CHAPTER I

CORPORATE HISTORY AND FRANCHISES OF THE COMPANY

On May 27, 1893, the town officers of the town of Newtown, Queens County, issued a permit to Cord Meyer, Jr., and six associates to form a corporation "for the purpose of supplying the said town and the inhabitants thereof with water." "Under the provisions of the Transportation Corporations Law, this permit, when acted upon, constituted a perpetual franchise to occupy the public streets of the town for the distribution of water for public and domestic purposes. The Citizens Water Supply Company of Newtown was incorporated in accordance with this permit by the filing of a certificate in the secretary of state's office June 1, 1893. The company's capital stock was fixed at $25,000 and its principal office was to be in the town of Newtown.

The company secured a hydrant rental contract from the town in January, 1894, and began to supply water in the following June. Its business developed quite rapidly. Its capital stock was increased twice in 1894, first to $50,000 and then to $100,000. In the following year it was increased to $150,000, and in 1896 the company issued $150,000 of first mortgage five per cent thirty-year bonds payable July 1, 1926.

At about this time (1896) the company gained control of the Wyckoff Heights Water Company, which owned a small distribution system with less than two miles of mains in the Wyckoff Heights section of Ridgewood. The Wyckoff company had been incorporated under the Transportation Corporations Law by a certificate filed in the secretary of state's office October 19, 1893, which described the company's business as follows: "To supply pure and wholesome water to the residents of Wyckoff Heights, comprising the Robert Adair and John L. Nostrand map, Schoonemaker map, map of Wyckoff Heights, Hamlin Babcock map, Martin Zeidler maps in the town of Newtown, Germania Real Estate and Improvement Company's maps, as the same several maps are now on file in the office of the County Clerk of Queens County, and its business shall be located in the Town of Newtown, in the County of Queens and State of New The incorporators had received the necessary permit from the town officers of Newtown on October 3, 1893. The Wyckoff company began to supply water in May, 1894, but as it had no independent source of supply, it purchased water from the city of Brooklyn. When the Citizens company extended its mains to the Ridgewood territory about 1896, it took over the business of the Wyckoff company as well as that of certain other concerns which had laid their own pipe systems on the borders of Brooklyn in connection with real estate developments.

On January 1, 1898, the entire town of Newtown was annexed to the city of New York and became Ward 2 of the borough of Queens. Shortly thereafter (in 1901) the Citizens company increased its capital stock to $500,000. In 1899 when the water companies made their first reports to the State Board of Tax Commissioners under the special franchise tax

law, the Wyckoff company, though still a distinct corporation, was being operated in conjunction with the Citizens company by the Cord Meyer interests. The Wyckoff company at that time reported that its gross earnings were $1,200 a year, of which $1,125 was spent for purchase of water and $75 for maintenance. It could not tell the original cost of its plant, but estimated its reproduction cost new as about $5,500. It protested against a special franchise assessment of $7,000 on the ground of overvaluation and inequality, stating that other real estate in the locality was assessed at about 65 per cent of its full value. At this time the Wyckoff company reported that it had 225 shares of common stock outstanding, of an aggregate par value of $4,500; that it had no funded debt and no real estate other than its special franchise. This company's original authorized capital stock was $10,000, but on November 9, 1900, it filed in the secretary of state's office a certificate increasing its capital stock to $100,000, all of which was issued immediately or in the very near future and was acquired by the Citizens company. The Wyckoff company also executed a mortgage for $400,000 to J. Henry Dick, as trustee, under date of December 1, 1900. Mr. Dick was at that time vice-president of the Citizens company, and the mortgage was issued in connection with the purchase of lands upon which the Citizens company's pumping station No. 5 (now dismantled), as well as a considerable portion of the Cord Meyer real estate development at Forest Hills, were afterwards located. By a certificate filed April 9, 1901, the Wyckoff company was merged into the Citizens company.

At about this time the Citizens company executed a second mortgage to the Colonial Trust Company as trustee, to secure an issue of $1,000,000 of four per cent twenty-year bonds due January 1, 1921. Of these bonds, $500,000 were issued immediately to pay for the Wyckoff property. Subsequently, the Wyckoff uplands, amounting to about 70 acres at Forest Hills, were transferred to the Cord Meyer Development Company without any corresponding reduction of the Citizens company's capitalization. The land so disposed of is now assessed at about $530,000 unimproved value, which is greater than the aggregate assessment of all the Citizens company's present land holdings in Queens.

On May 19, 1900, the Manhasset Water Company was incorporated with the consent of the town officers of the town of North Hempstead, Nassau County, for the purpose of supplying that town with water. Its original authorized capital stock was $25,000, but two years later this was increased to $250,000. In 1905 this company secured a hydrant rental contract from the town of North Hempstead, and a few months later the company was merged into the Citizens company, February 19, 1906. The Manhasset company's stock had all been acquired by the Citizens company at least several months previous to the merger.

The Citizens company in January, 1906, just before it absorbed the Manhasset company, filed a certificate increasing its authorized capital stock from $500,000 to $1,500,000. New stock to the amount of $500,000 was issued shortly thereafter, but I have not ascertained how much of it was issued in exchange for the stock of the Manhasset company. The Citizens company's capital stock was again increased in 1911 to $3,000,000, and all but $150,000 of the increase was issued immediately.

After the absorption of the Manhasset company by the Citizens company, and after the latter had entered into a five-year contract for the sale of water to the city of New York for use in the First Ward of Queens (Long Island City), the Citizens company, under date of December 22, 1908, filed in the office of the secretary of state an amended certificate

of incorporation by which the following paragraph was added to the original certificate: "Sixth The name of the other city, town or village to be so supplied with water is the City of New York.'

The Transportation Corporations Law, at the time of the incorporation of the Citizens company in 1893, provided that a water works corporation, having obtained a permit from the authorities of a city, town or village, should have authority to lay its water pipes "in any streets or avenues or public places of an adjoining city, town or village, to the city, town or village where such permit has been issued." In 1905 this law was amended, however, so as to make a water company's right to lay mains in an adjoining city or village conditional upon the company's having received the permission of the local authorities of such adjoining city or village. Whatever may have been the Citizens company's intention in filing, in 1908, its amended certificate above described, and whatever may have been its intention in acquiring and merging the Manhasset Water Company, it appears that it did not by either of these acts extend its franchises within the city of New York beyond the limits of the Second Ward of the borough of Queens.

The company in 1906 laid a trunk main from its Station No. 3 in the Fourth Ward of Queens through various streets in the Third Ward to its Station No. 8 at Douglaston and from there in 1907 to Station No. 7 at Great Neck. This main was laid in public streets without the consent of the city of New York, as required under section 82 of the Transportation Corporations Law as amended in 1905 and 1906. Under the decision in the case of Richards v. Citizens Water Supply Company, 144 App. Div. 206, handed down October 20, 1910 (on the opinion of Justice Carr), the company is a trespasser in the Third Ward and maintains its trunk mains there only by the sufferance of the city and the abutting property owners.

It should be noted that the company since its inception has been controlled by the Cord Meyer family, whose principal interest is real estate, and that for at least fifteen years Mr. William F. Sheehan has been associated with it as stockholder and as counsel.

CHAPTER II

CAUSES AND EXTENT OF FRICTION IN THE RELATIONS OF THE CITY, THE COMPANY AND THE WATER CONSUMERS OF THE SECOND WARD OF QUEENS

The relations between, the company and the city in recent years have been far from harmonious, and the evidences of dissatisfaction with the company among its patrons have been numerous. The triangle of trouble has been completed by a feeling of unrest approaching resentment on the part of the residents of the Second Ward of Queens because of the city's failure to give them direct relief, either by compelling the company to reduce its rates or by supplying city water at city rates in this section the same as in other sections of Greater New York. The following are the most important of the specific points that have been at issue:

(a) Dispute about purchase of water by the city.

For many years the city purchased water from this company for distribution to the city's patrons in the First Ward of Queens (Long Island City). The company claims that it was led to extend its plant and develop new sources of supply by the urgent demand of the city for more and more water, and that the city's discontinuance of the purchase of water at the beginning of 1914 was grossly unfair and amounted substantially to a repudiation of a gentlemen's agreement. On the other hand, the city claims that it was under no obligation to continue to take water from the company after the expiration of the water purchase contract, especially as it had found itself in a position where its own demands for water had increased beyond all reason on account of waste, which, with proper methods of administration, could be checked. The city claims that the company made its additional investments voluntarily, because of the great profit accruing to it through its sale of water to the city, and that having received these profits and taken the risk, the company has no more reason to complain upon ethical than upon legal grounds of the city's action.

(b) Dispute as to interconnections and use of the city's mains by the company.

For many years the company used certain city mains, at first in connection with the delivery of water to the city at the First Ward boundary line. Later, it has been using one of them solely in connection with its own service in the Second Ward. Prior to 1916 no rental was paid for the use of these mains. The company has sought to secure a lease of one of them pending the completion of the necessary sewer construction and street improvements to enable it to complete a trunk main circuit around its main area of distribution. The company also has desired to establish certain emergency interconnections between its distributing system and that of the

city in order to give more certain fire service, especially in the Ridgewood section. The city has been nursing a tradition that the company several years ago, through certain unauthorized connections with the city's mains in the Ridgewood district, got city water without paying for it, and has been loath to permit any interconnections that might lead to a revival of this old suspicion. It has also been unwilling to make any lease of its trunk mains in the Second Ward by which it would be giving away its present strategic advantages in case it should wish to install its own distribution system.

(c) Dispute as to hydrant rentals and fire protection.

The hydrant rental contract between the city and the company has expired and the company claims that the old rate of payment, namely, $20 per hydrant, is insufficient to cover the cost of service. The city, on the other hand, maintains that the company should immediately expend a large sum of money in order to enable it to furnish adequate fire protection within its area of service. The city claims that the question of rates for fire protection is bound up with the general question of rates. The company has been unwilling to disclose in detail the facts in regard to costs of operation, even though the city regarded these facts as a very important element in the proper adjustment of the controversy over the rates for fire service.

(d) Dispute as to domestic service rates and practices.

The consumers of the Second Ward have long been protesting against the rates for domestic service charged by the company, on the ground that these rates are much higher than the rates charged by the city where municipal water service is available, and also on the ground that the company's methods of applying the rates are unfair and oppressive. company has maintained that its rates were just and reasonable and that it was no longer earning even a fair return upon its investment. It has denied the authority of the commissioner to fix rates and has refused to open its books to enable him to analyze its operating expenses and look into its capital account.

(e) Dispute as to possible competition by the city.

For several years the company has been in great fear that the city would parallel its mains and thus compel it to incur the losses which inevitably result from competition. With this in mind the company has sought legislation to put it under the protection of a state commission and to curtail the city's right to enter its territory. On the other hand, the city has pointed to its own enormous investment in water works, including trunk mains through the Second Ward of Queens, and has strenuously resisted the enactment of any law that would tend to prevent paralleling and thereby give the company an exclusive franchise in a portion of the city.

(f) Dispute as to purchase of the company's plant by the city.

For many years it has been considered inevitable that the city should ultimately take over the private water companies. The city has tried to enter into purchase negotiations with the company, but the city does not