suffering, it is from the unguided, uncontrolled right of own- The railways of the United States are not built where they John J. Esch, the chairman of the House of Representatives' Interstate and Foreign Commerce Committee, also articulated the purpose of Federal review of railroad construction: [O]ne cause of the so-called "weak sister" has been the unrestricted right of railroads to be built wherever their proprietors thought fit. As a result of this unrestricted right we find in all States of the Union cases where, after a road has been built and well maintained and has gotten its traffic well established, another road puts in a parallel line with a result that instead of one strong road doing the traffic we have two weak roads, so they have to charge the same rate between competitive points and we burden the public by compelling it to sustain two weak roads when one strong road would have been sufficient. How does the bill stop that? In this way: Before a road or an extension thereof can be built it must get what is called in this bill a certificate of convenience and necessity from the Commission as a condition precedent to the building of a single rod [sic] or the extension of a new line *** This is not a new law. Several of the States have this kind of law now, notably the State of New York and the State of Wisconsin, and in other States the law has worked successfully. It has prevented the construction of new lines that could not by any possibility have any hope of meeting operating expenses, not to say anything about profits. It would prevent the construction of some of these short lines which may have no hope of ultimate financial success. In every way we have felt that this provision would lessen the number of "weak sisters," would prevent the creation of any new ones, and would strengthen the existing lines. We can get better service by strengthening the existing lines than by creating a rival or parallel line which would diminish the ability of the first line to make further improvements or betterments.19 18 59 Cong. Rec. 748 (1919); see also Rogers MacVeagh, "The Transportation Act of 1920, Its Sources, History, and Text" (New York: Henry Holt & Co., 1923), p. 221. 19 58 Cong. Rec. 8316 (1919); MacVeagh, id., p. 220. Section I (18)-(22) was therefore intended to protect existing lines from competition to some extent. The causes and deleterious effects of uncontrolled duplication were illustrated during a hearing exchange with a commissioner of the ICC: The CHAIRMAN. Would the exercise of this power on the part of the Federal Commission in any way tend to stabilize the securities of the company that had been given a certificate? Mr. CLARK. It seems to me inevitable that it would have that tendency and that effect. The principle underlying this is that a carrier, having been given a franchise to enter a field, ought to be protected against unnecessary and wasteful competition of the rival carriers. You will remember a few years ago as an instance of this, there was the keenest kind of rivalry between the roads that were commonly known as the Harriman interests and the Hill interests in the Northwest. The Harriman lines scouted the idea of building a line *** which they said was not worth building into; but then Hill had a different idea after a few years, and he started to build in there, and immediately the Harriman lines, with the most feverish haste and lavish expenditure, started and constructed a parallel line, so that that territory which was thought not worth serving with one railroad was served with two expensively built railroads under rival conditions so that cost was largely disregarded, and now the territory and the public have two roads to support.20 The capitalization problems that the provision was to help correct had grown from speculation and poor management as well as destructive competition among carriers. Administrative review prior to construction would, it was felt, encourage investment in railroad facilities to aid in stabilizing the failing credit worthiness of the system: It will aid very materially in securing the funds necessary for construction, and it is not likely that the old system of construction will be resorted to in the future. The people are not willing, and they will never be willing, in my opinion, to make large grants of public lands, to give enormous donations, to secure the construction of railroads; and if this conclusion be correct, then the provision *** ought to stay in the bill because it recognizes the power of the Federal Government to pass upon the question.21 The certification feature was regarded as a compliment of the planning and consolidation elements of the bill. It was felt that if the Federal Government were to direct the reorganization of industry structure, it should also have a controlling interest in the issuance of certificates to parties which carried business destined for interstate traffic. This logic was expressed during Senate floor debate: It is in harmony with some of the general and important features of the bill, particularly those relating to the consoli 20 U.S. House, op. cit., n. 15, I, 62. 21 Remarks of Senator Robinson, Member, Committee on Interstate Commerce, 59 Cong Rec. 863 (1919). dation of railway lines and systems. If you strike out this ** if we are to reorganize the railroads and put them on The chairman of the House committee explained the purpose of the requirement of ICC approval prior to the abandonment of lines: Railroads sometimes surrender the rights granted by their charter. The traffic is not what they expected, business conditions change, the natural resources which they thought first to get out to the open market become exhausted. There is no power now to restrain abandonment under Federal law. Railroads in many States can do as they will. We provide some control over the matter of abandonment so that cities and villages that have been built up on these lines can be given due consideration by the regulatory body before the order for abandonment is issued. Or given such control to the Commission to investigate the situation and determine the facts.23 The abandonment question was elaborated on by the National Association of Railroad and Utilities Commissioners: The law dealing with the power of the railroads to abandon service or track is quite debatable. Some courts have held that where a common carrier has taken out a charter to do business between two terminals that it shall not abandon its track. Other courts have held that where the company cannot profitably be employed the court may permit abandonment of that track *** In my own experience as a commissioner I have passed upon a number of these abandonment cases. In some of those cases we permitted the abandonment to take effect at some future period which would make those who have farm produce and timber ready to haul out during that season and had to get it out before the road was taken away. In others, the evidence showed clearly that the company was not operating at a loss and that they had a public service to perform.24 These remarks are evidence of the point of view that a carrier creates for itself the common carrier obligation of service to a locale that has become dependent on railroad transportation. This onus was also tantamount to the power gained by the Commission to compel new construction. Besides the certification requirement in paragraph 18, section I provided through paragraph 21 that the ICC may, after a hearing, "authorize or require by order a carrier by railroad subject to this act *** to provide itself with safe and adequate facilities for performing as a common carrier its car service as that term is used in this act, and to extend its line or lines." (Emphasis supplied.) The required extension is conditioned to be reasonably required in the interest of "public convenience and necessity" and the expense in 22 Remarks of Senator Robinson, 59 Cong. Rec. 862, 863 (1919); quoted in part in MacVeagh, op. cit., n. 18, p. 223. 23 58 Cong. Rec. 8318 (1919): MacVeagh, op. cit., n. 18, pp. 220-21. 24 Testimony of Charles E. Elmquist, president, NARUC, U.S. House, op. cit., n. 15, II, volved must not "impair the ability of the carrier to perform its duty to the public." The purpose for this power of compulsion was given some treatment in the ICC's report to Congress: The thought underlying *** this suggestion is that a railroad having been permitted, by public franchise and the powers that go with it, to build into a given territory, it should be required to properly serve and develop that territory. And in developed territory it is important to provide for the extension of short branch or spur lines or spur tracks to communities and industries that should be served and that can furnish sufficient traffic to justify such extension.25 Finally, the efficiency of railroad construction was linked directly to section 15(2) of the bill. It was here that the "rule of ratemaking, since refined and known as rate-of-return regulation, was first legislatively enacted to control return levels based on the aggregate value of railway property. If the public was to commit itself to a policy of paying rates which would yield to the carriers an adequate return, it seemed obviously desirable to prevent the construction of unnecessary lines.26 All the foregoing effort the attempt to prevent duplication and destructive competition, and to integrate the certification intent with the law's design for coherent management-was given urgency by the prospect that a serious and systematic ratemaking proposal was to be part of that same scheme. As the field of regulatory economics developed, the Averch-Johnson effect was devised as a model to explain a principal negative incentive that rate-of-return regulation creates for the utility. Regulation since the early part of the century has typically concentrated only on a specified average return on capital investment. Without supplemental oversight, the regulated company may invest excessively in capital facilities (whether less efficient than labor and hence more expensive), rather than reduce costs, because it can expect to earn more profit from its total operations, provided it does not exhaust the total market for its services. Hence, the rate of return is adjusted to the appropriate percentage of the aggregate rate base, and the cost of unneeded investment is passed on to ratepayers (this may influence the company in the direction of service quality improvements rather than actual negligence).27 This concept has major implications for any regulatory program such as (18)-(22) or section 214. There was obviously some understanding of this in 1920, as the linkage of section I(18)-(22) with section 15 (2) effectively gave the ICC the authority to control additions to the rate base. This pertains also to the FCC's administration of section 214.28 By no means was there complete agreement on the merits of the power of compulsion or the mandatory certification requirement itself. 25 ICC v. Oregon-Washington R. Co. 288 U.S. 14, 36, footnote (1932), citing Report of the Interstate Commerce Commission to the Congress, 1918, p. 2. 20 Locklin, op. cit., n. 1, p. 233. 27 Kahn, op. cit., n. 11, I, 24-25. 28 Although there is no word in the Communications Act of rate of return regulation. The Commission relies primarily on sections 201(b) and 202(a) in determining lawfulness of charges; the rate of return method is an inherited administrative one for insuring that the aggregate of all receipts acquired for services provided return a profit to the utility's owners. 44-667-79- -3 |