so that the total capitalization including bonds came to nearly sixty million dollars.

On December 30, 1903, the Niagara Falls Hydraulic Power and Manufacturing Company was granted a license or permit from the United States War Department "to maintain a system of cribs and booms and dikes partially constructed in the Niagara River near Port Day," as shown in an accompanying blue print; and the "Tunnel Company" was granted a similar permit on October 10, 1904, and another on March 7, 1905. none of these authorized the diversion of water; only the occupation of the bed of the stream for so long as "navigation or commercial interests" were not prejudiced. The "Tunnel Company" and the niagara Falls hydraulic Power and Manufacturing Company were, however, later granted permits authorizing them to divert water from the Falls. The first of these was issued under the Burton Act of June 29, 1906, which made revocable all permits granted under it, and provided that "nothing herein contained shall be held to confirm * * * any rights heretofore claimed or exercised in the diversion of water or the transmission of power." This act and all permits issued under it, expired in 1913, and the constituent companies had no federal permit until 1917, when the joint resolution of that year was passed. This also provided that "nothing herein contained shall be held to confirm * * * in * * * any such permittee any right in or to the water which he is now diverting or which he may be authorized to divert hereunder." The last permit was granted to the petitioner under the resolution of July 12, 1919; and was by its terms to expire on July 1, 1920, "unless the Congress shall before that date enact legislation regulating and controlling the diversions of water from the Niagara River, in which event this resolution shall cease to be of any further force or effect." The Federal Water Power Act-now Part I of the Federal Power Act - became law on June 10, 1920.

On March 2, 1921, the Federal Power Commission consisted of Newton D. Baker, Secretary of War; John Barton Payne, Secretary of the Interior; and Edwin D. Meredith, Secretary of Agriculture: it granted a license to the petitioner for a term of fifty years which authorized it to divert from the water of the Niagara River above the Falls, not to exceed in the aggregate a daily diversion at the rate of 19,500 cubic feet per second; and which contained the following provisions: "The fair value of the completed parts of the project as of the date of this license shall be determined as early as practicable in the manner prescribed by the Act, and the licensee hereby agrees to accept for the purpose of this license and of any provision of the Act, the fair value so determined, whelther arrived at by mutual agreement or as the result of proceedings in or final adjudication by the Courts." Again: "In the determination of the fair value of the project already constructed to be hereafter made as provided by Section 23 of the Act, [16 U.S.C.A. § 816] the fair value of the property of said Niagara plant (Stations 1 and 2) and of said Station No. 2, of the Hydraulic plant and of each of them shall be separately stated." Finally: "Upon the written consent of licensee, the Commission may order made under its seal, modify, alter, enlarge or omit insofar as authorized by law, any one, or more of the conditions or provisions of this license." The recitals in the license spoke of the petitioner's application to divert the water "through the project of applicant already constructed and through project works to be constructed * * * in respect of which project so far as already constructed said applicant had on the 10th day of June, 1920, a permit, right of way, and authority."

On May 13, 1910, when the Niagara River Treaty was proclaimed, none of the petitioner's three constituent companies had any indefeasible right to divert water from the river. it is true, as we have said, that two of them had been granted a limited privilege to set up cribs and booms, but that gave them no right to take any water. All rights granted under the Burton Act, 34 Stat. 626, were to end in 1913; and the joint resolutions, which in any event succeeded the treaty, were plainly intended to serve only as stopgaps. When Congress passed the Federal Water Power Act in 1920, 41 Stat. 1063, 16 U.S.C.A. § 791a et seq., the petitioner's slate was wiped clean; it stood at discretion, so far as concerned any existing federal rights of diversion. Congress had absolute power to stop it from taking any water whatever, or to impose what terms it chose. For support of this we need look no further than Article V of the treaty itself which provided that "no diversion of the waters of the Niagara River above the Falls from the natural course and stream thereof shall be permitted except for the purposes and to the extent hereinafter provided." The United States was then allotted the privilege of diverting within the State of New York from above the Falls "not exceeding in the aggregate a daily diversion at the rate of twenty thousand cubic feet of water per second." When Congress set up the Commission with power to issue licenses for the "utilization of power * * ** from * * * any of the navigable waters of the United States" § 4(d) of the Act of June 10, 1920, 41 Stat. 1065, 16 U.S.C.A. § 797(e) the Commission was vested with the distribution of this allotment, and any rights acquired from the State of New York necessarily yielded to what it might do. Thus the first question turns upon the validity of that provision in the license granted on March 2, 1921, which insured to the petitioner the appraisal of its "net investment" at "fair value."

The petitioner is right in saying that the Commission at that time supposed that the case fell within the proviso of § 23(a), 16 U.S.C.A.§ 816, and meant to issue a license "for a project * * * already constructed" under a "permit * * * heretofore granted." But in that the Commission was mistaken. Subdivision a of § 23 makes immune from the Act "any permit * * * heretofore granted," but allows the holder of "such permit" to apply for a license. Among those who are m entioned as possible holders are "States," so that we must suppose that it was thought just, and perhaps necessary, to protect permits held by states; and such permits could only have been federal. Textually at any rate, that precluded the state's immunity as to projects operated by itself, for the only immunity conferred is upon "permits," "rights-of-way" or "authority" which some authority has granted, and a state acts of its own authority and not by grant. Yet it would be absurd to suppose that a corporation operating under a state's license could be immune from federal control when the same "project" would not be, if operated by the state itself. Furthermore, the purpose of the section falls in line with the verbal interpretation. Although Congress of course meant to exclude certain existing "projects" from the new system, in general its purpose was to set up a system of comprehensive regulation of water power. We must assume that it may have felt its hands tied to some extent; the Supreme Court both before and since 1920, has held indefeasible a grlant, once made and acted upon. United States v. Central Pac. R. Co., 118 U.S. 235, 238, 6 S. Ct. 1038, 30 L. Ed. 173; United States v. Northern Pac. R. Co., 256 U.S 51, 63, 64, 41 S. Ct. 439, 655 L. Ed. 825. There are said to have been many valid licenses outstanding in 1920, issued by federal authorities which it was at least doubtful whether Congress could "affect" at all; § 23(a) excluded these and they adequately account for its enactment. On the other hand, it would have been a groundless compunction which should have protected "permits," "rights-of-way" or "authority" granted by municipalities or states. The purpose being to conserve all water power, so far as it was national, it would have been an anomaly to exempt anyone - states or individuals - had assumed to appropriate any part of this natural resource. No prescription could in law run against the nation; we must not impute to Congress any willingness to grant prescription as a favor. Indeed, there are occasions when even federal authority, lawfully exercised, has been construed not to protect those who have acted upon the faith of it. Philadelphia Co. v. Stimson, 223 U.S. 605, 32 S. Ct. 340, 56 L. Ed. 570; Greenleaf-Johnson Lumber Co. v. Garrison, 237 U.S. 251, 35 S. Ct. 551, 59 L. Ed. 939; Pennsylvania Water & Power Co. v. Federal Power Commission, 74 App.D.C. 351, 123 F.2d 155. What equitable claim then has a company which relies upon the grant by a state of something beyond its power? What standing does a state's license give it to seize upon the energy of the nation's streams, or to impair their navigability?

The course of the act through Congress bears out our conclusion. The joint resolutions, beginning with the first-that of January 19, 1917 - authorized the Secretary of War to issue permits for the diversion of water, but were, as we have seen, always solicitous to prevent any vested rights from arising, the danger of which was several times mentioned upon the floor. When the last resolution was passed, the Federal Water Power Act had been already bruited, and the resolution itself presaged its prospective passage. When it was introduced, Senator Harrison proposed an amendment expressly excluding the Niagara River, "so that we could really get some legislation beneficial to the consumers in that particular section." Senator Wadsworth, who had charge of the bill in the Senate, answered that the petitioner "will fall completely under the jurisdiction of the Commission just as any other water power company anywhere in the United States falls under it." Later in answer to a question of Senator McKellar, he said that the petitioner and any other company that might be organized "must come to the Commission and get a license, and the Commission can prescribe the conditions upon which the license is to be issued." These were unequivocal assertions that the petitioner's existing rights would not be recognized. Later, Senator Wadsworth amended the section himself by inserting the provision that the Act should not "confirm" or otherwise "affect" any existing claim; in explanation of which he said that the companies - "rightly or wrongly, I do not know which - have claimed, or have indicated that they might claim, certain continuing rights to the diversion of water and the generation of power * * * I do not want this bill in any way to confirm that claim." While that language does, indeed, shed no light upon whether § 23(a) was intended affirmatively to overbear state grants, at least it should not throw doubt upon the earlier categorical statements that they should not prevail.

The respondent was therefore right in holding that, at any rate as a new question, the petitioner was not entitled to have its "projects" appraised at their "fair value." Whether the respondent should have followed the construction of the first Commission, is anothelr matter. In spite of the plenitude of discussion in recent years as to how far courts must defer to the rulings of an administrative tribunal, it is doubtful whether in the end one can say more than that there comes a point at which the courts must form their own conclusions. Before doing so they will, of course, - like the administrative tribunals themselves - look for light from every quarter, and after all crannies have been searched, will yield to the administrative interpretation in all doubtful cases; but they can never abdicate. Even Gray v. Powell, 314 U.S. 402, 62 S. Ct. 326, 86 L. Ed. 301, - a case which perhaps went as far as any other, - left no doubt as to this. Mitchell v. United States, 313 U.S. 80, 97, 61 S. Ct. 873, 85 L. Ed. 1201. Be that as it may, the case at bar is different from the usual one in two important respects: (1.) there was no customary interpretation, but only a single instance; and (2.) the tribunal has reversed itself. The conventional reason for the deference exacted from courts for such rulings has always been the advantage possessed by such tribunals in a background of specialized experience and understanding, gathered from a long acquaintance of the members with the subject matter, either while they are in office or before. The continuity of this experience is assumed to build up an acquaintance inaccessible to others - courts included. If so, a single ruling, made shortly after the tribunal has been set up, should have far less weight than a series of repeated rulingls over a course of years. And when that isolated instance is repudiated by the same tribunal in the light of its added experience, it has scarcely any weight at all. Indeed, the very reason which forbids a court from lightly overruling an administrative ruling, a fortiori forbids its undertaking to say that a later ruling is mistaken when it reverses the earlier one. We must assume that continued occupation with the subject has disclosed the past error better than we can do ourselves. We conclude therefore that the petitioner has no right to the appraisal of the "fair value" of its "project" as of March 2, 1921.

The question remains as to what value the Commission should have taken in its place. The proceeding was authorized under § 4(b), 16 U.S.C.A. § 797(b), which allows it "to determine the actual legitimate original cost of and the net investment in a licensed project"; the last being the figure at which the United States may recapture it under § 14, 16 U.S.C.A. § 807, when the license expires, and the base upon which its rates are to be calculated, if it ever engages in interstate or foreign commerce. § 20, 16 U.S.C.A. § 813. Section 3(13), 16 U.S.C.A. § 796(13), defines "net investment": it is "the actual legitimate original cost * * * as defined and interpreted in the 'classification of investment in road and equipment of steam roads, issue of 1914, Interstate Commerce Commission', plus imilar costs of additions" etc. We are not, however, to read this definition independently of that provision of § 14 that "net investment shall not include * * * good will, going value, or prospective revenues." On the contrary, since the chief, if not the only, purpose of an investigation under § 4(b), is to find the value on recapture, or the rate base of the licensee, we are to understand the definition of § 3(13) as incorporating these limitations. We first turn to the "Classification" itself.

The Commission, as required by the Act, - § 3(13) - promulgated it as part of its own rules: it now appears as Part 103 of Title 18. Code Fed. Reg. We may start with § 103.02-2. This provides that the accounts of the carrier "shall be charged the cost of original road, original equipment, road extensions, additions, and betterments." These constituents are then immediately defined. "Original road means the land and fixed improvements provided and arranged for in the original plan for the construction of a new road." "Original equipment" and "road extensions" are defined in the same way. "Costs shall be actual money costs to the carrier." For the most part the rest of the "Classification" has little relevance to property like the petitioner's; but § 103.41 is more important; it relates to the "Cost of road purchased." It provides that "This account shall include the cash cost of any road * * * purchased"; and that when the sale includes "equipment, securities, and other assets" the "appraised value" of these must be deducted from the cash and only the remainder of the cash shall be charged to the carrier's account. So far, § 103.41 has no application to the case at bar, but the next sentence may be thought to have. It reads as follows: "Where the consideration given for the property purchased is other than cash, such consideration shall be valued on a current cash basis." Similarly, if part of the consideration is the assumption of liabilities, they shall be appraised at their cash value.

While § 4(b) of the Federal Power Act speaks of "actual legitimate original cost" and of "net investment" as though they might differ, § 3(13) declares that "net investment" is "actual legitimate original cost" as defined in the "Classification." Therefore we may dismiss as fanciful the theoretical possibility that "actual legitimate original cost" in § 4(b) can mean anything different from the same phrase as defined in the "Classification," and assume that that definition applies throughout the act whenever "net investment," or "original cost" appears. Were it not for § 103.41 of the "Classification" there could be no doubt that "original cost" meant the cost of the original construction. Section 103.02-2 confines the capital account to "the cost of original road, original equipment, road extensions, additions, and betterments" and defines each of these as that "provided and arranged for in the original plan for the construction of a new road." It is only in § 103.41 that we find another standard, and, although the rulings of the Interstate Commerce Commission - Incidentally all made after 1920 and in part at least made under § 19a - the "Valuation Act" 49 U.S.C.A. § 19a - are not entirely plain, it seems to us at least plausible to argue that that section meant to allow the purchaser of a going road to include in his capital account the value in cash or in property of whatever he in good faith paid. At any rate we shall assume arguendo that that is the right reading, although we might hesitate so to hold, if the case turned upon it. For, if that is true, the builder of a road who does not sell it, is at a disadvantage compared with one who does. The builder who does not sell is confined for his base to his original cost; he who sells can assure the buyer that he ...

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