§ 789. Federal court in San Francisco Water Rate Case, 1908. In Spring Valley Water Company v. San Francisco, 165 Fed. 667, decided October 7, 1908, District Judge Farrington apparently takes the ground that there is only one fair return and that that return can not be diminished in any degree without confiscation. As he fixes the fair return for the purposes of this case at 5% it seems probable that he is using the term in its constitutional sense and without relation to good public policy in the development of new enterprises. He says (at page 678):

Under the law the company is entitled to a just and reasonable compensation for the use of that portion of its property which is employed in collecting water and bringing it to the people of San Francisco. This just and reasonable compensation is property, and up to and including the full measure of that which is just and reasonable it is the property of the complainant; it can not be taken, directly or indirectly, by the power of the state for public use without due process of law. To say that a body of rates which affords some compensation, but something less than a reasonable compensation, is not confiscatory, is simply to say that the Constitution protects a portion but not all of a man's property. If the Supervisors have the power, and it is their duty to prescribe just and reasonable rates, and the court has the power to decide whether such rates are reasonable, and to annul ordinances in which the rates prescribed are unjust and unreasonable, it must follow that "the court has no power," as Judge Morrow says in Spring Valley Waterworks v. San Francisco, infra, "to diminish the measure of what is just compensation in any degree."

§ 790. Responsibility of regulatory commissions.

The courts seem inclined to place at least some of the responsibility for securing a fair treatment of public service enterprises upon the state regulatory commissions and authorities. Justice Timlin in the majority opinion in Minneapolis, St. P. & S. S. M. R. Co. v. Railroad Com

mission, 136 Wis. 146, 165, 116 N. W. 905, 17 L. R. A. (N. S.) 821, decided June 5, 1908, states:

In reviewing the order of the Railroad Commission the inquiry is not whether the rate, regulation, or service fixed by the Commission is just and reasonable, but whether the order of the Commission is unreasonable or unlawful. The nature of the inquiry is changed at this point, and the court is not investigating for the purpose of establishing a fixed point. Whether or not the order is within the field of reasonableness, or outside of its boundaries, is the question for the court. It is quite a different question from that which was before the Commission in this respect. The order being found by the court to be such that reasonable men might well differ with respect to its correctness cannot be said to be unreasonable. From this aspect it is within the domain of reason, not outside of its boundaries. This is the viewpoint of the reviewing court.

Somewhat similar in purport are the remarks of Justice Moody in Knoxville v. Knoxville Water Company, decided January 4, 1909: 12

The courts, in clear cases, ought not to hesitate to arrest the operation of a confiscatory law, but they ought to refrain from interfering in cases of any other kind. Regulation of public service corporations which perform their duties under conditions of necessary monopoly, will occur with greater and greater frequency as time goes on. It is a delicate and dangerous function, and ought to be exercised with a keen sense of justice on the part of the regulating body, met by a frank disclosure on the part of the company to be regulated. The courts ought not to bear the whole burden of saving property from confiscation, though they will not be found wanting where the proof is clear. The legislatures and subordinate bodies, to whom the legislative power has been delegated, ought to do their part. Our social system rests largely upon the sanctity of private

12 Knoxville v. Water Company, 212 U. S. 1, 18, 29 Sup. Ct. 148, 53 L. ed. 371, January 4, 1909.

property and that State or community which seeks to invade it will soon discover the error in the disaster which follows. The slight gain to the consumer, which he would obtain from reduction in the rates charged by public service corporations, is as nothing compared with his share in the ruin which would be brought about by denying to private property its just reward, thus unsettling values and destroying confidence. On the other hand, the companies to be regulated will find it to their lasting interest to furnish freely the information upon which a just regulation can be based.

§ 791. Elements of a reasonable return-Wisconsin Railroad Commission.

In State Journal Printing Company v. Madison Gas and Electric Company, 4 W. R. C. R. 501, 626-649, decided March 8, 1910, the Wisconsin Railroad Commission considers at considerable length the question of a fair rate of return. The Commission says in part:

The rate that may be considered a reasonable return for interest and profits on the investment undoubtedly varies with the circumstances. Generally speaking, however, it can perhaps be said that under normal conditions it consists of the ordinary rates for capital similarly invested, and that are sufficiently high to encourage investors to enter such enterprises. . .

While public utilities are subject to many conditions that tend to increase the risks under which their business is carried on, they are also afforded a great deal of protection that is of considerable value to the investors. This protection has its source partly in legal provisions, and partly in the fact that, after all, such utilities are natural monopolies and are engaged in furnishing services that have practically become necessities and for which there appear to be no effective substitutes. While the investors in gas and electric light plants are exposed to certain hazards or risks, these risks, while greater than the risks which obtain for money placed, say, in trust companies and good mortgages, are not, on the whole, as great as those which obtain in ordinary competitive enterprises.

The rates of return upon the investment are usually divided into interest which goes to those who furnish the capital, and profits which go to those who assume the responsibility and direction of the business. The rate of interest depends on the supply and demand for capital, and is, therefore, lower where the risks are low and where the troubles involved in looking after the investments are small, than where these elements are greater. That this should be the case, is only natural, for few are willing to assume risks and responsibilities unless they are compensated therefor in some form, or unless the prospects for such compensation are fairly good. There are other factors than those given which also affect the rate of interest, such as the readiness with which the money may be withdrawn, the location and nature of the industries, etc., which have been fully described in other decisions, but these are, perhaps, in most instances of smaller importance. Money placed in savings banks, trust companies and good mortgages yield from about 4 to about 5 per cent. In the case of such investments the risks are very small and they require but little care or trouble. These rates consist mostly of pure interest and can, perhaps, be regarded as the minimum rates that are obtained by the ordinary investors. Money invested in good bonds for which there is a ready market bring no more than the above rates, if as much. Bonds and mortgages of a somewhat lower grade yield from 6 per cent. up to 8 per cent. or more, and commercial paper brings from 6 to perhaps 10 per cent. or better. In fact, there are such variations in both the character of the investments and the rates they yield, that it is difficult, if not impossible, to properly classify them. . .

Risks are much greater in some industries than in others. Where the products depend upon fashions, the season, or where they are of a perishable character, the risks may be extremely great. In other undertakings, where competition is in every respect unrestricted, they are also considerable, though perhaps, on the whole, less than the cases just mentioned. Where some special favor, such as patent rights, monopoly powers, or some privilege of this character is enjoyed, the risks are, of course, less, and in some cases may be very small. As

risk is an element that is likely to affect the supply of both business capacity and capital, it is often found that, for those who are successful, the profits are much higher where the risks are great than where they are comparatively small. That this should be the case, is only natural; for, after all, those among the investors are comparatively few who do not attach considerable importance to safety or who are not willing to concede a part of their possible profits for an increase in the security of their investments.

As already pointed out, the greatest risks usually prevail in competitive undertakings. In these there is a constant struggle between the competitors to reduce the cost of production and to bring about other changes that will give them some advantage in the markets. Such producers have no way of controlling the supply of their products, and since the prices of the same are therefore beyond their control, they are apt to suffer from any improvement in the method of production on the part of any of their competitors that tends to either reduce the cost of these products or to enhance the demand for them in the market. The uncertainties or risks that are arising from these and similar sources are often extremely great. Even the ablest and most foreseeing of the producers are often taxed to the utmost in holding their own in the market. In cases where they are protected by patent rights or enjoy other advantages of this nature, the risks are, of course, somewhat reduced. But the security which is derived from such sources is not permanent. Patent rights expire. Improvements, both in organization and in methods and machinery, are constantly going on. Advantages of this kind are, therefore, apt to disappear at almost any moment.

In industries where certain monopoly conditions prevail, such as public utilities, competitive risks are, of course, of much smaller importance. In such industries the supply is under control and there is no direct competition in the sale of their products or services. . . .

But there are, in public utilities as well as in other industries, other than competitive risks. In the construction and operation of such plants many accidents may be met with and many