,among other things, to the question as to whether the capitalizations of such corporations are unwarrantably inflated.

The Commission makes a similar statement in its approval of the proposed sale by the Diamond State Telephone Company of its property to the Chesapeake and Potomac Telephone Company of Baltimore City, decided July 10,1912. The Commission says (at page 222): »

We have no appraisal of the property of the Diamond State Telephone Company located in Maryland; but we do not deem it essential in determining the present matter, which is, after all, but the transfer of properties from one to another of the constituent companies of the Bell Telephone System; and the book values will have no more bearing upon the question of rates under the new arrangement than they would have had under the old. Nor is the Commission to be understood as approving the consideration expressed in the agreement of sale and purchase as determining the physical value of the properties involved in the transaction.

And again in conclusion the Commission states that in its opinion the proposed sale will not injuriously affect the interests of the subscribers of the Diamond State Telephone Company, "especially as the Commission reserves for future consideration and investigation all questions of physical and going values and all other features of the company's affairs which may affect the rates upon the Eastern Shore."

§ 1039. Minnesota Supreme Court, 1897.

The case of Steenerson v. Great Northern Railway Company 30 involves the valuation of a railroad for rate purposes. Judge Canty, in delivering the opinion of the court, says (at page 715):

» 3 Md. P. S. C. R. 219, July 10, 1912.

"69 Minn. 353, 72 N. W. 713, October 20,1897.

Again, in determining what are reasonable rates, it is perfectly immaterial whether the railroad is mortgaged for two or three times what it would cost to reproduce it, or whether it is free from incumbrance. To hold otherwise would be to hold that the state or the public have indirectly guaranteed the payment of the mortgage bonds of every railroad. The state may as well guarantee the bonds directly as indirectly. But neither the state nor the public have done either the one or the other. It is immaterial how the property has been split up into different rights, interests, and claims. For the purpose of fixing rates, the holders of all of these stand in the shoes of the sole owner of the property, unincumbered. The rights of the bondholders are no more and no less sacred than the rights of such an owner.

§ 1040. New York Commission, Second District.

Fuhrmann v. Buffalo General Electric Company31 involves the valuation of an electric plant for rate purposes. In this case Chairman Stevens in delivering the opinion of the Commission states that capitalization does not necessarily bear any relation to fair value for rate purposes. He says (at pages 767, 768-769):

The certificates of stock issued to the shareholder do not in the least determine the fair value of the investment. They are not a measure of the efficient sacrifice made. They are mere title deeds, as it were, to the investment. There can not be a just return upon both the investment and the piece of paper which shows title to the investment. The function of the stock is not to determine how much the public shall pay, but how what the public has paid shall be divided among the shareholders. The value of the stock is not determined by the figures printed upon the certificates, but by the amount it receives upon a division of what the public pays. The value is rarely par. If the stock receives a large sum as dividends, the value rises; if a small sum, the value falls.

»'3 P. S. C. 2d D. (N. Y.) 739, 18 A. T. & T. Co. Com. L. 1094, April 2,1913.

If the amount the public should pay for the service were to be determined by the amount of stock issued, the result would be that the body having the power to determine the amount of stock would fix the return, and all consideration of the fair value of the investment used in the public service would go for naught. A stock dividend of say 100 per cent doubles the amount of the stock, but has no proper effect upon the rate the public pays. Such dividend neither increases nor diminishes the fair value of the property used in serving the public. It merely rearranges as between the shareholders the form and number of the pieces of paper showing their rights between themselves to the net earnings and to the property itself if ever divided among them. . . .

There has grown up, for some reason, a very peculiar and illogical notion with reference to the protection of so-called innocent investors in the stock of a public service corporation which deserves a little attention at this point.

The underlying conception upon which this notion is based is that the return the public is to pay is based upon the amount of stock and not upon the amount of the investment: that it should be reckoned upon the figures printed upon the title deed to the property rather than upon th6 value of the property itself. There is no law justifying any such view, and certainly no equity or justice. Once it is clearly apprehended that a person buying stock in such a corporation is buying only a right to a certain proportion of the dividends, the confusion disappears and the whole matter is put upon a just basis. The amount of the dividends depends wholly upon the business success of the corporation, and no one pretends that there is any principle justifying an exaction from the public of more than a fair return upon the value of the property used in the public service.

If a purchaser is foolish enough to pay more for the stock of such corporation than would be justified by the reasonable amount of dividends, there is no principle of equity which requires that the loss should be borne by the public, but every principle of equity and law requires that it should be borne by the person making the investment. No one at the present time, in any careful consideration of the subject, attempts to maintain that the public should pay a return upon the stock. Every one concedes that the return should be upon the investment; and yet from time to time we are met with a plea to protect the stock which is the title deed and disregard the investment which is the matter of substance.

§ 1041. Nebraska Commission.

Re Application of Lincoln Telephone and Telegraph Company for authority to increase rates 32 involves the valuation of a telephone plant for rate purposes by the Nebraska State Railway Commission. The Commission holds that existing capitalization need not be considered in an estimate of fair value for rate purposes. The Commission says (at pages 149-150):

The outstanding stocks and bonds of a corporation which were issued prior to regulation, whether the same express the actual value of the plant, or whether they are in excess, or are for a less amount than the real value, have only collaterally any effect, and are not necessarily taken into consideration in the matter of making rates for the future, and when so treated it will be readily seen that any question of overcapitalization in the past is absolutely eliminated and need not enter into the problem.

Stocks and bonds are in fact not certificates which will determine or designate the rate that a corporation shall charge, or that will necessarily determine the rate of return which the corporation shall be permitted to earn, but are in fact merely certificates designating the ratio of ownership in the plant and reciting the ratio in which the profits above actual operating expenses may be divided among the holders.

The bond itself as to principal is merely a mortgage in most cases and proclaims that at a certain definitely fixed date the corporation will pay back to the holder thereof a certain amount , or in case of dissolution that the holder shall first be reimbursed

19 A. T. & T. Co. Com. L. 134, June 26, 1913, Nebraska State Railway Commission.

in the principal sum before any distribution is made between holders of other securities. As to the interest, such a Iwnd promises first to the holder a definite sum at specified dates and that such interest shall be paid before any dividend is declared to the stockholders, whose claims are always secondary. . . .

As a net result, the only value that the certificate of stock really has, regardless of the amount written in, whether it be $1.00 or $100.00 face value, is nothing other than a determination of the ratio of ownership and the ratio in which the holder shall have a right to net profits, if there be any.

In the matter of the application of the Omaha, Lincoln and Beatrice Railway Company for authority to issue $2,250,000 of bonds and $850,000 of stock, decided February 25, 1913, the Commission points out that the rule of caveat emptor applies to purchasers of securities authorized by the Commission. Such purchasers are not exempt from the business risks involved in the possibility of the corporation issuing the securities being overcapitalized. The Commission quotes with apparent approval from the decision of the New Hampshire Commission in the matter of the petition of the Milford Light and Power Company, decided December 30, 1911, in which the New Hampshire Commission states that an approval of securities does not constitute a guaranty in any way that rates may be charged to enable the company to pay dividends at any given rate upon such securities and that whenever the Commission is called upon to exercise its rate-making power its action will be controlled by the amount of money shown to have actually been invested and the fair value of the property regardless of the amount of securities outstanding.

§ 1042. St. Louis Commission.

The St. Louis Public Service Commission in an investigation of the United Railways Company of St. Louis found

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