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Supplemental Appropriations—$760,000-$300,000 Special Counsel (studies), $460,000 ICC economic studies.

From the above table it may be seen that we estimated $350,000 would be allocated to Special Counsel and his staff, and $300,000 for his studies. (These amounts could be reallocated as Special Counsel deems appropriate.) We have programmed $310,000 for our economic studies on a contractual basis.

We are sending a copy of this letter and enclosures to Mr. Robert H. Binder, Deputy Assistant Secretary of Policy and International Affairs, Department of Transportation, so that he may forward the comments of DOT to you by April 14 as you requested.

We feel certain that the foregoing will demonstrate that the Commission's investigation will satisfy the data requirements of the Administration and provide the necessary means to explore the rail pricing structure and so determine the need for the necessary changes. Sincerely yours,



[Exhibit 9] APPENDIX A-PROJECTED ECONOMIC STUDIES The studies encompass the subjects of rail rate and cost structures, rail service deficiencies and rail rate base and rate of return. Each study is described below.


Study No. 1. Analysis of the rail rate structure and an identification of changes introduced as a consequence of general increases 1966-present. This study calls for the use of one percent waybill samples and other material as available to describe the extent of the freight rate differences, and perform a statistical evaluation of those differences. It is expected that this study will largely be performed by the Commission staff with the aid of consultants.

Study No. 2. Constraints on railroad pricing will focus on those shipment classes-by origin, destination and commodity-where Study No. 1 shows that railroads have not applied the full increases authorized. These will be analyzed to identify whether it was intermodal competition, product market characteristics or rail market characteristics that imposed the constraints. A large part of the research associated with this study will be performed by contractors.

Study No. 3. The economic impact of rail rate increases will have two dimensions. Part One will deal with the aggregate impact of rate increases on the output and prices of the economy. Part Two of the study will deal with the impact of the rail rate structure on the location of economic activity and the application of new production techniques in key rail-using industries. It is expected that this research will be performed entirely by a contractor.

Study No. 4. The relationship between rail rates and costs will identify cost of service structures in terms of origin, destination and commodity and compare these cost structures with themselves and their respective rate structures. Initially the study will use present cost finding formulas to derive an early evaluation of the rate/cost of service issue. The ICC Task Force on Cost Ascertainment has already identified major areas in cost finding where further research is needed. This study will pursue some of these topics, such as an updating of costs, an examination of variability and incorporation of traffic study data if available. It is intended that this study will be performed by a contractor.

Study No. 5. Alternative rate structures is intended to examine the effects in terms of rates, revenues, costs and economic impact of an alternative rate structure different from the present one. Two alternatives appear immediately of interest, one a cost-based rate system, the other a service-oriented structure. This study would necessarily draw on the results of the preceding four. It is intended that this study largely be performed by the Commission staff.

Study No. 6. Railroad freight service survey is designed to inform the Commission of the frequency and extent of railroad freight service deficiencies. Analysis of the collected data will enable the Commission to establish service standards, if desirable. It is intended that data collection and statistical processing will be performed by a contractor.


Study No. 7. The role of rate of return would encompass an examination of the use of return as an instrument of economic policy and the economic rationale of the rate of return concept, including a review of the claimed advantages or disadvantages of different approaches to rate base valuation and rate of return determinations. This study would be done in part by the Commission staff and in part by a contractor.

Study No. 8. Railroad investment would encompass an evaluation and updating of existing studies that examine the railroad industry investment patterns and an extension of these studies into territorial subdivisions and relating investment behavior with rate of return experience. It is intended that this study be performed by a contractor.

Study No. 9. Rate structure and rate of return will deal with the interaction between the shape of the rate structure and the rate of return. This study will be done jointly by the Commission staff and a contractor.


BACKGROUND In the preliminary report in Ex Parte No. 270 we alluded to the role of Honorable Louis D. Brandeis as Special Counsel for the Commission in the Five Percent Case: “The Commission instructed him 'to see that all sides and angles of the case are presented of record,' without advocating'any particular theory for its disposition' and to emphasize any aspect of the case which in (his) judgment, after an examination of the whole situation, may require emphasis.'

SELECTION, ROLE, AND SALARY The essential problems are the selection of the Special Counsel, the salary arrangement, and his role. We must know how much money can be offered and the manner by which we can retain such an individual.1 At that time we must be able to inform eligible persons what will be expected of the Special Counsel and what he is to receive in return.

Since the Special Counsel, to some extent, will be charged with responsibility for those investigations, he should be retained and become a party to the proceedings as soon as possible. Certainly before the direction of the proceedings is fixed the Special Counsel should have an opportunity to make his views known.


The Special Counsel would have legal authority at least equivalent to that of staff attorneys in the Bureau of Enforcement in any Commission proceeding in which it is directed to participate. However, because of the special role of Counsel in these far-reaching investigations, the obligations of Special Counsel would be much greater. This also follows from his added staff and the availability of adequate funds. Special Counsel should also receive the broad instructions given to Honorable Louis D. Brandeis.

Special Counsel would be a party to the investigations and would have to be treated as any other party. He would be assured complete independence. He could not be regarded as the Commission's spokesman or attorney. If he is to be charged with responsibility for the investigations, he should have the final say as to the evidence which he is to introduce in the record. This may create problems if he disagrees with economic studies put out on contract by the Commission. However, in case of an impasse, the studies could be released by the Commission just as the burden studies.

Mr. DINGELL. Other hearings and inquiries by this subcommittee relevant to the ICC will be carried on at later times. The Chair announces that it will be the intent of the Chair to inquire into activities of other Federal regulatory agencies as they affect small businesses in times to come.

1 From discussions with the General Counsel of the Civil Service Commission and his staff, we learned that the recipients of these contracts must be independent contractors, the rationale being to preclude subsequent suits against the Government for annuities.

The Chair is pleased to welcome the Chairman of the ICC, and the Chair also notes that you have with you, Mr. Chairman, Commissioner Brewer and other associates. If you would identify those who are present with you at this time, the Chair will allow you to come forward to the witness table along with Commissioner Brewer. I think in view of the fact that this is essentially an investigative proceeding into matters particularly relating to the filing of recent contracts with regard to freight rates, the Chair will allow


first to identify all of your associates and then we will administer the oath to you in a body.

Mr. Chairman, would you come forward. You may bring with you Commissioner Brewer and we will then let you identify your associates.

Chairman Stafford, it is a pleasure to welcome you to the committee. The Chair does wish to indicate we have a very high regærd for you as I have expressed at other times, and I do so again today.

The Chair also indicates this is intended to be a friendly proceeding in which we shall actually seek to provide both congressional guidance to you in carrying out your mandates and also try to see to it that you have the functions and capabilities within your organization to properly carry out your responsibilities with regard to regulating the vast businesses under the jurisdiction of your agency,

Mr. Chairman, would you like to identify those who are present with you. I do happen to know Mr. Kahn, of whom I happen to be a great admirer, as you know.



Mr. STAFFORD. In addition, we have the Deputy General Counsel, Art Cerra, who has been working on this, and of course my Vice Chairman, Commissioner Brewer.

In the audience this morning we have Commissioner Tuggle. Commissioner Brown is here; Commissioner Deason is here; Commissioner MacFarland is here. I believe that is all of my Commissioners that I have. One of our Commissioners has been out of town for about a week and a half now on his vacation.

Mr. DINGELL. There were also certain staff members you were to have with you.

Mr. STAFFORD. They are here.

Mr. DINGELL. Why don't we just hold up on any introductions of them. We will call on them

Mr. STAFFORD. I believe we have all of the staff members you invited, plus perhaps another one or two.

Mr. DINGELL. I think under the circumstances the Chair will administer the oath to you and Mr. Brewer at this time. I guess Mr. Kahn appears as an adviser to you at this time and we will treat him in that capacity.

Gentlemen, if you will rise.

Do you solemnly swear to tell the truth, the whole truth, and nothing but the truth, so help you God?

Mr. BREWER. I do.
Mr. DINGELL. Gentlemen, you may consider yourselves sworn.

The Chair under the circumstances will recognize our able counsel for questions and the Chair does feel compelled at this time to say that I am increasingly disturbed-counsel informs me that you do have a prepared statement.

Mr. STAFFORD. I do have a prepared statement. If you prefer I put it in the record, I would be happy to do it.

Mr. DINGELL. I think in view of the time and the fact that we have so many fine people lined up I think it would be appropriate if you excerpted from it and we will consider it as if given.

The Chair does find himself increasingly disturbed, I must say, at the $650,000 contract which has just been given to a former member of the Senate to become a special counsel in a freight-rate case now proceeding under your Agency.

The Chair does confess to some distress that the longer the staff of the Congress investigates this matter, the more disturbed I have become. On a number of occasions, representatives of your Agency have requested to come before my office to explain this matter in privacy. I must confess in other times I have gone at it this way

and I have always found at a time later I felt it better that this kind of thing be discussed on the public record so that the matter could be explained in a public forum and the record would be created.

think there are a number of questions to be posed; one, why did the Commission feel they had to go to an outside source to contract this freight-rate investigation when this is the main role of the Commission?

Two, the legality of the contract is open to serious question and will be explored by the committee. The GAO is investigating this matter now and the record of this hearing will, of course, be turned over to that Agency.

During our investigation of the contract, the committee discovered that the ICC is also letting another $884,000 in contracts, and the Chair does have some questions relating to what I believe are serious conflicts of interest on the part of former employees. Hopefully, this hearing today, gentlemen, will clear up the suspicions that frankly have been raised in the mind of the Chair in connection with the entire allocation of contracts. And so we will recognize you at this time, Mr. Chairman, for appropriate comments.

Before that, the Chair does note that an old friend, colleague and associate in this and other endeavors, is present, Mr. Conte.

Mr. CONTE. Thank you, Mr. Chairman.

I certainly appreciate those kind remarks. I have worked with you for a long time.

I might say we had ICC before our Appropriations Committee only last week and we did go into the subject matter, so I am quite familiar with it and will be very pleased to hear what is going on here today, and see if we can be helpful in bringing everything out.

I was well satisfied with our hearings before the Subcommittee on Appropriations and the DOT budget, and I know Chairman McFall asked questions on this.

Mr. STAFFORD. Thank you. I recall we went into it in considerable depth before the Appropriations Committee.

Mr. Chairman, I had asked to pass over my statement and put it in the record, but a number of questions that you proposed were spoken to in this statement. It is in our statement here this morning. If you would like to do that to get it on the record

Mr. DINGELL. You are recognized to proceed in whatever fashion you feel appropriate.

Mr. STAFFORD. Thank you, sir.

I am pleased to appear before you today to discuss the Interstate Commerce Commission's contract for special counsel in its investigations of the railroad freight-rate structure and other related cases.

Speaking for the Commission, we hope that our statements and any questions and answers that may follow will inform the subcommittee of our reasons for entering a sole-source, cost-reimbursable, no-fixed-fee type of contract.

Most of the information concerning this contract has already been submitted to this subcommittee by letter of March 5, 1973. Accordingly, my statement today will merely summarize the highlights of the factual information already supplied.

As you are aware in Ex parte 270 and related cases, the Commission has undertaken a far-reaching and intensive investigation of the railroad rate structure, the adequacy of railroad service, and the railroad rate base and rate of return.

These investigations respond to widespread concern that general increases in railroad rates, made necessary by the upward trend in wages and other costs of providing railroad service, may have had an adverse impact on shippers, railroads, and the general consuming public.

There is little doubt that the railroads needed additional revenue to meet the rising costs of doing business. What is not clear is whether the rate structure as it existed before this current inflationary period, or as it has evolved as a result of the increases, yields an economically effective and equitable system of prices for the movement of traffic by rail.

The rate structure investigation is exceedingly complex. It involves literally thousands of individually formulated rates and rate patterns which may or may not have pertinence one to the other. The relationship of these rates to the costs of providing the services, the competition among sources and markets for the hundreds of commodities

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