XI

"A REASONABLE RETURN UPON THE VALUE OF THE PROPERTY DEVOTED TO THE PUBLIC SERVICE”

In the words which form the title to this Chapter, Mr. Charles A. Prouty, speaking for the Interstate Commerce Commission, on February 22, 1911, stated the problem presented to the Commission by the petition of the Trunk Lines that they should be allowed to advance their rates. "We are to determine," said the Commission, "whether the net return of these carriers upon the value of their property devoted to the public service will be sufficient without an advance in their rates."

After an exhaustive review of the testimony presented on behalf of and against the railroads, the Commission reached the conclusion that these defendants have not established such a need for additional revenue as justifies, at this time, an increase in these rates. This decision was, however, without prejudice to the railroads.

It has been several times stated in the course of this discussion that in view of the complex character of this problem, nothing but an actual test can satisfactorily determine the financial re

sults from the operations of these several carriers. There is no evidence before us which establishes the necessity for higher rates. The probability is that increased rates will not be necessary in the future. In view of the liberal returns received by these defendants in the past ten years, they should be required to show, with reasonable certainty, the necessity before the increase is allowed. If actual results should demonstrate that our forecast of the future is wrong, there might be ground for asking a further consideration of this subject.

The railroads have again petitioned to be allowed to make a five per cent. advance in all rates in Official Classification Territory, north of the Ohio and east of the Mississippi rivers, an advance equivalent to a $40,000,000 increase in net revenues. If their officials were not convinced that the "actual test" asked for by the Commission had demonstrated that the Commission was wrong, the railroads would not make attempt to increase their rates. What, then, is the nature of this experience of the last three years, upon which the railroads must rely if they are to induce the Commission to reconsider its decision of 1911?

This question must be answered with reference to the evidence and reasoning upon which the Commission's former refusal was based. In substance this was as follows: The Pennsylvania, Baltimore and Ohio, and New York Central are typical trunk-line railroads. Their freight rev

enues were nearly one-half of the total freight revenue in Official Classification Territory. "Whatever rate might reasonably be imposed upon these three systems must be held to be a reasonable charge for that service by all lines."

The Commission defined a reasonable return upon the property of these three companies to be a margin of profits equivalent to certain earnings upon their common stocks. For the Baltimore and Ohio, it was held that "the sum remaining after fixed charges, including as a fixed charge the dividend upon the preferred stock, should be equivalent to between 7 and 8 per cent. upon the common stock," or about $2,280,000-11⁄2 per cent. on the present common stock. For the Pennsylvania, a margin of $18,000,000 over common-stock dividends was held not to be unreasonable. For the New York Central, the Commission found that, after allowing for an expected increase in operating expenses due to the higher wage scale which went into effect in 1910, the Company could pay its 6 per cent. dividends with about $1,500,000 to spare. For several reasons; an admitted inflation of the capital of the constituent companies and of the New York Central at the time of the consolidation in 1869, amounting to $57,000,000, on which

stock issued without consideration to the company, $120,000,000 in dividends had been paid, and not omitting to mention the fact that the New York Central was burdened with unprofitable leases, losses on which the public should not be expected to make up to its stockholders in higher rates, and having regard, finally, to the exceptionally strong position of certain of the New York Central's subsidiaries, the Commission reached the conclusion that this margin of $1,500,000 over the dividend requirement was not so small as to warrant an increase of freight rates in order to increase it.

We have, then, this standard by which to determine the reasonableness of rates in Official Classification Territory. If it appears that existing rates now yield these three companies substantially less than the amount of profits which the Interstate Commerce Commission, in 1911, declared to be reasonable, then the carriers will have established their case. If, on the other hand, the dividends of these three typical companies, notwithstanding higher operating costs and increased fixed charges, are still protected by the same relative margins of safety as those which the Commission considered adequate in 1911, then the railroads have lost their case before they open it.

The facts of railway profits for the last year for which statistics are available are as follows for each of the three companies under examination:

Pennsylvania Railroad Company-Year Ending December 31,

Baltimore and Ohio-Year Ending June 30, 1912:

Balance of Net Income or for Preferred Divi

New York Central and Hudson River Railroad-Year Ending

December 31, 1912:

Balance of Net Income over all charges...

Dividends (5 per cent.)....

Balance.....

Amount required to pay 6 per cent., the stand

$13,879,837

11,136,465

$ 2,743,372

ard accepted by the Commission in 1911.. $13,563,558 Balance-over 6 per cent......

316,279

Summarized, these results are as follows:

Balance of Net Earnings over charges accepted by the Commis

Balance of Net Earnings over charges for last fiscal year:

Baltimore and Ohio.

Pennsylvania....

New York Central.

$ 2,421,927 14,955,918 316,279