court review reported under the title Palmer v. United States, 75 Federal Supplement 63, the court held that the Commission has no power to require payment for the use of a freight car at a rate which exceeds the cost of ownership, including a reasonable return on investment.

These bills would require the Commission to give consideration to matters other than the cost of ownership of freight cars in establishing freight car rental rates to be paid by user railroads. As I read these bills, the Commission would be required in fixing car rental to "give consideration to the level of freight car ownership" and in so doing include a return on value that "will encourage the acquisition and maintenance of an adequate car fleet" or "on the basis of elements reflecting the value of use of freight cars."

In short, these bills propose that some unspecified amount be added to the car-hire rates, not to reflect ownership costs to compensate the owner for the use of his property, but rather to accomplish a regulatory purpose. Thus, the bills would direct the Commission to fix a return on value at such a level-obviously in excess of the present 6 percent-as in the Commission's judgment might encourage the acquisition of additional cars, or, for the same purpose, to compute a car-hire rate on the basis of elements designed to reflect some vague value of use theory-neither of which factors can properly be considered as costs of ownership. Such a regulatory device in the guise of compensation was questioned by the court in the Palmer case as being "so completely unrelated to the evil sought to be remedied (a car shortage) *** that serious question would arise as to its validity as a regulation."

In seeking to accomplish a regulatory purpose, these bills would displace the long accepted standard of computing car rental on ownership costs, including a fair return on investment, by requiring the Commission to use variable, uncertain, and theoretical factors in fixing car rental rates. How would the powers granted, and required to be used, be exercised? At what level would a return on value be fixed so as "to encourage" the acquisition of freight cars? How would the Commission compute compensation on "the basis of elements reflecting the value of use of freight cars?" The bills do not answer these questions.

From a practical point of view, the multilevel per diem rates already guarantee a car owner depreciation and a 6-percent return, not on his original cost but on the reproduction value of his property. Few, if any, railroads earn a 6-percent return on their investment after depreciation, even on the original cost of their investment.

What the proponents of these bills obviously want are car-hire rates based on something more than the costs of ownership. Unless a railroad is more interested in becoming a lessor of property than it is in fulfilling its common carrier responsibility. I submit that the multilevel per diem arrangements. imperfect as they are from the point of view of the user, give railroads adequate incentive for investment in whatever supply of freight cars are needed to satisfy the requirement of that road's shippers. While I express these views on behalf of a long list of railroads, I can say with certainty what the situation is on the Pennsylvania. I recommended the very extensive car acquisition program which we carried out in 1964 and a much more ambitious program for 1965. The cars to be built, rebuilt, or given heavy repairs are designed to meet a specific requirement of shippers at PRR stations. They are modern, of high capacity, and embody the latest in design of construction. All of the new cars will have roller bearings. All of the boxcars will have cushion underframe. Many of them will be equipped with the latest in load positioning and load restraining devices. Irrespective of type, they have one thing in common— they are extremely expensive, and they can pay off their investment only if they are extensively utilized.

Protecting of shipper requirements on our line and the revenue derived therefrom, not per diem, has been the incentive for our car programs. Let me tell you what we have done in 7 years. In July 1960 we completed a new car program, begun in 1959: 22,972 new freight cars were acquired at a cost of $212 million. Financing was through conditional sale arrangements or leasing— mostly the latter.

It was the largest car program, both with respect to quantity and cost, that has ever been undertaken by any railroad in such a short period of time.

Our subsequent 1960-65 freight car program includes 18,489 new cars, at a cost of $237.3 million; and 20,763 cars rebuilt or rehabilitated, at a cost of $62.1 million, also chargeable to capital expenditures. Insofar as the shipping public

is concerned, these latter are the equivalent of new cars. In 1965 alone, we are spending $102 million for 6,179 new freight cars and, in addition, $10.2 million to rehabilitate 1,957 freight cars.

As of September 30, 1965, 17,343 of the new cars, and 20,347 of the rebuilt and rehabilitated cars, had been placed in service.

The total 1959–65 freight car program of the Pennsylvania Railroad involves capital expenditures of $511.4 million, covering 62,224 cars-41,461 new and 20.763 rebuilt or rehabilitated to new condition. More than 60,600 of these are in service, or 49 percent of the PRR fleet. More are coming off the line every day, and all will be in service before the end of the year.

As a result of these programs, while the Pennsylvania Railroad handled 7.55 percent of the total class I railroad revenue ton-miles and originated 7.39 percent of total cars originated, in 1964, on January 1, 1965, we had 109,872 serviceable freight cars, 7.81 percent of the 1,406,196 serviceable railroad-owned freight cars on class I railroads.

The Pennsylvania Railroad doesn't look to the Burlington or to any other road. which supports this legislation to assist it in meeting the requirements of its shippers for coal cars, for ore cars, for auto-parts cars, for high-grade, insulated. boxcars, or for jumbo covered hoppers, except to the extent that such equipment made empty on our lines may be available for reverse loading to the owner.

I strongly commend to the attention of the railroads who have supported this legislation that they consider adopting a similarly resolute program of constructing cars suited to the needs of the shippers on their lines, relying on the multilevel per diem rates to provide them with funds to liquidate their equipment indebtedness. As for the Pennsylvania, I can forecast that we will continue to do what we have in the past; namely, to buy, build, and restore to service by repairs every freight car suitable for use by our shippers that we can pay for. If we are compelled by Interstate Commerce Commission action required by this legislation to contribute to the construction of grain cars by the Burlington and other western roads, we would simply have fewer dollars to devote to construction of cars required by and suitable for the use of our shippers.

To assess a terminating line a per diem charge in excess of the fair ownership cost of the cars involved would be to penalize it for conditions not only beyond its control, but also which are the result of the origin or intermediate line turning over to it a shipment subject to detention despite the most diligent efforts of the terminating carrier. In such a situation, if the origin line has a shortage while cars are backed up at the port awaiting ships, it is not the terminating line's fleet of cars which is inadequate. It is the origin line which has insufficient cars to take care of the transportation needs of its shippers, and this is true irrespective of whether or not the origin line shows an annual net credit in its per diem account.

The question before your committee is just about that simple either each individual railroad will be able to do its part in modernizing and, hopefully, in expanding the supply of railroad freight cars to meet a growing requirement for railroad freight transportation, with particular emphasis on the requirements of shippers at its stations, or the freight car supply will indeed become a gigantie pool with no one feeling any sense of responsibility except to make payments into a common fund. In my judgment, this would be a gigantic mistake and might indeed sound the end of railroad transportation carried out by a group of independent, commercially motivated railroad companies.

You are concerned with car shortages. To the extent that they have existed since World War II, they were certainly not the result of an inadequate per diem rate, which has risen from $1 to as much as $12.18 per car per day in that period. Although there has been a decline in freight car ownership since 1945 railroad freight traffic has also declined, at about the same rate as railroad freight car ownership. The decline in railroad freight traffic was brought about in large part by the inroads of competitive modes of transportation, most of which are subsidized. During that period the railroads' share of intercity freight traffic in the United States declined from 67 to 43 percent, with the motor carriers, inland waterways, oil pipelines, and air carriers all showing gains. Also, it should be noted that the average car capacity in 1964 was 58.3 tons, as compared with 51.1 tons in 1945. In fact, a comparison of levels of car ownership. 1945 versus 1964, does not disclose the whole picture. Although the number of cars decreased by 15.4 percent in this period, the total carrying capacity decreased only one-fifth as much, or 3.4 percent, due to the retirement of small

ears and larger capacity of new ones. In the central western region, average tons of wheat per car originated has increased 14.3 percent, from 51.3 tons in 1945 to 58.6 tons in 1963, the latest available figure. This increase in tons of wheat loaded per car may be accounted for by the increased use of jumbo covered hoppers. As noted in the March 1965 issue of Traffic Management, there is a definite trend toward using 100-ton covered hoppers for grain shipments. The article reports that the Burlington lines recently took delivery of 460 and that the Santa Fe is the largest single owner with 3,600 covered hoppers. The railroads have encouraged grain shippers to purchase over 1,000 of these cars by offering them reduced rates if the shipper owns the cars.

There are now approximately 105,000 covered hoppers owned by class I railroads and by the car lines. This is an increase of 61,600, or 143 percent, since September 1, 1955. On order as of September 1, 1965, there were 3.891 covered hoppers, of which over 90 percent are 100-ton capacity. Each of these 100-ton covered hoppers is equal to two 50-ton boxcars and with greater utilization, such as unit train service, it is possible that one of these 100-ton covered hoppers could move as much grain as four 50-ton boxcars moved in 1945.

The railroads are accomplishing faster turnarounds, better car utilization, and expedited repairs to equipment, all of which reduces the equipment required for a given volume of business. The railroad industry plans to spend $1.3 billion on equipment this year, an all-time high. In 1964 it was $1.1 billion, then a new high. This is the result of the incentives that I have mentioned, not increased per diem.

A car shortage occurs whenever a railroad serving a station is unable to supply a shipper with the car or all the cars he requires for loading on a particular day. The shortage may occur at only one station and may be alleviated the next day. There may be a shortage of one type of car and a surplus at the same station of some other kind of car.

At times of unusually high demand, shortages may be quite widespread, such as shortages of coal cars when steel companies and utilities are trying to stock up in advance of the 14-day miners' holiday; temporary shortages of grain cars at country elevators during the height of the harvest; shortages of specially equipped gondolas for moving steel when industry is attempting to build up stockpiles against the possibility of a steel strike.

Seldom is there a shortage of all kinds of cars all over the country. The Car Service Division of the Association of American Railroads has means at its command to supplement the car service rules as a means of relocating empty cars. They can and do issue special car orders requiring railroads, which predominantly release more cars than they require for loading, to expedite the return of certain types of cars to certain railroads. Sometimes these orders provide for a return of a particular road's ownership while at other times they require delivery of empty equipment of a certain type irrespective of ownership. These orders are supplementary to the car service rules and to the extent that may be outstanding and in effect they restrict the right and remove the obligation of the road hauling them empty from either using them to protect loading or to refrain from using that road's own car in lieu thereof.

Orders of the car service division to expedite the flow of certain kinds of empty equipment do not carry any penalties. When they are not effective in bringing about the desired result, the Interstate Commerce Commission has, in recent years, issued similar orders over the authority of the Director of the Bureau of Service and Safety. As distinguished from car service division orders, these ICC orders do carry heavy penalties. Roads which have violated such ICC orders have been prosecuted in the courts and fined heavily for such violations. Thus, it is to be understood that means are already available through the car service division of the ICC to supplement the car service division rules as a means to moving empty equipment into loading districts where the supply is short. It should be noted that the fines for violation of the ICC car service division orders are levied against only the roads which violate them by misappropriating empty equipment for use other than as specified.

The application of the proposed increased per diem charges would impose an inequitable burden in instances where car service orders are in effect requiring the return of empty equipment to the owning line. With respect to boxcars moving to western railroads, it is common practice for the eastern lines to receive AAR and ICC orders to send literally trainloads of empty boxcars to the West to meet their grain loading and other requirements. Many of these western cars come to the Pennsylvania Railroad via Potomac yard here in Washington and other eastern junctions, and terminate at nearby eastern seaboard points. Under

the orders referred to the Pennsylvania is, in many cases, not permitted to load the cars but is required to return them empty to Chicago, or some other western gateway, and assume the regular per diem charge while they are on our line. Certainly, that per diem charge should not be increased. Rather, as a matter of equity, in view of the short haul we receive in the loaded movement, we should not only be relieved of per diem, but actually compensated by the owner for moving the car empty in long haul. What "incentive" would result from paying a higher per diem for a car that comes to a road without that road having any control over it, and which, when released, must be returned empty to the owner?

I fully recognize that in the very nature of railroad transportation a free flow of equipment is required, and that cars provided by one railroad for its shippers must perforce move in the direction of normal traffic flows to the lines of other railroads. As an example of this, during 1964 there was an average of 314 plain boxcars of Burlington ownership on the Pennsylvania Railroad in excess of Pennsylvania plain boxcars on the Burlington. During the same period there was an average of 138 gondolas of Pennsylvania Railroad ownership on the Burlington in excess of Burlington gondolas on the Pennsylvania. This is a normal situation and is brought about because the Burlington loads more boxcars to the Pennsylvania than we load to them, and the Pennsylvania loads more gondolas to the Burlington than they do to us. Additional ownership of boxcars by the Pennsylvania or gondolas by the Burlington would not alter or improve the situation.

One very fundamental objection to a per diem rate in excess of the true cost of ownership is that it would add substantially to transportation costs because of increasing empty car mileage. The so-called per diem urge in periods of less than peak demand for cars would cause railroads to send foreign cars home empty in order to save per diem payments, and at the same time load their own cars off-line to earn per diem payment. This practice would, and in the past always has, definitely increased empty car mileage and, in turn, the overall costs of transportation. The most efficient way to obtain maximum use of freight cars is to maximize loaded car mileage and minimize empty car mileage. What is proposed in these bills would, in periods other than peak requirements, lead to directly opposite results and would result in wasteful transportation. The industry urgently needs to improve its percentage of loaded car-miles to a total car-miles which can be accomplished only by a more efficient use of the present car fleet. This in itself would, in my opinion, materially relieve any intermittent car shortage situations. The artificial standard of fixing compensation for car hire, as provided in these bills, would be both inequitable and impracticable. It would result in unjust enrichment of the few carriers that can best afford to buy cars, in a burdensome penalty on the carriers which cannot afford to acquire or have no need for additional equipment, and in excessive empty car mileage to avoid penalty car-hire costs in contravention of sound car service practices which require the fullest use of the freight car fleet.

The CHAIRMAN. Are there any questions by any members of the committee?

If not, thank you very much. We are pleased to have your presentation.

Now, did you identify all of the gentlemen who are with you for the record?

Mr. SMUCKER. Mr. Richard Bongartz, general attorney of the Pennsylvania Railroad, accompanies me.

The CHAIRMAN. Very well.

STATEMENT OF HON. JONEL C. HILL, PUBLIC UTILITY COMMISSIONER, STATE OF OREGON, SALEM, OREG.

Mr. HILL. Mr. Chairman. I am Jonel C. Hill, public utility commissioner of Oregon. I have filed my statement. And I wish only to say in addition that we have been listening to the railroad's argument back and forth, and we think it is all the more imperative that the committee remember that the real point at issue is the needs of the shipper

and the receivers of freight. They seem to be forgotten sometimes in these intermural bouts.

The CHAIRMAN. Thank you very much, Mr. Hill.

I believe you are a member of the Public Utility Commission of the State of Oregon.

Mr. HILL. I am the commissioner. We do not believe in having three-member commissions.

The CHAIRMAN. You are the commissioner, you have one member of the commission?

Mr. HILL. That is correct, sir.

The CHAIRMAN. Thank you.

And your statement, Mr. Hill, will be introduced in the record. (The statement is as follows:)

STATEMENT OF HON. JONEL C. HILL, PUBLIC UTILITY COMMISSIONER OF OREGON

My name is Jonel C. Hill. I am the public utility commissioner of Oregon.. The State of Oregon supports S. 1098 and similar House versions.

In April of this year I appeared before the Senate Commerce Committee in support of S. 1098. Our freight car shortage was acute then, particularly in wide-door cars. Since that time, the wide-door car shortage has continued and, in addition, we have had shortages of common boxcars, flatcars, chip cars, and large capacity cars. The shortage has not only continued but has grown worse and seems constant.

As you well know, the trend of the total freight car fleet level continues down. For example, between January 1, 1950, and January 1, 1965, the fleet declined by a quarter million cars. Another 4,000 have been lost this year as of August 15. Some carriers have been maintaining their fleets while others have not. Among those that have are the railroads serving Oregon. Nonetheless, Oregon suffers severe shortages and when inquiry into the reason is made, the response is that the cars are off line and not returning home promptly enough. As long as it is more profitable to rent cars belonging to other roads than it is to acquire ownership the national car fleet will continue to deteriorate.

Complicating the situation of a dwindling car fleet and a growing economy are the frequently forgotten needs of national defense. The impact of a large scale temporary movement such as last year's "Operation Desert Strike" which resulted in a severe shortage of flatcars; or the present long term situation of untold numbers of freight cars under load with military supplies for Vietnam reveals strains inimical to the needs of this Nation. So tenuous is the Nation's car supply that movements such as these, relatively small by major war standards, cannot be accommodated without injury to other shippers.

A remedy must be found and it cannot longer be left to the railroads, they have formed their committees in the past, with their efforts either temporary or nonavailing. Nor can the shortage longer be left to the issuance of service orders by the Interstate Commerce Commission. The ICC car order of last week is fine and is appreciated, but such action is at best temporary and only partly effective. Also, as the Senate Committee on Commerce has found, schemes to subsidize the construction of new cars for railroads or to build and lease new cars to railroads should not be considered so long as other methods are available. An incentive is needed to make car ownership desirable by all railroads. S. 1098 provides the incentive. The Interstate Commerce Commission is presently engaged in a car service investigation, Ex parte 241, to discover what additional rules they might prescribe to alleviate the chronic shortages. This type of bill, S. 1098, can provide them with a needed tool, beyond their present ability to do by rule or regulation.

I think it important to note that prior objections to S. 1098 have lost their merit in view of the elaborate safeguards against undue injury to any railroad which are present in section I(14) (a) of the Interstate Commerce Act and in the bill itself. Section 1(14) (a) provides for a hearing and, of course, final Commission action is subject to judicial review. The bill has been amended to allow