Louisville & N. R. v. Railroad Commission
This text of 196 F. 800 (Louisville & N. R. v. Railroad Commission) is published on Counsel Stack Legal Research, covering District Court, N.D. Alabama primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
JONES,' District Judge
(after stating the facts as above). As appears from the statement of facts and the master’s reports in these [813]*813cases, they involve the same principles of law and in general the same state of facts, varying somewhat in details in the different cases. They may, therefore, be disposed of in one opinion. After painstaking consideration of the record in each of them and the arguments of counsel, I have reached the conclusion that the rates complained of must he annulled, first, on the ground that in the classification of the railroads in Alabama for rate-making purposes and in the administration of the statutes each of the complainants were denied the equal protection of the laws; secondly, because the rates on the proof and in view of the value of the property devoted to intrastate business and the returns allowed therefrom by the rate statutes were confiscatory, and deny to complainants that just compensation for the use of their properties to which the Constitution entitles them.
Classification of the Roads.
The complainants insist that the classification of the railroads for rate-making purposes under the statutes referred to is arbitrary, and upjustly discriminatory, and is not based on any just relation between the railroads of Alabama which could fairly and honestly justify the. classification, whereby complainants are denied the rates accorded to other roads of the same or a higher class. It is difficult to understand the theory upon which the conclusion was reached that a .railroad p.ut, say in class 4 by the ‘ statute because of its bad loca[815]
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JONES,' District Judge
(after stating the facts as above). As appears from the statement of facts and the master’s reports in these [813]*813cases, they involve the same principles of law and in general the same state of facts, varying somewhat in details in the different cases. They may, therefore, be disposed of in one opinion. After painstaking consideration of the record in each of them and the arguments of counsel, I have reached the conclusion that the rates complained of must he annulled, first, on the ground that in the classification of the railroads in Alabama for rate-making purposes and in the administration of the statutes each of the complainants were denied the equal protection of the laws; secondly, because the rates on the proof and in view of the value of the property devoted to intrastate business and the returns allowed therefrom by the rate statutes were confiscatory, and deny to complainants that just compensation for the use of their properties to which the Constitution entitles them.
Classification of the Roads.
The complainants insist that the classification of the railroads for rate-making purposes under the statutes referred to is arbitrary, and upjustly discriminatory, and is not based on any just relation between the railroads of Alabama which could fairly and honestly justify the. classification, whereby complainants are denied the rates accorded to other roads of the same or a higher class. It is difficult to understand the theory upon which the conclusion was reached that a .railroad p.ut, say in class 4 by the ‘ statute because of its bad loca[815]*815tion, poor business, cost of production, maintenance, etc., and which on that account is justly allowed to charge more for service than a road more favorably situated, should automatically have its income lessened and its charges reduced because it had been purchased by a first-class railroad, and its classification as to rates altered to its own hurt by the action of a third party over which it had and has no control, and whose act in purchasing or leasing the road did not and could not possibly alter in any way the relation of any of the things upon which any just classification alone must rest. Section 2 of the Eight Groups Acts does this, and the result of it is in these cases that the Nashville, Chattanooga & St. Louis Railroad, which is rated by name in said acts as belonging to class 2, is ranked in class 1, because the Louisville & Nashville Railroad Company owns a majority of its stock, when, in fact, it does its interstate business at a loss, and when it ranks ninth on a basis of net earnings on all business.
Ownership of stock can, of course, have no relation to the quality of a road or the cost of transportation, or change or affect in any way the elements of the cost of the services rendered in the transportation of passengers or freight, and any classification on a basis of stock ownership is inherently and obviously wrong. But section 2 of the act is now a matter of secondary importance. The original classification embraces by name the various railroads of the state, and the witnesses examined, all of whom were familiar with the characteristics of all of the roads, were unable to discover any basis whatever, having a relation to differences between their conditions, which could have been adopted by the Legislature for its classification. They testify that there does not exist any facts or fact in the nature, condition, or history of complainants’ roads which could justify the classification of the statute. They show that the Louisville & Nashville in Alabama consists largely of branch lines which are unproductive as compared to other roads allowed to charge from 15 per cent, to 45 per cent, more than it; that it ranks fourth in net earnings per mile on all business and is classed “1” by the statute, while other roads, such as the Alabama Great Southern, ranking third in net earnings per mile, is classed “2.” It is further shown that the net earning basis is not a rational one for classification, since it offers a premium for bad management. Roads may he alike in all particulars, and yet the management may make one prosperous and the other insolvent. Good management, therefore, should not cause a difference in the rates allowed. And, besides, the net earnings per mile of all business includes interstate commerce, which may create all the difference in that regard between the roads, and, of course, such differences thus arising cannot be the basis of classification for intrastate rates. And the same argument applies to classification on gross earnings per mile. It is shown, too, that the difference of the cost of construction and of maintenance cannot have been the basis of classification, since other roads costing less to construct and maintain than complainants’ are put in classes 2 and 3 and allowed to charge from 15 per cent, to 25 per cent, more than complainants’ which are put in class 1. It is shown that the Louisville & Nashville and South & North Alabama railroads [816]*816are well and prudently managed, and render better service, and cost relatively more to construct, and now cost more to maintain than other roads, but are compelled by the statute classification to charge less than such other roads, and that the Nashville, Chattanooga & St. Rouis Railroad, which ranks in every physical and earning feature as to intrastate business below the roads in classes 1, 2, and 3, is forced to charge rates on the basis of being in class 1; that is to say, from IS per cent, to 25 per cent, less than the roa'ds in classes 2 and 3.
Andi the administration of these rate statutes, after their passage by the Regislature and by its consent under the direction of the Governor and through the orders of the Railroad Commission of Alabama acting in conjunction as the. administrative officers of. the state, has been unjustly discriminatory against complainants. A number of the railroads in the state filed similar bills to those of complainants attacking said rate statutes on the same grounds as complainants’ bills. After-wards such roads entered into agreements with the Governor of the state that, upon the dismissal of the bills of such complaining roads, they should be put in classes more favorable for charging rates. These agreements were carried out, and under them roads possessing equal or superior qualities to complainants’ in all characteristics upon which roads might be reasonably classified for rate making, such as cost of construction, cost of maintenance, earnings gross, and net per mile, were further classified more favorably for rate charges on freight business than they were in the statutes themselves, and were allowed! to charge 2^4 cents per mile for passengers, while complainants, having the characteristics as to such matters inferior to the favored roads, were forced to charge only 2cents per mile for passengers, and freight rates from 15 per cent, to 25 per cent, lower than such roads. These agreements were made in consideration of the abandonment by the roa'ds having the benefit of them of the right to litigate in the courts of the country the constitutionality of said rate státutes. There was and could be no legitimate reason or consideration moving between the favored roads and the state or its officials which could justify a classification for rate making to the prejudice of the complainants. Complainants being competing carriers, any classification which places equal roads in unequal positions, or unequal roads in equal positions, as to freights or reverses the natural relation of roads to the disadvantage of complainants, infringes their constitutional right to the equal protection of the laws. All this was done in these cases to the prejudice of the complainants by the classification of the rate statutes andl the administrative application of the policy of the statutes through the Governor and the Railroad Commission of the state of Alabama, contrary to the Constitution that neither enactment nor administration shall infringe on the right and privilege of equality before the law. No sufficient reason or excuse for these discriminations against complainants is shown, while the reasons against the same are cogent and apparent. It cannot be gainsaid, therefore, that no reason exists except that founded on want of information or other insufficient moving cause, not recognized in dealing with constitutional rights. Yick Wo v. Hopkins, 118 U. S. 356, 6 Sup. Ct. 1064, 30 L. Ed. 220.
[817]*817It is insisted, however, by counsel that the presumption in favor of legislative action furnishes a sufficient reason for the classification, and that the complainants must prove the negative that there was and is no j ust and rational excuse or reason for the classification with that particular degree of certainty which pertains to an affirmative issue and which excludes every conclusion, and they carry this contention so far even as to require the proof to exclude by negation the existence not only of all substantial reasons, but of fanciful, immaterial, and even impossible data. The ordinary and general rule is that negative averments in pleading do not have to be proved by the plaintiff unless his cause of action is founded on and grows out of the negative allegation, and then the plaintiff has only to establish his averment by the usual measure of proof required in civil suits according to the nature of the issue. 1 Grecnleaf, livid. §§ 78-80. In such cases the plaintiff certainly cannot be required to negative “beyond a reasonable doubt” either all or any immaterial or all or any impossible facts. We repeat, it is evident that the classification of railroads for rates must be based on some substantial difference between roads relating to the necessity and propriety of making differences between them in rates to be allowed, such, for instance, as the relative cost of production and maintenance of the roads and the •probable gross as well as net income on given rates, which necessarily require the consideration of, and allowance for, every possible factor influencing such results. Ño other circumstance can be suggested as proper upon which to base a classification, except on the idea that it indicates andl involves those just mentioned. Thus, if the length of the road is adopted, it is on the idea that the greater length implies a greater ability to produce earnings than shorter roads; but the presumption cannot be indulged against the proved facts contradicting it. The respondents suggest that net earnings per mile on all business might have been the basis, and they have constructed tables showing net earnings. But the proof shows that not a dollar of these net earnings is intrastate, and. of course, interstate net earnings can be no basis for intrastate rates or classification for intrastate rates. Smyth v. Ames, 169 U. S. 466, 18 Sup. Ct. 418, 42 L. Ed. 819; Minneapolis & St. L. Rd. v. Minnesota, 186 U. S. 257, 22 Sup. Ct. 900, 46 L. Ed. 1151.
It is next insisted that net intrastate earnings might have been the basis of classification, and that there is no evidence on this as to the several roads classified, but there is no bookkeeping by the roads or other persons or proof showing net intrastate earnings. There is no bookkeeping which could show net intrastate earnings of a railroad engaged in both interstate and intrastate commerce. The separation of the cost of interstate and intrastate service is an impossible problem.' The counsel for respondents say:
“If there^ is any accurate method of ascertaining the value of the property devoted to intrastate business, we have never heard of it, and do not know what it is.”
The net intrastate basis of revenue could not have been the basis of classification, and, if it was, the proof shows that the complainants [818]*818had none. The witnesses for complainants, who are familiar with the roads in Alabama, 'testify that there was and is no feature in the physical structure or otherwise of complainants’ roads showing a difference on which to found a classification to the disadvantage of complainants as compared to the other- roads, and they illustrate what they say by a statement of particulars. This is direct evidence and is uncontradicted, and therefore must have weight. Orleans v. Platt, 99 U. S. 676, 25 L. Ed. 404. Differences authorizing classification must not be conclusively occult and undiscoverable. It seems clear that the statutes making a classification of railroadfe in the state for rates on freights, and agreements for the application and administration of the rate statutes between the Governor and the Railroad Commission of Alabama, as shown in the complainants’ bills, deprive the complainants of the equal protection of the laws, and are unconstitutional and void. Gulf, C. & S. F. R. R. v. Ellis, 165 U. S. 154, 17 Sup. Ct. 255, 41 L. Ed. 666; Michigan Tel. Tax Cases (C. C.) 185 Fed. 634; Atchison, Topeka & S. Ry. v. Matthews, 174 U. S. 104, 19 Sup. Ct. 609, 43 L. Ed. 909; Yick Wo v. Hopkins, 118 U. S. 356, 6 Sup. Ct. 1064, 30 L. Ed. 220; Sellers v. Hayes, 163 Ind. 422, 72 N. E. 119; Ayars’ Appeal, 122 Pa. 277, 16 Atl. 356, 2 L. R. A. 577; State v. Hammer, 42 N. J. Law, 440; Cotting v. Kansas, 183 U. S. 79, 22 Sup. Ct. 30, 46 L. Ed. 92.
It does not require as strong a measure of proof to set aside legislative action where it is, as here, strictly speaking, administrative in its nature, and hinges upon ex parte inventories and calculations of the value of property upon which the lawmaking body without any hearing of the owner determines the reasonableness of a rate against him, as when the lawmaking body decides questions of policy in the other fields committed! to the legislative power. Constitutional rights are not to be enforced or denied upon technical grounds of pleading or views of the burden of proof. The courts in the adjustment of rights are often compelled to ascertain the existence of many things which are not capable of proof by mathematical demonstration, and, in ascertaining the adjustment of rights and: the remedying of wrongs, all that is possible or requisite is to get the best possible proof of which the nature of the inquiry is susceptible, and that, having been done, to determine the right accordingly, though it cannot be proved to a mathematical certainty, if it produces the requisite measure of conviction.
Rates Confiscatory.
The question of confiscation — the denial of that just measure of compensation the Constitution secures — depends on the value of th,e property devoted to intrastate business and the return the proposed rates will yield on such value.
As to this point, we may dismiss from consideration the case of the Nashville, Chattanooga & St. Louis Railway Company with a few words. The complainant has made its proof and submitted its case on the concession that interstate and intrastate business cost the same, while every one who has studied the matter knows that it costs at least 25 cents more to earn a dollar in intrastate than in interstate [819]*819business. The concession, therefore, is very liberal to the respondents. On this basis, however, the proof clearly shows that the intrastate commerce of the complainant was conducted at a loss before the passage of the laws in question. It is further shown that the statutes materially reduced this road’s earnings. As the rates previous to the statute were reasonable and such as were authorized by law, the statutory reductions complained of are clearly confiscatory. The reason why the intrastate business of this complainant is so unremunerative is because its roads in Alabama are short branch lines, in all consisting of only 128.96 miles, in a sparsely settled country with little commerce, as the master pointed out in his report. A road may afford in some cases to do a particular service at a loss. Thus, if other business, such as interstate commerce, compels the road to be kept up and operated, there are large expenses which must be incurred irrespective of haulage charges, and thus in other respects independent of the new business, and, if such a road can obtain intrastate business which will yield any sum over the added expense of doing that business, it will pay it to take such business, because the amounts thus collected above the added expense of doing the intrastate business will help to discharge the overhead or general expenses which would have to be incurred if such new business had not been undertaken. In this way the intrastate business of the Nashville, Chattanooga & St. Louis Railway, while not covering all the cost which should be charged to it, pays the added cost of doing such business and something over to reduce overhead expenses which would have been incurred if there had been no intrastate business. As the intrastate commerce on this road does not pay the expense of doing the business, the question of the valuation of the property does not arise; there being no proof that previous rates were in themselves unreasonable. As to this road the statutes are clearly confiscatory.
South & North Alabama Railroad and Louisville & Nashville Railroad.
The South & North Alabama Railroad runs across the mountain ridges and streams of the slate, and extends from Montgomery to Decatur, a distance of 192.90 miles. The building of it involved deep cuts, high fills, extensive tunneling, and the construction' of costly bridges over large streams, one over the Alabama river at Montgomery, others over the forks of the Warrior river, besides across many creeks. For some distance above Birmingham to Decatur, and some 20 miles below Birmingham, the line is one of the most difficult of construction and maintenance, if not the most difficult of any road in the state. A considerable part of the road is double-tracked.
The Louisville & Nashville Railroad, which operates the South & North Alabama Railroad as one of its divisions, has, independent of the South & North, a mileage of 1,064.24 in the state and altogether in this and other states 4,306.62 miles of road constituting one great system. The road of the Louisville & Nashville in Alabama, however, consists in large part of branch lines doing mostly a local business, which, in so far as it is intrastate, is unremunerative. A large part of its tonnage is of raw materials for iron furnaces, and is carried at [820]*820rates lower than any in the United States. These low rates were established and existing long before the passage of the rate statutes now in question, and had their origin in the policy and necessity of supplying the iron industry with raw materials at rates that would enable it to compete in the markets of the world with that of other sections having such transportation or other advantages over Alabama as would drive 'it out of the markets or suppress the manufacture of iron in Alabama. This policy met with great success in its object, but gave little profit to the road except in the building up of the country and the consequent general increase of business to it and other roads. The Louisville & Nashville Railroad in Alabama to-day, including its many branch roads, is not a first-class road as a whole in any respect, though it is first class in its main line extending through the state from the northern border to Montgomery, Mobile, Pensacola, and New Orleans.
The market value of bonds and stocks, while shedding in some cases light on the question of present value, cannot except in a very siight measure indicate what that value is as a matter of fact. The markei value of stocks and bonds merely shows the public estimate of the value of the whole property contributing to the income, v/hich may, as in the case of the Louisville & Nashville Railroad, embrace millions of dollars of property not used have as a common carrier. And this public opinion is also open to the influences of stock jobbing'manipulation and artificial bookkeeping, without the advantages óf sworn inven[821]*821tories and the precise testimony of competent and disinterested witnesses on exact inventories of existing property. A road may have a small amount of stock compared to its property, as in the case of the Louisville & Nashville Railroad, and it may have no bonds or a large amount of bonds against its property and the two combined may not, with premiums or discounts taken into consideration, indicate with any accuracy the present values of tlic property invested in the business and used as a common carrier. Therefore, while looking at all collateral matters reflecting light on the subject, the court regards the reproduction cost as the final test of present value.
Under inquiry 18 in the South & North Case the special master reports at page 72 et seq. the cost of reproducing the railroad and other properties, after deducting $328,419 from complainants’ figures, for the years named, as follows:
Tear ending .Tune SO, 1900. $20,01-3,714 84
Year ending June 30, 3907. 21,077,210 17
Year ending June 30, 3908..... 22,077,003 12
Year ending June 30, 3909. 22,151,800 36
Year ending June 30, 3910..... 23,372,752 27
Under the same special inquiry 18 at page 112 et seq., in the Louisville & Nashville Case, the master reports the cost of reproducing the railroad and other properties, including equipment used as a common carrier, after making deductions from complainants’ estimates of 8674,673.92, for the years named, as follows:
Year ending June 30, 1906. $41,258,565 60
Year ending June 30, 3907. 43,039.940 60
Year ending June 30, 3908. 40,800,319 22
Year ending June 30, 1909. 41,194,712 68
Year ending June 30, 193.0. 31,443,462 39
The respondents urged before the master all the objections now set up in the exceptions filed to his reports as to these values, and they were noticed seriatim, discussed, and disposed of by the master as shown in his "reports. After considering the exceptions, I approve and confirm the findings of the master on the questions of values and cost of reproduction, and overrule the exceptions in that regaid of respondents and complainants, and approve and confirm the master's reports thereon.
One of the objections of the respondents is that the estimates were based on the prices of 1907 when they were made, and that they were then unusually high. This is disposed of by the point that present values are required to be taken and used in determining present and prospective rates. Cotting v. Kansas, 183 U. S. 91, 22 Sup. Ct. 30, 46 L. Ed. 92; Willcox v. Consolidated Gas Co., 212 U. S. 19-52, 29 Sup. Ct. 192, 53 L. Ed. 382, 15 Ann. Cas. 1034; Stanislaus County v. J. C. & I. Co., 192 U. S. 215, 24 Sup. Ct. 241, 48 L. Ed. 406. And by the fact that the proof satisfactorily shows that the reconstruction could not have been effected from 1907 to 1910 at less than the estimates used. Record, S. & N. A. 116, 118, 368, 417, 430, 432, 497, 501; Record, L. & N., 365-367.
It is insisted that in reproduction estimates the enhanced value of property between the time of the original location of a railroad through [822]*822a wilderness or marsh, it may be, is not to be taken into account 40 or 50 years afterwards, when civilization, perhaps largely the result of the expenditures and operations of the road, has increased original values a hundredfold. Suppose a road is located when original cost is fabulously inflated), and the course of events brings things down to their intrinsic worth, upon whom does the loss fall? It is usually understood that the state does not make up such losses to its citizens. And, vice versa, when minerals are discovered, or oil wells developed on lands, does not the owner of the land own its product? And) how are tax values estimated ?' Do the officers take the value when land is first entered and cleared or when it has been improved and become a town site? The law is perfectly settled, with the obvious view of the matter, that increments and losses alike attach to ownership as to duties and rights pertaining to property. Willcox v. Con. Gas Co., 212 U. S. 52, 29 Sup. Ct. 192, 53 L. Ed. 382; Stanislaus v. Irrigation Co., 192 U. S. 215, 24 Sup. Ct. 241, 48 L. Ed. 406; San Diego Land Co. v. National City, 174 U. S. 757, 19 Sup. Ct. 804, 43 L. Ed. 1154. And this just rule has its balances and adjustments making it not oppressive to the public in any case. It is to be noticed, too, that the rates in fact usually diminish with the increase in property values, because the increase of business dominates values and justifies lower rates; but, be that as it may, the rule of giving to the owner the increments of value and subjecting him to the losses in values has the unequivocal sanction of the law.
As to the amount of valuation, the undisputed proof is that it is the tax valuation at 60 per cent, of real value brought up to par or 100 per cent. This could not be excessive if the tax value was 60 per cent, of the real value, and the uncontradicted proof is to that effect, and the proof is that it is not excessive. As to the factum of evidence being in the record of the value, it is shown that the law charged the State Tax Commission with the duty of assessing the franchise for taxation, and they did so and fixed the value at 60 per cent, of the real value, and it is shown what these assessments were. Record, L. & N. Case, 1927, 1928-1960; Record, S. & N. Case, 1389, 1400, 1598, 1599, 2622-2627, 2628, 2629, 2644-2648.
The assessments relied on were state valuations by officers specially delegated to make them, and not merely to receive the returns of the taxpayer. They are therefore competent evidence of probative worth. Wigmore on Evid. § 1640; Elliott on Evidence, § 1312; Ronkendorff v. Taylor, 4 Pet. 349, 7 L. Ed. 882. As to the propriety of valuing the franchise on a rate question, the authorities clearly settle the point in the affirmative. I refer to the master’s report in the South & North Case, pp. 41-46, where he considers the question. in an able manner, and I concur thoroughly in his conclusion. I merely cite here the authorities. Willcox v. Con. Gas Co., 212 U. S. [823]*82319-54, 29 Sup. Ct. 192, 53 L. Ed. 382, 15 Ann. Cas. 1034; Monongahela v. United States, 148 U. S. 321, 13 Sup. Ct. 622, 37 L. Ed. 463; People v. O'Brien, 111 N. Y. 1, 18 N. E. 692, 2 L. R. A. 255, 7 Am. St. Rep. 684; Topsham v. Maine W. Co., 99 Me. 371, 59 Atl. 537; State Railroad Tax Cases, 92 U. S. 606-607, 23 L. Ed. 663; Waterworks Co. v. Kansas City, 62 Fed. 863, 10 C. C. A. 653, 27 L. R. A. 827; Metropolitan T. Co. v. H. & T. Co., etc. (C. C.) 90 Fed. 683-689; Adams Express Company v. Kentucky, 166 U. S. 171, 17 Sup. Ct. 527, 41 L. Ed. 960; Fargo v. Hart, 193 U. S. 490, 24 Sup. Ct. 498, 48 L. Ed. 761; Adams Express Company v. Ohio, 166 U. S. 185-221, 17 Sup. Ct. 604, 41 L. Ed. 965; Beale and Wyman on R. R. Rate Regulation, §§ 368-370.
“But when, in the case of the business of a railroad company, we seek to determine the value of that portion of the entire property which is devoted to intrastate traffic, separate from the value of that portion devoted to interstate traific, when precisely the same property is devoted to both classes of traffic jointly, and to determine the expense of doing the intrastate business, separate from the expense of doing the interstate business, when the expenses incurred and charged are incurred in doing both classes of business jointly, we are dealing in pure eonjectui-e — conjectures such as would not be received and made the basis of an injunction res!raining the operation of a statute in any kind of an issue other than a railroad rate issue. Not only is any known method of ascertaining those facts uncertain and conjectural, but they are facts which from their very nature are incapable of ascertainment even approximately. No two railroad accountants agree as to the proper method of ascertaining these facts, and all agree that they cannot be ascertained' accurately. We insist that they cannot be ascertained with even an approximate accuracy. It has been said that, notwithstanding the difficulty of ascertaining the value of property devoted to intrastate business and the amount of the expense incurred In doing the intrastate business, wo must do the best we can to that end, and then, however uncertain and speculative the result, a state statute establishing intraslate rates must stand or fall according to that result. A proposition or principle of law, the justice of the application of which is made to depend upon the proof of facts which are not susceptible of proof, or at least can only be guessed at or ascertained by arbitrary and conjectural methods, must be fallacious. * * * How is it possible for a court in the ordinary rate case to be convinced clearly and beyond all doubt that a particular schedule of rates necessarily denies just compensation for the use of the railroad company’s property, when the essential facts upon which the conviction must be based are from their very nature speculative and conjectural?’
This exposition by counsel, if accepted, would result in one of two propositions; One, that the state could fix rates for inter and intra [824]*824state commerce as a unit; the other, that it could fix an arbitrary rate for the state business not subject to judicial review. Neither position .can be true. If the valuation of the common property is indivisible between inter and intra state commerce, it is plain that, as Congress must regulate the interstate commerce, it would have to regulate at the same time the intermingled intrastate commerce, and thus that the state could have nothing to do with it. It appears to be preposterous to suppose that the state can fix the reasonable returns on the property devoted to its use by the carrier without reference to the value of the property thus devotedl to the purposes of a common carrier.
The difficulty of the problem arises from the fact that the cost of transportation involves an assessment on the subjects of commerce of charges to cover common, general, overhead, or nonhaulage expenses and also the haulage cost, and that there is no way of allocating such charges to the transportation items when the property is used in common as stated by counsel for the respondents. It cannot be said what share of these common expenses shall be apportioned to an intrastate ton or passenger being transported. It may be in the same train and car with interstate tons and passengers. The solution of the question has heretofore been made to rest entirely on the experience and testimony of experts as to the relative difference in cost of the two services, and in every case in which the question has arisen the witnesses have, while agreeing on the fact that local or intrastate business is more costly than through or interstate business, varied very widely as to the amount of such difference. The variation is from 10 per cent, to 500 per cent, against the intrastate business. Smyth v. Ames, supra. It was pointed out in Chicago, etc., v. Tompkins, 176 U. S. 179, 20 Sup. Ct. 336, 44 L. Ed. 417, that any solution of the question on a gross revenue basis without regard to the difference in the relative cost of the two services was an absurdity. And so the difficulty was attempted to be overcome by putting a load, as it is called, on the intrastate revenue to equalize it for the purposes of comparison with the interstate. And the amount of this load was determined by [825]*825the opinion of the witnesses, who guessed at it scientifically or otherwise, leaving a very unsatisfactory task to the court in fixing on the proper amount.
Appreciating the unreliability of any solution of the question of difference on any revenue basis, the Louisville & Nashville Railroad Company undertook to ascertain the difference on the basis of the comparison of the actual cost of conducting each business, and at great expense took an accurate account of the cost of every particular item of transportation for a period of a week or more over their lines in Alabama, allocating such cost when possible and apportioning it when impossible of allocation between the interstate and intrastate business. It was shown that the period selected was a fair and average period of business. By this method, which is called the “unit of service basis,” the actual relative cost of doing the interstate and intrastate business was arrived at. The plan and method of the operation is explained in the report of the master in the Louisville & Nashville Case at pages 165 to 195. Of course, as pointed out in the report, the proportion of the actual cost of many of the accounts of expense allotted to the two services was necessarily based on the judgment or opinion of the officers in actual superintendence, as no allocation in such cases was possible. And for this reason there would necessarily be room for saying, as to the conclusion or result, that, however honest, it contained to that extent the inherent infirmity of opinion proof. But it happens that the results are confirmed in several ways which remove all uncertainty as to their accuracy and justness in these cases. The Louisville & Nashville has 13 divisions of its line in Alabama in which separate accounts are kept of the interstate and intrastate gross earnings, and of the actual expenses of such divisions without separation between interstate and intrastate traffic. These accounts are shown in Exhibit W. A. C; 67. In some of these divisions the interstate traffic predominated; in others the intrastate. An analysis and comparison of the earnings and expenses in the intrastate divisions, and of the earnings and expenses in the interstate divisions, reveals the fact that just in proportion as the intrastate traffic exceeds the interstate business in the divisions the cost of earning a dollar on all business increases, and that the difference between the -cost of earning a dollar in the interstate business is greater than that shown in the results of the application of the unit of service basis. Master’s Report, I,. & N. Case, pp. 161-165. By the unit of service basis the result is that it costs at least 25 per cent, of the revenue more to earn a dollar of intrastate revenue than it costs to earn a dollar from ail business. Record, L. & N. Case, 1600.
The complainants in the Louisville & Nashville Case and the South & North Case show, also, by algebraical calculations founded on equations taken from accurately kept accounts of the earnings and expenses of their roads, that the excess of earning a dollar in intrastate business over all business is 32 per cent, of the revenue in the Louisville & Nashville Case, and in the South & North Case 26 per cent, of the revenue. This is explained and shown in the Louisville & Nashville Case, Record, pp. 1600-1608, Master’s Report, 165, and in the [826]*826South. & North Case, Record, 6178, Master’s Report, 169. These confirmations make the result on the application of the unit of service basis perfectly reliable as showing that the difference between the cost of doing intrastate business and all business is certainly not less than 25 per cent, of the revenue of intrastate commerce,
The yearly ratio of the income of the complainants to these values for the years 1906, 1907, 1908, 1909, and 1910 is shown in the master’s report under inquiry 28. From the report it appears that the Louisville & Nashville Railroad had the net income or loss on its intrastate business as follows for the years named:
For the year ending June 30, 1906, net profit.38%
For the year ending June 30, 1907, net loss.'.95%
For the year ending June 30, 1908, net loss. 3.97%
For the year ending June 30, 1909, net loss. 1.91%
For the year ending June 30, 1910, net loss.82%
See Master’s Report, 211, 212.
And that the South & North Alabama Railroad had the following net income or loss on its intrastate business for the years named:
For the year ending June 30, 1906, net loss.53%
For the year ending June 30, 1907, net loss.46%
For the year ending June 30, 1908, net loss. 1.59%
For the year ending June 30, 1909, net loss. 40%
For the year ending June 30, 1910, net loss. 025%
—Master’s Report, p. 150.
These percentages are those on the income as affected by the statutory rates. Without the statutory rates the percentage would have been larger of profit or less of loss, but not to an extent to alter the result as to the question involved since, without the statute, the intrastate earnings afforded no fair return. It appears that in the Louisville & Nashville Case the intrastate business resulted in the year ending June 30, 1906, in a net profit of .38 per cent, on the value of the property and in the following years, including 1910, in a net loss of from .95 per cent, in 1907 to 3.97 per cent, in 1908. And in the South & North Case there was a net loss each year varying from .025 per cent, in 1910 to 1.59 per cent, in 1908.
The respondents insisted in argument that the intrastate rates on great tonnages of raw material not affected by the statutes in question. were abnormally low, and might be increased to materially augment the income, but they overlooked the fact that a statute belonging to the same series approved February 9, 1907, prohibited any increase of .the maximum rates prevailing January 1, 1907 (Acts Ala. 1907, p. 80), and, further, that these rates had prevailed for many years [827]*827prior thereto, and that they were necessary to sustain the iron industry in Alabama and transportation resulting therefrom to the railroads.
The exceptions, filed by the respective parties to the report of the master on the questions of earnings and the expenses of the business and the division of the same between interstate and intrastate traffic are disallowed and overruled. The same questions were raised before the master, and were severally considered and correctly ruled on as shown in his report.
Contrasting the ratio of total income from entire business with the ratio of intrastate income for the same periods, we have for the Louisville & Nashville Railroad Company:
f entire business.... For the year ending June 30, 1008.. o . , . . , B ( intrastate business. 4.94% .38%
f entire business... For the year ending June SO, 1907.. .4 . . , , , . „ . ” ! (intrastate business (loss).. 3.92% .95%
(entire business. For -the year ending Juno 30, 1908.. , , . .. , (intrastate business (loss).. 1.28% 3.97%
... ,. „„„„ fentire business. For the year ending June 30, 1909...( . , , . . , Lmtrastate business (loss).. 3.45% 1.91%
,. f entire business. For the year ending June 30, 1910...( . , . ^ , . „ , (intrastate business (loss).. 5.20% .82%
And for the South & North Alabama Railroad:
„ ("entire business......5.74% For the year ending June 30, 1908.. J . ' Lintrastate business (loss).53%
„ ,, ,. (entire business...5.79% For the year ending June 30, 1907. ..H ' (intrastate business (loss).48%
_ . .. r entire business.2.67% For the year ending June 30, 1908., ( intrastate business (loss).1.9o%
f entire business. 5.45% For the year ending June 30, 1909...4 „.... (intrastate business (loss).04%
f entire business.5.80% For the year ending June 30, 1910... 4 ...... .. ’ (intrastate business (loss).02o%
The above tables are from the report of the master under inquiry 28, and are on basis of income after deducting statutory losses; that is, what the income was under the rate statutes after it went into effect. The year ending June 30, 1906, was before the statute, and most of the year 1907. It is evident that the most radical errors in valuations, if made, would not, on correction, show a fair return to complainants on the property invested. It is shown that the statutory rates effect a loss of from 10 per cent, to 50 per cent, reduction on the rates prevailing before the statutes were passed on the same commodities, and that the total losses to the Louisville & Nashville per annum on account of the statutory rates is $263,252.52 on the basis of losses for the six months from June 30 to November 30, 1909. (Master’s Report, L. & N. Case, p. 205, and record tiñere cited); that the South & North losses are, oti the same basis, pfcr annum $210,-286.46 (Master’s Report, S. & N. A. R. R., 124, -find record cited). [828]*828These losses do not comprehend in either case the much greater losses which will occur to the net revenue on all business if, and when, interstate rates are adjusted to. the forced statutory rates, which is an inevitable result, both from commercial necessity and to avoid unjust discrimination against interstate commerce, as recently decided by the Interstate Commerce Commission. The schedule of .rates prevailing prior to March 2, 1907, when the first rate statute was passed, had been in force for a long time, in fact there had been a general tendency to reduce rates, since the opening of the roads to that date. The rates were reasonable. Under them the state had flourished and been greatly developed especially along complainants’ lines, and there 'was no congestion of commerce on account of excessive rates. The intrastate rates in Alabama on the complainant’s lines were, on the average, materially lower prior to March 2, 1907, when the first rate statute was enacted than in any other Southern state and are now materially lower, on an average, tiran any in the United States. Record cited in master’s report in South & North Case, p. 170. It is plain that the rate statutes were not the result of any unreasonable exactions by complainants’ rates prior to their passage, and it is demonstrable that the reduction in rates produced by the statutes, while causing immense losses to the complainants directly as well as in its interstate income, does not stimulate trade, and does not cheapen in any degree the selling price of commodities to the people. Commerce or traffic is noth-ihg more than the interchangeable flow of surplus commodities from one community or country to another. There must be population to produce and consume at each end of and along the transit, and this is limited by nature, and is only the subject of slow development. There is little margin in life of aggregate surplus products over aggregate consumption demands so that there can be no great variation in the volume of trade year by year. A variation of 10 per cent, or 20 per cent, either by addition or by subtraction in freight rates on articles consumed by the people and the subject of transportation is so infinitesimal compared to the selling price to the consumer that no account whatever of it is taken in his favor. Yet such reductions in the aggregate will bankrupt the carrier. It is commonly known that it is the last 10 per cent, of the freight and passenger charges that furnishes all the profit to the business. This may be illustrated both ways to show the benificence and bad effects of the statutory reductions.
The proof shows that a garment selling at retail in Alabama at 50 cents and weighing half a pound has a freight rate of 26 cents per hundred pounds from Mobile. The freight on the garment is I3/ioo of a cent or 1/3so of the price. Cotton overalls selling at $1, weight one pound, have a freight rate of 26 cents per hundred pounds, and the total freight is sa/ioo of a cent on the garment. This view is applied in the proof to long schedules of the commodities affected by the rate statutes (U. & N. Record, 3635), and demonstrates that 10 per cent, or 20 per cent, reduction in the freight rates would and does not make the goods any cheaper to the ultimate consumer or purchaser. The people buy from necessity, and their demands are not enlarged nor [829]*829their ability to buy increased by freight being reduced on a tin cup Viooo or Vr,o of 1 cent, or 25 cents on a $30 suit of clothes, or 2(4 cents on a $10 plow. A man does not eat two dinners because they can be had at 49 cents instead of 50 cetits, and a farmer does not buy two mules when he does not need but one because the freight is reduced $1 on a $200 mule, nor in any such case would he get the benefit of the reduction; nor in such cases is commerce stimulated when there was a free flowing current before these infinitesimal reductions.
The gross earnings of the Louisville & Nashville Railroad in Alabama for the year 1910 amounted to $8,434,099.08, and on intrastale business $3,615,102.61. Take 10 per cent, or 20 per cent, or 40 per cent, from these sums, and there would be left in the case of 20 per cent., only $470,221.77 of net income for entire business, and only a ratio of 1.13 per cent, on value of $41,443,462.39, instead of a ratio of 5.20 per cent., without this 20 per cent, reduction in income from rates. A similar catastrophe would follow in the case of the South & North Road, and, it is believed, of any road in the United States. There is no margin of 20 per cent, or even 10 per cent, to be spared on the earnings of any road. And, of course, as there was during that year (1910) a net loss of .82 per cent, without such supposed reduction of 20 per cent, of rate income on intrastate business, the reduction of 20 per cent, or even 10 per cent, would add to such loss.
The effect of the statutory reduction of rates then in these cases is to inflict a direct additional loss on the intrastate business, in the case of the Louisville & Nashville of $263,252.52, and in the case of the South & North of $210,286.46, per annum, when there was no net income above operating expenses on such business under the prevailing rates when the statutes'in question were enacted making the reductions. Of course, such being even proximately the result, it is evident that the Legislature misapprehended the situation when the statutes were enacted. Inter and intra. state business consist in the transportation of persons in any number, and of freight in any quantity, for any distance, on the fines of the carrier. At first view, it may appear surprising, at least to ordinary observation, that it costs relatively much more to do tlie intrastate than it costs to do the interstate business in the aggregate. The explanation is that the intrastate business generally involves short hauls with many stoppages and in less than car load lots; while the reverse is the case with the interstate business, which is generally through traffic with full loads, fevr stops, and for much longer hauls. It is evident that there is more profit in full loads, long hauls, and few stoppages than in the reverse. Another difference in tlie relative costs of the two traffics arises from the fact that the cost is composed of two classes of items — those affecting distance Or haulage, and those not affecting distance or non-haulage or terminal charges. It is estimated that 90 per cent, of a 30-mile haul is made up of nonliaulage cost, but the nonhaulage cost is uniform; that is, it does not increase with the length of the haul. It attaches alike to intrastate and interstate shipments.. Ret me illustrate this: A terminal charge at the point of starting say is $1 per ton, or any sum. Now, if we take an intra and an inter state ton [830]*830starting at the same time on a journey, the intrastate ton will arrive at its destination at, say 10 miles, and there will stop and incur another terminal charge, say of $1, or any other sum. The interstate ton goes its journey, say, of 200 -miles, and stops in another state. Now the initial terminal charge of $1 in the case of the interstate ton is distributed on 200 miles of transportation. The intrastate initial terminal charge and the final terminal charge are distributed on a transportation of only 10 miles. It is thus seen that the interstate ton bears only a small fraction of the cost per mile of terminal charges that the intrastate ton is subjected to. Thus it is universally recognized that the cost of transportation relatively diminishes with the increase of distance, for it is well known 'that local traffic takes more time, more fuel, more wages, more water, causes more wear and tear, and has less loads than the through traffic, and greater terminal charges per mile. It is therefore recognized by all who have investigated the subject that, though the same rates are charged on the same character of business in each service, a road may make a profit on its interstate business, and at the same time sustain a loss on its intrastate commerce.
“We hear much about a reasonable return on capital. A reasonable return is one which under honest accounting and responsible management will attract the amount of investors’ money needed for the development of our railroad facilities. More than this is an unnecessary burden. Less than this means a check to railfoad construction and to the development of traffic. Where the investment is secure, a reasonable return is a rate which approximates the rate of interest which prevails in other lines of industry. Where the future is uncertain the investor demands, and is justified in demanding, a chance of added profit to compensate for his risk. We cannot secure the immense amount of capital needed unless we make profits and risks commensurate. If rates are going to be reduced whenever dividends exceed current rates of interest, investors will seek other fields where the hazard is less or the opportunity greater. In no event can we expect railroads to be developed merely to pay their owners such a return as they could have ob-[831]*831tamed by the purchase of investment securities which do not involve the hazards of construction or the risks of operation.”
The whole question was elaborately discussed' in Central of Georgia Railroad v. Railroad Commission of Alabama et al. (C. C.) 161 Fed. 925, wherein it was held that railroad companies in Alabama were entitled to be permitted to earn a net profit of 8 per cent, per annum on the value of the property employed by them in intrastate business so long as the business was done without unjust discrimination and at reasonable rates.
The Maximum Rate Act.
Two years before the enactment of the statutes complained of, the Railroad Commission of Alabama made an exhaustive investigation of the reasonableness of the intrastate rates then charged in Alabama, the net revenues the carriers derived therefrom, and decided among other things that “the net earnings shown by the several railroads operating in Alabama are not in excess of a fair and just return upon the legitimate value of the properly employed,” and that reductions would be confiscatory. A table annexed to the opinion then rendered showed that the Louisville & Nashville Railroad Company earned 2% per cent, from its domestic business on the proportion of its property devoted to intrastate business, and that there was a deficit in the case of the Nashville, Chattanooga N 8t. Louis Railroad Company. Nothing is shown in the proof in these cases, or by any matter of which [832]*832the court could take judicial notice, to create any just foundation for a belief that in two years thereafter conditions had so changed and improved that the carrier could obtain three times more net earnings than before, and on reduced rates.
Interference With and Control of Interstate Commerce.
It has been strenuously insisted on the one side and denied on the other that the rate statutes in these cases as to local rates necessarily affecting interstate rates on an interstate road amount to a direct regulation of, and control of, interstate commerce, and that the statutes are void on that ground also. The argument in support of that contention is stated in a masterly manner by Judge Sanborn in Shepherd v. Northern Pac. Ry. Co. et al. (C. C.) 184 Fed. 765. The master sustained those views, and held that the state had no power to make rates on railroads engaged in interstate commerce. As I have held the rate statutes attacked in these cases void on two distinct grounds, I deem it unnecessary to go into the question of their being void on a third and distinct ground that they directly interfere with and control the interstate commerce of the complainants. This direct point is involved in the Minnesota case now before the Supreme Court and will doubtless be decided within a few weeks. While Congress under its power to regulate interstate commerce and to preserve its uniformity may have the power to annul state rates which interfere with that result, I do not believe that under the present statutes Congress has done so. I will therefore sustain the exceptions of the respondents in the several cases to the master’s findings on this point.
Counsel for complainants may prepare a draft of the decree in accordance with this opinion, and submit it to counsel for respondents.
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Cite This Page — Counsel Stack
196 F. 800, 1912 U.S. Dist. LEXIS 1594, Counsel Stack Legal Research, https://law.counselstack.com/opinion/louisville-n-r-v-railroad-commission-alnd-1912.