Interstate Commerce Act. I believe that the measures taken in these proceedings patently evidence our concern for investor protection and confidence. Rather than minutely detailing this response, I offer as further explanation of my position on this question a copy of the statement of May 16, 1974, of Chairman George M. Stafford to your Committee, a copy of which is attached hereto for your convenience, inasmuch as I concur in the views expressed therein. Question. What role does the Commission play in examining the effects of mergers which it approves? What role should it play? For what purposes should merger proposals be examined by the Commission? Answer. The role the Commission plays in proposed mergers is prescribed in section 5(2) of the Act. That section provides that a merger application shall be approved and authorized if it is found that the proposed transaction or transactions "will be consistent with the public interest", subject to such terms and conditions or modifications as the Commission shall find to be just and reasonable. In applying the statutory test of "consistent with the public interest" many factors are considered and weighed against one another. Included are the effects of the proposed transaction upon applicants' competitors, the effect on the users of applicants' service as well as those using competitors services, the effects on the communities served by both applicants and their competitors, and the possible injury to the employees of applicants. Consideration of these factors is circumscribed by the statutory requirement that carrier unifications must be carrier initiated. This requirement precludes from consideration the issue of preferability of alternative unifications. The phrase "consistent with the public interest" does not connote a public benefit to be derived or suggest the promotion of the public interest. The thought conveyed is merely one of compatibility. See Pacific Power & Light Co. v. Federal Power Commission, 11 F (2d) 1014. Stated in another way, the phrase means not contradictory or hostile to the public interest. See Merchants' Dispatch, Inc.— Purchase-Smathers, 25 M.C.C. 407, 409, and Southern Ry. Co-Control-Central of Georgia Ry. Co., 317 I.C.C. 557. Therefore, it devolves upon the Commission to weigh the benefits derived from the proposal against the detriments to be experienced by different segments of the public to ascertain whether the detriments outweigh the benefits. The utilization of the Commission's conditioning power is a frequently exercised device, used to counteract detriments resultant from proposed mergers. However, approval may not be conditioned upon acceptance of requirements more onerous than that imposed by the statute. Accordingly, in the absence of a showing that a proposed merger is in any way contradictory or hostile to the public interest, it is entitled to our approval as being "consistent with the public interest". Section 5 (11) of the Act further requires that we consider the antitrust aspects of the proposal and weigh the anti-competitive effects against the advantages of improved service and other matters in the public interest. Implicit in the criteria of section 5(2)(c) is our responsibility to preserve a structurally adequate balance of transportation service. In considering a proposed merger we not only apply the above-described standards, but use such other criteria as may be appropriate. In sum, the Commission plays an extremely active role in minutely examining the effects of proposed mergers after the carriers have applied. In addition to the mandate of the Interstate Commerce Act, the Commission must also consider the requirements of the National Environmental Policy Act of 1969. The Commission is cast in the role of promoting the public interest and conscientiously tries to exercise its responsibilities. It does not sit as an umpire, merely calling balls and strikes, but actually guides the proceedings within its prescribed jurisdictional limits. For example, in Finance Docket No. 24182, Chicago, Milwaukee and Northwestern Transportation Company-Consolidation-Chicago and North Western Railway Company and Chicago, Milwaukee, St. Paul and Pacific Railroad Company, pretrial proceedings were required to delineate the economic and operational evidence necessary to determine the merits of the proposal. The Commission more recently has been active in the considerations to resolve the Northeast rail problem. Approval of a merger does not terminate the Commission's role. Often jurisdiction is explicitly retained to insure adherence to conditions. At times monitor 2 The statement was printed in hearings, see serial No. 93-118. ing the effects is accomplished through mandatory reporting requirements. In some cases additional Commission action is necessary, such as considering the terms of inclusions or trackage rights agreements originally required as a condition to approval. In all instances the Commission has the facility and obligation to alter the terms of approval if warranted, pursuant to the terms of section 5(9) of the Act. In considering the role the Commission should play in rail mergers, the entire future of transportation must be considered. This concept is anything but recent. For example, in 1872 the Senate appointed the Windom Committee to investigate the possibility of securing cheaper transportation. The report of that Committee, Transportation Routes to the Seaboard, 43d Cong., 1st sess., Senate Rept. No. 307, Pt. 1, found that competition "invariably ends in combination" and so is insufficient to adequately protect the public. The conclusion reached in that report was one favoring national or state ownership of railroads. The Transportation Act of 1920 directed the Interstate Commerce Commission to draw up a plan for the consolidation of rail properties. There was no complementary jurisdiction to require the proposed consolidations and the program was a failure since the railroads were unwilling to adopt the plan. Congress, therefore, changed the Act in 1940 and enacted section 5(2), described above. The question devolves to a choice between nationalization, on the one hand, and, on the other, private ownership and operation of railroads subject to regulation directed to the preservation of competition as fully as possible, maintaining existing routes and channels of trade and commerce wherever practicable and promoting the public interest to the greatest extent possible. The latter course is preferable, as illustrated by the extreme cost of nationalized rail systems experienced by industrialized countries such as Japan, France, Germany, etc. For example, in 1968, The French National Railways lost, excluding subsidies, $901 million; British Railways, $354 million; Japanese Railways, $376 million; Italian Railways, $578 million; and German Federal Railways, $704 million. If the 4,658 locomotives and 437,412 freight cars used in Britain's rail system in 1968 is compared with the 27,376 locomotives and the 1,453,833 freight cars in use by Class One railroads in the United States for the same year, one can appreciate the enormity of the tax burden to be assumed under nationalization. Perhaps the most persuasive argument favoring private ownership of rail carriers is the experience of the Canadian railroads. The government-owned Canadian National cost the taxpayer, from 1969 through 1972, $108 million, $107 million, $100 million, and $58 million, respectively. In comparison, the privately-owned Canadian Pacific experienced net income before subsidies, for the same periods, of $26 million, $33 million, $47 million, and $43 million. The above-stated dollar amounts refer to U.S. dollars based on exchange rates obtained from the Federal Reserve Bulletin. In conclusion, the Commission should continue to examine merger proposals in the same manner as currently required under existing regulations. Only in this way can we try to encourage competitive systems providing adequate service to the public. Most of the carriers have been able to meet these goals profitably. Some critics would say that the Penn Central failure may be taken as an example of the frailty of the existing regulatory system, however, we must be cognizant of the fact that both the Pennsylvania Railroad and the New York Central Railroad were on the brink of financial failure prior to their merger. The merger may have forestalled bankruptcy. The existence of more favorable conditions circumventing the fatal cash shortage and the absence of other uncontrollable adverse conditions present in 1970 might have given the merger a chance. Consequently, this merger should not be used as a yardstick to measure the effectiveness of the present regulatory scheme. The merger movement as regulated pursuant to the Interstate Commerce Act has generally been highly successful. Question. To what extent should the Commission continue to govern entry and regulate rates for transportation companies? Answer. As a preface to my response, I wish to go on record with a statement which capsulizes my firm convictions on the subject of regulation generally: Regulation is not, and must never be permitted to become, in itself an end. It is always a means to an end, and is beneficial only so long as it serves the purposes for which it was intended. It is my honest and firm belief that the Commission should continue to govern entry and regulate rates for transportation companies, and that the statutory standards set forth in the Interstate Commerce Act are sound, and sufficiently flexible standards, and should not be modified. Pursuant to those standards the Commission can does serve well the end which inspired its institution by the Congress-the furtherance of the National Transportation Policy-by effective implementation of the Act enacted in furtherance of that policy. Although my position on this question is actually explained quite extensively in my responses to other more specific questions, such as in the answers to questions 19, 45, and 46, the following comments seem to be warranted. The Commission is performing the difficult task of striking a delicate balance between over and under regulation in a commendable manner. Its application of the existing statutory standards is a time-tested and proven positive factor in the development and preservation of a transportation which is geared to meeting the needs of all shippers. Question. It has been argued that the Commission's rate making decisions are guided by a zone of reasonableness standard. (a) Do you agree? If no, why not? If so: (b) What is the nature of this zone of reasonableness standard? (c) Is this zone of reasonableness standard being applied satisfactorily? (d) Should a statutory zone of reasonableness standard be provided the Commission? Answer, (a) Yes, I do agree. (b) Rarely, if ever, does the Commission suspend a rate on the grounds of unreasonableness where such rate exceeds the variable costs of performing the service to which the rate applies, and does not unreasonably exceed fully-allocated costs. This is the general nature of the "zone of reasonableness” which the Commission has applied for a considerable number of years. (c) Yes, it is being applied satisfactorily. Unlike purely mathematical formulas, the application of this standard permits sufficient rate flexibility to meet changes in economic and other circumstances. In applying this standard, the Commission considers factors such as the relationship of the particular rate which may be in question to the prevailing level of corresponding rates, whether the traffic involved can be moved at the level of rates in question, and so forth, thereby deriving an equitable solution with regard both to carriers and to those who are responsible directly or indirectly for payment of the transportation charges assessed by application of the rate. (d) No. For example, there may be circumstances under which it is an absolute necessity that a particular movement on a particular commodity be made at a rate below variable costs. As a more particular example, if the actual charge for the movement of a small shipment would be prohibitively high and prevent its movement, and the applicable rate falls within a zone of reasonableness standard as defined by statute, should such movement be prohibited even if a lower rate would not in any way impair the financial or operational condition of the carrier involved, and would permit this traffic to be moved? If a statutory zone is established, such movements would be prohibited by law. Would this be prudent, particularly in situations where the affected carrier has no other backhaul traffic, and will be forced to bear the entire cost of deadheading its empty equipment? On the other hand, would it better serve the interests of both shippers and carriers alike, under such circumstances, to permit the rendition of service at a rate which falls below variable costs, thereby not only providing needed transportation but also offsetting, to at least some extent, the carrier's cost of what would otherwise be an unproductive run? Consider also the ecological implications of such a situation. In my opinion a statutory zone would destroy the very kind of flexibility in rate-making under which our private enterprise system of transportation should continue to operate if we are to have the best possible service at the lowest possible rates consistent with the National Transportation Policy. Question. Which surface transportation carriers, if any, should be required to establish through routes and joint rates? Answer. Presently the Commission has authority to require intramodal through route and joint-rate arrangements between motor common carriers of passengers, railroads, pipelines, express companies, and water common carriers. The Interstate Commerce Act also authorizes the Commission to require railroads, pipelines, express companies, and water common carriers to establish through routes and joint rates with each other. Pursuant to the Act, motor common carriers of property are permitted, but are not required, to enter into joint-rate and through route arrangements with each other or with common carriers of other modes, and vice-versa. It is my opinion that the Commission should have the authority to require the establishment of through routes and joint rates among all carriers which are subject to the provisions of the Interstate Commerce Act. Accordingly, I have wholeheartedly supported the Commission's recommendations to the Congress that the Act be amended to add to the Commission's present authorization the authority to require the establishment of through routes and joint rates between motor common carriers of property, and between such carriers and common carriers by rail, express, and water. This additional authority would permit the Commission to direct the establishment of interline service to small and rural area shippers, and aid immeasurably in resolving the transportation problems of those shippers particularly. The availability of such arrangements enables a shipper to make one contract with the originating carrier on behalf of all participating carriers. Further, a shipper may find the rate for a through movement by consulting a single tariff instead of many. Shippers or consignees can recover from either the originating or delivering carrier for loss or damage by any carrier participating in the through movements. Additionally, shippers find that generally joint rates are lower than a combination of the rates of connecting carriers which are not parties to through movement arrangements. Question. In rate regulation cases, should the Commission undertake an independent investigation of carrier costs when it evaluates the necessity for rate increases? Why or why not? Answer. This is an extremely broad question, and if it is meant that the Commission goes out and physically examine the books of the carriers involved when a general rate increase is proposed, it would take an agency 50 times the size of the Commission to conduct such an investigation. Certainly costs are of great significance in general increase cases in determining the issue of whether the carriers have shown, on the record, a need for additional revenue. When such proposed increases are filed, the carriers do provide us with cost data, and every effort is made to either verify those figures or to evaluate them and adjust the figures to indicate the actual revenue need, if any. Additionally, we have available to us accounting reports and other records, which the Commission requires the carriers to maintain and to file with us, and the Commission audits these records within its budgetary limitations. Many of the problems envisioned by this question, of course, are being explored in some measure in Ex Parte No. 270. Question. In the Commission's June 4 order in Ex Parte 305, Nationwide Increase of 10% in Freight Rates and Charges 1974, the Commission requires the railroads who are willing to refile their tariffs under the conditions of that order to provide an estimate of the costs of deferred plant and equipment maintenance by August 19. (a) What constitutes deferred maintenance for the purposes of this reporting requirement? (b) What standards do you feel the railroads must meet in order to provide an accurate "estimate" of the cost of deferred plant and equipment maintenance by August 19? Answer. Prior to responding to any questions which are directed at Ex Parte No. 305, Nationwide Increase of Ten Percent in Freight Rates and Charges, 1974, I am obliged to state that this is an ongoing proceeding, and to emphasize that accordingly, my answers will be framed so as not to prejudge my position on issues which will arise therein in the future. Attached hereto for your convenience is a complete copy of the Commission's order of June 3, 1974, served June 4, 1974, in Ex Parte No. 305. (a) By utilizing information contained in the Commission's order served June 4, 1974, in Ex Parte No. 305, and by applying the generally accepted meaning of deferred maintenance to railroads, I believe that for purposes of these reporting requirements, deferred maintenance could aptly be defined as the accrued deterioration or deficiency in the physical operating condition of railroad track structures, cars and locomotives, and such depreciable property as bridges, tunnels, signal equipment, power transmission systems, and roadway machinery resulting from undermaintenance and which produces an adverse effect on railroad operations. It comprises the material, labor, and other expenses necessary to restore the property to a condition which, with a normalized maintenance program, will permit safe, efficient, dependable operations necessary to provide ade 4, most of the nation's railroads,' and certain rs having joint rates with said railroads, filed al increase of 10 percent in freight rates and tion 6 of the Interstate Commerce Act and the n Order No. 74-3440, of May 3, 1974, said tarif ject to possible investigation and suspension and ne 5, 1974; by petition and verified statements dated April 22. 1974, the carriers requested the issuance of orders iding orders entered by the Commission, relief from All other relief necessary to permit the proposed gen ective, subject to the condition that refund be made in se (including interim increases) resulting from the p eeded the increases subsequently approved or prescribed That interested parties were permitted to file protests ension of the tariff schedules and verified statements in re May 24, 1974, and the railroads were permitted to file ay 29, 1974; ng, That the Commission having considered the evidence and rties as set forth in the protests, verified statements and re it the nation's railroads are in need of additional freight rev ntly incurred costs of materials, other than fuel, and to provide of earnings; that the Commission also recognizes that without venues to be derived from increased freight rates and charged, he nation's railroads would be insufficient to enable them under cal and efficient management to provide adequate and effcient ortation services consistent with the public interest and the na rtation policy; appearing, That the Commission, having reviewed the evidence its of the parties, is convinced that the service provided by the roads is less than adequate and is in danger of further deterioration to the public interest, that in order to improve spion the ransonde te additional revenues, and that the increns propond woud of Long Island Rail Road did not join in the petition |