lions for its franchises: "Its past value was founded upon the opportunity of obtaining these enormous and excessive returns upon the property of the company, without legislative interference with the price for the supply of gas, but that immunity for the future was, of course, uncertain, and the moment it ceased and the legislature reduced the earnings to a reasonable sum the great value of the franchises would be at once and unfavorably affected.”

§ 1105. Values returned for taxation inconclusive.

1

It is sometimes urged that the valuation placed upon the property of the company for taxation should establish the present value. While it is true that this furnishes some criterion, it certainly is open to show the common fact that assessments on the district in question are usually no more than a certain percentage of actual values. Even its sworn return of tangible property has been held not to estop the company from showing higher value in disputing the reasonableness of legislative rates.2 But such returns are evidence against the company which seeks to establish higher value. Returns made to local bodies for parts of the physical property do not however prevent the company from showing that the value of the property as a whole is greater than the aggregate of these parts.

§ 1106. Tax valuation does not estop the State.

On the other hand the State by assessing a value for taxation does not estop itself from reducing that value by

past has authorized a capitalization which includes some franchise value it cannot later refuse to let the corporation get a fair return on the capitalization thus validated. And so it would be probably where the State has insisted that a certain price should be got for the shares

of the corporation which were issued against all the assets of the corporation franchises included.

1 Southern Pacific Ry. Co. V. Railroad Commrs., 78 Fed. 236 (1896).

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

later regulation of rates. As the United States Supreme Court recently pointed out in the Consolidated Gas case 1 even a franchise tax is a tax on the actual value of the franchise as it exists at any particular time; and the imposition of it is quite consistent with the value of the franchise being subject to diminution by a diminished income as a result of legislation reducing rates.2 The company may be taxed upon its franchise when by reason of the failure of the State to keep its rates down it is earning an extraordinary amount upon its physical value. But when the State choses to so reduce the rates that the company can earn nothing beyond the fair value of its tangible property, it will find that it has little or no franchise value left to tax.

Topic D. Cost of Reproduction as the Basis

1107. The Minnesota rule.

According to the rule adopted in Minnesota the value on which a railroad is entitled to a fair return is the cost of reproducing the road in its present condition at present prices. If extraordinary expenses were necessary in establishing the road, or if higher prices prevailed at the time it was built, these would not enter into consideration at all. The leading case on this point is Steenerson v. Great Northern Railway. The railway commission having fixed grain rates, the railway company appealed, and the question was finally determined in the Supreme Court of Minnesota. In delivering the principal opinion in the case Mr. Justice Canty said: "The railroad may have been

3

1 Willcox v. Consolidated Gas Co., 212 U. S. 19, 53 L. ed. 382, 29 Sup. Ct. 192 (1909).

2 Overruling s. c., 157 Fed. Rep. 849 (1908).

'69 Minn. 353, 72 N. W. 713 (1897).

See also State ex rel. Ry. Comm. v. Minneapolis & St. L. R. R. Co., 80 Minn. 191, 83 N. W. 60, 89 Am. St. Rep. 514 (1900).

constructed years ago, when iron rails cost $85 per ton, and everything else in proportion, or it may have been constructed yesterday, when steel rails cost but $16 per ton, and everything else nearly in proportion. Counsel for the railway company dwell much upon the original cost of the older portions of these lines of road. If a railroad was built 30 years ago at a cost of $40,000 per mile, and another one equally as good was built within a year through the same territory at a cost of $12,000 per mile, on what principle should it be held that the old road is entitled to three and one third times as much income as the new road? No guaranty was ever given by the State to the old road that the price of materials and the cost of construction would not decline, or that capital invested in railroads should not be subject to like vicissitudes as capital invested in other enterprises. Modern improvements and other causes have continued to reduce the cost of construction of all kinds of new plants, and to reduce the value of old plants, or render them wholly worthless, and the State did not guaranty that those causes should not in like manner affect the capital invested in railroads. Then the material question is not what the railroad cost originally, but what it would now cost to reproduce it."

1108. The Federal courts opposed.

The Minnesota rule having been applied by the Texas Railway Commission in fixing railroad rates in that State, the railroads filed in the Federal court a bill for an injunction against the rates. The rule was held to be an improper and unreasonable one, and the exaction of the rates as fixed by the commission was restrained.1 Circuit Judge McCormick said: "It is therefore not only impracticable, Houston & T. C. R. R., 90 Fed. 683 (1898).

1 1 Metropolitan Trust Co.

V.

but impossible to reproduce this road, in any just sense, or according to any fair definition of those terms. And a system of rates and charges that looks to a valuation fixed on so narrow a basis as that shown to have been adopted by the commission, and so fixed as to return only a fair profit upon that valuation, and which permits no account for betterments made necessary by the growth of trade, seems to me to come clearly within the provision of the Fourteenth Amendment to the Constitution of the United States, which forbids that a State shall deprive any person of property without due process of law, or deny any person within its jurisdiction the equal protection of the laws." 1

§ 1109. Explanation of the California decisions.

Two California decisions 2 appear to hold that nothing but the cost of reproduction is to be considered. The cases did not, however, go quite so far. They are well considered and explained by Circuit Judge Morrow in the Federal court in the Ninth Circuit: 3 "Neither of these cases goes to the extent of holding that in determining the value of the property of a corporation neither the capital stock nor bonded indebtedness can be considered. It is doubtless true that in many cases these elements may be excessive or fictitious, and represent speculative, rather than real and substantial, values. But there may be cases where both stock and bonds represent in the market a present actual value in the property of the corporation, and a value that could not be otherwise very well established. In such a case, what objection can there be to

1 Milwaukee Electric Ry. & L. Co. v. Milwaukee, 87 Fed. 577 (1898), goes almost to the same extent.

San Diego Water Co. v. San Diego, 118 Cal. 556, 50 Pac. 633

(1897); Redlands L. & C. D. Water Co. v. Redlands, 121 Cal. 365, 53 Pac. 843 (1898).

3 Spring Valley Waterworks v. San Francisco, 124 Fed. 574 (1903).

giving the evidence such consideration as, under all the circumstances, it deserves? It seems to me there can be none."

§ 1110. Factors disregarded by the reproduction rule.

The essential inadequacy of the reproduction rule has often been remarked. The different factors that should be considered are well set forth in the case of the National Waterworks Company v. Kansas City,1 a suit brought by a water company to enforce the statutory obligation resting upon the city to pay to the company the "fair and equitable value" of the whole works. In answer to the theory that this would be satisfied by finding what the works could be reproduced for, Mr. Justice Brewer said that reproducing the waterworks plant would not be a fair test, because that did not take into account the value which flows from the established connections between the pipes and the buildings of the city. It is obvious that the mere cost of purchasing the land, constructing the buildings, putting in the machinery, and laying the pipes in the streets-in other words, the cost of reproductiondoes not give the present value of the property. A completed system of waterworks, such as the company has, without a single connection between the pipes in the streets and the buildings of the city, would be a property of much less value than that system connected, as it is, with so many buildings, and earning, in consequence thereof, the money which it does earn. On the other hand in the case of Knoxville v. Knoxville Water Company,2 Mr. Justice Moody pointed out that in estimating for regulating purposes the value of a plant the cost of reproduction is not a fair measure of value unless a substantial allowance is made for the actual depreciation which makes

162 Fed. 853, 10 C. C. A. 653 (1894).

2212 U. S. 1, 53 L. ed. 371, 29 Sup. Ct. 148 (1909).