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PURCHASED THROUGH DOC, EX. PROJECT 10.18.57
This brief account of the development of rules governing
the separation of railroad operating expenses between freight and passenger services is based, for the most part, on files of the Bureau of Transport Economics and Statistics, and publications of the Commission. It is intended to provide a
readily-available source of background information concerning efforts of the Commission to obtain a reasonably accurate separation of operating costs, by type of service, primarily for consideration in connection with the establishment and
regulation of rates.
E. R. Jelsma
A Brief History of the Separation of Railroad Operating Expenses
Prior to the advent of the Interstate Commerce Commission, railroads filing reports with certain State Commissions made a separation of their operating expenses between freight and passenger services in such reports. The initial step in the development of a uniform system of accounts and a uniform method of reporting statistics to State Commissions was taken at the Second National Convention of Railroad Commissioners held in Columbus, Ohio, November 12, 1878, which adopted the resolution that "e Committee of five be appointed to consider this subject and to mature a form of returns and system of uniform railroad bookkeeping, so far as the same is practicable, and that the Committee be instructed to invite the cooperation of the leading railroad accountants of the country in the performance of this duty, and that they report at the next meeting of this convention." The next day (November 13, 1878) a committee was appointed and confirmed.
The above committee made its report at the Third National Convention of the Railroad Commissioners held in Saratoga Springs, New York, on June 10-11, 1879, at which time certain accounting and statistical rules and a form of return were agreed upon and adopted.
The rules and form of returns adopted were very general. They consisted of rules for distribution of revenues and expenses of operation, and the classification of expenditures for construction; an exhibit showing distribution of income and profit and loss items; an analysis of charges and credits to property during the year; an analysis of earnings and expenses; an analysis of assets and liabilities; and an analysis of mileage, traffic, etc. The reports of the railroads to the State Commissions complied with the form adopted at the Convention of 1879. Such reports contained provisions for the separation of operating expenses between freight and passenger services on the basis of the ratios of train-miles in each of the respective services to total train-miles.
The above accounting and statistical rules and forms of reports used by the railroads in reporting to the State Commissions were adopted by the Interstate Commerce Commission in 1887, when the Commission was created by the Act of Congress. The importance of separation of operating expenses between freight and passenger services was recognized by the Commission in its second annual report: "The act requires a statement of 'the earnings and receipts from each branch of business and from all sources.' This clearly requires a separation of freight and passenger earnings, and it is believed to be important, also, to apportion expenses between the freight and passenger service."1 And the Statistician to the Commission stated, in the "First Annual Report on the Statistics of Railways in the United States," that the apportionment of expenses between passenger and freight services in a satisfactory manner "is of great importance for an intelligent judgment on relative freight and passenger charges." 2 From 1888
1/ Second Annual Report of the Interstate Commerce Commission, 1888, p. 67. 2/ I.C.C., Statistics of Railways in the United States for the year ending June 30, 1888, p. 18.
through 1893, for years ended June 30, the annual statistical reports published by the Commission showed a separation of railroad operating expenses between freight and passenger traffic. The separation rule followed at that time was: "All expenses which are naturally chargeable to either freight or passenger traffic should be entered in their respective columns; expenses which are not naturally chargeable to either traffic should be apportioned on a mileage basis, making the division between freight and passenger traffic in the proportion which the freight and passenger train mileage bears to the total mileage of trains earning "1/.
In 1892, the Statistician to the Commission stated that this assignment of common expenses was introduced by the railways many years ago, when the difference in the character of the two services was so marked as to permit it to be made with a fair degree of accuracy. With development of the railway economy, however, which has resulted in increasing the rapidity of freight trains and the weight of passenger trains, it has been found that no more than half of the items of operating expenses can by any means be assigned to passenger and to freight service. This fact, taken in connection with the fact that the average cost per ton-mile and per passenger-mile, which was obtained upon the basis of the computation in question, was rarely used by commissioners in judging fair rates, induced rates, the railway commissioners to abandon this classification. 2
During the following twenty years, however, much progress was made in the general subject of cost accounting, both in manufacturing and in transportation. By 1914 many railways, on their own initiative, were apportioning their expenses by classes of service. In view of these developments the Commission decided to reconsider the matter of requiring carriers to apportion their operating expenses. After extensive preliminary inquiries, a hearing was held in Washington on May 2, 1914. A diversity of views developed. Some carriers desired the Commission to prescribe fixed formulas for apportioning all operating expenses, in the belief that the results would be helpful in rate litigation. Others contended that the results would prove of little use either to the carriers or commissioners
1/ In the Matter of the Separation of Operating Expenses, 30 I.C.C. 677. 2/ I.C.C., Statistics of Railways in the United States for the year ending June 30, 1892, pp. 86-87.
and would not justify the extra expense which careful cost accounting would entail. 1/2/
The Commission's initial step was that of offering a tentative plan under which the railroads would separate, if possible, their operting expenses between freight and passenger services, 3/ This plan provided that certain operating expenses would be divided between the freight service and the passenger service, whereas others would be reported as unapportioned.
The plan provided for the following classifications:
1. Directly assigned expenses, or those which assigned
1/ Twenty-eighth Annual Report of the Interstate Commerce Commission, 1914, Part I, p. 45.
From 1894 until about 1914, there developed within the body of informed opinion two contrasting points of view. One held that, because many of the expenses were common, it was absolutely impossible to divide the costs with mathematical exactness and that the division of these expenses which were common must rest on opinion. No matter how well it was informed, it would still be opinion. That view was supported by a court opinion (Northern Pacific Railway Co. v. Keyes, 91 Fed. 47). In contrast, there was a growing school of thought to the effect that, while there were significant differences in the respective methods of operation and that while no result could be arrived at which could be pronounced absolutely correct, the experience of other businesses with cost finding theories indicated that railroad costs could be developed to the point where the relatives could be useful in the solution of public problems. This point of view was thoroughly explored by the Wisconsin Railroad Commission in one of its 1907 decisions (Buell v. C., M. & St. P. Ry. Co., 1 Wis. RR. Reports, 324). It should be noted that one point of view urged a possibility, if not a probability, that certain new and useful knowledge could be obtained while the other point of view was adamant in its thought that the possibility or probability was impossible to attain nor did it appear to believe it necessary to gratuitously offer a substitute.
I.C.C., Statistical Series Circular No. 3, March 19, 1914.