When the ICC grants a rate increase, I assume that you look at the management of the company and the records of the payout of dividends over a series of years. And from my information, I believe that the L. & N. has paid dividends in 7 or 8 of the last 8 or 9 years.

Mr. O'NEAL. They have paid dividends, and the dividends that they have paid have been fairly substantial. I believe I think we have the numbers here-for 1977, or the 5-year period from 1973 to 1977, the L. & N. payout was 45 percent. The national payout for the railroads was 47 percent.

So their payouts are comparable generally with the industry at large. It's still a pretty high percentage.

Senator EXON. Well, Chairman O'Neal, I know you have a very difficult job over there in the ICC, and I am not sure what decision I would have made had I been on the ICC rather than the other side of the table, but I think there is a general concern on the subcommittee, and certainly on the whole committee, as we look to the possibility of railroad deregulation.

But here is a situation where it seems to me-and how do you answer this question?—it seems to me that this road has allowed its equipment, roadbeds, and tracks to run down by paying out dividends over a period of years, and now they come to the ICC and you come in here stating the L. & N.'s case that they need $427 million. That is a pretty big figure. It is a scare figure.

I would have to say: What is your opinion of the way this road has been operated by the present management over the last 7 to 8 years?

Mr. O'NEAL. Well, we have taken a look at that, and I think, just summarizing it, what I would conclude is that the operations over a long period of time, 7 or 8 years, has been fairly comparable to other railroads.

Now we might say-you might have some thoughts about whether railroads are performing properly, but it has not been out of line with other railroads. In fact, its investment in track and roadbed has been slightly higher than comparable carriers in the area on the average, and its payout of dividends has not been too out of line over a period of time.

Now in 1977, they did have a substantial dividend payout that really in our view did not look appropriate under the circumstances, but looking at them over a longer period of time it does not seem so out of line.

So that is where we come out on it. We are not happy with the situation, and indeed as I mentioned earlier we felt the need back in 1978 to issue a car service order to require the Seaboard Coast Line, to provide sufficient locomotives so that the L. & N. could service the coal mines in Kentucky. And we have had some real problems, in our mind, with the carrier meeting its common carrier obligation.

But we also feel that it has to have sufficient revenues so that it can meet that obligation. And I feel personally much better about imposing the common carrier obligation when I know that the carrier has the financial wherewithal to meet the requirements.

Senator EXON. I will be asking this question of the Departments of Transportation and Energy representatives before us later on

this morning, but do you anticipate that the L. & N. is going to be back next year for further increases to haul the coal? Or is this going to take care of them, in your opinion?

Mr. O'NEAL. Well, I do not have much doubt they will be coming in at least for increases to offset inflation. Now I do not know that we have any information on what they are anticipating-

Senator EXON. Now you do not really believe-do you really believe, Mr. Chairman-are you testifying on the record-that you suspect that L. & N. will be in next year for only inflationary increases?

Mr. O'NEAL. I am not aware of anything else. One of the things that has happened—I think it is important; maybe I have not brought it out well enough-what has happened here with the L. & N. is they have in effect restructured their rate system for coal. They have moved it up substantially by a major increment here in a short period of time.

I do not anticipate the L. & N. coming in to change that, and based on the standards that we are using, we would look awfully closely at any additional restructuring of their coal rates.

As I mentioned, they have gone from what was 129 percent of variable cost-revenue to variable cost-up to 169 percent in these cases, and that is a pretty substantial increase and I cannot anticipate that they will want to make an additional adjustment.

Senator EXON. What I am anticipating, Mr. Chairman, is the fact that the people of the United States have been encouraged to go to coal because there is supposed to be plenty of coal and it is supposed to be cheaper.

Now during your testimony you cited average dollar cost per million Btu's, and I believe that's the-the reference material was the one that started out "The national average" at the top, 215.5 for oil, 143.8 for gas, and 111.6 for coal.

Am I correct? Is that what you were referring to?

Mr. O'NEAL. That is right.

Senator EXON. And as I also understand, just for clarification of the record, those figures do not, for coal on the right side, indicate 1979 increases allowed by the ICC. Is that correct?

Mr. O'NEAL. That is correct.

On the other hand, they also do not include the 1979 increases for OPEC that would go on the left column under oil.

Senator EXON. I see. My point is that since we are telling the people of the United States to go to coal, if we continue these increases for transportation, increased labor costs, and so forth, I hope we do not find ourselves selling the United States on a policy that coal is a good buy on energy, and after we go through many of these expensive conversions, we are going to find that coal is approximating the price of oil.

Because if that is the situation, then I think the people should be told. But so far, I believe the word has generally been sold to the people of the United States that coal is going to be considerably cheaper than oil as far as we can see into the future.

I recognize that that is not directly a problem of the ICC, but it is something that we have to consider here.

Senator Ford.

Mr. O'NEAL. Well, based on our information, I would have to say that the impression conveyed to the public is accurate: That coal is much cheaper than any other of the competing forms of energy, and based on the increases on the OPEC prices recently, I do not see any reason to change that view at this time.

Senator EXON. Senator Ford.

Senator FORD. Thank you, Mr. Chairman.

Chairman O'Neal, when you granted the 22-percent increase in rates to the L. & N.—that was in the latter part of August-would you, or could you have, taken into consideration the cash position. of the Seaboard Coast Lines? Or was that a part of your consideration? Would the Seaboard Coast Lines in total have been a part of your consideration?

Mr. O'NEAL. Well, let me say, first, the rate increase—the 22 percent actually went into effect last year in 1978.

Senator FORD. That is right, but you made it final in August—Mr. O'NEAL. That is right.

Senator FORD. Subject to investigation.

Mr. O'NEAL. That is right.

Senator FORD. All right.

Mr. O'NEAL. But after the investigation, we made it final in August. We are looking at the L. & N. Railroad.

Senator FORD. It is a wholly owned subsidiary.

Mr. O'NEAL. Well, we are looking basically at the L. & N. Railroad and not

Senator FORD. When you say "basically," do you mean Seaboard's financial condition was not taken into consideration? They sign the notes when L. & N. wants to borrow some money.

Mr. O'NEAL. Well, we are looking at the revenue need of the L. & N. Railroad. We look at that carrier's use of the funds that are available to it; the cost to that carrier▬▬

Senator FORD. Do you look at the 1977 percent withdrawal for payments for dividends to the Seaboard in that consideration? Mr. O'NEAL. We did take a look at that.

Senator FORD. OK, so you are then taking into consideration the cash flow of the L. & N. to the Seaboard; but you do not look at the Seaboard as it relates to their cash position when you are making a rate change or adjustment for the L. & N.?

Mr. O'NEAL. We would look at, the total cash available to L. & N. in trying to make a judgment.

Senator FORD. Well, Mr. Chairman, on September 10, the president, or chairman of the Seaboard Coast Line made a statement and said: "We're in a much better position"-that was before you made the final award-said: "The Seaboard Coast Line and its subsidiary, the Louisville and Nashville, we had $190 million in cash on June 30.”

Did you take that into consideration?

Mr. O'NEAL. Well, I do not know what that exactly means. I mean, having cash on hand, I am not sure exactly-

Senator FORD. Well, that sounds pretty good, to me, almost $200 million in cash, and the chairman of the board is bragging, and he mentions the L. & N. in the same breath.

Mr. O'NEAL. Right. We took a look at what we knew about that number and

Senator FORD. Oh? You took that into consideration when you gave the 22 percent?

Mr. O'NEAL. Well, I am not sure we took the actual cash-on-hand figure into account. What I am saying is that we just recently took a look at that and found that only about $16 million of that $190 million was attributable to L. & N., was actually L. & N. cash. The rest of it was Seaboard Coast Line cash.

The fact that they have cash on hand is not that significant unless we know what the cash was-for example, was it free cash? Was it available for any use? What were the requirements for the use of that cash?-it doesn't really tell you that much all by itself. Senator FORD. Mr. Chairman, they say they need $427 millionplus, that is L. & N. If Seaboard is healthy, could not some of that cash come from them? They bought it for a reason, and apparently that is the mother hen.

Mr. O'NEAL. Some of it could come from the Seaboard Coast Line; sure.

Senator FORD. Did you take that into consideration when you gave the increase to give them the $427 million-plus?

Mr. O'NEAL. No, I don't

Senator FORD. Why is that not a factor when a company goes out and absorbs another company? In 1972, the chairman of the board said that the L. & N. would have autonomy; that we would not bother it; it was going to continue the same operation.

However, 6 years later, they are broke. And you did not take into consideration the siphoning off of the dividends and the profits without anything going back into the railroad?

Mr. O'NEAL. Well, the L. & N. Railroad should be a self-sustaining operation.

Senator FORD. Well, it should be, unless the owners take all the cash out of it.

Mr. O'NEAL. I think, going back again to the point that I was trying to make earlier, if you look at the movement of coal, the movement of coal should pay for itself at least, and the railroad ought to make some profit out of that movement. I don't know that anybody would disagree with that.

And based on the information that we have, the L. & N. went into 1977 or so, or 1978, with a very low ratio of revenue to variable cost. In other words, they were making about 129 percent of revenue to variable cost, and that does not cover full cost. To cover full cost, they would have to make at least 145 percent. To make a reasonable profit, they have got to be above 145 percent. And after this rate increase, they could go to about 169 percent on coal, and we just cannot find that that is unreasonable.

Now if the carrier starts proposing rate increases that are going to be substantially above that, we will take a much closer look at it.

Senator FORD. Mr. Chairman, do you look at all statements filed by a railroad when you are taking into consideration a rate increase?

Mr. O'NEAL. Well, anything that is in the record, certainly. Senator FORD. All right, during the fall of 1978, when seeking a rate increase and trying to justify it, L. & N. described its own equipment as "incapable of handling increased business without

capital improvement." And I quote: "To improve its service, substantial expenditures are required. Without the 20 percent rate hike, it would have a devastating effect upon L. & N.'s overall financial position."

Yet, in a statement filed about the same time as the rate increase justification, it is my understanding from the information I have and have been able to read, that L. & N. states in an attempt to refute the ICC's Bureau of Investigation now, that SCL is diverting financial resources: "Our evidence concerning service on the L. & N. refutes the idea"-this is L. & N., now-"refutes the idea that service is inadequate.'

Now you have the L. & N. making a statement on one side that their service is adequate; you have it on the other side saying it will be devastated if we do not get the 22 percent increase; that we just cannot serve; we are incapable.

Now you have a company making two statements to you, and they are 180 degrees apart. Now how can you substantiate a judgment that you have made to give them 38 percent? And I am talking about 38 percent. You may have given them 22 percent for certain reasons, and then the companywide 13 percent, and you admit they are going to come back after some more. Did you weigh those two statements in your judgment here?

Mr. O'NEAL. Well, I think there is a short term and a long term that you have to look at. Clearly, the railroad in 1977 paid out a large dividend. I think it is questionable as to why they should have done that.

But if you are looking at the quality of service of the L. & N. over a longer period of time, their statement about having adequately served is probably an accurate statement.

There was a definite change and deterioration in service in the last 2 or 3 years. And as I mentioned, I think a good part of that is because of the change in the movement of coal from North to South and the fact they were not really set up to handle it. In fact, I think it takes one locomotive to haul the same amount of coal that it takes three to go the other direction.

So there are locomotive requirements that increased substantially because of the different type of traffic they were handling, different moves in different directions, and

Senator FORD. Let me just ask you this: If you were chairman of that board or president of that company, how long would it take you to recognize that your traffic had shifted from North to South?

Mr. O'NEAL. I am not going to argue that they made the decision fast enough or that they did not make some mistakes; it looks to us, looking at it now, that they should have anticipated this sooner. They didn't.

Senator FORD. Oh? They should have anticipated-but it has taken them 11 years to get around to it, almost 11 years to find out that their traffic has shifted.

Mr. O'NEAL. Well, the increase has taken place in fairly recent years. I am not sure

Senator FORD. Well, it started in 1968, by L. & N.'s testimony. Mr. O'NEAL. OK—

Senator FORD. And today is 1979, I think. So that makes it almost 11 years. The consumer has to pay for it.