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and economically as its capabilities permit. Any governmental policy or regulatory action which adversely affects any of the physical carriers ultimately will have an unfavorable effect on freight forwarders. So, the forwarding industry has a vital interest in the type of regulation that is applied to other common carriers in the transportation system, as well as that applicable to forwarders.
The three basic changes proposed by the omnibus bills which would have a direct and important bearing on the freight-forwarding industry are:
(1) The change in the declarations of national transportation policy. (2) The changes in rate regulation and suspension provisions.
(3) The provisions regarding exemption of freight-forwarder associations.
These changes will be discussed in the order stated.
NATIONAL TRANSPORTATION POLICY
The freight forwarding industry is opposed to the change in the declaration of national transportation policy as set forth in section 2 of bills H. R. 6141 and H. R. 6142. Our thinking agrees with that of the ICC as expressed in its letter dated December 22, 1955, addressed to Chairman J. Percy Priest of this committee.
Not only does the proposed new policy fail to recognize the inherent advantage of freight forwarding but it would have the additional effect (1) of lessening the protection which the industry has and needs against unfair and destructive competitive pricing and practices and (2) of permitting and encouraging an intensification of competition in the forwarding industry by liberalizing the standards for obtaining freight forwarder permits.
I will discuss the first of these anticipated effects in more detail when I come to consider the changes in rate regulation and suspension powers. As to the second, there is hardly any room for doubt that the new policy, if made effective, would remove the protection which the industry now has, inadequate though it be, from improvident and wasteful duplication of forwarder services. That is so because the national transportation policy, by the terms of the statute, is one of the basic standards which the regulatory agency must use in determining whether or not to authorize additional freight forwarder service.
Section 410 of the act, governing the issuance of freight permits, requires the Commission to issue authority to institute or extend forwarder operations if it findsthat the applicant is ready, able, and willing properly to perform the service proposed, and that the proposed service *** is or will be consistent with the public interest and the national transportation policy *** Under another provision of the same section, the Commission is prohibited from denying an application solely on the ground that the proposed new service will be competitive with established freight forwarder service.
For a number of years now it has been apparent that the ease with which freight forwarder permits may be obtained is resulting in destructive duplication of forwarder service, with resultant impairment of overall service to the public. One of the bills now before your subcommittee, and which I will discuss at more length in a few moments, H. R. 9772, is designed to remedy the situation by removing the ban against considering competition in passing upon applications for forwarder permits.
If the new transportation policy proposed by the omnibus bills should be adopted it would not only nullify any beneficial effects that might otherwise result from the pending bill, H. R. 9772, but would further weaken the standards for granting forwarder permits. Under the present transportation policy, which applies as a standard in granting such permits, the Commission is admonished to "recognize and preserve the inherent advantages” of the forwarding industry, and to befoster sound economic conditions" within the industry. Under the proposed new policy the Commission would have no such duty, but would be directed to encourage rather than to limit competition.
For these and other reasons which will be more apparent after I have discussed the bill, H. R. 9772, we recommend that the proposed new declaration of national transportation policy, which finds expression in section 2 of the bills under consideration, be not adopted.
RATE REGULATION AND SUSPENSION PROVISIONS
The omnibus bills make the same changes in part IV of the act with regard to the establishment and administrative control of rates as are proposed to be made in parts I, II, and III of the act. There are, of course, some recommendations that do not apply to part IV, such as those regarding section 4, long and short haul, and the sections relating to proportional rates; but basically, the same rate machinery applies throughout the act and the bills propose the same changes therein.
Under the terms of the bills, section 15a of part I of the act, which now applies only to railroads, would be completely revised and would apply to all carriers, including freight forwarders. This new section 15a would take the place of the ratemaking rule now found
in section 406 (d), which latter section is repealed. See sections 8 and 21 (c) of the bills. It would also provide for the publication of volume rates and the establishment of special rates for Government traffic, the latter in lieu of free or reduced rates under section 22 which now applies to forwarders as well as other carriers.
The bills would also amend sections 404 and 406 of the act so as to limit the obligation of the forwarders and the power of the Commission to the establishment and fixing of just and reasonable maximum and minimum, as opposed to precise, rates. They would also revise the suspension powers and procedures now found in section 406 (e) by (1) reducing the suspension period from 7 to 3 months, (2) making suspension an extraordinary type of remedy, and (2) placing the burden of proof upon the complainant if complainant is a carrier. Finally, section 406 (f) would be amended so as to give the Commission jurisdiction over State-made service requirements as well as State-made rates. See sections 20 and 21 of the bills.
It should be noted here that while the freight forwarding industry does not advocate any change in section 22 of the act, which provides for free or reduced rates on Government traffic, if faced with the alternative of complete repeal of that section, as provided in the bill, H. R. 525, or modification of the section as provided for in sections 8 and 9 of the omnibus bills, the industry would favor the latter.
Of the remaining changes in rate procedures the industry regards as significant, and hence has a firm position with regard to (1) the limitations imposed upon the Commission's powers proposed by new section 15a (1), and (2) the proposed revision of the suspension powers as now contained in section 406(e) of the act. The freight forwarders oppose these changes for reasons which I will briefly state.
Under proposed new section 15a (1) the Commission, in determining whether a given rate is less than a reasonable minimum charge, would be prohibited from considering: (a) the effect of such rate on the traffic of any other mode of carriage, or (b) the relation of the rate to the charge of any other mode of transportation, or (c) whether such charge is lower than necessary to meet the competition of any other mode of transportation.
These limitations on the Commission's powers, taken together with the proposed changes in the suspension powers and the revised transportation policy, would make it virtually impossible for any freight forwarder to bring into issue any judgment or determination the rates of any of its competitors, whether within or without the freight forwarding industry.
In the first place the complaining forwarder, as a prerequisite to suspension, would be required to establish, by sworn complaint or affidavit, that the rate would "probably be unțawful,” that it would result in injury to complainant, and that other remedies were inadequate. If this almost impossible burden of proof should be made and suspension should result, complainant then, contrary to all established concepts, would have the burden of proving that the assailed rate was less than a "reasonable minimum charge." While that term is not defined, according to the Cabinet Committee report a rate is less than a reasonable minimum charge when it fails to cover the “direct ascertainable cost of producing the service."
When it is considered that the carrier having the burden, first of making out a case justifying suspension under these rigid requirements, and second of showing that the assailed rates do not cover the cost of producing the service, is not in possession of any of the revelant facts, it becomes clear that the suspension power under the pending proposals would be of no value or protection whatsoever to the forwarder.
The freight forwarding industry is particularly vulnerable to the type of rate cutting and rate wars which the changes proposed by the bills might be expected to engender. Forwarders' costs are substantially fixed, as much as 75 to 80 percent thereof being the cost of transportation paid to the physical carriers. The industry traditionally operates on a very narrow margin of profit. The operating ratio, or relationship between operating revenues and expenses, is normally in the neighborhood of 99 percent. Freight forwarders have no “captive traffic" with which to subsidize rate cuts on other traffic. All of their traffic is in the highly competitive less than carload and less than trainload field. The industry simply could not survive a large-scale and extended rate war under conditions where the Commission would have virtually no power to interfere.
Accordingly, we strongly recommend that your subcommittee reject the proposed changes in rate and suspension provisions, as well as the recommended changes in the declaration of national transportation policy.
FREIGHT FORWARDER ASSOCIATIONS
The third provision of the omnibus bills with which the forwarding industry is vitally concerned deals with what is, in fact, unregulated competition within the industry. I refer to the proposed amendment to section 402 (c), which is found in section 19 of the bills.
The purposes sought to be achieved by this amendment, as explained in the Cabinet Committee report, are essential to the well-being of the freight forwarding industry. And let me say in the very beginning that while there is a good deal of controversy about the language of the amendment as set forth in section 19 of the bills, there is almost no dispute about the fact that there is a problem and that something should be done about it.
Substantially all of my testimony at the September hearings on the Cabinet Committee report was devoted to an explanation of the problem of unregulated freight forwarders under the guise of associations, and I will not burden you at this time with a repetition of what I then said, except to the extent necessary to make our position clear on this record.
Section 402 (c) of the act, insofar as pertinent here, provides that part IV shall not be construed to apply to
* * the operations of a shipper, or a group or association of shippers, in consolidating or distributing freight for themselves or for the members thereof, on a nonprofit basis, for the purpose of securing the benefits of carload, truckload, or other volume rates *
The foregoing provision was included in the act not as an exemption, but as a clarification of the definition of freight forwarder. This is clear from the language of section 402 (c) which begins: "The provisions of this part shall not be construed to apply * * *." It is made doubly clear by the language of the report with which the House Committee on Interstate and Foreign Commerce reported the original forwarder bill in 1941. In that report the committee said:
Subsection (c)— that is 402 (c)— as has been previously pointed out, is a clarifying provision rather than an exemption (H. Rep. 1172, 77th Cong., p. 7). [Emphasis has been supplied there.)
The courts, nevertheless, have held that section 402 (c) is an exemption, and because of the broad and general nature of its terms it has become a loophole through which almost anyone with an inclination to engage in the business of freight forwarding may do so without benefit of permit or burden of regulation.
The Interstate Commerce Commission first took notice of the problem created by unregulated freight forwarding operations 10 years ago in its 60th annual report to Congress. In every report since that time, down to and including 1956, the Commission has discussed the problem with increasing alarm, and has recommended corrective legislation action.
At first the Commission undertook to pierce the structure of these so-called nonprofit operations and deal with the situation by the exercise of its powers under the act. In one case it found that an operator claiming exemption under section 402 (c) was, in fact, conducting freight forwarding service without lawful authority, and ordered
such operations to cease.
(Pacific Coast Wholesalers' Association Investigation of Status, 269 I. C. C. 504.). Upon appeal the district court, later upheld by the Supreme Court in a percuriam decision, reversed the Commission and held that the organization was entitled to the "exemption.” (81 Fed. Supp. 991; 338 U. S. 689.) After that decision, in 1950, the Commission reported to Congress that:
“In view of the conclusion reached by the courts in the Pacific Coast Wholesalers case it is difficult effectively to police and deal with operations of associations claimed to be exempt under section 402 (c) (1) (64th annual report).
In my September testimony I discussed thoroughly the Commission's comments and recommendations, and the Courts decisions. To bring the record down to date let me quote from the latest (69th) annual report of the Commission to Congress, wherein it is stated :
Freight forwarders are experiencing increased competition from shippers' associations and agents operating under the exemption provides in section 402 (c) of the act. In some cases the earnings of forwarders have sharply decreased. One forwarder discontinued operation for the stated reason that it was unable to compete with exempt shippers' associations (69th Annual Report of I. C. C., p. 119). (Emphasis supplied.]
I could offer more extensive, but certainly no more persuasive proof that operations claiming exemption as nonprofit associations are a serious threat to the stability of the regulated freight forwarding industry. It is axiomatic that Congress did not intend to enact optional regulation, leaving it to the operator to decide whether he will submit to the act or call himself an "association.” Clearly a problem exists which must be solved. But the matter of finding the solution
. of clearly drawing the line between regulated and unregulated activities as Congress intended initially to do, is not quite so simple.
The Cabinet Committee report simply recommends that the law be revised to Provide definite statutory standards for determining which shippers or shipper associations involved in consolidation or distribution of volume freight on a nonprofit basis for securing lower rates are entitled to exempt status (Recommendation “(d)" on p. 17 of report).
The drafters of the omnibus bills, in undertaking to carry out the foregoing recommendation, followed substantially the terms of a prior bill, H. R. 4503, introduced by Congressman Wolverton, by request, in the 83d Congress. That bill followed very closely the recommendations of the Interstate Commerce Commission in its comments to the Senate Interstate and Foreign Commerce Committee with regard to bill S. 2713, on which hearings were held by that committee during the 82d Congress. (For the Commission's comments see transcript of hearings printed in a document titled “Domestic Land and Water Transportation," 82d Cong., 2d sess., at p. 1349).
Opposition was expressed to the prior bills, after which section 19 of the present bills is patterned. In our opinion the arguments advanced by the opposition were concerned only slightly, if at all, with the merits of the issue, but were directed solely to the language used by the bills.
While there are some few who take the stubborn and unrealistic position that no problem exists and hence that nothing should be done, the majority of those who oppose the bills recognize that there is a problem. In addition to the Interstate Commerce Commission and