CHAPTER XIV.

OPERATING EXPENSES.

TOPIC A-ANNUAL CHARGES.

§ 411. Cost of service to be earned before return on capital. 412. Items in cost of performing service.

413. Net earnings in general.

414. Expense of equipment and maintenance. 415. Cost of rolling stock.

416. Cost of supplies.

417. Salaries of officials.

418. Estimating labor cost.

419. Loans.

420. Taxes.

421. Losses by accident.

422. Expenditures to get business.

423. Unreasonable expenditures.

424. Improvident expenditures.

TOPIC B-CONSTRUCTION ACCOUNTS.

425. Betterments considered.

426. Improvement of existing plant.

427. Replacement considered as repair.

428. Permanent improvements should not be annual charge.

429. New construction should not be charged as an operating expense.

TOPIC C-DEPRECIATION REQUIREMENTS.

§ 430. Allowance for depreciation.

431. Renewal of equipment to offset depreciation permissible.

432. Fund for repairs.

433. Authorities refusing to allow depreciation.

434. Sinking fund requirement.

435. Sinking fund for municipal bonds.

436. Amortization of franchises.

TOPIC DPAYMENTS MADE TO HOLDERS OF SECURITIES.

§ 437. Whether interest on bonds is properly an annual charge. 438. Dividends payable not classified as an annual charge.

TOPIC A-ANNUAL CHARGES.

8 411. Cost of service to be earned before return on capital. Before there can be any question of income on the capital employed, the necessary annual charges must be met by the rates; and first of all the actual cost of service furnished. This involves the payment of wages, and the purchase of current supplies. The general principle was concisely stated by Mr. Justice Brewer in Chicago and Northwestern Railway v. Dey: "Compensation implies three things: Payment of cost of service, interest on bonds, and then some dividend. Cost of service implies skilled labor, the best appliances, keeping the road-bed and the cars and machinery and other appliances in perfect order and repair. The obligation of the carrier to the passenger and the shipper requires all these. They are not matters which the carriers can dispense with, or matters whose cost can by them be fixed. They may not employ poor engineers, whose wages would be low, but must employ competent engineers, and pay the price needed to obtain them. The same rule obtains as to engines, machinery, road-bed, etc., and it may be doubted whether even the legislature, with all its power, is competent to relieve railroad companies, whose means of transportation are attended with so much danger, from the full performance of this obligation to the public."

And to quote from the same judge in another case:2 "It is obvious that the amount of gross receipts from any business does not of itself determine whether such business is profitable or not. The question of expenses incurred in producing those receipts must be always taken into account, and only by striking the balance between the two can it be determined that the business is profitable. The gross receipts may be large, but if the expenses are larger surely the business is not profitable.

135 Fed. 866, 1 L. R. A. 744, 2 Int. Com. Rep. 325 (1888).

2 Brewer, J., in Chicago, M. & S. P. Ry. v. Tompkins, 176 U. S. 167, 44 L. Ed. 418, 20 Sup. Ct. 336 (1900).

It cannot be said that the rates which a legislature prescribes are reasonable if the railroad company charging only those rates finds the necessary expenses of carrying on its business greater than its receipts."3

3 It is recognized in all cases that deal with the subject that except in the most extraordinary cases, a public service company must be permitted to earn enough to pay its operating expenses. See, upon the general principle:

UNITED STATES SUPREME COURT:

Union Pac. Ry. v. U. S., 99 U. S. 402, 25 L. Ed. 274 (1878), reversing 13 Ct. cl. 401; Spring Valley Water Works v. Schottler, 110 U. S. 347, 28 L. Ed. 173, 4 Sup. Ct. 48, affirming 62 Cal. 69; Dow v. Beidelman, 125 U. S. 680, 31 L. Ed. 841, 8 Sup. Ct. 1028 (1888), affirming 49 Ark. 325; Chicago & G. T. Ry. v. Wellman, 143 U. S. 339, 36 L. Ed. 176, 12 Sup. Ct. 400 (1892), affirming s. c. 83 Mich. 592; Reagan v. Farmers' Loan & T. Co., 154 U. S. 362, 38 L. Ed. 1014, 14 Sup. Ct. 1047 (1893); Covington & Lex. 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 Fed. 165; Lake Shore & M. S. Ry. v. Smith, 173 U. S. 684, 43 L. Ed. 858, 19 Sup. Ct. 365 (1899), reversing 114 Mich. 460, 72 N. W. 328; 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; Chicago & M. & St. P. v. Tompkins, 176 U. S. 167, 44 L. Ed. 418, 20 Sup. Ct. 336 (1900), affirming s. c. 90 Fed. 363 (1898); 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. Louis 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. 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.

FEDERAL COURTS:

Chicago N. W. R. R. v. Dey, 35 Fed. 866 (1888); Chicago W. P. M. & I. v. Becker, 35 Fed. 883 (1888); National Water Works Co. v. Kansas City, 62 Fed. 853, 10 C. C. A. 653, 27 U. S. App. 165 (1894); Memphis Gas Light Co. v. New Memphis, 72 Fed. 952 (1896); Southern Pac. Ry. v. Railroad Comm., 78 Fed. 236, B. & W. 322 (1896); Milwaukee Electric Ry. Co. v. Milwaukee, 87 Fed. 577, B. & W. 336 (1898); Metropolitan T. Co. v. Houston & T. C. R. R., 90 Fed. 683, B. & W. 342 (1898); No. Pac. Ry. v. Keyes, 91 Fed. 47 (1898); Chicago, M. & St. P. Ry. v. Smith, 110 Fed. 473 (1901); Interstate Com. Comm. v. Louisville & N. R. R., 118 Fed. 613

§ 412. Items in cost of performing service.

In Chicago, St. Paul, Minneapolis and Omaha Railway v. Becker the railroad and warehouse commission of Minnesota had made an order fixing a rate for switching the cars of other railroads in its yard in Minneapolis. The railroad brought this bill for an injunction against the enforcement of the rate, on the ground that the rate established by the commission was not remunerative. The injunction was granted. Mr. Justice Brewer said: "It is not within the power of the State, directly or indirectly, to put in force a schedule of rates, when the rates prescribed therein will not pay the cost of service. In this case the defendant took no testimony, and the complainant's testimony shows that the actual cost of the service, that is, wages of employes, rent of engines, keeping the track in repair, exceeds per car by fourteen cents the amount allowed in the schedule as compensation. In other words, it costs complainant one dollar

(1902); Louisville & N. Ry. v. Brown, 123 Fed. 946 (1903); Spring Valley Water Works v. San Francisco, 124 Fed. 574 (1903); Palatka Water Works v. Palatka, 127 Fed. 161 (1903); Tift v. So. Ry., 138 Fed. 753 (1905).

STATE COURTS:

Arkansas-St. Louis & S. F. Ry. v. Gill, 54 Ark. 101, 15 S. W. 18, 11 L. R. A. 452 (1891).

California-Spring Valley Water Works v. San Francisco, 82 Cal. 686, 23 Pac. 910 (1890).

Florida-State v. Atl. Coast Line et al. (Fla.), 37 So. 652 (1904).

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

Kentucky-Troutman v. Smith, 105 Ky. 231, 48 S. W. 1084 (1899).

Maine Kennebec Water Dist. v. Waterville, 97 Me. 185, 54 Atl. 6, 60 L. R. A. 56 (1902).

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

New York-Gould v. Edison Electric Co., 29 Misc. (N. Y.) 241, 60 N. Y. Supp. 559 (1899).

Pennsylvania-Brymer v. Butler Water Co., 179 Pa. 231, 36 Atl. 249, 36 L. R. A. 260, B. & W. 330 (1897).

4 35 Fed. 883 (1888).

6

and fourteen cents per car to do the work, and the defendants propose to allow it to charge only one dollar. The State cannot require a railroad corporation to carry persons or property without reward." "5

The question was involved in a decision by the English Railway Commission. Upon a complaint under section 1 of the Railway and Canal Traffic Act, 1854, that a railway company had, since the 1st of January, 1893, unreasonably increased their rates for coal for shipment from the applicants' collieries to the Tyne Dock and Sunderland, by an addition of 5d. to the rate per ton, it was held by the Railway Commission that it was not unreasonable that the increase complained of should have been made, the railway company having proved that the cost of working the applicants' traffic had increased by increased cost for locomotive power, owing chiefly to the shortening of the hours of labor, increased wages, greater number of wagons having been allotted to the applicants, owing to the colliery owners requiring their traffic to be conducted with greater despatch, and increased rates and taxes.

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§ 413. Net earnings in general.

The proper determination of net earnings is by no means the simple problem it might seem. It is obvious that certain expenditures should be accounted for as annual charges, but as to other outlays, it is difficult to state rules. The character of this problem in general was excellently stated by the Interstate Commerce Commission in one proceeding thus:

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"The item of conducting transportation cannot be much modified. Whenever a train moves so much coal must be used and so many men employed at the time of the movement. With maintenance of way and equipment this is not so. A certain amount

5 Citing from Railroad Commission Cases, 116 U. S. 331, 6 Sup. Ct. 344, 29 L. Ed. 365 (1886).

6 Charlaw & S. C. Co. v. North Eastern Ry., 9 Ry. & Can. T. Cas. 140. 7 Rates from St. Louis to Texas Points, 11 I. C. C. Rep. 238 (1905).