Amendments proposed by H. R. 6141 and H. R. 6142

Section 8 of H. R. 6141 and H. R. 6142 would repeal section 15a of the act, and insert a new section 15a.

Sections 11 (h), 17 (d), and 21 (c) of H. R. 6141 and H. R. 6142 would repeal sections 216 (i), 307 (f), and 406 (d) containing provisions similar to those in the present section 15a of the act.

The new section 15a would provide that in determining whether a rate, fare, charge, etc., results in less than a reasonable minimum charge, as used in the act, the Commission shall not consider the effect of such charge on the traffic of any other mode of transportation; or the relation of such charge to the charge of any other mode of transportation; or whether such charge is lower than necessary to meet the competition of any other mode of transportation. However, any carrier subject to the act would not be prohibited from protesting or complaining with respect to a rate, fare, or charge which it believed to be less than a reasonable minimum charge.

The new section 15a would also provide that in determining whether rates, fares, charges, et cetera, result in more than just and reasonable maximum charges, as used in the act, the Commission shall not require such charges to be reduced below the full cost of performing the services to which they apply, exclusive of losses in other services. The Commission would also be required, in making such determination, to take into consideration the extent and effect of competition with respect to the service to which the charges apply to the end that carriers would be prevented from imposing excessive or unreasonable charges on traffic which is noncompetitive.

Purpose of amendments

The purpose of the amendments is to repeal the existing "rule of ratemaking" for common carriers and freight forwarders, and impose certain prohibitions on the Commission in its determinations as to whether rates, fares, charges, et cetera, of such carriers and freight forwarders are lawful.

Testimony

DEPARTMENT OF COMMERCE

(Sinclair Weeks, Secretary; Louis S. Rothschild, Under Secretary for

Transportation)

Increased reliance on competitive factors in ratemaking cannot be effected without repeal of the present requirements of the rule of ratemaking contained in section 15 (a), especially as interpreted in conjunction with the present declaration of policy (R. 1732). This rule has been employed to further the unsound regulatory doctrine that rates should be no lower than necessary to meet competition and should avoid so-called destructive competition (R. 1732).

Under existing regulatory criteria, regulated carriers have been prevented from putting into effect compensatory rates because of the effect such rates might have upon competing media. Such artificial barriers inhibit the movement of traffic by the most economical form of transport and lead to higher cost to the shipper. The consumer and shipper benefit most when traffic is allowed to move by the most efficient and lowest cost medium. This is not possible where rates

are kept high because of the effect which lower rates might, in the opinion of the regulatory agency, have upon competing media (R. 180, 181).

Probably the most serious decision the managers of any business may have to make is the price at which its product or service should be offered to its customers. Upon the soundness of that determination rests success or failure. This is equally true in the field of transportation today, where increased competition has given the shipper a wide choice. Unquestionably, price is a fundamental arbiter in the exercise of that choice. Ordinarily, it is not the concern of Government to dictate price. It has, however, long been recognized that in the case of services affected with a public interest, such as public utilities and transportation, it is often necessary to impose regulatory restraints to protect the consumer. Unfortunately, Government regulation has been imposed to make determinations regarding the effect of rates upon the profitability of the transportation enterprises rather than to protect the shipper (R. 178).

To allow an administrative agency to substitute its judgment for that of carrier management under vague and inconclusive standards can only serve to inhibit the operation of competitive forces. Application of this rule of ratemaking has given the Interstate Commerce Commission the burdensome responsibility to exercise judgments usually and necessarily reserved to management (R. 179).

Despite the fact that price policy is the more basic prerogative of management in a private enterprise economy, it is observed that spokesmen of large segments of the transportation industry are in agreement that price policy in the common-carrier field should be determined through an administrative process rather than in the competitive market (R. 1734).

The new standards proposed in the amendments have as principal purposes to assure that dynamic competition will have a basic role in determination of rates as between competing transportation enterprises and that the ICC shall be relieved of its function of regulating rates so as to coordinate competition between various transport mediums (R. 180).

The Department believes that carrier self-interest tempered by the dictates of competitive enterprise is capable of producing a sounder rate structure than that which can be imposed by a regulatory agency required to exercise judgments in areas normally reserved to managerial discretion (R. 180).

The Advisory Committee amendments would specifically prohibit the Commission from considering

(1) the effect of proposed rates on the traffic of another mode of transportation;

(2) the relation of such rates to the rates of another mode of transportation; and

(3) whether proposed rates are no lower than necessary to meet competition in passing on minimum reasonable rates. These prohibitions are generally known as the three "shall nots." The effect which each has on increased reliance on competitive ratemaking is as follows:

First, if the Commission considers the effect of a proposed reduction in rates on the traffic of another carrier, it must necessarily ignore or

set aside the public interest in the movement of traffic by the form of carrier best adapted to its movement. Such an effect is clearly produced today in a great number of cases because, under the present law, the Commission takes such factors into account. A vested interest in existing distributions of traffic is the obvious result of such a consideration (R. 1732-1733).

Second, the Commission now disallows many proposed rates where there is involved the disturbances of existing rates of other carriers. Frequently proposed rates are disallowed under the guise of preserving a "rate structure." The effect of such a policy is to ignore the economic characteristics of the carrier proposing them. The public interest cannot be served by denying it the economies of less costly forms of transportation in order to preserve the levels of charges maintained by another. This policy has the further effect of freezing various levels of rates on the basis of past considerations which may have brought about present rate relationship. It is the Department's belief that rate policy should take into account changes and innovations in transport industries.

Third, the Commission must now fix rates by reference to their effect on competing carriers. According to this policy, rates should be "no lower than necessary to meet competition.' Such a policy has the effect of setting rates on the basis of the high-cost mode of transportation. Other modes with lower costs must maintain rates at a level which will either be on a parity with the high-cost mode or which will be differentially lower only to the extent necessary to offset certain service disabilities. Frequently, however, a lower cost form of carriage may quote compensatory rates so low as to take all or a substantial part of the traffic away from the high-cost mode. The Commission has tended to disallow such rates on the ground that they are lower "than necessary to meet competition," or that they deny to the high-cost carrier "a fair opportunity to compete for the traffic," thereby denying the public the full benefits of lower cost carriers (R. 1733).

Some question has been raised to this proposal upon the ground that competitive ratemaking, if permitted, would result in higher rates upon noncompetitive traffic. The Department does not believe this will be the case. In the proposed section 15a, the Commission is directed to prevent carriers from imposing excessive or unreasonable charges on traffic which is noncompetitive.

The new section also provides that just and reasonable maximum charges shall not be reduced below "the full cost of performing the services to which they apply exclusive of losses in other services." This provision is intended to protect the carriers against being required to perform services at a rate less than the costs applicable to the service to be performed (R. 181).

It should be noted that there is no intention to deny the Commission the freedom to consider any factors now specifically required to be taken into consideration by the rule of ratemaking, save for those specifically barred by the new section 15 (a). It would seem clear that repeal of the rule, which is in the nature of a declaratory statute, simply removes the requirement that they be considered but does not prohibit the consideration of these or any other pertinent factors unless expressly barred (R. 180).

Certainly the Department does not condone so-called cutthroat competition, such as rates below cost, and has preserved sufficient authority

for the regulators to continue to prevent such illegal practices. If there is any suggestion in any of these proposals of the advisory committee that would enable one segment of transportation to drive another out of business, it should be changed. The Department believes there is room for every segment of transportation in this country, and there is plenty of room for them all to prosper and to do well (R. 1734-35).

The Department believes that enactment of this section will go a long way in restoring the principle that in the absence of discrimination, the lowest rates should prevail where consistent with proper service (R. 181).

During the hearings the Department proposed amendatory language to section 8 of H. R. 6141 and H. R. 6142 which would make it clear that the three "shall nots" to be imposed on the Commission in the exercise of its ratemaking authority shall be applicable to intramode as well as intermode competitive situations (R. 1758).

Other proponents

AMERICAN SHORT LINE RAILROAD ASSOCIATION

(J. M. Hood)

It is suggested that paragraphs 1 and 2 of section 15 (a) be retained and that a new paragraph 3 be added to bring it into conformity with changes in other sections with respect to ratemaking. Paragraph 3 would prohibit the Commission from considering the effect of proposed rates on the traffic of another mode, the relations of the rates to those of another mode, or whether proposed rates are lower than necessary to meet the competition of another mode (R. 891).

ASSOCIATION OF AMERICAN RAILROADS

Jervis Langdon, Jr.

The ICC's use of its power to fix reasonable minimum rates frequently has the result of apportioning the available traffic between the various competing modes of transportation without regard to their economic capabilities. The railroads object to the decisions of the Commission which have this result. Instead, they concur with the following conclusions of the Cabinet Committee:

If the market is to determine the appropriate use of each form of transportation in accord with shippers' judgments of the utility to them in terms of cost and service, rates to be allowed to reflect cost advantages whenever they exist and to their full extent * * *. In brief, these rate maladjustments, in part enforced by regulation, deprive the public of the economy which would result from a distribution of the traffic in accord with the real capabilities of the several types of carriers just as they deprive the shipper of many valid choices which would be available to him were rate competition more free from restraint as to its character and timing.

The ICC has developed a faulty standard or rule of ratemaking which necessarily produces arbitrary apportionments of traffic among competing modes of transportation without regard to their economic capabilities or fitness for different types of transportation jobs. In its more recent decisions the ICC has used this faulty standard fairly frequently. The standard goes beyond the reasonableness of the rate per

se and its nondiscriminatory character, and asks the important additional question: How will the proposed rate affect the competing motor or water carrier? If the proposed rail rate promises to affect the competing carrier adversely by attracting more than what the ICC regards as a proper share of the traffic, it will usually be condemned.

In other words, in these proceedings which result from the protest of a competing motor or water carrier, the Commission believes that the railroad is not entitled to compete for more than a part of any particular traffic. It takes the same view when the reduced rates of regulated motor carriers are under review. The faulty standard which the ICC has developed for these proceedings consists of first determining the full cost to the shipper when using the competing forms, weighing their influences with the shipper, and finally arriving at what it regards as a competitive balance, approving or disapproving the rates on the basis of whether they will not or will attract more than a proper share of the business. This faulty rule of ratemaking is objectionable no matter whether rail or motor carrier competitive rates are under review, because in each instance the public is deprived of certain economies which it would otherwise enjoy (R. 531-532).

[There followed five examples of representative decisions of the ICC wherein it used the criticized standard of ratemaking either to condemn or justify the competitive rail rates (R. 532-535).]

The Commission is not constrained to use the faulty rule by the present wording of section 15 (a) of the act, but it uses the rule nevertheless. Consequently, the railroads support the rule of ratemaking as set forth in proposed section 15 (a) (1) because it would prevent the ICC from using the criticized standard in its determination of reasonable minimum rates. The proposed section 15 (a) (3), which the railroads support, is merely an indirect way of adding emphasis to the elimination of the faulty standard which is accomplished directly by proposed section 15 (a) (1).

Where this faulty standard for competitive rates has been used, the Commission has only the railroads and one-third of the truckers under its authority. According to reliable estimates, two-thirds of the intercity tonnage on the highways and nine-tenths of the traffic on the inland waterways are exempt from all rate regulations. Consequently, these nonregulated carriers are beyond all possible obligation to "share" their traffic with the railroads and regulated trucks. Moreover, when it comes to protecting a fair share of the traffic for the railroads, the ICC is directed by section 305 (c) of the present act to exempt the relatively few barges which are subject to its regulation.

The proposed rule of ratemaking would apply to all forms of transportation subject to the Interstate Commerce Act. Its purpose is to permit each mode to initiate its own competitive rates based on its own operating conditions-not the operating conditions of the competing mode. Thus, if the operating costs of motor carriers are less in certain circumstances, reduced rates reflecting that advantage would be approved by the Commission, and this would be true even if the motor carriers also provide superior service. The same principle would apply to the ratemaking of the other forms.

The railroads regard the proposed elimination of the faulty standard for the fixing of reasonable minimum rates as the basic recommendation of the Cabinet Committee. They are in favor of such