The president of the company,

which will alike fit all cases. a man of large financial affairs and experience in this section of the state, testified that the prevailing rate of interest on loans running for a long time and backed by first-class security was 7 per cent.; on ordinary commercial paper the rate was 8 per cent. It appears in the record here that the appellant has loaned to its allied corporation, the Tacoma Railway & Power Company, the sum of $2,250,000, on its promissory notes, at 6 per cent., raising the amount by an issue of bonds. It seems to us this meets the rule announced in the Willcox Case→→ an investment made in the same locality, in an enterprise of a similar nature, with approximately the same attendant risk. If appellant regards 6 per cent. as a proper return for its investment in the Tacoma Railway & Power Company, it should be willing to accept 7 per cent. as a proper return for its investment in its own property.

§ 770. United States Circuit Court, 1911-8% a fair returnWater Company.

Des Moines Water Co. v. City of Des Moines, 192 Fed. 193, decided September 16, 1911, is a water rate case. District Judge McPherson says (at page 198):

The greater the hazard, the higher the rate of interest. A farmer who observes his contracts and pays his debts can get a loan at a low rate of interest by a mortgage on his farm. A man whose credit is not good, and who can only tender security of a doubtful character, must pay a high rate of interest. This has always been so, and always will remain so. The fact that the company's charter may be revoked by a forced sale, or that it may expire at the end of twenty-five years, and that it will be continuously kept in litigation, are all hazards, which in other business enterprises would increase the rate of interest that the borrower must pay, and justly entitles it to a higher rate of earnings than if its earnings were certain and fixed, and were in perpetuity or of long duration. . . . Considering the hazards and liabilities, some of them certain and others contingent, and some of them destructive, an eight per cent. return is

moderate. But this proposed ordinance would allow nothing like eight per cent.

All fair-minded people should readily agree, and the defendant city and its officers ought to agree, that reasonable returns should be allowed to not only these investments, but these dangers and hazards, which clearly are to be taken into account, under the authorities.

§ 771. New York Court of Appeals, 1911-Fair rate of return a question of fact to be determined by lower court-Tax Case.

People ex rel. Manhattan Railway Company v. Woodbury, 203 N. Y. 231, 96 N. E. 420, decided October 17, 1911, is a special franchise tax case. The value of the special franchise was determined by the net earnings rule which provides for the capitalization of the surplus net earnings after allowing a 6% return on the value of the tangible property. The Court of Appeals held that the question of what is a fair and reasonable return is a question of fact and therefore a question to be determined on the evidence by the courts below. Judge Gray in delivering the opinion of the court says (at page 235):

Whether the rate of return to be allowed to the relator upon its tangible property, or whether the rate at which the net income should be capitalized, should be six per cent., as determined below, was a question of fact decided upon, concededly, conflicting evidence and is one with which, therefore, this court should not interfere. In the Jamaica Water Supply Company's Case (196 N. Y. 39), the character of the plaintiff's business affected the question of the rate of capitalization of net income; a consideration which, I think, does not obtain in this case.

$ 772. New York Public Service Commission for the First District-72% a fair return-Gas Company.

Mayhew v. Kings County Lighting Company, 2 P. S. C.

1st D. (N. Y.) —, decided October 20, 1911, is a gas rate case. Commissioner Maltbie says:

After considering all factors, including those just mentioned, the Commission has concluded that in view of all circumstances a fair rate of return for the years from 1911 to 1913 should not exceed 71⁄2 per cent. In the Queens Borough case, the finding was 8 per cent., and in the Brooklyn Borough gas rate case the complaint was dismissed because the earnings did not indicate a return of more than 7.6 per cent. upon a low valuation of the property. But both of these companies operate under less favorable conditions than does the Kings County Company, and, in order that all may be dealt with fairly, the rate of return should reflect these varying conditions.

In fixing the fair rate of return, the Commission has had in mind the principles adopted elsewhere in this opinion. If these were varied, it is probable that the rate of return should be altered.

It should be pointed out that a return of 72 per cent upon the whole amount is equivalent to a dividend rate of 10 per cent. upon stock equal to one-half of the fair value, if bonds to the amount of one-half were financed upon a 5 per cent, basis; or 9 per cent. dividends, if bonds were sold on a 6 per cent. basis. (For detailed discussion of this phase, see Queens Borough opinion.) As a matter of fact, the last issue of bonds was sold by the company on a 5.1 per cent. basis, notwithstanding the fact that more than one-half, indeed all, of the fair value is represented by bonds.

§ 784. Review of attitude of Supreme Court of the United States.

The attitude of the Supreme Court of the United States in relation to what constitutes a fair return has been a slow evolution. As noted in § 3 the Supreme Court held in 1876 that it had no power to declare void an act of a legislature fixing rates but this position of the court was later gradually modified and reversed. Up to the present time statutes or regulations fixing rates have only

been annuled by the Supreme Court in a few cases where the confiscatory nature of the rates fixed was so apparent that it was unnecessary to determine or discuss what constitutes a fair rate of return. Justice Moody in Knoxville v. Water Company, decided January 4, 1909, reviews these cases as follows (at page 17):9

It can not be doubted that in a clear case of confiscation it is the right and duty of the court to annul the law. Thus in Reagan v. Farmers' Loan & Trust Company, 154 U. S. 362, where the property was worth more than its capitalization, and upon the admitted facts the rates prescribed would not pay one-half the interest on the bonded debt; in Covington &c. Turnpike Company v. Sandford, 164 U. S. 578, where the rates prescribed would not even pay operating expenses; in Smyth v. Ames, 169 U. S. 466, where the rates prescribed left substantially nothing over operating expenses and cost of service; and in Ex parte Young, supra, where, on the aspect of the case which was before the court, it was not disputed that the rates prescribed were in fact confiscatory, injunctions were severally sustained.

In the few cases in which rates fixed have been sustained by the Supreme Court there has been some discussion or reference to specific rates of return. Thus in Stanislaus County v. San Joaquin, etc., Company, decided January, 1904 (see § 739), it was held that a law limiting the return of an irrigation company to 6% was not confiscatory. In Knoxville v. Water Company, decided January 4, 1909 (see § 752) the court found that the company would secure at least a 4% return and, though upholding the rates in question, states, by Justice Moody, "We do not feel called upon to determine whether a demonstrated reduction of income to that point would or would not amount to confiscation." The same day, January 4, 1909,

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

the same court handed down another decision, Willcox v. Consolidated Gas Company (see § 751). Here the opinion is by Justice Peckham and there is considerable discussion as to what constitutes a fair return. He concludes: "Taking all facts into consideration, we concur with the court below on this question, and think complainant is entitled to six per cent. on the fair value of its property devoted to the public use." In Cedar Rapids Gaslight Company v. Cedar Rapids, decided March 11, 1912 (see §759), the Supreme Court affirms the decree of the state court allowing 6% as a fair return. Justice Holmes states that the attitude of the state court has been "fair."

§ 785. Review of attitude of federal and state courts.

In the federal and state courts there are numerous cases in which specific rates of return have been held to be either confiscatory or non-confiscatory or have been held to be the fair rates of return. Up to 1911 there was scarcely any judicial authority for a rate of return higher than 5% or 6%. Among the cases prior to 1911 listed in §§ 731-759, there are only two that fix the rate of return above 6% (see §§ 744, 747). The legal rate of interest, usually 6%, has apparently exerted great influence with the courts in the determination of the fair rate of return. 10 The idea seems to be that so long as the company is permitted to earn the legal rate of interest there can be no question of confiscation.

The decisions of 1911 (see §§ 760-772) indicate that the federal courts are now inclined to allow higher rates of return than formerly. Instead of 5% or 6% the prevailing rates in the 1911 decisions are 7% and even 8%. The higher rates may be partially attributed to the influence and example of the state regulatory commissions.

10 See §§ 738, 743, 746, 747, 756.