§ 504. Company cannot make unreasonable rates. The requirement that no person may be charged more than a reasonable rate may be insisted upon although the result is that the company does not get a fair return from its schedule as a whole. Those who undertake a public employment enter upon a business affected with a public interest, which justifies the State in demanding that the rates charged shall be reasonable to the public. A test case upon this point was Missouri Pacific Railway v. Smith, where maximum rates were fixed by the Legislature which the plaintiff railway company claimed would cut off all the profits of their business. The court held that this was not fatal to the constitutionality of the legislation; Mr. Justice Thomason saying: "The additional fact that the traffic and business of the road, when operated according to the act of April 4th, and no passenger was charged exceeding 3 cents a mile, would not pay the interest on the debts of the railway company and the expenses of operating the road, does not show that the maximum passenger rate of 3 cents a mile is unreasonable. Rates of transportation sufficient to enable the road to realize a sum large enough to defray current repairs and expenses and pay a profit on the reasonable cost of building the road and equipping it, ought to be reasonable. The earnings of a road might be sufficient for this purpose, and yet not large enough to pay expenses and interest on its debts. Large and unnecessary debts might have been contracted through extravagance, enormous salaries, and mismanagement, exceeding the cost of building and equipping the road, and bearing a rate of interest amounting to more than a a reasonable profit on the capital necessary, when judiciously expended, to construct and equip the road. Like some individuals as to their business, railway companies can reach a point through extravagance, losses and mismanagement, when no rea 660 Ark. 221, 29 S. W. 752 (1895). sonable rate of profit will enable them to maintain their roads and pay the interest upon their debts, and when failure and a sale of the road to other parties become inevitable." 7 § 505. Reasonable rates not necessarily profitable. In another case 8 of much the same sort, much the same language was used, Mr. Justice Carter of Florida saying: "The returns attempt to question the reasonableness of the rates established by the Railroad Commissioners. They contain certain allegations that the rates are not just and reasonable, but these general allegations are qualified by other statesments that the rates, if enforced, will not afford a reasonable income, or in fact any net income over and above the reasonable cost of constructing and maintaining said railroads. The original return goes further, and includes with the cost in construction and maintenance the payment of fixed charges, which counsel admitted in argument means taxes and interest on outstanding bonds. The vice in this method of pleading lies in the fact that the question of reasonableness is made to depend upon the capacity of the rates to yield a net income over and above the cost of constructing and maintaining the road and the payment of fixed charges, whereas circumstances may exist under which rates are reasonable which do not afford a net income above the cost of operation and taxes, or the cost of operation, taxes and fixed charges. The returns set forth a few elements entering into the question as to what constitutes a reasonable rate, and attempt to make these elements controlling; whereas the conditions surrounding the operation of the road may deprive them of controlling force." 7 See the discussion of this principle in §§ 484-485, supra, and cases Icited therein. 8 State v. Seaboard Air Line, 37 So. 314 (Fla.), (1901), per Carter, J. § 506. Company cannot justify exorbitant profits. On the other hand, it is certain upon fundamental principles that the company cannot justify exorbitant profits by urging that the rates are reasonable in themselves. At first impression this has seemed to some persons unjust to the company; but it should be remembered that the company is still allowed a fair return upon its reasonable capitalization, which is all the right that those who have entered upon these enterprises have by established law. If it is found that rates may be reduced to a point which seems below the reasonable standard and yet produce a fair return, the company has no legal grievance if it is not permitted to charge higher rates. To quote a specific illustration: "The rate per ton mile, while often instructive, is not by any means a fair index of a reasonable rate. The cheapest traffic is frequently the most profitable to the carrier. For the year ending June 30, 1901, the average receipts per ton mile upon all kinds of traffic over the Chesapeake & Ohio System, embracing about 1,500 miles, was 3.88 mills. The percentage of operaating expenses was 62.87-much below the average of the whole United States and among the very lowest. Its net earnings were $3,656 per mile, equivalent to 6 per cent. interest on $60,000 per mile-just about the average capitalization of all our railroads. This example is referred to as showing that business may be profitably done at astonishingly low rates. Indeed, it is usually a question, not of the absolute rate, but of the conditions under which the traffic is handled." " § 507. Application of these principles to passenger fares. A railroad commonly maintains two distinct services as it is generally a common carrier of both passengers and goods. Of course the most important part of its business, from an economic point of view, is its freight traffic, but the passenger 9 Re Proposed Advances in Freight Rates, 9 I. C. C. Rep. 382, 396 (1902). business is by no means so inconsiderable a factor as some writers would lead one to think. A railroad company can certainly estimate from experience what proportion of its receipts may be expected from its freight and what from its passenger traffic. What proportion of the expense of operation is attributable to freight traffic and what to passenger traffic is very difficult to approximate; but here, again some of the special costs of handling passenger business may be known and in the roughest manner possible the fixed charges can be apportioned to the respective items in proportion to their volume. It is not claimed that this is in the least exact, but it is submitted that by some such computations it may be told whether the railroad is charging outrageous passenger fares, throwing upon this class of its business unreasonable burdens. TOPIC B-BASING RATES UPON COST OF SERVICE. 508. Difficulties in dividing joint costs. It is practically impossible, as has been admitted, to divide accurately to each item of traffic its proportionate share of the total expenditures-capital charges and operating expenses. The expenditures constitute joint costs for all the items of traffic; and the result is that it cannot be said with any degree of accuracy that a certain shipment has cost so much to transport. But this is more particularly true of apportioning capital charges than it is of estimating expenses of movement. And upon the whole, it is not altogether impossible to say of a particular rate that it is much greater than the cost of performing the service. This possibility is discussed in the sections which immediately follow.1 "It is manifestly quite as important on public grounds that the citizens who furnish a carrier with business from the pursuits in which they are engaged should not be oppressed with 1 Cost of service as a delivering factor in railroad rates is discussed in §§ 472-480, supra. See the cases cited in the notes to those sections. rates that are disastrous to their pursuits, as that a carrier should not be required to perform its service at a loss. The public good requires that benefits as well as burdens shall be justly distributed, and that one interest shall not profit unduly at the expense and to the serious prejudice of another. This is the spirit of the Law. A carrier has the peculiar advantage of being able to apportion its aggregate expenses upon its whole business, but a grower of fruit, or of grain, or a manufacturer, cannot do so. The product he markets must alone bear the transportation expense, and if this is excessive and deprives him of any return upon his investment or from his labor or skill, his business is ruined and a public injury is sustained. The equitable rule doubtless is that rates should bear a fair and reasonable relation to the antecedent average cost of the traffic. as delivered to the carrier for transportation, and the average market price the freight will command, or, as it is termed, the commercial value of the property.' 2 § 509. Cost of service different for different railroad sys tems. It must be obvious from all that has been said, that cost of service is a relative matter, different for different railroad systems. Upon some systems there will be grades, upon others none. Some are great systems with all the economies of large businesses, while others may conduct small systems through sparsely settled territory. To quote a specific instance from an opinion of the Interstate Commerce Commission: "Tested by these rules, a rate may be a very reasonable and just rate on one railroad and not reasonable and just on another. For example, a rate that would be reasonable and just on the New York Central & Hudson River Railroad may be so low that it would force the Minneapolis & St. Louis Railway into bankruptcy in less than thirty days; and a rate that might be reasonable and 2 Delaware State Grange v. New York, P. & N. R. R., 3 Int. Com. Rep. 554, 561. |