Senator LAUSCHE. I wish you would explain this. You may understand it; I don't. The CHAIRMAN. Go ahead. Mr. ZAGRI. This is a comparison of three items that are in the record. I insert this for emphasis. Comparison of the costs of shipment of an automobile in the first instance with the cost of shipment of coal. These are actual rates. One is for a distance of 462 miles in the case of the automobile, and in the case of coal 450 miles. Here we have the automobile rate at 40 cents per revenue-mile, and the cost is 77 cents. The historical relationship of raw materials to manufactured or high-grade commodities would be just the reverse. Usually it is a case where the manufactured commodity is a 2 to 1 relationship to the raw material. Here we have a case where the raw material rate is a 2 to 1 relationship to the manufactured commodity. In so doing, in destroying this historic relationship, we have an allocation of transportation burden to the wrong commodity. This results in, oftentimes, a high-cost carrier is able to outcompete a low-cost carrier because of this type of allocation to the transportation burden. Then we have an example of automobiles and soap. Here we have one case, 1,474 rail-adjusted miles, and the other 987 miles. They are practically the same. You have a high-value commodity like automobiles being shipped for about the same rate as soap. And similarly we have the comparison of marble or granite chips and automobiles, where the marble, a raw material, is being shipped for more. In other words, the value-of-service principle in these rates is completely out the window. The allocation of the transportation burden is out the window. I am for free competition, but I don't say this is free competition when a railroad, because of its tremendous brute strength, is able to use that strength by allocating an unjust share of transportation burden to a specific commodity for the purpose of destroying compe tition. That is our point, gentlemen. Comparisons are between transportation of raw materials in 40- to 50-foot boxcars with automobiles in an 85- to 87-foot flatcar. The Commission has shown great inconsistency in adhering to and departing from the value-of-service criteria. This point was made much better than I can make it by Mr. Freund. I would like to simply refer to it again because I think it illustrates our problem so well. Let me illustrate. In Automobile-Duluth to Washington (308 1.C.C. 523 (Sept. 17, 1959)), Division 2 of the Commission, condemned and ordered canceled motor carrier mileage rates. Commission held that a luxury-type automobile could not be transported at the same rate as an economy-type automobile with lighter weight. The rate was suspended on the ground that it was not just and reasonable that a higher valued automobile pay the same rate per hundred pounds as a low value automobile. Mr. Forgash tells us that the value-of-service principle has been dead for 30 years. Here we have a decision of Division 2 of the Commission, September 17, 1959, going off on the very point of the value of the commodity. The Commission enunciated the reverse principle just 7 months later in Suspension Board case No. 22950, and declined to suspend rail trailer load rates that applied regardless of the size, value, or rate of the automobiles transported. Thus, we find the Commission applying a double standard of ratemaking: one for motor carriers and another for railroads. This, gentlemen, within a space period of less than 7 months. This is the type of confusion, gentlemen, that I say calls for clarification by an act of Congress. Further startling departures by the Commission, from its pronouncements of the Duluth case, supra, may be found in the cost of transporting a Plymouth and Falcon which costs 59 cents and 49 cents per hundred pounds more than it costs to ship a Lincoln Continental. This comparison shows that while the value of the Continental is 321 percent of the value of the Falcon, the rate on per hundred pounds basis of the Continental is 29.51 percent less than that of the Falcon, and that while the value of the Continental is 229 percent of the value of the Plymouth six cylinder, the rate per 100 pounds of the Continental is 26.77 percent less than that of the Plymouth. It should be recognized that many railroad executives have not bought the soundness of the principle of piggyback plan I, III, IV, and V. In a report which appears in the national transportation report, which we call the Doyle report, Mr. Herbert O. Whitten, senior consultant, Chesapeake & Ohio Railway Co., fears that- The heavy present investment in terminal facilities (accurate estimates have not been located but it appears that about $13.5 billion of net book investment is tied up on distribution and gathering service and equipment supply service within the terminal city areas) — and this is important— may well not be covered by the reduced revenues from plans I, III, IV, and V, piggyback, and may be still another contributing factor to future rail bankruptcies ("National Transportation Policy," vol. 3, exhibit D, ch. 9, p. 36). Here we have an admission— Mr. LAUSCHE. Mr. Chairman Can you explain this language accurate estimates have not been located but it appears that about $13.5 billion of net book investment is tied up on distributing and gathering service What does that mean, "distribution and gathering service"? Mr. ZAGRI. I assume he is referring to terminal facilities where you have interchange and where you have boxcar transfers. The basic overhead investments of the railroads are in tracking and in terminal facilities. His point is that the piggyback rate does not accurately reflect the basic overhead of the railroads, and in so doing may lead to future bankruptcies of the railroad. In this memorandum he warns his particular railroad company, the Chesapeake & Ohio, from going into a piggyback operation, and recommends against it because he feels that the basic economics of piggybacking as it is practiced today is unsound. This is exactly our point. We feel that the $13.5 billion in terminal facilities are not being properly reflected in these piggyback rates; that these piggyback rates are not reflecting a proper contribution of the transportation burden of these commodities. In the long run this may not only lead to destruction of trucking competitors but the railroads themselves. The CHAIRMAN. Let's proceed, because we are running a little late. Mr. ZAGRI. The vice of the ICC policy permitting rates to reflect out-of-pocket costs is to be found in three principal areas: 1. If the out-of-pocket standard is used this will unfairly favor the railroads since their out-of-pocket expenses are low and their fixed costs are high; whereas in the case of the motor carrier its out-ofpocket expenses are high and the fixed costs are low. Dr. Frank Mossman, professor of transportation at Michigan State University, concludes: Therefore, if the railroad out-of-pocket costs were used as the criteria on a commodity where both rail and motor competed for the traffic, the railroads would have the financial ability to price many trucklines out of business ("Problems of the Railroads," pt. 4, p. 2305). This doesn't mean that the railroads are more efficient; it means that the method of criteria used does not necessarily promote that the most efficient carrier will carry the transportation. 2. The high-cost carrier with low out-of-pocket costs has a decided advantage over the low-cost carrier with high out-of-pocket costs. Commissioner Howard Freas who testified before this committee on March 28, 1958, stated: However, when competitive traffic is hauled at a minimum of profit by carriers whose costs are relatively high, the low-cost carrier who at the same or lower rates could provide the service at a reasonable profit is deprived of the business. By having the high-cost carrier perform the service, the overall charges to the public are not reduced as other traffic must bear a disproportionate share of the total transportation burden. Thus, the public is prevented from receiving the benefit of the more economical service (“Problems of the Railroads,” pt. 3, p. 1840). This principle I think the Commission could very well be reminded of in the resolution of this problem. The railroads are carriers of great diversification of commodities. The motor carriers are primarily specialists. The railroads are like department stores. The majority of motor carriers are like specialty shops. With the exception of 2,500 general commodity carriers, the balance of approximately 16,000 common carriers are specialistslike carriers of household goods, heavy machinery, films and associated commodities, textile carriers, automobiles, et cetera. In 1959, the revenue for 15,500 carriers averaged $88,300 per carrier. In a rate war, the specialized carrier is at a distinct disadvantage. First, he has no other commodities that he can fall back upon to carry the loss incurred on the specific competitive commodity under attack by the railroad. Second, he has very little staying power. In a blood-letting contest the motor carrier in most instances does not have the staying power to survive a battle with the average railroad. 3. This policy can only lead to a worsening of the financial picture of all modes of transportation. For example, the railroads carried 552 billion ton-miles and grossed $8.1 billion with the net income of $602 million in 1958. In 1960 the railroads carried 571 billion tonmiles, or an increase of almost 20 billion ton-miles, and grossed $8 billion, which was less, with a net income of $145 million. In other words, there was a reduction of almost $200 million net income. And this reduction of net income took place despite a decrease in the pas senger revenue deficit of $120 million. Selective rate cutting in specialized commodities has resulted in an increase in volume to the railroads, and a decrease in revenue. Review of the reports of the Interstate Commerce Commission covering the "Distribution of the Rail Revenue Contribution by Commodity Groups" shows that, for the period 1949 through 1958, the latest year for which data are available, they have increased traffic of certain competitive commodities by reducing rates or holding them down but have ended up worse off. This study included the following competitive commodities where selective rate cutting had been practiced: fresh meats, manufactured iron and steel, food products, electrical equipment, candy and confectionery, liquors, et cetera. For example, on forwarder traffic in 1958 they handled 52 percent more carloads than in 1949 but only received 23 percent more revenueno wonder Mr. Forgash likes this-the out-of-pocket cost of handling this traffic increased by 110 percent with the result that they received 51 percent less contribution to the so-called burden. Thus, on this traffic they seem to be trying to follow the principles enunciated by the banana peddler who bought bananas for 50 cents a dozen and sold them for 49 cents. When asked how he could afford to do this. he said he made it up on volume. A few other commodities on which the railroads have increased volume but had less left for the burden include canned and packaged foods: carloads up 6 percent; revenue up 21 percent; out-of-pocket costs up 59 percent; contribution down 30 percent, out-of-pocket costs up 61 percent and contribution down 47 percent. In a recent address before the Railway Systems and Management Association, Mr. Samuel A. Towne, chief of the cost-finding section of the ICC's Bureau of Accounts, noted that— the Commission's "Distribution of the Rail Revenue Contribution by Commodity Groups" for 1958 revealed that "21 tons of every 100 tons of carload freight carried failed to contribute anything to the recovery of constant costs." This means that over one-fifth of the total traffic is failing to pay its out-ofpocket cost. The seriousness of this "loss" traffic is emphasized when it is understood that, if this amount of traffic had paid its out-of-pocket cost, the contribution to burden would have been increased over 10 percent, a healthy step toward maximizing the net income. The prime purpose of selective rate cutting is not to get additional business at the cut rates but to destroy competition. Experience has demonstrated that the railroads have not been successful in diverting truck traffic unless they reduce the rates at least 20 percent below the truckers rates. My authority for this statement is John H. Turney, former Assistant Federal Coordinator of Transportation. By simple arithmetic it can be shown that if the railroads were to take over all competitive motor carrier traffic by reducing their rates 20 percent the railroads would lose over $300 million. Here I am simply expanding on the overall point that I made on the little carrier down in Texas where the railroads, by taking over the traffic carried by the motor carrier, would lose a substantial sum of money, but would result in taking over the traffic getting the competition. Applied on the overall, if we were to apply the principle of present out-of-pocket rates across the board, we find that if they captured all of the trucking business where the competition exists, which is 75 percent of the aggregate volume of manufactured commodities, that the railroads would be $300 million worse off than they are today. Mr. John C. McWilliams, a recognized transportation cost analyst, analyzed each of the 264 different commodity groups handed by railroads and motor carriers. He estimates: * that the railroads would have $458 million less net revenue than they had before they got the truck traffic. This is equal to nearly 65 percent of their net income in 1957. Senator LAUSCHE. Are you from Washington, Mr. Zagri? Mr. ZAGRI. Yes, I am. Senator LAUSCHE. Mr. Chairman, I think they declared the rule to be yesterday that there shall be no hearings of committees after the Senate is brought into session, and I have an engagement. I would like to hear his whole testimony. The CHAIRMAN. He has only three pages left. I wonder if we could finish that. Senator LAUSCHE. Finish this direct presentation? The CHAIRMAN. Yes, and then he can come back. The CHAIRMAN. If you can speed it up a little. Mr. ZAGRI. I am going as fast as I can. There are too many facts and figures in here. In bringing Mr. McWilliams' analysis up to 1958 we find in that year the class I railroads received aggregate revenues of $3.9 billion from manufactures and miscellaneous traffic, and their out-of-pocket cost for handling this traffic was approximately $2.3 billion, leaving $1.6 billion as the contribution to the transportation burden. The class I motor carriers in that year had manufactures and miscellaneous revenues of approximately $1.3 billion. Now, if the railroads reduce the rate on three-quarters of this traffic by 20 percent and were successful in attracting it all, the aggregate revenues would be $4.4 billion. If they could handle this new traffic at the same outof-pocket cost per ton as they handled their own traffic, namely $6.98 per ton, their out-of-pocket cost would aggregate $3.2 billion and their contribution to burden would be $1.2 billion or approximately $300 million less than they actually had from their own traffic at present rates. We must conclude then that the motive of selective rate cutting is not to acquire additional business but rather to destroy competition and establish monopoly. While the shipper may temporarily benefit from selective rate cutting, it is clear that he cannot benefit in the long run, once the railroads establish a monopoly and raise the rate on the shipment of a noncompetitive commodity. Finally the question arises: Does the consumer benefit from selective rate cutting? Attached hereto are copies of a Pontiac dealer's shipping recordsgentlemen, you have those attached to your copy-indicating the cost of delivery of a Ventura sports coupe from Kansas City, Mo., to |