# Amicus Curiae Brief — St. L. & O'Fallon R. Co. v. United States > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386007_0254%3A07 ## Record - **Collection:** Supreme Court brief - **Document type:** Amicus Curiae Brief - **Published:** January 1, 1929 - **Citation:** 279 U.S. 461 ## Text cen me s&s» & Nos, 131, 132. THE ST. LOUIS & O’FALLON RAILWAY COMPANY, | and MANUFACTURERS’ RY. CO., Appellants, va. THE UNITED STATES OF AMERICA, and THE INTERSTATE COMMERCE COMMISSION, Appellees. THE UNITED STATES OF AMERICA, and THE INTERSTATE COMMERCE COMMISSION, Appellants, va, THE ST LOUIS & O’FALLON RAILWAY | COMPANY, and MANUFACTURERS’ RY. CO., Appellees. SUBJECT INDEX. PAGE NE he ee em 8 RD oe st eT oe 1 Summary of Argument ......... EN AL AALS ee 1. 2 RISE CEO ie ee Ee, Cee 14 Panr ] THE INSRPARABLE PROBLEM OF KATE REGULATION 4ND VALUE REGULATION, Point # The valuation issue should not be isolated from the issue of rate regulation... Li, peg! 14 All values are relative and cannot be stated with out answering the questions: Waeeey es WR Pr ei 15 ee COO EET oie ee rao ekek 15 Value under what conditions? ..... — There is no one ‘‘true value" possessed Dh any thing ped oa eS as ; The value ef puble utility property is determined bey the obligation to serve at reasonable rates. 1Y The valuation of public utility property is an exer. cise of the legislative power of rate regulation ms 0] If judraal acthon gave utility properties a fixed value by compelling the use of a judicial for mula of valuation, the legislative power of rate regulation would be destroved......... 23 Point 4 A careful analveis of the legal and economic con- cepts of “property and ‘‘value’’ will clarify the problem. ii PAGE (a) **Property’’ is the dominion over things possessed--a bundle of rights —Wwhich is conferred by law........ a4 The source of property rights is the law-making DEE “us cece cshbahk thes bebavenvsN cake wesee's ~b (b) The value of property is the power to command a price, which depends upon the property rights conferred upon an owner by law... caukns Wieeke ie) The property of a publie utility owner is not an absolute dominion, but one qualified by public service obligations (ad) The value of public utility property is limited by the owner's limited power to command a price ee Point 5. Therefore, the legisiative power of rate-revulation must include the power of value regulation. . An interpretation of Smyth vs. Ames The ‘depreciated dollar’’ claim Point 6. The Supreme Court has consistently maintained: (a) That the rate making power is legis lative ib) That there is no formula for finding the value of a public utulity property Paar I. THE UNDERLUING INSD BR IN & VALUATION CASR. Point 7. The underlying iseue is) What is a fair price for the public service rendered! a5 The ethical standards of regulation must be con. sidered Is the highest possible proe a fair proce! SNP RRA ONLI PIE NT IE IE II APNE ND iii PAGE The carriers are seeking to charge ‘‘ what the traffic PS obs 6 tas ec Rhea tee 57 The cost of the service is a measure of the fair price .. io nu ene ae les heh eRe bee En os . 59 legislative Power to Determine Public Poliey.... 68 Point &. The question for judicial review is: Has a monop- oly price or a confiscatory price been estab. lished? pada’ are ee ss eae a Definitions of a monopoly price and a confiscatory price ..... Wats baa Wea 5.0 o's weds 65 A monopoly price ~ seites 68 A confiscatory price Tr T |< vene eden 69 A fair competitive price |. eo oe cree Pant IIT, THE LEGISLATIVE STANDARDS FORK RATE REGULATION AND VALUE REGULATION, Point 9. Congress has authorized and directed the Inter. state Commerce Commission to regulate rates and values ey be ea ~) to Point 10. The legislative power has provided no formula for establishing reasonable rates or reasonable Values, but required the Commission to exer- cise a reasonable judgment based on adequate information peeeenVessbecbavsce we Pant IV THE DRCISIVE ISSUE IN THE PRESENT CASE. Point 11. The reasonable judgment exercised by the Com. mission has been based on the princi le of fair competitive prices for services rendered. 8&1 iv Structural elements of value...............- ee oR bo rene ae 2 The judgment of the Commission may be tested by considering : (a) Whether traffic continues to move in reasonable volume; and investments continue to flow at reasonable rates of reterm ....... ee Pe ae aS ib) Whether the owners would have un dertaken to furnish the service volun tarily for the price which has been fixed = 6s bee 4] Point 12. The Supreme Court does not sit as a board of re Vision to substitute its judgement for that of the Commission “4 Point 13. The carriers are claiming that a property value exists unaffected bey their obligation to serve at a fair price oH Point 14. The carriers are contending that their property has a ‘‘true value’? which must be determined by giving dom nant consideration te a theo retical cost of reproduction at pre sent prices 97 Point 15. No property has any “true value’’; and ‘‘eosts”’ only furnish evidence of a fair price for the service rendered Reproduction costs are evidence of the highest pos sible prices—monopoly prices 1 has Point 16. By claiming an absolute Value the carters are ask ing the court to fix property values by formula and thereby to fix rates +A 107 eos RENE ILE LOIS IPE LTE AGING AIOE? — — Point 17. PAGE The carriers are asking the court to establish a fiat value, which is a monopoly value, for public utility property ..........6. cee e ee eee eee 107 Point 18. The contentions of the carriers are based on false concepts of ‘value’? and ‘property’, repudi- ated by authoritative economists and jurists... 107 A comment upon MeArdle vs. Indianapolis Water Company Cas bAcls abe k geen senaes .. Le Point 19. The carriers have not been deprived of any prop- erty right to charge a fair price for services rendered, or of any property value based on such a property right .* Perey An ‘earnest conflict of serious opinion” concern. ing the wisdom of legislative action does not bring a question of legislative poliey within the scope of judicial inquiry ineeea een ie 115 The administrative powers of the Commission... 128 127 Appendix A iy ; Lsctck Vibe ees Illustrative Instances in which Legislatures have Diminished the Bundle of Rights called “Property by Laws whieh have been Upheld in the Courts Appendix B - TT or ... 162 Limitations Upon Carrier Property Rights Spe- cifically Imposed by the Interstate Commerce Act. Appendix C . *y- 164 Sections loa and 19a of the Interstate Commerce Act. Co ee oe ee) : —— unc PES Re — a rr PADI ERLE Qi mag Eero ener ree , Taste or Cases Crrep. PAGE Aiken v. Boston ete. R. R. Co., 51 N. H. 504. .00...... 26 Ames v. Union Pacific Ry. Co., 64 Fed. 164........... 100 Bank of Columbia v. Okely, 4 Wheat. (UL S.) 235. ..31,119 Banton v. Belt Line Railway Co., 268 U.S. 418... 22 Bicek v. Mirah, 256 U. BS. 135..............:. .. .25, 26, 32 Bluetield Water Works ete. Co, v. Pub. Serv. Comm., 262 U. S. 679.... ree Be Bo Board of Commissioners v. res, 232 Pac. 834... 27 Boston Chamber of Commerce vo Boston, 217 UL S188 15 Boyd v. U.S, 116 US. 616... Se 1, PA Ae 115 Braceville Coal Co. v. a ge 26 Brush Flee. Co. v. ce «3k & See 9} Calder v. Bull, 3 Dall, S.) 386 are Gab Mh eas 27 California v. Central I’. “4 ee; £ & eae ae Cedar ee Gas Light Co. «. Cedar — 223 U. O55 . a te Ce ee be wa hve 0. 9 Chines. ete., R. R vy. Ander rson, 22 it & sare as Chicago, ete, Ro Rov. Transberger, 258 v 8. 67 3M Chicago, Burlington & Quiney RR. . MeGuire, ong U.S. 349. 63,110,111 ,~R&Q. R. R. Co. v. een 218 &. eee C.C.& St. L. Ry. Co. v. Backus, 154 U.S. 439. 16,34 Chicago, Milwaukee & St. P. Ry. Co. v. Minnesota, 154 ” §. 418 i 5 RO Cohens v. Virginia, 6 Wheat. (U.S) 264 113 Commonwealth vo Alger, 7 Cush (Mase) 53 JS Cotting v. Kansas City Stock Yards Co., ISS ULS. 79 67 Crattwell v. Lwe, 17 Ves. Jr. 335 29 Darnell vo Fadwards, 244 U.S. 561 a Darton Goose Creek RR Ca vi US 263 U.S. 456. . 1, 73. 74. ‘ h, “6. so. ma iz Des Moines Ges Co. vy. City of Des Moines, 238 U. A a. 105 Eaton v B.C. & Me RR, aT N. H. 306.. 25 _— vii PAGE Esselstyn v. Holmes, 42 Mont. 507................... 30 Fletcher Co. v. Int. Assn. of Mach., 55 Atl. 1077...... 30 Ue D, POMNNE, Tes Ws BEDS cass bocca eV beens vee a's 29 Georgia Ry. and Power Co. v. R. R, Commission, 262 Ee oS ace ee ee 50, 51 Harper v. Stanbrough, 2 La. Ann. 377................ 29 Hitehman Coal Co. v. Mitehell, 245 U.S, 229. i ae Hudson County Water Co. v. MeCarter, 209 U. Ss. 349. 71 Illinois Cent. R. R. Co. v. Commissioners, 161 Tl 247... 26 Illinois Central R. R. Co. v. 1. C. C., 206 U.S. 441.2... 95 International Harvester Co. v. Kentucky, 234 U. S. SE, 40s datas i oan anbs-+cdan dened sdonue rite International News Service v. Assoc. Press, 248 U. BN Gc chink kaie yah ca neice ied tuk che ees oka ¢1.98 Inte rstate C ommerce indiana v. 1. C. R. R. Co., 215 EE IR nah A Se AB Ne a ge RE aye 63 Interstate Commerce Commission v. Union Pacifie R. ee A ee Jersey City Printing Co. v. Cassidy, 683 N. J. Eq. 759... 30 Kawananakoa v. Polybank, 205 U.S. 349........... 98, 30 la Belle Iron Works v. U.S... 256 U.S. 377... .... . 120 Lineoln Gas & Flec. Co. v. Lincoln, 250 U.S. 256... |... 91 L. & N. R. R. Co, v. Central Stockyards Co., 212 U.S. 132 FEU Eb de4de Coin eta t ORAK Cia Dae e kee s 32 Louisville v. ¢ eal rland T. & T. Co., 225 U.S. 430... 91 Louisville & Nashville R. R. Co. v. Garrett, 231 U.S. Sar a ee ioe Clee pe ee Ue ea 49 Low v. Rees Printing Co., 41 Ne = a Se 26 McArdle v. Indianapolis Water Co., 272 U.S. 400. .112.114 McCulloch v. Maryland, 4 Wheat. (U. S.) 316........ 63 McCullom v. Smith, 19 Tenn. 372... hiv, eae ” Minnesota Rate Cases, 230 U.S. 392...0.....0...... Setlonh decal 15, 16, 36, 49, 50, 51, 65, 84, 94, 105 Munescte & St. L. Ry. Co. v. Minneapolis, 186 U.S. SE Gia Saas i hada ee i hes eee .100,117 hcaaesl ex rel, Southwestern Bell Tel. . v. Public ee SO TE Wa ls 8 Sacks c2sceeventetecss 53 Ste Soth te OE viii PAGE Missouri Pacifie Ry. Co. v. Humes, 115 U.S. 512...... 38 Monongahela Nav. Co. v. U.S., 148 US. 312... .. .16,34 Munn v. Hiinois, 4 UL S. 118 aoe o6 lee Ohio Valley Water Company v. Ben Avon Borough, 253 U. S. 287 seeeeElane ca cee ee 2) Omnia Commercial Co. v. United States, 261 US. 502. 31 Pacific Gas & Flee. Co. v. City and County of San Fran eciseo, JOS US, 408 oi ae fy) Pacifie Gas & Elec. Co. v. Police Court, 251 U.S. 22 ts Peik v. C.& NW. Rv. 94 «UL S. 164 116 People v. City of Chicago, 321 1 466 63 Prentis v. Atlantic Coast Line Co., 211 U. 8. 210 112 Pullen vo Commissioners, 65 N.C. 361 41 Railroad Commission Cases, 116 Uo S. 207 116 Rev v. Lwon, 2 T R788 a“ Roberson v. Rochester Folding Box Co. 171 N YO538) 0 San Diego Land and Town Co v. Jasper, 989 US 439 100 San Diego Land and Town Co. v National City, 174 U. 8. 7% 31,41, 1% Smyth vo Ames, 199 TS. 466 1%, 8, 40, 41, 42. 43, 48, 51, 99, 117, 118, 119 Sperry & Hutehinson Co. vo Rhodes, 220 oS wr a Springfield ete Co. vy. Allen, 40.N. Yo osu m St Louis v Hill, 116 Mo 427 * Standard O}F Co wv Southern Pacific Co, 268 US 146 th, 0, 113 Stanisians County vo San Joaquin, ete, Co, W2ULS8 ma) | 1m) State Utilities Commission vo Springfield Gas Co, 291 It 20 wh Tavior v. Beckham, 178 U.S 548, 580 123 Terminal RoR. Awan. s Inited States, 226 US 17 wt Terns and Pacifie RO Ko Cov Interstate Commerce Commission, 162 0S. 197 / a Thompson v Androscoggin Improvement Co, 4N A Transcontinental vo Emmerson, 298 I!) 34 * & ODA PLR ELLIE EPP LE — ix PAGE United States v. Steffens, 100 U.S. 82............... 2k United States v. Terminal R. R. Assoe., 224 US. 383... 38 Van Horn v. Dorrence, 2 Dall, (UL S.) 304.......... 27 astern meee Came. Beeb. ©. OLB, nics cc cece nic ewes 57, 88 Willeox v. Consolidated Gas Co., 212 UL S.19.0...... 53,91 Wynehamer v, People, 13 N. Y. 378................ 25, 26 Taste oy Srarures Crrep, Interstate Commerce Act, See, 15 (1)..00...... ee | Interstate Commerce Act, Sec. ba (2). . 9.47. 48, 72,77, 96 Interstate Commerce Act, See. 15a (4)... . . » «Dp bay OH Interstate Conumerce Act, See. lou (6) ah Ee 9 Printed in Appendix C Interstate Commerce Act, Sev. 19a » + edd ta Printed in Appendix C. Trxrnooks anp Excycroremias Crrep. 23 Amer.-Fug. Enc. of Law, p. 261................-- 2 2 Austin, ‘‘Lectures on Jurisprudence’’, S17, Sees. 1051.6 Sn Lene “jie 5 alah ,25, 28 Bauer, American Economie Review, Vol. 14, No. 2, p. 262 eee Bentham, Theory of Laewistation’’, Ch. Vill }'. eae. Js 1 Blackstone, Commentaries, 138 Rea . > sae ae Bonbright, ‘*The Problem of Judicial Valuation’, Co lumbia Law Review (Mav, 1927) 17,18 Bonbright, ‘The Eeonomie Merits of Original Cost and Reproduction Cost’’, Harvard Law Review, March, 1928, 58, G22 70 Cooley, ‘Constitutional Limitations ’', 7th Ed. p. 511.28, 31 Ely, **Keonomies'’, Book 2, p. 172 a6 **Monopolies and Trusts” 69 Property and Contract "’, poo9 ps) Franklin, Benjamin‘ Writings’’, Vol. X, (Smyth's Ed), p. 59 ' iets = tw x PAGE Gray, ‘‘ Nature and Source of Law"’, Sees, 34-53... ... 28 Hale, The ‘Physical Value’? Fallacy in Rate Cases, 30 Yale Law Journal, 710.. cates 10] Hobbes, ** Leviathan’’, Part 2, Ch. 18, p. 1) a Hobhouse, ‘* Property, Its Duties and Rights’, (1922) 0 2s Holland, ‘*Jurisprudence’’, 11th Ed., 51 to 56 >» Huxley, **Method and Results”, Pp 190.... ps Jhering, ‘Spirit of the Roman Law’’, See. 60 Os ® Kent’s Commentaries, 340 28 Kirshman, ‘‘The Principle of Competitive Cost) in Public Utility Valuation’’, 35 Yale Law Journal, 805 56 Laughlin, “The Elements of Politieal Feonomv’’, pp. ; 1} 79-77. . mS | Locke, ** Treatise on Civil Government’, See. 50 es Macleod, ‘*Elements of Feonomies’’, Vol. I, pp. 141, 143 . Fy Kn) Marshall, ‘Principles of FReonomics”’ Rook 4 : Chee 7, See. 6 4. Mill, ‘* Political Economy'', Vol. HT, p. 3... 37 Pound, ‘An Introduction to the Philosophy of Law’ pp. 4, 224 . Shear Raleigh, ‘‘Outline of the Law of Property’, po 1 Ra Ritchie, *‘Natural Rights’’, p. 234 pL 6 Ruling Case Law, 241 % 2 Raoling Case Law, 37 * Smith, ‘‘Personal Property’, 58 rf Stimeon, ‘Public Law Making", Ch. 7 as Taft, Chief Justice, Response to Resolutions on Janu ary 16, 1922, 250 US) Appendix TI 25, 124 Tanang, Principles of Feonemice’’, Volo 1, p. 115 33, 115 Van Hise, ‘Concentration and Control’, 84, 86 na | aa Ses Re Oe ot er caer IN THE Supreme Court of the United States Ovrenek Team, A. D. 1928 Nos. 13], 132. eee THE ST. LOUIS & O'FALLON RAILWAY COMPANY, and MANUFACTURERS’ RY. CO.,, Appellants, Vs, THE UNITED STATES OF AMERICA, and THE INTERSTATE COMMERCE COMMISSION, Appellees. THE UNITED STATES OF AMERICA, and THE INTERSTATE COMMERCE COMMISSION, Appellants, ve. THE ST. LOUIS & ©’ FALLON RAIL'VAY COMPANY, and MANUFACTURERS’ RY. CO., Appellees. BRIEF IN BEHALF OF THE NATIONAL CONFER. ENCE ON VALUATION OF AMERICAN RAIL. ROADS, AS AMICUS CURIAE. STATEMENT. There are two reasons for offering this brief. 1. The principal issue in this case is one of extraordi- nary public concern. It ix: How shall radroad property be valued for rate. making purposes, under the provisions of the Interstate Commeree Act. 2 The official representatives of the public interest seem constrained to adopt one theory of the law and to discard an alternative (but inconsistent) theory, which is supported Be Py 2 by equally impressive authority aad which would sustain with equal force the action of the Interstate Commerce Commission, which is under attack. It would be unfortunate in this momentous proceeding to have neo argument whatsoever presented to the court upon principles which might be held decisive of the main question here propounded. Alternative Theories of the Law It appears to be the position of counsel for the carriers and for the government that the valuation of private prop erty as the basis for public regulation i» ultimately a judi- cia] function; that such property has a value, independent of legislative action, which will be ascertained correctly if an administrative commission will follow the valuation rules laid down in the courts. The respective arguments follow: that the Interstate Commission has discovered (or failed to discover) this independent value of the carrier's property, by following (or failing to follow) the judicial rules, and that, therefore, its valuation should be sustained for should be set aside) There is some show of authority to justify counsel on beth sides in shayang the issues along the lines indicated. On the other hand, there is equally good authority for urging that the valuation of private property as the basis for public regulation i ultimately a legislative function: that ‘‘property’’ has ne absolute, inevitable ‘‘value,”’ which exists independent of legislative action. There is good authorty for urging that the value of property is determined, not only by the play of economic forces, but also by the laws which grant, regulate and prohibit that private dominion over things pronscnmed, which i defined in the law as ‘property. In the heht of these legal and econemic prince ples, it becomes evident that a regulatory commission is not directed to ascertain what the value of fc WORE elit 3 public utility property ts (a question usually answered by the stock exchange); but that such a commission has the duty of determining what the value of the property should be. It will be conceded that if the value of property devoted to pubhe service were an independent fact, to be ascer- then it might be necessary for the court now to decide whether such a fact had been correctly ascertained. But if it be conceded, also, that public regulation of public acrvice enterprises necessarily Increases and diminishes the values of properties thus dedicated to public use, then the court is nef now called upon to decide whether the com- mission has correctly ascertained an independent fact. On the contrary, it is the contention of present counsel that the court is now called upon to decide this question: Did the Interstate Commerce Commission administer reason- ably a public policy properly defined by Congress, when the Commission determined what value showd be given to the present carrier property in order that the objects of public regulation might be accomplished? In behalf of the public interests represented in the Na- tonal Conference on Valuation, its counsel seeks this op- portunity to demonstrate: (a) That the Interstate Commerce Commission might have placed a lower valuation upon the O'Fallon property under the present law, or under more explheit legislative directions, enacted within constitutional limitations; ih) That, in giving ‘‘due consideration to all the ele- ments of value recognized by the law of the land for rate- making purposes,’ the Commission gave such generous weight to private interests in railroad property (in com- parison with the weight given to public interests), that tained as one would find the weight of a bushel of wheat, 4 these private interests have no reasonable ground for com- plaint, although the rate-paying public might well pro- test. It should be evident that the present brief will neither duplicate nor merely extend the briefs filed for the United States and for the Interstate Commerce Commission, but that it will raise additional Issues, deemed worthy of con. sideration because the arguments here presented are sup- ported by many opinions of the Supreme Court and by the writings of legal and economic authorities of the highest rank. It is submitted that, when a litigant seeks to have the legislative power of rate-making transferred to the courts, it is fitting for the proponents of legislative power to ask the court to consider primarily, not the wisdom, but the constitutional validity of the exercise of the judicial power which is invoked. The opinions of the statutory three judge court, which sustain the order of the Commission, are reported in 22 F (2nd) 980. (RL, 125-140-148.) gs Orrylanin ah es telN | RPL EEE AES SUMMARY OF ARGUMENT. nee PART I. THE INSEPARABLE PROBLEM OF RATE REGU. LATION AND VALUE REGULATION. 1. The valuation issue should not be isolated from the issue of rate regulation, If a public utility property can- not be valued in such a manner as to insure reasonable rates, then the conceded power of rate regulation is de- stroved, The power to require reasonable rates compre- hends the power to prevent unreasonable profits. To di- minish profits, that might be made, is to diminish values, that might be obtained. Therefore, the process of rate regulation requires that the owners of a public utility prop- erty shall be deprived of a part of its potential value. Argument, p. 14. “ - Between the maximum property valuation, which would be the basis for, and the result of the highest feas- ible rates, and the minimum property valuation which would be the basis for, and the result of, the lowest feasible rates, hes the lepisintive field of rate regulation, The val- ation of a public utility property within these limits, as a basix for rate making, ix an exercise of the legislative power of rate regulation within the range of legislative discretion—and js mof subject to yudicial review. Argument, p. 20. 6 3. In order to justify judicial invasion of the field of legislative discretion the carriers are seeking to isolate the valuation issue from the issue of rate regulation. They are asking the courts to give utility properties a fixed value by compelling the use of a judicial formula of valuation, All property values are the joint product of economic and political forces. They depend upon mghts conferred and protected by laws. Tf judicial action establishes a public utility property value which cannot be changed by legis. lative action, the legislative power of rate regulation is destroyed. Argument, p. 23. 4. A careful analysis of the legal and economic concepts of ‘property’ and ‘‘ value’ wall clarify the problem. Argument, p. 24. ia) “‘Property os the dominion over things pos sessed——a ‘bundle of rights''——which i» conferred by law. Argument, p. 24. ib) The ‘'value’’ of property is the ‘power to com mand a price" for things possonsecd, which depends upon the power whic h the owner can exercise over his meacesions—that is, upon the ‘property’ which has wen conferred upon bam by law Argument, p. 33. ~~ OGRE LOLA LEME PIII ERE NEL ES — 7 , (c) The *tproperty’’ of a public utility owner is not an absolute dominion, but one qualified by the public service obligations which he has assumed. Among these obligations is the duty to charge only ‘‘ reason- able rates’’ for the use of the things which he has de- voted to public service, Argument, p. 37. (d) Thus the ‘‘value’’ of his ‘‘property’’ is de- pendent upon the inescapable fact that his property (his ‘‘bundle of rights’’ conferred by law) includes only a limited ** power to command a price’’. He can only command a price which the legislative power es- tablishes as ‘‘reasonable’’. The power to establish ‘reasonable rates’? necessarily il he the power to establish a ‘‘reasonable value’’ for the property used. Argument, p. 39. 5 Therefore the legislative power of rate regulation must include the power of value regulation. If a law fixing a formula for the finding of value were written in the courts, the result would be the absolute destruction of a vital, far reaching legislative power, by the substitution of judicial authority for legislative authority in rate-making. Argument, p. 39. Supreme Court has consistently maintained— that the rate making power is legislative ; that there is no formula for finding the value of a public utility property. Argument, p. 49. PART II. THE UNDERLYING ISSUE IN A VALUATION CASE. 7. The underlying issue in a valuation case, as in any rate-regulation case is; What is a fair price for the public service rendered?! Argument, p. 52. & The sole question to be presented for judicial review is: Has a ‘‘monopoly price’’ or a ‘‘confiscatory price’’ been established! Argument, p. 64. (a) A ‘monopoly price’’, as here defined, is one clearly exceeding any price obtainable by sellers under fair competitive conditions. Argument, p. 65. (b) A ‘‘confiscatory price’’, as here defined, is one clearly leas than any price obtainable by buyers under fair competitive conditions Argument, p. 65. See ee : TIPE ALIEN ATI NN PE AE EE IME — PART III. THE LEGISLATIVE STANDARDS FOR RATE REGU- LATION AND VALUE REGULATION. 9, In its exercise of the legislative power of rate-making Congress, in the Interstate Commerce Act, has authorized and directed the Interstate Commerce Commission Argument, p. 72. (a) ‘*To determine and prescribe what will be the just and reasonable’ rates. (See. 15 (1) ) (b) To ‘‘establish or adjust such rates’’ so as to provide a ‘‘fair return upon the aggregate value’’ of railway property. (See. 15a (2) ) (c) To enforce a trusteeship imposed on every indi- vidual railroad in regard to net income exceeding the ‘fair return’? upon the value of its individual prop- erty. (See. 15a (6) ) (d) To determine the aggregate value through its individual valuations ‘‘ascertained’’ through ‘‘its in- vestigation under Section 19a"’, giving ‘‘due considera- tion to all the elements of value recognized by the law of the land for rate-making purposes.’’ (Sec. 15a (4).) fg eR PP ORT IS REE POI ROLY AALS, LE I LY 10 10. The legislative power thus provided no formula for fixing reasonable rates, but required its administrative agent to obtain a vast amount of information, to consider it and to report it, so that the basis for its conclusions might be known. A mere reading of the Interstate Commerce Act will demonstrate the impossibility of establishing ‘*rea- sonable rates’? by any formula or—by the same token— the impossibility of establishing the ‘‘value”’ of railway property by any formula, ‘*A reasonable judgment having its basis in a proper consideration of all relevant facts’’— is clearly all that ix possible. Such a judgment has been exercised by the Commission. Argument, p. 78. PART IV. THE DECISIVE ISSUE IN THE PRESENT CASE, 11. This “reasonable jadgment"’ has been based on the principle that competitive prices should be high enough to support generously the credit of carriers whose securities represent prudent investment, se that the existing facilities may be maintained efficiently and further investments may he induced-—and not unreasonably higher than the prices which would have resulted if the public had undertaken to furnish the service or to compete fairly with private enter. prise. Argument, p. 81. (a) It would seem to be conclusive proof that rates have been fixed within the range of legislative discre tion (between a monopoly price and a confiscatory price) if experience shows that the traffic continues to move in a reasonable volume and that additional investments continue to flow into the public service at reasonable rates of return. Argument, p. 88. C- SFOS EL SAME PLM EEL ELD RAL RE ELIE LEI LE OVE ELLE SD ATES. RATER 11 (b) If rates or values established are attacked as ‘‘confiscatory’’, before an adequate experience has been had to demonstrate their effect, the court is called upon to decide (upon the record) that the owners of the property involved would not have undertaken to furnish this service, and would not now continue to furnish it, voluntarily, for the price which has been fixed. Argument, p. 91. 12. This reasonable judgment has been exercised within a ‘range of legislative diseretion’’ by a ‘‘tribunal appoint- ed by law and informed by experience’’, and the Supreme Court has held that it does not sit ‘tas a board of revision to substitute our judgment for that of the legislature, or of the Commission lawfully constituted by it, as to matters ’ within the province of either.’ Argument, p. 94. 13. But, in the present case, the carriers are seeking to avoid all discussion of a fair price for the service, by claim- ing that a property value exists independent of, and not to be affected by, their obligation to serve at a fair price. Argument, p. 96. 14. The carriers contend that their property has a ‘‘true value which is the economic equivalent of the property’’, which value ‘‘must be determined’’ by giving ‘‘dominant consideration’ to a theoretical cost of reproduction at “present prices’. Argument, p. 97. 12 15. No property has any independent, or ‘‘true’’, value —or any ‘‘economic equivalent’’—which is measured by reproduction cost or any other cost. Earning power— not cost—is the measure of value; as the Supreme Court has always held. Costs only firnish evidence of what would be a ‘fair price’’ for the service to recompense the seller for his outlays. Reproduction costs are only evidence of the highest possible prices—evidence of monopoly prices. Argument, p. 98. 16. Through the device of claiming that an absolute value inheres in their possessions, the carriers are in fact asking the court to establish a formula for fixing the value of their property; and thereby to establish a formula for fixing rates; and thereby to take away from the legislative branch of the government all substance of its constitutional power to fix rates, in order that only a fair price shall be charged for public services Argument, p. 107. 17. The carriers are asking the court (actually but not candidly) to establish a fiat value for all public utility prop erties at the amount of their theoretical reproduction cost to substitute a judicial formula for legislative discre tion--to transfer the legislative power of rate making from the legislatures to the courts; and by judicial action to es- tablish monopoly values for these properties as the basis for a constitutional night to charge monopoly prices. Argument, p. 107. BBO POOR DERE ER NORE ELLIE PI HEY: FANS JE HM REL LINHA TE See 13 18. The contentions of the carriers are based on (1) a false economic concept of ‘‘value’’, which the court is asked to adopt against the protests of all authoritative economists; and (2) a false juristic concept of ‘‘ property’, which the court is asked to adopt in repudiation of its own opinions and the concensus of legal commentators, Argument, p. 107. 1%. It is respectfully submitted that in the present case the carriers have not been deprived of any property right to charge a fair price for services rendered, or of any prop- erty value based on such a property mght; that the rates, the earning power and the resultant value of the property of the carriers were established by the Interstate Commerce Commission, in & conservative exercise of the legislative power of rate regulation, well within the limits of the range of legislative discretion; all in conformity with the laws and the Constitution of the United States. Argument, p. 114. 14 ARGUMENT .* PART I THE INSEPARABLE PROBLEM OF RATE RkAil LATION AND VALUE REGULATION, Point I. The valuation issue should not be :solated from the issue of rate regulation. If a public utility property cannot be valued in such a manner as to insure reasonable rates, then the conceded power of rate regulation is destroyed The power to require reasonable rates comprehends the power to prevent unreasonable profits. To diminish profits, that might be made, 1s to diminish values, that might be obtained. Therefore, the process of rate regu. lation requires that the owners of a public utility prop erty shall be deprived of a part of its potential value The «ffert tas smal ate thes ‘ al pat sest) tmetie from the prolyl ft of 1 shhis tatalits rewulatiot at aniv serve ta trbone mre thy Gcrevel stl Peers Cel : : - «ti banged eitind ¢ . ; . terrelmitiemia: ger egteie marisa jive WE rrtist pores inde he huyage fast elefertninit ge tive “Vv mitie ” af tiPesqee rts che ‘ ateal ' retablie tise The use of the wond ‘value’’ seems unfort fiate etre: Bn of the pteigecte mtiaet that We Te me eking to fhr ; an cromome fact, when we are in truth seeking fo compro mise economic claims incapable of a purely mathematical fixation. the conflicting claims of seller and buyer concern ng a fair price for a servicer But the word “value ’’ may *italive it whations threaghout this trief are cure uniets of ber wiee imdiicated Coaunes! for the ratiraad in their briefs Im the lower court conetantir demanded that the ccmpiniesion ehogid be 4 peowted to Gnd the tree va'ee which le the economic eqeliraient of the property implying (thet the veoperty hal an ateeiute ‘vaice which eheaul4 not be afoctet br govern mental regulation af ite earning power Thue the entire ergument is ebipged 6 an eromemic fallacy that wi!) fot feemt nee | eas SIRT ne 15 aid us to arrive at a just basis for rate regulation if we realize at the outset that all ‘‘values’’ are relative and that no *Value’’ can ever be stated except after considering and answering the questions: Value, to whom! Value, for whatf Value, under what conditions? Value, to whom”? It has been Jong settled that in a condemnation case, it is the value to the owner (of property taken) and not the value to the purchaser, which must be determined: because “the question is, What has the owner lost’ Not, What has the taker gained !"’ Boston Chamber of Commerce v. Bos. fon, 217 UL S. S80, 195. But at has been long settled also that in rate regulation its the value to the purchaser (of services rendered) which must be detertnined, because the publicis entitled to demand “that ne more be exaeted from it for use of a publie high Way than the services rendered by it (the company) are reasonably worth.’ Smyth v. Ames, 169 US. 466: Minne- sotn Rate Cases, 280 US. 552 The impossibility of ascertaining a value without an- swering the question: Value. to whom’? is made clear in the opinion delivered in Boston Chamber of Commerce v Boston, supra, where itis held: “But the Constitution does not require a disregard at the state of the title It does not require a parce] of land to be valued as an unencumbered whole. It merely requires that an owner of property taken should he pad for what is taken from him. It deals with petsoms, not with tracts of land" (jy. 195). Value, for what” Karning yrower determines “'value’’ for Purposes of con demwation or taratiom. In valuing a bridge company’s property ina condemmna from ense it was held that the earnings of this publie utility Loe am 16 *“*‘must enter into and largely determine the matter of value Monongahela Nav. Co. v. U.S... 148 U.S. 312, 319. In a railroad farefion cause, it was held that the value of property results from and varies with the profitableness of its use; and that ‘tthere is no peeumary value outside of that which results from such use.’* CoC Co €& St. L. Ry Ce. v. Backus, UA U.S. 439, 495) Bat in a rote regulates case, it was held that value was not—and could not he determined by actual earning power; because ‘'the value of the use, as measured by return, can- not be made the ertterion when the retarn itself is in ques tron Minnesota Rate Cases, 290 U.S. 352, 461. Value, under what conditions? Citations of authority are hard!y newled to demonstrate that all property values degend upon conditions that affect earning power Let us assume that the A-B Company has been earning 2) per cent on an investment of $1,000,000 and that tts servier is then dapleate!d by a competitor whe cuts prices, thereby reducing the profits of the original enterprise to 5 per cent The value of the A-B properts would be affeetedd by the changed conditions Let us for ther assume that the A.B Company is a public utility. [> not the value of its property affected by ite pabhe service obligations? Maw not rates he required that are reason ably comparable to the charges for which the public could supply the aame service and make a reasonable return on ite invewtment®? Must the public actually engaged in com petition, in order to rexiuce unreasonable rates and to fir reasonable ‘‘valuves"’ for pubhe utslity properties? Or, is public regulation intended as a substitute for competi: _ 17 tion and based upon the theory that, when monopoly is tolerated, or authorized, competitive rates can be estab- lished by law! Can it be questioned that these conditions, under which public utility properties actually exist, must be given ‘‘due consideration’’ as *‘elements of value’’ in placing a ‘‘value’’ on these properties as a basis for public regulation! Just because these questions—and so many of the ‘‘ele- ments of value’’--are blandly ignored in the arguments of public utility counsel (and apparently given no considera- tion In many Judicial opinions), it seems desirable, even if not necessary, to begin this argument with a restatement of the principal purpose of public utility regulation, and with an insistence that the valuation issue should not be isdlated from the major problem in which it arises. The distinction, at least, between rate-making value and market value, even though it is sometimes recog- mized in judicial opinions, is far from adequately recog- nized. Yet itus a distinction which underlies the whole theory of public utility regulation, a theory which is based on the principle that certain enterprises, called pubhe utilitues, should not be allowed to charge what- ever prices they might be able to charge if their power to coeree customers by means of the bargaining process were not to be limuted. In view of the fact that the market values of public service enterprises are simply a capitalization of the expected carnings that follow the exercise of the property owner's coercive powers, they enannot properly be used as the basis of a rate con- trol which is designed, not alone to observe, but to limit, these powers. It is the recognition of this fun- damental difference between valuation ax a measure and valuation as a modifier of market forces that has caused many writers on public regulation to put valu- ation for rate making in a place by itself and to dis- Unguish between this ‘value’ whieh cannot properly mean market value. and other judicial values, such as value for taxation, for damages, or for condemnation which, it is assumed, do properly mean market value."’ Bonbnght.—"' The Problem of Judicial Valuation.”’ Columbia Law Review, May, 1927. BR eson cw escens . + SEEN St ae Is — 18 The attempt to isolate the valuation of a public utility property for rate-making purposes from the problem of rate-regulation fails, not only because it leaves out of con- sideration a most influential ‘‘element of value,"" but also because it leaves the value to be determined in an economic vacuum. The valuator is asked to find the value of the property, not to its actual owner, but the value to any owner. No such value exists in fact. The valuator is asked to determine the value, not for rafe making purposes, but for aay purpose. No such value exists in fact. The valu ator is asked to determine the value, not under stated con- ditions, but under awy combtions. Ne such value exists in fact. Economists bave long since agreed Ubat there is no ‘true Value’’ possessed by anything as an ‘‘abiding intrinsic worth’’. As expressed by a writer in the Columbia Law Review, Volume J7, page 624: ** The ‘value’ of a thing ix always its value for the par ticular purpose, and in the particular conthiet, in hand at the tume of valuation. Henee there is no necessary relation between any given Value and cost, for cost was promoted and met by punt interests which may or may net carry over inte the present sifuation without change The only ‘true value’ for the present will be the one which best resolves conflicting imfterests in terms of a stable adjustment. So far a» the interests change, the ‘true value’ selution Likewise reqaires change. On may recall here the fact that back in the period of fall ing prices the railroads were accused of urging that true value for purposes of rate making Was sVvnony mous with histerteal, rather than with reproduction cost.” Realtting pounantly that no coonomist will support the long, diseteditedd notion that there is such a thing as one “true value'’, counsel for the carriers have been led to the assertion, in briefs in the lower court, that ‘‘for the last three centuries the economic theonmets have been anable to agree among themneelves upon a theory of value" Hut the LER ALBA NEIRE SIMI BIE P IT ESR ARDEA 19 primary meaning of pecuniary value, universally accepted by economists, is the “‘power to command a price,’’ or, in other words, an ‘‘exchange ratio’’; and counsel for the car- riers are seeking judicial support of the irrational propo- sitien that things in themselves have a ‘true value’’, inde- pendent of the factors determining the owner's **power to command a price’, or independent of the factors determin. ing the ratio at which one commodit’ under designated con- ditiens, will exchange for another. It is impossible even to discuss a method of fixing a value in an cconeme vacuum. Therefore, counsel for the ear- riers, While claiming that they desire to have the court lay down the rules for finding the one ‘true value’ (whieh is supposed to exist for anybody, for any purposes, under any conditions), are in reality seeking to have the court lay dewn the rules for finding a value which can exist only as the “‘value’’ of his property fo a monopolist, used by him as the Imasis for fixing the highest possible prices for buyers who are compelled to buy! (See Point 15, enfra.) It may be conceded that if there were no legislative power of rate-regulation capable of reducing the power of the pabhie utility owner to command a price, he might be able to renlive substantially the ‘value’? whieh is now claimed as the one ‘true value’. The reason hy he cannot realize such wa ‘'value'’, that ix, the reason why he has no such “pewer to command a price’’, ix because the legislative power of rate-regulation exists, Therefore. from the beginning to the end of this argu. Went, ios hecessary to combat the effort of the carriers to iwolate the valuation issue from the rate-regulation issue. It is necessary to continue to insist that the value of pub. lic utility property is determined by and must be made responsive to the obligation to serve at reasonable rates. In order to prevent this attempted isolation of the valua Yon IssUC, We must insist that no value can be stated for 20 any property, unless it be ‘stated as a value to a particular owner, for particular purposes, under particular conditions, A value cannot be stated for a public utility property as a part of the process of rate regulation, without stating it as: (1) a value to owners who are subject to the obligations of public service; (2) a value for rate-making purposes, Which must be consistent with, and determined by the law that public utility rates must be reasonable; and, therefore, (3) a Value arrived at by taking into consideration the incon. sistent and contheting private interests of sellers and buy, ers, Which must be compromised in order to deal fairly with all private interests and to arrive at that balancing of private imterests which is called, ‘‘the pubhe interest’’. Point 2. Between the maximum property valuation which would be the basis for and the result of the highest feasible rates, and the minimum property valuation which would be the basis for and the result of the lowest feasible rates, lies the legislative field of rate-regulation. The valuation of a public utility property within this field, as a basis for rate-making, is an exercise of the legislative power of rate regulation, within the range of legislative discretion —and is not subject to judicial review. There are certain cconomie limitations upon rate regu lation which cannot be disregarded Rates might be fixed so high as to stop the use af the service, or 80 low as to stop the furmushing of the service, Legislative action te compel either result would not be the regulation of pubhe serview, but ite destruction | and misguided efforts in this direction might well be restrained bw the courts on the ground of the constitutional limitations upon legislative power But. the legislative power with which we are here con cerned has been exerted only to compel the charging of CRA URN NE MTNA LAURER NET ESPNS SHY HENS ve m ANDEAN TTA _— 21 ‘reasonable rates'’. So the question presented is only one as to whether the Interstate Commerce Commission has acted in conformity with its delegated authority. In view of the conflicting interests of the sellers and buyers of any service, itis clear that there must be a considerable margin between those rates which would be most satisfactory to the sellers, producing the maximum value for their property, and rates which would be most satisfactory to the buyers, producing the cheapest efficient service for their use. There must be a considerable margin between rates which would be so unsatisfactory to sellers that they would cease to make further investments and seek to be relieved of public service Obligations, and rates which would be so unsatis- factory to buyers that they would cease to use the service, In and bevond the twilight zone between unreasonable rates and extortionate rates, a court in exercising judicial power may find it necessary to exercise its ‘independent judgment as to both law and facts;"’ and the same judicial review may be required in and beyond the twilight zone between unreasonably low rates and confiscatory rates. This, we understand to be the doctrine announced in the much discussed case entitled Ohio Valley Water Company Vv. Ben Aton Borough, 253 U.S. 287. Thus we find, at each end of the field of legislative power in rate regulation, a zone of unoertainty, wherein, in one case the independent judgment of the court upon the facts may cause it to set aside a commission order, although in another case, upon only slightly different facts, a similar order may be sus- tained, The point we desire to make now is that there tu an assured teld of legislative discretion (which hes between the vones of uneeriainty Which may be called unreasonably high and unreasonably low rates) wherein legislative power is exercised through an administrative commission whose acts within this field are not subject to judicial review. Yet ERIN ARE Rs Owe, Se 2 ‘ ‘ ERIE IN SERPS NYY DAT RPE SL ea there must be a considerable margin for difference of opin- jon as to what are ‘‘reasonable rates’’, so that within this same assured field of legislative discretion values differing in large amounts might be fixed for the same property by different commissions, or by the same commission under different circumstances. Banton vy. Belt Line Railway Co, 268 U.S. 415. To give short, specific examples: (1) Different real estate appraisers of equal experience and impartialty will differ widely as to the values of the same real estate in a large city. (2) The same appraiser may place different values upon the same real estate before and after the pas- sage of a toning ordinance, or the enactment of some other legal restriction upon the uses of real estate. (5) Rea! estate peculiarly valuable for a railroad passenger terminal may lose some of that value through the growth of motor bus transportation and the consequent decline of local pas- senger business. This last example indicates the interde- pendence of rates and values. It may be impossible to charge former local passenger rates in competition with motor bus transporation or private automobile transporta. tion. The decline of business, or its diminished profitable. ness, will reduce both the values of property peculiarly adapted to the business and the prices which can be charged and obtained for the service At this stage of the argument, it is only our purpose to emphasize the fact that there ts a field of legislative power within which there mast be a legisiative discretion in the fixing of values for rate making purposes. The effort of counsel for the carriers to establish a judicial rule of valuation, so that a ‘‘value"’ must be fixed at a specific amount, whereby ‘‘reasonable rates’’ must also be fixed at a specific amount, is in reality an effort to substitute a judicial rule for the ‘' reasonable jadement"’ of legislative agente within the field of legislative discretion. SUSAR ALTE NIE IEG TPT ILE RRS eee LE Mane 23 Point 3. In order to justify judicial invasion of the field of legisla- tive discretion the carriers are seeking to isolate the valu- ation issue from the issue of rate regulation. They are asking the courts to give utility properties a fixed value by compelling the use of a judicia] formula of valuation. All property values are the joint product of economic and political forces. They depend upon rights conferred and protected by laws. If judicial action establishes a public utility property value which cannot be changed by legis- lative action, the legislative power of rate regulation is destroyed. The judicial formula of valuation which the carriers are seeking to have established is that the present value of public utility property is always to be found by estimating the reproduction cost of the identical property at present prices! The field of judgment left to the Commission is only a limited Judgement in the weighing of evidence as to the amount of this reproduction cost, including the weighing of evidence as to what are the current or anticipated prices which should be applied. If such a formula were laid down, there would be an end of the legislative power of rate- regulation. If property devoted to publie service (which has no inevitable value) must be green an absolute value, bearing a fixed relation to cost, then the charge for the use of such property becomes practically a fixed charge: and the determination of reasonable rates is no longer an exercise of legislative judgment, wherein the interests of the public may receive due consideration. Rate regulation is made an artitrary process for determining what the public must pay for public services, regardless of what the service is “The true value that te the economic equivalent of the property. murt te ascertained in a way to determine the worth ax of the time of the controversy, that is, the then present value This requires that efective and dominant consideration be given to the then present prices.” Reply Nrief for Carriers in the District Court, p 12 24 ‘‘reasonably worth’’ to the public. Thereby, in the per- ennial economic conflict between private sellers and public buyers, the inherent legislative power to protect public buy- ers is destroyed. If property had an absolute value, an ‘abiding, intrin- sic worth’’, there would be a justification for the establish ment, by judicial rule, of a method whereby such a value must be ascertained. But since no property, whether used in private or public service, has any such absolute value, the effort to establish a judicial formula is simply an effort to have the courts give to public utility property this spe- cial **value’’ power of government, would be clearly an exercise of legis. an act which, so far as it may be within the lative power. The inevitable effect of such an exercise of judicial power would |e to destroy the substance of the legislative power of rate regulation, which, to be effective, must include the power of value regulation. Since the entire argument of counsel for the carriers depends upon the assertion that there is one ‘‘true value”, one “economic equivalent of property’'’, which can be ascer- tained by applying appropriate reproduction cost prices to an inventory of physical objects, it becomes necessary to return to fundamentals and to ask the court to consider the nature of the legal and economic coneepts of ** property" and ‘‘value’’. Point 4. A careful analysis of the legal and economic concepts of ‘‘property’’ and ‘‘value’’ will clarify the problem. (a) Property is the dominion over things possessed —# ‘‘bundle of rights’’ conferred by law. The greatest confusion is brought into any determina- tion of the value of property rights by the common assump- tion that what i« being valued ix a physical object, when in fact things do not have pecuniary values «themselves; and . eR IRENE IN UPI tek erm OOS 25 pecuniary values are found only in the rights of persons to use things, which rights are conferred and protected by law. These rights are the substance of an owner’s ‘*property’’. **There can be no conception of property aside from its control and use and upon its use depends its value. Branson v. Bush, 251 U.S. 182, 187."’ Block vy. Hirsh, 256 U.S. 135, 165 (dissenting opin- ion). ‘In its proper use the term property applies only to the rights of the owner in the thing possessed.”’ Amer.-Eng. Ene. of Law, Vol. 23, p. 261. 2 Austin, Jurisprudence, Sees. 1051, 1056. Macleod, Elements of Economics, Vol. 1, pp. 141, 143. Raleigh, Outline of the Law of Property, p. 1. perty, | ‘The term property (although in common parlance frequently applied to a tract of land or a chattel) in its legal signification means only the rights of the owner in relation to it. It denotes a right * ° ° over a determinate thing. Property is the right of any person to possess, use, enjoy, and dispose of a thing.’’ Wynchamer v. People, 13 N.Y. 378. 1 Blackstone, Com., 138. 2 Austin, Jurisprudence, 817; cited in Eaton v. B.C. d M. R. R., infra. **All that makes this property of any value is the aggregation of rights or qualities which the law an- nexes as incident to the ownership of it."’ Eaton v. B.C. & M. R.R., 51 N. H. 504. ‘Private property includes rights more or less nu- merous. Far from being a simple thing it is complex and has been called by law text-book writers a ‘bundle of rights’. Fly, Property and Contract, p. 59. One of the best statements of the nature of property is found in the classic opinion of Mr. Justice Doe, in Thomp- 26 f, sow V. Androscoggin Improvement Company, 54 N. H. 545, at 551, 552, 554 (1874), which has been quoted with ap- proval by numerous courts: Property in land must be considered, for many purposes, not as an absolute, unrestricted dominion, but as an aggregation of qualified privileges, limita. tions which are prescribed by the equality of rights, and a co-relation of rights and obligations, necessary for the highest enjoyment of land, by the entire com. munity of proprietors oe” The soil is often called property * ° ° but the proposition that the soil ix property conveys a very imperfect idea of the namerous and variously limited rights comprised in landed estate. And it is sometimes necessary to remember that the name of property be longs to some of the essentially proprietary rights vested in the person called the owner of the soil. * * * Property is taken when any of those proprietary rights is taken of which property consists. Aromond v. Green Bay, ete. Company, 31 Wis, 316, 385."" Other forceful statements of the same doctrine, univer sally recognized by the courts, may be found by reference to the following selected authorities: Block v. Hersh, 256 U.S. 135, 155, 156 (1920): Transcontenental vo. Emmerson, 298 Tl. 394, 390 ef seq. (1921); Wonchamer v. People, 13 N. ¥. 378, 433 (1856). (** Whatever subverts his rights in regard to (a chattel) annihilates his property in it’): Tiimeonts Central Ro Ro Co. ¥. Commucssoners, 161 Til 247, OM, 251 (1896). St) Lows vo Hell, 116 Me. S27 (1893): Low v. Recs Pronteng Co, 41 Nebr. 127, 146 (184); Athen wv. Bostom, etc. R. Ro Co, 51 N. HE 904 (1872); Springfield, etc Company v. Allen, 43 N.Y. 380 (1871); Bracecille Coal ( v. People, 147 TL 66, 71 (189%), 6 ROC LL, 261; 22 BCL, 37. The Source of Property Rights Starting. therefore, with a realistic concept of property as a bundle of rights, let us next consider briefly the source of these rights. One of our heritages from the ‘‘natural PPA PRIM LLL 20 CRAIC AIP EE OPN ee EE ee 27 rights’’ period of legal and political philosophy has been a tendency in some circles to attempt to classify the rights of property as natural and inalienable rights, not dependent upon civil government. This is diseussed by Dean Pound ‘**An Introduction to the Philosophy of Law’’. (Page 204.) Lawyers of romantic inclination have sometimes asserted that the right of property is of divine origin. {For example, Smith on Personal, Property, page 58 (1908). And Van Horn v. Dorrence, 2 Dall. (U. S.) 304, 310 (1795).] But the more realistic jurists now present a uniform front on the subject, and agree that this ‘‘bundle of rights’’ called “property '’, is created by the state—conferred by law. One of the earliest statements of this fundamental truth is to be found in the opinion of the United States Supreme Court in Calder v. Bull, 3 Dall. (U.S.) 386, at 394 (1798), where Mr. Justice Chase wrote: “It seems to me, that the right of property, in its ongin, could arise only from compact, express or im- plied, and | think it is the better opinion, that the right as well as the mode, or manner, of acquiring property, and of alienating or transferring, inheriting, or trans- mitting it, is conferred by society; it is regulated by civil institution, and ix always subject to the rules pre- seribed by positive law. When I say that a right is vested in a citizen, | mean, that he has the power to do certain actions; or to possess certain things, according to the law of the land."’ In Jaternational News Service v. Associated Press, 248 U.S. 215, Mr. Justice Holmes, concurring, wrote: **Property, a creation of law, does not arise from value although exchangeable as a matter of law. Many exchangeable values may be destroved intentionally without compensation."’ In Pullen vo Comissioners, 66 SN. C. 361, at 363 (1872), the court stated: ‘Property itself * * * is the creature of posi- tive law. The legislative power declares what objects in nature may be held as property."’ In Board of Commissioners v. Ryan, 232 Pac. 834 (Okla. 1925), the court's syllabus reads: ‘Property in all its forms is a creature of law."’ ATRIA ORME NETL IE ELE EST TE BEE ROE GIG IE ELIE SLE ELAM EPL SEES 28 Numerous other statements to the same effect are avail- able from early times to the most recent advance sheets, See: United States v. Steffens, 100 U.S. 82, 93 (1907): Commonwealth v. Alger, 7 Cush. (Mass.) 53, 84,85 (1851). In Publie Law Making, Ch. 7, Prof. F. J. Stimson a distinguished lawver and teacher, states: “That property is but the creature of law all English jurists admit.”’ Cooley, Constitutional Limitations, 7th Ed. p. 511; 2 Rent’s Commentaries, 340. Dean Pound has written that ‘‘ownership is a purely legal conception having its origin in and depending on the law’’, and this conception is that of all the jurists, See: Pound, “An Introduction to the Philosophy of Law,’ p, 224; 2 Austin, Lectures on Jurisprudence, Sec. 731; Grav, Nature and Source of Law, Sees, 34.55 26-41-51-53; Holland on Jurisprudence, 11th Ed. 51 to 56; S7-88; Hobbes, Leviathan, Part 2, Ch. 18, p 137-238 (1651); Ritehie, Natural Rights, p. 234; Jher ing, Spirit of the Roman Law, Sec. 6); Locke, Treatise on Civil Government, Sec. 4); Huxley, Method and Results, p. 190. In his book on the Theory of Legislation, Ch. VITE, p. 111, the great critic of the legal svsetem, Jeremy Bentham puts the matter suecinetly: “There is no such thing as natural property °° It is entirely the work of lnw ° °° Property and law are horn together and dic together He fore law's were made there was no property; take away laws and property ceases."" Benjamin Franklin puts it similarly, Writings, Vol. X, p. 59 (Smyth's ed.): Private property therefore is a Creature of Soc ety, and ix subject to the Calls of that Society, when ever its Necessities shall require it, even to its Inst | farthing."’ For a compact and authoritative exposition of *' The Notion of Property’’ see “Property, its Duties and Rights.”’ chapter on ‘‘The Historical Evolution of Property,” by L. T. Hobhouse (1922). LRT eR PN ee ee at a — 29 It is not necessary to rely merely on opinions of courts, concerning the source of property rights. Their decisions reveal the same source, An interesting illustration in re- cent times of the creation by law, through the Legislature, of a new property right, a new stick added to the bundle of rights, is furnished by the so-called ‘tright of privacy”’ cases. It was decided in Roberson v. Rochester Folding Box Company, 171 N. Y. 538 (1902), that the rights in a portrait of one who is the subject thereof, did not include the right to control the unauthorized use of copies. The Legislature of New York thereupon created such a property right. A certain young woman found that her portrait was being used for advertising purposes and brought suit under the statute for an injunction and for damages, an action predicated upon a property right which did not exist before the statute. This statute was upheld as constitutional by the United States Supreme Court in Sperry d& Hutchinson Company Vv. Rhodes, 220 U.S. 502 (1911), Mr. Justice Holmes stating that the law had the effeet of bringing this property right into existence. It is well known that at common law there is no property right in a dead bedy'; and vet by statute it would be easily possible for the State to create such a property right, vesting it in a relative, for example. In fact, it was even the law within the experience of men still living that one human being could have property rights in another? The source of such property rights was the law of the states. It is not only the Legislatures which create legal rights: they may be created by the courts themselves. For ex- ample, there was a time not so far distant when the intan- gible known as **good-will’’ was not regarded as a property nght.* Now it is the merest commonplace to state that “good-will’’ is one of the most valuable property rights ‘Blackstone's Commentaries, 429. Rea v Lynn, 2 T. R. 783 (1788); Foster v. Foster, 220 8 W 2168 (Tex C 1920) "Bee euch slave cases as MceCuliom v Smith, 19 Tenn. 342 (1888), and Harper +. Blonbrowgh, 2 La Ann 377 (1847). ‘Hee for example. the statement of Lord Eldon in Crattwell v. Lye, 17 Vea Jr 356. at 346 (1810) HSER EERIE NER EDT EY EON GE GEE MEO IEEE TELA BAY BA HOTT LEE 30 and in a few types of business it is almost the only property right of value. In Esselstyn v. Holmes, 42 Mont. 507, 516 (1910), the court deseribed good-will as follows: ‘It is property capable of transfer and the owner is entitled to the same protection in the exclusive en- joyment of it as he is in that of his tangible posses sions."’ The source of this well known property right is the law, acting, in this instance, not through the Legislature, but through the courts. Another illustration of present-day importance is the creation by some courts of a new kind of property right described as the right of an employer to a ‘‘free flow of labor’’' It has been necessary to demonstrate with some care that property is a ‘bundle of rights’ conferred by law—rights flowing from the exercise of sovereign power-—and to dem. onstrate that property is not a natural, absolute right of fixed extent, in order to help destroy the fallacious doctrine that property can have a value independent of, and not subject to modification by the exercise of legislative power. Even a fixed property right could not have the same value to all persons, for all purposes, and under all con- ditions. Bat since the right to be valued is itself conferred by law, it should be apparent that there cannot exist a right of property and a resultant value of property con trary to the will of the sovereign power which has created the property and given it its value. “There can be no legal right as against the authority that makes the law upon which the right depends.” Kawanonaloa * Polybask, 205 U.S. 349. Therefore, we find that since the law is the source of all property rights and resultant property values, the law. makers can create or destroy, and increase or diminish the Por « Ciecewion of thie newly created right. ave Jerecy City Printing Company « Casvidy 02 N J By Th) (190T). Fictcker Company + Inter eattions! Aseoctation of Machinists, SS AN) 1OTT IN J Bq. 1963). ané Gitcehmen Coal Compony + Mitr heli, 245 U BR PPP, et B62 (1917) Lehi NPL EERSTE OV ELST OREE THE PERE LE DP LEL LOE DL EL EIU i ala 31 bundle of property rights, which owners can exercise; and thereby the law-makers likewise can change the values of such properties to their owners. Nor does the constitution of the United States prevent the legislative power from depriving men of property rights. The constitution merely prohibits a deprivation ‘‘without due process of law’’, in which is comprehended arbitrary action against individuals, or the practical destruction of all recognized rights of ownership under an excessive exertion of the so-called “police power’. In a word, owners may not be deprived of property rights by the ‘‘arbitrary exercise of the powers of government unrestrained by the established principles of private rights and distributive justice’’. (Bank of Col. umlia v, Okelu, 4 Wheat. (U. S.) 235, 244.) The definition of *‘due process of law’ just quoted has been approved by the great constitutional lawyer, Judge Cooley in his com- ment that ‘‘we have met in no judicial decision a statement that embodies more tersely and accurately the correct view'’. (Cooley, Constitutional Limitations, 7th Edition (1903) page 505.) For a further discussion of the measure of this constitutional limitation we refer to the Conclusion Appendix A of this Brief, page 157. Thus, while it is well-settled law that legislative power may not deprive persons of property without due process of law, or ‘withhold from the owners of private property just compensation for its use’’, which ‘‘ would be a depriva- tion of property without due process of law’’ (San Diego Land and Town Company v. National City, 174 U. S. 739), it is equally clear and well-settled that the ‘‘bundle of rights’’, which constitute property, can be increased or diminished by legislative power and thereby property values can be likewise increased or diminished. (Omnia Commercial Co. v. U.S. 261 U.S. 502.) One of the most valuable of the sticks in the bundle of property rights is the right of use. This right may be entirely destroyed by statutes, such as those concerning SREP S Sea EERE IEE RE OT LN RET ES MS EAA LAS ERS BIOGEN RE ea 7 32 liquer, gambling devices, obscene literature, adulterated foods, etc., whereby a pre-existing right of use may be taken away or rendered almost valueless. By the same token, the regulation of use, by the laws governing the use of property devoted to public service, must inevitably destroy some property rights and values, while, at the same time, perhaps giving other property rights and values. The imposition of an affirmative duty vpon a railroad was described in an opinion of the Supreme Court as ‘*taking its property in a very effective sense’’. Yet the regulation was upheld (L. d& N. Radroad Company v. Central Stockyards Com. | pany, 222 U.S. 132, 145.) Many further examples of the subtraction, addition and modification of property rights in the exercise of legislative power in public utility regulation, will he given under subsequent points. For the present we may well sum up the discussion of the nature of property and the effect of legislative action upon property rights and values by quoting from an opinion of this court: **The fact that tangible property is also visible tends to give rigidity to our conception of our rights in it that we do not attach to others less concretely clothed But the netion that the former are exempt from leg. islative modification required from time to time in civi- lized life is contradicted not only by the doctrine of eminent domain, under which what ia taken is paid for, but by that of the polee power in its proper sense, under which ga right» may be cut down and to that extent taken without pay." Block +. Hirsh, 26 US. 135. As an appendix to this brief, we are printing a mass of illustrative instances, on which legislators have diminished the bundle of right« called ‘‘property’’ by laws which have been upheld in the courts. The purpose of this ex tensive review of authorities is to demonstrate that an abso. lute right of property, and an absolute calue of property, independent of, and not to be modified by, legislative action, cannot be established by a judicial formula of valuation, without the destruction of an essential legislative power Panne oe Sal tira Ree SM 33 which always has been preserved and upheld by judicial authority and which must be preserved and upheld, in ae- cordance with constitutional limitations. (Appendix A.) (b) gy el of property is the — to com- mand a price’’ for things possessed, depends upon the power which the owner can exercise over his that is, upon the ‘‘property’’ which has conferred upon him by law. If there is an accurate understanding of the nature of property, it must follow inevitably that no property can be valued except after due consideration of the extent of that power over the use of the things possessed which the par- ticular owner is permitted to exercise, for particular pur- poses, under particular conditions, by virtue of the par- ticular rights conferred upon him by law. There has been a wealth of discussion in legal and economic literature, concerning methods of ascertaining value, and concerning the nature of *'value’’, as a phtloso- phical concept. But there is no diffeulty in stating what , “pecuniary value’’ ts. It is the ‘‘power to command a price’’. —that is, the purchasing power of a commodity in terms of ather commodities, This value depends upon the profits, present and anticipated, which the use of property may To state such a value is to state an exchange ratio bring to the owner and, therefore, depends wholly upon the power of the owner to command a price for the use of his property. The cconomists and the courts are in agree- ment upon this conception of value: ‘The value of a commodity means in economics its vower of commanding other commodities in exchange. t means the rate at which the commodity exchanges for others, * ° ° The value of a commodity thus conceived is its value in exchange. This is very differ. ent from its usefulness or utility or importance. In every-day discourse we use the word ‘value’, sometimes to indicate exchange value, sometimes to indicate utili- ty or importance."’ Taussig, Vol. 1, page 115, Principles of Economics. “a gy Teas eee eo gm Rs cere st pce CHP ROE RN RET mI a er ie ae ene a 34 ‘In brief, exchange value is purchasing power; that is, a commodity has more or less value as it may be exchanged for more or less of other things. 7 9s In order to have value an article must be: (1) one which is transferable; (2) one for which we are will. ing to undergo some sacrifice; (3) one capable of satis. fying some desire.”’ Laughlin, The Elements of Political Economy, pages 75.77. “The value of property generally speaking is de. termined by its productivencss, the profits which its use brings to the owner."’ Monongahela Case, 148 U.S. 328. ‘But the value of property results from the use to which it is put and varies with the profitableness of that use, present and prospective, actual and antici. pated. There is no pecuniary value outside of that which results from such use."’ C GC. 6. & &. L. Ry. Co. ¥. Backus, 154 U_S. 439, 445 The foregoing opinions of the court are supported by more recent opinions, In International Harvester Com- pany v. Kentucky, 234 U.S. 216, the court was required to construe a statute making it a crime to sell harvesters at a price in excess of their ‘real value’’. The plaintiff in error contended that the law provided no undei sss able rule of conduct, for the reason that no one could tell what the ‘‘real value’ of a harvester would be at a partica. lar time. The answer to this question by the highest court of Kentucky was that ‘‘real value’’ had been previously de- clared, and was declared, to be ‘the market value under fair competition and under pormal market conditions” The Supreme Court of the United States reversed the Kentucky judgments on the basis of an opinion precisely in point in the present consideration of the contention of counsel for the carriers that their property has one ‘‘true value’. Mr. Justice Holmes wrote the opinion of the . , os 5 . - > Nak SO a aa CBE TERA MPT ~ i 35 court (two justices dissenting) which, after stating the previously quoted definition of value by the Kentucky Court, reads in part as follows : ‘*We have to consider whether, in application, this is more than an illusory form of words, when, nine years after it was incorporated, a combination invited by the law is required to guess at its peril what its product would have sold for if the combination had not existed and nothing else violently affecting values had occurred."’ After remarking ‘‘how impossible it is to think away the principal facts of the case as it exists, and say what would have been the price in an imaginary world’’, the opinion continues : ‘Value is the effect in exchange of the relative so- cial desire for compared objects expressed in terms of a common denominator. ‘It is a fact, and generally is more or less easy to ascertain. But what it would be with such increase of a never extinguished competition as it might be guessed would have existed had the combination not been made, with exclusion of the actual effect of other abnormal influences, and, it would seem, with exclusion also of any increased efficiency in the machines, but with in- clusion of the effect of the combination so far as it was economically beneficial to itself and the commu- nity, is a problem that no human ingenuity could «solve, The reason is not the general uncertainties of a jury trial, but that the elements necessary to deter- mine the imaginary ideal are uncertain both in nature and degree of effect to the acutest commercial mind. The very community, the intensity of whose wish rela- tively to its other competing desires determines the price that it would give, has to be supposed differently organized and subject to other influences than those under which it acts. It is easy to put simple cases; but the one before us is at least as complex as we have supposed, and the law must be judged by it. In our opinion it cannot stand."’ In Standard Ou Company v. Southern Pacific Company, 268 U.S. 146, the question presented to the court was the SF ESRLGL Ie EP OETA DOL LYS EPR ET SO att STEELE EGO AEM RE REE 36 value of a steamship which had been lost after a collision. Here clearly only a question of ‘‘market value’’ was pre- sented, not a value for rate-making purposes, not the value which property ought to have, but the value which property actually had to an owner for purposes of sale under existing market conditions. The opinion of the court pointed out that where no market value could be estab- lished through contemporaneous sales of like property, the value might be taken as the sum ‘‘that in all probability would result from fair negotiations between an owner willing to sell and a purchaser willing to buy’. The opin- ion held that ‘‘cost of reproduction as of the date of valua- tion constitutes evidence properly to be considered in the ascertainment of value’’, and then continued: ‘It is to be borne in mind that value is the thing to be found and that neither cost of reproduction new, nor that less depreciation is the measure or sole guide. The ascertainment of value is not controlled by arti- ficial rules."’ After quoting, with approval, the requirement for a ‘reasonable judgment’ laid down in the Minnesota Rate Cases, supra, the opinion, by Mr. Justice Butler, quoted, with evident approval, from an English case, as follows: **But there is another matter infinitely more impor- tant than this (referring to original cost less depre- ciation) —known even to the most unlearned—the con- stant change which takes place in the market. It is the market price which the court looks to, and noth ing else, as the value of the property. It is an old saying, ‘The worth of a thing is the price it will bring’. Thus reviewing the established economic and legal con- cept of value, we see that a pecuniary value, a value which can be stated in terms of money, depends wholly upon the owner's power to command a price. If the seller commands the market (through a practical monop- 37 oly), he can command the highest possible, or whatever is to him the most profitable, price. If the buyers command the market (where there is intense competition) they can command the lowest possible price, perhaps the least profitable to the seller. As a result, the values of prop- erty used must depend entirely upon market conditions and depend upon the location of power to control the prices for the use of property, Long ago John Stuart Mill warned students of political economy that value and prices are determined by competi- tion alone, and stated: ‘‘In so far only as they are thus determined can they be reduced to any assignable law.’’ Political Economy, Volume III, Page 3. Therefore, it becomes apparent that when the force of competition ho longer operates as a regulator of values and prices, When prices are regulated by governmental action, there is wo cconomac law which operates to fix ‘‘ reasonable rates’’ or to establish ‘*reasonable values’’ for property, unless the rate-making authority adopts, as a principle of regulation, some competitive principle, so as to exert po- iiftecal law in the direction of the economic law that would operate under such assumed conditions, (c) The ‘‘property’’ of a public utility owner is not an absolute dominion, but one q ed by the public service obligations which he has assumed. Among these obligations is the duty to charge nee hg sonable rates’' for the use of the things ch he has devoted to public service. The limited dominion which a public utility owner can ex- ercise over his possessions, the diminished number of sticks in his **bundle of rights,’’ is exemplified in the mass of cases cited in Appendix A, to which we have previously re- ferred. In addition to these cases attention should be called to the limitations specifically imposed on carrier property PORK ENNELY te a eset SOE AREER TTR Le RIERA CUT YX, MR PARR SA PNP 2 38 rights by the Interstate Commerce Act, which are summar. ized in Appendix B. To assert that a railroad corporation has the same un- qualified dominion over a terminal station, yards, engines and cars—that a private corporation has over its factory would be to assert an obvious untruth. There would be precisely the same untruth in the assertion that the ‘* prop- erty’ of the railroad corporation and the manufacturing corporation is the same private property. Therefore it can- not be rationally asserted that these different properties have the same values, or even that their different values can be ascertained by assuming contrary to fact that their owners have the same rights of dominion over the things they possess. Obligations imposed by law are direct inter- ferences with that exclusive control which is the very es- sence of ‘‘property’’ and the foundation of property ‘‘values."’ International News Service v. Associated Press, 248 U.S. 215. This court has repeatedly recognized that property values are diminished by obligations, such as those listed in Ap- pendices A and B and has sustained the validity of such diminutions. For example: Railroads may be required to share terminals. U. Ss. - Te rminal Radroad Assoc ialion, U4 U, S. 383. Railroads may be required to fence rights of way. Missount Pacific Railway v. Humes, WS US. 512. Railroads may be required to destroy weeds, to supply drainage for surface water, to sprinkle streets. Che ugu, ete., Radroad v. Anderson, 242 U.S. ZnS. Chicago, etc., Radroad vy. Transberger, 238 U.S. 67. Pacific Gas d Electrve Co. v. Polwe Court, 251 U. S. 22. PARE IL ORI ECO TY ADP OA 39 The obligation to charge only ‘‘reasonable rates’”’ is an exceedingly radical diminution of property value—but it has been sustained for centuries. (d) Thus the ‘‘value’’ of his ‘‘property’’ is dependent ly inescapable fact that his property (his 7 of rights’’ conferred by law) only eae she pe Gao eee a only command a p ve power establishes as ‘‘reasonable.’’ Theo to estab- lish ‘‘reasonable rates’’ seccenasti, tatntion the power to estublish a ‘‘reasonable value’’ for the property used. The legislative power, in limiting the owner’s ‘power to command a price’’ has not deprived the owner of property, but has merely determined, in an exercise of legislative authority, the extent of the dominion which the owners of public utility property shall be permitted to exercise over things possessed. The legislative power has determined that a public utility owner’s ‘‘property’’ shall not include the power to command the prices most satisfactory to him; and therefore has determined that his property shall not have the ‘‘value’’ most satisfactory to him. Point 5. Therefore the legislative power of rate regulation must include the power of value regulation. If a law fixing a formula for the finding of value were written in the courts, the result would be the absolute destruction of a vital, far- reaching legislative power, by the substitution of judicial authority for legislative authority in rate making. Ever since the opinion was handed down in Smyth vy, Ames, there has been a persistent effort to obtain in the court the establishment of a judicial formula for finding the ‘‘fair value of the property’’, which the court held 40 should be the basis of fixing reasonable rates.'| The court stated that in order to ascertain ‘‘that value’’ consid- eration should be given to numerous irreconcilable and in- harmonious factors such as original cost and present cost of construction, amount and market value of bonds and stocks and probable earning capacity of the property and undefined ‘‘other matters’’. The subsequent controversies over valuation and rate regulation have been waged be- tween interests seeking to have ‘‘dominant consideration” given to one particular factor. In other words, the effort has been to change a judicial opinion as to matters which should be taken into ‘‘consideration,’’ in the exercise of a reasonable legislative judgment, to a judicial formula pre- seribing rules which would practically control the exercise of the legislative judgment. In the meantime jurists and economists have criticised the Smyth vo Ames opinion because the court had appar. ently put the cart before the horse and held that ‘‘ value” should be ascertained as the basis for earning power when it is a perfectly obvious and inescapable economic fact that ‘value’ is the result of earning power. Yet if the opinion of the court had announced that reasonable rates should be fixed upon such a basis that as a result the owner would be able to realize a reasonable value in the use of his property, “We bold. however that the tusis of a alcuistions as to the ree somableness of rates to te charged ty « corperation maintaining a high way under legisiative sanction must be the fair value of the property being aeod by It for the convenience of the public And in order to ascertain that value, the original cost of construction, the amount es: pended In permanent Improvements the amoant and market value of {te teode and stack, the present as compared with the original cost of con struction, the probable earning capacity of the property under particular rates prescribed by statute and the sum required fo meet operating es penecs, are all matters for consideration. and are to be given such weight as may be just and right in each case We do not may that there may pot be other mattere to be regarded in estimating the value of the prop erty What the company te entitied to ack 's @ fair return upon the value of that which it emplore for the pallic convenience On the other hand what the public te entitled to demand fs that no more be exacted from it for the use of the public bighwar than the services rendered by it are reasonably worth” Amyfs « Ames 169 1 BH 466 546 BER OGRE EE LINER ts 41 criticism could not have gone to the length of stating that the rule of Smyth v. Ames is *‘legally and economically un- sound’’. Any objection would have been confined to a pro- test that the court had not prescribed any test for what it would regard as a ‘‘reasonable value”’. An Interpretation of Smyth v. Ames. It seems clear, however, upon a review of the preceding and succeeding cases, that the opinion in Smyth v. Ames was intended to mean that the result of reasonable rates should be to establish a reasonable value for the property. This is evidenced by the fact that the same justice who wrote the opinion in Smyth v. Ames shortly thereafter, in writing the opinion in San Diego Land and Town Com- pany Vv. Natwnal City, 174 U.S. 739, stated that “the rights of the public would be ignored if rates for the transporta- tion of persons or property on a railroad are exacted with- out reference to the fair value of the property used for the public or the fair value of the service rendered’’. Later in the same opinion he stated explicitly that the company was entitled to a ‘‘fair return upon the reasonable value of the property at the time it is being used for the public’. In the thirty vears since the opinion of Smuth v. Ames was written, the Supreme Court has steadfastly resisted every pressure to establish a judicial formula for valuation. whereby a Commission would be required to fix reasonable rates upon the hasis of a fiat value of property, withont compromising the conflicting interests of owner and user of property by exercising a legislative discretion to deter. mine what are reasonable values for properties and reason able prices for services. In the oft quoted opinion in Smyth v. Ames, the court clearly intended to lav down the law that rates should not be determined solely according to certain formulated interests of the buyers or sellers of —_ CLLR SINS ott OR Reet xt: poe sin " 2 : 9 ~- service, but should be determined after consideration of the conflicting and varying factors of value upon which are based the conflicting and varying claims of parties in eco- nomic conflict. The various ‘‘matters for consideration,’? which are stated, are to be ‘‘given such weight as may be just and right in each ease,"’ * * * and there may be ‘other matters to be regarded.’’ The court clearly anticipates not merely the exercise of discretion in individual cases, but also the gradual formulation of principles based on experi. ence in rate regulation, in the course of which there must be a constant balancing and compromising of *‘what the company (the seller) is entitled to ask" and **what the pub. lie (the buver) is entitled to demand.’ If we regard the ‘*rule’’ of Smyth vo Ames as a rule of evidence--not as a rule of decision—it becomes somewhat useful instead of wholly confusing. To describe the evidence which can be (or must be) considered by a jury requires a deseription of evidentiary facts that are in conflict. But to write a formula for decision requires a weighing of evidentiary facts and the elimination of conflict. The conflicting factors stated and not resolved in the opmmen in Smyth». Ames show that a rule of evidence —not a rule of decision —-was intended. Let ux consider, for example, the factors of orginal cost and reproduction cost. In a time of declining prices in a competitive market, the seller will urge that he must be recompensed for cost of production; and the buyer will urge that he could produce the same goods or services today ata lower cost. The market price resulting will be more or less of a compromise of these claums, with a tendency for prices to be fixed at cost of production, because, as Alfred Mar shall, dean of the English economists, writes, ‘Coast of re. production exerts little direct influence on value, save when parchasers can conveniently wait for the production of new supplies."" Principles of Eoonumics (1907), Book 5, Chap OSTEO PLE LEE WILE ES I 43 7, Sec. 6. On the other hand, suppose prices are rising. The seller's argument will be that he is entitled to sell the goods at what it would cost to produce them today, and the buyer’s argument will be that the seller should be satisfied with a fair profit based on what it actually cost the seller to pro- duce the goods. It will be noted that today sellers of transportation serv- ice are seeking to have prices based upon reproduction cost, although thirty vears ago they were seeking to have prices based on original cost. Their claims are not grounded upon faith in a particular economic theory or reverence for abiding principles of justice, but upon a rec- ognition of immediate self-interest. It may be urged that the buyers of transportation service also have shifted ground in the last thirty vears on the basis of immediate self-interest. But the establishment of a policy of gov- ernment should not be based upon the immediate interests of either sellers or buyers. In writing the so-called rule of Smyth v. Ames, the Supreme Court declined to hold that rates should be fixed upon dominant consideration of the interest of the buyers. !t declined to hold that in a time of falling prices, reproduction cost alone should be used to measure the rate base. The court did hold that original cost and reproduction cost and many other elements of value should be given consideration, so that a ‘‘fair value”’ might be established for property used for public service. Following the same logic, in recent years the Supreme Court has repeatedly declined to hold that rates should be fixed upon dominant consideration of the interest of the sellers. In other words, after a period of rising prices it is held— just as it was thirty vears ago after a period of fall. ing prices—-that reproduction cost alone shall not be used to measure the rate base. The Interstate Commerce Commission (and any rate- making public bedy) is required to take a long view of the Beep terme aysremrey 28 «tay SUAS TNS PETS IS Stig P BEELER IPMS lil a NP aaa 4H interests of sellers and buyers, in order to see, not merely how to satisfy the immediate interest of one or both groups, or how to work out a temporary compromise of the conflicting interests, but in order to see how to provide a reasonably permanent basis for compromising the conflict. ing interests. Standards of fairness that will persist are es sential, For this reason the Conunission has been compelled to give greater weight to the actual cost of production, shown by the money invested in the property than to the theoretical cost of dupheating the property, This is because cost of duplication could only be used as a rate base on a time of rising prices and could wof be used cn a time of declining prees, A railroad property is built up through contributions of capital, which must be represented by se eurities; and these securities must be maintained at ap proximately par, in order to sustain the credit absolutely required for the continuing expansion and improvement of facilities. If the property in which the capital has been invested is valued for rate-making purposes at not less than the amount of investment, it is at least possthle to sus. tain the credit of the enterprise. Om the other hand, if the property is valued at fess than the amount actually invested and represented by outstanding securities, it will be om posmble to sustain adequately the credit of the enterprise If reproduction cost, in a time of rissa prices, is utilized as a rate hase, not only will market valnes of securities rep resenting actual investment be inflated. but sarpluses will he earned, which may he used (and have heen used) as the hasi«s for additional stock ja«nes (lan the expanded hor rowing power will provide the basis for floating additional bonds. But, if a period of declimmng prices follows, a lower rate base, founded on reproduction cost, cannot be estab lished by the regulatory commission without impairing the eredit which the previous actions of the Commission have LAELIA IEA ER BEEN, ea are Rs aw 45 built up, and which must be sustained in order to promote the most efficient public service. Therefore, a regulatory commission knows that a repro- duction cost factor, utilized in favor of the interests of the sellers today, simply cannot be utilized reciprocally in the interest of the buyers tomorrow, Thereby, it is evident that to give dominant weight to this factor is to adopt for regulation today a principle which cannot be applied to regulation tomorrow. On the other hand, when the Commission considers the factor of the money investment necessary to build up the existing properties, the Commission knows that. if. that money has heen prudently expended and if outstanding securities represent the investment prudently made, then rates which provide a fair return upon that investment will sustain the credit of the company in a time of either rising prices, or falling prices. Merely by shifting the amount of the fair return to meet the current rates for money, the Commission will be able to sustain the credit of the enter. prise. If prices fall and it is urged that the properties could be duplicated for less than the amount of money in- vested in them, public policy in favor of protecting invest- ment and sustaining the credit of public service enterprises will prevent any actual duplication and will justify the charging of rates necessary to preserve the valnes of out- standing securities in order to give investors a reasonable return and to sustain credit so that the service may be im proved and extended. [Certainly the judicial authority would tread firmer ground in protecting an actual market value of securities representing investment than in pro- tecting a theoretical monopoly value which investors never have realized and never will realize without the aid of spe. cial legislation. ] On the other hand, in a time of rising prices, although a stable rate base might deny to the owners of securities a % eis COPMIE REL E TOPO REE MES, TERRA RET RETIN OR ES YE RS WRB Reg BRS PEO REE OTS TNL, ORR RER ss “I 46 temporary speculative profit, they would have little cause to complain of rates sufficient to give them an income equal to the current fair return upon similar investments, and a market value of one hundred cents on the dollar in the case of the sale of securities, Therefore, from the standpoint of seeking a principle of rate-regulation which can be ap- plied permanently, regardless of shifting price levels, a regulatory commission is compelled to accept the fact that investment is a far more useful factor than reproduction cost, in stabilizing security values, in sustaining credit, and in doing equal justice to sellers and buyers at all times There is, of course, still left open to the sellers the ‘‘de preciated dollar’? argument—-a claim of little benefit: to bondholders and, therefore, simply a claim that railroad stockholders should be given an economic security not pos sessed by any other class of investors in the nation, The ‘‘Depreciated Dollar’’ Claim. It seems unnecessary here to review the many arguments which have been presented aguinst the validity of the ‘de preciated dollar’’ claim. It is dealt with in the report of the Commission and presumably will be dealt with in other briefs. It ix, however, peculiarly pertinent to the present argument to point out that the depreciated dollar claim is a claim for equitable consideration and not the claim of a legal right, Millions of people bay life insurance policies to protect those near and dear to them, when they them selves, have gone They pay premiums in dollars saved by personal eacrifice. If prices fall, their beneficiaries may receive more than was sacrificed If prices rise, their heneficiaries may receive much less than was sacrificed Trust funds are bmilt op for private persons, donations are made to universities, hospitals, churches and charities. In. vestments for eoch purposes are made in bonds, bearing a fixed interest, payable nitimately in dollars. In other words, the noblest, moxt aneeclfish uses of money require reliance npen a retorn in meaner for money invested. , - . ns eeceenoeeeouiemnnnems a ? ve STE PEO RS AEA LENT PRINT OF EME TIRE Re ee ee STE Uae ate 4 47 The great enterprises of the community rest upon bor- rowed money; national, state and municipal bonds and corporation bonds. The railways have been constructed and extended largely by borrowed money. The imperative, dominating need in the establishment of public policy, whether in regulation of public utilities or otherwise, to promote the security and comfort of the vast majority of the people of the nation, is to insure the stability of money returns from money investment, To secure a stable purchasing power for money seems to be an appropriate ideal for private or political action. So far as such stablization can be reasonably accomplished, it will eliminate the depreciated dollar issue. But in the absence of effective stabilization, in the face of fluctuations in purchasing power whereby benefits ebb and flow. be. tween creditors and debtors, between buyers and sellers, there ix no possible justifieation for the exercise of legis. lative power to save one group of investors from losses suffered by vastly larger and more important groups of security holders. Let it be clearly understood that the ben- efit to be hestowed upon the railroad stockholder cannot be obtained except by imposing additional sacrifice upon those who have not received the same special treatment. Bene ficiaries of life insurance policies, the beneficiaries of trust funds, the holders of public and private bonds, would all be required, ont of their income having a diminished purchas. ing power, to make up the loss of purchasing power suf. fered by holders of railway stock. There is no equity in the depreciated dollar argument. It could have a sound basis only if it were necesary thus fo increase the purchasing power of the stockholders divi- dends, in order to sustain the credit of the enterprise. That argument cannot be made because, ax previously shown, a fair return upon investment fixed by current rates for 48 money will necessarily sustain the values of securities rep. resenting investment and sustain the credit of the enter. prise, Let us consider another factor mentioned in Smyth y, Ames and frequently derided as a basis for measuring ‘fair value’’. It is a factor which has a clear bearing upon fair rates. This factor is ‘‘probable earning capac itv’’. If a large amount of traffic can be carried over the same rails, the property will produce a higher return from a lower margin of profit, that is, out of lower rates, than if a small amount of traffic is carried. Such an earning capacity gives greater value to one private property than is found in a similar property that may have cost as much, but has not the same earning capacity. But in fixing rates which must be the same rates for the same service, there must be an averaging of the earning capacities of the rail roads affected, so that in the aggregate they will earn fair returns. Congress has so directed the Commission to fix rates in Section Mia of the Interstate Commerce Act. (Dis. cussed later in this brief under Point 9) Bat it is not here contended by anv party that two lines of railroad, having the same original or reproduction cost, should be given dif. ferent values as a bmais for rate making because one has a greater earning capacity than the other, Yet, according to all standards for valuing property used in private bus. hess, the two properties would hare different values, al. though their actual cost of construction or theoretical cost of reprextaction might be the same It must be evident that the legislative power of rate regu. lation becomes in operation a power of value regulation Therefore, in determining what rates ought to be charged, what rates are reasonable rates, the regulatory power must determine what values are reasonable values to be realized out of the use of property in public service. The moment a formula is laid down whereby a regulatory commission is 49 deprived of the power of compromising the conflicting, economie claims of buyers and sellers, and is required to adopt a formula for determining the value of the seller’s property and thereby the value of the service rendered to the buyer, this vital and far reaching legislative power is destroyed by substituting for the legislative discretion a judicial discretion in determining how the conflicting eco- nomic interests shall be compromised. Point 6. The Supreme Court has consistently maintained: (a) That the rate making power is legislative. (b) That there is no formula for finding the value of a public utility property. ‘The rate making power is a legislative power and nevessarily implies a range of legislative discretion."’ Minnesota Rate Cases, 230 U. 8. 352, 432 ‘It is the province of the Legislature to make the law; and when the Legislature or the body acting under its authority establishes the rate to be thereafter charged by the carrier, it is the duty of the courts to enforce the rule of law so made unless the consti- tional limits of the rate making power have been transgressed. The rate making power necessarily im- plies a range of legislative discretion; and so long as the legislative action is within the proper sphere, the courts are not entitled to interpose and upon their own investigation of traffic conditions and transpor- tation problems to substitute their judgment with re- spect to the reasonableness of the rates for that of the Legislature or of the railroad commission exercis- ing its delegated power."’ Lowsedle & Nashville Railroad Co. v. Garrett, 231 U. S. 298, **Rate making is no function of the courts; their duty is to inquire concerning results, and uphold the guaranties which inhibit the taking of private prop. 50 erty for public use without just compensation under any guise.’’ Pacific Gas and Electric Co. v. City and County of San Francisco, 265 U.S. 403. The making of rates ix a legislative, and not a judicial, function.” Terminal Railroad Assn. v. U. S., 266 U.S. 17. ‘What the company is entitled to demand in order that it may have just compensation is a fair return upon the reasonable value of the property at the time it is being used for the public. * ° * The ascertain. ment of that value is not controlled by artificial rules. It is not a matter of formulas, but there must be a reasonable judgment having its basis in a proper con- sideration of all relevant facts."’ Minnesota Rate Cases, 280 U.S. 352, 434. Georgia Ry. and Power Co. v. R. RB. Commusswon, 262 U.S. 625. Standard Oil Co. x. Southern Pactfie Co., 268 US. 146. In refusing to authorize the applieation of a formula, it was held in the Georgia Power Case, just cited, that ‘*‘the refusal of the Commission and of the lower court to hold that for rate making purposes the physical properties of a utility must be valued at the replacement cost leas depre- ciation, was clearly correct.” Likewise, in the last case cited, it was held that ‘‘neither cost of reproduction new, or less depreciation, is the measure oF sole guide’ in find- ing **value’’. The statements just quoted are peculiarly important because they are both followed by the quotation from the | Minnesota Rate Cases, transcribed above. Furthermore, | in the Georgia Case, the opinion of the court was accom panied by one dissenting opinion in which Mr. Justice Me- Kenna asserted that the problem of valuation was, in hist opinion, ‘‘direct and simple—with no baffling element ip it.’ He continued: ‘Tt was only to find the reproduction _— 51 cost of the utility and this necessarily was constituted of the cost of its materials and the cost of their fabrication, less an estimate of depreciation from the new. These costs and depreciations representing its value at the mo- ment of time it was being regulated and being used by the public, such moment being the time prescribed by the law for the determination of its value—determination of that upon which the rate for its use was to be based.’’ Thus it appears that in 1923 only one member of the Supreme Court (now deceased) took the position that there was a formula for finding the value of a public utility prop- erty for rate making purposes. This formula he stated; and it is precisely the same formula which counsel for the carriers are now seeking to have the court adopt. But the opinions of all the other members of the court have squarely asserted that valuation is not a matter of formula, but that there must be a ‘‘reasonable judgment having its basis in a proper consideration of all relevant facts’’. These relevant facts have been detailed in the familiar quo- tation from Smyth v. Ames, which is repeated in the Min- nrsota Rate Cases, supra, and in the Georgia Power Case, supra, It is perfectly clear that these ‘‘relevant facts’’ are those necessary for consideration in determining what are reasonable rates. Thus, in substance, the court more than thirty years after the decision in Smyth v. Ames is still refusing to an- nounce that public utility properties must be given a value to be determined by following a judicial rule—-a value which would absolutely prevent the exercise of legislative discretion in rate making. But the court has repeatedly de- cided that rates and the resultant values of public utility properties must be determined by the exercise of a reason- able judgment, by the legislature or the commission law- fully constituted by it to exercise such judgment. Minne- sota Rate Cases, supra, p. 433. RANT AONE EOP FUE EE IM SPL LOL G9 RISE NE AE AE RR RS re 52 PART II. THE UNDERLYING ISSUE IN A VALUATION CASE. Point 7. The underlying issue in a valuation case, as in any rate regulation case, is: What is a fair price for the public ser. vice rendered’? The general underlying issue which is involved in this case is the ancient one of ‘‘the fair distribution of the re- wards of industry.’’ The particular underlying issue which must be decided is the equally ancient one of ‘‘the fair price’’—the inevitable difference of opinion between the seller and the buyer of a commodity or a service. Naturally a seller desires to charge the highest possible price (consistent with the largest aggregate profit) and a buyer desires to pay the lowest possible price (consistent with the largest aggregate service). When prices are de- termined by private bargaining, the seller and buyer at. tempt to justify their respective demands by ethical argu- ments——since man is a moral, reasoning animal. But in the end the dominance of the seller or the buyer is determined by economic power, by the control of the market, sometimes inadequately described as the law of supply and demand. When the government takes upon itself the decision of this ancient and not altogether honorable controversy, be- tween the seller and the buyer, the ethical arguments gain importance because modern government (or at least, let us say, government under the Constitution of the United States) rests on moral sanctions. Justice is to be estab. lished, domestic tranquility insured and the general welfare promoted. EEN TLIO LL SAS 53 A commission is created to ascertain and to enforce the charging of ‘‘just and reasonable’ rates. The ethical standard is explicitly stated. The governmental power is called into action primarily for the benefit of the users of public utility service. But public power is not to be exerted solely in behalf of one class of citizens, and ‘*just and rea- sonable’? rates must be just and reasonable to the sellers as well as to the buyers. Thus we find provided also the requirement that there shall be a ‘‘fair’’ return to the sell- ers upon the ‘‘fair’’ value of the property used for public service. The ethical standard again is explicitly stated. The following quotation contains a typical expression of the ethical concept which dominates judicial opinions upon rate regulation ; ‘There must be a fair return upon the reasonable value of the property at the time it is being used for the public.”’ Willcox v. Consolidated Gas Co., 212 U.S. 19, 41. Missourt ex rel. Southwestern Bell Tel. Co. v. Pub- lic Service Commission, 262 U. 8S. 276. It may be pointed out that we are here considering what may be called material ethies rather than spiritual ethics. It is not necessary to state a moral code based upon meta- physical conceptions of what is right and wrong, or good or bad. The ethies involved are those of enlightened self- interest, that is, immediate self-interest. If the buyer pays induced to furnish, extend and improve the service he desires. If the seller charges more than a fair price buyers will not use the less than a fair price, sellers will not be ser- Vice to its utmost capacity ; community prosperity will be retarded ; buying power will be reduced. The Ethical Standards of Regulation It seems necessary to recall attention to the underlying issue in public utility rate regulation and to the ethical 54 standards which it is the duty of a regulating commission to enforce, because, in the arguments made in behalf of both sellers and buyers before courts and commissions, there is a constant confusion of appeals to ethical consider. ations and assertions of arbitrary rights resting upon sup- posed sovereign or economic law. There are claims that governmental power must be exerted to enforce the alleged rights of one party regardless of what is fair to the other party, or that economic power must he permitted free exer. cise regardless of what is fair to the party thus coerced. It is respectfully submitted that, if a just decision is to be rendered upon the ixsue now before this court, it is neces. sary at the outset for the court to found its consideration upon this proposition : Every theory * * ° every argument * * ° every claim of legal right * * * every assertion of economic * * * must be tested by the standard of what is fair to the other party. A legal right to an excessive profit cannot be asserted to prevent the Interstate Commerce Commission from ful- filling its legal obligation to fix a ‘just and reasonable” rate. The protection of an economic power to charge an excessive selling price cannot be demanded from a Com mission which is established for the very purpose of pre venting such an abuse of economic power. The legal rights and economic powers which may be found in private prop- erty when devoted to private competitive enterprise cannot be asserted as legal rights and economic powers of private property when devoted to public service and subjected to public regulation for the very purpose of preventing the unjust exercise of legal nights and economic powers. It is quite evident in reading the briefs he retofore sub mitted by counsel for the carriers in this proceeding (whiek follow the lines of arguments usually made by pubhe utility lawyers to courts and commissions) that they are demand. 55 ing legal sanction for the highest possible selling price for the service which they furnish, although the very purpose of rate regulation by public authority is to prevent the charging of such a price. Is the Highest Possible Price a Fair Price? The carriers claim: (1) that they should be reimbursed in the rates for all operating costs including labor and materials necessary to maintain their properties in good operating condition; (2) that the rates should permit them to accumulate the necessary depreciation reserves to re- place large units which become inoperative or obsolete ; (3) that they should be reimbursed for all taxes paid; and (4) that, having been protected against any possible expen- ditures ont of profits they should then receive, as net profits out of the use of private property, a fair return upon the present market values of all lands plus the reproduction cost at present prices of all their physical properties (with- out deducting any depreciation for expired service-life), including in that reproduction cost a return on many un- realizable, wholly theoretical ‘‘increases’’ in ‘‘value’’; and a return on all imaginable intangibles such as *‘ going con- cern value’’. Without pausing to criticise the absurd in- flations of reproduction costs in the methods utilized by the carriers” imaginative estimators, it should be pointed out that on no conceivable theory could private property util- ized in private competitive business earn regularly as large profits as those claimed for the public utility owners. When current prices will cover operating costs, mainte- nance, taxes, depreciation and a ‘‘fair return’’ on all pos- sible capital outlays (including the present cost of dupli- eating the identical plant and business) there will be no lack of competitors, where competition is possible. Such prices clearly exceed the highest possible prices which can be maintained in a competitive market, because competitive 56 prices will ordinarily produce much less, and cannot pro- duce regularly so large a return on capital invested. ‘‘On account of this tendency of prices to equal the expense of production, the expense of producing a unit of a commodity is called its normal value.’’ Ely, Eco- nomics, Book 2, p. 172 (1909). ‘*A competitive standard is a cost standard. Where two or more producers are competing for the sale of the same article, and that article is capable of bein reproduced in unlimited quantities, the price will ten to settle at the cost of production. This, however, is not the cost to the marginal or high cost producers, as is often erroneously imagined; it is the cost to the most efficient producer who in time increases the volume and reduces the price of his product to the extent that in- efficient producers whose costs exceed the price are driven to the wall. The result is that the least cost in the long run becomes the standard of competitive cost, and the public gets the service upon the best terms pos- sible. It is this cost-of-service principle, that regula- tion is striving to preserve. ° . * 2 . ‘*Regulation of public utilities in the United States has as its deepest purpose the perpetuation of ideals and standards attained in the field of natural competi- tion. Any other presumption or conclusion would ignore the fundamental principles of American indus- trial development and place the purposes of law and economics at variance."’ Kirshman, The Principle of Competitive Cost in Public Utility Valuation, 35 Yale Law Journal 805. Government regulation was established for the purpose of deciding the age ald issue hetween the seller and the buyer upon the ethical standard of a price that is ‘‘fair"’ to both. Yet the carriers are demanding that government regulation, established primarily for the purpose of pro- tecting the buyrr against the oppressions of a government created monopoly, should now be utilized to insure so far as possible to the seller the highest possthle selling price which he can exact from the buyer. The price sought is pe RES EDGR TI SEER — 57 higher than any which can be maintained in a competitive market—and therefore is a ‘‘monopoly price,’’ as herein- after defined. This oppressive demand is presented in the disguise of a ‘‘constitutional right’’. ‘*‘What the Traffic Will Bear.’’ There should be no misunderstanding of the true nature of the contentions of the carriers in this and similar pro- ceedings. [It is submitted that the claim of one carrier in one proceeding can be properly tested by considering the aggregate effect of the consistent claims of all the carriers in similar proceedings.| They are seeking to obtain the right to charge ‘‘all the traffic will bear’’. This theory of rate making has been advanced persistently by the car- riers and other public utilities ever since government reg- ulation began.’ The carriers generally admit (and admitted specifically in the recent western rate case, 113 1. C. C. 3), that af the moment the traffic will not bear the rates which they claim they are entitled, as a matter of law, to charge. The carriers are asserting a legal right to charge rates vastly in excess of what the traffic will bear. Thereby, they are laving the foundation for indefinite claims for increases in the event that the traffic will stand the strain. “What is clear is that the value of railroad property is no basis for rate making An arbitrarily established 5%% on value, when found, might well inflict gross injustice upon the shipper and put into the rail- road treasuries a sum greater than the worth of the service rendered. There have been many suggestions and many legislative attempts to fix an arbitrary basis for rates by limiting earnings. Every single one of these has failed The proper baste is just as clear today as it was thirty years ago it is what the traffic will bear” ~Editorial, Wall Street Journal—Auguet 2, 1926. “It in highly tmprotmtle that it would ever be possible to get the railways to agree to seek an advance in rates sufficient to give a so-called fair return on a reproduction cost valuation Their managers would know that if they did so they would encounter the united opposition of regulating commissions and shippers, and would arouse public sentiment tore hostile than ever existed before Railway officers fully realize that rates should be made not only in accordance with what the traffic will bear, but aleo in accordance with what public sentiment will stand.” 83 Railway Age, 1147 (1927). ——__ ELE IR LAER CAA OE LEER TN CE OEE RE, 58 Is it not clear that the very fact that the railroads today cannot charge the rates which they claim they are entitled to charge (as a matter of legal right and as a matter of economic right) shows that they do not possess the legal and economic rights which they claim? They claim that the ‘value’ of their properties is equal to their reproduction cost and therefore that reproduction cost estimates must control the fixing of the amount of value. They themselves insist that the word ‘‘value’’ is here used in its ‘ordinary meaning’, which is ‘* pecuniary value’’ or ‘market value", or in the terms of the economists, ‘‘value in exchange”. Yet every such ‘‘value’’ is absolutely determined by ¢arn- ing power and the carriers themselves must freely admit that their properties do not have today the earning power necessary to support the values claimed. Let us suppose that an individual had built a factory in 1914 which cost him $1,000,000 and that the most he had ever been able to make out of its operation was $40,000 a year. Suppose he employed an engineer to make a theo. retical estimate of the ‘‘reproduction cost’’ of his factory, together with a large addition for the ‘going concern value’ of his 4 per cent business, and thereby he arrived at a reproduction cost new (without depreciation) of $2,500,000. Would a bank lend him $1,000,000 at 5 per cent on that security, knowing that the present net earnings would fall short of paying the interest on the loan by $10, 000! Would any impartial judge fix the ‘‘valuc’’ of that property at $2,500,0007 It will he the purpose of present counsel subsequent!) to demonstrate that reproduction cost cannot be accepted as the measure of ‘‘value’’ under any definition of the word ‘‘yalue’’. But for the moment it is desired merely to point out that when counsel for the carriers admit that th [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386007_0254%3A07. Public record. Not legal advice.