Railroads: Rates and Regulations

These opinions, expressly recognizing the constitutionality of the free and full exercise of legislative power delegated by Congress beyond the power of the courts to review, are of fundamental importance. Had they been rendered a few days earlier, as we shall see, they might have prevented the supposed necessity of setting up a new commerce court by law in 1910. They would certainly have abridged the Congressional debates over points of law. Under these decisions, only authority and constitutional rights may be reviewed. The same issues were raised in the Portland Gateway opinion in 1910, soon to engage our attention, concerning the Commission's right to designate through routes for passenger travel. Over-ruling the Commission in this instance, however, the narrow right of review by the courts, as laid down in the Illinois Central case, is somewhat widened by an apparent refusal to treat the Commission's findings as to fact as conclusive in determining its jurisdiction; however conclusive it may regard them in other respects. A shady byway of judicial encroachment is thus rather surreptitiously indicated.

A more satisfactory re-affirmation of the disposition of the Supreme Court to allow a wide field and a free hand to the Commission in the exercise of its offices, is to be found in a third opinion, the so-called Burnham, Hanna, Munger case, also rendered in 1910.[670] Certain Missouri river cities complained that rates from the Atlantic seaboard were unduly high by comparison with those to cities in Central Traffic territory, namely between the Mississippi river and Buffalo. The Commission held the complaint well founded; and ordered a readjustment, by reduction of that portion of the rate west of the Mississippi. Thus, by leaving the rates to the Central Traffic Association cities unchanged, it materially benefited those along the Missouri river by comparison. Omaha and Kansas City were brought substantially closer to the seaboard as compared with Chicago and similar trade centres. The western roads, alone affected by this order, attacked it in the courts as an assertion by the Commission of power "artificially to apportion out the country into zones tributary to given trade centres to be pre-determined by the Commission, and non-tributary to others." The Supreme Court, in upholding the order, held that it would indeed be an abuse of power to raise or lower rates for the sole purpose above-outlined. Nevertheless, if the Commission were seeking primarily to correct rates inherently unreasonable, such action would not be invalidated by incidental effects upon trade conditions. The Supreme Court found, therefore, that the order in question was within its power, as thus defined, and, governed by the reasoning in the Illinois Central case, held that the Commission's decision could not be judicially reviewed upon the merits.

The line of judicial interpretation preceding the Mann-Elkins law of 1910 has been even more rigidly followed by the Supreme Court since that time. The most important decision, perhaps, was rendered in 1912. This concerned the absolute reasonableness of rates on fir lumber from the northern Pacific forests to the Middle West.[671] But it involved the additional consideration that the transcontinental roads had in a measure guaranteed an economic status to lumbermen under which they had made large investments, which, as they claimed, were jeopardized by an increase of freight rates in 1907. Two points were raised. One concerned the reasonableness of the new rates per se; the other their reasonableness in the light of their effects upon an established yet dependent industry. It was the old issue, in brief, between cost of service and value of service. A decision upon the latter basis alone might have resulted, as in a similar action, in the Burnham, Hanna, Munger case, just outlined, in decreeing an extension of authority over commerce by the Commission. Fortunately the court found otherwise in these lumber cases. It was able to uphold the order of the Commission, without deviation from the path of reasoning laid down in the Illinois Central opinion. The decision concludes as follows:

The unsatisfactory element in this decision is its implication that the Commission must be governed by cost of service principles in fixing reasonable rates. For to admit the plea of the lumbermen, that their industry could not stand the increase, would obviously lend an ear to the principle of value of service. May the railroads properly adopt either of the two principles in fixing their tariffs, while the Commission is confined to cost of service alone? Any such conclusion would tend to paralyze regulation. And Congress would certainly in a moment fly to the rescue with amplification of the statute.

This Pacific coast lumber opinion also contains the following succinct statement of the grounds upon which alone the Federal courts may review the orders of the Commission:

Quite like the preceding case was another concerning the reasonableness of advances of rates upon fir lumber from the Willamette valley to San Francisco. The Commission had ordered a reduced rate, from which the Southern Pacific appealed to the Supreme Court.[672] This tribunal set aside the order on the ground that, while seeking to protect an investment in lumber mills, it had not been governed by considerations as to the intrinsic reasonableness of the rates. The lumbermen then went back to the Commission with a new complaint, in response to which a slight advance was permitted to the railroad, apparently as a token of compliance with the opinion of the Supreme Court. But the Southern Pacific, not yet content, promptly appealed a second time under the Mann-Elkins law to the new Commerce Court. On June 4, 1912, this tribunal fully sustained the Commission in a most suggestive declaration of the obligation of a carrier, having once induced capital to embark in a new enterprise under promise of low rates, being subsequently estopped from charging to the full limit of what the traffic will bear.[673] This is a gratifying evidence of acquiescence of this new tribunal in the main line of interpretation laid down by the Supreme Court.

Federal decisions construing the law of 1906 during this period under review, revealed various shortcomings and defects which could be repaired only by additional legislation. They are to be considered among the causes contributing to the passage of the Mann-Elkins Act of 1910, shortly to engage our attention. Two in particular, the Orange Routing case and the Portland Gateway order, merit discussion. Neither directly involved monetary considerations, but a conflict between the rights of shippers and carriers. And both alike went on appeal to the Supreme Court of the United States.

The Orange Routing case against the Southern Pacific Railroad touched the right of the shipper to name the particular railways over which his fruit should reach Eastern markets.[674] Rates were the same by whatever route; but the railways denied the right of the shipper not only to name, but even to know, the route taken by his goods in transit. The same issue came up some years ago, concerning the right of cotton shippers at Memphis to designate the particular connecting railroads which should haul their goods. The purpose of the carriers in seeking to control this matter is obvious, and may be praiseworthy. Secret rebates cannot often be secured by shippers from the initial carriers, especially if, as in California, no railway competition exists. For the Atchison and the Southern Pacific have done away with that by pooling their fruit business. Secret rebates, if secured by shippers at all, must be wrung from the connecting lines, which bid for it at the great junction points, like Kansas City and Chicago. The initial road, by reserving the right to route the freight, is able most effectively to nullify all such pernicious contracts. But, on the other hand, this practice denies to the owner of the goods, control, or even supervision, over his own. Market conditions may easily change while the goods are in transit. It may be desirable to stop them off at Chicago, or divert them to New Orleans. And, moreover, damages for delay on such perishable goods as fruit are refused by the terms of the contract. The routing road exercises power without assuming responsibility. On these grounds, and in consonance with the long-established principles of common law, the Interstate Commerce Commission held that the shippers' rights were jeopardized. It was shown that freight was often diverted from one road to another in order to secure more valuable percentages of the through rate for the initial carrier. The Circuit Court in September, 1904, provisionally sustained the Commission; but its opinion was reversed by the Supreme Court in 1906. The court of last resort failed to find in the law any prohibition of such regulations concerning routes by the railroads. Incidentally it held that the Federal courts might enforce orders of the Commission, even although for reasons differing from those which governed the original order.[675]

The Portland Gateway case in 1910, before the Supreme Court,[676] also disclosed a defect in the law of 1906. It dealt with the right of the Commission to designate through passenger routes. Seattle, Washington, may be reached from the Middle West either by various lines to St. Paul and from thence due west by the "Hill lines," or by various railroads to Kansas City and thence by the Burlington and the Northern Pacific, also "Hill lines." There are also many routes first proceeding westward via the Union Pacific to Portland, Oregon, and from thence up to Seattle. By these latter routes most of the journey would be over the "Harriman lines," whereas by the former it would be by way of their competitors for the control of the northwest. Passengers all the way over the "Hill lines" were afforded every facility for through travel in the way of tickets and baggage; but if they chose the Portland route, great inconvenience followed from the refusal of the Hill lines to coöperate in facilities at the transfer point. In brief the "Hill lines" were working for the long haul over their own rails, as against the merely local haul from Portland to Seattle, which would follow the choice of the Harriman route.

The Commission upon its own motion investigated this situation, and, as a result, ordered the Northern Pacific to join with its rivals in establishing through routes via Portland to Seattle. This was done under authority in the law of 1906 to establish through routes and joint rates, provided "no reasonable or satisfactory through route exists." The Northern Pacific claimed, and was upheld therein by a dissenting opinion from the Commission, that there was already in existence such a route. Quick and comfortable travel via St. Paul already existed. Some eight thousand persons annually for one reason or another preferred, nevertheless, to go through Portland. The Commission held that this preference was reasonable, and that accordingly, with respect to such travellers, there was indeed no reasonable through route in effect. Passenger traffic, involving the element of personal choice, in other words, was different in law from freight business. The Circuit Court set aside this order upon the ground that a satisfactory alternative route over the Northern Pacific did actually exist. This decree was affirmed by the Supreme Court of the United States in 1910. But it was a hard-won victory for the carriers, inasmuch as Congress within six months specifically authorized the Commission to regulate such matters in future, without limitation as to the existence of other satisfactory routes.

The bitter rivalry between the Hill and Harriman systems for the control of the Northwest, as affecting the routing of freight traffic as well as of passengers through Portland, resulted in carrying a second case of the same sort before the Supreme Court. May temporary delay and congestion of business by way of any given line afford the Commission authority to designate another through route! In this instance, the Supreme Court has affirmed the order of the Commission.[677] It would appear, therefore, that this issue, for the present at least, is closed. The regulative power of the Federal government over routes and the division of joint rates is satisfactorily upheld.

Several Supreme Court decisions defining the power of the Commission to require testimony, both oral and documentary, in relation to matters which came before it, were rendered about this time. Its prestige and authority in this regard,—already affirmed in the late nineties,[678]—were considerably enhanced by an opinion delivered in April, 1904.[679] In the course of the proceedings, upon complaint of William R. Hearst against the Reading and other coal roads, certain contracts between the Lehigh Valley Coal Company and independent operators were called for. One Baird and others, including President Baer of the Reading company, declined to produce these coal purchase contracts. Others refused to testify concerning methods of fixing the price for anthracite coal at tidewater. Disregarding certain purely legal details, these refusals were based upon the contention that neither the Commission nor Hearst,—a well-known owner of various newspapers,—had shown any legal interest in the complaint. The court held, however, that the want of direct damage to the complainant was not essential to his standing before the Commission. Moreover, in this case, the Supreme Court overruled the Federal Circuit Court, which had held that the details of the contracts for purchase of coal by railroads from independent operators related wholly to intrastate transactions,—that, in other words, the selling of coal in Pennsylvania had nothing to do with interstate commerce. The Supreme Court adjudged that all the details of these transactions had a bearing upon the general question of the degree of monopoly in the coal business, and could not properly be withheld from examination as evidence by the Commission. In conclusion the court said: "To unreasonably hamper the Commission by narrowing its field of inquiry beyond the requirements of the due protection of rights of citizens, will be to seriously impair its usefulness and prevent a realization of the salutary purposes for which it was established by Congress." This sweeping decision by the court of last resort well buttressed the former decisions of that tribunal in the Brimson and Brown cases.

The so-called "Immunity Bath" Federal Court decision in 1906 materially affected, not so much the scope of authority of the Commission as its mode of procedure in eliciting testimony in railroad cases.[680] A resolution of the House of Representatives in 1904 had directed the Commissioner of Corporations to conduct an investigation into the affairs of the so-called "Beef Trust." In the course of this inquiry, Federal officials from the bureau held interviews in Chicago with prominent members of the beef-packing establishments. Important evidence was obtained, with the understanding that this was merely a general investigation having no relation to the Department of Justice, nor intended to be used in the prosecution of any suits at law. At the same time, agents examined the books of these companies. The accountants, however, in all cases refused to certify to their accuracy under oath. The material thus secured was incorporated in a report of the bureau in the following year. Not long afterward, when the prosecution of this combination was undertaken by the Department of Justice, the attorneys for the government made use of data in this report of the Bureau of Corporations in presenting their case. Consequently, on behalf of the packers under indictment under the provisions of the Sherman Anti-Trust Act, it was urged that the interdictions of this law were inoperative as to them, inasmuch as they had virtually been made to testify against themselves. The District court affirmed this immunity from prosecution under the provision of the Constitution forbidding any person from being compelled in a criminal case to be a witness against himself.[681]

The direct bearing of this decision upon subsequent prosecutions for rebating, as in the notable Chicago and Alton case in the following year, is apparent. No general investigation of any subject, evidently, could be undertaken either by Congress or the Interstate Commerce Commission, in the course of which testimony had been elicited under pressure, if it was intended that criminal prosecution by the Department of Justice was subsequently to take place. The eagerness of witnesses to secure the privileges of the "Immunity Bath" by frank avowal of material facts might otherwise thwart the government in the pursuance of its ends.

Another important decision of the Supreme Court touching the right of the Commission to compel testimony was rendered in 1908 in connection with the investigation of the Union Pacific system.[682] Mr. Harriman, the dominant factor in the management of this system, had caused the Union Pacific to purchase certain stocks of the Atchison and a number of other railroads in different parts of the country. The purchase price being known, the witness was asked whether he had a personal interest in the securities thus acquired by the road under his control. He declined to answer, on the ground that the power to require testimony was limited to the only cases where the sacrifice of privacy was necessary, namely those where the investigation concerned a specific breach of the law. The court, with three justices dissenting, sustained Harriman in his refusal, on the ground that this particular investigation was undertaken, not in pursuance of a complaint of specific violation of the law, but merely for the sake of general information as to the manner and method in which the business of common carriers was being conducted. No question was raised as to the right of the Commission to undertake general investigations of this sort; it was merely held that in the course of such investigations there was a limit to the inquisitorial power of this administrative body.

It may be added in this connection that the amendments added by the Mann-Elkins Act of 1910 most specifically defined the authority of the Commission in this regard.

The "commodity clause" of the Hepburn amendments to the Interstate Commerce Law, because of its unfortunate ambiguity, has already twice been before the Supreme Court.[683] The first interpretation was given in a decision concerning the Delaware and Hudson Railroad, handed down in May, 1909.[684] This affirmed the constitutionality of the statute at all points; but, at the same time, emasculated it most effectually. For, in order to harmonize the opinion with prior ones holding that ownership of stock in a corporation did not constitute legal ownership of the property of the company, it was necessarily held that a railroad by owning the share capital of a coal company did not thereby possess an interest, direct or indirect, in the coal mined. Moreover, a railroad which was the legal owner of coal at the mine might escape the interdiction of the law by selling the coal before transportation began. A handy means of evading the intent of the law could not have been more plainly indicated.

An attempt specifically to prohibit stock ownership in coal mines by railroads,—thus meeting in part the situation arising out of the foregoing decision,—was made in connection with the Mann-Elkins Act in 1910; but to no avail. The Senate, by a vote of twenty-five to thirty-one, rejected an amendment proposed by Senator Bailey of Texas, to prohibit stock ownership so clearly "that not even a judge of the Supreme Court could fail to understand it." The negative votes were all cast by the so-called "regular" Republicans. In the meantime, the clause had been carried to the Supreme Court for further interpretation in a suit against the Lehigh Valley Railroad.[685] The government in the lower court had already been defeated in an attempt to raise questions of fact as to the pecuniary interest of the road in the coal transported, irrespective of the technicalities as to legal ownership. The outcome in this case was more satisfactory. The Circuit Court was held to have erred in ruling out these considerations. It was unanimously decided by the Supreme Court that it was in violation of the law to use stock ownership for the purpose of destroying the entity of a producing corporation, while still so "commingling" its affairs in administration with the affairs of the railroad as to make the two corporations virtually one. This was a distinct gain for the government. It necessitated a compliance with the law in good faith. Upon the basis of this decision the Department of Justice instituted a new action against the Lehigh Valley Road, which was promptly met, however, by a readjustment of its corporate affairs.

The economic results under the "commodity clause" have been quite different from those doubtless anticipated by Congress. A salutary separation of coal mining from transportation is being effected; but in the case of the anthracite properties at least, in such manner as to hold out small hope of any direct benefit to the general public.

Absolute alienation of their coal properties by the railroads was subject to two difficulties. Some roads, like the Reading and the Lehigh Valley, had heavy issues of bonds outstanding, based upon the security, jointly, of both the railroad and the coal properties. The two could not readily be separated without retirement of these general mortgage bonds. In the second place, the operating relations between the railroads and their subsidiary coal companies, had for years been fixed upon the general principle of concentrating all profit from the two conjoined transactions of mining and carriage upon the transportation service alone. In other words, freight rates were established at so high a percentage of the selling price of coal that mining was necessarily conducted at a nominal profit, if any. This made no difference to the carriers, owning both mines and roads, but it had the desired effect of making it impossible for coal operators, independent of the railroads, to engage in the business. Without a modification of this plan the coal companies, already separately organized for the business by most of the railroads, could hardly be disposed of to advantage, either to the general public or even to their own shareholders. The only coal companies controlled by railroads which independently showed a considerable book-keeping profit were those owned by the Jersey Central and the Delaware and Hudson roads. The Lehigh Valley Coal Company had never paid dividends to its railroad corporation, but had contented itself with providing a very profitable tonnage. The Philadelphia and Reading Coal and Iron Company had likewise never been allowed to show a book-keeping profit sufficient to meet the interest upon its bonds and to provide for a sinking fund against exhaustion of its assets under ground.

Despite these practical obstacles, a general legal separation of hard-coal mining from transportation is in a fair way to be effected.[686] The Delaware, Lackawanna, and Western in 1909 was the first to act. With no joint mortgages and a charter right to mine coal directly, it merely organized a separate corporation, the Delaware, Lackawanna and Western Coal Company. The capital stock of this concern was then distributed gratis as a special dividend among its own shareholders. This coal company at once purchased all of the railroad's coal in stock, leased its mining appurtenances, and agreed henceforth to purchase all of its coal at the mine mouth for sixty-five per cent. of the tidewater price. The railroad continued to mine coal, but thus disposed of it before accepting it again for carriage. The Delaware and Hudson likewise entered into a contract with a coal company organized in 1901, which, after June, 1909, agreed to purchase all of its future output. The Lehigh Valley Railroad rearrangement was more complicated. It already had a coal company of the same name, the capital stock of which was pledged under its general railroad mortgage. Ownership was thus indissoluble. So the Lehigh Valley Coal Sales Company was organized in January, 1912. Its capital of $10,000,000 was provided by the railroad, which declared a stock dividend to its own shareholders, sufficient in amount to enable them to subscribe to the capital of the new concern. This company, then, like the others above mentioned, thereupon agreed to purchase all the coal mined by the railroad's subsidiary coal corporation.

At this writing great speculative interest attaches to the probable plan to be adopted by the Reading. Its intricate organization,[687] whereby both the railroad and the coal companies are owned by a purely finance or holding company, renders the problem of dissociation unique. A large volume of joint bonds are outstanding, with complicated provisions for sinking funds. The railroad actually owns no coal lands. The coal company, independently, is not profitable under existing traffic arrangements. Its operating ratio in 1911 was 98.7 per cent. It is "land poor"; carrying vast reserves of coal purchased by bond issues. The only asset sufficiently profitable by itself to make it attractive as a gift to shareholders, is the subsidiary coal company of the Jersey Central Railroad, which is itself controlled by means of stock ownership. The formation of a third coal sales company, whose stock could be distributed to shareholders of the Reading, as was done by the Lehigh Valley, would seem to be the only feasible plan.

But is there not danger, financially, for these and other railroads, that they may place this lucrative traffic in jeopardy by thus distributing their coal properties among shareholders by means of stock dividends? While, for a time, community of interest between railroad and coal mine may be assured through lodgment of stock ownership of both companies in the same persons, is it not likely that the two may become widely dissociated in the course of time? This contingency has been guarded against by an ingenious provision. The contracts providing for purchase and shipment of coal by the coal sales companies are terminable at the will of the railroad. So that if conflict of interest should arise in future, through transfers of stock of the coal sales company to outsiders, the carriers would be free to cancel the arrangement; create another corporation; distribute its shares among their stockholders once more; and thereafter go on as before. Manifold and ingenious, indeed, are the devices of the law for purposes of circumvention!

Whether the "commodity clause" is to bring about a further separation of transportation from activities of carriers in other lines of business remains to be seen. It was doubtless intended to have a general application. Some roads, other than those in the anthracite coal fields, have taken steps to set off their subsidiary concerns. The Louisville & Nashville, for example, has distributed among its stockholders all the shares of the Louisville Properties Company. This is a Kentucky corporation to which the railroad had transferred its holdings of coal and other lands. It was expected at the time that its capital stock of $600,000 would be worth par. The Union Pacific has done even better. It voluntarily reconveyed to the United States considerable tracts of coal lands, where title had been called in question in the course of investigations as to such railroad ownership. While there has been no sign of the Pennsylvania Railroad disposing of its investments in the Cambria and Pennsylvania Steel Companies, made prior to 1906, it is clear that the interdiction of the law will render any further outside operations of this sort difficult if not impossible.