These appeals involve the validity of the orders of the Railroad
and Warehouse Commission, and the legislative acts, of the State of
Minnesota prescribing maximum rates for freight, and a maximum fare
of two cents a mile for passengers. The rates relate to traffic
exclusively between points within the state. It was contended,
however, that, as applied to cities on the state's boundary, or to
places within competitive districts crossed by the state line, the
rates disturbed the relation previously existing between interstate
and intrastate rates, thus imposing a direct burden upon interstate
commerce and creating discriminations as against localities in
other states. The rates were also assailed as confiscatory. The
rates are sustained as to the Northern Pacific and Great Northern
companies. In the case of the Minneapolis and St. Louis Railroad
Company, the rates are held to be confiscatory in view of the
particular facts shown with respect to that road.
In reviewing the questions involved, the Court
held
that:
The Federal Constitution gives Congress an authority at all
times adequate to secure the freedom of interstate commercial
intercourse from state control and to provide effective regulation
of that intercourse as the national interest may demand.
The commerce that is confined within one state, and does not
affect other states, is reserved to the state. This reservation is
only of that power which is consistent with the grant to
Congress.
The authority of Congress extends to every part of interstate
commerce and to every instrumentality or agency by which it is
carried
Page 230 U. S. 353
on, and the full control by Congress over the subjects committed
to its regulation is not to be denied or thwarted by the
commingling of interstate and intrastate operations.
Even without action by Congress, the commerce clause of the
Constitution necessarily excludes the states from direct control of
subjects embraced within the clause which are of such a nature
that, if regulated at all, their regulation should be prescribed by
a single authority. There is thus secured the essential immunity of
interstate intercourse from the imposition by the states of direct
burdens and restraints.
There remains to the states the exercise of the power
appropriate to their territorial jurisdiction in making suitable
provision for local needs. The state may provide local
improvements, create and regulate local facilities, and adopt
protective measures of a reasonable character in the interest of
the health, safety, morals and welfare of its people, although
interstate commerce may incidentally or indirectly be involved.
Where matters falling within the state power, as above
described, are also, by reason of their relation to interstate
commerce, within the reach of the federal power, Congress must be
the judge of the necessity of federal action; until Congress does
act, the states may act.
The paramount authority of Congress enables it to intervene at
its discretion for the complete and effective government of that
which has been committed to its care, and, for this purpose and to
this extent, in response to a conviction of national need, Congress
may displace local laws by substituting laws of its own.
Regulation of railroad rates by the state began with railroad
transportation.
The authority of the state to prescribe what shall be reasonable
charges for intrastate transportation is statewide unless it be
limited by the exertion of the constitutional power of Congress
with respect to interstate commerce and its instruments. As a power
appropriate to the territorial jurisdiction of the state it is not
confined to a part of the state, but extends throughout the state
-- to its cities adjacent to its boundaries as well as to those in
the interior of the state. If this authority of the state be
restricted, it must be by virtue of the actual exercise of federal
control, and not by reason merely of a dormant federal power --
that is, one which has not been exerted.
Congress, in the Act to Regulate Commerce, expressly provided
that the provisions of the act should not extend to transportation
wholly within one state.
Having regard to the terms of the federal statute, the familiar
range
Page 230 U. S. 354
of state action at the time it was enacted, the continued
exercise of state authority in the same manner and to the same
extent after its enactment, and the decisions of this Court
recognizing and upholding such authority, this Court finds no
foundation for the proposition that the Act to Regulate Commerce
contemplated interference with the authority of the state to
prescribe reasonable rates for the exclusively internal traffic
throughout the extent of its territory.
Neither by the original act nor by its amendment has Congress
sought to establish a unified control over interstate and
intrastate rates; it has not set up a standard for intrastate rates
or prescribed, or authorized the federal Commission to prescribe,
either maximum or minimum rates for intrastate traffic.
The fixing of reasonable rates for intrastate transportation was
left by the act where it had been found -- that is, with the states
and the agencies created by the states to deal with that
subject.
Under the established principles governing state action,
Minnesota did not transcend the limits of its authority in
prescribing the rates here involved, assuming them to be reasonable
intrastate rates. It exercised an authority appropriate to its
territorial jurisdiction and not opposed to any action thus far
taken by Congress.
The interblending of operations in the conduct of interstate and
local business by interstate carriers, and the exigencies that are
said to arise with respect to the maintenance of interstate rates
by reason of their relation to intrastate rates, are considerations
for the practical judgment of Congress.
When the situation becomes such that adequate regulation of
interstate rates cannot be maintained without imposing requirements
with respect to such intrastate rates of interstate carriers as
substantially affect interstate rates, it is for Congress to
determine, within the limits of its constitutional authority over
interstate commerce and its instruments, the measure of the
regulation it should supply.
It is the function of the Court to interpret and apply the law
already enacted, but not, under the guise of construction, to
provide a more comprehensive scheme of regulation than Congress has
decided upon.
In the absence of federal action, effect may not be denied to
the laws of the state enacted within the field which it is entitled
to occupy until its authority is limited through the exertion by
Congress of its paramount constitutional power.
As to whether the rates are confiscatory,
held
that:
The ratemaking power is a legislative power, and necessarily
implies a range of legislative discretion.
Page 230 U. S. 355
This Court does not sit as a board of review to substitute its
judgment for that of the legislature or of the Commission lawfully
constituted by it, as to matters within the province of either.
The question involved is whether, in prescribing a general
schedule of rates involving the profitableness of the intrastate
operations of the carrier, taken as a whole, the state has
superseded the constitutional limit by making the rates
confiscatory.
While the property of railroad corporations has been devoted to
a public use, the state has not seen fit to undertake the service
itself, and the private property embarked in it is not placed at
the mercy of legislative caprice, but rests secure under the
constitutional protection which extends not merely to the title,
but to the right to receive just compensation for the services
given to the public.
For fixing rates, the basis of calculation of value is the fair
value of the property of the carrier used for the convenience of
the public.
Smyth v. Ames, 169 U.
S. 466.
There is no formula for the ascertainment of the fair value of
property used for convenience of the public, but there must be a
reasonable judgment having its basis in a proper consideration of
all relevant facts.
Where a carrier does both interstate and intrastate business, to
determine whether a scheme of maximum intrastate rates affords a
fair return the value of the property employed in intrastate
business, and the rates prescribed must be considered separately,
and profits and losses on interstate business cannot be offset.
Assets and property of a carrier not used in the transportation
business cannot be included in the valuation as a basis for
ratemaking.
Property of a railroad company cannot be valued for a basis of
ratemaking at a price above other similar property solely by reason
of the fact that it is used as a railroad, and increases in value
over cost cannot be allowed beyond the normal increase of other
similar property.
In valuing the plant of a carrier for purpose of fixing rates,
there should he proper deductions for depreciation.
Where the constitutional validity of state action is involved,
general estimates of division between interstate a intrastate
business cannot be accepted as adequate proof to sustain a charge
of confiscation.
In the cases of the Northern Pacific and Great Northern
companies on the examination of estimates of value, and methods of
apportionment,
held that t he proof is insufficient a
finding that the rates were confiscatory, and in each of those
cases, the decrees are reversed with instructions to dismiss the
bill without prejudice.
Page 230 U. S. 356
In the case of the Minneapolis and St. Louis Railroad Company,
held, in view of the special facts appearing, that the
margin of error in the estimates and calculations was not
sufficient to affect the result. The decree in that case, adjudging
the rates to be confiscatory, is therefore affirmed with the
modification that the state may apply to the court by bill or
otherwise, as advised, for a further order or decree whenever it
shall appear that, by reason of a change in circumstances, the
rates fixed by the state's acts and orders are sufficient to yield
to this company reasonable compensation for the service
rendered.
184 F. 765 modified and in part affirmed and in part
reversed.
These appeals involve the validity of the orders of the Railroad
and Warehouse Commission, and the legislative acts, of the State of
Minnesota prescribing maximum rates for freight, and a maximum fare
of two cents a mile for passengers. The rates relate to traffic
exclusively between points in the state. It was contended, however,
that, as applied to cities on the state's boundary, or to places
within competitive districts crossed by the state line, the rates
disturbed the relation previously existing between interstate and
intrastate rates, thus imposing a direct burden upon interstate
commerce and creating discriminations as against localities in
other states. The rates were also assailed as confiscatory.
Page 230 U. S. 376
MR. JUSTICE HUGHES delivered the opinion of the Court.
These suits were brought by stockholders of the Northern Pacific
Railway Company, the Great Northern Railway Company, and the
Minneapolis & St. Louis Railroad Company, respectively, to
restrain the enforcement of two orders of the Railroad &
Warehouse Commission of the State of Minnesota and two acts of the
legislature of that state prescribing maximum charges for
transportation of freight and passengers, and to prevent the
adoption or maintenance of these rates by the railroad companies.
In addition to the companies, the Attorney General of the state,
the members of the Railroad & Warehouse Commission, and also,
in the cases of the Northern Pacific and Great Northern Companies,
certain representative shippers, were made defendants.
Page 230 U. S. 377
The orders and acts, which, by their terms related solely to
charges for intrastate transportation, were as follows:
(1) The Commission's order of September 6, 1906, effective
November 15, 1906, fixing the maximum class rates for general
merchandise.
(2) The act, approved April 4, 1907, to take effect May 1, 1907,
prescribing two cents a mile as the maximum fare for passengers,
except for those under twelve years of age, for whom the maximum
rate was to be one cent a mile. Laws of 1907, c. 176.
(3) The act approved April 18, 1907, to take effect June 1,
1907, fixing maximum commodity rates for carload lots of specified
weights. Laws of 1907, c. 232.
(4) The Commission's order of May 3, 1907, effective June 3,
1907, establishing maximum "in-rates" for designated commodities in
carload lots from St. Paul, Minneapolis, Minnesota Transfer, and
Duluth to certain distributing centers. No complaint is made of
this order in the case of the Minneapolis & St. Louis Railroad
Company.
In 1905, the Legislature of Minnesota had adopted a joint
resolution directing the Commission
"to undertake the work of securing a readjustment of the
existing freight rates in this state, which will give a more
uniform system of rates throughout the state, and a uniform scale
of percentages which each class rate shall bear to the first class,
the readjustment to secure a substantial reduction in the existing
merchandise rates."
Laws of 1905, c. 350. Pursuant to this direction, the Commission
conducted a prolonged investigation. Public hearings were held
extending over several months in which the railroad companies took
an active part, submitting a large amount of testimony with respect
to the matters involved. The Commission found the existing class
rates for general merchandise to be unreasonable, and by the order
of September 6, 1906, above-mentioned, established
Page 230 U. S. 378
a new schedule of lower maximum rates. These rates were applied
to the classes shown by the so-called "Western Classification"
between stations in the state. This was a classification by which
articles were arranged in groups with reference to their general
character, value, and the cost of transportation, and with
modifications made from time to time, it had long been used by
common carriers in the West and Northwest as a basis for rates, the
commodities of each class taking the same rate under like
conditions. In Minnesota, however, a large number of commodities,
amounting to several hundred, had, by the intervention of the
Commission, been removed from this classification by the
application of special rates, known as "commodity rates," or
reduced in class so that the Western Classification in operation in
that state was very materially different from that in general use
as a basis of rates in other states.
The schedule of rates set forth in the order of September 6 was
such that each rate for each class bore an exact relation to each
other rate. The plan of the schedule was this: for first-class
merchandise, an allowance of 11.02 cents per cwt. was made for
terminal charges, and in addition, there was permitted a hauling
charge of .98 of a cent for each five miles up to 200 miles, for
each ten miles over 200 miles up to 400 miles, and for each twenty
miles over 400 miles up to 500 miles. For other classes, the rates
were a fixed percentum of the corresponding rates for the first
class. These rates were maximum terminal rates -- that is, they
related to transportation to or from certain important stations
called terminal or distributing stations. Between stations neither
of which is so designated, the rates of the schedule might be
increased by five percentum.
The railway companies complied with this order, and the class
rates were put into effect on November 15, 1906.
The Commission also had under consideration a reduction in the
commodity rates at which certain commodities
Page 230 U. S. 379
such as grain, coal, lumber, and livestock were moved in carload
lots. Because of the agitation with respect to these charges, the
railroad companies voluntarily reduced their rates about ten
percent on grain (September 1, 1906) and coal (October 22, 1906).
The Commission, however, on December 14, 1906, ordered a further
reduction in the commodity rates. The railroad companies brought
suit in the circuit court of the United States, and obtained a
temporary injunction restraining the enforcement of this order.
Thereupon the legislature passed the act above mentioned, approved
April 18, 1907, which established a new schedule of maximum
commodity rates in all respects like that fixed by the Commission,
save that the reduction was not so great. The act grouped the
various commodities which it embraced in several classes, for which
different rates were prescribed. There was no fixed percentage
relation between the classes, and no regular rate of progression of
the various charges with increasing distance. In other respects,
the method of making the schedules was similar to that adopted in
the order of September 6, 1906, the hauling charge decreasing as
the mileage increases.
The remaining action with respect to freight rates was taken by
the Commission in the order of May 3, 1907, for the purpose of
securing more favorable in-rates to a number of minor jobbing
centers. It applied to certain commodities, such as groceries in
carload lots, and was supplemental to the order of September 6,
1906, being intended to reestablish the relation which had
previously existed between the in-rates to these distributing
points and the general schedule of class rates.
The railroad companies obeyed this order of May 3, 1907, as they
had that of September 6, 1906, and they also put into effect the
passenger rate of two cents a mile. They were about to adopt the
commodity rates fixed by the Act of April 18, 1907, when these
suits were brought and a
Page 230 U. S. 380
temporary injunction restrained them from taking that course.
The other rates -- that is, the class rates, special in-rates, and
the passenger rates -- were permitted to remain in force pending
the suits.
The complainants assailed the acts and orders upon the grounds
(1) that they amounted to an unconstitutional interference with
interstate commerce, (2) that they were confiscatory, and (3) that
the penalties imposed for their violation were so severe as to
result in a denial of the equal protection of the laws and a
deprivation of property without due process of law. The
jurisdiction of the circuit court was sustained in
Ex Parte
Young, 209 U. S. 123,
where it was also held that the penal provisions of the acts,
operating to preclude a fair opportunity to test their validity,
were unconstitutional on their face. The circuit court then
referred the suits to a special master, who took the evidence and
made an elaborate report sustaining the complainants' contentions.
His findings were confirmed by the court, and decrees were entered
accordingly, adjudging the acts and orders (with the exception, in
the case of the Minneapolis & St. Louis Railroad Company, of
the order of May 3, 1907) to be void, and permanently enjoining the
enforcement of the prescribed rates, freight and passenger, and
their adoption or maintenance by the railroad companies. 184 F.
765.
From these decrees, the Attorney General of the state and the
members of the Railroad & Warehouse Commission prosecute these
appeals.
The penal provisions being separable (
Reagan v. Farmers'
Loan & Trust Co., 154 U. S. 362,
154 U. S. 395;
Willcox v. Consolidated Gas Co., 212 U. S.
19,
212 U. S. 53-54;
Grenada Lumber Co. v. Mississippi, 217 U.
S. 433,
217 U. S. 443;
West. Un. Tel. Co. v. Richmond, 224 U.
S. 160,
224 U. S.
172), the question of the validity of the acts and
orders fixing maximum rates is presented in two distinct aspects:
(1) with respect to their
Page 230 U. S. 381
effect on interstate commerce, and (2) as to their alleged
confiscatory character.
First. As to interference with interstate commerce.
None of the acts and orders prescribes rates for goods or
persons moving in interstate commerce. By their terms, they apply
solely to commerce that is internal. Despite this obvious purport,
it has been found below that the inevitable effect of the state's
requirements for intrastate transportation was to impose a direct
burden upon interstate commerce, and to create unjust
discriminations between localities in Minnesota and those in
adjoining states, and hence that they must fall as repugnant to the
commerce clause and to the action of Congress under it. To support
its conclusion, the circuit court presents an impressive array of
facts drawn from the approved findings of the master. 184 F.
775-792. Without giving all the details they embrace, these
findings may be summarized as follows:
I. The railroad property of each of the three companies
constitutes a single system. On June 30, 1906, the Northern Pacific
Railway company (a Wisconsin corporation) operated 7,695 miles of
track, of which 1,625 miles were in Minnesota. The Great Northern
Railway Company (a Minnesota corporation) at the same time operated
8,528 miles of track, of which 2,779 miles were in Minnesota. Their
lines extend westerly from Superior, Wisconsin, and Duluth,
Minnesota, and from St. Paul and Minneapolis, through the states of
Minnesota, North Dakota, Montana, Idaho, Washington, and Oregon, to
the Pacific coast. The Minneapolis & St. Louis Railroad Company
(also a Minnesota corporation) operated 1,028 miles of track
running from St. Paul and Minneapolis westerly and southerly to
points in South Dakota and Iowa. In the case of each company, the
movement of interstate and local traffic takes place at the same
time, on the same rails, with the same employees, and largely
Page 230 U. S. 382
by means of the same trains and cars. There has never been a
separation, and it is impracticable, in the exercise of fair
economy, to make a separation, between the interstate and
intrastate business in the case either of freight or of passengers.
By far the larger part of the traffic is interstate. In the year
1906, the freight business of the Northern Pacific Company, local
to Minnesota, was 2.67 percent of its entire freight business, and
12.33 percent of its freight business touching the state, and its
passenger business local to the state was 5.79 percent of its
entire passenger business, and 67.21 percent of its passenger
business touching the state.
The conditions attending the transportation of passengers and
freight are substantially the same for like distances within those
portions of the states of Wisconsin, Minnesota, North Dakota, and
South Dakota reached by the lines of these companies, whether the
transportation is interstate or wholly intrastate. Prior to the
acts and orders in question, the companies had maintained rates
which were relatively fair, and not discriminatory as between
interstate and intrastate business, and it is concluded that any
substantial change in the basis of rates thus established, due only
to the fact that the transportation was interstate or was local to
a state, and any substantial difference in rates as between the two
sorts of traffic, would constitute unjust discrimination in
fact.
II. The state line of Minnesota on the east and west runs
between cities which are in close proximity. Superior, Wisconsin,
and Duluth, Minnesota, are side by side at the extremity of Lake
Superior. Opposite one another on the western boundary of the state
lie Grand Forks, North Dakota, and East Grand Forks, Minnesota;
Fargo, North Dakota, and Moorhead, Minnesota, and Wahpeton, North
Dakota, and Breckenridge, Minnesota. The cities in each pair ship
and receive, to and from the same localities, the same kinds of
freight. The railroad companies
Page 230 U. S. 383
have always put each on a parity with the other in the matter of
rates, and if there were a substantial difference, it would cause
serious injury to the commerce of the city having the higher rate.
If the Northern Pacific Company failed to maintain as low rates on
traffic in and out of Superior as on that to and from Duluth, its
power to transact interstate business between Superior and points
in Minnesota would be seriously impaired and the value of its
property in Superior would be depreciated.
The maximum class rates fixed by the order of September 6, 1906,
were from 20 percent to 25 percent lower than those theretofore
maintained by the Northern Pacific and Great Northern Companies for
transportation in Wisconsin, Minnesota, and North Dakota, whether
such transportation was local to one of these states or was
interstate between any two of them. When the Northern Pacific
Company, pursuant to this order, installed the new intrastate
rates, it reduced its interstate rates between Superior and points
in Minnesota to an exact parity with its rates from Duluth.
Reduction was also made in the rates between both Duluth and
Superior and the above-mentioned points on the western boundary, so
as to put the border cities in North Dakota on an equal basis with
the neighboring cities in Minnesota. This reduction was
substantial, and had it not been made, the places adjoining the
boundary, but outside the state, could not have competed with those
within. Although the Northern Pacific Company thereby suffered a
substantial loss in revenue from its interstate business, it had
the choice of submitting to that loss or suffering substantial
destruction of its interstate commerce to these border localities
in articles covered by the orders. At the same time, the Great
Northern Company made similar reductions, although, in its case,
the transportation between Duluth and points in Minnesota was
interstate, its line passing through Wisconsin. The reason for
these reductions was
Page 230 U. S. 384
to preserve the relation in rates from Duluth which had always
existed between localities on the Great Northern line and those
similarly situated on the line of the Northern Pacific, and to meet
the reduced rates on the latter.
III. Moorhead, Minnesota, Fargo and Bismarck, North Dakota,
Billings and Butte, Montana, are so-called jobbing centers. Rates
had always been accorded to them by the Northern Pacific Company
which would allow them to compete with their nearest neighbors and
with St. Paul, Minneapolis, and Duluth. The order of September 6,
1906, as supplemented by that of May 3, 1907, substantially reduced
carload rates from the eastern terminals to Moorhead. This
reduction would have given Moorhead an advantage in territory
accessible to its jobbing industry not only as against Fargo,
unless carload rates to Fargo were similarly reduced, but also as
against Duluth, St. Paul, and Minneapolis unless less-than-carload
rates from these places to points accessible to Moorhead, which
included a considerable territory in North Dakota, were
proportionately reduced. If Fargo were protected as against
Moorhead, it would have an advantage over Bismarck in territory
common to them both, and an advantage over the eastern terminals in
territory common to them and to Fargo, unless carload rates from
the eastern terminals to Bismarck and less-than-carload rates from
those terminals to the territory accessible to Fargo were
correspondingly reduced, and so on from distributing point to
distributing point.
IV. Every rate comprehends two terminal charges, the initial and
the final, and a haulage charge. It is declared to be a cardinal
principle of ratemaking that a rate for a longer distance should be
proportionately smaller than one for a shorter distance, for even
if the haulage charge in the former case were the same per mile,
the rate per ton per mile should be less for the longer haul, as
the terminal charges would be spread over a greater distance.
Page 230 U. S. 385
A comparison disclosed that the rates established by the order
of September 6, 1906, and maintained by the Northern Pacific
Company between St. Paul and Moorhead, were in general
substantially less than the proportion of the interstate rates
maintained by the company to various points in North Dakota and
Montana, based on the mileage in Minnesota as compared to that of
the entire haul. Maintaining such a relation of rates involves, it
is found, substantial and unjust discrimination in fact against the
interstate localities.
V. After the installation by the Great Northern and Northern
Pacific Companies of the rates prescribed by the order of September
6, 1906, it appeared that the sum of the local rates from St. Paul
to Moorhead and from Moorhead to many points in North Dakota was
less than the interstate rates theretofore maintained from St. Paul
to these points. Both companies thereupon established rates from
St. Paul to the North Dakota points as a rule no greater than the
sum of the locals on Moorhead, but substantially lower in general
than the interstate rates in force when the order took effect.
Maintaining interstate rates from St. Paul to North Dakota
localities substantially greater than the sum of the locals based
on the state line would have caused unjust discrimination in fact.
The actual reason for the reduction in the interstate rates was to
prevent transshipment at Moorhead in order to take advantage of the
lower sum of the locals, and to retain on its line traffic which
might reach Moorhead over other lines by reason of competition,
and, as to less-than-carload lots, to enable jobbers in the Twin
Cities and Duluth to compete with those in Moorhead and Fargo in
territory which otherwise the latter would have exclusively
occupied by reason of their closer proximity.
VI. It it further held to be one of the fundamental dogmas of
ratemaking that the haulage charge per mile should not increase
with increasing distance if the conditions
Page 230 U. S. 386
be the same. Under the progressive decrease in the haulage
charge within the state provided by the order of September 6, 1906,
100 pounds of merchandise transported by the Northern Pacific from
St. Paul to Moorhead, 248 miles, would have been hauled for 48
miles at the rate of .98 cents per 10 miles, when Moorhead is
reached. If the same haulage charge of .98 cents per 10 miles were
applied for the remaining distance to Spokane, 1510 miles from St.
Paul (which is said to be taken as a fair example merely to
illustrate the principle), it would produce a rate from St. Paul to
Spokane on first-class merchandise of $1.79 per cwt. The Interstate
Commerce Commission in the Spokane rate case fixed the reasonable
rate on first-class merchandise from St. Paul to Spokane of $2.50
per cwt. Maintaining this rate and the state schedule in Minnesota
at the same time necessarily involves the raising of the per mile
haulage charge after the Minnesota state line has been crossed, or
the charge of a higher rate within Minnesota for its mileage
proportion of long haul interstate business than for business local
to the state which is carried under the same conditions, and hence
is found to result in unjust discrimination in fact against
localities west of the Minnesota line.
VII. For more than twenty-five years, the Northern Pacific
Company has maintained an equal basis of rates on merchandise
between its eastern and western terminals, respectively, and Butte,
Montana, and between its eastern and western terminals,
respectively, and localities intermediate between them and Butte.
Other railroads reaching Butte have, during the same time,
maintained like rates to Butte from Sioux City, Omaha, St. Joseph
and Kansas City on the east, and from San Francisco, Sacramento,
and Los Angeles on the west. Butte has been as the hub of a wheel
with spokes representing equal rates to these various cities.
Industries, it is said, have been born and have grown in reliance
upon this parity of rates.
Page 230 U. S. 387
Intermediate points have had rates fixed in proportion to the
Butte rates. Competition of markets and of carriers has brought
this about. The Northern Pacific Company cannot maintain the state
rates between its eastern terminals and Moorhead, and at the same
time its interstate rates from its eastern terminals to Butte,
without substantial discrimination in fact against Butte or
localities intermediate between its eastern terminals and Butte. If
it lowers its rates from its eastern terminals to Butte and
intermediate stations to such an extent as to obviate this
discrimination, it must, to preserve the relation which has always
existed, lower to a like extent its rates from its western
terminals to Butte and intermediate stations. Consequently, it is
found that, if the Northern Pacific Company maintains the
Commission-made rates between its eastern terminals and Moorhead,
it must either substantially discriminate in fact or destroy the
general relation of rates which has existed for many years in the
territory between the Missouri River and the Pacific coast.
VIII. Prior to the taking effect of the order of September 6,
1906, the Great Northern and Northern Pacific Companies had
established joint through rates in connection with other carriers
from all localities east or south of Minnesota to all points in
Minnesota west of St. Paul and Minneapolis. After the rates
prescribed by this order were installed, the sum of the locals on
St. Paul from all localities south and east of Minnesota to points
in Minnesota west of St. Paul and Minneapolis was substantially
less than the then-existing interstate rates for the through haul
to such western points. To avoid the resulting discrimination in
favor of St. Paul, the companies withdrew the existing interstate
rates and established a new tariff no higher than the sum of the
locals on St. Paul.
IX. Further illustrations are given of inequalities resulting
from the reduced Minnesota rates as compared
Page 230 U. S. 388
with rates for like transportation under similar conditions into
adjoining states, as, for example, from Moorhead easterly to
Minnesota points and westerly into North Dakota, and also of the
effects produced in the application of the state rates by reason of
the difference in the distances from St. Paul at which the state
line is reached on similar hauls over different lines. As the
schedule of September 6, 1906, prescribes a fixed relation between
rates for different distances and different classes, the conclusion
is that, if the rule must be adhered to in Minnesota, it cannot be
departed from substantially because of the intervention of a state
line at one distance or another without involving unjust
discrimination in fact.
It is found further that while, after the order of September 6,
1906, became effective, both the Great Northern and the Northern
Pacific Companies reduced certain interstate rates, as already
mentioned, the reduction was not to such extent as to remedy the
discrimination resulting from the fact that, in most cases, the
general basis of rates within Minnesota was substantially lower
than that maintained in North Dakota or upon traffic crossing the
state line.
X. The similarity in the conditions of interstate and intrastate
transportation is found also with respect to the commodities for
which rates were prescribed by the Act of April 18, 1907 (c. 232).
The main lines and branches of the Northern Pacific and Great
Northern Companies within Minnesota and North Dakota, with the
exception of certain limited tracts, lie within grain fields, and
grain is shipped in substantial quantities from nearly all stations
in these fields to Duluth, Minneapolis, and Superior. Shipments of
coal originate at the head of the Lakes -- that is, at Duluth or
Superior -- and find their destination at all localities served by
the companies in Minnesota and eastern North Dakota. Shipments of
lumber originate at Duluth, Cloquet, Little Falls, and other
Page 230 U. S. 389
places in Minnesota, and are destined to points throughout
Minnesota and North Dakota. Shipments of livestock are made in
Minnesota, South Dakota, and eastern Montana and go to South St.
Paul or Chicago. So far as the conditions of transportation are
concerned, it matters not, as to commodities moving eastwardly,
whether the shipment is made in Montana, North Dakota, or
Minnesota, or the transportation ends in Minnesota or in Wisconsin;
and, as to commodities moving westwardly, whether the shipments are
from Minnesota points or from Superior, or whether they find their
destination in Minnesota or in North Dakota. The conclusion is that
to maintain the commodity rates for transportation wholly within
Minnesota simultaneously with the interstate rates now in force
would involve unjust discrimination and would seriously impair the
interstate business of the companies, to avoid which it would be
necessary to reduce the basis of the interstate rates to a
substantial parity with that prescribed by the state law. It is
also stated that, if the rates fixed by chapter 232 of the Laws of
1907 should become effective, the rate on shipments of wheat, with
milling-in-transit privileges, from points in Minnesota via
Minneapolis to Chicago, would be automatically reduced, and that,
unless all interstate rates between Minnesota points and Chicago
via interior mill towns with similar privileges should be
correspondingly reduced, Minneapolis would have a substantial
advantage over such towns in its interstate rates.
XI. Prior to the Act of 1907, fixing the rate of two cents a
mile, the general basis of rates for passengers (of 12 years of age
or over) between any two points on the Northern Pacific system had
been for some years three cents a mile. After the new state rate
had been installed, the sum of the locals between Moorhead and
other Minnesota points and Moorhead and points westerly thereof was
less than the then-existing through interstate rates. The
passenger
Page 230 U. S. 390
fare act took effect May 1, 1907, and in the first month
thereafter the revenue for passengers on the Northern Pacific line
between Moorhead and other Minnesota points increased 647 percent
over that of the corresponding month of the preceding year, while,
eliminating Moorhead business, the revenue for passenger business
within the state decreased two percent. In June, 1907, the second
month, there were sold by the Northern Pacific Company, 4,037
tickets between St. Paul or Minneapolis, on the one hand, and
Moorhead or East Grand Forks on the other, as compared with only
172 such tickets in the corresponding month of the year before, and
in June, 1907, there were sold only 173 tickets between St. Paul or
Minneapolis, and Grand Forks and Fargo, as compared with 984 such
tickets in the corresponding month of the previous year. In May and
June, 1906, only one cash full fare was collected on a train from
Moorhead to St. Paul or Minneapolis. In those months in 1907, there
were 1,168 cash full fares and 82 cash half fares so collected.
Hence, it is said, the necessary, immediate, and direct effect of
the law was to deprive the Northern Pacific Company of a
substantial amount of its interstate passenger business through
Moorhead.
Notwithstanding the facility with which interstate passengers
could avoid the discrimination against them by making two contracts
with the company, it is found that discrimination in fact still
existed against the interstate passenger who, applying for a
through ticket, did not know that the sum of the locals on Moorhead
was less than the through rate, against the passenger with a trunk
which he could not check through unless on a through ticket, and
against a passenger who was compelled to use a sleeping car. The
Northern Pacific Company shortly remedied this discrimination by
reducing all its interstate fares for passenger transportation
through Moorhead to an amount no greater than the sum of the locals
over
Page 230 U. S. 391
Moorhead. Before this reduction, Wisconsin had fixed the maximum
passenger fare at two cents a mile, and North Dakota at two and
one-half cents a mile. The rates thereafter established by the
Northern Pacific Company between St. Paul, for example, and points
in North Dakota and beyond, and by the Northern Pacific Company
jointly with other companies for transportation between points
easterly of Minnesota and points on the line of the Northern
Pacific, were in general less than the previous rates by
approximately one cent per mile for the mileage in Wisconsin and
Minnesota, and by one-half cent per mile for the mileage in North
Dakota. It is concluded that these reductions were compelled to
avoid unjust discrimination, and in order that the companies might
transact interstate passenger business freely and without
impairment of volume.
There are added various hypothetical calculations of the losses
which would have been sustained if the basis prescribed by the
state acts and orders had been applied to the interstate business
and to local business in other states. We shall have occasion later
to refer to the actual results of the business of the railroad
companies during the time that the rates fixed by the acts and
orders (with the exception of the commodity rates) were in force,
and to the effect upon revenue which the adoption of the commodity
rates would have had.
The foregoing findings, as stated by the master, were made
"without regard to the justness or otherwise in fact of the
interstate rates so affected by such local rates." The
determination of the reasonableness of the interstate rates was not
deemed to be within the province of the court.
The appellants do not concede the correctness of the findings in
their full scope, and insist upon qualifications. They deny that
the evidence justified the finding that the
Page 230 U. S. 392
companies had maintained "an equable -- that is, relatively fair
-- basis of rates" prior to the acts and orders in question. The
general or comprehensive system of interdependent and fairly
related rates, each so equitably adjusted to the others that any
local change must of necessity throw the whole out of balance, is
declared to exist only in imagination -- to be a fiction
constructed in disregard of the facts of ratemaking and without
attention to the inconsistencies shown by the schedules which had
been in force. The actual reductions in interstate rates, which
followed upon the adoption of the state tariffs, were made, it is
urged, in rates voluntarily established by the companies themselves
which had not been declared to be reasonable by competent
authority, and in any case furnish no standard by which the
validity of the action of the state, in the control of its internal
affairs, should be judged. The appellants say that the local rates
in Minnesota were incongruous and unreasonable; that frequent
changes in the interest of favored shippers had been made through
the filing of temporary intrastate tariffs until the practice was
stopped by a statute of 1905 (Chapter 176) forbidding changes
without the consent of the Commission; that, with respect to grain
and livestock, the principal agricultural products of the state,
the companies maintained an "inharmonious jumble of arbitrary
rates," and that the acts and orders in question were designed to
correct inequalities in the intrastate tariffs, and to prescribe
charges which, upon thorough investigation and after public
hearings in which the companies participated, were found to be
reasonable and were brought into suitable relation with each other
by means of a scientific plan. And it is denied that unjust
discrimination as against localities without the state can be
predicated of the establishment of reasonable state rates.
It is also insisted that the prescribed intrastate freight rates
were not in general lower than the existing interstate
Page 230 U. S. 393
rates. Reference is made to the long distance traffic, which, it
is said, was moved within the state on proportionals of long haul
rates which were much below the local rates fixed by the state. It
is pointed out that the master found, in passing upon the question
whether the rates were confiscatory, that the gross revenue which
was derived from the interstate freight business during the fiscal
year ending June 30, 1908 (when all the rates in question were in
force save the commodity rates), was greater per ton-mile than that
derived in the same period from the interstate business within the
state, being in the case of the Northern Pacific Company in the
ratio of 1.4387 to 1, and in that of the Great Northern Company of
2.02894 to 1. The appellants also contest the validity of the
argument based on a hypothetical extension beyond the state line of
the "rate of progression" for additional distance which had been
prescribed by the state solely with reference to internal traffic,
and they submit illustrations of incongruities which they contend
would be shown by a similar extension of the rate of progression
disclosed by the former intrastate tariffs of the companies. Again,
it is urged that the extent of the reductions attributable to the
two-cent fare law may not be estimated properly by a comparison
with the former maximum rate of three cents a mile. Various rates
had been in force less than the maximum allowed. For the six years
prior to the two-cent fare law. the average rate per passenger per
mile for intrastate transportation in Minnesota, on the Northern
Pacific line, had ranged from 2.299 cents in 1901 to 2.435 cents in
1905, 2.406 cents in 1906, and 2.197 cents in 1907, and, during the
same time, the average rate per passenger per mile for interstate
transportation in Minnesota varied from 2.075 cents in 1901, 2.027
cents in 1905, 1.949 cents in 1906, and 1.981 cents in 1907.
[
Footnote 1] In the fiscal year
ending
Page 230 U. S. 394
June 30, 1908, with the two-cent fare law in force the average
rate per passenger per mile in Minnesota was 1.930 cents for
intrastate and 1.928 cents for interstate carriage.
It is conceded, however, that the schedules fixed for intrastate
transportation "necessarily disturbed the equilibrium theretofore
existing between the rates on the two classes of business" (state
and interstate) "on the boundary lines." This applies to the rates
to and from the cities situated on opposite sides of the Red River
of the North, the boundary between Minnesota and North Dakota, and
to and from Duluth and Superior on the eastern boundary. The
reduction of the state rates brought them below the level of the
interstate rates in those instances in which formerly both had been
maintained on a parity. So also, whatever may be said as to the
nonexistence of a general or comprehensive system of equitably
adjusted rates, it is clear that there are competitive areas
crossed by the state line of Minnesota, and that the state's
requirements altered the existing relation between state and
interstate rates as to places within these zones of competition,
and not merely as to the cities on the boundary of the state.
The situation is not peculiar to Minnesota. The same question
has been presented by the appeals, now before the Court, which
involve the validity of intrastate tariffs fixed by Missouri,
Arkansas, Kentucky, and Oregon. Differences in particular facts
appear, but they cannot be regarded as controlling. A scheme of
state rates framed to avoid discrimination between localities
within the state, and to provide an harmonious system for
intrastate transportation throughout the state, naturally would
embrace those places within the state which are on or near the
state's boundaries, and when these are included in a general
reduction of intrastate rates, there is, of course, a change in the
relation of rates as theretofore existing to
Page 230 U. S. 395
points adjacent to, but across, the state line. Kansas City,
Kansas, and Kansas City, Missouri; East St. Louis, Illinois, and
St. Louis, Missouri; Omaha, Nebraska, and Council Bluffs, Iowa;
Cincinnati, Ohio, and Covington and Newport, Kentucky, and many
other places throughout the country which might be mentioned
present substantially the same conditions as those here appearing
with respect to localities on the boundaries of Minnesota. It is
also a matter of common knowledge that competition takes but little
account of state lines, and in every part of the land, competitive
districts embrace points in different states.
With appreciation of the gravity of the controversy, the
railroad Commissioners of eight states [
Footnote 2] have filed their brief as
amici
curiae in support of the appeals, stating that, if the
doctrine of the court below were accepted, the regulation by the
states of rates for intrastate transportation would be practically
destroyed. They say that "there is practically no movement of
traffic between two towns within a state that does not come into
competition with some interstate haul," and that,
"if the disturbance of the existing relation between competitive
state and interstate rates is the correct criterion, no reduction
can be made in state rates without interfering with interstate
commerce."
The governors of three states, pursuant to a resolution of a
conference of the governors of all the states, have also presented,
by leave of the Court, their argument in defense of the position
taken by Minnesota. They do not seek "to belittle the effect of the
action of Minnesota on the business between the places" named in
the findings, but they are convinced that, if the principle
announced by the circuit court is upheld, it can be made to apply
by a showing of similar facts in virtually every state. Insisting
that, under their reserved power, "the
Page 230 U. S. 396
right of the states to regulate their own commerce is as clear
and broad as that of Congress to regulate interstate commerce,"
they assail the decision below not upon the ground that it
incorrectly sets forth conditions in Minnesota and adjoining
states, but for what they consider to be "its plain disregard of
the provisions of the federal Constitution which establish the
relations between the nation and the states." "The operation of
these provisions," they maintain,
"was not made to depend on geography or convenience or
competition. They cannot apply in one state and not in another,
according to circumstances as they may be found by the courts,
because they are vital principles which constitute the very
structure of our dual form of government."
The controversy thus arises from opposing conceptions of the
fundamental law, and of the scope and effect of federal
legislation, rather than from differences with respect to the
salient facts.
For the purpose of the present inquiry, the rates fixed by the
state must be assumed to be reasonable rates so far as intrastate
traffic is concerned -- that is, they must be rates which the
state, in the exercise of its legislative judgment, could
constitutionally fix for intrastate transportation separately
considered. If the state rates are not of this character -- a
question to be dealt with later -- they cannot be sustained in any
event; but, assuming them to be otherwise valid, the decree below,
with respect to the present branch of the case, rests upon two
grounds: (1) that the action of the state imposes a direct burden
upon interstate commerce, and (2) that it is in conflict with the
provisions of the Act to Regulate Commerce.
These grounds are distinct. If a state enactment imposes a
direct burden upon interstate commerce, it must fall regardless of
federal legislation. The point of such
Page 230 U. S. 397
an objection is not that Congress has acted, but that the state
has directly restrained that which, in the absence of federal
regulation, should be free. If the Acts of Minnesota constitute a
direct burden upon interstate commerce, they would be invalid
without regard to the exercise of federal authority touching the
interstate rates said to be affected. On the other hand, if the
state, in the absence of federal legislation, would have had the
power to prescribe the rates here assailed, the question remains
whether its action is void as being repugnant to the statute which
Congress has enacted.
Prior to the passage of the Act to Regulate Commerce, carriers
fixed their interstate rates free from the actual exertion of
federal control, and under that act, as it stood until the
amendment of June 29, 1906, 34 Stat. 584, c. 3591, the Interstate
Commerce Commission had no power to prescribe interstate rates.
Interstate Commerce Commission v. C., N.O. & T.P. R.
Co., 167 U. S. 479,
167 U. S. 511.
The states, however, had long exercised the power to establish
maximum rates for intrastate transportation. Was this power, apart
from federal action, subject to the limitation that the state could
not fix intrastate rates, reasonable as such, generally throughout
the state, but only as to such places and in such circumstances
that the interstate business of the carriers would not be thereby
affected? That is, was the state debarred from fixing reasonable
rates on traffic, wholly internal, as to all state points so
situated that, as a practical consequence, the carriers would have
to reduce the rates they had made to competing points without the
state in order to maintain the volume of their interstate business,
or to continue the parity of rates, or the relation between rates
as it had previously existed? Was the state, in prescribing a
general tariff of reasonable intrastate rates otherwise within its
authority, bound not to go below a minimum standard established by
the interstate rates made by the
Page 230 U. S. 398
carriers within competitive districts? If the state power,
independently of federal legislation, is thus limited, the inquiry
need proceed no further. Otherwise it must be determined whether
Congress has so acted as to create such a restriction upon the
state authority theretofore existing.
(1.) The general principles governing the exercise of state
authority when interstate commerce is affected are well
established. The power of Congress to regulate commerce among the
several states is supreme and plenary. It is "complete in itself,
may be exercised to its utmost extent, and acknowledges no
limitations, other than are prescribed in the Constitution."
Gibbons v.
Ogden, 9 Wheat. 1,
22 U. S. 196. The
conviction of its necessity sprang from the disastrous experiences
under the Confederation, when the states vied in discriminatory
measures against each other. In order to end these evils, the grant
in the Constitution conferred upon Congress an authority at all
times adequate to secure the freedom of interstate commercial
intercourse from state control, and to provide effective regulation
of that intercourse as the national interest may demand. The words
"among the several states" distinguish between the commerce which
concerns more states than one and that commerce which is confined
within one state and does not affect other states. "The genius and
character of the whole government," said Chief Justice
Marshall,
"seems to be that its action is to be applied to all the
external concerns of the nation, and to those internal concerns
which affect the states generally, but not to those which are
completely within a particular state, which do not affect other
states, and with which it is not necessary to interfere for the
purpose of executing some of the general powers of the government.
The completely internal commerce of a state, then, may be
considered as reserved for the state itself. "
Page 230 U. S. 399
Id., p.
22 U. S. 195.
This reservation to the states manifestly is only of that authority
which is consistent with, and not opposed to, the grant to
Congress. There is no room in our scheme of government for the
assertion of state power in hostility to the authorized exercise of
federal power. The authority of Congress extends to every part of
interstate commerce, and to every instrumentality or agency by
which it is carried on, and the full control by Congress of the
subjects committed to its regulation is not to be denied or
thwarted by the commingling of interstate and intrastate
operations. This is not to say that the nation may deal with the
internal concerns of the state, as such, but that the execution by
Congress of its constitutional power to regulate interstate
commerce is not limited by the fact that intrastate transactions
may have become so interwoven therewith that the effective
government of the former incidentally controls the latter. This
conclusion necessarily results from the supremacy of the national
power within its appointed sphere.
M'Culloch
v. Maryland, 4 Wheat. 316,
17 U. S. 405,
17 U. S. 426;
The Daniel
Ball, 10 Wall. 557,
77 U. S. 565;
Smith v. Alabama, 124 U. S. 465,
124 U. S. 473;
Baltimore & Ohio R. Co. v. Interstate Commerce
Commission, 221 U. S. 612,
221 U. S.
618-619;
Southern Railway Co. v. United States,
222 U. S. 20,
222 U. S. 26-27;
Mondou v. New York, N.H. & H. R. Co., 223 U. S.
1,
223 U. S. 47,
223 U. S.
54-55.
The grant in the Constitution, of its own force -- that is,
without action by Congress -- established the essential immunity of
interstate commercial intercourse from the direct control of the
states with respect to those subjects embraced within the grant
which are of such a nature as to demand that, if regulated at all,
their regulation should be prescribed by a single authority. It has
repeatedly been declared by this Court that, as to those subjects
which require a general system or uniformity of regulation, the
power of Congress is exclusive. In other matters, admitting of
diversity of treatment according to the special
Page 230 U. S. 400
requirements of local conditions, the states may act within
their respective jurisdictions until Congress sees fit to act; and,
when Congress does act, the exercise of its authority overrides all
conflicting state legislation.
Cooley v. Board of
Wardens, 12 How, 299,
53 U. S. 319;
Ex Parte
McNiel, 13 Wall. 236,
80 U. S. 240;
Welton v. Missouri, 91 U. S. 275,
91 U. S. 280;
Mobile County v. Kimball, 102 U.
S. 691,
102 U. S. 697;
Gloucester Ferry Co. v. Pennsylvania, 114 U.
S. 196,
114 U. S. 204;
Bowman v. Chicago &c. Ry. Co., 125 U.
S. 465,
125 U. S. 481,
125 U. S. 485;
Gulf, Colorado & Santa Fe Ry. Co. v. Hefley,
158 U. S. 103,
158 U. S. 104;
Northern Pacific Ry. Co. v. Washington, 222 U.
S. 370,
222 U. S. 378;
Southern Ry. Co. v. Reid, 222 U.
S. 424,
222 U. S.
436.
The principle which determines this classification underlies the
doctrine that the states cannot, under any guise, impose direct
burdens upon interstate commerce. For this is but to hold that the
states are not permitted directly to regulate or restrain that
which, from its nature, should be under the control of the one
authority, and be free from restriction, save as it is governed in
the manner that the national legislature constitutionally
ordains.
Thus, the states cannot tax interstate commerce, either by
laying the tax upon the business which constitutes such commerce or
the privilege of engaging in it or upon the receipts, as such,
derived from it,
State Freight Tax
Case, 15 Wall. 232;
Robbins v. Shelby Taxing
District, 120 U. S. 489;
Philadelphia & Southern Mail S.S. Co. v. Pennsylvania,
122 U. S. 326;
Leloup v. Mobile, 127 U. S. 640;
McCall v. California, 136 U. S. 104;
Brennan v. Titusville, 153 U. S. 289;
Galveston, Harrisburg & San Antonio Railway Co. v.
Texas, 210 U. S. 217;
Western Union Telegraph Co. v. Kansas, 216 U. S.
1;
Pullman Co. v. Kansas, 216 U. S.
56;
Meyer v. Wells, Fargo & Co.,
223 U. S. 298;
Crenshaw v. Arkansas, 227 U. S. 389; or
upon persons or property in transit in interstate commerce,
Passenger
Cases, 7 How. 283;
Crandall v.
Nevada, 6 Wall. 35;
State
Freight Tax Case, 15 Wall. 281;
Coe v.
Errol, 116
Page 230 U. S. 401
U.S. 517;
Kelley v. Rhoads, 188 U. S.
1;
Bacon v. Illinois, 227 U.
S. 504.
They have no power to prohibit interstate trade in legitimate
articles of commerce (
Bowman v. Chicago &c. Railway Co.,
supra; Leisy v. Hardin, 135 U. S. 100;
Vance v. Vandercook, 170 U. S. 438;
Schollenberger v. Pennsylvania, 171 U. S.
1;
Oklahoma v. Kansas Natural Gas Co.,
221 U. S. 229;
L. & N. R. Co. v. Cook Brewing Co., 223 U. S.
70), or to discriminate against the products of other
states (
Ward v.
Maryland, 12 Wall. 418;
Welton v.
Missouri, 91 U. S. 275,
91 U. S. 230;
Hannibal & St. J. R. Co. v. Husen, 95 U. S.
465;
Guy v. Baltimore, 100 U.
S. 434;
Walling v. Michigan, 116 U.
S. 446;
Minnesota v. Barber, 136 U.
S. 313;
Brimmer v. Rebman, 138 U. S.
78;
Darnell v. Memphis, 208 U.
S. 113); or to exclude from the limits of the state
corporations or others engaged in interstate commerce, or to fetter
by conditions their right to carry it on (
Crutcher v.
Kentucky, 141 U. S. 47;
Western Union Telegraph Co. v. Kansas, supra; Pullman Co. v.
Kansas, supra; International Textbook Co. v. Pigg,
217 U. S. 91;
Bucks Stove Co. v. Vickers, 226 U.
S. 205); or to prescribe the rates to be charged for
transportation from one state to another, or to subject the
operations of carriers in the course of such transportation to
requirements that are unreasonable or pass beyond the bounds of
suitable local protection (
Wabash &c. Railway Co. v.
Illinois, 118 U. S. 557,
118 U. S. 577;
Covington &c. Bridge Co. v. Kentucky, 154 U.
S. 204;
Louisville & Nashville R. Co. v.
Eubank, 184 U. S. 27;
Hanley v. Kansas City Southern Ry. Co., 187 U.
S. 617;
Railroad Commission of Ohio v.
Worthington, 225 U. S. 101;
Texas & N.O. R. Co. v. Sabine Tram Co., 227 U.
S. 111;
Hall v. De Cuir, 95 U. S.
485,
95 U. S. 488;
Cleveland, C.C. & St.L. Railway Co. v. Illinois,
177 U. S. 514;
Houston & T.C. R. Co. v. Mayes, 201 U.
S. 321;
McNeill v. Southern Railway Co.,
202 U. S. 543;
Mississippi R. Commission v. Illinois Central R. Co.,
203 U. S. 335;
Page 230 U. S. 402
Atlantic Coast Line v. Wharton, 207 U.
S. 328;
St. Louis Southwestern Ry. Co. v.
Arkansas, 217 U. S. 136;
Herndon v. C., R.I. & Pac. R. Co., 218 U.
S. 135;
Yazoo &c. R. Co. v. Greenwood Grocery
Co., 227 U. S. 1).
But, within these limitations, there necessarily remains to the
states until Congress acts a wide range for the permissible
exercise of power appropriate to their territorial jurisdiction
although interstate commerce may be affected. It extends to those
matters of a local nature as to which it is impossible to derive
from the constitutional grant an intention that they should go
uncontrolled pending federal intervention. Thus, there are certain
subjects having the most obvious and direct relation to interstate
commerce which nevertheless, with the acquiescence of Congress,
have been controlled by state legislation from the foundation of
the government because of the necessity that they should not remain
unregulated and that their regulation should be adapted to varying
local exigencies; hence, the absence of regulation by Congress in
such matters has not imported that there should be no restriction,
but rather that the states should continue to supply the needed
rules until Congress should decide to supersede them. Further, it
is competent for a state to govern its internal commerce, to
provide local improvements, to create and regulate local
facilities, to adopt protective measures of a reasonable character
in the interest of the health, safety, morals, and welfare of its
people, although interstate commerce may incidentally or indirectly
be involved. Our system of government is a practical adjustment by
which the national authority as conferred by the Constitution is
maintained in its full scope without unnecessary loss of local
efficiency. Where the subject is peculiarly one of local concern,
and from its nature belongs to the class with which the state
appropriately deals in making reasonable provision for local needs,
it cannot be regarded as left to the unrestrained will of
individuals
Page 230 U. S. 403
because Congress has not acted, although it may have such a
relation to interstate commerce as to be within the reach of the
federal power. In such case, Congress must be the judge of the
necessity of federal action. Its paramount authority always enables
it to intervene at its discretion for the complete and effective
government of that which has been committed to its care, and, for
this purpose and to this extent, in response to a conviction of
national need, to displace local laws by substituting laws of its
own. The successful working of our constitutional system has thus
been made possible.
The leading illustrations may be noted. Immediately upon the
adoption of the Constitution, Congress recognized the propriety of
local action with respect to pilotage, in view of the local
necessities of navigation. Act of August 7, 1789, c. 9, § 4, 1
Stat. 53, 54;
Cooley v. Port Wardens, supra. It was sixty
years before provision for federal license of pilots was made, Act
of August 30, 1852, c. 106, 10 Stat. 61), and even then port pilots
were not included,
Pacific Mail Steamship Co. v.
Joliffe, 2 Wall. 450,
69 U. S. 459).
And, while Congress has full power over the subject, and to a
certain extent has prescribed rules, it is still in a large measure
subject to the regulation of the states.
Anderson v. Pacific
Coast S.S. Co., 225 U. S. 187.
A state is entitled to protect its coasts, to improve its
harbors, bays, and streams, and to construct dams and bridges
across navigable rivers within its limits, unless there is conflict
with some act of Congress. Plainly, in the case of dams and
bridges, interference with the accustomed right of navigation may
result. But this exercise of the important power to provide local
improvements has not been regarded as constituting such a direct
burden upon intercourse or interchange of traffic as to be
repugnant to the federal authority in its dormant state.
Willson v. Black Bird Creek
Marsh Co., 2 Pet. 245;
Gilman v.
Philadelphia, 3 Wall. 713;
Pound v. Turck,
95 U. S. 459;
Mobile
County
Page 230 U. S. 404
v. Kimball, 102 U. S. 691,
102 U. S. 697;
Escanaba Co. v. Chicago, 107 U. S. 678;
Cardwell v. American Bridge Co., 113 U.
S. 205;
Huse v. Glover, 119 U.
S. 543,
119 U. S. 547;
Willamette Bridge Co. v. Hatch, 125 U. S.
1;
Lake Shore & Michigan C. Ry. Co. v.
Ohio, 165 U. S. 365;
Cummings v. Chicago, 188 U. S. 410;
Manigault v. Springs, 199 U. S. 473.
Thus, in
Gilman v.
Philadelphia, 3 Wall. 713, the complainants were
the owners of a valuable wharf and dock property in the Schuylkill
River, and sought to prevent the construction of a bridge which had
been authorized by the Legislature of Pennsylvania to connect East
and West Philadelphia. It appeared that the bridge would prevent
the passage of vessels having masts which had formerly navigated
the river up to the complainants' wharf, and would largely reduce
the income from the property. The Court affirmed the dismissal of
the bill upon the ground that, in the absence of legislation by
Congress, the state was acting within its authority. "The states
have always exercised this power," said the Court (
id., p.
70 U. S.
729),
"and, from the nature and objects of the two systems of
government, they must always continue to exercise it, subject,
however, in all cases, to the paramount authority of Congress,
whenever the power of the states shall be exerted within the sphere
of the commercial power which belongs to the Nation."
Again, in
Escanaba Co. v. Chicago, supra, the question
related to the power of the City of Chicago, acting under the
authority of the state, to regulate the closing of draws in the
bridges over the Chicago River. The Court said:
"The Chicago River and its branches must . . . be deemed
navigable waters of the United States, over which Congress, under
its commercial power, may exercise control to the extent necessary
to protect, preserve, and improve their free navigation. But the
states have full power to regulate within their limits matters of
internal police, including in that general designation whatever
will promote the peace, comfort, convenience, and prosperity
Page 230 U. S. 405
of their people. This power embraces the construction of roads,
canals, and bridges and the establishment of ferries, and it can
generally be exercised more wisely by the states than by a distant
authority. . . . When its [the state's] power is exercised so as to
unnecessarily obstruct the navigation of the river or its branches,
Congress may interfere and remove the obstruction. . . . But until
Congress acts on the subject, the power of the state over bridges
across its navigable streams is plenary."
Id., p.
107 U. S.
683.
While the state may not impose a duty of tonnage
(
Steamship Co. v.
Portwardens, 6 Wall. 31;
State
Tonnage Tax Cases, 12 Wall. 212;
Cannon v.
New Orleans, 20 Wall. 577), it may regulate
wharfage charges and exact tolls for the use of artificial
facilities provided under its authority. The subject is one under
state control, where Congress has not acted, although the payment
is required of those engaged in interstate or foreign commerce.
Keokuk Packet Co. v. Keokuk, 95 U. S.
80;
Cincinnati &c. Packet Co. v.
Catlettsburg, 105 U. S. 559;
Parkersburg & O. R. Transportation Co. v. Parkersburg,
107 U. S. 691;
Huse v. Glover, supra; Ouachita Packet Co. v. Aiken,
121 U. S. 444;
Sands v. Manistee River Improvement Co., 123 U.
S. 288,
123 U. S. 295.
In
Transportation Co. v. Parkersburg, supra, the Court had
before it an ordinance of that city prescribing rates of wharfage
on vessels discharging or receiving freight at public landings
belonging to the city. A transportation company having steamers
plying between Pittsburg and Cincinnati complained that the
wharfage charge was exorbitant. The Court held that the
reasonableness of the charge, it being simply one for wharfage, was
to be determined by the state law.
"The regulation of wharves belongs
prima facie, and in
the first instance, to the states, and would only be assumed by
Congress when its exercise by the states is incompatible with
interstate commerce."
Id., p.
107 U. S. 703.
Again, in
Ouachita
Page 230 U. S. 406
Packet Co. v. Aiken, supra, where the owners of
steamboats engaged in interstate commerce on the Mississippi River
complained of wharfage rates at New Orleans as unreasonable and
excessive, and in effect "a direct duty, or burden, upon commerce,"
the Court, overruling the contention, held that the case was
"clearly within the principle of the former decisions of this
Court, which affirm the right of a state, in the absence of
regulation by Congress, to establish, manage, and carry on works
and improvements of a local character, though necessarily more or
less affecting interstate and foreign commerce,"
id., p.
121 U. S.
447.
Quarantine regulations are essential measures of protection
which the states are free to adopt when they do not come into
conflict with federal action. In view of the need of conforming
such measures to local conditions, Congress from the beginning has
been content to leave the matter for the most part, notwithstanding
its vast importance, to the states, and has repeatedly acquiesced
in the enforcement of state laws. Act of February 25, 1799, c. 12,
1 Stat. 619, Rev.Stat. § 4797; Act of April 29, 1878, c. 66, 20
Stat. 37; Act of February 15, 1893, c. 114, 27 Stat. 449. Such laws
undoubtedly operate upon interstate and foreign commerce. They
could not be effective otherwise. They cannot, of course, be made
the cover for discriminations and arbitrary enactments having no
reasonable relation to health (
Hannibal & St.J. Railroad
Co. v. Husen, 95 U. S. 465,
95 U. S.
472-473), but the power of the state to take steps to
prevent the introduction or spread of disease, although interstate
and foreign commerce are involved (subject to the paramount
authority of Congress if it decides to assume control), is beyond
question.
Morgan's &c. S.S. Co. v. Louisiana,
118 U. S. 455;
Missouri, Kansas & Texas Ry. Co. v. Haber,
169 U. S. 613;
Louisiana v. Texas, 176 U. S. 1;
Rasmussen v. Idaho, 181 U. S. 198;
Compagnie Francaise &c.
v. Board of Health, 186
Page 230 U. S. 407
U.S. 380;
Reid v. Colorado, 187
U. S. 138;
Asbell v. Kansas, 209 U.
S. 251. In
Compagnie Francaise &c. v. Board of
Health, supra, the Court had before it the quarantine law of
Louisiana which, among other things, provided the state board of
health might,
"in its discretion, prohibit the introduction into any infected
portion of the state persons acclimated, unacclimated, or said to
be immune, when, in its judgment, the introduction of such persons
would add to or increase the prevalence of the disease."
The supreme court of the state, interpreting the statute, held
that it empowered the board to exclude healthy persons from a
locality infested with a contagious or infectious disease, whether
they came from without or within the state. It was objected that
this provision was too broad, and that the former decisions of the
court were based upon the right of the states to exclude diseased
persons and things which were not legitimate subjects of commerce.
The court sustained the law, saying, with respect to this
argument:
"But it must be at once observed that this erroneously states
the doctrine as concluded by the decisions of this Court previously
referred to, since the proposition ignores the fact that some cases
expressly and unequivocally hold that the health and quarantine
laws of the several states are not repugnant to the Constitution of
the United States, although they affect foreign and domestic
commerce, as in many cases they necessarily must do in order to be
efficacious, because, until Congress has acted under the authority
conferred upon it by the Constitution, such state health and
quarantine laws producing such effect on legitimate interstate
commerce are not in conflict with the Constitution. True is it
that, in some of the cases relied on in the argument, it was held
that a state law absolutely prohibiting the introduction, under all
circumstances, of objects actually affected with disease was valid
because such objects were not legitimate commerce. But this implies
no limitation on the power to
Page 230 U. S. 408
regulate by health laws the subjects of legitimate commerce. In
other words, the power exists, until Congress has acted, to
incidentally regulate by health and quarantine laws even although
interstate and foreign commerce is affected, and the power to
absolutely prohibit additionally obtains where the thing prohibited
is not commerce, and hence not embraced in either interstate or
foreign commerce."
Id., p. 931.
State inspection laws and statutes designed to safeguard the
inhabitants of a state from fraud and imposition are valid when
reasonable in their requirements, and not in conflict with federal
rules, although they may affect interstate commerce in their
relation to articles prepared for export, or by including
incidentally those brought into the state and held for sale in the
original imported packages.
Gibbons v. Ogden, supra, p.
22 U. S. 203;
Turner v. Maryland, 107 U. S. 38;
Plumley v. Massachusetts, 155 U.
S. 461;
Patapsco Guana Co. v. North Carolina,
171 U. S. 345,
171 U. S.
357-358;
Savage v. Jones, 225 U.
S. 501. And for the protection of its game and the
preservation of a valuable food supply, the state may penalize the
possession of game during the closed season, whether obtained
within the state or brought from abroad.
Silz v.
Hesterberg, 211 U. S. 31.
Interstate carriers, in the absence of federal statute providing
a different rule, are answerable according to the law of the state
for nonfeasance or misfeasance within its limits.
Chicago,
Milwaukee &c. Ry. Co. v. Solan, 169 U.
S. 133,
169 U. S. 137;
Pennsylvania R. Co. v. Hughes, 191 U.
S. 477,
191 U. S. 491;
Martin v. Pittsburg & Lake Erie R. Co., 203 U.
S. 284,
203 U. S. 294;
Southern Pacific Co. v. Schuyler, 227 U.
S. 601,
227 U. S. 613.
Until the enactment by Congress of the Act of April 22, 1908, c.
149, 35 Stat. 65, the laws of the states determined the liability
of interstate carriers by railroad for injuries received by their
employees while engaged in interstate commerce, and this was
because Congress, although empowered to regulate the subject,
Page 230 U. S. 409
had not acted thereon. In some states, the so-called fellow
servant rule obtained; in others, it had been abrogated, and it
remained for Congress, in this respect and in other matters
specified in the statute, to establish a uniform rule.
Mondou
v. N.Y., N.H. & H. R. Co., supra; Michigan Central R. Co. v.
Vreeland, 227 U. S. 59,
227 U. S.
66.
So, where Congress has not intervened, state statutes providing
damages for wrongful death may be enforced not only against land
carriers, but also against the owners of vessels engaged in
interstate commerce where the wrong occurs within the jurisdiction
of the state.
Sherlock v. Alling, 93 U. S.
99,
93 U. S. 103.
See American Steamboat Co. v.
Chase, 16 Wall. 522;
The Hamilton,
207 U. S. 398.
And, until Congress legislated on the matter, liability for loss of
property on interstate as well as intrastate shipments was subject
to state regulation. Some states allowed an exemption by contract
from all or a part of the common law liability; others allowed no
exemption. These differences in the applicable laws created
inequalities with respect to interstate transportation, but each
state exercised the power inherent in its territorial jurisdiction,
and the remedy for the resulting diversity lay with Congress, which
was free to substitute its own regulations, and this was done in
the recent amendment of § 20 of the Act to Regulate Commerce. Act
of June 29, 1906, c. 3591, 34 Stat. 584;
Adams Express Co. v.
Croninger, 226 U. S. 491,
226 U. S. 500.
It is within the competency of a state to create and enforce liens
upon vessels for supplies furnished under contracts not maritime in
their nature, and it is no valid objection that the state law may
obstruct the prosecution of a voyage of an interstate character.
The Winnebago, 205 U. S. 354. It
may also create liens for damages to property on land, occasioned
by negligence of vessels.
Johnson v. Chicago &c. Elevator
Co., 119 U. S. 388;
Martin v. West, 222 U. S. 191.
Cars employed in interstate commerce may be
Page 230 U. S. 410
seized by attachment under state law in order to compel the
payment of debts.
Davis v. C., C.C. & St.L. Ry. Co.,
217 U. S. 157. And
the legislation of the states safeguarding life and property and
promoting comfort and convenience within their jurisdictions may
extend incidentally to the operations of the carrier in the conduct
of interstate business provided it does not subject that business
to unreasonable demands and is not opposed to federal legislation.
Smith v. Alabama, 124 U. S. 465;
Hennington v. Georgia, 163 U. S. 299;
N.Y., N.H. & H. R. Co. v. New York, 165 U.
S. 628;
Lake Shore & M.S. Ry. Co. v. Ohio,
173 U. S. 285;
Missouri, Pacific Ry. Co. v. Larabee Mills Co.,
211 U. S. 612;
Missouri Pacific Ry. Co. v. Kansas, 216 U.
S. 262. It has also been held that the state has the
power to forbid the consolidation of state railroad corporations
with competing lines although both may be interstate carriers, and
the prohibition may have a far-reaching effect upon interstate
commerce.
Pearsall v. Great Northern Ry. Co., 161 U.
S. 646,
161 U. S. 677;
Louisville & Nashville R. Co. v. Kentucky,
161 U. S. 677,
161 U. S.
701-702.
See Northern Securities Co. v. United
States, 193 U. S. 317,
193 U. S. 348,
193 U. S.
382.
Again, it is manifest that, when the legislation of the state is
limited to internal commerce to such degree that it does not
include even incidentally the subjects of interstate commerce, it
is not rendered invalid because it may affect the latter commerce
indirectly. In the intimacy of commercial relations, much that is
done in the superintendence of local matters may have an indirect
bearing upon interstate commerce. The development of local
resources and the extension of local facilities may have a very
important effect upon communities less favored, and to an
appreciable degree alter the course of trade. The freedom of local
trade may stimulate interstate commerce, while restrictive measures
within the police power of the state, enacted exclusively with
respect
Page 230 U. S. 411
to internal business, as distinguished from interstate traffic,
may in their reflex or indirect influence diminish the latter and
reduce the volume of articles transported into or out of the state.
It was an objection of this sort that was urged and overruled in
Kidd v. Pearson, 128 U. S. 1, to the
law of Iowa prohibiting the manufacture and sale of liquor within
the state save for limited purposes.
See also Geer v.
Connecticut, 161 U. S. 519,
161 U. S. 534;
Austin v. Tennessee, 179 U. S. 343;
Capital City Dairy Co. v. Ohio, 183 U.
S. 238,
183 U. S. 245;
Missouri Pacific Ry. Co. v. Kansas, supra. When, however,
the state, in dealing with its internal commerce, undertakes to
regulate instrumentalities which are also used in interstate
commerce, its action is necessarily subject to the exercise by
Congress of its authority to control such instrumentalities so far
as may be necessary for the purpose of enabling it to discharge its
constitutional function.
Southern Railway Co. v. United States,
supra; Baltimore & Ohio R. Co. v. Interstate Commerce
Commission, supra.
Within the state power, then, in the words of Chief Justice
Marshall, is
"that immense mass of legislation which embraces everything
within the territory of a state not surrendered to the general
government, all which can be most advantageously exercised by the
states themselves. Inspection laws, quarantine laws, health laws of
every description, as well as laws for regulating the internal
commerce of a state, and those which respect turnpike roads,
ferries, etc., are component parts of this mass. No direct general
power over these objects is granted to Congress, and consequently
they remain subject to state legislation. If the legislative power
of the Union can reach them, it must be for national purposes; it
must be where the power is expressly given for a special purpose,
or is clearly incidental to some power which is expressly
given."
Gibbons v. Ogden, supra, pp.
22 U. S.
203-204.
And whenever, as to such matters, under these established
Page 230 U. S. 412
principles, Congress may be entitled to act by virtue of its
power to secure the complete government of interstate commerce, the
state power nevertheless continues until Congress does act, and by
its valid interposition limits the exercise of the local
authority.
(2) These principles apply to the authority of the state to
prescribe reasonable maximum rates for intrastate
transportation.
State regulation of railroad rates began with railroad
transportation. The railroads were chartered by the states, and
from the outset, in many charters, maximum rates for freight or
passengers, or both, were prescribed. [
Footnote 3] Frequently -- and this became the more general
practice -- the board of directors was permitted to fix charges in
its discretion, an authority which in numerous instances was made
subject to a limitation upon the amount of net earnings. [
Footnote 4] In several states, maximum
rates were also established, or the power to alter rates was
expressly reserved, by general laws. [
Footnote 5] In 1853, the State of New
Page 230 U. S. 413
York fixed the maximum fare for way passengers on the railroads
forming the line of the New York Central at two cents a mile (Laws
of 1853, c. 76, § 7), and this rate extending to Buffalo and
Suspension Bridge, on the boundary of the state, has continued to
the present day (Consol.Laws N.Y., c. 49, § 57). As a rule, the
restrictions imposed by the early legislation were far from
onerous, but they are significant in the assertion of the right of
control. More potent than these provisions in the actual effect
upon railroad tariffs was the state canal. It is a matter of common
knowledge that the traffic on the trunk lines from the Atlantic
seaboard to the West was developed in competition with the Erie
Canal, built, maintained, and regulated by the State of New York to
promote its commerce.
The authority of the state to limit by legislation the charges
of common carriers within its borders was not confined to the power
to impose limitations in connection with grants of corporate
privileges. In view of the nature of their business, they were held
subject to legislative control as to the amount of their charges
unless they were protected by their contract with the state. This
was decided in
Chicago, Burlington & Quincy R. Co. v.
Iowa, 94 U. S. 155;
Peik v. Chicago & Northwestern Railway Co.,
94 U. S. 164;
Winona & St. Peter R. Co. v. Blake, 94 U. S.
180, and other cases, following
Munn v.
Illinois, 94 U. S. 113. The
question was presented by acts of the Legislatures of Illinois,
Iowa, Wisconsin, and Minnesota, passed in the years 1871 and 1874,
in response to a general movement for a reduction of rates. The
section of the country in which the demand arose was to a large
degree homogeneous, and one in which the flow of commerce was only
slightly concerned with state lines. But resort was had to the
states for relief. In the
Munn case, the Court had before
it the statute of Illinois governing the grain warehouses in
Chicago. Through these elevators,
Page 230 U. S. 414
located with the river harbor on the one side and the railway
tracks on the other, it was necessary, according to the course of
trade, for the product of seven or eight states of the West to pass
on its way to the states on the Atlantic coast. In addition to the
denial of any legislative authority to limit charges, it was urged
that the act was repugnant to the exclusive power of Congress to
regulate interstate commerce. The Court answered that the business
was carried on exclusively within the limits of the State of
Illinois, that its regulation was a thing of domestic concern, and
that
"certainly, until Congress acts in reference to their interstate
relations, the state may exercise all the powers of government over
them, even though in so doing it may indirectly operate upon
commerce outside its immediate jurisdiction."
In the decision of the railroad cases above cited, the same
opinion was expressed. The language of the Court, however, went
further than to sustain the state law with respect to rates for
purely intrastate carriage. Thus, the Act of Wisconsin covered
traffic which started within the state and was destined to points
outside, and this was treated as being within the state power
(
Peik v. Chicago & Northwestern Railway Co.,
94 U. S. 164,
94 U. S.
177-178), a view which was later repudiated (
Wabash,
St.L. & P. Railway Co. v. Illinois, 118 U.
S. 557).
It became a frequent practice for the states to create
commissions as agencies of state supervision and regulation, and in
many instances the ratemaking power was conferred upon these
bodies. A summary of such legislation is given in
Interstate
Commerce Commission v. Chicago, N. O. & T. P. Ry. Co.,
167 U. S. 479,
167 U. S.
495-496. One of these state laws, that of Mississippi,
passed in 1884, came under review in
Stone v. Farmers Loan
& Trust Co., 116 U. S. 307. The
suit was brought to enjoin the Railroad Commission from enforcing
the statute against the Mobile & Ohio Railroad Company. It had
been incorporated
Page 230 U. S. 415
in the States of Alabama, Mississippi, Tennessee, and Kentucky
for the purpose of constructing a railroad from Mobile to some
point near the mouth of the Ohio River, where it would connect with
another railroad, thus forming a continuous line of interstate
communication between the Gulf of Mexico and the Great Lakes. The
Commission as yet had not acted. Sustaining the state power to fix
rates upon the traffic wholly internal, the Court directed the
dismissal of the bill. The state, said the Court (p.
116 U. S.
334),
"may beyond all question, by the settled rule of decision in
this Court, regulate freights and fares for business done
exclusively within the state, and it would seem to be a matter of
domestic concern to prevent the company from discriminating against
persons and places in Mississippi."
In the same case, it was declared that the power of regulation
was not a power to confiscate, and that, under pretense of
regulating fares and freights, the states could not "require a
railroad corporation to carry persons or property without reward,"
or do that which in law amounted "to a taking of private property
for public use without just compensation, or without due process of
law."
Id., p.
116 U. S.
331.
In
Wabash, St.L. & P. R. Co. v. Illinois, supra, it
was finally determined that the authority of the state did not
extend to the regulation of charges for interstate transportation.
There, the state statute was aimed at discrimination. It was said
to have been violated by the railroad company in the case of
shipments from points within Illinois to the City of New York. The
state court had construed the statute to be binding as to that part
of the interstate haul which was within the state, although
inoperative beyond the boundary. So applied, this Court held the
act to be invalid.
But no doubt was entertained of the state's authority to
regulate rates for transportation that was wholly intrastate. And,
in illustrating the extent of state power
Page 230 U. S. 416
(
id., p.
118 U. S.
564), the Court selected transportation across the state
from Cairo to Chicago and from Chicago to Alton, all boundary
points constituting important centers of commerce -- the one on
Lake Michigan, and the others at the confluence of the Mississippi
and Ohio Rivers, and of the Mississippi and Missouri Rivers,
respectively. After reviewing decisions holding state laws to be
ineffective which imposed a direct burden upon interstate commerce,
including the cases of the
State Freight Tax
Case, 15 Wall. 232;
Hall v. DeCuir,
95 U. S. 485;
Gloucester Ferry Co. v. Pennsylvania, 114 U.
S. 196;
Pickard v. Pullman Southern Car Co.,
117 U. S. 34, the
Court emphasized the distinction with respect to the operation of
the statute upon domestic transactions, saying:
"Of the justice or propriety of the principle which lies at the
foundation of the Illinois statute it is not the province of this
Court to speak. As restricted to a transportation which begins and
ends within the limits of the state, it may be very just and
equitable, and it certainly is the province of the state
legislature to determine that question."
Id., p.
118 U. S.
577.
The doctrine was thus fully established that the state could not
prescribe interstate rates, but could fix reasonable intrastate
rates throughout its territory. The extension of railroad
facilities has been accompanied at every step by the assertion of
this authority on the part of the states and its invariable
recognition by this Court. It has never been doubted that the state
could, if it saw fit, build its own highways, canals and railroads.
(
Railroad Company v.
Maryland, 21 Wall. 456,
88 U. S.
470-471.) It could build railroads traversing the entire
state, and thus join its border cities and commercial centers by
new highways of internal intercourse, to be always available upon
reasonable terms. Such provision for local traffic might indeed
alter relative advantages in competition, and, by virtue of
economic forces, those engaged in interstate trade and
transportation might find it necessary to make readjustments
Page 230 U. S. 417
extending from market to market through a wide sphere of
influence, but such action of the state would not for that reason
be regarded as creating a direct restraint upon interstate
commerce, and as thus transcending the state power. Similarly, the
authority of the state to prescribe what shall be reasonable
charges of common carriers for interstate transportation, unless it
be limited by the exertion of the constitutional power of Congress,
is statewide. As a power appropriate to the territorial
jurisdiction of the state, it is not confined to a part of the
state, but extends throughout the state -- to its cities adjacent
to its boundaries as well as to those in the interior of the state.
To say that this power exists, but that it may be exercised only in
prescribing rates that are on an equal or higher basis than those
that are fixed by the carrier for interstate transportation, is to
maintain the power in name while denying it in fact. It is to
assert that the exercise of the legislative judgment in determining
what shall be the carrier's charge for the intrastate service is
itself subject to the carrier's will. But this statewide authority
controls the carrier, and is not controlled by it, and the idea
that the power of the state to fix reasonable rates for its
internal traffic is limited by the mere action of the carrier in
laying an interstate rate to places across the state's border is
foreign to our jurisprudence.
If this authority of the state be restricted, it must be by
virtue of the paramount power of Congress over interstate commerce
and its instruments; and, in view of the nature of the subject, a
limitation may not be implied because of a dormant federal power --
that is, one which has not been exerted, but can only be found in
the actual exercise of federal control in such measure as to
exclude this action by the state which otherwise would clearly be
within its province.
(3) When Congress, in the year 1887, enacted the Act to Regulate
Commerce (24 Stat. 379, c. 104), it was acquainted
Page 230 U. S. 418
with the course of the development of railroad transportation
and with the exercise by the states of the ratemaking power. An
elaborate report had been made to the Senate by a committee
authorized to investigate the subject of railroad regulation, in
which the nature and extent of state legislation, including the
Commission plan, were fully reviewed (Senate Report 46, submitted
January 6, 1886, 49th Congress, 1st session). And it was the fact
that beyond the bounds of state control there lay a vast field of
unregulated activity in the conduct of interstate transportation
which was found to be the chief cause of the demand for federal
action.
Congress carefully defined the scope of its regulation, and
expressly provided that it was not to extend to purely intrastate
traffic. In the first section of the Act to Regulate Commerce,
there was inserted the following proviso:
"
Provided, however, That the provisions of this Act
shall not apply to the transportation of passengers or property, or
to the receiving, delivering, storage, or handling
Page 230 U. S. 419
of property wholly within one state, and not shipped to or from
a foreign country, from or to any state or territory as
aforesaid."
When, in the year 1906 (Act of June 29, 1906, c. 3591, 34 Stat.
584), Congress amended the act so as to confer upon the federal
commission power to prescribe maximum interstate rates, the proviso
in § 1 was reenacted. Again, in 1910, when the act was extended to
embrace telegraph, telephone, and cable companies engaged in
interstate business, the proviso was once more reenacted, with an
additional clause so as to exclude intrastate messages from the
operation of the statute. Act of June 18, 1910, c. 309, 36 Stat.
545. The proviso in its present form reads:
"
Provided, however, That the provisions of this Act
shall not apply to the transportation of passengers or property, or
to the receiving, delivering, storage, or handling of property
wholly within one state, and not shipped to or from a foreign
country, from or to any state or territory as aforesaid, nor shall
they apply to the transmission of messages by telephone, telegraph,
or cable wholly within one state, and not transmitted to or from a
foreign country, from or to any state or territory, as
aforesaid."
There was thus excluded from the provisions of the act that
transportation which was "wholly within one state," with the
specified qualification where its subject was going to or coming
from a foreign country.
In is urged, however, that the words of the proviso are
susceptible of a construction which would permit the provisions of
§ 3 of the act, prohibiting carriers from giving an undue or
unreasonable preference or advantage to any locality, to apply to
unreasonable discrimination between localities in different states,
as well when arising from an intrastate rate as compared with an
interstate rate as when due to interstate rates exclusively. If it
be assumed that the statute should be so construed (and it is not
necessary now to decide the point), it would inevitably follow that
the controlling principle governing the enforcement of the act
should be applied to such cases as might thereby be brought within
its purview, and the question whether the carrier, in such a case,
was giving an undue or unreasonable preference or advantage to one
locality as against another, or subjecting any locality to an undue
or unreasonable prejudice or disadvantage, would be primarily for
the investigation and determination of the Interstate Commerce
Commission, and not for the courts. The dominating purpose of the
statute was to secure conformity to the prescribed standards
through the examination and appreciation of the complex facts of
transportation by the body created for that purpose; and, as this
Court has repeatedly held, it would be destructive of the system of
regulation defined by the statute if the
Page 230 U. S. 420
court, without the preliminary action of the Commission, were to
undertake to pass upon the administrative questions which the
statute has primarily confided to it.
Texas & Pacific Ry.
Co. v. Abilene Cotton Oil Co., 204 U.
S. 426;
Baltimore & Ohio R. Co. v. Pitcairn Coal
Co., 215 U. S. 481;
Robinson v. Baltimore & Ohio R. Co., 222 U.
S. 506;
United States v. Pacific & Arctic
Co., 228 U. S. 87. In
the present case, there has been no finding by the Interstate
Commerce Commission of unjust discrimination violative of the act,
and no action of that body is before us for review.
The question we have now before us, essentially, is whether,
after the passage of the Interstate Commerce Act and its amendment,
the state continued to possess the statewide authority which it
formerly enjoyed to prescribe reasonable rates for its exclusively
internal traffic. That, as it plainly appears, was the nature of
the action taken by Minnesota, and the attack, however phrased,
upon the rates here involved as an interference with interstate
commerce is in substance a denial of that authority.
Having regard to the terms of the federal statute, the familiar
range of state action at the time it was enacted, the continued
exercise of state authority in the same manner and to the same
extent after its enactment, and the decisions of this Court
recognizing and upholding this authority, we find no foundation for
the proposition that the Act to Regulate Commerce contemplated
interference therewith.
Congress did not undertake to say that the intrastate rates of
interstate carriers should be reasonable, or to invest its
administrative agency with authority to determine their
reasonableness. Neither by the original act nor by its amendment
did Congress seek to establish a unified control over interstate
and intrastate rates; it did not set up a standard for interstate
rates, or prescribe, or
Page 230 U. S. 421
authorize the Commission to prescribe, either maximum or minimum
rates for intrastate traffic. It cannot be supposed that Congress
sought to accomplish by indirection that which it expressly
disclaimed, or attempted to override the accustomed authority of
the states without the provision of a substitute. On the contrary,
the fixing of reasonable rates for intrastate transportation was
left where it had been found -- that is, with the states and the
agencies created by the states to deal with that subject.
Missouri Pacific Ry. Co. v. Larabee Mills, 211 U.
S. 612,
211 U. S.
620-621.
How clear was the purpose not to occupy the field thus left to
the exercise of state power is shown by the clause uniformly
inserted in the numerous acts passed by Congress to authorize the
construction of railways across the Indian territory. This clause,
while fixing a maximum passenger rate, made the laws of an
adjoining state (in some cases Arkansas, in other Texas, and in
others Kansas) applicable to the freight rates to be charged within
the territory, and while the right to regulate rates on the
authorized line of railroad was reserved to Congress until a state
government should be established, it was expressly provided that,
when established, the state should be entitled to fix rates for
intrastate transportation, the right remaining with Congress to
prescribe rates for such transportation as should be interstate.
Within a month after the Act to Regulate Commerce was enacted, two
acts were passed by Congress for this purpose with respect to
railways extending across the territory from the Texas to the
Kansas boundary. The provision -- in both cases in identical
language, save that the one referred to the laws of Texas and the
other to the laws of Kansas -- was as follows (Act of February 24,
1887, c. 254, § 4, 24 Stat. 420; Act of March 2, 1887, c. 319, § 4,
24 Stat. 447):
"SEC. 4. That said railroad company shall not charge the
inhabitants of said territory a greater rate of freight
Page 230 U. S. 422
than the rate authorized by the laws of the State of Texas for
services or transportation of the same kind:
Provided,
That passenger rates on said railway shall not exceed three cents
per mile. Congress hereby reserves the right to regulate the
charges for freight and passengers on said railway, and messages on
said telegraph and telephone lines,
until a state government or
governments shall exist in said territory within the limits of
which said railway, or a part thereof, shall be located, and then
such state government or governments shall be authorized to fix and
regulate the cost of transportation of persons and freights within
their respective limits by said railway; but Congress
expressly reserves the right to fix and regulate at all times the
cost of such transportation by said railway or said company
whenever such transportation shall extend from one state into
another, or shall extend into more than one state:
Provided,
however, That the rate of such transportation of passengers,
local or interstate, shall not exceed the rate above expressed:
And provided further, That said railway company shall
carry the mail at such prices as Congress may by law provide, and
until such rate is fixed by law, the Postmaster General may fix the
rate of compensation."
The same provision is found in similar statutes passed in almost
every year from 1884 to 1902, and relating to lines intended to
serve as highways of interstate communication. [
Footnote 6] When Oklahoma became a state, the
laws
Page 230 U. S. 423
of other states which were referred to in these various acts
ceased to be operative within its limits, and by virtue of its
statehood and with the direct sanction of Congress, it became
authorized to prescribe reasonable maximum rates for intrastate
transportation throughout its extent.
Oklahoma v. A., T. &
S.F. Ry. Co., 220 U. S. 277,
220 U. S. 285;
C., R.I. & Pac. Ry. Co., 220 U.
S. 302,
220 U. S.
306.
The decisions of this Court since the passage of the Act to
Regulate Commerce have uniformly recognized that it was competent
for the state fix such rates, applicable throughout its territory.
If it be said that, in the contests that have been waged over state
laws during the past twenty-five years, the question of
interference with interstate commerce by the establishment of
statewide rates for intrastate traffic has seldom been raised, this
fact itself attests the common conception of the scope of state
authority. And the decisions recognizing and defining the state
power wholly refute the contention that the making of such rates
either constitutes a direct burden upon the interstate commerce or
is repugnant to the federal statute.
In
Dow v. Beidelman, 125 U. S. 680, the
statute of Arkansas, enacted in April, 1887,
Page 230 U. S. 424
which established three cents a mile as the maximum fare for
carrying passengers within the state on railroads over 75 miles in
length, was sustained against the objection of the owners of the
Memphis & Little Rock Railroad, who attacked the act as
confiscatory and arbitrary in its classification. The same statute
was again upheld in
St. Louis & San Francisco Railway Co.
v. Gill, 156 U. S. 649. In
Chicago &c. Ry. Co. v. Minnesota, 134 U.
S. 418, the statute of that state (March 7, 1887,
Gen.Laws 1887, c. 10) creating a Commission with power to prescribe
intrastate rates was adjudged to be invalid, but this was upon the
ground that the act as construed by the state court made the rates
published by the Commission final and conclusive, and precluded any
judicial injury whether they were reasonable. In
Chicago
&c. Railway Co. v. Wellman, 143 U.
S. 339, the act of the Legislature of Michigan (June 28,
1889, Pub.Laws 1889, p. 282) fixing the maximum fare for passengers
within the state at two cents a mile in the case of companies whose
gross earnings exceeded $3,000 a mile was unsuccessfully assailed
as confiscatory, and no contention was advanced that such an act,
operating throughout the state, was an unwarrantable interference
with interstate commerce.
In
Reagan v. Farmers' Loan & Trust Co.,
154 U. S. 362, the
trustee of a railroad mortgage attacked the statute of Texas (April
3, 1891, Gen.Laws 1891, c. 51, p. 55) which established a railroad
commission with authority to regulate tariffs, and the order of the
commission providing a schedule of classified rates for the
transportation of goods within the state. The challenge was of the
tariff as a whole, and the inquiry was whether the body of rates
was unreasonable and such as to work a practical destruction of
rights of property. Viewed in this aspect, the Court, upon the
allegations admitted by demurrer, held the action of the commission
to be beyond its constitutional power
Page 230 U. S. 425
and affirmed the decree of the circuit court enjoining the
rates. The decree, however, was reversed so far as it restrained
the commission from discharging the duties imposed by the statute
and from proceeding to prescribe reasonable rates and regulations.
A further question wan presented in
Reagan v. Mercantile Trust
Company, 154 U. S. 413, in
respect to the same statute and order as applied to the Texas and
Pacific Railway Company, which had been organized under the laws of
the United States (March 3, 1871, 16 Stat. 573, c. 122), and
operated its road not only within that state, but also for several
hundred miles outside. It was insisted that this company was "not
subject to the control of the state, even as to rates for
transportation wholly within the state," the argument being that it
was not within the state power to limit the federal franchise to
collect tolls. But the Court held that the act of Congress did not
go to the extent asserted, but left the company, as to its
intrastate business, subject to state authority.
The effect of intrastate rates upon interstate rates was urged
in
Smyth v. Ames, 169 U. S. 466, and
in the cases decided therewith. These suits were brought by
stockholders of the Union Pacific Railway Company, the Chicago and
Northwestern Railroad Company, and the Chicago, Burlington and
Quincy Railroad Company to enjoin the enforcement of the act of the
Legislature of Nebraska, passed in 1893. This was a comprehensive
statute, classifying the freight transported from any point in
Nebraska to any other point in that state and prescribing tables of
maximum rates. The companies affected were interstate carriers
engaged in a vast commerce, only a small portion of which was
wholly local to the state. On the eastern boundary lay Omaha, a
city of large importance in interstate trade, situated on the
Missouri River, with Council Bluffs, in the State of Iowa, directly
opposite. The point was distinctly
Page 230 U. S. 426
made in the circuit court that the statute interfered with
interstate commerce because, first, it established a classification
of freights different from that which prevailed west of Chicago,
and second, by reducing local rates, it necessarily reduced rates
on interstate business. Mr. Justice Brewer, who tried the cases,
overruled these objections, holding that neither the convenience of
the carriers nor the consequences of competition with respect to
interstate rates could be pleaded "in restraint of the otherwise
undeniable power of the state."
Ames v. Union Pacific Railway
Co., 64 F. 165, 171-172. Having disposed of this contention,
the court considered the question of the reasonableness of the
rates, and reached the conclusion that they were invalid because
they amounted to a deprivation of the carriers' rights of property.
On appeal to this Court, the counsel for the appellees directed
attention to the conditions of transportation in Nebraska. It was
argued that the local traffic was carried over the same tracks, in
the same trains, and often in the same cars with the interstate
traffic; that to separate the cost of carrying the one sort of
traffic from that of the other was a "manifest impossibility," and
that it was a necessary consequence of existing conditions that, if
Nebraska controlled the local rates, it at the same time controlled
the interstate rates. But this contention was not sustained, and
the affirmance of the decree was placed upon the distinct ground
that the rates were confiscatory. It was ruled that the
reasonableness of intrastate rates was to be determined by
considering the intrastate business separately. In answer to the
suggestion that the conditions of business might have changed for
the better since the decrees, the Court called attention to the
proviso in the decrees intended to meet such a case, adding that,
if the circuit court found that conditions were such as to permit
the application of the state rates without depriving the carriers
of just compensation, it would "be its duty
Page 230 U. S. 427
to discharge the injunction" and to make whatever order was
necessary "to remove any obstruction placed by the decrees in these
cases in the way of the enforcement of the statute."
Id.,
p.
169 U. S. 550;
see Smyth v. Ames, 171 U. S. 361,
171 U. S.
365.
In that one of the
Smyth cases which was brought by the
stockholders of the Union Pacific Railway Company, not only was the
case presented of a trunk line crossing the state with a relatively
small proportion of business local to Nebraska, but the company had
been formed by a consolidation of several companies by authority of
Congress, one of them being the Union Pacific Railroad Company,
incorporated by the Act of July 1, 1862, c. 120, 12 Stat. 489. By
this act (§ 18, p. 497), it was expressly provided that Congress
might reduce the rates of fare if unreasonable, and might fix the
same by law whenever the net earnings of the entire road and
telegraph should exceed a certain amount. But this language, while
showing that Congress intended to reserve the power to prevent
unreasonable exactions, was not deemed to be equivalent to a
declaration that the states through which the road might be
constructed should not regulate rates for intrastate
transportation. The Court said:
"It cannot be doubted that the making of rates for
transportation by railroad corporations along public highways,
between points wholly within the limits of a state, is a subject
primarily within the control of that state. . . . Congress not
having exerted this power, we do not think that the national
character of the corporation constructing the Union Pacific
Railroad stands in the way of a state prescribing rates for
transporting property on that road wholly between points within its
territory. Until Congress, in the exercise either of the power
specifically reserved by the eighteenth section of the Act of 1862,
or its power under the general reservation made of authority to add
to, alter, amend, or repeal that act, prescribes rates to be
charged by
Page 230 U. S. 428
the railroad company, it remains with the states through which
the road passes to fix rates for transportation beginning and
ending within their respective limits."
169 U.S. pp.
169 U. S.
521-522. It is plain that, had the intrastate rates,
established by the comprehensive statute of Nebraska, not been
found to be confiscatory, they would have been sustained in their
application to all intrastate traffic notwithstanding the reserved
power of Congress over the Union Pacific line, and despite the
argument based upon the interdependence of interstate and
intrastate rates.
The cases of
Louisville & Nashville Railroad Co. v.
Kentucky, 183 U. S. 503, and
Louisville & Nashville Railroad Co. v. Eubank,
184 U. S. 27,
concerned the validity of the long and short haul provision of the
Constitution of Kentucky, adopted in 1891. In the first case,
violation was charged with respect to the transportation of coal
from Altamont to Lebanon, an intermediate station, as compared with
charges for transportation from Altamont to Elizabethtown and
Louisville, all places being within Kentucky. The difference in
rate was justified by the company on the ground that, at
Louisville, the coal hauled from Altamout came into competition
with that brought down the Ohio River, and at Elizabethtown with
western Kentucky coal brought there by the Illinois Central
Railroad. The contention that the state provision operated as an
interference with interstate commerce was presented and overruled,
the Court saying:
"It is plain that the provision in question does not, in terms,
embrace the case of interstate traffic. It is restricted in its
regulation to those who own or operate a railroad within the state,
and the long and short distances mentioned are evidently distances
upon the railroad line within the state. The particular case before
us is one involving only the transportation of coal from one point
in the State of Kentucky to another by a corporation of that state.
It may be that the enforcement of the state regulation forbidding
discrimination in
Page 230 U. S. 429
rates in the case of articles of a like kind, carried for
different distances over the same line, may somewhat affect
commerce generally; but we have frequently held that such a result
is too remote and indirect to be regarded as an interference with
interstate commerce; that the interference with the commercial
power of the general government, to be unlawful, must be direct,
and not the merely incidental effect of enforcing the police powers
of a state."
183 U.S., pp.
183 U. S.
518-519. In the
Eubank case, which had been
argued before the first case was decided, it appeared that the
state court had construed the same provision of the Kentucky
Constitution as embracing a long haul from a place outside to one
within the state (Nashville and Louisville), and a shorter haul on
the same line and in the same direction between points within the
state. The Court held that, so construed, the provision was invalid
as being a regulation of interstate commerce, because it linked the
interstate rate to the rate for the shorter haul, and thus the
interstate charge was directly controlled by the state law. 184
U.S. pp.
184 U. S. 41-43.
The authority of the former decision upholding the state law, as
applied to places all of which were within the state, was in no way
impaired, and the Court fully recognized the power of the state to
prescribe maximum charges for intrastate traffic although carried
over an interstate road to points on the state line.
Id.,
pp.
184 U. S. 33,
184 U. S.
42.
The case of
Minneapolis & St.Louis Railroad Co. v.
Minnesota, 186 U. S. 257,
involved shipments of hard coal in carload lots from Duluth,
Minnesota, to points in the southern and western portion of that
state. The Railroad & Warehouse Commission of Minnesota, in
1899, prescribed a joint rate to be observed by the St. Paul &
Duluth Railroad Company, the Minneapolis and St. Louis Railroad
Company, and other carriers. The state court directed the issue of
a writ of mandamus to compel compliance with the order. It was
objected that the act under
Page 230 U. S. 430
which the order was made was unconstitutional so far as it
assumed to establish joint through rates over the lines of
independent connecting railroads and to divide joint earnings, and
that the tariff as fixed was not compensatory. This Court affirmed
the judgment. In
Alabama & Vicksburg Railroad Co. v.
Mississippi Railroad Commission, 203 U.
S. 496, the company made what it called a "rebilling
rate" on grain shipped from Vicksburg to Meridian, Mississippi,
which was applicable only in case of shipments received at
Vicksburg over the Shreveport line. It gave, however, to such
shippers an option for a specified time to send other grain from
Vicksburg instead, and thus it was in fact a local rate. To end
this discrimination, the state commission, in 1903, fixed the same
rate for all grain products shipped from Vicksburg to Meridian. It
was urged that the effect of the order would be to force the
plaintiff to enter into joint through interstate tariffs and
divisions with all lines reaching Vicksburg by rail or river,
whether it desired such arrangements or not. The Court sustained
the order, holding that it was competent for the state to enforce
equality as to local transportation, and that this equality could
not be defeated "in respect to any local shipments by arrangements
made with or to favor outside companies."
In
Northern Pacific Railway Co. v. North Dakota,
216 U. S. 579, the
Attorney General of North Dakota charged the company with
continuous violation of a law fixing rates for the carriage of coal
within the state (North Dakota, Laws of 1907, c. 51) and asked for
an injunction. It appears by the record that, in its return to the
rule to show cause in the state court, the company alleged that the
statute was void because repugnant to the commerce clause, and also
that the rate fixed thereby was confiscatory. In support of the
last contention, the return set forth that the maximum rates for
carrying coal which the company was allowed to charge under the act
in question were
Page 230 U. S. 431
greatly lower than the rates for similar service fixed by
Minnesota for that state (reference being made to c. 232 of the
Laws of 1907, the commodity rate act now in question), and those
fixed by the Railroad Commissions of Illinois and Iowa,
respectively, and that the conditions existing in North Dakota made
it impossible to transport coal at a less rate than in the states
named. The contention that the act violated the interstate commerce
clause was said by the supreme court of the state to be based upon
the assumption that state regulation of local rates on interstate
lines amounted to an interference with interstate commerce. In view
of the decisions of this Court, the last question was not
considered open to debate.
State v. Northern Pacific Railway
Co., 19 N.D. 45, 55. This ruling was not challenged by the
argument for the plaintiff in error here, and the question as to
interference with interstate commerce was treated as removed from
the case by the holding of the state court that the rates applied
only to transportation within the state. 216 U.S. p.
216 U. S.
580.
To suppose, however, from a review of these decisions that the
exercise of this acknowledged power of the state may be permitted
to create an irreconcilable conflict with the authority of the
nation, or that, through an equipoise of powers, an effective
control of interstate commerce is rendered impossible is to
overlook the dominant operation of the Constitution, which,
creating a nation, equipped it with an authority, supreme and
plenary, to control national commerce and to prevent that control,
exercised in the wisdom of Congress, from being obstructed or
destroyed by any opposing action. But, as we said at the outset,
our system of government is a practical adjustment by which the
national authority, as conferred by the Constitution, is maintained
in its full scope, without unnecessary loss of local efficiency. It
thus clearly appears that, under the established principles
governing
Page 230 U. S. 432
state action, the State of Minnesota did not transcend the
limits of its authority in prescribing the rates here involved,
assuming them to be reasonable intrastate rates. It exercised an
authority appropriate to its territorial jurisdiction, and not
opposed to any action thus far taken by Congress.
The interblending of operations in the conduct of interstate and
local business by interstate carriers is strongly pressed upon our
attention. It is urged that the same right of way, terminals,
rails, bridges, and stations are provided for both classes of
traffic; that the proportion of each sort of business varies from
year to year, and, indeed, from day to day; that no division of the
plant, no apportionment of it between interstate and local traffic,
can be made today which will hold tomorrow; that terminals,
facilities, and connections in one state aid the carrier's entire
business, and are an element of value with respect to the whole
property and the business in other states; that securities are
issued against the entire line of the carrier, and cannot be
divided by states; that tariffs should be made with a view to all
the traffic of the road, and should be fair as between through and
short-haul business, and that, in substance, no regulation of rates
can be just which does not take into consideration the whole field
of the carrier's operations, irrespective of state lines. The force
of these contentions is emphasized in these cases, and in others of
like nature, by the extreme difficulty and intricacy of the
calculations which must be made in the effort to establish a
segregation of intrastate business for the purpose of determining
the return to which the carrier is properly entitled therefrom.
But these considerations are for the practical judgment of
Congress in determining the extent of the regulation necessary
under existing conditions of transportation to conserve and promote
the interests of interstate commerce. If the situation has become
such, by reason of the interblending
Page 230 U. S. 433
of the interstate and intrastate operations of interstate
carriers, that adequate regulation of their interstate rates cannot
be maintained without imposing requirements with respect to their
intrastate rates which substantially affect the former, it is for
Congress to determine, within the limits of its constitutional
authority over interstate commerce and its instruments, the measure
of the regulation it should supply. It is the function of this
Court to interpret and apply the law already enacted, but not,
under the guise of construction, to provide a more comprehensive
scheme of regulation than Congress has decided upon. Nor, in the
absence of federal action, may we deny effect to the laws of the
state enacted within the field which it is entitled to occupy until
its authority is limited through the exertion by Congress of its
paramount constitutional power.
Second. Are the state's acts and orders
confiscatory?
The ratemaking power is a legislative power, and necessarily
implies a range of legislative discretion. We do not sit as a board
of revision to substitute our judgment for that of the legislature,
or of the commission lawfully constituted by it, as to matters
within the province of either.
San Diego Land & Town Co. v.
Jasper, 189 U. S. 439,
189 U. S. 446.
The case falls within a well defined category. Here we have a
general schedule of rates, involving the profitableness of the
intrastate operations of the carrier, taken as a whole, and the
inquiry is whether the state has overstepped the constitutional
limit by making the rates so unreasonably low that the carriers are
deprived of their property without due process of law, and denied
the equal protection of the laws.
The property of the railroad corporation has been devoted to a
public use. There is always the obligation springing from the
nature of the business in which it is engaged -- which private
exigency may not be permitted to ignore -- that there shall not be
an exorbitant charge
Page 230 U. S. 434
for the service rendered. But the state has not seen fit to
undertake the service itself, and the private property embarked in
it is not placed at the mercy of legislative caprice. It rests
secure under the constitutional protection which extends not merely
to the title, but to the right to receive just compensation for the
service given to the public.
Stone v. Farmers' Loan & Trust
Co., supra; Georgia Banking Co. v. Smith, 128 U.
S. 174,
128 U. S. 179;
Chicago &c. Ry. Co. v. Minnesota, 134 U.
S. 418;
Reagan v. Farmers' Loan & Trust Co.,
supra; St. Louis & S.F. Ry. Co. v. Gill, 156 U.
S. 649,
156 U. S. 652;
Covington &c. Turnpike Road Co. v. Sandford,
164 U. S. 578,
164 U. S.
596-597;
Smyth v. Ames, supra; San Diego Land &
Town Co. v. National City, 174 U. S. 739,
174 U. S. 754;
San Diego Land & Town Co. v. Jasper, supra; Stanislaus
County v. San Joaquin Co., 192 U. S. 201,
192 U. S. 215;
Knoxville v. Knoxville Water Co., 212 U. S.
1,
212 U. S. 17;
Willcox v. Consolidated Gas Co., 212 U. S.
19,
212 U. S.
41.
In determining whether that right has been denied, each case
must rest upon its special facts. But the general principles which
are applicable in a case of this character have been set forth in
the decisions.
(1) The basis of calculation is the "fair value of the property"
used for the convenience of the public.
Smyth v. Ames,
supra, (p.
169 U. S.
546). Or, as it was put in
San Diego Land & Town
Co. v. National City, supra, (p.
174 U. S.
757):
"What the company is entitled to demand in order that it may
have just compensation is a fair return upon the reasonable value
of the property at the time it is being used for the public."
See also San Diego Land & Town Co. v. Jasper, supra;
Willcox v. Consolidated Gas Co., supra.
(2) The ascertainment of that value is not controlled by
artificial rules. It is not a matter of formulas, but there must be
a reasonable judgment, having its basis in a proper consideration
of all relevant facts. The scope of the inquiry was thus broadly
described in
Smyth v. Ames (pp.
169 U. S.
546-547):
"In order to ascertain that value,
Page 230 U. S. 435
the original cost of construction, the amount expended in
permanent improvements, the amount and market value of its bonds
and stock, the present, as compared with the original, cost of
construction, the probable earning capacity of the property under
particular rates prescribed by statute, and the sum required to
meet operating expenses, are all matters for consideration, and are
to be given such weight as may be just and right in each case. We
do not say that there may not be other matters to be regarded in
estimating the value of the property. 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."
(3) Where the business of the carrier is both interstate and
intrastate, the question whether a scheme of maximum rates fixed by
the state for intrastate transportation affords a fair return must
be determined by considering separately the value of the property
employed in the intrastate business and the compensation allowed in
that business under the rates prescribed. This was also ruled in
the
Smyth case (
id., p.
169 U. S.
541). The reason, as there stated, is that the state
cannot justify unreasonably low rates for domestic transportation,
considered alone, upon the ground that the carrier is earning large
profits on its interstate business, and, on the other hand, the
carrier cannot justify unreasonably high rates on domestic business
because only in that way is it able to meet losses on its
interstate business.
In the present cases, the necessity of this segregation of the
domestic business in determining values and results of operation
was recognized by both parties. Voluminous testimony was taken
before the master, and numerous exhibits containing data and
calculations were submitted for the purpose of showing their
respective estimates
Page 230 U. S. 436
of the value of the entire property of the carriers in
Minnesota, the amount of income and expense in that state, their
theories of apportionment between the interstate and intrastate
business, and their contentions as to the net return for intrastate
transportation under the state rates. The multitude of facts which
are involved makes it impossible here to present a comprehensive
review, even in a summary way. We must be content with a statement
of the salient points, and deal only with those matters which,
after a careful consideration of the entire record, we regard as
controlling our decision.
In each of the three cases (save in certain particulars with
respect to that of the Minneapolis & St. Louis Railroad
Company), the method adopted by the master was as follows:
The period taken for the purpose of testing the sufficiency of
the rates was the fiscal year ending June 30, 1908. During this
period, all the rates in question, freight and passenger, were
actually in force, with the exception of the commodity rates
prescribed by the Act of April 18, 1907, which had been enjoined.
The amount of the reduction in the intrastate revenue which would
have been caused by the application of the commodity rates is
shown.
The master found the present value of the entire property of the
carrier, used in the public service in the State of Minnesota. This
valuation was as of June 30, 1908, and was made on the basis of the
cost of reproduction new. The master also made findings as to the
original cost of construction, and as to the present value on the
basis of cost of reproduction new, of the entire system of the
carrier. The estimated value of the railroad property within the
state was divided between the freight and passenger business upon
the relation of the gross revenue derived from each. The part of
the total value which was thus assigned to the freight business
within the state was then divided between the interstate and
intrastate
Page 230 U. S. 437
freight business on the basis of gross revenue, and a similar
division was made between the interstate and intrastate business of
the property value assigned to the passenger department. In this
way, the master found the value of the property used in intrastate
transportation, freight and passenger, upon which he computed the
net return received by the carrier.
There was no substantial dispute as to the amount of the entire
revenue assignable to the state or as to its division between
interstate and intrastate business, as an examination of the
transactions in which the revenue was obtained permitted the making
of the requisite apportionments with reasonable certainty.
The master also ascertained the total expense incurred by the
carrier within the state. This expense was first divided between
freight and passenger business. Those items of cost which were
directly incurred in each sort of business, and not common to both,
were directly assigned, and such items were found to cover about 60
percent of all expenses. The remaining items, those of common
expense, were divided between the freight and passenger business
upon the relation, as to most of them, of revenue train-miles, and
as to the others, of revenue engine-miles.
Having thus ascertained the share of the expense within the
state of the freight and passenger departments respectively, it
remained to divide that share, in each case, between the interstate
and intrastate business. This apportionment was made, in the case
of freight expense, upon what was termed an "equated ton-mile
basis," and, in the case of passenger expense, upon an "equated
passenger-mile basis." That is to say, the master concluded that
the cost per ton-mile of doing the intrastate freight business was
at least two and one-half times the cost per ton-mile of the
interstate freight business, and hence he divided the total freight
expense according to the relation of the interstate and intrastate
ton-miles after
Page 230 U. S. 438
the latter had been increased two and one-half times. In the
case of the passenger expense, he concluded that the cost per
passenger-mile in the intrastate business was at least 15 percent
greater than that in the interstate business, and the total
passenger expense was divided upon the relation of passenger-miles
after increasing the intrastate passenger-miles fifteen percent.
[
Footnote 7] By the use of
equalizing factors, the same result was obtained upon what was
called an "equated revenue basis." [
Footnote 8]
Page 230 U. S. 439
The net profits of the interstate and intrastate business,
respectively, passenger and freight, were then found by deducting
the apportioned share of expense from the apportioned share of
revenue, and the rate percent of the net profit upon the rate value
assigned to each sort of business was computed. The master
concluded that the returns from intrastate transportation were
unreasonably low, and hence that the rates in question were
confiscatory.
The validity of the result depends upon the estimates of the
value of the property within the state and the apportionments both
of value and of expense between interstate and intrastate
operations.
Page 230 U. S. 440
It will be convenient to take up the three cases separately:
1.
Northern Pacific Railway Company.
The par value, April 30, 1908, of the stock of this company, was
found to be $215,539,634.99, and of the bonds, $190,256,577.66;
total, $405,796,392.65. (Included in this statement of capital
stock is the sum of $60,539.634.99 received to April 30, 1908, upon
subscriptions to new capital stock ($95,000,000) authorized by
stockholders' resolution January 7, 1907).
These securities and their value in the market rest upon the
entire property of the company. They include assets of considerable
value (for example, the stock of the Northwestern Improvement
Company, owning extensive coal lands), which, however, do not form
part of what may be called the operating property of the company,
or that devoted to the public service, upon which the fair return
is to be calculated (15 I.C.C. 376, 397, 407). Referring to the
market value of the securities, the master said:
"Assets and property not devoted to public service have not been
valued, and, as they are a large element in stock valuation, it
follows that value of bonds and stocks is wholly unreliable, and
cannot be used in these cases as an element in determining the
value of operating property or as a basis for ratemaking."
In this view, the master was undoubtedly right.
Much evidence was produced before the master for the purpose of
showing the actual cost of construction and equipment of the entire
railroad system from the beginning down to April 30, 1908. This,
the master states, could be shown only by the corporate books and
records, and, in the early history of the original company, these
are somewhat obscure and uncertain, and, by reason of lapse of
time, could not be verified by other proof. The total investment
cost of the railroad system of the Northern Pacific thus shown was
$369,252,755. This included
Page 230 U. S. 441
certain items which the master held not to be properly allowable
as a part of the cost, and, after their deduction, the cost was
found to be $312,243,555. Of this investment cost, it appears from
the evidence submitted by the company's comptroller that the sum of
$128,184,985.82 was expended for construction and equipment, and
for improvements and betterments, during the period from September
1, 1896, to April 30, 1908. The master found that the Minnesota
track mileage is substantially 21 percent of the track mileage of
the whole system, [
Footnote 9]
and that, if the cost were proportioned accordingly, the amount
assignable to the state of the entire cost of construction and
equipment, as stated, would be $65,571,462.
The master, however, and the court below, in confirming his
findings, held that rates were not to be predicated upon the
original investment.
Taking as the basis the cost of reproduction new, the master
found the value of the entire railroad system or operating property
of this company to be $452,666,489. [
Footnote 10] The value of that portion of the system
which was in the State of Minnesota was separately found, on the
same basis, to be $90,204,545. It was upon this estimate of the
value of the property in the state, as apportioned between the
interstate and intrastate business, that the master computed the
rate of return.
The total net profits of the company for the fiscal year
Page 230 U. S. 442
ending June 30, 1908, from its Minnesota business (interstate
and intrastate), was found to be $5,431,514.56. This was equal to
6.021% on the entire estimated value of the property. This showing
of the results of the entire business at once directs attention to
the importance of the methods adopted in making apportionments;
but, before considering these, the question is presented as to the
soundness of the underlying estimate of value. May it be accepted
as a basis for a finding that the rates are confiscatory?
Values. The items entering into the valuation are set
forth in the margin. [
Footnote
11]
Page 230 U. S. 443
The first item is:
"Lands for right of way, yards, and terminals --
$21,024,562."
This is for the bare land, without structures or improvements of
any sort, as the entire cost of reproduction in building the road
and erecting all the existing structures is covered in other items.
The master states that the amount thus allowed for land is made up
as follows:
Terminal properties, St. Paul appraisement of Read,
Watson & Taylor, as modified by railroad company . . . .
$7,645,100.24
Add 5 percent for the cost of acquisition and
consequential damages. . . . . . . . . . . . . . . . . .
382,255.01
Page 230 U. S. 444
Property acquired after appraisement . . . . . . . . . . .
328,725.69
Minneapolis appraisement of Elwood, Barney, and
Ridgeway, as modified by railway company . . . . . . . .
4,027,616.17
Add 5 percent for acquisition and consequential damages. .
201,380.80
Property acquired after appraisement . . . . . . . . . . .
227,737.26
Duluth, appraisement of Stryker, Mendenhall, and Little. .
3,602,443.43
Add 25 percent for railway value, cost of acquisition,
and consequential damages. . . . . . . . . . . . . . . .
900,610.85
Total value of terminals . . . . . . . . . . . . . . . . .
17,315,869.45
Lands outside of terminals . . . . . . . . . . . . . . . .
3,708,693.45
Grand total. . . . . . . . . . . . . . . . . . . . . . . .
21,024,562.90
The appellants insist that no more than $9,498,099.27 should
have been allowed.
It is contended that the valuation was made upon a wrong theory;
that it is a speculative estimate of "cost of reproduction;" that
it is largely in excess of the market value of adjacent or
similarly situated property; that it does not represent the present
value, in any true sense, but constitutes a conjecture as to the
amount which the railway company would have to pay to acquire its
right of way, yards, and terminals, on an assumption, itself
inadmissible, that, while the railroad did not exist, all other
conditions, with respect to the agricultural and industrial
development of the state, and the location, population, and
activities of towns, villages, and cities, were as they now
are.
We may first consider the basis for the finding with respect to
the "lands outside terminals" -- that is, the right of way and
station grounds, etc., outside the three cities.
Page 230 U. S. 445
(a)
Lands outside terminals. The complainants' witness
was Mr. Cooper, the Land Commissioner of the company, who has
charge of the land grants for its entire system, of its right of
way and land purchases, and has had a wide experience in connection
with land values along the lines of the railway. In the latter part
of 1906, the state notified the company to report the value of its
properties, requiring a statement in one column of the "market
value," and in another column, of the "value for railway purposes."
Mr. Cooper was instructed to prepare the valuation for this report.
From the information he received in special inquiries, and his own
knowledge, and following what he understood to be the instructions
from the state, he set down under the heading of "market value" not
the market value in the proper sense of that term, but what in his
judgment it would cost the railroad company to acquire the land.
This included an excess which he estimated the company would have
to pay over the market value of contiguous and similar property if
it were called upon to undertake such a reproduction of its right
of way. It did not, however, embrace an allowance for payments
which might have to be made for improvements that possibly might be
found upon the property in such case, or for the consequential or
severance damages which might possibly have to be met, or for the
expense of acquisition. These supposed additional outlays he
undertook to estimate. For this purpose, he increased the "market
value" as stated (in the case of agricultural lands generally
multiplying it by three), and thus reached the amount set down as
the "value for railway purposes." As it serves clearly to
illustrate the theory upon which the land valuations were made, we
make the following excerpts from Mr. Cooper's testimony:
"The Master: When you speak of value, you mean cost of purchase?
"
Page 230 U. S. 446
"Witness: Cost of purchase; we are using the word 'value'
somewhat wrongly, as we are talking along here. It is the cost of
purchasing that property today."
"
* * * *"
"Witness: The word 'value' doesn't seem to me to fit this case,
because all the time we are figuring on the cost of reproducing
this property, and our instructions from the state use the word
'reproduce.' Now, if a railroad company could buy property at what
is generally considered its value, the word 'value' would fit in
all right, but there is this excess which a railroad company has to
pay beyond what is generally accepted as its value which increases
the cost of reproducing a railroad property."
"Q. And this excess which you now speak of is included in your
market values as reported to the state and used in your
testimony?"
"A. That is right."
"
* * * *"
"Q. . . . Well, now, does the term 'market value' as you have
used it in making this report to the state and in your testimony
here, have the same meaning, or is it used in the same sense, with
reference to the values you have fixed and reported to the state
for properties on the right of way outside of the terminals and
outside of the larger cities?"
"A. Oh, yes."
"Q. As in the cities here?"
"A. Yes; the same rule was applied all through in the Minnesota
valuations."
"
* * * *"
"Q. Therefore, your judgment as to the value of the railroad
property is always that it is higher than the value of contiguous
property?"
"A. Yes, yes, that is true."
"
* * * *"
Q. So that, in every case, what you call the market value is the
value of contiguous or similarly situated property, with an
additional amount which a railroad company is ordinarily compelled
to pay?
A. That is right.
"
* * * *"
Page 230 U. S. 447
"Q. You have put into the market value the excess which a
railroad company pays for land?"
"A. That is correct."
"Q. Then, when you multiply that, by three, you are multiplying
by three one of the elements going to make up excessive cost to a
railroad company?"
"A. That is right."
"
* * * *"
"Q. And you are unable to state how much upon the average you
have added to the true or normal market value, to allow for the
additional amount which the railroad company would have to pay upon
the hypothesis that it is now compelled to purchase the land?"
"A. That is correct."
"Q. And then having determined to your satisfaction at what
figure or sum you would place the market value of this property to
the railroad company, as you have described, you have added another
sum for severance damage, cost of improvements unnecessary to the
company, easements in abutting property, and general expenses?"
"A. That is correct."
"Q. And you have determined that, in agricultural communities,
this second addition is shown by the use of the multiple 3?"
"A. I think the multiple of 3 is too low and I so testified in
this case. When you are going through a highly cultivated country,
I think the multiplier of 3 is not enough."
"Q. But that is what you used for the purpose of the right of
way value of land through the agricultural communities?"
"A. That is right, in this state."
"Q. And in the cities, in the three large terminals, you have
added to what you describe as the market value of the lands to the
railroad company, ascertained as described by you already, the
amount necessarily to produce the difference shown in your
testimony between the market value of the terminals and the right
of way value?"
"A. That is right."
"Q. And while you are able to show, and we can ascertain
Page 230 U. S. 448
from an inspection of your testimony, the amount of the
difference between the market value to the railroad company, as you
have described, and the right of way value, and, in the rural
communities or agricultural districts, the difference between the
market value to you and the right of way value, there is nothing in
any of your exhibits which will show, nor are you now prepared to
state, the difference in what might be termed the normal, true,
ordinary market value of the lands to the ordinary individual and
the sum which you have fixed as the market value to the railroad
company if it were now compelled to purchase."
"A. That is correct."
The "market value" of the lands (outside of the three cities)
thus fixed and reported to the state was $2,008,491.50, and the
increased amount estimated, in the manner stated, which was
reported as the "value for railway purposes" was $4,944,924.60. The
latter amount was submitted by the complainants in this case as the
value of the lands. The master thought that the complainants'
witness used too large a multiplier, and allowed 75 percent of the
amount thus claimed, or $3,708,693.45, stating that this was
determined upon as the "fair reproduction value of the property."
This allowance, it will be observed, was about $1,700,000 in excess
of Mr. Cooper's estimate of "market value" as that term was used in
making the report.
(b)
Terminal properties. This term is used to designate
the lands for the right of way, yards, and terminals in St. Paul,
Minneapolis, and Duluth. The total original cost of these lands to
the company (according to its statement based on the best
information obtainable), including purchases to April 30, 1908, was
$4,527,228.76. The master allowed as their value, apart from the
improvements made by the company, which, as we have said, were
embraced
Page 230 U. S. 449
in the other items of reproduction cost, the sum of
$17,315,869.45.
In preparing the valuation for the report to the state, Mr.
Cooper employed real estate men in each of the cities to make an
appraisement. He instructed them, as he testifies, "to make a
conservative report of the cost of reproducing the properties owned
by the company in each of their respective cities." They divided
the property into districts and reported their estimate of units of
value, as, for example, by the square foot. Mr. Cooper took these
reports, discussed their valuations with the appraisers, and, aided
by his own knowledge, formed an independent judgment, in no case
increasing, and in some instances (with respect to certain St. Paul
and Minneapolis property) reducing, the appraisers' values. He then
set forth under the heading "market value," in the report to the
state, as described in the testimony we have quoted, his estimate
of what it would cost the company to purchase these lands,
exclusive of improvements that might be upon them, severance and
consequential damages and expenses incident to acquisition. The
amounts he thus fixed were as follows: for the property in St. Paul
$7,645,100.24; in Minneapolis, $4,027,616.17; in Duluth,
$3,555,593.93. In the case of the St. Paul and Minneapolis
properties, the amounts are precisely those adopted by the master
in his findings, and to this he adds 5 percent to cover cost of
acquisition and consequential damages. The master was of the
opinion that the appraisers of these properties were "fully
impressed with their value for railroad purposes," and that their
appraisement, as verified by them before him and modified by the
railway company, "is a generous valuation, and should be accepted
as full railroad value of the terminal properties," and it was so
accepted with the addition above stated. With respect to the Duluth
property, where the appraisement appears to have rested upon the
ordinary values of real estate,
Page 230 U. S. 450
the master sets forth as the appraised value, $3,602,443.43, to
which he adds 25 percent, or $900,610.85, "for railway value, cost
of acquisition, and consequential damages."
In reviewing the findings, the court below reached the
conclusion that
"the master in effect found that the cost of reproduction and
the present value of the lands for the terminals in the three great
cities, including therein all cost of acquisition, consequential
damages, and value for railroad use which he allowed, was only
about 30 percent more than the normal value of the lands in sales
between private parties. He found the value of the lands outside
the terminals to be only twice their normal value."
From our examination of the evidence, we are unable to conclude
that the excess stated may be thus limited. What is termed the
normal value does not satisfactorily appear. It further will be
observed from the summary of valuations we have set forth in the
margin [
Footnote 12] that
the amount thus allowed in item 1 for lands, yards, and terminals,
both in and out of the three cities ($21,024,562), was included in
the total on which 4 1/2 percent was allowed in item 30 for
"engineering, superintendence, legal expenses," and again was
included in the total on which 5 percent was allowed in item 37 for
"contingencies," and, in addition was included in the total on
which 10 percent was allowed in item 39 for "interest during
construction."
These are the results of the endeavor to apply the "cost of
reproduction" method in determining the value of the right of way.
It is at once apparent that, so far as the estimate rests upon a
supposed compulsory feature of the acquisition, it cannot be
sustained. It is said that the company would be compelled to pay
more than what is the normal market value of property in
transactions between private parties; that it would lack the
freedom
Page 230 U. S. 451
they enjoy, and, in view of its needs, it would have to give a
higher price. It is also said that this price would be in excess of
the present market value of contiguous or similarly situated
property. It might well be asked, who shall describe the conditions
that would exist, or the exigencies of the hypothetical owners of
the property, on the assumption that the railroad were removed?
But, aside from this, it is impossible to assume, in making a
judicial finding of what it would cost to acquire the property,
that the company would be compelled to pay more than its fair
market value. It is equipped with the governmental power of eminent
domain. In view of its public purpose, it has been granted this
privilege in order to prevent advantage being taken of its
necessities. It would be free to stand upon its legal rights, and
it cannot be supposed that they would be disregarded.
It is urged that, in this view, the company would be bound to
pay the "railway value" of the property. But, supposing the
railroad to be obliterated and the lands to be held by others, the
owner of each parcel would be entitled to receive on its
condemnation, its
fair market value for all its available
uses and purposes.
United States v. Chandler-Dunbar Water Power
Co., 229 U. S. 53. If,
in the case of any such owner, his property had a peculiar value or
special adaptation for railroad purposes, that would be an element
to be considered.
Mississippi &c. Boom Co. v.
Patterson, 98 U. S. 403;
Shoemaker v. United States, 147 U.
S. 282;
United States v. Chandler-Dunbar Water Power
Co. supra. But still the inquiry would be as to the fair
market value of the property; as to what the owner had lost, and
not what the taker had gained.
Boston Chamber of Commerce v.
Boston, 217 U. S. 189,
217 U. S. 195.
The owner would not be entitled to demand payment of the amount
which the property might be deemed worth to the company; or of an
enhanced value by virtue of the purpose for which it was taken; or
of an
Page 230 U. S. 452
increase over its fair market value, by reason of any added
value supposed to result from its combination with tracts acquired
from others, so as to make it a part of a continuous railroad right
of way held in one ownership.
United States v. Chandler-Dunbar
Water Power Co. and
Boston Chamber of Commerce v. Boston,
supra. There is no evidence before us from which the amount
which would properly be allowable in such condemnation proceedings
can be ascertained.
Moreover, it is manifest that an attempt to estimate what would
be the actual cost of acquiring the right of way if the railroad
were not there is to indulge in mere speculation. The railroad has
long been established; to it have been linked the activities of
agriculture, industry, and trade. Communities have long been
dependent upon its service, and their growth and development have
been conditioned upon the facilities it has provided. The uses of
property in the communities which it serves are to a large degree
determined by it. The values of property along its line largely
depend upon its existence. It is an integral part of the communal
life. The assumption of its nonexistence, and at the same time that
the values that rest upon it remain unchanged, is impossible and
cannot be entertained. The conditions of ownership of the property
and the amounts which would have to be paid in acquiring the right
of way, supposing the railroad to be removed, are wholly beyond
reach of any process of rational determination. The "cost of
reproduction" method is of service in ascertaining the present
value of the plant, when it is reasonably applied and when the cost
of reproducing the property may be ascertained with a proper degree
of certainty. But it does not justify the acceptance of results
which depend upon mere conjecture. It is fundamental that the
judicial power to declare legislative action invalid upon
constitutional grounds is to be exercised only in clear cases. The
constitutional invalidity
Page 230 U. S. 453
must be manifest, and if it rests upon disputed questions of
fact, the invalidating facts must be proved. And this is true of
asserted value as of other facts.
The evidence in these cases demonstrates that the appraisements
of the St. Paul and Minneapolis properties which were accepted by
the master were in substance appraisals of what was considered to
be the peculiar value of the railroad right of way. Efforts to
express the results in the terms of a theory of cost of
reproduction fail, as naturally they must, to alter or obscure the
essential character of the work undertaken and performed. Presented
with an impossible hypothesis, and endeavoring to conform to it,
the appraisers -- men of ability and experience -- were manifestly
seeking to give their best judgments as to what the railroad right
of way was worth. And doubtless it was believed that it might cost
even more to acquire the property, if one attempted to buy into the
cities as they now exist, and all the difficulties that might be
imagined as incident to such a "reproduction" were considered. The
railroad right of way was conceived to be a property
sui
generis, "a large body of land in a continuous ownership,"
representing one of the "highest uses" of property, and possessing
an exceptional value. The estimates before us, as approved by the
master, with his increase of 25 percent in the case of the Duluth
property, must be taken to be estimates of the "railway value" of
the land, and whether or not this is conceived of as paid to other
owners upon a hypothetical reacquisition of the property is not
controlling when we come to the substantial question to be
decided.
That question is whether, in determining the fair present value
of the property of the railroad company as a basis of its charges
to the public, it is entitled to a valuation of its right of way
not only in excess of the amount invested in it, but also in excess
of the market value of contiguous and similarly situated property.
For the purpose
Page 230 U. S. 454
of making rates, is its land devoted to the public use to be
treated (irrespective of improvements) not only as increasing in
value by reason of the activities and general prosperity of the
community, but as constantly outstripping in this increase, all
neighboring lands of like character, devoted to other uses? If
rates laid by competent authority, state or national, are otherwise
just and reasonable, are they to be held to be unconstitutional and
void because they do not permit a return upon an increment so
calculated?
It is clear that, in ascertaining the present value, we are not
limited to the consideration of the amount of the actual
investment. If that has been reckless or improvident, losses may be
sustained which the community does not underwrite. As the company
may not be protected in its actual investment, if the value of its
property be plainly less, so the making of a just return for the
use of the property involves the recognition of its fair value if
it be more than its cost. The property is held in private
ownership, and it is that property, and not the original cost of
it, of which the owner may not be deprived without due process of
law. But still it is property employed in a public calling, subject
to governmental regulation, and while, under the guise of such
regulation, it may not be confiscated, it is equally true that
there is attached to its use the condition that charges to the
public shall not be unreasonable. And where the inquiry is as to
the fair value of the property, in order to determine the
reasonableness of the return allowed by the ratemaking power, it is
not admissible to attribute to the property owned by the carriers a
speculative increment of value, over the amount invested in it and
beyond the value of similar property owned by others, solely by
reason of the fact that it is used in the public service. That
would be to disregard the essential conditions of the public use,
and to make the public use destructive of the public right.
Page 230 U. S. 455
The increase sought for "railway value" in these cases is an
increment over all outlays of the carrier and over the values of
similar land in the vicinity. It is an increment which cannot be
referred to any known criterion, but must rest on a mere expression
of judgment which finds no proper test or standard in the
transactions of the business world. It is an increment which, in
the last analysis, must rest on an estimate of the value of the
railroad use as compared with other business uses; it involves an
appreciation of the returns from rates (when rates themselves are
in dispute) and a sweeping generalization embracing substantially
all the activities of the community. For an allowance of this
character there is no warrant.
Assuming that the company is entitled to a reasonable share in
the general prosperity of the communities which it serves, and thus
to attribute to its property an increase in value, still the
increase so allowed, apart from any improvements it may make,
cannot properly extend beyond the fair average of the normal market
value of land in the vicinity having a similar character. Otherwise
we enter the realm of mere conjecture. We therefore hold that it
was error to base the estimates of value of the right of way,
yards, and terminals upon the so-called "railway value" of the
property. The company would certainly have no ground of complaint
if it were allowed a value for these lands equal to the fair
average market value of similar land in the vicinity, without
additions by the use of multipliers, or otherwise, to cover
hypothetical outlays. The allowances made below for conjectural
cost of acquisition and consequential damages must be disapproved,
and, in this view, we also think it was error to add to the amount
taken as the present value of the lands the further sums,
calculated on that value, which were embraced in the items of
"engineering, superintendence, legal expenses," "contingencies,"
and "interest during construction."
By reason of the nature of the estimates, and the points
Page 230 U. S. 456
to which the testimony was addressed, the amount of the fair
value of the company's land cannot be satisfactorily determined
from the evidence, but it sufficiently appears, for the reasons we
have stated, that the amounts found were largely excessive.
Finding this defect in the proof, it is not necessary to
consider the objections which relate to the sources from which the
property was derived or its mode of acquisition, or those which are
urged to the inclusion of certain lands which it is said were not
actually used as a part of the plant, and we express no opinion
upon the merits of these contentions.
The property other than land, as the detailed statement shows,
embraced all items of construction, including roadbed, bridges,
tunnels, etc., structures of every sort, and all appliances and
equipment. The cost of reproduction new was ascertained by
reference to the prices for such work and property. In view of the
range of the questions we have been called upon to consider, we
shall not extend this opinion for the purpose of reviewing this
estimate, or of passing upon exceptions to various items in it, as
their disposition would not affect the result.
The master allowed the cost of reproduction new without
deduction for depreciation. It was not denied that there was
depreciation in fact. As the master said,
"everything on and above the roadbed depreciates from wear and
weather stress. The life of a tie is from eight to ten years only.
Structures become antiquated, inadequate, and more or less
dilapidated. Ballast requires renewal, tools and machinery wear
out, cars, locomotives, and equipment, as time goes on, are worn
out or discarded for newer types."
But it was found that this depreciation was more than offset by
appreciation; that "the roadbed was constantly increasing in
value;" that it "becomes solidified, embankments and slopes or
excavations become settled and stable and so the better resist the
effects of
Page 230 U. S. 457
rains and frost;" that it "becomes adjusted to surface drainage,
and the adjustment is made permanent by concrete structures and
riprap," and that in other ways, a roadbed long in use "is far more
valuable than one newly constructed." It was said that
"a large part of the depreciation is taken care of by constant
repairs, renewals, additions, and replacements, a sufficient sum
being annually set aside and devoted to this purpose so that this,
with the application of roadbed and adaptation to the needs of the
country and of the public served, together with working capital . .
. fully offsets all depreciation and renders the physical
properties of the road not less valuable than their cost of
reproduction new."
And in a further statement upon the point, the "knowledge
derived from experience" and "readiness to serve" were mentioned as
additional offsets.
We cannot approve this disposition of the matter of
depreciation. It appears that the master allowed, in the cost of
reproduction, the sum of $1,613,612 for adaption and solidification
of roadbed, this being included in the item of grading, and being
the estimate of the engineer of the state commission of the proper
amount to be allowed. It is also to be noted that the depreciation
in question is not that which has been overcome by repairs and
replacements, but is the actual existing depreciation in the plant
as compared with the new one. It would seem to be inevitable that
in many parts of the plant there should be such depreciation, as,
for example, in old structures and equipment remaining on hand. And
when an estimate of value is made on the basis of reproduction new,
the extent of existing depreciation should be shown and deducted.
This apparently was done in the statement submitted by this company
to the Interstate Commerce Commission in the
Spokane Rate
Case in connection with an estimate of the cost of
reproduction of the entire system as of March, 1907.
See
15 I.C.C. 395, 396. In
Page 230 U. S. 458
the present case, it appears that the engineer of the state
commission estimated the depreciation in the property at between
eight and nine million dollars. If there are items entering into
the estimate of cost which should be credited with appreciation,
this also should appear, so that, instead of a broad comparison,
there should be specific findings showing the items which enter
into the account of physical valuation on both sides.
It must be remembered that we are concerned with a charge of
confiscation of property by the denial of a fair return for its
use, and to determine the truth of the charge, there is sought to
be ascertained the present value of the property. The realization
of the benefits of property must always depend in large degree on
the ability and sagacity of those who employ it; but the
appraisement is of an instrument of public service, as property,
not of the skill of the users. And when particular physical items
are estimated as worth so much new, if in fact they be depreciated,
this amount should be found and allowed for. If this is not done,
the physical valuation is manifestly incomplete. And it must be
regarded as incomplete in this case.
Knoxville v. Knoxville
Water Co., 212 U. S. 1,
212 U. S. 10.
Apportionment of values. As the rate of net return from
the entire Minnesota business (interstate and intrastate) during
the test year was 6.021 percent on a valuation of $90,204,545, and
would be greater if computed upon a less value, we are brought to
the question whether the methods of apportionment adopted are so
clearly appropriate and accurate as to require a finding of
confiscation of property used in the intrastate business.
The apportionment of the value of the property, as found,
between the interstate and intrastate business, was made upon the
basis of the gross revenue derived from each. This is a simple
method, easily applied, and for that reason has been repeatedly
used. It has not, however, been approved by this Court, and its
correctness
Page 230 U. S. 459
is now challenged. Doubtless there may be cases where the facts
would show confiscation so convincingly in any event, after full
allowance for possible errors in computation, as to make negligible
questions arising from the use of particular methods. But this case
is not of that character.
In support of this method, it is said that a division of the
value of the property according to gross earnings is a division
according to the "value of the use," and therefore proper. But it
would seem to be clear that the value of the use is not shown by
gross earnings. The gross earnings may be consumed by expenses,
leaving little or no profit. If, for example, the intrastate rates
were so far reduced as to leave no net profits, and the only
profitable business was the interstate business, it certainly could
not be said that the value of the use was measured by the gross
revenue.
It is not asserted that the relation of expense to revenue is
the same in both businesses; on the contrary, it is insisted that
it is widely different. The master found that the revenue per
ton-mile in the intrastate business, as compared with the revenue
per ton-mile in the interstate business, was as 1.4387 to 1.0000.
And, on his assumption as to the extra cost of doing the intrastate
business, he reached the conclusion that the cost per ton-mile in
proportion to the revenue per ton-mile in the intrastate business,
as compared with the interstate business, was as 1.7377 to 1.0000.
It is contended, according to the computations, that only a little
over 10 percent of the entire net revenue of the test year
($5,431,514.66) was made in the intrastate business, and that 90
percent thereof was made in the interstate business; but
approximately 21 percent of the total value of the property was
assigned to the intrastate business.
If the property is to be divided according to the value of the
use, it is plain that the gross earnings method is not an accurate
measure of that value.
In
Chicago, Milwaukee &c.
Ry. Co. Co. v. Tompkins, 176
Page 230 U. S. 460
U.S. 167, the court below had found the value of the plaintiffs'
property in South Dakota to be $10,000,000, and had divided it
between the interstate and intrastate business, according to the
gross receipts from each. Mr. Justice Brewer, in delivering the
opinion of the Court, after referring to the result reached,
said:
"Such a result indicates that there is something wrong in the
process by which the conclusion is reached. That there was can be
made apparent by further computations, and in them we will take
even numbers as more easy of comprehension. Suppose the total value
of the property in South Dakota was $10,000,000, and the total
receipts both from interstate and local business were $1,000,000,
one-half from each. Then, according to the method pursued by the
trial court, the value of the property used in earning local
receipts would be $5,000,000, and the percent of receipts to value
would be 10 percent. The interstate receipts being unchanged, let
the local receipts by a proposed schedule be reduced to one-fifth
of what they had been, so that, instead of receiving $500,000 the
company only receives $100,000. The total receipts for interstate
and local business being then $600,000, the valuation of
$10,000,000, divided between the two, would give to the property
engaged in earning interstate receipts in round numbers $8,333,000,
and to that engaged in earning local receipts $1,667,000. But if
$1,667,000 worth of property earns $100,000, it earns six percent.
In other words, although the actual receipts from local business
are only one-fifth of what they were, the earning capacity is
three-fifths of what it was. And, turning to the other side of the
problem, it appears that, if the value of the property engaged in
interstate business is to be taken as $8,333,000, and it earned
$500,000, its earning capacity was the same as that employed in
local business -- six percent So that, although the rates for
interstate business be undisturbed, the process by which the trial
court
Page 230 U. S. 461
reached its conclusion discloses the same reduction in the
earning capacity of the property employed in interstate business as
in that employed in local business, in which the rates are
reduced."
Id., pp.
176 U. S.
176-177.
The value of the use, as measured by return, cannot be made the
criterion when the return itself is in question. If the return, as
formerly allowed, be taken as the basis, then the validity of the
state's reduction would have to be tested by the very rates which
the state denounced as exorbitant. And if the return as permitted
under the new rates be taken, then the state's action itself
reduces the amount of value upon which the fairness of the return
is to be computed.
When rates are in controversy, it would seem to be necessary to
find a basis for a division of the total value of the property
independently of revenue, and this must be found in the use that is
made of the property. That is, there should be assigned to each
business that proportion of the total value of the property which
will correspond to the extent of its employment in that business.
It is said that this is extremely difficult; in particular, because
of the necessity for making a division between the passenger and
freight business, and the obvious lack of correspondence between
ton-miles and passenger-miles. It does not appear, however, that
these are the only units available for such a division, and it
would seem that, after assigning to the passenger and freight
departments respectively, the property exclusively used in each,
comparable use units might be found which would afford the basis
for a reasonable division with respect to property used in common.
It is suggested that other methods of calculation would be equally
unfavorable to the state rates, but this we cannot assume.
It is sufficient to say that the method here adopted is not of a
character to justify the court in basing upon it a finding that the
rates are confiscatory.
Page 230 U. S. 462
Apportionment of expenses. As already stated, it was
held in dividing the freight operating expenses that the cost of
doing the intrastate freight business was two and one-half times
that of doing the interstate freight business. That is to say, the
division of expenses was made according to ton-miles, interstate
and intrastate, after the intrastate ton-miles had been increased
two and one-half times.
The substantial question is whether the proof established this
extra cost with that degree of certainty which is requisite to
support a decree invalidating the state rates.
It appeared that the cost of intrastate business was not kept
separately or set up in the accounts or statistics of the
company.
The president of the company testified as to his judgment in the
matter, which was based, in the absence of such accounts, upon the
general facts of operation. His testimony was supported by that of
other eminent railroad men, who testified in the Great Northern and
Minneapolis and St. Louis cases. The elements entering into the
greater expense of doing intrastate business were defined to be
that the average haul was shorter, being (in the case of the
Northern Pacific) 104.52 miles for intrastate transportation as
against 485.3 miles for interstate transportation; that the state
business had to be handled twice at terminals; that the local
short-haul business used most valuable terminal facilities in order
to obtain its proper handling from the larger distributing centers,
and used those facilities to a greater extent for the tons handled
than did the longer through business; that the amount of clerical
and warehouse labor in connection with the local business was much
greater than in the case of the long-haul through business; that
the chances of damage were greater in the short-haul business
because of the greater number of individual transactions; that in
the short-haul business there was an excess of equipment for
loading and unloading;
Page 230 U. S. 463
that local or way freight trains were "loaded lighter;" that the
wear and tear on the local trains was greater because of frequent
stopping and starting; that there was increased switching,
resulting in greater damage to equipment and tracks; that the local
train was generally on the road more hours than a through train,
and therefore consumed more coal; that, in the smaller stations,
the amount of shifting was large; that many of the local trains
carried passengers, involving two stops at each station, one for
passengers and the other for the local freight work; that the
manner of operation of local trains increased the chances of injury
to employees; that the short-haul business moved irregularly and
spasmodically, and that its facilities were worked at their full
capacity only for limited periods.
From these considerations, which were elaborated in the
testimony, the witness reached the conclusion that the
"so-called local short-haul intrastate business costs anywhere
from three to six or seven times as much as the so-called long haul
through interstate business."
In the Great Northern case, the witnesses expressed the opinion
that the extra cost of intrastate freight was three or four times
greater than that of the interstate freight. One witness said that
it would be from four to six times. These estimates, it is
understood, had relation to the cost per ton mile.
The appellants do not dispute that business carried for short
distances on local trains is more expensive than the handling of
other business, but it is insisted that this is due solely to the
different train service that it receives. It is said that all
through trains start from divisional points and run from one end of
the division to the other without stop; that the local trains are
made up of cars carrying business destined for points intermediate
the termini of the division, and take up all traffic originating at
the intermediate stations; that the word "local," as
Page 230 U. S. 464
applied to these trains, is not synonymous with intrastate, but
that the local trains carry a large part of the interstate traffic,
both in receiving and distributing it, and that by far the greater
part of the extra cost of the local train service is properly
chargeable to interstate business. It is also insisted that, so far
as this extra expense can be charged to interstate business, it is
adequately met by the additional revenue of that business, which
per ton mile, as compared with the interstate business, is as
1.4387 to 1.0000.
To establish these propositions, and to meet the testimony of
the complainants' witnesses, the appellants introduced an elaborate
series of calculations, made by a professional accountant, which
were deduced from the results of an extended examination of the
records of the companies. The witness made computations as to the
character of the freight on each road, dividing it between through
and local freight upon each operating division and then subdividing
it between intrastate and interstate freight. It is contended by
the appellants that these calculations are sufficient to show that,
in the case of the Northern Pacific, about 91 percent of the
freight on through trains was interstate and about 9 percent
intrastate, and that, on the local trains, the interstate freight
amounted to 68.67 percent and the intrastate, 31.33 percent.
Calculations of this witness were also introduced, showing his
division of the total expenses between the passenger and freight
business, and then in each department between the interstate and
intrastate business, and, by means of these, it was estimated that,
under the rates in question (assuming them to have been applied to
the business of the fiscal year ending June 30, 1907, to which the
calculations were directed), the net profits on the intrastate
business as a whole would have been slightly more than six percent
upon an amount equal to the share of property value attributed to
that
Page 230 U. S. 465
business by the master's estimate and apportionment of total
value.
These computations are assailed by the appellees as inaccurate
and as based upon erroneous estimates. We shall not go into the
details, and, for the present purpose, we may assume that the
appellees are right in their criticism.
Our conclusions may be briefly stated. The statements of the
complainants' witnesses as to the extra cost of interstate
business, while entitled to respect as expressions of opinion,
manifestly involve wide and difficult generalizations. They
embrace, without the aid of statistical information derived from
appropriate tests and submitted to careful analysis, a general
estimate of all the conditions of transportation, and an effort to
express in the terms of a definite relation, or ratio, what clearly
could be accurately arrived at only by prolonged and minute
investigation of particular facts with respect to the actual
traffic as it was being carried over the line. The extra cost, as
estimated by these witnesses, is predicated not simply of haulage
charges, but of all the outlays of the freight service, including
the share of the expenses for maintenance of way and equipment
assigned to the freight department. And the ratio, to be accurately
stated, must also express the results of a suitable discrimination
between the interstate and intrastate traffic on through and local
trains respectively, and of an attribution of the proper share of
the extra cost of local train service to the interstate traffic
that uses it. The wide range of the estimates of extra cost, from
three to six or seven times that of the interstate business per ton
mile, shows both the difficulty and the lack of certainty in
passing judgment.
We are of opinion that, on an issue of this character, involving
the constitutional validity of state action, general estimates of
the sort here submitted, with respect to a subject so intricate and
important, should not be
Page 230 U. S. 466
accepted as adequate proof to sustain a finding of confiscation.
While accounts have not been kept so as to show the relative cost
of interstate and intrastate business, giving particulars of the
traffic handled on through and local trains, and presenting data
from which such extra cost as there may be, of intrastate business,
may be suitably determined, it would appear to have been not
impracticable to have had such accounts kept or statistics prepared
at least during test periods, properly selected. It may be said
that this would have been a very difficult matter, but the company,
having assailed the constitutionality of the state acts and orders,
was bound to establish its case, and it was not entitled to rest on
expressions of judgment when it had it in its power to present
accurate data which would permit the court to draw the right
conclusion.
We need not separately review the findings with respect to the
division of passenger expenses, as the same considerations are
involved, with the distinction, however, that the extra cost
attributed to the intrastate business is relatively small as
compared with that charged to intrastate freight. And, in view of
the conclusions reached on the controlling questions we have
considered, we express no opinion with respect to the method
adopted in dividing expenses between the passenger and freight
departments.
For the purpose of determining whether the rates permit a fair
return, the results of the entire intrastate business must be taken
into account. During the test year, the entire revenue, as found,
from the intrastate business, passenger and freight, amounted to
$2,897,912.26. All the rates in question were in force save the
commodity rates, and it is further found that the loss that would
have accrued in intrastate commodity business, by the application
of the commodity rates which were under injunction, would have
amounted to $21,439.67.
As neither the share of the expenses properly attributable
Page 230 U. S. 467
to the intrastate business, nor the value of the property
employed in it, was satisfactorily shown, and hence it did not
appear upon the facts proved that a fair return had been denied to
the company, we are of the opinion that the complainant failed to
sustain his bill.
2.
Great Northern Railway Company. -- The master found
that, at the time this suit was brought, the par value of the stock
of the company was $149,577,500, and of bonds, $83, 119,939; total,
$232,697,439. On June 30, 1908, the par value of the stock was
$209,962,750, and of bonds, $97,955,939.39; total, $307,918,689.39.
The property upon which these securities and their value in the
market are based includes, it is found, a very considerable amount
not devoted to the public service.
The balance sheet of the company of June 30, 1908, showed the
book valuation of the entire system employed in the public service
to amount to $319,681,815. The master held that various items were
included which were not properly allowable as a part of the cost,
and deducting these, there remained as the book-showing of the
total amount expended in construction and equipment, $295,401,213.
The Minnesota track mileage was found to be practically 32.59
percent of the total mileage, and upon this basis, the amount
assignable to the state of the total cost, as stated, amounted to
$96,271,255.
The master found that the cost of reproduction new of the entire
system was $457,121,469. [
Footnote 13] The value of the portion of the system in
Minnesota was separately found, on the basis of reproduction new,
to be $138,425,291. The net profits of the company during the test
year from its Minnesota business, interstate and intrastate, were
$8,180,025.11, equal to 5.909 percent upon this estimated
value.
The items entering into the estimate are the same in
Page 230 U. S. 468
character as those set forth in the estimate of the value of the
property of the Northern Pacific Company. [
Footnote 14]
Included in this reproduction cost was an allowance, for "lands
for right of way, yards, and terminals," of $25, 172,650.80, as
follows:
St. Paul, appraisement of Read, Watson, and Taylor . . . $
6,433,348.00
Add 5 percent for cost of acquisition and
consequential damages. . . . . . . . . . . . . . . . .
321,667.40
Minneapolis, appraisement of Elwood, Barney, and
Ridgeway . . . . . . . . . . . . . . . . . . . . . . .
11,619,765.00
Add 5 percent for cost of acquisition and conse-
quential damages . . . . . . . . . . . . . . . . . . .
580,968.15
Duluth, appraisement of Stryker, Mendenhall, and
Little . . . . . . . . . . . . . . . . . . . . . . . .
713,280.00
Add 25 percent for railroad value, cost of
acquisition, and consequential damages . . . . . . . .
178,320.00
Total value of terminals . . . . . . . . . . . . . . . .
19,847,366.55
Lands outside of terminals . . . . . . . . . . . . . . .
5,325,284.25
Grand total . . . . . . . . . . . . . . . . . . . .
25,172,650.80
The appraisements thus referred to, adopted by the master with
the additions stated, were made by the appraisers in the three
cities who were employed in the case of the Northern Pacific
Company. The valuations were made at the same time, and upon the
same basis, as the corresponding valuations in that case, and are
open to the same objections. In the company's estimate of the value
of the lands outside these cities, the amount stated as the market
value was largely increased to obtain the "right of way value;"
with respect to lands in agricultural sections,
Page 230 U. S. 469
the "market value" was generally multiplied by three, and of the
total amount of the estimate of the company the master allowed 75
percent, as in the Northern Pacific case.
In addition, 4 1/2 percent of the aggregate land values, as
found, was allowed in the item for "engineering, superintendence,
legal expenses," and the further allowance of 16 percent of these
land values was made in the item of "interest during construction"
(4 percent for four years).
In the physical valuation estimated on the basis of the cost of
reproduction new, the master made no deduction for depreciation,
while, on the other hand, there was included under the item of
grading the sum of $3,219,642 for adaptation and solidification of
roadbed. The engineer of the state commission estimated the
depreciation in the property at approximately $13,000,000.
What has already been said in the case of the Northern Pacific
Company with respect to estimates of value, the apportionment of
value, the testimony as to the extra cost of doing the intrastate
business, and the division of expenses between interstate and
intrastate business, is equally applicable here. [
Footnote 15] In these respects, there is no
material distinction between the two cases, and the same conclusion
must be reached in both.
3.
Minneapolis & St. Louis Railroad Company. This
case presents distinct considerations. The lines of this company
consist of about 1,028 miles of track, of which 396 miles are
operated under lease or trackage rights. Of its owned mileage (632
miles), approximately 60 percent is in the State of Minnesota. The
master thus describes it:
"It runs south from the inland Cities of St.
Page 230 U. S. 470
Paul and Minneapolis to Des Moines, with a branch to Storm Lake,
Iowa, and a branch to the South Dakota grain fields. Along its
entire line it comes in sharp competition with strong intersecting
railroad lines, and while, as before stated, it subserves a useful
public purpose and is operated in response to public demand, it can
be maintained only by the exercise of the highest economy and
watchfulness in its operation, and, to succeed, must be given
greater latitude than is necessary with respect to the more
favorably located and prosperous lines of railway."
The less favorable situation of the road is fully recognized by
the appellants, who object to its being regarded as affording a
fair test of the sufficiency of the rates. They say that its "total
mileage and the geographical location" are such "that it cannot be
taken as typical of the railway situation in Minnesota," and they
insist that "the important and material questions are raised by the
showing made in the Northern Pacific and Great Northern cases." And
the appellees, on their part, assert that
"it cannot be seriously contended that the rates complained of
are sufficient to yield any reasonable return on a proportionate
value of the property used in the conduct of the business covered
by the rates;"
that the net income of the road "from all sources is scarcely
sufficient to pay interest on its outstanding bonds;" that "the
value of the property is greatly in excess of the par value of the
bonds;" and that, as it seems to the appellees, "this company must
earn more money or go into the hands of a receiver, within a
comparatively short time."
The main facts are: the par value in 1908, of its stock and
bonds, was $30,011,800, divided as follows: stock, $10,000,000
(preferred, $4,000,000, common $6,000,000); bonds, $20,011,800. It
appeared that no dividends had been paid on the common stock since
1904. The annual interest charges amounted to $952,583.
Page 230 U. S. 471
The book cost of its property, after deducting items disallowed
by the master, was $28,574,225, and this, if divided according to
mileage, would give to Minnesota as its share, $17,127,390. The
mileage basis of division, however, fails to take account of the
fact that the property in Minnesota has a greater relative
value.
The master found the total value of the property in Minnesota on
the basis of the cost of reproduction new to be $21,608,464. In
this estimate there was included the sum of $5,999,397.90 for
lands, yards, and terminals. Of this amount, $4,556,298 was allowed
for the lands in Minneapolis on the estimate of the same appraisers
who had been employed in that city by the other companies, and to
this the master added five percent. The lands outside these
terminals were valued at $1,215,285.
The net earnings of the entire system after paying only
operating expenses and taxes, from 1903 to 1909, were found to be
as follows: 1903, $1,398,895.30; 1904, $1,229,524.49; 1905,
$1,277,870.96; 1906, $1,511,961.99; 1907, $1,419,822.54; 1908,
$1,220,862.21; 1909, $1,286,494.08.
The net earning of the company on all its business in Minnesota,
interstate and intrastate (involving any use of the property valued
as stated), after paying only operating expenses and taxes, were,
during the same period: 1903, $1,222,941.77; 1904, $1,052,478.74;
1905, $1,054,853.35; 1906, $1,109,260.56; 1907, $895,977.66; 1908,
$742,377.46; 1909, $794,472.58. The reference in each case is to
the fiscal year ending on June 30.
It thus appears that the net return from the entire Minnesota
business in 1907 was about 4.14 percent on the estimated value of
the property ($21,608,464) in Minnesota; in 1908, less than 3.5
percent, and in 1909, less than 3.7 percent
The master made his computations, with respect to the return
permitted under the rates in question, upon the
Page 230 U. S. 472
operations of the fiscal year ending June 30, 1907. The class
rates had been effective from November 15, 1906, and the passenger
fare act from May 1, 1907. It was estimated by the master that the
additional loss, which would have accrued in the interstate
business if these rates had been in force during the entire fiscal
year ending June 30, 1907, and if, in addition, the commodity rate
act, which was enjoined, had been applied to the intrastate traffic
of that year, would have amounted to $131,358, thus making a very
serious reduction in a return already inadequate, and his
conclusion was that the rates in question were plainly
confiscatory.
It is not necessary here to reproduce the computations, as we
are satisfied, after a careful examination of the evidence, that
while the methods of estimating value and of apportionment which
have been disapproved in the discussion of the cases of the other
companies are subject to the same objections in this case, so far
as they have been employed, the margin of error which may be
imputed to them is not sufficiently great to change the result. The
net return from the entire business in Minnesota, interstate and
intrastate, fell to $742,000 in the fiscal year ending June 30,
1908, and it is plain that the latter amount would have been
largely reduced had the commodity rate act been enforced. In view
of the actual results of the business in the state, and the clearly
established facts with respect to the conditions of traffic upon
this road, the conclusion cannot be escaped that the rates
prescribed by the acts and orders of Minnesota would not permit a
fair return to this company.
Without approving, therefore, the methods of calculation which
have been adopted, but recognizing the peculiar situation of this
road, and the undoubted effect of the rates in question upon its
revenues, we are of the opinion that the decree, so far as it rests
upon the confiscatory character of the rates as applied to this
company, should
Page 230 U. S. 473
be affirmed. In the desire, however, to prevent the possibility
that the decree may operate injuriously in the future, we shall
modify it by providing that the members of the Railroad &
Warehouse Commission, and the Attorney General of the state, may
apply at any time to the court, by bill or otherwise, as they may
be advised, for a further order or decree, whenever it shall appear
that, by reason of a change in circumstances, the rates fixed by
the state's acts and orders are sufficient to yield to the company
reasonable compensation for the services rendered.
The decrees in Numbers 291 and 292 are reversed and the
cases remanded with directions to dismiss the bills respectively
without prejudice.
The decree in Number 293 is modified as stated in the
opinion, and, as modified, is affirmed.
MR. JUSTICE McKENNA concurs in the result.
[
Footnote 1]
The two-cent fare law was in force for two months of the fiscal
year ending June 30, 1907.
[
Footnote 2]
Nebraska, Iowa, Kansas, South Dakota, North Dakota, Oklahoma,
Missouri, and Texas.
[
Footnote 3]
E.g. Maryland, Laws of 1826, c. 123, § 18; 1830, c.
117, §§ 2, 3; 1834, c. 281, § 3; Massachusetts, Laws of 1829, c.
26, § 6; 1830, c. 93, § 10; New York, Laws of 1828, c. 21, § 11; c.
238, § 11; 1831, c. 83, § 10; 1836, c. 242, § 9; Virginia, Laws of
1830, 1831, c. 119, § 19; c. 121, § 18; 1835, 1836, c. 121, § 24;
Ohio, Laws of 1833, 1834, p. 203, § 19; p. 396, § 9; North
Carolina, Laws of 1836, 1837, c. 40, § 30.
[
Footnote 4]
Connecticut, 1832, II Resolves and Private Laws (1789-1836), p.
992; Indiana, Laws of 1832, c. 146, §§ 23, 24; Florida, Laws of
1848, c. 244, § 11; New York, Laws of 1828, c. 304, § 13; 1832, c.
162, §§ 12, 17; Massachusetts, Laws of 1833, c. 118, § 4; Virginia,
Laws of 1839, c. 110, § 5; Wisconsin, Laws of 1847, p. 72, § 15;
1851, c. 262, § 7.
[
Footnote 5]
Illinois, Laws of 1849, p. 15, §§ 21, 32; Massachusetts, Laws of
1845, c. 191, § 2; 1860, c. 201, § 2; New York, Laws of 1850, c.
140, § 33; California, Laws of 1850, c. 128, § 77; 1861, c. 532, §
51; Iowa, Code of 1873, § 1305; Laws of 1874, c. 68, §§ 1-5; Report
of Industrial Commission, 1901, vol. 9, pp. 903-905, 911-915.
[
Footnote 6]
Referring to laws of Texas: Acts of July 4, 1884, c. 177, § 4,
23 Stat. 69, 70; July 1, 1886, c. 601, § 4, 24 Stat. 117, 119;
February 18, 1888, c. 13, § 4, 25 Stat. 35, 37; May 14, 1888, c.
248, § 4, 25 Stat. 140, 142; May 30, 1888, c. 337, § 4, 25 Stat.
162, 163; June 26, 1888, c. 494, § 4, 25 Stat. 205, 207; October 1,
1890, c. 1248, § 4, 26 Stat. 632. 634; July 30, 1892, c. 329, § 4,
27 Stat. 336, 338; March 1, 1893, c. 188, § 4, 27 Stat. 524, 525;
August 4, 1894, c. 215, § 4, 28 Stat. 229, 230; March 23, 1898, c.
87, § 4, 30 Stat. 341, 342.
Referring to laws of Kansas: Acts of July 4, 1884, c. 179, § 4,
23 Stat. 73, 74; June 21, 1890, c. 479, § 4, 26 Stat. 170, 171;
June 30, 1890, c. 638, § 4, 26 Stat. 184, 185; September 26, 1890,
c. 947, § 4, 26 Stat. 485, 487; February 27, 1893, c. 171, § 4, 27
Stat. 492, 493; March 18, 1896, c. 60, § 4, 29 Stat. 69, 70; March
30, 1896, c. 82, § 4, 29 Stat. 80, 82.
Referring to laws of Arkansas: Acts of June 1, 1886, c. 395, §
4, 24 Stat. 73, 74; July 6, 1886, c. 744, § 4, 24 Stat. 124, 125;
February 18, 1888, c. 13, § 4, 25 Stat. 35, 37; May 30, 1888, c.
337, § 4, 25 Stat. 162, 163; February 26, 1889, c. 280, § 4, 25
Stat. 745, 746; February 24, 1891, c. 288, § 4, 26 Stat. 783, 785;
March 3, 1891, c. 535, § 4, 26 Stat. 844, 846; February 24, 1896,
c. 30, § 6, 29 Stat. 13, 15; March 2, 1896, c. 38, § 4, 29 Stat.
40, 41; April 6, 1896, c. 93, § 4, 29 Stat. 87, 88; January 29,
1897, c. 108, § 4, 29 Stat. 502, 504; March 30, 1898, c. 104, § 6,
30 Stat. 349; January 28, 1899, c. 65, § 5, 30 Stat. 806, 808;
February 4, 1899, c. 88, § 6, 30 Stat. 816, 818; March 3, 1899, c.
453, § 6, 30 Stat. 1368, 1370.
Referring to laws of Territory of Oklahoma: Acts of February 28,
1902, c. 134, § 4, 32 Stat. 43, 45.
[
Footnote 7]
The method is illustrated from the following extract from the
findings in the
Northern Pacific case:
EQUATED TON-MILE BASIS
Freight-On basis of 1 intrastate ton-mile costing as much as 2.5
interstate ton miles.
Actual Equated Proportion Operating Exps.
Intrastate ton-mi. 130,580,988 x 2.5 = 326,452,470 = 25.362%
$1,355,273.82
Interstate ton-mi. 960,709,494 x 1.0 = 960,709,494 = 74.638%
3,988,444.43
----------- ----------- ------ -------------
1,091,290,484 1,287,161,964 = 100% $5,343,718.25
EQUATED PASSENGER-MILE BASIS
Passenger-On basis of 100 intrastate passenger miles costing as
much as 115 interstate passenger miles
Actual Equated Proportion Operating Exps.
Intrastate pas-
-senger miles 52,317,140 x 1.15 = 60,164,711 = 37,347%
$863,325.18
Interstate pas-
-senger miles 100,931,180 x 1.00 = 100,931,180 = 62.653%
1,448,306.77
----------- ----------- ------- ------------
153,248,320 161,095,891 = 100.% $2,311,631.95
[
Footnote 8]
Equated Revenue Basis. -- In the case of the Northern
Pacific Company, it was found that the relation of freight revenue
per ton per mile derived from the intrastate business, as compared
with the interstate business, was as 1.4387 is to 1.0000. The
relation of cost per ton per mile in the intrastate business in
proportion to revenue, to the cost per ton per mile in interstate
business in proportion to revenue, was then found to be as 1.7377
is to 1.0000, as follows:
250 1.4387 1.7377
--- � ------ = ------
100 1.0000 1.0000
The actual intrastate freight revenue was multiplied by 1.7377
to obtain the equated revenue, and thus the same percentages were
obtained as on the equated ton-mile basis, as follows:
"
EQUATED REVENUE BASIS -- FREIGHT"
Actual Revenue Equated Revenue
Intrastate $1,555,342.92 x 1.7377 = $2,702,719.39 = 25.362%
Interstate 7,953,734.41 x 1. = 7,953,734.41 = 74.638%
------------- -------
$10,656,453.80 = 100%
The relation of revenue per passenger mile, intrastate and
interstate, was found to be as 1.0092 is to 1.000, and thus, the
relation of cost per passenger mile in relation to revenue was as
1.1395 is to 1.0000. The division was then made as follows:
"
EQUATED REVENUE BASIS -- PASSENGER"
Actual Revenue Equated Revenue
Intrastate $1,015,150.34 x 1.1395 = $1,156,763.81 = 37.347%
Interstate 1,940,718.17 x 1. = 1,940,718.17 = 62.653%
------------- -------
$3,097,481.98 = 100.%
[
Footnote 9]
The master found that the total track mileage of the system was
7,695.80 and that the track mileage in Minnesota was 1,625.20. In
both cases, spurs, yards, and sidings were included. In Minnesota,
as shown by the company's statement, the "passing, side, and
industry tracks" amounted to 512.41 miles, leaving for the single
track, and second and third main track, miles, a total of 1,112.79
miles.
[
Footnote 10]
This estimate did not include the interest of the Northern
Pacific in the Spokane, Portland & Seattle Railroad, which was
under construction, or the Big Forks & International Falls
Railway, or the Minnesota & International Railway, or in
certain lines in Manitoba, under lease, which were found not to be
part of the operating system.
[
Footnote 11]
Valuation -- Northern Pacific
1. Lands for right of way, yards and terminals . . .
$21,024,562
2. Grading, clearing, and grubbing . . . . . . . . .
12,331,541
3. Protection work, rip-rap, retaining walls . . . . 374,091
4. Tunnels . . . . . . . . . . . . . . . . . . . . . 253,250
5. Crossties and switchtes . . . . . . . . . . . . .
3,657,576
6. Ballast . . . . . . . . . . . . . . . . . . . . .
1,960,969
7. Rails . . . . . . . . . . . . . . . . . . . . . .
5,645,307
8. Track fastenings. . . . . . . . . . . . . . . . . 727,228
9. Switches, frogs, and railroad crossings . . . . . 303,717
10. Track laying and surfacing. . . . . . . . . . . .
1,600,591
11. Bridges, trestles, and culverts . . . . . . . . .
3,586,063
12. Track and bridge tools. . . . . . . . . . . . . . 28,073
13. Fences, cattle guards, and signs. . . . . . . . .
471,609
14. Stockyards and appurtenances. . . . . . . . . . . 37,098
15. Water stations. . . . . . . . . . . . . . . . . .
436,489
16. Coal stations . . . . . . . . . . . . . . . . . .
120,039
17. Stations, buildings, and fixtures . . . . . . . .
920,423
18. Miscellaneous buildings . . . . . . . . . . . . .
1,054,874
19. Steam and electric power plants, gas plants . . .
196,338
20. General repair shops. . . . . . . . . . . . . . .
1,162,934
21. Shop machinery and tools. . . . . . . . . . . . .
529,322
22. Engine houses, turntables, and cinder pits. . . .
1,026,346
23. Track scales. . . . . . . . . . . . . . . . . . . 38,520
24. Docks and wharves . . . . . . . . . . . . . . . .
768,306
25. Interlocking plants and)
26. other signal apparatus) . . . . . . . . . . . . 114,430
27. Telegraph and telephone
28. lines . . . . . . . . . . . . . . . . . . . . . 285,145
28 1/2 General office furniture. . . . . . . . . . . 73,654
29. Solidification of roadbed (absorbed in above) ---------
Total 1 to 28 1/2 . . . . . . . . . $58,728,685
30. Engineering, superintendence, legal expenses,
4 1/2 percent 1 to 28 . . . . . . . . . . . . . 2,785,036
31. Locomotives . . . . . . . . . . . . . . . . . . .
3,454,040
32. Passenger equipment . . . . . . . . . . . . . . .
1,349,829
33. Freight car equipment . . . . . . . . . . . . . .
7,519,722
34. Miscellaneous equipment . . . . . . . . . . . . .
372,477
35. Marine equipment (none)
-----------
Total items 1 to 34 . . . . . . . . $74,209,789
36. Freight on construction material -- absorbed.
37. Contingencies, 5 percent 1 to 34. . . . . . . . .
3,710,479
38. Stores and supplies in Minnesota. . . . . . . . .
2,658,976
39. Interest during construction, 4 percent, 2 1/2
years Items 1 to 36 . . . . . . . . . . . . . . 7,420,957
40. Interest in terminal properties, St. Paul depot,
Duluth depot, Minnesota transfer. . . . . . . . 2,204,344
-----------
$90,204,545
[
Footnote 12]
See note, p.
230 U. S.
442.
[
Footnote 13]
This did not include the interest of the company in the Spokane,
Portland & Seattle Railroad, or lines under construction.
[
Footnote 14]
See page
230 U. S.
442.
[
Footnote 15]
The total revenue received by the Great Northern during the
fiscal year 1908, from its intrastate business, passenger and
freight, was $4,641,829.58, and it was found that the loss that
would have been sustained by the application of the enjoined
commodity rates to the intrastate commodity traffic would have
amounted to $87,261.43.