7 FULL TEXT OF FINDING THAT AFFECTS 7ESTERN FREIGHT RATES THE MORNING OREG0XIAX, MONDAY, MARCH 8, 1900. property, an estimate wai made showing i the quantities of earth and rock work of various kinds Involved In the construction of the system as It then existed. Sin that date the embankments have been widened, curvatures have been reduced, and many improvements requiring the movement of earth and rock have been made. The engineer of the company started with this estimate of 183 8. which he said had been carefully made and was, in his opinion, re liable, added to this a certain per cent for Improvements, and thereby determined the quantities of earth and rock work which would be requirvd to regrade the present road. A statement t was furnished showing the length and character of all tunnels, the length and character of all bridges, the number of culverts, etc. The amount and weight of the rils both in branch lines end in sidings were given, together with the number of ties per mile. To these items, worked out In elaborate detail, were applied the contract prices then prevailing for the various kinds of work and the prices at which materials of different kinds could then be bought in the open market. "Without attempting to ex amine those details or to restate the com putations. It may be said that, speaking always in round numbers, the cost of con structing the roadway of the Northern Pa clfio Hallway as at present existing was estimated by its engineer at $250,000,000, Which Included an item of $20,000,000 for contingencies and of $23,000,000 for interest. This was stated by- the witness to be the cost of reproducing the property at the time he gave his testimony. In March, 1907. He further said that curtain Items upon the system as they then existed, like buildings, water tanks, etc., wore worth less than the cost of new structures of the same kind, and he subtracted an item of $6,000,000 on Recount of depreciation, leaving the present value of the roadway, upon the basis of what It would cost to reproduce the same, at $244,000,000. He further stated that to purchase the equipment of the company new at that time would have cost $53,000,00 0, but that this equipment, owing to depreciation, was only fairly worth $4 5,000,000. This would give $289,000,000 as the falr value of roadway and equipment estimated upon th-a- basis of reproducing it In March, 1907. To this cost of construction was added an item of $107,000,000 for right of way end terminal grounds and still another Item for coal properties of $50,000,000, making a grand total of $446,000,000 as the fair value of the property of the Northern Pa cific Railway Company upon which it was entitled to earn a suitable return. This valuation Is by no means guess. The detailed manner in which it was made has already been given. The prices applied were corroborated by sev-eral witnesses of knowl edge and standing. The figures were sub - mltted to the engineer" of the Railroad Com mission of the State of Washington, who was engaged in making a valuation of the properties of these defendants In that state and who had come to have an ac curate acquaintance with the physical characteristics of these railroads In "Wash ington and a considerable knowledge of their history. He declined to -express an opinion with respect to the value of the right of way or the coal properties. He estimated at $220,000,000 the fair value of whloh was embraced In the $2S9,O0O,000 given by the engineer of the defendant, thus reducing the value of roadway and equipment $09,000,000. This witness also filed a detailed statement showing the re ductions made by him. "We have carefully examined the state ments of the defendant and of Mr. Gillette, but It would not be profitable to attempt here any analysis or criticism of them. As usual, the truth undoubtedly lies some where between these rather wide limits. The value of the right of way and ter minal grounds was reached by the same dftaljed process as the cost of construction. The land - agent of the Northern Pacific Company furnished a statement showing the quantity of land taken in each stats and 1n case of the larger terminals for each city and gave the value. He proceeded upon the assumption that a new road was to be located whore this road Is and the right of way purchased or condemned. In giving his estimate of the cost of con demning this rht of way the land agent separates his estimate into two divisions, pt yling one "large terminals." and the sec ond, "other right of way and station grounds." The so-called large terminals are 13 In number; the amount of land used in these terminal grounds is 4ti38 acres, and the estimated value $75,000,000'. The quantity of land used in other right of way is 152,185 acres, the estimated value being $31,869,587. Subtracting from the large terminals those in which the esti mated value Is less than $1,000,000 each, we have left -eight cities In which the esti mated cost of condemning the land used by the Northern Pacific Company for ter minal facilities 1 $73,000,000, as against $3 4,000,0 00 for the balance of its right of way. The complain aats attempted, to show by cross -examlnatiosi and by the introduction of sdme witnesses that this estimate for cost of right of way waa grossly excessive, but there is nothing In this reoord upon which the Commission can intelligently criticise that estimate. It la doubtless somewhat high, but It is by no means certain that upon the basis upon which It wai estimated it is extrava gantly high. The main item Is for terminal facilities in a half dozen cities, and the value In thejM cagfts were estimated by Independent witnesses, many of whom appeared before the Commission. It seema altogether probable to tts that the money value of this property, not Including coal properties, based on the cost of repro duction estimated In the manner above stated, would, in the Spring of 1907, have equaled ' at least $325,000,000. The operated mileage of this system, as reported in its statistical . return to the Commission for the year end ing June SO, 19o7, was 5S10 miles, and the above valuation would therefore mean a total Of about $5rt,000 per mile. Thle estimate seemes to cover slightly more miles than a re reported to the Commission, but this would not materially change the re sult. In estimating fhe present money value of lta property the Korthem Pacific puts upon Its coal lands a valuation of $ft0.000,000. These properties are certainly of great Importance to that company. Eastern coal Is used upon Its lines east of the Missouri River, which are about 2300 miles in extent; but for the 8600 miles west of the river practically the entire supply comes from the Northern Pa cific mines. The location of these xnlnem was given, but need not be stated here. It Is sufficient to Bay that the location Is such as to make them almoex indispensable to the operation of the railroad. The title to these coal prop erties Is not In the .Northern Pacific Com pany directly, but la. the Northwestern Im provement Company, a subsidiary corpora tlon of which the Northern Paclflo Railway Company owns the entire bond Issue and practically all the etock. The Improvement company mines this coal and sells It to the railroad company at so much per ton, in addition to doing a certain amount of com mercial business. The cost of producing the coal at the different mine and the price paid by the Northern Pacific were both given, showing a handsome margin of profit to the improvement company. The bonds of the improvement company are ' $7,000,000 In amount and pay 4 per cent Interest; the stock was eald to be $2, 775,000. It did not appear upon the hearing what divi dends, if any, had been paid upon thia stock; nor what the result of the financial opera tions of the Improvement company had been, but since the hearing and since the prepara tion of this report the Improvement company has paid a dividend of G29 per. cent and the Northern Pacific Company, from the proceeds y of this dividend, has dietrubuted to Its own stockholders a dividend of $11.26 per share. Cot of Original Construction Northern Pa cific. The construction of the Northern Pacific Kailway was begun in 1870, and the first re ceivership occurred in 1S75. The present auditor of the company testified that at the end of that receivership the books of the company showed cost of construction up to that time to have been, in round numbers, $05,000,000, and that the mileage then in op eration was 660 miles. Considerable work hrd been done in surveying and poaeibiy some uncompleted construction may have been un der way. The second receivership began In 1S93 and ended In the Summer of 3SDi. The same witness testified that the books of the com pany were better kept during this period than during the first period. He had, how ever, made no personal examination and had no personal knowledge of the accounts end could give no Idea of the meaning of ths - figure. Ho sakl that tor him. the North ern Pacific Railway Company began Septem ber l, 1S96. The books showed that up to that date $219,000,000 had been expended upon ' roadbed and structures and $22,000,000 upon equipment, making a total of $241,000, 000. The mileage had Increased to 4500 mls, giving an average cost, therefore, of about $53,575 per mils. The testimony of this witness really amounts to nothing more than a statement of the figures which appear in the annual re ports of the Northern Pacific Railway to this Commission. We have no Information as to the manner In which this construction went on. nor as to the means of payment, nor as1 to the amount of cash which this book outlay represented. It is reasonably certain that t:e road at that time" could not have cost, upon any economical basis' of con struction, anything like the amount shown by the?e figures. They Include the $65,000,000 which had been expended in constructing the 550 miles of road under the first administration of the Northern Pacific Company. They include the purchase of many branch Jin?. The period over which these transactions ex tended was one In which railway construction represented almost universally, especially In new sections of the country, extravagance and Jobbery. The condition of the road then was In no respect as good as today. The cost of constructing the Great Northern, which was completed !n 1F92. and which was prob ably a better road then than the Northern Paclflc In 1S0B, was stated by Its vice-president to have been $27,000 per mile. Upon the other hand, the money invested In this enterprise up to September 1. 189d, had not received. In all cas, regular re turns, and possibly some of It had received no returns. Rates of Interest upon the mort gages were high, but that inter was not In all caei paid. The auditor testified that on the averaare only eVxty-four tone-hundred ths of 1 per cent was paid In the way of rifvldends upon the capital stock of the Northern Pacific Company between the end of the first receivership and September 1, 1S96. Beginning with September 1, 1S96, we have a more intelligent and reliable account of thf financial operations of this company, and one whlh may fairly be said to be sat isfactory. Sine that dat the company has expended something over $3,ooo.00O, making a total expenditure of $m24,000,0K). Ths milrape ha In the meantime Increased from 45O0 to 697 miles, as stated by the auditor; WlO miles n given in the annu.il report to this Commission. This makes the cost of construction. Including equipment, something over $50,000 per mile. It will be seen from the above statement that it Is utterly Impossible to know what amount of money has been actually expended in constructing the Northern Pacific proper ties up to the present time. Previous to September 1, ISfltt. the account which we have Is entirely unreliable. It Is Impossible to say either what cash was Invested or what return has been paid upon the Investment. Capital irat ion Northern Pacffl c. The so-called "Northern Pacific System. at the time of the last receivership con sisted of eome 30 Independent properties op erated under one management. The purpose of the reorganization plan by which that receivership was terminated was to trans form this heterogeneous maes Into a homo geneous whole, and the effect of It has been to consolidate all these properties into one compact system. Under this reorganization scheme $13. 000,000 of 4 per cent bonds, known as "prior Hen" bonds, were secured by a first lien upon the entire property, and $rAftOO.ooo of 3 per cent bonds, known as "general Men" bonds, were secured by a sec ond mortgage upon the fame property. Of the.e two issues '$25,COO.ooo rf the prior lien bonds and $4.0O.OOi of the general lien bonds were reserved in the treasury of the com pany for the future development of the prop erty. The balance was either lesued In pay ment of various niorteaR8 previously exist ing against the properties, at prices named in the plan of reorganization, or held by the company as security for the payment of such mort gapes when they fell due. In 1000 a mortgage of $20.oo0,noo was was placed upon the St. Paul & Duluth division of the Northern Paclflc Company, to ne usv, in payment for the St. Paul & Du luth Railroad, which was purchased by the Northern Paclflo at about this time. Of these bonds $8,000,000 are outstanding. Cer tain of the prior lien bonds have been retired. so that the total bonded Indebtedness of the Northern Pacific at the pre.?nt time is $1R7. 000,000 bearing an average rate of Interest of something less than 4 per rent and carry ing fixed charges of substantially $7,000,000. As a part of this same reorganization nlnn. $75,000,000 of preferred st ick and $R0,Ort0.00O of common stock were issued. By the terms of the Issue the preferred stock might, at rertaln Intervals during the next 20 years, be retired at par. This privilege was sub sequently taken advantage - of. and for the purpose of secu rln g fund s with which to make the payment a corresponding amount of common stock was Issued. The only sto;k of the company today is, therefore, common stock and the total l;sue Is $155,000,000. It appears from the record that the old Northern Paclflc Company had both a pre ferred stock and a common stock and coun sel for that company states in his brief that the amount of the preferred was $51,000,000 and of the common $49,000,000. Of the new stocks. $2,500,000 of preferred and the same amount of common were reserved as a treasury stock and for reorganization pur poses. Of the balance, a certain amount of preferred seems to have been used In the satisfaction of mortgage Hens. The balance was exchangable upon the following terms: V'pon payment of $10 a share of preferred stock was Issued to stockholders having $50 of old preferred stock and $50 of old common stock, and a share of new com mon stock was lamed In exchange for a share of old common stock upon payment of $15 In cash. The new preferred stock seems to have been practically all taken up under the plan of reorganization, but a large number of shares of common stock was not subscribed for by the holders of the old common stock and this was subsequently sold to Mr. James J. HtlL and. his asso ciates, for $15 per share. The capitalization of the Northern Pa clflc Railway at the present time, therefore. Is about $342,000,000, or substantially $57, 800 per mile of line. It was said that the capitalization of the old companies embraced In the present system was approximately $380,000,000. The statistical report of the Northern Pacific for the year ended June 80, 1007, shows that this company has voted an additional Issue of $95,000,000 of common stock, none of which was at the time of the filing of that report outstanding. There is nothing In this case to show the necessity for or purpose of this stock Issue. The Northern Pacific and the Great Northern companies own Jointly the Burl ington system and have each Issued their obligations in the sum of $107,000,000 In payment for that property. We have treat ed the property as worth the Indebtedness and have made no account of this $107,000, 000 of obligations upon the part of ths Northern Pacific Company. Earnings Northern Paclflo. The preferred stock Issued In aooord ance with the clan of reorganization was entitled to a dividend of 4 per cent before anything was paid upon the cottnmon stock, and this dividend was regu larly paid down to the time when that stock was retired by the Issue of an equal amount of common stock. - No divi dends were paid on the common stock until 1SU9. when a dividend of 2 per cent was declared. In 1900 this was increased to 8 per cent. In 1001 to 4 per cent, in 1905 to 6 per cent. In 1903 the conversion of pre ferred into common stock occurred and the dividend of that year was equivalent to about 64 per cent upon the entire stock issue. Beginning with 1904, 7 per cent dividends have been regularly declared. The first full year in which this propf erty was operated under the new manage ment after the receivership was that ended June 80. 1898. Beginning with that year the cotmpany has. In addition to the payment of its fixed charges. Interest and dividends, as above stated., shown each year the fol lowing amounts Invested in permanent im provements and remaining as surplus. By "surplus" Is meant what Is left after all expenses have been deducted and the ap propriation for 'permanent Improvements made: Permanent Year. Surplus. Improvements. 181S $ 2.8U7.874.0O $ 811.709.35 1SW9 1,033,2S2.5 2.175,61.ltO 1U00 1.0S3, 818.76 3.000,000.00 J -KM 1.002,618.54 2.011.285.00 1!W2 1,547,286. IS 3.04)0,000.00 10O3 1.64.1.130.81 3.000,000.00 1VK4 1.37!,:J21.9S 3.0OO.OOO.OO 1VM5 3.01fl.31.St5 3,000.000.00 1106 5,542, 51D.m 3,000,000.00 1007 32.C.:.92D.43 Totals S31.77G.714.41 f 22,099,613-61 In the year 190 this company. In addition to the permanent Improvements and sur MEMBERS INTERSTATE COMMERCE COMMISSION, WHICH DECIDED SPOKANE RATE CASE MARTIN" A. KNAPP. plus above stated, charged off an Item of $?,031,0S0. 16 as depreciation of equipment. The roadbed and structures of the Northern Pacific have undoubtedly been fully .main tained out of operating expenses; indeed, the complainants insist that very exten sive betterments to th property have been charged against the coat of operation. It Is probable that the equipment of the company has also been maintained as part of the operating expense", but It might easily happen that hls would not be tr-ue, and we have, therefore, made no account whatever of this Item In stating the net renults of the financial operations of that company. Cost of Reproduction -Oreat Northern. The Great Northern Railway gave evidence tending to show the cost of reproducing its properties estimated upon the same brifds as already explained In case of the North ern Pacific. 1 ii some resper-t this tetim-my with respect to the Great Northern Is more satisfactory than that furnished by the Northern Pariflc The engineer of this company testified that there were In the offices of the company detailed surveys showing the quantities of earth and rock In case of K2 per cent of the entire system.' and that it was possible to make a very close estimate with respect to the remain ing 18 per cent. It also has a detailed ac count of Its tunnels. bridges, culverls, weight of rail, number of lies, amount of ballast, etc. To these quantities It applied the market prices prevailing in the Spring of 1907, thus working out In detail the cost of reproduction. This aggregates in all $-115,000,000. Including $41,000,000 for equip ment and $87.0K),0OO for right-of-way. The expense of right of way is estimated by this company in the same manner - aa by the Northern Pacific The value outside of terminaJs is $27,000,000, that of termin als, $00,000,000. The terminals named em brace 1 7 cities. Seven of these are esti mated at less than $1,000,000 each and dis regarding these, we have an estimated value of $55,000,000 for terminals at 10 points The total above given includes $15,000,000 for contingencies. $:-t.5O0.O00 for general and lefcal expenses, $:t7.5OO.0O0 for Interest. The prices charged are in many instances some what too high and the method of computa tion not strictly accurate. On the whole, however, we are Impressed that this esti mate has been prepared in good faith and with treat ar. It was submitted to Mr. Gillette, of the Washington Railroad Commission, already referred to. for his criticism and revision. Tn his opinion the estimate as given should have been reduced some $S0.000.OOO In all. leaving a total of $335,000,000. Here, as In case of the Northern Pacific, it Is probable that the truth lies between the extreme of his estimate and that offered by the defend ant. For our present purpose this estimate of the Great Northern Is rendered largeiy use less by reason of the fact that the intleasre covered by the est Imate seems to be ran i cally different from that covered by he reports of that company to this Commission, upon which our information as to its finan cial operations are based. The statement of th engineer covers 6523 mils of main track, while the report of the Great North ern to the Commission only covers 5135. The cost of reproduction per mile of main track, as stated by the engineer rf that company would be $02,500. This is probably in the vicinity of $10,000 per mile too high. Assuming that the cost of reproducing the whole 0523 miles was $52,500 per rntle. as we have lndlrated, the cost of reproducing the 5335 miles, covered by the report of the Great Northern to us. would be not far from $70,000,000. These estimates of the cost Vf repro duction In case of both the Northern Pacific and the Great Northern were made in the Spring of 1907, and It was said in the tes timony that the cost of reproduction, not Including the right of way. at that time would have been from 12 to 15 per cent higher than three or four years before. The cost of const ruclng these properties when these estimates were made would probably exceed by C'i per cent the cost of con structing them when the Pacific extension of the Great Northern waa built. Tills investigation conclusively shows that if any Importance whatever Is to be attached to the cot of reproduction in the establish ment of railway rates, the valuation must be undertaken by the Government Itself. No Individual has the means and no individual if he had the means could afford the expense of procuring - even a rough estimate, accurate within" reasonable limit, of the cost of re building either.of th?se defendant properties. In the present case we are impressed that the engineers of the defendants have proceeded In good faith, and the complainant were for tunate in being able to submit their esti mates to the rrltlclsin of a witness un usually well qualified to pass an opinion upon their accuracy; but even so we have little confidence In the reliability of the conclusion resched. There can be no satisfactory knowledge upon this point until public au thority makes a detailed valuation upon m uniform basis. The Great Northern Company owns either all or practically all of the capital stock of certain railroad companies which are op erated not by the Great Northern Company as such, but by the subsidiary company it self. The statements of the Great Northern showing cost of reproduction evidently In clude this mileage, upon the theory that a railroad whose stock was entirely owned by the Great Northern Company was In fact part of that railway system. Cost of Original Construction Great North ern. There Is no evidence In this record from which any satisfactory conclusion can be reached as to the actual amount of cash ex pended In the construction and development of the Great Northern Railway system. As Is well understood, the basis of that system Is lta leasehold Interest In the 6t. Paul. Min neapolis & Manitoba Railway, of which It took possession In 1890. The Manitoba Com pany Itself was organized In 1879 and began operations In 1SSO by acquiring certain other railroads which were in the hands of re ceivers. The first acquisition by the Mani toba Company represented 665 miles of com pleted road and a land grant of 2.000.000 acres, and the price paid was about $7,000. 000. It Is impossible to follow accurately the development of the Manitoba system from 1880 to 1890. One of the first acts of that company was to issue to its stockholders $16,0u0,000 of stock, for which no money .was ever paid. Subsequently . $5,000,000 of stock wax dis tributed among stockholders at par, and this made up the capital stock of the Manitoba Company when It leased Its property to the Great Northern. Very early In Its history It Issued $10,000. 000 in bonds, which were apportioned among Its stockholders at 10 per cent of the face value. These bonds were perfectly good and were saleable upon the market at par. The first dividend paid upon the capital stock of the Manitoba Company was in August, 1882, and was prr cent. From that time on dividends continued to be paid at the rate of 6 per cent or more down to the date of the lease. The Great Northern by the terms of this lease guaranteed the in terest upon the bonds of the Manitoba Com pany which were then outstanding or which might be Issued In the further construction of that road and also guaranteed & dividend upon Its stock. This $2o,O00,O00 of Mani toba stock was subsequently retired In ex change for $25,000,000 of Great Northers, stock. The last annual report of the St. Paul, Minneapolis A Manitoba Railway to thjs Commission before Its property was taken over by the Great Northern wm for the year V ' I XL - - x '- JAMX8 S. HARLAN. ended June SO, 1889. According to that-, re port the company then owned 2,718.89 miles of railway and operated under contract cer tain additional lines which brought the total up to 303O.16. Its outstanding capital srock was $20,000,000 and its outstanding bom's were $50,y85.OOO, making a total capitaliza tion. In round numbers, of $?9.4tt er mile. It reported the total cost of Its road and equipment at $78.52.595.70, or approximately $28.00 per mile. It will be remembered that of the $20,000, OOO of stock $15,000,100 had been a gratuity and that of the $00,000,000 of bonds $10. OoO.OOCO had been issued to the stockholders at 10 cents on the dollar. This company also owned, according to this report, certain stocks and bonds In other railway companies which were really a part of its system, amounting to about $20,000,000 par va lue, and the purpose of the organiza tion of the Great Northern seems to have been to capitalize a part or the whole of these securities. The first issue of capital stock by the Great Northern Company was for $20.000.000,. for which stockholders paid only 60 cents on the dollar. Htlll later the Great Northern issued $25, 000,000 of its capital stock in exchange for the $20,000,000 of Manitoba. stock, upon which, by the terms of its lease. It had guaranteed a tl per cent dividend. No money was ever paid for either of these Issues. Tne balance of the stock Issued from time to time by the Great Northern Company seems to have been paid for at par. The stock of that company was, during the period covered by these Issues, very much above par upon the market, being at the time of one Issue $J64 per share. This new stock was In all cases Issued proprotlonately to holders of Great Northern slock at par. "What was done with this money so realized from the sale of the balance of Its stock does not very clearly appear. The Mani toba road provided for the extension of its line to the Coast, a distance of something over SX miles, by Issuing a mortgage for $Ro,000,000. In the aeveiopment of Its sys tem the Great Northern Company has some times built railroan, becoming it-self the owner of their capital stork; It has some times built rallroaas by advancing the money and afterwards capitalizing the Interest of Its stockholders In that property. After spend ing days In examining the annual report to this Commission, the annual reports to tts stockholders, current accounts in financial Journals, It Is still Impossible to state with any degree of accuracy what money has gone into the properties of the Great Northern system either the M35 miles which It now operates or the 6523 miles which It control and which are really a part of Its entire property. It would be difficult to devise a m heme better intended to confuse and to conceal than that employed In the develop ment and operation of the Great Northern Railway e yet em. Capitalization Great Northern. The "he outstanding capital stock of the Great rthern Company, accordtng-to Its last re- t to this Commission. 1 $149,577,300 at Nori port par. Th Great Northern Company Itself has no bond' -,1 lndbtednew, It 1. Impossible ictly the funded Ind-Merines, or to state exact the capitalization . h . 1 J. Z the propertln, whlrh of enter into either the mileage operated by the .ret jsormern or the total mlleaite In which It le Interested. The Km Mem Railway of Minnesota embraces r0 miles, with a, capital stook or ,16.000,000 and a bond Issue of .70O.00O. The Great Northern Kiiaranteea B per rent on the stork and the interest on the bonds. The St. Paul. Minnpolls A Manitoba lease, to the Great Northern 8S7B mile-. It reports am outstanding bond 1 siie of Of n.V. lncludlna- $12,000,000 of Improvement bonds leaued to the Great North ern Itself and a stock lsmie of J-.V. 000.01. whir, as we have already seen, has been re- tiren ny an Issue of Great Northern stock. The remaining mileage operated h, the Greai Northern tiled no rertsWlth thl. Comm- slon and we have no Infnrm.tin. .A i - capital arcnunla Kara I nice Great Northern. The Great Northern Railway Company la an operating and holding company exclusive ly, owning- no railway It-elf. Ai previously atated. it owns , a ho'.f Interest In the Bur lington svatem. whlrh It carries In Its ac counts at 107.oro.ooo. and again which It assume- a liability of a Ilk. amount. This aseet ham been treated as offsettln the 11a omty. It appears from the last annual report or that company to thla Commission that the Great Northern had In Its treasury stocks which it valued at $7. 000. 000 and bonds which It valued at S;-.000.000. making In all MOO. 000. 000. Those stocks and bonds are all Inter. -t-paylnr securities and are or two classes. It has been already stated that the Groat Northern Company Issued Its own stork In the amount or t25.000.O00 par tn exchange for the Manitoba stock amounting to $10. 000.000 at par. This Manitoba stock is now carried as a treasury asset by the Great Northern Company, and In its income ac count, as stated to this Commission, it Is charred with dividends on this stock and credited with the same dividends as rental paid for the Manitoba property. This, of course, produces no effect upon the net re sult, but does swell the amount of Income which the Great Northern derives from other sources than operation. That company also owns the stocks of certain railroad companies which operate their own properties and par a dividend to the Great Northern Company. Por ex ample. It has $5,500,000 of the capital stock of th Wllraar Sioux Falls Railway Com pany, npon which that company pays a dividend of 7 per cent. This, of course. Is distinct from operation, and It should be remembered, therefore, that the financial report of the Great Northern Company, as shown by Its returns to tlve Interstate Com merce Commission, does not merely repre sent the results from the operation of the 5335 miles which It operates, but Includes as well tlve Income which It derives from Its ownership of some 1200 other miles of railway which are a part of lta system, but which are controlled throush stock owner ship and not by lease. These companies are accumulating; a aurplus on their own account, and hence the financial statement of the Great Northern does not fairly rep resent either the operating results from Its entire system or from the mileage which it operates itself. With this explanation we give below for the various years since 1890 the surplus, the permanent Improve ments, and the dividends paid by the Great Northern Railway Company. By "surplus" Is meant what remains after payment of dividends, fixed charges taxes and all other expenses, and the deduction of "permanent Improvements." Permanent Dlvl- Improve- d'nds. Year. 1S91 .. 1892 . 1893 .. 1J-S4 .. 1895 .. 18S6 ., 197 .. 1898 . 1899 . 19110 . 1901 . 1903 . 1903 . 1904 . 1905 . ISO . Surplus. .$ 988.621 943.473 . 1.182.830 Illicit 169.508 . 1.042.647 . 1.207.267 . 2.071.7GS . 1.787.191 . 2.21,7.761 I 2.VlV.990 4.133.979 . 3.432.181 . 5.137.376 meats. P. C. - W t 6 C 7 2.250.000 1.800.000 1.S00.O0O 1.689.0K4 2.000.000 $.000,000 2.023.843 3.000.000 .U0.1 4 t .? f ,! V i JCTSOX C. CLEMENTS. 1907 . 2. 155. 70S Total $33.791.L68 Deficit In 1S94 104.153 4.S4.7 7 $:7.62S.73 $3S.6S7,115 . The complaints make certain claims with respect to the matters hereinbefore stated touching the value and earnings of these properties and as to the conclusions to be drawn from those facts, which may be con sidered here. Northern Pacific Coal Iands. They Insist that the coal lands of the Northern Pa rifle should not be Included In the valiu of that property upon which the company Is entitled to earn a return. This position Is well taken. Those lands are certainly of the very first Importance to that railroad and It might have been both a wise and a proper thing to msrko this provision for the future. In that case the public could not well find fault If It were compelled to pay Interest upon what ever outlay was reasonably necessary; but if the public Is roqulred to pay upon the value of these lands it should also have ths benefit which accrues from their ownership. As it Is, the title to these properties la vested in an Independent company. That company conducts the mining operations and sells coal both to private consumers and to the railway, and It makes from Its rail way fuel, according to the statement fur nished us. a handsome profit. The railway pays as a part of Its operating expenses fur its coal at this price, so that the pub lic once pays a return upon these properties when the railroad buys Its fuel coal at the figure now charged. To permit the valuo of these properties to be used for the purpose of swelling the amount upon which an Income may be demanded by the Northern Pacific Railway Company would be to compel the public to pay twice upon this part of the Investment. Great Northern Ore Certificates, The annual report of the Great Northern Railway Company for the year 1900 contains an Item under deductions for the y?ar of $1,851,364, and the report states that this amount has been chargvnl off by reason of the transfer of certain securities of the company to the Iake Superior Company, Limited. It seems that such a company was organized and did take title to various properties and securities formerly owned by the Great Northern Company. In this manner the Lake Superior Company ob tained title to certain lands In the state of Minnesota containing extensive deposits of Iron ore. These lands have since been transferred to trustees and a contract for the taking out of the ore has been entered Into with the United States Steel Corpora tion. A certificate waa tssuoa to each holder cf t the share of Great Northern stock entitling holder of such certificate to a pro portionate share in the Income received ," " Th. or certYnc. t 1 orV J0"" Th V . by these trustees from the operation of the I worth on the market at one time B0 each; ..... . ,.rir... ,, today. February , 1903. the markvt price la about $71. and they have a prospective value very much itreater If the quantity of ore Is anything as larite as the estimate and the leases aos fullllled according to their terms. When It la remembered that none of the Great Northern stock, waa Issued for more than par. It will be seen that the holder of a share of this stock could by the sale of his ore certificate have realised nearly enough to reimburse him for the original cost of his stock. A considerable part of the Great Northern stock was Issued as a ! r " "a"1 "Presonted no cash danoa. These ore cert.ncate. at ISO each VOUIQ con.iuci.uij iui. ....... . . .. stockholders all the money ever actually ad vanced to the Great Northern Company li payment for stock. The complaints In sist that In determining what returns these stockholders may demand from the public the fact that this stock represents prac tically no. Investment of cash must be kept In mind by this Commission. Without atiompilns to determine what the rights of the public may have orig inally been In th-ese ore lanus a question which could not be IntelllKently determined upon this record It Is difficult to see how. at the present time, any practical applica tion can be made of the ld-a of the com plaints. These certificate are transferable and they are In no way connected with the sto k on account of which they w ere originally issued. The stockholder having received his certificate might sell his stock and retain the certificate or sell the cer tificate and retain bis stock. It Is alto gether probable that the ownership of stock and certificate In many cases has ceased to be the same. How. then, could we aay that the holder of Great Northern stock who has purchased hla stock In open market, who does not today own and never haa owned an ore cerUllcale. can b- account able for the value of those oro lands T Cer tainly thla was s mot momentous transac tion to th holders of this $li.o.ooo.uuu of Great Northern stock, for on the basis of past market prlcea It represented to them from $75,000,000 to $1 J4.000.e0tl In money, but apparently this Commission. In the de cision of the Questions before It. can make no account of that transaction. Distribution of Creavt Northern Stock at Pax. Of thla same character la the contention of the complainant with repect to the manner In which the stock of the Great Northern Company has been Usued. It has been already said that since about 1903 the stock of this company has sold upon the market at above par It haa also appeared that all the slock. Issues of the cunn-any after the nrst. wlln the exception of that Issue made to retire the Manitoba stock were distributed pro rata among the holders of the stock of the company at par. The actual market value of tue stock at the time of these various Issues so distrib uted ranged from lo to -' per share. A stockholder couid therefore have paid $100 for nla share of stock and at once sold the same upon the market for a much higher price, thus realising rrom the trans action irora 40 to 14 per share. The complainant Insists that this manner of selling slock Is vicious and unlawful, and that In determining the return to these stockholders we must have In mind the benefit conferred upon those stockholders by this operation. Assuming, without deciding, that the com plainant Is right In Its position that this practice is both unlawful and unwise, how can we. In this proceeding, take any prac tical note of what has been done? This stock Is selling today. January. 1U0S. upon the market al something less than $120 per share. If the original stockholder haa re tained and now owns hla stock he paid $100 In the beginning, haa received a regu lar dividend, and now owns his stock at the above advance. While the profit to him has been a handsome one. there Is certainly nothing here which would call for a penal izing of the stockholder. Suppose, now. that Instead of retaining the stock, the stockholder sold the same to some Innocent purchsser who paid the market price and who has continued to own the atock from then until now. Thla present stockholder paid perhaps $264 a share for his stock. He haa loal $ 144 per share. 6houd ire, for k 1 . that reason, compel him to sustatn a fur ther loss? The manner In which this stork has been manipulated may furnish a strong argu ment against the propriety of permitting the sale of new stock In this manner, but so far as this particular company and the stock already issued are concerned the transaction Is ended and can be given no practical conslderat Ion In determining what rates snail be charged br the Great North ern Railway company. AY ate red Stock -Great . Northern. Of the f l.WOOn.ooo of the capital stock of the Great Northern Railway Company out standing. $"0.Ooo.vO0 hnn been t.vtued with out the payment to that company of any money con'.df rat!ou. The complainant in sists that we should deduct f r.m the out standing capital Jtork of the !reat North ern Kailway Company this $30,000,000 and allow that company to earn dividends not upon $l5i.ooii.ooO. Its artual tuue. but upon $120,000,000, the amount for which cash was received. This cia'.m Is undoubtedly mmewhat dif ferent fr-jm the two preceding. A stock holder by the purchase of a share of stork becomes a part of the corporation and must of necessity stand like every other stock holder w hose stock Is of the same grade. If the stock of, the corporation has be-n In flate!, his stock, even thouch he pns par for it. become telnted with that Inflation. As a practical matter, this mut be so. Iut !n- ! we very much doubt whether In determ Ing what rate of dividend the stock of a railway company may earn we can properly deduct In every Inntanre watered piock. It in im possible to distinguish the spurious from the genuine. Those who received their stock without consideration have uiu.illv parted with It. and that very stock, if It j by the Government Itself or by a private cor could be Identified. Is owned by Its present t pom lion under franchise from the . Govern - possessor for a valuable consideration. The w-hole Mock ha- gone upon the market, haa wmfil a market value, has bc-ome the subject of Investment by Innocent stock holders. W- mav undoubtedly and we should have In mind the manner In which this stock was issued and the con-ideratl-'n wl.loh was paid f-r It. but we do not think that we should, for example, treat the out standing tapital stock of the Great North ern Railway as 120.Ooo.oOrt and not $l.v. 000. 0oo. These transaction ought to have been prevented to beqln with. Great eums might have been properly saved the puhlic by suitable supervision at the outset, but the evil has been done and for the most tart onnnot be safely undone. If this Gov- t ernment In the past has permitted the "capitalization" of earnings and securities and the "conferring of benefits" It oucht r.ot fod.iy to penallxe the Innocent holder of tne values thus created. Price Paid for Northern Paclflc Stock. The same observation applies to the claim of the complainants that we ought to es tablish the earmnea to which the Northern Pacific slock Is entitled in reference not to the present value, but to the original cost of thla stock. It will be remembered that of the $1 j.VnOO.OOO common stoek of that company, now outstanding $7S.0vn.noo was originally a preferred stock and $SO.OOO.OOO a common stock; that the preferred stock waa Issued upon the payment of $10 per hare In exchange for one-half share of old preferred and one-half share of old com mon, and that the $So.ooo.ooo of common stock was issued In exchange for common stock share for share, upon the payment of $15 in ensh. It is urged that this old com mon stock was utterly worthless and the preferred atock of very little value, so ths thla stock was really sold for $10 and $!." per share. Jt Is still further pointed out that a very large quantity of the common stock was never taken under the tlan of reorganization and was sold for $13 per share. Vndoubtedly thla fact must be kept In mlnvi by the commission in determining what earnings the Northern Pacific stock may fairly tlemaml. but If thnt stock, esti mated upon whatever may be the proper basis, whether by the money whleh had gone Into the property or the cost of repro ducing the property or the earning capacity of the property upon the basis of a reason able rate. was actually worth $luo per share, the mere fact that It sold at that time for murti less Is no reason why we should limit Its earnings today. Counsel for the complainants suggests certain other questions which are not equal ly free from difficulty. The foregoing state ment f facts shows that the Great North era Railway since IS00 has paid a dividend upon its outstanding stock, which was for the first year 314 per cent: for tho years "-i'. us:'. INO. 1S!1. 1S!7. 3 per cent: for the year lsci'J. ft per cent: 6i tjer cent, and for the remaining time 7 per cent. tne first Issue of Great Northern stock waa at .V centa on the dollar, and. as we have Just seen, the total Issue em- nntvea .i..,u""."'mi at par, for whleh no money was actually paid. The dividends paid by the Great Northern have yielded Its stockholders an ample return upon the Investment. In addition to this, that com pany since It began operations haa shown a surplus. Including its Investment out of earnings in p-rmanent Improvements. of some j.o.oih.mhm. The Manitoba Company. In addition to the raymcnt of ri1vilenls upon Its i-work. of which three-fourths was an absolute gratuity, accumulated during the ten veers of Its existence a eiirnlus of some $10,000,000. It does not nppenr what surplus may have been accumulated bv the other companies which the Great Northern controls. Now. the complainants Insist that thla $70,000,000 has been obtained bv tho Impo sition of unjust and unreasonable rates; that It belongs not to the Great Northern Company, but to the public which haa paid thfso rates, and that upon whatever basis we fix the return to which this company Is entitled, we must Brut deduct this $70. 00O.000. A somewhat similar Question Is raised touching the estimated value of th. rirhi of way. which Is embraced In the cost of the reproduction of these properties It will be remembered thst the total value of the structures and equipment of the North ern Pacific Cnmpnr.y was stated by us to be not far from $2.V. 000. Vm. This repre sents the total cost at present prices of re producing that entire property Now it was estimated that the land upon which this structure stands was worth $107 000 000. almost one-third of "the entire value of the property Itself upon the basis of re prod uctlon. Mu--h of this right of wav was given to the Northern Pacific originally bv the Gov ernment and by Individuals. a considera ble part of It has indeed t een since acquired t large expense. ,,,t still the total cost to that company of this rlpht of may has been but a fraetlon of the amount at ehleh It is carried into t run cost of reproduction The complainants Insist that the defendant Northern Pacific I'tm.ninv canr.ot charge the public with this enormous sum for which It haa never paid. These two questions are not by any means tho same, but t':e ergument by wh!ch they are sustained on the part of the complain ants Is substantially Identical and mar be briefly stated. In 1S72 a considerable part of the business portion of the City of Ru.-ton was destroyed by fire. The legislature of the State of Massachusetts, then In session, authorized ISoston to Issue It bonds for the purpm of loaning money to Individuals with which to rebuild this burnt district. Suit having been brought by a taxpayer to restrain the city from this action on the ground that the statute authorizing It was unconstitu tional, the Maasachusetta 'court enjoined the bond lssi:e. lta decision wm placed noon The ground that no public tax could be levied for the benefit of a private enterprise. No matter how great the Indlre-t benefit to the entire City of ItnMon might be from the rebuilding of these burnt st'.rrs promptly, the loan In the firs-. Instance waa to a private Individual; the publlienrnt.-ws only an Incident. Hence, thj . an obligation which might finally neceesitate the Impcstng of a public tax waa unconstitutional and void. Lowell va. Boston. Ill Mast. 4.M. Somewhat before the great Boston fire the legislature of the State of Wlseonsta au thorized the County of Fond du T-c to make a money contribution la aid sf the construc tion of a certain railroad In that county, and the county. In pursuance of this act of the Legislature and in observance of lta require ments. Issued certain notes to the railroad company. These note were not raid at ma turity anil suit waa brought agslnst the county by a bona fide purchsser Into whoesi handa they had previously come. i The Supreme Court of the State of Wis consin held that the act of the Legls!ature authorising this expenditure of money by the county was unconstitutional for the reason that It involved the levying of a public tax for the benefit of a private enterprise. It was said by the court that this railroad, while .eomellm-a spoken of as puhllc. was eseentlally a private undertaking; the funds with which It wss constructed were private; its operation and control were private; its profile belonged to private individuals. Hence, the County of Fond du Lao could not by a general tax subsidize thle) private venture. This holding of the State Court was re versed by the Supreme Court of the United States. It waa conceded in ' the opinion of that court that no public tax cou!d be laid for a private enterprise, but It waa e!d In the most emphatic terma thnt the ccfurtrue-I-mi of a railroad was not a private work. The service which it performed was public; Its rates and lta operation were subject to KPuMla control. The (act that the agency designated by the Legislature for the per formance of this public function happened to be a private corporation was of so sig nificance; the purpose and not the means selected for the perrormance f that purpose must control. Since the purpre waa public. the Legis.ature might authorize the count v to levy a public tax In furtherance of th: enterprise. The court used the following lan guage: "Whether the use of a railroad la a pubf or a private one depends In no measure the question who constructed It or who owl It. It has never been considered a matter J any lmtniriance that the road was built , the agency of a private corporation. No ter who la the agent, the function perfoa Is that of the state. Though the ownrj Is private, the uce Is public So turrJ bridges, ferries and canals, although by Individuals under public grants companies, are regarded as pub:tei Jurl riant to exact tolls or charge frelj granted for a service to the public. are compellable to permit the public to use their works In the manner In which such works can be ued. That al! persons may not put their own cars upon th road and us their own motive power, has no bearing upon the question whether the road ts a pub lic highway. It bears only upon the mode of use. of which the LegisUiture ts the ex clusive Ju.:ge." Oicott vs. the Supervisors, 1G " a:.:Jl The levying of to by a railway for its transportation service Is In essence the Im poking of a tax upon the public which re quire that service. This has always been held of tolls, ImpojwHi for the use of a turnpike. whether rrovuied miint&lni rr.ent. Hussey v.. St.irey. 4 B. & Ad.. OS. and there can be r.o dlnvrence in principle be tween the to'!- rxsc'.ed f ir the rlgit of pass age over a highway and the charge for the transportation or rre:Rht or passengers upon the railway. Railroad Commiss:oners vs. Portlsnd at Oxford R. K. Co.. 83 Me.. 27:.; Wahae-h r.y. Co. va Illinois, lis U. S.. Asti. From these, cases and from many others cited In the brief of the complainants. t- which no reference Is here ., made, the 'fol lowing general principles are sought to be dedm-ed : The providing of the highways) of a na tion Is an art of sovereignty essential to the exu-tcn.-e of the nation. These highways may be provided directly by. the Government Itself or by private Individuals under swn.- tlon or the Government. If the duty le dele gated to a private Individual, that Individual. whether person or corporation. Is tho agent of tho Government and acta subject to the a ell-know n laws of agrncy. If being au thorized to impose f.r Its service a reaaon ablo charge, it In fact Imposes one that ts exceealve. it Is answerable to the Govern ment. If having lmio-cd excessive tolle.. It still haa In Its ptiseorjslon the surplus over and shove what would have resulted from a fair charge, that surplus belongs to the peo ple and is held hy the private corporation for the benefit of the people. Value of Northern Pacific Right ef Way. The practical Importance of thla queetlon will be readily apprehended. The Northern Pacific Railway extends through a compara tively thinly settled portion of this country. Ir. comparison with other sections land valuea along lta line are small, lta lines penetrate no city which can fairly be called a great city. Nevertheless, the cost of Its right of way equals almost cne-thlrd of the entire cost of reproducing that property. The original rnrt of thla right of way to tho Northern Pa. -trie Company waa Insignifi cant aa compared with the present valuation placed upon it. What of It wan taken at the time of the original construction cost practically nothing. Much of It was given hy tho Government for the purpose of a right of way. which, it should be noted, la en tirely distinct from the land grant of tho company. Tre terminals In Spokane are malniy located upon the right of way or the railway. They cost the railway nothing whatever and they are extended in thla state ment at $7,000,000. A considerable portion of Its terminal prop erty In Seattle has hern purchased within ths Inst reven or eight years, but the prices paid r-.r thin were nothing like the values now placed uion it. It was said by one witness tor the defendants that the terminals of the Northern Pacific and Great Northern tn Seat tle had appreciated within the last f-w yeara l.o per cent and that portions of their ter minal lands had increased within thai time from 000 to r.o per cent. Whatever may he true todav In the com paratively near future the structure of the railways or thla country will be less In value than the land uton whleh they stand esti mated aa the value f the right or way has been estimated In these cases. Whether un der the laws and Constitution or the United Mates, our rallroals can demand a return m... ..my upon tne money which ha- been actually invested In theoo properties, but also upon this value, which has grown from si-mo-, n-thlng to vast proportions without the expenditure of money or the ast-imptlon of risk. Is a question of tremendous Importance Klaborate briefs have been s-ibmltt1 bv counsel, at tho request or the Commission upon this question, but It do., net seem profit able to dlscuee or docile it in this connection. Yte sha.l assume. In nlrposlng of this case, that the cost of reproduction u properly eeslmated upon the basis followed by the.-e defendants and that the Item of value of right of wav lei ' eiauu as a nan or ths. " ... 1 . . - Item. other Snrplns Tlarntnga. rom now to the complainants- claim that the surplus which has been accumu lated by these defendants from earnings should bo first subtracted from the value of their properties In determining the amount upon which they may properly earn. The contention of counsel Is that this surplus Is a fund held by the railway company as trustee for the public, whlrh this Commis sion should In some way manago to redis tribute to the public in the establishment of Just and reasonable rates. The railway 1s certainly an agent of the Government in the construction and operation of lta prop erty, and It Is only allowed to charge for Its services a reasonable compensation. l.es It. from this follow thst the surplus of the Great Northern Railway, for ex ample, which la said to be ;o.O0O.O0, Is held by that company tn trust for the public? I'oes It follow, ew-n. that the value of this property today should be decreased by $70,000,000 upon the theory that the public has paid Into the property that amount T It la well understood that rates by all lines to Spokane from a given K astern desti nation must be the same. We have already held that In establishing a reasonable rate tho strongest line should not alone bo con sidered; the necessities of the w-eaker line must also be taken Into account. In the application of this principle It Is evident that a rate might be fixed which would fay a very moderate return by one Una and a very handsome return by the other. Under the operation of these rates the Great Northern, by reason of lta cheaper construction and Its easier operation, might accumulate a surplus, while the Northern Paclflc did not. If so. could it be said that the surplus of the Gruat Northern had been Improperly accumulated when lis relea had been Just and reasonable? roea the mere fact of the accumulation of a surplus by a particular road show that the ratea upon tnat road hive b.-en excessive? But aaaume thai they have been. Thia $70,000,000 to which the complainants re fer In case of the Great Northern surplus is the result of the operations of the Mani toba and th Great Northern companies since the year 188u; that Is. for 27 years. During all that period this surplus haa been gradually accumulated and haa gone Into the property. Should the Govern ment today take note of that surplus for the purpose elther of so retiuctng the rates of the company that no earnings can be made upon this much of the property or with a view to tn some sense turn that surplus back again Into the hands of the public? There la no bsoiute test of a roasunable rate, and the Government haa supplied none. During all this period the excess has gone Into the property, which haa gradually be cotm more valuablu, and thla Increased value haa reflected Itself in the market price of the securities of that company. It Is Impossible to restore what haa been Improperly taken In th way of excessive ratea to those persons from whom it has been received. The Government, under those circumstances, cannot lay hold on this surplus aa a fund held in truat for the public. This case strongly Illustrates the fact that If any Government tribunal Is to do Justice between the railway and the public. If It is to feel any confidence In the correctness of Its conclusions, its aupervialon muat be contlnuoua and not spasmodic. Ther must be some point of departure and from that point the knowledge of the Government 4 Concluded, ea Pace fv V. f r 1