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DOMESTIC LAND AND WATER TRANSPORTATION

S. 2353, a Bill To Extend the Records and Reports Provision of the Interstate Commerce Act to Persons Furnishing Locomotives

[S. 2353, 82d Cong., 2d sess., by Mr. Johnson of Colorado (by request)]

A BILL To extend the records and reports provision of the Interstate Commerce Act to persons furnishing locomotives

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That (a) paragraph (6) of section 20 of the Interstate Commerce Act (49 U. S. C., sec. 20 (6)) is amended by striking out wherever appears therein the word "cars" and inserting in lieu thereof "locomotives, cars,"

it

(b) Subparagraph (c) of paragraph (7) of section 20 of the Interstate Commerce Act (49 U. S. C., sec. 20 (7) (c)) is amended by striking out the word "cars" and inserting in lieu thereof "locomotives, cars,".

UNITED STATES SENATE,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, Washington, D. C., Wednesday, March 5, 1952. The committee met, pursuant to adjournment, at 10 a. m., in room. G-16, United States Capitol, Washington, D. C., Senator Edwin Johnson of Colorado (chairman) presiding.

Present: Senators Johnson of Colorado, Hunt, Tobey, and Bricker. Also present: E. R. Jelsma, staff director of Subcommittee on Domestic Land and Water Transportation, and F. J. Keenan, assistant clerk of the Committee.

STATEMENT OF J. M. HOOD, PRESIDENT, THE AMERICAN SHORT LINE RAILROAD ASSOCIATION

Mr. HOOD. The bill proposes to extend the authority of the Commission so as to include the leasing of locomotives. This has been occasioned primarily by certain incurance companies retaining title to locomotives and leasing them to railroads for a prescribed period at rentals which many carriers have found to be advantageous.

To us there is no convincing reason why the Commission should undertake to add to its already arduous duties by extending itself into this field. If railroad management cannot determine the economical advisability of one method of acquisition of locomotives as against another, it is in a sorry state indeed.

The Commission has ample over-all authority to require honest and efficient operation of carriers, and there appears no reason to add this detail to their immediate jurisdiction.

Our recommendation is that S. 2353 do not pass.

The CHAIRMAN. The Commission is responsible for that amendment. They are the ones who want it.

Mr. HOOD. I know that, and I oppose it for the reasons stated. I think the Commission can well let the Equitable and the Northwestern and the other insurance companies spend their money as they like; and the railroads, after considering all of the factors-it involves the daily cost, the excess-profits taxation base, depreciation, disposition of equipment at the end of the 15- or 20-year-lease period, and many other things; it is often a close calculation, and at best it is a projection into the future of some unknown quantities.

Senator TOBEY. How did the insurance companies get title in the first place? Because of the indenture under the Philadelphia plan that said that the equipment bonds failed and had to be made good in part?

Mr. HOOD. That is correct, Senator, but in the Philadelphia plan or the equipment trust plan the title eventually passes to the carrier. And the period during which the indentures run is materially less than the life of the equipment, whereas in the Equitable plan it is a straight lease without_title passing ever, and for the anticipated life of the equipment. In other words, in the case of cars it is 15 years, I believe, or 20 years-20 years, I believe-and at the end of that period it has reduced the investment to salvage. In other words, the insurance company has recovered, in the form of daily rentals, all of its costs and carrying charges and reduced its investment to salvage value. There is an option for the carriers to extend the lease at a nominal rate of, 1 believe, 10 cents a day on cars, but actually the instrument you execute is a 20-year lease, which amortizes the entire investment. The CHAIRMAN. I think it is 15 years.

Mr. HOOD. You may be right. It is a long time since I examined one of them. They are very much in distaste at the moment because of the operations of the two things- your amortization-you see you cannot amortize something through the 5-year plan, something that the other fellow has bought and you cannot add an investment to your excess-profits-tax base.

The CHAIRMAN. You do not think, then, that the public interest would require such a bill as 2353?

Mr. HOOD. I certainly do not, Senator.

Senator BRICKER. Mr. Hood, take for instance there were a possibility of venture capital or equity money now, any securities issued to get that new money into the railroad business would have to be authorized by the Commission, would it not?

Mr. HOOD. You mean if the railroad, in order to acquire equipment, desired to issue securities on one form or another?

Senator BRICKER. Yes.

Mr. HOOD. That is correct. In practically all instances 5 percent of your capital can be borrowed without authorization, but with a few exceptions all of them are way beyond that.

Senator TOBEY. Is it not true or is it true that the equipment purchased under the lease plan and the Philadelphia plan are still in good shape from the investment houses; is there a demand still for them? Mr. HOOD. One was authorized yesterday at an effective rate of 3.17. $2,000,000.

Senator TOBEY. Has it been offered yet?

Mr. HOOD. Oh, yes. The Commission approved the sale.

Senator TOBEY. It walked right out, did it not?

Mr. Hood. It brought 99.026, I believe, on 3-percent certificate

trust.

Senator TоBEY. What road is that?

Mr. HOOD. Katy. Making an effective rate of 3.17, which is almost a percentage point higher than it was 5 years ago. We were borrowing money then for 2% to 21⁄2 for equipment trusts.

The CHAIRMAN. This S. 2353 is a very important piece of legislation, is it not? It would upset completely the present arrangements for acquiring equipment, would it not? The railroads cannot very well go out and sell bonds any more on the open market, and about the only way they can get equipment is through this lease arrangement. Would not this interfere greatly with the operation of that plan?

Mr. HOOD. Senator, I do not think it is particularly important legislation. The only effect of it is going to be to require three insurance companies-and perhaps others later-to come down to the Commission, spread all their financial doings and sources of income and practices under the Commission's jurisdiction, and perhaps go through some form of application and hearing before these things can be consummated. I do not think it would have one particle of effect upon the determination by a board of directors.

They have, you might say, three choices, if you are going to buy a thousand cars. One of them is to buy it out of funds in the treasury, no matter how they got it.

The second one is to pay, roughly, 25 percent down and issue equipment trust for 80 percent. The third one is to go to these insurance companies who furnish all of the money and retain title, exacting a rental which starts out-I am not going to try to be too accurate now at $2 for the first 3 years, $1.50 for the second 5, $1 for the third 5, 50 cents for the final period, with an option on the carrier to acquire the cars at the end of that time at salvage value, or rent them at 10 cents a day which is equivalent to a return on the salvage value.

In other words, I do not think management is going to pay the slightest attention to whether or not the Commission has any jurisdiction over the plan-they are going to be governed entirely by cold arithmetic: Is it to our advantage to use an equipment trust method or a leasing method?

The CHAIRMAN. I see. Thank you.

Senator BRICKER. That is determined by whether they got the money or not, is it not?

Mr. HOOD. To some extent. If you pay cash for a thousand cars, you have got to have $5,000,000 up. If you pay 20 percent down, and go the equipment trust route, you have got to have a million dollars up. If you go the lease route you need no immediate cash. The disadvantages are those I outlined: You get no depreciation accruals, you get no 5-year amortization, you get no addition to your excess-profits-tax base. Those things under existing conditions are usually determinative and this lease plan is practically nonoperative at the moment. It will probably come back again if conditions change.

Senator BRICKER. There is no great advantage one way or the other. It is a matter of necessity in some instances, I suppose:

Mr. HOOD. It is a cold dollars-and-cents basis, from the insurance companies' viewpoint a method of putting a dollar to work, earning 3 percent on it, and coming out whole. That is all the interest they have in the plan. From the railroad point of view, it is the ability to acquire equipment with no cash payment down and assuming an obligation to pay for 15 years, a rental.

Senator HUNT. Mr. Hood, knowing how long it takes the Interstate Commerce Commission to act on some of these things, would not this rather interfere with the business transaction between the manufacturer of the equipment and the purchaser of the equipment or the renter of the equipment, if a third party entered in and took months to decide whether to allow the permit or whether to allow the transaction? It is bound to creep in there, 2 or 3 or 4 or 6 months' delay in negotiating the business.

Mr. HOOD. Senator, it could, and until some path has been hewed so we would know about where we stood on it, it probably would. As a matter of fact, the Commission procedure in connection with the issuance of equipment trusts is not long and it does not interfere any. The car builders are roughly 18 months behind on deliveries and if a board of directors is willing to commit itself to a debt, there is ample time in which to file an application.

The procedure is short and the decisions come down with promptness, and I see no reason why, once a method and a determination have been made as to just what they needed on these leasings, it could be relatively short and nonirritating.

UNITED STATES SENATE,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
Washington, D. C., Tuesday, March 11, 1952.

The committee met, pursuant to adjournment, at 10 a. m., in room G-16, United States Capitol, Washington, D. C., Senator Edwin Johnson of Colorado (chairman) presiding.

Present: Senator Johnson of Colorado (chairman).

Also present: E. R. Jelsma, staff director of Subcommittee on Domestic Land and Water Transportation.

The CHAIRMAN. The hearing will please come to order. Dr. Splawn, I greet you. It is wonderful to see you here. Commissioner SPLAWN. Thank you, Mr. Chairman.

The CHAIRMAN. You may proceed in your own way, sir.

STATEMENT OF COMMISSIONER WALTER M. W. SPLAWN, CHAIRMAN, LEGISLATIVE COMMITTEE, INTERSTATE COMMERCE COMMISSION, ACCOMPANIED BY MEMBERS OF THE LEGISLATIVE COMMITTEE: COMMISSIONERS CHARLES D. MAHAFFIE AND JOHN L. ROGERS (CHAIRMAN OF THE ICC); AND COMMISSIONERS J. HADEN ALLDREDGE AND WILLIAM J. PATTERSON Commissioner SPLAWN. You have before you, Mr. Chairman, a folder which contains our comments as we have transmitted them to you on several bills on which we wish to appear this morning, beginning with the bills which you introduced yourself, S. 2353, 2354, 2355, 2356,

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