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would help them just that much. The danger in this theory is twofold. In the first place, the railroads have always had very imperfect knowledge of this “added” expense, and in the old days it was more of theory than anything else. They went out frankly to cut the throats of their water competitors and made the rates whatever was necessary for this purpose. In the second place, the theory places the chief burden of sustaining the profits and credit of the railroads upon the noncompetitive traffic, and this burden is likely to increase progressively. Commerce and industry tend to center at the favored competitive points, and their traffic tends to increase while that at the "normal rate” points tends to decrease. Gradually the traffic moving on the low rates ceases to be mere added traffic and the out-of-pocket expense swells in volume. So does the burden upon the noncompetitive traffic.
The danger of following this theory under present conditions is obviously much greater than it was in the old days, for the trucks, pipelines, and electric transmission lines have greatly curtailed the amount of strictly noncompetitive traffic.
After the railroads swept the inland waterways practically clean of competing traffic two influences set in. One was a public demand upon Congress for appropriations for the improvement of waterways, so that they could handle traffic more cheaply and efficiently. The other was a gradual revision of the railroad rate structure to a so-called "dry-land” basis, owing to the absence of water competition which could be used to justify fourth section relief. These two influences have brought a return to the water competition, which had disappeared, and it is progressively increasing.
This return of competition has so alarmed the railroads that they are clearly about ready to go back to the old policy of rate cutting, and have already made several moves in this direction, of which that which is here under consideration is one. If they continue with this policy unchecked, I have little doubt that they will eventually cripple their water competitors as they were crippled in days gone by.
Out of an experience of more than 25 years in the litigation of cases of this character I say to you that if the ratemaking rules which are in these bills are enacted, history will repeat itself as surely as night follows day. Right at this moment the rail carriers in at least four cases are proposing rail rates which equal cent for cent the overall costs incident to transportation in bargeloads in quantities of 500 tons, between the same points. No shipper in his right mind would go to the expense of getting together a shipping unit of 500 tons and utilize the slow and inferior barge service, if he could secure rail service, in carloads, at the same cost.
Now, if I could refer to what has happened before, I think I can tell you. We were regulated in 1940. The war came on in 1941 and kept everybody busy until late 1945, and the railroads had all of the traffic they could handle. After the war there were postwar adjustments, but the time has come now when they have really gone to work and there are at least half a dozen major cases now pending before the Commission in which they seek to do exactly the things that Commissioner Eastman said they did.
Generally speaking, we believe that the present act, properly administered, has proved to be a workable act in most respects and has provided fair treatment to all types of carriers, including the railroads, insofar as the interplay of competition is concerned. We are in complete accord with the statements at page 7 of the letter of Commission accompanying its report on S. 1920 addressed to Senator Magnuson, under date of December 22, 1955, which read:
It seems appropriate to emphasize what we have already suggested, that in the main the indicated objectives of the Advisory Committee may be effectuated within the framework of the present statutes. The dominant effect of the proposed legislation would be to permit all rates to gravitate to the bare compensatory level. In administering the present act this Commission has encouraged
healthy competition between different transportation agencies and between competing carriers in the same agency. (Emphasis mine.]
In the following discussion I shall consider the changes proposed in the transportation policy; the fourth section; the suspension process, and in ratemaking provisions of the bill.
THE NATIONAL TRANSPORTATION POLICY
Apart from the plain purpose of the restated transportation policy to
(a) give carriers more freedom than they now have to cut competitive rates, and
(6) reduce materially the power of the Commission to deal
with such reductions, there is not a single objective in the restatement of the revised policy running directly to the broad interests of the public and the national defense which could not be achieved under the present policy.
One very significant deletion made in the proposed new policy is the elimination of the inhibition against “unfair or destructive competitive practices.” As a substitute for that salutary prohibition we are deluged with such high-sounding expressions as "dynamic competition,” “new rate and service techniques," "technical innovations," all to the alleged end of reflecting “full competitive economic capabilities.”
The water carrier industry is neither deceived nor comforted by this grandoise language. As I have pointed out, as fast as they can get around to it, the rail carriers are endeavoring to put their carload rates on an exact parity with our bargeload rates. There is no doubt in our minds that the expression “full competitive economic capabilities” in the eyes of our railroad friends will be translated into rates which will divert all of the traffic now handled by the barge lines to their service.
At pages 3 and 4 of its above cited report in S. 1920 the Commission has noted the procedural and administrative difficulties entailed when expressions of this character are embodied in a statute and has urged extreme cautiton in any amendment of the policy.
In other words, the Commission is asking the very fair question, what is “dynamic competition ?"
THE FOURTH SECTION—-LONG AND SHORT HAUL CLAUSE
I come to the fourth section, the long and short haul clause.
Since the original passage of the Act To Regulate Commerce in 1887, Congress has made it unlawful for a carrier to charge a higher rate to a nearer than to a farther distant point over the same route in the same direction. Without more, the prohibititon would be absolute. However, the statute has always contained a proviso under which the Commission may in special cases, after investigation, grant authority to depart from the otherwise rigid terms of the statute.
Section 4, as it is now carried in the act, has always acted as a deterrent against destructive competitive practices at terminal points and as a protection against the imposition of higher rates at intermediate points not directly affected by water competition.
All previous efforts to repeal this section of the statute-and I may say they have all come from the railroads—or to render it innocuous have been rejected by Congress. Indeed, in 1920 Congress amended the section in several respects, the most important of which was the provision that the Commission shall not permit the establishment of any charge to or from the more distant point that is not reasonably compensatory for the service performed. This amendment to the fourth section was made concurrently with others, including the power to prescribe minimum rates, at the time the railroads were returned to private control, all of which amendments were designed to tighten up the act and give the Commission added power over practices theretofore beyond its control. The changes made by the 1920 act were summed up by Mr. Chief Justice Taft in Dayton-Goose Creek R. Co. v. United States (263 U. S. 456, at 478), as follows:
The new act seeks affirmatively to build up a system of railways prepared to handle promptly all the interstate traffic of the country. It aims to give the owners of the railways an opportunity to earn enough to maintain their properties and equipment in such a state of efficiency that they can carry well this burden. To achieve this purpose, it puts the railroad system of the country more completely than ever under the fostering guardianship and control of the Commission, which is to supervise their issue of securities, their car supply and distribution, their joint use of terminals, their construction of new lines, their abandonment of old lines, and by a proper division of joint rates, and by fixing adequate rates for interstate commerce, and, in case of discrimination, for intrastate commerce, to secure a fair return upon the properties of the carriers engaged.
I ask Your Honors to square, if you can, that fostering guardianship and control which you bestowed upon the Commission in 1920, with the emasculation of the powers of the Commission proposed in these bills.
The Commission was very quickly called upon to interpret and apply the “reasonably compensatory rule in a major proceeding involving a request for fourth-section relief, entitled “Transcontinental Cases of 1922” (74 I. C. C. 48). After setting forth that in its judgment the 1920 amendment was Congress' way of stating that the Commission should be less liberal than it had been in granting relief under the section, it went on to set forth what in the future it would consider to be a "reasonably compensatory” rate, and I ask you carefully to note this:
Such a ratesaid the Commissionmust (1) cover and more than cover the extra or additional expenses incurred in handling the traffic to which it applies; (2) be no lower than necessary to meet existing competition; (3) not be so low as to threaten the extinction of legitimate competition by water carriers; and (4) not impose an undue burden on other traffic or jeopardize the appropriate return on the value of carrier property generally, as contemplated in section 15a of the act. It may be added that rates of this character ought, wherever possible, to bear some relation to the value of the commodity carried and the value of the service rendered in connection therewith. We also find that where carriers apply for relief from the long- and short-haul clause of the fourth section and propose the application of rates which they designate as "reasonably compensatory," they should affirmatively show that the rates proposed conform to the criteria indicated above. It goes without saying that carriers should not propose rates or rate structures for approval in a fourth-section application which create infractions of other provisions of the Interstate Commerce Act, and particularly of section 3.
It is those elements of a “reasonably compensatory” rate which relate to water competition which are so galling to the railroads. As I have stated, they are now embarked upon a definite policy of reducing their carload rates to the level of overall charges of bargeload traffic. Since a barge line cannot hope to participate in competitive traffic unless its charges are substantially below those of rail carriers, it follows that rail rates on a parity with ours are not only lower than necessary to meet our competition, but are also so low as to threaten the extinction of water competition.
So long as the fourth section remains as it is, and so long as the principle enunciated in Transcontinental cases of 1922, supra, remains in force, the water carriers have a measure of protection against destructively competitive rates. As a matter of fact, the Commission ordinarily requires that rail rates be made differentially higher than overall barge rates. (See Pig Iron From New York Points and Detroit, 296 I. C. C. 747; Sugar, Atlantic and Gulf Ports to Ohio River Crossing8, 296 I. C.C. 127.)
Under the fourth section as it is here proposed, these safeguards would be lost. While the opening sentence of the new section would contain an absolute prohibition, the exception would no longer be left to the discretion of the Commission in special cases after investigation" as it is now. The career would determine in the first instance whether there is “actual competition of another carrier or carriers" and whether the rate it establishes is "not less than a just and reasonable minimum charge.” For all practical purposes administration of the long- and short-haul clause would pass from the Commission to the carriers.
What would be the remedy of the water carrier if the railroads did publish a rate lower than necessary to meet competition or lower than a just and reasonable minimum charge? Certainly it would not be found in the right to protest and request suspension. Under the changes proposed in the suspension provisions the Commission would be powerless to suspend the rate longer than 3 months and in that period it would be utterly impossible to make out a case, have a hearing, and secure a decision that a rate, for example, would be less than a reasonable minimum rate. The fact that the differences between the existing rate and the proposed rate could be impounded would serve no useful purpose to the water carrier because even if it succeeded in the final analysis it would have no status to recover the amount impounded, as reparation.
As an added precaution and in order to nail down the inability of anyone to secure relief against any competitive rate proposed, the bili in section 15a (1), which I shall discuss in detail later, provides that in determining whether a rate is unreasonably low the Commission is specifically precluded from considering
(a) the effect of such charge on the traffic of any other mode of transportation, or
(6) the relation of such charge to the charge of any other mode of transportation, or
(c) whether such charge is lower than necessary to meet the competition of any other mode of transportation.
Notice, Your Honors, how the expression “other mode” pervades all three of those. What do we gather from that? Do we gather that the Commission is powerless, in questions of competition, where a different agency is involved, but the railroads want the protection of the Commission for their competitive efforts against each other? Is that the significance of that wording “other mode”?
Under such a statute neither the Commission nor the courts could consider those safeguards as carefully written into the act in 1920. Any aggrieved party would be remanded to the impossible task of proving that the proposed rate is less than minimum, And if any
of you are lawyers,
I commend to you the difficulty of making any such proof as that. Considering the fact that a minimum rate need yield only the direct ascertainable costs of performing the service the chance of success in such an undertaking would be dim indeed.
And I think that that is what the bill contains.
The railroads continually complain that their managerial discretion with respect to the publication of water-competitive rates is not respected as it should be. In this connection the committee should consider very carefully the makeup of these so-called competitive rates on both sides of the equation. The rate of the water carrier between its ports must be a complete rate. That is, it must reflect in full the cost of operation, the investment in equipment, taxes, and a profit. That is because the water carrier has no other rates except the rates between its ports. The water carrier, unlike the rail carrier, has no reservoir of noncompetitive traffic out of which it can build up a war chest to use in competition. In every respect its rates are its normal rates and they are completely compensatory.
By way of contrast, the so-called rates which rail carriers ordinarily propose to meet the rates of the water carriers are not normal rates in any sense of the word. They are depressed rates, they need only cover the “direct ascertainable cost of producing the service.” If these words mean anything they mean bare out-of-pocket costs. They allow nothing for fixed charges, profit, or return on investment. In other words the Utopian field of competition which the rail carriers picture is one where they may maintain a rate returning bare out-ofpocket costs while the water carriers are obliged to maintain fully compensatory or maximum rates, and the Interstate Commerce mission can do nothing about it.
The water carriers, as stated, have no avenue of escape from this situation. The rail carriers, by way of contrast, are not only able to draw upon noncompetitive traffic in order to recoup revenue lost at the ports, but on no fewer than 10 occasions since the close of the war they have secured permission to put into effect increased rates on their entire body of traffic, thus giving them further revenues which counteract reductions made at the ports.
There was a period in the Federal regulation of transportation during which the rail carriers exercised the initiative in connection with the long- and short-haul clause. That was the period prior to the amendment of June 18, 1910. The situation that existed at that time was explained by the Commission in its decision in Administration of Fourth Section (871. C. C. 564, 566), where it said-and, incidentally, I commend that decision to your Honors, if you want a complete his