"Applicants point out that this request for blanket relief from all circuity limitations is the result of a study made by a joint committee of railroad traffic executives and representatives of the National Industrial Traffic League. They are jointly seeking ways and means to simplify and improve railroad tariffs. It is their consensus that circuity limitations are responsible for much tariff complexity, and they feel that further progress toward tariff simplification will be barred unless the wide variety of terms and conditions published to effectuate the circuity limitations can be completely removed. They maintain that the necessity for publishing lengthy and detailed routing instructions has increased the size of the tariffs manyfold, and the time and personnel costs required for extensive rate checks have added enormously to the carrier's operating expenses. Additionally they submit that even where the rates are published without routing instructions, the great bulk of the traffic moves over established service routes which are usually well within the circuity limitations we generally impose. Consequently, as a practical matter, they argue, the circuity limitations affect an extremely insignificant portion of all the traffic moving throughout the United States and weighing the inconvenience and expense involved to all concerned are not justified by any commensurate saving of carrier revenue." Despite this practical and meritorious approach to the problem of simplifying tariffs and saving of carrier revenue, the Commission found it necessary to deny the application stating:

"*** we are sympathetic with the struggles of the carriers to simplify their tariffs and to better their economic status, and within legal bounds will proceed to authorize long- and short-haul relief without unduly restrictive limitations whenever the facts so warrant. Neither the carriers' convenience in publishing tariffs nor our desire to afford them economic assistance, however, constitutes justification for the exercise by us of jurisdiction we do not possess." [Emphasis added.]

In short, the Commission found itself in the position that if it granted the application it would be "repealing provisions of the statute by administrative fiat." H. R. 6208 would remove the statutory barrier which was the sole grounds upon which the Commission based its denial of the application in FSA No. 28580. Further affirmative reason for favorable consideration of this legislation involves the burden placed upon the Commission in the administration of the fourth section as to circuity situations. In the Commission's statement of justification of H. R. 6208, transmitted to the chairman of the House Committee on Interstate and Foreign Commerce, it is said:

"Experience has demonstrated that the public interest is not being served by the imposition of the restrictions in question. The history of their administration has proven them to be excessively burdensome to all concerned. Together they have resulted in disproportionate expenditures of time, labor, and funds by both the carriers and the Commission in comparison with the relatively small benefits derived. Moreover, almost all of the dissatisfaction with section 4, which is expressed periodically by carriers and shippers alike, appears to stem from the same burdensome provisions" (Congressional Record, May 12, 1955, p. A3257).

The administration of the fourth section for indirect routes is burdensome and costly to the Commission and the public without compensating benefits in the public interest.

The other change in language that H. R. 6208 would make in the fourth section as it now reads is the elimination of the "reasonably compensatory" clause. The elimination of this clause would not only facilitate the administration of section 4. but the clause itself appears to be redundant of regulatory duties conferred upon the Commission by other sections of the act. For example, the national transportation policy specifies as one of the objectives of Commission regulation the prevention of destructive competition. This, therefore, is one of the considerations involved in determining the reasonableness of a rate, and it would appear preferable to condemn a rate directly under section 1 rather than indirectly by denying fourth section relief.

CONCLUSIONS

1. The enactment of H. R. 6208 will remove a major barrier in the path of further tariff simplification.

2. The enactment of H. R. 6208 will result in savings of the carriers' time, labor, and funds.

3. The enactment of H. R. 6208 will result in savings of Commission's time, labor, and funds.

4. The enactment of H. R. 6208, since it applies only to long-and-short-haul situations over circuitous routes, will not affect the competitive situation between rail transportation and other forms of transportation.

5. The public interest and the national transportation policy will not be adversely affected or jeopardized.

Accordingly, the National Association of Railroad and Utilities Commissioners urges your favorable consideration of H. R. 6208.

TESTIMONY OF HUNTER HOLDING ON BEHALF OF THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES

My name is Hunter Holding. I am a second vice president of the Equitable Life Assurance Society of the United States. I have been engaged in finance and securities work ever since graduation from college 30 years ago. The past 19 years I have been employed by the Equitable in securities investment work, devoting my time almost exclusively to transportation investments and problems for which I am responsible as one of the assistant heads of the securities investment department. Since coming to the society I have been involved in continuous study of the status and future of the transportation industry as a whole, its component industries and individual companies.

Billions in insurance company funds are invested in ships, railroads, pipelines, airlines, buslines, and trucklines. To be specific, nearly $3,850 million of life insurance funds are invested in railroad obligations alone. Our own companythe Equitable Life Assurance Society of the United States-has nearly $1,200 million invested in all types of transportation.

The society's interest in all transportation is threefold-all of practically equal importance. It is interested in direct investment. It is interested in the Nation having the finest possible transportation system and service as a protection for other industries in which it has multibillion dollar investments (all of them directly or indirectly dependent on transportation). Finally it is interested in the best possible transportation system and service as a primary element of national defense.

As an organization representing millions of policyholders the society has no special interests as to any particular industries or as to any divisions of any one industry as in the transportation field. Its interests, like those of it policyholders, are nationwide. For that very reason it feels a responsibility to its policyholders to set forth its beliefs as to a subject which affects all of them. We look upon transportation as being one of the most basic of all industries, for without the transportation industry the great steel, automobile, and power industries would come to a standstill. The common carriers on which the country's livelihood is so dependent include all types of transportation-the railroads for fast, low-cost transportation of heavy bulk commodities in tremendous volume; the trucks for smaller volume at the short distance retail level and many intermediate hauls-particularly fast delivery of high-priced commodities; the waterways, where they are available, for great low-cost bulk shipments; the pipelines for continuous, low-cost transportation of petroleum and gas products and the airways for the most rapid transportation, mainly of passengers, over great distances. In other words, the country needs all of these types of transportation and they are all integral parts of one of the most important basic industries. The country cannot get along on its present efficient basis of operation without any one of them and there is no indication that any one of them can ever be eliminated.

By far the greatest part of this industry is composed of common carrierscarriers set up to serve the public in the transportation of all types of commodities and having the responsibility to do so. These common carriers are subject to regulation by the Interstate Commerce Commission and in the case of the airlines by the Civil Aeronautics Board. Private carriers are exempt from the regulations to which common carriers are subject. Contract carriers are exempt from some of the regulations to which common carriers are subject-for example, they do not have to publish the actual rates they charge but only minimum rates. It is the common carrier group on which the American Nation is almost entirely dependent for its transportation and which it must keep strong and efficient for prosperous peacetime years and successful wartime operations.

The common carriers must have regulation to protect the public from irresponsible acts such as, destructive competition to the point of extinction at rates

below cost, unsound finance, and other acts which would in the long run destroy or cripple the common carrier system of the Nation. The Interstate Commerce Commission was created at a time when the railroads had a virtual monopoly of transportation in this country and except for a few natural (undeveloped) waterways and horse-drawn vehicles there was no competition from other types of transportation. There were no motor vehicles, there were no pipelines and there were no airways. Under those conditions of practical monopoly for the railroads, it was natural that many abuses arose and, after the creation of the Interstate Commerce Commission, it was, during subsequent years, given powers of such strength as was then necessary to rigidly control the railroad industry. Among the powers were:

1. Strict regulation of rates;

2. Establishment and regulation of uniform accounting systems;

3. Regulation of construction of new properties and the abandonment of old properties and services; and

4. Regulation of safety requirements and train operations.

There were many other powers granted to the Commission but those above are among the most important. Later bills gave the Interstate Commerce Commission power to regulate the common carriers represented by pipelines, by trucks, and buses (1935), and by waterways (1940).

From this point on I am using the railroads as an outstanding example of what has happened to the common carriers because theirs is the earliest and longest experience under a combination of regulation and the changing conditions which have brought greatly increased competition. They and many other common carriers are not now making an adequate return on property under some of the restrictions of present day regulation.

Prior to the Hepburn Act of 1906 the Interstate Commerce Commission did not have much real power to enforce many of the regulations. The Hepburn Act gave it such powers. Reference to schedule I attached will show that in 1905 the rate of return on all steam railways in the United States was 5.30 percent and in 1906, 5.80 percent. With the exception of a few years it stayed around the 5 percent level until after the Federal Government had taken over the railways during World War I. In fact, for all steam railways in the period 18901910 it averaged 4.67 percent (see schedule I) and for class I railways in the 6-year period 1911-16 (before the roads were under Federal control) it averaged 4.85 percent. By 1920, under Federal Government operation, the return on property was less than 0.1 percent and during that year the railroads were returned to their private owners and the Transportation Act of 1920 was enacted into law.

The essential part of the 1920 act was-the Commission shall initiate, modify, establish or adjust rates so that the carriers as a whole will earn a fair return upon the aggregate value of railway property. The Interstate Commerce Commission thereafter set 6 percent as their judgment of the "fair return" ordered by Congress. The basic idea of the act was to keep the railroad common carriers in a healthy condition so as to give the public efficient transportation service. In all the 35 years since 1920 class I railroads have earned a 6 percent rate of return on their investment in only one (6.36 percent in 1942). In many of those years the return has gone under 2 percent (1.37 percent in 1932, 1.99 percent in 1934 and 1.62 percent in 1938). Even in the prosperous year 1955 the rate of return on investment for class I railroads was only 4.21 percent and for the whole 35-year period the average rate has been only 3.68 percent. Earnings have been inadequate to attract capital for improvements in amounts sufficient to give the industry the best technological improvements in the volume required to give the best and most economical service.

It is very evident from the figures that since 1920 the average return on class I railroads has been substantially less than prior to that time. The record indicates that in the period 1926-29 the Interstate Commerce Commission refused the railroads as large rate increases as they requested because no emergency existed. In 1931-33 they refused the full rate increases requested because there was a depression; in 1936 because the Commission expected more traffic and in 1943-44 because there was a war boom.

From a practical angle it seems quite apparent that an industry with the ups and downs of the railroad industry cannot expect to approximate any given rate of return year in and year out, but must expect very high rates of return-certainly up to 8, 9, or 10 percent in good years, and must anticipate low returns down to, for example, 3 percent in the worst depression years, such as 1932, in order to average anywhere near a 6 percent return over a long period of years. Even at the high returns indicated, they would be far below the returns shown

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by large industries in prosperous years, which in many cases go above 15 or 20 percent.

That the present methods of ratemaking have been ineffectual is evidenced by the fact that over a third of the country's railroad mileage was in receivership in the 1930's after having gone through, what was up to that time, the greatest boom years in history. Actually, class I railroads entered the depression of the 1930's with net working capital of only about $285 million (it was $1,599 million at the end of 1955). Its fixed charges of $680 million (they were $374 million in 1955) proved to be too large to carry through the ensuing depression. Had the rate of return in prior years been adequate, the roads undoubtedly would not have been required to borrow a large part of the funds represented by those fixed charges. Based on comparisons of rate of return-from the commercial aspect conditions were far less chaotic for the country's railroads prior to 1917 than since, and it was in the early years that they were subjected to far less regulation than in the past generation. The present system of regulation simply has not worked to the best interests of the Nation and it seems apparent that the country's common carriers as a whole could do far better under less rigid regulation (particularly of rates), with excesses controlled by competitive forces and a more general "policing power" under the ICC.

The lower returns in the past generation cannot be ascribed to lack of business for the railroads because the ton mileage of class I roads has grown with the country's population and was far greater in 1955 than in 1929 or prior years.

Although the railroads nowadays take a smaller slice of the total freight transportation pie, the total pie is so much larger than formerly that on a traffic unit basis there has been a greater numerical increase in net ton-miles on class I railroads since 19301 than for any other type of transportation.

Nor can the lower returns be ascribed to lack of increasing efficiency on the railroads for even though they have been curtailed as to earnings they have used to the utmost what was available, and since the end of World War II have made additions and betterments of over $11 billion with the result that their efficiency has increased greatly.

However, had earnings been adequate these measurements of efficiency would have shown vastly greater improvement.

Neither have the railroads priced themselves out of the market, for railroad freight cost as a percentage of value of goods carried is substantially less than it was in 1929.

Railroad freight cost as percent of value of goods carried

It seems quite evident that the greater part of the blame for poor experience on the rate of return lies within the transportation laws themselves rather than their administration. For example, the rule of ratemaking (sec. 15a) was rewritten in 1933 to include "In the exercise of its power to prescribe just and reasonable rates the Commission shall give due consideration, among other factors, to the effect of rates on the movement o ftraffic; ***" and in 1940 this provision was amended to read "*** to the effect of rates on the movement of traffic by the carrier or carriers for which the rates are prescribed; **

In both cases the law attempts to make the ICC prescribe the proper rates on individual traffic movements for different types of transportation when the Commission cannot possibly know, as well as the carrier managements, the circumstances under which all of those individual traffic movements operate.

Throughout this long period of low return on the properties, while rail service has been fairly good, it has been nowhere near as good as it might have been had it received funds adequate to equip it with the latest technological advancements available to the industry. Just to name one item-freight cars-as of January 1, 1955, over 651,000 freight cars, or 37% percent of all class I freight cars, were over 25 years old. Repair costs per car owned have shown a long term increase ever since 1938 and while some of this is undoubtedly attributable to higher labor and materials costs, a part of it is undoubtedly due to the increasing proportion of old freight cars which has shown an upward trend ever since 1937. Had a higher rate of earnings been available the roads would undoubtedly have had a more modern freight car fleet, as well as other property improvements that they do not now enjoy.

The country's business leaders are more subject to criticism for the poor results than is the Interstate Commerce Commission. The former failed to help keep the law in step with changing conditions, whereas the Interstate Commerce Commission tried to regulate under these outmoded statutes. It is now the duty of business leaders to help modernize these statutes.

During the 1930's and 1940's there was a tremendous growth in the construction of highways, particularly express highways, and the production of automobiles and trucks and buses; in the construction of pipelines, improved waterways, and the production of airplanes and the establishment of airways.

While this growth was taking place among competing types of carriers-all common carriers-trucks, railroads, and water carriers alike were faced with growing competition from a new source-private and contract carriers.

Private carriers are fully exempt from regulation as they should be, but there has been growing abuse of the term "private carrier" by those doing a commoncarrier business (in many cases-part time-particularly in the trucking field). Such abuses occur as trip leasing and stretching the agricultural commodity exemptions to include such items as eviscerated chickens and possibly even green coffee beans, cocoa beans, etc. There should be careful redefinition of "private carriers" to include only transportation of the carrier's own legitimate property. Contract carriers do not have to file actual rates (only minimum) and many have been encroaching on the common-carrier field with the advantage of being able to undercut common-carrier rates without the common carriers knowing it (because publication of actual rates is not required). This abuse is mainly in the truck and water carrier fields but affects all common carriers. Motor and water-contract carriage should also be carefully redefined to eliminate such abuses.

In the meantime the Interstate Commerce Commission has been administering strict regulation on the following:

1. Rates

(a) Railroads.-On rates it made blanket increases which did not allow the individual railroad managements to set the rate to each individual type of haul and the competition on each, nor to change rates quickly as competitive conditions changed. Nor did it allow the roads sufficient freedom of action to reduce rates to meet competition on individual commodities and hauls. In many cases the roads could have competed very profitably at lower individual rates had they had greater freedom to set each rate as required. Studies indicate that proper freedom in this respect could have been both cost-saving to the public and profitable to the railroads earningswise.

There were no special rates on volume or bulk shipments to meet competition. Rate increases were suspended, sometimes for many months, for long, drawn

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