PART VI TRANSPORTATION PRICING CHAPTER 1. INTRODUCTION An outstanding fact about transportation is the increasing diversity of methods of carriage in the transportation system. The development of different modes and the extension of public way has increased the alternatives available to shippers and increased competition both among regulated carriers and between regulated and unregulated producers of transportation service. This has created difficult problems for rate policy on which Congress should continue to focus attention. The question of pricing in transportation is one of the two main facets of the regulatory problem. The other is the control of the structure of the system including control of entry and operating authority. Taken together, the two embrace the entire field of regulation other than the question of adequacy of service. Had we not of our own volition tackled the overall problem of pricing, it would have been mandatory because of the specific policy question raised in Senate Resolution 244 regarding the "long and short haul-section 4 of the Interstate Commerce Act" and the fact that this provision of the act came about as a result of the fundamentally complex problems of transportation pricing-in which the Government has attempted to strike a balance between the competitive instincts of management on the one hand and the public interest in the availability of service by all economically fit modes (and the avoidance of geographical discrimination against localities) on the other. For a variety of reasons these pricing problems are more complex than the pricing of either industry generally or regulated monopoly. Rate policy as well as other parts of transportation law should contribute to sound transportation goals. To do this under present conditions will require changes in traditional ratemaking practices. Rate structures, rate practices, and rate policy for regulated carriers evolved during an early era in which common carriage was supplied predominantly by railroads that had an effective monopoly of inland transportation. Many difficulties of common carriers today are attributable to the failure of regulated rates to adjust to the realities of current conditions. At the outset of any serious discussion of transportation pricing, recognition should be accorded the fact that rates apply to particular types of traffic and specific service, and that the cost of producing such service is difficult to determine with precision because many transportation costs are fixed and common to the total product. This means that no matter how refined cost analysis may become an amount of arbitrary apportionment of cost will remain. In the old monopoly situation, during which our transportation pricing philosophy was conceived, arbitrary apportionment of fixed or common costs was not fatal. Carrier management made its apportionment based on its evaluation of what the traffic would bear. The user who had no effective alternative was forced to accept the rate. The alternative transportation which is available today has released the user from this bondage. If the apportionment of fixed cost to his particular traffic elevates the price above that of the alternatives, including private carriage, the user promptly deserts the carrier whose pricing is based upon the obsolete philosophy. The carrier is left with an increasing percentage of what, under his philosophy, is lowvalue traffic which will not bear its full proportion of constant costs. It is time we reorient pricing philosophy to the competitive realities of the time. Such reorientation will disturb some time-hallowed rate structures which probably never should have been created, but which cannot be perpetuated if rail transportation is to survive. A particularly troublesome problem for common carriers arises from the practice which has grown up that it is somehow the function of transportation to equalize the competitive position of widely separated producers in the marketplace. Thus, for example, railroads will attempt to equalize the transportation price of Florida and California oranges in the New York market without regard to the transportation costs involved. This practice is justified on the basis that the more distant product would not move into the market and the carrier would thus lose that volume. The discrimination in favor of the more distant product must be accomplished by transferring a portion of its proper share of constant cost and profit to some other traffic which then shifts to alternative transportation. Especially in a situation of excess capacity and/or decreasing total traffic this sets off a vicious spiral of steadily increasing rates for the remaining users of the particular mode and, if unchecked, cannot fail to drive away increasing amounts of traffic with resulting carrier demise. This feature of pricing philosophy may have once had some validity, but it has little today in a relatively mature industrial economy faced with the problem of devising sound long-range policies for insuring greater efficiency in transportation investment and better utilization of a transportation system composed of different modes. The essential significance of alternatives currently available to shippers for a pricing philosophy which evolved in an era in which no alternatives were available is that changes must occur in ratemaking practices. There was a day in which rail transportation was the only effective means of shipment for goods traveling more than a few miles. Whether the move was for a comparatively short distance or not; whether it involved a carload or only a trunk full; there was no other choice. Not so today. There is a material difference between the economic suitability of the several modes in regard to size of load, distance moved, and the nature of the commodity. Pricing of service today should be designed to insure profitable operation in the traffic best suited to the mode. If other traffic is carried it should support the full costs incident to its nature and not be a drain upon revenues from more suitable traffic or inflate the charges attributable to that traffic. For example, short haul less-thancarload traffic is generally better suited to trucks than it is to rail roads; some feeder line and way station service is better suited to piggyback than to conventional all-rail. Pricing should be directed toward increased efficiency in utilization of equipment by appropriate incentive rates designed to attract that traffic most suitable to the characteristics of the mode. To the degree that a carrier seeks traffic more economically suitable to other modes by pricing below its full cost in that traffic, it must recover the balance of that cost by higher pricing elsewhere. The more suitable carrier is deprived of revenue and the shipper who is called upon to pay more than his proper share of constant costs finds his service elsewhere. Changes have been occurring in rate structures, rate practices and rate policy. The pressure of changing conditions has affected the pricing policies of transportation management and the wording and administration of the transportation law. But there is danger that the changes which are being made in the ratemaking practices of regulated carriers will not be of the proper type. For competitive pressures produce ratemaking practices that aggravate as well as alleviate transportation problems, that thwart as well as encourage the achievement of desirable transportation goals. A problem of rate policy which has yet to receive satisfactory solution is how to develop ratemaking practices which will contribute effectively to all of the important goals of transportation policy. Rules to accomplish this have proved difficult to devise. Attempts to devise such rules tend to produce seemingly insoluble paradoxes. The very attempt to devise policy to regulate rates in an industry increasingly characterized by competitive characteristics seems to be anamolous. Regulatory policy should contain rules for ratemaking which do not involve paradox and which are not contradictory. The following analysis is designed to produce specific recommendations which should help to improve existing rate policy in this respect. Chapter 6 contains these recommendations and a summary of the reasons for making them. A lengthy analysis in chapters 3-5 precedes these specific recommendations. The purpose of this extended discussion is to clearly indicate the nature of the paradoxes created for current policy by existing conditions and to show how the proposals recommended in chapter 6 can resolve these. The emphasis of chapters 3-5 is on the implications of recent developments in transportation for minimum rate policy. It is this aspect of rate control which has become of predominant importance with the development of a diversified, competitive transportation system, and it is in connection with problems of minimum rate policy that the most troublesome paradoxes exist for rate policy. The general conclusion of the following discussion is that greater emphasis should be placed upon cost as a factor in determining rates. One of the most important implications of this for policy is that greatly improved techniques for cost finding in transportation should be developed. Chapter 2 emphasizes the importance of this conclusion and contains specific recommendations for improvements in cost finding. CHAPTER 2. COST FINDING PROGRAM In noncompetitive or monopoly situations, pricing, in the absence of regulation, can be and has been based solely on managerial judgment of what the traffic will bear. Under the concept of wholly un regulated competition, abandoned by our country years ago, selective pricing can be and has been used to put weaker competitors out of business in order to absorb their markets, one by one, and then harvest the fruits of competitive success. Regulation, as applied to most of our industry today, seeks only to prevent discriminatory practices including unfair competition. In some of our vital public services we have chosen to establish tightly regulated monopoly. In others, notably transportation, we have selected a middle course of regulated competition involving control of entry and a degree of price and service regulation. In completely free enterprise, pricing need not bear any particular relation to cost. Supply and demand regulate price. If the product is sold below cost, someone goes out of business; if it is priced too high, no one buys and again someone goes broke. However, when price regulation is imposed, a basis for regulation must be established. This basis must, of necessity, include cost of production. When competition exists in regulated industry a common denominator or basis for comparison must be established. The only basis that can be measured with any degree of accuracy is cost, particularly when the competitors are grossly unlike as to the characteristics of the service they offer and as to their financial and market structures. In freight transportation we have a product-movement of thingsoffered by several competing modes. Each of these modes differs materially from the others in service characteristics which can be accurately evaluated in relation to price only by the individual user in consideration of his own distribution pattern. Material differences also exist between other characteristics of the carriers of the several modes, particularly as to resources, markets, and ratio of fixed to variable costs. Each mode in turn is composed of a number of carriers, each competing with carriers of like and unlike mode. All of these competitors share a common motive-to adjust their price/volume relationship to maximize net revenue. Some modes are much more cohesive in their pricing practices than others with the result that, in some cases, it is possible for an important segment of one mode to compete with a single carrier of unlike mode. The complexity of the regulatory problem stemming from this variety of service, market and financial characteristics makes it most unlikely that regulation of competitive transportation can ever be reduced to an exact mathematical formula. For this reason material discretion must be vested in the regulatory agency. If the regulatory agency is to achieve any degree of consistency in the exercise of its discretion, an objective basis for comparison is required. The only common denominator is comparative cost of producing the service offered. It is unfortunate that available cost information regarding the several modes of transportation is so inadequate. Rail Form A, devised by the Commission in recognition of their need for such data, has been assailed but nothing better has been offered. No such formula has been established for water transport despite efforts by the operators to assist in the project. Cost information regarding large regulated truckers is sketchy and regarding others is nonexistent. Until this situation is remedied no sound basis for intermodal price regulation is available. It is equally unfortunate that the word "cost" means so many different things to different people. Economists assign their meanings to fully distributed costs, long and short run out-of-pocket or marginal costs and the like and these meanings do not necessarily correspond to those understood by the regulatory agency, by industry or by the public. There is a serious need of a common language, comprehensible by all concerned, as an essential ingredient of successful price regula tion There are a number of excuses or reasons that could be advanced to explain why comprehensive cost procedures have never been applied generally to transportation. Among these are: the large carriers have not desired to add to their accounting burden and small carriers claim they could not afford it; the fact that any costing program that could be devised would not, at least initially, be wholly precise and would, of necessity, contain arbitraries; the inertia resulting from the fact that transportation pricing has never been cost-based; the fact that the regulatory agency has not required general uniform costing; and the fact that costing would require separation of line-haul and terminal costs by specific traffic which might upset some cherished rate structures. Other reasons advanced are that changing technology influences costs and so does changing volume which is somewhat like justifying lack of a military strategy or a foreign policy at any moment of time because a changing world makes formulation difficult and flexibility imperative. The lack of comprehensive cost information has prevented the regulatory agency from complying with the primary directive of the national transportation policy "to recognize and preserve the inherent advantages of each (mode of transportation)" and has required it to base its minimum rate control primarily on questions of meeting or preserving competition. There is evidence to indicate that industry accepts the idea of having the regulatory body to protect carrier against carrier or mode against mode, contrary to the principal purpose of regulation which is to maximize the potential of our total system for service to the public. Reorientation of such thinking is indicated. Throughout the course of our examination of transportation policy it has been repeatedly impressed upon us that, while cost is not the sole factor in pricing, it is the only measurable one. Sound cost analysis is an essential pricing tool without which there is, under present and foreseeable competitive conditions, no hope of equitable or effective minimum rate regulation. We are equally imbued with the belief that today minimum price control is essential to a healthy transportation industry under private ownership. Rates must reflect the true cost relationship between competing modes. RECOMMENDATIONS It is recommended that the Congress authorize, direct and fund a study to devise a uniform, equitable, adequate and continuing cost analysis program in transportation for implementation by the appropriate agency. The study should be conducted by an activity selected for its competence, integrity and objectivity. Participation of industry, the Fed |