into the making of the rate, if there are any that are compulsory or imperious, must be considered as well as the rights of the shipper." 45

§ 390. Volume of traffic as a factor affecting the rate.

As the volume of traffic increases, the particular rate tends to diminish. All fixed charges, and other expenses (like station expenses, salaries, and even to a certain extent wages, which are the same whether much or little freight is carried), must be paid largely out of the freight rates, and the greater the traffic, the less each separate article must bear. It is a general principle, therefore, that a large volume of traffic tends to lower the particular rate. This fact is the basis of a theory, sometimes held, which may be described as the law of increasing returns. Traffic to a certain amount is necessary, at a given rate, to pay fixed charges and operating expenses; when that amount of traffic is obtained, further shipments will net a profit even if they pay a low rate. 46 It is, therefore, inferred that fairness permits a higher charge upon the goods which must be carried, and a lower charge to attract additional traffic, which might not otherwise be obtained. This theory, however, if pressed to its logical result, will result in unfairness. Neither the cost to the carrier, nor the value to the shipper, is affected by such considerations. The unfairness is obvious of any rule which would result in an arbitrary difference of charge to two persons requiring identical service; it would not satisfy the shipper, who had first offered goods for shipment to be told that his competitor, who had offered goods afterwards, was given a lower rate, because the law of diminishing costs justified the making of a lower rate to the second comer. 47

45 All factors affecting a particular rate must be taken into account, not merely the length of the haul. Re Advances on Cattle and Sheep, 23 I. C. C. 7.

46 Volume of traffic as affecting

rate making is mentioned oftentimes; see National Hay Ass'n v. Lake S. & M. S. Ry., 9 Int. Com. 264. 47 Amount hauled by trains and density of traffic is generally considered as affecting the cost of opera

§ 391. Increased volume of traffic causing increase of cost. In one case the curious position was taken that rates must be raised because the increase in traffic required a large amount of new construction. In reply to this position the Interstate Commerce Commission said: 48 "It appeared from the testimony that offerings of traffic are at present extremely large; that all lines are taxed to their utmost capacity, and that some have found it absolutely impossible to handle the amount presented. This is requiring enormous outlay in the providing of additional track facilities and the furnishing of additional equipment; and it is said that rates ought to be increased in view of this large increase in traffic, and the incident expenditures required. The idea that increased traffic should raise rates is certainly a reversion of previous notions upon that subject. The first class rate from Chicago to New York is 75 cents per hundred pounds, and the distance is one thousand miles. The corresponding rate from Chicago to the Missouri River, one-half the distance, is 80 cents. Rates generally in western territory are higher than those in trunk line territory, and it has commonly been understood that this was due to the greater density of traffic in the latter section. Without doubt this increased demand upon railways is requiring the expenditure of large amounts, but there is nothing in this which would justify an advance of rates so long as that expenditure will add proportionately to the earning capacity of the properties." 49

Topic B. Method of Determining Particular Costs

§ 392. Proper proportion of total costs.

In the preceding chapters the total amount of gross receipts which a public service company is justified in taking from its whole business has been discussed. These

tion. Commercial Club of Salt Lake City v. A., T. & S. F. Ry., 19 I. C. C. 218.

48 Re Proposed Advances in Freight

Rates, 9 I. C. C. Rep. 38, 427. 49 See also Advance in Rates, Eastern & Western Cases, 20 I. C. C. 243, 304.

were in brief all annual expenditures, including an allowance for upkeep, and in addition the fair capital charges for the year, arrived at by determining what would be in the particular case a reasonable return upon proper capitalization.50 As an abstract matter the fairest way to all concerned to determine the price for any particular service would seem to be to apportion ratably the total disbursements of every sort to the various items of business, and so to arrive at proportionate rates. Theoretically, certainly any other method is less just to all concerned. In determining thus what is a reasonable rate for a service to be rendered, it is not proper to take the road as existing and as maintained, with its track and terminal equipments, salaries and all other expenses, and to regard as the total cost of any particular service merely the increased expense necessary to add to its business the service in question. Truly, the cost of each service ought to include its fair share of the interest on investment and of the general expense; and it is necessary, therefore, to consider what rules there may be devised for proper apportionment. 52

§ 393. Apportionment of separable costs.

Even in a complicated business, such as railway transportation, it ought to be possible to determine the peculiar cost of a particular service with some degree of accuracy. The first difficulty that presents itself is that the ordinary railroad is engaged in at least two different businesses, the transportation of freight and the transportation of pas

50 In Pennsylvania R. R. Co. v. Philadelphia County, 220 Pa. St. 100, 68 Atl. 676, 15 L. R. A. (N. S.) 108, it was held that passenger rates could not be so reduced as to prevent the railroad company from earning a fair profit upon that branch of its business.

51 Comparisons of ton-mile revenues are frequently resorted to by the Commission. Marian Coal Co.

v. D., L. & W. R. R. Co., 24 I. C. C. 140.

52 In Gulf, C. & S. F. R. R. Co. v. Railroad Commission (Tex.), 116 S. W. 795, the court held a railroad could charge for transporting lumber not merely the separable costs of such transportation, but also its proper proportion of the fixed charges of the railroad.

sengers, with their costs intermingled. 53 Now, many of the particular costs of moving traffic can be separated-the wages paid the train crews of freight trains from those paid to the train crews of passenger trains, and the fuel burned by freight locomotives from that burned by passenger locomotives, to take two important items. Moreover, to a certain extent the entire expense of transportation may thus be judged from the sums expended in operation.54 When the average amount expended in moving typical quantities of a given commodity is known, a standard is established by which it may be seen whether there is not a full return to the railroad of the entire cost attributable to the transportation of these goods. It would be wrong upon any theory to ignore the cost of service, in so far as it may thus be estimated; for to serve some shippers for less than the special costs of serving them would be plainly unfair to other shippers, who would almost inevitably be called upon to make up the deficiency.55

§ 394. Allocation of joint costs.

When the separable costs of operation have thus been distributed to the different kinds of services rendered, it will be found that from forty to sixty per cent of the total

53 Ton per mile earnings alone are not an absolutely correct test of reasonableness; a combination of both ton-mile and car earnings is a more correct test than either of those factors alone. Bahrenburg Bro. & Co. v. A. C. L. R. R. Co., 24 I. C. C. 560.

54 In Chicago, St. P., Mo. & O. Ry. Co. v. Becker, 35 Fed. 883, a rate for switching cars fixed by a commission was enjoined, the complainant's testimony showing that the actual cost of the service, viz., wages of employees, rent of engines, and keeping the track in repair, exceeded per car by fourteen cents

the one dollar allowed in the schedule as compensation.

Train mile earnings given as a basis of determining reasonableness in Standard Mirror Co. v. Pa. Ry., 27 I. C. C. 200.

55 No complaint can be made of a charge for a particular service which not only covers the full cost of the particular service asked, but also yields a fair profit above that cost. Southern Ry. Co. v. St. Louis H. & G. Co., 214 U. S. 297, 53 L. ed. 1004, 27 Sup. Ct. 678.

expenditures for which the company should be recouped have been thus accounted for, the percentage depending upon the kind of business in general and the accounting of the company in particular. 56 This determination of half of the average cost for particular services 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 half. This other half 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.57 In so far as the freight management and passenger management are divided between different officials, their salaries may be separately apportioned; and, as to a large extent freight equipment, and, to a smaller extent freight terminals, are divided, their capital charges may be divided. There remains, however, a very considerable total of joint costs inextricably combined, the salaries of the executive officers and the capital charges upon 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. 58 Some students of this subject are content to rest this upon respective utilization, dividing these joint costs in the proportion (say) of freight ton-mileage to passenger mileage. But this proportion seems to throw too great a burden upon the passenger service, the receipts from the passenger train being so much less than those from the freight train. Other

56 Pennsylvania R. R. Co. V. Philadelphia Co., 220 Pa. St. 100, 68 Atl. 676, 15 L. R. A. (N. S.) 108. See further, Tucker V. Missouri Pacific R. R., 82 Kans. 222, 108 Pac. 89.

67 Coal & Coke Ry. Co. v. Conley, 67 W. Va. 129, 67 S. E. 613. See also

State v. Atlantic C. L. Ry., 48 Fla. 114, 37 So. 657.

58 On this point see Re Advances on Coal to Lake Ports, 22 I. C. C. 604.

Train mile earnings as the basis of the comparison. Duluth Log Rates, 29 I. C. C. 420.