the interest of the public welfare, be prohibited until after arbitration, at least; and each arbitration board should contain a clear majority of representatives of the public. There seems no very good reason why differences between public utilities and their employees should not be settled by the usual regulating commissions. They arbitrate differences between shippers and railways as to how much the shippers shall pay the railways. Why should they not also arbitrate differences between the railways and their employees as to how much the railways shall pay the employees? Is it not best that the same body shall look at both sides of the ledger — that the body that regulates the income of public utilities shall also regulate their outgo?

Regulation by commission often extends to the finances of public utilities, relating to the issuance of securities by them or to the profits they are permitted to earn, or to both. The most thorough and expert investigation of the subject of regulation of security issues ever made was that by the Railroad Securities Commission, of which President Hadley of Yale was chairman, and which rendered its report in 1911. That commission expressed the opinion "that it is far more important to ascertain just what are the facts concerning the issue of securities and what is actually done with whatever money has in fact been realized from the stock which is issued, than merely to make sure that the par value of the stock was paid in at the time of issue." It is said that if railway rates were materially influenced by the amount of the outstanding securities it would be desirable for securities to be issued under governmental regulation, but it is believed that the amount and face value of outstanding securities has only an indirect influence on the making of rates, and that it should have little, if any, weight in their regulation. . . . If railroad securities were to be issued only after express authorization of each particular issue by the Interstate Commerce Commission or other governmental agency, it is difficult to see how the government could thereafer escape the moral, if not the legal, obligation to recognize these securities in the regulation of railroad rates. . . . The possible consequences of such a system are too serious to warrant its adoption at the present time." The Commission therefore confined itself to recommending legislation to require each railway to file with the Interstate Commerce Commission prior to the date of issuance of any securities, a full statement of their character and amount; to furnish to the Commission, at such times as it may require, full statements of its financial transactions which the Commission may make public at its discretion; and to compile, for the information of its stockholders, such information and in such form as the Commission may require regarding its financial transactions during the fiscal year, and any interests that its directors may have in any transaction under investigation.

These are eminently wise recommendations; but they have not

been acted on by Congress, which seems likely to pass more radical legislation - legislation which will be less wise in proportion as it is more radical. The purpose of regulation of security issues is to prevent over-capitalization of railways, with the evils attributed to it, some of them very real and some fanciful. But before we attempt to prevent over-capitalization it might be well to decide what it is; and few persons agree on a definition of it. A railway like the Chicago Great Western, with a capitalization of eighty-five thousand dollars a mile; gross earnings of eighty-five hundred dollars a mile, net earnings of but twenty-one hundred and twenty-nine dollars a mile, and neither paying nor earning anything on its stock, is obviously overcapitalized. Equally obvious is it that a railway like the Delaware, Lackawanna & Western, with gross earnings of forty thousand dollars a mile, net earnings of sixteen thousand dollars a mile, a capitalization of only thirty-three thousand dollars a mile, and paying regular dividends of twenty per cent., and frequently extra dividends, is greatly undercapitalized. Its property could not be reproduced for several times its capitalization. When we have such extreme examples our definition of over-capitalization, and idea of what should be done about it, become a matter of the point of view. Do we mean by it that securities have been issued as a bonus or sold at a discount? That has been done, and it can be prohibited; but this would seriously interfere with the construction of new, independent railways, which seldom can market any securities at par except bonds, and bonds only when they bear a very high rate of interest or a stock bonus is given with them. Do we mean by over-capitalization security issues in excess of cost? But in few if any cases do we know or can we ascertain the cost of the original construction of and the permanent improvements in our railways. Do we mean that capitalization exceeds the present cost of reproducing the railways? Congress has now provided for a valuation of railways by the Interstate Commerce Commission; and perhaps after it is made security issues might be based on it. But it is practically certain that if the cost of reproduction is given preponderant weight in the valuation, as the decisions of the Supreme Court indicate it must be, the valuations of most railways and of the railways as a whole will exceed their capitalization. Would we then authorize the railways whose capitalizations were smaller than their valuations to equalize them by issuing stock dividends? This question of regulating securities is much less simple than many think; and good sense dictates that for the present we should follow the conservative recommendations of the Hadley Commission.

Almost every time an order is issued by a regulating body regarding either rates or operation net earnings are more or less affected. There is a tendency to try to limit the profits of railways and other utilities to what is called a "fair return"; and there is an impression that the

courts have held that this is the maximum they may be permitted to have. What the courts have held is not that public utilities may not earn more than a fair return, but that they may not be restricted to less. They have fixed a minimum, but not a maximum limit. What, if anything, a public utility may earn in excess of the so-called "fair return," usually placed at six or seven per cent., is a question for the regulating body to determine, and should be dealt with by it as a matter of public expediency. Public expediency dictates that the return permitted to be earned shall be sufficient to attract enough capital into public utilities to enable them to render good and adequate service; and that efficient management shall be rewarded with larger returns than inefficient management, because if it is not there will soon be no efficient management.

Once the public has created regulating commissions of satisfactory personnel and adequate powers it would seem that it should be content to let them proceed with the performance of their difficult, delicate, and arduous duties without unnecessary and harmful interference. This, however, has seldom been done. The legislatures, after having created the commissions, often have passed laws for the regulation of rates and operation against the judgment, and even over the opposition, of the commissions. In some States the people themselves by referendum votes recently have passed laws to regulate matters whose regulation was within the special scope of the commissions' authority. This is contrary to sound principles of regulation by commission. Again, after having adopted special laws for the regulation and control of public utilities, we have applied to them Federal and (in many cases) State anti-trust laws, whose object is to enforce competition. Now, competition in rates, in the ordinary sense, and effective and wholesome public regulation are incompatible. You cannot have competition in, and effective regulation of, railway rates at the same time, any more than you can at the same time ride two horses going rapidly in opposite directions. The main aim of regulation of rates is to prevent unfair discrimination in rates. But competition inevitably leads to discrimination. When railways compete in rates they inevitably compete harder for the business of large shippers than of small shippers. That means secret rates and rebates, which are in violation of the Interstate Commerce Act, the provisions of which the Interstate Commerce Commission exists chiefly to enforce.

The true theory of regulation by commission seems to be this: The management of public utilities should be left in the hands of the owners or those that they choose to represent them. The regulating commissions should be made strong enough in personnel and statutory power to exercise corrective authority over the managements when the acts of the managements are unreasonable and unjust to the public. And such commissions having been created, they should be left free

to perform their duties without interference from the public or any public body except the courts, and then only when it can be shown that the commissions have exceeded their constitutional authority in a manner plainly unreasonable and unjust to the concerns over which their jurisdiction extends. The success of regulation probably will be in proportion to the consistency, fairness, and integrity with which we carry out these principles.

Some people think that the courts should have no authority to review and set aside orders of regulating commissions unless they are confiscatory. It has been contended, not only that this ought to be, but that it is the law. The making of rates, the Interstate Commerce Commission said, in its annual report for 1911, is a legislative function. "That being so, the dicretionary power involved in reaching a conclusion that a particular rate is or is not reasonable for the future, or that a particular discrimination is or is not undue, is a legislative discretion which cannot be reviewed by the courts." The same reasoning would equally limit the power of the courts to review orders regarding service and other matters. The Supreme Court of the United States in a recent decision 1 has refused to accept this theory. It holds that such authority as the commission has claimed, "however beneficently exercised in one case, could be injuriously exerted in another; is inconsistent with rational justice, and comes under the Constitution's condemnation of all arbitrary exercise of power." In other words, the railway or other public utility can always appeal to the courts, not only to determine if an order of a commission is confiscatory, but to determine if it is reasonable and based on substantial evidence. The courts may not annul an order of a commission unless it is plainly unreasonable. But when it is so they must set it aside.

The main principle on which the Government of the United States rests is that it should be a government of laws and not of men; that no one should have his life, liberty, or property taken without the right to be fully apprised of the reason and to appeal to the courts to determine if the taking is just. The doctrine that regulating commissions or other administrative bodies should be given any arbitrary power over public utilities is simply the doctrine that the property rights of the owners of public utilities should not be given the same protection as the property rights of other persons. It is a doctrine that seems inherently wrong and unjust; at least it is one that the Supreme Court has condemned as unconstitutional. On the other hand, the decisions of the courts leave an ample field for administrative regulating commissions to work in and to accomplish all of the great good which, with a suitable personnel and large powers, it is practicable for them to accomplish.

1 I. C. C. & U. S. vs. L. & N. R.R. Co.

SOME FEATURES OF STATE REGULATION OF

PUBLIC UTILITIES

BY JOHN H. ROEMER OF THE MILWAUKEE BAR, MEMBER OF THE RAILROAD COMMISSION OF WISCONSIN

(From an Address Delivered before the Wisconsin State Bar Association at Milwaukee, September 1, 1909)

This article shows the working of the Wisconsin public utilities law, during the first two years of its operation. - EDITOR'S NOTE.

The doctrine that the public has an interest in the use of the property of a public utility employed in a public service, though resting upon the principles of the common law, was not agreeable to the managements of public service corporations when state regulation and supervision of such corporations were first proposed. Nor has there ever been a full assent to this doctrine or a frank submission to the regulatory measures adopted by the state on the part of many such corporations. The view that their undertakings, except to a limited extent in the case of common carriers, were purely private business enterprises which could be conducted upon like principles as those prevailing in other commercial pursuits, controlled the managements in the transaction of all the affairs of the corporations, whether pertaining to their private corporate functions or to those relating to their public callings. While the view thus taken has long since become obsolete, it is not at all strange that it should have been entertained when we consider the persistence of both nation and states in maintaining the economic policy of laissez-faire in the evolution of our industrial system prior to the civil war. The fundamental distinction between public callings and private callings was then generally either disregarded or not recognized. In accordance with the prevailing economic theory of the times, competition, whether active, or potential, that is, theoretically possible though practically improbable, was regarded as the efficacious means of securing to the general public adequate service at reasonable prices from individuals and corporations engaged in businesses now classified as public callings.

Even the right of the public in the use of property which was devoted to a public service by virtue of legislative authority, and which could not be so employed without such authority, was almost wholly ignored and, in fact, in certain instances, expressly denied. Thus, in 1858 the Supreme Court of New Jersey held that a gas company

1

1 Patterson Gas Lt. Co. vs. Brady, 27 N. J. L. 248.