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with sufficient accuracy gives to the further computation greater reliability, as it greatly diminishes the percentage of error in the total, due to the comparative inaccuracy of the other third. This third consists of the part allocated to the particular business in question of the joint costs of operation, which consist principally of the general expenses and capital charges. Even here some distribution can be made. In so far as the freight management and passenger management are divided between different officials, their salaries may be set apart; and, as to a large extent freight and passenger equipment and terminals are divided, their capital charges may be separated.22
There remains, however, a very considerable total of joint costs inextricably combined - the salaries of the executive officers and the capital charges upon the roadbed, for example. At this point we are for the first time really driven to computation upon an artificial basis to arrive at some distribution; and obviously this is to be arrived at by striking some proportion. Some students of this subject are content to rest this in all processes of allocation upon respective utilization, dividing these joint costs in the proportion, say, of ton mileage to passenger mileage. But this proportion often throws too great a burden upon the passenger service, the receipts from the passenger train being less than those from the freight train. Other persons maintain that the volume of business done should invariably determine the proportion, dividing these joint costs, say, in the proportion of freight receipts to passenger receipts. But this proportion, in turn, often throws too great a burden upon the freight traffic, the passenger transportation usually receiving more service than its proportion of the total receipts.23
With due deference to those who have been worried in choosing between these two bases of casting proportions the revenue basis and the operating basis — the writer would suggest that by compound proportions, utilizing all of the comparative factors which would obviously have a determining influence, the respective errors in the single proportions would be largely compensated and in each case a defensible result would be reached. For example, one significant comparison to ascertain whether relative injustice is being done one traffic as against another is through the earnings per car. But, where the commodity moves in trainloads, the earnings per train-mile furnish the best criterion. Where the system of operation on a given railroad makes the assignment of two locomotives to the freight train the usual thing while the lighter passenger business is almost invariably handled by one locomotive, it would seem to be fairer to make the comparison in engine miles instead of train miles. And in general it may be said that no simple proportion is sufficient in itself; a compound is more apt to show reasonableness than any of its factors alone. In arriving at the average cost for given transportation, the fairest basis for division of costs will be that taking into account all factors in traffic movement. Whatever factors, or combinations of factors, are employed in determining what should be the proper average rate per ton per mile for the traffic in question, it is obvious that the carriers are entitled to a higher revenue per ton per mile than this average in the case of a given haul which is shorter than the average 24 This is the salient fact in comparing intrastate traffic with its low average haul and interstate traffic with its much higher average haul.
22 Missouri Pacific Ry. Co. v. Tucker, 230 U. S. 340 (1913). 23 Southern Pacific Co. v. Campbell, 230 U. S. 537 (1913).
Even in the latest cases in the Supreme Court dealing with the general problem under discussion, there is still no attempt to work out, as yet, a formula by which the separation of interstate and intrastate accounts in federal and state regulation of rates may be determined. The Supreme Court still does little more for us than to set forth, as if for further consideration, the processes of allocation pursued by the respective litigants, contenting itself with showing that whichever basis be followed the result in the particular case would be the same. This appears in a striking way in an important decision at the present term,25 which to many seems to mark an epoch in the science of rate regulation. The passenger rate there in question went into effect in May, 1907, and was observed by the company until about September, 1909, when, under the terms of the interlocutory injunction in the suit, the charge was increased to two and one half cents a mile. There were, therefore, two fiscal years – June 30, 1907, to June 30, 1909 - during which the company operated its road in West Virginia under the statutory rate. It was found that the intrastate passenger receipts, which had been $362,997-74 in the fiscal year 1906-07, had fallen, notwithstanding a considerable increase in the number of passengers and passenger mileage, to $289,943.22 in the fiscal year 1907-08. The passenger expenses for the latter year, estimated according to the method above set forth, together with taxes, amounted to $275,519.79, leaving a net surplus of $14,423.43. In the following fiscal year, 1908–09, the intrastate passenger receipts were $281,864.50. This showed a reduction of $81,133.24, as compared with the fiscal year 1906-07, although there was a gain over that year of 1,567,374 in the passenger mileage. The expenses attributed by the company to the intrastate passenger traffic, including taxes, for the year 1908-09, amounted to $283,416.62, thus leaving a deficit in the passenger operations of $1,552.12.
24 See Allen v. St. Louis I. M. & So. Ry. Co., 230 U. S. 553 (1913). 25 Norfolk & W. Ry. Co. v. Conley, 35 Sup. Ct. 437 (1915).
It does not seem possible that cases like Atlantic C. L. R. Co. v. North Carolina Corp. Comm., 206 U. S. 1 (1907), can stand any longer, holding as they have that a state body can make an order requiring a service to be rendered although considered as local service it results in a loss.
Evidence was introduced on behalf of the company showing how the results were obtained according to its calculations. It was testified that the intrastate passenger receipts had been carefully ascertained. With respect to the operating expenses, it was said that for many years accounts had been kept for the purpose of separating the expenses incident to the freight and passenger traffic respectively; that about sixty-five per cent of these expenses could be directly assigned, and that the remaining thirty-five per cent, consisting of items common to both sorts of transportation, were divided between the passenger and freight traffic on the basis of engine miles — this being deemed to be more equitable than the train-mile basis originally used, inasmuch as most of the freight was hauled by two engines. In practice, this method was assumed - in accordance with an early computation — to mean that twenty per cent of such items should be assigned to the passenger traffic; this, it was insisted, was a close approximation. Where a division of the road was partly in one state and partly in another, the passenger expenses were apportioned according to track mileage. These expenses within the state having thus been ascertained, they were divided between the interstate and intrastate traffic
basis of the gross passenger earnings; that is, it was assumed that the cost of the interstate and intrastate passenger traffic was the same in relation to revenue.26
The opinion does not undertake to review in detail the methods used on the part of the state to apportion the various common items of expense, that is, after all items capable of direct assignment had been charged to the business to which they related. It is sufficient to say that instead of employing a general factor for the distribution of the outlays common to both kinds of traffic, freight and passenger, the principal witness for the state divided each particular common item according to its character so as to make what was deemed to be a fair apportionment of that item. In this way a variety of methods were employed which the witness described at length. After ascertaining the amount of the total expense considered to be attributable to the passenger traffic within the state, it was divided between the intrastate and interstate business; and for the most part — aside from the expense of passenger stations - the division was made on the basis of passenger miles. This, as the Supreme Court noted, was without resorting to weighting the ratio, as might not improperly be done in cases where the evidence was clear as to the additional cost alleged to be involved in doing intrastate business as compared with hauling interstate traffic. 27
“It is apparent,” said the Supreme Court, “from every point of view that this record permits, that the statutory rate at most affords a very narrow margin over the cost of the traffic. It is manifestly not a case where substantial compensation is permitted and where we are asked to enter the domain of the legislative discretion; nor is it one in which it is necessary to determine the value of the property employed in the intrastate business. It is clear that by the reduction in rates the company is forced to carry passengers, if not at or below cost, with merely a nominal reward, considering the volume of the traffic affected. We find no basis whatever upon which the rate can be supported, and it must be concluded, in the light of the principles governing the regulation of rates, that the state exceeded its power in imposing it.” In these conclusions it will be noted that the Supreme Court has clearly enough turned its back on its former decisions, which had apparently held it not to be unconstitutional as confiscation to reduce particular rates to a point so low as to be altogether disproportionate to the other rates, so long as the schedule as a whole produced a profit.28
26 Louisville o. Cumberland Tel. & Tel. Co., 225 U. S. 430 (1912).
27 See the views formerly prevailing in St. Louis & S. F. Ry. Co. o. Gill, 156 U. S. 649 (1895).
This survey of the situation shows that, although the principles upon which the allocation of accounts should proceed can perhaps be stated so as to be intelligible, the working out of these principles into practice presents difficulties of computation which may to the lawyer seem almost insuperable. But it should be said that to the expert in accountancy, upon whom the lawyer in practice must rely, these are difficulties characteristic of all large operations where the costs involved are largely joint. Difficult though the problems presented may be, it is not more difficult to a lawyer, who can call an accountant to his aid, to estimate, with an approximation sufficient for the purpose, the cost of anything with which the litigation in which he is acting is concerned. It may seem impossible to tell what it will cost a railroad system to carry a ton of steel rails from one point in a state to another, but it is probably no more difficult than to determine what that ton of rails cost the great corporation which produced them. Generally speaking, the regulation of rates has been tending more and more as time goes on to be based upon the cost of service, and it is at last sufficiently clear that proportionality in allocation is the key to the computation. The principles governing the allocation of costs are just about to become clear enough to justify the expectation that the determination by computation in a given state of facts of the range within which a charge should be made, will be the method relied upon in deciding upon the reasonableness of rates. It may perhaps be exasperating to those who are faced with the occasion of making these computations, in the case of the wholly intrastate transportation of an interstate railway system, that the system cannot be treated as a unit in its operations, but must first of all be artificially divided for the purpose of regulation of rates into an interstate carrier and an intrastate carrier. But
28 Such as Minneapolis & St. L. R. Co. v. Minnesota, 186 U. S. 257 (1902).