§ 22. Circuit Judge Ross in San Diego Land and Town Case, 1896-Present value, not cost, the true basis. In San Diego Land and Town Company v. National City, 74 Fed. 79, United States Circuit Court, decided May 4, 1896, an action was brought to enjoin the enforcement of an ordinance of the board of trustees of a

municipality establishing water rates. The complaint was dismissed. Judge Ross says (at pages 83, 84):

In the solution of that problem many considerations may enter; among them, the amount of money actually invested. But that is by no means, of itself, controlling, even where the property was at the time fairly worth what it cost. If it has since enhanced in value, those who invested their money in it, like others who invest their money in any other kind of property, are justly entitled to the benefit of the increased value. If, on the other hand, the property has decreased in value, it is but right that those who invested their money in it, and took the chances of an increase in value, should bear the burden of the decrease. In my judgment, it is the actual value of the property at the time the rates are to be fixed that should form the basis upon which to compute just rates; having, at the same time, due regard to the rights of the public, and to the cost of maintenance of the plant, and its depreciation by reason of wear and tear. If one has property to sell, it is its present value that is looked to, one element of which may very properly be its cost; but one element only. So, too, if one has property to lease, it is its present value, rather than its cost, upon which the amount of rent is based. And if, as said by Mr. Justice Brewer in Ames v. Railway Co. [64 Fed. 165, quoted in § 21,] supra, the public were seeking to condemn the property in question for a greater public use, if that be possible, its present value, and not its cost, is that which the public would have to pay. It follows, I think, that, where the public undertakes to reduce the rates to be charged for the use of such property, it is its present value, and not its cost, that must be taken as a basis upon which to fix reasonable and just rates; having due regard to the cost of its maintenance, to its depreciation by reason of wear and tear, and

to the rights of the public. If, upon such a basis, a fair erest is allowed, no just cause of complaint can exist."

I. San Diego Land and Town Co. v. Jasper, 110 Fed. 702, 714, decided August 26, 1901, Judge Ross reaffirms the views expressed by him in 74 Fed. 79.

§ 23. Circuit Judge Thayer in Kansas City Stock-Yards Case, 1897-Cost plus appreciation in value.

In Cotting v. Kansas City Stock-Yards Co., 82 Fed. 850, 854, decided October 28, 1897, actions were brought to enjoin the enforcement of statutes of the State of Kansas fixing maximum charges for services at complainant's live-stock yards. Upon the final hearing the Federal Circuit Court dismissed the complaint, though granting a temporary injunction pending an appeal. Circuit Judge Thayer said (at pages 854, 855):

When a valuation is placed on property which has become affected with a public use, for the purpose of ascertaining whether the maximum rate of compensation fixed by law for its use is reasonable or otherwise, it is obvious that the income derived therefrom by the owner before it was subjected to legislative control cannot always be accepted as a proper test of value, because the compensation which the owner charged for its use may have been excessive and unreasonable. Again, when property has been capitalized by issuing stock, neither the market value nor the par value of the stock can be accepted in all cases as a proper criterion of value, because the stock may not represent the money actually invested, and, furthermore, because the property may have been capitalized mainly with reference to its income-producing capacity, on the assumption that it is ordinary private property, which the owner may use as he thinks proper, without being subject to legislative control.

2 For the opinion of Justice Harlan on appeal of this case to the United States Supreme Court, see § 25.

For opinion of United States Supreme Court on appeal of this case, see infra, § 26.

On the other hand, however, when property is valued for the purpose last stated, it is clear that the owner thereof is entitled to the benefit of any appreciation in value above the original cost and the cost of improvements, which is due to what may be termed natural causes. If improvements made in the vicinity of the property, the growth of the city or town where it is located, the building of railroads, the development of the surrounding country, and other like causes, give property an increased value, the owner cannot be deprived of such increase by legislative action which prevents him from realizing an income commensurate with the enhanced value of his property. . . . Upon the whole, therefore, the court concludes that the value of the property used for stock-yards purposes, as assessed by the master, is not unreasonable, considering the object for which such valuation was made, and that no sufficient reasons have been shown for disturbing the finding of the master on that issue.1

§ 24. Justice Harlan in Smyth v. Ames, 1898-Fair value of property used and how ascertained.

Smyth v. Ames, 169 U. S. 466, 18 Sup. Ct. 418, 42 L. ed. 819, decided March 7, 1898, is a leading case on the question of the determination of reasonable rates. In this case the United States Supreme Court decided against the constitutionality of a Nebraska statute establishing maximum freight rates. Justice Harlan, in delivering the opinion of the court, says (at page 544):

If a railroad corporation has bonded its property for an amount that exceeds its fair value, or if its capitalization is largely fictitious, it may not impose upon the public the burden of such increased rates as may be required for the purpose

Upon appeal to the United States Supreme Court, the decree of the Circuit Court was reversed with directions that the complainant's prayer be granted, upon the ground that the statute in question violated the Fourteenth Amendment to the United States Constitution in that it applied only to the Kansas City Stock-Yards Company and not to other companies or persons engaged in like business in Kansas.

of realizing profits upon such excessive valuation or fictitious capitalization; and the apparent value of the property and franchises used by the corporation, as represented by its stocks, bonds, and obligations, is not alone to be considered when determining the rates that may be reasonably charged. . . .

...

The court here quotes Covington and Lexington Turnpike Road v. Sandford, 164 U. S. 578, 17 Sup. Ct. 198, 41 L. ed. 560, decided December 14, 1896, and continues (at pages 545, 546):

A corporation maintaining a public highway, although it owns the property it employs for accomplishing public objects, must be held to have accepted its rights, privileges, and franchises subject to the condition that the government creating it, or the government within whose limits it conducts its business, may by legislation protect the people against unreasonable charges for the services rendered by it. It cannot be assumed that any railroad corporation, accepting franchises, rights and privileges at the hands of the public, ever supposed that it acquired, or that it was intended to grant to it, the power to construct and maintain a public highway simply for its benefit, without regard to the rights of the public. But it is equally true that the corporation performing such public services and the people interested in its business and affairs have rights that may not be invaded by legislative enactment in disregard of the fundamental guarantees for the protection of property. The corporation may not be required to use its property for the benefit of the public without receiving just compensation for the services rendered by it. How such compensation may be ascertained, and what are the necessary elements in such inquiry, will always be an embarrassing question.

We hold, however, that the basis of all calculations as to the the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public. And in order to ascertain that value, the original cost of construction, the amount expended in permanent im

provements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. On the other hand, what the public is entitled to demand is that no more be exacted from it for the use of a public highway than the services rendered by it are reasonably worth.

In the foregoing case the court did not attempt to fix the fair value of the property, so that the above is very largely dicta. After considering the effect of the proposed rates on the earnings of the companies, the court came to the conclusion that they could not be considered reasonable on any possible basis of value.

§ 25. Justice Harlan in San Diego Land and Town Case, 1899 -Reasonable value at time used.

In San Diego Land and Town Company v. National City, 174 U. S. 739, 19 Sup. Ct. 804, 43 L. ed. 1154, decided May 22, 1899, in which the United States Supreme Court affirmed a dismissal by the Circuit Court of a complaint in an action to enjoin the enforcement of a municipal ordinance establishing water rates (see § 22, supra), Justice Harlan, writing the opinion of the court, says (at pages 757-758):

The contention of the appellant in the present case is that in ascertaining what are just rates the court should take into consideration the cost of its plant; the cost per annum of operating the plant, including interest paid on money borrowed and reasonably necessary to be used in constructing the same; the