FINANCIAL OVERSIGHT

Last year this Subcommittee took a special interest in our financial oversight function and specifically recommended that additional positions be allocated to that activity. We are able to report that we have implemented that recommendation and today our program is operational. We have identified financial yardsticks that can be used to measure a carrier's performance and we are continually reviewing our reporting formats to be sure we are getting the right kind of financial data. We feel we must strengthen our internal capacity to revise our accounting rules and regulations and increase the number of on-site audits of carrier accounts. There are 10 individual systems of accounts and 8 manuals covering record destruction that should be updated at least every 5 years. This is not being accomplished. The system of accounts for railroads was last revised in 1962. The longer we delay these updates, the greater the risk becomes of introducing unreliable and misleading financial information into the system. This situation cannot continue to go uncorrected.

Our on-site examinations of carrier accounts are a vital part of our financial oversight function. Here we learn first hand the financial position of a carrier and demonstrate to the industry our interest in the financial aspects of its operation. Our audit program has recently been subjected to a thorough analysis. We have developed streamlined methods that will reduce the staff time needed to perform an audit and still enable us to get the information needed. We will continue to emphasize audits of the major railroads and motor carriers; concentrating on those in financial distress and those affiliated with a holding company. To be truly effective, however, we must get to more carriers more often.

Before leaving the financial oversight area, I thought it might be appropriate if I quickly reviewed the general financial condition of the railroad and motor carrier industries.

On the rail side, the most significant factor is the bankruptcy of 6 Class I carriers in the Northeast. It is hard to be optimistic about the short run possibilities of these lines. The outlook for the southern and western roads, however, is encouraging. Railroad traffic reflects the economy and, with the economy on the move, it should mean more tonnage and higher earnings. On an industry wide basis, the last generally good year for the railroads was 1966. Substantial improvement in operating economies will be necessary for railroads to maintain their ability to provide adequate service to the Nation.

The motor carrier industry is in the process of recovering from a sluggish economy and labor problems. By the close of Fiscal Year 1972, the carriers faced uncertain but hopeful conditions. The teamsters received a wage increase in July, 1972, and the economic stabilization program has restricted the amount of rate increases. However, with the restoration of the investment tax credit and stable labor conditions, the trucking industry could look forward to continued traffic growth.

TARIFF EXAMINATION

Last year the Commission sought additional positions to initiate a program that would permit a broader and more comprehensive review of tariff filings to enable us to detect hidden charges that can have a heavy impact on the shipping public. Although we still do not have all of the staffing that we think we need, enough of an increase was provided to permit us to begin limited operations. Recruitment and training for this highly specialized work is now in progress, with results expected during Fiscal Year 1974. While all parties involved in surface transportation stand to benefit by our new program, it is the small, uninformed shipper and shippers located in remote areas of the country that stand to gain the most. As a by-product of this new approach to tariff examination, we are hopeful that we will be able to detect more errors before publication; thus precluding costly formal proceedings that may otherwise result.

As a part of our continuing efforts toward self improvement, the Commission has also examined its tariff functions from both an administrative and managerial standpoint. For example, we have reorganized the tariff operation to provide for a better control of work assignments and to improve productivity and the quality of service provided. The Fourth Section Board and the Suspension Board were combined, with some of the functions transferred to other sections to better utilize resources and to cope with an increased workload. So far, the operation of the merged board is most satisfactory. Work performance is high, the quality of the

product is high, and we have been able to divert positions to more urgently needed work areas. Additional positions are still needed, however, to handle the additional work expected and to provide support to the new tariff examining program.

ADMINISTRATION

The Commission has always taken its responsibility for management improvements seriously. Throughout the years, we have instituted many procedural and organizational changes that have produced more efficient, effective and economical operations. Recently, the Commission became a part of the Government-wide productivity study. A system has been established to better measure and evaluate our productivity in several major work areas.

In a further development, the Commission has begun a review of its functions to determine needs that might be fulfilled through greater use of computers. The intent is to develop a comprehensive management information system capable of providing both operational support and increased management capability.

The emphasis on work measurement and productivity and the substitution of technology for staffing, when possible, should result in better utilization of our manpower resources.

SUMMARY

In summary, the Commission faces problems that are both complex and challenging. Many of the decisions we will make in the next couple of years will, no doubt, be historic and affect the transportation industry for years to come. This is not particularly new to the Commission. It has faced issues like this before. What is new is the way we are approaching our difficulties. Throughout my remarks, I have shown examples of how the Commission has developed both original and bold initiatives to alleviate or solve transportation problems. In some cases, we can never hope to entirely eliminate the problem, but we are making every effort to utilize our personnel as efficiently and effectively as possible. With the added positions received in 1973, thanks largely to the efforts of this Subcommittee, we were able to accomplish even more. This year our employment levels rose for the first time in 10 years. Our 1974 request will add 70 more positions. We feel this increase is necessary if we are to continue to deal with transportation problems on a timely basis.

That concludes my opening remarks. My colleagues and I will be glad to answer any questions you may have.

Hon. GEORGE P. SHULTZ,

[Enclosure 2]

INTERSTATE COMMERCE COMMISSION,
Washington D.C., April 11, 1972.

Director, Office of Management and Budget,
Washington, D.C.

DEAR MR. SHULTZ: We have received your reply of March 29, 1972, agreeing that an in-depth investigation of the railroad freight rate structure is desirable. You request assurance that the Administration's data requirements will also be served. The Commission is very much aware of the Administration's need for data on the rail industry. As you will see in the descriptions of the economic studies proposed by the Commission (Appendix A), these data requirements have been central to our study planning. In particular, the research intended in the cost area will pursue some of the key topics that have been under discussion by the Task Force established as a result of Docket No. 34013, Rules to Govern the Assembling and Presenting of Cost Evidence, 337 I.C.C. 298.

An essential element to the successful conduct of this investigation is the matter of choosing a proper Special Counsel and retaining his services. Some preliminary work has been performed in this regard; especially the type of financial arrangement, the Special Counsel's role, his rights and obligations, and his staff, and the availability of funds for studies deemed necessary in the course of this investigation (see Appendix B).

Below is a table showing the manner in which we plan to utilize these funds

PLANNED EXPENDITURES

Of amount released from reserve-$700,000-$350,000 Special Counsel and staff, $350,000 ICC economic studies.

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,

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.

RATE STRUCTURE STUDIES

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.

RAIL RATE OF RETURN

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.

APPENDIX B-SPECIAL COUNSEL

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.

RIGHTS AND DUTIES

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 you 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 regard 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.

TESTIMONY OF GEORGE M. STAFFORD, CHAIRMAN, INTERSTATE COMMERCE COMMISSION; ACCOMPANIED BY W. DONALD BREWER, VICE CHAIRMAN; VIRGINIA MAE BROWN, COMMISSIONER; ALFRED T. MacFARLAND, COMMISSIONER; CHESTER M. WIGGIN, COMMISSIONER; ARTHUR J. CERRA, DEPUTY GENERAL COUNSEL; ELIZABETH DALGLEISH, CONTRACTING OFFICER; FRED DOLAN, ADMINISTRATIVE LAW JUDGE; ALAN M. FITZWATER, BUDGET AND FISCAL OFFICER, OFFICE OF MANAGING DIRECTOR; FRITZ R. KAHN, GENERAL COUNSEL; ROBERT G. RHODES, ASSISTANT DIRECTOR, BUREAU OF ECONOMICS; AND WILBUR A. WILSON, NATIONAL AERONAUTICS AND SPACE ADMINISTRATION, OFFICE OF INDUSTRY AFFAIRS AND TECHNOLOGY UTILIZATION IN THE PROCUREMENT OFFICE

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.