Louisville & N.R. Co. v. Railroad Commission of Alabama

Decision Date05 April 1912
Docket Number266 C.C.,264 C.C.,263 C.C.
Citation196 F. 800
CourtU.S. District Court — Northern District of Alabama

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In the distribution and allowance of expenses between inter and intra business, many objections were interposed to the methods of accounting. It was insisted by respondents that the expenses of overlapping divisions-- that is, those having terminals-- in different states should not be apportioned between the states on the train mileage in each state. But the proof showed that the expense accounts were kept by divisions, and that the relative use in the several states was better reflected by the relative train mileage in the several states than otherwise and the accepted mode of accounting by railroad accountants was by that method, and so it was adopted by the master. The items of depreciation to be deducted were very large. The proofs showed that up to the 30th of June, 1907, the railroads kept no depreciation accounts. As structures or equipment were worn out or replaced, the cost of replacement was charged to the operating expenses. After June, 1907, depreciation accounts as to equipment were required to be kept and were authorized as to way and structure. After this charges to operating expenses to cover improvement account ceased.

The master held that it made no difference in estimating the present value of the reproduction basis how the accounts for depreciation had been kept or paid, that the capital account represented by the structure new, that is at 100 per cent., was necessarily reduced by the depreciation of the property reflecting the investment, and that it had to be kept at par by charges that directly or ultimately must be against the income, and that the adjustment made by complainants which ultimately carried all expenditures of value as a charge into the expenses of operation was correct. The master held that depreciation was not a disposition of part of the profits, but an expense which must be paid before the profits can arise, and that it made no difference whether the instrument of production was used up in a day or year or through a series of years, except in the mere form of the accounting, a single use being chargeable as an operating expense, as coal for fuel, and the annual expense being charged as an expense of the year, as taxes, the use requiring a series of years to exhaust the instrument of production being spread over the accounts of its expected life by annual charges to raise a depreciation fund as a liability against the company until it is credited on the retirement of the instrument with the whole original cost less the salvage value, as in case of bridges, rails, and equipment, and that the accounts of the complainant, being after this method, were correct.

Henry L. Stone, Gregory L. Smith, Sidney J. Bowie, W. A. Colston, and George W. Jones, for complainants.

R. C. Brickell, Atty. Gen., Henry C. Selheimer, and S.D. Weakley, for respondents.

JONES District Judge (after stating the facts as above).

As appears from the statement of facts and the master's reports in these cases, they involve the same principles of law and in general the same state of facts, varying somewhat in details in the different cases. They may, therefore, be disposed of in one opinion. After painstaking consideration of the record in each of them and the arguments of counsel, I have reached the conclusion that the rates complained of must be annulled, first, on the ground that in the classification of the railroads in Alabama for rate-making purposes and in the administration of the statutes each of the complainants were denied the equal protection of the laws; secondly, because the rates on the proof and in view of the value of the property devoted to intrastate business and the returns allowed therefrom by the rate statutes were confiscatory, and deny to complainants that just compensation for the use of their properties to which the Constitution entitles them.

Classification of the Roads.

The classification of the railroads in Alabama in the original act of March 2, 1907, and of the subsequent Eight Group Acts, approved November 23, 1907, is substantially the same; and, as the original act was repealed, it is necessary only to notice that of the later acts. The statutes fix maximum transportation rates on 100 or more of the commodities in common use, and constitute a considerable proportion of the transportation by the railroads of the state. The railroads are divided by name into four classes-- numbered 1, 2, 3, and 4-- and the maximum rates are fixed by schedules to each of said acts for the different commodities for different distances of transportation, whether in car load lots or otherwise. Class 1 is allowed to charge the maximum rate plus 5 per cent. Class 2 is allowed to charge the maximum rate plus 20 per cent. Class 3 is allowed to charge the maximum rate plus 25 per cent. Class 4 is allowed to charge the maximum rate plus 50 per cent. Acts of Alabama 1907, pp. 91-159. A small number of the commodities thus regulated as to rates are not subject to the percentage increase on the maximum rate. By section 2 of said acts it is provided that when any railroad in class 1, or which may thereafter be placed in class 1, shall own or operate any other railroad in whole or in part, or shall own a majority of the stock of another railroad, such railroad whose stock is thus owned or whose road is thus operated shall itself be put in class 1, and be allowed to charge only the rates of that class. The basis upon which the railroads were classed is not disclosed by the act itself, or by the proof adduced in the cases. It is seen that the differential in favor the allowed freight charges between class 1 and class 4 is 45 per cent. of the maximum charge allowed class 1. And the differential in favor of class 3 over class 1 is 25 per cent., and the differential in favor of class 2 over class 1 is 20 per cent. These differences are quite substantial. They are sufficient in many cases to absorb the entire net income available for returns to stockholders.

The power of the government to regulate railroads to preserve the just relation between the public and the corporations serving it is undoubted. The right of the public is to have reasonable and uniform rates. The right of the railroads is to have an equal protection of the laws with citizens generally and fair returns on their investments. Gulf, Colorado & S.F. Ry. v. Ellis, 165 U.S. 150, 17 Sup.Ct. 255, 41 L.Ed. 666; Smyth v. Ames, 169 U.S. 466, 18 Sup.Ct. 418, 42 L.Ed. 819.

The principles governing the right to classify railroads for the purpose of prescribing rates are somewhat similar to those applicable to their classification for levying taxes. In the exercise of this right, in either respect, however, the classification must have regard to, and be based on 'some real and substantial distinction bearing a reasonable and just relation to the things in respect to which such classification is imposed. ' Gulf, Colorado & S.F. Ry. v. Ellis, supra; Southern Railway v. Greene, 216 U.S. 417, 30 Sup.Ct. 291, 54 L.Ed. 536, 17 Ann.Cas. 1247. Rates on railroads are intended to cover operating expenses and returns to stockholders. Whether or not a given charge for a given service is proper must be determined after ascertaining whether the charge is reasonable in itself by the cost or expense to the owner in rendering the service and the income derived thereon from a given rate, and whether when taken with its income from all other rates the carrier receives a just return upon the property employed in the public service. The different situations and conditions under which different roads are operated justify different rates on them, but whenever railroads are substantially in the same class and conducted under the same surroundings, with the same hazards and drawbacks in their business, then the rates fixed by law upon them must be the same, and discriminations between them in this respect must be based upon some real substantial difference and not by reason of arbitrary selection, whereby burdens are placed upon one and benefits conferred upon another when relatively the different roads occupy the same substantial relation; otherwise equality before the law would be a myth in many cases, and the equal protection of the laws would consist in sound, rather than in substance. It may be conceded that the Legislature for rate-making purposes may set apart and classify railroads by name merely. Such exercise of power is upheld 'upon the idea that there has been precedent investigation, or that there exists such a familiarity with the characteristics and subjects of classification as enables the Legislature to classify by name on proper distinction. ' Minneapolis & St. Louis Rd. Co. v. Minnesota, 186 U.S. 257, 22 Sup.Ct. 900, 46 L.Ed. 1151. The grounds of the classification must be such as are discoverable and understood to be reasonable on full investigation by competent persons, otherwise every and any legislative classification would be unimpeachable, no matter how grossly arbitrary it might appear to the understanding.

The complainants insist that the classification of the railroads for rate-making purposes under the statutes referred to is arbitrary, and unjustly discriminatory, and is not based on any just...

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