The Relation of Public Service, or Quasi-public Corporations, to the People.

In reference to questions of value, the engineering commission must hear, consider, and reconcile arguments advanced by adverse and often hostile interests. On the one side stand the corporations, with large financial interests involved, often with an excessive amount of stock and bonds issued on the property, the existence of which issues the corporation wishes to justify, and, whether properly capitalized or not, the management being imbued with the perfectly human desire to defend corporate interests from attack of any kind; on the other side is public opinion, often unreasonable, often misinformed, and frequently prejudiced.

It appears necessary, therefore, to consider briefly the relation which these interests bear to one another, to study the causes which have led to mutual misunderstandings, and to note the proper relations which should, if possible, be established and maintained between the people and those corporations organized to perform certain of the functions of the State.

7A public service or quasi-public corporation is a corporation which is operating under the terms of rights, grants, or franchises given by the public, either to this particular corporation direct or granted by statute to a class of corporations.

The property of the corporation is used to render certain services to the public, with the expectation of financial gain.

It is not material whether the grant be a franchise permitting a water-works company to use the streets and alleys of a city for its mains, and the service be the pumping of water for domestic service and fire protection, or whether the grant be the statutory rights of corporate existence and eminent domain, and the service rendered be the transportation of freight and passengers; the general principle is the same; the company has secured from the people certain rights which enable it to do business, and the people are directly benefited by the services rendered by the company. The increased comfort of living makes for the growth of the city; the increased transportation facilities build and develop the country traversed by the railroad; and this growth and development, not only operate to the advantage of the people, but also to that of the company in the way of increased business and increased revenues.

The capital required to build and develop these properties was furnished in the hope of, and with the expectation of, a proper financial reward. It has frequently happened that such properties have been built years in advance of sufficient development to support the enterprise, built, in fact, without expectation of immediate returns, and long periods of time have often elapsed before any profit has been secured.

It has also frequently happened that corporations have been aided to a very large extent by public funds, by the voting of aid bonds, by the donation of large tracts of land, by payment for certain service at such rates as would largely relieve the company from loss in operation, by the remission of taxes, or by the direct donation of funds.

The company is clearly entitled to earn a reasonable profit on the actual capital invested, in addition to the legitimate cost of operation, payment of taxes, and sinking funds to cover depreciation and obsolescence.

The public is clearly entitled to good service at the lowest rates that will permit the company to earn its reasonable profit and expenses. Increases in tonnage, population, and consequent net earnings 8of the corporation should entitle the public to a benefit in reduced charges for service, when the increased earning is of a permanent character.

The general tendency of the Courts has been to treat a franchise as a contract, and to be governed closely by the language and evident intent of the makers, but to safeguard the rights of the public to the fullest extent consistent with justice.

A franchise requires specific performance of specific acts. Nothing will be assumed or implied. The Courts recognize that the investors are entitled to reasonable returns, and that the public is entitled to fair rates.

In the case of Los Angeles Water Company vs. City of Los Angeles (103 U. S., 711), the United States Courts held that at the expiration of a 30-year franchise, which provided that the city was to pay for the value of all improvements, when the city failed to agree upon, tender, or pay such value, so long as the company complied with the terms of the contract, and until the city terminated it by making or tendering payment, the passage of an ordinance by the city fixing rates was void.

In the case of Weatherly vs. Capital City Water Company (Ala. 22 So., 140), the Alabama Courts held that the acceptance of a franchise involved a grave responsibility, and that the company could not stop furnishing water and fire protection, even if the work was done at a loss.

In the case of Myer vs. Brown (65 Cal., 589), the Court said:

"It is well occasionally to recall the fact that there is no more reason to permit a municipal government to repudiate its obligations entered into for value, than to permit an individual to do so. Good faith and fair dealing should be exacted of one equally with the other."

Judge Brewer, in the Kansas City Water-Works case (62 Fed. Rep., 853), said:

"All contracts involving property rights and obligations, between municipalities and individuals, must be presumed to be based upon and to recognize the ordinary laws of business transactions."

In 1903 the Maine Supreme Court issued a set of instructions to appraisers appointed to fix values of certain properties. The Court set forth its views as follows:

"Summarized, these elemental principles are, the right of the company to derive a fair income based upon the fair value of the property 9at the time it is being used for the public, taking into account the cost of maintenance and depreciation and the current operating expenses, and the right of the public to demand that the rates shall be no higher than the services are worth to them, not in the aggregate, but as individuals."

The Supreme Court of the United States has again and again given its views, which may be summarized as follows:

"It cannot be said that a corporation is entitled, as of right, without reference to the interests of the public, to realize a given per cent. upon its capital stock. When a question arises whether the legislature has exceeded its constitutional powers in prescribing rates to be charged by a corporation controlling a public highway, stockholders are not the only persons whose rights and interests are to be considered. The rights of the public are not to be ignored.

"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 proceed 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." (164 U. S., 578.)

"It is not to be inferred that the power of limitation or regulation is itself without limit. This power to regulate is not a power to destroy, and limitation is not the equivalent of confiscation. Under pretense of regulating fares and freights the State cannot require a railroad corporation to carry persons or property without reward, neither can it do that which in law amounts to the taking of private property for public use without just compensation. * * *" (116 U. S., 307.)

In the case of Smyth vs. Ames (169 U. S., 466), the Court said:

"If a railroad corporation has bonded its property for an amount that exceeds its fair value, or if its capitalization is largely fictitious, it may not impose upon the public the burden of such increased rates as may be required for the purpose of realizing profits upon such excessive valuation or fictitious capitalizations; and the apparent value of the property and franchises used by the corporations, as represented by its stocks, bonds and obligations, is not alone to be considered when determining the rates that may reasonably be charged. * * *

"We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public.

10"What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. On the other hand, what the public is entitled to demand is that no more be exacted from it for the use of a public highway than the services rendered by it are reasonably worth."

The relations between the corporations and the public that they serve have been clearly defined by the Courts, as the foregoing quotations show.

That the mutual relations existing between the management of the corporations and the public are far from what they should be, there can be no doubt. On the one hand, the great mass of the voting public is uninformed as to actual revenues, disbursements, and operations of the corporations, as to whether their income is unreasonably large, or whether they are struggling to exist. The sums of money involved in the dealings of the corporations are so stupendous in comparison with the amounts used in an ordinary private business—even in one of considerable magnitude—that the majority of the public cannot comprehend them. The published statistics are in such form that only the careful student of affairs can understand or analyze them, and but few of the public officials who receive them are able to read the reports of the properties and comprehend them. As a consequence, the corporation, as a political issue, has been the subject of jest, gibe, and cartoon; there has not been an intelligent public discussion of available reports and statistics, and it may be said that, generally, the mass of the public has come to class all corporations as grasping, overbearing, and unjust, and to consider them all as exceedingly prosperous. This has been taken advantage of by politicians for their own selfish ends, and has led to sundry legislation, some of which has been unreasonable and unjust to the corporations, and much of which is aimed at real abuses that never ought to have existed.

The reasonableness of a rate depends, not alone on the amount of capital invested, but on the volume of traffic, the density of population, the actual cost of service, and many other elements. Rate legislation has been attempted without full investigation. Acts have been passed compelling the establishment of stations and terminals, the improvement of roadway and structures, the purchase of new equipment, the installation of safety appliances and block signals, and many other requirements have been made, some (but by no means all) of 11which are unreasonable and burdensome. Nearly one-half the States of the Union have by law required a 2-cent, or 2½-cent, passenger fare, regardless of density of population, amount of traffic, or other considerations which might render such rates unreasonable. The regulation of the carriers, by legislature, by railroad commissions, by State officials, and by Courts, the addition of burdens of expense, and the cutting off of revenue, all give considerable ground for the opposition of the carriers to anything that looks like hostile legislation, and compels the student of affairs to admit that there is justice in the claim of the managements, that there is grave danger, not only of seriously crippling many roads, but of so impairing the credit of the railroads as a class that it will be increasingly difficult to secure capital to provide for the necessary extensions and development of the transportation facilities of the country.

On the other hand, perfect frankness compels the admission that the state of public opinion which compelled the passage of these laws has been caused largely by the corporation officials themselves. There is probably no more loyal body of men in America to-day than the officials and employees of railroads. Their loyalty, however, is all to "our company." They enter its service as boys or young men; they grow up to the full strength of manhood working for its good; they take little or no part in public affairs; they have no time for the study of public questions. Their friends are almost exclusively among their own associates in the service of the road, and their development is along the lines of their own special work in the service. As a body of honest, honorable, and worthy men, absolutely loyal to their employers, they have few equals; but it is doubtful if any equal number of men, of equal intelligence, have as limited a knowledge of the fundamental truths of government, or knowledge so colored by bias. It is also doubtful whether any equal number of men have in their ranks so few who bear an active part in the duties and activities of citizenship, or who exercise large influence on their neighbors.

While the foregoing statement is believed to be absolutely true, it will not do to pass over the notable exceptions. Such men as James J. Hill, F. Am. Soc. C. E., M. E. Ingalls, and others of the higher officials, who have taken an active part in public affairs, have had commanding influence. Theirs has been the sound policy, as the property in their hands has not suffered. The short-sighted 12policy which, in December, 1909, induced the management of one road to compel all its employees holding municipal offices to resign, is bound to react and create hostile feeling on the part of the public.

The entire trend of a training in railway service is to fill a man with prejudice against all things that undertake to regulate or control the corporations, and often goes so far as to enable him to do, willingly and as a matter of right, things which with a broader view of the interest of the whole community he would not agree with at all. The result of this intensive training is that the railway service has in it thousands of men who become impatient with any effort to regulate or control; who permit their irritation to show; and who, by their own attitude, create unnecessary hostility. F. A. Delano, M. Am. Soc. C. E., President of the Wabash, in an address^[2] at Hannibal, Mo., on March 25th, 1909, said:

"In ordinary manufacturing or commercial undertakings, every man has his own notions about the conduct of his business, and does not want to be interfered with, or dictated to by people who know less about his business than he does himself. Now, while it may be argued in the case of public service corporations that the people who have put their money into these enterprises, have done it with their eyes open and with full knowledge that they were subject to governmental regulation and control, there is nothing in that argument which makes public interference any more palatable to the man or group of men who are interfered with."

This address well expresses the spirit of the railway managers and employees toward all forms of investigation, and the complete lack of understanding, on the part of these managers, of the legal and moral relations which they bear to the communities which they serve. It is extremely unfortunate that railway and corporation people have not taken the public fully into their confidence, and fully and freely given out correct information as to the operation and depreciation of their properties; also, it is unfortunate that, when a corporation official does feel a grievance, he permits himself to make a partisan speech, or write an unwise article for publication. Much hostility is traceable to foolish, undiplomatic sayings or writings of corporation managers (which are often but half quoted), or to equally foolish speeches or newspaper editorials in opposition to the corporations, which are taken seriously by the managers. Whatever may be the cause, there 13is a regrettable hostility, and, on the part of the corporation officials, there is an apparent unwillingness to admit right motives to anyone advancing theories regarding corporate regulation and control, due largely to the training and atmosphere surrounding the corporate service.

The public has a large bill of particulars, one of which is the promotion of wildcat companies, such, for instance, as the "New York and Chicago Air Line" project which, only a year or so ago, drew from $2,000,000 to $3,000,000 from the people in a limited territory. These people were "investing" in railway stocks. A Federal control of the issue of stocks and bonds would have prevented this and hundreds of like swindles. Any move to secure such a law has always been opposed by the management of large and legitimately operated corporations, under the impression that they are about to be persecuted, and, naturally, the victim classes these corporations with the alleged one that secured his money.

The issue of stocks and bonds far in excess of any possible cost or value of railroad, street railroad, and other properties, and the making of large personal fortunes by the promoters, are matters of such frequent occurrence that it is difficult, indeed, to dismiss them with a mere denial. There is hardly a community of any size which has not had its example of "consolidation," "combine," or "merger," which has resulted in the issue of excessive securities; and there is hardly a citizen of any intelligence who has not either seen or had experience with some form of corporation promotion carried on strictly within the law, but which, nevertheless, in plain language, was a swindle. These, to say nothing of some gigantic deals involving millions, will sooner or later compel some form of regulation of the issues of stocks and bonds. In the last analysis, it is the money of the people, the hundreds of thousands of small investors, depositors in banks, and owners of life insurance, whose money goes into corporation securities, and, until the officers of the great railroads co-operate in securing such forms of control of stock and bond issues as will make impossible the purely speculative "wildcat" corporations, and thus safeguard minor corporations, as to furnish at least reasonable security to those whose money is invested, all forms of corporation security must be under suspicion with the public, and the agitation for control must continue.

14It is not, as Mr. Delano says, a case of put your money in with your eyes wide open; it is an effort on the part of the people to safeguard this form of corporate security in such a way that it can be treated as any other form of sound investment. It should not be necessary to require that all investors in corporate securities be financial experts. It is the writer's opinion, based on his observation and professional practice, that the railroads are not generally open to charges of over-capitalization. While there are flagrant instances, the chief culprits are among other classes of corporations. If such be the fact, it would seem that the interests of the great railway corporations would be in no wise jeopardized by sane and reasonable control.

The theory of taxation is that every one shall bear his proportionate burden of the cost of maintaining the government.

Regardless of any opinions that may be held as to the propriety of the methods adopted in the Interstate Commerce Commission's commercial valuation of railroad properties, it will be conceded that the results gave a set of figures for all the States of the Union, secured by a uniform method of computation and distribution. Table 1, which is a compilation from Tables 1 to 11 of Bulletin 21, shows clearly why, in certain States, corporate taxation is a live issue, and if (as suggested by Mr. Williams in his article, elsewhere referred to) amendment of the Constitutions of some of the States is necessary, it is safe to assume that the condition of inequality shown by this table is such as to compel these changes.

It is needless to cite further instances; enough has been said to indicate:

First.—That the corporations and the public have such intimate business relations that a blow at either must necessarily injure the other seriously;

Second.—That the Courts have defined quite clearly the legal relation existing between the two interests;

Third.—That there is lacking a proper spirit of mutual confidence, and the two interests at the present time are generally hostile;

Fourth.—That there have been errors and abuses on the part of both corporations and public; and

Fifth.—That capital invested in corporations is, and should be, the money of the people, and should be safeguarded so as to prevent its loss by manipulation, and insure a fair return.

15TABLE 1.—Comparison of Assessed Valuation and Commercial Value of Railway Properties.

State or territory. Miles of single track. Commercial value: June 30th, 1904. VALUATION FOR ASSESSMENT. Ratio of assessed to commercial valuation: Percentage.

Year. Amount.

Alabama 4,669.35 $150,211,000 1905 $53,926,026 35.9

Arkansas 4,126.44 124,626,000 1904 34,709,623 27.8

California 6,262.54 350,694,000 1904 92,378,550 26.3

Colorado 4,976.24 198,261,000 1903 49,492,135 25.0

Connecticut 1,017.72 105,369,000 1904 120,493,648 114.4

Florida 3,555.84 80,467,000 1904 21,817,478 27.1

Georgia 6,304.72 156,603,000 1903 63,105,810 40.3

Idaho 1,461.53 91,877,000 1904 10,115,378 11.0

Illinois 11,622.74 805,057,000 1904 425,709,055 63.8

Indiana 6,917.85 375,541,000 1904 165,863,367 44.2

Iowa 9,859.23 344,847,000 1904 57,535,160 16.7

Kansas 8,811.43 356,356,000 1904 60,093,534 16.9

Kentucky 3,253.00 155,772,000 1904 77,658,040 49.9

Louisiana 3,898.74 123,401,000 1904 29,044,195 28.9

Michigan 8,660.29 277,597,000 1904 196,795,000 70.9

Minnesota 7,811.04 466,734,000

Mississippi 3,480.25 107,884,000 1902 29,847,640 27.7

Missouri 7,711.05 309,768,000 1903 97,916,869 31.6

Montana 3,267.10 196,209,000 1904 36,759,827 18.7

Nebraska 5,820.88 263,170,000 1904 46,082,853 18.5

Nevada 986.56 43,745,000 1904 13,778,049 31.5

New Hampshire 1,275.97 79,786,000 1904 22,625,000 28.3

New Jersey 2,277.85 333,568,000 1904 231,655,525 69.5

New York 8,297.29 898,222,000 1903 229,582,064 25.6

North Carolina 4,075.00 113,146,000 1904 69,480,974 61.4

North Dakota 3,190.77 689,797,000 1904 133,858,945 19.4

Oklahoma 2,611.03 78,668,000 1905 11,936,317 15.2

Pennsylvania 11,023.24 1,420,680,000

Rhode Island 211.89 25,719,000 1904 15,832,003 61.6

South Carolina 3,175.28 75,500,000 1903 29,467,716 39.0

South Dakota 3,047.14 49,646,000 1904 14,354,930 28.9

Tennessee 3,480.83 131,166,000 1903 58,536,566 46.6

Texas 11,848.03 237,718,000 1904 95,209,785 40.0

Utah 1,779.69 90,325,000 1904 20,682,461 22.9

Vermont 1,063.25 37,311,000 1902 27,344,020 73.3

Virginia 3,932.33 211,315,000 1904 63,269,623 37.7

West Virginia 2,836.83 201,799,000 1904 28,771,358 14.2

Washington 3,355.83 182,837,000 1904 26,066,949 14.3

Wisconsin 7,048.76 284,510,000 1904 218,024,900 76.6

Wyoming 1,247.70 100,307,000 1904 7,498,232 7.5

Arizona 1,751.35 68,356,000 1904 6,667,349 9.7

District of Columbia 32.00 5,578,000 1904 2,486,024 44.6

New Mexico 2,504.66 8,640,000 1904 8,511,538 9.9

Total, U.S.A. 213,932.13 11,244,852,000

In concluding this subject, it may not be amiss to quote the language of the Supreme Court in the Knoxville Water Case (212 U. S., 1), as follows:

"Regulation of public service corporations, which perform their duties under conditions of necessary monopoly, will occur with greater and greater frequency as time goes on. It is a delicate and dangerous function, and ought to be exercised with a keen sense of justice on the part of the regulating body, met by a frank disclosure on the part of the company to be regulated. The Courts ought not to bear the 16whole burden of saving property from confiscation, though they will not be found wanting when the proof is clear.

"The legislatures and subordinate bodies to whom the legislative power has been delegated ought to do their part. Our social system rests largely upon the sanctity of private property, and that State or community which seeks to invade it will soon discover the error, in the disaster that follows. The slight gain to the consumer, which he would obtain from a reduction in the rates charged by Public Service Corporations, is as nothing compared with his share in the ruin which would be brought about by denying to private property its just reward, thus unsettling values and destroying confidence. On the other hand, the companies to be regulated will find it to their lasting interest to furnish freely the information upon which a just regulation can be based."