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 public 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 arrived 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 I. C. C. 187); 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: Texas 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 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. 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 have 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.' "A spot price, on the other hand, reflects the conditions as of a single date or, at most, of a single year, and may be abnormally high or abnormally low as measured by the general level of prices in the immediate past and the probable future level. "We are firmly convinced that for the purpose of estimating the cost of reproduction of common-carrier property, to be considered as one of the elements to be taken into account in the ascertainment of the ratemaking value of the property, period prices afford a far more satisfactory basis than spot prices.” "Yearly prices," "Normal yearly prices," "Annual guide prices" are actual costs, shown "as an average for all pipeline carriers," in the compilation of Annual Guide Prices and Indexes. (See 1956 pipeline construction indexes, Engineering Section, Bureau of Aecounts, Cost Finding, and Valuation. See also "Spot prices," described in Empire Pipeline Co. (above).) PETROLEUM TRANSPORTATION TESTIMONY OF FAYETTE B. Dow BEFORE THE TEMPORARY NATIONAL ECONOMIC COMMITTEE, CONGRESS OF THE UNITED STATES, 76TH CONGRESS, OCTOBER 4,. 1939 Acting Chairman WILLIAMS. Do you solemnly swear that the testimony you are about to give in the matter now pending is to be the truth, the whole truth, and nothing but the truth, so help you God? Mr. Dow. I do. Acting Chairman WILLIAMS. Mr. Dow, will you proceed and give your name to the committee and for the record, and your background and experience and connection? Mr. Dow. Mr. Chairman, my name is Fayette B. Dow. I reside in Washington, D. C., and am engaged in the general practice of law. I am a graduate of Amherst College and of the law school of Columbia University. I was a member of the faculty of Columbia University for 5 years, and practiced law in New York for a few years. I came to Washington and entered the service of the Interstate Commerce Commission as one of its attorneys and examiners. During that period my work consisted, in part, of the hearing of rate cases in various sections of the country, the preparation of reports for the Commission, and matters of that kind. When I resigned from that position I opened an office in Washington and have been practicing here since. I am chairman of the general committee on railroad transportation of the American Petroleum Institute and have been for a considerable period of years. I am chairman of its committee on pipeline accounting regulations. That is a committee which has cooperated with the Interstate Commerce Commission in the revision and simplification of pipeline carrier accounts. I am a member of its committee on pipeline valuation. I am not a transportation authority; I am not a rate expert. I know enough about the subject to know that it is an exceedingly complex one and that it has been growing very much more complex in recent years. For the last 10 or 15 years I have not participated before the Commission in rate cases involving petroleum, for the reason that I have clients that are competitively interested in those controversies, and when that situation occurs they have gotten their own attorneys and fought it out. I have, however, kept my hand in in practice before the Interstate Commerce Commission in this period. For more than 20 years I have been counsel for the International Apple Association, an association of growers of apples and other fruits and vegetables in various sections of the United States, and I suppose I have participated, in that period, in perhaps 40 cases before the Commission involving rates on those commodities. Acting Chairman WILLIAMS. Have you a summarized copy of your statement which you can file with the committee, Mr. Dow? Mr. Dow. I have tried to brief it somewhat. The statement which I prepared was a very long one. All I propose to do is to bring to your attention some of the considerations which I think are of first importance. If I were to discuss the subject at length I'd spend far more time than your committee would be willing to have me take and I don't want to do that. Acting Chairman WILLIAMS. That was the reason I asked you, not that we want to curtail you at all in your statement, but following the practice we have adopted here. your written statement will be filed for the record and you may make such comments on it now as you see fit. (Mr. Dow's prepared statement was marked "Exhibit No. 1189" and is included in the appendix on p. 8583.) PIPELINE RATES AND EARNINGS Mr. Dow. Thank you, Mr. Chairman. I had no intention of reading my prepared statement, and before I get into the subject at all, it may be that I can clarify some matters which have developed in the course of the hearings up to this time. We had some discussion, you remember, a few days ago on the profits of the pipeline companies. Various figures have been put into the record on that subject. Then there was some discussion of the subject of the base, the proper base on which to compute the earnings of pipe-line companies. There was some discussion to the effect that original cost should be taken, and I heard a member of the committee seem to indicate that in his judgment, it should be depreciated cost. Now, for the purpose of clarifying those considerations, I have prepared some material which I would like to submit to the committee. I spoke to Mr. Cox about it yesterday on the day before and told him that the material was entirely from the records of the Interstate Commerce Commission, that I thought it would be helpful to the committee to have it, and he is in accord with the procedure which I am taking in placing it before your committee at this time. The Interstate Commerce Commission has three very important pipe-line proceedings which are pending, and one is the valuation of pipe lines. That valuation proceeding is almost 80 percent completed; more than 50,000 miles out of the 96,000 miles of pipe lines reporting to the Commission have been finally valued, and another 25,000 miles, let's say, have been tentatively valued, so that we are in position to get this morning a fairly good impression of the values which the Commission has found, and their relation to original cost and to depreciated cost. I have set up on the first page of the material which I am handing to you that information.' The first column shows original cost as of the valuation date, that is, December 31, 1934. To that cost is added, of course, the improvements and betterments to the lines since that time. The next column shows the depreciated costs appearing on the books of the pipeline companies, and the third column shows the final value. The fourth column shows the percentage relation of value to original cost. And then for the companies which have been tentatively valued at the bottom, the same information is shown. Rates will be made, as I understand it, upon the value for rate making purposes as found by the Commission, not upon original cost or depreciated cost. In that determination of value for rate-making purposes, the Commission is required under the act to consider original cost, reproduction new, and reproduction new less depreciation. It has considered those facts in reaching these values, and in a moment I will indicate to you the actual earnings of the pipeline companies on those values. That, I think, will give us a clearer picture than anyone that we have had. But, before I do that, I want to call your attention to the second page, which is Exhibit No. 2 of ICC Docket No. 26570. (Senator O'Mahoney resumed the Chair.) In a Mr. Dow (continuing). I am going to refer to that proceeding later on. word at this time, it involves an investigation by the Interstate Commerce Commission into all pipeline rates and practices involving substantially all of the lines operating east of the Rocky Mountains. Now, that happens to be one of the exhibits in this case, an exhibit of the Humble Pipeline Co., which shows the reductions which have been made in pipeline rates in very recent years. It is typical of other exhibits filed in the case and all that you need to look at in that exhibit to get the purpose of it, as far as I am concerned, is the extreme righthand column which shows the percentages of reductions that have taken place between September 18, 1933, and October 26, 1938. Dr. LUBIN. Mr. Dow, these rates I notice are all within the State of Texas? Mr. Dow. The rates within the State of Texas are local rates, and are also filed with the Interstate Commerce Commission where the oil moves coastwise beyond the Texas ports. Dr. LUBIN. Would a chart showing rates for longer hauls, let's say from midcontinent to the Chicago area, show equally large decreases? 1 "Exhibit No. 1190," appendix. Mr. Dow. The percentages might not be as large but they have been very substantial, and that information is available if this committee wants it. It is all on file with the Interstate Commerce Commission, and is being considered by the Commission in that case which, like the valuation proceedings, is in its final stages. The CHAIRMAN. In this case, Mr. Dow, every instance shows a substantial decrease. I am referring to this Exhibit No. 22, the last column. Dr. LUBIN. Were you aware there are three pages to it, Senator? The CHAIRMAN. I see; I beg your pardon. Mr. Dow. There are three pages to that exhibit. The mimeographed page at the bottom is a still different statement. (The tables referred to were market “Exhibit No. 1190" and are included in the appendix on p. 8611.) Excuse me, Mr. Chairman. Did you have a question? The CHAIRMAN. Yes; I am trying to determine whether or not these figures show a uniform decrease. Mr. Dow. Well, they are not uniform in percentages. The CHAIRMAN. I didn't mean uniform in rate, but the impression I got from the first page was that there was a decrease in every instance. Mr. Lubin corrected me by calling attention to the second page, and I am looking for an increase on the second page. Is there one? Mr. Dow. There are some rates there that do not show a change. There are others that show reductions. There are no increases that I have observed offhand. The CHAIRMAN. There are several blanks here, one of which is "No rate shown," "No rates in effect," "No rates in effect." What I am getting at, Mr. Dow, is this. I was looking at the wrong exhibit. The papers that were handed to me were not properly assembled. Nevertheless, what I am trying to determine is whether the trend of decrease indicated by this exhibit for the intrastate rates, within the State of Texas, is also to be found in interstate rates. Mr. Dow. In some, yes: in all, no. The CHAIRMAN. The preponderance here is of a decrease. What would be the case with respect to interstate rates? Mr. Dow. They were not increased, if that is what you mean. The decreases are very substantial in most of the rates, and the exhibits filed with the Commission so show. The CHAIRMAN. In interstate rates? Mr. Dow. In interstate rates. Mr. O'CONNELL. Are figures available for interstate rates in the same form that these are made available to us? I wondered if you had any particular reason for confining your statistics on this point to intrastate rates. Mr. Dow. These are rates filed with the Interstate Commerce Commission, all of them, and they are all involved in docket 26570 because they are made applicable to shipments going beyond the State of Texas. Mr. O'CONNELL. But, I take it, there must be many other rates which are equally available to the Interstate Commerce Commission involving interstate shipments, but we can't draw any direct inference from these figures as to what the trend of rates in interstate traffic has been. Mr. Dow. I will be very glad, if you would like to have me, to file a set of all of the exhibits showing these rate reductions. What I wanted to do was simply to indicate this: This is the important point, that there are no recent statistics of earnings which are representative of the present situation, because of these substantial rate reductions. Mr. O'CONNELL. This schedule doesn't relate to earnings, does it? Mr. Dow. It doesn't relate to earnings; no. I am coming to earnings in a moment. It does indicate, however, the substantial rate reductions which have taken place. Mr. O'CONNELL. In these areas? Mr. Dow. In these areas. Mr. O'CONNELL. What I wanted to know is how much of an inference we can draw from these limited figures as to the overall trend in these rates. Mr. Dow. I think you can, whether drawn from this particular sheet or not. I should be glad to testify that the reductions have been quite substantial. What the facts as a whole in that case appear to indicate is that the reductions have approximated 35 percent for the carriers as a whole. That was the recommendation of the examiner in his first proposed report, in docket 26570, and the reductions which have been made in the last, in very recent periods, approximate |