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perous times a reasonable amount as a surplus out of which it may maintain its dividend in less fortunate years. It is the practice of the strongest and best managed railroads and public service companies so to arrange matters by this process that they may always maintain their uniform dividend. This practice has the sanction of the Commission, as the following will show: "But it may be urged that after paying its fixed charges, taxes and dividend out of its net income for the year 1902, it had left but a comparatively small amount. That year was one of prosperity, and it can hardly be expected that conditions will continue without interruption as favorable. Ought not a railway to be allowed to accumulate, in some form, a surplus during fat years which may tide over subsequent lean years? To this we would unhesitatingly answer in the affirmative. In times like the present a railroad company should be allowed to earn something more than a merely fair return upon the investment; but we also think that it clearly appears that the Michigan Central is doing this." 10

§ 329. Greater profit for better service.

Reference might here be made to some recent theories, already resulting in some legislation dealing with the rate of return. The best of these proposals at present is for a sliding scale, the rate of dividend being permitted to increase as the price of the service to the public decreases. Some method of profit sharing, with increased returns for the corporations and better service for the communities, may be thought out which will spur the company not only to better service, but to wider extensions, not only to larger dividends, but to better maintenance. As the Commission has pointed out, a standard of rates must be so high that any needed carrier which serves the public "Re Advances in Freight Rates,

9 I. C. C. Rep. 382.

10 It will not, therefore, be assumed that when a surplus is found it

has been improperly accumulated. Spokane v. N. P. Ry., 15 I. C. C.

376.

with honesty may live; yet rates should still be so much below the possible maximum as to give high and exceptional reward to especially capable management.11 This amounts to saying that it is realized that a standard living wage should be established for the average line, leaving the better road to get more, while the worse may get less. 12

Topic D. Character of the Enterprise

§ 330. Larger returns in risky enterprises.

It follows from what has just been said that in a risky enterprise a large return may be demanded. The principle that as large a return is permissible as is obtained in businesses of similar character, covers the case. And the policy to induce people to undertake such services for the benefit of the public, requires a larger return for a more risky enterprise. 13 "Reasonable' is a relative term, and what is reasonable depends upon many varying circumstances. An equivalent to the prevailing rate of interest might be a reasonable return, and it might not. It might be too high or it might be too low. It might be reasonable, owing to peculiar hazards or difficulties in one place to receive greater returns there than it would in another upon the same investment."

" 14

§ 331. Hazards of the business considered.

The hazards of the business are therefore to be considered in determining what is a reasonable rate of return in the particular enterprise in question. An excellent example of this problem is to be found in the case of Canada Southern Railway v. International Bridge Company, 15 It was shown in that case that the bridge com

11 Advances in Rates, Western Case, 20 I. C. C. 307.

12 See Hooker v. Interstate Commerce Commission, 188 Fed. 342. 13 The quotation is from Brunswick & T. W. Dist. v. Maine Water Co., 99 Me. 371, 59 Atl. 537.

14 The character of the enterprise as a factor in determining the rate of return is mentioned in Cotting v. Kansas City S. Y. Co., 183 U. S. 79, 46 L. ed. 92, 22 Sup. Ct. 30. 15 L. R. 8 App. Cas. 723.

pany at its established charges was earning something like fifteen per cent upon its investment. The opinion of Lord Chancellor Selborne alluded to the peculiar risks of the enterprise rather by way of dictum than as the basis of his decision. He said, on this point: "You cannot ask a court to say that the persons who have projected such an undertaking as this, who have encountered all the original risks of executing it, who are still subject to the risks which from natural and other causes every such undertaking is subject to, and who may possibly, as in the case alluded to by the learned judge in the court below, the case of the Tay Bridge, have the whole thing swept away in a moment, are to be regarded as making unreasonable charges, not because it is otherwise than fair for the railway company using the bridge to pay those charges, but because the bridge company gets a dividend which is alleged to amount, at the utmost, to fifteen per cent. Their Lordships can hardly characterize that argument as anything less than preposterous." 16

§ 332. Whether uniform return upon all property.

It is suggested in the case of Steenerson v. Great Northern Railway Company 17 that a difference is to be made in the rate of return to be allowed upon different kinds of property, in the particular case a lower rate upon the real estate constituting the terminals of the company. This can hardly be. All the property employed in the enterprise should be taken together and a uniform rate of return allowed upon it all by the general principles of public service law. However, as the point is a novel one, the opinion of Mr. Justice Canty is quoted. He said: "Let us now consider what in these times is a reasonable income on $14,000,000, invested in these terminals, and

16 To the same effect is Troutman v. Smith, 105 Ky. 231, 48 S. W. 1084, allowing a ferryman a large profit on the capital invested because

of the notorious hazards of the business.

17 69 Minn. 353, 72 N. W. 713.

$30,000,000, invested in the rest of the road. The great value of the real estate covered by these terminals is given to it by anticipating the future. Very little of this real estate is in or near to the business center of either city. Most of it is outlying city property and suburban property. It is safe to say that other real estate similarly situated, in the same portions of St. Paul and Minneapolis, does not, on an average, yield an income of 1 per cent per annum above the taxes on the price of valuation at which it is held; and there is, as a general rule, no use to which such property can be put that will cause it to yield any greater income. Such real estate is valued, not on account of its present power to produce an annual income, but because it is believed that it will be still more valuable in the future. The owner of such property cannot expect to eat his loaf and still have it. He cannot expect that the property will pay a full-sized annual dividend, and at the same time double or treble in value every 10 or 20 years. He expects his dividends to accumulate in the form of increase in value." It may be that there is justification in disposing of this case in the way in which Mr. Justice Canty does; for if these great tracts of land are being held at inflated valuation full return upon that valuation ought not to be expected. 18 But, of course, if this policy is adopted there should not be any complaint, if later the company claims the unearned increment, which represents their foregone profit.

§ 333. Rate of interest dependent upon safety.

Just what rate of interest a public service company should be allowed to pay upon its bonded indebtedness it is difficult to determine by rule, since the circumstances will be different in different cases. Whatever it is obliged

18 In a few cases the point has been raised that all of the property belonging to the public service company should not come in for returns

upon the same basis. See WilkesBarre v. Spring Brook Water Co., 4 Lack. Leg. News (Pa.), 367.

pany at its established charges was earning something like fifteen per cent upon its investment. The opinion of Lord Chancellor Selborne alluded to the peculiar risks of the enterprise rather by way of dictum than as the basis of his decision. He said, on this point: "You cannot ask a court to say that the persons who have projected such an undertaking as this, who have encountered all the original risks of executing it, who are still subject to the risks which from natural and other causes every such undertaking is subject to, and who may possibly, as in the case alluded to by the learned judge in the court below, the case of the Tay Bridge, have the whole thing swept away in a moment, are to be regarded as making unreasonable charges, not because it is otherwise than fair for the railway company using the bridge to pay those charges, but because the bridge company gets a dividend which is alleged to amount, at the utmost, to fifteen per cent. Their Lordships can hardly characterize that argument as anything less than preposterous.

" 16

§ 332. Whether uniform return upon all property.

It is suggested in the case of Steenerson v. Great Northern Railway Company 17 that a difference is to be made in the rate of return to be allowed upon different kinds of property, in the particular case a lower rate upon the real estate constituting the terminals of the company. This can hardly be. All the property employed in the enterprise should be taken together and a uniform rate of return allowed upon it all by the general principles of public service law. However, as the point is a novel one, the opinion of Mr. Justice Canty is quoted. He said: "Let us now consider what in these times is a reasonable income on $14,000,000, invested in these terminals, and

16 To the same effect is Troutman v. Smith, 105 Ky. 231, 48 S. W. 1084, allowing a ferryman a large profit on the capital invested because

of the notorious hazards of the business.

1769 Minn. 353, 72 N. W. 713.

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