•'*, /'•• Z. w - * » «- » » INTERSTATE COMMERCE COMMISSION. Finance Docket No. 1176. MAINTENANCE EXPENSES UNDER SECTION 209. Submitted December 4, 1920. Decided July 12, 1921.) 1. In fixing- the maximum amount to be included in operating expenses for maintenance under the guaranty of section 209 of the transportation act, 1920, the Commission will, in applying the rule set forth in the proviso of paragraph (a) of section 5 of the "standard contract" be¬ tween the United States and the carriers, use as the basic measure the expenditure for maintenance during an average six months of the test period, adjusted to differences in the cost of labor and materials and in the amount and use of the property, in accordance with the provisions of paragraph (c). Held, that differences in the " cost of labor," as those words are used in said paragraph (c), do not include changes in the quality or effectiveness of labor but only changes in wages. 2. In fixing the maximum amount to be included in operating expenses for maintenance under said guaranty, the Commission will compute charges representing depreciations and retirements upon the same bases as those which were used during an average six months of the test period. James C. Davis and La Rue Brown for United States Railroad Administration. Alfred P. Thorn for Association of Railway Executives; and S. T. Bledsoe and J. P. Blair for Adjustment Committee, Association of Railway Executives. George W. Lamb for Louisville & Nashville Railroad Company; H. N. Rodenbaugh for Florida East Coast Railroad Company; H. A. Taylor for Erie Railroad Company; J. E. Vance for East Tennessee & Western Carolina Railroad Company; M. S. Goldbeatt for Virginian Railway Company; and others. Report of the Commission. By the Commission : By section 209 of the transportation act, 1920, carriers accepting its provisions were guaranteed relatively the same railway operating income for the " guaranty period " of six months following the termi¬ nation of federal control, on February 28, 1920, as had been paid by the government as compensation duringthe period of federal opera¬ tion. We were charged with the dutjjBf determining the amounts payable by the United States under tins guaranty and were given certain specific directions governing the method of determination. 00015-21- 1 1 r > 3^ "] 3 - t£L_ «") J ls\ Zy a 2 INTERSTATE COMMERCE COMMISSION REPORTS. This report deals with questions which have arisen respecting one of these specific directions, namely, that which is contained in para¬ graph (3) of subdivision (f) of section 209, reading as follows : There shall not be included in operating expenses, for maintenance of way and structures, or for maintenance of equipment, more than an amount fixed by the Commission. In fixing such amount the Commission shall so far as practicable apply the rule set forth in the proviso in paragraph (a) of section 5 of the " standard contract " between the United States and the carriers (whether or not such contract has been entered into with the carrier whose railway operat¬ ing income is being computed). The " standard contract" is the agreement between the Director General of Railroads and the carriers which defines the duties of the United States with respect to the properties which were taken over. Section 5 of this contract deals with upkeep, and paragraphs (a) and (c) are as follows: (a) During the period of Federal control the Director General shall, annu¬ ally, as nearly as practicable, expend and charge to railway operating expenses, either in payments for labor and, materials or by payments into funds, such sums for the maintenance, repair, renewal, retirement, and depreciation of the property described in paragraph (a) of section 2 hereof as may be requisite in order that such property may be returned to the Company at the end of Federal control in substantially as good repair and in substantially as complete equip¬ ment as it was on January 1,1918: Provided, however, That the annual expendi¬ ture and charges for such purposes during the period of Federal control on such property and the fair distribution thereof over the same, or the payment into funds of an amount equal in the aggregate (subject to the adjustments provided in paragraph (c) and to the provisions of paragraph (e) of this section) to the average annual expenditure and charges for such purposes included under the accounting rules of the Commission in railway operating expenses during the test period, less the cost of fire insurance included therein, shall be taken as a full compliance with the foregoing covenant. (c) In comparing the amounts expended and charged under the provisions of paragraphs (a) and (b) of this section with the amounts expended and charged during the test period, due allowance shall be made for any difference that may exist between the cost of labor and materials and between the amount of property taken over and the average for the test period, and, as to paragraph (a), for any difference in use between that of the test period and during Federal control which in the opinion of the Commission is substantial enough to be con¬ sidered, so that the result shall be, as nearly as practicable, the same relative amount, character, and durability of physical reparation. The guaranty under section 209 is wholly independent of any damages which the carriers may have suffered by reason of the tem¬ porary taking of their property during the period of federal control. For all such damages the government must render just compensation; and by their acceptance of the provisions of section 209 the carriers have in no way surrendered or abated any claims arising out of federal operation. The guaranty, therefore, was not founded upon MAINTENANCE EXPENSES UNDER SECTION 209. £ a legal obligation, j but upon the thought that in fairness it was the duty of the government to protect the income of the carriers, fol¬ lowing the termination of federal control, until such time as higher rates could be made effective under the provisions'of section 15a of the interstate commerce act. \ > The danger of such a guaranty, at a time when expenditures were wholly within the control of the private managements, was that the carriers might utilize the opportunity to profit unduly at the ex¬ pense of the public treasury. This danger was particularly acute in the case of maintenance, and for this reason it was plainly de¬ sirable to set some limit upon the sums which might be allowed for this purpose in computing amounts payable under the guaranty. Paragraph (3) of subdivision (f) of section 209 was the means of accomplishing this end. The " standard contract" was the result of months of negotiation between the Director General and representatives of the carriers generally. The President, in the emergency of the world war, had very suddenly taken over the railroads of the country. By procla¬ mation there had been brought into his possession and control 250,- 000 miles of main track, 2,500,000 freight cars, 66,000 locomotives, 55,000 passenger cars, and all the innumerable accessories of railroad plant and equipment. The owners were some 555 separate com¬ panies. The adjustment by contract of mutual rights and obligations with respect to this vast property was a matter of the greatest com¬ plexity and difficulty. In his statement, accompanying the proclamation, the President said: Immediately upon the reassembling of Congress I shall recommend that these definite guarantees be given: First, of course, that the railway properties will be maintained during the period of Federal control in as good repair and as complete equipment as when taken over by the Government; and, second, that the roads shall receive a net operating income equal in each case to the average net income of the three years preceding June 30, 1917; In his subsequent message to Congress he recommended that the carriers should receive an unqualified guaranty— that their properties will be maintained throughout the period of Federal con¬ trol in as good repair and as complete equipment as at present, and that the several roads will receive under Federal management such compensation as is equitable and just alike to their owners and to the general public. Pursuant to this recommendation Congress passed the federal con¬ trol act. Section 1 authorized the President to agree with and to guarantee to each carrier that it should receive as just compensation during federal control an annual sum " not exceeding a sum equiv^- 4 INTERSTATE COMMERCE COMMISSION REPORTS. lent as nearly as may be to its average annual railway operating in¬ come for the three years ended June 30, 1917." This fixed the maximum compensation, known as the " standard return," which the President might voluntarily agree to pay. It did not preclude him from offering less, or the carriers from seeking more; and provision was made for reference, in default of agreement, to a board of referees and ultimately to the court of claims. Section 1 further provided : Every such agreement shall also contain adequate and appropriate provisions for the maintenance, repair, renewals, and depreciation of the property, for the creation of any reserves or reserve funds found necessary in connection therewith, and for such accounting and adjustments of charges and payments, footb during and at the end of Federal control as may be requisite in ordel* that the property of each carrier may be returned to it in substantially as good repair and in substantially as complete equipment as it was in at the beginning of Federal control, and also that the United States may, by deduction from the just compensations or by other proper means and charges, be reimbursed for the cost of any additions, repairs, renewals, and betterments to such property not justly chargeable to the United States; in making such accounting and ad¬ justments, due consideration shall be given to the amounts expended or re¬ served by each carrier for maintenance, repairs, renewals, and depreciation during the three years ended June thirtieth, nineteen hundred and seventeen, to the condition of the property at the beginning and at the end of Federal con¬ trol and to any other pertinent facts and circumstances. The President is further authorized in such agreement to make all other reasonable provisions, not inconsistent with the provisions of this Act, * * * that he may deem necessary or proper for such Federal control or for the determination of the mutual rights and obligations of the parties to the agree¬ ment arising from or out of such Federal control. The " standard return," fixed as the maximum which might volun¬ tarily be offered, was based on the results from operation in the so- called test period of three years ended June 30, 1917, these being the most prosperous three consecutive years in the history of the carriers. It was, therefore, a liberal standard of compensation for the war use of property at a time when the country was enduring grievous burdens. Indeed, the present chairman of the Senate committee on interstate commerce, Senator Cummins, in a minority report submitted at the time expressed the view that the standard return would in the aggre¬ gate provide a sum " at least $175,000,000 more than fair, just compen¬ sation for the use of the properties, under the circumstances and con¬ ditions which now surround and confront us." The government has since paid to no company compensation less than the standard return, and to some it has paid more. It was also known that the standard return of many companies ex¬ ceeded their real earnings for the test period, because of failure to make adequate provision for maintenance and depreciation. One MAINTENANCE EXPENSES UNDER SECTION 209, 5 alternative in such cases was to pay less than the standard return, and the other, which was adopted, was to accomplish the same purpose by charging against the Director General only the same relative amount of maintenance as during the test period, charging to the carrier any excess necessary for safe and proper operation. That this theory was followed is shown by the following passage from a letter written by this Commission to the President under date of September 3, 1918; and included as Appendix H of our annual report to Congress for the year 1918: It is proper to state that all carriers do not observe the same standards of maintenance and depreciation. These depend somewhat upon varying operating and traffic conditions in different sections, and to a larger extent are affected by variations in the administrative policies of the carriers. There is, however, no fixed standard and aside from the conjectural character of the assumption of a single standard for all carriers, such an equalizing attempt would involve a complete revision of the accounts and reports of each carrier, a task so vast that it is utterly impracticable to attempt it. To meet this difficulty in a prac¬ tical way it is proposed to provide in the contract with carriers an automatic correction in the form of a provision that during federal control the Govern¬ ment shall expend enough on the carrier's property to insure its return at the end of federal control in substantially as good repair and complete equipment as it was on January 1, 1918, with the proviso that an average annual expendi¬ ture for such purposes equal, making due allowance for differences in wages of labor and cost of materials to that made by the carrier itself during the test period shall be deemed a satisfaction of the covenant, and with a further pro¬ vision that expenditures in excess of those so made by the carriers for the test period, but required for the safe and proper operation of the property, assum¬ ing a use similar to the use during the test period, shall be made good by the carrier. [Italics ours.] Stating the matter in another way, if a carrier spent too little for maintenance during the test period, it necessarily follows: (1) That its standard return exceeded its real test-period earnings. (2) That the same relative amount of maintenance during federal control would leave the property in worse condition at the end than at the beginning of such control. Under the standard contract the government in effect guaranteed no more than this same relative amount of maintenance, but its obli¬ gation to make the carrier whole for the use of its property was nevertheless met, in cases such as outlined above, by the payment of the full standard return. The excess of this return over just compen¬ sation was an offset to any inadequacy in maintenance. That this method of handling the matter was anticipated by Congress is shown by the injunction, in the provisions of the federal control act quoted above, that the contract should protect the government against repairs and renewals not justly chargeable to it and take into account the amounts spent for maintenance during the test period. ■6 INTERSTATE COMMERCE COMMISSION REPORTS. _ For present purposes the importance of this is to show that the upkeep provisions of the standard contract did not provide, and were not intended to provide, in and of themselves for the return of the property in all cases in as good condition as when received. . .. Passing to the matters more directly in issue, in computing amounts payable under the guaranty, we must limit the allowance for main¬ tenance by the rule set forth in the proviso of paragraph (a) of sec¬ tion 5 of the standard contract. The Director General interprets this rule in one way and the carriers in another. It becomes our duty to determine what we believe to be the proper interpretation. The contention of the Director General is that this proviso recog¬ nized the impossibility of determining by any physical comparison the amount of maintenance for which the government was liable and provided instead a simple mathematical or accounting method. The property taken over was so vast that any attempt to ascertain and compare by actual inspection its physical condition at the beginning and at the end of federal control was manifestly out of the question. The problem was, therefore, to fix upon some workable rule for meas¬ uring the federal liability in this respect, wThich would make possible a final settlement of accounts without interminable controversy of infinite complexity of detail. Such a rule, the Director General con¬ tends, was furnished by the proviso. The maintenance expenditures during the test period were the basic measure, but it was recognized that because of changes in wages and prices and in the amount and use of the property these expenditures would not serve the purpose fairly unless they were equated in ac¬ cordance with such changes. It is conceded that the contract provides for such equation, and there is little difference of opinion as to the process to be followed, except in the case of labor. So far as labor is concerned, the Director General confines the equation to the change in wages, including the effect upon wages of reduction in hours of service. In the administration of his duties he is acting upon this interpretation and has already made settlements with a number of important carriers upon that basis. Representatives of the carriers, however, contend that the equat¬ ing process ought not to stop with changes in wages but should allow, also, for changes in the quality or effectiveness of labor. Unless this is done, they say that the carriers will be unjustly deprived of very large sums of money. This statement is based on the claim that labor was far less effective in the guaranty period than in the test period, because of changes in working rules and conditions and because, also, of a notable reduction of efficiency arising out of changes in personnel and other causes. MAINTENANCE EXPENSES UNDER SECTION 209. 7 The controversy centers over the meaning of the words " cost of labor," as they are used in paragraph (c) of section 5 of the standard contract. As we understand the opposing views, the Director Gen¬ eral contends that these words mean only the rates of pay per unit for the recognized varieties of railroad labor, while the carriers con¬ tend that the labor must be related to the accomplishment of a given result, and hence that the words include in their meaning quality as well as wages. While the course of preceding negotiations would not ordinarily be of weight in determining the meaning of the written instrument finally agreed upon, both parties have seen fit to refer to these negoti¬ ations in support of their respective contentions. The original draft proposed by the carriers contained the language: " increases in the cost of material, increases in the price of labor, decreases in the efficiency of labot." The underscored words were eliminated at the instance of the Director General, and he points out that if it had been the intent of the parties to allow for the quality or efficiency of labor, reference to this matter would not have been eliminated and the intent would have been expressed in clear and unmistakable language. Similarly the carriers lay stress upon the substitution of the words " cost of labor " for " price of labor " and hold that this is inconsistent with any intent to make "cost" synonymous with "price," or rate of pay. It appears, however, that in one of their later drafts the carriers combined reference to " cost of labor " with a provision requiring consideration to be given to " differences in efficiency of labor," thus indicating that the change from " price " to " cost" was not deemed of controlling importance or to make unnec¬ essary specific reference to the matter of efficiency. We have no doubt that the Director General intended to exclude quality or efficiency of labor from the equating process, and that he believed that this had been done in the instrument finally agreed upon. This, apparently, was our own understanding at the time, for, as has already been noted, our letter of September 3, 1918, to the President contained these words: with the proviso that an average annual expenditure for such purposes, equal, making due allowance for differences in wages of labor and cost of materials, to that made by the carrier itself during the test period shall be deemed a satisfaction of the covenant. It remains to be determined whether or not this purpose was in fact accomplished. As we have already made clear, the guaranty of section 209 is in¬ dependent of any claims arising out of federal control, and in de¬ fining this guaranty Congress was free to limit the allowance for 8 INTERSTATE COMMERCE COMMISSION REPORTS. maintenance in such way as it saw fit. The method selected was reference to the proviso in paragraph (a) of section 5 of the standard contract. By this reference the proviso became a part of section 209, and for present purposes it is, therefore, wholly im¬ material whether or not the contract was consistent with the con¬ stitutional rights of the carriers or with their statutory rights under the federal control act. We are concerned only with the meaning of that language in the contract which has been incorporated, by reference, in the guaranty statute. We say this only to avoid con¬ fusion of issues and not to cast doubt upon the validity of the con¬ tract. It appears that after setting forth in general terms the obligation of the Director General with respect to upkeep, it became necessary to fix some practicable method by which his compliance with this covenant might be measured. The proviso was the method defi¬ nitely agreed upon by the parties. In essence it provides that the annual expenditure, or payment into funds, of sums for mainte¬ nance during federal control equal in the aggregate, after equation in accordance with paragraph (c), to the corresponding sums spent or reserved during the test period " shall he taken as a full compli¬ ance with the foregoing covenant." We are clear that it was the purpose of this proviso to provide a simple and easily applied test which would make it possible to measure compliance with the covenant by resort to the accounts of the carriers and without the prolonged controversy which would follow any method involving physical inspection or opinion evi¬ dence. In other words, it was the purpose to employ what has been called an " accounting" test rather than an " engineering inspec¬ tion" test. Paragraph (c) is incidental to and must be read with the pro¬ viso. It defines the method by which expenditures in the test pe¬ riod should be equated to changed conditions. The carriers empha¬ size the concluding words: " so that the amounts shall be, as nearly as practicable, the same relative amount, character, and durability of physical reparation." But these words are not an independent covenant or obligation, but merely an explanation of the purpose of the equating process and an affirmative declaration by the parties that this process would produce the desired result "as nearly as practicable." The words " cost of labor " in this paragraph do not, we think, open the door to a comparison of the quality or efficiency of labor. To hold otherwise would be contrary to the plain intent of the proviso, for it is impossible by resort to the accounts of carriers to MAINTENANCE EXPENSES UNDER SECTION 209. 9 determine the relative efficiency of labor at various periods, and the introduction of this indefinite and intangible factor would have relegated the " accounting " test to the very limbo of controversy and -conflict of opinion which it was designed to avoid. Moreover, what the carriers have in mind is really not cost of labor but cost of accom¬ plishment, an aggregate made up of the cost of labor multiplied by the quantity necessary for a given task. If it had been the intent to include the factor of quality or effectiveness or efficiency, whatever it may be termed, this would have been done in apt and unmistakable language and not by the strained construction of a phrase susceptible of a simpler interpretation. This view is strongly confirmed by the history of the negotiations. A further significant fact is that the proviso permits the Director General to fulfill his obligation in two ways—either by actual ex¬ penditure upon maintenance or by payment into funds for future use. If the latter method had been selected, obviously any comparison of efficiency of labor would have been out of the question, although a comparison of wages would have been wholly feasible. We therefore find and conclude that the proviso in paragraph (a) of section 5 of the standard contract sets forth a rule for measuring the compliance of the Director General with the covenant of upkeep by reference to the accounts of the carriers, when kept in accordance with our requirements; that the basic measure is the expenditure for maintenance during an average six months of the test period, adjusted to differences in the cost of labor and materials and in the amount and use of the property, in accordance with the provisions of paragraph (c); and that differences in the " cost of labor," as these words are used in paragraph (c), do not include changes in the quality or effectiveness of labor but only changes in wages. This conclusion is reinforced by the character of the claims against the government which have been based upon the carriers' interpreta¬ tion of the upkeep provision. As has been shown; the insistence of the Director General of Railroads, throughout the negotiations lead¬ ing up to the standard contract, that efficiency of labor should be eliminated from consideration sprang from the conviction that any attempt to weigh and appraise so indefinite a factor could only be productive of endless controversy. The soundness of this conviction and the inconclusive character of such attempts have been confirmed by the claims which the carriers have filed. For the most part these claims have been based on a formula de¬ vised by a committee of accounting officers and engineers representing the Association of Railway Executives. More recently another for¬ mula has been devised after conferences between representatives of the carriers and representatives of our bureau of finance. But both 00015—21 2 V 10 INTERSTATE COMMERCE COMMISSION REPORTS. these formulae are based upon the theory that changes in the ratio of maintenance expenditures for labor and for materials, so far as they are not accounted for by differences in prices and wages, neces¬ sarily reflect changes in the quality or effectiveness of labor. This theory presupposes a degree of similarity, in two given periods, be¬ tween the kind of work and the conditions under which it is per¬ formed which no formula can establish and which the very nature of maintenance makes improbable, particularly when the comparison is between an average six months of a three-year period and the six guaranty months of the year 1920. The incongruous results which such a formula will produce may easily be shown. There are also factors affecting the quantity of maintenance labor which have no connection with its quality or efficiency. Such are efficiency or inefficiency of management, changes in standards or methods, weather conditions, the effectiveness of mechanical appli¬ ances which may be utilized, and the extent to which repairs are made under contract in outside shops. The last-named has especial significance in connection with the operations of the guaranty period. It has been suggested that inequity may result if changes in efficiency of labor are not taken into consideration. But this is far from clear. As we have shown, the government paid most liberal compensation for the use of the railroad properties for war purposes. If there was a decrease in labor efficiency, does it follow that the railroads and their owners were in equity entitled to complete im¬ munity from the burdens which fell upon the country because of the war, or that results would have been in any degree more favorable for them during that period if their properties had remained in private hands? And let us consider the claims which have been presented. At the time when the roads were taken over much of their equipment was in poor condition. In a report of the division of operation of the Railroad Administration for the year 1918, the following ap¬ pears : One of the prime causes for the necessity of Government control of rail¬ roads and one of the most serious conditions the Railroad Administration was called orf to correct when assuming control, was the general bad condition of locomotives and cars. An extended period of heavy business, high prices for material, difficulty in obtaining sufficient labor, and the loss of many of their experienced me¬ chanics through the selective draft, followed by an early and unusually severe winter, had resulted in a general defective condition of locomotives and cars which had reached a point where repair tracks were blocked and terminals congested with bad-order cars, and shops and roundhouses were so crowded with locomotives awaiting repairs that proper facilities for maintaining the locomotives actually in service were no longer available. MAINTENANCE EXPENSES UNDER SECTION 209. 11 Added to this congestion due to failure of shippers to unload promptly cars consigned to them, many of which needed repairs before they could be reloaded, had made conditions at important terminals and shop points such that the mechanical departments were unable to cope with them. Turning to the statement of May 1, 1921, made by the present Director General to the committee on appropriations of the House of Representatives, it appears that the claims of the carriers for under- maintenance during federal control which are founded upon alleged ineffectiveness of labor amount to " several hundred millions of dol¬ lars." Similar claims filed with us for the guaranty period must ag¬ gregate some tens of millions of dollars. Since the close of the guar¬ anty period and with the falling off of traffic the carriers generally have cut their maintenance expenditures to the quick. Starting, then, with known deferred maintenance at the beginning of federal control, we are confronted by claims for undermaintenance during the suc¬ ceeding 32 months totaling in the neighborhood of a billion dollars, and by the fact that maintenance in more recent months has been subnormal. From this there might well be deduced a present physical condition of the railroads gravely perilous to both life and property,.. Yet in 1920 these railroads carried relatively more freight and pas-, sengers in the aggregate and more freight on the average in each car than at any time in their history. . . t A further consideration is deserving of mention. In the in-n terpretation of statutes the administration of which is committed to such special tribunals as the executive departments, the Su¬ preme Court of the United States has followed the interpreta¬ tions of the administrative bodies in cases of doubtful meaning, and has deemed a reenactment of any such statute with knowledge of. the administrative interpretation, without corrective change, as a congressional sanction or adoption of that interpretation. Thus, in United States v. Hermanos y C ompania, 209 U. S., 337, which turned, upon a federal revenue law, the court said: We have said that when the meaning of a statute is doubtful great weight should be given to the construction placed upon it by the department charged with its execution. Robertson v. Downing, 127 U. S., 207; United States v. Healey, 160 U. S., 136. And we have decided that the reenactment by Congress/ without change, of a statute, which had previously received long continued executive construction, is an adoption by Congress of such construction. United States v. Falk, 204 U. S., 143, 152. Other authorities are New Haven R. R. v. Interstate Com. Com., 200 U. S., 361, 401-402; United States v. IIcummers, 221 U. S., 220, 228; Jacobs v. Pritchard, 223 U. S., 200, 214. It would seem that the principles stated in the foregoing quota¬ tion enter into this case. Federal control was in the hands of the Director General of Railroads as the agent of the President, and 12 INTERSTATE COMAfERCE COMMISSION REPORTS. the standard contract, authorized by and pursuant to an act of Congress, prescribed the bases for settlements for the period of fed¬ eral control. The subsequent transportation act, 1920, made the ap¬ propriate provisions of the standard contract our guide for the like purpose during the six-months guaranty period which followed federal control. While it is true that the court has spoken of the " long continued " construction of a statute by the administrative tribunal, the under¬ lying principle would seem to be applicable here, since from the outset, as far as the matter has gone, the Director General has con¬ strued the provision here in question as we now construe it. As stated above, preceding the formulation of the contract, and in a letter to the President, later embodied in our annual report to Congress for the year 1918, we stated that, to avoid practically insuperable difficulties in the way of a precise contrast between maintenance for the test and federal control periods, it was the purpose to incorporate in the contract a provision which should make annual expenditures during federal control or payments into funds equal to test-period expenditures equated to " wages of labor and cost of materials " during federal control a satisfaction of the cove¬ nant concerning maintenance. It also appears that this construction of the proviso on the part of the Director General was known to Congress at the time the trans¬ portation act, 1920, was enacted. In the report of the committee on interstate and foreign commerce of the House of Representatives, dated November 10, 1919, and accompanying bill H. R. 10453, which contained the guaranty provisions of section 209 substantially in their present form, a letter from Director General Hines to Senator Town- send, dated October 21,1919, is quoted, which reads in part as follows: The actual obligation of the Railroad Administration is to return the prop¬ erties in the condition in which they were on December 31, 1917, but under the contract the Railroad Administration has the option to claim that it has per¬ formed its obligation, if it can show that it has expended on the property amounts corresponding to those which on the average were expended during the test period, modified so as. to represent changes in wages, prices, and use. As a practical matter, the Railroad Administration is figuring out what the average yearly expenditure for the test period would be for the year 1919 after " equat¬ ing" the changing factors of prices, wages, and use. [Italics ours.] Thus it follows that the subsequent transportation act, 1920, which prescribed the contract provision for our guidance, was enacted with knowledge of that proposed and interpreted basis of settlement, and such construction of the contract may be deemed to have been in the mind of Congress and to have been accepted and adopted in the enactment of the transportation act. This was in every way analogous to the reenactment of a statute with knowledge of an administrative MAINTENANCE EXPENSES UNDER SECTION 209. 13 interpretation of it, and these considerations may well influence us in the determination of the issue now before us. A further question involved in the maintenance adjustment has to do with the treatment of depreciation and retirement accounts in the guaranty period. The carriers contend that the same differences in the cost of labor and materials should be recognized in adj usting these accounts as in the case of the accounts representing applied material. Their argument is in substance that the obligation of the government was to return the property in as good condition as when taken over; that losses in physical life of property, represented by depreciation, should therefore have been paid for at current values; and that the obligation under the guaranty of section 209 in this respect is the same. Under the effective accounting rules and practices charges for de¬ preciation and retirements are based upon the book value—usually the cost—of the property. Depreciation charges are computed at an annual percentage of the book value and retirement charges take up any remaining portion of this value not accounted for by depreciation or salvage. Upon any unit of property, therefore, these charges do not change as market prices rise or fall; but since new property is taken into the accounts at cost when acquired, the aggregate expenditures for depreciation and retirements are to this extent affected by "changes in current price levels. It may be assumed that the bulk of the equip¬ ment in use during the guaranty period was bought prior to the test period and was still in use at the close of the guaranty period. Its replacement cost is yet unknown. ' This is equally true of other prop¬ erty. We find and conclude that it is not proper in determining amounts payable under the guaranty to take into consideration differences in cost of labor and materials which would not have affected the accounts if guaranty-period conditions had been substituted for those of the test period, and neither depreciation nor retirement accounts will be adjusted for such differences. In fixing maximum maintenance allow¬ ances for the guaranty period, charges representing depreciation and retirements will be computed upon the same bases as those which were used during an average six months of the test period. The guaranty of section 209 was accepted by 667 carriers, and to date they have been paid on account amounts totaling well over $400,000,000. A balance still to be paid is in controversy, and this report deals with the two major questions which have been in dis¬ pute and which were argued before the full Commission last Decem¬ ber. Minor questions are appropriately left to be determined as they arise in specific cases. Upon one of these major questions, that which has to do with depreciation and retirements, we are all in agreement. As to the other, there are differences of opinion. 14 INTERSTATE COMMERCE COMMISSION REPORTS. Effort is made to draw a distinction between " inefficiency of labor " as used in what is termed the " offensive sense of slacking or derelic¬ tion of labor " and as used to cover " changed effectiveness " resulting from the " changes in terms and conditions under which labor worked." The contention is that allowance should be made to the carriers for expenditures caused by the inoffensive form of inefficiency but not by the offensive. It is needless to say that this report is not based upon a distinction between offensive and inoffensive inefficiency. One dissenter goes so far as to state that the carriers make no claim for allowances based on inefficiency. The fact is that the records are filled with their statements as to the alleged expense caused by " inefficiency of labor," with nothing whatever to indicate an intent to limit the expression to any particular species. As one illustration of many which might be offered, the following excerpt from a brief filed in behalf of the Kansas City Southern is in point: It is not difficult to understand that the D"rector General might be unwilling to have the expression " decreases in the efficiency of labor " incorporated in the contract. To have done so might have been construed as an affront to labor, at a time when strenuous efforts were being made to establish and promote friendly and sympathetic relations. One can easily imagine the storm of pro¬ test which might have followed. But at about the same time that " efficiency of labor " went out of the con¬ tract we find that " cost of labor " came into it in substitution for " price of labor." Were the two incidents related? Was it the intention to employ the more innocuous expression " cost of labour " (which would include the inefficiency of labor as well as its efficiency), and in this manner rid the contract of lan¬ guage which might be regarded as offensive to the great army of railroad em¬ ployees whose services were being performed for the Government? * * * * * * ♦ Is it not a fair inference, therefore, that the efficiency or inefficiency of labor as such wTas taken out of the contract and included in the more inconspicuous and less offensive expression " cost of labor "t [Italics ours.] The carriers have always claimed and still claim that various factors, apart from changes in wages or prices, have increased the cost of maintenance work. They have insisted that " inefficiency of labor " was one of the chief of these. In presenting their claims or statements of amounts due under the guaranty, however, for the most part they do not undertake a segregation so that we may know what portion is ascribed to any one factor, but ask for a lump sum based upon a formula, revised from time to time, assumed to cover all ele¬ ments of increased cost whatever they may be. In the application of this formula items taken from the accounts are used; but that fact furnishes no proof of its soundness, which is, of course, dependent upon the basic premise. To the fallacy of this premise we have already alluded. In the proposed Baltimore & Ohio report, which is mentioned in one of the dissenting opinions, the MAINTENANCE EXPENSES UNDER SECTION 209. 15 possible unreliability of the formula was in effect conceded by the statement that it would be used " except in such cases in which it may appear that such use will result in substantial injustice to the carrier or to the United States." The carriers' adherence to formula has been largely guided by results, and they have yet to accept any without reservations. The same dissenter states that under the formula plan of settle¬ ment which he indorses, " where the amounts expended and charged as shown on the books of the carrier, are less than the maximum amount so fixed the carrier will, notwithstanding this fact, be limited to the amounts shown on its boohs of account under our accounting rules" He omits to mention that the plan contemplates permitting the carrier to accrue and include in the reckoning, at any time prior to settlement, reserves representing alleged undermaintenance dur¬ ing the guaranty period. In other words, it permits payments in excess of " actual expenditures" during the guaranty period, and this was in fact the case in the proposed Baltimore & Ohio report. Stress is laid upon changes in working conditions. During the guaranty period the Pennsylvania Railroad contracted for the repair of certain locomotives at the Baldwin Locomotive Works. It is sig¬ nificant that in our investigation of this matter the carrier's own wit¬ ness testified, as stated in the brief filed in its behalf, that the " cost of repairing a locomotive at the railroad's shops as compared with the cost in the Baldwin's shops might be fairly put at a ratio of $9,453 to $22,434." This notwithstanding the changes in working conditions. The effect of the " national agreements " is a highly con¬ troversial matter and as yet but one side has been presented to the Senate investigating committee. If, however, any of these changes in working conditions in effect caused an increase in wTages and the amount of the increase can be shown by satisfactory evidence, there is nothing in this report which would preclude an allowance ac¬ cordingly. Meyer, Commissioner, concurring: While I concur fully in the report of the majority, there are certain individual or personal considerations that should be made known to all those who are interested in the questions at issue. On January 3, 1918, immediately after federal control had been instituted, Director General McAdoo requested me to give considera¬ tion to statistical and accounting questions connected with the transition from private operation to federal control. My reply was made in the form of a memorandum to the Director General and was dated January 12, 1918. The most of that memorandum is not relevant here. However, part IV, entitled " The Standard of Maintenance," is directly in point, as indicating the point of view 16 INTERSTATE COMMERCE COMMISSION REPORTS. from which I approached some of the then pending problems. This memorandum was transmitted before there had been any conferences, of which I have knowledge, relating to the contract. In part IV, referred to, I used the following language: Under paragraph III I have discussed matters relating primarily to the amount or quantity of property taken over. I now wish to refer to the condi¬ tion or quality of that property. * * * There is available * * * a prac¬ ticable test which I believe will be found reasonably satisfactory * * *. I refer to the standard of maintenance observed by carriers as reflected in and determined by their respective operating expense accounts. The amount of money expended and charged under the heading of repairs, renewals, mainte¬ nance and depreciation, for instance, through a series of years, afford a reliable index of the condition of the property upon which such expenditures have been incurred, giving due consideration to variation in prices. Then follows a proposed paragraph to be inserted in section 1 of H. R. 8172, the then pending federal control bill, to give effect to the ideas previously expressed. The para¬ graph proposed by me reads in part as follows: " During the period of Federal control each carrier shall charge to operating expenses for depreciation and maintenance on its several classes of property, sums not exceeding the sums determined by the respective average rates charged by it on such classes of property during the three years ended June 30, 1917. * * * and provided further that, if on account of shortage of labor or materials a carrier cannot reasonably expend for maintenance the sums thus determined, giving due con¬ sideration to changes in the prices of materials and wages of labor, such sums shall nevertheless be charged to operating expenses and held for the purposes specified until such maintenance work can reasonably be undertaken." I then pointed out to the Director General that if this provision should be enacted into law it would insure to each carrier the same standard of maintenance and condition of its property at the ex¬ piration of federal control, as it had set for itself at the beginning or during the test period. I also have before me the original draft of the contract dated March 22,1918, circulated by Mr. Alfred P. Thorn. I will not recite nor discuss the marginal notes, inserts, and eliminations shown upon this copy as a result of discussions in the earliest conferences. They all point in one direction, namely, that nothing was done in the joint conferences on the contract in contravention of the views expressed regarding maintenance in my memorandum to the Director General. My connection with the contract was very slight. I was a member of the contract committee of the Commission which was formed at the request of the Director General and which participated in the joint conferences between the representatives of the Director Gen¬ eral and the representatives of the carriers. Obviously I had nothing to do directly with the action of the legally contracting parties. It must be plain to anyone who reads what has preceded that the views expressed in the majority report are the only views regarding the interpretation of the contract in which I could concur without MAINTENANCE EXPENSES UNDER SECTION 209. 17 doing violence to the facts within my personal experience connected with the contract. I realize that there may be room for doubt regarding the meaning of the contract as made by the contracting parties. I know of no basis for doubt regarding the understanding of the parties. As an individual member of the Commission, I can only insist that the contract means what the majority report says it means, and I can. not acquiesce in a contrary view until the Supreme Court of the United States has directed me to do so., Of the four then members of the Commission who were members of the contract committee, three unqualifiedly approve the position of the majority. It is also my understanding that the Director General has been maintaining the same position that is taken in the majority report. In other words, of the three groups represented in the protracted joint confer¬ ences which preceded the formulation of the final draft of the stand¬ ard contract, two agree with the views expressed in the majority report. Lewis, Commissioner, concurring: I am unable to find in the proclamation of the President, the lawT or the standard contract, ground for acceptance of claims for in¬ efficiency of labor built up on abstract theories of relative productive capacity of labor in the guaranty period, as compared with a six: months' average in the test period, on opinion testimony or fanciful formulae based on work not done or that will not be done. I there¬ fore can not accept so-called inefficiency of labor claims set up on. such nebulous foundations. However, my interpretation of the law and contract does not accord with a finding that consideration of " cost of labor " as herein involved, shall be limited to " only changes in wages." In the case of maintenance actually done, properly entered under prescribed accounting, and for which there are established bases for com¬ parisons, such a finding seems to foreclose consideration of the specific effect of changed working conditions and of rules and agree¬ ments imposed, generally by the government or with government sanction, between the test and guaranty periods. I concur in the finding on the insertion of the following paragraph in the majority report: If, however, any of these changes in working conditions in effect caused an increase in wngcs, and the amount of the increase can be shown by testimony or satisfactory evidence, there is nothing in the majority report which would preclude an allowance accordingly. While the paragraph does not fully cover the issue, my*concurrence is based on the expectation that, in consideration of specific cases, (>0015—21 3 18 INTERSTATE COMMERCE COMMISSION REPORTS. this stipulation will impart such elasticity as will result in fair and satisfactory settlements. It is desirable that the railroads be instructed to eliminate fanciful " inefficiency of labor " claims from their presentations. The require¬ ments of the law and contract, however, appear to me to require con¬ sideration of specific cases, rather than adoption of formulae to be dogmatically applied. Such a course is necessary to prompt and just settlement. Daniels, Commissioner, dissenting: The holding in the majority report that in allowing for maintenance during the guaranty period differences in the cost of labor between the guaranty period and the average six months of the test period shall include only changes in wages irrespective of the labor cost of work done is, in my judgment, erroneous and inequitable. The essential provisions of section 209, which afford the basis upon which the amounts payable to the several carriers are to be ascer¬ tained, are as follows: Sec. 209 (c). The United States hereby guarantees— (1) With respect to any carrier with which a contract * * * has been made fixing the amount of just compensation under the Federal Contrdl Act, that the railway operating income of such carrier for the guaranty period as a whole shall not be less than one-half the amount named in such contract as annual compensation * * *; (2) With respect to any carrier entitled to just compensation under the Fed¬ eral Control Act, with which such a contract has not been made, that the rail¬ way operating income of such carrier for the guaranty period as a whole shall not be less than one-half of the annual amount estimated by the President as just compensation for such carrier under the Federal Control Act, including the increases in such compensation provided for in section 4 of the Federal Control Act. If any such carrier does not accept the President's estimate respecting its just compensation, and if in proceedings under section 3 of the Federal Control Act it is determined that a larger or smaller annual amount is due as just compensation, the guaranty under this paragraph shall be increased or decreased accordingly. Paragraph (d) provides for the payment by any carrier into the Treasury of the United States of any amount of railway operating income earned during the guaranty period in excess of the income guaranteed. Paragraph (f) gives directions for computing railway operating income, or any deficit therein, for the guaranty period, for the purposes of section 209, and among other directions are the fol¬ lowing: (f) (3) There shall not be included in operating expenses, for maintenance of way and structures, or for maintenance of equipment, more than an amount fixed by the Commission. In fixing such amount the Commission shall so far as practicable apply the rules set forth in the proviso in paragraph (a) of section 5 of the "standard contract" between the United States and the MAINTENANCE EXPENSES UNDER SECTION 209. 19 carriers (whether or not such contract has been entered into with the carrier whose railway operating income is being computed) ; (f) (5) The Commission shall require the elimination and restatement of the operating expenses and revenues (other than for maintenance of way and structures, or maintenance or equipment) for the guaranty period, to the extent necessary to correct and exclude any disproportionate or unreasonable charge to such expenses or revenues for such period, or any charge to such expenses or revenues for such period which under a proper system of account¬ ing is attributable to another period. (g) The Commission shall, as soon as practicable after the expiration of the guaranty period, ascertain and certify to the Secretary of the Treasury the several amounts necessary to make good the foregoing guaranty to each carrier. The Secretary of the Treasury is hereby authorized and directed thereupon to draw warrants in favor of each skch carrier upon the Treasury of the United States, for the amount shown in such certificate as necessary to make good such guaranty. An amount sufficient to pay such warrants is hereby appropriated out of any money in the Treasury not otherwise ap¬ propriated. / Paragraph (a) of section 5 of the standard contract referred to in subdivision (3) of paragraph (f) of section 209 quoted above, containing the proviso setting forth the rule which is to be applied so far as practicable, is as follows: Sec. 5 (a). During the period of Federal control the Director General shall, annually, as nearly as practicable expend and charge to railway operating expenses, either in payments for labor and materials or by payments into funds, such sum for the maintenance, repair, renewal, retirement and deprecia¬ tion of the property described in paragraph (a) of section 2 hereof as may be requisite in order that such property may be returned to the company at the end of Federal control in substantially as good repair and in substantially as complete equipment as it was on January 1, 1918: Provided, however, That the annual expenditure and charges for such purposes during the period of Federal control on such property and the fair distribution thereof over the same, or the payment into funds of an amount equal in the aggregate (subject to the adjustments provided in paragraph (e) and to the provisions of paragraph (e) of this section) to the average annual expenditure and charges, for such pur¬ poses included under the accounting rules of the Commission in railway operat¬ ing expenses during the test period, less the cost of fire insurance included therein, shall be taken as a full compliance with the foregoing covenant. Paragraph (c) referred to in the proviso in the foregoing para¬ graph (a) is as follows: (c) In comparing the amounts expended and charged under the provisions of paragraphs (a) and (b) of this section with the amounts expended and charged during the test period, due allowances shall be made for any differences that may exist between the cost of labor and materials and between the amount of property taken over and the average for the test period, and, as to para¬ graph (a), for any difference in use between that of the test period and during Federal control which in the opinion of the Commission is substantial enough to be considered, so that the result shall be, as nearly as practicable, the same relative amount, character and durability of physical reparation. Among the questions which have arisen in the endeavor to adjust the amounts due the several carriers under the guaranty provisions 20 INTERSTATE COMMERCE COMMISSION REPORTS. above quoted, the one which has caused the most controversy is as to the amount which the carriers, in arriving at their operating income, were entitled to expend or charge for maintenance of way and struc¬ tures and maintenance of equipment during the guaranty period. Similar controversies are pending between the Director General and the carriers, as to the government's obligation to maintain the railroads during the period of federal control. Unless the carriers and the Director General agree upon the settlement of their contro¬ versies over the subject of maintenance, it may be necessary for the Commission to decide those controversies, by reason of the provisions of paragraph (h) of section 5 of the standard contract, which is as follows: If any question shall arise, either during or at the end of Federal control, as to whether the covenants or provisions in this section contained are being or have been observed, the matter in dispute shall, on the application of either party, be referred to the Commission, which, after hearing, shall make such find¬ ings and order as justice and right may require, which shall be final as to the questions submitted and shall be binding on and observed by both parties hereto, except that either party may take any question of law to the courts, if he or it so desires. In any event, pursuant to paragraph (3) of subdivision (f) of sec¬ tion 209 of the transportation act, the Commission is required to com¬ pute the railway operating income or deficit of each carrier for the guaranty period, and in such computation, so far as practicable, to