Page images
PDF
EPUB

upon property used in business enterprises similar to railroads. And upon the same general principle, another federal judge held recently that a local Louisiana telephone company which was making seven per cent ought not to be disturbed." With these cases in mind, one is justified in saying that the current rate of return to capital invested 78 in the community served may confidently be expected.79

§ 317. Reasonable profits sufficiently safe.

In any normal case, the proprietor of a public service may therefore expect a dividend equal to the current rate of return in enterprises of similar character. It should be borne in mind, however, that public services have in general more assured permanence, and less danger of ruinous competition, than most private businesses. However, opinions must necessarily differ as to what would be a reasonable profit in a given case. Most courts, when asked to declare the action of some legislative body in reducing certain rates to be virtual confiscation, will take the attitude that, unless the reduction worked is really indefensible, the legislative rate will not be disturbed.80 Thus in a recent Iowa case 81 the court did not consider an ordinance confiscatory which so reduced rates as to leave the company about five per cent on the value of the property which resulted in this case in over six per cent on its outstanding securities. A recent Florida case,82 where it was held that the court could not say that even three and one-half per cent upon the cost of a system was confiscatory, is to be explained by the fact that the present value might be one-half of the actual cost. Generally

77 Cumberland Tel. & Tel. Co. v. R. R. Commission, 156 Fed. 823. 78 Missouri R. & R. T. Co. v. Love, 177 Fed. 493.

79 Louisville & N. Ry. Co. v. Brown, 123 Fed. 946.

80 Willcox v. Consolidated Gas Co.,

212 U. S. 19, 53 L. ed. 382, 29 Sup. Ct. 192.

81 Cedar Rapids Water Co. V. Cedar Rapids, 118 Iowa, 234, 91 N. W. 1081.

82 State ex rel. v. Seaboard A. L. R. R. Co., 48 Fla. 129, 37 So. 314.

speaking proof that the net earnings which will be left by the proposed reduction will leave an absurdly low percentage, as in one recent case 83 two and one-third per cent, is enough to condemn the legislative rate. In one of the latest federal cases 84 it is said succinctly that the authorities practically establish a six per cent minimum. This is based upon the doctrine in Cotting v. Kansas City Stock Yards Company; 85 the court said in effect that legislation cutting the return of the company below six per cent was unconstitutional. Confined by the courts to this extent, regulation by commissions should have no terror to the investor. Bonds and stocks thus protected will not be brought below par by governmental action; indeed, they will in certain instances still sell at a premium.

§ 318. Rate of return upon investments in general.

Whatever standards there are in this matter are plainly external, and the court will take into account the rate of return upon investments prevailing in business generally. In a later opinion 86 the Commissions laid down this policy, "It may be admitted that it is for the interest of the general public, as well as the railroads, that their funded debt should bear as low a rate of interest as possible. A very considerable part of the saving to railway companies in recent years has come from a reduction in the rate of interest paid. In 1895 the average rate paid by all the railroads of this country was 4.69 per cent; in 1909 this figure had been reduced to 3.90 per cent, and the saving computed upon the indebtedness of 1909 represented by this decrease in the rate of interest would have amounted to $77,000,000. Interest upon its funded debt is a fixed charge in the nature of an operating expense, and, in proportion as this charge can be reduced, benefit should

83 Coal & Coke Co. v. Conley, 67 W. Va. 129, 67 S. E. 613.

84 St. Louis & S. F. Ry. v. Hadley, 168 Fed. 317.

85 183 U. S. 79, 46 L. ed. 92, 22 Sup. Ct. 30.

86 Advance

in Rates,-Eastern Case, 20 I. C. C. 243, passim.

accrue both to the railway company and its patrons. It must must be conceded, therefore, that railway rates and the treatment of our railways should be such as will make the long-time railway bond, which bears a proper relation to the value of the security, a favorite with the investing public." 87

§ 319. Public service has its peculiar risks.

Just what rate of interest a public service company should be allowed to pay upon its securities is difficult to determine by rule, since the circumstances will be different in different cases. Whatever it is obliged to pay to sell its bonds at par, if the negotiations for the issue are conducted with good faith, would be the test. And that would depend upon the stability of the business to the mind of the lenders. Public service bonds are sold on the exchanges from as low as a three per cent basis to as high as a sixteen per cent basis, and doubtless will always continue to do so. Enterprise and industrial progress would be at a standstill if the rate was kept down to that on government bonds.88 It must be remembered that those who embark in public services place their property to a great extent in the hands of the public. They must be always ready to supply the public demand, and must take the risk of any falling off in demand. They cannot convert their property to any other use, however unprofitable the public use may have become. 89 They must run in good times and bad with substantially the same expense. If they lose in bad times, they cannot recoup themselves by extraordinary profits

87 Where particular rates on a particular commodity between particular points are challenged, the question of net earnings on the particular lines involved is not important, unless it be shown that the margin of profit is so small on the system's business, as a whole, that a reduction in the particular rates would reduce the whole income below

the reasonable profit point. Board of Trade of Winston-Salem v. N. & W. Ry., 16 I. C. C. 12.

88 This is in part paraphrased from Wilkes-Barre v. Spring Brook Water Co., 4 Lack. Leg. News, 367.

89 Long Branch Commission v. Tintern Manor Water Co., 70 N. J. Eq. 71, 62 Atl. 474.

in good times. These risks exist to some extent in all communities, but they are greater in some than in others.

Topic C. Policies Respecting Return Allowed

§ 320. General policy for allowing a fair return. According to modern views upon the constitutional guaranties, an adequate return upon the true value of the property devoted to the public use, by those who conduct a public service, ought in all normal cases to be left; otherwise, it is conceded, they are in effect deprived of their property without due process of law, if their rates are so reduced by public authority as to leave no such adequate return. "The ordinary considerations of justice require that the money so invested by invitation of the Government should be allowed a fair return. This does not mean that we should permit rates which will guarantee all railroad investment, nor which will guarantee any railroad investment at all times, but we should allow rates which will yield to this capital as large a return as it could have obtained from other investment of the same grade. If rates formerly in effect have become insufficient, then higher rates should be permitted." 90 This is based upon sound public policy; it ought always be plain that those who invest their funds in some public employment are going to get a fair per cent upon their investment; because, unless they are assured of this, they will employ their money elsewhere; and many enterprises necessary for the public convenience will not be undertaken, nor will existing plants be extended. It is, then, not only due consideration for the rights of others, who have already invested their money in public service companies, but also an enlightened selfishness, with a view to the future, which dictates the policy that a reasonable return upon the value of the property used in the public service shall be held to be protected by the constitution. "If the present system

90 Advance in Rates, Eastern Case, 20 I. C. C. 243, passim.

of private ownership of railways is to be continued, sufficient inducement must be extended to private investors." 91

§ 321. No right to raise rates in prosperous times.

In prosperous times business all over the country increases, and consequently the amount of traffic carried by the railways increases. Since in the railroad business the law of increasing returns because of decreasing costs has surprising scope, this increase of traffic will produce greater profits at the rates formerly established. To a certain extent, the carrier may enjoy these increased profits in prosperous times, without the obligation to reduce rates, but the carrier may not increase rates, because in prosperous times the shippers can afford to pay more. This contention was well handled by the Commission in one case,92 thus: "The test of the reasonableness of a rate is not the amount of the profit in the business of a shipper or manufacturer, but whether the rate yields a reasonable compensation for the services rendered. If the prosperity of the manufacturer is to have a controlling influence, this would justify a higher rate on the traffic of the prosperous manufacturer than on that of one less prosperous. The right to participate in the prosperity of a shipper by raising rates is simply a license to the carrier to appropriate that prosperity, or in other words, to transfer the shipper's legitimate profit in his business from the shipper to the carrier. " 93

§ 322. Commercial conditions affecting dividends.

To a certain extent, the dividends which a railroad company can earn are dependent upon commercial conditions generally. When crops fail or when commercial crises

91 Spokane v. N. P. Ry., 15 I. C. C. 376.

92 Central Yellow Pine Asso. v. Illinois C. R. R., 10 I. C. C. Rep. 505. 93 In Tift v. Southern Ry., 10 I. C. C. Rep. 548, the Commission

said: "The carriers necessarily and justly participate in the increased prosperity of their patrons in the resultant enlargement of their own business."

« ՆախորդըՇարունակել »