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$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.

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 3 per cent basis to as high as a 12 per cent basis, and doubtless will always continue to do so. The suggestion that some fixed standard should be taken, such as the rate paid upon United States, State, or even municipal bonds in the locality in question has no justice in it. That was said very plainly by Mr. Justice Edwards in Wilkes-Barre v. Spring Brook Water Co.," when an application was made to him under the Pennsylvania statute to order a reduction of rates by a water company which was earning barely 5 per cent, allowing only 1 per cent for depreciation: "Reference has been made to the interest paid on Wilkes-Barre city bonds and on large sums otherwise safely invested. Such investments are not by any means analogous to investments in waterworks. Good bonds such as Wilkes-Barre bonds remain intact. They are not liable to change or diminution in principal. At a time certain the principal is to be paid to the investor to the last cent. If the rate paid on such investments shall determine the percentage of profit to be paid water companies there would be no inducement for anybody to invest money in works of a public nature. It would be much less wearisome to sit down twice a year and cut off coupons from bonds. Enterprise and industrial progress would be at a standstill. 20

§ 334. Risk by reason of depreciated security.

A very complicated instance of this general problem came up in the case of Steenerson v. Great Northern Railway, 21 already much quoted. The problem and its solution are thus stated by Mr. Justice Canty in his own words:

194 Lack. Leg. News (Pa.), 367. 20 Similar language is used in:

Milwaukee Elec. Ry. Co. v. Milwaukee, 87 Fed. 577.

21 69 Minn. 353, 72 N. W. 713.

"A large amount of railroad bonds floated years ago, for the full cost of the roads, at high rates of interest, are now very poorly secured. And on the maturity of such bonds, or when an attempt is made to reorganize the road on foreclosure, it is found difficult to scale down the amount of indebtedness to a point where the road will, under present conditions, be sufficient security for bonds drawing a fair rate of interest. These things tend to make the present rates of interest on railroad securities unreasonably high. But should the losses caused by all of these economic changes be borne by the public, or by the owners of the railroad? There can be but one answer to this question. As we have repeatedly stated, neither the State nor the public have ever guaranteed that railroads would always be worth the amount originally invested in them, or that what is a reasonable rate of income would not be less in the future than it was at the time of the investment, and have never guaranteed, directly or indirectly, either the interest or principal of railroad bonds. These losses must be borne, not by the public, but by the owners of the railroad; and, as against the public, the holders of the bonds have no greater rights than the railroad company itself."

§ 335. Rate of return dependent upon locality.

It is a part of the rule under discussion, that the rate of return which the company in question ought to be allowed to receive is that prevailing in the locality where the company is carrying on its business. This was said in Louisville & Nashville Railway Company v. Brown.22 In holding a reduction of rates unjustifiable, Judge Pardee said: "At present, I do not think it necessary to consider exhaustively the question as to how much per cent of net revenue, based on the actual value of the railroad and equipment, a railroad company is entitled to earn. I think it will be conceded that as long as the rates are reasonable, and do not unjustly discriminate, the company is

22 123 Fed. 946.

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 3 per cent basis to as high as a 12 per cent basis, and doubtless will always continue to do so. The suggestion that some fixed standard should be taken, such as the rate paid upon United States, State, or even municipal bonds in the locality in question has no justice in it. That was said very plainly by Mr. Justice Edwards in Wilkes-Barre v. Spring Brook Water Co.,19 when an application was made to him under the Pennsylvania statute to order a reduction of rates by a water company which was earning barely 5 per cent, allowing only 1 per cent for depreciation: "Reference has been made to the interest paid on Wilkes-Barre city bonds and on large sums otherwise safely invested. Such investments are not by any means analogous to investments in waterworks. Good bonds such as Wilkes-Barre bonds remain intact. They are not liable to change or diminution in principal. At a time certain the principal is to be paid to the investor to the last cent. If the rate paid on such investments shall determine the percentage of profit to be paid water companies there would be no inducement for anybody to invest money in works of a public nature. It would be much less wearisome to sit down twice a year and cut off coupons from bonds. Enterprise and industrial progress would be at a standstill. 20

§ 334. Risk by reason of depreciated security.

A very complicated instance of this general problem came up in the case of Steenerson v. Great Northern Railway, 21 already much quoted. The problem and its solution are thus stated by Mr. Justice Canty in his own words:

19 4 Lack. Leg. News (Pa.), 367. 20 Similar language is used in:

Milwaukee Elec. Ry. Co. v. Milwaukee, 87 Fed. 577.

21 69 Minn. 353, 72 N. W. 713.

"A large amount of railroad bonds floated years ago, for the full cost of the roads, at high rates of interest, are now very poorly secured. And on the maturity of such bonds, or when an attempt is made to reorganize the road on foreclosure, it is found difficult to scale down the amount of indebtedness to a point where the road will, under present conditions, be sufficient security for bonds drawing a fair rate of interest. These things tend to make the present rates of interest on railroad securities unreasonably high. But should the losses caused by all of these economic changes be borne by the public, or by the owners of the railroad? There can be but one answer to this question. As we have repeatedly stated, neither the State nor the public have ever guaranteed that railroads would always be worth the amount originally invested in them, or that what is a reasonable rate of income would not be less in the future than it was at the time of the investment, and have never guaranteed, directly or indirectly, either the interest or principal of railroad bonds. These losses must be borne, not by the public, but by the owners of the railroad; and, as against the public, the holders of the bonds have no greater rights than the railroad company itself.”

§ 335. Rate of return dependent upon locality.

It is a part of the rule under discussion, that the rate of return which the company in question ought to be allowed to receive is that prevailing in the locality where the company is carrying on its business. This was said in Louisville & Nashville Railway Company v. Brown.22 In holding a reduction of rates unjustifiable, Judge Pardee said: "At present, I do not think it necessary to consider exhaustively the question as to how much per cent of net revenue, based on the actual value of the railroad and equipment, a railroad company is entitled to earn. I think it will be conceded that as long as the rates are reasonable, and do not unjustly discriminate, the company is

22 123 Fed. 946.

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