2. Total expenses were also changing from 1964 through 1968. First, more aggregate amounts of labor, material and equipment were required to provide this added freight service although the incremental costs would be lower than the relative traffic increases. Second, technological changes reduced expenses; for example the number of employees declined 11 percent, average weight of carload freight increased 9 percent, and average miles per car day increased 7.8 percent. It is unlikely that similar economies were effected in passenger service. Third, unit costs of material and labor rose significantly. All materials, including fuel increased 9.3 percent while basic hourly wage rates were up 22 percent. On balance, to ascertain what savings were made by the discontinuance of passenger service would require the isolation of costs due to changes in freight traffic, productivity, and price increases. The determination of whether an increase in freight expense was caused by a proportionate (or disproportionate) increase in freight traffic, wage and price level changes, or expenses formerly charged to pasenger service which could not be avoided, is an extremely difficult task.

3. Savings would also have to be adjusted for significant cyclical fluctuations in both passenger and freight expenditures for repair and track maintenance functions, and for abnormal variations.

4. The common indicator of the expenses of passenger train operations and frequently the only source of information is the carriers' annual report to the Commission. Such reports do not show individual train data. Those reports also do not differentiate between available (savable or out-of-pocket) costs on the one hand and fully allocated costs on the other. Moreover, any projections using annual report expenses would have to be adjusted for price increases. Revenue changes would also have to be related to specific trains and adjusted for rate increases.

5. Projected savings in section 13a cases could serve as a possible starting point for examining actual savings. However, the submitted data frequently lacks the required detail for subsequent review. More importantly, section 13a presentations are usually conservative from the standpoint of the types of costs the carriers ordinarily include.

In order to minimize attacks on their evidence, many carriers have offered only the most obvious types of costs, i.e. repairs, fuel, crew wages, supplies, station and terminal savings, etc. Not infrequently, the Commission may substantially reduce these estimates on the ground that a carrier has not produced sufficient evidence. For example, in Southern Pac. Co. Discontinuance of Trains, 334 I.C.C. 159 at 174, no savings were recognized for labor involved in repair and servicing functions. The question, really was not whether there would be a saving, but rather how much; for patently a substantial portion of the disallowed $697,000 would have been savable. In other instances, reductions in carrier estimates have also been designed to reduce any questionable portion of a particular expense to the point where there would be little debate about the probability of the adjusted figures. Seldom, if ever, does the Commission allow the carriers to credit any savings for the return on the salvage value of equipment (a rate of return element is considered in freight out-of-pocket costs), track maintenance, superintendence, or significant amounts of general expenses incurred for passenger service for empolyees whose work is also associated with freight operations.

BACKGROUND OF THE DISCONTINUANCE OF THE FRISCO'S PASSENGER SERVICE

Despite the inherent limitations set forth above, we felt we could proceed to valid and useful conclusions with the Frisco Railroad as the subject, because (1) it had records on the savings it had achieved, (2) it had presented some of the most detailed cost evidence ever offered in section 13a cases, (3) the efforts of discontinuing trains in 1965 could be reviewed, in part, by data submitted in later cases involving the remaining two pairs of trains, and (4) the last pairs of trains were discontinued in 1967 thereby providing sufficient time for the carrier to estimate its eventual annual savings.

1 In addition, payroll taxes and other supplemental employee benefits increased at an even more rapid rate.

FRISCO PASSENGER SERVICE 1964 THROUGH 1968

Throughout 1964, the Frisco operated six pairs of regular passenger trains. Trains 105 and 106 provided service between Kansas City and Birmingham-a distance of 737 miles. Trains 107 and 108 offered duplicate service over the same route. Trains 3 and 4 ran between St. Louis and Oklahoma City for a distance of 541.8 miles, with Trains 9 and 10 serving the same points. Trains 709 and 710 operated 133.5 miles between Fort Smith, Arkansas, and Monett, Missouri, on a schedule that permitted transfers to Trains 9 and 10. Trains 807 and 808 operated between St. Louis and Memphis, a distance of 305.4 miles. Frisco also contracted for bus service between Lawton, Oklahoma, and Oklahoma City, to connect with Trains 9 and 10.2 In addition, Frisco operated a "mixed" train between Clinton, Missouri, and Kansas City, which offered passenger service but was primarily used for the movement of baby chickens in express service and U.S. mail.

On March 15, 1965, the Frisco filed notice that it proposed the discontinuance of all six pairs of regular passenger trains. The Commission instituted an investigation and in St. Louis-S.F. Ry. Co. Discontinuance of Trains, 327 I.C.C. 433 (hereafter referred to as 1965 Frisco case), it required the operation of Trains 3 and 4 and 107 and 108 after the Frisco had offered to run these trains as an alternative to total discontinuance. The "out-of-pocket" losses for each of the six pairs of trains as claimed by the Frisco are shown below with the adjusted totals approved by the Commission in the last column. Frisco's computations were based on the assumption that only 61.1 percent of its total passenger expenses as reported to the Commission would be savable."

In its adjustments, the Commission reduced the claimed savings from $1,413,756 to $61,067 for less than complete discontinuance of the six pairs of trains. The reductions resulted from two areas: traffic expenses and terminal savings.

The Commission reduced the carrier's claimed losses because it found that the salary of various traffic employees was not an out-of-pocket expense and therefore the $80,533 savings for Account 351, related to superintendence. $47,926 savings in Account 352, related to agencies, would not materialize.*

Commission approval of the carrier's counter proposal to keep two sets of trains in operation, in effect required modification of the proposed out-of-pocket terminal savings although they had been properly computed on the basis of total discontinuance.3

Joint passenger terminal expenses claimed as out-of-pocket expense were payments made on a use basis. Terminal expenses of $1,224,230 were disregarded by the Commission on the ground that they would not be savable unless the Frisco discontinued all passenger trains using particular terminals. For a discussion of 1964 terminal savings, see Appendix A, attached hereto. A synopsis of the claimed savings trains involved, method of billing and percent of Commission reduction with respect to each terminal follows:

2 The contract was established May 15, 1963, as a condition precedent to allowing the Frisco to cease train operations to Lawton.

3 Total expenses include operating expenses, rents and taxes.

41965 Frisco case, page 439.

Ibid., page 440.

Ibid, page 441.

51-728 0-71-pt. 2- -12

Trains 3 and 4 were renumbered as 1 and 2 and continued to operate between St. Louis and Oklahoma City during 1966. On November 23, 1966, the Frisco filed a notice of discontinuance for these trains under section 13a. An investigation was held and the discontinuance became effective shortly after. St. Louis-S.F. Ry. Co. Discontinuance of Trains, 330 I.C.C. 619 was decided on April 24, 1967. Savings claimed by the carrier were $768,553 on an estimated out-of-pocket basis. A comparison of the carrier's estimated savings, by major accounts, for 1964 and for the 1966 experience year are attached, as Appendix B. It should be noted that the average consist of Trains 1 and 2 was eight cars compared with six cars for Trains 3 and 4. (A buffet car and express car were added.) In 1966 both revenues and expenses reflect the effects of added traffic most of which came from discontinued Trains 9 and 10. Terminal costs also increased for the same reason and because of higher unit costs created by fewer trains. Additionally, the basic hourly wage rate for the Frisco from 1964 through 1968 went up 11 percent and the cost of material was 2.5 percent higher.

The savings estimate of $768,553 was reduced a total of $114,498 by the Commission. Injuries to persons (Account 420) were reduced by $18,124 to reflect a three year average rather than the abnormally high level of the experience year. Depreciation on passenger equipment of $42,175 was disallowed under “unusual circumstances," namely, that the difference between the net book value and resale price woud be charged to the depreciation reserve account. A miscellaneous deduction of $319 was also required. In addition, $53,880 was deducted for the feeder value of Trains 1 and 2 to the remaining two trains."

In November 1966 Trains 101 and 102 (formerly Trains 107 and 108), were also proposed for discontinuance in Finance Docket No. 24384, but within a month, the Frisco withdrew the discontinuance notice. At that time, the carrier was able to show out-of-pocket losses for the preceding 12 months of $138,613, an amount which, though substantial, was considerably less than the deficits of the prior years. For 1964 the Frisco had estimated losses of $163,014 on a comparable basis." The 1965 loss was $309,570.12

10

The withdrawal of the notice stemmed from two factors: an expectation of additional mail revenues to erase the losses and a realization by Frisco that the most recent data would show lower losses than it had expected. But after another year, the augumentation of mail revenues failed to materialize, and even worse, the Railway Post Office cars had been removed from these trains. As a result, another notice of discontinuance was filed (in Finance Docket 24809), and was allowed to become effective upon the carrier's showing that, the losses

7330 I.C.C. 619, 636–637.

8 Ibid. Page 632.

It was estimated that Trains 101 and 102 would lose revenue from passengers who used Trains 1 and 2 as connections. Citing Chicago & N.W. Ry. Co. Abandonment, 282 I.C.C. 525. 531-532 and subsequent cases, it was estimated that expenses on Trains 101 and 102 could be reduced by 50 percent of the feeder revenues. See 330 I.C.C. 619, 629–630. 10 See Finance Docket No. 24384-Statement in Relation to Proposed Discontinuance of Train Service, Exhibit A-23. The prior 12 months covered the period from October 1, 1965, through September 30. 1966.

11 1965 Frisco case, Appendix G, pp. 473–474. After the four sets of trains were discontinued, the costs of terminal and station expenses to Trains 101 and 102 (then 107 and 108) would have been higher. Therefore, $163.014 as an estimate of loss from future operations seems unduly low, particularly when consideration is given to the fact that at a later date Trains 101 and 102 were to be one of the two remaining pairs of trains. Out-of-pocket expenses listed in Appendix G are based on simultaneous discontinuance of all passenger service. Also see Appendix A of this letter.

12 Finance Docket No. 24384, Exhibit A-12.

in mail revenues, among other things, would increase the deficit on these trains to $944,000 per year. Appendix C hereto shows the losses for Trains 101 and 102 for 1964, 1966, and 1967.

Following the 1965 Frisco discontinuances, a number of factors occurred which could not reasonably have been projected at the time of the Commission decision but which significantly affected the savings the Frisco achieved. We have therefore divided the analysis of savings into several areas:

I. Adjustments that could have been anticipated:

(a) Increased savings.

(b) Decreased savings.

II. Adjustments due to unforeseen factors:

(a) Changes in the transportation of mail and express.

(b) The general upturn in wages and prices.

III. Effect of passenger discontinuance on

(a) Income tax.

(b) Property tax.

IV. Non-quantifiable items.

V. Summary and conclusions.

To provide a lucid presentation of the effects of discontinuing passenger service, we have assumed that at the time of the 1965 Frisco case, no counterproposal was made and therefore total discontinuance was achieved. This was done for several reasons; (1) detailed cost evidence was provided in the 1965 Frisco case, (2) the effect of discontinuing trains in 1965 could be reviewed, in part, by data submitted in later cases, (3) the intermingling of data from three train discontinuance proceedings would make it difficult to isolate the many factors that must be discussed.

13

With the exception of terminal expenses, the loss estimate accepted by the Commission in the 1965 Frisco case is used as a base upon which adjustments are made as we proceed toward a determination of the actual savings. Inasmuch as total discontinuance is assumed, terminal expenses disallowed in the 1965 Frisco case are accepted for this presentation." Estimated savings, unadjusted for wage and price increases, will be shown for the year 1968, the first full year after the passenger train discontinuance.

1965 FRISCO CASE

I. Adjustments That Could Have Been Anticipated

(A) Increases in savings were determined to be $347,227; detail is supplied below:

(1) Account 351-Superintendence (Traffic) and Account 352--Outside Agencies were increased by $88,130 and $32,764 respectively to reflect the wages of 15 employees who were engaged 100 percent in passenger operations during 1964.

(2) Account 392-Train Enginemen and Account 401-Trainmen-Wages were each increased by $73,000. The Frisco estimate for all 12 trains in 1964 was approximately $73,000 less than actual payments for each account because the projections were based on straight time earnings for a normal crew consist. This method of projecting wages understated actual crew cost due to the exclusion of constructive allowances such as terminal delays, mishandlings and deadheading, etc.

(3) Account 452-Salaries and Expenses of Clerks and Attendants was increased by $39,033 to reflect the abolishment of seven positions that had not been considered in previous estimates of savable expenses. The positions abolished were one each of the following classes of employees, machine, dictaphone, and key punch operators, filer, ticket filer, hand ticket filer, and timekeeper. (4) Health and Welfare Benefits were increased by $15,296 to reflect additional savings in wages identified in items (1), (2), and (3) above.

(5) Payroll Taxes were also increased to reflect additional labor savings identified in items (1), (2), and (3) above. The increase was $26,004.

(B) Decreases in Savings were determined to be $83,455; detail is supplied below:

13 327 I.C.C. 433, Finance Docket No. 23547 (also embracing Finance Docket Nos. 23548, 49, 50, 51, and 52), 330 I.C.C. 619, Finance Docket No. 24383 and Finance Docket No.

14 Appendix D attached.

(1) Account 102-Passenger Revenue was increased by $9,685. This amount was originally deducted from Account 102 in projecting lost revenues. However, related expenses were not adjusted. The revenue resulted from a bus operation (Mid-Continent Coaches, Inc., and Oklahoma Transportation Company), between Oklahoma City and Lawton, Oklahoma that connected with Frisco trains 9 and 10 operating between St. Louis, Missouri and Oklahoma City, Oklahoma. (2) The savings were further reduced to reflect the added cost of handling company mail and personnel that formerly moved in passenger trains. Additional expenses based on the discontinuance of the last two pairs of trains in 1967 were estimated at $64,290, separated between handling a company mail at $9,490, and moving company personnel via company owned buses and private autos at $54,800.

(3) Under provisions of a February 7, 1965 Mediation Agreement payments amounting to $9,480 annually are being paid to former dining car waiters. These payments are a further offset to savings.

II. Adjustments Due to Unforeseen Factors

(A) Retention of mail and express revenue:

(1) The Frisco estimated that 62.2 percent of the 1968 mail revenue of $682,642 from piggyback service was formerly handled in passenger train service. A recent Frisco study indicates that the out-of-pocket cost of handling mail and express in piggyback service on freight trains is approximately 50 percent of the revenue. This coincides with the conclusion reached in our intercity passenger train report of July 1969.5 For the eight carriers analyzed in that report, the cost of handling retained revenues was determined to be 48 percent.

(2) Frisco also estimated that 34 percent of 1968 express revenue of $1,597,931 from freight trains was formerly handled in passenger trains.

(3) Inasmuch as the Frisco, in its discontinuance proceeding, considered all mail and express revenues as being lost, the net effect was to realize approximately $483,949 in savings not previously anticipated. Stated differently the Frisco understated their projected savings by approximately $483,949 by not considering the mail and express revenue retained in freight train service.

(4) The following is offered not as a basis for a specific adjustment but merely to illustrate the effect of the changing transportation policies of the Post Office Department and REA Express, Inc., on the overall passenger operation of the Frisco.

In the 1965 Frisco case, net out-of-pocket deficits were shown for each of 6 pairs of trains. Had certain of these trains continued to operate, their losses would have been even greater in subsequent years due to cancellation of mail and express service. For example, on June 13, 1965, one Railway Post Office car was discontinued on Trains 3 and 10 between St. Louis and Monett at an annual revenue loss of $69,477 each and on August 29, 1964, Railway Post Office service was discontinued on Trains 3 and 4 between Monett and Oklahoma City resulting in an annual revenue loss of $111,000. During the period August 20, 1967, to October 29, 1967, Trains 101 and 102 (then the only remaining Frisco passenger trains) suffered an estimated annual mail revenue loss of $535,772. The loss of these revenues was an actuality, not merely a projection, at the time the trains were discontinued, and was a matter not affected by the subsequent disposition of the trains.

(B) Increased Operating Costs The effect of wage and price increases is not reflected in data presented in this report. Indexes supplied by the Frisco could not be applied due to a lack of necessary detail. Rather than employ a regional wage and price index, the expenses were not adjusted. However, to

15 Investigation of Costs of Intercity Rail Passenger Service, July 16, 1969.