South & North Alabama R. v. Railroad Commission of Alabama

GRUBB, District Judge. This matter comes on to be heard upon the application of the plaintiff for an injunction pendente lite against the Railroad Commission of Alabama, restraining the enforcement of an order, the effect of which was to reduce the plaintiff’s passenger fare of 3 cents a mile for adults to 2% cents, with like reduction for half fares. The questions of res adjudicata, due process of law, and interference with interstate commerce, with reference to the proceeding before the Commission, are not different from those presented in the case of Louisville & Nashville Railroad Co. v. Railroad Commission of Alabama et al. (D. C.) 208 Fed. 35, decided by this court, and may be ruled against the plaintiff as they were in that case, without extended discussion. The questions as to whether the plaintiff would receive a fair return on its property devoted to intrastate business, after the restoration of its voluntary freight rates, and with the 2Y2-cent passenger rate enforced, and if not, whether the enforcement of'the 2%-cent passenger rate would materially contribute to the result, remain for decision. The facts upon which these questions are to be decided differ from those presented to the court in the Louisville & Nashville Case, and the plaintiff contends that these differences should result in a different decision, and the plaintiff also contends that some of the legal conclusions which formed the basis of that decision are erroneous, and should be reconsidered by the court, with the result of a different conclusion in this case. The principal criticism of the decision of the court in the Louisville & Nashville Case is directed at that part of the opinion which holds that a showing of increased earnings under the reduced rate over what the plaintiff'had received in former prosperous years under the 3-cent fare, though such increase could not be traced to stimulation of traffic due to the reduction, might avail to show that confiscation did not result from the reduction. One contention of plaintiff is that if the increase in earnings under the reduced rate is due to increased density of traffic, or to increased prosperity, or to any cause other than stimulation, the plaintiff is entitled to the benefit of such increase as against legislative reduction of rates, at least up to the point where the increase under the reduced rate is such as to yield only a fair return on the property devoted to the public use. The soundness of this -contention does not admit of doubt. The question is each case remains as to whether the increase under the ‘reduced rate has or has not brought the earnings up to o;beyond the point of remuneration. The plaintiff also contends that the voluntary putting in force and maintaining for a time of a rate by the carrier does not estop the carrier from thereafter asserting that the rate is so unreasonably low as to be confiscatory, upon its subsequent discovery of that fact. This contention is also sound. Applying these legal principles to the Louisville & Nashville Case, the plaintiff argues that the court’s conclusion, from the fact that the passenger earnings in 1912 under the reduced rate had exceeded those — 475 — for the prosperous year of 1907 under the 3-cent rate, that the reduced rate was not confiscatory is an erroneous one. The argument assumes, that the court, in reaching this conclusion in the Louisville & Nashville Case, held that the state had power to deprive the carrier of a part of its increased'earnings by rate reductions, though such increase still left the carrier’s earnings below the point of remuneration, and that the putting in force and maintenance of a 3-cent passenger rate voluntarily by the carrier prevented it from afterwards asserting the unre-munerativeness of the 3-cent rate, though it could in fact be shown to be unremunerative. We think counsel are mistaken in each assumption. - The court found from the record in that case that the increase in passenger earnings under the reduced rate had in fact passed beyond the remunerative point, resting its finding partly, it is true, upon the fact that the earnings had passed the amount yielded during the carrier’s most prosperous years under the 3-cent fare, which it had voluntarily put in force and for many years maintained. The court did not hold that the putting in forcé and maintenance-of the 3-cent rate estopped the carrier from thereafter showing its unremunerativeness, if it was able to do so, but did hold the voluntary maintenance of the rate for a long period operated as an admission by the carrier of its reasonableness, to dispel the effect of which clear proof to the contrary would be necessary, and that such clearness of proof was not forthcoming. The-court found that the 3-cent fare, while in force, had been a reasonable one to the carrier, and did not hold that the carrier by its action in employing the 3-cent fare had precluded itself from ever thereafter asserting its unreasonableness. [1] The plaintiff’s criticism must therefore lie with the finding of the court that the 3-cent fare yielded fair returns to the carrier, and with its reasons for reaching that conclusion. The record in the Louisville & Nashville Case showed that this rate of fare was one of the carrier’s own adoption, which it had continued to maintain, after years of opportunity for experiment, and where and when it was not induced to do so by the demands of competition, and that it had, some years before the hearing, voluntarily reduced existing 4-cent rates of fare on its branch lines to 3 cents, to provide uniformity of fares over its system. These facts are persuasive that the plaintiff in the Louisville & Nashville Case, after ample opportunity to determine the reasonableness of a 3-cent fare, had arrived at a conclusion favorable to the reasonableness of that rate of fare. The court also had in mind the fact that before the era of rate regulation, the passenger carriers of the Southern states had adopted, almost without exception, a standard passenger rate of 3 cents a mile, and, except when it was reduced by rate regulation, had maintained this standard rate up to the time of the hearing, and that it was hardly conceivable that the passenger carriers of the country, with their facilities for determining whether or not a rate was remunerative, and with years of opportunity in which to experiment, would voluntarily, without the ■pressure of rate regulation or competition, have maintained a 3-cent fare if it was attended -with confiscatory results. — 476 — These were some of the facts, which the court felt justified it in assuming in the Louisville & Nashville Case, as a basis of fair comparison, the results which attended the operation of the 3-cent fare, and in holding that when the returns under the reduced fare had substantially passed beyond the returns of the carrier’s most prosperous year under the 3-cent fare, the reduced fare was shown to be reasonable,, since it equaled or exceeded the returns which had been yielded to the carrier under the old and reasonable fare. After reviewing the reasons which induced us to hold in the Louisville & Nashville Case that the 3-cent fare was reasonable, and giving careful consideration to the reasons assigned by the plaintiff against the correctness of our conclusion, we remain persuaded that the action of the plaintiff in that case, and that of practically all the carriers of passengers, including the plaintiff in this case, in the South, in voluntarily maintaining for years a 3-cent maximum fare, is controlling of any evidence contained in that record tending to show .its unreasonableness to the carrier. We still hold that the return to the carriers under the 3-cent fare, while it was operative, is a proper basis of comparison with the returns to the carriers under the reduced fare, by which to determine the reasonableness of the reduction. In the case we are now considering, we think it proper to consider, along with the other evidence, the action of this-plaintiff in maintaining, after opportunity for experiment and when not compelled by state action or by competition, a 3-cent fare, as evidence of the reasonableness to this plaintiff of that rate of fare, while it was in force; and, after giving careful consideration to all the evidence in the record, we hold that the 3-cent fare, while kept in force on the plaintiff’s railroad, was a reasonable fare to the carrier, and that the results of its operation afford proper bases with which to compare the results of the operation of the reduced fare of 2% cents, while it was in force, with the view of determining its reasonableness in the future to the Carrier. [2] If the yield to the carrier from intrastate passenger earnings under a specific rate are reasonable in amount, then confiscation cannot result from such a rate, even though it be also true that the entire earnings derived from intrastate business, both freight and passenger, are unremunerative. The remedy for. such a situation is the adjustment of freight rates, and not the disturbance of the passenger rates. A deficiency in intrastate earnings, due to unreasonably low freight rates, should be overcome by raising freight rates till they afford a reasonable return, and not by raising already reasonable passenger rates to accomplish that end. The problem presented by the record in this case is not the effect of an entire schedule of freight and passenger rates on plaintiff’s intrastate business. If this were the issue, a showing that the plaintiff did not receive, under the complete schedule, adequate returns would be conclusive of its right to redress as against the schedule. In a case like this one, in which a part only of the entire schedule is assailed, two questions must be décided before the relief is granted: First, whether or not the intrastate business of the carrier is properly remunerative ; and, second, whether or not, if the returns from its entire — 477 — intrastate' business are not properly remunerative, this condition is due to, or contributed to materially or substantially by, the enforcement of the portion of the schedule, which, alone, is complained of. If it appears that the portion of the schedule alone complained of is reasonable to the carrier, and affords a. fair return on the property devoted by it to the service, then the injury to the carrier’s business is accomplished elsewhere, and the business affected by the rates complained of should not be made to assume any part of the burden. Where a single rate or a partial schedule is the subject-matter of contention, the reasonableness of a single rate or partial schedule is an issue, as well as the sufficiency in the aggregate of the returns upon the carrier’s intrastate business. The insufficiency of the aggregate return is conclusive in favor of the carrier only as against the entire schedule. The reasonableness of a single rate or partial schedule is open to contestation, though the aggregate return may appear to be insufficient. The corollary of a contrary holding would be that the carrier would have the right to burden traffic, the rates upon which were already reasonably high, by increases, with the purpose of making up a deficiency caused by other traffic, with relation to which the rates were too low. The cost of the service, charges made by other carriers for similar service, and many elements, other than the aggregate returns from the carrier’s entire business, enter into the inquiry as to the reasonableness of a specific rate, all of which would be excluded from consideration if insufficiency in the aggregate were held to be controlling. In this case it may be that the plaintiff will receive insufficient returns on its entire intrastate business under the present schedules and the reduced passenger rate. This will or will not show the confiscatory nature of the reduced passenger rates, depending upon whether or not the insufficiency is brought about in whole or in part by the fact that the returns yielded by the reduced passenger rate are too small to properly remunerate the carrier for the service performed under that rate. If the returns to the plaintiff from intrastate passenger business under the reduced rate are ample to remunerate it for the service performed, and afford a fair return to it upon the property devoted to that traffic, the plaintiff must look for redress for any insufficiency in its aggregate intrastate earnings to the other rates, which affect unfavorably its intrastate freight traffic. The passenger rates alone being the issue in this case, the reasonableness of that rate is the vital question, upon which the alleged insufficient aggregate return to plaintiff, on its entire intrastate business, is merely one among many circumstances to which the court should look. If, after considering all the pertinent facts, the court is of the opinion that the 2%-cent fare is reasonable, then the plaintiff’s right to relief in this case fails, though its entire intrastate business does not yield it a fair return on the property devoted to that class of business. The plaintiff has offered evidence tending to show separately that the 2%-cent fare will not yield it a fair return on the value of the property, which it asserts is devoted to intrastate passenger business. The defendants, on the other hand, contend that, under a proper dis — 478 — tribution of expenses and values, the 214-cent fare will produce an adequate return, upon the value of the property attributable to intrastate passenger business. The plaintiff’s net income, over all charges, for the fiscal year of 1912, from all sources, amounted to $565,876; which is approximately 16 per cent, on its outstanding capital stock of about $3,500,000. The net return for that year would, after deducting all charges, except interest on plaintiff’s bonds, amount to about $1,-200,000, and would pay 5 per cent, upon the total valuation of plaintiff’s property, as estimated by it, of approximately $24,000,000. The net passenger train earnings for the same year, after deducting therefrom the proportionate share of taxes on the revenue basis, were $564,-538, which would yield in excess of 6 per cent, upon the plaintiff’s valuation of the property devoted to passenger business, using the method adopted by plaintiff to distribute value and expense between’ passenger and freight business. These figures quite clearly show that a showing of confiscation from the reduced rate depends upon whether the values and expenses are properly distributed by plaintiff’s method as between passenger and freight and'inter and intra state business. As to this the parties are in disagreement. The plaintiff contends that all supposed errors as to values and expenses as between inter and intra state and passenger and freight business, which may have occurred in the Louisville & Nashville Case, have been corrected in this case, and that there is an indisputable showing of inadequate return, as a result of the corrected methods. The defendants contend that errors in plaintiff’s figures as to valuation and distribution still exist, and make results of its methods worthless. Such consideration of the respective contentions as the limited time allowed us permits us has been given, and still leaves our minds in a state of uncertainty as to the correct conclusion to be deduced as to plaintiff’s methods of valuation and distribution and the results predicated upon them. The following facts are indisputably shown by the record bearing upon the effect of the reduced rate on intrastate passenger earnings during the time it was in force, and in comparison with like earnings under the 3-cent fare: There has been a steady increase of passengers carried annually from 1907 to 1913, except for panic years. This applies to both inter and intra state passengers. The increase in intrastate passengers carried for the year 1912 over 1907 was 247,473, or approximately 30 per cent. The increase in intrastate passenger miles during the same period amounted to 9,061,824, or 42 per cent. The increase for 1913 in passengers over 1907 was 383,970, or 45.99 per cent., and in passenger miles 12,510,738, or 58.12 per cent. The increase in intrastate passenger revenue for the year 1912 (under the 21/á_cent rate, except for 2% months) over the year 1907 (under the 3-cent fare) was $143,154.35, or approximately 25 per cent. For the year 1913 (under the 3-cent fare) the increase in revenue over that of the year 1907 was $285,931, and when reduced to a 2%-cent 'basis, assuming that all travel was at the 3-cent fare, the increase would be $137,167, which is in excess of 20 per cent. The plaintiff’s own figures conclusively show that gross intrastate passenger earnings under the 2%-cent fare, while in force, exceeded in the year 1912 sub — 479 — stantially all previous records of intrastate passenger earnings under thé 3-cent fare, even for the most prosperous years. The plaintiff’s figures for 1913 for passengers and passenger miles and for passenger revenue, after being reduced to the 2%-cent basis, for all travel, show a greater condition of increase. The year 1909 is the only year during the period of the 2%-cent fare that shows less gross' intrastate passenger earnings than the year 1907, the most prosperous year under the 3-cent fare. The year 1910 shows approximately equal gross intrastate passenger earnings with those of 1907, though the fare was half a cent less. The years 1911, 1912, and 1913 (the latter after reduction to the 2%-cent basis) show very substantial increases on gross intrastate passenger revenue over that of 1907. If the 3-cent fare yielded plaintiff reasonable returns on intrastate passenger business in 1907, then it follows that the 2%-cent fare yielded reasonable returns during the years 1911,1912, and would have yielded reasonable returns during the year 1913 if in force, unless the plaintiff was entitled to a greater percentage of return during those years than it was in 1907, or unless it cost the plaintiff so much more to earn the returns for those years than it did to earn the return for the year 1907, that, while the gross return was greater, the net was less than in 1907. For the reasons heretofore assigned, we cannot, disabuse our minds of the opinion that the 3-cent fare was reasonable to the carrier in 1907, and that the returns yielded by it afford proper bases of comparison with the returns yielded by the 2%-cent fare, in testing the reasonableness of the 2%-cent fare while in force, and now, if restored. As the 2%-cent fare produced, while it was in force, and would still produce if now in force, larger returns to the plaintiff than the 3-cent fare did while it was in force, the holding by us that it was reasonable necessarily implies the reasonableness of the 2%-cent fare, subject to the qualifications just stated. It is quite clear that the plaintiff could not complain of a reduced rate, if the effect of it was to stimulate traffic to the extent of making up, by the increased travel due to stimulation, the loss in revenue from the reduction in rate that would otherwise have resulted. A substantial part of the increased travel, after the 2%-cent rate became effective, however, was doubtless due to causes other than stimulation from the reduction. The plaintiff claims that it is entitled to the benefit of all the increase not due to stimulation, free from legislative interference. It is, as against such interference, only entitled to it, if the increased returns do not yield the plaintiff a fair return on the property devoted to the class of business from which the earnings are derived. If the 3-cent fare, when in force, was reasonable, and the amount yielded by it was less than that yielded afterwards by the 2%-cent fare, when in force, or that would be yielded now by it if restored, then confiscation would be shown to result from its restoration only upon a showing of changed conditions, then and now. [3] It is claimed that the plaintiff in its pioneer years received either no return or a less than a fair return for the service rendered, and upon the property devoted to the public use, and should be per — 480 — mitted a greater return now, to compensate for prior losses. If the 2%-cent fare will yield a reasonable return to the carrier at present, we do not think that it can be said to be confiscatory, because it fails to yield in addition an amount for the purpose of recouping prior Josses. The distribution of the increment due to increased population in the tributary territory and to increased density of traffic is, as between the carrier and its patrons, a matter of legislative policy, not to be controlled by the courts, unless less is left to the carrier than a fair return for the service rendered and the property employed at the time the court is called upon to act. [4] The contention of the plaintiff that estimates should be made over a series of years rather than from a single year — that since some years are lean in returns and some fat.,, the only fair criterion is the average — is a reasonable one. The returns relied upon by the court under the 2%-cent fare are not for one year alone, but for each of the years 1910, 1911, and 1912, and the reduced returns for 1913. With these years returns for the year 1907, a year of unexcelled prosperity, are compared. The returns for a series of years before and after 1907, instead of for that year alone, would be more favorable to the 214-cent fare. It is also contended that the comparison is between gross earnings under the two rates respectively, and that the net returns to the carrier is the test of reasonableness, as is undoubtedly the case. The record fails to show that the increased travel was handled at any considerably increased cost. The increase in train miles in the later period was substantially altogether the result of two additional trains that passed over the plaintiff’s railroad during the night, and were destined to accommodate interstate traffic almost exclusively. The old trains would have well accommodated the intrastate traffic. The record also shows that the cars in intrastate trains up to 1909 were not filled to their capacity, and there is no satisfactory showing of an increase 'of car miles thereafter, caused by increased intrastate travel- The ' additional terminal and accounting expenses could not be considerable, and its amount does not satisfactorily appear. We do not think that the record shows that the increased travel since 1907 was handled at such an increased expense as to leave the net returns below the remunerative point, because of it. It is also contended that the cost of operation has increased since 1907, because of higher wages, higher prices for material, and increased taxes, and that net returns are rendered less in proportion thereby. If the record showed that the increased gross intrastate passenger returns are now reduced in the net, below the remunerative point, because of -increased cost of passenger operation, the reduced rate would be thereby shown to be unreasonably low to the carrier. There is no separate showing of the amount of the increase on the passenger operation, due to increased wages, prices, and taxes, or that the increased gross intrastate passenger earnings were reduced thereby so that the net return failed to be properly remunerative to the plaintiff. By the methods of distributing expense and value of property, as between inter and intra state passenger business, adopted — 481 — by plaintiff, the returns upon plaintiff’s entire intrastate business, and by inference from the claimed equal or greater cost to earn a dollar in passenger business than in freight, upon its intrastate passenger business, are shown to be inadequate. There is a table of percentage of operating expenses to gross revenue during a period of years, showing increasing ratios. There is no showing of the effect of the increase in wages, prices, and taxes upon.net receipts from its intrastate passenger traffic. In the absence of a specific showing of the amount and effect of such increased ‘cost of passenger operation on the plaintiff’s net returns from its intrastate passenger traffic, we cannot reach the conclusion that otherwise adequate gross intrastate passenger returns are reduced below the point of confiscation by increases in the cost of operation generally, as shown by increasing ratios. Our conclusion is that the 3-cent fare was reasonable when in force; that the gross returns under the 2*4-cent fare did, while it was in force during average years, and if it was now restored would, exceed the returns under the 3-cent fare, and that no valid reason, either because of changed conditions or increased cost of operation, appears in the record with sufficient certainty, for holding that intrastate passenger returns, held by us to be adequate during the period of the 3-cent fare, should be held inadequate now. Our conclusion is that, if the' plaintiff’s entire intrastate business in Alabama was unremunerative during the period of the 2%-cent passenger fare, it must, so far as this record shows, have been due to its freight rather than to its passenger traffic. In this conclusion we are fortified by the plaintiff’s statement, appearing as exhibits to the supplemental bill (G. W. L. 4 and 7), that during the period from 1906 to 1912, inclusive, the plaintiff suffered a loss on its entire intrastate business in Alabama in the aggregate of $235,074.71, and averaging $33,567.39 each year for the seven years, and that, adopting plaintiff’s methods of distributing expense and value, there was during the same period a net operating profit on its intrastate passenger business ranging from $44,489.54 in 1906 to $238,084.06 in 1912, and averaged each year for the seven-year period $156,407.99. The responsibility for any loss on intrastate business that may exist, as between freight and passenger traffic, would seem to be located on the freight traffic by these statistics, as against any general statement in the record that it costs as much or more to earn a dollar of revenue in the passenger than in the freight traffic. .If a deficiency in intrastate earnings has existed during the seven-year typical period, it is due to the freight rather than the passenger rates in force during that period. It is true that this case is not to be prejudged by our decision in the Louisville & Nashville Case, and yet the conditions upon the two railroads may be compared, since, if the traffic conditions on the plaintiff’s railroad are more favorable to the lower rate than they are on the Louisville & Nashville Railroad Company, unless we are to repudiate our decision in that case, the comparison would result in sustaining the reasonableness of the 2%-cent fare, as applied to the plaintiff. The plaintiff’s line consists of approximately 210 miles of track, no substantial part of which consists of branches. For the fiscal year of 1912, — 482 — passenger miles per mile of. road on plaintiff’s road were three times those on the Louisville & Nashville railroad; passengers per mile of road were more than 2^> times greater on plaintiff’s road than on the Louisville & Nashville; passenger train revenue per. mile of road was more than 2% times larger on plaintiff’s road than it was on the Louisville & Nashville; passenger train revenue per train mile was 25 per cent, greater on plaintiff’s road. Gross operating revenue and net operating revenue, per mile of road, on business of all classes, were approximately three times larger on plaintiff’s road than upon the Louisville & Nashville. These figures show a much denser traffic on plaintiff’s road than upon the Louisville & Nashville. Other conditions being substantially the same, if a 2%-cent fare was reasonable on the Louisville & Nashville system, it would be all the more reasonable for the plaintiff’s railroad. It is said, however, that conditions are not the same; that the original cost of plaintiff’s road, owing to the character of the country through which it runs, was much greater, and that the cost of operation for like reasons is higher. Comparative figures as to the cost of passenger operation are not supplied. We do not doubt that the nature of the country traversed by plaintiff’s railroad renders operation more costly and original construction more expensive. There is, however, so marked a difference between the density of traffic on plaintiff’s road and that of the Louisville & Nashville that it seems difficult to avoid the conclusion that a rate which the Louisville & Nashville could endure without confiscation could be as well or better endured by the plaintiff. Our conclusion is that, though it may have required a 3-cent rate to produce adequate returns to plaintiff during and prior to 1907, the country along its line of road has expanded so much since that period, as shown by the plaintiff’s passenger earnings (especially its intrastate earnings), that a 3-cent fare is now shown to be no longer necessary to the plaintiff, and we are induced to believe that the increased earnings, being due, as appears from the record, to the permanent settlement of the country, as well as to the return of prosperity, will continue. At least the probability of permanency is so great as that we would not feel justified in disturbing the action of the commission while the increase still continues, and in advance of the final hearing. If, upon the final hearing, there is a showing of a decline in plaintiff’s passenger earnings, under the lower rate, it will then be time enough to enjoin the enforcement of the commission’s prder, upon proper showing of confiscation. Pending the final hearing, the application for a temporary injunction is denied.