II. CHANGES IN REGULATORY PROVISIONS

The rate-making rule.-Section 15a of part I of the act now contains a so-called "rate-making rule" which reads as follows:

(2) 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 the 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 honest, economical, and efficient management, to provide such service.

A similar rule is contained in section 216 (i) of part II (the Motor Carrier Act, 1935). The Committee of Six recommends a change in this rule, and the proposed substitute, which takes the form of a seetion of a new bill providing for the regulation by this Commission of the important modes of transportation, reads as follows:

SEC. 30. It shall be the duty of the Commission to exercize its authority over rates in such way as to permit the establishment by each mode of transportation of rates which, as a whole, will be adequate, under honest, efficient, and economics! management: (a) To sustain a national transportation system sufficient at al times to meet the needs of commerce, of the Postal Service, and of the nations defense; (b) to establish and maintain credit so that capital essential to provide the needed facilities and service may be attracted to the transportation industry and (c) to afford fair treatment to those having their money invested in the prop erty held for and used in the service of transportation: Provided, That the Commis sion shall have reasonable latitude to modify or adjust any particular rate which it may find to be unreasonable or unjustly discriminatory and to prescribe different rates for different sections of the country.

Prior to the Transportation Act, 1920, the Interstate Commerce Act (then known as the Act to Regulate Commerce) contained no "rate-making rule", but only the provisions of section 1 requiring rates, fares, etc., to be "just and reasonable". The history of the original section 15a, enacted in 1920, and of the prevent revised section 15a, enacted in 1933, is given at some length in Appendix A, because we believe this history to be enlightening in the consideration of the proposed new rule.

The significant things about the new rule are these:

(1) Both the original and the present rule began with the words: "In the exercise of its power to prescribe just and reasonable rates". The proposed rule omits any reference to "just and reasonable" rates.

(2) The present rule specifies that due consideration be given to the "effect of the rates on the movement of traffic." Reference to this factor is omitted in the proposed rule.

(3) The present rule specifies that due consideration be given to the "need, in the public interest, of adequate and efficient transportation service at the lowest cost consistent with the furnishing of such serv ice." The proposed rule provides that the rates shall be adequate "(a) to sustain a national transportation system sufficient at all times to meet the needs of commerce, of the Postal Service, and of the national defense." There is some similarity between the two provisions, but it will be noted that the latter omits any reference to "lowest cost" and adds reference to the needs of the "Postal Service and of the national defense."

(4) The present rule specifies that due consideration be given to the "need of revenues sufficient to enable the carriers, under honest, economical, and efficient management, to provide such service." The proposed rule contains a reference to "honest, efficient, and

onomical management," and elaborates the remainder by providing at the rates shall be adequate "(b) to establish and maintain dit so that capital essential to provide the needed facilities and vice may be attracted to the transportation industry; and (c) to ord fair treatment to those having their money invested in the operty held for an used in the service of transportation."

(5) The present rule of section 15a is directed to the rates of the rriers, principally the railroads, subject to part I of the Act, just as e rule of section 216 (i) is directed to the rates of the motor carriers bject to part II. The proposed rule is directed to the rates of all des of transportation subject to the revised act, and the results to achieved are stated in terms, not relating to any particular mode transportation, but generally to the "national transportation stem" and the "transportation industry."

It is evident that the railroads want a rule which will be divorced m the requirement of section 1 that rates be "just and reasonable," cept for the proviso that the Commission shall have "reasonable itude to modify or adjust any particular rate which it may find to unreasonable or unjustly discriminatory and to prescribe different tes for different sections of the country.' In both the original and e present section 15a, the rule has been linked with the requireent of section 1 that rates be "just and reasonable." It has given e Commission certain standards to apply in enforcing that requireent, but without eliminating from consideration other matters ich have always, by well-settled principles of law, been regarded relevant and of weight in determining what is "just and reasonle." In particular, the railroads want the Commission precluded om consideration of the "effect of the rates on the movement of affic."

It appears, therefore, that they have drafted a rule designed to ve the same legal effect as they ascribed in 1931 to the rule then effect. As shown in Appendix A, they then argued "that the use the expression 'just and reasonable rates' in section 15a connotes different meaning from its use elsewhere and recognizes the paraount financial consideration," and that the section was superim>sed upon the power to prescribe just and reasonable rates in such way as to give "paramount and controlling" force to the "revenue nsideration." We did not wholly sustain that contention, so now is proposed to phrase the rule in such a way that all doubt on that core will be removed. Apparently the thought is that under such revised rule, if the Commission is asked to permit a general increase 1 rates, it will have no other option than to grant permission, proided it is shown that existing revenues are not adequate to support eeded credit and to provide investors with a reasonable return, and does not appear that the proposed increase will yield more revenue han is needed for these purposes. In other words, our function is o become that of "mere computers", a conclusion which we repuiated in Reduced Rates, 1922, 68 I. C. C. 676.

To indicate the extent to which this conception deviates from wellettled principles of law, attention may be called to the fact that the o-called Hoch-Smith Resolution, adopted in 1925 and still in effect, begins as follows:

That it is hereby declared to be the true policy in rate making to be pursued by the Interstate Commerce Commission in adjusting freight rates, that the 130981-39-pt. 4——39

conditions which at any given time prevail in our several industries should be considered insofar as it is legally possible to do so, to the end that commodita may freely move.

In passing upon the resolution in Ann Arbor R. Co. v. United States, 281 U. S. 658, the court said, at pages 666-667:

This policy is not new. In rate making under existing laws it has been recog nized that conditions in a particular industry may and should be considere along with other factors in fixing rates for that industry and in determining the reasonableness; and it has also been recognized that so far as can be done with regard for the interests affected rates should be such as will permit the co modities to which they relate to move freely in the channels of commerce.

The main difference of opinion between the Commission and the railroads with respect to section 15a in the past has arisen over the desires of the latter to raise rates in times of economic depression In periods of general distress from this cause and in the face of a consequent drop in the demand for their services, the railroads have attempted, unlike most other industries, to find a means of escape from the common suffering by heavy increases in their rates. Regardless of the law of supply and demand, the Commission has gone a considerable distance in acceding to these requests, but it has refused to go the full distance, because of the weakness of the railroads' ow supporting evidence and the strength of the evidence submitted in great volume and detail by the shippers of the country that the results would be harmful, not only to industry generally, but to the railroads themselves. What the railroads now seek, apparently, is that the Commission shall be precluded from giving any weight te evidence of the latter character.

It may be doubted whether the proposed new rule would actually accomplish what the railroads have in mind. In the first place, the language employed, while disregarding, would not repeal, the require ment that rates be "just and reasonable." In the second place, the ends to be achieved, as set forth in the clauses of the rule designated (a), (b), and (c), are all dependent for their achievement not o rates but on revenues. It is difficult to see how the Commission, in endeavoring to apply the rule, could avoid considering the probable actual revenue results of the rates sought, which is manifestly the same thing as considering the "effect of the rates on the movement of traffic."

In one important respect, also, the rule might be quite misleading to investors. As has geen seen, the ends to be achieved are stated in terms which do not relate to the railroads or any mode of transports tion specifically, but generally to the "national transportation system' and to the "transportation industry." The rates are to be adequate, not to sustain the present railroad system, but rather a "national transportation system sufficient at all times to meet the needs of con merce, of the Postal Service and of the national defense." They are further to be adequate "to establish and maintain credit so that capital essential to provide the needed facilities and service may be attracted." not to the railroads, but "to the transportation industry." They are finally to be adequate to "afford fair treatment to those having ther money invested in the property held for and used in the service of transportation," but fair treatment to investors in railroad properties does not necessarily require that a return be paid upon investment in properties which are outmoded and cannot furnish service as cheaply and efficiently as some other form of transportation. Assuming that

ere is now in this country a large surplus of transportation facilities er and above reasonable requirements and assuming, also, that for tain services other modes of transportation are better than the lroads, it must be obvious that literal adherence to the proposed le would not necessarily improve the financial condition of the esent railroad systems.

We agree that if the Commission is to be given, under a new act, wers of comprehensive regulation over all important forms of insportation, the "rate-making rules" in the present section 15a d section 216 (i) might well be superseded by some general rule. e believe, however, that such a general rule may well be of the me general character as the present rules, instead of taking the rm proposed by the railroads."

Pooling and consolidation. The Committee of Three recommended at section 5 of part I of the act be amended in two important spects:

(1) Paragraph (1) now permits the railroads, with the approval of e Commission, to pool or divide their traffic or earnings. All the ilroads concerned must assent, and the Commission must find that e arrangement will not unduly restrain competition. The proposed nendment would enable the Commission to require such pooling or vision, when found to be "in the interest of better service to the blic, or economy in operation", whether or not the carriers assentder such rules and regulations, and for such consideration as between such rriers and upon such terms and conditions, as shall be found by the Commission be just and reasonable in the premises.

also eliminates the provision with respect to undue restraint of >mpetition.

(2) Paragraphs (2) and (3) now direct the Commission to prepare nd adopt a plan for the consolidation of the railroads into a "limited umber of systems," this plan to conform as nearly as may be to tated specifications. Once adopted, there is nothing to compel onsolidations, but none may thereafter be authorized by the Comission unless it conforms to the plan. The Commission may, howver, change the plan in its discretion. The proposed amendment ould eliminate the consolidation plan, but enable the Commission to pprove and authorize any "consolidation, merger, purchase, lease, perating contract, or acquisition of control" which it finds will promote the public interest." Certain matters are specified to which due consideration shall be given in determining the public

nterest.

H. R. 2531, in title I, part II, contains provisions following exactly. he recommendations of the Committee of Three.

The Committee of Six makes no recommendation with respect to the pooling provisions, but proposes a change in the consolidation provisions very like that advocated by the Committee of Three. The bill which has been drafted to carry out the recommendations of the Committee of Six, however, contains a section (sec. 48) combining provisions with respect to the unification of all types of carriers. The limitations now contained in paragraphs (19) to (21), inclusive, upon unifications of water carriers with railroads are omitted, as are the provisions of section 213 (a) of part II, which require special proof in the case of acquisitions of motor carriers by railroads. Under this proposed section, unifications of different types of carriers would be permitted as freely as unifications of carriers of the same type.

The Commission favors, in principle, the amendment of paragraph (1) proposed by the Committee of Three and H. R. 2531. Pooling of railroad traffic or earnings was common prior to the enactment of the Act to Regulate Commerce in 1887, which prohibited a pooling. For many years thereafter, the railroads insisted that their financial condition would be greatly improved if this prohibition were removed. It was removed in 1920, when the present paragraph (1) was enacted, but since then the railroads have made little use of the opportunity thus afforded. We believe it probable that there are numerous situations in which railroad traffic (especially less-thancarload traffic) or earnings could be pooled to the advantage of both railroads and the public, and that it is desirable that the Commission be given authority not only to permit, but to require, such arrangements under appropriate conditions. Nor is it necessary, in view of the widespread and intense competition which the railroads now encounter from other types of carriers, to lay stress, as in the past, upon the competition of railroads with each other.

We believe, however, that the proposed amendment to paragraph (1) would be more adequately worded if changed to read as follows

(1) That except upon specific approval by order of the Commission as in this section provided, and except as provided in paragraph (16) of section 1 of this part, it shall be unlawful for any common carrier subject to this part to enter inta any contract, agreement, or combination with any other such common carrier carriers for the pooling or division of traffic or of gross or net earnings, or of any portion of traffic or earnings; and in any case of an agreement for the pooling o division of traffic or earnings as aforesaid each day of its continuance shall be a separate offense: Provided, That whenever the Commission is of opinion, after hearing upon application of any carrier or carriers engaged in the transportation of passengers or property subject to this part, or upon its own initiative, that the pooling or division, to the extent indicated by the Commission, of their trafr or gross or net earnings, or of any portion of traffic or earnings, including all any portion of general increases in rates authorized by the Commission, will be in the interest of better service to the public, or economy in operation, the Con mission shall have authority by order to approve and authorize, or require, suct pooling or division, under such rules and regulations, and for such consideration as between such carriers and upon such terms and conditions, as shall be found by the Commission to be just and reasonable in the premises.

The Commission also favors the change proposed by the Committee of Three, the Committee of Six, and H. R. 2531 in the consolidation provisions. A similar change was, in fact, recommended in the Commission's annual report for 1925, and repeated in the annual reports for 1926, 1927, and 1928. Both H. R. 2531 and the bill embodying the recommendations of the Committee of Six require the Commission to find, before approving a proposed unification, that it will "promote the public interest." H. R. 2531 provides that in determining the public interest the Commission

shall give due consideration to the promotion of the efficiency and economy of the carriers' service, the affording of better and cheaper service to the public the securing of a simplified and more effective regulation of the carriers, the ultimate establishment of a number of strong and efficient systems, the due protectin of the interests of the stockholders and creditors, the maintenance of such co petition among the carriers as is necessary and reasonable in the protection of the public interest; and to all other relevant matters.

H. R. 2531 also enables the Commission to make the transaction which it approves "subject to such terms and conditions and such modifications as it shall find to be just and reasonable."