MEMORANDUM ON COMPETITIVE RATEMAKING, BY HARRY C. AMES,

ATTORNEY AT LAW

When I testified before your committee on May 4, 1956, with respect to H. R. 6141 and 6142, this question was propounded to me: "If a rail carrier can reduce its rate on a given commodity and still earn, under such reduced rate, its fully distributed costs, plus a fair profit, should it be allowed to make such a reduction, or should it be presented from doing so because it might have a harmful effect upon competing modes of transportation?"

If, in the regulation of commerce and the administration of the statute, we could consider only the 1 commodity and the 1 movement for which the reduced rail rate is proposed, there could be but 1 answer: The reduction should be allowed. But everyone even casually familiar with transportation knows full well that regulation cannot be insulated within such a narrow sphere. That is to say each major change in a rate must be considered in its relation to the rate structure as a whole.

As briefly as I can, let me explain what I mean. The total cost of operating a railroad is, of course, the difference between what is taken in and what is paid out. This total cost is generally spoken of as the "transportation burden." When it comes to setting up a rate structure for freight service, the carriers must apportion that burden among the thousands of commodities handled in such a fashion that the traffic will move. It means that on low-grade commodities, such as sand, gravel, coal, iron ore, and the like, the carriers must allocate a relatively light share of the burden-otherwise the traffic will not move. Articles of higher value must be assigned a relatively greater share of the burden, and so on. This process is known as the distribution of the transportation burden upon the basis of what the traffic will bear.

And under the necessity of thus distributing the general burden of transportation the rate structure of the rail carriers reflects the widest sort of range in the quantum of individual rates. The physical cost of handling a ton of traffic, either out-of-pocket or fully distributed, is no different whether that ton is composed of typewriters or coal. But the theory of what the traffic will bear has caused the actual rates to vary widely. In a proceeding before the Commission involving joint rail and barge rates (Docket No. 26712, Rail and Barge Joint Rates, 270 I. C. C. 591; 274 I. C. C. 229; 284 I. C. C. 785), the rail carriers made a cost study on some 52 typical movements of freight in joint rail and barge service, the idea being to show that the out-of-pocket costs for the all-rail service would have been lower than those for the joint rail and barge service. Putting the out-of-pocket costs at an index of 100, the actual rates showed a range of from 115.3 percent to 407.6 percent of such costs.

Now it has come about, as you pointed out during my testimony, that through the dozen or so general increases made in rail rates since 1945, the rail rate structure has become fairly high as an overall proposition. It is also true that some commodities whose share in the general burden of transportation is fairly high are moving in competitive water service. When the tremendously wide range of rail rates in general is considered, it is comparatively easy for the rail carriers to select a commodity description such as "iron or steel articles," reduce rates on it and still earn fully distributed costs, considering general averages. But the moment the carriers ease off the share of the burden which iron and steel articles are bearing, it follows that the slack must be assigned to some other commodity. Otherwise, the whittling down process will undermine the entire rate structure.

I cannot improve upon the Commission's language written in January 1940, when it commented upon the so-called Miller-Wadsworth amendment to the 1940 act. That amendment would have enacted into law just about the same principle which is reflected in the question we are here considering. It read:

"In order that the public at large may enjoy the benefit and economy afforded by each type of transportation, the Commission shall permit each type of carrier or carriers to reduce rates so long as such rates maintain a compensatory return to the carrier or carriers after taking into consideration overhead and all other elements entering into the cost to the carrier or carriers for the service rendered." Oddly enough the authors and proponents of the amendment stated flatly that it was designed to forestall any efforts to raise water rates to the level of rail rates, a result everyone who opposed regulation of water carriers greatly feared. There is not a word in the debates or discussions to show that anyone had rail reductions in mind. But as the amendment read, it could have been construed so as to give the same result as is visualized in H. R. 6141.

In commenting upon the inadvisability of the amendment the Commission had this to say about competitive ratemaking:

"Let us suppose, for example, a situation where competing railroads, coastwise steamship lines, and trucks are all maintaining to their own and the shippers' satisfaction in general, a compartively high level of freight rates on various packaged commodities of high value, and some carrier, for the sake of a temporary advantage, undertakes to cut those rates.

"If this must be allowed, ultimately all the competing rates will be reduced and a hole created in carrier revenues which may make it necessary to increase rates on traffic less able to stand the burden. We think that it should not be allowed, and that the Commission should be in a position to prevent such a train of events by exercise of its authority over minimum rates."

There is another phase of the matter which should be considered. In the question posed, we start with a hypothetical rail rate sufficiently high to cover fully distributed costs, including a profit. The corresponding water rate is lower than the rail rate by a reasonable differential in recognition of the less costly and inferior water service. It must be presumed, therefore, that the water rate, too, reflects fully distributed costs plus a profit. It stands to reason, therefore, that when the rail carrier reduces its rate to the level of the water rate the water carrier, if it hopes to continue to handle the traffic, must make a corresponding reduction. No one has a right to believe that the situation will remain static after the initial rail reduction. That is to say, if the Commission must permit the reduction in the rail rate it must recognize a parallel right in the water carrier to reduce its rate.

Who profits by such a situation? As the Commission points out, someone might gain a "temporary advantage" but this downward spiraling of rates can do no permanent good and can only result in an undermining of the rate structure. The time to stop a rate war such as that above depicted is in the beginning, rather than wait to see which type of carrier will first become exhausted. That philosophy was applied by the Commission in the three-way (rail, water, truck) competitive situation arising in Petroleum Between Washington, Oregon, Idaho, and Montana (234 I. C. C. 609). In that case the Commission said at page 637: "We were given power to fix minimum rates, however, primarily for the purpose of preventing destructive competition in rates and promoting the financial stability of the transportation agencies. Our duty in the exercise of that power is not done, therefore, if we allow competitive rates to gravitate to the lowest possible level."

Applying that reasoning the Commission refused to approve a reduced rail rate even though it would have returned earnings over and above full costs. It permitted the carrier, in lieu thereof, to establish a rate slightly higher and also higher than corresponding rates by truck and water. The Commission's decision was challenged in the courts and affirmed in Scandrett v. United States (32 Fed. Supp. 995); Same v. Same (312 U. S. 661, per curiam).

It is thus plain to see that the reduction of a rate is not so simple as some of the protagonists of absolute freedom in competitive ratemaking would have us believe. And just what is this rate structure as to which the Cabinet Committee seems so prone to risk a breakdown? Surely it cannot be deemed excessive because under it the rail carriers have been compelled to go to the Commission at least 10 times since the close of the war asking authority to make horizontal increases in order to bring their revenues more nearly to the level of a fair return.

The answer is that full power should continue to reside in the Commission to police and curb competitive excesses and to preserve the integrity of the rate structures and the sound economic future of all modes of transportation in the public interest.

MEMORANDUM ON H. R. 6208 BY HARRY C. AMES

When I testified before your committee on May 4, 1956, in connection with H. R. 6141 and H. R. 6142, concerning proposed revisions of the Interstate Commerce Act, you asked for a memorandum of my views with respect to H. R. 6208. The latter is a bill introduced by Mr. Priest presumably in response to legislative recommendation 4 of the Interstate Commerce Commission, reproduced at page 122 of its 69th annual report dated November 1, 1955.

The bill purports to make two changes in the existing law to meet the Commission's expressed objectives, as follows:

(1) It makes the "fourth section self-operating with respect to the right of a circuitous route to meet the rate or rates legally established between competitive points over the more direct routes, with no further authorization from the Commission being required other than the standards laid down by other sections of the act."

(2) "As an incident of this suggested change removal of the so-called reasonable compensatory provision is also proposed."

On behalf of the carriers I represent I would have to object to the proposed bill as it is written. We would have no objection to granting automatic relief under the long-and-short-haul clause over a circuitous route, if the carriers have first secured relief over the direct route. Similarly, there should be no great objection to allowing the carriers over indirect routes to meet the rates of the carrier or carriers operating the direct routes, even though the latter are complying with the long-and-short-haul clause.

Our difficulty with the bill, as it now is written is that it is impossible from it to determine just what is meant by the term "direct line or route" or whether the equalization of rates contemplated is that between or among the same types of carrier. For example, over the direct water route from New Orleans to St. Louis the water carriers comply with the fourth section. And since there is only one route over which the water carrier can operate, the Mississippi River, its route must be the direct route. Does this bill mean that rail lines operating circuitous routes from New Orleans to St. Louis, either on the east side or the west side of the river, would be allowed to meet the water rate? We cannot believe the Commission intended such a result but it could be argued that that is what the bill provides.

Our railroad friends are very adroit at shaping legislative provisions to meet their ends. For example, in at least four cases now pending before the Commission, they are seeking to reduce their carload rates (with minimums of 80.000 to 100,000 pounds per car) down to the precise level of the overall costs for bargeload service with a minimum of 500 tons or 1 million pounds. Of course, the proponents of the 1940 act regulating water carriers told the opponents of regulation that there were three specific provisions in the act, viz, the national transportation policy; the ratemaking rule in section 15a; and the concluding sentence of section 305 (c) which would absolutely prevent such a course of action. But the railroads are urging the first two of those provisions as specific authority for their actions. In other words, provisions avowedly placed in the act for the protection of water transportation are being urged as instruments for its destruction.

In order to effectuate the purpose intended I suggest that the language beginning at line 17 with the words: "ence: And provided further * * *," down to the word "points" on line 23, page 2, be made to read as follows: "And provided further, That any such carrier or carriers operating over a circuitous line or route may, subject only to the standards of lawfulness set forth in other provisions of this part of part III and without further authorization, meet the changes of another carrier or carriers of the same type operating a direct line or route, to or from the competitive points. As used in this proviso the term 'direct route' shall be construed to mean the shortest tariff route from and to such points."

THE REASONABLY COMPENSATORY RULE

The carriers I represent object most strenuously to the proposed elimination of the so-called reasonably compensatory rule, which now provides that "in exercising the authority conferred upon it in this proviso 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 * * **

And we do not agree at all with the Commission that elimination of the proviso is properly an "incident," necessary or otherwise, to the circuity provisions. Since its decision in Transcontinental Cases of 1922 (74 I. C. C. 48), the first major fourth-section proceeding after the passage of the Transportation Act, 1920, in which latter the term "reasonably compensatory" first appeared, the . Commission has construed the words to mean a rate

(1) which reflects more than the out-of-pocket costs incurred in handling the traffic and

(2) which is not lower than necessary to meet existing competition; and (3) which is not so low as to threaten the extinction of legitimate water competition; and

(4) which is not so low as to cast a burden on other traffic.

These constituent elements, which are stated in the conjunctive, and particularly (2) and (3) as set forth, have been a great aid to water carriers in resisting cut-throat competition. And while the words “reasonably compensatory" do not specifically appear in other sections of the act, the Commission has given consideration to elements (2) and (3) as above written in dealing with proposed competitive rates where no question under the fourth section is presented. For instance in its 64th annual report, dated November 1, 1950, at page 4, the Commission said as to all rates published to meet competition:

"Carriers are entitled under the act to compete for traffic, and all types of transportation have initiated reductions for that purpose. It is required, however, that the rates proposed be reasonably compensatory, that they do not result in undue discrimination, and that they do not lessen the carriers' ability to render adequate service."

We very much fear that if Congress takes positive steps to drop the "reasonably compensatory" proviso from the act, such action will be construed as an intention on its part to get rid of the definition of competitive rates so carefully set forth in Transcontinental Cases of 1922, supra, and which has been adhered to ever since.

STATEMENT OF G. C. TAYLOR, PRESIDENT, MISSISSIPPI VALLEY BARGE LINE Co., ON TON-MILES OF WATER TRANPORTATION AFFECTED BY H. R. 6141 AND H. R. 6142

My name is G. C. Taylor and I am president of the Mississippi Valley Barge Line Co., with offices at 1017 Olive Street, St. Louis, Mo. I have been with the line since its inception in 1929 and have been president for the past several years. My experience with barge-line operations has taken in every phase of the service and I believe I am qualified to speak with authority on the subject matter of this memorandum.

On several occasions during the hearings on H. R. 6141 and H. R. 6142, et al., observations by committee members indicated that it was estimated that probably not more than 10 percent of the traffic moving on the inland waterways would be affected by regulation. In public discussions on the matter similar Comments have been made from time to time.

I have always challenged the validity of these estimates and have felt that they were far too low. Therefore I caused a study to be made for the purpose of ascertaining what the true situation is. This study shows that while 10 percent might be a reasonably accurate figure as to tons carried by water, it is wide. of the mark when the percentages are based upon ton-miles of transportation. And the ton-mile figures are more fairly indicative of the transportation service rendered than are the tons.

Based upon the most complete study we have been able to make, it is estimated that the regulated traffic handled by common and contract carriers on the Mississippi River system amounts to about 34 percent of the total traffic expressed in ton-miles.

Of course we do not agree that it is only the regulated traffic which will be affected by the legislation. If rail carriers are given the freedom to make competitive rates which these bills contemplate, there is no reason to believe that they will overlook commodities which are now exempted under the provisions of law relating to bulk transportation. In fact, the only water transportation which cannot be reached by regulation is that handled in private carriage. We arrived at our figure of 34 percent for regulated traffic in the following manner: We took from the annual reports filed with the Commission by 21 common and 6 contract carriers on the Mississippi River system the total revenue figures for the year 1954, on the regulated tonnage which they handled. To determine the ton-miles of service we divided the total revenue in dollars by 4 mills, the latter representing the average earnings per ton-mile. This figure of 4 mills is based upon the estimates of experienced operators and we believe it very accurately approximates the average earnings in the trade on regulated traffic. The resulting 13,793,505,000 ton-miles amount to approximately 34 percent of the total ton-miles reported by the United States Corps of Engineers of 38.703,034,000 for 1954. The latter figures, of course, cover all traffic, including private carriage, handled on the Mississippi River system.

We have no way of determining the ton-miles handled in private carriage. But even if we assume that it amounts to 33 percent of the total-an estimate

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we believe to be very liberal-it will be seen that not 10 percent but some 67 percent of the total water transportation, expressed in ton-miles, stands to be affected by this legislation.

STATEMENT OF GUY L. BROWN, Grand CHIEF ENGINEER, BROTHERHOOD OF

LOCOMOTIVE ENGINEERS

As grand chief engineer and chief executive of the Brotherhood of Locomotive Engineers, I appreciate the privilege of filing this statement on behalf of the organization.

We are interested in H. R. 6141, one of the measures you have under consideration in these hearings. We take no position as to the other bills you are considering.

The Brotherhood of Locomotive Engineers is a labor organization, national in scope, organized in accordance with the Railway Labor Act, and composed of approximately 75,000 locomotive engineers and other men in engine service throughout the United States and Canada. It is the representative under the Railway Labor Act of the craft or class of locomotive engineers on approximately 98 percent of the railroad mileage throughout the United States.

As a labor organization representing an important segment of the transportaindustry, the brotherhood is interested in H. R. 6141, not only in the provisions of the bill which directly affect rail transportation but also in the enunciation of a sound national transportation policy of the Congress. It has welcomed the studies and report of the Presidential Advisory Committee on Transport Policy and Organization. It is appreciative of the introduction and consideration by your subcommittee of the bills now before you.

The

The brotherhood is acutely conscious of the necessity of maintaining, protecting and developing a sound and solvent system of railroad transportation to meet the needs of the commerce of the Nation and the national defense. brotherhood's particular function in this endeavor is to furnish an adequate supply of highly skilled and experienced engine service employees, without whom the complex and exacting service of operating rail traffic cannot be performed. The importance of this function can hardly be overstated. As the committee well knows from history, in times of national emergency the railroads bear the brunt of mass transportation. Without adequate rail transportation mobilization of a war effort would break down. Not only must there be maintained an adequate plant, cars and motive power, but also a reservoir of personnel with requisite skill and experience. It is of national concern that the profession of locomotive engineer be made sufficiently desirable and attainable that qualified men will be attracted to it, and will be willing to undergo the long period of education, training, and experience as a locomotive fireman necessary for promotion to service as engineer. The supply of railroad labor must be kept at a safe level and in high morale. Wisely, the bill continues in section 2 (3) the present statement of the national transportation policy of the Congress "to encourage fair wages and equitable working conditions." A strong and healthy railroad industry obviously is envisioned by this policy.

In the promotion of these objectives the attitude of the Brotherhood of Locomotive Engineers is not a negative one. It is rather that of encouraging a fuller utilization of the potentialities of rail service, of freeing it from unnecessary regulatory restraints, and of protecting it against unduly protected competition by other agencies of transportation. Railroad labor has felt the impact of the latter factor in loss of jobs as rail traffic has been diverted to other carriers. We think the pending bill is rightfully aimed at long overdue adjustments in transportation law and policy which will enable the railroad industry to more freely and fully fill its important role in the transportation service of the Nation. Although we approve the objectives of H. R. 6141 generally, we are opposed to one feature of the bill. I refer to section 6 and believe that the entire section should be stricken from the bill. If section 6 is deleted, we favor the enactment of the bill.

Section 6 would give to the Interstate Commerce Commission authority to override State service requirements under certain circumstances and thereby confer a new jurisdiction on the Commission in matters which have heretofore been within the province of the State governments to hear and decide. The problem sought to be reached is that of the so-called passenger deficit. The remedy to be afforded is the availability of Federal authority in addition to that