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SUPPLEMENTARY STATEMENT OF EARL B. SMITH, DIRECTOR OF TRANSPORTATION AND

COMMUNICATIONS, OFFICE OF THE ASSISTANT SECRETARY OF DEFENSE (SUPPLY AND LOGISTICS)

Mr. Chairman and members of the subcommittee, on April 24, 1956, I gave the views of the Department of Defense on those portions of H. R. 6141 and 6142 which proposed to modify the Government rate provisions in the Interstate Commerce Act and on H. R. 525 which would repeal entirely the Government ratemaking provisions of section 22 of that act.

In that testimony it was pointed out that in view of the fact that the Secretary of Defense supported the recommendations of the report of the President's Advisory Committee on Transport Policy and Organization, my remarks would be confined to the proposed repeal or modification, as the case may be, incorporated in H. R. 6141 and 6142, also H. R. 525. The Government rate provisions incorporated in section 22 of the act were given extensive and painstaking study by a subcommittee of the Presidential Advisory Committee and that Committee recommended the modification incorporated in H. R. 6141 and 6142. The proposed modification reflects a well-considered and reasonable solution to any changes needed in the Government rate provisions.

Since my prior testimony many witnesses have appeared before this subeommittee submitting testimony pro and con with respect to these bills. Generally speaking, certain segments of the transportation industry and practically all elements of the shipping industry have supported repeal of section 22 of the Interstate Commerce Act as exemplified by H. R. 525. Representatives of those groups have urged immediate passage of 1. R. 525 in preference to action on the Government rate provisions proposed in H. R. 6141 and 6142.

At the outset let me say that it is certainly conceivable that some of the criticism directed against the use of section 22 of the act has a valid basis. We know that it has. In fact, in my previous testimony, the abuses inherent in seetion 22 were delineated. We also pointed out to you the advantages implicit in section 22—flexibility in ratemaking to meet the changing military requirements and protecting security implicit in military operations. What we are urging is that Government rate provisions be amended to preserve the good and destroy the undesirable features of section 22.

Additionally, it is no doubt true that some personnel of the military depart. ments engaged in transportation procurement use methods and practices contrary to our policies and regulations in securing rates from the transportation industry. But I do want to direct your attention to the fact that the Department of Defense is a large organization with a vast employment of personnel engaged in buying transportation. To ascertain that all personnel follow all the rules all the time is a difficult task. There are infractions but they are the exception rather than the rule. When such departures from policy and regulations are disclosed, action is taken immediately to correct them.

Much of the testimony presented represents honest differences with respect to the need for Government rate provisions-some represents misunderstandings some is designed to mislead-a portion is just frivolous——there appears to have been more heat than light placed on this subject.

Since my previous testimony dealt, among other things, with the need for Gor. ernment rate provisions, my supplementaly testimony will treat only the testimony on which there has been misunderstanding. Additionally, this testimony will give you an informed estimate of what the complete repeal of the Government rate provisions of section 22 of the act will cost the military departments in terms of dollars.

Contention that: (a) Rates established on Government traffic are in many cases below standard levels of reasonableness, and (b) reduced rates for the Government result in increased rates to other shippers.

The advertising men work on the thesis that if a statement is continuously drummed into the ears of prospective purchasers, what is fiction will eventually become accepted as fact. The above statements actually fall in this categoryfor over the past 10 years these statements have been repeated often and long.

These two phrases are generally discussed independently of each other, but they are inextricably related. One proposition is that if the rates established on Government traffic are in many cases below the standard levels of reasonableness, then the rates on Government traffic would result in relatively-higher-thanreasonable rates for other shippers. Conversely, if rates on Government traffic are not below standard levels of reasonableness, then the Government rates would not have such an effect on the other shippers.

Actually, the test applied by the Interstate Commerce Commission to determine whether a rate is below a level of reasonableness is whether the earnings from a rate will be sufficient to cover fully distributed costs of providing the service, including assignment to profit, for which the rate is made. Hence, it can be seen that the earnings produced is the prime factor. It is not particularly the measure of the rates themselves, whether it be class, exceptions to class, commodity, or section 22 rates.

I want again to discuss the rate situation, particularly as it affects Government traffic. At this time there exists in this country two general categories of rates, or prices, used by transportation agencies—the first being class rates—the second, commodity rates. The class rates blanket the entire United States and are used to afford any shipper a rate on a sporadic shipment of goods on which there has not been a commodity rate established. The second category, or the commodity rates, as I pointed out in my previous testimony, are lower in measure than the class rates on the same commodity and have been established by the carriers for industrial concerns largely because of the volume shipped and the regularity of the movements. Except for commodity rates on shipments of coal and certain other commodities, there are no commodity rates available on Government, and particularly military traffic because they have not been placed in effect where military traffic moves. Consequently, rather than pay a high class rate on the shipment of a particular commodity which is to move in considerable volume, the military departments request a rate adjustment from the carrier or its agent. If the carrier grants the military departments a rate lower than the class rate, the carrier generally exercises its option to publish the rate in a section 22 document. If such a commodity rate were accorded an industrial concern, the carrier industry would have published the rate in a commodity tariff. Section 22 has merely been used as a vehicle to afford the Government a commodity rate to, from, or between its many installations. The attached exhibits show typical examples of actual requests made by the military departments for certain rates on particular items and the comparison of the measure of rates and earnings with existing rates.

Now I will discuss earnings. The Interstate Commerce Commission has had an opportunity on at least one occasion to study the level of earnings on section 22 traffic. Likewise, the Commission's Bureau of Transport Economics and Statistics has treated this same matter in its waybill analysis. This latter analysis was referred to in my previous testimony (pp. 4 and 5) wherein I said:

reports of the Bureau *** (shows] that the average level of section 22 quotations was above that of comparable commodity rates by 14 percent for years 1950 and 1952 and by 13 percent for the years 1953 and 1954."

Attempts to discredit this analysis of the Commission's Bureau of Transport Economics and Statistics have been unsuccessful. In fact, the letter transmitted to this subcommittee by the Director of the Commission's Bureau of Transport Economics and Statistics and reported in Traffic World of May 19, 1956, confirms what the analysis shows.

The report of the above letter in Traffic World mentioned ammunition fixed 11. 0. i b. n. for cannon, from Panhandle, Nebr., to Locada, Oreg. The shortline mileage was 1,148 miles. The then existing rate was $7.21 per 100 pounds and the minimum weight was 30,000 pounds. The volume for shipment was 20 million pounds or 210 carloads with an average load of 108,000 pounds. Carload revenue for each car based on the existing rate of $7.21 per 100 pounds at the average load of 108,000 pounds would have been $7,786.80. This would have produced $6.78 per car-mile and 126 mills per ton-mile. The carload revenue for each car based on the existing rate of $7.21 per 100 pounds at the minimum weight of 30,000 pounds would have been $2,163, or $1.88 per car-mile or 125 mills per ton-milé. The rate offered by the carrier was $4.69 per 100 pounds. Carload revenue produced for each car at this rate and the average loading of 108,000 pounds is $5,065.20—$4.40 per car-mile or 81.4 mills per ton-mile.

Following my prior testimony questions have been raised regarding the reliability of the results of comparing section 22 traffic with commercial traffic since the comparison was on "similar but not identical commercial traffic.” In this connection the revenue derived from traffic with similar characteristics may appropriately be compared regardless of the fact that the commodities may not be identical. It is historically a fact that the predominanee of decisions by the Commission in such matters are rendered on the same basis.

The Commission itself had an opportunity to consider these section 22 rates in. dockets Nos. 30860 and 30416, Class Rates Mountain Pacific TerritoryTranscon

78456-56-pt. 3 -32

tinental (296 1. C. C. 555). The exhibits in this proceeding abundantly support the results of the analysis referred to above.

Even though rates granted the Government under section 22 tenders have been lower than the class rates, they have been at levels, the same as or higher than commodity rates on comparable commodities of industrial concerns, and the revenue contribution to the carriers has been higher than that of comparable commodities shipped by industrial concerns.

Moreover, the analysis referred to above and the exhibits in dockets Nos. 30660 and 30416 conclusively show that the level of rates paid by the Governmenttraffic characteristics of the commodity (volume, load factors, distance, origins, and destinations) considered, return to the carriers a better revenue contribution than that produced by rates on comparable commodities shipped by industrial concerns. It is my belief based on experience that a complete investigation by the Commission of negotiated Government rates would confirm what has been already found on cursory examination.

Since military traffic is returning to the carrier industry a greater revenue contribution than that of commercial traffic (and the rates on which the latter contribution is based are reasonable), it seems mathematically impossible for military traffic to cast a burden on commercial traffic.

It seems inconceivable to me how anyone would seek to deny to the Government a rate on a commodity which will return to the carrier the same as or a higher revenue contribution than that afforded by a comparable rate accorded to an industrial concern.

Contention that: Privilege now available to carriers to reduce rates for the Government results in destructive rate wars among carriers and between modes of transportation.

It is certainly true that the present wording of section 22 contains the seeds for destructive rate wars. Despite this, however, and despite the further fact that the number of voluntary tenders are on the upgrade, there is no available evi. dence, at this juncture at least, that the situation has degenerated into unfair

and destructive rate practices. This view appears to be substantiated by the Commission's decision in docket No. 31451, All American Airways, Inc., et al. v. Abilene and Southern Railway Company et al. (decided November 23, 1955, reconsideration denied May 7, 1956), wherein it found that the railroads, in granting reduction to the military departments for the transportation of military personnel in groups, had “* *** not resulted in quotations by them which (were) * * * noncompensatory * * *" and that they were not ** unfair or destructive competitive practices * in contravention of the national transportation policy."

Much of the testimony of the witnesses before this subcommittee has tended to imply that to the extent that there are rate wars, the Government agencies are responsible. It is the policy of the Department of Defense to seek adjustments in rates which are reasonable both to the military departments and the carriers. While there are infractions of our policies and regulations, as pointed out pre viously in this testimony, they are corrected as rapidly as they are disclosed. Section 22 extends a privilege to the carriers and not to the Government. No carrier is bound to grant the Government any rate concession except through the usual litigation channels before the Commision as afforded by the Interstate Commerce Act, namely, a complaint that a rate is unreasonable and the Commission, after hearing, so finds.

It was specifically for the reasons described above that we have urged amendments in the Government rate provisions as proposed in H. R. 6141 and H. R. 6142. The legislative proposals in those two bills will go a long way in eliminating the possibility for rate cutting by the carrier industry in the drive for Government traffic.

Contention that: Gorernment rates are negotiated "under the counter" in secrecy.

The military departments use in principle the same procedure in negotiating rates with the carriers as used by ethical industrial concerns. When the inili. tary departments desire a reasonable rate on a particular commodity, a comparison is made between present and proposed rates and the ton-mile earnings on the present and proposed rates. After these factors are determined, the milltary departments make representations to the carrier or its agent setting forth the transportation characteristics of the commodity and the ton-inile earnings on the present and proposed rates and inquire whether the carrier or its agent will publish the rate that has been proposed. After a review of the information supplied by the military department, the carrier may reply in the affirmative.

The carrier then has two methods by which the rate can be made available to the Government. It may either publish the rate in a tariff and file it with a regulatory agency, or publish the rate in a tender under section 22.

The military departments would, of course, prefer to have these rates published in tariff form. However, since the option is with the carrier as to the medium of publication and for reasons best known to the carrier, the publication of the rate is generally in a tender under section 22. On the other hand, if the carrier replies in the negative to the request of the military departments to publish the proposed rate, the carrier and the military departments may then negotiate for a rate on a higher level, but certainly within a zone of reasonableness. After agreement is reached, the carrier then publishes the rates in the manner described immediately above.

Of course, if the carrier publishes the rate in a tariff, it is filed with the regulatory agency and is open to the general public for use and for inspection by any interested person. If the carrier publishes the rate in a section 22 tender, it is not filed with the Commission, but is tendered to the military departments in sufficient quantities to allow distribution to those Government agencies and installations affected by the rate. The military departments maintain a file of these section 22 tenders which are available for inspection by any interested person at reasonable business hours. Thus, it will be seen that under the regulations of the military departments, they follow the same procedure in conducting their rate negotiatitons as do industrial concerns.

In this connection you perhaps may inquire why the milltary departments received almost 19,000 voluntary tenders last year. The answer is relatively simple. Most of these voluntary offerings by carriers are made so that a carrier can meet his competition to participate in Government traffic or go below the competitive rate to insure getting the Government traffic. ADVANTAGES OF PRIVATE AND CONTRACT CARRIAGE AVAILABLE TO PRIVATE SHIPPERS

BUT NOT AVAILABLE TO GOVERNMENT Private shippers, in negotiations with common carriers, have avenues open to them that are not available to the Government. A private shipper, in negotiation for a rate with a common carrier, always has the private or contract transportation weapon available if the common carrier refuses the requested rate adjustment. Because of Department of Defense policy, the military departments do not engage in private transportation except on a very limited scale within installations and in terminal areas. Additionally, since contract carriers' route permits have been granted by the Commission to fit the pattern of industrial concerns, a very small amount of this contract transportation is available to the mliltary departments. The military departments are thus in reality "captive" to the common carrier industry.

ADDITIONAL COST TO THE MILITARY DEPARTMENTS IF SECTION 22 IS REPEALED Many inquiries have been made during this hearing as to what additional cost to the Government would be involved if section 22 is repealed. Since the preparation of our original report on S. 2114 and its transmission last February by the Department of the Army to the chairman, Committee on Interstate and Foreign Commerce, United States Senate we in the Department of Defense have had an opportunity to make a more thorough investigation of this problem and our best informed estimate is that at the present level of traffic (passenger and freight), it will cost the military departments annually approximately $200 million for freight and $15 million for passengers, or a total of $215 million. This $215 million figure, is of course, direct additional transportation cost only. It does not include the additional expense which will be necessary to hire additional personnel to process rate adjustments throught the carrier ratemaking machinery and litigate rate adjustments before the regulatory agency. Any estimate of this cost would be highly speculative--but this expense will emerge.

In the deliberations of your subcommittee on these bills and particularly II. R. 525 it should be pointed out that the United States District Court for the Northern District of California speaking through Circuit Judge Lemmon in doeket No. 35101, United States of America, Plaintiff v. Public Utilities Commistion of the State of California, Defendant, decided April 30, 1956, said that it would interfere with military operations to require the military departments to be subject to the normal ratemaking provisions of the Public Utilities Commission of California.

The Court held that “* * * insofar as section 530, * * * purports to authorize the Public Utilities Commission of California to impose 'such conditions as it may consider just and reasonable' upon the granting of reduced rates by commercial carriers in favor of the * * * (United States of America), it is invalid, void, and of no effect, as contravening the provisions of the United States Constitution relating to the national defense, supra. The * * * [Public Utilities Commission of California) is permanently enjoined from enforcing any of the restrictive provisions of seetion 530 as against the * (United States of America) * * *

In conclusion, the Department of Defense supports unqualifiedly the Government rate proposals in H. R. 6141 and 6142 and urges that they be favorably reported. Conversely, we recommend that H. R. 525 be unfavorably reported in its present form by your subcommittee. I thank you.

EXHIBIT 1 SULFURIC ACID-SHEFFIELD, ALA., TO FLORENCE, ALA. On April 6, 1955, a route order was issued to cover 36 carloads of sulfuric acid from Sheffield, Ala., to Florence, Ala.; movement to start immediately.

The applicable rate was a class rate of 21 cents per hundred pounds, minimum weight based on capacity of" tank car. It was requested that a rate of 115 cents per net ton, minimum weight based on capacity of tank car used be established. The requested rate was predicated on the Southern Freight Association Fourth Section Committee Sulfuric Acid Scale which is the basis used in establishing commodity rates on subject commodity between points in the same territory.

Rail carriers established commodity rate as requested, and a savings of $5,382 in transportation charges was realized. Tariff' rate: Distance

---miles. Average load

-pounds-- 100,000 Rate

--per hundredweight - $0.21 Revenue per car.--

$210.00 Revenue per car-mile

$12.00 Revenue per ton-mile..

-cents. Negotiated rate: Distance

--miles. Average load

---Pounds.- 100,000 Rate.

per net ton.. $1. 15 Revenue per car--

$57.50 Revenue per car-mile

$11.50 Revenue perton-mile.

--cents. 23 Basis: Southern Freight Association Fourth Section Committee Sulfuric Acid

Scale. Statistics same as for negotiated rate.

EXHIBIT 2 SMALL-ARMS AMMUNITION—BELLEMONT, ARIZ., TO HILL FIELD, UTAH The Fourth Transporation Zone Office reported on November 16, 1965, by telephone, volume movement of 10,600,000 pounds of small-arms ammunition from Navajo Ordnance Depot, Bellemont, Ariz., to Hill Air Force Base, Utah. Shipment to start immediately.

The present going tärift rate fourth class 185 cents per hundredweight, minimum 20,000 pounde.

The proposed rate of 116 cents per hundredweight, minimum 30,000 pounds, was predicated on commodity rate of 154 cents per hundredweight, published to apply on small-arms ammunition in Rocky Mountain Motor Tariff Bureau No. 82, ICC 55, from Gallup, N. Mex., to Salt Lake City, Utah. This rate reflects 38 percent of the first class rate.

Due to the time element of shipment, rate negotiations were entered into with motor and rail carriers by telephone on November 18, 1955, to establist the rate

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