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4. What rate of interest on the value of the property of the company, produced by the net income after making all proper deductions, in so low as to make the rate unreasonable or confiscatory? 82

§ 4519. Effect of incorporation after enactment of rate regulation. Where a public service company is incorporated after the enactment of a statute fixing rates applicable to corporations of its class, so as to be bound thereby, it cannot contest the reasonableness of such rates as applicable to itself. Thus, a street railway company was incorporated in Massachusetts under a statute making it "subject to all the duties, liabilities and restrictions set forth in all general laws now or hereafter in force relating to street railway companies," with certain exceptions which were not applicable. Prior to its incorporation a statute had been enacted requiring street railroad companies to carry school children at half price. The Supreme Court of the United States held that the street car company could not attack the constitutionality of the act as depriving it of property without due process of law for the reason that it was as much bound by the statute as if its provisions had been inserted in the charter of the company in terms.83 The same rule has been laid

down in New York in several cases.84

§ 4520. Nature of company as important. In determining the reasonableness of rates fixed by law, it is generally immaterial whether the company whose rates are regulated is a railroad, street railroad, water, gas, electric light, telegraph, telephone or other public service company. The governing rules as to ascertaining the value of the property, and what are to be deducted as operating expenses are the same, although there is an inclination on the part of the courts to allow a higher rate of return to some classes of public service corporations than to others, as noticed hereafter.85 Of course, freight rates on particular commodities are governed by particular rules not applicable to other corporations, since in such a case the particular service rendered is of great importance,86 while in the case of passenger rates and the rates of other companies the ques

82 See § 4548, infra.

83 Interstate Consol. St. R. Co. v. Massachusetts, 207 U. S. 79, 84, 52 L. Ed. 111, 12 Ann. Cas. 555, aff'g 187 Mass. 436, 11 L. R. A. (N. S.) 973, 2 Ann. Cas. 419, 73 N. E. 530.

84 See § 4511, supra, as to reduced rates to school children.

85 See § 4525, infra.

86 See Interstate Commerce Commission v. Chicago Great Western Ry. Co., 141 Fed. 1003, setting forth governing considerations in freight charges.

tion ordinarily is not as to the rate for particular kinds of service but for a uniform service to all the public.

§ 4521. Reasonableness of freight rates on particular commodities. The most of the decisions of the Interstate Commerce Commission relate to the reasonableness of freight rates on particular commodities. Under the statute creating that commission, if it finds any individual or joint rates to be unjust or unreasonable or unduly preferential or prejudicial, it may determine and prescribe what will be the reasonable rates to be charged in the future. In fixing such rates, the value of the commodity transported is properly taken into consideration,87 as well as the value of the service to the shipper, the cost of the particular service, etc., all of which is beyond the scope of this work,88 except as to a few incidental matters hereinafter noticed.

§ 4522. Reasonableness from viewpoint of patron or consumerIn general. There is a difference between the reasonableness of rates fixed by the corporation itself, and rates fixed by law, in most cases, in that in the one case the viewpoint is more especially that of the reasonableness as affecting the patron or consumer, while in the other case the element of reasonableness as affecting the patron or consumer is rarely considered and the only question is whether the rate fixed by law is so low as to deprive the corporation of a just return on the value of its property. Where the rate is fixed by the company, it is often commensurate with "what the traffic will bear," 89 which has been said to be "fundamental in private business but often wholly opposed to public duty." 90

In this connection, however, the reasonableness of rates fixed by the corporation is not considered and the only question is the reasonableness of rates as fixed by law. Undoubtedly, from the viewpoint of the corporation, rates are unreasonable unless they produce a sufficient sum to pay not only operating expenses but also a fair return upon the value of the property employed in the business.91 On the other hand, rates are unreasonable from the viewpoint of the patron or consumer if they are higher than what the service is worth

87 See Beale & Wyman, Railroad Rate Regulation, § 436.

88 See, on this subject, Beale & Wyman, Railroad Rate Regulation (2nd Ed.), $$ 380-603.

89 See Interstate Commerce Commis

sion v. Chicago Great Western Ry. Co., 141 Fed. 1003.

90 2 Wyman, Public Service Corporations, 1211. 91 See § 4548, infra.

to the patron or consumer. How far do these two viewpoints conflict? Are the courts to hold a rate reasonable, as fixed by law, where it imposes a rate more than the value of the service to the public in order to give the company a fair return upon its property, or, on the other hand, a rate corresponding to the value of the service to the public but so low as to give the company very little or no profit? Furthermore, what is the worth of the service to the public and how is it to be estimated?

§ 4523.Statement of rule. It was said by Justice Brewer in a decision of the Federal Supreme Court that "justice demands that everyone should receive some compensation for the use of his money and property, if it be possible without prejudice to the rights of others," but in the same case he also stated, in effect, that mere failure on the part of the public utility to obtain a profit was not conclusive that the rates fixed by law were too low.92 This exception to the rule as to the right to a fair return, if it may be so called, is applicable only to abnormal cases, but in such cases, where warranted by the circumstances, the exception is well settled by the later decisions, and it is now well recognized that circumstances may exist under which rates fixed by law must be held reasonable although they do not afford a net income above the cost of operation and maintenance or create a very low rate of return such as in ordinary cases would be held to be unreasonable, where a higher rate would be in excess of the value of the supply or service to the patron or consumer.93 In other words, under some circumstances, the rates fixed by law cannot be attacked by the company for failure to produce a fair return upon the investment if they do not exceed the

92 Reagan v. Farmers Loan & Trust Co., 154 U. S. 362, 38 L. Ed. 1014.

93 United States. San Diego Land & Town Co. v. National City, 174 U. S. 739, 755, 43 L. Ed. 1154; Smyth v. Ames, 169 U. S. 466, 546, 42 L. Ed. 819; Southern Pac. Co. v. Bartine, 170 Fed. 725, 767.

Florida. State v. Seaboard Air Line Ry., 48 Fla. 129, 37 So. 314. See also State v. Louisville & N. R. Co., 63 Fla. 274, 287, 57 So. 673.

Illinois. Chicago Union Traction Co. v. Chicago, 199 Ill. 579, 642, 65 N. E. 470.

Maine.

Brunswick & T. Water Dist. v. Maine Water Co., 99 Me. 371, 59 Atl. 537; Kennebec Water Dist. v. Waterville, 97 Me. 185, 60 L. R. A. 856, 54 Atl. 6.

Washington. Puget Sound Elec. Ry. v. Railroad Commission of Washington, 65 Wash. 75, Ann. Cas. 1913 B 763, 117 Pac. 739.

The same rule is announced by the Interstate Commerce Commission in cases within its jurisdiction. Imperial Coal Co. v. Pittsburgh, etc., R. Co., 2 Int. Com. Rep. 618, 636.

value of the service to the public,94 and a public service property may or may not have a value independent of the amount of rates, which for the time being may be reasonably large, and a public service company may, under some circumstances, be required to perform its service at rates prohibiting a fair return to its stockholders, considering their property merely as an investment.95

§ 4524. - Circumstances justifying rate producing no profit or very small profit. Circumstances may exist under which rates fixed by law are reasonable although not affording a net income above the cost of operation.96 Thus, as said in regard to a railroad company, "there may have been extravagance and a needless expenditure of money; there may be waste in the management of the road; enormous salaries, unjust discriminations as between individual shippers, resulting in general loss. The construction may have been at a time when material and labor were at the highest price, so that the actual cost far exceeds the present value; the road may have been unwisely built, in localities where there is no sufficient business to sustain a road. Doubtless, too, there are many other matters affecting the rights of the community in which the road is built

94 The public has a right to demand that no more shall be exacted than the services rendered are reasonably worth. The public cannot be subjected to unreasonable rates, in order simply that stockholders may earn dividends. Covington & L. Turnpike Road Co. v. Sanford, 164 U. S. 578, 597, 598, 41 L. Ed. 560; Spring Valley Waterworks v. San Francisco, 192 Fed. 137, 143; Spring Valley Water Co. v. San Francisco, 165 Fed. 667.

"The company engages in a voluntary enterprise. It is not compelled, at the outset, to enter into the undertakings. It must enter, if at all, subject to the contingencies of the business, and subject to the rules that its rates must not exceed the value of the services rendered to its customers. It has accepted valuable franchises granted by the state, franchises ordinarily exclusive for the time being, franchises which ordinarily debar the public from serving themselves satisfactorily in any other way; and in re

turn it must perform the duties to the
public which it has voluntarily as-
sumed at rates not exceeding the
value of the services to the public
taken as individuals, and this irre-
spective of the remuneration it may
itself receive." Brunswick & T.
Water Dist. v. Maine Water Co., 99
Me. 371, 59 Atl. 537, 541.

95 Brunswick & T. Water Dist. v.
'Maine Water Co., 99 Me. 371, 59 Atl.
537.

96 State v. Seaboard Air Line Ry., 48 Fla. 129, 144, 37 So. 314. See also Missouri Pac. Ry. Co. v. Smith, 60 Ark. 221, 243, 29 S. W. 752.

An illustration is where operating expenses are excessive and the management is inefficient. State v. Adams Exp. Co., 85 Neb. 25, 42 L. R. A. (N. S.) 396, 122 N. W. 691.

Rule applied to branch road. In re Arkansas Railroad Rates, 168 Fed. 720, 732; Steenerson v. Great Northern Ry. Co., 69 Minn. 353, 395, 72 N. W. 713.

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as well as the rights of those who have built the roads." 97 a later case in the Federal Supreme Court it was said that railroad companies cannot "in all cases be allowed to charge grossly exorbitant rates as compared with rates paid upon other roads, in order to pay dividends to stockholders. Each case must be determined by its own considerations, and while the rule is undoubtedly sound as a general proposition that the railways are entitled to a fair return upon the capital invested, it might not justify them in charging an exorbitant mileage in order to pay operating expenses, if the conditions of the country did not permit it."9 So it has been said that "if, in construction or purchase, more money has been put into a plant than is required for one adequate to the demands of the community, the usual return on such sum would be more than the service rendered the public is worth. Both the public and the public service investor are to be considered, and justice done to each." 99 Again, "where the cost to the carrier is not kept within reasonable limits, or where for any reason its business cannot reasonably be so conducted as to render it profitable, the misfortune must fall upon the carrier, as would be the case if it were engaged in any other line of business."1 For instance, if a suburban railway raises its rates so as to compel commuters to give up their homes and move into the city, it is reasonable, it seems, to lower the rates where the reduction will permit the company to carry at a profit over the cost of operating expenses, although at a rate less than an adequate return for the use of the property, where passengers cannot afford to pay a higher rate. So it has been said that "if a railroad is built into a new, sparsely settled territory with a view of serving a large future population and developing business, the Constitution does not require the few people and the small business of the present time to pay rates which will yield an income equal to the full return to be gathered when the country is populated and business developed to the full capacity of the road." Again: "If a plant is built, as probably this was, for a larger area than it finds

Reagan v. Farmers Loan & Trust Co., 154 U. S. 362, 412, 38 L. Ed. 1014. 98 Minneapolis & St. L. R. Co. v. Minnesota, 186 U. S. 257, 268, 46 L. Ed. 1151.

99 Coal & Coke Ry. Co. v. Conley, 67 W. Va. 129, 190, 67 S. E. 613.

1 Missouri, K. & T. R. Co. v. Interstate Commerce Commission, 164 Fed. 645, 648.

2 Puget Sound Elec. Ry. v. Railroad Commission of Washington, 65 Wash. 75, Ann. Cas. 1913 B 763, 117 Pac. 739. But compare People v. Public Service Commission for Second Dist., 159 N. Y. App. Div. 531, 538, 145 N. Y. Supp. 503.

3 Southern Pac. Co. v. Bartine, 170 Fed. 725, 767.

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