cost of the additional facilities required to accommodate traffic growth by air and/or highway. Additionally, congestion and related social costs would be lessened to the extent that passengers are induced to switch to rail transportation. Under these circumstances the cost of the subsidies required to sustain and promote rail passenger service may be offset, or more than offset, by savings in private and social costs elsewhere.13 This example also suggests that a program of assistance to rail passenger transportation should be coordinated with government investment programs for air and highway transportation. To sum up, the degree to which the present measure will contribute to the alleviation of the problems confronting rail transportation will depend largely upon (1) the extent to which the design of the basic rail passenger system is governed by profitability and/or valid economic welfare considerations, as against vague and unsubstantiated claims of public need, and (2) whether the financing provided will permit the degree of improvement in rail passenger service necessary fully to test the market potential of such service. 13 Under unusually favorable circumstances, as in the Northeast Corridor, it might be possible to maintain rail passenger service without subsidy. In order to avoid working at cross-purposes with a program attempting to maintain rail passenger service on a self-supporting basis, or with minimum subsidy, an effort should be made to insure that commercial airlines bear their full share of airway and airport costs, as determined on reasonable allocation principles, and to minimize the magnitude of local service airline subsidies. It would also be logical to experiment with the feasibility of levying charges to offset the congestion and other social costs arising in connection with air and highway transportation. THE COMPATIBILITY OF THE RULE OF JOHN J. COYLE Complaints regarding Interstate Commerce Commission1 Decisions in intermodal rate cases seem to be increasing in frequency and intensity in recent years. While there is probably some basis for complaint in certain instances, it would appear that the Commission has become a convenient scape goat in intermodal rate cases. The contention of this paper is that the major blame for problems which currently exist in administering intermodal rates is the result of an inconsistency between the rule of ratemaking and the national transportation policy. The former attempts to set an economic perspective on ratemaking whereas the latter adds certain social and political considerations.2 The consequences of this difference between the two will be explicated in other sections of the paper. A separate but related contention is that the most recent amendment to the rule of ratemaking made in 1958 was not a substantive change in the law. Evidence to support the statements made above will be garnered by reviewing and analyzing the development of the rule of ratemaking along with related decisions and important congressional hearings. The National Transportation Policy will also be analyzed. The treatment will be in two epochs. First, attention will focus on the period from 1920 to 1958. The rule of ratemaking was originally fashioned under the Transportation Act of 1920 and was amended in 1933 and 1940. The second section will treat the latest amendment to the rule of ratemaking which was made in 1958. A major change was supposedly made at this time and a number of controversial cases have ensued. Rule of Ratemaking—1920 to 1958 The original rule of ratemaking was contained in the Transportation Act of 1920 and was one of the manifestations of a change in regulatory philosophy contained in that Act. The rule of ratemaking directed Commission attention to the earnings of the railroads in order John J. Coyle is presently Professor of Business Administration at The Pennsylvania State University. Dr. Coyle received his B.S. in 1957 and his M.S. in 1959 from The Pennsylvania State University, and his D.B.A. from Indiana University in 1962. 1 Hereafter referred to as the Commission or the ICC. 2 One might argue that the rule of ratemaking indicates certain social considerations but the emphasis appears to be upon economic considerations. that an adequate transportation system could be provided. It indicated that railroads were entitled to a fair return upon a fair value of their property. This was not conceptually new since the Supreme Court had enunciated a similar view in 1898.3 However, the original rule of ratemaking was different in its approach since it focused attention upon aggregate rail properties, not individual situations. In other words, the 1920 version of the rule of ratemking represented an attempt to stabilize earnings of the railroad industry on a group basis. The record of the Commission following the Act of 1920 demonstrates that revenue stabilization was not achieved. It became apparent that: (1) the mere raising of the level of rates did not neiessarily augment carrier revenues since these across-the-board increases ignored differences in demand elasticities, i.e., not all commodities had the same elasticity of demand for transport purposes; (2) the cross-elasticity of demand or substitutability of carrier service was greater than anticipated, i.e., motor carrier carriers and others quickly capitalized on higher rail rates; and (3) administration of the provisions of the rule of ratemaking and the related recapture clause proved difficult and entailed vast expenditures of time and money. For these and other reasons, a change was made in the rule of ratemaking under the auspicies of the Emergency Transportation Act of 1933. The 1933 version of the rule of ratemaking read as follows: In the exercise of its power to prescribe just and reasonable rates the Commission shall give due consideration, among other factors, to the effect of rates on the movement of traffic, to the need in the public interest, of adequate and efficient railway transportation service at the lowest cost consistent with the furnishing of such service; and to the need of revenues sufficient to enable the carriers, under honst, economical, and efficient management to provide such service. The changes made above made the rule of ratemaking more flexible. Attention was still devoted to revenue needs and adequate service but this was not tied to a fair return standard. Also, attention was directed toward demand elasticity by the words, "effect of the rate on the movement of traffic." Furthermore, its application was no longer restricted to general rate level cases but could now also apply in other rate proceedings especially intermodal rate cases where only a limited number of rates were likely to be affected. The latter aspect received very little attention in the period immediately following the 1933 amendment. However, it did raise an interesting question that was brought out by Commissioner Joseph B. Eastman in the hearings preceding the Transportation Act of 1940, viz., whose traffic was to be considered in a competitive rate case. Con 3 Smyth vs. Ames, 169 U.S. 466 (1898). sequently, a phrase was added by the Transportation Act of 1940—“by the carrier or carriers for which the rates are prescribed." 4 We should note at this point that when the Motor Carrier Act was passed in 1935, a rule of ratemaking was made applicable to the motor carrier industry under the new Part II of the Act, but an additional stipulation was added, viz., that the Commission should preserve the inherent advantages of the motor carrier. This stipulation was made somewhat redundant by the National Transportation Policy which was added in 1940. But the stipulation was left intact although no corresponding addition was made for railroads in Part I nor was it included under Part III which added for water carriers in 1940. In one of the early cases following the Act of 1940 the Commission stated that although this directive was not contained in the rule as pertained to railroads, it should be considered in all fairness to the railroads.5 As we shall see, the question of inherent advantages becomes an important issue in later cases. At this point the stage was set, the Interstate Commerce Act Contained separate rules of ratemaking in each Part. The rules were basically the same with the exception noted above. It appeared then that in intermodal rate cases, proposed changes were to be viewed from the perspective of the proposing carrier, i.e., was such a change "economic" according to some criterion of reasonableness from his vantage point. The National Transportation Policy was added as indicated previously in 1940, and its purpose was to provide the Commission with some guidelines for regulation of competing forms of transport. In reading the hearings which preceded the Motor Carrier Act of 1935 and the Transportation Act of 1940, one detects a concern in some quarters about regulation of motor carriers and water carriers by the Commission, i.e., would it tend to be protective towards the railroads. The concern for impartial regulation and the protection of the newer agencies was such that a national policy was added as follows: It is hereby declared to be the national transportation policy of the Congress to provide for fair and impartial regulation of all modes of transportation subject to the provisions of the Act, so administered as to recognize and preserve the inherent advantages of each; to promote safe, adequate, economical, and efficient service and foster sound economic conditions in transportation and among the several carriers, to encourage the establishment and maintenance of reasonable charges for transportation services, without unjust discriminations, undue preferences, or advantages, or unfair or destructive competitive practices to cooperate with the several States and the duly authorized officials thereof; and to 4 It might be noted that a more extensive revision to the rule of ratemaking was proposed by the so-called “Committee of Six" appointed by President Roosevelt. 5 Petroleum and Petroleum Products to Ariz., 241 I.C.C. 21 (1940). encourage fair wages and equitable working conditions; all to the end of developing, coordinating, and preserving a national transportation system by water, highways, and rail, as well as other means, adequate to meet the needs of the commerce of the United States, of the Postal Service, and of the national defense. All of the provisions of this Act shall be administered and enforced with a view to carrying out the above declaration of policy. From the above one can see that the National Transportation Policy is in effect superimposed over all other provisions. Also that it introduces "noneconomic considerations such as national defense which might require, for example, protecting an inefficient agency in case of national emergencies. Furthermore, it uses some nebulous terms like destructive competition which are difficult to define. In fact, competition by its very nature may be considered destructive since inefficient firms may be driven out of business and new technologies will replace old ones. Finally, the concept of preserving inherent advantages has tended to be viewed by the ICC on the demand or user side which makes the quality of service of carriers a relevant consideration. If the focus was on the supply or carrier side, then only carrier cost would be relevant. In other words, if you view transportation from the user's viewpoint (demand) then decisions are made based upon the rate charged by the carrier and the quality of his service in relation to your requirements. So in some instances, air service may be purchased at very high rates. compared to surface modes but the shipper offsets this by decreased inventory costs or warehousing cost. On the supply or carrier side, the concept of inherent advantage would refer to the carrier's cost of providing the service. If the former perspective is taken then the Commission can get trapped into becoming an allocator of traffic, i.e., setting differentials on carrier's rates to offset service disadvantages. But the National Transportation Policy appears to lean in this direction and, in fact, inherent advantage was defined as cost and service in the congressional hearings.8 7 Before proceeding to an analysis of selected commission decisions following the Transportation Act of 1940, an additional point should be made about the rule of ratemaking. The rule of ratemaking is a legislative directive to the ICC. Unlike Sections 1, 2, 3, and 4, it does not lay down a rule of action for carriers subject to ICC jurisdiction. It directs the ICC to consider certain factors in the exercise of its power to prescribe just and reasonable rates. Theoretically, the rule of ratemaking could come into play in all rate cases where the reason 6 This is not meant to imply that such considerations have no validity but rather that they set the stage for different criteria to be applied. 7 There are differences of opinion, of course, on what should be the proper cost standard, i.e., out-of-pocket or fully-allocated. 8 U.S. Congress, Committee on Interstate Commerce, Senate Hearings, Transportation Act of 1939, 76th Cong., 1st Sess., 1939, pp. 1-3. |