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2. Apportioned expenses, or those which in the first in
stence were incurred jointly for both services but for
Unapportioned expenses, or those which could not be di-
In its report of June 13, 1914, on the practicability of providing for the ascertainment of cost figures in the general manner indicated in Circular No. 31/, the Counicsion specifically refused to abandon its of giving consideration to cost of railway services in establishing rates. The Commission agreed with the arguments advanced in support of a separation of expenses, namely: (1) that it would be a raterial aid in the determination of the cost of railway services, not only as between freight and passenger services as a whole, but also in determining the cost of particular classes of traffic l'or the reason that the separation of freight and passenger expenses is fundamental in all cost of service inquiries; (2) an authoritative formula separating operating expenses and leaving none unapportioned would simplify the work of carrier representatives in rate cases; and (3) the proposed reports would be of assistance in the study of comparative costs among railways. The Commission noted that manufacturers have found estimates of operating expenses regarding individual articles manufactured in a plant to be useful managerial tools in determining efPiciency and in product pricing and, while differences probably exist, the same principles should be true for the railway Industry. The Commission stated that it was erroneous to suppose that the Commission was interested in such statistics merely for the purpose of rate making. The statistics would be valuable in making year-to-year comparisons for the same railroad and for different roads in the same year.
The Commission also said:
1 In the Matter of the Separation of Operating Expenses, 30 I.C.č. 676.
2) Among cases in which cost evidence was introduced were: Five Per Cent
case, 31 I.C.C. 392; Anthracite Coal case, 35 I.C.C. 220; 1915 Western Rate Advance case, 35 I.C.C. 497; Western Passenger Fares case, 37 I.C.C. 1; Lake Erie Ports Iron Ore case, 41 I.C.C. 181; and New England Milk case, 40 I.C.C. 699.
It is the duty of the Commission to keep itself informed regarding the conduct of the railway business, that a knowledge of the variations in unit costs is valuable even if no rates are based thereon.
2. Approximately two-thirds of the operating expenses of a
railroad can be separated in a reasonably satisfactory manner. The separation of the remaining one-third 18 useful 11 a basis is selected which equitably measures the use which either service makes of common facilities.
3. "Special purpose" statistics rarely command that confi
dence which inheres in figures that are kept continuously on accepted bases without reference to a particular controversy.
Comparable use units might be found for distributing the property used in common.
5. The systematic development of railway cost accounting
and its free discussion in the light of all information
The Commission concluded that Circular No. 3 should be revised so that a workable plan would be developed which would not be unduly burdensome to the carriers and which would yield statistical results of a fundamental character of value alike to the carriers and the Commission, and that no operating expenses were to be left unapportioned.
The third step in the Commission's revival of this subject was the offering of a tentative plan (March 18, 1915) of separating expenses between freight and passenger services 1] based on its Circular No. 3 but modified in accordance with 30 I.C.C. 676. The Association of American Railway Accounting Officers made numerous suggestions for improving the formula without receding from the position that no uniform basis could be adopted which would apply equitably under all conditions. With the exception of those relating to maintenance of way and structures, most of the Association's suggestions were adopted. According to this plan:
1I.C.C. Statistical Series Circular No. 4, March 18, 1915.
3. Expression of opinion was invited as to the suita
bility of the following bases for the separation of
The locomotive con-mile, exclusive of the
way and structures expenses.
difficulty that gross-ton-miles were not
On May 21, 1915, a hearing was held at which the matter was submitted. The Commission stated that in discussions before it there was apparent acceptance of the necessity for such a division, and that there was no serious difference of opinion as to the methods proposed except as to maintenance of way and structures expenses for facilities used in common. The representatives of state commissions advocated use of "gross-ton-miles" and those of railroads "engine-ton-miles," apparently influenced by possible effect on future statistical evidence in passenger-fare cases.
Neither method was approved. The Circular No. 4 method was made effective and the carriers were required to report the disputed portion of the expenses as "undivided." Carriers also were required to compile locomotive-ton-mile data.
On December 7, 1915, 1, the Commission commented on various methods of separating expenses. Allocation of expenses based upon locomotive-tonmiles was rejected. The Commission said that to a certain extent this
1 Western Passenger Fares, 37 I.C.C. 1.
method forms a measure of the wear and tear on track and structures, but a large proportion of the maintenance of way and structures expenses are influenced only to a small extent and some expenses are not influenced at all by the weight and speed of trains. Action of elements and deterioration of materials continue regardless of whether trains pass over track or not. An example was the replacement of ties. It was unknown how much replacement was due to action of elements and how much due to wear. The Commission also indicated belief that there was no doubt but that high velocity of passenger trains, compared with freight, necessitates a better maintenance standard. Allocation based upon revenue train-miles was not approved because it does not take into account relatively greater speed of passenger trains or relatively greater weight and length of freight trains. The locomotive repair and transportation direct cost basis was not approved because there was little attempt on the part of the railway industry to support it. Locomotive ton-miles, including yard engine ton-miles, was not approved for reasons indicated in the disapproval of the locomotive tonmile method. The gross ton-mile basis was not approved because it does not directly take speed into consideration as indicative of increased wear.
After rejecting all of the bases offered both by the railroads and by the protestants, the Commission divided maintenance of way and structures expenses on the basis of the actual division of seven accounts:
The Commission indicated that its decision to use this basis of allocation was not necessarily to be regarded as conclusive of the method that should uitmately be used to divide maintenance of way and structures expenses between freight and passenger. Objections to the direct charge method were known and appreciated but the method was used because objections seemed less forceful than those waged against any of the other methods proposed. Resulting rules for the separation of expenses between freight and passenger services ("Rules Governing the Separation of Operating Expenses between Freight and Passenger Service on Large Steam Railways") were made effective as of July 1, 1915, and were used for the year ended June 30, 1916.
Part of the evidence before the Commission, (July 11, 1916, in the New England Milk case) concerned a method of dividing maintenance of way and structures expenses on the basis of fuel issues.
1 New England Milk case, 40 I.C.C. 699.
40 1.C.C. 699. Although the Commission here rejected this basis of apportioning maintenance of way and structures expenses, it subsequently became the basis used for 16 years. (See p. 9, following.) The method is fully described in The Separation of Railroad Operating Expenses between Freight and Passenger Services, William J. Cunningham, QUARTERLY JOURNAL OF ECONOMICS, February 1917.
"The theory upon which the fuel basis is offered as
Fuel consumption, in a large degree, is proportional
"Since the horsepower developed 18 directly propor-
"From an accounting viewpoint the fuel basis 18
In order to reduce statistical reporting for the period of the war, the Commission, on October 23, 1917, withdrew its requirements for apportioning cormon expenses between freight and passenger services and for maintaining a record of locomotive ton-miles, as prescribed by the rules
1 The Separation of Railroad Operating Expenses between Freight and Pas
senger Services, William J. Cunningham, QUARTERLY JOURNAL OF ECONOMICS, Vol. XXXI, February 1917, p. 236.