177 F. 493 | W.D. Okla. | 1910
These are suits by railroad companies to
enjoin the enforcement of the passenger rate of two cents per mile prescribed by the Constitution of Oklahoma and certain freight rates prescribed by the Corporation Commission of that state. The suits were brought in September, 1909, after an experience of about 2 (years with the passenger rate and from 9 to 18 months with the freight rates save some unimportant modifications; and it is claimed by the railroad companies the rates have proved so unreasonably low their continued enforcement will confiscate their property and deprive them of the equal protection of the law. In November, 1909, defendants’ pleas in abatement were overruled (174 Fed. 59), and the applications of the railroad companies for temporary injunctions were postponed to" afford defendants time for preparation. More than, two months have been‘given for that purpose. At the recent hearing of the applications defendants presented exceptions and demurrers to the bills of complaint. They will be referred to presently. Whether rates prescribed by a state are reasonable involves a determination of the value of the property devoted to the public use to which the rates apply, the measure of a reasonable return on that value, and whether . the rates allowed to be charged are sufficient to that end. The regulation of commerce among the states having been intrusted to Congress, and being therefore beyond the control of the state, difficult 'problems arise when the rates involved are those of a railroad com
In logical order there should first lie found the value of the company’s entire railroad property devoted to public use within the state, upon which, from all its operations therein, it is entitled to reasonable returns. Mr. Justice Harlan, in Smyth v. Ames, 169 U. S. 466, 546—547, 18 Sup. Ct. 418, 434, 43 L. Ed. 819, said:
“We hold, however, that the basis of all calculations as to the reasonableness of rales 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 ilie 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 tbe property under particular rates prescribed by statute, and the sum required to meet*496 operating expenses, 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.”
There is a tendency to deny the amount and value of outstanding, stocks and bonds as evidences of value. Wholly aside from any consideration of the rights of investors in good faith or of the general consensus of public opinion as exhibited in a normal market for the securities, such evidences imply a recognition of the effect upon local value of influences without the state. A company may have, elsewhere, property of great value employed in aid of all its transportation business. Distant connections with important commercial centers, an outlet to tidewater and the like may affect favorably the worth of every mile of road in the system. It is general knowledge that there is an important element of value in a railroad as a whole which the part within the state, solely and separately regarded,- does not possess. While the question ultimately is the value of the road within the state, the influence upon that value of things external is to be considered; and in the common judgment of men it is to some extent reflected in the amount and value of the stocks and bonds resting upon the system. Nor can it properly be said that such influence affects only the value for the interstate business of the company with which the state is not concerned in making local rates. There is too intimate a relation between- commerce within the state and that among the states, and too much interdependence in their mutual growth and prosperity. A railroad system is essentially a unit and is generally so regarded. For instance, the part within the state may be assessed for local taxation at its value as an organic portion of a larger whole. C. B. & Q. R. Co. v. Babcock, 204 U. S. 585, 598, 27 Sup. Ct. 326, 51 L. Ed. 636; Western Union Tel. Co. v. Gottlieb, 190 U. S. 412, 23 Sup. Ct. 730, 47 L. Ed. 1116; A., T. & S. F. R. Co. v. Sullivan (C. C. A.) 173 Fed. 456. A value of a railroad in a state for local taxation would seem also to be there when rates of transportation are fixed. The assessed value and the acknowledged basis upon which the assessment is made express the judgment of public officers charged with the duty of investigation under the forms of the law and should receive due consideration. There is another' matter to be regarded, not specifically mentioned in the above excerpt from the opinion of Mr. Justice Harlan. An established railroad system may be worth more than its original cost and more than the mere cost of its physical reproduction. It has passed the initial period of little or no return to its owners which, of greater or less duration, almost always follows construction and is -not infrequently marked by default and bankruptcy. The inevitable errors in its building which finite mind? and hands cannot avoid have been measurably corrected, time and effort have produced a commercial adjustment between it and the country it was intended to serve, relations have been established with patrons, and sources of traffic have been opened up and made tributary.. In other words, the railroad, unlike one newly constructed, is fully equipped and is doing business as a going concern. It has attained a position after many experiences common to railroad enter
When the railroad within the state is used in both interstate and local commerce it is necessary next to determine what part of its value should fairly be considered as devoted to each use separately, because obviously the company should not exact such excessive rates for local traffic as will also produce a return upon a value employed in a business over which the state has no control. Neither class of traffic, interstate or local, should be made to bear a burden caused by paring the rates on the other to the quick. It is generally agreed that, given the entire value of the railroad property in the state, it is fair to apportion it among the different kinds or classes of business upon a revenue basis, that is to say, in proportion to the gross revenue produced by them respectively. And a like rule applies when the questions involved require separate consideration of the freight and passenger business. In this way will be found the fair proportion of value devoted to each particular use, upon which the owner is entitled for such use to a reasonable return. Counsel for defendants object to this method of assigning values, and the observations of Mr. Justice Brewer in the Tompkins Case, 176 U. S. 175-177, 20 Sup. Ct. 336, 44 L. Ed. 417, are quoted to shov^ its inaccuracy under stated conditions. But it seems to have been adopted by him previously in the Nebraska case (Ames v. Union Pac. Ry. Co. [C. C.] 64 Fed. 165, 179, affirmed in Smyth v. Ames, supra) and by the courts generally in subsequent cases. Moreover, it is not perceived that the ton-mile basis advocated in its place is free from similar criticism. The number of tons hauled one mile has no bearing upon the value of the property employed save as revenue is produced, and when that element is recognized we are at once at the revenue basis. The ton mile could not be used in the necessary assignment of values as to mail, express, and miscellaneous services, nor as between passenger and freight traffic. Passengers are not transported by weight, and the passenger mile and the ton mile as units of measurement cannot be reduced to a common term. In these cases, therefore, the tot&l value of the railroad property in Oklahoma of each complaining company, viewed in all its aspects, should be apportioned according to the rule mentioned, and assigned separately to interstate and local business, to freight and passenger business, and to mail, express and miscellaneous business, so the effect of the contested rates may be ascertained.
It is not difficult to ascertain from the records of a railroad company as customarily kept the gross revenue from the local traffic wholly within the state. As to interstate traffic moving in a particular state, the proportion of revenue which should be credited to it may be fairly determined upon a mileage basis — that is, by allotting the state such part of the revenue as the mileage of haul' therein bears to the entire haul. It is said by counsel for defendants that because of the higher range of local rates in Oklahoma that state should be credited with a greater percentage of the interstate revenue than the mileage basis yields," That is but.another way of asserting that local rates so directly affect' interstate rates and the earnings therefrom that their influence may be
Having the total value of the railroad property in the state, the gross revenue from all operations therein, the gross revenue from each class of business, interstate and local freight and passenger, and mail, express, and miscellaneous, and the proportionate property values devoted thereto respectively, there must then be ascertained the net revenues from the local freight and passenger business so that their relation to'the value of the property employed in producing them, may be disclosed and the ultimate question answered,-to wit, whether the rates from which the net revenues come are reasonably compensatory. At this point arises the principal controversy. ' A substantial part of the expense of railroad operation is incurred indiscriminately in all its business. For example, the maintenance of way and structures in a state, which makes one of the most important general expense accounts, is almost entirely for the common benefit of all traffic, interstate and local, freight and passenger. As between freight and passenger traffic a large part of the expenses may be directly located and distributed, and it is the custom to apportion the remainder by various rules not necessary to mention here; but generally speaking it is impracticable in railroad business to separate expenses into the interstate and local and the minor and incidental operations. From the very nature of the case, therefore, some rule musfi be adopted for charging to each of them their fair and equitable proportion of the common expense. Of necessity it must proceed upon average conditions commonly known or shown to exist, .and it argues nothing to say that it does not fully apply to this or that exceptional instance. A general rule based on experienced observation is fair, and what is lost by its application in one place is doubtless gained in another, and an equitable equilibrium maintained. Of those suggested the revenue basis appears to be much more uniform in its adaptibility and much less subject to substantial objection. It has been frequently employed. Ames v. Union Pacific (C. C.) 64 Fed. 165; Smyth v. Ames, 169 U. S. 466, 18 Sup. Ct. 418, 42 L. Ed. 819; C., M. & St. P. R. Co. v. Tompkins, 176 U. S. 167, 20 Sup. Ct. 336, 44 L. Ed. 417; Northern Pacific v. Keyes (C. C.) 91 Fed. 47; In re Arkansas R. Rates (C. C.) 163 Fed. 141; St. Louis & S. F. R. Co. v, Hadley (C. C.) 168 Fed. 317. It is the one to which the mind naturally turns in every problem involving the charging of common expense to different departments of a business. When a general or common expense cannot be located,
_ Bearing on the division of expense is the much controverted question of extra cost of the local business as compared with the interstate. That the former costs much more than the latter is beyond doubt, but the difficulty is in applying the measure of difference. There is a general accord among practical railroad men of high standing and long experience that the cost of local freight traffic is from 2 to 8 times as much as that of interstate traffic, and of local passenger traffic from 25 to 50 per cent, more than the other. Though not altogether clear from the proofs here, it is probable the difference mentioned in the freight traffic should not he fully applied in addition to a division on' the revenue basis, for, as already seen, the difference finds expression in a measure in the relative revenue proportions themselves. A cogent reason for selecting the revenue basis in preference to the ton.-mile is that the former gives some effect to the known differences in cost. Nor is it altogether clear that the above ratio of extra cost of local freight traffic was intended by the witnesses to apply to all op
The criticism of the formula for apportioning extra cost mentioned in the Arkansas case (C. C.) 163 Fed. 141, is due to a misconception. It appears the evidence in that case showed that on a revenue basis the cost of local freight traffic was double that of the interstate. The court gave a quick abstract rule for ascertaining the local cost, which, if applied to the facts there, would have been to double the local revenue, add it to the interstate revenue, ascertain what proportion the doubled amount bore to the total sum and then take that proportion of the .total cost of both. Although every algebraic or mathematical formula applied to the particular facts before that court would have brought the same result, it is earnestly argued here that if a given body of rates are confiscatory they must, under the rule of the Arkansas case, still be confiscatory though the revenue were doubled by doubling the rates —that confiscation would follow, however high the rates and great the revenue. Obviously, if revenue is doubled solely by increasing local rates there would be little, if any, increase in gross cost; if revenue is doubled by increase in volume of local traffic without changing rates the gross cost would probably increase, but not proportionately. But no such construction as contended for can be put upon the language of the court. If the formula given is to be applied to shifting conditions there should be a corresponding change in the numerical factors. This is obvious from a cursory reading of the opinion. A change in the amount of local revenue from whatever cause, rates or volume of traffic, would affect the relative cost predicated on the revenue basis, but whenever the ratio is found the apportionment can readily be made by employing- it in the way indicated in the Arkansas case.
The evidence here shows that, regarding average conditions and not exceptional instances,' there is a substantial difference between interstate and local traffic in the ratio of cost to revenue. Particularly is this so as to- freight. In other words, the apportionment of expense on a revenue basis does not adequately express the difference between them. It is not necessary to determine it definitely in view of the value of the property of the companies and the statement that because of exceptional circumstances the Atchison, Topeka & Santa Fé and the Gulf, Colorado & Santa Fé roads should be considered together. The proofs justify the conclusion that the values of the roads in Oklahoma .are at least:
Missouri, Kansas & Texas...................................... $35,185,089
Atchison, Topeka & Santa Fé.................................... 41,877,391
Gulf, Colorado & Santa Fé..................................... 6,406,007
Tlie Missouri, Kansas & Texas................................... $1,878,589
The Atchison and the Gulf...................................... , 1,519,550
However, the importance of the difference in cost should not be underestimated. For illustration, if, during the period in question, it cost the Missouri, Kansas & Texas Company to earn a dollar of local freight revenue but 10 per cent, more than to" earn a like amount of interstate freight revenue, it received a net return of but 4% per cent, upon nearly $3,000,000 worth of property employed in that business; if the extra cost was 25 per cent., the net return was 2% per cent. ; if the extra cost was 50 per cent., there was a net return of less than V10 of 1 per cent. — and in each case without deduction for interest on bonds or dividends on stock. Rates should be just both to the public and the owner of the railroad. Smyth v. Ames, 169 U. S. 466, 544, 18 Sup. Ct. 418, 42 L. Ed. 819. It does not appear in these cases that the roads were ill conceived, greater in extent than they should be, unduly expensive in construction, or that they are not operated wisely and economically. It therefore does not seem that rates producing no more than a reasonable return on their fair value could be unjust to any one. In fixing the measure of return upon property devoted to public use regard should be had to the character of the business, the locality and the risk; whether the return will be uniform and secure; whether the patronage is steady or fluctuating and
“Taking all facts into consideration, we concur with the court below on this question, and think complainant is entitled to 6 per cent, on the fair value of its property devoted to the public use.”
In a preliminary announcement of the conclusion of the court Mr. Justice Peckham said:
“There is no rule as to any particular rate which any corporation subject to legislative control in the matter has a right to obtain without legislative interference. It depends upon circumstances and locality.”
The present needs of the cases in hand require no further expression than that the returns to the railroad companies shown by the proofs, arq clearly deficient.
The demurrers: It is argued that the freight and passenger rates are still in legislative process, and therefore within the doctrine of Prentis v. Atlantic Coast Line, 211 U. S. 210, 29 Sup. Ct. 67, 53 L. Ed. 150, not properly the subject of judicial consideration. Both phases of this contention have- already been considered in connection with the pleas. 174 Fed. 59. It is the law of the land that a state may not confine to its own courts a citizen who claims his rights under the Constitution of the United States have been denied. And the Supreme Court did not h®ld in the Prentis Case that a-similar result could be accomplished by prescribing and enforcing under penalties a legislative rul.e, even though tentative, and restricting the remedy of the citizen to subsequent legislative inquiry and action.
It is als.o urged that the bills of complaint are defective because the}' do not assail the freight rates separately. But the bills disclose the contrary,'at least by express general allegations. Moreover, the rates in question should properly be considered as a body and in connection with the other, freight rates of the companies not affected by the orders. Though the orders, save three modifications, were made successively, at different times during the year 1908, the rates prescribed constitute as much a single body as if embraced in one order. They affect from 40 to ÍSO’per cent. of the local freight business, and cause an average reduction of about 40 per cent, of the prior rates applied to the same amount of traffic. Presumably the Commission preserved a due relation ámong them so far as is practicable in such cases, and there is no contention that the rates left untouched are relatively
Upon the proofs temporary injunctions should be granted. Provisions are made in the orders for the keeping of accounts and the giving of bonds safeguarding, so far as practicable, the patrons of the roads if it should ultimately he determined the- enforcement of the rates should not have been suspended.