under the decision in the Wabash case,1 is subject only to the regulation of congress.2

The judicial investigation of the validity of state rates therefore requires what is in effect a statement of account of the state business of the railroad, and its segregation from the other business of the railroad, conducted with the same equipment. The railroad property in the state must be ascertained and apportioned to the state and interstate business, and if the case requires it, separately apportioned to the freight and passenger business, both state and interstate. It was said by the supreme court in holding that in such a case the cost and net profits of the state traffic must be ascertained that few cases are so difficult and perplexing as those which involve an inquiry whether the rates prescribed by the state legislature for the carriage of passengers and freight are unreasonable, but that the facts could not be determined with mathematical accuracy afforded no excuse for a failure to examine and solve the question involved.

3

§ 122. The supreme court on state regulation. The regulation by the states of intrastate rates in the exercise of its authority over domestic commerce has been reviewed by the supreme court in this jurisdiction under the fourteenth amendment in cases from Texas, Nebraska, South Dakota, Arkansas, Michigan, Minnesota, Florida,1o and Virginia.1

7

8

9

5

11

The principles applied in determining the validity of railroad rate regulation have also been discussed in connection with the

1 See 37, supra.

2 See Northern Pacific Railroad Co. v. Keyes, C. C. D. of North Dakota, 91 Fed. 47 (1898).

See South Dakota Rate Case, C. N. & St. P. R. Co. v. Tompkins, supra.

4 Reagan v. Trust Co., supra. 5 Smyth v. Ames, supra.

• Chicago, M. & St. P. R. Co. v. Thompkins, supra.

7 St. L. & S. F. R. Co. v. Gill, supra; Dow v. Bidelman, 125 U. S. 680, 31 L. Ed. 841 (1888).

8 Chicago Grand Trunk R. Co.

v. Wellman, 143 U. S. 339 (1892), 36 L. Ed. 176.

Chicago, etc., R. Co. v. Minnesota, 134 U. S. 418, 33 L. Ed. 970 (1890); Minn. & St. L. R. Co. v. Minnesota, 186 U. S. 257, 46 L. Ed. 1151 (1902).

10 Atlantic Coast Line R. Co. v. Florida, 203 U. S. 256, 51 L. Ed. 174 (1906); also Seaboard Air Line v. Florida, 203 U. S. 261, 51 L. Ed. 176 (1906).

11 Virginia Rate Case, supra, § 114.

rates imposed by the states or municipalities under state authority upon other public service corporations.1

In the Texas rate case, the supreme court reversed the decision of the circuit court in so far as it restrained the railroad commission from discharging the duties imposed by the legislative act and from proceeding to establish reasonable rates, but affirmed the decree in so far as it restrained the commission from enforcing the rates already established, as it was found upon the admitted facts that the rates failed to return an adequate compensation. The enforcement of the state rates was also enjoined in the Nebraska case on the same ground; and in the South Dakota case the decree of the circuit court refusing to enjoin and dismissing the bill of the railroad company was reversed on the ground that the circuit court had failed to determine the reasonableness of the rates, and the case was remanded with directions for such determination by ascertaining the cost of the state business. In the other railroad cases, where the merits of the appeals were considered, it was ruled that the railroad companies had failed to ovecome the presumption of reasonableness of the rates fixed by the state authority.2

§ 123. Schedules of rates and special rates.-The federal authority as illustrated in the cases determined by the supreme court has been invoked in two distinct classes of cases. That is, where the entire schedule of maximum rates, both freight and passenger, is fixed by state authority, and where there is not an entire schedule, but the maximum rates are fixed upon specific

1 See Kentucky Turnpike Case. 164 U. S. 578, 41 L. Ed. 560 (1896); and San Diego Water Rate Case, 174 U. S. 739, 43 L. Ed. 1155 (1899); The Stockyards Case, 183 U. S. 79, 46 L. Ed. 92 (1902); the Knoxville Water Case, 212 U. S. 12, 53 L. Ed. 371 (1908); the Consolidated Gas Case, 212 U. S. 19, 53 L. Ed. 382 (1908).

2 The Minnesota Rate Case, Shepard v. Northern Pac. R. Co., supra, § 110; the Missouri Rate Case, supra, § 110; the Arkansas Rate Case, supra, § 110; the

Kentucky Rate Case, supra, § 110, have all been appealed to the supreme court and are set for hearing at the October term, 1911. These cases all involve general schedules of rates, both freight and passenger. Rate cases are also pending in the supreme court from Nevada, 170 Fed. Rep. 752; from Kentucky, supra, § 110, and Oregon, supra, § 110. Other cases are pending in the circuit courts, not yet passed to final decree, in Oklahoma, Iowa, Kansas and North Dakota.

classes of commodities. In cases under the Interstate Commerce Act, as will be hereafter seen, it is as a rule the latter class of cases which is involved; that is, the reasonableness of the rates on specific commodities, or to or from specific localities, or more usually the relation of rates as between competing communities or kinds of traffic is brought under review.1

When the state authority is challenged on the ground that the railroad is deprived of an adequate return upon its property, the difficulty of determining this issue is very much increased when the reduction complained of is only upon a single commodity or a single class of freight. Such a reduction cannot be shown to be unreasonable, that is confiscatory, simply by proving that if the same reduction were applied to all classes of freight the railroad would fail to receive a proper return; and in such cases the railroad must show that this reduction would of itself prevent its securing an adequate return upon its property in the state. The supreme court said "in such a case the great difficulty in the attempt to measure the reasonableness of charges with reference to the cost of transporting a particular class of freight is well known and has often remarked."

1 In such cases as in the recent proposed general advance of rates, general schedules are of course involved, see infra, page 256.

2 Northern Pac. R. Co. v. North Dakota, 216 U. S. 579, 54 L. Ed. 624 (1910). This was a case where the railroad was charged with a continuous violation of the law fixed for the carriage of coal through the state. The supreme court said the question of reasonableness left the matter in so much doubt that the decree of the state court was affirmed without prejudice to the right of the railroad company thereafter to re open the case for a trial in court proving more fairly the confiscatory character of the rates proposed.

In Minneapolis & St. Paul R. R. Co. v. Railroad Commission, supra,

the court sustained a rate on coal from the northern corner of the state to the southern part of the state requiring a transfer from ore railroad to another. The court said a state could authorize its railroad commission to reduce an unreasonable joint through rate agreed upon between two or more roads and apportion the same between the railroads interested, and added:

"It was not necessarily entitled to earn the same percentage of profit on all classes of freight carried. We do not think it beyond the power of the state to reduce the rate upon a par ticular article provided the companies are able to earn a fair profit upon their entire business, and the burden is upon them to impeach the action of the commis

§ 124. The valuation of railroad property in state regulation. Where the validity of a regulation under state authority is questioned and a railroad or any public service corporation is involved, the valuation of the property of the company must necessarily be ascertained.

In some cases the value of the railroad property in the state has been ascertained from the value fixed for taxation by assessing boards, the relation of the assessed value and the actual value being duly shown or agreed upon.1 In states—where railroads are not taxed through property valuation but through some form of tax upon earnings, this means of valuation is not available, and the value therefore must be separately ascertained.2

The supreme court has laid down the general rule that in determining value in cases of state regulation, it is not the original cast of the property, but the value at the time of regulation; that is, the cost of reproduction, which is the test; that is, not the expenditure which was made to produce, but the expenditure

sion in this particular.

The commission was not bound to reduce the rate upon all classes of freight. They have the right to reduce it upon any specific article; and if, upon examining the tariffs of a certain road, the com mission is of opinion that the rates upon a particular article or class of freight is disproportionately or unreasonably high, it may reduce such rate, notwithstanding that it may be impossible for the company to determine with mathematical accuracy the cost of transportation of that particular article as distinguished from all others. Obviously, such reduction could not be shown to be unreasonable simply by proving that if applied to all classes of freight it would result in an unreasonably low rate."

In Atlantic Coast Line R. Co. v. Fla., supra, the court, affirming 48

Fla. 146, in refusing to disturb a local rate on phosphate, said: “We are aware of the difficulty which attends proof of the cost of transporting a single article, and in order to determine the reasonableness of a rate prescribed it may some times be necessary to accept as a basis the average rate of all transportation per ton per mile." It appeared in another case, that of the Seaboard A. L. Ry. v. Fla., supra, that the maximum phosphate rate fixed by the commis sion was materially larger than the average freight rate per ton per mile. See also Chicago & G. T. R. Co. v. Wellman, supra; St. Louis & S. F. R. R. Co. v. Gill, supra; Southern Ry. Co. v. McNeil, C. Ct. of N. C., supra.

1 See Missouri Rate Case and the Arkansas Rate Case, supra.

2 See the Minnesota Rate Case, supra

that will be necessary to reproduce the property. This principle that it is the present value of property that must be considered involves the further question of the right of the railroad or other quasi public corporation to demand a return upon the increased value of its property, including what is termed the "unearned increment." 2

This right, however, is obviously controlled by the limitation of the carrier to reasonable rates; that is, no increase in the value of property can justify the carrier in a rate which is unreasonable to the public. This qualification was distinctly declared by the supreme court in the consolidated gas case.3

4

In the valuation of property for rate regulation the ultimate fact of value and the relevancy of evidence to prove value must be distinguished. Thus in the Nebraska rate case, the court said that in determining value as the basis for making rates, capitalization," the original cost of construction, the amount expended in permanent improvements, the amount and market

1 See Smyth v. Ames, supra.

See discussion of this subject by the Interstate Commerce Commission with reference to the recent proposed advance of freight rates, infra, § 169.

• From opinion of supreme court in this case, 212 U. S. 52 (1909): "And we concur with the court below in holding that the value of the property is to be determined as of the time when the inquiry is made regarding the rates. If the property which legally enters in to the consideration of the question of rates has increased in value since it was acquired, the company is entitled to the benefit of such increase. This is, at any rate, the general rule. We do not say there may not possibly be an exception to it where the property may have increased so enormously in value as to render a rate permitting a reasonable return upon such increased

value unjust to the public. How such facts should be treated is not a question now before us, as this case does not present it. We refer to the matter only for the purpose of stating that the decision herein does not prevent an inquiry into the question when, if ever, it should be necessarily presented.

4 Smyth v. Ames, supra.

5 In the Knoxville Water Case, supra, involving the validity of the rates imposed upon a municipal water company, the court said that capitalization afforded no guide to the present value of the property, where substantially all the common and preferred stock was issued under construction contracts entered into with persons who controlled the corporate action, and was generally in excess of the true value of the propconerty furnished under the tracts.