(a) How much Government traffic is subject to section 22?-According to figures reported in the annual budget, the Federal Government spent, in fiscal 1958, nearly $1.2 billion for the "transportation of things," after deducting payments to commercial carriers for the movement of mail. Since this huge expenditure includes payments to commercial air carriers and to ocean shipping companies, it is not possible to say specifically just how much of the transportation purchased was performed by carriers subject to section 22.

We can, however, make a reasonable estimate of the minimum amount by noting that the MTMA study shows that the DOD spent about $368 million in fiscal 1958, for rail and truck freight service alone. We can add to this the $109 million for railroad freight services paid by the Government's civilian agencies, based on the GSA study. Finally, we can add another $73 million for the civilian agencies' trucking bill, based on an assumption that their truck-rail freight charges are split about 40-60 (a conservative estimate since DOD's truck-mail ratio was 45-55).72

We thus arrive at an estimate of $550 million as the Federal Government's freight bill for commercial rail and truck services, all of which could potentially be subject to section 22. This, of course, represents a minimum estimate, since it covers only carload and truckload traffic, and not LCL and LTL traffic. Also, it does not cover the Government's expenditures for domestic water carrier and freight forwarder freight services, which likewise fall within the scope of section 22.

(b) How much Government traffic moves on section 22 rates?—The answer to this question likewise cannot be given specifically, although as above, a reasonable estimate of the minimum amount can be made based on the MTMA and GSA studies. The MTMA report shows that in fiscal 1958 the DOD paid rail and truck carriers $106 million for freight services moving on section 22 rates. We can add to this $12 million for railroad freight services paid by the government's civilian agencies, based on GSA report," and another $8 million for these civilian agencies' truck services, again using the 40-60, truckrail ratio.

This totals $126 million, or 23 percent of the $550 million spent for rail and truck services.

On the basis of traffic volume in terms of tonnage, the MTMA study shows extensive use of section 22 by the DOD. For example, in fiscal 1958, DOD used this special privilege to move 19 percent of its carload freight, 26.8 percent of its truckload freight, and 52.6 percent of its household goods traffic.75

The pilot study of GAO also indicates extensive use of section 22 by Government agencies. To illustrate, section 22 was used, for the four commodities studied, for 44 percent of the shipments, 53 percent of the tonnage, and 48 percent of the total cost for moving this traffic during the 1-month study period.

70 MTMA sec. 22, analysis, 1958, tab. H.

See table 1 in Cover-Cutler study, p. 45 for total rail bill. Deduct $147 million, or DOD's rail bill per MTMA study (tab. H). Balance is civil agencies' bill.

72 MTMA analysis, tab. H.

73 MTMA analysis, tab. H.

74 See table 3 in Cover-Cutler study, p. 47. 75 MTMA analysis, tab. H.

(c) How do section 22 rates compare with commercial rates for similar traffic movements?—The answer to this question is the one that is the most difficult to get, because in many instances only commercial class rates apply over routes along which Government traffic moves. While it may be reasonable in some instances for such class rates to apply to the Government traffic, because of infrequency of movement or other factors, the Government's traffic officials contend that the volume of tonnage offered usually warrants their obtaining a section 22 rate that is the equivalent of a commercial commodity

rate.

As mentioned previously, the GSA analysis of the use of section 22 for rail carload traffic concluded that section 22 rates were on "substantially the same general level as tariff commodity rates." Whether this conclusion is a correct one is subject to debate, since comparisons by use of the 1-percent railroad waybill sampling are very general in nature, as they are based on traffic moving between or within broad geographical territories. The distances involved may be similar-even though between entirely different points-for both commercial and section 22 traffic, but other factors may be present which could materially influence any comparison of the two. Furthermore, the use of the 1-percent waybill sample as a means of making a fair comparison of section 22 with commercial rates has been questioned by the ICC, since it fails to take into account such things as infrequency of movement or movements contrary to the flow of commercial traffic.76

The MTMA study shows that if commercial rates were used in the absence of section 22 in fiscal 1958, the DOD's rail-truck freight bill would have been about $52 million higher, or $159 million for this section 22 traffic instead of $107 million." This significant difference (the "saving" of $52 million represents a reduction of 33 percent from the applicable commercial rates) is to be expected because 89 percent of the "saving" represented the difference between the section 22 rates actually used and high commercial class rates that would have applied in the former's absence.78 In practice, of course, it is doubtful whether the DOD would have paid, in the absence of section 22, the class rates in many instances, since it could have negotiated for lower rates and in all probability had most if not all of them approved by the ICC. This is supposition, of course, but a reasonable conclusion since the MTMA analysis indicates that the DOD's section 22 traffic compares very favorably with national averages for commercial rail and truck traffic in terms of such criteria as tons per unit, length of haul, and revenue per ton-mile.79

One important point brought out by the MTMA study was that 39.6 percent of the DOD's carload and truckload shipments moving on section 22 rates could have moved on commercial commodity rates in the former's absence.80 Since published commodity rates are special, reduced rates justified mainly because of the existence of

76 See letter from ICC to Representative Oren Harris in record of hearings before a subcommittee of the House Committee on Interstate and Foreign Commerce, April-May 1956. pt. I. p. 302.

MTMA analysis, tab G.

78 Ibid., tab I.

Ibid., tabs K and M.

80 Ibid., tab I.

a heavy and frequent commercial movement, the use of section 22 to move DOD traffic on even lower rates, regardless whether such rates were solicited or unsolicited, appears to be a "prima facie" abuse of this privilege. While the "savings" between section 22 rates and published commodity rates accounted for only 4.8 percent of the total "saving," the fact remains that the DOD seemingly took an unfair advantage of the rights under this provision in such instancesas perhaps it did in the remaining 6 percent of the "saving"-by section 22 rather than exception to class rates.

The GAO pilot study also illustrates this "excessive" application of section 22. Despite the fact that published commodity rates were available for shipments of gasoline a truly ubiquitous commodity that moves as frequently and in as large quantities in commercial as in Government channels of trade-Government agencies still employed section 22 to obtain reduced rates for such shipments. In fact, this brief but comprehensive study shows that out of 1,441 shipments of gasoline that moved on section 22 rates, 1,316, or 91 percent of the applicable section 22 rates, were either lower than existing commodity rates or lower than what the GAO rate experts determined to be an "estimated comparable commercial rate" that might be used in the absence of section 22.

It can, therefore, be concluded that while section 22 does provide the Government with a quick, simple means of avoiding payment of high class rates, it also has resulted in excessive reductions, in many instances, by bringing about rate cuts even below published commodity rates. Whether or not the Government actively sought the latter is not too important. The important thing is that it illustrates that abuses under section 22 can easily come about, and will tend to increase as competition for the Government's traffic increases. In other words, the door is wide open to abuse if either the Government agencies or the carriers decide to exploit it.

(d) How much traffic moves on negotiated and how much on nonnegotiated section 22 rates?-One of the specific points raised by the Senate Commerce Committee, when asking for a study of section 22 in its report on S. 939 in 1957, was that—

distinctions should be made between quotations and tenders requested by Government agencies * * * and those quotations voluntarily offered to the Government.

Government traffic officials have contended that they should not be accused of abusing their rights under section 22 if carriers bid too low for Government traffic. These officials claim that when they negotiate for reduced rates under section 22, they are merely seeking what in effect are commodity rates that are justified because of volume or other factors. If the carriers elect to quote unduly low rates, these officials contend, then they have no one to blame but themselves. Such a position is wholly inconsistent with the Government interest in a healthy transportation system.

In order to get a better picture of how much traffic moves on negotiated section 22 rates versus nonnegotiated or unsolicited section 22 rates, we can again refer to the MTMA study.

The study shows that for carload shipments by railroad on section 22 rates in fiscal 1958, 45 percent of the traffic moved on negotiated rates

and 55 percent on nonnegotiated rates.81 In other words, the railroads apparently took the initiative in quoting reduced section 22 rates 55 percent of the time, and the DOD did it 45 percent of the time.

For truckload shipments by motor carrier on section 22 rates, only 15 percent of the traffic moved on negotiated rates and 85 percent moved on nonnegotiated rates.82 The preponderance of unsolicited bidding in the trucking field clearly illustrates the characteristic of more independent action in rate matters that exists in this segment of the transportation industry, as compared to the railroad field, where section 22 tenders are made through the three major rail rate bureaus. The heavy proportion of DOD's section 22 traffic that moves on unsolicited quotations clearly illustrates the open bidding characteristic of this provision. Carriers are free to undercut one another, and apparently do so in many instances, to an extent that would not be sanctioned by the ICC. If this were not so, then quotations would not have been made below commodity rates that the MTMA and GAO studies show were available to Government agencies for particular movements.

Whether or not Government agencies at present are responsible for unreasonably low section 22 quotations does not, of course, measure this provision's potential for being abused. The important thing to recognize is that section 22 in itself creates a condition in which carriers can go too far either unknowingly or for a seemingly shortrun gain-and quote rates beyond any regulatory control which would be considered either unreasonable or unduly discriminatory by the ICC. Unfortunately, if an established carrier quotes an unduly low rate, the Government agency has no choice but to use it, or else be called to account by the GAO. Thus, there is no effective means at present to prevent exploitation-whether intended or not by the Government agencies of the open-bidding characteristic of section 22.

The fact that unsolicited quotations predominate in the use of section 22 is a mark against, not an exoneration of, this provision, since it indicates that the majority of its use is carried out on an open-bid basis. The bidding carriers, when competing for commercial traffic, must conform to rules and regulations of the Interstate Commerce Act which specifically prohibit open bidding as not in the public interest.

(e) Are section 22 rates compensatory?-Based on general averages, the studies to date indicate that section 22 rates provide revenues to carriers that, on an overall basis, compare favorably with revenues derived from commercial traffic.

As mentioned previously, the MTMA study made a number of comparisons of DOD's section 22 traffic as a whole, with the same commodities moving commercially by rail and truck. These statistics indicated that section 22 traffic compared favorably, with higher loads per unit, similar lengths of haul per ton, and higher revenues per 100 pounds and per ton-mile.83

Again, as in the case of the 1-percent carload waybill sample, we don't know whether these general comparisons are reasonable ones because they fail to take into account such things as frequency of movement, whether an empty backhaul was involved, extra services to the Government, different operating conditions, etc. It is quite possible that the unusual nature of much of the Government's traffic warrants higher rates than now applicable.

The only fair approach to use in comparing section 22 with commercial rates is by using the one adopted by the GAO, which equates the section 22 rates with existing or constructed rates considered fair and reasonable for similar movements between specific points.

If the DOD could show such favorable comparisons for specific movements, there appears to be very little reason to believe that it couldn't use such comparisons to justify to the regulatory agency reductions in rates on its traffic in the absence of section 22.

10. Conclusions

It is quite apparent, based on estimates made in this report, that section 22 is being used quite extensively by Government agencies, and accordingly has a decided impact on regulated railroads and motor carriers of freight. At present, there is no effective way to keep the proportion of the Government's traffice that moves on section 22 quotations (23 percent as a minimum estimate in terms of expenditures) from increasing if either Government traffic officials decide to exploit this privilege or regulated carriers experience greater difficulty in getting commercial traffic and thus start bidding aggressively among themselves for the Government's traffic as has happened under Civil Aeronautics Board exemptions in transoceanic air movements.

Estimates as to how much additional money it would cost the Government for transportation service in the absence of section 22 are misleading because it is usually assumed that repeal would take place immediately-thus forcing Government agencies to use high commercial class rates for a large share of the traffic formerly moving via section 22 rates. To illustrate, immediate repeal of section 22 would theoretically have forced the Department of Defense to pay an additional $52 million to railroads and truckers in fiscal 1958. nearly 90 percent of this added cost represented the difference between section 22 rates and class rates. If the Department of Defense were given a reasonable time to adjust these differences through the regulatory agency, the actual increase in cost would undoubtedly have been far less than this "paper rate" estimate.

Yet,

If section 22 were repealed, therefore, it might be desirable to continue existing quotations in force for a stated period-possibly 6 months or a year-to permit the Government agencies to justify exception or commodity rates for all or part of its traffic that is moving on section 22 rates. There would be alleged an added cost of administration by having to follow standard rate procedures, although this would be more troublesome than costly to Government traffic officials. Certainly, with the Government's rate negotiating and ratemaking responsibilities largely centered in two agencies, the General Services Administration and the Department of Defense, both of which have highly qualified personnel, there should be no reason to believe that the Government can't obtain fair and reasonable rates in the absence of section 22.