The relative lack of financial prosperity of carriers will be considered in determining the reasonableness of its rates.36 The adequacy of the revenue for the service performed by the carriers must take precedence over market conditions in determining the reasonableness of a particular rate.37 Wages, price of materials and supplies, greater amount hauled by trains, and density of traffic on a weak line will be considered.38 And the fact that the general level of rates is probably higher in sparsely settled than in a more thickly settled territory under consideration.39 § 387. Limitation upon the law of increasing returns. That the law of increasing returns cannot be carried too far in rate making has been pointed out many times by those who deal with this question from the legal standpoint. The general caution with which this principle is admitted may be seen by a quotation from one of the earlier opinions of the Commission: 40 "Carriers justify this adjustment of rates by which Ash Fork is charged two and one-half times as much as is Los Angeles, although the traffic to the latter point passes through the former, by saying that water competition fixes the rate at Los Angeles, and that although the rate is unreasonably low there is some profit in the movement. The railroad itself must be constructed and maintained, with its station-houses and its operating force. These general expenses must be incurred at all events. Any traffic not otherwise coming to the road which pays something above the cost of moving, including rent of engines and cars, cost of fuel and labor, adds to the gross revenues without correspondingly increasing operating expenses. The Commission does not sanction the extent to which this principle is often pressed 36 Michigan Copper & Brass Co. v. D. S. S. & A. Ry., 25 I. C. C. 357. 7 Lindsay Bros. v. P. M. R. R., 25 I. C. C. 368. 38 Commercial Club of Salt Lake City v. A., T. & S. F. Ry., 19 I. C. C. 218. 39 American National Live Stock Ass'n v. S. P. Co., 26 I. C. C. 37. 40 Re Proposed Advances in Freight Rates, 9 I. C. C. Rep. 382. in the making of relative rates; certainly it does not approve the relation of rates established in the example above cited. There are many limitations to the application of the principle. Additional traffic in reality adds to those expenses which are not in theory affected. It costs more to maintain the track and keep up the operating force of a railroad when transacting a heavy than when doing a light business. The general expenses are higher. Increased tonnage speedily finds its way into the construction account; still up to a point at which traffic can be handled to advantage increase in tonnage at the same rate not only increases gross receipts proportionately, but increases net receipts in a still greater proportion.' 99 41 § 388. Length of haul as a factor affecting a particular rate. The first and most obvious fact which affects the rate is the length of carriage. The further goods are carried, the less, generally speaking, the charge per mile will be, since certain fixed and terminal charges must be paid once and only once no matter how long the haul. As these charges must be paid out of the rate, it is clear that the more miles the goods are carried the less the amount of the fixed charges which must be added to the rate for each mile. 42 "It is a familiar rule in the transportation of freight by railroads, and has become axiomatic, that while the aggregate charge is continually increasing the further the freight is carried, yet the rate per ton per mile is constantly growing less all the time, unless there be exceptional conditions modifying this rule. In consequence of the existence of this rule, the increase of the aggregate charge continues to be less in proportion every hundred miles, arising out of the character and nature of the services performed and the cost of the service; and thus it ties so desire. In re Express Rates, 28 I. C. C. 132. 41 It is particularly true in the case of the express business that under percentage contracts, expenses can be made to increase faster than revenue whenever contracting par 42 Farrar v. East Tenn., V. & G. R. R., 1 Int. Com. Rep. 764, 1 Int. Com. 487. is that staple commodities and merchandise are enabled to bear the charges of transportation from and to the most distant portions of our country." 43 § 389. Modification of the principle of the length of haul. The length of the haul is, however, only one factor in the problem; and its effect may be modified or entirely neutralized by other considerations. The natural check, so to speak, on the operation of length of haul is the difficult character of the country through which the longer haul is carried on, making operation more expensive, and thus neutralize the advantage derived from the longer haul. For this or some similar reason, the rule that the rate per ton-mile diminishes in proportion to the length of the haul must continually be modified by other circumstances of various sorts.44 "The rule that the rate per ton per mile must be less for the greater distance is one of the tests by which the rates can be carefully scanned in themselves. It is, however, like looking at them with a microscope. It ignores all other tests except that which it alone furnishes. It ignores all surrounding circumstances and conditions and every factor of every kind and description that enters into the making of the rate, no matter how compulsory or imperious that factor may be. It serves in itself a valuable purpose, not only as a close test of what a rate really is, but also as a basis in the cases to which it can be made to justly apply as a rule; but to determine the reasonableness and justness of a rate, all surrounding circumstances and conditions, and the factors which enter 43 Length of haul is plainly an important factor in establishing particular rates; in the following citations this point is emphasized: New Orleans Cotton Exch. v. Cincinnati, N. O. & T. P. R. R., 1 Int. Com. 764; Business Men's Assoc. v. Chicago & N. W. R. R., 2 Int. Com. 48, 2 Int. Com. Rep. 73; Trammell v. Clyde S. S. Co., 4 Int. Com. 120, 5 Int. Com. 324; Cordele Machine 44 The quotation which follows is from Bragg, Com. in Business Men's Assoc. v. Chicago, S. P., M. & O. R. R., 2 Int. Com. Rep. 41, 47, 2 I. C. C. Rep. 52. 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. |