"You will immediately take up with the department the question of your use of the 24-inch main in Hoffman Boulevard, extending from your station No. 3 to the boundary line of the First Ward." The city stopped taking water from the Citizens company at the end of January, 1914, but was compelled to resume the service for a few days in February as a result of increased consumption in Brooklyn during a cold spell. Since then no water has been taken from the company for use in Long Island City. The amount delivered during January and February, 1914, was 109,572,508 gallons, which, at $65 per million gallons, would cost $7,122.21. This amount was cut by the comptroller to $6,577.50, and the bill was finally paid on October 28 1914. (i) Summary of the financial results to the Citizens company of its sale of water to the city, 1898-1914. During the twenty years from 1896 to 1915, inclusive, the company's gross earnings were approximately $5,500,000. From June, 1898, to February, 1914, it delivered to the city for use in the First Ward upwards of 28 billion gallons of water, for which it received a total of $1,840,550.08, or approximately one-third of its gross income. In 1898, the first year in which it sold water to the city, it paid dividends at the rate of seven per cent. In 1899 this rate was increased to nine per cent, and thereafter for twelve years the rate was ten per cent. In 1912, when the company's stock was increased from $1,500,000 to $2,850,000 over night, the dividend rate dropped to six per cent although the aggregate amount paid in dividends increased. The city began to buy water about four years after the time when the plant was put into operation, and from then on the company escaped the "lean years" that often mark the early life of such an TABLE 2-CITIZENS WATER SUPPLY COMPANY OF NEWTOWN RELATION OF CITY'S WATER PURCHASE CONTRACTS TO GROSS EARNINGS, 1898 TO 1915 INCLUSIVE Receipts from Sale of Water to City enterprise. From 1898 to 1911, inclusive, there was not a single year when the city's payments for water for use in the First Ward fell below one-third of the company's receipts from all sources, and in 1899 the city's payments were two-thirds of the total. The relation of the city's payments for water to the company's gross earnings from all sources is shown by Table 2. The gross receipts given in the table are made up from the company's reports to the state comptroller for the years 1898 and 1899; and from its statements filed with the department for the later years, with deductions in 1914 and 1915 on account of actual deductions made by the city from water purchase and hydrant rental bills. The figures have not been checked by an examination of the company's books. They are believed, however, to be substantially correct, although the year is not in every case quite identical with the calendar year. The company alleges that the development of Station No. 8, at Douglaston, and of Station No. 9, at Little Neck, as well as the construction of the trunk mains in the Third Ward by which water from these stations could be delivered into the Second Ward, was the direct outcome of the city's demand for an increased supply for the First Ward. In his statement before the board of estimate on January 30, 1914, Mr. Sheehan alleged that the company's capital investment in Station No. 8 was $620,000 and the investment in Station No. 9, $425,000. It is to be presumed that included in these figures was the cost of the trunk mains in the Third Ward and of all the company's lands tributary to these two stations. The company has steadfastly refused to disclose to the department the original cost of its property, and has refused to permit the department to examine its books for the purpose of finding this out. The department's estimate of the reproduction-cost-new of Stations No. 8 and No. 9, including buildings, pumps, boilers, wells, suction lines, air lines, etc., with an allowance for overhead expenses, is about $362,000. The cost-new of the trunk mains connecting Station No. 3 on Union Turnpike with Station No. 8, Station No. 9 and Station No. 7 (at Great Neck) may be $310,000, including overhead. Whether the cost of certain undeveloped water lands in the Third Ward near the city's Flushing pumping station and in the town of Hempstead, north of Valley Stream, and the cost of sinking experimental wells on these properties and of installing temporary mechanical equipment at Valley Stream are included in Mr. Sheehan's figures, we do not know. The department's estimate of the reproduction cost new of the experimental wells at these places and the Valley Stream equipment is about $83,000. Adding these figures together, we have a total of $755.000 covering all the structures that could possibly have been included in Mr. Sheehan's aggregate of $1,045,000 investment made for the purpose of bringing water from distant points to meet the city's demand. This figure of $755,000 is a very liberal one, including, as it does, an allowance for contractor's profit, engineering and interest during construction, which doubtless is in excess of what the company actually paid out on the work. It does not include legal expenses in connection with the litigation incidental to the construction of the pipe line in the Third Ward without a franchise. The land acquired beyond Station No. 3. consists of about 173 acres in the Third Ward of Queens and 187 acres in Nassau County. I should be greatly surprised to learn that the company paid much, if any, more than $200,000 for it, unless by a private arrangement with its affiliated real estate company. The conclusion is irresistible that the company's claim of an actual investment of $1,045,000 in connection with Station No. 8 and Station No. 9 is exaggerated, even if we expand the definition of these stations so as to include all other lands and structures in the Third Ward and in Nassau County which might be said to have been acquired or constructed to provide facilities for supplying the city with water, and also throw in Station No. 6 in the Second Ward. I can see no legitimate way of bringing the company's total investment on account of the city contracts up to $1,000,000. We have to consider not only the investment made for this purpose, but also the operating expenses attributable to the actual delivery of the water to the city and the increased amount of taxes paid on this account. As to the extra cost of operation, a comparison of the company's operating expenses for 1914 and 1915, exclusive of taxes, when very little water was sold to the city, with the expenses of previous years shows that the ratio of operating expenses to gross earnings was only slightly affected by the sale of water to the city. In 1911 and 1912 the operating ratio was at its lowest level, namely, 32 per cent. With the stoppage of the sale of water to the city in 1914 the operating ratio went up four points to 36 per cent, which is very nearly the average ratio for the entire period from 1898 to date. By applying this ratio to the company's gross earnings from all sources other than the city's water purchase contracts we get a figure representing approximately what the company's operating expenses would have been if the city had never bought any water for the First Ward. This figure subtracted from the aggregate operating expenses during this period leaves about $680,000, or approximately $24 per million gallons, as the additional operating cost to the company of supplying the city with water. During this entire period the company paid about $416,000 in taxes. It is impossible to tell just how much the company's taxes have been increased directly or indirectly by the sale of water to the city. It would be a very liberal estimate to assume that they have been increased thereby in the same proportion as the gross earnings. Making that assumption, we have about $135,000 of taxes to charge against the profits of the water purchase contracts. Operating expenses and taxes, as above estimated, would absorb about. 45 per cent of the company's receipts from the sale of water to the city, leaving over $1,000,000 of profit to take care of the investment. When we consider that the company as a result of this venture still has as indestructible assets lands in the Third Ward, in Nassau County and at Station No. 6, to which as hereinafter shown I am willing to concede a present real estate value of $345,000, while the company claims for such assets a value of $961,659, exclusive of the percentage for overhead expenses allowed by its expert, we can readily see that a maximum original investment of $1,000,000 is well taken care of through net profits of a like amount plus the present value of the land. This is true even if we assume that the trunk mains in the Third Ward and Stations No. 8 and No. 9, with all their equipment and tributary well systems, are now without value. In this connection I point out that as a part of the permanent assets above referred to the company has about 150 acres of choice uplands and wooded hillsides tributary to Stations No. 8 and No. 9, which are not necessary or useful for water purposes but are suitable only for farming, real estate development or parks, and also the Valley Stream farm of 112 acres, which is suitable for agriculture or suburban development. In other words, only a small portion of the lands acquired and held by the company in connection with its actual or proposed sale of water to the city is See Table 22, post, pp. 226-227. now or ever has been necessary for the water business. The rest of these lands cannot properly be charged against the water purchase contracts. In fact, there is every reason to believe that the present market value for real estate purposes of all these lands taken together, both uplands and water lands, is more than enough to compensate the company for their original cost with interest to date, leaving only the cost of the structural property to be amortized out of the net profits from the waterpurchase contracts with the city. In fact, prior to 1906 the company had invested very little on account of these contracts, but had taken out large profits, which might properly be regarded as constituting a fund accumulated in advance for supplying the capital needed for the later extensions of plant. The general financial results to the company of the sale of water to the city may be summarized as follows: Total revenue derived from water purchase contracts. Total taxes attributable to water purchase contracts, certainly not Net profits available for investment, interest and amortization.... Net amount available for interest on investment, if any, not supplied My conclusion from this analysis of the history of the water purchase contracts is that the company made a substantial profit from these contracts; that the city is under no obligation in law or equity to compensate the company further on this account or to take into consideration this investment in so far as it is not now necessary for the service of the Second Ward in fixing rates for domestic and business consumption or for fire protection; or to purchase any part of the company's lands, wells, pumping stations and trunk mains acquired or constructed as an incident to the sale of water to the city unless it can make good use of them. CHAPTER IV HISTORY OF INTERCONNECTIONS WITH AND USE OF THE CITY'S MAINS BY THE COMPANY (a) Alleged unauthorized use of water by the company in Ridgewood Heights, 1896-1906. Many years ago as the Ridgewood Heights section began to build up on the Queens side of the county line, arrangements were made by some of the residents and property owners of this section to secure water from the city of Brooklyn through meters set on the pipes in the vicinity of the city line and connected with distributing mains laid by the consumers in the Queens area. This was before the Citizens Water Supply Company of Newtown had been organized and had extended its service into this district. Some of the distributing systems supplied with Brooklyn water were owned by companies, one of which, the Wyckoff Heights Water Company, as already stated in this report, was incorporated and received a franchise from the town officers of the town of Newtown in October, 1893. Another concern, controlled by Meyerose & McDonald, was known as the Evergreen Water Company. About 1896, when the Citizens company went into Ridgewood, it acquired control of these private distribution systems, their accounts with the city of Brooklyn were closed out, and it was supposed that the connections with the Brooklyn city mains were cut. There remained, however, a few individual consumers on the Queens side of the line who had laid their own service pipes and who continued to be served with Brooklyn water. Matters remained thus until 1906, when the Brooklyn office of the department received an application to supply water to two houses near the corner of Stanhope Street and Cypress Avenue, just at the borough The shut-offs made on the Brooklyn system, which was supposed to end at the intersection of Stanhope Street and St. Nicholas Avenue, one block from the borough line, indicated that there was probably an open connection between the Brooklyn mains and those of the Citizens company. A pitometer test on the city's six-inch main in Stanhope Street showed a reversal of the normal direction of the flow of water under certain pressure conditions, thereby demonstrating the existence of this connection. Excavations were made which led to the following conclusions set forth in a report by Mr. I. M. de Varona, then chief engineer of the Brooklyn system, to Commissioner William B. Ellison under date. of June 2, 1906: "First: That some years ago there was a meter on the Brooklyn mains in Stanhope Street near St. Nicholas Avenue. "Second: That on September 19, 1898, the street was dug out on the northwest corner of Stanhope Street and St. Nicholas |