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an old plant of less value than a new one. And this he said in the particular case resulted in putting too high a valuation upon the waterworks. Its present physical value he thought was not more than the cost of reproduction less the actual depreciation.

§ 1111. Abandonment of the investment test impolitic. Emphasis has thus far been laid upon the essential injustice of any reproduction rule to the proprietors of the enterprise in ignoring large elements of value which exist in a going concern. And unless the promoters of an enterprise can rest assured of the fruits of their labor there may not be sufficient inducement to bring about a proper development of public works. It is an unfair rule which would subject investors to great chances of loss without any corresponding chances of gain. But there

is, moreover, the grave danger that in the course of time this rule devised by advocates for the public for the dismay of the companies may be turned upon the public to its own distress. So rapidly does advantageous realty of all sorts increase in value in a growing community that it will soon be seen that to reproduce many public works would cost much more now than the original cost. The few miles of trackage by which the New York Central Railroad enters the city of New York, a strip of land which cost originally comparatively nothing, could not be paralleled to-day for several hundred millions. The land grants stretching on each side of several of the Pacific railroads for thousands of miles could not in many tracts be replaced for many times their original valuation. One may prophesy with confidence that before the century is much older, regret will be felt that a short-sighted

1 See the language in WilkesBarre v. Spring Brook Water Co., 4 Lack. L. News (Pa.) 367 (1899).

See the language in San Diego Water Co. v. San Diego, 118 Cal. 556, 50 Pac. 633 (1897).

public opinion in the last century refused to protect the honest investor in his original investment, as the common law was inclined to do, and made the constitutional test for the regulation of rates that of the value of the property at any particular time.

§ 1112. Two principles still persist.

Finally it must be borne in mind that the problem presented to a court which is asked to set aside an established rate as unconstitutional because it amounts to a confiscation of property, is not precisely the same problem as that presented to a court which is asked to pass upon the fairness of a rate established by a public service company. If a statutory rate takes property, the property affected by it is not the original investment, but the property actually existent and owned by the company. If it is a taking of property to deprive the owner of a fair return upon it, the return must be unfair as income derived from that actual property. In determining whether the return allowed to the railroad is a fair return on their property the property is that actually in use, at its present value. Where, however, the question is whether the company is exacting too great a return on its investment by means of an unfair schedule the question is as to the amount actually and bona fide invested. Justifying legislative rates under the constitution therefore is one thing, and holding that unreasonable charges are not being made as a matter of common law is quite another matter.

CHAPTER XXXIII

RATE OF RETURN

§ 1120. Elements in determining a fair return.

Topic A. Establishment of the Doctrine

§ 1121. Establishment of the power to restrict charges. 1122. Rates fixed must not produce a deficit.

1123. Adequate return must be left.

1124. Reduction leaving reasonable return.

Topic B. Extent to Which Return Is Protected

§ 1125. Reasonableness of return now judicial question. 1126. Fair return generally conceded.

1127. Reasonable rates not necessarily profitable. 1128. Reduction ruinous only to certain companies.

1129. Possibility of increase of business at the lowered rates. 1130. Reasonable profit upon each transaction.

Topic C. Fair Rate of Return

§ 1131. Interest upon bonds protected. 1132. Dividends upon stock protected. 1133. Current rate of return.

1134. Reasonable profits sufficiently safe. 1135. Unreasonable profits not protected. 1136. Business profit now recognized. 1137. Greater profit for better service.

Topic D. Character of the Enterprise

§ 1138. Larger returns in risky enterprises.
1139. Public service has its peculiar risks.
1140. Special hazards of the business considered.
1141. Commercial conditions affecting dividends.

§ 1120. Elements in determining a fair return.

What constitutes a fair rate of return is difficult to determine by general rule as it is dependent upon the

particular case. It depends to a certain extent upon the character of the enterprise; in established businesses a lower rate should be expected than in new ventures. It depends moreover upon the nature of the security; upon bonds a lower rate of interest is to be expected than the usual percentage paid in dividends upon stocks. These are the principal considerations, but as the discussion advances it will be seen that there are other minor matters to be taken into account. It will make some difference, also, in what manner the matter comes before the court for decision. If the question is whether a rate fixed by one engaged in a public service is producing an unreasonably high rate of return, that is one thing. If the question is whether a rate fixed by public authority, either by the Legislature directly or by a commission acting in pursuance of legislative authority, is unreasonably low, that is another matter. It is obvious that there is all the difference of reasonable alternatives between these two aspects of the problem. Eight per cent might not be too much return by a schedule fixed by the company in one case, while a reduction of a schedule by legislation so as not to produce more than six per cent, might not be outrageous in the other.

Topic A. Establishment of the Doctrine

§ 1121. Establishment of the power to restrict charges. The earlier cases under the Fourteenth Amendment simply established that the State might regulate the rates of those engaged in public employment. The attention of the court was directed to showing that the power to regulate existed, and practically nothing was said about the limitations upon that power.1 And indeed the com

1 Where a company has accepted a franchise providing that it shall not charge more than certain rates,

it cannot of course later make the complaint that these rates are inadequate.

plainants did not adduce evidence that the rates fixed by the State were inadequate; they denied altogether that the rates could be regulated at all. The idea of these earlier cases, so far as one can judge from the language used, was that regulation of rates might go to any extent, so long as a deficit was not brought about.1

§ 1122. Rates fixed must not produce a deficit.

As soon as the power to regulate was once established the point was urged that the power had its limitations, and this the court conceded in very guarded language. For example, in the Railroad Commission cases 2 Chief Justice Waite said: "From what has thus been said it is not to be inferred that this power of limitation or regulation is itself without limit. This power to regulate is not a power to destroy, and limitation is not the equivalent of confiscation." As late as the case of Reagan v. Farmers' Loan & Trust Company 3 this requisite was not stated unequivocally. In that case Mr. Justice Brewer said:

United States.-Chesapeake & P. Tel. Co. v. Manning, 186 U. S. 238, 46 L. ed. 1144, 22 S. Ct. 881 (1902).

New York. Condon v. New Rochelle Water Co., 136 App. Div. 897, 120 N. Y. Supp. 1119 (1909).

1 The Federal cases of this period, which held that if there was any net profit left, apparently no matter how small, the legislation was not confiscatory, were: Munn v. Illinois, 94 U. S. 113, 24 L. ed. 72 (1876); Peik v. Chicago & N. W. Ry. Co., 94 U. S. 164, 24 L. ed. 97 (1876); Chicago, B. & Q. Ry. Co. v. Iowa, 94 U. S. 155, 24 L. ed. 94 (1876); Chicago M. & St. P. R. R. Co. v. Ackley, 94 U. S. 179, 24 L. ed. 99 (1876); Tilley v. Savannah, F. & W. R. R. Co., 5 Fed. 641

(1881); Wells v. Oregon Ry. & Nav. Co., 15 Fed. 561 (1883.)

2116 U. S. 307, 29 L. ed. 636 (1886).

3154 U. S. 362, 38 L. ed. 1014, 14 Sup. Ct. 180 (1894).

The Federal cases of this transition period when it was hoped that a profit would normally be left the public service company whose rates had been reduced by legislation were: Dow v. Beidelman, 125 U. S. 680, 31 L. ed. 841, 8 Sup. Ct. 1028 (1888); Chicago & G. T. Ry. v. Wellman, 143 U. S. 339, 36 L. ed. 176, 12 Sup. Ct. 400 (1892); Chicago N. W. R. R. v. Dey, 35 Fed. 866, 1 L. R. A. 744 (1888); Chicago & P. M. & O. R. R. Co. v. Becker, 35 Fed. 883 (1888).

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