ORAL PRESENTATION, JANUARY 12, 1924, BY JOHN E. OLDHAM, BEFORE THE INTERSTATE COMMERCE COMMISSION RE RAILROAD CONSOLIDATIONS

In beginning my study of 'the problem of railroad consolidation some years ago I approached the matter chiefly from the standpoint of finance and credit supplemented so far as was possible from the information available to me by a study of traffic relationships. I prepared and published a plan of consolidations before the taking of testimony in this proceeding was begun. At the conclusion of this hearing I testified and put this plan in evidence as Exhibit No. 709. In my testimony I stated that in developing the groupings I had not had the advantage of the valuable information in regard to traffic relationships which had been developed by Professor Ripley and the commission in its tentative plan, nor had I had the advantage of the testimony in these same matters which had been presented at the hearings. Since the hearings I have not had adequate opportunity to study this data, but I have made some examination of the more important parts of the record. There have been also some developments in other ways which would suggest some changes in my original plan. In considering both the original plan and the changes in it which I now suggest I would like to have it borne in mind that my general purpose and my interest in this proceeding is to show that without impracticable disruption of existing financial relationships and without so far as I can see substantially affecting established and existing routes of traffic, it is possible to include the railways of the country within a list of approximately a dozen systems of similar financial magnitude and similar earning power-systems coinciding in a general way with the great traffic territories and thus systems of diversified traffic, thereby simplifying the problem of rate regulation.

It will be apparent that the assignments I make will not be satisfactory to everyone, but if it is remembered that I have approached the subject more largely from the financial point of view than most of the witnesses, and that I am not attempting to weigh the evidence in the record or to argue that better arrangements in individual instances can not be made, I am in hopes that such suggestions as I make will not prove objectionable to any one, but will be looked upon as an attempt to be helpful in a situation which, as a whole, is surrounded with many difficulties. With my original groupings I prepared statistical data which showed that the systems which I proposed in each rate district were strikingly similar in their operating and traffic characteristics; that is to say, the costs of operation were proportionately the same or approximately so in each instance; the proportion of each class of tonnage was very similar; that is the tonnage of cach system was made up of similar proportions of products of agriculture, mines, forests, manufactures, etc.; the average rates per ton-mile and per passenger-mile varied but little. These comparisons will be found in detail on pages 44-46 of the Exhibit No. 709, which is a part of the record. Although reliable data covering valuations was not available, I concluded nevertheless that railroads in the same territory which handled very similar traffic must necessarily have similar facilities for handling such traffic, and of approximately the same value, and that inasmuch as the rates and operating costs were substantially uniform it was fair to conclude that such systems would be able to earn substantially the same rate of return on their respective property values and thus meet the requirements called for by the transportation act as defined by section 5, paragraph 4, which reads as follows:

"The several systems shall be so arranged that the cost of transportation as between competitive systems and as related to the values of the properties through which the service is rendered shall be the same so far as is practicable so that these systems can employ uniform rates in the movement of competitive traffic, and, under efficient management, earn substantially the same rate of return upon the value of their respective railway properties.'

In the matter of valuation, I might add that much more data is now available than was the case when my original studies were made and that while I have not attempted to compile the figures for the various systems, nevertheless, in the studies which I have recently made of the valuation data relating to important individual roads, I have found reproduction cost plus land values as determined by the commission are approximately the same for similar properties. This has confirmed my opinion that when valuations are completed and made available the conclusion alluded to above will be justified. The statistical comparison which I presented with my original groupings was based upon the earnings and operating statements of the test period, and the traffic statistics were for the year

ended June 30, 1916. I used the figures of the test period in the belief that they were more reliable for comparisons intended to reveal the relative positions of the various roads under normal conditions than were the figures of later periods. I used the traffic figures for the year 1916 inasmuch as such figures were not available for each year in the test period and inasmuch as the year 1916 was close to the average for the test period. The similarity of these systems, as I have developed them, I believe is not a matter of chance or coincidence but is the logical result of planning systems which extend widely throughout the rate district in which they operate. Systsems created in this was necessarily have the diversity of traffic of the whole district; they are subject to both the operating advantages and disadvantages which are found in the various parts of the district. This I found to be the case with the larger systems which were the result of earlier consolidations. I refer to such systems as the New York Central and the Pennsylvania in the eastern district, the Southern Railway, and the combination represented by the Atlantic Coast Line, and Louisville-Nashville systems in the southern district, and the Santa Fe and the so-called Hill group of roads in the western district. This matter is discussed at some length in Exhibit No. 710, which I introduced when I testified November 23. I would call special attention to the statistical comparison contained in this exhibit, of the traffic and operating statistics of the New York Central and Pennsylvania systems, with the combined statistics of all roads in the eastern district.

I desire to place especial emphasis upon the desirability, or perhaps better the necessity, of planning for systems which shall extend widely throughout the rate district in which they are located, in order that such systems may be of average character, because this is the principle in accordance with which average systems have been created heretofore and is the only principle I have been able to discover which is capable of general application.

I have now grouped the principal railways of the country into 11 systems in place of the 13 which I proposed in the above-mentioned pamphlet. Let me indicate in some detail the modifications of my original groupings and the regroupings which I desire at this time to suggest for the consideration of the commission. Reference to the pamphlet entitled "A Plan for Railroad Consolidations,' Exhibit 709, which is a part of the record, will show that in the eastern district I had proposed 5 consolidated systems; in the southern district 2, and in the western district 6-a total of 13 for the whole country. I now suggest 4 systems for the eastern district in place of 5, 2 systems for the southern district as heretofore, and 5 systems for the western district in place of 6, a total of 11 for the whole country. I have filed with the commission maps showing the four revised eastern systems; and the five revised western systems, together with statistical data showing the relative mileage, revenues, and operating costs of the systems in each district.

In the eastern district I now eliminate the Norfolk & Western-Chesapeake & Ohio system which I originally proposed. This was the one system in the eastern district which did not comply with the principle of extending widely throughout the rate, district in which it was located. For this reason it did not have the diversified and balanced traffic which is desirable; it was principally concerned with the movement of a single commodity-coal. Moreover, testimony in the record indicates that there is a large movement of this coal westward from the Pocohontas field, and that better distribution throughout the Central Western States and into the Northwest may be expected if the so-called coal roads are made parts of several widely extending systems than would be secured if these roads as originally proposed were made into a separate system which of necessity would be more nearly local in extent and character. Furthermore, since my original groupings were made I understand that the Carolina, Clinchfield & Ohio, which was made a part of the system referred to, has been leased to the Louisville & Nashville, and the Chesapeake & Ohio and the Hocking Valley have entered into closer relationships with the Nickel Plate Group. Because of these facts, I now suggest that the different roads in the Pocohontas district, instead of forming a single system, be allocated to one or another of the larger systems. The disposition of the Carolina, Clinchfield & Ohio and the Chesapeake & Ohio and the Hocking Valley has been indicated above; in addition I have allocated the Norfolk & Western to the Pennsylvania system which has long had a substantial interest in it, and the Virginian to the New York Central. Two of the systems which I originally proposed were based respectively upon the New York Central and included its affiliated companies with few additions, the chief of which was the Central Railroad of New Jersey; and upon the Pennsylvania and its affiliated companies. These two systems exemplify the type of systems which

consolidations are intended to create. Each of them extends widely throughout the eastern district and each of them is, therefore, of the average character which the consolidated systems are intended to possess. Reference has already been made to the similarity of these systems to a single system representing the combined or composite characteristics of all roads in the eastern district. The changes which I now suggest in the New York Central system, as originally proposed, are the subtraction of the Lake Erie & Western, which the Central no longer controls, and the addition of the Virginian. In the case of the Pennsylvania, I suggest the addition of the Norfolk & Western.

A third system which I originally proposed was based upon the Erie, the Lackawanna, the Nickel Plate, Pere Marquette, and the Wabash. It included, in general, lines in the eastern district located between the New York Central and the Pennsylvania and was referred to as the Buffalo system. I now revise this system by adding to it the Toledo, St. Louis & Western which has already been consolidated with the Nickel Plate, and the Chesapeake & Ohio and Hocking Valley which have established close relations with the Nickel Plate_group; and by taking from it the Wabash which is no longer necessary since the Toledo, St. Louis & Western traverses much the same territory and will prove equally serviceable. Although I originally grouped the Elgin, Joliet & Eastern with this system I have not included it in the revised system, since it is a road of such terminal character that it is closely related to several systems. The fourth system was based upon the Baltimore & Ohio and affiliated companies, the Philadelphia & Reading, and the Lehigh Valley. Geographically it occupies much the same position with relation to the Pennsylvania as the proposed Buffalo system does to the New York Central. I have modified this Baltimore & Ohio-Reading system by adding to it the Wabash lines east of the Mississippi River which have been taken away from the Buffalo system, and by subtracting the Toledo, St. Louis & Western which is already a part of the Nickel Plate group as stated above. The Lehigh Valley and the Wabash, with traffic rights over the Grand Trunk, would give the Baltimore & Ohio system an alternate and northerly route to Chicago, St. Louis and other points in the West. The four systems which I thus propose will all reach the Altantic seaboard, Chicago and St. Louis, the coal fields, both anthracite and bituminous, and southern connecting points. Each system will extend widely throughout the eastern rate district and each system will reach principal markets and shipping points; either the same markets and shipping points or others of equal importance.

In the exhibits introduced as a part of my testimony I showed by statistical tables that the systems which I suggested for the eastern district would handle traffic of various kinds in substantially the same proportion and at approximately the same costs. The modifications of the groupings which I now suggest make no material changes in these respects. The detailed statistics have been before referred to as appearing on pages 44-46, of Exhibit No. 709. Because of the similarity of operating costs net earnings will be similar, and if there is the simillarity of property values which I believe to be the case these net earnings will reflect a similar precentage of such values; that is, these systems will be able to earn substantially the same rate of return upon the values of their respective railway properties. With the standardization of the capital structure which will be brought about by consolidation, in accordance with the requirements of the transportation act, their respective incomes will be equally effective to establish and maintain credit. Thus they will be able to provide adequate service to the people of their territories. Systems of these characteristics fully comply with the intent of the transportation act because they will be able to operate with similar results in competition with each other under the uniform rates which are made necessary by the preservation of the competitive principle.

I make no change in the suggestion heretofore made as to the disposition of the New England roads. The record shows that these roads, as a group, are unlike any other group of roads of similar importance. Their dissimilarity is shown in their higher operating costs, in the character of their traffic, and in general in their inability to prosper under rates which are adequate for the roads in the eastern district outside of New England. My views in regard to the New. England roads have been presented in full at the hearings in Boston and later in Washington, and I will not take the time to elaborate them at this time. I will merely state that compliance with the principle of providing for average sustems which extend widely throughout the district in which they are grouped for rate making purposes requires that the New England roads become parts of the other systems which I have suggested.

As to the Southeastern section of the country I make no suggestions for any material modification of the groupings I have heretofore proposed, except to add to the Atlantic Coast Line-Louisville & Nashville system the Carolina, Clinchfield & Ohio as noted above. In my revised groupings I have not included the Florida East Coast in any system. With equal propriety it could become a part of either of the proposed systems or it could be jointly controlled by both. As an independent system, it would perhaps best serve the public. As with the New York Central and the Pennsylvania in the eastern district, so with the Atlantic Coast Line-Louisville & Nashville and the Southern systems in the South, they already extend largely throughout the territory and are average systems. The only other road of considerable size in this territory is the Seaboard. As a system by itself it is unsatisfactory, and there are no other roads apart from the Southern and the Atlantic Coast Line with which it could be united so as to form a strong unit. For these reasons, I have grouped it with the Southern for the maintenance of competition with the system which includes the Atlantic Coast Line.

West of the Mississippi River certain changes have also taken place in the general railroad situation since I made my original groupings. The Central Pacific has now been leased to the Southern Pacific. There has thus been established a relationship which has the approval of the commission and which may be looked upon as permanent. This arrangement places the Central Pacific at the service of both the Southern Pacific and the Union Pacific. It suggests that the only other mid-Rocky Mountain group, that is, the Denver & Rio GrandeWestern Pacific, should be placed in a similar relationship to the two other systems which reach the Denver gateway. The Atchison System like the Southern Pacific System is a gathering and distributing road in California. By allocating to it the Denver & Rio Grande-Western Pacific it will be afforded a route through the Denver gateway similar to that which the Central Pacific affords to the Southern Pacific. The other system in this territory which I propose, viz: the Burlington System, can serve and be served by a relationship to the Denver & Rio Grande-Western Pacific similar to that which has been assured to the Union Pacific with the Central Pacific. This will be shown by a reference to the maps wherein it appears that geographically the Burlington System is related to the Atchison and the Western Pacific in a manner similar to that of the Union Pacific to the Southern Pacific and the Central Pacific. In this way the four main systems which reach the Denver gateway will be provided with routes through this gateway fitted to their respective needs.

The testimony presented in the record makes it very clear, I think, that any grouping which does not include in one system the Northern Pacific, Great Northern and the Chicago, Burlington & Quincy would result in a serious breaking-up of existing routes and channels of trade and commerce quite inconsistent with the intent and actual provisions of the transportation act. In fact, this danger is recognized and commented upon at length in the tentative report of the commission, especially on page 598 from which the following quotation is taken:

“Breaking up the existing Hill combination and allying the Burlington solely with the Northern Pacific might well deprive the Great Northern of so much business northbound from the Burlington river line from Chicago as to jeopardize its welfare."

And, furthermore, it is probable that the separation of any one of these three roads from the other two would present insuperable financial difficulties. In my new grouping shown by the maps which I have filed, I therefore, place these three roads in one and the same system.

In my original grouping I made a system composed principally of the Illinois Central and the Soo, and I had placed the St. Paul with the Great Northern. I now group the Great Northern with the Northern Pacific and the Burlington, and I place the St. Paul with the Illinois Central in place of the Soo; I have not placed the Soo with any system but have left it as at present a part of the Canadian system which now owns it. In this St. Paul-Illinois Central system I include the St. Louis & San Francisco which I had previously grouped with the St. Paul; and I have added the International & Great Northern and the Gulf coast lines; by these means the system will have access to the various ports on the Gulf. This system is somewhat similar to that proposed by Mr. Holden in his four-group plan, except that the Frisco instead of the Missouri Pacific provides the principal line to the Gulf. It seems to me that this arrangement preserves competition to a greater degree.