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service, accompanies this. There is danger to the public that the product will be cheapened to its detriment, and to the stockholders that proper depreciation accounting will be abandoned. It seems therefore a policy to be reserved for adoption in particular cases of special bargaining. And this is a matter to be thought out carefully before action is taken in a particular case. Some better method of profit sharing with increased returns for the corporations and better service for the communities may be thought out which will spur the company not only to greater output, but to wider extensions, not only to larger dividends, but to better maintenance.

Topic D. Character of the Enterprise

§ 1138. 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. In Brunswick Water District v. Maine Water Company Mr. Justice Savage made the point very clearly indeed: ""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

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

"The following cases mention the character of the enterprise as a

factor in determining the rate of return:

United States.-Cotting v. Kansas City S. Y. Co., 183 U. S. 79, 46 L. ed. 92, 22 Sup. Ct. 30 (1901);

§ 1139. Public service has its peculiar risks.

Just what rate of interest a public service company should be allowed to pay upon its securities is difficult to determine by rule, since the circumstances will be different in different cases. Whatever it is obliged to pay to sell its bonds at par if the negotiations for the issue are conducted with good faith would be the test. And that would depend upon the stability of the business to the mind of the lenders. Public service bonds are sold on the exchanges from as low as a three per cent basis to as high as a sixteen per cent basis, and doubtless will always continue to do so. Enterprise and industrial progress would be at a standstill if the rate was kept down to that on government bonds. It must be remembered that those who embark in public services place their property to a great extent in the hands of the public. They must be always ready to supply the public demand, and must take the risk of any falling off in that demand. They cannot convert their property to any other use, however unprofitable the public use may have become. They must

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 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 & Texas Cent. R. R. Co., 90 Fed. 683 (1898); Louisville & N. Ry. v. Brown, 123 Fed. 946 (1903); Palatka Waterworks v. Palatka, 127 Fed. 161 (1903); Missouri K. & T. Ry. Co. v. Love, 177 Fed. 493 (1910).

Kentucky.-Troutman v. Smith, 105 Ky. 231, 48 S. W. 1084 (1899). Maine.-Kennebec Water Dist. v. Waterville, 97 Me. 185, 54 Atl. 6, 60 L. R. A. 856 (1902).

Minnesota.-Steenerson v. Great No. Ry. 69 Minn. 353, 72 N. W. 713 (1897).

V.

Pennsylvania.-Wilkes-Barre Spring Brook Water Co., 4 Lack. Leg. News, 367 (1898).

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

This is in part paraphrased from Wilkes-Barre v. Spring Brook Water Co., 4 Lack. Leg. News, 367 (1898).

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

2 Long Branch Comm. v. Tintern Manor Water Co., 70 N. J. Eq. 71, 62 Atl. 474 (1905).

run in good times and bad with substantially the same expense. If they lose in bad times they cannot recoup themselves by extraordinary profits in good times. These risks exist to some extent in all communities but they are greater in some than in others.

§ 1140. Special 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. 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, on this point: "You cannot 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." 2

See also Kennebec Water Dist. v. Waterville, 97 Me. 185, 54 Atl. 6,60 L. R. A. 856 (1902).

1 L. R. 8 App. Cas. 723 (1883).

2 To the same effect is Troutman v. Smith, 105 Ky, 231, 48 S. W.

§ 1141. Commercial conditions affecting dividends.

To a certain extent the dividends which a railroad company can earn are dependent upon commercial conditions generally. When crops fail or when commercial crises come the general business of the common carrier inevitably falls off. Even if it should raise its rates very considerably it would be difficult for it to maintain its regular dividends and it is doubtful whether it ought to do so and increase thereby the general distress. This may be pressed too far, and perhaps the point is overstated in Steenerson v. Great Northern Railway,' where Mr. Justice Canty insists that a railroad cannot say-When times are prosperous and dividends large, we win, when times are hard and business dull, the public must lose. The business of the carrier cannot but be affected by the State of commerce in the country at large. It is perhaps true that with good times and rising prices the value of the property of a public service company increases with other values and consequently it may justify higher earnings. 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 encourage

1084, (1899) allowing a ferryman a large profit on the capital invested because of the notorious hazards of the business.

169 Minn. 353, 72 N. W. 713 (1897).

The same idea is expressed in Matthews V. Board of Corp. Commrs., 106 Fed. 7 (1901).

2 90 Fed. 683 (1898).

See also Missouri, K. & T. R. R. Co. v. Love, 177 Fed. 493 (1910).

ments offered by the State." It may be that in good times small amounts may be set aside to maintain uniform dividends. For it is certainly desirable that there should be as few fluctuations as possible in the conduct of the finances of a public service company. And if commercial conditions are such that a four per cent bond may be sold at eighty-five, to better advantage than a five per cent bond at par, the writer sees little objection to accommodating the financing of the company to the times.

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