Railroads: Rates and Regulations

by William Zebina Ripley

The reasoning underlying local discrimination is admirably set forth by President Hadley in the following passage from his Railroad Transportation:—[202]

"On the coast of Delaware, a few years ago, there was a place which we shall call X, well suited for oyster-growing, but which sent very few oysters to market, because the railroad rates were so high as to leave no margin of profit. The local oyster-growers represented to the railroad that if the rates were brought down to one dollar per hundred pounds, the business would become profitable and the railroad could be sure of regular shipments at that price. The railroad men looked into the matter. They found that the price of oysters in the Philadelphia market was such that the local oystermen could pay one dollar per hundred pounds to the railroad and still have a fair profit left. If the road tried to charge more, it would so cut down the profit as to leave men no inducement to enter the business. That is, those oysters would bear a rate of one dollar per hundred, and no more. Further, the railroad men found that if they could get every day a carload, or nearly a carload, at this rate, it would more than cover the expense of hauling an extra car by quick train back and forth every day, with the incidental expenses of interest and repairs. So they put the car on, and were disappointed to find that the local oyster-growers could only furnish oysters enough to fill the car about half full. The expense to the road of running it half full was almost as great as of running it full; the income was reduced one-half. They could not make up by raising the rates, for these were as high as the traffic would bear. They could not increase their business much by lowering rates. The difficulty was not with the price charged, but with the capacity of the local business. It seemed as if this special service must be abandoned.

"One possibility suggested itself. At some distance beyond X, the terminus of this railroad, was another oyster-growing place, Y, which sent its oysters to market by another route. The supply at Y was very much greater than at X. The people at Y were paying a dollar a hundred to send their oysters to market. It would hardly cost twenty cents to send them from Y to X. If, then, the railroad from X to Philadelphia charged but seventy-five cents a hundred on oysters which came from Y, it could easily fill its car full. This was what they did. They then had half a carload of oysters grown at X, on which they charged a dollar, and half a carload from Y on which they charged seventy-five cents for exactly the same service.

"Of course there was a grand outcry at X. Their trade was discriminated against in the worst possible way—so they said—and they complained to the railroad. But the railroad men fell back on the logic of facts. The points were as follows: 1. A whole carload at seventy-five cents would not pay expenses of handling and moving. 2. At higher rates than seventy-five cents they could not get a whole carload, but only half a carload; and half a carload at a dollar rate (the highest charge the article would bear) would not pay expenses. Therefore, 3. On any uniform rate for everybody, the road must lose money, and 4. They would either be compelled to take the oyster car away altogether, or else get what they could at a dollar, and fill up at seventy-five cents. There was no escape from this reasoning; and the oyster men of X chose to pay the higher rate rather than lose the service altogether."

The logic of this oyster case seems convincing in its simplicity. But it presents more complications than appear at the outset.

First of all, what is the nature of the competition at the more distant point which is alleged to "compel" the lower rate? Is it merely of rival routes or of competing markets? It will be advisable to keep the two distinct so far as possible. Under the first heading, competition of routes, the subjoined sketches represent two possible situations. In both instances, however, Y, enjoying the lower rate, is more distant from Philadelphia than X. The difference between the two arises from the fact that in the one case X is nearer Philadelphia than Y on a roundabout line; while in the other X is actually nearer than Y by the shortest direct route. We may safely assume that the compelling competition alleged at Y as justifying the lower rate is by rail; as, the commodity being a marine bivalve, both places presumably enjoy equal facilities for water carriage. At all events, assuming that we have to do with competing rail routes alone, what differences obtain between the two sets of circumstances above sketched? Not insignificant inequalities in the length or power of the two routes are implied by the diagrams. They are supposed to represent substantially different lines, which may, for the purpose of the argument, be denominated strong, natural, or standard, and weak, unnatural, or abnormal, respectively, so far as the particular traffic in hand is concerned. That this distinction is not irrelevant, but frequently of determinant force, is shown by an analysis of concrete cases which have arisen for adjudication.

This proposition is clear beyond dispute. The actual cost of service, which fixes an irreducible minimum rate between Y and Philadelphia, is less on the short line than by the roundabout one. For either road to accept less than the portion of the cost traceable to this particular traffic, that is to say, the extra cost incident to its acceptance, is economically inconceivable. From this it follows, other conditions being equal, that the shortest line between Y and Philadelphia rules the rate in the last instance. This is normally the case. The roundabout route thereafter merely accepts the rate thus compelled. To permit the roundabout line to rule the minimum rate would not only violate a fundamental principle of operation: it would inevitably lead to chaos. The analogy with cut-throat competition in business is obvious. It is equally plain that the mere acceptance of a short line rate by a roundabout road, so long as this rate is adequate to yield some profit over the extra cost, while of advantage to some, may not work positive injury to any one. This condition normally corresponds to the state of affairs represented by diagram A. The nearer point, X, as Hadley avers, has no just grievance against Y because the latter has the good fortune to have a direct service to Philadelphia at a low rate. For Y to withdraw shipments from the line via X might even destroy the only chance of X for a market. It would also deprive Y of whatever benefit it might have derived from competition either of routes or of facilities. Of course, we have expressly omitted market competition as a factor, reserving it for separate treatment. Yet one objection arises. Normally, the direct line ought to maintain a tariff conforming in some degree to the distance principle. The roundabout line can compete at Y only by a violation of it, unless, indeed, its local tariffs be graded much more gradually. In other words, its progression towards the maximum must be distributed over a much longer line. Even this would, on Hadley's statement of fact, eliminate X from the Philadelphia market. Such reduction of local rates upon the roundabout route would in turn discriminate against places like Z on the direct line, equally distant with X from Philadelphia. For the latter places would necessarily be assessed at a higher rate per ton-mile.[203] This would constitute another form of local discrimination, which will be discussed in due time. There is, therefore, at best, only a choice of adjustments, either of which leads to some form of inequality. But, upon the whole, balancing the evil with the good, the first variant of our oyster case appears to be best solved by according all shippers at Y a somewhat lower rate than X enjoys.

Conditions corresponding to diagram A have frequently given rise to complaints before courts and administrative tribunals. An interesting illustration is afforded by the Hillsdale ice case in Michigan.[204] Ice was moved from this town to Springfield and Columbus, two neighboring Ohio cities, over several different routes. (See map on next page.) To Columbus the shortest road was by the Hocking Valley Railroad directly through Toledo. Another route by way of Sandusky existed; and even a third through Sandusky, thence over to Springfield, and in by the side door, so to speak, to Columbus. This last routing was due to the fact that the Big Four road from Sandusky diagonally across to Springfield had no access to Columbus except through a branch line from Springfield. This last-named zigzag route was 295 miles in length as against 190 miles by the direct line through Toledo. To Springfield, on the other hand, no direct route from Hillsdale existed; but freight might move either via Sandusky by the Big Four road or through Sandusky and around by way of Columbus. The shortest of any of these lines to Springfield, however, was twenty-nine miles longer than the shortest line to Columbus. This established Columbus, therefore, as normally the nearer point. Complaint arose from the fact that ice carried over the zigzag route to Columbus actually passed through Springfield and forty-five miles beyond to reach its destination. For such shipments over the Big Four road, Springfield instead of Columbus was the nearer point. But, contrariwise, for ice coming to Springfield through Columbus, the latter in turn became the intermediate point.[205] The specific complaint was that the rate by all routes to Springfield was one dollar per ton, while to Columbus it was only eighty cents. Originally, the rate was higher ($1.25 per ton), but was the same to both points. Is this a case of local discrimination or not?