1894 this system of roads had produced some very large amounts of income, sufficient to make extraordinary improvements and betterments in the road, as well as ordinary repairs, to pay large dividends, and accumulate a cash surplus which in 1894 amounted to about $3,500,000. Besides, the Minnesota Eastern Railway Company, which is owned and controlled by the Great Northern Railway Company, had at that time a cash surplus of $1,000,000. The managers of railroads have no right to play with the public the game of heads we win, tails you lose.' When times are prosperous and dividends large, we win. When times are hard and business dull, the public must lose." " 10 § 398. Recoupment in prosperous times. It is desirable that there should be as few fluctuations as possible in the rates of public service companies, and in particular in the rates of the common carrier. At the same time the business of the carrier cannot but be affected by the state of commerce in the country at large. And if the carrier must suffer to a certain extent with others in bad times he ought be allowed to recoup himself to some extent in prosperous times. This is hinted in Metropolitan Trust Company v. Houston and Texas Central Railroad Company, where Mr. Justice McCormick, in holding that the commission ought not to have reduced the rates of the railroad in the way that they did, said: "Promoters and proprietors of roads have looked to the future, as they had a right to do, and as they were induced to do by the solicitation of the various communities through which they run, and by various encouragements offered by the state." 12 10 The same idea is expressed in Matthews v. Board of Corp. Commrs., 106 Fed. 7 (1901). 11 90 Fed. 683, B. & W. 342 (1898). 12 See, also, Brunswick & T. W. Water Dist. v. Maine Water Co., 99 Me. 371, 59 Atl. 537 (1904). § 399. No right to raise rates in prosperous times. In prosperous times business all over the country increases and consequently the amount of traffic carried by the railways increases. Since in the railroad business the law of increasing returns because of decreasing costs has surprising scope, this increase of traffic will produce greater profits at the rates formerly established. To a certain extent the carrier may enjoy these increased profits in prosperous times without the obligation to reduce rates, but the carrier may not increase rates because in prosperous times the shippers can afford to pay more. This contention was well handled by the Interstate Commerce Commission in one case. 13 "The test of the reasonableness of a rate is not the amount of the profit in the business of a shipper or manufacturer, but whether the rate yields a reasonable compensation for the services rendered. If the prosperity of the manufacturer is to have a controlling influence, this would justify a higher rate on the traffic of the prosperous manufacturer than on that of one less prosperous. The right to participate in the prosperity of a shipper by raising rates is simply a license to the carrier to appropriate that prosperity, or in other words, to transfer the shipper's legitimate profit in his business from the shipper to the carrier.” 14 § 400. Creating a fund for payment of uniform dividends. A further suggestion has been made, which deserves consideration, that a railroad company, or any public service company, ought to be allowed to set aside in prosperous times a reasonable amount as a surplus out of which it may maintain its dividend 13 Central Yellow Pine Asso. v. Illinois C. R. R., 10 I. C. C. Rep. 505 (1905). 14 In Tift v. Southern Ry., 10 I. C. C. Rep. 548 (1905), the commission said: "The carriers necessarily and justly participate in the increased prosperity of their patrons in the resultant enlargement of their own business." in less fortunate years. It is the practice of the strongest and best managed railroads and public service companies so to arrange matters by this process that they may always maintain their uniform dividend. This practice has the sanction of the Interstate Commerce Comission,15 as the following will show: "But it may be urged that after paying its fixed charges, taxes and dividend out of its net income for the year 1902, it had left but a comparatively small amount. That year was one of prosperity, and it can hardly be expected that conditions will continue without interruption as favorable. Ought not a railway to be allowed to accumulate, in some form, a surplus during fat years which may tide over subsequent lean years? To this we would unhesitatingly answer in the affirmative. In times like the present a railroad company should be allowed to earn something more than a merely fair return upon the investment; but we also think that it clearly appears that the Michigan Central is doing this." TOPIC DRATE OF RETURN DEPENDENT UPON THE CHARACTER OF THE ENTERPRISE. § 401. Larger returns in risky enterprises. It follows from what has just been said that in a risky enterprise a large return may be demanded. The principle that as large a return is permissible as is obtained in businesses of similar character covers the case. And the policy to induce people to undertake such services for the benefit of the public requires a larger return for a more risky enterprise. 1 In Brunswick Water District v. Maine Water Company 1 Mr. Justice Savage made the point very clearly indeed: "Those who engage in a public service cannot be put upon quite the same level as those who make mere investments. They are not like the depositors in a savings bank, whose right to draw out is lim 15 Re Advances in Freight Rates, 9 I. C. C. Rep. 382 (1903). 199 Me. 371, 59 Atl. 537 (1904). ited to precisely what they have put in, with its earnings. They are, on the contrary, engaged in a business, with the ordinary incidents of a business, with some of the hazards and the hopes of a business. To be successful, they must be wise and prudent, thrifty and energetic. These virtues, if they have them, they impress upon the property, making it more valuable than it otherwise would have been. Is it to be said that they can have no return for skill and good management? We do not think so. They are entitled to charge reasonable rates. Reasonable' is a relative term, and what is reasonable depends upon many varying circumstances. An equivalent to the prevailing rate of interest might be a reasonable return, and it might not. It might be too high or it might be too low. It might be reasonable, owing to peculiar hazards or difficulties in one place to receive greater returns there than it would in another upon the same investment."2 6 2 The following cases mention the character of the enterprise as a factor in determining the rate of return: UNITED STATES SUPREME COURT: Cotting v. Kansas City S. Y. Co., 183 U. S. 79, 46 L. Ed. 92, 22 Sup. Ct. 30, B. & W. 316 (1901), reversing 82 Fed. 850 (1897); Stanislaus Co. v. San Joaquin C. & I. Co., 192 U. S. 201, 48 L. Ed. 406, 24 Sup. Ct. 241 (1903), reversing s. c. 113 Fed. 930. FEDERAL COURTS: Cleveland Gas Light Co. v. Cleveland, 71 Fed. 610 (1891); Milwaukee Elec. Ry. Co. v. Milwaukee, 87 Fed. 577, B. & W. 336 (1898); Metropolitan Trust Co. v. Houston & T. C. R. R., 90 Fed. 683, B. & W. 342 (1898); Louisville & N. Ry. v. Brown, 123 Fed. 946 (1903); Palatka Water Works v. Palatka, 127 Fed. 161 (1903). STATE COURTS: Kentucky-Troutman v. Smith, 105 Ky. 231, 48 S. W. 1684 (1899). Maine Kennebec Water Dist. v. Waterville, 97 Me. 105, 54 Atl. 6, 60 L. R. A. 856 (1902); Brunswick & T. W. Dist. v. Maine Water Co., 99 Me. 371, 59 Atl. 537 (1904). Minnesota-Steenerson v. Great No. Ry., 69 Minn. 353, 72 N. W. 713, B. & W. 333 (1897). Pennsylvania--Wilkes-Barre v. Spring Brook Water Co., 4 Lack. Leg. News (Pa.), 367 (1899). $402. Hazards of the business considered. The hazards of the business are therefore to be considered in determining what is a reasonable rate of return in the particular enterprise in question. 3 An excellent example of this problem is to be found in the case of Canada Southern Railway v. International Bridge Company. It was shown in that case that the bridge company at its established charges was earning something like fifteen per cent. upon its investment. The opinion of Lord Chancellor Selbourne alluded to the peculiar risks of the enterprise rather by way of dictum than as the basis of his decision. He said: "It seems to their Lordships that it would be a very extraordinary thing indeed, unless the legislature had expressly said so, to hold that the persons using the bridge could claim a right to take the whole accounts of the company, to dissect their capital account, and to dissect their income account, to allow this item and disallow that, and, after manipulating the accounts in their own way, to ask a court to say that the persons who have projected such an undertaking as this, who have encountered all the original risks of executing it, who are still subject to the risks which from natural and other causes every such undertaking is subject to, and who may possibly, as in the case alluded to by the learned judge in the court below, the case of the Tay Bridge, have the whole thing swept away in a moment, are to be regarded as making unreasonable charges, not because it is otherwise than fair for the railway company using the bridge to pay those charges, but because the bridge company gets a dividend which is alleged to amount, at the utmost, to fifteen per cent. Their Lordships can hardly characterize that argument as anything less than preposterous." So in Troutman v. Smith, where proceedings were instituted to compel a ferry to reduce its rates, Mr. Justice Burnam in de 3 L. R. 8 A. C. 723, B. & W. 315 (1883). 4 105 Ky. 231, 48 S. W. 1084 (1899). |