AMERICAN LINES v. L. & N. R. CO.

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Argument of Harry C. Ames, Jr.

Chief Justice Earl Warren: You may continue with your argument.

Mr. Harry C. Ames, Jr.: Mr. Chief Justice, may it please the Court.

I represent in 797, the Waterways Freight Bureau and the Regulated Barge Lines party to the case.

The Commission in this proceeding having found that the proposed rail rate to be above rail out-of-pocket cost and therefore compensatory, it addressed itself to the real issue or problem in this case that of its power under Section 15a(3) of the Act to the determination by comparison of costs which mode, rail or water, possess the inherent advantage of low costs and whether that advantage, if it lay with the water carriers, would be impelled.

It was no longer the simple problem of whether the rail rate standing in issue by itself was profitable rate to the railroads.

This must be borne in mind in consideration of the method and approach used by the Commission in reaching its determinations of who is the low cost carrier.

This is an effort by the Interstate Commerce Commission to ascertain which mode of carriage should be permitted in the public interest, not in the interest of the proponent mode alone to continue to participate in the transportation in question.

This proceeding is an outgrowth of the long line of cases reaching back some 40 years and more in which the water carriers have been forced to fight rail rate reductions designed to pick off vital tonnage.

The precise rate in question in this ingot molds case became effective March 19, 1965, almost immediately following the decision by the division of the Commission which was issued in February 1965.

The Commission found that this tonnage, ingot molds is a part of a group embracing iron and steel products which group is a third most important commodity group transported in barge line service.

It, the group, represents 11% of the barge line revenue.

It is one of only 11 groups of tonnage which account for 81.45% of the total barge revenue.

The Commission fully understood in fully mandated statements that the traffic is of more consequence to the barge lines than to the railroads and it was dealing with a railroad concept that would not only impair the ability of the water carriers to compete but to actually exist.

The barge lines in this case introduced evidence to prove and did prove that their inherent advantage of low cost would be impaired by this rate set at a level below the barge line fully distributed cost, that barge lines went one step further and proved that their inherent advantage could be destroyed by the ability in the railroads to take such a step with respect of only a few groups of commodities.

This evidence in this case was directed to the language of this Court in the New Haven case where at page 78, it was said the principal reason for the reference to Section 15a(3) as the hearing shown was to emphasize the power of the Commission to prevent the railroad from destroying or impairing the inherent advantages of other modes and the precise example given to the Senate Committee which led to the language adopted was a case in which the railroads by establishing on a part of their operations a compensatory rate below their fully distributed cost forced a smaller, competing, lower cost mode to go below its own fully distributed cost and thus perhaps to go out of business.

This conclusion was reiterated by this Court at page 759 in the same decision where it was discussing unfair or destructive competitive practices.

So the test before the Commission in ingot molds was not solely as the rail proponents would have us believe determined whether the rate was profitable to the railroads.

The test was the issue of intermodal competition under Section 15a(3).

First the division and secondly the Commission addressed themselves completely to this problem.

Vital findings of fact of the division and adopted by the Commission were first that the proposed rate was above rail out-of-pocket cost and therefore compensatory.

Second, that the barge's fully distributed costs were below such cost by the rails.

Third, that the proposed rate was below the rail's fully distributed cost and that the proposed rate was below the barge's fully distributed cost.

These findings --

Justice Byron R. White: Excuse me, does the -- does the record indicates how much of the barge's revenue comes from these particular items that are in --

Mr. Harry C. Ames, Jr.: The actual figure of revenue?

Justice Byron R. White: Well, what percentage?

Mr. Harry C. Ames, Jr.: 81% of their revenue would come from the 11 groups of commodity from 11 groups of --

Justice Byron R. White: That are involved here?

Mr. Harry C. Ames, Jr.: No, from the iron and steel group, approximately 11%.

Justice Byron R. White: Well, I take it that the barges, like the railroads, would have to recover their fully distributed costs from somewhere.

Mr. Harry C. Ames, Jr.: They have to -- have to recover their fully distributed costs from practically everything they buy.

Justice Byron R. White: It will either be from this traffic or some other traffic.

Mr. Harry C. Ames, Jr.: That's right sir.

Justice Byron R. White: And this is -- this is the -- the commodities that are involved here, about 10% of the barge's revenue --

Mr. Harry C. Ames, Jr.: The group of commodities to which ingot molds belong, yes, iron and steel products, roughly 11% of the revenue of the barge lines.

Justice Byron R. White: And the railroads have to get their costs from some place, I suppose, either this traffic or some other.

Mr. Harry C. Ames, Jr.: Yes, they have to get it.

For example, from other ingot mold traffic moving out of the same plant that this traffic moves out.

Justice Byron R. White: Fully distributed cost includes profit?

Mr. Harry C. Ames, Jr.: Yes.

Justice Byron R. White: And all overhead, depreciation --

Mr. Harry C. Ames, Jr.: Constant cost and the out-of-pocket cost.

Justice Byron R. White: And the fair return?

Mr. Harry C. Ames, Jr.: Yes.

Justice Byron R. White: Thank you.

Justice Abe Fortas: Yesterday, I discussed with the counsel who preceded you what the applicable standards were.

In your judgment as you understand it, are the standards that govern a case of this sort before the Commission confined to a comparison of cost or whatever type of cost -- whatever type of cost it might be?

Mr. Harry C. Ames, Jr.: Mr. Justice Fortas, I believe that in this case, this ingot molds case, the only problem before the Commission as the case was presented to the Commission by both barge lines and the rails was this question of the inherent cost advantage.

Justice Abe Fortas: Yes, but that's not my question.

As you read the statute, what -- is that the only standard that the Commission may or is required to take into account in deciding a case of this sort?

Mr. Harry C. Ames, Jr.: No.

I think it was incumbent upon the Commission and I think the Commission did consider what the effect of the impairment or destruction of the inherent cost advantage would be.

As they stated, it would impair their ability to actually exist.

Justice Abe Fortas: Now, that is because of the statement of policy in the National Transportation Act and the standards of the National -- the National Transportation Policy is made an applicable standard to this kind of a proceeding by expressed language of 158 --

Mr. Harry C. Ames, Jr.: 15a(3), that's right.

Justice Abe Fortas: Now, are you --

Mr. Harry C. Ames, Jr.: Consideration must be given to the National Transportation Policy.

Justice Abe Fortas: Right.

Alright.

Now, lets' -- let me see if I can get this clear in my own mind, if you don't mind.

The Commission has to take into account the cost factors, which is what you've been discussing.

The Commission should under the statute also take into account the relevant parts of the National Transportation Policy, is that right?

Mr. Harry C. Ames, Jr.: Yes, sir.

Justice Abe Fortas: Now, my next question is did the Commission here take into account not only the cost factors but also some considerations with respect to the National Transportation Policy?

Mr. Harry C. Ames, Jr.: Well yes, I think the Commission --

Justice Abe Fortas: And if it did so, could you, without too much spending a lot of time, show me just where in the Commission's opinion it did take that into account?

Mr. Harry C. Ames, Jr.: Well, I think the Commission took that into account, Mr. Justice Fortas, where it made a -- reached a conclusion that the effect of this rate and the concept advanced by the railroads would be to not only affect the barge line's ability to compete but also to actually exist.

Justice Abe Fortas: Alright.

Now, may I ask you at some point during the course of the total argument to hand the clerk a statement of the reference to the record?

Mr. Harry C. Ames, Jr.: That's appendix 68.

Justice Abe Fortas: Appendix --

Mr. Harry C. Ames, Jr.: Appendix 68, the joined appendix page 68.

Justice Abe Fortas: Thank you.

Mr. Harry C. Ames, Jr.: Now, these facts in this ingot molds case set forth precisely the problem discussed in the New Haven case an attempt by the high cost carrier by going below its fully distributed cost to force the low cost carrier to go below its fully distributed cost to compete.

Now, at the time that the ingot molds case was being tried before the Commission and at the time that the New Haven case was still before the courts, the Commission had before the case involving the movement of grain and in that case, the Commission referring to the New Haven case in the pendency of the issues pointed out that it was -- its -- part of its duty in the Grain case to consider which method of cost would be used in determining this question of an inherent cost advantage and it addressed itself directly to the problem.

And in the Grain case, it came up with the general rule that when regulated carriers were involved in an intermodal competitive situation such as we have in the Grain case, the Commission would use fully distributed cost for the purpose of measuring the inherent cost advantage.

Now, in the ingot molds case, both the division and the full Commission made referenced to the Grain case and to the general rule in the Grain case and used that rule as the rational basis for arriving at their conclusion in this case, the ingot molds case, that the measure of inherent cost advantage would be based upon fully distributed cost of both carriers.

The Commission refused the rail carrier's request in the Grain case to adjust upward the water carrier cost by adding public cost.

Just as in the ingot molds case, it refused to adjust downward the rail cost by ignoring constant cost.

Either action would have in effect eliminated or ignored the water carrier's inherent advantage of low cost.

The Commission having established the rule in the Grain case was perfectly within its right and it was its duty to follow that rule in this case because the rail carriers presented no reason for a departure from the general rule.

The rail carriers contended in this case that in determining the low cost mode, no comparison should be made.

The Commission should simply determine if the railroad was enhancing its profit by charging a rate in excess of out-of-pocket cost.

The Commission rejected this approach citing the New Haven case and this Court's admonition that it must decide how to measure the cost advantage.

The Commission reasoned that it could not compare by considering only the cost of the rail mode.

We find that the much discussed testimony of the four economists speaking for the railroads were summarized by the division as follows, that out-of-pocket costs rather than fully distributed costs should be the only basis for a pricing floor, that determination of the most economic form of transportation should be out-of-pocket cost and that there can be no meaningful comparison of full costs of rail versus water.

The full Commission adopted this summary.

The Commission did not ignore this testimony as suggested by the lower court but it did reject the proposals.

Based upon the decision in the Grain case and in the line of quoted decision, it rejected the out-of-pocket cost as a measure of comparison.

It is plain that while using out-of-pocket cost as a pricing floor may be proper when only the one mode of railroad is considered, the Commission rejected and with reason the proposal that only the rail rate and cost should be considered in the case under Section 15a(3).

It was never made clear by the economists just what was meant by the contention that out-of-pocket costs were best used in the determination of the most economic form of transportation or just how this would be a determinative if only one form of transportation was to be considered.

It was not necessary that the Commission set forth in detail all of its reasons for rejecting this testimony as determinative of the issues as in BNO versus U.S. -- 239 U.S. 349.

The court -- this Court held there is no requirement that the Commission specify the weight given to any item of evidence or fact or disclose mental operations by which its decisions are reached.

The lower court in questioning the Commission's use of out-of-pocket cost to determine the price floor in the Grain case mistakenly assumed that the Commission was considering inherent advantage of low cost in the same context as in this case.

It was not.

There was no comparison made in that case of the cost of unregulated carriers with those of the rails.

Section 15a(3) applies to different modes of transportation subject to the regulations under the Act.

Faced with the fact that traffic moved primarily in unregulated transportation, the Commission saw its task is different than any controversy such as in ingot molds.

In this ingot molds decision, the Commission discussed the division report, adopted the findings of fact and conclusions consistent with its decision, fully discussed the contentions of the parties made in their petition for reconsideration, incorporated by reference its discussion in the Grain case including the complete discussion of fully distributed versus out-of-pocket cost as a measure of cost advantage, pointed out that the precise example given to the Congress as a reason for the language in Section 15a(3) is precisely the situation under discussion, discussed the importance of the traffic to the water carriers, concluded as did the division that barge-truck method on a fully distributed basis was the low cost mode, that the rail rate below the barge's fully distributed cost impends upon the ability of the barge-truck mode to completely assert its inherent cost advantage.

In conclusion, may I say that contrary to the lower court's opinion, this is a normal situation involving intermodal competition between water and rail carriers, a situation contemplated in Section 15a(3), a situation in which the Commission is directed by the statute and by this Court in New Haven to determine the low cost mode of transportation.

In this normal situation, the Commission has rejected the rail's suggestion or proposal that it consider only rail out-of-pocket cost.

It would not decide the issue in that factor.

Instead, the Commission has adopted what it has described as its general rule to use fully distributed cost as a measure in determining the low cost agency.

Thank you.

Chief Justice Earl Warren: Mr. Friedman.

Argument of Daniel M. Friedman

Mr. Daniel M. Friedman: Mr. Chief Justice, may it please the Court.

The United States opposed the Interstate Commerce Commission in this case before the District Court and is opposing it before this Court because it believes that its decision in this case is not in conformity with the standards which Congress provided in Section 15a(3) for it to follow in cases involving rate regulation in intermodal competition situations.

In the New Haven case, this Court said that there can be no doubt that the purpose of this provision 15a(3) was to permit the railroads to respond to competition by asserting whatever inherent advantage of cost and service they possessed.

Our basic position before this Court in this case is that the Commission here on this record has not given an adequate explanation as to why the inherent advantage here doesn't lie with the railroads rather than as it found with the barges.

And we think, as I shall develop, that its decision turning down in this case the fully compensatory rail rates on ingot molds in fact prevents the very kind of vigorous hard competition between different modes of transportation that Congress intended to further in the 1958 amendments to the Act.

Now, I want to state at the very outset and all candid that the position we're taking in this case here add variance from the position we took in our brief before in the New Haven case as was brought out yesterday.

Quite frankly, we have reexamined our position that we took in New Haven in the light of some intervening factors.

I'll just mention them briefly.

First, that Mr. Justice White pointed out in the New Haven case the Court did not accept our argument.

Secondly, we have in this case the benefit of the economic testimony that was not before the Court in the New Haven case.

And finally, we have the fact that in 1966, the Council of Economic Advisors itself recommended the use of out-of-pocket cost as the basis for determining cost advantage in intermodal situations.

Justice Byron R. White: Is that in your brief?

Mr. Daniel M. Friedman: Which, Mr. Justice?

Justice Byron R. White: That last item that you --

Mr. Daniel M. Friedman: Yes, that is set forth in our brief.

We've set forth in our brief a reference that has not been quoted.

We set forth a reference to the view position taken by the Council of Economic Advisors and also of the views of the Department of --

Justice Byron R. White: What did the council say?

Mr. Daniel M. Friedman: The council said that they thought that in intermodal situations, the appropriate method for determining cost advantage for purposes of determining the inherent advantage should be on the basis of out-of-pocket cost rather than fully distributed cost.

Justice William J. Brennan: (Inaudible)

Mr. Daniel M. Friedman: This was an -- in its general economic report to the President was discussing the various -- the whole economy and it suggested this, as I shall develop when I come to my argument.

This would lead to a more efficient utilization of the nation's transportation resources, this type of pricing.

Justice Byron R. White: You've got to say something more about that.

Mr. Daniel M. Friedman: Oh yes, yes.

I'm going to in a couple of minutes.

I just like at the outset, to put the issue in an appropriate frame of reference, to say a little bit more as to what is meant when we talk here of out-of-pocket as against fully distributed costs.

By out-of-pocket, we mean those costs that are directly related to the particular movement of traffic involved.

To put it the other way, these are costs that would not be incurred if the particular movement had not been made, and these are figured over what we call relatively long term.

It isn't just limited to the cost that would be incurred this week in moving one shipment.

It's the amount that the particular type of traffic involved incurs as specific additional expenses.

The long-term costs on the other hand are costs that are incurred whether or not the particular traffic is carried.

And thus, by definition, these long-term costs do not vary in respect to this particular traffic and also bear no particular relation to the traffic.

Justice Byron R. White: But they must be recovered.

Mr. Daniel M. Friedman: They must be recovered --

Justice Byron R. White: At some traffic some time.

Mr. Daniel M. Friedman: Some time, that is correct, Mr. Justice, and we think that -- as I shall develop when I come in a moment to the economic testimony that permitting pricing on an out-of-pocket basis, that is pricing which gives the railroad its immediate expenses incurred in carrying this traffic plus something else as a contribution to total costs actually results in helping the achievement of meeting these total fixed costs rather than hurting it.

And I think that's the basic flow in the entire argument that has been made by our opponent.

Justice Byron R. White: Well, Mr. Friedman, what if all traffic were priced at that level?

Mr. Daniel M. Friedman: Well, obviously Mr. Justice, if all traffic were priced at this level, the railroad couldn't operate at a profit.

It couldn't run that way.

But the fact --

Justice Byron R. White: How come you just now -- how come you're just focusing on this particular traffic?

Mr. Daniel M. Friedman: Well, because -- because this is the particular --

Justice Byron R. White: You could say the same thing about all traffic item by item and if you did, you'd end up broke.

Mr. Daniel M. Friedman: But this -- but Mr. Justice, in a competitive system where someone is pricing --

Justice Byron R. White: Yeah, but competition doesn't remove the necessity from meeting those costs from some place.

Mr. Daniel M. Friedman: No, but those costs under the most economic utilization of resources, those costs will ultimately be met.

Mr. Justice, may I say something on this, that this type of pricing, out-of-pocket pricing is not something unusual.

It's not something unusual that was resorted to just in this particular case.

Now, this is basically, it seems to us the way in which the railroads price at page 141 of the record in this case, based on the statistics developed by the Commission, the witness stated that in 1960, 65%, almost two-thirds of all of this country's rail traffic moved at rates that were below fully distributed costs.

That is almost two-thirds of the total traffic in this country moved at rates of the type involved in this case.

Now, I'd also like to mention one other thing in connection with the calculation of these rates.

As the Commission determines out-of-pocket costs, that includes some element of the fixed cost because they do allow a rate of return on a part of the carrier's plant investment.

They also however in calculating fixed costs take into account such things as passenger deficits.

That has to be made up of course, but obviously, passenger deficits have nothing to do with the railroad's expenses in moving this particular freight.

Chief Justice Earl Warren: I suppose those figures -- the two-thirds though would be changing day by day, would they not, because of the railroads in handling their passenger traffic on the grounds that they -- they don't need an out-of-pocket expense?

Mr. Daniel M. Friedman: Well, they -- it might as a result of that drop, Mr. Chief Justice.

But I think the significant thing about this figure is that at least a few years ago, and I assume it hasn't substantially changed today --

Chief Justice Earl Warren: Maybe it hasn't substantially changed if they get rid of all of their passenger traffic, which they're rapidly doing.

Mr. Daniel M. Friedman: No.

I think Mr. Justice -- I think it's a fair assumption that today still, still probably the majority of rail traffic does move on this basis.

Now, I'd like to come, if I may, to the economic testimony in this case because I think --

Chief Justice Earl Warren: Let me ask you -- let me ask you this question.

If they don't get fully distributed expenses in this situation, cost in this situation where they have competition, do not rate payers have to make that up where there is no competition?

Mr. Daniel M. Friedman: Well, they do Mr. Justice, in one -- in one sense yes and in one sense no.

They have to make it up in the sense that obviously, the total operation has to be borne by all of the customers of the railroad's total expenses.

But the fact is -- the fact is that in this very case, permitting the railroad to carry this traffic at a rate that yields it more than its out-of-pocket cost actually contributes something to the total amount that the railroad has to earn.

In other words, the other customers of this railroad -- and let's assume a man who is shipping furniture and does not have this rate, this man is actually better off in the long run if the railroads carry this traffic at this rate than they don't because before this rate was put into effect, the railroads were carrying virtually none of this traffic.

That meant there was nothing on this traffic that was producing anything toward the total of the fixed cost.

Under this rate which caused the out-of-pocket cost to roughly $4.70 when the rate is $5.11, that means that for every ton of ingot molds that moves, $0.41 is contributed toward meeting the railroad's total overhead cost.

Now, in our whole economic system, pricing under our system involves facing up to the competitive situation.

Of course, where the railroads are not faced with this competition, they're going to price at what the traffic will bear.

This is true of any businessman.

If I'm a manufacturer of television sets and I have a particular television set which is because of its special characteristics has no competition, I am going to try and will be able to get a much higher rate of return on the sales of those sets than I can get at a set where I have four or five competitors.

Now, I got --

Justice Abe Fortas: But doesn't the statute commit all of that to the ICC and not to the Department of Justice?

Mr. Daniel M. Friedman: It does, Mr. Justice.

It does commit it to the Commission of --

Justice Abe Fortas: Now what you have, it seems to me that the very heavy burden of showing that the Commission has exceeded its powers under the law or has misapplied them that the economic judgment, as I understand it in these cases, is an economic judgment for the ICC to make.

Now, let me ask you whether as you read this statute, the only factors that are covered in here are compared to cost factors however they may be interpreted, or whether the National Transportation Policy has to be -- under the statute has to be considered.

Mr. Daniel M. Friedman: Our answer --

Justice Abe Fortas: And the next question, do you -- what do you make of the paragraph in the Commission's opinion on page 68 of the joint appendix which the Commission says an inherent cost advantage under the National Transportation Policy reasonably could not embrace a concept that would impair the ability of a character -- of a carrier not only to compete but to exist.

Now, are you -- is or is not that an appropriate standard and do you attack that finding as unsupported by the evidence here?

Mr. Daniel M. Friedman: Let me first answer your first question on what we think --

Justice Abe Fortas: Because I think there could be only one agency that would exercise debatable economic judgments on behalf of the Unites States Government.

And as I read the statute, that agency is the ICC.

Mr. Daniel M. Friedman: We recognize, Mr. Justice, of course that it's the Commission, as this Court said in New Haven, that the determination of how to preserve and further inherent advantage is a matter in the -- as it said in the first instance where the Commissions informed judgment.

Our quarrel basically with the Commission here is that we don't think they have adequately explained how they reached their judgment in this case.

And we think they haven't explained the in the like of the economic testimony, which I'll --

Justice Abe Fortas: Well, there are two things.

Are there -- this is my first question -- are there two things of cost factors in the National Transportation Policy or do you dispute that?

Mr. Daniel M. Friedman: Well, we think that the cost factors are one element of the National Transportation Policy.

Justice Abe Fortas: I understand that, but are there other factors in the National Transportation Policy that the statute commands A or B permits the Commission to take into account?

Mr. Daniel M. Friedman: Most assuredly there are.

Justice Abe Fortas: Now, did the Commission take into account here factors other than the cost factors?

Mr. Daniel M. Friedman: We think not, Mr. Justice.

Justice Abe Fortas: Well, what do you make of page 68 in this paragraph to which the counsel who preceded you --

Mr. Daniel M. Friedman: Well, we challenge -- we challenge that the Commission has given any basis in this case --

Justice Abe Fortas: That's separate.

That's not the same thing.

Now, the Commission did consider and it did take into account the impact upon the barge lines and the railroads impacted the survival -- the survival impact of this decision or the principal involved here, did it not?

Mr. Daniel M. Friedman: It took it into --

Justice Abe Fortas: Now, what you're saying is that it took it into account incorrectly --

Mr. Daniel M. Friedman: That is correct.

Justice Abe Fortas: -- or improperly.

Mr. Daniel M. Friedman: That is correct, yes.

Justice Abe Fortas: Incorrectly?

Mr. Daniel M. Friedman: Incorrectly.

Justice Abe Fortas: Now, tell us why.

Tell us why the -- do you think that this kind of allegedly selective rate reduction by the roads to compete with respect to a particular segment of a very complex traffic pattern could have no effect whatever on the survival ability of either the roads or the barge-truck services?

Mr. Daniel M. Friedman: I think that the evidence is clear that in this case that this particular rate cut on ingot molds could have no impact on the ability of the barge lines to compete.

The barge lines themselves, Mr. Justice, have conceded --

Justice Abe Fortas: What happened?

Is there anything in the record as to -- did those rates go into effect the rail rates?

Mr. Daniel M. Friedman: Yes, they have gone into effect.

Justice Abe Fortas: And is there anything in the record showing whether there was a diversion of traffic, this ingot traffic from the barges to the railroads?

Mr. Daniel M. Friedman: There is -- there is none -- there is nothing in the record, Mr. Justice, except that the witnesses have testified that -- the barge witnesses testified that they could not get this traffic at the same rate as the railroad.

Justice Abe Fortas: Now, do you -- now let's assume that the record evidences that the barge lines would lose this traffic --

Mr. Daniel M. Friedman: I think it's -- I think as I understand it in fact since the rail rate has gone into effect, the barge lines have not gotten any of this traffic.

The railroads have gotten --

Justice Abe Fortas: You mean it lost the traffic.

Mr. Daniel M. Friedman: It lost the traffic.

Justice Abe Fortas: Alright.

Now, are you saying to us that that evidence -- we assume that that is proof now.

Are you saying to us that that proof is not sufficient to support the Commission's finding or conclusion on page 68 of the joint appendix?

Mr. Daniel M. Friedman: Yes, that's precisely what we're saying, Mr. Justice.

Justice Abe Fortas: Now, will you please tell me why you think that the loss of this traffic cannot -- to the barge lines, cannot reasonably be relied upon by the Commission as a factor to disallow the railroad freight cut here.

Mr. Daniel M. Friedman: Because, Mr. Justice, there's nothing to show -- there's nothing to show that this particular cut would have any serious impact on the barge lines and in any way threaten their survival.

Let me come to the -- what the Commission said in this case.

The Commission said that this traffic is more important to the barge lines than the railroads.

It said that this particular broad category, iron and steel products is the third largest category of traffic that barges handle.

It gives them -- it represents approximately 11% of their revenues.

Now, I take it the implication in this is that if this rate cut is permitted, therefore it will follow that the railroads could make comparable rate cuts on all similar traffic and thus take away from the barge lines a total of 11% of their traffic.

Now, there's nothing to indicate at all in this record that there's any similarity in the conditions relating to these particular ingot molds and all the rest of the traffic.

Justice Abe Fortas: My point, Mr. Friedman, which I'm sure you anticipate, is that really, isn't that a judgment for the Commission --

Mr. Daniel M. Friedman: Well, it said --

Justice Abe Fortas: -- to make that nice debatable -- forgive me, a debatable judgment which you have just made now?

You may be right, you may be wrong.

I don't know.

But is it your business or our business either?

Or is it the business of your Commission?

Mr. Daniel M. Friedman: It's the business of the Commission, Mr. Justice, but the Commission we think has to explain -- has to explain out of belief why it reached its conclusion.

I just like to mention on the question of the importance of this traffic.

At page 3 of the brief for the barge line appellants in this case, in number 797, they described the ingot molds traffic itself as of minor traffic significance.

That's what they themselves say.

They themselves recognized that this particular item of traffic is of minor significance.

Now, I'd like to come, if I may, to the --

Justice Thurgood Marshall: Mr. Friedman, do you take the position that the Commission ignored the economic testimony or didn't give proper weight to it or what is your position?

Mr. Daniel M. Friedman: Well, we take the position that Commission did not adequately explain in the light of the economic testimony why on this record it was the barge lines rather than the railroads that had the inherent advantage.

In other words, the Commission did not adequately explain -- the Commission did not adequately explain why out-of-pocket rather than fully distributed was not the appropriate measure for determining inherent cost.

Justice Byron R. White: Well, I thought Mr. Justice Fortas -- in your discussion, Mr. Justice Fortas, you conceded that the -- that there was some impact on the -- on the -- that if you go below fully distributed cost and go down to the barge rate that the barges are going to lose this particular traffic.

Mr. Daniel M. Friedman: Yes, I did.

But my point is that -- that's the essence of competition I think, Mr. Justice.

Justice Byron R. White: Well, I know but it's also -- that's a different point.

That's a different point in saying the Commission didn't explain why it was using fully distributed costs.

It simply said the barge lines aren't going to survive.

Mr. Daniel M. Friedman: Now, they didn't -- well, they said the barge lines weren't going to survive but that -- they explained that as the reason for using fully distributed costs.

Let me, if I may, come to what the Commission -- the explanation the Commission gave, and first just by way of a little background what the economic testimony was in this case.

We had four distinguished economists in this case who dealt with the whole question the economics of so-called incremental cost price fixing.

The basis -- the whole thing is the railroads have already sunk into the economy a great deal of money.

They have these very heavy fixed costs.

And the economists pointed out that if you attempt to determine the inherent cost advantage on the basis of these heavy fixed costs, you're necessarily introducing an arbitrary element into this situation.

These costs are apportioned among the different commodities on a basis that has no direct relationship, no relationship at all to the particular cost incurred.

And that as long as it -- as I get back from carrying the particular commodity more than it costs me out-of-pocket more than my expenses of carrying the commodity, I am better off than if I didn't carry the commodity at all.

Justice Byron R. White: Mr. Friedman, I think you were up here several years ago in National Dairy --

Mr. Daniel M. Friedman: Yes.

Justice Byron R. White: -- arguing what's an unreasonable low cost.

Do you think under Section 3 of the Clayton Act that this railroad price here would have been at unreasonably low -- this rate would have been at unreasonably low price?

Mr. Daniel M. Friedman: I -- I just can't answer that, Mr. Justice because in the National Dairy case --

Justice Byron R. White: Well, you certainly must be answering it.

You must be answering it no.

You're saying that this would be perfectly all right in the -- in normal competitive affairs --

Mr. Daniel M. Friedman: Well, of the least --

Justice Byron R. White: -- if you price at that out-of-pocket cost rather than fully distributed cost.

And I just want to know for example whether under Section 3 the railroads can do this and still claim that they're charging a reasonable rate and not unreasonably lower.

Mr. Daniel M. Friedman: Well, Mr. Justice, of course under Section 3, there's the further element of the predatory purpose --

Justice Byron R. White: It has nothing to do -- that has nothing to do with my question.

I didn't suggest it.

I didn't ask you whether it would be violating Section 3.

I asked you whether or not this would be at an unreasonably lower rate under Section 3.

Mr. Daniel M. Friedman: I -- my own feeling is that it would not be, but I -- I have to -- I have to qualify my answer because I believe in the National Dairy case, the evidence from the case went back in this pride show that they were below their fully distributed costs, but I'm not -- I'm not sure that that's -- that's the only reason I would think -- I would think, Mr. Justice, that this is the type of pricing that it is permitted.

Now, the Commission, when it dealt with this economic evidence, gave several reasons why it said it was not persuasive.

The first reason it gave was -- basically, it said well, we have always in the past in dealing with this problem of intermodal competition treated fully distributed rather than out-of-pocket cost as the basis for determining inherent advantage.

They cited a group of cases for this proposition and with one exception none of the cases really discussed the economics of the problem at all.

The one case that did discuss it was the Grain case that Mr. Ames has relied on.

Now, I think the significance of the Grain case is while the Commission said in that case that when dealing with competition between regulated modes of competition it will look to fully distributed cost, the holding in the case -- the holding in the case was that because the competing water traffic was unregulated, they would determine inherent advantage on the basis of out-of-pocket costs and they upheld a reduced railroad rate because of the fact that the railroad's rates were above out-of-pocket costs even though they were below the barge lines.

And I think it's significant to see what the Commission said in explaining in that case why where you had an unregulated mode it was appropriate to use out-of-pocket costs as the basis for determining inherent advantage because it seems to us the very reasoning the Commission gave in that case for reaching that result there applies equally to the situation present in this case.

What the Commission said is as follows and this is on 321 ICC at pages 601 to 602.

The Commission said the optimum utilization of this excess capacity, and it was referring to the fact that the railroads used the word had sunk a great deal of capital into excess capacity.

The optimum utilization of this excess capacity is clearly consistent with the objectives of the National Transportation Policy provided that the existence of such excess capacity is not used as a destructive competitive weapon, and the fact that railroad rate was going to be below the barge rate and thus obviously take some of the business away was not viewed by the Commission as a destructive competitive weapon.

In the instant proceeding, it is clearly in the public interest and in furtherance of the National Transportation Policy to permit the respondents to utilize their excess plant capacity to increase their net revenues.

Knowing the Commission here has recognized the fact that it benefits the railroads, it benefits the shippers, it leads to the more efficient utilization of the nation's transportation resources to permit the railroad to price at a level which produces something over and above its cost incurred in carrying the traffic.

Now, the Commission gave some other explanations as to why it felt that in this case, fully distributed costs were the appropriate method of determining inherent cost.

It said the following at page 67 to 68 of the record, merely because a carrier is able without incurring an out-of-pocket loss to handle certain traffic at rates below fully distributed costs and perhaps by diverting sufficient tonnage from its regulated competitors to maximize thereby the contribution that such traffic would make to its overhead does not necessarily mean that the carrier is the more efficient of the two.

Well, it seems to us that if in fact one carrier can handle the traffic at a lower rate than another that is it can sell its goods cheaper and still make a profit that by definition is the most efficient operator.

What efficiency means in the industrial sense is the ability to produce goods cheaper.

Then the Commission made the following statement.

It said that by reducing its rate -- this is at page 71 of the appendix -- by reducing its rate below the level of the barge-truck full costs, the respondent railroads have unlawfully impinged upon the ability of the barge-truck mode competitively to assert its inherent cost advantage -- competitively to assert its inherent cost advantage.

But long before, three years before the railroads had filed this rate reducing the level to the barge lines, the barge lines themselves had put into effect the rate of $5.11 which is below their fully distributed costs of $5.19.

Now, there are two other respects I'd like to talk about in the Commission's report, and while we think the Commission in this case has not adequately focused on these issues, why we think the Commission has not done the kind of job it should do if its expertise is to be given great weight by the Court.

The Commission focused exclusively on the cost aspect of inherent advantage.

The claim that the barges, whether they have the inherent cost advantage.

But inherent advantage is, as this Court has recognized in New Haven, has another element.

It includes service as well as cost.

And if in fact at the same rate the railroads are going to get all of this traffic, this would seem to indicate very clearly that at least as far as the service advantage is concerned, that lies with the railroad.

That it seems to us is an inherent advantage of the railroad.

And the Commission nowhere in its report attempted to deal with this face of the case.

Now, in addition with dealing with the National Transportation Policy, the Commission restricted itself solely to the provision that the Act is to be administered to recognize and preserve the inherent advantages of each mode of transportation.

The statute, however, directs the Commission to give due consideration to the objectives -- plural, objectives -- of the National Transportation Policy.

And the objectives of course are not limited to preserving the inherent advantage of each form.

They more broadly included a wide range of factors.

Particularly, the Commission is enjoined to promote safe, adequate, economical and efficient services and force to sound economic conditions and transportation.

These are factors which we think in the face of this economic testimony, the Commission was required to give some consideration to explain in the light of what the realities are of pricing of railroad services, to explain why permitting this type of pricing was not in the public interest in furthering these other objectives of the Act.

Now, Mr. Helmetag who represents the railroads will discuss in greater detail of a legislative history of this statute, but we think basically what is shown here is the very kind of hard competition that commerce intended in Section 15a(3) for the railroads to be allowed to do.

We think basically with 15a(3) contemplated was that as long as the railroads were able to carry a product at a figure above their full -- their out-of-pocket costs and as long as viewed in the light of those out-of-pocket costs a prima facie at least, the railroads would have the inherent advantage.

If that is the situation, what commerce intended was to leave it to the marketplace, to leave it to the customers to decide which of the competing modes of carriage they wish to select, not to allow the Commission in fact to step in and say no because of the fact that the barges are going to lose this little bit of traffic and because we're concerned that if they lose this, this will be the opening wedge.

Therefore, it must be stopped.

And I would like to close, if I may, with two sentences from this Court's opinion in the New Haven decision where this Court said, If there is one fact that stands out in bold relief in the legislative history of Section 15a(3), it is that Congress did not regard the setting of a rate at a particular level as constituting an unfair or destructive competitive practice simply because the rate would divert some or all of the traffic from a competing mode.

If a carrier is prohibited from establishing a reduced rate that is not detrimental to its own revenue requirements merely because the rate will divert traffic from others, then the carrier is thwarted from asserting its own inherent advantages of cost and service.

And we think that is precisely this case.

Chief Justice Earl Warren: Mr. Friedman, the thing that I don't quite understand is this.

As I understood you to say, you couldn't have this kind of rate making throughout the railroad business because if it did, they corrode.

Mr. Daniel M. Friedman: That's right.

Chief Justice Earl Warren: They couldn't possibly operate.

Now, doesn't this mean that if they can find this to type or the standard that you support, only in competitive situations that all of these other cause will have to be loaded on to the people where there is no competition?

And if so, is that the proper rate making?

Mr. Daniel M. Friedman: I answered that Mr. Chief Justice.

Yes, it is the proper rate making because I think the idea that -- but omitting this kind of rate making on this particular commodity, you're loading the course on to the other, to the other shippers.

I suggest that in fact they're not loading the cost on your permitting in fact the cost to be reduced.

That is if I may suggest come back again on this particular shipment by providing the carrier with additional revenue, it would not have received had it not been carrying the ingot molds traffic and it's clear that unless they came down to the barge rate, they couldn't get it by enabling the carrier to get this additional revenue, this additional revenue which would not otherwise has gotten.

The other shippers are actually better off in the long run because they have to bear less of this burden for each ton of ingot molds that moves, the man who is shipping try -- furniture or the man who is shipping building blocks, the man who is shipping anything else has in the totality, these other shippers have to pay $0.41 less to the overheard cost.

And the very nature of competition is such I think that when you are faced with a competitive situation, what you will do is to set your price at a level that will maximize the profits from that traffic.

If you have a competitor, if you're competing with another form of transportation, you have to make your rate competitive if you hope to get that.

If you don't have the competitor, you don't get it but there's nothing, if I may use the word insidious about this rate making scheme as there's not really loading the cost of the total fixed cost on the other shippers.

In the long run, the other shippers benefit because as the result of this form of rate making, the total cost that they have to meet are help buttons, they're not handed by it.

Chief Justice Earl Warren: Well then I get back to Mr. Justice Fortas' question, isn't that something for the Commission to determine?

Mr. Daniel M. Friedman: Yes, I think it --

Chief Justice Earl Warren: That's what it said for --

Mr. Daniel M. Friedman: I think in the last analysis, it is for the Commission to determine but we think in this case, the Commission -- and in determining this, it seems to me the Commission has to make a reason satisfactory explanation as to why it reached that result and we don't think it has done it in this case.

The reasons we think the Commission has given do not justify its conclusion.

Chief Justice Earl Warren: But would you ask us to vacate this case and send it back for further findings or you just ask us to reverse it?

I mean, did you just ask us to affirm it?

Mr. Daniel M. Friedman: Well, the District Court's order itself has remanded this case to the Commission for reconsideration in the light of its opinion and we are urging affirmance of that.

We think this case must go back to the Commission for reconsideration.

Justice Abe Fortas: Mr. Friedman, do I correctly understand that overall generally the railroads, the greater portion of the railroads costs, are fixed cost rather than out-of-pocket cost as compared with the barges.

Mr. Daniel M. Friedman: As compared with the barges.

Yes, the barges have very --

Justice Abe Fortas: So that if you took the standard of out-of-pocket cost, the railroads would always have a built-in advantage on the basis of what you've been arguing to us.

Mr. Daniel M. Friedman: I can't -- not necessary.

Justice Abe Fortas: Why not?

Mr. Daniel M. Friedman: If they might depend on the fact of a particular case.

Justice Abe Fortas: I know but why wouldn't they have the advantage.

There is an enormous spread between the total cost including fixed as well as out-of-pocket cost and just the out-of-pocket cost.

Mr. Daniel M. Friedman: Well, if they do have this --

Justice Abe Fortas: So what you're really doing is saying that in every case the Commission has to -- has to allow the railroads the right to lower prices to cut their rates within that marginal area.

That's the thrust of your argument.

You maybe right, you may be wrong as a matter of economics.

As a matter of paying out the National Transportation Policy but I really wonder if that isn't a matter for the ICC and not for this Court and not if I may respectfully say so for the Department of Justice.

Mr. Daniel M. Friedman: Well, I think as to the latter Mr. Justice, we felt that as a party in this case, it was our -- it was appropriate for us to indicate to the Court the reasons why we would disturb in trouble by the way the Commission had decided this case.

Now I think it's true that probably in most instances of this type, the inherent advantage maybe with the railroads.

Justice Abe Fortas: What you're really saying if I correctly understand this.

The thrust to what you're saying is that anytime the railroads want to do it, they can cut prices within this marginal area to a degree and an extent that the barges -- barge lands cannot and take advantage of that for the purpose of taking away business from barge lines.

Mr. Daniel M. Friedman: Well, I suggest two things Mr. Justice.

First, I cannot say and I just don't know whether in every case that would be the fact and that in many situations where even though the actual movement to transportation by barge may have higher out-of-pocket cost than higher out-of-pocket cost in rail but maybe other problems that maybe for example in this very case, the barge transportation had additional charge as truck trans like at the end of it.

Justice Abe Fortas: I couldn't agree with your more.

I don't know either.

You don't know and I don't know and -- but the statute said that the ICC ought to know or if it doesn't know that we're all in a bad fix because it's got the power and the duty.

Mr. Daniel M. Friedman: The ICC should know and we think if the ICC would adequately explain why it has selected fully distributed rather than out-of-pocket, that maybe an area where it would be within the informed discretion and not subject to reversal by the courts.

But in this case, we think it hasn't done that.

I suggest the concertinos opinion in vain for any reason to explanation that deals with the facts of this case, that deals with the record other than wearing the most conclusively on its statement.

Justice William J. Brennan: Well, Mr. Friedman, did it say we chose fully distributed rather than out-of-pocket because if we don't choose fully distributed, this puts the barge line out of business.

Isn't that an explanation?

Mr. Daniel M. Friedman: But that as I suggested Mr. Justice does not --

Justice William J. Brennan: Wasn't that an explanation?

Mr. Daniel M. Friedman: That's an explanation for where it were sound one but that explanation I think is not supported by this record.

Justice William J. Brennan: If it was sound one, that's your difficulty.

Mr. Daniel M. Friedman: If it was supported by this record.

It would have to -- they would have to show that there is some real danger that by permitting the ingot molds, that permitting this type of rate to go in effect on ingot mold, this would carry over to the entire contraries of traffic and would enable the railroads to really -- to club the barges to death and we don't think there is any basis for that contention.

Argument of Carl Helmetag, Jr.

Mr. Carl Helmetag, Jr.: Mr. Chief Justice and may it please this Court.

Chief Justice Earl Warren: Mr. Helmetag.

Mr. Carl Helmetag, Jr.: I'm appearing here today on behalf of the railroad appellees both the principal appellees which included the railroads that published this rate mainly the what have now the Penn Central Company and the Louisville and Nashville Railroad and also for the large group of railroads that intervened in the proceedings below in support of the principal railroad appellant in that case.

I would say at the outset that our position here is the same as the position that -- which Mr. Friedman has advanced for the United States Government and it's the same position that the antitrust division of the Department of Justice took in the court below.

I think it might be well to emphasize at the outset one of the points that Mr. Friedman touched upon.

This particular ingot mold rate involves a very small amount of traffic some 4,000 tons of business a year moving in barges or in rail cart and 600-ton shipment about eight or ten shipments a year.

This rate which the railroad published this rate of $5.11 which equals the charge of the competing barge-truck group just equal, it doesn't undercut it.

This rate is a very typical rate.

It's a rate of which there is literally thousand of this type of rates maintained not only by the railroad but by the truck lines and by the barge lines.

That is a rate which in response to competitive situations is reduced below the so-called fully distributed level but which is above the out-of-pocket cost level and therefore produces either you want to call it a contribution to the railroad constant expenses which are the expenses which aren't incurred in the rendition of this traffic or it produces the problem.

The two things there are anomalous.

I might say that if the barge lines in this case had not argued that this particular rate interfered with their inherent advantage, the Commission would have approved this rate.

It regularly, everyday approved rates of this type.

In every instance and virtually every instance where competitive rates are before the Commission and they are bound to be compensatory and as this rate was beneficial to the proponent carriers on revenue requirement.

The Commission upon those showing will approve the rate so that in this instance --

Chief Justice Earl Warren: May ask you this.

Mr. Carl Helmetag, Jr.: Yes sir.

Chief Justice Earl Warren: In emphasizing as you say this -- the small amount of traffic, are you suggesting to us that this is just de minimis and that we shouldn't pay any attention to it or are you arguing that this should be applied to all intermodal transportation so that you get that -- the benefits of it whether it's large or small?

Mr. Carl Helmetag, Jr.: We say that the principles that we advocated here and which we're bound to be consistent with the legislative history of Section 15a(3) and the National Transportation Policy should govern all intermodal competitive rate situation.

Chief Justice Earl Warren: And then the small amount here, that's the amount to anything as far as the argument is concerned.

Mr. Carl Helmetag, Jr.: No.

We're not basing our argument on the fact that this is a relatively insignificant type of traffic but I did want to put it in the right prospective there.

The Commission could not have made any finding that taking this traffic from this very prosperous and vigorous barge carrier would have driven the amount of business.

They just couldn't make that kind of a finding but every piece of traffic that we seek, every piece of traffic that were in a competitive market for we regard it but you don't want to upgrade before it into the railroad industry.

Half that's we make on this type of business in totality which enable the railroads to either meet their constant expenses or to approximately.

Now, our position as I say here is that what the Commission has done in this instance and bear in mind what they've done here.

They have fixed as the floor for railroad pricing, not railroad cost, nothing related to the railroad transportation carriage of this but the fully distributed cost level of the competing mode namely this barge-truck group.

The lawfulness of our rate, the rail rate is being judged not by the characteristics of our business and not by our cost but by the cost of another competing mode.

Now, when this matter came before the lower court, the lower court made a very exhaustive review of the legislative history not only of Section 15a(3) which is the controlling statutory standard but judging the awfulness of these reduced intermodal competitive rate but also and perhaps more importantly of the National Transportation Policy itself.

I would remind perhaps Mr. Justice Fortas that in response to the questions he has been asking that Section 15a(3) does not order the Commission merely to judge the lawfulness of these reduce rates by the National Transportation Policy but contains other specific standards.

For example, if you would turn to page 34 of the appendix, the controlling statutory standards in Section 15a(3) which is the standard that apply to this type of reduced intermodal competitive rate making is the first one, the Commission in determining whether a rate is valid than a reasonable minimum rate shall consider the facts and circumstances attending the movement of traffic by the carrier or carriers to which the rate is applicable.

Now, that standard says that the Commission in judging the lawfulness of this rate should do so in respect to the characteristics of rail movement and the cost of the rail movement not the cost of the competing barge lines and then it goes on to say, rates of a carrier shall not be held up to a particular level to protect the traffic of any other mode of transportation giving due consideration to the objectives in multiple not the single objective.

The objectives of the National Transportation Policy declared in this Act.

Justice Byron R. White: Well on that basis, I take it that the railroads didn't need to stop at $4.00 -- what was the price that was set here?

The rates --

Mr. Carl Helmetag, Jr.: The rate of $5.11.

Justice Byron R. White: They just certainly didn't need to stop at $5.11.

Mr. Carl Helmetag, Jr.: No, but they --

Justice Byron R. White: They could have gone right down to one penny above their cost.

Mr. Carl Helmetag, Jr.: Their cost in this case of performing this -- yes sir.

The cost on this case of performing this service was $4.70 a ton.

Justice Byron R. White: And you could have gone -- and you could have gone to $4.70 a ton.

Well, why did you stop at $5.11?

Mr. Carl Helmetag, Jr.: Because the uncontroverted testimony in this case was if the railroad were to effectively compete with this particular piece of businesses, ingot mold --

Justice Byron R. White: This is as long as you have to go to get the traffic.

Mr. Carl Helmetag, Jr.: We would have to have a rate of $5.11 which would equal the charge being made by the competitive barge-truck service.

Justice Byron R. White: But that's irrelevant to what they're charging or you could go right on back down to what you're saying, you could go right down to your cost.

Mr. Carl Helmetag, Jr.: I'm saying we could sir but I'm saying that in this instance, the testimony of the shipper and we believe the shipper and the Commission have no reason not to believe it was that if the railroad were to have an opportunity to compete for this traffic, they had to have devices equal to those of the competing barge-truck group and we did published that rate and we've gotten some of the business.

Justice Byron R. White: Surely, the person who testifies that way wouldn't say you wouldn't get it if you were lower.

Mr. Carl Helmetag, Jr.: No sir, it wouldn't but he said that that was the rate we would have to maintain and there was no advantage to us to go any lower because we would get less return above our out-of-pocket cost.

By the way, I might point out that this out-of-pocket cost --

Justice Byron R. White: But it does still be practicable to you in your approach to get $4.70.

Mr. Carl Helmetag, Jr.: Yes sir.

It would be profitable because it would make some contribution to the cost and expenses which we were not then getting.

Justice Byron R. White: Which other people are then paying.

Mr. Carl Helmetag, Jr.: Sir, they're not paying it because nobody is making this contribution until you get this particular piece of traffic.

When you get it, you get the contribution and that goes towards the railroad's cost and expense.

Justice Byron R. White: Well, I think if you already have your rate structured fixed before this time to have recovered your fully distributed cost.

Mr. Carl Helmetag, Jr.: Sir?

No sir.

Justice Byron R. White: If somebody.

Mr. Carl Helmetag, Jr.: No sir.

I might say that that is not the fact.

Justice Byron R. White: You're not making a profit.

Mr. Carl Helmetag, Jr.: We are making a profit sir but most of the railroads in the country do not cover their fully distributed cost.

Let me just say this for example to make this clear to you.

Since 1958 when Section 15a(3) was enacted.

The railroads have reduced their rates 13.5% across the Board.

Now, that means that's in the face of generally rising cost.

Now, notwithstanding that fact and they have improved their overall situation very greatly.

Now, the reason they done that is that they now have a competitive pricing structure.

They are in a position by maintaining lower prices to attract business and therefore more nearly cover their constant expenses.

If we are precluded from maintaining this rate far from enabling as to recover our constant expenses, we don't get them on this particular business.

If we don't get them on a whole lot of other pieces of business like this, we do not make our constant expenses.

Now, that's the reality to the situation in order to improve our situation, we have to put in competitive prices, price which would bring the business to us and make some contribution toward the costs and expenses.

Now, I would in --

Justice Byron R. White: Now what the --

Mr. Carl Helmetag, Jr.: Yes sir.

Justice Byron R. White: -- if your cost -- if you have it by demand, you would say you could not put a rate if below $5.00 demand?

Mr. Carl Helmetag, Jr.: Yes sir.

Justice Byron R. White: Why?

Mr. Carl Helmetag, Jr.: Because it's well established by the case in this Court by cases in all the District Court and by long line of cases which nobody require with before the Commission that if we publish a rate below the expenses which we incur in providing the service, i.e. the out-of-pocket cost that that rate is non-compensatory and unlawful.

It then violates in the National Transportation Policy.

Justice Byron R. White: But it hasn't anything to do with the barges.

Mr. Carl Helmetag, Jr.: It hasn't anything to do with the barges but --

Justice Byron R. White: That would be wrong even if there were --

Mr. Carl Helmetag, Jr.: Wrong in any instance but the barge line which would be the normal situation to come in here and complain before the Commission that that is an unlawful rate because it is below the railroad expenses that are incurred in providing the service which is being priced and that would be found unlawful.

That's the normal situation.

It happen everyday before the Commission.

I'm running a little short of time but I would like to just say something about the legislative history of this section.

Particularly with respect to the requirement that the Commission recognized and preserves inherent advantages, this requirement came into law, and in 1935, a part of the Motor Carrier Act of 1935 and it came in at the insistence of the motor carrier industry.

Now, the reason they insisted upon this, they were afraid that the Commission would require the motor carrier to raise their rates in order to protect the railroad.

The legislative history makes it clear that what the motor carriers insisted upon was the right to have their rate reflects their own cost characteristics.

Now, in 1940 when the Congress had before the Transportation Act of 1940 which brought on the regulation the water carrier industry, the water carrier made the same demand.

They insisted that if they were going to be brought on the regulation that the Commission in judging the lawfulness of their rate do it with respect to their own cost considerations and not the cost considerations of the railroad and in 1958 when the Section 15a(3) was before the Congress, Senator Smathers, Senator Wheeler to come and testify into what was the intent and purpose of the National Transportation Policy with respect to the preservation of inherent advantages and Senator Wheeler said that the purpose was to just as I have stated.

To make certain that the Commission in judging the lawfulness of rates of any mode would do so with respect to that mode's cost -- own cost characteristics and not the characteristics of another mode.

And during our colloquy with Senator Schoeppel who -- Senator Wheeler made the statement in this part, Senator Schoeppel said this.

?Of course all of that was tied to one cord of factor namely that those rates when they were established would be compensatory was it not, talking about the preservation of inherent advantage.

And Mr. Wheeler who had managed the 1940 Act in the Motor Carrier Act said, to be part in this matter exactly, as long as they were compensatory then they could reduce the rate.

The water carrier could reduce their rate as long as they were compensatory to take business of way or the motor carriers could reduce their rates to a compensatory level to take business away from the railroad and the railroad could reduce their rate to meet competition so long as they are compensatory.

Now, it was in view of that legislative history that the lower court found that normally, the Commission should approve rate when it binds their compensatory.

And that in this case since they have found they were compensatory and beneficial to the railroad own revenue requirement, they should have approved them but if they weren't going to approve them, they had a very heavy obligation to show why they were taking it diametrically opposite approach.

That is approach inconsistent with the legislative history of Section 15a(3).

I would -- if I had the time, I would point out that the lower court made a great reference to the new automobiles case and said that that case in which the Commission had dealt with the 1940 Act provided the proper philosophy to be applied in this situation but the Commission had not followed it.

They didn't follow it here.

And therefore, the lower court quite properly concluded that what the Commission had done here was inconsistent with the legislative history and the intent of Congress that carriers and this intermodal situation should be normally free to reduce their rates provided their compensatory and provided they're not detrimental to the carrier's own requirements and in doing that, the lower court was echoing precisely what this Court had said in New Haven.

And this Court in New Haven as the Court will remember said that carriers should not be prohibited from reducing a rate which is compensatory and which is not detrimental to its own requirements merely because such a rate would have divert traffic from the competitive mode.

And that Court went on to say that this applied even though it would take all of the traffic from another mode and even though it would destroy the other mode so that the impact of this rate on the barge line would have no concern to the Commission under both the New Haven doctrine and under the legislative history of the applicable section and I see it that I'll close on that note.

I would invite attention -- the Court's attention to the fact that we have detailed in our brief the legislative history of the applicable standard.

I would mention to Mr. Justice White that the report of the accounts of economic advisors is quoted in part to page 36 of our brief in Footnote 78.

Chief Justice Earl Warren: Mr. Goodman.

Argument of Leonard S. Goodman

Mr. Leonard S. Goodman: Mr. Chief Justice and members of the Court.

In the guise of asking more findings from the Commission, the department and the appellees generally would impose a rule of law on the Commission.

In their view, the Commission must permit the railroads to decrease their rates within this margin between full cost and out-of-pocket cost in the discretion of the railroads.

The counsel for the railroads has stated to this Court, the Commission had no concern with the effect on the barge lines.

Now, I wish to emphasize very strongly that affirming the lower court's decision means that this Court affirms that rule of law and our reason for appeal was to overturn that rule of law.

Now, the appellees urge that this particular rate that was before the Commission would not seriously affect the barge lines while the Commission's judgment differed.

Its judgment differed with respect both to the effectiveness rate on the barge lines and with respect to the effect of this practice, this measure of inherent advantage that the railroads espoused the effect of this practice on the barge lines.

Further, the Commission's findings in this case are indeed sufficient to support the Commission's full cost standard.

Now, I believe the counsel for the department inadvertently state to this Court that the Commission had not even considered service advantages.

If the Court please, at pages 40 and 43 of the record, there are findings there concerning the service advantages and findings to the effect that service advantages are not determinative of the issue in this case.

Justice Hugo L. Black: What did you mean by different, you mean the full cost or the out-of-pocket cost?

Mr. Leonard S. Goodman: Well, Your Honor in this case, it was a difference in dollars and cents as between $7.59 cents which was the full cost -- fully distributed cost of the railroads and $4.69 which was their out-of-pocket cost of handling this ingot mold traffic and this is apparently the position of the railroads that within their discretion, they should have the opportunity to file any rate at a level between those two figures.

Justice Hugo L. Black: Why would that comply with inherent advantage situation or provision?

Mr. Leonard S. Goodman: It infringes the inherent advantage clause of the National Transportation Policy because it deprives if the railroads are permitted to file rates on this basis, it would tend to deprive the barge lines of an inherent cost advantage.

Justice Hugo L. Black: Are the railroads making money or losing money on this one, as a whole?

Mr. Leonard S. Goodman: That's debatable but apparently, they're making money.

This is profitable to the railroads.

Justice Hugo L. Black: But why do you say that the full cost is $7.00 if they're making money.

How could they make money if the full cost is $7.00 something and they carry it to $5.00?

Mr. Leonard S. Goodman: No, they make money in this sense.

If they filed a rate at their full cost level or in some higher figure than $5.11 --

Justice Hugo L. Black: What do you mean by full cost -- what it actually cost for the transporter?

Mr. Leonard S. Goodman: Well, actually in the sense that it includes depreciation and includes many -- it includes the --

Justice Hugo L. Black: Will that have to be included in order to show how much it cost?

How can it be done without including that?

Mr. Leonard S. Goodman: Your Honor, they make money only in this sense that they -- when they obtain the traffic, they are able to make some contribution to their constant cost which without the traffic, they would not make any contribution too.

This constant cost go on whether or not they handle this traffic and when they --

Justice Hugo L. Black: What's the full cost of the barge line?

Mr. Leonard S. Goodman: The full cost of the barge lines is about $5.19.

Justice Hugo L. Black: Why does -- between $7.00 and $5.00.

Mr. Leonard S. Goodman: Well, on of the main differences is that the barge lines do not have a right of way cost.

They do not pay user charges.

They don't have to pay for the use of the waterways.

That's a very real difference between the two modes of transportation and we believe --

Justice Hugo L. Black: In other words, that's -- what would you call that?

Inherent advantage?

Mr. Leonard S. Goodman: Yes, yes, this is precisely what Senator Wheeler said during the legislative history of the Transportation Act.

This wasn't inherent cost advantage.

This was a natural advantage to the water carriers.

Justice Hugo L. Black: Why did the Commission or anyone else then go on the basis of less than the full cost in determining the inherent advantage?

Mr. Leonard S. Goodman: We don't.

Justice Hugo L. Black: Well, I understood you to say they did.

Mr. Leonard S. Goodman: No.

Justice Hugo L. Black: The total cost of the railroad is $7.00.

Mr. Leonard S. Goodman: Well, we made that initial comparison of that $7.00 and something to $7.59 with the $5.19 of the barge lines and made a determination that on the basis of that comparison, the barge lines were the low cost mode.

They possess that the inherent--

Justice Hugo L. Black: That's what you understand the basis of the Commission's holding?

Mr. Leonard S. Goodman: That is the Commission's holding Your Honor.

Justice Hugo L. Black: And the basis of it is that I understand from you now, the full cost of the railroad is $7.00 and something and the full cost of the barge line is $5.00.

Mr. Leonard S. Goodman: That's true.

Yes.

Justice John M. Harlan: (Inaudible)

Mr. Leonard S. Goodman: I'm sorry, I don't understand.

Justice John M. Harlan: Are they depending on where you start the whole case as to whether the Commission's standing starting off the practice that the first thing that you have to do is to find out which either the railroad or the barge lines has the inherent advantage.

Your position is that the inherent advantage of the barge line is determined on the basis of fully distributed cost which is exactly appears to be determined on the basis of (Inaudible), isn't that the issue?

Mr. Leonard S. Goodman: Well Your Honor, I don't believe that's precisely the issue because the railroads are not so much concerned with determining inherent advantages and with comparing costs.

Justice John M. Harlan: That's what I'm actually talking about.

Mr. Leonard S. Goodman: Yes, this is our position.

This is our position that you must make a comparison and you must make this determination.

Justice John M. Harlan: If the Commission was wrong of the matter withstanding the same inherent advantage determined by fully distributed cost and based on the fact that the premise that under the proper standing the railroads have the inherent advantage.

How come this case would not be quite different?

Mr. Leonard S. Goodman: Yes it might.

Yes.

Justice Hugo L. Black: How could they find that if the cost -- the actual cost is $7.00?

Why can't they decide to what the actual cost is?

Why can't you get anything else out of any formula that's been created by anybody?

Mr. Leonard S. Goodman: Well, it's the purpose --

Justice Hugo L. Black: In determining the inherent advantage of each, how can you get away from the fact that you must consider the total cost to the railroad and the total cost to the barge?

Mr. Leonard S. Goodman: Well, Mr. Justice Black, we suggested on brief a matter which was not within the Commission's report, a competition of counsel solely that the same result might have been reached on this record if the Commission had taken the out-of-pocket cost of the railroads and it's simply added to that, the constant right of way cost of the railroads so as to prevent the railroads from undermining from taking away the inherent advantage of the barge lines and not having this cost.

Justice Hugo L. Black: How can you get it without some kind of an artificial distinction having no basis in fact, away from the fact inherent advantage shown by the full cost of the railroad and the full cost of the barge?

Mr. Leonard S. Goodman: This is a standard that the Commission has employed and is --

Justice Hugo L. Black: That you want to choose.

Mr. Leonard S. Goodman: Yes.

Justice Hugo L. Black: Well, how can you get away from that matter unless you have some kind of an artificial formula that does not meet the actual facts of the competition?

Mr. Leonard S. Goodman: We have not tried to and I --

Justice Hugo L. Black: That's what I was trying to see if that's your position.

Mr. Leonard S. Goodman: We have not tried to and I think I must agree with you to do any other formula would be artificial.

Justice Potter Stewart: But any other but the other formula is the one embraced by the annual report of the Council of Economic Advisers and that's 1966 report isn't it among other experts?

Mr. Leonard S. Goodman: Well, Council of Economic Advisers did suggest that the most efficient use of society's resources would be made under an out-of-pocket standard but it was never explained on this record shifting the traffic away from an existing barge service to an existing railroad service made more efficient use of society's resources.

Both services were in existence, both services should be used.

Thank you.