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 memoranda of the movement of traffic as well as the receipts and expenditures of moneys. The exercise of the powers conferred upon the Commission under these provisions of the Act is also discussed in Chapter XX, particularly under Topic A. § 341. Real cost of operation. The real cost of operation is not so easy a figure to determine as one might first suppose. If brought to the test of inquiry before the courts, not only must the actual expenditures be shown, but they must be defended, if attacked, as reasonable in themselves. Certain items of annual expenditure should obviously be included as annual charges, such as wages and supplies, provided that such expenditures have not been unreasonable. But as to other expenditures there is difficulty in deciding whether they should be included as current expenses or provided for out of new capital, such as replacements and betterments. Involved in this problem is the accounting permissible in allowing for depreciation and reparation. And in this connection the propriety of setting aside a sinking fund or providing against amortization should be considered. Altogether, it will be seen that this is not a matter to be dismissed with the accepted rule that only proper annual charges should be deducted from gross income, while all expenditures for lasting improvements should be provided for from new capital. These are fundamental issues in many cases brought before the courts; a company must make full disclosure of its earnings and expenses when it assails as confiscatory the rates fixed by the authorities to which the power to act has been delegated. Topic A. Cost of Performing Service § 342. Cost of rendering service. Before there can be any question of income on the capital employed, the necessary annual charges must be met by the rates; and first of all the actual cost of service furnished. This involves the payment of wages, and the purchase of current supplies. The general principle was concisely stated by Mr. Justice Brewer in Chicago and Northwestern Railway v. Dey: 23 "Compensation implies three things: Payment of cost of service, interest on bonds, and then some dividend. Cost of service implies skilled labor, the best appliances, keeping the roadbed and the cars and machinery and other appliances in perfect order and repair. The obligation of the carrier to the passenger and the shipper requires all these. They are not matters which the carriers can dispense with, or matters whose cost can by them be fixed. They may not employ poor engineers, whose wages would be low, but must employ competent engineers, and pay the price needed to obtain them. The same rule obtains as to engines, machinery, roadbed, etc., and it may be doubted whether even the legislature, with all its power, is competent to relieve railroad companies, whose means of transportation are attended with so much danger, from the full performance of this obligation to the public." 19 24 § 343. Net earnings in general. The proper determination of net earnings is by no means the simple problem it might seem. Of the total costs of conducting transportation something in the vicinity of one-half are what may be termed out-of-pocket costs that is cost of fuel and wages, and repairs to locomotives and cars.25 It is obvious that there are many 23 35 Fed. 866, 1 L. R. A. 744, 2 Int. Com. Rep. 325. See further Missouri Pacific Ry. v. Tucker, 230 U. S. 340, 57 L. ed. 1507, 33 Sup. Ct. 961. 24 Chicago, M. & S. P. Ry. v. Tompkins, 176 U. S. 167, 44 L. ed. 418, 20 Sup. Ct. 336. See also Wood v. Vandalia R. R., 231 U. S. 1, 34 Sup. Ct. 7. 25 Louisville & N. R. R. C. & C. Rates, 26 I. C. C. 20. Where the operating ratio is extraordinarily high, the Commission will not feel justified in ordering a reduction. Nebraska State Railway Commission v. C., B. & Q. R. R., 23 I. C. C. 121. other expenditures to be accounted for as annual charges, as to which it is difficult to state rules of apportionment in any itemized schedule of costs, but which nevertheless enter into the cost of performing any part of the transportation rendered by the company in question. The character of this problem in general was excellently stated by the Commission in one proceeding 26 thus: "The item of conducting transportation cannot be much modified. Whenever a train moves so much coal must be used and so many men employed at the time of the movement. With maintenance of way and equipment this is not so. A certain amount must be expended to keep the roadbed and other permanent structures and the rolling stock in a going condition, but a certain other amount, although necessary to keep the property good in the long run, may be laid out sooner or later according to the will of the management. For example, rails must be relaid but the time of relaying can usually be varied for a considerable period. So in the renewal of a bridge or a culvert there is a leeway of years usually. A car or an engine can be used after good economy would require its abandonment. The building of a station can be postponed almost indefinitely. From these considerations it results that the management can without taking from or adding to the items which are actually needed to keep the property good vary for a particular year or even for a series of years by several hundred dollars per mile the cost of operation and thereby the net results. In addition to this the amount charged to maintenance may be greatly varied by the manner in which the accounts are kept. A new car is purchased in the place of an old one. It is largely more efficient and more expensive. What part of it shall be charged to main 26 Rates from St. Louis to Texas Points, 11 I. C. C. Rep. 238. Where the margin of profit to the carrier on a low grade commodity was small to begin with and the business itself is not so desirable now as formerly, the enchanced cost of operation may properly be offset by an increase of the rate. Mountain Ice Co. v. D., L. & W. R. R., 15 I. C. C. 305. tenance and what part to permanent improvement? So of the replacement of rails, bridges, culverts, depots and whatever enters into the construction and equipment of a railroad. Some railroads carefully separate what is properly maintenance from what is strictly an addition; others are liberal in the making of these distinctions, charging more to maintenance and renewal and less to betterment, while still others charge all improvements against operating expenses. The general tendency in all parts of the country is to charge more to operation than formerly." § 344. Salaries paid to officials. The salaries of officials must, of course, be paid, as part of the annual charges; but these salaries must not be fixed at an extravagant amount. If a group of stockholders who controlled a majority of the stock could vote themselves enormous salaries, and deduct the amount from the receipts of the company before making a return to capital, the highest possible rates might be justified, and the rights of the public be ignored. This question was considered, and well discussed, by Mr. Justice Brewer in Chicago and Grand Trunk Railway v. Wellman: 27 "It is agreed that the defendant's operating expenses for 1888 were $2,404,516.54. Of what do these operating expenses consist? Are they made up partially of extravagant salaries,-fifty to one hundred thousand dollars to the president, and in like proportions to subordinate officers? Surely, before the courts are called upon to ad- . judge an act of the legislature fixing the maximum passenger rates for railroad companies to be unconstitutional, on the ground that its enforcement would prevent the stockholders from receiving any dividends on their invest 143 U. S. 339, 36 L. ed. 76, 12 Sup. Ct. 400. In St. Louis & S. F. Ry. Co. v. Hadley, 168 Fed. 317, the court refused to take it into consideration as against a legislative reduction of rates that the companies would be compelled to reduce the wages of their employees. |