Railroad Rate Regulation

entitled to earn some amount; and it seems reasonably clear to me that, if entitled to earn something under the above conditions, it is entitled to earn under the same conditions a compensatory amount equal, at least, to the usual and legal rate of interest in the locality where the railroad is situated. Judging by the business of the past 19 years, in connection with the showing made on this hearing as to present and future business, I conclude that there is no prospect in the immediate future that the net earnings of the complainant's railroads in Florida will approach an amount at all equal to the interest on the value of the said railroads at the usual rate prevailing in Western Florida."

§ 336. Investment in public service.

Finally, the advantages of investment in public service are strongly presented in the following extract from the opinion of the Commission in the Advance in Rates Case of 1910. "What business can be more attractive to the investor than this, in which no rival is to be apprehended, where the amount of business is assured, and where the price for the transaction of that business is protected by the fundamental law of the land. All this has long since reflected itself in the prices of railway securities. Ten years ago a high-grade, long-time railroad bond like the 3 1-2 per cent New York Central underlying mortgage sold at par. To-day, owing apparently to the increase in the rate of interest a similar bond, in order to bring par, must bear a rate of 4 per cent, or perhaps slightly more. These railroad bonds command nearly as high a price when no question of local taxation intervenes as do municipal bonds. The price of railroad stocks in the past has not been controlled by the same considerations as that of railroad bonds. These stocks have been largely the subject of speculation and the prices have been determined by other considerations than the mere rate of dividend. These conditions are changing. In Official

Classification territory the day of railroad construction and railroad consolidation has given place to that of railroad operation. The successful railroad magnate of the future in this territory will be he who can operate his properties most economically and most satisfactorily."

§ 337. Present tendencies in regulation.

It is significant that in the Five Per Cent cases of 1914 a more liberal policy had been pursued in this respect. It is still true, however, that there is as yet no fixed percentage applicable to all cases established. Each case is still to be judged on its own merits; it may well be that a railroad in one community would be entitled to one rate of return, while another line in another community would be entitled to a different rate. It may be that a large and solidly established company will not be entitled to as high a return as a smaller one which is struggling against adverse circumstances. The most that can be said by way of general principle, is that the return should be at least the average return which is earned by other classes of business of the same degree of hazard in the same community. The Commission in fixing a rate of return should, if it is well advised, be liberal lest too strict a policy result in turning capital to other fields of enterprise. The United States still needs development by improvement of its means of transportation. If the period of extensive building is coming to an end, the possibility of intensive development is only in its beginning. In its valuations of properties, the Commission should guard against inflation, but should be liberal in establishing the rate of return on that value.

CHAPTER VIII

OPERATING EXPENSES

§ 340. Provisions of the Act.

341. Real cost of operation.

Topic A. Cost of Performing Service

§ 342. Cost of rendering service. 343. Net earnings in general. 344. Salaries paid to officials. 345. Cost of supplies.

346. Unreasonable expenditures. 347. Improvident arrangements. 348. Estimating labor cost.

349. Scientific management.

350. Loans.

351. Taxes.

Topic B. Expenditures on the Plant

§ 352. Expense of equipment and maintenance.

353. Cost of rolling stock.

354. Losses by accident.

355. Betterments considered as maintenance.

356. Improvement of existing plant.

357. Replacement considered as repair.

358. Permanent improvements should not be annual charge.

359. New construction should be charged to capital.

360. New construction not an operating expense.

361. Betterment out of income.

Topic C. Depreciation Requirements

§ 362. Allowance for depreciation.

363. Types of depreciation.

364. Authorities refusing to allow depreciation.

365. Renewal of equipment to offset depreciation.

366. Fund to repair depreciation.

367. Capitalization of past depreciation.

368. Payments into sinking fund.

369. Amortization of franchise rights.

Topic D. Operations of Consolidated Properties

§ 370. Complications in case of systems.

371. Divisions as integral parts of the whole system.

372. Unprofitable portions of the line not considered. 373. Systems considered as wholes.

374. Treatment of branch lines.

375. Constituent roads operated under separate charters. 376. Rent of leased portions.

377. If rental becomes unjustifiable.

$340. Provisions of the Act.

The functions of the Commission in regard to the determination of operating expenses are by no means inconsiderable. It can always call upon the carriers for reports of various sorts; and now by the expansion of its practice in establishing rules for keeping accounts, it keeps a very close control over the proper division between fixed charges and operating expenses. These reports among other things must, in accordance with section 20, include the number of employees, and the salaries paid each class; the accidents to passengers, employees, and other persons, and the causes thereof; the amounts expended for improvements each year, how expended, and the character of such improvements; the earnings and receipts from each branch of business and from all sources; the operating and other expenses; the balances of profit and loss; and a complete exhibit of the financial operations of the carrier each year, including an annual balance sheet; and the Commission has been in the broadest way possible given power, in its discretion, for the purpose of enabling it the better to carry out the purposes of the Act, to prescribe a period of time within which all common carriers subject to the provisions of this Act shall have, as near as may be, a uniform system of accounts, and the manner in which such accounts shall be kept. The Commission by further provisions of section 20 may, in its discretion, prescribe the forms of any and all accounts, records, and memoranda to be kept by carriers subject to the provisions of this Act, including the accounts, records, and