Northern Pacific Railway Co. v. North Dakota Ex Rel. McCue

Background

The State of North Dakota passed a 1907 law fixing maximum intrastate rates for shipping coal, mainly affecting local lignite. Three large railroads refused to follow the law, and the State sued to force them to charge the new rates. After long proceedings in the state courts, judges found that one railroad showed a small net profit, another showed a loss, and a third was adequately compensated under the rates. The railroads appealed to the United States Supreme Court.

Reasoning

The core question was whether a State may compel a carrier to haul a specific commodity at rates that do not fairly cover the cost and a reasonable reward. The Court said state rates start with a presumption of reasonableness, but that presumption can be overturned by proof that a rate forces carriers to transport a commodity for less than the full, properly apportioned cost or without reasonable return. All actual costs must be counted, including apportioned overhead, maintenance, and taxes. On that basis the Court held the state rules went too far and reversed the state judgments, sending the cases back for further proceedings consistent with this opinion.

Real world impact

The decision protects railroads from being required to subsidize a local industry through specially low rates and requires regulators to consider the full, apportioned costs of service. State lawmakers and commissions must avoid singling out a commodity for rates that would make carriers operate at a loss. The ruling limits how far states can use rate-setting to promote local development at the expense of carriers.