Topic D. Economic Principles Affecting Rate Making § 1220. Law of decreasing costs. 1221. Exceptions to law of decreasing cost. 1222. Competition as a factor. 1223. Policy for permitting competitive rates. § 1190. Various theories as to rate making. Various theories as to the making of particular rates are still in vogue. Indeed, the first impression, which lasts after much reading on the topic, is that where there is not confusion upon the subject, there is disagreement. But apparently the more lawyerlike persons would base all particular rates upon the cost of the service to the company, while the more businesslike persons would make the universal test the value of the service to the patron. Opportunists would leave the making of rates to competition; paternalists would attempt to equalize the advantage of customers in making rates. But, however various they may seem, these theories as to the proper basis of rate making align themselves into two opposed groups, the legal, which gives chief place to the cost of service, and the economic, which makes the value of the service the basis. There used to be these two schools as to the whole schedule, one maintaining that the total receipts which a public service company might take was limited by law, the other one asserting that the corporations were entitled to what they could get out of the public. This matter of the whole schedule has so long been settled against economic freedom and in favor of legal restriction that no one would reopen the controversy with any hope of success. But still at the present time with all conceding that the gross earnings which a company may take are limited by law in any given case to a determinate amount, the economic school still persists in saying that the company can get these gross receipts by any distribution of the burden that it finds most advantageous. Topic A. Cost of Service as the Basis § 1191. 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 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. 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.1 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 plant as existing and as maintained, and to regard as the whole cost of any subsequent service merely the increased expense necessary to add to its business the service in question. Truly, the cost of each service ought to inIclude 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.2 To look at the problem from another 1 In Pennsylvania R. R. Co. v. Philadelphia County, 220 Pa. St. 100, 68 Atl. 676, 15 L. R. A. (N. S.) 108 (1908), 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. 2 In Gulf C. & S. F. R. R. Co. v. Railroad Commission (Tex.), 116 S. W. 795 (1909), the court held a railroad could charge for trans point of view, the entire schedule of rates having been established, and the amount to be raised by the entire schedule of rates having been determined, the sum of all the particular rates must equal that amount; and this sum is tested by adding together the rates received. § 1192. Apportionment of separable costs to different services. Even in a complicated business it ought to be possible to determine the peculiar cost of a particular service with some degree of accuracy. Take the most difficult of all, railway transportation. 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 passengers, with their costs intermingled. 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. When the average amount expended in moving 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. And an expert railway management ought to be able to estimate with a sufficient degree of accuracy the porting lumber not merely the separable costs of such transportation, but also its proper proportion of the fixed charges of the railroad. 1 In Chicago, St. P. Mo. & O. Ry. Co. v. Becker, 35 Fed. 883 (1888), 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 employés, rent of engines, keeping the track in repair, etc., exceeded per car by fourteen cents the one dollar allowed in the schedule as compensation. particular expenditures involved in moving a carload from one point to another-wages, coal, oil and the like. 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. 1 1 § 1193. 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 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. 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. Thus to consider still railroad operation, in so far as the freight management and passenger management are divided between different officials the salaries may be 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, how 1 Conversely 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, 29 Sup. Ct. 678 (1909). ever, a very considerable total of joint costs inextricably combined, the salaries of the executive officers and the capital charges upon roadbed, as example. At this point we are for the first time really driven to computation upon an artificial basis to arrive at some distribution. Obviously this is to be arrived at by striking some proportion. 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 persons maintain that the volume of business done should determine the proportion, dividing these joint costs (say) in the proportion of freight receipts to passenger receipts. But this proportion in turn seems to throw too great a burden upon the freight traffic, the passenger business obviously receiving more service than its proportion of the total receipts. Confronted suddenly with this problem in the late litigation resulting from the recent two cent passenger legislation, the State courts have hardly got further at first, than to say that they would not permit a reduction in rates in one branch of railroad service whether passenger or freight, which did not leave a fair profit upon each branch above its proper proportion of the expense of operation. 1 2 § 1194. Apportionment between interstate and intrastate business. Where a road runs through several States the Constitu 1 Pennsylvania R. R. Co. v. Philadelphia Co., 220 Pa. St. 100, 68 Atl. 676, 15 L. R. A. (N. S.) 108 (1908). 2 Coal & Coke Ry. Co. v. Conley (W. Va.), 67 S. E. 613 (1910). See also State v. Atlantic C. L. Ry. Co., 48 Fla. 114, 37 So. 657 (1904). See further Tucker v. Missouri Pacific R. R. Co. (Kans.), 108 Pac. 89 (1910). |