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porated portions of this railway system should not, for the purposes of such a case as this, be regarded as separate railroads."

450. When constituent roads are operated under separate

charters.

It is held in some cases that the fact that the constituent roads still preserve their original charters and are theoretically operated under them is sufficient to justify the requirement that each shall be treated by itself in rate regulation. Thus in one recent case,2 where the propriety of a reduction in rates ordered by the railroad commission of Florida was in question, it was shown that the Pensacola & Atlantic division of the Louisville & Nashville Railroad System was in reality a separate corporation. It was shown that the rates enforced would not give an adequate return upon the Pensacola & Atlantic Railroad itself, although the Louisville & Nashville System was shown to be profitable. Upon these facts Judge Pardee granted an injunction to prevent the enforcement of these rates, saying in substance: "The fact that a line of railroad is operated in connection with other lines owned by the same company, but under separate charters, whereby the earnings of such line are increased and its operating expenses reduced, does not prevent its being considered as a separate and independent line for the purpose of determining the reasonableness of rates thereon, fixed by the State; full consideration of the joint. operation being given when the road is credited for the increated business and reduced expenses."

§ 451. Systems considered as wholes.

Specific illustration of the general matters which have been discussed under this topic may help to an appreciation of the general problem. In a comparatively recent investigation, Re Advances in Freight Rates,3 upon certain lines, the Interstate

2 Louisville & N. R. R. v. Brown et al., 123 Fed. 946 (1903). 39 I. C. C. Rep. 382 (1902).

Commerce reported upon various ones of the principal railroad systems, among them the Lake Shore & Michigan Southern Railway, itself a part of a "community of interest." Extracts from this report follow:

"The Lake Shore & Michigan Southern, on June 30, 1901, owned a majority of the capital stock of its competitor, the New York, Chicago & St. Louis Railroad Company, a majority of the capital stock of its connection, the Pittsburg & Lake Erie Railroad Company, almost one-half of the capital stock of the Lake Erie & Western Railroad Company, and $11,224,000 of the capital stock of the Cleveland, Cincinnati Chicago & St. Louis Railway Company, besides smaller holdings in other companies. These stocks had been acquired, in addition to the payment of dividends not less than 6 per cent., for many years, out of net earnings. During the year 1902 it purchased, apparently out of surplus, $4,728,200 of the capital stock of the Indiana, Illinois & Iowa Railroad Company, the entire capital being $5,000,000.

"This company after paying 7 per cent. dividend to its stockholders has a surplus each year sufficient to buy the control of a very considerable railroad. Before holding that its revenues ought to be further increased, or that the government ought not to exercise any supervision over those revenues, it may be well to consider what the bearing of this process, continued for half a century, is to be upon two of the great economical problems before us, namely the distribution of wealth, and the control of the avenues of transportation.'

§ 452. When corporations of diverse characters held.

Where, however, a railroad system owns corporations of another sort, they would hardly be held to form so integral a part of the system that their receipts and charges should be brought into the same account. Thus in the case just examined1

4 Steenerson v. Gt. No. Ry., 69 Minn. 353, 72 N. W. 713 (1897).

the Great Northern Railway owned a steamship line and a coal company; and it was held that the finances of these corporations should be separately kept, Mr. Justice Canty said:

"Even if these separately incorporated portions must be regarded as one railroad, or a single system, it is still a question whether the plant of the Northern Steamship Company should be regarded as a part of that system, and it is still more doubtful whether the mines or plant of the Sand Coulee Coal Company should be so regarded; and, if these plants should not be considered a part of the railway system, the Great Northern Railway Company would not have to put into the common pot in this case such profits of those two concerns as result from a just and equitable division of profits between the railway system and each of these other plants. But the burden would still be on the railway company in this case to show that it has made such a just and equitable division of such profits, and, as before stated, it has failed to maintain that burden."

And on a similar principle, where a grant of land was made to a railroad, taxes on the land and land office expenses were not proper annual charges on the railroad; the finances of the land office should be kept separate from those of the railroad.5

TOPIC C-LEASED LINES.

§ 453. Rent of leased roads.

Where a bona fide lease of one road to another is made, the operating road is entitled to include the rent of the leased road in its operating expenses. It is the annual expense of providing its appliances for carrying on its public business, and as such is a proper annual charge against gross income. In the case of Southern Pacific Company v. Board of Railroad Commissioners, where the question involved was the reasonableness of the rate established by the Commissioners for the

5 Southern Pacific Co. v. Railroad Comrs., 78 Fed. 236, 272 (1896). 178 Fed. 236 (1896).

Southern Pacific system, it appeared that an annual rental of $600,000 was to be paid by the Southern Pacific Company to the California Pacific, a leased road. It was urged that certain fixed charges on the system which had been paid by the lessor should not be deducted. It was, however, held that the entire rent should be deducted. Mr. Circuit Judge McKenna said: “It is not very clear why the fixed charges should be charged, and the rent not charged, or why the former should be deducted from the latter. As we have seen, and shall see, it is the expenditures of the Southern Pacific Company which we can only consider. Was the rent or were the fixed charges such an expenditure? By the terms of the lease, there was to be paid by the Southern Pacific Company to the California Pacific Company a rental of $600,000 per annum, and it is provided that ‘it will, during said term, keep and maintain said property in good order, condition, and repair, and operate, add to, and better the same at its own expense, and will pay all taxes legally assessed against or levied thereon.' The rent, therefore, is as much an annual expenditure as the taxes and betterments are and why, then, should it not be allowed, or why should something be allowed out of it, or instead of it, which is not an expenditure to the Southern Pacific Company?"

§ 454. Rental must be fixed in good faith.

The rent must be agreed upon in good faith; otherwise it would be in the power of the owners of a railroad to increase the annual charges, by successive leases, to such an extent that any rate would be reasonable. But granting the good faith of the lease and the reasonableness of the rent, it is a proper element of charge. To quote again from Mr. Circuit Judge McKenna: "The objection to allowing the rental is stated by one of the counsel to be that any rent could be charged or successive lettings be made with successive rentals, and all with the same propriety and legality be charged. Whether this would be done is improbable. That it could be done legally would depend

upon good faith, and the relation and proportion of the rent to the property. I see, therefore, no objection to this charge of $600,000 rental. It is an annual expenditure of the Southern Pacific Company, to be annually reimbursed to it from the income of the road with other expenditures." 2

455. If rental becomes unjustifiable.

According to the Minnesota doctrines by which the reproduction value of the road is the only proper basis of charge, the operating line cannot charge to annual operating expenses the agreed rental of a leased line, even though it was reasonable at the time the lease was made, if it is now higher than is justified by the present rate of income and reproduction value of the leased road. "If the amount of such fixed charges exceed the amount of what is a reasonable income on the cost of reproducing the road, the patrons of the road should not be required to pay the excess.

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§ 456. Betterments of leased roads.

Money expended by the operating road in making betterments on the leased road may or may not be chargeable to current income. If the making of betterments is required by the lease at the expense of the operating railroad, the expenditure is really part of the rent of the road, and is therefore a proper annual charge. And this was held even in a case when at the expiration of the lease, fifty years later, the then cash value of the betterments made during the term was to be repaid to the lessee; the Court remarking that "it would be hard guessing to say what traces of them would be left in fifty years.' Where

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2 So. Pacific Ry. Co. v. Railroad Commrs., 78 Fed. 236 (1896).

3 Ante, § 328.

4 Canty, J., in Steenerson v. Great Northern Ry., 69 Minn. 353, 72 N. W. 713 (1887).

5 Southern Pacific Co. v. Railroad Comrs., 78 Fed. 236, 268 (1896), per McKenna, J.

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