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Missouri Pacific Railroads thereupon asked for permission to establish a rate of 14 cents a hundred pounds instead of 30 cents normal rate. The Commission turned them down first, but in the second petition they allowed a 15-cent rate to be established there.
And let me say as to all of these rates that they were reduced to the competitive point only and fourth section relief was allowed so that to intermediate points on the railroad as well as points beyond the higher rates were kept in effect.
As of 1955, under the Commission's cost computations, the rates on black strap molasses on the short-line distance of some eight hundredodd miles, fall 6 cents a hundred pounds short of paying out-of-pocket costs, and they fall very much more than that below the fully distributed cost levels. And yet the 29-cent rate remains in effect for a distance of eight hundred-odd miles on the Illinois Central and more than 1,000 miles on the Missouri Pacific, below out-of-pocket costs and obviously is a burden on other traffic.
It should be said about these black strap molasses rates that they were established for a minimum quantity of some 1,800 tons. And it may be argued that it is cheaper to haul 1,800-ton lots than singlecarload lots. But I think it is quite apparent that under any computation this rate approved by the Commission not only goes down to but probably below the out-of-pocket cost level. So that it seems to me that it would be very difficult for anyone to conclude that the Commission is unduly restrictive today in allowing railroad rates to be reduced wherever they desire to make reductions to meet the barge competition.
I happen to be personally acquainted with another case involving sugar rates from the West to Omaha where reductions were made to meet water competition to Chicago, but they were not allowed to inter. mediate points where there wasn't any barge competition. And the result of that situation was not only the railroads losing the higher rated traffic but the forcing out of business in Omaha a manufacturing establishment using sugar, forcing that business to move to Chicago, the point beyond, where the lower rate was established. I would like to call your attention to that situation on chart 14.
I shall proceed as fast as I can. I think this is a situation that would interest the committee as showing the Interstate Commerce Commission policy with respect to allowing these rate reductions to meet competition, and their effect.
Back in the 1920's the western railroads used to have a lower rate on sugar from the Pacific coast to Chicago than they had at intermediate territories. In 1924 the Interstate Commerce Commission found that to be an unlawful situation, in violation of the long-andshort haul rule. They required the railroads to eliminate the fourth section violation and the railroads then established an 84-cent rate on sugar from San Francisco, which was blanketed back as a postage stamp rate clear to points in Nevada less than 500 miles from San Francisco. So that we had an 84-cent rate for 470 miles to Piute, Nev., as well as for 2,260 miles for Chicago.
At that time the Interstate Commerce Commission made an investigation of what would be reasonable sugar rates in the Southwest, and they established a scale of rates which is depicted by the black line at the lower end of this chart, for which $1.25 was the reasonable rate
for the 2,260-mile distance, San Francisco to Chicago. Measured by that scale, this 84-cent rate was about 40 cents a hundred lower than a maximum reasonable rate.
The Nevada Public Service Commission tried to get the sugar rates reduced from San Francisco to points in that State, and the Commission in that case found that an 84-cent rate was a reasonable rate for 470 miles. And they graded it down from there. They had a 62-cent rate for a distance of 290 miles that I want to refer to later.
Now, in that situation sugar began to go through the Panama Canal from San Francisco, through New York and the Great Lakes back to Chicago. And the railroads thereupon applied for a 62-cent rate from San Francisco to Chicago, keeping the higher rate in effect at intermediate points.
The Interstate Commerce Commission denied their application and said that that is obviously too low a rate in view of the $1.25 rate that had already been found reasonable in the Southwestern States.
But the railroads came back again and said, “The Illinois waterway is now open. Sugar is now moving by barge from New Orleans to Chicago and by water from San Francisco to New Orleans."
At this time they asked for a 60-cent rate, and the Commission allowed a 65-cent rate to Chicago, keeping, however, the higher 84cent rate at all the intermediate points clear back as far as Ogden. The Commission in that case said, however, that west of Ogden you should not maintain a higher rate from San Francisco than you do to Chicago.
The railroads weren't satisfied with that and they came back again, and this time they asked for a 55-cent rate, and they pointed out that barges were moving sugar to Chicago and St. Louis, and the Commission thereupon permitted a 60-cent rate to go into Chicago and a 58-cent rate to St. Louis.
During that time there was a manufacturer of candy in Omaha, an Omaha man, born and bred there, who had built up a national market for cough drops. And he had a nice little business with a couple of hundred or so employees. He came to the chamber of commerce and the railroad company and said, “Here, the maintenance of this high rate to Omaha, as compared with the lower rate to the points beyond, Chicago and St. Louis, is running me out of business; it is a handicap greater than I can bear.” He said, “I have found it necessary in getting my sugar from the West, to ship it by rail right through Omaha to the Mississippi River and haul it back by truck to Omaha. I can get it at a lower rate that way than by stopping the car at Omaha and unloading it at that point. But I still can't stand the difference in rate. Unless you can give me for my shorter haul as low a rate or approximately as low a rate as you give to my competitor at Chicago, I will have to move out."
Well, the railroad gave him a nominal reduction, but it was not enough, and this industry did move with all its employees from Omaha to Chicago. And thus the railroads lost the high rate business and Omaha lost an industry and employees. And that, I submit, is an illustration of how this practice works out, of declaring a lower rate to a water competitive point to be not unjustly discriminatory as compared to a higher rate to the intermediate point.
I have only one other chart to show you, Mr. Chairman, and that bears on the contention which has been made that the growth of water
transportation and highway transportation has been harmful to the railroads, and it is alleged to be unfair, especially because the Government encourages the development of water transportation by providing a so-called subsidy to the carriers on the waterways and the highways.
I had occasion to make a study of that matter in a case before the Interstate Commerce Commission several years ago involving transportation on the Mississippi River in which the usual contentions were made that the railroads competing with the barge line along the river were being injured by loss of traflic. I tested that by taking the tonnage and the revenues of the railroads immediately paralleling the Mississippi River and the intracoastal canal from New Orleans to Houston and comparing their growth in the year 1951 as compared with 1939 with the growth that had been made by the railroads of the United States as a whole. This chart shows the result of that study.
The first group of bars you see here represents tons originated in percentage of 1951 to 1939. The left-hand bar, the dark red bar, shows the growth of tonnage of the railroads of the United States as a whole was 64 percent in that period. At the same time the growth of the railroads paralleling the waterway was greater than that. The next bar to the right here is the Illinois Central Railroad, the third one is the Gulf, Mobile & Ohio. The next one is the Missouri Pacific and the one farthest to the right is the Texas & New Orleans. Those are the roads paralleling the waterways. You notice they all had a greater tonnage increase in this period 1939 to 1951 than the roads in the United States as a whole.
The next set of bars here shows the increase in ton-miles for the United States as a whole versus these railroads. And there in tonmiles as well as tons, there was on the whole a somewhat greater increase along the river and canals.
But the most striking increases were in freight revenues and in net railway operating income shown on the next two sets of bars. You will notice that the freight revenues of the lines paralleling the rivers, and to a more striking degree the net railway operating income of those lines, increased at a much greater rate than the United States as a whole. And, of course, if they had been losing traffic on account of the Mississippi River waterway the reverse would have been shown. The fact of the matter was that while the bargelines' traffic increased during that period, it was mostly in low grade freight. And while the railroads had an increase in low grade traffic they had a still greater increase in the high grade manufactured freight which was tendered to them by the growth of industry along the river attracted by the lower water rates.
This same situation prevails not only along the Mississippi River but along the Great Lakes and wherever cheap water transportation attracts industry. It gives the railroads more than it takes away from them. And thus, I submit that water transpotration is complementary rather than hurtful to the railroads.
For those reasons, Mr. Chairman-not to trespass further on your time-I have come to the conclusion that the letting down of the bars to a still further competition and still wider spread between the noncompetitive rates, so-called, and competitive, would be injurious to the public as a whole and to the carriers as well. I think that what would happen, as shown by these charts, would be substantially the
establishment of two sets of rates in the railroad pricing system. The competitive traffic would pay about one half or less than one-half the rates of the noncompetitive traffic. I don't think that the so-called noncompetitive traffic can stand any such difference as that, and I do not believe that a system of half prices on competitive traffic, or less than half prices, would work out in the public interest.
Thank you very much.
Mr. HARRIS. Thank you, Mr. Childe, for this very comprehensive discussion you have presented to the committee.
Mr. CHILDE. Thank you, Mr. Chairman.
STATEMENT OF ROLLA D. CAMPBELL, GENERAL COUNSEL, ISLAND
CREEK COAL CO., HUNTINGTON, W. VA. Mr. CAMPBELL. Mr. Chairman, with your permission I would like to file my prepared statement which I have here and I will only tell you what the substance of it is.
Mr. HARRIS. Yes; we will be glad to have you do that. (The statement referred to is as follows:)
STATEMENT OF ROLLA D. CAMPBELL, GENERAL COUNSEL, ISLAND CREEK COAL Co.,
HUNTINGTON, W. VA. Mr. Chairman, my name is Rolla D. Campbell. I reside in Huntington, W. Va. I appear here on behalf of Island Creek Coal Co., which is a large producer of bituminous coal sold generally in the eastern part of the United States. I am the general counsel of such company. I appear in opposition to H. R. 6141.
It is not my purpose to burden you with a detailed discussion of the technical aspects of the various sections of this bill. That has already been done extremely well by other witnesses who have appeared here ahead of me. I refer to the statements of Mr. F. F. Estes, director of the transportation department of National Coal Association, of Mr. William M. Maddox, executive secretary of the Property Owners' Committee, and of Mr. David A. Wright, chairman of the Waterways Council opposed to regulation extension. My company is a member of each such association and heartily supports the positions they have taken in opposition to this bill.
I think I can be most helpful to you by describing the operations of my company and indicating the manner in which H. R. 6141 would be harmful to its interests. This will be primarily a case study rather than an argument based upon general considerations.
Island Creek Coal Co. operates 19 coal mines. They are all located in southern West Virginia, eastern Kentucky, and southwest Virginia, in areas known in the industry as distriets 7 and 8. These mines are located on branches of the Chesapeake & Ohio, Norfolk & Western, and Virginian railroads, commonly called the Pocahontas carriers. Each mine is served by only one carrier. In not a single instance is there competition between two or more carriers for the business of any single mine. Each mine has to start its production to the market via one railroad.
The production of these mines is about 15 million tons annually. The bulk of this coal is sent to markets in the parts of the United States east of the Mississippi River. Some also goes to Canada and to foreign countries in Europe and Asia. Most of our coal moving to destinations in this country is hauled all rail, but substantial tonnages are moved on the Ohio River, the Great Lakes, and along the Atlantic coastal waters.
These mines are located in geographical areas known as the inner crescent and outer crescent freight origin groups. Generally speaking, the inner crescent gronp lies closer to the Ohio River and takes lower rates on north and west bound coal than the outer crescent group. The outer crescent group lies east and south of the inner crescent group and takes lower rates on east and south bound coal. Also, generally speaking, the rates from each group to the large
consuming markets are the same regardless of the location of the mine within the group, i. e., whether nearer or farther from the destination. Of course, local rates are not set up on a group basis but are based primarily on distance.
The rates from these origin groups to common market destinations are not only related as between these two groups by specific differentials but are also related by specific differentials to other origin groups located in Kentucky, Tennessee, in northern West Virginia, in western and central Pennsylvania, and in Ohio and other Middle Western States.
The relationship of the various coalfields located in these freight origin groups is highly important to all coal producers selling coal in the common markets served by mines located in two or more groups. The reason is that coal is a highly competitive commodity and the competition is focused not at the mine but at destination where the coal is consumed. Competition is on the basis of delivered price made up of mine price plus freight. Often the freight is half or sometimes more than half of the delivered price.
It is axiomatic in the coal trade that a difference of a few pennies per ton in the delivered price will determine the choice of supplier among several suppliers competing for the same business. This is particularly true of coal sold to public utility electric generating stations, which generally buy on a comparative cost of heat units delivered in the form of coal to their plants. A small difference on a ton makes a large difference at the end of the year because of the large quantities of coal consumed. This electric utility market for coal is the one showing by all odds the greatest rate of growth and to it the coal industry looks for an important part of its future.
The active interest of all coal producers in both level of freight rates and differentials is, therefore, based on a solid footing of competitive necessity. Coal mines must be designed for an economic life of 20 years or more, and to continue to produce during such life they must have rail rates which will permit them to reach the common markets on a competitive basis. Today a mechanized mine with cleaning plant costs $7.50 to $10 per ton of annual capacity to install.
Such large capital investments cannot be justified unless there is a reasonable stability of freight rate levels and differentials. If a mine loses its competitire position because of a change in rate levels or differentials, all it can do is to shut down and quit. The mine cannot be moved to a more favorable location. It has to exist where the coal is. The rail carrier serving it holds its destiny in the carrier's hands. This power, frankly, is too great and too dangerous unless restrained by positive authority of a ratemaking body having the right to fix specific rates and differentials.
It is significant that not a single mine of my company has a local market which will absorb a substantial percentage of its total output. All coal produced by the company, with trifling exceptions, must go to distant markets where it coinpetes with coal from its own districts as well as from other districts. In not a single common market area does my company enjoy a lower rate than its competitors, but in most markets its coal must sell in competition with other coals having lower freight rates. The same is generally true of most of the mines of other producers located in the same freight origin groups.
My company's coal competes not only with other coal but also with oil and gas. These fuels generally cost less to produce and transport than coal. Certainly, the wage factor in their production and transportation is far less than is the wage factor in the production and transportation of coal. Until very recently, coal has been losing position to oil and gas for both domestic and industrial use.
In view of what I have said, I think you will agree with me that to my company, and to other coal companies selling in the common markets, both in this country and abroad, freight rate levels and differentials are more than matters of mild interest. Indeed, they are matters of economic life and death-nothing less.
It should be apparent to you that we are forced by economic necessity to oppose a bill which would grant to the railroads serving our mines the freedom to fix the level of rates at any figure they wish, so long as it is not below an out-of-pocket cost or above a reasonable full cost maximum. Inevitably, the freedom of the rail carriers to fix rates to meet competition would mean that the losses coming from the low rates would have to be imposed on commodities tied to the rails to which competitive forms of transportation are not available. As I have indicated, our mines have only one form of transportation available to them-rails. They cannot benefit from the proposed change but they surely can and will be hurt. They may even be sentenced to economic death,