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This study, issued as information, has not been adopted by the Interstate Commerce Commission.

340 I.C.C.

INTERSTATE COMMERCE COMMISSION REPORTS

PREFACE

This publication was prepared in response to the Commission's order of December 11, 1970 instituting its Investigation of Railroad Freight Rate Structure, Ex Parte No. 270. It is the first completely priced-out rail burden study since Statement No. 6-64, Distribution of the Rail Contribution by Commodity Groups-1961.

Comparison of the results of this study with the results of the 1961 study would be improper for two reasons. First, the 1961 study was priced-out at the out-of-pocket and fully distributed cost levels, whereas the 1966 study uses the variable and fully allocated cost levels as prescribed by the Commission in Docket No. 34013, Rules to Govern The Assembling and Presenting of Cost Evidence. Secondly, the commodity groupings are dissimilar due to the Commission's adoption, effective January 1, 1964, of a new commodity classification.

A second rail burden study, covering the year 1969, is expected to be released in the near future. The 1966 and 1969 studies can be compared to measure shift among commodities in their relative contribution to the transportation burden. Completion of the 1969 burden study will be contingent upon receipt from the Department of Transportation of waybill data applicable to the year 1969.

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Revenue Contribution to Burden and

Other Data, by Commodity Classes and Territorial Movements, 1966

895-915

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INVESTIGATION OF RAILROAD FREIGHT RATE STRUCTURE

INTRODUCTION

The distribution of the rail revenue contribution by commodity groups for the Year 1966 was constructed using the same methods and procedures employed in the 1961 study and previously. Some modifications have been made in the development of costs. For example, the Commission's decision in Docket No. 34013, Rules to Govern The Assembling and Presenting of Cost Evidence, 337 ICC 298, contains findings with respect to cost levels and the elements to be included therein which differ from those employed in past studies. This study applies unit costs for the year 1966 to the service units incurred in handling the traffic covered by the Commission's one percent waybill sample for that year.' The resultant aggregate costs are then compared with the revenue for each commodity to determine the revenue contribution.

The term “revenue contribution”, as used in this study, refers to the amount by which carload revenues resulting from the rate structure in effect during the year 1966 exceed or fail to meet the variable costs. Revenue contribution is a function of costs, rates, and volume, and reflects not only cost factors but also the influence of demand for transportation, a value-of-service factor which is independent of direct cost.

COST LEVELS

Aggregate costs are shown at only the variable cost level. Revenue - Cost relationships however are shown at both the variable and fully allocated cost levels.

Variable costs represent those expenses which, over the long-term period, fluctuate with the volume of traffic handled. The variable costs are computed at 80 percent of the freight operating expenses, rents, and taxes. They also include an allowance for the cost of equity capital invested in transportation property plus interest on borrowed capital invested in transportation property. This allowance for the cost of equity capital plus interest on borrowed capital is applied to 50 percent of the road property and 100 percent of the equipment used in freight service. No provision is made in either level of costs for Federal income taxes.

Constant costs represent the remaining body of operating expenses, rents, taxes (other than Federal income taxes) and allowance for the cost of equity capital and interest on borrowed capital which are not included in the variable costs. Unlike previous studies of the rail revenue contribution, the constant costs do not contain the deficits caused by passenger-train service and less-than-carload service. The total constant costs were assigned to the various commodities on a pro-rata ton and tonmile basis regardless of kind or class.

The fully allocated costs in this study refer to the sum of the variable costs and the statistical ton and ton-mile apportionment of constant costs computed as described above.

UNIT COSTS

The unit costs used in this study were prepared by the Section of Cost Finding of the Bureau of Accounts by the application of the rail cost formula, Rail Form A,' to the annual freight operating expenses, rents and taxes and service units of the Class I railroads for the year 1966. These unit costs have not been published and differ from the unit costs published for the year 1966 in Statement No. 2-68, Rail Carload Cost

See Bureau of Economics' Carload Waybill Statistics, 1966, TD-1, Territorial Distribution, Traffic and Revenue hy Commodity Classes.

'Rail Form A has been published by the Bureau of Accounts as Statement No. 9-66. 340 I.C.C.

INTERSTATE COMMERCE COMMISSION REPORTS

Scales by Territories for the year 1966 because updated special study factors were substituted where appropriate in the formula used to produce these unit costs, and the findings in Docket No. 34013, supra, were implemented in the formula.

The variable costs reflect the average switching conditions and average train operations of the territories in which the traffic moved, the average weight of load, the average length of haul, the type of equipment and the empty-return movement of the equipment. It is believed that recognition of these transportation characteristics in the application of the costs is sufficiently representative of the costs incurred by the carriers for transporting the major portion of the commodity classes. Since only the territorial movements as a whole are under consideration, a special operating practice that would concern only a portion of a movement would not be as representative of the costs as are the territorial average conditions reflected in these costs.

Certain classes of commodities have individual characteristics which vary from the territorial average conditions reflected by this procedure. Specific recognition of such differences has been made by adjustments in the variable unit costs of the following commodities: iron ore (101), copper ore (102), bituminous coal and lignite (112), coke (33113) and railroad equipment (374) moving on its own wheels.

These adjustments are due mainly to movement in larger than normal size trains (way and through trains with a greater than territorial average gross ton weight of cars and contents, excluding cabooses), and a smaller than average amount of terminal switching service, and result in reductions in a portion of the costs in Region III, Official Territory, and Region VII, Western District. These reductions necessitated an offsetting increase in the costs applicable to the remaining traffic. A discussion of the adjustment of unit costs for specific commodities is contained in the ensuing paragraphs.

Commodity Class 101, Iron Ores

In the Western district the costs of handling iron ore were adjusted to reflect the cost and operating characteristics of two railroads in that district whose iron ore traffic was 87 percent of the total tons carried by them during the year 1966. Three components of terminal cost were adjusted to reflect the characteristics of these two roads, i.e.: Group IV, Carload switching expenses at origin and destination; Group VIII, Carload station clerical expenses; and Group XI, Train supplies and expenses. The line-haul costs were adjusted to reflect the train weights and length of haul in way trains of these two roads, and to reflect a 100 percent empty return of freight train cars.

The cost of movement of iron ore in the Official territory was adjusted to reflect the lower terminal cost for Group IV, Carload . switching expenses at origin and destination; Group VIII, Carload station clerical expenses; and Group XI, train supplies and expenses based on ratios previously developed. The line-haul costs were adjusted to reflect the heavier than average train weight for iron ore in the Official territory for way and through trains based on Verified Statement 177 in Ex Parte No. 256, Increased Freight Rates, 1967, 332 ICC 280.

Commodity Class 112. Bituminous Coal and Lignite

The cost of switching bituminous coal at origin and destination in Official territory and Western district was based on the relationship of switching minutes per equated car handling of four large coal hauling railroads in the Official territory to the regional average. The adjustments in terminal costs for clerical costs and train supplies and expenses in the Official territory and Western district, i.e., Group VIII expenses and

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INVESTIGATION OF RAILROAD FREIGHT RATE STRUCTURE

Group XI expenses, were based on the relationship of the two iron ore roads to the regional average in the Western district because it is reasonable to assume that the similarity of these two bulk commodities, iron ore and bituminous coal, result in similar handling costs.

The line-haul costs in the Official territory were adjusted to reflect the train weights of way and through trains based on two large coal hauling roads in the Official territory. This adjustment had the effect of increasing the average train weights for way and through trains because coal traffic is handled in trains that are heavier (gross tons of cars and contents excluding cabooses) than the usual way and through trains in the Official territory. This resulted in a decrease in the line-haul unit costs. No adjustment was made in the line-haul costs in the Western district.

Commodity Class 33113, Coke

The terminal unit costs for coke include the same switching adjustment in Official territory as bituminous coal. No other adjustments were made in the costs for coke.

Railroad Equipment Moving on its Own Wheels

For movement of railroad equipment on its own wheels at lawful tariff rates, the unit costs were determined separately because this commodity incurs different services from the usual traffic.

The terminal expenses incurred in moving this traffic are: Group IV, terminal switching of the revenue movement; Group VII, Station clerical; and Group XI, Train supplies and expenses and special services. Those omitted as not applicable are the Group IV, switching for spotting and pulling empty cars and the Group VI, freighttrain car expenses, road train to industries (origin plus destination).

In the line-haul unit costs, there is no provision in the cost per car-mile for tare weight of the car as the weight of the car is treated as lading and costed out using costs per ton-mile. The line-haul car costs omit freight-train car ownership costs and the expense of any empty return.

Commodity Class 102 Copper Ore

Copper ore moving from the mine to the smelter is thought to be a special type of movement and to differ from the average of other traffic in the Western district. In 1961 computation of the cost of transporting copper ore was done in detail to reflect differences in switching costs, station clerical costs, cost of special services and weight of train. For expediency, relationships in the 1961 study were applied to the 1966 costs to produce the specific costs applied to copper ore. In addition, the line-haul costs were computed with a 100 percent empty return of cars and were not increased for circuity.

COMPUTATION OF AGGREGATE COSTS

The variable cost of handling any particular traffic was determined by multiplying the service units developed in the carload waybill study by the appropriate unit costs and totalling the results. The unit costs were applied by type of car and by territorial movement.

The terminal unit costs used for interterritorial movements, i.e., Official to South, South to Official, Official to West, West to Official, South to West, and West to South, were based on one terminal handling in the origin territory and one terminal handling in the destination territory. The cost was obtained by taking one-half of the terminal unit cost in the originating territory and one-half of the terminal unit cost in

340 I.C.C.

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