Business conditions, the necessity for a rate lower than the one under which the traffic moves, its low value in comparison with its weight, and other considerations, make it proper that some traffic shall bear less than its equal proportion of the cost of service. Sometimes, were a particular traffic charged with its full proportion of the cost of service, it would not move at all. The public welfare demands that such traffic shall move; the carrier loses nothing in conceding a low rate to such traffic, if the rate exceeds, by something more than a nominal amount, the actual cost. The carrier's equipment must be maintained, and the general expenses must go on, even though the traffic does not move. These considerations underlie the statement of the Commerce Court:492 That relative freight rates have not been based upon the fair, proportionate cost or value of the service alone or in combination, is demonstrated by the entire history of freight classification. The carrier cannot complain of a violation of its constitutional rights if, not to favor some person or class, but for the general welfare, it is compelled to make a rate for some particular service which, though in excess of the out-of-pocket expense, would nevertheless be confiscatory, if it were applied to all its freight; that is, the carrier has no constitutional right to a rate for each distinct kind of service which will equal its proportionate share of the entire operating expense.

The language quoted from the opinion of the Commerce. Court is susceptible of misconstruction, and it is not without significance that no similar statement appears in the affirming opinion of the Supreme Court. Limiting the language of the Commerce Court, as it was probably intended to be limited, to the meaning that an equal percentage over actual cost need not be fixed for the transportation of all commodities,

492 Atchison, T. & S. F. Ry. Co. v. United States, 203 Fed. 56, 59; Commerce Court Opinion No. 61, 537. Lemon Rate Case; affirmed by the Supreme Court Atchison, T. & S. F. Ry. Co. v. United States, 231 U. S. 736. The statement of the Commerce Court quoted in the text was fortified by citing: Minneapolis St. L. R. Co.

v. Minnesota, 186 U. S. 257, 46 L. Ed. 1151, 22 Sup. Ct. 900; St. L. & S. F. R. Co. v. Gill, 156 U. S. 649, 39 L. Ed. 567, 15 Sup. Ct. 484; Atlantic C. L. R. Co. v. North Carolina Corp. Com., 206 U. S. 1, 51 L. Ed. 933, 27 Sup. Ct. 585, 11 Ann. Cas. 398. To the same effect see Texas & P. Ry. Co. v. R. R. Com. of La., 192 Fed. 280, 112 C. C. A. 528.

the statement is a correct rule of law. That the rule must be limited as stated above, follows from the decision of the Supreme Court annulling rates on coal prescribed under the laws of North Dakota.493 Those state rates, paying no more than the actual cost to the carrier, were prescribed for the avowed purpose of enforcing a "public policy." The state presented the argument "that the rate was imposed to aid in the development of a local industry." Answering this contention, Mr. Justice Hughes, delivering the opinion of the court, said:

"While local interests serve as a motive for enforcing reasonable rates, it would be a very different matter to say that the state may compel the carrier to maintain a rate upon a particular commodity that is less than reasonable, or-as might equally well be asserted-to carry gratuitously, in order to build up a local enterprise. That would be to go outside the carrier's undertaking, and outside the field of reasonable supervision of the conduct of its business, and would be equivalent to an appropriation of the property to public uses upon terms to which the carrier had in no way agreed." The learned Justice, that there should be no misunderstanding of the rule, expressly referred to the principle that classification of commodities with different ratings thereon was permissible. He said: "The legislature undoubtedly has a wide range of discretion in the exercise of the power to prescribe reasonable charges, and it is not bound to fix uniform rates for all commodities, to secure the same percentage of profit on every sort of business. There are many factors to be considered-differences in the articles transported, the care required, the risk assumed, the value of the service, and it is obviously important that there should be reasonable adjustments and classifications. "494

493 Northern P. R. Co. v. North Dakota, 236 U. S. 585, 59 L. Ed. 735, 35 Sup. Ct. 429. See also Norfolk & W. R. Co. v. Conley, 236 U. S. 605, 59 L. Ed. 745, 35 Sup. Ct. 437, and the cases cited in Note 483, ante.

494 The Hoch-Smith Resolution (43 Stat., 801, 49 U. S. C. A., Sec. 55), passed since this decision was ren

Nothing in this decision con

dered, makes mandatory the consideration of certain elements which previously had been left to the discretion of the Interstate Commerce Commission and, to that extent, has restricted the wide range of discretion which such Commission previously enjoyed in the making of rates. But see the construction of the resolution by the

flicts with the decision in the North Carolina case.

(Note

510, post.) There the carrier was compelled to perform an absolute duty, although in doing so for a reasonable charge there was a loss. In the North Dakota case (Note 493, ante) the court held that less than a reasonable rate could not be required of the carrier.

§ 91. Some of the Principal Elements of the Cost of Service.-Interest on bonded indebtedness, operating expenses, dividends on the investment of the carrier, the maintenance of way and structures, and taxes all enter into the cost of service and should be considered, but the indebtedness and the stock upon which dividends are sought must represent actual obligations contracted in good faith and the expenses must be actual and reasonable.495 Mr. Commissioner Prouty,496 discussing this question, aptly says: "To make the capital account of our railroads the measure of their legitimate earnings would place, as a rule, the corporation which has been honestly managed from the outset under enormous disadvantages." What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience.497 In considering the value of the property employed in serving the public, it must be remembered that such a test is not absolute and, at times, yields to the public interest and to the rule as to the value of service, both of which are discussed hereinafter.

U. S. Supreme Court in Ann Arbor R. Co. v. U. S., 281 U. S. 658, 74 L. Ed. 632, 50 Sup. Ct. 444..

495 Dow v. Beidelman, 125 U. S. 680, 31 L. Ed. 841, 8 Sup. Ct. 1028; Re Alleged Excessive Rates on Food Products, 4 I. C. C. 48, 116; Northern Pacific Ry. Co. v. North Dakota, 236 U. S. 585, 59 L. Ed. 735, 35 Sup. Ct. 429; Vandalia R. R. Co. v. Schnull, 255 U. S. 113, 65 L. Ed. 539, 41 Sup. Ct. 324; Banton V. Belt Line Ry. Corp., 268 U. S. 413, 69 L. Ed. 1020, 45 Sup. Ct. 534.

496 Grain Shippers' Asso. v. Ill. Cent. R. Co., 8 I. C. C. 158, 182. See

also Re Proposed Advance in Freight Rates, 9 I. C. C. 382, where is found a full discussion of the question.

497 Smyth V. Ames (Nebraska Freight Rate Case), 169 U. S. 446, 42 L. Ed. 819, 18 Sup. Ct. 418; Covington & Lexington Turnpike R. Co. v. Sandford, 164 U. S. 578, 41 L. Ed. 560, 17 Sup. Ct. 198; Knoxville v. Knoxville Water Co., 212 U. S. 1, 53 L. Ed. 371, 29 Sup. Ct. 148; Brabham v. Atlantic C. L. R. Co., 11 I. C. C. 464, 473; Wilcox v. Consolidated Gas Co., 212 U. S. 19, 53 L. Ed. 382, 29 Sup. Ct. 192, 15 Ann. Cas. 1034.

§ 92. Valuation of Common-Carrier Property. The value of the property employed by common carriers for the public convenience is always a proper element in the determination of the reasonableness and propriety of a whole schedule or system of rates, because it constitutes the base upon which total net earnings should be predicated. It may or may not be important, however, in determining the reasonableness of rates on a particular commodity, depending largely upon the proportion of total revenues of the carrier or carriers involved that may thus be affected. The Interstate Commerce Commission, in the Eastern Advance Rate case, 498 declared that "The question of revenue is therefore fundamental and ever-present in all considerations as to the reasonableness of railroad rates, although it may not be, and seldom is, where single rates are presented, the controlling question." In the Dayton-Goose Creek case, 499 the United States Supreme Court expressed doubt that total net earnings of carriers ever had constituted proper evidence in the determination of particular rates, declaring that there is nothing in the Interstate Commerce Act requiring the consideration of total net earnings in fixing such rates. Frequently, however, rates on one commodity may, because of the volume of movement, substantially affect total carrier earnings and thus cause this factor to become a matter of importance in fixing such rates. Then, too, the relationship of rates in one territory to those of another may render the consideration of total carrier earnings, and, consequently, the valuation of common carrier property, an important consideration in the determination of proper interterritorial rates.

It is a task of great magnitude to value, according to the rules of law governing valuations for rate-making purposes, the properties of the common carriers of the country, and, because of the lack of stability and permanency in the results thus obtained, this element of rate-making is still rather uncertain, indefinite and inconclusive.

The rule announced in Smyth v. Ames,500 which is still the law, is as follows:

498 Eastern Advance Rate Case, 20 I. C. C. 243.

499 Dayton-Goose Creek Ry. Co. v.

U. S., 263 U. S. 456, 68 L. Ed. 388, 44
Sup. Ct. 169.

500 Smyth v. Ames, 169 U. S. 466,

"We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public. And, in order to ascertain that value, the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expense, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. On the other hand, what the public is entitled to demand is that no more be exacted from it for the use of a public highway than the services rendered by it are reasonably worth."

It should be kept in mind that this oft-quoted rule formulated by the Supreme Court was announced in a suit to enjoin an act "To Regulate Railroads, to Classify Freights, to Fix Reasonable Maximum Rates to be Charged for the Transportation of Freights upon Each of the Railroads in the State of Nebraska, and to Provide Penalties for the Violation of this Act." While the rule is a correct rule of law, as limited by the last sentence of the foregoing quotation, when considered in reference to a general schedule of rates, it cannot be practically applied to a particular rate. Even with reference to a general schedule of rates, it should be construed in connection with the decision of the case of Covington & Lexington Turnpike R. Co. v. Sandford,501 where the same distinguished Judge, Mr. Justice Harlan, who wrote the opinion in Smyth v. Ames, said:

"It is proper to say that if the answer had not alleged, in substance, that the tolls prescribed by the Act of 1890 were

42 L. Ed. 819, 18 Sup. Ct. 418. Compare St. Louis & O'Fallon Ry. Co. v. U. S., 279 U. S. 461, 74 L. Ed. 457, 49 Sup. Ct. 384. See, post, Note 505.

501 Covington & Lexington Turnpike Road Co. v. Sandford, 164 U. S. 578, 41 L. Ed. 560, 17 Sup. Ct. 198.