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But I must come to the issue with reference to the recapture of excess earnings. We do not oppose the repeal of section 15a. Those for whom I speak favor the repeal of section 15a, including the recapture provisions. The only matter in controversy as far as we are concerned is with reference to the retroactive features of repeal, or what might be called the absolute cancellation of all back claims. That we oppose.
Now, in order to understand section 15a of the transportation act, this fact is fundamental. It contains two main provisions. Neither one of those provisions can be considered aside from the other. Together they constitute a unit. Each one is a complement to the other.
What are those two provisions ? The first is the so-called rule of rate-making. The second is the so-called recapture of excess earnings.
The fact that those two are a unit was emphasized in the Supreme Court decision in the Dayton-Goose Creek case, sustaining the constitutionality of the recapture provisions. In fact, the Supreme Court said that the union, the correlation of these two propositions was the very plan of the act itself.
Now, what is that plan? Under the rule of rate making, which was an entirely new thing in the transportation law of this country, the commission was directed to fix rates upon what might be called a group system. That is to say, for purposes of computation, they should divide the country into certain sections and they should fix rates which would permit all the railroads within that territory, good and bad, strong and weak, as nearly as they could do so, to earn a fair return upon the aggregate value of all the railroad properties—all the railroad properties, strong and weak, within that territory. That is the heart of the rule of rate making. Nothing like that had existed prior to that and the commission was simply directed to fix rates that were just and reasonable.
I might illustrate that at length, but there can be no question I think but that that is a fundamental proposition in the consideration of section 15a.
Now, I say that if we could repeal the rule of rate making from the beginning, it would be logical to also repeal the recapture provision from the beginning. Obviously you can not do that. That rule has been in effect for all these years. It is logical to repeal them both for the future, because they go together. The recapture provision follows immediately in the same section after this rule of rate making. It amounts to something like this. We say to the railroads, we are going to fix your rates now upon a new system, a new rule of rate making, under which we are going to permit the strong roads within this territory to earn more than they would otherwise earn, if it were not for this new rule of rate making, but in return for that favor which we give you, we propose to take away from you strong roads within that territory one-half of the excess above 6 per cent for a common fund to help out the weak roads that are within that territory.
In other words, recapture is an integral part of the scheme involved in the rule of rate making. There is no escape from that.
Now, the practical question is, as a matter of fact, have roads had higher rates because of this rule of rate making during this period
than they would have had if it had not been for the rule of rate making! There is a difference of opinion about that. I might argue that at length from our viewpoint. I think in many cases they have, and I cite you to the main rate case immediately following the transportation act, ex parte 74; that ran all through that decision. In that case, under this new rule of rate making, the commission granted a fiat horizontal increase in freight rates from 25 to 40 per cent, 35 per cent in the section of the country in which I live, upon all rates of every class and character; a 35 per cent flat increase.
The commission argued in that case that this new group system of rate making was the heart of the proposition, and they granted those increases very largely because of the rule of rate making which existed.
Now, what do we propose? We do not propose to insist upon an attempt to collect all of this money, three hundred and sixty-some million dollars which upon the commission's figures are due under the recapture provision. We suggest a compromise proposal which we think is fundamental in sound reason.
The first thing we propose is this: That we change the basis of recapture from the individual year to the whole period. Let me explain that. Under the present law, if a railroad earns more than 6 per cent in one year, one-half of the excess above 6 per cent is due for recapture, even though in the next year or any other subsequent year, it has a deficit.
We contend that is unfair to the carriers; that they should be given the benefit of the lean years within this period as well as the fat years. So we propose to change the basis and to figure recapture upon the lean and fat years together over the whole period, from the day this rule of rate making, this system of making rates, went into effect, up until the day of its repeal.
The practical effect of that would be to at once release more than half of the carriers, and I think at least two-thirds of the carriers, from any obligation whatsoever.
Mr. O'CONNOR. What would it amount to?
Mr. Hoch. The amount, up to and including the year 1930, upon the commission's basis would be $237,000,000 instead of three hundred and sixty-some million dollars. However, our proposal is to include 1931 and 1932, the figures on which are not yet available, which would undoubtedly very greatly increase the total amount due.
And this is a significant thing, that even up to and including 1930, taking it over the whole period, out of the $237,000,000 recapturable upon the commission's figures, more than 50 per cent of it is due from three roads at the top of the list. One of those roads has earned a substantial excess above 6 per cent every year from the day that new rule of rate making went into effect, 1920, down to the latest figures that we have--every one of them.
We say that it is unwarranted in the case of those roads which have earned every year consistently through this whole period an excess above 6 per cent to say, “We are going to wipe all of that off of the books."
The second thing we propose, in addition to pooling over the whole period, fat and lean years together, is to give to the commission the power to make compromise settlements. Now, that is not a new
proposal. The commission itself in a communication to the Senate in 1930 formally proposed that and submitted the draft of a provision to carry it into effect.
Now, what is the effect of that? There has been, as Mr. Beck says, this great controversy with reference to these valuations. The primary question now in controversy with reference to recapture is as to the basis of valuations. That is primary, because obviously if you increase the valuations, you decrease the showing of percentage of excess carnings.
We propose to give to the commission the power to make compromise settlements so that they may sit down with these roads in controversy and say, " You say your valuation is so much; we say it is so much. Can we not, in the interest of avoiding litigation, arrive at a compromise basis for settlement ? "
We do not insist upon any immediate settlement, or anything of the sort. We recognize the conditions of the roads and we propose liberal terms to be fixed by the commission. That is no more power than has been given to the commission in many other cases.
Mr. Cox. If the good that would inure from the first part of this bill be offset by the bad results to be followed by the enactment of the latter part of the bill, would not in your judgment the net result of the adoption of this measure at this time be the loss of that little remaining of the public confidence which the Congress holds ?
Mr. Hoch. I should like to discuss that at length, but time is up and I do not want to impose upon these other gentlemen who desire also to be heard this morning.
Mr. RAYBURN. Mr. Chairman, may I say just a word about the procedure? This committee has given us three times as much time as we excepted and we are not asking for any more time. But Mr. Parker is here and he knows so very much about these matters and he has not had an opportunity to say a single word. Of course, we are in a situation as to time which we must face. I did not know that we were going to argue this bill in this committee, as I had hoped it would be argued in the House. I have no quarrel with Mr. Hoch's statement.
The CHAIRMAN. Of course, there is no opportunity to hear Mr. Parker this morning.
Mr. RAYBURN. I realize that.
The CHAIRMAN. We will take the matter up and advise you, however. Of course, the committee desires to give both sides a full opportunity to be heard.
Mr. PARKER. Mr. Chairman, may I say just one word. There has been reference here to only two holding companies, the Penn Road and the Allegheny Corporation. I would like to leave with the committee some charts that accompany this report showing the holdings of other roads. There is the chart of the Union Pacific, which is a holding company; another one of the New York Central, which is a holding company, and some with reference to the Van Śweringens, which are in sequence showing you exactly what they have done; and also the Pennsylvania.
The CHAIRMAN. We thank you gentlemen for your presentation. The committee will now go into executive session.
(Whereupon the committee went into executive session, following which it adjourned.)
COMMITTEE ON RULES
EDWARD W. POU, North Carolina, Chairman WILLIAM B. BANKHEAD, Alabama. FRED S. PURNELL, Indiana. JOHN J. O'CONNOR, New York,
EARL C. MICHENER, Michigan. ADOLPH J. SABATH, Illinois.
HARRY C. RANSLEY, Pennsylvania. DANIEL E, GARRETT, Texas.
JOSEPH W. MARTIN, JR., Massachusetts. ARTHUR H. GREENWOOD, Indiana. E. E. COX, Georgia. THOMAS S. MCMILLAN, South Carolina.'
WILLIAM S. MOYE, Clerk