Railroads: Rates and Regulations

One final relation between operating and fixed expenses is left for consideration. It is so well put by J. Shirley Eaton in an unpublished paper, that it can best be stated in his own words:

Railroad expenditures, as Taussig clearly pointed out a number of years ago,[44] afford a prime illustration of the production of several commodities by a single great plant simultaneously at joint and indistinguishable cost. The classic economists illustrated this law by the joint production of wool and mutton and of gas and coke. In both of these instances neither commodity could conceivably be produced alone. Nor was either one, so to speak, a by-product of the other. So nearly of equal importance are the two, in fact, that the cost of production for each may approximately be determined by dividing the total cost according to the relative worths of the two or more products. The law of joint cost with reference to the production of transportation is somewhat different. Compare, for instance, the carriage by a railroad of thousands of passengers and different commodities in every direction, under varying conditions, singly or by wholesale, slowly or by express, over a given set of rails every day; with the operation of a great refinery producing simultaneously kerosene, gasoline, lubricating oils and greases as well as various odd chemicals. Both are examples of production at joint cost, but with various important contrasts. In the refinery all the costs are joint. All the processes are interlocked. Every increase in the output of kerosene produces pari passu an increase of the other commodities. On the railroad not all, but only a part of the costs are joint, in such manner as has been shown. For, from the joint portion of its plant—roadway rails and locomotives—the railroad may produce transportation of different sorts quite independently. It may choose to especially cultivate its passenger traffic, or its cotton or coal business. After a certain point of congestion is reached, the various sorts of traffic on the railroad may even become actually competitive with one another so far as the joint use of the plant is concerned. It is plain that this could never happen in the refinery. The use of more stills for making kerosene would automatically produce more by-products of every sort. But on a railroad it might well happen that the coal and passenger business might come to interfere with one another. A choice of emphasis as between fast refrigerator beef or fruit traffic, and limited express service, may have to be made on a long single track line. Nevertheless, in spite of these peculiarities of transportation, the general law of joint costs holds good, in that it is a demand for each service rather than its cost which finally determines the chargeable rate.[45] This must be so, because of the fact that the cost of each shipment is so largely joint and indeterminate, and that a large part of the entire plant is indistinguishably devoted to the general production of transportation without reference to particular units of business. One concrete example may serve to illustrate this point.

For years attempts have been unsuccessfully made by accountants to effect the primary separation between expenses of passenger and freight business,[46] in order to determine the cost of transportation per unit in each case. Some companies like the Louisville & Nashville and the Burlington system, still divide up the two, usually on the basis of the engine mileage for each class of traffic. This may be serviceable enough for comparisons of costs from year to year in the same company, but it has no general value and it may, moreover, become highly misleading. The most absurd conclusions may result. Thus at one time it appeared from such data, compiled by the Interstate Commerce Commission, that the New York Central, with five times the density of traffic of the Illinois Central, was actually conducting its freight business at a much higher cost per ton mile. Such inconsistencies induced the Interstate Commerce Commission in 1894 to abandon the attempt at any such primary separation of accounts.[47] It has since been reattempted, in special cases, as by the Wisconsin Railroad Commission in its notable "Two-cent Fare" decision in 1907, the division being made according to a number of different criteria.[48]

But it is plain that a very large proportion—probably over half—of the expenditures for freight and passenger business are entirely joint, however distinct the revenues from each service may be. We have seen that approximately two-thirds of the outgo is incurred on behalf of the property as a whole. Certain expenses, to be sure, such as train wages, coal consumption and the maintenance of rolling stock, are readily divisible; but with respect to the maintenance of way and structures—about forty per cent. of the total outgo—all guides fail. Even in respect of the cost of rails, due to wear and tear of train movement, we are quite at sea in the allocation of expenses. Freight trains may indeed be four times as heavy as passenger trains; but, on the other hand, they move at far slower speeds. And then, finally, how about the large item of capital cost, the proportion of outgo for fixed charges? This equals about twenty-seven per cent. of the total expenditures for the United States as a whole. We may, of course, divide these expenses arbitrarily on the basis of the relative gross revenue from freight and passenger business respectively. And yet how absurd it would be to attempt to allocate an expense of a million dollars for the abolition of grade crossings in this way. As between the New Haven road, with passenger and freight revenues about equal, and a western road with only one-tenth of its income derived from passengers, the apparent cost of freight business on the eastern road would be absurdly reduced by any such process. The facts are plain. So many expenditures are incurred indiscriminately on behalf of the service as a whole—being an indispensable condition for operation of the property at all—that no logical distinction of expense even as between passenger and freight traffic is possible. This being so, how futile it is to expect to be able to set off the expenses due to any particular portion either of freight or passenger service, and especially to any individual shipment. It may oftentimes be possible to determine the extra cost due to individual shipments. This, of course, mainly applies to what are called movement expenses. Thus the haulage cost of a 2,000-ton grain train from Chicago to New York has been estimated at $520. But how small a part this is of the total cost, the preceding analysis must have made clear. In the Texas Cattle Raisers' case, detailed analysis of the extra cost for the traffic in cattle was presented.[49] The starting point in this attempt was necessarily an allocation of freight and passenger expenditures, which, if defective, would vitiate the entire subsequent calculation as to costs. In this instance, it was the judgment of the Interstate Commerce Commission in its final decision in 1908, that no such separation of expenditures was possible as a basis for the determination of cost of service.