These suits were brought by stockholders of the Northern Pacific Railway Company, the Great Northern Railway Company and the Minneapolis and St. Louis Railroad Company, respectively, to restrain the enforcement of two orders of the Railroad and Warehouse Commission of the State of Minnesota and two acts of the legislature of that State prescribing maximum charges for transportation of freight and passengers, and to prevent the adoption or maintenance of these rates by the railroad companies. In addition to the companies, the Attorney-General of the State, the members of the Railroad and Warehouse Commission, and also, in the cases of the Northern Pacific and Great Northern companies, certain representative shippers, were made defendants.
(1) The Commission's order of September 6, 1906, effective November 15, 1906, fixing the maximum class rates for general merchandise.
(2) The act, approved April 4, 1907, to take effect May 1, 1907, prescribing two cents a mile as the maximum fare for passengers, except for those under twelve years of age, for whom the maximum rate was to be one cent a mile. (Laws of 1907, c. 97.)
(3) The act, approved April 18, 1907, to take effect June 1, 1907, fixing maximum commodity rates for carload lots of specified weights. (Laws of 1907, chap. 232.)
(4) The Commission's order of May 3, 1907, effective June 3, 1907, establishing maximum "in-rates" for designated commodities in carload lots from St. Paul, Minneapolis, Minnesota Transfer and Duluth to certain distributing centers. (No complaint is made of this order in the case of the Minneapolis and St. Louis Railroad Company.)
In 1905, the legislature of Minnesota had adopted a joint resolution directing the Commission "to undertake the work of securing a readjustment of the existing freight rates in this State, which will give a more uniform system of rates throughout the State and a uniform scale of percentages which each class rate shall bear to the first class, the readjustment to secure a substantial reduction in the existing merchandise rates." (Laws of 1905, c. 350, p. 631.) Pursuant to this direction, the Commission conducted a prolonged investigation. Public hearings were held extending over several months in which the railroad companies took an active part, submitting a large amount of testimony with respect to the matters involved. The Commission found the existing class rates for general merchandise to be unreasonable and by the order of September 6, 1906, above mentioned, established
The schedule of rates set forth in the order of September 6, was such that each rate for each class bore an exact relation to each other rate. The plan of the schedule was this: For first-class merchandise an allowance of 11.02 cents per cwt., was made for terminal charges and in addition, there was permitted a hauling charge of .98 of a cent for each five miles up to 200 miles, for each ten miles over 200 miles up to 400 miles, and for each twenty miles over 400 miles up to 500 miles. For other classes, the rates were a fixed per centum of the corresponding rates for the first class. These rates were maximum terminal rates; that is, they related to transportation to or from certain important stations called terminal or distributing stations. Between stations neither of which is so designated the rates of the schedule might be increased by five per centum.
The railway companies complied with this order and the class rates were put into effect on November 15, 1906.
The Commission also had under consideration a reduction in the commodity rates, at which certain commodities
The remaining action with respect to freight rates was taken by the Commission in the order of May 3, 1907, for the purpose of securing more favorable in-rates to a number of minor jobbing centers. It applied to certain commodities, such as groceries in carload lots, and was supplemental to the order of September 6, 1906, being intended to reestablish the relation which had previously existed between the in-rates to these distributing points and the general schedule of class rates.
The railroad companies obeyed this order of May 3, 1907, as they had that of September 6, 1906, and they also put into effect the passenger rate of two cents a mile. They were about to adopt the commodity rates fixed by the act of April 18, 1907, when these suits were brought and a
The complainants assailed the acts and orders upon the grounds (1) that they amounted to an unconstitutional interference with interstate commerce, (2) that they were confiscatory and (3) that the penalties imposed for their violation were so severe as to result in a denial of the equal protection of the laws and a deprivation of property without due process of law. The jurisdiction of the Circuit Court was sustained in Ex parte Young, 209 U.S. 123, where it was also held that the penal provisions of the acts, operating to preclude a fair opportunity to test their validity, were unconstitutional on their face. The Circuit Court then referred the suits to a special master, who took the evidence and made an elaborate report sustaining the complainants' contentions. His findings were confirmed by the court and decrees were entered accordingly, adjudging the acts and orders (with the exception, in the case of the Minneapolis and St. Louis Railroad Company, of the order of May 3, 1907) to be void and permanently enjoining the enforcement of the prescribed rates, freight and passenger, and their adoption or maintenance by the railroad companies. 184 Fed. Rep. 765.
From these decrees, the Attorney-General of the State and the members of the Railroad and Warehouse Commission prosecute these appeals.
The penal provisions being separable (Reagan v. Farmers' Loan & Trust Co., 154 U.S. 362, 395; Willcox v. Consolidated Gas Co., 212 U.S. 19, 53, 54; Grenada Lumber Co. v. Mississippi, 217 U.S. 433, 443; West. Un. Tel. Co. v. Richmond, 224 U.S. 160, 172), the question of the validity of the acts and orders fixing maximum rates is presented in two distinct aspects, (1) with respect to their
First. As to interference with interstate commerce.
None of the acts and orders prescribes rates for goods or persons moving in interstate commerce. By their terms, they apply solely to commerce that is internal. Despite this obvious purport it has been found below that the inevitable effect of the State's requirements for intrastate transportation was to impose a direct burden upon interstate commerce and to create unjust discriminations between localities in Minnesota and those in adjoining States; and hence that they must fall as repugnant to the commerce clause and to the action of Congress under it. To support its conclusion, the Circuit Court presents an impressive array of facts drawn from the approved findings of the master. (184 Fed. Rep. 775-792.) Without giving all the details they embrace, these findings may be summarized as follows:
I. The railroad property of each of the three companies constitutes a single system. On June 30, 1906, the Northern Pacific Railway Company (a Wisconsin corporation) operated 7,695 miles of track, of which 1,625 miles were in Minnesota. The Great Northern Railway Company (a Minnesota corporation) at the same time operated 8,528 miles of track, of which 2,779 miles were in Minnesota. Their lines extend westerly from Superior, Wisconsin, and Duluth, Minnesota, and from St. Paul and Minneapolis, through the States of Minnesota, North Dakota, Montana, Idaho, Washington and Oregon, to the Pacific Coast. The Minneapolis and St. Louis Railroad Company (also a Minnesota corporation) operated 1,028 miles of track running from St. Paul and Minneapolis westerly and southerly to points in South Dakota and Iowa. In the case of each company, the movement of interstate and local traffic takes place at the same time, on the same rails, with the same employes, and largely
The conditions attending the transportation of passengers and freight are substantially the same for like distances within those portions of the States of Wisconsin, Minnesota, North Dakota and South Dakota reached by the lines of these companies, whether the transportation is interstate or wholly intrastate. Prior to the acts and orders in question, the companies had maintained rates which were relatively fair and not discriminatory as between interstate and intrastate business; and it is concluded that any substantial change in the basis of rates thus established due only to the fact that the transportation was interstate or was local to a State, and any substantial difference in rates as between the two sorts of traffic, would constitute unjust discrimination in fact.
II. The state line of Minnesota on the east and west runs between cities which are in close proximity. Superior, Wisconsin, and Duluth, Minnesota, are side by side at the extremity of Lake Superior. Opposite one another, on the western boundary of the State, lie Grand Forks, North Dakota, and East Grand Forks, Minnesota; Fargo, North Dakota, and Moorhead, Minnesota; and Wahpeton, North Dakota, and Breckenridge, Minnesota. The cities in each pair ship and receive, to and from the same localities, the same kinds of freight. The railroad companies
The maximum class rates fixed by the order of September 6, 1906, were from 20 per cent. to 25 per cent. lower than those theretofore maintained by the Northern Pacific and Great Northern Companies for transportation in Wisconsin, Minnesota and North Dakota, whether such transportation was local to one of these States or was interstate between any two of them. When the Northern Pacific Company, pursuant to this order, installed the new intrastate rates, it reduced its interstate rates between Superior and points in Minnesota to an exact parity with its rates from Duluth. Reduction was also made in the rates between both Duluth and Superior and the above-mentioned points on the western boundary so as to put the border cities in North Dakota on an equal basis with the neighboring cities in Minnesota. This reduction was substantial and, had it not been made, the places adjoining the boundary, but outside the State, could not have competed with those within. Although the Northern Pacific Company thereby suffered a substantial loss in revenue from its interstate business, it had the choice of submitting to that loss or suffering substantial destruction of its interstate commerce to these border localities in articles covered by the orders. At the same time, the Great Northern Company made similar reductions, although, in its case, the transportation between Duluth and points in Minnesota was interstate — its line passing through Wisconsin. The reason for these reductions was
III. Moorhead, Minnesota, Fargo and Bismarck, North Dakota, Billings and Butte, Montana, are so-called jobbing centers. Rates had always been accorded to them by the Northern Pacific Company which would allow them to compete with their nearest neighbors and with St. Paul, Minneapolis and Duluth. The order of September 6, 1906, as supplemented by that of May 3, 1907, substantially reduced carload rates from the eastern terminals to Moorhead. This reduction would have given Moorhead an advantage in territory accessible to its jobbing industry not only as against Fargo, unless carload rates to Fargo were similarly reduced, but also as against Duluth, St. Paul and Minneapolis unless less-than-carload rates from these places to points accessible to Moorhead, which included a considerable territory in North Dakota, were proportionately reduced. If Fargo were protected as against Moorhead, it would have an advantage over Bismarck in territory common to them both and an advantage over the eastern terminals in territory common to them and to Fargo, unless carload rates from the eastern terminals to Bismarck and less-than-carload rates from those terminals to the territory accessible to Fargo were correspondingly reduced; and so on from distributing point to distributing point.
IV. Every rate comprehends two terminal charges, the initial and the final, and a haulage charge. It is declared to be a cardinal principle of rate-making that a rate for a longer distance should be proportionately smaller than one for a shorter distance; for even if the haulage charge in the former case were the same per mile, the rate per ton per mile should be less for the longer haul, as the terminal charges would be spread over a greater distance.
V. After the installation by the Great Northern and Northern Pacific Companies of the rates prescribed by the order of September 6, 1906, it appeared that the sum of the local rates from St. Paul to Moorhead and from Moorhead to many points in North Dakota was less than the interstate rates theretofore maintained from St. Paul to these points. Both companies thereupon established rates from St. Paul to the North Dakota points as a rule no greater than the sum of the locals on Moorhead but substantially lower in general than the interstate rates in force when the order took effect. Maintaining interstate rates from St. Paul to North Dakota localities substantially greater than the sum of the locals based on the state line would have caused unjust discrimination in fact. The actual reason for the reduction in the interstate rates was to prevent transshipment at Moorhead in order to take advantage of the lower sum of the locals and to retain on its line traffic which might reach Moorhead over other lines by reason of competition, and, as to less-than-carload lots, to enable jobbers in the Twin Cities and Duluth to compete with those in Moorhead and Fargo in territory which otherwise the latter would have exclusively occupied by reason of their closer proximity.
VI. It is further held to be one of the fundamental dogmas of rate-making that the haulage charge per mile should not increase with increasing distance if the conditions
VII. For more than twenty-five years the Northern Pacific Company has maintained an equal basis of rates on merchandise between its eastern and western terminals respectively and Butte, Montana, and between its eastern and western terminals respectively and localities intermediate between them and Butte. Other railroads reaching Butte have during the same time maintained like rates to Butte from Sioux City, Omaha, St. Joseph and Kansas City on the east, and from San Francisco, Sacramento and Los Angeles on the west. Butte has been as the hub of a wheel with spokes representing equal rates to these various cities. Industries, it is said, have been born and have grown in reliance upon this parity of rates.
VIII. Prior to the taking effect of the order of September 6, 1906, the Great Northern and Northern Pacific Companies had established joint through rates in connection with other carriers from all localities east or south of Minnesota to all points in Minnesota west of St. Paul and Minneapolis. After the rates prescribed by this order were installed, the sum of the locals on St. Paul from all localities south and east of Minnesota to points in Minnesota west of St. Paul and Minneapolis, was substantially less than the then existing interstate rates for the through haul to such western points. To avoid the resulting discrimination in favor of St. Paul, the companies withdrew the existing interstate rates and established a new tariff no higher than the sum of the locals on St. Paul.
IX. Further illustrations are given of inequalities resulting from the reduced Minnesota rates as compared
It is found further that while, after the order of September 6, 1906, became effective, both the Great Northern and the Northern Pacific Companies reduced certain interstate rates, as already mentioned, the reduction was not to such extent as to remedy the discrimination resulting from the fact that in most cases the general basis of rates within Minnesota was substantially lower than that maintained in North Dakota or upon traffic crossing the state line.
X. The similarity in the conditions of interstate and intrastate transportation is found also with respect to the commodities for which rates were prescribed by the act of April 18, 1907 (c. 232). The main lines and branches of the Northern Pacific and Great Northern Companies within Minnesota and North Dakota, with the exception of certain limited tracts, lie within grain fields, and grain is shipped in substantial quantities from nearly all stations in these fields to Duluth, Minneapolis and Superior. Shipments of coal originate at the head of the Lakes — that is, at Duluth or Superior — and find their destination at all localities served by the companies in Minnesota and eastern North Dakota. Shipments of lumber originate at Duluth, Cloquet, Little Falls and other
XI. Prior to the act of 1907, fixing the rate of two cents a mile, the general basis of rates for passengers (of 12 years of age or over) between any two points on the Northern Pacific system, had been for some years three cents a mile. After the new state rate had been installed, the sum of the locals between Moorhead and other Minnesota points and Moorhead and points westerly thereof was less than the then-existing through interstate rates. The passenger
Notwithstanding the facility with which interstate passengers could avoid the discrimination against them by making two contracts with the company, it is found that discrimination in fact still existed against the interstate passenger who applying for a through ticket did not know that the sum of the locals on Moorhead was less than the through rate, against the passenger with a trunk which he could not check through unless on a through ticket, and against a passenger who was compelled to use a sleeping car. The Northern Pacific Company shortly remedied this discrimination by reducing all its interstate fares for passenger transportation through Moorhead to an amount no greater than the sum of the locals over
There are added various hypothetical calculations of the losses which would have been sustained if the basis prescribed by the state acts and orders had been applied to the interstate business and to local business in other States. We shall have occasion later to refer to the actual results of the business of the railroad companies during the time that the rates fixed by the acts and orders (with the exception of the commodity rates) were in force, and to the effect upon revenue which the adoption of the commodity rates would have had.
The foregoing findings, as stated by the Master, were made "without regard to the justness or otherwise in fact of the interstate rates so affected by such local rates." The determination of the reasonableness of the interstate rates was not deemed to be within the province of the court.
The appellants do not concede the correctness of the findings in their full scope and insist upon qualifications. They deny that the evidence justified the finding that the
It is also insisted that the prescribed intrastate freight rates were not in general lower than the existing interstate
It is conceded, however, that the schedules fixed for intrastate transportation "necessarily disturbed the equilibrium theretofore existing between the rates on the two classes of business" (state and interstate) "on the boundary lines." This applies to the rates to and from the cities situated on opposite sides of the Red River of the North, the boundary between Minnesota and North Dakota, and to and from Duluth and Superior on the eastern boundary. The reduction of the state rates brought them below the level of the interstate rates in those instances in which formerly both had been maintained on a parity. So also, whatever may be said as to the non-existence of a general or comprehensive system of equitably adjusted rates, it is clear that there are competitive areas crossed by the state line of Minnesota and that the State's requirements altered the existing relation between state and interstate rates as to places within these zones of competition and not merely as to the cities on the boundary of the State.
The situation is not peculiar to Minnesota. The same question has been presented by the appeals, now before the court, which involve the validity of intrastate tariffs fixed by Missouri, Arkansas, Kentucky and Oregon. Differences in particular facts appear, but they cannot be regarded as controlling. A scheme of state rates framed to avoid discrimination between localities within the State, and to provide an harmonious system for intrastate transportation throughout the State, naturally would embrace those places within the State which are on or near the State's boundaries; and, when these are included in a general reduction of intrastate rates, there is, of course, a change in the relation of rates as theretofore existing to
With appreciation of the gravity of the controversy, the Railroad Commissioners of eight States
The controversy thus arises from opposing conceptions of the fundamental law, and of the scope and effect of Federal legislation, rather than from differences with respect to the salient facts.
For the purpose of the present inquiry, the rates fixed by the State must be assumed to be reasonable rates so far as intrastate traffic is concerned; that is, they must be taken to be rates which the State, in the exercise of its legislative judgment, could constitutionally fix for intrastate transportation separately considered. If the state rates are not of this character — a question to be dealt with later — they cannot be sustained in any event; but, assuming them to be otherwise valid, the decree below, with respect to the present branch of the case, rests upon two grounds: (1) That the action of the State imposes a direct burden upon interstate commerce; and (2) that it is in conflict with the provisions of the Act to Regulate Commerce.
These grounds are distinct. If a state enactment imposes a direct burden upon interstate commerce, it must fall regardless of Federal legislation. The point of such
Prior to the passage of the Act to Regulate Commerce, carriers fixed their interstate rates free from the actual exertion of Federal control; and under that act, as it stood until the amendment of June 29, 1906, 34 Stat. 584, c. 3591, the Interstate Commerce Commission had no power to prescribe interstate rates. Interstate Commerce Commission v. C., N.O. & T.P. Ry. Co., 167 U.S. 479, 511. The States, however, had long exercised the power to establish maximum rates for intrastate transportation. Was this power, apart from Federal action, subject to the limitation that the State could not fix intrastate rates, reasonable as such, generally throughout the State, but only as to such places and in such circumstances that the interstate business of the carriers would not be thereby affected? That is, was the State debarred from fixing reasonable rates on traffic, wholly internal, as to all state points so situated that as a practical consequence the carriers would have to reduce the rates they had made to competing points without the State, in order to maintain the volume of their interstate business or to continue the parity of rates or the relation between rates as it had previously existed? Was the State, in prescribing a general tariff of reasonable intrastate rates otherwise within its authority bound not to go below a minimum standard established by the interstate rates made by the
(1.) The general principles governing the exercise of state authority when interstate commerce is affected are well established. The power of Congress to regulate commerce among the several States is supreme and plenary. It is "complete in itself, may be exercised to its utmost extent, and acknowledges no limitations other than are prescribed in the Constitution." Gibbons v. Ogden, 9 Wheat. 1, 196. The conviction of its necessity sprang from the disastrous experiences under the Confederation when the States vied in discriminatory measures against each other. In order to end these evils, the grant in the Constitution conferred upon Congress an authority at all times adequate to secure the freedom of interstate commercial intercourse from state control and to provide effective regulation of that intercourse as the national interest may demand. The words "among the several States" distinguish between the commerce which concerns more States than one and that commerce which is confined within one State and does not affect other States. "The genius and character of the whole government," said Chief Justice Marshall, "seem to be, that its action is to be applied to all the external concerns of the nation, and to those internal concerns which affect the States generally; but not to those which are completely within a particular State, which do not affect other States, and with which it is not necessary to interfere, for the purpose of executing some of the general powers of the government. The completely internal commerce of a State, then, may be considered as reserved for the State itself."
The grant in the Constitution of its own force, that is, without action by Congress, established the essential immunity of interstate commercial intercourse from the direct control of the States with respect to those subjects embraced within the grant which are of such a nature as to demand that, if regulated at all, their regulation should be prescribed by a single authority. It has repeatedly been declared by this court that as to those subjects which require a general system or uniformity of regulation the power of Congress is exclusive. In other matters, admitting of diversity of treatment according to the special
The principle, which determines this classification, underlines the doctrine that the States cannot under any guise impose direct burdens upon interstate commerce. For this is but to hold that the States are not permitted directly to regulate or restrain that which from its nature should be under the control of the one authority and be free from restriction save as it is governed in the manner that the national legislature constitutionally ordains.
Thus, the States cannot tax interstate commerce, either by laying the tax upon the business which constitutes such commerce or the privilege of engaging in it, or upon the receipts, as such, derived from it (State Freight Tax Case, 15 Wall. 232; Robbins v. Shelby Taxing District, 120 U.S. 489; Philadelphia & Southern Mail S.S. Co. v. Pennsylvania, 122 U.S. 326; Leloup v. Mobile, 127 U.S. 640; McCall v. California, 136 U.S. 104; Brennan v. Titusville, 153 U.S. 289; Galveston, Harrisburg & San Antonio Railway Co. v. Texas, 210 U.S. 217; Western Union Telegraph Co. v. Kansas, 216 U.S. 1; Pullman Co. v. Kansas, 216 U.S. 1, 56; Meyer v. Wells, Fargo & Co., 223 U.S. 298; Crenshaw v. Arkansas, 227 U.S. 389); or upon persons or property in transit in interstate commerce (Passenger Cases, 7 How. 283; Crandall v. Nevada, 6 Wall. 35; State Freight Tax Case, supra, p. 281; Coe v. Errol, 116 U.S. 517;
They have no power to prohibit interstate trade in legitimate articles of commerce (Bowman v. Chicago &c. Railway Co., supra; Leisy v. Hardin, 135 U.S. 100; Vance v. Vandercook Co. (No. 1), 170 U.S. 438; Schollenberger v. Pennsylvania, 171 U.S. 1; Oklahoma v. Kansas Natural Gas Co., 221 U.S. 229; L. & N.R.R. Co. v. Cook Brewing Co., 223 U.S. 70); or to discriminate against the products of other States (Ward v. Maryland, 12 Wall. 418; Welton v. Missouri, supra; Hannibal & St. J.R.R. Co. v. Husen, 95 U.S. 465; Guy v. Baltimore, 100 U.S. 434; Walling v. Michigan, 116 U.S. 446; Minnesota v. Barber, 136 U.S. 313; Brimmer v. Rebman, 138 U.S. 78; Darnell v. Memphis, 208 U.S. 113); or to exclude from the limits of the State corporations or others engaged in interstate commerce or to fetter by conditions their right to carry it on (Crutcher v. Kentucky, 141 U.S. 47; Western Union Telegraph Co. v. Kansas, supra; Pullman Co. v. Kansas, supra; International Text Book Co. v. Pigg, 217 U.S. 91; Buck Stove Co. v. Vickers, 226 U.S. 205); or to prescribe the rates to be charged for transportation from one State to another, or to subject the operations of carriers in the course of such transportation to requirements that are unreasonable or pass beyond the bounds of suitable local protection (Wabash &c. Railway Co. v. Illinois, 118 U.S. 557, 577; Covington &c. Bridge Co. v. Kentucky, 154 U.S. 204; Louisville & Nashville R.R. Co. v. Eubank, 184 U.S. 27; Hanley v. Kansas City Southern Ry. Co., 187 U.S. 617; R.R. Commission of Ohio v. Worthington, 225 U.S. 101; Texas & N.O.R.R. Co. v. Sabine Tram Co., 227 U.S. 111; Hall v. DeCuir, 95 U.S. 485, 488; Cleveland, C., C. & St. L. Railway Co. v. Illinois, 177 U.S. 514; Houston & T.C.R.R. Co. v. Mayes, 210 U.S. 321; McNeill v. Southern Railway Co., 202 U.S. 543; Mississippi R.R. Commission v. Illinois Cent R.R. Co., 203 U.S. 335;
But within these limitations there necessarily remains to the States, until Congress acts, a wide range for the permissible exercise of power appropriate to their territorial jurisdiction although interstate commerce may be affected. It extends to those matters of a local nature as to which it is impossible to derive from the constitutional grant an intention that they should go uncontrolled pending Federal intervention. Thus, there are certain subjects having the most obvious and direct relation to interstate commerce, which nevertheless, with the acquiescence of Congress, have been controlled by state legislation from the foundation of the Government because of the necessity that they should not remain unregulated and that their regulation should be adapted to varying local exigencies; hence, the absence of regulation by Congress in such matters has not imported that there should be no restriction but rather that the States should continue to supply the needed rules until Congress should decide to supersede them. Further, it is competent for a State to govern its internal commerce, to provide local improvements, to create and regulate local facilities, to adopt protective measures of a reasonable character in the interest of the health, safety, morals and welfare of its people, although interstate commerce may incidentally or indirectly be involved. Our system of government is a practical adjustment by which the National authority as conferred by the Constitution is maintained in its full scope without unnecessary loss of local efficiency. Where the subject is peculiarly one of local concern, and from its nature belongs to the class with which the State appropriately deals in making reasonable provision for local needs, it cannot be regarded as left to the unrestrained will of individuals
The leading illustrations may be noted. Immediately upon the adoption of the Constitution, Congress recognized the propriety of local action with respect to pilotage, in view of the local necessities of navigation. Act of August 7, 1789, c. 9, § 4; 1 Stat. 53, 54; Cooley v. Board of Wardens, supra. It was sixty years before provision for Federal license of pilots was made (act of August 30, 1852, c. 106; 10 Stat. 61), and even then port pilots were not included. Pacific Mail Steamship Co. v. Joliffe, 2 Wall. 450, 459. And while Congress has full power over the subject and to a certain extent has prescribed rules, it is still in a large measure subject to the regulation of the States. Anderson v. Pacific Coast S.S. Co., 225 U.S. 187.
A State is entitled to protect its coasts, to improve its harbors, bays and streams, and to construct dams and bridges across navigable rivers within its limits, unless there is conflict with some act of Congress. Plainly, in the case of dams and bridges, interference with the accustomed right of navigation may result. But this exercise of the important power to provide local improvements has not been regarded as constituting such a direct burden upon intercourse or interchange of traffic as to be repugnant to the Federal authority in its dormant state. Willson v. Blackbird Creek Marsh Co., 2 Pet. 245; Gilman v. Philadelphia, 3 Wall. 713; Pound v. Turck, 95 U.S. 459; County of
While the State may not impose a duty on tonnage (Steamship Co. v. Portwardens, 6 Wall. 31; State Tonnage Tax Cases, 12 Wall. 204, 212; Cannon v. New Orleans, 12 Wall. 577), it may regulate wharfage charges and exact tolls for the use of artificial facilities provided under its authority. The subject is one under state control, where Congress has not acted, although the payment is required of those engaged in interstate or foreign commerce. Keokuk Packet Co. v. Keokuk, 95 U.S. 80; Cincinnati &c. Packet Co. v. Catlettsburg, 105 U.S. 559; Parkersburg & O.R. Transportation Co. v. Parkersburg, 107 U.S. 691; Huse v. Glover, supra; Ouachita Packet Co. v. Aiken, 121 U.S. 444; Sands v. Manistee River Improvement Co., 123 U.S. 288, 295. In Transportation Co. v. Parkersburg, supra, the court had before it an ordinance of that city prescribing rates of wharfage on vessels discharging or receiving freight at public landings belonging to the city. A transportation company having steamers, plying between Pittsburg and Cincinnati complained that the wharfage charge was exorbitant. The court held that the reasonableness of the charge, it being simply one for wharfage, was to be determined by the state law. "The regulation of wharves belongs prima facie, and in the first instance, to the States, and would only be assumed by Congress when its exercise by the States is incompatible with the interests of commerce." (Id., p. 703.) Again, in Ouachita
Quarantine regulations are essential measures of protection which the States are free to adopt when they do not come into conflict with Federal action. In view of the need of conforming such measures to local conditions, Congress from the beginning has been content to leave the matter for the most part, notwithstanding its vast importance, to the States and has repeatedly acquiesced in the enforcement of state laws. (Act of February 25, 1799, c. XII, 1 Stat. 619, R.S., § 4797; Act of April 29, 1878, c. 66, 20 Stat. 37; Act of February 15, 1893, c. 114, 27 Stat. 449.) Such laws undoubtedly operate upon interstate and foreign commerce. They could not be effective otherwise. They cannot, of course, be made the cover for discriminations and arbitrary enactments having no reasonable relation to health (Hannibal & St. J. Railroad Co. v. Husen, 95 U.S. 465, 472, 473); but the power of the State to take steps to prevent the introduction or spread of disease, although interstate and foreign commerce are involved (subject to the paramount authority of Congress if it decides to assume control), is beyond question. Morgan's &c. S.S. Co. v. Louisana, 118 U.S. 455; Missouri, Kansas & Texas Ry. Co. v. Haber, 169 U.S. 613; Louisiana v. Texas, 176 U.S. 1; Rasmussen v. Idaho, 181 U.S. 198; Compagnie Francaise &c. v. Board of Health, 186 U.S. 380;
State inspection laws and statutes designed to safeguard the inhabitants of a State from fraud and imposition are valid when reasonable in their requirements and not in conflict with Federal rules, although they may affect interstate commerce in their relation to articles prepared for export or by including incidentally those brought into the State and held for sale in the original imported packages. Gibbons v. Ogden, supra, p. 203; Turner v. Maryland, 107 U.S. 38; Plumley v. Massachusetts, 155 U.S. 461; Patapsco Guana Co. v. North Carolina, 171 U.S. 345, 357, 358; Savage v. Jones, 225 U.S. 501. And for the protection of its game and the preservation of a valuable food supply, the State may penalize the possession of game during the closed season whether obtained within the State or brought from abroad. Silz v. Hesterberg, 211 U.S. 31.
Interstate carriers, in the absence of Federal statute providing a different rule, are answerable according to the law of the State for nonfeasance or misfeasance within its limits. Chicago, Milwaukee &c. Ry. Co. v. Solan, 169 U.S. 133, 137; Pennsylvania R.R. Co. v. Hughes, 191 U.S. 477, 491; Martin v. Pittsburg & Lake Erie R.R. Co., 203 U.S. 284, 294; Southern Pacific Co. v. Schuyler, 227 U.S. 601, 613. Until the enactment by Congress of the act of April 22, 1908, c. 149, 35 Stat. 65, the laws of the States determined the liability of interstate carriers by railroad for injuries received by their employes while engaged in interstate commerce, and this was because Congress, although empowered to regulate the subject,
Again, it is manifest that when the legislation of the State is limited to internal commerce to such degree that it does not include even incidentally the subjects of interstate commerce, it is not rendered invalid because it may affect the latter commerce indirectly. In the intimacy of commercial relations, much that is done in the superintendence of local matters may have an indirect bearing upon interstate commerce. The development of local resources and the extension of local facilities may have a very important effect upon communities less favored and to an appreciable degree alter the course of trade. The freedom of local trade may stimulate interstate commerce, while restrictive measures within the police power of the State enacted exclusively with respect
Within the state power, then, in the words of Chief Justice Marshall is, "that immense mass of legislation, which embraces everything within the territory of a State, not surrendered to a general government: all which can be most advantageously exercised by the States themselves. Inspection laws, quarantine laws, health laws of every description, as well as laws for regulating the internal commerce of a State, and those which respect turnpike roads, ferries, &c., are component parts of this mass. No direct general power over these objects is granted to Congress: and, consequently, they remain subject to state legislation. If the legislative power of the Union can reach them, it must be for national purposes; it must be where the power is expressly given for a special purpose, or is clearly incidental to some power which is expressly given." Gibbons v. Ogden, supra, pp. 203, 304.
And, wherever as to such matters, under these established
(2) These principles apply to the authority of the State to prescribe reasonable maximum rates for intrastate transportation.
State regulation of railroad rates began with railroad transportation. The railroads were chartered by the States and from the outset, in many charters, maximum rates for freight or passengers, or both were prescribed.
The authority of the State to limit by legislation the charges of common carriers within its borders was not confined to the power to impose limitations in connection with grants of corporate privileges. In view of the nature of their business, they were held subject to legislative control as to the amount of their charges unless they were protected by their contract with the State. This was decided in Chicago, Burlington & Quincy R.R. Co. v. Iowa, 94 U.S. 155; Peik v. Chicago & Northwestern Railway Co., 94 U.S. 164; Winona & St. Peter R.R. Co. v. Blake, 94 U.S. 180, and other cases, following Munn v. Illinois, 94 U.S. 113. The question was presented by acts of the legislatures of Illinois, Iowa, Wisconsin and Minnesota, passed in the years 1871 and 1874 in response to a general movement for a reduction of rates. The section of the country in which the demand arose was to a large degree homogeneous and one in which the flow of commerce was only slightly concerned with state lines. But resort was had to the States for relief. In the Munn Case, the court had before it the statute of Illinois governing the grain warehouses in Chicago. Through these elevators,
It became a frequent practice for the States to create commissions, as agencies of state supervision and regulation, and in many instances the rate-making power was conferred upon these bodies. A summary of such legislation is given in Interstate Commerce Commission v. Chicago, N.O. & T.P. Ry. Co., 167 U.S. 479, 495, 496. One of these state laws, that of Mississippi, passed in 1884, came under review in Stone v. Farmers Loan & Trust Co., 116 U.S. 307. The suit was brought to enjoin the Railroad Commission from enforcing the statute against the Mobile and Ohio Railroad Company. It had been incorporated
In Wabash, St. L. & P. Railway Co. v. Illinois, supra, it was finally determined that the authority of the State did not extend to the regulation of charges for interstate transportation. There the state statute was aimed at discrimination. It was said to have been violated by the railroad company in the case of shipments from points within Illinois to the city of New York. The state court had construed the statute to be binding as to that part of the interstate haul which was within the State although inoperative beyond the boundary. So applied, this court held the act to be invalid.
But no doubt was entertained of the State's authority to regulate rates for transportation that was wholly intrastate. And, in illustrating the extent of state power
The doctrine was thus fully established that the State could not prescribe interstate rates but could fix reasonable intrastate rates throughout its territory. The extension of railroad facilities has been accompanied at every step by the assertion of this authority on the part of the States and its invariable recognition by this court. It has never been doubted that the State could, if it saw fit, build its own highways, canals and railroads. (Railroad Company v. Maryland, 21 Wall. 456, 470, 471.) It could build railroads traversing the entire State and thus join its border cities and commercial centers by new highways of internal intercourse to be always available upon reasonable terms. Such provision for local traffic might indeed alter relative advantages in competition, and, by virtue of economic forces, those engaged in interstate trade and transportation might find it necessary to make readjustments
If this authority of the State be restricted, it must be by virtue of the paramount power of Congress over interstate commerce and its instruments; and, in view of the nature of the subject, a limitation may not be implied because of a dormant Federal power, that is, one which has not been exerted, but can only be found in the actual exercise of Federal control in such measure as to exclude this action by the State which otherwise would clearly be within its province.
(3.) When Congress, in the year 1887, enacted the Act to Regulate Commerce (24 Stat. 379, c. 104), it was acquainted
Congress carefully defined the scope of its regulation, and expressly provided that it was not to extend to purely intrastate traffic. In the first section of the Act to Regulate Commerce there was inserted the following proviso:
"Provided, however, That the provisions of this act shall not apply to the transportation of passengers or property, or to the receiving, delivering, storage, or handling of property, wholly within one State, and not shipped to or from a foreign country from or to any State or Territory as aforesaid."
When in the year 1906 (act of June 29, 1906, c. 3591, 34 Stat. 584), Congress amended the act so as to confer upon the Federal commission power to prescribe maximum interstate rates, the proviso in section one was reenacted. Again, in 1910, when the act was extended to embrace telegraph, telephone and cable companies engaged in interstate business, the proviso was once more reenacted, with an additional clause so as to exclude intrastate messages from the operation of the statute. Act of June 18, 1910, c. 309, 36 Stat. 539, 545. The proviso in its present form reads:
"Provided, however, That the provisions of this Act shall not apply to the transportation of passengers or property, or to the receiving, delivering, storage, or handling
There was thus excluded from the provisions of the act that transportation which was "wholly within one State," with the specified qualification where its subject was going to or coming from a foreign country.
It is urged, however, that the words of the proviso are susceptible of a construction which would permit the provisions of section three of the act, prohibiting carriers from giving an undue or unreasonable preference or advantage to any locality, to apply to unreasonable discriminations between localities in different States, as well when arising from an intrastate rate as compared with an interstate rate as when due to interstate rates exclusively. If it be assumed that the statute should be so construed, and it is not necessary now to decide the point, it would inevitably follow that the controlling principle governing the enforcement of the act should be applied to such cases as might thereby be brought within its purview; and the question whether the carrier, in such a case, was giving an undue or unreasonable preference or advantage to one locality as against another, or subjecting any locality to an undue or unreasonable prejudice or disadvantage, would be primarily for the investigation and determination of the Interstate Commerce Commission and not for the courts. The dominating purpose of the statute was to secure conformity to the prescribed standards through the examination and appreciation of the complex facts of transportation by the body created for that purpose; and, as this court has repeatedly held, it would be destructive of the system of regulation defined by the statute if the
The question we have now before us, essentially, is whether after the passage of the Interstate Commerce Act, and its amendment, the State continued to possess the state-wide authority which it formerly enjoyed to prescribe reasonable rates for its exclusively internal traffic. That, as it plainly appears, was the nature of the action taken by Minnesota, and the attack, however phrased, upon the rates here involved as an interference with interstate commerce, is in substance a denial of that authority.
Having regard to the terms of the Federal statute, the familiar range of state action at the time it was enacted, the continued exercise of state authority in the same manner and to the same extent after its enactment, and the decisions of this court recognizing and upholding this authority, we find no foundation for the proposition that the Act to Regulate Commerce contemplated interference therewith.
Congress did not undertake to say that the intrastate rates of interstate carriers should be reasonable or to invest its administrative agency with authority to determine their reasonableness. Neither by the original act nor by its amendment, did Congress seek to establish a unified control over interstate and intrastate rates; it did not set up a standard for intrastate rates, or prescribe, or
How clear was the purpose not to occupy the field thus left to the exercise of state power is shown by the clause uniformly inserted in the numerous acts passed by Congress to authorize the construction of railways across the Indian Territory. This clause, while fixing a maximum passenger rate, made the laws of an adjoining State (in some cases Arkansas, in others Texas, and in others Kansas) applicable to the freight rates to be charged within the Territory; and while the right to regulate rates on the authorized line of railroad was reserved to Congress until a state government should be established, it was expressly provided that, when established, the State should be entitled to fix rates for intrastate transportation — the right remaining with Congress to prescribe rates for such transportation as should be interstate. Within a month after the Act to Regulate Commerce was enacted, two acts were passed by Congress for this purpose with respect to railways extending across the Territory from the Texas to the Kansas boundary. The provision — in both cases in identical language — save that the one referred to the laws of Texas and the other to the laws of Kansas — was as follows (act of Feb. 24, 1887, c. 254, § 4, 24 Stat. 420; act of March 2, 1887, c. 319, § 4, id., 447):
"SEC. 4. That said railroad company shall not charge the inhabitants of said Territory a greater rate of freight
The same provision is found in similar statutes passed in almost every year from 1884 to 1902 and relating to lines intended to serve as highways of interstate communication.
The decisions of this court since the passage of the Act to Regulate Commerce have uniformly recognized that it was competent for the State to fix such rates, applicable throughout its territory. If it be said that in the contests that have been waged over state laws during the past twenty-five years, the question of interference with interstate commerce by the establishment of state-wide rates for intrastate traffic has seldom been raised, this fact itself attests the common conception of the scope of state authority. And the decisions recognizing and defining the state power wholly refute the contention that the making of such rates either constitutes a direct burden upon interstate commerce or is repugnant to the Federal statute.
In Dow v. Beidelman, 125 U.S. 680, the statute of Arkansas, enacted in April, 1887 (April 4, 1887, Acts 1887,
In Reagan v. Farmers Loan & Trust Co., 154 U.S. 362, the trustee of a railroad mortgage attacked the statute of Texas (April 3, 1891, Gen. Laws 1891, c. 51, p. 55) which established a railroad commission with authority to regulate tariffs, and the order of the commission providing a schedule of classified rates for the transportation of goods within the State. The challenge was of the tariff as a whole and the inquiry was whether the body of rates was unreasonable and such as to work a practical destruction of rights of property. Viewed in this aspect, the court, upon the allegations admitted by demurrer, held the action of the commission to be beyond its constitutional power
The effect of intrastate rates upon interstate rates was urged in Smyth v. Ames, 169 U.S. 466, and in the cases decided therewith. These suits were brought by stockholders of the Union Pacific Railway Company, the Chicago and Northwestern Railroad Company and the Chicago, Burlington and Quincy Railroad Company, to enjoin the enforcement of the act of the legislature of Nebraska passed in 1893 (April 12, 1893, Acts 1893, c. 24). This was a comprehensive statute classifying the freight transported from any point in Nebraska to any other point in that State and prescribing tables of maximum rates. The companies affected were interstate carriers engaged in a vast commerce only a small portion of which was wholly local to the State. On the eastern boundary lay Omaha, a city of large importance in interstate trade, situated on the Missouri river with Council Bluffs, in the State of Iowa, directly opposite. The point was distinctly
In that one of the Smyth Cases which was brought by the stockholders of the Union Pacific Railway Company not only was the case presented of a trunk line crossing the State with a relatively small proportion of business local to Nebraska, but the company had been formed by a consolidation of several companies by authority of Congress, one of them being the Union Pacific Railroad Company, incorporated by the act of July 1, 1862, c. 120, 12 Stat. 489. By this act (§ 18, id. 497), it was expressly provided that Congress might reduce the rates of fare if unreasonable and might fix the same by law whenever the net earnings of the entire road and telegraph should exceed a certain amount. But this language, while showing that Congress intended to reserve the power to prevent unreasonable exactions, was not deemed to be equivalent to a declaration that the States through which the road might be constructed should not regulate rates for intrastate transportation. The court said: "It cannot be doubted that the making of rates for transportation by railroad corporations along public highways, between points wholly within the limits of a State, is a subject primarily within the control of that State. . . . Congress not having exerted this power, we do not think that the national character of the corporation constructing the Union Pacific Railroad stands in the way of a State prescribing rates for transporting property on that road wholly between points within its territory. Until Congress, in the exercise either of the power specifically reserved by the eighteenth section of the act of 1862 or its power under the general reservation made of authority to add to, alter, amend or repeal that act, prescribes rates to be charged by
The cases of Louisville & Nashville Railroad Co. v. Kentucky, 183 U.S. 503, and Louisville & Nashville Railroad Co. v. Eubank, 184 U.S. 27, concerned the validity of the long and short haul provision of the constitution of Kentucky adopted in 1891. In the first case, violation was charged with respect to the transportation of coal from Altamont to Lebanon, an intermediate station, as compared with charges for transportation from Altamont to Elizabethtown and Louisville, all places being within Kentucky. The difference in rate was justified by the company on the ground that at Louisville the coal hauled from Altamont came into competition with that brought down the Ohio River and at Elizabethtown with western Kentucky coal brought there by the Illinois Central Railroad. The contention that the state provision operated as an interference with interstate commerce was presented and overruled, the court saying: "It is plain that the provision in question does not in terms embrace the case of interstate traffic. It is restricted in its regulation to those who own or operate a railroad within the State, and the long and short distances mentioned are evidently distances upon the railroad line within the State. The particular case before us is one involving only the transportation of coal from one point in the State of Kentucky to another by a corporation of that State. It may be that the enforcement of the state regulation forbidding discrimination in
The case of Minneapolis & St. Louis Railroad Co. v. Minnesota, 186 U.S. 257, involved shipments of hard coal in carload lots from Duluth, Minnesota, to points in the southern and western portions of that State. The Railroad and Warehouse Commission of Minnesota, in 1899, prescribed a joint rate to be observed by the St. Paul and Duluth Railroad Company, the Minneapolis and St. Louis Railroad Company and other carriers. The state court directed the issue of a writ of mandamus to compel compliance with the order. It was objected that the act under
In Northern Pacific Railway Co. v. North Dakota, 216 U.S. 579, the Attorney General of North Dakota charged the company with continuous violation of a law fixing rates for the carriage of coal within the State (North Dakota, Laws of 1907, c. 51) and asked for an injunction. It appears by the record that in its return to the rule to show cause in the state court, the company alleged that the statute was void because repugnant to the commerce clause and also that the rate fixed thereby was confiscatory. In support of the last contention the return set forth that the maximum rates for carrying coal which the company was allowed to charge under the act in question, were
To suppose, however, from a review of these decisions, that the exercise of this acknowledged power of the State may be permitted to create an irreconcilable conflict with the authority of the Nation, or that through an equipoise of powers an effective control of interstate commerce is rendered impossible, is to overlook the dominant operation of the Constitution which, creating a Nation, equipped it with an authority, supreme and plenary, to control National commerce and to prevent that control, exercised in the wisdom of Congress, from being obstructed or destroyed by any opposing action. But, as we said at the outset, our system of government is a practical adjustment by which the National authority as conferred by the Constitution is maintained in its full scope without unnecessary loss of local efficiency. It thus clearly appears that, under the established principles governing
The interblending of operations in the conduct of interstate and local business by interstate carriers is strongly pressed upon our attention. It is urged that the same right-of-way, terminals, rails, bridges, and stations are provided for both classes of traffic; that the proportion of each sort of business varies from year to year and, indeed, from day to day; that no division of the plant, no apportionment of it between interstate and local traffic, can be made to-day which will hold to-morrow; that terminals, facilities and connections in one State aid the carrier's entire business and are an element of value with respect to the whole property and the business in other States; that securities are issued against the entire line of the carrier and cannot be divided by States; that tariffs should be made with a view to all the traffic of the road and should be fair as between through and short-haul business; and that, in substance, no regulation of rates can be just, which does not take into consideration the whole field of the carrier's operations, irrespective of state lines. The force of these contentions is emphasized in these cases, and in others of like nature, by the extreme difficulty and intricacy of the calculations which must be made in the effort to establish a segregation of intrastate business for the purpose of determining the return to which the carrier is properly entitled therefrom.
But these considerations are for the practical judgment of Congress in determining the extent of the regulation necessary under existing conditions of transportation to conserve and promote the interests of interstate commerce. If the situation has become such, by reason of the interblending
Second. Are the State's acts and orders confiscatory?
The rate-making power is a legislative power and necessarily implies a range of legislative discretion. We do not sit as 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. San Diego Land & Town Co. v. Jasper, 189 U.S. 439, 446. The case falls within a well defined category. Here we have a general schedule of rates, involving the profitableness of the intrastate operations of the carrier taken as a whole, and the inquiry is whether the State has overstepped the constitutional limit by making the rates so unreasonably low that the carriers are deprived of their property without due process of law and denied the equal protection of the laws.
The property of the railroad corporation has been devoted to a public use. There is always the obligation springing from the nature of the business in which it is engaged — which private exigency may not be permitted to ignore — that there shall not be an exorbitant charge
In determining whether that right has been denied, each case must rest upon its special facts. But the general principles which are applicable in a case of this character have been set forth in the decisions.
(1.) The basis of calculation is the "fair value of the property" used for the convenience of the public. Smyth v. Ames, supra (p. 546). Or, as it was put in San Diego Land & Town Co. v. National City, supra (p. 757), "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." See also San Diego Land & Town Co. v. Jasper, supra; Willcox v. Consolidated Gas Co., supra.
(2.) The ascertainment 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 consideration of all relevant facts. The scope of the inquiry was thus broadly described in Smyth v. Ames, supra (pp. 546-547): "In order to ascertain that value,
(3.) Where the business of the carrier is both interstate and intrastate, the question whether a scheme of maximum rates fixed by the State for intrastate transportation affords a fair return, must be determined by considering separately the value of the property employed in the intrastate business and the compensation allowed in that business under the rates prescribed. This was also ruled in the Smyth Case (id., p. 541). The reason, as there stated, is that the State cannot justify unreasonably low rates for domestic transportation, considered alone, upon the ground that the carrier is earning large profits on its interstate business, and, on the other hand, the carrier cannot justify unreasonably high rates on domestic business because only in that way is it able to meet losses on its interstate business.
In the present cases, the necessity of this segregation of the domestic business in determining values and results of operation, was recognized by both parties. Voluminous testimony was taken before the Master, and numerous exhibits containing data and calculations were submitted for the purpose of showing their respective estimates
In each of the three cases (saye in certain particulars with respect to that of the Minneapolis and St. Louis Railroad Company) the method adopted by the Master was as follows:
The period taken for the purpose of testing the sufficiency of the rates was the fiscal year ending June 30, 1908. During this period, all the rates in question, freight and passenger, were actually in force, with the exception of the commodity rates prescribed by the act of April 18, 1907, which had been enjoined. The amount of the reduction in the intrastate revenue which would have been caused by the application of the commodity rates is shown.
The Master found the present value of the entire property of the carrier, used in the public service in the State of Minnesota. This valuation was as of June 30, 1908, and was made on the basis of the cost of reproduction new. The Master also made findings as to the original cost of construction, and as to the present value on the basis of cost of reproduction new, of the entire system of the carrier. The estimated value of the railroad property within the State was divided between the freight and passenger business upon the relation of the gross revenue derived from each. The part of the total value which was thus assigned to the freight business within the State was then divided between the interstate and intrastate
There was no substantial dispute as to the amount of the entire revenue assignable to the State or as to its division between interstate and intrastate business, as an examination of the transactions in which the revenue was obtained permitted the making of the requisite apportionments with reasonable certainty.
The Master also ascertained the total expense incurred by the carrier within the State. This expense was first divided between freight and passenger business. Those items of cost which were directly incurred in each sort of business, and not common to both, were directly assigned; and such items were found to cover about sixty per cent. of all expenses. The remaining items, those of common expense, were divided between the freight and passenger business upon the relation, as to most of them, of revenue train-miles, and as to the others, of revenue engine-miles.
Having thus ascertained the share of the expense within the State of the freight and passenger departments respectively, it remained to divide that share, in each case, between the interstate and intrastate business. This apportionment was made, in the case of freight expense, upon what was termed an "equated ton-mile basis;" and in the case of passenger expense upon an "equated passenger-mile basis." That is to say, the Master concluded that the cost per ton-mile of doing the intrastate freight business was at least two and one-half times the cost per ton-mile of the interstate freight business, and hence he divided the total freight expense according to the relation of the interstate and intrastate ton-miles after
The validity of the result depends upon the estimates of the value of the property within the State and the apportionments both of value and of expense between interstate and intrastate operations.
1. Northern Pacific Railway Company.
The par value, April 30, 1908, of the stock of this company was found to be $215,539,634.99, and of the bonds $190,256,577.66; total, $405,796,392.65. (Included in this statement of capital stock is the sum of $60,539,634.99 received to April 30, 1908, upon subscriptions to new capital stock ($95,000,000) authorized by stockholders' resolution January 7, 1907.)
These securities and their value in the market rest upon the entire property of the company. They include assets of considerable value (for example, the stock of the Northwestern Improvement Company owning extensive coal lands) which, however, do not form part of what may be called the operating property of the company, or that devoted to the public service, upon which the fair return is to be calculated (15 I.C.C. Rep. 376, 397, 407). Referring to the market value of the securities, the Master said: "Assets and property not devoted to public service have not been valued, and as they are a large element in stock valuation it follows that value of bonds and stocks is wholly unreliable and cannot be used in these cases as an element in determining the value of operating property or as a basis for rate-making." In this view the Master was undoubtedly right.
Much evidence was produced before the Master for the purpose of showing the actual cost of construction and equipment of the entire railroad system from the beginning down to April 30, 1908. This, the Master states, could be shown only by the corporate books and records; and in the early history of the original company these are somewhat obscure and uncertain and, by reason of lapse of time, could not be verified by other proof. The total investment cost of the railroad system of the Northern Pacific thus shown, was $369,252,755. This included
The Master, however, and the court below in confirming his findings, held that rates were not to be predicated upon the original investment.
Taking, as the basis, the cost of reproduction new, the Master found the value of the entire railroad system or operating property of this company to be $452,666,489.
The total net profits of the company for the fiscal year
Values. The items entering into the valuation, are set forth in the margin.
"Lands for right-of-way, yards and terminals — $21,024,562.90."
This is for the bare land, without structures or improvements of any sort, as the entire cost of reproduction in building the road and erecting all the existing structures is covered in other items. The Master states that the amount thus allowed for land is made up as follows:
"Terminal properties, St. Paul appraisement of Read, Watson & Taylor, as modified by railroad company ................................ $7,645,100.24 "Add 5 per cent for the cost of acquisition and consequential damages ................................ 382,255.01
"Property acquired after appraisement ........................................ 328,725.69 "Minneapolis appraisement of Elwood, Barney and Ridgeway, as modified by railway company ........................................ 4,027,616.17 "Add 5 per cent for acquisition and consequential damages .................. 201,380.80 "Property acquired after appraisement ........................................ 227,737.26 "Duluth, appraisement of Stryker, Mendenhall and Little .................. 3,602,443.43 "Add 25 per cent for railway value, cost of acquisition and consequential damages ................................ 900,610.85 "Total value of terminals ................. 17,315,869.45 "Lands outside of terminals ............... 3,708,693.45 "Grand Total .............................. 21,024,562.90"
The appellants insist that no more than $9,498,099.27 should have been allowed.
It is contended that the valuation was made upon a wrong theory; that it is a speculative estimate of "cost of reproduction;" that it is largely in excess of the market value of adjacent or similarly situated property; that it does not represent the present value, in any true sense, but constitutes a conjecture as to the amount which the railway company would have to pay to acquire its right-of-way, yards and terminals, on an assumption, itself inadmissible, that, while the railroad did not exist, all other conditions, with respect to the agricultural and industrial development of the State, and the location, population and activities of towns, villages and cities, were as they now are.
We may first consider the basis for the finding with respect to the "lands outside terminals," that is, the right-of-way and station grounds, etc., outside the three cities.
"The Master: When you speak of value, you mean cost of purchase?
* * * * * * * *
"Witness: The word `value' doesn't seem to me to fit this case, because all the time we are figuring on the cost of reproducing this property, and our instructions from the State use the word `reproduce.' Now, if a railroad company could buy property at what is generally considered its value, the word `value' would fit in all right, but there is this excess which a railroad company has to pay beyond what is generally accepted as its value which increases the cost of reproducing a railroad property.
"Q. And this excess which you now speak of is included in your market values as reported to the State and used in your testimony? A. That is right. * *
"Q. . . . Well, now, does the term `market value' as you have used it in making this report to the State and in your testimony here, have the same meaning, or is it used in the same sense with reference to the values you have fixed and reported to the State for properties on the right-of-way outside of the terminals and outside of the larger cities? A. Oh, yes.
"Q. As in the cities here? A. Yes; the same rule was applied all through in the Minnesota valuations.
* * * * * * * *
"Q. Therefore, your judgment as to the value of the railroad property is always that it is higher than the value of contiguous property? A. Yes, yes, that is true. * * * * * * * *
"Q. So that, in every case, what you call the market value is the value of contiguous or similarly situated property, with an additional amount which a railroad company is ordinarily compelled to pay? A. That is right. * * * * * * * *
"Q. Then, when you multiply that by three, you are multiplying by three one of the elements going to make up excessive cost to a railroad company? A. That is right. * * * * * *
"Q. And you are unable to state how much upon the average you have added to the true or normal market value, to allow for the additional amount which the railroad company would have to pay upon the hypothesis that it is now compelled to purchase the land? A. That is correct.
"Q. And then having determined, to your satisfaction at what figure or sum you would place the market value of this property to the Railroad Company, as you have described, you have added another sum for severance damage, cost of improvements unnecessary to the Company, easements in abutting property, and general expenses? A. That is correct.
"Q. And you have determined that, in agricultural communities this second addition is shown by the use of the multiple 3? A. I think the multiple of 3 is too low, and I so testified in this case. When you are going through a highly cultivated country, I think the multiplier of 3 is not enough.
"Q. But that is what you used for the purpose of the right-of-way value of land through the agricultural communities? A. That is right, in this State.
"Q. And in the cities, in the three large terminals, you have added to what you describe as the market value of the lands to the Railroad Company, ascertained as described by you already, the amount necessary to produce the difference shown in your testimony between the market value of the terminals and the right-of-way value? A. That is right.
"Q. And while you are able to show, and we can ascertain
The "market value" of the lands (outside of the three cities) thus fixed and reported to the State was $2,008,491.50, and the increased amount estimated, in the manner stated, which was reported as the "value for railway purposes" was $4,944,924.60. The latter amount was submitted by the complainants in this case as the value of the lands. The Master thought that the complainants' witness used too large a multiplier and allowed 75 per cent. of the amount thus claimed, or $3,708,693.45, stating that this was determined upon as the "fair reproduction value of the property." This allowance, it will be observed, was about $1,700,000 in excess of Mr. Cooper's estimate of "market value" as that term was used in making the report.
(b) Terminal properties. This term is used to designate the lands for the right-of-way, yards and terminals in St. Paul, Minneapolis and Duluth. The total original cost of these lands to the company (according to its statement based on the best information obtainable) including purchases to April 30, 1908, was $4,527,228.76. The Master allowed as their value, apart from the improvements made by the company which, as we have said, were embraced
In preparing the valuation for the report to the State, Mr. Cooper employed real estate men in each of the cities to make an appraisement. He instructed them, as he testifies, "to make a conservative report of the cost reproducing the properties owned by the company in each of their respective cities." They divided the property into districts and reported their estimate of units of value, as, for example, by the square foot. Mr. Cooper took these reports, discussed their valuations with the appraisers and aided by his own knowledge, formed an independent judgment, in no case increasing and in some instances (with respect to certain St. Paul and Minneapolis property) reducing the appraisers' values. He then set forth under the heading "market value" in the report to the State, as described in the testimony we have quoted, his estimate of what it would cost the company to purchase these lands, exclusive of improvements that might be upon them, severance and consequential damages and expenses incident to acquisition. The amounts he thus fixed were as follows: For the property in St. Paul, $7,645,100.24; in Minneapolis, $4,027,616.17; in Duluth, $3,555,593.93. In the case of the St. Paul and Minneapolis properties the amounts are precisely those adopted by the Master in his findings, and to this he adds 5 per cent. to cover cost of acquisition and consequential damages. The Master was of the opinion that the appraisers of these properties were "fully impressed with their value for railroad purposes" and that their appraisement as verified by them before him and modified by the railway company "is a generous valuation and should be accepted as full railroad value of the terminal properties," and it was so accepted with the addition above stated. With respect to the Duluth property, where the appraisement appears to have rested upon the ordinary values of real estate,
In reviewing the findings, the court below reached the conclusion that "the Master in effect found that the cost of reproduction and the present value of the lands for the terminals in the three great cities, including therein all cost of acquisition, consequential damages, and value for railroad use which he allowed, was only about 30 per cent. more than the normal value of the lands in sales between private parties. He found the value of the lands outside the terminals to be only twice their normal value."
From our examination of the evidence we are unable to conclude that the excess stated may be thus limited. What is termed the normal value does not satisfactorily appear. It further will be observed — from the summary of valuations we have set forth in the margin
These are the results of the endeavor to apply the cost-of-reproduction method in determining the value of the right-of-way. It is at once apparent that, so far as the estimate rests upon a supposed compulsory feature of the acquisition, it cannot be sustained. It is said that the company would be compelled to pay more than what is the normal market value of property in transactions between private parties; that it would lack the freedom
It is urged that, in this view, the company would be bound to pay the "railway value" of the property. But, supposing the railroad to be obliterated and the lands to be held by others, the owner of each parcel would be entitled to receive on its condemnation, its fair market value for all its available uses and purposes. United States v. Chandler-Dunbar Water Power Co., decided May 26, 1913, 229 U.S. 53. If, in the case of any such owner, his property had a peculiar value or special adaptation for railroad purposes, that would be an element to be considered. Mississippi &c. Boom Company v. Patterson, 98 U.S. 403; Shoemaker v. United States, 147 U.S. 282; United States v. Chandler-Dunbar Co., supra. But still the inquiry would be as to the fair market value of the property; as to what the owner had lost, and not what the taker had gained. Boston Chamber of Commerce v. Boston, 217 U.S. 189, 195. The owner would not be entitled to demand payment of the amount which the property might be deemed worth to the company; or of an enhanced value by virtue of the purpose for which it was taken; or of an
Moreover, it is manifest that an attempt to estimate what would be the actual cost of acquiring the right-of-way, if the railroad were not there, is to indulge in mere speculation. The railroad has long been established; to it have been linked the activities of agriculture, industry and trade. Communities have long been dependent upon its service, and their growth and development have been conditioned upon the facilities it has provided. The uses of property in the communities which it serves are to a large degree determined by it. The values of property along its line largely depend upon its existence. It is an integral part of the communal life. The assumption of its non-existence, and at the same time that the values that rest upon it remain unchanged, is impossible and cannot be entertained. The conditions of ownership of the property and the amounts which would have to be paid in acquiring the right-of-way, supposing the railroad to be removed, are wholly beyond reach of any process of rational determination. The cost-of-reproduction method is of service in ascertaining the present value of the plant, when it is reasonably applied and when the cost of reproducing the property may be ascertained with a proper degree of certainty. But it does not justify the acceptance of results which depend upon mere conjecture. It is fundamental that the judicial power to declare legislative action invalid upon constitutional grounds is to be exercised only in clear cases. The constitutional invalidity
The evidence in these cases demonstrates that the appraisements of the St. Paul and Minneapolis properties which were accepted by the Master were in substance appraisals of what was considered to be the peculiar value of the railroad right-of-way. Efforts to express the results in the terms of a theory of cost of reproduction fail, as naturally they must, to alter or obscure the essential character of the work undertaken and performed. Presented with an impossible hypothesis, and endeavoring to conform to it, the appraisers — men of ability and experience — were manifestly seeking to give their best judgment as to what the railroad right-of-way was worth. And doubtless it was believed that it might cost even more to acquire the property, if one attempted to buy into the cities as they now exist and all the difficulties that might be imagined as incident to such a "reproduction" were considered. The railroad right-of-way was conceived to be a property sui generis, "a large body of land in a continuous ownership," representing one of the "highest uses" of property and possessing an exceptional value. The estimates before us, as approved by the Master, with his increase of 25 per cent. in the case of the Duluth property, must be taken to be estimates of the "railway value" of the land; and whether or not this is conceived of as paid to other owners upon a hypothetical reacquisition of the property is not controlling when we come to the substantial question to be decided.
That question is whether, in determining the fair present value of the property of the railroad company as a basis of its charges to the public, it is entitled to a valuation of its right-of-way not only in excess of the amount invested in it, but also in excess of the market value of contiguous and similarly situated property. For the purpose
It is clear that in ascertaining the present value we are not limited to the consideration of the amount of the actual investment. If that has been reckless or improvident, losses may be sustained which the community does not underwrite. As the company may not be protected in its actual investment, if the value of its property be plainly less, so the making of a just return for the use of the property involves the recognition of its fair value if it be more than its cost. The property is held in private ownership and it is that property, and not the original cost of it, of which the owner may not be deprived without due process of law. But still it is property employed in a public calling, subject to governmental regulation and while under the guise of such regulation it may not be confiscated, it is equally true that there is attached to its use the condition that charges to the public shall not be unreasonable. And where the inquiry is as to the fair value of the property, in order to determine the reasonableness of the return allowed by the rate-making power, it is not admissible to attribute to the property owned by the carriers a speculative increment of value, over the amount invested in it and beyond the value of similar property owned by others, solely by reason of the fact that it is used in the public service. That would be to disregard the essential conditions of the public use, and to make the public use destructive of the public right.
Assuming that the company is entitled to a reasonable share in the general prosperity of the communities which it serves, and thus to attribute to its property an increase in value, still the increase so allowed, apart from any improvements it may make, cannot properly extend beyond the fair average of the normal market value of land in the vicinity having a similar character. Otherwise we enter the realm of mere conjecture. We therefore hold that it was error to base the estimates of value of the right-of-way, yards and terminals upon the so-called "railway value" of the property. The company would certainly have no ground of complaint if it were allowed a value for these lands equal to the fair average market value of similar land in the vicinity, without additions by the use of multipliers, or otherwise, to cover hypothetical outlays. The allowances made below for a conjectural cost of acquisition and consequential damages must be disapproved; and, in this view, we also think it was error to add to the amount taken as the present value of the lands the further sums, calculated on that value, which were embraced in the items of "engineering, superintendence, legal expenses," "contingencies" and "interest during construction."
By reason of the nature of the estimates, and the points
Finding this defect in the proof, it is not necessary to consider the objections which relate to the sources from which the property was derived or its mode of acquisition, or those which are urged to the inclusion of certain lands which it is said were not actually used as a part of the plant; and we express no opinion upon the merits of these contentions.
The property other than land, as the detailed statement shows, embraced all items of construction, including roadbed, bridges, tunnels, etc., structures of every sort, and all appliances and equipment. The cost of reproduction new was ascertained by reference to the prices for such work and property. In view of the range of the questions we have been called upon to consider, we shall not extend this opinion for the purpose of reviewing this estimate, or of passing upon exceptions to various items in it, as their disposition would not affect the result.
The Master allowed the cost of reproduction new without deduction for depreciation. It was not denied that there was depreciation in fact. As the Master said, "everything on and above the road-bed depreciates from wear and weather stress. The life of a tie is from eight to ten years only. Structures become antiquated, inadequate and more or less dilapidated. Ballast requires renewal, tools and machinery wear out, cars, locomotives and equipment, as time goes on, are worn out or discarded for newer types." But it was found that this depreciation was more than offset by appreciation; that "the road-bed was constantly increasing in value"; that it "becomes solidified, embankments and slopes or excavations become settled and stable and so the better resist the effects of
We cannot approve this disposition of the matter of depreciation. It appears that the Master allowed, in the cost of reproduction, the sum of $1,613,612 for adaptation and solidification of road-bed, this being included in the item of grading and being the estimate of the engineer of the state commission of the proper amount to be allowed. It is also to be noted that the depreciation in question is not that which has been overcome by repairs and replacements, but is the actual existing depreciation in the plant as compared with the new one. It would seem to be inevitable that in many parts of the plant there should be such depreciation, as for example in old structures and equipment remaining on hand. And when an estimate of value is made on the basis of reproduction new, the extent of existing depreciation should be shown and deducted. This apparently was done in the statement submitted by this company to the Interstate Commerce Commission in the Spokane Rate Case in connection with an estimate of the cost of reproduction of the entire system as of March, 1907. (See 15 I.C.C. Rep. 395, 396.) In
It must be remembered that we are concerned with a charge of confiscation of property by the denial of a fair return for its use; and to determine the truth of the charge there is sought to be ascertained the present value of the property. The realization of the benefits of property must always depend in large degree on the ability and sagacity of those who employ it, but the appraisement is of an instrument of public service, as property, not of the skill of the users. And when particular physical items are estimated as worth so much new, if in fact they be depreciated, this amount should be found and allowed for. If this is not done, the physical valuation is manifestly incomplete. And it must be regarded as incomplete in this case. Knoxville v. Knoxville Water Co., 212 U.S. 1, 10.
Apportionment of Values. As the rate of net return from the entire Minnesota business (interstate and intrastate) during the test year was 6.021 per cent. on a valuation of $90,204,545, and would be greater if computed upon a less value, we are brought to the question whether the methods of apportionment adopted are so clearly appropriate and accurate as to require a finding of confiscation of property used in the intrastate business.
The apportionment of the value of the property, as found, between the interstate and intrastate business was made upon the basis of the gross revenue derived from each. This is a simple method, easily applied, and for that reason has been repeatedly used. It has not, however, been approved by this court and its correctness
In support of this method, it is said that a division of the value of the property according to gross earnings is a division according to the "value of the use," and therefore proper. But it would seem to be clear that the value of the use is not shown by gross earnings. The gross earnings may be consumed by expenses, leaving little or no profit. If, for example, the intrastate rates were so far reduced as to leave no net profits, and the only profitable business was the interstate business, it certainly could not be said that the value of the use was measured by the gross revenue.
It is not asserted that the relation of expense to revenue is the same in both businesses; on the contrary, it is insisted that it is widely different. The Master found that the revenue per ton-mile in the intrastate business, as compared with the revenue per ton-mile in the interstate business, was as 1.4387 to 1.0000. And, on his assumption as to the extra cost of doing the intrastate business, he reached the conclusion that the cost per ton-mile in proportion to the revenue per ton-mile in the intrastate business, as compared with the interstate business, was as 1.7377 to 1.0000. It is contended, according to the computations, that only a little over 10 per cent. of the entire net revenue of the test year ($5,431,514.66) was made in the intrastate business, and that 90 per cent. thereof was made in the interstate business; but approximately 21 per cent. of the total value of the property was assigned to the intrastate business.
If the property is to be divided according to the value of the use, it is plain that the gross-earnings method is not an accurate measure of that value.
In Chicago, Milwaukee &c. Ry. Co. v. Tompkins, 176 U.S. 167,
"Such a result indicates that there is something wrong in the process by which the conclusion is reached. That there was, can be made apparent by further computations, and in them we will take even numbers as more easy of comprehension. Suppose the total value of the property in South Dakota was $10,000,000, and the total receipts both from interstate and local business were $1,000,000, one half from each. Then, according to the method pursued by the trial court, the value of the property used in earning local receipts would be $5,000,000, and the per cent. of receipts to value would be 10 per cent. The interstate receipts being unchanged, let the local receipts by a proposed schedule be reduced to one fifth of what they had been, so that instead of receiving $500,000 the company only receives $100,000. The total receipts for interstate and local business being then $600,000, the valuation of $10,000,000, divided between the two, would give to the property engaged in earning interstate receipts in round numbers $8,333,000, and to that engaged in earning local receipts $1,667,000. But if $1,667,000 worth of property earns $100,000 it earns six per cent. In other words, although the actual receipts from local business are only one fifth of what they were, the earning capacity is three fifths of what it was. And turning to the other side of the problem, it appears that if the value of the property engaged in interstate business is to be taken as $8,333,000, and it earned $500,000, its earning capacity was the same as that employed in local business — six per cent. So that although the rates for interstate business be undisturbed, the process by which the trial court
The value of the use, as measured by return, cannot be made the criterion when the return itself is in question. If the return, as formerly allowed, be taken as the basis, then the validity of the State's reduction would have to be tested by the very rates which the State denounced as exorbitant. And, if the return as permitted under the new rates be taken, then the State's action itself reduces the amount of value upon which the fairness of the return is to be computed.
When rates are in controversy, it would seem to be necessary to find a basis for a division of the total value of the property independently of revenue, and this must be found in the use that is made of the property. That is, there should be assigned to each business, that proportion of the total value of the property which will correspond to the extent of its employment in that business. It is said that this is extremely difficult; in particular, because of the necessity for making a division between the passenger and freight business and the obvious lack of correspondence between ton-miles and passenger-miles. It does not appear, however, that these are the only units available for such a division; and it would seem that, after assigning to the passenger and freight departments respectively, the property exclusively used in each, comparable use-units might be found which would afford the basis for a reasonable division with respect to property used in common. It is suggested that other methods of calculation would be equally unfavorable to the state rates, but this we cannot assume.
It is sufficient to say that the method here adopted is not of a character to justify the court in basing upon it a finding that the rates are confiscatory.
The substantial question is whether the proof established this extra cost with that degree of certainty which is requisite to support a decree invalidating the state rates.
It appeared that the cost of intrastate business was not kept separately or set up in the accounts or statistics of the company.
The president of the company testified as to his judgment in the matter, which was based, in the absence of such accounts, upon the general facts of operation. His testimony was supported by that of other eminent railroad men, who testified in the Great Northern & Minneapolis and St. Louis cases. The elements entering into the greater expense of doing intrastate business were defined to be: That the average haul was shorter, being (in the case of the Northern Pacific) 104.52 miles for intrastate transportation as against 485.3 miles for interstate transportation; that the state business had to be handled twice at terminals; that the local short-haul business used most valuable terminal facilities in order to obtain its proper handling from the larger distributing centers, and used those facilities to a greater extent for the tons handled than did the longer through business; that the amount of clerical and warehouse labor in connection with the local business was much greater than in the case of the long-haul through business; that the chances of damage were greater in the short-haul business because of the greater number of individual transactions; that in the short-haul business there was an excess of equipment for loading and unloading;
From these considerations, which were elaborated in the testimony, the witness reached the conclusion that the "so-called local short-haul intrastate business costs anywhere from three to six or seven times as much as the so-called long-haul through interstate business." In the Great Northern case, the witnesses expressed the opinion that the extra cost of intrastate freight was three or four times greater than that of the interstate freight. One witness said that it would be from four to six times. These estimates, it is understood, had relation to the cost per ton mile.
The appellants do not dispute that business carried for short distances on local trains is more expensive than the handling of other business, but it is insisted that this is due solely to the different train service that it receives. It is said that all through trains start from divisional points and run from one end of the division to the other without stop; that the local trains are made up of cars carrying business destined for points intermediate the termini of the division and take up all traffic originating at the intermediate stations; that the word "local" as
To establish these propositions, and to meet the testimony of the complainants' witnesses, the appellants introduced an elaborate series of calculations, made by a professional accountant, which were deduced from the results of an extended examination of the records of the companies. The witness made computations as to the character of the freight on each road, dividing it between through and local freight upon each operating division, and then sub-dividing it between intrastate and interstate freight. It is contended by the appellants that these calculations are sufficient to show that in the case of the Northern Pacific, about 91 per cent. of the freight on through trains was interstate and about 9 per cent. intrastate, and that on the local trains the interstate freight amounted to 68.67 per cent. and the intrastate, 31.33 per cent. Calculations of this witness were also introduced showing his division of the total expenses between the passenger and freight business, and then in each department between the interstate and intrastate business; and by means of these, it was estimated that, under the rates in question (assuming them to have been applied to the business of the fiscal year ending June 30, 1907, to which the calculations were directed), the net profits on the intrastate business as a whole would have been slightly more than six per cent. upon an amount equal to the share of property value attributed to that
These computations are assailed by the appellees as inaccurate and as based upon erroneous estimates. We shall not go into the details, and, for the present purpose, we may assume that the appellees are right in their criticism.
Our conclusions may be briefly stated. The statements of the complainants' witnesses as to the extra cost of intrastate business, while entitled to respect as expressions of opinion, manifestly involve wide and difficult generalizations. They embrace, without the aid of statistical information derived from appropriate tests and submitted to careful analysis, a general estimate of all the conditions of transportation and an effort to express in the terms of a definite relation, or ratio, what clearly could be accurately arrived at only by prolonged and minute investigation of particular facts with respect to the actual traffic as it was being carried over the line. The extra cost, as estimated by these witnesses, is predicated not simply of haulage charges, but of all the outlays of the freight service including the share of the expenses for maintenance of way and equipment assigned to the freight department. And the ratio, to be accurately stated, must also express the results of a suitable discrimination between the interstate and intrastate traffic on through and local trains respectively and of an attribution of the proper share of the extra cost of local train service to the interstate traffic that uses it. The wide range of the estimates of extra cost, from three to six or seven times that of the interstate business per ton mile, shows both the difficulty and the lack of certainty in passing judgment.
We are of opinion that on an issue of this character involving the constitutional validity of state action, general estimates of the sort here submitted, with respect to a subject so intricate and important, should not be
We need not separately review the findings with respect to the division of passenger expenses, as the same considerations are involved, with the distinction, however, that the extra cost attributed to the intrastate business is relatively small as compared with that charged to intrastate freight. And, in view of the conclusions reached on the controlling questions we have considered, we express no opinion with respect to the method adopted in dividing expenses between the passenger and freight departments.
For the purpose of determining whether the rates permit a fair return, the results of the entire intrastate business must be taken into account. During the test year the entire revenue, as found, from the intrastate business, passenger and freight, amounted to $2,897,912.26. All the rates in question were in force save the commodity rates and it is further found that the loss that would have accrued in intrastate commodity business, by the application of the commodity rates which were under injunction, would have amounted to $21,493.67.
As neither the share of the expenses properly attributable
(2.) Great Northern Railway Company. The Master found that at the time this suit was brought the par value of the stock of the company was $149,577,500, and of bonds $83,119,939; total, $232,697,439. On June 30, 1908, the par value of the stock was $209,962,750, and of bonds, $97,955,939.39; total $307,918,689.39. The property upon which these securities and their value in the market are based includes, it is found, a very considerable amount not devoted to the public service.
The balance sheet of the company of June 30, 1908, showed the book valuation of the entire system, employed in the public service, to amount to $319,681,815. The Master held that various items were included which were not properly allowable as a part of the cost, and deducting these, there remained as the book-showing of the total amount expended in construction and equipment, $295,401,213. The Minnesota track mileage was found to be practically 32.59 per cent. of the total mileage, and upon this basis, the amount assignable to the State of the total cost, as stated, amounted to $96,271,255.
The Master found that the cost of reproduction new of the entire system was $457,121,469.
The items entering into the estimate are the same in
Included in this reproduction cost was an allowance, for "lands for right-of-way, yards and terminals," of $25,172,650.80, as follows:
"St. Paul, appraisement of Read, Watson and Taylor ................... $ 6,433,348.00 "Add 5 per cent. for cost of acquisition and consequential damages ........... 321,667.40 "Minneapolis, appraisement of Elwood, Barney and Ridgeway ................. 11,619,765.00 "Add 5 per cent. for cost of acquisition and consequential damages ........... 580,968.15 "Duluth, appraisement of Stryker, Mendenhall and Little ............... 713,280.00 "Add 25 per cent. for railroad value, cost of acquisition and consequential damages ............................. 178,320.00 "Total value of terminals ............... 19,847,366.55 "Lands outside of terminals ............. 5,325,284.25 "Grand total ............................ 25,172,650.80"
The appraisements thus referred to, adopted by the Master with the additions stated, were made by the appraisers in the three cities who were employed in the case of the Northern Pacific Company. The valuations were made at the same time, and upon the same basis, as the corresponding valuations in that case and are open to the same objections. In the company's estimate of the value of the lands outside these cities, the amount stated as the market value was largely increased to obtain the "right-of-way value"; with respect to lands in agricultural sections,
In addition, 4 1/2 per cent. of the aggregate land values, as found, was allowed in the item for "engineering, super-intendence, legal expenses" and the further allowance of 16 per cent. of these land values was made in the item of "interest during construction" (4 per cent. for 4 years).
In the physical valuation estimated on the basis of the cost of reproduction new, the Master made no deduction for depreciation, while, on the other hand, there was included under the item of grading the sum of $3,219,642 for adaptation and solidification of road-bed. The engineer of the state commission estimated the depreciation in the property at approximately $13,000,000.
What has already been said in the case of the Northern Pacific Company with respect to estimates of value, the apportionment of value, the testimony as to the extra cost of doing the intrastate business and the division of expenses between interstate and intrastate business, is equally applicable here.
(3.) Minneapolis & St. Louis Railroad Company. This case presents distinct considerations. The lines of this company consist of about 1028 miles of track of which 396 miles are operated under lease or trackage rights. Of its owned mileage (632 miles) approximately sixty per cent. is in the State of Minnesota. The Master thus describes it: "It runs south from the inland cities of St.
The less favorable situation of the road is fully recognized by the appellants who object to its being regarded as affording a fair test of the sufficiency of the rates. They say that its "total mileage and the geographical location" are such "that it cannot be taken as typical of the railway situation in Minnesota"; and they insist that "the important and material questions are raised by the showing made in the Northern Pacific and Great Northern Cases." And the appellees, on their part, assert that "it cannot be seriously contended that the rates complained of are sufficient to yield any reasonable return on a proportionate value of the property used in the conduct of the business covered by the rates"; that the net income of the road "from all sources is scarcely sufficient to pay interest on its outstanding bonds;" that "the value of the property is greatly in excess of the par value of the bonds"; and that, as it seems to the appellees, "this company must earn more money or go into the hands of a receiver, within a comparatively short time."
The main facts are: The par value in 1908, of its stock and bonds was $30,011,800, divided as follows: stock, $10,000,000 (preferred, $4,000,000, common, $6,000,000); bonds, $20,011,800. It appeared that no dividends had been paid on the common stock since 1904. The annual interest charges amounted to $952,583.
The Master found the total value of the property in Minnesota on the basis of the cost of reproduction new to be $21,608,464. In this estimate there was included the sum of $5,999,397.90 for lands, yards and terminals. Of this amount $4,556,298 was allowed for the lands in Minneapolis on the estimate of the same appraisers who had been employed in that city by the other companies; and to this the Master added five per cent. The lands outside these terminals were valued at $1,215,285.
The net earnings of the entire system, after paying only operating expenses and taxes, from 1903 to 1909, were found to be as follows: 1903, $1,398,895.30; 1904, $1,229,524.49; 1905, $1,277,870.96; 1906, $1,511,961.99; 1907, $1,419,822.54; 1908, $1,220,862.21; 1909, $1,286,494.08.
The net earnings of the company on all its business in Minnesota, interstate and intrastate (involving any use of the property valued as stated), after paying only operating expenses and taxes, were, during the same period: 1903, $1,222,941.77; 1904, $1,052,478.74; 1905, $1,054,853.35; 1906, $1,109,260.56; 1907, $895,977.66; 1908, $742,377.46; 1909, $794,472.58. The reference in each case is to the fiscal year ending on June 30.
It thus appears that the net return from the entire Minnesota business in 1907 was about 4.14 per cent. on the estimated value of the property ($21,608,464) in Minnesota; in 1908, less than 3.5 per cent.; and in 1909, less than 3.7 per cent.
The Master made his computations, with respect to the return permitted under the rates in question, upon the
It is not necessary here to reproduce the computations, as we are satisfied, after a careful examination of the evidence, that while the methods of estimating value, and of apportionment, which have been disapproved in the discussion of the cases of the other companies are subject to the same objections in this case, so far as they have been employed, the margin of error which may be imputed to them is not sufficiently great to change the result. The net return from the entire business in Minnesota, interstate and intrastate, fell to $742,000 in the fiscal year ending June 30, 1908, and it is plain that the latter amount would have been largely reduced had the commodity rate act been enforced. In view of the actual results of the business in the State, and the clearly established facts with respect to the conditions of traffic upon this road, the conclusion cannot be escaped that the rates prescribed by the acts and orders of Minnesota would not permit a fair return to this company.
Without approving, therefore, the methods of calculation which have been adopted, but recognizing the peculiar situation of this road, and the undoubted effect of the rates in question upon its revenues, we are of the opinion that the decree, so far as it rests upon the confiscatory character of the rates as applied to this company, should
The decrees in Numbers 291 and 292 are reversed and the cases remanded with directions to dismiss the bills respectively without prejudice.
The decree in Number 293 is modified as stated in the opinion and, as modified, is affirmed.
MR. JUSTICE McKENNA concurs in the result.
Referring to Laws of Kansas: Acts of July 4, 1884, c. 179, § 4, 23 Stat. 73, 74; June 21, 1890, c. 479, § 4, 26 Stat. 170, 171; June 30, 1890, c. 638, § 4, 26 Stat. 184, 185; Sept. 26, 1890, c. 947, § 4, 26 Stat. 485, 487; Feb. 27, 1893, c. 171, § 4, 27 Stat. 492, 493; Mar. 18, 1896, c. 60, § 4, 29 Stat. 69, 70; Mar. 30, 1896, c. 82, § 4, 29 Stat. 80, 82.
Referring to Laws of Arkansas: Acts of June 1, 1886, c. 395, § 4, 24 Stat. 73, 74; July 6, 1886, c. 744, § 4, 24 Stat. 124, 125; Feb. 18, 1888, c. 13, § 4, 25 Stat. 35, 37; May 30, 1888, c. 337, § 4, 25 Stat. 162, 163; Feb. 26, 1889, c. 280, § 4, 25 Stat. 745, 746; Feb. 24, 1891, c. 288, § 4, 26 Stat. 783, 785; Mar. 3, 1891, c. 535, § 4, 26 Stat. 844, 846; Feb. 24, 1896, c. 30, § 6, 29 Stat. 13, 15; Mar. 2, 1896, c. 38, § 4, 29 Stat. 40, 41; Apr. 6, 1896, c. 93, § 4, 29 Stat. 86, 88; Jan. 29, 1897, c. 108, § 4, 29 Stat. 502, 504; Mar. 30, 1898, c. 104, § 6, 30 Stat. 347, 349; Jan. 28, 1899, c. 65, § 5, 30 Stat. 806, 808; Feb. 4, 1899, c. 88, § 6, 30 Stat. 816, 818; Mar. 3, 1899, c. 453, § 6, 30 Stat. 1368, 1370.
Referring to Laws of Territory of Oklahoma: Act of Feb. 28, 1902, c. 134, § 4, 32 Stat. 43, 45.
EQUATED TON-MILE BASIS.
Freight — On basis of 1 Intrastate ton mile costing as much as 2.5 Interstate ton miles.
Actual Equated Proportion Operating Exps. Intra. ton mi. 130,580,988 X 2.5 = 326,452,470 = 25.362% $1,355,273.82 Inter. ton mi. 960,709,494 X 1.0 = 960,709,494 = 74.638% 3,988,444.43 ___________ ___________ _______ ____________ 1,091,290,482 1,287,161,964 = 100% $5,343,718.25
EQUATED PASSENGER-MILE BASIS.
Passenger — On basis of 100 Intrastate passenger miles costing as much as 115 Interstate passenger miles.
Actual Equated Proportion Operating Exps. Intrastate passenger miles 52,317,140 X 1.15 = 60,164,711 = 37.347% $863,325.18 Interstate passenger miles 100,931,180 X 1.00 = 100,931,180 = 62.653% 1,448,306.77 ___________ ___________ ______ ____________ 153,248,320 161,095,891 = 100.% $2,311,631.95
250 1.4387 1.7377 ___ ÷ ______ = ______ 100 1.0000 1.0000
The actual intrastate freight revenue was multiplied by 1.7377 to obtain the equated revenue and thus the same percentages were obtained as on the equated ton-mile basis, as follows:
EQUATED REVENUE BASIS. FREIGHT. Actual Revenue Equated Revenue Intrastate $1,555,342.92 X 1.7377 = $2,702,719.39 = 25.362% Interstate 7,953,734.41 X 1. = 7,953,734.41 = 74.638% _____________ _______ $10,656,453.80 = 100%
The relation of revenue per passenger mile intrastate and interstate was found to be as 1.0092 is to 1.0000; and thus, the relation of cost per passenger mile in relation to revenue was as 1.1395 is to 1.0000. The division was then made as follows:
EQUATED REVENUE BASIS. PASSENGER. Actual Revenue Equated Revenue Intrastate $1,015,150.34 X 1.1395 = $1,156,763.81 = 37.347% Interstate 1,940,718.17 X 1. = 1,940,718.17 = 62.653% ______________ _______ $3,097,481.98 = 100.%
Valuation — Northern Pacific. 1. Lands for right of way, yards and terminals ......... $21,024,562 2. Grading, clearing and grubbing ...................... 12,331,541 3. Protection work, rip-rap, retaining walls ........... 374,091 4. Tunnels ............................................. 253,250 5. Cross-ties and switch-ties .......................... 3,657,576 6. Ballast ............................................. 1,960,969 7. Rails ............................................... 5,645,307 8. Track fastenings .................................... 727,228 9. Switches, frogs and railroad crossings .............. 303,717 10. Track laying and surfacing .......................... 1,600,591 11. Bridges, trestles and culverts ...................... 3,586,063 12. Track and bridge tools .............................. 28,073 13. Fences, cattleguards and signs ...................... 471,609 14. Stockyards and appurtenances ........................ 37,098 15. Water stations ...................................... 436,489 16. Coal stations ....................................... 120,039 17. Stations, buildings and fixtures .................... 920,423 18. Miscellaneous buildings ............................. 1,054,874 19. Steam and electric power plants, gas plants ......... 196,338 20. General repair shops ................................ 1,162,934 21. Shop machinery and tools ............................ 529,322 22. Engine houses, turntables and cinder pits ........... 1,026,346 23. Track scales ........................................ 38,520 24. Docks and wharves ................................... 768,306 25. Interlocking plants and | > ......................... 114,430 26. other signal apparatus | 27. | > Telegraph and telephone lines .................. 285,145 28. | 28 1/2. General office furniture ........................ 73,654 29. Solidification of roadbed. (Absorbed in above) ___________ Total 1 to 28 1/2 .......... $58,728,685 30. Engineering, superintendence, legal expenses, 4 1/2 per cent 1 to 28 ............................ 2,785,036 31. Locomotives ......................................... 3,454,040 32. Passenger equipment ................................. 1,349,829 33. Freight car equipment ............................... 7,519,722 34. Miscellaneous equipment ............................. 372,477 35. Marine equipment (none) ___________ Total items 1 to 34 .................. $74,209,789 36. Freight on construction material — absorbed. 37. Contingencies, 5 per cent 1 to 34 .................... 3,710,479 38. Stores and supplies in Minnesota ..................... 2,658,976 39. Interest during construction; 4 per cent 2 1/2 years Items 1 to 36 ................................ 7,420,957 40. Interest in terminal properties, St. Paul depot, Duluth depot, Minnesota Transfer ................... 2,204,344 ___________ $90,204,545