The Subject Of The Legal Control Of Railroad Corporations by the federal, State, and municipal governments is so very broad that several volumes would be required to adequately discuss even the present condition of such regulation. A large part of the subject (the making of rates) is usually considered to be entirely outside of the province of the engineer, since the engineer is never called on to make rates or to revise them. But there are many cases where a knowledge of the method actually employed by railroad managers in making and revising rates, and the control which has already been exercised by the State and federal governments over rate-making, will give the engineer a much clearer idea of the influence which rate-making has on many of the problems which daily come before him. It may be more accurate to say that he should understand how little rate-making is affected by such variations in engineering design as he is able to control. In the next few pages an attempt will be made to very briefly state a few of the fundamental principles regarding the methods of rate-making and the control of rates which is exercised by the State and federal governments.

28. Basis Of Freight-Rates

The usual method of setting a price on a manufactured commodity is to determine from actual experience what is the cost of manufacturing the commodity and to add to such cost an amount which will pay a reasonable return on the capital invested, and also pay a reasonable return to the manufacturers to compensate them for their time, skill, and knowledge of the business. If the manufactured article is secured by patents and is in great demand, the profit added to the cost of the manufacturing will be correspondingly large, and yet even this is considered right since the owners of a valuable invention are entitled to a corresponding profit on the invention. Ever since legal control of railroad-rates has been suggested there has been an effort to establish a basis of cost of transportation, so that by adding a reasonable amount, which will pay for the use of the capital, a proper charge may be determined, and that the railroad shall be enjoined from attempting to collect any greater charge for such transportation. A consideration of some of the facts already stated, together with demonstrations made in subsequent chapters, will show that the cost of transportation is a very variable quantity. It will be shown that, even though we determine from statistics of the whole country that the average cost of transporting one ton per mile is about .5 c, we cannot therefore say that the cost of transporting one ton for one mile on any particular railroad and under all conditions will be .5 c. or even approximately so. Even if we were to establish from the statistics of any one given road that the average annual cost of transporting freight on that road amounted to a certain figure, it would be neither fair nor equitable to say that all traffic should be charged according to this figure, that no traffic should be taken at any less figure, nor that any charge could be made at any greater figure. To a very considerable extent it is true that railroad expenses are independent of the amount of business done. The fixed charges must be paid regardless of the amount of business, if the road is kept solvent. The cost of maintaining the road-bed and track is very largely independent of the amount of traffic. Whether there are twenty trains per day each way or only one, the amount of track-work which is necessary to keep the road up to a given standard will not be proportional to the number of trains. Although the fuel bill will vary more nearly in accordance with the amount of traffic, it will be by no means strictly in accordance with it. The practical result of all this is that railroad profits are subjected to "the law of increasing returns." The first half of the business which is done costs a large proportion of the total; the final ten per cent is almost clear profit. A railroad is very often compelled to accept some of its business at a rate which is much lower than the average rate or it cannot get the business at all. It can handle the additional business at a net additional cost which will be less than the amount received for it and hence can make a profit on such business. Under such conditions the business is profitable. If it is attempted to increase the charge for this low-grade business to the average rate for all business it will not get it at all. If it is attempted to reduce the charges on its local noncompetitive business to the lower average rate actually received the road cannot pay its expenses and must go bankrupt. These facts may be illustrated by a very simple concrete example, in which the figures make no pretense of accuracy and. are given merely for the purpose of illustrating a principle. Suppose that a road is handling 80,000 tons of non-competitive freight per year, for which it receives $1 per ton; suppose that it has an opportunity of handling 80,000 additional tons of competitive freight at the rate of 60 cents per ton; its gross receipts are therefore $128,000. The competition is such that it must accept the competitive freight on the basis of 60 cents or refuse it altogether. It is therefore handling 160,000 tons of freight at an average rate of 80 cents per ton. Assume that it could handle its non-competitive business alone at a total expenditure, for operating expenses and fixed charges, of 90% of the amount received or $72,000 for the 80,000 tons. Assume that the extra business, whose cost is confined to comparatively small additions to the cost of maintenance of way, maintenance of rolling stock, and the expenses of conducting transportation, costs but 50 cent er ton. The additional business is therefore handled at a cost of $40,000, and the entire traffic at a total expenditure of $112,000, which leaves a net profit of $16,000 on the business. Although the competitive business is handled at a far less rate than the non-competitive business the net profit on that part of the business alone is $8000, which is as great as the profit on the non-competitive business. If, in response to attempts to enforce uniform rates, the charges were cut down to the uniform basis of $128,000 on 160,000 tons of freight or an average price of 80 cents per ton, we would find that the additional competitive freight could not be obtained at all. The road would then be compelled to attempt to pay its operating expenses by handling the 80,000 tons of freight at 80 cents, which would give a revenue of only $64,000 when the actual expenses, including fixed charges, are supposed to cost $72,000. Such a condition of affairs could only lead to bankruptcy. The condition of competition is one that a road is forced to meet.