TRAFFIC GLOSSARY

RATE FACTORS

RATE FACTORS

Freight rates must be considered from two different standpoints-private and public. A railroad company, to the extent that it is a private corporation and in the sense that its property is distinctly its own, may establish its charges with regard solely to the interest of its stockholders-to strive for the largest possible revenue and regulate its charges in accordance with the law of supply and demand. But it is affected with a public interest and must consider the public welfare. From the public point of view the public benefit is of first importance, and from the private viewpoint the return upon the capital invested is of the greatest moment. The problem is to reconcile the private and public interests without unduly subordinating the one to the other. A railroad is affected with a public interest because it applies its property to a PUBLIC INTER-use in which the public is directly concerned. The State grants to it the right of eminent domain-the power to condemn lands for its way and structures for the public benefit. It assumes obligations to the public and, within constitutional limits, is subject to governmental regulation. On the other hand, the stockholders and bondholders who furnish the money for the construction and equipment of a railroad and take the risk of its successful operation are entitled to the profits derived from its operation, and to this extent it is a private corporation.

PRIVATE AND

ESTS.

PRINCIPAL
FACTORS.

While the stockholders and bondholders are entitled to a fair return upon their investment, the charges of a railroad cannot be fixed solely with regard to their interests, and without regard to the rights of the public. The public cannot be subjected to unjust rates in order that large dividends may be earned, nor has the public any right to demand rates so low as not to yield a fair return upon the money invested in a railroad. Under the common and statute laws, rates must be fair and reasonable, both to the railroad and to the public. The reasonableness of a rate involves many considerations and in many cases presents a very difficult problem

In making a rate the principal factors taken into consideration are the following: (a) Cost of the service to the carrier.

(b) Value of the service to the shipper.

(c) Value of the article.

(d) Nature of the article-whether crude or finished, liquid or dry, etc.

(e) Risk in handling the article.

(f) Distance of haul.

(g) Bulk and weight of the article.

(h) Whether special facilities or extra services are required.

(i) Expense at terminals.

(j) Volume of traffic, and periods of movement.

(k) Method of packing and protecting the article.

(1) Rates on similar articles moving under similar circumstances and conditions.

(m) Rates of competing carriers.

(n) Competition between producing centers or markets.

(0) Whether or not the rate will be conducive to an increasing movement of the article.

(p) Prospects of cars being returned loaded or empty.

The cost theory of rates is that charges should be based in accordance with the cost to the railroad of performing the service. Theoretically, each shipment

COST THEORY. (Con.)

RATE FACTORS

should bear its proportional share of the expense of the whole service. However, it is almost impossible to ascertain exactly the cost of any railroad service; for none of the fixed charges and few of the operating expenses can be assigned, except arbitrarily, to any particular part of the traffic handled by a railroad.

The only general way in which the cost of transportation can be ascertained is to calculate for all traffic over a given period, the operating expense, the administrative expense, maintenance expense, taxes, etc. This total expense has to be apportioned between the passenger traffic and freight traffic. If this be done, as is usually the custom, by deducting from the total expenses the expenses directly chargeable to passenger and freight traffic, respectively, and then apportioning the remainder in proportion to the number of passenger train miles and freight train miles, the result will be only an approximation.

It may be assumed that this approximation is the fairest possible and that the aggregate expense allotted to freight traffic represents the total freight cost for the given period. The total of the amount obtained by multiplying the total number of tons of freight by the total number of miles hauled will represent the number of tons hauled one mile. If the entire cost of freight transportation be divided by the total number of tons hauled one mile the quotient will represent the average cost of hauling one ton one mile. If an amount necessary to afford an adequate return upon the capital invested in a railroad be apportioned between the passenger traffic and freight traffic, and the sum allotted to freight traffic be divided by the total number of tons hauled one mile, the quotient thus obtained, added to the previous quotient showing the cost of transportation, will indicate the amount that should be charged for freight transportation per ton per mile. This, however, would be but an average based upon past, and not upon future traffic, the amount of which cannot be known in advance.

The expenses of a railroad are largely independent of the amount of traffic it handles. They are customarily divided into two classes: fixed charges and operating expenses. All of the items of fixed charges are constant. Traffic may decrease and profits disappear but fixed charges must be paid. The operating expenses of a railroad are not all variable; there are certain operating expenses that must be incurred whether the volume of traffic be light or heavy.

The cost of handling traffic fluctuates widely from year to year, and even from month to month. The cost varies in different sections of the country and on different railroads in the same sections. It costs more to build and operate a railroad in mountainous regions than in level regions. Increases or decreases in the volume of traffic affect the cost; therefore, rates based on cost would necessarily have to undergo frequent changes.

The mere cost of movement; that is, the expense of receiving, transporting and delivering freight, can be estimated with a reasonable approach to accuracy.

If it were feasible to fix rates upon the basis of cost it would result in imposing the heaviest burden upon the cheapest goods. It might not cost a railroad any more to haul a carload of cheap goods a hundred miles than a carload of expensive goods of equal bulk and weight, yet if the rates were based solely upon the cost of service the price of the cheap goods might be made prohibitive.

In its First Annual Report the Interstate Commerce Commission said: "It was, very early in the history of railroads, perceived that, if these agencies of commerce were to accomplish the greatest practicable good, the charges for the transportation of different articles of freight could not be apportioned among such articles by reference to the cost of transporting them severally, for this, if the apportionment

COST THEORY (Con).

VALUE OF

VICE.

AR

RATE FACTORS

of cost were possible, would restrict within very narrow limits the commerce in articles whose bulk or weight was large as compared with other value. On the system of apportioning the charges strictly to the cost, some kinds of commerce which have been very useful to the country, and have tended greatly to bring its different sections into more intimate business and social relations, could never have grown to any considerable magnitude, and in some cases could not have existed at all, for the simple reason that the value at the place of delivery would not equal the purchase price with the transportation added.

"The traffic would thus be precluded, because the charge for carriage would be greater than it could bear. On the other hand, the rates for the carriage of articles, which, within small bulk or weight concentrate great value, would, on that system of making them, be absurdly low; low when compared to the value of the articles, and perhaps not less so when the comparison was with the value of the service in transporting them. It was therefore seen not to be unjust to apportion the whole cost of service among all the articles transported, upon a basis that should consider the relative value of the service more than the relative cost of carriage. Such method of apportionment would be best for the country, because it would enlarge commerce and extend communication; it would be best for the railroads, because it would build up a large business, and it would not be unjust to property owners, who would thus be made to pay in some proportion to benefit received. Such a system of rate-making would in principle approximate taxation; the value of the article carried being the most important element in determining what shall be paid upon it.

"To take each class of freight by itself and measure the reasonableness of charges by reference to the cost of transporting that particular class, though it might seem abstractly just, would neither be practicable for the carriers nor consistent with the public interest.

"The public interest is best served when the rates are so apportioned as to encourage the largest practicable exchange of products between different sections of our country and with foreign countries; and this can only be done by making value an important consideration, and by placing upon the higher classes of freight some share of the burden that on a relatively equal apportionment, if service alone were considered, would fall upon those of less value. With this method of arranging tariffs little fault is found, and perhaps none at all by persons who consider the subject from the standpoint of public interest."

The shipper of cheap goods cannot afford to pay as much for transportation as the shipper of expensive goods. A rate that would be low enough to induce the movement of one commodity might be so high as to prohibit the movement of another.

It seems on the surface unfair to charge one shipper more than another for practically the same service. But the value of the service theory is beneficial alike to the railroad, the shipper of cheap goods and the shipper of expensive goods, because each TICLES AND SER- ton of cheap goods, even if it cannot pay average rates, pays something towards the cost of operation and reduces to that extent the amount which must necessarily be raised from expensive goods. The movement of cheap goods may be enormously increased by low rates, while it cannot be had at all at high rates, or rates that would be fair and reasonable for expensive goods. A high rate may be an inconsiderable item to articles of little bulk and great value. They have the ability to pay the rate. Therefore, different grades of traffic must necessarily pay different rates for the same service.

RATE FACTORS

A railroad is capable of furnishing transportation and nothing else. If there be no traffic for a railroad it is worthless. It must, therefore, fix rates sufficiently low to stimulate the movement of traffic. High rates on certain articles curtail production and consequently reduce the amount of freight offered for transportation.

The interests of a territory through which a railroad runs are the interests of the railroad. The development of industries along its line means increased traffic. The greater the amount of freight offered for transportation the better the chances of success in operating a railroad. The industries cannot develop unless they can send their products to the market, and this cannot be done if rates are too high. Just so far as a railroad fails to make rates which will enable its territory to market its products, just so far will its traffic be curtailed.

The greater the volume of traffic the less, other things being equal, is the cost of handling each unit of it. It costs relatively less to handle thirty cars in a train than twenty. It cost less to handle freight in carload lots than in less than carload lots. Freight in carload lots is loaded by the shipper and unloaded by the consignee, and moves from point of origin to destination. without having to be transferred en route, while freight in less than carload lots is handled through freight stations and, if moving through several junction or transfer points, extra expense of transferring is involved. The amount of traffic that a rate will produce is an important factor to be considered in making a rate.

The distance of the haul is one of the important factors in constructing a rate. It is worth more to carry goods a longer than a shorter distance, especially over the same route. Each additional mile involves an additional service. While the total rate increases with distance, the average rate per ton-mile decreases as the distance increases. It does not cost twice as much to haul freight 200 miles than it costs for a haul of 100 miles. The average cost decreases as the distance increases. The expenses at terminals are not affected by the distance freight is hauled. They remain the same whether the haul is 200 or 100 miles, and this is practically true with respect to all other expenses, except, of course, the actual distance hauling expenses. When both the terminal and hauling expenses are considered, the cost per ton-mile is greater for shorter than for longer hauls.

The local rates of a railroad are usually established on a distance or mileage scale, different rates being made on different classes of goods. Different classes of goods must pay different rates regardless of the distance hauled. It is as impracticable to fix a per-mile rate to apply on all classes of goods as it is to make rates solely on the basis of the cost of service. The result would be the same-the heaviest burden being imposed upon the cheapest goods.

Higher rates are frequently charged for shorter than for longer distances over the same route. The same rate may apply for distances over the same route varying as much as 100 miles. These conditions are generally created by competition between railroads themselves, or between railroads and water-lines, or between producing centers or markets.

Risk is always an element that must be considered in making rates. Articles which are dangerous and destructive or perishable and destructible must pay higher rates than articles of a less dangerous or perishable nature, other things being equal. There is much greater risk in handling a shipment of glassware than one of hardware, because the former may be easily broken. There is greater risk in carrying expensive goods than in carrying cheap goods; in case of loss or damage the railroad must pay claims based on the value of the goods.