the right to continue in that business to the extent that they are now engaged in it, but requires that they obtain the approval of the Commission for further expansion of their activities. I also call to your attention the fact that section 303 (e) of the act declares it to be the policy of the Congress that the Commission shall exempt transportation by contract carriers by water which, by reason of the inherent nature of the commodities transported, their requirement of special equipment or their shipment in bulk, is not actually and substantially competitive with transportation by any rail, motor or water common carriers. No change is suggested to section 303 (e). So that, in fact, the achieving of this proposal for equality of regulation among competitors is unnecessary in any given case, because in the absence of competition, exempt status can be continued under this section. Mr. WILLIAMS. Thank you, Mr. Ray. I believe under the proceedings announced yesterday by the chairman (Mr. Harris), it was agreed that upon completion of your statement we would go back to Mr. Rothschild's statement and let him pick up there. Then, when the prepared statements of the representatives of the Commerce Department and the Commission and the Department of Defense had been completed, they would submit to questions. Am I correct in that— questioning would await the completion of your statements? Mr. RAY. That is substantially correct. We ourselves, or in the Commerce Department, made no presentation on section 22, and we consider that the Defense Department presentation, which will be made by Mr. Earl Smith, as part of our overall presentation, and I think Mr. WILLIAMS. I believe they have witnesses here to testify. Mr. RAY. Mr. Smith is here and we had thought that perhaps he should go on also before questioning was undetraken. Mr. WILLIAMS. That was my understanding. Mr. RAY. And, the Secretary, as you know, had another testifying engagement this morning, and when that is finished he will be here. That will probably be before we have finished the presentation we refer to. Mr. PRIEST. Mr. Chairman, may I inquire whether the Defense Department is confining its testimony primarily to section 22 or discussing the entire bill? Mr. SMITH. Section 22 entirely. Mr. RAY. Section 22. Mr. PRIEST. Thank you. Mr. RAY. Could I mention one further matter at this point? Mr. RAY. We have prepared at the suggestion of the committee a comparative print of the entire bill. I wonder whether I should offer that for the record or whether you would want to have it in the record. Mr. WILLIAMS. We would like to have that made available to the members of the committee. I do not think it will be necessary to include it as a part of your testimony. Mr. RAY. I think we have delivered sufficient copies and I will not offer it again as part of the record. Mr. WILLIAMS. I believe on yesterday you were interrupted, Mr. Rothschild. So, if you will, you may proceed and pick up where you left off yesterday. STATEMENT OF HON. LOUIS S. ROTHSCHILD, UNDER SECRETARY OF COMMERCE FOR TRANSPORTATION, UNITED STATES DEPARTMENT OF COMMERCE-Resumed Mr. ROTHSCHILD. Mr. Chairman, and gentlemen, if you will turn to page 48 of my statement, I think that is the point at which I stopped yesterday. The first comment is on freight-forwarder associations. FREIGHT-FORWARDER ASSOCIATIONS Section 19 of the bill implements the recommendation of the Advisory Committee report relating to freight-forwarder associations. Section 402 (c) of the act now provides an exemption from economic regulation applicable to a shipper, a group or association of shippers, and shippers' agents engaged in consolidating or distributing freight for themselves or for members thereof on a nonprofit basis for the purpose of securing lower rates. The amendment would give the Commission discretionary authority to make the exemption inapplicable where it finds, after investigation and hearing, that the activities of such persons are not being conducted solely for such purposes. The Commission would be required to consider, among other things, the facts and circumstances surrounding the organization and establishment of such activities; the scope of the activities; basis of charges, if any, for the service or services provided; and the extent such activities are in competition with the services of regulated freight forwarders. I should like to emphasize that legitimate and bona fide associations engaged in consolidating or distributing freight for their members on a nonprofit basis have nothing to fear from the amendment which is proposed by section 19 of the bill. The amendment does no more than insure that the provisions of section 402 (c) will be confined to their original purpose. The purpose of the amendment is to vest the Commission with the authority necessary to cope with the numerous individuals and groups claiming to be exempt from regulation as shippers' associations but who are in actuality nonregulated forwarding enterprises for profit. The Commission has pointed out in its annual reports for the past several years, including its 69th annual report, November 1, 1955, that it has been unable to make any progress in dealing with these activities since the courts have held that the provisions of section 402 (c) constitute an outright exemption rather than a clarifying provision. The Commission for many successive years has recommended to the Congress that corrective legislation be enacted. It is clear from the legislative history of the Freight Forwarder Act, which added part IV to the Interstate Commerce Act, that the Congress did not intend the provisions of section 402 (c) to constitute anything more than a clarification of the definition of the term "freight forwarder" as used therein. This is apparent not only from the language in section 402 (c) which reads that "The provisions of this part [IV] shall not be construed to apply" to the operations described therein, but also from the various committee reports. The Committee on Interstate and Foreign Commerce of the House in reporting a bill which led to enactment of section 402 (c) said in House Report 1172, 77th Congress, 1st session, that— The definition therefore draws a line of distinction which clearly excludes brokers, nonprofit associations of shippers, warehousemen, and pool-car operators, as those persons normally operate, since such persons do not do all of the things required under the definition to constitute a freight forwarder. In order to make absolutely sure, however, that the definition cannot by construction be held to cover shipper, groups of shippers, and nonprofit associations of shippers, consolidating or distributing freight for themselves or their members, or to cover warehousemen, pool-car operators, and other shippers' agents engaged in consolidating or distributing pool cars, and not assuming responsibility for the through movement of the property, subsection (c) was included in this section (p. 6). [Italics supplied.] The committee stated further: Subsection (c), as has been previously pointed out, is a clarifying provision rather than an exemption. The Congress was simply attempting to make it clear to the administrative agency that it should not bring within the scope of the definition those persons who were not doing the things required of a freight forwarder. The Commission was stymied in its efforts to control the operations of associations engaged in consolidating or distributing freight when the Supreme Court held in U. S. v. Pacific Coast Wholesalers Association (338 U. S. 689), that the provisions of section 402 (c) constituted an outright exemption from the provisions of part IV and were not merely clarifying in nature. The Commission found that the association was operating as a freight forwarder without a permit in violation of the act, and ordered it to discontinue such operations. The holding of the Commission was based on the fact that since the association was handling freight for nonmembers on a prepaid basis and making “refunds" to its members, it was holding itself out to the public and operating for profit. The Supreme Court in upholding the district court's reversal of the Commission's decision held that since the association did not handle freight for nonmembers except at the request of a member, there was "no reasonable ground for ruling that the association was on a profit basis, or that it was holding its service out to the general public." The effect of the decision is to prevent the Commission from going into the activities actually conducted by associations of this nature. Obviously, there is no limit as to the number of persons that may be served by associations of this nature, so long as such services are performed at the request of a member. No extended discussion is required to determine the effect of the operations of associations of this nature on regulated freight forwarders and the public. These associations, or unregulated forwarders, can select profitable hauls. They publish and file no tariffs. and can, therefore, fix their rates so as to undercut the regulated forwarder. The result is that traffic is diverted from the regulated forwarder, who is required to serve the public at established rates. The Commission said in its 66th annual report, November 1, 1955, that: * * * Unless we are given broader authority than we now have to deal with various types of operations that are being carried on under the exemption, a segment of essentially for-hire forwarding will continue its growth to the detriment of the public interest, and particularly to shippers in large as well as small communities which must depend for service upon the regulated forwarders. [Italics supplied.] Now, Mr. Chairman, I should like to discuss service deficits. SERVICE DEFICITS In the period since the transport policy report was prepared and legislation for its implementation was introduced, the Interstate Commerce Commission has announced that it will conduct a thorough investigation of the passenger-service deficit problem. Your committee may therefore wish to defer consideration of this matter until after the conclusion of the Commission's investigation. If, however, more immediate attention is thought to be desirable we suggest your examination of the following proposal. Section 6 (a) and (b) of the bill implement the recommendation of the Advisory Committee report relating to "service deficits" by amending section 13 (3) and (4) of the act so as to authorize the Interstate Commerce Commission to order the discontinuance or curtailment of railroad services or facilities in intrastate commerce. Before exercising this authority the Commission would be required to find, after full hearing, that a State requirement causes a net loss in revenue to the carrier or carriers involved, or otherwise unduly burdens interstate or foreign commerce, and that reasonably adequate service in lieu thereof by other carriers or modes of transport will be available to the public. The authority would be comparable to that imposed by authority of the State, when they are found to impose which the Commission now has under section 13 (3) and (4) over intrastate fares, charges, classifications, regulations, or practices, imposed by authority of the State, when they are found to impose an undue burden on interstate commerce. The purpose of the section is to provide some relief for rail carirers in securing the necessary authority to discontinue or curtail unprofitable facilities or services for which there is no longer sufficient public need to justify heavy operating losses to the railroads. Class Ì railroads of the United States have incurred an annual operating deficit in their passenger-service operations every year since 1930 with the exception of the war years, 1942-45. The deficit averaged about $250 million annually between 1936-40, with the annual average rising to nearly $625 million between 1948 and 1953. The passenger-train deficit for 1954 was approximately $670 million and is estimated in the neighborhood of $634 million for 1955. The Interstate Commerce Commission states in its 69th annual report that the deficit operation of railroad passenger trains continued to be a vexing problem for us, the State commissions, and the railroads themselves, and was aggravated in 1954 by declining revenues both in passenger and freight service. Commenting on the passenger-train deficit in its 66th annual report for 1952, the Commission said: curtailment of unprofitable train operations of a local nature offers one of the means of reducing the passenger deficit. While we have the power to authorize the complete abandonment of a line of railroad and have been called upon to exercise such power, we cannot, under the present act, authorize the carriers merely to curtail service on a line. This power, where it exists at all, rests with the State regulatory commissions. It would appear that, as long as the Federal law stands as it is, if anything substantial along this line is to be accomplished, the State commissions must do it by cooperative action among themselves. [Italic supplied.] The railroads have experienced difficulties in obtaining authority from the State commissions for the discontinuance or curtailment of unprofitable passenger services. Quite frequently, the State com mission does not have the authority to permit the railroad to discontinue or curtail passenger service. Even in those instances where the authority exists, the State commissions have unduly delayed or been reluctant to permit discontinuances or curtailments because of opposition from local interests. No complete study or analysis of the reasons for denial by State regulatory bodies of applications for discontinuance of unprofitable passenger trains, or of the length of time required for these bodies to act on such applications, is available. However, the 1954 report of the Special Committee on Cooperation with the ICC in the study of the railroad passenger deficit problem *** while there may be reasons for a State commission denying an application for authority to discontinue passenger trains, we have yet to find any justification whatsoever for the extreme delay evidenced in some jurisdictions in assigning and holding hearings on the carriers' applications for such authority. Although this discontinuance or curtailment of unprofitable passenger-train services in intrastate commerce would have some effect on the general financial condition of the railroads, the most important effect would be upon the general shipping and traveling public. Losses from unprofitable passenger services must be recouped at the expense of other patrons, localities or traffic. The Interstate Commerce Commission pinpointed this relationship in its 66th annual report: This passenger deficit constitutes a burden which falls almost entirely on the carload freight traffic. The total revenues from freight service in the year 1951 amounted to $8,933 million. If the passenger-service revenues had been equal to the passenger-service costs, which assumes that the deficit is entirely eliminated, the carriers could have reduced their freight charges for all freight services by about 7 percent ($680 million divided by $8,933 million) without affecting their 1951 net railway operating income from the combined freight and passenger services. I should like to make it clear to the committee that the authority given by section 6 (a) and (b) of the bill is not intended as a directive to the Commission to discontinue all unprofitable railroad services and facilities. The section says quite plainly that the Commission may not issue an order prescribing or requiring discontinuance or curtailment of services covered by a State requirement "unless it finds that there is or will be available to the public reasonably adequate service in lieu thereof by other carriers or modes of transport." It seems to me that in view of these limitations the Commission should adopt an attitude of "show me" so that the public's right to adequate service will not be impaired. of the National Association of Railroad and Utilities Commissioners states that The Commission states in its report that it does not have any objection to these amendments. Although we have not proposed any amendments which would extend this principle to motor and water carriers, the advisory committee states in its report that the Congress may wish to give consideration to these additional forms of transportation. If the committee desires, we shall be happy to submit appropriate amendments to the act, to cover motor and water carriers. Mr. WILLIAMS. Mr. Rothschild, I notice that there are two more pages in your testimony. Was it your desire that this be included as part of your statement? |