failed to do so, as was the case in the New Haven proceedings. Under these circumstances, the Commission's exercise of power is essential to meet a national need of preserving vital transportation facilities, unhampered by local requirements that drain away its resources. III. ADOPTION OF H. R. 6012 WOULD IMPAIR THE POWER OF THE INTERSTATE COMMERCE COMMISSION TO ACT IN NECESSARY CASES Although it is generally recognized that commuter service is not a profitable service in the ordinary case, it is performed as an adjunct to other services of a more major character involving substantial road hauls which can absorb losses suffered in commuter service. In a rare case the carrier involved has no substantial road haul providing profits against which the commuter service loss can be offset. The Old Colony situation in the New Haven reorganization was an outstanding example. The Central Railroad Co. of New Jersey is another. In such a case it is obvious that continued operation of the properties at an over-all loss resulting from providing commuter service can only result in disaster. If the carrier's essential freight service is to be continued, some relief from commuter service losses must be provided. Where the carrier has been obliged to go into proceedings under section 77 because of its financial problems, it seems clear that exercise by the Commission of its power to eliminate a serious drain on the carrier's resources in order to preserve vital freight service is a matter of national public interest. Such a power should be strengthened rather than limited. For example, in the Jersey Central case, detailed studies of the commuter service during 1946, in evidence in the proceedings before the Commission, show a net loss attributable to commuter service of over $3,000,000 for that 1 year alone. The situation in New Jersey is further aggravated because of the severe taxes imposed upon the railroads operating in that State. These taxes fall with particular emphasis upon those railroads such as the Jersey Central which have no substantial mileage outside of the State to produce earnings sufficient to offset the tax burden within the State. In the course of the Jersey Central proceedings, exhibits introduced before the Commission showed that the tax rates in New Jersey are greater in proportion to railroad value than those of any other State in the Union. Under these circumstances the Interstate Commerce Commission may well conclude that the need for relief is so imperative that, as in the case of intrastate rates under section 13, local considerations must give way to the paramount national needs of a strong transportation system. Were the power of the Commission to deal with this problem eliminated, it would be powerless to afford necessary relief. In dealing with the critical situation presented in the New Haven case the Interstate Commerce Commission did no more than it would have been expected to do under a corresponding situation under section 13 of the Interstate Commerce Act where rates alone are involved. It may or may not adopt a similar plan in the case of the Jersey Central. In any event, it may reasonably be assumed that whatever action it takes in the Jersey Central will be fully supported by the evidence submitted and that it will deal with the needs of the situation in the light of the national public interest. In the absence of any showing whatever that the Interstate Commerce Commission has failed to act reasonably and properly in dealing with such a situation and in the absence of any showing that it would do so, and in view of the possible need for the exercise of such a power in extreme situations in the future, it is respectfully submitted that H. R. 6012 should be disapproved. Very truly yours, WILLARD P. SCOTT. NEW YORK 4, May 24, 1948. Hon. CHAUNCEY W. REED, Chairman of Subcommittee of House Committee on the Judiciary, DEAR CONGRESSMAN REED: I am making this brief reply to Mr. Scott's letter to you of May 21, in order to keep the record straight. In point III of his letter, Mr. Scott gives the impression that the New Jersey Central has operated at an over-all loss, due to commuter service. The "Income account" of the New Jersey Central, as submitted by the trustee at the hearings held a year ago before the Interstate Commerce Commission, on the railroad's application for an increase in commutation fares, shows that the New Jersey Central has earned a substantial operating profit, after absorption of all losses from passenger service and after allowance for all taxes. The figures are as follows: I do not have the figures for 1946 and 1947. In August of 1946 the lines of the New Jersey Central in Pennsylvania were taken over by a separate company known as the Central Railroad Co. of Pennsylvania. The income statement which I have and which was used for rate-making purposes, shows the operating results of only the New Jersey company. I assume that for reorganization purposes the lines of both companies are considered as one unit. It is evident that the New Jersey Central is well able to continue passenger service. Despite this fact, I think it is apparent both from Mr. Scott's letter and the letter from Mr. Splawn to Congressmen Michener that there is a very real danger that the plan finally approved in the New Jersey Central reorganization will contain provisions permitting elimination of passenger service without reference to the State public utility commission. The only sure protection against this danger is H. R. 6012. Respectfully yours, EDGAR E. HARRISON. PLAINFIELD, N. J., May 24, 1948. Re H. R. 6012. Hon. CHAUNCEY W. REED, Chairman of Subcommittee of House Committee on the Judiciary, House of Representatives, Washington 25, D. C. DEAR CONGRESSMAN: I have just received a copy of the letter addressed to you by Willard P. Scott pursuant to the understanding had at the conclusion of the hearing on H. R. 6012 before your subcommittee. I believe most of the argument set forth in Mr. Scott's letter is rebutted by the statements and testimony before you and so as not to create a voluminous record I wish merely to make brief reference to certain sections of his letter. The second paragraph of the letter states that the views expressed are Mr. Scott's individual views. It should be brought to your attention, however, that Mr. Scott is a member of the firm of Oliver & Donnally, which firm represents the bondholders in the present plan of reorganization of the Central Railroad Co. of New Jersey and which firm was the one which handled the New Haven reorganization. It may be that the expressions of his letter are those of a group interested not, as stated in the letter in the national welfare, but in the pocketbooks of certain bondholders. On page 2, reference is made that of all railroad reorganizations the New Haven is the only one to which this plan has been adopted. It may be that the attorneys for the other interested parties did not see the possibilities of this plan. There is no reference that the article to which objection is made was incorporated in any plan other than that of the New Haven and now the Jersey Central. The fact that a "bad" power is infrequently exercised does not make it any the less undesirable. If The first complete paragraph at the top of page 4 has no basis in fact. article III is adopted in the plan of reorganization, the State definitely loses necessary controls and powers including, as was pointed out by Mr. See, that vital control over safety. The so-called threat by reason of the utility commission's actions with regard to the Old Colony case set forth on page 5 does not exist in the present case as has been testified by William Wyer, the former chief executive officer of the Central at hearings before the Interstate Commerce Commission. He admitted that the Public Utility Commission of New Jersey was a very fair body and had treated the railroad well. This is substantiated by the statement and proofs offered by Deputy Attorney General Harrison at the hearing. It is somewhat illogical to dwell upon the needs of the Central Railroad from the angles of national public interest and the freight service being rendered as weighed against the necessity and need for the suburban passenger service. Argument that national interest and freight service cannot be carried on by this "little" railroad because of its losses from taxes and passenger service within the State of New Jersey does not take into account nor make reference to the fact that the main source of income of this railroad has voluntarily been severed by the formation of two companies, namely, the Jersey Central and the Pennsylvania Central. Mr. Scott's letter refers to the need of maintaining the vital freight and through passenger service. Insofar as the through passenger service, which is the Reading Co. and Baltimore & Ohio service, the persons so served can reach their destinations through the use of other railroads. The passengers who will lose their means of transportation if the plan is adopted with the present article III have no other means of railroad transportation in order to reach their destination. If through passenger service is the least bit important then the Reading Co., who hold the majority of stock in the Central and use the Central for its through passenger service, could and should take over the entire Central line and operate it as part of the Reading System. The same applies with regard to the Baltimore & Ohio Railroad which uses the Central lines in order to reach New York City and which company is the greatest single stockholder of and has the controlling interest in the Reading Co. The question resolves itself into one of public interest against private interest and the right of the States to retain certain necessary controls over railroads. H. R. 6012 is a most worth-while bill and should be speedily enacted into law. Respectfully yours, AUGUSTUS S. Dreier. NATIONAL ASSOCIATION OF RAILROAD AND UTILITIES COMMISSIONERS, Re H. R. 6012, amending section 77 of the Bankruptcy Act. Chairman, Subcommittee of House Committee on the Judiciary, DEAR CONGRESSMAN REED: Mr. Willard P. Scott has provided me with a copy of his letter to you, dated May 21, 1948, expressing opposition to the enactment of H. R. 6012. Mr. Scott presents four points in support of his position. Under headings which summarize each of his points, I wish to submit the following brief comment: Mr. Scott states that ICC power which H. R. 6012 would withdraw constitutes no threat to State jursidiction because it has been, and will be, rarely used. The existence of the power, under section 77, to bypass State regulation of passenger service was first revealed in November 1939 in dicta contained in the Supreme Court decision in Palmer v. Massachusetts (308 U. S. 79). Because of improving economic conditions associated with World War II, few railroad reorganization proceedings have been initiated since that date. Those cases which were pending in 1939 were, for the most part, too far advanced to be affected by the decisions in Palmer v. Massachusetts. This is the chief reason why the ICC power in question has actually been exercised in only one case and is pending in only one additional case. Any substantial adverse change in the economic condition of the country may bring another wave of railroad reorganization proceedings, though of course every one hopes that this will not be the case. The time to correct defects in the law is when the defect is discovered, and before substantial injury has been done. An undesirable extension of Federal power should not be continued merely because it will be sparingly used. It is small comfort to the people of New Jersey, or to the people of any other State which may be next on the list, to know that the protection of State regulation will be left undisturbed in any number of other States. There is only one way to make certain that Mr. Scott is correct in saying that this Federal power will be rarely used—that is, to enact legislation withdrawing the power. Mr. Scott states that it can be assumed that the Commission will not exercise this power unless the facts clearly justify the need therefor. Were the Federal power in question used only to make a present determination of specified passenger service to be immediately discontinued, Mr. Scott's assumption might be admissible. Even then we question whether the Federal agency is in a position to appraise properly the local needs of the general public, which must be balanced against the system needs of the carrier. However that may be, in the cases which have so far arisen, the Federal power has been exercised or proposed to be exercised, not by authorizing an immediate discontinuance of specified service, but by approving a formula under which, in the event of a future loss of a certain number of dollars, the carrier is free to then change or discontinue any service it considers necessary to overcome the loss. Approval of such a formula requires more than a finding of present facts. It requires a present prediction that, at any time in the indefinite future, the loss, from passenger service, of a certain specified number of dollars, will render the discontinuance of some or all of such passenger service consistent with the public interest. Such a prediction must either ignore, or involve a guess regarding, the future volume of all classes of the carrier's business and the revenues therefrom; the volume of net profits from the entire business of the carrier at such time; the value, in purchasing capacity, of the dollar at such time; and the consequent actual effect of such loss of a specified number of dollars upon the ability of the carrier to then continue to serve the public. In addition to this prediction, approval of such a formula also involves an expression of faith in the carrier's desire and ability to make any required future change or discontinuance of service in a manner compatible with the public interest, and without the need of any surveillance or regulatory control by any governmental agency. Crediting the Interstate Commerce Commission with the best of intentions, the State commissions are justifiably skeptical af any regulatory modus operenda which requires not only a determination of present facts, but also prescience as to future needs and conditions, and faith in the carrier's superior ability to adjudge and safeguard the public interest. No State commission claims the ability to regulate by formula, in futuro, in this way. We deny that it is possible for agency to make present findings of fact which would justify the surrender, now, of future State and Federal regulatory authority in the event of happening of certain conditions specified in a formula. Mr. Scott states that, in principle, the Federal power in question is similar to that exercised under section 13 of the Interstate Commerce Act. The Federal power conferred by section 13 is the power to review State commission orders relative to railroad rates, and to override those orders in the event of a finding of undue prejudice or discrimination against interstate commerce, or persons and localities in interstate commerce. Primary rate jurisdiction remains with the States. The Federal power is, in effect, an appellate procedure. Under the doctrine of North Carolina v. United States, (325 U. Ŝ. 507), the Federal agency's reviewing power under section 13 is closely circumscribed. The Federal power asserted under section 77 is not the power to review State commission service orders, but the power to exercise initial and primary jurisdiction in cases where the State has not acted and has not been asked to act. Moreover,under section 77, the Federal power may, and has been, exercised by approving a formula effective in the uncertain future. No Federal authority exercisable under section 13 remotely approaches this section 77 power to encroach upon and destroy State jurisdiction. Mr. Scott states that the Federal power in question enables the Commission to meet the needs of a critical situation where State regulatory bodies have failed to do so. In all States, the carriers are assured of a public hearing and a full opportunity to present their views. In every case, an appeal may be taken to the courts, including appeal to the Supreme Court of the United States on all constitutional questions. In rare cases where franchise obligations may restrict a State commission's authority to authorize justifiable curtailments of service, the remedy is to seek required fare increases, or release from franchise obligations through State legislative action. These matters were fully discussed in our oral statement to the Committee on May 14. The approval of a formula which strips a State commission of regulatory power to deal with future service problems not yet developed or presented cannot possibly be justified on the ground that the State commissions "have failed" to meet the situation. Unless and until the "situation" actually arises at some future time, it will not be known what specific action the State regulatory commission will take. The assumption that State commission will not render proper and fair decisions in such cases, and that the Federal agency can better judge the requirements of the situation long in advance, and that the over-all public interest is in better hands by circumventing State regulation and giving the carriers free rein, is invidious and patently inadmissible. I appreciate the opportunity which has been afforded to comment on Mr. Scott's letter. Yours very truly, FREDERICK G. HAMLEY, General Solicitor. Hon. EARL C. MICHENER, INTERSTATE COMMERCE COMMISSION, Chairman, Committee on the Judiciary, House of Representatives, Washington D. C. DEAR CHAIRMAN MICHENER: Your letter of April 5, 1948, addressed to the Chairman of the Commission and requesting a report and comment on H. R. 6012, introduced by Representative Case of New Jersey, to amend section 77 of the Bankruptcy Act, has been referred to our legislative committee. After careful consideration by that committee I am authorized to submit the following comments in its behalf: Subdivision (b) of section 77 in general sets out the requirements of the statute as to what a plan for the reorganization of a railroad may and shall include and specifically states that the plan shall provide adequate means for its execution including a rather long list of provisions which may be included, ending with the following: "and may include any other appropriate provisions not inconsistent with this section." H. R. 6012 would amend the act by adding at the end of subdivision (b) the following: "Provided, however, That such plan of reorganization shall not affect the existing authority of any State or State regulatory agency relating to services, operations, or rates. The second sentence of subdivision (f) of section 77 is as follows: "Upon confirmation of the plan, the debtor and any other corporation or corporations organized or to be organized for the purpose of carrying out the plan; shall have full power and authority to, and shall put into effect and carry out the plan and the orders of the judges relating thereto, * * * the laws of any State or the decision or order of any State authority to the contrary notwithstanding." The proposed bill provides for insertion after the word "authority" near the end of the above provision of the following: "other than those relating to service, operations or rates." Thus, the proposed amendment would have the effect of prohibiting inclusion in a plan of reorganization of any provision affecting the existing authority of any State or State regulatory agency relating to service, operations, or rates. In considering the effect of this proposal, it appears that in at least two respects, it would impose important limitations upon the powers heretofore asserted by the Commission and the courts under the Bankruptcy Act. These involve plan provisions for termination of passenger operations under specified conditions, and for merger with a corporation chartered in another State, of a railroad corporation operating in a State which imposes certain restricting regulatory provisions upon railroads owning or operating property in the State but not chartered under the laws of the State. There are two outstanding examples of the first-mentioned situation. In the New York, New Haven & Hartford Railroad Co. reorganization, the Commission approved a plan which provided for acquisition by the reorganized New Haven of the property of the Old Colony Railroad Co. In view of the enormous deficits experienced by the latter company, principally as a result of the high costs of terminal operation in Boston, the plan provided for termination of the Öld Colony passenger service, when the losses from such services exceeded a critical figure specified in the plan. The critical figure having been exceeded in the time specified, the New Haven recently served notice on State authorities that it would terminate much of the Old Colony passenger service on October 1, 1948. Such plan provision, of course, required modification of the Old Colony and New Haven charters. The other case of this character arises in the Central Railroad Co. of New Jersey reorganization, in which a plan was filed containing somewhat similar provisions to those in the New Haven case. Hearings have not been concluded in this proceeding, and no decision has been made by the Commission. The text of these provisions of the plan is attached hereto as appendix A. The best example of merger of a railroad contrary to State law occurred in the plan approved in the Chicago, Rock Island & Pacific Railway Co. reorganization, |