UP, is a party. It appears that when the statement was refiled in this proceeding the final page and verification were inadvertently omitted. In its reply to respondent's motion, protestant has supplied the text of the final page, consisting of about a sentence and a half. To strike this testimony based upon a technical interpretation of the Commission's rules would serve no useful purpose. The motion is denied.

Protestant, Hoerner Waldorf, moves to strike testimony by certain of respondent's traffic officers regarding the lack of participation by other northwestern lines in Union Pacific's 5-percent pulpboard rate reduction and their opinion that the failure of the Burlington Northern and the Milwaukee Road to participate in the reduction resulted from an exercise of managerial discretion on the part of these carriers. As the basis for its motion, protestant alleges that since the route from its plant to California via the UP was closed prior to the reduction in question, other carriers could not participate in the reduction over this route so that there could not have been any discretion involved. In its view, then, the testimony is contrary to the evidence of record. Moreover, according to protestant, UP's witnesses are not competent to testify concerning the reasons for managerial actions taken by the traffic departments of other railroads.

UP points out that the Milwaukee and Burlington Northern did not take the pulpboard reduction to any points on their lines, a fact to which UP's witnesses, as fully qualified rate officers, were competent to testify. Their reference to this lack of participation as resulting from "managerial discretion" is mere characterization, objection to which goes only to the weight to be given the testimony. The motion to strike is denied.

Protestant further moves to strike the testimony by one of these same rate officers concerning comparative levels of rates throughout certain parts of Mountain Pacific territory, and the effect that intermodal competition has had upon those rates. In support of its motion, it challenges the statement as a sweeping generalization unsupported by any tariff authority or other evidence. In the alternative, Hoerner Waldorf requests the opportunity to crossexamine this witness concerning the conclusion he advances.

We find that a duly qualified rate officer of a railroad is competent to express his observations concerning a general rate pattern and the effects of competition upon it. To the extent that this opinion is unsupported, protestant's objection goes to its weight, not to its

admissibility. The matter of comparative rate levels on various commodities throughout Mountain Pacific territory has been fully explored in the verified statements of both parties in both this proceeding and in docket No. 36418, Hoerner Waldorf v. Union Pacific Railroad. Cross-examination on this topic would not further the fair and efficient disposition of this proceeding. The protestant's motion is denied.

Hoerner Waldorf also asks that a sentence within respondent's reply argument concerning reciprocal switching at Los Angeles be stricken as unverified. The matter contained within this sentence is drawn from the verified statements of record. The motion is denied. The cost evidence. Cost evidence submitted by the parties in their opening statements in this proceeding consists of photocopies of some of the cost evidence introduced in docket No. 36418, Hoerner Waldorf Corporation v. Union Pacific Railroad Company, et al., supra. Since protestant's costs represent a restatement of the costs submitted by respondent, the origins and destinations are identical. Both parties cost the movement of 90,000 pounds, in unequipped, general service boxcars from Schilling, Mont., to 17 California destinations. Both parties' costs were derived from an application of Rail Form A, I.C.C. Statement No. I F I-73, Formula for Use in Determining Rail Freight Service Costs, to the 1974 expenses and statistics of those carriers assigned to the Commission's region VI (Mountain Pacific and Trans-territory). The cost comparisons submitted by Hoerner Waldorf and UP in their opening statements differ only slightly because of differences in mileages used and cost updating procedure employed. Both parties show the pulpboard commodity rates to be clearly compensatory. An analysis of this part of the cost evidence may be found in appendix B to this report.

In its reply statement, UP submitted a revised cost statement which is discussed in a later section of this report.

THE ISSUES

1. Preference and prejudice.-Hoerner Waldorf argues that the commercial closing of the Silver Bow route subjects it to undue prejudice and unreasonably prefers its competitors in violation of section 3(1) of the act. To warrant a finding under this section, the shipper must show, inter alia, that rate differences subject it to actual or potential injury. Chicago Board of Trade v. Illinois Central R., 344 I.C.C. 818, 831 (1973); Fresh Meats, Ill., Ind., Ky., Ohio &

Mo. to Points in Fla., 318 I.C.C. 5, 10-12 (1962). Such evidence is not apparent upon this record.

Protestant's mill increased its capacity from 250 tons per day in 1957 to 1,000 tons per day in 1966 and underwent further expansion in 1976. In 1973, it shipped 9,659 tons of pulpboard to California. By 1975, this figure had risen to 38,778 tons. During the first 6 months of 1976, its shipments to California approached in cars and tonnage its shipments for the entire year of 1975. Protestant's own statement shows that:

Although in the past less than 10% of the Schilling production was marketed in California, in 1976 Hoerner Waldorf shipped approximately 17% of its Schilling production, or 1,154 carloads of pulpboard to California.3

Hoerner Waldorf states that it hopes to expand its plant at Reno, Nev., and that a future customer may someday locate at one of the small communities in California. Mere expectations of future success cannot establish the injury precedent to a finding of undue prejudice. We find no violation of section 3(1) of the act.

2. The justness and reasonableness of the rates.-Cancellation of the pulpboard commodity rates over the Silver Bow route brings into effect substantially higher class and combination rates. Protestant claims that these higher rates are unjust and unreasonable.

Under section 1(5)(a) of the act, as recently amended, the Commission may not find a rate increase unjust or unreasonable unless it first finds that the carrier has market dominance over the traffic involved. In our order of December 30, 1976, we noted that virtually all of the traffic under consideration moved via rail carriers which have participated in rate bureau discussion, consideration, approval, or publication of the rates under consideration. We also observed that resulting increased rates exceed variable cost by 180 to 205 percent and that significant diversion to other modes of transportation does not appear to be a viable alternative to protestant. We, therefore, found that UP has market dominance over the traffic in question. The record before us substantiates this finding and we reaffirm our prior conclusion as to market dominance.

Respondent shows that, to 17 destinations in California, the 90,000-pound pulpboard commodity rates which applied over Silver Bow prior to December 31, 1976 produced a composite revenue-to'Protestant's reply statement, p. 11.

variable-cost ratio of 1.65. Protestant, restating respondent's costs, calculates that this ratio is 1.70. Thus, the average difference between respondent's and protestant's revenue-cost ratios is 0.05 percent, and both parties show that the commodity rates here in question are clearly compensatory.

Cancellation of those commodity rates forces application of substantially higher class and combination rates. Protestant calculates that, to certain California destinations, these higher rates yield revenue-to-variable-cost ratios of as much as 229 to 242 percent at the 90,000-pound minimum weight level." Hoerner Waldorf argues that such rates are prima facie unjust and unreasonable. It cites no authority to support its argument.

We have long held that costs alone do not determine the maximum limits in rate making and that rates which exceed even fully allocated costs by substantial margins do not necessarily exceed maximum reasonable rate levels solely by reason of that fact. General Motors Corp. v. New York Central R. Co., 311 I.C.C. 622, 625 (1960); Southeastern Assn. of R. & Util. Commrs. v. A. T. & S. F. Ry., 321 I.C.C. 519, 545 (1964); United States v. Great Northern Ry. Co., 293 I.C.C. 341, 345 (1954); Public Serv. Com. of N. Dak. v. Great Northern Ry. Co., 340 I.C.C. 739 (1972).

For this reason, in our prior consideration of maximum levels of rates on noncompetitive traffic we "have studiously avoided establishing a maximum ceiling on rates based on a fixed percentage ratio of revenue to fully allocated costs ***." National Elec. Mfrs. Assoc. v. Aberdeen & R. R. Co., 349 I.C.C. 502, 514 (1974), affirmed in relevant part, National Electrical Mfrs. Assn. v. United States, 407 F. Supp. 598, 602 (W.D. Pa. 1976).

However, this does not mean that the railroads may raise their rates on this traffic at their pleasure. Section 15(8) of the act provides that the burden of proof is on the railroad to show that the proposed increased rates over the Silver Bow route are just and reasonable.

Respondent states that at least 20 percent must be added to the variable cost level to reflect fully allocated costs which are more properly the measure of maximum rates than variable cost, which is a measure of minimum compensatory recovery. Rules to Govern Assembling & Present Cost Evidence, 337 I.C.C. 298, 326 (1970). Its cost witness states that comparison with fully allocated costs

'For example, Hoerner Waldorf's rates from Schilling for UP delivery at Fullerton, Calif., have increased 25 percent from $1.70 to $2.12 per hundredweight at the 90,000-pound level. "The evidence is that most of this traffic moves at the 90,000-pound level of rates.

would show a much smaller profit margin to the carriers than a comparison of rates with variable costs. Nevertheless, respondent has neither challenged the compensativeness or reasonableness of the commodity rates it has canceled, nor has it submitted an analysis of the revenue-cost relationship for the involved traffic at the fully allocated cost level under the class and commodity rates it has imposed. Respondent's revision of its costs in its reply statement goes only to show that the commodity rates remaining via Portland are not beyond a reasonable maximum.. For example, respondent has recalculated its costs based upon longer mileages involving a rerouting of this traffic over Klamath Falls, Bieber, or Spokane after December 31, 1976. For this reason its revised cost statement does not accurately portray the revenue-variable cost relationships resulting from the application of class and combination rates over the shorter Silver Bow route. Such a showing could only be correctly made by using the lower costs for the shorter route over which the higher class and combination rates are sought to be justified. Respondent's revised cost statement is, therefore, inapposite and can be given no weight in determining the justness and reasonableness of the higher class and combination rates which the UP put into effect over the Silver Bow route on December 31, 1976. Respondent has thus produced no evidence to show that the class and combination rates remaining after cancellation of the involved commodity rates are not in excess of a maximum reasonable level for the service provided. Publication of class rates in previous tariffs is no proof of their reasonableness under the circumstances (particularly in the absence of any allegation that they were prescribed by the Commission).

The UP contends that imposition of the higher class and combination rates over Silver Bow are not unreasonable since protestant has not made extensive use of the route and because

"Revised exhibits 2, 3, and 4 attached to the verified statement of James F. Harrity in respondent's reply statement. Column 3 of these exhibits, which purports to show the "short haul" effective December 31, 1976, the date pulpboard commodity rates were canceled over the Silver Bow route, draws its mileages from exhibit SRF-2.

A review of this exhibit, which is attached to the verified statement of S. R. Forbes in respondent's opening statement, reveals that the mileages in Harrity's column 3 are taken from the final column in exhibit SRF-2 showing routing via Klamath Falls, Bieber, or Spokane ["routes 20 & 23"].

Harrity's revised exhibits seem to have another defect, since they appear to base their revenue calculations (column 15) upon commodity rates. If this is so, then what the Union Pacific is saying is that the commodity rates which remain in effect over longer routes after December 31, 1976 are not excessive. That argument does nothing to meet the railroad's burden under section 15(8) of showing that the higher class and combination rates it put into effect over the Silver Bow route on December 31, 1976 are just and reasonable.