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

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THE PROBLEM OP MEASURING A PAIR RATE OF RETURN IN REGULATED INDUSTRY WITH SPECIAL REFERENCE TO THE MOTOR CARRIER INDUSTRY by PAUL FREDERICK LITTLE B.A., U n i v e r s i t y o f Toronto, 1965 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION i n the Department of Commerce and Business A d m i n i s t r a t i o n We accept t h i s t h e s i s as conforming t o the r e q u i r e d s t a n d a r d THE UNIVERSITY OF BRITISH COLUMBIA August, 1968 In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f t he r e q u i r e m e n t s f o r an advanced deg ree a t t he U n i v e r s i t y o f B r i t i s h C o l u m b i a , I a g r e e t h a t t h e L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and S t u d y . I f u r t h e r ag r ee t h a t p e r m i s s i o n f o r e x t e n s i v e c o p y i n g o f t h i s t h e s i s f o r 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 the Head o f my Depar tment o r by h.ils r e p r e s e n t a t i v e s . I t i s u n d e r s t o o d t h a t c o p y i n g o r p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l no t be a l l o w e d w i t h o u t my w r i t t e n p e r m i s s i o n . Depar tment The U n i v e r s i t y o f B r i t i s h Co l umb i a Vancouve r 8, Canada ABSTRACT The motor c a r r i e r i n d u s t r y of North America i s s u b j e c t to r e g u l a t o r y c o n t r o l s over i t s r a t e s e t t i n g p r a c t i c e s . In the United S t a t e s and i n Canada , p u b l i c commissions must develop c e r t a i n t o o l s f o r measuring when an i n d i v i d u a l r a t e o r an e n t i r e r a t e s t r u c t u r e i s e i t h e r e x p l o i t i v e to the s h i p p i n g p u b l i c o r c o n f i s c a t o r y to the c a r r i e r . T h e t o o l t h a t has been a p p l i e d h i s t o r i c a l l y i s the o p e r a t i n g r a t i o , simply the r e l a t i o n s h i p of t o t a l revenues to t o t a l expenses of the c a r r i e r . The o p e r a t i n g r a t i o i s not as r e l i a b l e an instrument as the r a t e o f r e t u r n p r i n c i p l e employed by r e g u l a t o r s of other r e g r e g u l a t e d i n d u s t r i e s . I n the U n i t e d S t a t e s , where the oper-- a t i n g r a t i o 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 c r i t i c i z e d . I n Canada, students of the motor c a r r i e r i n d u s t r y are s t i l l f a c e d w i t h the problem of d e c i d i n g what c o s t d a t a mu* be compiled b e f o r e the o p e r a t i n g r a t i o can be used w i t h any con-f i d e n c e by r e g u l a t o r s . T h i s t h e s i s attempts to study the problems i n v o l v e d i n making a j u d i c i a l measurement o f the f i n a n c i a l e f f e c t a r a t e may be h a v i n g on the c a r r i e r and the s h i p p e r . As a r e s u l t , the o p e r a t i n g r a t i o i s examined a t some l e n g t h . In a d d i t i o n , the t h e s i s c o n f r o n t s the problem, more p r e s s i n g to Canadian r e g u l a t o r s , 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 how to c o l l e c t i t b e f o r e the o p e r a t i n g ^S4t!korimay be developed. To study t h i s problem, the t h e s i s has brought t o g e t h e r economic analyses of the motor c a r r i e r i n d u s t r y as c o n t r a s t e d to o t h e r r e g u l a t e d f i e l d s w i t h c e r t a i n r e s e a r c h i n t o the development of commission and j u d i c i a l thought on the manner of how r a t e r e g u l a t i o n should be e f f e c t e d . A p i o n e e r i n g e f f o r t was made to c o l l e c t a s e t of c o s t s f o r B r i t i s h Columbia motor c a r r i e r s to supplement what i s o t h e r --wise a m a i n l y t h e o r e t i c a l p i e c e of w r i t i n g . C l e a r l y , t h i s t h e s i s has not been designed so t h a t any con-- c r e t e c o n c l u s i o n s c o u l d be drawn about how e f f e c t i v e or 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 nor about p r e c i s e l y what d a t a Canadian r e g u l a t o r s should s e t about c o l l e c t i n g . I t i s f e l t , however, t h a t some needed focus has 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 p r e s e n t l y , a t i t s b e s t , b a d l y n e g l e c t e d . In a d d i t i o n to the a s s i s t a n c e p r o v i d e d by h i s a d v i s o r s on the F a c u l t y of Commerce and Business A d m i n i s t r a t i o n at the U n i v e r s i t y o f B r i t i s h Columbia, the w r i t e r wishes to acknowledge the advic e and co-o p e r a t i o n a f f o r d e d him by the o f f i c e s o f the Auto-motive T r a n s p o r t A s s o c i a t i o n o f B r i t i s h Columbia and numerous members t h e r e o f . THE PROBLEM OF MEASURING A FAIR RATE OF RETURN  IN REGULATED INDUSTRY WITH SPECIAL REFERENCE TO THE MOTOR CARRIER INDUSTRY , TABLE OF CONTENTS Chapter Page INTRODUCTION i I THE BASIS OF RATE REGULATION 1 The Role of Competition T T 1 Economic C h a r a c t e r i s t i c s 3 The N a t u r a l Monopoly 4 Competition and Rate R e g u l a t i o n 8 Unjust D i s c r i m i n a t i o n 9 Ruinous Competition 13 Le g a l J u s t i f i c a t i o n 14 E n g l i s h Common Law 15 America 16 1877-1934 18 Summary 23 I I MOTOR CARRIER RATE REGULATION 24 Aims 24 J u s t i f i c a t i o n 25 Economic C h a r a c t e r i s t i c s of the Industry . . . 25 B r i e f H i s t o r y 33 Powers and Du t i e s of the Motor C a r r i e r R e g u l a t o r 36 Minimum Rate R e g u l a t i o n 36 Maximum Rate R e g u l a t i o n 37 Rate D i s c r i m i n a t i o n 38 The Re g u l a t o r y Environment 39 The U n i t e d S t a t e s 39 Canada 43 H i s t o r y 43 Present S i t u a t i o n . . 46 Summary. . . . . . . . . . . 47 I I I DETERMINATION OF A FAIR RATE OF RETURN IN MOST REGULATED INDUSTRIES 48 S e t t i n g the Rate L e v e l 49 The Rate Base 51 Measures of V a l u a t i o n 52 The F a i r Rate of Return 58 The Legal H i s t o r y of Rate of Return Determination 63 Summary 72 - 2 -TABLE OP CONTENTS (Cont'd) Chapter Page TV DETERMINATION OP A FAIR RETURN IN THE MOTOR CARRIER INDUSTRY . 75 The I n a p p l i c a b i l i t y of Return on Investment as the R a t e - S e t t i n g C r i t e r i o n 76 The Operating R a t i o . . 83 Summary 91 V THE OPERATING RATIO AS A WORKABLE STANDARD OF REVENUE REQUIREMENT 95 A c c e p t a b i l i t y 95 Items Included i n Operating Cost 95 Taxes 96 D e p r e c i a t i o n 99 F i n a n c i a l Costs . 101 D i v e r s i t y of the Industry 106 Use 120 Summary. . . . . . . . . . . . . 123 VI THE IMPERATIVE OF COST STANDARDS 125 C o l l e c t i o n of Cost Data 133 R e s u l t s 135 Future Research 138 Summary 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 Page I ASSET TURNOVER RATIOS - SELECTED MOTOR CARRIERS . . 78 II CANADIAN IMPERIAL BANK OF COMMERCE - "SELECTED CORPORATE RATIOS" 84 III SAMPLE OF CARRIERS INDICATING BREAKDOWN OF OWNED VERSUS LEASED EQUIPMENT 116 IV COMPARABILITY OF LEASING VERSUS OWNING 117 V PER CENTS TO INCREASE OUT-OF-POCKET COSTS TO A REVENUE NEED LEVEL 128 VI OUT-OF-POCKET EXPENSES, SERVICE UNITS AND OUT-OF-POCKET UNIT COSTS FOR COST STUDY CARRIERS FOR STUDY YEAR BROUGHT UP TO CURRENT YEAR LEVEL 130 VII QUESTIONNAIRE "A" l 4 l VIII QUESTIONNAIRE "B" 142 THE PROBLEM OP MEASURING A FAIR RATE OP RETURN IN REGULATED INDUSTRY WITH SPECIAL REFERENCE TO THE MOTOR CARRIER INDUSTRY LIST OF FIGURES F i g u r e Page 1 ECONOMIES OF SCALE 5 2 FEATURES OF THE NATURAL MONOPOLY 12 3 ZONE OF REASONABLENESS 49 4 RELATION OF LOAD FACTOR TO OPERATING RATIO AND 108 RATE OF RETURN FOR 70 CLASS I MOTOR COMMON CARRIERS OF GENERAL COMMODITIES, 1953. . . . i INTRODUCTION P u b l i c r e g u l a t i o n of p r i c e s o r r a t e s o f c e r t a i n i n -d u s t r i e s i s an accepted f a c t of Twentieth Century c a p i t a l i s m . Our e o c i e t y has accepted the f a c t t h a t i t s e l e c t e d r e p r e s e n t -a t i v e s have the a u t h o r i t y to apply v a r i o u s forms of c o n t r o l over i n d u s t r y t h a t i s i n the o p i n i o n of the r e g u l a t o r y commission p r i c i n g c o n t r a r y to what i s i n the b e s t i n t e r e s t o f producers and consumers as a whole. Although the l e g i s l a t i v e branch of government decides where and to what extent r a t e and p r i c e c o n t r o l s w i l l be ap-p l i e d , the day to day a d m i n i s t r a t i o n of such powers i s gen-e r a l l y p l a c e d w i t h q u a s i - j u d i c i a l commissions. Such commissions s i t i n judgement oteer appeals and counter-appeals from consumers and producers a f f e c t e d by the r e g u l a t i o n of r a t e s . Perhaps more than any o t h e r c l a s s of i n d u s t r y , " s e r v i c e " i n d u s t r i e s have i n l a r g e p a r t been s u b j e c t e d to c o n t r o l s over t h e i r freedom i n s e t t i n g r a t e s . Gas and e l e c t r i c power companies , communication companies , and most forms of p u b l i c and 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 p o l i c e d to some degree as to the r a t e s they may s e t or the way i n which they are s e t . F o r the power and communication companies, the foremost concern o f the r e g u l a t o r i s to assure t h a t the revenue generated by these huge p u b l i c monopolies i s no more o r l e s s than what i t ( the r e g u l a t o r ) n c o n s i d e r s r easonable. As f a r as r e g u l a t i o n of the v a r i o u s t r a n s p o r t modes i d concerned, the d u t i e s and purposes o f the r e g u l a t o r are as v a r i e s as are i i the economic c h a r a c t e r i s t i c s of the concerns being r e g u l a t e d . In a s i t u a t i o n where a r a i l r o a d monopolizes s e r v i c e i n one area, c o n t r o l of maximum r a t e s may be the o v e r r i d i n g concern. Where a number o f r a i l r o a d s and t r u c k i n g f i r m s are engaged i n heated co m p e t i t i o n f o r the s e r v i c e business of one area, how-ever, the problem of the r e g u l a t o r w i l l be to assure that a workable form of c o m p e t i t i o n ensues and that no f i r m which i s s e r v i n g an economic and u s e f u l purpose i s f o r c e d out of b u s i n e s s . In other words, the r e g u l a t o r must be a l e r t to the p o s s i b i l i t y o f short-term ruinous p r i c i n g on the p a r t of one c a r r i e r . On the o t h e r hand, the r e g u l a t o r must a l l o w a h e a l t h y p r i c e com-p e t i t i o n even i f such leads to an e v e n t u a l monopoly s i t u a t i o n . To d i s t i n g u i s h h e a l t h y from u n f a i r p r i c i n g p r a c t i c e s i s a major t a s k i n t h i s r e g a r d . In c a r r y i n g out the d u t i e s of r a t e r e g u l a t i o n t h a t they are charged with, the p u b l i c commissions have, o r should have developed a number of c r i t e r i a f o r j u d g i n g whether or not u n i t s under t h e i r j u r i s d i c t i o n s are s e t t i n g j u s t and reasonable r a t e s i n l i g h t of t h e i r p a r t i c u l a r circumstances. T h i s t h e s i s w i l l examine these c r i t e r i a o r t o o l s i n the g e n e r a l case, and p a r t i c u l a r l y i n the motor t r u c k i n g i n d u s t r y . S p e c i f i c a l l y , the t o o l most g e n e r a l l y used to judge u t i l i t y r a t e s i s the r a t e of r e t u r n on investment. In the case of the motor t r u c k i n g i n d u s -t r y , r a t e of r e t u r n on investment has not been u t i l i z e d by r e g u l a t o r y commissions to judge r a t e adequacy. Rather, a r a t i o i i i o f t o t a l o p e r a t i n g expenses to o p e r a t i n g revenues i s g e n e r a l l y employed where a t r u c k i n g r a t e i s under examination. The p r i -mary purpose of t h i s t h e s i s i s to i n q u i r e i n t o the mechanics of r a t e r e g u l a t i o n i n the motor t r u c k i n g i n d u s t r y . Such an examin-a t i o n i n v o l v e s mainly an e v a l u a t i o n o f the o p e r a t i n g r a t i o as a c r i t e r i o n f o r determining the reasonableness o f r a t e s . In order to a r r i v e a t a p o i n t where t r u c k i n g r a t e r e g u l a t i o n and the t o o l s of such r e g u l a t i o n c o u l d be i n t e l l i g e n t -l y d i s c u s s e d , t h i s w r i t e r f e l t i t necessary to examine a t some l e n g t h the f o l l o w i n g f a c t o r s : 1. The economic and l e g a l j u s t i f i c a t i o n f o r r a t e r e g u l a -t i o n over i n d u s t r y . 2. An economic and h i s t o r i c a l d e s c r i p t i o n o f the motor t r u c k i n g i n d u s t r y l e a d i n g to a d i s c u s s i o n o f why i t may be r e g u l a t e d 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 why j u s t i f i c a t i o n of i t s r e g u l a t i o n must be d i f f e r e n t than f o r other i n d u s t r y . 3. The t o o l s g e n e r a l l y a p p l i e d by r a t e r e g u l a t o r s i n t h e i r r e g u l a t i o n of r a t e s 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 of a r a t e base and r e t u r n on that base. 4. A d i s c u s s i o n of why these same t o o l s mw$y not be ap-p l i e d to the motor t r u c k i n g i n d u s t r y . The above f o u r p o i n t s are, i n f a c t , the substance of the f i r s t f o u r chapters o f t h i s t h e s i s . Chapter I looks f i r s t i n t o the economic c h a r a c t e r i s t i c s of those i n d u s t r i e s the s t a t e i v has chosen to r e g u l a t e ; i . e . economies of s c a l e , l a r g e f i x e d investment, and a tendency to r e s u l t i n monopoly s i t u a t i o n s . By and l a r g e , these c h a r a c t e r i s t i c s are f o r e i g n to the motor c a r r i e r i n d u s t r y . Chapter I a l s o f o l l o w s i n some depth the l e g a l r a t i o n a l e and development of r e g u l a t i o n f o r those ind u s -t r i e s which are a f f e c t e d with a common c a l l i n g and are hence open to p r i c e r e g u l a t i o n . Chapter I I turns to the motor t r u c k i n g i n d u s t r y i t -s e l f ; f i r s t i t s h i s t o r y i n the United S t a t e s and then i n Canada. The t r u c k i n g i n d u s t r y i s c o n t r a s t e d ^M'ddcompared with other forms of i n d u s t r y whose r a t e s may be r e g u l a t e d by p u b l i c b o d i e s . The development of r a t e r e g u l a t i o n and the n e c e s s i t y f o r t h i s development are reviewed i n t h i s Chapter. The terms of r e f e r -ence and the d u t i e s of the p u b l i c r e g u l a t o r i n re s p e c t of t r u c k i n g are e x p l a i n e d . Reference i s made e q u a l l y to the U.S. and to Canada. Chapter I I I , an important s e c t i o n of the t h e s i s , looks i n t o the standard t o o l s employed by a p u b l i c r a t e r e g u l a t o r to c a r r y out i t s f u n c t i o n . These t o o l s i n the case of most r e g u l a -t e d concerns are thie r a t e base and the r a t e of r e t u r n on th a t base. D i s c u s s i o n f j t & l r S B t & e of the reaso n i n g behind employment of these t o o l s and how they r e l a t e to establishment and main-tenance of f a i r and reasonable r a t e s t r u c t u r e s . The development o f l e g a l thought on the s u b j e c t i n the Un i t e d S t a t e s j u r i s d i c t i o n i s g iven c o n s i d e r a b l e d i s c u s s i o n by the w r i t e r as i t was f e l t V 1 2 that such cases as Smyth and Ames ; McCardle ; and Federal 3 Power Commission , etc., are c l a s s i c underpinnings to the en-t i r e subject of rate of return regulation i n the western world, and that review of t h e i r philosophy and. decisions were essen-t i a l to any work concerned with rate regulation. Chapter IV turns to s p e c i f i c consideration of the operating r a t i o - the tool that has been used extensively and generally i n the United. States to measure the reasonableness of a return i n the motor trucking industry. It i s pointed out that return on a rate base has not been used generally i n the trucking industry to judge rate structures. The reasoning be-hind t h i s i-Pr^ P.'tiGe- which springs 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 of t h i s industry i s outlined and examined. Chapter V i n the thesis i s a lengthy section. It consists of a detailed study of the operating r a t i o and i t s use i n regulation of motor c a r r i e r rates. The Chapter resorts In large part to I l l u s t r a t i o n s of how and where th i s t o o l has been u t i l i z e d right from the beginning of trucking regulation to the present day. The review and c i t a t i o n of cases on the subject derives from the United States. The Chapter makes some c r i t i c i s m of the operating r a t i o as well as a number of sugges-tions as to how i t may be more f r u i t f u l l y employed by regulators. 1Smyth and Ames, 169 U.S., 466 (1898). p McCardle et a l . , v. Indianapolis Water Company, 272 U.S., 400, 192T~. ^Federal Power Commission v. Natural Gas Pipeline Company, 315 U.S., 575, 1942. v i Chapter VI, the f i n a l Chapter of the t h e s i s , turns t o a d i s c u s s i o n o f the co s t a c c o u n t i n g methods and data t h a t w i l l have to be employed by motor t r u c k i n g r e g u l a t o r s before the o p e r a t i n g r a t i o can be an e n t i r e l y e f f e c t i v e and. acc u r a t e t o o l f o r measuring the reasonableness of t r u c k i n g r a t e s . With more p a r t i c u l a r r e f e r e n c e to Canada, the Chapter then o u t l i n e s the l a c k o f cost knowledge of c a r r i e r s and p o r t r a y s t h i s by means o f the r e s u l t s o f a co s t survey performed i n 1 9 6 7 . There i s need f o r a d e t a i l e d knowledge o f per u n i t c o s t s of c a r r i e r o p e r a t i o n s before r a t e r e g u l a t i o n w i t h use of the o p e r a t i n g r a t i o can be acc u r a t e and o b j e c t i v e i n Canada. T h i s p o i n t i s c o n t i n u a l l y s t r e s s e d . To s t a t e t h a t the purpose of the s i x chapters of t h i s t h e s i s i s to prove or to e s t a b l i s h any c o n c l u s i o n e i t h e r about the motor t r u c k i n g i n d u s t r y , the r e g u l a t i o n o f r a t e s i n t h a t i n d u s t r y o r the t o o l s t h a t may be used to e f f e c t such r e g u l a -t i o n would be to m i s l e a d the reader at the o u t s e t . In f a c t , the t h e s i s c o n t a i n s no g e n e r a l c o n c l u s i o n chapter beyond the summary i n Chapter V I . C e r t a i n l y , the d i s c u s s i o n does l e a d to a number o f suggestions and. o b s e r v a t i o n s by the w r i t e r with r e g a r d to how r a t e r e g u l a t i o n i n the i n d u s t r y might be made more o b j e c t i v e and a c c u r a t e . Such i s the task of Chapter V I . The purposes of t h i s t h e s i s are as f o l l o w s : 1 . To demonstrate the e x i s t e n c e o f a problem; i . e . how d i f f i c u l t i s the task o f m a i n t a i n i n g a f a i r r a t e s t r u c t u r e f o r r e g u l a t e d i n d u s t r i e s and, i n p a r t i c u l a r , f o r motor c a r r i e r s . v i i 2. To e x p l o r e the f a c e t s of the problem; i . e . the t o o l s t h a t may be used to b r i n g about e f f e c t i v e r a t e r e g u l a -t i o n , the reasons these t o o l s have been developed, and the s i n g u l a r i t y of the type of t o o l used by t r u c k i n g r a t e r e g u l a t o r s . 3. To i n d i c a t e how the t r u c k i n g r a t e r e g u l a t o r may b e t t e r employ the r e g u l a t o r y t o o l i t has used h i s t o r i c a l l y and what must be r e q u i r e d of the i n d u s t r y i t s e l f i n a j u r i s -d i c t i o n such as Canada, and p a r t i c u l a r l y B r i t i s h Columbia, b e f o r e any g r e a t improvements can be expect-ed i n the q u a l i t y of r a t e r e g u l a t i o n . In t h a t t h i s t h e s i s Is not attempting to a r r i v e a t any s p e c i f i c c o n c l u s i o n s about r a t e r e g u l a t i o n e i t h e r i n the g e n e r a l case or f o r motor c a r r i e r s , why might i t be c o n s i d e r e d important o r s i g n i f i c a n t ? I t i s the o p i n i o n of t h i s w r i t e r t h a t the s i g -n i f i c a n c e i s t h i s : the r e g u l a t i o n of t r u c k r a t e s i n Canada i s , at present, an imprecise p r a c t i c e . In the o p i n i o n of c e r t a i n t r u c k i n g a s s o c i a t i o n s i n Canada, r e g u l a t i o n of e n t r y and r a t e s and the machinery f o r a l t e r a t i o n of r a t e s i s n e g l e c t e d and weak. E s p e c i a l l y i n l i g h t of American r e g u l a t i o n of motor t r u c k i n g , Canadian p r a c t i c e needs and m e r i t s a t t e n t i o n . Unless r e s e a r c h i s soon i n i t i a t e d t h a t w i l l r e s u l t In workable t o o l s and methods f o r r e g u l a t i o n of r a t e s such that the i n d u s t r y can be f l e x i b l e to changes i n economic c o n d i t i o n s , the s t a b i l i t y of the i n d u s t r y may w e l l be threatened. In a d d i t i o n , u n t i l the r e g u l a t o r can assure the r e g u l a t e d t h a t i t can measure the v i i i j u s t n e s s and reasonableness o f t r u c k i n g r a t e s from the stand-p o i n t of producer and consumer, the Canadian t r u c k i n g i n d u s t r y and p u b l i c may begin to q u e s t i o n very s e r i o u s l y j u s t how e f f e c -t i v e and meaningful r a t e r e g u l a t i o n c o u l d p o s s i b l y be i n these circumstances. I t i s suggested that r a t e r e g u l a t i o n over t r u c k e r s , although i t does not have to be s t r i c t , i s v i t a l l y n e cessary to the s t a b i l i t y of the i n d u s t r y and the w e l f a r e of s h i p p e r s and p u b l i c . The r e g u l a t o r s must equip themselves with t o o l s capable of e v a l u a t i n g r a t e s and r a t e s t r u c t u r e s , o t h e r -wise the r e g u l a t i o n i t s e l f w i l l become l e s s and l e s s e f f e c t i v e and, a t the same time, more d i f f i c u l t to j u s t i f y . In essence, t r u c k i n g r a t e r e g u l a t i o n needs more a t t e n -t i o n i n Canada. There i s a great need f o r Canadian r e g u l a t o r s who possess r a t e c o n t r o l s over the t r u c k i n g i n d u s t r y to study the American example of how the use of o p e r a t i n g r a t i o s , s t a n -dard c o s t a c c o u n t i n g p r a c t i c e s and w e l l e s t a b l i s h e d procedures of hearings and appeals can combine to make the t r u c k i n g i n d u s -t r y a w e l l a d j u s t e d and s t a b l e component of a n a t i o n a l t r a n s -p o r t a t i o n p o l i c y . T h i s t h e s i s attempts to b r i n g together these f a c e t s o f American p r a c t i c e as an example of what can be done and how i t has been done. F i n a l l y , some d i s c u s s i o n should be devoted to the l i m i t a t i o n s of t h i s paper. C l e a r l y , the main problem i s t h a t most w r i t i n g s and c o n s t r u c t i v e examples are American and, as a r e s u l t , the t h e s i s i s l a r g e l y American i n i t s terms of r e f e r e n c e . A r e s e a r c h study was c a r r i e d out d u r i n g the course of the t h e s i s i x i n B r i t i s h Columbia which d i d serve to i n d i c a t e the chasm t h a t e x i s t s between knowledge of c o s t s i n the U.S. and Canada. As f a r as i t s a b i l i t y t o c o n t r i b u t e u s e f u l data to the t h e s i s , however, the r e s e a r c h study was not s u c c e s s f u l . Although the U n i t e d S t a t e s pioneered and developed most p r a c t i c e s of t r u c k i n g r a t e r e g u l a t i o n , i t i s u n f o r t u n a t e t h a t some time c o u l d not have been devoted to i n t e r v i e w i n g c a r r i e r s and r e g u l a t o r y o f f i c i a l s i n B r i t i s h Columbia so as to o b t a i n o p i n i o n s as to the e f f i c a c y of a p p l y i n g American p r a c t i c e s to the r e l a t i v e l y unresearched Canadian s i t u a t i o n . T h i s l a c k of a t t e n t i o n to the d i s t i n c t p r a c t i c a l problems of r e g u l a t i o n i n Canada may be a flaw i n t h i s study. I t could, however, pr o v i d e more than s u f f i c i e n t m a t e r i a l f o r the next stage of r e s e a r c h i n t o development o f o b j e c t i v e , a c c u r a t e r a t e r e g u l a t i o n f o r t h i s j u r -i s d i c t i o n . 1 CHAPTER I THE BASIS OF RATE REGULATION The Role of Competition In a f r e e c a p i t a l i s t economy, competition i s con-s i d e r e d to be the " r e g u l a t o r " par e x c e l l e n c e . By means of open competition, I n d u s t r i a l l y , p o l i t i c a l l y , even i n d i v i d u a l l y and on n a t i o n a l s c a l e s , i t i s f e l t t h a t the systems and i n -d i v i d u a l s i n v o l v e d w i l l work to t h e i r h i g h e s t and most e f f i c -i e n t c a p a c i t i e s . S o c i e t y a t l a r g e w i l l be the b e n e f i c i a r y o f u p r i g h t p r a c t i c e s and e n f o r c e d i n t e g r i t y on the p a r t of p a r -t i c i p a n t s i n the c o m p e t i t i o n . In the i n d u s t r i a l sphere, j u s t and reasonable p r i c e s or r a t e s to consumers are perhaps the most s i g n i f i c a n t and d e s i r e d r e s u l t of f r e e c o m p e t i t i o n . The s p e c i f i c p r i c e o b j e c t i v e s sought by a system o f f r e e compe-t i t i o n are u s u a l l y these f o u r : 1. To prevent unreasonable p r i c e s and e x c e s s i v e e a r n i n g s . 2 . To assure t h a t adequate earnings are r e a l i z e d so that the i n d u s t r y can continue 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 prevent u n j u s t d i s c r i m i n a t i o n between i n d i v i d u a l s o r groups of i n d i v i d u a l consumers. 4. To assure the consumer the best p o s s i b l e s e r v i c e at a minimal p r i c e . For v a r i o u s reasons, however, " j u s t and r e a s o n a b l e " XD.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. Irwin, Inc., 1951 , p. 7 0 1 ; and D,V. Harper, Economic  R e g u l a t i o n o f the Motor C a r r i e r Industry by the STaTes"; Urbana, u n i v e r s i t y o f I l l i n o i s Press, 1959, P. l / c . 2 r a t e s cannot always come about i n an environment of f r e e com-p e t i t i o n . Indeed, c o m p e t i t i o n may have to be r e i n f o r c e d o r r e p l a c e d when such c o n d i t i o n s as the f o l l o w i n g might c h a r a c t e r -i z e a p a r t i c u l a r i n d u s t r y : 1. " S i t u a t i o n s i n which competition, as a p r a c t i c a l matter 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 unre g u l a t e d market w i l l not produce c o m p e t i t i v e r e s u l t s . 2. 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, because of i m p e r f e c t i o n s i n the market, com-p e t i t i o n does not produce competitive 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 has produced or may be expected to p r o -duce c o m p e t i t i v e r e s u l t s , but where, i n l i g h t o f oth e r p o l i c y c o n s i d e r a t i o n s , c o m p e t i t i v e r e s u l t s a re un-s a t i s f a c t o r y i n one or more r e s p e c t s . " 2 The t h i r d s i t u a t i o n i s not of concern to t h i s t h e s i s . I t r e f e r s to the case 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 to come f o r t h from the o p e r a t i o n of a p a r t i c u l a r i n d u s t r y , r e s u l t s t h a t c o m p e t i t i o n cannot b r i n g about. E q u i t a b l e d i s t r i b u t i o n of product, defence c o n s i d e r a t i o n s and economic s t a b i l i z a t i o n would be prime examples. The f i r s t and second s i t u a t i o n s are the m a t e r i a l of the t h e s i s however. Both r e f e r to cases where, due to the economic c h a r a c t e r i s t i c s of an i n d u s t r y , c o m p e t i t i o n cannot be expected to " r e g u l a t e " i n favour of the p r i c i n g o b j e c t i v e s sought by s o c i e t y . ^Kaysen, C , and D.P. Turner, A n t i t r u s t P o l i c y : An  Economic 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 Press, Cambridge, 1959, p. 109. 3 R e g u l a t i o n cannot, of course, be f o i s t e d upon any i n d u s t r y t h a t e x h i b i t s c e r t a i n c o m p e t i t i v e i m p e r f e c t i o n s . Indeed, i t i s d i f f i c u l t to t h i n k of a f i e l d t h a t does not. The l e g a l r a t i o n a l e g i v e n f o r r e g u l a t i o n of an i n d u s t r y w i l l be looked i n t o i n some d e t a i l under the heading, "The N a t u r a l Monopoly", i n t h i s chapter, but i t c o u l d be s a i d summarily here that r e g u l a t i o n i s g e n e r a l l y a p p l i e d where an e s s e n t i a l s e r v i c e i s i n v o l v e d and the p u b l i c i n t e r e s t as a whole i s a f f e c t e d . The purpose of the next s e c t i o n i s to show the economic and s o c i a l b a s i s of r a t e r e g u l a t i o n . Economic C h a r a c t e r i s t i c s There are numerous economic c h a r a c t e r i s t i c s of an i n d u s t r y t h a t , because i t renders an e s s e n t i a l s e r v i c e and d i r e c t l y a f f e c t s p u b l i c i n t e r e s t , i s earmarked f o r r a t e regu-l a t i o n . The monopoly, an economic model t h a t e x h i b i t s a number of micro-economic f e a t u r e s , i s c l e a r l y the f i r s t c h o i c e . For reasons which are unnecessary to go i n t o , the f i r m which en-joys uncontested s e l l i n g p r i v i l e g e s f o r an e s s e n t i a l product i n any market nor m a l l y w i l l have i t s r a t e s or p r i c e s h e l d be-neath c e r t a i n maxima by s o c i e t y . Any f i r m f i t t i n g t h i s d e s c r i p -t i o n which i s not r e g u l a t e d 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 c e r t a i n l y must r e a l i z e t h a t the t h r e a t of c o n t r o l s i s present should s e r i o u s p u b l i c a g i t a t i o n begin to develop over i t s p r i c e s t r u c t u r e . Other than the pure monopoly s i t u a t i o n which b r i n g s 4 about maximum p r i c e c o n t r o l s , economic theory has p o i n t e d out othe r p r o b l e m a t i c s i t u a t i o n s to s o c i e t y so t h a t i t w i l l know i n advance where maximum as w e l l as ot h e r types of r a t e r e g u l a t i o n are r e q u i r e d . One set of f e a t u r e s c h a r a c t e r i z e what has come to be known as the " n a t u r a l monopoly" s i t u a t i o n . The N a t u r a l Monopoly A l l arguments i n f a v o u r of r a t e r e g u l a t i o n f o r p u b l i c u t i l i t i e s and f o r most r e g u l a t e d t r a n s p o r t modes r e v o l v e around the f e a t u r e of economies of s c a l e that e x i s t somewhere i n 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 cause these economies of s c a l e . Before l o o k i n g at the components of economies of s c a l e , l e t us examine why such c o n d i t i o n s c a l l f o r r a t e r e g u l a t i o n . Wherever economies of s c a l e are to be found i n an i n d u s t r y ( i . e . the i n d u s t r y i s one where u n i t c o s t s decrease w i t h volume) and one or more f i r m s are able to achieve econ-omies of volume/scale beyond those of i t s competitors, com-p e t i t i o n i s doomed i n the medium to long run. S o c i e t y must rec o g n i z e t h i s b e f o r e ruinous p r i c i n g p r a c t i c e s have caused s i g n i f i c a n t wastage of resources on the p a r t of the unsuccess-f u l c o m p e t i t o r s . One remedy i s not to a l l o w u n r e s t r a i n e d c o m p e t i t i o n to get s t a r t e d i n t h i s i n d u s t r y i n the f i r s t p l a c e , r a t h e r to encourage the u n i t e x h i b i t i n g economies to become a monopoly 5 and then r e g u l a t e I t s p r i c e s . Take the f o l l o w i n g as an example: three f i r m s , A, B, and C, producing an e s s e n t i a l s e r v i c e are competing i n one marketplace. They are of equal s i z e and have average t o t a l c o s t curves as r e p r e s e n t e d i n the e x h i b i t . PIG. 1 ECONOMIES OP SCALE In t h i s s i t u a t i o n , the minimum long run p r i c e that the producers c o u l d charge and consumers c o u l d expect would be P-^ . I f f i r m A should drop out of the market, or i f B and C should expand t h e i r p l a n t and take advantage of the economies of s c a l e o f f e r e d by t h i s i n d u s t r y , thus f o r c i n g the unexpanded f i r m A out, minimum long run average c o s t s would f a l l to ?2* ^ these economies were a v a i l a b l e i n the i n d u s t r y , c l e a r l y the f i r s t s i t u a t i o n was never a s t a b l e one. Indeed, the second s i t u a t i o n i s no more s t a b l e . E i t h e r f i r m B or C w i l l e v e n t u a l l y expand i t s p l a n t and capture the f u r t h e r economies that s t i l l e x i s t and i n time only one f i r m w i l l be l e f t . The o n l y o t h e r a l t e r n a -t i v e would be f o r the two of the o r i g i n a l three f i r m s to make an agreement to share the market and m a i n tain p r i c e s w e l l above what the monopolist's average c o s t would be i n the event o f one f i r m a dropping out. C e r t a i n l y t h i s i s not i n the p u b l i c i n t e r e s t . 6 Consumers should be the b e n e f i c i a r i e s of any econ-omies o f s c a l e t h a t might e x i s t i n an i n d u s t r y . T h i s i s imper-a t i v e when the product or s e r v i c e i s a n e c e s s i t y . Thus, when a market s i t u a t i o n d i c t a t e s that one optimum-sized producer r a t h e r than a number of s m a l l e r producers should supply the market due to the presence of economies of s c a l e i n the i n d u s -t r y , then p u b l i c p o l i c y should a l l o w i t . Monopoly, i n o t h e r words, i s i n the p u b l i c i n t e r e s t . As we have s t a t e d e a r l i e r , however, there i s l i t t l e assurance that a monopolist w i l l p r i c e i n the best i n t e r e s t s of s o c i e t y by any means. Thus, a " n a t u r a l monopoly" r e s u l t i n g from an u n s t a b l e c o m p e t i t i v e s i t u a t i o n , such as the i n d u s t r y w i t h s i g n i f i c a n t economies of s c a l e , c a l l s f o r s t a t e r e g u l a t i o n of r a t e s i n the same manner as the e s t a b l i s h e d monopoly I f each i s producing an e s s e n t i a l s e r v i c e or product. Having seen how the presence of economies of s c a l e In an e s s e n t i a l i n d u s t r y can l e a d to a s t a t e - r e g u l a t e d monopoly s i t u a t i o n , we should now look a t those f e a t u r e s of an i n d u s t r y t h a t might h i n t at the e x i s t e n c e of such l a t e n t economies of s c a l e . 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 of such an i n d u s t r y would be a s u b s t a n t i a l investment i n f i x e d f a c i l i t i e s . An i n d u s t r y such as any u t i l i t y where a s s e t turnover i s q u i t e slow would be a good example. Quite simply, any i n d u s t r y or f i r m which has a l a r g e p r o p o r t i o n of i t s a s s e t s tied, up i n l o n g e r term f i x e d f a c i l i -7 t i e s e x h i b i t s a c o s t p r o f i l e where f i x e d charges to Income are f a r g r e a t e r than v a r i a b l e expenses per u n i t o f output. As the volume o f output i n c r e a s e s , the same f i x e d c o s t s become spread over a g r e a t e r and g r e a t e r denominator of u n i t s . Thus, u n l e s s v a r i a b l e expenses i n c r e a s e i n o r d i n a t e l y , economies of s c a l e be-g i n t o appear. The heavy p r o p o r t i o n of f i x e d c o s t s phenomenon, alo n g w i t h the attendant economies of s c a l e i t b r i n g s about, i s of course c h a r a c t e r i s t i c of many I n d u s t r i e s . The automobile f a c t o r i e s , the o i l and pe t r o c h e m i c a l i n d u s t r y , v a r i o u s metal i n d u s t r i e s are but a few examples. T h i s f e a t u r e i s f a r more prominent f o r the main p a r t , however, i n those f i e l d s where the s t a t e has chosen to apply r a t e r e g u l a t i o n . As f a r as c a p i t a l t u r n over i s concerned, the r a i l w a y s e x h i b i t a 2 to 4 year c y c l e , telephone companies and power u t i l i t i e s are approximately i n the same range.^ A glance a t c a p i t a l t u r nover r a t i o s f o r a few - Asset Turnover R a t i o s ^ R a t i o o f Net F i x e d Assets t o O p e r a t i n  v m  Revenue Canadian N a t i o n a l R a i l r o a d Co. $827,000 Chesepeake & Ohio R a i l r o a d 397,000 Great Northern R a i l r o a d 265,000 Pennsylvania R a i l r o a d 893,000 Union P a c i f i c R a i l r o a d 549,000 American Telephone & Telegraph Co. 953,000 B e l l Telephone/Canada L t d . 596,000 B r i t i s h Columbia Telephone 98,000 C o n s o l i d a t e d E d i s o n o f New York 696,000 g Revenue F i x e d x A s s e t s $3,iy8,UUO 845,000 724,000 1,291,000 1,574,000 2,654,000 1,923,000 345,000 3,170,000 R a t i o .26 .48 .37 .71 .34 .36 .30 .29 .22 Source - Moody's T r a n s p o r t a t i o n and U t i l i t i e s Manuals, 1965. x Net o f D e p r e c i a t i o n . 8 of the l a r g e s t unregulated i n d u s t r i e s does show a marked d i f -h. f e r e n c e . Why the r a i l r o a d s and power companies have been chosen f o r r a t e and o t h e r types of r e g u l a t i o n i s c l e a r from the econ-omic c h a r a c t e r i s t i c s mentioned and the e f f e c t such c h a r a c t e r -i s t i c s have on s o c i e t y . Very few r e g u l a t e d i n d u s t r i e s do not d i s p l a y them to any degree. The exact l e g a l b a s i s f o r choos-i n g such i n d u s t r i e s , as opposed to others l i s t e d above, w i l l be c l a r i f i e d i n the next s e c t i o n . Competition and Rate R e g u l a t i o n In an i n d u s t r y such as the ones we have d e s c r i b e d as p o t e n t i a l " n a t u r a l " monopolies with v a s t investment i n f i x e d 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 , i t i s a very b i g d e c i s i o n f o r s o c i e t y to s e t up e i t h e r a s t a t e - r u n f i r m or to a l l o w a monopoly i n that market. Yet to some extent i n Western economies, the s t a t e has done j u s t t h a t . Telephone companies, e l e c t r i c and gas power companies and some oth e r " u t i l i t i e s " have, t h e r e f o r e , been j u s t i f i e d on the f o r e g o i n g economic grounds. Asset Turnover R a t i o s 4Ratio of Net F i x e d Assets to Net S a l e s jg^fi Net S a l e s Net R a t i o  F i x e d Assets F o r d Motor Company (U.S.) $11,537,000,000 $3,020,000,000 .29 General Motors Co. (U.S.) 20,733,000,000 4,161,000,000 .20 U n i t e d S t a t e s S t e e l 4,400,000,000 2,714,000,000 .62 I.B.M. 3,573,000,000 2,304,000,000 .65 S h e l l O i l Company 3,091,000,000 1,716,000,000 .56 Source - Moody's I n d u s t r i a l Manuals, 1966. x N e t of D e p r e c i a t i o n . 9 In many cases ( i . e . where an area i s served only by one company)'^railway i n d u s t r y p r o v i d e s an example of r e g u l a t e d c o m p e t i t i o n i n a f i e l d p o s s e s s i n g the f e a t u r e s of a n a t u r a l monopoly. What are the problems and o b j e c t i v e s that a regu-l a t o r such as the I n t e r s t a t e Commerce Commission i n the U.S. or Canada's T r a n s p o r t a t i o n Commission fac e s In r a t e r e g u l a t i o n o f a concern such as the r a i l w a y i n d u s t r y ? In t r y i n g to ma i n t a i n a system of workable competition, both between i n d i v i d u a l r a i l r o a d s and between the r a i l r o a d and ot h e r modes, the r e g u l a t o r w i l l be attempting, of course, to p r o t e c t the i n t e r e s t s o f consumers o f the v a r i o u s t r a n s p o r t a -t i o n s e r v i c e s and, i n a d d i t i o n , the f i n a n c i a l v i a b i l i t y of the producers themselves. S p e c i f i c a l l y , the concern w i l l be mainly w i t h p r e v e n t i o n of un j u s t d i s c r i m i n a t i o n between consumers or groups of consumers on the one hand and the discouragement of ruinous c o m p e t i t i o n on the o t h e r . For as long as h e a l t h y com-p e t i t i o n e x i s t s e i t h e r I n t e r o r i n t r a - m o d a l l y , there should be l i t t l e need f o r s c r u t i n y of maximum r a t e l e v e l s except where d i s c r i m i n a t i o n might be i n v o l v e d . Once the p o t e n t i a l n a t u r a l monopoly i s allowed to become a monopoly, however, maximum r a t e c o n t r o l must come i n t o p l a y . Unjust D i s c r i m i n a t i o n The r a i l w a y or, f o r that matter, any i n d u s t r y d i s -p l a y i n g heavy f i x e d c o s t s , d e c r e a s i n g u n i t c o s t s , and doing b u s i n e s s i n an i m p e r f e c t l y c o m p e t i t i v e s i t u a t i o n f i n d s i t most 10 p r a c t i c a l to i n i t i a t e p r i c e d i s c r i m i n a t i o n among customers. Unjust 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 by c o s t d i f f e r e n t i a l s e xperienced i n s e r v i n g the d i f f e r e n t consumers. Rather, the margin between the p r i c e s charged i s based s o l e l y on e l a s t i c i t i e s o f demand; i . e . on the d i f f e r e n c e between the p r i c e s v a r i o u s p o t e n t i a l customers w i l l pay'. The reason t h a t a heavy f i x e d c o s t f i r m or i n d u s t r y i s more l i k e l y to f o l l o w such a p r a c t i c e i s that i t has a gre a t d e a l more p r i c i n g f l e x -i b i l i t y . Any e x i s t i n g f i r m , i n order to s u r v i v e i n i t s s h o r t run economic term, must a t l e a s t cover I t s v a r i a b l e expenses or "out-of-pocket" c o s t s of doing b u s i n e s s . Any c o n t r i b u t i o n to overhead, no matter how s m a l l , i s i n the best i n t e r e s t s of the f i r m . In the concern w i t h heavy v a r i a b l e c o s t s , t h e r e f o r e , management has no c h o i c e but to cover the major o p e r a t i n g c o s t s of s e r v i n g every customer. No matter how great the spread of customer e l a s t i c i t y of demand i n the market, management must recoup most of i t s t o t a l c o s t s every time i t s o l i c i t s a customer. T h i s holds r e g a r d l e s s o f how imperfect the co m p e t i t i v e s i t u a t i o n might be. In the i n d u s t r y where we f i n d l a r g e f i x e d c o s t s and economies of s c a l e , a l a r g e p r o p o r t i o n of u n i t c o s t s i n v o l v e d i n s e r v i n g a customer are f i x e d overhead c o s t s , charges which do not have to be covered i n the immediate p e r i o d . The o u t - o f -pocket expense of s e r v i n g an I n d i v i d u a l i s r e l a t i v e l y q u i t e s m a l l . Again, any c o n t r i b u t i o n above t h i s minimum i s to be 11 d e s i r e d . Thus, management i s to be expected to charge the p r o s p e c t i v e consumer whatever he i s w i l l i n g t o pay, p r o v i d e d i t w i l l at l e a s t meet the v a r i a b l e c o s t of s e r v i c e . In t h a t v a r i a b l e c o s t s are of minor order i n t h i s case, the manager has a f a r g r e a t e r range w i t h i n which to p r i c e than does h i s c o u n t e r p a r t , the low f i x e d investment case. Yet the management of the r a i l r o a d or s i m i l a r company must meet f u l l y a l l o c a t e d c o s t i n the long run. The obvious way of doing so i s to sub-s i d i z e the s e r v i c e i n which he i s p r i c i n g w e l l below t o t a l c o s t w i t h p r o f i t s earned on p r i c e s set w e l l above f u l l c o s t i n o t h e r markets w i l l i n g to pay such a p r i c e . In e f f e c t , the heavy f i x e d c o s t f i r m can s e t i t s p r i c e s a c c o r d i n g to the e l a s t i c i t i e s of demand i n d i c a t e d by i t s v a r i o u s consumers. T h i s i s shown i n the diagrams on page 12. Where the r e g u l a t o r and h i s r a t e r e g u l a t i o n come i n t o the p i c t u r e to discourage u n j u s t d i s c r i m i n a t i o n has to be, of course, where the r a i l r o a d or whatever s u b j e c t i n d u s t r y i s i n -v o l v e d enjoys a p a r t i a l monopoly. U s u a l l y t h i s w i l l be geo-gr a p h i c i n nature and complaints come from a s o - c a l l e d " c a p t i v e s h i p p e r " . Many I.C.C. hearings and even more Board of T r a n s -p o r t Commissioners' cases i n the past have i n v o l v e d such s i t u -a t i o n s . The duty of the r e g u l a t o r i s to weigh the evidence c a r e f u l l y to determine i f the d i s c r i m i n a t o r y p r i c e charged the p l a i n t i f f i s indeed u n j u s t or perhaps j u s t i f i e d due to s p e c i f i c c o s t c o n s i d e r a t i o n s i n v o l v e d i n s e r v i n g t h a t p a r t i c u l a r consumer. The r a t e s t r u c t u r e may o r may not be suspended. LOW FIXED INVESTMENT CASE Avg.cost p e r u n i t 12 1* 60 Area of 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 F i x e d Cost Q u a n t i t y FIG. 2 FEATURES OF THE NATURAL MONOPOLY In any time p e r i o d s h o r t of the long run, a f i r m i s w e l l a d v i s e d to take on b u s i n e s s t h a t w i l l a t l e a s t cover i t s out-of-pocket c o s t s of s e r v i c i n g t h a t new b u s i n e s s . In the case of the f i r m with low f i x e d investment 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 narrow i n t h a t the gap between f u l l y a l l o -cated and out-of-pocket c o s t Is 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 which do not have to be met and a l l o c a t e d immediately, a f a r g r e a t e r range of p r i c i n g freedom e x i s t s . When a f i r m of t h i s type c h a r a c t e r i z e s the market moreover, 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 about sooner o r l a t e r as w e l l . As demonstrated i n the s e c t i o n on n a t u r a l monopoly and i n F i g . 2, t h i s f i r m has f e a t u r e s of a n a t u r a l monopoly. As such, i t w i l l charge the customer i n Market A the maximum he i s w i l l i n g t o pay i n the knowledge t h a t , as the monopoly s i t u a t i o n becomes more apparent, t h i s p r i c e can be " s u b s i d i z e d by the p r i c e t h a t can then be exacted from the customer i n Market B. 1 3 Ruinous Competition Another most s e r i o u s problem faced, by r e g u l a t o r s of commerce, a problem p e r t i n e n t to t r a n s p o r t a t i o n and r a i l r o a d s , i s , without a doubt, the matter of r u i n o u s ot d e s t r u c t i v e com-p e t i t i o n . A d e f i n i t i o n o f such p r a c t i c e s would be : c o m p e t i t i v e p r i c i n g by a producer , or producers , designed to undercut r i v a l s to the extent t h a t the l a t t e r are f o r c e d out of business,, where-upon the o r i g i n a l producer , havingygained s o l e c o n t r o l of the market , may r a i s e h i s p r i c e s a g a i n and prt&ce as a monopolist. A l l too o f t e n the 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 done to a l l f i r m s engaged i n the p r i c e "war" and an u n s t a b l e s e r v i c e s i t a a t i o n f o r the consumer. Moreover, a f i r m i n an i n d u s t r y c h a r a c t e r i z e d by heavy f i x e d c o s t s i s f a r more suspect to engage i n such p r a c t i c e s than one i n another i n a d i f f e r e n t i n d u s t r y . Again, because the r a i l r o a d o r s i m i l a r f i r m need o n l y earn a v e r y s m a l l s h o r t r u n out-of-pocket c o s t p l u s anynjcon-t r i b u t i o n i n o r d e r to s t a y i n b u s i n e s s , management i s f r e e to p r i c e f o r p r o t r a c t e d p e r i o d s a t l e v e l s f a r below f u l l y a l l o c -ated c o s t o r even l o n g r u n v a r i a b l e c o s t . F o r the f i r m which must cover a much h i g h e r v a r i a b l e c o s t i n o r d e r to remain v i a b l e , c l e a r l y t h i s same f l e x i b i l i t y does not e x i s t . Although there are e x c e p t i o n s t o the r u l e , ( the e a r l y motor c a r r i e r i n d u s t r y b e i n g one t h a t s h a l l be examined l a t e r ) , r u i n o u s c o m p e t i t i o n i s f a r more l i k e l y to take p l a c e when the market i s composed o f one o r more u n i t s which do have a h i g h p r o p o r t i o n of f i x e d c o s t s . Such f i r m s as t h i s do have g r e a t e r 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 s h o r t to medium run. The b i g g e s t d i f f i c u l t y f o r a r e g u l a t o r such as the B.T.C. o r the I.C.C. i s the s i t u a t i o n where a heavy f i x e d c o s t f i r m such as a r a i l r o a d i s competing f o r the same busi n e s s as a concern such as a t r u c k i n g l i n e t h a t e x h i b i t s low f i x e d and , h i g h v a r i a b l e c o s t s p#r u n i t . I n t r y i n g to m a i n t a i n a workable co m p e t i t i o n , the r e g u l a t o r must c o n t i n u a l l y be aware o f the power the r a i l r o a d may possess to engage the t r u c k e r i n a ruinous c o m p e t i t i v e s i t u a t i o n . As a r e s u l t , a g r e a t d e a l o f commission time can be spent i n i n v e s t i g a t i o n of such complaints by t r u c k e r s . The standard which has come to be the accepted minimum a r a i l r o a d may charge i s i t s l o n g r u n v a r i a b l e c o s t of s e r v i c e * * . T h i s w i l l take i n more c o s t s than those p r e s e n t i n simple s h o r t r u n out-of-pocket c o s t . L e g a l J u s t i f i c a t i o n Why are some i n d u s t r i e s s i n g l e d out f o r r a t e r e g u l a t i o n and c o n t r o l s whftle o t h e r s , a p p a r e n t l y e x h i b i t i n g the same econ-omic c h a r a c t e r i s t i c s , are e n t r u s t e d to the r e g u l a t i n g f o r c e s o f Hhe market ? Indeed, what i s the l e g a l and h i s t o r i c j u s t i f i c a t i o n 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 ? |n t h i s s e c t i o n some i n d i c a t i o n w i l l be g i v e n of the r e a s o n i n g employed by the most p r e s t i g o u s c o u r t s to j u s t i f y r a t e r e g u l a t i o n o f c e r t a i n i n d u s t -r i e s throughout the y e a r s . The terms " a f f e c t e d with a p u b l i c i n t e r e s t " and "a NOTE ** Although i t seems a strange use of economic terminology - to t a l k of " l o n g run 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 r u n 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 economists such as G.W. W i l s o n (Essays on Some U n s e t t l e d  Questions i n the Economics of T r a n s p o r t , U. of I n d i a n a 1965) do employ the term. We must assume b a s i c c a p i t a l -i z a t i o n c o s t s are excluded. 15 common c a l l i n g " have been vsome;..legal"-It.erms.-. used s i n c e the seventeenth century to d i s t i n g u i s h those i n d u s t r i e s which should, i n the o p i n i o n o f law, be subjected to p u b l i c r e g u l a t i o n when com p e t i t i v e c o n d i t i o n s f a l l s h o r t o f what s o c i e t y expects. In other words, when the l e g i s l a t o r sought j u r i s d i c t i o n o r c e r -t a i n c o n t r o l s over an i n d u s t r y because o f socio-economic prob-lems such as those examined i n the l a s t s e c t i o n , the commission had to appeal f o r a c o u r t d e c i s i o n so t h a t the s u b j e c t i n d u s t r y c o u l d be l a b e l l e d i n t h i s manner. A d e f i n i t i o n of e i t h e r of these terms i s , of course, most s u b j e c t i v e . Perhaps as c o n t r o -v e r s i a l a matter as any t h a t a Supreme Court has had to f a c e was t h a t of determining what was and what was not " 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 " . Today, the s i t u a t i o n has become more nebulous. As P h i l l i p s n o t es: ...today the l e g a l concept of 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 not s t a t i c . S t a t e d simply, the p u b l i c i n t e r e s t with which some businesses are a f f e c t e d i s one c r e a t e d by the p u b l i c p o l i c y of the people.5 E n g l i s h Common Law Rate r e g u l a t i o n , j u s t i f i e d on these grounds, d e r i v e s from E n g l i s h common law. In the seventeenth century C h i e f J u s t i c e Hale i n h i s famous De P o r t i b u s Maris l a i d out the con-d i t i o n s under which a merchant can continue to seek h i s p r i -vate advantage and yet go beyond the bounds of "bare p r i v a t e i n t e r e s t " , " i f " as he says... -'CF. P h i l l i p s , The Economics of R e g u l a t i o n , Homewood, 1 1 1 . , R.D. Irwin, Inc., 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 unto which a l l persons that come to that p o r t must come and unlade o r lade t h e i r goods...because they a re the on l y wharfs l i c e n c e d by the queen...or because there i s no o t h e r wharf i n that p o r t . . . t h e r e cannot 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 cranage....For now the wharf and crane are 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 cease to be j u r i s p r i v a t e only.6 Thus, whatever the c o u r t determined a "common c a l l i n g " was to 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 than s et by the market. E s s e n t i a l s e r v i c e w i t h m o n o p o l i s t i c tendencies was ap p a r e n t l y the d e f i n i t i o n of such an i n d u s t r y and a t th a t time, the spectrum o f c a l l i n g s which were looked at and con-7 t r o l l e d i n t h i s way was q u i t e wide. America P r i o r to the American C i v i l War, a ve r y l i b e r a l i s t i c p h i l o s o p h y was p r e v a l e n t i n , t h e U n i t e d S t a t e s and the d o c t r i n e of p u b l i c i n t e r e s t was i n e f f e c t subordinated to the F i f t h and Fourteenth Amendments to the American C o n s t i t u t i o n . These p r o v i d e d that no one should be d e p r i v e d o f p r o p e r t y without due process o f law. For t h i s reason, the U.S. Supreme 6 i b i d . , p. 53 . 7 I t should be noted t h a t , when t a l k i n g about a "common c a l l i n g " , we should not be confused w i t h the term "common c a r r i e r " . A d e f i n i t i o n of the l a t t e r In a l e g a l sense i s as f o l l o w s : "...one who holds h i m s e l f out to the p u b l i c as a c a r r i e r of goods f o r reward...the essence o f the s t a t u s "common" (as d i s t i n c t from " p r i v a t e " ) i s that such a c a r r i e r does not d i s c r i m i n a t e amongst those.who request h i s s e r v i c e s nor does he have the r i g h t to r e f u s e an o f f e r o f goods f o r shipment", (Smyth, J.E. and D.A. Soberman, The Law and  Business A d m i n i s t r a t i o n i n Canada, Toronto, P r e n t i c e - H a l l o f Canada, lyob, p. 303 J. 17 Court became deeply embroiled i n p u b l i c r e g u l a t i o n . S t a t e p r i c e r e g u l a t i o n , a matter which c o u l d be i n j u r i o u s to the p r i v a t e i n t e r e s t s o f a producer, was a s e n s i t i v e and contended i s s u e i n those years, and the Court's d e f i n i t i o n s of i n d u s t r i e s " a f f e c t e d with a p u b l i c i n t e r e s t " (or some such wording) was narrow indeed. I t took a stepped-up pace of i n d u s t r i a l and economic development to r e v i v e concerned i n t e r e s t i n p r o t e c t -i n g the p u b l i c from the c o m p e t i t i v e i m p e r f e c t i o n s o f the market. I t c o u l d be s a f e l y s a i d that r a i l r o a d s were mainly r e s p o n s i b l e f o r t h i s renewed awareness i n the n e c e s s i t y of r e g u l a t i n g "common c a l l i n g s " . The r a i l w a y s , which expanded and f l o u r i s h e d i n the l a s t q u a r t e r of the n i n e t e e n t h century i n the U.S., d i s p l a y e d v ery d i f f e r e n t economic c h a r a c t e r i s t i c s and had a very d i f f e r -ent e f f e c t on the p u b l i c than d i d t r a d i t i o n a l s m a l l s c a l e , h i g h l y c o m p e t i t i v e i n d u s t r y up to t h a t time. For one t h i n g , the young r a i l r o a d s experienced no competition from each other i n t h e i r own spheres. There were too few of them. C e r t a i n l y , the c o m p e t i t i o n from o t h e r modes was n e g l i g i b l e , except i n the E a s t e r n barge a r e a s . In a d d i t i o n , the pace of i n d u s t r i a l development and p o p u l a t i o n growth was making these m o n o p o l i s t i c -type t r a n s p o r t companies e s s e n t i a l to the l i f e o f a l l Americans. There was no doubt that r a i l r o a d s were a f f e c t e d w i t h a very s t r o n g p u b l i c I n t e r e s t and c o u l d be p o t e n t i a l l y q u i t e dangerous to the p u b l i c u n l e s s r a t e c o n t r o l s were i n t r o d u c e d . 18 The famous Granger movement of the l 8 7 0 ' s was p r i -m a r i l y concerned, w i t h g a i n i n g these c o n t r o l s . The success that the Grangers met with i n e s t a b l i s h i n g s t a t e r e g u l a t o r y commissions f o r c o n t r o l of r a i l w a y r a t e s and p r o t e c t i o n of the farmers' i n t e r e s t s was due to be the h a r b i n g e r o f a much wider movement f o r p u b l i c r a t e r e g u l a t i o n i n t o o t h e r areas and g r a d u a l l y a broader i n t e r p r e t a t i o n of what was a "common c a l l i n g " . In s h o r t , new i n d u s t r i a l and t e c h n o l o g i c a l develop-ments were b r i n g i n g about i m p e r f e c t i o n s i n the c o m p e t i t i v e con-d i t i o n s t h a t s o c i e t y r e l i e d upon to guard i t s I n t e r e s t s . Such i m p e r f e c t i o n s r e q u i r e d g r e a t e r government involvement and an awareness by the c o u r t s that a l a i s s e z - f a i r e p h i l o s o p h y was no l o n g e r i n the p u b l i c i n t e r e s t . The h i s t o r y and r a t i o n a l e of government r a t e r e g u l a -t i o n over s e l e c t e d i n d u s t r i e s can best be t r a c e d by a number of "milestone" American c o u r t cases r i g h t from the days of the Grangers and t h e i r r e a c t i o n to r a i l w a y development. T h i s l e g a l h i s t o r y of r e g u l a t i o n i n the U.S. has s i g n i f i c a n c e f o r the e n t i r e Western world. 1877-1934 During t h i s p e r i o d the U.S. Supreme Court allowed the government deeper and deeper i n t o the r e g u l a t i o n o f p r i v a t e b u s i n e s s . The f i r s t s i g n i f i c a n t case came to the c o u r t i n o 1877 on the appeal of Munn i n Munn v. I l l i n o i s where the % u n n v. I l l i n o i s , 94 U.S., 113, 122 (1877), as quoted i n P h i l l i p s , o p . c i t . , p. 57. 19 former c o n t e s t e d the r i g h t of the s t a t e to f i x maximum charges on 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 . The b a s i s of appeal was that the i n d i v i d u a l ' s r i g h t to p r i v a t e p r o p e r t y was being 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 Fourteenth Amend-ments . The Court r u l e d i n favour of the s t a t e on the ground t h a t : . . . 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 monopoly . . . t h e i r b u s i n e s s most c e r t a i n l y tends to a common charge and i s become a t h i n g of 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): ...every such warehousemen ought to be under p u b l i c r e g u l a t i o n t h a t he can take but a reasonable t o l l . 9 The l e g i s l a t i v e power to r e g u l a t e r a i l r o a d s and o t h e r " u t i l i t i e s " had been given a tremendous boost. Throughout the l a s t q u a r t e r of the n i n e t e e n t h century, Munn v. I l l i n o i s was c i t e d r e p e a t e d l y f o r s i m i l a r cases concern-i n g r a t e r e g u l a t i o n over storage, l a d i n g and u n l a d i n g f a c i l i t i e s . The f i r s t s i g n i f i c a n t expansion of the i n t e r p r e t a t i o n came i n 1914 w i t h German A l l i a n c e Insurance Company v. K a n s a s . 1 0 Here the c o u r t r u l e d the insurance business had s u f f i c i e n t p u b l i c i n t e r e s t a t t a c h e d to i t to m e r i t p u b l i c r e g u l a t i o n of the r a t e s i t c o u l d charge. Not a monopoly nor an i n d i s p e n s a b l e commodity, the f i r e i nsurance business was found " p r a c t i c a l l y a n e c e s s i t y " , and thus the s t a t e ' s r i g h t to reduce a set of charges was up-h e l d . Although the c o u r t s t i l l h e l d to the p u b l i c i n t e r e s t " d o c t r i n e " , i t s i n t e r p r e t a t i o n of t h i s was a l r e a d y expanding. I b i d . ^ ^ 1 0 German A l l i a n c e Insurance Company v. Kansas, 233 U.S., 20 The f i r s t c o u r t case which attempted to d e f i n e and c l a s s i f y , f o r f u t u r e r e f e r e n c e , those i n d u s t r i e s which were c l o t h e d with a p u b l i c i n t e r e s t and were thus r e g u l a b l e f o r r a t e purposes was Wolff Packing Company v. I n d u s t r i a l Court  o f K a n s a s , 1 1 Although t h i s was a d e c i s i o n unfavourable to the r e g u l a t o r , the three c a t e g o r i e s of s o - c a l l e d common c a l l i n g s t h a t the c o u r t enumerated and which, i t s a i d , s hould 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 f i r s t were those i n d u s t r i e s such as r a i l r o a d s , u t i l i t i e s and o t h e r common c a r r i e r s who c a r r i e d on bus i n e s s under a grant of p r i v i l e g e by the p u b l i c . Such a grant imposed a c l e a r r e s p o n s i b i l i t y to the p u b l i c . The second c l a s s was composed of those i n d u s t r i e s regarded as " e x c e p t i o n a l " i n which " p u b l i c i n t e r e s t had been r e c o g n i z e d from e a r l i e s t times". Examples here were given as "keepers of inns, cabs, g r i s t m i l l s , e t c . " . The t h i r d c l a s s were those businesses ...though not 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 nception, may be; f a i r l y s a i d to have r i s e n to be such and have become s u b j e c t i n consequence to some govern-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 i n the t h i r d category c o u l d not be d e f i n e d simply, but r e s t e d e n t i r e l y i n the l a p of j u d i c i a l i n q u i r y . As the case s a i d : l"'l*As c i t e d by P h i l l i p s , C P . , The Economics of Re g u l a t i o n , Homewood, 111., R.D. Irwin Inc., 1965, p. 64. 1 2 P h i l l i p s , o p . c i t . . 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 (in the court's opinion) might be subjected without regula-t i o n . ^ 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, for concerns not easily placed in one of the f i r s t two categories, only the court could decide whether regulation was called for. Nor did the court have to justify i t s future decisions on any other basis than that of i t s own judgement as to the potential danger to public interest inherent in a particular situation. This decision is far more significant that i t might f i r s t appear. It serves to explain how even today the layman is often unable to understand why some industries are subjected to rate regulation while others, with similar economic features and to some degree a similar effect on the public, are l e f t un-controlled. The logic (or lack of i t ) has rested throughout the years purely in the minds of the Justices of the U.S. Supreme Court. The effect of this Court's logic has by no means been confined only to the United States. 14 In 1934, the decision in Nebbia v. New York in sig-nalling a return to heavier government restriction over indus-^ I b i d . , p. 6 6 . l2*NebbiaVv. New York, 291 U.S., 502 (1934). 22 t r i a l p r i c e s e t t i n g , expanded upon and f i n a l i z e d the philosophy-a i r e d i n W o l f f . ...there can be no doubt that upon proper o c c a s i o n and by a p p r o p r i a t e measures the s t a t e may r e g u l a t e a business i n any of i t s aspects, i n c l u d i n g the p r i c e s to be charged...a s t a t e i s f r e e to adopt whatever economic p o l i c y may reasonably be deemed necessary to promote p u b l i c w e l f a r e and to 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 In o t h e r words, the c o u r t was sounding the death k n e l l to the n e c e s s i t y f o r p r o v i n g an i n d u s t r y was a f f e c t e d with a p u b l i c I n t e r e s t . I t was the s t a t e ' s r i g h t to r e g u l a t e where and when i t saw f i t and any c o n s i d e r a t i o n s o f common c a l l i n g o r p u b l i c i n t e r e s t were to be p u r e l y i n the c o u r t ' s own mind when i t passed judgement on the s t a t e ' s a c t i o n . 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 i n the nature of t h i n g s mean no more than 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 p u b l i c good.l° For a l l i n t e n t s and purposes, Nebbia v. New York and the cases l e a d i n g t h e r e t o have been a s u f f i c i e n t b a s i s f o r s t a t e r a t e r e g u l a t i o n to proceed upon. Right up to the present day, the U.S. Supreme Court has a llowed the s t a t e to e n t e r many f i e l d s of r a t e r e g u l a t i o n a d d i t i o n a l to pure u t i l i t i e s and r a i l -ways. The j u s t i f i c a t i o n f o r such allowance o f t e n c i t e s Nebbia or, i f not, s i m i l a r r e a s o n i n g i s a p p l i e d . Whether o r not the c o u r t has d i s c a r d e d the d o c t r i n e of p u b l i c i n t e r e s t i s a moot ^ P h i l l i p s , op.cit_., p. 67. l 6 I b i d . , p. 68. 23 q u e s t i o n . I r r e s p e c t i v e of whether the term does or does not appear i n l e g a l d e c i s i o n s today, i t should be c l e a r t h a t the p u b l i c i n t e r e s t has to be a t the r o o t of the c o u r t ' s thoughts when i t loo k s on a case i n v o l v i n g s t a t e r a t e r e g u l a t i o n . Summary By way of summarizing and t r y i n g to answer the i n i t i a l q u e s t i o n of t h i s s e c t i o n , v i z . why are some I n d u s t r i e s r e g u l a t e d w h i l e o t h e r s i m i l a r ones are not, we have no ch o i c e but to t u r n to Wolff Packing Company and Nebbia. I t i s the accepted p h i l o s o p h y today, and has been the accepted p h i l o s o p h y s i n c e those years, t h a t the s t a t e does have the 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 i t to be i n the p u b l i c ' s best i n t e r e s t . Western s o c i e t y has p l a c e d great r e l i a n c e and confi d e n c e i n i t s c o u r t s i n matters of I n d u s t r i a l r a t e r e g u l a -t i o n . As a r e s u l t , t h e r e i s no b e t t e r answer to our q u e s t i o n than t o say t h a t 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 the hi g h c o u r t s and t h i s l o g i c i s based p u r e l y and simply on t h e i r i n t e r p r e t a t i o n o f what i s i n the best p u b l i c i n t e r e s t . 24 CHAPTER I I MOTOR CARRIER RATE REGULATION Aims In statements of t r a n s p o r t a t i o n p o l i c y and i n l e g i s -l a t i v e preambles both f o r Canada and the U n i t e d S t a t e s , numerous aims are g i v e n f o r r a t e r e g u l a t i o n (as d i s t i n c t from ot h e r p u b l i c c o n t r o l s ) over the v a r i o u s modes of t r a n s p o r t a t i o n . Such can u s u a l l y be a s s o c i a t e d with one of f i v e p r i n c i p a l o b j e c t i v e s : 1. To assure the s h i p p e r o r passenger of 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 j u r i s d i c t i o n , t h u s . . . 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 reasonably 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 f i n a n c i a l v i a b i l i t y , y e t . . . 5. p r o t e c t i n g the s h i p p e r o r passenger from being 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 prevent u n j u s t d i s c r i m i n a t i o n by the c a r r i e r s between i n d i v i d u a l s or groups of the p u b l i c . 5. F i n a l l y , t o b r i n g about the most e f f i c i e n t a l l o c a -t i o n of t r a f f i c among modes so t h a t each w i l l operate w i t h i n i t s own sphere of demonstrated in h e r e n t advantage and the 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 of the economy w i l l s u f f e r minimal wastage. 1 I n s o f a r as r a t e r e g u l a t i o n of the common o r c o n t r a c t motor c a r r i e r i s concerned, the aims of the l e g i s l a t o r and the d u t i e s of the r e g u l a t o r are no d i f f e r e n t from the g e n e r a l case. Note: No p a r t i c u l a r source i s h e r e i n c i t e d f o r these aims. One sees evidence of them, however, both s p e l l e d out and under-stood 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 of t r a n s p o r t . Our own Canadian T r a n s p o r t a t i o n Act (R.S.C., 1952, as amended 1967) perhaps emphasizes No. 5 more than the o t h e r s . 25 D e s p i t e a l i t t l e more or l e s s emphasis on c e r t a i n o f the f i v e p o i n t s above, the r e g u l a t o r y commission w i l l apply the same o b j e c t i v e s i n attempting t o c o n t r o l the r a t e s of a l l types of common c a r r i e r s o f p r o p e r t y . J u s t i f i c a t i o n As p o i n t e d out i n Chapter I, u t i l i t y r a t e r e g u l a t i o n , r a i l w a y r a t e r e g u l a t i o n , and o t h e r r a t e r e g u l a t i o n have i n common the same economic and s o c i a l j u s t i f i c a t i o n s . In the o p i n i o n of not a few c r i t i c s , the p r a c t i c e of r a t e r e g u l a t i o n over the motor c a r r i e r i n d u s t r y does n o t . In f a c t , a reason-ab l e case i s put forward t h a t there i s no j u s t i f i c a t i o n f o r s t a t e r e g u l a t i o n of t r u c k i n g r a t e s . We s h a l l examine some of such r e a s o n i n g a f t e r l o o k i n g i n t o the 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 the Ind u s t r y In the ge n e r a l case, the motor c a r r i e r i n d u s t r y e x h i b i t s a very d i f f e r e n t s et of economic c h a r a c t e r i s t i c s from the u t i l i t i e s examined i n Chapter I . In the f i r s t p l a c e , few motor c a r r i e r s r e q u i r e s u b s t a n t i a l f i x e d o r sunk investment i n f a c i l i t i e s . U n l i k e the r a i l r o a d o r p u b l i c u t i l i t y which may not succeed i n t u r n i n g over i t s c a p i t a l i n thr e e o r even f i v e y ears, a h e a l t h y t r u c k i n g f i r m w i l l generate gross revenues three o r f o u r times the s i z e of i t s f i x e d a s s e t investment each y e a r . The l a r g e s t c l a s s of a s s e t s f o r a t r u c k i n g f i r m i s mov-26 i n g equipment. T h i s has a r e l a t i v e l y s h o r t l i f e and i s r e a d -i l y s a l e a b l e . The v a s t m a j o r i t y o f expenses are, t h e r e f o r e , o p e r a t i n g c o s t s - v a r i a b l e d i r e c t l y w i t h the volume of a c t i v i t y . One i s s u e t h a t s h o u l d be reviewed here f o r the motor c a r r i e r i n d u s t r y i s whether o r not i t might e x h i b i t economies.of s c a l e . C l e a r l y , t h i s i s s i g n i f i c a n t . I f economies do e x i s t , then there i s a danger of c o n c e n t r a t i o n , p o s s i b l y even a mono p o l i z a t i o n by two o r thr e e l a r g e f i r m s coming about. In such a s i t u a t i o n as t h i s , a n a t u r a l monopoly can soon develop and adverse p r i c i n g p r a c t i c e s ensue. On the o t h e r hand, should s t u d i e s show t h a t the s m a l l f i r m s d i s p l a y e f f i c i e n c y o f opera-t i o n s equal t o t h a t o f the much l a r g e r f i r m , then the imperative of minimum r a t e r e g u l a t i o n would a g a i n be q u e s t i o n a b l e . A number of r e s p e c t e d American c o s t s t u d i e s have concluded j u s t t h i s — 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 o p e r a t i n g c o s t s and f i r m s i z e . A t r u c k i n g c o s t study o f some note was t h a t of Robert A. Nelson i n 1 9 5 9 . 2 Taking a sample of s l i g h t l y over one hundred c a r r i e r s of f r e i g h t i n New England, Nelson s e t out to d i s c o v e r what, i f any, r e l a t i o n s h i p e x i s t e d between the s i z e of the motor c a r r i e r and the e f f i c i e n c y of the o p e r a t o r . Annual revenue was taken as the best a v a i l a b l e measure of c a r r i e r s i z e and t h i s , i n t u r n , c o r r e l a t e d w i t h : R.A. Nelson. "The Economies o f S c a l e i n the Tr a n s p o r t I n d u s t r y : A Reply , Land Economics, V o l . XXXV, May, 1 9 5 9 . 27 1. Cost per ton-mile; 2. Cost per v e h i c l e m i l e ; 3. Cost per average h a u l ; l e d the r e s e a r c h e r t o conclude elsewhere t h a t : . . . s i z e of f i r m bears l i t t l e r e l a t i o n t o o p e r a t i n g c o s t s . Consequently i t can h a r d l y be maintained t h a t t h e r e are economies of 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 tendency toward monopoly stemming from t h a t cause.5 Of some i n t e r e s t t o t h i s t h e s i s are the c o e f f i c i e n t s of rank c o r r e l a t i o n t h a t Nelson developed from h i s sample: C o e f f i c i e n t s of Rank C o r r e l a t i o n 4 (102 c a r r i e r s o p e r a t i n g w i t h i n and d o m i c i l e d i n New England) Cost per v e h i c l e m i l e t o Annual Revenue 0.07 Cost per ton m i l e t o Annual Revenue 0.33 Cost per average h a u l to Annual Revenue 0.45 A l e s s r e c e n t but b e t t e r known motor c a r r i e r c o s t study was p e r -formed by M.J. Roberts In 1956 (see Chapter V as w e l l ) . ^ A l -though Roberts' evidence was not as c o n c l u s i v e as t h a t of Nelson's, he was a b l e t o suggest t h a t i t was not the s i z e of ^U.S. Senate, Report of S e l e c t Committee on Small Business, Competition, R e g u l a t i o n and the P u b l i c I n t e r e s t i n the Motor  C a r r i e r Industry, 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. Nelson. The Economies of S c a l e In the T r a n s p o r t I n d u s t r y : A Reply' 1, Land Economics, V o l . XXXV, May, 1959, P. 183. M.J. Roberts, "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 H e a l t h " , Land Economics, Vol.XXXII, No. 3, May, 1956, pp. 228 - 238. 28 a c a r r i e r , but r a t h e r c e r t a i n o p e r a t i n g c h a r a c t e r i s t i c s such as u t i l i z a t i o n of equipment and average l e n g t h of ha u l t h a t determined the e f f i c i e n c y o f a c a r r i e r . These p o i n t s w i l l be examined i n g r e a t e r d e t a i l i n Chapter V. The b u l k of Roberts' evidence might be summarized simply and e f f e c t i v e l y i n the 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 As s e t s (Measure of S i z e ) and  V e h i c l e - M i l e Costs - Percentage i n Each Class" C a r r i e r S i z e (Assets -Small (0-3) Medium (5-6) Large (6-22) Low Cost - 0-50 per v e h i c l e m i l e 14.6$ 7.10 6.10 Medium - 50-80 / per v e h i c l e m i l e 28.70 15.80 10.30 High Cost - 80-180 £ per v e h i c l e m i l e 12.90 2.60 1.90 Source: M.J. Roberts, Land Economics, V o l . XXXII, p. 231. C e r t a i n l y , the above g r i d does not pu r p o r t to be con-c l u s i v e evidence t h a t economies of s c a l e d i d not show up i n Roberts' study. I t may, however, be observed t h a t a low co s t c a r r i e r was more o f t e n extremely s m a l l than extremely l a r g e . By the same token, an extremely l a r g e c a r r i e r was more o f t e n low c o s t than h i g h c o s t . As f o r the extremely s m a l l c a r r i e r i n Roberts' study, i t was j u s t as l i k e l y t o be high c o s t as low c o s t . Some evidence of l a r g e - s c a l e economies might be 29 evidenced, however, by the f a c t t h a t h i g h c o s t c a r r i e r s were almost e x c l u s i v e l y the extremely sma l l c a r r i e r . On the whole, however, Roberts' evidence d i d i n d i c a t e that l a r g e - s c a l e econo-mies were not a n o t a b l e c h a r a c t e r i s t i c of the motor c a r r i e r i n d u s t r y . Thus, two r e s p e c t e d c o s t s t u d i e s have borne out one assumption t h a t we are a b l e to make from c e r t a i n obvious economic c h a r a c t e r i s t i c s of the motor t r u c k i n g i n d u s t r y , t h a t i s , econo-mies of s c a l e are not l i k e l y t o be found. On the o t h e r hand, there i s an i n c r e a s i n g awareness today t h a t t h e r e are o t h e r f a c t o r s which might b r i n g about economies f o r the l a r g e - s c a l e t r u c k e r . F o r one t h i n g , l a r g e - s c a l e t r u c k i n g today i s being f o r c e d more and more to automate i t s o p e r a t i o n s as much as p o s s i b l e . Modern t e r m i n a l f a c i l i t i e s , data p r o c e s s i n g equip-ment, automatic m a t e r i a l s h a n d l i n g d e v i c e s are a l l n e c e s s i t a t e d as soon as the t r u c k e r e n t e r s l a r g e - s c a l e o p e r a t i o n s . The employment of such f a c i l i t i e s i s not n e c e s s a r i l y that mark of a c o m p a r a t i v e l y economical o r e f f i c i e n t s e r v i c e however, but merely a development occas i o n e d by growth and entrance i n t o a volume o p e r a t i o n . Yet i t i s p o s s i b l e that the s h i p p i n g p u b l i c may come to c o n s i d e r t h a t these imperatives of l a r g e - s c a l e o p e r a t i o n a c t u a l l y are s e r v i c e advantages. Should t h i s b r i n g about a l o s s i n patronage f o r the s m a l l e r c a r r i e r (who cannot a f f o r d such automation and s e r v i c e due to volume d e f i c i e n c y ) , 30 then c o n c e n t r a t i o n Is l i k e l y t o develop i n the i n d u s t r y - a c o n c e n t r a t i o n brought about by c e r t a i n advantages of s c a l e which c o u l d be l a b e l l e d "economies". A l s o , I t i s more l i k e l y t h a t the l a r g e o p e r a t o r may experience g r e a t e r 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 than the small t r u c k e r . Whether t h i s i s a c t u a l l y due to a b e t t e r c r e d i t worthiness or, more l i k e l y , because of poor understand-i n g of s m a l l c a r r i e r o p e r a t i o n s on the p a r t o f the f i n a n c i n g , i n s t i t u t i o n s , i s not r e l e v a n t . The f a c t i s t h a t the l a r g e c a r r i e r i s l i k e l y t o be i n an advantaged p o s i t i o n . F o r both these reasons, i t i s p o s s i b l e t h a t economies, or, more p r o p e r l y , advantages, of s c a l e c o u l d w e l l e x i s t i n the motor c a r r i e r i n d u s t r y . I f such a p o s s i b i l i t y d i d e x i s t then on the b a s i s o f the d i s c u s s i o n about economies of s c a l e and n a t u r a l monopolies s p r i n g i n g from such economies, one might be able to j u s t i f y t r u c k i n g r a t e r e g u l a t i o n much i n the same way as u t i l i t y and r a i l w a y r a t e r e g u l a t i o n i s j u s t i f i e d . The type of advantages of s c a l e t h a t have been examined here, however, are not i n any way p e c u l i a r t o the motor c a r r i e r i n d u s t r y . I f one were t o j u s t i f y motor c a r r i e r r e g u l a t i o n on the above grounds, then s u r e l y he c o u l d accept r a t e r e g u l a t i o n over any i n d u s t r y . Economies or advantages of s c a l e i s not the answer. ^Our i n d u s t r y has t r a d i t i o n a l l y been one of s m a l l , i n -dependent 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 companies. Being s m a l l . . . f i n a n c i n g was accomplished out of r e t a i n e d e a r n -i n g s . 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 than simply revenue u n i t s ) has been mainly l i m i t e d t o the l a r g e r c a r r i e r s who can r e s o r t t o oth e r than earned s u r p l u s f o r r e s o u r c e s " . Roland N. Reedy, S e c r e t a r y T r e a s u r e r , Great Southern T r u c k i n g Company, F i n a n c i n g Motor C a r r i e r Operations. 1958. ~ 51 We must search deeper before f i n d i n g a s a t i s f a c t o r y j u s t i f i c a -t i o n f o r motor c a r r i e r r a t e r e g u l a t i o n . In a r a t h e r c o n c i s e a r t i c l e , The Economic B a s i s of  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 , ? D.P. Pegrum asks some p o i n t e d q u e s t i o n s as to why motor c a r r i e r s are, i n f a c t , r e g u l a t e d . He does not c o n t r a s t the economic s t r u c t u r e of the motor c a r r i e r t o t h a t of the r a i l r o a d o r u t i l i t y and con-clude t h a t the t r u c k e r d i s p l a y s none of the f e a t u r e s of a n a t u r a l monopoly. He cannot, t h e r e f o r e , j u s t i f y r a t e r e g u l a -t i o n f o r t h i s mode on any such grounds. Competition, he f e e l s , p r o v i d e s an adequate safeguard t o the p u b l i c from d i s c r i m i n -a t o r y p r i c i n g and ruinous c o m p e t i t i v e p r a c t i c e s . The motor c a r r i e r w i t h i t s s m a l l a s s e t base i s "economically m o b i l e " , y and when economic m o b i l i t y i s i n evidence In any i n d u s t r y , t h a t i n d u s t r y i s approaching p e r f e c t c o m p e t i t i o n . T h i s i s a b a s i c l e s s o n of economic t h e o r y . In theory a t l e a s t , i t i s simple to demonstrate how the motor c a r r i e r i n d u s t r y does resemble the p e r f e c t l y c o m p e t i t i v e model: Rate Volume 'R.A. Nelson, "Pegrum on the Economic B a s i s o f P u b l i c P o l i c y f o r Motor Tr a n s p o r t " , Land Economics, V o l . XXVIII, August, 1952, pp. 245 - 265. 8 I b i d . , p. 256. 32 Firm "A" i s a trucker whose major investment i s i t s power unit and t r a i l e r at the p r e v a i l i n g per ton rate over a ce r t a i n route (R-^). "A" i s earning a reasonable p r o f i t . Should the demand f o r trucking service increase and shippers b i d up the rate to R2, "A" w i l l be earning more than a s u f f i c i e n t p r o f i t . Firm "B", sensing t h i s p r o f i t a b l e market, quickly buys another unit and enters the route. With demand and supply thus again in equilibrium, the rate f a l l s back to R]_. Should the new rate f a l l below R, either "A" or "B" can e a s i l y leave the market. Entrance and departure i s thus f a c i l i t a t e d due to the f a c t that the major expense of doing business here i s represent-ed by variable costs. The f i x e d Investment ( i . e . the unit i t -s e l f ) Is not substantial r e l a t i v e to the revenue i t w i l l create i n a year of business. In addition, such a f i x e d asset, un-l i k e a r a i l r o a d right-of-way and structures, can quickly change hands i n a used market at a good portion of i t s factory p r i c e . Such mobility acts as good protection to the consumer or shipper as w e l l . The rate R^ i s not only most stable, but as i t should gravitate to the l e v e l of the truckers' long-ran marginal cost, i t should be extremely reasonable. "The theory of regulation", as Pegrum notes, "grew out 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 How, then, does th i s theory apply to motor c a r r i e r s ? Ibid., p. 247. 33 In a word, i t does not. It i s the opinion of t h i s writer that rate regulation of motor c a r r i e r s cannot l o g i c -a l l y spring from t h e o r e t i c a l economic arguments such as "the theory of regulation". Rate controls over motor c a r r i e r s were introduced at the same time as entry controls i n t h i s industry. The application of these two, moreover, came not as a r e s u l t of long meditation, nor a f t e r reference to economic theory, but simply as ad hoc remedies to a perilous competitive s i t u a t i o n i n an embryonic transport industry, an industry which was growing at a colossal rate. B r i e f History Although regulation of motor c a r r i e r s may not be necessary f o r exactly the same reasons that require rail r o a d s to be regulated, i t does not follow that regulation of motor c a r r i e r s i s undesirable. A study of motor c a r r i e r transportation as i t existed p r i o r to the establishment of e f f e c t i v e regulation reveals c e r t a i n undesirable and objectionable features f o r which a remedy was sought. Some of these practices were s i m i l a r to r a i l r o a d practices considered objectionable; others were peculiar to the motor c a r r i e r industry.10 Prio r to passage of the f i r s t motor c a r r i e r acts, conditions i n the American trucking industry were chaotic. The i n t e r n a l combustion engine was perfected, roads were under construction, shippers were demanding more and more in the way of fa s t transportation. Thus, the p o s s i b i l i t y of getting into a booming transportation revolution with but a D.P. Locklin, op.cit., p. 668 34 very small Investment began to attr a c t thousands of would-be ca r r i e r s v i r t u a l l y overnight. In the period 1915-1930, how-ever, i t was evident that more motor c a r r i e r s were becoming available than the t r a f f i c warranted. This surplus of operators, coupled with a general ignorance by these small businessmen of how to set remunerative rates, resulted i n a mad scramble f o r business. The res u l t was a s i t u a t i o n where even the larger operators were unable to secure a stable p o s i t i o n . 1 1 The public could not expect adequate service under these unsettled competitive conditions which persisted f o r more than a decade in some states of the U.S., nor were the authorities or c a r r i e r s w i l l i n g to wait u n t i l the industry s e t t l e d into equilibrium. Before long, most responsible c a r r i e r s , ably assisted by the railroads, were appealing to state l e g i s l a t u r e s to r e s t r i c t the entrance of truckers into the industry. Between the years 191-5 and 1928, therefore, most states i n the United States entered the f i e l d of motor c a r r i e r regulation. The i n i t i a l intention was only to protect the public and, most important, the industry i t s e l f from a severe overcapacity which was developing as a result of inordinately rapid growth. "Prior to regulation, new truckers entered business at w i l l , slashed t o l l s to get f r e i g h t , paid, inadequate wages ...maintained t h e i r trucks so badly that they endangered other 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 'wild-catting' and ensured a reasonably high standard of service along the route concerned." A.W. Currie, Economics of  Canadian Transportation, 2nd Ed., Toronto, university of Toronto press, iy^y, pp. 493-494. 35 Even beyond, the n e c e s s i t y of p r o t e c t i n g an embry-oni c motor c a r r i e r i n d u s t r y from i t s e l f , r e g u l a t o r y p h i l o s o p h y was f o r c e d to become concerned f o r the f i r s t time about the t r a n s p o r t a t i o n f i e l d i n i t s e n t i r e t y : By 1920, although competing c a r r i e r s had not 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 ' p r o v i n c e , the p a t t e r n was becoming e v i d e n t . The Congress, r e a l i z -i n g 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 the n a t i o n a l economy might w e l l be d e s t r u c t i v e of the i n d u s t r y , began to s h i f t the emphasis of r e g u l a -t o r y l e g i s l a t i o n . . . t o the continued w e l f a r e of the i n d u s t r y i t s e l f . i 2 That motor t r u c k e r s had to be l i m i t e d i n number by route, by r e g i o n and by s t a t e was soon an accepted f a c t . That r a t e con-t r o l s must accompany e n t r y 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 the absence of r a t e c o n t r o l s , " a u t h o r i z e d " t r u c k e r s would be f r e e of the f u l l c o m p e t i t i v e f o r c e attendant upon oth e r i n d u s t r i e s and thus at l i b e r t y to a d j u s t r a t e s to what the t r a f f i c would bear. By r e s t r i c t i n g c o m petition, s t a t e r e g u l a t o r s had i n c a p a c i t a t e d f o r e v e r the ec o n o m i c a l l y mobile t r u c k i n g i n d u s t r y from s t a b i l i z i n g i t s e l f e v e n t u a l l y to a p o s i t i o n of p e r f e c t c o m p e t i t i o n . One might say that the motor c a r r i e r was d e s t i n e d as e a r l y as the f i r s t e n t r y con-t r o l s of 1920 to be an " a r t i f i c i a l monopoly". Any m o n o p o l i s t i c economic u n i t , of course, whether n a t u r a l or c o n t r i v e d , c o u l d expose i t s consumers to e x c e s s i v e r a t e s , d i s c r i m i n a t i o n o r Inadequate s e r v i c e . The l o g i c of a p p l y i n g r a t e c o n t r o l s t o -^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 the p l a c e of the market p r i c e mechanism was thus no d i f f e r e n t i n i t s a p p l i c a t i o n to t r u c k e r s than t o r a i l r o a d s or t o u t i l i t i e s . Powers and D u t i e s of the Motor C a r r i e r R e g u l a t o r Thus f a r , there has been no d i s c u s s i o n o f what form r a t e r e g u l a t i o n a c t u a l l y t a k e s . In t h i s s e c t i o n , t h e r e f o r e , we s h a l l l o o k a t the v a r i o u s powers and d u t i e s of the r e g u l a -t o r i n r e l a t i o n t o r a t e s e t t i n g . Minimum Rate R e g u l a t i o n The establishment and maintenance of minimum r a t e l e v e l s over p a r t i c u l a r routes i s one aspect o f motor c a r r i e r r a t e r e g u l a t i o n i n the U n i t e d S t a t e s . To the extent that c o m p e t i t i o n does e x i s t w i t h i n the imposed e n t r y l i m i t a t i o n s , the r e g u l a t o r i s concerned that e x c e s s i v e r a t e - c u t t i n g p r a c t i c e s not go on. Indeed, even where e n t r y c o n t r o l s are enforced, some degree of co m p e t i t i o n w i l l f a c e the r e g u l a t e d c a r r i e r . S t a t e t r u c k i n g r e g u l a t o r s i n the U n i t e d S t a t e s have u s u a l l y r e s e r v e d themselves some a u t h o r i t y over the minimum r a t e s such c a r r i e r s might s e t i n the f a c C of t h i s competition 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 are l e s s s t r i c t , the importance of p o l i c i n g minimum r a t e l e v e l s looms l a r g e r a g a i n . •"•^ D.U. Harper, Economic R e g u l a t i o n of the Motor T r u c k i n g  Industry by the S t a t e s , Urbana, U n i v e r s i t y of I l l i n o i s Press, Oh. IX, 1959. 37 Such power, of course, a c t s as a more d i r e c t method of p r e -v e n t i n g d e s t r u c t i v e c o m p e t i t i o n . The mechanics of minimum r a t e r e g u l a t i o n w i l l not be e x p l a i n e d In t h i s Chapter. The d i f f i c u l t i e s imposed upon a commission i n determining what a minimum r a t e l e v e l o r minimum r a t e f o r a p a r t i c u l a r h a u l should be are extremely complex and, as we s h a l l see, u n s e t t l e d , to say the l e a s t . In f a c t , one f a c e t of these d i f f i c u l t i e s ; i . e . how to d i s -t i n g u i s h whether o r not a t r u c k e r i s e a r n i n g "a f a i r r e t u r n " w i t h h i s r a t e s , i s the s u b j e c t of l a t e r Chapters. S u f f i c e i t to say t h a t most r e g u l a t o r s are empowered to set or to d e t e r -mine minimum r a t e l e v e l s i n o r d e r t o s a t i s f y the o b j e c t i v e s they are charged to seek as l i s t e d at the beginning of t h i s Chapter. Maximum Rate R e g u l a t i o n In t h a t s h i p p e r s are t h e o r e t i c a l l y f r e e to engage p r i v a t e t r u c k i n g should common c a r r i e r r a t e l e v e l s become too high, e x c e s s i v e r a t e s should not be a danger to the p u b l i c . However, such a statement would be of l i t t l e s o l a c e to the s m a l l volume s h i p p e r . In a d d i t i o n , the r e s t r i c t e d e n t r y c h a r a c t e r i s t i c of the i n d u s t r y i n d i c a t e s t h a t t h e r e may w e l l be many c a p t i v e s h i p p e r s r e l i a n t upon one highway c a r r i e r . E s s e n t i a l t o the p r o t e c t i o n of such s m a l l and c a p t i v e s h i p p e r s i s the v e s t u r e of maximum r a t e powers with the r e g u l a t o r . 38 Maximum r a t e r e g u l a t i o n u s u a l l y goes hand i n hand wit h the aforementioned minimum r a t e powers to a commission wi t h j u r i s d i c t i o n over t r u c k e r s . In many ways, the c r i t e r i a of what c o n s t i t u t e s an unreasonably hi g h r a t e are the same as those employed t o study minimum r a t e l e v e l s . Again, t h e r e -f o r e , we s h a l l d e f e r d i s c u s s i o n of such c o n s i d e r a t i o n s u n t i l l a t e r c h a p t e r s . Rate D i s c r i m i n a t i o n Although maximum and minimum r a t e r e g u l a t i o n are the terms of r e f e r e n c e f o r a l l r e g u l a t o r y commissions w i t h a u t h o r -i t y over t r u c k e r s , o f t e n r e g u l a t o r y power s l i g h t l y beyond t h i s Is g i v e n to p r e s c r i b e 'and h o l d c a r r i e r s t o s p e c i f i c r a t e s t r u c t u r e s . Not o n l y does t h i s take care of the abuses of unreasonably high and non-compensatory r a t e s , but a l s o i t a llows a commission to prevent u n j u s t d i s c r i m i n a t i o n as be-tween s h i p p e r s o r groups of s h i p p e r s . In many cases, r a t e d i s c r i m i n a t i o n i s s p e c i f i c a l l y d e a l t w i t h i n s t a t u t o r y p r o -v i s i o n s o r commission r u l e s as w e l l . C l e a r l y , t h i s i s a s i g n i f i c a n t problem and one m e r i t i n g the a t t e n t i o n of the r e g u l a t o r . Thus, minimum and maximum r a t e r e g u l a t i o n , o r the more sweeping power of s e t t i n g s p e c i f i c r a t e s along with p r o v i s i o n s to p r o h i b i t d i s c r i m i n a t i o n , are the p r i n c i p a l c o n s i d e r a t i o n s o r the b a s i c forms of common c a r r i e r r a t e r e g u l a t i o n . The approach to each of these problems i s by no 39 means standar d throughout North America, nor do a l l r e g u l a -t o r s share the same ph i l o s o p h y about how t h i s k i n d of r e g u l a -t i o n should be a d m i n i s t e r e d . The next and f i n a l s e c t i o n o f t h i s Chapter w i l l b r i e f l y review some of the powers and s t r u c t u r e s of c a r r i e r r a t e a u t h o r i t i e s and how the v a r i o u s types of r a t e r e g u l a t i o n are c a r r i e d out t h e r e i n . The Regulatory Environment At t h i s p o i n t , i t would be d e s i r a b l e t o s t a t e j u s t how t r u c k i n g r a t e r e g u l a t i o n has evolved i n our c o n t i n e n t . What i s i t s h i s t o r y ? What are the organs and methods of en-forcement? In t h a t the U n i t e d S t a t e s pioneered i n the p r a c t i c e of a d m i n i s t e r i n g c o n t r o l s over t r u c k i n g r a t e s , i t might be best to begin i n t h a t c o u n t r y . The U n i t e d S t a t e s In the U n i t e d S t a t e s , r e g u l a t i o n of t r u c k i n g by the s t a t e s began i n 1914. In 1935, the F e d e r a l Motor C a r r i e r Act was passed. S i n c e passage of t h i s Act, moreover, the r o l e of the f e d e r a l government, as a d m i n i s t e r e d by the I n t e r -s t a t e Commerce Commission, has been the one emphasized by students of the i n d u s t r y . T h i s i s d e s p i t e the f a c t t h a t a great d e a l of the onus of r a t e and oth e r r e g u l a t i o n s t i l l f a l l s on the s t a t e s ' u t i l i t y commissions. On the s t a t e l e v e l , e a r l y r e g u l a t i o n of motor c a r r i e r s was a matter of s t r e t c h i n g the e x i s t i n g s t a t e p u b l i c 40 u t i l i t y laws and commissions to i n c l u d e economic o v e r s i g h t of t h i s new development i n t r a n s p o r t a t i o n . Over a p e r i o d of f i f t e e n y e a r s , the c o u r t s around the country g r a d u a l l y ap-proved such r a t e r e g u l a t i o n by the s t a t e s of common and con-t r a c t motor c a r r i e r s . Even by 1935, motor c a r r i a g e was w e l l bound by p r a c t i c a l l y every s t a t e i n the union. As f a r as r a t e c o n t r o l i s concerned, every s t a t e except New J e r s e y has e i t h e r maximum-minimum powers, minimum powers alone, or, more u s u a l l y , c o n t r o l over the p r e c i s e r a t e s charged by c a r r i e r s o p e r a t i n g i n t r a - s t a t e . Each s t a t e employs s i m i l a r c r i t e r i a f o r determining r a t e adequacy or unreasonableness. A l l U.S. s t a t e s have t h e i r own motor c a r r i e r a c t or a s e c t i o n on motor c a r r i e r s w i t h i n a t r a n s -p o r t a t i o n o r p u b l i c u t i l i t i e s a c t . The a d m i n i s t r a t o r of such an a c t i s u s u a l l y c a l l e d the s t a t e U t i l i t y Commission. The f e d e r a l government ent e r e d the f i e l d of motor c a r r i e r r e g u l a t i o n i n the midst of the t h i r t i e s as i t was then apparent t h a t a great gap was de v e l o p i n g i n the r e g u l a -t i o n o f t h i s i n d u s t r y and, indeed, i n the t o t a l t r a n s p o r t a -t i o n sphere i t s e l f . That gap was, of course, i n t e r s t a t e o p e r a t i o n s . The Motor C a r r i e r Act of 1935, now Part I I of the I n t e r s t a t e Commerce Act, p l a c e d a l l American c a r r i e r s o p e r a t -i n g 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 under the j u r i s -41 d i c t i o n of the I n t e r s t a t e Commerce Commission. In the area of r a t e r e g u l a t i o n , the s t i p u l a t i o n s are r e l a t i v e l y s e v e r e . The Commission may p r e s c r i b e the maximum, minimum, o r a c t u a l r a t e s t o be charged by any c a r r i e r o r group of c a r r i e r s i n any area o r f o r any p a r t i c u l a r haul t h a t the Commission has cause t o i n q u i r e i n t o . S e c t i o n 204 of the Act s t a t e s the g e n e r a l d u t i e s and powers t o be e x e r c i s e d by the Commission over motor c a r r i e r s . To enable 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 out, the Act allows the Commission t o e s t a b l i s h reasonable requirements w i t h r e s p e c t t o f i l i n g r e c o r ds and r e p o r t s , keeping a uniform system of accounts, e t c . With regard to a d m i n i s t r a t i o n o f the Act, D i v i s i o n I I of the I.C.C. i s r e s p o n s i b l e f o r d e a l i n g w i t h r a t e s , t a r i f f s , agreements be-tween c a r r i e r s , v a l u a t i o n of f i r m s , and the h a n d l i n g of f o r -mal complaints about r a t e and t a r i f f m a t t e r s . S e c t i o n 216(b) i s the one r e q u i r i n g f o r e i g n and. i n t e r s t a t e o p e r a t o r s t o : e s t a b l i s h , observe and enf o r c e reasonable charges, 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 and reasonable r e g u l a t i o n s and p r a c t i c e s . 1 4 The I.C.C. has two g e n e r a l approaches t o determining whether, indeed, reasonable r a t e s are being charged. The f i r s t i s the - ^ I n t e r s t a t e Commerce Act, Sec.2 U.S., as c i t e d by C.B. A i t c h i s o n , F a i r Reward and J u s t Compensation, Common C a r r i e r  S e r v i c e - Standards Under the I n t e r s t a t e Commerce Act, Washington, 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 g e n e r a l revenue case. Here, one o r more c a r r i e r s , p o s s i b l y r e p r e s e n t e d by t h e i r r a t e bureau, show the Commission t h a t an emergency e x i s t s f o r the p a r t i e s concerned. E x i s t i n g revenues are t a b l e d , the c h a r a c t e r of the need of the c a r r i e r s 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 , and present and f o r e s e e n o p e r a t i n g expenses are s t a t e d . In a d d i t i o n , sometimes evidence as to book investment and the r e q u i r e d present r a t e s of r e t u r n thereon are shown. A c o n c l u d i n g statement i s made to the Commission by the a p p l i c a n t s as to what revenue changes are r e q u i r e d to earn reasonable p r o f i t s and the consequent g e n e r a l r a t e changes c a l l e d f o r . Opposing witnesses are heard as w e l l . By the same token, a g e n e r a l revenue case can be i n i t i a t e d by the s h i p p e r ( s ) . Here, i t i s demonstrated t h a t need e x i s t s f o r a l i g h t e n i n g of the g e n e r a l r a t e burden. In the g e n e r a l r a t e case, n e i t h e r the Commission nor the a p p e l l a n t s are concerned w i t h the g e n e r a l l e v e l of r a t e s , r a t h e r t h e i r i n t e r n a l s t r u c t u r e - s p e c i f i c charges which someone f e e l s are out of balance with the g e n e r a l reasonableness of the r a t e l e v e l . The same type of data i s f i l e d by c a r r i e r s f o r a g e n e r a l r a t e case w i t h the a d d i t i o n of more s p e c i f i c c o s t and revenue f i g u r e s f o r the hauls under i n v e s t i g a t i o n . P r o f i t r a t i o s , r e t u r n on investment, d e t e r -m i n a tion of the out-of-pocket c o s t l e v e l are a l l p e r t i n e n t c o n s i d e r a t i o n s f o r both c a s e s . T h i s i n f o r m a t i o n , a l l of 43 which p e r t a i n s to d e t e r m i n a t i o n of a f a i r r e t u r n , i s the s u b j e c t of the next c h a p t e r s . As s t a t e d , the I.C.C. has a b s o l u t e power of r u l i n g on r a t e s f o r any i n t e r s t a t e c a r r i e r . T h i s i n c l u d e s the m a j o r i t y of t r u c k e r s i n the U.S. The Commission can respond to an appeal r e g a r d i n g r a t e s o r i t can i n i t i a t e proceedings i t s e l f . C l e a r l y , common motor c a r r i e r r a t e r e g u l a t i o n i s s c r u t i n i z e d r a t h e r c l o s e l y i n the U.S. even though, as we s h a l l see, some of the mechanics of r a t e and r a t e l e v e l examination are f a r from p e r f e c t i n t h e i r use and development. Canada In Canada, i t has o f t e n been s a i d t h a t the f e d e r a l government has 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 motor c a r r i e r o p e r a t i o n s , but f o r the time being has "loaneEd" i t s r e g u l a t o r y powers to the p r o v i n c e s . By v i r t u e of pas-sage of the r e c e n t T r a n s p o r t a t i o n A c t 1 ^ however, the f e d e r a l government has g i v e n i n d i c a t i o n t h a t i t w i l l take i t s powers back and set up a committee of the new T r a n s p o r t a t i o n Commis-s i o n t o a d m i n i s t e r them. Even wi t h t h i s recent move, i t i s somehow d i f f i c u l t t o imagine t h a t Ottawa r e a l l y wants the headaches of t r u c k i n g r e g u l a t i o n , and most observers are c u r i o u s l y and s k e p t i c a l l y a w a i t i n g some d e f i n i t e a c t i o n . H i s t o r y P r i o r t o 1949, the p r o v i n c e s enjoyed e x c l u s i v e and 1 5 R . S . C , 1952, C. 271, as amended 1967 44 r e l a t i v e l y uncontested c o n t r o l over the a c t i v i t i e s o f motor c a r r i e r 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 at t h a t time was concerned. T h i s was by v i r t u e of S e c t i o n 92 of the B r i t i s h North America Act which gave the j u n i o r governments j u r i s -d i c t i o n over "property and c i v i l r i g h t s " and " l o c a l works". T h i s i s not t o say t h a t such e x c l u s i v e r i g h t s were not con-t e s t e d from time t o time. In 1937, and again i n 1940, b i l l s were i n t r o d u c e d i n t o the f e d e r a l parliament u r g i n g f e d e r a l c o n t r o l s over i n t e r p c o v i n c i a l o p e r a t i o n s . S i n c e , a t the time, such o p e r a t i o n s amounted t o o n l y three t o f i v e p e r cent o f t o t a l I n t e r c i t y b u s i n e s s , 3 - ^ the o p p o s i t i o n t o f e d e r a l r e g u l a t i o n 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 the arguments i n f a v o r o f such l e g i s l a t i o n no matter how co m p e l l i n g . The r a i l w a y s and other i n t e r e s t s who vehemently c a l l e d f o r f e d e r a l c o n t r o l s s i m i l a r t o those i n the U.S. simply had to wait u n t i l the volume of i n t e r p r o v i n c i a l t r u c k i n g m e r i t e d the time and expense of s e n i o r government a d m i n i s t r a t i o n . Moreover, s i n c e the Canadian f e d e r a l govern-ment had c o n t r i b u t e d but m i n i m a l l y t o highway investment up to t h i s time, t h e r e was another c o n t r a s t t o the American s i t u a t i o n . Another f e a t u r e of the 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 mid-century was t h a t although most p r o v i n c e s had some s o r t of motor c a r r i e r a ct o r p u b l i c u t i l i t i e s a c t which i n some way took care of s a f e t y and en t r y matters, and s t i p u l a t e d measures t o p r o t e c t the >A.W. C u r r i e , I b i d . , p. 499. 45 p r o & i n c i a l l y - o w n e d roads, r a t e r e g u l a t i o n even t o the extent of f i l i n g was n e g l e c t e d by the s t a t e . In the t h i r t i e s alone some weak but u n s u c c e s s f u l attempts were made by the i n d u s t r y i t s e l f t o r e g u l a t e r a t e s e t t i n g . In 194-9, a s i g n i f i c a n t c o u r t case turned the course U of motor c a r r i e r r a t e r e g u l a t i o n h i s t o r y i n Canada. A motor coach o p e r a t o r i n doing b u s i n e s s i n Maine, New Bruns-wick 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 by the New Bruns-wick Motor C a r r i e r Board (the a u t h o r i t y f o r motor c a r r i e r and motor bus o p e r a t i o n s In New Brunswick). An appeal t o the Supreme Court of Canada brought about the d e c i s i o n t h a t a p r o v i n c i a l government had no r i g h t t o r e g u l a t e any f a c e t of i n t e r p r o v i n c i a l o r f o r e i g n motor c a r r i e r o p e r a t i o n s . S e v e r a l p r o v i n c i a l appeals simply served t o a f f i r m the d e c i s i o n and suddenly the f e d e r a l government was f a c e d w i t h the t a s k of p a s s i n g l e g i s l a t i o n as t o how i t proposed t o handle i t s new-found yet u n s o l i c i t e d r e s p o n s i b i l i t i e s . The r e s u l t was the passage of the F e d e r a l Motor V e h i c l e T r a n s -p o r t Act of 1 9 5 4 . Of l i t t l e s u r p r i s e t o anyone, the f e d e r a l govern-ment simply used t h i s a c t t o s e t up the v a r i o u s p r o v i n c i a l r e g u l a t o r y agencies as f e d e r a l c o n t r o l boards, v e s t e d with a l l powers l e g a l l y h e l d by the s e n i o r government t o r e g u l a t e l 7A.G. Ont v. A.C. Winner, 5 4 l ; 4 D.L.R., 657, 71 C.R.T.C., 225. 46 the t r u c k i n g and bus i n d u s t r i e s . Prom t h a t time u n t i l v ery r e c e n t l y , t h e r e f o r e , r e g u l a t i o n of motor c a r r i e r o p e r a t i o n s i n Canada has been e n t i r e l y under 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 growing 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 were being a d m i n i s t e r -ed, however, under the a u t h o r i t y o f a f e d e r a l s t a t u t e . Present S i t u a t i o n As a r e s u l t of the p r o v i n c i a l m o nopolization of t r u c k i n g r e g u l a t i o n , Canada i s c h a r a c t e r i z e d by a marked l a c k of u n i f o r m i t y i n the content of i t s motor c a r r i e r a d m i n i s t r a t i o n p r o v i n c e t o p r o v i n c e . I t i s not the t a s k of t h i s t h e s i s t o draw a t t e n t i o n t o the vast d i f f e r e n c e s t h a t e x i s t between c e r t a i n j u r i s d i c t i o n s , nor to p o i n t out 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 f a r as r a t e r e g u l a t i o n i s concerned, however, there i s m e r i t i n revi e w i n g v a r i o u s p r o v i n c i a l approaches to the problem. I t should r e a d i l y be apparent, moreover, t h a t the same t i g h t a d m i n i s t r a t i o n of r a t e c o n t r o l e x i s t i n g i n the U.S. v i a the I.C.C. and s t a t e commissions does not e x i s t In Canada. A l l p r o v i n c e s i n Canada (with the e x c e p t i o n of Newfoundland) have a board o r commission which a d m i n i s t e r s r e g u l a t o r y powers over motor t r u c k e r s . Each r e g u l a t o r pos-sesses some a d m i n i s t r a t i v e power over f r e i g h t r a t e s , and. o n l y • L OAs C u r r i e notes, the p h i l o s o p h y toward r e g u l a t i o n of 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 than i n the U.S.lL "Some p r o v i n c i a l governments oppose r e g u l a t i o n of r a t e s because they 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 keep down t r a n s -p o r t a t i o n t o l l s of both r a i l and highway c a r r i e r s . . . . e n f o r c -i n g r e g u l a t i o n s c o u l d c o s t too much money...The i n d u s t r y (here) 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. 46 one p r o v i n c e , A l b e r t a , f a i l s t o e x e r c i s e t h i s power. In the case of Nova S c o t i a and New Brunswick, the r e g u l a t o r s 1 author-i t y c o n s i s t s o n l y of r e q u i r i n g the operat o r s t o f i l e t h e i r schedule o f r a t e s . In the remainder o f the p r o v i n c e s , the r e g u l a t o r y commission enjoys a degree of d i r e c t i n f l u e n c e over t r u c k i n g t a r i f f s . In A l b e r t a , and a l s o i n Ont a r i o , the r e g u l a t o r does not a c t u a l l y u t i l i z e i t s a u t h o r i t y t o e s t a b l i s h or m a i n t a i n r a t e s and r a t e l e v e l s . T h i s i s a remarkable con-t r a s t t o American s t a t e r e g u l a t o r s and the I n t e r s t a t e Com-merce Commission. The l a t t e r , as we s h a l l see, are deeply Inv o l v e d i n r a t e cases at a l l t i mes. In B r i t i s h Columbia, the Motor C a r r i e r Branch of the P u b l i c U t i l i t i e s Commission must approve every r a t e p u b l i s h e d by any motor c a r r i e r i n the p r o v i n c e . Any schedule c o n s i d e r e d unreasonable can be a l t e r e d o r suspended. In ord e r t o m a i n t a i n the i n t e g r i t y o f the o v e r a l l r a t e s t r u c t u r e , the Commission has power to a d j u s t any p a r t i c u l a r r a t e as w e l l . In B.C., where r a t e hearings are not uncommon, a n ( j [ a n a c t i v e c a r r i e r a s s o c i a t i o n seems t o be encouraging r e s e a r c h i n t o the d i f f i c u l t a r e a of t r u c k i n g r a t e and e n t r y c o n t r o l s , i t would appear that some of the most e f f e c t i v e r e g u l a t i o n , r e g u l a -t i o n s i m i l a r to t h a t i n the U.S., may be d e v e l o p i n g . 19por example, d u r i n g the S p r i n g of 1967, a h e a r i n g was i n progress b e f o r e the P.U.C. of B r i t i s h Columbia wherein a l l Vancouver I s l a n d t r u c k e r s were opposing a c o n t e n t i o n by a num-ber of 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 exces s i v e . 47 Summary T h i s Chapter has been concerned with both the j u s t i f i c a t i o n s and arguments a g a i n s t r a t e r e g u l a t i o n over t r u c k i n g . A f t e r some review was made of the t h e o r e t i c a l aspects of the problem, the a c t u a l h i s t o r y of how r a t e r e g u l a t i o n came i n t o b e i n g i n t h i s i n d u s t r y both i n - t h e U n i t e d S t a t e s and i n Canada was o u t l i n e d . I t would seem t h a t t h e r e are s u b s t a n t i v e arguments on both s i d e s of the i s s u e . In a c t u a l p r a c t i c e , r a t e r e g u l a t i o n seemed t o come as a nec e s s a r y p a r t n e r t o e n t r y c o n t r o l s i n the U n i t e d S t a t e s when the In d u s t r y was young and growing q u i c k l y . In a d d i t i o n , t h i s Chapter has i n t r o d u c e d c e r t a i n of the terms of r e f e r e n c e t h a t t r u c k i n g r a t e r e g u l a t o r s d e a l w i t h . The r a t e "case" i s a term that w i l l be f r e q u e n t -l y d e a l t w i t h i n subsequent c h a p t e r s . 48 CHAPTER I I I 1 DETERMINATION OF A FAIR RATE OF RETURN IN MOST REGULATED INDUSTRIES In Chapter I a review was made of the economic j u s t i f i c a t i o n s f o r s t a t e r e g u l a t i o n of c e r t a i n i n d u s t r i e s . At the same time, some of the l e g a l r a t i o n a l e behind p u b l i c c o n t r o l over b u s i n e s s was sketched out . I t was found t h a t the U.S. Supreme Court w i l l condone r a t e c o n t r o l s over an Indust r y which, i f l e f t u n f e t t e r e d , could be harmful, i n the CourtVs o p i n i o n , t o the best p u b l i c i n t e r e s t . F u r t h e r , the d e c i s i o n s o f t h i s august body have had gre a t i n f l u e n c e even beyond U.S. j u r i s d i c t i o n . In Chapter I I i t was seen how the motor c a r r i e r was i n t r o d u c e d to s t a t e r e g u l a t i o n both i n the U n i t e d S t a t e s and i n Canada. Some review was made of the economic c h a r -a c t e r i s t i c s o f the motor c a r r i e r i n d u s t r y so as to suggest that the j u s t i f i c a t i o n f o r r e g u l a t i o n of r a t e s i n t h i s f i e l d r e s t s on d i f f e r e n t grounds than those o f most o t h e r r e g u l a -t e d i n d u s t r i e s . The i n t e n t of t h i s Chapter i s to i n d i c a t e b r i e f l y what form r a t e r e g u l a t i o n w i l l take i n the g e n e r a l case, then to i n t r o d u c e and examine i n d e t a i l the i s s u e u s u a l l y c o n s i d e r e d the t h o r n i e s t f o r r a t e r e g u l a t o r s . The i s s u e i s t h a t of d e c i d i n g how to measure the r e t u r n on investment being earned by the i n d u s t r y o r f i r m and then choosing 49 c r i t e r i a f o r judging the adequacy or " f a i r n e s s " of h i s r e -t u r n . In the subsequent chapter, the motor c a r r i e r i n d u s t r y w i l l be examined i n l i g h t of the d i s c u s s i o n of t h i s c h a p ter. S e t t i n g the Rate L e v e l As s t a t e d i n Chapter I, a r a t e r e g u l a t o r i s s a d d l e d with r e s p o n s i b i l i t i e s both to the p u b l i c and to the producer or c a r r i e r t h a t i t i s r e g u l a t i n g . For the p u b l i c , i t attempts to ensure reasonable r a t e s as w e l l as adequate and r e l i a b l e s e r v i c e . For the f i r m o r i n d u s t r y , the r e g u l a t o r w i l l t r y to guarantee a r a t e l e v e l whereby reasonable p r o f i t s can be earned and f i n a n c i a l s t a b i l i t y maintained. The s e t t i n g of such a r a t e l e v e l i s not a p r e c i s e s c i e n c e by any means. C l e a r l y , a l l the a u t h o r i t y can aim f o r i s t o have i t s r a t e l e v e l f a l l w i t h i n a "zone of reasonableness" at a l l times. FIG. 3 P R I C E P E R U N I T Zone of Unreasonableness Li n e of E x p l o i t a t i o n Reasonable Reasonable B L i n e of C o n f i s c a t i o n Zone of Unreasonableness O v e r a l l Rate of Return Although t h i s "zone" w i t h i n which the r e g u l a t o r s e t s the r a t e l e v e l i s not w e l l d e f i n e d , i t s upper and lower l i m i t s are u s u a l l y the s u b j e c t of c l o s e s c r u t i n y . As the "Zone of reasonableness" i s a term one may expect to encounter i n any source concerned 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 from a r u l i n g i n 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). 50 e x h i b i t p o i n t s out, moreover, the o n l y way of ju d g i n g whether a r a t e l e v e l ( o r p r i c e per u n i t 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 " , and hence without the bounds of reason-ableness, i s by examining the r a t e of r e t u r n the In d u s t r y i s ear n i n g with t h a t p a r t i c u l a r r a t e l e v e l . I t i s c o n c e i v a b l e t h a t o t h e r c r i t e r i a might e x i s t f o r making such judgements. For one t h i n g , the reasonableness o f a r a t e l e v e l c o u l d be examined from the standpoint of what s o c i e t y would be w i l l i n g to pay f o r the product or s e r v i c e s . T h i s might be a j u s t i -f i a b l e means f o r e v a l u a t i n g a product o r s e r v i c e which i s not e s s e n t i a l t o s o c i e t y . In t h a t most r e g u l a t e d concerns 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 approach would soon be d i s c r e d i t e d as r a t e l e v e l s s e t i n t h i s way would have no upper l i m i t . Throughout the years, t h e r e f o r e , r e g u l a t o r y commis-si o n s and " c o u r t s " of appeal beyond them have come to a t t a c h great importance t o the r a t e o f r e t u r n on investment to the r e g u l a t e d f i r m o r i n d u s t r y . Once a commission has e s t a b l i s h -ed i t s own standards of when a r e t u r n i s too hig h o r too low, i t can then examine and make e x p e d i t i o u s judgements on the r a t e s being charged by i n d u s t r i e s under 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 the f i r m o r i n d u s t r y can the commission judge whether an i n d u s t r y i s ch a r g i n g " j u s t and re a s o n a b l e " p r i c e s . In t u r n , the commission can judge whether I t s r e g u l a t i o n i s adequately s i m u l a t i n g the 51 n a t u r a l c o n t r o l s of the market t h a t have been removed and replaced, f o r t h a t i n d u s t r y . To s et r a t e s w i t h i n bounds of reasonableness, r e g -u l a t o r y commissions are f a c e d w i t h two o v e r r i d i n g t a s k s . The f i r s t i s t h a t of measuring, or s e t t i n g , standards f o r measurement of the f i r m ' s a s s e t base upon which the r a t e of r e t u r n w i l l be computed. The second problem i n v o l v e s f i n d -i n g y a r d s t i c k s f o r judging how reasonable the r e t u r n i s once computed. Important as these two f a c e t s of r a t e r e g u l a t i o n are, n e i t h e r has been c l e a r l y s t a n d a r d i z e d nor s e t t l e d i n the minds of economic and acco u n t i n g t h e o r i s t s . L i k e so much of the p r a c t i c e of p u b l i c b u s i n e s s r e g u l a t i o n , the problem of s e t t i n g "a f a i r r e t u r n on a f a i r v a l u e " f o r r a t e -making purposes i s most c o n t r o v e r s i a l . The next two s e c t i o n s w i l l l o o k at some of these u n s e t t l e d matters and attempt t o show how the r e g u l a t o r handles them. The Rate Base In s e t t i n g out t o determine what i s a f a i r r e t u r n on a f a i r value f o r a r e g u l a t e d concern, the r e g u l a t o r ' s f i r s t t a s k i s t o d e r i v e what i t c o n s i d e r s t o be a f a i r and reasonable v a l u a t i o n f o r the s u b j e c t f i r m . Throughout the years, v a l u a t i o n of the r a t e base has, i n f a c t , r e c e i v e d f a r g r e a t e r a t t e n t i o n on the p a r t of commissions than has 52 the r e t u r n i t s e l f . In t h i s s e c t i o n we s h a l l l o o k at some of the measures of v a l u a t i o n . Measures of V a l u a t i o n U s u a l l y when one examines a d i s p u t e over matters of v a l u a t i o n , he expects to f i n d a c o n t r o v e r s y between economists and accountants. To the former, of course, value can o n l y be r e p r e s e n t e d by the d i s c o u n t e d sum of a l l estimated f u t u r e net r e t u r n s of the i n d u s t r y o r f i r m under study. To the l a t t e r , a f i r m ' s value means something more concrete such as might be r e p r e s e n t e d on a balance sheet by the p e r i o d i c amount o f net a s s e t o r e q u i t y accounts. The elements of c o r p o r a t e value to the accountant are b a s i c a l l y o n l y two: 1. T a n g i b l e a s s e t s (land, b u i l d i n g s , equipment, cash, s e c u r i t i e s , e t c . ) . 2. I n t a n g i b l e a s s e t s ( g o o d w i l l , patents, e t c . ) . Hence, any c o n t r o v e r s y between accountants as to how a f i r m /-might be e v a l u a t e d w i l l r e v o l v e around methods of v a l u a t i o n r a t h e r than what items might be i n c l u d e d i n the a n a l y s i s . ^Most of the I.C.C. Rate Cases t h a t are 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 with r a t e base r a t h e r than w i t h the r e t u r n on the base. For example: ( i ) McCardle et a l . v. I n d i a n a p o l i s Water Company; ( i i ) Los Angeles 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 of 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. Only one case, B l u e f i 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 , d e l v e s very deeply i n t o r a t e of r e t u r n i t s e l f . 53 In p l a c i n g a value on the p r o p e r t y of a r a t e -r e g u l a t e d f i r m , however, the economists' concept of value i s c l e a r l y i n a p p l i c a b l e . S i n c e d i s c o u n t e d f u t u r e p r o f i t s are the measure of value, the r e g u l a t o r c o u l d p l a c e any value on the f i r m i t wanted merely by a d j u s t i n g the a l l o w -able f u t u r e r a t e s . The i s s u e s i n v o l v e d i n e v a l u a t i n g the r a t e base of a r e g u l a t e d f i r m are, t h e r e f o r e , mainly those of account-in g t h e o r y . The v a r i o u s measures of value used by the r e g -u l a t o r s can be d i v i d e d i n t o two c a t e g o r i e s : 1. O r i g i n a l Cost V a l u e . 2. Reproduction Cost V a l u e . P h i l l i p s breaks these two broad c l a s s i f i c a t i o n s down i n the f o l l o w i n g manner: 1. (a) " A c t u a l " or O r i g i n a l Cost T h i s i s 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 the o r i g i n a l p l a n t and equipment, p l u s a d d i t i o n s , when f i r s t devoted to p u b l i c s e r v i c e . (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 the present p l a n t and equipment, p l u s a d d i t i o n s as shown i n the investment accounts on the books of the company. (c) H i s t o r i c a l Cost o r "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 , un-wise, or extravagent e x p e n d i t u r e s . (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 the business as measured by the o u t s t a n d i n g bonds, s t o c k and o t h e r s e c u r i t i e s . 54 2. (a) Current o r Reproduction Cost: P r i c e  L e v e l Accounting" The cost of p l a n t and equipment, p l u s a d d i t i o n s , estimated at p r i c e l e v e l s p r e -v a i l i n g at the date of v a l u a t i o n . (b) S p l i t 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 ) of p l a n t and equipment i n s t a l l e d before a s p e c i f i e d date, and the r e p r o d u c t i o n c o s t ( o r i g i n a l c o s t ) of p r o p e r t y i n s t a l l e d t h e r e a f t e r . (c) T a x a t i o n Value The value of p r o p e r t y assessed f o r t a x a t i o n purposes. (d) Exchange o r Purchase Value The value of a company as determined by the p r i c e another p a r t y i s w i l l i n g to pay f o r the property. 5 Although i t i s not the i n t e n t of t h i s Chapter t o r e s o l v e which of the above v a l u a t i o n methods would be the " f a i r e s t " f o r the purpose of d e r i v i n g a r a t e base, there i s some value i n reviewing the t h e o r e t i c a l arguments i n f a v o r of both o r i g i n a l and r e p r o d u c t i o n c o s t measures. The most comp e l l i n g argument f o r e v a l u a t i n g a com-pany on the b a s i s o f i t s a s s e t s ' o r i g i n a l c o s t i s t h a t t h i s i s the s i m p l e s t and most a c c u r a t e l y o b j e c t i v e method. So lo n g as the accounting has been complete and honest, a com-mi s s i o n can t e l l at a glance what the r a t e base i s and how 3C.F. P h i l l i p s , The Economics of Regula t i o n , Homewood, 111., R.D. Irwin Inc., 19o5, pp. 21b-217. 5 5 much i t may have d i m i n i s h e d o r i n c r e a s e d from one year to the next.. A p e r i o d i c summation of a s s e t accounts, accounts com-posed of items c o s t e d at simple a c q u i s i t i o n p r i c e , minus d e p r e c i a t i o n , i s shown i n the standard balance sheet. Hence, the simple balance sheet i s a l l the commission would r e q u i r e as long as i t was assured of the i n t e g r i t y of the a c c o u n t i n g system employed by the f i r m . A second argument i n f a v o r of a c t u a l c o s t i s t h a t i t w i l l make f o r a more s t a b l e r a t e l e v e l over a p e r i o d of time. Unless major changes are made i n i n v e s t e d c a p i t a l , the r a t e base w i l l remain u n a l t e r e d , and hence the p u b l i c can be assured t h a t i t w i l l not be s u b j e c t e d to r a t e s o r p r i c e s which are c o n t i n u a l l y f l u c t u a t i n g . We might r e c a l l t h a t the maintenance of s t a b l e as w e l l as reasonable r a t e s i s a prime o b j e c t i v e of r a t e r e g u l a t i o n . The t h i r d f a v o r a b l e f e a t u r e which at t a c h e s to o r i g -i n a l c ost v a l u a t i o n r e l a t e s to a t t r a c t i o n of c a p i t a l . As L o c k l i n p o i n t s out: There i s no b e t t e r way of i n d u c i n g people to put money i n t o an i n d u s t r y than by paying them a s t a b l e r e t u r n on what they have a l r e a d y put in...On the o t h e r hand, the cost of r e p r o d u c t i o n b a s i s would pay i n v e s t o r s a r e t u r n , not on what they have put i n but on what they would have to put i n to con-s t r u c t a p l a n t at the present time.4 Of course, i n an environment where p r i c e l e v e l s are going down te m p o r a r i l y , the i n v e s t o r would be rewarded more than p r o p o r -^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. Irwin Inc., I960, p. 40b. 56 t i o n a t e l y f o r h i s investment, while, i f the value of the d o l l a r i s d e c r e a s i n g , the r e t u r n to e q u i t y and debt holders would be l e s s than proportionate,, As L o c k l i n notes, the l a t t e r s i t u a t i o n might appeal t o a s p e c u l a t o r , but not to the s e r i o u s i n v e s t o r t h a t management wants to a t t r a c t . In t h i s w r i t e r ' s o p i n i o n , r e p r o d u c t i o n cost v a l u a -t i o n and " p r i c e l e v e l " a c c o u n t i n g would be the o n l y a c c e p t -able c o s t approach to the r a t e base of a r e g u l a t e d i n d u s t r y . The 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 c o s t v a l u a t i o n of a s s e t s i s , of course, r e l a t e d to income. Even i f he can be persuaded to accept the accountant's "computed amount" con-cept of income, he w i l l i n s i s t on p r i c e l e v e l a c c o u n t i n g . During p e r i o d s of extended i n f l a t i o n , s u c h as the world has experienced i n the post-war years, to value o l d e r a s s e t s at o r i g i n a l c o s t , he f e e l s , i s l u d i c r o u s . The problem s p r i n g s i n l a r g e p a r t from u n d e r - d e p r e c i a t i n g ( i . e . computing d e p r e c i a -t i o n on a low-valued a s s e t base), and hence o v e r s t a t i n g p r o f i t s . The d i s l o c a t i n g e f f e c t s both to the company and to the economy at l a r g e from such a p r a c t i c e would apply not o n l y to a r e g -u l a t e d concern, but e q u a l l y to the f i r m o p e r a t i n g i n a com-p e t i t i v e market. Although the c h i e f o b j e c t i o n of economists and o t h e r c r i t i c s opposed to o r i g i n a l c o s t v a l u a t i o n i s c e n t r e d on the m i s l e a d i n g i n d i c a t i o n i t g i v e s of net income, there are o t h e r s u p p o r t i n g arguments f o r r e p r o d u c t i o n cost v a l u a t i o n . The one Bonbright c i t e s has to do w i t h o p t imal a l l o c a t i o n of the 57 n a t i o n ' s r e s o u r c e s . 5 A c c o r d i n g t o h i s argument, the r a t e s of non-regulated i n d u s t r i e s tend t o r e f l e c t r e p r o d u c t i o n c o s t s i n times of i n f l a t i o n . I f the r a t e s of the r e g u l a t e d concern are not p r e d i c a t e d upon an i n f l a t e d r e p r o d u c t i o n c o s t as w e l l , t h e i r r a t e s w i l l be lower than those of co m p e t i t i v e i n d u s t r i e s . Therefore, there w i l l be an u n j u s t i f i e d i n c r e a s e i n demand f o r the r e g u l a t e d i n d u s t r i e s ' product o r s e r v i c e s r e l a t i v e t o the demand f o r the co m p e t i t i v e i n d u s t r i e s ' output. The i n c r e a s e d demand w i l l , i n t u r n , t r i g g e r unmerited expan-s i o n of f a c i l i t i e s and investment t h e r e i n . T h i s does, of course, assume t h a t there w i l l be some degree of s u b s t i t u t -a b i l i t y between the spheres of r e g u l a t e d and un r e g u l a t e d i n -d u s t r i e s . T h i s r e a s o n i n g i s not' c o n v i n c i n g . In the w r i t e r ' s o p i n i o n , t h e r e i s no c l e a r i n d i c a t i o n t h a t the p r i c e s o f un-r e g u l a t e d f i r m s r e f l e c t r e p r o d u c t i o n c o s t s of a s s e t s any more than do the p r i c e s o f r e g u l a t e d concerns. F o r one t h i n g , no acc o u n t i n g body has s a n c t i o n e d any method of d e p r e c i a t i o n 6 o t h e r than t h a t based on the o r i g i n a l c o s t of the a s s e t . C e r t a i n l y , most r e g u l a t e d 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, New York, Columbia U n i v e r s i t y Press, 1 9 b l , pp. 207-270. 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 being done wit h r e g a r d to changing the method of d e p r e c i a t i n g comes from the Un i t e d S t a t e s . Although a number of r e p o r t s have been produced and submitted by the Accounting Research D i v i s i o n o f the 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 Accounting P r i n c i p l e s Board of t h i s body has y e t to i s s u e any s i g n i f i c a n t o p i n i o n s , nor has i t taken any s p e c i f i c a c t i o n . 58 r a i l r o a d s w i l l have a l a r g e r p r o p o r t i o n of t h e i r f i x e d a s s e t s t i e d up i n o l d , l o n g - l i v e d equipment. For t h i s reason, t h a t type of f i r m w i l l f e e l the brunt of i n f l a t i o n more than another when i t has to r e p l a c e a l a r g e , o l d p i e c e o f equip-ment. On the o t h e r hand, unregulated, p r i v a t e i n d u s t r y con-t a i n s many o r g a n i z a t i o n s with l a r g e amounts of o l d , f i x e d equipment. One j u s t i f i c a t i o n of r e p r o d u c t i o n c o s t v a l u a t i o n i s t h a t i t maintains the i n v e s t o r ' s r e a l income. Only when p r o f i t s are set on a base which moves wit h the p r i c e l e v e l w i l l the i n v e s t o r be a b l e to keep up w i t h the c o s t of l i v i n g . As p o i n t e d out above, however, the average i n v e s t o r looks f o r a r e t u r n nn what he has i n v e s t e d , not on what h i s investment i s worth i n terms of the p r e v a i l i n g p r i c e l e v e l . Having reviewed the c o n f l i c t i n g a c c o u n t i n g theory, we are soon aware t h a t a r e g u l a t o r y commission i s by no means bound to how i t should, or could, i n terms of the c o s t ap-proach, ev a l u a t e a r a t e base. I t Is not d i f f i c u l t t o imagine t h a t a r e g u l a t o r might change i t s a t t i t u d e from p e r i o d t o p e r i o d depending on the p r e v a i l i n g economic c o n d i t i o n s or the p h i l o s o p h i e s of I t s members. The F a i r Rate of Return Although i t has received, l e s s a t t e n t i o n than the problem of determining a r a t e base, the q u e s t i o n of what con-59 s t i t u t e s a f a i r r a t e of r e t u r n on t h a t base i s e q u a l l y im-p o r t a n t . In f a c t , the net income of the i n d u s t r y under r e g -u l a t i o n w i l l l i k e l y show l a r g e magnitudes of change i n response to s l i g h t allowed changes i n the r a t e of r e t u r n . Again, l o o k r i n g o n l y at theory, l e t us examine the standards and c r i t e r i a which might be used by the r e g u l a t o r to set an a l l o w a b l e r e -t u r n f o r an i n d u s t r y . Any standard of what i s a " f a i r " r e t u r n to a company must take r e f e r e n c e to those p a r t i e s which have a f i n a n c i a l i n t e r e s t i n the f i r m , e i t h e r as owners o r as c r e d i t o r s . The r e g u l a t o r must reco g n i z e t h a t the concerns i t i s r e g u l a t i n g are i n competition f o r f i n a n c i n g w i t h the u n r e g u l a t e d s e c t o r . Thus, i n a d d i t i o n to meeting annual o p e r a t i n g expenses, i n -c l u d i n g d e p r e c i a t i o n , the r a t e l e v e l w i l l have to account f o r d i v i d e n d payments, i n t e r e s t payments and a c e r t a i n c o n t r i b u t i o n t o s u r p l u s i n l i n e w i t h what an i n v e s t o r would expect from any f i r m with s e c u r i t i e s i n the market. F a i l i n g t h i s , the r e g u l a t o r and the s t a t e would be saddled with the a d d i t i o n a l r e s p o n s i b i l -i t y of f i n a n c i n g r e g u l a t e d concerns themselves. One way of computing the minimum r e t u r n t h a t i n v e s -t o r s w i l l c o n s i d e r f a i r and respond to i s by f i g u r i n g the f i r m ' s c o s t of c a p i t a l . The c o s t of c a p i t a l t o any f i r m might be d e f i n e d as t h a t minimum r a t e of r e t u r n which any i n v e s t -ment or, f o r t h a t matter, any going concern must earn i n o r d e r to a t t r a c t the funds i t r e q u i r e s . The standard manner i n which a company w i l l c a l c u l a t e t h i s c o s t i s by adding up and averag-60 i n g i t s annual d i v i d e n d and i n t e r e s t r a t e s of payment. T h i s might be i l l u s t r a t e d as f o l l o w s : ESTIMATED COST OF CAPITAL Percentage of Annual Weighted C C a p i t a l S t r u c t u r e Cost Cost Bonds 50$ 4.0$ 2.000$ Preferred. Stock 15$ 5.5$ 0.825$ Common Stock & S u r p l u s 35$ 11.0$ 3.850$ O v e r a l l Cost of C a p i t a l 100$ 6.675$ 7 The above might be, i n oth e r words, the " o u t - o f -pocket" c o s t s of f i n a n c i n g f a c e d by the r e g u l a t e d f i r m o r any othe r f i r m . I f c o n t r a c t u a l payments are not met each year and the " o p t i o n a l " common st o c k d i v i d e n t s p a i d with some r e g u l a r i t y and w i t h a s u i t a b l e r e t u r n t o the i n v e s t o r 1 s e q u i t y , then the i n d u s t r y o r f i r m w i l l e v e n t u a l l y l o s e i t s source of f i n a n c i n g . In t h i s case, the r e g u l a t o r y a u t h o r i t y must a l l o w a r a t e l e v e l which w i l l r e t u r n at l e a s t t h i s weighted average of f i n a n c i n g c o s t s - 6.675$. Only a r a t e of r e t u r n which w i l l accomplish t h i s can be c o n s i d e r e d a " f a i r r e t u r n on a f a i r v a l u e " f o r that p a r t i c u l a r concern. Anything l e s s would be c o n f i s c a t o r y t o the owners and c r e d i t -ors . Another way i n which a f a i r r e t u r n can be c a l c u l a t e d ^ P h i l l i p s , o p . c i t . , p. 279. 61 i s by the use of what i s o f t e n r e f e r r e d to as "the comparable earnings s t a n d a r d " . T h i s i s d e f i n e d as the r a t e of r e t u r n t h a t w i l l meet c o n t r a c t u a l payments and then a l l o w the e q u i t y i n v e s t o r a r e t u r n on h i s funds equal to t h a t d i s p l a y e d by o t h e r b u s i n e s s e s i n the p r i v a t e s e c t o r which have correspond-i n g r i s k s . The major o b j e c t i o n t o t h i s standard i s t h a t i t i s q u i t e Impossible t o f i n d an i n d u s t r y w i t h 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 t o those of c e r t a i n r e g u l a t e d i n d u s t r i e s . How, f o r i n s t a n c e , would one compare the r i s k s a t t a c h e d to steel-making w i t h those of an e l e c t r i c u t i l i t y ? In the f i n a l a n a l y s i s , a r e g u l a t o r y commission i s most l i k e l y t o r e f e r to the c o s t of c a p i t a l of the u t i l i t y o r c a r r i e r under r e g u l a t i o n i n o r d e r to r u l e what the a l l o w -a b l e " f a i r r e t u r n " w i l l be. In a d d i t i o n , a g r e a t d e a l of s u b j e c t i v e judgement w i l l be u t i l i z e d . For one t h i n g , an a c t u a l d e t e r m i n a t i o n of c o s t of c a p i t a l w i l l be f a r more com-i p l i c a t e d and, to some degree, " s u b j e c t i v e " i t s e l f . The e x e r c i s e i s not as simple as t h a t of c a l c u l a t i n g the o u t - o f -pocket c o s t of f i n a n c i n g i n d i c a t e d above. The crux of the problem i s d e t e r m i n i n g the cost of e q u i t y f i n a n c i n g . The c o s t of e q u i t y c a p i t a l , a c c o r d i n g t o a d e f i n -i t i o n i n any standard f i n a n c e t e x t , i s a c t u a l l y a " r e q u i r e d C.B. A i t c h i s o n , F a i r Reward and Just Compensation,  Common C a r r i e r S e r v i c e - Standards Under the I n t e r s t a t e  commerce Act, Washington, 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. 14 - 1 7 . 62 earnings r a t e " y or an o p p o r t u n i t y c o s t . I t i s based on what amount the s t o c k h o l d e r s would deem s u f f i c i e n t t o encourage them to leave t h e i r funds i n t h a t investment. In o t h e r words, the " c o s t " i s t h a t necessary at l e a s t to m a i n t a i n the p r i c e of the s t o c k on the market. Going f u r t h e r , t h i s r e q u i r e d earnings r a t e r e a l l y depends on what oth e r o p p o r t u n i t i e s are a v a i l a b l e to the i n v e s t o r . T h i s t h e s i s does not purport to s o l v e the q u e s t i o n as to how t h i s c o s t of e q u i t y c a p i t a l should be measured. I t must be p o i n t e d out t h a t the i s s u e i s p e r p l e x i n g to f i n a n c i a l a n a l -y s t s apart from those i n p u b l i c r e g u l a t o r y commissions. S u f f i c e i t t o say, however, t h a t the c o s t of e q u i t y c a p i t a l i s depend-ent on the market's v a l u a t i o n of the f i r m and, as a r e s u l t , the r e g u l a t o r has no course but to l e t the market d i c t a t e what " c o s t s " i t w i l l demand f o r f i n a n c i n g . The p a r t i e s of the mar-ket w i l l , of course, be employing t h e i r own standards of "com-par a b l e e a r n i n g s " to the r e g u l a t e d f i r m f o r the r i s k c l a s s i n which they p l a c e i t . T h e r e f o r e , t h i s matter should not have to be of concern to the r e g u l a t o r . Thus, the c o s t of e q u i t y c a p i t a l , and even the c o s t of debt f i n a n c i n g (because of the r i s k element i t i n t r o d u c e s i n t o the c a p i t a l 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 the market's v a l u a t i o n of the f i r m . The a v a i l a b i l i t y of f i n a n c i n g ^G. David Q u i r i n , The C a p i t a l Expenditure D e c i s i o n , Toronto, R i c h a r d D. Irwin Inc., 19b/, p. 13. 63 determines whether a f i r m , r e g u l a t e d or not, w i l l s u r v i v e . Should not then the r e g u l a t o r r e f e r s o l e l y to the e x i s t i n g and p r o j e c t e d s t a t e of the c a p i t a l market In s e t t i n g a r a t e l e v e l f o r i t s u t i l i t y o r c a r r i e r ? A f i n a n c i a l a n a l y s t , or, indeed, the f i n a n c i a l v i c e - p r e s i d e n t of the r e g u l a t e d f i r m , would undoubtedly t h i n k so. As mentioned, the r e g u l a t o r does r e f e r to the c o s t of c a p i t a l t o the u t i l i t y o r c a r r i e r when s e t t i n g r a t e s . When one reviews the h i s t o r y of r a t e of r e t u r n cases, however, he d e t e c t s a r e l u c t a n c e on the p a r t of the I n t e r s t a t e Commerce Commission or the U.S. Supreme Court to set i t up as an o f f i c i a l standard. The emphasis seems to be on seasoned judgement and there i s an obvious r e l u c t a n c e to become i n -v o l v e d i n any s p e c i f i c t e c h n i c a l approach such as the c o s t of c a p i t a l "standard" would, be. T h i s should be evident f u r t h e r on i n the Chapter. The L e g a l H i s t o r y of Rate of Return Determination The U n i t e d S t a t e s Supreme Court has long been an i n t e g r a l p a r t of the r a t e s e t t i n g process of U n i t e d S t a t e s ' r e g u l a t o r y commissions. Indeed, i t s judgements have been an a u t h o r i t a t i v e source of precedent and l e g a l o p i n i o n f o r Canada and o t h e r western c o u n t r i e s concerned wi t h r a t e l e v e l d e t e r m i n a t i o n . The main concern has been to guard a g a i n s t the l e g i s l a t i v e - a p p o i n t e d commissions s e t t i n g r a t e s c o n f i s -64 c a t o r y t o the p r i v a t e p r o p e r t y of r e g u l a t e d i n d u s t r i e s while g i v i n g the p u b l i c n o n - e x p l o i t i v e p r i c e s . (The two c o n s i d e r a -t i o n s the c o u r t has d e a l t w i t h on appeal s i n c e the mid-ni n e t e e n t h c e n t u r y have been, of course, r u l i n g s on f a i r v a l ue of r a t e "base" and f a i r r e t u r n on that base.) As noted e a r l i e r , the former has consumed the major share of the c o u r t ' s a t t e n t i o n . The f i r s t attempt to set a j u d i c i a l standard f o r a p u b l i c u t i l i t y r a t e s e t t i n g was i n 1898 i n the famous Smyth v. Ames case. 3- 0 The appeal by Ames, an o f f i c e r of the Union P a c i f i c 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 had the r i g h t t o 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 from m a i n t a i n i n g r a t e s adequate t o meet o p e r a t i n g expenses, r e g u l a r i n t e r e s t upon a l l o b l i g a t i o n s , and t o j u s t i f y a d i v i d e n d on a l l of i t s s t o c k . Thus, the cou r t was f a c e d with r u l i n g : 1. Whether the l e g i s l a t u r e of the s t a t e concerned was c o n f i s c a t i n g the c a r r i e r ' s p r o p e r t y ; i . e . t a k i n g i t f o r p u b l i c use without j u s t compensation, when the r a t e l e v e l was h e l d below t h i s f u l l measure demanded by the r a i l r o a d . F u r t h e r , i f such a l e v e l was not maintained, should due process of lqw be i n s t i t u t e d as a matter of course? 2. What the c a r r i e r ' s reward should be. In the c o u r t ' s o p i n i o n , Ames' c o n t e n t i o n was weak i n t h a t " . . . i t makes the i n t e r e s t s of the c o r p o r a t i o n main-t a i n i n g a p u b l i c highway the s o l e t e s t as t o the la w f u l n e s s 1 0Smyth v. Ames, 169 U.S. 466 (1898). 65 of the r a t e " . T h i s "...omits a l t o g e t h e r any c o n s i d e r a t i o n of the r i g h t of the p u b l i c to be exempt from unreasonable e x a c t i o n s " . Hence, i t should be the p e r o g a t i v e of the r e g u l a t o r , or, on appeal, the c o u r t i t s e l f , to determine "the f a i r v a lue of the p r o p e r t y being used by the c o r p o r a -„ 11 t i o n f o r the convenience of the p u b l i c . Although the court d i d not o f f e r any d e f i n i t e formula f o r determining what the t r u e o r f a i r value of t h i s p r o p e r t y should be, i t d i d s t a t e s e v e r a l d i s t i n c t standards t h a t should be "con-s i d e r e d " . Even at t h i s , the c o u r t was being f a r more s p e c i f i c than l a t e r c o u r t s were to be. The c r i t e r i a of value to be c o n s i d e r e d i n a r r i v i n g at a r a t e base were as f o l l o w s : 1. The o r i g i n a l c o s t of c o n s t r u c t i o n of the c o r p o r a -t i o n . 2. The amount expended i n permanent improvements. 3 . The amount and market value of i t s s t o c k and bonds. 4. The present, as compared with the o r i g i n a l , c o s t of c o n s t r u c t i o n . 5 . The probable e a r n i n g c a p a c i t y of the p r o p e r t y under 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 r e q u i r e d to meet o p e r a t i n g e x p e n s e s . 1 2 j A i t c h i s o n , o p . c i t . , p. 15. 1 2 , , J u s t i c e Brandeis 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 case 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 to c o n s i d e r a l l those "and other r e l e v a n t f a c t s " i n making judgements. "What, i f any, weight s h a l l be given to.any one must p r a c t i c a l l y r e s t i n the j u d i c i a l d i s c r e t i o n of the t r i b u n a l which makes the determina-t i o n . " •'-^Aitchison, l o c . c i t . Southwestern B e l l Telephone 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 quoted 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 for Union Pacific at the time, the case seemed to set a trend to consideration of these factors. 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 commis-sions. At the turn of the century, price levels had fallen a great deal since the era of i n i t i a l railroad construction and, in addition, reproductive cost measures were seen as one way of "checking against the excesses that frequently took place in the earlier periods of construction and were mani-fest in the financial structures of the companies".1^ Throughout the f i r s t quarter of this century, f a i r value of rate base continued to be the prime issue in rate case appeals to the Supreme Court. With the deflation f o l -lowing the First World War, the regulated corporations began to c a l l for reproductive cost standards in order to maintain their plants. 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 in 1 9 2 6 . Here, a divided court stated: •^Smyth v. Ames, as quoted by Aitchison, op.cit., p. 17. 1^McCardle et a l . v. Indianapolis Water Company, 272 U.S. 400 (1926~K 6 7 ...the reasonable c o s t of a system of waterworks, w e l l planned, and e f f i c i e n t f o r the p u b l i c s e r v i c e , i s good evidence of i t s value at the time of con-s t r u c t i o n ... so long as there i s no change i n the l e v e l of p r i c e s . . . ( i n which case)...then the present value of lands p l u s the present value of c o n s t r u c t -i n g the 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 D uring t h i s embryonic stage of j u d i c i a l s t a n d a r d -s e t t i n g as to measures of f a i r reward and j u s t compensation, there was very l i t t l e mention of the r a t e of r e t u r n f e a t u r e . The f i r s t case d e a l i n g with t h i s at any l e n g t h was B l u e f i e l d Water Works and Improvement Company v. P u b l i c S e r v i c e Commis-18 s l o n of West V i r g i n i a . The main p r i n c i p l e s the Supreme Court c o n s i d e r e d 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 the "comparable e a r n i n g s " d o c t r i n e as w e l l as the c o s t of c a p i t a l standard reviewed i n the p r e v i o u s s e c t i o n . A p u b l i c u t i l i t y i s e n t i t l e d to such r a t e s as w i l l permit i t to earn a r e t u r n on the value of the p r o p e r t y which i t employs f o r trie convenience of the p u b l i c equal to t h a t being made at the same  time and i n the same g e n e r a l p a r t of the country on  Investments i n o t h e r business undertakings which are attended by corresponding r i s k s and u n c e r t a i n t i e s . 1 9 In a d d i t i o n , 1 7 I b i d . , p. 411. 1 8 B l u e f i 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 , 2 b 2 U.S. o"79 ( 1 9 2 3 ) . 1 9 I b i d . , p. 6 8 3 . 68 ...the r e t u r n should be reasonably s u f f i c i e n t to assure confidence i n the f i n a n c i a l soundness of  We u t i l i t y and should be adequate under e f f i c i e n t and economical management to maintain and support i t s c r e d i t and enable i t to r a i s e the money necessary f o r the proper d i s c h a r g e of i t s p u b l i c d u t i e s . 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 t h i s c o u r t t h a t : the r a t e of r e t u r n may become too high o r too low by changes 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 investment (elsewhere i n the market), the money market, and business c o n d i t i o n s g e n e r a l l y . 2 1 In the e a r l y d e p r e s s i o n years, as most students of h i s t o r y are aware, the composition of the U.S. Supreme Court changed a great d e a l . With t h i s change i n personnel, a very d i f f e r e n t approach to d e t e r m i n a t i o n of r a t e bases came about as w e l l . The case, Los Angeles Gas and E l e c t r i c C o r p o r a t i o n 2 2 y_. R a i l r o a d Commission of C a l i f o r n i a represented a t u r n i n g p o i n t as, with i t , the court upheld the s t a t e commission's use of h i s t o r i c a l c ost f o r s e t t i n g a r a t e base. The reasons f o r t h i s d e c i s i o n are numerous. Not the l e a s t important was the f a c t t h a t a d e p r e s s i o n and d e c l i n i n g p r i c e s were s e t t i n g i n . The r e a l s i g n i f i c a n c e of t h i s case, however, was not the f a c t t h a t a new formula was e s t a b l i s h e d , f o r none was, but the statement of the c o u r t that i t was not the commission's charge to apply a formula nor to p r e s c r i b e a r b i t r a r y c r i t e r i a , but t o : g u I b i d . , p. 683. 2 1 I b i d . , p. 684. 2 2 L o s Angeles 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 of C a l i f o r n i a , 289 u.g. i>b7 (1933) . ~ 6 9 examine the end r e s u l t of the 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 determine whether i t s t o t a l e f f e c t was to deny the owner of the 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. 2 3 In o t h e r words, the cour t was h e r a l d i n g a new er a where r a t e -s e t t i n g was to be even more s u b j e c t i v e i n nature than i t was p r e v i o u s l y . The "End R e s u l t " d o c t r i n e of the C a l i f o r n i a case was c l a r i f i e d i n 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 oh Company of 1 9 4 2 . In the I.C.C. Annual Report of th a t year, t h i s case was r e f e r r e d to as "one of the most s i g n i f i c a n t d e c i s i o n s i n the h i s t o r y o f u t i l i t y r e g u l a t i o n " . 2 5 The idea of any s t r i c t q u a s i - f o r m u l a such as Smyth v. Ames had pro-duced came to an end as a unanimous cou r t s t a t e d : The C o n s t i t u t i o n does not b i n d rate-making bodies to the s e r v i c e of any s i n g l e formula o r combination o f formulas. Agencies to whom t h i s l e g i s l a t i v e power has been de l e g a t e d are f r e e , w i t h i n the ambit of 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 the pragmatic a d j u s t -ments which may be c a l l e d f o r by p a r t i c u l a r circum-s t a n c e s . .. . I f the ( F e d e r a l Power) Commission's order, as a p p l i e d to the f a c t s b e f o r e i t and viewed i n i t s e n t i r e t y , produces no a r b i t r a r y r e s u l t , our i n q u i r y i s at an e n d . 2 6 2 ^ 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  Company, 315 U . S . 575 ( 1 9 4 2 ) . 2 4 I b l d . , p. 2 8 8 . ^ i n t e r s t a t e Commerce Commission, Annual Report 1 9 4 2 , as quoted i n A i t c h i s o n , o p . c i t . , p. 3 2 . 2 6 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  Company, 3 1 5 U.S. 5 7 5 ( 1 9 4 2 , as quoted i n Pegrum, o p . c i t . , p. b 7 b . 70 The message here i s c l e a r . In the f u t u r e , commissions would not be r e q u i r e d t o give any weight to s p e c i f i c elements of value as l a i d down i n the 1 8 9 8 case. In 1 9 4 4 , another s i g n i f i c a n t case having to do with det e r m i n a t i o n of f a i r value of a r a t e base, F e d e r a l Power 27 Commission v_. Hope N a t u r a l Gas Company, met the i s s u e s of o r i g i n a l c o s t versus present value head-on. I n d i c a t i n g again t h a t the commissions of the f u t u r e were not to be bound by e i t h e r measure, the court s t a t e d : Rates which enable the company to operate s u c c e s s f u l l y , to m a i n t a i n 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 to compensate i t s i n v e s t o r s f o r the r i s k s assumed c e r t a i n l y cannot be condemned as i n v a l i d , even though they might produce o n l y a meager r e t u r n on the s o - c a l l e d ' f a i r value' r a t e b a s e . 2 " C l e a r l y , what the c o u r t was s a y i n g here was t h a t i t now saw the two problems of r a t e base and r a t e of r e t u r n on t h a t base as l e s s d i s t i n c t c o n s i d e r a t i o n s one from the o t h e r . Again, the "end r e s u l t " of a r a t e l e v e l should be the c r i t e r -i o n o f whether o r not the r a t e was reasonable ( i . e . how d i d i t a f f e c t consumer and producer?), not some vague adherence to a r a t e base determined by means of s t r i c t a c c o u n t i n g and economic quanta. The r e g u l a t o r was, i n e f f e c t , f r e e to em-p l o y whatever method i t saw f i t to determine r a t e l e v e l s . 2 7 F e d e r a l Power Commission v. Hope N a t u r a l Gas Company, 320 U.S. 591 (1944), as quoted i n Pegrum, o p . c i t . , p. b77. 2 8 I b i d . , p. 677. 71 Thus, as f a r as d e t e r m i n a t i o n of a r a t e base i s concerned, i n the eyes of the U.S. Supreme Court a r e g u l a t o r y commission i s f r e e to take i n t o c o n s i d e r a t i o n whatever measures and standards i t d e s i r e s . The m a j o r i t y of U.S. and Canadian commissions are, t h e r e f o r e , most s u b j e c t i v e i n t h e i r approach to p a r t i c u l a r c a s e s . " P a i r v a l u e " has come to mean value e s t a b l i s h e d by a r e g u l a t o r i n t h i s manner a c c o r d i n g to the p h i l o s o p h y l a i d down i n Hope N a t u r a l Gas and N a t u r a l Gas P i p e - l i n e . T h i s v a l u a t i o n i s l i k e l y to l i e w i t h i n the range of other more o b j e c t i v e v a l u a t i o n s , such as a s t r i c t r e p r o d u c t i v e or o r i g i n a l c o s t might g i v e . F a i r value today can best be expressed as a " f e e l i n g " on the p a r t of the a u t h o r i t y . In t h a t s e t t i n g a r a t e base has, s i n c e the e a r l y f o r t i e s , been a r a t h e r s u b j e c t i v e e x e r c i s e , i t i s d i f f i c u l t to imagine t h a t most r e g u l a t o r s would look a t the determina-t i o n of r a t e of r e t u r n on t h a t base as being any more exact. I t might s a f e l y be s a i d t h a t the approach of most boards i s s i m i l a r t o t h a t espoused i n B l u e f i e l d Water Works and the r a t e t h a t i s set w i t h a reasoned judgement as to what i s necessary to a t t r a c t c a p i t a l . By way of a q u i c k sketch of what c r i t e r i a sorae s e l e c t e d r e g u l a t o r s do employ as a matter of course to s e t r a t e s , we might look a t a few p r a c t i c e s . A c c o r d i n g to Pegrum, the F e d e r a l Power Commission and the F e d e r a l Communications Commission use a c t u a l or h i s -7 2 t o r i c a l c o s t to set a r a t e b a s e . 2 ^ Some s t a t e r e g u l a t o r s , such as C a l i f o r n i a , Massachusetts, and Wisconsin, use the "prudent investment" as a base. Another uses c o s t o f r e -pr o d u c t i o n as a g r e a t e r source o f r e f e r e n c e . In Ohio, the s t a t e u t i l i t y commission i s s u p p l i e d with a set of up-to-date index numbers f o r v a l u a t i o n of a s s e t s . For the r e g u l a t o r s employing a low base "formula", of course, the r a t e of r e t u r n must be s e t h i g h e r . In Canada, a l l u t i l i t y and t r a n s p o r t r e g u l a t o r s seem to adhere t o the a t t i t u d e expressed by the U.S. court i n Hope and N a t u r a l Gas P i p e l i n e . In oth e r words, th e r e i s no appar-ent e f f o r t t o u t i l i z e one formula of r a t e base d e t e r m i n a t i o n . U n t i l 1 9 6 1 , however, the P u b l i c U t i l i t i e s Commission of B.C. h e l d a p p r a i s e d value o f B.C. E l e c t r i c Co., to mean d e p r e c i a t e d ^ 5 0 o r i g i n a l c o s t . ^ The Canadian Board of Transport Commissioners has l o n g had an open mind on a l l f a c t o r s a f f e c t i n g v a l u a t i o n . As f a r as r a t e of r e t u r n i s concerned, i t i s evident t h a t most r e g u l a t o r s i n Canada have r e f e r r e d p r i m a r i l y t o the a t t r a c t i o n of c a p i t a l s t a n d a r d . Summary At t h i s p o i n t , a b r i e f summarization of the f o r e -going Chapter and an i n d i c a t i o n of how i t leads to Chapter IV 2 9 p e g r u m , o p . c i t . , Ch. 2 6 . 30 Marko, D.H., Determination of F a i r Rate of Return i n  Regulated I n d u s t r i e s , (Term paper, Commerce 544, U.B.C., 1967, P. 2 2 ) . Mr. Marko's study of the P u b l i c U t i l i t i e s Act of B.C., (Sec. 1 6 , Sub.rSec. l ) and the a c t i o n s of the B.C. E l e c t r i c Company under t h i s Act l e d him t o t h i s c o n c l u s i o n . 73 i s i n o r d e r . The purpose of the Chapter has been to o u t l i n e the problem areas connected with establishment of a " f a i r r e t u r n " to r e g u l a t e d i n d u s t r y i n the g e n e r a l case. Secondly, some h i s t o r y was o u t l i n e d as to how r e g u l a t o r y commissions have d e a l t with such problems throughout the y e a r s . As i n d i c a t e d , the two c o n s i d e r a t i o n s f o r the r e g u l a t o r a r e : 1. E s t a b l i s h i n g a v a l u a t i o n or " r a t e base" f o r the i n d u s t r y concerned. 2. Judging what an a l l o w a b l e r e t u r n on t h a t base might be a f t e r c o n s i d e r a t i o n of the needs o f the i n d u s t r y i t s e l f , and, secondly, the requirements of those who w i l l use the s e r v i c e s of t h a t i n d u s -t r y . The t o o l s and terms of r e f e r e n c e of r e g u l a t o r s appear somewhat out of p l a c e , however, when one a l t e r s the course of h i s r e s e a r c h from t h a t of r e g u l a t i o n of a u t i l i t y o r a r a i l r o a d t o r e g u l a t i o n of the motor t r u c k e r . As Chapter I I s t a t e d , the economic c h a r a c t e r i s t i c s of a t r u c k -i n g f i r m , indeed the i n d u s t r y i t s e l f , are s u b s t a n t i a l l y d i f -f e r e n t from those of a power u t i l i t y o r a r a i l r o a d with t h e i r l a r g e investment i n f i x e d a s s e t s . The t a s k of the next Chapter i s to e x p l o r e the prob-lems of r a t e r e g u l a t i o n i n the motor t r u c k i n g i n d u s t r y . Par-t i c u l a r l y , these problems w i l l be exposed to the t h e o r i e s and t o o l s of r a t e r e g u l a t i o n o u t l i n e d In some d e t a i l i n Chapter I I I . In t h i s way, the examination t o f o l l o w should provide 74 the reader w i t h an idea of j u s t how d i f f e r e n t and d i f f i c u l t i s the t r u c k i n g i n d u s t r y to r e g u l a t e i n i t s r a t e - s e t t i n g p r a c t i c e s . 7 5 CHAPTER IV DETERMINATION OP A FAIR  RETURN IN THE MOTOR CARRIER INDUSTRY I t was e s t a b l i s h e d i n Chapter I I that motor c a r r i e r r a t e r e g u l a t i o n shares the same twin purposes of r a t e r e g u l a -t i o n as u t i l i t i e s and other t r a n s p o r t modes. Nowhere are these twin aimes s t a t e d more a u t h o r i t a t i v e l y than i n S e c t i o n 2 l 6 ( i ) of the U.S. I n t e r s t a t e Commerce Act - o f t e n r e f e r r e d to as the "Rule of Rate-Making": ...(the 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 of adequate and e f f i c i e n t s e r v i c e at the  lowest c o s t c o n s i s t e n t w i t h the f u r n i s h i n g of s e r v i c e . . . and the need o f revenues s u f f i c i e n t to enable the  c a r r i e r s , under honest and e f f i c i e n t and economical management to pro v i d e such a s e r v i c e . 1 Thus, i n attempting t o set a j u s t and reasonable r a t e l e v e l , the r e g u l a t o r o f t r u c k i n g concerns, l i k e any oth e r r a t e r e g u l a t o r , must r e f e r both to the i n t e r e s t s of the consumer and to those of the op e r a t o r . The "zone of reasonableness" between what i s e x p l o i t a t i v e to the p u b l i c and c o n f i s c a t i v e to the motor c a r r i e r s hould be s e t i n the same manner as a r a t e "zone" f o r a r a i l r o a d o r a telephone company. In t h a t t r u c k i n g i s r e g u l a t e d under the same terms of r e f e r e n c e as any o t h e r concern, t h a t i s , i n the c o u r t ' s o p i n i o n " a f f e c t e d with a p u b l i c i n t e r e s t " , one would expect t h a t the t h o r n i e s t I n t e r s t a t e Commerce Act, S e c t i o n 2 l 6 ( i ) , as c i t e d by C.B. A i t c h i s o n , P a i r Reward and. Ju s t Compensation, Common  C a r r i e r S e r v i c e - Standards Under the I n t e r s t a t e Commerce" Act, Washington, 1 9 5 4 , 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 , p. 7 . 7 6 i s s u e i n s e t t i n g t r u c k r a t e s i s t h a t reviewed, i n Chapter I I I , " s e t t i n g a f a i r r e t u r n on a f a i r v a l u e " . C e r t a i n l y , the major problem of motor c a r r i e r r a t e r e g u l a t i o n l i e s i n determining what r a t e l e v e l b r i n g s the c a r r i e r ( s ) , o r more s p e c i f i c a l l y , those f i n a n c i a l l y i n v o l v e d i n the o p e r a t i o n of the c a r r i e r ( s ) , a j u s t and reasonable r e -ward f o r t h e i r s e r v i c e s p l a c e d i n p u b l i c use. However, be-cause of the economic c h a r a c t e r i s t i c s of the motor t r u c k i n g i n d u s t r y , f e a t u r e s which have been examined b r i e f l y i n Chapter I I , r a t e - s e t t e r s f o r t h i s i n d u s t r y have looked to somewhat d i f f e r e n t c r i t e r i a f o r judging what c o n s t i t u t e s a j u s t "reward." to the o p e r a t o r ( s ) . H i s t o r i c a l l y , as s h a l l be seen, commissions have shied, away from d e t e r m i n a t i o n of a f a i r reward on a f a i r value i n o r d er to set reasonable or even n o n - c o n f i s c a t o r y r a t e s . T h i s Chapter w i l l examine i n depth the c r i t e r i a t h a t have been used. The I n a p p l i c a b i l i t y of Return on I n v e s t -ment As The R a t e - S e t t i n g C r i t e r i o n  For most r e g u l a t e d concerns such as a r a i l r o a d or a u t i l i t y , the "key v a r i a b l e " that the r e g u l a t o r must con-s i d e r i n s e t t i n g a r a t e l e v e l and, i n e f f e c t , p r o v i d i n g f u t u r e revenue to the f i r m i s the enormous amount of c a p i t a l t h a t the f i r m has t i e d up In "fixed." f a c i l i t i e s . Why i s t h i s the key v a r i a b l e ? Because the major cost t h a t management fa c e s i s that of s e r v i c i n g the equity and debt h o l d e r s that 77 have p r o v i d e d the v a s t amounts of c a p i t a l necessary f o r o p e r a t i o n . Indeed, the major r i s k f a c i n g the management, the owners, and the c r e d i t o r s of such a f i r m i s t h a t a s u i t -able r e t u r n on investment w i l l not be earned from year to y e a r . I f t h i s r i s k i s not overcome, the f i r m ' s l i f e - b l o o d i n the form of p l e n t i f u l , low-cost c a p i t a l w i l l stop i n a matter of a few y e a r s . F o r t h i s reason, a s u i t a b l e r e t u r n on i n v e s t -ment to s u p p l i e r s of f i n a n c i n g has to be the term of r e f e r e n c e of a r e g u l a t o r y commission s e t t i n g r a t e s f o r a "normal" r e g -u l a t e d i n d u s t r y . Quite c l e a r l y , investment i n f i x e d f a c i l i t i e s i s not the 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 of a t r u c k i n g f i r m . As we r e c a l l from Chapter I I , the d i s t i n g u i s h i n g economic c h a r a c t e r i s t i c o f the t r u c k i n g i n d u s t r y i s i t s r e l a t i v e l y s m a l l amount of f i x e d a s s e t s . With a s s e t t u r n o v e r r a t i o s p some twelve o r more times g r e a t e r than a r a i l r o a d , the motor c a r r i e r d i s p l a y s a very l a r g e p r o p o r t i o n of v a r i a b l e c o s t s i n i t s f u l l y - a l l o c a t e d u n i t expenses. The major c o s t s t h a t management must be concerned w i t h are, t h e r e f o r e , v a r i a b l e o p e r a t i n g c o s t s . Thus, the major r i s k a t t a c h e d t o o p e r a t i o n of a motor c a r r i e r business i s t h a t o f not meeting these c o s t s with o p e r a t i n g revenues. Moreover, the major r i s k to manage-ment of a motor c a r r i e r i s f a r more immediate than the major r i s k to the r a i l r o a d . The l a t t e r ' s key c o n s i d e r a t i o n i s t h a t See Table I , as c o n t r a s t e d with r a t i o s on pages 7 and 8. 78 TABLE I ASSET TURNOVER RATIOS - SELECTED MOTOR CARRIERS 1966 Net Property Operating & C a r r i e r Revenue Equipment R a t i o Overland Express 6,503,000 2,076,000 3.13 G i l l I n t e r p r o v i n c i a l 8,724,000 1,516,000 5.76 Tran smoun t a i n Express (U.S.) 20,619,000 7,733,000 2.70 V i k i n g F r e i g h t Company (U.S.) 20,642,000 8,203,000 2 . 5 2 Yale Express System (U.S.) 65,983,000 26,025,000 2.53 C o n s o l i d a t e d Freightways 184,348,000 89,500,000 2 . 0 6 P a c i f i c I n t e r -mountain Express (U.S.) 155,755,000 41,247,000 3.77 Source: Moody's T r a n s p o r t a t i o n Manual, 1 9 6 6 . 79 of a t t r a c t i n g and m a i n t a i n i n g investment c a p i t a l t o e s t a b -l i s h l o n g r l i f e f a c i l i t i e s . The former, however, must con-cern i t s e l f more with the day-to-day imperative of paying wages, pur c h a s i n g f u e l , m a i n t a i n i n g and s e r v i c i n g i t s h i g h l y mobile and s h o r t - l i v e d equipment. T h i s i s not to say t h a t a f i r m w i t h heavy f i x e d c o s t s does not have to g i v e f i r s t c o n s i d e r a t i o n to v a r i a b l e o p e r a t i n g expenses. Such v a r i a b l e o p e r a t i n g expenses, however, re p r e s e n t o n l y a minor share of o p e r a t i n g revenue. Looking at the problem from the standpoint of the owner(s) of the motor c a r r i e r , moreover, i t i s h i g h l y d o u b t f u l t h a t he would be p r i m a r i l y i n t e r e s t e d i n what the r e t u r n on h i s s m a l l investment would be f o r the y e a r . Rather, h i s concern would again be with t h a t r i s k of not meeting the s u b s t a n t i a l v a r i a b l e o p e r a t i n g expenses year by year o r even month by month. T h i s i s the primary reason t h a t r a t e b a s e / r e t u r n on investment i s not used to r e g u l a t e t r u c k i n g r a t e s . There i s another reason as w e l l . Because of the economic c h a r a c t e r i s t i c s of the motor c a r r i e r , any r a t e of r e t u r n on f i x e d investment i n t h a t i n d u s t r y t h a t would be low enough to have meaning to a c a p i t a l market accustomed to e v a l u a t i n g r e t u r n s v a r y i n g no more than one o r two p e r -centage p o i n t s from the range between a "prime" l e n d i n g r a t e and c o n v e n t i o n a l mortgage r a t e s ( c u r r e n t l y 7 to 9 per c e n t ) , i t i s t h i s w r i t e r ' s o p i n i o n t h a t such a r e t u r n would be j u s t too s m a l l a f i g u r e both i n a b s o l u t e terms and r e l a t i v e t o o p e r a t i n g c o s t s to be of s i g n i f i c a n t value t o the r a t e r e g u l a t o r . I f a r e g u l a t o r y agency were to s e t a r a t e l e v e l based, on a "normal" r e t u r n on investment, say, s i x per cent, the r e g u l a t o r would be g i v i n g the t r u c k e r o n l y a very s m a l l margin between revenues and expenses, perhaps as s m a l l as one per cent of c o s t . C l e a r l y , a s l i g h t m i s c a l c u l a t i o n of estimated revenues o r expenses would leav e the op e r a t o r w i t h o p e r a t -in g l o s s e s . T h i s k i n d o f a r i s k i s too heavy f o r the ope r a t o r . He needs more b r e a t h i n g space than one per cent of c o s t i n order t o undertake the r i s k of e n t e r i n g and o p e r a t i n g i n the i n d u s t r y . With a b r e a t h i n g space of, say f i v e to e i g h t per cent of c o s t , perhaps the owner's r e t u r n on investment w i l l be a mammoth ten to twenty p e r cen t . Because of the i n s i g n i f i c a n t s i z e of the r a t e base, how-ever, the o p e r a t o r w i l l need t h i s k i n d o f a r e t u r n ii o r d e r to have a p r e s e n t a b l e p r o f i t i n abs o l u t e terms. The f o l -lowing i l l u s t r a t i o n shows how a two per cent expense under estimate c o u l d be f a t a l to a f i r m w i t h an as s e t t u r n o v e r r a t i o of 4:1. EXHIBIT 2 CASE I - Expense Estimated. Low Value of C a r r i e r ' s T a n g i b l e or Operating Property (Estimate) $20,000. T o t a l Operating Expense (Estimate) 80,000. T o t a l Operating Revenue (with r a t e s set t o r e t u r n 6$ 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 taxes - $90,000. - .06 (20,000) 81,200. P r o j e c t e d Net Income Before I n t e r e s t and Taxes 1,200. Net P r o j e c t e d Income/Total Expense 1.33$ CASE I I - A c t u a l Value of Property $20,000. T o t a l Expense ( A c t u a l ) 81 , 6 0 0 . T o t a l Revenue 81,200. Net Income (Loss) Before I n t e r e s t (400) The p r e c e d i n g argument, of course, i s v u l n e r a b l e to the a s s e r t i o n t h a t r i s k i s an element of great considera-t i o n i n the motor c a r r i e r i n d u s t r y and of f a r l e s s concern to the v a s t power companies and r a i l r o a d s who, with t h e i r l a r g e investment i n f i x e d f a c i l i t i e s , are not l i k e l y to be f o r c e d out of o p e r a t i o n due t o a short-term (even two or thr e e y e a r s ) economic set-back. T h i s was d i s c u s s e d i n Chapter I I . As a r e s u l t , why should not a motor c a r r i e r r a t e r e g u l a t o r be a b l e to e v a l u a t e t h i s r i s k and, having e s t a b l i s h e d the c a r r i e r ' " r a t e base" set a hi g h r a t e of r e t u r n which r e f l e c t s t h i s r i s k d i f f e r e n t i a l r e l a t i v e to 82 the u t i l i t y o r r a i l r o a d ? A suggested reason i s t h a t the t r u c k i n g i n d u s t r y d i s p l a y s very p e c u l i a r r i s k c h a r a c t e r i s t i c s and, i n o r d e r to determine what a reasonable r e t u r n would be f o r the i n d u s t r y , the r e g u l a t o r would have to f i n d many i n d u s t r i e s with s i m i l a r c h a r a c t e r i s t i c s and use the r e t u r n on i n v e s t -ment t h e r e i n as a guide f o r the motor t r u c k i n g f i e l d . T h i s w r i t e r f i n d s i t very d i f f i c u l t t o t h i n k of any i n d u s -t r y which i s s i m i l a r t o motor t r u c k i n g - s i m i l a r i n the degree and type of r i s k with which i t c o n f r o n t s the would-be i n v e s t o r / o p e r a t o r . On the o t h e r hand, i t might be suggested t h a t the r a i l r o a d i n d u s t r y , the e l e c t r i c , gas and telephone u t i l i t i e s are s i m i l a r i n t h e i r r i s k c h a r a c t e r -i s t i c s t o most heavy f i x e d investment i n d u s t r y - manufactur-i n g and s e r v i c e . At any r a t e , the r i s k i s s u f f i c i e n t l y low and, as has been suggested above, f a m i l i a r enough to the average i n v e s t o r t h a t the c a p i t a l market can e v a l u a t e i t r e l a t i v e to the same low r i s k i n o t h e r heavy f i x e d i n v e s t -ment f i e l d s . The more u n c e r t a i n i s the f u t u r e of an under-t a k i n g , the h i g h e r i s the degree of r i s k and the l e s s cap-able w i l l any a u t h o r i t y be of e v a l u a t i n g i t a c c u r a t e l y . At t h i s p o i n t , i t must be p o i n t e d out t h a t t h i s t h e s i s i s not s u g g e s t i n g the t r u c k i n g i n d u s t r y , which does e x h i b i t a high r e t u r n on investment, should not be allowed such a r e t u r n . C e r t a i n l y , the element of r i s k i s very 83 p r e v a l e n t i n the i n d u s t r y , f a r more so than i t i s f o r a r a i l r o a d , gas o r e l e c t r i c company. As Chapter I I has suggested, a motor c a r r i e r i s f a r more s u s c e p t i b l e to sudden competition, indeed,competition so s t r o n g as to f o r c e him out of o p e r a t i o n . Firms can, and do, move i n and out of a s e r v i c e very r a p i d l y . A b a s i c r u l e of i n v e s t i n g i s , of course, t h a t the g r e a t e r the r i s k present, the g r e a t e r i s the r e t u r n r e q u i r e d of the p a r t y or f i r m s o l i c i t i n g the funds. Table I I on page 84 i n d i c a t e s t h a t the Canadian t r u c k i n g i n d u s t r y does, i n f a c t , d i s p l a y a h i g h r e t u r n on i n v e s t e d c a p i t a l r e l a t i v e to most o t h e r r e g u l a t e d i n d u s -t r i e s . The O p e r ating R a t i o In recent years, t h e r e has been an i n c r e a s i n g awareness on the p a r t of motor c a r r i e r r e g u l a t o r s t h a t r a t e of r e t u r n on investment Is an i n a p p r o p r i a t e standard f o r examining r a t e adequacy. The I.C.C. has never, i n f a c t , employed the " f a i r r e t u r n on f a i r v a l u e " concept f o r a motor c a r r i e r case. Ever s i n c e the very e a r l y days of motor c a r r i e r r e g u l a t i o n , the " o p e r a t i n g r a t i o " has gained the g r e a t e r confidence of c r i t i c s as an index of revenue requirement. The o p e r a t i n g r a t i o i s t h a t percentage f i g u r e a r r i v e d at when one d i v i d e s t o t a l o p e r a t i n g revenue by t o t a l o p e r a t i n g c o s t . In the case of E x h i b i t 2 } the TABLE I I CANADIAN IMPERIAL BANK OF COMMERCE -" S E L E C T E D CORPORATE RATIOS" S e l e c t e d I n d u s t r y A i r T r a n s p o r t Water T r a n s p o r t Railways Truck T r a n s p o r t Bus T r a n s p o r t P i p e l i n e s Telephones E l e c t r i c Power Gas D i s t r i b u t i o n T o t a l T r a n s p o r t a t i o n T o t a l U t i l i t i e s T o t a l Communication Jo Return on Invested C a p i t a l 9 . 8 7 . 2 3.4 13.2 12.6 9 . 2 5 . 6 5 . 6 4.9 5 . 6 5 . 2 6 . 0 Source: Canadian I m p e r i a l Bank of 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 " , based on T a x a t i o n S t a t i s t i c s f o r the year 1 9 6 4 . 85 o p e r a t i n g r a t i o i s 80,000/81,200 or 98.52 per cent . The f i r s t time the o p e r a t i n g r a t i o was r e l i e d upon to make a s i g n i f i c a n t d e c i s i o n about the adequacy o f motor c a r r i e r r a t e s was i n 1943 i n Increased Common C a r r i e r Truck  Rates i n the East.-^ T h i s case had t o do with an a p p l i c a t i o n by c a r r i e r s of a r e g i o n f o r a 4 per cent i n c r e a s e i n r a t e s . A f t e r making a d e t a i l e d c o s t study of a l l u n i t c o s t s (per v e h i c l e - m i l e ) and oth e r p e r t i n e n t f i n a n c i a l c o n s i d e r a t i o n s such as d i v i d e n d s p a i d , i n c r e a s e s i n s u r p l u s , f i x e d i n v e s t -ment and working c a p i t a l , the Commission agreed w i t h the c a r r i e r s ' c o n t e n t i o n t h a t o p e r a t i n g expenses and the p r o j e c t -ed Increases i n these expenses should be the prime c r i t e r i a f o r j u d ging revenue requirement. Having reviewed the econ-omic f e a t u r e s of the t r u c k i n g i n d u s t r y and the problems at t a c h e d t o use of r a t e of r e t u r n on investment t h e r e i n , we can now a p p r e c i a t e the Commission's reasoning when i t s t a t e d i n " d i s c u s s i o n " : . . . t h e i r s i s p r i m a r i l y a s e r v i c e i n d u s t r y i n th a t the value 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 per cent of t h e i r annual gross revenues. They contend t h a t , i n determining whether a ge n e r a l i n c r e a s e i n r a t e s should be approved, c o n s i d e r a t i o n be given s o l e l y t o the need o f the i n d u s t r y f o r s u f f i c i e n t revenue t o enable 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 the payment of income taxes, and th a t no attempt be made to f i x a r a t e of r e t u r n based on the value ^ of t h e i r o p e r a t i n g p r o p e r t y o r of t h e i r net worth. Increased Common C a r r i e r Truck Rates i n the East, 42 M.C.C., pp. b33 - b57. 4 I b i d . , p. 655. 8 6 In i t s statement, the Commission made the s i g n i f i c a n t d e p a r t -ure from r a t e of r e t u r n that the motor c a r r i e r s were w a i t i n g form. T h i s paragraph i s as o f t - q u o t e d i n I.C.C. Motor C a r r i e r cases as i s Hope N a t u r a l Gas^ i n u t i l i t y and r a i l w a y cases, both i n I.C.C. and i n the Supreme 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 are a convenience i n determining the extent 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. Because t r u c k l i n e s have few out s t a n d i n g o b l i g a t i o n s i n comparison wi t h the r a i l r o a d s , the f i x e d charges of t r u c k l i n e s are r e l a t i v e l y low, and there i s a s m a l l e r spread between a motor c a r r i e r ' s net o p e r a t -i n g revenue and i t s net income before Income taxes than i n the case of the r a i l r o a d . 6 The d e c i s i o n : Many respondents are, and have been e x i s t i n g on too narrow a margin between revenues and expenses; others are o p e r a t i n g a t a l o s s . The respondents as a whole are not st r o n g enough f i n a n c i a l l y (on the 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 ) to undergo extended p e r i o d s of u n p r o f i t a b l e o p e r a t i o n . Some i n c r e a s e i s reasonable and necessary to accomplish the purpose of the n a t i o n a l t r a n s p o r t a t i o n policy.< Thus, i t i s not d i f f i c u l t t o understand what prompt-ed the Commission t o employ the o p e r a t i n g r a t i o as a t e s t of revenue need. In t h i s r e s p e c t e d body's own words, the oper-a t i n g r a t i o t e s t i s a "convenience". A i t c h i s o n , a c a r e f u l student of the Commission and the economic and l e g a l grounds ^ F e d e r a l Power Commission v. Hope N a t u r a l Gas Company, 320 U.S. 591 (1944), .. 6 Increased Common C a r r i e r Truck Rates i n the East, 42 M.C.C., p. 635. ~ ' 7 I b i d , , p. 6 5 7 . 87 upon which i t works, r e f e r s to the o p e r a t i n g r a t i o as a "formulatory s h o r t - c u t " . Not e n t i r e l y convinced of i t s merit, however, A i t c h i s o n d e s c r i b e s the o p e r a t i n g r a t i o i n t h i s manner: ...This t e s t has been r e s o r t e d to from the 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 -expensive means of determining e x p e d i t i o u s l y the 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 holly e m p i r i c a l , and i s based on the assumption, impossible of s t a t i s t i c a l proof, t h a t some giv e n p e r c e n t a g e — s a y 93 per c e n t — i s the 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 of r a t e s . " Indeed, the o p e r a t i n g r a t i o i s extremely simple to use. A l l a commission need do i s examine the o p e r a t i n g expenses t o judge i f they are reasonable and then set a r a t e l e v e l which w i l l produce a c e r t a i n o p e r a t i n g r a t i o t h a t i s c o n s i d e r e d adequate. ...Now the o l d b a t t l e s about 'prudent investment' versus ' r e p r o d u c t i o n c o s t ' can 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 or a c c o u n t i n g f o r e x t r a -o r d i n a r y obsolescence.9 Many economists have, however, searched f o r more compe l l i n g arguments i n f a v o r of the o p e r a t i n g r a t i o than merely i t s "convenience" and " s i m p l i c i t y " . The f a c t that a r e t u r n on investment percentage i s not deemed so s u i t a b l e f o r motor 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 not impress p °Aitchison, C.B., o p . c i t . , p. 77. 9A. Wright, "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 , 24, 1953, p. 28. 88 them g r e a t l y . As A i t c h i s o n n o t e s : W r i t e r s on t r a n s p o r t a t i o n economics...are unanimously 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 no t h i n g . . . ( t h e y ) may be u s e f u l o n l y as guides to change o r trends which may be significant.i<-> One c r i t i c i s m of the o p e r a t i n g r a t i o i s t h a t i t a f f o r d s unwarranted p r o t e c t i o n t o the motor c a r r i e r . In that a "normal" r a t e of r e t u r n would look too sm a l l i n abso l u t e terms t o the owner of a t r u c k i n g l i n e , the l a t t e r has, so say some c r i t i c s , persuaded the I.C.C. and oth e r commissions t o g i v e him a much h i g h e r r a t e of r e t u r n . Be-cause t h i s r a t e o f r e t u r n i s f a r too high t o be allowed by t r a d i t i o n a l r a t e - b a s e - f a i r r e t u r n language, the t r u c k e r s have succeeded i n c o n c e a l i n g the r a t e a c t u a l l y being earned. The f a c t i s , however, t h a t : ...every 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 to some r a t e of r e t u r n . . . a n d the r a t e can always be computed.H C e r t a i n l y , the o p e r a t i n g r a t i o does g i v e b e t t e r p r o t e c t i o n t o the owners of a h i g h l y v o l a t i l e i n d u s t r y where earnings are apt to f l u c t u a t e w i d e l y from y e a r t o year. Knappen's c r i t i c i s m i s , however, t h i s : Assuming t h a t ' b e t t e r p r o t e c t i o n ' were the o n l y t e s t , then t h e r e would be no st o p p i n g the r a i s i n g of r a t e s s h o r t o f the p o i n t a t which the Industry 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 . the monopoly p r i c e l e v e l . . . A t t h a t p o i n t the i n v e s t o r s would have maximum p r o t e c t i o n , but the patrons would have minimum prot e c t i o n . 1 2 I0Aitchison, C.B., o p . c i t . , p. 73. n L . S . Knappen, "The T r a n s i t Operating R a t i o - Another View", 53 P.U.F., 485 (1953), p. 68. 1 2 I b i d . , p. 72. 89 C l e a r l y , the c r i t i c i s m here i s t h a t the o p e r a t i n g r a t i o i s merely a t o o l f o r d i s g u i s i n g the f a c t t h a t the motor c a r r i e r i n d u s t r y c o u l d be allowed a h i g h e r r a t e of r e t u r n than what the r i s k s might warrant and t h a t , i n e f f e c t , o t h e r modes of t r a n s p o r t a t i o n might be d i s c r i m i n a t e d a g a i n s t . Perhaps the b a s i c c r i t i c i s m of the o p e r a t i n g r a t i o t e s t i s t h a t , con-t r a r y to what i s u s u a l l y claimed, the r a t i o i s not a t a l l an "accurate gauge" of revenue requirement. There are not any c l e a r o b j e c t i v e c r i t e r i a f o r judging what a r a t i o should be I What does- c o n s t i t u t e a reasonable margin between revenues and expenses? Although the I n t e r s t a t e Commerce Commission has adopted a c e r t a i n formula which we s h a l l look at i n the next Chapter, i t i s somewhat u n c l e a r as to what standards were used to a r r i v e at I t . Knappen r e c a l l s J u s t i c e Jackson's d i s s e n t i n Hope N a t u r a l Gas, a d i s s e n t about the l o s s of o b j e c t i v e standards f o r e v a l u a t i n g u t i l i t y r a t e base, as how he f e e l s 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 an "accurate gauge". We need not be s l a v e s to a formula but u n l e s s we can p o i n t out a r a t i o n a l way of r e a c h i n g our c o n c l u s i o n s they can o n l y be accepted as r e s t i n g on i n s t i t u t i o n o r p r e d i l e c t i o n . I must admit t h a t I possess no i n s t i n c t by which t o know the 'reasonable' from the 'unreasonable' i n p r i c e s and must seek some conscious design f o r d e c i s i o n . 1 3 In o t h e r words, the c r i t i c i s m i s t h a t the o p e r a t i n g r a t i o i s no more o b j e c t i v e , simple, o r a c c u r a t e than the " f a i r v a l u e " c r i t e r i o n . ^ F e d e r a l Power Commission v. Hope N a t u r a l Gas, 320 U.S. 591 (1944J, as quoted by Knappen, L.S., o p . c i t . , p. 7 0 . 90 Indeed, d e s p i t e the Supreme Court's r e l u c t a n c e t o adopt c l e a r , set standards, the f a i r r e t u r n concept does have meaningful and f a i r l y o b j e c t i v e bases. The c o n v e n t i o n a l 6, 7 or 8 per cent r a t e of r e t u r n on net investment has great s i g n i f i c a n c e t o p r o s p e c t i v e i n v e s t o r s throughout the economy. An allowed r a t e of r e t u r n can be based on e v i d e n t money mar-ket c o n d i t i o n s and can be a d j u s t e d as those c o n d i t i o n s change. Depending on 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 r e g u l a t o r can soon t e l l f a i r l y a c c u r a t e l y how f a i r the allowed r a t e Is to the owner. What meaning or s i g n i f i c a n c e a t t a c h e s to an o p e r a t i n g r a t i o of 93 per cent as f a r as the p u b l i c , i n v e s t -ors, o r even t r a i n e d f i n a n c i a l a n a l y s t s are concerned? No Independent market of t r a n s a c t i o n s can judge an o p e r a t i n g r a t i o such as a s e c u r i t i e s market does r a t e s of r e t u r n f o r bonds and s t o c k s . Knappen a l s o takes i s s u e with the I.C.C. c o n c l u s i o n i n Middle West Increases t h a t the r i s k i n h e r e n t In motor c a r r i e r o p e r a t i o n s i s a t t a c h e d to expenses r a t h e r than to I n -v e s t e d c a p i t a l : I t seems a strange use of words to a t t r i b u t e r i s k t o a company's expenses. Those are i t s debts and i t i s an o l d s a y i n g t h a t while a company's accounts r e c e i v a b l e may not be 100 per cent good, i t s accounts payable always a r e . That i s , there Is no u n c e r t a i n t y , no r i s k about such o b l i g a t i o n s to the debtor. 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 H X . S . Knappen, o p . c i t . , p. 71, i n r e f e r e n c e to the f o l -lowing quote: ,Where~The amount of investment 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 primary f a c t o r i n determining revenue needs...the owners of motor c a r r i e r s can h a r d l y be expected to look to the r e t u r n on the amount of t h e i r investment as an i n c e n t i v e where the p r i n c i p a l r i s k i s a t t a c h e d to the s u b s t a n t i a l l y g r e a t e r amount of expense." Middle West General Increases,48 M.C.C., p 542 9 1 Summary De s p i t e i t s many f a u l t s , the o p e r a t i n g r a t i o Has been adopted w i d e l y as the best means a v a i l a b l e f o r determining a motor c a r r i e r ' s revenue requirement and s e t t i n g a r a t e l e v e l therefrom. I t i s d i f f i c u l t t o c l a i m t h a t i t p r o v i d e s an accurate standard whether I t be 9 9 per cent o r 8 0 per c e n t . E s p e c i a l l y i n an i n d u s t r y as d i v e r s e as the motor t r u c k i n g i n -dustry, i t i s i m p o s s i b l e to be p r e c i s e i n s t a t i n g what a r a t i o should be i n o r d e r to p r o v i d e adequate yet n o n - e x p l o i t i v e p r o f i t s . In the f i n a l a n a l y s i s , however, the o p e r a t i n g r a t i o appears to be the o n l y t o o l t h a t can enable a r e g u l a t o r t o s a t i s f y the demands of r a t e r e g u l a t i o n s with regard to a motor c a r r i e r . In t h a t a t r u c k e r l a c k s the " l a s t i n g power" of a heavy f i x e d investment u t i l i t y . ? even f o r 1 a yearv'of"-unprofitable o p e r a t i o n ! i . e . a year where o p e r a t i n g revenues f a i l to meet o p e r a t i n g c o s t s , the r e g u l a t o r must concentrate i t s f u l l a t t e n -t i o n on keeping the f i r m s of i t s j u r i s d i c t i o n i n business year to year. Otherwise the u s e r of t r u c k i n g s e r v i c e s can i n no way be a s s u r e d of s t a b l e and r e l i a b l e s e r v i c e . Thus, the r e g u l a t o r ' s purpose must be t h a t of p r o v i d i n g a margin of  revenues over expenses t h a t i s not i n danger of d i s a p p e a r i n g  e n t i r e l y i f economic or s a l e s c o n d i t i o n s e f f e c t a decrease i n  revenues or an i n c r e a s e i n c o s t s year to y e a r . An adequate " r e t u r n " on c a p i t a l i n v e s t e d , o r a p r o f i t s u f f i c i e n t to out-92 weigh the " r i s k s i n c u r r e d i n o p e r a t i n g expenses" i s r e a l l y not the crux of the matter and, i n f a c t , has l i t t l e r e l a t i o n t o t h i s immediate problem of t r u c k r e g u l a t i o n . That i s , simply a l l o w i n g the o p e r a t o r s u f f i c i e n t p r o f i t s t h a t w i l l en-courage him to s t a y i n business without a l l o w i n g the consumer to be e x p l o i t e d . At t h i s p o i n t of the t h e s i s , we might pause b r i e f l y to review the m a t e r i a l t h a t has been examined thus f a r . P i e c i n g t o g e t h e r and o r g a n i z i n g t h i s background should p r o v i d e us w i t h the background necessary f o r the examination of some more s p e c i f i c c o n s i d e r a t i o n s of motor c a r r i e r r a t e r e g u l a t i o n . In the f i r s t p l a c e , some review has been made of the j u s t i f i c a t i o n s and aims of r a t e r e g u l a t i o n f o r u t i l i t i e s and r a i l w a y s . Then, the motor t r u c k i n g i n d u s t r y was examined i n the same con t e x t . While i t was found t h a t the aims of motor c a r r i e r 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 the same as those f o r r e g u l a t i o n of any i n d u s t r y , the economic j u s t i f i c a t i o n s were somewhat d i f f e r e n t . Mainly because of i t s economic c h a r a c t e r -i s t i c s , the motor t r u c k i n g i n d u s t r y has to be t r e a t e d as an e x c e p t i o n by a r e g u l a t o r such as the I n t e r s t a t e Commerce Com-m i s s i o n . Next, a s u b s t a n t i a l amount of time was spent l o o k i n g at how the r a t e r e g u l a t o r s e t s r a t e s f o r the I n d u s t r y under i t s c o n t r o l . Never a p r e c i s e s c i e n c e at any time, r a t e - s e t t i n g was nonetheless found to r e s t on the t i m e - t e s t e d and l o g i c a l , i f 93 not too o f t e n o b j e c t i v e , c r i t e r i o n of a " f a i r r e t u r n on a f a i r v a l u e " of the producers' p r o p e r t y . I t was shown how t h i s concept, a l b e i t a thorny and c o n t e s t e d i s s u e , has con-s t i t u t e d the standard approach of a l l r e g u l a t o r s s e t t i n g adequate r a t e l e v e l s f o r r e g u l a t e d i n d u s t r i e s . We are l e f t w i t h the impression t h a t f a i r l y o b j e c t i v e economic and a c c o u n t i n g c r i t e r i a do e x i s t whereby one might make h i s own judgements as to the reasonableness of a r a t e . T h i s i s des-p i t e the f a c t t h a t the U.S. Supreme Court seems to be a v o i d -ing as much as p o s s i b l e adopting set formulae f o r measuring r a t e bases o r r e t u r n s on those bases. When, i n the l a s t s e c t i o n , examination was made of the problem of determining a f a i r 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 , i t was found t h a t , again due to economic c h a r a c t e r -i s t i c s d i f f e r e n t from those of o t h e r r e g u l a t e d concerns, the f a i r r a t e of r e t u r n on a f a i r v a l u e p r i n c i p l e i s not employed by a t r u c k i n g r a t e r e g u l a t o r . Instead, the " o p e r a t i n g r a t i o " , simply the percentage of t o t a l o p e r a t i n g c o s t s to o p e r a t i n g revenues, i s the t o o l t h a t most r e g u l a t o r s use to determine the revenue requirement f o r motor t r u c k e r s . In t h a t t r u c k i n g i s a r e l a t i v e l y young r e g u l a t e d concern, i t has not m e r i t e d as much a t t e n t i o n on the p a r t of such standard s e t t e r s as the U.S. Supreme Court, the U.S. I n t e r s t a t e Commerce Commission and the v a r i o u s U.S. s t a t e commissions. In Canada, moreover, t r u c k i n g has been f o r some time i n a r a t h e r ambiguous r e g u l a -t o r y environment. I t i s u n d e r s t a n d a b l e , t h e r e f o r e , t h a t the 94 Operating r a t i o , the t o o l with which regulators set trucking rate le v e l s , i s s t i l l a very rough and badly understood instrument. For the next section of t h i s thesis, therefore, an examination w i l l be made of the operating r a t i o as i t i s used today by motor c a r r i e r regulators, of i t s accuracy as an indicator of rate adequacy, and f i n a l l y of the conditions that must be brought about i f the operating r a t i o i s to be more accurate, meaningful and r e l i a b l e for the purposes of rate regulation. 95 CHAPTER V THE OPERATING RATIO AS A WORKABLE  STANDARD OF REVENUE REQUIREMENT" Acceptability The major objection to employment of the operating ratio as a standard of revenue need, we might reca l l , was that no objective c r i t e r i a seem to exist for setting a stan-dard. More basic again, however, i s the problem of deter-mining conditions wherein this simple ratio "...merely the relation between two highly variable sums of money"1 w i l l have comparable meaning when calculated for two or more firms exhibiting markedly different cost characteristics. Any indus-try, especially one as diverse as motor trucking, is composed of many units who not only operate differently and incur cost patterns peculiar to themselves, but might account for those costs in very different ways. Clearly, a crude relation of revenues to "operating costs" for each operator throughout the industry w i l l produce some very diverse results both in the size of the ratios and in the items each ratio includes. Items Included in Operating Cost The f i r s t problem that w i l l have to be overcome be-fore the operating rat io can be accepted as an "accurate A C . B . Aitchison, Fair Reward and Just Compensation,  Common Carrier Service - Standards Under the Interstate  Commerce Act, Association of Interstate Commerce Practitioners, Washington, 1954, p. 77. 96 gaiage" of revenue requirement i s t h a t of s t a n d a r d i z i n g those items to be i n c l u d e d i n " p p e r a t i n g c o s t " . T h i s i s , of course, very b a s i c . The most important items of o p e r a t i n g c o s t f o r a motor c a r r i e r are, of course, v a r i a b l e and s e m i - v a r i a b l e expenses such as d r i v e r s ' wages, f u e l , o i l and grease, v e h i c l e maintenance and o t h e r expenses i n c u r r e d d i r e c t l y w i t h the volume of b u s i n e s s . There i s no disagreement on these items. The second category of o p e r a t i n g c o s t s are those f i x e d and n e a r l y f i x e d expenses such as t e r m i n a l overhead ( i n d i r e c t l a b o r , maintenance, e t c . ) and g e n e r a l overhead ( i n c l u d i n g s e l l i n g and a d m i n i s t r a t i v e expenses). Although the items i n -c l u d e d i n "overhead" are apt to vary somewhat from f i r m to f i r m , the g r e a t e s t problems f o r the r e g u l a t o r , i t might be suggested, w i l l be these t h r e e : 1. Taxes 2. D e p r e c i a t i o n 3. F i n a n c i a l C o s t s . Taxes One p r i n c i p a l d i f f i c u l t y i n attempting to make a u n i v e r s a l d e f i n i t i o n of " o p e r a t i n g r a t i o " f o r a r e g u l a t e d i n -d u s t r y l i e s i n treatment of taxes, e s p e c i a l l y income t a x e s . C l e a r l y , an o p e r a t i n g r a t i o w i l l appear q u i t e d i f f e r e n t i f a l l taxes have been i n c l u d e d e i t h e r as a deduction from o p e r a t i n g revenue or as another item of o p e r a t i n g c o s t , d i f f e r e n t , t h a t 97 i s , from a r a t i o where taxes have been excluded from considera-ti o n . There has r e a l l y never been too much problem as f a r as the Interstate Commerce Commission i s concerned about how to treat d i r e c t taxes against property, taxes upon payrolls, or purchase taxes. They have always been included as items of operating cost, necessary f o r maintaining the c a r r i e r ' s property and conducting business inc i d e n t a l to transportation. Indeed, such tax accounts are included i n the I.C.C. Uniform Account C l a s s i f i c a t i o n . With regard to inclus i o n of both state and federal i n -come taxes, however, there has been some disagreement through-out the years. In Increased Common Ca r r i e r Truck Rates In The  East, the Commission could not agree ...that the rates of respondents as a whole should be f i x e d s u f f i c i e n t l y high to 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 Is that motor c a r r i e r s are owned by d i f f e r e n t kinds of p r o p r i e t o r s , v i z . partnerships, corporations, individuals, each of which has d i f f e r e n t income tax l i a b i l i t i e s . Often, Commission decisions i n the years since 1942 l e f t i t quite un-cle a r i n the reader's mind as to whether or not income taxes had or had not been considered as part of the operating r a t i o used to judge revenue need. Increased Common Ca r r i e r Truck Rates In The East, 42 M.C.C., p. 647. 98 Today, i n the U n i t e d S t a t e s the I.C.C. a t l e a s t seems to have r e s o l v e d the i s s u e of income tax e s . In 1952, i n Increases, P a c i f i c Northwest, a d i v i s i o n of the Commission r u l e d i n f a v o u r of the c a r r i e r s ' c o n t e n t i o n t h a t : F e d e r a l income taxes and surtaxes were a proper charge t o op e r a t i o n s i n determining a reasonable r a t e l e v e l f o r the c a r r i e r s as a whole. T h i s case has been c i t e d f r e q u e n t l y with the r e s u l t t h a t the Commission seems t o be s a t i s f i e d t h a t i t has s e t t l e d the prob-lem of income tax. The Commission now a p p a r e n t l y regards the r u l e as w e l l s e t t l e d t h a t Income taxes are to be taken i n t o account as o t h e r o p e r a t i n g disbursements a r e . 4 When one examines I.C.C. motor c a r r i e r c o s t s t u d i e s , however, he f i n d s t h a t income t a x has been excluded v e r y p o i n t e d -l y from c o n s i d e r a t i o n i n computing revenue need: ...the amount of revenue need i s based on a procedure which i n v o l v e s the use of 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 of both F e d e r a l and S t a t e c o r p o r a t e income taxes....5 I t i s , t h e r e f o r e , u n c l e a r as to how the operator, o r any i n t e r -e s t e d observer ( f o r whom the c o s t s s t u d i e s are intended), can . share the same understanding as to what an "op e r a t i n g r a t i o " i s . C l e a r l y , the income tax problem i s a r a t h e r s i g n i f i c a n t 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 the o p e r a t i n g r a t i o can ^Incr e a s e s , P a c i f i c Northwest, 54 M.C.C., p. 127. 4 A i t c h i s o n , o p . c i t . , p. 88. 5 ^ I n t e r s t a t e Commerce Commission, Bureau of Accounts, Cost of 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 Motor Common C a r r i e r s of General Commodities, Washington, 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 meaningful r e g u l a t o r y t o o l . In Canada, o f f i c i a l understanding o f the o p e r a t i n g r a t i o has a p p a r e n t l y always assumed I n c l u s i o n o f income tax as p a r t o f o p e r a t i n g c o s t s . Although, t o t h i s w r i t e r ' s know-ledge, the Issue has never a r i s e n i n regard to motor c a r r i e r r e g u l a t i o n , the Board of Tra n s p o r t Commissioners made the f o l -lowing statement about a r a i l r o a d r a t e case i n 1948: Income tax payable i n r e s p e c t to 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 chargeable to r a i l w a y o p e r a t i n g expenses.6 D e p r e c i a t i o n The problem about d e p r e c i a t i o n expense i s not a q u e s t i o n o f whether o r not i t should be i n c l u d e d as an o p e r a t -i n g c o s t , but how i t should be c a l c u l a t e d . D e p r e c i a t i o n , an unavoidable expense o f doing business, i s an o p e r a t i n g c o s t . And y e t , i f i t i s not measured i n the same manner f o r a l l c a r r i e r s , c l e a r l y g r e a t d i s p a r i t i e s c o u l d a r i s e i n o p e r a t i n g r a t i o s . D e p r e c i a t i o n expense f o r a motor c a r r i e r i s both a f i x e d bufeden and a v a r i a b l e c o s t d i r e c t l y v a r i a b l e w i t h volume. The f i r s t type of d e p r e c i a t i o n i s r e l a t e d to f i x e d f a c i l i t i e s , c l a s s i f i e d as P l a n t and Equipment i n most acc o u n t i n g systems. The second type, l i k e l y 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 the motor t r u c k i n g i n d u s t r y , i s d e p r e c i a t i o n on v e h i c l e s , both A i t c h i s o n , o p . c i t . , p. 90. 100 power u n i t s and t r a i l e r s . The three standard ways of computing annual d e p r e c i a t i o n expense i n any business a r e : ( l ) S t r a i g h t -l i n e method, (2) D e c l i n i n g Balance method, and (3) Sum-of-the-y e a r s - d i g i t s method. Si n c e the methodology of these v a r i o u s methods i s w e l l known, i t i s not necessary to o f f e r an e x p l a n a t i o n . An example of the d i s p a r i t i e s t h a t c o u l d a r i s e i n o p e r a t i n g c o s t due to d i f f e r e n t ways of d e p r e c i a t i n g might be f r u i t f u l how-ever. EXHIBIT 3 D e p r e c i a t i o n Expense 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 of $20,000 each - F i r s t Year of Operation - P r o j e c t e d 10-year l i f e each S t r a i g h t D e c l i n i n g S u m - o f - t h e - y e a r s - d i g i t s L i n e Balance (10$) (Double)  Undepreciated C a p i t a l Cost $1,000,000 $1,000,000 $1,000,000 D e p r e c i a t i o n Expense (1st year) $ 100,000 $ 200,000 (20$) $ 181,818 (10/55) The i d e a of l e a v i n g management of a f i r m w i t h a wide range of c h o i c e as to how i t must d e p r e c i a t e i t s p r o p e r t y i s q u i t e a c c e p t a b l e i n the realm of p r i v a t e , c o m p e t i t i v e e n t e r -p r i s e . F o r an i n d u s t r y such as motor t r u c k i n g , however, where the element of r e g u l a t i o n i s present and where the r e g u l a t o r seeks t o s e t r a t e s on the b a s i s of a r e l a t i o n s h i p of c o s t s to revenues, t h i s p h i l o s o p h y i s q u i t e unacceptable. D i s p a r i t i e s 101 such as the above, indeed g r e a t e r than t h a t , can be e x h i b i t e d between v a r i o u s f i r m s i n a s i n g l e year due to the method each chooses to d e p r e c i a t e . C l e a r l y , some standard must be s e t even i f such an a c t i o n w i l l undoubtedly b r i n g c r i e s o f "over r e g u l a t i o n " from the c a r r i e r s i n v o l v e d . Otherwise, the o p e r a t -i n g c o s t cannot be comparable from f i r m to f i r m and the o p e r a t -i n g r a t i o w i l l be u n s a t i s f a c t o r y as a measuring gauge. F i n a n c i a l Costs Undoubtedly, the most d i f f i c u l t item to c a l c u l a t e and i n c l u d e i n a statement o f " o p e r a t i n g c o s t s " used to determine revenue need are the f i n a n c i a l expenses o f the f i r m . F i n a n c i a l expenses, of course, d e r i v e from the c a p i t a l s t r u c t u r e o f a b u s i n e s s . Because the t r u c k i n g i n d u s t r y i s so d i v e r s e i n nature, c a p i t a l i z a t i o n s v a r y c o n s i d e r a b l y from f i r m to f i r m . Thus, t o make a g e n e r a l d e f i n i t i o n o r to attempt even a standard c l a s s i f i c a t i o n of what c o n s t i t u t e s f i n a n c i a l c o s t s throughout t h i s i n d u s t r y would be an impossible t a s k . We s h a l l have to examine the items one by one. The most ge n e r a l and e a s i l y understood f i n a n c i a l ex-pense i s , of course, s t r a i g h t i n t e r e s t on borrowed funds. Even the very u n s o p h i s t i c a t e d s m a l l o p e r a t o r w i l l know with some accuracy how much i n t e r e s t he i s paying every year on, say, a bank demand loan o r a debt instrument such as a bond o r equipment t r u s t c e r t i f i c a t e . I t i s suggested here that 102 such charges are expenses of o p e r a t i o n and c l a s s i f i e d as f i x e d c o s t s and should be i n c l u d e d f a i r l y e a s i l y i n any estimate of revenue need. As soon as a c a r r i e r becomes l a r g e enough t h a t he can e n t e r the f i e l d of common st o c k f i n a n c i n g , the problem of determining t o t a l f i n a n c i a l c o s t s becomes c o n s i d e r a b l y more complex. As mentioned i n Chapter I I , the c o s t of f l o a t i n g and m a i n t a i n i n g an i s s u e of common s t o c k on the market i s very d i f f i c u l t to determine. What the a n a l y s t i s attempting to measure i s the percentage of r e t u r n on the shareholder's d o l l a r t h a t the market c o n s i d e r s necessary a t a p a r t i c u l a r time to a t l e a s t m a i n t a i n the value of t h a t s t o c k with i t s p e c u l i a r r i s k c h a r a c t e r i s t i c s . In a d d i t i o n to the r e t u r n that the company d i s p l a y s f o r each d o l l a r of net investment^ many a n a l y s t s f e e l t h a t the a c t u a l "payout" or y i e l d t h a t goes to the s t o c k h o l d e r from t h a t r e t u r n i s a l s o a value-making c o n s i d e r a t i o n . Thus, the c o s t of e q u i t y money t h a t i s ...a t any time the r e s u l t of the i n t e r a c t i o n of the company's r e t u r n on investment, the y i e l d to i n v e s t o r s , the h i s t o r y of both of these and a host of o t h e r f a c t o r s which can be summed up as 1 the c u r r e n t a t t i t u d e of the market'...' i s a very d i f f i c u l t item t o c a l c u l a t e w i t h any accuracy a t a l l even f o r f i n a n c i a l economists of the Canadian N a t i o n a l and Canadian P a c i f i c R a i l r o a d s , l e t alone the t r u c k o p e r a t o r j u s t l a r g e enough to get i n t o e q u i t y f i n a n c i n g . ^Canadian Royal Commission on T r a n s p o r t a t i o n , Volume I I I , 1961, p. 310. 103 C l e a r l y , we have come again to the problem of c o s t of c a p i t a l . The c o s t of common stock f i n a n c i n g , l i k e the c o s t s of a l l o t h e r " e q u i t y " f i n a n c i n g i s not re p r e s e n t e d by a c l e a r - c u t , out-of-pocket sum of money. A l l the money o r " c a p i t a l " t h a t i s t i e d up i n a business (even though i n the t r u c k i n g business t h i s sum w i l l be s m a l l r e l a t i v e to t h a t of a u t i l i t y or r a i l r o a d ) c o u l d presumably be i n v e s t e d elsewhere by i t s s u p p l i e r s . Thus, the money t i e d up i n working c a p i t a l , revenue-producing v e h i c l e s , p l a n t and equipment, e t c . , i r r e s p e c -t i v e of whether i t came i n the course of business from r e t a i n e d earnings, d e p r e c i a t i o n a c c r u a l s , i n i t i a l c o n t r i b u t i o n of owner-manager, or from the e q u i t y market o u t s i d e , t h i s money has a „ c e r t a i n " o p p o r t u n i t y c o s t " which w i l l have to be met. I f t h i s c o s t cannot be met, and i t can o n l y be met from p r o f i t s , c l e a r l y the investment of t h i s c a p i t a l i n t h i s c a r r i e r r e p r e s e n t s a mis-a l l o c a t i o n o f r e s o u r c e s . Although i t i s d i f f i c u l t f o r even some of the l a r g e r c a r r i e r s to understand, any f i r m w i l l have to i n c l u d e as p a r t of i t s c o s t of doing business a c e r t a i n r e t u r n o r p r o f i t on each d o l l a r t h a t has gone i n t o the a s s e t s o f t h a t business — i r c e s p e c t i v e o f where t h a t d o l l a r came from. As The Highway Research Board views i t : Although i t i s tr u e that not a l l o f the t r u c k i n g i n d u s t r y ' s p r o p e r t y i s purchased with bank loa n funds, n e v e r t h e l e s s those who supply the funds want some r e t u r n , whether they be s t o c k h o l d e r s , banks, f i n a n c e companies, or i n d i v i d u a l owners. The element of p r o f i t i s a recognized c o s t i n 104 ...American Industry.° The I n t e r s t a t e Commerce Commission has always r e c o g n i z e d t h a t r e t u r n o r " i n t e r e s t on investment" i s a c l e a r item of co s t t h a t should be c o n s i d e r e d along w i t h o p e r a t i n g c o s t s when c a l c u l a t i n g revenue need. Other than the s t r a i g h t i n t e r e s t charges on borrowed money, however, the r e q u i r e d r e t u r n on pr o p e r t y o r " i n t e r e s t on investment" i s not i n c l u d e d i n o p e r a t i n g c o s t , r a t h e r added onto the f i n a l o p e r a t i n g c o s t f i g u r e i n or d e r to m a i n t a i n the d e s i r e d o p e r a t i n g r a t i o . Because i n t e r e s t on investment i s not i n c l u d e d i n the computation of o p e r a t i n g r a t i o s . . . t h e o u t - o f -pocket c o s t s should be i n c r e a s e d by the f o l l o w i n g p ercents to pro v i d e revenue need.... Although t h i s wording leaves the reader a l i t t l e confused as to how the r e q u i r e d r e t u r n on c a p i t a l should be a p p l i e d to the o p e r a t i n g r a t i o s , the l a t e s t I.C.C. P o l i c y Statement on g e n e r a l r a t e proceedings makes i t q u i t e c l e a r that t h i s i s ver y d e f i n i t e l y an Item of c o n s i d e r a t i o n f o r determining revenue need: ...respondents ( i . e . c a r r i e r s appearing i n ge n e r a l r a t e cases) s h a l l produce evidence o f the sum of money, i n a d d i t i o n t o o p e r a t i n g expenses, needed 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 to 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 c a p a c i t y to render s e r v i c e . T h i s evidence should i n c l u d e , without l i m i t i n g the evidence that should "Highway Research Board: B u l l e t i n 301, Line-Haul Truck-i n g Costs i n R e l a t i o n t o V e h i c l e Gross Weights, N.R.C. pub-l i c a t i o n No. 929, Washington, D.C, 1961, p. 75. ^I.C.C. Bureau of Accounts, o p . c i t . , p. 5. 105 ...be presented, 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 the respondents' reasonable 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.1 0 Again, the Highway Research Board's statement might be i n s e r t -ed: "...the element of 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 American i n d u s t r y " . I f t h i s statement i s t r u e , and the modern t h i n k i n g on c o r p o r a t e f i n a n c e i n d i c a t e s that i t i s , then s u r e l y we have not succeeded i n our attempt to i n t r o d u c e more o b j e c t i v i t y and a c -curacy i n t o the p r a c t i c e o f t r u c k r a t e - s e t t i n g by d i s c a r d i n g the f a i r r e t u r n on f a i r value p r i n c i p l e and s u b s t i t u t i n g the o p e r a t i n g r a t i o t o o l i n i t s s t e a d . F o r indeed, how i s a regu-l a t o r to judge what a reasonable r e t u r n on investment (now as an item of "cost") would be f o r the motor c a r r i e r any more than he c o u l d judge f o r a r a i l r o a d ? C e r t a i n l y t h i s Item w i l l be i n -s i g n i f i c a n t i n s i z e r e l a t i v e to t h a t of the r a i l r o a d , but the p r i n c i p l e remains the same. Ap p a r e n t l y the Commission s t i l l has t o oversee i n s e r t i o n of a c o s t element f o r r e t u r n on i n -v e s t e d c a p i t a l of the motor t r u c k e r . What c r i t e r i a w i l l i t use to judge the a c c e p t a b i l i t y of the evidence t h a t the respondents w i l l present? T h i s evidence, which we have a l r e a d y c l a s s i f i e d somewhat l o o s e l y as the " f i n a n c i a l c o s t " element, i s going to be weighed i n a f a i r l y s u b j e c t i v e and non-uniform manner by the v a r i o u s r e g u l a t o r s , o b servers and o p e r a t o r s . Again, the o p e r a t -l°Interstate Commerce Commission, Order No. 34816: Increased Minimum Charges 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 i n g r a t i o , because of the probl e m a t i c elements i t i s composed of, l o s e s a l i t t l e more of our conf i d e n c e as a p o t e n t i a l o b j e c t i v e , a c c u r a t e , u n i v e r s a l gauge of motor c a r r i e r revenue requirement. D i v e r s i t y of The Industry Some t r u c k e r s i n t h i s p r o v i n c e are l o s i n g money with 'compensatory' o p e r a t i n g r a t i o s . Others, w i t h i d e n t i c a l r a t i o s , a re r e a l i z i n g v e r y good p r o f i t s . You have t o be ve r y c a r e f u l when you t r y to read any-t h i n g i n t o t h i s r a t i o . 1 1 The above statement, the w r i t e r gathers, i s r e p -r e s e n t a t i v e o f the a t t i t u d e the Canadian t r u c k i n g Industry has toward the use of o p e r a t i n g r a t i o s e i t h e r f o r s e t t i n g r a t e s o r f o r any o t h e r p u r p o s e . 1 2 The reason i s that each f i r m i n the motor c a r r i e r i n d u s t r y i s l i k e l y to operate under v e r y d i f f e r e n t c o n d i t i o n s . What might be an item of c o n s i d e r a b l e expense to one t r u c k e r might not even e x i s t f o r another. The type of route an o p e r a t o r s e r v i c e s , the k i n d of product he ha u l s , the equipment he uses, the frequency and d e n s i t y of h i s hauls, I n -deed h i s p o l i c y towards l e a s i n g o f f a c i l i t i e s and equipment, are j u s t a few v a r i a b l e s t h a t can g r e a t l y a f f e c t the magnitude of h i s r a t i o between o p e r a t i n g c o s t s and revenues. Let us examine a few of the major i s s u e s i n some d e t a i l . Statement to w r i t e r by a management o f f i c i a l of one of the country's l a r g e s t t r u c k e r s , J u l y , 1967. 1 2 T h i s impression was gained by the w r i t e r a f t e r t a l k i n g t o management of some s i x major t r u c k e r s i n B r i t i s h Columbia. 107 13 A c c o r d i n g to Hudson and ConstantIn, the average  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 the most c r i t i c a l o p e r a t i n g c h a r a c t e r i s t i c a f f e c t i n g the o p e r a t i n g r a t i o . T h i s index, c r u c i a l t o any mode of t r a n s p o r t , and 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 c a r r i e r s depending on the type of o p e r a t i o n , i s a good i n d i c a t o r of u t i l i z a t i o n . In the 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 the f o l l o w i n g c a l c u l a t i o n : T o t a l Loaded Ton M i l e s T o t a l C a p a c i t y Ton EXAMPLE: M i l e s o f F l e e t T o t a l Loaded Ton M i l e s f o r p e r i o d 500,000 T o t a l Normal C a p a c i t y Ton M i l e s f o r p e r i o d 750,000 Load F a c t o r s - 500,000 D . 6 7 750,000 These authors made a study of the r e l a t i o n s h i p be-tween the l o a d f a c t o r w i t h motor t r u c k e r s ' o p e r a t i n g c o s t s and revenues. U s i n g data d e r i v e d from a sample of 70 C l a s s I i n t e r s t a t e commodity c a r r i e r s ( a l l l a r g e o p e r a t o r s ) i n one r e g i o n of the U n i t e d S t a t e s i n 1953, they demonstrated t h a t the o p e r a t i n g r a t i o improved v e r y q u i c k l y a f t e r a 50 p e r cent l o a d f a c t o r was reached. Indeed, a very s t r o n g c o r r e l a t i o n i s seen between l o a d f a c t o r and the o p e r a t i n g r a t i o . The r e s u l t s •^W.J. Hudson and J.A. Co n s t a n t i n , Motor 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 , N.Y., N.Y., Ronald Press Inc., 1958. 108 are demonstrated by the f o l l o w i n g : FIGURE 4 Rate of Return 50 40 30 20 10 ( **4tat< of P sturn Ope rH±n Ratffc 5 Operating R a t i o 100 98 96 94 92 90 Load F a c t o r R e l a t i o n of 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 of r e t u r n f o r 70 C l a s s I motor common c a r r i e r s of g e n e r a l commodities, 1953. Source: Hudson, W.J., and C o n s t a n t i n , J.A., Motor 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 , Ronald Press Company, New York, 1958, P. 169. 1 0 9 The r e s u l t o f Hudson and Con s t a n t i n ' s a n a l y s i s would not be too s i g n i f i c a n t f o r the purposes o f t h i s t h e s i s i f the lo a d f a c t o r s o f f i r m s w i t h i n a c e r t a i n s i z e category o r even a c e r t a i n r e g i o n c o u l d be expected to be s i m i l a r . As Hudson and C o n s t a n t i n note, however, there i s probably no more v o l a t i l e f e a t u r e i n the t r u c k i n g i n d u s t r y than the l o a d f a c t o r . Depending on the type o f s e r v i c e rendered o r the k i n d o f o p e r a t i o n b e i n g s o l i c i t e d , the l o a d f a c t o r w i l l v a r y g r e a t l y among i n d i v i d u a l o p e r a t o r s . General commodity c a r r i e r s as a group may be expected t o experience a lower l o a d f a c t o r than s p e c i a l commodity c a r r i e r s and c o n t r a c t c a r r i e r s . Likewise 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 schedules may have lower l o a d f a c t o r s than c a r r i e r s which conduct non-scheduled o p e r a t i o n s . 1 ^ And y e t there are o t h e r f a c t o r s i n f l u e n c i n g the l o a d f a c t o r t h a t are not connected w i t h any c l a s s i f i c a t i o n s such as the above. These c o u l d 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 overexpansion 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 ve r y common problem 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 ve r y low l o a d f a c t o r un-l e s s the c a r r i e r can induce r e t u r n h a u l 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 of the 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 l o a d f a c t o r t h a t a c a r r i e r can generate. "Low d e n s i t y " f r e i g h t ( i n terms of ton m i l e s per route m i l e ) cannot produce h i g h l o a d f a c t o r s f o r the t r u c k e r u n l e s s 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 than weight. l ^ I b l d . , p. 1 6 8 . 110 4. Undoubtedly a c a r r i e r ' s managerial e f f i c i e n c y has a very great e f f e c t on the l o a d f a c t o r . As mentioned, the s k i l l w i t h which the o p e r a t o r i s a b l e t o s o l i c i t , schedule and route 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 the u t i l i z a t i o n he gets from h i s v e h i c l e s and the c a p i t a l he has t i e d up i n the bu s i n e s s . True, some c a r r i e r s are not a b l e t o reach the same l e v e l o f e f f i c i e n c y i n terms of u t i l i z a t i o n because of f a c t o r s such as the f i r s t t h r e e p o i n t s mentioned. Others, however, can o n l y have themselves to blame i f t h e i r l o a d f a c t o r does not compare f a v o r -a b l y w i t h t h a t o f t h e i r c o m p e t i t o r s . Thus, the 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 c h a r a c t e r i s t i c of t r u c k i n g o p e r a t i o n s and i t i s an index which the o p e r a t i n g r a t i o seems to r e f l e c t r a t h e r c l o s e l y . Because of the v o l a t i l i t y o f t h i s f a c t o r , we would have t o be very wary of u s i n g the oper-a t i n g r a t i o by i t s e l f . I t would be meaningless to t r y to apply one r a t i o t o two t r u c k i n g f i r m s which, because of d i f f e r e n t o p e r a t i n g 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 f a c t o r s , might have wide d i s c r e p a n c i e s i n c o s t p e r u n i t (e.g. ton-mile, v e h i c l e - m i l e , v e h i c l e year, e t c . ) . The g r e a t e s t danger, t h e r e f o r e , i n attempting to ap p l y a r a t e l e v e l t h a t w i l l b r i n g every c a r r i e r i n the i n d u s t r y an o p e r a t i n g r a t i o of a t l e a s t 93 per cent, f o r i n s t a n c e , i s t h a t the r e g u l a t o r w i l l be s u b s i d i z i n g the c a r r i e r s which, due t o o p e r a t i n g i n e f f i c i e n c i e s , e x h i b i t low l o a d f a c t o r s under normal o p e r a t i n g c o n d i t i o n s . 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 of i n e f f i c i e n c y or poor u t i l i z a t i o n , but because o f the c h a r a c t e r o f h i s business ( p o i n t s 1-3 above), the s e t t i n g o f a minimum o p e r a t i n g r a t i o might be a v e r y s a t i s -f a c t o r y way of b r i n g i n g a l l c a r r i e r s reasonably compensatory I l l and f a i r p r o f i t l e v e l s . By s e t t i n g an a r b i t r a r y r a t i o f o r a l l c a r r i e r s when wide 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 are known to e x i s t i n the i n d u s t r y , however, the r e g u l a t o r i s a c t u a l l y a l l o w i n g the e f f i c i e n t f i r m s too h i g h a p r o f i t l e v e l and, a t the same time, 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 keeping i n -e f f i c i e n t f i r m s a l i v e . 1 5 In t h i s s i t u a t i o n , the consumer of t r a n s p o r t a t i o n s e r v i c e s i s f o r c e d t o pay h i g h e r r a t e s due to the i n e f f i c i e n -c i e s o f some o p e r a t o r s . In a r e g u l a t e d environment where e n t r y of co m p e t i t i o n i s l i m i t e d , such a s i t u a t i o n can be p e r -p e t u a t e d q u i t e e a s i l y . The r e g u l a t o r , we r - e c a l l , must simulate as much as p o s s i b l e the f o r c e s o f co m p e t i t i o n . Yet, by p r o -t e c t i n g an i n e f f i c i e n t operator, the r e g u l a t o r i s I g n o r i n g the most b a s i c duty t h a t c o m p e t i t i o n does accomplish. I t d i s -patches the i n e f f i c i e n t v e r y q u i c k l y . What danger i s p o i n t e d out by use of the l o a d f a c t o r ? The f a c t has simply been u n d e r l i n e d t h a t the o p e r a t i n g r a t i o 3 - 5"if f a l r p r o f i t i S determined by the requirements of the 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 circumstances, 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 and p u b l i c p o l i c y becomes t h a t of keeping an umbrella over e x i s t i n g producers and e x c l u d i n g others from i t s s h e l t e r . T h i s , o f course, i s the reason f o r the r e s i s t a n c e of occupants to new e n t r a n t s and the r e l u c t a n c e o f p u b l i c agencies t o accede t o the request f o r admission tendered by new occupants." Pegrum, D.P., The Economic B a s i s of P u b l i c P o l i c y f o r Motor  Transport, P.U.B1., Aug., 1952, V o l . XXVIII, No. 3, p. 255. 112 s h o u l d never be r e f e r r e d to without a great d e a l of s u p p o r t i n g d a t a . Any prudent rate-making agency must look r a t h e r c a r e -f u l l y a t the nature of the c a r r i e r 1 s business before making judgements based upon the o p e r a t i n g r a t i o . Some f a c t o r s that the r e g u l a t o r might c o n s i d e r would be v a r i a t i o n s i n volume and c h a r a c t e r of tonnage, v a r i a t i o n s i n l e n g t h of h a u l , the extent to which s a l e s e f f o r t i s d i r e c t e d a t the most d e s i r a b l e t r a f f i c , the p r o p o r t i o n of s m a l l shipments, p r o p o r t i o n of r e t u r n h a u l s and a v a i l a b i l i t y t h e r e o f , t r a f f i c and c o m p e t i t i v e c o n d i t i o n s f o r the c a r r i e r . C o n s i d e r a t i o n of such items might g i v e an i n d i c a t i o n as to whether o r not the l o a d f a c t o r of t h a t p a r -t i c u l a r t r u c k e r comes as a r e s u l t of the c o n d i t i o n s to which he i s s u b j e c t o r whether he s h o u l d c l e a r l y be doing b e t t e r . We have found t h a t the l o a d f a c t o r i s one element o f t r u c k i n g o p e r a t i o n s which has great I n f l u e n c e over c o s t s and the o p e r a t -i n g r a t i o . In t h a t i t i s a h i g h l y v a r i a b l e element, we must be c a r e f u l to examine i t c l o s e l y a t any time the o p e r a t i n g r a t i o i s r e f e r r e d t o . In 1956, Dr. M.J. Roberts o f the U n i v e r s i t y o f F l o r i d a completed a study of t r u c k i n g c o s t s which was intended to demon-s t r a t e t h a t economies of s c a l e d i d not e x i s t i n the motor c a r r i e r i n d u s t r y (see Chapter I I I ) . 1 ^ One "by-product" of t h i s study of s i g n i f i c a n c e f o r t h i s t h e s i s was some r a t h e r a r r e s t i n g f i n d i n g s about the o p e r a t i n g r a t i o . I t was d i s c o v e r e d that t h i s r a t i o , M.J. Roberts,"Some Aspects o f 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 H e a l t h " , Land Economics, V o l . XXXII, No. 3 , (August, 1956), pp. 228-38": 113 a l b e i t an accepted measure of f i r m e f f i c i e n c y , c o u l d very w e l l be f a r from the mark as an 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 h e a l t h . Again, because of the d i v e r s i t y of the motor c a r r i e r i n d u s t r y , two o p e r a t i n g c h a r a c t e r i s t i c s , v i z . e f f i c i e n c y and f i n a n c i a l o r o p e r a t i n g h e a l t h , were not n e c e s s a r i l y r e l a t e d . Roberts took a sample of 114 C l a s s I c a r r i e r s of gen-e r a l commodities o p e r a t i n g over s i m i l a r routes and a l l i n the same t e r r i t o r y . He f e l t , t h e r e f o r e , t h a t t e r r a i n , l o a d f a c t o r s , t r a f f i c d e n s i t y and equipment s i z e would be q u i t e s i m i l a r f o r a l l h i s c a r r i e r s . Using the v e h i c l e m i l e r a t h e r than the ton m i l e as h i s b a s i c u n i t o f measurement, Roberts s e t up as an i n d i c a t o r o f e f f i c i e n c y the average c o s t per v e h i c l e m i l e . The i n i t i a l r e l a t i o n s h i p of c o s t s to o p e r a t i o n a l c h a r a c t e r i s t i c s i s shown i n the t a b l e on page 28. A c c o r d i n g to t h i s a n a l y s i s , 61 companies maintained a normal r e l a t i o n s h i p where h i g h c o s t s combined w i t h h i g h o p e r a t -i n g r a t i o s and low c o s t s w i t h low r a t i o s . I t was the 51 compan-i e s t h a t d e v i a t e d from t h i s expected p a t t e r n t h a t were of i n t e r -e s t to t h i s w r i t e r . C l e a r l y , Roberts' e f f i c i e n c y measure (cents per v e h i c l e m i l e ) does not agree w i t h the measure g i v e n by the o p e r a t i n g r a t i o . Why i s t h i s ? For one t h i n g , the e f f i c i e n c y measure employed i n t h i s study shows o n l y c o s t s , whereas the o p e r a t i n g r a t i o i s d e r i v e d from both c o s t s and revenues. The obvious e x p l a n a t i o n f o r such an anomoly would seem to 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 A c c o r d i n g to the a n a l y s t , however, the low c o s t , h i g h - o p e r a t i n g r a t i o group (IV) handled 9.2 ton m i l e s o f f r e i g h t f o r each v e h i c l e m i l e as opposed to a 7.3 l o a d i n g f o r the group t h a t managed a low o p e r a t i n g r a t i o d e s p i t e h i g h c o s t s ( 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 over those t h a t were u n u s u a l l y s t r o n g i n revenue-g e n e r a t i n g capacity.17 Thus, we have to l o o k elsewhere f o r an e x p l a n a t i o n as t o why some f i r m s were producing more revenue per v e h i c l e m i l e than others, 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 an eye to h a v i n g as much homogeneity i n o p e r a t i n g c h a r a c t e r i s t i c s as p o s s i b l e . The answer had to l i e i n d i f f e r e n c e s i n type of t r a f f i c c a r r i e d . In o t h e r words, the r a t e and t r a f f i c s t r u c t u r e , even i n one r e g i o n and f o r one r e l a t i v e l y homo-geneous group of c a r r i e r s , was s u f f i c i e n t l y d i v e r s e to a l l o w some c a r r i e r s w i t h low c o s t s to d i s p l a y h i g h o p e r a t i n g r a t i o s and some c a r r i e r s w i t h high c o s t s to show low r a t i o s . The revenue b e i n g generated by v a r i o u s f i r m s v a r i e d c o n s i d e r a b l y . The p o i n t to be made from Roberts' a n a l y s i s i s simple. Although the o p e r a t i n g r a t i o might g i v e a good i n -d i c a t i o n of how w e l l a c a r r i e r i s managed under a c e r t a i n r a t e l e v e l . | t cannot be l a b e l l e d , as i t u s u a l l y i s , an index of 1 7 I b i d . , p. 235. * % o t e : "According to 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 which were t r a c e d to 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 revenue-produc i n g c h a r a c t e r o f the t r a f f i c handled." I b i d . , p. 235. 115 e f f i c i e n c y . F or t h a t reason, even when such problems as the l o a d f a c t o r are considered, the o p e r a t i n g r a t i o s t i l l does not i n d i c a t e the same t h i n g about d i f f e r e n t c a r r i e r s . An a r b i t r a r y r a t i o s e t a t 930 or 950 w i t h the understanding t h a t i t w i l l b r i n g compensatory r a t e s to a l l i n the r e g i o n i s not 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 r a t e i n the same manner. Some low co s t d e v i a t e s , o p e r a t i n g extremely e f f i c i e n t -l y , w i l l be hard-pressed to g a i n a f a i r reward f o r t h e i r e f f o r t s w i t h t h a t s tandard. Others (high c o s t d e v i a t e s ) , because they h a u l more l u c r a t i v e t r a f f i c even though they i n c u r h i g h e r c o s t s over s i m i l a r routes, w i l l reap p r o f i t s h i g h e r than t h e i r " e f f i c i e n c y " warrants. Another f e a t u r e o f the motor c a r r i e r i n d u s t r y t h a t makes the use of the o p e r a t i n g r a t i o q u i t e d i f f i c u l t i s the d i v e r s i t y i n a s s e t makeup of d i f f e r e n t c a r r i e r s . One most s e r i o u s c o n s i d e r a t i o n r e l a t e s to l e a s i n g of equipment. For as f a r as the p r o p o r t i o n of l e a s e d versus owned equipment and f a c i l i t i e s i s concerned, there i s no g e n e r a l standard i n the i n d u s t r y (see Table on page 116). Some c a r r i e r s own a l l t h e i r revenue u n i t s and p l a n t w hile others l e a s e as much as p o s s i b l e , i n c l u d i n g t h e i r t i r e s . One page 117 i s & c o n t r i v e d i l l u s t r a -t i o n of how the o p e r a t i n g r a t i o s might be an e n t i r e l y m i s l e a d -i n g t o o l f o r e v a l u a t i n g the e f f i c i e n c y o f two d i f f e r e n t t r u c k -i n g f i r m s with d i f f e r e n t l e a s i n g p o l i c i e s . T h i s problem Is of concern to 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 T o t a l Power T r a i l e r U n i t s  Own Lease Own Lease Own Lease 2 6 10 2 60 40 16 0 6 0 100 0 19 0 19 0 100 0 No. of 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 C l a s s 1 1 1 Note; Only t h r e e o f t h i r t e e n responding c a r r i e r s o f f e r e d t h i s type o f i n f o r m a t i o n , hence no c o n c l u s i o n s may be drawn about the i n d u s t r y i n B.C., nor even about f i r m s c i r c u l a r i z e d . The i n f o r m a t i o n here may be of i n t e r e s t however. Source; U.B.C., - A.T.A. of B.C. T r u c k i n g Survey, Summer,1967. 117 TABLE IV COMPARABILITY OP LEASING VERSUS OWNING Gross Revenue Operating Expenses ( T o t a l ) Equipment Maintenance Terminal T r a f f i c Insurance and S a f e t y A d m i n i s t r a t i v e and General Operating Taxes and L i c e n c e s T r a n s p o r t a t i o n Wages, F u e l Equipment Rents D e p r e c i a t i o n P l a n t Revenue Equipment Operating R a t i o Firm A * 1,000,000 958,000 101,000 129,000 30,000 45,000 66,000 52,000 498,000 12,000 30,000 Firm B 1,000,000 998,000 101,000 129,000 30,000 45,000 66,000 52,000 498,000 65,000 12,000 95.8 99.8 20 Firm 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 api e c e , thus i n c u r r i n g i t s equipment r e n t a l charge 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 of the two f i r m s a re e n t i r e l y d i f f e r e n t . F irm B looks to be i n a f a r more c r i t i c a l s t a t e o f revenue need. 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 an investment o f $403,000. A reason-a b l e r e t u r n on t h i s investment might be f i g u r e d a t the co s t of c a p i t a l . I f t h i s c o s t i s i n the neighborhood of ten per cent, $40,300, then the o p e r a t i n g r a t i o f o r Firm A i s the same as i t i s f o r Firm B. Firm A Operating Cost $958,000 F i n a n c i a l Cost 40,300 TOTAL 998,300 Operating R a t i o 99.83 20source: R e p r e s e n t a t i v e Cost f i g u r e s - Hudson C o n s t a n t i n , p. 101, from American T r u c k i n g Assoc., I nc. Trends (Wash.1956), p. 12. 118 m i s t s . As W i l l i a m B. Saunders, the noted t r a n s p o r t a t i o n con-s u l t a n t , s t a t e d i n a r a t e h e a r i n g i n 1965 : ...a company wit h no investment a t a l l can produce handsome p r o f i t s to s u p p l i e r s of c a p i t a l with an o p e r a t i n g r a t i o o f as much as 99 per cent; such a case a r i s e s whenever the 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 and equipment and charges 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. A u t o m a t i c a l l y , such a c a r r i e r needs a much s m a l l e r percentage o f net revenue than does a c a r r i e r who owns a l l of the pr o p e r t y and 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 not a s a t i s f a c t o r y measure o f revenue need . ! 9 C e r t a i n l y i f a r e g u l a t o r i s attempting t o s e t a compensatory r a t e l e v e l f o r two motor c a r r i e r s who have d i f f e r e n t p o l i c i e s about l e a s i n g , he i s going to have to look w e l l beyond the simple o p e r a t i n g r a t i o to judge revenue requirements. In the example above, the i s s u e i s ve r y c l e a r l y t h a t of the r e g u l a t o r r e f e r r i n g t o , and i n c l u d i n g an acc u r a t e allowance f o r " f i n a n c i a l c o s t " i n the c a l c u l a t i o n o f revenue need. As noted e a r l i e r , the I n t e r s t a t e Commerce Commission does t h i s even though i t a p p a r e n t l y does not make t h i s item a p a r t o f the o p e r a t i n g c o s t s . I t i s i n c l u d e d a f t e r c o s t s are computed and f i g u r e ^ i n t o the o p e r a t i n g r a t i o . Again, we see the imperative o f r e c o g n i z i n g the f i n a n c i a l r e t u r n on i n v e s t e d c a p i t a l as a c o s t o f b u s i n e s s . As long as the r e g u l a t o r makes allowance f o r t h i s and as lo n g as the respondents t o a r a t e h e a r i n g supply the r e g u l a t o r w i t h f i n a n c i a l i n f o r m a t i o n so t h a t he can make a f u l l and a c c u r a t e allowance, there should be no •^source: Canadian I n d u s t r i a l T r a f f i c League Notes, February 12, 19^ 5, (Issue 4222), p. 4. Reference to N.I.T.L. Statement t o I n t e r s t a t e Commerce Commission r e : Increased Rates Between Colorado, Wyoming and Southwest. Dockett No. 34444. 119 great problem of d i s p a r i t y i n the o p e r a t i n g r a t i o s o f two f i r m s because o f d i f f e r e n t p o l i c i e s about l e a s i n g equipment. Saunder's c r i t i c i s m (above) comes a t a time, however, when respondents are s t i l l s u p p l y i n g v e r y poor and incomplete f i n a n c i a l informa-t i o n . 2 1 At t h i s p o i n t , we have reviewed some of the more im-p o r t a n t c o n s i d e r a t i o n s a r e g u l a t o r must take account o f i f he i s to employ the o p e r a t i n g r a t i o e f f e c t i v e l y . We have noted t h a t there are two b a s i c problems i n v o l v e d i n u s i n g i t . For one t h i n g , r e g u l a t o r s and c a r r i e r s a l i k e must agree on some standard manner o f i n c l u d i n g items i n o p e r a t i n g c o s t . Income tax, method of d e p r e c i a t i o n and c a l c u l a t i o n o f f i n a n c i a l c o s t s are the t h r e e most d i f f i c u l t areas a t p r e s e n t . The second o b s t a c l e i n the way of a more u n i v e r s a l use of the o p e r a t i n g r a t i o i n the motor c a r r i e r i n d u s t r y has to do with the extreme d i v e r s i t y i n t h a t i n d u s t r y . D i s p a r i t i e s i n l o a d f a c t o r s , managerial e f f i c i e n c y , type o f haul, c h a r a c t e r o f f r e i g h t c a r r i e d and p o l i c i e s about equipment l e a s i n g are o n l y a few o f the v a r i a b l e s t h a t g r e a t l y a f f e c t t h i s h i g h l y v o l a t i l e r a t i o . The o n l y way t h a t a r e g u l a t o r can take account of the d i f f e r e n c e s i n such items from f i r m to f i r m i s to ask. f o r and analyze a great d e a l more data and f i n a n c i a l i n f o r m a t i o n from the c a r r i e r s thalfr he r e g u l a t e s . T h i s w i l l be the s u b j e c t of a l a t e r s e c t i o n . I b i d . , p. 3, "An examination of the papers f i l e d by the 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 data made a v a i l a b l e . . . o n l y s i x t y - s i x of the one hundred and twenty-four f i l e d r e p o r t s of any k i n d " . 120 Use The one motor trucking rate regulator that i s success-f u l l y using the operating r a t i o both to set and evaluate rate lev e l s as well as in d i v i d u a l trucking rates is the U.S. Inter-state Commerce Commission. The I.C.C. does not, of course, employ the operating r a t i o exclusively as a measure of revenue need, rather I t uses i t along with a great deal of supporting data and other information. Nor i s the I.C.C. the only regulator that r e l i e s upon t h i s r a t i o as a regulatory t o o l . Harper's research indicates that most state u t i l i t y commissions i n the U.S. employ the operating r a t i o , usually along with the rate of return c r i t e r i o n , to judge revenue nmidFcarriers operating i n t e r -s t a t e . 2 2 The I.C.C, to t h i s writer's knowledge, has never referred to the rate of return p r i n c i p l e as an indicator of revenue need f o r motor c a r r i e r s . In Canada, the operating r a t i o i s sometimes referred to by commissions involved i n c a r r i e r rate hearings. To t h i s writer's knowledge, no statement of what constitutes a reason-able or adequate r a t i o has ever been published as a r e s u l t of any rate or entry case i n t h i s country. It might be concluded from t h i s that the operating r a t i o i s not accepted as being very meaningful f o r trucking rate regulation i n Canada. This could e a s i l y be understood when one takes into account the lack "D.V. Harper, Economic Regulation of the Motor Trucking  Industry By the States, Urbana, University of I l l i n o i s Press, 1959, PP. 194-19b. 121 of c o s t i n f o r m a t i o n t h a t r e g u l a t o r s here are presented w i t h . The most f r u i t f u l approach to se e i n g how the o p e r a t i n g r a t i o can be used e f f e c t i v e l y i s , t h e r e f o r e , t o r e f e r to the I.C.C. and i t s a p p l i c a t i o n . T h i s i s one of the tasks o f the next chapter. S i n c e 1943, r i g h t up t o the presen t decade, 93.0 has been c o n s i s t e n t l y used i n r a t e cases by the I.C.C. as the best a v a i l a b l e guide f o r j u d g i n g the reasonableness o f motor t r u c k -i n g f r e i g h t r a t e s . In Increased Common C a r r i e r Truck Rates In  New England, the Commission r a i s e d the a p p e l l a n t s ' r a t e s t r u c t u r e f i v e per cent so as to e s t a b l i s h an o p e r a t i n g r a t i o of 93$ "which appeared to be r e a s o n a b l e " . 2 ^ In another New England g e n e r a l revenue case the Commission s t a t e d t h a t 93.0 "appeared to be rea s o n a b l e " i n view o f the average c o n d i t i o n s 24 c o n f r o n t e d by the group p r o p o s i n g the g e n e r a l i n c r e a s e i . In yet another case, the I.C.C. r u l e d t h a t the respondents' r a t e s ppr were e a r n i n g "more than out-of-poc&et c o s t s " i n t h a t they were m a i n t a i n i n g a 93.0 r a t i o w i t h the lower r a t e s . In view o f the d i v e r s i t y o f the t r u c k i n g i n d u s t r y , a d i v e r s i t y which was reviewed to some extent i n Chapter IV, the U.S. I n t e r s t a t e Commerce Commission seems t o have a r r i v e d a t a 23 Increased Common C a r r i e r Truck Rates i n New England, 43, M.C.C., p. 21. 24 i i Increased Common C a r r i e r Truck Rates i n New England, 44, M.C.C., p. 17. ^Minimum Weight on Tr 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 reasonable r e l a t i o n s h i p between revenues and o p e r a t i n g c o s t s i n t h i s i n d u s t r y g e n e r a l l y . D e s p i t e the a p o l o g i e s and q u a l i f i c a t i o n s which o f t e n accompany r e f e r e n c e to 93.0 i n the l a s t twenty years o f t r u c k i n g r a t e cases, the obse r v e r cannot f a i l t o be impressed by the f a c t t h a t t h i s r e s p e c t e d body has cont i n u e d to a t t a c h I t s e l f to one standard f o r so many y e a r s . The a n a l y s i s o f the v a r i o u s i n f l u e n c i n g f a c t o r s made i n t h i s c h apter suggests, however, t h a t the o p e r a t i n g r a t i o as i t appears p r e s e n t l y to be employed i n I.C.C. cases may be q u i t e f a r from b e i n g a d e f i n i t i v e s o l u t i o n to the problem of s e t t i n g and r e g u l a t i n g motor c a r r i e r r a t e s . I t might be suggested t h a t the prime c o n s i d e r a t i o n i n s e t t i n g a r a t e l e v e l l i e s i n d e t e r -mining whether the r a t e i s compensatory y e t n o n - e x p l o i t i v e over p a r t i c u l a r routes o r movements of the c a r r i e r . A g e n e r a l o p e r a t -i n g r a t i o o f 93.0 or, f o r th a t matter, any ot h e r l e v e l , might o r might not i n d i c a t e t h a t a c e r t a i n g e n e r a l r a t e l e v e l was r e t u r n i n g f u l l y a l l o c a t e d c o s t s o f o p e r a t i o n p l u s a c e r t a i n r e t u r n t o the o p e r a t o r . To the r e g u l a t o r , whose duty should be to see th a t a l l s e r v i c e s o f the c a r r i e r are be i n g t r e a t e d e q u i t a b l y , s u r e l y s p e c i f i c c o s t and revenue data r e l a t i n g to i n d i v i d u a l movements and routes s h o u l d be o f g r e a t e r concern than the average c o n d i t i o n s c o n f r o n t e d by a c a r r i e r , o r worse s t i l l , a group of c a r r i e r s , p r o p o s i n g c e r t a i n r a t e a c t i o n . T h i s p a r t i c u l a r c r i t i c i s m of the o p e r a t i n g r a t i o as 123 i t has been employed i n p a s t years has not escaped the a t t e n -t i o n of c e r t a i n d i s s e n t e r s to I.C.C. cases i n r e c e n t years however. As one Commissioner i n Candy, Drugs, Motors, I r o n  Bars, V a l v e s Westbound noted: System average expenses such as has been presented by both respondents and p r o t e s t a n t s are of 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 determining 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 p o i n t s . 2 6 More r e c e n t l y an I.C.C. statement would seem to i n d i c a t e t h a t indeed c o s t data on routes and i n d i v i d u a l h a u l s i s more p e r -t i n e n t to r a t e r e g u l a t i o n than average.of system revenues and c o s t s . An o p e r a t i n g r a t i o i s the r e s u l t of comparing the 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 revenues r e c e i v e d from a l l r a t e s , some of which may be much above the c o s t s t o the c a r r i e r , and 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 -i n g r a t i o of a c a r r i e r are measures of the c o s t o f h a n d l i n g any one shipment, the c o s t evidence normally presented i n r a t e hearings i s of l i t t l e v a l u e i n determining the compensating nature of the a s s a i l e d r a t e s . 2 7 Summary In t h i s c h a p t e r we have c r i t i c i z e d the o p e r a t i n g r a t i o from more than one s t a n d p o i n t . I t has been suggested, f i r s t , t h a t t h e r e i s some doubt as to what c o s t items might compose an o p e r a t i n g r a t i o and, secondly, t h a t i n the extremely d i v e r s e 2^Candy, Drugs, Motors, Iron Bars, V a l v e s Westbound, 54, M.C.C., 1952, p. 727. -27 ' I n t e r s t a t e Commerce Commission, Reports, V o l . 313, 1961 p. 371. ' ' 124 t r u c k i n g f i e l d a r a t i o such as t h i s must be i n t e r p r e t e d with the a i d o f a gr e a t d e a l o f s u p p o r t i n g data. F i n a l l y , i t has been p o i n t e d out t h a t an o p e r a t i n g r a t i o f o r the t r u c k i n g f i r m as a whole c o u l d be e n t i r e l y mis-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 j u s t n e s s o f r a t e s over p a r t i c u l a r routes o r s e r v i c e s o f the c a r r i e r . In the f i n a l a n a l y s i s , the t r u c k e r s ' r e t u r n s h o u l d be no w e i g h t i e r a con-s i d e r a t i o n to the r e g u l a t o r than the e f f e c t o f h i s r a t e s on i n d i v i d u a l s h i p p e r s who may i n many cases be " c a p t i v e " and open to 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 an attempt to look more c l o s e -l y a t the p o s i t i v e aspects o f the o p e r a t i n g r a t i o as a r e g u l a t o r y t o o l . Some sug g e s t i o n w i l l be made o f what s t a n d a r d i z a t i o n i n c o s t r e p o r t i n g must be brought about i n the t r u c k i n g i n d u s t r y b e f o r e r a t e r e g u l a t i o n based on an index l i k e the o p e r a t i n g r a t i o can be meaningful and a c c u r a t e . An examination o f the cos t a c c o u n t i n g procedures t h a t must be engendered by the r e g u l a t o r s and employed by the r e g u l a t e d f i r m s i n o r d e r to achieve t h i s s t a n d a r d i z a t i o n can, h o p e f u l l y , be brought to l i g h t . F i n a l l y , the chapter w i l l e x p l o r e b r i e f l y j u s t what stage the t r u c k i n g i n d u s t r y i n Canada or, more p a r t i c u l a r l y , B r i t i s h Columbia seems a c t u a l l y t o have achieved i n terms of i t s a b i l i t y to c o l l e c t and s t a t e a s e t of standard c o s t s . 125 CHAPTER VI THE IMPERATIVE OF COST STANDARDS The f i r s t s t e p towards development and use of the o p e r a t -i n g r a t i o as a t o o l f o r measuring the p r o f i t a b i l i t y of motor t r u c k i n g o p e r a t i o n s l i e s i n c o l l e c t i n g a. great d e a l of a c -c u r a t e c o s t data from the c a r r i e r s who are to be r e g u l a t e d . Indeed, c o s t s must be c o l l e c t e d i n t e n s i v e l y and, i f necessary, r e p e a t e d l y u n t i l the r e g u l a t o r may begin to formulate c e r t a i n " y a r d s t i c k s " or standards of what c o s t s should be f o r a type of s e r v i c e and how these c o s t s should change gi v e n c e r t a i n v a r i a t i o n s i n a p p l i c a t i o n , such as t e r r a i n , l o a d d e n s i t i e s , l e n g t h of haul, e t c . Another e s s e n t i a l s t e p that must be taken b e f o r e the o p e r a t i n g r a t i o can be of v a l u e to the t r u c k i n g r a t e r e g u l a -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 s p e c i f i c a l l y the manner i n which a l l t r u c k e r s c o l l e c t and r e p o r t upon t h e i r c o s t s of o p e r a t i o n . D e p r e c i a t i o n and c a p i t a l i z a t i o n p o l i c y , the manner of c a l c u l a t i o n of c o s t of c a p i t a l , a l l such c o n s i d e r a -t i o n s would have to be approached i n a uniform manner by a l l c a r r i e r s under the same j u r i s d i c t i o n s . In the U n i t e d S t a t e s , c o s t s and c o s t data have long been r e c o g n i z e d as the cornerstone of r a t e r e g u l a t i o n . In 1939, a c o s t s e c t i o n was added to the I n t e r s t a t e Commerce Commission f o r the purpose of c o l l e c t i n g c o s t s . I t was r e a l i z e d t h a t the o n l y way i n which a r a t e c o u l d be judged noncompensatory, 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 r a t e a g a i n s t a standard developed f o r that p a r t i c u l a r s e r v i c e by the c o s t s e c t i o n . In cases when a proposed r a t e i s p r o t e s t e d , data on thecost-.dF t r a n s p o r t i n g the t r a f f i c are requested from 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 c o s t i t i s u s u a l l y suspended. 1 The important f a c t o r of I.C.C. r a t e r e g u l a t i o n i s , of course, t h a t the Cost S e c t i o n has p r o v i d e d the Commission w i t h the necessary c o s t d a t a . A l s o , the c a r r i e r s are being encour-aged to r e p o r t t h e i r c o s t s i n a standard manner so t h a t t h i s c o s t data can be c o n t i n u a l l y up-dated, r e v i s e d , and used to t e s t proposed r a t e s o f c a r r i e r s under I.C.C. j u r i s d i c t i o n . ...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 moving over 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 the one-way t r i p would y i e l d $200. or about 12 cents per v e h i c l e - m i l e . I t was e v i d e n t from s t u d i e s prepared by our s t a f f t h a t the l i n e - h a u l c o s t alone would approximate twice the revenue y i e l d and adding to t h i s f i g u r e the t e r m i n a l c o s t and expense of r e t u r n i n g the v e h i c l e to the o r i g -i n a l p o i n t Has-unquestionably non-compensatory. 2 The I n t e r s t a t e Commission's c o s t s t u d i e s have aimed throughout the years to f i n d the out-of-pocket c o s t of o p e r a t -i n g v a r i o u s c l a s s e s of s e r v i c e s performed by motor c a r r i e r s i n the t h i r t e e n t r u c k i n g t e r r i t o r i e s of the U n i t e d S t a t e s . The c o s t formula used separates t o t a l expenses among l i n e -Howard Preas, The Rate of Costs i n Ratemaking, an address g i v e n by the I.C.C. Commissioner before the 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 , February 14, 1956, p. 6. 2 I b i d . , p. 7. 127 haul, pick-up and d e l i v e r y , b i l l i n g and c o l l e c t i n g , and p l a t f o r m h a n d l i n g , and a r r i v e s a t a per u n i t c o s t f o r each o f these c a t e g o r i e s o f s e r v i c e . Adjustments are made f o r weight and f o r d i s t a n c e , adjustments based both on examina-t i o n o f r e p o r t e d c o s t s , and on s p e c i a l time and motion s t u d i e s of r e p o r t i n g c a r r i e r s . As a r e s u l t o f the c o s t s t u d i e s , the 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 o u t - o f -pocket c o s t o f s h i p p i n g a c e r t a i n weight over a s p e c i f i e d d i s t a n c e by one c l a s s o f v e h i c l e i s f a i r l y a c c u r a t e . The s u b j e c t o f most of the examination o f the re c e n t chapters of t h i s t h e s i s , the o p e r a t i n g r a t i o , i s not d i r e c t l y r e l a t e d to the out-of-pocket c o s t s , r a t h e r to f u l l y d i s t r i b u t -ed c o s t s ; i . e . as a percentage o f the t o t a l revenue necessary to cover a l l expenses, r e n t s , taxes, i n t e r e s t on investment, as w e l l as a r e t u r n s u f f i c i e n t to a t t r a c t c a p i t a l . The c o s t s c o l l e c t e d by the I.C.C. Cost F i n d i n g and Accounts Bureau can be used by themselves to ev a l u a t e proposed r a t e s and r a t e i n -creases where there i s reason t o b e l i e v e a r a t e i s i n the range of an out-of-pocket c o s t . On the o t h e r hand, the Accounts Bureau has done s u f f i c i e n t r e s e a r c h t h a t i t i s a b l e to p r o v i d e a s e t o f f a c t o r s by which the out-of-pocket c o s t f o r a r e g i o n can be i n c r e a s e d to a r r i v e a t a f i g u r e of revenue need based on the I.C.C. standard o f a 93 per cent o p e r a t i n g r a t i o . The f o l l o w i n g f a c t o r s are presented i n the 1966 v e r s i o n of the I.C.C. T e r r i t o r i a l Cost Study Summary: 128 TABLE V PER CENTS TO INCREASE OUT-OF-POCKET COSTS TO A REVENUE NEED LEVEL REGION PER CENT 1. C e n t r a l 17.96 2. E a s t e r n C e n t r a l 18.18 3. Middle A t l a n t i c 17-90 4. Middlewest 17-72 5- Within New England 18.01 6. Between New England and New York C i t y and Beyond 18.33 7- P a c i f i c 17.78 8. Rocky Mountain 17.58 9. Southern 17.49 10. East South 17.53 11. So u t h - C e n t r a l 17.74 12. Southwest 17-74 13. T r a n s c o n t i n e n t a l 17-66 Source; I.C.C. Bureau of Accounts, Cost 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 Motor  Commission C a r r i e r s o f General Commodities -19b5, September, 19bo, p. 7. The f u l l y d i s t r i b u t e d c o s t p e r u n i t ( i . e . per cwt., per shipment, per v e h i c l e m i l e ) which one would a r r i v e a t when adding the above percentages to the Cost Bureau's o u t - o f -pocket f i n d i n g s would thus i n c l u d e an allowance f o r r e t u r n on pr o p e r t y i n v e s t e d . Part o f the e x p l a n a t i o n f o r the v a r i a t i o n s i n the above f a c t o r s from r e g i o n t o r e g i o n i s e x p l a i n e d by the d i f f e r e n c e i n a v a i l a b i l i t y of c a p i t a l i n the v a r i o u s r e g i o n s of the U.S. As the Bureau p o i n t s out, the va l u e o f having a t o t a l o r f u l l y d i s t r i b u t e d c o s t , o r as they c a l l i t , a f i g u r e of "revenue need", i s t h a t t h i s p r o v i d e s "a degree 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 c o s t s f o r r a i l and water c a r r i e r s when such c o s t s i n c l u d e d (as they u s u a l l y do) an allowance f o r r e t u r n i n a l l p r o p e r t y " . Although U.S. c o s t s t u d i e s have p r o v i d e d means f o r con-v e r t i n g (or b u i l d i n g up) to a f u l l y a l l o c a t e d c o s t from an out-of-pocket f i g u r e , the main emphasis and aim of the Cost Bureau has been to f i n d out-of-pocket c o s t l e v e l s . The u n i t a t which the s t u d i e s aim i s t o t a l out-of-pocket c o s t per hundred weight shipped. Separate s t u d i e s have been done as w e l l to make adjustments f o r such c o n s i d e r a t i o n s as: 1. V a r i a t i o n s i n average running speed. 2 . V a r i a t i o n s i n d e n s i t y o f shipment (pounds per c u b i c f o o t of s p a c e ) . ( V i ) The accompanying t a b l e g i v e s an i n d i c a t i o n of the b a s i c study r e s u l t s which may have to be s u b j e c t e d to the above a d j u s t -ments (see Table V ) . As the t a b l e i n d i c a t e s , Motor T r u c k i n g Cost S t u d i e s are most s o p h i s t i c a t e d and indeed complicated to use. T h e i r value i s t h a t they are a b l e to p r o v i d e a r e s e a r c h e r w i t h a p r e c i s e f i g u r e of what a c e r t a i n type o f s e r v i c e should c o s t an o p e r a t o r to perform. The d e t a i l , o f course, i s more than s u f f i c i e n t f o r the r e g u l a t o r ' s primary purpose which i s to judge the reasonableness of a r a t e . A r e g u l a t o r would need no such degree of d e t a i l to determine whether an e s t a b l i s h e d I.C.C. Bureau of Accounts, Cost of 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 Motor C a r r i e r s of General Commodities -1965 , September, 1966, Washington, D.C, p. 5 . TABLE V I OUT-OF-POCKET EXPENSES, SERVICE UNITS AND OUT-OF-POCKET UNIT COSTS FOR COST STUDY CARRIERS FOR STUDY YEAR BROUGHT UP TO CURRENT YEAR LEVEL L I N E 1. L i n e - h a u l Cost Per V e h i c l e - M i l e 2. L i n e - h a u l Cost Per Cwt. M i l e Out-of-Pocket Expenses Name Amount S e r v i c e U n i t s 253,867,974 V e h i c l e -M i l e s Out-of-Pocket U n i t Costs 4 5 682,674,182 37.187 R a t i o i n - Study year creases o r o u t - o f -decreases pocket c u r r e n t y e a r c o s t s to study y e a r brought up to c u r r e n t l e v e l - / ( c o l . 5 X c o l . 6) 6 7 3. Pick-up and D e l i v e r y 134,489,535 Cwt.Rec'd. Costs Per 100 l b s . P and D 4. P l a t f o r m Cost Per 100 82,482,553 Cwt.Plat-l b s . Platformed formed 5. B i l l i n g and C o l l e c t i n g 17,156,419 Shipments Cost Per Shipment B i l l e d . 1.04341 253,867,974 Cwt.Miles 187,426,161,140 .13545 1.00834 657,661,140 20.450 .91520 286,638,840 28.776 1.01679 20,617,490 83.213 1.03033 38.801 .13658 18.716 29.259 85.737 Source: I n t e r s t a t e Commerce Commission, Bureau of Accounts, Cost of T r a n s p o r t i n g F r e i g h t by  Cl a s s I and C l a s s I I Motor Common C a r r i e r s o f General Commodities by Regions o r T e r r i t o r i e s - 19b5, Washington, D.C, September 19bb, P. 27. o 1 3 1 o r proposed r a t e was i n arange which would make i t e i t h e r compensatory , non-compensatory, o r e x p l o i t i v e . I n s e t t i n g out to develop a standard c o s t framework f o r Canadian r e g u l a t o r y purposes, however, we can b e n e f i t fi>S«n the I.C.C. Accounts Bureau's s t u d i e s . I t i s apparent, f o r one t h i n g , t h a t any c o l l e c t i o n o f c o s t data should be done on a r e g i o n a l b a s i s . C l e a r l y , a mountainous t e r r a i n w i l l o c c a s i o n extremely d i f f e r e n t c o s t f a c t o r s than a p r a i r i e o r congested i n t e r - c i t y r e g i o n . Another c o n s i d e r a t i o n t h a t the I.C.C. c o s t s t u d i e s r a i s e i s t h a t of how d e t a i l e d a breakdown a Canadian c o s t -c o l l e c t i n g team should aim a t . A l s o , what u n i t s ( i . e . ton-mile, v e h i c l e - m i l e , e t c , ) should be our term of r e f e r e n c e ? I t ±4 the o p i n i o n of t h i s t h e s i s t h a t , f o r r e g u l a t o r y purposes, a c o s t study should be as simple as p o s s i b l e . I t i s suggested t h a t the m^Svt a p p r o p r i a t e u n i t to use i n c o s t - c o l l e c t i n g might be a type of v e h i c l e s e r v i c e and the t o t a l o p e r a t i n g c o s t of t h a t sensrice ( i n c l u d i n g a reasonable a l l o c a t i o n of overhead) f o r an a c c o u n t i n g p e r i o d . I n t h i s way, we would be a b l e to take take advantage o f the o p e r a t i n g r a t i o t o o l more d i r e c t l y . With a statement o f t o t a l 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 revenues f o r a l a r g e number o f c a r r i e r s o f f e r i n g s i m i l a r o r v e r y n e a r l y s i m i l a r v e h i c l e s e r v i c e s to the s h i p p e r , a r e g u l a t o r 132 would soon g a i n an a p p r e c i a t i o n of what an average o p e r a t i n g r a t i o should be. Once a s e t of standard r a t i o s was compiled f o r the many types o f common c a r r i a g e being o f f e r e d i n a re g i o n , the r e g u l a t o r would develop an i n t e l l i g e n c e o f s e r -v i c e s o f f e r e d by s p e c i f i c c a r r i e r s which were not reasonably p r o f i t a b l e . As the s i t u a t i o n stands today, a p r o v i n c i a l r e g u l a t o r , when presented w i t h a respondent's o p e r a t i n g r a t i o , has no standard a g a i n s t which to judge t h a t percentage whatever i t may be. Again, i t should be emphasized that c o s t c o l l e c t i n g should be done not on the b a s i s o f the t o t a l o p e r a t i o n s o f a c a r r i e r , but on i t s v a r i o u s s e r v i c e s . I t might be r e c a l l e d t h a t the c r i t i c i s m of the I.C.C. r a t e hearings was t h a t the famous 93 percent r a t i o has always been a p p l i e d to 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 meaningless as an i n d i c a t o r o f the p r o f i t a b i l i t y o f i n d i v i d u a l r a t e s under i n v e s t i g a t i o n . On the o t h e r hand, i t would not be wise to d i s r e g a r d the 93 percent standard from p o s s i b l e a p p l i c a t i o n to the Canadian s i t u a t i o n . As i t has i n very many i n s t a n c e s by very a s t u t e observers been c o n s i d e r e d a reasonable r e l a t i o n -s h i p between t o t a l 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 reven-ues, t h i s r a t i o 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 . The p e r p l e x -i n g q u e s t i o n which does remain i s , of course, what to i n -133 elude i n a statement of o p e r a t i n g c o s t s . As d i s c u s s e d i n p r e -v i o u s chapters, i t i s most o p t i m i s t i c to expect an u n s o p h i s t i -c a t e d c a r r i e r to know h i s f i n a n c i a l c o s t of s t a y i n g i n b u s i n e s s . By f i n a n c i a l c o s t s , the broader meaning i s suggested; i . e . r e -t u r n s u f f i c i e n t t o j u s t i f y the e f f o r t and expense of o p e r a t i o n . For t h i s reason, i t would be a d v i s a b l e to e l i c i t o n l y o u t - o f -pocket data, i n c l u d i n g any t a n g i b l e f i n a n c i a l c o s t s such as i n t e r e s t on borrowed funds and the earnings, growth, and d i v i d e n d s expected by o u t s i d e i n v e s t o r s i n the case of e q u i t y f i n a n c i n g . With such b a s i c c o s t i n f o r m a t i o n , a r e s e a r c h e r should formulate h i s own c a l c u l a t i o n s of the o p e r a t i n g r a t i o above which a c a r r i e r , i f r a t i o n a l , would cease o p e r a t i o n s . In any I n d u s t r y such as t r u c k i n g , where the s m a l l e r , l e s s s o p h i s t i c a t e d u n i t s predominate, i t i s u n l i k e l y t h a t there w i l l be a g e n e r a l a p p r e c i a t i o n of the o p p o r t u n i t y c o s t s con-nected w i t h s t a y i n g i n o p e r a t i o n beyond a c e r t a i n o p e r a t i n g r a t i o l e v e l . C o l l e c t i o n o f Cost Data • As i n d i c a t e d numerous times e a r l i e r , the i n i t i a l stage i n any program designed to make Canadian motor 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 i n g e t t i n g i n t o the f i e l d , and c o l l e c t i n g c a r r i e r c o s t s i n l a r g e samples. In a p i l o t study sponsored by the Automotive Transport A s s o c i a t i o n of B r i t i s h Columbia i n 1967, i t was d e c i d e d to i s o l a t e two types o f v e h i c l e s e r v i c e . Costs were to be broken down under 134 w e l l d e f i n e d headings f o r the two types of t r a i l e r combina-t i o n s . I f c a r r i e r s c o u l d supply a f i g u r e of t o t a l m i l e s operated by t h a t t r a i l e r combination over an a c c o u n t i n g p e r -i o d , c o n c l u s i o n s c o u l d be based on t o t a l o p e r a t i o n s c o s t s r e l a t i v e to the t r a i l e r combination m i l e . H o p e f u l l y , the c a r r i e r s 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 be grouped a c c o r d i n g to annual o p e r a t i n g mileage and c o s t s t a n -dards c o u l d be developed f o r these groupings. The study was designed i n the f o l l o w i n g manner: 1. Two most common types of t r a i l e r combinations were s e l e c t e d . A 74-76000 gross v e h i c l e weight d i e s e l -powered tandem a x l e t r a c t o r with a f o r t y f o o t i n -s u l a t e d dry box t r a i l e r was used 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 the 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 type of s e r v i c e . 2. The c o s t breakdown of the q u e s t i o n n a i r e was based most c l o s e l y on t h a t employed by the U.S. I n t e r -s t a t e Commerce Commission Bureau of Accounts, Cost F i n d i n g and V a l u a t i o n Report, A S i m p l i f i e d Procedure  f o r Determining Cost of Handling F r e i g h t by Motor  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 the I.C.C. Uniform System of Accounts. 3. A sample of B r i t i s h Columbia 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 sent both "A" and "B" Q u e s t i o n n a i r e s , while others were sent e i t h e r one o r the o t h e r . The b a s i s of s e l e c t i o n of c a r r i e r s was not i n any way s c i e n t i f i c . C i r c u l a -t i o n depended, f i r s t l y , upon the A.T.A.'s p r a c t i c a l o p i n i o n of which c a r r i e r s would be capable of making the type of c o s t breakdowns the 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, secondly, which c a r r i e r s would be w i l l i n g t o respond a t a l l . 4. With r e g a r d t o the problem of 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 "cost of bor-rowed money" o n l y . In t h a t those d e s i g n i n g the q u e s t i o n n a i r e s d i d not f e e l any more c o u l d be asked f o r a t t h a t time than t h i s , the study had to be l i m i t e d i n t h i s r e s p e c t . As the t h e s i s suggested 135 i n e a r l i e r chapters, f i n a n c i a l c ost 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 -of-pocket payments of i n t e r e s t . On the o t h e r hand, were the q u e s t i o n n a i r e s t o ask f o r an estimate 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 of 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 the primary aim which was t o c o l l e c t a c c u r a t e c o s t informa-t i o n . 5 . Another a r e a of s i g n i f i c a n t weakness i n t h i s p i l o t study concerned q u e s t i o n 10 which asked f o r a statement of "Average Overhead Expense per M i l e " . I t i s d o u b t f u l t h a t the m a j o r i t y of 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 they would have an ac c u r a t e a l l o c a -t i o n of the overhead expense d e t a i l e d i n the q u e s t i o n . In 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 the c a r r i e r s ' degree of 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 of the Q u e s t i o n n a i r e s d i d ask some questions r e g a r d i n g budgetary and c o s t a l l o c a t i o n procedures. Q u e s t i o n n a i r e s "A" and "B" were i d e n t i c a l i n 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 of t r a i l e r combination.' Q u e s t i o n n a i r e "B" i s r e p r i n t e d i n Appendix "A" f o r r e f e r e n c e . R e s u l t s The r e s u l t s of the t r u c k i n g c o s t Q u e s t i o n n a i r e s were d i s a p p o i n t i n g . From a t o t a l o f f o r t y - f i v e f i r m s c i r c u l a t e d with e i t h e r o r both o f the Q u e s t i o n n a i r e s , o n l y twenty r e -p l i e d a t a l l . Of the r e p l i e s , o n l y t h i r t e e n f i r m s were a b l e to p r o v i d e u s e f u l i n f o r m a t i o n . Nor d i d a l l of these p r o v i d e complete d a t a : 136 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" Less than 50,000 miles/annum 50,000 to 100,000 miles/annum Over 100,000 miles/annum 1 4 1 ~6~ 3 1 3 7 S i n c e the response was so t h i n and the data so incom-p l e t e , there was no sense i n attempting to s u b j e c t the r e s u l t s to any s t a t i s t i c a l a n a l y s i s i n o r d e r t o a r r i v e a t standards f o r mileage c l a s s e s . Nor was i t p o s s i b l e t o do any c o r r e l a -t i o n between annual mileages and change i n c o s t s per m i l e . The v a r i a n c e s between i n d i v i d u a l responses were i n some cases i n c r e d i b l y wide. I t i s i n t e r e s t i n g , however, t o t a b l e the i n f o r m a t i o n r e c e i v e d . In some r e s p e c t s i t might be o p t i m i s t i c to expect a n y t h i n g more than " i n t e r e s t i n g " r e s u l t s from a p i l o t . s t u d y conducted i n a d i v e r s e f i e l d such as t r u c k i n g - a study, i t might be added, t h a t was researched by means of q u e s t i o n n a i r e s r a t h e r than p e r s o n a l i n t e r v i e w s . I t i s very d i f f i c u l t t o make any c o n c l u s i o n s from the r e s u l t s of the two Q u e s t i o n n a i r e s . A b r i e f study of T a b l e s tyf and j f r f f makes t h i s p o i n t most c l e a r . The manner i n which the t a b l e s are presented, however, does draw a t t e n t i o n to what the r e s e a r c h e r s expected from the study - the great v a r i a t i o n s In r e p o r t e d c o s t . In the t r u c k i n g i n d u s t r y f o r a r e g i o n such as B r i t i s h Columbia, some c a r r i e r s might operate i n mountainous areas while o t h e r s , o p e r a t i n g t r a n s c o n t i n e n t a l l y from B.C., w i l l experience a g r e a t d e a l of p r a i r i e m i l e s . In such a s i t u a t i o n , one would expect c o n s i d e r a b l e c o s t d i s c r e p a n c i e s . 137 A second e x p l a n a t i o n f o r these r e s u l t s l i e s i n the manner of c o s t c o l l e c t i n g i t s e l f . Q u e s t i o n n a i r e s are not the c l e a r e s t form of communication. They do not permit the r e s e a r c h e r and respondent to come t o g e t h e r i n order t o f u l l y understand what should be asked f o r nor, f o r t h a t matter, what a c t u a l l y can be p r o v i d e d . As a Highway Research Board study i n 1961 noted: "The f i e l d data from t h i s study were ob 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 the i n d i v i d u a l motor c a r r i e r s i t was presumed at the 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 not p o s s i b l y have been obtained by m a i l q u e s t i o n n a i r e . " ^ T h i s same study found t h a t o n l y by p e r s o n a l examina-t i o n of the a c c o u n t i n g systems of the c a r r i e r s they proposed to 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 decide whether o r not i t was worthwhile t o use the i n f o r m a t i o n produced by the system. "The a c c o u n t i n g i n f o r m a t i o n which was kept by many c a r r i e r s was such as would r e v e a l the p o s i t i o n o f the business as a whole f o r top management, but would not show v e h i c u l a r c o s t d a t a . In those cases where a c a r r i e r 1 s r e c o r d s c o u l d not 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 , the i n t e r v i e w was q u i c k l y terminated . " 5 I n the A.T.A. study we, as r e s e a r c h e r s , did/not. take the n a i v e view t h a t a l l c a r r i e r s c i r c u l a t e d c o u l d p r o v i d e the v e h i c u l a r c o s t data needed. ?H-owev.e.r»,. no,..examination ;of c a r r i e r s ' ^Highway Research Board, B u l l e t i n 301, Line Haul Truck- i n g 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 of S c i e n c e s , N.R.C., Washington, D.C, 1961, p. 42. 5 I b i d . , p. 42. 138 c o s t a c c o u n t i n g systems was done, wi t h the e x c e p t i o n of some p r e l i m i n a r y Interviews with two of the l a r g e s t c a r r i e r s c i r -c u l a t e d . These l a r g e c a r r i e r s were capable of p r o v i d i n g c o s t data of the type d e s i r e d and employed c o s t a c c o u n t i n g programs t h a t r e p o r t e d such to o p e r a t i o n a l management on a r e g u l a r b a s i s . U n f o r t u n a t e l y , i t appears t h a t the v a s t m a j o r i t y of those c i r c u l a t e d c o u l d not, and of those c a r r i e r s who d i d p r o v i d e data, some must have been making r a t h e r i l l -based e s t i m a t e s . A s c r u t i n y of the overhead expense per m i l e would have t o l e a d one to such a c o n c l u s i o n . Future 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 s t a n d p o i n t o f s e t t i n g c o s t standards, do r e p r e s e n t a beginning i n a program t o i n t r o d u c e o b j e c t i v i t y and a c c o u n t i n g accuracy i n t o the process of s e t t i n g t r u c k r a t e s i n B r i t i s h Columbia. A number of important r e a l i z a -t i o n s have been made a l r e a d y as a r e s u l t of t h i s study. F i r s t and foremost, the c o - o p e r a t i o n and oonfidence of the t r u c k i n g i n d u s t r y must be gained by the r e g u l a t o r , £or the r e g u l a t o r i s going t o have t o engender (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 0n the c a r r i e r s i n d i v i d u a l l y . C a r r i e r s w i l l have to be a b l e to determine t h e i r own o p e r a t i n g c o s t s and r e p o r t on them wi t h accuracy. In o r d e r t o p r o v i d e the cost/mileage data such as 139 was required i n the A.T.A. study, c a r r i e r s should be encourag-ed to maintain a master record f o r each type of t r a i l e r com-bination operated. The imperative of segregating service units according to the t e r r a i n they operate i n , as well as t h e i r physical description, i s , of course, obvious. These segregations of cost data may be accomplished i n the follow-ing manner: 1. The accounting year of a l l c a r r i e r s should be standardized and subdivided, perhaps, into quarters or months. Cost reports should be prepared as often as possible i n the early period of vehicle cost determination. 2. Carriers could e a s i l y set up logs or expense sub-ledgers f o r each type of operation they maintain; i . e . each t r a i l e r combination. A control account would be used as well. There would be no need to maintain a separate account f o r each i n d i v i d -ual truck however. 3. A l l operating costs such as f u e l , o i l , t i r e s and maintenance expense can then be charged Into these logs, or sub-ledgers. As mileage Is report-ed, i t should be recorded i n the accounts as w e l l . 4. As drivers' wages should vary f a i r l y d i r e c t l y with mileage ( i n f a c t , t h i s i s one point the cost study did make - per mile labor costs were f a i r l y con-stant), a figure of t o t a l drivers' wages could be taken from such an expense account and allocated among the various t r a i l e r combination accounts according to the mileage t o t a l i n the account at the end of the accounting period. The same a l -location would apply to various supplemental employment benefits as w e l l . 5. Depreciation should not present any obstacle to th i s suggested cost accounting program. Many trucking firms i n the United States already de-preciate on a units-of-service basis. The operator must be encouraged to make a reason-able estimate of the t o t a l mileage l i f e of a l l vehicles i n his f l e e t and alloc a t e t o t a l de-pr e c i a t i o n on t h i s basis. In t h i s case, even 140 i f the t r u c k e r had to use another method f o r tax purposes, he would a t l e a s t have a ready f i g u r e t o use f o r b u i l d i n g up h i s expenses per 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 mileage do p r e s e n t a problem f o r the c o s t d e t e r m i n a t i o n system being suggested. The items termed "overhead" In the Q u e s t i o n n a i r e s , as w e l l as insurance and c e r t a i n l i c e n c e f e e s , are com-m i t t e d c o s t s and 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 the v a r i o u s s e r v i c e sub-accounts i n o r d e r t o a r r i v e at a t o t a l c ost per m i l e 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 , of course, upon what b a s i s would these c o s t items be d i v i d -ed? A b a s i c approach might be to 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 types of t r a i l e r combination m i l e s ) consume equal amounts of 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 expense and time 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 overhead p r o p o r t i o n a t e t o the number of m i l e s i t operated by the end of the a c c o u n t i n g p e r i o d . I f t h i s a s -sumption was wrong, the c a r r i e r c o u l d l e a r n from o b s e r v a t i o n and experience 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. In having t o r e l y on o b s e r v a t i o n t o s e t up proper overhead a l l o c a t i o n , the t r u c k e r i n our case would 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 er-head among v a r i o u s products or the departments producing them. The main d i f f e r e n c e i s , of course, 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 hile we are s u g g e s t i n g the t r u c k e r a l l o c a t e on a per m i l e b a s i s as h i s measure of a c t i v i t y . 7. The c o s t of 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 the t r u c k e r once c a l c u l a t e d , would have t o be t r e a t e d as an overhead item 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 combinations as overhead. The manner of c a l c u l a t i n g c o s t of 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 problem o f a scope beyond t h i s t h e s i s . In o r d e r t o compile the type of v e h i c l e c o s t data t h a t i s being d i s c u s s e d here, the s m a l l e r f l e e t o p e r a t o r s w i l l have to be encouraged to i n c r e a s e the number of c o s t r e p o r t s t h a t they are p r e s e n t l y u s i n g . Three b a s i c neces-TABLE V I I QUESTIONNAIRE "A" Item Number of 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 B a s i s of D e p r e c i a t i o n 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 V alue Less than 50,000 m i l e s 1 Reply 16 3.6000 3.8100 S t . L i n e 10 3810 50,000 to 100,000 m i l e s per annum Minimum Maximum Median 8.0000 9.3000 8.4000 3.3000 4.1000 3.6200 S t . L i n e S t . L i n e S t . L i n e 7000 1.0800 1.0110 Over 100,000 m i l e s p e r annum 3.2518 7 7000 V e h i c l e (-{-trailer) D e p r e c i a -0.0450 t i o n Expense 0.1070 1.0000 0.8230 0.0328 Average Cost of C a p i t a l 0.0350 0.0100 0.0520 0.0251 0.0072 Average F u e l , O i l , Grease Expense 0.0670 0.0660 0.0700 0.0685 0.0720 Average T i r e and T i r e Main-tenance Expense 0.0480 0.0173 0.0300 0.0225 0.0150 Average V e h i c l e Maintenance Expense - Own Shop 0.1050 0.0848 N/& N/R 0.0555 Average Insurance Expense 0.0180 0.0070 0.0162 0.0145 0.0104 Average Labor Expense 0.1280 0.1115 0.1560 0.1255 0.1200 Average Overhead Expense 0.0450 0.0170 0.2148 0.1170 O.3544 T o t a l o f Reported Costs 0.5530 0.3586 1.5390 1.1961 0.6673 E s t i m a t e o f V e h i c l e Main-tenance f o r those not a b l e t o supply a c o s t f i g u r e 0.0848 0.0848 (same f i g u r e as minimum) T o t a l Costs Per M i l e 0.5530 0.3586 1.6238 1.2809 0.6673 2. Note: 1. Firms are d i v i d e d i n t o t h r e e groups a c c o r d i n g t o t h e i r r e p o r t e d average mileage oper a t e d by v e h i c l e s . 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 mileage 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. The minimum p e r t a i n s t o the f i r m f o r a c o s t item r e p o r t e d the l e a s t . The maximum p e r t a i n s t o the 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 . Median c o s t s were compiled as w e l l i n t h i s case - the median simply b e i n g the middle f i r m ' s c o s t s . . ,cont.J"d. Item Number of 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 B a s i s of D e p r e c i a t i o n 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 V e h i c l e ( + t r a i l e r ) D e p r e c i a -t i o n Expense Average Cost of 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 Main-tenance Expense Average V e h i c l e Maintenance Expense Average Insurance Expense Average Labor Expense Average Overhead Expense T o t a l o f Reported Costs Estimate o f Expenses not Reported Cost o f C a p i t a l (same as min.) T i r e & T i r e Maintenance (same as min.) V e h i c l e Maintenance (minimum) Labor (same as Q u e s t i o n n a i r e "A") Overhead (minimum) T o t a l Costs Per M i l e TABLE V I I I QUESTIONNAIRE "B" Less than 50,000 m i l e s Minimum Maximum Median 50,000 to 100,000 m i l e s 1 Reply 2.0000 4.3000 3.60000 8437 3.3000 1.8000 2.9000 S t . L i n e S t . L i n e S t . L i n e S t . L i n e 2000 4650 3318 1.3960 0.0300 0.0180 0.0470 0.0090 0.2280 0.0100 N/R 0.0450 0.0810 0.0347 0.0670 0.0480 N/R 0.0227 N/R 6.0646 0.0382 0.0316 O.O650 0.0321 N/R 0.0180 N/R N/R 0.1280 0.2280 0.1280 0.2280 0.0450 0.0380 0.0124 0.0597 0.0060 0.0318 0.0046 0.0236 0.1740 0.3870 0.3180 0.1849 0.3501 0.5150 0.6740 0.4579 0.3501 r o Over 100,000 m i l e s Minimum Maximum Median Note: (cont'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 12.3000 17.5000 15.0000 3.0539 3.4390 3.3500 N/R N/R N/R N/R N/R N/R 2.1000 2.4000 2.3350 0.0302 0.0070 0.0700 0.0016 0.0555 0.0104 N/R 0.0159 0.0434 0.0087 0.0839 0.0150 0.0740 0.0273 N/R 0.6740 0.0312 N/R 0.0720 N/R N/R 0.0224 N/R 0.3544 0.1906 0.9263 0.4800 0.0070 0.0016 0.0555 0.1200 0.1200 0.1200 0.3106 1.0463 0.6641 4. In o r d e r t o p r o v i d e a complete s e t o f c o s t s i n each case, c e r t a i n f i g u r e s have been "plugged i n " f o r those items 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 used as the t a b l e s i n d i c a t e . 143 s i t i e s , as suggested by Mr. P.G. Anderson, a member of the P r i v a t e Truck C o u n c i l of America,^are: 1. Truck Defect Card - used f o r shop o r d e r and p a r t s and l a b o r used (on i n d i v i d u a l v e h i c l e s ) . 2. P e r i o d i c Truck - u s e d f o r accumulating c o s t of Report each v e h i c l e ; - a l s o to accumulate 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 (or as e n t i t l e d here, " t r a i l e r c o m binations"). 3. D a i l y Garageman's - used f o r f u e l and o i l d i s p e n s i n g Report and mileage d r i v e n by i n d i v i d u a l v e h i c l e s . To convince the s m a l l e r o p e r a t o r t h a t the e x t r a ex-pense and e f f o r t o f p r e p a r i n g forms and h i r i n g s t a f f t o main-t a i n a system o f data 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 these forms a t p e r i o d i c i n t e r v a l s ) i s , i n i t s e l f , a v a l u a b l e e x e r c i s e f o r him as w e l l as f o r h i s r e g u l a t o r w i l l not be at a l l easy. Nor i s any amount of c a j o l i n g by the r e g u l a t o r and t r u c k i n g a s s o c i a t i o n going t o accomplish the t a s k o v e r n i g h t . Quite f r a n k l y , a c o s t a ccounting system, a l -though i n the s m a l l o p e r a t o r ' s best I n t e r e s t i n the medium and long run, w i l l be an expensive and bothersome headache t o him to i n i t i a t e . Q uite a s e l l i n g e f f o r t w i l l be c a l l e d for'. The p o s i t i v e p o i n t s which might be s t r e s s e d i n encouraging manage-ment, however, a r e : DCanadian I n d u s t r i a l T r a f f i c League, " T r a f f i c Notes", Issue No. 4210, November 27, 1964, p. 5. 144 1. D e t a i l as to i n d i v i d u a l vehicles or even groups of vehicles w i l l show the operator immediately where possible defalcations or i n e f f i c i e n c i e s by his drivers and s t a f f are hurting him. 2. The same d e t a i l w i l l point out where his most p r o f i t a b l e business l i e s . 3. The cost reports he i s supplied with w i l l give him better on-line" control over his operations; i . e . he w i l l be able to see and analyze re s u l t s f a r closer to that time when the a c t i v i t i e s which produce his eventual r e s u l t s (the annual P r o f i t & Loss Statement) occur. Corrective and/or r e -info r c i n g action can be taken immediately. 4. A more s p e c i f i c consideration concerns warranties. Co l l e c t i o n of money due from manufacturers of equipment would be greatly f a c i l i t a t e d i f the purchaser had a record, i n some d e t a i l , of what he had to spend 6n his in d i v i d u a l vehicles at various mileage l e v e l s . As a summary to t h i s section, reference might be made to the remarks of the aforementioned Mr. P.G. Anderson, Director of Safety, Quality Bakers of America, before the 25th Annual Meeting, Private Truck Council of 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 vehicle or vehicle type) - "Having determined the cost data we want, j u s t i f y i n g the expense and e f f o r t of c o l l e c t i n g and compiling i t should be done not only to ourselves but to the Accounting Department. In general, accounting departments s t r i v e to keep both t h e i r s t a f f and expenses to a minimum. When asked f o r additional data, t h e i r usual reaction i s "we don't have the help" or " i t ' s going to cost too much". Because t h e i r help and co-operation i s needed to produce the cost statements, 145 they might be asked i n s t e a d f o r t h e i r ideas and recommenda-t i o n s on how the c o s t i n f o r m a t i o n might be developed and what they estimate the expense t o be. T h i s can then be com-pared to the t o t a l f l e e t expense on a percentage b a s i s . I t should, i n most cases, range between two and f i v e p e r c e n t . A h i g h e r percentage of expense I n d i c a t e s t h a t an e x c e s s i v e amount of d e t a i l i s b eing c o l l e c t e d f o r the number of v e h i c l e s i n v o l v e d . I t i s our experience t h a t c o m p i l i n g and u s i n g v e h i c u l a r c o s t data can r e s u l t i n r e d u c i n g t r u c k expense from 7 f i v e t o over t e n per c e n t . " Summary Perhaps the main purpose served by t h i s Chapter has been t o p r o v i d e the r eader w i t h an a p p r e c i a t i o n of the s t a r k c o n t r a s t e x i s t i n g between American and Canadian s o p h i s t i c a t i o n w i t h r e g a r d t o c o m p i l a t i o n and knowledge of t r u c k i n g c o s t l e v e l s and standards. F o r the purpose of r e g u l a t i o n of r a t e s , i t would appear t h a t the I n t e r s t a t e Commerce Commission has an e s t a b l i s h e d d e t e r m i n a t i o n system more d e t a i l e d than i s a c t u a l l y n e c e s s a r y . In B r i t i s h Columbia, a Province f e l t by t h i s w r i t e r to be a t l e a s t t y p i c a l of any Canadian Province, a crude p i l o t program f a i l e d t o d e r i v e r e s u l t s which would convince any observer t h a t even the t r u c k i n g i n d u s t r y i t s e l f can g e n e r a l l y I b i d . , p. 6. 146 p r o v i d e a c c u r a t e v e h i c u l a r c o s t d a t a . I t i s t h i s w r i t e r ' s o p i n i o n t h a t c o m p i l a t i o n of a c c u r a t e v e h i c u l a r c o s t data w i l l have to be the f o u n d a t i o n of any program designed to improve the t r u c k i n g r a t e r e g u l a -t o r ' s a b i l i t y t o judge the reasonableness of proposed o r e x i s t i n g f r e i g h t r a t e s . I t i s suggested t h a t a r e g u l a t o r c o u l d take the same approach and the same breakdown as shown i n the c o s t q u e s t i o n n a i r e designed f o r the Automotive T r a n s -p o r t A s s o c i a t i o n of B r i t i s h Columbia. Once the c a r r i e r s are a b l e to p r o v i d e t h i s i n f o r m a t i o n , the r e g u l a t o r must c o l l e c t i t r e p e a t e d l y , i n f a c t on a continuous b a s i s , u n t i l some I n t e l -l i g e n c e can be made of what I t should c o s t t o operate a g i v e n type of s e r v i c e over a g i v e n type of route, p o s s i b l y s u b j e c t to c e r t a i n o t h e r c o n d i t i o n s . There i s simply no e q u i t a b l e way a body may s i t i n judgement of any k i n d of r a t e u n l e s s i t has some standard t o guide i t s t h i n k i n g . In Chapter V the s u g g e s t i o n was made t h a t a r a t i o of o p e r a t i n g c o s t s to o p e r a t i n g revenues i s not as s u i t a b l e a c r i t e r i o n f o r judging t r u c k i n g r a t e s as i s a r a t e of r e t u r n f o r r a i l w a y o r u t i l i t y r a t e s t r u c t u r e s . The t r u c k i n g i n d u s -t r y , u n f o r t u n a t e l y , i s too d i v e r s e , the s e r v i c e s of the i n -d i v i d u a l t r u c k i n g f i r m too p e c u l i a r to themselves to permit a " t o t a l " f i n a n c i a l r a t i o t o have comparable meaning f o r the i n d u s t r y i n g e n e r a l or, indeed, t o have any meaning wi t h r e s p e c t to the r e s u l t s of an i n d i v i d u a l s e r v i c e performed by 147 the f i r m . T h i s i s not t o say t h a t the " t o t a l " o p e r a t i n g r a t i o has not p l a y e d a major r o l e i n American t r u c k i n g r a t e r e g u l a -t i o n . O b j e c t i o n s t o i t s f u r t h e r use, however, are being v o i c e d s t r o n g l y today. What must be s t r i v e d f o r i s a standard which can be a p p l i e d t o the s i m i l a r i t i e s which do e x i s t i n t h i s i n d u s t r y . These s i m i l a r i t i e s , of course, are going t o appear o n l y as examination i s made of the i n d i v i d u a l a spects of t r u c k i n g -the r o u t e s , the s e r v i c e s , the types o f equipment, the cargo c a r r i e d , e t c . To apply the o p e r a t i n g r a t i o t o a c t i v i t i e s w i t h common denominators such as these would make a gre a t d e a l o f sense. To apply i t t o any conglomeration,' o f a c t i v i t i e s i s going to produce m i s l e a d i n g r e s u l t s , f o r as more and more a c t i v i t i e s are grouped, the s m a l l e r i s the l i k e l i h o o d t h a t the v a r i o u s syntheses w i l l be comparable. C l e a r l y , i t i s being suggested t h a t a t r u c k i n g r a t e r e g u l a t o r should develop standard " o p e r a t i n g r a t i o s " f o r i n d i v i d u a l types o f s e r v i c e - whether they be c l a s s i f i e d by v e h i c l e type o r by the type of cargo they c a r r y and i n what k i n d of t e r r a i n . The i n g r e d i e n t which i s s a d l y l a c k i n g a t t h i s stage,which would permit c e r t a i n r a t i o s t o be developed, i s knowledge of the c o s t s of o p e r a t i n g these types o f s e r v i c e s . As t h i s Chapter has attempted t o p o i n t out, d e t a i l e d c o s t s of o p e r a t i o n can onl y be p r o v i d e d by the c a r r i e r s t h a t i n c u r them. In o r d e r t o p r o v i d e the necessary c o s t data, the c a r r i e r s them-s e l v e s must be encouraged t o i n i t i a t e r e l a t i v e l y simple y e t d e t a i l e d v e h i c u l a r c o s t a c c o u n t i n g systems. A s u b s t a n t i a l s a l e s e f f o r t i s c a l l e d f o r on the p a r t of the r e g u l a t o r s and the t r u c k i n g a s s o c i a t i o n s . 149 APPENDIX "A"  UNIVERSITY OP BRITISH COLUMBIA  CONFIDENTIAL QUESTIONNAIRE - B THIS QUESTIONNAIRE RELATES ONLY TO: A 74-76,000 G.V.W. DIESEL-POWERED TANDEM  AXLE TRACTOR WITH A 40' FLAT DECK SEMI TRAILER USED IN OTHER THAN MAINLAND- VANCOUVER ISLAND OPERfiTlW  THEREFORE PLEASE F I L L IN THE FOLLOWING INFORMATION: (The o b j e c t i v e i s to l e a r n your c o s t per m i l e f o r the above c l a s s of v e h i c l e s e r v i c e ) 1. NUMBER OF VEHICLES OP THIS SERVICE CLASS IN YOUR FLEET IN THE LAST ACCOUNTING YEAR 2. TOTAL MILEAGE OPERATED IN THE LAST ACCOUNTING YEAR (To n e a r e s t thousand) BY ALL VEHICLES IN THIS CLASS OF SERVICE 3. DEPRECIATION INFORMATION: (A) BASIS OF DEPRECIATION ( S t r a i g h t l i n e , D e c l i n i n g balance, e t c . ) POWER UNIT TRAILER (B) AVERAGE ACQUISITION PRICE OF THE POWER UNIT TRAILER 74-76,000 G.V.W. VEHICLES PRESENTLY IN FLEET (C) AVERAGE AMORTIZATION PERIOD OF THE 74-76,000 G.V.W. VEHICLES PRESENTLY IN FLEET (D) PROJECTED AVERAGE RESIDUAL VALUE OF THE 74-76,000 G.V.W. VEHICLES PRESENTLY IN FLEET (E) VEHICLE DEPRECIATION EXPENSE PER MILE (Average f o r 74-76,000 G.V.W. V e h i c l e s p r e s e n t l y i n F l e e t ) 4. AVERAGE COST OF CAPITAL PER MILE PER 74-76,000 G.V.W. VEHICLE IN FLEET (or, Cost of Borrowed Money) 5. AVERAGE FUEL' OIL' AND GREASE EXPENSE PER MILE PER 74-76,000 G.V.W. VEHICLE IN FLEET 150 - 2 -6. AVERAGE TIRE AND TIRE MAINTENANCE POWER UNIT TRAILER EXPENSE PER MILE PER 74-76,000 G.V.W. VEHICLE IN FLEET 7. AVERAGE VEHICLE MAINTENANCE EXPENSE PER MILE PER 74-76,000 G.V.W. VEHICLE IN FLEET (To i n c l u d e : (a) P a r t s (b) Labour (c) Garage Overhead) 8. AVERAGE INSURANCE EXPENSE PER MILE PER 74-76,000 G.V.W. VEHICLE IN FLEET (CARGO INSURANCE INCLUDED) 9. AVERAGE LABOUR EXPENSE PER MILE PER 74-76,000 G.V.W. VEHICLE IN FLEET (To 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 , s t a t u t o r y c o n t r i b u t i o n s ) 10. AVERAGE OVERHEAD EXPENSE PER MILE PER 74-76,000 G.V.W. VEHICLE IN FLEET (To i n c l u d e expenses of 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 , p r o p e r t y taxes, power, any 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 equipment, p r o p e r t y insurance on s t r u c t u r e s and 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 and f i x e d equipment, 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 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 A n a l y s t . 12. GENERAL INFORMATION (Please check a p p r o p r i a t e space) (a) We OWN LEASE (b) We OWN LEASE (c) We OWN LEASE (d) We DO OURSELVES ( ) THESE POWER UNITS THESE TRAILERS THE TIRES FOR THIS EQUIPMENT THE VEHICLE MAINTENANCE FOR THIS EQUIPMENT HIRE OUT ( ) 151 - 5 -1 3 . BUDGETING AND COSTING (a) Budgeting, e s p e c i a l l y of o p e r a t i n g overhead, must occur i f one i s to determine a f u l l c o s t p e r v e h i c l e m i l e . For each c l a s s o f s e r v i c e o f f e r e d by your company (such as the 7 4 - 7 6 , 0 0 0 G.V.W. with box t r a i l e r ) , do you prepare a budget f o r : (a) Expected Labour expense YES ( ) NO ( (b) Expected v e h i c l e main-tenance expense YES ( ) NO ( (c) Expected o p e r a t i n g o v e r -head YES ( ) NO ( What i s the l e n g t h of your budgetary p e r i o d (b) I f the answer to each q u e s t i o n i s YES, i s each above expense normally computed per 7 4 - 7 6 , 0 0 0 G.V.W. v e h i c l e - m i l e ? YES ( ) NO ( (c) Do you have cost r e p o r t s t h a t g i v e you your c o s t per 7 4 - 7 b , 0 0 0 G.V.W. v e h i c l e m i l e f o r : (1 ) Labour YES ( ) NO ( (2) V e h i c l e Maintenance YES ( ) NO ( CONFIDENTIAL 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 and J u s t Compensation, Common  C a r r i e r S e r v i c e - Standards Under the I n t e r s t a t e Commerce Act, Washington, 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. 2. American T r u c k i n g Assoc., Inc., Trends, Washington, 1956. 3. Bonbright, J . C , 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, New York, Columbia U n i v e r s i t y Press, 19bl. 4. Canadian Im p e r i a l Bank of Commerce, May 1967 Commercial L e t t e r . 5. Canadian I n d u s t r i a l T r a f f i c League, " T r a f f i c Notes", Issue No. 4210, November 27, 1964. 6. Canadian I n d u s t r i a l T r a f f i c League Notes, February 12, 1965. 7. Canadian Royal Commission on T r a n s p o r t a t i o n , V o l . I l l , 1961. 8. Canadian T r a n s p o r t a t i o n Act (R.S.C, 1952, as amended 1967). 9. Competition, R e g u l a t i o n and The P u b l i c I n t e r e s t In the Motor  C a r r i e r Industry, Washington, D.C, U.S. Government P r i n t i n g O f f i c e , 195b. 10. C u r r i e , A.W., Economics of Canadian T r a n s p o r t a t i o n , 2nd Ed., T o r o n t o , U n i v e r s i t y of Toronto Press, 1959. 11. Day, H.J., Motor C a r r i e r s - Accounting and Cost C o n t r o l  System, T r a f f i c S e r v i c e Corp., Washington, 1949. 12. Domestic Land and Motor T r a n s p o r t a t i o n , Progress Report of the Committee on I n t e r s t a t e and F o r e i g n Commerce, Senate Report No. 1039, 82nd Congress, 1st Se s s i o n , Washington, D.C., 1951. 13. Freas, Howard, The Role of Costs i n Ratemaklng, N a t i o n a l F r e i g h t T r a f f i c Assoc., Feb. 14, 195b. 1 4 . Harper, D.V., Economic R e g u l a t i o n of the Motor T r u c k i n g Indus-t r y by the S t a t e s , Urbana, U n i v e r s i t y of I l l i n o i s Press, 1959. 15. Highway Research Board, B u l l e t i n 301, L i n e Haul T r u c k i n g 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 of Scienc e s , N.R.C., Washington, D.C, 196l. 16. H o r n g r e n , C J . , Accounting 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. 153 BIBLIOGRAPHY (Cont'd) 17. Hudson, W.J., and Co n s t a n t i n , J.A., Motor 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 , N.Y., N.Y., Ronald Press Inc., 1958. 18. I.C.C. Bureau of Accounts, Cost of 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 Motor C a r r i e r s of General Commodities -1965, Sept. 19bo, Washington, D.C. 19. U.S. I n t e r s t a t e Commerce Commission Bureau of Accounts, Cost F i n d i n g and V a l u a t i o n Report, A S i m p l i f i e d Procedure f o r  Determining Cost of Handling F r e i g h t by Motor C a r r i e r s - 1959. 20. I n t e r s t a t e Commerce Commission, Bureau of Accounts, Cost of  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 Motor Common C a r r i e r s of General Commodities, Washington, D.C., September, .1966. 21. I n t e r s t a t e Commerce Commission, Order No. 34816, Increased  Minimum Charges 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. ,22. I n t e r s t a t e Commerce Commission, Reports, V o l . 313, 1961. 23. Kahn, F.R., P r i n c i p l e s of Motor C a r r i e r R e g u l a t i o n , Wm. C. Brown Co., Dubuque, l a . , 19561. 24. Kaysen, C , and Turner, D.F., A n t i t r u s t P o l i c y : An Economic  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 Press, Cambridge, 1959. 25. Knappen, L.S., "The T r a n s i t Operating R a t i o - Another View", 53, P.U.F., 485 (1953). 26. L o c k l i n , D.P., Economics o f T r a n s p o r t a t i o n , Chicago, R.D. Irwin Inc., 1960. 27. Moody's T r a n s p o r t a t i o n and U t i l i t i e s Manuals, 1965,1966. 28. Nelson, R.A., "Pegrum on the Economic B a s i s of 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, August, 1952. 29. Nelson, R.A.. "The Economics of S c a l e In the Transport Indus-t r y : A Reply", Land Economics, V o l . XXXV, May, 1959. 30. Oi, W.Y., and Hurter, A.P., Economics of P r i v a t e Truck T r a n s - p o r t , W.C. Brown & Co., Northwestern U n i v e r s i t y , 1905. 31. Pegrum, D.F., P u b l i c R e g u l a t i o n of Business, R.D. Irwin Inc., Homewood, 111., Rev. EdT, 19fc>5. 32. Pegrum, D.F., The Economic B a s i s of P u b l i c P o l i c y f o r Motor Transport, P.U.F., August, 1952, V o l . X X V l l l . 154 BIBLIOGRAPHY (Cont'd) 33. P h i l l i p s , CP., The Economics of Regulation, Homewood, 111., R.D. Irwin Inc., 19b5. 34. Quirin, G. David, The Capital Expenditure Decision, Toronto, R.D. Irwin Inc., l^bTT 35. Roberts, M.J., "Some Aspects of Motor Carrier Costs: Firm Size E f f i c i e n c y and Fina n c i a l Health", Land Economics, Vol. XXXII, No. 3, August, 1956. 36. Small-eBusiness Administration, Motor Carriers - Financial Structure, December, 1956. 37. Si m p l i f i e d Procedure f o r Determining Cost of Handling Freight  by Motor c a r r i e r s , Bureau of Accounts Cost Finding and Valuation, I.C.C, 1959. 38. Smyth, J.E., and Soberman, D.A., The Law and Business Adminis-t r a t i o n i n Canada, Toronto, Prentice-Hall of Canada, 1900. 39. Taff, C.A., Commercial Motor Transportation, Rev. Ed., 1961, R.D. Irwin, Homewood, 111. 40. Troxel, E., Economics of Public U t i l i t i e s , Rhinehart & Co., N.Y., 1945. 41. Wright, A., "The Operating Ratio - A Regulatory Tool", Public  U t i l i t i e s Fortnightly, V o l . 24, 1953. 42. Wilcox, C , Public P o l i c i e s Towards Business, R.D. Irwin Inc., Chicago, 1955^ CASES 1. B l u e f l e l d Water Works and Improvement Company v. Public  Service Commission of West V i r g i n i a , 2b2 U."ST, 679 (1923). 2. Candy, Drugs, Motors, Iron Bars, Valves, Westbound, 54, M.C.C, 1952. 3. Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S., 575 (1942). 4. German A l l i a n c e Insurance Company v. The Industrial Court of Kansas, 233 U.S., 389 (1914). 5. Increased Common Carri e r Truck Rates i n New England, 43, 44, M.C.C. " 155 BIBLIOGRAPHY (Cont'd) 6. Increased Common C a r r i e r Truck Rates In The East, 42, M.C.C. 7. Increases, P a c i f i c Northwest, 54, M.C.C. 8. Los Angeles 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 Commis-s i o n o f C a l i f o r n i a , 28$ U . S . , 2b1? (1953)." 9. JMcCardle e t a l . v. I n d i a n a p o l i s Water Company, 272 U.S., 400 (192b). 10. Minimum Weight on T r i s o d i u m Phosphate, 94, M.C.C. 11. Munn v. I l l i n o i s , 44 U.S., 113, 122 (1877). 12. Nebbia v. New York, 291 U.S., 502 (1934). 15. A.G. Ont v. A.C. Winner j : 54l; 4 D.L.R., C.R.T.C. 14. Smyth v. Ames, 169 U.S., 466 (1898). 

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