the general fund should bear of various programs as a result of Government use of facilities.

It concludes that the concept of user charges should be accepted now for gradual application to air and waterway transportation over a period of years. The system should be designed ultimately to recover operating and maintenance costs plus improvements of federally aided transportation facilities. An approach to formulas to accomplish this is indicated.

CHAPTER 3. OWNERSHIP OF ONE MODE OF TRANSPORTATION

BY ANOTHER

Following an examination of the background of this question, chapter 3 discusses an idealistic concept of a transportation company offering service by several modes, either singly or in combination, best suited to the service/cost needs of the shipper. The conclusion is drawn that, regardless of the national benefits to be derived from such operation, it is not realistic to expect such companies to be formed in the present industrial climate of our country.

Recommendation is made that ownership of one mode by another be permitted all modes equally when clearly determined in each case to be in the public interest. It is suggested that such ownership be under a renewable license and evidence that the common ownership is, in fact, operated in the public interest be required as a condition of renewal. It is also recommended that the powers of the regulatory agency in regard to through routes and rates be strengthened and that users be permitted to initiate applications for combination service.

CHAPTER 4. CONSOLIDATIONS AND MERGERS

General consolidation of railroads in the near future is presented as the most important measure to restore the railroad industry to the health and vigorous status of over 30 years ago and as a necessary basis for a coordinated transportation system for the Nation. The analysis is confined to railroad consolidation because of the relative ease of adjusting the organizational structure of other modes.

The history of the national consolidation policy and plans proposed are reviewed. This history reveals that the interest in general consolidations since 1920 has shifted in emphasis from advantages in regulation to advantages in expenses and, lately, advantages in service performance and resulting net revenue potential and credit standing. The advantages and the obstacles and objectives are analyzed. However, the conclusion is reached that the lack of interest of railroad management has been the principal reason for the 40 years of meager progress. There is, therefore, a lack of adequate incentive and the solution of the problem accordingly is in providing adequate incentive. The public interest in maintaining privately owned railroads as a basic element of an efficient transportation system and one that will provide for economic growth and national defense requires early

action.

The guiding principles for a consolidation policy are presented. Emphasis is given to the desirability of industry initiative with Government cooperation and aid. The public interest requires a regional

or national approach beginning with the northeast area where conditions of the industry are acute.

The proposed legislation should assign the task of developing detailed consolidation policy to the Department of Transportation if established promptly, otherwise to a special agency created for the purpose. Action should seek to insure industry collaboration through a special task force and time limits should be set for positive action.

CHAPTER 5. INTERCITY RAIL PASSENGER SERVICE

This chapter examines at length the declining trends of rail passenger service since the 1920's and attempts to differentiate between the need of this service and the desire therefor. It also differentiates between intercity and commuter rail service which are distinct problems. It concludes that there is but little real need in most of the United States but that there is indication of desire sufficient to justify investigation in depth to determine those city pairs that probably could support rail passenger service provided that service was redesigned to meet today's conditions. It is further concluded that the rail passenger business is still big business today and too much of an asset to discard lightly, the gross annual revenues still amounting to over $1 billion annually.

An extensive cross section of national opinion regarding rail passenger service is quoted and a possible approach to a successful rail passenger service is suggested along the line of a single rail passenger corporation operating on existing facilities over routes chosen by competent market survey.

CHAPTER 6. THE LONG AND SHORT HAUL PROVISION (SEC. 4) OF THE INTERSTATE COMMERCE ACT

This chapter was written as a separate document because of the specific requirements of Senate Resolution 244. The subject is properly a part of overall pricing policy and is treated as such in part VI of this report.

The conclusions reached elsewhere regarding cost related pricing, when implemented, will in time render the fourth section controversy moot. These conclusions do not admit of departures from sound economic pricing merely to meet competition.

In the interim it is recommended that the fourth section be reinstated as written prior to 1957 and that exception thereto be restricted to those cases in which it is clearly established that relief will result in a national benefit or that it is justified because of cost considerations.

CHAPTER 7. ADEQUATE TRANSPORTATION SERVICE IN RURAL AREAS

The amount and adequacy of public carrier transportation service is declining in many rural areas. These services operate between points in rural areas and between these areas and major cities. Railroad passenger and freight services on branchlines have been reduced in all parts of the Nation and it is clear that this trend will continue as the railroads concentrate on their proper economic role as large-scale transporters. In New England and the Middle West, public bus and

truck service has been importantly reduced. Combined with the rail reductions this has left many large areas with no public transport

service.

The primary causes of these service declines are reductions in rural population, basic changes in raw material and distribution economics and, most importantly, the rise of private auto and truck transportation. Public carrier traffic, which is now divided between too many carriers and service organizations has declined so greatly due to the above causes that discontinuance has become the only attractive alternative. Since private transport is clearly going to be the dominant form in rural areas in the future, the question is, What policies are needed to maintain some amount of public service?

Federal policies

(1) Require the Post Office to use public highway carriers and relieve it of the necessity for buying transportation only through bid procedures. This has caused most highway mail revenue to go to private contractors.

(2) Rationalize Federal laws and regulations on mail, express, and small shipments traffic in order to reduce duplication of services and encumbering regulations, and concentrate the traffic in the smallest number of operating entities.

(3) Conduct a census of transportation so the facts about rural transportation will be available. No really informed decisions can be made at present.

State policies

(4) Remove burdensome and punitive regulation, especially detailed rate and service regulation. The public carriers are fighting for their existence and must have all possible flexibility.

(5) Many of these problems are regional rather than pertaining to a single State and the State commissions involved must group together in planning to deal with them as has been done to some extent in New England.

Carrier policies

(6) Those carriers with a stake in rural service must aid in the pooling and concentrating of efforts now beginning. Combination freight and passenger service in a single vehicle is needed in the sparser areas. Mail and express should move with other traffic to the maximum extent possible. The total available revenues must be pooled in the fewest operating companies if service is to continue in many rural areas.

PART VI-TRANSPORTATION PRICING

This part contains an analysis of the implications of changing conditions for transportation pricing. The analysis indicates that present policy affecting the regulation of rates requires congressional attention if it is to contribute effectively to all of the transportation goals now enumerated in the statement of national transportation policy.

Part VI consists of six chapters. Chapter 1 is a brief introduction stating the purpose and main conclusion of this part. Specific recommendations for policy are contained in chapters 2 and 6.

Chapters 3-5 contain: (1) a summary of existing rate policy; (2) a discussion of paradoxes created for present policy by existing conditions in transportation; and, (3) an analysis of how the recommendations made in chapter 6 will help to resolve these paradoxes. Stress is laid on the implications of recent transportation developments for minimum rate policy. It is this aspect of rate control which has become of predominant importance with the development of a diversified, competitive transportation system, and it is in connection with problems of minimum rate policy that the most troublesome paradoxes exist for rate policy today.

The general conclusion of this part is that greater emphasis should be placed upon cost as a factor in determining rates. For when rates are properly related to cost the benefits of a diversified transportation system composed of competing carriers can be realized, and difficult problems of intercarrier (both intermodal and intramodal) rate relationships can be resolved.

Undue emphasis on the right of carriers to compete for traffic by cutting rates must be avoided for this may distort rather than help to establish proper rate-cost relationships. Compensatory floors should be established for competitive rate cutting. The proper floor should be the long-run marginal cost of providing the service. Present definitions of long-run out-of-pocket costs, such as that used in the ICC rail form A, are inadequate measures of appropriate long-run marginal cost. A cost finding program will be required to define and determine appropriate long-run marginal costs for regulatory purposes.

Appropriate "long-run marginal cost" for minimum rate regulation should correspond to the economist's definition of this term. This provides for an allowance for a return sufficient not only to cover the avoidable costs of providing service, but also to defray all appropriate fixed and indirect costs, thus insuring continued production. Properly interpreted, "long-run marginal costs" is not unlike “fully distributed cost." But its determination involves defferent concepts and procedures than those used in the determination of fully distributed costs for competitive firms by conventional accounting techniques. It presupposes a regulatory framework with effective controls not only over rates but also over entry of carriers and supply of transportation service. Because of this, determination of long-run marginal costs of producing transportation service can be treated independently of the rate which is charged.

Sound long-range objectives of rate policy should include

(1) the right of carriers to reflect appropriate costs in their rates;

(2) the economist's concept of long-run marginal cost as the appropriate cost concept;

(3) restraint of competitive ratemaking when it distorts appropriate rate-cost relationships, and the rationalization of competitive relationships on the basis of long-run marginal cost relationships; and

(4) attempts to promote desirable forms of coordinated transportation service between the various modes by appropriate modifications of ratemaking practices.

In a period of change such as that through which the transporation industry is now passing, it is necessary to establish goals as guidelines for specific policy. The emphasis in this report on the desirability of policies which produce rates reasonably related to costs is intended to provide such a guideline. It must not be expected and it is not here advocated that specific rate policy under present conditions can or should produce rates closely related to long-run marginal costs. What is to be expected is that present policy will encourage changes in rates which will move in the direction advocated. Specific rules for ratemaking which should help encourage the development of rates suitable for modern transportation conditions are listed below. The aim of regulation should be to insure that freedom to make competitive rates tends to produce rates reasonably related to long-run marginal costs as defined in this part. The following specific rules for ratemaking should help to produce this result:

(1) Rate changes which result in rates that depart further from fully distributed costs than at present may be presumed to produce rates unreasonably related to costs, unless specific evidence can be presented to demonstrate that such rates are reasonably related to long-run marginal costs.

(2) The long and short haul provisions of section 4 of the Interstate Commerce Act should be extended to apply equally to all modes. Relief there from should not be extended to permit meeting the competition but only when justified on the basis of cost considerations.

(3) No carrier should be required to price his services above fully distributed cost or long-run marginal cost, whichever is higher, to protect the traffic of another carrier.

(4) In cases involving intermodal competition, pricing below the full cost of providing service by one mode which forces carriers of other modes to price below fully compensatory levels shall be presumed to be unfair, unless it can be demonstrated that such prices are not below long-run marginal costs.

(5) Divisions of joint rates should be reasonably related to the fully distributed or long-run marginal costs of all carriers providing the service, and rate policy should encourage service over routes which will minimize the total cost of providing the service.

PART VII-ADDITIONAL SPECIFIC MATTERS

CHAPTER 1. TAXATION OF WAY

Studies show that railroads and oil pipelines are more heavily taxed than motor, air, or water carriers, in major part because State and local property taxes on rights-of-way are not exacted from the other carriers. Accordingly, the ad valorem rightof-way property tax was selected for special study because of the direct and unique tax burden on rail and pipelines resulting therefrom. The Federal Government is virtually precluded by the Constitution from levying property taxes, however, State and particularly local governments derive substantial revenues from this course. Most railroad and pipeline property is centrally assessed although local assessment is still extensive. Despite State laws requiring uniform tax treatment, railroads and pipelines are discriminated against, as com