Court, where the issue was whether a certain rate upon phosphate fixed by a commission was fair to the railroad affected, it was said: "There is testimony tending to show the gross income from all local freights and the value of the railroad property, and also certain difficulties in the way of transporting phosphates owing to the lack of facilities at the terminals. But there is nothing from which we can determine the cost of such transportation. We are aware of the difficulty which attends proof of the cost of transporting a single article, and in order to determine the reasonableness of a rate prescribed it may be sometimes necessary to accept as a basis the average rate of all transportation per ton per mile." Cost is, therefore, an important element in arriving at a judgment with respect to a rate. What weight shall be given to that element, as compared with all the other elements entering into a particular rate, the courts have hitherto been inclined to say, was a matter to be decided in each individual case. Our commissions have not been willing to compel the establishment of rates solely according to mileage; the public benefits, the greater volume of business of carriers warranting lower rates to all, the force of competition and many other potent considerations still outweigh a claim of right founded only on geographic location. And it is true that in themselves ton-mile statistics, reflecting as they do neither car loading, train tonnage, nor car or train mileage, are far from being infallible guides in fixing freight rates. But the drift toward the doctrine that rates should be proportioned according to differences truly existing in the cost of rendering the service is altogether in accordance with the tendency of the modern law of public service against all discriminatory practices." Indeed, any method of fixing rates which results in disproportionate treatment to different customers asking somewhat different services seems to the writer to be against that fundamental principle of equality which of late years has been held to be violated by discriminatory treatment of different patrons asking substantially similar services. A schedule of rates in which the respective rates are based upon their proportional cost of the whole service rendered would not fail to-day to meet the approbation of the courts. Not only would 7 See Southern Ry. Co. v. St. Louis H. & G. Co., 214 U. S. 297 (1909). all courts agree that legislation forbidding disproportionality in rates is unconstitutional, but also it is doubtless law that a publicservice company may so arrange its schedule as to make each rate yield a reasonable profit for each service above the fair cost, without any question as to the legality of such a course. And according to the latest opinion in the Supreme Court, a state is held to act in defiance of the constitutional rights of the carrier by imposing a schedule in which the rates in one part of the service are fixed so out of proportion with the rates in another branch as to throw an undue share of the total burden upon the business where the rates are reduced; and it is therefore now clearly established that, if the policy of proportional distribution of the real costs is adopted by the rate-making body, no objection can be made on any grounds whatsoever. The suggestion is sometimes made that a distinction is to be drawn between keeping the different classes of charges proportionate and making the particular rates proportionate. Except for the inherent difficulties of pursuing the inquiry further, the writer perceives no difference in principle between the two; and he has no reason to believe that the distinction has foundation in law. IV In accordance with these principles which have now come to be regarded as fundamental, the method of procedure where the cost of conducting intrastate transportation is in question is to find what part of the gross receipts is derived from business within the state, and then find the actual cost of doing that business. This, however, cannot be found by taking a proportionate part of the cost for the entire system, since the cost of moving local freight is greater than that of moving through freight. "Additional fuel is consumed at each station where there is a stop. The wear and tear of the locomotive and cars from the increased stops and in shifting cars from main to side tracks is greater; there are the wages of the employees at the intermediate stations, the cost of insurance, and these elements are so varying and uncertain that it would seem quite out of reach to make any accurate comparison of the relative cost. And if this is true when there are two separate trains, it is more so when the same train carries both local and through freight. It is impossible 8 See Seaboard A. L. Ry. v. Florida, 203 U. S. 261 (1906). to distribute between the two relative cost of carriage. Yet that there is a difference is manifest, and upon such difference the opinions of experts familiar with railroad business is competent testimony, and cannot be disregarded. The fact that an exact mathematical computation of the cost is impossible is immaterial; the cost must be found, as best it may, before the reasonableness of the local rate can be determined. There are many things that have to be determined by court and jury in respect to which mathematical accuracy is not possible." Again, in another way, the error in any such unsophisticated computation will be manifested. Say that the testimony discloses that the operating expenses of the entire system during each of the years were over 60 per cent of the gross receipts. If the cost of doing local business in the state in question will be the same as that of doing the total business of the company, then the net earnings of that local business would not exceed 40 per cent of the gross receipts. Suppose that by the reduction put in force by the Commission of the state the gross receipts will be less by 15 per cent; that would then leave 25 per cent of the gross receipts as what might be called net earnings, to be applied to the payment of interest on bonds and dividends on stock. But further testimony in such a case will invariably show that the cost of doing local business is much greater than that of doing through business. If it should be 85 per cent of the gross receipts, then a reduction of 15 per cent in the gross receipts would leave the property earning nothing more than expenses of operation. These lines of computation show that without a finding as to the cost of doing the local business it is impossible to determine whether the reduced rates prescribed by the authorities of the state were unreasonable or not.10 To continue the inquiry further, suppose the total value of the property of the railroad within the state is found to be $10,000,000 and the total receipts both from interstate and local business are $1,000,000, one half from each. Then, according to the method once confidently asserted but now generally condemned, the value • Chicago, M. & St. P. Ry. Co. v. Tompkins, 176 U. S. 167, 178 (1900). For this purpose, among others, it has recently been established that the Interstate Commission can require carriers engaged in both interstate and intrastate commerce to make full returns of all their accounts of every sort. Interstate Commerce Commission v. Goodrich Transit Co., 224 U. S. 194 (1912). 10 See the discussion of these facts in the lower court - Chicago, M. & St. P. Ry. Co. v. Tompkins, 90 Fed. 363 (1898). of the property used in earning local receipts would be $5,000,000, and the per cent of receipts to value would be 10 per cent. But the error in this method of computation may be seen by supposing the interstate receipts to remain unchanged and letting the local receipts by a proposed schedule be reduced to one fifth of what they had been, so that instead of receiving $500,000 the company only receives $100,000. The total receipts for interstate and local business being then $600,000, the valuation of $10,000,000, divided between the two, would give to the property engaged in earning interstate receipts in round numbers $8,333,000, and to that engaged in earning local receipts $1,667,000. But if $1,667,000 worth of property earns $100,000 it earns 6 per cent. In other words, although the actual receipts from local business are only one fifth of what they were, the earning capacity is three fifths of what it was. And turning to the other side of the problem, it appears that if the value of the property engaged in interstate business is to be taken as $8,333,000 and it earned $500,000, its earning capacity would be the same as that employed in local business 6 per cent.11 It has, however, generally been recognized that local shipments are much more expensive to handle in proportion to mileage than long-distance shipments. As enumerated in one case in the federal court, this is brought about by three factors: "(1) The shortness of the haul; (2) the lightness of the train-loads; and (3) the expense of billing and handling the traffic." 12 But warning has been given in more recent cases that these differences must not be formulated arbitrarily into a ratio, fixed without reference to particular circumstances, to the effect that the cost of handling intrastate business in comparison with interstate business is in the proportion of 2 to 1. It follows that the one thing to be determined is the separate cost of the interstate business considered by itself. There must be a serious attempt to determine by extrinsic evidence the actual cost of doing intrastate business. At all events, the difference in cost between interstate and intrastate business is such that the percentage of difference between the cost of doing intrastate and interstate business may approximately be estimated with some degree of certainty. 11 See also In re Arkansas Ry. Rates, 163 Fed. 141 (1908). V The state legislation of a few years ago reducing passenger fares could, of course, only apply to intrastate business. To determine whether this reduction was unjustifiable the federal courts found that they were required not only to allocate the respective costs of passenger and freight business, but also to apportion these to the intrastate and interstate business. In one of the leading cases 13 in this subject, Judge McPherson narrowed the discussion of the basis of apportionment to two theories the mileage proportion and the revenue proportion. He admitted that neither of these would result in mathematical accuracy; but he insisted that as a practical matter the one which promised to be most satisfactory should be taken as the basis of action. "The theory to now recognize must be either the proportion of earnings, state or interstate, or ton and passenger mile." After reviewing what few cases there are bearing upon the point, notwithstanding that in many of them the greater proportionate cost of local business as compared with through business is pointed out, he said that, although other standards are suggested, the more satisfactory and accurate was "the difference in cost in relation to the revenue." In a later case 14 this view was elaborately defended by Judge Hook as a working basis for the distribution of all expense incident to railroad business among its revenue yielding operations of every character. "From the very nature of the case, therefore, some rule must be adopted for charging to each of them their fair and equitable proportion of the common expense. Of necessity it must proceed upon average conditions commonly known or shown to exist, and it argues nothing to say that it does not fully apply to this or that exceptional instance. A general rule based on experienced observation is fair, and what is lost by its application in one place is doubtless gained in another, and an equitable equilibrium maintained. Of those suggested the revenue basis appears to be much more uniform in its adaptability and much 13 St. Louis & S. F. R. Co. v. Hadley, 168 Fed. 317, 348 (1909). The same principles would seem to apply correspondingly when the constitutionality of the action of the Interstate Commerce Commission in fixing interstate rates is brought in question in the courts. Missouri K. & T. R. Co. v. Interstate Commerce Commission, 164 Fed. 645 (1908). 14 Missouri K. & T. Ry. Co. v. Love, 177 Fed. 493, 498 (1910). |