We do not pretend that this is the only solution, or even that it may be the best one. But after some 10 years of open invitation to all parties interested to come up with an answer, we think the bill represents the best solution available.

I want to thank you for your patience in hearing me, and I would be happy to try to answer any questions that you might have.

Senator PROUTY. Now, Mr. Walrath, we will subject you to a few questions.

Mr. Walrath, as you know, many if not most of us are concerned with the proposed legislation.

Is it your opinion that many railroads actually need an expanded car fleet to handle their originating traffic requirements?

Mr. WALRATH. I could not identify any individual road, Mr. Chairman, because one of the first purposes of our study, would be to find out who are deficit roads.

We know that deficit roads exist by virtue of the inability of railroad systems as a whole to meet the needs of shippers.

I think we will very clearly find that the eastern roads are in the deficit position, at least in some cases. I recall having heard Mr. Langdon, president of the B. & O., explain what a difficult time he had in meeting the demands of the Cuban situation when a heavy demand for cars was called upon to move traffic south.

Whether he meant that his road was short of cars at that moment, or whether he was unable to get cars from other roads, I am not aware. I know these things occur, and we can't meet the crises.

Senator PROUTY. It is my understanding that the so-called car service rule requires railroads to load cars of foreign ownership in preference to their own when such cars are destined off their line; is that correct?

Mr. WALRATH. They have, I think, a rule that some people call the 3-to-1 rule. I am not quite aware of the details.

I am sure some of the railroad witnesses could more clearly state it. I notice that in the 1961 record of the hearings before the Senate that this rule was mentioned.

There is a requirement, an internal rule of the railroads themselves, that they load back or load out foreign cars rather than their own, and that they are supposed to hold enough cars to meet their own originating requirements, yes.

Senator PROUTY. If this is true, wouldn't it more or less force the eastern lines to build cars which they don't need, or else pay a heavy penalty in the form of these charges?

Mr. WALRATH. I should say, Mr. Chairman, if you have the ideal situation of every road owning what it needed but no more than enough than to load out its own originating traffic, we wouldn't have a car shortage.

Not having studied the individual roads to see what their individual requirements are, as we would have to do at hearings or in some fashion under this bill, I would be reluctant to guess at what inequities might exist.

Certainly there would be no purpose on our part to make one road own more cars than it needed, more than its proportionate share, based on the traffic that it originated or controlled.

I mentioned in my direct testimony that there may well be inequitable situations that the railroads themselves will have to try to straighten out and seek our approval on.

Whenever we discover inequities on our own, I think it would be our responsibility to try to propose some form of relief.

Senator PROUTY. Is it your judgment that some of the eastern lines terminate far more traffic than they originate?

Mr. WALRATH. I think that may be true, yes sir, especially some of the short lines which have nothing but traffic provided by the other railroads. They are a very clear example of inequitable situations if we require them to own rail cars in proportion either with their revenue or their tonnage.

Senator PROUTY. In other words, they need fewer cars than many of the others?

Mr. WALRATH. I think that is entirely correct, sir.

Senator PROUTY. Is it true that the railroads that are supporting the present legislation had net per diem receipts of $34.6 million? Mr. WALRATH. I have heard that said. I didn't check those figures. Senator PROUTY. Could any of these railroads be classed as terminating railroads, similar to eastern lines?

Mr. WALRATH. They certainly would on some traffic. We normally think of them as the agricultural originating roads. But certainly on products from the East back, I suppose they terminate quite a bit. Senator PROUTY. I rather assumed from what you have said thus far that you might be receptive to some kind of amendment that would require the ICC to consider different criteria in setting the per diem rate. Am I correct in understanding that?

Mr. WALRATH. I wasn't suggesting that, Senator, because I think we need a considerable freedom of discretion, and of course, sound handling, if we are to meet the ever-changing picture. I'm quite aware that some shortages may exist because capital that is available is being put into special equipment rather than into ordinary boxcars that are required at harvesting time.

I would have serious misgivings were we given the responsibility of trying to work out an incentive per diem plan based upon specific statutory criteria and then find that the situation changed from the time that we tried to help in writing such specific criteria.

I like the way the present bill is drawn, sir. I think it lays the broad guidelines down. We can work within it.

Senator PROUTY. I believe last year that the Association of American Railroads indicated in a statement before this subcommittee that with increased maintenance and increased efficiency, existing car fleets should prove adequate to meet such requirements as can now be foreseen. I assumed that you don't consider that an accurate reflection.

Mr. WALRATH. I think 1963 has shown that that doesn't work out in practice. Perhaps the ideal of shippers-prompt loading and unloading, quick handling through terminal and classification yard, transit by the shortest route to the consignee, no waiting time, and rapid return of cars could be demonstrated on paper. In practice it just hasn't worked that way.

Senator PROUTY. To what extent has the 7-percent income-tax credit provided by the Revenue Act of 1962 acted as a stimulus to new car investment?

Mr. WALRATH. I only know what we read in the trade journals, that orders are being placed for new cars. It is my impression a great many of these orders are for special-type cars, cars designed for piggyback, large-capacity cars, and other special types of cars, rather than for cars which are usually in short supply, such as boxcars for handling heavy agricultural commodities.

Senator PROUTY. This has been of some real benefit to railroads, as has the accelerated depreciation.

Mr. WALRATH. I should think so. You have touched on a sensitive point as to those railroads which have not made use of the tax credit. Senator PROUTY. Many roads which are opposed to the proposed legislation are not in a position to benefit from either of those.

Mr. WALRATH. I'm afraid you're right. I'm afraid that's one of the facts, one of the difficulties of this situation.

Senator PROUTY. I think you said during your testimony-perhaps I'm wrong, and I would like it clarified; have you considered a sliding scale for per diem charges?

Mr. WALRATH. Of course, we haven't officially considered a scale at all since the Palmer case. We haven't gotten right down to try to resolve the problem in that sense. If the question is whether such a scale is required, I think the answer necessarily is affirmative because $2, a flat $2 or $2.88, or any figure you pick, would not be fair in the light of modern-day special equipment. Some of this equipment is worth a great deal more than standard cars, and some of it is worth less. Old cars that have been depreciated are worth less than those that are brand new, either to the user or to the owner.

I think we would necessarily have to give weight to consideration of a sliding scale.

Senator PROUTY. In your opinion, what effect would higher per diem rates have on the New Haven Railroad, and perhaps the Boston & Maine?

Mr. WALRATH. There again it depends on the flow of traffic. If a deficit railroad is involved, higher per diem rates might have an economic impact. There again, the question concerns the status of a particular railroad. If it is mostly a receiving line, experiencing long delays in port or at its receiving points, such rates might have an adverse effect. That might be one of the situations where an inequity is created which should be straightened out by interrail agree

ments.

Of course, there is always-again I do not have details on it-there is always the remedy, between railroads, in the division of rates, to take into account the revenue needs.

Senator PROUTY. As a matter of fact, it would only add to the difficulties which these railroads and others in the east are experiencing, would it not?

Mr. WALRATH. It certainly could in some instances, yes, especially if we were to set the rate at too high a level. There again it is a question of what is fair to the owning railroad and is an incentive to anyone, whether it be the New Haven, even in receivership, to acquire, through lease or through purchase, equipment to meet its fair share of the transportation burden.

Senator PROUTY. A member of the staff has just called to my attention the fact that in 1962 the New Haven had a per diem deficit of $15 million. This would only increase that, would it not?

Mr. WALRATH. I didn't hear the year, sir.

Senator PROUTY. 1962.

Mr. WALRATH. Of course, I would think the New Haven's operations are not a normal operation under the present situation.

I am not trying to evade your question. I suppose if they had such a deficit, and costs of per diem were higher, it would enlarge

the deficit.

Senator PROUTY. They haven't been paying that, I presume?
Mr. WALRATH. No, sir, I think not.

Senator PROUTY. Do you have any questions, Mr. Grinstein?

Mr. GRINSTEIN. Mr. Chairman, you mentioned that there was a decline in the number of cars and also a decline in the capacity of

cars.

Has the decline in capacity been less than that in numbers?

Mr. WALRATH. No, I haven't actually had that researched, Mr. Grinstein, but I base that conclusion on the fact that we are not meeting the needs of rail shippers. We do know, of course, what the tonnage is. So that I should say the decline in the number of cars has been in excess of the increased capacity for that reason, if for no other.

Current car shortages are more acute and more difficult to resolve. As I pointed out, in trying to resolve one situation we created a shortage somewhere else.

Mr. GRINSTEIN. I am afraid I missed the point here. Do you define the decline in capacity from the lack of service available?

Mr. WALRATH. Yes. That is the general basis on which I made. that statement. I don't know what the ratio is today but considering increased carrying capacity and turnaround speed, and other modern improvements, today you wouldn't require as many cars as you would have 20 years ago in moving a given amount of tonnage. I am satisfied that is correct.

Faster trains, longer trains, higher demurrage charges that induce shippers to handle cars faster, all those things have helped. I am saying that despite those things, our rail fleet is not as able to meet the needs of commerce as it was 20 years ago.

Also, the increase in bad order cars is alarming. Even if we had the same number, the increase in bad order is far above what knowledgeable rail people think is a proper average. It has been up to very nearly 10 percent at times, it is a little better than that now.

We are having heavier retirements of rail cars than replacement. And on the existing car fleet, the incidence of heavy repairs is increasing. Indeed, the percentage of the available cars that require extensive rebuilding has reached an alarming figure. I don't pose as an expert in this matter, but I think the Association of American Railroads is equally concerned with that feature of the problem. Mr. GRINSTEIN. The association has a car service order organization within it?

Mr. WALRATH. Yes, they issue their own car service orders. Normally, our orders are entered only when their efforts have not solved the situation.

We seldom enter a car service order unless the railroads have exhausted their internal efforts to meet the situation. They know about a crisis situation as quickly as we do. They have calls for cars they can't supply, so they endeavor to act themselves.

The difficulty is that the AAR, being a voluntary association, has no sanctions to impose. On the other hand, violation of our order carries a heavy penalty. Ordinarily, our orders are entered only in very extreme situations.

Mr. GRINSTEIN. How do you get your statistics? How do you know, for example, when you have a car shortage? Do you just hear of complaints from the sugar people in Louisiana or from the grain people in Nebraska?

Mr. WALRATH. No; we actually check the situation in the field. Our field staff has this responsibility. We might get a complaint that would not be based on fact at all. We check those, police them in the field.

When we are told that cars we are sending back to Nebraska, for example, are creating a shortage in sugar cars in Louisiana, our service agent in the New Orleans district will check to make certain that the information is correct.

Our staff also checks through the AAR people. And I think it fair to say that we are not very often in disagreement with the Association of American Railroads on whether a shortage exists. Sometimes they don't agree with us about the entry of our orders.

Mr. GRINSTEIN. Isn't there a normal situation of car shortage? Don't you anticipate you would regularly have an anticipated level of car shortage?

Mr. WALRATH. Yes, that is true. And if you need any details I have here with me, as I announced earlier, the Director of the Bureau of Safety and Services, and his assistant, Mr. Rider, who deals with that particular problem.

I take it that you are talking now of the normal harvest time, we will say, for grains in the West, or in the Midwest, or in the Southwest. We know when these periods occur. And the owning railroads in those areas do attempt to gather their cars, and sometimes they even gather foreign cars, too, in advance of this known need. It is my impression that they begin some 30 days ahead of a harvest to get and retain as many cars as they can which, in the case of foreign cars, puts a burden on them, of course, similar to that of the terminating roads.

These situations are not without equities and in-equities at each end. The carriers do attempt to meet the known shortages. I think the point is that nobody contends that railroads today, many of which are operating with difficulty at best, should have a surplus of cars to meet shipper requirements. Only an adequate supply is needed.

What we are trying to do is find a happy medium where we are not faced with continually increasing shortages and where, in trying to meet the Nebraska needs, our orders will not create a shortage of sugar cars in Louisiana. It is a very simple and current illustration. Mr. GRINSTEIN. I had a conversation some time ago with a gentleman, I believe named Mr. Buford of the Association of American Railroads, and he indicated that they expected in nonharvest time to have a certain car shortage throughout the country. But that in harvest time it tends to increase geometrically.

Mr. WALRATH. Yes, I think that is true. I think if the balance were perfect you would expect to have some surplus in nonharvest times and some shortages in harvest times.