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realized, not by individuals, but by the very body of citizens which is paying the rates.

The right of a city to sink its construction bonds from annual income was recognized in Preston v. Detroit Water Commissioners. The City of Detroit owned its water works, and water rates were assessed on the basis of annual payments to a sinking fund, as well as of operating expenses. Mr. Justice Moore said: "Ever since 1873 a levy of 75,000 each year has been made, and the proceeds of the levy paid over. It has not been necessary during that time for the water board, in order to meet its expenses, to ask for any further direct tax. It is now urged that the water ought to be furnished the users at its cost, and that the interest account, the extension account, and the cost of the plant should be borne by the property of the city. Is there any equity in this contention? It is not an unusual thing for cities and villages to confer a franchise upon a private corporation to do what is being done by the board of water commissioners. The right to do this has never been questioned so far as we know, though the policy of doing it has often been questioned. Had this been done, would it be unreasonable for the private corporation to expect utimately to get back from its patrons the cost of its investment, including its extensions, with a reasonable profit? If the legislature may confer upon the municipality the right to grant such a franchise, why may not that right be exercised by the means of a board of water commissioners in the interests of the municipality, so the municipality shall ultimately own the property? In the exercise of the franchise by a private corporation, the rates fixed must doubtless be reasonable and equitable. What more can be required of the rates fixed by the water board?"

$436. Amortization of franchises.

Where a franchise for a limited period is granted to a public service company, it seems perhaps proper to deduct from gross

9 117 Mich. 589, 76 N. W. 92 (1898).

income a sufficient amount to sink the value of a secured franchise which will disappear at the end of the period, since the value of the plant is annually depreciated by that amount. In Milwaukee Electric Railway v. Milwaukee, 10 recently cited, the court continued thus: "For the causes thus stated, within general rules which are well known, it is manifest that this element must be taken into account before it can be determined that earnings derived from a plant are excessive; and in the same line there is much force in the argument of counsel that consideration should also be given to the factor of depreciation by amortization of franchises, as all the franchises in question terminate in the year 1924. The latter item, if allowed, would be a matter of simple computation; but a just measure of physical depreciation seems, to some extent, although only partially, involved in provisions for maintenance, and, while the testimony is very full and instructive upon this subject, it does not clear the case from serious difficulties in the way of stating a definite ratio or sum for such allowance."

However this may be in the case put, it is clearly so in many cases to-day where, by a scheme now much in favor in bargaining between a municipality and a public service company, it is provided that the works shall be constructed by the public service company at its own expense and operated by it as its own for a fixed period, at the end of which time the subway, or whatever it may be, is to become the property of the municipality free of payment. It is obvious that in such a case the public service company must be allowed to sink the cost of such works from sums set aside from annual earnings.

10 87 Fed. 577, B. & W. 342 (1898).

TOPIC D-PAYMENTS MADE TO HOLDERS OF SECURITIES.

§ 437. Whether interest on bonds is properly an annual charge.

It is very common and not unnatural to speak of interest 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:1 "The fixed charges are the interest on the bonds.2 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."

All this may well be; but as a matter of fact, the real situation is that a public service company must produce a certain amount of net income, discovered by deducting the gross annual expenses from the gross income, and that net income must be enough to pay all security holders their rate of return,-to

135 Fed. 866, 1 L. R. A. 744 (1888).

2 Cited with approval in Southern Pacific Co. v. Railroad Commrs., B. & W. 322, 78 Fed. 236 (1896).

the bondholder his stipulated interest, to the stockholder his fair dividend. And according to modern constitutional law, both have the same protection, and both are subject to the same mischances.3

§ 438. Dividends payable not classified as an annual charge. In determining the net income it is not 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 railway 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 principle was affirmed, Mr. Justice Brown saying: "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."

3 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. See Steenerson v. Gt. Northern Ry., 69 Minn. 353, 72 N. W. 713, B. & W. 333 (1897).

4 Collins, J., in State v. Minneapolis & S. L. R. R., 80 Minn. 191, 83 N. TV. 60 (1900).

5 Minneapolis & S. L. R. R. v. Minnesota, 186 U. S. 257, 46 L. Ed. 1151, 22 Sup. Ct. 901 (1902).

CHAPTER XV.

SYSTEMS OPERATED AS UNITS.

§ 441. Complications in case of systems.

TOPIC A-SYSTEMS OPERATED AS UNITS.

§ 442. Methods of consolidation.

443. Divisions as integral parts of the whole system. 444. Branch lines.

445. Unprofitable portions of the line not considered.

446. Whole systems should be taken together.

447. Rates on different parts of same system apportioned.

TOPIC B-HOLDING CORPORATIONS.

§ 448. Apportionment to constituent companies.

449. System taken as a whole.

450. When constituent roads are operated under separate charters. 451. Systems considered as wholes.

452. When corporations of diverse characters held.

TOPIC C-LEASED LINES.

§ 453. Rent of leased roads.

454. Rental must be fixed in good faith.

455. If rental becomes unjustifiable.

456. Betterments of leased roads.

TOPIC D-PECULIAR EXPENSE OF THE PARTICULAR SERVICE.

§ 457. Special circumstances affecting the particular rate.

458. Divisions built through a difficult territory.

459. Divisions in sparsely populated territory.

460. Way stations.

461. General requirements may produce particular losses. 462. Plant adapted for larger population.

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