In determining whether railroad rates fixed by a state authority
are confiscatory because not yielding a proper return, the basis of
calculation is the fair value of the property used in the service
of the public.
Therefore, when a railroad which was originally constructed and
owned by two is operated by one of them under an arrangement
whereby his interest will end and become vested in the other at the
expiration of a term of years, the original investment of the
operating owner should not be charged in annual installments
against the annual operating revenue in determining whether the
rates fixed are remunerative.
There is a strong presumption in favor of rates fixed by an
experienced administrative body after a full hearing.
Rates should not be held too low upon evidence that they proved
Page 244 U. S. 565
during a brief period, when condition for traffic were
abnormally poor and little effort was made to improve them.
In determining the adequately of rates, the circumstance that
the railroad has been unwisely built in an unfavorable locality,
and the nature and value of the service actually rendered by it to
the public, are matters to be considered.
that, in testing the validity of rates affecting
a limited class of traffic in which the railroad is for the time
engaged, an extra cost of construction not justified by that
traffic but incurred with a view to extending the road ultimately
into more lucrative territory should not be accounted a a part of
the fair value by which the rates must be gauged.
In the absence of a fair test of rates challenged as
confiscatory, and in the presence of some doubt of their adequacy,
dismissal of the bill should not be absolute, but should be without
prejudice to another suit in case they should prove confiscatory
when fully and fairly tested.
Final decree following 209 F. 99 modified and affirmed.
The case is stated in the opinion.
MR. JUSTICE PITNEY delivered the opinion of the court:
Appellant filed his bill in the district court against the
members of the Mississippi Railroad Commission, an administrative
body having the usual powers, in which he sought relief by
injunction against an order prescribing maximum rates on logs in
carload lots transported in intrastate commerce upon a railroad
operated by him, the ground of his complaint being that the rates
were so low as to be confiscatory, and therefore violative of the
due process of law provision of the Fourteenth Amendment.
Page 244 U. S. 566
The court refused a preliminary injunction (209 F. 99), and,
upon final hearing, dismissed the bill. The case is brought here by
direct appeal because of the constitutional question, under § 238,
The railroad in question is known as the Batesville
Southwestern, and extends from a junction with the Illinois Central
at Batesville for a distance of about 17 miles through a timber
country, its entire line being within the State of Mississippi. It
was built jointly by appellant and the Illinois Central Railroad
Company, under a contract pursuant to which he disbursed
approximately $146,000 and the company approximately $98,000. The
contract was made in 1910, and, by its terms, Darnell was to
maintain and operate the road for twenty years, the company to pay
him for maintaining it $143 per mile per annum, and the road was to
become the property of the company at the end of twenty years
without further payment; the agreement, however, being subject to
termination by the company prior to the expiration of the twenty
years upon specified terms. The building of the road was commenced
about June, 1911. Darnell began operating it as a common carrier in
March, 1912, but its construction was not finally completed until
about the middle of June, 1914.
The road is of standard gauge and construction, ballasted, and
built in a first-class manner. Its traffic consists almost wholly
of shipments of logs in carload lots from points along the line to
the terminus at Batesville.
Pending the construction of the road, the Batesville
Southwestern Railroad Company was organized as a corporation to
take over the property, but the road remained in the hands of
Darnell as lessee. In April, 1912, he established and promulgated a
tariff providing a uniform rate for freight on logs in carload
lots, with a minimum of 4,500 feet, regardless of the kind or
character of the timber, which was, for 10 miles and under, $2.80
Page 244 U. S. 567
feet; 10 to 15 miles, $3.35 per thousand; 15 to 20 miles, $3.90
per thousand. Complaint having been made to the Mississippi
Railroad Commission by citizens interested in the logging business
that these rates were extortionate, unjust, and confiscatory, a
hearing was had, and, as a result, the Commission, in July, 1913,
made an order reducing the rates nearly 50 percent on oak, ash and
hickory, and more than 50 percent on other kinds of logs.
It appears that, at the time of the construction of the
railroad, Darnell individually was the owner of a large amount (at
the time of the hearing he owned 19,000 acres) of timber land in
the country through which the road was projected, and that this
furnished the reason for his interest in its construction and
operation. At the same time, he owned the principal part of the
stock of R. J. Darnell, Incorporated, a lumber-milling corporation,
but between that time and the time of the hearing, the bulk of the
stock had passed into the hands of his sons, he still remaining
president of the company, and having sold to it the timber on the
lands owned by him, the company agreeing to cut it, have it hauled,
and loaded on the cars, and to pay him a fixed amount per
The bill of complaint showed gross receipts from the operation
of the railroad for the year ending June 30, 1913, amounting to
$15,553.01, and operating expenses $4,296.20, leaving net earnings
of $11,256.81. Against this, however, complainant charged as an
annual rental $8,133.39, this being 1/20 of $162,667.69, then
stated to be the amount invested by him in the construction of the
road. Deducting this so-called rental charge left only $3,123.42,
or less than 2 percent on the sum alleged to have been expended by
complainant. These figures were the result of the rates established
by him, and it was alleged that at the much lower rates established
by the Commission the road would yield no return above operating
Page 244 U. S. 568
The bill was filed in September, 1913, the Commission's rates
not having as yet been put into effect. At the preliminary hearing,
the district court held (209 F. 99) that, upon the showing then
made, it would not interfere with the Commission's rates, at least
until final hearing, thus affording a period for experiment as to
whether new business would be developed in volume sufficient to
make those rates remunerative.
Upon the final hearing, evidence having been submitted by both
sides, the court's decree was to the effect that the rates
established by the Commission were reasonable, and should be
In this Court, appellant insists first that the district court
erred in holding that he was not entitled to charge against the
annual operating revenue 1/20 of the amount expended by him in the
construction of the road. We are clear that this contention is
untenable. In determining whether rates are confiscatory because
not yielding a proper return, the basis of calculation is the fair
value of the property used in the service of the public. Smyth
v. Ames, 169 U. S. 466
169 U. S. 546
Minnesota Rate Cases, 230 U. S. 352
230 U. S. 434
The hypothetical annual payments of 1/20 of the cost of the road to
Darnell were not a proper rent charge, and bore no relation to the
actual value of the property. They arose out of the contractual
arrangement between Darnell and the Illinois Central, and were in
the nature of an amortization charge to take account of his
diminishing interest in the road. But, upon that theory, the
interest of the Illinois Central increased in value by as much as
that of Darnell decreased. In any aspect, the transference of his
interest to the Illinois Central, and any charge on that account,
made by him for purposes of his own bookkeeping, had no proper
relation to the question of the value of the property, and hence
were of no concern to the public.
It is insisted that, upon the proofs, and especially by
Page 244 U. S. 569
actual experiment, the rates established by the Commission were
shown to be confiscatory.
It is well established that, in a question of ratemaking, there
is a strong presumption in favor of the conclusions reached by an
experienced administrative body after a full hearing. Besides this,
there was affirmative evidence before the district court to the
effect that the rates were reasonable. The evidence for
complainant, tending to show they were nonremunerative, while based
upon actual experience in the operation of the road, yet relates to
only a brief period when conditions were abnormal. The road was a
new one, not completed until June, 1914 -- that is, after the
filing of the bill and shortly before the final hearing. The
Commission's rates, although promulgated in June, 1913, were not
put into effect until September 10, and the period of
experimentation to which the evidence related extended only from
the date last mentioned to March 31, 1914. Practically the entire
business of the road at first was hauling logs from complainant's
land to a mill operated by R. J. Darnell, Incorporated at Memphis.
That mill was destroyed by fire in June, 1913, and thereafter the
corporation constructed a mill at Batesville, but this was not
placed in operation until March 17, 1914. In consequence, there was
a heavy falling off in traffic on the road, there being no Darnell
shipments except such logs as were on hand when the Memphis mill
The evidence throws doubt upon the question whether the road, if
built merely for the purpose of serving the timber country that is
tributary to its present line, was not an extravagant venture. But
as yet there has been no serious effort to develop traffic even
from that country aside from complainant's own properties. If the
road was built rather as a branch of the Illinois Central, and with
a view to extending it into a more lucrative territory, any extra
cost of construction attributable to this is
Page 244 U. S. 570
hardly to be accounted as a part of the fair value devoted to
the use of the timber traffic. The circumstances that a road may
have been unwisely built, in a locality where there is not
sufficient business to sustain it, may be taken into account.
Reagan v. Farmers' Loan & Trust Co., 154 U.
, 154 U. S. 412
And the nature and value of the service rendered by the company to
the public are matters to be considered. Covington &c.
Turnpike Co. v. Sandford, 164 U. S. 578
164 U. S. 597
Smyth v. Ames, 169 U. S. 466
169 U. S.
In the case before us, if the earning capacity of the railroad,
present and prospective, really is as small as appellant claims, it
may be doubted whether the road is worth what it cost. But it is
sufficient for the present to say that the experimental period was
too brief; there is too little showing of an effort to develop
traffic along the line of the road from property other than that of
complainant, and conditions during the entire period covered by the
testimony have been too abnormal to enable us to say that the
Commission's rates are confiscatory.
The decree under review should be so modified that the dismissal
of the bill shall be without prejudice to another suit to restrain
the enforcement of the Commission's rates if, after a full and fair
test, they shall be found to be confiscatory (Knoxville v.
Knoxville Water Co., 212 U. S. 1
212 U. S. 19
Willcox v. Consolidated Gas Co., 212 U. S.
9, 212 U. S. 55
as so modified, it should be affirmed.
Modified and affirmed.