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carriers and the Bureau of Valuation. The Commission was not formally a party to a stipulation and when the final decision was made the Commission was always considered free to depart from any stipulation, although in practice this was seldom necessary. The stipulations were introduced as a part of the record and the testimony and written evidence were then limited to the issues as delineated by the stipulations. This system of prehearing conferences is regarded as an overwhelming success; in fact, it is thought by some to be the device which saved the valuation project from complete failure.

"Intermediate reports of examiners were not issued in the valuation cases After the close of the hearing, the parties were given opportunity to file briefs and reply briefs. In their briefs they could request oral argument; requests were invariably granted. Oral argument was usually held before a division of the Commission, although in some instances oral arguments were heard by the entire Commission. The first draft of the final report was prepared by the examiner and reviewed by the reviewing section in the Bureau of Valuation, known as the Valuation Board of Review.

“The primary valuations of the railroad were substantially completed by 1933. The Commission is currently finishing the valuation of oil pipelines. The fieldwork in pipeline valuation began in 1935 and was completed in about a year. In its annual report for 1939 the Commission reported that out of 52 pipeline companies owning 93,036 miles of pipeline, 44 companies owning 77,516 miles of pipeline had been served with tentative valuations. Of the 14 companies final valuation reports had been completed for 35, covering 49,734 miles of pipeline. The entire project is now substantially completed. The staff of the Bureau of Valuation has now been reduced to 189 persons. A single ex: miner remains and the last trial attorney has been transferred to the Bureau of Law.

"The Commission is required by the act to 'keep itself informed with respect to all new construction, extensions, improvements, retirements, or other changes in the condition, quantity, use, and classification of the property of all coinmon carriers as to which original valuations have been made and the cost of all additions and betterments thereto and of all changes in the investments therein' which have occurred since basic valuations were established, and to have information available at all times' that will enable the Commission to revise and change its previous inventories, classifications, and valuations. The carriers annually file reports which keep the valuations current. These reports are policed and checked by the field force of the Bureau, but in connection with this work there are no hearings or other proceedings that might be regarded as adjudications."

Mr. Dow. You can have anything from among my notes here. I have got other data that I would like to submit to this committee, but you may have it all.

The CHAIRMAN. You can submit whatever you wish, Mr. Dow.

Mr. SINGMAN. Mr. Chairman, I would like at this time also to offer for the record a series of documents, correspondence primarily, which were obtained from Mr. Dow's files, and should like to ask your permission to submit to Mr. Dow a series of questions which he can submit the answers to at a later time.

(The correspondence referred to appears on p. 1027.) The CHAIRMAN. Is that agreeable, Mr. Dow?

Mr. Dow. Absolutely agreeable. The only disappointment about it is when they take my files they don't keep them. \ I don't have any gift for throwing things away.

The CHAIRMAN. Do you want these papers back that you submit? Mr. Dow. I gave them copies of

The CHAIRMAN. They are only copies. We are not taking your files.

Mr. Dow. That is why I said I was sorry because I want to get rid of them.

The CHAIRMAN. The only thing we are going to return is that statement of yours before the TÑEC.

Mr. Dow. I have 2 or 3 others here.

The CHAIRMAN. Do you want to put that in the record now or later?

Mr. Dow. I think it ought to go in consecutively and I will be glad to have it. I will be glad to arrange here;

The CHAIRMAN. You can put any additional data in you want in the record. Just submit it to counsel and they will arrange it. They have their order to put it in the record for you.

Is that agreeable?
Mr. Dow. Thank you very much. That is a great courtesy.
The CHAIRMAN. I beg your pardon?
Mr. Dow. It is a great courtesy and I appreciate it.

The CHAIRMAN. We will have that done. Thank you very much, Mr. Dow. And I will assure you that we will read with great interest the additional data that you submit.

. Mr. Dow. Thank you.

Now, Mr. Chairman, I am going to hand you—one of the papers that I am going to put in the record I have shown to Mr. Harkins. It is new. It is the 1955 values of the pipelines, of all the facts, so far found by the Commission.

Mr. SINGMAN. It is in the record.
The CHAIRMAN. That is being put in the record.
Mr. Dow. You included this?
Mr. SINGMAN. Yes, sir.
Mr. Dow. I certainly appreciate your giving me all this time.
(Subsequently, Mr. Dow supplied the following:)

THE INTERSTATE COMMERCE COMMISSION'S UNDERESTIMATION OF VALUES These 1955 elements of value found by the Commission, as well as all of the values found for pipelines since 1934, have been consistently underestimated in many respects.

For example :

(1) Cost of reproduction new : Period prices rather than annual prices have been used. In the past 10 years, period prices have been from 5 to 20 percent belowi actual annual costs. As illustrations, there are attached some of the factors used in finding 1947 and 1956 period prices, and a tabulation of the costs of reproduction for 11 pipelines for 1955 which the Interstate Commerce Commission in a period of rising costs found to be less than the original cost of the same properties.

(2) “Present value of lands found by the Commission. The Commission determines the value of most lands by using the prices of adjacent agricultural lands. The Commission has conceded that values arrived at in this manner may be below actual cost. The valuation decisions of the Commission show that they usually are below cost, in many cases by substantial amounts.

(3) "Present value of rights-of-way: This estimate is based on the actual cost of these rights less the amortized portion. In arriving at this estimate, no consideration is given to the actual appreciation.

(4) The amount estimated for cash working capital: If a comparison shows the receipt of cash earned in connection with services performed lagged behind the payments to be made on account of performing such service, cash working capital is allowed to cover the average number of days' payments by which collections of revenues lagged behind payments of expense assignable to those rerenues, plus 15 days' payments to provide for a buffer fund of reserve cash on hand to take care of variations in relation between cumulated receipts and cumulated payments due to sensonal or casual influences on traffic or expense.

The amount of cash on the balance sheet is given consideration only to the extent that the ultimate finding of working capital, including material and supplies, shall not exceed the sum of the cash and the material and supplies on hand at date of valuation. (See Artesian Belt, 84 I. C. C. 481.)

These, and other underestimates in the values found by the Commission, have been the subject of repeated protest by the pipeline companies, without suc

cess. There follows a summary of 130 instances in decisions of the Interstate Commerce Commission in which the Commission rejected the pipeline company's contentions.

VALUATION OF RAILROADS AND PIPELINES BY THE INTERSTATE COMMERCE

COMMISSION

The Commission is required by the Transportation Act of 1940 to fix rates, to prescribe regulations, and to find value for ratemaking purposes, "to the end of developing, coordinating, and preserving a national transportation system * * * adequate to meet the needs of the commerce of the United States * and of the national defense.- National Transportation Policy” (54 Stat. 899).

Section 15 a (2) of the Interstate Commerce Act provides :

(2) In the exercise of its power to prescribe just and reasonable rates the Commission shall give due consideration, among other factors, to the effect of rates on the movement of traffic by the carrier or carriers for which the rates are prescribed ; to the need, in the public interest, of adequate and efficient railway transportation service at the lowest cost consistent with the furnishing of such service; and to the need of revenues sufficient to enable the carriers, under honest, economical, and efficient management to provide such service.” [Emphasis supplied.]

The Interstate Commerce Commission, charged with the obligation of developing and preserving a national transportation system adequate to the needs of commerce and the national defense, is confronted with two strikingly different situations in the exercise of its ratemaking power:

Railroads.--The repeated petitions for rate increases, in the aggregate, by geographical regions, by an old system of transportation, frequently in financial distress due to rising costs and loss of traffic, which, through competition from other types of carriers-carriers offering greater service at less cost-can but lose traffic by rate increases, yet must meet the competition, or raise its rates, or go broke.

Pipelines.—The appeal for valuation for ratemaking purposes by young and growing individual transportation companies whose relative economy, whose efficiency, whose rate reductions in the face of rising prices, and whose improved service and constant growth have combined to increase their volume of traffic by 265 percent treble their investment in 16 years.

In both cases, in finding value as a rate base, reproduction cost is a factor to be considered if the properties are such that a sensible person would reproduce them.

The Commission has given its reason for not using the reproduction costs of the railroads.

In Er parte 175, a railroad rate case (284 I. C. C. 589, at p. 608), the Commission said: "No prudent man would consider reproducing the properties on the basis of the extremely high reproduction costs estimated."

The choice of words closely followed the language of the Supreme Court in Market Street Railway v. Railroad Commission (324 U. S. 518, 05 S. Ct., 770, at p. 778): “* * * no responsible person would think of reproducing the present plant, consisting in substantial part of cable cars and obsolete equipment."

Again, at page 779, the Supreme Court said:

"Without analyzing rate cases in detail, it may be safely generalized that the due process clause never has been held by this court to require a commission to fix rates on the present reproduction value of something no one would presently want to reproduce * * **

The railroads have expressly disclaimed the use of reproduction cost as a base. See Er parte 175 (284 I. C. C. 589, at p. 608); Ex parte 206 (300 I. C. C. 633, at

p. 654).

The Commission, in 1938, made the distinction between railroads and pipelines clear in its annual report to Congress, at page 5:

"THE RAILROAD PROBLEM

*** * * many railroad lines in the past were improvidently planned and projected, and some of them should never have been built.”

And at pages 17, 18, the Commission, referring to the financial distress of many of the carriers said, "The one exception has been the pipelines.”

The railroads are valued in the aggregate because the question of value is raised in general railroad rate increase cases, covering large geographical areas. Pipelines have been valued individually because they have never asked for a general rate increase. In fact, no pipeline has asked the Commission for authority to increase its rates.

Value is found for ratemaking purposes. When railroad rate increases are asked, the Commission has felt it necessary to take into consideration, among other factors, the loss of railroad traffic stemming from the competition of pipelines and other carriers. In its decision in Ex parte 206, the Commission pointed out that in 1939, of the volume of intercity freight traffic, both publie and private, the railroads carried 62.4 percent of the total ton-miles while the pipelines carried 10.2 percent. In 1955 the railroad percentage of ton-miles had dropped to 49.5 (a decrease of 20 percent), while that of the pipelines had increased to 15.9 (an increase of over 50 percent). These are proportional percentages. Actually the pipelines' traffic increased 265 percent. Furthermore, the Commission referred to a series of railroad general rate increase cases, June 20, 1946, to February 4, 1957, in which it estimated that on a cumulated basis the railroads were granted increases in rates amounting to 98.2 percent. Ex parte 206 (300 I. C. C. 633, at pp. 663, 667).

Reproduction cost is not found practicable for use as a base in railroad ratemaking. The Commission said in Ex parte 175 (284 I. C. C. 589, at p. 608) :

“In fairness, to bring about the end result of a reasonable return and reasonable rates which it would be possible to charge, the manner of estimation of value shown in our former report on further hearing should be employed again as the measure of value for the purposes of this proceeding at this stage.” [Emphasis supplied.]

A further contrast between railroads and pipelines, in revenues per ton-mile, is attached.

"THE COOPERATION REQUIRED BY THE LAW"

(See p. 37)

The Interstate Commerce Commission's statement with reference to

CONFERENCES WITH ITS BUREAU OF VALUATION

In Chicago, Milwaukee & St. Paul Ry. Co. (44 Val. Rep. 441, 447 (1933)), the Commission said:

“The stipulations were not the act of the attorneys of record, but of experts on both sides of special skill in the various phases of valuation appraisals, designated by the parties for this purpose. And the agreements were arriyed at by further studies of data and exchange of information and opinion calculated to discover the errors in the position of the one side or the other which resulted in the original disagreement. Thus, where the stipulations are the only relevant matter, we are spared the necessity of determining disputed facts from conflicting testimony through the prior admissions of error by the experts relied upon either by the carriers or the Bureau.

"We hold, accordingly, that conferences of experts prior to the issuance of our final report, in a proper case, are appropriate to the legislative purpose of the valuation act, and within our power to authorize and act upon pursuant to paragraph (c) of section 19a ; and that a finding based on the results of such conferences, which does not fail to give to all the evidence offered for the record the consideration to which it is justly entitled, is not in contravention of the statutory requirement for a hearing."

However, agreements reached at such conferences (even stipulations) are not binding on the Commission. Northwestern Terminal Railway Co. ( (1929) 29 Val. Rep. 182, affirming 135 I. C. C. 482) ; Western Pacific Railway Co. ( (1929) 29 Val. Rep. 239, 265), and many prior decisions :

Winston Salem Southbound Ry. Co. (75 1. C. C. 187) ;
Kansas City Southern Ry. Co. (75 1. C. C. 223, 226) ; and
Atlanta B. & A. R. R. Co. (75 I. C. C. 645, 661).

VALUATION DATA IS "OPEN TO PUBLIC INSPECTION"

All pipeline valuation reports, from the earliest to the most recent, have contained a reference similar to the following, from one of the most recent : Teras

1 This refers to the so-called Ex parte 175 method in which reproduction cost is rejected. New Mexico Pipe Line Co. Valuation (Docket No. 1293 (1956 report)), decided October 10, 1957 :

"The details respecting the figures here reported are on file in the valuation records of the Commission, open to public inspection, and subject to the direction of Congress. These details are referred to for greater particularity as to the matters herein stated."

DEFINITIONS

"Guide service lives," Atlantic Pipe Line Co. (47 Val. Rep. 541, at p. 590) :

“The physical lives which were agreed upon” to be "used as a guide in determining physical lives to be applied to the inventory of particular carriers."

“Physical life is defined as the period in years between the time of installation and the time of retirement, due solely to physical deterioration, wear, tear, rot, rust, decay, and the action of the elements. In determining physical life allowance is made for observed obsolescence, which can be seen by the eye in a field inspection. No allowance is made for the functional factors of depreciation which limit the service life, such as unobserved obsolescence, inadequacy, depletion, and decline and exhaustion of the traffic which the property was designed to transport.”

"Period unit prices" and a “normal price,” from Atlantic Pipe Line Co. (47 Val. Rep. 541, at p. 592):

“Period unit prices are applied as of the date of valuation. The attempt is not to determine the exact price of a particular article on that date, for that price may have been abnormally high or low, but rather to ascertain what may be termed a normal price. For this purpose, primary consideration is given to the range of prices during the years immediately prior and subsequent to the date of valuation, and secondary consideration to prices during the years somewhat farther removed."

And from Ajax Pipe Line Corp. (50 Val. Rep. 1, at p. 30):

"Period unit prices as of December 31, 1947, have been applied. The attempt is not to det

the exact price of a particular article on that date, for at price may have been abnormally high or low, but rather to ascertain what may be termed a normal price. The prices are based on investigation of prices over a period of many years giving appropriate consideration to the usual transitory nature of inflated prices occurring because of labor, material, and food shortages during the war or postwar period. The price level used as of December 31, 1947, in accordance with past practice, is a long-term forecast and contemplates ‘tunneling through' the war and postwar price peaks."

Period prices" and "unit period prices," from Atlantic Pipe Line Co., at page 593:

"An agreement has been reached on the major elements of cost for the years 1929 to 1936, inclusive, and as to period prices, as of December 31, 1934. These prices have been used as a guide in determining the period prices which we have applied to the units of property. These unit period prices have been applied as of the date of valuation."

From Ajax Pipe Line Corp., at page 31 :

"All of the data above referred to have been considered in conference by our representatives and the working committee of the American Petroleum Institute. An agreement had previously been reached on the major elements of cost for the years 1929 to 1936, inclusive, and as to period prices as of December 31, 1934. This cooperative phase of the work was continued and annual guide prices agreed on for each of the succeeding years 1937 to 1947, inclusive. In a like manner agreements as to guide period prices as of December 31, 1947, was reached. These prices have been used as a guide in determining the period prices which we hare applied to the units of property. These unit period prices have been applied as of the date of valuation.”

“Period prices," as opposed to spot or “Yearly prices,” Empire Pipeline Co. (48 Val, Rep. 582, 592):

"The determination of the correct period price involves a study of prices current during a period of years, including the year of valuation, and looks to the future as well as the past. In this respect it conforms to the holding of the Supreme Court of the United States in McCardle v. Indianapolis Water Co. (272 U. S. 400), that '* * * in determining present value, consideration must be given to prices and wages prevailing at the time of the investigation, and in the light of all the circumstances there must be an honest and intelligent forecast as to probable price and wage levels during a reasonable period in the immediate future.'

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