uted cost, of course, while others pay substantially more. In the final analysis, however, the burden must be paid by total traffic.

If the rail argument is correct, then it is obvious that any additional traffic attracted to the rails must result in a larger contribution to the burden than is being made by present traffic. This would be relatively simple if the rails could hold rates on the traffic they now have and only apply reductions to traffic being handled by competitors. This is not the case, however. Rate reductions designed to attract traffic from competitors must apply also to similar traffic now being handled by rail. This will result in a reduction in the margin between out-ofpocket costs and fully distributed costs on the traffic currently being hauled. Thus, if the new traffic is to be helpful to the rails, it must more than make up for the reduction in contribution from present traffic.

To illustrate the effect of rate reductions on competitive traffic, the attached appendix C has been prepared. It is based upon data from the Interstate Commerce Commission and the Corps of Engineers, Department of the Army.

This appendix C shows in detail amounts of agricultural and bulk commodities hauled by the railroads, the water carriers, and the regulated trucking companies. It shows the revenues derived by the railroads from movement of these traffics in 1960, the average revenue per ton, the average out-of-pocket costs per ton, and the contribution to burden made by these commodities as determined by the ICC Bureau of Accounts in its publication "Distribution of the Rail Revenue Contribution by Commodity Group" for the year 1960, previously referred to.

By a most conservative estimate, it is assumed that in order to attract the traffic now being handled by other forms, the rails would have to reduce their rates by 10 percent. These reduced rates are then applied to the total traffic handled by these three classes of carriers on the assumption that the reduced rates would attract all of it to the rails. The rail out-of-pocket cost scales are then applied to the total tonnage, and the costs so derived are subtracted from the increased revenues to find the contribution to burden that this increased traffic would yield.

This appendix shows that if the railroads, through a rate reduction of as little as 10 percent, could attract all of the traffic now being handled by their water competitors and their regulated motor carrier competitors, they would cut the contribution to the transportation burden now being made by these commodities by 87 percent.

According to the ICC's study cited above, the railroads in 1960 handled 871 million tons of agricultural and bulk commodities for which they received $3,664 million in revenues. Their out-of-pocket costs for handling such commodities was $3,055 million, leaving a contribution to burden of $609 million.

Under the assumptions above, the rails would haul 1,563 million tons of agricultural and bulk commodities for which they would receive $6,992 million. Their out-of-pocket costs would increase to $6,911 million, reducing the contribution to burden by these commodities to only $81 million. This would result in shifting more than $500 million of the burden to other classes of traffic. (See appendix D.)

As indicated, these assumptions are extremely conservative as to the amount of reduction that would be required to attract additional traffic and very generous as to the amount of traffic they would be likely to attract. Under these assumptions, the effect of this type of rate cutting on the profitability of the rails is minimized. As a matter of fact there would probably be no contribution to "burden." It would undoubtedly take more than a 10percent cut to obtain the traffic.

Actually, rate reductions on competitive traffic by one form of transport would be met by similar reductions by its competitors. As I have previously pointed out, this would result in each probably retaining its present share of traffic, but deriving less money for hauling it. In the present financial condition of the various transportation agencies such action could only lead to disaster.

The relative size of the individual railroad companies as well as their financial structure would in nearly all cases assure them victory in any fight of this type. Despite their alleged poverty, the railroads have huge investments in land and other facilities which make them able to withstand long periods of low earnings, as history has shown. This position is bolstered by the relatively slow effect of operating losses on investment.

2 Class I intercity only.

The rails' ratio of investment to gross operating revenue is about 3 to 1. This means that their capital is turned over once every 3 years. Trucking companies, on the other hand, have a ratio of investment to revenue of about 1 to 4. This means that their capital is turned over four times a year. Thus, the effect of an operating loss on the investment of a railroad is only onetwelfth that of such a loss on the investment of a trucking company. An operating loss of 10 cents on the dollar for a railroad would have the impact of 3 cents per year while a loss of this size would have the impact of 40 cents per year on the truckline.

Another factor to be considered is the adequacy of the rail plant to handle additional traffic. There is today, on the railroads, no such excess of capacity as existed in previous times. Today, the rail car and locomotive fleets are tailored more nearly to the levels of traffic now being handled. Any substantial increase in traffic would require relatively large additional investment in rail plant. This, of course, would further increase the burden to be borne by higher classes of traffic.

Unfortunately, it has not been possible to include in this estimate the commodities now being carried by exempt motor carriers or the commodities handled by private carriers that might be susceptible to diversion to rail at lower rates. Data for this traffic are not presently available from any source, but it seems to us to be imperative that it be obtained and analyzed before any drastic action, such as here contemplated, be taken.

Summarizing, if the rails were successful in taking away from the water and regulated motor carriers all of the bulk and agricultural traffic handled by them, the rails would find themselves making less money rather than more. In our opinion, the same thing would be true if, through the even more drastic reductions needed, they were to take over the traffic of exempt motor carriers and of private carriers.

Summarizing on the point of lower freight rates allegedly needed to save the railroads from bankruptcy or nationalization:

To get

The railroads will allegedly make their money by increasing volume. this volume they must reduce rates. Until they get the volume on which to make money, they will lose revenues they are now getting through their present higher rates. Between the time they start their rate cutting, and the time they get the volume to make more money they will be met, rate cut by rate cut, by their competitors, up to the point their competitors (or the railroads) withdraw from the battle through lack of resources to continue the fight-or through outright bankruptcy. During the interim period, service and equipment will deteriorate-some never to be restored. This looks like the road to nationalization to us. We must have safe, adequate, and efficient transportation, and someone must pay for it.

You are being asked to authorize this grand experiment without any real basis or information being presented to you as to what the effects will be. You have been told that the railroads will be saved and at the same time the shippers will save a billion dollars a year, based on a theory which does not make sense and which does not go near a real solution to the so-called common carrier problem.

The minimum rate power and discrimination, preference, and prejudice

Let's look, for a moment, at the minimum rate power of the Commission and its present power to control discrimination, preference, and prejudice.

What is a reasonable minimum rate? The best definition attempted by the Commission is in New Automobiles in Interstate Commerce 259 ICC 475. That decision was favorably commented upon by the Commerce Committees of both the House and Senate at the time paragraph (3) was added to section 15a of the Interstate Commerce Act in 1958. At page 534 of that decision appears the following:

"What constitutes a minimum reasonable rate is a matter to be determined in the light of the facts of record in each individual case, avoiding arbitrary action and keeping within statutory and constitutional limitations, just as in the case of maximum reasonable rates. Whether a rate is below a reasonable minimum depends on whether it yields a proper return; whether the carrier would be better off from a net-revenue standpoint with it than without it; whether it represents competition that is unduly destructive to a reasonable rate structure and the carriers; and whether it otherwise conforms to the national transportation policy and the rules of ratemaking declared in the act of 1940."

Where rates are found to be below a reasonable minimum level, or where rates are found to be unjustly discriminatory or unduly prejudicial and preferential, the Commission now has the power to remove such unlawfulness by determining and prescribing (I am quoting from section 15 (1) of the Interstate Commerce Act) "what will be the just and reasonable individual or joint rate * * * or charge *** to be thereafter observed, or the maximum or minimum, or maximum and minimum, to be charged." That power was exercised in Class Rate Investigation, 1939, and without that minimum rate power the undue prejudice and preference as between the different regions of the country there found to exist could not have been removed. That power has been exercised by the Commission in many cases, and without it the Commission would be powerless to prevent or remove unjust discrimination or undue prejudice and preference. This is particularly true where such discrimination is between localities and the rates or charges are controlled by different carriers. The Interstate Commerce Commission has so testified and we agree.

In Skinner & Eddy Corp. v. United States, 249 U.S. 557, 565–566, 39 S. Ct. 375. 378 (1919), decided prior to the Transportation Act of 1920, by which the Commission was given power to fix minimum rates, the court said:

"Congress, however, steadfastly withheld from the Commission power to prevent, by direct action, the charging of unreasonably low rates. The common law did not recognize that the rate of a common carrier might be so low as to constitute a wrong; and Congress has declined to declare such a rule. Despite the original Act to Regulate Commerce and all amendments, railroads still have power to fix rates as low as they choose and to reduce rates when they choose. The Commission's power over them in this respect extends no further than to discourage the making of unduly low rates by applying deterrents ***. But the main source of the Commission's influence to prevent excessively low rates lies in its power to prevent unjust discrimination. The order prohibiting the unjust discrimination, however, leaves the carrier free to continue the lower rate the compulsion being that if the low rate is retained, the rate applicable to the locality or article discriminated against must be reduced. That is, the carrier may remove the discrimination either by raising the lower rate to the relative level of the higher, or by lowering the higher to the relative level of the lower, or by equalizing conditions through fixing rates at some intermediate point." (Citations and footnote omitted.)

Continuing on the question of whether the Commission could control preference and prejudice without the minimum rate power, it has been asserted by railroad witnesses that the Commission's power would remain unchanged. The Commission disagrees. We believe the Commission is right.

The Commission would not have full power to remove any undue prejudice or preference found to exist.

In Moline Consumers Co. v. Chicago, B. & Q. R. Co., 213 ICC 135, at page 142, the Commission said:

"The principle is well established that where an order is made under section 3 of the act an alternative must ordinarily be afforded. The offender or offenders may abate the discrimination by raising one rate, lowering the other, or altering both."

To the same effect are more than 50 other ICC decisions.

In Texas & Pacific Ry. Co. v. United States, 289 U.S. 627, the Court said: "Where an order is made under section 3, an alternative must be afforded." In connection with that statement of the Court, appears this footnote:

"This is not true of an order pursuant to section 15 (1), prescribing maximum or minimum or maximum and minimum rates, but the present orders were not issued under that section."

It should be made clear at this point that section 3(1) of the Interstate Commerce Act prohibits undue prejudice and preference as between shippers, localities, ports, etc. And section 15 (1) provides that where the Commission finds such undue prejudice or preference, "the Commission is hereby authorized and empowered to determine and prescribe what will be the just and reasonable individual or joint rate, * ** or the maximum or minimum, or maximum and minimum, to be charged ***"

Under the holdings of the Supreme Court, this power under section 15 (1) may be exercised, in removing undue prejudice and preference, only where the justness and reasonableness, as well as the unduly prejudicial or preferential character, of the rates under investigation are in issue and there is substantial evidence in support of both allegations. This is made clear in New York v.

United States, 331 U.S. 284 (the general class rate investigation, 1939), where at pages 343 and 345, the Court said:

"It may not be said in this case, as it was held in Texas & Pacific Ry. Co. v. United States, supra, p. 633, that there was no evidence of the unreasonableness of the rates, or that that question was not in issue. The Commission here found that the rates were unjust and unreasonable under section 1 and it proceeded to fix new rates under section 15 (1) * * *.

"Once the Commission has found rates to be 'unjust or unreasonable or unjustly discriminatory or unduly preferential or prejudicial,' it is empowered to prescribe rates which are 'just and reasonable' or 'the maximum or minimum or maximum and minimum,' to be charged * * *."

To the same effect is Ayrshire Corp. v. United States, 335 U.S. 573. Plainly, in the Texas & Pacific case it would not have been enough simply to state in the decision of the Commission that the order requiring removal of the undue prejudice and preference found was made under section 15(1) and not under section 3 (1) of the act. Something more would have been necessary; namely, a finding of unreasonableness under section 1 upon adequate evidence. Such findings were made by the Commission in York Mfgrs. Asso. v. Pennsylvania R. Co., 107 I.C.C. 219 (sustained, 266 U.S. 191), and Coal to Beloit, Wis., and Northern Illinois, 263 I.C.C. 179 (sustained in the Ayrshire case just mentioned), wherein the minimum rate power under section 15 (1) was employed. Thus, the law relating to undue prejudice and preference is that an alternative must be afforded the carriers, except where the public interest, or the achievement of a just and reasonable result, demands that a specific manner of removal be prescribed. In many section 3 cases there is no allegation of unreasonableness, or the record is inadequate to support a finding of unreasonableness. Thus, the finding of undue prejudice and preference must stand alone, and the order of removal must leave the carriers with an alternative.

Moreover, and this is very important, a section 3 order requiring removal of undue prejudice and preference may run only against carriers defendant where they effectively control both the prejudicial rate and the preferential rate. This is made plain in the Court's decision in the Texas & Pacific case. Where, as in the general class-rate investigation and many other cases before the Commission, the undue prejudice order is entered under the minimum rate powers in section 15(1), and there is a finding of unreasonableness as well as of undue prejudice and preference, it is not important whether the same carriers effectively control both the prejudicial and preferential rates. This was made clear by the Supreme Court in New York v. United States, supra. But that can be done only where the rates in issue are found unreasonable as well as unduly prejudicial and preferential; and, as I have stated, a number of complaints before the Commission concern only rate relationships, and the only finding that can be made is one of undue prejudice and preference, not unreasonableness.

The point I wish to emphasize here is that, as pointed out in the Commission's statement, shippers, communities, etc., have no protection whatever under the prohibition against undue prejudice and preference under the act unless the same carrier or carriers effectively participate in and control the rates on both the prejudiced and preferred traffic, which has not been the situation in many important rate proceedings before the Commission.

It is thus plain that, without the minimum rate power, many of the discriminatory rate practices which have been before the Commission over the years could not have been removed, and this will be true of such practices in the future if this proposal becomes law.

The nature of regulation

Another point that I think should be discussed briefly concerns the nature of regulation.

The railroads assert, and there seems to be considerable acceptance elsewhere of the idea, that there has been no basic change in the principles and philosophy that underlay the original act of 1887. It seems to me that such a basic change was made in 1920. At that time the Congress changed the philosophy of regulation from one of protection of the shipper to one that would assure the country of a healthy, adequate, and vigorous national transportation system as well as protect the shipper. The competitive warfare between the rails and water carriers, which had led to the destruction of the latter, and the need for carrier revenues sufficient to enable them to maintain a sound transportation plant caused Congress to add a new dimension to the law-the fostering of carrier

welfare. By carrier welfare I do not mean simply profits but also the preservation of a sound, adequate, and safe transportation plant. The device given by Congress to the ICC in 1920 was the minimum rate power. By it the ICC could not only curb predatory and destructive rate warfare but also insure adequate revenues for the carriers. This concept was strengthened when motor carriers and water carriers were brought under regulation in 1935 and 1940, respectively, and when the national transportation policy was adopted in 1940. To now remove the minimum rate power of the Commission would not be to move ahead constructively but to move backward, destructively, to the days of 1900.

The national transportation policy was adopted in 1940. It provides, among other things, that the ICC shall "promote safe, adequate, economic and efficient service and foster sound economic conditions in transportation and among the several carriers ;" and "encourage the establishment and maintenance of reasonable charges for transportation services, without unjust discriminations, undue preferences or advantages, or unfair or destructive competitive practices;". Section 15a (2), a principal section of the rule of ratemaking, directs the Commission in the exercise of its power to prescribe just and reasonable rates, among other things, to give due consideration to the need of revenues sufficient to enable the carriers to provide adequate and efficient service.

It will not be possible for the Commission to carry out the above enumerated responsibility if they lose the minimum rate power.

The Commission will not be able to insure that "reasonable charges for transportation services" will be established and maintained. The word "reasonable" must, of necessity, mean a charge or rate falling between two extremes; i.e., a rate that is too high, on the one hand, or too low, on the other. If the Commission retains control over what is too much but loses control over what is too little, it cannot make a determination as to reasonableness and it cannot make a determination with respect to the adequacy of carrier revenues.

The Commission will not be able effectively to prevent undue preferences and advantages for reasons previously given. Neither, in our opinion, will it be able effectively to prevent unjust discriminations.

The Commission will definitely not be able to deal with unfair or destructively competitive rate practices. To the extent that they are to be controlled under this bill, they eventually are to be remedied by the Department of Justice and the courts for all practical purposes-no remedy at all.

For the past 50 years we have relied as a nation upon service competition in transportation as the best means of insuring technical advances, innovations, and service improvements. The result of this service competition is reflected in the fact that we have in this country the finest transportation system the world has ever seen. Appreciating the importance of each of the different modes of transportation and their individual and unique contributions to a well-rounded national transportation system, the Interstate Commerce Commission has sought to carry out the national policy by preventing the excesses of unbridled rate competition among carriers. To this end the Commission sought to see to it that carriers compete vigorously with one another, but that none competes as aggressively that its competitors are destroyed.

In contrast, the carriers would, under the proposed legislation, be free to name any rate without regard to cost of performing the service that may be necessary to secure the traffic. Without statutory power as to minimum rates, this can only result in competition that is the most ruthless and destructive sort of economic warfare, in which only the financially strong can possibly hope to survive.

The great purpose of the Interstate Commerce Act was to establish the law of equality by eliminating favoritism and discrimination between persons, places, and commodities. Unbridled competitive rate cutting leads inevitably to discrimination. The history of regulation under the Interstate Commerce Act provides myriad examples of the necessity for governmental control of carrier selfishness in order to prevent preference of the large shipper and discrimination against the small shipper. All of the major rate proceedings have revealed the tendency of uncontrolled carrier management, whether of rail, water, or highway carriers, to respond to the pressure and demand of the big and important shippers or receivers in derogation of the interests of the small shippers and receivers and of the smaller and relatively less important communities or localities. Here again the ICC has sought to carry out the national policy by insuring a stable rate structure and proper rate relationships. It cannot do so without power to control minimum as well as maximum rates.