Mr. WEISS. Yes, sir. As I go on

Senator LAUSCHE. Why do the railroads have that high fixed cost? Mr. WEISS. Because of their fixed plant and equipment, railroad stations, trackage, locomotives, cars, things of that character.

Senator LAUSCHE. Yes, sir. And those things, the competing modes of transportation do not have, is that right?

Mr. WEISS. No, sir; because a truck which is the comparable motive equipment in the motor carrier industry is less expensive than an engine or cars.

Senator LAUSCHE. All right, good enough.

Mr. WEISS. Motor carriers, on the other hand, have high direct or variable costs—about 90 percent of total expenses and relatively slight overhead, in sharp contrast to the railroads, and therefore have little room for price competition. Stated differently, the large proportion of out-of-pocket expenses provides a very high floor to the rate level of the motor carrier.

The railroads could establish rates on competitive traffic at some point above approximately 70 percent of their total costs. The truck rates could fall to only a point above 90 percent of their total costs. Because of these cost relationships, the railroads have a distinct advantage over motor carriers in setting rates on a cost-of-service basis.

Senator LAUSCHE. May I interrupt again?

Senator SMATHERS. Yes.

Senator LAUSCHE. If the railroads have an advantage in establishing competitive rates because of that excessive plant maintenance, terminal stations, railroad beds and railroad right-of-ways, doesn't it follow that railroads are at a distinct disadvantage with other modes of transportation because of that very fact, in the first place? Mr. WEISS. In terms of their cost structure?

Senator LAUSCHE. Yes. That is they have 20 or 30 percent which is their capital investment which other modes of transportation doesn't have? Isn't that a disadvantage?

Mr. WEISS. Yes, sir.

Senator LAUSCHE. All right, proceed.

Mr. WEISS. There is a practical significance to this; namely, that in the competitive struggle for tonnage, increased resort will be had to rate cutting. This is not merely theoretical. Based on his service with the ICC, Commissioner Howard Freas states:

When a large part of the expenses are constant, there is an advantage from an individual carrier's standpoint in hauling traffic that pays less than the full cost of service rather than letting a rival carry it. As returns are reduced below full costs in an effort by some carriers to gain an advantage, others retaliate and the fight is on. Unrestrained, it will proceed until the public right to adequate and dependable transportation has been destroyed. Meanwhile, in order to obtain additional revenue, less vulnerable traffic will be subjected to rate increases.1

With this as background let us examine the rate-making proposals in S. 3778 which reads:

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.

1 The Future Role of the Government in Regulating a Highly Competitive Transportation System; talk before National Industrial Traffic League, Chicago, Ill., November 14, 1957.

Thus a rate change proposed by a railroad would simply have to meet the test of whether it might hurt a competing railroad. The effect on other modes of transportation would not be within the purview of the ICC.

It may sound pretty, but stripped of official language it spells out a railroad license for rate war.

For railroads by virtue of their high percentage of fixed costs always need volume. To get it they can always cut rates-if allowedon competitive products while financing these operations out of their noncompetitive traffic. In other words, such a policy would allow out-of-pocket ratemaking on selected products which would return the entire transportation industry to the pre-1920 era of ratemaking. The Federal Coordinator of Transportation, 20 years ago, said:

This out-of-pocket cost theory is, it may be said, an element of great danger to the entire transportation industry, particularly as competition becomes general rather than incidental.

Senator SMATHERS. That was 20 years ago, before the 1940 act was passed?

Mr. WEISS. Yes, sir. But you hear earlier the definition of compensatory as being nothing more or very, very slightly above out-of-pocket costs. I said earlier, sir, in answer to one of your questions it depends on what you mean by compensatory.

Senator SMATHERS. Right. But the statement was made, nevertheless, prior to the Congress adopting the 1940 Act.

Mr. WEISS. Yes, sir.

Out-of-pocket rate making, inevitable if the rate making proposals of S. 3778 were accepted, would have this result:

The railroads because of high fixed costs would be able to carry traffic at a fraction of its full cost, while motor and other carriers, with most of their expenses variable, could not operate for long without recovering their full costs. They would be unable to compete for the traffic.

Every member of this committee knows that the railroads have practiced this form of rate war in the past.

As a matter of fact, the gentleman from the Seatrain demonstrated that to you. Given the opportunity, they will wage such rate wars again.

Think of the position railroad management would be in to start, fight and win a rate war with other carriers if they are not only given permission to compete on this unfair basis but are actually encouraged to so compete and are financed by special legislation which would not only relieve them of responsibility in their areas of financial lossby that I refer to passenger traffic-but would actually subsidize the cost of such unfair competition by the Government loans made available by section 20 (d) of S. 3778.

The result would be inevitable.

And such a rate war would be destructive and disastrous to the trucking industry.

It would harm our members whose livelihood depends on a healthy and thriving trucking industry.

And finally, and most important, it would be harmful to the general public interest.

Senator SCHOEPPEL. I would like to ask you at this juncture this question: You say it would be disastrous to the trucking industry. Do

you go one step further and say that it would be disastrous to the water carriers?

Mr. WEISS. By the same token, sir, but I appear here in a sense almost as a special pleader for the trucking industry, which employs our members.

Senator SCHOEPPEL. Yes.

Mr. WEISS. I would extend that, sir, to other modes of transportation.

The entire history of both rail and truck transportation indicates the necessity to consider the behavior of rivals; that is, other modes. It indicates that rate cuts will be met promptly. Only the true regulation of rates can hold rate cutting in check. And as previously shown, no such check is provided in the proposed bill; in fact the checks now present would be removed.

Senator SMATHERS. What checks-never mind, go ahead.

Mr. WEISS. If there is a rate at which rate cutting will cease without the intervention of agreement or regulation, the history of the motor carrier or railroad industries does not seem to have disclosed it.

If one places dependence on the "survival of the fittest" policy, he runs the risk of a return to the discriminatory and monopolistic conditions which brought about the original act to regulate commerce. Yet by removing the ICC's present authority to fix rates which take into account the entire transportation picture, the proposed bill paves the way for destructive competition. It is just as important to restrain destructive competition as it is to restrain monopoly. The proposal in S. 3778 is only a restatement of the railroads' theory of "dynamic competition" which only 2 years ago they sought to achieve substantially the same goal; stripping the ICC of effective ratemaking power.

Dynamic competition eliminates the unsuccessful competitor, and monopoly takes its place. Then prices invariably rise when the successful competitor has no rival.

In the 1930's did the railroads seek to relax controls or regulations in order to meet truck competition? On the contrary, they sought to extend controls to the truck industry. They had come to like the stability which ICC regulation had brought to the rail industry. It was the railroads who urged that the motor carriers be allowed to enjoy the benefits of Federal regulation to the same extent as the rails. Yet now they seek a return to a system which will lead to an unstable freight rate structure.

This commitee ought to ask itself: Has the ICC denied the railroad a rate reduction unless it was so low that it would destroy the transportation system of our Nation?

Here are the facts: Interstate Commerce Commissioner Anthony F. Arpaia has publicly stated in a talk to a railroad audience that railroads file an average of 3,000 rate changes every working day.

In 1956, out of about a million such rate changes, the ICC, after protest by other transporters, adjudged as unlawful only 12 such changes. These involved eleven one-thousandths of 1 percent of the total railroad revenues for that year.

In the words of a railroad president, Mr. Perry Shoemaker, president of the Lackawanna Railroad, as quoted in the February issue of Fortune: "All the railroads have done for 25 years is bellyache."

Railroad freight rates authorized by the ICC have increased 107.7 percent since June 30, 1946. Does this forecast lower rates by the rails on traffic which is essentially rail borne? Isn't it logical to assume that rate cuts are intended to drive out competition? Will not this rate proposal transform freight transportation into a private preserve for the railroads?

May I call your attention to the 71st annual report of the ICC which covers the fiscal year ended June 30, 1957. Table 6 on page 156 has statistics on operating revenues, operating expenses and taxes of class I line haul railroads, 1946 to 1956. May I just read you the freight revenues for the two terminal years as shown by this table.

In 1946 the freight revenues were, rounding off the figures, $6 billion, in 1956 the freight revenues were, rounding off the figures, $9 billion, an increase of 50 percent in 10 years for this industry in their freight business. And another significant figure for the same period of time

Senator SMATHERS. What is that date now, from what to what? Mr. WEISS. 1946, freight revenues, class I line haul railroads, rounding off the figures, $6 billion in 1946, $9 billion in 1956. An increase, sir, of 50 percent.

The ratio of total operating expenses to total operating revenues for these same class I line haul railroads, declined from 83.35 percent in 1946 to 76.85 percent in 1957.

Senator SMATHERS. Of course, you don't mention

Mr. WEISS. 1956, sir, excuse me.

Senator SMATHERS. You don't mention the fact that they lost $700 million in passenger service.

Mr. WEISS. Excuse me, Mr. Chairman. There is a proposal with respect to freight, not with respect to passenger. I said in the introduction of my statement there are many elements in the Committee's proposal and in this bill which the Teamsters would support, including, I said, specifically, the disencumbrance of the passenger deficit. I said that, sir.

Senator LAUSCH. What are the figures, the comparative figures with regard to the trucking industry and the barge line industry?

Mr. WEISS. Excuse me. Mr. Arpaia, does this report include these figures?

Mr. ARPAIA. I am not sure what portion of the report you have, but I think it does.

Mr. WEISS. Excuse me, sir. Rather than delay the proceedings, may I furnish this to the Chairman of the Committee or to the counsel ?

Senator LAUSCHE. Yes.

Senator SMATHERS. Very well.

Mr. WEISS. Thank you, sir.

Senator SCHOEPPEL. I would like to ask Mr. Weiss this question, where he makes reference at the top of page 8 to what Mr. Arpaia has said, and before he discussed what Mr. Perry Shoemaker has said. Do not the motor carriers have relatively the same rights to ask for increases in their rates?

Mr. WEISS. Or decrease, yes, certainly.

Senator SCHOEPPEL. Yes.

And that has been a fair percentage granted in relation to their applications, has it not?

Mr. WEISS. Frankly, sir, I don't know what the percentage is with respect to motor-carrier rates. But if this is the percentage, not to be facetious, what is the shooting all about?

Senator SCHOEPPEL. I appreciate that. But I was wondering, in fairness, the trucking industry does have accordingly the same right? Mr. WEISS. Yes, sir.

Senator SCHOEPPEL. All right.

Mr. WEISS. Whether you take it in terms of the number of instances or the revenue which is accounted for in these instances, they are infinitesimal, sir.

Senator SMATHERS. I might add this: are you familiar with the figures which showed the rate of return on net investment of the railroads?

Mr. WEISS. No, sir. I have enough to do with the trucking industry, sir.

[Laughter.]

Senator SMATHERS. Well, despite their increase from $6 billion to $9 billion, I presume you are aware of the return on net investment having this dropped. Whether or not this is bad management, whatever it is, we are not trying to defend them on that.

But I think it would be interesting to observe that their rate of return on net investment was 3.29 percent in 1956, the year that they had a return of some 9 billions of dollars.

If I remember the figures on the water carriers, they had a net return of some 12 percent, and so on. But we can hassle these sta

tistics back and forth.

Mr. WEISS. Let my position be clear, sir. We understand the plight of the railroads.

Senator SMATHERS. Right.

I think your statement is good, where you say "We don't think in order to try to help them you should destroy the other ones." I think there is something to that, right there.

But the question is: "Do we destroy?"

Mr. WEISS. That is the question.

The teamsters union cannot subscribe to a theory of saving the railroad industry by destroying the trucking industry. The railroads are important-we grant that-but not that important.

The real problem is that the railroad managements are as inflexible in their operations, in their seeking solutions of their own choice, as the very steel in the rails upon which their trains operate.

We need all forms of transportation, competing with each other under fair and equitable ground rules, to produce the lowest rate consistent with the best service.

Competition exists in today's transportation system, but it is competition under fair and equitable rules for all forms of transport. On this very point, the committee may be interested in a staement by Thomas L. Preston, General Solicitor, Association of American Railroads, before the House Committee on Interstate and Foreign Commerce on April 24, 1953-just about 5 years ago.

Mr. Preston, speaking on behalf of the railroad industry was testifying in opposition to H. R. 3203, the trip-leasing bill:

The basic consideration which leads the railroads to oppose this bill is their conviction that its passage would in substantial measure defeat the national transportation policy declared by Congress in the Interstate Commerce Act,