cludes a profit to the merchants of whom he buys his material." 53

§ 255. Cost enhanced by fraudulent contract.

It is clear that, if the contract is collusively made with the contractor, the company cannot rely on the contract price as the bona fide cost of the plant. If, for instance, the owners of the public service company should, either individually or through an independent corporation, such as a construction company, owned by them, make a contract for the payment of an extravagant price for doing the work, it would doubtless be necessary to go behind the form, and find the sum actually expended in the construction.54 But it will be assumed, in the absence of evidence, that the contract was made in good faith and without any ulterior motives. But where securities are issued as bonuses or without any regard to cost they furnish neither a measure nor guide to the value of the property. In one case 55 the United States Supreme Court pointed out that against a piece of construction costing not more than $124,000 securities aggregating $325,000 were given to the contractor. It is perhaps unnecessary to say, remarked the court, that the contracts were made by the company with persons who at that time controlled its voting power.

§ 256. Construction now thought unwise.

It may turn out in some cases that some parts of the plant will prove of little value in the working of the system at a later time. In fairness it would seem that in such cases the question should be whether the expenditure seemed wise at the time it was made; if so, that expenditure should be considered like any other. It is still a

53 See to the same effect, Gloucester Water Co. v. Gloucester, 179 Mass. 365, 60 N. E. 977.

54 See Dow v.

Biedelman, 125 U. S.

680, 31 L. ed. 841, 8 Sup. Ct. 148.

55 Knoxville v. Knoxville Water Co., 212 U. S. 1, 53 L. ed. 371, 29 Sup. Ct. 148.

question on the authorities whether the stockholders themselves must not bear the burdens of earlier misfortunes of railroads instead of present shippers.56 If a cheaper mode of construction was deliberately chosen with the knowledge that it must later be superseded, the Commission will not permit both the money expended in rectifying the line and the original cost to be charged as capital against the shipping public. 57 On the other hand, if the money may fairly be said to have been judiciously expended at the outset, it would seem that, although it is now seen that the expenditure might have been more wisely made, the capital charge should fairly remain. 58 If to-day by the preponderance of expert opinion a better way of laying out a system might have been followed, it still may be true that the construction seemed wise at the time it was done.59

§ 257. Equipment long since superseded.

The extreme form of this problem relates to superseded equipment. Take the case of a street railway which is constructed as a horse railway, then at great expense is changed to a cable road, then later at still greater expense is converted to an electric road, and then is obliged by statute to build a subway and place its tracks underground. It may have happened that all these expenditures were provided for by the raising of new capital for which securities are still outstanding. Would it be outrageous to ask that some return on this capital should still constitute a charge upon the present concern? In several cases some respect has been paid to this capitalization long after its tangible results have disappeared, notably in Milwaukee Electric Railway & Light Co. v. Milwaukee,0 where

56 Meeker & Co. v. L. V. R. R. Co., 21 I. C. C. R. 129.

57 Kansas City So. Ry. v. United States, 231 U. S. 433, 34 Sup. Ct. 125.

58 Wilkes-Barre v. Spring Brook Water Co., 4 Lack. (Pa.) Leg. News, 367.

59 See Capital City Gaslight Co. v. Des Moines, 72 Fed. 829.

60 87 Fed. 577.

District Judge Seaman allowed $2,000,000 in addition to the actual value of the present properties, making an allowance for the necessary and reasonable investment in the purchase of the old lines and equipments, which were indispensable to the contemplated improvement, and for the large investment arising out of the then comparatively new state of the art of electric railways for a large system.61

§ 258. Portion of plant not now utilized.

As to such portion of the plant as is not utilized at all in the present operation, the problem is more difficult still. If this is being held in condition to operate in emergencies, which are not altogether improbable, it would seem plain in analogy to the decisions just discussed that it may be included. On the other hand, if it is not devoted to any present use, then it should be plain that allowance should not be made for it in estimating the cost. In this case property no longer of any use should be carried in a separate account, as property should be which is being held for use in the remote future. In accordance with these distinctions a Federal court 62 has allowed for old gas works superseded but held in reserve, while the Minnesota court 63 refused to consider large tracts of land held for possible future freight terminals. These decisions are not necessarily inconsistent. The plant in the first case would be by most business men regarded as sufficiently devoted to the immediate business, while the land in the second case is plainly being carried more as a speculation. Business men would demand a business profit on the whole plant in the first case, but they might well be content to carry without profit unimproved lands, relying upon the appreciation of the property for their ultimate profit.

61 See also Metropolitan Trust Co. v. Houston & T. C. R. R. Co., 90 Fed. 683.

62 Capital City Gaslight Co. v. Des Moines, 72 Fed. 829.

63 Steenerson v. Gt. Northern Ry., 69 Minn. 353, 72 N. W. 713.

§ 259. Treatment of outside investments.

In determining whether rates for transportation are fair, any other business of the corporation than carriage should be excluded, both as to capital and operation. This was so well worked out by the Commission in the Great Northern case as to be worth restatement here. Ore properties belonging to defendant carrier were transferred to an independent company, in exchange for certificates entitling the holders thereof to participate in the profits of said company. These certificates were turned over gratis to the shareholders of defendant; and it was held that, upon a question of reasonableness of rates, this fact could not be urged to deny the right of the shareholders to receive a reasonable income on their stock. The idea of the Commission was that, where the coal lands owned by a carrier are leased to an independent company, which made a profit out of their operation, the carrier should not be permitted to use the value of such property, for the purpose of swelling the amount upon which it may demand an income from rates to be paid by the public.64 In a recent case of importance in the Supreme Court,65 it was held that the Commission might compel carriers engaged in interstate commerce to report upon financial operations in other lines of activity than those subject to the Act. Thus the investment in amusement parks, if conducted under the same auspices as carriage to and from the park, and the profits from its operation, must be reported, in order that the Commission may be sure there has been no juggling of accounts, in reporting upon the investments in facilities for interstate commerce and the profits derived therefrom.

§ 260. Allowance for unremunerative betterments.

It has strenuously been insisted of late by counsel that

64 City of Spokane v. N. P. Ry., 15 I. C. C. 376.

65 Interstate Commerce Commis

sion v. Goodrich Transit Co., 224 U. S. 194, 56 L. Ed. 729, 32 Sup. Ct. 436.

railroads are being required to expend large sums in certain classes of improvements which do not add to the revenue-earning capacity of the property. Instances are the erection of expensive passenger stations in large terminals, the abolition of grade crossings, the elevation of tracks through towns and cities, the adoption of safety appliances and the like. There is a public demand for these improvements, which often takes the form of a legislative enactment or a municipal ordinance; and it is said that the public which demands all this should expect to pay for the improvement. It is, perhaps, not a solution of the question to say simply that such property is entitled to its return, along with other property. It may be necessary to isolate this property, and permit of the gradual amortization of this form of investment, with the understanding that the sums thus set aside shall not ultimately be capitalized. While it is reasonable to say that such rates may be charged as will permit the accumulation of a fund to take care of charges of this sort, the Commission has indicated that it feels that the stockholders must expect to forego something by way of dividend to this end.

§ 261. Contributions made by the State.

Another difficult problem arises from the fact that in many instances the property of the company in question represents in part contributions by the State. The Government may have given the company the land for its right of way, or it may have made contributions in cash out of which properties have been purchased. It is argued strongly in some quarters that only the property in which the company has invested funds, and not that part which has been donated by the government should be considered in determining reasonable rates. It may be true that actual title and possessions are not always conclusive. The determination of a reasonable rate is ultimately based upon the public policy, which may demand that certain