BEFORE THE
City of Spokane, Spokane Chamber of Commerce of ^
Spokane, Spokane Jobbers' Association, and the
County *of Spokane,
Petitioners and Complainants,
vs.
Northern Pacific Railway Company, Great Northern
Railway Company, The Union Pacific Railroad
Company, Oregon Railroad d Navigation Company,
Spokane Falls d Northern Railway Company,
Defendants.
Canadian Pacific Raihvay Company, Chicago, Burling¬
ton d Quincy Railway Company, Chicago d North¬
western Railway Company, Lake Shore d Michigan
Southern Railway Company, The New York Central
d Hudson River Railroad Company, Pittsburg, Fort
Wayne d Chicago Railway Company, Pennsylvania
Railioay Company, New York, New Haven d Hart¬
ford Railroad Company, and Boston d Maine Rail¬
road Company,
Defendants by Order of Commission.
Pacific Coast Jobbers d Manufacturers' Association,
The Portland Chamber of Commerce, Merchants'
Protective Association of Seattle, and Tacoma Traf¬
fic Association,
Intervenors.
J
>
REPLY BRIEF OF PETITIONERS AND COMPLAINANTS
H. M. Stephens, Attorney for the Petitioners and Com¬
plainants.
Lawrence Hamblen, Corporation Counsel of the City of
Spokane, and Frank Allen, Assistant Corporation Counsel
of the City of Spokane, for the City of Spokane.
R. M. Barnhart, Prosecuting Attorney of Spokane
County, for the County of Spokane.
THE INLAND PRINTING CO., SPOKANE.
"> > "> t -»
Bll
BEFORE THE , i
" * * " " ^ l> l1! *»
r,,
City of Spokane, Spokane Chamber of Commerce of ^
Spokane, Spokane Jobbers' Association, and the
County K)f Spokane,
Petitioners and Complainants,
vs.
Northern Pacific Railway Company, Great Northern
Railway Company, The Union Pacific Railroad
Company, Oregon Railroad d Navigation Company,
Spokane Falls d Northern Railivay Company,
Defendants.
Canadian Pacific Railway Company, Chicago, Burling¬
ton ct- Quincy Railway Company, Chicago & North¬
western Railway Company, Lake Shore d Michigan
Southern Railway Company, The New York Central
d Hudson River Railroad Company, Pittsburg, Fort
Wayne d Chicago Railway Company, Pennsylvania
Railway Company, New York, New Haven d Hart¬
ford Railroad Company, and Boston d Maine Rail¬
road Company,
Defendants by Order of Commission.
Pacific Coast Jobbers d Manufacturers' Association,
The Portland Chamber of Commerce, Merchants'
Protective Association of Seattle, and Tacoma Traf¬
fic Association,
Intervenors. y
REPLY BRIEF OF PETITIONERS AND COMPLAINANTS
H. M. Stephens, Attorney for the Petitioners and Com¬
plainants.
Lawrence Hamblen, Corporation Counsel of the City of
Spokane, and Frank Allen, Assistant Corporation Counsel
of the City of Spokane, for the City of Spokane.
R. M. Barnhart, Prosecuting Attorney of Spokane
County, for the County of Spokane.
TMI INLAND PRINTING CO., SPOKANE.
vVv V-^
2
REPLY BRJ£fr.QPP£T:IIiftNeRS AND COMPLAINANTS ,
It is impossible* within reasonable limits, to review in
detail the brrefs:oT*flffi''de'fdndants and intervenors, or any
or either of them.
It is hoped, however, that this reply brief will, in con¬
nection with the other briefs of complainants, be sufficient
to meet and refute the positions and contentions of defend¬
ants.
It is significant that notwithstanding the Canadian Pacific
Railway Company has been made a party to this proceeding,
it has not appeared at any hearing and it is not contesting
this proceeding and by its absence and silence has admitted
that the complainants are entitled to the relief they are
asking.
It should be assumed and is a reasonable assumption
that it would be satisfactory to the Canadian Pacific and
its connecting lines for this Commission to give and to grant
to the complainants herein all the relief which they are
seeking.
If a terminal rate be satisfactory to the Canadian Pacific,
it must be deemed a reasonable and fair rate, and a reason¬
able rate for the original defendants in this proceeding.
That single fact warrants this Commission in granting
the full measure of the relief that the complainants seek
herein.
As stated in the opening brief, if the horizontal reduc¬
tion is not made, then it will become the duty of this Com-
3
mission to determine what reduction should he made upon
all traffic originating in territory not subject to water compe¬
tition.
territory not subject to water competition. Rightfully, the
rates upon this traffic should be less to Spokane than to Coast
points, and if this lesser rate is enforced\ the reductions from
income and the amount of loss to the defendants would be
greater than the horizontal reductions sought.
BRIEF OF THE GREAT NORTHERN RAILWAY
COMPANY.
(The figures in parenthesis, unless otherwise indicated,
are references to the pages of the briefs of defendants.)
It is admitted (9) that within what is termed the Spo¬
kane Territory or "Spokane Zone," only 70 per cent of the
merchandise sold is distributed through the City of Spokane.
It is shown in the opening brief of petitioners thai-
Spokane has no distributing territory or "Zone" to the east
of Spokane.
It appears in the evidence that dealers and jobbers of
Spokane are not able to sell anything in the territory beyond
100 miles to the west and south of the City of Spokane,
while the Coast jobbers are able to sell in the "Spokane
Territory."
The statement of the Great Northern Railway Com¬
pany (33) shows that the local or state traffic is only about
It is not denied by any of the defendants that 70 per cent
of the interstate traffic to Spokane from the East originates in
4
25 per cent of, or one-quarter as much as, the interstate
traffic. •
The complainants agree with the counsel for the Great
Northern Railway Company in his assertion that the com¬
plainants are required to pay reasonable rates, and that the
complainants are not entitled to any reduction, which would
result in the defendants receiving less than a reasonable
rate. Complainants also assert that defendants are not
entitled to'anything in excess of reasonable rates.
It is true that the complainants have alleged that prac¬
tically all the rates to Spokane are unreasonable. Counsel
for the Great Northern Railway Company, therefore, insist
that the burden of proof is upon the complainants to estab¬
lish the fact that the rates are unreasonable.
The complainants contend that they have sustained the
allegations of the complaint in every way possible.
If the facts in this case do not show the rates to be
unreasonable no case can be imagined wherein it would be
possible to so do.
The people at Spokane and in the surrounding country
are entitled to a reasonable rate upon and over the shortest
and cheapest route. This Commission has been committed
to that doctrine many years.
In the case of Newland vs. Northern Pacific Railroad
Company et al., 6 Interstate Commerce Reports, 143-4, it
was held that shippers of wheat were entitled to have wheat
go from Ritzville, Washington, to Wallula over the North-
5
ern Pacific Railroad and thence to Portland over the Union
Pacific System, and to have the rate fixed over that route
because transportation over that route was less expensive than
to go the more circuitous and longer route over the Northern
Pacific across the Cascade Mountains and thence to Portland.
The language of the Commission in that case is as follows :
The complainants "claim that they have a just and
reasonable right to have the products of their farms carried
to market by the shortest and least expensive routes at a
reasonable through rate."
In this we believe no more is demanded by complainants
than is their right under the law, and the rate from Ritzville
to Portland which the carrier or carriers may lawfully exact
must be reasonable for the transportation bv the shorter and
less expensive route through Wallula Junction.
In this case the Commission further held that the Com¬
mission would presume that the rate fixed by the agreement
between two companies was reasonable and remunerative to
the company having the longest and most expensive haul.
The language of the Commission is as follows:
It may be fairly assumed that the rates separately made
over their respective routes or lines by the Union Pacific
System and the Northern Pacific Company, as well as the
rates made by them jointly from these distant branch line
points are reasonably remunerative and profitable; and in
view of all the ascertained facts we must believe that reason¬
able compensation for the transportation of like products
over these longer lines embracing the much more costly
branch line service is excessive and unreasonable for the less
expensive service over the more direct and very much shorter
Wallula Junction route from Ritzville to Portland.
J his case is authority for the further contention made
by the complainants that the rate by the longer route, that is
the Union Pacific route, fixed by agreement between the de-
6
fendants, must (as against defendants) be presumed reason¬
able for the Union Pacific Company. The Union Pacific
was more expensively built, and the complainants are entitled
to have the rate fixed upon the less expensive route.
Other cases supporting these propositions are as follows:
Jerome Hill Cotton Company vs. M. K. & T. R.
Co., 6 I. C. R. Report, 622.
Chamber of Commerce vs. Chicago M. & S. T. P.
R. Co., 7 I. C. R., 508.
Reo vs. Mobile & Ohio R. R. Co., 7 I. C. R., 52.
Phillips, Bailey & Co. vs. L. & N. R. R. Co., 8 I. C.
R., 93, 106-8.
Counsel are in error in contending that the establishment
of water competition eliminates the Coast rates as a com¬
parison with the Spokane rates. ^
The effect of showing water competition is simply to
1
relieve the defendants from the obligation of the fourth
clause of the Interstate Commerce Act and does not relieve
them from the further obligation of that law to charge
reasonable rates only.
The mere fact of admitting that greater rates are charged
for the longer than the shorter haul shifts the burden of
proof and requires the defendants to show that they are not
making a reasonable profit from the lower rates at the
greater distance point.
The defendants did not attempt to prove that they have
not received a fair, reasonable and remunerative return from
the business to the greater distance points.
Freight Bureau vs. Cincinnati N. O. & T. P. R. Co.,
4 I. C. R., 611-2.
7
#
Board of Trade of Chattanooga vs. E. Tenn., Va.
& Ga. R. Co., 4 I. C. R., 222.
Freight Bureau vs. Cincinnati, etc. Co. et al., 6 I. C.
R., 236-8.
Counsel for defendant states that the water rates are
from 20 to 60 per cent, or an average • of 40 per cent,
below the rail rate.
It is clear, therefore, that the defendants are not meeting
the water rates and do not need to meet the water rates in
orde** to secure the business.
Under these conditions it is more than safe to indulge
in the presumption that reasonable rates and remunerative
rates are received for Coast business by the defendants.
There is no presumption, in the absence of evidence, that
the rates charged by the defendants for Coast business are
unreasonable or unremunerative, in the face of the fact that
those rates are on an average 40 per cent greater than water
rates.
From the fact that the defendants have all the business
they can do and more freight is offered than they can haul,
and the water companies seem to be in like situation, the
result shown by the evidence naturally follows, namely, a
raising of the rates by the water companies and the rail
companies simultaneously.
Counsel for the Great Northern Railway Company (39)
state that it costs as much to haul an empty car as it would
cost to haul a loaded car. The result is that the hauling
of an empty car westward is a great loss, and this loss the
8
%
defendants expect the Spokane people to make good, to a
great extent, notwithstanding the fact that nearly all of the
empty cars are hauled further west than Spokane.
The petitioners are not complaining of the fact that the
defendants haul freight westward to Coast points, nor of
the fact that Oriental trade is being developed, or that any
other community is prosperous, but they are complaining that
the rates charged to Spokane and surrounding country are
in and of themselves unreasonable as compared to everything
with which they may be compared and with reference to the
facts and conditions shown by the evidence.
If the rates to Spokane cannot be compared to Coast rates
simply from the fact that there is water competition at coast
points there is still ample evidence in this case upon which to
sustain the allegation that the rates to Spokane are in and of
themselves unreasonable.
There isn't any evidence in this case that the defendants,
or either of them, hauled freight to Japan or China at a loss
and this Commission is bound to assume that they were not
hauled at a loss. The evidence of the loss, if any, was in
the possession of defendants and they failed to produce any
such evidence. T hey knew that the Oriental rate sheet would
be used as a comparison with the Spokane rates and the
defendants failed to even suggest that the rates received on
Oriental freight are unremunerative or unreasonable.
Commissioner Clements in the case of Phillips, Bailey
& Co. vs. Louisville & Nashville R. Co., 8 I. C. R., 106-8,
clearly points out the erroneous contention made by counsel
9
that the Coast rates cannot be used for comparison in reach¬
ing a just conclusion as to what are reasonable rates to
Spokane.
The complainants more than sustain any burden of proof
that the law casts upon them.
The annual reports show increased earnings from'year
to year until the gross and net earnings have more than
doubled, and the traffic is greater and denser than any other
transcontinental road; that the Great Northern Railway
Company has been paying annual dividends every year, at
the rate of 7 per cent per annum, and has accumulated a large
suiplus, and now has an almost unlimited amount of surplus
on hand, and with its capital stock has purchased stock and
bonds of other companies, almost equal in amount to the
capital stock of the Great Northern Railway Company, and
that it still has those stocks and bonds; that, in addition to
large expenditures for operating expenses and maintenance,
the Great Northern Railway Company has expended tremen¬
dous amounts in permanent improvements, such as re-laying
its entire main line and much of the branch lines with heavier
steel, revising its grades, changing the alignment of its tracks
and building numerous permanent structures, and construct¬
ing a tunnel through the Cascade Mountains, and built and
put afloat the largest steamers on the Pacific Ocean and
Great Lakes.
The actual net earnings, therefore, are much greater than
shown by the annual reports of the Great Northern Railway
Con pany.
io
Its earnings have been for many years much in excess of
the dividends actually paid. The road has been practically
rebuilt out of earnings.
More than a prima facie case was made by the complain¬
ants when they showed the excessive earnings of the Great
Northern Railway Company and its capitalization.
•
To meet the more than prima facie case made by com¬
plainants, the defendants undertook to show exaggerated
present value and cost of reproduction at this time. By so
doing, the defendants admitted the prima facie case of the
complainants and the burden of proof shifted upon the
defendants to show that, by a reduction of the rates as
prayed for, a reasonable profit would not remain.
The defendants failed to show what it would cost to
reproduce a transcontinental railroad at the present time. In
order to do so it was necessary for them to show, not the
boom prices existing at the time of the hearing, but the
average prices for the time that it would take to build the
road.
The defendants, although requested so to do, failed and
neglected to furnish evidence of any value or values covering
tiie period claimed by the defendants it would take to con¬
struct a transcontinental line.
The matter quoted by counsel (45) from the opening
biaef of complainants, should be qualified to the extent of
saying that as against the defendants, but not in their favor
the rate for a longer distance over the Union Pacific to
Spokane will be presumed reasonable in comparison with
11
the same rate for the shorter distance. Therefore, the same
rate for the shorter distance is necessarily excessive and un¬
reasonable.
Counsel attempt to argue that the rate, over the Union
Pacific, Northern Pacific and Great Northern is competitive.
This is incorrect. The rates were agreed upon between the
three companies, and they are not competitive rates in any
sense.
This Commission has so held and its opinion has been
confirmed by the court of last resort.
Central Yellow Pine Asso. vs. 111. C. R. Co. et al.,
10 I. C. R., 541.
111. Central R. R. Co. vs. Interstate Commerce Com¬
mission, 27 S. C. R., 700.
The natural advantages of sea Coast cities do not warrant
railroads in charging unreasonable rates to interior points.
It follows that a reasonable rate to Spokane cannot be
based upon a water rate to coast points plus the local rate
back to Spokane. That would be purely and wholly an arbi¬
trary rate and without reference to the services performed.
Usually the service performed is governed primarily by dis¬
tance, and the mere fact that there is wTater competition to
Coast points does not warrant charges or rates to Spokane
which are equal to the Coast rates plus arbitrary rates back
to Spokane.
Counsel state that the rates now in force were made at
Spokane's request and for her benefit and protection (46).
Since the first case before this Commission, many years
1 2
ago, Spokane and its people have been contending that they
were and are entitled to terminal rates or better than terminal
rates. At a meeting held in Chicago a reduction of rates was
granted. Before that meeting a "boycott" had been declared,
according to Mr. Woodworth, on account of the grossly ex¬
cessive rates which had for many years been exacted.
It is clear that Spokane and its people did not secure all
that they were entitled to or all that they demanded. It is
safe to say that the conference was held at the solicitation
of the Great Northern Railway Company and the Northern
Pacific Company rather than the people of Spokane.
If Spokane had reasonable and fair freight rates with its
natural advantages, it would be a much greater city than it
is today. In the immediate vicinity of Spokane there is
almost unlimited water power. This water power can be
used to develop electric power which can be delivered within
100 miles of Spokane at not to exceed $30.00 per horse
power per annum, while steam horse power (we are in¬
formed) will cost more than three times that sum.
If natural advantages are to be .considered and given an
opportunity to develop, the electric power above mentioned
would, within a limited time, be in use for large and extensive
manufacturing purposes, and for operating all the railroads
within a distance of 150 or more miles from Spokane. The
result would be a much larger and better city than now
exists.
Counsel (48) use this sentence,—
"Undoubtedly a public carrier would be allowed,' during
1 3
%
such times to make such rates as would enable it to hold
funds in reserve for the less prosperous era sure to follow."
If less prosperous eras are sure to follow, 'then the boom
prices of today should not be taken for the determination ot
the value or cost of reproduction.
The value or cost of reproduction should not be greater
than the average between the prosperous eras and dull eras,
which are "sure to follow."
The complainants contend that the defendants have
already been permitted to hold funds in reserve "for the
less prosperous era sure to follow" and that the surplus
now on hand is more than sufficient to meet the requirements
of the contentions made by the defendants.
The evidence shows that very, very large net profits are
now on hand and that the net profits are, under the law, very
much greater than now appear, for the reason that perma¬
nent improvements have been charged to operating expenses.
Counsel do not indicate just what the amount of surplus
should be. As a matter of law, they are not entitled to any
surplus whatever.
Complainants have, however, been much more than liberal
in not attacking and asking for return of exorbitant rates,
but are willing that the very large surplus and reserve now
on hand should be retained, but insist that the time has
arrived when the accumulation of any additions to that sur¬
plus ought to cease.
Counsel say (^o) —
14
"It is clear that the amount of the investment is not the_
basis upon which the income the owner of such property is
entitled to receive should be computed."
Assuming this statement to be the law, then the invest¬
ment today of the whole sum necessary to acquire a trans¬
continental railroad would not be the basis for computing
earnings or upon which the owner is entitled to receive com¬
pensation.
The object and purpose of this Commission should and
doubtlessly will be to fix rates with reference to about the
average condition of affairs, and not upon boom prices or
boom values.
All of the defendants insist upon the boom values being
taken and fixing the values at the present time, and yet at the
same time state that the present condition of affairs cannot
continue long.
It is just as fair, therefore, to contend that the rates
should be fixed upon "panicky" prices and values as to contend
that they should be fixed by boom prices and conditions.
Formerly this Commission was committed to the doctrine
that earnings of railroad companies should not be in excess
of a reasonable return upon investments; that is, the earnings
might be less than a return upon the investments when invest¬
ments were not properly or honestly made, but never greater
than upon the investment.
I he opinions of this Commission indicate that railroad
lates should not be subject to fluctuations and variations as
the prices and values of ordinary commodities fluctuate and
vary.
1S
Under the opinions of the Commission the defendants
are not entitled to earn anything upon increased values due
to the growth of the country or cities, but should be limited
to and not exceed actual investments.
Newland vs. Northern Pacific R. R. Co. et ah, 6 I.
C. R., 144.
Cary vs. Eureka Springs R. Co., 7 I. C. R., 316-7. v
Counsel (53) state that the original cost of $28,000 per
mile does not represent a fair value of the conditions of
the Great Northern Railway Company, because many and
expensive improvements and betterments have been made to
the property, line changes and grade revisions made, ex¬
pensive terminals and other property added.
1
Counsel fail to state that these many and expensive im¬
provements and betterments, changes, revisions, terminals and
other additions have practically all been made from net earn¬
ings and profits. They do not represent investments by the
stockholders.
The annual reports show that the money invested by the
stockholders has been mainly in branch lines and that the
main line and branch lines have all been extensively and per¬
manently improved, almost unlimited betterments made and
a great many line changes and grade revisions and expensive
terminals and other additions paid out of the earnings. They
represent investments by those who pay the freight. The
consumers have unwillingly made these investments. The
stockholders of the Great Northern have not made these in¬
vestments.
Certainly the time has arrived when the consumers are
i6
entitled to insist that the property has been bettered and im¬
proved to such an extent that freight rates can be materially
reduced and the stockholders still receive a liberal remunera¬
tion upon the actual investments made by stockholders.
Counsel insist (53) that Mr. Hogeland has been cor¬
roborated in all respects where he differed from Mr. Gillette.
This is incorrect. In many respects it was possible for the
defendants to have corroborated Mr. Hogeland if the facts
justify such corroboration, but they failed in that respect.
Many witnesses when cross-examined upon vital points were
forced to confess ignorance when they ought to have been
able to testify fully.
The fact is that the inflated and boom prices at Seattle
have decreased about 25 per cent since the hearing of this
case. This is outside the record but can be readily ascer¬
tained.
It has never been conceded by complainants in this case
that it would require as much as $300,000,000.00 to repro¬
duce the Great Northern System. The estimate of three
hundred million is greatly in excess of what the complainants
believe would be required to reproduce the Great Northern
System, but it was deemed more than liberal to take that
as a basis of reproduction for the reason that the Great
Northern Railway Company is earning more than a reason¬
able income on that sum.
The tables presented by counsel (57, 60) are unwar¬
ranted.
*
I he annual reports show a large amount of the income
17
expended for maintenance of the property. When such sums
are actually expended nothing further is allowable for depreci¬
ation and all that is charged oft to depreciation in the annual
reports is nothing more or less than surplus or profit, and
after being charged to the profit and loss account it is in
one way or another divided between the stockholders. Quite
a different result would follow by failing to deduct the
amount of alleged depreciation as shown by this table. If
3 per cent be deducted for depreciation then the amount
$
expended for maintenance of the property cannot also
be deducted. This would be doubling the depreciation.
The table shows upon its face that it is unreliable and
untrustworthy because it shows so much less earned than is
actually being paid out by the Great Northern Railway Com¬
pany. The interest charges are paid, and dividends at the
rate of 7 per cent are paid upon all stock and more than
$ 10,000,000 net surplus after payment of liberal sums for
maintenance and permanent improvements and betterments.
The capital stock and bonds aggregate in round numbers
$250,000,000.00 and add to this as more than a liberal
addition $50,000,000.00 and pay 7 per cent thereon, or
$3,500,000.00, subtract double the estimated loss of revenue
by reduction of rates and there will remain a very large sur¬
plus from present earnings, and a more than sufficient sum
to adjust local and eastbound rates.
It is therefore useless to contend that the Great Northern
Railway Company is making less than 6 per cent upon the
money of the stockholders.
18
Counsel are in error (58) in saying that the Commission
directed defendant, Great Northern Railway Company, to
furnish certain information with reference to eight months
of the fiscal year ending June 30, I9°7* The information
required was for the first six months of the fiscal year ending
June 30th, 1907, and because of the blockade in the months
of January and February that Company conceived the idea
that it would be more advantageous to it to furnish the infor¬
mation for eight months instead of six months.
Complainants take issue with counsel upon the assertion
that the net earnings for the fiscal year ending' June 30th,
1907, will be smaller than they were far the fiscal year ending
ing June 30, 1907, ought to settle thisGssue, $hich should
be available to this Commission now or in the very near
future.
Counsel for the Great Northern Railway Company are
♦
insisting that the people of Spokane and surrounding country
pay losses that may be occasioned by the enforcement of the
laws in the States of Minnesota, Dakota and Montana, as
well as the law passed by Congress relating to liability to
employees.
Counsel in effect assert that some or all of these laws
will be violated, and that such violation will incur and
occasion great penalties. This Commission ought to say to
the defendants that they must not violate those laws and in¬
cur those penalties; that stockholders, if there is mismanage¬
ment of its property, must stand the loss.
I he fact that the Minnesota laws reduce freight or
19
passenger rates, does not increase the value of services rend¬
ered to Spokane shippers. Surely the losses incurred in the
States of Minnesota, Dakota and Montana should not be
borne by the people in Idaho or the eastern portion of the
State of Washington.
The fact that the City of Spokane has grown to a city
of considerable magnitude is no justification for the defend¬
ants extorting from the people something like $20,000,000.00
in the past, more than other people to the west of them have
paid for the same service.
Spokane has been like a Chinaman's foot, is has grown
some in spite of torture and the unjustifiable infliction of the
heathen Chinese practice.
It has never been held, by any court or this Commission,
that under all circumstances a railroad company is entitled to
earn an income upon the increased value of property by
reason of the growth of the country, or which has been pur¬
chased, not by investments of stockholders, but by the invest-
\
ment of net earnings, and the investment of excessive charges
for freight.
Clearly railroad companies are not entitled to earn a
sufficient sum to satisfy them in the way of interest, and at
the same time rebuild, rehabilitate and reconstruct a road and
spend thereon sums equal or nearly equal to the original cost
of the system, and yet, as against the public, be entitled to
earn upon money contributed by the public and so used by
the railroad company.
Any one familiar with railroad construction understands
20
thoroughly that a large amount of right-of-way and terminals
are always donated.
If the cost of reproduction is to be considered, it must
be upon the theory that large donations would be made by
individuals and communities. It must be upon the further
assumption that a transcontinental road would pass through,
upon and over a large amount of public lands, upon, over
and across which a right-of-way is granted by the general act
of Congress of 1875.
The evidence and statements furnished by the defend¬
ants, Northern Pacific Railway Company and the Great
Northern Railway Company, show that large donations were
made to them, respectively.
No doubt other communities gave valuable right-of-way
and terminals to the Great Northern Railway Company
the same as did the people of the City of Spokane. Some
of them may have been donated on promises similar to those
made to the people of the City of Spokane.
The time has passed when the country along the transcon¬
tinental roads, which have been in operation from 14 to 24
years, entitles them to earn any more than if they were being
operated in an older community. The northern transconti¬
nental roads have much greater territory, traffic and business
than the average of the roads in the older and more thickly
populated districts.
Mr. Hill does not agree with his counsel (70). Mr.
I IiII says that he had investigated the Northwestern
country and knew that there was no risk or danger in building
11
to the Northwest or Pacific Coast. He had investigated the
forests and knew the extent and quantity thereof. He had
investigated and knew the quantity of ores being mined and
shipped. He built the Great Northern road to the North
Pacific Coast, not because he desired a hazardous under¬
taking or that there was any danger of loss to investors, but
because he desired the freight and knew that it was to be
had, and that his road could not do otherwise than prosper.
In one of Mr. Hill's interviews (Complainants' opening
brief, 44) Mr. Hill said:
I would not have you imagine we run a railroad
for any charitable purpose. we do not run it
because of any affection for our fellow beings.
We run it solely for business reasons, because we
expect- to make money in good round sums.
In another interview (Complainants' opening brief, 30)
Mr. Hill said:
The lumber is what we want. Between here and the
Atlantic Coast the lumber forests are insignificant. In Min¬
nesota at the head of the Mississippi, is the only body of
timber; there is much demand for pine. In ten years the
trans-Mississippi lumber woods will be done. The supply
must come from Puget Sound. This is not guess work. I
know we can do it. If we would carry the product the
country yields, why, it would build us. It is the tonnage
we must carry. We might carry a car occasionally, car lots
of tea and Japanese fans, but we rely upon the solid tonnage
of the country.
It is more reasonable for the Government to say to rail¬
road companies that they cannot earn money upon rights-
of-way donated by the Government or others, than to hold
that the railroad companies are entitled to earn upon values
resulting from the growth of the country, or that they shall
22
earn upon investments made from net earnings, or shall
earn upon investments from funds belonging to the public
/
and wrongfully and unlawfully exacted from the public.
Railroad companies are no more entitled to earn upon
donated rights-of-way, or rights-of-way purchased with net
earnings or any other property donated or purchased from
net earnings, than they would be to recover substantial
damages for the opening of a public street across the right-
of-way. It is property in which the public have an interest,
and it ought to suffice if the railroad companies are permitted
to continue their use of that property without the public
paying anything for such use, instead of permitting railroads
to earn money thereon.
The opening of a public street or highway across a right-
of-way of a railroad company is nothing more or less than
a use thereof by the public, and a refusal to permit railroad
companies to earn an income is but another method of giving
to the public the use of the interest that they have in the
property.
2 Lewis on Eminent Domain, Sec. 491.
The doctrine is well established that if net incomes be
used in making permanent improvements and betterments,
and thereby the security of the mortgagee is made better,
that the mortgagee takes the property charged with the debts
incurred, on account of the application of the net income
to permanent improvements and betterments, etc.
Short s Law of Railway Bonds and Mortgages, Sec.
597 ct seq., and authorities cited by the author.
23
Virginia & A. Coal Company vs. Central Railroad
& Banking Co. of Georgia et al., 170 U. S., 370,
18 S. C. R., 6^7.
While it may be difficult to fix any absolute standard or
rule for the purpose of determining what is a permanent
improvement or what is a betterment, at the same time the
evidence in this case shows conclusively that millions and
millions of dollars have been expended for permanent im¬
provements and betterments.
The annual reports of the defendants prove these facts
conclusively.
Any fair or reasonable rule applied to these defendants,
at least the Great Northern Railway Company and the
Northern Pacific Railway Company, will show that they are
annually expending millions of dollars for permanent im¬
provements and betterments. These expenditures are, in
fact and in legal effect, surplus, and should be added to the
surplus in considering the result that will follow from a
reduction of rates as prayed for in this case.
The amount exoended by the Great Northern Railway
Company and the Northern Pacific Railway Company,
\
annually, for permanent improvements and betterments, will
greatly exceed the amount of reductions that will result by
the granting of the prayer of the plaintiffs herein.
This Commission in the case of the Central Yellow Pine
Association vs. 111. Central Railway Company, 10 I. C. R.,
537, held that it was not proper to include in operating ex¬
penses expenditures for betterments and permanent improve¬
ments.
24
This Commission also held in that case that the fact
that the operating expenses increased was not sufficient to
defeat a reduction of rates when the net earnings also
increased, or were not decreased.
This Commission in that case also held that where a rate
is made by agreement between carriers, that competition is
eliminated. These holdings are in line with the arguments
herein and heretofore made.
This Commission, in the last mentioned case, also held
that they are not required to determine accurately the value
of the property of the common carriers, when the evidence
is conflicting, or when it is uncertain or unsatisfactory.
See pages 535-541, 543"4-
The Supreme Court of the United States in the case of
Illinois Central Railway Company vs. Interstate Commerce
Commission, 27 S. C. R., 700, has affirmed the holdings of
the Commission in the case last above mentioned.
That Court holds that the question of reasonable rates
is one of fact and that the findings of the Commission will
not be disturbed, and affirmed.the conclusions of lav/ reached
by the Commission.
That Court also held in the case last referred to that
freights are tolls and that tolls must be reasonable for the
services rendered.
The Court held in the case of Texas and Pacific Railway
vs. Ahiline Cotton Oil Company, 27 S. C. R., 350, that
when a rate is filed with the Commission that no remedy
25
exists through the courts or elsewhere than through this
Honorable Body. To the same effect is the case of
Brooklyn Union Gas Company vs. City of New
York, 188 New York, 334; 81 N. E., 141.
It is of vital importance that rates should be made as low
as this Commission can consistently and reasonably fix them,
0
in view of those decisions.
In all of the computations made by the defendants none
of them take into consideration the additional net earnings
expended or which have been charged off or put into a sepa¬
rate account for permanent improvements and betterments.
The policy pursued by the defendants in making improve¬
ments and betterments have greatly exceeded what is reason¬
able and equitable as between the carriers and consumers.
This is confessed, by the defendants practically ignoring that
subject.
If it is necessary to re-build, re-grade, re-lay with heavier
steel and re-align the main line and many of the branches of
the defendants every ten or fifteen years out of earnings, no
relief could ever be granted shippers or consumers.
Counsel (74) uses this sentence:
"Minor improvements, such as bank widening, line
changes, grade revisions, substitution of heavy for light rails,
changes from wooden to steel bridges, and improvement of
equipment, were to a considerable extent made out of earn¬
ings, while generally new lines were acquired, and the more
extensive improvements and additions were made, by the
issuance of new capital stock "
It is safe for this Commission to assume without looking
2 6
any further that when counsel for the Great Northern Rail¬
way Company failed to point out wherein any of the above
mentioned things have been done with the proceeds of capital
stock, that nothing of the kind was done, and that everything
mentioned in the quotation represents surplus and profits,
except, that part of the new lines were purchased with pro¬
ceeds from capital stock.
Judging from the annual reports rates are being reduced
almost everywhere except upon Interstate freight to Spokane.
Counsel argue, however (74-5), that the fixing of the
rates by the defendants and the payment thereof by the
public, concludes the question of the reasonableness of the
rates.
If this argument is sound, all the decisions that have ever
been rendered must be reversed and a new decision promul¬
gated, namely, that whatever rate a railroad fixes is a reason-
ble rate.
If that be the law or the condition that confronts us, and
that decision or law be promulgated, the people of the United
States will reverse that decision and law by an appropriate
revolution.
*
The argument thus made, followed to its logical con¬
clusion, would necessitate this Commission adjudging them¬
selves to be dummies, useless and worthless ornaments, and
that Congress was imbecilic.
In this proceeding the complainants are not attempting
to recover the excessive, exorbitant rates they have heretofore
paid or that have been paid by the consumers, but they are
27
insisting that the defendants shall not earn so large an in¬
come as heretofore upon those illegal and unlawful exactions
invested in permanent improvements and betterments.
In this contention the complainants have an abiding faith
that their contentions are more than reasonable and fair and
that this Commission will so adjudge.
Complainants still insist that the tables shown in their
opening brief on page 95 are accurate with the qualifications
there suggested. Pages 26 and 27 of the 1906 Annual Re¬
port of the Great Northern Railway Company show the
gross earnings of that company alone to be $46,259,550.12,
operating expenses $23,131,081.11, taxes $1,605,801.09,
leaving the income from operation of the Great Northern
Railway Company alone $21,520,667.92. From this amount
there should be deducted the net rentals as shown on page
27, and the net income from operation is the result. It is
$17,413,572.96. To this should be added "other income"
of $2,202,302.13, making a total income of the Great North¬
ern Railway Company alone $19,615,675.09, from which
should be deducted the dividends declared of $9,300,385.50,
leaving a balance of $10,315,279.59, without taking into ac¬
count the "miscellaneous income" received ($1,409,255.90)
and without taking into consideration the income from pro¬
prietary lines, which is almost $3,000,000.00.
The bonds and stock of proprietary companies are owned
by the Great Northern Railway Company and not in the
hands of the public. Hence, there is nothing further to
deduct from what is shown as the net income of proprietary
lines on page 26 of the 1906 annual report.
28
The table may be made up as follows:
Gross earnings (page 26) including propri¬
etary companies $53,076,661.49
Operating expenses (page 26) including pro¬
prietary companies 26,853,145.60
$26,223,515.89
Less taxes (page 26) including proprietary
companies 1,822,953.81
Income from operation (page 26) including
proprietary companies 24,400,562.08
Other income (page 28) . 2,202,302.13
Net income.... 26,602,864.21
Rentals, interest, etc. (page 27) 4,107,094.96
$22,495,769.25
Dividends, etc. (page 28) 9,300,395.31
Net income—net profits $13,195,373.94
This table eliminates all the objections made by counsel
in their brief.
Complainants do not agree with the counsel (85-6) in
their statement with reference to stock and bonds owned by
the Great Northern Railway Company. The annual reports,
in evidence, of said company, however, are not now before
the writer hereof. It is, therefore, necessary to burden the
Commission with investigation of this matter if they deem
it vital.
The statements of counsel as to the earnings of propri¬
etary companies and the surplus thereof do not seem to be
in accord with the evidence.
The balance sheet (p. 33) of the 1906 annual reports
29
shows $9,172,469.68 of surplus funds of proprietary com¬
panies deposited with the Great Northern Railway Company."
In addition to that surplus fund there is a surplus in the treas¬
ury of the St. Paul, Minneapolis and Manitoba Railway
*
Company of over $2,000,000.00.
The condensed balance sheet also shows almost $12,000,-
000.00 of unexpended surplus transferred to the funds there¬
in indicated. Said balance sheet also shows the Great North¬
ern Railway Company has a balance in its profit and loss
account, which is nothing but surplus, of $25,571,453.99.
These statements in the annual report do not seem to be in
accord with the statements of counsel and tables shown on
pages 88-9 of their brief.
The table on page 89 shows nearly $2,000,000.00 loss
in operating the Steamship Company that the Great Northern
Railway Company is attempting to make complainants and
other shippers pay.
The defendants are not entitled to deduct three per cent
for depreciation and at the same time deduct the large ex¬
penditures for maintenance shown by the annual reports.
They cannot do both. If they accept the depreciation of
three per cent per annum, then their net surplus must be in¬
creased by the amounts charged to repairs, maintenance, im¬
provements and betterments in the annual reports.
Complainants are unable to find any explanation of the
table on page 95 of the brief of the Great Northern Railway
Company. Complainants cannot find any justification there¬
for in the annual reports.
/
3°
According to page 26 of the 1906 Annual Report, the
net income of proprietary lines is in round numbers $3,000,-
000.00, and the complainants are unable to find any table
from which the tables of counsel are taken.
•
The attempt of counsel for the most part, has been to
insist that the Great Northern Railway shall be taken as a
whole, as a system, yet when surplus and net income are to
be dealt with, they desire a segregation. They are not en¬
titled to segregate for one purpose and insist that the railways
shall be taken as a whole for another purpose.
It was not incumbent upon the Great Northern Railway
Company to permit its stockholders to subscribe for new
increases thereof at par. It was entitled to have the same
sold at the market price, and if the stockholders desired to
purchase the same in proportion to their holdings at the
market price, they had such right.
Stokes vs. Continental Trust Co., 186 New York,
285; 78 N. E., 1090.
The fact that the market value of stock is above par,
demonstrates that investors are willing to take as dividends
much less than the dividends that have actually been paid.
The fact that it would be necessary for the defendants
to make a re-arrangement of rates, does not obviate the
necessity of this Commission lowering rates which are too
high and unreasonable.
The statement that (100) the rates now existing were
granted at the request of Spokane has already been noted.
If the complainants arc willing to take their chances with
31
the Seattle, Tacoma and Portland shiopers as to the territory
in which they can do business with an equal rate, why not
let them have that opportunity?
If terminal rates to Spokane be reasonable, as to what
territory will be distributed over by shippers at Spokane and
other places is a question of the "survival of the fittest," and
the consumer will reap the benefit. No argument has been
advanced and no reason given why rates should be main¬
tained and the consumer be required to pay excessive and
unreasonable and exorbitant freight rates, because some job¬
ber at either one or many places may desire to co-operate
with the railroad to parcel out territory.
Complainants and all others are entitled to reasonable
rates whatever may be the result.
The statements of counsel (101) with reference to this
being a jobbers' fight, etc., are unwarranted and not in
accord with the facts or the record.
If terminal rates are given to the people of Spokane they
are entirely willing to take their chances, and if, under these
conditions, the Portland, Tacoma, Seattle and Eastern jobbers
shall sell merchandise in, around or about Spokane, no com¬
plaint will be heard from the consumers.
The objection made at Portland to the filing of the
amended complaint and'intervention was sustained. Hence,
the conclusion is irresistible that the filing of the amended
complaint at that time was not a proper or appropriate pro-
•
cceding. The issue affecting eastbound rates should have
32
been raised and presented at an earlier stage of the proceed¬
ings, if proper in this case at all.
If the Coast jobbers or any other person or corporation
shall • hereinafter file a petition and prosecute proceedings
with a view of benefiting the consumer, the complainants
herein will not "butt in" or intervene in the proceeding for
the purpose of preventing consumers from obtaining reason¬
able rates.
If the eastbound rates are too high or if the Interstate
distributive rates are too high, let an appropriate proceeding
be commenced and prosecuted before this Commission and
reasonable rates be established.
According to the practice of railroads all over the country
there seem to be "zone areas," that is, a mven territory within
which rates are the same from all over that territory to
terminal and other points.
The alleged "zone" of Spokane is not different from
"zone areas" all over the country.
As to what, if any, lesser rates shall be given to the terri-
tory east of Spokane will depend upon the extent that the
Commission holds that all "zone" areas shall be abolished.
The Supreme Court of'Maine in case of Brunswick & T.
Water Dist. vs. Maine .Water Co., 59 Atl., 542, held that
the words "present prices" mean prices within a period nec-
essary for the construction of the water works, which were
to be valued on a given date.
0
Applying this case to railroads,-there isn't any evidence
33
in this case upon which this Commission can base a safe
opinion as to cost of reproduction. There isn't any evidence
as to values or prices or the average values or prices for the
last four years.
In the absence of such evidence this Commission cannot
allow the defendants to earn anything above the interest,
upon the bonds and reasonable dividends, upon their stock,
that is, reasonable dividends upon the stock of the most
cheaply and economically constructed road.
The Maine Court, by analogy, holds the same as this
Commission has held, namely: that the public are entitled
to have the rates fixed on the least expensive road.t
i
The Maine Court held (543-4) :
If there is mere than one source of supply, other things
being equal, the community is entitled to have the least ex¬
pensive one used.
^ ^
^ A
For instance, if water can profitably be served from a
nearer source of supply at a certain rate, the company ought
not to be permitted to charge a higher rate, based upon the
expense of bringing it from the farther and more expensive
source. And this even if in attempting to serve this and
ether communities together it might be more profitable to the
company to do so.
Complainants confidently expect this Commission to hold
/
that reasonable rates to Spokane, in view of all the facts
and circumstances in and surrounding this case and proceed
ing, shall not exceed the terminal rates at Coast points.
Mr. Hill in 1892 stated that he could and would give
terminal rates; that his company could and would make ample
profit upon those rates,
34
The inevitable conclusion is that if terminal rates were
reasonable in 1892, less than terminal rates are reasonable
today, in view of the fact that the Great Northern Railway
Company and the Northern Pacific Railway Company have
reached their full capacities as single track railways and have
more freight offered than they can haul, and also in view of
the fact that the net earnings have greatly increased and that
now there is an almost unlimited surplus on hand, and the
conditions are much better now than in 1892 when Mr. Hill
made his statements and promises.
The fact that counsel for the Great Northern Railway
Company say that they discard as worthless the statements
made by men relating to transactions that happened fifteen
years ago, does not warrant this Commission in discarding
that evidence. Mr. Hill has not denied those statements,
and those statements are corroborated by the newspaper re¬
ports printed at the time, and the testimony of those same
1
witnesses taken in 1896.
Counsel to the contrary, notwithstanding, this record
must be taken as showing that Mr. Hill did make the prom¬
ises that he is alleged to .have made and did say to the people
of Spokane that he was building a road whereon he could
transport freight cheaper than on any other road, and that
he could afford to haul freight cheaper than other roads could
afford to haul it.
This promise seemed so good to the people of Spokane
that it would he extremely strange if they ever forget it.
Mr. Hill (among other things) said:
35
uAs far as we have gone we have undertaken and have
succeeded in building a radroad that is capable of doing more
business than any transcontinental road that has been or will
be built hereafter. * * * * It will take to pay
our interest and dividends and to operate our lines forty per
cent less per mile than what it costs our neighbors.
You can make a distributing point of Spokane and compete
with, if not surpass, other distributing centers in this com¬
munity, and we should not feel that we are doing ourselves
justice if we cannot bring goods here to sell at a competing
point less than any city west cr south of here.
This portion of the country seems to me to be paying 'tribute
to California. For iS years its trade appears to me to have
been directed from that state, That this circumstance has
militated against the progress of this state goes without say¬
ing. You cannot make a great distributing point out of
Spokane unless you have facilities equal to or better than
those possessed by its competitors. We should feel that we
are not doing what is for our own best interests, if we did
not put every business man here in a position where he could
meet the competition of any rival to the west or to the south.
A vL* *1*
*1* <|«
We shall come here, however, feeling absolute confidence
that we shall be able to carry your products to the markets
for less money than any other railroad can afford to carry it;
and I knew that no road will ever be built in the future that
will be able to do the same zvork for less than we can do it.
* * . * We are not coming here to show
fear of water carriers. If we had been afraid of them
we should not now be building our road to the Coast. * *
As to our position in regard to TERMINAL RATES,
and WHAT I SAID ABOUT YOU BEING ABLE TO
COMPETE WITH ANY CITY WEST OR SOUTH.
YOU COULD NOT DO IT IF YOU HAD TO PAY
MORE FOR THE SERVICE THAN THEY HAVE
TO PAY. Bear this in mind, that as long as there is a city
and as long as our railroad is located on the ground, you
will be nearer to us than any one else. * * * The
people iiave an exaggerated idea about the cheap¬
ness of water carriage. WlIY, you might build a
canal ten feet deep right along side of the great
Northern Railway Company, from one end to the
other and we would still do the business. You ap¬
pear surprised, but if you consider that with such a line as
we are building, a train crew of five men can take along, at a
36
speed of fifteen miles per hour eight hundred tons of mer¬
chandise. To do that on a canal would require from three
to five canal boats and three to five crews of men, and even
then they would plod along at about a three mile gait. * *
We must stand or fall with you. You cannot extend your
business without extending ours and vice versa. This country
cannot grow unless you are a distributing and collecting
center. We are partners. * * In coming here, our
road is your transliner, a very prominent transliner harbor,
and we expect to carry as much tonnage as. though it were
a harbor with twenty feet of water in it. We want to load
our trains solid and run them through solid east and west.
* * In reference to the future of Spokane, I have
made some statements that would lead you to infer a good
deal. I have made these statements with full knowledge of
what the words I used mean. * * The days which
are coming will enable you people, as I have said before, to
compete with any city wrest or south of you. You are now
the only city in Eastern Washington that can call itself a
distributing point, the place where the products of that sec¬
tion are exchanged, and there is no reason why you should
not always remain a distributing center, controling the busi¬
ness of Eastern Washington. * * No railroad west
of the Mississippi or Missouri—and I was going to say
Chicago, but there is one west of Chicago,—can or does
carry more freight at lower rates of cost than we do, nor is
there any west of the Mississippi that can at all approach
us. We have tried to make the best and cheapest operated
railroad it was possible to construct. A railroad is just like
a brewery or a mill. A man may have a very large fine mill,
but put another mill or make cloth or flour or iron cheaper,
the time will come when he will have to close down. This
is the reason why we claim we are justified in building the
kind of a railroad we are building and expect to build."
Mr. Durham testified (vol. i, p. 146) :
We expected we should have at least terminal rates, and
that we should be able to enter into full and fair competition
with the Coast cities. That was very clearly and very thor¬
oughly the expectations of cur people after Mr. Hill had
been here.
Mr. Norman testified emphatically that terminal rates
were promised (vol. 1, pages 171"2) :
37
MR. DUNN: Did Mr. Hill, at any time during the
course of these negotiations ever promise you that he would
make the same rates to Spokane that he would make to his
terminal on the Sound; did he ever put that precise and plain
proposition to you in the form of a promise or an assurancef
MR. NORMAN: Many times, he did. * * .
MR. DUNN: Outside of those two suggestions, the
one about the rate upon nails and the other about this rate
upon zvhich Spokane could compete, did he ever in any way
make the assurance to you that Spokane should receive the
same rates as his terminals upon the Soundf
MR. NORMAN: He reiterated that, sir, on many
occasions; on many occasions.
Mr. Doland testified (vol. i, pages 182, 189) :
*
Mr. Hill said he didn't promise to give us terminal rates,
but relative rates. * * / asked him this: "When
you get to the coast will you give spokane terminal
rates ?" He said, "I will give Spokane terminal rates
or better/' * * * •
Q. (<Did Mr. Hill explain to you the character of his
rates, when he said they might be terminal rates or better?"
MR. DOLAND: He said they would be terminal
rates or better.
The reduction which resulted from the Chicago confer-
ence was not for the purpose of keeping promises, but re¬
sulted (Mr. Woodworth said) from a boycott, and an ad¬
mission on the part of the defendants that previous rates
were too high and grossly excessive.
The statement (104) that the uncontradicted evidence
shows that there has been a constant reduction of rates since
1892 is not warranted by this record. See tariff sheets.
The evidence does not show any other place where the
same conditions exist as at Spokane.
Within a comparatively small distance, around and about
Spokane, there exist large and extensive lumber industries,
38
large and extensive mining industries and as good agricultural
country as can be found in the world. There isn't any evi¬
dence that any other city or town used as a comparison is
similarly situated.
The City of Spokane has not become what she is by
reason of the assistance and help of the railroads, other than
the mere fact that they exist, but in spite of them. Notwith¬
standing the constant injustice and illegal tribute that has been
exacted from her and her people, she has grown and ex¬
panded. The resources are so great that she has withstood
great burdens.
BRIEF OF THE NORTHERN PACIFIC RAILWAY
COMPANY.
Counsel are mistaken (4) in asserting that the plaintiffs
have abandoned their complaint as to mixed car loads. The
tariff sheets and the table prepared by Air. McCune will
show these discriminations.
Counsel admit that the railway companies have not met
the water rates. It is not necessary for them to meet the
water rates in order to carry the freight.
Complainants do not admit that water competition pre¬
vents defendants from securing reasonable and remunerative
rates to Coast points.
Complainants do allege that the defendants use the water
A;,
competition theory as a pretence and subterfuge for maintain¬
ing excessive and unreasonable rates to Spokane.
The same conditions do not exist today that existed in
39
1892. The records will show a vast difference between the
amount of business done, gross receipts and net receipts, of
the Northern Pacific Railway Company in 1896 and the
Northern Pacific Railroad Company in 1892. The facts are
wholly and entirely different, and the hearing in 1892 can
have no effect on this case.
The complainants do not deny the fact that shipments
are made by water. But it is an easily ascertainable fact that
the amount of shipments and the tonnage by water are not
equal to five per cent of the total shipments and tonnage to
Pacific Coast points, and the railroad companies are able to
make rates much in excess of water rates and are able to do
business on the rates which they do make and which rates
do not meet the water rates at all. It may be that the Pacific
Coast rates are some lower than they would be if there was
no Pacific Ocean, but the fact remains that reasonable profit
and reasonable remuneration are received on Coast business
by rail.
The only purpose that the financial history of the North¬
ern Pacific Railroad Company can have in this case is to show
that the stock of the Northern Pacific Railway Company is
all watered.
Counsel spend considerable time in an effort to show that
the outstanding obligations of the Northern Pacific Railroad
Company were at the time of the re-oro-anization $380,000,-
000.00. As a matter of fact the re-organization plan and
statements of counsel show that outstanding obligations in the
hands of the public were only $272,000,000.00. 7Te plan
4°
of the re-organization was that primarily of the bond-holders,
not of the stockholders.
Counsel are careful not to set forth some of the details
of the re-organization.
Perhaps counsel assumed that the details of the re¬
organization are common knowledge, so much so as to be
printed in a current magazine—"Everybody's Magazine" for
July, page 20.
9
Holders of general first mortgage bonds of the
OLD company were permitted to exchange them for
those of the NEW company, and for each $iooo.oo,
the holders received $1350.00 of new bonds. tlie
holders of general second mortgage bonds and gen¬
eral third mortgage bonds received i 18 j2 per cent
of the new bonds, plus 50 per cent in preferred
stock certificates. that is, for each $1000.00 bond
the holders received $1685 in new securities.
(Northern Securities Co., Record pp. 1657-9.)
Not only was the stock all watered but a large part of the
bonds were watered.
Counsel are seemingly frank in their statement (24) as
follows:
"The present cost of construction, or of re-production,
therefore, is only one of the facts determining present
value; and in considering the reasonableness of a
rate, the commission would not be controlled by
that alone."
The argument of counsel, however, is practically con-
41
fined to the cost of reproduction and does not in any way
suggest to this Court any other theory or basis upon which
the defendants should be allowed to fix rates. To fix them
on that basis would require rates to fluctuate as any market¬
able commodity may fluctuate.
All that has been said in reply to the Great Northern
Railway Company's brief, with reference to large expendi¬
tures for betterments and permanent improvements, is ap¬
plicable to the Northern Pacific Railway Company.
It is evident that the Great Northern Railway Company
and the Northern Pacific Railway Company are in much
better condition, have more business and earning more money
than are railroads in many of the more densely populated
districts.
i
These roads have the traffic of empires, large areas on
either side, that are not affected or reached by any other
railway company.
They complain of the sparsely settled country and yet at
other times claim credit for foresight in locating the roads
as they were located (32, 34).
Counsel say:
"The road commands the traffic of the most productive
regions of northern Minnesota, North Dakota, Montana,
northern Idaho and Washington. * * * There is
not a single city of importance in northern Minnesota, North
Dakota, Montana (except Great Falls), northern Idaho or
Washington that is not reached either by its main line or
branches."
The Northern Pacific Railway Company, therefore, has
no reason or right to complain of the lack of population.
42
The tables and figures of counsel, wherein an attempt is
made to show small earnings, are not fair or just (36-8).
* They take an average of all the years the Northern Pa¬
cific Railway Company has been operating since the purchase
of the property at foreclosure sale and include the bonded
indebtedness with the capital stock. The bonds draw only
3 and 4 per cent. This is all they are entitled to earn upon
the bonded indebtedness. They are not entitled to borrow
money at 3 per cent and 4 per cent and earn 7 per cent there¬
on and pocket the difference of 3 per cent and 4 per cent.
This is not permissible even under the case of Smyth vs.
Ames. If we are to take present day boom prices, the de¬
fendant is not entitled to have anything considered except
their most prosperous year, that is, the fiscal year ending
June 30th, 1906, or the fiscal year ending June 30th, 1907.
Instead of the earnings being as set forth in those tables, the
facts are as set forth in the 1906 Annual Report. That an¬
nual report shows a dividend of 7 per cent and a large surplus
remaining after more than liberal expenditures for mainte¬
nance, permanent improvements and betterments. It doesn't
matter what kind of tables are made up, the fact remains
that upon all capital stock,—all watered,—7 per cent divi¬
dends have been paid for many years and the interest has
been paid upon the watered and other bonds as well, and
after all these have been attended to, and more than liberal
expenditures for maintenance, betterments and permanent
improvements, a very large surplus remains.
Counsel state that the bonds were not sold for par, that
the company did not realize par for its bonds—more water.
43
Notwithstanding this fact, interest has been paid upon par
value of bonds, and the complainants have not sought to
take advantage of this fact. These facts should, however,
be considered by this Commission in arriving at and deter¬
mining what are just and reasonable rates.
Counsel cite and quote from Cotting vs. Kansas City
Stock Yards Company, 183 U. S., 79 (22 S. C. R., 3°' 44)i
but fail to inform the Commission that the portion of
opinion quoted by counsel was not concurred in by other
members of the Court. The language so quoted is of one
Justice only.
The concurring opinion of Justices Harlan, Gray, Brown,
Shiras, White and McKenna, is as follows:
*
We assent to the judgment of reversal—so far as the
merits of this case are concerned—upon the ground that the
statute of Kansas in question is in violation of the 14th
Amendment of the Constitution of the United States in that
it applies only to the Kansas City Stock Yards Company, and
not to other companies or corporations engaged in like busi¬
ness in Kansas, and thereby denies to that company the equal
protection of the laws. Upon the question whether the
statute is unconstitutional upon the further ground that, by
its necessary operation, it will deprive that company of its
property without due process of law, we deem it unnecessary
to express an opinion.
If the decision in the 119 Indiana case be the law, the
railroads could and would dictate what rates can be charged
in all instances.
The hue and cry about the stopping of projected new
roads cannot have any force in determining this case.
It is a matter of public knowledge that the Chicago, Mil-
44
waukee & St. Paul Ry. Co. is building a transcontinental line
as rapidly as it can. The evidence is that the Northern
Pacific Railway Company and the Great Northern Railway
Company are building, as rapidly as they can, a road from
Spokane to Portland. The evidence also shows that a line
is being built from Spokane into and through what is known
as the Palouse Country. The Northern Pacific Railway
Company and the Oregon Railroad & Navigation Company
are building a joint road from Lewiston, Idaho, to Riparia,
Washington. Other roads also are projected and being built-
in the State of Washington. Doubtless there will be a line
from the Great Northern, a short distance east of the Colum¬
bia River to Pasco, Washington, to connect with the road
from Spokane to Portland, now being built.
Complainants are not at all alarmed about this action
or proceeding defeating any legitimate projected railway.
The following statement of counsel (45) is erroneous :
"Now the complainants make no claim that these rates
are unreasonable as regard to the value of the services for
which they are charged. They do not say that to haul freight
from the eastern terminals to Spokane is worth less than the
carriers now charge for this service."
It is as startling as it is unwarranted. The allegation of
the petition is that the rates are intrinsically unreasonable,
illegal and exorbitant. If the complainants understand the
English language this means that the rates, in and of them¬
selves, are unreasonable and greater than the value of the
services rendered.
Upon the oral argument Mr. Bunn made the statement
45
and contended that it is worth just as much to haul freight to
Spokane whether there be one road or many roads.
This position cannot be maintained where there are two
or three roads running into the same place and one of them
can haul the freight cheaper than the others. In that event
the rates should be fixed on the basis of the one that can
render the service the cheapest.
The logical result of Mr. Bunn's argument would lead
him to the same conclusion that Mr. Yoakum, Chairman of
the Executive Committee of the Chicago, Rock Island &
Pacific Railway, reaches.
Mr. Yoakum, in his article in the July number of "The
World's Work/' says:
"Valuation for the purpose of establishing a basis for
fixing transportation charges would not be of any disad¬
vantage to the railroads, except to further disturb present
financial conditions, but of no practical value for the
purpose of arriving at a fair and equitable basis for
rate-making, and I do not believe that it would cure the
existing ills.
' As a railroad manager, I should not oppose it, nor do
I see how the right of the Government to make such valuation
can be challenged, even though I doubt its ultimate efficiency
in accomplishing the practical results for which it is being
urged. The expense it would entail on the Government
would be unwise, as all the elements constituting the principle
of fair and equitable rates can be had through other sources
of information at the Government's command—which will
be reliable while the valuation theory will not.
* * * * * * * jjt
There is a total stock issue on railroads of about
$6,650,000,000, of which amount about $4,150,000,000 is
dividend paying stock, and $2,500,000,000 is non-dividend-
paying stock. The stockholders receive annually about
$240,000,000 as dividends, which is 5.78 per cent on the
total dividend-paying stock, and but 3.6 per cent of the total
stock issue of the railroads."
4^
The Great Northern and Northern Pacific are paying
double the average interest on all railroad stocks, if Mr.
Yoakum's figures are accurate.
Mr. Bunn's argument will lead him to the same position
that the railroad traffic men occupy, that is, fixing the tariffs
and rates without reference to the value of railroad property
and solely with the view of the highest and best rate that the
traffic will bear.
This rule is not in accord with the decisions of this Com¬
mission.
Counsel admitted (66-7) that the total bonds and stock
issued at the time of the purchase of the property at the
foreclosure by the Northern Pacific Railway Company was
$311,000,000. This amount could not possibly be spread
out to pay $380,000,000' of stocks and bonds of the old
company, and give a bonus of $350 on each $1000 of the
general first mortgage bonds and $685 on each $1000 of the
bonds under the second and third mortgages. It seems to
inevitably follow that the outstanding stock and bonds of
the old company did not exceed $272,000,000. The old
company was insolvent and unable to pay its bonded debts.
The stockholders were out their money. The plan of re¬
organization shows that there is a large amount of watered
bonds and that all the stock is watered.
Complainants insist that the stockholders of the re¬
organized company shall not be permitted to earn more on
the bond investment than the rate agreed upon. A large
amount of the bonds were sold at less than par. The entire
47
capital stock of the reorganized company was donated and
given away. The actual investments were less than the
$161,000,000 of bonds issued at the time of the purchase.
Complainants insist that when the Northern Pacific Rail¬
way Company is permitted and allowed to pay interest on
bonds and indebtedness largely in excess of the amount in¬
vested at the rate agreed upon and then 7 per cent upon
watered stock that the stockholders shall not thereafter be
entitled to require that a greater rate of interest should be
paid to them or that permanent or lasting improvements shall
continue to be made as they have heretofore been made,
until after the long suffering public have had reasonable
relief.
The writer hereof has searched in vain for the evidence
supporting the statement of counsel (70) that the expenses
of repairing the motive power is 15 per cent per annum.
This Commission and the courts have refused to adopt
the theory upon which railroad rates have heretofore been
made by the railroad companies. Defendants are still con¬
tending for that same old theory (72-3) to-wit: All that
the traffic will bear.
Counsel do not set forth any reason why the coal lands
of the Northern Pacific should be included in the estimate
of the cost of reproduction. The whole or any considerable
portion thereof is not used continuously or frequently.
It has already been shown in this brief that electric power
is much cheaper than coal, along the western portion of the
Northern roads, beginning some distance east of the Rocky
48
Mountains, and the Northern Pacific and Great Northern
can be equipped and operated by electricity, developed by
water power, cheaper than by coal. Other motive power may
soon be cheaper than coal or electricity.
If coal lands can be included, terminals for 100 years
hence can be included also.
It is shown in the opening brief of complainants that
unused property cannot be included in estimating cost of
reproduction or in fixing the value upon which common
carriers are entitled to earn an income.
BRIEF OF THE UNION PACIFIC RAILWAY AND
THE OREGON RAILROAD AND NAVIGA¬
TION COMPANIES.
The reduction of rates as prayed for herein would not
be a serious matter to the Union Pacific and Oregon Rail¬
road and Navigation Companies because their interstate
traffic to Spokane does not exceed 12^2 per cent of the whole
thereof.
This Commission ought to follow the early rule laid
down by the Commission, namely, that the shippers are en¬
titled to a rate upon the shortest and cheapest route.
There isn't any evidence in this case to show that the
accumulated profits and the surplus on hand have been occa¬
sioned by excessive local rates or other rates at the east end
of the lines. According to the intervenors, the rates at the
east end of the line are low.
If the local rates at the east end of the systems are
49
excessive and unreasonable, the defendants had ample oppor¬
tunity to show that the surplus was accumulated from such
illegal exactions. They did not do so. Hence, this Com¬
mission is not entitled to indulge in any presumption of that
character.
It must also be borne in mind that the local traffic receipts
are only about 25 per cent of the total income.
Counsel (11) seem unwilling to concede that there have
been changes in the last 15 years, except that Spokane has
grown notwithstanding railroad opposition. At the hearings
in 1892 and 1896 the defendants contended strenuously that
earnings had everything to do with the matter of fixing rates.
They now claim that they have nothing whatever to do with
the matter of fixing rates.
Counsel seem to have entirely overlooked the question
of reasonable rates in their entire argument. The argument
is made that if water competition exists that the railroads
have a right to insist upon higher rates to Spokane than to
the Coast, notwithstanding the higher rates to Spokane would
be unreasonable.
There is one thing that exists at the present time and
that existed at the time of the hearing in 1892 and that is
the fact that less than 5 per cent of the total tonnage to the
Pacific Coast is by water. The decision rendered in 1892
finds as a fact that the water tonnage Jtifi not exceed 5 per
cent of the shipments to Coast points.
The complainants have the data from Pacific Coast ports,
5°
and the calculation they have made shows less than 5 per
cent of the total tonnage to the Pacific Coast is now by water.
The lowest rate by water at the present time is greater
than the existing lumber rate by rail.
Counsel are in error (21) in stating that Mr. McCune
selected the 30 articles mentioned in the petition herein. Mr.
McCune was not employed by the complainants until long
after the petition was filed. As soon as Mr. McCune was
employed, it was discovered that no accurate results can be
obtained by taking a few selected articles. Hence, a com¬
plete commodity list was made up by Mr. McCune and was
put in evidence for the reason that nothing short of that
would be accurate and in fact nothing short of that would
have been fair. It is therefore just and fair to discard and
disregard all the tables presented bv counsel for the Union
Pacific Railway Company and the Oregon Railroad & Navi¬
gation Company because it is impossible to arrive at anything
like an accurate result or anything like a fair presentation of
the whole case other than by the entire commodity list.
Averages cannot be depended upon to show the true
situation or to obtain a fair or accurate result as to the reduc¬
tion of rates or to determine what are reasonable rates.
An examination of the rate sheets will show that averages
(28) are wholly inadequate to give this Commission a true
idea of the situation.
The rate sheets for the length of time that the respective
rate sheets were in existence will demonstrate that at no time
has Spokane secured any substantial reduction until a boycott
was instituted in 1904, The fact that lower rates to the
more distant points have been reduced less than the higher
rates to the shorter distance point isn't any proof whatever
that the higher rates, still existing, to the shorter distance
point, are reasonable.
The result of the argument of counsel and the logical
conclusion thereof is, so long as railroads agree upon and
obtain rates, that those rates are reasonable and no reduction
can be had. This argument is fallacious.
Counsel seem to argue that the complainants and the
people of the "Inland Empire" should, with bowed head and
upon bended knees worship the railroad companies for per¬
mitting the former to prosper; that they should be sub¬
missive and docile because they are so situated that the rail¬
road companies have charged higher rates to Spokane and
surrounding territory than they have at any other place upon
the lines of the defendants.
Complainants are not attempting to prevent the City of
Salt Lake, Ogden, Reno, Butte or Missoula from securing
better rates.
Counsel are in error in stating that Spokane enjoys the
jobbing trade of the.Coeur d'Alene mining district or any
place to the east of Spokane (46).
Spokane doesn't enjoy any better rates than any other
town or city surrounding it or within what is sought to be
termed the magic "Spokane Zone."
S'pokane never has had rates so that it could have the
exclusive trade within that "Zone."
52
The solicitation of counsel for the jobbers of Spokane
has a motive back of it. That motive is to continue the
existing unreasonable rates, so the consumers will be mulcted
for a large amount of money. The complainants have not
asked this Commission to give Spokane any better rates than
shall be given Walla Walla, Pendleton or other towns sur¬
rounding the City of Spokane.
If Walla Walla or Pendleton are good places for jobbers
to locate and do business, complainants hope they will so
do and be successful and secure reasonable rates from the
railroads.
The statement of counsel (68) that the ocean steamers
are making better time than railroads is a comment that
demonstrates the disregard of the railroad companies for
the people doing business wfith them. No possible excuse
can be offered for that condition of affairs.
It is immaterial to defendants whether or not the jobbers'
territory of Spokane will be increased by terminal rates. If
Spokane is given terminal rates, the consumers would be
benefited and a large amount of money would be retained
in the "Inland Empire" that is now illegally, wrongfully and
unlawfully exacted by the railroad companies.
Complainants are not asking this Commission to enforce
an illegal or unlawful contract (70) but are undertaking to
have this Commission decide and determine that the rates
which Mr. Hill said in 1892 were reasonable; and now
reasonable.
It is not believable that if defendants in this case admitted
53
orally or in their briefs that terminal rates are reasonable
rates to Spokane that this Commission would not adopt that
admission and enter an order fixing rates not greater than
terminal rates.
If counsel for defendants had openly agreed that Spokane
ought to have terminal rates there is no doubt that this
Commission would make and enter an order fixing rates not
greater than terminal rates.
While Mr. Hill was not counsel for his railroad in
1892, yet he was superior to and above its counsel. He
was the President of that company and knew more about
its affairs and what were reasonable and unreasonable rates
than any attorney who then or now represents it or any other
of the defendants herein.
Supposing, therefore, that Mr. Hill had appeared before
this Commission, or its members, who took testimony in this
case, and stated to the Commission that terminal rates to
Sookane would be and are reasonable and further agreed to
put those rates into effect, would this Commission make an
order in conformity to those statements and that agreement?
lr so, why should the Commission not make an order in con¬
formity with the statements and agreement made in 1892 by
Mr. Hill, when the net earnings of his road are now greatly
increased and the profits immense?
It does not seem possible to the complainants herein that
this Commission can do otherwise than grant and give and
enforce by appropriate order, terminal rates to Spokane and
give Spokane the same advantages and privileges of mixed
54
carload lots and less than carload lots as are now enjoyed
by Coast cities and towns.
What proof is so conclusive and so convincing as the
unqualified admission and agreement of a party not con¬
troverted or denied? Such proof in all courts is ample for
judgment to be rendered in accordance with such uncontro-
verted and undenied admissions and contract.
The oral argument of Mr. Cotton was a clear indication
and practically an assertion that the new line to Spokane—
Soo, Canadian Pacific, Spokane-International-—will put
into effect and there will very shortly be in force thereon,
terminal rates to Spokane. Mr. Cotton is confirmed in this
by the silence and failure of the Canadian Pacific to appear
herein. It was made a party to this proceeding and by reason
of its silence and failure to appear, judgment should go by
confession, against it.
Complainants agree that the defendants are entitled to
reasonable rates and that rates are not necessarily measured
by a return upon the capital stock. Counsel say (73-4),
"A reasonable rate and not a reasonable return upon the
capital investment is the measure of the carrier's ability to
charge."
1
It is reasonable, however, to conclude that when a carrier
is receiving a reasonable return upon the capital invested by
it, it is receiving reasonable rates or more than reasonable
rates.
It is unnecessary to create a "straw man" and then
knock him down as counsel have done (75) when the actual
facts in this case are so opposite to the "straw man."
55
T^hen the railroads become so sulky, stubborn and mean
that they attempt or in fact create a panic because indi¬
viduals or a combination of individuals in one or many
instances appear and prosecute claims before a tribunal
created by these United States and thereby bring dire conse¬
quences upon themselves and others, it certainly is time when
the depression is on and the prices of their properties are low^
that the Government should acquire one or two of the trans¬
continental lines, and the transportation problems would be
settled in very short order (75).
Counsel continue in error (76) in arguing that rates
should be fixed solely by comparison with other towns and
cities and that no other matter should be considered. As it
has been many times stated, this would result in railroad
companies forever regulating and controlling rates.
Counsel seem to have the same idea that Mr. Harriman
apparently has, towit: that railroads should not be con¬
trolled to any extent or in any degree whatever.
The argument of counsel will lead to the conclusion that
railroads are entitled to speculate in stocks and bonds instead
of doing a railroad business. According to argument of
counsel they are entitled to issue and sell stock for the purpose
of speculating in the stocks of other companies, as the Union
Pacific did with the stocks of the Northern Pacific Railway
Company and the Great Northern Railway Company. The
writer hereof does not remember whether or not the annual,
renorts show an account or report of the $90,000,000 profit
made in that speculation.
5^
The average rates used by counsel seem to include local
as well as interstate rates.
The fact that giving terminal rates to Spokane would
necessitate changes in methods of doing business and changes
in tariff sheets or that it would affect other roads is no excuse
for a failure of the Commission to prant to complainants
v
the relief they are entitled to upon and under the facts of
this particular case.
If the railroads are to continue and be permitted to do
business just as they have heretofore and make rates in the
same way as they have made them, there isn't anything for
this Commission to do and it should be abolished so far as
it is created or given power to fix or regulate rates for com¬
mon carriers of freight.
A commencement must be made somewhere and at some¬
time. The hue and cry of the railroads is an old story and
will not frighten anyone who knows anything about their
tactics.
The complainants regard this Commission as experts upon
railroads and freight rates. They believe that this Com¬
mission is more competent and capable of reaching just and
reasonable results than the employees or governing bodies
of any of the railroads.
BRIEF OF INTERVENORS.
The intervenors have no standing in this case and it is
not deemed necessary to give their brief anv detailed con¬
sideration.
57
The thing they seem to most desire is that what they term
the "Spokane Zone" should be eleminated and the "Coast
Zone" created in such a way that the "Coast Zone" could
never be penetrated by any one outside thereof.
They desire this Commission to do what they are com¬
plaining of except they desire to be the sole beneficiaries.
If, upon a proner petition and full hearing in a subse¬
quent proceeding, this Commission shall find the eastbound
rates or the Interstate distributive rates from Portland to be
excessive or unreasonable, they should be reduced.
With the local rates in the State of Washington, this
Commission has nothing to do.
Mr. Hill said in one of the newspaper articles, which
has been quoted, that Spokane and surrounding country paid
tribute to California too long for its own good.
If Spokane can have the same rates as Coast points, then
every jobber will have an equal show.
If the Portland intervenors would turn their attention to
the development of the State of Oregon they would have
ample to occupy their time. If they would secure the build¬
ing of railroads in that State to undeveloped portions thereof,
they would not be quarreling with "infant Spokane."
If San Francisco would turn her attention to undeveloped
arid regions tributarv thereto and to the traffic with the
Hawaiian and Philippine Islands she would not need worry
about the small territory designated as "Inland Empire" in
the State of Washington.
58
Intervenors from Seattle and Tacoma realized their mis¬
take and "folded their tents like the Arabs and silently stole
away/' never to return.
It seems ludicrous to make an argument now about a
rate war, when the railroads are having more business than
they can do. There is more freight offered for water trans¬
portation than can be hauled, and rates cannot be changed
as easily as formerly because of the control of this Com¬
mission.
We believe that all matters discussed in the brief of the
intervenors have been sufficiently covered and need not be
further replied to in detail.
CONCLUSION.
Complainants confidently believe that this Commission
will hold that 7 per cent dividends on stock (without any
margin on the bonded debts above the agreed rate of interest)
is quite a liberal amount to allow stockholders uoon their
investments. The writer hereof has not been able to find a
decision of any court fixing the rate of income or dividends in
excess of that amount, in fact none have been found fixing
the rate of earnings at as high as 7 per cent. There are
decisions holding that 6 oer cent is ample and liberal. There
are others holding a much lesser rate sufficient. The Supreme
Court of California held in the Water cases that 6 per cent
is ample and liberal, and the Suoreme Court of the United
States affirmed those cases.
San Diego Land & Town Co. vs. Jasper, 189 U. S.,
436, 422; 23 S. C. R., 574.
59
Stanislaus vs. San Joaquin & K. R. C. & I. Co., 192
U. S., 201; 24 S. C. R., 246, 247.
With the abundant and beautiful resources in the north¬
western part of the United States and the rapidity with which
it has been settled and the magnitude of the population there
dwelling, it is no longer a new or undeveloped or savage
country and there isn't any reason why railroads into or
through the State of Washington should earn more money
than they do in the State of Minnesota or in the Middle
States. The European and other foreign stockholders ought
to be very grateful for receiving so much more interest than
thev can make money earn at home. There is little, if any,
doubt that a very large amount of stock of the Great
Northern Railway and the Northern Pacific Railway Com¬
pany is owned by Europeans and other foreigners.
The defendants ought to be satisfied with 7 per cent 011
1
the capital stock when the legal rates of interest in the States
of Washington, Idaho, Montana, North Dakota and Minne-
* *
sota are, respectively, as follows: 6, 7, 8, 7, 6.
The law in many ways recognizes the necessity of pro¬
tecting the weak from the avarice of the strong. One of
the best illustrations of this necessary legislation is the fixing
legal rates of interest and providing remedies for usury.
The powerful railroad corporations are like unto the
money lenders. 1 he people and public need and require pro¬
tection from them.
The Commission is entitled to assume that traffic will
increase and that by reason of increased traffic, the net income
will not be seriously, it at all, decreased.
6o
Railroad Co. vs. Wellman, 143 U. S., 343; 12 S. C.
R., 400. ,
The defendants are not entitled to have this case
determined upon the same basis or theory as if their property
was being condemned. The public have an interest in their
property and to the extent that the public have such interest
they should not be required to pay upon what they already
have, or to the extent that they own or have an interest in
the property of the defendants.
This case should be determined on the equitable principle
of law which prevents a land owner from requiring the occu¬
pant to pay for the use of the improvements put on the
property by the occupant. This principle is well established.
16 Am. and Eng. Ency. of Law (2nd Ed.), 109,
and authorities there cited.
The permanent improvements made from the earnings
of defendants were made by the public as effectually as by
the occupants of land under the authorities just cited.
It is a well known fact that in the construction of new
roads or the making of new extensions or the extending of
main lines or branches, that a large amount of money is made
in developing town sites, etc., which should be taken into
consideration in fixing rates.
In the case of Olcott vs. The Supervisors, 16th Wall,
695-6, the court held:
"Whether the use of a railroad is a public or a private
one depends in no measure upon the question who constructed
it or who owns it. It has never been considered a matter
of any importance that the road was built by the agency of
6x
a private corporation. No matter who is the agent, the
function performed is that of the State. Though the owner¬
ship is private the use is public. So turnpikes, Dridges,
ferries and canals, although made by individuals under public
grants, or by companies, are regarded as Publici juris. The
right to exact tolls or charge freights is granted for a service
to the public. The owners may be private companies, but
they are compellable to permit the public to use their works
in the manner in which such works can be used. That all
persons may not put their cars upon the road, and use their
own motive power, has no bearing upon the question whether
the road is a public highway. It bears only upon the mode
of use, of which the legislature is the exclusive judge.
It is unnecessary, however, to pursue this branch of the
inquiry further, for it is not seriously denied that a railroad,
though constructed and owned by a private corporation, is a
matter of public concern, and that its uses are so far public
that the right of eminent domain of the State may be exerted
to facilitate its construction. But it is contended that though
the purpose and use may be public, sufficiently to justify
taking private property, they are not public when the right
to impose taxes is asserted. It is argued that there are dif¬
ferences between the power of taxation and the powfer of
taking private property for a public use, and that because
of these differences it does not follow that wherever the one
power may be exerted the other can. We do not care to
inquire whether this is so or not. The question now is whether
if a railroad, built and owned by a private corporation, is
for public use, because it is a highway, taxes may not be
imposed in furtherance of that use. If there be any pur¬
pose for which taxation would seem to be legitimate it is the
making and maintenance of highways. They have always been
governmental aifairs, and it has ever been recognized as one
of the most important duties of the State to provide and
care for them. Taxation for such uses has been immemorially
imposed. When, therefore, it is settled that a railroad is a
highway for public uses, there can be no substantial reason
why the power of the State to tax may not be exerted in
its behalf. It is said that railroads are not public highways,
per se; that they are only declared such by the decisions of
the courts, and that they have been declared public only with
respect to the power of eminent domain. This is a mistake.
In their very nature they are public highways. It needed
no decision of courts to make them such. True, they must
be used in a peculiar manner, and under certain restrictions,
but they are facilities for passage and transportation afforded
62
to the public, of which the public has a right to avail itself.
As well might it be said a turnpike is a highway, only because
declared such by judicial decision. A railroad built by a
State no one claims w7ould be anything else than a public
highway, justifying taxation for its construction and main¬
tenance, though it could be no more open to public use than
is a road built and owned by a corporation. Yet it is the
purpose and the uses of a work which determine its char¬
acter. And if the purpose is one for which the State may
properly levy a tax upon its citizens at large, its legislature
has the power to apportion and impose the duty, or confer
the power of assuming it upon the municipal divisions of the
State."
Much the same language was used in Smyth vs. Ames,
169 U. S., 466, 18 S. C. R., 433, as follows :
"A railroad is a public highway, and^ none the less so be¬
cause constructed and maintained through the agency of a
corporation deriving its existence and powers from the State.
Such a corporation was created for public purposes. It per¬
forms a function of the State. Its authority to exercise the
right of eminent domain and to charge tolls was given pri¬
marily for the benefit of the public. It is under govern¬
mental control, though such control must be exercised with
due regard to the guarantees for the protection of its
property."
The court in Smyth vs. Ames approved the case of Cov¬
ington & L. Turnpike Road Co. vs. Covington, 164 U. S.,
578, 596; 17 S. C. R., 205-6. In the latter case the court
used this language:
It is proper to say that if the answer had not alleged,
in substance, that the tolls prescribed by the act of 1890 were
wholly inadequate for keeping the road in proper repair and
for earning dividends, we ecu Id not say that the act was
unconstitutional merely because the company (as was alleged,
and as the demurrer admitted) could not earn more than 4
per cent on its capital stock. It cannot be said that a cor¬
poration, operating a nub lie highway, is entitled as of right,
and without reference to the interests of the Public, to realize
a given per cent upon its capital stock. IT hen the question
63
arises whether the legislature' ticis exceeded its constitutional
power in prescribing rates to be charged by a corporation
controlling a public highway, stockholders are not the only
persons whose rights or interests are to be considered. The
rights of the public are not to be ignored. It is alleged here
that the rates prescribed are unreasonable and unjust to the
company and its stockholders. But that involves an inquiry
as to what is reasonable and just for the public. If the
establishing of new lines of transportation should cause a
diminution in the number of those who need to use a turn¬
pike road, and, consequently, a diminution in the tolls col¬
lected, that is not, in itself, a sufficient reason why the cor¬
poration operating the road should be allowed to maintain
rates that would be unjust to those who must or do use its
property. The public cannot properly be subjected to
unreasonable rates in order simply that stockholders may earn
dividends. The legislature has the authority, in every case
where its power has not been restrained by contract, to pro¬
ceed upon the ground that the public may not rightfully be
required to submit to unreasonable exactions for the use of
a public highway established and maintained under legislative
authority. If a corporation cannot maintain such a highway
and earn dividends for stockholders, it is a misfortune for
it and them which the constitution does not require to be
remedied by imposing unjust burdens uoon the public. So
that the right of the public to use the plaintiff's turnpike
upon payment of such tolls as, in view of the nature and
value of the service rendered by the company, are reasonable,
is an element in the general inquiry whether the rates estab¬
lished by law are unjust and unreasonable. That inquiry also
involves other considerations, such, for instance, as the rea¬
sonable cost of maintaining the read in good condition for
public use, AND THE AMOUNT THAT MAY HAVE BEEN
REALLY AND NECESSARILY INVESTED IN THE ENTERPRISE.
In short, each case must depend upon its snecial facts; and
when a court, without assuming itself to prescribe rates, if
required to determine whether the rates prescribed by the
legislature for a corooration controlling a public highway
are, as an entiretv, so unjust as to destroy the value of its
property for all the purposes for which it was acquired, its
duty is to take into consideration the interests both of the
public and of the owner of the property, together with all
other circumstances that are fairly to be considered in deter¬
mining whether the legislature has, under the guise of regu¬
lating rates, exceeded its constitutional authority, and prac¬
tically deprived the owner of property without due process
64
of law. What those other circumstances may be, it is not
necessary now to decide. That can be best done after the
parties have made their proofs.
It is further insisted by the company that the rates pre¬
scribed for it by the act of 1890 are much less than those
imposed by the General Statutes of Kentucky upon other
turnpike companies of the State; consequently, that that act
denies to it the equal protection of tha laws. The proposi¬
tion of the defendant, is that the constitutional provision
referred to requires all turnpike companies in the State to be
placed by the legislature, when exercising its general power
over the subject of rates to be charged upon highways of
that character, upon substantially the same footing. Upon
this point the Court of Appeals of Kentucky said: "A turn¬
pike road leading into and connected with a populous city
like that of the City of Covington could afford to charge less
toll, by reason of the immense travel upon it, than turn¬
pikes in thinly settled portions of the County or State; and
hence, under former constitutions the legislature has seen
proper to regulate the tolls as the turnpike road may happen
to be located." The circumstances of each turnpike company
must determine the rates of toll to be properly allowed for
its use. Justice to the public and to stockholders may require,
in respect to one road, rates different from those prescribed
for other roads. Rates on one road may be reasonable and
just to all concerned, while the same rates would be exorbi¬
tant on another road. The utmost that any corporation oper¬
ating a public highway can rightfully demand at the hands
of the legislature when exerting its general powers is that it
receive what, under all the circumstances, is such compensa¬
tion for the use of its property as will be just, both to it and
to the public. If the rates prescribed for the defendant in
this case were manifestly much lower, taking them as a
whole, than the legislature has by general laws prescribed
for other corporations whose circumstances and location are
not unlike those of the defendant, a different Question would
be presented. At any rate, no case of that kind is properly
presented by the pleadings, and there is no ground for hold¬
ing that the act of 1890 denies to the defendant the equal
protection of the laws.
In the case of Kennebec Water District vs. City of Water-
ville (Me.), 54Atl., 12, the court uses this language:
If the Maine Water Company were doing a private
65
business, knowing its present income, and the facts tending
to show a probable increase in the future or otherwise, it
would be comparatively easy to approximate the present vabe
of its plant and franchises. But it is not doin? a private
business. It is not a private corporation. The value of its
property cannot be appraised as if it were a private corpora¬
tion doing a private business. * * * It is a quasi
public, or public service, corporation. In pursuit of legiti¬
mate gain, it has devoted its property to a public use. In
that way the public have acquired an interest in the use of
the property. The company owes a duty to the public as
well as to its stockholders. It must serve the public faith¬
fully and impartiallv and must charge no more than reason¬
able rates for service.
In the case of San Diego Water Company vs. The City
of San Diego et ah, 118 Cab, 556; 50th Pac., 636, the
\
court held (various Judges rendered opinions) :
But this is not an ordinary business enterprise. Those
who engage in it put their property entirely into the hands
of the public. Having once embarked, it is beyond their
power to draw back. They must always be ready to supply
the public demand, and must take the risk of any falling off
in that demand. They cannot convert their property to any
other use, howTever unprofitable the public use may become.
They have expended their money for the benefit of others,
and subject to the control of others. That money has, in
effect, been taken by the public; and the public, while
refusing to return that money cannot be heard to say that
it no longer has need for all of it. Nor would it, on the
other hand, be just to the consumers to require
them to pay an enhanced price for the water, on
the ground that it would now cost more to con¬
struct similar works. such a contingency may well
happen; but to allow an increase of rates for such
reason would be to allow the water company to make
a profit, not as a reward for its expenditures and
services, but for the fortuitous occurrence of a rise
in the price of materials and labor. the law does
not intend that this business shall be a specula¬
tion in which the water company or the consumers
shall respectively win or lose upon the casting of
a die, or upon the equally unpredictable fluctua-
66
tions of the markets. for the money which the
company has expended for the public benefit, it is
to receive a reasonable, and no more than a rea¬
sonable, reward. It is to be paid according to what it
has done, and not according to what others might conceivably
do. In effect, the bargain between the company
and the public was made when the works were con¬
structed; and this matter is to be determined
according to the state of things at that time. * * *
As we have said, it is not the water or the distributing
works, which the company may be said to own, and the value
of which is to be ascertained. They were acquired and con¬
tributed for the use of the public. The public may be
said to be the real owner, and the company only
the agent of the public to administer their use.
What the company has parted with—what the
public has acquired is the money reasonably and
properly expended by the company in acquiring its
property and constructing its works. the state has
taken the use of that money, and it is for that use
that it must provide just compensation. What
revenue money is capable of producing is a question of fact,
and, theoretically at least, susceptible of more or less exact
ascertainment. Regard must be had to the nature of the
investment, the risk attending upon it, and the public demand
for the product of the enterprise. It would not, of course,
be reasonable to allow the company to profit equal to the
greatest rate of interest realized upon any kind of investment,
nor on the other hand, to compel it to accept the lowest rate
of remuneration which capital ever obtains. Comparison
must be made between this business and other kinds of busi¬
ness involving a similar degree of risk, and all the surround¬
ing circumstances must be considered. An important circum¬
stance will always be the rate of interest at which money can
be borrowed for investment in such a business; and, where
the business appears to be honestly and prudently conducted,
the rale which the company would be compelled to pay for
borrowed money will furnish a safe, though not always con¬
clusive, criterion of the rate of profit which will be deemed
reasonable. * * *
In fact, the case appears to have been tried largely on a
wrong theory, the greater portion of the evidence consisting
of testimony of expert witnesses as to the value of the
property. This is, at the best, an unsatisfactory way of
determining the question of actual cost (for which purpose
67
only could it be admissible) and should not be resorted to
when better evidence can be obtained. * * *
With regard to the question of the depreciation of the
plant by use, it is sufficient to say that ordinary repairs
should be charged to current expenses, that substantial recon¬
struction or replacement should be charged to the construc¬
tion account, and that depreciation should not he otherwise
considered. It is, doubtless, difficult in many cases to prop¬
erly discriminate between current and ordinary repairs and
such repairs as amount, in effect, to new construction. Such
difficulties, when they arise, must be solved by the application
of the principles on which ordinary business enterprises are
conducted. * * *
In the first place, the evidence develops that there can
be no general depreciation of this plant as a whole. There
are tunnels, wells, reservoirs, water rights and real estate,
amounting to more than one-half of the valuation of the
plant. There is no depreciation of these things. There is
no wear and tear; no permanent and gradual destruction by
use and age. Most of them stand as everlasting as the hills.
The thecry of plaintijf in this regard, seems to he that the
life of a plant cf this character may he approximated at
thirty years, and that a sinking fund of one-thirtieth of its
value should he collected from the rate payers annually, and
laid aside to he handed to the stockholders upon the occasion
of its demise, as an alleviation salve to their sorrow. But
such a thing is all wrong for it results in the
consumers of water buying the plant, and paying
for it upon installments. consumers of water can¬
not be charged with cost of construction. They are
only to pay a fair interest upon such cost; and as we look at
this matter, if this 3^2 per cent is not stowed away in the
vaults as a sinking fund to make glad the hearts of the
stockholders upon the expiration of the 30 years, which
theory cannot be tolerated for a moment, then it must go
into the plant as cost of construction, and therefore not
chargeable against the consumers. The result of such ex¬
penditure is only to increase the valuation of the plant, and
to thereby draw from the consumers an income upon the
amount of the investment. If improvements are to be made
in the plant, the cost of these improvements should be charged
against the construction account. If repairs are to be made
upon the plant as it stands, as, for example, a new pipe sub¬
stituted for an old piece of the same size and quality, such
charge should be considered operating expenses.
The obligation is to compensate for service rendered.
68
What will constitute just compensation involves many con¬
siderations. Certainly no allowance need be made for
unnecessary expenditures, either in construction or manage¬
ment. Nor is the test always the cost to the companies.
There is no limit to the number of companies which may
bring water into a city. The franchise is freely offered to
all in the constitution. If there are many companies and
thereby the cost of management is increased, this fact would
not call for increased rates. The service is worth no more
when rendered by ten companies than when one company
furnishes all the water. Incidentally to the inquiry as to
what is a fair compensation for the service, the governing
board may well inquire into the cost which the company
whose rates are to be regulated have incurred in bringing
water to the city, and in distributing it. But these matters
are merely incidental, and never determinative of the
question.
Under the authorities and admissions of counsel the
"unearned increment" does not represent any investment by
the stockholders for the benefit of the public. The
defendants are not entitled to have rates fixed thereon.
This Commission is the final arbiter of the rights of the
complainants. The complainants have no power or authority
to go beyond this Commission into the courts and relitigate
the* questions herein presented, while the defendants have
that power and authority and this Commission should be
extremely careful in its consideration of the rights of com¬
plainants and give and grant to them the relief which they
demand, if upon the whole case there is reasonable and fair
grounds for so doing.
Whatever order the Commission may make is of short
duration and putting terminal rates to Spokane into effect for
the period provided for by law, cannot seriously damage or
harm the defendants or cither of them. The tendency of the
unearned increment cannot
The
69
courts is to test, by actual operation, the effect of reduced
rates for a reasonable length of time, and thereby ascertain
the actual results and effect of the reduced rates.
There is every reason why this Commission should grant
the prayer of the comnlainants herein for the period of two
years, and at the end'of that two years, determine what has
actually been the result of such reductions. There is no
good reason why this should not be done. The defendants
and each of them have such a large amount of surplus that
has been accumulated by excessive and exorbitant rates that
no legitimate complaint can be made of losses which may
possibly occur during a period of two years.
Upon the whole case the complainants are entitled to a
great deal more relief than they have prayed for.
Respectfully submitted,
H. M. STEPHENS,
Attorney for Petitioners and Complainants.
LAWRENCE HAMBLEN,
Corporation Counsel of the City-of Spokane,
FRANK ALLEN,
Assistant Corporation Counsel of the City of Spokane,
For the City of Spokane.
R. M. BARNHART,
Prosecuting Attorney of Spokane County,
For the County of Spokane.