Base Rates on Maximum Costs
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says C. L. Wheble, B.Com.(Lond.) Lecturer on Transport. City of London College and Chiswick Polytechnic Economics of Rate Fixing for Road Trans Port Require That Price Structure Shall Not be Influenced by Railway I)? actix SINCE the issue of the Transport Advisory Council's Report on service and rates in the road-transport industry, there has naturally been a good deal of discussion regarding the best means for giving effect to its proposals. On the one hand there are those who believe that statutory control of rates is the sine qua non of efficient organization of the industry. On the other hand, some operators consider that the baneful effects of statutory rates regulation would be incalculable and that only unfettered development will allow the industry to reach a stage where the needs of the public can best be satisfied. In point of fact, both these views may be correct, according to circumstances. There is 'general agreement that statutory control of rates for the A-licensee running long-distance services would be beneficial, both to the trader and the operator.
No Interference with C-licensees.
In the case of C-licence holders, however, it is realized that any interference with the natural growth in their numbers would be detrimental to the public interest. The situation as regards B-licensees (as representative of short-distance operation) is much more difficult, and any control of rates in this sphere of the industry is not likely until charges for long-distance haulage have been established on a satisfactory basis. It seems, however, that there has been a tendency to overlook the economic aspect of rate fixing in discussions of this kind. In considering the economic problems facing the A-licensee, it should be rioted at the outset that the questions of service and rates are necessarily inter-related. There is an underlying assunaption that the users of road, transport will be prepared to pay for a higher standard of service, providing reliability and regularity are accompanied by relative stability in rates.
Traders Will Accept Higher Rates. There is, in my opinion, no doubt that most traders are prepared to face the issue of higher 'rates, so long as they can depend on the service being suited to their particular requirements. In these days of intensive competition, both in wholesale and retail markets, the factors of reliability and regularity of service are frequently indispensable to the trader. Not less important is the question of stability of rates. This is especially the case where transport costs represent a large proportion of the selling price of goods. In businesses where the system of budgetary control is operative, it is necessary to forecast as accurately as possible all those costs which form an integral part of the selling price of articles, and stability of road-transport rates may be of considerable assistance in this direction.
Whilst these preliminary considerations are helpful in many ways, we are still faced with the real problem B30
of rate-fixing, namely, upon what principle, if any, shall rates be based? Is it advisable to adopt the railway principle of "what the traffic will bear," or should the factor of cost be kept uppermost in your minds? The elucidation of this problem is the real purpose of this article. Dealing first with the question of cost, it is hardly necessary to refer readers of The Commercial Motor to the excellent work of S.T.R. in the matter of operating costs of all classes of commercial vehicle. Nevertheless, the economic aspect of rate fixing is not particularly concerned with the operating costs of individual operators, because such figures will obviously depend upon the types of vehicle used and the classes of work performed.. ,. What is a "Marginal Operator"?
It is, however, the costs of the "marginal operator" which are so important an element in the economic problem. The vehicles of this type of haulier are those which are just required to satisfy the last portion of the demand for road transport on the long-distance routes, and he is called a marginal operator because, at the current rates, it only just pays him to use his vehicles. Does this conception have any real significance when applied to the question of the statutory control of rates? I believe it should, in fact, be the whole basis on which the rates structure is to be built. It must be understood that there are probably many marginal firms whose continuance in the road-haulage. business is of the greatest importance to -traders: In the long run, therefore, any rates which may be fixed should be adjusted so that the marginal operators can continue to pay their way. In other words, the criterion of cost, if used as a basis for a rates structure, should be the operating costs of hauliers who are least favour
.. ably placed. Base Rates on Ton-mileage.
• Even if this point be. conceded, there is still the question of individual rates to be settled. Here, again, the basis should be the operating experience of the . marginal firms and not tliat of the most efficient. It is suggested that, the basis of individual rates should be a scale of standard rates per ton-mile, on a similar plain to the scale of standard charges for goods by merchandise train on the railways. Before such a scale can be established it. will be necessary to make a careful statistical inquiry on the subject of the average load per mile and the average operating costs per mile for the marginal operators. From these data, figures indicating the average cost per ton-mile could be obtained. From a practical standpoint, arguments may be 'advanced that such a s,egregation of marginal firms would not be possible. This is perfectly true, but, provided that trained statisticians were employed, the difficulty could, no doubt, be overcome by the adoption of the " sample " and other methods of inquiry. By this means the operating costs of a number of firms could be obtained and the base figures indica.ted above could be calculated from the data collected for operators with the highest costs.
Let us suppose that satisfactory base figures can be obtained. Bodies responsible for the rates structure will have to face a further difficulty, namely, that of establishing a classification suited to the particular conditions in the road-haulage business. A classification of some kind seems to be indispensable.
Admittedly, a classification is a method of price discrimination based on " ability to pay," but it must be • realized that such discrimination frequently enables a service to be performed more efficiently, and at a lower cost for all users, than would otherwise be possible. However, a classification method of charging depends for its success on a high degree of monopoly, and for this reason I am of the opinion that not more than six classes should be adopted for road transport.
Undesirable Anomalies?
In view of the large number of operators in the business, even six divisions may produce undesirable anomalies and unfair competition as between One operator and another. For instance, if one operator could secure only the lowest class of traffic he could not continue in business for long. Adequate arrangements for a fair distribution of traffic would have to be evolved, and in this respect the clearing houses might perform a useful function.
Reductions in the rate per ton-mile as distance increases would be justified on economic grounds, because the law of increasing returns operates distinctly in the road-haulage business. For example, the operating costs of a four-wheeled 6-ton petrol vehicle, on the basis of 300 miles per week, are 10c1. per mile, whilst at 1,000 miles per week this figure falls to 6.83d.
Whilst the railways make a charge for terminal services on a tonnage basis, this method does not seem applicable to the road-haulage business. A more practical method would be a standing charge per hour, to cover the overhead costs of the vehicle when waiting to receive or deliver freight.
Bogy of Exceptional Rates.
A more controversial subject is that of exceptional rates, which, it seems, will be demanded by many large traders. If the percentage of traffic moving at exceptional rates approaches anywhere near the railway figure of 80 per cent., all the efforts at road-transport rate fixing will be rendered nugatory.
The experience of the railway, the rates of which are
established chiefly on the principle of " -to pay," because of the large proportion of 'fixed costs, should not be allowed to warp the minds of those responsible for initiating schemes for a road rates structure. In view of the predominance of the cost factor in road transport, a maximum of 20 per cent of the total traffic should be envisaged when dealing with the question of exceptional rates.
In concluding this examination of the economic aspect of rate fixing, a word of warning must be uttered. Statutory control and standardization of rates may be desirable, but let the road-transport industry beware lest controlled rates become so rigid that even permanent changes in operating costs will be unaccompanied by appropriate alterations in rates.