Railroads: Rates and Regulations

by William Zebina Ripley

The original long and short haul clause, as we have seen, forbade a greater charge for a short than for a long distance over the same line under "substantially similar circumstances and conditions." The principal amendment in 1910 was the elimination of this troublesome clause, "substantially similar circumstances and conditions";—responsible, as experience had shown for the practical nullification of the entire fourth section of the law of 1887 through the interpretation placed upon it in 1896 by the courts.[746] The insertion of a new provision in 1910 prohibiting carriers from charging "any greater compensation as a through route than the aggregate of the intermediate rates," concerned a somewhat different question, and may be omitted from consideration in this connection. The Commission was given authority under the amended law to relieve carriers from the prohibition of the statute, which, in this regard, did not become effective until February 17, 1911. It was uncertain at the time how extensive was the violation of the distance principle; although a comprehensive investigation by the Elkins Committee in 1905[747] showed the existence of many irregular tariffs all over the country. Within the first ten months after the law took effect, 5723 applications for relief under this section were filed. Of this number only two hundred and ninety concerned passenger fares: making it clear that the problem was mainly one of adjustment of freight rates. Inasmuch as the Commission held that each application should be treated as a formal complaint to be separately passed upon, it will be seen that these applications for relief considerably outnumbered the total of 4570 formal complaints which had otherwise been filed since 1887. Amendment of the fourth section obviously imposed a heavy additional burden upon this administrative arm of the Federal government.

The proposition to amend the long and short haul clause in 1910 called forth the same divergence of opinion in Congress as to regulation which characterized the original debate twenty years before. One party wanted an absolute long and short haul clause, permitting of no departure from the distance principle. The other stood for a more elastic plan, whereby carriers under certain economic justification should be allowed to make a higher charge at the intermediate point. The prime difficulty lay in defining these exceptional cases. Had Congress left this solely to the discretion of the Commission without such definition, the law might be held unconstitutional, as involving a complete delegation of legislative power. The situation was clearly stated at the time by the Chairman of the House Committee on Interstate Commerce. "Practically what we do here is to give the Commission power to say what, in a particular case, shall be a just and reasonable rate; although we declare as a general proposition that it shall be unjust and unreasonable to charge more for a short haul than for a long haul." In brief, it is clear that Congress intended that the general language of the statute should furnish the rule which the Commission was to adopt in applying this section of the law.

Was there any further intention of Congress in thus amending the long and short haul clause? The carriers contended that the only effect was to deny the railways the right to decide for themselves whether they might disregard the rule of the section: in other words, that they must conform to the interpretation laid down by the Commission itself in the Georgia Railroad Commission cases in 1892.[748] The Commission, on the other hand, at once interpreted the amendment, as defining the purpose of Congress differently. It held that the railroads must assume the burden of justification. The carriers, therefore, must become the advancing party in proving that violation of the distance principle was warranted by the necessities of the case. It is obvious that, without this interpretation placed upon the amendment, Congress would not be providing a remedy for local discrimination, but would be merely giving power to declare the existence of a wrong.

The constitutionality of the amended section seemed likely to depend upon the manner in which it was applied administratively. If construed as conferring unrestricted power to grant or deny applications for relief, it would probably be held void, as already observed, as an unfettered delegation of legislative authority. Rate making being a legislative function, this attribute of the Congress could not constitutionally be vested in entirety in an administrative body. The Commission must, in other words, be restricted and guided by certain rules and standards set by the legislature. This point had been well established respecting the exercise of control over the issue of capital stock by railroads by the state commissions. It was clear, also, that the long and short haul clause did not impose an inviolable rule to be enforced against all carriers. This had been the contention of complainants against the railroads in the Spokane case, soon to be considered. It seemed clear that the proper function of the Commission under the law, was to investigate each case by itself in the light of the first three sections of the Act in general. After such investigation, if it appeared that a departure from the distance principle would result neither in unreasonable rates nor in undue discrimination, permission therefore must be granted. Under such circumstances it could not lawfully be withheld. And in the contrary case deviation from the long and short haul principle must likewise be refused.

The Commission in enforcing the new long and short haul clause, in the first place laid down certain general rules for its own guidance.[749] Perhaps the most important of these was that the different rates or fares to be compared, must apply to the same classes of transportation. It would be obviously unjust to compare a one-way fare with either excursion or commutation rates. Export and import freight rates, usually lower than regular domestic rates, must each be dealt with in a class by themselves, in determining whether the more distant point by having a higher rate prejudiced the rights of intermediate ones. Congress certainly did not intend to make the charging of a commodity or carload rate in transcontinental traffic unlawful, merely because it happened to be lower than local rates or less-than-carload classified shipments from intermediate points. Violation of the distance principle must properly always be determined by comparison between rates of the same kind. A number of similar rules were promulgated for the sake of duly standardizing practice.

Applications from the carriers for exemption from the long and short haul clause in freight tariffs fell into four distinct groups. The largest number of petitions,—more than one-fourth of the total filed,—had to do with the necessities of circuitous lines in meeting through rates made over more direct routes.[750] In such cases the lowest through rate was often made by the longer line, which might, at the same time, conceivably be operated at a lower cost. Permanent relief was granted by the Commission in comparatively few of such instances; and then only when it appeared either that the short line had observed the distance principle throughout, or else that the intermediate rates upon the long line were apparently reasonable and just, in and of themselves. Under such conditions the Commission sometimes permitted the circuitous route, especially if it were manifestly so, to meet, not only the prevailing rate over the short line, but also any future rate which it might put into effect.

Next in importance, measured by the number of applications for relief from the long and short haul clause in freight tariffs, were those based upon the exigencies of market competition. The familiar case of the rivalry of Florida and California orange growers in the eastern markets may illustrate the situation.[751] The growers must be put into that market and held there in each case in competition with one another, each served by the carriers who profited by their traffic. Should it be said that because such market competition compelled a low through rate, irrespective of distance, that no higher rate at any intermediate point where such market competition did not exist, should be allowed? The difficulty and danger, however, of accepting the justification of market competition was, of course, the fact that exemption from the distance principle might deny to the intermediate points the advantage to which they were justly entitled by reason of their geographical location.[752] The compelling force of market competition is exemplified also in the transportation of pine lumber from all along the southern tier of states to the consuming territory of the treeless Middle West. The mills in Mississippi, Louisiana, Arkansas, and Texas are so much nearer than those in Florida or Georgia, that exceptionally low rates per mile must be put in from these latter states to enable them to hold their own. Such exceptionally low rates, if applied to all intermediate points, would, of course, prove ruinously unprofitable to the railroads concerned. There were certainly contingencies of this sort entitled to relief.

Closely akin to market competition in compelling departure from the long and short haul clause, were the practices arising in connection with commodity rates to meet special circumstances in production or consumption. A public building, perhaps, was to be erected at a given point; and active competition arose from quarrymen in different parts of the country for supplying the cut stone. A carrier serving such a quarry put in a special carload rate in order to enable the shipper on its line to compete for the contract. No similar commodity rates, as a fact, were called for from intermediate stations, inasmuch as no other quarries on the line were interested in this particular job. The Commission ruled in such cases that no tariffs from intermediate points need be filed, unless desired for the benefit of some other shipper. Such cases are obviously analogous in principle to those above mentioned under the heading of market competition.

The third and perhaps, as it may appear in the future, the most substantial ground for seeking relief from the long and short haul clause in freight rates was the force of water competition. For example, all along the Atlantic seaboard the low rates of coastwise steamships were absolutely compelling in their effect upon through rates by rail. Obviously the railroads could not share in the business, unless they met the low water rate,—a low water rate which, very properly, ought not to affect the higher charges at interior intermediate points not enjoying such competition by water. On the other hand, it was evident that the utmost care needed to be exercised in accepting this excuse for the lower rate at the more distant point; or, otherwise stated, for higher rates at the intermediate points not in the enjoyment of water competition. It was unquestionable, as experience all over the country had demonstrated, that the force of such competition upon internal waterways had been greatly exaggerated by the railroads for their own purposes. The steamboats had disappeared from the Mississippi and all its branches, and from the smaller rivers of the southern states, not because they were surpassed either in speed or in economy, but by reason of the superior organization and certainty of through shipments by land.[753] The railroad always beat the steamboat, mainly because it was not hampered by the difficulty of breaking bulk at transfer points. The river boat served relatively few places, while the railroad could make connections everywhere. And, finally, the water lines, being open at all times to competition for the worth-while business from rivals who needed merely to assemble enough capital to buy a boat, could not distribute their margin of profit according to the pressure of competition at different points along every line.[754] Whether a revival of commerce upon our inland waterways will ever change the nature of this competition between water and land transportation remains to be seen. But, in the meantime, it was indubitable that the plea of competition by water required careful examination before being accepted at its face value. The importance of this consideration appears clearly in connection with the Intermountain rate cases, soon to be discussed.