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Of course there was not very much of this character of competition during the war, with everybody being as busy as they could be handling the war load, but when this question was brought up again after the war, the Commission in a decision known as the New Automobile case, in 159 I. C. C., undertook to review its entire approach to this problem, and reached the conclusion.
If you will pardon me a second, gentlemen, I would like to read the exact language used by the Commission when it reviewed its approach to this whole problem.
Mr. HARRIS. Is this a very lengthy statement?
This is at page 538 of the Commission's decision in New Automobiles in Interstate Commerce (259 I.C.C.):
As Congress enacted separately stated ratemaking rules for each transport agency it obviously intended that the rates of each such agency should be determined by us in each case according to the facts and circumstances attending the movement of the traffic by that agency. In other words, there appears no warrant for believing that rail rates, for example, should be held up to a particular level to preserve a motor-rate structure, or vice versa.
In that decision, the Commission recognized that there had been many deviations from that rule in the past, and undertook to set the pattern and standard for the future.
But the ink on that decision was no sooner dry than it began again to deviate.
Mr. Harris. To carry that further for just a very brief moment, and to assist me in my own thinking about this zone of reasonableness in ratemaking, let me see if I understand it correctly.
Do I understand you to say that the maximum rate would be one which would be not below the full cost of performing the service, and on the other hand the rate could well be above the full cost of performing the service? Would you say that is a correct interpretation of your position?
Mr. LANGDON. No, sir. If I understood you correctly, in describing your maximum rate, you have described what was recommended in the Cabinet Committee report as the standard for maximum rates. We do not agree with that and do not advocate any change in the maximum rate rule or the maximum rate standards that the Commission has been employing.
Mr. HARRIS. I know that, but in your discussion you outlined what would be the effect of these changes regarding the maximum and minimum rates. You referred to the zone of reasonableness, I believe, in your statement in discussing the Commission recommendations.
Mr. LANGDON. Yes, sir. Maybe I can make it clear, sir.
Mr. LANGDON. The maximum under our proposal here, sir, would continue just exactly as it is today. That is undefined. There is no statutory language at present in the Interstate Commerce Act which says what reasonable maximum rates are. The only standards that you have for reasonable maximum rates are the standards that you gain by reading the decisions of the Commission. They generally are standards which reflect, to a certain extent, what the traffic may reasonably bear. They reflect also the use of analogy. If you have a rate on commodity X which is comparable to commodity Y, and the rates on commodity Y have previously been fixed by the Commission,
the chances are that you will get, maybe, the same level on commodity X. But there is nothing in the statute today, nor do we advocate there should be, any definition of what a maximum reasonable rate is, sir.
Mr. HARRIS. How about the minimum? Does the same answer apply? Do you mean, then, the minimum rate should be one which is compensatory?
Mr. LANGDON. Yes, sir.
Mr. HARRIS. Do I understand the meaning of compensatory to be the actual out-of-pocket expense only?
Mr. LANGDON. No, sir. A reasonably compensatory rate, if I may read--and I adopt it—the Commission's definition of a reasonably compensatory rate, it is the rate which covers the variable costs over a long period of time, the out-of-pocket expenses, plus a contribution to the overhead.
Mr. HARRIS. Plus a contribution?
Mr. LANGDON. Plus a contribution to the overhead; yes, sir. In other words, we do not want to make rates on the level of our out-ofpocket costs because, of course, to do so we just take in a new dollar for an old. We want to gain in our net revenues as a result of these competitive rates.
The result is that any rate that we propose in order to be compensatory must not only cover the cost that is associated with the movement of the traffic, a cost which would not be there unless the traffic moved, over a long period of time—and incidentally that would include a partial return on investment-plus a contribution to the overhead on net revenues. That is the approach, sir, that we make to a reasonably compensatory rate, and I think it is the approach that the Commission would employ, sir.
Mr. HARRIS. And that includes a profit, of course? Mr. LANGDON. Yes, sir. Mr. HARRIS. What do you mean by "out-of-pocket cost"! I think I know, but I want to hear your explanation.
Mr. LANGDON. There are two types of out-of-pocket cost, sir. There is the out-of-pocket cost which varies with the traffic as it moves tomorrow, let us say, the short-term out-of-pocket cost, the additional cost to which you are put because that added car is in the train. Then there is the out-of-pocket cost—and this is the only type that is worth thinking about and the only type that we are interested in—which measures the variability of the costs over a long period of time. In other words, you get new traffic, and it is the cost that is incurred in connection with the movement of that new traffic over a long period of time, including a return on the investment in the cars that are necessary to carry it, including a pro rata contribution or share of the maintenance expenses of the track, and so forth.
I think for all intents and purposes, we in the railroad industry are perfectly prepared to accept the Commission's definition of out-of. pocket cost. They take all of the operating expenses, rents, and taxes, minus the income taxes, and they apply 80 percent to it, and then they add a 4 percent return on the equipment, and then they add a 2 percent return on the road property, and then they add in your income taxes, and then, finally, they relate the expenses to the service units, and that is your out-of-pocket expense. That is the Commission definition.
It is a long-term, out-of-pocket variability. The ICC arrived at
that 80 percent figure by looking at the effect on expenses of changes in traffic over a long period of time, and they came to the conclusion that generally speaking, those expenses varied in the ratio of 80 to 100. For that reason, they have been employing in their cost formula, which is very widely used nowadays, 80 percent of all operating expenses, rents, and taxes, plus this partial return on investment, plus income taxes, and that is, generally speaking, the out-of-pocket cost approach of the Commission.
We would, sir, certainly want rates no lower than that, and we would want something representing a contribution, certainly, above the average yardstick.
Mr. HARRIS. That is very clear. It is certainly information which I am glad to get. I have this final question which may be the $65,000 challenge. You are recommending changes in section 15 to implement the basic policy of the Cabinet Advisory Committee report. As I understand, this would give you a more equal opportunity with other modes of transportation, meaning that you would be in a position to publish lower tariffs under certain conditions to compete with other modes of transportation. That, to me, so long as it is compensatory, from what I understand compensatory is, seems to me, when the public can be benefited by it and the other shippers would not be adversely affected it, to be desirable.
I may be wrong: I am certainly going to give it more consideration as we go along in these hearings.
But, at the same time, you are asking for the opportunity of providing reduced rates to certain shippers to meet these competitive conditions, and there is a constantly requested increase for rates to all the shipping public. If I remember correctly, I saw a few days ago the ICC granted a 5-percent increase to rates of the railway. It does not seem consistent to me to advocate on the one hand the right to reduce rates when, by its own action on the other hand, it is seeking authority to increase rates. That is my problem. If you can help me any, I would be appreciative of it.
Mr. LANGDON. Of course, sir, to the extent that we can reduce rates and thus improve our net revenue position, our need for increased rates to offset these staggering labor bills that we get periodically nowadays will be reduced. To the extent that we can spread the burden of our transportation over more and more traffic, the traffic that we should hope to get back, or at least retain,
to that extent our need for these periodic rate adjustments will be affected, obviously.
You see what is happening is this transportation of ours, and I mean by burden the expense of doing the business, it is increasing all the time, and we have a relatively smaller part of the pie all the time over which to spread it. If we can increase the part of the pie over which we can spread these increased costs, that, in turn, will obviously affect our need for increased revenues.
What is happening now, sir, if I may make this concluding observation, is this: If the present trends continue in the railroads share of ton-miles, 10 years from now, while the country's total ton-miles will be up roughly 22 percent, assuming the same trend since the war is maintained during the next 10 years, our share will be down to a point that will be roughly 11 percent less than our absolute ton-mile level was last year. Moreover, if these expenses of ours continue to grow at
the same rate as since the war, 10 years from now they will be up 33 percent.
So we will have 11 percent less traffic than we had last year over which to spread, according to these trends, an increase in expenses of 33 percent.
The only way, as I see it, that we possibly can survive in those circumstances is to be allowed to ride with the country, to take our proportion of this increase. We are slipping all the time, and we are slipping to the point where it is a dying industry, there is no doubt about it. It is a question of time; 10 years from now, as I say, the only possible way that we can absorb this continuing increase in expenses is to be able to participate in the traffic of the country as it increases.
This proposal here may not be successful, but at least we want an opportunity to be able to make our rates on the basis of our conditions.
Mr. Harris. Thank you very much. I want to again commend you for your presentation here this morning.
Obviously, you have demonstrated here your familiarity with these problems, and your knowledge of these very complicated conditions and situations that exist. Therefore, we appreciate your giving us the benefit of your experience and this information.
Mr. LANGDON. Thank you, Mr. Chairman and members of the committee.
Mr. Harris. Mr. Fort, I believe you will be the next witness.
Will there be any other witness of the railroad industry, of the association, besides yourself?
Mr. FORT. No, sir, not unless at some later date. Not at this time. We plan no further witnesses.
Mr. HARRIS. The committee will adjourn until 2 o'clock, at which time we will be glad to hear you.
May I inquire how long your statement will be ?
Mr. Fort. I think the direct will be perhaps an hour or an hour and a quarter. Mr. Harris. Very well.
(Whereupon, at 12:20 p m., the committee recessed, to reconvene at 2 p. m., the same day.)
Mr. Harris. The committee will come to order.
Mr. Fort is our next witness. You may resume where you left off this morning, Mr Fort.
STATEMENT OF J. CARTER FORT, VICE PRESIDENT AND GENERAL COUNSEL OF THE ASSOCIATION OF AMERICAN RAILROADSResumed
Mr. FORT. My name is Carter Fort. I am vice president and general counsel of the Association of American Railroads with headquarters here in Washington. That association is a voluntary, unincorporated organization including in its membership railroad companies operating more than 95 percent of the total railroad mileage in this country
and having operating revenues which are more than 95 percent of the total railroad operating revenues.
I appear today in response to the notice dated March 26, 1956, which announced that your subcommittee would hold hearings on H. R. 6141, and related bills, “incorporating the recommendations made in the report of the Presidential Advisory Committee on Transport Policy and Organization.” That notice stated that these hearings represent a continuation of the preliminary hearings held by your subcommittee last September during the recess of the Congress "at which time an explanation of the report was made by the Advisory Committee members, and by representatives of the four transport industries involved."
As Mr. Jervis Langdon, Jr., has just told you, the railroad industry endorses and supports, in general, with certain reservations he noted and with certain additional reservations that I shall note, the purposes and objectives of the several recommendations of the Presidential Advisory Committee on Transport Policy and Organization as those recommendations are proposed to be implemented by the provisions of the identical bills, I. R. 6141 and H. R. 6142. I say "in general” because the railroads take no position at this time as to the recommendations in the report and provisions of the bills that relate to special rates for Government transportation and to exemption of certain shippers or shipper associations from freight forwarder regulation; and they do not advocate at this time certain of the other proposals including, for example, the suggested changes in the provisions of the Interstate Commerce Act relating to maximum rates and some features of the proposed modification of those provisions of law dealing with the suspension of proposed rates.
There are also other features which were mentioned this morning by Mr. Langdon and additional features which I shall mention a little later.
In his statement Mr. Langdon dealt specifically with those recommendations of the Advisory Committee and implementing provisions of the pending bills that have to do with the regulation of carriers' rates by the Interstate Commerce Commission, especially in the field of competitive ratemaking. He stated the railroads' position as to all of these matters. It is my purpose to discuss the Advisory Committee's other recommendations and their proposed implementation, omitting of course discussion of those matters as to which I have indicated the railroads would take no position.
Before doing so, however, I should like to point out that while the Advisory Committee's report is of broad scope it fails to deal with many matters highly important to a long-range and comprehensive revision of Federal transportation policy. (When I speak of Federal transportation policy there, I am not referring merely to the declaration of policy.) The report and bills fail to deal with such matters of first importance, for example, as subsidies and other public aids received by competitors of the railroads, including subsidies that result from the failure of Government to impose adequate charges for the use of publicly provided and maintained facilities for transportation by highway, inland waterway, and air. They fail to deal with the limitations under existing law, as it has been administered by the