Railroads: Rates and Regulations

by William Zebina Ripley

A similar device was used by the Burlington road in its dealings with the Missouri river packing houses on export traffic. They signed an agreement making a rate to Germany of twenty-three cents per hundred to last until December 31, 1905. Before the expiration of this time, however, the roads concerned, publicly filed an amended tariff presumably for all shippers of thirty-five cents per hundred. They nevertheless continued the old rate to the packers. This case went to the Supreme Court which decided in 1908 that the device was unlawful and discriminatory.[175]

And then again there are all the possibilities of the printer's art to be used, in connection with the preparation of elaborate tariffs.[176] The tariff of "33 cents per hundredweight" may conceivably be a typographical error, to be speedily corrected in a supplementary hektograph sheet filed the next day. Involved and elaborate rate sheets may be reprinted with only one little change among a thousand items left as before. Different tariffs may interlock with complicated cross references. In one case in 1902 it took seven different tariffs to enable one to compute the rate for a given shipment. In twelve months, to December 1907, there were filed with the Interstate Commerce Commission 220,982 such tariffs, each containing changes in rates or rules. Some "expire with this shipment,"—and some agree to "protect" any rate of any competing carrier, that is to say, to meet it if it happen to be lower.

An entirely different plan of rebating,—and a most effective one,—has to do with apparently unrelated commercial transactions.[177] Many shippers are large sellers of supplies to the railroad. How easy then to make a concession in rates to an oil refinery for example, by paying a little extra for the lubricating oil bought from a subsidiary concern. The Federal authorities in recent years and especially in connection with the prosecution of the Standard Oil Company in 1908-1911, have discovered the most extraordinary variations in the prices paid by railroads for supplies. Independent concerns were often not allowed to compete in the sale of lubricants at all. It would be difficult to prove any connection between so widely separate sets of dealings; and yet it is clear that rebates are often given in this way. Or even more fruitful as an expedient, especially in these later days when rebating is a serious offence, why not confer a favor by extra liberality in allowances for damages to goods in transit? In 1909 the so-called Beef Trust was specifically ordered by the Attorney General of the United States to desist from such practices. Positively the only way to detect such fictitious allowances for damages, is to ferret out each case by itself. This is a slow and necessarily expensive process. Damage allowances and quid pro quo transactions in the purchase of supplies, are indeed almost "smokeless rebates," as they have aptly been termed.

Personal discrimination may be as effective upon competition through denial of facilities to some shippers, as through conferring of special favors upon others. Practices of this sort have been quite common in the coal business, especially in the matter of furnishing or refusing to furnish an ample supply of cars or suitable spur tracks to mines. In the well known Red Rock Fuel Company case in 1905,[178] the railroad definitely announced its policy, "not to have a lot of little shippers on its line who would ship coal when prices were high and then shut up shop and go home and let the large shippers have the lean years." The development of over 4,000 acres of coal lands was thus denied in favor of the large companies, until the Interstate Commerce Commission took the matter up. A year later came the startling revelations upon the Pennsylvania Railroad as to the practice of discrimination in furnishing cars to coal mines.[179] A comprehensive investigation by the company itself resulted in the discharge of a number of high officials. It appeared, for example, that the assistant to President Cassatt had acquired $307,000 in stock of coal companies without cost; that a trainmaster for $500 had purchased coal mine stock which yielded an annual income of $30,000; and that one road foreman was given three hundred shares of the same company stock for nothing. In all these cases the object was to secure not only an ample supply of cars for the favored companies, but perhaps even the denial of suitable service to troublesome competitors. In this regard, the old practices of the Standard Oil Company in the eighties are recalled. Not only, as in the celebrated Rice case,[180] did it demand heavy refunds on its own shipments, but it also compelled the imposition of a surtax on its competitors' traffic which was to be added to its own special allowance.

Yet other means of favoring large shippers at the expense of small ones, are almost impossible to eradicate. Certain of these may be illustrated by recently discovered practices of the Standard Oil Company. They are fully described in a special report of the United States Commissioner of Corporations in 1905. Upon the basis of this evidence, extraordinary efforts were made by the Federal authorities to secure convictions and to impose heavy fines for violation of the Elkins law. But the company escaped heavy penalties, in the main, by reason of legal technicalities. The prosecutions of 1906-1909, however, cannot be regarded as valueless, merely because the company escaped the imposition of fines aggregating millions of dollars. The moral effect of it was thoroughly good; and it is now clear that laws can be so drawn as to apply in future. Nor can any student of the evidence doubt for a moment, that, whether strictly an infraction of the law or not, the net result of these practices was to confer an advantage upon this large shipper, not open to its smaller competitors. Certain of its advantages, such as the ownership of pipe lines from the wells to the seaboard refineries and the strategic location of its plants, are the fruit of great resources and keen business acumen. But other advantages, particularly the relative rates on refined oil from Standard Oil plants and from centres of independent refining, are, according to the report of the Bureau of Corporations, due to pressure brought to bear upon the carriers. Whether they are or not, the result is discriminatory just the same.

The reason for the persistent pressure for low rates on petroleum products is, of course, that the cost of manufacture is so low relatively to the expense of transportation. An ample manufacturing profit is one-half cent per gallon of crude oil; and the average cost of refining does not exceed that amount. Yet a half cent will scarcely pay freight for more than one hundred miles. Hence it follows that for distances greater than this, the question of profit or loss may entirely depend upon the delicate adjustment of the freight rate. In this regard, a great company shipping all over the country has a great advantage over smaller competitors with a strictly local market, in that it can play off one rate against another. Thus, in one notable case, cited by the Bureau of Corporations, the Burlington road gave an absolutely unremunerative rate from the Standard refinery at Whiting near Chicago to East St. Louis, thereby enabling troublesome competition to be subdued; but it was recompensed by the payment of heavier charges on shipments to other points on the Burlington system, where, there being no competition, the high freight rate could be shifted on to the consumer. The Commissioner of Corporations gives one instance on the Northwestern road of a carload rate from Whiting to Milwaukee in order to meet water competition from independents at Toledo, which netted the carrier just ninety-two cents for the carriage of 24,000 pounds of oil a distance of eighty-five miles, with free return of the empty car.

The peculiarity of many of these rate adjustments of the Standard Oil Company of late years was that they were publicly filed; and hence not open to legal attack. This does not however detract in the least from their discriminatory character. One example, right here in New England, now happily corrected, may be cited from the records of the Interstate Commerce Commission for 1906.[181] The southern half of New England was mainly supplied with kerosene from the great Standard refinery at Bayonne, New Jersey. The oil was brought there from the fields by pipe line; and, being refined, was distributed by tank vessels all along the coast, with a short rail haul thereafter to inland points. The total cost to the Standard company was estimated by the Bureau of Corporations at between fourteen and sixteen cents per hundredweight. To meet this, the independent western refiners had to ship all the way by rail. This was more expensive in any event; but for some years they found their handicap greatly increased by the refusal of the New Haven road to join in any joint through rate. The western independents, therefore, had to pay the sum of two local rates, up to and beyond the Hudson river, thereby bringing their transportation up to approximately thirty cents per hundred pounds. In other words, their cost of carriage per gallon was enhanced more than enough to constitute a fair refining profit in itself. The result was the practical exclusion of competition from this source. Fortunately, however, after this investigation the New Haven was ordered to pro-rate with the western roads, thereby overcoming about half of this disability. This case clearly evinces the necessity of effective Federal regulation of such matters as joint rates; and it also shows how possible it may be to so adjust tariffs, openly and even legally, as to favor one shipper over another.

Unlike the preceding instance, most of the Standard's rebates have been, in fact if not technically, secret. Perhaps the most flagrant case occurred in the rates from Whiting to the southeastern states. The Bureau of Corporations estimated that $70,000 a year was saved by this device; and all competition from independent sources was eliminated within that territory. The Illinois Central and Southern roads cross at an obscure point in Tennessee known as Grand Junction. This was made a centre of distribution for the entire South.[182] But the rate under which the oil moved,—and in one given month 169 carloads were thus carried,—was given on a special tariff, publicly filed at Washington, to be sure, but prescribing the rate, not from Whiting but from Dalton, Illinois, to Grand Junction, Tennessee. Dalton was an almost unknown station, near the refinery. Of course any other shipper who happened to know of it, and who happened to have oil to ship from Dalton to Grand Junction, could have had the same rate of thirteen cents a hundred pounds. But he would find it moved over a roundabout route, over four different connecting lines, instead of over the rails of a single company. As against this rate of thirteen cents, the only routes known to the Ohio independent producers charged from nineteen to twenty-nine and one-half cents per hundred pounds. Meantime the Standard's oil was by this devious means reaching every point in the South at prices which no competitor could hope to meet. In one case, the oil going by way of Grand Junction, travelled over one thousand miles when the direct route from Chicago was only a little over five hundred miles. The adjustment was everywhere such that, even on the commonly known tariffs, Whiting enjoyed a special advantage over the sources of independent oil. Atlanta, Georgia, is only 733 miles by short line and 1003 miles by way of Grand Junction from Whiting. Toledo, with its independent refineries, is distant only 687 miles. Yet despite this fact, the commonly known rates were shown to be, from Whiting, 33.2 cents as against 47.5 cents from Toledo. So, even without the Grand Junction contrivance, the Standard was seemingly favored more than enough. It should be added, in conclusion, that while the Grand Junction rate was publicly filed, its discriminatory character stands proven by the fact that all the actual shipments were "blind billed;" that is to say, no local agent knew what was the rate actually paid. Such blind bills of lading are photographically reproduced in the report above named. Moreover the ill repute of the transaction was indicated by the prompt cancellation of the rate when discovered in 1905. But in the meantime it had done its work, and fixed monopoly prices for an indispensable product over a quarter of the territory of the United States.

Aside from the palpably dishonest secret rebating, the real root of the difficulty with many of the other big shippers beside the Standard Oil Company,—and an abuse moreover exceedingly hard to correct,—is the open adjustment of rates from competing centres of manufacture or distribution in such a way as to confer favors. The Bureau of Corporation's report on the Transportation of Petroleum Products deals fully with this. Relative rates, as above stated, always seem to favor Chicago (Whiting) as against the centres of independent refining such as Cleveland, Pittsburg, or Toledo. Formerly, before the great refinery was established in 1890 at Whiting,—which, by the way, produces one-third of all the kerosene used in the United States,—the roads from these centres made joint through rates all over the country. They still do so on many other commodities. But on petroleum products they have been withdrawn. The result is that everywhere, except where they can secure entrance by water, the disability in rates against the independent refiner is most effective. That much the same conditions prevail in other lines of business is affirmed on the highest authority. The Railway Age Gazette has repeatedly protested against the pressure which is now brought to bear against the carriers by such organizations as the Illinois Manufacturers' Association to substitute open but discriminatory local rates for the old secret favors upon which the great shippers throve for so many years. Fortunately, however, this situation in some cases relieves the Federal government of the burden of detection of maladjustments of this sort. For the communities aggrieved are constantly on the watch to protect their interests against rival cities. This factor clearly appears in the sugar and cement lighterage cases in 1908.[183] Carriers at New York in order to equalize rates with carriers serving Philadelphia refineries, grant "accessorial allowances" for the use of lighters or for cartage, in order, as they aver, to overcome the disability against their clients. But Philadelphia shippers are ever on the alert to detect such favors given at New York; and substantially aid the government in eradicating the evil. In the grain elevator allowance cases, likewise, at Omaha and Council Bluffs in 1906-1909, not only unfavored shippers at these points but St. Louis grain merchants as a body, intervened as complainants against the system. The powerful motive of self-interest thus invoked is of great service.