REPORT OF THE INTERSTATE COMMERCE COMMISSION TO THE PRESIDENT OF THE UNITED STATES ON CERTAIN ASPECTS OF THE PROPOSED LAKE ERIE-OHIO RIVER CANAL, OCTOBER 3, 1939

BY THE COMMISSION:

DESCRIPTION OF THE PROJECT

Of the four projects for providing a through waterway between Lake Erie and the Ohio River reviewed in the report of the Chief of Engineers, United States Army, and in the underlying reports of the Board of Engineers for Rivers and Harbors, the Division Engineer, and the District Engineer (all found in House Document No. 178, Seventy-sixth Congress, first session), only the one which received the approval of the Chief of Engineers need be considered here. The waterway under that project would be constructed over the so-called Pittsburgh-Ashtabula route from Beaver, Pa., on the Ohio River 25 miles below Pittsburgh, Pa., up the Beaver River 21 miles to a point in the vicinity of New Castle, Pa., thence up the Mahoning River about 35 miles to Warren, Ohio, serving Struthers and Youngstown, Ohio, as intermediate points, and thence for about 46 miles by canal and a large storage reservoir to Lake Erie at a point about 10 miles west of Ashtabula, Ohio. The total distance would be about 102 miles. The waterway would have a minimum channel depth of 12 feet and would contain 14 locks and dams. The locks would have 2 chambers, each measuring 720 feet by 56 feet and capable of accommodating tows of six 1,000-ton barges. A new harbor would have to be provided at the Lake Erie terminus. The Beaver and Mahoning Rivers would have to be widened and dredged, and many railroad and highway bridges would require alteration. The total cost of the improvement work, including interest during construction, is estimated to be $240,000,000, and the annual cost of the facility (consisting of maintenance and operation expenses, depreciation and amortization charges, and interest on investment, with certain adjustments) is set at $12,157,000.1 The estimated first cost is equivalent to about $2,353,000 per mile and the

1 The adjustments referred to are for benefits from advance replacement of existing facilities, such as buildings, bridges, and waterworks, valued at $9,244,000, and for loss of income from abandonment of existing harbor facilities, valued at $10,000,000. The effect is to raise an “annual carrying charge" of $12,084,000 to what is termed an "annual economic cost" of $12,157,000. (H. Doc. 178, pp. 15, 166-168.) The latter figure is the more significant one.

estimated annual cost to about $119,000 per mile. It is proposed to require local interests to bear $14,156,000, or about 6 percent, of the first cost. Benefits other than benefits to navigation are either small, as in the case of those resulting from flood control, or not estimated, as in the case of those resulting from improved water supplies and from better sanitation.

QUESTIONS THE COMMISSION WAS ASKED TO CONSIDER

Your memorandum to us under date of February 16, 1939, contains the following:

The Board [of Engineers for Rivers and Harbors] states that "if the railroads would permanently reduce the rates by an average of 29 cents per ton prior to construction of the waterway, the through project could not be justified." The Board then goes on to say that:

"At the present time the Interstate Commerce Commission does not regard cost of service as the sole and controlling factor in determining whether rates are just and reasonable (see 223 I. C. C. 657, page 737), and hence it would be illogical to consider the present rates as the cost of providing the rail service, and it would accordingly be impossible for the Board to predict the extent to which rail rate reductions will be put into effect either prior to or after the construction of the waterway. However, it is quite evident that if rail reductions are to be made, as is usually done to meet water competition, it would be advantageous to both the railroads and the United States for such reductions to be made before large obligations are incurred for construction work on the through canal."

In view of this report, I wish that the Commission would undertake an investigation of rail rates in the area affected and review the report, as soon as it is printed, so that the Commission may advise me on whether or not rate reductions of the magnitude and type noted above would be economically justified. I presume that such review would require consideration of the present railway and highway facilities in the area concerned, and of the effect which construction of the project would have on rail and motor carriers. These are problems which I should like to have examined before large Federal expenditures are made for the project.

We have construed your request as requiring us to advise you, first, whether the rates in the area and on the traffic assumed to be affected could be permanently reduced an average of 29 cents per ton, without construction of the waterway, and, second, what effect such construction would have on rail and motor carriers. We have not considered it appropriate for us to comment upon the physical features of the proposed waterway or the estimates of what its first cost and the annual cost thereafter will be.

CAN RAIL RATES BE REDUCED IN THE AMOUNT AND IN THE MANNER SUGGESTED WITHOUT CONSTRUCTION OF THE PROPOSED WATERWAY?

Before considering this question it is necessary to explain how the reduction of 29 cents per ton is computed. The cost of trans

porting the estimated volume of traffic on the proposed waterway, including terminal handling and certain incidental costs, is estimated to be 72 cents per ton less than the cost to the shipper (at the time of the estimate) of rail service of or a combination of rail and water service. According to the estimates, it will cost the public 43 cents a ton to provide the waterway facilities ($12,157,000 of annual cost, divided by 27,746,000 tons of estimated traffic) so that the net saving is the difference between 43 and 72 cents, or 29 cents.2 The latter figure also can be derived by dividing 27,746,000 tons into the net savings of $8,000,000, as estimated by the Board, which amount is the approximate difference between the estimated gross savings of about $20,000,000 and the annual cost of $12,157,000. The saving would, of course, be more than 29 cents on some commodities or movements and less than 29 cents on others.

For the present purpose, it is not necessary to comment on the accuracy of the tonnage estimates or the computation of the net savings. These matters will be developed in another connection. It suffices here to say that there is a very substantial volume of potential traffic for the waterway.

We assume that the Board did not consider whether the average reduction of 29 cents in railroad rates, if made, could and would be confined to the rates on the commodities and from and to the specific points included in its traffic estimates.*

Iron ore and coal constitute about 90 percent of the prospective tonnage set down by the Board. Miscellaneous items of traffic consist mainly of limestone, coke, and iron and steel products. All of the iron ore in the estimate, approximately 10,000,000 net tons, is what is known as ex-lake ore, which is ore originated in Minnesota, Wisconsin, or Michigan, moved to Lake Erie ports by water, and transported thence by rail to interior points, in some cases after storage at the ports. The estimated coal movement, consisting wholly of bituminous coal, aggregates 15,180,000 tons, divided as follows: Lake-cargo

It may be noted, for discussion later (pp. 792-794), that a comparison of railroad rates with the cost of providing transportation service by water does not involve like cost elements. The railroads have to provide and maintain their own rights-of-way and to pay taxes for the support of government functions, but no such burdens would be placed on users of the waterway under the plan.

The term "Board" is used herein as a convenient means of referring collectively to the individuals and board responsible for H. Doc. 178. Where necessary, differentiation will be made between these individuals and the Board.

The commodities and the points of origin and destination are set out in detail in appendix table 1. Certain of the information there given is not found in H. Doc. 178 but represents an estimate presented to and considered by the Board. In transmitting this information to the Commission the Board indicated that "while all of the items were not accepted as prospective traffic it was generally agreed that the total was a very reasonable estimate of the prospective canal traffic." In preparing these comments it is necessary to use the data given in the table without knowledge of the particular items the Board questioned. The estimate of the District Engineer also is given in the table. 216338m-40-vol. 235-50

coal, which moves under special rail rates to lake ports for movement beyond by water, 9,053,000 tons; coal now moving by rail to Buffalo, Cleveland, and Detroit, 2,794,000 tons; fuel coal, moved by rail to Lake Erie ports for fueling lake vessels, 137,000 tons; and what the Board designates as "industrial coal", viz, coal destined to industrial plants on or contiguous to the Canal, 3,196,000 tons. Thus, about 9,000,000 tons of the estimated coal movement may be considered to be handled by the railroads under lake-cargo rates and 6,000,000 tons under the relatively higher track-delivery or local rates. The principal destinations of the iron ore that moves through Lake Erie ports are the steel mills in what may be called, for this purpose, the Youngstown and Pittsburgh areas. Other such mills are found in Ohio, Pennsylvania, and West Virginia. This traffic normally has been large in volume, and the participating rail carriers would resist any change in rates that would lessen the share they individually obtain. Less than half of the average movement in recent years is included in the Board's estimate of potential traffic, but all movements would be involved, directly or indirectly. Practically all steel plants in the afore-mentioned areas are competitive with each other in the marketing of their products and also with plants in Illinois, Indiana, and other States which utilize Lake Superior ore, and with plants in Maryland, New York, eastern Pennsylvania, and the South which receive their ore, or most of it, either from local or foreign sources. The ex-lake rates on iron ore to the several destinations are and for years have been related to each other. Even if such were not the case, it is clear that a reduction of 29 cents, or any figure approaching this amount, in the rates from and to the points embraced in the Board's estimate without some readjustment of other ore rates in eastern territory would create important advantages for such destination points and important disadvantages for other steel-mill points. Ex-lake iron ore is at present moving from lake ports to Youngstown and Warren at a rate of 88 cents per gross ton, to the Aliquippa-Midland group at $1.05, and to the Pittsburgh group at $1.21. The existing relations between the respective ex-lake ore rates have remained substantially unchanged for more than 10 years.

The tonnage of ex-lake ore that has moved from Lake Erie ports, as reported by the Ore and Coal Exchange, has been as follows, converted into net tons: Year 1929, 38,966,910 tons; 1934, 12,938,934 tons; 1935, 16,624,711 tons; 1936, 27,445,187 tons; 1937, 36,124,950 tons; and 1938, 10,967,123 tons. The average annual movement in 193437 was about 23,300,000 short tons, or about 60 percent of the peak in 1929. Because of subnormal conditions in the steel industry in 1938, the tonnage for that year is not included in the average. The likely future volume of ore movements is discussed at pp. 767-776.

Our conclusion that the rate reduction mentioned by the Board cannot be confined to Youngstown and the other destinations included in its estimate is based not only on the competition of steel plants and on the efforts the carriers which serve the respective plants would put forth to protect their own traffic by enabling the plants reasonably to maintain their competitive status, but also on the terms of the Interstate Commerce Act as these have been construed and administered by us.

Section 3 of the act prohibits undue prejudice and preference as between localities and shippers. If the waterway were actually built and in operation, competition of railroads with water carriers operating thereon might justify relatively lower rail rates between the points directly affected by such competition than between points not so affected. This question is discussed subsequently. But, in the absence of actual water-carrier competition, it is certain that reductions confined to the points embraced in the Board's estimate would bring forth protests from other shippers and localities alleging undue prejudice and preference. One particular form of discrimination, namely, higher rates to intermediate than to more-distant points, is prohibited by section 4 of the act if, in a particular instance, the only justification offered is potential water competition not actually in existence. There is considerable doubt whether we could permit reductions to the points embraced in the Board's estimate without a reasonable alinement of competitive rates; and if such alinement were made, the particular localities which would be served by the proposed waterway would receive little net advantage. The change proposed by the Board, therefore, would ultimately affect not only the 10,000,000 tons of iron ore included in its estimate but also, though possibly in an amount less than 29 cents, an additional 13,300,000 tons, of ex-lake ore from Lake Erie ports. The annual revenue loss of the railroads would be increased from $2,900,000 to $5,560,000, if it be assumed that a reduction in the amount of 20 cents per ton on the additional 13,300,000 tons would result. Some, though small, revenue losses might also occur on eastern domestic and imported ore which moves to interior points.

The Board's estimate of prospective lake-cargo coal tonnage is substantially equal to its estimate of ex-lake ore tonnage. Together, these tonnages constitute about 70 percent of the total. By reason of the favorable conditions under which it moves and of competitive factors, lake-cargo coal for many years has been given lower rates than those which apply to track-delivery or local coal moving to the

See footnote 5.