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The entire history of both rail and truck transportation indicates the necessity to consider the behavior of rivals. It indicates that rate cuts will be met promptly. Only the regulation of minimum rates can hold rate cutting in check. And as previously shown, no such check is provided in the proposed bill.
If there is a rate at which rate cutting will cease without the intervention of agreement or regulation, the history of the motor carrier or railroad industries does not seem to have disclosed it.
Yet by removing the ICC's present authority to fix minimum reasonable rates at a point higher than out-of-pocket costs (if the circumstances required), the proposed bills pave the way for destructive competition. A maximum-minimum rate range without ICC authority to fix actual rates is useless. It is just as im portant to restrain destructive competition as it is to restrain monopoly,
As "dynamic competition” becomes more and more successful, it becomes in: creasingly static. Successful competition eliminates the unsuccessful competitor, and monopoly takes its place. Then prices invariably rise when the successful competitor has no rival.
In the 1930's, did the railroads seek to relax controls or regulation in order to meet truck competition? On the contrary, they sought to extend controls to the truck industry. They had come to like the "stability" which ICC regulation had brought to the rail industry. It was the railroads who urged, perhaps with tongue in cheek, that the motor carriers be allowed to enjoy the benefits of Federal regulation to the same extent as the rails. Yet now they seek a return to "dynamic competition," which will lead to an unstable freight-rate structure.
Isn't it somewhat ludicrous to speak of dynamic competition between the 450 railroad giants that comprise our railroad system and over 20,000 medium- and small-sized trucking firms? Isn't this a case of the largest and dominant carrier system crying "wolf," in view of the fact that the railroads carry some 51 percent of all freight traffic, while the motor carriers have only some 18 percent;" that 54.9 percent of all certificated motor carriers (9,980 firms) have less than $50,000 gross revenue, in contrast to the 121 class I line-haul railways with revenues of over $1 million annually; " and that 92 percent of the motor carriers subject to ICC jurisdiction operate less than 10 trucks?
One is led to wonder whether the railroads' basic philosophy is that theirs is the only transportation system which has to survive; that other modes of transportation are expendable. Certainly, they have continued their long-standing policy of charging what the traffic will bear. With the approval of the ICC, they have raised the level of their freight rates 12 times during the past 10 years. Rates on agricultural products now average more than 70 percent above the 1945 level.14
Does this record forecast lower rates by the rails on traffic which is essentially railborne? In view of these Commission-approved rate increases, why do the rails suddenly advocate "dynamic competition" and at the same time talk of reducing rates? Isn't it logical to assume that rate cuts are intended to drive out competition? Won't these proposals transform freight transportation into a private preserve for the railroads?
We need all forms of transportation, competing with each other under fair and equitable ground rules, to produce the lowest rate consistent with the best service.
Competition exists in today's transportation system, but it is competition under fair and equitable rules for all forms of transport. On this very point, the committee may be interested in a statement by Thomas L. Preston, general solicitor, Association of American Railroads before the House Committee on Interstate and Foreign Commerce on April 24, 1953—just about 3 years ago. Mr. Preston, speaking in behalf of the railroad industry was testifying in opposition to H. R. 3203, the trip-leasing bill:
"The basic consideration which leads the railroads to oppose this bill is their conviction that its passage would in substantial measure defeat the national transportation policy declared by Congress in the Interstate Commerce Act, which
11 Traffic World, March 19, 1956, p. 30.
12 ICC Commissioner Mitchell, before Senate Small Business Committee, December 1, 1955 : Reply by ICC to Senate Small Business Committee on the Interstate Commerce Act, November 28, 1955.
13 Marketing and Transportation Situation, U. S. Department of Agriculture, April 26, 1956, cover page.
is designed to accord to all forms of public transportation including the railroads, an opportunity to compete for traffic under fair and impartial regulation."
Implicit in this statement, it seems to me, is an acknowledgment by the spokesman for the railroads that the present Interstate Commerce Act permits the railroads to compete “under fair and impartial regulation."
Why do the rails now claim otherwise?
The present regulations maintain a healthy competitive balance, in the interest not only of the shipping public, but of the carriers as well. Thus, competition is controlled, rather than cut-throat. And as a result, freight rates are stable, rather than chaotic.
H. R. 6141, on the other hand, may well lead to cutthroat carrier competition and produce uncontrolled rate wars so that freight rate stabilization between individual shippers, areas, or territories become impossible to maintain.
There is no sound reason for believing that today's competition between different modes of transport, if freed of restraint under present rules, would not be destructive of fair and just shipper rate relations, as was the case prior to 1887.
Hamstringing other forms of transportation to help the railroads is not the way to achieve an economical, efficient, coordinated privately operated national transportation system. Only through intelligent regulation can we guard against rate-setting which discriminates against commodities, territories, States and cities. Inadequately regulated competition may be quite as much of a public evil as unregulated monopoly.
There are countless communities in the United States served solely by trucks. I truck lines serving the major cities are weakened by railroad rate cuts, how are these small communities which do not have rail or water carriers to receive their daily necessities? Will enough trucklines survive to furnish transportation to these communities? Will they be able to provide adequate service? Isn't it also likely that both business and consumers in these communities will have to pay higher prices?
Competition in the best interests of a well-rounded transportation system should be based on service, not price. You all know the evil effect of price wars, particularly on the "little fellow.” The present rules of the game have not meant the end of competition, nor have they prevented growth and expansion of all types of carriers. Summary
I should like to summarize the main points of this statement. These conclusions are, in my judgment, based upon sound economic principles and are supported both by recognized, independent transportation authorities, and by our industrial history.
If H. R. 6141 and companion bills are passed :
1. Railroads are likely to obtain a monopoly over intercity freight transportation. With unlimited financial resources, the rails can afford to cut rates until they bave either driven trucks off the road or forced them to sell to the railroads. Then, without competition, the rails can use the maximum rates to make shippers and consumers pay the costs of the transportation war and whatever the traffic will bear in the future.
2. The development of strong, stable modes of transportation under independent ownership, with its impetus for progress, will be jeopardized.
3. By establishing price as the sole factor in ratesetting, rather than traditional "value of service" principles, the existing equitable and stable rate structure will be discarded and chaos will probably result. Marketing practices, as they presently exist, will be disrupted, since producers will no longer be assured that competitors would be required to bear a comparable transportation cost.
4. Since the ICC will lose virtually all its authority to protect both carrier and shipper against unfair rates, smaller shippers and smaller communities will again face the disastrous effects of volume and long-haul discrimination.
Mr. Mohn, vice president of the International Brotherhood of Teamsters, has Indicated to you the interest of our organization in H. R. 6141. It is worth repeating them, in the light of the foregoing analysis.
1. The Teamsters' Union is interested in the continued health and prosperity of the industry which provides employment to its members.
*Tulp Leasing (Interstate Commerce Act). Hearings before the Committee on Interstate and Foreign Commerce, House of Representatives, 83d Cong., 1st sess., on H. R. 3203. April 21, 22, 23, 24, 30, and May 7, 1953, p. 232. Emphasis supplied.
2. The union is interested in preserving the job opportunities of its members.
3. The union is interested in securing the highest possible benefits for its members. For this reason, it desires fair and equitable rules which will permit the trucking industry to retain sufficient competitive vitality to make progress and thereby permit the union to negotiate freely for wage increases and other benefits.
4. The union is interested in continuance of a privately owned, independent transportation system which is not, and will not become, a mere appendage of another mode of transport.
Mr. HARRIS. I have a request from Mr. Thomas L. Preston, vice president and general counsel of the Association of American Railroads, to file a supplemental statement of Mr. Jervis Langdon, Jr., on behalf of the association. I might say that this is a statement which is the result of a conversation that I had with Mr. Carter Fort just before his death, in which he requested that the association have permission to file an additional or supplemental statement, and it will be received at this point.
Mr. HINSHAW. Is that statement to follow another statement, or will it be placed separately?
Mr. HARRIS. I believe it is requested that this statement follow the testimony of Messrs. Turney and Aitchison.
(The statement referred to was inserted as indicated and appears on p. 742.)
Mr. HARRIS. We have a supplementary statement of Mr. James G. Lyne to be inserted. Mr. Lyne has previously testified so I suppose this will become a part of his other testimony, Mr. Clerk,
(The statement referred to was inserted following Mr. Lyne's testimony and appears on p. 414.)
Mr. Harris. We have a statement requested by our colleague, Mr. Bob Jones of Alabama, for inclusion in the record, a statement of Mr. Milton Cummings of Huntsville, Ala. It is a rather voluminous statement. It may be included in the record. (The statement referred to follows:) STATEMENT OF MILTON K. CUMMINGS, HUNTSVILLE, ALA.
SUMMARY ANALYSIS OF REPORT OF PRESIDENTIAL ADVISORY COMMITTEE ON TRANSPORT POLICY
AND ORGANIZATION AND OF H. R. 6141 AND RELATED LEGISLATION The background of the report of the Presidential Advisory Committee on Transport Policy and Organization (the Weeks report) is one of pronounced bias in favor of railroads and against waterway and highway transportation. The study from which it emerged was a response to a memorandum to the President from the Association of American Railroads pleading for more privileged statutory treatment. The working group which participated in preparation of the report consisted exclusively of persons with a background or interest in rail transportation and of railroad specialists. The report itself proposes drastic changes in regulatory law designed to shift the balance of competitive forces radically in favor of the railroads and against the interests of water and motor carriers.
The recommendations of the Weeks report are derived from a structure of fallacious premises as to present regulatory law. The report asserts that present regulation is based on the obsolete assumption that the railroads have a monopoly of intercity transportation. But, in fact, Federal regulation ho never been based on this as a primary assumption. On the contrary, since 188., regulatory law has been more pointedly directed at predatory and destructive competitive practices and at the resulting discriminations between shippers and communities. The report asserts further that regulation has failed to keep pace with the development of highway and waterway carriage. In fact, however, the portions of the
Interstate Commerce Act dealing with railroads have been amended 144 times, and the acts of 1935 and 1940 were specifically framed to adapt regulation to the development of highway and waterway carriage. The recommendations which emerge from the fallacious premises of the Weeks report are necessarily equally invalid.
It is true that every railroad is a monopoly in the legal sense that it has exclusive access to a right-of-way acquired through the exercise of eminent domain. But, iar more significant to regulation was the prevalence of disorderly rate wars between railroads and against water carriage which culminated in the Act to Regulate Commerce of 1887. After 1869, railroad history and practice were characterized by construction subsidies, overexpansion, excess capacity, secret rebates to large shippers, predatory ratecutting on competitive traffic, and excessive charges on poncompetitive traffic. The resulting commercial and community inequities and dislocations led to the public demand for regulation and to the Act of 1887. As stated by Commissioner Kenneth Tuggle of the Interstate Commerce Commission in 1955:
*There is no sound reason for believing that carrier competition today, especially between different agencies of transport, if freed from all restraints, would not be destructive of fair and just shipper rate relations, as was the case prior to 1887."
The rate wars preceding regulation were particularly severe because of the ability of the railroads to cut rates selectively, carrying competitive commodity movements at less than full cost and recouping the consequent losses by excessive rates ou noncompetitive movements. The loss rates were especially prevalent on water competitive movements, and the ever-recurring rate wars eventually destroyed much of the water transportation industry. The intermittent rate wars and truces introduced a serious element of uncertainty into agriculture and industry dependent on stable and fair transportation costs.
The Weeks report proposes to free the carriers to utilize their economic capabilities in the competitive pricing of their service. The economic capabilities peculiar to railroads are those of predatory and destructive attack. The railroad systems were generally completed before the Transportation Act of 1920, so that the railroad lines lie along the most advantageous routes wherever the railroad promoters choose. By contrast, much of the volume of motor truck transportation has come into being since the requirements of certification were imposed in 1935, and, in consequence, the motor carrier is limited to routes and commodities approved by the I. C. C. This circumstance narrows the area within which a railroad needs to concentrate its competitive attack. Other localities and commodities are left in a noncompetitive field where they can be exploited for high railroad profits to finance the rate wars elsewhere.
The railroads have a proclivity for discriminatory ratecutting built into their cost structure. Because so much of their costs are fixed, regardless of traffic volume, they find it easy to regard only the incremental or out-of-pocket cost as the real cost of moving any newly acquired traffic. Therefore, they quote a cut rate based only on the out-of-pocket cost and fail to recover the fixed cost. In 1913, according to the Interstate Commerce Commission, 87 out of 256 commodity groups moved at less than fully distributed cost. This is 32.7 percent of the total. In fart, in their enthusiasm for ratecutting, the railroads moved 40 commodities, or 13.3 percent of the total, at even less than out-of-pocket costs. The resulting Insses were made up by excessive charges on the remaining 169 commodities. Fifty-three commodity groups, or 19.9 percent of the total, moved at charges exeeding 150 percent of fully distributed costs, and 8 commodity groups yielded the railroads over 200 percent of fully distributed costs.
By contrast, waterway operators and trucklines have a higher percentage of ont-of-pocket costs and are compelled to charge rates on all movements exceeding fully ristributed costs by narrow margins. According to Dr. Ford K. Edwards, from 25 to 30 percent of railroad costs are fixed in contrast to only 10 percent for water carriers and intercity truck lines. This gives the railroads a major rate-war weapon not possessed by their competitors.
The Weeks report would sharpen this cost-cutting weapon by providing a minimuun rate standard of direct ascertainable cost, presumably the same thing as ont-of-pocket cost. In representative cases cited herein the Weeks standard would permit particular railroads to cut rates by as much as 18 percent below minimum rates allowed under the present statute, and thereby to destroy the competitive waterway and highway traffic.
Railroad spokesmen complain that other modes of transportation are subsidized. Actually, however, the discriminatory rate structure of the railroads constitutes
a private subsidy system of major proportions. The losses the railroads take on traffic competitive with waterways and truck lines have to be made up from some source to avoid bankruptcy. This is substantially the same process as a Goverument subsidy which compensates a private operation for losses taken on below. cost business. The source from which the railroads obtain the subsidy funds is the excessive revenue from noncompetitive traffic, a species of private excise tax. According to data published by the Interstate Commerce Commission, the railroads financed losses amounting to $1,158,494,000 in this manner in 1953, a private subsidy of major proportions. By way of comparison, the outlay of the Federal Government in 1953 on the 12 major active waterways was only $55,800,000—less than 5 percent as much as the private railroad subsidy.
One of the most formidable of the economic capabilities of the railroads for competitive purposes is large size. The revenue of the average class I railroad in 1953 was about 40 times as great as that of the average motor or water carrier. Eight railroads had revenues exceeding $200 million each, ranging up to $848 million for the Pennsylvania. The largest intercity truckline in the country had revenues just short of $48 million, less than 6 percent as big. Furthermore, the railroads are much more diversified as to routes served and commodities carried, permitting them to pick off the more specialized small carriers by highway and waterway 1 by 1.
The fallacy of the economic-capabilities doctrine is that in the field of transportation; the power of the railroads to take business from competing modes does not reflect superior efficiency. The fixed cost structure, the private subsidy system, their overwhelmingly large size, and their diversified traffic are capabilities of economic warfare which are irrelevant to efficiency. Consequently, the successful exercise of these capabilities would commonly transfer traffic from the more efficient agency to the less efficient.
Congress was aware of the dangers of the economic-capibilities doctrine in the formulation of the Transportation Act of 1940. The recorded deliberations of the Congress demonstrate that the provision to foster the inherent advantages of each mode of transportation was specifically intended to prevent the exercise of destructive economic capabilities.
The Weeks proposals are especially threatening to the small shipper and the small community. Small industrial and mercantile firms are not in a position to bargain for cut rates in the manner of the traffic executives of their large corporate competitors. Recurrent general rate increases fall heavily on the small shipper, and the selective exceptions and retreats from these rates go primarily to the large shipper. The virtual repeal of the long-and-short-haul clause proposed by the Weeks report would be a severe blow to the many landlocked communities and farm regions dependent on the railroads. These are the areas subjected to the private excise tax of superprofitable rail rates collected to finance the private subsidy of competitive traffic.
Indeed, even the apparently favored large shippers and communities would receive only a temporary benefit. The intent of predatory rail competition, if unleashed by the Weeks proposals, would be to destroy competitors. Once this objective had been achieved, no further motive would remain for the railroads to continue the depressed rates, and higher rate levels would be restored. It is notable that the Weeks report contains no proposals whatever to heighten competition between railroads.
While proposing to unleash the railroads for attacks upon small carriers in other modes, the Weeks report would constrict the other modes even more than at present. Thus, the activities of private and contract motor carriers would be sharply delimited by redefinition of those terms, tending to place them in the more tightly regulated common carrier category. Activities of freight forwarder associations would be curtailed. The bulk commodity exemption for water carriers would be repealed. The philosophy of the report is internally consistent. It would strengthen the big and correspondingly weaken the small.
The Weeks report has serious implications as to regional development. Itdustrial growth in the South and West has been especially dependent on waterway and highway carriage. The Mississippi, the Ohio, the Tennessee, the Cumberland and the Warrior-Tombigbee River systems and the Gulf Intracoastal Waterway are main avenues of traffic and are predominantly southern. From 1946 to 1954 the tons of inland freight moved on the Mississippi and its tributaries increased by 69.7 percent, while the carloadings of freight in the Southeastern States served by these rivers increased only 9.7 percent. Similar observations could be made with respect to the waterways of the West. In the valleys of the Columbia, the Missouri, and the Arkansas, water transportation promises to play an increasing role in regional development,