v. Great Northern Railway Company,62 the court answered the question in the negative, Mr. Justice Canty saying: "If a railway company has made what turns out to be a bad bargain by issuing its bonds for six per cent or seven per cent interest per annum that should be its misfortune and not the misfortune of the public." 63

§ 311. Rates at which governments can borrow no criterion. The Commission has been accustomed to repeat with approval the language of the courts to the effect that compensation implies payment of cost of service, interest on bonds, and then some dividend. The rates at which governmental bodies can borrow is obviously no criterion in itself. The standard is what the current rate of return is on securities of private companies conducting other businesses of similar character. This has been pointed out by the Commission, very clearly:64 "In many countries the conduct of transportation by railways is undertaken by the government at public expense. The government of the United States could probably borrow what money would be needed to buy or build the railways of this country at from 2 1-2 to 3 per cent. Ought the public to be taxed for the service rendered beyond this rate of interest? Plainly, no such test ought to be applied. This government does not undertake that duty, nor does it guarantee any rate of return upon the money invested. It would be clearly unjust to impose upon the private capital which performs this quasi-government function all the hazard without allowing it some participation in whatever profit may accrue.'

99 65

62 69 Minn. 353, 72 N. W. 713. But see Pennsylvania R. R. Co. v. Philadelphia County, 220 Pa. St. 100, 68 Atl. 676, 15 L. R. A. (N. S.) 108.

63 See contra, Norwich Gas & E.

Co. v. City of Norwich, 76 Conn. 565, 57 Atl. 746.

64 Morgan Grain Co. v. A. C. L. R. R., 19 I. C. C. 460.

65 Re Advance Freight Rates, 9 I. C. C. Rep. 382.

§ 312. Prevailing rate of interest allowed.

The prevailing rate of interest upon bonds of like security is to be allowed to bondholders; and the court will inform itself as to that. Thus when the point was raised in Milwaukee Electric Railway Company v. Milwaukee “ Judge Seaman in protecting the bondholders and others against undue reduction of fares by city ordinance, said: "The interest rate fixed in the bonds issued by the company is 5 per cent. The rate which prevails in this market, as shown by the uncontroverted testimony, is 6 per cent for real estate mortgages and like securities. If the $5,000,000 basis be adopted, surely a better rate must be afforded for the risks of investment than can be obtained on securities of this class, in which there is no risk. Upon the basis of $7,000,000, which is more logical and just, the 5 per cent named in the bonds is clearly not excessive, and should be accepted by a court of equity as the minimum of allowance; and, even upon the defendant's partial showing, the return would be less than one-quarter per cent above that, with the large margin for depreciation left out of account." 67

§ 313. What are reasonable dividends?

Within the last ten years, as has been seen, the general principle has become established that there must be left to those who conduct a public enterprise an adequate return on their investment as a whole. This newer view was well put in one sentence in New Memphis Gas Light Company v. New Memphis, thus: "The company has a right to such gross revenue from the sale of gas as will enable it to pay all legitimate operating expenses, pay interest on valid fixed charges, so far as bonds or securities represent an expenditure actually made in good faith, and also to pay a reasonable dividend on stock, so far as this

66 87 Fed. 577.

67 The prevailing rate of interest is the test; see Stanislaus Co. v. San

Joaquin C. & I. Co., 192 U. S. 201, 48 L. ed. 406, 24 Sup. Ct. 241.

68 72 Fed. 952.

What

represents an actual investment in the enterprise." then is reasonable dividend? Dividends upon stock at least where there are outstanding bonds ought to be permitted to be somewhat larger than the interest upon the bonds. Since the bonds have a prior lien upon the assets, the risk to the holders of them is much less than to the holders of stock, and the stockholders should therefore have a higher rate of return because of the risk of passing of dividends in bad times or of foreclosure in case of complete failure. This question of reasonable dividend depends chiefly upon the current rate of return.69

§ 314. Current rate of return.

What constitutes a fair rate of return must obviously be determined by some standard. The current rate of return upon enterprises of a similar character is submitted to be the true basis of fixing the percentage. This is the basis insisted upon in testing the evidence in the more discriminating cases which discuss the problem carefully. Thus in Spring Valley Waterworks v. San Francisco,70 where an ordinance passed by a board of supervisors would reduce the annual net earnings below 4.40 per cent on the value of the property necessarily employed in the service, or 3.30 per cent on its stock after deducting proper charges, its enforcement was enjoined as fixing a rate so low as to be a taking of private property for public use without just compensation, Judge Merrow said: "The next question to be considered is, what will be a fair and reasonable income for the complainant to receive as a just compensation for the public use of its property? A number of bankers have testified as to the usual and customary net income from investments of $10,000,000 and upwards of capital in corporations of a quasi-public nature, where judiciously managed. The affidavits of four bankers of

69 Among the many cases to this effect, see Pennsylvania R. R. Co. v. Philadelphia County, 220 Pa. St.

100, 68 Atl. 676, 15 L. R. A. (N. S.) ` 108.

70 124 Fed. 574.

long experience and well-known character and standing fix the rate at not less than 7 per cent per annum, and aver that a net income of less than 7 per cent per annum from large investments would not be a reasonable or fair return. The affidavits of five bankers of like standing and character and similar experience fix the rate at not less than 6 per cent per annum, and aver that a net income of less than 6 per cent per annum for large investments would not be a reasonable or fair return. The affidavit of one banker of large wealth and experience fixes the rate of net income from such investments at between 4 and 5 per cent per annum. The weight of evidence is clearly in favor of a rate of not less than 6 per cent per annum."

§ 315. Fair rate of return.

99 71

According to present ideas, therefore, a fair rate of return must be left in the generality of cases; but if an adequate return is left, the legislation is of course constitutional, although it be a reduction from the rates formerly in force. In Cedar Rapids Company v. Cedar Rapids 72 Mr. Justice Weaver in dismissing a complaint, to the effect that a reduction in rates of a water company made by public authority was unconstitutional because confiscatory, said: "Just the extent which this reduction will affect the company's earnings it is impossible to prove or predict with certainty, but we see no reason to believe that the total revenue, after making all due allowance for discounts, will be reduced below $50,000. The operating expenses charged for the year preceding the trial (being largely in excess of the average in its experience) were $23,000, or, including taxes, $28,000. On this basis the net earnings are 5 1-2 per cent on a valuation of $400,000, or 4 2-5 per cent on a valuation of $500,000, or 6 1-2 per cent on the total amount of capital

71 Of the cases cited, see especially San Diego L. & T. Co. v. Jasper, 189

U. S. 439, 47 L. ed. 892, 23 Sup. Ct. 571.

72 118 Iowa, 234, 91 N. W. 1081.

stock and bonds. Stated otherwise, this will enable the company to pay its interest charge of $7,500, make a dividend of 5 per cent on its capital stock (including stock issued as dividends), and leave a margin of over $3,000 for contingencies. This estimate of earnings may be very materially reduced, or the estimate of the value of the plant be very materially increased, before the court will be justified in saying that the plaintiff s property is being exposed to destruction or confiscation by an unprofitable schedule of rates." 73

§ 316. Current rate the standard.

75

It will be seen, therefore, that the current rate of return to capital is accepted as the true basis of fixing the percentage. Some illustrations of the way the courts treat the matter nowadays will illustrate this further. In Brymer v. Butler Water Company 74 the court said in reviewing the schedule of a water company, that it is entitled to a rate of return, if the property will earn it, not less than the legal rate of interest; a return of something over six per cent was held not unreasonable therefore. Furthermore this court, in the still later case of the Pennsylvania Railroad Company v. Philadelphia County," frankly said that it regarded its previous suggestion of six per cent as simply fixing a minimum return, not the maximum one at all. Men do not put their money into business enterprises for small interest, as this court well says. In a recent federal case 76 the court thought that the owners of a railroad should have a profit above the necessary expense of conducting such business equal to eight per cent per annum upon the value of the property so employed, that being the legal rate of interest in Alabama on loans of money, and the current rate of profit

73 See accord Brymer v. Butler Water Co., 179 Pa. St. 231, 36 Atl. 249, 36 L. R. A. 260.

74 179 Pa. St. 231, 36 Atl. 249.

75 220 Pa. St. 100, 68 Atl. 676, 15 L. R. A. (N. S.) 108.

76 Central R. Co. v. Railroad Commission, 161 Fed. 925.