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stockholders should therefore have a higher rate of return because of the risk of passing of dividends in bad times or of foreclosure in case of complete failure. But the question remains, what rate of return should be allowed upon stock, and this question of reasonable dividend depends chiefly upon the current rate of return to those who conduct other businesses of similar character.2

2 In normal cases a public service company is protected in the payment of a fair dividend. See

UNITED STATES SUPREME COURT:

Union Pac. Ry. v. U. S., 99 U. S. 402, 25 L. Ed. 274 (1878), reversing 13 Ct. ct. 401; Reagan v. Farmers' L. & T. Co., 154 U. S. 362, 38 L. Ed. 1014, 14 Sup. Ct. 1047 (1893), reversing in part and affirming in part 51 Fed. 529; Covington & L. T. R. Co. v. Sanford, 164 U. S. 596, 41 L. Ed. 561, 17 Sup. Ct. 198 (1896), reversing s. c. 20 S. W. 1031; Smyth v. Ames, 169 U. S. 466, 42 L. Ed. 819, 18 Sup. Ct. 418, B. & W. 347 (1898), affirming s. c. 64 Ped. 165; San Diego L. & T. Co. v. National City, 174 U. S. 739, 43 L. Ed. 1154, 19 Sup. Ct. 804 (1899), affirming s. c. 74 Fed. 79; Cotting v. Kansas City S. Y. Co., 183 U. S. 79, 46 L. Ed. 92, 22 Sup. Ct. 30, B. & W. 316 (1901), reversing 82 Fed. 850 (1897); Minneapolis & St. L. R. R. v. Minn., 186 U. S. 257, 46 L. Ed. 1151, 22 Sup. Ct. 901 (1902), affirming 80 Minn. 191, 83 N. W. 60 (1900); San Diego L. & T. Co. v. Jasper, 189 U. S. 439, 47 L. Ed. 892, 23 Sup. Ct. 571 (1903), affirming s. c. 110 Fed. 702; Stanislaus Co. v. San Joaquin C. & T. Co., 192 U. S. 201, 48 L. Ed. 406, Sup. Ct. (1903), reversing s. c. 113 Fed. 930. FEDERAL COURTS:

Cleveland Gas Light Co. v. Cleveland, 71 Fed. 610 (1891); Memphis Gas Light Co. v. New Memphis, 72 Fed. 952 (1896); Southern Pac. Ry. v. Railroad Com., 78 Fed. 236 (1896); Milwaukee Electric Ry. Co. v. Milwaukee, 87 Fed. 577 (1898); Metropolitan Trust Co. v. Houston & T. C. R. R., 90 Fed. 683 (1898); Louisville & N. Ry. v. McChord, 103 Fed. 216 (1900); Interstate Com. Com. v. Louisville & N. R. A., 118 Fed. 613 (1902); Palatka Water Works v. Palatka, 127 Fed. 161 (1903). STATE COURTS:

Florida-State v. Seaboard Air Line (Fla.), 37 So. 658 (1904).
Illinois-City of Chicago v. Rogers Pk. Co., 214 Ill. 212, 73 N. E. 375

(1905).

Iowa Cedar Rapids Co. v. Cedar Rapids, 118 Ia. 234, 91 N. W. 1081 (1902).

Maine-Brunswick & T. W. Dist. v. Maine Water Co., 99 Me. 371, 59 Atl. 537 (1904).

§ 394. Current rate of return.

What constitutes a fair rate of return must obviously be determined by some standard. The current rate of return upon enterprises of a similar character is submitted to be the true basis of fixing the percentage. This is said in the more discriminating cases which discuss the problem carefully. Thus in Spring Valley Waterworks v. San Francisco,3 where an ordinance passed by a board of supervisors would reduce the annual net earnings below 4.40 per cent. on the value of the property necessarily employed in the service, or 3.30 per cent. on its stock after deducting proper charges, its enforcement was enjoined as fixing a rate so low as to be a taking of private property for public use without just compensation, Judge Merrow said: "The next question to be considered is, what will be a fair and reasonable income for the complainant to receive as a just compensation for the public use of its property? A number of bankers have testified as to the usual and customary net income from investments of $10,000,000 and upwards of capital in corporations of a quasi-public nature, where judiciously managed. The affidavits of four bankers of long experience and well-known character and standing fix the rate at not less than 7 per cent. per annum, and aver that a net income of less than 7 per cent. per annum from large investments would not be a reasonable or fair return. The affidavits of five bankers of like standing and character and similar experience fix the rate at not less than 6 per cent. per annum, and aver that a net income of less than 6 per cent. per annum for large investments would not be a rea

Minnesota State v. Minneapolis & St. L. R. R., 80 Minn. 191, 83 N. W. 60, 89 Am. St. Rep. 514 (1900).

Mississippi-Alabama & V. Ry. v. Railroad Co. (Miss.), 38 So. 356

(1905).

Pennsylvania--Brymer v. Butler Water Co., 179 Pa. 231, 36 Atl. 249, 36 L. R. A. 260 (1897); Wilkes-Barre v. Spring Brook Water Co., 4 Lack. Leg. News (Pa.), 367 (1899).

3 124 Fed. 574 (1903).

sonable or fair return. The affidavit of one banker of large wealth and experience fixes the rate of net income from such investments at between 4 and 5 per cent. per annum. The weight of evidence is clearly in favor of a rate of not less than 6 per cent. per annum.

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§ 395. Usual business profit,

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. Therefore the cases will be rare where it would be justifiable to pay more than 10 per cent. dividends upon stock after deduction of all proper charges. Two illustrations of the way a court may treat the matter offhand will illustrate this. In Brymer v. Butler Water Company the court said in reviewing the schedule of a water company, that it is entitled to a rate of return, if the property will earn it, not less than the legal rate of interest; a return of something over 6 per cent. was held

4 Of the cases cited in the preceding section, see, especially: UNITED STATES SUPREME COURT:

San Diego L. & T. Co. v. Jasper, 189 U. S. 439, 47 L. Ed. 892, 23 Sup. Ct. 571 (1903), affirming s. c. 110 Fed. 702; Stanislaus Co. v. San Joaquin C. & I. Co., 192 U. S. 201, 48 L. Ed. 406, 24 Sup. Ct. 245 (1903), reversing 113 Fed. 930.

FEDERAL COURTS:

Cleveland Gas Light Co. v. Cleveland, 71 Fed. 610 (1891); Memphis Gas Light Co. v. New Memphis, 72 Fed. 952 (1896); Metropolitan Trust Co. v. Houston & T. C. R. R., 90 Fed. 683, B. & W. 342 (1898); Palatka Water Works v. Palatka, 127 Fed. 161 (1903).

STATE COURTS:

Iowa-Cedar Rapids Co. v. Cedar Rapids, 118 Iowa, 234, 91 N. W. 1081 (1902).

Pennsylvania-Brymer v. Butler Co., 179 Pa. 231, 36 Atl. 247, B. & W.

320 (1897).

5 179 Pa. 231, 36 Atl. 249, 36 L. R. A. 260, B. & W. 330 (1897).

not unreasonable therefore. In Grand Haven v. Grand Haven. Water Works, the court in fixing quantum meruit the value of hydrant service which the city had received from the water company estimated what the cost of a plant that would furnish adequate fire protection would be, and computed that the city was saved the interest and depreciation on that sum, $14,000, which at the rate of 8 per cent. would amount to $1,120 per year. In both of these instances it should be noticed the courts were really considering what rate of return it would be not unreasonable to allow the company to take, not to what rate of return it would be not unreasonable for the state to reduce the company.

§ 396. 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. 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 entitled to earn some amount; and it seems reasonably clear to me that, if entitled to earn something under the above conditions, it is entitled to earn under the same conditions a compensatory amount equal, at least, to the usual and legal rate of interest in the locality where the railroad it situated. Judging by the business of the past 19 years, in connection with the showing made on this hearing as to present and future business, I conclude that there is no prospect in the immediate future that the net

6119 Mich. 652, 78 N. W. 890 (1899).

7123 Fed. 946 (1903).

earnings of the complainant's railroads in Florida will approach an amount at all equal to the interest on the value of the said railroads at the usual rate prevailing in Western Florida."s

§ 397. Paying dividends dependent upon commercial conditions.

To a certain extent the dividends which a railroad company can earn are dependent upon commercial conditions geneerally. When crops fail or when commercial crises come the general business of the common carrier inevitably falls off. Even if it should raise its rates very considerably it would be difficult for it to maintain its regular dividends and it is doubtful whether it ought to do so and increase thereby the general distress. This may be pressed too far, and perhaps the point is overstated in Steenerson v. Great Northern Railway, where Mr. Justice Canty says: "It is not necessary here to determine just what rate of annual income on the cost of reproducing all of the road except the terminals is the least which the court. would uphold before declaring the rates fixed by the commission confiscatory, but we are of the opinion that in such times as existed in 1894 an income of 5 per cent. per annum on such cost is certainly not unreasonably low or confiscatory, and that is as far as it is necessary to go in this case. More especially is this true since it appears from the evidence that in years prior to

8 To the same effect are: San Diego L. & T. Co. v. National City, 174 U. S. 739, 43 L. Ed. 1154, 19 Sup. Ct. 804 (1899), affirming s. c. 74 Fed. 79; Cotting v. Kansas City S. Y. Co., 183 U. S. 79, 46 L. Ed. 92, 22 Sup. Ct. 30, B. & W. 316 (1901), reversing 82 Fed. 850 (1897); San Diego L. & T. Co. v. Jasper, 189 U. S. 439, 47 L. Ed. 892, 23 Sup. Ct. 571 (1903), affirming s. c. 110 Fed. 702; Stanislaus Co. v. San Joaquin C. & I. Co., 192 U. S. 201, 48 L. Ed. 406, 24 Sup. Ct. 241 (1903), reversing s. c. 113 Fed. 930; Southern Pac. Ry. v. Railroad Com., 78 Fed. 236 (1896); Milwaukee Electric Ry. Co. v. Milwaukee, 87 Fed. 577, B. & W. 336 (1898); Brymer v. Butler Water Co., 179 Pa. 231, 36 Atl. 247, 36 L. R. A. 260, B. & W. 330 (1897); Wilkes-Barre v. Spring Brook Water Co., 4 Lack. Leg. News (Pa.), 367 (1899).

969 Minn. 353, 72 N. W. 713, B. & W. 333 (1897).

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