made regarding rates, and that if the property which legally entered into the consideration of the question of rates had increased in value since it was acquired the company was entitled to the benefit of such increase. It added, however, that while such was the general rule there might be an exception 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.

§ 169. The unearned increment in valuation of railroad property in rate regulation.-In the Advance Rate Case (February 22, 1911) it was contended by the Burlington railroad, one of the applicants for the increased rate, Western Trunk Line Case, 20 I. C. C. R. 307, that it was entitled as a matter of legal right to a fair return upon the actual value of its property used for transportation, which value, from whatever source in the past created, is measured in its case by at least the cost of presently reproducing its physical plant. To obtain such fair return, it claimed the right to charge ratio of transportation which, subject to the one limitation that the particular rates are themselves reasonable and just to the shipper, will produce such reasonable return upon the property employed. It was claimed that largely through the increased value of its real estate holdings as well as through the putting of earnings of the company into the property the actual fair value of the railroad far exceeded its capitalization and that therefore it was entitled to freight increase as a reasonable return upon the actual value of the property.

But the commission declined to admit this contention and said whatever the true economic or legal view may be as to the right of a carrier to consider the increase in value of its land as a part of the value upon which it is entitled to a reasonable return, such increase in value does not of itself establish the right of a carrier to increase the rate upon a given service.

The commission said it was yet to be decided that a public agency created by public authority may continuously increase. its rates in proportion to the increase of its value either (1) because of betterments which are made out of income or (2) because of the growth of the property in value due to the increase in value of the land which the company owns.

§ 170. The relation of railroad rate to investment of earnings in property. It was ruled by the supreme court in Illinois, Central R. Co. v. Commission, 206 U. S. 441, 51 L. Ed. 1128 (1907), affirming the order of the commission in 10 I. C. C. R. 505 (the Yellow Pine Association Case), that improvements which add to the permanent value of the property, and are paid from earnings are not properly charged to operating expenses in determination of the reasonableness of rates.

The court said it would seem as if "expenditures for additions to construction and equipment, as expenditures for original construction and equipment, should be reimbursed by all of the traffic they accomodate during the period of their duration, and improvements that will last many years, should not be charged against the revenue of a single year.' The court distinguished the Union Pac. R. R. Case, 99 U. S. 402, 25 L. Ed. 274, as not involving rates, or the rights of shippers.

In the Advance Rate Case in Official Classification Territory, 20 I. C. C. 243 (Feb. 1911; see infra, § 376), the commission said that this principle seemed to apply also to non-revenue producing improvements, forced by public demand, such as expensive passenger stations, abolition of grade crossings in cities, adoption of safety appliances and the like. It was suggested however that while this seemed to be the law, public policy might under some conditions lead to a different conclusion, so far as favoring the accumulation of surplus from earnings in improving a system. The question whether the investment from earnings belonged to the public or to the stockholders was not determined; the commission saying "until the status of this surplus is determined by legislative action or judicial interpretation, this commission cannot properly permit an advance in rates, with the intent to produce an accumulation of surplus for this purpose.

§ 171 (130). Reasonableness under sections 1 and 3.-The reasonableness of rates under section 1 must be distinguished from undue and unreasonable preferences of localities, which are prohibited by section 3. Thus it was held in Commission v. N. C. & St. L. R. Co., 120 Fed. 934 (1903), that a finding of unreasonableness under section 1 could not be established merely by a proof of a violation of section 3. That is, that a rate may

be reasonable per se and still be unduly preferential of a Iocality, and thus be violative of section 3. A rate which is unreasonable, however, per se, may be shown by the same facts to be unduly preferential of the locality as compared with other localities. See infra, section 3.

§ 172 (131). Consideration of reasonableness in the courts.— In Commission v. Southern Railway Co., 117 Fed. 741 (1902), the circuit court of the western district of Virginia said that in determing the issue as to whether rates to and from a city were unjust and unreasonable in themselves, the greatest weight should be given to the opinion of expert witnesses, the effect of the rates charged upon the growth and prosperity of the city, the cost of transportation as compared with the rates charged and the rates in force to other cities where the circumstances are as nearly the same as may be. In this case the court refused to enforce an order of the commission directing reduction of rates to Danville, Virginia. 122 Fed. 800 (1903).

In Commission v. L. & N. R. Co., 118 Fed. 613 (1902), the court found that the rates to Savannah from certain points on the Pensacola division of the Louisville & Nashville road were unreasonable and said that they could not be justified by the contention that the railroad company had been building up a port and thus securing a longer haul. The court said that rates unreasonable in themselves could not be justified by considerations of this character. In this case an advanced rate filed with the Interstate Commerce Commission and put into effect pending the hearing before the commission on the legality of the rate previously in force, was held properly before the commission on such hearing.

On the issue of reasonableness in rates, the sworn return of the officers of the road made to state authorities for the purposes of taxation is admissible but not conclusive. L. & N. R. Co. v. Brown, 123 Fed. 946 (1903).

In Commission v. Lehigh Valley R. Co., 74 Fed. 784 (1896), the court said that the fact that the cost of carriage of all the coal of an entire railroad system from all points of the shipment to all destinations was a certain per cent. of the gross receipts from coal did not justify the conclusion that on a particular line of part of the system the cost of carriage bore the same relation to

the gross receipts of the whole line, and that the commission erred in holding the contrary theory.

The carriage of expensive merchandise is entitled to greater compensation than that of cheap goods. Commission v. D. L. & W. R. Co., 64 Fed. 723 (1894).

§ 173 (132). Rulings of the commission upon the reasonableness of rates.-The commission, though prior to 1906 it had no power to determine what rate a railroad should charge, has during the whole period of its existence been vested with the important jurisdiction of investigating and determining whether rates are reasonable or unreasonable. The supreme court has in several cases wherein it differed from the commission in the conclusions of law as to the construction of the act, remanded the cases to the commission for its own investigation upon the question of the reasonableness of the rates, or has entered judgment without prejudice to the commission's right to re-investigation of the question of reasonableness of the rates. Interstate Com. Com. v. Clyde Steamship Co., 181 U. S. 33, 45 L. Ed. 731 (1901); L. & N. R. R. Co. v. Behlmer, 175 U. S. 676, 44 L. Ed. 409, supra.

In many cases the conclusions of the commission have been accepted and acted upon by the railroad companies in the adjustment of their rates, and though its conclusions may be recommendations and not judgments, they none the less have a permanent value and constitute a body of the administrative law on this difficult question of railroad administration. The opinions and conclusions have the greater weight from the character of the membership since the organization of the commission, and from the thoroughness of its investigation, as evidenced by the opinions.

Under the enlarged jurisdiction of the commission under the acts of 1906 and 1910, its rulings have vastly increased in importance.

In the recent ruling denying the advances in rates in the Western Traffic Line Cases, supra, the commission summarized its powers, saying: "It is doubtless true that in its control over the charges which the railroads make, this commission exercises a power so extensive as to justify the broadest consideration of the economic and financial effects of its orders, but the government has not undertaken to become the directing mind in rail

road management. This commission is not a general manager of the railroads, and no matter what the revenue the carriers may receive there can be no control placed by the commission upon its expenditure, no improvements directed, and no economies enforced."

In the same opinion the basis of the policy in the more congested portions of the country as to rates was stated as follows: "First, a basic classification of commodities with relation to their relative value, bulk, fragility, and other proper transportation considerations, upon which is built a wisely balanced schedule of charges fixed with reference to well-defined zones of distributive territory; and, beneath these, those special rates on certain commodities as to which the public need demands that exceptions shall be made."

In 14 I. C. C. R. 376, the commission said it had no authority to establish general rate schedules, but must deal with the interstate rates of this country which had not been established upon any definite theory as it finds them. What the commission takes off in one place, it cannot add in another. Unless, therefore, the general result of all rates is to yield an undue revenue to the carrier, the commission should not reduce a particular rate simply because it might have thought in establishing that rate de novo as part of a general scheme it ought to be somewhat lower or somewhat higher in proportion to the others. The rate attacked must be so out of proportion as to be unreasonable and must so discriminate as to be undue and unlawful as to some other rates. This case involved the rates upon live stock from Iowa points to Chicago, and the commission thought that while the general level of the rates ought not to be reduced, that the groupings of territory wherein the specific rates were effective should be revised.

§ 174. Limitations of the commission's power in fixing rates. While it is recognized that neither the commission nor any public regulative body can reduce rates below what is termed the confiscatory limit, that is, so as to deny the carrier a reasonable return upon the property devoted to the public service, its power is also limited, in that in determining the reasonableness of a rate, it cannot reduce a reasonable rate for the sake of encouraging or protecting any business interest of the shippers.