Cost of service

“ The correct method of dealing with the question of cost is to treat the service as a whole, and if the revenue for the whole service, including allowance for government mail, meets the cost of the whole service, it is immaterial whether each class of that service pays its own cost, or even whether the cost of one class has to be made up by a greater charge upon other classes. ”

“ While, also, the rates for the low-value articles may not cover every item in the so-called cost of service, they do contribute to the revenue an amount which might otherwise have to be made good by the fixing of higher rates on goods in other classes. ”

“ A great majority of those who advocate valuation say that they should be based on the cost of the service. The proper method, then, would be to ascertain the exact cost of hauling each commodity and then base rates on these ascertained costs, making them just high enough to allow the road a fair return. ”

“ Few women when they assume the care of a household know the exact value of the household plant; the amount to be deducted each year for wear and tear; the relative proportions expended annually for rent, fuel, food, clothing, and service; the number of meals served and the approximate cost of each; the amount of profit, waste, or unproductiveness that results from all expenditures made. Every manufacturer, every business man knows the value of his plant, its increasing or diminishing value, the cost of materials used and of service employed. ”

“ If the undeniable benefits of rural service to the people can be given with ever-increasing efficiency at a cost no greater than that, it can be reasonably assumed that the people who live upon the farms of the United States and endure the hardships of such life with its many attendant inconveniences are certainly entitled to their share of public benefit, especially when as shown, the cost is so small compared to the inmeasurable advantages afforded.
The city delivery service of the nation with its 34,000 carriers costs now over $43,000,000. ”

“ See infra, pp. 304-305.↑ The phrase 'jurisdictional cost of service' as used here means the producer's system-wide cost of service (i.e., all operating expenses, including depreciation, depletion, and taxes, plus a fair return on the rate base) for its sales of natural gas subject to the Commission's jurisdiction. ”

“ The Wisdom of Having a Physical Valuation.—It is hard to understand how any thoughtful person can now doubt this, for we are in a period of regulation and taxation of public service corporations, and the only question is whether they shall be regulated and taxed with a full understanding of the investment involved, or by arbitrary methods, such as the 2 cents per mile passenger rate, which has been so popular in many States, under widely different conditions and irrespective of the cost of the service. ”

“ For many recent years the packet service of the country, traversing every known sea to keep up a connexion with those whom the exigencies of life and commerce have dispersed so widely, has cost the nation something like a million sterling per annum! ”

“ The cost of promoting the enterprise, the discount on the hazard, the loss of interest during its infancy, the labor of building up the undertaking—these are all real elements of cost, and may remain in the property as value, but, like all other items of cost, they have their reasonable limits, which, in each individual case, can be determined within narrow bounds. ”

“ In an editorial in another part of this same issue the Gazette advocates the raising of rates to meet higher prices of supplies and higher wages; it is surely as feasible to lower rates as it is to raise them, and, even though it were necessary to base rates on the cost of service, it does not seem as if that would be entirely impractical, inasmuch as it is the whole argument advanced for raising the commutation rates on the railroads entering New York City. ”

“ In fixing a uniform price for identically the same labor or material, whether on a small poverty-stricken road or a main trunk line, no serious injustice is done, provided the price fixed is one which, from a strictly engineering standpoint, is a reasonable figure for cost of reproduction. The differences in class are due, not to special differences in cost of physical property, but rather to differences in earning ability on account of good or poor territory served, efficient or inefficient management, or other reasons not connected with the physical structure ”

“ From the selfish point of view the chief interest of the employer is to keep the bills down and to get the greatest possible amount of service even at the cost of the greatest expenditure of human strength; among employees, it is to do sufficient work to retain a good place, and to use whatever materials are most convenient. ”

“ While the writer has no personal interest in the matter, on one side or the other, having served both municipality and corporation in water-works valuations, he feels, nevertheless, that engineers can do a genuine service, alike to the public and to the public service corporation, in laying stress on the fundamental elements of cost and value, and particularly those on which rates should be predicated, in public service corporation property valuation and rating. ”

“ Cost v. value of service, 166.—Relative merits of each, 167.— Charging what the traffic will bear, 169.—Unduly high and low rates, 171.—Dynamic force in value of service, 177.—Cost of service in classification, 179.—Wisconsin paper case, 181.—Cost and value of service equally important, checking one another, 184.
Not only must rates of all sorts be delicately adjusted to suit the immediate exigencies of trade; they must be constantly modified in order to keep pace with its ever changing conditions. This is peculiarly true of a rapidly growing country like the United States. ”

“ The right-of-way account in no wise differs from that of any other item of physical cost. The right of way, with all its hold-ups, items for damages, court costs, legal expenses, bills for personal services and expenses in securing it, abstracts and recording of deeds, is just as much an element of physical cost as the rails. The cost of acquiring the right of way is as proper an element as charges for inspecting the rails, freight charges on them, the loading and unloading, or any other charges that enter into the cost of rails delivered to the track-laying contractor. ”

“ It is not possible to build any public service plant without incurring all these expenses to a greater or less degree. They are essential elements of cost, and must go into the value of the plant when completed. It can hardly be argued that cost, which in a large property runs into thousands or hundreds of thousands of dollars, has no value at the commencement of operation, nor does it appear that the value is subject to depreciation as long as the property is an operating plant. ”

“ If you calculate what the servants living in your house cost you in one way and another, you{98} will come to the conclusion that there would be less expense for the employer and certain profit for the servants, whose service by the hour would be better paid. ”

“ Thus limited, it is desirable, whenever practicable, that the burthen should fall on those to whom the service is rendered; that the expense, for instance, of roads and bridges, should be defrayed by a toll on passengers and goods conveyed by them, thus dividing the cost between those who use them for pleasure or convenience, and the consumers of the goods which they enable to be brought to and from the market at a diminished expense. ”

“ There can be no question that for an indispensable public service like transportation, conducted under monopolistic conditions, the ideal system of charges would be to ascertain the cost of each service rendered and to allow a reasonable margin of profit over and above this amount. ”

“ Probably correct present value estimates which include depreciation may not be even fairly approximated without intimate knowledge of the particular property, and this should embody operation, policy of management, past performance, study of historical cost (as far as the records will permit) , estimated cost of construction, and actual cost of maintenance. The life of a piece of track or equipment, disregarding obsolescence and extraordinaries, generally depends on the type and details of construction, the service it has done, and the service that will be required of it. ”

“ There are certain expenses connected inseparably with the construction of any public work, which, on the completion of that work, are not capable of physical identification, but which, nevertheless, belong to and must be a part of the cost of the physical property. These expenses are legitimate; and, as long as the property is operated, a very large part, if not all, of the entire expense remains in the present value of the property as a "going concern." ”

“ The service output method bases the depreciation cost not on years of [Pg 178] life nor on life in terms of working hours of service. Here an attempt is made to predetermine the output of the asset in terms of units of product, and so burden every unit with its fair share of depreciation. To secure full equality of charges, up-keep costs must be reckoned on the same basis, rather than on a time basis of service hours or length of life. If conditions are uniform and normal, this method, where applicable, secures perhaps the most satisfactory of all allocations of depreciation costs. ”

“ We’ve got to figure individual cost for certain distances and localities and directions of traffic, figure in the varying cost of handling different sorts of freight, and then put in a percentage of the general cost of the business, just as the restaurant-keeper makes each patron pay proportionately for the cost of bread and butter, heat, light, service and rent, no matter how large or how small his check may be on any one occasion. ”

“ Hardly a trunk line road exists to-day that has not grown up from a small beginning, changed its line, reduced its grades, added safety devices, changed the type of its bridges and buildings, increased the weight of its rails, put in service much heavier equipment, in fact, completely changed everything, except, perhaps, the original right of way.
The task of securing from old accounting department records an accurate statement of cost is—and the writer says it with the confidence 94born of experience—an impossibility. It is a job of such magnitude as to be practically prohibitive. ”

“ Summarized, these elemental principles are, the right of the company to derive a fair income based upon the fair value of the property 9at the time it is being used for the public, taking into account the cost of maintenance and depreciation and the current operating expenses, and the right of the public to demand that the rates shall be no higher than the services are worth to them, not in the aggregate, but as individuals. ”

“ Yet, after no long period of reawakened prosperity, by proper economy it is confidently anticipated that even the present low rates, now as favorable as any country affords, will be adequate to sustain the cost of the service. ”

“ The company is clearly entitled to earn a reasonable profit on the actual capital invested, in addition to the legitimate cost of operation, payment of taxes, and sinking funds to cover depreciation and obsolescence.
The public is clearly entitled to good service at the lowest rates that will permit the company to earn its reasonable profit and expenses. Increases in tonnage, population, and consequent net earnings 8of the corporation should entitle the public to a benefit in reduced charges for service, when the increased earning is of a permanent character. ”

“ There is a considerable amount of cost, which cannot be taken out of capital, where facilities are abandoned or line or grade changed. These changes are common to all growing roads; they are due to the demands for greater traffic; they are necessary to the welfare of the community served; they are often made at points where no charge of defective design will apply. They might be termed expenses due to the development of the State, and, in the development of the railroad business, they were absolutely necessary for its present standard of efficiency. ”

“ The cost of advertising, the cost of colonization, and canvassing by agents engaged 281in building up the business tributary to the corporation, the cost of developing an efficient business organization and an efficient plant—every possible item of developing the business finds accurate record in the development expense deduced from the accounting records as outlined. ”

“ Riggs is fully aware that replacement cost and real value can rarely, if ever, coincide, and therefore plainly agrees, as to that elementary and essential point, with the writer and disagrees with Professor Adams, who would ignore or destroy every non-physical element of value in the property of all public service corporations. ”

“ It is a fact—rapidly coming to be recognized by legislative and judicial bodies—that the prescription and regulation of tolls, charges, and assessments against public corporations cannot be made systematic and intelligent unless there is provided some estimate of the value of the property involved, based on the cost of its replacement or reproduction. ”

“ Inasmuch as the definition of a reasonable rate has been stated to include the cost of the service and a reasonable return upon the value of the property employed, it inevitably follows that our charge to the public includes these elements of cost. ”

“ The advocates of State interference in the regulation of rates seem to be possessed with the conviction that the true basis of charge is the cost of the service, and they labor under the common error that the mileage basis is a practical method of determining this. ”