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Senator McCLURE. Is the subsidy to the railroads equally reprehensible?

Mr. DEMPSEY. I think we are talking about shippers, for example, being impacted in some way or another. I would not want to take the position that Federal assistance in any circumstance is improper. That would be a foolish position for anyone to take.

Senator McCLURE. I guess the reason I ask the question is the terin reprehensible. If subsidies are reprehensible, I assume they are all reprehensible.

Mr. DEMPSEY. No; but I don't think it is too strong a word under the circumstances. The question is whether any particular kind of subsidy serves an important enough public policy to withstand scrutiny.

If I hadn't made that point clear up to now, I want to underscore it. There may be shippers who should be subsidized for all I know. I find it difficult to believe that the barge shippers, major coal companies, oil companies, who are large enough to assemble the kind of volumes that move by barge traffic would claim there is a case for that kind of subsidy-what I am saying is I haven't heard it in these proceedings.

If, in any respect, a subsidy is justified, it does seem to me that the price of that subsidy ought to be widespread across the entire economy in some fashion and not centered upon a competing mode of transportation, like the rail industry.

If the railroads were making 10-percent return on capital, 12-, 13percent return as some of our competitors do, that would be one thing. Last year we made a 1.56-percent return on capital. I think the Congress is fully aware of the depressed state of our industry.

I think all those factors have to be taken into account in judging whether this is a wise position or this is an unwise one altogether and therefore 100 percent recapture is necessary.

As to how the charges should be allocated, it seems to us—and I recognize that there are problems with the segment-by-segment kind of charge-yet it does seem to us that that is the only one that makes any sense from an economic point of view, because if you don't have that kind of system underway to charge a particular waterway or users of that waterway then what you wind up with is another kind of subsidy.

It is a cross subsidy within the waterway user group and you have the users of the less expensive parts of the waterway subsidizing the users of the more expensive parts of the waterway and critically important you don't get that kind of careful appraisal of the economic value of a particular project that you would if you charged the expenses of that projected new construction, new improvement against the users of that improvement, rather than across the users of the entire waterway system.

Senator DOMENICI. But, on that score, there is a certain amount of justifiable reliance upon a development that has occurred and there is a certain potential for serious dislocation in those segments which have learned to rely upon the subsidy or the O. & M.

I think we have to look at that. I have no doubts that the overall user fee we are talking about is not going to have any detrimental impact as far as the competitive nature of the barge industry.

I do believe if you assess some very high cost segments, the total cost and you already permitted shippers and industries to develop, that we might very well find ourselves supporting what appears to be very inequitable in terms of reliance upon and some very serious distortions could be proven and would seriously jeopardize the approach that it is not going to be a terribly onerous approach.

We don't have the answer to that, but we appreciate your comments. I assume if we started from scratch, with nothing there, what you have just said would make eminent sense.

What we are really saying is on some of the very high cost segments of the system, they are truly not profitable from the standpoint of the investment we have made and we certainly shouldn't continue to cause more reliance and cause them to grow without some economic evaluation of our expenditure of tax dollars versus that mode of transportation so if we don't come out with the segmented charge, you will understand that we are talking about a balancing in midstream here before we go and redo them all.

They are already in place. My thesis is before we start redoing them for the second time through that now is the time to take this look while we have got them in place.

Mr. DEMPSEY. I appreciate the force of what you say. I would make two brief comments. One, we are looking ahead with respect to new projects, there isn't really room for reasonable debate on the question.

As to older projects, I think the studies made indicate while we would prefer not to have any phasing in at all, we realize the practical realities of the situation. It seems to us that is important. Any reasonable phasing period is designed to cushion that kind of impact. If really the charges are not to be segmented, then we fail to see really the basis for a phasein at all.

I think I will close my remarks now so I won't take any more time from my colleagues. Mr. Chairman, I might ask Mr. Taylor to begin.



Mr. TAYLOR. I am Bill Taylor. I am president of the ICG Railmad. In honoring the wishes of the chairman, I am submitting my statement as written and will just make a few comments. [See p. 665.)

However, my willingness to be brief ought not to be interpreted in any way as lack of vigor on the subject. I feel quite strongly about the subject of locks and dam 26. I was surprised and somewhat amazed to hear Senator Johnston say this morning that he didn't know that anyone was opposed to locks and dam 26. We must have been tapping on his window with a sponge because we have been very vocal on this subject. I want the record perfectly clear

Senator GRAVEL. I think that is what is understood as political license.

Mr. TAYLOR. I spoke to the Senator beforehand, but I didn't know he was going to take that position.

The critical question here is one that I think is separable as the format of our presentation tends to indicate. While I am fully cognizant of Senator McClure's observation that politically the issue may not be separable and I have had some experience having been vice president of ICG here in Washington for 5 years, so I have some sense of the political, I hope, as well as the business.

But I suggest from an analytical point of view, this should be separated in your mind because what we are concerned about with the construction of a new lock and dam is an expansion of the transportation capabilities in the territory which the waterways serve. That is the same territory which we serve, but we also serve a considerably broader territory as do all the railroads. We also serve a constituency which extends beyond the constituency which is capable of using the waterways.

Finally, we have a very high fixed charge business. You spread the less revenue over the fixed charges because you have an increased competitive capability and you have a very serious problem. I suggest if you have any doubt about it, that you study the history of the Northeast. In my judgment, there was a good deal of difficulty and confusion in the early days of our consideration of the problems of the Northeastern railroads; but I think Secretary Adams has said that I am quite sure that most of us who were involved in those hectic days have concluded that the fundamental problem that developed in the Northeast was the overbuilding of the transportation system. It was done without planning. It was done piecemeal.

What I think this committee and this Congress, this administration and whomever else is involved must do and do very seriously is think about and study what the need is for transportation capability in the area and what can satisfy that need.

I suggest to you that the rail plan was in place, paid for by private enterprise money and it deserves consideration that the competing forms of transportation not be expanded without a very careful appraisal, which I am not satisfied has been made up to this point.

There will be very respectable testimony in this record that locks and dam 26 can be repaired at a very minimal cost as compared with a structuring of an increased capacity downstream. We think that ought to be very seriously considered.

The integrity of the private investment and the railroad industry is at stake here. I think that issue must demand your attention. I agree, of course, that user charges are absolutely essential. They are essential on whatever size transportation capability you conclude should be established; but they are not completely intertwined.

It seems to me the size of the facility is one thing and then the charge to be assessed on it is another. I hope this committee will consider those issules because the very health and existence of the rail transportation system that stands in competition with the river system is at stake.

Senator McCLURE. Mr. Chairman, I just want to explain to the witness and to others that I' have whip duty on the floor and I am going to have to leave, otherwise I would have stayed throughout the balance of your testimony; but I think you would be the first to agree that the congressional action on the Northeast corridor questions of railroads were also highly politically resolved.

Mr. TAYLOR. Yes. If you mean the entire Northeast Con Rail area, yes.

Senator McCLURE. They weren't simply an analysis of transportation needs. They were also involved in a broader context of regional economic impact, social values, and political influence.

Mr. TAYLOR. That is exactly the point, Senator. The aid which ultimately was required to reconstruct the rail system in the Northeast, in my judgment, was largely brought about by a piecemeal development and subsidization of other transportation systems in the area until we had an overbuilt system, but an area which could not live without a rail system. That is why ConRail is where it is. That is why the U.S. Government has given it the kind of support it did.

What I am asking you is to plan ahead so we don't have to repeat that seriatim exercise in the Midwest.

Senator DOMENICI. Mr. Chairman, before we go to the next witness, let me make a few observations with the present witness. If I understand, you are suggesting that we not tie the user charges to locks and dam 26 authorization. You use the words that we ought to separate them in our minds. Let me tell you how I feel about that.

I think if we separate them, user charges are going to be forever in our minds. Nothing is going to happen to them. You have to appreciate the political implications there and the opportunities that are presented. You are aware of them.

I haven't made up my mind about locks and dam 26, but I have heard plenty of testimony over the past 8 or 9 months about it.

On the issue of competition, what has happened, I would like to share with you and see if you agree, the Congressional Budget Office has made an analysis of what has happened to the modes of transportation since the year 1910, that being the year when a rather special emphasis began to occur in both highways and inland waterways.

In 1940, according to this summary, rail was 63 percent of the traffic in this country. Trucks were 10, and rivers and canals were 3.6. I will just jump to 1960. Rail was 44, truck was 21.8, and the rivers had come up threefold, they were now at 9.2. If we carry that over to 1974, rail is down to 38.8, truck is not up much, it is 22.3; but rivers and canals were up now again to 11.8. I think that is what you have been telling us in your general statement.

I would also like to place in the record an excerpt from the Interstate Commerce Commission White Paper on Mergers. I would just read a portion of it. They concluded that the railroad industry has suffered a substantial adverse impact from postwar imports of public funds to other transportation needs.

They continue on, saying the construction of primarily highways, and so forth, and the improvement of inland waterways has had a negative impact on the railroad system. The investments have pro

duced a diversion of traffic away from the railroads, reducing the share of transportation revenues.

They conclude, in addition, a reduction in profit margin on the retained rail traffic occurred as these new facilities were paid for with public money. Lower transportation costs and improved seryices a fforded may have had socially desirable results, but because railroad competitors or various portions thereof do not fully pay for the economic costs incurred by these new improved facilities, a distortion has been introduced into the allocation of transportation resources and accordingly, the negative impact on railway earnings has been accelerated.

Senator GRAVEL. Thank you.
Mr. DEMPSEY. My next witness is Thomas S. Carter.



Mr. CARTER. Thank you.

Gentlemen, my name is Thomas S. Carter. I am president and chief operating officer of the Kansas City Southern Railway Company. I have filed for the record a formal statement. I will not take the time to read it; but I would like for it to be considered. (See p. 677.]

We are a small southern railroad. We want to stay that way. During the last 312 years, I have not been able to pay a dividend to my stockholders. Rather, I put every dollar I could generate back into the maintenance of the right-of-way. It is a bit difficult for us to meet competition by charging less for the movement of products to the market, simply because someone else-I am here talking about the taxpayers—is paying for maintenance of their rightsof-way.

In my paper I have drawn four conclusions. I will hit those very briefly and then pass the mike down to my friend. First; I ask that the subsidization of the waterways be terminated. I believe very seriously that that should be done.

Second: I am asking that locks and dam 26 be repaired rather than relocated, rebuilt and enlarged. Third, I am sorry that Senator McClure is not here to hear this; but I think that consideration should be given—this is outside the two bills we are talking about; but certainly consideration should be given to the removal of restrictions against the railroads to operate contract as carriers.

Our competitors do have these rights. It is a rather difficult subject to explain briefly; but they do have those rights. I think perhaps that would answer part of the question. Fourth: I believe very strongly and I so recommend that a user charge be imposed on the waterways.

If there are no questions, that is all I have.
Senator GRAVEL. Thank

you. Please proceed.

Mr. DEMPSEY. Our next witness is Mr. William Mahoney, who appears on behalf of the Railway Labor Executives Association.

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