TOPIC A-SYSTEMS OPERATED AS UNITS.

442. Methods of consolidation.

Even the briefest examination of the limitations under which consolidation of public service companies may be brought about will throw some light upon the propriety of treating systems as wholes. The consideration of this matter of the consolidation of companies belongs of course to those who are writing of the law of corporations in general. Still it may be pointed out that the present railway systems are almost invariably consolidations of various constituent companies, and that these constituent companies are almost always left in existence after the consolidation. (1) The commonest form of consolidation is perhaps by a long term lease given by the constituent road to the operating company. (2) Another equally usual is for the consolidating company to hold all or part of the stock of the constituent companies. There are, of course, two other types of combination, one less integrated than either of those just mentioned, the other more consolidated than either. (3) Thus the only bond between the railroad companies may be some traffic agreement or pooling arrangement whereby each company is left as an independent unit; (4) there may be complete consolidation, the new corporation taking over the constituent companies outright, these companies going out of existence.

It is obvious that the problem proposed for discussion in this chapter does not arise in the third and fourth types described, since, in the third, each road still remains the operating unit, while in the fourth it is plain that the new company is the sole

Pennsylvania-Wilkes-Barre v. Spring Brook Co., 4 Lack. Leg. News (Pa.), 367 (1899).

But see Chicago & G. T. Ry. v. Wellman, 143 U. S. 339, 36 L. Ed. 176, 12 Sup. Ct. 400 (1892), affirming s. c. 83 Mich. 592, 47 N. W. 489; San Diego L. & T. Co. v. National City, 174 U. S. 739, 43 L. Ed. 1154, 19 Sup. Ct. 804 (1839), affirming 74 Fed. 79; Louisville & N. Ry. v. Brown, 123 Fed. 946 (1903); Steenerson v. Gt. N. Ry., 69 Minn. 353, 72 N. W. 713 (1897).

operating unit. Whatever difficulties there may be will occur in the first and second cases. Like most questions of rate regulation, this question may arise in one of two ways: one aspect of it will be whether a railroad company operating leased lines or held lines is justified in treating its system as a whole; the other side of the question will be whether such an operating company can be required at all to consider its system as a whole in making rates.

In regard to both questions it may be pointed out that the law of corporations, and particularly the law of public service companies, forbids absolutely one such company leasing itself to another and also the holding of the controlling interest in the stock of one such corporation by another. The only way in which combination along these lines may be perfected therefore with safety is by express permission of the Legislature of the State, obtained in one form or another at one time or another. It may fairly be argued, therefore, that since this railway system is organized with the consent of the State, it is not unjustifiable for the management of that company to deal with the public upon the basis that the system is a unit; and furthermore, it cannot be complained by the owners of this system, who have applied for the power to combine, if the. State in regulating charges in the future treats the system as a whole.

443. Divisions as integral parts of the whole system.

It must, however, be insisted upon as the usual solution of this problem that the railway system shall be treated as an entirety. By this conception every division is as much an integral part of the whole system as the different portions of the main line are. And the contention is that it is not proper to segregate a division and fix rates for it upon the basis of its own finances taken by themselves, although some slight scope may be given to such considerations.

This general principle was well expressed, and the reasons establishing it were well set forth, in an early proceeding before

the Interstate Commerce Commission, a significant extract from which is subjoined; speaking of an outlying division which was part of a consolidated system it was said: “They are feeders to the main lines and help swell the revenues of those lines. Their profitableness is not to be measured solely by what they earn themselves, but by the increase of business and revenue they bring to the main lines. For book-keeping purposes it is proper enough to keep their accounts separately, but for their usefulness to the system of which they form a part, these accounts are slight evidence and these feeders are entitled to a much larger credit. A selected fractional part of any great railroad might be taken and a showing made by an apportionment of earnings and cost of operation and fixed charges, that it is unprofitable, but this would furnish no indication of its value and profitableness as an important part of the whole property. For purposes of rates the several auxiliary roads should not be looked upon as wholly independent lines which may separately establish rates looking only to a satisfactory ledger account of each separate road. These subordinate and branch roads are, for all purposes of control and operation, parts of one great system."2

§ 444. Branch lines.

The typical railroad system has trunk lines with ramifying branches. To a certain extent it is plain that the main lines with their denser traffic can be operated at less cost per ton per mile than the lateral branches. At the same time if in a total haulage the distance upon the branch is short relatively to the distance upon the main line, it may not be unjustifiable to make the same proportionate rate for the whole distance. This was one of the many points brought out in the important case before the commission concerning rates upon milk from the tributary territories about New York brought daily to the city

2 Per Commission in Delaware State Grange v. New York, P. & N. Ry., 3 Int. Com. Rep. 554 (1891).

itself. In that opinion it was said: "Ordinarily, the branch line traffic should pay more, but most of the branch lines in the nearby section are short, all of them have heretofore been given main line rates on this traffic, and some of them pass through main line stations of other roads or lead to or near the Hudson River where the traffic is affected by the competition of a line of steamers. Again, with an additional charge over main line rates from nearby branch line points, applying the same rate on main and branch lines in the distant region, which the long-distant carriers will doubtless deem necessary, would hardly be consistent. In view of these facts, we think that the group distances and rates for this traffic should be made to apply on branch as well as on main lines." 4

§ 445. Unprofitable portions of the line not considered.

In Steenerson v. Great Northern Railway the court considered at length the subject of unprofitable lines; and held that the profitable portions of the system could not be compelled to pay the loss on lines built through a newly and sparsely settled country. The reasoning of Mr. Justice Canty is as follows: If, he said, the road was profitable a certain reasonable rate would be fixed. If then a new and unprofitable extension were made, and the accounts covered the whole system, the rates on the older portion of the road would necessarily be raised, and that portion would bear the burden of the new extension. But why should the older portion of the line bear a loss due to the mistaken management of the company?

"To say that the country owes a railroad company a living is one thing. To say that the country must indemnify a railroad company against all of its own mistakes is a very different

3 Milk Producers Protective Assn. v. Delaware, L. & W. Ry., 7 I. C. C. Rep. 92 (1896).

4 See, also, Northwestern Ia. Grain & S. Assn. v. Chicago & N. W. Ry., 2 Int. Com. Rep. 431 (1891).

579 Minn. 353, 72 N. W. 713 (1897).

thing. To hold that a railroad company can impose on the public all kinds of burdens, by all kinds of unbusinesslike ventures and speculations would be monstrous. These considerations lead to the conclusion that when any feeder or extension, portion of a railroad line or system is an incumbrance on the rest of the line or system, so that the rest of such line or system would, at the same rate, produce more net income if such portion did not exist, then such portion is not self-supporting; that is, if all the gross earnings on all the traffic passing over such portion, and on the whole length of the haul on such traffic, will not pay the operating expenses on such traffic for the whole length of such haul, and pay for the wear and tear on the line caused by such additional traffic, and also pay a reasonable income on the cost of reproducing such portion of the line, and these conditions. are not of a temporary character, but are the result of building the feeder or extension where there was not sufficient business to justify its existence, then such portion is not self-supporting. A portion of a line that is not self-supporting is not a feeder, but an incumbrance; and in determining what are reasonable rates on the rest of the line or system, any State has a right to reject such portion from the line or system. Of course, in rejecting the same all benefit to the rest of the line or system from traffic passing over such portion must also be rejected, and nothing can be allowed to the rest of the line or system on such traffic, except the operating expenses on the same, including the additional wear and tear on the rest of the road caused by such traffic. Whether this rule would apply where such a portion of a line or system ceased to be self-supporting by reason of some temporary cause, such as an unusual drought or a pestilence, we need not consider."

It is perhaps fair to point out that in a later portion of the same opinion the court expressed the opinion that the whole system should be entitled to share the prosperity of each constituent part of it.