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In every case, that I have been able to find, in which the Commission has fixed as a minimum rate a rate above the out-of-pocket cost of the proponent carrier, it will be found that it was done because of the effect upon the distribution of the transportation burden and other elements of ratemaking, and not at all for the reasons assigned by my learned friend on the other side.
Nevertheless, although that power has not been used in the 15 years which the Commission has had it, I believe that it is vital to effective regulation that the Commission continue to have the power to consider the effect on competing carriers and modes of transportation of minimum rates which may be prescribed.
I do not think I am quite alone. I obtained this morning a copy of a petition for suspension. It is now pending before the suspension board of the Commission. It was filed by the Western Trunk Line Committee, a railroad committee. It was against a tariff filed by tht Grain Belt Transportation Co., and the commodity rate was on tractors and parts in straight or mixed carload from Charles City, Iowa, to points in Oklahoma.
I want to read you the reasons which the railroads requested that this rate be suspended, and I am quoting exactly:
It will be noted in the attached exhibit that the proposed truck rates range from 17 to 22 cents per hundred pounds under the rail rates to the representative destination shown. Your petitioner is unaware of any carrier or commercial competition necessitating rates on as low a basis as here proposed. And it is evident that if they are allowed to become effective, rail carriers would be precluded from any participation in this traffic.
There are your three "shall nots,” every one of them in reverse, in that paragraph. That is what the railroads practice. You have been hearing what they preach.
Competitive rate cutting leads inevitably to discrimination. The history of regulation under the Interstate Commerce Act provides myriad examples of the necessity for governmental control of carrier selfishness in order to prevent preference of the large shipper and discrimination against the small shipper.
All of the major rate proceedings have revealed the tendency of uncontrolled carrier management, whether of rail, water or highway carriers, to respond to the pressure and demand of the big and important shippers or receivers, many of whom have publicly espoused the principles of these bills, in derogation of the interests of the small shippers and receivers and of the smaller and relatively less important communities or localities. These bills would not only restore the uncontrolled competitive ratemaking which existed prior to the Interstate Commerce Act, but would remove any effective remedy for discriminatory pricing by the carriers.
Prior to the enactment of section 15a the courts held that under section 3 of the present act that upon a finding of discrimination the Commission had only the power to condemn the tort and not the power to prescribe the remedy. Under the present section 15, the Commission has the power to prescribe the remedy as well as to condemn the tort. The bills would take away that power and leave the Commission without any effective means of correcting a discriminatory rate situation, in my opinion.
The small shipper and the small community, as I have said, are the usual victims of discrimination because the amount of traffic that they can offer does not incite the avarice of the carrier traffic manager. At the same time, a discrimination case under section 3 under the rulings of the courts and the Commission casts upon the complainant a burden of proof so onerous that only large and financially strong shippers or receivers can afford to sustain it.
As a result, the small shippers and small communities have relied in the past on the general relief from discrimination accorded by the Commission under the present law in general rate proceedings where the Commission prescribes a just and reasonable rate adjustment. This would no longer be possible.
For many years a substantially lower basis of rates existed in official territory, the territory east of the Mississippi River and north of the Ohio-Potomac, than existed in other parts of the country, and its discriminatory effect was the subject of repeated complaint by the southern and western sections of the Nation. The Commission undertook to correct this discriminatory situation by prescribing a uniform scale of class rates east of the Rocky Mountains in docket 28300 and also to prescribe a uniform classification nationwide in docket 28310. Neither of these momentous decisions, which did so much to bring about equality could have been effectuated under H. R. 6141 and 6142 which have eliminated the power of the Commission under section 15 to prescribe a basis of rates to eliminate descrimination.
An anomalous situation arises under the proposed amendment of section 4 in that the carriers would be free to establish rates for a long haul lower than those in effect for a shorter intermediate haul over the same line, without prior application to the Commission, and to justify those rates upon the basis of competition by another carrier or carriers. Yet under section 15 (1) the Commission is specifically prohibited from considering the relation of a carrier's charge to the charge by any other mode of transportation. Thus, in effect, the new section 4 permits the carrier to justify a departure from the long haul-short haul rule upon the basis of competition, and in the next breath section 15 (1) prohibits the Commission from considering the rate of the competing carrier. Must the Commission than take the word of the carrier who is departing from the long haul-short haul provision that competition of another carrier exists and justifies the departure?
If the committee please, I have come to what I regard as the most important matter and the most serious defect in these bills. That is the resultant redistribution of the transportation burden among different kinds of commodities.
The implicit, if not avowed, purpose of the bills and the report of the advisory committee is to bring about a rate adjustment based entirely upon the cost of service. I have already commented upon the utter impracticability of such a proposal because of the absence of any standard by which cost rates can be accurately established.
Under the rate adjustment initiated by the railroads many years ago prior to regulation and approved and continued by the Commission under regulation, there is in effect today throughout the United States what is known as a "value of the service” rate adjustment. In essence, this means rates upon high-valued products, such as manufactured products, are relatively greater per ton, per car, per carmile or per ton-mile than the rate upon primary or raw products, such as those of agriculture, animals, mines, and forests. This means that a relatively small proportion of the transportation burden over and above out-of-pocket costs has been assigned to the lower valued products with the result that they have been able to move freely. On the other hand, the higher valued manufactured products have borne a relatively high portion of the transportation burden but have also moved freely.
That might be illustrated by the relationship of the rate to the value of the product. The average rate on coal is approximately 80 percent of the value of the product at the mine. The average rate on steel products which load almost as heavy as the coal is only 5 percent of the value of the product. It is that difference in relationship that is helped and aided by the value of the service adjustment.
The free movement of raw materials and manufactures throughout the country is the very foundation of our national economy as opposed to the insular economy of Europe today. Without it our cities and towns would have grown up only along the rivers and seacoasts; our inland cities and towns could never have existed. If there is to be a continued free movement of traffic, and particularly of the lower valued commodities, this value of service structure must be maintained.
If, as the report intimates, the time has come to shift to a cost of service rate structure, the rates on those low-valued commodities must be increased to offset and compensate for the reductions which would inevitably follow on competitive traffic if present regulatory controls were removed.
Always being fond of my stomach, I have thought that in Washington, D. C., if that came about, we would no longer be able to enjoy the fresh fruits and vegetables from the San Joaquin, Imperial, Salt River, Rio Grande, Wenatchee, and Hood River Valleys of the West.
Under the latest available information, the average revenue upon manufactured products is 185 percent of the out-of-pocket cost, as computed by the Bureau of Accounts, Cost Finding and Valuation; the average revenue of the products of agriculture, 128 percent; those of animals and their products, 115 percent; those of mines, 121 percent; and those of forest products, 128 percent. Upon the whole, the relationship of the revenues of nonmanufactured products to the out-ofpocket cost of transportation is 124 percent.
On the whole the revenue on all traffic is 150 percent of the out-ofpocket cost, which means that the transportation burden, as I have said heretofore, constitutes a third of the total cost.
If the value of service concept is to be discarded in favor of a cost of service rate adjustment, it follows that all traffic would have to yield in revenues approximately 150 percent on all freight traffic as a whole. To increase the revenues on nonmanufactured products from the present 124 percent of out-of-pocket cost to 150 percent of out-ofpocket cost would require rate increases on these nonmanufactured products of about 21 percent. They include such commodities as wheat Hour, cereal food preparations, hay and straw, soybean and vegetable oil cake, most fresh fruits and vegetables, frozen foods and vegetables, livestock, coal, coke, ore, sand and gravel, crushed stone, crude petroleum, phosphate rock, sulfur, logs, pulpwood, fuel and road oils, brick, sewer pipe, and animal and poultry feed. Most of these commodities are already severely burdened by the general rate increases coming one after another in recent years.
Witness, for example, the case of coal which contributes over 25 percent of the total rail tonnage. It is presently faced with a struggle for survival against natural gas and oil in the competitive fuel market and clearly unable to bear rate increases in the amounts necessary to provide the munitions of war, to sustain a rail rate war against the motor carriers and water carriers.
A large segment of the economy, albeit composed of small and sometimes insignificant units, will be placed at the mercy of the railroads under these bills, and almost inevitably will become mere pawns in the game as the railroad traffic managers vie with each other and with their competitors in slashing rates to obtain the traffic of a relatively few large shippers in whose hands are concentrated the vast tonnages of iron and steel, aluminum products, alcoholic liquors, manufactured foods and cereals, canned goods, lumber, textiles, automobiles, soap, sugar, cheese and dairy products, tobacco and cigarettes. On all of those I have mentioned and a number of others, there have been substantial decreases by the railroads in the last few years.
Is it not significant that these shippers are vigorously espousing these bills?
I ask you to look at the graph on page 27. I have divided all freight traffic into two kinds. The upper 2 bars deal with manufactured traffic, and you will observe that they account for $4.25 billion in revenues, which is a little over half of the total freight revenue.
The raw and semiprocessed materials account for $4,013 million.
The first bar shows the out-of-pocket cost of manufactures as reported by the Commission's cost section. The red portion of that bar shows the amount of the contribution of manufactures at the present time to the overall burden of transportation under a value of the service basis of ratemaking.
You will notice that that is almost as much as the out-of-pocket cost. If you shifted, as the Advisory Committee says we must shift, to a cost of service basis, the out-of-pocket cost of manufactures would remain the same, but the contribution to burden would be reduced by $800 million. That is shown by the little red square to the right.
Let us look and see what happens on the raw material. The out-ofpocket cost there is a much greater amount than the contribution to burden under the present rate adjustment. But if you shift to a cost of service rate adjustment, the contribution to burden will be increased on these commodities by precisely the same amount as it was reduced on manufactures.
Quite apart from the effect of the abandonment of the value of service rate structure on the rates for raw materials, fuel and agricultural products, is its devastating effect upon transportation. The Advisory Committee's intimation that the Motor Carrier Act of 1935 was enacted in the expectation that cost of service would be given greater emphasis in ratemaking is wholly without any support in the legislative history of that act. I happen to know because I was engaged in trying to get truck costs at that time for the Coordinator. As a matter of fact, when the Motor Carrier Act was sponsored by Coordinator Eastman there was an almost complete dearth of data respecting truck costs and this situation continued at least as late as 1941. As I recall, the first time any effort was made, and it was made by the truck industry, was in 1939 to obtain the cost of transportation by motor carrier.
The adoption of a cost of service concept in ratemaking might well spell the end of the trucking industry as we know it today. The rail cost advantage in the mass transportation of freight at the longer distances means that on much of the traffic for which they now compete with the trucks, the rails would be able to cut rates to å level which the motor carriers could not meet and stay in business. This is true because virtually all of the traffic of the motor carriers is handled competitively with the railroads but the railroads have a vast amount of captive traffic, approximately 50 percent of the total, for which the trucks do not compete at all. Therefore, a rate war between the railroads and the trucks can only end in disaster for the trucks, since the trucks have no substantial noncompetitive traffic upon which to levy the cost of the battle.
Moreover, selective rate cutting, which the bills would foster and encourage, would enable the railroads to reduce the rates on truck competitive traffic at points served in common by the rails and the trucks, thus depriving the trucks of traffic which now enables them to operate and serve thousands, I think it is 50,000, if I remember correctly, of points throughout the United States which have no rail service.
It would also permit the railroads to cut the rates on traffic upon which the trucks now depend for back haul traffic to support predominantly less than truckload operations in the reverse direction.
The new competition will not be confined in its scope or impact to the area where the railroads may have a cost or service superiority; it will reach as well into areas where the trucks have a clear cost and service advantage, with the result that the truck service will be considerably impaired or rendered a great deal more expensive to the shipper.
The railroad must necessarily invest considerably more in fixed plant in relation to the traffic carried than any of the other competing modes of transportation. On the other hand, the current direct operating costs of these other carriers bulk larger per unit of service performed than in the case of the railroads generally.
The result is that the relationship between operating revenues and expenses, as expressed in terms of percentage, is much lower in the case of railroads, currently approximately 79 percent, including the passenger deficit, than for the motor carriers, currently about 96 percent.
Because of their higher operating ratios, the motor carriers are much more sensitive to reductions in their revenues, and there is much less left out of the revenue dollar for the motor carrier after paying operating costs than for the railroad. The railroads, by rate reductions, can reduce rates to a point which places the motor carriers in a deficit category, at the same time maintaining a margin above their own operating expenses. The result of such rate reductions is a foregone conclusion. The weaker competitor is eliminated; the survivor