Question: Which rate makes the biggest contribution to net?
Answer:

Mr. HALE. May I interrupt at this point?
Mr. ROBERTS. Čertainly.

Mr. HALE. The only difficulty I see with that is: How can you tell how much traffic a given rate is going to attract?

Mr. LANGDON. It is a trial-and-error proposition to a certain extent. There is judgment involved and it is a dynamic process, this ratemaking, and undoubtedly we make mistakes occasionally.

What you are groping for all the time is that rate which will maximize your net revenues.

Of course, in order to arrive at that answer-you may never arrive at it perfectly-but to arrive at that answer you have to take into account the volume which is going to be affected by that rate.

It is a question, as I say, of trial and error, groping toward the best

result.

This is just a simple statement of the principle. It is awfully hard in many cases to apply it and to maximize net revenues, but that is always the objective.

So to answer your question specifically, sir, you cannot be certain. You just simply have to do the best you can in moving toward that objective.

And the important point that I really want to make is that from a ratemaking standpoint, particularly in the case of the railroads, the use of fully distributed cost is a very serious mistake, and as authority for that statement I would like to quote the Interstate Commerce Commission's own cost section. I am reading now just a few sentences from statement No. 4-54, November 1945, at pages 20-21 of the statement by the cost section of the ICC:

Prices are never based on an arbitrary apportionment of the constant or fixed expenses. Indirect expenses never burden all traffic proportionately, ton for ton, irrespective of the ability for traffic to pay.

Such an approach indeed would be contrary to the principle that low unit contributions to the constant cost may yield increased aggregate contributions as a result of added volume.

I should like to read from another statement of the same section of the ICC which came across my desk just a week ago:

The fully distributed costs in this study refer to the sum of out-of-pocket cost and the statistical ton and ton-mile apportionment of the cost as described above. In respect to the fully distributed costs, a word of caution is necessary concerning their use in ratemaking. Rates based solely on fully distributed costs shown herein would ignore one of the greatest principles of ratemaking. That is, that of differential charging. If rates were made without recognizing differential charging, the result would be reductions on high-grade traffic and concomitant increases on low-volume traffic.

Historically, rates reflect the continual interplay of economic forces so as to permit all commodities to move with the most reasonable freedom and at the same time contribute as much as possible to the transportation burden.

So that this reasonably compensatory rate that we want to establish may in many instances represent a level that is above our so-called fully distributed cost, but in other instances, depending upon the volume and in an effort to maximize the contributions to the net revenues, it may very well be below fully distributed costs. What is a fully distributed cost is a wholly arbitrary computation. It represents your variable costs (the costs that go up and down with traffic) plus the arbitrary apportionment of overhead, the constant expense. You can use any one of several methods for apportioning the constant expense to traffic. It produces widely varying results so far as your fully distributed costs are concerned.

As the Commission's cost section says, it has no place in ratemaking, the objective always being to maximize your net revenues. I repeat that that result can often, depending on volume, be accomplished by a rate that is less than fully distributed cost, but always above your variable cost.

With your permission, I would like to read a brief sentence from a report of a royal commission in Canada where they had exactly the same problem.

I am reading from page 274 of the Royal Commission on Canada's Economic Prospects, a chapter having to do with transportation:

Any traffic which meets its long-run, out-of-pocket cost and makes some contribution to common overheads, no matter how small, should be carried by the carrier concerned. In this way overheads on the remaining traffic are reduced, all shippers are better off, and the most efficient use of transport resources is promoted.

That is precisely what we should like to be able to do insofar as our competitive ratemaking is concerned.

And I would like to close with a word about discrimination among shippers.

In no way do we want to change or have affected the Commission's control over our rates from the point of view of discriminatory practices.

In the ordinary case, if we are meeting competition between two points, and another shipper has the same competitive situation, we are bound to make the same adjustment for him.

So far as truck competition is concerned, that rule is largely unnecessary because truck competition exists everywhere, and today in the ordinary case if we are meeting truck competition, we lower for the whole area the rate level on a particular commodity, so that every town, every shipper, small or large, throughout the competitive area or region of the United States, and often throughout the entire country, if the competitive situations are similar, will have the same rate level.

So that the question of discrimination among shippers affected by truck competition that we are trying to meet is, in most instances, today, largely moot because we provide a rate level for the entire territory which, on a mileage basis, is substantially comparable. It varies, in other words, with miles with a recognition and tapering for the longer distances, the old theory of making rates since 1887.

In the case of water competition, the situation is somewhat different. There, of course, the competition exists between specific points that are located on the river.

In the ordinary case when the railroad undertakes to meet that competition or to put in a rate which will improve its net revenues by sharing in that competitive traffic, the railroad itself is not causing discrimination. The discrimination is already there.

The existence of water transportation, in a sense, is the discrimination which the railroad, if it can do it on a compensatory basis, simply wants to meet.

Once we have met it, once we have been successful and actually do share in this water competitive traffic, and thus get a contribution to our net revenues from that source, it follows, of course, that the situation of the shipper who is inland is better, because otherwise, if we cannot meet the competition and get contributions to our net revemues from those competitive situations, the alternative is to put the entire transportation burden on the shipper who is noncompetitive, if there is such a thing nowadays.

That is a well-recognized principle.

We have a certain transportation burden to meet for which we have to find the revenues. To the extent that we can obtain net revenues by participating in competitive situations, it follows that the revenues that otherwise would have to be obtained from the noncompetitive situations are reduced.

So that, actually, while this may seem paradoxical, the meeting of competition is to the long-range benefit of the inland shipper, because otherwise he is going to have to pay the entire bill, and this is true even though he does not participate in this lower competitive rate level.

Now, if in doing that we discriminate unjustly we do not want in anyway the Interstate Commerce Commission's jurisdiction to be curtailed.

If this inland shipper, despite the picture I have painted to you, still feels he is hurt, he should have an unqualified right to complain to the Interstate Commezve Commission, and there Eave been some bistances where in order to take care of the discrimination against the mand shingen, we have had to either withdraw or modify our competitive pre proposes.

We give that protection to the shippers, an overriding effect, and It should be giver an overriding afect.

But I had a three ne-it beck a long time, but I did it-I have read every size ICC ferson on this internode competitive rate problem, starting in bend it is quite remarkable that while there in stres where stumpers have intervened and complained of dis2PM, sImidese cases, it is nec a major problem.

As I say, there larg been ustanees when shippers have come in sd created that the competitive rate that a railroad wanted to esall'st wed SCULAR rst them and the Commission has Per found for ze gins Diem, but at least the stirper had this kor ve is serimitation Leged Eserimitation, could be ind ad het geven must ded

Bet des ses lang not been very many. I think one reason is

De as of the trick competition is explained before, the is long remarq” y provided the competitive level throughout Pole 12% Y a the heart there would be to discrimination.

I think in the meeting of water competition that there have been a few instances where we have been guilty of discrimination, but only a few, and I think the reason there again is that these shippers realize that unless we can participate in this competitive traffic we are going to have to give the entire transportation burden to them to sustain. I think, in other words, they are realistic. I think that completes my statement, sir.

(The formal statement of Mr. Langdon is as follows:)

STATEMENT OF JERVIS LANGDON, JR., IN SUPPORT OF THE AMENDMENT TO SECTION 15а OF THE INTERSTATE COMMERCE ACT AS INCORPORATED IN S. 3778 AS SECTION 5

My name is Jervis Langdon, Jr., and I am general counsel of the Baltimore & Ohio Railroad Co., with headquarters at Baltimore, Md. I appear here today, however, for the Association of American Railroads. That association is a voluntary, unincorporated organization including in its membership railroad companies operating more than 95 percent of the total railroad mileage in this country and having operating revenues which are more than 95 percent of the total railroad operating revenues.

The railroads for which I speak support the suggested amendment to section 15a of the Interstate Commerce Act (the ratemaking rule) as proposed in the report of the Subcommittee on Surface Transportation of the Senate Committee on Interstate and Foreign Commerce, pages 12-13. This amendment is set forth in section 5 of S. 3778, as follows:

"SEC. 5. Section 15a of the Interstate Commerce Act, as amended, is amended by inserting after paragraph (2) thereof a new paragraph (3) as follows:

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(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 purpose of this statement will be to show that the enactment of this: amendment would not merely carry out the intent of the Congress when it passed the Transportation Act of 1940 (as well as the Motor Carrier Act of 1935) but is required to put the Interstate Commerce Commission back on the track that was intended at that time. In 1945 the ICC recognized that intention when it announced the principle of the Automobile Case, infra, reading as follows:

"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." Since 1945, however, there have been deviations from this principle, and the amendment is thus made necessary.

HISTORICAL BACKGROUND FOR THE PRINCIPLE OF THE AUTOMOBILE CASE.

The principle of the decision of the Interstate Commerce Commission in the Automobile Case, 259 I. C. C. 475, 538 (1945), finds its roots in the Motor Carrier Act of 1935 and the Transportation Act of 1940. No other principle can be squared with the action taken by the Congress in enacting this legislation.

When the regulation of motor carriers was being seriously considered in the early 1930's, the opposition concentrated on the argument that the railroads were the chief parties in interest and that, with a "railroad-minded ICC," they would' seek to have motor carriers regulated for the benefit of the railroads, not the motor carriers. To guard against any such possibilities, the Congress, in enacting the Motor Carrier Act of 1935 (now part II of the Interstate Commerce Act) provided the motor carriers with their own "declaration of policy and delegation of jurisdiction to the Interstate Commerce Commission" which made clear the "policy of Congress to regulate transportation by motor carriers in such manner as to recognize and preserve the inherent advantages of, and foster sound economic conditions in, such transportation * * * develop and preserve a highway transportation system properly adapted to the needs of the commerce of

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the United States and of the national defense.

"The Congress went further and, in formulating a ratemaking rile for moter carriers, instructed the Commission in the exercise of its power to fix just and reasonable rates, to "give due consideration, among other factors, to the inherent advantages of transportation by such carriers, to the effect of rates upon the movement of traže by such Carriers, * * * * And finally the Congress added the following proviso to the antipreference section in the Motor Carrier Act.

“Provided, however. That this paragraph shall not be construed to apply to discriminations, prejudice, or disadvantage to the trafe of any other rrier of whatever description."

Five years later came the Transportation Act of 1940, and the opponents of water-carrier regulation employed the same argument. They were convinced that, with railroad support, the ICC would be inclined to overlook the inherent advantages of water transportation and regulate the water carriers in the interest of the railroads. There was some sympathy for this point of view in the Congress. W. at these Members of Congress insisted upon was assurance that rates of water carriers would not be controlled-under the guise of developing, co ordinating, and preserving a national transportation system" in accordance with the national transportation policy-in the interest of the railroads, and they demanded spec.fi: provisions which would require the Commission to forget about other forms of transportation when passing on rates for water carriage and to guard the inherent advantages of that form of transportation.

But not only did the Members of Congress demand such assurances, they received them in the form of specific statutory provisions."

At the time the Transportation Act of 1940 was in conference, there was added to the ratemaking rule in each of the three parts of the act the italicized phrase quoted below:

1 See. 202 (a), Motor Carrier Act of 1935.

* Sec. 216 (1), Motor Carrier Act of 1935. Emphasis ours. At that time, the ratemaking rule which governed the railroads (see. 15a) provided that in the exercise of the Commission's power to prescribe just and reasonable rates it "shall give due consideration, among other factors. to the effect of rates on the movement of traffe." The addition of the phrase "by the carrier or carriers for which the rates are prescribed" came later with the Transportation Act of 1940.

*Sec. 216 (d), Motor Carrier Act of 1935. A similar proviso was added to see. 3 (1) which is the antipreference governing the railroads in the Transportation Act of 1940.

The bill that ultimately became the Transportation Act of 1940 was S. 2009, which was first passed in differing versions by both Houses in 1939, but not passed in its final form until 1940.

The following appears as footnote 7 to the dissenting opinion of Mr. Justice Black in Interstate Commerce Commission v. Inland Waterways Corp., 319 U. S. 671 (1943), at p. 655:

"Legislation similar in purpose to the 1940 act was considered by congressional committees in the 74th and subsequent Congresses. Opposition to legislation giving the Commission authority over water transportation came from representatives of the water shippers. A typical protest was made by Cleveland A. Newton, general counsel. Mississippi Valley Association, in the hearings before the Committee on Merchant Marine and Fisheries, House of Representatives, 74th Cong., 2d sess., on H. R. 5379: This bill if enacted into law will place water carriers along the coast and upon our inland rivers under the absolute domination and control of the Interstate Commerce Commission. That Commission was created to regulate, conserve, and control railways. It is a railway-regulating agency. It naturally has the railway viewpoint, and past experience convinces us that the Commission, as now constituted. is railway-minded and that it would not be in the public interest to place water services under its domination and control. We have observed the performance of the Commission in the past, under a comprehensive declaration of policy enacted by Congress, and that experience, we regret to say, has not inspired confidence.” ” Hearings. p. 471.

Sce. for example, the minority views of two members of the House Committee on Interstate and Foreign Commerce as accompanying the majority report No. 1217, Transportation Act of 1939, 76th Cong., 1st sess.. at pp. 29–31.

Mr. LUCAS. *** Under the bill, as I understand it. the Interstate Commerce Commission would have the power, and it would be its duty, to fix rates on the Illinois River with respect to the transportation of that wheat and corn. Would it be possible for the Interstate Commerce Commission to fix the rate the same as the railroad rate from that point to St. Louis?

"Mr. WHEELER. Not if the Commission does its duty, because the bill specifically provides that it must take into consideration the inherent advantages of the water carrier. Everyone agrees that goods can be shipped more cheaply by water than by rail." 84 Congressional Record 5879.

The following Senators and Representatives, among others, either required assurance that the Commission would not discriminate against water carriers or expressed the conviction that under the statement of policy, the Commission would be unable to discriminate against water carriers: Senators Austin, Clark of Missouri. Connally, Ellender, Lucas, Miller, McNary, Norris. Peprer. Shipstead, Truman, and Wheeler: Representatives Bland. Bulwinkle, Crosser. Culkin, Halleck, Lea. Pierce of Oregon, Sparkman, and Wadsworth. s Pt. I. sec. 15 (2); pt. II. sec. 216 (i); and pt. III, sec. 307 (f). See S. Rept. 433, 76th Cong., 1st sess., May 16, 1939, at pp. 2-3.