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case is reported in 283 1. C. C. 219. The case is designated “Alcoholic Liquors in Official Territory.” The railroads sought to establish reduced rates on alcoholic liquors—to become effective August 25, 1950. Upon protest by motor and water carriers the ICC suspended the proposed railroad rate reductions. The evidence in the case indicated that the railroads were suffering heavy losses of this remunerative traffic to other forms of transportation. The ICC said in its report on the case that “evidence offered by the respondents shows that the proposed rates would return revenues approximating 146 percent of the fully distributed costs.” Nevertheless, the ICC forbade the railroads to establish rates on this basis of 46 percent in excess of “fully distributed” costs—since such rates, in the ICC's opinion, would have been “lower than necessary to meet the competition."
Most recent case of refusal by ICC to permit reduced rates.-A member of the committee asked me to cite "the most recent case” in which the ICC had denied to a railroad the right to reduce rates to the degree the railroad wished. As of the third week in May 1956, the most recent such case, I believe, is that designated as Investigation and Suspension Docket No. 6509, which concerns rates on freight moved in trailers on flat cars (co-called piggyback service). The railway involved in this case is the Great Northern.
The railway proposed to establish a rate of $1.03 per 100 pounds between the Twin Cities and Minot, N. Dak., which would yield it 4.43 cents per ton-mile, for the movement of butter and eggs. The butter and eggs would be hauled in trailers, these trailers to be moved on the railway's flatcars, except to and from the places of business of the shipper and consignee and the railway's terminals in the Twin Cities and Minot. The rate charged by competing highway truckers for this movement was $1.15 per 100 pounds and they protested the proposed reduction by the railway which would provide rates lower than theirs. The ICC agreed with the truckers, saying that the proposed reduced railway rate “would constitute an unfair and destructive competitive practice.”
Proportion of total freight traffic hauled by trucks in Great Britain.--I was asked what proportion of freight traffic is hauled by railroads as compared to trucks in Great Britain-in relation to the proportion being carried by the two forms of transport in the United States. From a sample taken in Britain in 1952, Government statisticians in that country calculated that the trucks moved 37 percent of the combined ton-mileage moved by both rail and truck. In the United States in the same year the ICC's figures indicate that, of combined rail and truck ton-mileage, the trucks handled about 23 percent. It is not surprising that the ratio of truck movement should be higher in Britain than here, because average hauls are much shorter in Britain. Furthermore, the British trains are much lighter and the relative economy of rail as compared to truck movement is probably not as great in Britain as in the United States. The figures on traffic in Britain were cited in an article in the July 1955 issue of the Journal of the Institute of Transport. The author was Dean Gilbert Walker of the University of Birmingham.
Principles of railroad ratemaking.--I was asked by one the committee members to outline my ideas regarding principles to be observed in railroad ratemaking, and to state wherein any modifications were necessary in these principles in the light of changed conditions in transportation.
I believe it is a fair statement of observable fact to say that—until the rapid development in recent year of forms of inland transportation other than the railroad—especially trucks and barges—there was a considerable degree of general agreement (among economists, at least) as to the basic principles which should govern the making of railroad freight rates. There was, of course, never any absence of disputes about specific rate proposals. But the lively argument among economists on railroad rates, which began almost a century ago and continued down to about the time of World War I, had largely died down,
The key principle of ratemaking which came to be generally accepted was this: that, since a large proportion of railroad costs are joint or common or overhead (i. e., are incurred regardless of whether any specific movement of traffic occurs or not), it is sound practice to collect such indirect costs from customers, not in direct ratio to the volume of each kind of freight that moves, but rather to weight the distribution of indirect costs somewhat in accordance with the ability of the kind of freight in question to bear these indirect costs.
For example, the out-of-pocket costs to a railroad of hauling a carload of machinery might be no more (except for a higher insurance risk, in case of loss or damage) than the out-of-pocket cost of hauling a carload of sewer pipe.
But the selling price at destination of the sewer pipe might be only a small fraction of the selling price of the machinery. If the railroad should attempt to charge exactly the same proportion of its indirect or overhead costs to both the sewer pipe and the machinery--thereby making the rates approximately equal ou both- the result might be that much of the sewer pipe couldn't move. In that case, all of the indirect costs would fall on the remainder of traffic which continued to move (for example, on the machinery).
Hence, it has been considered sound practice-from the point of view of the railroad, the sewer-piper shipper and the shipper of more valuable commodities such as machinery-to have the railroad collect a much higher ratio of its indirect costs from shippers of the higher valued products than from shippers of lower valued commodities such as sewer pipes. The rate on machinery and other higher valued commodities, thus, has been much higher than the rate on sewer pipe and other commodities of less value. The economic justification for the difference is this:
That the lower rate on sewer pipe (covering fully all out-of-pocket costs, with some contribution toward meeting overhead and other indirect costs) was an advantage to the sewer-pipe shipper, because without this lower rate, his product might not be able to move. Moreover, the rate was advantageous to the railroad because the sewer-pipe movement paid all out-of-pocket costs plus some contribution to indirect costs which, if the sewer pipe didn't move, the railroad would hove to try to collect from other shippers. Finally, the lower rate on sewer pipe was advantageous, even, to the shippers of machinery and other high-rated products, because however small the contribution of the sewer-pipe movement to the payment of the railroads' indirect costs this contribution was nevertheless a sum that, if the sewer pipe did not move, the railroad would have to collect through higher rates on machinery and other highvalued commodities. It was better for the machinery shipper to get from shippers of sewer pipe some help toward meeting the railroads' overhead and other indirect costs than not to get any such help at all.
This doctrine of giving considerable weight to ability to pay or what the traffic will bear in ratemaking was the central ratemaking principle about which economists used to argue--but which had become pretty generally accepted by the time of World War I. There continued to be plenty of contention over specific rates, of course. Shippers and carriers and their lawyers will always have disagreements to resolve in the adjustment of specific rates—however complete the agreement may be on the fundamental economic principles to be applied.
HOW ONSET OF COMPETITION HAS WEAKENED THE APPLICABILITY OF THE
“ABILITY TO PAY” PRINCIPLE
The stabilization of rates under skilled regulation by the Interstate Commerce Commission for practically all freight movement-except local drayage throughout the United States, had many advantages. Every shipper knew, not only his own transportation charges, but those of his competitors. He knew that there would not likely be any sudden or sharp changes in these charges— and that, if changes were proposed, he would have an opportunity to present his point of view on these changes before an impartial tribunal. Moreover, all shippers were protected from arbitrary inequity of treatment; and the general approach to ratemaking of not charging more than the traffic would bear gave reassurance to the shipper of low-valued commodities. It also benefited the shipper of high-valued goods, because while he had to pay a large share of the railroads' indirect costs—his rates were probably lower than they would have been if railroad rates had been so high on low-valued freight as to prevent its movement in quantity.
The objection to relying today, as in the past, on full-scale application of value-of-service practices in ratemaking does not lie in the idea itself, but in the fact that, with only half of the Nation's freight traffic now moving by rail, these accepted practices no longer produce the generally beneficial results they used to produce.
Application of these practices no longer produces its one-time beneficial results because there has been a rapid develpoment of barge and truck transportation, only a fraction of which is regulated. This unregulated transportation is not obliged to serve all comers as the railroads are obliged to do—but can pick that traffic on which railroad rates (on the ability-to-pay doctrine) have been relatively high; and it can, and does, ignore the hauls and the traffic on which railroad rates are relatively low.
The effective ceiling on the railroad rate on any commodity used to be that commodity's ability to pay. In other words, the railroad rate could safely go high enough to be just below the point where a further increase would curtail the producers' ability to ship that commodity. That was the old ceiling, and with high-value commodities (such as silk, or tobacco products, or alcoholic beverages, or machinery) the ceiling was pretty high. But, now, the ceiling has fallen. The ceiling is now located at the point of the cost to the shipper of hauling his own products in his own trucks or his own barges.
Before this alternative transportation came along a railroad might have been able to charge rates on valuable commodities as high as 10 cents per tonmile, or even more with no danger of losing so much as a pound of freight by making charges as high as this. But now, if the railroads try to charge 10 cents a ton-mile on highly valuable freight, it isn't just a few pounds of traffic in that commodity that they risk losing, but probably 100 percent of it.
SUGGESTED PRINCIPLES AND PRACTICES IN RATEMAKING AND RATE REGULATION,
APPLICABLE TO PRESENT-DAY CONDITIONS
Since new conditions have arisen in transportation—which routine application of formerly accepted principles, alone, will not adequately solve-it will take a lot of time and a lot of thinking and discussion and experimenting before principles and practices fully applicable to current conditions will be evolved to the point where they will gain general acceptance. The Cabinet Committee report was an important contribution to the evolution of these revised principles and practices. The testimony before this committee of the Congress, and the discussion and study of this testimony by your committee, can be a further important contribution to the formulation of adequately revised principles and practices in this important area.
(I should observe in passing that there is persuasive reason for believing that the recommendations in the Cabinet Committee report embody highly competent economic thinking on these questions-from the fact that, in the 80-called working group which advised the Cabinet Committee in the preparation of its report, were included two of the country's ablest transportation economists. I refer to Charles Dearing, of the Brookings Institution, and to Associate Prof. Ernest Williams, of Columbia University. It is not conceivable that men of their professional integrity and competence in transportation economics would have permitted their names to be associated with this Cabinet report unless they believed the findings were in harmony with sound economic policy.)
Now as to principles and practices which, in my personal and fallible opinion, should prevail in ratemaking and rate regulation under present-day conditions, I make the following suggestions :
I The principle of “charging no more than the traffic will bear" needs to be modified to recognize the fact that a lower ceiling is required than the shipper's ability to pay. It is no longer the shipper's ability to pay that establishes the ceiling on rates-instead the ceiling is now located at the cost to the shipper of providing his own or obtaining some other form of transportation. The value of the service is as valid a consideration in ratemaking today as it ever was the only difference being that a different yardstick has to be used, viz, the price at which the shipper can get the service from some other agency than the railroad. The yardstick of value of service used to be ability to pay. Today, the yardstick has to be the cost of any alternative form of transportation. Assuming that it is sound public policy to allow common carriers to compete for traffic which they can handle economically, regulatory authority should put no impediment in the way if common carriers seek to reduce the ceilings on their rates to a lower level (as long as they do not incur an out-of-pocket loss in so doing).
A new problem confronts legislators and regulators who determine transportation policy. This new problem is that of avoiding the kind of regulation that will divert traffic into uneconomic methods of movement and make the Nation's cost of transportation service higher than need be. This danger did not arise to complicate the problem of regulation when there was only one type of transportation available. It is of highest importance now. To avoid this danger, the legislators and regulators should interfere little if at all with the price competition of one type of transportation with another type. It is beyond the power of the regulators to prevent the major part (i. e., the unregu. lated part) of truck transportation or barge transportation from competing with the railroads, or with the small fraction of barge and truck transportation which is regulated (65 percent of truck transportation and 90 percent of barge transportation are unregulated). Recognizing that railroads cannot be protected against unregulated transportation, it follows that, if truck and barge transportation are given one-sided protection against railroads, the only result can be that railroads are going to have a considerable disadvantage in competition. If one type of competitor is thus arbitrarily restrained on a onesided basis, it inevitably follows that he will fail to get the full share of traffic which he could handle more economically than the other fellow. If regulation thus diverts transportation froin more economic to less economic channels, it will increase the Nation's total cost of transportation contrary to the public interest.
This is the new problem which has arisen to complicate the task of the regulators. The problem did not exist as long as there was only one form of transportation. Today, it is one of the most important of all transportation problems.
While regulatory intervention in price competition between one type of transportation and another is dangerous, and likely to do much more harm than good (for reasons given above), there is no reason why regulation of rate competition as between regulated carriers of the same type should not continue, wherever continuing need for such regulation exists.
(Since it is impossible for regulators to prevent unregulated barges and trucks from competing with regulated common carriers, the regulators should put no obstacles in the way of the common carriers in competing back. On the other hand, since regulatory authority embraces all of railroad transportation, the regulators have, for example, just as much ability today as they ever had to prevent one railroad from engaging in so-called cutthroat competition with another railroad. This is one aspect of regulation which has not been out. moded by the advent of unregulated types of transportation.)
There is no useful public purpose served in forbidding a common carrier to adjust rates to meet competition (if its costs permit), on the grounds that meeting the competition would destroy some traditional pattern of common carrier rates. (For example, if rates on some basic commodity have traditionally been the same from points A and B, and unregulated competition invades the traffic at point A, but not a point B, then the common carrier ought to be allowed to meet the competition at A, without reference to the rates it charges at B. If we are going to have equitable competition between regulated and unregu. lated carriers, then regulated carriers must have the same right that the unregulated once have-to meet competition where it exists, without having to make proportionate adjustments where it does not exist.)
As to volume or trainload rates—there can be no economic objection to a reduced rate for shipments in quantity, if the expense to the carrier is less for the quantity shipments than for those in smaller volume. There is no special incentive, however, for common carriers to establish volume rates, unless competition is already offering or threatening to offer such rates. Regulators are completely powerless to afford any protection to the little fellow who might be disadvantaged by volume rates, if such volume rates are going to be offered anyhow by unregulated carriers. The regulators can forbit the regulated carriers to meet this competition, but this action injures the regulated carrier while affording the little fellow no protection whatsoever. The common carriers (i. e., the carriers which will handle any traffic, anywhere) are the little fellow's main reliance for transportation-and any public policy which weakens the the competitive strength of the true common carrier goes contrary to a policy of looking out for the welfare of the little fellow. It should be borne in mind that inland waterway transportation is inherently discriminatory. It is discriminatory by location—that is, only a relatively small part of the country is
served by navigable rivers. It is also discriminatory by volume, in that inland waterway transport goes out after shipments in bulk, and is not interested in the little fellow who has only a few tons to ship.
VI There is little danger of destructive competition arising if different types of transportation are permitted to compete freely on the basis of their comparative costs. This freedom already exists in part e. g., for unregulated carriers to compete with the railroads. It is sometimes contended that, if the railroads are given a parallel right to compete back, they might make ruinously low rates until they drive their competitors out of business, after which they would greatly increase their rates. A little observation suggests the impossibility of any such development. With good highways everywhere and millions of trucks available, the very minute the railroads would try to raise their rates above costs of truck operation, the traffic would go right back onto the highway, almost overnight. The same situation would obtain regarding barge transportation. Because of the ease with which the unregulated competitor can quickly come back, if temporarily displaced by railroad competition of the cutthroat variety, there exists no incentive whatsoever for the railroads to engage in this form of competition.
VII It is frequently alleged that the railroads want to make below-cost rates on competitive traffic, and make up the difference by higher rates on so-called captive traffic. The traffic on which the railroads are most likely to want to reduce their rates is that which has practically abandoned the rails entirely. If the railroads should make rates on such traffic, sufficiently high to meet all outof-pocket costs plus some contribution to indirect or overhead costs—and if such rates should attract this traffic back to the rails--then the railroads would have gained some contribution to their overhead costs that they are not now getting. In other words, railroad rates which are above out-of-pocket costs and which will recover traffic not now moving by rail, will reduce the burden of overhead now borne by captive traffic-not increase the burden on the captive traffic, as erroneously alleged.
VIII If carriers of different types are permitted and encouraged to compete freely with each other on a basis of their comparative costs, they will inevitably learn more about their own and their competitors' costs than they know now. The result may well be not just that they will take traffic from each other, but also that they will yield traffic to each other, where study and experience gives them the knowledge that a competitor has a decided cost advantage. There is undoubtedly some traffic still moving by rail that could be moved more economically by truck, just as trucks are hauling some traffic that could be more economically hauled by rail. Competition between types of transportation on a basis of comparative costs would not mean, necessarily, that any one type would be hauling a greater or less proportion of the Nation's total traffic than it now hauls. But there would be assurance that the traffic each type would haul would be that for which it is economically best adapted. Today there is no such assurance.
I believe, if attention is given to the foregoing points—which are designated by roman numerals I through VIII, inclusive, that, in course of time, full discussion by regulators, shippers, commerce lawyers, traffic officers of the various agencies. of transportation, and students of economics will bring about a reasonable theory of ratemaking which will take account of transportation conditions as they actually exist.
But it should go almost without saying that a theory and practice of ratemaking, which was frozen into law and regulatory precedents at a time when virtually all inland traffic moved by rail and was subject to 100 percent regulation, is no longer adequate in a period when the alternative of unregulated transportation of one or more types is available to practically all shippers and receivers of freight. The proposals of the Cabinet committee, embodied in H. R. 6141 and 6142, are not revolutionary. They would not abolish regulation.
They would merely adapt regulation in some degree to the changes which have | come about in conditions in the transportation industry. Respectfully submitted.
JAMES G. LYNE. JUNE 8, 1956.