I have a short prepared statement, which, if it meets with your approval, Mr. Chairman, I would like to submit for the record, and then merely comment on some of the salient points.

Senator SMATHERS. All right.

We will make your prepared statement a part of the record, in full, Mr. Chairman.

(The statement of Chairman Freas follows:)

Mr. Chairman and members of the Interstate and Foreign Commerce Committee, my name is Howard Freas. I have been a member of the Interstate Commerce Commission for the past 42 years. Since the first of this year, I have served as its Chairman.

The Commission appreciates the opportunity to express its views concerning section 5 of S. 3778, which would amend section 15 (a) of the Interstate Commerce Act by adding to that section a new paragraph (3), reading as follows:

(3) In a proceeding involving competition with another mode of transportation, the Commission, in determining whether a rail rate is lower than a reasonable minimum rate, shall consider the facts and circumstances attending the movement of the traffic by railroad and not by such other mode.

The proposed amendment to section 15 (a) would apply only where reduced rates are proposed for rail carriers; it does not purport to apply where, for example, reduced rates are proposed for motor

carriers.

The Commission is strongly of the view that all forms of transportation should be regulated impartially, and that, specifically, the same principles of ratemaking should be applied to all carriers. While it may be contended that nothing affirmatively prevents application of the proposed amendment to rates proposed by other types of carriers, there would remain the problem that the amendment is limited by its terms to rail rates.

Paragraph (2) of the present section 15a provides that—

the Commission shall give due consideration, among other factors, to the effect of rates on the movement of traffic by the carrier or carriers for which the rates are prescribed; * * *

This requirement appears to be substantially equivalent to the proposed amendment, leaving aside the last six words of the amendment, i. e., "and not by such other mode."

As you know, the Congress has provided in the national transportation policy that all of the provisions of the Interstate Commerce Act "shall be administered and enforced with a view to carrying out the above declaration of policy." It is the declared

national transportation policy of the Congress *** to *** foster sound economic conditions in transportation and among the several carriers; to encourage the establishment and maintenance of reasonable charges for transportation services, without *** unfair or destructive competitive practices; * *

*

Thus, for example, the Commission has considered the effect of a rate war upon all of the carriers involved, in exercising its rate powers. In addition, however, we are uncertain as to the effect of this proposed amendment. In discussing it, the report of the Subcommittee on Surface Transportation (p. 12) contains the following statement:

It is the policy of this subcommittee, and it is believed to be the policy of the Congress, that each form of transportation should have opportunity to make rates reflecting the different inherent advantages each has to offer so that in every case the public may exercise its choice, cost and service both considered,

in the light of the particular transportation task to be performed. The subcommittee believes and the national transportation policy is clear, however, that such ratemaking should be regulated by the Commission to prevent unfair destructive practices on the part of any carrier or group of carriers.

We are in complete agreement with this statement, and we believe that it fairly states the Commission's view of existing law. The report goes on to state that:

*** The subcommittee recommends, therefore, that the Commission consistently follow the principle of allowing each mode of transportation to assert its inherent advantages, whether they be of service or of cost. In 1945, in New Automobiles in Interstate Commerce (259 I. C. C. 475), the subcommittee believes that the Commission properly construed the intent of Congress in this respect when it said:

"As Congress enacted separately stated ratemaking rules for each transport agency, it obviously intended that the rates of each such agency should be determined by us in each case according to the facts and circumstances attending the movement of the traffic by that agency. In other words, there appears no warrant for believing that rail rates, for example, should be held up to a particular level to preserve a motor-rate structure, or vice versa (259 I. C. C. at p. 538)."

The subcommittee wishes to affirm the interpretation of the Commission given in the Automobile case epitomized in the words quoted above. The proposed amendment that the Commission shall not—

consider the facts and circumstances attending the movement of the traffic * by such other mode,

thus appears to be in conflict with the statement in the report of the subcommittee that it desires

the Commission to prevent unfair destructive practices on the part of any carrier or group of carriers.

Moreover, the amendment clearly would be inconsistent with the controlling objectives of the national transportation policy, quoted above, which would remain unchanged.

We assume that the amendment is not intended to embody the "three shall nots" urged by the railroads, for the subcommittee's report states (p. 12) that:

The subcommittee is not convinced that the record before it justifies approval of the railroads' proposal.

Nevertheless, the uncertain purpose of the amendment would enable the railroads to contend that it is intended to give to them complete freedom, in the presence of competition from another mode of transportation, to establish rates which merely cover out-of-pocket costs. We cannot determine from the subcommittee's quotation from the Commission's 1945 report in New Automobiles in Interstate Commerce (259 I. C. C. 475), what would be the intended practical effect of the proposed amendment upon ratemaking. The real questions are (1) whether Congress desires to give to the high-cost carrier in every competitive rate situation complete discretion to establish any rates which cover its out-of-pocket costs without regard to its effect upon the ability of the low cost carriers to move the particular traffic at rates which cover all of their cost, and (2) whether and to what extent Congress desires to prohibit the maintenance of minimum rates on high value commodities at a level higher than would be justified by cost considerations alone.

We respectfully submit that these issues are too important to both carriers and shippers to be left in doubt. If, contrary to our recom

mendation, Congress determines to amend the rule of ratemaking in section 15a, we urge that the intended effect be made clear, rather than left to years of litigation, which would be bound to result from the bill's uncertainty and from the fact that it appears to treat different modes of transportation differently.

We also consider the proposed amendment unworkable for several reasons. We have taken the position that a purpose of rate regulation should be to encourage the flow of traffic by the most economical means. With respect to this position we have heard no criticism. Assuming it to be sound, and we believe it is, the starting point is the determination of the most economical means of transportation, a determination which often cannot be made without considering the facts and circumstances attending the movement of the traffic by other modes of transportation.

Let us consider, by way of example, rail rate reductions made to meet barge competition. By their very nature, barge costs differ substantially with the movement of traffic. It goes without saying that an occasional movement of 50 tons of a given commodity by barge results in costs to the barge line which differ substantially from those of a fairly regular movement of the same commodity in 500-ton lots. We know of no way of determining the cost to the barge carrier without some knowledge of the nature and extent of the probable movement of the traffic. Without knowing the cost, there is no way of determining which form of transportation is the most economical. By the same token, we do not see also how we could give effect to the mandate in the national transportation policy— to recognize and preserve the inherent advantages of each; to promote safe, adequate, economical, and efficient service and foster sound economic conditions in transportation and among the several carriers.

Whenever conditions permit, given transportation should return the full cost of performing carrier service. Certainly full costs in the aggregate have to be obtained in our transportation system if it is to be kept healthy. In many instances, however, the full cost of the lowcost form of transportation exceeds the out-of-pocket cost of another. If, then, we are required to accept the rates of the high cost carrier merely because they exceed its out-of-pocket costs, we see no way of preserving the inherent advantages of the low cost carrier. In any event, that other mode would be compelled to depress its rates below full costs in order to preserve its inherent advantages against the high cost form of transportation. This would mean that the carrier with the inherent advantages would be forced into an unhealthy situation, or that higher rates would have to be charged on noncompetitive traffic in order to make up the deficit, for certainly the full cost of performing a transportation service must come from somewhere.

It should be pointed out also that in New Automobiles in Interstate Commerce (259 I. C. C. 475), the proceeding cited with approval in the subcommittee's report of April 30, the question of the distribution of the traffic was gone into at length (see pp. 484 to 492). However, with the proposition that rates of a low-cost carrier should not be held up to a particular level to protect the traffic of other carriers we are in full accord.

While, as we have previously indicated, we see no need for any change in existing legislation in this regard, nevertheless if the com

mittee feels that some change should be made, we suggest that the fears of the railroads might be allayed and the expressed views of the subcommittee incorporated in the statute by substituting for the proposed paragraph (3) of section 5 of S. 3778 language substantially as follows:

(3) "In a proceeding involving competition between carriers, the Commission, in determining whether a proposed rate is lower than a reasonable minimum rate, shall consider the facts and circumstances attending the movement of the traffic. Rates of a carrier shall not be held up to a particular level to protect the traffic of a less economic carrier, giving due consideration to the inherent cost and service advantages of the respective carriers."

It should be noted that our suggested language would be applicable to all types of carriers and, if adopted, would require corresponding amendment of the other parts of the act. Also, it would not affect the special provisions in section 305 (c), relating to water-carrier rates and practices, which we accept as representing a settled policy of the Congress.

We point out in our statement that excepting for the last six words of the proposed paragraph (3) to be added to the rule of ratemaking that is, the words "and not by such other mode," the proposed amendment appears to be substantially the same as the requirement now contained in paragraph 2 of the present section 15 (a). The amendment would apply only when reduced rates are proposed for railroad carriers.

Now, this committee knows, it is the declared national transportation policy of the Congress, and I quote now: "to foster sound economic conditions in transportation and among the several carriers, to encourage the establishment and maintenance of reasonable charges for transportation services without unfair or destructive competitive practices."

In exercising its rate powers, the Commission has considered the effect of a rate war upon all the carriers involved.

While it may be contended that nothing affirmatively in this proposal prevents application of the proposed amendment to rates that are proposed by carriers who are of other types, nevertheless, the problem would arise by reason of the fact that the amendment specifically mentions railroads and it might be contended that by its terms it was limited to the railroads.

But aside from this inequality of treatment as between the different modes of transportation, we are uncertain as to the effect of the proposed amendment.

We are in complete accord with the statement of the subcommittee on page 12 of the report of the subcommittee and believe that it fairly expresses the Commission's view regarding existing law.

However, the proposal that the Commission shall not-and I refer now to the subcommittee report-shall not consider the facts and circumstances attending the movement of the traffic by such other mode, appear to be in conflict with the statement in the report that the subcommittee the report of the subcommittee, that it desires the Commission to prevent unfair, destructive practices on the part of a carrier or group of carriers.

Senator SMATHERS. May I interrupt you right at that point to say that suppose we added on this language-leave on those last six words, but added the words, or something to this effect, that we would in

a proceeding involving competition with another mode of transportation, the Commission, in determining whether a rail rate is lower than a minimum reasonable rate, shall consider the facts and circumstances attending the movement of the traffic by railroad and not by such other mode, except that the Commission will always, should always, have the right to consider whether an application for a rate falls within-this I am just speaking informally-falls within the purview of unfair destructive rate practice.

Commissioner FREAS. I would say, offhand, that that would be a step in the right direction. I doubt, though, that it would go far enough, for this reason: That I don't now conceive of how the Commission could tell whether or not it fell into that category unless it did first consider the facts and circumstances surrounding the transportation of other modes.

Senator SMATHERS. May I just, if the Senators would indulge me just a minute, Senator Lausche and Senator Potter, let me just make a broad-sort of a broad statement for myself.

Senator POTTER. Just yourself, this time.
Senator SMATHERS. Just myself.

As I gathered the impression of the subcommittee as we went through this, it was that we could see where the Commission, after the adoption of the 1940 act, they would recognize in most of your decisions as we gather them up here, up until 1950, you would let one mode of transportation, wherever it made an application for a lower rate and that rate was compensatory to it, to that applicant, you people would say: "This is an exercise of its inherent advantage," and you would let that lower rate go into effect. Then you got into 1950, and it began to appear from these cases, the petroleum products from Los Angeles, Arizona, to New Mexico, and so on, Petroleum Products case in Illinois, the Alcoholic Liquors case, Scrap Rail From Southern Ports to Chicago case, Southwestern Tank Truck Carriers case, and so on, petroleum in California and Oregon, most of them petroleum, coffee from California, magazines from Philadelphia, in each instance, in all of those cases, they were all decided in 1951, 1952, 1953, 1954, 1955, the Commission began to shift off the inherent advantage theory and began to say that even though you recognized that an applicant for a lower rate, by one mode of transportation, even though that rate would be compensatory to that mode of transportation, nevertheless, because it would, by the very nature of the competition, have the tendency to destroy the business of the other mode of transportation, you then read into the act the theory that you had to protect this other mode of transportation and you read that into it.

In other words, we have been reading our feeling is that the Commission has been reading-into the national transportation policy, and the act, the desire to protect another mode of transportation irrespective of whether or not the lowered rate sought by the first mode of transportation was compensatory, or a reasonable rate to them, to the extent that all rates have been steadily going up and being fixed at what you might say is a false rate, and it is being done to protect all modes of transportation, but it is being done, we are afraid, at the disadvantage of the shippers and the general public.

Now, that is generally what it looks like to me, and I think that was the general impression that I got from most of the members of the committee.