Ruling Court Case No. 2. The Minnesota Rate Cases, Volume 230 United States Reports, Page 352

The Railroad and Warehouse Commission of the State of Minnesota, pursuant to an act of the legislature directing a thorough investigation into the railroad rates in force in the state, worked out and adopted a schedule of rates, for both freight and passenger traffic, which the railroads were ordered to put into effect. Suits were started against the members of the Commission and against the railroads by the owners of stock in the different railroad companies, alleging that the acts of the legislature and the regulation by the commission were unconstitutional and void and asking the court to enjoin the railroads from adopting the rates and the commission from taking any steps to enforce their adoption. Two reasons were urged against the constitutionality of the regulation, first, that although these rates applied only to shipments wholly within the state, still their relation to the whole business of the railroad and the necessity for maintaining an equality of competition for places even outside of the state required changes in the rates for interstate business, with the result that the state commission was in effect exercising a control over interstate commerce which was exclusively within the domain of Congress, and second, that the rates were too low to permit the railroad companies to earn a fair profit upon their investment, so that the property of the stockholders was taken by the public for the public use without compensation to the owners. All the suits of this kind brought by the stockholders were appealed to the Supreme Court of the United States, and because of the identity of the questions involved, they were all combined under the title of the Minnesota Rate Cases. The opinion of the Supreme Court, delivered by Mr. Justice Hughes, declared that the incidental reaction upon the interstate rates which would necessarily result from the enforcement of the schedule of intrastate rates did not make the intrastate regulation an interference with interstate commerce. It was held that the states, by legislature or commission, could fix the rates for shipments wholly within the limits of the state, without exceeding their constitutional authority. Upon the question of confiscation, the court said: "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. But it remains under the constitutional guaranty of the right to receive just compensation for the service given to the public. In determining whether that right has been denied, each case must rest upon its special facts. But the general principles which are applicable have been set forth in the decisions. The basis of calculation is the "fair value of the property" used for the public. The ascertainment of that value is not controlled by artificial rules, and is not a matter of formulas, but there must be a reasonable judgment having its basis in a proper consideration of all relevant facts. In order to ascertain the "fair value," 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. Where the business of the carrier is both interstate and intrastate, the question whether a scheme of maximum rates fixed by the State for transportation within the state 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. The State can not 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 can not justify unreasonably high rates on domestic business because it finds it necessary to meet in that way losses on its interstate business."

The court found that in the case of one of the railroads, the rates were so low that they were confiscatory and failed to yield to the company a reasonable return, so that they could not be enforced by the commission. It was found that the other railroads had not demonstrated that the rates were unreasonable, and they were denied the injunction against the enforcement of the rates. The court passed upon the following contentions made as to the method of fixing a value upon the property.

The market value of the stocks and bonds issued by the companies was not considered in fixing the value. While the securities represent the ownership of all the property of the railroad, there was included, in this case, much property which was not used in the service of transportation and should not therefore be included in that property upon which the rates ought to yield a fair return.

The railroads had insisted that the valuation of the lands and right of way be based upon the estimated costs of newly reproducing a similar property. This estimate covered, first, the market value as real estate, based upon the value of surrounding lands, second, the excess which the railroad company would have to pay in order to secure contiguous land, third, the expenses of acquiring the land, in case of a new construction, such as damages to structures and improvements existing upon it, and other general expense of the transfer. The court held that this method of computation could not be sustained. It could not be assumed that the rail-road would have to pay any artificial or excessive price for the land, since it possessed by the power of eminent domain, the right to take it upon paying its fair market value. To assume also that the property could be bought at the present time through a settled community raises an entirely speculative basis for its valuation. The court said: "The uses of the property in the community served by the railroad are to a large degree determined by the existence of the railroad. The values of the property along its line depend largely upon its existence. The assumption of its non-existence, and at the same time that the values that rest upon it remain unchanged, is impossible and can not be entertained. The cost-of-reproduction method is of service in ascertaining the present value of a plant when it is reasonably applied, and when the cost of reproducing a property may be ascertained. But it can not be applied where the results must depend upon mere conjecture." It was, therefore, held that the property of the railroad could not be valued at more than the fair value of land in the vicinity. It was also held that the value was not to be limited to the amount originally invested. The company is entitled to the benefit of a general increase in the value of land in the community, and, on the other hand, the public is entitled to a valuation that is not inflated because of an originally reckless or extravagant investment.