Page images
PDF
EPUB

on only 82.7 percent of the total iron ore tonnage of the Great Northern in that year. On the remainder of the tonnage that road received less than 92 cents, and on 2.57 million tons of interline ore it received an average of only 26.88 cents a ton. The comparison made is thus with unlike things. Since the estimated total cost is for all iron ore, the comparison should be with the average revenue per ton which the Great Northern derived from handling all of the ore on which that estimated cost is based. That average revenue for 1946 was 83.94 cents. Thus, the average revenue exceeded complainant's estimates of cost, without the corrections or considerations above indicated, by only about 1 cent a ton. The corrections and considerations referred to cannot be resolved into specific amounts from the data before us, but from such data it is our judgment that the total costs properly assignable to the iron ore traffic of the Great Northern in 1946 do not exceed those shown in complainant's study.

In 1947, the average revenue per ton from iron ore on the Great Northern was 85.7 cents. Detailed cost data for that year are not of record, but the periodic reports made to us by this road show that costs of labor and materials increased substantially over 1946, and the income-tax credits applicable to former years, which as made in 1946 complainant regarded as applicable to that year, were greatly reduced in 1947.

With minor exceptions, the Great Northern in its study developed the out-ofpocket costs by the use of Rail Form B, designed by the Cost section of our Bureau of Accounts and Cost Finding. This formula was used in the development of costs in New Automobiles in Interstate Commerce, supra, and is described on pages 501-503 of the report therein.

The costs were based on the system operating expenses, rents, taxes, and passenger deficits. No allowance was included for the out-of-pocket portion of the return on the cost of property. The system unit costs for the various service units, such as locomotive-miles, locomotive ton-miles, train-miles, car-miles, and gross ton-miles, were applied to the statistics of the train in which the ore moved. Under this formula the running-service costs for the train handling ore traffic was computed as $1,015.45.

Considering the return movement of empty cars, the equated number of loaded cars per train was 86.77, and the running cost per loaded car was $11.70. This was added to the computed costs per loaded car of $3.34 for origin switching, $2.80 for destination switching, $1.61 for station service, and 83 cents for dock service to produce a total of $20.28 per carload, including nonrevenue freight. The latter figure was increased to $21.31 when adjusted to a revenue carload basis. This total cost, when divided by 62.87 long tons per carload, produces an out-ofpocket cost of 33.9 cents, including 1.39 cents for dockage, and 32.51 cents without dockage.

The Great Northern's witness made a check of the costs by substituting Mesabi division maintenance of way and structures and transportation rail-line expenses for the system figures for such expenses. The results, according to the witness, showed no substantial change in the costs.

Constant costs for the iron-ore traffic as developed by the Great Northern were based on a revenue ton and revenue ton-mile distribution of the system constant costs. These latter expenses include the constant portion of the operat. ing expenses, rents, taxes, and passenger deficits, but exclude the constant portion of the return on the cost of property and the less-than-carload deficits. By this statistical apportionment of the constant costs, 57.96 cents per ton was charged to the ore traffic." About 49 percent of system terminal constant costs and 15 per cent of system line haul constant costs were assigned to iron ore.

The fully distributed cost was then computed by adding the out-of-pocket cost and the constant cost developed as described above, producing a total of 91.86 cents per ton. If allowance for return at 4 percent on the carrier's book investment, plus allowance for cash and material and supplies and less depreciation and amortization, be included, namely, 22.44 cents per ton, and fully distributed

19 The study assigns the same constant costs per ton and per ton-mile to iron ore as to traffic of the highest grade. The Great Northern witness, after working in costs for over 30 years, preferred not to endorse any cost formula for rate-making purposes. Ву using the formula described in Class Rate Investigation, 1939, 262 I. C. C. 447, 571, he computed iron ore costs as $1.50 per ton, as compared with the assailed rate of 92 cents.

11 The constant costs were 9.14 cents for dockage, about 35.35 cents for operating expenses, rents, and taxes, and about 13.47 cents for passenger deficiencies, the latter amount excluding 0.88 cent constant cost for dockage. Including dockage, the passenger deficiency constant costs were 14.35 cents.

12

costs thus determined without contribution to less-than-carload deficits, appear as 114.3 cents per ton,2 as compared with the assailed rate of 92 cents.

As stated, these cost studies were based on the results for the so-called strike year of 1946, in which the volume of the iron ore transported was somewhat below normal. On the other hand, the 1947 volume was probably above normal. In that year the iron ore tonnage on the Great Northern increased over 1946 by 34.2 percent. The 92-cent rate continued in effect throughout 1947, without the addition of any general increases, as was true on other traffic, and as indicated, the costs of labor and materials substantially increased.

Duluth Missabe cost8.-In 1946, the Duluth Missabe operated 569 miles of road and handled 3,054 million ton-miles of freight, of which 2,938 million or 96.2 percent consisted of iron ore. Its total freight operating expenses were $18.3 million or 6 mills per ton-mile.

Here again, complainant computed the costs for the ore traffic on this road based on a ton-mile apportionment of the system operating expenses. Ilowever, because of the small percentage of nonore traffic, the use of this method of apportionment for the Duluth Missa be is not open to important criticism. The costs thus computed were found to be 53.6 cents per ton. The railway tax accruals and net rents chargeable to both freight and passenger service in 1946 were $55,854,879. After deduction of the passenger portion of the expenses, 16.9 cents per ton was assigned to the iron ore traffic. The passenger deficit of this road in 1946 was $636,461, and 1.9 cents per ton was assigned to the iron ore traffic. The allowance for return was computed at a rate of 4.75 percent on complainant's estimated value of the Duluth Missabe of $61,503,582. The return thus chargeable to the ore traffic, based on a ton-mile distribution, is 8.6 cents

per ton.

The total cost computed by complainant for operating expenses, rents, taxes, passenger deficit, and return is 81 cents per ton, as compared with the assailed rate of 92 cents. This rate applied on about 90 percent of the ore handled by the Duluth Missabe. The 1947 costs, similarly computed, are also 81 cents per ton. The 1918 costs, so computed, are 93 cents per ton, or 12 cents over 1946 costs, as compared with the 1948 general rate increase of 13 cents.

Earnings of defendants.-Without any tax adjustments, the Great Northern net railway operating income fluctuated from $25.04 million in 1946 to $23.8 million in 1947 and $27.2 million in 1948. Based on the recorded investment, plus supplies and cash, less accrued depreciation and amortization, at the beginning of each of the years, those incomes yielded respective returns of 4.18, 4.24, and 4.70 percent. If nonrecurring tax credits are considered, the return on this basis was 3.42 percent in 1946 and 4.06 percent in 1947. The net railway operating income of the Duluth Missabe, without tax adjustments, was $8.67 million in 1946, $8.95 million in 1947, and $10.16 million in 1948. On the same basis as used for the Great Northern, those incomes yielded respective returns of 10.75, 11.35, and 11.43 percent.

In the fist 9 months of 1949, as compared with the same period in 1948, the net railway operating income declined from $18.9 million to $15.3 million, or by 18.7 percent, on the Great Northern, and from $9.1 million to $8.5 million, or by 6.4 percent, on the Duluth Missabe. On the basis of our valuation of the Great Northern properties as of June 30, 1915, the latest date on which we have had occasion to determine the value of that road, plus subsequent additions and betterments, the rates of return since and including 1946 vary only slightly from those above shown based on book investment. No elements of value are of record from which we could determine a fair value of the properties used in transportation by the defendants in recent years.

Rate history and comparisons.-In 1908, the Great Northern tariff publishing rates on iron ore to upper lake ports provided that such rates included "weighing, sorting, docking, and delivery to vessel.” The rate thus published fror Mesabi Range points to lake docks, for movement beyond by water, was 80 cents. In 1911, the Duluth Missabe's predecessors reduced their rate to 60 cents, and this reduction was met by the Great Northern. In Lum v. Great Northern Ry. Co., 33 I. C. C. 541, we prescribed a rate of 55 cents from the Mesabi Range to upper lake ports, and that rate was established in 1915. The prescribed rate became 63.5 cents under our authorization in 1917. The rate was further increased to

12 The carrier's book investment, less depreciation, was apportioned between line-haut and terminal expenses on the basis of the out-of-pocket expenses. The terminal portion was distributed on a tonnage basis and the line-haul portion on a ton-mile basis between the ore traffic and the nonore traffic.

$1 in 1918, under General Order No. 28 of the Director General of Railroads. In the following year a separate dockage charge of 5 cents was established, and at the same time the line-haul rate was reduced to 95 cents. Under the general reductions of 1922, the rate became 86 cents, with no change in the dockage charge. In 1923 division 1 found this rate and charge not unreasonable in Adriatic Jining Co. v. Chicago & N. W. Ry. Co., supra, and this finding was affirmed in October 1924 by division 1 in Jones & Laughlin Ore Co. v. Director General, 92 I. C. C. 683.

In November 1924, the dockage charge was increased to 10 cents and the rate was reduced to 81 cents. The dockage charge was increased in 1938 to 11 cents, and this charge continued in effect until May 6, 1948, when as stated, it was increased under our general authorization to 13 cents. Except for temporary increases in certain parts of the 1930's the assailed rate of 81 (ents continued in effect from 1924 to May 6, 1948, when under our general authorization it became 92 cents, the present rate.

Since 1924, when, as stated, the assailed rate and dockage charge, then aggregating 91 cents, were found not unreasonable, that rate and charge have been increased, in the aggregate, by 15.4 percent. In the same period, by reason of greatly increased transportation costs, experienced by railroads generally, the rail carriers in the western district have successively increased their rates and charges, upon our authorization, by not less than 70 percent. Somewhat lesser increases were made on coal and coke, livestock, grain, and certain other commodities, but on the whole the cumulative increase was much greater than on iron ore to the upper lake ports.

The assailed rate is compared with other rates on iron ore and with numerous rates on other heavy-loading commodities, such as coal, cement, lime, bulk salt, and wheat. In all instances the rates thus used are on a substantially higher level than the assailed rate as applied over the Great Northern, and in some instances on a higher level and in others on a lower level than the assailed rate as applied over the Duluth Missabe. In 1947, the iron ore ton-mile revenues from the Mesabi Range were 6.3 mills on the Great Northern and 9.4 mills on the Duluth Missabe. On the 1946 Mesabi ore the average haul to the upper lake ports approximately 91.8 miles and the average ton-mile earnings were 8.9 mills. From the Marquette and Menominee Ranges to Escanaba, Mich., 60 and 81.3 miles, respectively, the rate at that time was 78 cents and the respective ton-mile earnings were 11.6 and 8.26 mills. The lowest ton-mile earnings under any iron ore rate to the upper lake ports, other than the rate assailed over the Great Northern, are those under the rate from the ('uyuna Range to Superior, Wis., 108.2 miles. In 1916, that rate was 81 cents and the earnings, 6.69 mills.

The assailed rate is on a substantially lower level than the ex-lake rates on this same ore from lower lake ports to interior points in official territory. For example, the ex-lake rate to the Leetonia, Ohio, group, for a weighted-average haul of 89 miles, at the time of the filing of the complaint was 94 cents, or 16 percent higher than the assailed rate, and is now $1.40, or 51 percent higher than the present rate under attack. The average carload weight of the ex-lake ore is slightly greater than that to the upper lake ports. While the movements of ex-lake ore are less concentrated than those to the head of the Lakes, they are made over lines of heavy traffic density and under favorable operating conditions. In contrast to the 100 percent empty return movement at the head of the Lakes, the ex-lake carriers transport a large volume of coal on the return trip of the cars. Traffic under the ex-lake rates is subject to demurrage and diversion charges, which is not true of traffic under the assailed rate. The handling charge from lake to rail at the lower lake ports is generally 1 cent per ton less than at the upper Jake ports.

The only rate comparison presented by complainant is with a rate of $2.40 on iron ore from Benson Mines, N. Y., to Pittsburgh and Aliquippa, Pa., 510 and 491 wiles, respectively, yielding respective earnings of 4.2 and 4.37 mills per tonmile. This is a depressed rate voluntarily reduced by the rail carriers to meet rail-and-lake competition through the port of Clayton, N. Y., on the St. Lawrence River, and therefore can be given little weight in measuring the maximum reasonableness of other rates. The rate was increased to $2.60 under our authorization of December 29, 1947.

For distances approximating the average haul of Mesabi iron ore to the upper lake docks, for which the assailed rate at the time of the hearing was the equivalent of 72.3 cents per net ton, the concurrent rates, per net ton, under maximum reasonable scales prescribed or approved by us in various proceedings on certain other low-grade, heavy-loading commodities were $1.505 on ex-lake bituminous

[blocks in formation]

fine coal from upper lake ports to Minnesota destination ; $1.25 for single-line application on sand and gravel between points in Minnesota and North Dakota; $2.80 on cement between portions of Minnesota, Wisconsin, Iowa, and northern Missouri; $2.20 on lime between points in western trunk-line zone I; and $1.80 on common brick from Iowa points to destinations in Minnesota, South Dakota, and Nebraska.

Value of the service.—The movement of iron ore to the upper lake ports is peculiar in that it is highly concentrated and in large volume, and in that it must move by railroad. This latter fact affords no reason by itself for charging what might otherwise be regarded as unreasonable rates, but it is a rate-making factor which neither the carriers nor this Commission may disregard in distributing the total transportation burden among the respective commodities offered, and which has become increasingly important since the recent war as the costs of transportation have mounted and the competition between the respective forms of transportation has intensified.

Complainant contends, however, that the ability of one segment of an industry to bear and absorb rates allegedly far above the full costs of rendering the service should not fix the value of the service for another segment of the industry which is unable to do so. This has refere ce to the fact, as evidenced of record, that the production costs of beneficiated ore are substantially greater than those of direct-shipping ore, despite reductions in royalties and concessions made by the State of Minnesota in reduced taxes, designed to encourage the production of low-grade ores.

This Commission may not fix rates dependent solely upon the profits of any shipper or group of shippers, but must give consideration to all of the interests affected. Plainly, the transportation conditions attending the transportation of beneficiated ore are not sufficiently different from those of direct-shipping ore to warrant the prescription of different rates on the one than on the other. Nor, as complainant admits, would the record support an attempt to break up the present origin grouping so as to apply a different rate from complainant's origins than from other origins in the Mesabi and Vermilion Ranges. In passing upon these rates and charges, therefore, our consideration of the ability to bear the transportation costs may not be limited to the producers of beneficiated ore alone, but must comprehend the economic condition at least of that portion of the entire industry which ships ore under the rates and charges assailed. There is upon this record no indication that the Mesabo-Vermilion iron ore industry as a whole is in economic distress or that the group rate is in any respect burdensome to it.

Competition from other range8.-In the sale of their ore, complainant and other producers on the Mesabi Range are in competition with iron ore producers on other ranges in the Lake Superior region. Approximately 75 percent of all iron ore shipped to upper lake ports moves from the Mesabi Range, and the proved reserves on that range greatly exceed those on the other ranges. The iron ore price at the lower lake ports, which is published before the start of each shipping season, establishes the price basis for ore of the same iron content from all shipping points in the region.

Because of the greater cost of production, underground ore has had greater difficulty in competing with direct-shipping ore than has beneficiated ore, and only about 2 percent of the total shipments from the Mesabi Range in 1946 consisted of underground ore. On the other hand, practically all of the ore shipped from the Michigan and Wisconsin ranges, and a large portion of the ore from the Cuyuna Range, is underground ore. It is thus plain that any substantial reduction in the rate from the Mesabi Range would reflect itself in a like rate reduction or in reduced tonnage from the other ranges referred to in the Lake Superior region. These latter ranges are served by the intervening carriers, which are less prosperous than the Great Northern, and whose revenues would be seriously affected by a substantial reduction in the rates or tonnage from the ranges served by them.

General discussion and conclusions.-Iron ore furnishes the second largest volume of traffic on the railroads of the country. The bulk of the iron ore traffic to the upper lake ports is carried by relatively few railroads, including defendants and the intervening roads, which derive an important part of their revenues from this traffic. In the case of the Great Northern, iron ore to the upper lake ports constitutes about 45 percent of its total tonnage and conributes about 10 percent of its total freight revenues. The iron ore tonnage has fluctuated widely from year to year, not apparently because of the level of or any change in the freight rates, but because of changes in general business conditions,

particularly in the steel industry. The reserves of high-grade ore, while still substantial, are rapidly dwindling, and in time the low-grade ores must be made to supply most or all of the needs in this respect of the steel industry. When that time comes, it may be that the carriers concerned should be expected to contribute to the continued development of the low-grade ores by a reduction to their rates, but this record fails to show that the level of the assailed rate or charge has thus far retarded, or that it is likely to retard, to any serious extent the use of beneficiated ore. It is significant in this connection that, although a considerable number of producers ship their ore under the rate assailed, including some 13 producers of beneficiated ore, no other shipper of any grade of ore, from the Mesabi Range or from any of the other ranges, intervened in this proceeding.

Complainant's principal reliance is upon cost. The cost data of record, for the reasons previously given, are not convincing that the average revenue derived under the assailed rate and charge by the Great Northern in 1946. exceeded the costs, including return on investment, by more than a small margin, if at all. Detailed cost data for later years are not before us but from other data of record and from the periodic reports made to us by this carrier, as well as from our general knowledge obtained in proceedings wherein these and other carriers throughout the Nation sought authority to increase their rates and charges, we know that the percentage increase in the costs of labor and materials since then has been at least as great as the aggregate increase of 14.1 percent in the assailed rate and charge made in May 1948.

The costs as shown for the Duluth Missabe indicate that the assailed rate for that carrier is relative high, and its prosperous condition supports that view. However, we have repeatedly recognized in general revenue proceedings that the Duluth Missabe presents a special situation with respect to the iron ore rates to the upper lake ports. Its prosperous condition affords no reason in itself for requiring a reduction in the rate under attack. The weight to be given to its earnings must be evaluated along with the earnings from the iron ore traffic and the revenue needs of the Great Northern and of the intervening carriers. These latter carriers, as stated, are less prosperous than the Great Northern, and any substantial reduction in the rate assailed would have a serious effect upon their revenues. Moreover, complainant has not originated any shipments on the Duluth Missabe since 1944, and in that year, the latest period for which the facts are of record, only 6 percent of the total iron ore shipments over that road consisted of beneficiated ore.

From the cost and other data of record, including the comparisons with rates on other commodities, we are convinced that the rates and charges assailed have not been, and are not now, bearing an unjust proportion of the total transportation burden of the carriers affected.

We find that the rates and dockage charges assailed are not shown to have been or to be unreasonable. The complaint will be dismissed.

COMMISSIONER AITCHISON dissents. COMMISSIONERS ALLDREDGE, PATTERSON, AND Cross did not participate in the disposition of this proceeding.

APPENDIX

Analysis of complainant's cost study Complainant's studies are intended to show the costs of transporting iron ore by rail from the mines on the Mesabi Range in the State of Minnesota to the docks of the Duluth Missabe at Duluth, Minn., and the docks of the Great Northern at Allouez, Wis. The costs were computed on various bases for a number of years, as follows:

1. Costs were developed for the movement of iron ore by the Duluth Missabe for the years 1922-47 based on system freight operating expenses, rents, taxes, and passenger deficits, plus an allowance for return on the cost of the property (freight and passenger).

2. Costs were developed for the movement of iron ore by the Great Northern, based on system unit costs adjusted by the ratio that the cost per net ton-mile for the Mesabi division for the year 1925 bore to the 1925 system costs, for the selected years of 1930, 1936, 1939 to 1941, and 1944 to 1946.

3. Costs for the Great Northern were based also on Minnesota and Wisconsin freight operating expenses, rents, taxes, passenger deficits, and allowance for return, adjusted by the ratio that the cost per net ton-mile for the year 1925

« PreviousContinue »