the year cannot be charged as an annual expense. In Southern Pacific Co. v. Railroad Commissioners 46 that question actually came up for decision. It appeared that the Southern Pacific Company, as lessee, had entered into an elaborate lease with the Oregon & California Company as lessor, by the terms of which the net earnings received by the lessee should be applied to pay the interest on the bonded indebtedness of the lessor with a proviso that if there should not be a sufficiency of net earnings upon the line to pay this interest the Southern Pacific Company might pay the same on account of the Oregon & California Company and charge the payment to it, being entitled to reimburse itself from future net earnings with six per cent interest until paid. The Southern Pacific Company claimed that a payment which it had made on this account should be put in as a current expenditure in determining whether the rates fixed by the California Commission left it a reasonable return above proper expenses. But the court held otherwise; on this point Judge McKenna said: "Was the payment of the interest a loss to the Southern Pacific Company? Clearly not. It is secured to it, and is to be reimbursed to it, and is charged in the report as a 'balance deficit payable by Oregon & California Railroad Company.' Clearly, again, if it had not been paid, it could not be claimed as a loss. If paid, and to be reimbursed and secured, it cannot be claimed as a loss, if the debtor or the security be good. I cannot assume now that the debtor or the security will not be good. It may be, of course, that it will not be good, but I can only deal with present conditions, or, at any rate, with those likely to occur within a reasonable period of time. That, under the lease, the payment of the deficit is not a charge on the Southern Pacific Company, is not only evident from its terms, but evident from the allegations of the bill."

46 78 Fed. 236.

47 It seems that if there has been

inefficient financiering, in engaging on speculative ventures at inflated

§ 351. Taxes.

Taxes for the year are obviously a proper annual charge. Overdue taxes for past years paid during the year can hardly, however, be properly regarded as an annual charge.48 Upon the policy for the State to pursue in taxing public service companies in general and railroads in particular, there is and may be much difference of opinion. Such companies should, of course, be taxed upon their tangible property at its locus, and this is generally done. But upon the question of whether there should be a high franchise tax opinion differs, although it is now recognized that such taxes are constitutional enough. It may be pointed out, however, that if too heavy a franchise tax is levied upon a railroad company, it is bound in the end to react upon the rates which the railroad will charge the public, as the payments made for taxation requirements are obviously annual charges. This matter was thus discussed by the Commission in one proceeding. 49 "Several of the carriers stated that there was a tendency on the part of States and municipalities to increase the taxes levied upon railroads, and that this imposes an additional burden. Railroad property, like every other species of property, should bear its just burden of taxation. If the property has been once taxed, the stock which represents that property ought not to be taxed a second time; and when it is, the tax on the property is in the nature of an operating expense."

Topic B. Expenditures on the Plant

§ 352. Expense of equipment and maintenance.

As the railroad is obliged to provide a sufficient equipment for the proper accommodation of the public, and to keep all its appliances and premises in good condition,

prices, the company and not the shipper should bear the loss. The New England Investigation, 27 I. C. C. 1.

48 Southern Pacific Co. v. Railroad Comrs., 78 Fed. 236.

49 Re Advances in Freight Rates, 9 I. C. C. Rep. 382.

the cost of maintaining the equipment is, of course, to be repaid from the rates. The Commission is clear that normally rates should be provided for keeping its equipment up to modern standards of operation.50 Maintenance of way and structure should be always taken into account in estimating the cost of operating the road.51 The public policy of permitting full allowance for upkeep is sufficiently obvious to the Commission.52 And in passing on rates this has been reiterated as occasion arises; for it is well understood nowadays that, when it comes to the question of service, the demand is that it shall be adequate, and rates should be allowed sufficient to bring that about.53 The public cannot expect to get from the carriers more than it is paying for; and it must be realized that low rates have an inevitable tendency to result in inadequate facilities.

§ 353. Cost of rolling stock.

The expense from use of rolling stock constitutes one of the heavy items in the operating charges of a railroad. As has been pointed out, this is a charge which tends to increase rather than diminish. In one proceeding before the Commission the ground was gone over in a thorough manner, as the following extract will show: 54 "One of the most important items which enter into the expense of railroad operation is the cost of equipment. For the purpose of arriving at some satisfactory opinion on this subject the Commission examined in this proceeding the first vice-president of the American Car and Foundry Company and in another similar proceeding the general manager of the construction department of the Pullman Company. The testimony of these gentlemen agrees.

50 Meeker & Co. v. Lehigh Valley Ry., 21 I. C. C. 129.

51 Standard Mirror Co. v. P. R. R., 27 I. C. C. 200.

52 May Bros. v. Y. & M. R. R., 26 I. C. C. 323.

53 National Lumber Exporters Asso. v. St. L., I. M. & S. Ry., 28 I. C. C. 215.

54 Rates from St. Louis to Texas Points, 11 I. C. C. Rep. 238.

The cost of building a car also of necessity varies with the changes in cost of materials and labor which have been about the same in the car shop as in other railroad operations. What should be especially noted, and what largely accounts for the apparent great increase in price is the fact that the car of to-day differs radically from the car of ten or twelve years ago. The evidence as to the cost of locomotives is less complete than in case of cars. Engines, like cars, are of much greater capacity than formerly, and they are also equipped with many improved devices which are supposed to add to the value in actual operation. In units of tractive power, the difference is less when given by the engine. Even when so measured we are inclined to think that they were distinctly higher in 1902 than in 1892. The ownership of the various locomotive works of the United States has been so adjusted within the last few years that 'suicidal competition' no longer exists; and this fact is easily observed in the price which railways are compelled to pay." 55

§ 354. Losses by accident.

A certain amount of loss by accident is inseparable from the conduct of any business, and this is particularly true of a business having so many unavoidable dangers as that of railroad operation. In so far as these losses are without fault of anyone concerned the sums paid to make reparation for them may obviously be charged as an expense of operation. But more than this, it seems, must be conceded; a certain amount of negligence by employees cannot be avoided, and these losses also seem inseparable from the conduct of the business. The only losses which the railroad company may not properly charge against the public, therefore, are those which result from its own reckless management, or its willful failure to provide adequate

55 An advance will not be justified because of acquiring new equipment, where the former equipment was

sufficient. City of Spokane v. N. P. Ry. Co., 19 I. C. C. 162.

56

facilities. These points were excellently made in a ruling some years ago by the Commission.57 "The defendant states that excessive damages are claimed by Texas shippers with respect to the shipment of live stock; it apparently insists that these damages are unjust and that it is compelled to recoup itself by an advance in the rate. This Commission can hardly find that a judgment rendered in due course of judicial procedure is unjust or excessive. Nor can we assume that this defendant has been coerced into payment of unreasonable or unjust damages by the bringing of such suits. The fact, however, that claims of that kind are made in large amounts, that such claims are often compromised by the carriers, that when not compromised they result in large verdicts and that as a consequence the carrier is obliged to pay large sums for damage to live stock in transit is undoubtedly proper to be shown. It is an incident in the transportation of that commodity, which may properly be taken into account by the railway in establishing its tariff. If for any reason these claims for damages have become more frequent than they were formerly, without fault upon the part of the railway, that might be a reason for increasing the rate. It should be carefully observed, however, that the defendant ought not by this means to escape from its own negligence."

$355. Betterments considered as maintenance.

It is not always easy to determine whether replacement construction of the plant of a public service company constitutes an annual or a capital charge. Current repairs obviously constitute annual charges. Outright extensions just as obviously should be put into the capital account. But as to replacement, and more particularly as to improvements, problems arise which may be handled in different ways. Since they may be handled in different 56 See In re Arkansas R. R. Rates,

168 Fed. 720.

57 New Orleans Live Stock Ex

change v. Texas & P. Ry., 10 I. C. C. Rep. 331.