Northern Railway Company 1 the court answered the question in the negative, Mr. Justice Canty saying: "If a railway company has made what turns out to be a bad bargain by issuing its bonds for six per cent or seven per cent interest per annum that should be its misfortune and not the misfortune of the public." 2

§ 1132. Dividends upon stock protected.

Within the last ten years, as has been seen, the general principle has become established that there must be left to those who conduct a public enterprise some adequate return on their investment as a whole. This newer view was well put in one sentence in New Memphis Gas Light Company v. New Memphis,3 thus: "The company has a right to such gross revenue from the sale of gas as will enable it to pay all legitimate operating expenses, pay interest on valid fixed charges, so far as bonds or securities represent an expenditure actually made in good faith, and also to pay a reasonable dividend on stock, so far as this represents an actual investment in the enterprise." What then is reasonable dividend? Dividends upon stock at least where there are outstanding bonds ought to be permitted to be somewhat larger than the interest upon the bonds. Since the bonds have a prior lien upon the assets, the risk to the holders of them is much less than to the holders of stock, and the stockholders should therefore have a higher rate of return because of the risk of passing of dividends in bad times or of foreclosure in case of complete failure. This question of reasonable dividend depends chiefly upon the current rate of return.1

169 Minn. 353, 72 N. W. 713 (1897). But see Pennsylvania R. R. Co. v. Philadelphia County, 220 Pa. St. 100, 68 Atl. 676, 15 L. R. A. (N. S.) 108 (1908).

2 See contra, Norwich Gas & E.

Co. v. City of Norwich, 76 Conn. 565, 57 Atl. 746 (1904).

4

372 Fed. 952 (1896).

Among the many cases to this effect, see:

United States.-Cotting v. Kan

§ 1133. Current rate of return.

The current rate of return to capital it is submitted is the true basis of fixing the percentage. This is said in the more discriminating cases which discuss the problem carefully. Some illustrations of the way the court treats the matter now will illustrate this further. In Brymer v. Butler Water Company1 the court said in reviewing the schedule of a water company, that it is entitled to a rate of return, if the property will earn it, not less than the legal rate of interest; a return of something over six per cent was held not unreasonable therefore. Furthermore this court in the still later case of the Pennsylvania Railroad Company v. Philadelphia County 2 frankly said that it regarded its previous suggestion of six per cent as simply fixing a minimum return, not the maximum one at all. Men do not put their money into business enterprises for small interest, as the court well says. In a recent Federal case the court thought that the owners of a railroad should have a profit above the necessary expense of conducting

sas City S. Y. Co., 183 U. S. 79, 46 L. ed. 92, 22 Sup. Ct. 30 (1901); Stanislaus Co. v. San Joaquin & K. R. C. & I. Co., 192 U. S. 201, 48 L. ed. 406, 24 Sup. Ct. 241 (1903); Cleveland Gas Co. v. Cleveland, 71 Fed. 610 (1891); Milwaukee Electric Ry. Co. v. Milwaukee, 87 Fed. 577 (1898); Central Ry. Co. v. Railroad Commission, 161 Fed. 996 (1908); St. Louis & S. F. R. R. Co. v. Hadley, 168 Fed. 317 (1909).

Florida.-State v. Seaboard Air Line, 48 Fla. 152, 37 So. 658 (1904). Iowa.-Cedar Rapids Co. V. Cedar Rapids, 118 Ia. 234, 91 N. W. 1081 (1902).

Maine.-Brunswick & T. W. Dist. v. Maine Water Co., 99 Me. 37 1, 59 Atl. 537 (1904).

Minnesota.-State v. Minneapolis

& St. L. R. R. Co., 80 Minn. 191, 83 N. W. 60, 89 Am. St. Rep. 514 (1900).

Mississippi.-Alabama & V. Ry. v. Railroad Commission, 86 Miss. 667, 38 So. 356 (1905).

Pennsylvania.-Pennsylvania R. R. Co. v. Philadelphia County, 220 Pa. St. 100, 68 Atl. 676, 15 L. R. A. (N. S.) 108 (1908).

West Virginia.-Coal & Coke Co. v. Conley (W. Va.), 67 S. E. 613 (1910).

1179 Pa. St. 231, 36 Atl. 249 (1897).

220 Pa. St. 100, 68 Atl. 676, 15 L. R. A. (N. S.) 108 (1908).

Central R. Co. v. Railroad Commission, 161 Fed. 925 (1908).

such business equal to eight per cent per annum upon the value of the property so employed, that being the legal rate of interest in Alabama on loans of money, and the current rate of profit upon property used in business enterprises similar to railroads. And upon the same general principle another Federal judge held recently that a local Louisiana telephone company which was making seven per cent ought not to be disturbed.1 With these cases in mind one is justified in saying that the current rate of return to capital invested 2 in the community served may confidently be expected.3

§ 1134. Reasonable profits sufficiently safe.

In any normal case the proprietor of a public service may therefore expect a dividend equal to the current rate of return in enterprises of similar character. It should be borne in mind, however, that public services have in general more assured permanence and less danger of ruinous competition than most private businesses. However opinions must necessarily differ as to what would be a reasonable profit in a given case, most courts when asked to declare the action of some legislative body in reducing certain rates to be virtual confiscation will take the attitude that unless the reduction worked is really indefensible the legislative rate will not be disturbed. Thus in a recent Iowa case the court did not consider an ordinance confiscatory which so reduced rates as to leave the company about five per cent on the value of the property which resulted in this case in over six per cent on its outstanding securities. A recent Florida case,5

1 Cumberland Tel. & Tel. Co. v. R. R. Commission, 156 Fed. 823 (1907). 2 Missouri R. & T. R. Co. v. Love, 177 Fed. 493 (1910).

Louisville & N. Ry. Co. v. Brown, 123 Fed. 946 (1903).

Cedar Rapids Water Co. v. Cedar Rapids, 118 Iowa 234, 91 N. W. 1081 (1902).

5 State ex rel. v. Seaboard A. L. R. R. Co., 48 Fla. 129, 37 So. 314 (1904).

where it was held that the court could not say that even three and one-half per cent upon the cost of a system was confiscatory, is to be explained by the fact that the present value might be one-half of the actual cost.

§ 1135. Unreasonable profits not protected.

Generally speaking proof that the net earnings which will be left by the proposed reduction will leave an absurdly low percentage as in one recent case 1 two and onethird per cent is enough to condemn the legislative rate. In one of the latest Federal cases 2 it is said succinctly that the authorities practically establish a six per cent minimum. But in Stanislaus County v. The San Joaquin Company,3 the United States Supreme Court permitted the dividend of an irrigation company not yet developed to be cut to six per cent. On the other hand, in the case of Cotting v. Kansas City Stock Yards Company 1 the court held that legislation cutting the return of the company below six per cent was unconstitutional. Administered in this spirit rate regulation should have no terror to the general investor. Bonds and stocks thus protected will not be brought below par by governmental action; indeed they will sell at a handsome premium.

1136. Business profit now recognized.

4

It should be said in fairness that much more than this six per cent may be earned in many instances, without the profit being unreasonable. Except in the most highly developed communities public service has certain risks even as compared with private business, besides its obvious advantages. They must run whatever the times, and their fate is linked with that of the community.

1 Coal & Coke Ry. Co. v. Conley (W. Va.), 67 S. E. 613 (1910). St. Louis & S. F. R. Co. v. Hadley, 168 Fed. 317, 354 (1909).

192 U. S. 201, 48 L. ed. 406, 24 Sup. Ct. 245 (1903).

183 U. S. 79, 46 L. ed. 92, 22 Sup. Ct. 30 (1901).

They are engaged in a business with the ordinary incidents of a business, with some of the hopes and hazards of a business. It is plain, for example, that the rates at which investors will lend their money to governmental bodies furnishes little criterion of the return that will be required to induce them to invest in the various securities of the public service companies.2 The whole problem of rate regulation has been seen more steadily of late. It has been appreciated that in dealing with a public service company the State is really dealing with a private business concern, however many the obligations may be which it owes to the public. The risks they run are such that their financial management should be left to them unless they be shown to be taking profit with outrageous disregard of their public obligation. With these broader views it would not be surprising if some consideration should be given to the entrepreneur. And to some extent the ability to conceive and execute new projects or a comprehensive consolidation deserve a return.

§ 1137. Greater profit for better service.

Reference might here be made to some recent theories, already resulting in some legislation dealing with the rate of return. The best of these proposals at present is for a sliding scale, the rate of dividend being permitted to increase as the price of the product to the public decreases. The advantages to the public of such a deal are obvious; but it has hidden disadvantages. There will be a spur to intensive improvement, to cheapen the product, certainly; but a deterent to extensive work, to extend the

1 Brunswick & T. Water Dist. v. Maine Water Co., 99 Me. 371, 59 Atl. 537 (1904).

2 Spring Valley Waterworks v. San Francisco, 124 Fed. 574 (1903). 'Pennsylvania R. R. Co. v. Phila

delphia County, 220 Pa. St. 100, 68 Atl. 676, 15 L. R. A. (N. S.) 108 (1908).

• Metropolitan Trust Co. v. Houston & T. C. R. R. Co., 90 Fed. 683 (1898).