[279 U.S. 461, 462] Messrs. Daniel N. Kirby, of St. Louis, Mo., Frederick H. Wood, of New York City, Robert H. Kelley, of Houston, Tex., and Leslie Craven, of Chicago, Ill., for St. Louis and O'Fallon Ry., et al.
[279 U.S. 461, 468] The Attorney General and Mr. George W. Wickersham, of New York City, for the United States.
[279 U.S. 461, 473] Messrs. Walter L. Fisher, of Chicago, Ill., and P. J. Farrell and Oliver E. Sweet, both of Washington, D. C., for the Interstate Commerce Commission.
[279 U.S. 461, 478] Mr. Donald R. Richberg, of Chicago, Ill., for National Conference on Valuation of American Railroads, as amicus curiae, by special leave of Court.
Mr. Justice McREYNOLDS delivered the opinion of the Court.
These are cross-appeals from the final decree of the District Court, Eastern Missouri, three judges sitting, in a suit to annul an Interstate Commerce Commission order, dated February 15, 1927, which directed St. Louis & O'Fallon Railway Company to place in a reserve fund one-half of its determined excess income for the years 1920 (ten months), 1921, 1922, and 1923 (that is, half of the sum by which the net railway operating income for each of those years exceeded 6 per cent. of the ascertained value of property devoted to public service); and to pay to the Commission the remaining one-half, with 6 per cent. interest, beginning four months after termination of the year; i. e., May 1, 1921, 1922, 1923, and 1924
Section 15a, added to the Interstate Commerce Act by Transportation Act 1920, contains nineteen paragraphs (49 USCA 15a). Of those specially important here, 1, 2, 3, 5, 7, and 8 are copied in the margin;* 4 and 6 follow:
After an investigation instituted under section 15a, May 14, 1924, for the purpose of determining incomes received by St. Louis & O'Fallon Railway Company (the O'Fallon) and Manufacturers' Railway Company (the Manufacturers'), asserted to be parts of one system, for the years 1920- 1923, the Commission found: (1) Although the stock of both corporations was mostly owned by the Adolph Busch estate, and their principal officers were the same, they were not carriers operated under common control and management as a single system within paragraph 6. (2) The Manufacturers' had received no excess operating income: (3) The value of the O'Fallon's property devoted to public service in 1920 (ten months) was $856,065; in 1921, $875,360; in 1922, $978,874; in 1923, $997,236; and during each of those years it received net operative income exceeding 6 per cent. upon the stated valuation.
The above-described recapture order followed.
The cause is properly here under the Judicial Code, as amended by Act of February 13, 1925 (U. S. C. tit, 28, 345 (28 USCA 345)):
The Act of October 22, 1913 (38 Stat. 219, 220), transferred to District Courts the jurisdiction granted to the Commerce Court by Act of June 18, 1920 (36 Stat. 539), and provided for review by this court of causes embraced therein. The jurisdiction for the Commerce Court included:
Paragraph (4), 238, applies to all those causes formerly cognizable by the Commerce Court and reviewable here. The words 'other than for the payment of money' were taken from clause first, Act of 1910, above quoted, and, as there, they delimit the trial court's jurisdiction. They do not inhibit review here of any cause formerly cognizable by the Commerce Court. Moreover, the order under consideration was not merely for payment of money; and the proceeding below was to set aside, not to enforce it.
Wisconsin Railroad Commission v. Chicago, Burlington & Quincy R. Co., 257 U.S. 563 , 42 S. Ct. 232, 22 A. L. R. 1086, and Dayton- Goose [279 U.S. 461, 483] Creek Railway Co. v. United States, 263 U.S. 456 , 44 S. Ct. 169, 33 A. L. R. 472, point out the general purpose of the Transportation Act 1920, and uphold the validity of section 15a.
The Manufacturers' is a switching road with 30 miles of track within St. Louis, Mo. The O'Fallon-a coal-carrying road-has 9 miles of main line, all in Illinois, and this connects with the Terminal Railroad at East St. Louis. Through the latter deliveries are made to sundry points in St. Louis, some of which are on the Manufacturers' line. 'The distance between the railroad of the O'Fallon and the railroad of the Manufacturers' is about 12 miles, and all communication by rail between the two properties is effected over the tracks of the Terminal, including a bridge over the Mississippi River.' Both the Commission and the District Court held that the record failed to show these two roads were under common control and management and operated as a single system within the meaning of paragraph 6. We accept their conclusion.
The Commission directed the O'Fallon to pay 6 per cent. interest on the recaptured one-half of its ascertained excess net railway operating income beginning four months from the end of the year during which the excess accrued (paragraph 6). The District Court rightly ruled that, as the carrier made bona fide denial of any excess under circumstances sufficient to justify a contest, no interest should have been imposed for any time prior to the final order. Not until then could the carrier know what, if anything, it should pay.
Also, we think the District Court rightly rejected the claim that excess earnings were not recapturable unless and until the Commission had fixed a general level of rates intended to yield fair return upon the aggregate value of carrier property either as a whole, or in some prescribed rate or territorial group. Congress, of course, [279 U.S. 461, 484] realized that final valuations would require prodigious expenditure of time and effort; but the language concerning recapture indicates that prompt action was expected. Practical application of paragraphs 5 and 6 does not necessarily depend upon prior compliance with paragraphs 2 and 3. The act should be construed so as to carry out the legislative purpose. The proviso of paragraph 3 prescribing action to be taken during two years beginning March 1, 1920, and the clause of paragraph 6 excepting the income of certain roads prior to September 1, 1920, are hardly compatible with this claim by the carrier.
Paragraph 4, 15a, directs that, in determining values of railway property for purposes of recapture, the Commission 'shall give due consideration to all the elements of value recognized by the law of the land for rate-making purposes, and shall give to the property investment account of the carriers only that consideration which under such law it is entitled to in establishing values for rate-making purposes.' This is an express command; and the carrier has clear right to demand compliance therewith. United States ex rel. Kansas City Southern Railway Co. v. Interstate Commerce Commission, 252 U.S. 178 , 40 S. Ct. 187.
Thirty years ago, Smyth v. Ames announced (546 of 169 U. S. (18 S. Ct. 434)): 'We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a cor- [279 U.S. 461, 485] poration maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public. And in order to ascertain that value, the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the rrobable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. On the other hand, what the public is entitled to demand is that no more be exacted from it for the use of a public highway than the services rendered by it are reasonably worth.'
In Southwestern Bell Telephone Co. v. Public Service Commission (page 287 of 262 U. S. (43 S. Ct. 546)) we said: 'It is impossible to ascertain what will amount to a fair return upon properties devoted to public service without giving consideration to the cost of labor, supplies, ect., at the time the investigation is made. An honest and intelligent forecast of probable future values made upon a view of all the relevant circumstances, is essential. If the highly important element of present costs is wholly disregarded such a forecast becomes impossible. Estimates for tomorrow cannot ignore prices of today.'
The doctrine above stated has been consistently adhered to by this court.
The report of the Commission is long and argumentative. Much of it is devoted to general observations relative to the method and purpose of making valuations; many objections are urged to doctrine approved by us; and the superiority of another view is stoutly asserted. [279 U.S. 461, 486] It carefully refrains from stating that any consideration whatever was given to present or reproduction costs in estimating the value of the carrier's property. Four dissenting Commissioners declare that reproduction costs were not considered; and the report itself confirms their view. Two of the majority avow a like understanding of the course pursued.
The following from the dissenting opinion of Commissioner Hall, concurred in by three others, accurately describes the action of the Commission:
In the exercise of its proper function, this court has declared the law of the land concerning valuations for rate-making purposes. The commission disregarded the approved rule and has thereby failed to discharge the definite duty imposed by Congress. Unfortunately, proper heed was denied the timely admonition of the minority-'The function in this commission is not to act as an arbiter in economics, but as an agency of Congress, to apply the law of the land to facts developed of record in matters committed by Congress to our jurisdiction.'
The question on which the Commission divided is this: When seeking to ascertain the value of railroad property for recapture purposes, must it give consideration to current, or reproduction, costs? The weight to be accorded thereto is not the matter before us. No doubt there are some, perhaps many, railroads the ultimate value of which should be placed far below the sum necessary for reproduction. But Congress has directed that values shall be fixed upon a consideration of present costs along with all other pertinent facts; and this mandate must be obeyed.
It was deemed unnecessary by the court below to determine whether the Commission obeyed the statutory direction touching valuations since the order permitted the O'Fallon to retain an income great enough to negative any suggestion of actual confiscation. With this we [279 U.S. 461, 488] cannot agree. Whether the Commission acted as directed by Congress was the fundamental question presented. If it did not, the action taken, being beyond the authority granted, was invalid. The only power to make any recapture order arose from the statute.
The judgment of the court below must be reversed. A decree will be entered here annulling the challenged order.
Mr. Justice BUTLER took no part in the consideration or determination of this cause.
Mr. Justice BRANDEIS (dissenting).
The main question for consideration is that of statutory construction. By Transportation Act 1920, February 28, 1920, c. 91, 15a, 41 Stat. 456, 488 (49 USCA 15a), Congress delegated to the Interstate Commerce Commission the duty to establish and maintain rates which will yield 'a fair return upon the aggregate value of the railway property' of the United States. By paragraph 4 thereof, it directs that in ascertaining value the Commission shall 'give due consideration to all the elements of value recognized by the law of the land for rate-making purposes,' and shall 'give to the property investment account ... only that consideration which under such law it is entitled to in establishing values for rate-making purposes.' The report of the Commission, which accompanies the order challenged, declares: 'In the methods of valuation which we have followed in this proceeding we have endeavored to give heed to this direction (that contained in paragraph 4). ...' Excess Income of St. Louis & O'Fallon Ry. Co., 124 I. C. C. 3, 19. Speaking for the dissenting members, Mr. Commissioner Hall said: 'If the law needs change, let those who made it change it. Our duty is to [279 U.S. 461, 489] apply the law as it stands.' Pages 63, 64. And Mr. Commissioner Aitchison added: 'If we anticipate grave results will follow, our responsibility will be fully met if we suggest to the Congress, under our statutory powers to recommend new legislation to that body, the enactment of a rule for rate making under the commerce clause which will have no such unfavorable effects.' Page 64.
Section 15a makes no specific reference either to the original cost of the property, or to prudent investment, or to current reproduction cost, or to the then existing price level. Section 19a (49 USCA 19a)-the valuation provisions of the Act of 1913-to which section 15a refers, directs the Commission to report, among other things, 'in detail as to each piece of property, ... the original cost to date, the cost of reproduction new, the cost of reproduction less depreciation'; and also 'other values, and elements of value.' After the enactment of section 15a and before entry of the order challenged, it was held in Southwestern Bell Telephone Co. v. Public Service Commission, 262 U.S. 276 , 43 S. Ct. 544, 31 A. L. R. 807, a case arising under a state law, that the rate base on which a public utility is constitutionally entitled to earn a fair return is the then actual value of the property used and useful in the business, not the original cost or the amount prudently invested in the enterprise. The government concedes that current reproduction cost is admissible as evidence to show present value under section 15a. The carrier concedes now that neither Congress nor the common law made current reproduction cost the measure of value. The question on which the Commission divided is this: Did Congress require the Commission, when acting under section 15a, to give, in all cases and in respect to all property, some, if not controlling, effect to evidence establishing the estimated current cost of reproduction? Or did Congress intend to leave to the Commission the authority to determine, as in passing upon other con- [279 U.S. 461, 490] trovered issued of fact, what weight, if any, it should give to that evidence?
The O'Fallon contends, among other things, that the order is confiscatory. The claim is that the order left to the company a return of only 4.35 per cent. upon the value ascertained in accordance with the rule declared in the Southwestern Bell Case and McCardle v. Indianapolis Water Co., 272 U.S. 400 , 47 S. Ct. 144. If this were true, it would be immaterial whether Congress purported to authorize the course pursued by the Commission. But the fact is that in each of the recapture periods the earnings were so large as to leave, after making the required payments to the Commission, about 8 per cent. on what the carrier alleged was the fair value of the property. The O'Fallon argues that, since the statute, and the order required it to hold as a reserve one-half of the excess over 6 per cent., it is deprived of that property. This is not true. The requirement that one-half of the earnings in excess of 6 per cent. shall be retained by the carrier until the reserve equals 5 per cent. of the value of the railroad does not deprive the carrier of any property. It merely regulates the use thereof. Compare Kansas City Southern R. Co. v. United States, 231 U.S. 423, 453 , 34 S. Ct. 125, 52 L. R. A. (N. S.) 1. The provision is one designed to secure financial stability, and is similar to those prescribing sinking funds, depreciation, and other appropriate accounts. 1 Congress may regulate the use of railroad property so as to insure financial as well as physical stability. Both are essential to the safety and the service of the public. In Dayton-Goose Creek R. Co. v. United [279 U.S. 461, 491] States, 263 U.S. 456, 486 , 44 S. Ct. 169, 33 A. L. R. 472, where the facts were in this respect identical with those in the case at bar, the constitutional validity of the order was sustained. If the failure to give to the evidence of current reproduction costs the effect claimed for it by the O'Fallon was error, it is not because the carrier's constitutional rights have been invaded, but because the Commission failed to observe a rule prescribed by Congress for determining the amounts to be recaptured and reserved.
The claim of the O'Fallon is in substance that, since construction costs were higher during the recapture periods than in 1914, the order should be set aside, because the Commission failed to find that the existing structural property and equipment which had been acquired before June 30, 1914, was worth more than it had been then. 2 The Commission undertook, as will be shown, to find present actual value, and, in so doing, both to follow the direction of Congress and to apply the rule declared in the Southwestern Bell Case. It is true that this court there declared that current reconstruction cost is an element of actual value, and that Congress directed the Commission 'to give due consideration to all the elements of value recognized by the law of the land for rate- making purposes.' But while the act required the Commission to consider all such evidence, neither Congress nor this court required it to give to evidence of reconstruction cost a mechanical effect or artificial weight. They left untrammeled its duty to give to all relevant evidence such probative force as, in its judgment, the evidence inherently possesses. The Commission concluded that in respect to the evidence of reproduction costs the differences between the Southwestern Bell Case and that at bar were [279 U.S. 461, 492] such as to lead to different results in the two cases. It did so mainly because 'in the administration of the valuation and recapture provisions,' ascertainment of value 'is affected by a vast variety of considerations that either do not enter into, or are less easily perceived in, problems incident to the regulation of local public utilities.' Page 27. In my opinion the conclusions of the Commission are well founded. To make clear the reasons, requires consideration of the function of the Commission in applying section 15a and of the problems with which it is confronted.
First. The Commission is a fact-finding body. The question whether it must give to confessedly relevant facts evidential effect is solely one of adjective law. Statutes have sometimes limited the weight or effect of evidence. They have often created rebuttable presumptions and have shifted the burden of proof. But no instance has been found where under our law a fact-finding body has been required to give to evidence an effect which it does not inherently possess. Proof implies persuasion. To compel the human mind to infer in any respect that which observation and logic tells us is not true interferes with the process of reasoning of the fact-finding body. It would be a departure from the unbroken practice to require an artificial legal conviction where no real conviction exists. 3
An arbitrary disregard by the Commission of the probative effect of evidence would, of course, be ground for setting aside an order, as this would be an abuse of discretion. Orders have been set aside because entered without evidence;4 or because matters of fact had been considered [279 U.S. 461, 493] which were not in the record;5 or because the Commission excluded from consideration facts and circumstances which ought to have been considered; 6 or because it took into consideration facts which could not legally influence its judgment. 7 But no case has been found in which this court has set aside an order on the ground that the Commission failed to give effect to evidence which seemed to the court to be of probative force, or on the ground that the Commission had drawn from the evidence an inference or conclusion deemed by the court to be erroneous. 8 On [279 U.S. 461, 494] the contrary, findings of the Commission involving the appeciation or effect of evidence have been treated with the deference due to those of a tribunal 'informed by experience' and 'appointed by law' to deal with an intricate subject. Illinois Central R. Co. v. Interstate Commerce Commission, 206 U.S. 441, 454 , 27 S. Ct. 700. Unless, therefore, Congress required the Commission, not only to consider evidence of reconstruction cost in ascertaining values for rate-making purposes under section 15a, but also to give, in all cases and in respect to all property, some weight to evidence of enhanced reconstruction cost, even if that evidence was not inherently persuasive, the Commission was clearly authorized to determine for itself to what extent, if any, weight should be given to the evidence; and its findings should not be disturbed by the court, unless it appears that there was an abuse of discretion.
Second. While current reproduction cost may be said to be an element in the present value of property, in the sense that it is 'evidence properly to be considered in the ascertainment of value,' Standard Oil Co. v. Southern Pacific Co., 268 U.S. 146, 156 , 45 S. Ct. 465, 467 (69 L. Ed. 890), it is clear that current cost of reproduction higher than the original cost does not necessarily tend to prove a present higher value. Often the fact of higher reconstruction cost is without any influence on present values. It is common knowledge that the current market value of many office buildings and residences constructed prior to the World War have failed to reflect the greatly increased building costs of recent years, although the need of new buildings of like character was being demonstrated by the large volume of con- [279 U.S. 461, 495] struction at the higher price level. Many railroads built before the World War have never been worth as much as their original cost, because high construction cost combined with adverse operating conditions and limited traffic have at all times prevented their earning, despite reasonable rates, a fair return on the original cost. The Puget Sound extension of the Chicago, Milwaukee and St. Paul is a notable example. 9 Many branches, and indeed whole lines of railroad, have been scrapped since 1920. Abandonment of 2,439 miles of railroad was authorized under paragraph 18 of section 1 of the Interstate Commerce Act, 49 USCA 1(18), between 1920 and 1925, and in the three fol- [279 U.S. 461, 496] lowing years 2,010 miles more. 10 These properties had, in the main, become valueless for transportation, either because traffic ceased to be available, or because competitive means of transportation precluded the establishment of remunerative rail rates. 11 Obviously, no one would contend that their actual value just before abandonment was what it originally cost to construct them or what it would then have cost to reconstruct them.
Third. The terms of section 15a and its legislative history preclude the assumption that Congress intended by paragraph 4 to deny to the Commission in respect to evidence of reconstruction cost the discretion commonly exercised in determining what weight, if any, shall be given to an evidential fact. In 1920, no fact was more prominent in the mind of the public and of Congress than that the cost of living was far greater than that prevailing when the existing railroads were built. 12 But neither in Transportation Act 1920, nor in any committee report, is there even a suggestion that the Commission would be required [279 U.S. 461, 497] to give to that fact any effect in ascertaining values for rate-making purposes under section 15a. If it had been the intention of Congress to compel the Commission to increase values for rate-making purposes because the price level had risen, it would naturally have incorporated such a direction in the paragraph. On the other hand, the committee reports and the debates show that the opinion was quite commonly held that the actual values were less than the property investment account appearing on the books of the carriers;13 and the proposal made by the railroads that the investment account be accepted as the measure of value was resisted as being excessive. 14 The property [279 U.S. 461, 498] investment account in 1920 was about 19 billions of dollars. 15 The then reproduction cost of the railroads, applying index figures to estimated actual cost, was over 40 billions. 16 It is inconceivable that Congress, after rejecting property investment account as excessive, intended by section 15a to make mandatory on the Commission the consideration of elements which would give a valuation double that which had been rejected. The insertion in section 15a of the provision that the Commission 'shall give to the property investment account of the carriers only that consideration which under such law it is entitled to in establishing values for rate-making purposes,' and the rejection of other proposed measures of value, show that Congress intended not to impose restrictions upon the discretion of the Commission. 17
Congress did intend to provide a return on the existing railroad property which should be only slightly more than that which had been enjoyed during the six preceding years. To have required that the then price level be reflected in the values to be fixed under section 15a would have resulted in a rate base of double the property investment account of the carriers; for the cost of living was then about double prewar prices. The prescribed fair return [279 U.S. 461, 499] applied to such a rate base would have produced more than double the average net earnings from operation of the several properties during the three years preceding federal control; more than double and amount which the carriers agreed to accept under the Federal Control Act, March 21, 1918, c. 25, 1, 40 Stat. 451, as fair compensation for the use of their property; more than double the guaranty provided by Transportation Act 1920, 209 (49 USCA 77), for the six-month period after the surrender of control. The sum which the railroads had thus earned net in those six years equalled 5.2 per cent. on the property investment account, as carried on their books.
In making provision for a fair return, the main purpose was not to increase the earnings of capital already invested in railroads, but to attract the new capital needed for improvement or extension of facilities. 18 This was to be accomplished by raising the rate or return from 5.2 per cent. to 5.5 per cent. (Senate Reports, vol. 1, No. 304, 66th Cong. 1st Sess.):
The means by which the bill was to accomplish the desired end are thus stated in the report:
Either increase in the rate of return or increase of the base on which that return is measured would have served to adjust compensation to higher price levels. The adoption by Congress of the increase in the return, as the means of compensating for the decreased purchasing power of the dollar, precludes the assumption that it intended that the valuation should reflect that lessened pur- [279 U.S. 461, 501] chasing power. By explicitly choosing the former Congress implicitly rejected the latter. 19 For to have allowed an increase in both would have gone beyond adjusting earnings to increased costs and have made this increase a mere pretext for allowing unwarranted profits to the railroads. The proceedings which led to the passage of the act make it clear that Congress intended no such result.
Fourth. The declared purpose of Congress in enacting section 15a was the maintenance of an adequate national system of railway transportation, capable of providing the best possible service to the public at the lowest cost consistent with full justice to the private owners. Following the course consistently pursued by this court in applying other provisions of the Interstate Commerce Act, Texas & Pacific Ry. Co. v. Interstate Commerce Commission, 162 U.S. 197, 211 , 219 S., 16 S. Ct. 666; New England Divisions Case, 261 U.S. 184, 189 , 190 S., 43 S. Ct. 270; Dayton-Goose Creek Ry. Co. v. United States, 263 U.S. 456, 478 , 44 S. Ct. 169, 33 A. L. R. 472, the Commission construed section 15a in the light of the declared purpose of Congress and of the economic factors involved. From its wide knowledge of actual conditions and its practical experience in rate making, it concluded that to give effect to enhanced reproduction costs would defeat that purpose. Page 27.
It knew that the value for rate-making purposes could not be more than that sum on which a fair return could be earned by legal rates, and that the earnings were [279 U.S. 461, 502] limited both by the commercial prohibition of rates higher than the traffic would bear and the legal prohibition of rates higher than are just and reasonable. It knew that a ratebase fluctuating with changes in the level of general prices would imperil industry and commerce. It knew that the adoption of a fluctuating rate-base would not, as is claimed, do justice to those prewar investors in railroad securities who were suffering from the lessened value of the dollar, since the great majority of the railroad securities are represented by long-term bonds or the guaranteed stocks of leased lines which bear a fixed return, and that only the stockholders could gain through the greater earnings required to satisfy the higher rate base. It recognized that an adequate national system of railways, so long as it is privately owned, cannot be provided and maintained without a continuous inflow of capital; that, 'obviously, also, such an inflow of capital can only be assured by treatment of capital already invested which will invite and encourage further investment' (Page 30); and that, as was said in Dayton-Goose Creek Ry. Co. v. United States, 263 U.S. 456, 481 , 44 S. Ct. 169, 173 (68 L. Ed. 388, 33 A. L. R. 472): 'By investment in a business dedicated to the public service the owner must recognize that, as compared with investment in private business, he cannot expect either high or speculative dividends but that his obligation limits him to only fair or reasonable profit.' 20 [279 U.S. 461, 503] The conviction that there would in time be a fall in the price level was generally held. As a fluctuating rate base would thus directly imperil industry and commerce and investments made at relatively high price levels during and since the World War,21 would tend to increase the cost of new money required to supply adequate service to the public, and would discourage such investment, the Commission concluded that Congress could and have intended to require it to measure the value or rate base by reproduction cost, since this would produce a result contrary to its declared purpose. And, as confirming its construction of section 15a, the Commission showed that, with the stable rate base which it had accepted as the basis for administering the act, the aim of Congress to establish an adequate national system had been attained. It pointed out that: 'During the period 1920-1926, inclusive, the investment in railroad property increased by 4 billions of dollars. A substantial part of this money was derived from income, but much of it was obtained by the sale of new securities. The market for railroad securities since the passage of the transportation act, 1920, has steadily improved and the general trend of interest rates has been downward. The credit of the railroads in general is now excellent. ...' Page 33.
Fifth. Other considerations confirm the construction given by the Commission to the phrase 'value for rate making purposes,' as used in section 15a. In condemnation proceedings, the owner recovers what he has lost by the [279 U.S. 461, 504] taking of the property, Boston Chamber of Commerce v. Boston, 217 U.S. 189, 195 , 30 S. Ct. 459, and such loss must be determined, 'not merely with reference to the uses to which it is at the time applied, but with reference to the uses to which it is plainly adapted.' Mississippi & R. Boom Co. v. Patterson, 98 U.S. 403 , 408 (25 L. Ed. 206). Compare Louisville & Nashville R. R. Co. v. Barber Asphalt Co., 197 U.S. 430, 435 , 25 S. Ct. 466. But the actual value of a railroad- its value for rate-making purposes under section 15a-may be less than its condemnation value. As was said in Southern Ry. Co. v. Kentucky, 274 U.S. 76, 81 , 82 S., 47 S. Ct. 542, 544 (71 L. Ed. 934) a case involving state taxation: 'The value of the physical elements of a railroad-whether that value be deemed actual cost, cost of reproduction new, cost of reproduction less depreciation or some other figure-is not the sole measure of or guide to its value in operation. Smyth v. Ames, 169 U.S. 466 , 547 (18 S. Ct. 418). Much weight is to be given to present and prospective earning capacity at rates that are reasonable, having regard to traffic available and competitive and other conditions prevailing in the territory served.'
Value has been defined as the ability to command the price. 22 Railroad property is valuable as such only if, and so far as, used. If rates are too high, the traffic will not move. Hence the value or rate base is necessarily dependent, in the first place, upon the commercial ability of the property to command the rates which will yield a return in excess of operating expenses and taxes; and such value cannot be higher than the sum on which, with the [279 U.S. 461, 505] available traffic, the fair return fixed under section 15a can be earned. Persistent depression of rates or lessening volume of traffic, from whatever cause arising, ordinarily tends to lower actual values of railroad properties. It follows that, since the Commission is required by the rule of Smyth v. Ames, reaffirmed in the Southwestern Bell Case, to determine the rate base under section 15a by actual value as distinguished from prudent investment, it must, in making the finding, consider the effect upon value of both the commercial and the legal limitations upon rates, and, among other things, the effect of competition upon the volume of traffic.
Recent experience affords striking examples of commercial limitations upon rates. In Ex parte 74, Increased Rates, 1920, 58 I. C. C. 220, the Commission sought to establish rates which would yield 6 per cent. upon the aggregate values of the railroads in the several groups. The carriers claimed as the aggregate value $20,040,572,611-that amount being carried on their books as the cost of road and equipment. The Commission fixed the value about 5 per cent. lower-at $18,900,000,000. In order to produce on that sum net earnings equal to 6 per cent., it increased freight rates, in the eastern group, 40 per cent. over the then existing rates; in the southern group, 25 per cent.; in the western group 35 per cent.; and, in the mountain-Pacific group, 25 per cent. 23 As a result of these increases, the average gross revenue per ton mile in 1921 was in the eastern district 96.1 per cent. greater than for the fiscal year ended June 30, 1914; in the southern, 61.4; in the western, 59.3; and in the United States as a whole, 76.2. Reduced Rates, 1922, 68, I. C. C. 676, 702. [279 U.S. 461, 506] Passenger rates were subjected by the order in Ex parte 74, to a flat increase of 20 per cent., and surcharges were added. Page 242 of 58 I. C. C.