James Clark McReynolds

“ While this court declared in the Southwestern Bell Case that prudent investment is not to be taken as the measure of value, it has never held that prudent investment may not be accepted as evidence of value, or that a finding of value is necessarily erroneous if it happens to be more nearly coincident with what may be supposed to have been the cost of the property than with its estimated reproduction cost. The single-sum values found by the Commission do not coincide either with the estimated prudent investment or with the estimated reconstruction cost. ”

“ To use a machine, after a much better and more economical one has become available, is as inefficient as to use two men to operate an efficient machine, when the work could be performed equally well by one, at half the labor cost. Such an instrument of transportation, although originally well conceived and remunerative, should, like machines used in manufacturing, be scrapped when it becomes wasteful. ”

“ There is no testimony here as to how much it cost to build any railroad or any substantial part of one in any of the recapture periods, and for that reason it is impossible to make a comparison of such costs in the two periods. It is not safe to assume, as the O'Fallon has assumed, that costs of building railroads have varied in recent years in direct ratio to the variation in costs of commodities in general use, or in the costs of materials or labor generally. ”

“ Even the common business incentive of establishing low prices in order to induce an enlarged volume of sales is absent, since the volume of the business done by a water company will not be appreciably affected by a raising or lowering of the rates, except in so far as water in quantity is used for manufacturing purposes. In other words, the commercial limitation upon rates-what the traffic will bear-is to a large extent absent in the case of such a local monopoly. The city water user must submit to such rates as the utility chooses to impose, unless they are curbed by legislative enactment. ”

“ The recapture of excess earnings and the establishment of reserves are a part of the process of establishing such rates 'that carriers as a whole (or as a whole in each of such rate groups or territories as the Commission may from time to time designate) will, under honest, efficient and economical management, * * * earn an aggregate annual net railway operating income equal, as nearly as may be, to a fair return upon the aggregate value of the railway property of such carriers held for and used in the service of transportation.' Paragraph 2. ”

“ The question on which the Commission divided is this: When seeking to ascertain the value of railroad property for recapture purposes, must it give consideration to current, or reproduction, costs? The weight to be accorded thereto is not the matter before us. No doubt there are some, perhaps many, railroads the ultimate value of which should be placed far below the sum necessary for reproduction. But Congress has directed that values shall be fixed upon a consideration of present costs along with all other pertinent facts ”

“ If it were possible to show on a chart the rise in cost of replacing the railroad as a whole we would still not be telling the whole story, because the increase would represent not only a higher level of wages and prices but a change in the character of the plant. Rails and ballast are heavier, frogs and switches more powerful, bridges stronger. ”

“ Perhaps the most striking instance of the limitation by law of rates which the traffic would bear commercially is furnished by cases under the long and short haul clause. By that clause, a rail carrier is often obliged (unless relieved by order of the Commission) to elect between suffering practically a total loss of existing traffic between competitive points or suffering a loss in existing revenues by reducing rates at both the competitive points and intermediate noncompetitive points. ”

“ The lessening of the service value of a part of the railroad plant may flow from changes in the volume or character of its traffic. For economy and efficiency are obviously to be determined with reference to the business of the carrier then being done and about to be done. [55] A station warehouse for less-than-carload freight may have become valueless for rate-making purposes, because, through motor competition, the railroad had lost substantially all its less-than-carload business at that point. ”

“ While a part often has some service value, although not efficient according to the existing standard, its use may involve such heavy, unnecessary operating expense as to render it valueless for rate making purposes under section 15a. The Commission, when requested to consider evidence of reproduction cost, must therefore examine the value of every part of the plant, and that of the whole plant, as compared with the value of a modern, efficient plant. ”

“ Rail rates are being constantly curbed by the competition of markets and of rival means of transportation. Rail rates are curbed also by the influence of high rates upon the desires of individuals. The public can, to a considerable extent, do without rail service. If the rates are excessive, traffic falls off. Thus when passenger rates are too high, travel is either curtailed or people employ other means of transportation. ”

“ If rates are too high, the traffic will not move. Hence the value or rate base is necessarily dependent, in the first place, upon the commercial ability of the property to command the rates which will yield a return in excess of operating expenses and taxes; and such value cannot be higher than the sum on which, with the available traffic, the fair return fixed under section 15a can be earned. Persistent depression of rates or lessening volume of traffic, from whatever cause arising, ordinarily tends to lower actual values of railroad properties. ”

“ The current cost of constructing, then, a plant substantially like the utility's (assuming it to be efficient) would be persuasive evidence of its actual value. For upon that issue, concerning a local water monopoly, the inquiry would naturally be: How much would it cost the community to substitute for the private monopoly a publicly owned plant? But evidence of the cost of reconstructing a railroad built before 1914 might, for the reasons stated above, be no indication whatever of its postwar value for rate-making purposes under section 15a. ”

“ Branch lines may lose all their service value so that they should be abandoned because motor transportation has become more efficient. On the other hand, the traffic may have grown so much as to render inefficient a part of a line originally wisely constructed with heavy grades [56] or curves. [57] In that event economy and efficiency will demand elimination of the grades and curves and may even require the building of tunnels or a cut-off. [58] In so far as such a condition exists, the railroad would obviously not be reconstructed with the heavy grades and curves ”

“ To make such a determination for any railroad involves a detailed inquiry into the character and condition of all those parts of the plant which may have reduced functional value because of the post-war changes affecting transportation above referred to, and also into the character and the volume of the carrier's business. For the efficient plant means that plant which is economical and efficient for the particular carrier in view of the peculiar requirements and possibilities of its own business. ”

“ If the failure to give to the evidence of current reproduction costs the effect claimed for it by the O'Fallon was error, it is not because the carrier's constitutional rights have been invaded, but because the Commission failed to observe a rule prescribed by Congress for determining the amounts to be recaptured and reserved. ”

“ While the railroad is legally a common carrier, it is actually an industrial railroad. Ninety-nine per cent. of its revenues are derived directly from the carriage of coal; and, of the remaining 1 per cent., about half appears to come from a payment of $300 a month made by the Busch Coal Company for carrying its miners to and from its mines. Besides the coal from the Busch mines, there is a substantial but diminishing amount carried under a long-time contract from two mines located on an electric road, the East St. Louis & Suburban Railway, which crosses the O'Fallon. ”

“ But, if 'weight in the legal sense' must be given to evidence of present construction costs, by the judgment now given we do not lay down any legal rule which will inform the Commission how much weight, short of its full effect, to the exclusion of all other considerations, is to be given to the evidence of synthetic costs of construction in valuing a railroad property. ”

“ Through its own experience it had the benefit of an expert knowledge of all the factors affecting value of railway property growing out of changes in methods of transportation, of improvement in transportation appliances, and the consequent obsolescence of existing equipment, of improvement in methods of railroad construction and consequent reductions in cost. ”

“ The terms of section 15a and its legislative history preclude the assumption that Congress intended by paragraph 4 to deny to the Commission in respect to evidence of reconstruction cost the discretion commonly exercised in determining what weight, if any, shall be given to an evidential fact. In 1920, no fact was more prominent in the mind of the public and of Congress than that the cost of living was far greater than that prevailing when the existing railroads were built. ”

“ Statutes have sometimes limited the weight or effect of evidence. They have often created rebuttable presumptions and have shifted the burden of proof. But no instance has been found where under our law a fact-finding body has been required to give to evidence an effect which it does not inherently possess. ”

“ If less than full effect may be given, it is difficult for me to see how, without departure from established principles, the Commission could be asked to do more than it has already done-to weigh the evidence guided by all the proper considerations-or how, if there is evidence upon which its findings may rest, we can substitute our judgment for that of the Commission. ”

“ And 'just what measure of economy is effected by retaining locomotives in yard and work train service after their condition has become such that they are no longer capable of performing their assigned duties in road service, is not apparent, to say the least.' Railway Review 1924, vol. 74, p. 771. The replacement of antiquated power with modern locomotives in its switch-yards by the Seaboard Air Line Railway is estimated to have effected a savings in operating costs which will pay an annual return of 50 per cent. on the investment in the new engines. ”

“ Its influence has grown steadily with the growth of competition by water and motor, with the growth in the size of the individual railroad system, with the growth in the dependence of railroads for their revenues upon long-haul freight traffic and with the growing length of the average haul. ”

“ The O'Fallon argues that, since the statute, and the order required it to hold as a reserve one-half of the excess over 6 per cent., it is deprived of that property. This is not true. The requirement that one-half of the earnings in excess of 6 per cent. shall be retained by the carrier until the reserve equals 5 per cent. of the value of the railroad does not deprive the carrier of any property. ”

“ Many railroads built before the World War have never been worth as much as their original cost, because high construction cost combined with adverse operating conditions and limited traffic have at all times prevented their earning, despite reasonable rates, a fair return on the original cost. ”

“ Assuming that there has since been an average decline in unit price level of 25 per cent., a valuation under the current reproduction cost doctrine would wipe out one billion of that additional investment. ”

“ Rail rates are sometimes held illegal because the exaction is greater than the value of the service to the shipper. There is in fact no corresponding limitation upon water rates. The charge is so small, as compared with the inconvenience which would be suffered in doing without the service, that the worth to the water taker could rarely be doubted. ”

“ But the service rendered by a local water company in a populous city is practically indispensable to every inhabitant. There can be no substitute for water, and to escape taking the service is practically impossible; for an alternative means of supply is rarely available. ”

“ The reduction of grade means practically the rebuilding of such lines and the expense of this together with the interruption to traffic while it is being done has prevented much of this from being carried out for unless the subject is thoroughly investigated, we are apt to consider it as impracticable. * * * Simply maintaining in first class condition a roadway that, as far as grades and alinement are concerned, is of a type such as was constructed a half century ago, is not maintaining a modern railroad. ”

“ It is common knowledge that the current market value of many office buildings and residences constructed prior to the World War have failed to reflect the greatly increased building costs of recent years, although the need of new buildings of like character was being demonstrated by the large volume of construction at the higher price level. ”