VALUE OF THE SERVICE AS A FACTOR IN RATE MAKING 523 the fair value of the property. To the particular element of ex- travagant construction it would be possible to give effect in either of two ways: by writing down the value of the property or by disallowing a reasonable rate of return. So far as this particular element is concerned, therefore, it may not greatly matter that what is actually done is to write down the value of the property. But in many connections the distinction between the two proc- esses is important. Suppose all the elements which can be thought to affect the fair value of the property have been considered, and it has been determined that its fair value is n. If it were taken to be the law that rates need not provide a reasonable return, it would follow that a reasonable return on n need not necessarily be provided; while if the law requires a reasonable return on the fair value of the property employed in every case, then by hypoth- esis the company is entitled to a return on n regardless of all other considerations. Unreasonable operating expenses, like unreasonable capital charges, are not part of what is meant by the cost of the service. The cost of the service as a rate-making criterion means its reasonable cost. The Supreme Court has said, in sustaining legislative railroad rates against the allegation (which was not fully estabHshed) that they did not cover operating expenses: "Of what do these operating expenses consist? Are they made up partially of extravagant salaries; fifty to one hundred thousand dollars to the president, and in like proportion to subordinate oflScers? Surely, before the courts are called upon to adjudge an act of the legislature fixing . . . rates for railroad companies to be unconstitutional . . . they should be fully advised as to what is done with the receipts and earnings of the company; for if so advised, it might clearly appear that a prudent and honest management would, within the rates prescribed, secure to the bondholders their interest, and to the stockholders reason- able dividends. . . .It has not come to this, that the legislative power rests subservient to the discretion of any railroad corporation which may, by exorbitant and unreasonable salaries, or in some other im- proper way, transfer its earnings into what it is pleased to call 'operat- ing expenses.'" ^° This point — that utilities are not entitled to charge to the public, as a part of cost, the burden of their own extrav- "* Chicago & Grand Trunk Ry. Co. v. Wellman, 143 U. S. 339, 345, 346 (1892).
