A witness for the protestants advanced the theory that the trend of the return upon investment should be considered only after a deduction had been made from the property investment of each year to the extent that the investment represents improvements made out of the surplus earnings of the previous year remaining after the payment of a reasonable return upon the investment of that year. It is conceivable that if provision were made for averaging years of prosperity and of depression that such an arrangement if adopted for the future might be equitable alike to the investor and the public, although insurmountable practical difficulties might be involved. But as no such rule has been announced in the past, it seems impossible to distinguish one dollar of investment from another in the present case. RETURNS ON BOOK COST OF PROPERTY. The unverifiable character of cost of property standing on the books of the carriers when the Commission's accounting rules were prescribed in 1907 has already been referred to. Subsequent outlay for specific additions and betterments as reported annually by the carriers may, in general, be accepted as more accurate. The aggregate figure of book cost of property, which corresponds to the original entry with subsequent annual additions, is one in which the unverifiable clement decreases progressively in proportion to the total book cost. For the 41 roads in Wettling's exhibit the net cost of road and equipment in 1901 was 3.005 billions; for 1907, 3.842 billions; and for 1914, 5.078 billions. This showing, however, exaggerates the relative magnitude of that part of the total addition since 1907 that can be assumed to represent a trustworthy addition to the carriers' investment. Of the total outlay of $1,235,976,642 from July 1, 1907, to July 1, 1914, for road and equipment, $496,287,178 was expended for new lines and extensions. The Commission has no data to indicate how far this latter amount was a fair price for the roads acquired. As is shown by Table No. 41 printed in the appendix, the total book value of road and equipment between 1907 and 1914 increased between 24 and 29 per cent. When deduction is made, however, for cost of new lines and extensions, or when mileage is taken into account, the increase falls to between 14 and 17 per cent. This indicates that for the period something over 2 per cent per annum fairly represents the proportion of additions and betterments to the cost of the preexisting road and equipment. The figures for the other items of additions and betterments on these 41 railroads, including $306,181,596 for equipment, $68,685,430 for additional main tracks, $33,357,334 for ballast, $33,959,369 for right of way and station grounds, $32,112,924 for sidings and spur tracks, $30,211,248 for station buildings and fixtures, and $30,130,622 for bridges, trestles, and culverts, amounting in all to $739,689,463, representing a new capital outlay may be taken to be presumably accurate. Subject, as book cost of property is, to the limitations indicated, the basis of book cost, in default of the completion of the official valuation, may be employed, as it has been in the past, as a usable basis for a study of the course and tendency of the returns. Table No. 12 is the showing made by the carriers for the 41 roads covered by Wettling's exhibit. TABLE 12.-Net cost of road and equipment and operating income (minus rents for lease of road): 1901-1914. The operating income less rentals shows a maximum return upon the cost of road and equipment in the fiscal year 1907. The general level for the six preceding years is higher than for the subsequent period. Roughly speaking, for the 41 roads as a whole, the level for the period 1901-1907 was approximately 5 per cent; and for the subsequent period of 1907-1914 about 41 per cent. The table next printed, No. 13, affords comparison of the protestants' evidence as to rate of return with that of the carriers'. In this table the ratio of net operating income to property investment shows a decline in both sections. There are here included the Union Pacific, the Northern Pacific, and the Great Northern. 35 I. C. C. TABLE 13.-Ratio of net operating income (after deduction of taxes, hire of equipment, joint facility, and miscellaneous rents) to property investment: 1901–1914. 1 Chicago & North Western; Chicago, St. Paul, Minneapolis & Omaha; Chicago, Burlington & Quincy; Chicago, Milwaukee & St. Paul; Chicago Great Western; Iowa Central; Great Northern; Minneapolis & St. Louis; Northern Pacific; Minneapolis, St. Paul & Sault Ste. Marie; Union Pacific. Atchison, Topeka & Santa Fe; Chicago, Rock Island & Pacific; Fort Smith & Western; Galveston, Houston & Henderson; Kansas City, Mexico & Orient; Kansas City Southern; Midland Valley; Missouri, Kansas & Texas; Missouri & North Arkansas; Missouri, Oklahoma & Gulf; Missouri Pacific; St. Louis, Iron Mountain & Southern; St. Louis Southwestern; St. Louis Southwestern of Texas; Morgan's Loui siana & Texas; St. Louis & San Francisco; Texas & Pacific; Trinity & Brazos Valley. As illustrating the showing of the two next preceding tables we insert Chart C. CHART C.-Ratio of operating income less rental to net cost of road and equipment. A, 41 roads; B, western roads; C, southwestern roads (A, B, C, railroad witness); D, northwestern roads; E, southwestern roads (D, E, protestant witness). Data from Tables 12 and 13. E 3 From data submitted by the protestants a showing comparable to that exhibited in Tables Nos. 11 and 12 is presented. The subjoined table, No. 14, is a tabular statement of the ratio of net operating revenue to net cost of road and equipment of each of 10 selected roads from an exhibit by protestants' witness, Powell. While no composite average ratio is presented, the general fall in the rate of return is evident from inspection; even the stronger roads, with the exception of the Burlington, show a decline. TABLE 14.-Ratio of net operating income to net cost of road and equipment, 10 selected roads: 1901-1914.1 1901. 1902. 1903. 3.12 1904. 3.52 1905. 3.71 1906. 3.14 1907. 1908. 1909. 1910. 1911. 1912. 1913.. 1914. P. ct. P. ct. P. ct. P. ct. P. ct. P. ct. P. ct. P. ct. P. ct. P. ct. 4.28 1 Net operating income is operating income after deduction of hire of equipment and joint facility and miscellaneous rents but not rentals for lease of road. 2 Deficit Whatever infirmity attaches to the ratio of return indicated by these tables, which are based upon book cost containing a large unverified element, the trend which the exhibits indicate is significant. While not bearing directly on the matter of the return upon book cost of property, the distribution of each dollar of revenue as between labor and the investors during the period 1901-1914 has been shown by the carriers and checked for three of the principal roads by the Commission. The labor compensation embraces not only the amount paid for labor required in operation, but also the companies' pay roll for labor employed in the construction of additions and betterments. 35 I. C. C. TABLE 15.-Returns to labor and capital compared: 1901-1914. 1 Labor compensation includes that of general officers. 2 Excludes compensation of general officers. Represents net income (or net corporate income) increased by interest on funded and floating debts and net rents for lease of road. In this year $9,276,185 was charged to income as "improvements written off." TESTIMONY UPON THE VALUE OF THE CARRIERS' PROPERTY. Various estimates of the true value of the carriers' property or parts thereof are to be found in the testimony of both the carriers and the protestants. This testimony as to value comprised that offered by the executive heads of several roads, by an engineer of one of the state commissions, and certain valuations made by some of the state commissions. The carriers, however, expressly disclaimed basing their plea for increases upon any valuation presented. The president of the Missouri, Kansas & Texas testified that a careful physical valuation made during the last two years by this carrier of its lines of railway in Oklahoma shows that on the average they could not be reproduced for less than $60,000 a mile.. The method employed in this valuation is not sufficiently evidenced of record to accord to this figure further consideration. The president of the Chicago Great Western called attention to tables in Wettling's exhibit purporting to show that on the average the carriers directly interested in this proceeding had earned for the past seven years 7 per cent on a valuation of $29,219 per mile, which he testified was far below the cost of reproduction. He also testified that in 1911 he had a valuation made of the lines of the Chicago Great Western in Iowa, and that it averaged $61,935 per mile of main line. It is enough to say that the method of valu |