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BOOK IV. REGULATION OF PUBLIC

SERVICE

PART IX. RESTRICTION OF CHARGES

CHAPTER XXXI

GENERAL THEORY OF RATE REGULATION

§ 1060. General principles governing reasonableness.

Topic A. The Schedule as a Whole

§ 1061. Reasonableness of the schedule as a whole.

1062. Many elements to be taken into account.

1063. Reduction of particular rates leaving sufficient total earnings. 1064. Rule of proportionality in sharing costs.

1065. Rates must be fair to all concerned.

1066. Interests of the companies to be considered. 1067. Interests of the public to be considered.

1068. Accommodation of both sought.

1069. Enlightened policy in rate regulation.

Topic B. The Particular Rate

1070. Reasonableness of the separate rate.

1071. Relation of the particular rate to the whole schedule. 1072. Rates unreasonable in themselves.

1073. Value of the service.

1074. What the traffic will bear.

1075. Making rates compared with levying taxes.

1076. Service of unusual value.

1077. Service not worth usual amount.

1078. Average cost always modified.

§ 1060. General principles governing reasonableness. The question of the reasonableness of rates is a complex one. As there are two parties having an interest in the rates, the company serving and the customer served, and their interests are diverse and, to a considerable extent, opposed, a rate which is reasonable from the point of view of one may be quite unreasonable from the point of

view of the other. The interest of the company is entirely directed toward framing a schedule of rates which as a whole shall produce a certain return, and so long as the return is realized it is immaterial to it what the proportion of contribution of each individual customer is to the whole amount. On the other hand, the customer is interested in the individual rate charged to him, and in that alone. So long as his rate is a fair one it is immaterial to him that the whole schedule is so arranged as to yield a great profit to the company. As the case stands thus, it is necessary in framing a schedule to require a proper amount of concession from all parties concerned. The principles on which the fairness of the whole schedule would be determined will be limited by the requirement of fairness to the individual customer; and on the other hand the principles on which the reasonableness of a particular rate would be determined may need modification because of the just claim of the company to a fair compensation. The examination of the reasonableness of the charges must therefore involve a study both of the reasonableness of the schedule as a whole and also of the reasonableness of the separate rates.

Topic A. The Schedule as a Whole

§ 1061. Reasonableness of the schedule as a whole. The reasonableness of the schedule as a whole depends upon whether it yields a fair return to the proprietors of the service. This is largely a mathematical question governed by principles which may now be said to be well recognized. The public service company is entitled first of all to pay all its expenses of operation. These include not only the actual disbursements for operation in each

1 The latest of the long line of Federal cases in which these elements are fully considered is Mis

souri, K. & T. Ry. Co. v. Love, 177 Fed. 493 (1910).

year, but also certain annual charges which must be paid before any real profit is realized. Moreover the company is entitled by the modern decisions to gain a fair profit upon its reasonable capitalization. The determination of what constitutes a reasonable capitalization and what a fair return, is a matter which is not altogether clear in its details upon the authorities as yet. But generally speaking it may be said that by the present policy a total return will be allowed in normal cases sufficient to yield the company a net profit above proper charges equal to that which would be realized from any other business where the capital and the risk were the same.1

§ 1062. Many elements to be taken into account.

2

That these various elements are all taken into consideration by a modern court in passing upon the reasonableness of a schedule of rates is shown in many leading cases. For example in the case of Brymer v. Butler Water Company, the court being called upon under a statute to pass upon the complaint that the schedule of rates of the water company was too high, Mr. Justice Williams said: "By what rule is the court to determine what is reasonable, and what is oppressive? Ordinarily that is a reasonable charge or system of charges which yields a fair return upon the investment. Fixed charges and the costs of maintenance and operation must first be provided for, then the interests of the owners of the property are to be considered. They are entitled to a rate of return, if their property will earn it, not less than the legal rate of interest; and a system of charges that yields no more income than is fairly required to maintain the plant, pay fixed charges and operating expenses, provide a suitable sink

1 The latest of the many State cases in which these elements are all taken into account is Coal &

Coke Ry. Co. v. Conley (W. Va.), 67 S. E. 613 (1910).

2 179 Pa. St. 231, 36 Atl. 249, 36 L. R. A. 260 (1897).

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