Open Collections

UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

The problem of measuring a fair rate of return in regulated industry with special reference to the motor… Little, Paul Frederick 1968

Your browser doesn't seem to have a PDF viewer, please download the PDF to view this item.

Item Metadata

Download

Media
831-UBC_1968_A4_5 L58.pdf [ 8.73MB ]
Metadata
JSON: 831-1.0102369.json
JSON-LD: 831-1.0102369-ld.json
RDF/XML (Pretty): 831-1.0102369-rdf.xml
RDF/JSON: 831-1.0102369-rdf.json
Turtle: 831-1.0102369-turtle.txt
N-Triples: 831-1.0102369-rdf-ntriples.txt
Original Record: 831-1.0102369-source.json
Full Text
831-1.0102369-fulltext.txt
Citation
831-1.0102369.ris

Full Text

THE  PROBLEM OP MEASURING A PAIR RATE OF RETURN IN REGULATED INDUSTRY  WITH S P E C I A L REFERENCE TO THE MOTOR CARRIER INDUSTRY  by PAUL FREDERICK L I T T L E B.A., U n i v e r s i t y o f T o r o n t o ,  1965  A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE  REQUIREMENTS FOR THE DEGREE OF  MASTER OF BUSINESS ADMINISTRATION  i n t h e Department of Commerce a n d B u s i n e s s A d m i n i s t r a t i o n  We a c c e p t t h i s t h e s i s required standard  THE  as c o n f o r m i n g  t o the  UNIVERSITY OF B R I T I S H COLUMBIA August,  1968  In p r e s e n t i n g  for  that  this  thesis  an a d v a n c e d d e g r e e a t  the  Study.  thesis  Library shall  I further  for  agree  in p a r t i a l  the U n i v e r s i t y of  make  it  that  freely  for  of  British  available  permission  for  or p u b l i c a t i o n  of  my w r i t t e n  this  thesis  for  permission.  Department The U n i v e r s i t y o f B r i t i s h V a n c o u v e r 8, Canada  Columbia  It  financial  is  the  requirements  Columbia,  I agree  reference  and  e x t e n s i v e copying of  s c h o l a r l y p u r p o s e s may be g r a n t e d by t h e  D e p a r t m e n t o r b y h.ils r e p r e s e n t a t i v e s .  without  fulfilment  Head o f my  understood  gain  this  shall  that  not  be  copying  allowed  ABSTRACT The  motor c a r r i e r  industry  to r e g u l a t o r y  controls  In  States  the  United  of North America i s  over i t s r a t e  and  subject  setting practices.  i n Canada , p u b l i c  commissions  must d e v e l o p c e r t a i n t o o l s f o r m e a s u r i n g when an i n d i v i d u a l rate or the  an  entire rate  shipping  t h a t has  i s e i t h e r e x p l o i t i v e to  p u b l i c o r c o n f i s c a t o r y to the  been a p p l i e d h i s t o r i c a l l y  simply  the  of  carrier.  the  structure  r e l a t i o n s h i p of  i s not  operating  the  r a t e o f r e t u r n p r i n c i p l e employed by i n d u s t r i e s . I n the  -ating ratio  w i t h the  This  by  United  the  operating  regulators  ratio  can  of  where t h e  industry  other  h a v i n g on  the  the  shipper.  operating  ratio  carrier  be  and  oper-  are  still  u s e d w i t h any  the  In  p r o b l e m , more p r e s s i n g  the  operating  ^S4t!korimay be  be  the  addition, to  Canadian  t h a t o f what c o s t d a t a must be c o l l e c t e d and i t before  con-  i n making  a result ,  i s e x a m i n e d a t some l e n g t h .  thesis confronts  be  e f f e c t a r a t e may As  reg  criticized.  problems i n v o l v e d  financial  collect  as  .  the  to  regulators  the motor c a r r i e r  t h e s i s attempts to study the  regulators,  instrument  States,  a j u d i c i a l measurement o f  the  an  expenses  p r o b l e m o f d e c i d i n g what c o s t d a t a mu*  compiled before fidence  reliable  tool  ratio,  i s more h i g h l y r e f i n e d , i t i s g r e a t l y  I n Canada, s t u d e n t s o f faced  as  operating  revenues to t o t a l  The  regulated  ratio  total  i s the  carrier.The  how  developed.  To  study  this  problem, the  economic a n a l y s e s contrasted into  t h e s i s has  brought  o f t h e m o t o r c a r r i e r i n d u s t r y as  to other regulated f i e l d s  with c e r t a i n  t h e d e v e l o p m e n t o f c o m m i s s i o n and  on t h e manner o f how  made t o c o l l e c t  Columbia motor c a r r i e r s  -wise a m a i n l y  Clearly,  this  judicial  r a t e r e g u l a t i o n s h o u l d be  A p i o n e e r i n g e f f o r t was British  together  effected.  a set of costs f o r  writing.  not been designed  - c r e t e c o n c l u s i o n s c o u l d be  thought  t o s u p p l e m e n t what i s o t h e r -  t h e o r e t i c a l piece of  t h e s i s has  research  drawn a b o u t how  so  t h a t any  effective  conor  i n e f f e c t i v e motor c a r r i e r r a t e c o n t r o l s are a t p r e s e n t a b o u t p r e c i s e l y what d a t a C a n a d i a n r e g u l a t o r s s h o u l d about c o l l e c t i n g . has  It i s felt,  nor  set  however, t h a t some n e e d e d  focus  been brought onto an a r e a o f p u b l i c r e g u l a t i o n t h a t i s  presently  , at i t s best, badly  neglected.  In a d d i t i o n t o t h e a s s i s t a n c e his  advisors  at the U n i v e r s i t y o f B r i t i s h  w r i t e r wishes  operation  by  on t h e F a c u l t y o f Commerce a n d B u s i n e s s  Administration the  provided  t o acknowledge  the advice  a f f o r d e d him by t h e o f f i c e s  motive Transport numerous members  and c o -  o f the Auto-  Association of British thereof.  Columbia,  C o l u m b i a and  THE  PROBLEM OF MEASURING A FAIR RATE OF RETURN IN REGULATED INDUSTRY  WITH S P E C I A L REFERENCE TO THE MOTOR CARRIER INDUSTRY  ,  TABLE OF CONTENTS  Chapter  Page INTRODUCTION  I  II  III  THE BASIS OF RATE REGULATION The R o l e o f C o m p e t i t i o n T T Economic C h a r a c t e r i s t i c s The N a t u r a l M o n o p o l y C o m p e t i t i o n and Rate R e g u l a t i o n Unjust D i s c r i m i n a t i o n Ruinous C o m p e t i t i o n Legal J u s t i f i c a t i o n E n g l i s h Common Law America  i 1 1 3 4 8 9 13 14 15 16  1877-1934  18  Summary  23  MOTOR CARRIER RATE REGULATION Aims Justification Economic C h a r a c t e r i s t i c s o f t h e I n d u s t r y . . . Brief History Powers a n d D u t i e s o f t h e M o t o r C a r r i e r Regulator Minimum R a t e R e g u l a t i o n Maximum R a t e R e g u l a t i o n Rate D i s c r i m i n a t i o n The R e g u l a t o r y E n v i r o n m e n t The U n i t e d S t a t e s Canada History Present S i t u a t i o n . . Summary. . . . . . . . . . .  24 24 25 25 33  DETERMINATION OF A FAIR RATE OF RETURN IN MOST REGULATED INDUSTRIES S e t t i n g t h e Rate L e v e l The R a t e B a s e Measures o f V a l u a t i o n The F a i r R a t e o f R e t u r n The L e g a l H i s t o r y o f R a t e o f R e t u r n Determination Summary  36 36 37 38 39 39 43 43 46 47  48 49 51 52 58 63 72  - 2 TABLE OP CONTENTS  (Cont'd)  Chapter TV  V  VI  Page DETERMINATION OP A FAIR RETURN IN THE MOTOR CARRIER INDUSTRY . The I n a p p l i c a b i l i t y o f R e t u r n on I n v e s t m e n t a s the R a t e - S e t t i n g C r i t e r i o n The O p e r a t i n g R a t i o . . Summary THE OPERATING RATIO AS A WORKABLE STANDARD OF REVENUE REQUIREMENT Acceptability Items I n c l u d e d i n O p e r a t i n g C o s t Taxes Depreciation F i n a n c i a l Costs . D i v e r s i t y of the Industry Use Summary. . . . . . . . . . . . .  75 76 83 91 95 95 95 96 99 101 106  120 123  THE IMPERATIVE OF COST STANDARDS C o l l e c t i o n o f Cost Data Results Future Research Summary  125 133 135 138 145  APPENDIX "A"  149  BIBLIOGRAPHY  152  THE  PROBLEM OF MEASURING A FAIR RATE OF RETURN IN REGULATED INDUSTRY  WITH SPECIAL REFERENCE TO THE MOTOR CARRIER INDUSTRY  LIST OF TABLES  Table I II  III  IV V  Page ASSET TURNOVER RATIOS - SELECTED MOTOR CARRIERS . .  78  CANADIAN IMPERIAL BANK OF COMMERCE - "SELECTED CORPORATE RATIOS"  84  SAMPLE OF CARRIERS INDICATING BREAKDOWN OF OWNED VERSUS LEASED EQUIPMENT  116  COMPARABILITY OF LEASING VERSUS OWNING  117  VI  PER CENTS TO INCREASE OUT-OF-POCKET COSTS TO A REVENUE NEED LEVEL 128 OUT-OF-POCKET EXPENSES, SERVICE UNITS AND OUT-OFPOCKET UNIT COSTS FOR COST STUDY CARRIERS FOR STUDY YEAR BROUGHT UP TO CURRENT YEAR LEVEL 130  VII  QUESTIONNAIRE "A"  l4l  VIII  QUESTIONNAIRE "B"  142  THE PROBLEM OP MEASURING A FAIR RATE OP RETURN IN REGULATED INDUSTRY WITH S P E C I A L REFERENCE TO THE MOTOR CARRIER INDUSTRY  L I S T OF FIGURES  Figure  Page  1  ECONOMIES  2  FEATURES OF THE NATURAL MONOPOLY  12  3  ZONE OF REASONABLENESS  49  4  RELATION OF LOAD FACTOR TO OPERATING RATIO AND RATE OF RETURN FOR 70 CLASS I MOTOR COMMON CARRIERS OF GENERAL COMMODITIES, 1953. . . .  OF SCALE  5  108  i INTRODUCTION Public dustries Our  r e g u l a t i o n of p r i c e s or rates of c e r t a i n i n -  i s an  accepted f a c t  e o c i e t y has  accepted  a t i v e s have the industry pricing and  that  contrary  day  e r a l l y placed sit  to apply  opinion  legislative  t o what e x t e n t  , the  that  i t s elected  various  of the  t o day  rate  and  i n t e r e s t of  other  the  set. For  to the the  been s u b j e c t e d  g e n e r a t e d by  , and  t h e y may  rates.  "service"  controls  electric  most f o r m s  power of  set or  regulator  and  various  the  way  policed i n which  communication companies, i s to assure t h a t  regulator)n considers  r e g u l a t i o n of the duties  and  to  t h e s e huge p u b l i c m o n o p o l i e s i s no  t h a n what i t ( t h e  the  rates  power and  foremost concern of the  as  from  f r e i g h t t r a n s p o r t a t i o n i n North America are  some d e g r e e as  ap-  commissions  c l a s s of i n d u s t r y ,  , communication companies  be  r e g u l a t i o n of  o v e r t h e i r f r e e d o m i n s e t t i n g r a t e s . Gas  they are  decides  o f s u c h powers i s g e n -  counter-appeals  p r o d u c e r s a f f e c t e d by  i n d u s t r i e s have i n l a r g e p a r t  to  producers  price controls w i l l  administration  P e r h a p s more t h a n any  and  over  commission  w i t h q u a s i - j u d i c i a l commissions. Such  c o n s u m e r s and  public  forms of c o n t r o l  regulatory  best  represent-  b r a n c h o f government  i n j u d g e m e n t oteer a p p e a l s and  companies  capitalism.  a whole.  A l t h o u g h the  plied  fact  t o what i s i n t h e  c o n s u m e r s as  where and  the  authority  i s i n the  of Twentieth Century  the  more o r  r e a s o n a b l e . As  the revenue less far  t r a n s p o r t modes i d c o n c e r n e d ,  purposes o f the  regulator  are  as  v a r i e s as  are  ii  the  economic c h a r a c t e r i s t i c s o f  the  concerns being  regulated.  I n a s i t u a t i o n where a r a i l r o a d m o n o p o l i z e s s e r v i c e area,  c o n t r o l o f maximum r a t e s may  Where a number o f  r a i l r o a d s and  heated competition ever,  the  f o r the  problem of  the  an  In o t h e r of  words,  short-term  the  other  petition To  e c o n o m i c and the  hand, t h e  regulator w i l l e n s u e s and  p r i c i n g on  be  no  the  alert part  t o an  charged with,  out  to the  a healthy  the  the  duties  of  criteria  of  examine t h e s e c r i t e r i a i n the  investment. return  or  are  f o r judging  On  p r i c e com-  is a  major  on  commissions  judge u t i l i t y  In t h e  case of  investment to  general  industry.  has  that should  whether o r  s e t t i n g j u s t and  t o o l s i n the  motor t r u c k i n g  t o o l most g e n e r a l l y u s e d t o  regulatory  possibility  p u b l i c c o m m i s s i o n s have, o r  t h e i r p a r t i c u l a r circumstances.  in light  rate of  business.  rate regulation  rates  try,  of  monopoly s i t u a t i o n .  jurisdictions  r e t u r n on  a  carrier.  u n i t s under t h e i r  particularly  that  regard.  have d e v e l o p e d a number o f  will  how-  f i r m which i s  o f one  eventual  concern.  area,  to assure  that  one  engaged i n  from u n f a i r p r i c i n g p r a c t i c e s  In c a r r y i n g o u t they are  are  u s e f u l purpose i s f o r c e d  even i f such l e a d s  in this  overriding firms  r e g u l a t o r must a l l o w  d i s t i n g u i s h healthy  task  trucking  r e g u l a t o r must be  ruinous  the  s e r v i c e b u s i n e s s o f one  workable form of competition serving  be  in  reasonable  This  thesis  case,  rates  i s the  been u t i l i z e d  judge r a t e adequacy.  and  Specifically, rate  the motor t r u c k i n g not  not  Rather,  the of  indusby a  ratio  iii  of  total  operating  expenses t o o p e r a t i n g  employed where a t r u c k i n g mary p u r p o s e o f t h i s rate  regulation  ation  rate  thesis  i s generally  i s under examination.  The  i n t h e motor t r u c k i n g  industry.  S u c h an e x a m i n -  o f the operating  ratio  r e g u l a t i o n and t h e t o o l s o f such r e g u l a t i o n c o u l d discussed,  length  this  writer  felt  The e c o n o m i c a n d l e g a l tion  2.  over  intelligent-  i t n e c e s s a r y t o examine a t some  industry  why j u s t i f i c a t i o n than f o r other  leading  t o a d i s c u s s i o n o f why i t  i n i t s p r i c e - s e t t i n g p r a c t i c e s and o f i t s r e g u l a t i o n must be d i f f e r e n t  industry.  regulation of rates  regulators i n  i n most i n d u s t r i e s v i z .  d e t e r m i n a t i o n o f a r a t e base and r e t u r n 4.  A discussion plied The  first  regula-  d e s c r i p t i o n o f the motor  The t o o l s g e n e r a l l y a p p l i e d b y r a t e their  f o r rate  industry.  may be r e g u l a t e d  3.  justification  An e c o n o m i c a n d h i s t o r i c a l trucking  into  be  rate  the f o l l o w i n g f a c t o r s :  1.  the  as a  f o r determining the reasonableness o f rates.  In o r d e r t o a r r i v e a t a p o i n t where t r u c k i n g  ly  pri-  i s t o i n q u i r e i n t o t h e mechanics o f  i n v o l v e s m a i n l y an e v a l u a t i o n  criterion  revenues  on t h a t  base.  o f why t h e s e same t o o l s mw$y n o t be a p -  t o t h e motor t r u c k i n g above f o u r p o i n t s  four chapters of t h i s  industry.  are, i n fact, thesis.  the substance o f  Chapter I looks  t h e economic c h a r a c t e r i s t i c s o f those  first  i n d u s t r i e s the state  iv  has  chosen t o r e g u l a t e ;  investment, By  legal  these c h a r a c t e r i s t i c s a r e f o r e i g n  industry.  Chapter  I also follows  r a t i o n a l e and development o f r e g u l a t i o n  open t o p r i c e  The  trucking  f o r those  industry  i s contrasted  regulation  development a r e r e v i e w e d ence a n d t h e d u t i e s  and  States  ^M'ddcompared w i t h  are explained.  t o t h e U.S.  t o Canada.  section  of the t h e s i s ,  i n t o t h e s t a n d a r d t o o l s e m p l o y e d by a p u b l i c carry  out i t s f u n c t i o n .  c o n c e r n s a r e thie r a t e  base. of  for this  i n respect of  i s made e q u a l l y  Chapter I I I , an important  ted  bodies.  The t e r m s o f r e f e r -  regulator  Reference  other  by p u b l i c  and the n e c e s s i t y  i n t h i s Chapter.  of the public  industry i t -  and then i n Canada.  whose r a t e s may be r e g u l a t e d  development o f r a t e  trucking  indus-  and a r e hence  t o t h e motor t r u c k i n g  i t s h i s t o r y i n the United  forms o f i n d u s t r y The  t o t h e motor  regulation.  Chapter I I turns first  fixed  i n some d e p t h t h e  t r i e s w h i c h a r e a f f e c t e d w i t h a common c a l l i n g  self;  large  and a tendency t o r e s u l t i n monopoly s i t u a t i o n s .  and l a r g e ,  carrier  i . e . economies o f s c a l e ,  Discussionfjt&lrSBt&e  these  These t o o l s  rate  regulator to  i n t h e c a s e o f most  base and t h e r a t e  of return  of the reasoning behind  and r e a s o n a b l e r a t e  of  l e g a l t h o u g h t on t h e s u b j e c t  is  given  considerable  discussion  structures.  i n the United  regula-  on t h a t  employment  t o o l s a n d how t h e y r e l a t e t o e s t a b l i s h m e n t  tenance o f f a i r  looks  and main-  The d e v e l o p m e n t  States  jurisdiction  by t h e w r i t e r a s i t was  felt  V  that such cases as Smyth and  1  2  Ames ; McCardle ; and  Federal  3 Power Commission , e t c . , are c l a s s i c underpinnings to the t i r e subject and  en-  of r a t e of r e t u r n r e g u l a t i o n i n the western world,  that review of t h e i r p h i l o s o p h y and. d e c i s i o n s were essen-  t i a l to any  work concerned w i t h r a t e r e g u l a t i o n .  Chapter IV turns to s p e c i f i c c o n s i d e r a t i o n operating  of  the  r a t i o - the t o o l that has been used e x t e n s i v e l y  g e n e r a l l y i n the United. S t a t e s  and  to measure the reasonableness of  a r e t u r n i n the motor t r u c k i n g i n d u s t r y .  It i s pointed  out  that r e t u r n on a r a t e base has not been used g e n e r a l l y i n the t r u c k i n g i n d u s t r y to judge r a t e s t r u c t u r e s .  The  reasoning  be-  h i n d t h i s i-Pr^P.'tiGe- which s p r i n g s from the s p e c i f i c economic c h a r a c t e r i s t i c s o f t h i s i n d u s t r y i s o u t l i n e d and Chapter V i n the t h e s i s i s a lengthy c o n s i s t s of a d e t a i l e d study of the o p e r a t i n g use  i n r e g u l a t i o n of motor c a r r i e r r a t e s .  In l a r g e p a r t to I l l u s t r a t i o n s of how  and  examined.  section.  r a t i o and i t s  The  Chapter r e s o r t s  where t h i s t o o l  been u t i l i z e d r i g h t from the beginning of t r u c k i n g to the present  day.  The  review and  s u b j e c t d e r i v e s from the United c r i t i c i s m o f the o p e r a t i n g t i o n s as to how  i t may  The  has  regulation  c i t a t i o n o f cases on  States.  It  the  Chapter makes some  r a t i o as w e l l as a number of sugges-  be more f r u i t f u l l y employed by  regulators.  Smyth and Ames, 169 U.S., 466 (1898). p McCardle et a l . , v. I n d i a n a p o l i s Water Company, 272 1  400, 192T~.  315  ^ F e d e r a l Power Commission v. N a t u r a l U.S., 575, 1942.  Gas  U.S.,  P i p e l i n e Company,  vi  Chapter VI, the f i n a l  Chapter of the t h e s i s ,  to a d i s c u s s i o n o f the cost accounting will the tool  ratio  c a n be an e n t i r e l y  lack o f cost  is  ratio  before  rate  c a n be a c c u r a t e  continually  To thesis  tion  and o b j e c t i v e  state that  i n Canada.  This  point i s  e i t h e r about i n that  o r t h e t o o l s t h a t may be u s e d t o e f f e c t s u c h the reader at the outset.  no g e n e r a l  i n Chapter V I .  conclusion  t o how r a t e r e g u l a t i o n  purposes o f t h i s  In f a c t ,  does l e a d t o  by t h e w r i t e r  with  i n t h e i n d u s t r y m i g h t be made Such i s the task  of Chapter V I .  t h e s i s a r e as f o l l o w s :  To d e m o n s t r a t e t h e e x i s t e n c e difficult  i s the task  structure  f o r regulated  for  carriers.  motor  regula-  c h a p t e r beyond the  C e r t a i n l y , the d i s c u s s i o n  more o b j e c t i v e a n d a c c u r a t e .  1.  of carrier  the r e g u l a t i o n o f rates  a number o f s u g g e s t i o n s and. o b s e r v a t i o n s  The  There  the purpose o f the s i x chapters o f t h i s  industry,  thesis contains  regard  t h i s by  r e g u l a t i o n w i t h use o f the o p e r a t i n g  would be t o m i s l e a d  summary  outlines  in 1 9 6 7 .  costs  With  stressed.  the motor t r u c k i n g  the  survey performed  i s t o p r o v e o r t o e s t a b l i s h any c o n c l u s i o n  industry  rates.  knowledge o f c a r r i e r s and p o r t r a y s  need f o r a d e t a i l e d knowledge o f p e r u n i t  operations  before  t o Canada, t h e C h a p t e r t h e n  means o f t h e r e s u l t s o f a c o s t  that  e f f e c t i v e and. a c c u r a t e  f o r measuring the reasonableness o f t r u c k i n g  more p a r t i c u l a r r e f e r e n c e the  methods a n d d a t a  have t o be employed by m o t o r t r u c k i n g r e g u l a t o r s operating  turns  o f a problem;  of maintaining  a fair  i . e . how rate  i n d u s t r i e s and, i n p a r t i c u l a r ,  vii  2.  To  explore  t h a t may tion, the  To  be  the  used  i n d i c a t e how  diction  at  q u a l i t y of  i n the  this  conclusions  any  an  rate  about r a t e  I t i s the  is this:  great  the  imprecise  in light  why  used  industry  itself  particularly  attempting  might of  r e g u l a t i o n of practice.  methods f o r r e g u l a t i o n o f r a t e s  i t be  considered  regulator  can  assure the  expect-  truck  rates  the  opinion  In  rates  of  r e g u l a t i o n o f motor  such t h a t  the  threatened. regulated  and  sig-  rates  and  weak.  trucking, research and  i n d u s t r y can  the  i t can  the  certain  Unless  stability  In a d d i t i o n ,  that  general  i n Canada i s ,  i s neglected  attention.  any  important  this writer that  changes i n economic c o n d i t i o n s , w e l l be  juris-  to a r r i v e at  r e s u l t In w o r k a b l e t o o l s  i n d u s t r y may  be  i n Canada, r e g u l a t i o n o f e n t r y  that w i l l  and  regulation.  is  soon i n i t i a t e d  in a  r e g u l a t i o n e i t h e r i n the  opinion  of American  better  British  merits  the  and  historically  C a n a d i a n p r a c t i c e n e e d s and  to  regula-  trucking  improvements c a n  the machinery f o r a l t e r a t i o n of  flexible  tools  r a t e r e g u l a t o r may  the  t h e s i s Is not  f o r motor c a r r i e r s ,  significant?  of  Canada, and  ed  Especially  t o o l u s e d by  t o o l i t has  required  before  present,  type of  trucking  regulatory  trucking associations and  the  Columbia,  nificance  i . e . the  to b r i n g about e f f e c t i v e r a t e  the  s u c h as  In t h a t  or  problem;  regulators.  what must be  case or  the  r e a s o n s t h e s e t o o l s have b e e n d e v e l o p e d ,  employ t h e  specific  facets of  s i n g u l a r i t y of  rate 3.  the  until  measure  be of  the  the  viii  justness  and  point  p r o d u c e r and  and  of  reasonableness of  p u b l i c may  tive  and  circumstances.  although  necessary  to the  tools  wise the and,  at  i t does n o t  public.  The  tion  i n Canada.  trucking  There  i s a great  A m e r i c a n example o f how  try  h e a r i n g s and a well  adjusted  portation policy.  the  and This  how  i t has  been  Finally, limitations  result,  the  A research  and  thesis  less effective  justify.  to  t h e s i s attempts  to b r i n g  study  ratios,  established  atten-  regulators  industry  of o p e r a t i n g well  with  other-  stan-  procedures  trucking  s t a b l e component o f a n a t i o n a l  an  of  indus-  trans-  together  example o f what c a n  these  be  done  done.  some d i s c u s s i o n  of t h i s  most w r i t i n g s  to  combine t o make t h e  f a c e t s o f A m e r i c a n p r a c t i c e as and  structures,  trucking  use  p r a c t i c e s and  a p p e a l s can  vitally  welfare  need f o r C a n a d i a n  the  of  these  r a t e r e g u l a t i o n n e e d s more  p o s s e s s r a t e c o n t r o l s o v e r the  accounting  rate  become l e s s and  who  dard cost  in over  is  the  effec-  must e q u i p t h e m s e l v e s  same t i m e , more d i f f i c u l t  In e s s e n c e ,  strict,  i n d u s t r y and  r a t e s and will  standindustry  p o s s i b l y be  rate regulation  regulators  itself  from the  s e r i o u s l y j u s t how  have t o be  of the  evaluating  regulation the  very  rate regulation could  stability  capable of  rates  Canadian t r u c k i n g  I t i s suggested that  truckers,  and  consumer, t h e  begin to question  meaningful  shippers  trucking  paper.  should  C l e a r l y , the  constructive  c a r r i e d out  during  devoted  to  the  main p r o b l e m i s t h a t  examples a r e  i s l a r g e l y American  s t u d y was  be  A m e r i c a n and,  i n i t s terms o f the  course of  as  a  reference. the  thesis  ix  in B r i t i s h  Columbia which d i d  e x i s t s between knowledge o f f a r as  its ability  however, t h e  s t u d y was  A l t h o u g h the  that  of  and  opinions  to the  relatively  Canada may  to  as  the  be  to  development o f  i n the useful  not  U.S.  and  data to  the  distinct  a flaw  in British  f o r the  It could, next  accurate rate  developed  Columbia  p r a c t i c a l problems of  i n t h i s study.  objective,  thesis,  interviewing  e f f i c a c y of applying  material  As  i t i s unfortunate  have b e e n d e v o t e d t o  the  that  Canada.  p i o n e e r e d and  regulation,  officials  chasm  successful.  States  rate  i n d i c a t e the  so  American  unresearched Canadian s i t u a t i o n .  more t h a n s u f f i c i e n t  isdiction.  not  regulatory  obtain  attention  United  trucking  some t i m e c o u l d  carriers  costs  to contribute  research  most p r a c t i c e s  serve to  This  as  practices lack  regulation however,  stage of  regulation  to  of  in  provide  research  into  for this jur-  1  CHAPTER  THE The  Role of  t o be  free the  on  national  dividuals ient  and  scales,  involved  i n the  will  and  most s i g n i f i c a n t and  tition  work t o  excellence.  usually  that  the  or  large  rates  desired  these  By  will  be  means  of  s y s t e m s and and  the the  In  the  to  consumers a r e  most  ineffic-  beneficiary part  of  free  perhaps  just the  competition.  a system of  free  of  par-  i n d u s t r i a l sphere,  r e s u l t of  s o u g h t by  i s con-  even i n d i v i d u a l l y  t h e i r highest  e n f o r c e d i n t e g r i t y on  price objectives  are  at  competition.  reasonable prices  specific  par  i t is felt  Society  practices  ticipants  economy, c o m p e t i t i o n  Industrially, politically,  capacities.  upright  capitalist  "regulator"  open c o m p e t i t i o n , and  RATE REGULATION  Competition  In a sidered  BASIS OF  I  The  compe-  four:  1.  To  2.  To a s s u r e t h a t a d e q u a t e e a r n i n g s a r e r e a l i z e d so t h a t t h e i n d u s t r y can c o n t i n u e p r o f i t a b l e o p e r a t i o n s and thus p r o v i d e a s t a b l e s e r v i c e to s o c i e t y .  3.  To p r e v e n t u n j u s t d i s c r i m i n a t i o n between o r groups o f i n d i v i d u a l consumers.  individuals  4.  To a s s u r e t h e consumer t h e minimal p r i c e .  service  prevent  For  unreasonable p r i c e s  various  reasons,  and  excessive  best p o s s i b l e  however,  " j u s t and  earnings.  reasonable"  D.P. L o c k l i n , Economics of T r a n s p o r t a t i o n , Chicago, R.D. I r w i n , Inc., 1951, p. 701; and D,V. Harper, Economic R e g u l a t i o n o f t h e M o t o r C a r r i e r I n d u s t r y by t h e STaTes"; U r b a n a , u n i v e r s i t y o f I l l i n o i s P r e s s , 1959, P. l / c . X  at  a  2  r a t e s c a n n o t a l w a y s come a b o u t petition.  ize a particular  industry:  S i t u a t i o n s i n which a c t i v e competition e x i s t s , but where, b e c a u s e o f i m p e r f e c t i o n s i n t h e m a r k e t , comp e t i t i o n does n o t p r o d u c e c o m p e t i t i v e r e s u l t s .  3.  S i t u a t i o n s i n which competition e x i s t s , o r c o u l d e x i s t , and h a s p r o d u c e d o r may be e x p e c t e d t o p r o duce c o m p e t i t i v e r e s u l t s , b u t where, i n l i g h t o f o t h e r p o l i c y c o n s i d e r a t i o n s , competitive r e s u l t s a r e uns a t i s f a c t o r y i n one o r more r e s p e c t s . " 2  third  situation  from the o p e r a t i o n o f a p a r t i c u l a r  competition  of product,  cannot b r i n g about.  defence  to this  the m a t e r i a l o f the t h e s i s t o t h e economic  c a n n o t be e x p e c t e d  industry,  Equitable  c o n s i d e r a t i o n s and e c o n o m i c  w o u l d be p r i m e e x a m p l e s .  objectives  i s not o f concern  thesis.  t o t h e c a s e where s o c i e t y r e q u i r e s o t h e r r e s u l t s t o  come f o r t h  due  character-  2.  refers  that  c o n d i t i o n s as t h e f o l l o w i n g might  " S i t u a t i o n s i n which c o m p e t i t i o n , as a p r a c t i c a l m a t t e r cannot e x i s t o r s u r v i v e f o r long, and i n which, t h e r e f o r e , an u n r e g u l a t e d market w i l l n o t produce competitive r e s u l t s .  The It  com-  I n d e e d , c o m p e t i t i o n may have t o be r e i n f o r c e d o r  r e p l a c e d when s u c h  1.  i n an environment o f f r e e  The f i r s t however.  characteristics  and second Both r e f e r  results  distribution stabilization situations are t o cases  o f an i n d u s t r y ,  where,  competition  to "regulate" i n favour of the p r i c i n g  sought by s o c i e t y .  ^Kaysen, C , and D.P. T u r n e r , A n t i t r u s t P o l i c y : An E c o n o m i c and L e g a l A n a l y s i s , Howard U n i v e r s i t y P r e s s , C a m b r i d g e , 1959, p . 109.  3  Regulation industry Indeed, The be  that  looked  social basis  the the  public next  of rate  that,  The  be  not.  industry  heading,  "The  will Natural  s a i d summarily essential  a whole i s show t h e  here  service  affected.  economic  and  selling  is clearly go  the  Any  threat  of  a g i t a t i o n begin to  regua  number  choice.  For  f i r m which  en-  essential  product  or  held  prices  firm fitting  in i t s price the  exhibits  an  and  for rate  first  i n t o , the  have i t s r a t e s  society.  regulated  public  i s earmarked  p r i v i l e g e s f o r an  c e r t a i n l y must r e a l i z e t h a t serious  essential service  e c o n o m i c model t h a t  market n o r m a l l y w i l l  t i o n which i s not  price  i s to  interest,  unnecessary to  n e a t h c e r t a i n maxima by  should  an  does  numerous e c o n o m i c c h a r a c t e r i s t i c s o f  monopoly, an  uncontested  any  that  where an  b e c a u s e i t r e n d e r s an  reasons which are  in  applied  section  of  i t could  i n t e r e s t as  of micro-economic f e a t u r e s ,  joys  but  imperfections.  of a f i e l d  under the  any  regulation.  directly affects public lation.  f o i s t e d upon  Characteristics  There are industry  be  given f o r regulation  i s generally  and  purpose of  Economic  think  i n t h i s chapter,  involved  The  to  i n t o i n some d e t a i l  regulation  course,  certain competitive  i t is difficult  Monopoly",  is  exhibits  legal rationale  that  cannot, of  setting  this  be-  descrip-  practices  controls  i s present  develop over i t s  structure.  O t h e r than the  pure monopoly s i t u a t i o n w h i c h  brings  4  a b o u t maximum p r i c e c o n t r o l s , other  problematic  required.  has p o i n t e d  s i t u a t i o n s t o s o c i e t y so t h a t  a d v a n c e where maximum a s w e l l are  economic t h e o r y  One  as o t h e r  set of features  i t will  types o f r a t e  characterize  out  know i n  regulation  what  has come  t o be known a s t h e " n a t u r a l m o n o p o l y " s i t u a t i o n . The N a t u r a l  Monopoly  All utilities  arguments i n f a v o u r  a n d f o r most  around the f e a t u r e in  regulated  of r a t e  regulation f o r public  transport  o f economies o f s c a l e  modes  that  revolve  e x i s t somewhere  the i n d u s t r y o r a t l e a s t c e r t a i n of the f a c t o r s that  t h e s e economies o f s c a l e . economies o f s c a l e , rate  Before looking  l e t us examine why  cause  a t t h e components o f  such c o n d i t i o n s  call for  regulation.  W h e r e v e r e c o n o m i e s o f s c a l e a r e t o be f o u n d industry  ( i . e . the i n d u s t r y  i s one where u n i t  w i t h v o l u m e ) a n d one o r more f i r m s  are able  costs  i n an  decrease  to achieve  econ-  omies o f v o l u m e / s c a l e b e y o n d t h o s e o f i t s c o m p e t i t o r s ,  com-  petition  must  recognize  i s doomed i n t h e medium t o l o n g t h i s before  significant ful  ruinous  run.  Society  p r i c i n g p r a c t i c e s have  wastage o f r e s o u r c e s  on t h e p a r t  caused  of the unsuccess-  competitors. One  to get s t a r t e d  remedy  i s not to allow  in this  industry  unrestrained  i n the f i r s t  place,  competition rather  to  e n c o u r a g e t h e u n i t e x h i b i t i n g e c o n o m i e s t o become a m o n o p o l y  5  and  then r e g u l a t e  Its  Take the and  C,  cost  following  p r o d u c i n g an  marketplace.  prices. an  of  equal  represented  i n the  PIG.  If  c h a r g e and  f i r m A s h o u l d d r o p out  expand t h e i r p l a n t offered out,  by  and  minimum l o n g  run  s i t u a t i o n was is  no  its  plant  and  and  i n time only  t i v e w o u l d be an  f o r the  agreement t o  what t h e firma  one  share  the  i n the  Either  capture  minimum l o n g  the  market, o r  one.  run  total  would f a l l  c l e a r l y the  two  of  the  the  m a r k e t and  Certainly  ^  scale  these  expand  still  only  exist  other  alterna-  t o make  maintain prices well  w o u l d be  A  second s i t u a t i o n  o r i g i n a l three firms  t h i s i s not  P-^.  first  eventually  The  the  should  ?2*  to  f u r t h e r economies t h a t left.  C  economies of  Indeed, the  be  that  unexpanded f i r m  f i r m B or C w i l l  firm will  price  i f B and  the  industry,  monopolist's average cost  dropping out.  one  e x p e c t w o u l d be  thus f o r c i n g the  never a stable  more s t a b l e .  have a v e r a g e  B,  SCALE  average costs  e c o n o m i e s were a v a i l a b l e  in  A,  exhibit.  take advantage of  this industry,  competing  consumers c o u l d of  three firms,  1  t h i s s i t u a t i o n , the  producers could  are  s i z e and  ECONOMIES OP  In  example:  essential service  They are  c u r v e s as  as  i n the i n the  above  event o f public  one  interest.  6  Consumers s h o u l d omies o f ative  scale  when t h e  be  the  t h a t might  e x i s t i n an  product  service  or  market  s i t u a t i o n d i c t a t e s that  rather  t h a n a number o f  m a r k e t due try,  to the  presence of  i s i n the  however, price  there  i n the  public  best  allow As  assurance  i n t e r e s t s of  " n a t u r a l m o n o p o l y " r e s u l t i n g f r o m an situation,  s u c h as  the  scale  supply  the  i n the  indus-  Monopoly,  we  have s t a t e d  any  unstable  as  e s t a b l i s h e d m o n o p o l y I f e a c h i s p r o d u c i n g an  essential industry  situation,  we  should  can now  t h a t might h i n t at the scale.  i n the  the  of  same manner essential  p r e s e n c e o f economies of  lead look  to a s t a t e - r e g u l a t e d at  existence  those f e a t u r e s of  w o u l d be  a s u b s t a n t i a l investment  industry  s u c h as  s l o w w o u l d be  a good  Quite of  any  utility  scale  o f an  industry  s u c h an  turnover  is  of  industry  in fixed facilities.  where a s s e t  In  monopoly  such l a t e n t economies  C e r t a i n l y the main c h a r a c t e r i s t i c o f  proportion  a  product.  H a v i n g s e e n how an  Thus,  economies  calls  service or  will  competitive  industry with s i g n i f i c a n t  f o r state r e g u l a t i o n of rates  other  earlier,  means.  scale, the  in  a monopolist  s o c i e t y by  imper-  Thus, when a  i t .  that  is  producer  producers should  economies o f  econ-  This  optimum-sized  interest.  is little  industry.  any  i s a necessity.  one  smaller  then p u b l i c p o l i c y should  words,  b e n e f i c i a r i e s of  An  quite  example.  simply,  i t s assets  any  i n d u s t r y o r f i r m w h i c h has  t i e d , up  i n longer  term f i x e d  a  large  facili-  7  ties far  e x h i b i t s a cost p r o f i l e greater  where f i x e d  c h a r g e s t o Income a r e  than v a r i a b l e expenses p e r u n i t o f output.  volume o f o u t p u t  increases,  t h e same f i x e d c o s t s become  o v e r a g r e a t e r and g r e a t e r denominator o f u n i t s . variable gin  expenses i n c r e a s e  As t h e spread  Thus,  unless  i n o r d i n a t e l y , economies o f s c a l e b e -  t o appear. The  with  heavy p r o p o r t i o n  the attendant  course  economies o f s c a l e i t b r i n g s  characteristic  factories,  o f f i x e d c o s t s phenomenon,  o f many I n d u s t r i e s .  t h e o i l and p e t r o c h e m i c a l  i n d u s t r i e s a r e b u t a few e x a m p l e s . prominent  turnover  i s concerned,  telephone the  This  A glance  ^Ratio  feature  i n those  metal  i s f a r more  fields  where t h e  As f a r a s c a p i t a l  e x h i b i t a 2 to 4 year  c o m p a n i e s a n d power u t i l i t i e s  same r a n g e . ^  The a u t o m o b i l e  rate regulation.  the railways  i s of  industry, various  f o r t h e m a i n p a r t , however,  s t a t e has chosen t o a p p l y  about,  at capital  are approximately  turnover  ratios  m  x  Source  - Moody's T r a n s p o r t a t i o n  x Net  of Depreciation.  and U t i l i t i e s  cycle, in  f o r a few  Asset Turnover Ratios o f Net F i x e d A s s e t s t o O p e r a t i n g Revenue Revenue Fixed Assets C a n a d i a n N a t i o n a l R a i l r o a d Co. $827,000 $3,iy8,UUO 845,000 Chesepeake & Ohio R a i l r o a d 397,000 724,000 Great Northern R a i l r o a d 265,000 1,291,000 Pennsylvania R a i l r o a d 893,000 1,574,000 Union P a c i f i c R a i l r o a d 549,000 2,654,000 A m e r i c a n T e l e p h o n e & T e l e g r a p h Co. 953,000 1,923,000 B e l l Telephone/Canada L t d . 596,000 345,000 B r i t i s h Columbia Telephone 98,000 3,170,000 C o n s o l i d a t e d E d i s o n o f New Y o r k 696,000 v  along  Manuals,  Ratio  .26 .48 .37 .71 .34 .36 .30 .29 .22 1965.  8  of  the  largest  unregulated  i n d u s t r i e s does show a marked d i f -  h. ference. Why for  r a t e and  the  r a i l r o a d s and  other types  power companies have b e e n  o f r e g u l a t i o n i s c l e a r from the  omic c h a r a c t e r i s t i c s m e n t i o n e d and istics  h a v e on  display ing  society.  them t o any  such  clarified  i n the next and  Rate  I n an potential  degree.  industries,  Competition  Very  few The  the e f f e c t  exact  as opposed to o t h e r s  listed  above, w i l l  Regulation  i n d u s t r y such  as t h e  ones we  have d e s c r i b e d  s t a t e has  Yet  done j u s t  i t i s a very b i g  power c o m p a n i e s and  have, t h e r e f o r e , been j u s t i f i e d  on  t o some e x t e n t  that.  as  in fixed  either a state-run firm  a l l o w a monopoly i n t h a t market.  gas  be  section.  d e c i s i o n f o r s o c i e t y t o s e t up  and  not  l e g a l b a s i s f o r choos-  " n a t u r a l " monopolies with v a s t investment  economies, the  econ-  character-  r e g u l a t e d i n d u s t r i e s do  a s s e t s r e q u i r e d f o r o p e r a t i o n i n the f i e l d ,  electric  such  chosen  Telephone  some o t h e r  or  to  i n Western companies,  "utilities"  the f o r e g o i n g economic  grounds.  4Ratio  Asset Turnover Ratios o f Net F i x e d A s s e t s t o Net  jg^fi Net  F o r d M o t o r Company (U.S.) G e n e r a l M o t o r s Co. (U.S.) United States S t e e l I.B.M. S h e l l O i l Company Source  Sales  $11,537,000,000 20,733,000,000 4,400,000,000 3,573,000,000 3,091,000,000  - Moody's I n d u s t r i a l M a n u a l s ,  Sales Net Ratio Fixed Assets $3,020,000,000 .29 4,161,000,000 .20 2,714,000,000 .62 2,304,000,000 .65 1,716,000,000 .56  1966.  x  Net  of Depreciation.  9  In many c a s e s one  company)'^railway  competition monopoly. lator  ( i . e . where an a r e a  industry provides  i n a f i e l d possessing  i s served  an example o f r e g u l a t e d  the features  of a natural  What a r e t h e p r o b l e m s and o b j e c t i v e s  that  s u c h a s t h e I n t e r s t a t e Commerce C o m m i s s i o n  o r Canada's T r a n s p o r t a t i o n  Commission f a c e s  of a concern such as the r a i l w a y  o n l y by  a regu-  i n t h e U.S.  In rate  regulation  industry?  In t r y i n g t o m a i n t a i n a s y s t e m o f w o r k a b l e  competition,  b o t h between i n d i v i d u a l r a i l r o a d s a n d between t h e r a i l r o a d a n d other  modes, t h e r e g u l a t o r w i l l  protect tion  be a t t e m p t i n g ,  of course, to  t h e i n t e r e s t s o f consumers o f t h e v a r i o u s  s e r v i c e s and, i n a d d i t i o n ,  producers themselves. with prevention  the f i n a n c i a l  Specifically,  of unjust  transporta-  viability  the concern w i l l  of the  be m a i n l y  d i s c r i m i n a t i o n between c o n s u m e r s o r  g r o u p s o f c o n s u m e r s on t h e one hand a n d t h e d i s c o u r a g e m e n t o f ruinous  competition  petition little  on t h e o t h e r .  F o r as long  exists e i t h e r Inter or intra-modally,  n e e d f o r s c r u t i n y o f maximum  d i s c r i m i n a t i o n m i g h t be i n v o l v e d .  rate  as h e a l t h y there  should  l e v e l s except  Once t h e p o t e n t i a l  com-  where natural  m o n o p o l y i s a l l o w e d t o become a monopoly, however, maximum c o n t r o l must come i n t o  Unjust  be  rate  play.  Discrimination The  railway  o r , f o r t h a t matter, any i n d u s t r y  p l a y i n g heavy f i x e d c o s t s ,  decreasing  business  competitive  i n an i m p e r f e c t l y  unit costs,  dis-  and d o i n g  s i t u a t i o n f i n d s i t most  10  practical Unjust  to i n i t i a t e  customers.  d i s c r i m i n a t i o n i s t h a t which i s not j u s t i f i e d  differentials Rather, on  p r i c e d i s c r i m i n a t i o n among  experienced i n serving  t h e d i f f e r e n t consumers.  t h e m a r g i n between t h e p r i c e s c h a r g e d  elasticities  prices various  by c o s t  i s based s o l e l y  o f demand; i . e . on t h e d i f f e r e n c e between t h e p o t e n t i a l customers w i l l  a heavy f i x e d c o s t  firm or industry  such a p r a c t i c e i s that  pay'.  The r e a s o n  i s more l i k e l y  i t has a g r e a t  that  to follow  d e a l more p r i c i n g f l e x -  ibility.  Any run  existing firm,  i n order  i n i t s short  e c o n o m i c t e r m , must a t l e a s t c o v e r I t s v a r i a b l e e x p e n s e s o r  "out-of-pocket" costs  of doing business.  o v e r h e a d , no m a t t e r how s m a l l , firm.  serving  i s i n the best  i n t e r e s t s of the therefore,  but t o cover the major o p e r a t i n g  every customer.  customer e l a s t i c i t y  No m a t t e r how g r e a t  holds regardless  costs  o f how  every time i t s o l i c i t s  imperfect  costs  the spread o f  o f demand i n t h e m a r k e t , management  r e c o u p most o f i t s t o t a l This  Any c o n t r i b u t i o n t o  I n the concern w i t h heavy v a r i a b l e c o s t s ,  management h a s no c h o i c e of  to survive  must  a customer.  the competitive  situation  might be.  I n t h e i n d u s t r y where we f i n d economies o f s c a l e , a l a r g e p r o p o r t i o n  l a r g e f i x e d c o s t s and of unit costs  in  s e r v i n g a customer a r e f i x e d overhead c o s t s ,  do  n o t have t o be c o v e r e d  pocket expense o f s e r v i n g small.  Again,  involved  charges  i n t h e immediate p e r i o d .  The  an I n d i v i d u a l i s r e l a t i v e l y  a n y c o n t r i b u t i o n above t h i s minimum  which out-of-  quite  i s t o be  11  desired.  T h u s , management i s t o be  prospective will  at  l e a s t meet t h e  variable has  consumer w h a t e v e r he  costs  a f a r greater  counterpart, of  are  the  cost  the  railroad  i n the  sidize  the  elasticities This  run.  picture  volved  regulator  railroad  cases  duty of the  i s to  i f the  Usually  this  to  the  consumers.  t o be,  industry will  have i n v o l v e d  i s to weigh the  in serving be  in  the  of  is in-  be  e v e n more B o a r d o f  discriminatory  not  cost  r e g u l a t i o n come i n t o  geo"captive Trans-  such  situ-  evidence  p r i c e charged  or perhaps j u s t i f i e d  o r may  sub-  total  In e f f e c t ,  or whatever subject  involved  s t r u c t u r e may  management  allocated  d i s c r i m i n a t i o n has  past  his  12.  his rate  regulator  i s indeed unjust  considerations  manager  the  o f d o i n g so  i t s various  page  and  i n the  plaintiff  rate  Yet  it  that  c o m p l a i n t s come f r o m a s o - c a l l e d  to determine  The  the  i t s prices according  monopoly.  carefully  cost  In  s e t w e l l above f u l l  Many I.C.C. h e a r i n g s and  The  case.  such a p r i c e .  to discourage unjust  Commissioners'  ations.  set  provided  i s p r i c i n g w e l l below  d i a g r a m s on  i n n a t u r e and  shipper".  case,  the  w h i c h t o p r i c e t h a n does  prices  t o pay  enjoys a p a r t i a l  graphic  in this  o f demand i n d i c a t e d by  where t h e  service.  o b v i o u s way  on  f i r m can  i s shown i n t h e  course,  port  The  earned  Where t h e the  t o pay,  s i m i l a r company must meet f u l l y  markets w i l l i n g  heavy f i x e d c o s t  of  f i x e d investment  s e r v i c e i n w h i c h he  cost with p r o f i t s other  v a r i a b l e cost  range w i t h i n  or  long  is willing  of minor order  low  expected to charge  due  to  the  specific  t h a t p a r t i c u l a r consumer.  suspended.  12 Area of LOW FIXED INVESTMENT CASE  Avg.cost per unit  1*  P r i c i n g Freedom  F u l l y A l l o c a t e d Cost -Out-of-Pocket Cost  60  Fixed  Cost  Quantity  FIG. FEATURES OF  THE  2  NATURAL MONOPOLY  I n any t i m e p e r i o d s h o r t o f t h e l o n g r u n , a f i r m i s w e l l a d v i s e d t o t a k e on b u s i n e s s t h a t w i l l a t l e a s t c o v e r i t s o u t - o f - p o c k e t c o s t s o f s e r v i c i n g t h a t new b u s i n e s s . In the c a s e o f the f i r m w i t h low f i x e d i n v e s t m e n t i n f a c i l i t i e s (Case I ) , p r i c i n g f l e x i b i l i t y i s q u i t e n a r r o w i n t h a t t h e gap between f u l l y a l l o c a t e d and o u t - o f - p o c k e t c o s t I s t h i n . For the f i r m w i t h a l a r g e p r o p o r t i o n of i t s f u l l y a l l o c a t e d c o s t s r e p r e s e n t e d by f i x e d c o s t s , c o s t s w h i c h do n o t have t o be met and a l l o c a t e d i m m e d i a t e l y , a f a r g r e a t e r r a n g e o f p r i c i n g f r e e d o m e x i s t s . When a f i r m o f t h i s t y p e c h a r a c t e r i z e s t h e m a r k e t m o r e o v e r , u n j u s t p r i c e d i s c r i m i n a t i o n i s l i k e l y t o come a b o u t s o o n e r o r l a t e r as w e l l . As d e m o n s t r a t e d i n t h e s e c t i o n on n a t u r a l m o n o p o l y and i n F i g . 2, t h i s f i r m has f e a t u r e s o f a n a t u r a l monopoly. As s u c h , i t w i l l c h a r g e t h e c u s t o m e r i n M a r k e t A t h e maximum he i s w i l l i n g t o pay i n t h e k n o w l e d g e t h a t , as t h e m o n o p o l y s i t u a t i o n becomes more a p p a r e n t , t h i s p r i c e c a n be " s u b s i d i z e d by t h e p r i c e t h a t c a n t h e n be e x a c t e d f r o m t h e c u s t o m e r i n M a r k e t B.  13  Ruinous  Competition A n o t h e r most s e r i o u s p r o b l e m faced, by  commerce, a p r o b l e m p e r t i n e n t is,  . A d e f i n i t i o n of  p r i c i n g by to the  market  that  original  , may  All  too  all  firms  o f t e n the  the  l a t t e r are  t r i b u t i o n i n order  short  run  must c o v e r a much h i g h e r  are  is  one  that  t o the shall  f a r more l i k e l y  o f one costs.  a  or  variable cost  to  service industry to  s i m i l a r f i r m need  engage  does not  do  the  i n order  firm  to  allocwhich  to remain v i a b l e ,  e x i s t . Although  e a r l y motor c a r r i e r ruinous  only  anynjcon-  management i s f r e e  examined l a t e r ) ,  this  done  a t l e v e l s f a r below f u l l y  to take p l a c e  as  the  monopolist.  an u n s t a b l e  variable cost. For  o r more u n i t s w h i c h do Such f i r m s  sole c o n t r o l of  i s f a r more s u s p e c t  i n business,  r u l e , ( the be  rivals  o f b u s i n e s s , , where-  prt&ce as  and  railroad  same f l e x i b i l i t y  exceptions  being  competitive  i n another i n a d i f f e r e n t industry.  periods  or even long  this  out  run out-of-pocket cost plus  to stay  for protracted  clearly  :  consumer. Moreover, a f i r m i n an  by h e a v y f i x e d c o s t s  small  and  p r i c e "war"  Again, because the  cost  d e s t r u c t i v e com-  r e s u l t i s i r r e p a r a b l e damage b e i n g  s u c h p r a c t i c e s t h a n one  earn a very  forced  producer , havingygained  engaged i n t h e  characterized  ated  railroads,  s u c h p r a c t i c e s w o u l d be  r a i s e h i s p r i c e s again  s i t a a t i o n f o r the  price  ot  of  a producer , or producers , designed to undercut  extent  upon the  in  t o t r a n s p o r t a t i o n and  without a doubt, the m a t t e r of r u i n o u s  petition  regulators  there  industry  competition  when t h e m a r k e t i s composed  have a h i g h p r o p o r t i o n have g r e a t e r  of f i x e d  l a s t i n g power i n a  14  low  p r i c e s i t u a t i o n f o r the The  biggest  B.T.C. o r t h e firm  s u c h as  difficulty  I.C.C. i s t h e a railroad  a c o n c e r n such as  power t h e  i s competing f o r the  to maintain  p o s s e s s t o engage t h e  s i t u a t i o n . As  time can  spent  a result,  a great  i n i n v e s t i g a t i o n of  which has  f i x e d and , a workable  aware o f  the  trucker i n a deal of  by  truckers.  standard  may  charge i s i t s l o n g run v a r i a b l e c o s t of s e r v i c e * * . T h i s  Legal  are  i n simple  some i n d u s t r i e s s i n g l e d o u t  c o n t r o l s whftle o t h e r s ,  omic c h a r a c t e r i s t i c s , Hhe  present  minimum a  short run  will  out-  market  are  apparently entrusted  ? I n d e e d , what i s t h e  for rate regulation  e x h i b i t i n g the  to the  legal  and  same e c o n -  regulating forces historic |n  indication will  employed by  prestigous  be  courts  g i v e n of the to j u s t i f y  throughout the  The  reasoning  this  of  justification  f o r p u b l i c r e g u l a t i o n when i t i s a p p l i e d ?  ries  railroad  Justification Why  and  than those  accepted  ruinous  commission  such complaints  the  as  The  t a k e i n more c o s t s of-pocket cost.  come t o be  cost  same b u s i n e s s  t h a t e x h i b i t s low  u n i t . In trying  competitive  the  s i t u a t i o n where a h e a v y f i x e d  t h e r e g u l a t o r must c o n t i n u a l l y be  r a i l r o a d may  be  run.  f o r a r e g u l a t o r s u c h as  a trucking line  h i g h v a r i a b l e c o s t s p#r competition,  s h o r t t o medium  s e c t i o n some t h e most  rate regulation of c e r t a i n indust-  years.  terms " a f f e c t e d w i t h  a public interest"  and  "a  NOTE * * A l t h o u g h i t seems a s t r a n g e u s e o f e c o n o m i c t e r m i n o l o g y - t o t a l k o f " l o n g r u n v a r i a b l e c o s t " , as o b v i o u s l y i n the t r u e l o n g run a l l c o s t s are v a r i a b l e , t r a n s p o r t a t i o n e c o n o m i s t s s u c h a s G.W. W i l s o n ( E s s a y s on Some U n s e t t l e d Q u e s t i o n s i n t h e E c o n o m i c s o f T r a n s p o r t , U. o f I n d i a n a 1965) do employ t h e t e r m . We i z a t i o n c o s t s are excluded.  must assume b a s i c  capital-  15  common c a l l i n g "  vsome;..legal"-It.erms.-. u s e d  have been  seventeenth century to d i s t i n g u i s h in  t h e o p i n i o n o f law,  competitive  be  conditions f a l l  controls  o v e r an  sought  i n d u s t r y because  to appeal f o r a court d e c i s i o n  could  be  labelled  i n t h i s manner.  jurisdiction  was  a matter  that  as any  section,  o f d e t e r m i n i n g what was interest".  nebulous.  Phillips  As  Today,  or  so t h a t  the  In  cerprob-  commission  the s u b j e c t i n d u s t r y  A definition  of either  Perhaps  t h a t a Supreme C o u r t has  with a public  when  o f socio-economic  t h e s e terms i s , o f c o u r s e , most s u b j e c t i v e . versial  regulation  s h o r t o f what s o c i e t y e x p e c t s .  lems s u c h as t h o s e e x a m i n e d i n t h e l a s t had  the  i n d u s t r i e s which should,  subjected to public  o t h e r words, when t h e l e g i s l a t o r tain  those  since  a n d what was  had  not  the s i t u a t i o n  has  of  as c o n t r o to face  "affected become more  notes:  . . . t o d a y t h e l e g a l c o n c e p t o f common c a l l i n g s , w i t h i t s many d u t i e s and o b l i g a t i o n s , i s n o t s t a t i c . Stated s i m p l y , t h e p u b l i c i n t e r e s t w i t h w h i c h some b u s i n e s s e s a r e a f f e c t e d i s one c r e a t e d by t h e p u b l i c p o l i c y o f the people.5  E n g l i s h Common Rate  Law regulation,  justified  from E n g l i s h  common law.  J u s t i c e Hale  i n h i s famous De  ditions  interest",  111.,  -'CF. R.D.  and  "if"  these grounds,  Portibus Maris  laid  out  the  c o n t i n u e t o seek h i s  y e t go b e y o n d t h e bounds o f  a s he  derives  In the s e v e n t e e n t h c e n t u r y C h i e f  under which a merchant can  v a t e advantage  on  "bare  con-  pri-  private  says...  P h i l l i p s , The E c o n o m i c s o f R e g u l a t i o n , Homewood, I r w i n , I n c . , i y b 5 , P. 5 5 .  16  the k i n g o r s u b j e c t have a p u b l i c wharf u n t o which a l l p e r s o n s t h a t come t o t h a t p o r t must come a n d unlade o r lade t h e i r goods...because they a r e the o n l y w h a r f s l i c e n c e d by t h e q u e e n . . . o r b e c a u s e t h e r e i s no o t h e r w h a r f i n t h a t p o r t . . . t h e r e c a n n o t be taken a r b i t r a r y o r e x c e s s i v e d u t i e s f o r wharfage o r c r a n a g e . . . . F o r now t h e w h a r f a n d c r a n e a r e a f f e c t e d w i t h a p u b l i c i n t e r e s t and they c e a s e t o be j u r i s p r i v a t e o n l y . 6 Thus, w h a t e v e r t h e c o u r t  d e t e r m i n e d a "common c a l l i n g " was t o  have i t s p r i c e s o r r a t e s c o n t r o l l e d r a t h e r t h a n s e t b y t h e market.  E s s e n t i a l service with monopolistic  apparently time,  the d e f i n i t i o n  was  o f such an i n d u s t r y and a t that  the spectrum o f c a l l i n g s  trolled  tendencies  i n t h i s way was q u i t e  w h i c h were l o o k e d wide.  a t and c o n -  7  America P r i o r t o the American C i v i l philosophy  was p r e v a l e n t  in,the United  o f p u b l i c i n t e r e s t was i n e f f e c t and  Fourteenth  These p r o v i d e d  ibid.,  States  subordinated  liberalistic  and the d o c t r i n e to the F i f t h  Amendments t o t h e A m e r i c a n C o n s t i t u t i o n . t h a t no one s h o u l d  w i t h o u t due p r o c e s s o f l a w .  6  War, a v e r y  be d e p r i v e d  For this  reason,  of property t h e U.S. Supreme  p. 53.  I t s h o u l d be n o t e d t h a t , when t a l k i n g a b o u t a "common c a l l i n g " , we s h o u l d n o t be c o n f u s e d w i t h t h e t e r m "common carrier". A d e f i n i t i o n o f the l a t t e r In a l e g a l sense i s as follows: "...one who h o l d s h i m s e l f o u t t o t h e p u b l i c a s a c a r r i e r o f goods f o r r e w a r d . . . t h e e s s e n c e o f t h e s t a t u s "common" ( a s d i s t i n c t f r o m " p r i v a t e " ) i s t h a t s u c h a c a r r i e r does n o t d i s c r i m i n a t e amongst those.who r e q u e s t h i s s e r v i c e s n o r d o e s he have t h e r i g h t t o r e f u s e an o f f e r o f goods f o r s h i p m e n t " , (Smyth, J . E . a n d D.A. Soberman, The Law a n d B u s i n e s s A d m i n i s t r a t i o n i n Canada, T o r o n t o , P r e n t i c e - H a l l o f Canada, l y o b , p . 303 J . 7  17  C o u r t became d e e p l y e m b r o i l e d price  regulation,  private issue  a m a t t e r which c o u l d  i n t e r e s t s of a producer,  i n t h o s e y e a r s , and  "affected with a public narrow indeed.  i n g the  public  could  for  be  the  was  regulation. be  a  State  i n j u r i o u s to  s e n s i t i v e and  the  contended  Court's d e f i n i t i o n s of  industries  i n t e r e s t " ( o r some s u c h w o r d i n g )  I t took a stepped-up pace o f  economic development  It  in public  to r e v i v e  from the  concerned  competitive  s a f e l y s a i d that  industrial  interest in  imperfections  t h i s renewed a w a r e n e s s i n t h e  necessity  of  and  protect-  of  r a i l r o a d s were m a i n l y  was  the  market.  responsible  regulating  "common c a l l i n g s " .  The last  railways,  quarter of  the  which expanded and  nineteenth century  flourished in  i n the  v e r y d i f f e r e n t e c o n o m i c c h a r a c t e r i s t i c s and ent  e f f e c t on  highly the in the  the  competitive  public  industry  spheres.  competition  up  to  that  d e v e l o p m e n t and type transport T h e r e was  no  T h e r e were t o o  In a d d i t i o n ,  population  that  For  few  of  public  Interest  and  the  g r o w t h was  to  public  unless rate  could  be  controls  differ-  scale,  one  thing,  from each  them.  other  Certainly, in  the  pace o f i n d u s t r i a l making t h e s e the  life  r a i l r o a d s were a f f e c t e d  strong the  a very  n e g l i g i b l e , except  companies e s s e n t i a l t o  doubt  time.  competition  f r o m o t h e r modes was  E a s t e r n barge a r e a s .  had  displayed  than d i d t r a d i t i o n a l small  y o u n g r a i l r o a d s e x p e r i e n c e d no t h e i r own  U.S.,  the  monopolistic-  of a l l Americans. with a  potentially quite were  introduced.  very dangerous  18  The marily that  famous G r a n g e r movement o f  concerned, w i t h g a i n i n g  the  G r a n g e r s met  farmers'  i n t e r e s t s was  In s h o r t ,  ments were b r i n g i n g that  rate  a w a r e n e s s by  the  i n d u s t r i a l and  about  imperfections  the  i n the  greater  courts  public  that a  success regulatory  protection  of  into other areas a  "common  technological i n the  develop-  competitive  conSuch  government i n v o l v e m e n t and  an  l a i s s e z - f a i r e p h i l o s o p h y was  r a t i o n a l e o f government r a t e  i n d u s t r i e s can  " m i l e s t o n e " American c o u r t  best  be  traced  c a s e s r i g h t from the  their reaction  l e g a l h i s t o r y of r e g u l a t i o n e n t i r e Western  and  no  interest.  h i s t o r y and  t i o n over s e l e c t e d  G r a n g e r s and  pri-  h a r b i n g e r o f a much  regulation  new  required  The  the  t o be  and  was  s o c i e t y r e l i e d upon t o g u a r d i t s I n t e r e s t s .  imperfections  longer  due  rates  a b r o a d e r i n t e r p r e t a t i o n o f what was  calling".  ditions  The  with i n e s t a b l i s h i n g state  w i d e r movement f o r p u b l i c gradually  l870's  these c o n t r o l s .  commissions f o r c o n t r o l of r a i l w a y the  the  to railway i n the  by  a number  days of  development.  U.S.  has  regulaof  the  This  significance for  world.  1877-1934 During t h i s period government d e e p e r and business.  The  first  the  U.S.  deeper i n t o the  Supreme C o u r t a l l o w e d regulation  s i g n i f i c a n t c a s e came t o  of  the  the  private  court  in  o  1877  in  on  the  %unn Phillips,  a p p e a l o f Munn i n Munn v .  v . I l l i n o i s , 94 U.S., o p . c i t . , p. 57.  Illinois  113,  122  where  (1877),  as  the  quoted  19  former on  c o n t e s t e d the r i g h t  o f t h e s t a t e t o f i x maximum  the o p e r a t i o n of g r a i n e l e v a t o r s .  that  the  individual's right  The  ments .  The  Court  ruled  basis of appeal  t o p r i v a t e p r o p e r t y was  i n t e r f e r e d w i t h c o n t r a r y to the F i f t h and  charges was  being  F o u r t e e n t h Amend-  i n f a v o u r o f t h e s t a t e on t h e  ground  that: . . . e l e v a t i n g f a c i l i t i e s . . . m a y be a v i r t u a l m o n o p o l y . . . t h e i r b u s i n e s s most c e r t a i n l y t e n d s t o a common c h a r g e a n d i s become a t h i n g o f p u b l i c i n t e r e s t and use... and  t h a t a c c o r d i n g to J u s t i c e Hale  (above):  . . . e v e r y s u c h warehousemen o u g h t t o be u n d e r r e g u l a t i o n t h a t he can t a k e b u t a r e a s o n a b l e The  legislative  power t o r e g u l a t e r a i l r o a d s and  had  been g i v e n a tremendous  Illinois  was  ing  rate regulation  The  first  1914  interest  the  repeatedly f o r s i m i l a r cases  expansion  w i t h German A l l i a n c e  Insurance  a m o n o p o l y n o r an  the f i r e  i n s u r a n c e b u s i n e s s was  and  the s t a t e ' s r i g h t  thus  held.  Although  "doctrine",  found  to reduce  the c o u r t s t i l l  sufficient  regulation  concern-  facilities. came i n  Company v . K a n s a s .  i n s u r a n c e b u s i n e s s had  Not  unlading  o f the i n t e r p r e t a t i o n  attached to i t to merit public  could charge.  "utilities"  q u a r t e r of the n i n e t e e n t h century,  o v e r s t o r a g e , l a d i n g and  significant  the c o u r t r u l e d  it  cited  other  boost.  Throughout the l a s t Munn v .  public toll.9  Here  1 0  public  of the r a t e s  i n d i s p e n s a b l e commodity,  "practically a necessity", a set of charges  h e l d to the p u b l i c  i t s i n t e r p r e t a t i o n o f t h i s was  already  was  up-  interest expanding.  Ibid. ^ ^  1  0  German A l l i a n c e  Insurance  Company v . K a n s a s ,  233  U.S.,  20  The classify,  first  c o u r t case which attempted  f o r f u t u r e reference, those  clothed with a public  interest  r a t e purposes  was W o l f f  of Kansas,  Although  the  1 1  i n d u s t r i e s w h i c h were  a n d were t h u s  Packing  t o d e f i n e and  regulable f o r  Company v . I n d u s t r i a l  t h i s was a d e c i s i o n u n f a v o u r a b l e  r e g u l a t o r , the three c a t e g o r i e s o f s o - c a l l e d  callings  Court  t h a t t h e c o u r t enumerated and which,  to  common  i t said,  should  be l e g a l l y  r a t e r e g u l a b l e were q u i t e s i g n i f i c a n t .  The  were t h o s e  industries  and o t h e r  common c a r r i e r s who  such  carried  p r i v i l e g e by the p u b l i c . responsibility  The regarded  on b u s i n e s s u n d e r a g r a n t o f  Such a g r a n t  second  c l a s s was  imposed a  composed o f t h o s e  as " e x c e p t i o n a l " i n which earliest  o f inns, cabs,  were t h o s e  utilities  clear  to the p u b l i c .  r e c o g n i z e d from "keepers  as r a i l r o a d s ,  first  times".  "public  industries  interest  had been  Examples h e r e were g i v e n a s  gristmills,  etc.".  The t h i r d  class  businesses  ...though n o t c o n s i d e r e d p u b l i c a t t h e i r c o n c e p t i o n , may be; f a i r l y s a i d t o have r i s e n t o be s u c h a n d have become s u b j e c t i n c o n s e q u e n c e t o some g o v e r n ment r e g u l a t i o n . 1 2  The  r a t i o n a l e o f placement  d e f i n e d simply, inquiry.  i n the t h i r d  but r e s t e d e n t i r e l y  As t h e c a s e  category  i n the l a p of  c o u l d n o t be judicial  said:  l"'l*As c i t e d by P h i l l i p s , C P . , The E c o n o m i c s o f R e g u l a t i o n , Homewood, 111., R.D. I r w i n I n c . , 1965, p . 64. 1 2  Phillips,  op.cit..  p . 65  21 ...the thing which gave the public interest was the indispensable nature of the service and the exhorbitant charges and arbitrary control to which the public ( i n the court's opinion) might be subjected without regulation.^ With the Wolff Packing case, the court had made i t clear that to a very large extent no set standards would exist by which an industry could be classed regulable or non-regulable. Henceforth,  f o r concerns not e a s i l y placed i n one of the f i r s t  two categories, only the court could decide whether regulation was c a l l e d f o r .  Nor d i d the court have to j u s t i f y i t s future  decisions on any other basis than that of i t s own judgement as to the p o t e n t i a l danger to public interest inherent i n a p a r t i c u l a r situation.  This decision i s f a r more s i g n i f i c a n t that i t might  f i r s t appear.  It serves to explain how even today the layman  i s often unable to understand why some industries are subjected to rate regulation while others, with similar economic features and to some degree a s i m i l a r e f f e c t on the public, are l e f t uncontrolled.  The logic (or lack of i t ) has rested throughout  the years purely i n the minds of the Justices of the U.S. Supreme Court.  The e f f e c t of this Court's logic has by no means  been confined only to the United States. 14 In 1934, the decision i n Nebbia v. New York  in sig-  n a l l i n g a return to heavier government r e s t r i c t i o n over indus-  ^ I b i d . , p. 6 6 . l2  *NebbiaVv. New York, 291 U.S., 502 (1934).  22 trial  price  setting,  aired  i n Wolff.  e x p a n d e d upon and  finalized  the  philosophy-  . . . t h e r e c a n be no d o u b t t h a t upon p r o p e r o c c a s i o n and by a p p r o p r i a t e m e a s u r e s t h e s t a t e may regulate a b u s i n e s s i n any o f i t s a s p e c t s , i n c l u d i n g t h e p r i c e s t o be c h a r g e d . . . a s t a t e i s f r e e t o a d o p t w h a t e v e r e c o n o m i c p o l i c y may r e a s o n a b l y be deemed n e c e s s a r y t o promote p u b l i c w e l f a r e and t o e n f o r c e t h a t p o l i c y by r e g u l a t i o n . 1 5  I n o t h e r words, t h e knell  to  the  necessity  with a public where and calling own  or public  was  f o r p r o v i n g an  Interest.  when i t saw  court  I t was  f i t and  the  any  industry  state's  was  judgement on  purely the  death  affected  r i g h t to  considerations  i n t e r e s t were t o be  m i n d when i t p a s s e d  sounding the  of  i n the  state's  regulate common court's  action.  Thus, ...the phrase ' a f f e c t e d w i t h a p u b l i c i n t e r e s t ' can t h e n a t u r e o f t h i n g s mean no more t h a n an i n d u s t r y , f o r adequate reason, i s s u b j e c t to c o n t r o l f o r the public good.l° For the  cases leading  rate the  regulation U.S. of  ways.  The  rate  has  regulation  have b e e n a s u f f i c i e n t  discarded  Ibid.,  p.  the  additional  to  to  state  the to  67.  of  public  York for  present  and state day,  e n t e r many  pure u t i l i t i e s  i s applied.  doctrine  New basis  f o r such allowance o f t e n  op.cit_., p. 68.  R i g h t up  a l l o w e d the  s i m i l a r reasoning  ^Phillips, l 6  purposes, Nebbia v.  t o p r o c e e d upon.  justification  i f not,  court  thereto  Supreme C o u r t has  fields  or,  a l l i n t e n t s and  in  and  rail-  c i t e s Nebbia  Whether o r n o t  the  i n t e r e s t i s a moot  23  question.  I r r e s p e c t i v e o f w h e t h e r t h e t e r m does o r does n o t  appear i n l e g a l  d e c i s i o n s today,  public  h a s t o be a t t h e r o o t o f t h e c o u r t ' s  interest  when i t l o o k s on a c a s e  i t s h o u l d be c l e a r t h a t t h e thoughts  involving state rate regulation.  Summary By initial  way o f s u m m a r i z i n g a n d t r y i n g  question  regulated while but  of this  since  philosophy  those  s e c t i o n , v i z . why a r e some I n d u s t r i e s  o t h e r s i m i l a r o n e s a r e n o t , we have no c h o i c e  to turn to Wolff  accepted  years,  Packing  Company a n d N e b b i a .  interest.  confidence tion.  I t i s the  t o d a y , a n d h a s been t h e a c c e p t e d  philosophy  t h a t t h e s t a t e does have t h e r i g h t  to regu-  l a t e as long as the c o u r t c o n s i d e r s best  t o answer t h e  i t t o be i n t h e p u b l i c ' s  Western s o c i e t y has p l a c e d g r e a t  i n i t s courts i n matters of I n d u s t r i a l  As a r e s u l t ,  there  r e l i a n c e and rate  regula-  i s no b e t t e r a n s w e r t o o u r q u e s t i o n  than  t o say that the l o g i c  o f r e g u l a t i o n has r e s t e d w i t h t h e  high  c o u r t s and t h i s  i s based p u r e l y and s i m p l y  logic  i n t e r p r e t a t i o n o f what i s i n t h e b e s t p u b l i c  interest.  on t h e i r  24  CHAPTER  II  MOTOR CARRIER RATE REGULATION  Aims In statements of lative  p r e a m b l e s b o t h f o r Canada and  aims a r e public can  t r a n s p o r t a t i o n p o l i c y and  given  for rate regulation  c o n t r o l s ) over the  u s u a l l y be  associated  various w i t h one  the  United  (as d i s t i n c t modes o f of  in  States, from  legisnumerous  other  transportation.  Such  five principal objectives:  1.  To a s s u r e t h e s h i p p e r o r p a s s e n g e r o f r e l i a b l e s e r v i c e from the c a r r i e r s under the r e g u l a t o r ' s jurisdiction, thus...  2.  a l l o w i n g the r e g u l a t e d c a r r i e r s t o conduct r e a s o n a b l y p r o f i t a b l e o p e r a t i o n s and m a i n t a i n financial v i a b i l i t y , yet...  5.  p r o t e c t i n g the s h i p p e r or passenger from f o r c e d t o pay e x c e s s i v e r a t e s .  4.  To p r e v e n t u n j u s t d i s c r i m i n a t i o n by t h e c a r r i e r s between i n d i v i d u a l s o r g r o u p s o f t h e p u b l i c .  5.  F i n a l l y , t o b r i n g a b o u t t h e most e f f i c i e n t a l l o c a t i o n o f t r a f f i c among modes so t h a t e a c h w i l l o p e r a t e w i t h i n i t s own s p h e r e o f d e m o n s t r a t e d i n h e r e n t a d v a n t a g e and t h e t o t a l t r a n s p o r t a t i o n r e s o u r c e s o f t h e economy w i l l s u f f e r m i n i m a l wastage.  being  1  Insofar  as  rate  r e g u l a t i o n of the  motor c a r r i e r  i s concerned,  the  duties  regulator  no  of the  are  aims of the  common o r  contract  l e g i s l a t o r and  d i f f e r e n t from the  general  the case.  N o t e : No p a r t i c u l a r s o u r c e i s h e r e i n c i t e d f o r t h e s e a i m s . One s e e s e v i d e n c e o f them, however, b o t h s p e l l e d o u t and u n d e r s t o o d i n most l i t e r a t u r e d e a l i n g w i t h r e g u l a t i o n o f t r a n s p o r t . Our own C a n a d i a n T r a n s p o r t a t i o n A c t (R.S.C., 1952, a s amended 1967) p e r h a p s e m p h a s i z e s No. 5 more t h a n t h e o t h e r s .  25  Despite points  a little  more o r l e s s e m p h a s i s on c e r t a i n o f t h e f i v e  above, t h e r e g u l a t o r y  objectives  i n attempting  commission w i l l  apply  t o control the rates  t h e same  o f a l l types o f  common c a r r i e r s o f p r o p e r t y .  Justification As railway  rate  pointed  out i n Chapter I, u t i l i t y  r e g u l a t i o n , and o t h e r  common t h e same e c o n o m i c a n d s o c i a l opinion  o f n o t a few c r i t i c s ,  over t h e motor c a r r i e r able  industry  state regulation of trucking rates. a f t e r looking  justifications.  does n o t .  there  regulation,  r e g u l a t i o n have i n  the practice of rate  case i s put forward that  such reasoning  rate  rate  In the regulation  In f a c t ,  a reason-  i s no j u s t i f i c a t i o n f o r We s h a l l  examine some o f  i n t o t h e economic c h a r a c t e r i s t i c s  of the i n d u s t r y .  Economic C h a r a c t e r i s t i c s o f t h e I n d u s t r y In t h e g e n e r a l e x h i b i t s a very  in not  examined i n C h a p t e r I .  motor c a r r i e r s r e q u i r e facilities.  t h e motor c a r r i e r  Unlike  three year.  a healthy  In the f i r s t  s u b s t a n t i a l f i x e d o r sunk  the r a i l r o a d  or public u t i l i t y  succeed i n t u r n i n g over i t s c a p i t a l  years,  industry  d i f f e r e n t s e t o f economic c h a r a c t e r i s t i c s  from t h e u t i l i t i e s few  case,  trucking firm will  i n three  o r f o u r times the s i z e o f i t s f i x e d asset The l a r g e s t c l a s s o f a s s e t s  investment w h i c h may  o r even  generate gross  place,  five  revenues  investment  each  f o r a t r u c k i n g f i r m i s mov-  26  i n g equipment. ily  This  saleable.  operating  has a r e l a t i v e l y  The v a s t m a j o r i t y  costs  carrier  industry  scale.  Clearly, this  should  show t h a t  this  —  p o s s i b l y even a coming a b o u t .  a n a t u r a l monopoly c a n soon  the small  firms  On t h e o t h e r  o f t h e much l a r g e r f i r m ,  American cost  In  develop  hand,  display efficiency  r e g u l a t i o n would a g a i n  number o f r e s p e c t e d  economies.of  I f e c o n o m i e s do e x i s t ,  large firms  adverse p r i c i n g p r a c t i c e s ensue.  o f minimum r a t e  therefore,  be r e v i e w e d h e r e f o r t h e m o t o r  i s a danger o f c o n c e n t r a t i o n ,  tions equal t o that  should  of opera-  then t h e  imperative  be q u e s t i o n a b l e .  A  s t u d i e s have c o n c l u d e d  just  t h a t no p o s i t i v e r e l a t i o n s h i p e x i s t s between u n i t  operating  costs  n o t e was t h a t of  o f expenses are,  i s significant.  such a s i t u a t i o n as t h i s ,  studies  and i s r e a d -  i s whether o r n o t i t might e x h i b i t  m o n o p o l i z a t i o n b y two o r t h r e e  and  life  - v a r i a b l e d i r e c t l y w i t h t h e volume o f a c t i v i t y .  One i s s u e t h a t  then there  short  slightly  and f i r m s i z e .  A trucking  o f R o b e r t A. N e l s o n i n 1 9 5 9 .  cost 2  s t u d y o f some  T a k i n g a sample  o v e r one h u n d r e d c a r r i e r s o f f r e i g h t i n New  Nelson s e t out t o discover  England,  what, i f any, r e l a t i o n s h i p e x i s t e d  between t h e s i z e o f t h e m o t o r c a r r i e r a n d t h e e f f i c i e n c y o f the  operator.  A n n u a l r e v e n u e was t a k e n a s t h e b e s t  measure o f c a r r i e r  s i z e and t h i s ,  i n turn,  available  correlated  with:  R.A. N e l s o n . "The E c o n o m i e s o f S c a l e i n t h e T r a n s p o r t I n d u s t r y : A R e p l y , L a n d E c o n o m i c s , V o l . XXXV, May, 1 9 5 9 .  27  1.  Cost per  2.  Cost per v e h i c l e  mile;  3.  Cost per average  haul;  ton-mile;  l e d the r e s e a r c h e r t o conclude  elsewhere  that:  . . . s i z e of f i r m bears l i t t l e r e l a t i o n to operating costs. C o n s e q u e n t l y i t c a n h a r d l y be m a i n t a i n e d t h a t t h e r e a r e economies o f s c a l e a v a i l a b l e i n the i n d u s t r y , o r a t e n d e n c y t o w a r d monopoly stemming from t h a t cause.5 Of  some i n t e r e s t  correlation  to this  that Nelson  t h e s i s are the c o e f f i c i e n t s developed  Coefficients  o f Rank  Annual  Correlation  carriers operating within d o m i c i l e d i n New E n g l a n d )  to 0.07  to 0.33  Revenue  Cost per average Annual  4  Revenue  Cost per ton m i l e Annual  rank  from h i s sample:  (102 and Cost per v e h i c l e m i l e  of  haul to 0.45  Revenue  A l e s s r e c e n t b u t b e t t e r known m o t o r c a r r i e r c o s t s t u d y was f o r m e d by M.J.  Roberts  though Roberts' Nelson's,  he was  I n 1956  e v i d e n c e was  (see Chapter V as w e l l ) . ^  per-  Al-  n o t as c o n c l u s i v e as t h a t o f  able to suggest  t h a t i t was  not  the s i z e  of  ^U.S. S e n a t e , R e p o r t o f S e l e c t Committee on S m a l l B u s i n e s s , C o m p e t i t i o n , R e g u l a t i o n and t h e P u b l i c I n t e r e s t i n t h e Motor C a r r i e r I n d u s t r y , Washington, D . C , U.S. Government P r i n t i n g O f f i c e , 195b, PP. 512 316. 4  R.A. N e l s o n . I n d u s t r y : A Reply' , 1  The E c o n o m i e s o f S c a l e I n t h e T r a n s p o r t L a n d E c o n o m i c s , V o l . XXXV, May, 1959, P.  183.  M.J. R o b e r t s , "Some A s p e c t s o f M o t o r C a r r i e r C o s t s : F i r m S i z e E f f i c i e n c y and F i n a n c i a l H e a l t h " , L a n d E c o n o m i c s , V o l . X X X I I , No. 3, May, 1956, pp. 228 - 238.  28  carrier,  a  as  but r a t h e r  utilization  certain  examined i n g r e a t e r  simply  characteristics  o f equipment and average l e n g t h  determined the e f f i c i e n c y  The  operating  of a carrier.  detail  that  These p o i n t s  will  be  i n C h a p t e r V.  bulk of Roberts'  and e f f e c t i v e l y  of haul  such  e v i d e n c e m i g h t be summarized  i n t h e f o l l o w i n g manner: EXHIBIT 1  R e l a t i o n s h i p Between A s s e t s (Measure o f S i z e ) a n d V e h i c l e - M i l e Costs - Percentage i n Each Class" Carrier Size Small  (0-3)  Low C o s t  - 0-50 mile  Medium  -  50-80  per vehicle / per vehicle  mile High Cost  -  80-180 £  per vehicle  Medium  28.70  (6-22)  (5-6)  6.10  15.80  10.30  2.60  1.90  mile  Source:  M.J. R o b e r t s , Certainly,  clusive Roberts'  study.  By low  than high  i n Roberts' low  however, be o b s e r v e d t h a t  extremely small  t h e same t o k e n , a n e x t r e m e l y l a r g e cost  cost.  study,  t o be con-  e c o n o m i e s o f s c a l e d i d n o t show up i n  I t may,  c a r r i e r was more o f t e n  231.  Land Economics, V o l . XXXII, p .  t h e a b o v e g r i d does n o t p u r p o r t  evidence that  -  Large  7.10  14.6$  12.90  (Assets  cost.  a low c o s t  than extremely c a r r i e r was more  As f o r t h e e x t r e m e l y s m a l l  i t was j u s t  large.  as l i k e l y  t o be h i g h  often  carrier cost  as  Some e v i d e n c e o f l a r g e - s c a l e e c o n o m i e s m i g h t be  29  evidenced,  however, by  the  almost e x c l u s i v e l y the however, R o b e r t s ' m i e s were n o t  fact  that  high  extremely small  cost  carrier.  evidence d i d i n d i c a t e that  a notable  c a r r i e r s were On  the  whole,  large-scale  c h a r a c t e r i s t i c of the motor  econo-  carrier  industry. Thus,  two  respected  studies  a s s u m p t i o n t h a t we  are  characteristics  the motor t r u c k i n g  mies of there  of  s c a l e are  i s an  not  able  cost  have b o r n e o u t  t o make f r o m c e r t a i n o b v i o u s  likely  t o be  industry,  found.  On  i n c r e a s i n g awareness today t h a t  that  the  there  f a c t o r s which might b r i n g about economies f o r the  one economic  i s , econo-  other are  hand, other  large-scale  trucker.  For  one  f o r c e d more a n d possible.  thing,  large-scale trucking  more t o a u t o m a t e i t s o p e r a t i o n s  Modern t e r m i n a l  ment, a u t o m a t i c m a t e r i a l s as  s o o n as  the  employment o f a comparatively  trucker  facilities, handling  enters  such f a c i l i t i e s  i s not  Yet  come t o c o n s i d e r  a c t u a l l y are  by  afford  that  s e r v i c e advantages.  s u c h a u t o m a t i o n and  the  these imperatives  about a l o s s i n patronage f o r the  equip-  a l l necessitated The  s e r v i c e however,  g r o w t h and  i t i s possible  that  are  as  n e c e s s a r i l y t h a t mark o f  economical or e f f i c i e n t  volume o p e r a t i o n .  operation  data processing  devices  being  as much  large-scale operations.  merely a development o c c a s i o n e d  may  today i s  smaller  s e r v i c e due  of  entrance shipping  but  into a public  large-scale  Should t h i s carrier  (who  bring cannot  t o volume d e f i c i e n c y ) ,  30  then concentration concentration which c o u l d  be l a b e l l e d  trucker.  , institutions, carrier  Whether t h i s  i s not relevant.  motor c a r r i e r on  the basis  because o f poor  on t h e p a r t The f a c t  may  than the  understand-  of the financing  i s that  the large  t o be i n a n a d v a n t a g e d p o s i t i o n .  For both these reasons, o r , more p r o p e r l y ,  the large operator  i s a c t u a l l y due t o a b e t t e r  c a r r i e r operations  i s likely  that  ease i n f i n a n c i n g h i s o p e r a t i o n s  w o r t h i n e s s o r , more l i k e l y ,  ing of small  - a  "economies".  I t i s more l i k e l y  experience greater  credit  t o develop i n the i n d u s t r y  brought about by c e r t a i n advantages o f s c a l e  Also,  small  Is l i k e l y  advantages,  industry.  i t i s possible that  of scale could well  economies,  exist  I f such a p o s s i b i l i t y d i d e x i s t  i n the then  o f t h e d i s c u s s i o n about economies o f s c a l e and  n a t u r a l m o n o p o l i e s s p r i n g i n g f r o m s u c h e c o n o m i e s , one m i g h t be able as  to j u s t i f y  regulation i s justified.  of advantages o f s c a l e t h a t  have b e e n e x a m i n e d h e r e ,  If  and r a i l w a y  r e g u l a t i o n much i n t h e same way  rate  are  utility  trucking rate  n o t i n any way p e c u l i a r t o t h e m o t o r c a r r i e r  The t y p e however,  industry.  one were t o j u s t i f y m o t o r c a r r i e r r e g u l a t i o n on t h e above  g r o u n d s , t h e n s u r e l y he c o u l d industry.  accept  r a t e r e g u l a t i o n o v e r any  Economies o r advantages o f s c a l e i s n o t t h e answer.  ^Our i n d u s t r y h a s t r a d i t i o n a l l y b e e n one o f s m a l l , i n d e p e n d e n t o p e r a t i o n s w i t h r e l a t i v e l y few l a r g e c o m p a n i e s . B e i n g s m a l l . . . f i n a n c i n g was a c c o m p l i s h e d o u t o f r e t a i n e d e a r n ings. A c q u i s i t i o n o f o t h e r c a r r i e r p r o p e r t y and o p e r a t i n g r i g h t s ( o t h e r t h a n s i m p l y r e v e n u e u n i t s ) h a s been m a i n l y l i m i t e d t o t h e l a r g e r c a r r i e r s who c a n r e s o r t t o o t h e r t h a n earned surplus f o r resources". R o l a n d N. Reedy, S e c r e t a r y T r e a s u r e r , G r e a t S o u t h e r n T r u c k i n g Company, F i n a n c i n g M o t o r C a r r i e r O p e r a t i o n s . 1958. ~  51  We must s e a r c h tion  deeper before  f o r motor c a r r i e r  In a r a t h e r Public  questions  regulated.  that  article,  The E c o n o m i c B a s i s o f  to that  t h e economic s t r u c t u r e o f  of the r a i l r o a d  atory  He c a n n o t ,  therefore,  p r i c i n g and ruinous i t s small  industry lesson  competitive  asset  when e c o n o m i c m o b i l i t y  basic  justify  rate  Competition,  and c o n of a regulahe f e e l s ,  an a d e q u a t e s a f e g u a r d t o t h e p u b l i c f r o m d i s c r i m i n -  c a r r i e r with  that  or u t i l i t y  d i s p l a y s none o f t h e f e a t u r e s  f o r t h i s mode on a n y s u c h g r o u n d s .  provides  some  a s t o why m o t o r c a r r i e r s a r e , i n f a c t ,  the trucker  n a t u r a l monopoly.  and  concise  He does n o t c o n t r a s t  the motor c a r r i e r  tion  regulation.  P o l i c y f o r M o t o r T r a n s p o r t , ? D.P. Pegrum a s k s  pointed  clude  rate  finding a satisfactory justifica-  practices.  base i s "economically  The m o t o r mobile",  i s i n e v i d e n c e In any i n d u s t r y ,  i s approaching p e r f e c t o f economic t h e o r y .  competition.  In theory  s i m p l e t o d e m o n s t r a t e how t h e m o t o r c a r r i e r resemble t h e p e r f e c t l y c o m p e t i t i v e  This  is a  at least, i t i s industry  does  model:  Rate  Volume  'R.A. N e l s o n , "Pegrum on t h e E c o n o m i c B a s i s o f P u b l i c P o l i c y f o r Motor T r a n s p o r t " , Land Economics, V o l . XXVIII, A u g u s t , 1952, p p . 245 265. 8  Ibid.,  p.  256.  y  32  F i r m "A" and  i s a t r u c k e r whose major investment i s i t s power u n i t  t r a i l e r at the p r e v a i l i n g per ton r a t e over a c e r t a i n  route (R-^).  "A"  i s earning  a reasonable p r o f i t .  demand f o r t r u c k i n g s e r v i c e i n c r e a s e r a t e to R ,  "A"  2  F i r m "B", u n i t and  in equilibrium,  b i d up  the  profit.  t h i s p r o f i t a b l e market, q u i c k l y buys another  the r o u t e .  With demand and  supply thus again  the r a t e f a l l s back to R]_.  r a t e f a l l below R, market.  shippers  the  w i l l be earning more than a s u f f i c i e n t  sensing enters  and  Should  e i t h e r "A"  o r "B"  Should the  can e a s i l y leave  new the  Entrance and departure i s thus f a c i l i t a t e d due  f a c t that the major expense of doing business here i s ed by v a r i a b l e c o s t s . s e l f ) Is not  The  to  represent-  f i x e d Investment ( i . e . the u n i t i t -  s u b s t a n t i a l r e l a t i v e to the revenue i t w i l l  i n a y e a r of b u s i n e s s .  the  create  In a d d i t i o n , such a f i x e d a s s e t ,  l i k e a r a i l r o a d r i g h t - o f - w a y and  un-  s t r u c t u r e s , can q u i c k l y change  hands i n a used market at a good p o r t i o n of i t s f a c t o r y p r i c e . Such m o b i l i t y a c t s as good p r o t e c t i o n to the consumer or s h i p p e r  as w e l l .  The  r a t e R^  i s not  only most s t a b l e ,  as i t s h o u l d g r a v i t a t e t o the l e v e l of the t r u c k e r s ' marginal c o s t , i t should be extremely r e a s o n a b l e . of r e g u l a t i o n " , as Pegrum notes, "grew out  I b i d . , p.  247.  long-ran  "The  theory  of the unique  economic c h a r a c t e r i s t i c s of the r a i l r o a d s " . 9 t h i s t h e o r y a p p l y to motor c a r r i e r s ?  but  How,  then, does  33  In a word, i t does n o t .  I t i s the o p i n i o n of  w r i t e r t h a t r a t e r e g u l a t i o n of motor c a r r i e r s cannot  logic-  a l l y s p r i n g from t h e o r e t i c a l economic arguments such as theory  of r e g u l a t i o n " .  were i n t r o d u c e d industry.  The  at the same time as e n t r y c o n t r o l s i n t h i s a p p l i c a t i o n of these two,  economic theory,  but  simply  moreover, came not  nor a f t e r r e f e r e n c e  as ad hoc  to  remedies to a p e r i l o u s  s i t u a t i o n i n an embryonic t r a n s p o r t  i n d u s t r y which was Brief  "the  Rate c o n t r o l s over motor c a r r i e r s  as a r e s u l t of long m e d i t a t i o n ,  competitive  this  industry,  an  growing at a c o l o s s a l r a t e .  History Although r e g u l a t i o n of motor c a r r i e r s may not be necessary f o r e x a c t l y the same reasons that r e q u i r e r a i l r o a d s to be r e g u l a t e d , i t does not f o l l o w that r e g u l a t i o n of motor c a r r i e r s i s u n d e s i r a b l e . A study of motor c a r r i e r t r a n s p o r t a t i o n as i t e x i s t e d p r i o r to the establishment of e f f e c t i v e r e g u l a t i o n r e v e a l s c e r t a i n u n d e s i r a b l e and o b j e c t i o n a b l e f e a t u r e s f o r which a remedy was sought. Some of these p r a c t i c e s were s i m i l a r to r a i l r o a d p r a c t i c e s c o n s i d e r e d o b j e c t i o n a b l e ; others were p e c u l i a r to the motor c a r r i e r industry.10 P r i o r to passage of the f i r s t motor c a r r i e r a c t s ,  conditions The  i n the American t r u c k i n g i n d u s t r y were c h a o t i c .  i n t e r n a l combustion engine was  under c o n s t r u c t i o n , i n the way  shippers  perfected,  roads were  were demanding more and more  of f a s t t r a n s p o r t a t i o n .  Thus, the p o s s i b i l i t y  g e t t i n g i n t o a booming t r a n s p o r t a t i o n r e v o l u t i o n w i t h but  D.P.  L o c k l i n , o p . c i t . , p.  668  of a  34  very s m a l l Investment began to a t t r a c t thousands of would-be c a r r i e r s v i r t u a l l y overnight. ever, i t was  In the p e r i o d 1915-1930, how-  e v i d e n t t h a t more motor c a r r i e r s were becoming  a v a i l a b l e than the t r a f f i c  warranted.  T h i s s u r p l u s of o p e r a t o r s , coupled with a g e n e r a l ignorance by these s m a l l businessmen of how r a t e s , r e s u l t e d i n a mad was to  scramble  to s e t The  result  a s i t u a t i o n where even the l a r g e r o p e r a t o r s were  unable  secure a s t a b l e p o s i t i o n .  1 1  f o r business.  remunerative  The p u b l i c c o u l d not  expect  adequate s e r v i c e under these u n s e t t l e d c o m p e t i t i v e c o n d i t i o n s which p e r s i s t e d f o r more than a decade i n some s t a t e s of the U.S.,  nor were the a u t h o r i t i e s o r c a r r i e r s w i l l i n g to wait  u n t i l the i n d u s t r y s e t t l e d i n t o e q u i l i b r i u m .  Before  most r e s p o n s i b l e c a r r i e r s , a b l y a s s i s t e d by the  railroads,  were a p p e a l i n g to s t a t e l e g i s l a t u r e s to r e s t r i c t the of  long,  entrance  t r u c k e r s i n t o the i n d u s t r y . Between the years 191-5  and 1928,  t h e r e f o r e , most  s t a t e s i n the U n i t e d S t a t e s entered the f i e l d of motor c a r r i e r regulation.  The  initial  i n t e n t i o n was  p u b l i c and, most important, o v e r c a p a c i t y which was  o n l y to p r o t e c t the  the i n d u s t r y i t s e l f from a severe  d e v e l o p i n g as a r e s u l t of  inordinately  r a p i d growth.  " P r i o r to r e g u l a t i o n , new t r u c k e r s entered business at w i l l , s l a s h e d t o l l s to get f r e i g h t , paid, inadequate wages ...maintained t h e i r t r u c k s so b a d l y t h a t they endangered o t h e r highway u s e r s . . . . C e r t i f i c a t i o n f o r e s t a l l e d ' w i l d c a t t i n g ' and ensured a reasonably high standard of s e r v i c e a l o n g the route concerned." A.W. C u r r i e , Economics of Canadian T r a n s p o r t a t i o n , 2nd Ed., Toronto, u n i v e r s i t y of Toronto press, i y ^ y , pp. 493-494.  35  E v e n beyond, t h e n e c e s s i t y o n i c motor c a r r i e r was f o r c e d  industry  from i t s e l f ,  t o become c o n c e r n e d  transportation  field  o f p r o t e c t i n g a n embryregulatory  f o r the f i r s t  philosophy  time about t h e  i n i t s entirety:  By 1920, a l t h o u g h c o m p e t i n g c a r r i e r s had n o t y e t s u b s t a n t i a l l y invaded the r a i l r o a d s ' province, the p a t t e r n was b e c o m i n g e v i d e n t . The C o n g r e s s , r e a l i z ing t h a t u n b r i d l e d c o m p e t i t i o n i n a f i e l d so v i t a l t o t h e n a t i o n a l economy m i g h t w e l l be d e s t r u c t i v e o f t h e i n d u s t r y , began t o s h i f t t h e e m p h a s i s o f r e g u l a tory l e g i s l a t i o n . . . t o the continued welfare of the industry itself. i 2  That motor t r u c k e r s region  h a d t o be l i m i t e d i n number b y r o u t e ,  a n d b y s t a t e was s o o n an a c c e p t e d f a c t .  t r o l s must accompany e n t r y  free of the f u l l competitive  industries traffic  and thus a t l i b e r t y  would b e a r .  regulators  industry  position  of perfect  o f 1920  truckers  f o r c e a t t e n d a n t upon to adjust  By r e s t r i c t i n g  from s t a b i l i z i n g competition.  m o t o r c a r r i e r was d e s t i n e d trols  "authorized"  rates  itself  would  other  state  the economically eventually  mobile to a  One m i g h t s a y t h a t t h e  as e a r l y as t h e f i r s t  t o be an " a r t i f i c i a l m o n o p o l y " .  entry  Any  expose i t s consumers t o e x c e s s i v e The l o g i c  rates,  con-  monopolistic  economic u n i t , o f c o u r s e , whether n a t u r a l o r c o n t r i v e d ,  Inadequate s e r v i c e .  con-  t o what t h e  competition,  had i n c a p a c i t a t e d f o r e v e r  trucking  rate  c o n t r o l s was a l o g i c a l c o r o l l a r y .  In t h e absence o f r a t e c o n t r o l s , be  That  by  could  discrimination or  of applying  rate controls to  -^Domestic Land and Water Transportation, Progress Report of the Committee on Interstate and Foreign Commerce, Senate Report No. 1039, 82nd Congress, 1st Session, Washington, D . C , 1951, P. 5 .  36  take  t h e p l a c e o f t h e m a r k e t p r i c e mechanism was t h u s  different  i n i t s a p p l i c a t i o n t o t r u c k e r s than  no  to railroads  or to u t i l i t i e s . Powers a n d D u t i e s o f the Motor C a r r i e r  Regulator  Thus f a r , t h e r e rate  regulation actually  we s h a l l tor  takes.  In t h i s  Minimum R a t e  section, therefore,  to rate  setting.  Regulation  The  establishment  over p a r t i c u l a r  a n d m a i n t e n a n c e o f minimum r a t e  routes  i s one a s p e c t  rate r e g u l a t i o n i n the United S t a t e s . competition the  form  l o o k a t t h e v a r i o u s powers a n d d u t i e s o f t h e r e g u l a -  in relation  levels  has b e e n no d i s c u s s i o n o f what  does e x i s t  o f motor  To t h e e x t e n t  w i t h i n t h e imposed e n t r y  carrier that  limitations,  r e g u l a t o r i s concerned that excessive r a t e - c u t t i n g  p r a c t i c e s n o t go o n . enforced,  I n d e e d , e v e n where e n t r y c o n t r o l s a r e  some d e g r e e o f c o m p e t i t i o n  will  face the regulated  carrier.  State usually rates  reserved  t r u c k i n g regulators i n the United States t h e m s e l v e s some a u t h o r i t y o v e r  such c a r r i e r s might  t h e minimum  s e t i n the facC of t h i s  In j u r i s d i c t i o n s where e n t r y c o n t r o l s a r e l e s s i m p o r t a n c e o f p o l i c i n g minimum r a t e l e v e l s  have  competition  strict,  the  looms l a r g e r a g a i n .  •"•^D.U. H a r p e r , E c o n o m i c R e g u l a t i o n o f t h e M o t o r T r u c k i n g I n d u s t r y by t h e S t a t e s , U r b a n a , U n i v e r s i t y o f I l l i n o i s P r e s s , Oh. IX, 1959.  37  S u c h power, o f c o u r s e , venting  destructive The  be  explained  a commission  acts  as  a more d i r e c t method o f  competition.  m e c h a n i c s o f minimum r a t e In  this  Chapter.  The  regulation w i l l  difficulties  minimum r a t e f o r a p a r t i c u l a r h a u l complex and,  as  In f a c t ,  f a c e t of these d i f f i c u l t i e s ;  one  shall  t i n g u i s h whether o r not with his rates, to  say  i s the  see,  should  a trucker subject  t h a t most r e g u l a t o r s  mine minimum r a t e they are  unsettled,  later  c h a r g e d t o s e e k as  t o say  listed  at  the  to  Chapters.  the  least.  "a f a i r  to s a t i s f y  or  extremely  i . e . how  empowered t o  l e v e l s i n order  level  are  i s earning  of  are  be  not  i m p o s e d upon  i n d e t e r m i n i n g what a minimum r a t e  we  pre-  disreturn"  Suffice i t  set  or  to  deter-  the  objectives  beginning of  this  Chapter.  Maximum R a t e  In private too  public.  entry  should  are  t h e o r e t i c a l l y free to  common c a r r i e r r a t e  rates  should  not  be  volume s h i p p e r .  c h a r a c t e r i s t i c of the many c a p t i v e to the  vesture  In a d d i t i o n , industry  shippers  protection  of  reliant  of the  upon one and  o f maximum r a t e powers w i t h t h e  the  little  solace  restricted  indicates that  such small  engage  l e v e l s become  a danger to  However, s u c h a s t a t e m e n t w o u l d be  Essential the  shippers  excessive  small  w e l l be  is  that  trucking  high,  to the  Regulation  there  highway captive  may  carrier. shippers  regulator.  38  Maximum r a t e with the with  a f o r e m e n t i o n e d minimum r a t e powers t o a  jurisdiction  over truckers.  o f what c o n s t i t u t e s as  an  t h o s e employed t o  fore,  we  later Rate  r e g u l a t i o n u s u a l l y goes hand i n hand  shall  defer  s t u d y minimum r a t e  are  levels.  the  same  Again,  such c o n s i d e r a t i o n s  thereuntil  Discrimination  terms of  this  of  rate  criteria  chapters.  A l t h o u g h maximum and  ity  I n many ways, t h e  unreasonably high  discussion  commission  reference  over truckers, Is given  structures.  f o r a l l regulatory often  regulatory  to p r e s c r i b e Not  unreasonably high  minimum r a t e  only and  'and h o l d  does t h i s  power s l i g h t l y carriers  take care of  or  discrimination  is specifically  or  groups of  p r o b l e m and  one  beyond  abuses  but  of  also i t  In many c a s e s ,  well.  Clearly, this the  attention  be-  rate  dealt with i n statutory  meriting  rate  d i s c r i m i n a t i o n as  shippers.  c o m m i s s i o n r u l e s as  significant  the  the  author-  to s p e c i f i c  non-compensatory r a t e s ,  tween s h i p p e r s  are  commissions w i t h  a l l o w s a commission to prevent u n j u s t  visions  regulation  pro-  is a of  the  regulator.  Thus, minimum and more s w e e p i n g power o f provisions  setting  specific  to p r o h i b i t d i s c r i m i n a t i o n ,  considerations regulation.  maximum r a t e  or  The  the  basic  forms of  approach to each of  regulation, rates  are  the  along  or  the  with  principal  common c a r r i e r  rate  t h e s e p r o b l e m s i s by  no  39  means s t a n d a r d t h r o u g h o u t N o r t h A m e r i c a , n o r do a l l r e g u l a tors  s h a r e t h e same p h i l o s o p h y a b o u t how t h i s  tion  s h o u l d be a d m i n i s t e r e d .  this  Chapter w i l l  structures  of c a r r i e r  types of rate  The  briefly  are c a r r i e d out t h e r e i n .  Environment  this  point,  how t r u c k i n g  rate  regulation  What i s i t s h i s t o r y ?  practice  In that  The  United  to state  has e v o l v e d i n o u r  just  continent.  What a r e t h e o r g a n s a n d methods o f e n the United  to begin  States  controls  i n that  pioneered  i n the  over trucking  rates, i t  country.  States In t h e U n i t e d  the  states  Act  was p a s s e d .  role  i t w o u l d be d e s i r a b l e  of administering  m i g h t be b e s t  section of  r e v i e w some o f t h e powers a n d  At  forcement?  The n e x t and f i n a l  of regula-  r a t e a u t h o r i t i e s a n d how t h e v a r i o u s  regulation  Regulatory  kind  States,  began i n 1914.  regulation  o f t r u c k i n g by  I n 1935, t h e F e d e r a l  Motor C a r r i e r  S i n c e passage o f t h i s A c t , moreover, t h e  o f t h e f e d e r a l government, a s a d m i n i s t e r e d b y t h e I n t e r -  s t a t e Commerce C o m m i s s i o n ,  h a s b e e n t h e one e m p h a s i z e d b y  students of the industry.  This  great  deal  o f t h e onus o f r a t e  falls  on t h e s t a t e s '  utility  On t h e s t a t e  level,  i s despite  the f a c t  and o t h e r r e g u l a t i o n  that  a  still  commissions.  early regulation  o f motor  c a r r i e r s was a m a t t e r o f s t r e t c h i n g t h e e x i s t i n g s t a t e  public  40  utility of  laws and commissions t o i n c l u d e  economic  t h i s new d e v e l o p m e n t i n t r a n s p o r t a t i o n .  f i f t e e n years,  the courts  proved such r a t e tract  bound b y p r a c t i c a l l y  e x c e p t New  rates  around t h e country g r a d u a l l y ap-  E v e n b y 1935, every s t a t e  m o t o r c a r r i a g e was  h a s e i t h e r maximum-minimum  o r , more u s u a l l y ,  unreasonableness.  every  powers, minimum  intra-state.  Each  A l l U.S. s t a t e s  portation or public u t i l i t i e s act i s usually called  The  have t h e i r own m o t o r  act.  the state U t i l i t y  carrier regulation  i n the midst  then apparent  a great  tion  of this  tion  sphere i t s e l f .  transo f such  Commission.  the f i e l d  of the t h i r t i e s  gap was d e v e l o p i n g  i n d u s t r y and, i n d e e d ,  a  The a d m i n i s t r a t o r  f e d e r a l government e n t e r e d  that  state  f o r d e t e r m i n i n g r a t e adequacy o r  c a r r i e r a c t o r a s e c t i o n on m o t o r c a r r i e r s w i t h i n  an  state  c o n t r o l over the p r e c i s e  c h a r g e d by c a r r i e r s o p e r a t i n g  employs s i m i l a r c r i t e r i a  well  i n the union.  f a r as r a t e c o n t r o l i s concerned,  Jersey  powers a l o n e ,  Over a p e r i o d o f  r e g u l a t i o n b y t h e s t a t e s o f common a n d c o n -  motor c a r r i e r s .  As  oversight  a s i t was  i n the regula-  i n the t o t a l  T h a t gap was, o f c o u r s e ,  o f motor  transporta-  interstate  operations.  The Interstate ing  M o t o r C a r r i e r A c t o f 1935,  Commerce A c t , p l a c e d  now P a r t  I I of the  a l l American c a r r i e r s  i n t e r s t a t e and i n t o f o r e i g n c o u n t r i e s  operat-  under the j u r i s -  41  diction  o f t h e I n t e r s t a t e Commerce C o m m i s s i o n .  of  regulation,  rate  The  any  area  that  204 o f t h e A c t s t a t e s t h e g e n e r a l  powers t o be e x e r c i s e d  the Act allows  by t h e Commission o v e r motor  t h e Commission t o e s t a b l i s h r e a s o n a b l e to f i l i n g  records  keeping a uniform system o f accounts, administration responsible  valuation  of firms,  to  agreements be-  and t h e h a n d l i n g  of f o r -  matters.  2 1 6 ( b ) i s t h e one r e q u i r i n g f o r e i g n and.  operators t o :  e s t a b l i s h , observe and e n f o r c e r a t e s and c l a s s i f i c a t i o n s , J u s t r e g u l a t i o n s and p r a c t i c e s . 1 4 I.C.C. h a s two g e n e r a l  indeed,  e t c . With regard  tariffs,  c o m p l a i n t s about r a t e and t a r i f f  Section  The  and r e p o r t s ,  o f t h e A c t , D i v i s i o n I I o f t h e I.C.C. i s  f o r dealing with rates,  tween c a r r i e r s ,  interstate  duties  To e n a b l e e f f e c t i v e r a t e r e g u l a t i o n t o be c a r r i e d  requirements with respect  mal  t h e Commission has  into.  Section  out,  o r group o f c a r r i e r s i n  o r f o r any p a r t i c u l a r h a u l  carriers.  severe.  t h e maximum, minimum, o r a c t u a l  t o be c h a r g e d b y a n y c a r r i e r  cause t o i n q u i r e  and  the s t i p u l a t i o n s are r e l a t i v e l y  C o m m i s s i o n may p r e s c r i b e  rates  In the area  reasonable rates  reasonable charges, and r e a s o n a b l e  approaches t o d e t e r m i n i n g whether,  are being  charged.  The f i r s t  i sthe  - ^ I n t e r s t a t e Commerce A c t , S e c . 2 U.S., a s c i t e d b y C.B. A i t c h i s o n , F a i r Reward a n d J u s t C o m p e n s a t i o n , Common C a r r i e r S e r v i c e - S t a n d a r d s U n d e r t h e I n t e r s t a t e Commerce A c t , W a s h i n g t o n , D.C., 1954, A s s o c i a t i o n o f I n t e r s t a t e Commerce P r a c t i t i o n e r s , p . 19.  42  general  revenue case.  represented an  by  carriers  tabled,  the  operating  sometimes e v i d e n c e as rates  statement  character  of  expenses are  return  thereon are  i s made t o t h e  and  the  required general  h e a r d as  By  the  same t o k e n ,  i n i t i a t e d by  the  shipper(s).  the  rates,  general  appellants rather  are  their  reasonableness of  Here,  filed  by  rate  cost  and  general  rate the  The  ratios,  m i n a t i o n of the  out-of-pocket f o r both cases.  cost  general  level  - specific  of  charges general  same t y p e o f d a t a i s  on  level  This  that  Commission  r a t e case w i t h the  return  be  burden.  revenue f i g u r e s f o r the  Profit  considerations  the  level.  investigation.  for.  revenue case can  of balance with the  c a r r i e r s f o r a general  o f more s p e c i f i c  reasonable  i t i s demonstrated  internal structure  the  as  well.  r a t e case, n e i t h e r  out  concluding  r a t e changes c a l l e d  concerned w i t h the  w h i c h someone f e e l s a r e  required  applicants  to earn  a general  need e x i s t s f o r a l i g h t e n i n g of  present  addition,  the A  the  the  and In  shown.  C o m m i s s i o n by  consequent  In the  stated.  that  Existing  need o f  t o book i n v e s t m e n t and  Opposing w i t n e s s e s are  nor  of the  possibly  Commission  p a r t i e s concerned.  t o what r e v e n u e c h a n g e s a r e profits  show t h e  f o r a d d i t i o n a l revenue i s d i s p l a y e d ,  foreseen  present  o r more c a r r i e r s ,  r a t e bureau,  emergency e x i s t s f o r t h e  revenues are  and  their  H e r e , one  addition hauls  investment, are  under  deter-  a l l pertinent  information,  a l l of  43  which p e r t a i n s  to determination  subject  next  of  the As  on  rates  majority t o an  the  of t r u c k e r s  absolute  i n the  This  U.S.  The  see,  rather some o f  examination are  is  the  or  i t can  rates  c l o s e l y i n the  power o f  includes  initiate  respond  proceedings  rate regulation  is  even t h o u g h , as  we  U.S.  t h e m e c h a n i c s o f r a t e and  f a r from p e r f e c t  ruling  the  Commission can  C l e a r l y , common m o t o r c a r r i e r  scrutinized shall  I.C.C. has  interstate carrier.  appeal regarding  itself.  return,  chapters.  stated,  f o r any  of a f a i r  rate  i n t h e i r use  and  level development.  Canada I n Canada, i t has government has motor c a r r i e r its  the  operations,  but  powers t o t h e  recent  government has b a c k and  f o r the  somehow d i f f i c u l t  them. to  the  By  Act ^  federal  headaches of t r u c k i n g r e g u l a t i o n , s k e p t i c a l l y awaiting  recent  pasfederal  Commis-  move, i t i s  Ottawa r e a l l y wants and  "loaneEd"  t a k e i t s powers  Transportation  Even w i t h t h i s  imagine t h a t  v i r t u e of  i t will  new  has  however, t h e  1  i n d i c a t i o n that  a committee o f  sion to administer  time being  provinces.  Transportation  given  s e t up  c u r i o u s l y and  the  c o n t r o l over a l l f a c e t s of e x t r a - p r o v i n c i a l  regulatory  sage o f  o f t e n been s a i d t h a t  most o b s e r v e r s  the are  some d e f i n i t e a c t i o n .  History Prior  1 5  R.S.C,  t o 1949,  1952,  C.  the  271,  provinces  as  amended  enjoyed exclusive  1967  and  44  r e l a t i v e l y uncontested carriers  c o n t r o l over the a c t i v i t i e s  i n s o f a r as any r e g u l a t i o n e x i s t i n g  concerned.  o f motor  a t t h a t t i m e was  T h i s was b y v i r t u e o f S e c t i o n 92 o f t h e B r i t i s h  N o r t h A m e r i c a A c t w h i c h gave t h e j u n i o r g o v e r n m e n t s  juris-  diction  works".  This  over  "property  and c i v i l  i s not t o say that  s u c h e x c l u s i v e r i g h t s were n o t c o n -  t e s t e d from time t o time. were i n t r o d u c e d  I n 1937,  cent  such operations of total  regulation the  and a g a i n  i n t o the f e d e r a l parliament  c o n t r o l s over i n t e r p c o v i n c i a l time,  r i g h t s " and " l o c a l  operations.  urging Since,  amounted t o o n l y t h r e e  Intercity business, ^  i n 1940,  federal a t the  to five per  the opposition to f e d e r a l  3 -  and o p p o s i t i o n by t r u c k e r s and s h i p p e r s  outweighed  a r g u m e n t s i n f a v o r o f s u c h l e g i s l a t i o n no m a t t e r how  compelling.  The r a i l w a y s  and  other  called  f o rfederal controls similar  simply  had t o wait  until  i n t e r e s t s who t o those  t h e volume o f i n t e r p r o v i n c i a l  t h e time and expense o f s e n i o r  administration.  Moreover,  government  s i n c e the Canadian f e d e r a l govern-  ment h a d c o n t r i b u t e d b u t m i n i m a l l y this  vehemently  i n t h e U.S.  trucking merited  to  bills  t o highway i n v e s t m e n t up  t i m e , t h e r e was a n o t h e r c o n t r a s t t o t h e A m e r i c a n  situation.  Another f e a t u r e o f t h e r e g u l a t o r y environment f o r motor c a r r i e r s  u n t i l m i d - c e n t u r y was t h a t a l t h o u g h  most  provinces  h a d some s o r t o f m o t o r c a r r i e r a c t o r p u b l i c  utilities  a c t w h i c h i n some way t o o k c a r e  entry matters,  >A.W.  o f s a f e t y and  and s t i p u l a t e d measures t o p r o t e c t t h e  C u r r i e , I b i d . , p . 499.  45  pro&incially-owned of  filing  roads,  r a t e r e g u l a t i o n even t o t h e e x t e n t  was n e g l e c t e d b y t h e s t a t e .  In t h e t h i r t i e s  alone  some weak b u t u n s u c c e s s f u l a t t e m p t s were made b y t h e i n d u s t r y itself  to regulate rate  In  of  194-9,  motor c a r r i e r  setting.  a significant  c o u r t case  i n doing business  i n Canada.  wick Motor C a r r i e r Board  ( t h e a u t h o r i t y f o r motor  and m o t o r bus o p e r a t i o n s  I n New B r u n s w i c k ) .  a provincial of  government had no r i g h t  Several provincial  Brunscarrier  An a p p e a l t o  t o r e g u l a t e any f a c e t  o r f o r e i g n motor c a r r i e r appeals  and suddenly  simply  operations.  served to a f f i r m the  t h e f e d e r a l government was f a c e d  the t a s k of p a s s i n g l e g i s l a t i o n handle  Bruns-  o f Canada b r o u g h t a b o u t t h e d e c i s i o n t h a t  interprovincial  decision  A  i n Maine, New  w i c k and Nova S c o t i a c h a l l e n g e d a r u l i n g b y t h e New  t h e Supreme C o u r t  the course  U  rate regulation history  motor coach o p e r a t o r  turned  with  a s t o how i t p r o p o s e d t o  i t s new-found y e t u n s o l i c i t e d  responsibilities.  r e s u l t was t h e p a s s a g e o f t h e F e d e r a l M o t o r V e h i c l e  The  Trans-  port Act of 1 9 5 4 . Of ment s i m p l y regulatory all  little  s u r p r i s e t o anyone, t h e f e d e r a l  used t h i s agencies  a c t t o s e t up t h e v a r i o u s  as f e d e r a l  c o n t r o l boards,  govern-  provincial vested  with  powers l e g a l l y h e l d b y t h e s e n i o r government t o r e g u l a t e  A . G . Ont v . A.C. Winner, 5 4 l ; 4 D.L.R., C.R.T.C., 2 2 5 . l 7  657, 71  46  the  t r u c k i n g a n d bus i n d u s t r i e s .  recently, in  therefore,  regulation  Prom t h a t  time u n t i l  of motor c a r r i e r  very  operations  Canada has b e e n e n t i r e l y u n d e r p r o v i n c i a l a d m i n i s t r a t i o n .  The g r o w i n g i n t e r p r o v i n c i a l o p e r a t i o n s ed,  however,  were b e i n g  under the a u t h o r i t y o f a f e d e r a l  administer-  statute.  Present S i t u a t i o n As a r e s u l t o f t h e p r o v i n c i a l m o n o p o l i z a t i o n o f trucking  regulation,  lack of uniformity administration this  Canada i s c h a r a c t e r i z e d by a marked  i n the content  province  o f i t s motor  to province.  I t i s not the task of  t h e s i s t o draw a t t e n t i o n t o t h e v a s t  exist  between  certain jurisdictions,  carrier  differences  nor to point  o u t what  s e r i o u s problems these d i f f e r e n c e s can b r i n g about. as  rate regulation  reviewing should  various  i s concerned,  however,  administration  As f a r  i s merit  in  p r o v i n c i a l approaches to the problem.  It  r e a d i l y be a p p a r e n t , m o r e o v e r , t h a t  there  that  t h e same  o f r a t e c o n t r o l e x i s t i n g i n t h e U.S.  tight v i a the  I.C.C. a n d s t a t e c o m m i s s i o n s d o e s n o t e x i s t I n C a n a d a .  All  provinces  i n Canada  (with  the exception  N e w f o u n d l a n d ) have a b o a r d o r c o m m i s s i o n w h i c h regulatory  powers  over motor t r u c k e r s .  s e s s e s some a d m i n i s t r a t i v e  power  of  administers  Each r e g u l a t o r pos-  over f r e i g h t rates,  and. o n l y  • As C u r r i e n o t e s , the p h i l o s o p h y toward r e g u l a t i o n o f t r u c k i n g i s f a r more r e s e r v e d i n Canada t h a n i n t h e U.S.lL "Some p r o v i n c i a l g o v e r n m e n t s oppose r e g u l a t i o n o f r a t e s b e c a u s e t h e y c o n s i d e r t h a t u n r e s t r i c t e d t r u c k i n g w i l l k e e p down t r a n s p o r t a t i o n t o l l s o f b o t h r a i l and highway c a r r i e r s . ...enforci n g r e g u l a t i o n s c o u l d c o s t t o o much money...The i n d u s t r y ( h e r e ) tends t o p o l i c e i t s e l f . " C u r r i e , A.W., I b i d . , p. 498. LO  46  one  province,  Alberta,  fails  to exercise  c a s e o f Nova S c o t i a a n d New B r u n s w i c k , ity  consists  only  regulator  tariffs.  In A l b e r t a ,  and r a t e  trast  state  merce C o m m i s s i o n . Involved i n rate  regulators  This  i n Ontario, the to establish  i s a remarkable  and t h e I n t e r s t a t e  a s we s h a l l  Columbia,  C o m m i s s i o n must a p p r o v e e v e r y  by any motor c a r r i e r i n t h e p r o v i n c e .  rate  Any s c h e d u l e  u n r e a s o n a b l e c a n be a l t e r e d o r s u s p e n d e d .  any p a r t i c u l a r r a t e as w e l l . j[  h e a r i n g s a r e n o t uncommon,  carrier  seems t o be e n c o u r a g i n g r e s e a r c h  association  area of trucking  appear that  rate  and entry  a n (  a  n  active  into the  controls,  some o f t h e most e f f e c t i v e r e g u l a t i o n ,  s i m i l a r to that  In structure,  In B.C., where r a t e  tion  Com-  t h e Motor C a r r i e r Branch o f  C o m m i s s i o n h a s power t o a d j u s t  difficult  con-  see, are deeply  order t o maintain the i n t e g r i t y of the o v e r a l l rate the  the  cases a t a l l times.  Public U t i l i t i e s  considered  their  influence  i t s authority  levels.  The l a t t e r ,  In B r i t i s h  published  and a l s o  does n o t a c t u a l l y u t i l i z e  t o American  author-  1  In the remainder o f the provinces,  or maintain rates  the  the regulators  commission enjoys a degree o f d i r e c t  over trucking  In t h e  of r e q u i r i n g the operators t o f i l e  schedule o f r a t e s . regulatory  t h i s power.  i t would regula-  i n t h e U.S., may be d e v e l o p i n g .  19por example, d u r i n g t h e S p r i n g o f 1967, a h e a r i n g was i n p r o g r e s s b e f o r e t h e P.U.C. o f B r i t i s h C o l u m b i a w h e r e i n a l l V a n c o u v e r I s l a n d t r u c k e r s were o p p o s i n g a c o n t e n t i o n b y a numb e r o f m u n i c i p a l i t i e s t h a t r a t e s on common c a r r i e r s were e x c e s sive.  47  Summary This justifications trucking.  C h a p t e r has been c o n c e r n e d w i t h b o t h t h e and arguments a g a i n s t  United that  issue. as  are substantive  industry  both  in-the  I t w o u l d seem  regulation controls  i n the United  trucking  rate  "case" i s a term that  l y d e a l t w i t h i n subsequent  quickly.  Chapter has i n t r o d u c e d  that  chapters.  of the  seemed t o come  was y o u n g a n d g r o w i n g  this  of t h e terms o f r e f e r e n c e The r a t e  rate  to entry  when t h e I n d u s t r y  with.  over  rate  a r g u m e n t s on b o t h s i d e s  In a c t u a l p r a c t i c e ,  In a d d i t i o n ,  deal  i n this  a n d i n Canada was o u t l i n e d .  a necessary partner  States  t h e a c t u a l h i s t o r y o f how  came i n t o b e i n g  States  there  regulation  A f t e r some r e v i e w was made o f t h e t h e o r e t i c a l  a s p e c t s o f t h e problem, regulation  rate  certain  regulators  will  be  frequent-  48  CHAPTER I I I DETERMINATION OF A FAIR RATE OF RETURN  1  IN  MOST REGULATED INDUSTRIES  In C h a p t e r I a r e v i e w was made o f t h e e c o n o m i c justifications At  f o r state  t h e same t i m e ,  control the  regulation  some o f t h e l e g a l r a t i o n a l e b e h i n d  o v e r b u s i n e s s was s k e t c h e d o u t .  U.S. Supreme C o u r t w i l l  Industry  of certain i n d u s t r i e s .  which,  i fleft  the  CourtVs opinion,  the  decisions  I t was f o u n d  condone r a t e  unfettered,  t o the best  controls  could  public  that  o v e r an  be h a r m f u l , i n  interest.  o f t h i s a u g u s t body have had g r e a t  e v e n b e y o n d U.S.  public  Further, influence  jurisdiction.  In C h a p t e r I I i t was s e e n how t h e m o t o r c a r r i e r was i n t r o d u c e d and  i n Canada.  acteristics that  both i n the United  o f t h e motor c a r r i e r i n d u s t r y f o r regulation  States char-  so as t o suggest  of rates  i n this  on d i f f e r e n t g r o u n d s t h a n t h o s e o f most o t h e r  field  regula-  industries.  The what f o r m r a t e  intent  considered  of t h i s Chapter i s to i n d i c a t e  regulation w i l l  then t o introduce  that  regulation  Some r e v i e w was made o f t h e e c o n o m i c  the j u s t i f i c a t i o n  rests ted  to state  i n the general  a n d examine i n d e t a i l  the thorniest  of deciding  take  f o r rate  the issue  regulators.  how t o measure t h e r e t u r n  b e i n g earned by t h e i n d u s t r y  briefly case,  usually  The i s s u e i s  on i n v e s t m e n t  o r f i r m and then  choosing  49  criteria turn. will  f o r j u d g i n g the adequacy o r " f a i r n e s s " of h i s r e -  In t h e s u b s e q u e n t be  c h a p t e r , the motor c a r r i e r  industry  of the d i s c u s s i o n of t h i s  chapter.  examined i n l i g h t  Setting  the Rate As  Level  stated  i n Chapter  with r e s p o n s i b i l i t i e s or c a r r i e r  that  I, a r a t e r e g u l a t o r  b o t h t o t h e p u b l i c and  i t i s regulating.  reasonable rates  service.  For the f i r m o r i n d u s t r y ,  guarantee  a rate  Clearly, level  level  stability  within  P R I C E  Reasonable  P E R  B  Although t h i s  limits  science  The  can  t r y to be  s e t t i n g of  by any  means.  c a n a i m f o r i s t o have i t s r a t e  level  3  Line  Zone o f U n r e a s o n a b l e n e s s Line of E x p l o i t a t i o n  of  Confiscation  Unreasonableness  O v e r a l l Rate  the r a t e  reliable  Reasonable  Zone o f  sets  i t attempts  a "zone o f r e a s o n a b l e n e s s " a t a l l t i m e s . FIG.  U N I T  and  producer  the r e g u l a t o r w i l l  maintained.  i s not a p r e c i s e  a l l the a u t h o r i t y  fall  as w e l l as a d e q u a t e  l e v e l whereby r e a s o n a b l e p r o f i t s  e a r n e d and f i n a n c i a l such a r a t e  to the  For the p u b l i c ,  to ensure  i s saddled  of Return  "zone" w i t h i n  which  i s not w e l l d e f i n e d ,  are u s u a l l y the subject  of close  the  regulator  i t s upper scrutiny.  and As  lower the  "Zone o f r e a s o n a b l e n e s s " i s a t e r m one may e x p e c t t o e n c o u n t e r i n any s o u r c e c o n c e r n e d w i t h p u b l i c r e g u l a t i o n . I t d e r i v e s f r o m a r u l i n g i n F e d e r a l Power C o m m i s s i o n v . N a t u r a l Gas P i p e l i n e Co., 315 U.S. 575 (1942).  50  exhibit a rate  points level  o u t , moreover, t h e o n l y  (or price per unit  way o f j u d g i n g  whether  i n u n i t terms) i s " c o n f i s c a -  t o r y " o r " e x p l o i t i v e " , a n d hence w i t h o u t t h e bounds o f r e a s o n ableness, earning that For  i s by examining t h e r a t e o f r e t u r n  with that p a r t i c u l a r rate  other  level.  the Industry i s  I t i s conceivable  c r i t e r i a might e x i s t f o r making such  one t h i n g ,  judgements.  the reasonableness o f a rate l e v e l  examined from t h e s t a n d p o i n t to pay f o r the product  c o u l d be  o f what s o c i e t y w o u l d be w i l l i n g  or services.  f i a b l e means f o r e v a l u a t i n g  T h i s m i g h t be a  a product  justi-  o r s e r v i c e which i s  not  essential to society.  are  producing something e s s e n t i a l , o r p r a c t i c a l l y e s s e n t i a l ,  however, t h i s levels  I n t h a t most r e g u l a t e d  a p p r o a c h w o u l d s o o n be d i s c r e d i t e d a s r a t e  s e t i n t h i s way w o u l d have no u p p e r  Throughout the years,  therefore,  sions  and " c o u r t s "  great  importance t o the r a t e o f r e t u r n  regulated  firm or industry.  regulatory  on i n v e s t m e n t  Once a c o m m i s s i o n  i t s own s t a n d a r d s o f when a r e t u r n  it  c a n t h e n examine and make e x p e d i t i o u s being  limit.  commis-  o f a p p e a l b e y o n d them have come t o a t t a c h  ed  rates  concerns  to the  has e s t a b l i s h -  i s too high  o r t o o low,  j u d g e m e n t s on t h e  c h a r g e d by i n d u s t r i e s u n d e r i t s j u r i s d i c t i o n .  Only w i t h a r e l a t i v e l y  c l e a r i d e a o f what i s " e x p l o i t i v e "  to the customer and " c o n f i s c a t o r y " t o t h e f i r m o r i n d u s t r y can  t h e commission  "just  j u d g e w h e t h e r an i n d u s t r y  and r e a s o n a b l e " p r i c e s .  judge whether I t s r e g u l a t i o n  In turn,  i s charging  the commission can  i s adequately simulating the  51  natural  c o n t r o l s o f t h e market t h a t  replaced, f o r t h a t  To  industry.  set rates within  u l a t o r y commissions a r e f a c e d The  first  have b e e n removed a n d  i s that  bounds o f r e a s o n a b l e n e s s , w i t h two o v e r r i d i n g  o f measuring,  or setting,  reg-  tasks.  standards f o r  measurement o f t h e f i r m ' s  asset  return w i l l  The s e c o n d p r o b l e m i n v o l v e s  find-  how r e a s o n a b l e t h e r e t u r n  i s once  ing  be computed.  yardsticks  f o r judging  b a s e upon w h i c h t h e r a t e o f  computed. I m p o r t a n t a s t h e s e two f a c e t s o f r a t e are, the  neither  has been c l e a r l y  standardized  minds o f e c o n o m i c a n d a c c o u n t i n g  regulation  nor settled i n  theorists.  L i k e so  much o f t h e p r a c t i c e o f p u b l i c b u s i n e s s r e g u l a t i o n , t h e problem o f s e t t i n g  "a f a i r  return  on a f a i r  m a k i n g p u r p o s e s i s most c o n t r o v e r s i a l . will  look  a fair  first  value  sections  them.  task  years,  i s to derive  valuation  greater  o u t t o d e t e r m i n e what i s a f a i r  f o r a regulated  reasonable valuation  far  two  Rate Base In s e t t i n g  on  The n e x t  f o r rate-  a t some o f t h e s e u n s e t t l e d m a t t e r s a n d a t t e m p t t o  show how t h e r e g u l a t o r h a n d l e s  The  value"  concern,  the regulator's  what i t c o n s i d e r s  f o r the subject  firm.  t o be a f a i r a n d Throughout the  o f t h e r a t e base has, i n f a c t ,  a t t e n t i o n on t h e p a r t  return  received  o f commissions t h a n has  52 the of  return i t s e l f .  In t h i s  s e c t i o n we  shall  l o o k a t some  the measures o f v a l u a t i o n .  Measures o f V a l u a t i o n U s u a l l y when one of  v a l u a t i o n , he  e c o n o m i s t s and value  can  study. concrete  the  such  the p e r i o d i c  a controversy the former,  latter,  matters  between  of  course,  the discounted  r e t u r n s of the  sum  of a l l  industry or firm  under  a f i r m ' s v a l u e means s o m e t h i n g more  as m i g h t be  represented  amount o f n e t  elements of c o r p o r a t e value only  To  r e p r e s e n t e d by  f u t u r e net  To  to f i n d  accountants.  o n l y be  estimated  expects  examines a d i s p u t e o v e r  on a b a l a n c e  sheet  asset or equity accounts. to the accountant  are  by  The  basically  two: 1.  T a n g i b l e a s s e t s ( l a n d , b u i l d i n g s , equipment, securities, etc.).  2.  Intangible assets  Hence, any /-might be  (goodwill, patents,  c o n t r o v e r s y between a c c o u n t a n t s  evaluated w i l l  r a t h e r t h a n what i t e m s  cash,  etc.).  as t o how  a  firm  r e v o l v e a r o u n d methods o f v a l u a t i o n m i g h t be  i n c l u d e d i n the  analysis.  ^Most o f t h e I.C.C. R a t e C a s e s t h a t a r e d i s c u s s e d l a t e r i n t h i s Chapter are concerned p r i n c i p a l l y w i t h r a t e base r a t h e r t h a n w i t h t h e r e t u r n on t h e b a s e . F o r example: ( i ) M c C a r d l e e t a l . v . I n d i a n a p o l i s W a t e r Company; ( i i ) L o s A n g e l e s Gas and E l e c t r i c C o r p o r a t i o n y . R a i l r o a d Commission o f C a l i f o r n i a ; ( i i i ) N a t u r a l Gas P i p e l i n e Company v . F e d e r a l Power Commission. O n l y one c a s e , B l u e f i e l d W a t e r Works and Improvement Company v . P u b l i c S e r v i c e C o m m i s s i o n o f West V i r g i n i a , d e l v e s v e r y deeply into r a t e of r e t u r n i t s e l f .  53  regulated is  In p l a c i n g a v a l u e  on  firm,  economists'  clearly  are  inapplicable.  t h e measure o f v a l u e ,  value able  however, t h e  on  the  future  can  issues  The be  1.  (a)  involved  f i r m are, various  divided  Phillips down i n t h e  of a  rate-  concept of  discounted  future  value  profits  regulator could place adjusting  any  the  allow-  rates.  of a r e g u l a t e d  ulators  the  property  f i r m i t w a n t e d m e r e l y by  The  ing theory.  Since  the  in evaluating  therefore,  rate  mainly those of  measures o f v a l u e  i n t o two  the  u s e d by  base account-  the  reg-  categories:  1.  O r i g i n a l Cost  2.  Reproduction Cost  b r e a k s t h e s e two  Value. Value.  broad  classifications  f o l l o w i n g manner: " A c t u a l " or O r i g i n a l Cost T h i s i s t h e amount a c t u a l l y p a i d f o r I n s t a l l i n g t h e o r i g i n a l p l a n t and e q u i p m e n t , p l u s a d d i t i o n s , when f i r s t d e v o t e d t o p u b l i c service.  (b)  Book o r  "investment"  Cost  The amount a c t u a l l y p a i d f o r i n s t a l l i n g t h e p r e s e n t p l a n t and e q u i p m e n t , p l u s a d d i t i o n s as shown i n t h e i n v e s t m e n t a c c o u n t s on t h e b o o k s o f t h e company. (c)  Historical  Cost or  "Prudent  Investment"  The o r i g i n a l c o s t minus any f r a u d u l e n t , wise, or extravagent expenditures. (d)  C a p i t a l i z a t i o n Cost The c a p i t a l i n v e s t e d i n t h e m e a s u r e d by t h e o u t s t a n d i n g and o t h e r s e c u r i t i e s .  b u s i n e s s as bonds, s t o c k  un-  54  2.  (a)  Current o r Reproduction L e v e l Accounting"  Cost:  Price  The c o s t o f p l a n t a n d equipment, p l u s additions, estimated at price l e v e l s prev a i l i n g a t the date o f v a l u a t i o n . (b)  Split  Inventory  Value  The o r i g i n a l c o s t ( r e p r o d u c t i o n c o s t ) o f p l a n t and equipment i n s t a l l e d b e f o r e a s p e c i f i e d date, and t h e r e p r o d u c t i o n c o s t (original cost) of property i n s t a l l e d thereafter. (c)  Taxation The v a l u e purposes.  (d)  Value of property assessed  Exchange o r Purchase  f o rtaxation  Value  The v a l u e o f a company a s d e t e r m i n e d b y t h e p r i c e another p a r t y i s w i l l i n g t o pay f o r the property.5  Although  i t i s not the intent  of this  Chapter t o  r e s o l v e w h i c h o f t h e above v a l u a t i o n methods w o u l d be t h e " f a i r e s t " f o r t h e purpose o f d e r i v i n g a r a t e base, some v a l u e of both  i n reviewing  original  The  the t h e o r e t i c a l  arguments i n f a v o r  and r e p r o d u c t i o n c o s t measures.  most c o m p e l l i n g  argument f o r e v a l u a t i n g a com-  pany on t h e b a s i s o f i t s a s s e t s ' o r i g i n a l is  there i s  cost i s that  t h e s i m p l e s t a n d most a c c u r a t e l y o b j e c t i v e method.  l o n g as t h e a c c o u n t i n g mission  111.,  can t e l l  has been c o m p l e t e a n d h o n e s t ,  at a glance  3C.F. P h i l l i p s ,  So a com-  what t h e r a t e b a s e i s a n d how  The E c o n o m i c s o f R e g u l a t i o n ,  R.D. I r w i n I n c . , 19o5,  this  p p . 21b-217.  Homewood,  55  much i t may  have d i m i n i s h e d  or  increased  n e x t . . A p e r i o d i c summation o f a s s e t posed of  items costed  depreciation, the as  as  i t was  sheet  the  i s a l l the  balance sheet.  commission would  integrity  of the  U n l e s s major changes are  that  not  be  s t a b l e as w e l l as  rate  level  over a p e r i o d  We  hence t h e  to rates  capital,  of  the  p u b l i c can  that  the  time. rate  be  or p r i c e s which  might r e c a l l  reasonable rates  i s that i t  assured are  maintenance  i s a prime o b j e c t i v e  of  regulation.  The inal  and  subjected  continually fluctuating. of  rate  made i n i n v e s t e d  remain u n a l t e r e d ,  i t will  require  firm.  make f o r a more s t a b l e  base w i l l  Hence,  accounting  A s e c o n d argument i n f a v o r o f a c t u a l c o s t will  the  a c c o u n t s , a c c o u n t s com-  standard  assured of the  s y s t e m e m p l o y e d by  year to  s i m p l e a c q u i s i t i o n p r i c e , minus  i s shown i n t h e  simple balance long  at  f r o m one  cost  third  valuation  Locklin points  favorable  feature  which attaches  r e l a t e s to a t t r a c t i o n of  to  capital.  origAs  out:  T h e r e i s no b e t t e r way o f i n d u c i n g p e o p l e t o p u t money i n t o an i n d u s t r y t h a n by p a y i n g them a s t a b l e r e t u r n on what t h e y have a l r e a d y p u t i n . . . O n t h e o t h e r hand, t h e c o s t o f r e p r o d u c t i o n b a s i s w o u l d pay i n v e s t o r s a r e t u r n , n o t on what t h e y have p u t i n b u t on what t h e y w o u l d have t o p u t i n t o c o n s t r u c t a p l a n t at the present time.4  Of  course,  i n an  temporarily,  Irwin  the  e n v i r o n m e n t where p r i c e l e v e l s a r e i n v e s t o r w o u l d be  g o i n g down  r e w a r d e d more t h a n  ^D.P. L o c k l i n , Economics of T r a n s p o r t a t i o n , I n c . , I960, p . 40b.  propor-  Chicago,  R.D.  56  tionately dollar  i s decreasing,  w o u l d be latter the  f o r h i s investment, while,  less  the  r e t u r n t o e q u i t y and  than proportionate,,  s i t u a t i o n might appeal  serious  As  and  "price l e v e l " accounting  able  c o s t approach to the  i s , of course,  persuaded to accept cept  of  During  income, periods  experienced original in  at  on  insist  on  the  feels,  effects  base),  and  both to the  The  concern,  petitive  but  e q u a l l y to the  acceptindustry.  can  of  be  accounting. the world  has  older assets problem  springs deprecia-  hence o v e r s t a t i n g  company and not  to the  profits. economy  only to a  firm operating  at  reg-  i n a com-  market.  Although the critics  valua-  ( i . e . computing  l a r g e from such a p r a c t i c e would apply  ulated  only  E v e n i f he  to value  from u n d e r - d e p r e c i a t i n g  dislocating  cost  "computed amount" c o n -  is ludicrous.  a low-valued asset  to  cost valuation  o f e x t e n d e d i n f l a t i o n , s u c h as  c o s t , he  the  attract.  price level  post-war years,  holders  not  r a t e base of a r e g u l a t e d  accountant's  he w i l l  i n the  large part  tion The  w o u l d be  r e l a t e d t o income.  the  but  reproduction  economist's c h i e f o b j e c t i o n to o r i g i n a l  assets  the  L o c k l i n notes,  i n v e s t o r t h a t management wants t o  tion  of  debt  to a speculator,  In t h i s w r i t e r ' s o p i n i o n ,  The  i f the value  c h i e f o b j e c t i o n o f e c o n o m i s t s and  opposed to o r i g i n a l  cost valuation i s centred  misleading  indication  supporting  arguments f o r r e p r o d u c t i o n  Bonbright  cites  has  i t gives of net  t o do w i t h  optimal  income, t h e r e  are  cost v a l u a t i o n . allocation  of  on  other the other  The the  one  57  resources.5  nation's  of non-regulated costs  According  i n d u s t r i e s tend  i n times o f i n f l a t i o n .  concern are not p r e d i c a t e d as w e l l ,  their rates w i l l  industries. in  Therefore,  to reflect  there  demand w i l l ,  will  cost  competitive  be an u n j u s t i f i e d  increase  i n d u s t r i e s ' product o r s e r v i c e s  i n turn,  s i o n o f f a c i l i t i e s and investment there  reproduction  be l o w e r t h a n t h o s e o f  t o t h e demand f o r t h e c o m p e t i t i v e  The i n c r e a s e d  reproduction  I f the rates of the r e g u l a t e d  upon an i n f l a t e d  demand f o r t h e r e g u l a t e d  relative  t o h i s argument, t h e r a t e s  will  i n d u s t r i e s ' output.  t r i g g e r unmerited expan-  therein.  course,  assume t h a t  ability  between t h e s p h e r e s o f r e g u l a t e d  T h i s does, o f  be some d e g r e e o f s u b s t i t u t and u n r e g u l a t e d i n -  dustries .  This opinion,  there  regulated  firms  reasoning  i s not' c o n v i n c i n g .  i s no c l e a r i n d i c a t i o n t h a t reflect  reproduction  t h a n do t h e p r i c e s o f r e g u l a t e d accounting  body has s a n c t i o n e d  costs  concerns.  In the w r i t e r ' s the p r i c e s o f unof assets  any more  F o r one t h i n g ,  no  any method o f d e p r e c i a t i o n  6 other  t h a n t h a t b a s e d on t h e o r i g i n a l  Certainly,  most r e g u l a t e d  cost  of the a s s e t .  i n d u s t r i e s such as u t i l i t i e s and  5J.C. Bonbright, P r i n c i p l e s of P u b l i c U t i l i t y Rates, York, Columbia U n i v e r s i t y P r e s s , 1 9 b l , pp. 207-270.  New  The most p r o g r e s s i v e t h i n k i n g t h a t i s b e i n g done w i t h r e g a r d t o c h a n g i n g t h e method o f d e p r e c i a t i n g comes f r o m t h e United States. A l t h o u g h a number o f r e p o r t s have b e e n p r o d u c e d and s u b m i t t e d by t h e A c c o u n t i n g R e s e a r c h D i v i s i o n o f t h e American I n s t i t u t e o f " C e r t i f i e d P u b l i c Accountants, the A c c o u n t i n g P r i n c i p l e s B o a r d o f t h i s body h a s y e t t o i s s u e a n y s i g n i f i c a n t o p i n i o n s , n o r h a s i t t a k e n any s p e c i f i c a c t i o n .  58  railroads will tied  up  have a l a r g e r p r o p o r t i o n  i n o l d , l o n g - l i v e d equipment.  type of  firm will  feel  the  brunt of  For  to replace  ment.  hand, u n r e g u l a t e d ,  the  other  t a i n s many o r g a n i z a t i o n s  with  this  fixed  assets  reason,  that  i n f l a t i o n more  a n o t h e r when i t has On  of t h e i r  a large,  old piece private  than of  equip-  industry  l a r g e amounts o f o l d ,  con-  fixed  equipment.  One that  i t maintains the  profits will As  justification  are  the  s e t on  out  a r e t u r n nn  investor's  able  t o k e e p up  what he  has  invested,  s o o n aware t h a t  bound t o how proach, that  i t should,  evaluate  cost  income.  w i t h the  not  could,  a rate base.  price cost  level  of  living.  investment  accounting i s by  i n terms o f the  theory, no  cost  difficult  to  a r e g u l a t o r m i g h t change i t s a t t i t u d e f r o m p e r i o d  period  d e p e n d i n g on  the  the  philosophies  of  The  F a i r Rate of  Return  Although  for  level.  commission  I t Is not  is  O n l y when  on what h i s  conflicting  a regulatory or  valuation  average i n v e s t o r looks  prevailing price  Having reviewed the are  real  above, however, t h e  i s worth i n terms o f the  we  reproduction  a b a s e w h i c h moves w i t h t h e  i n v e s t o r be  pointed  of  p r e v a i l i n g economic c o n d i t i o n s  means ap-  imagine to or  I t s members.  i t has  received, l e s s a t t e n t i o n than  problem of d e t e r m i n i n g a r a t e base, the  question  the  o f what  con-  59  stitutes  a f a i r r a t e of r e t u r n  portant.  In f a c t ,  ulation will to s l i g h t ing  only  the  likely  theory,  w h i c h m i g h t be t u r n f o r an  l e t us  regulator  o f what  that  t o s e t an  payments,  the  owners o r as  the  rate  the  s t a t e w o u l d be  ity  of f i n a n c i n g regulated  One  ment o r ,  way  consider  defined  level will  i n l i n e w i t h what an  cost  r  re-  as  creditors.  any  for  a certain contribution  this,  cost  the  regulator  themselves.  of c a p i t a l  that  to a t t r a c t the  funds i t r e q u i r e s .  The  a company w i l l  calculate this  i s by  inves-  f i g u r i n g the t o any  f i r m might invest-  g o i n g c o n c e r n must e a r n  cost  any  additional responsibil-  t h a t minimum r a t e o f r e t u r n w h i c h any  f o r that matter,  sector.  have t o a c c o u n t  r e s p o n d t o i s by  The  The  expenses, i n -  o f c o m p u t i n g t h e minimum r e t u r n  of c a p i t a l .  financial  unregulated  Failing  w i t h the  concerns  f a i r and  company  i n v e s t o r would expect from  market.  saddled  to a  concerns i t i s r e g u l a t i n g  i n t e r e s t payments and  and  tors w i l l  look  criteria  allowable  " f a i r " return  i n a d d i t i o n to meeting annual operating  f i r m with s e c u r i t i e s i n the  be  s t a n d a r d s and  f o r f i n a n c i n g w i t h the  cluding depreciation,  firm's  is a  f i r m , e i t h e r as  i n competition  surplus  reg-  Again,  t o t h o s e p a r t i e s w h i c h have a  r e g u l a t o r must r e c o g n i z e  to  i n d u s t r y under  rate of r e t u r n .  examine t h e  the  standard  i n the  dividend  im-  show l a r g e m a g n i t u d e s o f change i n r e s p o n s e  u s e d by  must t a k e r e f e r e n c e  Thus,  base i s e q u a l l y  industry.  Any  are  that  income o f t h e  a l l o w e d changes i n the at  interest  net  on  standard  in  order  manner i n w h i c h  a d d i n g up  and  averag-  60  ing  i t s annual dividend  m i g h t be i l l u s t r a t e d  and i n t e r e s t r a t e s  o f payment.  This  as f o l l o w s :  ESTIMATED COST OF CAPITAL Percentage of Capital Structure  Annual Cost  Weighted C Cost  Bonds  50$  4.0$  2.000$  Preferred. Stock  15$  5.5$  0.825$  35$  11.0$  3.850$  Common S t o c k & Surplus Overall  Cost  100$  of C a p i t a l The pocket" costs other and  firm.  6.675$  above m i g h t be, i n o t h e r of financing faced  equity,  by t h e r e g u l a t e d  year  some  and w i t h a s u i t a b l e r e t u r n t o t h e i n v e s t o r s 1  source of f i n a n c i n g . a rate  In t h i s  case,  l e v e l which w i l l  of r e t u r n which w i l l return  accomplish  on a f a i r v a l u e "  eventually  the regulatory return  weighted average o f f i n a n c i n g c o s t s  "fair  f i r m o r any  dividents paid with  then the i n d u s t r y o r f i r m w i l l  must a l l o w  "out-of-  I f c o n t r a c t u a l payments a r e n o t met e a c h  t h e " o p t i o n a l " common s t o c k  regularity  words, t h e  7  -  this  at least  6.675$.  lose i t s authority this  Only a r a t e  c a n be c o n s i d e r e d  f o r that  a  p a r t i c u l a r concern.  A n y t h i n g l e s s w o u l d be c o n f i s c a t o r y t o t h e owners a n d c r e d i t ors . A n o t h e r way i n w h i c h a f a i r  ^Phillips,  o p . c i t . , p.  279.  return  c a n be c a l c u l a t e d  61  i s by  the  use  o f what i s o f t e n  earnings standard".  This  i s defined  t h a t w i l l meet c o n t r a c t u a l investor a return other ing  on  r e f e r r e d t o as as  payments and  the  comparable  rate of  then allow  h i s funds equal to that  b u s i n e s s e s i n the  "the  return  the  equity  displayed  p r i v a t e s e c t o r w h i c h have  by  correspond-  risks. The  quite  major o b j e c t i o n  I m p o s s i b l e t o f i n d an  to t h i s  standard i s that  industry with r i s k c h a r a c t e r i s t i c s  i d e n t i c a l to those of c e r t a i n regulated instance,  w o u l d one  w i t h t h o s e o f an In t h e most l i k e l y  compare t h e  electric final  t o r e f e r to the  cost  to  How,  for  steel-making  of cost  utilized.  a great  For  one  of c a p i t a l w i l l  be  is  utility  t o r u l e what t h e  In a d d i t i o n ,  be  commission  of c a p i t a l of the  i n order  be.  judgement w i l l  actual determination  attached  analysis, a regulatory  "fair return" will  subjective  risks  industries.  utility?  or c a r r i e r under r e g u l a t i o n able  i t is  allow-  deal  of  thing,  an  f a r more  com-  i  p l i c a t e d and, exercise  t o some d e g r e e ,  i s not  pocket cost  as  s i m p l e as  of f i n a n c i n g  ition  i n any  cost  that  cost  of e q u i t y  standard finance  The  of c a l c u l a t i n g the  i n d i c a t e d above.  problem i s d e t e r m i n i n g the The  "subjective" i t s e l f .  of equity  capital, text,  The  out-of-  crux of  the  financing.  according  to a  is actually a  defin-  "required  C.B. A i t c h i s o n , F a i r Reward and J u s t C o m p e n s a t i o n , Common C a r r i e r S e r v i c e - S t a n d a r d s U n d e r t h e I n t e r s t a t e commerce A c t , W a s h i n g t o n , D . C , A s s o c i a t i o n of I n t e r s t a t e commerce P r a c t i t i o n e r s , 1954, pp. 1 4 - 1 7 .  62  earnings r a t e " amount t h e them t o  o r an  y  opportunity  stockholders  leave  t h e i r funds i n that  " c o s t " i s that necessary at  the  stock  the  market.  r a t e r e a l l y d e p e n d s on to the  t o how  it  this  pointed  ysts  apart  t o say, the  cost  encourage  In o t h e r  l e a s t to m a i n t a i n the  what o t h e r  out  of e q u i t y  that  words,  price  required  opportunities  r e g u l a t o r has  no  earnings"  i t .  cost  of  of the to  of debt f i n a n c i n g  regulated  Therefore,  concern to the  capital  regulatory equity  of  earnings  are  available  the  question  measured.  l e t the The  as  Suffice  i s depend-  a  result,  m a r k e t d i c t a t e what p a r t i e s of  the  standards of  f i r m f o r the  mar"com-  risk class in  t h i s matter should  not  have  regulator.  cost  of equity  (because of  the  capital,  and  r i s k element  even the it  of the  firm.  The  availability  ^G. D a v i d Q u i r i n , The C a p i t a l E x p e n d i t u r e T o r o n t o , R i c h a r d D. I r w i n I n c . , 19b/, p. 13.  cost  introduces  s t r u c t u r e ) , i s i n e x t r i c a b l y l i n k e d to  market's v a l u a t i o n  anal-  commissions. capital  as  I t must  to f i n a n c i a l  f i r m and,  e m p l o y i n g t h e i r own  to the  Thus, the  i n t o the  be  be  i s perplexing  c o u r s e but  of course,  to solve  should  demand f o r f i n a n c i n g .  which they p l a c e of  the  market's v a l u a t i o n  "costs" i t w i l l  parable  capital  issue  however, t h a t  the  will,  the  purport  from those i n p u b l i c  on  t o be  investment.  Going f u r t h e r , t h i s  t h e s i s does n o t  ent  ket  to  what  investor.  This  be  I t i s b a s e d on  w o u l d deem s u f f i c i e n t  the  on  cost.  of  the  financing  Decision,  63  determines whether a f i r m , r e g u l a t e d Should not and  projected  rate or,  then the  level  firm,  s t a t e of the  the  of c a p i t a l  financial  or c a r r i e r ?  t o the  utility  on  C o m m i s s i o n o r t h e U.S. standard.  judgement and  there  volved  specific  i n any  capital  A financial  "standard"  analyst,  regulated  so.  r e g u l a t o r does r e f e r t o t h e  cost  o r c a r r i e r when s e t t i n g r a t e s .  the  part  of the  i s an  however,  i t up on  obvious reluctance  i n the  The  Legal H i s t o r y of Rate of Return Determination  This  he  should  as  an  seasoned  t o become i n -  t e c h n i c a l a p p r o a c h s u c h as  would, b e .  When  I n t e r s t a t e Commerce  e m p h a s i s seems t o be  on  integral  In s e t t i n g a  Supreme C o u r t t o s e t  The  survive.  to the e x i s t i n g  h i s t o r y of r a t e of r e t u r n cases,  a reluctance  official  will  v i c e - p r e s i d e n t of the  mentioned, the  reviews the  detects  be  the  evident  cost  of  further  Chapter.  The  United  States  part  of the  rate s e t t i n g process  regulatory  commissions.  authoritative Canada and  Supreme C o u r t has  Indeed,  western c o u n t r i e s The  l o n g been  of United  an  States'  i t s j u d g e m e n t s have b e e n  source of precedent  other  determination. the  c a p i t a l market  would undoubtedly t h i n k  As  one  regulator refer solely  for i t s utility  indeed,  or not,  and  legal  opinion  concerned with  m a i n c o n c e r n has  l e g i s l a t i v e - a p p o i n t e d commissions  been t o g u a r d  an  for  rate  level  against  setting rates confis-  64  catory to the private property giving tions  the p u b l i c non-exploitive p r i c e s . the court  nineteenth value  has d e a l t w i t h  century  of rate  on a p p e a l  have been, o f c o u r s e ,  "base" and f a i r  noted e a r l i e r , the  of regulated  i n d u s t r i e s while  (The two  considera-  since the midr u l i n g s on  fair  r e t u r n on t h a t b a s e . )  As  t h e f o r m e r h a s consumed t h e m a j o r s h a r e o f  court's attention.  The  first  3  Pacific right  to set a j u d i c i a l  r a t e s e t t i n g was i n 1898  public u t i l i t y v . Ames c a s e . -  attempt  0  The a p p e a l  standard  f o ra  i n t h e famous Smyth  b y Ames, an o f f i c e r  of the Union  R a i l r o a d , was t h a t no r e g u l a t o r y a u t h o r i t y h a d t h e  to p r o h i b i t the r a i l r o a d  o r any u t i l i t y  r a t e s a d e q u a t e t o meet o p e r a t i n g  expenses,  from  regular  maintaining interest  upon a l l o b l i g a t i o n s , a n d t o j u s t i f y a d i v i d e n d on a l l o f i t s stock.  Thus, t h e c o u r t was f a c e d w i t h  1.  Whether t h e l e g i s l a t u r e o f t h e s t a t e c o n c e r n e d was c o n f i s c a t i n g the c a r r i e r ' s property; i . e . taking i t f o r p u b l i c u s e w i t h o u t j u s t c o m p e n s a t i o n , when t h e r a t e l e v e l was h e l d b e l o w t h i s f u l l measure demanded b y t h e r a i l r o a d . Further, i f such a l e v e l was n o t m a i n t a i n e d , s h o u l d due p r o c e s s o f lqw be i n s t i t u t e d a s a m a t t e r o f c o u r s e ?  2.  What t h e c a r r i e r ' s In t h e c o u r t ' s  in  ruling:  that  taining  1 0  "...it  reward should be.  opinion,  Ames' c o n t e n t i o n  makes t h e i n t e r e s t s o f t h e c o r p o r a t i o n  a p u b l i c highway t h e s o l e t e s t  Smyth  was weak  v . Ames, 169 U.S.  466  main-  as t o t h e l a w f u l n e s s  (1898).  65  of the r a t e " . of the  right  exactions". regulator, "the  fair  This  "...omits  a l t o g e t h e r any  o f t h e p u b l i c t o be  exempt f r o m  Hence, i t s h o u l d be  the p e r o g a t i v e  o r , on value  appeal,  the  court  itself,  f o r the  court  d i d not  what t h e did  convenience o f f e r any  true or f a i r  definite  value  the  determine the  corpora-  11 Although  formula  standards  Even a t t h i s ,  than  c o u r t s were t o b e . in arriving  of  for  the  t h a t s h o u l d be  c o u r t was The  being  criteria  the  determining  of t h i s property should  sidered".  considered  to  o f the p u b l i c .  state several distinct  later  unreasonable  o f t h e p r o p e r t y b e i n g u s e d by  „ tion  consideration  be, i t "con-  f a r more of value  specific to  a t a r a t e b a s e were as f o l l o w s :  1.  The o r i g i n a l tion.  2.  The  amount e x p e n d e d i n permanent  3.  The  amount and  4.  The p r e s e n t , as construction.  5.  The p r o b a b l e e a r n i n g c a p a c i t y o f t h e p r o p e r t y p a r t i c u l a r r a t e s p r e s c r i b e d by s t a t u t e .  6.  The  sum  Aitchison,  be  cost of c o n s t r u c t i o n of the  market v a l u e o f compared w i t h  improvements.  i t s s t o c k and the o r i g i n a l ,  r e q u i r e d t o meet o p e r a t i n g  op.cit.,  p.  corpora-  bonds. cost  expenses.  of  under  1 2 j  15.  J u s t i c e B r a n d e i s a t t a c k e d the " s o - c a l l e d r u l e " of t h i s c a s e i n 1923. " L e g a l l y and e c o n o m i c a l l y unsound", he s a i d . The d e c i s i o n d i r e c t e d a t r i b u n a l t o c o n s i d e r a l l t h o s e "and o t h e r r e l e v a n t f a c t s " i n making judgements. "What, i f any, w e i g h t s h a l l be g i v e n t o . a n y one must p r a c t i c a l l y r e s t i n t h e j u d i c i a l d i s c r e t i o n o f t h e t r i b u n a l w h i c h makes t h e d e t e r m i n a tion." •'-^Aitchison, l o c . c i t . 1 2 , ,  S o u t h w e s t e r n B e l l T e l e p h o n e Co. v . M i s s o u r i P u b l i c S e r v i c e Commission, aoa U.S. 27b. (1923T. as q u o t e d i n P h i l l i p s , o p . c i t . , p. 225.  66  Although the court never had to enquire too deeply into an actual valuation f o r Union P a c i f i c at the time, the case seemed to set a trend to consideration of these f a c t o r s . The cost of reproduction was given a great deal of weight, presumably because of the court's philosophy at the time and because of the compelling arguments given by the state commissions.  At the turn of the century, price levels had f a l l e n  a great deal since the era of i n i t i a l r a i l r o a d construction and, i n addition, reproductive cost measures were seen as one way  of "checking against the excesses that frequently took  place i n the e a r l i e r periods of construction and were manifest i n the f i n a n c i a l structures of the companies". ^ 1  Throughout the f i r s t quarter of t h i s century,  fair  value of rate base continued to be the prime issue i n rate case appeals to the Supreme Court. lowing the F i r s t World War,  With the deflation f o l -  the regulated corporations began  to c a l l f o r reproductive cost standards t h e i r plants.  i n order to maintain  In fact, reproductive cost of assets became  almost the entire issue.  The case usually considered to  be the high water mark of the reproductive cost thinking was McCardle et a l . v. Indianapolis Water Company i n 1 9 2 6 . Here, a divided court stated:  •^Smyth v. Ames, as quoted by Aitchison, op.cit., p. 17. ^McCardle et a l . v. Indianapolis Water Company, 272 400 (1926~K 1  U.S.  67 ...the r e a s o n a b l e c o s t of a system o f waterworks, w e l l p l a n n e d , and e f f i c i e n t f o r t h e p u b l i c s e r v i c e , i s good e v i d e n c e o f i t s v a l u e a t t h e t i m e o f c o n s t r u c t i o n ... so l o n g a s t h e r e i s no change i n t h e l e v e l of p r i c e s . . . ( i n which c a s e ) . . . t h e n the p r e s e n t v a l u e of lands p l u s the p r e s e n t value of c o n s t r u c t i n g t h e p l a n t , l e s s d e p r e c i a t i o n , i s a f a i r measure of the present value of the p r o p e r t y . 1 7  During setting  this  embryonic  as t o m e a s u r e s o f f a i r  stage of j u d i c i a l r e w a r d and  t h e r e was  very l i t t l e  The  case d e a l i n g with t h i s  first  Water Works and  just  standard-  compensation,  mention of the r a t e of r e t u r n f e a t u r e . a t any  l e n g t h was  Bluefield  Improvement Company v . P u b l i c S e r v i c e Commis-  18 s l o n o f West V i r g i n i a . Court  The  main p r i n c i p l e s  the  Supreme  considered a p p l i c a b l e to r a t e of r e t u r n h i n t e d at  " c o m p a r a b l e e a r n i n g s " d o c t r i n e a s w e l l as t h e c o s t o f standard  reviewed  i n the previous  the  capital  section.  A p u b l i c u t i l i t y i s e n t i t l e d t o s u c h r a t e s as w i l l p e r m i t i t t o e a r n a r e t u r n on t h e v a l u e o f t h e p r o p e r t y w h i c h i t employs f o r trie c o n v e n i e n c e o f t h e p u b l i c e q u a l t o t h a t b e i n g made a t t h e same t i m e and i n t h e same g e n e r a l p a r t o f t h e c o u n t r y on Investments i n o t h e r business undertakings which are a t t e n d e d by c o r r e s p o n d i n g r i s k s and u n c e r t a i n t i e s . 9 1  In  addition,  1 7  Ibid.,  p.  411.  18 B l u e f i e l d W a t e r Works and Improvement Company v . P u b l i c S e r v i c e C o m m i s s i o n o f West V i r g i n i a , 2 b 2 U.S. o"79  19  Ibid.,  p.  683.  (1923).  68  . . . t h e r e t u r n s h o u l d be r e a s o n a b l y s u f f i c i e n t t o a s s u r e c o n f i d e n c e i n the f i n a n c i a l soundness o f We u t i l i t y and s h o u l d be a d e q u a t e u n d e r e f f i c i e n t and e c o n o m i c a l management t o m a i n t a i n and s u p p o r t i t s c r e d i t and e n a b l e i t t o r a i s e t h e money necessary f o r the proper discharge of i t s p u b l i c duties. 2 0  Of  some s i g n i f i c a n c e was  a r e c o g n i t i o n by  this  court that:  t h e r a t e o f r e t u r n may become t o o h i g h o r t o o low by c h a n g e s a f f e c t i n g o p p o r t u n i t i e s f o r i n v e s t m e n t ( e l s e w h e r e i n t h e m a r k e t ) , t h e money m a r k e t , and business conditions g e n e r a l l y . 2 1  I n t h e e a r l y d e p r e s s i o n y e a r s , as most s t u d e n t s h i s t o r y a r e aware, t h e c o m p o s i t i o n changed a g r e a t d e a l .  With t h i s  o f t h e U.S.  Supreme  change i n p e r s o n n e l ,  of  Court a  very  different  a p p r o a c h t o d e t e r m i n a t i o n o f r a t e b a s e s came a b o u t  as w e l l .  The  case,  Los  Angeles  Gas  and  Electric  Corporation  2 2  y_. R a i l r o a d C o m m i s s i o n o f C a l i f o r n i a point use  as,  with  i t , the  of h i s t o r i c a l  court upheld  d e c i s i o n a r e numerous.  the f a c t  t h a t a d e p r e s s i o n and  in.  real  the f a c t but  the  charge but  significance  t h a t a new statement  the  state  Not  least  case,  e s t a b l i s h e d , f o r none not  reasons  important  however, was  o f t h e c o u r t t h a t i t was  to apply a formula  The  d e c l i n i n g p r i c e s were  of t h i s  f o r m u l a was  the  a turning  commission's  cost f o r s e t t i n g a rate base.  for this  The  represented  the  was  setting not was,  commission's  nor to p r e s c r i b e a r b i t r a r y  criteria,  to:  g u  Ibid.,  p.  683.  2 1  Ibid.,  p.  684.  L o s A n g e l e s Gas and E l e c t r i c C o r p o r a t i o n v . R a i l r o a d Commission o f C a l i f o r n i a , 289 u.g. i>b7 ( 1 9 3 3 ) . ~ 2 2  69 examine t h e end r e s u l t o f t h e l e g i s l a t i v e a c t i o n i n o r d e r t o d e t e r m i n e w h e t h e r i t s t o t a l e f f e c t was t o deny t h e owner o f t h e p r o p e r t y a f a i r r e t u r n f o r i t s use.  23  In  o t h e r words, t h e c o u r t  was h e r a l d i n g  s e t t i n g was t o be e v e n more s u b j e c t i v e  a new e r a  where  i n nature than  rate-  i t was  previously. The clarified  "End R e s u l t "  i n Federal  doctrine  o f t h e C a l i f o r n i a c a s e was  Power C o m m i s s i o n v . N a t u r a l  Gas P i p e l i n e  oh  Company o f 1 9 4 2 . this  c a s e was r e f e r r e d  decisions of  I n t h e I.C.C. A n n u a l R e p o r t  of that  t o a s "one o f t h e most s i g n i f i c a n t  i n the history of u t i l i t y r e g u l a t i o n " . 5 2  any s t r i c t  year,  quasi-formula  The i d e a  s u c h a s Smyth v . Ames h a d p r o -  d u c e d came t o an e n d a s a unanimous c o u r t  stated:  The C o n s t i t u t i o n does n o t b i n d r a t e - m a k i n g b o d i e s t o the s e r v i c e o f any s i n g l e f o r m u l a o r combination o f formulas. A g e n c i e s t o whom t h i s l e g i s l a t i v e power has b e e n d e l e g a t e d a r e f r e e , w i t h i n t h e a m b i t o f t h e i r s t a t u t o r y a u t h o r i t y , t o make t h e p r a g m a t i c a d j u s t ments w h i c h may be c a l l e d f o r b y p a r t i c u l a r c i r c u m s t a n c e s . .. . I f t h e ( F e d e r a l Power) C o m m i s s i o n ' s o r d e r , as a p p l i e d t o t h e f a c t s b e f o r e i t a n d v i e w e d i n i t s e n t i r e t y , p r o d u c e s no a r b i t r a r y r e s u l t , o u r i n q u i r y  i s a t an e n d . 6 2  2  ^Federal  Company, 2 4  as  315  Power C o m m i s s i o n v . N a t u r a l  U . S . 575  Ibld.,  Gas P i p e l i n e  (1942).  p. 2 8 8 .  ^ i n t e r s t a t e Commerce Commission, A n n u a l R e p o r t quoted i n A i t c h i s o n , o p . c i t . , p. 3 2 .  1942,  26 F e d e r a l Power C o m m i s s i o n v . N a t u r a l Gas P i p e l i n e Company, U.S. a s q u o t e d i n Pegrum, o p . c i t . , p.  b7b.  315  575 (1942,  70 The  message h e r e i s c l e a r .  In the  not  be  weight to s p e c i f i c  value  required as  laid In  to give  any  down i n t h e 1944,  determination  future,  would  elements  of  1 8 9 8 case.  another s i g n i f i c a n t  of f a i r  commissions  value  c a s e h a v i n g t o do  of a r a t e base,  Federal  with  Power  27 C o m m i s s i o n v_. Hope N a t u r a l original again  cost  that  bound by  Gas  versus present  the  Company,  value  commissions of the  e i t h e r measure, t h e  met  head-on.  the  of  Indicating  f u t u r e were n o t  court  issues  to  be  stated:  R a t e s w h i c h e n a b l e t h e company t o o p e r a t e s u c c e s s f u l l y , to maintain i t s f i n a n c i a l i n t e g r i t y , to a t t r a c t c a p i t a l , and t o compensate i t s i n v e s t o r s f o r t h e r i s k s assumed c e r t a i n l y c a n n o t be condemned as i n v a l i d , e v e n t h o u g h t h e y m i g h t p r o d u c e o n l y a meager r e t u r n on t h e s o - c a l l e d ' f a i r value' rate b a s e . " 2  Clearly, the  two  ion it  court  was  less distinct the  "end  result"  of whether o r not a f f e c t consumer and  economic q u a n t a .  The  h e r e was  of a r a t e  the  one  level  r a t e was  producer?),  i t now  not  on  from the should  reasonable  means o f  r e g u l a t o r was,  p l o y w h a t e v e r method i t saw  that  r a t e of r e t u r n  considerations  t o a r a t e b a s e d e t e r m i n e d by  be  that  other. the  criter-  ( i . e . how  some vague strict  saw  adherence  accounting  in effect,  f r e e to  f i t to determine r a t e  did  and em-  levels.  F e d e r a l Power Commission v . Hope N a t u r a l Gas Company, U.S. 591 ( 1 9 4 4 ) , as q u o t e d i n Pegrum, o p . c i t . , p . b77. 2 7  320  saying  p r o b l e m s o f r a t e b a s e and  b a s e as Again,  what t h e  2 8  Ibid.,  p.  677.  71  Thus, as  f a r as  concerned,  i n the  commission  i s f r e e to take  and  eyes o f  e s t a b l i s h e d by philosophy line.  This  other  e x p r e s s e d as  is likely  c o s t might g i v e . " f e e l i n g " on  imagine t h a t  to  It might  s a f e l y be  s i m i l a r to that rate that  way  might  that  Federal  value  part  the  Gas  look  Pipe-  range  of  reproductive  today can  best  be  authority.  since  exercise,  would look  the  Natural  the  a strict  of the  b a s e as  to  i t is at  being  the any  the  early  difficult determinamore  exact.  a p p r o a c h o f most b o a r d s i s  judgement as  the  t o what i s  capital.  of a quick  According the  and  approach  e s p o u s e d i n B l u e f i e l d W a t e r Works and  selected regulators we  on  in their  l i e within  s u c h as  subjective  s a i d that  necessary to a t t r a c t  rates,  the  i s set w i t h a reasoned  By  Gas  F a i r value  most r e g u l a t o r s  of r a t e of r e t u r n  Canadian  come t o mean  s e t t i n g a r a t e b a s e has,  been a r a t h e r  and  i n t h i s manner a c c o r d i n g  down i n Hope N a t u r a l  In t h a t forties,  has  regulatory  whatever measures  o f U.S.  most s u b j e c t i v e  "Pair value"  valuation  a  Supreme C o u r t a  majority  more o b j e c t i v e v a l u a t i o n s ,  or o r i g i n a l  tion  The  a regulator  laid  U.S.  of a r a t e base i s  into consideration  therefore,  to p a r t i c u l a r cases.  and  the  standards i t d e s i r e s .  commissions are,  to  determination  do  sketch  employ as  a t a few  o f what c r i t e r i a  sorae  a matter of course to  set  practices.  t o Pegrum, t h e  Federal  Power Commission  C o m m u n i c a t i o n s Commission use  a c t u a l or  his-  72 torical  cost  to set a rate base. ^  s u c h as C a l i f o r n i a , "prudent  Massachusetts,  investment" as a base.  production  Some s t a t e  2  as a g r e a t e r  use t h e  Another uses cost  of r e -  In O h i o , t h e  i s supplied with a set of up-to-  d a t e i n d e x numbers f o r v a l u a t i o n e m p l o y i n g a low b a s e  and W i s c o n s i n ,  source o f reference.  s t a t e u t i l i t y commission  regulators,  "formula",  of assets. of course,  For the regulators the rate of return  must be s e t h i g h e r .  I n Canada, a l l u t i l i t y a n d t r a n s p o r t  regulators  t o a d h e r e t o t h e a t t i t u d e e x p r e s s e d b y t h e U.S. c o u r t and  Natural  ent  effort  Until  Gas P i p e l i n e . to utilize  1961,  In o t h e r  words, t h e r e  one f o r m u l a o f r a t e b a s e  however, t h e P u b l i c U t i l i t i e s  held appraised  value  o f B.C. E l e c t r i c  seem  i n Hope  i s no a p p a r determination.  C o m m i s s i o n o f B.C.  Co., t o mean  depreciated  ^ 5 0  original  cost.^  has  h a d an open m i n d on a l l f a c t o r s a f f e c t i n g  As  long  The C a n a d i a n B o a r d o f T r a n s p o r t  f a r as r a t e o f r e t u r n  i s concerned,  Commissioners valuation.  i t i s evident  that  most  regulators  i n Canada have r e f e r r e d p r i m a r i l y t o t h e a t t r a c t i o n  of c a p i t a l  standard.  Summary At  this  point,  a brief  g o i n g C h a p t e r a n d an i n d i c a t i o n  2  9pegrum,  o p . c i t . , Ch.  summarization o f the f o r e o f how i t l e a d s  t o C h a p t e r IV  26.  30 Marko, D.H., D e t e r m i n a t i o n o f F a i r R a t e o f R e t u r n i n R e g u l a t e d I n d u s t r i e s , (Term p a p e r , Commerce 544, U.B.C., 1967, P. 2 2 ) . Mr. Marko's s t u d y o f t h e P u b l i c U t i l i t i e s A c t o f B.C., ( S e c . 1 6 , Sub.rSec. l ) a n d t h e a c t i o n s o f t h e B.C. E l e c t r i c Company u n d e r t h i s A c t l e d h i m t o t h i s conclusion.  73 is  in  order. The  purpose of the  C h a p t e r has  been t o o u t l i n e  problem areas connected with establishment to regulated h i s t o r y was dealt with the  two  industry  o u t l i n e d as  considerations  t o how  case.  regulatory  f o r the  some  commissions  have  As  indicated,  are:  Establishing a valuation industry concerned.  2.  J u d g i n g what an a l l o w a b l e r e t u r n on t h a t b a s e m i g h t be a f t e r c o n s i d e r a t i o n o f t h e n e e d s o f t h e i n d u s t r y i t s e l f , and, s e c o n d l y , t h e r e q u i r e m e n t s o f t h o s e who w i l l use t h e s e r v i c e s o f t h a t i n d u s try.  t o o l s and  course of  or a r a i l r o a d  firm,  ferent  the  indeed the  the  The lems o f  in fixed  task  of  the  rate regulation  ticularly,  motor t r u c k e r .  itself,  are  the  utility As truck-  substantially  or a r a i l r o a d with  diftheir  assets.  next Chapter i s to explore  i n the  these problems w i l l  motor t r u c k i n g be  of r a t e r e g u l a t i o n o u t l i n e d In  III.  I n t h i s way,  some d e t a i l  examination to follow  the  industry.  exposed t o the  tools  the  alters  economic c h a r a c t e r i s t i c s of a  industry  the  regulators  of r e g u l a t i o n of a  f r o m t h o s e o f a power u t i l i t y investment  of  however, when one  from that  to r e g u l a t i o n of  Chapter I I stated,  "rate base" f o r  terms o f r e f e r e n c e  of place,  his research  or  return"  Secondly,  years.  regulator  "fair  1.  a p p e a r somewhat out  large  general  such problems throughout the  The  ing  i n the  of a  the  theories  probParand  i n Chapter  should  provide  74  the is  r e a d e r w i t h an the  trucking  practices.  idea of  industry  j u s t how  to regulate  d i f f e r e n t and  difficult  in i t s rate-setting  75 CHAPTER IV DETERMINATION OP A FAIR RETURN IN THE MOTOR CARRIER I t was e s t a b l i s h e d  INDUSTRY motor  carrier  s h a r e s t h e same t w i n p u r p o s e s o f r a t e  regula-  rate  regulation  tion  as u t i l i t i e s  i n Chapter I I that  and other t r a n s p o r t  modes.  Nowhere a r e  t h e s e t w i n a i m e s s t a t e d more a u t h o r i t a t i v e l y t h a n i n S e c t i o n  2l6(i)  o f t h e U.S. I n t e r s t a t e  Commerce A c t - o f t e n  referred  to as t h e "Rule o f Rate-Making":  . . . ( t h e c o m m i s s i o n ) . . . s h a l l g i v e due c o n s i d e r a t i o n t o the need o f adequate and e f f i c i e n t s e r v i c e a t t h e lowest cost c o n s i s t e n t w i t h t h e f u r n i s h i n g o f s e r v i c e . . . and t h e n e e d o f r e v e n u e s s u f f i c i e n t t o e n a b l e t h e c a r r i e r s , under honest and e f f i c i e n t and economical management t o p r o v i d e s u c h a s e r v i c e . 1  Thus, the  i n attempting  regulator  regulator, and  t o s e t a j u s t and reasonable r a t e  of trucking  concerns,  like  any o t h e r  t o those o f the operator.  to t h e motor c a r r i e r  The "zone o f r e a s o n a b l e n e s s "  any  i s regulated  other concern,  with a public  and c o n f i s c a t i v e  s h o u l d be s e t i n t h e same manner a s a  "zone" f o r a r a i l r o a d  trucking  rate  must r e f e r b o t h t o t h e i n t e r e s t s o f t h e consumer  between what i s e x p l o i t a t i v e t o t h e p u b l i c  rate  level,  o r a t e l e p h o n e company.  In t h a t  u n d e r t h e same t e r m s o f r e f e r e n c e  that  i s , i n the court's  i n t e r e s t " , one w o u l d e x p e c t  opinion that  as  "affected  the thorniest  I n t e r s t a t e Commerce A c t , S e c t i o n 2 l 6 ( i ) , a s c i t e d b y C.B. A i t c h i s o n , P a i r Reward and. J u s t C o m p e n s a t i o n , Common C a r r i e r S e r v i c e - S t a n d a r d s U n d e r t h e I n t e r s t a t e Commerce" A c t , W a s h i n g t o n , 1 9 5 4 , A s s o c i a t i o n o f I n t e r s t a t e Commerce Practitioners, p. 7 .  76  issue  i n setting truck  "setting a f a i r  return  Certainly, regulation  lies  carrier(s), in  the  Chapter  the  a fair  the  major problem of motor c a r r i e r  of  the  services placed  features  fair  r e w a r d on  industry  f o r judging  operator(s).  However, motor  criteria  value  in order  rates.  that  This  have been  be-  in  have l o o k e d  to  what c o n s t i t u t e s  Historically,  to set  as  a  shall of  reasonable  Chapter w i l l  re-  trucking  have shied, away f r o m d e t e r m i n a t i o n  a fair  the  involved  w h i c h have been e x a m i n e d b r i e f l y  even n o n - c o n f i s c a t o r y depth the  the  rate  reasonable  i n p u b l i c use.  II, rate-setters f o r this  commissions  brings  a j u s t and  economic c h a r a c t e r i s t i c s o f  "reward." t o t h e  seen,  level  those f i n a n c i a l l y  carrier(s),  somewhat d i f f e r e n t c r i t e r i a just  reviewed, i n C h a p t e r I I I ,  value".  o r more s p e c i f i c a l l y ,  ward f o r t h e i r  industry,  on  i s that  i n d e t e r m i n i n g what r a t e  operation  cause of  rates  be  a or  examine i n  used.  The I n a p p l i c a b i l i t y o f R e t u r n on Investment As The R a t e - S e t t i n g C r i t e r i o n For a utility, sider  the  key  f i r m has variable?  i s that  of  c o n c e r n s s u c h as  v a r i a b l e " that  revenue to the  the  faces  "key  in s e t t i n g a rate  future that  the  most r e g u l a t e d  tied  level  and,  f i r m i s the up  In  the  a railroad  r e g u l a t o r must  in effect,  enormous amount o f  major cost  s e r v i c i n g the equity  and  that  con-  providing  "fixed." f a c i l i t i e s .  Because the  or  Why  capital is  this  management  debt h o l d e r s  that  77  have p r o v i d e d operation. the  Indeed,  amounts o f c a p i t a l  necessary f o r  t h e m a j o r r i s k f a c i n g t h e management,  owners, a n d t h e c r e d i t o r s o f s u c h a f i r m i s t h a t  able  return  year. the  the vast  on i n v e s t m e n t w i l l  If this  risk  o f a few y e a r s .  For this  the firm's  capital  reason,  will  life-blood in  stop  i n a matter  a suitable return  on i n v e s t -  ment t o s u p p l i e r s o f f i n a n c i n g has t o be t h e t e r m o f of a r e g u l a t o r y ulated  commission  As  setting  rates  f o r a "normal"  clearly,  investment  in fixed  key v a r i a b l e t o s u c c e s s f u l o p e r a t i o n we  r e c a l l from Chapter  characteristic small  reference reg-  industry.  Quite the  suit-  n o t be e a r n e d f r o m y e a r t o  i s n o t overcome,  form o f p l e n t i f u l , low-cost  a  of a trucking  i s not firm.  I I , t h e d i s t i n g u i s h i n g economic  o f the t r u c k i n g  amount o f f i x e d  facilities  assets.  industry  i s its relatively  With a s s e t  turnover  ratios p  some t w e l v e o r more t i m e s g r e a t e r carrier its  d i s p l a y s a very  fully-allocated  than a r a i l r o a d ,  large proportion  unit  expenses.  of variable costs i n  The m a j o r c o s t s  management must be c o n c e r n e d w i t h a r e , t h e r e f o r e , operating  costs.  Thus,  of a motor c a r r i e r with operating  revenues.  ment o f a m o t o r c a r r i e r r i s k to the r a i l r o a d .  See  Table  the major r i s k attached  business  I  i s that  Moreover,  the motor  to  that  variable operation  o f not meeting these  costs  t h e m a j o r r i s k t o manage-  i s f a r more immediate t h a n t h e m a j o r The l a t t e r ' s  , as c o n t r a s t e d  key c o n s i d e r a t i o n  with  ratios  i s that  on pages  7 and  8.  78  TABLE  I  ASSET TURNOVER RATIOS - SELECTED MOTOR CARRIERS 1966 Net Operating Revenue  Carrier  Property & Equipment  Ratio  Overland Express  6,503,000  2,076,000  3.13  Gill  8,724,000  1,516,000  5.76  20,619,000  7,733,000  2.70  20,642,000  8,203,000  2.52  65,983,000  26,025,000  2.53  184,348,000  89,500,000  2.06  155,755,000  41,247,000  3.77  Interprovincial  T r a n smoun t a i n Express Viking  Freight  Company Yale  (U.S.)  (U.S.)  Express  System  (U.S.)  Consolidated Freightways Pacific Intermountain E x p r e s s (U.S.) Source:  Moody's  T r a n s p o r t a t i o n Manual,  1 9 6 6 .  79 o f a t t r a c t i n g and lish  longrlife  cern  itself  maintaining  facilities.  more w i t h t h e  wages, p u r c h a s i n g f u e l , h i g h l y m o b i l e and say  that  give  day-to-day imperative  of  the  i n what t h e  and  be  year. of not  e x p e n s e s y e a r by  Rather,  used to r e g u l a t e  This  he  does n o t  rate base/return  on  low  f i x e d investment  centage p o i n t s and it too  returns  month.  conventional  small  no  industry  opinion  a f i g u r e both  carrier, primarily  be  would with  operating  This  is is  the not  Because of  that  any  the  rate  t h a t would  more t h a n one  r a n g e between a  mortgage r a t e s  i s this writer's  a  problem  investment  motor c a r r i e r ,  i n that  varying  from the  only  investment  enough t o have m e a n i n g t o a c a p i t a l m a r k e t  to e v a l u a t i n g  to  rates.  economic c h a r a c t e r i s t i c s o f the on  to  expenses.  substantial variable  T h e r e i s a n o t h e r r e a s o n as w e l l .  return  have  w o u l d be  his small  y e a r o r e v e n month by  trucking  paying  i s not  Looking at the  that  con-  servicing i t s  h i s concern would a g a i n  meeting the  primary reason that  of  owner(s) of the motor  r e t u r n on  estab-  however, r e p r e s e n t  revenue.  i t i s highly doubtful  interested f o r the  expenses,  to  however, must  to v a r i a b l e operating  operating  standpoint  moreover,  capital  s h o r t - l i v e d equipment.  consideration  minor share of  risk  former,  maintaining  Such v a r i a b l e o p e r a t i n g  that  The  a f i r m w i t h heavy f i x e d c o s t s  first  from the  investment  be  accustomed o r two  per-  "prime" l e n d i n g  ( c u r r e n t l y 7 to 9 per  t e r m s and  relative  rate  cent),  s u c h a r e t u r n w o u l d be  i n absolute  of  just to  operating  c o s t s t o be o f s i g n i f i c a n t  regulator. level per  as  to the rate  I f a r e g u l a t o r y a g e n c y were t o s e t a r a t e  based, on a " n o r m a l " r e t u r n on i n v e s t m e n t ,  cent,  very  value  say,  t h e r e g u l a t o r w o u l d be g i v i n g t h e t r u c k e r o n l y a  s m a l l m a r g i n between r e v e n u e s a n d e x p e n s e s ,  s m a l l a s one p e r c e n t  Clearly,  perhaps  of cost.  a slight  m i s c a l c u l a t i o n of estimated  revenues o r expenses would l e a v e  the operator  ing  i s t o o heavy f o r t h e  losses.  operator. of cost  five on  This  kind of a r i s k  He n e e d s more b r e a t h i n g  i n order  operating  i n the industry.  t o e i g h t p e r cent  with  operat-  s p a c e t h a n one p e r c e n t  t o undertake the r i s k  o f e n t e r i n g and  With a b r e a t h i n g  space of, say  o f c o s t , p e r h a p s t h e owner's r e t u r n  i n v e s t m e n t w i l l be a mammoth t e n t o t w e n t y p e r c e n t .  Because o f t h e i n s i g n i f i c a n t ever, to  six  the operator  w i l l need t h i s  have a p r e s e n t a b l e  lowing  profit  o f t h e r a t e base, k i n d o f a r e t u r n ii  i n absolute  terms.  i l l u s t r a t i o n shows how a two p e r c e n t  estimate ratio  size  c o u l d be f a t a l  o f 4:1.  to a firm with  order  The f o l -  expense  an a s s e t  how-  under  turnover  EXHIBIT 2 CASE  I - E x p e n s e E s t i m a t e d . Low  Value  of C a r r i e r ' s  Operating Total  Property  Tangible or (Estimate)  $20,000.  O p e r a t i n g Expense (Estimate)  80,000.  T o t a l O p e r a t i n g Revenue ( w i t h r a t e s s e t t o r e t u r n 6$ on t a n g i b l e p r o p e r t y ) b e f o r e i n t e r e s t and t a x e s - $90,000. - .06 (20,000) P r o j e c t e d Net Income B e f o r e I n t e r e s t and T a x e s Net  1.33$  II - Actual  Value  of Property  $20,000.  T o t a l Expense ( A c t u a l )  81,600.  T o t a l Revenue  81,200.  Net  Income  (Loss) Before  Interest  (400)  The p r e c e d i n g argument, o f c o u r s e , the a s s e r t i o n  tion to  1,200.  P r o j e c t e d Income/Total Expense  CASE  to  81,200.  that r i s k  i n the motor c a r r i e r  i s vulnerable  i s an element o f g r e a t c o n s i d e r a i n d u s t r y and o f f a r l e s s  t h e v a s t power c o m p a n i e s a n d r a i l r o a d s who,  large  investment  forced  in fixed  facilities,  economic s e t - b a c k .  Chapter  As a r e s u l t ,  rate  II.  why  T h i s was  the c a r r i e r '  r e t u r n which r e f l e c t s  (even  their t o be  two o r  discussed i n  s h o u l d not a motor  r e g u l a t o r be a b l e t o e v a l u a t e t h i s  established  with  are not l i k e l y  o u t o f o p e r a t i o n due t o a s h o r t - t e r m  three years)  concern  r i s k and,  carrier having  "rate base" set a high r a t e of  this  risk  differential  r e l a t i v e to  82  the  utility  or  railroad?  A suggested reason i s that displays very  peculiar risk  the  trucking  c h a r a c t e r i s t i c s and,  t o d e t e r m i n e what a r e a s o n a b l e r e t u r n w o u l d be industry,  the  ment t h e r e i n as  use  the  difficult  suggested that  the  service.  and,  has  railroad  At  relative  to the  ment f i e l d s . the  will  exhibit  any  field.  the  indus-  - similar in  hand, i t m i g h t the  wouldbe  electric,  industry  risk  the  the  similar in their risk  rate,  higher  any  the  same low  The  At thesis  other  industry,  are  invest-  gas character-  - manufactur-  is sufficiently  b e e n s u g g e s t e d above, f a m i l i a r enough t o  average i n v e s t o r t h a t  taking,  the  t o most h e a v y f i x e d i n v e s t m e n t  i n g and  able  On  telephone u t i l i t i e s  as  the  on  type of r i s k w i t h which i t c o n f r o n t s  investor/operator.  istics  order  t o t h i n k o f any  t r y which i s s i m i l a r t o motor t r u c k i n g  and  for  return  a guide f o r the motor t r u c k i n g  This w r i t e r f i n d s i t very  be  in  r e g u l a t o r w o u l d have t o f i n d many i n d u s t r i e s  w i t h s i m i l a r c h a r a c t e r i s t i c s and  d e g r e e and  industry  c a p i t a l market can risk  more u n c e r t a i n i s the  i s not a high  such a r e t u r n .  point,  suggesting return  on  heavy f i x e d  i s the  future  d e g r e e o f r i s k and  a u t h o r i t y be  this  i n other  of e v a l u a t i n g  i t must be the  investment,  C e r t a i n l y , the  out  industry, should  element of  it  invest-  o f an  the  the  under-  less  cap-  i t accurately.  pointed  trucking  evaluate  low  not  risk  that  this  which be is  does  allowed very  83  prevalent  i n the  railroad,  gas  suggested,  industry,  or e l e c t r i c  in  and  him  out  investing present,  company.  a motor c a r r i e r  sudden c o m p e t i t i o n , to f o r c e  f a r more so  out  indeed,competition  of o p e r a t i o n .  i s , of course, greater  or f i r m s o l i c i t i n g  Table II  the  has  strong and  the  required  to  as  do,  A basic  greater  return  move  rule  of  risk  of  the  party  funds.  page 84  on  so  F i r m s can,  rapidly.  that  i s the  the  Chapter I I  i s f a r more s u s c e p t i b l e  of a s e r v i c e very  the  As  than i t i s f o r a  indicates that  trucking  i n d u s t r y does, i n f a c t ,  invested  capital  relative  the  d i s p l a y a high  t o most o t h e r  Canadian return  regulated  on  indus-  tries. The  Operating  Ratio  In r e c e n t  years,  a w a r e n e s s on  the  of r e t u r n  investment  on  part  there  I s an The  employed the  on  return  motor c a r r i e r  case.  motor c a r r i e r  regulation,  the  greater  requirement. arrived total  operating  the  ratio  In the  very  "operating  divides total  cost.  value"  the  of c r i t i c s  operating  a t when one  I.C.C. has fair  as  an  increasing  regulators  inappropriate  Ever since  confidence The  been an  o f motor c a r r i e r  examining r a t e adequacy. "fair  has  that  standard  never,  in  concept  rate  for fact,  for a  e a r l y days  of  ratio"  gained  has  index of  revenue  i s that percentage operating  revenue  case of E x h i b i t  2  }  figure by  the  TABLE  II  C A N A D I A N I M P E R I A L B A N K O F COMMERCE " S E L E C T E D CORPORATE R A T I O S "  Jo R e t u r n on Invested C a p i t a l  Selected Industry Air  Transport  Water  Transport  Railways Truck Bus  Transport  Transport  Telephones  Gas  9.8 7.2 3.4 13.2 12.6 9.2  Pipelines  Electric  -  Power  Distribution  5.6 5.6  4.9  Total  Transportation  5.6  Total  Utilities  5.2  Total  Communication  6.0  Source:  C a n a d i a n I m p e r i a l Bank o f Commerce, May 1 9 6 7 Commercial L e t t e r , " S e l e c t e d Corporate R a t i o s " , b a s e d on T a x a t i o n S t a t i s t i c s f o r t h e y e a r 1 9 6 4 .  85 operating  ratio The  is  80,000/81,200  first  carriers  per cent.  r a t i o was r e l i e d  This  i n Increased  Common C a r r i e r T r u c k  c a s e h a d t o do w i t h  o f a r e g i o n f o r a 4 p e r cent  A f t e r making a d e t a i l e d c o s t study  paid,  increases  an a p p l i c a t i o n  increase  i n rates.  of a l l unit costs (per  v e h i c l e - m i l e ) and o t h e r p e r t i n e n t f i n a n c i a l such as d i v i d e n d s  considerations  i n surplus,  fixed  invest-  ment a n d w o r k i n g c a p i t a l ,  t h e Commission a g r e e d w i t h t h e  carriers'  operating  ed for  contention  Increases judging  i n these  upon  d e c i s i o n about t h e adequacy o f motor  r a t e s was i n 1943  R a t e s i n t h e East.-^ by  98.52  time t h e o p e r a t i n g  t o make a s i g n i f i c a n t carrier  or  that  expenses and t h e p r o j e c t -  expenses s h o u l d  revenue requirement.  be t h e p r i m e  criteria  Having reviewed the econ-  omic f e a t u r e s o f t h e t r u c k i n g i n d u s t r y a n d t h e p r o b l e m s attached can in  t o u s e o f r a t e o f r e t u r n on i n v e s t m e n t  now a p p r e c i a t e  t h e Commission's r e a s o n i n g  t h e r e i n , we  when i t s t a t e d  "discussion": ...theirs i s p r i m a r i l y a service industry i n that t h e v a l u e o f t h e i r o p e r a t i n g p r o p e r t y i s o n l y 15 t o 20 p e r c e n t o f t h e i r a n n u a l g r o s s r e v e n u e s . They contend t h a t , i n determining whether a g e n e r a l i n c r e a s e i n r a t e s s h o u l d be a p p r o v e d , c o n s i d e r a t i o n be g i v e n s o l e l y t o t h e need o f t h e i n d u s t r y f o r s u f f i c i e n t r e v e n u e t o e n a b l e them t o meet t h e i r o p e r a t i n g expenses and earn a p r o f i t a f t e r t h e payment o f income t a x e s , a n d t h a t no a t t e m p t be made t o f i x a r a t e o f r e t u r n b a s e d on t h e v a l u e ^ of t h e i r o p e r a t i n g property o r o f t h e i r n e t worth.  I n c r e a s e d Common C a r r i e r T r u c k R a t e s i n t h e E a s t , M.C.C., p p . b33 - b57. 4  Ibid.,  p . 655.  42  86 In i t s s t a t e m e n t , ure  t h e C o m m i s s i o n made t h e s i g n i f i c a n t  from r a t e o f r e t u r n t h a t t h e motor c a r r i e r s  form.  T h i s p a r a g r a p h i s as o f t - q u o t e d  cases  a s i s Hope N a t u r a l  waiting  i n I.C.C. M o t o r C a r r i e r  Gas^ i n u t i l i t y  b o t h i n I.C.C. a n d i n t h e Supreme  were  depart-  and r a i l w a y  cases,  Court:  The c a r r i e r s ' o p e r a t i n g r a t i o s a r e a c o n v e n i e n c e i n d e t e r m i n i n g t h e e x t e n t by which t h e i r t o t a l expenses are l e s s o r g r e a t e r than t h e i r o p e r a t i n g revenue. B e c a u s e t r u c k l i n e s have few o u t s t a n d i n g o b l i g a t i o n s i n comparison with the r a i l r o a d s , the f i x e d charges o f t r u c k l i n e s a r e r e l a t i v e l y low, a n d t h e r e i s a s m a l l e r s p r e a d between a m o t o r c a r r i e r ' s n e t o p e r a t i n g r e v e n u e a n d i t s n e t income b e f o r e Income t a x e s than i n t h e case o f the r a i l r o a d . 6  The  decision: Many r e s p o n d e n t s a r e , a n d have b e e n e x i s t i n g on t o o n a r r o w a m a r g i n between r e v e n u e s a n d e x p e n s e s ; o t h e r s are operating a t a l o s s . The r e s p o n d e n t s a s a w h o l e a r e n o t s t r o n g enough f i n a n c i a l l y (on t h e b a s i s o f t h e i r o p e r a t i n g r a t i o s ) t o undergo extended p e r i o d s of u n p r o f i t a b l e operation. Some i n c r e a s e i s r e a s o n a b l e and n e c e s s a r y t o a c c o m p l i s h t h e p u r p o s e o f t h e n a t i o n a l transportation policy.<  Thus, ed  t o u n d e r s t a n d what  t h e C o m m i s s i o n t o employ t h e o p e r a t i n g  revenue need. ating  ratio  student  320  i ti s not d i f f i c u l t  In t h i s  test  respected  ratio  as a t e s t o f  b o d y ' s own words,  i s a "convenience".  prompt-  the oper-  Aitchison, a careful  o f t h e Commission and t h e economic and l e g a l  ^ F e d e r a l Power C o m m i s s i o n v . Hope N a t u r a l U.S. 591 ( 1 9 4 4 ) , ..  grounds  Gas Company,  6 I n c r e a s e d Common C a r r i e r T r u c k R a t e s i n t h e E a s t , M.C.C., p . 635. ~ ' I b i d , , p.6 5 7 . 7  42  87  upon w h i c h i t works, r e f e r s t o t h e "formulatory merit, this  short-cut".  Not  operating  r a t i o as  a  e n t i r e l y convinced of i t s  however, A i t c h i s o n d e s c r i b e s  the  operating  ratio  in  manner: . . . T h i s t e s t has been r e s o r t e d t o f r o m t h e n e c e s s i t y of r e s o r t i n g to a simple, g e n e r a l l y r e l i a b l e , i n e x p e n s i v e means o f d e t e r m i n i n g e x p e d i t i o u s l y t h e g e n e r a l f i n a n c i a l s i t u a t i o n of such c a r r i e r s . . . t h i s t e s t i s w h o l l y e m p i r i c a l , and i s b a s e d on t h e assumption, impossible of s t a t i s t i c a l proof, that some g i v e n p e r c e n t a g e — s a y 93 p e r c e n t — i s t h e b r e a k i n g p o i n t between a f a i r and an u n f a i r body o f rates."  Indeed, the  operating  a c o m m i s s i o n n e e d do judge i f t h e y a r e will  ratio  i s extremely simple  i s examine t h e  r e a s o n a b l e and  produce a c e r t a i n o p e r a t i n g  operating  to use.  expenses  then set a r a t e ratio  that  is  level  All to which  considered  adequate.  ...Now t h e o l d b a t t l e s a b o u t ' p r u d e n t i n v e s t m e n t ' v e r s u s ' r e p r o d u c t i o n c o s t ' c a n be f o r g o t t e n as may the i n t r i c a t e c o n t r o v e r s i e s over such n i c e matters as d e p r e c i a t i o n methods o r a c c o u n t i n g f o r e x t r a ordinary obsolescence.9  Many e c o n o m i s t s have, however, s e a r c h e d f o r more arguments i n f a v o r " c o n v e n i e n c e " and  of the  operating  "simplicity".  The  compelling  r a t i o than merely i t s f a c t that  deemed so  a return  investment percentage  i s not  c a r r i e r r e g u l a t i o n as  i t i s f o r u t i l i t i e s , does n o t  on  s u i t a b l e f o r motor impress  p ° A i t c h i s o n , C.B.,  o p . c i t . , p.  77.  9A. W r i g h t , "The O p e r a t i n g R a t i o - A R e g u l a t o r y P u b l i c U t i l i t i e s F o r t n i g h t l y , 24, 1953, p. 28.  Tool",  88  them g r e a t l y .  As A i t c h i s o n  notes:  W r i t e r s on t r a n s p o r t a t i o n e c o n o m i c s . . . a r e u n a n i m o u s l y of the view that o p e r a t i n g r a t i o s , s t a n d i n g alone, mean n o t h i n g . . . ( t h e y ) may be u s e f u l o n l y a s g u i d e s t o change o r t r e n d s w h i c h may be s i g n i f i c a n t . i < - > One c r i t i c i s m  of the operating  ratio  i s that i t  a f f o r d s unwarranted p r o t e c t i o n t o t h e motor c a r r i e r . that  a "normal" r a t e o f r e t u r n would l o o k  absolute has,  commissions t o g i v e cause t h i s  rate-base-fair return  i s , however,  the l a t t e r  rate of return.  i s f a r too high  have s u c c e e d e d i n c o n c e a l i n g fact  line,  p e r s u a d e d t h e I.C.C. a n d o t h e r  h i m a much h i g h e r  rate of return  traditional  The  too small i n  t e r m s t o t h e owner o f a t r u c k i n g  s o s a y some c r i t i c s ,  In  Be-  t o be a l l o w e d b y  language, the t r u c k e r s  the rate a c t u a l l y being  earned.  that:  . . . e v e r y o p e r a t i n g r a t i o i s e q u i v a l e n t t o some r a t e o f r e t u r n . . . a n d t h e r a t e c a n a l w a y s be c o m p u t e d . H Certainly,  the operating  ratio  does g i v e  better protection to  the  owners o f a h i g h l y v o l a t i l e  i n d u s t r y where e a r n i n g s a r e  apt  t o f l u c t u a t e w i d e l y from y e a r t o year.  is,  however,  Knappen's  criticism  this:  A s s u m i n g t h a t ' b e t t e r p r o t e c t i o n ' were t h e o n l y t e s t , t h e n t h e r e w o u l d be no s t o p p i n g t h e r a i s i n g o f r a t e s s h o r t o f t h e p o i n t a t w h i c h t h e I n d u s t r y i t s e l f may v o l u n t a r i l y forego any f u r t h e r i n c r e a s e s ; i . e . t h e monopoly p r i c e l e v e l . . . A t t h a t p o i n t t h e i n v e s t o r s w o u l d have maximum p r o t e c t i o n , b u t t h e p a t r o n s w o u l d have minimum p r o t e c t i o n . 1 2  I0Aitchison,  C.B., o p . c i t . , p . 73.  L.S. Knappen, "The T r a n s i t O p e r a t i n g R a t i o View", 53 P.U.F., 485 (1953), p . 68. n  1 2  Ibid.,  p . 72.  - Another  89  Clearly,  the  criticism  merely a t o o l  i s t h a t the  for disguising  i n d u s t r y c o u l d be the  here  allowed  of the o p e r a t i n g r a t i o  trary  t o what i s u s u a l l y c l a i m e d ,  expenses?  has  adopted a c e r t a i n Chapter,  Although  feels  m a r g i n between  formula  w h i c h we  shall  at  It.  Knappen r e c a l l s  standards  a t a l l an  for evaluating u t i l i t y  revenues Commission i n the  standards  Justice  Jackson's  loss  of  r a t e base,  as  p e r s o n a l l y about the o p e r a t i n g r a t i o  as  any  s h o u l d be I  look at  a d i s s e n t about the  the  con-  There are not  I n t e r s t a t e Commerce  i n Hope N a t u r a l Gas,  objective  i s not  i t i s somewhat u n c l e a r as t o what  were u s e d t o a r r i v e  he  the  what  Perhaps  f o r j u d g i n g what a r a t i o  What does- c o n s t i t u t e a r e a s o n a b l e and  carrier  i s that,  ratio  gauge" o f revenue r e q u i r e m e n t .  clear objective criteria  dissent  the  test  is  o t h e r modes o f  discriminated against.  criticism  next  t h a t the motor  that, i n effect,  basic  "accurate  fact  a h i g h e r r a t e of r e t u r n than  r i s k s m i g h t w a r r a n t and  t r a n s p o r t a t i o n m i g h t be  the  operating ratio  an  how  "accurate  gauge". We n e e d n o t be s l a v e s t o a f o r m u l a b u t u n l e s s we can p o i n t o u t a r a t i o n a l way o f r e a c h i n g o u r c o n c l u s i o n s t h e y c a n o n l y be a c c e p t e d as r e s t i n g on i n s t i t u t i o n or predilection. I must a d m i t t h a t I p o s s e s s no i n s t i n c t b y w h i c h t o know t h e ' r e a s o n a b l e ' f r o m t h e ' u n r e a s o n a b l e ' i n p r i c e s and must s e e k some c o n s c i o u s design f o r decision.13  I n o t h e r words, t h e  criticism  no more o b j e c t i v e , s i m p l e ,  i s t h a t the o p e r a t i n g r a t i o  or accurate  than  the  "fair  is  value"  criterion.  591  ^Federal (1944J, as  Power C o m m i s s i o n v . Hope N a t u r a l Gas, q u o t e d by Knappen, L.S., o p . c i t . , p .  320 70.  U.S.  90  I n d e e d , d e s p i t e t h e Supreme C o u r t ' s adopt c l e a r ,  set standards,  have m e a n i n g f u l and 6,  7 or 8 per  significance An ket  allowed  soon t e l l owner.  operating ors,  r e t u r n concept  r a t e o f r e t u r n on n e t  to prospective  c o n d i t i o n s and  fair  o b j e c t i v e bases.  can  be  be  as  a c c u r a t e l y how  fair  the  o f 93  per  cent  as  f a r as  economy.  change.  regulator  allowed  the  great  money mar-  r a t e Is  What m e a n i n g o r s i g n i f i c a n c e a t t a c h e s ratio  has  those c o n d i t i o n s  to  can to  an  public, invest-  a n a l y s t s are concerned?  Independent market o f t r a n s a c t i o n s can  j u d g e an  No  operating  s u c h as a s e c u r i t i e s m a r k e t d o e s r a t e s o f r e t u r n f o r  bonds and  stocks.  Knappen a l s o t a k e s in  evident  i n v e s t o r r e a c t i o n to a r e t u r n , the  fairly  conventional  investment  b a s e d on  adjusted  o r even t r a i n e d f i n a n c i a l  ratio  The  to  does  i n v e s t o r s throughout the  r a t e o f r e t u r n can  D e p e n d i n g on  the  cent  fairly  the  reluctance  M i d d l e West I n c r e a s e s  c a r r i e r operations vested  issue with  t h a t the  i s attached  risk  the  I.C.C.  inherent  conclusion  In motor  t o expenses r a t h e r than t o  In-  capital:  I t seems a s t r a n g e use o f words t o a t t r i b u t e r i s k t o a company's e x p e n s e s . Those a r e i t s d e b t s and i t i s an o l d s a y i n g t h a t w h i l e a company's a c c o u n t s r e c e i v a b l e may n o t be 100 p e r c e n t good, i t s a c c o u n t s payable always a r e . T h a t i s , t h e r e I s no u n c e r t a i n t y , no r i s k a b o u t s u c h o b l i g a t i o n s t o t h e d e b t o r . The r i s k , whatever i t i s , i s the r i s k of the c r e d i t o r . 1 4  X . S . Knappen, o p . c i t . , p . 71, i n r e f e r e n c e t o t h e f o l lowing quote: Where~The amount o f i n v e s t m e n t i s r e l a t i v e l y s m a l l i n r e l a t i o n t o t o t a l c o s t s , investment i s not the p r i m a r y f a c t o r i n d e t e r m i n i n g r e v e n u e n e e d s . . . t h e owners o f m o t o r c a r r i e r s can h a r d l y be e x p e c t e d t o l o o k t o t h e r e t u r n on t h e amount o f t h e i r i n v e s t m e n t as an i n c e n t i v e where t h e p r i n c i p a l r i s k i s a t t a c h e d t o t h e s u b s t a n t i a l l y g r e a t e r amount o f e x p e n s e . " M i d d l e West G e n e r a l I n c r e a s e s , 4 8 M.C.C., p 542 X H  ,  91 Summary Despite  i t s many f a u l t s ,  a d o p t e d w i d e l y as motor c a r r i e r ' s therefrom. accurate  should  best  revenue requirement  standard i n an  be  i n d u s t r y as  i n order  and  to claim  w h e t h e r I t be  i t i s impossible  operating  ratio  Has  been  means a v a i l a b l e f o r d e t e r m i n i n g  It i s d i f f i c u l t  Especially dustry,  the  the  t o be  to provide  that  9 9 per  diverse  setting  i t provides  cent  as  precise  a rate  or  a  level an  8 0 per  cent.  the motor t r u c k i n g in stating  adequate yet  what a  in-  ratio  non-exploitive  profits.  In the a p p e a r s t o be satisfy  the  final  the  demands o f  motor c a r r i e r .  In t h a t  of a heavy f i x e d operation! operating tion  on  be  tool  can  a trucker  costs,  the  firms  lacks  i f economic o r increase  capital  trucking  reliable that  i s not  i n costs  invested,  atten-  i n business  year no  the  a margin  effect  year to year.  in  Thus,  i n danger of  or a p r o f i t  t o meet  its full  service.  sales conditions  a  power"  s e r v i c e s can  of p r o v i d i n g  to  yearv'of"-unprofitable  revenues f a i l  i t s jurisdiction  s t a b l e and  ratio  to  "lasting 1  user of  revenues over expenses t h a t  " r e t u r n " on  the  u t i l i t y . ? even f o r a  of  p u r p o s e must be  r e v e n u e s o r an  with regard  r e g u l a t o r must c o n c e n t r a t e  Otherwise the  regulator's  operating  enable a r e g u l a t o r  i . e . a y e a r where o p e r a t i n g  assured of  entirely  that  rate regulations  investment  keeping the  to year. way  only  a n a l y s i s , however, t h e  of  disappearing a decrease An  in  adequate  sufficient  to  out-  92 weigh the not  the  allowing  the  operator  expenses" i s  in fact,  has  little  regulation.  sufficient  really relation  That i s ,  profits  that w i l l  i n business without allowing  the  en-  consumer  exploited.  this  to review the together  and  point  material  of the that  organizing  thesis,  has  this  considerations In the  justifications railways.  first  and  same c o n t e x t .  carrier  place,  o f any  rate  somewhat d i f f e r e n t . istics,  the  exception  by  a regulator  us  found that  regulation. b e e n made o f  the  economic  the  aims o f  same as  and  motor  those  justifications  t o be  the  examined i n  i t s economic  i n d u s t r y has  s u c h as  the  the  with  some more  i n d u s t r y was  Mainly because of  motor t r u c k i n g  Piecing  regulation for u t i l i t i e s  i t was  industry,  rate  some r e v i e w has  r a t e r e g u l a t i o n were e s s e n t i a l l y  regulation  briefly  provide  examination of  motor t r u c k i n g  While  might pause  background should  of motor c a r r i e r  aims o f  Then, t h e  we  been e x a m i n e d t h u s f a r .  background necessary f o r the  specific  the  m a t t e r and,  to stay  At  the  i n operating  immediate problem o f t r u c k  c o u r a g e him t o be  incurred  crux of the  to t h i s simply  "risks  for  were  character-  t r e a t e d as  an  I n t e r s t a t e Commerce Com-  mission.  Next, a s u b s t a n t i a l amount o f at  how  the  control.  rate regulator Never a p r e c i s e  nonetheless found to r e s t  sets  r a t e s f o r the  science on  t i m e was  the  a t any  Industry  time,  time-tested  spent  looking under i t s  rate-setting  and  logical,  if  was  93  not  too  often  fair  value"  this  concept,  stituted  objective,  of the  the  w i t h the  do  to the  pite  that  ing  as much as  the  U.S.  possible on  fair  and  on  tool  a fair  due  other value  the  various  t r u c k i n g has  U.S.  the  U.S.  state  of  avoid-  regulated principle  operating  the  concern,  character-  i s not  use  the  employed  "operating  ratio",  to  operating  to  determine  In t h a t  i t has  not  trucking merited  s e t t e r s as  I n t e r s t a t e Commerce commissions.  trucking  concerns,  costs  such standard  made o f  In Canada,  It i s understandable,therefore,  as  the  Commission moreover,  b e e n f o r some t i m e i n a r a t h e r ambiguous  t o r y environment.  own  i s des-  motor  t o economic  Instead,  a r e l a t i v e l y young r e g u l a t e d  Supreme C o u r t ,  This  i n the  t h a t most r e g u l a t o r s  part  left  and  seems t o be  revenue requirement f o r motor t r u c k e r s .  the  are  formulae f o r measuring  return  again  percentage of t o t a l i s the  We  s e c t i o n , e x a m i n a t i o n was  a trucking rate regulator. the  setting  bases.  from those of  much a t t e n t i o n on U.S.  last  found that,  different  revenues,  is  i t was  rate of r e t u r n  simply  the  those  con-  m i g h t make h i s  Supreme C o u r t  adopting set  a how  i s s u e , has  industries.  whereby one  on  shown  o b j e c t i v e economic  problem of determining a f a i r  istics  by  fairly  exist  When, i n t h e  industry,  I t was  reasonableness of a r a t e .  r a t e bases or returns  the  return  approach of a l l r e g u l a t o r s  that  criteria  fact  "fair  contested  levels f o r regulated  j u d g e m e n t s as the  a t h o r n y and  standard  impression  accounting  of a  producers' property.  albeit  adequate r a t e  criterion  regula-  that  the  94  Operating r a t i o , the t o o l with which r e g u l a t o r s  set  rate l e v e l s ,  i s s t i l l a very rough and  instrument.  For the next s e c t i o n of t h i s t h e s i s ,  badly understood  an examination w i l l be made of the o p e r a t i n g used today by motor c a r r i e r r e g u l a t o r s , an i n d i c a t o r of r a t e adequacy, and  rate  meaningful and  regulation.  therefore,  r a t i o as i t i s  of i t s accuracy as  f i n a l l y of the  that must be brought about i f the o p e r a t i n g more accurate,  trucking  conditions  r a t i o i s to  be  r e l i a b l e f o r the purposes of  95  CHAPTER V THE OPERATING RATIO AS A WORKABLE STANDARD OF REVENUE REQUIREMENT" Acceptability The major objection to employment of the operating r a t i o as a standard of revenue need, we might r e c a l l , was that no objective c r i t e r i a seem to exist for setting a standard.  More basic again, however, i s the problem of deter-  mining conditions wherein this simple r a t i o "...merely the r e l a t i o n between two highly variable sums of money" w i l l 1  have comparable meaning when calculated for two or more firms exhibiting markedly different cost c h a r a c t e r i s t i c s . try,  Any indus-  especially one as diverse as motor trucking, i s composed  of many units who not only operate d i f f e r e n t l y and incur cost patterns peculiar to themselves, but might account f o r those costs i n very different ways.  C l e a r l y , a crude r e l a t i o n of  revenues to "operating costs" for each operator throughout the industry w i l l produce some very diverse results both i n the size of the r a t i o s and i n the items each r a t i o includes. Items Included i n Operating Cost The f i r s t problem that w i l l have to be overcome before the operating r a t i o can be accepted as an "accurate  C . B . Aitchison, F a i r Reward and Just Compensation, Common C a r r i e r Service - Standards Under the Interstate Commerce Act, Association of Interstate Commerce P r a c t i t i o n e r s , Washington, 1954, p. 77. A  96  gaiage"  of revenue requirement  i t e m s t o be very  included i n "pperating  cost".  This  those  i s , of  course,  basic.  The  most i m p o r t a n t  motor c a r r i e r are, expenses s u c h as m a i n t e n a n c e and  items of o p e r a t i n g  of course,  v a r i a b l e and  d r i v e r s ' wages, f u e l , other  volume o f b u s i n e s s . The  i s that of standardizing  semi-variable  o i l and  grease,  of operating  these  items.  costs are  fixed  and  those  t e r m i n a l overhead  l a b o r , m a i n t e n a n c e , e t c . ) and  general  cluded firm,  and  the  apt  to vary  g r e a t e s t problems f o r the  suggested, w i l l  be  these  (indirect  overhead ( i n c l u d i n g  administrative expenses).  i n "overhead" are  the  d i s a g r e e m e n t on  n e a r l y f i x e d expenses such as  selling  vehicle  expenses i n c u r r e d d i r e c t l y w i t h T h e r e i s no  second category  cost f o r a  A l t h o u g h the  items i n -  somewhat f r o m f i r m t o r e g u l a t o r , i t might  be  three:  1.  Taxes  2.  Depreciation  3.  F i n a n c i a l Costs.  Taxes One  principal  universal definition dustry  lies  Clearly, taxes  an  of  difficulty  i n attempting  "operating  ratio"  i n treatment of taxes, operating  ratio will  for a regulated i n -  especially  income  taxes.  appear q u i t e d i f f e r e n t  have b e e n i n c l u d e d e i t h e r as a d e d u c t i o n  r e v e n u e o r as a n o t h e r i t e m  t o make a  of o p e r a t i n g  from  i fa l l  operating  cost, d i f f e r e n t ,  that  97  is,  from a r a t i o where taxes have been excluded from c o n s i d e r a -  tion. There has r e a l l y never been too much problem as f a r as the I n t e r s t a t e Commerce Commission i s concerned  about how t o  t r e a t d i r e c t taxes a g a i n s t p r o p e r t y , taxes upon p a y r o l l s , o r purchase t a x e s .  They have always been i n c l u d e d as items o f  o p e r a t i n g c o s t , necessary f o r m a i n t a i n i n g the c a r r i e r ' s p r o p e r t y and conducting business i n c i d e n t a l t o t r a n s p o r t a t i o n . such t a x accounts  a r e i n c l u d e d i n the I.C.C. Uniform  Indeed,  Account  Classification. With r e g a r d t o i n c l u s i o n of both s t a t e and f e d e r a l i n come taxes, however, t h e r e has been some disagreement out the y e a r s .  through-  In Increased Common C a r r i e r Truck Rates In The  E a s t , the Commission c o u l d n o t agree ...that the r a t e s o f respondents as a whole s h o u l d be f i x e d s u f f i c i e n t l y h i g h t o permit them to pay income taxes, surtaxes, and excess p r o f i t taxes and r e t a i n a normal p r o f i t . 2  The problem I s t h a t motor c a r r i e r s are owned by d i f f e r e n t of  kinds  proprietors,viz. partnerships, corporations, individuals,  each o f which has d i f f e r e n t income t a x l i a b i l i t i e s .  Often,  Commission d e c i s i o n s i n the years s i n c e 1942 l e f t i t q u i t e unc l e a r i n the r e a d e r ' s mind as t o whether o r not income taxes had o r had not been c o n s i d e r e d as p a r t o f the o p e r a t i n g r a t i o used t o judge revenue need.  Increased Common C a r r i e r Truck Rates In The East, 42 M.C.C., p. 647.  98 Today,  i n t h e U n i t e d S t a t e s t h e I.C.C. a t l e a s t  seems t o have r e s o l v e d t h e i s s u e o f income t a x e s . Increases,  Pacific  Northwest,  a division  ruled i n favour of the c a r r i e r s '  I n 1952, i n  o f t h e Commission  contention  that:  F e d e r a l income t a x e s a n d s u r t a x e s were a p r o p e r charge t o operations i n determining a reasonable r a t e l e v e l f o r t h e c a r r i e r s as a whole. T h i s case  h a s been c i t e d  Commission lem  frequently with  seems t o be s a t i s f i e d  the r e s u l t  that the  t h a t i t has s e t t l e d t h e p r o b -  o f income t a x . The C o m m i s s i o n now a p p a r e n t l y r e g a r d s t h e r u l e a s w e l l s e t t l e d t h a t Income t a x e s a r e t o be t a k e n i n t o account as other o p e r a t i n g disbursements are. 4  When one examines however, ly  he f i n d s  I.C.C. m o t o r c a r r i e r c o s t s t u d i e s ,  t h a t income t a x h a s b e e n e x c l u d e d  very  pointed-  from c o n s i d e r a t i o n i n computing revenue need: . . . t h e amount o f r e v e n u e n e e d i s b a s e d on a p r o c e d u r e which i n v o l v e s t h e use o f an o p e r a t i n g r a t i o which i s computed b e f o r e payment o f b o t h F e d e r a l a n d S t a t e c o r p o r a t e income t a x e s . . . . 5  It  i s , t h e r e f o r e , u n c l e a r a s t o how t h e o p e r a t o r ,  ested observer share is.  ( f o r whom t h e c o s t s s t u d i e s a r e i n t e n d e d ) ,  t h e same u n d e r s t a n d i n g Clearly,  a s t o what a n " o p e r a t i n g  t h e income t a x p r o b l e m i s a r a t h e r  i s s u e which begs c l a r i f i c a t i o n b e f o r e  ^Increases, 4  o r any i n t e r -  Aitchison,  Pacific op.cit.,  can .  ratio"  significant  the operating r a t i o can  N o r t h w e s t , 54 M.C.C., p . 127. p . 88.  5 ^ I n t e r s t a t e Commerce C o m m i s s i o n , B u r e a u o f A c c o u n t s , C o s t o f T r a n s p o r t i n g F r e i g h t by C l a s s I a n d C l a s s I I M o t o r Common C a r r i e r s o f G e n e r a l C o m m o d i t i e s , W a s h i n g t o n , D . C , I . C . C , September, 19tb, p . 5.  99  be  u n i v e r s a l l y employed as a m e a n i n g f u l r e g u l a t o r y  I n Canada, o f f i c i a l ratio part  has a p p a r e n t l y of operating  ledge,  understanding of the operating  a l w a y s assumed I n c l u s i o n o f income t a x a s  costs.  Although,  to this writer's  the Issue has never a r i s e n i n regard  regulation,  tool.  the Board o f Transport  l o w i n g statement about a r a i l r o a d  know-  t o motor  carrier  C o m m i s s i o n e r s made t h e f o l r a t e case i n  1948:  Income t a x p a y a b l e i n r e s p e c t t o r a i l w a y o p e r a t i n g income i s , I t h i n k , p r o p e r l y c h a r g e a b l e t o r a i l w a y o p e r a t i n g expenses.6  Depreciation  The question ing  cost,  problem about d e p r e c i a t i o n  o f whether o r n o t i t should b u t how i t s h o u l d  be i n c l u d e d  be c a l c u l a t e d .  u n a v o i d a b l e expense o f d o i n g b u s i n e s s , And  yet,  carriers,  expense i s n o t a as an  operat-  Depreciation,  i s an o p e r a t i n g  an  cost.  i f i t i s n o t m e a s u r e d i n t h e same manner f o r a l l clearly  great  disparities  could  arise i n operating  ratios.  Depreciation  expense f o r a motor c a r r i e r  f i x e d bufeden a n d a v a r i a b l e c o s t The  first  type o f d e p r e c i a t i o n  c l a s s i f i e d as Plant The  second type,  the  motor t r u c k i n g  Aitchison,  i s both a  d i r e c t l y variable with  i s related to fixed  a n d E q u i p m e n t i n most a c c o u n t i n g  likely  volume.  facilities, systems.  t o be a much l a r g e r c o n s i d e r a t i o n i n  industry,  o p . c i t . , p.  i s depreciation  90.  on v e h i c l e s ,  both  100  power u n i t s and  trailers.  annual d e p r e c i a t i o n (2)  years-digits  method.  due  standard  ways o f  business are:  D e c l i n i n g B a l a n c e method, and  the methodology of  w e l l known, i t i s n o t example o f t h e  three  e x p e n s e i n any  l i n e method,  Since  The  necessary to  disparities  that  (l) Straight -  (3)  these various o f f e r an  could  computing  Sum-of-the-  methods i s  explanation.  a r i s e in operating  t o d i f f e r e n t ways o f d e p r e c i a t i n g m i g h t be  An cost  f r u i t f u l how-  ever. EXHIBIT 3 D e p r e c i a t i o n E x p e n s e f o r 50 Power U n i t s A c q u i s i t i o n P r i c e o f $20,000 e a c h - F i r s t Year of Operation - P r o j e c t e d 10-year l i f e e a c h  Undepreciated C a p i t a l Cost  Straight Line (10$)  Declining Balance (Double)  Sum-of-the-years-digits  $1,000,000  $1,000,000  $1,000,000  $  $  $  Depreciation Expense  (1st y e a r ) The  idea  range of c h o i c e  as  quite acceptable prise. the  For  an  100,000 of  t o how  i n the  i t must d e p r e c i a t e  i t s property  realm of p r i v a t e , competitive  i n d u s t r y such as motor t r u c k i n g ,  s e e k s t o s e t r a t e s on  181,818 (10/55)  l e a v i n g management o f a f i r m w i t h a w i d e  element of r e g u l a t i o n  revenues,  200,000 (20$)  the  t h i s philosophy  i s present basis  and  enter-  however, where  where t h e  regulator  of a r e l a t i o n s h i p of c o s t s  i s quite unacceptable.  is  to  Disparities  101  s u c h a s t h e above,  indeed g r e a t e r than t h a t ,  between v a r i o u s f i r m s chooses even  to depreciate.  Clearly,  i f such an a c t i o n w i l l  r e g u l a t i o n " from i n g cost cannot ing  i n a single  ratio will  Financial  be c o m p a r a b l e  i n a statement  revenue  need  involved.  o f "over  Otherwise,  the operat-  from f i r m t o f i r m and the o p e r a t -  t h e most d i f f i c u l t  gauge.  expenses,  structure of a business.  expenses  Because t h e t r u c k i n g  this  the c a p i t a l  industry  i s so  v a r y c o n s i d e r a b l y from  t o make a g e n e r a l d e f i n i t i o n  even a s t a n d a r d c l a s s i f i c a t i o n costs throughout  o f the f i r m .  of course, d e r i v e from  i n nature, c a p i t a l i z a t i o n s Thus,  item t o c a l c u l a t e and  o f " o p e r a t i n g c o s t s " used t o determine  are the f i n a n c i a l  Financial  We s h a l l  bring cries  Costs  include  to f i r m .  each  some s t a n d a r d must be s e t  be u n s a t i s f a c t o r y a s a m e a s u r i n g  Undoubtedly,  diverse  y e a r due t o t h e method  undoubtedly  the c a r r i e r s  c a n be e x h i b i t e d  firm  o r to attempt  o f what c o n s t i t u t e s  financial  i n d u s t r y w o u l d be a n i m p o s s i b l e t a s k .  have t o examine t h e i t e m s one b y o n e .  The  most g e n e r a l a n d e a s i l y  understood f i n a n c i a l ex-  pense i s , o f course, s t r a i g h t  interest  Even  small operator w i l l  the very unsophisticated  some a c c u r a c y how much i n t e r e s t  certificate.  funds. know w i t h  he i s p a y i n g e v e r y y e a r on,  s a y , a bank demand l o a n o r a d e b t o r equipment t r u s t  on b o r r o w e d  i n s t r u m e n t s u c h a s a bond I t i s suggested here  that  102  such charges are  expenses of o p e r a t i o n  costs  be  and  revenue  should  enter  soon as  the  field  determining t o t a l complex. and  As  difficult  that  time to a t  an  the  common s t o c k  issue  of  costs  financing,  fixed  estimate  common s t o c k What t h e  market c o n s i d e r s the  of  company d i s p l a y s feel  stockholder  consideration.  that  the  the  on  of  the  of  more  floating is  analyst  is  on  shareholder's  the  of  that  attempting  stock  In a d d i t i o n t o  actual  with i t s  the  return  investment^  "payout" or y i e l d  return  cost  problem  market  f o r each d o l l a r of net  from that  Thus,  cost  he  necessary at a p a r t i c u l a r  value  characteristics.  the  becomes c o n s i d e r a b l y  percentage of return  least maintain  many a n a l y s t s to the  of  to determine.  the  peculiar risk that  i n any  a c a r r i e r becomes l a r g e enough t h a t  financial  t o measure i s t h e dollar  easily  mentioned i n Chapter I I , the  maintaining  very  fairly  c l a s s i f i e d as  need.  As can  included  and  i s also a  that  goes  value-making  o f e q u i t y money t h a t  is  . . . a t any t i m e t h e r e s u l t o f t h e i n t e r a c t i o n o f t h e company's r e t u r n on i n v e s t m e n t , t h e y i e l d t o i n v e s t o r s , t h e h i s t o r y o f b o t h o f t h e s e and a h o s t o f o t h e r f a c t o r s w h i c h can be summed up as the c u r r e n t a t t i t u d e o f the market'...' 1  is  a very  difficult  even f o r f i n a n c i a l Canadian P a c i f i c  t o c a l c u l a t e w i t h any  economists of  Railroads,  l a r g e enough t o g e t  III,  item  the  Canadian N a t i o n a l  l e t alone the  into equity  accuracy at a l l  truck  and  operator  financing.  ^ C a n a d i a n R o y a l C o m m i s s i o n on 1961, p. 310.  Transportation,  Volume  just  103  Clearly, of  capital.  costs  The c o s t  of a l l other  clear-cut, "capital"  that  a utility  o f common s t o c k  "equity"  out-of-pocket i s tied  trucking business  by  we have come a g a i n  this  sum o f money.  sum w i l l  Thus,  depreciation  be s m a l l  relative  certain  "opportunity  a n d equipment, e t c . ,  initial  c o s t " which w i l l  c a n n o t be met, a n d i t c a n o n l y investment  allocation  of  of this  capital  carriers  retained  c o n t r i b u t i o n o f ownert h i s money has a „  have t o be met.  carrier  If this  represents  clearly a mis-  f o r e v e n some o f t h e l a r g e r have t o i n c l u d e a s p a r t  of doing business a c e r t a i n return  each d o l l a r that ircespective  irrespec-  resources.  t o understand, any f i r m w i l l  i t s cost  capital,  be met f r o m p r o f i t s ,  i n this  Although i t i s d i f f i c u l t  of  elsewhere  t h e money t i e d up i n w o r k i n g  manager, o r f r o m t h e e q u i t y m a r k e t o u t s i d e ,  the  to that of  p r e s u m a b l y be i n v e s t e d  accruals,  by a  (even though i n t h e  o f w h e t h e r i t came i n t h e c o u r s e o f b u s i n e s s f r o m  earnings,  cost  l i k e the  A l l t h e money o r  up i n a b u s i n e s s  revenue-producing v e h i c l e s , plant tive  financing,  f i n a n c i n g i s not represented  or r a i l r o a d ) could  i t s suppliers.  t o the problem o f c o s t  has gone i n t o t h e a s s e t s  o f where t h a t  or profit  on  of that business —  d o l l a r came f r o m .  As The Highway  Research Board views i t : Although i t i s true that not a l l o f the trucking i n d u s t r y ' s p r o p e r t y i s p u r c h a s e d w i t h bank l o a n f u n d s , n e v e r t h e l e s s t h o s e who s u p p l y t h e f u n d s want some r e t u r n , w h e t h e r t h e y be s t o c k h o l d e r s , banks, f i n a n c e companies, o r i n d i v i d u a l owners. The e l e m e n t o f p r o f i t i s a r e c o g n i z e d c o s t i n  104  ...American The  I n t e r s t a t e Commerce C o m m i s s i o n h a s a l w a y s r e c o g n i z e d  return that  Industry.°  o r " i n t e r e s t on i n v e s t m e n t " i s a c l e a r i t e m  should  calculating  be c o n s i d e r e d revenue need.  along  with operating  when  Other than the s t r a i g h t i n t e r e s t r e t u r n on  o r " i n t e r e s t on i n v e s t m e n t " i s n o t i n c l u d e d i n  operating figure  of cost  costs  c h a r g e s on b o r r o w e d money, however, t h e r e q u i r e d property  that  cost,  i n order  r a t h e r added onto t h e f i n a l  operating  to maintain the d e s i r e d operating  cost  ratio.  B e c a u s e i n t e r e s t on i n v e s t m e n t i s n o t i n c l u d e d i n the computation o f o p e r a t i n g r a t i o s . . . t h e o u t - o f p o c k e t c o s t s s h o u l d be i n c r e a s e d b y t h e f o l l o w i n g p e r c e n t s t o p r o v i d e revenue need.... Although t h i s wording leaves t o how t h e r e q u i r e d the  operating  general very  the reader a l i t t l e  r e t u r n on c a p i t a l  ratios,  the l a t e s t  should  c o n f u s e d as  be a p p l i e d t o  I.C.C. P o l i c y S t a t e m e n t on  r a t e p r o c e e d i n g s makes i t q u i t e  d e f i n i t e l y a n Item o f c o n s i d e r a t i o n  c l e a r that  this i s  f o r determining  revenue need: ...respondents ( i . e . c a r r i e r s appearing i n general r a t e c a s e s ) s h a l l p r o d u c e e v i d e n c e o f t h e sum o f money, i n a d d i t i o n t o o p e r a t i n g e x p e n s e s , n e e d e d t o a t t r a c t debt and e q u i t y c a p i t a l which they r e q u i r e t o i n s u r e f i n a n c i a l s t a b i l i t y and the capacity to render s e r v i c e . This evidence should i n c l u d e , without l i m i t i n g the evidence that should  "Highway R e s e a r c h B o a r d : B u l l e t i n 301, L i n e - H a u l T r u c k i n g C o s t s i n R e l a t i o n t o V e h i c l e G r o s s W e i g h t s , N.R.C. p u b l i c a t i o n No. 929, W a s h i n g t o n , D . C , 1961, p . 75. ^I.C.C. Bureau o f Accounts,  o p . c i t . , p . 5.  105  ...be p r e s e n t e d , p a r t i c u l a r i z e d r e f e r e n c e t o t h e r e s p o n d e n t s ' r e a s o n a b l e i n t e r e s t , d i v i d e n d and s u r p l u s requirements.10 Again, ed:  the  Highway R e s e a r c h B o a r d ' s s t a t e m e n t m i g h t be  "...the element o f p r o f i t  i s a recognized  cost  insert-  i n American  industry". If  this  corporate  finance  succeeded  i n our  curacy the  i n t o the  fair  return  operating lator  ratio  item  he  could  of  indicates that attempt  to  practice of on  fair  introduce truck  value  w o u l d be  r a t e - s e t t i n g by  For  same.  capital  to judge the present?  of  a c c e p t a b i l i t y of  somewhat l o o s e l y as  evidence, the  weighed i n a f a i r l y  various  regulators,  how  the  "financial subjective  o b s e r v e r s and  railroad,  What c r i t e r i a the  have a l r e a d y  c o s t " element, and  reguas  more  than  be  but  Commission  element f o r r e t u r n  w h i c h we  ac-  (now  Item w i l l  evidence that  still on  will  init  use  respondents classified  i s going  Again,  in-  the  n o n - u n i f o r m manner by  operators.  not  the  is a  investment  of the  the motor t r u c k e r .  This  on  A p p a r e n t l y the  to oversee i n s e r t i o n of a cost  vested  indeed,  on  discarding  substituting  Certainly this  to that  have  more o b j e c t i v i t y and  f o r t h e m o t o r c a r r i e r any  in size relative  remains the  t h e modern t h i n k i n g  p r i n c i p l e and  judge f o r a r a i l r o a d ?  principle  will  and  i t i s , t h e n s u r e l y we  t o o l i n i t s stead.  "cost")  significant  be  i s true,  t o j u d g e what a r e a s o n a b l e r e t u r n  an  has  statement  the  to the  operat-  l ° I n t e r s t a t e Commerce Commission, O r d e r No. 34816: I n c r e a s e d Minimum C h a r g e s Between P o i n t s In C e n t r a l S t a t e s , A p r i l 2 8 , 1967, p. 2 .  106  ing  ratio,  because o f t h e p r o b l e m a t i c  of,  loses a l i t t l e  objective,  e l e m e n t s i t i s composed  more o f o u r c o n f i d e n c e  as a p o t e n t i a l  a c c u r a t e , u n i v e r s a l gauge o f m o t o r c a r r i e r  revenue  requirement.  Diversity  o f The I n d u s t r y  Some t r u c k e r s i n t h i s p r o v i n c e a r e l o s i n g money w i t h 'compensatory' o p e r a t i n g r a t i o s . Others, with i d e n t i c a l r a t i o s , a r e r e a l i z i n g v e r y good p r o f i t s . You h a v e t o be v e r y c a r e f u l when y o u t r y t o r e a d a n y thing into this r a t i o . 1 1  The  above statement,  resentative o f the a t t i t u d e  the w r i t e r gathers,  t h e Canadian t r u c k i n g I n d u s t r y has  toward t h e use o f o p e r a t i n g r a t i o s for  any o t h e r p u r p o s e .  motor c a r r i e r conditions. one  1 2  industry i s l i k e l y  e q u i p m e n t he u s e s , deed h i s p o l i c y  of  i s that each f i r m  to operate  f o r another.  different  the frequency  he h a u l s , t h e  and d e n s i t y o f h i s hauls, I n -  towards l e a s i n g o f f a c i l i t i e s  and equipment,  a few v a r i a b l e s t h a t c a n g r e a t l y a f f e c t  t h e magnitude  h i s r a t i o between o p e r a t i n g c o s t s a n d r e v e n u e s .  L e t us  detail.  S t a t e m e n t t o w r i t e r b y a management o f f i c i a l country's largest truckers, July, 1967.  o f one o f  T h i s i m p r e s s i o n was g a i n e d b y t h e w r i t e r a f t e r t a l k i n g management o f some s i x m a j o r t r u c k e r s i n B r i t i s h C o l u m b i a . 1 2  to  i nthe  The t y p e o f  the k i n d of product  examine a f e w o f t h e m a j o r i s s u e s i n some  the  under very  rates or  What m i g h t be an i t e m o f c o n s i d e r a b l e e x p e n s e t o  t r u c k e r might n o t even e x i s t  just  either f o r setting  The r e a s o n  r o u t e an o p e r a t o r s e r v i c e s ,  are  i s rep-  107 According  t o Hudson a n d C o n s t a n t I n ,  13  l o a d f a c t o r t h a t a c a r r i e r e x h i b i t s i s t h e most operating index,  characteristic  crucial  affecting  the  critical  the operating  ratio.  of operation,  carriers  d e p e n d i n g on t h e  i s a good i n d i c a t o r o f u t i l i z a t i o n .  In  case o f motor t r u c k i n g , i t i s a r r i v e d a t by making t h e  following  calculation:  EXAMPLE: T o t a l Loaded Ton M i l e s f o r p e r i o d T o t a l N o r m a l C a p a c i t y Ton M i l e s for period Load F a c t o r s  -  500,000 750,000  These authors  .  D  T o t a l L o a d e d Ton M i l e s T o t a l C a p a c i t y Ton Miles of Fleet  500,000 750,000  6 7  made a s t u d y  o f the r e l a t i o n s h i p be-  tween t h e l o a d f a c t o r w i t h m o t o r t r u c k e r s ' o p e r a t i n g revenues.  Using  interstate  commodity c a r r i e r s  data  operating  ratio  costs and  d e r i v e d f r o m a sample o f 70 C l a s s  region of the United States the  This  t o a n y mode o f t r a n s p o r t , a n d most l i k e l y t o  d i f f e r g r e a t l y between i n d i v i d u a l type  the average  ( a l l large operators)  i n 1953,  improved v e r y  l o a d f a c t o r was r e a c h e d .  they  I  i n one  demonstrated  that  q u i c k l y a f t e r a 50 p e r c e n t  Indeed, a v e r y  strong  s e e n between l o a d f a c t o r a n d t h e o p e r a t i n g  correlation i s  ratio.  The r e s u l t s  •^W.J. Hudson a n d J . A . C o n s t a n t i n , M o t o r T r a n s p o r t a t i o n : P r i n c i p l e s a n d P r a c t i c e s , N.Y., N.Y., R o n a l d P r e s s I n c . , 1958.  108  are  d e m o n s t r a t e d by t h e  following:  FIGURE 4 Rate of Return  Operating  50  100  40  98  30 **4tat< o f P s t u r n 20  (  96 94 92  10 Ope  rH±n Ratffc  Load  5  90  Factor  R e l a t i o n o f l o a d f a c t o r t o o p e r a t i n g r a t i o and r a t e o f r e t u r n f o r 70 C l a s s I m o t o r common c a r r i e r s o f g e n e r a l commodities, 1953. S o u r c e : Hudson, W.J., a n d C o n s t a n t i n , J.A., M o t o r C a r r i e r T r a n s p o r t a t i o n , P r i n c i p l e s and P r a c t i c e s , R o n a l d P r e s s Company, New Y o r k , 1958, P. 169.  Ratio  109  The not load  r e s u l t o f Hudson a n d C o n s t a n t i n ' s a n a l y s i s  be t o o s i g n i f i c a n t f o r t h e p u r p o s e s o f t h i s t h e s i s factors of firms  a certain region and  Constantin  within  could  would  i f the  a c e r t a i n s i z e c a t e g o r y o r even  be e x p e c t e d t o be s i m i l a r .  n o t e , however, t h e r e  i s p r o b a b l y n o more  volatile  feature  factor.  D e p e n d i n g on t h e t y p e o f s e r v i c e r e n d e r e d o r t h e  kind  i n the t r u c k i n g  A s Hudson  of operation  industry  being s o l i c i t e d ,  g r e a t l y among i n d i v i d u a l  than the l o a d  the load f a c t o r w i l l  vary  operators.  G e n e r a l commodity c a r r i e r s a s a g r o u p may be e x p e c t e d t o e x p e r i e n c e a l o w e r l o a d f a c t o r t h a n s p e c i a l commodity c a r r i e r s a n d c o n t r a c t c a r r i e r s . L i k e w i s e common c a r r i e r s o p e r a t i n g on r e g u l a r s c h e d u l e s may h a v e l o w e r l o a d f a c t o r s than c a r r i e r s which conduct non-scheduled operations. ^ 1  And that  y e t there  are other factors  influencing the load  a r e n o t connected w i t h any c l a s s i f i c a t i o n s  above.  These c o u l d  factor  such as the  e a s i l y be l i s t e d :  1.  A low l o a d f a c t o r c o u l d r e s u l t from an o v e r e x p a n s i o n of a c a r r i e r ' s f l e e t . Conversely, f o r t u i t o u s o r extremely e f f i c i e n t r o u t i n g and s c h e d u l i n g would b r i n g about a v e r y h i g h l o a d f a c t o r .  2.  A v e r y common p r o b l e m i n t r a n s p o r t a t i o n , d i r e c t i o n a l imbalance, would produce a v e r y low l o a d f a c t o r u n l e s s the c a r r i e r can induce r e t u r n haul t r a f f i c from another source.  3.  The p h y s i c a l c h a r a c t e r i s t i c s o f t h e t r a f f i c c a r r i e d w i l l g r e a t l y a f f e c t the load f a c t o r that a c a r r i e r can g e n e r a t e . "Low d e n s i t y " f r e i g h t ( i n t e r m s o f ton m i l e s p e r route m i l e ) cannot produce high l o a d f a c t o r s f o r the t r u c k e r unless h i s t a r i f f i s based on c o n s i d e r a t i o n s o t h e r t h a n w e i g h t .  l^Ibld.,  p.  168.  110  4.  Undoubtedly a c a r r i e r ' s m a n a g e r i a l e f f i c i e n c y has a v e r y g r e a t e f f e c t on t h e l o a d f a c t o r . A s m e n t i o n e d , the s k i l l w i t h which t h e o p e r a t o r i s a b l e t o s o l i c i t , s c h e d u l e and r o u t e h i s t r a f f i c w i l l have a d i r e c t and s i g n i f i c a n t e f f e c t on t h e u t i l i z a t i o n he g e t s f r o m h i s v e h i c l e s a n d t h e c a p i t a l he h a s t i e d u p i n t h e business. T r u e , some c a r r i e r s a r e n o t a b l e t o r e a c h t h e same l e v e l o f e f f i c i e n c y i n terms o f u t i l i z a t i o n because o f f a c t o r s such as t h e f i r s t three p o i n t s mentioned. O t h e r s , however, c a n o n l y h a v e t h e m s e l v e s t o blame i f t h e i r l o a d f a c t o r does n o t compare f a v o r ably with that of t h e i r competitors.  Thus, t h e l o a d f a c t o r i s one h i g h l y v o l a t i l e trucking operations ratio of  ating one  ratio  operating factors, ton-mile,  by i t s e l f .  Because o f t h e v o l a t i l i t y the oper-  I t w o u l d be m e a n i n g l e s s t o t r y t o a p p l y  c h a r a c t e r i s t i c s and consequent d i f f e r e n c e s i n l o a d m i g h t have w i d e d i s c r e p a n c i e s vehicle-mile,  level  operating  wary o f u s i n g  t o two t r u c k i n g f i r m s w h i c h , b e c a u s e o f d i f f e r e n t  The  the  rather closely.  f a c t o r , we w o u l d h a v e t o be v e r y  ratio  a rate  and i t i s an index which the o p e r a t i n g  seems t o r e f l e c t  this  characteristic of  greatest that w i l l  ratio  v e h i c l e year, e t c . ) .  danger,  therefore,  i n attempting  b r i n g every c a r r i e r  o f a t l e a s t 93  regulator w i l l  i n cost per unit (e.g.  p e r cent,  i n t h e i n d u s t r y an  f o r instance,  be s u b s i d i z i n g t h e c a r r i e r s w h i c h ,  operating  inefficiencies,  operating  conditions.  i s that due t o  e x h i b i t low l o a d f a c t o r s under normal  C e r t a i n l y , when a c a r r i e r d i s p l a y s a low  l o a d f a c t o r not because o f i n e f f i c i e n c y but  because o f t h e c h a r a c t e r  the  s e t t i n g o f a minimum o p e r a t i n g  f a c t o r y way o f b r i n g i n g  to apply  or poor  of h i s business  utilization,  (points  1-3  r a t i o m i g h t be a v e r y  a l l c a r r i e r s reasonably  above), satis-  compensatory  Ill  and  fair profit  all  c a r r i e r s when w i d e d i s c r e p a n c i e s i n e f f i c i e n c y a r e known  to e x i s t  levels.  By s e t t i n g a n a r b i t r a r y r a t i o f o r  i n t h e i n d u s t r y , however, t h e r e g u l a t o r i s a c t u a l l y  allowing the e f f i c i e n t the  same t i m e ,  efficient  cies  alive. 5  firms  1  situation,  t h e consumer o f t r a n s p o r t a t i o n  i s f o r c e d t o p a y h i g h e r r a t e s due t o t h e i n e f f i c i e n -  o f some o p e r a t o r s .  entry of competition petuated  In a r e g u l a t e d environment  i s limited,  quite easily.  t e c t i n g an i n e f f i c i e n t most b a s i c d u t y  The r e g u l a t o r , we r - e c a l l , must  operator,  that competition  the i n e f f i c i e n t  where  s u c h a s i t u a t i o n c a n be p e r -  a s much a s p o s s i b l e t h e f o r c e s o f c o m p e t i t i o n .  patches  l e v e l and, a t  i s d e f e a t i n g i t s e n t r y p o l i c y by k e e p i n g i n -  In t h i s services  firms too high a p r o f i t  simulate  Y e t , by p r o -  the r e g u l a t o r i s Ignoring the does a c c o m p l i s h .  It dis-  very quickly.  What d a n g e r i s p o i n t e d o u t b y u s e o f t h e l o a d f a c t o r ? The  fact  h a s s i m p l y been u n d e r l i n e d t h a t t h e o p e r a t i n g  ratio  3-5"if p fit i determined by t h e requirements o f t h e l e a s t e f f i c i e n t . . . e n t r y w i l l have t o be r e s t r i c t e d . Under such c i r c u m s t a n c e s , the i n c e n t i v e f o r e f f i c i e n t p r o d u c t i o n i s m i s s i n g a n d p u b l i c p o l i c y becomes t h a t o f k e e p i n g an u m b r e l l a o v e r e x i s t i n g p r o d u c e r s a n d e x c l u d i n g o t h e r s f r o m its shelter. This, o f course, i s the reason f o r the r e s i s t a n c e o f o c c u p a n t s t o new e n t r a n t s a n d t h e r e l u c t a n c e o f p u b l i c a g e n c i e s t o accede t o t h e r e q u e s t f o r a d m i s s i o n t e n d e r e d by new o c c u p a n t s . " f  a  l  r  r  o  S  Pegrum, D.P., The E c o n o m i c B a s i s o f P u b l i c P o l i c y f o r M o t o r T r a n s p o r t , P.U.B ., Aug., 1952, V o l . XXVIII, N o . 3, p . 255. 1  112 should  n e v e r be  data.  Any  fully  r e f e r r e d to without  a great  a t the nature  of the  carrier s  business  1  ratio.  r e g u l a t o r m i g h t c o n s i d e r w o u l d be  before  which s a l e s e f f o r t  i s directed at  the p r o p o r t i o n o f s m a l l and  availability  for  the  carrier.  i n d i c a t i o n as ticular  thereof,  traffic  Consideration  v a r i a t i o n s i n volume  i s s u b j e c t o r w h e t h e r he  We  have f o u n d t h a t the  be  ratio. careful  ratio  In t h a t  the  traffic,  of the  conditions  should  conditions to  c l e a r l y be  l o a d f a c t o r i s one  great  hauls  load f a c t o r of that  Influence  doing  element o f  o v e r c o s t s and  time the  an par-  which  better. trucking the  operat-  i t i s a h i g h l y v a r i a b l e e l e m e n t , we  t o examine i t c l o s e l y a t any  must  operating  i s referred to.  I n 1956, completed a study strate  competitive  and  extent  t h e most d e s i r a b l e  and  a result  he  ing  the  of such items might g i v e  to whether o r not  w h i c h has  making  shipments, p r o p o r t i o n of r e t u r n  t r u c k e r comes a s  operations  care-  Some f a c t o r s t h a t  c h a r a c t e r o f tonnage, v a r i a t i o n s i n l e n g t h o f h a u l , to  supporting  p r u d e n t r a t e - m a k i n g a g e n c y must l o o k r a t h e r  j u d g e m e n t s b a s e d upon t h e o p e r a t i n g the  deal of  Dr.  M.J.  Roberts o f the U n i v e r s i t y o f  o f t r u c k i n g c o s t s w h i c h was  t h a t economies o f s c a l e d i d not  industry  (see C h a p t e r I I I ) . ^ 1  significance about the  for this  operating  One  t h e s i s was  ratio.  exist  intended  Florida  t o demon-  i n the motor  "by-product" of t h i s  carrier  study  of  some r a t h e r a r r e s t i n g f i n d i n g s  I t was  discovered  that t h i s  ratio,  M.J. R o b e r t s , " S o m e A s p e c t s o f M o t o r C a r r i e r C o s t s : Firm S i z e E f f i c i e n c y and F i n a n c i a l H e a l t h " , Land Economics, V o l . X X X I I , No. 3 , ( A u g u s t , pp. 228-38":  1956),  113  albeit be  an a c c e p t e d  measure o f f i r m e f f i c i e n c y ,  f a r f r o m t h e mark a s  Again, two  because of the  operating  an  diversity  characteristics,  o f the motor c a r r i e r v i z . e f f i c i e n c y and  commodities o p e r a t i n g  traffic all  He  d e n s i t y and  his carriers.  mile  felt,  114  Class  therefore,  is  financial  the  and  vehicle mile  According  page  to t h i s  r a t i o s and  low  ies  that deviated  a n a l y s i s , 61  costs with  est  to t h i s w r i t e r .  from t h i s  for  r a t h e r than the  ton  operating  ratio.  Why  F o r one  t h i n g , the  study  low  ratios.  I t was  characteristics  agree with  the  a  operat-  51  compan-  t h a t were o f  inter-  e f f i c i e n c y measure  (cents  t h e measure g i v e n by  the  i s this? e f f i c i e n c y measure e m p l o y e d i n  shows o n l y c o s t s , w h e r e a s t h e o p e r a t i n g  from b o t h c o s t s and  an  vehicle mile.  c o s t s combined w i t h h i g h  C l e a r l y , Roberts'  does n o t  as  companies m a i n t a i n e d  expected pattern  per v e h i c l e mile)  the  28.  n o r m a l r e l a t i o n s h i p where h i g h ing  gen-  quite similar  i n i t i a l r e l a t i o n s h i p of costs to operational t a b l e on  or  load factors,  a s h i s b a s i c u n i t o f measurement, R o b e r t s s e t up  shown i n t h e  of  a l l in  that terrain,  i n d i c a t o r of e f f i c i e n c y the average cost per The  industry,  I carriers  over s i m i l a r routes  e q u i p m e n t s i z e w o u l d be Using  health.  necessarily related.  R o b e r t s t o o k a sample o f  same t e r r i t o r y .  well  i n d i c a t o r of c a r r i e r f i n a n c i a l  o p e r a t i n g h e a l t h , were n o t  eral  could very  revenues.  The  ratio  this  i s derived  obvious explanation  f o r such  an a n o m o l y w o u l d seem t o l i e i n d i f f e r e n c e s i n l o a d f a c t o r s .  114  According  t o t h e a n a l y s t , however, t h e  r a t i o group  ( I V ) h a n d l e d 9.2  ton miles  v e h i c l e m i l e as o p p o s e d t o a 7.3 managed a low  operating  low  cost,  high-operating  of f r e i g h t  l o a d i n g f o r the  f o r each group  that  r a t i o despite high costs ( I ) .  D e s p i t e t h e i r revenue d i s a b i l i t y , f i r m s i n the former group had a d i s t i n c t advantage i n v e h i c l e u t i l i z a t i o n o v e r t h o s e t h a t were u n u s u a l l y s t r o n g i n r e v e n u e g e n e r a t i n g capacity.17 Thus, we  h a v e t o l o o k e l s e w h e r e f o r an e x p l a n a t i o n  some f i r m s were p r o d u c i n g others, having  as much h o m o g e n e i t y i n o p e r a t i n g  traffic  The  a n s w e r had  carried.  structure,  some c a r r i e r s w i t h and  low  of  was  r a t e and  f o r one  The simple.  relatively  d i c a t i o n o f how level.  1 7  Ibid.,  p.  ratios.  various firms varied  operating  well a carrier  | t c a n n o t be  homo-  s u f f i c i e n t l y diverse to  p o i n t t o be made f r o m R o b e r t s '  A l t h o u g h the  traffic  costs to d i s p l a y high operating  g e n e r a t e d by  to  to l i e i n d i f f e r e n c e s i n type  some c a r r i e r s w i t h high c o s t s t o show low  revenue b e i n g  eye  than  as  r e g i o n and  geneous g r o u p o f c a r r i e r s ,  an  why  characteristics  I n o t h e r words, t h e  e v e n i n one  to  more r e v e n u e p e r v e h i c l e m i l e  f i r m s , t h a t i s , t h a t were s e l e c t e d w i t h  possible.  as  labelled,  allow ratios The  considerably.  analysis i s  r a t i o m i g h t g i v e a good i n i s managed u n d e r a c e r t a i n r a t e as  i t u s u a l l y i s , an  index  of  235.  *%ote: "According t o t h i s evidence, the e f f i c i e n c y o p e r a t i n g r a t i o d i s c r e p a n c i e s w h i c h were t r a c e d t o d i f f e r e n c e s i n revenue-generating a b i l i t y are a s s o c i a t e d w i t h the revenueproducing c h a r a c t e r of the t r a f f i c handled." I b i d . , p. 235.  115  efficiency.  For that  reason,  load f a c t o r are considered, not  the operating  ratio  will  ratio  does  b r i n g compensatory r a t e s  manner.  Some l o w c o s t  ly,  be h a r d - p r e s s e d t o g a i n  will  with that  standard.  deviates,  Others  h a u l more l u c r a t i v e t r a f f i c over s i m i l a r routes, "efficiency"  will  to a l l i n the region  i n asset  efficient-  reward f o r t h e i r e f f o r t s deviates),  because  even though they i n c u r h i g h e r  reap p r o f i t s higher  than  o f the motor c a r r i e r  they costs  their  of leased  i s concerned,  there  tires.  One page  o f how t h e o p e r a t i n g  ing  tool f o revaluating  ing  firms  This  i s the  One most  standard  For  i n the  Some c a r r i e r s own a l l t h e i r l e a s e a s much a s p o s s i b l e ,  117 i s & c o n t r i v e d  illustra-  r a t i o s m i g h t be a n e n t i r e l y  the e f f i c i e n c y  with d i f f e r e n t leasing  that  v e r s u s owned e q u i p m e n t a n d  i s no g e n e r a l  ( s e e T a b l e on page 116).  including their  industry  ratio quite d i f f i c u l t  revenue u n i t s and p l a n t w h i l e o t h e r s  tion  extremely  r e l a t e s t o l e a s i n g o f equipment.  f a r as t h e p r o p o r t i o n  industry  i s not  i n t h e same  makeup o f d i f f e r e n t c a r r i e r s .  consideration  facilities  a fair  (high cost  makes t h e u s e o f t h e o p e r a t i n g  serious  operating  that  warrants.  Another feature  diversity  An  s e t a t 930 o r 950 w i t h t h e u n d e r s t a n d i n g  going t o a f f e c t a l l p a r t i c i p a n t s i n the rate  as  still  i n d i c a t e t h e same t h i n g a b o u t d i f f e r e n t c a r r i e r s .  arbitrary it  e v e n when s u c h p r o b l e m s a s t h e  mislead-  o f two d i f f e r e n t t r u c k -  policies.  problem Is o f concern t o r e g u l a t o r s  and econo-  116  TABLE I I I  SAMPLE OF CARRIERS  INDICATING BREAKDOWN  OF OWNED VERSUS LEASED EQUIPMENT  % of Total  No. o f C a r r i e r s P r o v i d i n g F l e e t Information f o r Class  Power Own  Note;  be  Own  Lease  Own  Lease  2  6  10  2  1  16  0  6  0  100  0  1  19  0  19  0  100  0  type  of t h i r t e e n responding of information,  carriers  60 40  offered  h e n c e no c o n c l u s i o n s  drawn a b o u t t h e i n d u s t r y i n B.C., n o r e v e n  firms c i r c u l a r i z e d . interest Source;  Lease  Units  1  Only three this  Trailer  The i n f o r m a t i o n  may about  h e r e may be o f  however.  U.B.C., - A.T.A. o f B.C. T r u c k i n g  Survey,  Summer,1967.  117  TABLE  IV  COMPARABILITY OP LEASING VERSUS OWNING  Firm A  Firm  B  * G r o s s Revenue Operating  Expenses  (Total)  Equipment Maintenance Terminal Traffic Insurance and S a f e t y A d m i n i s t r a t i v e and General O p e r a t i n g Taxes and L i c e n c e s Transportation Wages, F u e l Equipment Rents Depreciation Plant Revenue E q u i p m e n t Operating  1,000,000  1,000,000  958,000  998,000  101,000 129,000 30,000 45,000 66,000 52,000  101,000 129,000 30,000 45,000 66,000 52,000  498,000  498,000 65,000  12,000 30,000  12,000  95.8  Ratio  99.8  20  F i r m B l e a s e s t h i r t e e n t r u c k s a t $5,000 a p i e c e , t h u s i n c u r r i n g i t s e q u i p m e n t r e n t a l c h a r g e o f $65,000. Firm A owns t h i r t e e n ( w e l l d e p r e c i a t e d ) u n i t s v a l u e d a t a c o s t o f $31,000 a p i e c e . The d e p r e c i a t i o n r a t i o s o f t h e two f i r m s a r e e n t i r e l y d i f f e r e n t . F i r m B l o o k s t o be i n a f a r more c r i t i c a l s t a t e o f r e v e n u e n e e d . A c t u a l l y , F i r m A i s i n an i d e n t i c a l s i t u a t i o n . The u n i t s i t owns r e p r e s e n t a n i n v e s t m e n t o f $403,000. A r e a s o n a b l e r e t u r n on t h i s i n v e s t m e n t m i g h t be f i g u r e d a t t h e cost of c a p i t a l . I f t h i s cost i s i n the neighborhood o f t e n p e r c e n t , $40,300, t h e n t h e o p e r a t i n g r a t i o f o r F i r m A i s t h e same a s i t i s f o r F i r m B. Firm A Operating Cost F i n a n c i a l Cost TOTAL Operating Ratio  20source:  p . 101, p . 12.  $958,000 40,300 998,300 99.83  R e p r e s e n t a t i v e C o s t f i g u r e s - Hudson C o n s t a n t i n , f r o m A m e r i c a n T r u c k i n g A s s o c . , I n c . T r e n d s (Wash.1956),  118 mists.  A s W i l l i a m B. S a u n d e r s ,  sultant,  the noted t r a n s p o r t a t i o n con-  stated i n a rate hearing  i n 1965:  ...a company w i t h no i n v e s t m e n t a t a l l c a n p r o d u c e handsome p r o f i t s t o s u p p l i e r s o f c a p i t a l w i t h a n o p e r a t i n g r a t i o o f a s much a s 99 p e r c e n t ; s u c h a c a s e a r i s e s whenever t h e r e p o r t i n g c a r r i e r l e a s e s a l l p r o p e r t y a n d equipment a n d c h a r g e s back c a p i t a l c o s t s as a r o u t i n e o p e r a t i n g expense. Automatically, s u c h a c a r r i e r n e e d s a much s m a l l e r p e r c e n t a g e o f n e t r e v e n u e t h a n d o e s a c a r r i e r who owns a l l o f t h e p r o p e r t y a n d equipment i n h i s motor c a r r i e r o p e r a t i o n s . In i t s s i m p l e s t terms....the o p e r a t i n g r a t i o i s n o t a s a t i s f a c t o r y measure o f revenue n e e d . ! 9  Certainly rate  i f a regulator i sattempting  l e v e l f o r two m o t o r c a r r i e r s  a b o u t l e a s i n g , he i s g o i n g simple  operating  ratio  who have d i f f e r e n t  I n t h e example above,  requirements.  the issue i svery  cost" i n the calculation  need.  t h e I n t e r s t a t e Commerce  does t h i s part  even though i t a p p a r e n t l y  of the operating  computed a n d f i g u r e ^ the  imperative  capital  hearing he  costs.  into the operating  ratio.  item a  costs are  Again,  we s e e  r e t u r n on i n v e s t e d  As l o n g a s t h e r e g u l a t o r makes  and as long as the respondents t o a rate  the regulator with  c a n make a f u l l  Commission  I t i s included after  as a cost o f business.  supply  that  o f revenue  does n o t make t h i s  o f recognizing the f i n a n c i a l  allowance f o r t h i s  clearly  t o , and i n c l u d i n g an accurate  allowance f o r " f i n a n c i a l As n o t e d e a r l i e r ,  policies  t o have t o l o o k w e l l b e y o n d t h e  t o judge revenue  of the r e g u l a t o r r e f e r r i n g  t o s e t a compensatory  and accurate  financial  allowance,  information there  should  so t h a t be no  •^source: C a n a d i a n I n d u s t r i a l T r a f f i c League N o t e s , F e b r u a r y 12, 19^5, ( I s s u e 4222), p . 4. Reference t o N.I.T.L. S t a t e m e n t t o I n t e r s t a t e Commerce C o m m i s s i o n r e : I n c r e a s e d R a t e s Between C o l o r a d o , Wyoming a n d S o u t h w e s t . D o c k e t t No. 34444.  119  great  problem of d i s p a r i t y i n the  because o f d i f f e r e n t  policies  operating  ( a b o v e ) comes a t a t i m e ,  are  supplying  tion.  portant  one  there  are  thing,  tax,  p o i n t , we  considerations  standard  are  this  t o employ t h e  that  the  operating  two  r e g u l a t o r s and  i n t h e way  ratio  effectively.  carriers  We  c a r r i e d and  policies  variables that  o n l y way  of  t o do  The the with  character  of  about equipment l e a s i n g a r e greatly affect  t h a t a r e g u l a t o r can  he  This w i l l  regulates.  financial be  Income costs  second operating the  extreme  this  freight only a  take account of  information the  subject  few  highly volatile  s u c h i t e m s f r o m f i r m t o f i r m i s t o ask. f o r and and  some  D i s p a r i t i e s in load factors,  type of haul,  d e a l more d a t a  For  c a l c u l a t i o n of f i n a n c i a l  i n d u s t r y has  industry.  i f he  i t .  cost.  areas at present.  im-  have n o t e d  a l i k e must a g r e e on  o f a more u n i v e r s a l use  i n the motor c a r r i e r i n that  t h e more  b a s i c problems i n v o l v e d i n u s i n g  managerial e f f i c i e n c y ,  in  informa-  a r e g u l a t o r must t a k e a c c o u n t o f  t h r e e most d i f f i c u l t  diversity  of the  incomplete f i n a n c i a l  have r e v i e w e d some o f  method o f d e p r e c i a t i o n and  ratio  Saunder's  however, when r e s p o n d e n t s  manner o f i n c l u d i n g i t e m s i n o p e r a t i n g  obstacle  The  p o o r and  firms  2 1  At  is  very  two  about l e a s i n g equipment.  criticism still  r a t i o s of  from the of a l a t e r  the  ratio.  differences  analyze  a  carriers  great thalfr  section.  I b i d . , p . 3, "An e x a m i n a t i o n o f t h e p a p e r s f i l e d by t h e c a r r i e r s . . . c l e a r l y r e v e a l s , u n f o r t u n a t e l y , t h e inadequacy of the d a t a made a v a i l a b l e . . . o n l y s i x t y - s i x o f t h e one h u n d r e d and t w e n t y - f o u r f i l e d r e p o r t s o f any k i n d " .  120  Use The  one motor t r u c k i n g r a t e r e g u l a t o r t h a t i s s u c c e s s -  f u l l y u s i n g the o p e r a t i n g  r a t i o both t o s e t and evaluate  l e v e l s as w e l l as i n d i v i d u a l s t a t e Commerce Commission. employ the o p e r a t i n g  rate  t r u c k i n g r a t e s i s the U.S. I n t e r The I.C.C. does not,  o f course,  r a t i o e x c l u s i v e l y as a measure o f revenue  need, r a t h e r I t uses i t along w i t h a great d e a l o f s u p p o r t i n g data and o t h e r  information.  Nor i s the I.C.C. the o n l y  t h a t r e l i e s upon t h i s r a t i o as a r e g u l a t o r y t o o l . research  r a t i o , u s u a l l y along w i t h the r a t e o f  r e t u r n c r i t e r i o n , t o judge revenue nmidFcarriers 2 2  Harper's  i n d i c a t e s that most s t a t e u t i l i t y commissions i n the  U.S. employ the o p e r a t i n g  state.  regulator  operating  inter-  The I . C . C , to t h i s w r i t e r ' s knowledge, has never  r e f e r r e d t o the r a t e o f r e t u r n p r i n c i p l e as an i n d i c a t o r o f revenue need f o r motor c a r r i e r s . In Canada, the o p e r a t i n g r a t i o i s sometimes r e f e r r e d to by commissions i n v o l v e d i n c a r r i e r r a t e h e a r i n g s .  To t h i s  w r i t e r ' s knowledge, no statement o f what c o n s t i t u t e s a reasonable o r adequate r a t i o has ever been p u b l i s h e d any  r a t e o r e n t r y case i n t h i s c o u n t r y .  from t h i s t h a t the o p e r a t i n g  as a r e s u l t o f  I t might be concluded  r a t i o i s not accepted as being  very meaningful f o r t r u c k i n g r a t e r e g u l a t i o n i n Canada.  This  c o u l d e a s i l y be understood when one takes i n t o account the l a c k  "D.V. Harper, Economic R e g u l a t i o n o f the Motor Trucking Industry By the S t a t e s , Urbana, U n i v e r s i t y o f I l l i n o i s Press, 1959, PP. 194-19b.  121  of cost  information that  The most f r u i t f u l  approach  c a n be u s e d e f f e c t i v e l y and  r e g u l a t o r s here a r e p r e s e n t e d w i t h .  i t s application.  t o s e e i n g how t h e o p e r a t i n g r a t i o  i s , therefore,  This  to refer  t o t h e I.C.C.  i s one o f t h e t a s k s o f t h e n e x t  chapter.  Since  1943,  been c o n s i s t e n t l y  right  used  up t o t h e p r e s e n t d e c a d e ,  93.0  i n r a t e c a s e s b y t h e I.C.C. a s t h e b e s t  a v a i l a b l e guide f o r j u d g i n g t h e reasonableness o f motor ing freight  rates.  New E n g l a n d , structure o f 93$  "which  the appellants'  rate  p e r cent so as t o e s t a b l i s h an o p e r a t i n g r a t i o appeared  England g e n e r a l revenue "appeared  truck-  I n I n c r e a s e d Common C a r r i e r T r u c k R a t e s I n  t h e Commission r a i s e d  five  has  t o be r e a s o n a b l e " . ^  I n a n o t h e r New  2  93.0  case t h e Commission s t a t e d t h a t  t o be r e a s o n a b l e " i n v i e w  o f the average  conditions 24  c o n f r o n t e d by t h e g r o u p p r o p o s i n g t h e g e n e r a l i n c r e a s e i . y e t a n o t h e r c a s e , t h e I.C.C. r u l e d  that  In  the respondents'  rates  ppr  were e a r n i n g "more t h a n o u t - o f - p o c & e t were m a i n t a i n i n g a 93.0 In view d i v e r s i t y which U.S.  costs"  i n that  r a t i o w i t h the lower  o f the d i v e r s i t y  they  rates.  of the trucking  industry,  was r e v i e w e d t o some e x t e n t i n C h a p t e r  IV,  a the  I n t e r s t a t e Commerce C o m m i s s i o n seems t o have a r r i v e d a t a  23 I n c r e a s e d Common C a r r i e r T r u c k R a t e s M.C.C., p . 21.  24  I n c r e a s e d Common C a r r i e r M.C.C., p . 17.  Truck Rates  i n New E n g l a n d , 43, i i i n New E n g l a n d , 44,  ^ M i n i m u m Weight on T r i s o d i u m Phosphate,  44, M.C.C., p . 408.  122  remarkably p r e c i s e  standard  o f what c o n s t i t u t e s a r e a s o n a b l e  r e l a t i o n s h i p between revenues a n d o p e r a t i n g industry  generally.  Despite  the apologies  w h i c h o f t e n accompany r e f e r e n c e years o f trucking  r a t e cases,  i m p r e s s e d by t h e f a c t to a t t a c h  Itself  The  that  chapter suggests,  it  appears p r e s e n t l y  f a r from being  this  a definitive  prime c o n s i d e r a t i o n  m i n i n g whether t h e r a t e  return  i n f l u e n c i n g f a c t o r s made  rates.  to see that  the operating  r a t i o as  I t m i g h t be s u g g e s t e d level  lies  that  i n deter-  i s compensatory y e t n o n - e x p l o i t i v e  o f 93.0 o r , f o r t h a t m a t t e r ,  fully  continued  years.  o r movements o f t h e c a r r i e r .  A general  any o t h e r  a c e r t a i n general  allocated costs  to the operator.  equitably,  f o r s o many  i n setting a rate  o r might n o t i n d i c a t e that returning  body has  t o be  s o l u t i o n t o the problem o f s e t t i n g  the  routes  twenty  t o be e m p l o y e d i n I.C.C. c a s e s may be q u i t e  r e g u l a t i n g motor c a r r i e r  ing r a t i o  respected  however, t h a t  and  particular  and q u a l i f i c a t i o n s  t o 93.0 i n t h e l a s t  analysis of the various  this  i n this  the o b s e r v e r cannot f a i l  t o one s t a n d a r d  in  costs  o f operation  To t h e r e g u l a t o r ,  level,  cost  i n d i v i d u a l movements a n d r o u t e s  operat-  might  rate  l e v e l was  plus  a certain  whose d u t y s h o u l d  a l l services of the c a r r i e r are being surely specific  over  be  treated  and revenue data r e l a t i n g t o should  be o f g r e a t e r  concern  than the average c o n d i t i o n s  confronted  by a c a r r i e r ,  o r worse  still,  proposing c e r t a i n rate  a group o f c a r r i e r s ,  This p a r t i c u l a r c r i t i c i s m  action.  of the operating  r a t i o as  123  it  has  b e e n e m p l o y e d i n p a s t y e a r s has n o t e s c a p e d  t i o n o f c e r t a i n d i s s e n t e r s t o I.C.C. c a s e s however.  As  one  the a t t e n -  i n recent  years  C o m m i s s i o n e r i n Candy, D r u g s , M o t o r s ,  B a r s , V a l v e s Westbound  Iron  noted:  S y s t e m a v e r a g e e x p e n s e s s u c h a s has been p r e s e n t e d by b o t h r e s p o n d e n t s and p r o t e s t a n t s a r e o f l i t t l e , i f any, p r o b a t i v e v a l u e i n d e t e r m i n i n g the compensatory c h a r a c t e r o f r a t e s on s p e c i f i c a r t i c l e s between p a r t i c u l a r points.26 More r e c e n t l y an  I.C.C. s t a t e m e n t  i n d e e d c o s t d a t a on tinent  r o u t e s and  w o u l d seem t o i n d i c a t e  i n d i v i d u a l h a u l s i s more  to r a t e r e g u l a t i o n than average.of  that per-  system revenues  and  costs. An o p e r a t i n g r a t i o i s t h e r e s u l t o f c o m p a r i n g t h e t o t a l o p e r a t i n g expenses, taxes, l i c e n c e s , w i t h the t o t a l r e v e n u e s r e c e i v e d f r o m a l l r a t e s , some o f w h i c h may be much a b o v e t h e c o s t s t o t h e c a r r i e r , a n d some b a r e l y meeting o r p o s s i b l y below the c o s t s . . . . S i n c e n e i t h e r the average v e h i c l e - m i l e c o s t nor the o p e r a t ing r a t i o o f a c a r r i e r a r e measures o f the c o s t o f h a n d l i n g a n y one s h i p m e n t , t h e c o s t e v i d e n c e n o r m a l l y presented i n rate hearings i s of l i t t l e value i n determining the compensating nature of the a s s a i l e d rates. 2 7  Summary In  t h i s c h a p t e r we  f r o m more t h a n one that  have c r i t i c i z e d  standpoint.  I t has  the o p e r a t i n g  been suggested,  ratio  first,  t h e r e i s some d o u b t a s t o what c o s t i t e m s m i g h t compose  o p e r a t i n g r a t i o and,  secondly,  ^Candy, Drugs, Motors, M.C.C., 1952, p . 727. 2  t h a t i n the extremely  an  diverse  I r o n B a r s , V a l v e s Westbound, -  54,  27 ' I n t e r s t a t e Commerce C o m m i s s i o n , R e p o r t s ,  p.  371.  V o l . 313,  '  1961  '  124  trucking f i e l d the  a ratio  a i d of a great  deal  Finally, ratio  s u c h a s t h i s must be i n t e r p r e t e d o f supporting  i t has been p o i n t e d  with  data. out that an  operating  f o r t h e t r u c k i n g f i r m a s a whole c o u l d be e n t i r e l y  l e a d i n g as t o the p r o f i t a b i l i t y and justness particular analysis,  routes  of rates  o r services o f the c a r r i e r .  the truckers'  return should  mis-  over  In the f i n a l  be no w e i g h t i e r  a con-  sideration  t o t h e r e g u l a t o r than t h e e f f e c t o f h i s r a t e s on  individual  shippers  who may i n many c a s e s be " c a p t i v e " a n d  open t o c e r t a i n e x p l o i t a t i o n .  The  next chapter w i l l  be a n a t t e m p t  ly a t the p o s i t i v e aspects of the operating tool. cost  Some s u g g e s t i o n  ratio  c a n be m e a n i n g f u l a n d a c c u r a t e . accounting  this  light.  Finally,  the operating  p r o c e d u r e s t h a t must be e n g e n d e r e d b y t h e  standardization  can,  the chapter w i l l  stage the t r u c k i n g British  industry  firms  hopefully, explore  i n order to  be b r o u g h t t o  briefly  i n Canada o r , more  C o l u m b i a seems a c t u a l l y t o have a c h i e v e d  ability  industry  An e x a m i n a t i o n o f t h e  and employed by t h e r e g u l a t e d  achieve  regulatory  be made o f what s t a n d a r d i z a t i o n i n  r a t e r e g u l a t i o n b a s e d on a n i n d e x l i k e  regulators  its  r a t i o as a  r e p o r t i n g must be b r o u g h t a b o u t i n t h e t r u c k i n g  before  cost  will  t o l o o k more c l o s e -  to collect  j u s t what  particularly, i n terms o f  and s t a t e a s e t o f standard  costs.  125  CHAPTER THE The  first  ing ratio  as  IMPERATIVE OF  a tool  cost data  f o r measuring the lies  until  the  collected  variations  how  costs  ratio  begin  should  can  be  of value  Depreciation  manner o f c a l c u l a t i o n  to the  under the  recognized cost  United as  the  s e c t i o n was  f o r the o n l y way  necessary,  be  certain  for a  type  load densities,  and  and  same  taken before  trucking rate  specifically  the regula-  the  manner  r e p o r t upon t h e i r c o s t s  capitalization  of cost of c a p i t a l ,  t i o n s w o u l d have t o be  In the  if  change g i v e n c e r t a i n  t h a t must be  i n which a l l t r u c k e r s c o l l e c t  carriers  ac-  regulated.  to formulate  terrain,  t o r would i n v o l v e s t a n d a r d i z i n g v e r y  operation.  of motor  etc.  Another e s s e n t i a l step operating  t o be  o f what c o s t s s h o u l d  i n a p p l i c a t i o n , s u c h as  length of haul,  are  operat-  deal of  i n t e n s i v e l y and,  r e g u l a t o r may  these  of the  profitability  c a r r i e r s who  " y a r d s t i c k s " or standards o f s e r v i c e and  use  i n c o l l e c t i n g a. g r e a t  from the  I n d e e d , c o s t s must be repeatedly  COST STANDARDS  s t e p t o w a r d s d e v e l o p m e n t and  trucking operations curate  VI  policy,  a l l such  approached i n a uniform  of  the considera-  manner by a l l  jurisdictions.  States,  c o s t s and  cost data  have l o n g  cornerstone  of rate r e g u l a t i o n .  added to the  I n t e r s t a t e Commerce  purpose of c o l l e c t i n g c o s t s . i n w h i c h a r a t e c o u l d be  I t was  judged  been  In 1939,  a  Commission  realized  that  noncompensatory,  the  126  e x p l o i t i v e o r p r e j u d i c i a l was  to t e s t the  rate against  s t a n d a r d d e v e l o p e d f o r t h a t p a r t i c u l a r s e r v i c e by  the  a cost  section. In c a s e s when a p r o p o s e d r a t e i s p r o t e s t e d , d a t a on thecost-.dF t r a n s p o r t i n g t h e t r a f f i c a r e r e q u e s t e d f r o m our s t a f f . I f the r a t e c l e a r l y f a l l s below the o u t of-pocket cost i t i s u s u a l l y suspended. 1  The course, the  important that  the  Cost S e c t i o n  necessary cost  aged to r e p o r t cost  d a t a can  f a c t o r of  data.  has  Also,  t h e i r costs be  I.C.C. r a t e r e g u l a t i o n provided  the  the  Commission  c a r r i e r s are  being  i n a s t a n d a r d manner so  c o n t i n u a l l y up-dated, r e v i s e d ,  t e s t p r o p o s e d r a t e s o f c a r r i e r s u n d e r I.C.C.  i s , of  encour-  that  and  with  this  used  to  jurisdiction.  ...A c a r r i e r r e c e n t l y p u b l i s h e d a r a t e f o r a commodity m o v i n g o v e r 1600 m i l e s i n 30,000 pound l o t s . A simple c a l c u l a t i o n i n d i c a t e d t h a t t h e one-way t r i p w o u l d y i e l d $200. o r a b o u t 12 c e n t s p e r v e h i c l e - m i l e . I t was e v i d e n t f r o m s t u d i e s p r e p a r e d by o u r s t a f f t h a t t h e l i n e - h a u l c o s t a l o n e would approximate t w i c e the r e v e n u e y i e l d and a d d i n g t o t h i s f i g u r e t h e t e r m i n a l c o s t and e x p e n s e o f r e t u r n i n g t h e v e h i c l e t o t h e o r i g i n a l point Has-unquestionably non-compensatory. 2  The  I n t e r s t a t e Commission's c o s t  throughout the ing various in The  the  years to f i n d  out-of-pocket  cost  of  operat-  c l a s s e s o f s e r v i c e s p e r f o r m e d by m o t o r c a r r i e r s  thirteen trucking  cost  the  s t u d i e s have aimed  territories  formula used separates t o t a l  of the  United  States.  e x p e n s e s among  line-  Howard P r e a s , The R a t e o f C o s t s i n R a t e m a k i n g , an a d d r e s s g i v e n by t h e I.C.C. C o m m i s s i o n e r b e f o r e t h e N a t i o n a l F r e i g h t T r a f f i c A s s o c i a t i o n , F e b r u a r y 14, 1956, p. 6. 2  Ibid.,  p.  7.  127  haul,  pick-up and d e l i v e r y , b i l l i n g  platform  handling,  of these categories  and a r r i v e s a t a p e r u n i t cost of service.  weight and f o r d i s t a n c e , tion  of reported  studies  distance  of shipping  chapters of t h i s  As a r e s u l t o f t h e c o s t  a c e r t a i n weight over a s p e c i f i e d  t h e s i s , the operating  to the out-of-pocket costs,  costs;  out-of-  accurate.  o f most o f t h e e x a m i n a t i o n o f t h e r e c e n t ratio,  rather  rents,  taxes,  w e l l as a r e t u r n s u f f i c i e n t  i s not d i r e c t l y  to f u l l y  i . e . as a percentage o f the t o t a l  to c o v e r a l l expenses, as  a n d on s p e c i a l t i m e a n d m o t i o n  b y one c l a s s o f v e h i c l e i s f a i r l y  The s u b j e c t  ed  A d j u s t m e n t s a r e made f o r  t h e I.C.C. f e e l s i t s c a l c u l a t i o n o f t o t a l  pocket cost  related  costs,  f o r each  a d j u s t m e n t s b a s e d b o t h on e x a m i n a -  of reporting carriers.  studies,  and c o l l e c t i n g , and  revenue  distributnecessary  i n t e r e s t on i n v e s t m e n t ,  to attract capital.  The c o s t s  c o l l e c t e d b y t h e I.C.C. C o s t F i n d i n g a n d A c c o u n t s B u r e a u c a n be u s e d by t h e m s e l v e s t o e v a l u a t e creases  where  there  proposed r a t e s and r a t e i n -  i s reason t o b e l i e v e a rate  range o f an o u t - o f - p o c k e t  cost.  On t h e o t h e r  A c c o u n t s B u r e a u h a s done s u f f i c i e n t to provide  hand, t h e that  i t i s able  a s e t o f f a c t o r s by which t h e o u t - o f - p o c k e t  for a region  c a n be i n c r e a s e d  o f a 93  p e r cent  operating  The f o l l o w i n g f a c t o r s a r e p r e s e n t e d i n t h e 1966  o f t h e I.C.C. T e r r i t o r i a l  cost  t o a r r i v e a t a f i g u r e o f revenue  n e e d b a s e d on t h e I.C.C. s t a n d a r d ratio.  research  i s i n the  C o s t S t u d y Summary:  version  128  TABLE V PER  CENTS TO INCREASE OUT-OF-POCKET COSTS TO A REVENUE NEED L E V E L  REGION 1. 2. 3. 4. 56. 78. 9. 10. 11. 12. 13.  Central Eastern Central Middle A t l a n t i c Middlewest W i t h i n New E n g l a n d Between New E n g l a n d a n d New C i t y and Beyond Pacific Rocky M o u n t a i n Southern East South South-Central Southwest Transcontinental  Source;  The  PER CENT 17.96 18.18 17-90 17-72 18.01 York 18.33 17.78 17.58 17.49 17.53 17.74 17-74 17-66  I.C.C. B u r e a u o f A c c o u n t s , C o s t o f T r a n s p o r t i n g F r e i g h t By C l a s s I a n d C l a s s I M o t o r Commission C a r r i e r s o f G e n e r a l Commodities 19b5, September, 19bo, p . 7.  fully  distributed  shipment, p e r v e h i c l e m i l e )  cost per unit  ( i . e . p e r cwt., p e r  w h i c h one w o u l d a r r i v e a t when  a d d i n g t h e above p e r c e n t a g e s t o t h e C o s t  Bureau's  out-of-  pocket f i n d i n g s would thus i n c l u d e an a l l o w a n c e f o r r e t u r n on property in  invested.  t h e above f a c t o r s from r e g i o n t o r e g i o n  difference o f t h e U.S.  in availability  of capital  f o r the v a r i a t i o n s i s e x p l a i n e d by the  i n the various  As t h e B u r e a u p o i n t s o u t , t h e v a l u e  total or fully of  Part o f the explanation  d i s t r i b u t e d c o s t , o r as they  " r e v e n u e need",  i s that t h i s provides  call  regions  o f having  a  i t , a figure  "a d e g r e e o f com-  129  p a r a b i l i t y with f u l l y  d i s t r i b u t e d costs  c a r r i e r s when s u c h c o s t s allowance f o r return A l t h o u g h U.S. verting an  included  (as  for rail  t h e y u s u a l l y do)  cost  studies  have p r o v i d e d  to a f u l l y  a l l o c a t e d cost  studies  aim  is total  of  the  levels.  The  out-of-pocket cost  Separate studies  have b e e n done  t o make a d j u s t m e n t s f o r s u c h c o n s i d e r a t i o n s  1.  Variations  2.  V a r i a t i o n s i n d e n s i t y o f shipment per cubic f o o t of space).  i n average running  from  aim  been t o f i n d o u t - o f - p o c k e t c o s t  hundred weight shipped. well  an  means f o r c o n -  o u t - o f - p o c k e t f i g u r e , t h e m a i n e m p h a s i s and  u n i t a t which the  water  i n a l l property".  ( o r b u i l d i n g up)  C o s t B u r e a u has  and  per as  as:  speed. (pounds  (Vi) The  accompanying t a b l e g i v e s  r e s u l t s w h i c h may ments  (see  Table V ) .  Cost Studies use.  have t o be As  the  an  i n d i c a t i o n of  subjected table  i s that  above  they are  able  operator  than s u f f i c i e n t to judge the no  to perform. f o r the  The  to provide  detail,  regulator's  adjustTrucking  a  researcher  service  of course,  to  should  i s more  primary purpose which i s  reasonableness of a r a t e .  such degree of d e t a i l  study  indeed complicated  w i t h a p r e c i s e f i g u r e o f what a c e r t a i n t y p e o f c o s t an  basic  i n d i c a t e s , Motor  a r e most s o p h i s t i c a t e d and  T h e i r value  to the  the  A r e g u l a t o r would need  t o d e t e r m i n e w h e t h e r an  established  I.C.C. B u r e a u o f A c c o u n t s , C o s t o f T r a n s p o r t i n g F r e i g h t by C l a s s I a n d C l a s s I I M o t o r C a r r i e r s o f G e n e r a l C o m m o d i t i e s 1965, September, 1966, Washington, D.C, p. 5.  -  TABLE OUT-OF-POCKET  VI  EXPENSES, SERVICE UNITS AND  OUT-OF-POCKET  UNIT COSTS  FOR COST STUDY CARRIERS FOR STUDY YEAR BROUGHT UP TO CURRENT YEAR  L I N E  Out-ofPocket Expenses  Name Amount Service Units  4 1. L i n e - h a u l C o s t P e r Vehicle-Mile  253,867,974  VehicleMiles  2. L i n e - h a u l C o s t P e r Cwt. M i l e  253,867,974  Cwt.Miles  3. P i c k - u p a n d D e l i v e r y C o s t s P e r 100 l b s .  134,489,535 Cwt.Rec'd. P and D  4.  P l a t f o r m Cost Per l b s . Platformed  100  82,482,553  Cwt.Platformed  5.  B i l l i n g and C o l l e c t i n g Cost P e r Shipment  17,156,419  Shipments Billed  Source:  Out-ofPocket Unit Costs  5  682,674,182 37.187 187,426,161,140  .13545  LEVEL  Ratio i n Study year creases or out-ofdecreases pocket current year costs t o s t u d y y e a r b r o u g h t up to current level- / (col. 5 X c o l . 6)  6  . 1.04341  7  38.801  1.00834  .13658  657,661,140 20.450  .91520  18.716  28.776  1.01679  29.259  20,617,490 83.213  1.03033  85.737  286,638,840  I n t e r s t a t e Commerce Commission, B u r e a u o f A c c o u n t s , C o s t o f T r a n s p o r t i n g F r e i g h t C l a s s I a n d C l a s s I I M o t o r Common C a r r i e r s o f G e n e r a l C o m m o d i t i e s by R e g i o n s o r T e r r i t o r i e s - 19b5, W a s h i n g t o n , D . C , S e p t e m b e r 19bb, P. 27.  by  o  131  o r p r o p o s e d r a t e was compensatory  In  i n a r a n g e w h i c h w o u l d make i t e i t h e r  , non-compensatory, o r e x p l o i t i v e .  s e t t i n g out  Canadian r e g u l a t o r y  to develop a  p u r p o s e s , however, we  I.C.C. A c c o u n t s B u r e a u ' s s t u d i e s . that  any  basis.  c o l l e c t i o n of  cost  cost  f a c t o r s than a p r a i r i e  i s that  collecting  o f how  It  etc,)  ±4  the  purposes, a cost suggested m i g h t be that  for  an  that  sensrice  opinion  our  a  occasion  of  what u n i t s  this  extremely inter-city  as  s i m p l e as unit  s e r v i c e and  the  In  this  operating  way,  ratio  cost-  ?  regulatory  total  operating  w o u l d be  able  operating  costs  revenues f o r a l a r g e  number o f  carriers offering similar  similar vehicle  to  t o o l more d i r e c t l y . and  services  total  to  the  cost  overhead)  total  or very nearly  It i s  i n cost-collecting  a l l o c a t i o n of we  ton-mile,  possible.  to use  the  (including a reasonable  for  region.  studies  (i.e.  thesis that,  thing,  regional  I.C.C. c o s t  term of r e f e r e n c e  m^Svt a p p r o p r i a t e  accounting period.  statement of  done on  or congested  the  at. Also,  s h o u l d be  a type of v e h i c l e  take advantage o f a  aim  s t u d y s h o u l d be  the  f o r one  d e t a i l e d a breakdown a Canadian  team s h o u l d  vehicle-mile,  that  framework f o r  b e n e f i t fi>S«n t h e  I t i s apparent,  d a t a s h o u l d be  Another c o n s i d e r a t i o n  of  can  C l e a r l y , a mountainous t e r r a i n w i l l  different  raise  standard cost  take With  operating  shipper,  a  regulator  132  w o u l d s o o n g a i n a n a p p r e c i a t i o n o f what an a v e r a g e ratio  should be.  Once a s e t o f s t a n d a r d  f o r t h e many t y p e s region, vices  operating  r a t i o s was  compiled  o f common c a r r i a g e b e i n g o f f e r e d i n a  t h e r e g u l a t o r would develop  o f f e r e d by s p e c i f i c  an i n t e l l i g e n c e o f s e r -  c a r r i e r s w h i c h were n o t r e a s o n a b l y  profitable. As  the s i t u a t i o n  when p r e s e n t e d  stands  today,  with a respondent's  a provincial regulator, operating ratio,  s t a n d a r d a g a i n s t which t o judge t h a t percentage  has no  whatever i t  may b e . Again,  i t s h o u l d be e m p h a s i z e d t h a t c o s t  s h o u l d be done n o t on t h e b a s i s o f t h e t o t a l carrier, that  b u t on i t s v a r i o u s s e r v i c e s .  the c r i t i c i s m  famous 93 p e r c e n t  collecting operations of a  I t m i g h t be r e c a l l e d  o f t h e I.C.C. r a t e h e a r i n g s was t h a t t h e ratio  has always been a p p l i e d t o t o t a l  o p e r a t i o n s o f respondents  and. t h a t t o t a l  o p e r a t i o n s c o s t may  be most m e a n i n g l e s s a s a n i n d i c a t o r o f t h e p r o f i t a b i l i t y o f individual  On  r a t e s under  t h e o t h e r hand,  t h e 93 p e r c e n t  s h i p between t o t a l ratio  to the  A s i t has i n v e r y many i n s t a n c e s b y  very astute observers  this  i t w o u l d n o t be w i s e t o d i s r e g a r d  standard from p o s s i b l e a p p l i c a t i o n  Canadian s i t u a t i o n .  ues,  investigation.  been c o n s i d e r e d a r e a s o n a b l e  relation-  o p e r a t i n g c o s t s and t o t a l o p e r a t i n g  s h o u l d be c o n s i d e r e d r e l e v a n t .  i n g q u e s t i o n which does remain i s , o f course,  reven-  The p e r p l e x -  what t o i n -  133  elude  i n a statement of o p e r a t i n g  vious  chapters,  cated  carrier  By  financial  this  c o s t s , the  interest  on  dividends  should  i t w o u l d be  i n c l u d i n g any  e x p e c t e d by  advisable  outside  h i s own  above which a c a r r i e r , Industry  be  nected ratio  a general with  out-of-  c o s t s such  a  as  and  case of  would cease  equity  researcher ratio  operations.  smaller,  i t i s u n l i k e l y that  a p p r e c i a t i o n of the  opportunity  less there  costs  con-  beyond a c e r t a i n o p e r a t i n g  Data •  i n d i c a t e d numerous t i m e s e a r l i e r ,  program designed  f i e l d , and  collecting  study  of B r i t i s h  the  initial  stage  in  t o make C a n a d i a n m o t o r t r u c k i n g r a t e  r e g u l a t i o n a more o b j e c t i v e p r a c t i c e l i e s  types  operation.  level.  As  pilot  i.e. re-  only  growth,  information,  t r u c k i n g , where t h e  staying i n operation  C o l l e c t i o n of Cost  any  earnings,  business.  c a l c u l a t i o n s of the o p e r a t i n g  s o p h i s t i c a t e d u n i t s predominate, will  to e l i c i t  pre-  unsophisti-  expense o f  i n v e s t o r s i n the  i f rational,  s u c h as  and  tangible financial the  in  cost of s t a y i n g i n  effort  With such b a s i c c o s t  formulate  I n any  the  borrowed funds and  financing.  discussed  b r o a d e r meaning i s s u g g e s t e d ;  to j u s t i f y  reason,  pocket data,  As  i t i s most o p t i m i s t i c t o e x p e c t an  t o know h i s f i n a n c i a l  turn s u f f i c i e n t For  costs.  c a r r i e r costs  s p o n s o r e d by  i n l a r g e samples.  the Automotive Transport  C o l u m b i a i n 1967,  of vehicle service.  in getting into  i t was Costs  decided  were t o be  In  the a  Association  to i s o l a t e  two  b r o k e n down u n d e r  134  w e l l d e f i n e d headings tions.  If carriers  o p e r a t e d by iod,  that  f o r t h e two  types of t r a i l e r  could supply a f i g u r e of t o t a l  trailer  c o n c l u s i o n s c o u l d be  combination based  on  combinamiles  o v e r an a c c o u n t i n g p e r -  t o t a l operations costs  relative  to the t r a i l e r combination m i l e .  carriers  responding t o the q u e s t i o n n a i r e c o u l d l a t e r  grouped dards  a c c o r d i n g to annual  c o u l d be d e v e l o p e d  H o p e f u l l y , the  o p e r a t i n g mileage  f o r these groupings.  and The  be  cost  stan-  study  was  d e s i g n e d i n t h e f o l l o w i n g manner:  1.  Two most common t y p e s o f t r a i l e r c o m b i n a t i o n s were selected. A 74-76000 g r o s s v e h i c l e w e i g h t d i e s e l powered tandem a x l e t r a c t o r w i t h a f o r t y f o o t i n s u l a t e d d r y box t r a i l e r was u s e d i n Q u e s t i o n n a i r e "A". Q u e s t i o n n a i r e "B" i n v o l v e d t h e same t r a c t o r h a u l i n g a f o r t y f o o t f l a t deck s e m i - t r a i l e r In the same t y p e o f s e r v i c e .  2.  The c o s t breakdown o f t h e q u e s t i o n n a i r e was b a s e d most c l o s e l y on t h a t e m p l o y e d by t h e U.S. Inters t a t e Commerce C o m m i s s i o n B u r e a u o f A c c o u n t s , C o s t F i n d i n g and V a l u a t i o n R e p o r t , A S i m p l i f i e d Procedure f o r D e t e r m i n i n g C o s t o f H a n d l i n g F r e i g h t by M o t o r C a r r i e r s -1959T T h i s breakdown was e s s e n t i a l l y t h e I.C.C. U n i f o r m S y s t e m o f A c c o u n t s .  3.  A sample o f B r i t i s h C o l u m b i a c a r r i e r s was s e l e c t e d , f o r t y - f i v e i n number. Some c a r r i e r s were s e n t b o t h "A" a n d "B" Q u e s t i o n n a i r e s , w h i l e o t h e r s were s e n t e i t h e r one o r t h e o t h e r . The b a s i s o f s e l e c t i o n o f c a r r i e r s was n o t i n any way s c i e n t i f i c . Circulat i o n depended, f i r s t l y , upon t h e A.T.A.'s p r a c t i c a l o p i n i o n o f w h i c h c a r r i e r s w o u l d be c a p a b l e o f m a k i n g t h e t y p e o f c o s t breakdowns t h e Q u e s t i o n n a i r e s were a s k i n g f o r , and, s e c o n d l y , w h i c h c a r r i e r s w o u l d be w i l l i n g to respond at a l l .  4.  With r e g a r d t o the problem o f f i n a n c i a l c o s t s , the Q u e s t i o n n a i r e s ' , q u e s t i o n 6, s p e c i f i e d " c o s t o f b o r rowed money" o n l y . In t h a t t h o s e d e s i g n i n g t h e q u e s t i o n n a i r e s d i d n o t f e e l any more c o u l d be a s k e d f o r a t t h a t t i m e t h a n t h i s , t h e s t u d y had t o be l i m i t e d i n t h i s r e s p e c t . As t h e t h e s i s s u g g e s t e d  135  i n e a r l i e r chapters, f i n a n c i a l cost o r "cost of c a p i t a l " i s c e r t a i n l y g r e a t e r than s t r a i g h t o u t o f - p o c k e t payments o f i n t e r e s t . On t h e o t h e r hand, were t h e q u e s t i o n n a i r e s t o a s k f o r a n e s t i m a t e o f c o s t o f c a p i t a l from each c a r r i e r , the respondents' ignorance o f a proper c a l c u l a t i o n c o u l d be f a r more damaging t o t h e p r i m a r y a i m w h i c h was t o c o l l e c t a c c u r a t e c o s t i n f o r m a tion. 5.  A n o t h e r a r e a o f s i g n i f i c a n t weakness i n t h i s p i l o t s t u d y c o n c e r n e d q u e s t i o n 10 w h i c h a s k e d f o r a statement o f "Average Overhead Expense p e r M i l e " . It i s d o u b t f u l that the m a j o r i t y o f respondents are s u f f i c i e n t l y advanced i n t h e i r budgetary methods t h a t t h e y w o u l d have a n a c c u r a t e a l l o c a t i o n o f t h e overhead expense d e t a i l e d i n t h e question.  I n o r d e r t o g a i n some a p p r e c i a t i o n o f t h e c a r r i e r s ' degree o f s o p h i s t i c a t i o n  i n c o s t a c c o u n t i n g methods, S e c t i o n  13 o f t h e Q u e s t i o n n a i r e s  d i d a s k some q u e s t i o n s  budgetary  and c o s t a l l o c a t i o n  Questionnaires  regarding  procedures.  "A" a n d "B" were i d e n t i c a l  in a l l  r e s p e c t s but t h e i r headings which i n d i c a t e d the type o f trailer Appendix  combination.'  Questionnaire  "B" i s r e p r i n t e d i n  "A" f o r r e f e r e n c e .  Results The  results  disappointing. with plied to  either  From a t o t a l  o r both  at a l l .  of the trucking cost Questionnaires of forty-five  of the Questionnaires,  Of t h e r e p l i e s ,  provide u s e f u l information.  complete  data:  firms  were  circulated  o n l y twenty r e -  o n l y t h i r t e e n f i r m s were a b l e Nor d i d a l l o f these  provide  136  Questionnaire  1 4 1  t h a n 50,000 m i l e s / a n n u m 50,000 t o 100,000 m i l e s / a n n u m O v e r 100,000 m i l e s / a n n u m Less  Since  the  plete,  t h e r e was  to  statistical  any  for  Nor  was  to  expect anything  study,  i t p o s s i b l e t o do  results  researchers reported British areas  r a t h e r than p e r s o n a l  i s very of the  difficult  two  will  presented,  correlamile.  researched  experience one  the  from  a  trucking - a  by means o f  interviews.  t o make any  conclusions  A brief  study  from of  Tables the  however, does draw a t t e n t i o n t o what  the  study  The  - the  great  operating  a great  v a r i a t i o n s In  trucking industry f o r a region  some c a r r i e r s m i g h t o p e r a t e  others,  cases  manner i n w h i c h  In t h e  Columbia,  situation,  any  i t m i g h t be o p t i m i s t i c  Questionnaires.  expected from the  cost.  while  standards  "interesting" results  a d d e d , t h a t was  incom-  results  however, t o t a b l e  tyf and j f r f f makes t h i s p o i n t most c l e a r . tables are  so  the  change i n c o s t s p e r  I n some r e s p e c t s  more t h a n  i t m i g h t be  questionnaires  the  at  c o n d u c t e d i n a d i v e r s e f i e l d such as  It  data  to subject  to arrive  It i s interesting,  received.  pilot.study  the  between i n d i v i d u a l r e s p o n s e s were i n some  i n c r e d i b l y wide. information  t h i n and  analysis i n order  t i o n between a n n u a l m i l e a g e s a n d variances  7  sense i n attempting  mileage c l a s s e s .  The  so  "B"  3 1 3  ~6~  r e s p o n s e was  no  Questionnaire  "A"  considerable  cost  as  i n mountainous  t r a n s c o n t i n e n t a l l y from  deal of p r a i r i e m i l e s .  would expect  such  In such  B.C., a  discrepancies.  137  A second e x p l a n a t i o n f o r these cost  collecting  itself.  form of communication. and  respondent  what s h o u l d be can  be  results  Questionnaires They do n o t  lies  i n t h e manner o f  are not  permit  the  the  researcher  t o come t o g e t h e r i n o r d e r t o f u l l y asked  provided.  As  f o r nor,  f o r t h a t matter,  clearest  understand  what  a Highway R e s e a r c h B o a r d s t u d y  actually 1961  in  noted:  "The f i e l d d a t a f r o m t h i s s t u d y were o b t a i n e d by i n t e r v i e w e r s who c a l l e d on t h e i n d i v i d u a l m o t o r carriers i t was p r e s u m e d a t t h e s t a r t and l a t e r confirmed t h a t the degree of d e t a i l d e r i v e d c o u l d n o t p o s s i b l y have been o b t a i n e d by m a i l questionnaire."^ This  same s t u d y  t i o n of the accounting to was  found  t h a t o n l y by p e r s o n a l  systems o f the c a r r i e r s  they  examina-  proposed  q u e s t i o n c o u l d the r e s e a r c h e r s d e c i d e whether o r not i t w o r t h w h i l e t o use  the  i n f o r m a t i o n p r o d u c e d by t h e  system.  "The a c c o u n t i n g i n f o r m a t i o n w h i c h was k e p t by many c a r r i e r s was s u c h a s w o u l d r e v e a l t h e p o s i t i o n o f t h e b u s i n e s s a s a whole f o r t o p management, b u t w o u l d n o t show v e h i c u l a r c o s t d a t a . In those c a s e s where a c a r r i e r s r e c o r d s c o u l d n o t be r e l a t e d to s p e c i f i c groups of s i m i l a r v e h i c l e s , t h e i n t e r v i e w was q u i c k l y t e r m i n a t e d . " 5 1  I n t h e A.T.A. s t u d y  we,  as r e s e a r c h e r s , d i d / n o t . t a k e  naive view t h a t a l l c a r r i e r s  circulated  v e h i c u l a r c o s t data needed.  ?H-o v. .r»,. no,..examination ;of c a r r i e r s ' we  could provide  the  the  e  ^Highway R e s e a r c h B o a r d , B u l l e t i n 301, L i n e H a u l T r u c k ing Costs i n R e l a t i o n t o V e h i c l e Gross Weights, N a t i o n a l Academy o f S c i e n c e s , N.R.C., W a s h i n g t o n , D.C, 1961, p . 42. 5Ibid.,  p.  42.  138  c o s t a c c o u n t i n g s y s t e m s was preliminary culated.  done, w i t h t h e e x c e p t i o n o f some  I n t e r v i e w s w i t h two  These l a r g e c a r r i e r s  of the  were c a p a b l e  c o s t d a t a o f the type d e s i r e d and programs t h a t r e p o r t e d such regular basis.  based e s t i m a t e s .  A  cir-  of providing  employed c o s t  accounting  t o o p e r a t i o n a l management on  c i r c u l a t e d c o u l d not,  d i d provide data,  and  a  vast  of those  carriers  some must have b e e n m a k i n g r a t h e r  i l l -  s c r u t i n y of the overhead expense p e r  w o u l d h a v e t o l e a d one  Future  carriers  U n f o r t u n a t e l y , i t appears t h a t the  majority of those who  largest  mile  t o such a c o n c l u s i o n .  Research The  r e s u l t s of t h i s  study,  although  incomplete  and  i n c o n c l u s i v e from the standpoint of s e t t i n g cost standards, represent a beginning and  i n a program t o i n t r o d u c e  accounting accuracy  rates  in British  i n t o the process  Columbia.  First of  and  objectivity  of s e t t i n g  A number o f i m p o r t a n t  t i o n s have b e e n made a l r e a d y a s a r e s u l t  foremost,  of t h i s  g a i n e d by  t h e r e g u l a t o r i s g o i n g t o have t o e n g e n d e r  truck  realizastudy.  the c o - o p e r a t i o n and  t h e t r u c k i n g i n d u s t r y must be  oonfidence  the r e g u l a t o r ,  individually.  d e t e r m i n e t h e i r own  Carriers w i l l  o p e r a t i n g c o s t s and  £or  ( o r impose) r a t h e r  wide-sweeping improvements i n c o s t a c c o u n t i n g p r a c t i c e s the c a r r i e r s  have t o be  r e p o r t on  0n  able  to  them w i t h  accuracy. In  do  order t o provide the cost/mileage  d a t a such  as  139  was  r e q u i r e d i n the A.T.A. study, c a r r i e r s s h o u l d be encourag-  ed to m a i n t a i n a master r e c o r d f o r each type of t r a i l e r comb i n a t i o n operated.  The  imperative of s e g r e g a t i n g s e r v i c e  u n i t s a c c o r d i n g t o the t e r r a i n they operate i n , as w e l l as t h e i r p h y s i c a l d e s c r i p t i o n , i s , of course, obvious. s e g r e g a t i o n s of c o s t data may  be accomplished  These  i n the f o l l o w -  ing manner: 1.  The accounting y e a r of a l l c a r r i e r s should be s t a n d a r d i z e d and s u b d i v i d e d , perhaps, i n t o q u a r t e r s o r months. Cost r e p o r t s should be prepared as o f t e n as p o s s i b l e i n the e a r l y p e r i o d of v e h i c l e c o s t d e t e r m i n a t i o n .  2.  C a r r i e r s c o u l d e a s i l y s e t up l o g s o r expense subl e d g e r s f o r each type of o p e r a t i o n they m a i n t a i n ; i . e . each t r a i l e r combination. A c o n t r o l account would be used as w e l l . There would be no need t o m a i n t a i n a separate account f o r each i n d i v i d u a l t r u c k however.  3.  A l l o p e r a t i n g c o s t s such as f u e l , o i l , t i r e s and maintenance expense can then be charged Into these l o g s , or s u b - l e d g e r s . As mileage Is r e p o r t ed, i t s h o u l d be recorded i n the accounts as w e l l .  4.  As d r i v e r s ' wages s h o u l d vary f a i r l y d i r e c t l y w i t h mileage ( i n f a c t , t h i s i s one p o i n t the cost study d i d make - per m i l e l a b o r c o s t s were f a i r l y cons t a n t ) , a f i g u r e of t o t a l d r i v e r s ' wages c o u l d be taken from such an expense account and a l l o c a t e d among the v a r i o u s t r a i l e r combination accounts a c c o r d i n g t o the mileage t o t a l i n the account a t the end of the a c c o u n t i n g p e r i o d . The same a l l o c a t i o n would apply t o v a r i o u s supplemental employment b e n e f i t s as w e l l .  5.  D e p r e c i a t i o n should not present any o b s t a c l e to t h i s suggested c o s t a c c o u n t i n g program. Many t r u c k i n g f i r m s i n the U n i t e d S t a t e s a l r e a d y dep r e c i a t e on a u n i t s - o f - s e r v i c e b a s i s . The o p e r a t o r must be encouraged t o make a reasona b l e estimate of the t o t a l mileage l i f e of a l l v e h i c l e s i n h i s f l e e t and a l l o c a t e t o t a l dep r e c i a t i o n on t h i s b a s i s . In t h i s case, even  140  i f t h e t r u c k e r had t o u s e a n o t h e r method f o r t a x p u r p o s e s , he w o u l d a t l e a s t have a r e a d y f i g u r e t o use f o r b u i l d i n g up h i s e x p e n s e s p e r m i l e f o r each type of v e h i c l e s e r v i c e . 6.  C e r t a i n c o s t s which are f i x e d i r r e s p e c t i v e of m i l e a g e do p r e s e n t a p r o b l e m f o r t h e c o s t determination system being suggested. The i t e m s termed "overhead" In the Questionnaires, as w e l l as i n s u r a n c e and c e r t a i n l i c e n c e f e e s , a r e comm i t t e d c o s t s a n d must be a l l o c a t e d r a t h e r c a r e f u l l y between t h e v a r i o u s s e r v i c e s u b - a c c o u n t s i n order to a r r i v e at a t o t a l cost per mile over an a c c o u n t i n g p e r i o d . The q u e s t i o n i s , o f c o u r s e , upon what b a s i s w o u l d t h e s e c o s t i t e m s be d i v i d ed? A b a s i c a p p r o a c h m i g h t be t o assume t h a t a l l u n i t s of product of the f i r m ( I . e . the v a r i o u s t y p e s o f t r a i l e r c o m b i n a t i o n m i l e s ) consume e q u a l amounts o f a d m i n i s t r a t i v e , s a l e s , t e r m i n a l and t r a f f i c e x p e n s e and t i m e i n t h e i r p r o d u c t i o n . I n i t i a l l y , t h e r e f o r e , each t r a i l e r combination c o u l d be a l l o c a t e d a p o r t i o n o f t h i s o v e r h e a d p r o p o r t i o n a t e t o t h e number o f m i l e s i t o p e r a t e d by t h e end o f t h e a c c o u n t i n g p e r i o d . If this ass u m p t i o n was wrong, t h e c a r r i e r c o u l d l e a r n f r o m o b s e r v a t i o n and e x p e r i e n c e what a more e q u i t a b l e d i s t r i b u t i o n would be. I n h a v i n g t o r e l y on o b s e r v a t i o n t o s e t up p r o p e r o v e r h e a d a l l o c a t i o n , t h e t r u c k e r i n o u r c a s e w o u l d be no d i f f e r e n t from the manufacturer t r y i n g t o a l l o c a t e o v e r h e a d among v a r i o u s p r o d u c t s o r t h e d e p a r t m e n t s p r o d u c i n g them. The m a i n d i f f e r e n c e i s , o f c o u r s e , t h a t the manufacturer u s u a l l y a l l o c a t e s overhead p r o p o r t i o n a t e l y w i t h d i r e c t l a b o r c o s t , w h i l e we a r e s u g g e s t i n g t h e t r u c k e r a l l o c a t e on a p e r m i l e b a s i s as h i s m e a s u r e o f a c t i v i t y .  7.  The c o s t o f c a p i t a l , i n c l u d i n g any d i r e c t f i n a n c i n g c o s t s i n c u r r e d by t h e t r u c k e r o n c e c a l c u l a t e d , w o u l d h a v e t o be t r e a t e d as an o v e r h e a d i t e m and a l l o c a t e d among t h e v a r i o u s t r a i l e r c o m b i n a t i o n s as o v e r h e a d . The manner o f c a l c u l a t i n g c o s t o f c a p i t a l , as d i s c u s s e d p r e v i o u s l y , i s a p r o b l e m o f a scope beyond t h i s t h e s i s . In o r d e r  that  i s being  will  h a v e t o be  reports  that  t o compile the  discussed  here,  the  type of v e h i c l e cost smaller  encouraged to i n c r e a s e  they are  presently  using.  the  fleet  data  operators  number o f  Three b a s i c  cost neces-  TABLE V I I QUESTIONNAIRE  "A"  Less  50,000  than miles 1 Reply  50,000  Item Number o f V e h i c l e s i n F l e e t Average Mileage Operated Average A c q u i s i t i o n P r i c e Basis of Depreciation Average A m o r t i z a t i o n Period P r o j e c t e d Average R e s i d u a l Value  16 3.6000 3.8100  t o 100,000 m i l e s p e r annum Minimum Maximum M e d i a n 8.0000 3.3000 St.Line  St.Line  10  9.3000 4.1000 St.Line  8.4000 3.6200 St.Line  7000  1.0800  1.0110  7000  0.1070 0.0350  0.0450 0.0100  1.0000 0.0520  0.8230 0.0251  0.0328 0.0072  0.0670  0.0660  0.0700  0.0685  0.0720  0.0480  0.0173  0.0300  0.0225  0.0150  0.1050  0.0848 0.0070  N/R 0.0145  0.1255  0.0555 0.0104 0.1200  0.6673  0.0180 0.1280 0.0450  0.1115 0.0170  N/& 0.0162 0.1560 0.2148  Total  0.5530  0.3586  1.5390  1.1961  0.0848  0.0848  1.6238  1.2809  Costs  Estimate of V e h i c l e Maintenance f o r those not a b l e to supply a cost f i g u r e (same f i g u r e a s minimum) Total  Costs Per Mile  3.2518 7  3810  V e h i c l e (-{-trailer) D e p r e c i a t i o n Expense Average Cost o f C a p i t a l Average F u e l , O i l , Grease Expense Average T i r e and T i r e Maintenance Expense Average V e h i c l e Maintenance E x p e n s e - Own Shop Average Insurance Expense Average Labor Expense Average Overhead Expense of Reported  O v e r 100,000 m i l e s p e r annum  0.3586  0.5530  0.1170  O.3544  0.6673  N o t e : 1. F i r m s a r e d i v i d e d i n t o t h r e e g r o u p s a c c o r d i n g t o t h e i r r e p o r t e d a v e r a g e m i l e a g e o p e r a t e d by v e h i c l e s . 2. Where a number o f c a r r i e r s r e p o r t e d w i t h i n one m i l e a g e c l a s s , t a b u l a t i o n s o f minimum;:and maximum c o s t s were made. T h e minimum p e r t a i n s t o t h e f i r m f o r a c o s t item reported the l e a s t . T h e maximum p e r t a i n s t o t h e f i r m f o r a c o s t i t e m r e p o r t e d the h i g h e s t . M e d i a n c o s t s were c o m p i l e d a s w e l l i n t h i s c a s e - t h e m e d i a n s i m p l y b e i n g t h e m i d d l e f i r m ' s c o s t s . . ,cont. "d. J  TABLE V I I I  ro  QUESTIONNAIRE "B" Item  L e s s t h a n 50,000 m i l e s Minimum Maximum M e d i a n  50,000 t o 100,000 m i l e s 1 Reply  Number o f V e h i c l e s i n F l e e t Average M i l e a g e Operated Average A c q u i s i t i o n P r i c e Basis of Depreciation Average A m o r t i z a t i o n P e r i o d P r o j e c t e d Average R e s i d u a l Value Vehicle (+trailer) Depreciat i o n Expense Average C o s t o f C a p i t a l Average F u e l , O i l , Grease Expense Average T i r e and T i r e Maintenance Expense Average V e h i c l e Maintenance Expense Average Insurance Expense Average Labor Expense Average Overhead Expense Total of Reported Costs  2.0000 4.3000 3.60000 8437 3.3000 1.8000 St.Line St.Line St.Line  2000  12.3000 17.5000 15.0000 3.0539 3.4390 3.3500 N/R N/R  N/R N/R  N/R N/R  3318  1.3960  2.1000  2.4000  2.3350  0.0300 0.0810 0.0382 0.0180 0.0347 0.0316  0.0380 0.0124  0.0302 0.0070  0.0434  0.0312  0.0470 0.0670 O.O650  0.0597  0.0700  0.0839 0.0720  0.0090 0.0480 0.0321  0.0060  0.0016  0.0150  N/R 0.2280 N/R 0.0100 0.0227 0.0180  0.0318 0.0046 0.0236 0.1740  0.0555 0.0104  0.0740 N/R 0.0224 0.0273  0.3501  0.1906 0.9263 0.4800  N/R  4650  2.9000 St.Line  O v e r 100,000 m i l e s Minimum Maximum M e d i a n  N/R  0.0450 6.0646  N/R N/R  0.3870 0.3180 0.1849  N/R  0.0159  0.0087  N/R  N/R  N/R  N/R  0.6740 0.3544  Estimate o f Expenses not Reported C o s t o f C a p i t a l (same a s m i n . ) T i r e & T i r e M a i n t e n a n c e (same as min.) V e h i c l e M a i n t e n a n c e (minimum) L a b o r (same a s Q u e s t i o n n a i r e  "A")  O v e r h e a d (minimum)  0.0070 0.2280 0.2280 0.1280 0.1280  0.0450  0.0016 0.0555 0.1200 0.1200 0.1200  0.5150 0.6740 0.4579 0.3501 0.3106 1.0463 0.6641 Total Costs Per Mile N o t e : ( c o n t ' d . ) 3. T o t a l r e p o r t e d c o s t s were t o t a l l e ' d T 4. I n o r d e r t o p r o v i d e a c o m p l e t e s e t o f c o s t s i n e a c h c a s e , c e r t a i n f i g u r e s h a v e b e e n " p l u g g e d i n " f o r t h o s e i t e m s where no c o s t was r e p o r t e d . V a r i o u s f i g u r e s were u s e d a s t h e t a b l e s i n d i c a t e .  143  sities,  a s s u g g e s t e d by Mr.  Private Truck C o u n c i l of  P.G.  Anderson,  a member o f  the  America,^are:  1.  Truck Defect Card  - u s e d f o r shop o r d e r and p a r t s and l a b o r u s e d (on i n d i v i d u a l vehicles).  2.  Periodic Truck Report  - u s e d f o r accumulating cost of each v e h i c l e ; - a l s o t o a c c u m u l a t e c o s t s by c l a s s i f i c a t i o n f o r groups of v e h i c l e s ( o r as e n t i t l e d here, " t r a i l e r combinations").  3.  D a i l y Garageman's - u s e d f o r f u e l a n d o i l d i s p e n s i n g Report and m i l e a g e d r i v e n by i n d i v i d u a l vehicles. To  pense and  convince the s m a l l e r o p e r a t o r that  effort  o f p r e p a r i n g forms  and  hiring  the e x t r a staff  ex-  t o main-  t a i n a system o f d a t a g a t h e r i n g (and t o t a l l i n g i n f o r m a t i o n from t h e s e forms  at periodic  intervals) i s , in itself,  v a l u a b l e e x e r c i s e f o r him a s w e l l a s f o r h i s r e g u l a t o r n o t be a t a l l e a s y . r e g u l a t o r and  amount o f c a j o l i n g by  Quite frankly,  initiate.  will the the  a c o s t a c c o u n t i n g system, a l -  i n the small operator's best I n t e r e s t  long run, w i l l to  i s any  trucking a s s o c i a t i o n going to accomplish  task overnight. though  Nor  a  i n t h e medium  be a n e x p e n s i v e a n d b o t h e r s o m e h e a d a c h e t o Quite a s e l l i n g  p o s i t i v e p o i n t s which  might  be  effort  will  stressed  be c a l l e d  for'.  him The  i n e n c o u r a g i n g manage-  ment, however, a r e :  C a n a d i a n I n d u s t r i a l T r a f f i c League, I s s u e No. 4210, November 27, 1964, p . 5. D  and  "Traffic  Notes",  144  1.  D e t a i l as t o i n d i v i d u a l v e h i c l e s o r even groups of v e h i c l e s w i l l show the o p e r a t o r immediately where p o s s i b l e d e f a l c a t i o n s o r i n e f f i c i e n c i e s by h i s d r i v e r s and s t a f f a r e h u r t i n g him.  2.  The same d e t a i l w i l l p o i n t out where h i s most p r o f i t a b l e business l i e s .  3.  The cost r e p o r t s he i s s u p p l i e d with w i l l g i v e him b e t t e r o n - l i n e " c o n t r o l over h i s o p e r a t i o n s ; i . e . he w i l l be a b l e t o see and analyze r e s u l t s f a r c l o s e r t o that time when the a c t i v i t i e s which produce h i s e v e n t u a l r e s u l t s (the annual P r o f i t & Loss Statement) o c c u r . C o r r e c t i v e and/or r e i n f o r c i n g a c t i o n can be taken immediately.  4.  A more s p e c i f i c c o n s i d e r a t i o n concerns w a r r a n t i e s . C o l l e c t i o n o f money due from manufacturers o f equipment would be g r e a t l y f a c i l i t a t e d i f the purchaser had a r e c o r d , i n some d e t a i l , o f what he had t o spend 6n h i s i n d i v i d u a l v e h i c l e s a t v a r i o u s mileage l e v e l s . As a summary t o t h i s s e c t i o n , r e f e r e n c e might be  made t o the remarks o f the aforementioned Mr. P.G. Anderson, D i r e c t o r o f S a f e t y , Q u a l i t y Bakers o f America, b e f o r e the  25th Annual Meeting, P r i v a t e Truck C o u n c i l o f America Inc., March 11, 1964: " J u s t i f i c a t i o n f o r Compiling Cost Data" (by v e h i c l e or v e h i c l e type) - "Having determined the c o s t d a t a we want, j u s t i f y i n g the expense and e f f o r t o f c o l l e c t i n g and c o m p i l i n g it  s h o u l d be done not o n l y t o o u r s e l v e s but t o the Accounting  Department.  In g e n e r a l , a c c o u n t i n g departments  both t h e i r s t a f f and expenses  t o a minimum.  s t r i v e t o keep  When asked f o r  a d d i t i o n a l data, t h e i r u s u a l r e a c t i o n i s "we don't have the h e l p " o r " i t ' s going t o c o s t t o o much".  Because t h e i r h e l p  and c o - o p e r a t i o n i s needed t o produce the c o s t statements,  145  t h e y m i g h t be t i o n s on  how  asked i n s t e a d f o r t h e i r ideas the  cost  information  what t h e y e s t i m a t e t h e pared to the should,  total  fleet  e x p e n s e on  involved.  I t i s our  vehicular cost  to over ten per  and  t h e n be  f i v e per  t h a t an  c o l l e c t e d f o r the  experience that  d a t a can  can  and com-  a percentage b a s i s .  r a n g e between two  i s being  recommenda-  developed  This  p e r c e n t a g e o f expense I n d i c a t e s  amount o f d e t a i l  five  expense t o be.  i n most c a s e s ,  A higher  m i g h t be  and  r e s u l t i n reducing 7  cent.  excessive  number o f  compiling  It  and  truck  vehicles  using  expense  from  cent."  Summary Perhaps the been t o p r o v i d e contrast  the  main purpose s e r v e d  r e a d e r w i t h an  l e v e l s and  to compilation standards.  For  it  would appear t h a t  an  established determination  actually  at  Chapter  of  the  has  stark  Canadian s o p h i s t i c a t i o n  and  knowledge o f t r u c k i n g  cost  the  purpose of r e g u l a t i o n of  rates,  I n t e r s t a t e Commerce C o m m i s s i o n  has  s y s t e m more d e t a i l e d t h a n i s  necessary. In B r i t i s h  t o be  the  this  appreciation  e x i s t i n g between A m e r i c a n and  with regard  by  Columbia,  least typical  program f a i l e d observer that  Ibid.,  o f any  to derive even the  p.  6.  a Province  felt  by  Canadian Province,  this  a crude  r e s u l t s which would c o n v i n c e  trucking  industry  itself  writer  can  pilot  any  generally  146  provide  accurate  It accurate o f any  vehicular cost  i s this writer's  vehicular cost  data w i l l  to judge the  existing freight take the  i n the  it  cost  rates.  same a p p r o a c h and  to provide  l i g e n c e can type of  be  this  a body may  has  some s t a n d a r d  costs  or u t i l i t y  unfortunately,  the  cost  shown Trans-  carriers  r e g u l a t o r must  some  possibly  There i s simply kind  no  of  are  collect  to operate a  type of route,  i n general  suggestion  rate  i s too  financial ratio  to the  the  or,  results  was  Intelgiven  subject  equitable  rate unless  made t h a t  revenues i s not  trucking rates  t r u c k i n g f i r m too  "total"  or  regulator  a continuous basis, u n t i l  to operating  for railway  respect  on  regula-  it  to guide i t s t h i n k i n g .  f o r judging  dividual  rate  Once t h e  s i t i n judgement o f any  a criterion  industry  Columbia.  conditions.  In C h a p t e r V of o p e r a t i n g  trucking  foundation  d e s i g n e d f o r the Automotive  service over a given  way  the  of  same breakdown as  made o f what I t s h o u l d  to c e r t a i n other  a  have t o be  the  information,  in fact  compilation  I t i s suggested that a  questionnaire  repeatedly,  try,  that  reasonableness of proposed  port A s s o c i a t i o n of B r i t i s h able  opinion  program d e s i g n e d t o improve the  tor's a b i l i t y  could  data.  structures. diverse,  the  as  as  a  ratio  suitable  i s a rate of The  trucking  return indus-  s e r v i c e s of the  p e c u l i a r to themselves to  in-  permit  t o have c o m p a r a b l e m e a n i n g f o r  indeed, o f an  t o have any  individual  meaning  the  with  s e r v i c e performed  by  147  the f i r m . has  This i s not t o say that the " t o t a l "  n o t p l a y e d a major r o l e  i n American  tion.  O b j e c t i o n s t o i t s f u r t h e r use,  voiced  s t r o n g l y today.  operating  ratio  trucking rate regula-  however, a r e b e i n g  What must be s t r i v e d f o r i s a s t a n d a r d w h i c h c a n be a p p l i e d t o t h e s i m i l a r i t i e s w h i c h do e x i s t These s i m i l a r i t i e s , examination  o f course,  a r e going t o appear only as  i s made o f t h e i n d i v i d u a l a s p e c t s o f t r u c k i n g -  the r o u t e s , the s e r v i c e s , carried,  i n this industry.  etc.  t h e t y p e s o f equipment, t h e c a r g o  To a p p l y t h e o p e r a t i n g r a t i o  to activities  with  common d e n o m i n a t o r s s u c h a s t h e s e w o u l d make a g r e a t d e a l o f sense. going  To a p p l y  i t t o a n y conglomeration,'  t o produce m i s l e a d i n g r e s u l t s ,  activities various  will  Clearly,  i t i s being  o r by t h e t y p e  kind of t e r r a i n . this  stage,which  suggested  standard  types o f s e r v i c e  type  that the  be c o m p a r a b l e .  r e g u l a t o r should develop  vehicle  f o r a s more a n d more  a r e grouped, t h e s m a l l e r i s t h e l i k e l i h o o d  syntheses  individual  of activities i s  that a trucking rate  "operating r a t i o s " f o r  - w h e t h e r t h e y be c l a s s i f i e d by o f cargo  t h e y c a r r y a n d i n what  The i n g r e d i e n t w h i c h i s s a d l y l a c k i n g a t would permit  certain ratios  is  knowledge o f t h e c o s t s o f o p e r a t i n g t h e s e  As  t h i s Chapter  has attempted  t o p o i n t out,  t o be  types o f s e r v i c e s . detailed costs of  o p e r a t i o n c a n o n l y be p r o v i d e d b y t h e c a r r i e r s In o r d e r t o p r o v i d e t h e n e c e s s a r y  developed,  t h a t i n c u r them.  cost data, the c a r r i e r s  them-  s e l v e s must be e n c o u r a g e d t o i n i t i a t e  relatively  d e t a i l e d v e h i c u l a r cost accounting systems. sales effort  i s called  and t h e t r u c k i n g  f o r on t h e p a r t  associations.  of the  simple yet  A substantial regulators  149  APPENDIX "A" UNIVERSITY OP B R I T I S H COLUMBIA CONFIDENTIAL QUESTIONNAIRE  THIS QUESTIONNAIRE  -B  RELATES ONLY TO:  A 74-76,000 G.V.W. DIESEL-POWERED TANDEM AXLE TRACTOR WITH A 40' F L A T DECK SEMI TRAILER USED IN OTHER THAN MAINLANDVANCOUVER ISLAND OPERfiTlW THEREFORE PLEASE F I L L IN THE FOLLOWING INFORMATION: ( T h e o b j e c t i v e i s t o l e a r n y o u r c o s t p e r m i l e f o r t h e above c l a s s of v e h i c l e service) 1. NUMBER OF VEHICLES OP THIS SERVICE CLASS IN YOUR F L E E T IN THE LAST ACCOUNTING YEAR 2. TOTAL MILEAGE OPERATED IN THE LAST ACCOUNTING YEAR (To n e a r e s t t h o u s a n d ) BY A L L VEHICLES IN THIS CLASS OF SERVICE 3. DEPRECIATION (A)  INFORMATION:  BASIS OF DEPRECIATION  (Straight line, D e c l i n i n g balance, etc.) POWER UNIT TRAILER  (B)  AVERAGE IN  (C)  FLEET  AVERAGE  AMORTIZATION  PERIOD OF THE  74-76,000 G.V.W. VEHICLES PRESENTLY IN  (D)  ACQUISITION PRICE OF THE  74-76,000 G.V.W. VEHICLES PRESENTLY  FLEET  PROJECTED AVERAGE RESIDUAL VALUE OF THE 74-76,000 G.V.W. VEHICLES PRESENTLY IN F L E E T  (E) V E H I C L E DEPRECIATION EXPENSE PER MILE ( A v e r a g e f o r 74-76,000 G.V.W. Vehicles presently i n Fleet) 4. AVERAGE  COST OF CAPITAL PER MILE PER  74-76,000 G.V.W. V E H I C L E IN F L E E T (or,  C o s t o f B o r r o w e d Money)  5. AVERAGE FUEL' OIL' AND GREASE EXPENSE PER MILE PER 74-76,000 G.V.W. V E H I C L E IN F L E E T  POWER UNIT  TRAILER  150 - 2 6. AVERAGE T I R E AND T I R E MAINTENANCE EXPENSE PER MILE PER 74-76,000 G.V.W. V E H I C L E IN F L E E T  POWER UNIT  TRAILER  7. AVERAGE V E H I C L E MAINTENANCE EXPENSE PER MILE PER 74-76,000 G.V.W. V E H I C L E IN F L E E T ( T o i n c l u d e : (a) P a r t s ( b ) L a b o u r (c) Garage Overhead) 8. AVERAGE INSURANCE EXPENSE PER MILE PER 74-76,000 G.V.W. VEHICLE IN F L E E T (CARGO INSURANCE INCLUDED) 9. AVERAGE LABOUR EXPENSE PER MILE PER 74-76,000 G.V.W. V E H I C L E IN F L E E T ( T o i n c l u d e o p e r a t o r ' s wages, f r i n g e b e n e f i t s , statutory contributions) 10. AVERAGE OVERHEAD EXPENSE PER MILE PER 74-76,000 G.V.W. V E H I C L E IN F L E E T ( T o i n c l u d e expenses o f t e r m i n a l , s a l e s , t r a f f i c , a d m i n i s t r a t i o n , property taxes, power, a n y r e n t a l on s t r u c t u r e s o r on f i x e d e q u i p m e n t , p r o p e r t y i n s u r a n c e on s t r u c t u r e s a n d f i x e d equipment, d e p r e c i a t i o n on s t r u c t u r e s a n d f i x e d e q u i p m e n t , g e n e r a l maintenance, a m o r t i z a t i o n o f improvements on l e a s e h o l d s , e t c . ) 11. LICENCE EXPENSE PER MILE  12. GENERAL INFORMATION (a) We  T h i s i n f o r m a t i o n w i l l be i n s e r t e d by the Accounting Analyst.  (Please  check a p p r o p r i a t e  space)  OWN THESE POWER UNITS LEASE  (b) We  OWN THESE TRAILERS LEASE  ( c ) We  OWN LEASE  (d) We  THE TIRES FOR THIS EQUIPMENT  DO OURSELVES ( HIRE OUT  (  ) THE VEHICLE MAINTENANCE FOR THIS EQUIPMENT )  151  13.  5  -  BUDGETING AND COSTING ( a ) B u d g e t i n g , e s p e c i a l l y o f o p e r a t i n g o v e r h e a d , must o c c u r i f one i s t o d e t e r m i n e a f u l l c o s t p e r v e h i c l e m i l e . F o r e a c h c l a s s o f s e r v i c e o f f e r e d by y o u r company ( s u c h a s t h e 7 4 - 7 6 , 0 0 0 G.V.W. w i t h b o x t r a i l e r ) , do you p r e p a r e a budget f o r : (a) E x p e c t e d L a b o u r e x p e n s e YES ( ) NO ( (b) E x p e c t e d v e h i c l e t e n a n c e expense  main-  (c) Expected o p e r a t i n g head  YES (  ) NO (  overYES (  ) NO (  What i s t h e l e n g t h o f y o u r b u d g e t a r y p e r i o d (b)  (c)  I f t h e a n s w e r t o e a c h q u e s t i o n i s YES, i s e a c h above e x p e n s e n o r m a l l y computed p e r 7 4 - 7 6 , 0 0 0 G.V.W. v e h i c l e - m i l e ? YES (  ) NO (  Do y o u have c o s t r e p o r t s t h a t g i v e y o u y o u r c o s t p e r 7 4 - 7 b , 0 0 0 G.V.W. v e h i c l e m i l e f o r :  CONFIDENTIAL  (1)  Labour  YES (  ) NO (  (2)  V e h i c l e Maintenance  YES (  ) NO (  Q u e s t i o n n a i r e completed by COMPANY OFFICIAL ADDRESS TELEPHONE NUMBER  152  BIBLIOGRAPHY 1.  A i t c h i s o n , C.B., F a i r Reward a n d J u s t C o m p e n s a t i o n , Common C a r r i e r S e r v i c e - S t a n d a r d s U n d e r t h e I n t e r s t a t e Commerce A c t , W a s h i n g t o n , D.C., A s s o c i a t i o n o f I n t e r s t a t e Commerce P r a c t i t i o n e r s , 1954.  2.  American T r u c k i n g  3.  Bonbright, J . C , P r i n c i p l e s of Public U t i l i t y Columbia U n i v e r s i t y Press, 19bl.  4.  Canadian Imperial  5.  Canadian I n d u s t r i a l T r a f f i c 4210, November 27, 1964.  League,  6.  Canadian I n d u s t r i a l T r a f f i c  League  7.  C a n a d i a n R o y a l Commission  8.  Canadian T r a n s p o r t a t i o n Act (R.S.C,  9.  C o m p e t i t i o n , R e g u l a t i o n a n d The P u b l i c I n t e r e s t I n t h e M o t o r C a r r i e r I n d u s t r y , Washington, D . C , U.S. Government P r i n t i n g Office, 195b.  10.  C u r r i e , A.W., Economics o f Canadian T r a n s p o r t a t i o n , Toronto,University of Toronto Press, 1959.  11.  Day, H.J., M o t o r C a r r i e r s - A c c o u n t i n g a n d C o s t C o n t r o l System, T r a f f i c S e r v i c e C o r p . , W a s h i n g t o n , 1949.  12.  Domestic Land and Motor T r a n s p o r t a t i o n , P r o g r e s s Report o f the Committee on I n t e r s t a t e a n d F o r e i g n Commerce, S e n a t e R e p o r t No. 1039, 82nd C o n g r e s s , 1 s t S e s s i o n , W a s h i n g t o n , D.C., 1951.  13.  F r e a s , Howard, The R o l e o f C o s t s i n R a t e m a k l n g , T r a f f i c A s s o c . , F e b . 14, 195b.  14.  H a r p e r , D.V., E c o n o m i c R e g u l a t i o n o f t h e M o t o r T r u c k i n g I n d u s t r y by t h e S t a t e s , U r b a n a , U n i v e r s i t y o f I l l i n o i s P r e s s , 1959.  15.  Highway R e s e a r c h B o a r d , B u l l e t i n 301, L i n e H a u l T r u c k i n g C o s t s i n R e l a t i o n t o V e h i c l e G r o s s W e i g h t s , N a t i o n a l Academy o f S c i e n c e s , N.R.C., W a s h i n g t o n , D . C , 196l.  16.  H o r n g r e n , C J . , A c c o u n t i n g f o r Management C o n t r o l , P r e n t i c e - H a l l , Englewood C l i f f s , N.J., 19b5.  Assoc., Inc., Trends, Washington,  Bank o f Commerce, May  1967  1956.  R a t e s , New Commercial  "Traffic  Notes",  York, Letter.  Issue  N o t e s , F e b r u a r y 12,  No.  1965.  on T r a n s p o r t a t i o n , V o l . I l l , 1961.  1952,  as amended  1967).  2nd  National  Ed.,  Freight  153 BIBLIOGRAPHY  17.  (Cont'd)  Hudson, W.J., a n d C o n s t a n t i n , J.A., M o t o r T r a n s p o r t a t i o n P r i n c i p l e s a n d P r a c t i c e s , N.Y., N.Y., R o n a l d P r e s s I n c . ,  1958.  18.  I.C.C. B u r e a u o f A c c o u n t s , C o s t o f T r a n s p o r t i n g F r e i g h t byC l a s s I and C l a s s I I M o t o r C a r r i e r s o f G e n e r a l C o m m o d i t i e s 1965, S e p t . 19bo, W a s h i n g t o n , D.C.  19.  U.S. I n t e r s t a t e Commerce C o m m i s s i o n B u r e a u o f A c c o u n t s , C o s t F i n d i n g and V a l u a t i o n R e p o r t , A S i m p l i f i e d P r o c e d u r e f o r D e t e r m i n i n g C o s t o f H a n d l i n g F r e i g h t b y M o t o r C a r r i e r s - 1959.  20.  I n t e r s t a t e Commerce Commission, B u r e a u o f A c c o u n t s , C o s t o f T r a n s p o r t i n g F r e i g h t by C l a s s I and. C l a s s I I M o t o r Common C a r r i e r s o f G e n e r a l C o m m o d i t i e s , W a s h i n g t o n , D.C., September,  .1966. 21. ,22.  I n t e r s t a t e Commerce Commission, O r d e r No. 34816, I n c r e a s e d Minimum C h a r g e s Between P o i n t s i n C e n t r a l S t a t e s , A p r i l 26", 1967. Interstate  Commerce Commission,  R e p o r t s , V o l . 313,  1961.  23.  Kahn, F.R., P r i n c i p l e s o f M o t o r C a r r i e r R e g u l a t i o n , Wm. 1 Brown Co., Dubuque, l a . , 1956 .  24.  K a y s e n , C , and T u r n e r , D.F., A n t i t r u s t P o l i c y : An E c o n o m i c and L e g a l A n a l y s i s , Howard U n i v e r s i t y P r e s s , Cambridge, 1959.  25.  Knappen,  L.S.,  "The T r a n s i t  53, P.U.F., 485  Operating Ratio  C.  - A n o t h e r View",  (1953).  26.  L o c k l i n , D.P., E c o n o m i c s o f T r a n s p o r t a t i o n , I r w i n I n c . , 1960.  27.  Moody's T r a n s p o r t a t i o n a n d U t i l i t i e s  28.  N e l s o n , R.A., "Pegrum on t h e E c o n o m i c B a s i s o f P u b l i c P o l i c y f o r M o t o r T r a n s p o r t " , L a n d Economics,' V o l . X X V I I I , A u g u s t , 1952.  29.  N e l s o n , R.A.. "The E c o n o m i c s o f S c a l e I n t h e T r a n s p o r t t r y : A R e p l y " , L a n d E c o n o m i c s , V o l . XXXV, May, 1959.  30.  O i , W.Y., a n d H u r t e r , A.P., E c o n o m i c s o f P r i v a t e T r u c k T r a n s p o r t , W.C. Brown & Co., N o r t h w e s t e r n U n i v e r s i t y , 1905.  31.  Pegrum, D.F.,  Manuals,  R.D.  1965,1966.  P u b l i c R e g u l a t i o n o f B u s i n e s s , R.D.  Homewood, 111., 32.  Chicago,  Indus-  Irwin Inc.,  Rev. EdT, 19fc>5.  Pegrum, D.F., The E c o n o m i c B a s i s o f P u b l i c P o l i c y f o r M o t o r T r a n s p o r t , P.U.F., A u g u s t , 1952, V o l . X X V l l l .  154 BIBLIOGRAPHY  (Cont'd)  33.  P h i l l i p s , C P . , The Economics o f R e g u l a t i o n , Homewood, 111., R.D. Irwin Inc., 19b5.  34.  Q u i r i n , G. David, The C a p i t a l Expenditure D e c i s i o n , Toronto, R.D. Irwin Inc., l^bTT  35.  Roberts, M.J., "Some Aspects of Motor C a r r i e r C o s t s : Firm S i z e E f f i c i e n c y and F i n a n c i a l Health", Land Economics, V o l . XXXII, No. 3, August, 1956.  36.  Small-eBusiness A d m i n i s t r a t i o n , Motor C a r r i e r s - F i n a n c i a l S t r u c t u r e , December, 1956.  37.  S i m p l i f i e d Procedure f o r Determining Cost o f Handling F r e i g h t by Motor c a r r i e r s , Bureau o f Accounts Cost F i n d i n g and V a l u a t i o n , I . C . C , 1959.  38.  Smyth, J.E., and Soberman, D.A., The Law and Business Administ r a t i o n i n Canada, Toronto, P r e n t i c e - H a l l of Canada, 1900.  39.  T a f f , C.A., Commercial Motor T r a n s p o r t a t i o n , Rev. Ed., 1961, R.D. Irwin, Homewood, 111.  40.  T r o x e l , E., Economics of P u b l i c U t i l i t i e s , N.Y., 1945.  41.  Wright, A., "The Operating R a t i o - A Regulatory T o o l " , P u b l i c U t i l i t i e s F o r t n i g h t l y , V o l . 24, 1953.  42.  Wilcox, C , P u b l i c P o l i c i e s Towards Business, R.D. Irwin Inc., Chicago, 1955^  Rhinehart & Co.,  CASES 1.  B l u e f l e l d Water Works and Improvement Company v. P u b l i c S e r v i c e Commission of West V i r g i n i a , 2b2 U."ST, 679 (1923).  2.  Candy, Drugs, Motors,  3.  1952.  Iron Bars, V a l v e s , Westbound, 54,  M.C.C,  F e d e r a l Power Commission v. N a t u r a l Gas P i p e l i n e Co., 315 U.S.,  575 (1942).  4.  German A l l i a n c e Insurance Company v . The I n d u s t r i a l Court o f Kansas, 233 U.S., 389 (1914).  5.  Increased Common C a r r i e r Truck Rates i n New England, M.C.C. "  43,  44,  155 BIBLIOGRAPHY  6.  Increased  7.  Increases,  8.  L o s A n g e l e s Gas a n d E l e c t r i c C o r p o r a t i o n v . R a i l r o a d Commis1 s i o n o f C a l i f o r n i a , 28$ U . S . , 2b ?  9.  Common C a r r i e r  (Cont'd)  Pacific  T r u c k R a t e s I n The E a s t ,  Northwest,  54,  42, M.C.C.  M.C.C.  (1953)."  JMcCardle e t a l . v . I n d i a n a p o l i s W a t e r Company,  272  (192b). 10.  Minimum W e i g h t  on T r i s o d i u m  11.  Munn v . I l l i n o i s ,  12.  N e b b i a v . New Y o r k ,  15.  A.G. Ont v . A.C. W i n n e r j  14.  Smyth v . Ames,  44 U.S.,  Phosphate,  113,  94, M.C.C.  122 (1877).  291 U.S., 502 (1934). :  169 U.S.,  54l;  466  4 D.L.R.,  (1898).  C.R.T.C.  U.S.,  400  

Cite

Citation Scheme:

        

Citations by CSL (citeproc-js)

Usage Statistics

Share

Embed

Customize your widget with the following options, then copy and paste the code below into the HTML of your page to embed this item in your website.
                        
                            <div id="ubcOpenCollectionsWidgetDisplay">
                            <script id="ubcOpenCollectionsWidget"
                            src="{[{embed.src}]}"
                            data-item="{[{embed.item}]}"
                            data-collection="{[{embed.collection}]}"
                            data-metadata="{[{embed.showMetadata}]}"
                            data-width="{[{embed.width}]}"
                            async >
                            </script>
                            </div>
                        
                    
IIIF logo Our image viewer uses the IIIF 2.0 standard. To load this item in other compatible viewers, use this url:
http://iiif.library.ubc.ca/presentation/dsp.831.1-0102369/manifest

Comment

Related Items