§ 1155. Outstanding loans. It is obvious that a loan made by a company during the year cannot be charged as an annual expense. In Southern Pacific Co. v. Railroad Commissioners,' 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." 1156. Interest payable. It is very common and not unnatural to speak of in 178 Fed. 236 (1896). 1 terest payable upon bonded indebtedness as fixed charge and therefore one of the items in making up the total of annual expenditures. Thus Mr. Justice Brewer speaks of it in the well-known case of Chicago and Northwestern Railway Company v. Dey: "The fixed charges are the interest on the bonds. This must be paid, for otherwise foreclosure would follow, and the interest of the mortgagor swept out of existence. The property of the stockholders cannot be destroyed any more than the property of the bondholders. Each has a fixed and vested interest, which cannot be taken away. I know that often the stockholder and the bondholder are regarded and spoken of as having but a single interest; but the law recognizes a clear distinction. A mortgage on a railroad creates the same rights in mortgagor and mortgagee as a mortgage on my homestead. The legislature cannot destroy my property in my homestead simply because it is mortgaged, neither can it destroy the stockholders' property because the railroad is mortgaged. It cannot interfere with a contract between the company mortgagor and the mortgagee, or reduce the stipulated rate of interest; and so, unless that stipulated interest is paid, foreclosure of course follows, and the mortgagors' rights, the property of the stockholders, are swept away.' 1157. Dividends declared. Nor in determining the net income is it permissible to include dividends on the stock. Dividends must be paid, if at all, out of net income, and are in no sense annual charges or operating expenses. "It seems to us very clear that in estimating the operating expenses of a rail 135 Fed. 866, 1 L. R. A. 744 (1888). Cited with approval in Southern Pacific Co. v. Railroad Commrs., 78 Fed. 236 (1896). 2 Smyth v. Ames, 169 U. S. 466, 42 L. ed. 819, 18 Sup. Ct. 418, B. & way stock dividends cannot be included. They are no part of the cost of operation. Nor should they be included, under any of the authorities, when ascertaining the reasonableness of a rate tariff. This is in no manner denying the defendant's right to earn sufficient to pay its operating expenses, interest upon its bona fide bonded indebtedness, and a proper dividend upon its lawfully issued stock shares or value of the investment. Upon appeal to the Supreme Court of the United States this language of the Minnesota court was affirmed: 2 "In proving that the cost of transporting all merchandise exceeded the rate fixed by the commission on this coal, the interest upon bonds and dividends upon stock were included in operating expenses. The propriety of the first is at least doubtful, the impropriety of the second is plain. We do not intend, however, to intimate that the road is not entitled to something more than operating expenses." Topic B. Expenditures on the Plant § 1158. Expense of maintaining equipment. 3 As the public service company 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, the cost of maintaining the equipment is of course to be repaid from the rates. Thus, in the case of a ferry, the court in passing on the reasonableness of a rate took it into account that the owner of the ferry "is compelled, in the operation of the ferry, to keep for the accommodation of the public two large boats for the transportation of vehicles, a waiting boat, a large flat outside waiting boat for convenience in getting in and out of skiffs, 1 State ex. rel. v. Minneapolis & St. L. R. R. Co., 80 Minn. 191, 83 N. W. 60 (1900). 2 Minneapolis & S. L. R. R. Co. v. Minnesota, 186 U. S. 257, 46 L. ed. 1151, 22 Sup. Ct. 900 (1902). 3 Troutman v. Smith, 105 Ky. 231, 48 S. W. 1084 (1899). four skiffs, a large reflecting lamp, that throws light across the river; and that she owns, and is compelled to keep in repair and free from mud, the approaches to the ferry on both sides, and employ regularly two men, and frequently three or four additional hands to perform the necessary work." And in a recent gas works case in determining what constitutes "net profits," the court' said that: "The cost of operation in furnishing gas within the city upon which profits are to be divided, including necessary repairs must be charged as expenses to be deducted from the amount received therefrom in order to determine the profit thereon." 1159. Losses due to 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 a 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 employés 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 facilities. Similarly a supply company can claim allowance for that amount of wastage which experience proves is not inconsistent with proper management.3 Reference should be made here to the employés' compensation acts which are being urged to-day. In the case of 2 1 Erie v. Erie Gas & M. Co., 78 Kans. 348, 97 Pac. 468 (1908). 2 See In re Arkansas R. R. Rates, 168 Fed. 720 (1909). 3 See Rieker v. Lancaster, 14 Lanc. L. Rev. (Pa.) 393 (1897). a public service company particularly the personal accident seems to be a part of the cost of performing the service which the community should bear. § 1160. Betterments considered as maintenance. It is not always easy to determine whether replacement construction of the plant of a public service company constitutes annual or capital charges. 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 ways not unreasonably, it cannot be said that a corporation is acting unreasonably in adopting one policy or the other. This was pointed out by Mr. Justice Bradley when in Union Pacific Railroad Company v. United States,1 the Supreme Court was called upon to decide whether that company had acted unreasonably in so arranging its finances that it did not appear to be making such net earnings as by the terms thereof were to be applied to the reduction of certain of its bonds. "As a general proposition, net earnings are the excess of the gross earnings over the expeditures defrayed in producing them, aside from and exclusive of the expenditure of capital laid out in constructing and equipping the works themselves. It may often be difficult to draw a precise line between expenditures for construction and the ordinary expenses incident to operating and maintaining the road and works of a railroad company. Theoretically, the expenses chargeable to earnings include the general expenses of keeping up the organization of the company, and all expenses incurred in operating the works and keeping them in good condition and repair; while expenses 199 U. S. 402, 25 L. ed. 274 (1878). |