Chicago, Milwaukee, St. Paul & Pacific Railroad Company v. Illinois – Oral Argument – November 12, 1957 (Part 1)

Media for Chicago, Milwaukee, St. Paul & Pacific Railroad Company v. Illinois

Audio Transcription for Oral Argument – November 12, 1957 (Part 2) in Chicago, Milwaukee, St. Paul & Pacific Railroad Company v. Illinois

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Earl Warren:

Number 12, Chicago, Milwaukee, St. Paul and Pacific Railroad Company, Appellant versus State of Illinois, Illinois Commerce Commission, et al.

Number 27, United States of America versus State of Illinois, Illinois Commission and Milwaukee Road Commuters’ Association.

And Number 28, Interstate Commerce Commission, Appellant versus State of Illinois, Illinois Commerce Commission, and Milwaukee Road Commuters’ Association.

Mr. Johns.

Charlie H. Johns, Jr.:

May it please the Court.

These appeals are from the judgment of a three-judge District Court for the Northern District of Illinois.

The District Court set aside orders of the Interstate Commerce Commission prescribing interstate and intrastate fares for the Chicago suburban service of the Milwaukee railroad.

The Commission’s order prescribing the intrastate fares was based upon a finding of an undue revenue discrimination against interstate commerce.

As you know, Section 13, paragraphs 3 and 4 of the Interstate Commerce Act, provides among other things that if in an investigation of any intrastate rate, fare, practice, and so forth, the Commission finds that such a rate, practice or fare causes an undue discrimination against interstate commerce, it shall prescribe the fare, rate or practice which will remove such discrimination.

The last case under Section 13 (4) which this Court had occasion to consider at oral argument was King versus United States referred to in the brief.

As you will recall, in that case, the Commission had raised the intrastate freight rates in Florida in part at least to take care of this passenger deficit with which the railroads are faced.

That passenger deficit continues today.

And as we mentioned in the brief, the Commission is now engaged in a general investigation into that subject.

The case here today involves one phase of that question.

In the record, at page 5, is a map showing the setting of our case.

The territory, in which the Milwaukee performs its suburban service, extends over its west line, a distance of 37 miles between Chicago and Elgin, Illinois, and over its north line, a distance of 73 miles between Chicago and Walworth, Wisconsin.

There are only two intermediate — interstate points involved, Walworth and Zenda, Wisconsin.

On the west line, the railroad performs daily during the work week or I should say operates one train between Chicago and a point about half way at Bensenville, and 13 trains between Chicago and Elgin.

On the north line, it operates three trains daily between Chicago and Deerfield, a point just north of the Cook County line, nine trains daily and this is in both directions between Chicago and Fox Lake, up in the lake area and one train daily between Chicago and Walworth, Wisconsin.

On the weekends, of course, the service is reduced.

The fares, both interstate and intrastate for this suburban service were before the Commission’s orders and are now as a result of the Commission’s orders on the same level.

The undisputed fact here today is that before the Commission issued its orders, this suburban service was not — was failing by $306,000 to cover its out-of-pocket cost of over $2,200,000.

The case had its origin in 1952 when the railroad went to the State Commission requesting permission to take off some of its all power trains to consolidate other trains and to then to raise its fares by amount necessary to cover the out-of-pocket cost.

Its case there for an increase in fares was based primarily upon a showing of insufficient revenues to cover the cost and use an abbreviated cost study to prove its point in the belief that it could clearly show that this out-of-pocket cost was greater than the revenues it was getting from the service.

Was there a simultaneous application at that stage to the Interstate Commerce Commission to —

Charlie H. Johns, Jr.:

No — no, sir.

— create interstate rates?

Charlie H. Johns, Jr.:

No, sir.

There was none.

The State Commission —

Felix Frankfurter:

Was this — was this particular local service — out-of-pocket service a unique situation or did it apply to other local non-heavy, non-dense traffic through?

Charlie H. Johns, Jr.:

There is a showing of record of the total loss.

The railroad is suffering from its total passenger service.

Felix Frankfurter:

Within Illinois?

Charlie H. Johns, Jr.:

No, sir.

Felix Frankfurter:

All together.

Charlie H. Johns, Jr.:

This is the —

All together, the figure is something like 22 million, I think.

Felix Frankfurter:

But this proceeding in 1952 before the State Utilities Commission, if that’s what’s it called, merely it was directed to agree to local services, is that right?

Charlie H. Johns, Jr.:

Yes, sir.

Felix Frankfurter:

And that what I want to know is whether they were conspicuous or unique instances of — of out-of-pocket deficits.

Never mind it.

Charlie H. Johns, Jr.:

That’s — that I can answer, sir.Out there — here is that out-of-pocket deficit alone plus a showing that increase fares will produce substantially increase in revenues mixed to the case.

Felix Frankfurter:

Well, as I understand it, the railroad sold — earn their cost on every item of —

Charlie H. Johns, Jr.:

That’s quite —

Felix Frankfurter:

Is that it?

Charlie H. Johns, Jr.:

That’s quite true, sir.

Felix Frankfurter:

That’s all I want to know.

What — what made this?

What led the railroad to single this out for relief from the State Commission?

Charlie H. Johns, Jr.:

Well —

Felix Frankfurter:

Because that was at the side of the deficit?

Charlie H. Johns, Jr.:

I think so, sir.

Yes, sir.

This — this was being performed at an out-of-pocket loan.

Felix Frankfurter:

I understand but their lack of services, that were out-of-pocket —

Charlie H. Johns, Jr.:

That’s true, too.

The State Commission was of the view that taking into consideration the fact that during a state proceeding and before the report was issued, the railroad had converted to a diesel operation that it — the railroad had an operation in which it was recovering substantially more revenues than the expenses.

The State Commission then denied any relief whatsoever.

The railroad then came to the ICC alleging that under — under its diesel operation, the existing intrastate suburban fares were causing an undue revenue discrimination against interstate commerce.

Charlie H. Johns, Jr.:

The railroad requested increases in its suburban fares, intrastate and interstate, averaging about 29%.

Although the railroad introduced evidence such as rate comparisons and cost of living indexes, each case was bottomed upon a showing of out-of-pocket cost exceeding revenues.

The cost this time included such items as depreciation and maintenance of way which were not presented to the State Commission.

The carrier also included at these —

Earl Warren:

Why weren’t they presented to the State Commission?

Do you know what the —

Charlie H. Johns, Jr.:

The record show, sir, that the railroad thought that it was clearly a showing under its abbreviated formula cost far exceeding the revenues.

That’s the reason given of record.

Earl Warren:

Is that the — is that the normal practice before State Commissions if they just give the State Commission what they think is sufficient or — or do — do they put on their whole case before they go to the Interstate Commerce Commission.

Charlie H. Johns, Jr.:

Well, in this case, the — the ICC mentioned in its report that — that the Commission’s — on the railroad’s excuse, explained their failure to present a fully developed case but did not excuse the —

Earl Warren:

I beg your pardon.

Charlie H. Johns, Jr.:

The Commission said that — that the railroad’s explanation explained why it had not gone but did not excused the railroad’s action in not presenting a fully — a full cost study to this information.

Felix Frankfurter:

Was the scope of inquiring between — before the two Commission is the same?

Charlie H. Johns, Jr.:

No, sir and that’s — that’s my main — one of my first point that — that the point — the scope is not the same.

They have different statutes and — and the previous proceedings are conducted for different purposes.

As I say, the carrier in the ICC proceeding also introduced in assistance of the examiner, this Northwestern point — scale of fares for its suburban service.

The railroad also introduced that the request of the Commission’s cost finding stay up on the additional explanation of its cost study.

The Commission in this report found that these suburban — the suburban service was causing an undue revenue discrimination against interstate commerce and specified the increases averaging about 21% which in this judgment was needed to correct the discrimination.

It also authorized increases in the interstate fares and those fares became effective in January 1956.

Now, following the Commission’s usual practice, it did not then and there prescribed these intrastate fares but left the way open for the State to allow them to go into effect.

When the state failed to approve the increases, the Commission entered its order.

The complaint was then filed in the lower court attacking only the order affecting the intrastate fares.

Earl Warren:

May I ask you, what alternative the State Commission had at that — at that juncture?

Charlie H. Johns, Jr.:

Well, that was — that was about the only action it could have taken — allow them to go into effect.

The —

Earl Warren:

Well — there was a mandate then rather than —

Charlie H. Johns, Jr.:

It’s not a mandate because they don’t have to.

But if they do voluntarily allow these rates to go into effect, they maintain — retain jurisdiction over the whole rate structure.

And frankly, it’s much better for the State Commission to handle these local matters than it is for the federal commission.And that’s the reason the order doesn’t issue immediately.

We present four questions here.

Charlie H. Johns, Jr.:

The United States joins in the first two.

They are these –

Whether the Commission was wrong in considering evidence which the State Commission have not considered.

(2) Whether the Court could set aside the order approving the increases in the interstate fares.

Then the third question is whether the Commission’s findings are sufficient to show an undue revenue discrimination.

And the fourth question is whether the evidence supports the finding that the prescribed fares will be just and reasonable.

I would first like to discuss this question of submitting the same evidence to both commissions.

The court below held in effect that the ICC, in an investigation involving an intrastate rate, must limit its consideration to the evidence introduced in a prior state proceeding.

The Court said, “If different evidence is to be offered or a different basis of fares is to be urged before the Interstate Commission, the State Commission should have been given a chance to fix fares on the same evidence and the same basis.”

Now, while the Court there is specifically referring to these cost items, the ruling is just as applicable to the Northwestern’s fares which were put in at — upon the insistence of the examiner and it is just as applicable to these questions which the Commission’s cost finding staff presented to the railroad in which the railroad answered on the record.

Felix Frankfurter:

Let’s see if I understand this.

Does that mean — am I to infer from what the court below said that the ICC reviews or must act on the record made before the State Commission?

Charlie H. Johns, Jr.:

The lower court didn’t say that but —

Felix Frankfurter:

I know it didn’t but that’s what it means.

Charlie H. Johns, Jr.:

— but that’s what it means, sir.

That’s what it means.

We become a reviewing court of some state action.

Felix Frankfurter:

In the — in this proceeding, the order which we are reviewing, the Commission — the State Commission was a part — was before it, was it not?

Charlie H. Johns, Jr.:

Was before as a party.

Felix Frankfurter:

Was a party or merely sitting like the Trinity Brother in the — I forgot the name.

Charlie H. Johns, Jr.:

As a party.

Felix Frankfurter:

As a party?

Charlie H. Johns, Jr.:

Yes, sir.

Felix Frankfurter:

It could put evidence in?

Charlie H. Johns, Jr.:

And it did.

Felix Frankfurter:

And it did.

Charlie H. Johns, Jr.:

Yes, sir.

Now, I hear counsel say — saying that’s not so.

The state took a very small part in this case.

The case on the other side was developed mainly by the Commuters’ Association but there is a witness who testified in this case and he was appearing for the State Commission.

Charlie H. Johns, Jr.:

He was employed by the State Commission.

Felix Frankfurter:

Well, it ought not to the matter of dispute even between intense counsel whether as a matter of law, the State Commission is or is not a party with power to put in what evidence would be.

That ought —

Charlie H. Johns, Jr.:

The State?

Felix Frankfurter:

— not to be a matter of controversy.

Charlie H. Johns, Jr.:

The State Commission —

Felix Frankfurter:

Now, what is the answer?

Charlie H. Johns, Jr.:

It was a party before the Commission.

There are several reasons while — why the ruling of the lower court is unsound such as the fact that the two proceedings are conducted under different statutes and for different purposes.

And the fact that time, the time element alone would require the railroad to bring this case up to date in the later ICC proceeding.

But we say here that the best reason is the ruling of this Court in the first Florida log case.

That’s reported at 282 United States Report and it’s referring to in the brief.

In that case, the Court — this Court held that the Commission could prescribe an intrastate rate to remove an undue revenue discrimination where there hadn’t even been prior state proceeding.

In that case, as you will recall, the Georgia Commission came to the ICC complaining of interstate rates on logs between Florida and Georgia and that the intrastate rate on logs for a distance up to 170 miles within Florida.

The — in the administrative proceeding, the Commission found that both rates need to be adjusted.

It adjusted the interstate rate down and the intrastate rate up.

The in — the Florida intrastate rate had been voluntarily established by the carrier and the argument was made that since the rate had not been made or imposed by the State, within the wording of the statute, the ICC had no jurisdiction to order its — it changed.

In ruling against that contention, this Court discussed the Government’s changed philosophy towards the regulation of the railroads in the Transportation Act of 1920 and the authoritative duty of the railroad — of the Commission to maintain a national railway system and the importance of the intrastate rates under such a scheme.

The Court stated that the Commission’s authority over intrastate rates is to be read in the light of the affirmative duty to fix rates and to take other important steps to maintain an adequate national railway system.

And the Court said that to hold — that the Commission could not act until the Court — the State had first said in judgment upon the lawfulness of those rates would be repugnant to that grant of authority.

Under this affirmative duty and the duty exist today under the National Transportation Policy and under the Commission’s rule of ratemaking, Section 15 (a) (2).

The Commission is not required to concern itself with any problem in a case like this other than whether on the evidence before it.

The intrastate rates do in fact cause an undue revenue discrimination against interstate commerce.

That affirmative duty cannot be performed satisfactorily if the investigation is to be limited to a record developed in some proceeding over which the ICC has no jurisdiction.

This Court’s opinion in the first Florida log case as well as the opinions of two lower courts following that decision were called to the attention of the court below and are not discussed in its opinion.

Earl Warren:

Did you carry that to the extent that the railroad company can make just a pro forma complaint before a State Commission and not introduce — not make a real case and then when the decision went against it to go to the ICC?

Charlie H. Johns, Jr.:

I — I would say, sir, that it would be against the railroad’s own interest to do such a thing.

Earl Warren:

Could do it under the rule you just announced?

Charlie H. Johns, Jr.:

That is the holding — the holding in the Florida case is that the State Commission did not have to pass upon those because of this important duty of maintaining an adequate national transportation system.

Earl Warren:

Now, the state procedure is just abortive.

Charlie H. Johns, Jr.:

No, sir.

It’s not.

I wouldn’t say it’s abortive.

The parties in the Florida case simply didn’t have to go there.

Now, they do go there for many reasons.

Earl Warren:

They didn’t have to go there in this case?

Charlie H. Johns, Jr.:

I would say under the Florida decision, no sir.

Earl Warren:

Well then it is abortive if they didn’t have to go and if this is a new proceeding, is it?

Charlie H. Johns, Jr.:

Yes, sir.

I — I guess it is with that.

Earl Warren:

Then should — then we — we should consider this as though there was no necessity for the railroad company to go to the State Commission and that it makes no difference what the finding of the State Commission was.

Charlie H. Johns, Jr.:

That is true, sir.

This is an independent record and independent proceeding.

And the questions are here whether the findings support the order and whether the finding of the order is based upon substantial evidence.

Felix Frankfurter:

Mr. Johns, you argue this as though this is a question of what I might call common law as a matter of principle that we work out.

Don’t we have to go to the statute to find out if the statute requires and doesn’t require?

The statute says something about this, isn’t it?Couldn’t it?

Charlie H. Johns, Jr.:

That’s true, sir.

And the statute says, 13 (3) speaks of notifying the state where an investigation concerns a rate made or imposed by the State.

And Section 13 (4) then says, in any investigation where you find — where we find a discrimination, undue discrimination, then we shall correct — that the Commission shall correct it.

Felix Frankfurter:

Since you’re dealing with state rate to which the Congress is concerned with, state rates.

After the Freeport doctrine, it’s ought to protect the State and they did it in a particular way by Section 13 (3), didn’t they?

Namely, that they must give the State notice and at the behest of the Interstate Commerce Commission, the State Commission may sit with the Interstate Commerce Commission.

Charlie H. Johns, Jr.:

Yes, sir.

Felix Frankfurter:

The statute doesn’t say a word about going to the State Commission in the first instance, does it?

Charlie H. Johns, Jr.:

No, sir.

It doesn’t.

And the provision —

Felix Frankfurter:

It will be if they do go and make a kind of a shadow, indulged in the kind of shadowboxing to which the Chief Justice’s question referred, may commend itself.

And the Commission could say, “You go back there.”

Charlie H. Johns, Jr.:

That’s quite true.

For example, in this —

Felix Frankfurter:

Could the Commission do that?

Has the Commission done that as a matter of its own practice?

Charlie H. Johns, Jr.:

I don’t recall one but in this very case the Commission says that — that the railroad’s explanation does not excuse its action in not making a full showing before the State Commission.

Felix Frankfurter:

Well, that’s just a little slap under this, doesn’t it?

Charlie H. Johns, Jr.:

Well, that’s quite true but it’s a warning to other railroads too that they should go to the State Commissions and present a full case.

In — in other words, the important thing here was on this record, was there a showing of undue discrimination?

That’s the big question.

Earl Warren:

Well, Mr. Johns, the only thing that I — I haven’t got quite straight in my mind is this.

Why should the Commission say that they were not excused for not putting on a full case before — the state court when there was no necessity for putting on any case?

No necessity for employing there at all under your — under your theory.

Charlie H. Johns, Jr.:

Because under the practice, they do go there, and ordinarily, we don’t have the work to perform in reviewing one of these cases.

The states will grant some relief and we don’t see the case at all.

It cuts down on (Inaudible) that’s a selfish reason for it.

I would like to turn now to a consideration of the adequacy of the findings to support this conclusion of undue revenue discrimination.

While the lower court does not question the Commission’s finding that the revenues for the suburban service were failing by over $306,000 to — to cover the out-of-pocket cost of that service.

It held the justification for the exercise of the federal power did not clearly appear on this, because the Commission did not also specifically find what contribution from the suburban service would constitute a fair share of the railroad’s total revenues.

Now, as I’ll point out in this argument, this Court, in the King’s case held that such a specific finding was not essential in a case of this type.

This Court of course has stated that there are no formal requisites for findings in a case under Section 13 (3) and (4).

This Court has also stated that the findings on a Commission’s report will vary with the statutory authority invoked and with the context of the situation presented.

We say that in the context of the situation presented here, these findings are applicable.

The findings appear at pages 36 and 37 of the record, the Commission’s formal finding.

The first finding is that the existing suburban fares did not produce enough revenue to cover the out-of-pocket cost.

There is no dispute here on that point.

It’s — that formal finding is based upon a summary in the report of the cost study submitted by the railroad and by the commuters.

The second finding is that the suburban fares imposed by the State caused in a less increase to the extent prescribed would continue to cause an undue revenue — an undue discrimination against interstate commerce.

Now, the whole theory of the Commission’s case is summed up, I think, in the second finding.

In other words, as the Commission points out at the bottom of page 36 of the record and going over to — at the bottom of page 35 and going over on to 36, to the extent that this suburban service fails to meet the out-of-pocket cost and make all the contribution that it reasonably can to the respondent’s indirect cost.

It — it increases respondent’s past through deficit and results in an undue burden upon its freight operations, state and interstate.

Charlie H. Johns, Jr.:

Now, that’s the theory upon which the Commission was acting and I will in a minute —

Does that — does that mean that in any case where the Commission finds that an interstate rate was not paying its way, that automatically results — justifies the finding — the discrimination against interstate commerce?

Charlie H. Johns, Jr.:

No, sir.

In the Florida log case, this Court said that more was required that you have to study the revenues to see what the old rate was producing and what the new rates would produce.

But that is the principal finding and I will discuss in just a moment, I think, this Court’s past opinion support that holding.

The third formal finding is that the undue discrimination can and should be removed by establishing fares not lower than those prescribed.

Now, in this case, the Commission thought that a 21% increase would cover all of the proven out-of-pocket cost and contribute a little to the indirect cost.

The fourth formal finding is that the prescribed fares are just unreasonable.

That can be supported by the cost evidence here alone.

While I make that statement on the brief, I cite no authority for it but this Court has recognized the fact that a cost study will support a finding of reasonableness.

The case to which I refer and which is not cited in the briefs is the old — Illinois Commerce Commission case involving the Chicago switching charges.

It’s reported at 292 United States Report, page 474 and my particular page reference is page 484.

The finding goes ahead to say that the prescribed fares will produce substantial additional revenue that’s based upon a discussion in the report and in the record, showing that over the years, the patronage of this carrier and this service has been increasing and that it continued to increase after the last fare increase in 1951.

The Commission was afraid, however, that the railroad’s request for a 29% increase would adversely affect the movement of this traffic and wasn’t willing to go that high.

Therefore, it gave them 21%, roughly 21% increase which would deal substantially more revenues.

That finding goes ahead to say that these prescribed fares are necessary to afford a fare contribution towards the indirect cost and return and to enable the carrier to provide adequate and efficient service.

The Commission also found that the interstate suburban fares increased on the same level would be just and reasonable.

The lower court thought that the findings were inadequate because the report contains no specific finding of what contribution from the suburban fares would constitute a fare proportion of the railroad’s total income, and as we point out on brief, this Court in the King case indicated that no specific finding was essential.

The lower court realizing that, then said, “Well, there is no finding here that the revenue produced by the intrastate fares will contribute not more than a fair proportion of the total income.

We think that findings that the increases prescribed will be just and reasonable and are necessary so that travel there under may make a fair contribution, is the equivalent of a finding that they will contribute not more than a fair proportion.

The — the Court also criticized the findings because it’s — this last finding is based upon a fair contribution towards indirect cost and return rather than a fair contribution towards the total income.

We think that when you’re dealing with a losing portion of the business and you’re trying to cover the cost — the out-of-pocket cost and get some contribution to the indirect cost that the phrase of fair contribution towards an indirect cost is more appropriate than the phrase “fair contribution to the total income.”

Felix Frankfurter:

Is there anything in the Commission’s report which indicates that if these high rates go into cost, in fact, more revenues will flow.

Charlie H. Johns, Jr.:

Yes, sir.

Felix Frankfurter:

Where is it?

I don’t mean the negative but if this keeps up, it will be a drain.

I want something to indicate that if you’ll raise it, you may not have even more of a drain.

Charlie H. Johns, Jr.:

Yes, sir.

That’s the — on the fourth finding, isn’t it?

Felix Frankfurter:

Third?

Earl Warren:

You will provide —

Felix Frankfurter:

Will produce substantial (Inaudible) —

Earl Warren:

Yes.

Felix Frankfurter:

Is that — the — that’s four, is it?

Charlie H. Johns, Jr.:

Yes, sir, four.

It will produce its —

Felix Frankfurter:

Well, what I want to know whether in the — in the — those are the conclusions, in the report —

Charlie H. Johns, Jr.:

Yes, sir.

Felix Frankfurter:

— itself.

Was there evidence on that point?

This is all a matter of prophesy of course as we know, isn’t it?

But is there is some basis in the record —

Charlie H. Johns, Jr.:

Oh, yes, yes.

Felix Frankfurter:

(Inaudible)

Charlie H. Johns, Jr.:

The —

Felix Frankfurter:

Was that challenged by the respondents?

Charlie H. Johns, Jr.:

No, sir.

But they —

Felix Frankfurter:

You mean, they agree that if the higher rate was produced, would less be the deficit?

Charlie H. Johns, Jr.:

I say that it’s not challenged.

That finding is not challenged.

Felix Frankfurter:

Yes.

Charlie H. Johns, Jr.:

Now, it’s based upon a showing in the record that over the years, the patronage of this line has been increasing and that even after the last fare increase in 1950 or 1951, the patronage has continued to increase.

In other words, it shows a building up.

So the Commission thought that a 21% increase would not adversely affect —

Felix Frankfurter:

There’s a basis for this forecast you’re saying.

Charlie H. Johns, Jr.:

Oh, yes.

Felix Frankfurter:

All right.

Charlie H. Johns, Jr.:

There’s a basis for it.

The views of this Court in past cases, I believe, support the proposition that a showing of a non-compensatory rate plus a showing that a reasonable increase in that rate will produce substantially more revenues are adequate to support a finding of an undue revenue discrimination.

Charlie H. Johns, Jr.:

For example, in the first Florida log case, this Court held that the showing of a non-remunerative rate was not sufficient to support a finding of discrimination that you had to have more.

And the Court went ahead to say that the more needed was the study of the revenues to see what had been produced — what were to be produced under the increased rate.

See if it’s going to be substantial and if that is necessary to eliminate this discrimination.

In the North Carolina case, involving the fares of four railroads, passenger fares of four railroads in that State during World War II, this Court said that the order in the second Florida log case, incidentally the Court set aside the order in the first Florida log case because we haven’t made this revenue study.

The Commission took the case back and made the revenue study, issued another order and this Court upheld that order.

And in the North Carolina case, in explaining why the order in the second Florida log case was upheld, this Court said that that order in the second Florida log case was based upon a finding supported by evidence, that the intrastate rate was abnormally low, less than reasonably compensatory, insufficient under all the circumstances and conditions to cover the full cost of the service.

Now, there’s — this Court said in North Carolina was why the Florida log order was upheld.

Insufficient under all circumstances to cover the full cost of the service that was one commodity in Florida moving a maximum distance over 170 miles.

And in the King case, the Court seems to have taken it for granted that the Commission’s jurisdiction extends to a non-compensatory rate.

There at one place, the Court states near the last part of the opinion.

The C — ICC’s jurisdiction over intrastate rates, however, is not limited to cases where those rates are non-compensatory.

And then, in the dissenting opinion in the King case, Mr. Justice Douglas, gave an example of what he considers to be undue revenue discrimination against interstate commerce.

And here is what he said by way of example.

If intrastate freight operations fail to produce an adequate return as determined by reference to the cost of the intrastate operations and the investment in the intrastate business, interstate commerce is discriminated against.

If that is an undue revenue discrimination, we have an aggravated case of it here.

We submit that in the context of the situation presented here, the finding relative to undue — revenue discrimination is ample.

We believe that other findings, if added, would in the words of the District Court in the New Haven Commutation Fares case cited in the brief, simply amount to a piling on of more words without an essential change in substance.

Time does not permit me to discuss these other two points involving the basis for the Commission’s finding that these increased fares will be just and reasonable as I’ve said before.

I think the cost alone supports it or the propriety of setting aside the interstate order which is not connected in any way whatsoever with this question of discrimination.

Could I ask you a question?

Charlie H. Johns, Jr.:

Yes, sir.

Is there anything in the record to show that the intrastate passenger service is making a greater or less — proportionate contribution to the overall deficit of the railroad than the interstate passenger traffic is?

Charlie H. Johns, Jr.:

No, sir.

There isn’t.

That point was made, sir, in the case below that — that the contribution from the suburban service is relatively greater or at least the suburban service is relative better off than the average service of the railroad.

The Commission’s answer to that was and it’s given in the report that simply because some other segment of the business is were solved — is no excuse for not trying to get the cost and as much to the indirect cost as you can get out to this particular segment.

In other words, it goes right along with this Court’s view in the Florida log case.

This Court said in the Florida log case that in a revenue discrimination case, we are not concerned with the relation of rates.

We are concerned with the relation of rates to income from these rates charged, how much income are you getting.

Here, they don’t even get enough to cover the out-of-pocket cost and I don’t think that you have to be a so-called expert to see that if a segment of the business, in an important segment, is not paying its way, it’s a drag on the total service.

But that isn’t enough, is it?

You’ve got to show that that also creates a discrimination.

Charlie H. Johns, Jr.:

That is in itself a discrimination.

It is a drag on the total service.

The sentence is, if you haven’t got a problem with the segment of your business, of course, it is a drag as far as discrimination is concerned.

I don’t see if that follows.

Charlie H. Johns, Jr.:

Well, that’s the theory here I —

Felix Frankfurter:

You’re saying it’s a discrimination against commerce —

Charlie H. Johns, Jr.:

Yes, sir.

Felix Frankfurter:

— rather than a relationship between rate or commodities or services.

Charlie H. Johns, Jr.:

Yes, sir.

That’s true.

Felix Frankfurter:

You’re hitting the — the purpose of the business.

Charlie H. Johns, Jr.:

The overall revenues of this carrier is hurting because it’s not paying its own way.

It’s not even paying its out-of-pocket cost.

It’s a drag on that business.

What about the overall operation of the railroad?

Is it making a little bit of money?

Charlie H. Johns, Jr.:

Make — in this year, it made a 2% return, sir, 1954 is the year.

Hugo L. Black:

And there’s no finding here to (Inaudible)

I understood you to say to Justice Harlan, there was no finding here that this loss was any greater than that — more on the other parts of railroads on the interstate business.

Charlie H. Johns, Jr.:

On the passenger business.

(Inaudible)

Then it seems to me that your position is, necessarily, that the Commission has the power to make intrastate rates than — pay more than their part of the cost.

There’s no way that there’s a conference.

Charlie H. Johns, Jr.:

No, sir.

Not more but certainly paid their costs.

Hugo L. Black:

Yes.

But if it’s their cost, do you say that the Commission can go ahead and let other places — interstate fares — lose money and yet you can make the people who carry intrastate rates to pay more, pay the full amount of the —

Charlie H. Johns, Jr.:

No, sir but this Court said in the —

Hugo L. Black:

Is that your position?

Charlie H. Johns, Jr.:

No, sir.

This Court said in the past rate case, New York versus United States Report at — at 331 United States that the Commission doesn’t have to correct all of the evils in the —

Hugo L. Black:

What kind of case was that?

Charlie H. Johns, Jr.:

That involved the class rates.

Hugo L. Black:

And what kind of carrier?

Charlie H. Johns, Jr.:

Oh, it was interstate carriers, interstate rates.

Hugo L. Black:

Interstate carriers?

Charlie H. Johns, Jr.:

Yes, sir.

Hugo L. Black:

— (Voice Overlap) interstate carriers.

Charlie H. Johns, Jr.:

Yes, sir.

Hugo L. Black:

You have here intrastate carriers as — as compared with interstate carriers.

Charlie H. Johns, Jr.:

Yes, sir.

Hugo L. Black:

Do I understand the Commission takes the position that it inquire intrastate carriers to pay more than their part of the — of the load?

Charlie H. Johns, Jr.:

No, sir.

Hugo L. Black:

So that would be true, wouldn’t it?

If you pick up the segment of intrastate commerce and say it got to make good 100% but interstate doesn’t.

That’s why you have general losses you have to determined.

Charlie H. Johns, Jr.:

But we don’t come to that question because this segment isn’t even paying its out-of-pocket cost.

Hugo L. Black:

That’s right but what about the other sections.

Are there any other sections that are doing that?

Charlie H. Johns, Jr.:

Well, the Commission says if that’s — that’s beside the point.

Hugo L. Black:

Well, if it’s beside the point, however, if this is a particular kind of relationship which the Government only recently entered into at much protest, after requiring the intrastate rates to be raised as a further requirement, extra burdens, it must be born in order for the Commission have power to do that.

Charlie H. Johns, Jr.:

Yes, sir.

Hugo L. Black:

Do I understand you to say that the Commission could do that and make the intrastate rates be a 100% to see that they don’t have a set law without seeing if the other part of the road operate on the same basis.

Charlie H. Johns, Jr.:

I — I say that we correct the — the evil before us at the time —

Hugo L. Black:

Yes.

But you pick out however the intrastate rates.

Charlie H. Johns, Jr.:

No, because the — the interstate rates are being increased, too, on this very service.

Earl Warren:

Mr. Merrill.

R. K. Merrill:

May it please the Court.

On the last issue which has been raised by the bench, our overall passenger deficit on the Milwaukee Railroad is shown by the record in this case based on the full cost, is 157%.

That means that the full cost of our entire passenger operation represents 157% of our revenues.

The record also shows here that the operating ratio or our deficit on our suburban service at the time of the investigation of our fares by the Interstate Commerce Commission was 185%.

I believe that answers the question as to whether the suburban fares were or were not making a comparable contribution to that of the overhead passenger business.

Hugo L. Black:

Well, they would be, wouldn’t it if they made 35% less than the cost which the Commission think the cost is.

R. K. Merrill:

I don’t understand the question, sir.

Hugo L. Black:

I understood you to say that a 185% loss on that suburban and 135% loss on the whole.

R. K. Merrill:

No, sir.

What I say is that the expenses in connection with the suburban service represent 185% of the revenues.

But on the overall passenger business, the expenses represent only 157% of the revenues.

Now, I think it would be well to look at what would be required if the railroad were to be required to segregate from all of its passenger earnings, all of the expenses connected with the interstate service and those connected with the intrastate service.

The Milwaukee Railroad operates in 13 different states from Indiana on the east to the State of Washington on the west.

We operate many passenger trains in all of those states.

Most of those trains carry both intrastate and interstate passenger service.

Before the Interstate Commerce Commission then could hold that fares which are clearly non-compensatory in Illinois for discriminating against interstate commerce, a railroad would be required to make a nationwide study, in effect, of all its trains, of all its expenses and of all its revenues and say, “When we get all through, this much represents our interstate passenger.

This much represents our Illinois intrastate passenger contribution”.

Felix Frankfurter:

But could — could Illinois come in and say, “You’re trying to jack up our local rate beyond the ratio of the cost of the rate in Washington or some other state.”

R. K. Merrill:

I believe Illinois is — Illinois rates are unit under themselves.

We have an operation in this case which is a suburban —

Felix Frankfurter:

Well, it would be — you can’t have them a unit under themselves regardless of the unit of some other state if the point of attack is to drain on the total commerce earning.

R. K. Merrill:

Well —

Felix Frankfurter:

And that’s the theory of 13 (3), formulate extending the old (3) and (4) doctrine, isn’t that right?

R. K. Merrill:

Yes, sir.

That is correct and I believe it would be the duty of the Commission, however, not only to adjust the rates in Illinois so they do not discriminate or cause a drain on the system earnings but they would also have the duty to fix — bring up the rates in Washington.

There is nothing in the Act that says the Commission must act with respect to each state at one time.

As Mr. Johns said, they deal with each evil as it comes before them and that is what they were doing here.

Felix Frankfurter:

But my question is whether a State may not say the operation of this is to make the incidence of increase greater for us in a comparable situation in the neighboring state or even in the distant states.

R. K. Merrill:

I think if they could show that was true, they could raise that point, Mr. Justice but they did not raise it in this proceeding.

William J. Brennan, Jr.:

Are there any findings on it one way or the other?

R. K. Merrill:

No, sir.

There are no findings other than with respect to what contribution the Illinois rates are not making.

Felix Frankfurter:

Were the issue raised?

R. K. Merrill:

No, sir.

Now, I think there were some discussion here as to what the railroad was —

Hugo L. Black:

That’s all what was raised, am I wrong about that?

R. K. Merrill:

I beg your pardon, sir.

Hugo L. Black:

I thought (Inaudible) where they did raise the question.

There is no finding that the — their — their part when you hold this much rate on them and wouldn’t discriminate on them.

R. K. Merrill:

What they said was that the interstate business would be discriminating against the intrastate business, Mr. Justice.

That was the contention raised.

Hugo L. Black:

Well, if — if that were correct, ICC could do that.

R. K. Merrill:

If that were correct, they could not do it, sir, but it is not correct.

Now, the railroad did not go before the State Commission and do any shadowboxing.

In 1952, we had an out-of-pocket loss from our operation of over $1 million.

We went to the State Commission and we pleaded for prompt action.

We put in our case and the figures we put in were not inflated.

The Commuters’ Association itself concedes that we had a loss of $864,000 and a full cost deficit of $1 million — of $2,144,000 deficit at the time we went to the State Commission.

The State Commission, however, disregarded our pleas for relief and they kicked the case around for two years and four months.

It took only two days for the railroad to put in its evidence.

They let it drag for two years and four months before they finally said to us, “With the diesel operation, you would have a profit of $224,000 a year, over and above your out-of-pocket cost.

You are now dieselized,” and that happened a year after the record was completed before the Commission, “therefore, you’re entitled to no increase whatsoever.”

Now, with the dieselization, we were able to reduce our expenses to what we deemed — what we computed our out-of-pocket loss to be $700,000 a year.

We are just been turned down on a showing of over a million dollars a year out-of-pocket loss.

We deemed that these rates discriminated against interstate commerce and we approach what the Interstate Commerce Commission what they petitioned, asking that they investigate and determine whether that was not the result of the raise.

Now, this question is originally before the Illinois Central Railroad has had increases in its fares ordered by the Interstate Commerce Commission and the Illinois Commerce Commission has gone to the federal courts and attempt to just set it aside.

And the lower court in Chicago, the federal court said, “We find that the Illinois Central fares in the suburban territory, as compared with their overall passenger deficit, result in a deficit both relatively and absolutely lower or less than the overall passenger deficit.”

And notwithstanding that they could make that specific finding, the lower court upheld the Commission order increasing those fares, and this Court on appeal, affirmed it on rehearing, again affirmed the order of the lower court.

Felix Frankfurter:

Mr. Merrill, I ought to know but I don’t.

In your proceeding before the Illinois Commerce Commission, did you ask for an increase of rates by virtue of the Transportation Act?Or did you ask for an increase of rate under the Illinois Public Utility Act if that is —

R. K. Merrill:

Under the Illinois Public Utilities Act, sir.

Along with it, we ask, instead of just a blanket increase, it would eliminate our entire out-of-pocket loss, we asked for a way to discontinue our non-rush hour trains where there might be fewer people riding than there were members of the train crew.

And with that savings, we could reduce the amount of the increase if we sought from the Commission.

The Commission said you will not take off one train.

You will continue to run the whole service whatever loss it produces and you will not have one cent increase in your fares.

Now, I’d like to suggest to the Court what the effect of this order is.

The State says it takes away our jurisdiction.

Now, what it does, it takes away their power to compel the railroad to charge fares less than those which they have prescribed.

And that’s the power which — perhaps they never had because in the North Dakota and West Virginia cases, it was held that the State cannot single out a class of traffic and make it operate at a loss.

At an out-of-pocket loss or it is depriving the railroad of its protection under the due process of the Fourteenth Amendment.

Felix Frankfurter:

Well, it’s a far cry from the North Dakota case when you’re dealing with a major — perhaps — for example, certainly a major portion of the whole traffic of the railroad to these little local suburban line.

R. K. Merrill:

Well, Mr. Justice Frankfurter, in the North Dakota case, they were dealing only with the rates on midnight.

Felix Frankfurter:

Well — but midnight was a very important part of it.

R. K. Merrill:

Yes, sir.

And passengers —

Felix Frankfurter:

Traffic in the North Dakota.

R. K. Merrill:

— in the Chicago suburban area where we all — all the 16,000 people a day are very important to the Milwaukee Railroad.

Felix Frankfurter:

As to the total?

R. K. Merrill:

Yes, sir.

Felix Frankfurter:

The total — what is the proportion?

R. K. Merrill:

As to the total passengers, sir, I cannot tell you.

Felix Frankfurter:

I mean, the total, your total revenue in Illinois from this suburban traffic should be deprived with its measurable — commensurable with the midnight traffic in North Dakota.

R. K. Merrill:

I would say that our total revenue from this traffic as found by the Commission here is approximately $2 million a year.

Now —

Felix Frankfurter:

That’s a lot of money to me.

R. K. Merrill:

Sir?

Felix Frankfurter:

A lot of money to me.

R. K. Merrill:

And it is to a railroad with 2% return.

Hugo L. Black:

So, the passenger deficit of the railroad is over $22 million, doesn’t it?

R. K. Merrill:

That’s on a fully distributed cost basis.

Hugo L. Black:

Yes.

R. K. Merrill:

Yes, sir.

It was over $22 million and that includes all our intrastate as well as our interstate operation.

It’s not the interstate versus this particular loss on the suburban service.

Now, the effect then would not deprive them of their power because this Court in the Wisconsin Railroad Commission case which they decided very soon after the Section 13 (4) was enacted had this to say.

When the State Commission shall recognize their obligation to maintain a proportionate and equitable share of the income of the carriers from intrastate rates, conferences between the Interstate Commerce Commission and the State Commissions may dispense the necessity for any rigid federal order and leave the State Commissions free to increase or reduce those rates in their discretion.

Now, as to the effect of these rates on a commuter from the opposition that would appear that they are going to pay a very unreasonably high rate, actually, they will pay the same rate as their fellow commuter has been paying for the last four years in the adjoining Chicago and Northwestern Railroad.

They will pay lower rates that are now in effect in the Chicago suburban area and the Illinois Central Railroad and the Chicago South Shore Railroad.

They will pay the same rates that are in effect on the Chicago, Rock Island and Pacific Railroad within that area.

They are receiving service which cause the railroad 3 cents a passenger mile to perform on a full cost basis.

At the time of this — of the hearing by the Interstate Commerce Commission, they were paying only one and six tenth cents of that cost.

As the result of the order of the Interstate Commerce Commission, they are paying less than 2 cents a mile of that cost.

Therefore, since these rates went into effect on April 20, 1956, these commuters have been excused from paying over $1,750,000 of the full cost rendering the service and they are now seeking by this proceeding here to compel the railroad to refund another $575,000 out of the already inadequate fares which they have paid to the railroad and they will thereby increase the bargain which they are receiving at the hands of the railroads.

Now, the Interstate Commerce Commission is directed by Congress to administer the Interstate Commerce Act so as to encourage transportation — to encourage reasonable charges for transportation without unjust discrimination and to foster sound economic conditions among the carriers subject to its regulation, all to the end of developing and preserving a national transportation system, adequate to meet the needs of the commerce of the United States, of the postal system and of the national defense.

This Court has said that the Commission may impose upon any use by a State of an interstate system for intrastate commerce, any reasonable condition which it deems necessary or desirable.

Now, the condition imposed here is that the commuters on the Milwaukee Railroad, instead of paying about one half of the cost of the service, should pay two thirds of the cost of that service.

Certainly, that is a reasonable requirement.

And certainly, it is a step in the right direction towards fixing fares on a realistic basis if there is to be a survival of the national transportation system.

Felix Frankfurter:

Mr. Merrill, before you sit down, may I ask you a question though I’m not at all sure you’re the person I should ask it of.

I probably should’ve asked of Mr. Johns.

As I understand it, the Government agrees with the Interstate Commerce Commission on questions 1 and 2 relating to the intrastate rate fixing from which I incurred that they take no position on 3 and 4, is that correct?

R. K. Merrill:

That’s my understanding —

Felix Frankfurter:

That’s your understanding?

R. K. Merrill:

— sir.

Felix Frankfurter:

Now, what I want to know is this.

Assuming, and I’m making an absolute and — and qualified assumption because I don’t know what I think about it.

But assuming one agrees with the Government on questions 1 and 2, does that make for instance the setting aside of the interstate rate formed by its own cost?

R. K. Merrill:

No, sir.

It would not.

We would also have to —

Felix Frankfurter:

And yet they’re tied together, aren’t they?

I mean the —

R. K. Merrill:

Yes.

We’d have to show that there was evidence that supported the finding that the proposed fares were just and reasonable.

Felix Frankfurter:

Then I’m a little puzzled with that, why the Government should have contracted itself out of the — particularly the fourth question because that means the interstate rate is hanging in the air.

R. K. Merrill:

Yes, sir.

Felix Frankfurter:

As I say, you’re may be the wrong person to ask that.

R. K. Merrill:

Well, I would be glad to have Mr. Johns answer it because I was —

Felix Frankfurter:

Well, it would be — it will be agreeable I think, we’d like to have light on that.

Earl Warren:

When you finish your last — have you finished —

R. K. Merrill:

I am — completed, sir.

Thank you very much.

Earl Warren:

Oh, Mr. Johns, could you answer that question please.

Charlie H. Johns, Jr.:

Well, let me state that the interstate order was not attacked in the court below at all.

The complaint specifically restricts itself and it’s in the record at page 6, I believe, to the west line and so much of the traffic as on the north line between Chicago and the Illinois state line, that’s page 6 at the top — top paragraph, the first full sentence.

Felix Frankfurter:

Page 6 of the record?

Charlie H. Johns, Jr.:

The record.

Yes, sir.

The second full sentence.

This complaint relates to the entire west line and to the portion of the north line that is in Illinois and that was all that was considered by the court below.

There was nothing said in the petitions for reconsideration about these interstate fares.

They went into effect in January.

The petitions were filed in February.

We say that under this Court’s ruling in the Tucker case that since they didn’t object to the interstate fares in the petition for reconsideration, they couldn’t raise them in court.

Felix Frankfurter:

The Court didn’t — the law did set it aside, isn’t it?

Charlie H. Johns, Jr.:

It set it aside, yes sir.

Tom C. Clark:

The Solicitor General was with you on this, was he?

Charlie H. Johns, Jr.:

On that point.

Yes, sir.

Now we file — we filed a motion as we state in the brief to correct the judgment.

Felix Frankfurter:

Well, I — I understand if they say they only agree on those two questions raised.

Charlie H. Johns, Jr.:

Well —

Felix Frankfurter:

Is that right?

That’s your own view.

Tom C. Clark:

They’re not with you on the third point (Voice Overlap) —

Charlie H. Johns, Jr.:

On the third point — on the findings and on this (Voice Overlap) —

Tom C. Clark:

Yes.

(Voice Overlap)

Charlie H. Johns, Jr.:

— request, the original list.

Felix Frankfurter:

So that simply means that that’s all they wanted to argue.

There’s just one brief on both the U.S. and the ICC.

Charlie H. Johns, Jr.:

They filed a page and a half (Voice Overlap) —

Tom C. Clark:

They’re neutral on the first two points, I get, I get it.

Felix Frankfurter:

Well, I’m sorry.

I think that that’s —

Charlie H. Johns, Jr.:

On the second two points there, you — yes, sir.

Felix Frankfurter:

All right.

Thank you very much.

Charlie H. Johns, Jr.:

They take no —

Tom C. Clark:

First two points in your brief.

They don’t take issue on that, do they?

Charlie H. Johns, Jr.:

They are with us.

Tom C. Clark:

For 13 (3) and (4).

Charlie H. Johns, Jr.:

Yes, sir.

What about the first two?

Charlie H. Johns, Jr.:

The first two, they are with us.

That is the —

Tom C. Clark:

That they’re with you?

They don’t say one way or another.

Felix Frankfurter:

That’s all they asked this Court to review, didn’t they?

Charlie H. Johns, Jr.:

The two questions.

Felix Frankfurter:

Yes.

Charlie H. Johns, Jr.:

One, about the different evidence before the different commissions and the question of the interstate (Inaudible)

It is not on appeal on the question of the sufficiency of the findings or on this question of the adequacy of the evidence to support the finding of (Voice Overlap) —

Felix Frankfurter:

All right.

Charlie H. Johns, Jr.:

— of those regions.

Felix Frankfurter:

Thank you very much.

Earl Warren:

Mr. Begley.

Harry R. Begley:

Mr. Chief Justice, may it please the Court.

I represent the Illinois Commerce Commission in the State of Illinois.

I shall divide the appellee’s time with Mr. Guthrie who represents the Commuters’ Association in which it was a very active protestant both before the Illinois Commission and before the Interstate Commission.

As the appellant have stated, this is a Section 13 (4) matter.It raises again the conflict between the state and federal control in matters of this kind.

I know this Court has reviewed many Section 14 cases.

But in our opinion, this case presents the final in usurpation of the State’s normal authority over intrastate rates.

If the lower court is reversed and the Interstate Commission report and order allow to stand in the last (Inaudible) the state control of her local rates, in our opinion has not only been killed but effectively buried.

Briefly, as the appellants indicated, this matter began before the Illinois Commission.

It was a proceeding for “elimination of trains” as well as of rate interest.

It affects only the suburban service of the Milwaukee Railroad in the Chicago area.

After a considerable hearings in about 3000 pages of testimony and exhibit, the Illinois Commission found by an order of November 10, 1954, upon the record made before that Commission, that the railroad instead of suffering an out-of-pocket loss of approximately a million dollars, actually, upon proper allocating of expenses and by dieselizing their suburban service, would have a profit of approximately $224,000.

Now, instead of appealing the order of the Illinois Commission to our Supreme Court or up to our court, that the order was contrary to the manifest weight of the evidence or that it was arbitrary in determining the out-of-pocket — by out-of-pocket expense which changed an alleged deficit into a profit.

The railroad elected to go to the Interstate Commerce Commission and file a Section 13 (3).

At the hearing that followed before the Interstate Commission, the railroad introduced other evidence that had been entered since — before the Illinois Commission which contains certain expenses which they claim is out-of-pocket cost on their depreciation and maintenance of way.

As the — as the Interstate Commission bring forth a comment, respondent’s explanation where the prior omission was its impression, that even without them that it shows —

All they —

Harry R. Begley:

— a considerable deficit from this service.

Yes.

Harry R. Begley:

This explains but it does not excuse its incomplete showing before the Illinois Commission.

Upon the evidence presented to the Interstate Commission, that Commission made a report, finding an out-of-pocket loss of $306,000 —

Yes.

Harry R. Begley:

— and entered increase fares of $383,000 which was the Commission report said but eliminate the out-of-pocket deficit and result in a contribution to indirect cost and taxes of approximately $77,000 annually.

Harry R. Begley:

The interstate report then comment that the freight operations of the railroad both intra and interstate for a $37 million income on the passenger service, both intra and interstate, suffer a deficit of $22,800,000 resulting in an overall net railroad income of $14,500,000.

The report then states to the extent that this suburban service fails to meet the out-of-pocket cost and make all the contribution that it reasonably can in the respondent’s indirect cost.

It increases respondent’s passenger deficit and results in an undue burden upon its freight operations, state and interstate.

Even here, the report does not claim any discrimination against interstate commerce, only that such deficit puts a burden on both state and interstate freight operation.

This is not a person and localities discrimination nor is it a case where Section 13 (4) is being employed to raise intrastate rates through a previously decided interstate level.

They have not gone to the Interstate Commission and have — and have received interstate rate which they then came to the Illinois Commission and asked the Illinois Commission to match.

This is not that kind of a case.

Instead, this is a case where the Interstate Commission exerts authority to raise one set of — of intrastate rate.

The suburban fares in the Chicago area upon a single factual finding at the suburban rate, upon the interstate commission’s determination of out-of-pocket cost results in non-compensatory rate not being a person and locality discrimination, the only justification for the interstate’s exercise of jurisdiction over this purely intrastate rate, it’s upon the ground of a revenue discrimination against interstate commerce.

This Court has repeatedly laid down the doctrine that in order to show a revenue discrimination, the Interstate Commission must find that the intrastate rates fail to pay their fair proportionate share of the revenue to the carrier.

Well, they do undertake the contrast, don’t they?

Harry R. Begley:

They call that out of thin air, Mr. Justice —

But your real position is, there is no evidence to support the findings.

Harry R. Begley:

There is no evidence — the ultimate finding, the ultimate finding of the Commission is that these rates are discriminatory against interstate commerce.

There are no subsidiary findings, no factual subsidiary findings or statements which will give credence to that conclusory statement.

Well, if the evidence was sufficient to support the generalized finding, the conclusory finding, we wouldn’t be concerned about those findings, would you?

Harry R. Begley:

That might be, Your Honor.

I think that the — the report has to stand on its own merit by the findings.

I don’t think this Court is called upon to examine the evidence if the finding, the findings themselves do not support the order.

Felix Frankfurter:

By findings, you mean everything that’s said in the report as well as in the numbered paragraphed at the end.

Harry R. Begley:

That is correct, Your Honor.

It — it requires all of the subsidiary statements as well as the ultimate four or five findings that the Commission puts at the end of its order.

Hugo L. Black:

Your argument is — I take it.

I want to be sure but I’m not.

Harry R. Begley:

Sure.

That the mere finding if it’s an out-of-pocket loss, and that’s all you’re basing in, is inadequate to support the ultimate finding of discrimination against interstate commerce.

Harry R. Begley:

That is correct, Your Honor.

If I may go on, in this Court, in the North Carolina case in 325 United States, states —

Felix Frankfurter:

You mean — you mean to say, if they show there is a heavy drain, a heavy deficit on a particular service, what else would they show?

Harry R. Begley:

They must show that that drain is no — as — is no greater or is greater, I might say, is greater, than the drain of the other service.

Harry R. Begley:

In other words, in order to show a discrimination there has to be some comparative analysis made to show that there is an actual discrimination.

Felix Frankfurter:

You mean that — does that mean that it might be shown that as a matter of fact, the carrier agreed at a lower rate and which order to be carried on?

Harry R. Begley:

I don’t quite follow your question, Your Honor, this (Voice Overlap) —

Felix Frankfurter:

But I’m just giving you an extreme illustration of — of —

Harry R. Begley:

That if they would carry — if they carry wheat more than what wheat — the total cost of service of wheat on an intrastate basis, I do not think that one fact alone would justify Interstate Commerce Commission setting aside the intrastate rate on wheat.

Felix Frankfurter:

But if size — would you say that a sizeable out-of-pocket loss in carrying particular, if you please, segregated item of traffic isn’t enough, they must further show that that isn’t true at least to as equal in extent if not a greater extent about other segregatable items, is that it?

Harry R. Begley:

Well, in fact, at least if they have to show that that item which they are carrying in a lot constitutes a discrimination against interstate commerce.

Felix Frankfurter:

By discrimination, perhaps this is elaborate on what you mean by that would get into the clear.

Harry R. Begley:

I — I will, Your Honor.

Felix Frankfurter:

All right.

Harry R. Begley:

I — I shall, I’d be very happy to.

As I’ve said in the North Carolina case, this Court stated, the Commission made no findings as to what intra — contribution from intrastate traffic would constitute a fair proportion of the railroad’s total income.

Nothing in the later case of King versus United States altered or modified the requirement that there must be a finding that the intrastate rates fail to pay their fair proportionate share.

In the report of the Interstate Commission which is before the Court in the instant case, there is not one word concerning the railroad’s revenues other than suburban revenues, and no finding or subsidiary statement regarding the contribution that the suburban service should make as its fair proportionate share to the railroad’s income.

The report states that the passenger service has a large deficit of approximately $23 million while the freight service has a substantial profit.

The finding is that the suburban service provides revenue of $1,800,000.

So far, as the report itself shows, the interstate passengers could have been transported for nothing while the intrastate suburban passengers contributed a $1,800,000 to the total revenues of the Milwaukee Railroad.

However, we know that there is no such ridiculous situation as that.

While the Interstate Commission’s report does not mention, the 1954 annual report to the Interstate Commerce Commission of the railroad was stipulated to be in the evidence.

And that report shows that the total passenger revenue was $14,906,000 while the passenger deficit was $22,800,000.

Now, we believe that the words discrimination against interstate commerce mean something and mean what they say.

In other words, discrimination is a difference of treatment, an unjust or an unequal distinction.

Some comparative analysis must be drawn to demonstrate the discrimination.

An analysis based upon facts of the record and not a mere conclusory statement that there was discrimination against interstate commerce.

Now, keeping in mind the figures which the report shows, we have first a suburban deficit of $306,000 as found by the Commission against a suburban revenue of $1,800,000 considerable more revenue than deficit, while the total passenger revenue of $14,916,000 is considerably less than the passenger deficit of $22,800,000.

Now, even if you take the so-called fully distributed passenger suburban deficit by adding an extra million dollars to the $130 — to the $306,000 out-of-pocket cost, we still have more revenue than deficit in the intrastate service while we have just the opposite in the interstate service.

If there is discrimination, it would be that the discrimination is against the suburban service and not against the interstate.

You might look at it in another way.

The suburban revenues of $1,800,000 is 12% of the total passenger revenues while the suburban deficit, even on a fully distributed faces of a hundred — of $1,300,000 is only 6% of a passenger deficit.

While we believe that the interstate’s report itself must contain the basic findings as to the intrastate fair proportionate share, actual findings of fact which tend to show a failure to sustain such a proportional burden and in the absence of any such finding, it is not necessary to look at the evidence.

Harry R. Begley:

Yet, there are other facts from the evidence itself which tend to even more dispel any discrimination against interstate commerce.

The annual report of the railroad which was stipulated in the evidence shows that while the passengers carried other than commutation or suburban passenger, fell from $7,500,000 in 1945 to $3 million in 1954.

And the revenue fell from $36 million in 1945 to $13,500,000.

This is other than commutation in 1954.

The commutations are suburban business increase substantially in both total passengers and in revenue.

Nor do we believe, Your Honors, that the freight service has any bearing upon a comparison to determine a discrimination by the passenger suburban service against interstate commerce.

That would be almost like comparing bananas with bicycle.

There is no showing at all what the intrastate freight revenues or expenses amount to or what the intrastate freight contributes as to the total net earnings.

On the basis of the facts stated in the report, the $306,000 suburban deficit amounts to less than a 1% drag on the $37 million net earnings of the freight service.

If the intrastate freight —

Felix Frankfurter:

Does that make a difference, the percentage of the drag, if it is a drag and the rate could be jacked up to a reasonable level?

Harry R. Begley:

The statute, Mr. Justice, says undue and unreasonable discrimination.

We think that there must be something in the meaning of an undue and unreasonable discrimination.

I don’t think that it says suppliantly just a discrimination maybe of a slight drag might contribute some.

Felix Frankfurter:

I don’t think if that meaning would be satisfied if the — the rate which is being charged, though out-of-pocket, is still a reasonable rate, what that means in the rate fixing.

You don’t challenge if this rate considered by fairly is an unreasonable rate, forget for the moment the problem we’re discussing.

Harry R. Begley:

Your Honor, I would —

Felix Frankfurter:

Because you said in effect, here is the deficit, here is the drag as you call it, and the drag is due to the fact or can be — the gap can be build.

The drag can be removed if a rate is imposed which is imperfectly reasonable.

I’m not without knowledge of the difficulty of that clearly.

Harry R. Begley:

Surely.

Felix Frankfurter:

But that’s what you’re talking about, namely, that the rate in and of itself couldn’t be challenged as being unreasonable.

Harry R. Begley:

It (Voice Overlap) —

Felix Frankfurter:

And therefore they say that’s it — we are now going to impose a reasonable rate, a rate which is reasonable for the service rendered which will remove the drag.

That’s the position — Commission’s position, isn’t it?

In effect (Voice Overlap) —

Harry R. Begley:

Well, that’s the one — that’s the Interstate Commission’s position.

In other words, if they say that they have —

Felix Frankfurter:

(Voice Overlap)

Harry R. Begley:

— the right to go into that and we say that that is the — it’s an intrastate matter which the State Commission should be the exclusive one to fix it.

Felix Frankfurter:

Well, that’s — that’s water over the dam since the Wisconsin case in 1921.

Harry R. Begley:

Well, Your Honor, the Wisconsin Commission case put it on the basis of a fair contribution to the railroad revenues and did not, I think, in any way up — upturn the Florida case which came many, many years after and which said that a mere non-compensatory rate does not justify a Section 13 (4) proceeding by the Interstate Commerce Commission.

Felix Frankfurter:

A non-compensatory rate maybe a non-unreasonable rate.

Harry R. Begley:

I beg your pardon?

Felix Frankfurter:

A non-compensatory rate maybe in certain circumstances a not unreasonable rate.

Harry R. Begley:

That is — that — that is correct.

That is correct.

But I think that the statute requires discrimination against interstate commerce not —

Felix Frankfurter:

Which means that the revenue — the interstate, as I understand it, you — I’d like to have your light on this.

Harry R. Begley:

Surely.

Felix Frankfurter:

As I understand it, this is not an easy subject.

Discrimination against interstate commerce mean a depletion of the revenue of a carrier engaged in interstate commerce due to intrastate rate which is not reasonably justified.

Harry R. Begley:

Your Honor, I am afraid that — I cannot agree that that is the interpretation to be given to Section 13 (4).

I think that it stops before then.

I think there has to be more than just a mere non-compensatory rate and the ability to increase that rate.

Felix Frankfurter:

I agree with that, too.

But I said it deplete the interstate revenue of the interstate carrier, the affirmative protection of which was one of the chief representative of the Transportation Act of 1920.

Harry R. Begley:

That’s correct to that extent — to that extent, Your Honor.

William O. Douglas:

(Inaudible)

Harry R. Begley:

That is right.

That is merely the starting point to see if there is discrimination.

The mere fact of depletion is not in our opinion, justify the Interstate Commerce Commission to exercise as — its extraordinary jurisdiction to take over the intrastate fare.

Felix Frankfurter:

Oh sure.

If the interstate carriers, making an 8% profit when the rates are 3% or 4% for — for capital, certainly, then depletion wouldn’t — wouldn’t be enough.

Harry R. Begley:

Well, —

Felix Frankfurter:

If you’ve got — but if you’ve got an income that isn’t within that level and is still between a reasonable level or is not unreasonable then you got a different story.

William O. Douglas:

No.

But the depletion — your point is that depletion doesn’t necessarily has been — anything to do with discrimination.

Harry R. Begley:

That is correct Mr. Justice Douglas.

William O. Douglas:

You’d get a — get a whole depletion on interstate, intrastate?

Harry R. Begley:

That’s right.

William O. Douglas:

Interstate (Inaudible) still don’t have a case of discrimination.

Harry R. Begley:

That’s correct.

You wouldn’t — I — in my opinion you wouldn’t have a case of discrimination.

Felix Frankfurter:

Do you demonstrate that in your brief?

Harry R. Begley:

I beg your pardon?

Yes, Your Honor.

Felix Frankfurter:

Do you demonstrate that in your brief?

Harry R. Begley:

Yes, yes, we do.

I — as I recall we do.

Felix Frankfurter:

Well, it’s not in my understanding.

Harry R. Begley:

The — I might say that in that, this Court has held in the Baltimore & Ohio versus United States case that even an interstate rate which was non-compensatory did not justify upsetting that rate.

Felix Frankfurter:

May not, if you’ll say may not, then I’ll believe you.

Harry R. Begley:

Well, all right.

All right, Your Honor.

I will be — I will stand corrected, may not upset the rate.

Felix Frankfurter:

All right.

I’ll agree then.

Harry R. Begley:

We respectfully submit here, Your Honor there aren’t any reasonable basis of comparison.

There is no showing of discrimination against interstate commerce in the report and order of the Commission.

Certainly, there is no showing of undue or unreasonable discrimination.

Felix Frankfurter:

Well, does that mean — may I pursue this.

Does that mean you must compare, you must have a ratio between the rates that are claimed discriminatory and some other factor of the income of the carrier?

Harry R. Begley:

That’s correct.

Felix Frankfurter:

Is that what you mean?

Harry R. Begley:

I mean that there must be some comparative analysis in order to show a real substantial as — as Chief Justice Taft said in the Wisconsin Commission case, C, B & Q case that there has to be a substantial, a real substantial discrimination against interstate commerce.

Felix Frankfurter:

Well, there you had of course a great problem of fixing up — wiping out the whole — the whole rate structure.

Harry R. Begley:

That — that’s right.

And at that particular time, Your Honor, that case was decided under the 1920, Section 15 (a) National Transportation Policy which required the courts and the Interstate Commission to consider the railroads both interstate and intrastate to have a six and a half — I mean, a five and a half to 6% return which is not in Section 15 (a) in the present statute.

But there isn’t this — there isn’t that — a directive, statutory directive that there has to have a minimum rate of return.

Felix Frankfurter:

You’re not suggesting that to is too bloated an income, too?

Harry R. Begley:

No, Your Honor.

I certainly am not.

Also, in this case, there has not even any disparity of rates.

Normally, even in a discrimination case.

There is a rate disparity between the interstate and the intrastate rate which is attempted to be used as a justification for this revenue discrimination.

Here, however, we find that the intrastate rate set by the interstate commission is higher than the interstate.

The report itself showed that the one-way coach fares intrastate are fixed at 3 cents per mile with a minimum of 25 cents whereas the interstate fares are on the basis of two and a half cents per mile with a 15-cent minimum.

Therefore, in the absence of any, in our opinion, rate disparity are factual discrimination.

The report must be looked at for what it actually is.

A proceeding before the Interstate Commission with a determination by the Commission upon the evidence submitted to them and upon the allocation of cost as they determine that the intrastate suburban service operates at a loss.

That, to us, is the fundamental issue in this case.

Can the Interstate Commerce Commission exercise jurisdiction over an intrastate rate simply because they find it non-compensatory.

In Florida versus United State, 282 U.S., Chief Justice Hughes answered that question specifically in the negative.

He stated, “But to justify the Commission in the alteration of intrastate rates, it was not enough for the Commission to find that the existing intrastate rates on a particular traffic were not enumerative or reasonably compensatory.

The authority to determine the reasonableness per se of intrastate rates lay with the state authorities and not with the Interstate Commerce Commission.

Any departure from that decision would change Section 13 (4) requiring a discrimination against interstate commerce into a straight Section 15 (1) rate proceeding based upon a mere cost of service.

And at the same time would, for all practical purposes, repeal by implication the reservation in Section 1 which preserves the right of the several states to regulate intrastate commerce.

I think at this point, the language of this Court in Palmer versus Massachusetts in 308 U.S. which we didn’t cite in our brief but which was a question of the bankruptcies court power over intra — over the railroad station closing.

But it spoke about the conflict between the State and the federal jurisdiction.

This Court stated, “At best this is subtle business calling for great wariness less — what professes to be mere rendering, becomes creation and attempted interpretation of legislation becomes legislation itself.

Especially if wariness enjoined when the problem of construction implicates one of the recurring faces of our federalism and thus striking a balance between national and state authority in one of the most sensitive areas of government.”

Therefore, a construing legislation, this Court has disfavored inroads by implication on state authority and recently confined restrictions upon the traditional power of states to regulate their local transportation to the plain mandate of Congress.

The plain mandate of Congress in Section 13 (4) is removal of undue discrimination against interstate commerce.

As it was stated in the very first case, in the Wisconsin Commission case, the action of the interstate commerce should be directed to substantial disparity which operates as a real discrimination against an obstruction to interstate commerce.

In the North Carolina case, this Court specifically said neither Section 13 (4) nor any other congressional legislation indicates a purpose to attempt wholly to deprive the states of their primary authority to regulate interstate — intrastate rate.

A scrupulous regard for maintaining the power of the State in this field has caused this Court to require that Interstate Commerce Commission orders giving precedents to federal right must meet a high standard of certainty.

We respectfully submit that the report of the Interstate Commerce Commission in this case does not meet that high degree of certainty which shows that there is a real discrimination against our obstruction to interstate commerce on the record here.

While a state should not be enjoined — should not enjoy the earnings from interstate commerce to support intrastate commerce, the state should only be called upon to furnish compensation for the intrastate business, reasonably proportionate to that for the interstate business.

If proportionate contribution in relation to interstate, our total income is not necessary, then the reasonableness of the rate becomes the ability to pay and the value of the service becomes what the traffic will bear instead of an effort to remove a real discrimination against interstate commerce.

Harry R. Begley:

If the National Transportation Policy under the Interstate Commerce Act is to be that all intrastate rates must be compensatory then Congress should amend that Act.

Legislative usurpation by the Interstate Commerce Commission along that line should not be tolerated or sanctioned by this Court.

The State Commission, I can assure you, are fully aware of the need for an efficient, strong, and adequate transportation system.

Mass transportation which is involved in this suburban fare cases is important to the national interest.

The problems of traffic congestion and the large loss of life in traffic accidents which exist in peacetime and the need to move people to and from work, in wartime with gas rationing require in the public interest the promotion and continuance of adequate mass transportation service at reasonable rates.

Exacting some subsidy, even if we assume that the service operates at a loss from the freight service for mass commuters service is justifiable as requiring the freight service to support interstate passenger service.

The Interstate Commerce Commission is not the only expert body which is capable of exercising an informed judgment.

There is one other point that I would like to touch on, on behalf of the state and that is the lower court held that if different evidence is to be offered or a different basis is to be urged before the Interstate Commission, the State Commission should have been given a chance to fix rates on the same evidence in the same basis.

I see the time — the factual —

Earl Warren:

You have a minute or two more —

Harry R. Begley:

All right, fine.

The factual situation in this place clearly supports this proposition.

As we have pointed out, there is no real discrimination against interstate commerce but merely a claim non-compensatory intrastate rate.

If a railroad can come before the State Commission and put in a case which fails to show any loss and then go to the Interstate Commission and put in a different case on expenditure which may show an actual loss, with the Interstate Commission making a report which gives the State Commission 30 days to adopt the interstate finding or else be hit with a Section 4 — 13 (4) affirmative order then all semblance of state authority over inter — intrastate rates disappear.

The clear reservation of state power over intrastate rates found in Section 1 becomes a nullity and the State Commission is not even a way station in the journey to the Interstate Commerce Commission as the lower court said but is reduced to a mere bulletin board for the posting of the Interstate Commerce Commission order.

Thank you.