change in the ratemaking rule has authorized freedom to cut rates. Spokesmen for the water carriers agree with motor carrier representatives in stressing the significance in the ratemaking rule of the national transportation policy. But water carrier representatives take the position that present minimum rate policy is ambiguous and needs to be clarified. Specifically they urge that the phrase "destructive competition" be more clearly defined. Their attitude reflects concern under present law, that there is too much freedom in competitive pricing.

Statements made by the Interstate Commerce Commission since the passage of section 15a (3) have not dispelled confusion concerning the meaning of the amendment. Indeed, the Commission in its written decisions and in its statements to congressional committees provides the best documentation of the thesis that the meaning of minimum rate policy today is less certain and its application more confusing than before the addition of section 15a (3).

In commenting on the decision handed down in the Paint case, Commissioner Webb stated that the vitally important question concerning the extent, if any, to which the rule of competitive ratemaking was changed by the Transportation Act of 1958 was left unanswered, and that carrriers, shippers, and the courts were entitled to a much clearer expression of the Commission's views.31

In testimony presented before a subcommittee of the Senate Interstate and Foreign Commerce Commission, Chairman Winchell gave the following explanation of the Commission's interpretation of the rule of ratemaking:

Mr. BARTON. ** how did the 1958 amendment change the rule of rate making?

Mr. WINCHELL. The opinion of some Members of Congress disagreeing as to what extent the 1958 amendment

Mr. BARTON. I am talking about the Commission now, Mr. Winchell. In other words, if it was already in the law and was merely implicit in the law, and merely codified by Congress, how did it change the law?

Mr. WINCHELL. It made the statutory requirement which prior to that time had been, as far as the new Automobile case was concerned, an interpretation of the Commission, the Commission's decision or interpretation of the act.

Mr. BARTON. *** if it was already in the law why did the 1958 act change the law in any way?

Mr. WINCHELL. I don't know that the 1958 amendment changed those portions other than writing into the act the rule of conduct which the Commission had previously followed.

Mr. BARTON. Do you believe then that there has been no change in the rule of ratemaking in the 1958 act?

Mr. WINCHELL. I believe that the emphasis has been changed, as I outlined before.

Mr. BARTON. To what extent, sir?

Mr. WINCHELL. That bigger emphasis is being placed upon the cost of rendering the service in making it a more predominant factor in the consideration of the reasonableness of rates.

Mr. BARTON. I don't believe that the rule of ratemaking mentions that, does it? Mr. WINCHELL. No, but it specifically says that we shall not hold up the rates of one mode to protect the rates of another, and that could only be based on costs.

Mr. BARTON. You do believe there has been a change, then? Sir, do you believe there has been a change?

31 Paint and Related Articles-Official Territory, I. & S. No. 7027, ICC.

Mr. WINCHELL. There has been a change in emphasis.

Mr. BARTON. To what extent has this change in emphasis gone, Mr. Chairman?

To what extent did it change the law, and, in turn, to what extent has it affected the actions of the Commission?

Mr. WINCHELL. Just as I outlined, by placing greater emphasis, it has made the cost of service of rendering certain transportation operations, it has placed the emphasis on that in determining whether a rate should be suspended or not suspended to a greater extent than the emphasis has been placed on that particular factor before. You are assuming that there is just one factor in a suspension matter, and in most cases there are many factors. There is quite a difference of opinion as to how much emphasis should be placed on the upper part of 15a (3) in proportion to the last statement, giving due regard to the national transportation policy."

In the words of the Chairman of the Commission, the present minimum rate policy of the Commission is not essentially different from the policy followed prior to 1958 because the same factors formerly considered in the determination of a reasonable minimum rate are still relevant. The effect of the 1958 legislation has caused the Commission to change the relative emphasis given to cost-of-service considerations in determining whether or not a proposed rate should be suspended. But the question of how much emphasis should be placed upon the upper part of 15a (3) in proportion to the last statement, emphasizing that due regard be given to the national transportation policy, is recognized as a matter about which there is a difference of opinion.

In a Senate committee print, issued following the hearings referred to above, emphasis was placed on the uncertainty of the present minimum rate policy. This report suggests the Commission review its policies with respect to the ratemaking provisions of the Interstate Commerce Act and that, in each case, it provide a reasoned discussion of the policies that the Commission follows with respect to section 15a (3) of the Interstate Commerce Act. Stress is placed on the incorporation of the national transportation policy in the rule of ratemaking as a matter of substance, requiring the Commission to examine a proposed competitive rate for destructive effect as well as destructive intent, to the end that a balanced and healthy transportation system by all modes be preserved.33

Thus, there is abundant evidence that uncertainty surrounds the meaning of minimum rate policy, and, since the 1958 amendment to the ratemaking rule, additional confusion has arisen concerning the way in which minimum rate policy will be applied in particular cases. It cannot be denied that transportation law deals with complex situations. Undoubtedly this is a source of some of the present uncertainty concerning the meaning of minimum rate policy. It is also true that, whenever a change is made in the law, there is likely to be initial confusion with regard to its precise meaning and how it will be applied. But the disagreement over the meaning of section 15a (3) reflects something more basic than customary uncertainty over the meaning of new law which is to be applied by a regulatory agency. There is reason to believe that fundamental issues of regulatory policy

33 U.S. Congress, Senate, subcommittee of the Committee on Interstate and Foreign Commerce, "Decline of Coastwise and Intercoastal Shipping Industry," Aug. 29, 1960. 33 Ibid., p. 50.

34 See exhibit 2 to pt. VII, ch. 11, on "Suspensions" for differences of opinion on proper interpretation of sec. 15 a (3).

are involved. The justification for this statement and the nature of the issues responsible for the sharp differences of opinion which exist will be analyzed in the following chapter.

CHAPTER 4. FUNDAMENTAL ISSUES

Transportation law affecting rate regulation has undergone considerable change since the original act of 1887. Changes in the law are often necessary to meet new circumstances, and the problem of keeping the law abreast of changing conditions is one of continuing importance. Recent technological improvements and increasing competition between modes and between regulated and unregulated carriers have created new conditions in transportation which raise fundamental issues for rate policy.

The purpose of this chapter is to discuss these fundamental issues. The following questions will be considered:

(1) In view of the changes which are occurring in transportation and in distribution patterns, can traditional rate structures for regulated carriers be justified? If so, can existing rate structures and rate relationships be maintained?

(2) Is a general policy of regulating minimum rates consistent with the public interest? Is existing minimum rate policy workable?

(3) Are other aspects of present rate policy, such as those involving discrimination and maximum rate controls, sound and workable?

The fact that transportation conditions are such as to warrant concern with basic questions of this nature implies that transportation policy has reached a crossroads. The differences of opinion about section 15a (3) referred to in chapter 3 involve fundamental issues of the sort with which we are here concerned. For essentially the controversy over section 15a (3) reflects different philosophies concerning the role of regulation and competition in ratemaking. Development of a diversified transportation system, in which several modes of carriage are available for users, calls for a reexamination of the entire concept of rate regulation. Whether rate regulation is justifiable in view of current conditions is a fundamental issue which underlies all of the following discussion.

1. Changes in transportation conditions

Since the beginning of the 20th century, changes in transportation technology have profoundly affected the transportation system of the United States. Highlights of these changes have included: (1) Development of motor vehicles and a vast, continuing program of highway construction; (2) extensive inland waterway improvements and the development of powerful and efficient tows; (3) construction of great networks of improved pipelines capable of carrying petroleum and other products; and (4) the rise of, as yet, incompletely developed new forms of travel with great potential (such as air freight which not only gives promise of achieving breakthroughs of productivity, which will radically reduce the costs and improve the competitive position of this mode of transportation, but also is already affecting distribution patterns of high value commodities).

These technological developments have provided shippers with numerous alternatives. Today it is possible to ship freight not only by rail, but also by motor vehicle, water, air, or pipeline, including various combinations of these. Moreover, a shipper is able to utilize common carriage, contract carriage, or his own privately operated transport facilities, alone or in such combination as he chooses to suit his convenience.

This growth in alternatives for shippers has led to a marked reduction in the relative importance of the railroad, which dominated inland transportation in the United States in the latter part of the 19th century. Precise information concerning the efforts of the development of different modes on their relative shares of traffic is not available. We know that significant shifts have been occurring in the relative importance of rail, highway, water, and pipeline transportation; and in addition there is evidence of important shifts in the relative importance of unregulated as compared with regulated forms of carriage 35 In 1932, of the total ton-miles of freight of the country (carried by steam railroads, Great Lakes water carriers, pipelines, intercity trucks, inland waterways, electric railways, and airplanes-coastwise and intracoastal water trades excluded because no ton-miles were reported for those carriers), the steam railroads carried 73.9 percent. Great Lakes operators carried 7.8 percent; pipelines 6.2 percent; intercity trucks 9.4 percent; inland waterways 2.5 percent; electric railways and airplanes 0.2 percent. Of the total intercity movement of goods by motortruck in 1932, it was estimated that probably as much as onehalf was performed by private carriers (industries or persons which own or lease their own motor vehicles).36

By 1958, the relative shares of freight traffic carried by railroads had declined to 46.31 percent of the total. Motor vehicles accounted for 20.47 percent; inland waterways including the Great Lakes, 15.66 percent; oil pipelines, 17.51 percent; and airways 0.04 percent.37

The decline in the relative importance of the railroads has been accompanied by an increase in the importance of private and unregulated forms of for-hire carriage relative to regulated carriers. Not only has the total volume of intercity freight carried by motortruck increased, but also the proportion of motortruck freight moved by exempt, for-hire, and private motor carriers has grown. Approximately two-thirds of the total intercity ton-miles moving over the highways in 1956 was unregulated.38 The proportion of traffic which is exempt from regulation and currently moving by water carrier has been variously estimated between 75 and 90 percent. In view of the growing relative importance of both water and highway transportation, the growth of this traffic, not subject to regulation, is noteworthy. It indicates that the option of using forms of unregulated carriage is being exercised increasingly by modern shippers of freight in the United States.

39

Unregulated carriers of freight are important primarily in water and highway transportation. They include carriers of exempt commodities, gray area operators, and private carriers. "U.S. Congress, Senate, Committee on Interstate Commerce, "Hearings on Motor Carrier Act, 1935, 74th Cong. 1st sess., p. 63.

U.S. Interstate Commerce Commission 73d Annual Report, June 30, 1959, p. 11. U.S. Interstate Commerce Commission 71st Annual Report, June 30, 1957, p 3. U.S. Congress, House, Subcommittee of the Committee on Interstate and Foreign Commerce, "Hearings on Transport Policy and Organization," 84th Cong., 1st sens. p. 18. See also. U.S. Department of Commerce," Evaluation of Rate Regulation," by Merrill J. Roberts (mimeographed), p. 12.

2. Implications of transportation changes for the structure of regulated rates

Federal regulation of transportation began in 1887 in a period when railroads dominated inland transportation. The railroad rate structure which evolved under the early days of regulation was strongly influenced by value of service considerations. This meant that rates for particular services were not closely related to the costs of providing those services, but rather might be considerably above or below any fair estimate of these costs.

For the purpose of clarifying the following discussion of factors which influence the making of rates, the following definitions are provided. Whenever reference is made to value of service, quality of service, fully distributed cost, short-run out-of-pocket cost, long-run outof-pocket cost, and long-run marginal cost, the following definitions will apply:

(a) Value of service.-When referred to as a factor in ratemaking this term will be used in our discussion to refer to shippers' evaluation of service as made manifest by their willingness to ship via a given mode at different line-haul rates. There are numerous factors which influence the willingness of shippers to ship at high or low rates. Some of the factors are sometimes considered to be synonymous with value of service. For example, it is said that articles with high value per pound have a high value of service. This is often true, but the value of service of a high valued article may be additionally influenced by other factors. Economic and commercial conditions surrounding production and sale of given commodities often influence rates which shippers can afford to pay for transportation, and these conditions, by definition, affect value of service.

It is important to distinguish value of service from quality of service. From the definition given above, these two concepts may be easily confused. The following example may clarify the distinction. The value of service of diamonds is higher than the value of service of coal. Thus a shipper may be willing to pay many hundreds of dollars per pound for shipping diamonds to their destination by any given mode. But the shipper of coal may not be wiling to pay more than a few cents per pound for the shipment of coal. However, a shipper of diamonds may be willing to pay twice as much per pound to ship diamonds by air than he is willing to pay to ship them by boat. In the latter case we are comparing the willingness of the shipper to pay for the service of different modes of shipment. Here it will be convenient to designate the shipper's willingness to pay different rates as being attributable to differences in the quality of service rather than differences in value of service.

(b) Quality of transportation service.-Refers to factors other than line-haul rates which affect the willingness of shippers to use one mode in preference to another. Thus, if there is no difference in the quality of service, shippers will be indifferent to using one mode of transportation rather than another as long as the line-haul rates are the same. But if, for any reason, shippers prefer to use a given mode in preference to another when the quoted rates for the line-haul transportation are the same, the quality of service for the preferred mode will be considered superior. According to this definition, there may be differ