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value of bonds and stocks, the present as compared with the original cost of construction, the probable earning capacity under the rates, the sum required to operate the business, are all matters to be considered and must be given such weight as may be just and right in each case, and the court concluded by saying: "We do not say that there will not be other matters to be regarded in estimating values."

The decisions of the supreme court and other tribunals on questions of valuation in the rate cases, where the question at issue is as to the reasonable return a corporation is entitled to receive under a public regulation of rates, must be distinguished from eminent domain and analogous cases, where a right of purchase of the property of public utility companies is exercised by municipalities under reserved contract rights; and also from cases of valuation for taxation, where the ascertainment of relative value under construction of statutory standards is involved.

1

§ 125. The apportionment of railroad property in state regulation. In the case of an interstate railroad where the lines may extend over several states, the problem is complicated as the value of that part of the property which is located in the state must be ascertained, and when ascertained, must be apportioned as between the state and federal business which is conducted with the same tracks and the same equipment.

The most direct and simple method of apportioning to a state the value of the interstate railroad located therein is on a basis of mileage, and this method has been approved as a prima facie basis for taxation, both as to tangible and intangible property." But this basis has obvious limitations both in rate regulation

1 See Omaha v. Omaha Water Co., 218 U. S. 180, 54 L. Ed. 991 (1910), where the court said that an option to purchase excluded any value on account of unexpired franchise, but did not include the value as a going concern; Knoxville Water Co. Case, supra; Wilcox v. Consolidated Gas Co., supra; The Kansas City Waterworks Case, 62 Fed Rep. 853, C. C. A.

(1894), 8th Circuit; San Diego Co. v. Jasper, 189 U. S. 439 (1903), 47 L. Ed. 892, affirming 110 Fed. Rep. 702, as to municipal regulation of irrigation rates.

2 West, Union Tel. Co. v. Massachusetts, 125 U. S. 530 (1888), 31 L. Ed. 790; Adams Express Co. v. Ohio, 165 U. S. 194 (1897), 41 L Ed. 683.

and in taxation, and its application may do grave injustice. Thus where the railroad extends through a state where it has very valuable terminal property and runs through a rich populous section, while in another state it has no such property and runs through a poorly developed country, the apportionment on a mileage basis would be clearly inapplicable.1 Other methods therefore are suggested, such as the apportionment basis upon the gross or net revenues.

Not only must there be an apportionment in determining the state value, if it is based upon the general value of the railroad system, but on the issue of an alleged confiscatory state regulation there must be an apportionment of that state value to the state and interstate business carried on with the same property and equipment. This has been done on what is known as the revenue basis; that is, the value of the property is apportioned according to the state and interstate business. Where the regulation complained of affects only the passenger or freight business, there must be a still further apportionment of this state and interstate value of the state property as between the passenger and the freight business, both state and interstate.2

§ 126. Confiscation in state regulation; how proved.-Assuming that the proportionate property in the state has been approximately ascertained and apportioned to the different classes of traffic, state and interstate, the determination of a claim of confiscation then requires that the net revenues of the state as distinguished from the interstate business, must be ascertained. The sources of the different classes of revenue, whether state or interstate, passenger or freight, can be determined with accuracy from the records of the railroad company.

In order to ascertain the net revenues derived from the intrastate business the cost of conducting the intrastate as distinguished from the state business must still be ascertained.3

1 See an interesting and able discussion of this subject by Prof. B. H. Meyer, now of the Interstate Commerce Commission and formerly of the Wisconsin Railroad Commission, in "The Methods for the Distribution of Railway Values Among States, Bulletin No.

21 Census Bureau (1905) Government Printing Office."

2 See Arkansas Rate Case supra; Missouri Rate Case, supra; Minnesota Rate Case, supra.

In the South Dakota Rate Case, supra, where the court reversed the judgment of the circuit

As the property and equipment are used for all classes of traffic, there is no separate record in the company's books of the cost of doing any specific class of business; and such separate cost, therefore, can only be ascertained by what is known as the revenue theory, wherein the cost of each class of traffic is estimated by apportioning the total cost in proportion to the revenue derived from each class of traffic, or the cost of each class of traffic is estimated by "allocating" such expenses as can properly be charged to any class of traffic and distributing the remaining cost upon such determined units as the cost per ton mile and the cost per passenger mile.1

court, 90 Fed. Rep. 636, the failure to ascertain the cost of doing a local business, the court said that the inability to ascertain the cost with mathematical accuracy was no reason for not determining the cost from the best evidence obtainable.

1 The revenue theory and ton mile theory. See a very thorough discussion of these different methods of estimating the cost of different classes of traffic by the Wisconsin State Commission in Buell v. C. M. & St. P. R. R., 1 Wis. Commission R. R. Report, 324.

See also McPherson, J., in St. Louis & S. F. R. Co. v. Hadley, Missouri Rate Case, supra; Farrington, J., in the Nevada Rate Case, supra; Vandeventer, J., in Arkansas Rate Cases, 163 Fed. Rep. 141; Sanborn, J., in Minnesota Rate Case, 184 Fed. Rep. 765. See also report of Master in this

case.

In the Oklahoma Rate Case the circuit court of appeals, 8th circuit (1911), 185 Fed. 329, approved the revenue theory as the more reasonable and equitable. It was conceded that cases could be imagined as suggested by the supreme court in the South Dakota Case,

176 U. S. 167, wherein the results did not seem to be perfect, but the ton mile theory was open to objections, and the revenue basis appealed more persuasively to the reason than any other.

See Hook, J., in same case, in circuit court, 177 Fed. 1. c. p. 498.

In the Arkansas Rate Case, 187 Fed. Rep. 292, 1. c. 320 (1911), the court, Trieber, J., said that a care ful consideration of the facts showed that neither of these theories would produce approximately correct results if no other factors were taken into considera tion. The straight revenue theory did not take into consideration the increased rates charged for intrastate traffic. The ton mile theory did not consider the additional expense of the local business. The court concluded that the fairest method was to apportion the cost of maintaining the way and structures of the railroad between the intrastate and interstate business on the earnings from the two classes of business, while the cost of locomotive and car maintenance which should be charged to each class of business, could be more nearly approximated by using the car mile basis. Such expenditures

If it appears that the cost of conducting the intrastate business is greater proportionately than the interstate business, allowance may be made for such extra cost from the best evidence obtainable.1

as could be definitely assigned to the intrastate and interstate business, were allocated" accordingly.

1 The comparative cost of intra state and interstate business. The contention is made and recognized with approval in several cases, see South Dakota Rate Cases, supra, and the Nebraska Rate Case, supra, and by Vendeventer, J., in the Arkansas Rate Case, 163 Fed. Rep. 141, that the production of a given amount of revenue is attended with greater cost in intrastate business than in interstate business. In the Minnesota Rate Case, supra, the court said that there was an increased cost in the additional fuel consumed and increased wear and tear of machinery on each train involved in the stopping at every station. As to the rulings of the commission on through and local rates under the Interstate Commerce Act, see infra, § 180. While local rates are usually intrastate rates, and through rates interstate rates, this is not always the case, particularly in respect to passenger traffic. Where a large city is located at or near a state boundary extensive suburban local business may be interstate business, while through express trains from one end of the state to the other will be intrastate. The estimates of experts as to the increased cost of intrastate business in reported cases differ widely, dependent in some cases largely upon local conditions.

In the Minnesota Rate Case, 184 Fed. Rep. 765, the court affirmed the report of the master that the cost of doing intrastate business, was two and one-half times more than the cost of doing interstate business, and that the cost of doing intrastate passenger business was fifteen percent more than the cast of doing interstate passenger business.

In the Oklahoma case it was said by Hook, J., 177 Fed. Rep. 1. c. 499, that it was claimed by the railroad men that the cost of local freight traffic was from two to eight times as much as that of interstate traffic, and of local passenger traffic from twenty-five percent to fifty percent more, but it was probable that the difference mentioned in the freight traffic should not be fully applied in a division of cost on the revenue basis, for there the difference found expression in a measure in the relative revenue proportions.

In the Arkansas Rate Case, supra, the court found that the total difference in cost between intrastate and interstate freight was two hundred and ten percent in favor of the intrastate. This was after deducting the increased revenue; and on the same basis the increased cost of the intrastate passenger service was ten percent net greater than that of the interstate passenger.

§ 127. Rate of profit necessary to avoid charge of confiscation. When the value of the investment in the state and the net revenue realized thereon under the established rates have been ascertained, this net revenue must be compared with the rate of profit which the railroad is entitled to realize upon such an investment. The rule is laid down by the supreme court in the New York City gas case,1 that there is no particular rate of compensation which must in all cases and in all parts of the country be regarded as sufficient for capital invested in business enterprises. Such compensation must depend greatly upon circumstances and locality and above all upon the amount of hazard in the enterprise. Under the facts of that case in view of the absence of competition the court held that a rate which would permit a return of 6 per cent. would be enough to avoid a charge of confiscation.

2

In the California water rate case the supreme court held that a reduction of water rates by a board of supervisors so as to give an annual income of 6 per cent. of the then value of the property of the water company actually used to supply water to the public, did not necessarily amount to a taking of property without due process of law.

In Minnesota rate case where the state legal rate of interest was 6 per cent. in the absence of contract and 10 per cent. under contract, the court, Sanborn, J., affirmed the report of the master holding that the railroad companies were entitled to a net return of 7 per cent. per annum upon their respective properties. The court said that in view of the fact that the business was subject to public regulation a railroad should be permitted to receive a return sufficient to accumulate a reasonable surplus for times of depression and to maintain the character of their service. The court, therefore, held that 7 per cent. upon the values of the property in Minnesota was no more than the railroads were entitled to under the constitution of the United States.

In the Arkansas rate case the court based its conclusion that the railroads were entitled to a return of 6 per cent. upon

1 Wilcox V. Consolidated Gas Co., supra.

2 Stanislaus v. Joaquin, 192 U. S. 204, 48 L. Ed. 406 (1904), reversing 113 Fed. Rep. 390.

See Shepard v. Northern Pac. R Co., supra.

4 See 187 Fed. Rep. 290 (1911).

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