The railroad panel report, citing the large amounts of traffic moving in bulk by water and the difficulty rail carriers have in competing for this traffic because of the exempt water carriers' ability to change rates freely, recommended repeal of these exemptions. The investor panel took the same position.

The user panel, on the other hand, did not believe any useful purpose would be gained by the extension of regulation resulting from such repeal and opposed any change in the present law. The majority of the waterway panel, after considerable discussion of the advisability of partial repeal of the dry-bulk commod ity exemption, voted against any change in the water carrier exemptions. Two members of this panel dissented and advocated elimination of the dry-bulk com. modity exemption for traffic moving on the Mississippi River system and connect. ing waterways.

The pipeline panel also opposed any repeal, while the air transport, highway, and freight forwarder panels chose to take no position on this question.

COMMENTS OF THE POLICY BOARD

The policy board after reviewing the panel's positions stated:

"Only two panels have favored repeal or any limitation of these exemptions. We are not convinced that the lack of regulation of the water carriage of bulk commodities has any substantial effect on the competitive situation between bulk water carirers and other carriers. Under such circumstances, we should not and do not recommend extension of regulation."

RECOMMENDATIONS OF THE BOARD OF DIRECTORS

The board of directors approved the above conclusion and comments of the policy board.

COMPARISON WITH H. R. 6141

H. R. 6141 would repeal subsection (b) of section 303, which exempts from regulation the movement by water of three or less commodities, in bulk in a single vessel, which includes two or more vessels navigated as a unit. It would also give "grandfather" operating rights as common carriers to presently exempt water carriers.

TAA opposes any change in the present exemption provision applying to water carriers of bulk commodities.

Mr. BAKER. That takes us to the eighth position, maximum rate regulation.

The TAA board of directors after careful consideration of the views of its eight permanent policy-formulating panels and its policy group, recommended:

Detele from section 15a of the Interstate Commerce Act that clause which requires the ICC to give consideration "to the effect of rates on the movement of traffic by the carrier or carriers for which the rates are prescribed," and add to section 15a a clause to the effect that it is the intention of Congress to permit the maintenance of carrier credit and the attraction of equity capial.

In taking this position, the board did not have in mind any change in the principles of ratemaking embodied in other portions of the act, and the interpretation thereof.

The board particularly was agreed that the value of service concept of ratemaking should not be jeopardized. While there was agreement on this principle, it has not been possible to get agreement on exact legislative language wording to insure this.

H. R. 6141 advocates a complete change in the concept of minimum and maximum ratemaking powers of the Commission, on which TAA presently has no position. Included in H. R. 6141 is a new section

15a.

The association still believes that the Commission should not use section 15a as a basis for substituting its judgment for that of management as to the effect of proposed rates on carrier earnings.

However, since the whole problem of revision of the rule of ratemaking has been greatly complicated by the proposals in the Cabinet Committee report, the association does not list the elimination of the : phrase:

5

the effect of rates on the movement of traffic by the carrier or carriers for which the rates are prescribed.

as a priority recommendation at this time.

It does believe that the addition to section 15a of a clause to the effect that it is the intention of Congress to permit the maintenance of carrier credit and the attraction of equity capital is important. (Additional statement on maximum rate regulation is as follows:)

MAXIMUM RATE REGULATION

ACTION OF THE PANELS

At one time the user panel considered adopting a proposal put forward by one of its members to permit carriers to increase rates freely, provided that such increases were not discriminatory and did not violate "the common law of extortion." This suggestion was not approved, and since that time discussions concerning maximum rate regulation have centered around suggested revisions in the rules of ratemaking for common carriers in parts I, II, and III of the Interstate Commerce Act.

The majority of the user panel initially recommended the repeal of the rules of ratemaking on the grounds that carrier management rather than the regulatory authority should have the responsibility for setting rates which will achieve maximum carrier revenues as long as such rates do not violate any of the other provisions of the act. User panel members felt that the ratemaking rules, and particularly the language in them which directs the Commission, in the exercise of its ratemaking powers, to consider the "effect of rates on the movement of traffic by the carrier or carriers for which the rates are prescribed," have caused the Commission to substitute its judgment for that of carrier management in deciding whether proposed increased rates are likely to increase revenues or will, on the other hand, because of traffic losses, actually decrease revenues. They believed that the Commission in making a maximum rate decision should confine itself to deciding whether or not the maximum rate is unreasonable with respect to the shippers who must pay that rate, leaving to the judgment of the carriers the question of whether the rates in issue are wise from a revenue standpoint.

The investor and railroad panels were also concerned about the Commission's exercise of what should be managerial functions and originally proposed that the "effect of rates on the movement of traffic" clause be eliminated from section 15a, the railroad ratemaking rule, but that the remainder of that section be retained. The reluctance of these panels to support the user panel proposal for repeal of section 15a, in addition to the opposition of the highway and waterway panels to the repeal of that section or of the ratemaking rules applicable to their forms of transportation, resulted in attempts to formulate amendments to the ratemaking rules. Since the user, investor, and railroad panels were concerned primarily with changes in the railroad rule of ratemaking and since the highway, waterway, and freight forwarder panels did not suggest any modifications relating to maximum rate regulation in the ratemaking rules in the other parts of the act, the remaining panel deliberations were limited to proposed changes in section 15a.

The investor and railroad panels, besides advocating the repeal of the "effect of rates on the movement of traffic" language in section 15a, were anxious to add wording indicating congressional intent that the Commission in fixing rates should give consideration to the need of railroads for sufficient revenue to attract equity capital. In addition, the investor panel had urged the insertion of Language in section 15a referring to the necessity of revenues adequate to permit carriers to depreciate their property during its economically justifiable life. The following indicates the changes in section 15a first put forward by the investor panel representatives (language to be deleted is in black brackets and new language italicized):

"In the exercise of its power to prescribe just and reasonable rates the Commission shall give due consideration, among other factors [to the effect of rates on the movement of traffic by the carrier or carriers for which the rates are prescribed]; to the need, in the public interest, of adequate and efficient railway transportation service at the lowest cost consistent with the furnishing of such service; and to the need of revenues sufficient to enable the carriers, under honest, economical, and efficient management to provide such service, to depreciate their depreciable property during its economically justifiable life, and to attract equity capital."

All of the modifications in section 15a suggested above were soon criticized. The user panel indicated its willingness to forego its recommendation for repeal of the entire section and support instead deletion of the "effect of rates on the movement of traffic" clause, but at that point representatives of the highway and other panels took the position that elimination of this wording might call into question the power of the Interstate Commerce Commission to consider the value of service in ratemaking. It was stated that, although value of service had existed as a rate concept before the appearance of the ratemaking rule in the Interstate Commerce Act, removal now of the only statutory language which may be interpreted as explicitly referring to value of service might result in further emphasis on costs as a ratemaking factor.

In response to this thought an attempt was made to replace the "effect of rates on the movement of traffic" clause in section 15a with a direct reference to the value-of-service principle and to add a proviso directing the Commission to accept the judgment of the carriers as to the effect of proposed rate changes on revenues. User, investor, and railroad panel spokesmen did not approve of this means of handling the problem; and, when it later appeared that the highway panel would oppose any modification of the present "effect of rates on the movement of traffic" clause, the user, investor, and railroad panel representatives returned to their previous recommendation that the clause be deleted from section 15a.

There was further difference of opinion over the additions proposed by the investor panel at the end of section 15a referring to depreciation and the attraction of equity capital. While no panel objected to the addition of the phrase "to attract equity capital," the railroad panel wished to include in addition another provision directing the Commission to exercise its ratemaking functions in such a manner as to make possible the achievement of railroad net income approximating a 6 percent return on the fair value of transportation property.'

However, neither the pipeline panel nor investor panel representatives favored a provision setting 6 percent as the proper rate of return, and user panel members doubted the advisability of this step.

The investor panel proposal to add to section 15a a phrase relating to depreciation of carrier property met opposition from the pipeline and user panels. User panel representatives argued that such action might necessitate argument over the depreciation policies of the carriers in every important rate case, thus further delaying final action in these proceedings. Investor panel representatives, on reconsideration, were willing to drop this suggestion.

At this point panel representatives reviewed their basic positions on the question of what should be done about section 15a. It was found that the user, investor, and railroad panels were in fundamental agreement first, as to the desirability of strengthening the power of railroad management to make basic rate policy decisions and particularly to predict the effect of rate changes on traffic volume without interference from the Commission; and second, as to the

1 See footnote for a draft of sec. 15a (2) incorporating these changes.

2 The following is a draft of sec. 15a (2) incorporating the changes discussed in the last two paragraphs of the text (language to be deleted is in black brackets and new language italicized):

"In the exercise of its power to prescribe just and reasonable rates the Commission shall give due consideration, among other factors, [to the effect of rates on the movement of traffic by the carrier or carriers for which rates are prescribed,] to the value of the service for which the rates are prescribed; to the need, in the public interest, of adequate and efficient transportation service at the lowest cost consistent with the furnishing of such service; and to the need of revenues sufficient to enable the carriers, under honest, economical, and efficient management, to provide such service, to depreciate their depreciable property during its economically justifiable life, and to attract equity capital; Provided, That the Commission shall accept the judgment of the carriers as to the effect of proposed rate changes on carrier revenues.

"It shall be the duty of the Commission to maintain, as far as possible, a general level of railroad rates which, over a period of years, will produce revenues consistent with the standards set forth in this section and a net income return approximating 6 percent on the fair value of railroad property devoted to public use."

necessity for giving further emphasis to the financial health of the carriers as one of the aims and purposes of regulation. In spite of their agreement on the two broad principles, these three panels continued to differ over the means of implementing them.

It was against this background that the investor panel reconsidered the original user panel proposal for complete repeal of section 15a. One result of the long discussions concerning the "effect of rates on the movement of traffic" clause had been to raise some doubt as to whether its repeal would accomplish the end desired. At least one user panel representative had argued that, as long as other provisions of section 15a direct the Commission to minister to the revenue needs of the carriers, conscientious performance of this duty would require the Commission in any event to consider the probable effect of rate increases on the movement of the traffic in order to determine to its own satisfaction whether proposed rate increases would actually result in increased carrier revenues. The investor panel finally decided to adopt the user panel position for repeal of section 15a,3 provided that the statement of national transportation policy in the Interstate Commerce Act were amended to make maintenance of carrier credit and the attraction of equity capital one of the explicit aims of regulation. The user panel approved this suggestion, and with this proposed amendment the national transportation policy would read as follows (new language in italic): "It is hereby declared to be the national transportation policy of the Congress to provide for fair and impartial regulation of all modes of transportation subject to the provisions of this act, so administered as to recognize and preserve the inherent advantages of each; to promote safe, adequate, economical, and efficient service and foster sound economic conditions in transportation and among the several carriers; to permit the maintenance of carrier credit and the attraction of equity capital; to encourage the establishment and maintenance of reasonable charges for transportation services, without unjust discriminations, undue preferences or advantages, or unfair or destructive competitive practices; to cooperate with the several States and the duly authorized officials thereof; and to encourage fair wages and equitable working conditions-all to the end of developing, coordinating, and preserving a national transportation system by water, highway, and rail, as well as other means, adequate to meet the needs of the commerce of the United States, of the postal service, and of the national defense. All of the provisions of this act shall be administered and enforced with a view to carrying out the above declaration of policy."

The railroad panel favored repeal of “the effect of rates on the movement of traffic” clause and the addition of language to section 15a referring to the maintenance of carrier credit, the attraction of equity capital, and the making of improvements in the art of transportation as factors to be considered by the Commission in the exercise of its rate powers. This panel opposed repeal of section 15a because it believed that such action might be construed as an indication that Congress wished to give the regulatory authority broader discretion to exercise its judgment on matters which should be left to carrier management. The panel did not oppose the change in the declaration of national transportation policy proposed by the user and investor panels.

The highway panel report opposed any change in section 15a. This panel believed that repeal of this section or of "the effect of rates on the movement of traffic" clause in section 15a would permit railroads to reduce rates at will to out-of-pocket cost levels. The highway panel also objected to the addition to the declaration of national transportation policy of the phrase referring to carrier credit and the attraction of equity capital on the grounds that this language was designed to fit only the railroad situation and hence should appear in part I of the act. The panel's principal fear in this connection was that the Commission might construe such language in the policy statement as a directive to use the return-on-invested-capital theory in the regulation of maximum motor carrier

rates.

The waterway panel opposed repeal of section 15a but approved the change proposed in the national transportation policy statement. The pipeline panel approved repeal of section 15a provided that a direct reference to the value-ofservice principle similar to that discussed by the panels was included elsewhere in the act, perhaps in the transportation policy statement. This panel also approved the proposed inclusion of the carrier credit and equity capital language in the transportation policy statement. The air transport panel, though it took no positive position on these proposals, did not oppose them.

Eleven members of the user panel dissented to the majority position for repeal of sec. 15a.

COMMENTS OF THE POLICY BOARD

The policy board, after reviewing the panels' positions, stated:

The recommendation of the user and investor panels for the repeal of section 15a, the rule of ratemaking applicable to railroads and other carriers subject to part I of the Interstate Commerce Act is, we think, unquestionably sound. The rule has never really served one of its principal purposes, that is, to assure a financially healthy railroad system. As indicated above, the original form of this legislation, which provided for a specific fair return on railroad property and recapture of excess earnings, was repealed in 1933 in favor of what was thought to be a more flexible standard. The Commission at that time spoke in terms of the desirability for railroad income to vary with the business cycle and of the necessity for good carrier earnings during prosperous times in order to offset the inevitable pinch during depressions. Though Congress did not write this latter thought into the law in so many words, the present rule confers ample authority on the Commission to follow such a policy. But now that generally prosperous times are here the Commission seems to have forgotten its earlier prescription for carrier financial health.

Instead of serving as the statutory basis for maximum rate regulation, one of the prime aims of which is to assure adequate revenues to the carriers being regulated, the ratemaking rule has been used primarily by the Commission to whittle down carriers' requested increases in rates. Most of these actions have not been based squarely on a finding that the new rates would be unreasonable to the shippers paying them but apparently in large part on the Commission belief that the increases proposed would reduce the volume of traffic by diverting business to other forms of transportation and hence would not bring the additional revenue estimated by the carriers. The Commission has also consistently taken a more optimistic attitude than the carriers toward future business prospects and because of this often concluded that financial need for the entire increase requested has not been demonstrated.

Both the language and history of section 15a indicate that it constitutes statutory authority and even a directive to the Commission to participate actively in the making of carrier pricing policy. We think a change in emphasis to indicate that Congress now intends a minimum of paternalism can best be achieved by repeal of the ratemaking rule and by inserting in the declaration of transportation policy broad language referring to the necessity of adequate earnings for carriers of all forms of transportation subject to the Interstate Commerce Act, where it may serve as one of the expressed aims of Congress to be considered by the Commission. The language finally chosen by the user and investor panels, that it shall be the policy of Congress "to permit the maintenance of carrier credit and the attraction of equity capital" particularly the words "to permit," aptly indicates the intent of these panels. We interpret them as meaning that regulation should allow sound financial conditions to exist to the full extent that control to prevent unreasonably high or discriminatory charges to shippers will permit, but should not take an active hand in determining the methods as to how such conditions are to be attained.

Repeal of section 15a will not strip the Commission of its power to prevent the establishment of unreasonably high rates. The "just and reasonable" standard of section 1 of the act will protect against such rates, whether they are rates which would unduly enrich the carriers or unreasonably high rates which result from inefficiency on the part of the carriers. But in applying the "just and reasonable" standard the Commission will be guided by the declaration of policy and not by a ratemaking rule which up to now the regulatory agency has considered as authority for substituting its judgment for that of carrier management as to what will best promote the financial health of the carriers. So long as the Commission retains what it considers to be specific authority to determine what level of rates will attract the most favorable volume of traffic and receives conflicting evidence on this score from the proponents of and protestants against a general rate increase, the easiest solution for the Commission will continue to be not to accept the contentions of either party completely but to reach its own conclusions as to what rates it would charge if it were carrier management. In the frequent absence of sufficient knowledge on the part of the Commission to enable it to reach an intelligent conclusion, the result is simply a split of the difference between the conflicting claims. We believe that the carriers are best judges of the most desirable level of rates from the revenue viewpoint.

The railroad panel favored deletion of certain parts of the ratemaking rule and the addition of some new language but opposed repeal of the entire provision.