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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
elimination as set forth (in the form of three "shall-nots”) in section 15a (1) of H. R. 6141 and H. R. 6142. At the conclusion of this testimony, a slightly different method is suggested for achieving the same result (R. 537).
It is important to dispel the Commission's unfounded fear that the principal objectives of H. R. 6141 and H. R. 6142 would result in "cutthroat competition” between the carriers. If the principal objectives are adopted, the ICC would continue to have control over reasonable minimum rates, the only change being the elimination of the faulty standard for judging them, as embodied in the three "shall-nots" set forth in proposed section 15a (1). Furthermore, the ICC would continue to have complete control over discriminatory practices, and there would be no relaxation of its power to protect the public. Finally, the ICC would still have the same control over reasonable maximum rates as in the past (R. 545-546).
It is misleading for the Commission to suggest that the "dominant effect of the proposed legislation would be to permit all rates to gravitate to the bare compensatory level.” Under the proposed revisions, the ICC would continue to have its power to reject noncompensatory rates. The out-of-pocket cost scales developed by the Commission's staff require some return on investment, and are clearly above "the bare" compensatory level. Moreover, as the ICC itself has recognized, rates based on considerations other than cost of service are having an increasingly difficult time to survive in the competitive era which has taken over the transportation industry. The "gravitation” to which the Commission refers is already in motion, and its pace may well accelerate as unregulated and private transportation continue to grow (R. 546–547):
The ICC gives the impression that two alternatives lay before Congress: (1) A well regulated and evenly balanced control of transportation wherein competition is "given adequate play” but not too much play; or (2) "resort to the laws of the jungle with competition in full play” with the ICC powerless to “restrain excesses.” No such alternatives exist. The "laws of the jungle with competition in full play" already exist for the two-thirds of the transportation on the highways and the nine-tenths of the transportation on the inland waterways over which the ICC has no control in rate matters.
The true alternatives before Congress are: (1) A continuation of the present practice under which the railroads and the regulated trucks, although surrounded by completely unregulated agencies of transportation which "resort to the laws of the jungle with competition in full play,” are often stopped from publishing reasonably compensatory rates because they promise adversely to affect the competing form; and (2) a modified practice under which the railroads and the regulated trucks, still surrounded by the same unregulated and completely uncontrolled competition, would be able to publish compensatory and nondiscriminatory rates without regard to their effect upon the competing form (R. 547-548).
To summarize: In their competition with the other forms, the rail. roads want the right to make their rates based on their operating conditions, subject, of course, to the ICC's continuing control over maximum reasonableness, minimum reasonableness, and unjust discrimination. The basic recommendation of the Cabinet Committee
would give this right not only to the railroads but to each and every form of transportation. To implement it, it is suggested that the following simple addition be made as paragraph (3) to the present section 15a, and it would, of course, be added to the ratemaking rules in the other parts of the act.
(3) In the exercise of its power to prescribe just and reasonable rates, the Commission shall not consider the effect of such rates on the traffic of any other mode of transportation; or the relation of such rates to the rates of any other mode of transportation; or whether such rates are lower than necessary to meet the competition of any other mode of transportation.
Other provisions in H. R. 6141 which are designed to produce “increased reliance on competitive forces in ratemaking” are not regarded as essential to the achievement of this basic recommendation of the Cabinet Committee (R.548).
This statement bears particularly upon the testimony of Messrs. Turney and Aitchison, as witnesses for the American Trucking Associations, Inc., hereinafter called the ATA. The ATA argues:
(1) The "fair share” test (which would be abolished under a principal recommendation of the Cabinet Committee) is not applied by the ICC when it passes upon the rates of one form of transportation in competition with another form;
(2) The "fair share” test has been embraced by the railroads; accordingly, they are now precluded from questioning it;
(3) The proposed legislation would open the door to discrimination against small communities and small shippers, and against noncompetitive traffic;
(4) By taking traffic away from the trucks as the result of reduced rates, the railroads would only worsen their net-revenue position.
In competing with the railroads, the objectives of motor carriers are to confine the competition to competition in service, and to continue the “value of the service” theory of ratemaking under which high rail rates would continue on high-valued traffic. They fear price competition because truck costs are higher (R. 742–743).
Considering the enumerated arguments in order:
(1) The ATA confuses the issue by contending that the ICC does not apply the "fair share" test. It argues that the ICC merely attempts to give each mode a “fair opportunity to share” in or to permit "all carriers an equal opportunity to compete” for, available traffic. It is further pointed out that this frequently has meant that the Commission prescribesrate differentials which would overcome service disadvantages of the railroads or the water carriers and thus permit the shipper to choose among competing modes freely. The railroads assert that the imposition of rate differentials has the undeniable effect of apportioning traffic. No matter how it is expressed, the fact is that the ICC does take into account the effect of proposed rates on the competing mode (R. 743–745). [There followed a detailed discussion of two ICC decisions which are regarded as examples of “umbrella” ratemaking (R. 745–748).]
(2) While the “fair share” test has necessarily been employed by the railroads, they are now not precluded from criticizing it. The railroads have taken notice of the Commission's decisions relating to "fair share" (R. 748).
(3) The ATA is wrong in contending that the proposed legislation would open the door to discrimination against small communities and small shippers. In appendix A of witness Turney's statement are listed voluntary rate reductions made by the railroads in the three territories of the country between 1950 and 1955. Every reduction listed was made uniformly throughout each territory without distinction as to community or shipper. The ATA is also wrong in contending that the proposed revisions would leave small communities and small shippers without an effective remedy against discriminatory rates. None of the revisions supported by the railroads would interfere with the Commission's power to curb discriminatory rate practices.
The other modes of transportation accuse the railroads of wanting to reduce their rates "selectively" on certain commodities which the other modes regard as their mainstay. The motor carriers prefer higher valued manufactured articles, and the water carriers specialize in bulk commodities. Each fears reductions in rail rates on the commodities in which it specializes, with the railroads allegedly free to recoup their losses from certain other noncompetitive or "captive" traffic. However, broadly speaking, there is no such thing as "captive" rail traffic; it is all competitive (R. 749-750).
(4) It is contrary to fact that, by taking traffic away from the motor carriers at compensatory rates, the railroads would worsen their net revenue position. The motor carriers assume that their competitive traffic would be diverted to the railroads if the rail rates are reduced by 20 percent. Their argument is that, although gross revenues of the railroads would be greatly increased because of the added traffic, the additional cost to the railroads of handling the increased volume would more than offset the added revenues. This is derived from the assumption that 1 average truckload of 15 tons, if diverted to the rails, would fill 1 boxcar. Actually, 1 average boxcar will take 2 average truckloads. This oversight lead to the overstatement of rail costs for the diverted traffic by 77 percent, or by $457 million in the aggregate. When the error is corrected, the ATA calculations show that, under its other assumptions, the railroads could improve their net railway operating income over 1955 by $79 million, despite the 20 percent reduction in rates.
It is also a misleading assumption that the railroads would reduce their rates by 20 percent on less-than-carload traffic, which, under the figures used by the ATA, the railroads already handle at a loss. The net results of ATA's calculations, if confined to truckload traffic and the use of rail costs for such traffic at 30 tons per car instead of 15 tons, are net savings to the public of $1,047 million in freight charges and a net gain to the railroads of $225 million in earnings (R. 751).
[There followed the legislative history of the Motor Carrier Act of 1935 and the Transportation Act of 1940, set forth for the purpose of showing that Congress intended that the rates of each mode of transportation should be regulated in the light of its particular conditions, and without regard to the conditions of the competing mode (R. 752–757).]
SECOND SUPPLEMENTAL STATEMENT
In its supplemental statement the ICC sets forth its objections to the "shall nots" found in the proposed rule of ratemaking in section 15a (1). The Commission agrees that in passing upon proposed rates their effect on a competing mode is taken into account, but denies that it attempts to apportion traffic among competing modes of traffic. Apportionment of traffic is the inevitable result of these practices which the Commission defends as being in the public interest of transportation as a whole. It gives four reasons which will be considered in order: (1) The practice is in accord with the objectives of the present transportation policy; (2) the practice is often in the interest of protecting the form of transportation with the lower full costs as distinguished from lower out-of-pocket costs; (3) the general public wants and desires to have motor and water service in any event; (4) the practice is necessary to protect the public from discriminatory rates.
(1) Instead of nullifying the national transportation policy, the “shall nots” would require the ICC to carry out its basic objective. At the time the Transportation Act of 1940 with its national transportation policy was under consideration, there was some fear that the water-carrier rates would be regulated in the interests of the railroads. Consequently, the ratemaking rule in each part of the act, the antipreference provisions in each part, and section 305 (c) were all worded so that the Commission, in giving effect to these provisions, could not determine what effect they would have on the traffic of competing carriers. Safeguards of the same character had been provided when, 5 years earlier, motor carriers were brought under ICC regulation and there was fear that their rates would be regulated in the interest of the railroads. As to the national transportation policy itself, it was extended in 1940 to apply to the railroads as well as the water and motor carriers. Thus the ICC was called upon to recognize and preserve the inherent advantages of each mode of transportation.
Subsequent to 1940 early decisions of the ICC properly interpreted and applied the above-mentioned modifications in the act. A good example is New Automobiles in Interstate ('ommerce (259 I. C. C. 475 (1915)). At page 538 of the decision the Commission said:
As Congress enacted separately stated ratemaking rules for each transport agency. it obviously intended that the rates of each such agency should be determined by us in each case according to the facts and circumstances attending the movement of the traffic by that agency. In other words, there appears no warrant for believing that rail rates, for example, should be held up to a particular level to preserve a motor-rate structure, or vice versa.
However, more recent decisions of the Commission improperly interpret the ratemaking provisions of the act, and the “shall nots” would require the ICC to carry out the national transportation policy as designed by the Congress (R. 1771-1774).
(2) Instead of promoting low-cost transportation, the ICC practiee-which the “shall nots" would change-often penalizes the low-cost form of carriage. The "shall nots" wonld enable the railroads to make competitive rates which will at once reduce their unit costs and increase their net revenues. Every economist knows that this objective in the case of an industry with substantial fixed costs, is often attained by rates which are less than full costs. As an example, in the transportation of commodity X, the out-of-pocket cost is $3 and the full cost is