FREIGHT CAR SHORTAGE

TUESDAY, JUNE 25, 1963

U.S. SENATE,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON FREIGHT CAR SHORTAGE,

Washington, D. C. The subcommittee met pursuant to adjournment at 10 a.m., Hon. Senator Thurmond presiding.

Senator THURMOND. The subcommittee will come to order.

This morning's hearing is the second in the 88th Congress on the bill designed to relieve the railroad freight car shortage, S.1063.

Witness at the first meeting endorsed both the goals and mechanics of this proposal, which was introduced at the request of the Interstate Commerce Commission. I understand that the appearances today will be, for the most part, in opposition.

Senator Moss of Utah had been scheduled as the initial witness, but he cannot be here due to a commitment to chair another meeting. His statement will, without objection, be placed in the record. (Full text of statement follows:)

STATEMENT OF HON. FRANK E. Moss, A U.S. SENATOR FROM UTAH

Mr. Chairman and members of the subcommittee, we are again considering a bill which has been presented to the U.S. Congress each session for the past several years. The mere fact that it has so far failed to be enacted by the Congress does not in any way lessen the importance or the urgency of this bill. As a matter of fact, the problem of freight car shortage has grown increasingly severe to the serious detriment of our national welfare.

As I have stated on several occasions in the past during discussions on the bill, the people of Utah and other Western States are vitally interested in the passage of this bill, which is designed to relieve critical shortage of freight cars for shipping agricultural products and livestock to distant markets. During harvest seasons this shortage assumes the gravity of a crisis for Utah and many other Western States. whose economies are dependent to a considerable extent upon agricultural products.

A study of the up-to-date data on freight car ownership will show that prospects for securing necessary freight cars at the time and place needed are certainly no better this year than in the past. Current U.S. shortage of freight cars as of the week ending June 8, 1963, totals 11,828. As of May 1, 1963, freight cars ordered total 16,344. Despite this sizable order for new freight cars, they are just not being installed as fast as old cars are being retired. As of the same date, new freight cars installed were 11,079, but the number of old ones retired totaled 26,201. This is more than double the number of new ones installed. In addition to the nationwide inadequacy of the freight car fleet, there is also the unhappy phenomenon of eastern railroads withholding the prompt return of cars owned by those of the West, which in general maintain fleets large enough to handle their own volume of business. This is, of course, attributable to the per diem charge of $2.88 for off-line cars, which is much too low for such equipment that earns generally far in excess of this amount. It is cheaper to pay the charge for using off-line cars than to build new cars. This being so, railroads naturally have no incentive to purchase new cars or to maintain old cars in good order.

S. 1063 is designed to remedy this situation. It will authorize the Interstate Commerce Commission to prescribe per diem charges for the use of freight cars on a basis that will provide an economic incentive to the deficit owning raliroads of our Nation to acquire and maintain their proportionate supply of cars adequate to meet the needs of commerce and the national defense. It will provide just and reasonable compensation to car owners and contribute to sound car service practice.

The authority contained in this bill is urgently needed and indeed so requested by the ICC in order to remedy once and for all this perennial problem and to replace the ineffective stop-gap measures that the ICC has been compelled to exercise by issuing service orders whenever recurrent emergencies develop.

I hope this committee will agree with me that it is imperative this bill be passed as soon as possible to assure an adequate freight car supply for all normal traffic and a reasonably adequate supply during harvest or periods of emergency.

Senator THURMOND. The Chair calls Mr. Greenough, president of the Pennsylvania Railroad, to lead off.

STATEMENT OF ALLEN J. GREENOUGH, PRESIDENT, PENNSYLVANIA RAILROAD; ACCOMPANIED BY RICHARD R. BONGARTZ, GENERAL ATTORNEY

Mr. GREENOUGH. Senator, I have a statement which I would like to read and interpolate, perhaps, as I go along, and answer any questions the committee has, either during the statement or at the end of it.

My name is Allen J. Greenough. I have been employed by the Pennsylvania Railroad for 35 years in various operating capacities, and since November 1, 1959, have held the position of president and chief administrative officer. My knowledge and familiarity with respect to freight car requirements, utilization, and distribution have been accumulated in the hard school of experience over a long period of years as division superintendent, superintendent of freight transportation, general superintendent, general manager and vice president transportation.

I am appearing here in opposition to S. 1063, both on behalf of my company and of the following 21 railroads:

Ann Arbor Railroad Co.; Bangor & Aroostook Railroad Co.; Central Railroad Co. of New Jersey; Delaware & Hudson Railroad Corp.; Detroit, Toledo & Ironton Railroad Co.; Erie-Lackawanna Railroad Co.; Florida East Coast Railway Co.; Lehigh & Hudson River Railway Co.; Lehigh Valley Railroad Co.; Long Island Rail Road Co.: Maine Central Railroad Co.; Monon Railroad; New Jersey, Indiana & Illinois Railroad Co.; New York Central System: New York, Susquehanna & Western Railroad Co.; Pittsburgh & Lake Erie Railroad Co.; Pennsylvania-Reading Seashore Lines; Pittsburgh & West Virginia Railway; Reading Co.; Seaboard Air Line Railroad Co., and Wabash Railroad Co.

These railroads own 25.14 percent of the class I railroad freight car ownership in the United States. Adding to this ownership that of the Southern Pacific, New Haven, and Boston & Maine Railroads, which separately are opposing this bill, the railroads in opposition own 30.82 percent of class I railroad ownership.

Senator THURMOND. Do you mean by that railroad freight car ownership?

Mr. GREENOUGH. Yes, sir; exclusive of privately owned cars, of

course.

S. 1063 would require the Interstate Commerce Commission to give consideration to matters other than the cost of ownership of freight cars in establishing freight car rentals to be paid by user railroads. Under the provisions of section 1(14) (a) of the Interstate Commerce Act, which S. 1063 would amend, the Commission is empowered to fix the rate of freight car rental to the extent of compensating the car owner for the cost of ownership, including a reasonable return on investment. Anything in addition to such cost has been held to be a penalty, and therefore unlawful. Palmer v. United States, 75 Fed. Supp. 63 (1947).

To circumvent this decision, S. 1063 has been introduced to require the Commission, in fixing car rental to "give consideration to the level of freight car ownership" and, in so doing, to 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.

The purported objective of the bill is to "encourage the acquisition and maintenance of a car supply adequate to meet the needs of commerce and the national defense." While no one can quarrel with the objective, the means proposed would serve principally to enrich a few railroads, by penalizing other railroads which cannot afford to pay such tribute, without accomplishing the desired result. Indeed, it could very well actually defeat its objective.

S. 1063 is identical in content with other bills that have been introduced in recent years, and which, fortunately for the railroad industry, have failed of enactment. As in the past, the bill is principally sponsored by a group of railroads, primarily in the West, which would profit by its enactment. These railroads own 31.43 percent of the freight car ownership.

To give you some idea of the economic forces at play here as between class I railroads, the group of railroads which support this bill had a composite rate of return on net investment in 1962 of 3.79 percent. The railroads that I represent had a rate of return on net investment in that year of only 0.95 percent. The rate of return of the proponent lines also exceeded the 2.79-percent rate of return for all class I railroads in 1962.

For the first 3 months of 1963, the railroads that I represent had a combined deficit of $21.1 million, as compared with a combined net income or profit of $43.2 million for the group supporting the bill. Of the 35 class I railroads failing to earn their fixed charges during the first quarter of 1963, none of which support this bill, 22 are in the East.

Furthermore, this group of railroads supporting S. 1063 enjoyed a net per diem credit of $33.3 million in 1962, in contrast to a net per diem debit of $35.7 million for the group of railroads which I represent.

For each nickel that the per diem rate is increased, the class I railroads supporting this bill would receive $578,966, based on their 1962 operations. On the same basis, the additional cost to my railroad alone would be $331,710 per year for each nickel increase in the per diem rate.

That is the economic picture-a group of relatively prosperous railroads, which generally would stand to profit from S. 1063, opposed

a carrier is predominantly an originating, terminating or bridge line, he states that the bill would enable the Commission to prescribe per diem charges on a basis that will provide an economic incentive to the deficit owning railroads to acquire more cars. And in so stating, he recognized, in answers to questions, that such Commission action could have an adverse financial effect on certain railroads, but he brushed this aside with the comment that such inequities could be cured by agreements between railroads.

There is certainly little consolation or security in this suggestion. In fact, the freight traffic manager of the Burlington was recently quoted as saying that the

financially distressed railroads are not building nearly as many freight cars as we western lines think they should

and that the only workable solution is S. 1063.

That the purpose of the railroads supporting S. 1063 is to place a financial burden on the railroads that I represent is implicit in Mr. Martin's statement at the June 17 hearing, page 133 of the transcript, where he said:

In fact, the only opposition comes from a few railroads which have not maintained their share of the car fleet, which can do business, fortuitously, on the car investments of other roads-by using their cars at a rental of $2.88 per day, and which have a vested selfish interest in the preservation of the status quowhich has been so unfortunate from a national viewpoint.

I will deal with this statement later. I mention it now as a clear indication that the agreements suggested by Chairman Walrath are illusory.

All in all, we are left completely up in the air as to how the additional powers granted by the bill would be used. Presumably the Commission could fix different per diem rates for different types of equipment, different rates depending upon the season of the year, different rates dependent upon varying economic levels of business, different rates for different railroads, and different rates in different areas of the country.

Aside from the question of the equity or possible benefits of such a hodgepodge system, the problems of administering and accounting for any or all or any combination of these possibilities would be fantastic, and, to say the least, extravagant.

The inequities that could stem from the application of the provisions of S. 1063 are many. Of immediate concern to the railroads that I represent is the penalty that it would place on them as predominantly terminating roads. This is particularly true of carriers in Eastern territory-east of Chicago and north of the Ohio Riverbecause the pattern of traffic flow is from west to east and south to north. Consequently, under the application of the car service rules that I have mentioned, the Eastern lines do not have the need for an expanded car fleet to take care of their originating traffic requirements. On my railroad alone, we release, in interline service, 10 empty cars for every 9 cars loaded in such service.

Therefore, the so-called incentive rates, which would result from the application of the bill's provisions would serve not as an incentive to the Eastern lines to build cars which they cannot properly load under car service rubut only as a burdensome penalty on

I don't know if Mr. Perlman is here today or not, but he will have some comment on that, I think, with respect to the Pittsburgh & Lake Erie Railroad.

The multilevel per diem rates, which have recently been approved by a substantial majority of the car ownership of the country, and which are scheduled to become effective next year, are based solely on cost of car ownership factors, not on the noncost factors provided in S. 1063. Again, these rates are computed on the basis of reproduction costs, not original costs. Under such multilevel per diem, the $2.88 rate per car per day will be replaced by a scale of daily rates ranging up to $7.74 for cars valued $20,000 and over.

Any Commission review of such rates may be made under the Commission's present powers, but without consideration of factors other than those on which such rates were based. Nor does the litigation. now pending before the Commission regarding the lawfulness of past and present per diem rates comprehend or require consideration of nonownership cost factors to determine the propriety of such rates which are based solely on ownership costs.

What the proponents of this bill obviously want are car-hire rates based on something more than costs of ownership. The spokesman for the group of railroads supporting the bill suggested increasing a $4.50 rate to $5 and adding from 40 to 60 cents to the other multilevel per diem rates.

In short, S. 1063 proposes that some unspecified amount be added. to the car-hire rate, not to reflect ownership costs to compensate the owner for the use of his property, but rather to accomplish a regulatory purpose. Thus, the bill would direct the Commission to fix a return on value at such a level-obviously in excess of 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, S. 1063 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 bill does not answer these questions. And the Commission that seeks these additional powers sheds no light on how they would

be used.

In his prepared statement the Chairman of the Commission says that the first step would be to determine the extent to which railroads are deficient in car ownership, by types of equipment. Although he speaks of consideration for the flow of traffic and whether