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Other aspects of the rail case are interesting. One refrain running through their massive public relations propaganda program—and I read it in the Saturday Evening Post editorial just last night, this week's issue, has been—and I would like to make this point because I think it bears on what you gentlemen do in freeing competitive practices in transportation beyond where they are In OW . Cutthroat competition, not transportation monopoly was the reason for the enactment in 1887 of the first act to regulate commerce. In 1885 Mr. Charles Francis Adams, president of the Union Pacific Railroad, speaking on the subject of the effects of railroad competitive practices, had this to say: It may produce good in the end ; but railroad competition, as necessarily practiced, causes for the time being the wildest discrimination and utmost individual hardship. That is, under its operation you will always find certain points when there is a war of rates going on, which have enormous advantages conferred upon them, which advantages are not and cannot be extended to other points. The point, therefore, which is not influenced by the war of rates suffers terribly. Its business is destroyed. How the business community, under the full working of railroad competition, can carry on its affairs, I cannot understand. I had not been able to understand how it could do it before. I became president of a railroad and I do not understand it now. The businessman never knows what railroad rates are going to be at other places, or at different times. He cannot sit down and say, “I can count upon such a transportation rate for such a period of time, and make my arrangements accordingly.” He has to say, “I cannot tell today what the transportation rate is going to be tomorrow, either for me or for my competitor.” This must be so just as long as uncontrolled competition exists. It cannot be avoided. The next year, a Senate committee reported on the situation and in its report of 1886, known as the Cullum report, stated: The paramount evil chargeable agains the operation of the transportation System of the United States, as now conducted, is unjust discrimination between persons, places, commodities and particular descriptions of traffic. * * * The evidence is conclusive that personal favoritism between rival shippers first took place " * * The indiscriminate and cutthroat competition of the carriers * * * offered a golden Opportunity to those in search of secret and preferential rates. Mr. Chairman and gentlemen of the committee, control of destructive competition has been a principal reason not only for the original act but for each of its major revisions. If this Congress should free the railroads so as to enable them to engage in such competition, it would be taking a step diametrically opposed to the action of every previous Congress which has studied the transportation problem. And let me here repeat that the problem of transportation regulation never fundamentally changes, even though the agencies furnishing the transportation change. For hundreds of years it has been found necessary to regulate rates for the protection of the economy and it has been necessary to place restraints on competition so that there might be a balanced transportation system in which the new may participate with such of the old as may still have its place in the economy of the day. Now, another constant refrain in the railroad tune is that the Interstate Commerce Act is obsolete, and I think I read that again last night. Since its original enactment it has been amended more than 144 times and has been subject to major revisions many times. The last major revision took place in 1940 when the water carriers were

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brought under regulation and the national transportation policy was adopted. That national transportation policy, to which the railroads fully subscribed, is perhaps the finest expression of its kind in regulatory history. It clearly sets forth the salient objectives of proper regulation. The competitive_rate proposal now before you runs counter to that declaration. In his book, The National Transportation Policy and Intercarrier Competitive Rates, by Prof. S. C. Oppenheim, now of the Michigan Law School and published in 1945, he had this to say:

It is obvious that if the Commission were to confine itself to a consideration of the factors applicable only to rail transportation when it is called upon to consider reduced rail rates, and if it were to take the same approach in considering reduced rate of motor carriers or water carriers, each part of the act would be treated as a compartment completely insulated from every other part of the act. No conception could be further removed from the clearly expressed legislative intention. Such an interpretation is the very negation of the declaration of national transportation policy. As already shown, the Whittington amendment has the legal effect of repeating the declaration of policy in every specific provision of the act. By that process, it is a major premise in every interagency rate coordination case that the Commission is compelled to consider the influence of the rates of the proposing carrier on the traffic of the rival forms of transport.

Now, in conclusion, Mr. Chairman and gentlemen, we submit that the current situation contains no requirement for a change in the ratemaking power of the Interstate Commerce Commission; that the Interstate Commerce Commission is not, as alleged, following an umbrella system of ratemaking; that the establishment of just and reasonable rates cannot be made without considering the competitive situation in any given proceeding; that the principal evil sought to be corrected in the original Interstate Commerce Act and all subsequent revisions has been destructive competition; that the principal effect of the proposal now before you would lead back in the direction of destructive competition, not away from it as have all past statutes; and finally that the principal problem of the railroads is their passenger deficit aggravated, of course, by the current business recession.

Thank you, Mr. Chairman. .

Senator SMATHERS. All right, Mr. Pinkney. Thank you very much. That is a very persuasive and fine statement of your views and the truckers' views.

Do you have any questions, Senator Potter, or Senator Schoeppel?

Senator SCHOEPPEL. I am sorry, I was delayed, and was not able to hear the opening part of your testimony.

I would like to ask you, turning to page 10, for my clarification, where you say in that second paragraph:

As stated above, all the proposals that have been brought forward, including the proposal in section 5, are subject to the same disability.

Now, are you setting out separately and distinctly just the rate phases of this thing from the other phases discussed in the report, or do you mean that statement to apply to all the recommendations made by the subcommittee and to the full committee?

Mr. PINKNEY. Senator Schoeppel, I mean that to refer to the present language in the report, section 5 of S. 3778, which is contained in the subcommittee's report.

Senator SCHOEPPEL. Pertaining to what particular---

Mr. PINKNEY. Pertaining to competitive ratemaking only, sir. Senator SCHOEPPEL. You want to limit that to the competitive ratemaking? Mr. PINKNEY. Yes, sir, definitely, yes. Senator ScHoFPPEL. I wanted to be sure to get that. Mr. PINKNEY. I had stated prior thereto that that is the only proposal of serious concern to us. Senator SCHOEPPEL. I missed that phase of the thing. And I apologize to you. Mr. PINKNEY. We do not seek to stand in the way of any of the other proposals which deal truly with the problems of the railroads. Senator SCHOEPPEL. The blinders that you refer to there, is that your interpretation of what this competitive rate phase of this report would do, if enacted into law § Mr. PINKNEY. Yes, sir. Senator SchoBPPEL. Is that what you are referring to? Mr. PINKNEY. Yes, sir. Senator ScHoFPPEL. I believe for the moment I have no further questions. Senator SMATHERS. Senator Potter? Senator POTTER. Yes. Mr. Pinkney, I am sorry, too, that I missed the opening part of your statement. But in the discussions we have had so far there has been, at least to my knowledge, a confusion as to just what we mean by “reasonable minimum rate” as compared with “compensatory” or a compensatory rate. Now, what would your definition be of reasonable minimum rate? Mr. Pinkney. Senator Potter, that is an extremely difficult question, sir. I would say, first, every reasonable rate would be a compensatory rate. But when you get into the question of what is compensatory, we run into quite a confusing picture. Let me start at the bottom: In the case of sand and gravel, which can only move if the rates are quite low, those rates have been found to be compensatory b the Commission in many instances where they barely meet ... pocket costs. By “out-of-pocket costs” I mean just the actual cost of moving them, plus some small amount of contribution of some sort to profit and overhead. enator Potter. But not the percentage of overhead? Mr. PICKNEY: Oh, no, not the percentage of overhead, which, for example, alcoholic beverages carry. There is a thing called the transportation burden in our ratemaking system, which means that the entire transportation system, whether it be motor, rail or truck, must return, of course, from all of its revenues, full cost plus some additional for profit. The out-of-pocket cost in the case of the rails is many, many, many percentage points below full cost. Yet it is recognized that such things as agricultural commodities, the products of the farm, the products of the forest, the products of the mines, raw ore, for example, couldn't possibly move if they were called upon to bear the full cost plus profit. So, in our peculiar system of ratemaking, which works, we set up rates which permits all of those traffics to move and has those which are best able to do it to bear the

transportation burden in greater degree. In other words, alcoholic beverages, in theory and in fact, carry fairly high rates, way above fully distributed costs, or full costs.

On the other hand, the sand and gravel is down just above the out-of-pocket cost level. If you say that a reasonable rate is an outof-pocket cost rate, a rate which you are starting on the movement of liquor can then gravitate down to out-of-pocket costs, it no longer makes a contribution to the transportation burden, and somebody has to make that up, because a carrier can't operate without getting its full costs back. And so we have a rate structure.

I think Mr. Child's chart before this committee might have been startling in appearance, but it is one that works. It permits all traffics to move in this country with the finished product, with the manufactured product, the high-valued product, the luxury item, generally bearing rates above fully distributed costs; and in the case of that type of merchandise, if we are to maintain our transportation system, a reasonable rate must be a rate above fully distributed costs, whereas, a reasonable rate on the sand and gravel is something considerably less.

Senator POTTER. In determining the rate structure, do they consider the compensatory rate on, say, gravel and sand, your so-called low-cost items? Is that based entirely upon out-of-pocket costs, and then on your luxury items, is that the overhead, is that part of the compensatory rate? How does the ICC now determine a compensatory rate?

Mr. PINKNEY. I told the chairman when we came in, I brought Mr. Watkins, who has handled a great many of these rate cases for us.. That is a technical question he is best qualified to answer.

Mr. WATKINS. I think that is something that nobody can answer;. Senator Potter, in detail, because you are then asking what is in the minds of each of the Commissioners when they reach a conclusion.

Let me say this: that their decisions indicate that they take into consideration all of the matters that Mr. Pinkney has referred to, and that they generally recognize that there are these low-grade commodities which cannot bear as high a rate as some of the highgrade commodities.

Now, just exactly how they relate that to the out-of-pocket costs, certainly cannot be said in any detail, because probably the minds of each Commissioner relates it in a different way, in his own mind. But they reach the conclusion, and we know that their conclusions do result in

Senator POTTER. Isn't it true that one of the fears, as I understand from your statement, that the motor carriers fear, that if the Commission is allowed to only look at the railroads' costs in fixing rates, that railroads will be able to come into a given area and drive their rates down to drive out competition? Isn't that one of the fears ?

Mr. WATKINS. Yes.
Senator POTTER. Where the rate may not be compensatory?

Mr. WATKINS. You mean run their rate down to where it is not compensatory?

Senator POTTER. Yes.

Mr. WATKINS. They could run it down to where yon would say it was not a compensatory part of the rate structure. It still might return more than their out-of-pocket costs.

Senator POTTER. There again we get back to what we mean by “compensatory rate.'

Mr. WATKINS. Yes.

Senator SMATHERS. I want to say this: The law does not permit them now to operate at below compensatory rates. Is that not correct?

Mr. WATKINS. That is right.
Senator POTTER. That is right.

Senator SMATHERS. Low compensatory rates may be below the figure of other transportation mediums and would stiil be compensatory to them. The original applicant for a lower rate must establish that it is not below a compensatory rate to him.

Senator POTTER. As I understand, other carriers are fearful that with the language here, where you don't consider the effect on other carriers, that the rates may be lower, and it all depends, then, what you mean by "compensatory,” to a degree as to be unfair competition to another carrier. I think that has been one of the fears. Otherwise

Senator SMATHERS. I think that is what they are fearful of. It is just as though, for example, I was a railroad, able to run at a lower rate over a certain distance, and it was compensatory to me, and you had an equivalent route certified by the ICC but you were operating a truck and it might happen that on that particular route it would be compensatory to me, but that rate which I offered would be below your compensatory rate; therefore, I would get all the traffic eventually. That is what would worry you. That is what worries them.

Senator POTTER. Yes.

Now, the question is, do I have an inherent advantage, though, which the Congress says that the public is entitled to, or not? That is what this is all about, just that.

Mr. PINKNEY. Of course, Mr. Chairman, on that inherent advantage proposition, the railroads have, if you choose to call it that, they have this inherent advantage, that with their broad, balanced traffic, their possibility of getting revenues from other things, they can sharply drop the rates on, let us say liquors, I will stick with alcoholic beverages, they could sharply drop them 50, 60, 70 percent and still be within the compensatory tests judged by an out-of-pocket cost standard. That liquor would no longer be carrying its share of the transportation burden, and of course that would immediately cause all of that traffic to go over on the railroads and put out of business those motor carriers who might be dependent for their entire livelihood upon the movement of that one commodity.

Whether that would be in the public interest or not, I seriously doubt.

Senator SMATHERS. In the liquor cases, as a matter of fact, the Commission found that the railroads were hauling it at 146 percent above the fully distributed costs, but they would not let them lower the rate, even though they were 146 percent above it for the reason, if they did it, it would injure these other people.

Now, the question is: Is it the Commission's job to run this giant handicapping system, allocating business and saying, "we are going to keep everybody alive"? It also works the other way, trucks on short hauls, with less than carload lots, with flexibility, they can do a much better job than railroads, in some instances but not many, and

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