erty and the service performed, nor in the case of these companies, between their capital stock and just earnings." Increased cost of labor and equipment makes the cost of service higher, but this is generally offset by increased efficiency. This question is interestingly discussed and valuable tables given in the case of Re Class and Commodity Rates from St. Louis to Texas Common Points, 11 I. C. C. 238, et seq., and in Sec. 47 supra, other cases are cited and discussed. The Transportation Act, 1920, Section 15a, paragraphs 3 to 6 prescribe for "carriers as a whole or as a whole" in each rate" group a standard of 5 per centum as a minimum which shall constitute until March 1, 1922 a fair return on the "aggregate property value." The Commission may after March 1, 1922 change this percentage. § 84. Same Subject. Difficulties in Determining the Question. It is easy to state the fundamental rule announced in Smyth v. Ames, supra, that the fair value of the property used for the public convenience shall be taken as a basis for determining the reasonableness of a schedule of rates, but the difficulty arises in determining what is a "fair value”— Who is to fix this value? What fact must of necessity be considered in arriving at this determination? 34 Primarily the rate-making body must determine what the fair value is, and such determination has a force which the courts must regard. In the Minnesota Rate cases, the Supreme Court said: "The rate-making power is a legislative power, and necessarily implies a range of legislative discretion. We do not sit as a board of revision to substitute our judgment for that of the Legislature, or of the commission, lawfully constituted by it, as to matters within the province of either." While this is true, neither a legislature nor a commission can confiscate the property of a public utility company, and the courts must therefore determine, when properly applied to, whether or not a particular rate or schedule of rates violates the constitutional rights of the carrier or other person or corporation engaged in a public 34. Simpson v. Shepard, 230 U. S. 352, 433, 434, 57 L. Ed. 1511, 33 Sup. Ct. 729, citing San Diego Land & Town Co. v. Jasper, 189 U. service, whose rates have been prescribed by the legislature, or under its authority. Congress has empowered the Interstate Commerce Commission to make a physical valuation of railroads, but to do this will require years and even when it is done the question will not be entirely settled. In the Minnesota Rate cases, supra much testimony was taken as to value, relative cost, expenses, etc., but the Supreme Court rejected the proof as not adequate-the Court did however announce certain general and fundamental principles. It was there held that (1) the basis of the calculation is the fair value of the property, used for the convenience of the public; (2) that such value was not to be determined by arbitrary rules, but cost of construction of improvements, the market value of stock and bonds, the present as compared with the original cost of construction the probable earning capacity under the rates prescribed must be considered. And after quoting from Smyth v. Ames the Court concluded "We do not say there may not be other matters to be regarded in determining the value of the property." And when a carrier is engaged in both interstate and intrastate transportation, and a rate is prescribed for intrastate movements the court announced a third principle as follows: The question "must be determined by considering separately the value of the property employed in the intrastate business, and the compensation allowed in the business under the rule prescribed." In the Indiana case" further emphasis was given to the fact that prescribing rates was a legislative function, and when rates are so prescribed by a lawfully authorized tribunal the carriers seeking to set them aside must make definite and satisfactory proof. In the 1910 Western Rate Advance case it was contended upon the part of one of the carriers that "it is immaterial how the property was acquired, what it originally cost, whether the present value may be claimed to be in part the result of earnings put back into the property in betterments or is due to growth of traffic and development of the country serv 35. Wood v. Vandalia R. Co., 231 U. S. 1, 58 L. Ed. 97, 34 Sup. Ct. 7. ed." " This contention was denied by the Commission, Mr. Commissioner Lane saying: "Notwithstanding these decisions, it remains for the Supreme Court yet to decide that a public agency, such as a railroad created by public authority, vested with governmental authority, may continuously increase its rates in proportion to its value, either (1) because of betterments it has made out of income, or (2) because of the growth of the property in value due to the increase in the value of the land which the company owns." This answer is fully supported by the subsequent decision of the Supreme Court in the Minnesota Rate Cases and other like state rate cases decided about the same time." This principle must not, however, be given too broad an application. Construed in the light of the decisions cited it does not deny a carrier returns on investments merely because such investments may have been made from earnings or may have resulted from an increase in the value of the original investment, but the principle would prevent charging unreasonable rates even though such rates were necessary to earn a fair return on the investment. § 85. Cost of Service. The value of the equipment of a common carrier, is an element in determining what it costs to transport any particular commodity, and what such cost is, that is the "cost of service," is a fact that is properly considered in determining what is a reasonable and just rate to 36. Advances in Rates, Western Case, 20 I. C. C. 307, 339. In support of this claim these cases were cited: Ames v. Union Pac. Ry. Co., 64 Fed. 165; Reagan v. Farmers Loan & Trust Co., 154 U. S. 362, 38 L. Ed. 1014, 14 Sup. Ct. 1047; Missouri, K. & T. Ry. Co. v. Love, 177 Fed. 493; Kennebec Water Co. v. Waterville, 97 Me. 185, 54 Atl. 6; National Water Works Co. v. Kansas City, 62 Fed. 853; Metropolitan Trust Co. v. Houston & T. C. R. Co., 90 Fed. 683; San Diego Land & Town Co. v. National City, 74 Fed. 79; Matthews v. Board of Commissioners, 106 Fed. 9. 37. Simpson v. Shepard-Minnesota Rates Cases-230 U. S. 352, 57 L. Ed. 1511, 33 Sup. Ct. 729; Knott v. Chicago, B. & Q. R. Co.-Missouri Rate Cases-230 U. S. 474, 57 L. Ed. 1571, 33 Sup. Ct. 975; Chesapeake & O. R. Co. V. Conley-West Virginia Rate Cases-220 U. S. 513, 57 L. Ed. 1597, 33 Sup. Ct. 985; Southern Pac. Co. v. Campbell, 230 U. S. 537, 57 L. Ed. 1610, 33 Sup. Ct. 38 be charged. This item will be seen referred to by the Interstate Commerce Commission frequently in its opinions determining whether or not the rates under discussion are or are not reasonable. The Supreme Court, speaking of the commission, said: "The tribunal may and should consider the legitimate interests as well of the carrying companies as of the traders and shippers."' 3 In considering a proposed advance in freight rates," Mr. Commissioner Prouty first considers the question "is the rate reasonable, estimated by the cost and value of the service?" In another case," Mr. Commissioner Clements said: "The test of the reasonableness of a rate is not the amount of the profit in the business of the shipper or manufacturer, but whether the rate yielās a reasonable compensation for the services rendered." Cost of service, however, cannot be made an absolute guide in fixing rates. District Judge Bethea" well says: "The cost of service to a carrier would be an ideal theory, but it is not practicable. Such cost can be reached approximately, but not accurately enough to make this factor controlling. It is worthy of consideration, however." Judge Clements expressed the rule of the commission as follows:"3 1027; Oregon R. & Nav. Co. v. Campbell-Oregon Rate Cases230 U. S. 525, 537, 57 L. Ed. 1604, 33 Sup. Ct. 1026; Allen v. St. Louis, I. M. & S. Ry. Co.-Arkansas Rate Cases-230 U. S. 553, 57 L. Ed. 1625, 33 Sup. Ct. 1030; Wood v. Vandalia R. Co.-Indiana Rate Case-231 U. S. 1, 58 L. Ed. 97, 34 Sup. Ct. 7; Louisville & N. R. Co. v. Garrett-Kentucky Rate Case 231 U. S. 298, 58 L. Ed. 229, 34 Sup. Ct. 48. See also Sec. 46 Supra and notes 45, 54 and 55 this chapter. 38. Re Alleged Excessive Rates on Food Products, 4 I. C. C. 48, 3 I. C. R. 93; Schumacher Milling Co. v. Chicago, R. I. & P. Ry. Co., 6 I. C. C. 61, 4 I. C. R. 373; Re Proposed Advances in Freight Rates, 9 I. C. C. 382; Int. Com. Com. v. Chicago G. W. Ry. Co., 141 Fed. 1003, 1015. Separation of Operating Expenses, 30 I. C. C. 676, 678; Coal Rates from Virginia, 30 I. C. C. 635, 646; and cases cited. 9. Tex. & Pac Ry. Co. v. Int. Com. Com. 162 U. S. 197, 40 L. Ed. 940, 16 Sup. Ct. 666, 5 I. C. R. 405. in 40. Re Proposed Advance Freight Rates, 9 I. C. C. 382. 41. Central Yellow Pine Asso. v. Ill. Cent. R. Co., 10 I. C. C. 505. 42. Int. Com. Com. v. Chicago Great W. R. Co., 141 Fed. 1003, 1015, and cases cited. Affirmed, same style case. 209 U. S. 108, 52 L. Ed. 705, 28 Sup. Ct. 493. 43. Cannon v. Mobile & O. R. Co., 11 I. C. C. 537, 542. "While in the relative adjustment of rates as between places on its line a carrier cannot rightfully ignore the relative cost to it of the respective services rendered by it, and since it ordinarily costs more to haul feight a longer distance than a shorter one, the carrier cannot rightfully ignore substantial differences in distance where all other circumstances and conditions are equal, or substantially similar. There are other matters of equal importance to that of cost of the service and often more controlling which must also be considered. Among these is competition both of carriers and of markets. The greater the inequality or dissimilarity in other potent circumstances or conditions the less controlling becomes the matter of relative cost.” In determining the cost of service Mr. Commissioner Clements said: "Expenditures for additions to construction and equipment should be reimbursed by all the traffic they accommodate during the period of their duration, and improvements that will last many years should not be charged against the revenue of a single year.""* The principle, however, must be applied in connection with the holding in the Knoxville Water Co. case," that earnings should be sufficient to pay a reasonable return on the property employed in the public service and provide against depreciation. "Cost of service, could not, in any event require an unreasonable rate. and, under some circumstances, a carrier may be compelled to perform a particular service to the public at an actual loss. The Transportation Act of 1920 prescribes as something to be accomplished a definite return for the use of capital. Here the Congress has said that all the cost of service shall be paid by all the shippers, and that included in this cost there must be a definite return to the investor. Elsewhere in the 1920 Act are repeated provisions of the original Act requiring that all charges must be reasonable. The Congress has now made one factor, "fair return" on capital invested, an essential part of a reasonable rate, practically 44. Central Yellow Pine Assn. v. Ill. Cent. R. Co., 10 I. C. C. 505; Ill. Cent. R. Co. v. Int. Com. Com., 206 U. S. 441, 461, 51 L. Ed. 1128, 1136, 27 Sup. Ct. 700. 45. Knoxville V. Knoxville Water Co., 212 U. S. 1, 53 L. Ed. 371, 20 Sup. Ct. 148. |