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 obviously receiving more service than its proportion of the total receipts. 59

§ 395. Basis of the distribution.

In a late case 60 these principles are thus discussed by Judge Hook. "From the very nature of the case, therefore, some rule must be adopted for charging to each of them their fair and equitable proportion of the common expense. Of necessity it must proceed upon average conditions commonly known or shown to exist, and it argues nothing to say that it does not fully apply to this or that exceptional instance. A general rule based on experienced observation is fair, and what is lost by its application in one place is doubtless gained in another, and an equitable equilibrium maintained. Of those suggested the revenue basis appears to be much more uniform in its adaptability and much less subject to substantial objection. It has been frequently employed. It is the one to which the mind naturally turns in every problem involving the charging of common expense to different departments of a business. When a general or common expense cannot be located what is more obviously reasonable than to say in the first place the different branches or departments shall bear it according to the value of their products of their gross earnings, and then make due allowance for exceptional conditions if any are perceived? That seems at the start to satisfy the mind intent on equity. It is a working basis for the distribution of all expense incident to railroad

59 Rate per ton per mile to be considered as relative test in rate making. National Hay Asso. v. M. C.

19 I. C. C. 34.

R. R., What

are reasonable passenger

rates: See Trier v. C., St. P., M. & O. Ry., 30 I. C. C. 352.

60 Missouri, K. & T. Ry. Co. v. Love, 177 Fed. 493.

business among its revenue yielding operations of every character." 61

§ 396. Basis of the proportion.

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 each of which it is admitted has its error-the writer would suggest that by a compound proportion, utilizing both proportions, the respective errors in the single proportions would be largely offset, and an entirely defensible result would be reached.62 One significant comparison to ascertain whether relative injustice is being done one traffic as against another, is through the earnings per car.63 But, where the commodity moves in trainloads, the earnings per trainmile furnish the best criterion.64 And in general it may be said that neither train mileage nor car earnings is sufficient in itself; a combination of both ton-mile and car earnings is more apt to show reasonableness than either of those factors alone.65 Whatever factors, or combination 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 rate on a haul which is shorter than the average. And in arriving at the average cost for a given commodity for a given transit the fairest basis will be that taking into account all factors in traffic movement.67

61 Citing Smyth v. Ames, 169 U. S. 466, 18 Sup. Ct. 418, 42 L. ed. 819; Chicago, M. & St. P. R. Co. v. Tompkins, 176 U. S. 167, 20 Sup. Ct. 336, 44 L. ed. 417; Northern Pacific v. Keyes, 91 Fed. 47; In re Arkansas R. R. Rates, 163 Fed. 141; St. Louis & S. F. R. Co. v. Hadley, 168 Fed. 317.

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

63 Ozark Fruit Growers' Ass'n v.

66

St. Louis & S. F. R. R., 16 I. C. C. 106; see also Merchants' & Manufacturers' Ass'n v. A. C. L. R. R., 22 I. C. C. R. 467.

64 Traffic Bureau of Nashville v. Louisville & N. R. R., 28 I. C. C. 533. 65 Wisconsin Steel Co. v. P. & L. E. R. R., 27 I. C. C. 152.

66 Wharton Steel Co. v. D., L. & W. R. R., 25 I. C. C. 303.

67 Pabst Brewing Co. v. C., M. & St. P. Ry., 17 I. C. C. 359.

§ 397. Average rate per unit of service.

In dealing with a multiplicity of rates for particular services, the computations described in this topic are next carried to the determination of the average cost per unit of service, which may be used thereafter as a standard for testing the charge for any particular service.68 Of any given company it may be said that it is entitled to take as gross receipts from its whole business a certain sum, determined by adding together its operating expenses, including therewith all proper maintenance charges, and its fixed charges, that is, a fair return upon a reasonable capitalization. This total amount divided by the total service gives the average cost per unit. In testing freight rates, the standard to be determined is the ton-mile cost. If the sum of the whole amount of freight carried be one hundred million ton-miles, and the gross revenue required from freight be one million dollars, the average rate of freight will be one cent per ton-mile. If there were no other factors in the problem, therefore, a fair proportionate rate would be the ton-mile average charge. Because, however, of other factors, which cause a difference between commodities with respect to the fair charge for carrying them, a uniform ton-mile rate applied to all cases would not result in reasonable rates.69

§ 398. Recognition of the ton-mile cost basis.

Although generally abhorrent to economists, the tonmile cost basis is well recognized by judges to-day as the first test to be employed in determining the reasonableness of particular rates. In a recent case 70 in the United

68 Cost figures are of great value. Pittsburgh Vein Operators of Ohio v. P. Co., 24 I. C. C. 280.

There is no exact standard by which the reasonableness of a rate can be measured. National Wool Growers' Ass'n v. O. S. L. R. R. Co., 25 I. C. C. 675.

69 Ton-mile cost as measure of rate.

National Lumber Exporters' Ass'n v. St. L., I. M. & S. Ry., 28 I. C. C. 215.

An increase made solely for purpose of obtaining more revenue is held by the Commission not to be justified. Collingwood Brick Co. v. P. M. R. R., 26 I. C. C. 572.

70 Atlantic C. L. Ry. Co. v. Florida,

States Supreme Court, where the issue was whether a certain rate upon phosphate fixed by a commission was fair to the railroad affected, Mr. Justice Brewer, speaking for the court said: "And here we face the situation: The order of the commission was not operative upon all local rates but only fixed the rates on a single article, to wit, phosphate. There is no evidence of the amount of phosphates carried locally; neither is it shown how much a change in the rate of carrying them will affect the income, nor how much the rate fixed by railroads for carrying phosphates has been changed by the order of the commission. There is testimony tending to show the gross income from all local freights and the value of the railroad property, and also certain difficulties in the way of transporting phosphates owing to the lack of facilities at the terminals. But there is nothing from which we can determine the cost of such transportation. We are aware of the difficulty which attends proof of the cost of transporting a single article, and in order to determine the reasonableness of a rate prescribed it may be sometimes necessary to accept as a basis the average rate of all transportation per ton per mile. We shall not attempt to indicate to what extent or in what cases the inquiry must be special and limited. It is enough for the present to hold that there is in the record nothing from which a reasonable deduction can be made as to the cost of transportation, the amount of phosphates transported, or the effect which the rate established by the commission will have upon the income. Under these circumstances it is impossible to hold that there was error in the conclusions reached by the Supreme Court of the State of Florida, and its judgment is affirmed." 71

203 U. S. 256, 51 L. ed. 174, 27 Sup. Ct. 108.

71 See also Wood v. Vandalia R. R., 231 U. S. 1, 34 Sup. Ct. 7, holding that it is not enough to set forth the capital values and the net earnings,

even if all this may have been done convincingly: before the operating ratios and ton-mile costs established from this proof can be available, it must be shown that the particular traffic under consideration costs

§ 399. Ton-mile cost basis not oppressive.

At all events it may be said that governmental regulation based upon the ton-mile basis is not oppressive. This is shown sufficiently in another case 72 involving a similar issue decided by the same Justice on the same day. "With reference to the second of these cases the order made by the railroad commission is said by the plaintiff in error to be an 'irregular, unjust and unreliable method of rate fixing,' and this upon the theory that the order makes the rate per mile the same for any distance, whether one mile or a hundred miles. It appears that 16.43 per cent of all the local freight business of the company in Florida comes from the carrying of phosphates, and reference is made to several cases in which the courts have noticed the fact that the cost of moving local freight is greater than that of moving through freight, and the reasons for the difference. But evidently counsel misinterprets the order of the railroad commission. It does not fix the rate at one cent per ton per mile. It simply provided that it shall not exceed one cent per ton per mile, prescribes a maximum which may be reduced by the railroad company, and if distance demands a reduction the company may and doubtless will make it. In addition it must be borne in mind that it is to be presumed that the railroad commission acted with full knowledge of the situation; that phosphates were in Florida possibly carried a long distance, the place of mining being far from the place of actual use or preparation for use. Further, when we turn to the report of the railroad company (which of course is evidence against it) we find that the company's average freight receipt per ton per mile in the State of Florida was 8,5% mills; so that the rate authorized for phosphates was nearly two mills per ton larger than such average. Under these circumstances it is impossible to say that there

more or less than the average, as the case may be.

72 Seaboard Air Line Ry. Co. v.

Florida, 203 U. S. 261, 51 L. ed. 175, 27 Sup. Ct. 109.