franchise and good will of the railroad. The results arrived at did not perhaps express the value of the properties, but they did express, and with substantial fairness and accuracy, the cost of reproducing those properties at the time of the valuation."

$ 360. The rule held unreasonable by the federal courts.

The Minnesota rule having been applied by the Texas Railway Commission in fixing railroad rates in that state, the railroads filed in the federal court a bill for an injunction against the rates. The rule was held to be an improper and unreasonable one, and the exaction of the rates as fixed by the commission was restrained. Circuit Judge McCormick said:

It is therefore not only impracticable, but impossible to reproduce this road, in any just sense, or according to any fair definition of those terms. And a system of rates and charges that looks to a valuation fixed on so narrow a basis as that shown to have been adopted by the commission, and so fixed as to return only a fair profit upon that valuation, and which permits no account for betterments made necessary by the growth of trade, seems to me to come clearly within the provision of the Fourteenth Amendment to the Constitution of the United States, which forbids that a state shall deprive any person of property without due process of law, or deny any person within its jurisdiction the equal protection of the laws. It is true that railroad property may be so improvidently located, or so improvidently constructed and operated, that reasonable rates for carriage of freights and passengers will not produce any profit on the investment. It is also true that many railroads not improvidently located, and not improvidently constructed, and not improvidently operated 'may not be able, while charging reasonable rates for carriage of freight, to earn even the necessary running

4 Metropolitan Trust Co. v. Houston & T. C. R. R., 90 Fed. 683, B. & W. 342 (1898).

expenses, including necessary repairs and replacements. And there are others, or may be others, thus constructed and conducted, which, while able to earn operating expenses, are not able to earn any appreciable amount of interest or dividends for a considerable time after the opening of their roads for business. This is true now of some of the roads, parties to these bills. At one time or another, and for longer or shorter times, it has been true, doubtless, of each of the roads that are parties to these bills. Promoters and proprietors of roads have looked to the future, as they had a right to do, and as they were induced to do by the solicitations of the various communities through which they run, and by various encouragements offered by the state. The commission, in estimating the value of these roads, say that they included interest on the money invested during the period of construction. This is somewhat vague, but the "period of construction" mentioned is probably limited to the time when each section of the road was opened to the public for business. And even if extended to the time when the road was completed to Denison and to Austin in 1873, nearly twenty years after its construction was begun at Houston, it would not cover all of the time, and possibly not nearly all of the time, in which the railroad company and its predecessors have lost interest on the investment. The estimate made on behalf of the railroad in this case of the cost to that company and to its predecessor company of the railroad property, and the business of that company as it exists to-day, may not be exactly accurate,-clearly is not exactly accurate; but it seems to me that it is not beyond the fair value of the property, as it is shown to have been built up and constituted, and to exist to-day as a going business concern, and that such rates of fare for the carriage of persons and property as are reasonable, considered with reference to the cost of the carriage and the value of the carriage to the one for whom the service is rendered, cannot be reduced by the force of state law to such a scale as would appropriate the value of this property in any measure to the use of the public without just compensa

tion to the owners thereof, and would deprive the owners thereof of the equal protection of the law guaranteed by the Constitution of the United States, as cited."

§ 361. Explanation of the California decisions.

Two California decisions appear to hold that the cost of construction, as represented by the stocks and bonds outstanding, cannot be shown as bearing on the value of the plant. The cases did not, however, go quite so far. They are considered and explained by Circuit Judge Morrow in the Federal Court in the Ninth Circuit.6

7

"The important question is the basis upon which just compensation is to be determined. It may be considered as established that it is the reasonable value of the property at the time it is being used for the public service, but how this value is to be ascertained and what elements are to be included in the estimate are still subjects of controversy. In the case of San Diego Water Co. v. San Diego it was held that bonded indebtedness was to be disregarded, but this was said with reference to the findings in that case [namely, that the value was in fact a certain amount]. In Redlands L. & C. D. Water Company v. Redlands it was held that provision should not be made for the bonded or other indebtedness of the company, or of the interest thereon, but that the fair value of the property necessarily used in furnishing water was the basis upon which to determine the amount of revenue to be provided by the ordinance fixing rate, and that this basis should be the same whether the works were acquired or constructed by the company with its own resources or with money borrowed from others. It was further said that the amount of the capital stock paid into the

5 San Diego Water Co. v. San Diego, 118 Cal. 556, 50 Pac. 633; Redlands L. & C. D. Water Co. v. Redlands, 121 Cal. 365, 53 Pac. 843 (1898). 6 Spring Valley Waterworks v. San Francisco, 124 Fed. 574 (1903). 7 Supra. 8 Supra.

water company by its stockholders, and the amount of its bonded and floating indebtedness and the interest thereon, were immaterial factors in the question of reasonableness of rates. But in this case there was no averment in the complaint as to the value of the plant, and no showing before the court as to what this value was; and manifestly neither the amount of the capital stock nor the amount of the bonded indebtedness could supply this omission, and the conclusion which the court reached was that, as the value of the plant was the basis upon which the court was to determine the sufficiency of the compensation, it was essential to present that fact to the court before the water company was entitled to a judgment that the rates were unreasonable. But neither of these cases go to the extent of holding that in determining the value of the property of a corporation neither the capital stock nor bonded indebtedness can be considered. It is doubtless true that in many cases these elements may be excessive or fictitious, and represent speculative, rather than real and substantial, values. But there may be cases where both stock and bonds represent in the market a present actual value in the property of the corporation, and a value that could not be. otherwise very well established. In such a case, what objecttion can there be to giving the evidence such consideration as, under all the circumstances it deserves? It seems to me there can be none."

TOPIC F-FRANCHISE AND GOOD-WILL, WHETHER ENTITLED TO BE CONSIDERED.

362. Value of franchise not considered in estimating rates. It must be clear that in estimating the capital upon which a public service company is entitled to a fair return the value of a franchise enjoyed by the company cannot be considered. The value of the franchise is itself based on the capacity of the company to earn profits; and it becomes greater when the earnings of the company are increased. If, therefore, a high rate of in

come could be justified on account of the great value of the franchise, this fact would in turn enhance the value of the franchise itself and so justify a still higher charge; and there would be no limit to the legal charge of the company until the limit of charge which was in fact possible as a matter of business had been reached.1 In one case2 there is a dictum that the value of the franchise may be considered in arriving at the proper basis for just compensation; but it is submitted that the suggestion is unsound.

§ 363. Value of franchise as basis for taxation.

A different question arises when the value of the property of the company is estimated for purpose of taxation. The franchise is owned by the company, is of value, and would be paid for if the whole business were sold; and it should therefore be taxed.3 This is, of course, a tax on the actual value of the franchise as it exists at any particular time; and the imposition of it is quite consistent with the value of the franchise, being subject to diminution by a diminished income as a result of legislation reducing rates.

8 364. Value of franchise when the property is bought.

Whether when the plant of a public service company is taken by a city, by eminent domain or by contract, compensation is to be made for the franchises of the company is not entirely clear on the authorities. The question should of course be determined according to whether, in view of the purchase or taking, any value remains in the franchise. Although the company may be

1 In Brunswick v. T. W. Dist. v. Maine Water Co., 99 Me. 371, 59 Atl. 537 (1904), much the same idea is expressed by Mr. Justice Savage.

2 Spring Valley Works v. San Francisco, 124 Fed. 574 (1903). It may well be that if a price is paid for the franchise to the governmental authorities granting the franchise that this sum must be accounted a part of the cost of the plant.

3 Brisbane v. Brisbane Tramway Co., 9 Queensland L. J. 67 (1898).