Railroads: Rates and Regulations

by William Zebina Ripley

At times it is inevitable that cost of service and value of service considerations come flatly into opposition. Usually, as in the California raisin case or in the grant of low rates on Oregon lumber east bound about 1893, they reinforce one another; that is to say, the lower rate given to build up business obtains on a service given at lower cost. But it sometimes happens that shipments of the same commodities over a line in opposite directions may occur and that the lower rate applies to the (presumably) more costly service. In 1906 a manufacturer in Menasha, Wis., complained to the Interstate Commerce Commission[155] that his rates on woodenware to the Pacific slope were ten cents per 100 lbs. higher than were rates on the same goods between the same points east bound, notwithstanding the fact that the empty car mileage west bound was then three times as great as in the contrary direction. The movement of empties west bound would certainly seem to justify as low if not lower rates on the basis of comparative cost of operation, supposing that there was coincidence in time. Only one satisfactory explanation for this apparent anomaly suggests itself; viz., that this low eastbound rate was given to build up a new industry in the West. In other words, the cost of service, a dependable guide for a road in a static condition, failed of effect upon a line possessed of great dynamic possibilities. Occasionally opposition of principles like this may occur in questions of classification. It may temporarily be worth while, in order to build up a new industry, to accord a lower rating to a commodity actually more valuable or more expensive to handle than others. Here again the dynamic force in the value of service principle out-weighs all other considerations of relative cost of service.

The value of service principle in general fails, not only in the determination of absolutely reasonable rates, but it is inadequate also to the solution of perhaps the more difficult problem of relative rates. This question of relativity is twofold; first as between different places, and secondly as between different commodities. These are, in other words, the problems respectively of distance tariffs and of classification. The manner in which distance tariffs evolve, has already been discussed, and it is evident that the cost of service principle is of fundamental importance, even though it be tempered by considerations of commercial expediency, that is to say, by the necessity of at all times under stress of competition, charging only what the traffic will bear. But while the value of service principle—charging according to demand in other words—applies at the competitive points, the other principle of relative cost should be the fundamental one in fixing upon the scale of local non-competitive rates.

The second phase of the problem of relativity arises in connection with classification.[156] How shall goods be graded in respect of their freight charges for identical services in carriage? Besides illustrating the interplay of the two fundamental principles, this topic serves also to clear up another possible confusion of terms. Proportioning transportation charges to the value of the service must always be clearly distinguished from basing them upon the mere value of the goods. Nothing is more certain than that no direct causal relation between freight rates and the intrinsic value of commodities is traceable. On wire the freight rate between two given points may be about one-fourth of the commercial value; on sheet iron one-third; on lumber somewhat more, and on hay two-fifths; while on cattle and hogs the freight rate may range as low as one-tenth to one-eighth of their commercial value. On coal, on the other hand, the freight rate often more than equals the price of the coal at the mine, and on very low grade commodities like bricks, the transportation charges may equal two or even three times the worth of the goods.[157] For each locality or even direction, these percentages will change. Positive reasons for these varying relationships are discernible in local trade conditions. While in general cheap goods are rated lower; if for any reason—bulkiness or risk—they cost relatively more to transport, they may very properly be advanced in grade. Normally, raw products move at lower rates than finished products—for instance, wheat and flour or cattle and beef. This is in accord with charging what the traffic will bear in relation to value. But in the making of export rates, it may be to the interest of the carrier to reverse this order, actually according to the finished product the lower rate, thereby encouraging the development of manufactures at home rather than abroad.[158] Classification committees and regulative commissions are thus compelled to waver between the two opposing considerations of cost and value. One cannot avoid the conclusion, however, that, contrary to the usual rule, in this field of classification undue weight is often accorded by railway managers to that small element of total cost of service arising from risks of damage in transit—insurance cost, in other words—to the neglect of the financially more important consideration of what the traffic will bear. This emphasis upon the cost side of the account by classification committees, oddly enough is peculiarly characteristic of ratings in the higher class commodities. Among low grade goods, like grain, lumber or coal, the risk of damage is small, so that insurance cost becomes almost negligible. The insistent consideration among these low grade commodities is much more apt to be that of relative demand; arising from the necessity of close and constant adjustment to the behests of trade. Special or commodity rates, based directly upon what the traffic will bear, rather than upon the element of cost, are likely to prevail in these cases. But the very large revenue which could be obtained from increasing the rates upon the higher grade of goods seems not to be fully appreciated.

A valuable instance of the play of opposing considerations of cost and value of service in the classification of freight rates is afforded by the complaint in 1908 of the pulp paper makers in Wisconsin, already cited in another connection.[159] It appeared that for similar service over the same roads, the rates per carload on saw logs for lumber were only about one-half those charged for carriage of logs to be ground into paper pulp. Judged on the basis of commercial value, hemlock and spruce bolts, too short and often otherwise unfit for lumber, were worth much less than saw logs; and yet they paid double the freight rates. This was not because the pulp wood was less desirable as traffic. In many ways it was more so. The haul was twice as long as for saw logs. The paper mills brought relatively more supplementary tonnage in the form of coal, food stuffs and supplies for workmen and their families. Fully as much of the finished product to be reshipped to consumers resulted. While smaller in volume, the pulp wood business was far more permanent. It was growing rapidly while the lumber business was declining. Moreover, the actual cost of service in hauling pulp wood was fully as low as for lumber logs. Carloads were much heavier, and were more regular in movement. In practice they involved no milling-in-transit obligation, that is to say, no obligation to re-ship the finished paper out over the same road; while all the saw log rates carried this obligation—a matter of some moment to the railways. And finally the value of the service to shippers of pulp wood was less than to mere lumbermen; in other words, the paper makers were operating under closer margins of profit; their plants were more costly, and depreciated more rapidly. The defence of the carriers in this case was not that the rates on pulp wood were too high in themselves, but that the rate on saw logs was perhaps unduly low—the latter having been crowded down to a minimum figure by competition in the early days of the business by the lumber raftsmen who floated the saw logs downstream from the forest to the saw mills. But of equal importance probably in perpetuating the higher rates on pulp logs, was the assumption that while the value of the bolts themselves was perhaps even less than that of saw logs, the value of the resultant product, paper, was much greater than that of lumber. But the Wisconsin Railroad Commission, in entire harmony with the principle repeatedly laid down by the Federal commission, held that the carriers must be guided by real distinctions of cost from a transportation standpoint and not by gradations of value. If the goods were bulky, awkward, or risky to handle, perhaps requiring special appliances or equipment, relatively high classification was permissible. But if they were substantially similar for purposes of carriage, no gradation in rates based upon differences in the ultimate uses to which the commodity might be put would be upheld. Such was the reasoning of the Interstate Commerce Commission in a decision, holding that fire, building and paving brick must be accorded equal rates, regardless of their differing values.[160] That the element of value is, however, not negligible is brought out in a later Federal case,[161] wherein it was recommended that cheap china, to be given away as premiums in the tea trade, be rated nearer ordinary crockery or earthenware, even though shipped in the same manner as high grade china ware. Under the official classification, chinaware is rated first class if in boxes, and second class in casks. Earthenware or crockery is carried at twenty per cent, less than third class, in small packages (L. C. L.). On the basis of mere cost of service, it would seem as if boxes of chinaware should have a lower rating than casks. Boxes stow better than casks, with less risk of breakage. But the commercial practice being to ship the finer grades of chinaware in boxes, such shipments are graded higher because the traffic will usually bear a higher rate. Thus considerations of cost of service yield to those of value. The Interstate Commerce Commission, however, noting the exceptional circumstances under which the tea company distributed its cheap chinaware, recommended a revision of the classification to meet the needs of the case; in other words ordering a greater emphasis upon the elements of the value of the service, even at the expense of relative cost of operation.

Our final conclusion, then, must be this: That both principles are of equal importance; and that both must be continually invoked as a check upon each other. The tendency to the elevation of cost of service to a position of priority—rather characteristic of regulative bodies and of legislators—is no less erroneous than the marked disposition of railway managers to insist upon the universal applicability of the principle of charging what the traffic will bear. Neither will stand the test of reasonableness alone. Whether the one or the other should take precedence can only be determined by a careful study of the circumstance and conditions in each case; and in practice, the instances where either principle becomes of binding effect to the entire exclusion of the other, are extremely rare.

FOOTNOTES:

[119] 13 I.C.C. Rep., 319. The general investigation of wool rates is another admirable instance. 23 Idem, 151.

[120] Wisconsin Railroad Commission, 1908. Cf. p. [181], infra.

[121] The diverse interests to be reconciled must also include the lumbering centres once "next the stump," but now placed at a relative disadvantage. The Eau Claire lumber case [reprinted in Railway Problems, pp. 203-233] should be read in this connection.

[122] The remarkable rise of the sash, door and blind industry in the South, as prejudiced by comparison with Chicago under an outworn schedule of rates, is given in 23 I.C.C. Rep., 110.