less subject to substantial objection. It has been frequently employed. . . . It is the one to which the mind naturally turns in every problem involving the charging of common expense to different departments of a business. When a general or common expense cannot be located, what is more obviously reasonable than to say in the first place the different branches or departments shall bear it according to the value of their products of their gross earnings, and then make due allowance for exceptional conditions if any are perceived?"

The state courts have not unnaturally made such opposition as they could to the working out of a doctrine which almost inevitably in practice means that intrastate rates cannot be reduced so as to range on a parity with interstate rates in cost per mile. In one of the cases in the state courts the problem was discussed in this manner: 15

"The other issue the respondent has likewise failed to meet. Taking the figures from the brief filed by the respondent, we find that the local business alone produces a net earning of at least 3 per cent on the total value of the road in Florida, charging against such income the whole of the taxes. While a state is not permitted to offset local business against interstate business, and to justify low local rates by reason of the profitableness of the latter, yet the interstate and foreign business may and should be considered in determining the proportion of the value of the property of the company assignable to local business. There is no proper showing of the interstate and foreign business, so that we may determine on what fraction of the whole value of the property in Florida the company might be entitled to earn an income from local business. There is, however, a showing that the interstate and foreign business is large, and on a proper showing and a proper proportioning of the service between domestic and foreign business this percentage of net income would be largely increased. Under the scheme of distribution of the earning of the whole road between the several states through which it runs, a ton of Florida oranges or early vegetables is allowed the same credit as a ton of coal in Virginia, and no more."

In a more recent case in one of the state courts the same disposition to kick against the pricks is manifested. The Washington Southern Railway, as it appeared in the evidence in that case, although located wholly within the state of Virginia, was as a

15 State v. Atlantic C. L. R. Co., 48 Fla. 146, 148, 37 So. 657 (1904).

matter of fact operated almost entirely for interstate business. An order of the State Corporation Commission fixed a maximum passenger rate of two and one half cents a mile for all railroads within the state. At this rate, the plaintiff's intrastate traffic would not make a fair return on the capital invested, but the earnings from interstate business were sufficient to afford a fair return on the total capital. The plaintiff had been voluntarily doing its passenger business in Virginia, both intrastate and interstate, at an average of 2.35 cents per mile. The plaintiff appealed from the order of the Commission. The Virginia Court held 16 that the unreasonableness of the rate fixed by the Commission was not established. Not willing to deny the settled law that profits in interstate business cannot justify reduction of intrastate rates, the court attempted to make the distinction that the established rule cannot apply where the intrastate business is merely incidental, it being impracticable to determine on what proportion of the whole capital it should earn a fair return. But experience has shown that in any determining rates, capital simultaneously used in both classes of business may in some way or other be apportioned and the respective revenues may likewise be separated by casting some proportion or other. Apparently some such method should have been employed in this case; the result, however, may in the particular case have been right, on the ground that the company did not furnish sufficient data for making any computations. The court relied also on the adoption of similar rates by the railroad; but, except to strengthen the presumption of reasonableness, that cannot affect the constitutionality of the rates ordered by the Commission.

VI

The interblending of operations in the conduct of interstate and local business by interstate carriers is apparent. The same right of way, terminals, rails, bridges and stations are provided for both classes of traffic; the proportion of each sort of business varies from year to year, and indeed, from day to day. Attention was drawn recently to the extreme difficulty and intricacy of the calculations which must be made in the effort to establish a segregation of intrastate business for the purpose of determining the return 16 Washington So. Ry. Co. v. Commonwealth, 112 Va. 515, 71 S. E. 539 (1911).

to which the carrier is properly entitled therefrom. Yet, realizing all this, the Supreme Court said in the Minnesota Rate Cases 17 "But these considerations are for the practical judgments of Congress in determining the extent of the regulation necessary under existing conditions of transportation to conserve and promote the interests of interstate commerce. If the situation has become such, by reason of the interblending of the interstate and intrastate operations of interstate carriers, that adequate regulation of their interstate rates cannot be maintained without imposing requirements with respect to their intrastate rates which substantially affect the former, it is for Congress to determine, within the limits of its constitutional authority over interstate commerce and its instruments the measure of the regulation it should supply."

In the Minnesota Rate Cases there was no substantial dispute as to the amount of the entire revenue assignable to the state or as to its division between interstate and intrastate business, as an examination of the transactions in which the revenue was obtained permitted the making of the requisite apportionments with reasonable certainty. The master to whom the cases were referred then proceeded to ascertain the total expenses incurred by the carrier within the state in moving both interstate and intrastate traffic within its borders from the accounts of the company in a way found satisfactory. This expense was then divided between freight and passenger business according to a process subject to a certain per cent of error. Those items of cost which were directly incurred in each sort of business, and not common to both, were directly assigned; and such items were found to cover about sixty per cent of all expenses. The remaining items, those of common expense, were divided by the master between the freight and passenger business upon the ratio, as to most of them, of revenue trainmiles, and as to the other, of revenue engine-miles.18

The net profits of the interstate and intrastate businesses respectively, passenger and freight, were then found by deducting 17 230 U. S. 352 (1913).

But as was pointed out in the Shreveport Case, there are limits even in the present situation to the extent to which the state may by its orders put intrastate rates out of line with interstate rates. Houston E. &. W. T. Ry. Co. v. United States, 234 U. S. 342 (1914).

18 Compare to the same effect the working out of the problem in the Missouri Rate Cases, 230 U. S. 474 (1913).

the apportioned share of expense from the apportioned share of revenue, and the rate per cent of the net profit upon the property value assigned to each sort of business was computed. The master concluded that the returns from intrastate transportation were unreasonably low and hence that the rates in question were confiscatory. But, as the Supreme Court pointed out, the validity of this result depended upon the estimate of the value of the property within the state and the apportionments both of value and of expense between interstate and intrastate operations. On the method of appraising property, it was held that certain elements of value largely relied upon by the master were not to be regarded in regulation of rates. And furthermore it was held that, where the constitutional validity of state action is involved, general estimates based upon arbitrary ratios of division between interstate and intrastate business cannot be accepted as adequate proof to sustain a charge of confiscation.1

19

Having thus ascertained the share of the expense within the state of the freight and passenger departments respectively, it remained to divide that share, in each case, between the interstate and intrastate business. This apportionment was made by the master, in the case of freight expense, upon what was termed an "equated ton-mile basis"; and in the case of passenger expense upon an "equated passenger-mile basis." That is to say, the master concluded that the cost per ton-mile of doing the intrastate freight business was at least two and one half times the cost per ton-mile of the interstate freight business, and hence he divided the total freight expense according to the relation of the interstate and intrastate ton-miles after the latter had been increased two and one half times. In the case of the passenger expense, he concluded that the cost per passenger-mile in the intrastate business was at least fifteen per cent greater than that in the interstate business, and the total passenger expense was divided upon the relation of passenger-miles after increasing the intrastate passenger-miles fifteen per cent. By the use of equalizing factors, the same result was obtained upon what was called an "equated revenue basis." But the Supreme Court insisted that there was not sufficient justification by any evidence in the record to support the master 19 See also Pennsylvania R. R. v. Philadelphia Co., 220 Pa. St. 100, 68 Atl. 676 (1908).

in his assumption that the cost of doing intrastate business was so out of proportion to the cost of moving interstate traffic.20

VII

Even in a complicated business such as railway transportation, it ought to be possible to determine the peculiar cost of a particular service with some degree of accuracy. The first difficulty that presents itself, as has been seen, is that the ordinary railroad is engaged in at least two different businesses, the transportation of freight and the transportation of passengers, with their costs intermingled. Now, many of the particular costs of moving traffic can be separated the wages paid the train crews of freight trains from those paid to the train crews of passenger trains, and the fuel burned by freight locomotives from that burned by passenger locomotives, to take two important items. Moreover, to a certain extent the entire expense of transportation may thus be judged from the sums expended in operation. When the average amount expended in moving typical quantities of a given commodity is known, a standard is established by which it may be seen whether there is not a full return to the railroad of the entire cost attributable to the transportation of these goods. It would be wrong upon any theory to ignore the cost of service, in so far as it may thus be estimated; for to serve some shippers for less than the special costs of serving them would be plainly unfair to other shippers, who would almost inevitably be called upon to make up the deficiency.21

When the separable costs of operation have thus been distributed to the different kinds of services rendered, it will be found that from something like 662% per cent of the total expenditures for which the company should be recouped have been thus accounted for, the percentage depending upon the kind of business in general and the accounting of the company in particular. This determination of nearly two thirds of the average cost for particular services 20 See Morgan's L. & T. R. & S. S. Co. v. Railroad Commission, 127 La. 636, 53 So. 890 (1910).

21 Northern Pacific R. R. Co. v. McCue, 35 Sup. Ct. 429 (1915).

It has been made clear by the Supreme Court for some time that it would not permit the Interstate Commerce Commission to set aside a rate which was giving the railroad only the cost of the service, fairly proportioned. Interstate Commerce Commission v. Stickney, 215 U. S. 98 (1909).