health of a railroad be placed on one commodity, when all of us are concerned with the Nation's energy problems and the Nation's energy goals? Especially the increased use of coal.

Are transportation costs of coal going to rise to the extent that conversion is no longer feasible?

I am convinced, Mr. Chairman, that no one in the eastern Kentucky coalfields would argue that rates would rise. My concern is that a Federal regulatory agency has allowed such an excessively increased rate, with all of the statutory responsibilities that are placed upon that Commission, and having the full knowledge of the information that would give them an opportunity to make a determination, why this determination was made.

And we are not talking about 22 percent today, Mr. Chairman, we are talking about 38 percent; 22 percent to a monopoly railroad that hauls from captive shippers that has required them over the last years to buy hopper cars, and in addition to that to furnish switching engines to go down to the L. & N. line, pick up the cars that they had purchased, take it up to their tipples, load them, take it back to L. & N. That in itself is a subsidy.

And then, to allow 13 percent on top of the 22 percent indicates to me that we have got to take a long, hard look at what the ICC has done, and I intend, Mr. Chairman, with your approval, today to ask some very, I hope, hard questions that we can get some hard answers to. We are going to play a little hardball this morning, Mr. Chairman.

Senator EXON. Thank you, Senator Ford.

We will open our testimony, then, this morning with the Honorable A. Daniel O'Neal, Chairman of the Interstate Commerce Commission.

Mr. Chairman, we are glad to have you here to try and give us the side of the ICC on this controversy that has our subcommittee very much concerned.

And with that, I will ask you to read your opening statement. If you would care to put some of it in the record and summarize, fine. If not, we will be glad to listen to your full testimony, because we are very much interested in your explanation.

STATEMENT OF HON. A. DANIEL O'NEAL, CHAIRMAN, INTERSTATE COMMERCE COMMISSION; ACCOMPANIED BY JERRY ROBINSON. ATTORNEY, ADVISORY SECTION OF RATES, OFFICE OF PROCEEDINGS; AND JOHN ANDERSON, CHIEF, COST ANALYSIS BRANCH, BUREAU OF ACCOUNTS

Mr. O'NEAL. Thank you, Mr. Chairman, Senator Ford.

I do appreciate the opportunity for us to come before the committee and discuss this case. I understand the concern about it, and I hope that after a discussion we will all have a little better understanding of how the Commission got to the point it did.

I do have a longer statement that I would like to submit for the record, and I will go through a summary statement.

Senator FORD. Without objection, the full statement will be entered into the record.

Mr. O'NEAL. I have with me this morning on my right, your left, Mr. Jerry Robinson from the Office of Proceedings; on my left, your right, John Anderson from the Bureau of Accounts. These

gentlemen can help me explain and deal with any details that may come up in the question and answer period.

The L. & N. Railroad has drawn a good deal of attention from the Interstate Commerce Commission in the past 2 or 3 years. The performance of the carrier in 1978 was, in our view, clearly inadequate. The performance was such that it required the Commission to issue an emergency car service order to insure that, to the extent we could, coal was being moved by that railroad.

Car service orders, however, have to be recognized as short-term solutions, and our feeling is, based on the information available to us, that the L. & N. needs significant revenues to rebuild its track and to buy sufficient equipment.

Coal is the most important commodity for the L. & N., accounting for about two-thirds of its originated traffic. I might say that it also coal-accounts for 48 percent of its total traffic, and only about 27 percent of its revenue, which says something about how much contribution coal is making, as opposed to other commodities, to the welfare of the carrier.

In recent years, traffic flows on the L. & N. have changed dramatically, and the L. & N. has changed from being principally a South-to-North carrier, to becoming a North-to-South carrier. In fact, the amount of coal moving from North to South has increased by 148 percent in the last few years, and this has important implications for track and roadbed expenditures. The fact that some of the track is single-line track means that it has important implications for the efficient handling of equipment.

Demand for coal generally, especially low-sulfur Kentucky coal, has greatly increased. So that generally, over the whole system, the coal traffic has been increased by about 60 percent.

L. & N. needs to spend large amounts to change its configuration and handle increased demands. Prior to the Commission's recent decision, the L. & N.'s revenue to variable cost ratio was 129 for coal traffic.

Now we generally say that in order for a carrier to cover all of its costs on a particular move, that it should make 145 percent of variable cost. So this carrier, while it was not losing money on individual moves, was not making all of its costs on the movement of coal.

After the decision, the ratio of revenue-to-variable costs went from 129 to 169 percent. And we feel that that is reasonable; it does cover total cost, and it does represent what looks to be a reasonable profit.

I think it is worthwhile to point out at this point that several other commodities move at similar ratios, and other recent coal decisions have authorized rates at similar revenue/cost ratios.

Now in the back of the longer statement, we list some commodities that move at ratios substantially higher than the 169 percent that we feel L. & N. coal is moving at.

Some examples: Wheat is moving at about well over 200 percent of variable cost in some places. Iron ore at 220 percent. There are several other commodities, if you look down the list: manufactured iron and steel, primary copper products, heavy machinery, even locomotive railroad car parts are moving at very high rates in some places.

So there are many commodities moving at rates higher than the rate of coal.

What we tried to do in the case was to balance competing interests and determine the L. & N.'s need for additional revenues to pay for transportation costs. I think it is important to note that this railroad has had some problems; it did have a loss last year; and it needs to spend something like $427 million over the next few years to upgrade its system.

We weighed these factors. We took into account the increase in the price to consumers, the effect on inflation, the effect on energy consumption, and the effect on geographic regions of the country.

We took into consideration different theories that were advanced to the Commission, such as the Department of Transportation's argument that rates on coal should be based on the delivered price, Btu equivalency, with other fuels, and the Commission did not accept that argument, and it did not go along with that theory. At this point, it might be useful to reference another document that is attached to the statement, identified as "The Average Dollar Cost per Million Btu's for Steam Generating Plants for 1978."

If you will look at that list, it shows the price for oil, gas, and coal, and indicates that down the line for each region of the country, oil is much higher-moves at a much higher price than gas, and gas is much higher than coal; coal is still the lowest delivered fuel source per million Btu's.

Senator FORD. Compared to the coal delivered from Poland to Tampa?

Mr. O'NEAL. Well, the cost of coal from Poland, I agree, is moving at the delivered price is lower than the delivered price from certain parts of Kentucky.

Senator FORD. And eastern Tennessee.

Mr. O'NEAL. OK. I acknowledge that. However, I think it is important to recognize that we are talking about different countries, different lifestyles, and the labor unions in Poland I doubt are as effective as the labor unions in the United States, and I doubt that the lifestyle of the labor folks in Poland is quite as good as in the United States. I think there are a lot of ingredients in the total cost.

The question would be whether we should hold down transportation rates on a railroad that is having some problems in order to overcome differences in other ingredients that go into the cost of the fuel.

It is difficult to predict the effects of these authorized increases, but just looking at some of the information that was provided in the record, it does not look as though the increases are going to have that much of an effect on utility users.

One party to the case, Electric Fuels Corp. in Florida, for example, indicated there would be a 16-cent increase per month to their

consumers.

Another point here is the Council on Wage and Price Stability did state that the increase was within the inflation guidelines. We are concerned about the competitive impacts, and we do know in the short run that some mines in Kentucky may experience some difficulty in competing in some markets, but in the long

run we feel the Kentucky mines will be better off because they will be served by a stronger railroad.

And I think it is important to note right here that the 22-percent increase did have the following conditions attached:

First, the funds derived from that increase must be kept in a separate account.

Second, the funds from that account can only be used for capital improvements and maintenance on the railroad, unless otherwise specified by the ICC.

Third, the details of the expenditures must be fully reported to the agency, and we have required that the divisions within the railroad, the Family Line System, be adjusted so that the L. & N. does derive all the benefits from the revenues generated.

I think it is also useful to note that, while the Commission's actions here have been controversial, the agency has applied some restraint on the railroad to hold down its increases as they apply to captive shippers. And I think that the authority available to the Commission now has been exercised. It may be useful to keep in mind that some of the legislative proposals would remove even that authority. If this legislation were enacted it would have important implications for the movement of coal and perhaps other commodities that are captive.

That concludes the summary statement. I would be happy to try and answer any questions at this time.

Senator EXON. Thank you, Chairman O'Neal.

You made reference in your testimony to the fact that the L. & N. is facing, I think you said, $427 million to upgrade their facilities in the next several years. That, I assume when you talk about upgrading facilities, is track and equipment, primarily?

Mr. O'NEAL. Track, roadbed, equipment, right.

Senator EXON. What is the general philosophy in the ICC with regard to the establishment of revenues with regard to operating costs of a railroad and long-term capital investments?

Mr. O'NEAL. Well, the-

Senator EXON. I mean, is it both? What is your approach? I recognize, of course, that the revenues of a railroad have to pay for their operating expenses and capital investments, but is there a rule of thumb that you use in the ICC in this regard?

Is there a difference between "operating revenues" and "capital investment" as far as the rate increase applications that are considered?

Mr. O'NEAL. Well, the Commission has recently been trying to develop an approach that breaks down the various elements that we feel are important. We are doing this because of our efforts to encourage the railroads to price more selectively and to rely less on general increases.

So what we have done, particularly in coal cases-now we have not had that many cases involving other commodities, but for coal cases we have looked to insure that the rates are covering the full costs of moving the coal.

We have developed a number that represents what we think is the current cost of capital.

We have added that to the full cost of moving the coal. And we have developed from that what we think is a return that will cover costs and will represent a reasonable profit.

Now in some of the coal cases, particularly in the West, we have gone beyond that. We have added another factor for differential pricing in order to support the entire railroad. That was not a factor in the L. & N. case. We did not prescribe a rate here; we were merely looking at the proposed rate by the carrier to determine whether it was reasonable.

Senator EXON. You said that two-thirds of the traffic on the L. & N. is directly coal related.

Mr. O'NEAL. Coal represents about two-thirds of the L. & N.'s originated traffic.

Senator EXON. Originated traffic. How does that compare with the norm of the other railroads? What I am getting at here is: Has L. & N., in your opinion, had the innovative management that is necessary to attract new merchandise, or to maintain the merchandise that they used to carry?

You said in your testimony, I believe, that there had been a rather dramatic change in the L. & N. in the last several years. I assume that was with regard to the amount of revenues originated on the road with regard to coal and other commodities.

Now could you give us some figures on what the change was 8 years ago? Was it half coal and half other commodities? What were the ratios?

Mr. O'NEAL. Well, I do have some numbers here. Eight years ago, 1971, total coal tonnage was 51.3 million tons; total tonnage was 120 million tons, so the percent for coal was 42.6 percent. That percentage now-and that is all traffic, not just originated trafficfor 1978 the number is 44 percent. In the statement I guess we had the 1977 number, which is 48 percent, but for 1978 the number is 44 percent for coal.

There has been a little increase in the percentage for coal. The total freight on the L. & N. has-the increase for coal has been much larger than the increase for total freight.

Senator EXON. Am I correct in assuming that that other freight, then, went to trucks?

Mr. O'NEAL. It very likely did go to trucks; other modes of transportation. The trend for railroads generally has been that while their total tonnage has increased somewhat, their percent of the transportation pie has decreased. That is true in the case of the L. & N.

Senator EXON. Does the L. & N. Railroad, Mr. Chairman, with its two-thirds' reliance on coal as originating merchandise, does that exceed any other railroad in the country?

What I am getting at: Is this a highly unusual circumstance? I am trying to say: Why?

Mr. O'NEAL. I would say, "Yes;" there are not many railroads that have this large a percentage of their traffic coming from coal. There are some. The Norfolk & Western would be one that has a very high percentage of traffic as coal traffic. Then there might be some others, but those would be some of the major ones.

Senator EXON. All right, one other question then, Mr. Chairman, and then I will recognize Senator Ford.