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is free to seek recoupment for the temporary reduction in operating net.
In addition, the motor carrier is much more limited in the scope of its operating authority. The motor carrier frequently specializes in the transportation of a single commodity or group of articles. It may be limited as to the direction of movement. By selecting a particular commodity, or a particular area within which to reduce rates, the rail carrier may divert the critical tonnage and revenue of a motor carrier to the point of ruin and still not increase its own tonnage or revenue significantly.
We do not write upon a clean slate. The history of the competitive struggle between the water carriers and the railroads between 1890 and 1920 is a clear lesson of history as to what happens when the railroads are set free to destroy a competitor. In a period when the Commission had no minimum-rate powers, the railroads reduced the rates on water competitive traffic to a point which forced the water carriers out of business. It was only when the Director General took over the railroads and established barges on the inland waters, and later on in 1920 when the Commission was given minimum-rate powers that water-carrier service was restored. Exactly the same thing is in store for the trucks if the Advisory Committee recommendations are adopted.
It should be remembered that the water carriers had a cost advantage over the railroads and hence the railroads had to below their own out-of-pocket costs in order to stifle water competition. Conversely, at the present time, motor-carrier competition could be stifled by the railroads without going below their out-of-pocket costs, which is the only restriction contemplated for them in the policy proposed by the Committee.
As I have heretofore stated, I doubt very much if under their concept of direct ascertainable cost they mean actual out-of-pocket cost.
The objectives of the bills as set forth in the Advisory Committee's report have a certain surface plausibility and appeal. It would seem to be a perfectly laudable objective to have all transportation performed by the most efficient and economical medium. It would also seem desirable to encourage technical innovations and service improvements and certainly it would be desirable to have the shipper choose among the competing modes of transportation on the basis of cost and service utility to the end that each particular traffic would be handled by the carrier able to provide the most economical and efficient service.
But will these bills bring about these results?
The basic transportation policy has up to now been directed toward encouragement of service competition, not price competition, and this service competition has been virtually free of any regulation. Service competition and not competitive ratemaking encourages technical innovations, the development of new service techniques, the increase of operating and managerial efficiency, full use of facilities and equipment, and high standards of service, economy, and efficiency for the benefit of the transportation user.
If the selection of the mode of transportation is determined by price alone, there is no incentive to compete in terms of service. On the other hand, if a rate adjustment is maintained which places rates on
parity as between different modes of transportation and with any inherent service disadvantage offset, the transportation user then has the opportunity to select between the carrier modes on the basis of service rendered, and service competition becomes a reality. With charges in equipoise, the carriers are encouraged to make technical innovations and to bring about operating efficiency as a means of attracting traffic of their particular mode.
On the other hand, if rate competition is permitted to run rife, the natural result is for the carrier and the shipper alike to ignore service considerations and rely largely on price in selecting the mode of transportation. Where the economically advantaged competitor has it in his power to eliminate competition, the result is monopoly and the destruction of all incentive to improve service and maintain efficient and economical operations.
Railroads do not labor under any present disadvantage in competing with the motor carriers not of their own making. There is now nothing which prevents the railroads from competing with the trucks in service if their management were inclined to do so. The railroads have in the past sought to offset inferior service, such as in transit time, in loading and unloading, and in pickup and delivery, by rate cutting instead of by improving service, which lies within their power but not within the present disposition of the railroad managements.
The adoption of a policy favoring competitive ratemaking will do nothing but compound the railroad inertia, and we can be certain that with all effective competition eliminated the railroads will be absolutely without any incentive to improve service and that the inertia of railroad management will continue.
The present-day rate structure is the rate structure built by the railroads as modified by regulation. Competition between the railroads and the motor carriers under that rate adjustment is and properly should be upon the basis of the service which each offers. The railroad has tremendous inherent advantages, including its own roadbed and its economy in mass transportation. Its competition for traffic is not being hampered by rate regulation.
I now pass just for a moment or two to two other proposals in the bills, which, as I read the testimony of witnesses for the Association of American Railroads, are not now supported by the railroads. That is, first, the proposal to reduce the period of time for which a tariff may be suspended. Under the present practice, the Commission generally acts through a board of suspension and investigation to which any person may address a petition on requesting suspension of a particular tariff. That is true of rail, motor, or water carriers. The board examines the tariffs and the facts set forth in support of the petition, and frequently calls in the parties for conference to further develop the relevant facts. If it is concluded to suspend the tariff, the matter is set for hearing, and at the hearing the carrier proponent has the burden of establishing the lawfulness of the proposed rates under the Interstate Commerce Act.
In some cases, but they are very few, the Commission is able to complete its investigation prior to the expiration of the 7 months' period.
If you will take the procedural rules of due process with respect to the time required for the petition, the reply, the hearing, the report of the hearing officer, the exceptions to the report, the consideration by
the Division, the order of the Division, the appeal or petition for reconsideration from the Division to the entire Commission, you will see that from merely adding 2 and 2 together you come out with more than 7 months. The proposal to reduce it to 3 months, while certainly the carriers whom I represent would welcome it, is utterly impractical, if not asinine.
Furthermore, the bills, in those cases where a competing carrier petitions for suspension, shift the burden of proof from the carrier proposing the rates to the complaining carrier. A large number and probably a majority of suspension requests today come from carrier competitors or their rate bureaus and they seek suspension of competitive rate reductions. In the table which I read earlier, out of a total of 3,874 protested adjustments, only 263 were by shippers. All the rest were by carriers, either of the same or a competing mode of transportation.
Thus under the statutory standards which we have discussed above, it would be necessary for a carrier seeking suspension of another carrier's reduced rate to establish that the proposed rate is below the out-of-pocket cost of the carrier proponent.
The difficulty of sustaining this burden of proof is almost insuperable when it is considered that the carrier having the burden is not in possession of any of the relevant facts which would permit a showing of the cost of transportation even if the concept of directly ascertainable cost were a clearly defined one.
In that connection, I would like to ask the committee to turn back to page 9 for a moment. I said, in discussing that page, that the most difficult and complicated translation in cost work is in translating service, that is, line and terminal cost, into traffic-movement cost. That can only be done on the basis of what are called traffic unit and performance unit factors. The number of different service units that are required to produce one traffic unit, can only be obtained by a test, either performance test or a traffic test, on the line of the very carrier whose rate is involved. His opponent has no way, under heaven, to ascertain what those vital and indispensable items are.
In addition to this onerous burden, the carrier opposing a particular rate reduction is required under H. R. 6141 and H. R. 6142 to show that it will be irreparably injured if the rates are allowed to go into effect.
When these two requirements are coupled together, it becomes clear that the suspension power will be nothing more than a shadow insofar as intercarrier rate competition is concerned.
I should not limit that to intercarrier competition. In my judgment, the competition in rates between carriers of the same mode is equally important as the competition between carriers of different modes.
If any such rule as that proposed in these bills is to be followed, it should be followed on a carrier basis and not on a mode of transportation basis. I cannot see any difference between a railroad competing with another railroad and a railroad competing with a motor carrier. If he gets it, and I do not get the business, I am no better off because he is a railroad. On the other hand, as a motor carrier, it hurts me just as bad to lose traffic to another motor carrier as it does to a railroad.
There is no possible argument that can be made or has been made in this record with respect to competition between different modes of transportation that cannot be made with respect to rate competition between carriers in the same mode.
As a practical matter the carrier reducing the rates will do so without any effective control by the suspension power of the Commission. The small shipper who is now protected in many instances from actions of the carriers in publishing discriminatory rate adjustments by the action of competing carriers in calling these adjustments to the attention of the Commission and securing their suspension, would lose this very important protection and many cases of incipient discrimination which are now arrested by the Commission would under the new bills become effective tariff publications without any satisfactory regulatory remedy.
The next paragraph relating to the destruction of classification is highly technical and I will not do more than let it stay in the record. I will not read it. Now I come to the net result.
The Advisory Committee report claims that the present transportation policies result in losses to shippers and the consuming public amounting to "billions of dollars per year.” The statement, which is not documented, in my opinion, is contrary to demonstrable facts.
The present railway net operating income for 1955 which is, after giving effect to income-tax deferrals, slightly in excess of $939 million per year, provides a return upon the value of the rail investment of approximately 3.8 percent. There is nothing in the current income accounts that indicate that the railroads out of their present earnings can absorb any substantial part of a reduction of even 1 billion dollars per year. Or, for that matter $1.
They were successful in having a 15 percent general increase in freight rates made permanent in December 1955. They then filed for an additional increase. In March of 1956 they obtained an additional increase of 6 percent. Because of selective rate cutting and the relative low value of the commodities, these increases fell heaviest upon the nonmanufactured articles. According to the public press, and I have no other information, the railroads are preparing to file applications for additional increases at this time.
Under this state of facts, it is obvious that the shippers cannot be saved billions of dollars in freight rates unless the proposed rate cuts bring in additional traffic sufficient to produce net income in an amount which will overcome the reduction in rates and make possible the provision of the additional facilities required to handle the diverted traffic. Presumably this additional traffic is to come from the trucks.
Let us see what would happen if these proposed rate cuts were successful in capturing and diverting 100 percent of the motor carrier traffic.
Appendix B, at page 45, is a statement which shows the effect upon railroad earnings which would result if the railroads were successful in diverting to railroads 100 percent of the traffic now handled by class I intercity motor carriers of general and specialized commodities. In making this statement it was necessary to determine the traffic upon which the cuts would be made and the amount of the cut which would be necessary to entirely eliminate their highway competitors. Examination of the 149 groups of commodities in the manufactures and miscellaneous products category indicates that there are less than half a
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dozen of these groups which are not competitive in some degree with motor carrier transportation. Since the degree of this competition between rail and motor varies with the different
of these commodities, we have recognized that a maximum of one-quarter of the present rail manufactured products revenue was derived from shipments of commodities which are not vulnerable to truck competition and therefore would not require any reduction in rates.
We have further assumed that a rate reduction of at least 20 percent upon the remaining or competitive manufactures rail traffic and upon all truck traffic would be sufficient to divert all of the latter to the railroads.
I called attention to appendix B, the rate reductions which had actually been made by the railroad according to their own presentation. You will find that in many of those cases, the reduction in rates were substantially in excess of 20 percent.
The railroads cost of handling the diverted traffic was estimated at the 1955 out-of-pocket costs as reported by the cost section of the Commission.
On the opposite page, page 37, the graphs depict the results which would follow if the railroads diverted to themselves all of the motor carrier traffic. It shows that by reducing the rates and eliminating the competition, they would obtain for themselves additional revenues of $3,694,000,000. This calculation does not take into account the large increase in facilities which would be necessary to handle the additional traffic diverted from the motor carriers.
The motor carriers part of the traffic is $373 million greater than the rail proportion, and this is due to the fact that, as shown on page 45, while the motor carrier proportion of truckload competitive traffic is about two-thirds that of the rail, the motor carrier portion of the small shipment, the LTL traffic, is five times as great as the rail traffic.
At the present time the railroads have a net railway operating income of $939 million after giving effect to tax deferrals. In Ex parte 196 the chief statistician for the railroads stated that a net railway operating income of at least $1,100,000,000 was necessary to meet the needs of the minimum capital improvement program of the carriers.
The second bar on the chart on page 37 gives effect to the diversion by simply reducing the revenues upon the competitive traffic by 20 percent and making no changes in the rates upon other traffic. As indicated by this bar, the net railway operating income would be reduced by the diversion of $793 million.
About one-third of the income taxes would also be reduced. That is, Uncle Sam would have to pay for part of this reduction.
This $379,000,000 would be less than 3.2 percent of the present ratemaking value. Inasmuch as several billions of dollars would necessarily be required to provide the facilities necessary for the additional traffic, it is obvious that it would be imperative for the railroads to provide increased revenues.
The last bar on the chart indicates the only way in which this additional revenue could be obtained, which is by increasing the rates upon the noncompetitive manufactures traffic and the raw and semiprocessed materials. An increase of 20 percent upon this traffic would produce a net railway operating income of approximately the same ratio as that which is produced by the present rail traffic. That is shown by the bottom bar on page 37.