the first 3 months of 1943 and a greater loss for the balance of the year is anticipated unless prevailing conditions change. The reports filed by Arrow with this Commission indicate that in 1938, 1939, and 1940, its three general officers received combined salaries of $72,000 in each year. In 1941 and 1942, the combined salaries of the three general officers were increased to $88,000 in each year. During the 5-year period, the corporation paid dividends of $65,800 and increased its earned surplus by $286,600. During the same period, the investment in carrier operating property less depreciation plus working capital increased from $786,221 to $799,216. On December 31, 1942, the carrier had an unappropriated surplus of $670,182. Not all motor carriers have had the favorable results from operations enjoyed by Arrow. During the past 5 years the officers of Arrow have been well paid, and few carriers are in as sound a financial position as it to undergo even short periods of adversity. Discussion.-The rule of rate making to be followed by us in fixing rates of common carriers by motor vehicle in section 216 (i) of the act is as follows: In the exercise of its power to prescribe just and reasonable rates, fares, and charges for the transportation of passengers or property by common carriers by motor vehicle, and classifications, regulations, and practices relating thereto, the Commission shall give due consideration, among other factors, to the inherent advantages of transportation by such carriers; to the effect of rates upon the movement of traffic by the carrier or carriers for which the rates are prescribed; to the need, in the public interest, of adequate and efficient transportation service by such carriers at the lowest cost consistent with the furnishing of such service; and to the need of revenues sufficient to enable such carriers, under honest, economical, and efficient management, to provide such service. Respondents point out that theirs is primarily a service industry in that the value of their operating property is only 15 to 20 percent of their annual gross revenues. They contend that, in determining whether a general increase in rates should be approved, consideration be given solely to the need of the industry for sufficient revenue to enable them to meet their operating expenses and earn a profit after the payment of income taxes, and that no attempt be made to fix a rate of return based on the value of their operating property or their net worth.1 The carriers' operating ratios are a convenience in determining the Net worth is the excess of assets over liabilities and represents the owners' equity in the enterprise. In arriving at net worth, as used in this report, the amount for "other intangible property" has been deducted. As used in this report, the term "operating ratio" means the percent which a carrier's direct operating expenses is to its total operating revenue. Direct operating expense includes depreciaion charges, operating rents, and taxes assignable to motor-carrier operations such as gasoline taxes, social security taxes, registration fees, and similar items. The operating ratio does not take into consideration dividends on investments in other companies or income derived from activities other than motor-carrier operations, interest on debt, miscellaneous income charges, or income or excess-profits taxes, State or Federal. extent by which their total expenses are less or greater than their operating revenue. Because truck lines have few outstanding obligations in comparison with the railroads, the fixed charges of truck lines are relatively low, and there is a smaller spread between a motor carrier's net operating revenue and its net income before income taxes than in the case of a railroad; for example, the net operating revenue of the 188 class I respondents in 1942 was $7,001,613, and the net income before income taxes was $6,445,283. The difference of approximately $550,000 is the net of miscellaneous income charges and interest payments less any dividends received from outside sources. The wide range under the present rate structure in the operating ratios of the 188 class I respondents for various periods is set forth in the appendix. Some of the respondents are earning substantial profits, while others are operating at losses. From an examination of the appendix, it is apparent that the general level of rates should not be adjusted upwards sufficiently high to enable all carriers to conduct profitable operations. If this were possible in the light of competitive conditions and it were done, most of the carriers would earn excessive profits. The carriers, however, with operating ratios substantially higher than the average have a right to propose rates either individually or as a group which will provide them an opportunity to earn a fair return if increasing their rates above their competitors would result in increased revenues. The following table shows the investment in carrier operating property less depreciation plus working capital, net worth less other intangible property, net operating revenue in 1942, and the relation of the net operating revenue to investment and net worth of the 118 class I respondents in trunk-line territory to which reference has been made: Investment in carrier operating property less depreciation plus working capital__ Net worth less other intangible property Net operating revenue in 1942. Relation of net operating revenue to investment, percent. $12, 407, 393 $9, 290, 195 $2,918, 679 23.5 31. 4 Respondents rely on Galveston Electric Co. v. City of Galveston, 258 U. S. 388, and Georgia Ry. & Power Co. v. Railroad Comm. of Georgia, 262 U. S. 625, in support of their contention that their profits should be determined after deduction of income taxes. In Reduced Rates, 1922, 68 I. C. C. 676, the Commission indicated that railroad corporations should pay their Federal income taxes out of income, rather than collect it, in effect, from the public in the form of transportation charges adjusted to enable them to retain a designated fair return over and above the tax. At the time of the United States Supreme Court opinions cited, the Federal income-tax rate was 10 percent, and stockholders were not required, as they are today, to pay income taxes on dividends received from corporations. Some motor carriers are corporations, and others are operated by individuals or partnerships. The corporations pay normal income taxes ranging from 15 to 24 percent, depending upon their normal tax net incomes. They also pay surtaxes ranging from 10 to 16 percent of their surtax net incomes, and, in addition, some corporations pay excess-profits taxes. As individuals conducting motor-carrier operations as sole proprietors or partnerships are not required to pay income taxes as motor carriers on their income from carrier activities, but rather to pay on the basis of their personal incomes less deductions, the income taxes and surtaxes applicable to the net income earned from motorcarrier operations are not separately determinable and are not included in the reports filed with us. For that reason, the net income of sole proprietorships and partnerships is not comparable to that of corporations. The normal tax and surtax rates increase as taxable income increases, and a carrier whose taxable income is $5,000 would pay a much lower percentge in income taxes and surtaxes than one whose taxable income is $100,000. We must fix rates for an industry in which the motor carriers have gross revenues ranging from less than $10,000 to over $20,000,000 a year. An operating ratio of 95 percent would permit some of the carriers having low net incomes to retain almost all their net operating revenues; while for a larger carrier an operating ratio of 95 percent might permit the retention of only 2 or 3 percent of gross revenues after payment of income taxes and surtaxes, and less if excess profits were earned. We do not agree that the rates of respondents as a whole should be fixed sufficiently high to permit them to pay income taxes, surtaxes, and excess-profits taxes and retain a normal profit. In the past, the operating ratios of the trunk-line and New England motor carriers as a whole during the first quarter of each year have been higher than their operating ratios for the entire year. Adverse winter operating conditions account in part for this result. The better showing during the entire year of 1942 than in the first quarter, as indicated in the appendix, may be attributed in large part to the general increase of 6 percent which the trunk-line and New England respondents made in their rates in March 1942. Because some wage increases approved by the National War Labor Board were not paid during the first quarter of 1943, there will be some increase in operating expenses, and we cannot anticipate that this increase will be offset by other factors during the rest of the year. The protestants generally agree that the respondents should be permitted to increase their rates if a need for such increase is found. The motor branch of the transportation industry is a vital factor in our war effort. Its continued maintenance at present efficiency depends upon whether it is permitted to earn adequate revenues. The war effort and civilian economy would suffer from a break-down in truck transportation, and such a break-down would harm the Government's economic stabilization program more than would a necessary increase in truck rates. Many respondents are, and have been, existing on too narrow a margin between revenues and expenses; others are operating at a loss. The respondents as a whole are not strong enough financially to undergo extended periods of unprofitable operation. Some increase in rates is reasonable and necessary to accomplish the purpose of the national transportation policy. The question is: How much of an increase should be permitted? A general increase in rates and charges resulting in a revenue increase of approximately 9.7 percent is sought. If the operating revenue in 1942 of the 188 class I respondents had been 9.7 percent higher and their total expenses had remained the same, their average operating ratio would have been 86 percent, and a similar increase in rates in the first quarter of 1943 would have produced an operating ratio of 89 percent. A general increase of 4 percent in the rate level would produce, as nearly as we can estimate, an average operating ratio of approximately 93 percent, which appears to be reasonable. Based upon the revenues and expenses of the 118 class I trunk-line respondents during the first quarter of 1943, an increase of 4 percent in gross revenues would result in an annual return of approximately 30 percent on their operating property after providing for normal income taxes. The carriers propose an increase of 4 percent in their truckload rates and a greater increase on less-than-truckload traffic. There has been no sufficient showing justifying the singling out of any particular class of traffic or any group of commodities to bear a greater burden of the increase than any other class. We conclude that the proposed general increase of 4 percent in truckload rates applied to all respondents' rates and charges would be just and reasonable. Respondents have indicated they did not hope to retain the full amount of the increases sought. They fear that if truckload rates were increased by 4 percent, some tonnage would be diverted to competing rail carriers, whose rates on carload traffic would be approximately 10 percent less than those on truckload traffic. The loss of traffic to a motor carrier does not mean in all cases a corresponding loss in net income. Because railroad freight cars are moved in trains and trucks operate as single units, the out-of-pocket cost of the rail carriers on carload traffic is probably much less per 100 pounds than that of motor carriers for moving truckload traffic. Because of their fear of losing traffic, the respondents indicated an intention to remove all or part of their proposed increase on any tonnage which might be lost owing to the existence of lower competitive rail rates or rates of motor carriers which are not parties to the tariffs of the Conference. If such a program were put into effect, it would make those shippers whose traffic is not affected by competition bear the entire burden of the carrier's increased operating costs, and, if numerous reductions of this type were to be made, another general increase in rates might become necessary. We do not favor such a program as that outlined by the respondents, and shall watch carefully all filings of reduced rates which might indicate that such a program is being put into effect. Executives of certain motor carriers testified as to their dissatisfaction with the present motor-carrier rate structure, which is patterned on that of the rail carriers. Under the law, they retain their power to initiate rate changes, and they may proceed to the establishment of a rate structure better adapted to truck operations so as to equalize more nearly the opportunity of all motor carriers to earn a profit, if they are able to do so. Respondents' minimum charges per shipment may be in need of revision upward to a greater extent than approved herein. If such a need exists, respondents may again present the issue upon a record adequate for the determination of that issue. For rate-making purposes, New York City and surrounding areas are divided into zones, and the rates to the zones are fixed with differential relation to the rates to and from zone 1. The Port of New York Authority pointed out that the percentage increase in rates proposed by the respondents would change the present differential relationship between the zones and asked that, if the general increase proposed is approved, the respondents be required to preserve the present differentials. The respondents do not oppose the preservation of the present rate relations between the zones. Although the 10-percent increase on less-than-truckload traffic sought by respondents would in some cases increase the present differentials, a general 4-percent increase will have little effect except that, in the disposition of fractions, a differential 1 cent higher than existing at present might result. In establishing the rates permitted herein, the increase should be applied to the New York City zone 1 rates, and the present differentials should be preserved. On argument, the Port of New York Authority also asked that the spread in rates between the ports of New York City, Philadelphia, and Baltimore be not increased. The class rates to and from the ports are based generally on distance. In some instances, the rates to New York |