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H E A R I N G S

BEFORE

THE MER CHA NT MA RINE AN D FI SH ER IE S 

SUB COM MITTEE OF THE 

COMMITTEE ON

INTERS TAT E AND FOR EIG N COMMERCE 

UNITE D STATES SENATE

EIGHTY-SEVENTH CONGEESS 

FIR ST SESSION 

ON

THE PROBLEMS OF THE NONCONTIGUOUS AREAS SHIPP ING 

INDUSTRY AND TO THE ECONOMIC IMPACT ON TH E OFFSHORE AREAS SERVED

MARCH 6, 7, 13, AND 14, 1961

Printed for the use of the Committee on Interstate and Fore ign Commerce

71709

U.S. GOV ERNMEN T PR INTING OFFIC E

WA SHING TON : 1962
•* i .

COM MIT TEE ON INTE RS TA TE AND FO RE IGN COMMERCE

WARREN Q. MAGNUSON, Washington, Chairman

JOHN O. PASTORE, Rhode Island 

A. S. MIK E MONRONEY, Oklahoma 

GEORGE A. SMATHERS, Florida 

STROM THURMOND, South Carolina 

FRA NK J. LAUSCHE, Ohio 

RALPH YARBOROUGH, Texas 

CLAIR ENGL E, California 

E. L. BAR TLETT, Alaska 

VANCE HARTK E, Indiana 

GALE W. McGEE, Wyoming

Edward Jarrett, Chief Clerk

Jeremiah J. Kenney, Jr., Assistant Chief Clerk

Harold I. Baynton, Chief Counsel

John M. McElroy, Assistant Chief Counsel

M. W. Coding, Staff Counsel

Gerald B. Grindstein, Staff Counsel

ANDREW F. SCHOEPPEL, Kansas 

JOHN MARSHALL BUTLER, Maryland 

NORRIS COTTON, New Hampshire 

CLIFFORD P. CASE, New Jersey 

THRUSTON B. MORTON, Kentucky 

HUGH SCOTT, Pennsylvania

Subcommittee on Merchant Marin e and Fish er ies

WARREN G. MAGNUSON, Washington, Chairman

JOH N O. PASTORE, Rhode Island 

E. L. BAR TLETT, Alaska 

CLAIR ENGLE, California

JOHN MARSHALL BUT LER , Maryland 

THRUSTON B. MORTON, Kentucky 

HUGH SCOTT, Pennsylvania

II
C O N T E N T S

Statement of—

Edwards, Hon. A. M., Secretary of Guam, Agana, Guam--------------- 60

Fern6s-Isern, Dr. A., Resident Commissioner of Puerto Rico, House

Office Building, Washington, D.C ____________________________ 171

Fitch, Edwin M., Assistant to the General Manager, the Alaska

Railroad, Dep artm ent of the Interior, Washington, D.C _________ 70

Fong, Hon. Hiram L., U.S. Senator from Hawaii, Senate Office

Building, Washington, D.C---------------------------------------------------- 3

Gruening, Hon. Ernest, U.S. Senator from Alaska, Senate Office

Building, Washington, D.C__________________________________ 19

Kashiwa, Hon. Shiro, atto rney general of the State of Hawaii, Honolulu, Hawaii; accompanied by William Rogers, special deputy

attorney general, Washington, D.C----------------------------------------- 33

Kendall, Lane C., commercial shipping adviser to MSTS, room 1004, 

Building T-8, 3800 Newark Street NW., Washington, D.C.; 

accompanied by Capt. Charles B. Beck, USN, Director, Water 

Traffic Division, MSTA, and Joseph Daley, Office of the Assistant 198

Secretary of Defense, Installatio ns and Logistics________________

Long, Hon. Oren E., U.S. Senator for Hawaii, Senate Office Building,

Washington, D.C__________________________________________ 7

Lvkes, J. M., Jr., senior vice president, Lykes Bros. Steamship Co.,

1741 DeSales S treet NW., Washington, D.C___________________ 293

McC arthy, Adm. F. M., president, A. H. Bull Steamship Co., National

Press Building, Washington, D.C _____________________________ 279

Munoz-Marfn, Hon. Luis, Governor of Puerto Rico, San Juan,

P.R .; statem ent presented by Teodoro Moscoso, Economic

Development Administrator, San Jua n, P.R ___________________ 175

Oshiro, Hon. Robert, State represe ntative, Hawaii Legislature,

Honolulu, Hawaii__________________________________________ 54

Riley, Burke, executive assistan t to Gov. William A. Egan, Juneau,

Alaska___________________________________________________ 189

Ross, Leo C., secretary -treasurer, Pacific Far East Line, Inc., 918

16th Street NW., Washington 6, D.C_________________________ 265

Sevier, Randolph, president, Matson Navigatio n Co., 1001 Connecticut Avenue NW., Washington, D.C_______________________ 207

Skinner, D. E., president, Alaska Steam ship Co., 1026 17th Street

NW., Washington 6, D.C___________________________________ 256

Staken, Hon. Thomas E., chairm an, Federal Maritime Board, General

Accounting Office Building, Washington, D.C __________________ 9-24

Letters and other material:

Clark, Henry W., vice president, Alaska Steamship Co., 1026 17th

Stre et NW., Washington 6, D.C _____________________________ 321

Halstead, G. C., vice president and director, Alcoa Steam ship Co.,

Inc., 17 Batter y Place, New York, N.Y _______________________ 295

Hutchinson, Hon. Everett, Chairman, Inter sta te Commerce Commission, Washington, D.C___________________________________ 297

Kashiwa, Hon. Shiro, attorney of the Sta te of Hawaii, Honolulu,

Hawaii___________________________________________________ 319

Pessel, A. J., vice president, Matson Navigation Co., 1001 Connecticut Avenue NW., Washington 6, D.C _____________________ 324

Appendix A:

Puerto Rico’s problem wiht the U.S. maritime laws_______________ 324

ni

DOMESTIC OFFSHORE SHIPPING

MONDAY, MARCH 6, 1961

U.S. Senate,

Committee on I nterstate and F oreign Commerce, 

Subcommittee on Merchant Marine and Fish eri es,

Washing ton, D.C.

The subcommittee was called to order, pursuan t to notice, at 10 a.m. 

in room 5110, New Senate Office Building, Hon. E. L. Bartlett 

presiding.

Senator B artlett. The subcommittee will be in order.

Before proceeding with the hearings, I should like, for the record, 

to outline briefly the nature and scope of the subcommittee’s interest.

The present hearing is an extension of the inquiry commenced in 

the last session on problems of the domestic shipping industry. Ea rlier hearings were directed to the problems of the coastwise and intercoastal segments of the domestic shippin g industry. Attention now 

will be directed to the problems of the noncontiguous shipping industry and to the economic impact on the offshore areas served.

Shipping to the major noncontiguous areas of the Nation operates 

under the same basic statutes as those which govern coastwise and 

intercoastal transportation, except for economic regulation, and is 

confronted by the same cost problems and operating conditions. Rate 

levels of transportation between the continental and noncontiguous 

areas have advanced in a continuing and accelerating round of general increases in postwar years. In some instances, new general increases have been filed before final decisions on previous rate increases. 

At present separate rate cases affecting the three major noncontiguous 

areas of Alaska, Hawaii, and Puerto Rico are in process of determination.

A continuing conflict has developed between the crucial need for 

reasonable transportation rates to tne noncontiguous areas necessary 

to their survival, and the need of carriers for increased revenue to 

meet mounting costs of operating, cargo handling, and vessel replacement. It has become quite apparent that, almost irrespective of the 

merits of decisions in specific rate cases, the piecemeal approach of 

present regulatory proceedings offers no long-range solution of the 

fundamental problems.

It is the purpose of the present hearings to take, we hope, a “new’ 

look” at not only the specific problems but at the basic policies and 

programs of Government as they affect the present shipping services 

to each of these important domestic areas. It is the subcommittee’s 

intention at this time to hear from all who are concerned and affected 

by present conditions seeking specific information, ideas, or proposals 

which m ight be relevant in developing appropriate legislation.
2 DO MES TI C OFF SH ORE SH IP P IN G

I think I speak for my fellow committee members when I say these 

problems must be viewed as national problems—and the ir resolutions 

must, therefore, be reflections of a national policy. It is our hope 

that each witness will, without the restraints of tradition, speak on 

both the specific issues and policies that will best serve the long-range 

national interest.

The record of these hearings will remain open for supplementary 

statements and material for a period of 6 wTeeks following the last 

day upon which testimony is received.

I am going to ask unanimous consent, which will be promptly 

granted, to follow the statement which I have just made with an 

associated statement bearing more specifically upon the general subject, but I will not consume time now by reading it.

(The statement follows:)

Program for Study of Ship pin g P roblems of th e Domestic Noncontiguous

Areas

I. NEED FOR THE STUDY

Recent rate increases requested by American-flag ocean carriers for service 

to U.S. noncontiguous are as and States—princ ipally Alaska, Hawaii, Puerto 

Rico, and Guam—point up a critical conflict: th at between the need, by the 

car riers on one hand, for high er freigh t revenue to meet mounting operating 

and vessel replacement cos ts; and on the other hand, the requ irement that these 

noncontiguous areas have low transportatio n rat es in order to survive and 

develop their economies. At the present time the following facts are component 

parts of a stateme nt of the problem ; the noncontiguous are as are mainly 

dependent on ocean transp ortation for expo rt and import movements: most of 

this traffic is between the U.S. mainland and these offshore are as: under the 

term s of the cabotage laws trade with the main land is restric ted to American 

vessels; and, rate regulation in such trade is und er the jurisdiction of the Federal M aritime Board.

Assuming th at the prim ary national intere st is best served by fostering anti 

expanding trade between the main land and U.S. ter ritories and noncontiguous 

States, the problem becomes how to provide reasonab le freigh t costs th at will 

not penalize or undermine the local economies. Experien ce with case by case 

regulatory disposition of these rate matters amply justified the conclusion that 

no long-range resolution is to be gained on a piecemeal basis. In each proceeding, the agency has been confronted with the choice of penalizing the carrier and 

its future ability to serve or penalizing the industry and consumers in the area 

served. This adversary atmosphere, heightened by the frequency of rate controversies, has not lent itse lf to judgments th at go beyond the narrow confines 

of the record.

What is needed, and wh at the Merchant Marine Subcommittee must concern 

itself with, is a policy on this matt er th at best serves the national interest.

n . PURPOSE AND SCOPE OF TH E STUDY

To determine (or rede term ine) such a policy will require initially a definition 

of wh at the national intere st is—what commercial and defense goals are sought 

and wh at prestige and foreign policy objectives must be fulfilled by this trade. 

Conversely, a delineation must be made of the values not to be protected.

Next, an exam ination in depth must be made of the problems facing both the 

are as served and the ocean c arr ier s serving these areas. Such examination cannot be limited solely to the present high cost—low rate conflict, but beyond to 

anticipate, for example, the popular industrial ambitions of each noncontiguous 

are a and the rates and service frequency needed to fulfill the goals.

Finally, altern ative policy solutions would be proposed and the ir effects considered. In each case the alternativ es will be tested for the ir consistency or 

inconsistency w ith the definition of national policy.

Failure to deal affirmatively with this problem, not at a very critical point, 

invites a policy of drift.
DOMESTIC OFFSHORE SHIPPING 3

II I. SUGGESTED FORM OF HE AR ING S

A. Stateme nt by represe ntatives of the local government of Hawaii, Alaska, 

Guam, and Pue rto Rico: These statem ents should encompass all aspe cts of the 

problem as seen by the offshore areas. At this session technical data should 

be submitted by witnesses backing up the main speaker.

B. Testimony from the car riers involved in the tra des between the main land 

United States and the noncontiguous areas. This general ma terial also to be 

accompanied by technical data.

C. Afte r this statem ent and joining of the problem, the various Government 

agencies and Dep artm ents would be invited to give the ir views of how the 

national intere st is involved, and how best it is to be served.

D. Presen tation and consideration of altern ative methods for resolving the 

transp ortation pro blem: Several of the previous witnesses may want to return 

to express their views on the soundness of these alternatives.

It is to be noted that the committee does not anticipate th at the differing 

fac tual problem s of each offshore area will necessarily be susceptible to the 

same solutions.

Se na tor Bartlett. Now the witness lis t before me reveals th at the 

able and dis tin gu ish ed Se na tor fro m Ha wa ii, Se na tor Hiram Fon g, 

will testify first.

STA TEM ENT OF HON. HIRA M L. FONG, U.S. SENATOR FROM TH E 

STATE OF HAW AII

Se na tor B artlett. We are glad to hav e you.

Se na tor F ong. Senat or, I am very ha pp y to be here th is mo rning. 

I deeply ap preciate th e op po rtu ni ty to ap pe ar before you an d express 

my views on a m atter o f vital i mp ortan ce to th e State of H aw aii .

Haw aii is the only isla nd St at e and is com pletely dependent upon 

sh ipping fo r her sustenance. Th e att ainm en t of sta teh ood and the 

increased commercial activ ity resu lti ng therefrom has served to emphasize th is dependence.

In his recent testim ony befor e the Federal Maritime Bo ard , I)r . 

Jame s II . Sho emaker, vice presi dent, Ba nk of Haw aii, sta ted th at 

more th an tw o-thi rds of the food consumed in Ha wa ii is shipp ed by 

sur fac e tran sp or tatio n from the ma inl and, and more th an 90 percent 

of consum er goods oth er than food , which include clo thing, aut om obiles, and bu ild ing ma terials, are sim ila rly imported. By the same 

token, the chief a gricultural products of H aw aii , sug ar an d pin eap ple , 

must reach ma inl and ma rke ts by ship . In 1958, 2,699.287 tons of 

consum er and ind us tri al goods w ere s hip ped to H aw aii f rom th e m ainland , while 1.472,744 tons o f H aw aiian products sim ila rly mov ed to the 

ma inland . Service is pro vid ed betw een the main lan d an d all deepwater po rts lo cated in the isl and s b y f reighter.

For ma nv years, Matson Na viga tio n Co. ha s been the chief ca rrier 

of frei gh t between the west coast of the Un ite d States an d Ha waii, 

and has likew ise carried pas sen ger s to and fro m Ha waii. Matson 

has served Haw aii efficiently an d well.

However, since 1946, because of rising costs, th is com pan y has 

placed nine general rate increas es into effect. Two of these resulted 

in heari ng s and in each instan ce the Fe de ral Mari tim e Bo ard fou nd 

th at the increases were ju st an d reasonable.

Pe nd ing now before the Bo ard is a fu rther ap plicati on by Matson 

for a 121^-pe rcen t incre ase. Th is increase is being opposed by the 

State of Haw aii and by local in du stria l intere sts. I t appe ars th at 

a po int may hav e been rea che d where the frei gh t costs not only
4 DOMESTIC OFFSHORE SHI PPI NG

have become a burden upon consumers and business interests in Hawaii 

and a hindrance to economic development of the new State, but tha t 

costs incurred by this shipping company are such tha t it may be uneconomic for it to continue to do business without further rate increases.

I do not take any position, Mr. Chairman, with respect to the reasonableness of these rate increases. The decision on what a f air rate 

of re turn should be to the owners of a shipping company is one which 

requires meticulous study by accountants and economists. I am 

tremendously concerned, however, by the increasingly heavy burden 

placed upon consumers in Hawaii and upon local industries which 

export their products to the mainland.

The pineapple industry offers a good example of the dependence 

of Hawaii’s business interests on shipping as well as the burden of 

rising freight costs on a local industry. This is a $125 million industry which employes between 10,000 and 20,000 persons, depending 

on the season. Today, this industry finds itself in a highly competitive market, and its position as one of the basic income producers in 

Hawaii is jeopardized. A leader in the in dustry has stated t hat competitive conditions have prevented the industry from passing on the 

most recent freight increases to its customers and tha t the industry 

is in no position to absorb any further freight increases.

The Federal cabotage laws (46 U.S.C. 289, 46 U.S.C. 883) prevent 

the carriage of goods and passengers between Hawaii and the mainland on other than American-flag vessels. This legislation has been 

justified on the ground that it encourages the growth and development 

of an American merchant marine which can be made immediately 

available in time of war. I am in full accord with this principle.

However, because of these laws, offshore areas such as Hawaii 

cannot take advantage of the lower rates provided by foreign vessels 

for shipment of freight. They are compelled to pay substantially 

more each year for their essential ocean freight services because of 

the national policy requiring them to use U.S.-flag vessels than they 

would be if they were free to use the most economical services regardless of nationality.

Furthermore, this inequitable burden may well increase in the near 

future. The vessels presently serving Hawaii were constructed for 

the most p art diiring World War II for the United States and sold 

at favorable prices afte r the war to the private carriers. These 

vessels are now almost all approaching their 20th anniversary in 

service. They will have to be replaced eventually. If they are replaced at present U.S. ship construction costs, which are almost twice 

as much as foreign costs, these costs will have to be absorbed by the 

people of Hawaii through even higher freight rates.

I believe th at maintenance of a segment of a strong U.S. merchant 

marine should not devolve chiefly upon these areas. The problem is 

national and should be solved on a national basis.

It is my hope that the committee will make a thorough study of 

these probems and tha t it will recommend solutions which will be in 

the best interest of the people and business interests of the offshore 

areas, recognizing at the same time tha t the ocean carriers serving 

these areas must make a reasonable profit if they are to continue in 

business. With particu lar respect to Hawaii, orderly development of 

its economy in the years to come will depend upon the regularity of
DOMESTIC OFFSHORE SHIPPING 0

ocean transportation and the reasonableness of shipping rates. Fin ally, national policy with respect to maintenance of the U.S. merchant 

marine must be reexamined and new determinations made.

Thank you, Mr. Chairman.

Senator Bartlett. Thank you, Senator Fong. I believe you mentioned tha t more than two-thirds of the food consumed in Hawaii 

reaches there by ocean shipping.

Senator Fong. Ninety percent, Mr. Chairman. Ninety percent of 

all consumer goods, other than food.

Senator Bartlett. How about food ?

Senator Fong. Two-thirds of the food consumed in Hawaii is imported.

Senator B artlett. Do you foresee the possibility that a t some time 

in the futu re a greater percentage of food will be produced in the 

islands for local consumption or do you believe the land will always 

be more valuable for sugar and pineapple ?

Senator Fong. I believe the land is always more valuable in the 

type of agricultural pursuits we are now pursuing. We have a very 

difficult time in Hawaii in getting land for the truck farmer. For 

example, on the Island of Oahu, where almost 80 percent of our population is situated, on 10 percent of the land, of the State we almost 

have no land for agricultural pursuits for small farmers, and it is 

a very, very difficult thing to find land for these truck farmers to produce the things we need. More and more I think we will be dependent on surface transporta tion to take care of our requirements.

Senator Bartlett. While your land is most productive, the aggregate acreage available is rather limited in terms of Nebraska or the 

Dakotas, for example.

Senator Fong. Yes, very much so. Much of our land is mountainous, and I believe we only have around 10 to 15 percent class A land 

tha t could be used for good agricultural purposes. Much of our land 

is class B land and mountainous terrain.

Senator Bartlett. Now, pursuing that line of inquiry for a moment 

more, how does the island of Hawaii, for example, or any of the other 

islands receive its foodstuff? Does it all come to Honolulu and then 

transshipped, or is there direct service from the mainland?

Senator Fong. We have direct service to the various islands, and 

we also have transshipping from Oahu. I do not know what the p ercentages are, but there is quite a lot of transshipment.

Senator Bartlett. Transshipment is by barge or how ?

Senator Fong. By barge mostly.

Senator Bartlett. My recollection is that Hawaii is the only one 

of the three offshore areas—Alaska, Hawaii, and Puerto Rico—tha t 

now enjoys passenger steamship service. How many carriers serve 

Hawaii for passenger carriage ?

Senator Fong. I believe there are two passenger carriers, Matson 

and American President Line.

Senator Bartlett. Are the passenger ships of Matson new, medium 

aged, or becoming older ?

Senator Fong. I think they are more than 20 years old and within 

a few years they will have to be replaced.

Senator Bartlett. If they are replaced, if new ships are built for 

tha t trade, under existing circumstances, would it not require a very 

considerable elevation of passenger rates?
6 DOMESTIC OFFSHORE SHIPPING

Senator Fong. From my understanding, a freight-carrying ship 

costs around $10 million. These ships were acquired by the Matson 

Navigation, I believe, for the sum of approximately a million dollars. 

Now, there is a difference of $9 million there not taken into account 

in computing costs. If you were to make a 6-percent return, there is 

$54,000 righ t there, to be considered in just interest alone on the $1 

million without talking about the cost of amortization or depreciation, 

say for a period of 20 years. It must necessarily follow these ships 

are to be replaced by ships that would exceed in cost the sum now 

being shown on the books, and that the company expects a return of 

probably 0 or at least 4 percent on their costs. Under those circumstances the rates will materially rise. Passenger ships, 1 understand, 

cost at least $25 million each.

Senator Bartlett. There is keen competition at this time, is there 

not, between the passenger steamships and the airlines?

Senator F ong. I am not in a position to answer that question, except 

that there are not too many trips that have been made by the Matson 

Navigation with the two ships they have. I think they have the 

Matxonia and the Lurline. There is a Matson man here who will be 

able to give that testimony.

There are only two ships that make the Hawaiian run, and there is 

some talk one of the ships will be taken off the run in June. I don’t 

know whether that is definite or not.

The Matson Navigation people have representatives here to testify 

and I presume they will be able to answer that question. But most 

of our passengers come by airlines rathe r than by ships.

Senator Bartlett. Is that on account, would you think—of course, 

this is all speculative—of a desire to save time, and be able to spend 

more time in the islands-----

Senator Fong. It is cheaper by airplane because it only takes 4i/2

or 5 hours to get to Hawaii now—whereas by ship it takes around 

4l£ days, and with all the food and services tha t must go with 4 ^ 

days on a ship, the costs are much higher if you go by ship than if 

you go by airplane. Most of our passengers come to Hawaii by airplane.

Senator Bartlett. From some later witness we will seek to elicit 

information about the comparative rate schedules, in p art to point up 

the possibility tha t you have suggested—tha t if the carrier serving 

Hawaii has to get new ships on run, with the high costs, the trade 

actually may no longer be competitive.

Senator F ong. Yes.

Senator Bartlett. Thank you very much, Senator Fong, for a most 

useful statement.

Senator F ong. Thank you, Mr. Chairman.

Senator Bartlett. Our next witness will be the former Governor 

of the then Territory of Hawaii, one-time superintendent of instruction of the territory, and now the Senator from the new State, Senator Oren Long.

We welcome you, Senator, because we know tha t you always are 

eminently qualified to speak on this subject.
DOMESTIC OFFSHORE SHIPPING 7

STATEMENT OF HON. OREN E. LONG, TJ.S. SENATOR FROM THE 

STATE OF HA WA II

Senator Long. Thank you, Mr. Chairman.

It may seem obvious tha t the questions to be considered in these 

hearings are important to Hawaii. One need only to consult a map 

or a globe to see tha t our island State is totally dependent upon sea 

transportation as far as all heavy goods are concerned. Yet while 

transport by rail, motor, and inland waterway has been the subject 

of many books, extensive inquiries, and considerable legislation, transportation to and from the so-called noncontiguous areas seems largely 

to have been overlooked. It is even possible tha t some persons underestimate the interest of the people of Hawaii in a solution of the 

problems—an illusion that I hope to correct.

I wish to make it unmistakably clear that Hawaii has a deep and 

permanent interest in sea transportation. Indeed, I know of no 

domestic issue with a greater impact on my State than tha t of how 

best to provide the transporta tion without which we will suffer irr eparable damage. Further , we recognize a community of interest with 

the people of Alaska, Puerto Rico, and Guam in this regard. For 

these reasons, we welcome these hearings and stand ready to assist 

the committee in any way we can.

Some basic facts of island life are involved in this matter. Among 

these facts are the following: One, we are dependent on sea trans portation for our very existence. Two, further integration into the national 

economy can be fostered only throu gh sea transp ortation; and, three, 

this one essential service is beset by economic problems created by 

established national maritime policies.

We are caught up in a cost spiral th at is exacting an ever-increasing 

toll on our economy and our people. We have no choice but to pay the 

bill—it is unthinkable tha t we should be without the service of water 

carriers—but the bill is getting higher and higher and is approaching 

the point where severe damage may be done to our economy and our 

standard of living.

For we are talking here not about trivia or luxuries. We are talking about the cost of importing two-thirds of our food and nine-tenths 

of our other consumer goods. We are talking about the cost of exporting over h alf of the production of our economy. And we are also 

talking about the impact of these costs on a community that already 

has one of the highest costs of living in the Nation and where production costs are already at a level where foreign commodities are challenging ours in the American market.

I am not one to grieve about the economic integration tha t these 

figures disclose. Rather, I feel tha t the facts are evidence of a desirable division of labor between us and our sister States. But the general freig ht rate rose 89 percent in 8i/2

 years prio r to 1959 and I fear 

that, if rates continue on the escalator, we may yet be raising our own 

rice and letting California’s versatile farmers try their hands at pineapple culture.

The problem cannot be laid fully at the doors of the carriers or the 

Federal Maritime Board. True, we have had our differences with 

both, but the root cause lies much deeper. It lies in two fundamental 

elements of maritime law; one, restricton of offshore trade to Ameri-
8 DOMESTIC OFFSHORE SHIPPING

can-flag carriers, and, two, the absence of subsidy for carriers in this 

protected trade.

These two factors together force our own small community to bear 

the full burden of the costly American maritime industry as it affects 

the Hawaiian trade. In the absence of subsidy, shipping revenues must 

be high enough to meet American wage standards, American shipbuilding costs, and the other American-level expenditures associated 

with operating an American-flag service. So revenues must rise, and 

every business, every person in Hawaii feels the impact.

What can we do to improve the situation? The easiest solution 

would be to open our trad e to foreign flags and let rates find their 

economic level through competition. An unsubsidized lifting of the 

sabotage restriction would, however, run counter to national policy 

and would surely p ut our carriers out of business. This would be an 

impossible approach.

If, however, carriers to offshore areas were treated the same as 

carriers in foreign commerce, a favorable rate structure would be possible without causing disaster to American-flag shipping. Again 

rates would seek their economic level through competition, but carriers would be sustained through subsidy and the national policy of 

keeping American bottoms on the sea would be reinforced. Consideration of this alternative is clearly merited.

A third possibility would be to award subsidies to our carriers while 

retaining the cabotage restriction. This would remove some of the 

present inequities, but would raise major questions in ratemaking and 

in distributing total costs between artificially constructed rates and 

subsidies for which standards would be difficult to find.

I feel th at I cannot make a definite recommendation today. I, too, 

am looking forward to what these hearings may reveal. But I would 

be remiss if I did not urge the need for taking some action to alleviate 

the present situation. Some change in our maritime laws must be 

made to accommodate the peculiar problems of noncontiguous areas 

within the framework of national maritime policy. I am confident 

that sound legislation will be developed as a result of these hearings. 

I hope so, because the stakes could hardly be greater for Hawaii.

Senator Bartlett. An excellent statement, Senator Long, which 

will be truly helpful to the committee.

I was, perhaps, particularly impressed by the th ird point you mentioned, on page 1 of your statement, where you said—and I quote:

This one es sential service is beset by economic problems created by established 

nat ion al m aritime policies.

Your view*, then, is, I take it, that what is occurring in Hawaii and 

these other offshore areas is occurring inadvertently, so far as intention is concerned, by reason of maritime policies adopted by this 

Government long since, which were not tailored to the situations to 

which you now address yourself ?

Senator Long. Tha t is correct.

Senator Bartlett. And your contention is th at the time has come 

for the National Government to take a separate look a t the offshore 

situation?

Senator Long. Yes. I think i t should be c arefully studied, evaluated, and these new conditions tha t have developed be met. It is going to become increasingly more difficult for Hawaii as our population
DOMESTIC OFFSHORE SHIPPING 9

increases. Of course, it will be the same with your State of Alaska.

Senator Bartlett. The committee, in the 86th Congress, held many 

hearings relating to the intra- and inter-coastal shipping trades and 

learned, among other things, that service along our coasts has virtually disappeared. That, of course, is highly unfortunate so far as 

our need to have a fleet is concerned, and is unfortunate in other ways.

But in those cases, as we all know, there are other modes of transportation which are available. Th at will never be true, so far as 

we can now predict.

Senator Long. That is true.

Senator Bartlett. You are going to have to pay the bill under 

present laws and practices, whatever th at bill may be, no matter how 

much economic and other suffering may take place in the State if this 

continues—if this cost spiral continues.

Thank you, Senator Long, very much, indeed.

Senator Long. Thank you, Mr. Chairman.

Senator Bartlett. The next witness is Chairman Stakem, Federal 

Maritime Board, and Maritime Administrator.

We greet you in both those capacities, Mr. Chairman.

STATEMENT OE THOMAS E. STAKEM, CHAIRMAN, FEDERAL 

MARITIME BOARD, MARITIME ADMINISTRATOR

Mr. Stakem. Thank you, Senator.

Senator Bartlett. You may proceed.

Mr. Stakem. Thank you, Senator Bartle tt.

The Federal Maritime Board welcomes the opportunity to participate in this study and in the consideration of the problem of shipping 

in the domestic offshore trades for the Board has Deen much concerned 

over the fact tha t in recent years increasing expenses have forced the 

carriers in these trades to make rate increases which, although justified from the standpoint of the ship operator, nevertheless have an 

impact on the residents of the domestic offshore areas which they can 

ill afford to withstand. The proper solution of these problems makes 

it necessary to give attention to all pertinent facets.

There can be no doubt tha t for years to come water transportation 

will be the principal means for the interchange of goods between 

Alaska, Hawaii, Puerto Rico, Guam, and the 48 contiguous States of 

our United States. It is equally clear that the proper development of 

these offshore components of our Nation will rest in a large measure 

on the water transportation services which form the essential connecting link. The problem them becomes basically one of, Can these services be provided at a cost which will not inhibit the proper growth of 

those areas ?

Virtually all rate increases made in these trades in recent years have 

been subjected to formal investigation by the Board. Some of these 

are still in the progress of hearing and as to these no comment is 

made—the outcome cannot be foreseen. However, with respect to the 

completed investigations, the evidence has shown that the increases 

were justified and necessary if the carriers were to maintain their 

services.

It is readily apparent tha t since the ocean transportation costs are 

not resulting in unreasonable profits to the water carriers, any reduc-
10 DOMESTIC OFFSHORE SHIPPING

tion in their rates must be compensated for through reductions in 

their expenses of operations or offsetting income from other sources 

or the services will not be continued. The question to be resolved by 

the Congress and the President is whether the national interest dictates as a result of these hearings that the Federal Government provide the necessary funds for such compensation. If i t is determined 

tha t subsidization of these services is necessary—as to which I am not 

prepared to make any recommendation at this time—there are a number of possible methods by which varying degrees of reduction in the 

cost of ocean transportation might be accomplished. They ar e:

(1) Construction-differential subsidy on new vessels: This might 

offer some help in the replacement of present fleets. However, it must 

be borne in mind that present fleets represent purchases of war-built 

ships at which might be termed bargain prices. Replacement costs, 

even with construction subsidy, would exceed prices so that the rate 

base would not be reduced. By itself, this alternative, while it might 

make possible the ultimate and necessary replacement of ships, would 

not lead to a reduction in rates unless a new type ship of far greater 

efficiency could be designed and built with such aid.

A variation of the construction subsidy method might be to build 

replacement ships for the Government’s account, sell them to the 

operators at minimum downpaymetns of 5 to 25 percent and payments on a low interest rate mortgage to be made only if earnings 

exceeded a given profit percentage. This could be termed an “earnings debenture plan.”

(2) Operating-differential subsidy: In this method, the absence of 

foreign competition in the noncontiguous trades, because of the existing cabotage laws, would make it necessary to provide an entirely 

new basis for establishing the amount of the subsidy payable and be a 

drastic departure from the principle envisioned by this form of 

subsidy.

(3) Trade promotion subsidy: In place of an operating differential 

subsidy, consideration could be given to a direct subsidy to assure 

service at rates which would be set or affirmatively authorized by the 

Government. This would be in the nature of a contract between a 

qualified shipping line and the Government of the United States 

which would call for the operation of specific service with stated frequencies at freight rates which would be specified by the Government 

on the basis of the economic needs of the areas to be served regardless 

of whether the rates were compensatory. The subsidy which would 

be paid would be designed to offset losses incurred from such an operation.

Several countries already gra nt aids of this nature to shipping companies to induce them to supply needed services to areas which could 

not support shipping lines without some such aid. Canada, for example, has paid subsidies to coastal and inland water carriers to provide services to outlying communities where operating expenses are 

greater than probable revenues. Other countries have done this in 

order to provide services to small outlying islands and communities 

where profitable commercial operation is virtually impossible.

In the light of the need for economic development in our noncontiguous States and possessions and their dependence on ocean t ransportation, the question of establishing a direct subsidy in the nature 

of a trade promotion or cost of living subsidy to reduce costs would
DOMESTIC OFFSHORE SHIPPING 11

warrant serious consideration only if a valid case can be made th at 

such development is being stifled by high ocean freigh t rates.

(4) Government ope rations: As an alternative method to providing 

direct subsidy to the carriers in the offshore domestic trade, Government operation of the services would be possible.

Under such Government operation, presumably through general 

agency arrangements, freight rates could be set at such a level as was 

deemed consistent with furthering the development of the States and 

territories. Excess of expenses over revenues would be borne by the 

Government.

Such an operation is open to criticism on the grounds tha t it is 

contrary to the philosophy of fostering private shipping enterprise. 

Further , there is the practical problem of the manner in which the 

existing private operators could be integrated into the Government 

operation, even assuming that such operators are provided priority in 

the appointment of general agents.

(5) Government charter: The Government could furnish ships to 

the operator a t a low minimum charter hire, graduated upward on the 

basis of profits, if earned.

In such a plan, the minimum charter hire expense would be used 

in determining the fair and reasonable carrier rates and any increased profits would be recouped by the Government on a slidingscale basis.

All of the foregoing suggestions would require legislation and substantial appropriations. In addition to these suggestions, lower rates 

might be obtained through repeal of the cabotage laws. We 

strongly urge th at this proposal does not merit serious consideration. 

Such action would be potentially destructive of U.S.-flag operations 

in these trades with the resulting loss of availability of American 

vessels and employment of American seamen without assurance of 

any substantial reduction in freight rates. If trade was dependent 

in whole or in part on foreign-flag tonnage, any world disturbance 

could lead to withdrawal of foreign ships with the resulting difficulty 

of replacement by U.S.-flag services. As to Alaska, due to the high 

cost of loading and discharging cargo, the seasonal factors, and the 

character of this trade, there is no assurance tha t foreign-flag carriers 

would provide the necessary service to develop the area. They would 

presumably—as is usual—concentrate on the port or ports through 

which the greatest amount of cargo flowed and on the port or ports 

which they could serve most easily in combination with their calls 

at foreign ports, such as Japan, China, et cetera, with the result tha t 

some ports would not receive sufficient service.

Moreover, the repeal of these laws would involve a complete departure from the traditional policy since the early days of American 

independence of reserving these trades to U.S. ships. Available traffic 

would be divided with the result that our domestic fleet would be 

further reduced in number, if not completely eliminated. The continuance of any American operators in the trades would require the 

payment of construction and operating subsidies. In two world wars 

the domestic fleet has been an important nucleus which was in immediate operating condition and available to serve military and naval 

needs. The necessity for their continued existence seems beyond 

doubt.
12 DOMESTIC OFFSHORE SHIPPING

There has been some thought that if a certificate of convenience 

and necessity was required before a water carrier could engage in 

domestic offshore trades, the result would be that cargo would not be 

drained away from the regular carriers in the trade by irregular 

or casual operators and that this would result in a better utilization of 

the space offered by the regular certificated carriers. With better 

filled ships the revenues would be improved without substantial increase in operating expenses and this, it is suggested, would enable 

the certificated carriers to reduce their rates.

This is highly problematical. The effect of a certificate, of course, 

is to protect existing operators from additional competition. The 

elimination or reduction of competition rarely leads to better rates or 

services. For example, i t seems doubtful tha t container operations 

would have developed as far as they have today in the domestic offshore trades without the spur of competition.

A suggestion tha t does not require Federal aid, yet offers a hope 

for decreases in cost of ocean transportation service to the offshore 

areas, is the development of more efficient service. The handling of 

unitized freight-containerized cargo via integrated ship, motor, and 

rail services and possibly air, with through routes, under one bill of 

lading, throu gh door-to-door service with minimum handling, stowing, packing, and repacking offers an opportunity for less costly 

transportation. A coordinated joint board of the several regulatory 

agencies specializing in the various forms of transportation would 

be a means to accomplish this.

In conclusion, the suggested methods by which rates in the noncontiguous domestic trades might be reduced have been offered in 

the light of the assumption indicated in the program for study of 

this problem tha t a reduction in ocean freig ht rates by the carriers 

is required in order for the areas involved to survive and develop 

their economies, even though the ocean freight rates were reduced 

below a compensatory level. As you will note, the ready solutions 

having the earliest and most effective results would call for substantial expenditures by the Federal Government.

It is our understanding tha t the program for the study of this problem contemplates an exhaustive review to make certain t hat any action 

which is undertaken will accomplish its purpose. In this connection, 

we would like to point out tha t there are many factors which go to 

make up the cost of goods to the ultimate consumer. Among these 

would be the original procurement cost, insurance and financing 

charges, the cost of moving the commodity to sea-board, sometimes 

receipt and storage at seaboard and the cost of moving to shipside, 

ocean transp ortation, receipt and storage costs at port of unloading, 

onward transportation to point of final destination, as well as wholesale and retail markup. Many of these cost factors are unregulated.

It is assumed tha t before any conclusion is reached on the various 

alternative ways of lowering freight rates, an effort will be made to 

settle definitively the relationship of the ocean carr ier’s charges to 

the ultimate consumer costs. It would be u nfortunate if drastic legislative changes were to be made in our shipping laws or a new program of Government subsidization were to be undertaken only to find 

that the effect of such changes did not provide the desired result because the ocean transportation factor was not as significant a factor
DOMESTIC OFFSHORE SHIPPING 13

in consumer costs as anticipated or because the savings represented 

by reduced ocean transporta tion costs have been partia lly or wholly 

absorbed by the unregulated factors.

It may be that this study will indicate the essentiality of an ad justment in freight rates in order to assure the economic stability of the 

offshore States and possessions but without a thorough study, there 

will always be an area of doubt and of danger tha t the steps taken 

will not achieve their objective.

We will be most happy to assist the committee in any way that we 

can.

I might add, Senator, tha t th is statement, although i t doesn’t show 

here, it has been cleared by the Department of Commerce and the 

Bureau of the Budget.

Senator Bartlett. Thank you, Mr. Chairman.

Your words of caution tha t we should not move perhaps too far 

too soon will assuredly be heeded by the committee in respect to the 

hearings which are now underway, because actually our whole purpose is to determine where we are, why, where we may be headed, 

how our destination will appear to us once we are th ere; and to arrive 

at any answers, of course, we must be fortified with all the data which 

may possibly be accumulated.

Mr. Stakem. As you know, Senator, the Federal Maritime Board 

has asked its Deputy General Counsel to be liaison with this committee in this study, so th at anything tha t we can do to assist we will 

certainly do.

Senator Babtlett. I am very glad to hear that, because I was just 

about to make that request of you.

I think that some of the information which you have properly suggested here, the committee not only should desire, but require. Pe rhaps it can come from the Federal Maritime Board more appropriately and more speedily than from anywhere else.

Now, in your statement, Chairman Stakem, I find these words on 

page 2, after you had said that if it is discovered th at subsidization 

is necessary, there are a number of alternate approaches which might 

be taken, and you said you are not prepared to make any recommendations at this time.

May I ask this: Do you foresee th at the Federal Maritime Board 

will, at a later date during these hearings or before the committee 

makes final determination, present to the committee specific recommendations ?

Mr. Stakem. Yes. I was, before leaving the stand, going to sug-

§

est t hat we will follow the hearings very closely, and as you come 

own toward the end of the hearings we will be very happy to come 

back and give you the benefit of what we can.

Senator Bartlett. Excellent.

On tha t same page, namely, page 2, you were referring to the alternate of applying a construction differential subsidy for this trade. 

Actually, would you not agree with me that if that, and tha t only, 

were done, the effect might be for even higher rates?

Mr. Stakem. Yes; that is a fact, Senator.

When you compare the base for the ratemaking purposes of the 

present ships against what the new ships would be even with construc71709—62------ 2
14 DOMESTIC OFFSHORE SHIPPING

tion subsidy, you would still have a higher rate base, which would not 

result in reduction.

Senator Bartlett. It would give the trades fine new ships, but 

wouldn’t go to the heart of the problem that agitates us now : bringing down the cost of living in those places by reason of lower trans ­

portation rates.

Mr. S takem. I agree.

Senator Bartlett. On page 3 of your statement you refer to a 

variation of the construction subsidy method, whereby replacement 

ships might be built for the Government’s account.

May 1 ask you if this has ever been tried in this country, or elsewhere ?

Mr. Stakem. Yes. We have built ships for Government account 

and later sold them to the industry. I think a classic example that 

first comes to mind is the Mariner ships tha t were built by the Maritime Administration at the time of Korea. Admiral Cochrane was 

Chairman at th at time, and 35 Mariners were constructed for Government account. Several of them were later turned over to the Navy, 

but the great majority of them were eventually sold to the shipping 

industry, and all of those are now plying the Pacific Ocean trades.

Senator Bartlett. How has th at program worked, satisfactorily or 

otherwise ?

Mr. Stakem. It has worked satisfactorily. It requires, initially, 

the outlay of the complete cost of the vessel by the Government and 

then a mortgage backed with a small downpayment by the operator. 

In the last years, the emphasis has been put the other way, for the 

Government to seek its appropriations for ship construction only on 

the basis of our participation in the costs with an insurance guarantee 

on the part of the Government for private financing of the shipowner’s costs.

Senator Bartlett. May I ask this, in tha t connection: again, if 

this program were adopted, this particular one, it would be a means 

to get ships to the given trades; but it wouldn’t necessarily operate 

to reduce rates, would it-----

Mr. Stakem. No-----

Senator Bartlett. Or to keep them at existing levels ?

Mr. Stakem. No; unless, as I pointed out in the statement, the 

mortgage payments were tied to the earnings of the ship, and to be 

collected only after a certain percentage on investment of the company—what we call the earnings debenture plan here.

Senator Bartlett. This might or might not, then, seek the objective 

which is the main concern of the committee at this time?

Mr. Stakem. Yes. It is something to study. Whether it would be 

a cure-all I am not prepared to say.

Senator Bartlett. Going to your second presentation, operating 

differential subsidy, Mr. Chairman, why do we have a shipping subsidy program?

Mr. Stakem. Because without it the American flag would disappear 

from the seas in foreign trade.

Senator Bartlett. If Matson serves, as I believe it does, Australia 

and other areas in tha t p art of the globe, and a freighter sets out for 

Australia and has, we’ll say, 500 tons for discharge at Honolulu, how, 

in an accounting manner, do you approach this problem ?
DOMESTIC OFFSHORE SHIPPING 15

Mr. Stakem. A ship tha t is operated with operating subsidy, th at 

does engage in some leg of the domestic trade, must repay to the 

Government a certain cost of the ship—I am talking about a construction subsidy ship now—must pay to the Government a certain 

amount representing the percentage of the domestic cargo to the total 

cargo. I would be very happy to put into the record at this time a complete 

statement as to how this formula works out.

Senator Bartlett. Very well. We appreciate that.1

How about the operating subsidy? Granted that the bulk of the 

cargo on this particular ship is going to Australia, but some fraction 

of it is discharged at Honolulu ?

Mr. Stakem. There is no recouping of operating subsidy on the 

basis of the percentage of the utilization for domestic as against 

the foreign.

Senator Bartlett. The company would not, then, be paid for this 

500 tons landed in Hawaii ?

Mr. Stakem. Yes. The ship is operating in the domestic trade, or 

in the foreign trade, and it would be paid a subsidy based upon its 

competition in that trade, and there would be no reduction in operating subsidy by reason of a small portion of the ship being used in 

the domestic trade, if it had certain rights given to it by the Board.

Senator Bartlett. You don’t even inquire into the percentage of 

traffice th at might be diverted to domestic areas along the route, because of an understanding that it is always fractional ?

Mr. Stakem. I am subject to correction, Senator. My General 

Counsel tells me tha t there is a recoupment on both construction and 

operating subsidy for that portion th at goes in the domestic trade.

Senator Bartlett. The accounting procedures and techniques must 

be rather involved in respect to both categories.

Mr. Stakem. They are. And, as I promised, I would put a statement in the record as to how that works out in actual practice.

Senator Bartlett'. Thank you.

Well, pursuing tha t same line of inquiry a bit furth er, the subsidy, 

as you stated, is provided so th at we will have a fleet in being in time 

of national need.

Mr. Stakem. Yes.

Senator Bartlett. And you say tha t if a subsidy, an operating dif ­

ferential subsidy, were to be applied to the ships serving offshore 

areas, this would represent a drastiCj and I quote: “a drastic departure 

from the principle envisioned by this subsidy.” Inso far as I am concerned, that is a factual statement. But could it not be said, Mr. Chairman, tha t with practically all 

ships having disappeared from the coastal and intercoastal trades, 

and with many ships having disappeared from the offshore areas, substitution having been made by barges, we fail in whatever measure 

of need there may be to keep in being an operating fleet th at might be 

just as important, surely, as those American carriers engaged in foreign trades ?

Mr. Stakem. I agree with that, and I think our statement is pre dicated upon the fact tha t we think the operations in both the domes1

 See supplemental information from Mr. Stakem, p. 76.
16 DOMESTIC OFFSHORE SHIPPING

tic, coastal, and intercoastal and offshore trades are important, and 

we should take all means to keep these people in business.

Senator Bartlett. The subsidies on our foreign trade weren’t put 

into effect to help the carriers; they were put into effect to make contributions, ship contributions to the national defense, when and if 

the need arose; right.

Mr. Stakem. Actually, the subsidy is based upon two principles— 

one, that these ships are necessary for national defense purposes, and 

also tha t they are necessary for the economic well-being of the 

Nation.

I would say there are two bedrocks written into the policy statement of the 1936 act on shipping—that we need them from an economic point of view, as well as national defense.

Senator Bartlett. Yes.

On page 4 of your statement you referred to subsidization by Canada to coastal and inland water carriers to provide services to outlying communities. We have never done anything of tha t nature, 

have we, in our maritime history ?

Mr. Stakem. No, we have not.

Senator Bartlett. Do you know, from what you may have heard, read, or otherwise learned, how this program works out so far as 

Canada is concerned ?

Mr. Stakem. I do not have the exact details with me, but it may 

be tha t we could expand the statement, perhaps, more on what we 

know. I would be very happ y to take a look at the records, and if 

we can supplement it in that area we will.2

Senator Bartlett. There may be nothing useful and comparable 

tha t would come out of such a survey, but if anything does, we would 

appreciate having it.

Mr. Stakem. Yes.

Senator Bartlett. On tha t same page, page 4, you suggested that 

the proposition of grantin g a direct subsidy ought to hinge on the 

validity of the case tha t could be made tha t economic development 

of these several areas is, or will be, hindered by high ocean freight 

rates. Later on, I believe, you pointed out tha t many other factors 

must enter in here.

In your own view, if you care to express it—and perhaps you are 

not in a position now to do so—do you believe that high ocean freight 

rates have a material bearing upon the economic prosperity of Puerto 

Rico, Alaska, and Hawaii?

Mr. Stakem. The question is broad, Senator, and I don’t want to 

answer it specifically. I do think tha t the freig ht rates do have a 

bearing. Now the extent of the bearing is something tha t perhaps 

will be developed in these hearings.

Senator Bartlett. Well, going back to the subsidy, we all recall 

that for a time after the war the Government-owned ships were chartered below the regular c harter rates to serve Alaska, and this was a 

form of subsidy, was it not ?

Mr. Stakem. Yes; on a very low charter rate, as I remember.

Senator Bartlett. And I remember it had a very useful and even 

necessary effect at that time—necessary so f ar as the area was concerned.

2

 See sup ple me nta l Informa tion from Mr. Stakem, p. 77.
DOMESTIC OFFSHORE SHIPPING 17

You said on page 5 that another alternative would be furnishing by 

the Government of ships at minimum charter hire rates, which ties 

in with tha t charter arrangement for Alaska some years ago.

May I ask you, Mr. Stakem, if this were deemed approp riate, does 

the Government have suitable ships for these several trades in readiness, or comparative readiness ?

Mr. Stakem. I have in mind, Senator, tha t in connection with the 

total replacement program, tha t we do receive into the reserve fleets 

a number of vessels tha t may be useful for this purpose.

In tha t connection, it might be of interest to the committee if we 

gave you a breakdown of what ships there are in the reserve fleets 

tha t might possibly be used for that, the better classes of ships—I am 

not thinking of the Liberties—the better classes of ships.3

Senator Bartlett. Thank you.

What authority does the Board now possess, if any, to charter such 

ships at attractively low rates, or attractive rates ?

Mr. Stakem. I believe tha t we do not have authority to charter 

without a public hearing to show the nonavailability of vessels suitable—suitable vessels in private hands.

Senator Bartlett. The authority is in law, though? You have the 

authority by existing law, after hearings ?

Mr. Stakem. Yes, after certain hearings.

Senator Bartlett. Now, Mr. Chairman, you urged most seriously 

and most strongly against any amendment of the cabotage laws which 

would permit foreign ships to provide these services. I don’t know 

what the general view is regarding this, but I know for my pa rt I 

agree with you thoroughly. It isn’t going to be done, and if it were 

done, as you suggest here the effects might be adverse rather than 

beneficial, because there are situations beyond the control of the Federal Maritime Board.

Mr. Stakem. That is right.

Senator Bartlett. I have an illustration of this.

We all know th at the ocean distance between Alaska and Jap an is 

much less than between Jap an and any other American ports. But 

recently a conference agreement was entered into, solidified, certified, 

and is effective, whereby freight rates from Jap an to Alaska, and 

vice versa, are much higher th an from Japan to other American ports. 

So the mere entrance of foreign shipping into these areas certainly 

is not guaranteed to solve any problems, and, as you appropriately 

stated, they might go only to those ports furnishing the greatest volume 

of traffic.

Mr. Stakem. Yes.

I had in mind, Senator, Alaska particularly, where if you did allow 

foreign liners into the trade, you might find tha t they would go to 

one or two ports, but—and I once made a count for my own information as to how many different places in Alaska tha t Alaska Steam 

goes, and I thin k it was somewhere between 70 and 90. I didn’t know 

there were tha t many places a large oceangoing ship could visit in 

Alaska.

Senator Bartlett. In a coastline comprising 34,000 miles, there are 

many more they could go to. There might not be any people there, 

but they could go.

3

 See supplemental Information from Mr. Stakem, p. 80.
18 DOMESTIC OFFSHORE SHIPPING

Mr. Stakem. Bu t I do n’t th in k the re is any doubt abo ut it, if you 

rep eal the cabo tage laws and expecte d to ge t serv ice to many, many 

of th ese ports, you would n’t ; t hi s would n ot r esu lt.

Se na tor Bartlett. Now o n p age 6, these were y ou r wor ds :

In two world wars the domestic fleet has been an impor tant nucleus which 

was in immediate operating condition and available to serve militar y and naval 

needs. The necessity for their continued existence seems beyond doubt.

An d yet it is tru e th at in the Alask a trad e— about which I know 

som ewh at more than th e othe r tra des—ship s are bei ng inc rea sin gly 

replaced by barges, and they pe rfo rm a very useful service. I don’t 

know wh eth er or not sim ila r barge s could be used to Haw aii and 

Pu erto Rico; but, to the ex tent the y are in any of thes e areas, the 

av ail ability of a m erc hant fleet in be ing for na tio na l defen se decreases; 

and, o f course, t hat is one of the prime conside ration s before th is committee now, in seeking to make a deter mi natio n as to wh at, if an ything, sho uld be done concer nin g the overa ll pro blem, because we know 

th at no t only intra co astal lv and interc oasta lly , bu t also in these offsho re are as, the numb er of ships does not com pare with the number 

pre vio usly in service.

In respect to ce rtification, Mr. Ch airma n, is t he re an y way that you 

cou ld infor m the com mittee wh eth er certification wou ld go only to 

ships, or wou ld the y also be app lied to ba rge opera tions?

Mr. Stakem. I ha d n ot given much thou gh t to th at p ar tic ul ar po int, 

Se na tor, but it would seem to me that it might well be, if the certificate rou te was decided upo n, adv antage ous to the tra de , th at the re 

would be certificates fo r barge opera tions as well as ship ope rations .

T hat is an off-the-cuff s tatem ent, witho ut any op po rtu nity to think 

abo ut it. 4

Se na tor Bartlett. We shall not seek to h old you to th at statem ent .

Now is it not tru e, Mr. Ch airma n, th at thes e ca rri ers servin g the 

offshore area s have pro duced some of the most significant and useful 

dev elopments in the po st- W orld W ar I I period of the his tor y of U.S . 

mari tim e tra ns po rtatio n, mo der niz ation, conta iner- typ e opera tions 

and the like? Is it not the case that practic all y all sign ificant ad ­

vanc es in those dir ections have come in thes e tra des?

Mr. Stakem. It v ery defin itely is tru e, and we are ju st beg inn ing to 

see t he ex pansion of wh at has developed in the domestic tra de, in the 

foreig n tra de, and I hav e in mind the conta ine r ships which Grace 

Lin e is t ry in g to get int o the Vene zuela trad e as an example of that.

Se na tor Bartlett. An d it follows autom ati cally , I suppose, th at 

rat es wo uld be even muc h hi gh er than they are if these imp rovements 

had not been made?

Mr. S takem. I think t hat is true.

Se na tor B artleit. Now you mention on page 8 that , if subsidies are 

provide d in whatever for m the y might be, substan tia l exp enditure s 

will be required by the Fe deral Government, and we m ust assume that 

is the case.

Th e question here will be, will it not, tw of old: one the well-being 

of the peop le of Pu er to Rico, Ha wa ii, Guam , and Ala ska, all of 

whom are Americans, and, two, na tio nal defense needs? The cost 

has to be con trasted with those two fac tors.

4

 See supplemental Information from Mr. Stakem, p. 81.
DOMESTIC OFFSHORE SHIPPING 19

Mr. Stakem. I agree with that, Senator.

Senator Bartlett. Now you have mentioned at some length, and 

appropriately, tha t what it costs to ship a pound of onions from 

New York to San Juan, or from San Francisco to Honolulu, or from 

Seattle to Seward is not the whole cost which the consumer pays, 

tha t there are many other elements which enter in here.

I am particularly hopeful, Mr. Stakem, tha t in the assistance you 

were good enough to promise the Board will give the committee, 

we shall enter very directly into tha t entire situation and see if we 

can get any approximate breakdown as to the importance of these 

various elements.

Mr. Stakem. Yes.

Senator Bartlett. And we will want to know ultimately, or to decide, on the basis of the information which may be available, how 

much other costs can rise simply by reason of an ocean freight increase. Sometimes these things mushroom.

Mr. Stakem. I would like to think, Senator, as the operators in 

these trades are brought before this committee, that if they have any 

information along this line, to assist the record they should be asked 

to supply it.

There has been no cost study, as such, in Alaska or Hawaii or 

Puerto Rico by the Federal Maritime Board, and it might be quite 

an undertaking, from a manpower and cost point of view, to go into 

tha t deep a study. Certainly you couldn’t do it within a week.5

Senator Bartlett. Tha t is why I said we may have to depend upon 

approximations here, because I don’t believe these factors will have 

been susceptible of precise definition. Our conclusions may have to 

be somewhat general. However, we have a jesting remark made in 

Alaska ever since I was a youngster, that the barber charges the price 

he does for a haircut—which has now reached $2.50 in some cities— 

because of the high freig ht rates. Well, of course, there is a semblance of tru th to that. All the elements tha t enter into the higher 

cost of living in Alaska hit the barber as well, and he has to get 

more for clipping hair.

Before Mr. Grinstein proceeds, I note the presence in the room of 

the junior Senator from Alaska, and if it is agreeable to you—as 

I know he is so busy with another hearing at the moment—perhaps 

Chairman Stakem will step aside until Senator Gruening has delivered his statement, and then we will return to you.

STATEMENT OF HON. ERNEST GRUENING. U.S. SENATOR FROM THE 

STATE OF ALASKA

Senator Bartlett. Senator Gruening, we are indeed h appy to have 

you.

Senator Gruening. Mr. Chairman, I am grateful for this opportunity and just to keep the record straight, since the last 10-percent 

increase was levied, the price of haircuts in Fairbanks has risen from 

$2.50 to $3, so th at there is apparently a definite relationship between 

the high cost of transportation and the cost of haircuts which you 

pointed out.

5

 See supplemental information from Mr. Stakem, p. 81.
20 DOMESTIC OFFSHORE SHIPP ING

Senator Bartlett. You flabbergast me, I had not known of this 

recent development.

Senator (tkuexixg. I wish to thank you, Mr. Chairman, and this 

committee for giving me the opportunity to present once again, a case 

for the State of Alaska in connection with the very useful study of 

offshore shipping in which you are now engaged.

Mr. Chairman, during the last decade, waterborne freight rates to 

Alaska have increased 56.4 percent. The cost of operation, the legitimate costs, had increased by that percentage. The State is, even now, 

fighting a 10-percent increase allowed by the Federal Maritime Board 

to go into effect more than a year ago over the opposition of the State. 

Even if this increase should ultimately be denied by the Board, its 

inflationary effects have already been imbedded in the economy of 

Alaska, and, even should shippers be refunded the excess costs they 

may have been charged there is nothing tha t can effectively roll back 

the higher costs which are now a pa rt of every commodity purchased 

in the State. For the consuming public will have paid the higher cost 

on every commodity as a result of the freig ht rate increase even if the 

refund is made to the shippers.

The State of Alaska must find a solution to this problem of intolerable freight rates. The unbelievably high costs of living in Alaska 

have been an economic phenomenon recognized and made the subject 

of comment by one study after another. That the unduly high cost 

of living is a direct result of the high costs of waterborne transportation is unquestioned.

Within the last week the freakish effects of high living costs resulting from high transportation costs have been manifested in yet another blow to the Alaska economy. For many years we had looked 

forward to the enactment of Federal legislation which would provide 

assistance to our sorely pressed public schools—as much in need of 

Federal help in Alaska as anywhere in the United States. Imagine 

our dismay to find that, when the funds would be apportioned under 

the plan proposed for Federal aid to education oy the President, 

Alaska would receive the minimum amount available to a State. The 

reason lies in that the plan of distribution is calculated to provide the 

largest amount of help to the poorest States. But, because in Alaska 

wages have to be high to provide a living wage because of the high cost 

of everything, it appears as though Alaska were a wealthy State. 

This is, of course, a distortion of the facts concerning the economy of 

the State, and one we hope to remedy before the education bill is 

finally enacted. However, this is one more occasion on which the 

desperate need to reduce transporta tion costs is once again brought 

to the fore.

The plight Alaska suffers results from the nature of the Alaska 

water commerce. This is an abnormal kind of trade which is, in 

reality, interstate commerce, but lacks the controls of an effective 

regulatory agency a nd/or the existence of other, competitive forms 

of transportation available to other States of the continental United 

States.

While it is interstate commerce, the nature of the trad e is, in reality, 

tha t of foreign shipping. This gives rise to an anomalous situation 

in which the Alaska trade is limited to domestic carriers with the 

same problems of operation as carriers in the foreign trades, but who 

have none of the advantages accruing from construction and operat-
DOMESTIC OFFSHORE SHIPPIN G 21

ing subsidies which might make possible a saving to shippers and consumers, if such subsidies should be granted in combination with adequate regulation. While this is a situation shared in common with 

the other offshore areas of Hawaii and Puerto Rico, it is exaggerated 

in Alaska by the lack of any subsidized carrier for which Alaska is 

an intermediate point, thus providing the advantage which might be 

obtained by the availability of transportation at costs competitive 

with foreign shipping.

The result of this is that the application of national defense policies 

designed to strengthen the American merchant marine by the exclusion of foreign carriers from domestic trade causes the citizens of the 

offshore areas to subsidize this policy by paying increased transportation costs, thus bearing an unequal burden of national defense not 

shared by other citizens of other parts of the United States.

This, then, is our problem. It is to find solutions for the problems 

of Alaska, as well as for the other offshore areas th at this committee 

has undertaken the study with which we are now concerned.

It is my belief tha t it is, first of all, necessary to establish a new 

attitude on the p art of the carriers th at serve my State of Alaska and 

on the part of the Federal M aritime Board which presides over their 

rate increase applications. It is necessary that the carriers and the 

Board adopt an attitude of concern for the public welfare which at 

least matches the zeal for improving the financial position of the 

carriers. At present there is no policy of the carriers or the Board 

which clearly recognizes the interests of the public. At least, the 

effects upon Alaska of the operations of the carriers and the administration of shipping affairs oy the present Federal Maritime Board 

and its predecessors have not given indications tha t consideration of 

the public interest is of concern to either.

While this is a generalized objective, I would like to suggest some 

specific approaches which might be followed to obtain regulatory 

policies for the offshore areas which would take account of the needs 

of the people served.

A. Changes in statutory standards of ratesetting: Much of the 

difficulty we face can be remedied by enactment of statutes which 

would insure the regulation of rates charged by carriers on a basis 

which would not only provide a fair return to them, but, also, a fair 

break to the consumer.

(1) Articulation of standard s: The present statutory requirement 

tha t rates set for the offshore trades must be “just and reasonable,” is, 

of course, the definition supplied for other forms of transporta tion 

regulation. For the water transp ortation trade, however, the Federal 

Maritime Board and its predecessors have never developed progressive 

standards and procedures for ratesetting which other agencies have 

applied and which can make a very grea t difference in determining 

whether the rates paid by the public are truly “just and reasonable” 

or otherwise. A precise statu tory definition of the standard s to be 

applied in determining the rates to which carriers are entitled would 

eliminate many of the difficulties faced by areas they serve.

(2) Realistic accounting of assets, investments, and costs: The public is entitled to an honest analysis of carrier earnings in the determination of rates to be assessed. The ratepaying public should not 

be charged for the acquisition by stockholders of profitable items of 

property not used in the trade and from which it derives no benefit.
22 DOMESTIC OFFSHORE SHIPPING

Tha t is the case with the principal maritime carrier from the 48 States 

to the 49th, namely, the Alaska Steamship Co. The facts which will 

be brought out in clue course reveal financial practices which cannot 

be justified as part of a service affected with public interest.

B. Responsibility of carriers for maintenance of efficient fleets: In 

connection with the general need for the development of an attitude 

of responsibility to the ratepaying public, the carriers should be required—as much in their own interests as that of the public—to maintain an efficient fleet, constantly reconditioned throu gh construction 

of new vessels and repair of the old so that service can be maintained 

on as economical a basis as possible. Certainly, carriers should not be 

allowed to charge unrealistic depreciation costs to the ratepayer while 

siphoning off the depreciation funds for profitmaking operations of 

stockholders to the neglect of the fleet.

C. Reformation of the organization and procedures of the Federal 

Maritime Bo ard : A basic cause of difficulties faced by the public 

served by the offshore carriers has been the organizational structure 

and procedures of regulation followed by the Federal Maritime Board 

and its predecessor agencies.

(1) Schizophrenic organization: An organizational malady of the 

Federal Maritime Board to which attention has been repeatedly 

called, and to which reference was made in the recent report to the 

President by Dean .Tames M. Landis, is the schizophrenic nature of 

its organization. The Federal Maritime Board and the Maritime 

Administration, both located within the Department of Commerce, 

are both agencies concerned with oceangoing shipping. But the nature of their functions is—or should be—quite different.

In theory, it would appear tha t the function of the Federal Maritime Board is to regulate and control rates, services, practices, and 

agreements of oceangoing common carriers by water. However, as 

the cu rre nt Governm ent organiz ati on manual sta tes:

The Fed era l Maritime Board and Adm inistration foster the development and 

encourage the maintenance of a merchant marine.

In other words, the Federal Maritime Board must promote and 

encourage development of the same industry it is expected to regulate 

at the same time.

Moreover, the schizophrenia here is intensified by the fact that the 

Maritime Administrator, whose clear duty is to promote the growth of 

the merchant marine, is also Chairman of the Federal Maritime 

Board tha t regulates operations of the very same merchant marine.

It is therefore virtually impossible for the same agency to both 

promote development of an industry and, at the same time, regulate 

it, if the regulating is to be of any effect, and in the public interest.

Regulation, by its very terms, involves restriction of some aspects 

of carrier operations. Almost inevitably, a case can be made that 

regulation—for example, failure to allow rate increases—inhibits 

growth of the industry.

With the best intentions in the world it seems impossible tha t the 

Maritime Administration can, on the one hand, work to strengthen 

and promote the merchant marine, and on the other hand, act to 

restrict it.

As noted in the Landis report, a related and important factor in 

the organizational problem of the Federal Maritime Board is that
DOMESTIC OFFSHORE SHIPPING 23

it is organizationally located within the Department of Commerce. 

While recognizing th at the Board operates independently of the Secretary of Commerce—except tha t it is guided by policies of the Secretary in awarding subsidies—it is, nevertheless, dependent on the 

Department for assignment and payment of personnel, for budgetary 

allocations, for office space, and other housekeeping services. The 

effect of this relationship must tend to exert controls over the operation of the Board.

2. Failure of the Maritime Board and Administration to take positive action for improvement of American merchant m arin e: Although, 

as noted above, it is a responsibility of the Maritime Administration 

to promote the welfare of the American merchant marine, it is 

apparent from the well-publicized plig ht of domestic shipping that 

the agency has not carried it out. Imaginative solutions to problems 

of dwindling business, overage fleets, and costly operations are demanded, but have been disastrously lacking.

It is not sufficient tha t the only remedy apparently known to the 

Maritime Board and Administration for increasingly difficult problems of maritime carriers is the application of the balm of higher 

rates. While this remedy gives momentary relief to carriers it does 

nothing to cure basic ills of the industry and it is disastrous to the 

people of Alaska overburdened with steadily mounting living costs. 

The higher rate remedy to all ills also obviously wreaks serious 

damage on an economy chiefly dependent on water transportation as 

is Alaska’s.

The plig ht of Alaska—saddled with ever-increasing freight rates 

of the water carriers on which it is totally dependent—has been known 

for generations. Yet there have never come from Board, the Maritime Administration, or its predecessors any suggestions whatever as 

to solutions for this problem.

Aside from the general public interest in a healthy merchant 

marine, aside from the interest of Alaska in securing an economical 

means of water transportation, the water carriers themselves have 

long suffered from this lack of imaginative, dynamic programs for 

improvement of the merchant marine.

3. Inordinate length of hearings: The inordinate length of time required to complete adjudicatory proceedings before the Martime 

Board is a procedural defect the Board has in common with other 

regulatory agencies. Recommendations of the recent Landis report 

on this to President-elect Kennedy are, with distinctions as to specialized aspects of maritime regulation, applicable to the Federal Maritime Board.

4. Regulation of reporting procedures of car riers: Associated with 

the need for shortening the time of proceedings before the Board is 

the recommendation that the Board be empowered to require the carriers to submit reports containing specified information necessary to 

determine rates.

At this time one reason for the exceptional length of time required 

for hearings lies in the fact that masses of data concerning the economic status of a carrier must be elicited during the course of the 

hearings. The data needed are not available in the form of published 

documents or records readily available at the Board. Months of time 

required to compile the facts needed to show the true financial status 

of a carrier could be eliminated if carriers were required to file periodic
24 DOMESTIC OFFSHORE SHIPP ING

reports of information of the character now sought by time consuming 

discovery processes.

5. Need to extend time of rate increase suspension: At present the 

Maritime Board may suspend the effective date of a rate increase for 

a period of 4 months. As noted above, the existing procedural delays and the need for extensive discovery of facts to prepare a case 

make it impossible to obtain a decision from the Board during the 

suspension period. If the time during which rates may be suspended 

is lengthened and the adjudicatory process is shortened, it could be 

possible to achieve a decision by the Board within the period of rate 

suspension. This would, of course, be of exceptional benefit to carriers and consumers alike in view of savings in money th at would accrue and numerous other advantages flowing from an early determination of issues in dispute. I am pleased to point out tha t the Senate 

has now passed the bill, S. 804, which would extend the time during 

which rate increases may be suspended from 4 to 7 months. I hope 

this measure will soon pass the House and be enacted into law.

In conclusion, I might suggest tha t it would be useful to extend to 

the offshore carriers the provisions of the national transportation 

policy adopted by Congress in 1940 to apply to transportation subject 

to the regulation of the Interstate Commerce Act. To the carriers 

with which we are here concerned could equally well be applied the 

policy to—

provide for fai r and impartial regulation * * * to promote safe, adequate, economical, and efficient service and foster sound economic conditions in transportation * * * to cooperate with the several States * * * all to the end of developing, coordinating, and preserving a national transportation system adequate 

to meet the needs of the United States, of the postal service, and the national 

defense.

Senator Bartlett. Thank you, Senator Gruening. I hope you have 

an ample supply of mimeographed copies of this statement, because 

I suspect there will be an extraordinary demand.

Senator Gruening. There is an ample supply, Mr. Chairman, and 

they are available to the press and public and the other members of the 

committees, as well as to the carriers.

I thank you, Mr. Chairman.

Senator Bartlett. Thank you very much.

FURTH ER STATEMENT OF HON. THOMAS E. STAKEM, CHAIRMAN,

FEDERAL MARITIME BOARD AND MARITIME ADMINISTRATOR

Senator Bartlett. Chairman Stakem, I want to ask you a question 

or two, based upon Senator Gruening’s statement.

Mr. Stakem. Yes, sir.

Senator Bartlett. What regulatory requirements an d/or privileges 

does the Federal Maritime Board have under the law, if th at question 

is comprehensible ?

Mr. Stakem. The Federal Maritime Board has authority under the 

law to regulate in the foreign trade and also to regulate in the offshore 

domestic trade.

We have au thority to set the measure of rates in the domestic trade. 

We do not have that same authority in the foreign trade. We can only 

knock down the rate if we find it to be detrimental to the commerce of 

the United States.
DOMESTIC OFFSHORE SHIPPING 25

Senator Bartlett. What standards, under the law, guide the Federal Maritime Board in its determinations ?

Let me be a little clearer on that. Does the chief requirement have 

to do with the financial solvency of the p articular carrier, or are you 

required to inquire constantly into the public interest as well?

Mr. Stakem. I think tha t we are required to do both, to take the 

financial position of the carrier into consideration as well as the economic impact of the rates themselves, and I am thinking of the 

domestic trade.

Senator Bartlett. As a matter of practice, would you say that these 

two goals have had equal consideration historically by the Federal 

Maritime Board and its predecessors ?

Mr. Stakem. Let me speak only for myself. I believe tha t I have 

tried to, in the decisions since I have been on the Board, weigh both 

factors in our ratemaking proceedings.

Senator Bartlett. Would you care to comment, Mr. Chairman, 

upon the statement made in the Landis report in these words, and 

I quote:

But in its quasi-judicial aspects it (Federal Maritime Board) suffers from a 

lack of settled public procedures and standards of decision, thus resulting in the 

exercise frequently of arbitrary powers by the staff. It places too much emphasis on bureaucratic details to the disregard of matters of large public Importance. A fog of secrecy also surrounds many actions of the Board and no 

articulate standards seem to have developed with respect to ex parte presentations. Each agency, however, requires separate consideration and individual 

remedial action.

Mr. Stakem. Fa r be it from me to criticize the Coordinator for the 

President on the matter of regulation. I do believe that i t is intended 

tha t a fuller and broader review of the agencies is intended by Mr. 

Landis.

Certainly, as to the reference to secrecy, I think the Federal Maritime Board operates in a kind of a glass bowl. I am n ot aware of 

any secrecy in connection with our proceedings. I have personally 

talked to Mr. Landis since he assumed office, and we have promised 

him the fullest cooperation in endeavoring to bring about more expeditions proceedings before the Board and to conduct whatever inquiry toward better management is necessary. And I believe tha t Mr. 

Landis is satisfied th at we are straightening out our procedures and 

tha t we have more timely decisions, and less problems in this area in 

the future.

Senator Bartlett. Are we to infer, then, tha t they weren’t timely 

before, and needed straightening out ?

Mr. Stakem. I think there were considerable delays in proceedings 

before th at with a little more push we could have done a quicker job.

Senator Bartlett. Yesterday’s papers, I believe, had a story that 

came as a surprise to me, whicn they carried from Washington that 

the Atomic Energy Commission had captured or recaptured control 

from the staff. The story went on to say tha t the Commission has 

been operated under staff jurisdiction for goodness knows how long, 

and a great victory was won, because the men who were appointed to 

run the Commission are, according to the paper, going to run it instead of the staff.

This quotation, to which I have referred from the Landis report, 

makes an allegation regarding the staff powers of the Fede ral Maritime Board. Do you have any comment on that ?
26 DOMESTIC OFFSHORE SHIPPING

Mr. Stakem. My only com men t is th at the staff of the Federal 

Mari tim e Bo ard does not ru n it ; it is run by the three Bo ard members.

Se na tor B artlett. You den y this?

Mr. Stakem. Yes.

Se nator Bartlett. In Se na tor Gr ue ning ’s sta tem ent it was said 

th at the Sec retary of Commerce guides the Fe de ral Maritim e Bo ard 

in resp ect to the a wa rd of subsidies. To w ha t deg ree does his control 

run in th at are a ?

Mr. Stakem. Th e Se cretary of Commerce has policy guidan ce in 

the are a of subsidy, th at is, the con struction and op erating subsidy. 

The Federal Mari tim e Bo ard is com pletely independent in the matter 

of reg ula tio n under the 19 16 act. B ut th e lan gu age of plan 21 , ad opted by the Congress in 1950 , does give th e S ecretar y of Comm erce 

au thor ity to give polic y g uid anc e in the ar ea of subsidy.

Se nator Bartlett. Do you hav e to follow7

 his recommenda tion s ?

Mr. Stakem. Th e law' is no t clear on th at point . Lawy ers will 

differ on it. I t ha s been fre qu en tly ar gued th at th e Se cretary of Com ­

merce could sta te a position bu t it wou ld no t necessarily be bin din g 

on the Board. I can only say th at in th is are a of policy guidan ce 

in the 5 yea rs th at I hav e been on the Bo ard th at we have had no 

difficulties w ith the D ep artm en t of C ommerce.

Se nator Bartlett. An as sociated co mment m ade by S en ato r Gr uening ties in with this. W ha t if the Se creta ry of Comm erce would 

mak e a recommendation rega rd ing a sub sidy and you would dis rega rd i t ; could he cut you r p aycheck off ?

Mr. Stakem. Tha t I doubt, since it is a term appointme nt. He 

pro bably could—ag ain , we are spe cul ating. Th e desig nation of the 

Ch airm an can be mad e by the Presiden t, at his ple asu re, and there 

are certa in are as in w hich a C abi net officer could o perate, if we r each ed 

a po int of ultim ate disagr eem ent on major points.

Se na tor Bartlett. Bu t, more seriously, the Se cre tar y of Com ­

merce does have bu dg eta ry control over yo ur o peration s?

Mr. Stakem. Yes. The budget fo r the Maritime Ad mi nis tra tio n, 

which is the policing arm of the Bo ard , in the subsidy field, as well 

as the Bo ard’s budget wi th resp ect to person nel, goes throug h the 

De pa rtm en t of Commerce, is cleared the re, be fore it goes t o th e Burea u 

of the B udg et.

Se nator Bartlett. Se na tor G ruening said, and I q uo te :

The plight of Alaska—saddled with ever-increasing freigh t rates of the 

wa ter carriers on which it is to tally dependent—has been known for generations. 

Yet there have never come from the Board, the Maritime Adm inistration or its 

predecessors any suggestions whateve r as to solutions for this problem.

Now, my question is not intended to be a go ading one. I wa nt 

inf orma tion.

W ha t are the responsibilitie s in this field of the Ma riti me Bo ard 

an d the Maritim e Adm inistrat ion?

Mr. Stakem. First, let me say th at I th in k Se na tor Gr uenin g oversta ted his case. I don ’t agree th at the Maritime Ad minist ratio n and 

the Fe deral Ma riti me Bo ard have no t offered suggestion s in the domestic shipping . I feel th at und er th e law th at i t is o ur re spo nsi bility 

to foste r an A merica n me rch ant marine in the dom estic area. An d I 

would tie ve ry ha pp y to list ch ap ter and verse of the numb er of rec ­

ommendatio ns and areas of action th at we hav e tak en over the years.
DOMESTIC OFFSHORE SHIPPIN G 27

Senator Bartlett. I wish you would, do tha t and concentrate exclusively perhaps upon the so-called offshore areas.

Mr. Stakem. Yes. I would also like, with the Senator’s permission, to submit a letter from the Board in reply to at least certain 

parts of Senator Gruening’s statement. I think it was most critical 

of the Federal Maritime Board and I am sure tha t we would like to 

make a supplementary statement for the record on a number of points 

raised.6

Senator Bartlett. Permission granted.

Mr. Grinstein ?

Mr. Grinstein. Mr. Chairman, I take it it is your view the cabotage 

restriction is supported mainly on national defense reasons?

Mr. Stakem. Yes, sir.

Mr. Grinstein. Has the Department of Defense ever made a determination as to how many ships are required in the domestic offshore 

trade—Alaska, Hawaii, Puerto Rico ?

Mr. Stakem. This is a continuing study on the p art of the Dep artment of Defense with Maritime as to the need of ships, pointed to 

national defense. It has been a long time since I have looked at th at 

study and I don’t recall whether it is broken down into the foreign 

and domestic. We would be very happy to submit something for the 

record on that.7

Mr. Grinstein. In other words, though, it is your recollection that 

the Board does have some directive from the Department of Defense 

setting up certain levels of ships required in this trade?

Mr. Stakem. Yes, and this is a continuing thing, and we constantly 

consult with the Department of Defense in this area. I don’t believe, 

if I were to take a guess, tha t it is broken down into domestic as 

against foreign, but we will look at it from that point of view.

Mr. Grinstein. When I said ships, I meant American-flag ships.

Mr. Stakem. Yes, sir.

Mr. Grinstein. In response to a question from Senator Bartlett, 

you said the Federal Maritime Board in a rate proceeding looks both 

to the needs of the carrier, as well as the economic impact on the area 

concerned. On page 4 of your statement you said tha t trade promotion or cost-of-living subsidy to reduce costs would warrant serious 

consideration only if a valid case can be made that such development 

is being stifled by high ocean freight rates.

Has the Board made any such determination along these lines?

Mr. Stakem. I don’t think I get the thrust of your question.

Mr. Grinstein. Well, when the Board is balancing these two considerations, the needs of the carrier and the impact of increased rates 

on the area concerned, let’s say Hawaii, has the Board made a determination tha t development in Hawaii is being stifled by Hawaiian 

ocean freight rates ?

Mr. Stakem. No, I don’t think so, in just those terms. I think that, 

however, with a review of the Board’s reports, it will show th at the 

economic impact of the rates were taken into consideration in the 

ultimate decision made.

Mr. Grinstein. Have you made any determination as to approximately how far rates could go without too gre at a burden on the offshore area?

« See supplemental Information from Mr. Stakem, p. 81.

7

 See supplemental Information from Mr. Stakem, p. 82.
28 DOMESTIC OFFSHORE SHIPPING

Mr. Stakem. Not specifically.

Mr. Grinstein. Has the Board ever made a general investigation of 

domestic offshore shipping, both with respect to increasing rates and 

a projection or the burden it would impose on the economy generally?

Mr. Stakem. There was a transportation study several years back 

on the domestic trade. I would be very happy to furnish a copy of 

that to the committee.8

Senator Bartlett. Tha t will be accepted, Mr. Stakem, and will be 

incorporated in the committe’s file.

Mr. Grinstein. Air. Chairman, what is the Federal Maritime Board 

permitting as a fair return to the carriers involved in these trades? 

Is there any percentage level, 5 or 7 percent ?

Mr. Stakem. I don’t want to get too deeply into the allowance because of the cases th at are pending now tha t will come to the Board 

for decision, but I can say this, tha t the Board in the most recent 

Puerto Rican case, docket 807, attempted a complete reevaluation, and 

to restate a rate basis in that case t hat would be meaningful in this 

trade. We would be very happy to submit for the record the elements considered by the Board in this case.

Mr. Grinstein. Would it be your view, Air. Chairman, for costs, 

both operating and replacement costs, will stabilize or continue to 

mount over a 5-year period ?

Mr. Stakem. It is a fact tha t—you are talking of replacement cost 

of ships?

Mr. Grinstein. Yes.

Air. Stakem. The Board has been very happy to see the reduced 

costs of ship construction in this country. We have had two bids 

tha t have gone even lower than the staff estimate of what the cost 

would be. I think the answer is hungry shipyards.

From the standpoint of the replacement of ships, we like to see 

this trend and we would like to build a lot more at the present going 

prices.

Mr. Grinstein. Wha t about operating costs? Is it anticipated 

they will stay on an even keel or decrease or mount?

Mr. Stakem. I don’t see any immediate hope for a decrease in the 

operating costs of vessels under the American flag. As to the guess 

of increasing, I would rather pass that.

Mr. Grinstein. Are there any foreign ports a comparable distance 

from the United States as Hawaii, say, served by subsidized carriers?

Air. Stakem. You are contrasting the distance between, say, California and Hawaii with some of the foreign areas tha t would be in 

the Caribbean area ?

Mr. Grinstein. Tha t is correct.

Air. Stakem. I should think the answer to your question is yes, 

there are foreign areas served, in the foreign trade, tha t are closer 

to the United States than Hawaii is.

Air. Grinstein. Has there ever been a comparison of the rates between these areas of comparable distance ?

Mr. Stakem. I am sure we have, within the Regulatory Office of 

the Board, rate information of this kind.

Senator Bartlett. Could you supply that for the record ?9

8

 See supplemental information from Mr. Stakem. p. 82. 9

 See supplemental information from Mr. Stakem, p. 83.
DOMESTIC OFFSHORE SHIPPING 29

Mr. Stakem. Yes, what we have I will supply.

Mr. Grinstein. Mr. Chairman, do carriers in the domestic offshore 

trade benefit from the same treatment as all subsidized carriers, with 

the exception of subsidy? I have in mind here nontaxable reserve 

fund.

Mr. Stakem. They do not have the same privilege as th e subsidized 

operators have under the 1936 act. They have some privileges, but 

not all. If it will help the committee, we can give a contrast as bet ween t he domestic operators and th e offshore operators.10

Senator Bartlett. It will be helpful and we shall appreciate your 

doing that.

Mr. Grinstein. Along this line, would such benefits as they have 

that are not presently available to domestic offshore shipping, if 

these were extended to the carriers in the domestic offshore trades, 

do you thin k they would have a significant effect?

Mr. Stakem. They would have some effect, Mr. Grinstein. How 

significant it will be, I couldn’t venture an opinion at the moment. 

But anything helps, that is for sure.

Mr. Grinstein. Has the Board made any determination on the 

likelihood or possibility there might develop a shift, both from 

American ships and U.S. mainland, for services, supplies, and market 

outlets? I was thinking there instead of United States and American-flag carriers serving Alaska, perhaps Jap an and Japanese-flag 

carriers would become the main source of supply.

Mr. Stakem. It would be hard for me to answer that question, Mr. 

Grinstein. The question fundamentally as I understand it, are the 

offshore areas, like Puerto Rico and Alaska, and Hawaii, buying more 

from, increasing their purchases from foreign markets as against 

their purchases in this country.

I would say that there is an increase, but I think by a great majority 

the most of this trade is with this country.

Mr. Grinstein. I understand that. Some of the testimony, as I 

recall, testimony already presented, is tha t rates are apparently, in 

the domestic offshore trades, reaching what might be called a peril 

point, a point of too great a burden. It seems to me it would be 

material to know whether this is true and, two, if it is true, where 

these domestic offshore areas will begin to look for services, as well as 

market outlets and supply ?

Mr. Stakem. We will give you the best we can on that, Mr. Grinstein.* 11

Senator B artlett. Mr. Bourbon ?

Mr. Bourbon. I have no questions, Senator.

Senator Bartlett. Mr. Goding has been with the committee for 

some months studying this very problem. Do you have any 

questions?

Mr. Goding. I have a question as to your statement on certification. 

In your prepared statement you questioned the value of certification, 

insofar as its having any economic impact. You stated tha t certification, in effect, protects the carriers. The question really is, does 

certification as we know it not also establish an obligation to serve, 

and provide a greater control over the type and degree of service

10 See supplemental Information from Mr. Stakem, p. 83.

11 See supplemental information from Mr. Stakem, p. 84.

71709—62------3
30 DOMESTIC OFFSHORE SHIPPING

th at is subject to certification ? Also is ce rtif ication or the equ ivalent 

not im pli cit in most of the alt erna tiv e suggestions—I won’t say recommendation s—th at you have mad e as to things th at might be done. 

In t he fore ign tr ade s, you have y our de signated essent ial trad e routes?

Mr. Stakem. I have nev er been one th at feels th at a certification 

in the domestic offshore trad e has been nece ssary. I t seems to me 

th at —an d I have m ade th is p oint in my sta tem ent—th at the domestic 

offshore trad e and the inte rco astalw ise tra de , are in the fo refro nt on 

new inventions in sh ipping ope rations . I am th in ki ng of the containe riz ati on. I have the fee ling th at if we ha d no t ha d the sp ark 

of com petition in tho se tra de s which migh t no t be present wi th ce rti ­

ficates t ha t we would n ot have m ade the a dva nces in these tra de s th at 

we have.

Th ere is no question as to you r point th at a certificate of convenience and necessity has som ewh at the ma rks of the essential tra de 

rou te concept. But up to th is point , we have nev er felt it was 

necessa ry to go th at fa r in the domestic tra de .

Mr. Goding. Would you agree th at some such form would be re ­

quired, if acti on were to be tak en on any altern ative th at you dis ­

cussed ?

Mr. Stakem. I think the objectives could be met without the c ert ifica te?

 the necessity fo r the certific ation. But if, as the result of these 

hearings, it was fou nd th at this was a necessa ry elem ent in the aid 

th at might come out of the hearings, yes, we wou ld be gla d to tak e a 

second look at our pos itio n on it.

Mr. Goding. If I recall correc tly, and I am depending on memory, 

I th in k for me r Ch air ma n Morse cha nged his position to some extent 

on th at . I think the testim ony in 1959 ind ica ted basically the positio n you tak e tod ay and last yea r, if I rec all correctly. Chairma n 

Morse ind icated th at he thou gh t certification and some changes in the 

form of economic reg ula tio n m igh t be desira ble. Do you recall th at ? -'2

Mr. Stakem. No, I don’t recall that. But I do say this, th at a 

cha nge in position would have to be mad e by the Fe de ral Ma ritime 

Bo ard, and this has not been specifically stu die d bey ond the fact, as 

I sta ted tod ay, th at we see no imm ediate necessity of chan geov er.

Mr. Goding. I hav e one suggestion here, in ter ms of materi al for 

the reco rd. I think it would be h elp ful if we ha d specific da ta in the 

form of a tab le or tabu la ry prese nta tion of the ton nag e, num ber of 

vessels in volved in the non con tigu ous services set up again st the nu mber in other domestic ope ration s. I am speakin g of com mon-carrier 

dr y cargo vessels.

Mr. Stakem. Yes, we will be ha pp y to fu rn ish th at fo r th e r eco rd. 13

Se na tor Bartlett. Com petition is no t necessarily denied, Mr. 

Sta kem , by reason of certification, is it?

Air. Stakem. No, you can certifica te as ma ny as you feel are necessary in the t rade to do the p rope r job.

Se na tor Bartlett. Right, Air. Gr ins tein?

Air. Grin ste in. Air. Ch airma n, you men tion ed before in your b rie f 

before the court of app eals, I believe, in docket 807, you set out the 

sta nd ards you ap pli ed in the rat em aking case. I hav e been inform ed 

by note th at docket 807 was reve rsed by the co urt of appe als and va12 See sup ple me nta l Inf orm ation from Mr. Stakem, p. 84.

13 See supplem ental Inf orm ation from Mr. Stakem, p. 85.
DOMESTIC OFFSHORE SHIPPING 31

cated. Was it based on the fact they felt your standards were inadequate ?

Mr. Stakem. No, let me change your word from “reversed” to “remanded.” It was remanded on, i think, a very narrow point. I 

haven’t got the remand direction with me, but it seemed to me there 

were two points made by the court. One was, in going for the domestic market value, or the market value of the vessels, in the rate 

base, it was felt tha t the discussion and reasons were not properly 

set forth in the opinion.

Then there was, I think, a question of what happens when the depreciation is eliminated and you have perhaps a resale of ships, at a 

new rate base. So I would consider tha t the court’s action is not a reversal of the elements of the rate base, but merely a remand on these 

two points which must now be considered by the Board.

Mr. Grinstein. When you supply for the record your brief, could 

you also supply the court of appeals’ decision, and what new determinations are made ?

Mr. Stakem. Yes.14

Mr. Grinstein. In your brief before the court of appeals, in docket 

807, did you also set out what considerations you give to the effect of 

rates on the local economy ?

Mr. Stakem. I would have to reread the presentation, Mr. Grinstein.

Mr. Grinstein. If you do have some statement as to how much investigation you make and how this evidence is weighted in a determination, I th ink it would be helpful to the committee.

Mr. Stakem. Yes, sir.15

Senator Bartlett. Mr. Chairman, Mr. Grinstein tried to tie you 

down and make you an economic prophet in advancing 5-year projects 

and you were probably wise in not making any direct commitment, 

but can we not say this, tha t if the future is as the past, the costs of 

operating ships and the costs of constructing ships, even if temporarily they are down, will advance as will everything else in our economic structure?

Mr. Stakem. Yes. I can say this, tha t the Office of Ship Construction which keeps a running record of the costs, has used a measure, 

shall we say a measure of thumb, tha t about 5 percent a year has been 

the indication of the cost rise, except as I say for this last period 

where we are getting much better prices than we had expected.

Senator Bartlett. Decreases tend to be temporary in nature.

Mr. Stakem. Yes, sir.

Senator Bartlett. The whole economic pressure in the Western 

World is on the inflationary side and it may apply to other parts of 

the world, as far as I know, and I suspect it does.

Mr. Stakem. It probably does.

Senator Bartlett. Now Air. Grinstein also asked you w’hat I 

thought was a very worthwhile question. What, if any, evidence is 

there th at high freight rates may be inducing foreign carriers to come 

to these offshore areas? I wonder if you will be good enough, if it 

is possible for you, to present a statement to the committee on that 

very point.

14 See supplemental Information from Mr. Stakem, p. 85. 

“ See supplemental information from Mr. Stakem, p. 169.
32 DOMESTIC OFFSHORE SHIPPING

For exam ple, in Alaska 1 know th at within the la year man y, or 

at least several, Japa ne se ships have pu t in wi th steel carg oes and 

with oth er con struction ma ter ials, to the loss of Am erican carriers , 

an d Am eric an steel mills, an d Am eric an labo r. I do n’t know wh at 

beari ng the freigh t rat es ha d on this, if any , bu t if y ou cou ld supply 

inf orma tio n on th at point, it migh t be he lpfu l, because th at which 

has been starte d may ex pand a nd m ultip ly u nless we t ake ap pr op riate 

steps.

Mr. Stakem. Yes. I th in k it is common kno wle dge t hat the Jap anese are very activ e in solicitin g business in Alask a. Th ey do ca rry 

considerable pulp out of the mill at Si tka, an d I know in tryi ng to 

get a haul both ways the y are actively solic iting m erc hants fo r Jap anese goods. 16

Se nator Bartlett. And will you not agree wi th me, Mr. Ch airma n, 

th at in these instances, and oth ers which may arise, or may alread y 

hav e arisen, it is an obligation on our part to see to it th at, insofar 

as possible, Am erican goods, bu ilt by Am erican labo r and carried 

by America n carrie rs, are employed ?

Mr. Stakem. I think th at is our res ponsibility , Senator.

Se nator Bartlett. Th an k you very muc h, Mr. Ch air ma n, fo r an 

inf orma tiv e statem ent which we will stu dy an d res tud y.

Mr. Stakem. Th an k you, sir.

Se na tor Bartlett. An d we s hall depen d very largely, 1 might add, 

upo n the Federal Ma riti me Bo ard to giv e us on a co nti nuing basis 

the data so essential to th is inquiry.

Mr. Stakem. We will do our best, Senato r.

Se na tor Bartlett. Now the com mittee is going to sta nd in recess, 

bu t we are not going to wa it un itl tom orrow mo rning before we resume because we a re goi ng to run ou t of tim e if we do th at. I f it is 

not a burden upon those who are to te stify also t his mo rning, we are 

going to ask them to retu rn at 2 o’clock t hi s aft ern oo n, at w hich tim e 

the hea rin gs will be resumed.

Th e attorney gen eral of Ha waii is to be he ard next and Mr. 

Oshiro, a member of the Haw aiian Le gisla tur e, the Gover nor of the 

Virgin Islands, and Mr. Ed wards , secre tar y of Gua m. We would 

hop e at lea st to conclude th eir testimony du ring th e aft ern oo n session.

(Thereu pon, at 1 2:1 0 p.m., the su bcomm ittee recessed, to reconvene 

at 2 p.m. the same d ay.)

AFTERNOON SESSION

Se na tor Bartlett. Th e com mittee w ill be in orde r.

Th e actin g cha irm an of the subcom mittee w’ants to expre ss the hope 

and belief th at tomorrow the able and dis tin gu ish ed Senator from 

Ca lifornia , Mr. En gle , sha ll have return ed fro m the G olde n State , on 

schedule , a nd will be here to preside o ver the hearin g. An d n ext week 

also we hope to give, if possible, even more objective attentio n to this 

problem than the cha irm an who is befo re yo u now.

Th e comm ittee is ho nored to have as th e next witness M r. Ka shiwa, 

attorney general o f th e St ate of Ha wa ii.

For th e record it m igh t be stat ed th at the atto rney general of H aw aii 

is accom panied by Mr. W illiam Kegel’s, atto rney , of Wash ing ton , D.C.,

10 See supplemental Information from Mr. Stakem, p. 169.
DOMESTIC OFFSHORE SHIPPING 33

special deputy attorney. You identify, if you care to, Mr. Rogers 

more particularly, will you ?

STATEMENT OF SHIRO KASHIWA, ATTORNEY GENERAL OF THE

STATE OF HAWA II, ACCOMPANIED BY WILLIAM ROGERS, OF

WASHINGTON, D.C.

Mr. Kashiwa. Mr. Rogers, of Washington, D.C., is associated with 

my office as special deputy attorney general in all the Hawaiian m aritime matters.

Senator Bartlett. We are glad to have him here, too.

Now you may proceed, Mr. Kashiwa.

Mr. Kasiiiwa. For the record, my name is Shiro Kashiwa. I am 

the attorney general of the State of Hawaii.

Gov. William F. Quinn has asked me to appear on behalf of the 

State during these hearings. The Governor deeply and sincerely 

regrets that he could not himself come to Washington. Our legislature 

is presently in session. As you may imagine, it is difficult for him 

to leave Honolulu at this time. He has asked me to convey his sincere 

regrets for his inability to be here.

I le has especially asked me to state to you his profound appreciation 

for the institution of this investigation. The State, for reasons which 

I shall attempt to develop, believes th at the problem of high and continually increasing maritime rates for its essential shipping to and 

from the mainland is one of the most serious economic problems 

Hawaii faces today. The Governor was gratified to have the opportunity to meet with the Governors, Senators, and congressional officials of Alaska and Puerto Rico on this problem during inauguration 

week while he was here in Washington, and wants me to reaffirm his 

vital concern with this problem. He has asked me to say again for 

him tha t the State is anxious to continue its cooperation and aid in 

this committee’s search for an equitable remedy.

A word or two about the economy of Hawaii will demonstrate the 

overwhelmingly crucial importance of maritime rates and service to 

our people, and the vital need for remedial Federal legislation. I 

have set forth some of the general economic indicators in attachment 

I of this statement.

The Hawaiian island chain is some 2,400 miles off the coast of California. It consists of eight major isla nds: Oahu, the Island of Hawaii 

(the “Big Island” ), Maui, Kauai, Niihau, Molokai, Lanai, and Kahoolawe. The chain extends over some 400 miles of ocean.

The land area in the State is 6,435 square miles. This makes Hawaii roughly the same area as the States of Connecticut and Rhode 

Island combined.

Our population is something over 600,000, to which should be added 

about 50,000 or 60,000 Armed Forces personnel. This population is 

greater than the population of Alaska, Nevada, Wyoming, Vermont, 

Delaware, or New Hampshire. The bulk of these people, over 500,000 

of them, live in the city and countv of Honolulu, which includes the 

principal metropolitan center of Honolulu, our major business community, the seat of the State government, and, of course, the Island’s 

major shipping port.

The economy of Hawaii is tied to the economy of the mainland. 

Hawaii is far from self-sufficient. We are, in broad terms, specialists,
34 DOMESTIC OFFSHORE SHIPPING

sel lin g good s and services to the ma inl and an d pu rcha sin g the bulk 

of wh at we consume fro m ma inland producers an d suppliers. N at ­

ur ally , such an economy is totally depen den t upon tran sp ortatio n.

Gover nor Quinn, testify ing at rece nt Maritime Bo ard ra te he ar ­

ings, described the importance of our tra ns po rtat io n services to and 

fro m the main lan d as follo ws (Pa cific Co ast-H aw aii an d A tl an tic/ 

Gu lf- Haw aii Gen eral Inc rea se in Rates, Fe de ral Maritime Bo ard 

docket 869 (h ereina fte r docket 869), tra ns cr ip t, p. 2203) :

Haw aii is vita lly dependent upon its ocean shipping services. More than h alf 

of everything produced in Hawaii is shipped out over the seas to the mainland. More tha n half of everything that the people of Hawaii consume—more 

tha n half of their foods, the ir clothing, the ir automobiles, most of the products 

th at go into their houses—are imported from the m ainland.

Aside fro m mili tary spe nding , two major indu str ies su pp ort ou r 

eco nomy : ag ric ulture a nd tourism.

Ha waiian ag ric ulture h as a long h istory. Th ro ug ho ut th at his tory 

it has been gea red to prod uctio n of specialized p rodu cts f or sh ipm ent 

to the m ark ets of the m ain lan d.

Su ga r is t he most im po rta nt. At the p resent time, H aw aii p roduces 

ap prox im ate ly 1 millio n ton s of sugar pe r ye ar fo r shipm ent to the 

ma inland. About 800,000 to ns move to Cal ifo rn ia in bulk u nd er tar iff 

ter ms fo r refining . Th e rem ain der is shippe d to Atla nt ic coast re ­

fineries. Th e valu e of this expo rt crop to th e Ha waiian economy in 

1959 was rou ghly $131 millio n (ex hib it 107, doc ket 869, prelim inary 

d a ta ).

Our second majo r crop fo r expo rt to th e mainlan d is pin eap ple s. 

Twenty -sev en millio n cases were pro duc ed du ring the fiscal ye ar end ­

ing May 31, 1958. Th e value of the pin eapple crop was $122 millio n 

(i bid .—pr eli mi nary d a ta ).

The se two majo r products, as I have ind ica ted , are in larg e part 

ma rke ted on the mainlan d; the economy of the island s, th e incomes 

of our peo ple and th ei r employment op po rtu nitie s depe nd to a ma rke d 

degree upon the con tinued success of these two sectors of the ag ri ­

cu ltu ral ind ustry .

Th e second majo r nondefense pi llar of the Ha waiian economy is 

the tou ris t ind ustry . Tourism in Ha wa ii has shown rem ark able 

grow th in the las t few yea rs. Th ere a re now alm ost 200,000 v isitors 

to the islands each year. Th e tourist indu str y, as a form of invisible 

ex po rt, h as recently become alm ost as sign ific ant to the St ate’s economy as the visible exp orts of agric ultural prod ucts.

These two majo r ind ust ries, alo ng wi th defe nse spending, constitu te the majo r sources of do lla r ear nin gs fo r Ha wa ii. These ea rn ­

ing s become paym ents fo r the enormous volum e of goods which we 

im po rt from the m ain lan d each year. Th ere a re few m an uf ac turin g in ­

du str ies in Ha wa ii. We im port into the S tate alm ost all of th e p ro duc ts which are pa rt of mid -20th cen tur y life in the Un ite d Sta tes . 

Th us , in 1958, Ha wa ii bought fro m the ma inl and $426 million of 

vario us goods—food, clo thing, con struct ion ma terials, app lian ces, 

dr ug s (ex hibit 34, p. 29, docket 869). Purch ase s from the ma inl and 

cu rren tly are ru nn ing at abou t ha lf a billion dolla rs per year.

Th e dependence upon tra ns po rta tio n is pa rticul ar ly marked in the 

area o f consum er goods. Responsible economists have estima ted, for 

exa mple, th at 90 percent of o ur consumer item s—shoes, televisio n sets, 

and refrigerators, con struction ma ter ial s—which make up the bulk
DOMESTIC OFFSHORE SHIPPING 35

o f personal expenditures of our people, are imported from the mainland. Almost two-thirds of our food is brought over the oceans as 

well. (Dr. James If. Shoemaker, docket 869, transcript, pp. 1750- 

1751). These commodities are indispensable to Hawaii.

In short, we depend in vital ways upon transportation. As a specialized economy, we produce for sale to the mainland, and we use our 

earnings on the mainland to import the essentials of life into Hawaii. 

Some indication of the vast catalog of goods we import and export 

can be seen from attachments II and III to this brief. It lists westbound and eastbound cargo, to the Pacific coast, as well as to the east 

coast and it is listed in four different pages, quite a long list of commodities. Hawaii could not live without transportation.

However, we have but one form of transportation to turn to: ocean 

shipping. The other States of the United States can call on a variety 

of competitive services, including truck, rail, and highway transportation. In Hawaii, aside from a. negligible amount of air freight, 

however, all our essential exports and imports move by ship. Ocean 

transportation has a monopoly over our vital transportation needs. 

Steamship service is the lifeline of the Hawaiian economy.

Thus we stand on a different footing than the States of the mainland. We are wholly unable to avoid the impact of increases in ocean 

shipping costs. Every cost increase fo r our essential ocean shipping 

services immediately affects the economy and people of Hawaii. We 

have no other service to turn to.

II igh shipping costs for our exports affect the competitive position of these exports in the mainland market, and hence the incomes 

and employment opportunities in Hawaii. We have noticed this p articularly in recent years in the case of our pineapple industry which 

is now finding its ability to compete substantially affected by increases 

in ocean freight rates, and is losing mainland markets to foreign pineapple. In fact, one of our large canneries has recently announced that 

it will cease operations.

On the other hand, every increase in freig ht rates on inbound 

commodities, such as cars, refrigerators and food, shoes and construction materials, also has several serious consequences. On major consumer items, purchase of which cannot be postponed or avoided, we 

have no alternative but to pay the higher price. The transportation 

cost increase is passed on to the consumer and adds to the inflationary 

drain on the purchasing power of the consumer dollar in Hawaii. 

Some measure of the high cost of living in Hawaii, occasioned in part 

by the burden of high transportation rates, may be seen from attachments II and IV , attached to this brief, which compare our food prices 

with those on the mainland.

For other items, consumption can be postponed or there are altern ative sources of supply. For these, transportation cost increases can 

have the effect of depressing sales of mainland manufactured goods. 

This is because the diluted value of the dollar may compel the consumers to forgo expenditures, or alternative products manufactured 

in foreign countries and shipped in at foreign-flag freight rates can 

be sold at lower prices.

Note, for example, automobile sales. Foreign cars have penetrated 

the Hawaiian market much more deeply than the mainland market. 

As attachment V shows, in 1958 more than one out of every three 

cars sold in Hawaii were manufactured in foreign countries and im-
36 DOMESTIC OFFSHORE SHIPP ING

ported into Hawaii at foreign-flag rates. On the mainland foreign 

car sales were less than 1 in 10. There is no doubt tha t a p art of the 

move to foreign cars in Hawaii is the result of the simple fact tha t 

the ocean freight on cars all the way from E ngland is roughly identical with the freight on U.S. cars moving only the 2,400 miles from 

Ca lifornia (docket 869, tr an sc ript ,p . 2536).

We are now also importing increasing amounts of meat products 

from Australia and New Zealand, textiles from Japan, and lumber 

and newsprint from Canada. This trend to foreign sources of supply 

and manufacture has meant tha t U.S. suppliers and shippers as a 

whole are finding themselves more and more shut off from the growth 

of the Hawaiian economy. Although our imports from the mainland still vastly exceed our imports from foreign countries, imports 

from foreign countries are growing at a more rapid rate than shipments from (he m ain lan d, as shown in atta ch men t VI.

To give you some idea of the overall m agnitude of the importance 

to our economy of the freight movement between the mainland and 

Hawaii, I have set out in attachment V II I a schedule of tonnage and 

revenue in recent years. Note that our personal income in 1958 was 

only $1,154 million. Ocean freight charges, that is to say, charges 

solely for moving our imports and exports between the mainland and 

Hawaii, were almost $80 million. This is 6 percent of all our income.

It is therefore a matter of fundamental importance tha t the cost 

of ocean shipping to the people of Hawaii be kept as low as is economincally possible. The people of Hawaii are prepared to pay for 

the commercial cost of their service, but they should not be called upon 

to bear alone, by themselves, some higher cost imposed by a national 

policy.

Hawaii has gained statehood. As a matter of equity its admission 

as a State must be on an equal footing with all other States. If it is 

to grow, if its economic ties with the other States are to develop, it 

must also have transportation rates which reflect commercial considerations.

The cost of Hawaii’s essential maritime services to and from the 

mainland is already higher than it should be; is increasing at an 

alarming rate; and may shortly spurt upward to a level beyond our 

ability to pay. This is in considerable part due to Federal maritime 

policy.

Federal law restricts trade between the mainland and Hawaii to 

U.S.-flag vessels. U.S.-flag vessels are more expensive to operate than 

foreign-flag vessels. Vessel replacement in U.S. yards is subtantially 

more costly than replacement in foreign yards. Costs of operating 

U.S.-flag vessels have increased more rapidly in recent years than 

costs of foreign-flag lines.

This higher cost of U.S.-flag service is borne by the people of 

Hawaii alone. In the Merchant Marine Act of 1936, of course, Congress authorized the Maritime Administration to absorb up to onehalf the cost of construction of vessels to be used by American shipping companies in the foreign trades. Similar relief, however, was 

not afforded to American-flag operators in the domestic offshore 

trades. In fact, these trades were expressly excluded from the subsidy provisions of the Merchant Marine Act.

The 1936 act also provided for the subsidizing by the United States 

of the differential in operating costs of American-flag vessels over
DOMESTIC OFFSHORE SHIPPING 37

comparable operations of foreign-flag operators. Again, this effort 

to assist the U.S. merchant marine to match the lower costs of foreign 

carriers was not extended to the domestic trades.

As a result of this national policy, the increasingly high cost of 

U.S.-flag services between the mainland and Hawaii must be borne by 

the people of Hawaii alone. Rates in mainland-Hawaii trade have 

nearly doubled in a decade. The history of these rate increases is reflected in attachment V III . It shows between the years of 1951 to 1959 

rates have gone up 88 percent. It is hardly surprising, therefore, 

that the cost of living in Hawaii has gone up much more rapidly than 

elsewhere in the Nation, as shown in attachm ent IX . It shows that 

on the mainland, U.S. consumer index jumped—this is between 1950 

and 1959—U.S. consumer index jumped from 102 to 124 while the 

Hawaiian index jumped from 120 to 151.

Had Honolulu been a foreign port during this same period, our 

annual freig ht bill would have been consistently lower and would 

not have reflected the inflationary spiral which is now having such a 

vital effect on our economy.

The policy of the Merchant Marine Act of 1936 was geared from all 

appearances to national considerations of defense. It was thought essential to insure a modern fleet-in-being under the American flag, and 

to continue a nucleus of commercial shipbuilding, against the hazard 

of war.

Thus the Federal Government in 1936 encouraged domestic shipyards and the development of a more modern merchant marine by the 

use of construction-differential subsidy and enabled the continuation 

of U.S.-flag foreign services by an operating-differential subsidy. 

The wisdom of this policy became apparent in the dark days of 

World W ar II .

Perhaps there were valid reasons why Congress did not extend 

these same benefits to the carriers in the Hawaiian trade in 1936, while 

at the same time continuing to require, through longstanding restrictions, that Hawaii be served only by U.S.-flag carriers in Americanbuilt ships. Hawaii was then a territory. And the cost differential 

between U.S.-flag carriers and foreign-flag carriers perhaps was not 

so drastic then as it is today.

But as this committee knows, since World W ar II economic conditions of the ocean steamship industry have changed markedly. The 

bar against use of foreign-flag vessels now has the effect of th rusting 

upon Hawaii the full burden of costly American shipping services. 

I would like to repeat that. The bar against the use of foreign-flag 

vessels now has the effect of thrusting upon Hawaii the full burden of 

costly American shipping service.

Perhaps this is essential from the standpoint of the national inte rest. It may well be a vital national policy to preserve the fleet used in 

the mainland-Hawaii service under our flag in the event of a national 

emergency. We would not question such a policy decision. But we 

feel th at to require the people of Hawaii to bear the entire cost of this 

national policy decision is unjust and inequitable.

I would like to repeat that. We feel to require the people of Hawaii 

to bear the entire cost of this national policy decision is unjust and 

inequitable.
38 DOMESTIC OFFSHORE SHIPPING

Th is burde n ap pa rently will increase to even more severe pr op or ­

tions in the near future. Th e majo rity of the vessels in the Ha wa iima inl and service were purch ase d by th e c arrie rs from th e Government 

sh ortly af te r Worl d W ar I I at fav ora ble price s of $1 millio n to $2 

millio n each. Thus, Matso n’s tota l investme nt fo r its lar ge fleet, m uch 

of it alread y reco vere d thro ug h depre cia tion, was only $36 million. 

Bu t the useful life of thes e vessels is soon to exp ire. I t is now' estimated th at the cost of con struct ion of a rep lacem ent fo r each vessel, 

wi th the necessary techno logical im provem ents, w ill cost up to 10 times 

the inv estment in the present vessels. Matson, fo r example, has estima ted th at to replace its W orld W ar I I fleet wi th mo der n vessels, it 

will require up wa rds of $300 million, as shown in att achm en t X.

I w ill n ot repe at th e l ist because i t is a very lon g list , bu t the vessels 

are nam ed i n that att ach me nt.

Th ere are seve ral possibilities—all disastrou s. E ither the carriers 

will find them selves unable to ga ther the br ea th -ta king capit al sums 

req uir ed for new vessels—which will mean th at Haw aii will be served 

by obsolete, de terio ratin g vessels, or the rep lac em ent vessels will be 

bu ilt a nd the ir cost passed on to the people of Haw aii in the form of 

astron omical freigh t charges . These high er frei gh t cha rges could 

w’ell be beyond ou r ab ility to pay.

Some rem edy fo r th is inequity, some rel ief fro m th is approaching 

crisis, must be forthc om ing . Measures mu st be take n to insure th at 

the cost o f ocean tra ns po rta tio n to the peop le of Haw 'aii be pegged at 

the lowest feasible level. Th is could be accom plished eith er dire ctl y— 

by opening up the trad e to the lowest cost foreig n-flag op era tor, a 

rem edy the Stat es does n ot recom mend, o r ind ire ctly, by arra ng in g fo r 

a system of Fe de ral assistan ce, to be pas sed on to the consumers as 

low’er or more stab le rates, whi ch would offset the hi gh er c ons truction 

and op erating costs of U.S.-flag carriers.

Th e State has giv en a gr ea t deal of thou gh t to the precise form 

which this rem edial leg islation should tak e. We have not, however, 

pro posed any specific term s fo r a bill for you r co nsideration , prim arily 

because we reco gnize th at its final form must be based on con siderations of natio nal policy with resp ect to wh ich you are much more 

qualified to speak th an we. We are, how ever, anx ious to continu e 

to aid and coo perate wi th yo ur search fo r a solution . We have a 

wealth of inform ation whi ch might be rel ev an t to your con sidera ­

tions, much of it gathe red in the course o f the rece nt Mari tim e Bo ard’s 

inv estiga tion of the 1959 Ha wa ii rate increase. We would like to 

make this ava ilab le to you. My office and ou r rep res entative s here 

in Washin gto n are prep ared to work with yo ur staff at any time.
DOMESTIC OFFSHORE SHIPPING 39

It is not the position of the State that its people should escape the 

payment of just rates for ocean shipping services. Hawaii does not 

want the Federal Government to provide ocean transportation at the 

expense of its fellow citizens on the mainland. We will pay our own 

way. The State feels, however, th at it should not have to bear alone 

the costs of a national program. In order that the United States 

might have vessels readily available in the event of a national emergency, Hawaii is now compelled by national law to pay an artificially 

high price for its shipping. If this national defense policy is valid, 

its cost, we think, should be borne by the people of all the States of 

the Union.

(The attachments to Mr. Kashiwa’s statement follow.)

Atta chm ent I

S e l e c t e d e c o n o m i c i n d i c a t o r s

I. G R O S S P R O D U C T O F S T A T E

Y ea r A m o u n t A ve ra ge an nual 

p erc en t i nc re as e

1939 - _______________ _________________ ____ _______

Th ou sa nd s

$562, 500

1952 . . . ....................................................................... - ............. 1,1 41, 304 1939-52_______ 8.6

1958__________________ _______ __________ ____________________________ 1,4 00, 000 1952-58_______ 4.5

I I . T O T A L P E R S O N A L IN C O M E

P er io d or ye ar A m o u n t In d ex

1946-50 ________ _________ _____ ____________ ______ __________ ____

Th ou sa nd s

$708,000 

876,000 

1,0 24,00 0 

1,0 98,00 0 

1,1 54,00 0

100

124

145

155

163

1951-55....................................... .................................................................................................

1956 . ................ ........................................................ ............... ........... .......

1957.................................................................... . ........................... - ............... ............. .............

1958. ................................ ......... ..................... ........................... ............. .

I I I . A V E R A G E P E R C A P IT A IN C O M E

P er io d or y ea r A m o u n t In dex

1946-50........................................... ......... .................................. ........................... ......... ...........

Th ou sa nd s

$1,3 73

1,694

1,787

1,821

1.852

100

123

130

133

135

1951-55 . . ..........................................................................................- .............

1956 .............................. ................. ..................... ........... .........

1957........... ........................................... ............. ............... . ................... ..................... ...............

1958______ __________________ _________________ _______ ______ ______ ______

So urce : E x h ib it N o. 33, F .M .B . dock et N o . 869, " T h e H aw ai ia n M a rk e t” , co m pi le d an d pu b li sh ed by 

J. W alt er T hom p so n C o.
40 DOMESTIC OFFSHORE SHIPPING

Attachment II

Commodity Cargo carried by Matson Navig ation Co., Pacific Coast to Haicaii,

1959 Com mercial: Sh or t tons Merchandise, general, not otherw ise specified-------------------------- 227, 033

Asphalt, liquid in hulk___________________________________ 5, 242

Autos and tru cks________________________________________ 10, 034

Beer____________________________________________________ 14, 375

Boxes, fiberb oard________________________________________ 15, (173

Canned goods____________________________________________ 39, 627

Feed and gra in :

In bags______________________________________________ 63,110

In bulk______________________________________________ 1,153

Fe rtili ze r:

In packages__________________________________________ 23, 410

In bulk______________________________________________ 48, 869

In liquid_____________________________________________ 39, 832

Flo ur___________________________________________________ 20, 981

Fuel oil, bulk____________________________________________ 232,336

Fu rnitu re_______________________________________________ 3, 579

Household appliances_____________________________________ 5, 513

Iron, steel, and machinery_________________________________ 69, 283

Lumb er:

Loose__________________________________________________ 11, 861

Strapped____________________________________________ 117, 330

Paper, newsprint in rolls__________________________________ 8, 859

Petroleum prod ucts_______________________________________ 12, 350

Plywood, stra pped________________________________________ 4, 288

Refrige rato r cargo_______________________________________ 45, 940

Rice____________________________________________________ 16, 540

Tinplate_________________________________________________ 10, 499

Ventilated cargo__________________________________________ 19, 093

Total commercial_______________________________________ 1, 078, 813

Sea vans (military household goods moving on Government bill

of lading )_____________________________________________ 13,347

MSTS______________________________________________________ 80, 316

Total westbound________________________________________ 1,172. 420

Source : Exhibit No. 29, FMB docket 869. , =

Commodity Cargo carried by Matson Navigation Co., Hawaii to Pacific Coast,

1959

Short tons Merchandise, general_________________________________________ 9, 720

Autos and trucks _____________________________________________ 720

Coffee, green ________________________________________________ 3,186

Containers, empty, ret urned___________________________________ 1, 352

Hides, green________________________________________________ 1,155

Household goods 589 Iron, steel, and machinery____________________________________ 5, 385

Molasses, in bulk_____________________________________________ 215. 839

Pineapple, canned (unitiz ed )__________________________________ 03,804

Pineapple, canned (loose )_____________________________________ 120,081

Refrig era tor cargo____________________________________________ 20, 090

Sugar, raw, in hulk__________________________________________ 781,084

Sugar, refined, in sacks_______________________________________ 20, 420

Wallboard__________________________________________________ 20. 824

Sea vans, empty______________________________________________ 2. 200

Total commercial_______________________________________ 1, 273, 793

Sea vans (military household good moving on Government bill of

lad ing)------------------------------------------------------------------------------ 9,859

MSTS______________________________________________________ 21, 207

Total easthound________________________________________ 1. 304. 859

Source: Exhibit No. 29, FMB docket 869. = = = = =
DOMESTIC OFFSHORE SHIPPING 41

Cargo carried by Matson Navigation Co., United States Lines Co., and Isthmian

Lines, Inc., Atlantic-Gulf to Hawaii, 1959

Commodity

Com mercial: Short tom Merchandise, general, n.o.s___________________________________ 53, 623

Autos and trucks _____________________________________________ 2, 090

Canned goods_______________________________________________ 3, 759

Chemicals__________________________________________________ 259

Clay______________________________________________________ 157

Cotton piece goods--------------------------------------------------------------- 1,160

Fecxl and grain ____________________________________________ 30,231

Fe rtiliz er__________________________________________________ 8, 469

Floor covering_____________________________________________ 884

Fu rnitu re__________________________________________________ 539

Glass and glassware________________________________________ 862

Household appliances_______________________________________ 332

Household effects (v an s)_____________________________________ 1,340

Insecticide_________________________________________________ 977

Iron and stee l_____________________________________________ 26, 725

Liquors and beer___________________________________________ 2, 994

Machinery_________________________________________________ 767

Me ets, re efe r____________________________________________________ 362

Pap erb oar d________________________________________________ 547

Pap er produc ts____________________________________________ 502

Peanuts ___________________________________________________ 314

Sulp hur___________________________________________________ 2, 912

Tex tiles___________________________________________________ 990

Tin plate___________________________________________________ 37, 961

Total commercial________________________________________ 178, 756

Sea vans (m ilitary household goods moving on Government bill

of la d in g )_____________________________________________________ 1,3 77

MSTS--------------------------------------------------------------------------------- 15,773

Total westbound_________________________________________

Sources : Exhibits 2, 8, and 29, FMB docket 869.

194, 599

Cargo carried by Matson Navigation Co., United States Lines Co., and Isthmian

Lines, Inc., Hawaii to Atlantic-Gulf, 1959

Commodity

Com mercial: Sho rt tons Merchandise, general, n.o.s______________________________________ 7, 253 Household goods___________________________________________ 417

Iron an d stee l (s c ra p )___________________________________________ 1,3 85

Pineapples and juice__________________________________________ 290, 751

Refrigerator cargo_________________________________________ 66

Sugar, raw, in bulk_______________________________________ 82,981

Tinplate------------------------------------------------------------------------------ 485

Total commercial________________________________________

Sea vans (m ilitary household goods moving on Government bill

of lading )____________________________________ ____ _

MSTS_____________________________________________________

Total eastboun d__________________________________________

383, 938

2,291 

19, 672 

405, 901

Sou rces : Exhibits 2, 8, and 29, FMB docket 869.
42 DOMESTIC OFFSHORE SHIPPING

Attachment I I I

Comparison of annual average retail prices for major food items in U.S.

mainland cities and Honolulu

Item

1959 average price

U.S. cities Honolulu

Bacon (sliced, per p ound) ..................... . ........... . ........................ ........... ........... $0.651 $0 849 Salm on (pink, per pound)........................... ................. ............................ ......... .622 663 Bu tte r (per pound)’.................... . ............................... .............. ..................... . .759 835 Cheese (per po und).............. ................... ............................ . ......................... .581 674 Milk (evaporated, 1 4 ounces)................... . ................... ..................... . ......... .153 . 176 Potatoe s (per po un d) ............................................................... ...... ......... ........ .066 . 116 Onions (per p ou nd )................. ................ ........................ .............. ................ . . 112 . 125 Peaches "(can, No. 2W )............ . . . .......... .......... ................ . . . .353 . 409 Corn (can, No. 2)...... .............. ................................. ..................... ............. . 192 .243 Peas (can, No. 2)............ ........................................................................... .202 254 Flour, wheat (5 po unds) ............. ...... .................................... ............. . ............... . 544 . 742 Coffee (per po un d).. ........... ........................ ................... ......... ... . 774 986 Lunch meat (can, 12 ounces)______ _____ _______________ __________ .512 .558

Sources: Mainland cities, U.S. Dep artment of Labor, Bureau of Labor Statistics. Honolulu, State 

dep artment of labor and industrial relations, bureau of research and statistics.

Exhibit No. 61, FMB docket 869.

Attachment IV

Comparison of annual average retail prices for food item s listed in attachment

III, 5 mainland cities and Honolulu

1959 City average

Ho nolulu----------------------------------------------------------------------------------------$6. 630

U.S. city average__________________________________________________ 5. 521

Los Angeles_______________________________________________________ 5.69 8

Por tla nd __________________________________________________________ 5. 560

San Fran cis co _____________________________________________________ 5.970

Se at tle ____________________________________________________________ 5. 502

New York_________________________________________________________ 5. 546

S ourc es: M ai nl an d cities , U.S . D ep ar tm en t of Lab or , B ur ea u of Lab or S ta ti st ic s. 

Ho no lulu, S ta te dep ar tm en t of la bo r an d in d u st ri al re la ti ons, bu re au of re se ar ch an d 

st ati sti cs. E xhib it No. BI, FM B do ck et 869.

Attach m en t V

Comparison of foreig n automobile sales, Haw aii and the mainland

Percent of total sales

Main land Hawaii

1957_____________________________ ____________________ __________ 3.8 14.7 1958________________ ____________ ________ ________ ______ . . 8.6 35.7 1959................... .............. ................ ......... ..................... .............................. 9.8 30.8

Source: FM B docket 869, tr. pp. 2.535-2536.
DOMESTIC OFFSHORE SHIPPING 43

Atta c h m en t V I

Growth rates of Hawaiian purchases fro m mainland and foreign countries—

Purchases from mainland and impo rts from foreign countries

[I n th o u san d s o f d ol lars]

Y ear o r av er ag e pe riod H aw aii ,

m ain la n d

In dex H aw ai i,

forei gn

In dex

1946-501 .............................................................. $304,0 00 100 $12,154 100

1952 55 1 .............................................................. 365,0 00 120 19,714 162

1956 ___________ _________ ____ - 407,000 134 22, 779 187

1957 ..........................................................- 464.0 00 153 26,695 220

1958 ».................................................................................. 426,0 00 140 33,244 274

1 1948 an d 1951 n o t av ai la bl e.

2

 Y ea r of su gar s tr ik e.

So ur ce : E x h ib it N o. 33, F M B do ck et 869, “ Th e H aw aii an M a rk e t, ” co m pi le d an d p ubli sh ed b y J. W alter 

T hom pso n Co .

Att a c h m en t V I I

Annual freight movem ent between Haicaii and the mainland liner services

T O N N A G E

[I n s h o rt to ns of 2,000 po un ds )

1957 1958 1959

Pac ific c oa st -H aw ai i se rv ice _ _________________________ 2,710, 806 

658,807

2,107,18 7 

612,010

1 2,4 77, 335 

•\ tlan tie/ gnlf -H aw aii se rv ice ______________________________ 600,500

R E V E N U E S

[I n th o u san d s o f dollars]

Pa cific co as t- H aw ai i se rv ic e. - _____________________________ 52,290

2

 18,187

48,8 20

2

 17,857

55,6 67 

2

\ tla nt ie /g nlf -I faw ai i se rv ice . _____________________________ 17,043

T o ta l_______ ____ ______ ______ - ........... - ------------------------ 70,477 66,677 72.710

• W ei ght t ons ca rr ie d b y H aw ai ia n M ar in e F re ig htw ays u nav ail ab le .

2

 R ev en ue s of U n it ed S ta te s Lin es unav ail ab le (1957, 25,338 to ns; 1958, 31,877 to ns ; 1959, 36,637 to ns) . 

So ur ce s: E x h ib it s 1, 2, 8, 10, a nd 29, F M B dock et 869.

Atta c h m en t V I I I 

Pacific coast-Hawaii rate increases

[I n pe rc en t]

Eff ec tiv e d ate o f 

in cr ea se

A m o u n t In cr ea se o ve r 

1950 ba se

Feb . 1,1951................... 10.0 10

Ia n. 14, 1 9 5 2 .. .............. 7.5 18.25

M ar . 1,' 1953_________ 8.5 28.30

M ar . L 1955............ . . . 6.0 36

Eff ec tive d ate of 

in cr ea se

A m o u n t In cr ea se ov er 

1950 bas e

J u ly 15, 1957.................. 13.2 53.95

Jan . 20, 1958_________ 9.0 67.81

S ep t. 14, 1959________ 12.5 88.79
44 DOMESTIC OFFSHORE SHIPPING

Att a c h m en t IX

Comparison of rates of increase of Hawaii and U.8. consumer prices indexes

[1 94 3= 10 0]

Y e a r

U .S . c o n ­

s u m e r p ri ce 

in d e x

H a w a ii co n ­

s u m e r p ri c e 

in d ex

19 50 ______________________________ 10 2. 8

11 4. 5

124. 6

12 0.1

13 5. 9

15 1. 7

19 55 __________________________ .

19 59 __________________________

S o u rc es: B u sin e ss r ese a rch d e p a rtm e n t of t h e B a n k of H a w a ii , e x h ib it N o . 118, F M B d o c k e t 869 .

Attach m en t X

Replacement cost of Matson Navigation Co.’s 1960 cargo fleet

V es se l

H a w a ii a n R a n c h e r____

H a w a ii a n F a r m e r ...........

H a w a ii a n C r a fts m a n ...

H a w a ii a n P la n te r ...........

H a w a ii a n E d u c a to r ___

H a w a ii a n F is h e r m a n ..

H a w a ii a n M e rc h a n t__

H a w a ii a n B u ild e r...........

H a w a ii a n P a c k e r ............

H a w a ii a n R e ta il e r___

H a w a ii a n R e fin e r_____

H a w a ii a n l u m b e r m a n

H a w a ii a n T r a d e r ______

H a w a ii a n T o u r is t...........

H a w a ii a n T ra v e le r____

H a w a ii a n c it iz e n •..........

C a li fo rn ia n •___________

H a w a ii a n >_________ . . .

T o t a l ____________

Y e a r

b u ilt

O rig in a l co st 

p lu s i m p ro v e ­

m e n ts

C o st of re p la c ­

in g fl eet w it h 

m o d e rn h ig h ­

sp e ed carg o 

s h ip s a n d 

sp e cia l sh ip s

1944 $2 ,3 33,2 10 $1 4, 65 5,00 0

1944 2, 077, 990 14 ,65 5 000

1945 1, 71 8, 70 7 14, 655 ,000

1945 1, 689, 608 14, 655, 000

1945 1, 563, 616 14, 655, 000

1945 1. 629, 505 14 .6 55 ,000

1945 2,3 29,2 50 14, 65 5,00 0

1945 2, 349, 726 14 ,6 55 ,000

1943 2,4 07,1 18 14 ,6 55 ,000

1944 1, 33 1, 42 7 14 ,655 ,000

1944 2,3 90,5 50 14 ,655 ,000

1944 62 8,5 01 14 ,655 ,000

1945 91 0,91 8 14 ,6 55 ,000

1945 99 4,77 9 14, 65 5,00 0

1945 993, 528 14, 655, 000

1960 4. 0 50 ,0 00 14 ,6 15 ,000

I9 60 3,3 00,0 00 14 ,615 ,000

1960 3,3 00,0 00 14 ,6 15 ,000

35,9 98 ,3 43 27 8, 32 5,00 0

i R e m o d e le d .

S o u rc e: M a ts o n N a v ig a ti o n C o ., e x h ib its 25 a n d 29, F M B d o c k e t 869 .

Senator Bartlett. Thank you, Mr. Attorney General.

The rate increases to which you have referred apply equally and in 

equal measure to eastbound traffic?

Mr. Kashiwa. No. I don’t like to go into a detailed discussion of 

our last rate, but as you know in ocean shipping—by the way, the 

last rate case was 12.5 percent, generally speaking, but in certain areas 

tha t was not applied.

Senator Bartlett. Over the years, over the last decade, for example, would you say that the increases that have been applied to 

the transportation of eastbound cargo have been identical or closely 

so with westbound cargo?

Mr. Kashiwa. I would not say so, because there were certain reductions made in certain areas on eastbound cargo.

Senator Bartlett. Applying to pineapple in many instances?

Mr. Kashiwa. More to sugar.

Senator Bartlett. More to sugar. Do you have any explanation 

of that?
DOMESTIC OFFSHORE SHI PPI NG 45

Mr. Kasiiiwa. Now, Senator, this is an area which is now being 

discussed in our rate case before the Maritime examiner, and it will 

be before the Board. I am, personally, counsel of record. Of course, 

the briefs will be available to your staff, if the staff wants to discuss 

the problems, but i t is a field where I do not wish to go into a lengthy 

discussion about it.

Senator Bartlett. We have no desire or intention to try a case 

here, but let me persist for a moment.

Is this situation to which you refer historically true? To use a 

word which may not be accurate, has there always been favoritism for 

sugar as compared with pineapple?

Mr. Kasiiiwa. In one of the earlier cases, case 808, there was an 

instance of favoring pineapple, and a correction was made.

Senator Bartlett. Well, we will let t hat be.

Are you now contesting a proposed freight rate increase ?

Mr. Kasiiiwa. Oh, yes. Yes, the 12.5-percent rate case was heard. 

We started out in New York, San Francisco, Hawaii, back in Washington, and is now before the examiner.

Senator Bartlett. When was the request for tha t increase made?

Mr. Kasiiiwa. In September 1959.

Senator Bartlett. All right. That is the one I have in mind.

Now, it is true, is it not, Mr. Attorney General, tha t the cost of 

living in Hawaii is materially higher than in any of the original 

48 States?

Mr. Kasiiiwa. It is.

Senator Bartlett. Why should tha t be so, in your opinion ?

Mr. K asiiiwa. Well, it is our opinion tha t one of the contributing 

causes is higher freigh t rates. Everything must be shipped out there.

Senator Bartlett. You heard Mr. Stakem make his statement this 

morning, I know. He very correctly, in my opinion, said ocean freight 

rates in and by themselves aren’t the sole reasons for increases in the 

prices of commodities when they reach the public. And he named 

several other factors that might and I suppose always do apply. Have 

you any personal view as to whether ocean freig ht rates are the pri ncipal factor?

Mr. Kasiiiwa. Now, this I would like to say: On certain specific 

items what the chairman said may be true. But where there is a generally high level, and the State is located 2,000 miles away from the 

mainland and here these rates are going up and up, there is a corresponding rise in the index. We can point our finger and say, well, this 

certainly should materially contribute to this rise.

Now, 1 think tha t there is no exact way of determining to the n th 

degree whether a certain raise is all due to a certain thing, but as a 

general rule we can point to the difference between the mainland and 

Hawaii, tha t we are separated by this body of water and we have this 

higher living cost index, and I thin g that is attributable to the freight 

rates.

Senator Bartlett. Well, it is true, is it not, Mr. Kashiwa, tha t the 

Federal Government itself recognizes the markedly higher cost of 

living in Hawaii by gran ting its own employees a cost of living 

allowance?

Mr. Kashiwa. That is true.

71709 4
46 DOMESTIC OFFSHORE SHIPPING

Senator Bartlett. What is the order of that allowance now in 

Hawaii ?

Mr. K ashiwa. I don’t know. I am a State employee. But it runs 

about 25 percent, doesn’t it? I am not so certain about it. I can get 

tha t differential for you and submit it to you.

Senator Bartlett. It is my recollection it is 20 percent in Hawaii 

now, but 1 would appreciate your doing that, as indicative of the 

higher costs of living there.

Mr. Attorney General, to your knowledge is any fre ight transported 

from the U.S. mainland to Hawaii by barge?

Mr. Kashiwa. Yes.

Senator Bartlett. When did that start ?

Mr. Kashiwa. Many years ago there was a steamship strike, and 

there were some barge shipments to Hawaii, but lately it has been 

revived from the Pacific Northwest area, just very lately.

Senator B artlett. Are the barges important in the transportation 

scheme of things as of now ?

Mr. Kashiwa. No, it has been only very recently these barges have 

come in and, as I understand, they handle lumber and i t is significant 

to this extent tha t lately Matson has announced that with respect to 

its Northwest trade, certain of its shipping schedules are going to be 

materially disrupted.

Senator Bartlett. From which of the U.S. ports does the greatest 

Hawaii tonnage come?

Mr. Kashiwa. San Francisco and Los Angeles.

Senator Bartlett. What would be the percentage from Portland 

and Seattle—small, medium ?

Mr. Kashiwa. Portland, Seattle, I would say it is small compared 

to San Francisco and Los Angeles tonnage. But I could get those 

figures for you.

Senator Bartlett. Don’t trouble. I don’t think tha t will be 

necessary.

Is San Francisco the nearest port on the mainland to Honolulu?

Mr. Kashiwa. Tha t is true.

Senator Bartlett. In Senator Long’s statement this morning, confirmed by you, he said tha t in the Sy2

 years last past freight rates 

have witnessed a cumulative rise of 89 percent. Do you have any 

readily available information as to the situation in tlie comparable 

period before then ?

Mr. Kashiwa. Yes. We don’t have it here, but we can get the 

raises before 1951 for you and we can submit th at in tab ular form.

Senator Bartlett. Ocean freight rates have gone up; trucks rates 

have gone u p; and if anything hasn’t gone up in the last decade, I 

don’t know offhand what it might be. However, do you have any 

information which you might make available to the committee as to 

these increases of 89 percent compared with general rail increases, 

truck-rate boosts, and increases which might have been experienced 

on intracoastal or intercoastal shipping routes ?

Mr. Kashiwa. We don’t have the figures here now, but certainly 

we can work this out for you.

Senator Bartlett. I don’t know if I should call upon you to supply tha t information. Perhaps we could get it. I think we will save 

you the labor of going into that, because tha t really is not your proper 

function. But I think' we must have from the ICC or some other Fed-
DOMESTIC OFFSHORE SHI PPI NG 47

era l agency some kin d of ya rdstick here by which to make comp ari ­

sons.

Mr. Kashiwa. I wanted to po in t out, even thou gh these percen tages may be hi gh, on the ma inland here y ou hav e an a lte rnative , where 

som ething goes up you do n’t nec essarily have to use th at service, 

you can use some othe r service, like tru ck ing, fo r example. In H awaii you do n’t hav e this alt erna tiv e. You either have to use steamship or n oth ing .

Se na tor Bartlett. Or it doesn’t get the re.

Mr. K ashiw a. That is rig ht .

Se na tor Bartlett. H ow is tourism fa ri ng in the St at e to the w estwa rd ?

Mr. Kashiwa. Very well, Senator . We have been spendin g a lot 

of m oney on destinatio n centers on t he othe r islands . W aikiki is just 

boom ing. In th at b usine ss everything looks very good at the pre sen t 

time. Of course, it looks as thou gh , on the face of things , because 

they all fly the re, th at shipping doesn’t affec t th is b usiness too mu ch, 

but at the same time, when the y come the re, they must be fed , the y 

buy materials and goods the re, and this all comes by steamship.

Se na tor Bartlett. Mr. Atto rney Gener al, it is tru e, in all proba bility , th at all of us in this room are qu ite ad ap ted to th e pro position 

of bo arding an airplane and goin g from where we are to whe re we wTan t 

to go. B ut is it no t likew ise tru e th at the majority , in num bers and 

per cen tages, of Am erican s have never been aboard a plane? Lots 

of people will no t tak e an airp lane for vac ation t rips o r fo r any o ther 

purpose, and if the y do n’t have passenger service to Ha wa ii, fo r example, as they do not to Al ask a, they w on’t go to H aw aii ?

Would you agree wi th t ha t?

Mr. K ashiwa. Are you ta lk in g about steam ship—I di dn ’t ge t y our 

question.

Se na tor Bartlett. My question is t h is : If you did n ot ha ve pa ssenger steam ship service to H aw aii , wou ld you not deny m any p eop le the 

op po rtu nity of going the re, because they are no t willing to fly ?

Mr. K ashiwa. Tha t is tru e. Th ere are many, ma ny peo ple—I am 

still surpris ed —many who a re no t wi lling to fly. Th ey would ra th er 

sail dow n there and come back on a boat. Fo rtun at el y we do have 

them sti ll tra ve lin g out the re and also on the Matsonia.

Se na tor B artlett. Mr. Gr inste in fortifi es my vag ue recollection on 

this subje ct by say ing 78 perce nt of th e people in the Un ite d States 

have n ever flown, and I suppose a substan tial p erc entag e o f the 78 p er ­

cent have no inten tio n of flying, or the y would have done so before 

now.

Mr. K ashiwa. W ha t I wa nt to b ring befo re the com mittee is th is: 

this rise in costs, when people he ar abo ut the prices of th ings in 

Ha wa ii, the tou ris ts, instea d of being enc ouraged to go out the re, it 

has a de terin g effect. For example, th is mo rning we he ard abo ut 

your $3 ha ircu t in Ala ska. "When a to ur ist he ars about this, he says, 

well, it must be pr etty h igh cost ou t th ere , just th at ind ex alone. An d 

it does hav e a de ter ing effect. An d I think th at , alt ho ug h tourists 

don ’t go down there on ships, stil l th is economy there sho uld be as 

attrac tiv e to them as mu ch as possible.

Se na tor B artlett. We ll, I th in k we ought to hav e availabl e no t 

only by way of attachm ent, bu t we ought to rea d into the record , 

a few of the food price dif fer entials which you noted in yo ur att ach-
48 DOMESTIC OFFSHORE SHI PPI NG

ment 3. These figures come from the Bu rea u of La bo r Statist ics of 

the U.S . De partm ent of Labor, and I note, Mr. At torney General, 

th at you inform us th at the 1959 ave rag e price of bacon, sliced, per 

pound, on the ma inl and was 65 cents—o r ap prox im ate ly th at , and 

in Ha wa ii it was 84 cents, 85 cents almost. And salm on—we must 

get th at in the reco rd, of course—pi nk, 62 cents, and in Haw aii it 

was 66 cents. The differential is no t so high the re, th an k goodness, 

because we w ant you to ea t lots of Alaska salmon.

Mr. Gr ins tein ju st ga ve me a ho rrible thou gh t. He s aid you migh t 

be ge tting some of th at salm on fro m Ja pan . I f you are, don’t.

Bu tte r costs 79 cents on the main lan d, an d in Ha wa ii 83 cents. 

Potatoes were 6.066 cen ts a pound on the main lan d and 11.6 in H aw aii.

These are im po rta nt con sideration s, an d if the high er prices in 

Ha wa ii don’t arise on account of the tra ns po rtat io n system, I do n’t 

know wha t th e reasons would be.

I think th at two item s especially th at you refe r to are of grea t 

importance. You said th at you are discov ering th at the com petition 

with your pin eapple indu str y has reache d the po int where one large 

fac tory is going to have to close dow n, and th at the small foreig n 

cars are prov ing so po pu lar th at inc rea sin g num ber s are brou gh t in 

on fo reign ships.

Would you agree wi th me, Mr. At torney Ge neral, when I say th at 

I have a conviction th at it is jus t as i mpo rta nt in resp ect to m aintaining a fleet in being to hav e them ser vin g in these offshore are as as 

in the foreign trad e and the ships migh t, and even could, be more 

rea dil y av aila ble in time of need ?

Mr. Kasiiiwa. I th in k it is ju st as im po rtan t; I agre e, Senat or.

By the way, Senator , there is a very in teresting aspect of this lum ­

ber shipm ents out of Canada com ing to Haw aii .

Se nator Bartlett. Increasin g ?

Mr. K asiiiwa. In cr ea sing ; yes.

Se na tor Bartlett. You men tioned, as I recall, th at tra ns po rta tio n 

costs amo unt to 6 pe rce nt of the total cost of a prod uc t in Ha wa ii.

Mr. Kasiiiwa. That is not the exact statem ent I made.

Se nator B artlett. I did n’t think it was. W ha t did you say there ?

Mr. K asiiiwa. Th is is 6 percen t of all of ou r income.

Se nator Bartlett. Oh, ye s; th at ’s much different.

Do you have any comp ara tive figures fo r any of the other states, 

in respect to tra ns po rta tio n ?

Mr. Kasiiiwa. No, we do n’t, Senator. Th is again , if it is rea lly 

nece ssary, we can furnish .

Se nator Bartlett. It seems v ery, v ery h igh to me. I think we w ill 

seek th at inf orma tio n fro m anoth er source. We will try the ICC.

Mr. Kashiwa. By the way, this is both ways, eastbo und and wes tbound p ut together.

Se nator Bartlett. I understand.

Now, yo ur att achm en t 8 shows th at a ra te increase in the Ha wa ii 

trad e of 10 perce nt went int o effect on Fe br ua ry 1, 1951 ?

Mr. K asiiiwa. Yes.

Se nator Bartlett. An d the n again , Ja nuar y 1952, an addit ion al 

7i/2

 pe rcen t: Ma rch 1, 1953, 8i/

2

 pe rcen t; Marc h 1, 1955, 8 pe rce nt; 

Ju ly 15, 1957, 13.2 p ercent; Ja nu ar y 20, 1958, 9 p erc ent; and Septe mber 1 4,19 59 ,121/fc p erce nt; ad ding up to a gran d total of 88.79 percent.

Mr. K ashiwa. T hat is rig ht.
DOMESTIC OFFSHORE SHI PPI NG 49

Senator Bartlett. Now you say the State is objecting to the latest 

increase?

Mr. Kasiiiwa. That is right, the September 14, 1958, 12.5 percent. 

We have tiled a protest and it is in litigation now as to whether that 

is j ust or not. It is now before the examiner.

Senator Bartlett. In the meantime, are these higher rates being 

collected?

Mr. Kashiwa. Yes.

Senator B artlett. Is the money thereby taken by the carriers being 

segregated for possible refund ?

Mr. Kasiiiwa. No, it is not.

Senator Bartlett. So what does that mean? If the Federal Maritime Board were later to determine tha t the increase was not warranted, the shippers and /or consumers would not be reimbursed?

Mr. Kasiiiwa. They will be.

Senator B artlett. It is being segregated, then, held in escrow ?

Mr. Kashiwa. Well, even though it is not held in escrow, my understanding is there will be a reimbursement to the shippers.

Senator Bartlett. There is a reimbursement provided in any case?

Mr. K ashiwa. Yes.

Of course, the difficulty would be turn ing tha t over to the consumer. This would be a very, very difficult problem.

Senator Bartlett. Now on page 13 of your statement you said that 

Matson, for example, has estimated tha t to replace its World War I I 

fleet with modem vessels would require the expenditure of $300 

million. Have you learned whether Matson is ready, able, or even 

willing to put up any such sum of money for replacement?

Mr. Kashiwa. I do not know. But this is actually taken from our 

case, FMB docket No. 769. These figures are taken from the docket.

Senator Bartlett. A company, with every good intention in the 

world, might not be able to do this.

Mr. Kashiwa. It is a very large figure.

Senator Bartlett. Then going one step further on tha t—or one 

further league on tha t sea, or that metaphor, maybe—what, aside 

from national defense considerations, in your opinion, is going to 

occur if something is not done in this situation, and these ships were 

out and the inflationary process continues ?

Mr. Kashiwa. Well, either these ships will be remodeled, remodeled, remodeled, and at the end I am sure tha t they will not have 

any use as ships for defense, but we will have to get along with very 

old unsatisfactory ships, because $300 million is rather prohibitive, 

and unless some Federal aid comes in, whether by shipbuilding subsidy or something of tha t nature, the future is very, very dark.

In fact, this last 12 ^ rate case, where the State protested—there is 

a great deal of interest in the State; everybody is interested about 

this—in fact, the case was started after a joint resolution by the House 

and the Senate, the State legislature, and the whole project is being 

fought and financed by the State government; in other words, the 

State is fully interested in the entire picture, and this is one of the 

phases—who is going to rebuild the ships hereafter.

Senator Bartlett. Would it be fai r to say in the opinion of the 

people of the State of Hawaii, without trying to blame or praise the 

carriers concerned, this 12/^ percent increase coming after so many
50 DOMESTIC OFFSHORE SHIPPING

oth ers in the las t 81^ years before this, had caused the people to become ala rmed as to th eir economic future ?

Mr. K ashiwa. T hat is rig ht.

Se na tor Bartlett. Mr. Gr inste in ?

Mr. Grin ste in. Mr. Ka shiwa, when Ch air ma n Sta kem was testifying , on p age 8 of his testimo ny he said the fo llo win g:

It is assumed that before any conclusion is reached on the various altern ative 

ways of lowering freigh t rates an effort will be made to settle definitively the 

relatio nship of the ocean carri er’s charges to the ultimate consumer costs.

I t ake it he h ad refe rence to t he poss ibility t he re might be a h ighe r 

marku p by the retaile r or distrib utor in Ha wa ii. Has there ever 

been a stud y made of this t o find ou t whethe r th ere is a highe r m arku p ?

Mr. Kashiwa. No, we haven’t. But it is definite th at before the 

good s go to Ha wa ii it h as to pay th at f re ig ht r ate . I mean a certain 

frei gh t bill, and c ert ain ly where the figures definitely show in Ha wa ii 

the cost of l ivi ng is much higher, this frei gh t bill has some influence 

in th at area. Now as to exactly how much, th is I cannot pu t my 

fing er on. I t would be very difficult to tra ce back. But defin itely 

there is a d irect r ela tionship .

Mr. G rin ste in. But the re ha sn ’t been any s tud y th at w ould allocate 

so much o f the cost to the fre ig ht rat e ?

Mr. K ashiw a. No.

Mr. Grin ste in. In a rate pro cee din g before the Fe de ral Maritim e 

Bo ard , has the St ate of Haw aii contested thes e rat es at lea st in pa rt 

on the grounds of economic im pact or the need s of a developing 

economy, or has it been m ain ly on the rat e f ormula ?

Mr. Kashiwa. The en tir e grou p, inclu din g all the attorneys, took 

a tr ip ou t to Ha waii, and we ha d a 5-day session there , and peop le 

fro m th e variou s islands, people in busin ess in Ho no lulu, all appeare d 

before the exa miner and there was quite a leng thy he arin g on the 

im pact on various ind ustries, fo r example, th e veg etable men, and 

the da iry indu str y, and there was quite a gr ea t deal of ex pe rt testimony pu t on by the Un iversit y of Ha wa ii Eco nom ics De partm ent.

That pha se of the case I would say was most fully exp lored.

Mr. Grin ste in. Has th at mate ria l appeare d in the Fe de ral Maritim e B oard opinions, o r th e ex am ine r’s repo rt, writ ten ?

Mr. K ashiwa. We ll, there has been no exam iner’s rep or t ; but this 

is all in the tra ns cript. I t covers hund red s and hu nd red s of pages. 

Th e case ha s no t been decided as yet.

Mr. Grin ste in. I un de rst an d that.

You were talk ing ju st a bout the last case: I was th in ki ng of more. 

Th ere have been seven of these, and over the period of seven-----

Mr. K ashiwa. I wa nt to po in t this out. It is only in the las t 12i/> 

perce nt rais e th at the re was a rea l contest of any na ture whatsoever.

Se na tor Bartlett. Did the State ever prote st before then, in these 

8

1

/? ye ars , th at you k now of?

Mr. K ashiwa. No.

Mr. G rin ste in. Th is is the first time?

Mr. K ashiwa. Yes.

Se na tor B artlett. Mr. Bourbon?

Mr. K ashiwa. I think this is the first raise th at came af te r we became a Sta te.
DOMESTIC OFFSHORE SHIPPING 51

Mr. Bourbon. Just one thought occurs to me: Do you think some 

of your people are taking advantage of this situation, some of the 

people that are not affected by it at all, fo r instance, to the point where 

a Hawaiian shirt costs 20, 22, or 25 cents here, and it cost 45 cents in 

Hawaii, to have ironed? Do you think a lot of people who are really 

not bothered by it at all are taking advantage of the situation and 

putting their little bite on things, too ?

Mr. Kashiwa. This is an area where it is very difficult to say. A 

rise in a basic thing like freig ht rates has an indirect impact all over, 

and it has a tendency to spiral the rest of the things. As to how much, 

for example, the barber is affected, or how much the clothes are 

affected, to bring this down to a close mathematical formula is very 

difficult; but there is, I would say, an impact which is indirect. But 

it does have an effect.

Mr. Bourbon. That is all.

Senator Bartlett. Off the record.

(Discussion off the record.)

Senator Bartlett. On the record.

Mr. Kashiwa. For example, a laundry delivery truck, the price for 

a delivery truck in the islands is added on and this runs into $200 

or $300 per car. This is an area which he must earn extra to pay for 

that truck. And these things cumulate. That is my point.

Of course, the person who has a s hirt washed, it costs him a little 

more, so he charges a little more. Tha t is the effect of it.

Senator Bartlett. Do you have adequate service frequency ?

Mr. Kashiwa. Bight now ?

Senator Bartlett. Yes.

Mr. Kashiwa. As far as I know, yes.

Now, there is one thin g I would like to say, tha t we have four 

islands, and in between these islands, as I have stated, there are barge 

services. Now on the outer islands, like Kauai, Hilo, and Nawiliwili, 

some of the merchants there may want more service, naturally, but 

that is tied—as fa r as Matson is concerned—with the sugar, the pineapple loading, so whatever they may not be able to get on Matson 

shipping directly at those ports will come to Honolulu and will be 

barged over to the outer islands.

Now, this is as far as the outer island inadequacies—I wouldn’t call 

it an inadequacy, but it is a situation which is there.

Senator Bartlett. But you have no complaint to make about fre ­

quency of service between your principal ports and the mainland?

Mr. Kashiwa. No.

Senator Bartlett. How many carriers serve Hawaii from the U.S. 

west coast ?

Mr. Kashiwa. The U.S. west coast only ?

Senator Bartlett. Yes.

Mr. Kashiwa. This would be appropriate for the Matson people. 

I have the list of ships here.

Senator Bartlett. I mean as to the number of companies, rather 

than ships of a given company ?

Mr. Kashiwa. Matson is the main one. Of course, we have some 

tramp—in the rate case, for example, it was ap pare nt there are some 

tramps t hat pick up scrap tin and brin g tin down. Now, tha t is on 

non-Matson ships.
52 DOMESTIC OFFSHORE SHIPPING

Senator Bartlett. Does American President Lines serve Hawaii?

Mr. Kashiwa. Yes.

Senator Bartlett. With freight ?

Mr. Kashiwa. No.

Senator Bartlett. Ju st passenger service ?

Mr. Kashiwa. Well, very small freight, if any. It is mostly 

passenger.

Senator Bartlett. How about States ?

Mr. Kashiwa. No. They have an application pending at this time, 

as I understand it.

Senator Bartlett. But Matson carries the m ajority of the freight?

Mr. Kashiwa. Yes.

Senator Bartlett. Do you have any questions, Mr. Goding?

Mr. Goding. What about other contract or industrial carriers? 

You mentioned some tramps carrying tin and scrap. Does industrial, 

contract, or other shipping enter the picture very appreciably ?

Mr. Kashiwa. In our rate case it appeared tha t this tin deal is a 

very special contract service. The other areas, there are very few 

other products brought in on a similar basis as tin.

Mr. Goding. I wondered whether fertilizer or bulk cement-----

Mr. Kashiwa. Bulk cement; yes. They used to have their own 

ship. But lately we manufacture our own cement out there. Of 

course, there is a lot of oil, gasoline, and tha t type—tankers—that 

come out there. Stan dard Oil.

Mr. Grinstein. On page 8 of your testimony you mentioned foreign products coming in on foreign-flag vessels to Hawaii. Is it 

your opinion that if the rates continue to increase in the trade tha t 

the Hawaiian people will begin to look to other countries for their 

sources of supply and the foreign-flag vessels for the source of their 

services ?

Mr. Kashiwa. Well, we don’t necessarily look to them. For example, the Australian or New Zealand meat comes in in refrigerated 

ships and the meat is dropped in Honolulu and cut up and sold, and 

it is cheaper than the mainland meat, and this causes problems.

Mr. Grinstein. I wasn’t referring necessarily to the present time. 

I take it there are some foreign products presently competing with 

mainland products in Hawaii. But is it your opinion tha t in the 

future if the rates continue to increase, the ocean freight rates between the mainland and Hawaii, tha t Hawaii will have to look to 

foreign sources for their services and supplies?

Mr. Kashiwa. We don’t look to it, but it is kind of a forced situation there.

Senator Bartlett. In tha t connection, I note by your attachment 

6—and that was a very good reply you just made, Mr. Kashiwa—that 

this trend toward foreign importations has been very pronounced 

since 1946. Using the period 1946-50 with an index figure of 100, we 

discover that in 1958 the index for imports from the mainland, according to this attachment, was at 140.

Mr. Kashiwa. Yes.

Senator Bartlett. But the index for foreign importations in the 

1946-50 period, was, in 1958, 274, so there is a gain of only 40 points 

on Hawaii’s importations from the U.S. mainland, but 174 points on 

importations from foreign lands.
DOMESTIC OFFSHORE SHIPPING 53

I think tha t tha t goes to the heart of what we are discussing here 

today—that we may be pricing ourselves out of some mighty valuable 

and important markets.

Mr. K ashiwa. This is especially so in pineapples. Of course, it is 

on the reverse; we are the suppliers of the pineapples, but as I understand, it is cheaper to ship pineapples from Formosa to San Francisco than from Hawaii to San Francisco, and, therefore, we have a 

very, very difficult situation there. Foreign pineapple is underselling 

our pineapple.

Senator Bartlett. When the pineapple from Formosa travels to 

San Francisco either on foreign-flag carriers or U.S.-flag carriers, 

that operation is subsidized, and yours is not.

Mr. Kashiwa. Tha t is correct, And it is a very serious situation 

on the island of Kauai. That is the extreme northernmost island. 

The sole economy there is sugar and pineapple. The town of Kapaa 

which, I would say, is about—I don’t know the exact population there, 

but it used to be a very thriving town. The owners of the cannery 

there have announced that they are not going to continue th at cannery, 

and it is creating quite an economic problem there.

Senator Bartlett, flow many people will tha t throw out of work, 

do you judge, in the fields and cannery ?

Mr. K ashiwa. Right now it has not been closed, but I don’t know 

the exact figures. But I can give you the exact economy of that Kapaa 

situation from the economic development section of our State 

government.

Senator Bartlett. I wish you would furnish a statement on this 

particular subject and this particular place.

(See lette r from Mr. Kashiwa, p. 319.)

Mr. Bourbon. With regard to the pineapple from Formosa, do you 

have any figures as to the cost of the pineapples at Formosa, before 

put on the ship, as compared to the cost of yours ?

Mr. Kashiwa. No, I don’t have them, but I can get those for you 

from the pineapple people.

Mr. B ourbon. That might be quite a factor in the lower cost from 

Formosa.

Mr. Kashiwa. Yes. I would like to state this: in this 12 ^ percent 

rate case, the pineapple people hired special counsel from San Fran ­

cisco, and he was right beside us and right from the very beginning 

to the end, protesting this raise, as far as they are concerned. Of 

course, there is an eastbound business, but they were righ t in there 

pitching with us.

Senator Bartlett. I am going to ask the committee staff, in line 

with your inquiry, Mr. Bourbon, to see what we can discover about 

the production of pineapple on Formosa, when they started the export, 

and what their production costs are compared to those in Hawaii.

Mr. Bourbon. Yes, sir.

Senator Bartlett. Thank you very much, Mr. Kashiwa. You have 

given us much useful information.

Senator Bartlett. The next witness will be the Honorable Robert 

Oshiro, member of the House, Hawaii Legislature. He has testified 

before this committee previously on allied subjects, and we are glad 

to have him once more in a different setting.
54 DOMESTIC OFFSHORE SHIPPING

STATEMENT OF ROBERT OSHIRO, MEMBER OF TH E HOUSE, HAWA II 

LEGISLATURE

Mr. Osiiiro. Thank you, Mr. Senator.

Senator Bartlett. You get your shirts done cheaper here, too.

Mr. Osiiiro. I would like to inform the committee, as well as the 

press, that my oral presentation will be a condensation of my written 

statement and there may be a slight variation in regard to emphasis.

Mr. Chairman, members of the Merchant Marine and Fisheries 

Subcommittee of the Senate Committee on Interstate and Foreign 

Commerce, my name is Robert C. Oshiro, member of the House of 

Representatives, first State Legislature of the State of Hawaii.

Than k you very much for this opportunity to speak at this hearing 

on a matter which so vitally concerns us in Hawaii, as well as the 

people of Alaska and Pureto Rico, and is, in our opinion, vitally important to the national economy and defense.

We are extremely happy tha t you have chosen to examine the effect 

of the Federal maritime laws on the economies of the domestice offshore areas. Although I am not prepared to give detailed remarks, 

inasmuch as I was asked to testify on very short notice, nevertheless 

I sincerely hope th at whatever I may say will be of some small help 

to you in better understanding our situation in Hawaii.

Air. Chairman, before I proceed any further , I would like to request 

tha t my written statement and Resolution No. 33 adopted by the 

House of Representatives of the first Legislature of the State of 

Hawaii, general session of 1961, be entered in the record of this hearing with your approval and with the approval of the members of this 

committee.

Senator Bartlett. That will be done. Without reading it, will you 

give us the general sense of that resolution ?

Mr. Osiiiro. Mr. Chairman, I will go into the matter of the resolution at the end of my remarks.

Senator Bartlett. All right.

Mr. Oshiro. Gentlemen, because of the geographical location of the 

State of Hawaii, we are dependent upon ocean transportation for 

survival. We depend on ocean transportation for our basic necessities—our food, shelter, and clothing. Literally, ocean transportation 

is our lifeline.

Freight rates and freight rate increases are not directly the subject 

of this hearing, but I believe they are of critical significance when 

considering tbe effects of the present maritime laws on Hawaii, 

Alaska, and Puerto Rico.

As far as we can see, freight rates will continue to rise in order to 

meet the American wage standards, ship construction and operational 

costs, unless the present maritime laws are modified. The larger the 

bill we must pay for ocean transport, the less we have to spend on the 

goods we need and to invest in the businesses which will contribute 

to our growth. As an illustration, today in Hawaii it costs $275 to 

ship an item which could have been shipped for $100 in 1946.

Gentlemen, we recognize tha t it is the national policy to sustain 

that portion of the merchant marine which competes with foreign car-
DOMESTIC OFFSHORE SHIPPING 55

riers through operating and construction subsidies, and to protect the 

coast trade from foreign competitors by excluding foreign ships from 

such trade. This policy is now incorporated into our laws pertaining 

to our merchant marine.

1. With the use of subsidies to sustain tha t portion of the merchant marine, which competes with foreign carriers, we have no argument.

2. But in regard to the domestic carriers which serve Hawaii, Alaska, and Puerto Rico, we would like to emphasize that because subsidies are not available to them, they must maintain shipping revenues high enough to meet wage standards, operating and construction costs, which means th at freight rates will continue to rise.

This means t hat in maintaining our national policy, the domestic 

carriers and their customers pay the full cost of supporting one portion of the merchant marine, while the general taxpayers pay a substantial part of the cost of the other portion of the merchant marine.

Not only do I and my fellow citizens of Hawaii as general tax ­

payers support that portion of the merchant marine in foreign trade, 

as we should, but in addition we pay a special kind of tax in the form 

of higher prices for consumer goods and in the form of lower sales 

or return on our exported goods in order to support the nonsubsidized 

portion of the merchant marine. It is this second kind of tax which 

we believe is unfair.

Briefly, I have stated the problem as it affects our people. Now, 

in regard to solutions, I am of the opinion that the wisdom of the 

members of this committee and Congress will develop solutions acceptable to the consumers and the ocean carriers within the fram ework of the concept of the national policy now embodied in the maritime laws.

However, as a member of the House of Representatives of the State 

of Hawaii, may I direct your attention to the resolution which suggests th at an inquiry be made as to the feasibility of g ranting financial assistance to domestic carriers so tha t the cost of sustaining this 

portion of the American merchant marine will not fall entirely upon 

the people of H awaii; and should such subsidies be granted, in regard 

to Hawaii, that the Federal Maritime Board be requested to insure 

the admission of other subsidized carriers to the Hawaii-mainland 

trade so that competitive and comparable rates can be established.

It is my humble opinion tha t a policy of subsidizing domestic carriers would foster and maintain the national policy of maintaining 

a strong merchant marine for the Nation’s welfare and national defense. It is vital to our national security and to our defense tha t 

the United States have immediately available adequate ships for use 

in transporting troops and materials in case of war, as I believe that 

this is one of the most im portant reasons for subsidizing Americanflag vessels engaged in foreign commerce. I believe ships in the 

domestic trade are much more readily available in time of war, as 

experienced in World War II , in which Hawaii was one of U.S. 

bastions of defense in the Pacific.

Thank you very much for your kind and considerate attention. I 

will be most happy to answer any questions you may have.
56 DOMESTIC OFFSHORE SHIPPING

(Sta tem ent fo llo ws :)

Sta te m en t of Mr. R obert Os h ir o , Mem be r of t h e H ous e of

R epr es en ta ti ves , Sta te of H a w a ii

Mr. Chairman, tha nk you very much for inviting me to speak at this hearing on a ma tter which so vita lly concerns us in Haw aii. We are extrem ely 

pleased that you have chosen to examine th e effect of th e Federal maritime laws 

on the economies of the domestic offshore areas. We are also very appreciative 

of the work performed by Pue rto Rico and Alaska, the two are as which share 

so many of our problems, in investigating this problem and in subm itting the 

results of their studies to you for your consideratio n. I sincerely hope that 

my rema rks will be of some small help to you in better understanding our situation in Hawaii.

Sometimes even we in Hawaii forget for a moment how completely dependent 

we are on water transp ortation. It is our economic lifeline in every sense of 

the word. The cars on our roads, the paper in our offices, the fur niture in our 

homes, the equipm ent in our facto ries—for all these and hund reds of other 

items we depend on wa ter transportatio n. Two-thirds of our food and 90 

percent of our consumer goods come from the mainland over the oceans. We, 

of course, produce in the islands some of the things we need, but we are in no 

sense of the word self-sufficient no r should we be.

Our insular economy is built in large measure on exchange—we expo rt sugar 

and pineapple and import goods. The primary market for the sugar and pineapple which we grow, harvest, and process lies not in the islan ds but again 

over the ocean on the main land. Thus our lifeline works in both directions— 

we are dependent on sea tran spo rtation to brin g us the goods we consume and 

to move the products we must sell, which in turn earn for us the income we 

need to purchase the goods we require.

Not only are we utter ly dependent on sea tra ns po rt bu t we pay a high price 

for this dependency. Of every dolla r we spend outside of Hawaii, 5 cents is 

paid to mainland and foreign concerns for ocean and ai r freight. And since 

only a small portion of our goods are moved by foreign firms and only a minute 

portion by air freight, almost all of the 5 cents is paid to main land concerns 

for ocean tran sport. And this 5 cents is in addition to w hat we, like the citizens 

of any mainland State, must pay as our sha re of the cost of transp orting goods 

from the farm or facto ry to the point of use, or in our case th e p ort of dep artu re 

or what our suga r and pineapple companies must pay for rail freigh t on the 

mainland. This cost of sea transp ort then is for us a cost over and above that 

which you would expect a main land consumer or producer to pay.

Study after study has demonstrated the impact which these costs have on 

our insular economy. Staple goods, for example, are priced measurably higher 

in Hawaii than on the mainland, a result of the fac t th at a distrib uto r pays 

more for food landed in Hawaii. Milk costs more in Haw aii than almost anywhere on the mainland. This higher cost is a res ult of paying from 3% to 4 

cents per qu art for bringing items to Hawaii which are necessary for milk production. The story with respe ct to nonfood prod ucts is similar. A large percentage of the cost of everything we use and consume in our homes, offices, 

schools, farm s, and factories is for shipping. And while this is a cost we shall 

have with us alway s in Hawaii, it is the magnitude of th at cost and its effect 

on our cost of living, our standard of living, and our rate of economic growth 

th at is of such concern to us.

Not only is our dependence on sea tra nsport both complete and costly, 

but in addition we must rely on a single company—Matson Navigation— 

to move 90 percent of the ocean freight between Hawaii and the mainland. Freight rates and fre igh t rat e increases are not direc tly the subjec t of this hearing, but I believe they are of critical significance when conside ring the effects of the present maritim e laws on the State of Hawaii. 

Frankly, as far as we can see, domestic tari ffs will continue to rise unless the 

present laws are modified, and such increases will continue to hamper our 

economic growth and depress many of our local business activities. The larg er 

the bill we must pay for ocean tran sport, the less we have to spend on the 

goods we need and the less we have to invest in the businesses which will contribu te to our growth. The cost of tran spo rtin g freigh t has increased tremendously since 1946. Today, it costs $275 to ship an item which could be 

shipped for $100 in 1946. This 175 percent increase in the cost of shipping genera l cargo compares to a 63 percent increase in the Honolulu consumer price
DOMESTIC OFFSHORE SHIPPING 57

index since the year 1043. And while admittedly our local price index has a 

number of limitations, it is doubtful tha t such limitations are sufficient to explain away all of this difference.

We also recognize that some of the modern freight handling methods adopted 

by Matson should tend to reduce the cost of shipping some items and thus to 

lessen a little the cumulative effect of these increases. In spite of these allowances, the fact remains tha t we live on islands utterly and completely dependent 

on a single shipping line, the costs of whose services have increased drastically 

in a period of only 15 years. And we know who pays this bill when we buy 

cereal, machines, lumber, equipment, and the other items tha t are essential to 

the functioning of our modern economy.

We recognize that it is national policy to maintain a strong merchant marine 

and to sustain tha t portion of the merchant marine which competes with foreign carriers through operating and construction subsidies. With the use of 

these means to achieve the national policy, we have no argument.

However, as you know, subsidies are not available to the merchant marine 

which serves offshore areas such as Hawaii, Alaska, and Puerto Rico. Rather, 

this portion of the merchant marine is sustained by forbidding lower cost, 

foreign competitiors to carry domestic traffic, and thus permitting the domestic 

lines to pay their costs and earn a profit out of shipping revenues.

This means tha t to achieve and maintain the national policy, the domestic 

shippers and their customers pay the full cost of supporting one portion of the 

merchant marine, while the general taxpayers pay a substantial par t of the 

cost of the other portion of the merchant marine. Not only do I and my 

fellow citizens in Hawaii as general taxpayers support tha t portion of the 

merchant marine in foreign trade, as we should, but in addition we pay a special 

kind of tax in the form of higher prices for consumer goods and in the form of 

lower sales or retu rn on our exported goods in order to support the nonsubsidized portion of the merchant marine. It is this second kind of tax which we 

believe is unfair.

We respectfully request that the matter as to the feasibility of gra nting subsidies to our domestic carriers, similar to those granted to other American-flag 

lines, be considered by this committee so t hat the cost of sustaining the portion 

of the American merchant marine serving domestic areas will not fall entirely 

upon the people of Hawaii, Alaska, or Puerto Rico.

In regard to Hawaii, should such subsidies be allowed, we further respectfully 

request tha t Hawaii-mainland trade be opened to other carriers so tha t competitive and comparable rates will be established, thus assuring to the people 

of Hawaii a share in the benefits which would result from granting subsidies.

I have been authorized by the Hawaii House of Representatives to transmit 

to President Kennedy, to Senator Magnuson, and to the members of the Senate 

Committee on Interstate and Foreign Commerce and its Subcommittee on Merchant Marine and Fisheries the resolution adopted by the House requesting your 

assistance in this matter of properly placing the burden for sustaining that 

portion of the merchant marine which serves Hawaii and other similar areas.

Gentlemen, we a re very pleased tha t you are so seriously and exhaustively investigating this problem which has plagued us so long t hat sometimes we have 

even tended to ignore it. But ocean transport is so vital to our very existence, 

and the cost of that transport such a significant factor in the cost of the things 

we buy and in the amount of income we receive from the items we sell tha t one 

cannot either understand the Hawaii of today or discuss the Hawaii of tomorrow without considering the problem of ocean transport. I know, gentlemen, that you are as cognizant as I of the opportunity you have to rectify an 

inequity and of the tremendous beneficial impact your actions may have on the 

future of our State and our people.

Thank you.

(Resolution 33 follows:)

Resolution

Whereas, because of their geographical location, the people of Hawaii are 

greatly dependent upon the ocean carriers of Matson Navigation Co. for their 

exporting and importing trad e; and

Whereas the ocean carriers of Matson Navigation Co., although considered a 

part of the American merchant marine, are classified as domestic carriers or 

“common carriers by water in interstate commerce” and are not qualified to 

receive any financial assistance from the Federal Government but are expected
58 DOMESTIC OFFSHORE SHIPPIN G

to pay their cost and earn a profit out of shipping revenues, which means th at 

the people of Hawaii are required to assume the great burden of cost and profit 

of Matson’s ocean carriers; and

Whereas it is the j>olicy of the United States to sustain the American merchant marine through operating and construction subsidies amounting to as 

much as 70 i>ercent of wages and 50 percent of construction costs in order to 

enable American-flag lines to operate successfully with tariffs and other charges 

similar to those charged by foreign ocean carriers ; and

Whereas such a policy to sustain the American merchant marine is beneficial 

to all of the people of the United States of America and it is just as appropriate 

that the Nation as a whole pay for the maintenance of such a policy so that 

the cost will not disproportionately fall upon the people of Hawaii and other 

domestic shippers and their customers who pay general taxes to sustain foreign 

shippers of the American merchant m arin e: Now, therefore, be it

Resolved by the House of Representatives of the First Legislature of the

State of Hawaii, general session of 1961, That the Honorable John F. Kennedy, 

President of the United States of America, the Honorable Warren G. Magnuson, chairman, and all members of the Senate Committee on Interstate and 

Foreign Commerce and its Subcommittee on Merchant Marine and Fisheries 

are hereby resi>ectfully requested to investigate the possibility of and give serious consideration to granting financial assistance to Matson Navigation Co. similar to subsidies granted to other American-flag lines in order tha t the cost of 

sustaining this portion of the American merchant marine will not fall entirely 

upon the people of Haw aii; and be it further

Resolved, That, if such subsidies are granted, the Federal Maritime Board 

be requested to insure the admission of other subsidized carriers to the Hawaiimainland trade so tha t competitive and comparable rates can be established; 

and be it finally

Resolved, That copies of this resolution be transmitted to the Honorable John

F. Kennedy, President of the United States of America, the Honorable Warren

G. Magnuson, chairman, and all members of the Senate Committee on Interstate and Foreign Commerce and its Subcommittee on Merchant Marine and 

Fisheries, the Federal Maritime Board, and the Honorable Oren B. Long and 

the Honorable Hiram L. Fong, U.S. Senators from Hawaii, and the Honorable 

Daniel K. Inouye. U.S. Representative from Hawaii, by the Honorable Robert 

C. Oshiro, representative of the First Legislature of the State of Hawaii.

Senator Bartlett. It was good of yon to make the trip clear from 

Honolulu to Washington to present your views before this committee. 

Tha t which you had to say, which you incorporated in your written 

statement, and which you abbreviated in your presentation will be 

carefully considered, T assure you, by the committee.

Let me ask you: When was that resolution adopted ?

Mr. Oshiro. Mr. Chairman, that resolution was adopted on Thursday. last week, the day T left for Washington.

Senator Bartlett. It is brandnew, then ?

Mr. Orhtro. Yes, Mr. Chairman.

Senator Bartlett. Should we interpret this by the Hawaii House 

of Representatives as reflecting an especially keen interest in this 

problem?

Mr. OsniRO. Mr. Chairman, I think the resolution and my presence 

here indicates that as far as the house of representatives is concerned 

we are very much interested in the entire problem and we intend to 

keep close contact with your office and with this committee as to the 

future costs, and wherever we can help we would like to do so.

Senator Bartlett. Then you were directed or requested by the 

house of representatives to come here to testify ?

Mr. Ostitro. Yes, Mr. Chairman.

Senator Bartlett. And the legislature is now in session ?

Mr. Ostiiro. Yes, Mr. Chairman.
DOMESTIC OFFSHORE SHIPPING 59

Senator Bartlett. Notwithstanding the fact tha t your presence 

there would otherwise be taken for granted, you thought it important 

enough to leave for several days to come here ?

Mr. Osiiiro. Yes, Mr. Chairman.

Senator Bartlett. Now, you mentioned subsidies. Tha t is a word 

not unheard of in these Halls. There are subsidies of one kind or another, I guess. But the word is not too popular in all quarters yet; 

certainly not, I suspect, with you or with me. We prefer some other 

means of making suitable arrangements, if they are to be found. I)o 

you have any alternate ideas as to how this problem could be resolved ?

Mr. Oshiro. Mr. Chairman, I arrived earlier in Washington than 

I expected, because I had short notice and 1 was not familiar with the 

problems. But, like many other things, the more you look into the 

problems, the more you find th at the solutions create problems also. 

Frankly, I do not have the experience, nor the knowledge, nor the background to contemplate any specific suggestions.

The only suggestion that we thought of back in Honolulu, at the 

time the resolution was drafted, was on the basis of what meager information we had. We felt that if the carriers in the foreign commerce could be subsidized t hat we saw no reason why the domestic 

carriers could not also be subsidized. But as far as the other solutions are concerned, we would rath er leave it up to the wisdom of 

the committee.

Senator Bartlett. We assuredly would not ask you to appear here 

before the committee as an expert on maritime transportation.

Do you have the feeling tha t these repeated freight rate increases 

are bearing down hard upon the individual citizen of Hawaii ?

Mr. Oshiro. Yes, Mr. Chairman, for this re ason : The figures quoted 

by Senator Long, as well as the attorney general, are correct. But 

those figures, I believe, take into consideration the years from 1950 to 

1959. Just for curiosity, before I left Hawaii, I had a reference 

bureau check into the rates since 1946 and the astounding thing is 

what we could have shipped in 1946 for a hundred dollars would cost 

today, in terms of freig ht alone, $275. That means tha t we have less 

money to buy other consumer goods or to buy other products from the 

west coast or any other place; and th at is the reason why 1 would like 

to emphasize the factor of national economy, because Hawaii is a 

good market for a lot of the west coast industries. But if the tariffs 

keep on rising, it is going to get to a point where we may have to turn 

to other sources for our products, like the attorney general indicated. We buy a lot of lumber from Canada, whereas we used to buy 

it from Washington State and Oregon and California.

Senator Bartlett. Of course, these figures you produced, to which 

you just referred, are startling that it costs $275 now to ship an item 

which could have been shipped for $100 in 1946. But I don’t suppose 

anyone would contend that this represents an average of the inflationary process to which this country has been subjected since then. It 

is extraordinary, is it not ?

Mr. Oshiro. Yes, Mr. Chairman.

Senator Bartlett. Mr. Grinstein ?

Mr. Grinstein. I have no questions.
60 DOMESTIC OFFSHORE SHIPPI NG

Air. Bourbon. I hav e none.

Mr. Goding. I have none.

Se na tor Bartlett. I wa nt to than k you very muc h. An d I would 

deem it a per son al fav or, Air. Oshiro, if you wou ld th an k yo ur colleag ues in the house of rep res ent atives fo r ha ving made it possible 

fo r you to come here to te sti fy before the co mmittee, because you have 

giv en us some da ta th at otherwise would no t hav e been availab le. 

Bu t, more im po rta ntly, you have contr ibu ted b y inform ing us of the 

concern of the peop le of Ha wa ii in respec t to th is problem . I pe rson ally am deeply app rec iative .

Mr. Osiiiro. Th an k you. Air. Chairma n.

Se na tor Bartlett. Air. G oding just inform s me th at the n ext sc hed ­

uled witness, Governor M erw in of the V irg in I sla nd s, will n ot ap pe ar 

before the com mittee.

Incid ental ly, it migh t be m entioned th at the Virgi n Isl an ds do not 

fall withi n the provisions of the cabotag e law s which ap ply to these 

othe r areas.

Let ’s go into recess fo r 10 m inutes.

(A short recess was taken .)

Se nator Bartlett. Th e sub committee will be in ord er.

It is our pleasure now to hear from the form er A ssociat e Solicitor 

of the D epartme nt of the In te rior a nd the p resent secr eta ry o f Gua m, 

Air. A. Al. Ed wa rds .

STATEMENT OF A. M. EDWARDS, SECRETARY OF GUAM

Mr. E dwards. Th an k you, Air. C hairm an.

I wish to tak e th is op po rtu nity on be ha lf of the people of Guam 

to say how deeply appreciat ive we are of this op po rtu nity to ap pe ar 

before you and express our views on this matter, whi ch is of v ita l im ­

portance to the island o f Gua m. Gover nor Flo res asked I express his 

regrets he was una ble to be pre sen t and he asked th at I ap pe ar and 

pre sen t his views.

As you know, Guam is th e most dista nt of th e U.S . territo rie s from 

the ma inland, being some 3,200 miles west of H aw aii . In fac t, Guam 

is the g ateway to the U nited State s from the F ar Ea st, being a pp roxima tely 1,500 miles east of th e Ph ilipp ine s. I t is the lar gest and the 

greates t populated o f the M arianas Isl ands, ha ving a land are a of 221 

squ are miles, with a population of about 70,000 persons, of which 

about 30,000 a re n atives of Gua m and the r est com posing the personnel 

of the Armed Forc es, th ei r departm ents and civ ilia n personnel connected with the var iou s activitie s of the mili tary and oth er Federal 

an d territor ia l acti vities.

Our pre sen t economy is based on fu rn ishi ng services to the Armed 

Forces. We have very lit tle industry, altho ug h effort is being mad e 

at the pre sen t tim e to rev italize the use of coconuts, which before 

W orld W ar I I was one of th e main sources of income fo r th e te rrito ry . 

Whil e we are attempting to do this, we have discovered th at a large 

numb er of ou r coco nut trees are diseased and we are ha vin g a survey 

made now by a docto r who was form erl y of the Un ive rsi ty of the 

Ph ili pp ines to det erm ine wh eth er or n ot we can uti liz e our coconuts.
DOMESTIC OFFSHORE SHI PPI NG 61

Senator Bartlett. If he can’t do it, remember the Bartlett tree 

surgeons.

Mr. Edwards. I certainly will.

We understand and we have had information tha t there is a new 

machine that will produce not only coconut oil but also coconut flour, 

and utilize the fiber of the coconuts and, if this would develop, if this 

machine is practical, and can be economically operated, feasible for 

operation on Guam, it would give us some industry.

There is little agricultural activity, although efforts are being made 

to increase the production of food. We are working now in developing some poultry, but as to agricu lture we are still confined more or 

less to truck gardening, and we do not begin to serve anywheres close 

to 10 percent. It is confined to mostly the use of bananas; we have a 

few pineapples, which are used for the local m ark et; but nothing is 

exported and in fact we have to import all of our fresh fruits and 

vegetables.

As I have said, we import over 90 percent of all of our food products, 

and 100 percent of all other consumer items needed for the civilian 

economy. Therefore, transportation is a vital connecting link to our 

lifeline. In other words, Guam cannot survive without sea transportation.

Guam, too, has been and is being affected by general rate increases. 

We have had two recent rate increases, with the second coming prior 

to the final determination of the first. And these cases are still pending before the Maritime Board.

We are also in a similar position as is Hawaii, since coastwise 

laws which protect American maritime industry in the shipment of 

goods between the coastal cities on the mainland likewise apply to 

Guam. And at this point we recognize tha t since coastwise laws 

applied to Guam, the shipper of merchandise in an American-flag 

vessel from the States—say it is shipped to Japan, th at carrier gets a 

subsidy, whereas if it is shipped to Guam, which lies practically due 

south of Tokyo, being the same distance from the same city, the 

carrier gets no subsidy. And thus the people of Guam have to pay 

full rate, plus reasonable rate of return on their investment, in having 

all of our commodities transported and all the cargo transported to 

Guam.

In addition, we have, because of our location, and because of the 

nearness to the Fa r East, we are a v ital link in our national defense 

and by reason thereof Guam does not enjoy the same privileges as 

the coastal cities on the mainland or in other areas under the United 

States flag, w ith regard to competition from foreign vessels.

By Executive Order No. 86-83, dated February 14, 1941, Guam 

was declared and reserved as a naval defense sea area and all foreign 

vessels are prohibited, unless the ir entry is authorized by the Secretary of the Navy.

Since this is a matter of our national defense, naturally we in Guam 

are not in a position to comment thereon. We only wish to call 

this matter to your attention so that the committee might be cognizant 

of this matter.

71 709— 62 5
62 DOMESTIC OFFSHORE SHIPPING

I should like to file with the committee an exhibit which shows 

the commercial inbound and outbound cargo broken down to show 

whether originating in the continental United States, Hawaii, or 

foreign countries, and this is broken down between two commercial 

carriers serving the area and it covers the years 1955 through the 

first half of 1956. It also shows the dollar value of this cargo, on the 

commercial cargo.

We also have here the military cargo, tha t is, carried by these 

civilian vessels, of the two carriers who serve tha t area. This does 

not include the cargo that is transported by the Navy.

In conclusion, I would like to say tha t the people of Guam feel 

tha t we should have some relief because as you can readily understand, since over half of our population is tied in with the military 

and have what we on Guam call “commissary privileges,” the other 

half being the natives and the people connected with the civilian 

economy do not enjoy those privileges.

We get all of our products, food, consumer durables, through commercial lines. For example, it costs us, to buy a roll of toilet tissue, 

more for freight than the cost of the item itself. In fact, I think 

I was told tha t a box of toilet tissue runs around $8 and the freight 

on it is $11. So you can see how our economy is tied in to the shipping 

and when you realize that our carriers get no subsidy because we are 

within the confines of the coastwise laws, it makes it a rather hard 

and difficult situation to put upon our civilian economy, the high 

rate of transportation that we have out there.

That concludes my statement. I would be delighted to answer any 

questions.

Senator Bartlett. Thank you, Mr. Edwards.

First, let me say the exhibit to which you referred will be accepted.
DOMESTIC OFFSHORE SHIPPING 63

(The above-mentioned material follows:)

Report of cargo inbound-outbound, Guam, M l.

Pacific Fa r Eas t Lin e 1955 (58 

vessels)

1956 (58 

vessels)

1957 (55 

vessels)

1958 (38 

vessels)

1959 (36 

vessels)

1st 6 

mon ths 

of 1960 (18 

vessels)

INBOUND CARGO

Originating i n United Sta te s........................

Or iginating Haw ai i___ _____ ___________

Originating for eig n.........................................

Tot al co mm erc ial (sh ort to ns ' ) ........

Tot al co mm erc ial (rev enue to n s 2) . .

M ili ta ry ex-U nited S ta te s..... .......................

M ili ta ry ex-H aw aii ____________________

29,633

425

11,484

50,952

1,196

12,488

81,109

1,084

11,574

51,232

910

16,188

94,806

1,633

9,487

42,686

456

5,988

41,542 

100,532

64,636 

108,522

93,767 

115,114

68.330 

103,457

105,926 

120,604

49,130 

58,241

(’) (•) (’) 42.148 55,573 18,119

M ili ta ry ex-foreign_____________________

Tot al m ilitar y_______ ______ ______

(’) (’) (’) 22.821 2,840 2,005

64.969 58,413 20,124

OUTBOUND CARGO

De stine d United St at es .................. ..........

De stine d fore ign____________ __________

3,759

40, 705 

47

4, 963

38,768 

371

3,832

19,294

105

5,925 

4,907 

229

5,392

26,486 

203

3,006

14,605 

Destin ed Hon olulu____________________ 124

Tot al co mm erc ial (sh ort ton s ') ........

M ili ta ry d estin ed Uni te d St at es .............

M ili ta ry , for eig n___ _____ _____________

Tot al m ilitar y____ _______________

44,511 44,102 23,231 11,061 32,081 17,735

(’)

(’)

(’)

(’)

(’)

(’)

1,451

2,162

4.070 

1,783

2,060

1,227

3,613 5,853 3,287

Am erican Pr es id en t Lines (16 vessels)

(12 ves ­

sels)

(13 vessels)

(16 vessels)

(15 vessels)

(8 ves ­

sels)

INBOUND CARGO

Or iginating in United Sta te s........................

Origi natin g foreign_____ _______ ________

To ta l com mercia l (sh ort ton s >)____

Tot al commercia l (revenue ton s 2) . .

M ili tary ex -United S ta te s.. .............. ..........

M ili ta ry ex-foreign________ ____ ___ ____

Tot al m ilitar y___________ ________

12,351

29

9,427

No ne

12,200

None

18,559 

None

12,467 

None

6, 887 

No ne

12,380

20,441

9,427 

17,280

12,200

21,950

18,559 

29,834

12,467 

23,295

6,887 

14,611

(»)

(’)

(•)

(»)

(’)

(’)

13,148 

None

19,846 

None

8,749 

None

13,148 19,846 8,749

OUTBOUND CARGO

De sti ne d United St at es ..................................

Destin ed f ore ig n........... ..................... ..........

To ta l comm ercial (sh ort tons >)........

To tal com me rcial (revenue ton s 2) . .

M ili ta ry d estin ed Uni te d St at es ........ .........

M ili tary , fo re ig n. ............................................

To tal m il it a ry .. ................. . ................

150

2,033

71

5,056

169

3,252

471

1,718

390 

« 20

1,170

50 

‘ 2 

1,234

2,183

3,590

5,127 

10,533

3,421

7,987

2,189

7,252

1,580

6,024

1,286 

4,557

(’)

(’)

(’)

(*)

(’)

(»)

No ne

158

No ne

85

No ne

35

158 85 35

1

 Sh ort t ons of 2,000 p ou nds.

2

 Revenue tons o f 2,000 p ou nd s or 40 cub ic feet.

’ N ot av ailabl e.

« Honolu lu, H aw aii.

Sources: Comm erc ial m anifests and bills of lading on file at com me rcial po rt. M ilitar y m an ife sts on file 

a t Nav al Su pp ly Dep ot, Gu am . Co mp iled by em ployees of the com me rcial po rt of Gua m an d go vernm en t of G uam.
C 5

Rec apitula tion sheet— Report of inbound-outbound cargo, Guam, M .I .

1955 1956 1957 1958 1959 F ir st 6 m o n th s of 

1960

T ons V al ue T o n s V al ue T ons V al ue T ons V al ue T ons V al ue T ons V al ue

P F E :

T o ta l In b o u n d to ns 100,532

44,511

P)

108,522 

44,102

P)

115,114 

23,231

P)

103,457 

11,061 

68,5 82

120,604

32,08164,266

58,241 

17,735 

23,411

T o ta l o u tb o u n d to ns

T o ta l to n n ag e c arr ie d ........................ 145,043 152,624 138,345 183,100 216,951 99,3 87

A P L :

T o ta l in b o u n d to ns 220,441 

3,5 90 

P)

17,280

10,533

P)

21,9 50

7,987P)

29,834 

13,148 13,307

19,846

6,024

19,931

14,611

4,557 8,784

T o ta l o u tb o u n d to nsT o ta l m il it ary to ns

24,031 27,8 13 29,9 39 56,289 45,801 27,952

109,074

41,984

425

11,513

3,909

47

42,7 38

P)

P)o

(«)

180,437

60,3 79

1,196

12,488

5,034 

371 

43,8 24

P)P)(')

P)

168,282

93,3 09

1,084

16,574

4,001 

105 

22,5 46

P)P)P)

PJ

239,389

69,791

910

16,188

6,396

229

6,625

55,29622,821

1,451

2,3 20

262, 752

107,273

1,633

9,487

5,782

223

27,6 58

75,419

2,8 40

4,070 

1,868

127,339

49,5 73 

456 

5,988

3,0 56

126

15,839

26,8 68

2,005

2,0 60

1,262

C om m er ci al , I n b o u n d :

U n it ed S ta te s______________________ $19 ,698 ,055 

287,5 60 

3,1 45,51 7

1,369, 888

3,215

3,2 24,24 5

(')P)P)P)

$17, 781,125 

333,310 

3, 728,008

1,244,82 6 

83,9 67

4,5 01, 773

P)P)P)P)

$20 ,653 ,305

450,207 

3,2 51,18 8

857,060

84,801 

4, 560,179

P)P)P)P)

$17 ,674 ,997 

380,121

3,1 45,36 0

1,115,20 0

29,0 82

2, 782,929

P)P)P)PJ

$24,180,179 

404,322 

3, 734,3102,947,37 1 

166,516

2, 797,609

PJ

PJP)P)

$27 ,352 ,307 

511,271 

4,4 86,45 65,4 07,27 3 

102,561

2,6 45,15 6

PJP)P)PJ

H o n o lu lu __________________________

F o r e i g n . . ______ __________________

C om m er ci al , o u tb o u n d :

U n it ed S ta te s...................... .....................

H o n o lu lu ............. ..................... ............... .

F o re ig n ___________________ _____ ___

M il it ary , in b o u n d :

U n it ed S ta te s.......................................... ..

F ore ig n____________________________

M il it ary , o u tb o u n d :

U n it ed S ta te s............................................

F o re ig n .. _________________________

DOMESTIC OFFSHORE SHIPPING
DOMESTIC OFFSHORE SHI PPI NG 65

Senator Bartlett. What was the value of the imports for the last 

year for which there is a record, civilian ?

Mr. Edwards. That is total import?

Senator Bartlett. Yes.

Mr. Edwards. For 1959 i t was approximately—we had $24,180,179 

imported from the United States; $404,322 from Honolulu, Hawaii; 

and the foreign imports were $3,734,310.

Senator Bartlett. The goods thus imported were exclusively for 

the use of the civilian population ?

Mr. E dwards. Yes.

Mr. B artlett. You told us, as I recall, that about half the civilian 

population is connected with our Military Establishment in one way 

or another?

Mr. E dwards. A little over half.

Senator Bartlett. What do the remainder of the people do?

Mr. Edwards. Prim arily serve military establishments.

Senator Bartlett. But those who are not connected, I mean ?

Mr. Edwards. Still servicing the establishments, like our civilian 

laundries service the people who take and work for the Government; 

private industry, as you know, the military buys quite a bit from local 

firms, whatever they buy locally, that is, things tha t are coming in, 

and really the principal function is serving the military and servicing 

them.

Senator Bartlett. Do you know if the U.S. cabotage laws have been 

in effect ever since we have had jurisdiction over Guam?

Mr. Edwards. I am not certain just w’hen they went into effect. We 

took jurisdiction over Guam in 1898, the Treaty of Paris. Is my 

memory right? Did it start in 1916 or when? I am not familiar 

enough with it.

Senator Bartlett. We will allow you to consult your sources and 

furnish this information for the committee files and include the 

answer to the question I asked, which you couldn't be expected to 

answer offhand.

As a matter of practice, does the Navy perm it many, or any, foreign 

ships to put in to Guam and deliver cargo?

Mr. Edwards. No, sir; none.

Senator Bartlett. What U.S. carriers serve Guam ?

Mr. Edwards. Pacific Far East and American President Lines.

Senator Bartlett. You spoke about two recent rate increases. Of 

what order were they ?

Mr. E dwards. I don’t have the numbers of them. From the M aritime Commission.

Senator Bartlett. Will you please also supply for the files at your 

convenience the dates and percentage increases applied. And it m ight 

be well to go back for a period of 10 years before the first of these rate 

increases and give us information as to what happened during tha t 

time.

Mr. Edwards. All right.

I would like to say m this connection th at we have a local counsel 

in the government of Guam which was handling those rate cases, and 

he would be available to give any information to your staff on any of 

the background here on these specific items.

Senator Bartlett. Very good. Thank you. What is his name ?

Mr. Edwards. Eugene Stewart, of Hume & Stewart.
66 DOMESTIC OFFSHORE SHIPPI NG

Senator Bartlett. Here in town ?

Mr. E dwards. Yes.

While his commitments precluded him from being here today, tomorrow he will be available any time tha t your staff might wish to 

contact him and will be delighted to cooperate and give you any information as to all of these finer points on these cases which are still 

pending.

Senator Bartlett. How do you account for the fact tha t there has 

been such a slight development of agriculture there?

Mr. Edwards. Well, as you know, the minimum wage laws, Fa ir 

Labor Standards Act, applies to Guam.

Senator Bartlett. Does that apply the same way as to Iowa, for 

example ?

Mr. E dwards. The same way exactly. It is $1 minimum now. So 

everybody who can get a job with the military gets a job with the military . As you know, our land is volcanic and coral. We have a t errific amount of insects that just devour crops as fast as you can put 

them in and the net result is it is extremely difficult to produce them 

and in the tropical climate it just keeps you busy trying to keep the 

undergrowth down. It grows faster than your crops. Being ter ­

rifically small areas, maybe 2- and 3-acre tracts, and tha t is a sizable 

tract, it keeps you busy try ing to keep everything but the crops from 

growing and you cannot use mechanical equipment, it is not large 

enough, the areas are not large enough, the farmers are not sufficiently 

established that will permit them to do it.

Senator Bartlett. Do the homestead laws of the United States 

apply to Guam?

Mr. Edwards. Well, no, they don’t. No public land laws of the 

United States apply to Guam. And that is another situation. A 

large number of acres were used during the war, after Japanese occupation was ended, and the military came in, we just have acre upon 

acre of airfields under concrete strips. Our best and most productive 

land is there now. And it is truly amazing when you go onto tha t 

island and see the terrific buildup we had to have, which was so essential and such an important point in the war, but still they have 

removed a lot of the buildings and you just see acres of roads, tar 

roads, water-bound roads, concrete runways, and a lot of tha t land 

has not been returned to production and it would cost a terrific amount 

to get it back.

The Navy and the Armed Forces are trying as they determine, in 

the ir wise judgment, they don’t need any land, they are turn ing it 

back, tha t is, some of it goes to the government of Guam and some of 

it was on lease, they acquired some of it, and in tha t way they dispose of it under our regular disposal laws.

But the conditions are such tha t people cannot take and make 

enough or get enough capital to start out and try to clear the land 

where there isn’t concrete and still at the same time produce a crop and 

make enough, because they can live, as I say, they get our minimum 

wage, $1, and our civilian economy is—our civilian workers tr y to get 

a job with the military.

That is the reason why, before World War I I, copra was one of the 

main stabilized crops they had, very productive. But you cannot use 

coconut trees and generate copra with labor at $1 and $1.25 an hour.

Senator Bartlett. It won’t work out.
DOMESTIC OFFSHORE SHIPPING 67

Mr. Edwards. It just won’t.

Senator Bartlett. Is the land fertile ?

Mr. Edwards. Some of it is and some is not. The southern half 

of the island is very hilly and in fact that part will not produce very 

much of anything, because afte r you pass up 100 or 150 feet above 

sea level it becomes very arid and very hilly, very little arable land 

there. It is the northern half, and tha t is where we have all our air ­

fields.

Senator Bartlett. Wha t is the highest point on Guam ?

Mr. E dwards. About 1,850 feet, I think.

Senator B artlett. How far south from Tokyo is it?

Mr. Edwards. It is about 1,600,1 think.

Senator Bartlett. In case you are curious, I am only asking you to 

educate me. I don’t know this will be useful.

Mr. E dwards. Well, I think your colleague, Senator Gruening, and 

Senator Long, they made a trip out there, and I would strongly urge 

tha t every Senator, every Senator, should see Guam. Having served 

in Washington a number of years, working in these things, as you well 

know, for the last 6 or 7 years, you just don’t realize the problems that 

you face when you go out there and see it. They are terrifically loyal 

people. It is truly a wonderful sight to watch these small Guamanian 

children all line up in the front of the school and make the pledge of 

allegiance to the fiag in the morning. They are patriotic, very loyal, 

and energetic.

Senator Bartlett. Are the services and facilities of the Farmers 

Home Administration available to people there ?

Mr. E dwards. No. There is no Federal agricultural activity being 

done in Guam today.

Senator Bartlett. How many Guamanians are there ?

Mr. Edwards. A little over 29,000. That is the 1960 census.

Senator Bartlett. How large did you say Guam is?

Mr. Edwards. 221 square miles. It is approximately 30 by 8, 30 

miles long by 8 miles wide.

Senator Bartlett. I don’t know tha t when the witness from Alaska 

appears he will be able to give, if he so desires, situations comparable 

to that which you cited. I don’t know he will deal specifically with 

toilet tissue, b ut situations where the freight is much higher than the 

original cost.

But let me say what you already well know : in other ways there 

are startling contrasts. You said the land area of Guam was 221 

square miles and the Department of Inte rior recently created in 

Alaska a wildlife range of over 14,000 square miles of land with, 

perhaps, not much more agricultural activity there.

Now, Mr. Edw ards, you are appearing here on behalf of th e people 

of Guam, and you suggested that they need and they are entitled to 

some relief from the present situation relating to maritime tran spo rtation. Are you in a position officially or otherwise to inform the 

committee as to what you believe the nature of th at relief ought to be?

Mr. Edwards. Well, naturally I cannot speak for the administration or the D epartment of Inte rior under which we all serve. I cannot speak officially, except I can say it was the idea of Governor Flores 

that we have to be put in a comparable position as the man who is 

shipping cargo from the United States to a foreign country, because
68 DOMESTIC OFFSHORE SHIPPING

we are so fa r away. The coastwise laws were to protect the American 

maritim e industry, going from New York, say, to New Orleans, 

around to San Francisco. But when you are approximately 6,500 

miles from the mainland, which is much fa rther than a lot of foreign 

areas are, and whenever American carriers carry cargo to a foreign 

area, the people of the United States subsidize so he can compete with 

foreign carriers. The people of Guam don’t have that. We don’t 

get the benefit of that. And still we are much f arther away and our 

rates, as you can recognize, because of the distance, we have to pay the 

straight out and out rate tha t the carrier has to demand for his rate 

of return, which makes it rathe r a high rate.

Senator Bartlett. Out of your long experience in territorial matters, do you have any present recollection of why it is that the cabotage 

laws are not applied to the Virgin Islands and are to Guam ?

Mr. Edwards. Well, when they wrote the Virgin Islands Organic 

Act they left it up to the President to determine. That was in 1936. 

It was left up to the determination of the President whether or not 

they should be applicable and he issued an Executive order determining they should not be applicable. The only other area, as I 

understand it—I am not an expert on coastwfise or any maritime laws, 

because, as you know, in the Department our experience or my experience has just been with other laws which would come before us on 

various matters—but, as I understand, American Samoa is the only 

other area in which coastwise laws are inapplicable, and since the 

President made the Virgin Islands inapplicable, we, Puerto Rico, 

Alaska, and Hawaii were the only ones tha t were made applicable 

to it.

Senator Bartlett. The President couldn’t change the situation regarding Guam. That would have to be done by law.

Mr. Edwards. Tha t has to come within—it would require legislation, yes.

Senator Bartlett. Thank you very much.

Mr. Grinstein ?

Mr. Grinstein. Mr. Edwards, you said Pacific Far East Lines and 

American President Lines serve Guam. Do they have any obligations to serve Guam, or do they do it because they think it is good 

business?

Mr. E dwards. Well, really I am not in a position to say absolutely 

whether they are under an obligation or not. I don’t know if steamships have something like a certificate of convenience that is required 

of bus lines or something like that. The airlines ha ve; they get scheduled airlines and they have to have a certificate. I am not familiar 

enough with it to determine whether or not Maritime issues those 

certificates or not.

Mr. Grinstein. Well, let me ask th is: We will say Pacific Fa r E ast 

Lines serves Guam. Does i t serve it with a subsidized vessel and repay back to the Treasury the amount they are subsidized?

Mr. Edwards. Again, I am not familiar enough. That is why I 

suggested t hat you might get all of these answers from Mr. Stewart, 

who is fully familiar. He is a maritime specialist here in Washington 

and would be familiar with that. I am not familiar enough with it 

to determine just what the situation is on those technical aspects.
DOMESTIC OFFSHORE SHIPPING 69

Mr. Grinstein. The main source of supply, then, for the civilians 

in Guam would be the U.S. mainland, including Hawaai, and the 

main source of supply would be the U.S. vessels ?

Mr. Edwards. Oh, yes; it is the only source.

Mr. Grinstein. Thank you.

Senator Bartlett. Mr. Bourbon ?

Mr. Bourbon. Did those two lines make application to Maritime 

to serve you by more frequent calls ?

Mr. Edwards. I beg your pardon ?

Mr. Bourbon. Did Pacific Fa r Eas t and AP L request permission 

from Maritime to make more frequent calls at Guam? It seems to 

me I read tha t recently.

Mr. Edwards. Well, I don’t recall whether they made application 

or not. I can tell you th at in 1955 there were 58 vessels oi PF E, 58 

in 1956, 55 in 1957, 38 in 1958, 36 in 1959, and 18 in the first 6 months 

of 1960.

Mr. Bourbon. Do you have adequate service from them now?

Mr. Edwards. Yes, I would say we have adequate service. Naturally all our passengers come in by air and all of our mail is by air. 

We have mail service by Pan American three times a week and we 

have two flights a week out of Guam to the mainland. But all of 

our produce comes in, all of our supplies, food products and consumer durables, automobiles and hard and soft goods, by ship and the 

average, as I say, is about once a week.

But here recently, the first 6 months of 1960. we had 18 vessels out 

of 26 weeks. And AP L had only eight vessels. So really, the first 

6 months we had 26 vessels and there were 26 weeks. Now sometimes 

they land within a day of each other.

Mr. Bourbon. Doesn’t it seem strange, tha t if I recall properly, 

you said you brought $24 million in imports from the United States 

and only about $3 million from the Fa r East? They get a subsidy 

on anything th at is shipped from th e F ar Ea st, don’t they, to Guam, 

because th at is foreign trade? I would think you would be able to 

buy a whole lot of things a lot cheaper in the Fa r East than in the 

United States and yet you buy eight times as much from the United 

States.

Mr. E dwards. Well, the only imports we get from foreign countries 

is some food products and some soft durables and a few automobiles, 

but that is about the extent of it. These people mostly buy stateside 

products. Now I am not certain whether they are subsidized on their 

foreign merchandise tha t is brought in from Jap an or Hong Kong 

or Manila; I am not familiar enough with tha t to say.

Mr. Bourbon. They must be, because they are bringing it into the 

United States.

Mr. E dwards. I would imagine it would be, too, subsidized foreign 

merchandise. I would imagine it would be, bu t I am not certain of it.

Mr. Bourbon. That is all.

Senator Bartlett. Mr. Goding?

Mr. Goding. In an area you are probably very familiar with, you 

recall the Commission on the Application of Federal Laws to Guam 

that made a report following the enactment of the organic act and 

pursuant to the terms of that act ?

Mr. Edwards. Yes, sir.
70 DOMESTIC OFFSHORE SHIPPING

Mr. Goding. If I recall, that Commission recommended tha t Guam 

be removed from the protection of the coastwise laws.

Mr. Edwards. That is correct, sir.

Mr. Coding. Do you recall what happened subsequently ? I can 

see that in view of the security problem tha t you might not get service, but there might be other reasons.

Mr. Edwards. Well, no; no action has ever been taken on it. We 

went through this application, this Commission’s recommendations 

on the application of Federal laws to Guam and put in everything, but 

because of the defense sea area nothing was done on that.

Mr. Coding. My understanding is, and it may not be correct, if 

Guam were removed from the protection of the cabotage laws, the 

subsidized lines operating there could then serve the area without rebating the subsidy on that.

Mr. Bourbon. That would seem to be so.

Mr. C oding. I wondered if that possibility had been considered.

Mr. Edwards. Well, you could keep it a Navy defense sea area and 

keep out the foreign vessels and still make an exception to the coastwise laws and permit a subsidy.

Mr. Coding. In other words, Guam would then have the benefits of 

a subsidy ?

Mr. E dwards. Yes, and still there would be no foreign vessels coming in.

Senator Bartlett. Mr. Edwards, do you have an adequate harbor 

or harbors at Guam ?

Mr. Edwards. A very good harbor. It is naval, b ut very good.

Senator Bartlett. The commercial carriers use tha t harbor?

Mr. E dwards. Oh, yes. They come in and one side is set off for the 

Navy, and (he Government of Guam operates the commercial port. 

These figures I am giving you are taken from our Department of 

Commerce, which the commercial port is one of its bureaus.

Senator Bartlett. Thank you very much. We are grateful for 

your appearing here.

Mr. Edwards. It was a pleasure.

I wish, on behalf of the people of Guam, to express our appreciation 

for you giving us this opportunity to present this problem to you, 

because it is most timely in Guam right now.

Senator Bartlett. It ties in with the problem we have under consideration, most assuredly.

The final witness today will be Mr. Fitch, of the Department of 

the Interio r.

STATEMENT 0E EDWIN M. FITCH , ASSISTANT TO THE GENERAL

MANAGER, THE ALASKA RAILROAD, DEPARTMENT OF THE IN ­

TERIOR, WASHINGTON, D.C.

Mr. F itch. Mr. Chairman, I will try and speak somewhat more to 

the point and more rapidly than our last Alaska Railroad trains 

used to run in the old days.

When I first got off the train at Seward in 1947,1 recall being met 

by a resident who said, “Good old Alaska Railroad, on time to the 

day.” We now are on time usually to the minute.
DOMESTIC OFFSHORE SHIPPING 71

Senator Bartlett. Now Mr. Fitch, I take tha t as a matter of 

gospel, but before others may be willing to do so, you had better 

identify yourself.

Mr. F itch. My name is Ed win M. Fitch, Assistant to the General 

Manager of the Alaska Railroad. I have worked for the Railroad 

since 1947 and my headquarters are in Washington, D.C.

Senator Bartlett. And the Federal Government owns the Alaska 

Railroad and it is operated under the jurisdiction of the Interior 

Department.

Mr. Fitch. That is correct, sir.

Senator Bartlett. Thank you.

Mr. Fitch. May I give just a brief history of the Railroad. We 

have been operating in one form or another for more than half a 

century. The Railroad goes back to the private railroad constructed 

from Seward which eventually the Government took over. We run 

from the port of Seward to Fairbanks, 471 miles. We also operate 

out of the port of W hittier, which used to be a military port, but is 

now deactivated. We still run there because there are two or three 

large industries in Whittier which we must serve.

The financial characteristics of the Railroad can be described briefly. 

Our freight income is about $12 million a year. Our total income 

is perhaps a couple of million dollars more. About half our revenue 

is from coal and oil. We try to keep our heads above water in terms 

of breaking even, as far as our costs are concerned, and those costs include $1,900,000 a year depreciation. As of this time, this year, this 

fiscal year, we are $130,000 ahead of the game. Since we were in the 

red last year at this time, we are $630,000 better off, in terms of our 

net now, than we were last year in spite of an increase in our depreciation charges.

Senator Bartlett. Do you care to start a steamship company then 

out of the profits ?

Mr. F itch. I am a railroad man and I don’t know anything about 

steamship companies, except this, the Alaska Railroad is in partnership with the steamship companies. Their health is important to us, 

as ours is to them.

We are also in partnership with the trucklines. We would rath er 

work with them than fight them, though sometimes they are a little 

more ready to compete strongly with us than we are with them. We 

have, I think, been very successful in winning the cooperation of the 

truckers. We have done it through piggyback and containerization, 

and I think the only excuse fo r your having me testify on behalf of 

the Railroad is to secure added emphasis on the subject of containerized freight.

The Alaska Railroad, Alaska Steamship Co., and some of the bargelines have pioneered in containerized freight in the Alaska trade.

If you had looked at our Anchorage yard on a sunny day in Ja nuary—if I had been in Anchorage in January. I would have escaped 

the rigors of the Washington winter—you would have seen flatcars 

loaded with containers and piggyback trailers all over the place. 

Every time I go down past the Potomac yard I look for piggyback 

and containers and rarely see them.

In my judgment, and if you will allow me a bit of bragging, the 

Alaska Railroad is the No. 1 container railroad in the whole United
72 DOMESTIC OFFSHORE SHIPPING

States in terms of the percentage of its traffic which is shipped via 

containers. The reason it is so economical for us to do this is important, I think, to this committee in considering water transportation, because we have an advantage in terms of saving through containers th at a railroad th at does not cross a dock does not have.

Our goods must come largely via Seattle, or Portland, or San Francisco, over a dock. They are taken to Seward by ship or barge, again 

transferred over a dock and placed on Alaska Railroad trains to go 

into the interior to Anchorage and Fairbanks. It has been savings 

due to tha t kind of transportation which has been responsible for 

the fact that the Alaska Railroad is probably the only carrier in the 

world tha t is paying 1961 prices, and is charging just about what it 

charged in 1937 for transportation. Tha t is not true in some particular commodities, but by and large we are making about the same 

per hundred pounds of freight as we made in 1937 for our line haul 

over the Alaska Railroad.

Senator Bartlett. May I interrupt at that point ?

You said you are making about the same amount. Are you also 

charging about the same amount ?

Mr. F itch. I beg your pardon, sir, I meant charge, not make. We 

are charging about the same amounts as wTe charged in 1937. One 

obvious example is our passenger rate which was 6 cents per mile in 

1937 and is 6 cents per mile in 1961.

I am happy to report that our longshoremen—these longshoremen, 

by the way, are the employees of a contractor of the Alaska Railroad, 

not ours—they are cooperating with us in this endeavor. They are 

not resisting containerization. They realize tha t containerization 

means a great deal to the maintenance of the port of Seward as a successful port, and we are extremely pleased w ith the way the ILW U 

officers and members in Seward are cooperating to be certain tha t we 

have an efficient containerized operation at tha t point.

We also, of course, run piggyback, and we have done so for many 

years. The largest truckers, some of them, in Alaska, may have 80 

to 90 percent of their cargo going over our railroad piggyback. I am 

told tha t there are one or two lines that have never sent a pound of 

freig ht over the highway, but have used us for the over-the-road transportation and have themselves then been the delivery carrier.

We on the Alaska Railroad regard piggyback as old fashioned, 

however, and expect containerization will increase, and piggyback 

will decline as far as we are concerned.

I would like to call the attention of the committee to the fact that 

the Alaska Railroad has a very profound and deep interest in through 

rates to Alaska. We would like to look forward to the day when a 

container could be loaded at the m anufacturer’s warehouse in Chicago, 

or Pittsburgh, or wherever the origin of the goods is, and tha t container could go via rail through the ports to Anchorage or Fairbanks, 

the only handling being the physical handling or placing the goods 

inside the container at the manufacturer’s warehouse, and the taking 

of the goods out of that container when it arrives at the merchant's 

warehouse.

Senator Bartlett. This is not now possible ?

Mr. Fitch. No, sir.

Senator Bartlett. Why?
DOMESTIC OFFSHORE SHIPPING 73

Mr. F itch. In the first place, the Alaska Railroad is not in a position to allow its own containers to move very far out of Seattle. 

There are no arrangements for pooled containers in this country as 

yet to compare with the pooling of freight cars, which is done as you 

know under the guidance of the Association of American Railroad’s 

Car Service Division.

There is developing, through the freight forwarders, what would 

amount to a pool of containers, and in the future perhaps this will 

develop as far as the railroads are concerned. But there are obstacles 

to it now. One, there are no physical arrangem ents for keeping track 

of these containers, and I would be the first to admit th is is a difficult 

problem, if they should be shipped all over the U nited States and to 

some extent all over the world.

In the second place, we have no way of establishing a throu gh rate, 

even if we did have pooled containers a t this time. As you know, the 

situation there is due to the fact there is one kind of regulatory board, 

ICC, for the traffic to the port, and another, the Maritime Board for 

the water carrier, and another, the Secretary of the Interior, for the 

Alaska Railroad, or if it moves by truck, it goes back to ICC.

I should like to report to this committee th at although some members may have been disappointed at the action by the President in 

vetoing a bill to place the Alaska Railroad under the ICC last year, 

tha t the General Manager has recommended to the Department of 

Inte rior tha t we be placed under the Inte rstate Commerce Commission for purposes of rate regulation only, and while that has not been 

adopted as official policy by the Department, the General Manager is 

recommending tha t be done.

I would like to close, sir, with one little statement about the future 

of railroading. We on the Alaska Railroad do not feel defeatest about 

railroads. We operate under a good many handicaps, and also with 

some financial advantages, tha t is true, in terms of comparison with 

Class I railroads. We are a one-way railroad, a short-line railroad, 

a thin traffic railroad, but we have kept our heads above water. In 

terms of the meaning of the railroad to Alaska, can I call your attention to the fact tha t two-thirds of the population lives along the rail 

belt area.

I would also like to ask you to imagine what would have happened 

to Anchorage if the Alaska Railroad had gone through Valdez or 

Cordova. In my opinion the development of Alaska would have occurred some place else. I suspect Anchorage would have been little 

more than a village beside a salmon cannery, except as the railroad 

moved through there. True, with the coming of the highways more 

development is possible, but I doubt very strongly if the highways 

would have come in the rail belt area except as the Alaska Railroad 

had developed the area first.

I think there is a great future for railroads in terms of furnishing 

economical and good and fast transportation. I would like to wind 

up this brief statement by saying th at it is very important to the ra ilroad tha t we get along with our partners, the shipping companies, 

with our partn ers the truckers, and we hope that we can continue to 

work with them as cooperatively as has been possible in the past.
74 DO MESTIC OFF SH ORE SH IP P IN G

Th e gen era l ma nager of the rai lro ad , Mr. D. N. Sm ith , may wish 

to file a sta tem ent with the comm ittee, a nd I would lik e per missio n to 

do so, if he wishes.

Se na tor Bartlett. Gr anted .

Mr. Fi tch, if thes e jo in t throug h rat es could be establ ished, is it 

yo ur opinion th at su bstan tia l savings might be made possible to the 

ultim ate consumer ?

Mr. Fitc h. Tha t is alw ays the ore tically so an d I th in k in pract ice 

it often is so. Th is, of course, could ha pp en with or wi thou t contai ners. Th e reason fo r it is that almost i nv ariably th e f ixin g of rates 

fo r the long throug h route mean s lower rates pe r ton -mile th an fo r 

the short route. For example, the rate fro m Se attle to Seward, fo r 

del ive ry in the city of Seward, for the water h au l, is norm all y some ­

wh at high er th an the prop ort ion al rate which appli es if the t hrou gh 

ra te is appli ed going on throug h to An chorage or Fa irb an ks , and in 

ter ms of rate h istory, th at has been alm ost alw ays the case. I t takes 

men’s decisions to m ake it so, bu t I t hi nk t hat th is hi sto ry m eans that 

there would be some likelih ood of the same thi ng happ en ing on throu gh 

rates to interio r Ala ska.

Se na tor Bartlett. You spoke abo ut th e innovatio ns and impro vements made in respec t to use of con tainer s, bo th at sea an d ashore. 

Is it no t the case, as was suggested t his mornin g, th at if this ha d not 

occ urred, the rate increases fo r Alask a, an d I must assume fo r the 

othe r offshore co mm unities, wou ld have been m uch lar ge r th an act ually 

has been the case d ur in g t he po st-Worl d W ar I I pe rio d ?

Mr. Fitc h. I can speak only fo r the Al aska Ra ilr oa d dir ectly , of 

course, bu t if it had no t been for con tainer s, either we wou ld be losing several hu nd red tho usand dollars every y ea r o r our rates wo uld be 

hi gh er t ha n the y are now.

Se na tor B artlett. Th is t he n has been a high ly sig nif ica nt develop ­

ment in the tr an sp or ta tio n indu str y.

Mr. Fitc h. I t has , sir, and I th in k it ha s lessons fo r the whole of 

the tran sp ortatio n i nd us try, not jus t for the Alas ka trade .

May I po in t out in th at conn ectio n th at th e mili tary now has in 

use 85.000 conta ine rs fo r oversea trade . Those are the so-called Conex boxes.

Se na tor B artlett. W ha t kind ?

Mr. Fitch . Conex boxes. A small conta ine r, as I recall, about 7 by 

8 bv 12 or 13; som eth ing like th at.

Se nator B artlett. Th ere is no sta nd ard size fo r thes e conta ine rs?

Mr. F itch . Y es ; these are all the same.

Se na tor Bartlett. Those, bu t oth ers have dif fer ent sizes?

Air. Fitch . Yes; and th at is one of the big obstacles to successful 

conta ine riz ati on th roug ho ut the cou ntry. Th ere are several com mittees wo rki ng on t ha t. I ha pp en to be alternate to th e gene ral m anager 

as a member of tw o of them , one ma intai ned by th e Am eric an Sta nd ­

ar ds Associa tion and the National Defense Trans po rtation Ass ocia ­

tion. Th ey have agreed to a mo dular sta nd ard, in un its of 10 feet, 

10, 20, and so fo rth , and I regr et to say th at sin ce we were in the conta in er busin ess a long time be fore these sta nd ards were th ou gh t of, ou r 

conta ine rs are all 24 feet long .

Se nator Bartlett. You were first?

Air. F itch . We were i n th ere first.
DOMESTIC OFFSHORE SHIPPING

Senator Bartlett. And biggest ?

Mr. Fitch. With the steamship companies, and there has been a 

tendency for the steamship companies to use the 24 to 37 foot boxes.

Senator Bartlett. Now you mentioned tha t the longshoremen in 

the Alaska ports are of particular interest to you as a member of the 

Alaska Railroad, and tha t they have accepted this change in circumstances. Was tha t acceptance readily given or did it come after 

tumult and toil and trouble ?

Mr. Fitch. Remember I said tha t the contract—we have a longshore contractor who made the arrangements with the union. I was 

not in Alaska at the time, but I am informed the acceptance was 

readily given, and tha t the longshoremen not only caused no turmoil 

and trouble, but they have recognized that their fu ture in Seward depends to a great extent upon the success of containerization.

Senator Bartlett. I am going to suggest in this connection that 

it will be useful to have in the file, although not in the record, an 

article on this very subject which appeared in a recent issue of either 

Harper’s or the Atlantic Monthly—Harpe r’s, I believe—by William 

Glazier upon the subject of automation, and an agreement between 

industry on the Pacific coast and the longshoremen relating to this. 

It bears out your declaration, Mr. Fitch, that longshoremen have 

been willing to accede to that which at first blush would seem to mean 

a diminution of work opportunities for them.

Mr. Bourbon. Could I ask a question, Senator ?

Senator Bartlett. Yes ; of course.

Mr. Bourbon. Do your longshoremen up there share in the $5,500, 

000 fund the Pacific coast people have set up to compensate them for 

the less work ?

Mr. Fitch. The contractor’s longshoremen—they are not railroad 

employees—have th eir own agreement with the contractor, and I am 

quite sure this is a separate agreement, applicable to the port of 

Seward, and so that I am almost certain they do not share in that.

Mr. Bourbon. But there is a special bonus for acceptance of the 

containers?

Mr. F itch. I would like to check tha t point. It is my u nderstanding, though, that there is a wage ra te only for our longshoremen. I 

am not aware of any special bonus for handling containers. But that 

is subject to check, sir, and I will check that.

Senator Bartlett. I think you will probably discover that the situation is otherwise, and tha t these longshoremen at Seward, who 

make up a unit of the international union, are included within the 

agreement. I don’t know this to be a fact, but I would think so because I think they would have this protection from their national 

director.

Mr. Fitch. I regret I am not more expert on tha t point.

Senator Bartlett. If you are not, it is about the only thing relating 

to this you are not.

Mr. Fitch. Than k you, sir.

Senator Bartlett. Mr. Grinstein ?

Mr. Grinstein. You mentioned a lot of traffic is coming in by barge. 

Is this increasing? Is more traffic coming into Alaskan ports by 

barge?

Mr. Fitch. Yes.
76 DOMESTIC OFFSHORE SHIPPING

Mr. Grinstein. And they are bringing containers in by barge ?

Mr. Fitch. Tha t is correct.

Mr. Grinstein. Are these regulated by the Federal Maritime 

Board?

Mr. Fitch. I so understand, yes.

Senator Bartlett. Mr. Goding.

Mr. Goding. To supplement that, do you have railroad figures over 

a period of years or could you supply them on the relative proportion 

of ship and barge container traffic ?

Mr. Fitch. Over how long a period ?

Mr. Goding. Over the last 4 or 5 years ?

Mr. Fitch. Five years. All right. I am sure Alaska Steamship 

Co. will forgive me if I point out one of the problems here has been 

the provision of deck space fo r containers and the conventional ship 

doesn’t have a great deal of deck space for containers. It is possible 

to modify it and provide more.

We have had problems of getting the type of deck space which will 

permit the maximum of containers in the trade. That has been one 

reason for the increase in barges in the Alaska trade, though not the 

only reason.

Senator Bartlett. Thank you, Mr. Fitch, very much. We may be 

calling on you at a later date for further contributions in the way of 

information.

The committee will stand in recess until tomorrow morning at 10 

o’clock.

(Whereupon the subcommittee recessed at 4 :33 p.m., to reconvene 

at 10 a.m., March 7,1961.)

(Supplemental information from Administrator Thos. E. Stakem, 

Jr. , previously requested, follows:)

U.S. Department of Commerce,

Maritime Administration,

W ashington, D.C. April 28,1961. Hon. E. L. Bartlett,

Chairman, Subcommittee on Merchant Marine and Fisheries, Committee on

Interstate and Foreign Commerce, U.S. Senate, Washington, D.C.

Dear Senator Bartlett : During my testimony on March 6, 19G1, at the

hea ring of your subcommittee inquiring into the problems of domestic offshore 

shipping, I was requested to furnis h certain informtaion for the record.

It occurs to me that it would be most convenient to you and your staff to 

have the inquiries directed to me identified by the page numbers of the tra nscr ipt of the hearing.

Accordingly, there is attache d a series of pages on which we have identified 

the requests by the transcript page numbers involved, followed by the responses thereto.

We will be happy to furnish any additional information available to us 

which you may desire.

Sincerely yours,

Thos. E. Stakem, Maritime Administrator.

Item 1—Pages 86-38

Furni sh a state ment on the formula used for recoupment of operating-differe ntial and construction-differential subsidies when a subsidized vessel makes 

a call to a domestic offshore area.

Cases involving questions of reduction of operating -differential subsidy where 

a subsidized vessel makes a domestic call to an offshore are a fall into two 

categories, namely, (1) those are as which are subject to our coastwise laws, 

in which case abatement of subsidy is required, such as Hawaii, Puerto Itico, 

Guam, Midway, Wake, and Alaska; and (2) those are as which are not subjec t to our coastwise laws, in which case aba tement of subsidy is not required,
DOMESTIC OFFSHORE SHIPPING 77

such as the Virgin Islands and Samoan Islands. There is a separate category 

involving U.S. trusteeships such as the Marshall Islands, but these areas are 

not territories of the United States, are not subject to our coastwise laws 

(even though foreign-flag carriers are excluded from serving such area s), and 

abatement of subsidy is not required.

In all cases requiring operating-differential subsidy reduction, the formula 

for such reduction is spelled out in section 605 (a), as follows:

“* * * if the subsidized vessel earns any gross revenue on the carriage of 

mail, passengers, or cargo by reason of such coastal or intercoastal trade the 

subsidy payment for the entire voyage shall be reduced by an amount which 

bears the same ratio to the subsidy otherwise payable as such gross revenue 

bears to the gross revenue derived from the entire voyage.”

For example, where a subsidized vessel makes a voyage in the mixed foreign 

and domestic commerce of the United States earning a gross revenue of 

$200,000 of which $20,000 was earned from the cargo carried in the domestic 

trade, the amount of subsidy accrued for the entire voyage would be reduced 

by 10 percent.

Additionally, if the subsidized vessel regarding which operating subsidy 

must be reduced had also received construction-differential subsidy aid, section 

506 requires the annual repayment to Maritime of “tha t proportion of [onetwentieth or] one twenty-fifth [depending upon the statu tory life of the vessel] of the construction-differential subsidy paid tby the Government] for 

such vessel as the gross revenue derived from the entire voyages completed 

during the preceding year.” For example, assume tha t a vessel on which a 

construction-differential subsidy of $5 million was paid earned $2 million gross 

revenue during the year, of which $400,000 or 20 percent was earned from 

cargo carried in the domestic trade. Twenty percent of one twenty-fifth of 

$5 million (20 percent of $200,000) or $40,000 would be required to be paid 

to the Maritime Administration.

Item 2—Pages 89-40

Furnish whatever is available as to how the subsidization program by Canada 

to its coastal and inland water carriers to provide services to outlying communities works out.

Bill 336, passed by the House of Commons of Canada on June 23, 1947, established the Canadian Maritime Commission. The Commission is responsible for 

administering, in accordance with regulations of the Governor in Council, any 

steamship subventions voted by Parliament and makes an annual report to the 

Minister of Transport of its affairs and operations.

In response to an inquiry to the Canadian Embassy in Washington, D.C., the 

Maritime Administration was furnished information on maritime subsidies by 

lette r dated November 17,1958, copy attached.

In the Commission’s latest annual report, dated June 28, 1960, the following 

is the full information reported on “Subsidized Steamship Services” :

“In accordance with the terms of the Canadian Maritime Commission Act, the 

Commission continued to administer subventions voted by Parliament.

“During the fiscal year 1959-60 subventions were paid for coastal and inland 

services only. Thirty services received assistance, 2 on the west coast, to on 

the Great Lakes, and 26 on the east coast; these included the river and Gulf 

of St. Lawrence and the Canadian National Railways, Newfoundland coastal 

services, comprising 9 different routes and 11 vessels. A strike of seamen on 

the west coast resulted in a 2-week stoppage on subsidized steamship services. 

One new service is included—the Trois-Pistoles and Les Escoumains service—in 

which the Federal and Provincial Governments share equally.

“A new vessel has been built for the Department of Transport to be operated 

on the Pelee Island and the mainland services. Tenders were called for the 

operation of this vessel, to be submitted by February 15, 1960. The previous 

contractor, the Pelee Shipping Co., Ltd., submitted the lowest tender and was 

consequently awarded the contract to operate the service.

“The Commission’s inspectors examined all services and carried out surveys 

to ascertain the need for the continuance of existing services. The Commission 

is represented on the standing committee of explosives in connection with the 

dangerous goods shipping regulations in the Canada Shipping Act. It has also 

been represented on several interdepartm ental committees investigating tran sportation problems, in various parts of the country.

71709—62------6
78 DOMESTIC OFFSHORE SHIPPIN G

Statistics of steamship subventions

In te rp ro v in cia l se rvice s be tw ee n—

Que be c, P ri nce E d w ard Is la nd, an d N ova Sc otia.

N ova Sco tia an d P ri nce E d w ard Is la n d _________

N ova Sco tia an d N ew B ru n sw ic k _______________

N ew B ru nsw ic k a n d Q ue be c............... ....................... .

P ri nce E d w ard I sl an d a n d N ew fo undla nd_______

Pro vin ci al services:

B ri ti sh C olu m bia _______________________________

N ew B ru nsw ic k________________________________

N ew fo u n d la n d _________________________________

N ova Sco tia............................................................. ...........

O n ta ri o _______________ _____ ___________________

Q ue be c................................................................................. .

T o ta l st ea m sh ip s u b v en ti o n s____ _____________

P aid 1959-60 M ain e st im at es

$174,000

558, 784 

33,000 

67,500 

72,0 00

$174,000

617,000

33,000

62,500

72,000

277, 736 

104,600 

3,7 07, 654 

196,900 

164,000 

1,2 25, 200

294,500 

104,600 

3, 317,000 

196,900 

157, 500 

1,059,20 0

6,5 81, 374 6,088,20 0

Passenger, freight, and mail traffic on subsidized coastal services

1958 1959

Pas se nger s. - .............................. ......... ........... ....................... ....................................... 1,8 34,44 7 

201,239 

252, 731 

555, 752

1,8 27, 282 

224,579 

285,217 

578,645

Car go (t o n s)............ ................. .................................................. .......................

M ail (b ag s) _______________ _____ ______________ ______________

Veh icles............. ......... ......... ................. . ....................... ............... ...................

“The sum of $6,581,374 shown as paid in 1959-60 is the net sum after recovering the undermentioned amounts by way of recaptu re of subsidy:

Prince Edw ard Isla nd and Nova Scotia service____________________ $58, 216

Prescott, Ontario, and Ogdensburg, N.Y., service1__________________ 15,000

Vancouver and west coast of Vancouver Island service______________ 7, 334

Total recaptured_________________________________________ SO, 550

1

 S in c e th e c o n tr a c t w a s n e g o tia te d in 1 9 5 1 , th e t o t a l s u b s id ie s p a id f o r th e P r e s c o tt 

a n d O g d e n s b u rg s e rv ic e h a v e b e e n f u ll y r e fu n d e d .

Canadian E mbassy, 

Washington, D.C., November 11,1958. Irwin M. Heine, Esq.,

Chief, Statistics and Special Studies Office,

Maritime Administration, Washington, D.C.

Dear Mr. Heine : With reference to your telephone conversation a short while 

ago w ith Mr. Broadbridge of this Embassy on the ma tte r of maritim e subsidies 

as it concerns Canada, we now have received fairly complete information from 

the Canadia n Maritime Commission in Ottawa.

Prior to the estab lishm ent of the Cana dian Maritime Commission in 1947 

steam ship subsidies were adm inistere d by the Departm ent of Tra de and Commerce. The Cana dian Maritime Commission Act 1947, section 8b, states that 

“the Commission shall administer, in accordance with regu lations of the Governor in Council, any steam ship subventions voted by Parliam ent.” Adm inistration of steam ship subventions involves the duty of advising the Minister (of 

Transpo rt) the amount of subsidy which should be placed in the estimates upon 

which Parlia me nt votes.

At the present time there are 29 subsidized services operating on the eas t and 

west coasts of Canada. The atta che d lis t taken from the estimates of 1958-59 

gives detai ls; 27 of the services are purely domestic and 2 involve a call at a 

U.S. port.

Many of these services have been estab lished for some considerable tim e; in 

most cases there is no choice but to continue them as communities have grown 

up which are dependent on the service afforded and have no other means of 

communication. For each subsidized service a careful check is m ade of c urrent 

expe nditures and the contractor is requ ired to submit yearly financial state-
DOMESTIC OFFSHORE SHIPPING 79

ments. One of the difficulties which faces the Commission in this administration 

is the steady increase in contractor’s operating costs particularly in regard to 

fuel and labour. As f ar as it is possible to do so the Commission allows increases in costs to be offset by reasonable increases in freight rates, dependent 

upon the ability of the communities involved to pay higher rates. However, even 

though rates a re increased as much as the traffic will bear there remain a number 

of cases where without subsidy contractors would suffer operating losses.

Before recommending any increase in subsidy the Commission makes a complete investigation into the facts and satisfies itself tha t the services are essential to the communities involved. A careful study is made of the applicant’s 

financial statements and, where necessary, an independent audit is ordered.

Similar investigations are made in regard to applications for new subsidies. 

These are only recommended on the grounds of public convenience and necessity 

or in cases where the Commission is satisfied tha t the communications involved 

in the new service will promote trade and be of economic service to the community or the country a t large. In assessing the amount of subsidy tha t will be required a profit of not more 

than 10 percent of the capital employed is allowed. Where the reliability of the 

estimates of revenues and expenditures used for this purpose is in doubt, and 

it is possible tha t the actual earnings may be in excess of the 10 percent allowance for return on capital, a recapture clause is included in the subsidy contrac t whereby the Government recovers, in whole or in part, the subsidy 

which has contributed to such excess.

The following factors are taken into account before recommending the payment of a subsidy and assessing its amount.

1. ES SE NT IALITY OF SERVICE

(a) Examination of alternatives, if any.

(b ) Consequences of cessation of an existing service.

(c) Adequacy of service to needs of area served—

(i) consideration of freight requirements:

(ii) consideration of passenger requirements.

(d) Development or maintenance of area served.

(e) Relation of proposed service to industry and to imports and exports of the 

community concerned.

(/) Postal requirements.

(fZ) Link with other transportation services.

(h ) Assistance to domestic or international trade.

2. FINA NC IA L ASP ECTS OF SUBSIDY REQUESTED

(o) Analysis of award in relation to—

(i ) type and frequency of service;

(ii ) number of passengers to be carried;

(iii) type and amount of freight to be carried;

(lv) suitability of vessel employed or to be required—

(A) cost of acquisition;

(B) cost of operation.

(b) Analysis of ancillary government costs; public works expenditures on terminals, post office expenditures on carriage of mails, etc.

(c) Analysis of balance sheets and profit and loss statements.

(d) Scrutiny of accounts in relation to costs, expenditures, capitalization, dividends, profits, and depreciation, to ensure tha t service will be operated on an 

efficient and economic basis.

(e) Study of competitive services, if any, to prevent abuse of subsidies for 

competitive purposes.

(/) Study of passenger and freight rates to ensure that the immediate area is 

bearing its fair share of the total and to prevent unfa ir effect on other rates in 

the area.

(d) Consideration of corporate or personal status and financial ability of contractor to perform service.

(h ) Consideration of length of contract.

Yours sincerely,

A. B. Ritchie,

Charge d’Affaires, ad interim.
80 DOMESTIC OFFSHORE SHIPPIN G

Canadian Maritime Commission—Steamship subventions for coastal services

19 58 —59

Vancouver and north ern British Columbia ports, service between___ $194, 500

Vancouver and west coast of Vancouver Island, service between____ 100, 000

EASTERN LOCAL SERVICES

Baddeck and Iona, Nova Scotia, service between__________________ 17, 500

Campobello, New Brunswick, and Lubec, Maine, service between___ 8, 000

Cross Point, Quebec, and Campbellton, New Brunswick, service

between------------------------------------------------------------------------------ 50, 000

Dalhousie, New Brunswick, and Miguasha, Quebec, service between_ 27, 500

Grand Manan and the mainland, New Brunswick, service between___ 95, 000

Halifax, Canso, Guysborough, and Isle Madame, Nova Scotia______ 30, 000

Ile-aux-Coudres and Les Eboulements, Quebec, service between_____ 15, 000

Iloaux -Grues and Montmagny, Quebec, summer service between___ 3, 300

He-aux-Grues and Montmagny, Quebec, win ter service between_____ 1, 700

Mulgrave and Canso, Nova Scotia, service between_______________ 54, 900

Mulgrave, Queensport, and Isle Madame, Nova Scotia, service between____________________________________________________ 32,500

Murray Bay and north shore of St. Lawrence River, Quebec, win ter

service between____________________________________________ 50, (RK>

Owen Sound and ports on Manitoulin Island and Georgian Bay, Ontario, service between_____________________________________ 100, 000

Pelee Isla nd and the mainland, Ontario, service between___________ 42. 500

Pictou, Mulgrave and Cheticainp, Nova Scotia, service between____ 17, 000

Pictou, Nova Scotia, Charlottetown, Prince Edward Island, and the

Magdalen Islands, service between__________________________ 174, 000

Prescott, Ontario, and Ogdensburg, N.Y., service between___________ 15, 000

Prince Edw ard Island and Newfoundland, service between________ 104, 000

Prince Edward Island and Nova Scotia, service between___________ 567, 000

Quebec, Natashquan, and Harrington, Quebec, service between_____ 607, 000

Quebec or Montreal, Gasp6 and Magdalen Islands, Quebec, service

between___________________________________________________ 1S9, (XX)

Rimouski, Matane, and points on the n orth shore of the St. Lawrence

River, Quebec, service between______________________________ 125, 500

Riviere du Loup and St. Simon an d/or Tadoussac, Quebec, service

between___________________________________________________ 21, (XX)

St. John , New Brunswick, Tiverton, Free port, Westport, and Yarmouth, Nova Scotia, service between_________________________ 33, 000

Sorel and lie St. Ignace, Quebec, service between________________ 43, 000

Sydney and Bay St. Lawrence, Nova Scotia, service between--------- 45, 000

Newfoundland coastal steamship services_______________________ 2, 800, 000

To tal_________________________________________________ 5, 563, 500

Item 3—Page J^l

Furnish information as to what ships in the reserve fleets are suitable and in 

com parative readiness for use in the several domestic offshore trad es if a 

Government charter program is deemed appropriate .

With respe ct to the Alaska, Guam, and Haw aiian trad es, the following suitable ships are available from th e west coast reserve fleets:

C- 3__________________________________________________________________ 1

C1-M-AV1 (many fitted for Alaskan tr ade)__________________________ 23

VC2-S-AP2 (Victory )______________________________________________ 68

VC S-S-AP 3 (V icto ry )________________________________________________ 14

In addition to these ships it is estimated that one C-2 ship will be traded in 

under the trade-in and build program and become available on the west coast 

during the ne xt 12 months.
DOMESTIC OFFSHORE SHIPPING 81

With respe ct to the Puerto Rican trad e, the following ships are available from 

the Atla ntic and gulf coast fleets:

C-2______________________________________________________________ 1

VC2-S-AP2_______________________________________________________ 6 8

VC2-S-AP3_______________________________________________________ 3 1

CIA______________________________________________________________ 6

C1B______________________________________________________________ 2 6

In addition to the above it is estim ated th at two C-2 ships will become ava ilable from the trade-in and build program on the Atlantic coast during the next 

12 months.

Ite m 4—Page

Advise whether certificates of convenience and necessity would be limited to 

ships or whether they would also be applicable to barge operations.

We understand the tes t as to the applicability of certificates of necessity 

requirements under the Interstate Commerce Act is whether the carri er operates as a common carrier by water. If so, a certificate is required. If the 

operation is th at of a con tract carrier, a permit is required, except in a very 

limited area. Consequently, i t appears th at certificates of necessity could be issued to barges, 

as well as ships, when operatin g as common carriers.

Ite m 5—Pages 46-41 (see pp. 30-32)

Furnish any available information as to the relation between ocean tra nspo rta ­

tion costs and consumer costs in the offshore domestic areas.

As was indicated at the hearing, the Feder al Maritime Board has und ertaken 

no cost study, as such, of the rela tion between ocean transp ortation costs and 

other costs which are involved in establish ing the ultimate consumer costs.

The subcommittee chairma n apparen tly concurred in our recommendation 

that before any conclusion is reached as to the advisab ility of adopting any of 

the enumerated altern ative methods of lowering freigh t rates, an effort should 

be made to settle definitely the relatio nship of the ocean ca rrier charges to 

other cost factors. We believe th at only by an analysis of the res ult of a 

thorough study of the cost factors contributing to the ultimate consumer costs 

can it be determined whether the ocean transp ort ation charge is such a significan t factor in the ultimate consumer cost th at a reduction of ocean freigh t 

rates would accomplish the desired result. As we envisage it, the suggested cost 

analysis would be made w ith respect to commodities exported from the mainland 

to Alaska, Haw aii, Guam, and Pu erto Rico, and commodities imported therefrom 

which have a significant effect on the economy of these domestic, noncontiguous 

areas. The study would cover all factors th at affect the ultim ate costs of each 

selected commodity, including, but not limited to, price of items at mainland 

sources, packaging and crating, inlan d transp ort ation and handling at each end, 

ocean transp ortation, insurance, loading and unloading aboa rd ship, losses, inland distributio n, and wholesale and retai l prices. Inasmuch as such a study 

is beyond the are a of our responsibility and capability at present, we suggest 

that the subcommittee consider employment of one of the many independent 

research and management consultant firms who can furnish an objective report 

of the type desired. In orde r that the subcomm ittee have some idea of the expense it would incur in obtaining such a report, we have obtained from one 

firm an estima te of $57,000, under a cost-plus-a-fixed-fee type of contract and a 

6-month period for completion.

Item 6—Pages 48-59, 65

In the hea ring before the Subcommittee on Merc hant Marine and Fisheries, 

Committee on Commerce, on March 6, 1961, relative to the domestic offshore 

shipping problems, Hon. E rnest Gruening, U.S. Senator from the Sta te of Alaska, 

asserted that the effects upon Alaska of the operation s of the carriers and the 

adm inistration of shipping affairs by the presen t Federal Maritime Board and 

its predecessors have not given indic ation s th at consideration of the public interest is of concern to either. In addition, Senator Gruening stated th at neither 

the Federal Maritim e Board, the Maritim e Adm inistration, nor their predecessors had ever offered an y suggestions to solve the plight of domestic w ate r tra ns ­

portation—partic ularly in the Alaska trade.
82 DOMESTIC OFFSHORE SHIPPING

The Federal Maritime Board and the Maritim e Adm inistration feel that they 

and the ir predecessors have shown continuing concern for the public interest 

of the noncontiguous States and territo ries and th at their concern in this respect, as well as their concern for the economic well-being of the carriers, is indicated by their annu al rep orts to Congress since World War II. In fact, the 

volume of material included in the annu al reports during those years relative to 

the domestic offshore trades makes it impractical to repeat for insertion in the 

record. However, an exam ination of such repo rts makes it app arent th at the 

Board and Administration, and their predecessors have been acutely aware of the 

problems in the offshore domestic trade, partic ularly Alaska. With in our sta tutory auth ority, various efforts have been made to implement the requireme nts of 

services to such areas. Among other things, carrier service to the Alaska area 

has been aided for years by providing Government-owned vessels under bareboat charters. Favorable bareboat charter rates and off-hire arra ngemen ts have 

enabled the furnishing of services to Alaska which would not otherw ise have 

been provided by commercial enterprises. Bareboat charters to all domestic 

operators provided for a base chart er rat e of 8V2 percent of the statutory sales 

price, w ith additional c harter h ire of 6% percent, if earned. Charters fo r foreign 

operations provided a single rate of 15 percent. Following World War II, the 

first choice for purchase of Government-owned vessels made available under the 

Merchant Ship Sales Act of 1946 w as given to domestic operators in recognition 

of the fac t tha t the ir ships were the first ones available fo r defense purposes and 

in recognition of the urgent need fo r reestablishing domestic w aterborne services.

Senator Gruening also asse rted, “Tha t the unduly high cost of living [in 

Alaska] is a dire ct result of the high costs of waterborne transp ortation is unquestioned.”

On the basis of the limited information developed in the hearings and our 

information as reported to your subcommittee for inclusion in the hearing 

record, there is considerable doubt as to th at conclusion. This unc ertainty is 

the prime reason for our recommendation to your subcom mittee that a comprehensive survey be made to settle definitively the rela tionsh ip of the various cost 

factors which go into the ultim ate consumer costs.

As to Senator Gruening’s alleg ation of a lack of concern for the “public 

intere st,” it is the view of the Board and the Administrator th at the “public 

intere st” of the offshore domestic are as is best served by ad equate and continued 

waterborne tran sportation. Consequently, the Board has exerted its efforts 

to prevent unw arranted ret urns to carrie rs through increase d rat es but with 

the knowledge tha t refusal of increases which are shown to be necessary in order 

to provide a minimum fair ret urn to the c arriers on their investments would be 

con trary to the car riers’ constitutio nal rights and would lead them to reduce 

substantially or completely terminate their services to such areas.

Ite m 7—Page 67

Has the Department of Defense ever made a dete rmination as to how many 

ships a re required in the domestic offshore trad e?

The planning groups of all services submit the ir ocean lif t requirements to 

JCS in term s of measurement tons. These data are collated by the joint staff 

and summarized in terms of overall militar y requirements. Ocean lift requirements are not refined to the point of specifically stating ship requirements for 

a part icu lar service or operation.

Ite m 8—Page 69

Has the Board ever made a general investigation of domestic offshore shipping. both with respect to increasing rates and a projection of the burden it 

would impose on th e economy generally?

The Board has not made a general investigation of thi s nature. However, a 

study was conducted by the Maritime Adm inistration in April 1959, entitled 

“United States South Atlantic-Pue rto Rican Shipping Services” which indicates 

the consideration given to the economy of t ha t area. Copies of this report were 

sent to the House Merchant Marine and Fisheries Committee, House of Representatives, in April 1959. (The stud y refe rred to is contained in the committee 

file for refere nce.)
DOMESTIC OFFSHORE SHIPPING 83

Item, 9—Page 71

Furnish a comparison of the rates between mainlan d—domestic offshore areas 

and m ainla nd—foreign ports of comparable distances.

Fre igh t rat es are sta ted in different fashions, some as cents per cubic foot or 

100 pounds, others as dollars per ton of 2,240 or 2,000 pounds or of 40 cubic 

feet, etc. In orde r to present the desired comparison in a readily und erstandable manner, th e attache d table (item 9A) has been prep ared to show the charges 

for moving defined lots of cargo from named ports to particular destinations. 

For example, the first column is the charge for moving a typical automobile 

(Ford, Chevrolet, Plym outh) measuring 540 cubic feet and weighing 3,600 pounds.

Column 2 portray s the rat es for one roll of newsprint 3 feet in diameter and 

5 feet long, weighing 1,500 pounds.

Column 3 is for 2,240 pounds of flour (wh eat) in bags.

Column 4 :1.000 board fee t of lumber weighing 3,200 pounds.

Column 5 : Steel sheets, 2,000 pounds.

Column 6: Canned vegetables, 2,000 pounds measuring 50 cubic feet.

Column 7 : Cotton piece goods, 2.000 pounds measuring 80 cubic feet.

Rates are quoted for hund reds of items in almost every tariff and no effort 

has been made to compare all of them. These seven items were selected at random and a re considered a fa ir comparison.

Ite m 9-A

N a u ­

tica l

m ile s

1 a u to ­

m ob ile

1 ro ll 

new sp rin t

2,240 

p o u n d s 

of flou r

L u m ­

ber

St ee l

sh ee ts

C an n ed

vegeta ble s

C o tto n

piec e

goods

6,703 N ew Y ork to H aw aii .................... - ......... $391 $27.21 $38.00 $63.86 $29.96 $38 .89 $82.22

6,786 N ew Y ork to C ap eto w n _____________ 371 18.08 32.00 37.50 19.20 61 .56 113.50

5,871 N ew Y or k to B uen os A ires .................... 446 21 .43 25.00 104.17 16.07 75.00 132.00

2^091 San Fra nc is co to H aw ai i ___________ 243 19.11 27.53 50.00 25.76 32.20 51.52

2^098 N ew Y or k to A zo re s________________ 419 25.45 25.50 53.57 25.00 40.18 117.00

2,047 N ew Y ork to C ost a R ic a. __________ 246 23.63 20.1 6 45.72 25.00 40.00 90.4 0

2,588 San Fra nc is co to E l S alv ador.......... ..... 405 17.41 25.76 65.00 25.00 57.00 160.00

4,536 San Fra nc is co to Y o k o h am a__ . . ___ 618 29.25 25.48 48. 75 20.22 83.44 111 .00

R2 32 S ea ttle to A la sk a (S ew ar d) _______ 298 28.05 I 35 .84 45.72 41.58 3.', 86 40.80

R3 72 N ew Y or k to H a it i__________________ 351 22.50 21.28 35.00 21.50 50.00 86.00

1,474 N ew Y or k to J a m a ic a _______________ 297 23.25 19.4 9 40.00 24.00 33 .75 86.00

1,489 N ew Y or k to D om in ic an R ep u b li c__ 281 28.50 24.19 42.50 21.80 44.50 69.60

1,399 N ew Y ork to P u ert o Rico (S an J u a n ). 205 11.70 19.04 32. 77 18.60 25.00 43.20

1

 P al le ti ze d o r in van s.

N o t e.—F re ig h t calc ula te d from ta riff s on file w it h th e B oar d a n d in effect F eb . 28,19 61.

Ite m 10—Page 72

Furnish a contr ast between the subsidized operators and the nonsubsidized 

ope rato rs as to reserve funds and the tax tre atm ent thereof.

Nonsubsidized American-flag carriers in the domestic offshore trade, as well 

as other nonsubsidized U.S.-flag operators engaged in the foreign or domestic 

commerce of the United States or in the fisheries, may establish pu rsu an t to 

section 511 of the Merchan t Marine Act, 1936, as amended, a construction reserve 

fund into which may be deposited the proceeds from the sale of vessels and indemnities from the loss of vessels. Section 511 allows the postponement of the 

tax on gains arising from such sale or loss (where the owner so elects) by providing for nonrecognition of the tax but requiring a corresponding redu ction in 

the basis of a new vessel acquired with such proceeds, thu s reducing de preciation 

deductions on the la tte r vessel, thereby increasing taxable income over the economic life of the new vessel. Such tax defe rment is available only if the gains 

are expended for the acquisition of a new vessel within a period of 2 years or 

extensions granted up to an additional 3 years. Provision is also made for the 

deposit of earn ings in the construction reserve fund but no tax deferment is 

available with respe ct to such deposited earnings.

A subsidized operator is required, pu rsu ant to section 607 of the act, to create 

and mainta in (1) a ca pital reserve fund, and (2) a special reserve fund.

The subsidized ope rator is required to deposit into the cap ital reserve fund—
84 DOMESTIC OFFSHORE SHI PPI NG

(а) Annually an amount equal to the annu al depreciation, if earned, on 

its subsidized ships ; otherwise when earn ings pe rm it;

(б) The proceeds of insurance and indem nities received on account of 

total loss of any subsidized vesse l;

(c) The proceeds from the sale or other disposition of a subsidized vessel;

(d) Such percentage of the annual net profits from subsidized operations 

as the Maritime Adm inistration shall determine is necessary for the pur ­

chase, replacement, or reco nstruction of vessels, if the cumulative net profits 

are over 10 percent per a nnum of capital necessarily employed;

(e) Interest on securities and cash balan ces in the capital reserve fund 

and the interest on securities in the special reserve fund ;

(/ ) Such voluntary deposits as may be approved by M aritim e; and

(g) Such transf ers from the special reserve fund as may be approved by 

Maritime.

Into the special reserve fund, the subsidized ope rato r is requ ired to deposit—

(a) Annually the entire amount of profits (without rega rd to capital 

gains and losses) earned in the subsidized operations in excess of 10 percent per annum of CN E;

(&) Intere st on the f und’s cash bala nces; and

(c) Voluntary deposits as approved by Maritime.

Section 607(h) of the act provides that “earnings of any contractor receiving 

an operating-differential subsidy und er autho rity of this act, which are deposited 

in the contractor’s reserve funds * * * shall be exempt from all Federal taxes.’’ 

The T reasury D epartmen t an d the subsidized operato rs have entered into closing 

agreements concerning the meaning of the above as applied to deposits of earnings 

(including capital gain).

The closing agreements provide th at the deposited earnings and capital gains 

shall be tax deferred, i.e., such earnings and gains are not recognized as taxable 

income bu t the depreciation basis of any vessel acquired with such deposits shall 

be reduced by the amount of such deposits used in the acquisition of said vessel. 

The closing agreements f ur ther provide that the difference between depreciation 

computed on this reduced basis and the depreciation requ ired to be deposited in 

the cap ital reserve fund by section 607(h) of the act, which is computed on the 

basis of the full cost of the vessel to the operator, shall be trea ted as tax defe rred 

funds.

In the event amounts are withdrawn from the c apital or special reserve funds 

and paid into the contrac tor’s general fund s or distrib uted as dividends or 

bonuses, the earnings are taxable as if earned during the year of such withdrawal.

Item 11—Pages 13,

Furnish information as to changes in trade patte rn of offshore domestic areas 

as between the U.S. mainland and foreign sources.

Foreign and noncontiguous inbound trade at A laska, Hawaii, and Puerto Rico in

dry-cargo ships, calendar years 1955 and 1959

[In thou sand s of long tons)

1955 1959 1955 1959

Im po rts from foreign so urces: 1

A la sk a ........ . . . ............. 2.1 16.3

Recei pts fro m U.S. m ai nla nd: 1

A la s k a .. __ _ . ______ 353.6 281.3 H a w a ii .. ,................. .......... 98.9 123.2 Ha wa ii 1,408. 7 

1,394.0

1,572.6 Pue rto Rico........................ 216.0 520.8 Pu er to Rico li 307. 7

1

 S our ce: Bureau of Cen sus (all dry-cargo ships).

’ Sou rce: Corps of Engineers (self-propelled dry-cargo ships 1,000 gross ton s an d over).

Ite m 12—Page 16

Did Mr. Morse, former Chairman, Federal Maritime Board, indic ate about a 

year ago that he had changed his opinion so that he then thought certification 

of carriers in the domestic offshore trad es and some changes in the form of 

economic regulation might be desirable?

A review of testimony by the form er Chairman before congressional committees for 1959 and 1960 fails to confirm th at he expressed such an opinion and 

we are unaware of any other indic ation by Mr. Morse to thi s effect.
DOMESTIC OFFSHORE SHIPPIN G 85

Ite m IS— Page 16

Furnish specific data in the form of a tab ular presentation of the tonnage and 

number of dry-cargo common-carrier vessels involved in the noncontiguous 

services as compared to the domestic operations.

The following tabulation is of ships of 1,000 gross tons and over which were 

operating as common car riers in the coastw ise, inte rcoastal, and noncontiguous 

trades on December 31, 1960. A limited number of ships, engaging in domestic 

trade incidental to the ir principa l foreign tra de services, have been excluded. 

If furth er info rmation concerning these exclusions and the companies involved 

is desired it can be provided.

[Tonnage in thousands]

Numb er of 

ships

Gross ton s Deadweight

tons

Tota l, all trades.............. . .............................................................. 86 691 923

Coastwise tra de __________________________________ 37 283 394

Atlantic and Gulf __. ______________ 10 77 86

Pacific _________________________

Intercoastal tra de _________________________________ 27 206 308

Noncontiguous trad e _________________________________ 49 408 529

Alaska ___ ________________ ______________ - ____ 7

24

18

40

226

142

61

292

176

Hawaii ________________ _________ ______________

Puerto Rico ___ __ __________-_____ ______________

Vessels norm ally included in domestic trade but excluded from above because of

being inactiviated or chartered out for foreign service on Dec. SI, 1960

Inactive Cha rtered for foreign service

Num ber 

of ships

Gross Deadweight

tons

Numb er 

of ships

Gross Deadweight

tons

1 8 11

Intercoastal........................ ......

Noncontiguous:

4 29 44 4 30 47

Alas ka................................ 3

1

18

8

27

12

1 8 11

Pue rto R ico..................... - 2 14 22 11 75 109

To tal ....... . ..................... 11 77 116 16 113 167

Ite m 11,—Pages 70, 77, 78

Wh at is the Federal Maritime Board permitting as a fa ir ret urn to the carriers involved in the domestic offshore tra des ?

Supply Fed eral Maritime Boa rd’s order, report, and brief in docket No. 807, 

Atla ntic & Gulf-Puerto Rico, General Increas e in Rates and Charges, together 

with the decision of the U.S. Court of Appeals for the District of Columbia, 

No. 15846, decided Feb rua ry 23, 1961, which vacated the Board’s order and 

remanded the case for reconsideration and clarification of the rate base question.

In docket No. 807, the Board stated th at the maximum permissible ra te of 

return in the Puerto Rico tra de is 7 ^ per centum of a rate base consisting of 

the value of owned prop erty devoted to the tr ade 1 plus working capital. The 

Board’s decision in docket No. 807 is atta che d hereto, together with the decision of the U.S. Court of Appeals for the District of Columbia, remanding the 

case to the Board fo r reconsidera tion of specific issues.2 3

1

 In co m pu ting th e ra te b as e, ve ssels ar e va lu ed a t m ar ket va lu e an d oth er ass ets de vo ted

to th he tr ade are va lu ed a t ne t book value.

3

 The issu es as st ate d by th e C ou rt ar e :

“ * * * th e ca se [i s] re m an de d fo r th e B oa rd to co ns id er an d cl ar if y th e ra te ba se 

qu es tio n. The B oa rd sh ou ld al so pa ss up on th e Com mon wea lth ’s ar gum en t th a t it is not 

fa ir to ra te payers to le t an ac cu m ul at ed de pre ci at io n re se rv e be de pleted an d de pr ec ia tion 

ch ar ge s th er eb y in cr ea se d. ”
86 DOMESTIC OFFSHORE SHIPPING

Attached are the requested order, report, brie f and court decision. This m atter is currently under consideration as to the app rop riate fu rth er action by the 

Board.

Ite m 14—Order and report

Order

At a Session of the Fed eral Maritime Board, held at its office in Washington, 

D.C., on the 28th day of April A.D. 1960 

No. 807

Atlan tic & Gul f-P uerto Rico General I ncr eas e in R ates and Char ges

This proceeding having been institu ted by the Board on its own motion, and 

having been duly heard and subm itted by the parties, and full investigation of 

the ma tters and things involved having been had, and the Board, on the date 

hereof, having made and ente red of record a report sta tin g its conclusions and 

decision thereon, which report is hereby referred to and made a pa rt hereof, 

and having found that the proposed rates and charges here in under investiga ­

tion are just and rea son able:

It is ordered, Th at this proceeding be, and it is hereby, discontinued.

By the Board.

J am es L. P im pe r, Secretary.

F ederal Mar itim e B oard

No. 807

Atlan tic & Gul f-P uerto R ico Gener al I ncr ease in R ate s and Charges

Rate s between North Atla ntic and gulf ports of the United States and Puerto

Rico, as increased 15 percent or 6 cents per cubic foot or 12 cents per

100 pounds, whichever produces the gre ater increase in revenue, and as 

furth er increased 12 percent, found jus t and reasonable

Odell Kominers, Mark P. Schlefer, and Sterling F. Stoudemire, Jr., for 

respondents.

Eduardo Garcia, Walton Hamilton, William D. Rogers, Abe Fortas, Seymour Berdon, and William L. McGovern for Commonwealth of Pue rto Rico, 

intervener.

John Regan for Administrator of General Services, intervener.

Mitchell J. Cooper, Frank M. Cushman, Vernon C. Stoneman, and John B.

Street for Asociacion de In dust ri als de Pue rto Rico (Manu facture rs Association of Puerto Rico) and Commonwealth Manufacturers Association, 

interveners.

Joh n B. Stree t, Frank M. Cushman, and Vernon C. Stoneman for Paula 

Shoe Co., intervener.

John B. Street and Vernon C. Stoneman for Caribe Shoe Corp., intervener.

Mitchell J. Cooper and Frank M. Cushman for Coastal Footwear Corp., 

intervener.

L. Merrill Simpson for Bata Shoe Co., Inc., intervener.

William M. Requa for Association of Sugar Producers of Puerto Rico, 

intervene r.

J. W. Harnach for Cooperative Grange League Federation. Inc., intervener.

Harold L. Copp for Atla ntic Indu stries, Inc., intervener.

T. A. Smith for Louisiana State Rice Milling Co., Inc., intervener.

Wm. M. Reid for the Rice Millers’ Association, intervene r.

Ala n F. Wohlstetter for Trail er Marine Tra nsporta tion , Inc., intervener.

Alf red K. Kestehbaum for Cigar Manufactu rers Association of America, 

Inc., intervener.

Robe rt E. Mitchell and Edward A ptaker as public counsel.
DOMESTIC OFFSHORE SHIPPING 87

REPORT OF T H E BOARD

(Clarence G. Morse, Ch air man; and Thos. E. Stakem, Vice Ch airman)

Submitted December 3, 1959. Decided April 28, 1960.

On December 4, 1956, the U.S. Atlantic & Gulf-Puerto Rico Conference 

(the Conference), then comprised of Bull Insular Line, Inc.. Lykes Bros. 

Steam ship Co., Inc., Waterm an Steamship Corp., and Alcoa Steam ship Co., 

Inc. (Bull, Lykes, Waterman, and Alcoa), filed with the Board Tariffs FMB 

F—No. 14, Homeward Fre ight Tariff No. 7, and FMB F—No. 13, Outw ard 

Fre ight Tariff No. 7, naming increases in commodity rat es over the applicable 

rates then in effect, to become effective Janu ary 5, 1957, between U.S. Atlantic 

and Gulf of Mexico ports and p orts in Pue rto Rico.

On December 20, 1956, J. W. de Bruycker, agent for the conference, filed 

special permission application to modify on sho rt notice the increases in 

rates to reflect an adjustment not in excess of 15 percent or 6 cents per cubicfoot or 12 cents per 100 pounds, whichever produces the gre ater increase in 

revenue, over the applicable rates then in effect. This incre ase will be referred to a s the 15-percent increase.

On Janu ary 4, 1957, pursuant to section 18 of the Shipping Act, 1916, as 

amended, 46 U.S.C. 817 (the 1916 ac t), and the Inte rcoasta l Shipping Act, 

1933, as amended, U.S.C. 843 et seq. (th e 1933 ac t), we ordered an investigation into the reasonablenes s and lawfulness of the rate s, charges, regulations, 

and prac tices sta ted in the tar iff schedules filed December 4, 1956, and ordered 

the operation of these schedules suspended until midnight Janu ary 8, 1957, 

unless otherwise ordered.

On Janu ary 8, 1957, we amended our order of Janu ary 4, 1957, and granted 

the special permission to publish the rate increases, as modified, to be effective not earlier than Janu ary 9, 1957, on 1 day ’s notice. We also ordered an 

investigation of the 15-percent increase, and direc ted (a) th at the car riers 

shall keep an account of all freigh t moneys received by reaso n of said rate 

increases for the period commencing Janu ary 9, 1957, and terminating May 

5, 1957; and (ft) th at the carriers, upon final dete rmination by the Board, 

shall pay to shippers, out of the ir general funds, the sums if any to which the 

respective i>ersons who pay the freigh t may be entitled. The 15-percent increase bec ame effective on Janu ary 10, 1957.

The orde rs of Janu ary 4 and Janu ary 8, 1957, made the conference, Agent 

de Bruycker, Bull, Lykes, Waterma n, and Alcoa respondents in this proceeding. Notice of investigation and hea ring appeared in the Feder al Register 

of Jan uary 17, 1957, 22 F.R. 355, and hea ring was held in New York, N.Y., 

April 16 through May 3, 1957. Afte r hea ring on the 15-percent increase, 

but before briefs of the parties were due, the respondents published on Jul y 

18, 1957, a 12-percent additional general rate increase (the 12-percent increase ), to become effective September 14, 1957. On August 14, 1957, I’anAtlantic Steamship Corp. (Pa n-A tlantic), an affiliate of Wate rman, filed revisions to its Homeward Tariff No. 1, FMB, F-No. 1, to become effective 

September 18, 1957, naming local commodity rat es from Puerto Rico to U.S. 

Atla ntic p orts based on the same pa tte rn as the conference rates.

By supplemental order of September 5, 1957, we (o) expanded the proceeding 

to include an inve stiga tion into the lawfulness of the rates as fu rth er increased 

by 12 p erc ent; (ft) suspended the operation of the Conference and Pan-Atlantic 

schedules naming the 12 percent increase until Janu ary 14, 1958; (c) made 

Pan-Atlantic a resp ond ent; and (d) ordered a furth er hea ring in the proceeding. Notice of the expanded investigation and furth er hea ring appe ared in the 

Federal Register of September 12, 1957, 22 F.R. 7291. and furth er hea ring was 

held at New York October 21 through 28,1957, and concluded in Washington, D.C.. 

November 1, 1957. The 12 percent increase became effective on Janu ary 15, 

1958.

During the course of the hearing s the exam iner denied requests by the interveners that the respondents be required to produce or make available underlying books, records, and accounts for the purpose of cross-exam ination in order 

to test the accu racy of certain of respondents’ exhibits in the form of financial
88 DOMESTIC OFFSHORE SHIPPING

and sta tistic al summ aries based upon allocations and computations derived from 

underlying documents. In an initial decision served Feb ruary 3, 1958, the examiner considered those exhibits as reliable, probative, and substan tial, based 

on the sworn testimony of the witnesses through whom they were introduced 

as to the ir correctness and accuracy.

After oral argument upon exceptions to the initial decision of the examiner, 

in an order entered Jun e 13, 1958, we overruled the examiner as to these issues, 

and st at ed :

‘ We do not agree with the examiner that the summary evidence presented 

by respondents, without reasonable access to supporting and underlying books, 

records, and accounts by which the accuracy and sufficiency of the evidence may 

be tested, is ‘reliable, probative, and substan tial evidence’ as required by section 

7(c ) of the Adm inistrativ e Procedure Act. The record is insufficient for the 

Board to make proper findings as to the lawfulness of the rat es under section 

18 of the 1916 act and under the 1933 act

* * * * * * *

“We conclude that this proceeding should be remanded to the examiner for 

fu rth er hearing, and, in order that th e full record here in shall contain probative 

and substan tial evidence sufficient for the Board to make valid determinations 

as to the lawfulness of the rates under investigation, respondents should produce at such furth er hearings, or make available to inte rveners and public counsel, such original and underlying books, records, accounts, and worksheets, including corporate profit and loss stateme nts and balance sheets, as are required 

to determine the probative value of the evidence, the accuracy of computations 

and allocations between regulated and nonregulated activities, and the scope and 

accuracy of intercorporate transactions. Further, there should be full disclosure of data with respect to any sales or tra nsfers of corporate assets which 

would be relevan t and material in determining accurately the fa ir value of properties and assets devoted to this Pue rto Rican service.” 1

The proceeding was remanded to the exam iner for the purpose of receiving 

furth er evidence.

Fu rth er hearings were held before an exam iner during the period October 6-28, 

1958. Interveners who appe ared during the course of the proceeding in opposition to the rate increases, or as the ir inte rests may appear, were the Commonwealth of Puerto Rico (the Commonwealth), the Administrat or of General 

Services, Asociacion de Ind ust riales de Puerto Rico (Manu fac turers Association 

of Pue rto Rico), Commonwealth Man ufac turers 2\.ssociation, Pau la Shoe Co., 

Caribe Shoe Corp., Coastal Footwear Corp., Bata Shoe Co., Inc., Association of 

Sugar Producers of Pue rto Rico, Cooperative Grange League Federation, Inc., 

Atlanta Industries, Inc., Louisian a State Rice Milling Co., Inc., the Rice Millers’ 

Association, T railer Marine Transportation, Inc., and Cigar Manufac turing Association of America, Inc.

In his initial decision the exam iner found and concluded that the 15 percent 

and 12 percent increases under investigation were just and reasonable and that 

the proceeding should be discontinued.

Excep tions to the initial decision and replies thereto were filed, and oral ar ­

gument was heard. Exceptions and proposed findings not discussed in this 

rep ort nor reflected in our findings have been considered and found not justified 

by the fac ts or not rela ted to ma terial issues in this proceeding.

The carrier respondents

1. Alc oa: Alcoa offers weekly service from the North Atlantic ports of New 

York and Baltimore, Md., and weekly service from the gulf ports of Mobile, 

Ala., and New Orleans, La., to ports in Pue rto Rico. Each of the sailings serves 

all ports in Puerto Rico. The vessels in the North Atlantic service, after discharge at Puerto Rico ports, proceed into other trad es, generally contract services. In the gulf service, the vessels return from Puerto Rico to the gulf ports 

in the northbound trade, a service inaugurated in March 1958.

2. During 1956, 1957, and the first 6 months of 1958, average vessel utilizatio n 

on a cubic basis by Alcoa in the Pue rto Rican service rang ed from 39.5 percent 

in the second quarter of 1956 to 84.3 percent in the fourth quarter of 1957 in 

the North Atla ntic service, and from 44.4 percent in the second q uarte r of 1956 

to 66.6 percent in the second q uarte r of 1957 in the gulf service. Alcoa’s average 

southbound voyage in 1957 from the North Atlantic consumed 14.5 days, and 

from the gulf 12.7 days.

1

 U.S. Atlantic and Gulf/P uerto Rico Rate Increase, 5 FMB 426, 429, and 430-1.
DOMESTIC OFFSHORE SHIPPING 89

3. Bull: Bull provides three sailings per week from North Atlantic ports to 

Puerto Rico. One sailing proceeds from Baltimore and Philadelphia, Pa., to 

Puerto Rico and retu rn. Another sailing proceeds from New York to Puerto 

Rico and retur n (the Thursday sai ling), and the third from New York to Puerto 

Rico, thence to the Dominican Republic and return (the Fri day sailing). Basically the services are provided with six G-2 type vessels, operated on a strict 

2-week turn around. In addition, Liberty-type vessels are also employed to lift 

stators, generators, ammunition, and other specialized cargo destined to Puerto 

Rico which cann ot be handled on the reg ula r C-2 vessels. Liberty ships were 

also utilized in some instances to carry full cargoes of bagged raw sugar under 

the tariff, but this movement declined rapidly in 1957 due to conversion of the 

raw sug ar movement to bulk movement under contract, and has since come to 

a vir tua l halt. Caribbean Dispatch, Inc., an affiliate of Bull, is a major contract 

carri er of bulk sugar.

4. In a transactio n closed December 18, 1956, characterized in the brief for 

the Conference as “an irre fragibly [sic] arm ’s-length transa ction between completely unrela ted interests,” Olympia Corp., Inc., in Delaw are, acquired substantially all of the stock of A. H. Bull Steamship Co., a New Jersey corporation 

(A. H. Bull, New Jerse y). Prior to the tran saction, the purcha ser and the 

sellers had no stockholders, directors, or other inte rests in common, or any 

similar relationship. Olympia had been organized by its parent, American 

Coal Shipping, Inc. (ACS), which paid $100,000 fo r all of Olympia’s outstanding 

stock, as the instrum ent designed to facil ita te the consummation of the transa ction. ACS and its own stockholders also loaned to Olympia about $5 million, 

at intere st of 5 percent. Between December 18, 1956, and Janu ary 21, 1957, 

Olympia’s name was changed to A. H. Bull Steam ship Co. (A. H. Bull, Delawa re). The transa ction contemplated purchase by Olympia of all of the outstan ding stock of A. H. Bull. New Je rsey, for a tota l consideration of $40 million 

(which was not finally accomplished until February 28, 1957), the liquidation 

of A. H. Bull, New Jerse y, and the tra ns fer of all of its assets to A. H. Bull, 

Delaware.

5. On December 18, 1956, A. H. Bull, New Jers ey, had over $18 million in 

cash, obtained from surplus, liquidation of quick assets represe nting in part 

depreciation funds, release of vessel replacement funds, and receipt of repayments of advances and dividends from subsidiary companies, among others. 

On th e closing date of the stock purchase, this $18 million w as declared by A. H. 

Bull, New Jersey, as a dividend, paid principally to Olympia, and the remainder 

of the purchase price of $40 million was met from the proceeds of the loans 

from ACS and its stockholders of $5 million mentioned above, and bank loans 

of some $17 million at intere st rates ranging from 4*4 to 5 percent, guaranteed 

by ACS.

6. The net purchase price paid by Olympia for A. H. Bull, New Jersey, was 

therefore about $22 million. The book net worth of A. II. Bull, New Jerse y, at 

the time of closing was about $12,330,000. Inciden t to the purchase, the physical 

asse ts of A. H. Bull, New Jersey, and its subs idiaries had been independently appraised. About January 21, 1957, in partial but almost complete liquidation of 

A. H. Bull, New Jerse y, its assets were tra nsferre d to the books of A. H. Bull, 

Delaware, and in the process the vessel book values were raise d from $5,160,421.85 

to $12,892,610.21, effective as of the closing date, the latte r figure representing 

about 70 percent of the appraised values of the vessels. The ascribed values of 

certain other asse ts were changed also for consolidated statem ent purposes, but 

on the corporate books only the vessel values were changed. Thus on the books 

of A. H. Bull, Delaware, the vessel book values are carried presently at amounts, 

less accru ed depreciatio n since the closing date, represe nting a pro rata share 

of the tota l purchase price paid by A. H. Bull, Delaw are, for the asse ts of A. H. 

Bull, New Jersey.

7. Corporate entitie s affiliated with respondent Bull, so far as is here pertinent, 

include A. H. Bull, Delaw are, of which respondent Bull is a subsidi ary ; A. H. 

Bull & Co., which provides contine ntal U.S. overhead services for Bull and 

others in the corporate family in ret urn for management and operatin g commissions composed principally of a percentage of revenues and a per diem husbanding ch arge ; several sep ara te corporations which own and operate pier 

facilities in Puerto Rico ; Caribbean Dispatch, Inc., mentioned abov e; and Dafton 

Realty Co., owner of office facilities in New York utilized by Bull.

8. For 65 days between August 19 and October 22, 1957, Bull’s operations were 

immobilized by a strike aris ing o ut of a jurisdictiona l dispute between seafaring 

unions. The strike was not unrelated to the fact th at ACS, the new owner of the
90 DOMESTIC OFFSHORE SHIPPIN G

Bull properties, was in pa rt owned by the United Mine Workers. Other strikes 

which have affected the operations of Bull at v arious ports, for varying reasons, 

and for periods of time ranging from 2 to 44 days, totaled 33 days in 1951, 1952, 

and 1956; 12 days in 1953; 101 days in 1954; 78 days in 1955 ; 14 days in February 

1957 ; and 20 days in the first 6 months of 1958.

9. Ly kes: Lykes operates its weekly service between the gulf ports of Lake 

Charles, La., and Houston and Galveston, Tex., and occasionally other western 

gulf ports, and Puerto Rico, as a pa rt of its subsidized service on trade route 19 

(line A service) between gulf ports of the United States and Cuba, Haiti, the 

Dominican Republic, Venezuela, Colombia, and Panama . No voyages are operated to or from Puerto Rico exclusively. The n umber of vessel days opera ted by 

Lykes in the Pue rto Rican portion of its line A service is less than th at in the 

service to and from foreign ports. During 1956, 1957, and the first 6 months of 

1958, average vessel utilization on a cubic basis achieved by Lykes in its combination Puerto Rican service ranged from 66.6 perc ent in the fourth qu art er of

1957 to 90.9 percent in th e first quart er of 1957.

10. Wate rm an: At the outset of this proceeding Wa terman operated a weekly 

service between New Orleans and Mobile and Puerto Rico, utilizing two vessels on 

a 14-day turna round, with additional vessels for relief purposes and when extra 

cargo demanded. Beginning in October 1957 W aterman also inau gurated weekly 

sailings, utiliz ing two vessels on a 14-day turna rou nd in regular breakbulk service, between New York, Baltimore, and Pue rto Rico. Waterm an intended to 

provide a permanen t North Atla ntic-Pue rto Rico service, at first with regular 

breakbulk vessels, and later converting to tra ile rsh ip service. Waterm an is a 

subsidiary of McLean Industries, Inc.

11. Effective February 4, 1958, Waterm an with drew from the conference, and 

simultaneously ceased all operations in the Puerto Rican trades, wrhich were 

taken over without break in service by Waterm an Steamship Corp, of Pue rto 

Rico (Wa term an P.R.). The la tte r is a wholly owned subsidiary of W aterm an, 

is not a respondent, and is not a member of th e conference, although its rates are 

in a ll respects the same as those of the conference. When filing its initial tariffs 

with the Board, and in subsequent pleadings herein, Waterm an P.R. has agreed 

to be bound by the results of this proceeding so fa r as its rat es are concerned. 

Statistical and financial data reflecting the combined Waterm an and Wate rman 

P.R. operations a re of record, although no recent d ata were presented forecasting 

operating results for the entire y ear 1958 as was the case with the other conference respondents.

12. On Feb ruary 28, 1958, Waterman P.R. inaugu rated its North AtlanticPue rto Rico trailersh ip service, with the sailing of the Bienville. This vessel, 

upon arr iva l in Pue rto Rico, was prevented from discharging its cargo because 

of labor difficulties. After some delay the Bien ville proceeded to New Orleans, 

where her cargo was discharged and that which had n ot spoiled was transferred 

to a ship regularly employed in the Waterman P.R. gulf-Puerto Rico breakbulk 

service. The Bienville voyage consumed in all 34 days. After this experience, 

Waterm an P.R. discontinued its North Atla ntic-Pue rto Rico service, which has 

not since been resumed either on a breakbulk or trailersh ip basis.

13. Pan-A tlan tic: Pan-Atlantic is an affiliate of Waterman, and as such was 

required to m aintain the same rates a s the conference by the terms of the conference agreement to which W aterman was a party. Between April 1957 and early

1958 P an-Atlantic provided a northbound service from Pue rto Rico to Miami and 

Jacksonville, Fla., in conjunction with its inte rcoasta l and west coast-Puerto 

Rico services, which was suspended at the end of this period and has not been 

resumed. The tariff under which such service was operated was canceled effective August 22, 1958. So f ar as the record discloses, this service was minimal, 

since the cargo carried averaged only 51 tons per voyage, with gross revenue 

per voyage of $1,506. These data are so insignificant as to wa rra nt the ir exclusion from consideration herein, although the rat es under investigation will remain subject to th e findings.

14. Pan-Atlantic instituted a trailership service between New York and Puerto 

Rico on July 30, 1958, which is presently being operated. On October 27, 1958, 

we denied a petition by the conference requesting that this investigation be 

broadened by naming Waterman P.R. as a respondent, and bringing in issue the 

curre nt tariffs of Pan-Atlantic and Waterman P.R.

The Puerto Rican economy and the trade

15. Pue rto Rico is a small island, 100 miles long and 25 miles wide, sepa rated 

from the nearest point in the United States by over 1,000 miles of open water. 

The economy of the island has never been self-sustaining, and it has few natural
DOMESTIC OFFSHORE SHIPPING 91

resources. It is one of the most densely populated areas of the world. Puerto 

Rico’s external trade is almost entirely with the United States. About 40 percent of all goods produced, and about 54 percent of all goods consumed, by the 

people of Puerto Rico are destined to, or originate in, the United States. Average 

income per capita in Puerto Rico in 1954 was $446, as compared with $1,770 in 

the United States. The percentage of the labor force of Puerto Rico unemployed 

or only partially employed has consistently exceeded t hat in the United States. 

These data indicate tha t increases in the cost of shipping such as are here involved affect the economy of Puerto Rico and the living stand ards of its populace 

more sharply than would similar increases elsewhere in the Nation.

16. The conference rates in the Puerto Rican trade are determined by threefourths majority vote of the members. Therefore no one c arrier can dominate 

the making of rates. Waterman P.R., presently operating in the gulf-Puerto 

Rico trade, is not a member of the conference, and its rates can be made by individual action, subject only to the competitive impact of the rates maintained 

by the conference. As is indicated by the revenue statistics shown in table I 

below, Bull is the dominant carrier in the trade, receiving approximately 50 

percent revenues even in the year 1957 when Bull's operation were immobilized 

for more than 65 days.

Table I.—Gross transportation revenues of the respondents

C a rri e r 1956 1957 1 st h a lf 1958

B u ll.................................................................- ........................................................... $2 4. 99 3, 85 0 

6,5 34 ,3 89 

6, 244 ,8 64 

3,8 43,3 68

$2 1,6 46 ,3 83 

9,4 16,2 67 

9,1 75,9 49 

3,7 74,8 43

$1 1, 68 2, 20 7 

4, 65 1, 46 8 

4,2 15 ,0 49 

1, 94 0,2 79

W a te rm a n __________________ _________________________ ______

A l c o a ___________________________________________ _____ __________

L y k e s _________________________ _____ ____________________________

T o ta l ___________________ __________________ - ____________ 41 ,6 16 .4 71 44,0 13,3 42 22,4 89 ,0 03

17. The most recent traffic and revenue projections of the respondents, where 

given, were based on an extension of their most recent experience, tha t for the 

first half of 1958, subject to the adjustm ents for known or contracted cost increases. Although there is testimony of record to the effect tha t a gradual 

increase may be expected in the movement of general cargo between Puerto Rico 

and the mainland, the statistics of record disclose a decline in tonnage carried of 

cargo subject to the tariffs here involved. This decline is attribute d in large 

part to the conversion of the raw sugar movement from bagged movement under 

the tariffs to bulk movement under contract, and to the construction of a fertilizer plant in Puerto Rico, which virtually eliminated the movement of prepared 

fertilizer and substituted therefor the movement of fertilizer raw materials in 

tramp vessels. Table II below shows the tonnage data submitted for the years 

1955-57 and the first half of 1958, and the projections for the full year 1958 

where given. Weight tons are computed on the basis of the weight of the cargo 

carried, and freight payable tons on the basis on which the freight charges were 

paid, either weight or measurement. The data for the full year 1957 in tables 

I and II reflect the impact of the long strike in tha t year against Bull, and 

the consequent diversion of substantial amounts of traffic normally carried by 

it to Alcoa and other carriers. They show the dominant position of Bull in 

the trade.

Table II.—Tonnage carried in freight payable tons, except where indicated

C a rrie r 1955 1956 1957

1st h a lf

1958

p ro je c te d

1957 1958

B u ll .............................................. 1,87 6, 964 1.8 28 .2 75 1, 15 1, 99 3 71 0,87 7 55 8,88 0 1,1 17,7 60

A lc o a________ _____________ 42 9,47 0 312,70 1 41 8,50 9 18 6,42 2 16 9,3 63 34 0, 00 0

W a t e r m a n ..... ................. . . 23 9,53 5 23 8,89 5 29 8,8 31 14 8,52 6 13 2,20 2

L y k e s ___ . . .................................. 20 3,43 8 10 7,82 2 21 5,64 4

D o _________ _____ ________ _ ‘ 2 45 ,334 • 2 62 ,389 • 186,22 0 > 102,52 2 i 10 2,91 8 • 20 5, 83 6

W e ig h t to n s.
92 DOMESTIC OFFSHORE SHIPPING

18. Taking into consideration the factors mentioned in par agr aph 17 above, 

and the entry into the tra de of Pan-A tlantic with its new and att rac tiv e trailership sen-ice, which will no doub t succeed in diverting some traffic from the 

services main taine d by the other respondents, it is found th at the projections of 

the respondents as to th e yea r 1958 are reasonable.

Specific commodity rates

19. In the first initial decision issued herein, the examiner found as follows:

“60. The shipper interv eners, generally, are those who ship commodities under

so-called promotional rates. These rates have been maintain ed by the carr iers, 

prio r to the proposed increases, at comparatively low levels designed to promote 

the movement of the commodities so rated. The promotional rates apply 

primarily to northbound traffic, and most of them have been used since 1946 in 

cooperation with and at the request of the newly developing in dustries in Puerto 

Rico. This traffic, in gross tons, in 1955, amounted to approximately 20,000 

tons northbound and 1,000 tons southbound. In 1956 it amounted to approximately 25,000 tons northbound and 2,000 tons southbound. The revenue from 

this traffic in relation to total revenue was perhap s less th an one-half of 1 percent.

“61. Selected commodities from those transp orted at promotional rate s, stated 

by the car riers to be typical, were northb ound: Shoes, paperboard, chinaware, 

coffee, cigars, rugs, artificial flowers, boxes, knocked down, scrap metal, scrap 

tobacco and confection ary; and southbound: Tin cans, iron and steel articles, 

glass jars, bottles, not otherwise specified, paper and paper products, and tiles. 

Two shippers, understood to be represen tative of shippers of such commodities, 

testified at the first hearing. One was a ship per of candy and the other of 

shoes, both shipping from Puerto Rico to the U.S. mainland. Their main objectio ns were that the first rat e increases on the commodities were gre ater than 

15 percent. This is so because of the 6 cents per cubic foot or 12 cents per 100 

pounds aspect of the first increase.

“62. The shippers gave imp ortant consideratio n to the relatively low shipping 

rat es for their products, it is stated, in the ir decisions to establish business in 

Pue rto Rico, since transp ortation charges are vita l factors in the ir business 

prospects. The record shows th at the 15 percent rate increase raised footwear 

costs 1.13 percent of the value of the product, and candy 1.78 percent. These 

increases, it is stated, seriously limit the possibilities of expanding mainland 

business, and discourage people from establish ing business in Puerto Rico.

“63. The records show th at the promotional rat es are too low, and appear to be 

noncompensatory, even with the 15 percent increase, and there is some question 

as to whether the furth er 12 percent increase renders said promotional rates 

compensatory.”

20. No exceptions were take n to the findings quoted above. They are borne 

out by the record, and no additional evidence was presented at the second fu rthe r hearing rela ting to these issues. We adopt the findings set forth above. 

Cost increases

21. The cumulative rate increases under investigation herein aggregate about 

29 percent. The last prio r general rate increase in the Puerto Rican trade was 

made effective November 12, 1951. Since that date, the expenses of the respondents have increased substantially. For example, Bull shows that stevedoring wages in the United States have increased 46 percen t and in Puerto Rico 

about 63 percent, fuel oil costs have increased 23 percent, vessel operating costs 

as a whole 54 percent, crew wages 62 percent, vessel rep air costs 50 percent, and 

insuranc e 52 percent. Comparable cost increases are shown for the other three 

carriers in the trade.

22. There is evidence that the carr iers, through increased efficiency of operations, have endeavored to minimize the impact of the stated cost increases. 

Stevedoring expenses account for a sub stan tial proportion of total operating 

expenses. Bull shows th at from 1951 to the end of 1957 loading costs in New 

York increased from $4.06 to $4.69 per ton, and discharge costs at the same port 

from $4.80 to $5.74 per ton, increases of 15.5 percent and 19.6 percent respectively, 

fa r lower than the wage increases shown. This favorable result is attribu ted to 

increased efficiency in loading and discharge operations, the leasing of modern 

improved term inal facilities, and in some degree to the use of containers and 

vans. Loading and discharge at San Juan, P.R., however, reflected more closely 

the wage increases, attrib ute d to the lesser efficiency of port arrangements and 

labor. Leading costs at that port in the same period increased from $2.02 to $3.07 

per ton, and discharge costs from $2.79 to $4.71 per ton, increases of 52 

percent and 68.8 i»ercent respectively.
DOMESTIC OFFSHORE SHIPPING 93

23. Wat erman shows, in addition to the cost increases stated above, that 

effective in October 1958 longshore wage increases at Puerto Rican ports will 

after that date increase stevedoring expenses by about 92 cents per ton, and 

that known prospective wage increases will by the end of 1958 increase crew 

wage costs by $160,000 annually over the wage levels for 1957.

Allocation methods

24. Of the principal respondents, Waterm an is the only carrier which operates 

an exclusive Pue rto Rican service. The remaining respondents, as shown in 

paragraph s 1-9, supra, operate their services to and from Puerto Rico eith er 

wholly or par tially on a joint basis with other services. This has necessitated 

allocation of the joint service expenses of the respondents, and of the assets 

devoted to these services, so as to asc ertain as nearly as possible the proper 

apportionment of expenses and assets between the regulated and nonregulated 

trades in order to determ ine the adequacy of revenue in the regulated trade. 

For this purpose, the respondents have made their allocations principally on 

ton-mile prorate formulae.

25. Where possible, such as in the case of port and cargo handling expenses 

incurre d in Puerto Rico, the expenses were directly assigned. Most other 

expenses, including vessel operating expenses, cargo and port expenses in the 

United States, vessel depreciation, and overhead, were subject to allocation. The 

need for allocation does not alter the basic factors contributing to vessel operating expenses, the tonnage and the distance carried. In applying the ton-mile 

prorate, the respondents used the str aight-line distanc es between ports of loading 

and discharge, since a vessel sailing toward Pue rto Rico is also sailing toward 

the foreign ports of call. Vessel operating expenses and certain other expenses 

were then allocated to the Puerto Rican service in the proportion th at PuertoRican ton-miles bore to total ton-miles operated in the joint services.

26. Where the ton-mile prorate involved too heavy a burden, as where the 

allocation was between the Puerto Rican trade and the entire company operation, 

a revenue p rorate was used for convenience, using as factors the proportion that 

Pue rto Rican revenue bore to total revenue. In the case of loading costs, distance 

is not a relevant factor, and allocations were generally made on the basis of the 

number of tons handled. In the case of Bull’s substan tially equ idistant Puerto 

Rican and Dominican destinations, its use of a ton-mile prorate in the allocation 

of loading and stevedoring costs in the United States resulted in an approximately equal allocation of loading expense per ton.

27. Strike expenses incurred by Bull in 1957 were allocated by it on the basis 

of a revenue prorate, because the development of a ton-mile formula would have 

made necessary a port-to-port analysis of tonnage and distances for a minimum 

of 155 sailings, a burdensome task. Since the Dominican revenue is substan tially 

higher per ton tha n Pue rto Rican revenue for approximately the same distance, 

as shown below, this actually allocated a higher proportion of strike expenses 

to the Dominican traffic, and a lower proportion to Puerto Rican traffic, tha n 

would have resulted from the use of a ton-mile prorate.

28. Vessel assets were assigned to th e P uerto Rican services of the respondents 

on the proportion of the vessel operating days in those services, allocated where 

necessary on the basis of a ton-mile pr orate. Assets in Pue rto Rico were directly 

assigned to th e Pue rto Rican service, and term inal property in the United States 

was generally allocated on a revenue prorate.

29. At the request of other parties, the respondents in most instances also 

computed the ir expenses on the basis of revenue pro rate formulae. The int erveners contend th at for the purposes of this proceeding revenue prora te allocations should be used. For example, the Commonwealth argues that segregation 

of the joint voyage results on the Friday sailings of Bull gave inordinately excessive profits to the Dominican portion and exceptionally large losses to the 

Pue rto Rican portion in 1957, as to which on a ton-mile pro rate Bull shows a 

combined net revenue on the join t sailings, after depreciation and overhead 

but before taxes, of $46,345, with allocation of a loss of $244,973 to the Puerto 

Rican portion and a profit of $291,318 to the Dominican portion.

30. In 1957 total tonnage carried by Bull on the joint voyages was 311,699 

tons, of which 36,784 tons w*ere Dominican cargo. In the same year total join t 

voyage fre ight revenue was $5,367,625, of which Dominican revenue was $924,140. 

The Commonwealth characterizes as anomalous the resu lts of the ton-mile prorate which att rib ute s to the Dominican tra de n et revenue equal to 30 percent of 

each dollar of revenue. Bull’s revenue per ton in the Dominican trade in 1957

71709 0 —62------ 7
94 DOMESTIC OFFSHORE SHIPPING

was 36 i>ercent higher than in the Puerto Rican trade ($27.04 versus $10.94), 

and costs of discharge in the same year in the Dominican Republic were only 

22.5 percent of like costs in Puerto Rico ($1.06 versus $4.71). These data 

indicate that the protit results derived through use of ton-mile pro rate formulae 

reflect with a reasonable degree of accuracy the inheren t differences as between 

the Dominican and Puerto Rican trades. The Commonwealth also argues tha t 

the use of the ton-mile prorate results in somewhat higher unit costs on the 

joint service voyages than on the Thursday sailings of Bull which serve only 

Pue rto Rico. These resu lts are fully explained by the facts th at there were 

more sailings in 1957 in the joint service with about the same amount of total 

tonnage, and consequently lower tonnage per voyage and high er costs per ton, 

and also tha t the join t voyages were subject to overtime costs because of late 

sailings not incurred on the Thursday sailings.

31. The Manufacturers Association of Puerto Rico contends th at allocation 

of expenses for the Friday join t service sailings of Bull should be made on a 

so-called known-cost-per-ton method. By this method, allowable expenses on 

the joint service voyages would be confined to the unit costs incurred on the 

Thu rsday sailings which serve Puerto Rico exclusively, which costs can be 

computed without the necessity for allocations. Such a method bears no 

rela tion to the realities of the situation, and is clearly erroneous.

32. The Commonwealth alternative ly suggests th at in lieu of allocation in 

the case of Bull’s Friday sailings, the total profit res ults on the joint voyages 

should be included, on the grounds that the Dominican operation is a byproduct 

of the Puerto Rican trade which could not stan d on its own fe et; that only 

13 percent of the cargo on the jo int voyages is Dominican ; that Dominican Cargo 

is less than one-half of 1 i>ercent of the total Bull Puerto Rico tonn age; and 

that the car rier itself recognizes the incidental natur e of the Dominican operations by failing to allocate out of its asset stat ements any portion of vessel 

and other property values attrib uta ble to the Dominican operation. The issue 

here is not the profit accruing to Bull as a result of its joint service operations, 

but the justness and reasonableness of the rates under investigation, which 

in the nature of the case must be decided on the basis of the adequacy of the 

revenues derived therefrom. The re is no suggestion that allocation is not 

necessary in the case of the o ther respondents which operate join t services, and 

no good reason appears why Bull should be accorded special treatm ent in this 

respect. The author itie s cited clearly support agency actio n in general rate 

proceedings in adopting appropriate means of effectuating a sepa ration of the 

regulate d and nonregulated portions of an inte grated enterprise. See Cities

Service Gas Co. v. Federal Power Com'n. 155 F. 2d 694, 704-5 (1946), cert. den.

329 U.S. 773; and Colorado Inte rstate Gas Co. v. Federal Power Commission,

324 U.S. 581, 586-92 (1945). The fac ts of record clearly indicate t ha t dissimilar 

rates and cost factors as between the Puerto Rican and Dominican operations 

make allocation necessary in order to avoid distortion of the oi>erating results 

in the Puerto Rican tra de and the use of the resulting data in assessing the 

lawfulness of the ra tes under the jurisdiction of the Board.

33. In the light of the findings in paragraph s 23-31, supra, we agree with 

the exam iner that the use of the ton-mile prorate formulas, where utilized, 

and the other allocation methods adopted by the respondents, are reasonable 

and proper for the purposes of this proceeding.

Depreciation and Butt's vessel book values

34. In general, the vessel book values maintained by the respondents represen t 

the cost of acquisition, plus additions and betterments, depreciated on the 

basis of a 20-year vessel life down to a residual scrap value amounting to 2.5 

percent of acquisition cost. In the discussion immediately to follow, vessel 

acquisition costs and book values are stated as approximations, since precision 

is not necessary for disposition of the issues here raised, and since precise data, 

after allocations, are shown, infra.

35. Alcoa’s C -l vessels, utilized in its gulf service, were acquired in 1941 and 

1942 a t costs ranging from $1 million to $1,250,000, and by December 31, 1956, 

had been depreciated down to net book values ranging from $223,000 to $322,000. 

Its C-2 vessels used in the North Atlantic service were acquired in 1946 and 

1947 for $1,200,000 to $1,333,000 and by the same date had been depreciated 

down to $535,000 to $635,000.

36. Waterm an’s C-2 vessels used in its gulf service were acquired in 1947 

and 1948 for $984,000 to $1,100,000, and by December 31, 1956, had been depreciated down to about $500,000. Lykes’ C-l vessels were acquired between
DOMESTIC OFFSHORE SHIPPING 95

1943 and 1949, for $943,000 to $1 million, and by the same date had been depreciated down to slightly less than 50 percent of original cost.

37. In the case of Bull, most of the C-2 vessels had been acquired in 1947 

at costs of $948,(XX) to $1,096,000 by A. H. Bull New Jersey, and by December 

18, 1956, had been depreciated down to about $750,000. Two of the C-2 vessels 

were acquired in 1954 by A. H. Bull New Jersey in exchange for fully depreciated Liberty vessels and m<xlest .'.mounts of cash, and entered on the books 

at about $208,000 and $248,(XX). These two C-2’s by December 18, 1956, had 

been depreciated down to about $173,000 and $203,000. Annual depreciation 

charges in 1957, if taken by A. II. Bull Delawa re on the basis of the vessel book 

values maintained in the books of A. H. Bull New Jersey, on the portion of the 

fleet allocated to the Pu erto Rican trade, would have amounted to $396,887.

38. As of December 18, 1956, as a result of the tran sac tion detailed in paragraphs 4-6 above, the C-2 vessels utilized by Bull in its Pue rto Rican services 

were entered on the books of A. H. Bull Dela ware at acquisition costs of about 

$853,000 to $979,000, representing as there sta ted about 70 percent of the ir then 

appraised values. As a result, depreciation charges claimed herein by Bull in 

1957, and actu ally taken on the books of A. H. Bull Delaware, amounted to 

$929,514, or $532,627 more than would have been claimed by A. H. Bull New 

Jerse y in the event the tran saction had not taken place. Similarly, the increased depreciation taken in the first 6 months of 1958 amounted to $364,540, as 

aga inst $194,456 had the tra nsaction not occurred.

39. Domestic marke t value for C-2 vessels, exclusive of extras, in April 1957 

is shown in the record as $1,350,(XX), which by October 1958 had declined to 

$875,000. The ear lier value reflects the high market values which were the 

resu lt of the Suez Canal crisis which created a sudden shortage in available 

vessels. The later value reflects the decline in vessel market values resulting 

from the depression in the shipping industry which occurred between the 

dates given. For C- l vessels, exclusive of extras, the domestic ma rke t value 

in April 1957 was $1,100,(XX), which declined by October 1958 to $575,000.

40. The Commonwealth contends tha t, with respect to depreciation generally, 

the vessels of the respondents have alre ady been depreciated below realistic 

economical residual values as reflected by the m ark et values shown, that residual 

values based on nominal scra p value are unrealistic and do not represen t an 

accurate measure of the actu al residual value of the vessels which can be presumed to have a service life of more than 20 years and will at the expiration 

of that time either be sold or trad ed in at prices much higher tha n scrap value, 

that the residual service value of the vessels is at least equal to their book 

values at the end of 1955, and that as a consequence depreciation charges taken 

by the respondents should be disallowed in the ir entirety as an item of expense 

in determining the results of the operation s by the respondents in the Puerto 

Rican trade.

41. The depreciatio n practices of the respondents, and the estim ated residual 

value, are recognized for tax purposes, and are in conformity with the Board’s 

General Order 24 ( 46 C.F.R. sec. 284.2 (f)). Contrary to the contention of the 

Commonwealth, this record affords no basis for conjectu re as to the possible 

residual value of the vessels utilized in the Puerto Rican trade, other than the 

trad itio nal and long-accepted residual value used by the respondents. To adopt 

the suggestion of the Commonwealth would sub stitute speculation for ce rtainty, 

since depreciation charges allowed would fluctuate with varying judgments as 

to possible futur e residual values which may be afFected by unforeseen circumstances. We reject the contention of the Commonwealth.

42. Public counsel and the interveners also contend that for the purposes of 

this proceeding the depreciation charges claimed by Bull on the basis of vessel 

acquisition costs entered on the books of A. H. Bull Delaware must be disallowed, depreciation allowed only on the book values maintain ed prior to the 

ACS transactio n by A. H. Bull New Jerse y, and vessel book values determined 

on the basis of projections of the books of A. H. Bull New Jersey. The arg uments are based in the main on the rule propounded by the Supreme Court, 

particu larly with regard to utility companies such as power and light and telephone companies, that the proj>er guide to book value of a uti lity’s prop erty is 

the cost as of the time when the property to be valued was first acquired by a 

public utility or dedicated to the public use. See A.T. d T. Co. v. United States,

299 U.S. 232, 239 (1936), and cases there cited. A.T. d T. Co. v. United States,

supra, upon analysis, is also autho rity at pages 240-244 for the statem ent that 

acquisition cost of the last owner in a bona fide arm ’s-length transactio n may
96 DOMESTIC OFFSHORE SHIPPING

properly be entered on the books of the acqu iring utility , and is the proper 

depreciation base.

43. There is no suggestion here tha t the ACS purchase was anything other 

tha n an arm ’s-length transactio n between unrelated interests, that the re was 

any atte mpt at collusion so as to arb itra rily inflate the values of the Bull 

properties, or that the purchase was an improvident one. In fact, based upon 

vessel market values shown in the record, the Bull assets were acquired at 

bargain prices, and the vessel acquisition costs entered upon the books of A. H. 

Bull Delaware represent the true acquisition costs incu rred by t ha t corporation. 

The Board has no jurisdic tion over financial tran sac tions involving carriers 

such as these subject to the statutes, and the decision here must be based on 

the facts as they exist.

44. It is found th at the depreciation charges claimed as expenses by the 

respondents, including those claimed by Bull on the basis of vessel acquisition 

costs incurred by A. H. Bull Delaware, are reasonable and proper for the pu rposes of this proceeding, and that the vessel book values main taine d by A. H. 

Bull Delaw are reflect the true acquisition costs of the vessels utilized by Bull 

in its Puerto Rican services.

Valuation and rate bases

45. Ge ner al: The conference advocates rate bases calc ulated as of Jun e 30, 

1958, notwithstanding that the first increase here involved became effective in 

Janu ary 1957. Waterman individually contends for rat e bases compiled as of 

December 31, 1957. Public counsel and the Manufactu rers Association of Puerto 

Rico contend that rat e bases should be constructed as of December 31, 1957, 

applicable to the 1957 rate increase, and as of June 30, 1958, applicable to the 

1958 rate increase. The Commonwealth assigns values based on a composite 

analysis of the tota lity of the exhibits submitted. In General Increase in

Hawaiian Rates, 5 F.M.B. 347, 354-5, we stated that carriers are entitled to a 

fair return on the reasonable value of the property at the time that it is being 

used for the public, and that in ascertaining the “reasonable value” of the 

ca rrier’s property devoted to public services, we are not bound by any artificial 

rules or formula, citing San Diego Land Company v. National City, 174 U.S. 739 

(1899), and the Minnesota Rate Cases, 230 U.S. 352 (1913).

46. This proceeding involves two separate rate increases, the second superimposed upon the first. The record, includes data concerning the actual operations of the respondents for almost a full year under the first of these increases, 

and for almost 6 months under the combined increases. In the usual rate increase case, determination of the lawfulness of the increases proposed is necessarily predicated upon projections of revenues and expenses expected in the 

futu re, and the property value s for the purpose of calculating the expected 

rate of retu rn are most readily determinable as of the time the rat e increases 

are proposed. Here, however, particu larly with regard to the 15-percent increase, the results of operations under the increased rates can be ascertained 

with some degree of certainty. The most precise method of resolving the issues 

presented by this proceeding would be to determine average values of the property of the respondents employed during 1957, applying operating results for 

the yea r 1957 to the resulting figures to determine rat es of return actually 

earned during tha t year, and then to ascerta in values as of December 31, 1957, 

applying projected operating r esults for the year 1958, based upon actu al operations during the first 6 months of that year, to the asce rtained values as of December 31, 1957, the approximate date when the 12 percent increase became 

effective, so as to compute expected rates of retur n for the year 1958. Such 

extre me precision, however, is not required, and it is doubtful that the different 

value s arriv ed at would be substan tially at varianc e with each other. For 

the purposes of this proceeding, therefore, property values will be determined 

as of December 31, 1957, and the resulting rate bases applied to the actual 

operating results so fa r as they can be determined on the record for the year 

1957, and the projected results for the year 1958. While this may have a 

tendency to lessen somewhat the values applicable to the yea r 1957 because of 

depreciation, it is deemed that the results will not be unreasonable.

47. In table II I below a re set forth the rat e bases claimed by the conference, 

and in table IV the rate bases claimed individually by Wate rman.
DOMESTIC OFFSHORE SHIPPING 97

Table III.—Rate bases claimed by the conference

Bu ll: , „ _ Vessels_______________________________________________ 1

 $12, 048, 584

Working cap ital_______________________________________ 2, <MX), 000

Brooklyn term inal (nonow ned)--------------------------------------- 5,000,000

Philadelphia term inal (nonow ned )----------------------------------- 3,004,916

Baltim ore term inal (nonow ned)-------------------------------------- 6,000,000

Puerto Rico term inals__________________________________ 4, 062, 194

Other property___________________________________________ "47, 387

Claims pending___________________________________________ 22, 584

Total_______________________________________________ 32, 945, 665

Alcoa:

Vessels_______________________________________________ 5,183, 638

Working capit al_______________________________________ 1. 233, 955

New York te rmin al (nonowned)_________________________ 2,015,400

Baltimore terminal (nonowned)_________________________ 1,117,000

Mobile term inal (non owned)____________________________ 1,901,800

New Orleans term inal (nonowned) ______________________ 825, 700

Puerto Rico terminal (non own ed)________________________ 1,500,000

Terminal equipment (nonowned)_________________________ 356,600

Structures____________________________________________ 98, 371

Equipment____________________________________________ 231, 957

Spare pa rts ___________________________________________ 67, 734

Total_______________________________________________ 14, 532,155

Lykes:

Vessels_______________________________________________ 3, 784, 230

Working c aptial_______________________________________ 445, 212

Terminal pro per ty_____________________________________ 3, 589

Other property________________________________________ 92, 801

Sta tutory reserve funds________________________________ 2, 022, 488

Total_______________________________________________ 6, 348, 320

Wate rm an :

Vessels_______________________________________________ 4,170, 856

Working cap ital______________________________________ 1, 208, 091

Mobile term inal (nonowned)___________________________ 1,000,000

New Orleans term inal (nonow ned)______________________ 750,000

Pue rto Rico terminal__________________________________ 1, 242, 716

Furniture, fixtures and other equipment__________________ 167, 604

Office building, mobile__________________________________ 289, 491

Puerto Rico stevedore equipment______________________ 23, 863

Puerto Rico wharf equipment__________________________ 1, 239

To tal _______________________________________________ 8, 853, 860

Grand total_________________________________________ 62,680,000

1

 Thi s fig ure does not Inclu de an y va lu e as sign ed fo r Lib er ty sh ips, an d, becaus e of an 

err or in ca lc ul at io n In th e co nferen ce br ief, sh ou ld be $12,2 88, 581 on th e ba si s claimed by 

th e co nferen ce .
98 DOMESTIC OFFSHORE SHIPPIN G

Table IV.—Rate bases claimed by Waterman Method 1:

Vessels, average of reproduction cost depreciate and net book 

value______________________________________________

Oth er property________________________________________

Working capital______________________________________

1 $4,666,171 

3, 474, 913 

1, 892,107

Total----------------------------------------------------------------------- 10, 033,191

Method 2:

Vessels, market value_________________________________ 3, 070, 500

Other property------------------------------------------------------------ 3, 474’ 913

Working capital------------------------------------------------------------ 1, 892, 107

Total----------------------------------------------------------------------- 8, 437, 520

' T his figure, although labeled average of reproduction cost depreciated and net book 

value, embraces as an element the depreciated value of replacement vessels rather than reproduction cost depreciated of the vessels employed.

48. The items listed in table II I designated as “other p r o p e r t y “structures “e q u ip m e n t“spa re p a r t s “term inal p r o p e r t y “furniture, fixtures, 

anti other e q u ip m e n t“office b u ild in g a n d “stevedore equipment” ; and 

“wharf equipment” represen t allocations of owned property carried into the 

claimed rate bases at net book value, and there is generally no dispute concerning the propriety of including such asset values. There is little justification for 

the inclusion of the item called claims pending in the rate base claimed for 

Bull, and it will not be furth er considered.

49. Lykes alone among the respondents does not claim as a part of its rate 

base the values of any nonowned terminals, on the ground that its vessels utilize 

a number of different public terminals, and the ratio of its use of any partic ula r 

termin als would be minimal and difficult to determine. Accordingly, it claims as 

expense items in its profit and loss state ments the full ren tals paid for term inal 

use. Lykes includes in its claimed rate base sta tutory reserve funds amounting 

to $2,022,488, made up of capital reserve fund s of $1,734,919 representing accumulate d depreciation on the portion of its vessels allocated to the Puerto Rican 

services, and special reserve funds amounting to $287,569. Both of these reserve 

funds are required to be maintained by Lykes in connection with its subsidized 

foreig n operations under section 607 of the Merchant Marine Act, 1936, as 

amended, 46 U.S.C. 1177. We are not impressed with the argument advanced 

that these statutory reserve funds should be considered as property devoted to 

the Pue rto Rican service, and no f urthe r consideration will be given to this item.

50. Vessels: In table III, the vessels allocated to the Puerto Rican trade by 

the respondents are valued by weighting original and reproduction costs, depreciated, using as factors 70 percent of reproduction cost depreciated and 30 percent of acquisition costs, depreciated. These percentages were rejected by us 

in our decision in General Increases in Alaskan Rates and Charges, 5 F.M.B. 486, 498 (1958). The respondents argue that Bull has in the d ista nt past built 

its own ships and operated in the Puerto Rican trade with newly constructed 

tonnage, and has developed plans for replacement vessels, although there are 

no p rese nt indications that new ship construction will be embarked upon in the 

near future; that Alcoa has likewise had naval architects prepare designs for 

replacement vessels; and that Lykes is contractually committed to a ship replacement program in connection with its subsidized operations. For these 

reasons, the conference contends tha t the circumstances presented in this proceeding differ from those in the Alaska case and jus tify the use of the 70 per- cen t/30 percent weighting. The exam iner used an average of original costs and 

reproduction costs, citin g prior decisions, see Rates of Inter-Island SteanC Navigation Co., Ltd., 2 U.S.M.C. 253 (1940) ; Alaskan Rates, 2 U.S.M.C. 558 (1941), and 2 U.S.M.C. 639 (1942) ; General Increase in Hawaiian Rates, supr a;

and General Increases in Ala skan Rates and Charges, supra.

51. Table V below shows, after allocation, the original and reproduction costs, 

depreciated as of December 31, 1957, the avera ges therefore, and the market 

values of the vessels employed by the respondents. The market values are 

average s of the domestic market values stated in paragraph 39 above, taken 

so as to eliminate extremes of value occasioned by the special circum stances 

detailed. As in the case of table III, the vessel values in the case of Bull do not 

include assigned values for Liberty-type vessels w’hich the record indicates will 

occupy a diminishing role in its operations.
DOMESTIC OFFSHORE SHIPPING 99

Table V.—Vessel values

B u ll ..............

A lc oa_____

L y k es..........

W ate rm an .

T o ta l

O rigi na l co st 

dep re cia te d

R e p r o d u c ­

ti on co st de ­

pre ci at ed

A ve ra ge

D om es tic

m ark et

val ue s

$4, 875 ,99 5

1,4 21, 166

993,2 00

1,1 52,13 2

$16,890 ,740 

7,48 7,08 1

5,409, 969 

6, 535,356

$10 ,883 ,318 

4,454,12 4 

3,2 01,58 5 

3,8 43, 744

$7,620 ,90 0

3,9 13,97 2 

2,3 59,80 6 

3,1 67,27 5

8,4 42,49 3 36,3 23, 146 22,382,771 17,0 61.9 53

52. We disagree with both the conference and the exam iner as to the fair 

and reaso nable value of respondent’s vessels. Wh at the respondent carriers are 

entitled to is “a fa ir return on the reasonable value of the property at the time 

it is being used for the public,” San Diego Land Company v. National City,

supra. We find th at value of the vessels on the domestic ma rke t at or about 

the time the rate increase is requested with adjustments to eliminate short-term 

peaks in vessel values, is the proper method for dete rmining the reasonable 

value of the property being used for the public. We do not feel th at we should 

assume for rate mak ing purposes th at a ca rrier has reproduced its vessels. 

When the carri er has reproduced a vessel and placed it in service he is entitled 

to a fa ir return on its value. Until then, the shipping public should not be 

forced to pay rates based even in pa rt on the conjec tural value of some phantom 

vessel which may never serve it. To the exten t the conclusions set for th in 

prior cases disagree with those expressed herein they are overruled.

53. We find the fa ir and reasonable values of the vessels of the respondents 

devoted to the Pue rto Rican service to be those set forth in table V under the 

heading “Domestic Ma rket Values.”

54. Working ca pi tal: The exam iner found th at a fa ir and reasonable allowance for working cap ital as an element of the rate bases would be approximately one-twelfth of the annual operating expenses experienced in 1957 of the 

respective car riers, exclusive of depreciation, or $1,800,(MX) for Bull, $860,000 for 

Alcoa, $360,000 for Lykes, and $615,(MX) for Wate rman.

55. The conference excepts to thi s finding, contending th at the carri ers are 

entitled to (1) a buffer fund equivalent to one-twelfth of annual operating expenses, exclusive of depreciation, plus (2) an amount sufficient to cover the 

lag in revenue collections behind the rela ted disbursements citin g Alaskan

Rates, 2 U.S.M.C. 558, 566 and 2 U.S.M.C. 639, 645. Under this method they say 

Bull is entitled both to the buffer of one-twelfth of operating expenses or 

$1,800,000 and the collection lag of $1 million and th at the other respondents are 

entitled to a sim ilar working ca pital d eterm ination.

56. The inte rveners and public counsel also except to the examiner’s finding, contending th at working capital should be computed on the basis of the 

requ irem ents laid down in General Order 31, 46 C.F.R. sec. 286.3 (a)(1 ).’

57. In General Increases in Hawaiian Rate s, supra, we used General Order 71 

as the method for the computation of working cap ital as an element of the r ate 

base. In General Increases in Alaskan R ates and Charges, supra, we disallowed 

claimed working capital computed by the form ula detailed in the Alaskan Rates

cases, supra and allowed working cap ital calcu lated in accordance with General O rder 71 (superseded by General Order 31). In that case we characterized 

that general order as basically consisting of the average voyage expenses for 

each vessel in the car rie r’s fleet.

58. The examiner concluded th at use of the formula was not app ropriate 

in this proceeding, {minting out that und er limitation 3, the inclusion by Bull 

in its current liab ilities of annual install ments due of its debt, and ann ual 

inte rest payments would leave it with a negative balance for working capital. 

We find nothing in this record to warrant a reversal of our holding in General

Increases in Hawaiian Rates, supra and General Increases in Alaskan Rates

and Charges, supra. We will, however, clarify those two decisions in one 

respect. In dete rmining a fair and reasonable allowance for working cap ital 

as an element of the ra te bases in proceedings such as these, we will limit the 

amount to th at determined under limitation 4 of General Order 31 and give no 

consideratio n to limitatio n 3 of th at order.

3

 Limitations 3 and 4 of that order which relate to the computation of working capital 

are set for th In appendix A.
100 DOMESTIC OFFSHORE SHIPPIN G

59. We find that the fair and reasonable allowance for working capital would 

be th e amount computed under limitation 4 of General Order 31, or $1,087,000 for 

Bull, $204,100 for Alcoa, $222,100 for Lykes, and $285,800 for Waterman.

00. Property used but not owned: As is indicated in table III, Bull, Alcoa, 

and Waterman claim as elements of the ir rate bases sub stantial amounts repre ­

senting the value of term inals and terminal equipment used by them in their 

Puerto Rican services which are owned by others. In conjunction with these 

claims, Bull has adjusted its operating expenses to sub stitute owners’ expenses 

detailed on the record in the case of the Brooklyn and Philade lphia term inals for 

terminal rentals, and has credited its revenues with the profits derived from 

the operation of the Puerto Rican term inals by its sub sidiaries; Alcoa has 

adjusted its operating expenses to eliminate rental costs for term inals; and 

Wa term an has adjuste d its operating expenses to elim inate profits from the 

operation of its Puerto Rican term inal owned by Waterm an P. R. However, 

Waterm an claims as operating expenses the ren tals paid for term inals at 

Mobile and New Orleans, and the record affords no basis for determining the 

amount of such rental payments. The Baltimore term inals used by Bull and 

Alcoa are leased to them free by the owners as an inducement to increase the 

amount of traffic moving over the piers, and Bull’s ren tal paym ents for its 

Philadelphia pier are subs tantially less than owners’ costs.

61. The examiner found that in the case of Bull and Alcoa the inclusion 

in the ir allowable rate bases of the value of prop erty used but not owned 

with the concurrent elimination from operating expenses of ren tals paid for 

such property and the subs titution of owners’ exi>enses th erefor, is reasonable 

and proper. In the case of Waterma n, however, he found th at since it was 

impossible to determine on the record its rental paym ents for the use of its 

Mobile an d New Orleans term inals or the expenses of the owners thereof, that 

the value of such property should not be included in its rate base. In arriving 

at the value of property used but not owned he found the prop er valuation 

to be the net book value where ascertainable, or if not, he found a value on 

the basis of other evidence of record. The exam iner concluded th at prior 

decisions of the Board had allowed for rat e base purposes the value of p roperty 

used,'although not owned by the carriers, which he sta tes is in accord with the 

accepted theory of valuation.

62. In our most recen t ruling on thi s point in General Increases in Alaskan

Rates and Charges, supra, we included the value of a cha rtered vessel in the 

ca rrier’s rate base but excluded certain nonowned .shore side prop erty since it 

was difficult if not impossible to determine its proper value. We think we were 

in err or in including the value of the nonowned assets in the carrie r’s rate base. 

We are not impressed with the arguments of the conference th at such assets 

should be included in the rate base of some of the ca rri er respondents in this 

proceeding. We note that Lykes did not claim as pa rt of its rate base such 

nonowned property, and it app ears that Bull did not include piers owned by 

the Commonwealth of Puerto Rico. Fur ther, in the case of Waterman, the 

examiner refused to include the value of such property in its base. Again in the 

case of Alcoa, in arriving at a value to be included in that company’s rate base 

the examiner because of insufficient data reduced the amounts claimed by the 

same percentage he had reduced Bull’s claimed values. These same problems led 

us to conclude in General Increases in Alaskan Rates and Charges, supra, tha t certain nonowned property was not properly includible in the carrier’s rate 

base.

As indicated above, such assets were claimed by some of the carriers and not 

by others, were excluded by the examiner in the case of Waterman, and Bull 

app arently did not claim all of such property. Thus we are asked to arrive 

at rate bases of various car riers containing different elements depending in 

some cases on the claims of the carrie rs and in others on th e evidence submitted 

by it as to the value of the property. This we will not do. Proceedings such 

as this are difficult enough withou t adding to the problems. The respondents 

in this case present no binding precedent that requires us to include such 

prop erty in a carri er’s rat e base. We do not feel that either logic or law 

necessitates the ir inclusion. The carriers are not devoting the ir capital to the 

shipping public inso far as such prop erty is concerned. It is proper of course 

to include in allowable expenses the rental paid and other expenses of the 

carriers which arise by reason of the use of such facilitie s, but to include the 

value of nonowned prop erty in the rate bases in our opinion w’ould gra nt the 

carriers a windfall at the expense of the shipping public.
DOMESTIC OFFSHORE SHIPPIN G 101

63. Bull’s Pue rto Rican term inal: The exam iner included in the rate base of 

Bull $2,144,572, the net book value as of December 31, 1957, of cer tain Puerto 

Rican term inals owned by Bull and devoted to the trade. Public counsel excepts to this inclusion and the Commonwealth contends that the amount should 

be reduced by some $475,000 represen ting the tota l acquisition cost of certain 

property adjo ining one of the term inals on which is located a building which 

occupies about one-twelfth of the are a and which is leaded for purposes not related to the Puerto Rican trade. The rem ainder of the property is admittedly 

used for term inal services and the build ing ren tals are credited to the Puerto 

Rican services of Bull. We agree with the exam iner that $2,144,572 should 

be included in the rate base of Bull as represe nting the value of Bull’s Puerto 

Rican owned terminals. This prop erty is owned by Bull and devoted to the 

trade, ren tals from the building will be cred ited to Bull’s Puerto Rican service, 

as well as any profit realized from the operatio n of the term inal. Under such 

circu mstances there is no justification for excluding the term inals in whole or 

in p art from Bull’s r ate base.

64. Re capit ula tio n: Table VI below sets forth the total values of the property 

of the respondents devoted to the ir Puerto Rican services, as found for the 

puriMjses of this proceeding, reflecting the findings specifically made above concerning the valuation of vessels, working capital, and term inals and term inal 

equipment as of December 31, 1957, and reflecting also the net book values of all 

other prop erty as of December 31, 1957, as found in the record. In the case of 

Lykes, net book values for such oth er property were not subm itted as of December 31, 1957, and the values included are the avera ges of net book values 

shown in the record as of Jun e 30, 1957, and as of Jun e 30, 1958.

Table VI.—Values

Bull______________________________________________________

Alcoa_____________________________________________________

Lykes_____________________________________________________

Wa terman_________________________________________________

$11, 491, 987

4, 570, 966 

2, 680, 115

5, 350, 285

REVENUES AND EXPENSES

65. Ge ne ral: As stated in par agr aph 46 above, in the present posture of this 

proceeding it is possible to determine with reasonable ac curacy the actual ope rating results experienced by the respondents during 1957 in the performance of 

their Pue rto Rican services, and thus to make findings concerning the lawfulness of the 15 percent increase. Reasonable projections for the future may be 

made based upon revenue and expense data subm itted by the respondents covering the first 6 months of operations in 1958 under the combined 15-percent and 

12-percent increases, by which the lawfulness of the combined increase s may be 

gaged. Numerous issues are raised by the parties concerning the revenues to 

be assigned to the Pue rto Rican trad e, and the expenses allowable. Certain 

of these, relating to allocation methods employed by the respondents, depreciation claimed by them, and the adjustment of expenses to elim inate ren tal costs 

for nonowned term inals or to sub stitute owners’ costs therefor, have been 

treate d separately above, and need not be restate d here. In res tating the 

assignable revenues and allowable expenses, the findings there made will govern. 

Generally, disposition of the issues raised concerning 1957 expenses and revenues 

will suffice, and later data restate d accordingly.

66. Interv ene rs and public counsel contend that the revenues of the respondents for 1957 should be restate d so as to give effect to a full ye ar’s operations 

under the 15-percent increase, which became effective on Janu ary 10 of that 

year. It is also contended that the expenses of Bull for th at year should be 

adjuste d so as to eliminate the expenses incu rred during the str ike mentioned 

in par agr aph 8 above, of which $643,037 of general operatin g expenses and 

$146,483 of depreciation are allocable to the Puerto Rican services, on the 

ground that this strike was unique in cha rac ter, and occurred for reasons not 

rela ted to the Puerto Rican trad e. As to the strike expenses, the examiner 

concluded th at the effect on the revenue position of Bull was no differen t except 

in degree from th at of any other str ike for which no claim was made. We 

disagree with the examiner. This strike was unrelated to the ordinary labormanagement controversies, and the general operating expenses incurred during 

the s trik e should be excluded from Bull’s expenses for 1957, but no sound reason
102 DOMESTIC OFFSHORE SHIPPING

is shown for the elimination of depreciation expenses incurred during that 

period. With respect to the resta tem ent of revenues to cover a full year of the 

15-percent increase, we agree with the examiner that the operatin g resu lts for 

1957 do not enter into projections for the future, and restatement thereof so as 

to reflect a full year’s operation would serve no useful purpose.

67. 1957 revenues and expenses: Bull shows operating revenues for 1957 of 

$21,646,383, which are a djusted to include amounts of $117,954 covering interest 

revenue from a mortgage on the Brooklyn terminal held by Bull, $86,018 covering 

net profit of the Pue rto Rico term inal companies, and $68,187 covering top 

wharfa ge collected in Philadelphia. Public counsel and the interveners contend th at the revenues should be furth er adjusted so as to include $38,335 of the 

net profits of Caribbean Dispatch, Inc., earned in carryin g bagged raw suga r 

und er con trac t term s which would normally have been transported by Bull at 

tariff rate s, and $60,069 of profits earned by Bull in conducting independent 

stevedoring operations at Puerto Rico for other carriers during the strike period. Of these adjustme nts, the examiner found th at only the inclusion of the 

intere st revenue is improper, that it is included only for the reason that the 

value of the Brooklyn term inal is claimed in Bull’s ra te base and that it is no 

more a p art of the earnings derived from the Puerto Rican service than the revenue from any other unrelated investment. We agree with the examiner, as to 

the intere st revenue, but are of the opinion th at elimination of the strike expense for 1957, as found above, requires also that the bagged raw sug ar and 

stevedoring profits should be excluded from the assigned revenues.

68. Bull shows total allocated operatin g expenses of $22,644,027. Adjustments 

upw ard include $95,872 covering costs incurred as a res ult of actions brought in 

Pue rto Rican courts for overtim e wages by stevedore foremen, and $69,273 covering the excess of actual Puerto Rican overhead expenses over budget provisions 

therefor. Adjustments downward include a credit of $145,299 for stevedore 

overhead charged into the stevedoring account; $72,319 to substitute owners’ expenses for terminal ren tal s; $3,813 to cover a correction in the allocation of 1957 

strike expe nses; and a stipulated correction of $35,232 in management and opera ting commissions. The Manufactu rers Association of Pue rto Rico contends 

that the adjustment of expenses to cover the foremen’s overtime su its is improper 

on th e ground th at the expense is a ttribu tab le to a violation of law by Bull. The 

suits arose from a difference of opinion as to Bull’s liab ility for overtime payments, and the costs incurred by Bull are operatin g costs properly includible.

69. The Man ufacturers Association of Puerto Rico also contends th at Bull’s 

1957 expenses should be adjusted downward by $6,398 to reflect an allocation of 

inactive vessel expense and depreciation of other equipm ent to the Dominican 

traffic not made by the respondents, and this adjustment is considered proper. 

We agree with the exam iner th at operating expenses should be reduced by 

$139,404 to cover the excess of commissions paid to A. H. Bull & Co. over and 

above the costs of the latter as allocated on a revenue prorate.

70. Alcoa shows gross operating revenues in 1957 of $9,175,949. Operating 

expenses after allocation were $10,615,037, adjusted downward by $423,120 to 

exclude pier rentals.

71. Lykes shows gross operating revenues in 1957 of $3,774,843. Operating 

expenses afte r allocation were $4,540,813.

72. Waterman shows gross operating revenues in 1957 of $9,416,267, covering 

both its gulf and North Atlantic operations. Expenses were $8,771,685. Interveners contend that the expenses should be adjusted to elim inate charter hire of 

$32,400 on a vessel included in the rate base, and to elim inate $13,770 interest on 

a vessel mortgage. Since the vessel is not included in the rate base the charter 

hire paid is a proper expense. Intere st payments are not operating expenses as 

such, but are rat her costs of cap ital employed which should be borne out of 

profits earned, and an adjustment is proper. It is also contended that Wa terman’s revenues and expenses for 1957 should be restated so as to eliminate the 

results of its North Atla ntic service, which was conducted in th at year at a loss, 

for the reason th at such service was only tem porarily operated. As state d above, 

operating results for 1957 do not enter into projections for the future, and the 

service was instituted by W aterma n with the full intention of making it permanent. To eliminate the results of this service would distor t the actu al revenue 

position of W aterman in defiance of the facts of record.
DOMESTIC OFFSHORE SHIPPING 103

73. Giving effect to the findings above, inclu ding elimination of strik e expenses 

and adjustments relatin g thereto, and the adjustment in Bull’s revenues as 

found in paragraph 67 above, and the inclusion of ren tal expenses and deletion of 

owners’ expenses for nonowned prop erty disallowed in the rate base, table VII 

below shows the operating results of the resp ondents in 1957, as adjusted :

Table VI I.—1957 operating results

R ev enues Exp en se s N e t pro fi t or 

(loss)

B ull __________ _____________________ $21 ,800,4 88 $21 ,835,989 ($35,501)

Alco a . ______________________ ___________ ____ _ 9,1 75,94 9 10,615 ,03 7 (1,43 9,0 88)

Lvk es _ ___ ______ _______________________ 3, 774,843 4,5 40,81 3 (765,970)

W ate rm an __________________________________________________ 9,416,26 7 8,7 57,91 5 658,352

74. 1958 revenues and expenses: As stated in paragraph 17 above, the revenue 

projections of the respondents, where given, were based on an extension of the ir 

most recent experience, that for the first half of 1958, subjected to adjustments 

for known or contracted cost increases. Revenues for 1958 were calculated as 

twice those for the first 6 months, adjusted to give effect for the full year to the 

12 percent increase which became effective Janu ary 15. Expenses for the first 

6 months were adjusted upward by about 1 percent. Waterman did not submit 

future projections, basing its position on the fac t tha t it ceased operation s in 

the trade and its successor in the operation is not a respondent herein. Wa terman contends, therefore, tha t no consideratio n may be given to the future op erations of W aterm an, P. R., in the trade in dete rmining the lawfulness of the r ate s 

here under investigation. Waterman, P. It., is, however, an existing o perator in 

the Gulf-Puerto Rico trade, its rates are identical with those under investigation, 

and it has agreed to be bound by the findings herein. Accordingly, for the 

purposes of this report, projected 1958 results for the combined Waterman and 

Waterman, P. R., operation from the gulf j>orts to Pue rto Rico are calculated 

below on the same basis as used by the oth er respondents. Revenues for the 

first 6 months are doubled, and adjusted upward by $54,000 as suggested by 

public counsel to reflect a full year’s operatio n under the 12 percent increase. 

Expenses for the first 6 months, as adjusted, are doubled and adjusted upward 

by 1 percent to reflect the cost increases expected by the other respondents. 

This will fail to give effect to the cost increases shown by W aterman indiv idually 

as stated in par agr aph 23 above, but it is expected that similar cost increases 

will also affect the other respondents, and they are disreg arded here in order to 

trea t all the ca rriers similarly.

75. In computing operating expenses for the first 6 months of 1958, Bull 

included vessel rep air expenses on a reserve basis in its voyage accounts. For 

the period these reserves totaled $197,428. Actual rep air expenses during the 

period were $57,951 less th an this amount, and public counsel and the interveners 

contend th at the excess should be cred ited to Bull’s expenses and only actual 

rei>air costs allowed. Bull’s actual rep air expenses were $413,311 in 1957, and 

$562,795 in 1956, and it does not app ear that the reserves are excessive. For 

the purpose of projecting expenses over the full year 1958, the reserves for 

rep air expenses will be allowed.

76. The combined Waterman and Waterman, P. R., expenses repo rted for the 

first 6 months of 1958 in the ir Gulf-Puerto Rico service include costs of $8,617 

attrib uta ble to tra nsfer of the Bienville cargo at New Orleans into a vessel 

regu larly providing breakbulk service to Pue rto Rico. Waterm an contends th at 

this amount should not be disallowed. It is an expense of a nonrecurring natur e 

and for the purp ose of projecting futur e operating results, the conte ntion has 

merit, and the adjustment requested will be made.

77. Giving effect to the findings relatin g to 1957 revenues and expenses, and 

those made specifically with regard to 1958, table VII I shows the revenues and 

expenses of the respondents for the first 6 months of 1958, and the projected 

operatin g results for the full year 1958.
104 DOMESTIC OFFSHORE SHIPPING

Table V III.—1958 operating re sults

F ir st hal f 1958 1958 pro je ct ed

R ev en ues Ex pe ns es R ev en ue s Exp en se s N et pr of it 

or (loss)

B u ll .............. ........................ ............... $11,706,918 $11,384,232 $23,650,643 $23,070,350 $580,293

A lc oa ........ ........................ 4 ,215' 049 4,99 0,803 8,48 4,0 00 10,027,000 (1,543 ,000)

L y k e s .. R 940,279 2 ,150,083 3,9 19,73 7 4,318,2 34 (398,497)

W ate rm an an d W ate rm an P . R . . . . 4,12 1,3 23 3; 417,080 8,2 96,64 6 6,90 2,50 1 1,394,145

DISCUSS IO N AND CO NC LU SION

In our order remanding this proceeding for furth er hearing we direc ted that 

the record developed should be sufficient for considera tion of the issues either 

thro ugh analysis of all carr iers, or through consideration of Bull as the ratemaking c arrier. The examiner treated the respondents as a whole. We disagree. 

In General Increases in Hawaiian Rates, supra, and again in General Increases

in Alaskan Rates and Charges, supra, we followed our prior decisions and adhered to the principle that the dominant carri er in a noncontiguous domestic 

tra de will be taken as the ratemaking line. We find nothing in this record 

which wa rra nts a different conclusion here. Bull is by f ar the dominant ca rrier 

in the trade and its gross revenues during the first half of 19,58 exceeded those 

of the other three carr iers. They were approximate ly 2% times those of the 

next larg est carrier. Consideration of the issues in this proceeding will be 

made on the basis of Bull as the ra tema king carrier .

On the basis of the findings set forth herein Bull in 1957 suffered a loss of 

some $35,500 and the 15-percent increase has been shown to be fully justified. 

On the basis of the 1958 projection which we have found to be reasonable, Bull 

on a ra te base of $11.5 millions during 1958 would earn 5 perc ent before income 

taxe s.

The Commonwealth contends th at Bull’s allowable return should be 5 percent. The conference argues that a rat e of 10 percent after taxes is reasonable. 

Public counsel says 7.5 percent after tax is the proper rate of return in this 

proceeding.

Our predecessors fixed 7 percent after taxes in Rate s of Inter-Island Steam

Navigation Co., Ltd., 2 U.S.M.C. 253, 262 (1940), and 7.5 percent in Alaskan

Rates, 2 U.S.M.C. 558, 573. Recently in General Increases in Alaskan Rates and

Charges, supra, at pages 500 and 501, we allowed rates of return of 5.22 and 8.90 

percent upon two alte rna tive methods of rat e base valuation considered by us. 

We find tha t a rate of return of not in excess of 7.5 percent after income taxes 

of the rate bases determined as set forth in our findings is fair and reasonable.

In view of our finding a s to a fair and reaso nable rate of retu rn and the finding as to Bull’s e arnings under the combined 15-percent a nd 12-percent increases 

we find it unnecessary to give furth er consideration on the contentions of the 

Commonwealth with respect to the treatm ent of income taxes.

The conference excepts to the examiner’s fail ure to include in the rate base a 

sep ara te amount for going concern value. As we said in General Increases in

Alaskan R ates and Charges, supra, a t page 500, “Neither the Board nor any of its 

predecessors has ever included a separate ‘going concern value’ in a rate base 

of any of the respondent ca rriers .”

We see no reason to dep art from the fair-return-on-fair-v alue stan dard which 

the Board and its predecessors have used and reject the contention of the conference t ha t the operating rati os exjterienced by the respondents should be considered by us as a method of determining the reasonableness of the rates under 

inve stiga tion in this proceeding.

ULTIM A TE FIN D IN G S

We find and conclude that the 15- and 12-percent increases here under 

investigation are ju st and reasonable.

An order discontinuing this proceeding will be entered.

By the Board.

James L. Pimpeb, Secretary.
DOMESTIC OFFSHORE SHIPPING 105

Appendix A

General Order No. 31, provides in pertinent pa rt as follows (46 C.F.R. sec. 

286.3(a) (1) in pa rt) :

LIMITATION ( 3 ) — ADJUSTED WORKING CAPITAL

The excess, if any, of the balance of “adj ust ed working cap ital” of the operato r and its wholly owned subsidiary companies as of the balance sheet date, 

after interim adjustments thereof, as provided in paragraph (d) of this section, 

and allocated to subsidized ojierations as provided in par agr aph (e) of this 

section, over “limitatio n of adjusted working capit al” in subsidized operations, 

as defined in limitation (4), shall be deemed to be “cap ital held in reserve” in 

the business and shall not be taken into account in determining “capita l employed.”

For the purpose of applying this limitation, “adjusted working cap ital” shall 

include only the following accounts defined in p art 282 of this c ha pt er :

Accounts:

100-199 ( 369) : Current assets (less reserves and provision for accrued 

deposits in sta tutory reserve funds other than voluntary deposits, which 

shall not be accrued for deposit).

200: Unterminate d voyage expense.

375-389: Deferred charges (to operations) and prepaid expenses.

Less acco unts:

400-534: Current liabilities (exclu ding mortgage notes—vessels, and other 

liabilities payable from s tat uto ry reserve fun ds).

495: Advance ticket sales and deposits.

500: Unterminate d voyage revenue.

The provision for accrued deposits into the sta tut ory reserve funds referre d 

to in accounts 100-199 hereinabove shall include, but is not limited to, the 

following:

(i) Accrued depreciatio n on vessels required to be deposited into the capital 

reserve fu nd;

(ii) Proceeds from sale or loss of vessels and other amounts which, upon 

collection, are required to be deposited into the capital reserve fu nd ;

(iii) All accrued mandatory deposits into the special reserve fund.

LIMITATION ( 4 ) — LIMITATION OF ADJUSTED WORKING CAPITAL

Adjusted working capital as determined under limitation (3) shall be allowed 

as “capital employed” to the extent of the total average voyage expenses employed 

in subsidized operations determined a s follo ws:

Average voyage expenses shall be determ ined on the basis of the actua l expenses 

of operating and maintaining the subsidized vessels (excluding layup expenses) 

for a period represented by the average length of time of all round voyages 

(exclu ding layup periods) calc ulated separately for each subsidized service 

(lin e). For the purposes of this limitation, the term “line” shall be deemed to 

mean those described in part I of the opera ting-differential subsidy agreement, 

or in instances w here the routes or services described therein are not designated 

as “lines,” then the trade routes referred to in pa rt I of the subsidy agreement 

shall for such purposes be deemed to be “line s” : Provided, Th at in any event 

passenger services shall be deemed to be “lin es” sepa rate and distinct from freight 

services: And provided further, That in instances where unsubsidized vessels are 

operated in subsidized services and are subject to the reserve and rec apture provisions of th e agreement, they shall not be considered as a sep ara te categ ory but 

shall be included with the subsidized vessels for the line involved.

This determination shall be made in the following man ne r:

F ir st: By dividing the sum of such expenses for the accounting period involved 

applicable to the subsidized vessels in each such service (line) by the aggregate 

number of days (excluding layup days) consumed in all voyages of such vessels 

in each such service (line ) terminating during such period ;

Second: By multiplying the quotient thus obtained by the number of days 

(excluding layup days) in the average voyage in each such service (line) ; and

T hird: By multiplying the resulting product by the quotient of the total number of days (excluding layup days) consumed in voyages of subsidized vessels
106 DOMESTIC OFFSHORE SHIPPING

in each such service (line) term inating during the accoun ting period divided by 

the number of calendar days within the accounting period.

The expense of operatin g and main taining the subsidized vessels shall include 

overhead (accounts 900-955 less accounts 670 and 895) allocated to subsidized 

operations under § 286.4 and tota l operating expense—terminated voyages (accounts 701-799 in pt. 282 of this chapter). For the purpose of this limitation 

(4), if in any instance, the average subsidized voyage in auny subsidized service 

(line), as determined above, is of less than 90 days’ dura tion, the expense of hull 

and machinery insurance (account 755) and P. and I. insuranc e (account 757) 

shall be determined to be th at for a period of 90 da ys : Provided, T hat such allowance for insurance expense shall not, in the aggregate, exceed the tota l actual 

insuranc e exjiense for the accounting period. Expenses used for this purjjose 

shall be those included in the annual accounting for each calendar year, tiled 

under pa rt 292 of this chapter, and shall not be a dju sted therea fter.
BRIE F OF RESPONDENT FEDERAL MARITIME BOARD

AND STATEMENT OF RESPONDENT UNITED STATES

OF AMERICA

I n T he

Witefa States Court of Appeals

F or th e District of Columbia Circ uit

No. 15 ,846

Common wealth of P uerto Rico, petit ion er

v.

U nited S tates of A merica and F ederal Maritim e B oard, 

respondents

No. 15 ,847

United S tates Atlantic & Gul f-P uerto Rico Conference, 

ET AL ., PE TI TI ONER S

v .

U nited States of A merica and F ederal Maritim e B oard, 

RE SP ON DE NT S

On Petitio ns for Review of an Order of the Fed eral

Maritime Board

R obert A. Bicks

As sis tant At torney

General

R ichard A. Solomon

H enry Geller

Attor neys,

Dep artm ent of Jus tice

Washington 25, D. C. 

Novem ber 7,1960

J ames L . P imper

General Counsel

R obert E. Mitc he ll

E dward Aptak er

Assis tant General Counsel

Donald J . Bru nn er

At torn ey

Attorneys for Respondent

Federal M aritime Board

107
108 DOMESTIC OFFSHORE SHIPPIN G

STA TEM ENT OF QUEST ION S PR ESEN TE D

The questions presented by the Commonwealth of Puerto 

Rico 1

 ar e:

1. Whether the Board erred in ascribing to the carrie rs’ 

vessels a valuation for rate base purposes equal to their 

market value.

2. Whether the Board allowed an excessive rate of return to the carriers.

3. Whether the Board allowed the carriers to charge an 

excessive annual vessel depreciation expense.

The questions presented by the United States Atlantic 

and Gulf/Puerto Rico Conference, et al., are as follows:

1. Whether the Conference has standing to seek review 

of the Board’s order.

2. Whether the Board erred in considering the Bull 

Steamship Company to be the “ ratemaking carrier” in the 

trade.

3. Whether the Board erred in excluding from the carrier ’s rate base terminal properties which are used, but 

not owned, by the carriers.

4. Whether the Board understated the carriers ’ rate base 

by allowing an unreasonably low working capital.

5. Whether the Board erred in ascribing to the carriers’ 

owned terminal facilities a valuation for rate base purposes 

equal to their net book value.

6. Whether the Board erred in rejecting an operating 

ratio approach, rathe r than the fair-return-on-rate-base approach, in determining whether the carr iers’ rates are just 

and reasonable.

1

 The Commonwealth’s petition for review raises additional questions, which are abandoned in the Commonwealth’s brief. Accordingly, respondents’ statement of the questions presented by the 

Commonwealth is limited to only those questions which the Commonwealth is now pressing.

(I)
DOMESTIC OFFSHORE SHI PPING 109

TABLE OF CONTENTS

Page

Statement of Questions Presented..................................................... I

Jurisdictional Statement ..................................................................... 1

Statement of the Case.......................................................................... 2

A. Statutory Background ........................................................... 2

B. The Board’s Findings ............................................................. 3

1. Valuation and Rate Base............................................ 4

2. Expenses ...................................................................... 5

3. Dominant Carrier Theory........................................... 6

4. Rate of Return ........................................................... 6

5. Operating Ratio as Measure of Reasonableness. . . . 7

C. The Instan t Petitio ns............................................................... 7

Summary of Arg ument......................................................... .'............. 8

A. Summary of Argument in Response to Brief of Commonwealth of Puerto Rico ......................................................... 8

B. Summary of Argument in Response to Brief of United

States Atlantic & Gulf-Puerto Rico Conference.............. 11

Argument ............................................................................................. 14

A. Argument in Response to Brief of Commonwealth of

Puerto Rico .................... 17

I. The Board Did Not Er r in Valuing Vessels at

Market Value ..................................................... 17

II. The Board Did Not Err in Finding a 7%% Rate

of Return to Be Reasonable............................... 22

II I. The Board Did Not Allow Excessive Depreciation

Charges ............................................................... 25

B. Argument in Response to Brief of United States Atlantic

Gulf-Puerto Rico Conference............................................ 33

I. The Conference’s Petition Should Be Dismissed f or Want of Jurisd iction ....................... 33

II. The Board Did Not Err in Considering Bull as

the “Ratemaking Carrier” .................................. 38

II I. The Board Properly Excluded from Rate Base

the Terminal Properties Used, But Not Owned, 

by the C arr ie rs ................................................... 42

IV. The Board’s Allowance for Working Capital Is

Fa ir and Reasonable and Consistent With the

Facts and Evidence .......................................... 47

V. The Board Correctly Ascribed to Carrier-Owned 

Terminals a Rate Base Valuation of Net Book

Value ............................................................... 49

VI. The Board Correctly Refused to Follow the Operating Ratio Approach ...................................... 51

Conclusion ............................................................................................ 53

Statement of the United State s........................................................... 55

( in )

71709 0 — 62------ 8
1 1 0 DOMESTIC OFFSHORE SHIPPIN G

TA BL E OF CA SE S

Page

Alabam a-T enn. Natural Gas Co. v. Fed er al Po we r Comm ission, 203 

F.2d 404 (195 3) ...................................................................................... 4S

Alask a Ra te Investi gatio n, 1 U.S .S.B. 1 (1 919).................................... 43, 51

Alaskan Ra tes , 2 U.S.M.C. 558 (1 941)..................................................... 16 ,51

Alaskan Ra tes , 2 U.S.M.C. 639 (1 942)..................................................... 48

Am erican Tel. <& Tel. Co. v. United State s, 299 U.S. 232 (1936) . . . 27

Ba lti more, C & A Ry. Co., 31 Val. Rep. 505 (1 930)........................... 44

City o f Detroit, Michigan v. F.P.C., 97 App. D.C. 260, 230 F.2d

810 (195 5) ................................................................................................ 53

F. P.C . v. H op e Natural Gas Co., 320 U.S. 591 (1944),

17, 18 ,1 9, 21, 23, 24, 29, 33, 55

Fr oz en Foo d Ex pr ess v. United States, 351 U.S . 40 (1 956)............... 35

General In creases in Alask an Rates, 5 F.M .B. 486 (1 958). .. 38, 42, 48, 51 

General Increase in Ha wa iia n Rates, 5 F.M .B. 347 (1 957). . 22 ,3 8, 48 ,5 1 

Georg ia Pr op ertie s Co. v. Henselee, 138 F. Supp. 587 (M.D. Tenn.

1955) ........................................................................................................... 26

I.C .C. v. New Yo rk N.H. & H.R. Co., 287 U.S. 178 (1 932)............... 45

In terstate Natural Gas v. F.P.C., 156 F.2d 949 (194 9), Affd. 331

U.S. 682 (1946) ........................................................................................ 37 ,38

Ka na wh a Gas & Utilities Co. v. Comm issioner o f I nt. Rev., 214 F.2d

685 (C.A. 5, 1954).................................................................................... 27

Kimb ell-D iam ond Milling Co. v. Comm ission er, 187 F. 2d 718

(C.A. 5, 1951) . Cert. den. 342 U.S. 827 (1 951)........................... 27

Lind heim er v. Illinois Bell Te lep hone Co., 292 U.S. 151 (1934) . . 37

Manufa ctu rers Ry. Co. v. United States, 246 U.S. 457 (1 918)........... 44

Min nesota Ra te Cases, 230 U.S. 352 (1 913)........................................ 45

Middle West General In creases, 48 M.C.C. 541 (1 948)....................... 52

Missouri ex rel. South western Be ll Te lep hone Co. v. P.S.C ., 262

U.S. 276 (1923) ........................................................................................ 19

Montan a-D ako ta Utilities Co. v. F.P.C. , 169 F.2d 392 (1948), cert.

den. 335 U.S. 853 (1948) ....................................................................... 36

New Yor k Centr al R.R . Co. et al., 27 Val. Rep. 1 (1 929)................... 44

New Yo rk, N.H. & H.R. Co., 30 Val. Rep. 1 (192 9), Affd. 287

U.S. 178 (1932) ...................................................................................... 46

Pa cific F ar Ea st Line s v. Fed er al Maritime Boa rd , 107 U.S. App.

D.C. 155, 275 F.2d 184, 187, cert. den. 363 U.S. 82 7....................... 55

Ra tes o f In ter-Island Steam Navigation Co. Ltd., 2 U.S.M C 253

(194 0) ......................................................................................................... 

5 1 Ro chester Tel. Corp. v. U.S., 307 U.S. 125 (1 939)............................... 34

Se cr etar y o f Ag riculture v. The United St ates, 347 U.S. 645, 654 55

Sun Oil Co. v. F. P.C ., 256 F.2d 233 (1 958)............................................ 37

United States v. Lo s An geles <£ S.L.R. Co., 273 U.S. 299 (1927 ) 34

United States v. St or er Br oadcastin g Co., 351 U.S. 192 (1956) 35

IV
DOMESTIC OFFSHORE SHIPPIN G 111

STATUTES

Page

Intercoas tal Shipp ing Act, 1933 (46 U.S.C. § 843-848).................... 2,1 4

Int ern al Revenue Code, 1954, Section 103 1(a) (26 U.S.C.

§ 1 031(a)) ............................................................................................. 32

Int ersta te Commerce Act, Section 19 (a) (49 U.S.C. § 1 9 (a )).......... 43

Jud icial Review Act, 1950 (5 U.S.C. § 1031 et se q.).......................... 1

Merchant Marine Act, 1936 (46 U.S.C. 1101 et se q. ):

Sec. 607(a ) (46 U.S.C. §11 7 7 (a )) ............................................... 47

Sec. 607(c) (46 U.S.C. § 1 177 (c )) ............................................... 24

Shipping Act, 1916:

Section 15 (46 U.S.C. § 8 14 )........................................................... 15

Section 18 (46 U.S.C. § 8 17 )........................................................... 2

MIS CELLANEOUS

Fed eral Maritime Boa rd General Order 31, Lim itations 3 and 4,

46 C.F.R. Sec. 286.3(2) (1) ................................................................ 4,5, 47

I.T. 2615, XI-1 Cum. Bull, 112 (1 93 2) ................................................... 32

v

I n T he

W tte b St ates Court of app eals

F or th e Distr ict of Columbia Circuit

No. 15,846

Comm onw ealth of P uerto R ico, pet itioner

v.

U nited States of America and F ederal Marit ime Board, 

respondents

No. 15,847

Unite d States Atlan tic & Gul f-P uerto Rico Confer ence, 

B ull-I nsul ar L in e, I nc., Alcoa Steam ship Company, 

I nc., L yre s Bros. Steam ship Co., I nc., and R ichard

K insella, pet itio ner s

V.

U nited States of America and F ederal Marit ime Board, 

RESPONDENTS

BR IEF OF RE SPON DE NT FEDERA L MARITIME BOAR D

AND STA TEME NT OF RE SPON DE NT UNITE D STA TES

OF AMERICA

JUR ISDICTION AL STA TEMENT

The jurisd iction of this Court is based on the Judic ial 

Review Act of December 29,1950 (64 Stat. 1129, as amended, 

5 U.S.C., Section 1031, et seq.).

(1)

113
1 1 4 DOMESTIC OFFSHORE SHIPPIN G

STATEMENT OF THE CASE

A. Statut or y Background

The proceeding arises out of petitions by the Commonwea lth of Puert o Rico (Commonwealth) and by the United 

States Atlantic & Gulf-Puerto Conference, et al. (Co nferenc e), 1 2 for review of an ord er of the Fe de ral Maritime 

Board entered after an inve stigatio n held by the Board 

pu rsua nt to Section 18 of the Shipping Act, 1916 (39 Sta t. 

735, as amended, 46 U.S.C. Section 817), and Section 3 

of the Int erc oasta l Shipping Act, 1933 (47 Stat. 1426, as 

amended, 46 U.S.C. Section 845), wherein the Board found 

cer tain rat e increase s of the Conference to be just and 

reasonable. The increase s applied to rates governing the 

common car riage of ocean-borne carg o between United 

State s Atlantic and Gulf po rts and po rts in Pu erto Rico.

On December 4, 1956, the Conference filed with the Board 

tar iffs increasing the existin g rates by 15 percent. Ex ­

ercisin g the powers vested in it by the 1916 and 1933 Acts, 

the Board ente red an ord er, Ja nu ar y 4, 1957, institut ing 

an investigation into the lawfulness and reas onablen ess 

of these increases. The Commonwealth moved for leave, 

and was permitted , to inte rvene in the proceedin g.

He arings were held befo re a hearing examiner of the 

Board in April, 1957. However, pr ior to issuance of an 

ini tial decision by the Examiner, the Conference, on Augu st 14, 1957, filed a fu rthe r general rate increase of 12 

perce nt to become effective on September 14, 1957. The 

Board suspende d the 12 percen t rate increase for fou r 

months, as authorized by Section 3, Inter coast al Shippin g 

Act, 1933 (46 U.S.C. §84 5), thus postponing the effective 

date of the increase to Ja nu ar y 15, 1958. The Bo ard’s 

inv estigation was expande d to cover this second increase, 

and fu rthe r hea rings were held in October, 1957. An initial decision was issued by the hea ring exam iner, and ex1

 Joined with the Conference as petitioners are its individual 

steamship line members and its secretary.

2
DOMESTIC OFFSHORE SHI PPING 115

ceptions thereto were filed with the Board. One of the 

principal issues raised in the exceptions was whether the 

examiner had erred in not requiring the carriers to produce books and records to substantiate certain financial 

statements which they had offered in evidence. On Jui.3 

13, 1958, the Board remanded the proceedings to th e‘examiner for further hearings, with a direction to the carriers to produce substantiating records for all financial 

exhibits submitted at the previous hearing. Following 

such furth er hearings, in which the carriers produced 

and/or made their underlying records available to all parties for inspection and copying, the examiner issued an 

initial decision on September 10, 1959 (J.A. 54). In the 

initial decision, the examiner found both the 15 and the 12 

percent rate increases to be just and reasonable.

Exceptions were filed to the initial decision, and oral 

argument was heard by the Board. Thereafter, the Board 

issued the Report and Order of April 28, 1960, which are 

the subject of these review proceedings.

B. The Board’s Findings

In its Report and Order of April 28, 1960 (J.A. 12), 

the Board announced its findings and conclusions, with 

reasons therefor, holding the rate increases to be just and 

reasonable (J.A. 53).

In arriving at its conclusions, the Board followed the 

traditional “ fair return on rate base” approach, calculating the carri er’s rate base by placing a valuation on the 

property devoted to the trade by the carriers (the rale 

base), and allowing the carriers a fair and reasonable return thereon.

The Board treated the Bull Steamship Company, one of 

the Conference members, as the “ ratemaking line” (J.A. 

49). This approach was based principally on the facts 

that Bull was by far the largest carrier in the trade, and 

that in its capital investment, revenues, and expenses, 

Bull was fairly representative of all the lines in the trade 

(J.A. 49).

3
116 DOMESTIC OFFSHORE SHI PPI NG

The Board’s findings and conclusions, and its reasoning in support thereof, may be summarized as follows: 

1. Valuation and Rate Base

In determining the rate base, the Board followed the 

principle that the carriers are entitled to a fair return on 

the reasonable value of the property at the time it is being 

used for the public (J.A. 34). In valuing the car riers’ 

vessels, the Board rejected such approaches as original 

book cost depreciated (suggested by the Commonwealth) 

and reproduction values (urged by the carriers), and instead, used as a basis the domestic market values of the 

vessels for the period under consideration. These market 

values were averaged out so as to eliminate fairly wide 

fluctuations occasioned early in the period by the Suez 

crisis and later in the period by a depression in the shipping industry (J.A. 37-38).

In determining the value of terminals, the Board distinguished between those owned by the carriers and those 

used-but-not-owned by the carriers. For the used-but-notowned terminals, the Board did not include their value 

in the rate base for the reason that the carriers are not 

devoting their own capital to the public service. However, the Board did allow7

 the carriers to charge against 

revenues, as operating expense, the rental and other expenses incurred by the carriers by reason of their use of 

such facilities (J.A. 42). For the carrier-owned terminals, the Board, like the examiner, allowed the carriers to 

include the net book value of those properties in the rate 

base (J.A. 42), but it rejected the carrie rs’ contention 

that such terminals should be valued at what a willing 

seller and willing buyer would settle on as a fair price 

for the property (J.A. 131).

The Board found that a fair and reasonable allowance 

for working capital as an element of the rate base would 

be an amount equal to the total of vessel operating expenses for one round voyage for each vessel in the carrier ’s fleet. This formula is the same as that set up in 

its General Order 31, Limitation 4, by which “ capital neces4
DOMESTIC OFFSHORE SHIPPIN G 117

sarily employed” is calculated for carriers operating under 

subsidy contract in the foreign trades (46 C.F.R. 286.3(a)) 

(J.A. 40).

2. Expenses

The only expense item in dispute in this proceeding is 

depreciation expense. As to this expense item, the Board 

found that in December, 1956, American Coal Shipping, 

Inc., through a subsidiary (Olympia Corporation) purchased substantially all of the stock of A. H. Bull Steamship Co. of New Jersey. In Janu ary, 1956, in substantially 

complete liquidation of A. H. Bull, New Jersey, its assets 

were transferred to the books of Olympia Corporation, since 

renamed A. H. Bull Company of Delaware, and the vessels were entered on the latte r’s books at an acquisition 

cost of $12.9 millions, the latter figure representing about 

70 percent of the appraised value of the vessels (J.A. 19). 

The same vessels had, at the time of the transfer, a book 

value of $5.2 million on the books of the predecessor corporation. The purchase of Bull by Olympia was found on 

undisputed evidence to be an arms-length transaction between unrelated interests. The Board concluded that in 

the light of the bona tides of the transaction and the reasonableness of the purchase price, as compared with the 

substantially higher market values for vessels, the acquisition cost of the vessels as entered on Bull of Delaware’s 

books constituted a proper depreciation base (J.A. 33).

The carriers depreciate their vessels, on the basis of a 

20-year service life, from acquisition cost down to a residual scrap value amounting to 2.5 percent of acquisition 

cost (J.A. 30). In the case of Bull’s vessels, the residual 

value was thus set at about $55,000 per vessel. The Board 

found that such depreciation practice is recognized for tax 

purposes, and is in conformity with the Board’s regulations; and it approved this method of depreciating the vessel assets. The Board rejected the Commonwealth’s contention that residual value must be based on predicted 

market values at the end of the vessel’s service life, on 

the ground that such a method would substitute speculation for certainty (J.A. 31-32).

5
1 1 8 DOMESTIC OFFSHORE SHIPPIN G

3. Dominant Carrier Theory

Afte r thoroughly examining all the evidence relating to 

traffic and operations of the four carriers in the trade, the 

Board determined that Bull is by far the dominant carrier 

in the trade. 2

 It makes three sailings weekly, as compared 

with only weekly services by each of the other three carriers (J.A. 17 & 20). Unlike any of the other three carriers, 

Bull is not engaged in substantial vessel operations in 

other trades (J.A. 17 & 20). And with the ships used in the 

Puerto Rico trade, Bull calls at no foreign ports on two 

of its three weekly sailings, while on the third, it calls only 

at one foreign port and handles a proportionately small 

volume of foreign traffic (J.A. 17). Two of the other 

three carriers carry substantial volumes of foreign cargo, 

and call at a number of foreign ports, with the same ships 

which serve Puerto Rico (J.A. 20). Consequently, the 

Board followed the theory, also followed in its prior decisions, that the dominant carrier in a noncontiguous domestic trade may, on facts such as these, be taken as the 

ratemaking line. The issues in the proceeding were determined, therefore, by treating Bull as the ratemaking 

carrier (J.A. 49).

4. Rate of Return

The Board carefully projected an estimate of operating 

results for the year 1958, based on actual operating results of record for the first half of 1958. 1958 was the

first year in which the carriers operated under the increased rates. The Board found that Bull, with a rate 

base of $11.5 millions, would earn before taxes a net profit 

of $580,293 for 1958 with the increased rates in effect.

2

 T he gross revenu es for th e first half 1958 were as follows:

Bu ll ................................................................................. $11,706,918

Alc oa ............................................................................... 4,215,049

Ly ke s ............................................................................... 1,940,279

W aterm an and W aterm an P.R ................................... 4,121,323

(J.A . 48)

6
DOMESTIC OFFSHORE SHIPPIN G 119

Such earnings are equivalent to a return of 5.0 percent, 

before taxes, on the rate base. The Board found that a 

rate of return of not in excess of 7.5 percent after income 

taxes would be fair and reasonable (J.A. 49). Inasmuch 

as the combined 15 percent and 12 percent increases thus 

resulted in a return of not more than 5.0 percent before 

income taxes to Bull, the ratemaking carrier, the Board 

reached the ultimate conclusion that the increased rates 

were just and reasonable (J.A. 50).

5. Operating Ratio as Measure of Reasonableness

The Board, finding that the rate increases under investigation were just and reasonable under the fair-return-onfair value standard adopted by the Board and its predecessors in similar investigations, found no reason to depart 

from that standard. Consequently, the Board rejected 

the contention of the Conference that the operating ratio 

theory, rather than the rate base theory, be used as a 

method of determining the reasonableness of rates (J. A. 50). 

C. The Instant Petitions

The instant petitions, filed separately by the Commonwealth and by the Conference although consolidated for 

argument, seek review of the order of the Federal Maritime Board finding the increased freight rates in the United 

States Atlantic and Gulf Coast to Puerto Rico to be just 

and reasonable. On the one hand, the Commonwealth challenges (a) the vessel valuations, (b) the rate of return, 

and (c) the depreciation expense allowed by the Board as 

unreasonably oppressive on the shippers, and as excessively 

liberal to the carriers. On the other hand, the Conference 

challenges as unreasonably oppressive on the carriers and 

excessively liberal to the ratepayers (a) the B oard’s valuation of terminals, (b) its exclusion from the carriers ’ rate 

base of certain terminals which are used, but not owned, 

by the carriers, and (c) the amount of working capital 

allowed by the Board. The Conference, in addition, attacks the Board’s (d) use of the “ ratemaking line” ap7
120 DOMESTIC OFFSHORE SHIP PING

proach, and (e) the Board’s refusal to use the operatingratio formula rather than the fair-return-on-rate-base 

formula in determining a just and reasonable rate level.

SUMMARY OF ARGU MENT

There are three basic considerations which closely affect 

any exercise by the Board of its power to prescribe just 

and reasonable rates under the Intercoastal Shipping Act, 

1933.

The first of these considerations is the fact that the Board 

cannot control entry into the regulated field, for there is 

no statutory requirement of a license or certificate of public convenience and necessity as a prerequisite to operation 

in the domestic off-shore trades.

Secondly, there is no limitation upon abandonment of 

service. Any carrier in the domestic off-shore trade is 

entirely free to decrease the number or scope of its sailings or to abandon service altogether.

Thirdly, the capital equipment employed in the regulated 

off-shore trades is mobile and immediately useable in unregulated business. The vessels employed in the regulated 

trade can be shifted readily into the foreign trades where 

the level of rates is unregulated.

These three factors distinguish the regulated off-shore 

domestic trades from all other businesses in which rates are 

regulated. Such other businesses where there are limitations on inauguration and abandonment of service, and 

where capital equipment is not adaptable to unregulated 

use, give rise to regulatory principles which are not always 

applicable to the regulatory problems confronting the Board 

with respect to rates in the domestic off-shore trade.

A. Summary of Argument in Response to Brie f of Commonwealth of Puerto Rico

I. The Board was correct in valuing vessels at current 

market value for rate base purposes. If the Board were 

to limit vessel valuation to net book cost depreciated, as 

urged by the Commonwealth, carriers would feel a strong 

inducement in inflationary times such as these to take their

8
DOMESTIC OFFSHORE SHIP PING 121

ships out of the regulated trade and place them into foreign trades.

The basic reason for using net book value in determining 

a rate base lies in the great difficulty encountered in determining an exchange value for the capital equipment 

used by most types of utilities. This consideration does 

not apply in the case of ships, for ships are commonly 

bought and sold in the market, and they have a readily 

ascertainable exchange value.

Another reason for adhering to net book value for rate 

base purposes is the fact that the capitalization of net 

earnings furnishes an unrealistic yardstick. This is because future net earnings depend on the rates allowed by 

the regulatory body. In the case of ships, however, current market value is in fact a capitalization of earnings 

realizable in the unregulated trades. In other words, vessels have a value independent of what the Board allows 

for rate base purposes, since they are immediately available for use in unregulated trades.

In view of these considerations, the use of market value 

by the Board was reasonable and proper. It resulted in 

a valuation very substantially lower than that argued for 

by the carriers who sought to introduce reproduction cost 

as a relevant factor. The Boa rd’s use of market value 

has the merit of insuring that carriers will not abandon 

the domestic service for more profitable ventures elsewhere.

II. The Board did not err in finding a 7^ % rate of return to be reasonable. Contrary to the Commonwealth’s 

contention, Bull should not have been restricted to earnings 

which would merely permit it to pay the interest on its 

debt capital and to realize a reasonable return on its equity 

capital. Since the company is to an overwhelming extent 

debt-financed, the approach urged by the Commonwealth 

would result in an unreasonably small return on the investment risked in the trade. Whether the capital is borrowed 

or owned, its value remains the same and the public benefits to the same degree.

In any case, the Board simply engaged in obiter dictum

9
122 DOMESTIC OFFSHORE SHIPPIN G

in establishing a 7^2% rate of return as the maximum allowable rate. In fact, as the Board expressly found, Bull, 

the ratemaking carrier, earned a return of only 5.0% on 

its rate base during the first year of operation under the 

increased rates. With allowance for income taxes, this rate 

of return is reduced to roughly 2.5%. This can scarcely 

be condemned as an excessive rate of return.

The rate of return allowed by the Board compares reasonably with the returns allowed in comparable trades 

serving Alaska and Hawaii. It is lower than the 10% 

rate of return allowed to subsidized carriers in foreign 

commerce before recapture of subsidy. It is not out of 

line even with returns earned by other regulated utilities 

which have the benefit of a franchise or other protected 

monopoly. The rate of return allowed by the Board is very 

substantially below the rate of return contended for by the 

carriers.

III. The Board did not allow excessive depreciation 

charges. In this connection, the Commonwealth argues that 

the Board erred in allowing Bull to use as a vessel acquisition cost a cost higher than the original cost to a predecessor company. It further argues that the residual values 

for ships have been fixed too low, with the consequence 

that annual depreciation expense is too high.

With respect to the acquisition cost allowed for Bull’s 

vessels, the Board found on undisputed evidence that the 

present owners of the Bull Steamship Company purchased 

that company from its predecessors in a bona fide, armslength transaction. The purchase price was prudent and, 

as ratably apportioned to the vessels, resulted in an acquisition cost for the vessels considerably below their then 

market value. It is settled that where a utility purchases 

capital equipment at a cost higher than the seller’s book 

cost, the excess may properly be amortized over the life 

of the property if such excess is a “ true increment of 

value.’’ In the instant case, the higher acquisition cost 

reflected a true increment of value since ships had in fact 

appreciated in value. Since the acquisition cost of the 

ships was the result of a bona fide, arms-length purchase, 

10
DOMESTIC OFFSHORE SHIPPING 123

and was manifestly within the range of prudent investment, 

the Board was correct in allowing Bull to claim depreciation on the basis of such cost.

With respect to residual value, the Board allowed the 

carriers to charge annual depreciation against a residual 

value equal to estimated scrap value. The Commonwealth 

argues that the residual value is unrealistically low, and 

that at the end of their service lives, the ships are likely 

to be worth much more. The Commonwealth’s argument 

is based entirely on conjecture. It is impossible to know 

whether after the approximately seven remaining years 

of their service life, the ships will be worth more or less 

than the residual value ascribed to them on the carriers ’ 

books.

If it should turn out that the ships have a value in excess of the book residual value, the carriers are required 

under the tax laws to apply such excess against the tax 

base of any replacement vessel in the purchase of which 

the proceeds of the prior vessel are used. Thus, even if 

there is an excess, such excess does not represent a windfall to the carrier, but instead, reduces the depreciation 

expense borne by ratepayers during the life of the replacement vessel.

B. Summary of Argument in Response to Brief of United

States Atlantic & Gulf-Puerto Rico Conference

I. The Conference’s petition should be dismissed for want 

of jurisdiction. The Board’s decision finds the Conference’s 

rate increases to be ju st and reasonable. It consequently 

does not adversely affect the Conference, nor does it have 

any present impact upon the Conference. All that the 

Conference can complain about is the possible application 

of statements in the Boa rd’s repo rt in a way* that may 

adversely affect petitioners in some future rate case if 

future contingencies should so eventuate. This position 

is wholly conjectural and fails to present at this time any 

case or controversy for decision. Moreover, the Conference 

can not at one and the same time both support the Boa rd’s 

decision and attack it.

11
124 DOMESTIC OFFSHORE SHIPPING

II. The Board did not e rr in considering Bull as the ‘ ‘ ratemaking ca rrie r.” The “ ratemaking car ri er” approach 

followed in the insta nt case is consistent with Board prec edent. It co rrec tly recognizes tha t Bull is by f ar the largest 

ca rrie r in the trade, and that its service is almost entirely 

free of any foreign admixture. Unlike the oth er carriers 

in the trade, Bu ll’s service presents no serious problems 

of cost or asset allocation.

In arg uin g again st the “ ratemaking ca rr ie r” approac h, 

the Conference wishes to introduce Alcoa and Lykes into 

the ratem aki ng pic ture in a way th at acco rds them equal 

weight with Bull and Waterm an. Since Alcoa, and to a 

lesser exten t, Lykes, ope rate in an atypical fashion, the ir 

introd uction into the rate making picture would ma terially 

di stor t the resu lts.

The use of Bull as the “ ratemaki ng ca rr ie r” brings 

about an end result closely similar to that which would 

be reached if a composite of Bull, Wa terma n, and Lykes 

were used. Since Alcoa, by reason of its high ly pecu liar 

opera tions is not entitled in any event to consideration 

in the ratemaking process, the Boa rd ’s use of the “ ratemak ing ca rr ie r” appro ach did not adv ersely affect the 

Conference.

II I. The Board did not er r in excluding from the carri ers ’ rat e base certain termin al prop ert ies used but not 

owned by the carriers . The exclusion of such non-owned 

pr op erty is consistent with Board prec edent. ' A con trary 

appro ach would per mit the carri ers to ear n a ret urn on 

prop erty which they have never risked or put into the 

public service.

This is especially tru e in the insta nt case. The term inal 

used by Bull at Philad elphia is ren ted to Bull by the 

Municipa l Po rt Au tho rity at a favorable rental as a pro ­

motiona l device to increas e traffic throug h the Po rt of 

Philad elphia. The terminal used by Bull at Baltimore is 

owned by an I.C.C.-regulated railroad, which permits Bull 

to use it free of charge. Thus, both the Phi ladelphia and 

Baltim ore terminal s have alread y been dedicated to and 

paid for by the public, and it would be an injustice to 

12
DOMESTIC OFFSHORE SHIPPING 125

require the public to pay again for such property. Such 

payment would give Bull an unearned windfall. With 

respect to the terminal used by Bull at New York, the 

Board was satisfied that the rental payment was prudent, 

and the inclusion of such payment as an operating expense 

made it unnecessary to include the asset value as an 

element of Bull’s rate base. The Board thus treated all 

used-but-not-owned terminals consistently.

IV. The Board did not err in allowing the carriers an 

insufficient working capital. As computed by the Board, 

the working capital allowed the carriers was equivalent 

to the expense of one complete round voyage for each of 

the ships in the service. This sum is ample to meet all 

working capital needs of the carriers. Under the terms 

of the carriers ’ tariff, freight in the Puerto Rico trade is 

prepaid and consequently the carriers, unless they depart 

from their own tariff, have in hand the voyage’s revenues 

before the voyage begins. The Conference has failed to 

show that it needs any allowance greater than that fixed 

by the Board.

V. The Board did not err in ascribing to carrier-owned 

terminals a rate base valuation of net book value. The 

carriers contend that since the Board allowed market 

value for ships, it should have done the same for carrier-owned terminals. The record, however, contained no 

evidence of market value for terminals. All that was 

available was an appraised value resulting from the consideration of a number of factors, including original cost, 

reproduction cost, present and future revenues, etc. There 

would have been no consistency if the Board used this appraised value for terminals and true market value for 

ships.

Moreover, the use of any “ market value” for terminals 

introduces great uncertainty, since there is no active exchange of terminal properties. The Board was correct in 

using net book value for carrier-owned terminals.

VI. The Board did not err in rejecting the operating 

ratio approach. It has never followed such approach in 

any precedent case, although it has often been urged to

71709 O—<62------9 13
126 DOMESTIC OFFSHORE SHIPPING

do so. The natur e of the steamship indu str y is such as 

to make the fair -return-o n-fair-va lue app roa ch reliable. 

Since it is the method tra dition ally used, the Board would 

need some im porta nt reason for departing from it. The 

record discloses no such reason. Moreover, the Con ference cannot claim that it is prejudiced by the Boa rd ’s 

ref usal to use the opera ting ratio apro ach, since the Board 

found the rate increase s to be just and reasonab le on the 

basis of the app roach which it did follow.

ARGUMENT

In empowerin g the Board to prescribe “ just and reason abl e” rat es, the Int erc oasta l Shi ppi ng Act, 1933 (46 

U.S.C. Sections 843-848), employs term inology which resembles that employed in other rate- reg ula tor y statutes. 

But this resem blance should not be perm itted to obscure 

some very im porta nt differences between the sta tutory 

scheme entruste d to the Bo ard’s jurisd iction and those 

entru ste d to other rat e-regula tin g agencies. These differences are so basic that they cast grave doubt upon argu ­

men ts prem ised upon analogies between the Board and 

such other agencies as the I.C.C., C.A.B., F.P.C., and sta te 

public utility commissions.

The first of these differences lies in the fac t tha t, unlike 

oth er rat e-regula tin g bodies, the Bo ard has no power to 

control entry into the regulated field of business.3

 It cannot gran t or withhold a certificate of public convenience 

and necessity. Such a certificate or some othe r type of 

license is a pre req uis ite to engagin g in all other rate - 

regulated businesses.

Because there is no licensing res tric tion in the domestic

3

 Since enactment in 1940 of Part III of the Interstate Commerce 

Act, which applies to common carriers by water in commerce between points in one state and points in another state, the Int ercoastal Shipping Act applies only to trade between points in the 

48 contiguous states, on the one hand, and points in the outlying 

states and territories, on the other. The most important areas of 

application of the Intercoastal Shipping Act are the domestic trades 

to and from Alaska, Hawaii, Puerto Rico, Guam, and the Virgin 

Islands.

14
DOMESTIC OFFSHORE SHIPPING 127

off-shore trades, carriers in those trades do not enjoy a 

protected monopoly. It is true that such carriers may, 

as they do in the trade under consideration, join together 

into conferences for the purpose of fixing rates in concert, 

as authorized by Section 15 of the Shipping Act, 1916 

(46 U.S.C. Section 814). Such conferences, however, are 

purely voluntary, and regardless of their existence, new 

carriers are free to enter into the regulated service without any restriction whatsoever. Thus, while carriers in 

the domestic off-shore trades are subjected to rate regulation, they do not have the countervailing benefit of being 

protected against excessive competition.

A second difference between the regulatory scheme involved here and those applicable in other public utility 

fields is the absence of any governmental control over 

abandonment of service. Any carrier in the domestic offshore trade, although regulated as to its rate level, is unregulated as to whether and to what degree it will continue to operate in the regulated trade. Any such carrier 

can at will add to o r subtract from its number of sailings 

or ports served; or it may abandon its service altogether 

if it wishes to.

A third difference between this regulated trade and most 

others lies in the mobility and adaptability of the capital 

equipment. The vessels used in domestic off-shore trade 

are equally capable of use in unregulated business. In 

this respect, the carrie rs’ capital equipment is different 

from pipeline, communications, and power equipment, since 

these are immobile and unadaptable for use in any unregulated business. Railroad equipment can similarly be used 

only in regulated business. Even aircraft, although they 

are mobile, cannot be transferred readily into unregulated 

services, for there are only a limited number of unregulated activities in which airc raft can be used. The only 

other regulated business in which the capital equipment 

is, like ships, readily adaptable to unregulated activity is 

trucking. But motor carriers are given some protection 

against excessive competition by the regulatory requirement that new carriers must first obtain a certificate of

15
128 DOMESTIC OFFSHORE SHIPPING

public convenience and necessity. It is significant of the 

ad aptab ility of trucks to unregulate d use that the I.C.C. 

fixes truck rat es on an ope rating rat io basis, rath er than 

on a fair-retu rn-on-rate-bas e formula. Und er the op era ting rat io approac h, carriers are allowed to earn a net 

pro fit which is measured in term s of the relatio nsh ip between ope rating revenues and opera ting expenses, and not 

in terms of the rela tion ship between net profit and cap ital 

investment.

The foreg oing differences closely affect the Bo ard’s r atemak ing powers. These differences have long been recognized by the Board. In Ala skan Bates, 2 U.S.M.C. 558, 572 

(1941), the Bo ard’s prede cess or called attentio n to the fact 

th a t:

“ . . . question arises whe ther such risks wa rra nt a 

high er rat e of return than would be allowed a land 

utility. Such utilities ope rate und er public fran chise 

or other protection and are, in effect, monopolies 

within the are as they serve. Ra ilroads also are af ­

forded protection again st undue competition thro ugh 

the issuance of certificates of public convenience and 

necessity. There is no such pro tection in the Alaskan 

trad e.”

These considerations are such as to give a pre sen t relevance to the word s of Jus tice Jackson:

“ We are confronted with regulation of a unique type 

of enterprise which I think requires considered reje ction of much conventional utility doctrine and adop tion 

of concepts of ‘just and rea son able’ ra tes and prac tices 

and of the ‘public in tere st’ that will take account of 

the peculia rities of the busin ess.

• • » • •

“ To regulate such an enterpri se by und iscr iminatingly 

tra nsplan tin g any body of rat e doctrine conceived and 

ada pte d to the ordin ary utility business can serve 

the ‘public in te re st ’ as the Na tural Gas Act requires, 

16
DOMESTIC OFFSHORE SHIPPING 129

if at all, only by accident.” Dissenting opinion of 

Justice Jackson, Federal Poiver Commission v. Hope

Natural Gas Co., 320 U.S. 591, 646, 649-650 (1944).

A. Argument in Response to Brief of Commonwealth of

Puerto Rico.

The Commonwealth attacks three aspects of the Boa rd’s 

order: The valuation of ships at market value; the rate 

of return allowed by the Board; and the amount of vessel 

depreciation expense recognized by the Board. The Board 

is said by the Commonwealth to have been too liberal with 

the carriers with respect to each of these elements of the 

Board’s order. In so contending, the Commonwealth is 

in error.

I. The Board Did Not Err in Valuing Vessels at Market Value.

The Board rejected the carriers ’ contention that the vessels should be valued at a weighted average of original and 

reproduction costs depreciated, weighting the former at 30 

percent and the latter at 70 percent.4

 On this theory, Bull’s 

vessels would have been assigned a value of $12,048,584 

(Conference’s Brief on Further Hearing, p. 46, App. A).

Instead, the Board held that reproduction cost should 

not be a factor in vessel valuation, because “ the shipping 

public should not be forced to pay rates based even in part 

on the conjectural value of some phantom vessel which 

may never serve it ” (J.A. 38) (Bd. Rep., p. 25). Accordingly, the Board refused to “ assume for rate-making purposes that a carrier has reproduced its vessels” (Ibid.). Instead, the Board found that the carriers are entitled to 

“ a fair return on the reasonable value of the property at 

the time it is being used for the public” (Ibid.). On this 

theory, the Board fixed Bull’s vessel values at $7,620,900, 

i.e., the “ value of the vessels on the domestic market at 

or about the time the rate increase is requested, with ad4

 The Examiner recommended that Bull’s vessels be valued at 

$10,883,318, the straight arithm etical average of original and reproduction costs depreciated (J.A. 84-87). (In. Dec., pp. 25, 29). 

: 17 i
130 DOME8TIC OFFSHORE SHIPPIN G

jus tments to eliminate short-te rm peaks in vessel value s” 

(Ib id.).

The Commonwealth contends that the Board should have 

permitte d Bull only to earn a return on the depreciate d 

vessel book cost of $4,875,995. The Commonwealth’s “ basic 

objection is one of fundam enta l principle” (Comm. Br., 

p. 14), i.e., that the Board erred in using marke t value at 

all, rather than orig inal book cost depreciated . Accordingly, we do not herein reargue the accuracy of the marke t 

valu e as determined by the Board. Th at value was testified to by a competent, wholly dis intere ste d exp ert witness 

from the Maritime Ad mi nistr ation’s Office of Ship Constru ctio n, whose resp onsibility it is to maintain current information on the market values of vessels of all types. 

We discuss here only the prin ciple of usin g marke t value 

as the pro per form ula for valu ing vessels in the regulated 

domestic off-shore trades .

In reje ctin g the extremes suggested by the Conference 

and the Commonwealth, and ado pting ma rke t value, the 

Board correctly settled on a valuation th at was fa ir and 

reasonable. Under the controlling case law—of which 

Federal Pow er Com mission v. Hope Natural Gas Co., 320 

U.S. 591 (1944), is the basic exp ress ion—the ratemaking 

agency is “ not bound to the use of any such form ula or 

combination of form ulae in determ ining ra te s. ” 320 U.S. 

at p. 602. “ . . . the result reached, not the meth od employed, . . . is controlling ” (Ib id.). “ If the total effect 

of the rate order cannot be said to be unjus t or unrea son ­

able, judicial inq uiry und er the Act is at an en d” (Ib id.). 

• As pointed o ut in the introd uctory passages of this argu ­

ment, the vessels employed by Bull in t his tra de a re useable 

in the unr egu lated fore ign trades, and available for such 

use with out limitation.

Fo r this reason, ma rke t value is the prop er mea sure of 

valuation of ships 5

 for ratemak ing. So low a value as

5

 Fixed properties, such as terminals, used by carriers in their 

regulated operations call for a different method of valuation. In 

recognition of this fact, the Board valued the terminal properties

! 18 I
DOMESTIC OFFSHORE SHI PPI NG 131

book cost depreciated—at a time when ships have, in general, greatly appreciated in value during the years since 

their acquisition—would be unrealistic. It would tend to 

discourage, rather than foster, regular and dependable 

service in the regulated domestic trades. In periods when 

rates are firm in foreign commerce—i.e., when vessel m arket values are high—carriers in the regulated domestic 

off-shore trades will be strongly induced to do what they 

are always able to do—to put their vessels into more 

profitable foreign service.

In contending that ships should be held to their net 

book value and no more, the Commonwealth places great 

reliance on the “ classic dissent” of Justice Brandeis in 

Missouri ex rel. Southwestern Bell Tel. Co. v. P.S.C., 262 

U.S. 276, 289 (1923). One of the principal bases for Justice 

Brandeis’ disagreement with certain valuation theories 

theretofore followed was the fact that “ It is impossible 

to find an exchange value for a utility, since utilities, unlike merchandise or land, are not commonly bought and 

sold in the market.” 262 U.S. at p. 292. This is pertinent 

and correct in reference to all other utilities; but is not 

pertinent and correct in reference to common carriers by 

water. Ships are commonly bought and sold in the market, 

and their exchange value is at least as easily ascertainable 

as that of land.

A further basis for the Brandeis rationale lies in the 

fact that “ the present value of a utility [cannot] be determined by capitalizing its net earnings, since the earnings are determined, in large measure, by the rate which 

the company will be permitted to charge; and thus, the 

vicious circle would be encountered” 262 U.S. a t pp. 292-3. 

The same idea underlies the majority decision in Federal

Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 

601 (1944), where the Court reasons: “ The heart of the 

matter is that rates cannot be made to depend upon ‘fair

owned by the carriers at their net book cost, depreciated. The Conference, in its petition, asails this method of valuation of terminals 

as unfairly low (see infra, p. 54).

19
132 DOMESTIC OFFSHORE SHIPPING

value’ when the value of the going enterprise depends on 

earnings under whatever rates may be anticipated.”

These observations have cogency in relation to “ captive” 

utilities, in which capital is committed more or less irrevocably to the regulated business. The capital equipment 

of such utilities can be used only in regulated enterprises, 

and can earn only what the regulatory authority will 

allow. This is not so in the case of off-shore domestic 

carriers. The carriers in the Puerto Rico trade, with only 

small operating adjustments, could withdraw their equipment and engage in foreign commerce. Bull already calls 

to a minor extent at the Dominican Republic with the 

ships used in the Puerto Rico trade; if rates in the Puerto 

Rico trade failed to reflect fairly the earning capability 

of these ships, Bull would be under considerable inducement to reduce or abandon its Puerto Rican service and 

increase its service at foreign ports in the Caribbean or 

other areas. So also Lykes, which devotes about 30 percent of its vessel days to domestic calls as against 70 

percent to foreign calls in the Caribbean. And Waterman, 

with services embracing broad trading areas in the transAtlantic and trans-Pacific trades, could readily put its 

two Puerto Rico vessels into these trades where it is 

well-established, if its management felt that the returns 

earned by these ships do not fairly reflect their earning 

capacity. No legal limitation exists to prevent or even 

hinder such a change in operations.

Thus, unlike most other utilities, where value depends 

on what earnings the regulatory authority will allow, ocean 

shipping equipment has a value independent of what the 

regulatory authority will allow. Vessel values are established, in fact, on precisely the basis that Justice Brandeis 

correctly observed to be impossible in the case of other 

utilities: their present values can be, and are, determined 

by capitalizing earnings, and thus are precisely what their 

market value is, after all. Vessel market values are a 

direct reflection of the earning capacities of vessels.

20
DOMESTIC OFFSHORE SHIPPIN G 133

When ocean rates are firm, ship market values are high, 

and when the contrary is true, vessel values drop.

As the Supreme Court held in the Hope Natural Gas

case, the ratemaking function “ involves the making of 

pragmatic adjustments” 320U.S. at p. 602. It is a necessary 

pragmatic adjustment for the Board to recognize the fkct 

that ships have a particular earning capacity, represented 

by their market value, and that this earning capacity, if 

it cannot be realized in the regulated trade, can readily 

be realized in unregulated trades.

Nor can it be argued that, by operating in a regulated 

trade, the carriers have elected to surrender temporarily 

high earning capabilities in return for long range regulatory protection against competition. Unlike other rateregulated fields, the domestic off-shore trades are open 

to the entry of any carrier without limitation. The carriers before this Court hold no certificate or license; and 

no would-be competitor needs any certificate or license to 

enter the trade in competition with them.

The principle followed by the Board was proper. The 

Commonwealth concedes, as it must, th at “ the Board might 

employ an alternative to prudent investment” (Comm. 

Br., p. 15). As the Supreme Court said in the Hope case: X

“ * * * it is the result reached not the method employed which is controlling. * * * If the total effect 

of the rate order cannot be said to be unjust and 

unreasonable, judicial inquiry under the Act is at an 

end. • * * and he who would upset the rate order 

under the Act carries the heavy burden of making 

a convincing showing that it is invalid because it is 

unjust and unreasonable in its consequences.” 320 

U.S. at page 602, 64 S. Ct. at page 287.

The “ total effect” of the Boa rd’s determination is not 

unjust or unreasonable. The use of market value for 

vessel valuation has the merit of tending to insure that 

the carriers will not abandon the domestic service for 

greener pastures elsewhere, and thus helps to preserve 

21
134 DOMESTIC OFFSHORE SHIPPING

reg ular and dependable service in the domestic tra de s? 

Moreover, the Commonwealth has not carried the “ heavy 

burden of making a convincing showing that it is invalid 

because it is un jus t and unreasonable in its consequences.’’ 

The rat es between Puert o Rico and the mainland have 

not been shown to be unduly high in relation to rates 

between the mainlan d and othe r off-shore sta tes or te rr itories, or in relatio n to rat es for any other kind of comparab le service.

II. The Board Did Not Err in Finding a 7^4% Rate of Return

To Be Reasonable.

On the theory advanced by the Commonwealth, Bull 

should be confined to no “ grea ter return tha n is requ ired 

to service the debt and pay the cost of equ ity ca pital.” 

(Comm. Br., p. 19.) Anything more, as serts the Commonwealth, would “ create a windfall to the owners.” 

(Ibid.)

In the case of Bull, a company pur cha sed in early 1957 

for $22 million, only $100,000 of the purcha se price was 

equity capital. The entire balance was debt capital, borrowed at rat es ran gin g from 4 | to 5 perc ent. The Commonwealth seems to be arguin g that as to the debt capital, 

Bull should be permitte d only to recoup the cost of tha t 

capital, i.e., the int ere st expense, and as to the equity capital, Bull should be per mitted only to recoup from the 

ratepa ye rs a fair re tu rn —let us say for the sake of argu ­

ment, 7j perc ent—as reflecting the cost of that capital. 

On the theory apparen tly advanced by the Commonwealth,

6

 The Board has had occasion in the past to concern itself with 

this question. In General Increase in Hawaiian Rates, 5 F.M.B., 

347, 356, it said.

“If the book value of Matson’s property is used as a rate 

base, the proposed tariffs may well be said to yield an unreasonably high return. Matson’s vessels were purchased at a 

time when their cost was considerably lower than they are 

at the present time. If the fleet were liquidated it would have 

twice the amount of its book value, available for other investment. Therefore, book value, as the measure of the fair value 

of the property devoted to these trades is entirely unrealistic.” 

22
DOMESTIC OFFSHORE SHIPPING 135

the owners of Bull, on what is in fac t a $22 million inv estment, should be allowed to earn no pro fit on the borrowed 

money, and an ann ual profit of 7i percen t on the $100,000 

equity, or only $7,500. Such a return rep res ents an annual 

profit of about fou r one-hundredth s of one percent on an 

inve stment of $22 million. This is a sure way to inhibit 

investment.

Wh ether the money is borrowe d or owned, the value of 

the cap ital devoted to the public service rem ains the same. 

It is the ca rr ie r’s ra te base on which a r ate of return should 

be calculated. It cannot affect the ratepa ye r if the ca rri er 

uses borrowed , rath er than owned capital. To the ra te ­

pay er, the ships and other facilities which are placed at 

his service rem ain the same, and the service afforded him 

remains as valuable, whether the ca rrier has u sed owned or 

borrowed capital. The carrier, when it borrows capital, 

assum es the liability to rep ay it. It does not receive any 

unconscionable windfall by reason of us ing borrowe d money 

rather than owned money. The cap ital com prising the 

rat e base is risked equally, wheth er it is borrowed or 

owned.

The question before the Board was “ what return should 

a ca rrier be perm itted as a fa ir compensation for pu tting 

a r ate base, of whate ver value, into the Pu erto Rico tr ad e!” 

This question the Boa rd answ ered, by finding that a re ­

turn not in excess of 7^2 percent would be a fa ir compensation for employin g such rate base in the trade. The 

Boa rd was, in effect, setting an up per limit beyond which 

it would not find a rate of return to be reaso nable.

In making this finding, the Board went somewhat fu rthe r than was nece ssary, by wTay of obiter dictum. The 

Board found that Bull, the ratem aking c arrie r, was in fac t 

earning under the increased rates a ret urn, before taxe s, 

of 5.0 percent on its rate base (J.A . 49). With allowance 

for income taxe s, this rat e of return is reduced to roug hly 

2.5 percent. It cann ot seriously be arg ued that this is an 

excessive rat e of return .

The Hope case tells us th at it is enough if the “ tot al 

effect of the rate order can not be said to be un just and

23
136 DOMESTIC OFFSHORE SHIPPIN G

un rea sonable .” 320 U.S. at p. 602. The total effect of 

the Boa rd ’s decision is to let stan d a rate str uctur e which 

re tu rn s to the ratem aki ng ca rri er the modest return of 2.5 

perce nt on its rate base, afte r taxes. It is the refore , we 

subm it, a ju st and reasonable rate order.

Even the 7 ^ percen t return which the Board fixed as a 

maximum by way of dictum “ cannot be said to be unjust 

or unrea sonable ,” in the language of the Hope case. “ It 

is not theor y but the impact of the rat e order which cou nts.” 

Ho pe, 320 U.S. at p. 602. Here the 7^2 percen t maximum 

rate of ret urn, which the Board said it would have found 

reas onable, is the same as that allowed in comparable 

trad es serv ing Alaska and Hawaii. It is lower than the 

10 pe rce nt ret urn on “ cap ital necessa rily employe d” which 

is allowed to subsidized ca rri ers in the foreign tra des befor e rec aptur e of profits (see Section 607(c), Merchant 

Marine Act, 1936, 46 U.S.C. Section 1177(c)). It is not 

out of line with returns realized at the present time even 

by public utilities which enjoy a protected monopoly by 

rea son of holding a certificate or some other form of 

fran chise.

It is also far below the rate of return contended for by 

the carriers . The ca rriers argu ed that “ in the sharply 

competitive Puert o Rica n trade 10% is a rock-bottom 

minim um.” (Co nference’s Brief on Fur th er Hearin g, p. 

50). The carri ers argued also tha t Bu ll’s rate base should 

be valu ed at $32,945,665. (J.A . 35) (Bd. Rep., p. 22).

Thu s, the Conference was asking for a perm issible retu rn for Bull after taxe s of $3,294,566 annually. The 

Board, however, found Bu ll’s rate base to be $11,491,987 

(J.A. 43) (Bd. Rep., p. 30), and thus, und er its dictum,

would have allowed an ann ual return for Bull, after taxes, 

of up to n/2 percent of this amount, or $861,898. O11 the 

rate base contended for by Bull, this ret urn would rep resen t a rat e of return of less than 3 percent. The Board 

allowed, in effect, a return less than one-third of that contended for by the carriers .

There is, in summary, no merit to the Commonwealth’s 

claim. If the return were limited, as the Commonwealth

24
DOMESTIC OFFSHORE SHI PPI NG 137

contends, to “ proven cap ital costs,” the ca rriers would 

be held to an insufficient return.

III. The Board Did Not Allow Excessive Depreciation Charges.

The Commonwealth arg ues th at the dep reciation expense allowed Bull is excessive for two rea sons: (a) it is 

based on an asset cost which is higher than the original 

cost to the orig inal owners of the assets; and (b) it is 

based on an unr ealistically low residu al value, with the 

res ult that the amount of ass et valu e to be ann ually depreciated —i.e., the difference between values when the asset is acquire d and when it is disp osed of—is gr ea ter tha n 

if a higher residual valuation were used. Neither contention has merit. The Board, as will be shown, allowed Bull 

an acqu isition cost that prop erl y reflected the cost of acqu isition in a bona fide, ar m ’s leng th transa ction, and it allowed as a residu al valuation a reasonable amount, based 

on expected scrap value.

(a) The acquisition cost allowed by the Board was 

not unr easona bly high.

In October 1956, the owners of the Bull Steamship Corpor ation of New Je rsey agreed to sell their stock in th at 

company to a group of purch ase rs for the pric e of $40 million. This was a bona fide, ar m ’s length transa ction. There 

was no relationship whatsoever between the two agreeing 

pa rties o the r than the relatio nsh ip of buyer and seller (J.A. 

120-121).

One of the elements in the purchase price was the large 

cash reserve of the company, amo unting to $18 million. 

The purch ase rs, in short, knew that the purcha se re pr esented an outlay of $22 million for the assets of the compan y other than cash. The purch asers set up a Delaware 

corporation named “ The Olympia Co rporation ,” and it 

boug ht the stock of Bull, New’ Jerse y. Af ter the purchase, 

the name of the Olympia Corpo ration was changed to A. 

H. Bull Company of Delaware.

The $22 million purcha se pric e wras then dis tributed 

among the various assets for the ultimate pur pos e of es25
138 DOMESTIC OFFSHORE SHIP PING

tablish ing an acquisition cost for each ass et on the books 

of Bull Delaw are. The method of dis trib ution was a reasonable one. An independent appra isa l of marke t value 

was made for each asset. So determined, the total apprais ed m ark et value for all the assets of the company came 

to app roximately $31.5 million. Thus, the pur cha se price 

of $22 million was equal to 70 percent of the apprais al 

value. The $22 million purchase price was then dis trib ute d 

among the component assets by assigning to each 70 p er ­

cent of its apprais al value. By this method, the six BullC-2 vessels were assigned an acquisitio n cost of $878,000 

each for fou r of the vessels and $980,000 each for the 

oth er two vessels which had valuable improvements. The 

actual m ark et value of the four ships in 1957 was $1,200,000 

each, and for the two improved ships was $1,300,000, as 

established in the und isputed testimony of the valu ation 

expert from the staff of the Federal Maritime Board (J.A . 

194-196, 225). Thus, the acquisition cost assigned to the 

vessels was roughly 25 percen t below their marke t value.

The assets of Bull, New Jerse y, were then tra ns ferred 

to Bull, Delaw are, and entered on the books of the latte r 

corporation at the acqu isition costs calculated as described 

above.

The Commonwealth, recognizing that the initial pu rchase by Bull, Delaware, of Bull, New Je rs ey ’s stock was 

ind isputa bly an ar m ’s length transa ctio n, attack s the tran sfer of the ships from the New Jersey to the Delaw are 

corpo ration as a tran sfer between related interests. It 

is tru e that these companies were rela ted, the Delaw are 

corpo ration hav ing become the paren t of Bull, New Jerse y, 

at the time of the book tran sfer of the ships.

What the Commonwealth overlooks, however, is the fact 

th at the entire purchase, although involving several steps, 

was intended to be a single transa ctio n. It is settled that 

. where the essential natur e of a tra nsactio n is the 

acquisition of propert y, it will be viewed as a whole and 

closely relate d step s will not be sep arated. . . . ” Georgia

Propert ies Co. v. Henselee, 138 F. Supp. 587 (M.D. Tenn. 

26
DOMESTIC OFFSHORE SHIPPING 139

1955). Thus, in effect, such a transaction is nothing more 

than the acquisition of the assets of Bull, New Jersey, by 

the new owners. A subsequent book transfer of these assets, as a step in the process of acquisition, does not have 

a separate legal effect independent of the entire purchase. 

Kanawha, Gas and Utilities Co. v. Commissioner of Int.

Rev., 214 F. 2d 685 (C.A. 5,1954); Kimbell-Diamond Milling

Co. v. Commissioner, 187 F. 2d 718 (C.A. 5, 1951); cert. den. 

342 U.S. 827 (1951).

What we have, then, is an a rm ’s length purchase of ships 

at a price which cannot be called anything but prudent, in 

view of the substantially higher prevailing market prices. 

Should such a price be discounted by the regulatory authority, and disallowed to the extent that it exceeds the depreciated book cost of these assets to the original owner of 

the ships? The Board correctly concluded that it should 

not.

Even where fixed utility equipment was involved, the 

Supreme Court has held tha t a prudent, bona fide purchase, made at arm ’s length, will support the entry of assets on the purchaser’s books at the purchase price. In 

American Tel. & Tel. Co. v. United States, 299 U.S. 232 

(1936), the Court held that where acquisition costs for 

valid reasons exceed the seller’s book costs, the excess will 

be considered a “ true increment of value” and “ provision will be made for amortization of such amounts through 

operating expenses.” (299 U.S. at pages 240, 243.) Of 

course, they will not be permitted to be amortized if they 

appear “ to be a fictitious or paper increment.” (299 U.S. 

at p. 240.) In the instant case, the higher cost to the new 

owners does in fact represent a “ true increment of value,” 

for the market values of the ships was materially higher 

than the new owner’s cost, which, to the extent it exceeded 

the old owner’s cost, was truly representative of increased 

value of the asset.

If the rule of the American Tel. and Tel. case is properly 

applicable to such fixed utility assets as communications 

equipment, it is a fortiori applicable to the vessels used 

in domestic off-shore trade. Such trades are not fran27
140 DOMESTIC OFFSHORE SHIPPING

chised; and carriers engaging in it are not only open to 

the competition of new carriers, they are also subject to 

no restrictions as to abandonment of service. Thus, in 

contrast to communications equipment, which has a value 

and is useful only as it is used in a regulated utility, ships 

have an independent value as assets readily useable in unregulated business. If an investor in the domestic offshore service were limited to an acquisition cost, for depreciation purposes, equal to the original cost of the ships to 

the original owner, it is safe to say that there would be 

very little capital available for investment in these trades.

In short, the owners of Bull, Delaware, invested in the 

ships of that company a sum truly and accurately reflected 

in the acquisition costs entered on the books of that company. Since the acquisition costs were the result of a bona 

fide, arm ’s length transaction, and since such costs were 

manifestly within the range of prudent investment, they 

are properly subject to amortization out of operating expense. The Board correctly allowed Bull to claim depreciation expense calculated on the basis of such cost.

(b) Bull’s vessel depreciation expense was not improperly based on an unrealistically low residual value 

of the ships.

The Board, as it has uniformly done in all prior rate 

cases, allowed the carriers to charge annual depreciation 

against a residual value equal to estimated scrap value. 

This was to be depreciated over a 20-year period, the estimated service life of the vessels. This method of depreciation is in accord with the Boa rd’s—and the Interstate 

Commerce Commission’s 7—uniform system of accounts, 

and it accords with the conventional, long-standing prac7

 The Board and the Inte rstate Commerce Commission have collaborated in setting up a Uniform System of Accounts to be used 

by water carriers. Many of the water carriers under the jurisdiction of one agency are also under the jurisdiction of the other, and 

the Uniform System of Accounts was set up so th at a single report 

could be made and filed by carriers with the two agencies.

" J 28
DOMESTIC OFFSHORE SHIPPING 141

tice of vessel owners. It also has been sanctioned by the 

tax authorities (J.A. 152).

The Commonwealth, however, disputes the use of scrap 

value as residual value. It points to the fact that vessel 

values have over the postwar years declined more slowly 

than anticipated, so that ships bought immediately after 

the war, such as the ships under consideration, are now, 

with about two-thirds of their normal service life expired, 

still worth more than one-third of their original post-war 

purchase price. The Commonwealth conjectures that when 

the ships are retired, they will bring not merely the residual scrap value to which the book values of the ships are 

being depreciated, but instead will be sold or traded in 

for new ships at a price considerably in excess of the scrap 

value.

It is possibly true that, if the Board had prescribed a 

higher value than scrap value, and a correspondingly lower 

annual depreciation expense, such prescription would be 

legally valid, if the residual value fixed by the Board could 

be supported as a reasonable prediction of future value. 

There is no constitutional or statutory requirement that 

the operator of a public service shall receive in the end 

more than he has put into it at the beginning. Federal

Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 

606-7 (1944). But on the other hand, there is no prohibition against his receiving more if, as here, asset values 

have in effect appreciated during their useful life.

The nub of the question is, what should be done with 

the incremental value of assets which are worth at the 

end of their service life more than the residual value 

ascribed to them on the carriers ’ books! Under the 

Board’s view, the carrier will receive this value. Under 

the Commonwealth’s view, the owner is not entitled to 

this benefit. Only the ratepayers may receive it, in the 

form of lower annual depreciation expense during the life 

of the vessel.

What the Commonwealth is really saying is that the 

carriers should have predicted that vessel values would

71709 o —«: 10

29
142 DOMESTIC OFFSHORE SHIPPING

not decline to scrap value. The Commonwealth goes on 

to say that, having failed to predict the still conjectural 

fact that their resale value at the end of their service lives 

will exceed the predicted scrap value, the carriers should 

compensate for their faulty prediction by no longer charging depreciation expense. It should be noted that the 

Commonwealth does not say that when it was set up on 

the carrie rs’ books, the residual value was unreasonably 

or capriciously chosen.

While the Commonwealth has the benefit of a decade 

and a half of hindsight on its side, it still is by no means 

clear that it is correct in its contention. The ships now 

being used in the Puerto Rico trade have a few years of 

service life ahead of them. As of January 1957, the six 

Bull C-2 vessels principally used in the Puerto Rico common carrier service had, depending on the individual ship, 

anywhere from 74 to 93 months, or an average of 7 years, 

of depreciable life ahead of them. The carriers had— 

and still have—no way of knowing that at the end of those 

seven years (roughly, January 1964) the ships will be 

worth more, and if so, how much more, than the predicted 

scrap value of approximately $55,000 per ship. There is 

no assurance that values will not decline more sharply in 

the next few years. The Commonwealth cannot show 

that the car riers’ claimed residual values are necessarily 

too low. Whether they are or not is a fact that will not 

be known for a few more years.

The Commonwealth speculates, however, that it is a fair 

probability that at the end of their service lives the ships 

will be worth a good deal more than $55,000 apiece. Conceding for the sake of argument that this is true, and conceding even that this might have been foreseen when the 

ships were first acquired immediately after World War 

II, we question whether it follows that carriers should 

for this reason be required to base their accounting practices during the life of the vessel on any such prediction. 

We further question whether depreciation schedules should 

be periodically revised to reflect changing conjectures about 

vessel values at the end of their service lives.

30
DOMESTIC OFFSHORE SHIPPING 14 3

The effect of such a prediction is to increase greatly the 

car riers’ capital risk. If residual values are put at a 

high figure representing the judgment that market values 

will in the future be high, the carrier is held to a limited 

depreciation expense that will not restore his investment 

if, in the end, the market value fails to maintain the predicted level. The Commonwealth’s theory, in short, would 

force the carrier to rely on a highly speculative trade-in 

or resale value for the recoupment of his capital investment, rather than to rely on the far more certain method 

of recouping capital during the service life of the ships 

by an evenly spaced depreciation expense based on a conservative residual scrap value.

The choice, in essence, is between a large terminal recoupment at the end of twenty years, or a more gradual 

recoupment evenly spaced over the twenty years. The 

former choice puts on the carriers all risk of loss if the 

actual residual value turns out to be lower than predicted, 

and gives the ratepayers precisely the same kind of “ windfal l” which the Commonwealth would withhold from the 

carrier. The latter choice appears to be the more reasonable, for although it leaves open the possibility that the 

carrier will get the benefits of any capital gain that results 

from appreciations in ship values, it merely puts on the 

ratepayer the not unfair burden of paying out over the 

vessel’s service life no more than its cost of acquisition by 

the carrier. In short, we do not believe that the ratepayer has ground for complaint if benefits resulting from 

asset appreciation accrue to the carrier rathe r than the 

ratepayer. The alternative, of requiring the carrier to 

predict appreciations in value and causing him to bear all 

risk of loss in the event of an erroneously high prediction, 

makes for too much uncertainty and, in a field where carriers are subject to rate regulation but are not franchised 

against competition, would tend to discourage investment 

in new equipment.

Nor can it be assumed that any incremental value would 

necessarily accrue to the carriers to the exclusion of the 

ratepayer. What is most likely—and what might be rer 3i
144 DOMESTIC OFFSHORE SHIPPIN G

quired by the Bo ard if and when the question is presen ted 

—is th at the incrementa l value would be applied to the 

acquisition cost of the replacement vessel and thu s reduce 

its initial book value, res ulting in corr espond ingly reduced 

dep reciation expense on the replacem ent vessel.

Un der section 1031(a) of the Inter nal Revenue Code, 26 

U.S.C . section 1031(a), no gain or loss shall be recognized 

for tax purposes if prop erty held for use in business is 

exch ange d solely for prop erty of a like kind to be used in 

business. This means that a ca rri er may avoid tax lia ­

bility on the cap ital gain realized in the exchange of fully 

depre cia ted vessel where the trade- in allowance is in excess of the dep reciate d basis of th at vessel. See I.T. 2615, 

XI-1 Cum. Bull. 112 (1932). Such cap ital gain is applied 

to the purchase price of the replacem ent vessel so as to 

reduce its tax basis and thus reduce the depreciation expense allowable for tax purposes again st the new vessel.

It is entirely possible th at when and if the ca rri ers are 

able to sell the ir pre sen t vessels for a price ma terially in 

excess of the residual value, such “ windfall” (as the 

Commonwealth calls it) would be req uired by the Board 

to be deducted from the book value of the replacement 

ship s and th us pro tanto to reduce the dep reciation expense 

to be borne by ratepaye rs during the life of the replacement vessel. Certainly, it would at th at time be open to 

the Commonwealth to make its “ wi nd fall” argu men t, if 

the Bo ard tre ate d the matt er differently. But to make 

this arg um ent now is pre mature.

The th eory a dvanced by the Commonwealth is, we believe, 

less merito rious tha n the theory followed by the carri ers 

and sanctioned by the Board. The Commonwealth overlooks the fac t that at the out set of the depreciation period, 

it is likely to be impossible to judg e reliably what ma rke t 

valu es will pr eva il twe nty years h ence; and it moreover fails 

to consider the inhibition on investm ent th at would res ult 

if the ca rrier were to be deprived in advance of any benefits th at might res ult from asset appreciation. The dep reciation practic es under review are, we submit, reasonable, 

and “ the total effect of the rate order can not be said to 

• ' 32
DOMESTIC OFFSHORE SHI PPI NG 14 5

be unjust and unreasonable.” Federal Power Commission

v. Hope Natural Gas Co., 320 U.S. 591, 602 (1944).

B. Argument In Response To Brief of United States

Atlantic <£ Gulf-Puerto Rico Conference

Notwithstanding the fact that the B oard’s order permits 

the Conference’s rate increases to stand, the Conference 

assails the Board’s action as possibly restrictive on future 

rate actions of the Conference.

The Conference’s petition should be dismissed for want 

of jurisdiction, because it does not present a case or controversy.

The Conference’s petition is, moreover, without merit. 

On the basis of arguments which are unsupported by either 

the evidence or the applicable law, it seeks a gross enlargement of its rate base which the Conference would no 

doubt seize upon to justify large further rate increases. 

In addition, it seeks to overturn the Board’s “ ratemaking 

carrier” approach in favor of an approach which would 

in this trade materially distort the aggregate profit-andloss position of the carriers, and it seeks to replace the 

Board’s traditional fair-return-on-rate-base approach with 

a novel operating ratio approach. In all of these contentions, the Conference is in error.

I. The Conference’s Petition Should Be Dismissed for Want

of Jurisdiction.

The B oard’s decision finds the Conference rate increases 

to be just and reasonable, and permits the Conference rate 

structure to stand undisturbed. There is, therefore, no 

case or controversy for the Conference to bring before the 

Court. An earlier motion by respondents for dismissal of 

the Conference’s petition was denied by the Court, without 

prejudice to its renewal at this time. The respondents 

accordingly renew the motion.

The Conference seeks to find standing to sue by arguing 

that the Board’s order lays down principles which adversely affect the Conference. Even though the rate increases have not been interfered with, the Conference asserts

33
146 DOMESTIC OFFSHORE SHIPPIN G

that these prin ciples somehow have an immediate impact 

upon the Conference.

The unanimous decision of the Supreme Court, p er J ustice 

Bra nde is, in United States v. Los Ang eles and S.L .R. Co.,

273 U.S. 299, 309-310 (1927), is dispositive of the Con ference’s pos ition:

“ The so-called ord er here complained of is one which 

does not command the carri er to do, or refrain from 

doin g any thing; which does not gr an t or withhold any 

autho rity , privilege, or lim its; which does not extend 

or abridge any power or fac ilit ies; which does not 

subject the ca rrier to any liability, civil or crimin al; 

which does not change the ca rriers existin g or fut ure 

sta tus or con dition; which does not determ ine any rig ht 

or obligation .” Sup ra, 309-310.

The Conference cites the decision in Rochester Tel. Corp.

n. United Sta tes , 307 U.S. 125 (1939), as mod ifying the 

prin ciple of the Los Angeles case. In fact, the Rochester

case confirms that the Conference has no standing .

In its Rochester decision, the Court quoted the above 

passage from the Los Ang eles case, and went on to say :

“ Pla inly the denial of judicial review in these cases 

does not deriv e from a reg ard for the special functions 

of administrative agencies. Jud icial abstention here 

is merely an application of the tra ditio na l cri teria for 

bringing judicial action into play. Pa rtly these have 

been writte n in Article 3 of the Con stitu tion, U.S.C.A., 

by what is implied from the gran t of ‘judicial po we r’ 

to determine ‘Case s’ and ‘Co ntrove rsies,’ Art. 3, Sec. 

2, U.S. Constitu tion. Pa rtly they are an aspect of the 

pro ced ural philosoph y pertaining to the federal courts 

whereby, ever since the first Judiciary Act, Congress 

has been loathe to auth orize review of interim steps in 

a procee ding.” [Footnotes omitted.] 307 U.S. at p. 

131.

This is sim ply a re-affirmation of the p rinciple that where, 

as here , “ the ord er sought to be reviewed does not of it34
DOMESTIC OFFSHORE SHIPPIN G 147

self adv erse ly affect complain ant but only affects his rights 

adv ersely on the contingency of future admi nis tration actio n,” then “ res ort to the courts . . . is either pre ma ture 

or wholly beyond the ir province.” 307 U.S. at p. 130.

In a fu rth er attem pt to establish its standing, petitioner 

cites United State s v. Sto rer Broadca sting Co., 351 U.S. 192 

(1956), and Fro zen Foods Expre ss v. United Sta tes , 351 

U.S. 40 (1956). In the form er, the Fe de ral Communication s Commission issued a “ rulemaking or de r” which had 

the effect of placing a limit on the number of bro adc asting 

stations in which the app lica nt, dire ctly or indirectly, could 

have an interest. In the lat ter , the In te rsta te Commerce 

Commission issued an order that specified cer tain commodities as not being “ ag ric ultural” within the meaning 

of an exception of 203(b) of the In terstate Commerce Act. 

In the Sto rer case, the C ourt found t h a t:

“ The regulation s h ere u nde r consideration presently 

aggriev e the resp ond ent. . . . The Rules now operate to 

control the business affairs of Sto rer. . . . Commission 

hearings are now affected by the Rules. Storer cannot cogently pla n its pre sen t or futur e opera tio ns.” 

351 U.S. at pp. 199-200.

In the Froze n Food Express case, the Cou rt found 

th at :

“ [The Commission’s determ ina tion] has an immediate and practical impact on carriers . . . . The ‘o rd er ’ 

of the Commission warns every carrier, who does not 

have autho rity from the Commission to tran sp ort these 

commodities that it does so at the risk of incurring 

crim inal penalties. . . . [they] run civil and criminal 

risks. . . . [A ca rrier] may lose its rig hts to operate 

at all, if it does not resp ect the Com mission ’s ‘or de r’.” 

351 U.S. at p. 44.

It is clear that in these cases the ord ers und er review 

established s tand ards which immediately altere d or affected 

the manne r in which the regulated businesses were to be

35
148 DOMESTIC OFFSHORE SHIPPIN G

conducted; and in the second of these cases, there was the 

additional fact that failure to comply with the standard 

could result in criminal and civil penalties. In contrast, the 

insta nt Report and Order of the Federal Maritime Board 

neither alters nor affects the Conference’s business practices, and threatens no penalties. The carriers may conduct their business as they have been doing, with the rates 

which they have themselves established, entirely unaffected 

by the order.

All that the Conference is saying is that it is apprehensive that the Board has laid down “ principles by which 

future regulation of the trade will be governed,” with the 

result that the Board may have restricted the Conference’s 

freedom in the future to make rates. The Conference is 

merely speculating that “ all the carriers may at any moment 

find their existing rates unlawful because of improvements 

in Bull’s operating efficiency or other factors, outside of 

their control, improving the profitability of Bull’s operations.” The simple fact, demonstrated by the Conference’s 

own argument, is that it is asking for an advisory ruling 

that some of the statements made in the Boa rd’s Report 

are erroneous, because in the event of some future contingency, these statements may conceivably be applied so as 

to result in a future determination adverse to the petitioners.

The wholly conjectural argument of the Conference in 

the instan t case is on all fours with that of the petitioner in 

Montana-Dakota Utilities Co. v. Federal Power Commission, 169 F. 2d 392, 402 (1948) (cert. den. 335 U.S. 853). 

There the Commission set up a formula designed to return 

to petitioner a fair and reasonable compensation for its 

services. In its suit for review, petitioner posed two hypothetical situations in which, so it argued, it would not in 

fact receive reasonable compensation. The Court sai d:

“ Until an actual test of the rate schedule is made showing that it results in some unfairness, the Court cannot annul a prescribed rule for applying the rate to 

deliveries simply because petitioner can conceive a situation which considered in isolation might not return 

the amount hoped fo r.” supra, at 402.

36
DOMESTIC OFFSHORE SHIPPING 149

Sim ilar reasoning was followed in Su n Oil Company v. 

Federal Pow er Commission, 256 F . 2d 233 (1958). There, 

Su n’s rat e schedule filings were reje cted and its certificates of public convenience and nece ssity were cancelled, 

but no injury to Sun was shown nor was there any threat 

of injury . The Court st at ed :

“ The re is no need to anticipa te an injury n ot presen tly 

threatened and not shown to be something likely to a rise 

in the fu tu re .” 256 F. 2d at p. 239.

The Conference has been unable to show t ha t the re is any 

inj ury likely to arise in the future und er the conditions 

which pre sen tly exist and which pres umably will continue 

to exist. The Conference can at best only assume that B ull’s 

opera ting efficiency will increas e or that other fac tor s—not 

furth er desc ribed—may occur to the detrim ent of the re ­

maining ca rriers in the Conference. Such spec ulative conjecture does not warrant the Cou rt’s settin g aside the 

Boa rd ’s order.

The Conference cannot at one and the same time both 

sup port the ultimate conclusion of the Board and attack 

the methods employed to arriv e at that conclusion. The 

following lang uage from Lin dhe ime r v. Illin ois Bell Telephone Co., 292 U.S. 151 (1934), is dispositive of the ins tan t 

ca se :

“ The company was successful in the District C ourt and 

has no rig ht to appeal from that decree in its favor. 

The company is not entitled to prosecute such an app eal 

for the purpose of pro cur ing a review of the Cou rt 

below with resp ect to the value of the com pan y’s p ropert y or other findings of which it com plains.” supra,

at 176.

Even if the Conference were to pre vail in the ins tan t 

controversy , the rat es would still stand as app rov ed by the 

Board. This being the case, the re is no purpose to be 

served by jud icia l inquiry. In Inter sta te Natural Gas Co.

37
150 DOMESTIC OFFSHORE SHIPPIN G

v. Fed eral Power Commission, 156 F. 2d 949, 951 (1946) 

(affd. 331 U.S. 682), the Cou rt sta ted :

“ [T]he rate ord er must be viewed in its entire ty, and 

‘it is not the theory but the impact of the rat e ord er 

which counts. If the total effect of the rate ord er 

cannot be said to be unjus t and unreasonable judicial 

inquiry und er the Act is at an end.’ ” (citatio ns omitted) 

supra, a t 951.

Here, the Conference adm its that the tot al effect of the 

rate order is ju st and reasonable, for it has estab lished 

the rate itself, and it sup por ts the rate order aga inst the 

challenge of the Commonwealth. It cann ot now ask for 

fu rthe r judicial inquiry.

II. The Board Did Not Err in Considering Bull as the “Ratemaking Carrier.”

In certain prior rat e investigations,8

 the Board and its 

predecesso rs have followed the “ ratem aki ng car ri er ’’ ap ­

proach in analyzing the jus tne ss and reasonable ness of the 

rates under inquiry. In so doing, the Board has, in effect, 

said th at where the re is a single, greatly pre dom ina nt carrie r in a domestic off-shore trade, whose opera tions comprehensively serve that trade, that ca rrier may be tre ate d as 

the “ rat em aking ’’ ca rri er, and rat es for the tra de will be 

reviewed by the Bo ard in the ligh t of the rate base and 

profit and loss positions of that car rier.

In those cases, as in the ins tan t case, this is a reasonable 

app roach under the pa rti cu lar circums tances which the 

Bo ard found to be prevai ling in the tra de. Bull is by far 

the lar ge st ca rrier in the trade. Fo r the firs t half of 1958 

it carried 57 percent of the total tonnage car ried by all 

ca rriers in the trade.® Bull has three sailings per week

8

 E.g., Gen eral Increa se in Ha wa iia n Ra tes, 5 F.M .B. 347 (19 57); 

Gen eral Increases in Al as ka n Ra tes, 5 F.M .B. 486 (195 8).

® 558,880 ton s for Bull; 169,363 ton s for Alc oa; 132,202 ton s for 

W at er m an ; and 107,822 ton s for Lykes (J.A . 23) (Bd. Rep. 7).

38 I
DOMESTIC OFFSHORE SHIPPIN G 151

from North Atlantic ports to Puerto Rico,10 utilizing six 

C-2 type vessels on a strictly maintained 14-day turnaround 

(J.A. 17) (Bd. Rep. 5). Moreover, Bull devotes its operations almost exclusively to the domestic trade. Of its 

three weekly sailings, two call at no other ports than those 

in the U. S. North Atlantic and in Puerto Rico. The third 

sailing calls at the Dominican Republic, but the amount of 

foreign cargo picked up and discharged is very small in 

proportion to the domestic cargo and the geographical 

deviation involved is trifling (J.A. 17). The Bull service, therefore, presents no very complex problem of revenue 

and expense allocation as between regulated and unregulated activity.

In contrast with the service of Bull, Alcoa and Lykes 

are preponderantly concerned with trades other than the 

Puerto Rican trade.

Lykes operates vessels worldwide as a subsidized carrier. 

Its so-called “ Line A” service (one of five major services 

linking U. S. Gulf ports with every continent except Australia) sails once weekly to a broad area throughout the 

Caribbean, calling at Cuba, Haiti, the Dominican Republic, 

Puerto Rico, Venezuela, Colombia, and Panama, in addition to U. S. Gulf ports. Lykes makes no voyages to or 

from Puerto Rico exclusively (J.A. 20) (Bd. Rep. 8). The 

U.S.-Puerto Rican cargoes handled by Line A are far exceeded by the foreign cargoes handled.

Alcoa’s Puerto Rican service consists of a weekly southbound voyage from North Atlantic ports to Puerto Rico, 

averaging 14.5 days in transit to Puerto Rico, as contrasted 

with 6 days for Bull (J.A. 17). After discharge at Puerto 

Rico, these vessels then proceed into foreign trades. Alcoa 

also has a weekly service from Gulf ports to Puerto Rico, 

averaging 12.5 days in tran sit to Puerto Rico (J.A. 17). 

Prio r to March 1958, Alcoa had no northbound service in 

either its North Atlantic or Gulf trades, but in that month

10 Puerto Rico is roughly equidistant from New Orleans and New 

York. As the ratemaking carrier, Bull’s service from the North 

Atlantic is also fairly representative of services from the Gulf.

39
152 DOMESTIC OFFSHORE SHIPPING

it began to haul cargo homebound to the Gulf (but not the 

North Atlantic) from Puerto Rico. The record herein was 

made too soon after the commencement of Alcoa’s homebound service to the Gulf to permit any firm impression of 

it to be drawn (J.A. 17) (Bd. Rep. 5).11

Waterman, like Lykes, operates vessels in a number of 

wide-ranging trades, serving the Atlantic, Gulf, and Pacific ports of the United States and ports in Asia and 

Europe. It furnishes a weekly shuttle service between 

New Orleans and Puerto Rico, operating 2 C-2 vessels on 

a 14-day turnaround, and it calls at no foreign ports with 

these ships.

In short, Lykes serves Puerto Rico as an incident to its 

subsidized Line A service; and Alcoa serves Puerto Rico 

southbound primarily to place ships in position so that it can 

honor its northbound contractual commitments. Only 

Bull and Waterman operate what may be called a “ pure” 

Puerto Rican service, and in contrast to Bull, Waterman 

carries a small proportion of the total traffic.

On these facts, the Board obviously was correct in concluding that Bull is the “ rate-making line” in the trade.

The Conference, however, argues that the “ rate-making 

ca rri er” doctrine deprives other carriers of their right to 

a fair return, thereby “ depriving [them] of their property 

in violation of the Fourteenth Amendment.” It advocates, 

as the only Constitutional approach, the use of “ the composite results of the group or a representative sample of its 

members.” Use of the composite results of the group (or 

their average, which is the same thing), or of a representative sample, would still result in rates too low for Alcoa 

and Lykes to earn a profit. This stems from peculiarities 

of their operation, not the Board’s method of evaluating 

the overall rates. There is no way to assure every carrier 

a profit, unless the rates be set at a level which permits even 

the most inefficient carriers to earn a profit. Obviously,

11 Alcoa has contract commitments which preempt its vessels after 

they have called at Puerto Rico on the southbound voyage from 

New York (J.A. 194).

40
DOMESTIC OFFSHORE SHIPPING 153

such a rate level would destroy all incentive for efficiency 

and would be exorbitant in its effect on shippers.

There is no logic to the Conference’s argument that 

the Board violates the carriers ’ Constitutional rights by 

using the “ rate-making ca rri er” approach, but not by 

using composite results as a representative sample. As 

seen, whichever approach is used, the least efficient carrier 

or carriers will operate at a loss. There is nothing about 

the composite group or representative sample approach 

which makes it any more Constitutional than the “ rate ­

making carrier” approach. Whatever approach the Board 

took, it would have to discount heavily the weight to be 

given to Lykes and Alcoa, whose Puerto Rican service is 

merely incidental to other predominating foreign operations, and whose operations even under the increased rates 

adopted by the Conference itself resulted in very substantial 

losses for the year 1958.12 Their inclusion would materially 

distort the much more reliable picture to be gained from 

the operations of Bull and Waterman, which operate substantially “ pure” Puerto Rican services unencumbered by 

far-ranging and heavy foreign carryings. These carriers 

operated at projected profits for 1958 of $580,293 for Bull 

and $1,394,145 for Waterman.

Even if the Conference’s suggestion were adopted, and 

the composite group or a representative sample were used, 

Alcoa would have to be completely eliminated from the 

ratemaking picture oecause of its curiously atypical operations, which consume twice as many days in transit (with 

twice as much vessel operating expense) as the other carriers. It is even doubtful whether Lykes, with its very 

diffuse service, should be included in the composite or representative sample. But even including Lykes, the net result 

of a composite of Bull, Waterman, and Lykes would be 

more unfavorable to the Conference’s position than using 

Bull alone. On the aggregate rate base for these three

12 As proje cte d on the bas is of ac tual op era tio ns for the first 

six mo nth s of 1958, Alcoa would ha ve suffered a loss of $1,543,000 

for th e full yea r 1958; and Lykes on th e sam e bas is would have 

suffered a loss of $398,497 (J.A. 48) (Bd. Re pt., p. 36).

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154 DOMESTIC OFFSHORE SHIPPING

ca rri ers as dete rmined by the Board (J.A . 43) (Bd. 

Rep., p. 30), the aggTegate net profit of the three (J.A . 47) 

(Bd. Rep., p. 36) would have resulte d in a net r ate of r etur n 

of 7.7 percent before taxes, rather tha n the 5.0 percen t 

rate of ret urn calculated by the Board for 1958 using Bull 

alone.

The re is the refore no merit to the Conference’s contention that the composite results should have been used. The 

purpose of this contention is to bring into the picture the 

dis tortion th at would result from giving any ratemaking 

weight to Alc oa’s circuitous and unreasonably expensive 

and inefficient o perations.

The Boa rd did not violate the ca rr ie rs ’ Con stitutio nal 

rig hts by using Bull as the “ ratem aki ng ca rr ie r.” Decidin g as it did, the B oard actually reached a more favorable 

res ult for the ca rri ers than if it had used the app roach now 

advocated by the Conference.

III. The Board Properly Excluded From Rate Base the Terminal Properties Used, But Not Owned, By the Carriers.

The Board, upon consideration of the record, of the 

pa rtie s’ argum ents , and of p revious Bo ard decisions,13 concluded that the value of certain terminal facilities used but 

not owned by the ca rri ers should n ot be included in the rate 

base. These were the termin als used by Bull at Ph ila ­

delphia, Baltimore, and New York. The basis for the 

Bo ard’s conclusion lies in the fact tha t, insofar as such 

prop erty is concerned, the ca rriers are not devoting the ir 

cap ital to the shippi ng public (J.A . 42).

The Boa rd has maintained this consistent position (with 

the one exception mentioned in footnote 13) since enac tmen t 

of the Shipping Act, 1916. In the very first rate investi13 Except on one occasion, the Board has uniformly held tha t 

used-but-not-owned property should be excluded from rate bases. 

As to the one instance in which the Board departed from the rule 

(General Increases in Alaska Rates and Charges, 5 F.M.B. 486), 

the Board stated in its insta nt decision that “we were in error in 

including the value of non-owned assets in the carrier’s rate base.” 

(J.A. 41).

42
DOMESTIC OFFSHORE SHIPPING 155

gation under the Act, Alaskan Rate Investigation, 1 U.S.S.B. 

1 (1£>19),14 the predecessors of the present Board stated:

“ The reasonableness of the rates depends largely 

upon whether they yield a fair return upon the value 

of the carrier's property devoted to the public service.” 

(emphasis added.) (l.U.S.S.B. at p. 4.)

In the decision under review, the Board found that to depart 

from this principle and “ to include the value of this nonowned property in the rate bases in our opinion would 

grant the carriers a windfall at the expense of the shipping 

public.” (J.A. 42)

The Conference assails the Board decision in this respect. 

It would have the Board include in the rate base the value 

of all terminals used by Bull, regardless of whether Bull 

owned, leased or was allowed to use the property free of 

charge. The Conference bases its position on its assertion 

that “ the public benefits from the use of the property, and 

must therefore pay rates allowing a return thereon. . . .”

To support this position, the Conference cites various 

agency and court decisions arising out of section 19a of 

the Interstate Commerce Act (49 U.S.C. section 19a). That 

section requires the Interstate Commerce Commission to 

make a detailed physical valuation, classification, and inventory of all of the property of rail carriers under its 

regulation. There is nothing comparable to this in the 

Shipping Act.

But even the eases arising under Section 19a of the 

Interstate Commerce Act, including those cited by the 

Conference, run counter to, rather than in support of the 

Conference position. The Conference admits that “ Bull 

leases the Philadelphia and Baltimore terminals from the 

municipal Port Authorities at favorable rentals (i.e., below 

owner’s costs), as a promotional device on their part to

^Petitio ners in their brief (see Conference Brief, page 27) make 

the unsupported assertion that the Board included an item of 

non-owned property in the rate base in the Alaska Rate case of 

1919. There is nothing in the text of the opinion to justify such 

an assertion.

43
156 DOMESTIC OFFSHORE SHIPPIN G

inc rease the traffic using the ir servic es.” (Conference 

Brief, pag e 26.) 15 In dealing with the same type of sit ua ­

tion, the ICC in New York Central Railroad Company, el

al., 27 Val. Rep. 1, 57 (1929), sta ted :

“ In our view these pro per ties must be reg ard ed as 

held for development in the general public intere st 

and not th at of corporatio ns organized for profit.”

The Supreme Court in Manufactu rers Ry. Co. v. United

States , 246 U.S. 457, 496 (1918) has followed the same pr inciple :

“ If the stip ula ted ren tal is less than the fa ir annual 

value of the p rop erty, it is to be presum ed that the grant 

of the excess was to the public, no t to the priv ate in terest 

of the Railway.”

The short answ er to the Con fere nce’s contentio n is tha t 

in dea ling with the ratemaking questions arisin g out of 

the lease of te rminal prop ert ies from municipal author ities, 

the ICC considers that insofa r as such prop ert y is municipally owned it is p ar t of the public domain, and th a t:

“ where the ca rrier makes no cap ital outlay in its acquisition, nothing should be included in the valuation 

for public prop erty of this kind, but that the rentals

shou ld be charged to operating expens es.” (Em phasis 

supp lied.) Baltimo re, Chesapeake & Atlan tic Railway

Company, 31 Val. Rep. 505, 512. (1930).

The same reas oning is applicable to the Baltimore term inal. 

It is already devoted to public use by the railroad which 

owns it and is being compensated for it in the rail rate 

str uctur e. Bull has no rig ht to gain a windfall by including

15 According to the evidence of the record, only the Philadelphia terminal is municipally owned (J.A. 114). The Baltimore 

terminal is actually owned by the Baltimore and Ohio Railroad 

in whose rate base it is already included (J.A. 196). The railroad 

permits Bull to use the terminal free of charge for the purpose of 

attracting additional railroad cargo over its line.

44
DOMESTIC OFFSHORE SHIPPING 157

it in its rate base, and thus to cause the public to pay twice 

for the same asset.

Thus, so far as Bull’s Philadelphia and Baltimore terminals are concerned, the Board dealt with them in the 

same manner as the ICC would have : the rental expense, if 

any, was required to be treated as operating expense and 

the value of these terminals was excluded from the rate 

base.

Bull’s New York terminal is used by Bull under an arm’s 

length, commercial lease. The Conference argues that the 

Board should include the value of this terminal in the 

rate base, although it concedes that the Board has the discretion to do what it did, that is to include the rental as 

an operating expense, and to exclude the terminal value 

from the rate base.10 In the ascertainment of value of 

property used for the convenience of the public, the Board 

is not controlled by an artificial formula, “ but there must 

be a reasonable judgment, having its basis in a proper consideration of all relevant facts.” Minnesota Bale Cases,

230 U.S. 332,434 (1913).

The Board exercised a “ reasonable judgment” in excluding the New York terminal from Bull’s rate base. In 

so doing, the Board treated all of Bull’s terminals consistently : it excluded all used-but-not-owned terminals from 

the rate base, but permitted Bull to include as operating 

expenses the rental for such terminals. By satisfying itself 

that the rentals were reasonable, the Board protected the 

rate-payers against any exorbitant expense that might result from an improvident lease. And the method followed 

by the Board had the advantage of uniformity and certainty. 

The Board summarized the conflicting positions of the carriers and the highly uncertain valuations claimed by them, 

and s aid :

“ As indicated above, such [used-but-not-owned] assets 

were claimed by some of the carriers and not by others, 

were excluded by the examiner in the case of Water16 Interstate Commerce Commission v. New York, N.H. & H.R.

Co., 287 U.S. 178,198 (1932), fn. 6.

71709 O—«2 41 45
158 DOMESTIC OFFSHORE SHIPPING

man, and Bull apparen tly did not claim all of such 

pro perty . Thu s we are asked to arr ive at rat e bases 

of vari ous carri ers containing differe nt elements depending in some cases on the claims of the ca rrier and 

in o thers on the evidence subm itted by it as to the value 

of the [terminal] pro perty. This we will not do. Pro ­

ceedings such as this are difficult enough with out add ­

ing to the problems.” (Em pha sis supplied.) (J.A . 

42)

The Conference cannot show that the Board has acted 

ar bi trar ily in choosing to include terminal ren tals as an 

opera ting expense rath er than to include their values in 

the rat e base. The Boa rd ’s treatm ent of the problem is on 

all fou rs with tha t of the ICC in New York , N.H. & II.R. Co.,

30 Val. Rep. 1, 36, (1029), af f’d 287 U.S. 178 (1932). There, 

the Commission considered the valuation for rate niaking 

pur poses of the G rand C entral Te rminal in New York which 

the rai lro ad was permitte d to use, jointly with o the r ca rriers , 

und er a lease or con tract arrang ement. The situat ion was 

thus similar to the situ ation before the Board. The Commission sa id :

“ The carrier does not own an interest that would 

cause it to suffer a loss by deflation or to profit by the 

the enchancement of value which might take from or 

add to the intrinsic worth of the pr op er ty .”

The Commission, although acknowledging that such a use 

of the terminal is a “ commercially valuable contr act,” 

concluded that for rate-m aking purposes, no portion of the 

Te rm inal’s asse t value should he included in the ca rr ie r’s 

rate base.

The Board, in short, did not err in excluding used-butnot-owned terminal prop erty from Bu ll’s rat e base.

46
DOMESTIC OFFSHORE SHIPPING 159

IV. The Board’s Allowance for Working Capital Is Fair and

Reasonable and Consistent With the Facts and Evidence.

The Boa rd considered three alt ern ati ve methods of computing working ca pi ta l:

1. To use an amo unt equal to one twelfth of the yea r’s 

opera ting expenses, which would he app rox imately $1,800,- 

000 for Bull, usin g actu al opera tin g expenses for 1957. 

This was the method sugg ested by the hearing examiner.

2. The use the figure arr ived at by the hearing exam iner 

plus an add itio nal $1,000,000 allowance said to be n ecessary 

to cover the tim e lag involved in collecting receivables. This 

method was urg ed by the Conference, and would call for a 

working cap ital of $2,800,000.

3. To calculate the amount by app lyin g the formula set 

out in the Boa rd ’s General Order 31, Lim itat ions 3 and 4, 

46 C.F.R. sec. 286.3(2) (1). This formula establishes the 

procedure for calculating adjus ted working cap ital as an 

element of “ cap ital nece ssarily emp loyed” by subsidized 

op era tors in the foreign tra de .17 This method was advocated by Public Counsel and interv ene rs. In essence, this 

method fixes working cap ital at an amo unt equal to the 

expense of one round voyage for each vessel employed in 

the service. Bull, which opera tes 6 C-2s in the Pu erto Rico 

service was th us allowed a sum equa l to six tim es the voyage 

expense of a typical C-2 round voyage in the reg ula ted 

trade. As app lied to Bull, the formula resulte d in a working cap ital allowance of $1,087,000.

The Board had found in two prior rat e inv estigations 

that the Gen eral Ord er 31 formula allowed a fa ir and 

reasonab le valuation of working cap ital for rate -base pur17 Under the subsidy program enacted in the Merchant Marine 

Act, 1936, a carrier operating under a subsidy contract may distribu te or withdraw as profit a sum “not in excess of 10 per centum 

per annum on the contractor’s capital necessarily employed in his 

business. . . .” 46 U.S.C. Section 1177(a). Profits exceeding 10 

per cent of capital necessarily employed are subject to partial 

recapture by the Government. Among other components, capital 

necessarily employed includes a working capital allowance as 

spelled out in the Board’s General Order 31.

47
160 DOMESTIC OFFSHORE SHIPPIN G

poses. General Increase in Hawaiian Rates, 5 F.M.B. 347, 

350 (1957), and General Increases in Ala ska n Rates and

Charges, 5 F.M.B. 486, 500 (1958). In the la tte r case, the 

Board reviewed method (2) above, which had earlier been 

followed in Ala ska n Rates, 2 U.S.M.C. 639, 644-6 (1942), 

and reje cted th at method as unsound and excessive. It is 

thi s rejected method which the Conference would reinsti ­

tute.

The amount of working capital allowed by the Board is, 

as seen, equal to the expense of one complete round voyage 

fo r each of the ships in the service. This sum is clearly 

sufficient to meet all working cap ital needs of the carriers . 

While some, but not all, 18 of the voyage expenses are laid 

out by the ca rri er in advance, it is normal prac tice for the 

ca rrie r to receive its freigh t payment either upon receipt 

of the cargo, or upon deliv ery thereof. Thus, the ter mi nation of the roun d voyage norm ally marks the poin t when 

the reven ues for such voyage are in the ca rr ie r’s hands. 

In fact, the Conference tar iff specifies th at freigh t must be 

prepaid (J.A . 157-8). Thus, to the extent the carri ers live 

up to the ir own tariff, the ir fre ight revenues are actually 

in hand when the cargo is placed abo ard the vessel. The re 

is consequently no very sub stantial lag between p ayment of 

expenses and receipt o f revenues. To the exte nt that there 

is any such lag, the working capital allowed by the Board— 

equal to the round voyage expense for each ship in the ser vice—is ample to take care of the ca rr ie r’s inte rim needs.

Wo rkin g cap ital is require d to meet the need which 

‘‘arises largely from the time lag between paymen t by the 

Com pany of its expenses and receipt by the Company of 

pay ment for service in respect of which the expenses were 

incu rre d.” Alabama-Ten ness ee Nat. Gas Co. v. Federal

Power Commission, 203 F. 2d 494 (1953), cited in General

Increases in Ala ska n Rates and Charges, 5 F.M.B. 486, 500 

(1958). The allowance of any add itional amount would

18 I t was conceded by the carrier’s witnesses that some of the 

voyage expenses were not paid out in advance in cash, but were 

rather accrued as accounts payable, and thus did not represent any 

actual cash requirement (J.A. 157).

48
DOMESTIC OFFSHORE SHIPPING 161

unnecessarily inflate the ra te base to the detrime nt of the 

shipping public.

In sup po rt of its demand for a lar ge r working capital, 

the Conference asserts that the re is an add itio nal need for 

a “ fund for uncontrollable con ting encies.” They sugg est 

that this fund be set at appro xim ately $2,000,000, rep resenting 30 d ay s’ opera ting expenses. The only example of 

such an “ unco ntrollable con ting enc y” given by the Conferen ce is a strike. The conference ap parently has overlooked the fac t that where a strike causes a discontinuance 

of vessel operations, the re would be a correspon ding decrease, if not a cessation, of vessel opera ting expenses du ring the strike. In the event of such a contingency, the 

work ing cap ital allowed by the Board would still appear to 

be adequate to cover all fore seea ble financial needs dur ing 

such a contingency.

The Conference also criticizes the B oa rd ’s working cap ital 

calculation on the ground th at it is based on a formula applicable to subsidized ca rriers in the foreign tra de, but the 

Conference is unable to show why this is nec essarily bad. 

The fact is th at L imitation 4 of General Ord er 31 sets up a 

clear and precise form ula by which work ing cap ital can be 

com puted; and it is a form ula, moreover, which is entirely 

fa ir and reas onable and readily ada ptable to the needs of 

carri ers in the regulated domestic trades . The Boa rd ’s 

working cap ital allowance should be found to be lawful.

V. The Board Correctly Ascribed To Carrier-Owned Terminals

a Rate Base Valuation of Net Book Value.

As to terminal s owned by the carriers , the Board allowed net book value for the rate base valu ation. In the 

case of Bull, the ratemaki ng line, it owns the terminal s 

which it uses in Puert o Rico. These terminals had a net 

book value of $2,144,572 as of December 31, 1957. The 

Conference sponsored a witness who testified th at Bu ll’s 

Pu ert o Rica n termin als should be valued at $4,062,194, this 

being the value at which the terminals were appra ise d by 

the independent apprais ers hired by the purch ase rs of Bull 

(J.A . 203). In arr iving at this appra isa l, the follow ing 

I 4 9 “
162 DOMESTIC OFFSHORE SHIPPING

factors were considered: present and future earnings, degree of obsolescence and adequacy or inadequacy, original 

cost, reproduction cost, previous appraisals, etc. (J.A. 130- 

1). The appraisers then concluded that a willing buyer 

would pay a willing seller the price of $4,062,194 for the 

pro per ties ; but there was no actual sale or market transaction against which this opinion could be checked (J.A. 131).

The Conference argues that the Board should have applied to the terminals the appraisal value of $4 million instead of the net book value of about $2 million. The sole 

ground advanced by the Conference for this argument is 

that, having valued the ships at their market value, the 

Board should also have valued terminals at their market 

value.

The Conference’s argument is based on an erroneous 

premise. The record contained no market value for terminals comparable to the market value for ships. Ship 

market values are easily and objectively determined, on 

the bases both of sales prices on ships actually sold and of 

bidding and asking prices which are constantly being exchanged through ship brokers. The activity of the ship 

market reported currently in trade publications makes it 

possible for anyone conversant with this market to arrive 

at a fairly precise and objective judgment of the current 

market value for a particular type of ship at any given time.

In contrast, a judgment of the “ market value” of 

terminals is entirely subjective, for there is no such thing 

as a market or frequent exchange of terminals. This is 

borne out by the testimony of the Conference’s own appraiser, who admitted that such subjective factors as reproduction cost and future earnings entered into appraisal.

In view of these facts, the Board’s decision to use net 

book value for terminals, far from being inconsistent with 

its ship valuation, is entirely reasonable. In the first place, 

the record contained no evidence of a terminal “ market 

value,” for there is no such “ market value,” in the 

sense that that term is applied to ships. Thus, although 

the Conference charges the Board with inconsistency in 

using book value for terminals while using market value 

50
DOMESTIC OFFSHORE SHIPPIN G 163

for ships, the Conference is equally inconsistent in urging 

that the Board should use appraisal value for terminals 

and market value for ships. The appraisal value is no 

more equivalent to market value than is net book value.

The Board was correct for the further reason that the 

considerations which led the Board to reject net book 

value for ships are absent in the case of terminals. Unlike ships, terminals are not mobile or readily saleable, 

and there is not the danger, present in the case of ships, 

that a restriction to net book value for rate purposes will 

induce the owner to withdraw the terminals from the regulated trade. This is especially true in the case of Puerto 

Rican terminals, whose usefulness is practically confined to 

the regulated domestic trade with the United States mainland, ?uerto Rico having only a limited volume of trade 

with foreign countries.

In sum, the Board was correct, and was not inconsistent, 

in rejecting the highly uncertain and subjective appraisal 

value for terminals and adopting net book value instead.

VI. The Board Correctly Refused to Follow the Operating

Ratio Approach.

The Board in the present case adhered to its regular 

practice of using the fair-return-on-rate-base approach 

in judging rates in the domestic offshore trades. Alaska

Rate Investigation, 1 U.S.S.B. 1, 4 (1919), Rates of InterIsland Steam Navigation Co., Ltd., 2 U.S.M.C. 253 (1940); 

Alaska Rates, 2 U.S.M.C. 558 (1941); General Increase in

Hawaiian Rates, 5 F.M.B. 347, 354 (1957); General Increases in Alaskan Rates, 5 F.M.B. 486, 495 (1958). The 

Board and its predecessors have invariably followed this 

approach, and have rejected the contention, advanced in 

previous rate investigations, that the operating ratio approach should be adopted. In General Increases in Alaskan

Rates, 5 F.M.B. at p. 495, the Board sta ted :

“ We agree with the examiner that the operating 

ratio theory has never been followed by the Board or 

its predecessors and should have no controlling weight

51
164 DOMESTIC OFFSHORE SHIPPING

in this proceeding. Ope rating rat io has been used in 

motor ca rrier rate cases by the In terstate Commerce 

Commission, where the ra tio of o per ating revenues (and 

expenses) to investment in cap ital equipment is relatively la rg e; i.e., four or five to one or better. In contras t, Alaska Steam’s ratio of revenue (or expenses) 

to cap ital investm ent is only slig htly in excess of two 

to one. We see no reason to de pa rt from the fai rreturn -on -fair-v alue standard which the Board and its 

predec essors have use d.”

To justi fy the requested de partu re from precedent, the 

Conference relies heav ily upon cases involving m otors ca rrie rs. Such cases have only a doubtful relevance to the 

instan t case. Motor carri er equipment depreciates very 

rap idl y in contr ast to the fa r slower depreciation character istic of ships. Trucks have a service life of the ord er 

of 5 ye ars; the service life of ships is fou r times as long. 

It is commonplace for regulated motor ca rri ers to operate 

hundred s of pieces of rap idly-d epreciatin g rolling stock, 

thu s making the rate base app roach cumbersome. In contras t, Bull, the lar gest ca rri er in the Pu erto Rican trade, 

opera tes only six ships.

In the insta nt case, the ratio of annual ope rating expense 

to investm ent is approxima tely two to one. In motor ca rri er cases, this rat io is much lar ger. In Middle West General Increases, 48 M.C.C. 541, 552 (1948), the In terst ate 

Commerce Commission found th at this rat io was 3.78 to 1 

for 98 Class I motor carriers . However, even dealing with 

motor carriers , the Commission has recognized that rat e 

of return on investm ent is ‘1

 useful in an apprais al of the financial condition and pro gre ss of the motor ca rri er industr y .” 48 M.C.C. a t p. 553.

In ar guing that the Board should abandon the fair-retur non-fair-value prin ciple, the conference is asking the agency 

to dis car d over forty yea rs of well-settle d practice. Commenting on the adoptio n of a method oth er than the trad itionally used rate-b ase method to dete rmine the lawfu lness 

of na tural gas rates, this Court in City of Detroit, Michigan

52
DOMESTIC OFFSHORE SHIPPING 165

v. Federal Power Commission, 97 App. D.C. 260, 230 F. 2d 

810, 818-9 (1955), stated:

“ [The rate-base method] has been repeatedly used by 

the Commission, and repeatedly approved by the 

Courts, as a means of arriving at lawful—‘just and 

reasonable’—rates under the Act. Unless it is continued to be used at lease as a point of departure, the 

whole experience under the Act is discarded and no 

anchor, as it were, is available by which to hold the 

terms ‘just and reasonable’ to some recognizable meaning.”

Similar considerations apply in the instant case.

Moreover, since the Board found the rates to be just and 

reasonable on the theory which it did follow, the Conference 

can scarcely claim that it is prejudiced because the Board did 

not go through the process of also using the operating ratio 

to reach the same conclusion. As the hearing examiner 

sta ted :

“ Since in any event the use of the operating-ratio 

theory would have no effect on the ultimate conclusions 

here arrived at by the use of standards heretofore approved by the Board, no further consideration need be 

given to the contentions relating thereto.” (J.A. 104).

All that the Conference really seeks is for the Board to do a 

superfluous act. This request is without merit.

CONCLUSION

Although assailed from either extreme, the Board was 

correct in its decision th at the rate increases under investigation are just and reasonable. For its part, the Commonwealth contends, without merit, th at the carriers should 

be held to limitations on vessel valuation, rate of return, 

and depreciation expense which would unreasonably deprive the carriers of revenues to which they are entitled, 

and which would tend to discourage the investment of additional capital in the domestic off-shore trades, if not to 

r~53
166 DOMESTIC OFFSHORE SHIPPING

cause either the curtailment or abandonment of service. 

And for its part, the Conference, although it is in no way 

prejudiced or adversely affected by the Boa rd’s decision, 

seeks to impose on the Board such a change in its ratemaking principles as would result in the end in a most 

exorbitant rate structure, intolerable and expensive to the 

taxpayers.

Both petitions are without merit. The Boa rd’s decision 

strikes the proper balance between the interests of the 

carriers and of the ratepayers. The decision should therefore be affirmed.

Respectfully submitted,

J ames L . P imp er

General Counsel

R obert E. Mitc hell

E dward A ptaker

Assistant General Counsel

Donald J . Brunn er

Attorney

Attorneys for Respondent

Federal Maritime Board

Washington 25, D. C.

November 7,1960

54
DOMESTIC OFFSHORE SHIPPING 167

STA TEMENT OF TH E UNITE D STA TES

The United States does not believe that the issue of the 

appropriate rate base can be resolved on the basis of the 

present record. On this basic issue, the Board did not pass 

on the argument of the Commonwealth, but held sim ply:

“ We find that the value of the vessels on the domestic 

market at or about the time the rate increase is requested with adjustments to eliminate short term peaks 

in vessel values, is the proper method for determining 

the reasonable value of the property being used for the 

public” (Par. 52).

This conclusion of the Board may come within the wide 

discretion the Board has in this area, in view of the peculiar 

limitations on its regulatory authority over the shipping 

industry. See Federal Power Commission v. Hope Natural

Gas Co., 320 U. S. 591. But it is impossible, on this bare 

assertion, to “ know what [its] decision means . . . ” (Secretary of Agriculture v. The United States, 347 U.S. 645, 654), 

and judicial review of it must await, the United States 

believes, a detailed explanation by the Board based upon 

the record in this case or other relevant considerations 

within the Board’s expertise. Cf., Pacific Far East Lines

v. Federal Maritime Board, 107 U.S. App. D.C. 155, 275 

F. 2d 184, 187; cert. den. 363 U.S. 827. The United States 

furth er believes that the Board, on such a remand, should 

pass on the Commonwealth’s argument that it is unfair to 

the ratepayers to permit the depletion of the old depreciation reserve built up over the years and removed to finance 

the purchase.

Respectfully submitted,

Robert A. Bicks,

Assistant Attorney General

Richard A. Solomon,

Henry Geller,

Attorneys, Department of Justice

Washington 25, D. C.

November 7, 1960

55
168 DOMESTIC OFFSHORE SHIPPIN G

Item H —Decision

UNIT ED STATES COURT OF APPEALS FOR THE DISTRICT OF 

COLUMBIA CIRCUIT 

No. 15846

T h e Commo nw ealth of P uerto Rico, Petitio ner, v. F ederal Mar itime Board

and United Stat es of America, Respondents

Unit ed Stat es Atlan tic & Gulf-P uerto Rico Confer enc e, et al., Waterman

Stea m sh ip Corporation and W aterman Stea m sh ip Corporation of P uerto

Rico, I ntervenors

No. 15847

Unit ed States Atlantic & Gul f-P uerto Rico Confer enc e, et al., Petition ers, 

v. F ederal Mar itime Board and United States of America, Respo nden ts

T h e Commo nw ealth of P uerto Rico, I ntervenor

ON PETITION S FOR REVIEW OF AN ORDER OF THE FEDERAL MA RITIME BOARD

Decided February 23, 1961

Mr. William D. Rogers for jietitioner in No. 15840. Mr. George Bunn also entered an appearance for petitioner in No. 15846.

Mr. Mark P. Schlefer, with whom Mr. T. S. L. Perlm an was on the brief, for 

petitio ner in No. 15847.

Mr. Edward Aptaker, A ssistant General Counsel, Federal Maritime Board, with 

whom Messrs. Jame s L. Pimper, General Counsel, and Robert E. Mitchell, Assistan t General Counsel, were on the brief, for respondent Federal Maritime Board.

Mr. Henry Geller, Attorney, Dej>artment of Justice, with whom Mr. Richard 

A. Solomon, Attorney, Depa rtment of Justice, was on a statement filed In behalf 

of respondent United States of America.

Messrs. Warren Price, Jr., and Sterling F. Stoudenmire, Jr., were on the brief 

for intervenors Waterman Steamship Corporation and Wate rman Steamship 

Corporation of Puerto Rico in No. 15846.

Before Edgerton, P retty ma n, and Bas tia n, Circuit Judges.

P er Curiam : We are asked to review a Federal Maritime Board ruling of 

April 28, 1960, that certain large rate increases for carriage of cargo between 

Puerto Rico and i>orts on the Atla ntic and Gulf coasts of the United States are 

ju st and reasonable.1

In a report which accompanied its orde r the Board sa id : “We find tha t value 

of the vessels on the domestic marke t at or about the time the rat e increase is 

requested with adjustments to eliminate short term peaks in vessel values, is 

the proi>er method for determining the reasonable value of the property being 

used for the public.” The Board did not say why it adopted market value as a 

ra te base or why it rejected Puerto Rico’s contention tha t this base is grossly 

excessive and rates should be based on prud ent investment less depreciation.

The Departm ent of Justice urges on behalf of the United States tha t the rate 

base question cannot be resolved on the present record. We agree. The Admin istr ative Procedure Act require s all decisions to sta te not only findings and 

conclusions but also “the reasons or basis therefor, upon all the material issues 

of fact, law or discretion presented on the record * * *” 8 8(b), 5 U.S.C. 8 1007(b). 

The Board “should make the basis of its action reasonably clear. We cannot 

find th at it did so here.” Radio Station KFH Co. v. Federal Communication

Commission, 101 U.S. App. D.C. 164, 166, 247 F. 2d 570, 572; Pacific Far East

Line, Inc. v. Federal Maritime Board, 107 U.S. App. D.C. 155, 275 F. 2d 184. Cf. Secretary of Agriculture v. United State s, 347 U.S. 645, 654.

The Board’s order is therefo re vacated and the same remanded for the Board 

to reconsider and clarify the rate base question. The Board should also pass 

upon the Commonwealth’s argu men t that it is not fair to ra te payers to let an 

accumulated depreciation reserve be depleted and depreciatio n charges thereby 

increased.

> The Board acted under | 18 of the Shipping Act. 1916. c. 451, 39 Stat. 735, as amended, 

46 U.S.C. f f 801, 817, and | 3 of the Intercoaa tal Shipping Act, 1933, c. 199, 47 Stat. 1426, 

aa amended, 46 U.S.C. If 843, 845. Thia proceeding for review ia brought under the Judi cial Review Act of 1950, c. 1189, 64 Stat. 1129, aa amended. 5 U.S.C. | 1031 ef »eg.
DOMESTIC OFFSHORE SHIPPING 169

The motion to dismiss P uerto Rico’s petition for review in No. 15846 is denied. 

Puerto Rico’s motion to dismiss the petition for review in No. 15847 is granted. 

Vacated and remanded.

Ite m 15—Page 78

How much investigation is made and how is evidence weighted by th e Federal 

Maritime Board in making a determination on a requested rate increase?

Protests by affected local shippers and Government bodies against offshore 

domestic rat e increases are always given attentive consideration. In formal 

cases involving offshore domestic rates, Sta te and other local government 

bodies are welcome to intervene, and the practice has been, in general, tha t 

they have intervened and presented evidence as to the impact of the proposed 

rate change on th e local economy.

The Board has long been awa re th at steamship service is a factor in the 

economy of the domestic offshore area s. Recently, in its decision in docket No. 

807, United Sta tes Atlantic and Oulf-Puerto Rico Conference Increases in

Rates (mult. op. decided April 28, 1960, pp. 9-10), the Board made special findings as to the effect of increased steamship rat es on the economy and living 

standard s of Puerto Rico.

The needs of the economy of the domestic offshore are as for lower freight 

rates must be weighed against the constitu tional right of the car riers to rates 

th at will not deprive them of a minimum fair return on their investm ent. 

The Board must also balan ce aga inst the need for low freight rates the need 

for continuing steamship service, and therefore must allow a rate structure 

which will not driv e carriers out of the trade. Accordingly, the Board allows 

what it considers a fa ir return on investment, endeavoring to hold these down 

to the ir lowest reaso nable values. In recent cases, it has determined such 

fair return to be not more than 7% percent of the market value of the owned 

property the carrier actually devotes to the trade plus working capital.

Ite m 16—Page 79

What, if any, evidence is there that high domestic freigh t rates may be conducive to imports into offshore domestic are as via foreign-flag vessels from 

foreign ports? Specific reference is made to steel cargoes and other construction materials being imported into Alaska aboa rd Japa nese ships.

The Trans-Pacific Freight Conference of Japan which covers traffic moving 

from Jap an to Alaska quotes open rates on iron and steel angles, bars, channels, 

plates, rods, rails, sheets, etc., subject to a minimum per 2,240 pounds or 40 

cubic feet of $14 to Anchorage and $18.20 to other ports.

The rates of Alaska Steamship Company for moving such prop erty from 

Seattle or Tacoma to Seward or Valdez (Anchorage is not served direct) is 

$46.57 per 2,240 pounds (quoted as $1.89 p er 100 pounds plus 10 pe rcent).

An exam ination of records of the Census Bureau reveals that in 1959 the 

only movement of metal from Jap an to Alaska was classified as metal manufactures and parts, 311 short tons moving to Sitka. The Corps of Engineers 

repo rt for 1959 Indicates 12,822 short tons of metal manufac tures and parts 

and 6,259 sho rt tons of steel mill products moved to Alaska from the Pacific 

Northwest. Thus it appears that less than 2 percent of such materials moving 

into Alaska in 1959 originated in Jap an. Reports of the domestic movement in 

1960 are not available; Census records indicate that during January through 

October 1960, the movement of this type commodity totaled 1,872 short tons of 

which 1,403 sho rt tons were iron and steel pipe and tube. The port of discharge is not indicated on the reports. Because of this small volume of the 

movement of steel from Jap an to Alaska, it cannot be concluded th at any differences in freigh t rates has had a significant impact on the source from which 

the cargoes were obtained.

DOMESTIC OFFSHORE SHIPPING

TUESDAY, MARCH 7, 1961

U.S. Senate,

Committee on I nterstate and Foreign Commerce, 

Subcommittee on Merchant Marine and Fisheries,

Washin gto n, D.C.

The subcommittee was called to order, pursuant to adjournment, at 

10:16 a.m., in room 5110, New Senate Office Building, Hon. E. L. 

Bartlett presiding.

Senator Bartlett. The committee will be in order.

It is the committee’s very special privilege this morning to hear as 

the first witness Dr. Femos-Isern, Resident Commissioner from Puerto 

Rico, a factual as well as eloquent witness on all matters having to do 

with the great commonwealth.

Dr. Femos, we welcome you.

STAT EMENT OF DR. A. FERN fiS-ISERN, RESID ENT COMMISSIONER 

OF PUE RTO RICO

Dr. Fernos. May I proceed?

Senator Bartlett. Yes; surely, Mr. Commissioner.

Dr. F ernos. Mr. Chairman, I appreciate the opportunity to appear 

before your committee briefly to present some pertinent facts concerning maritime transportation between Puerto Rico and continental 

United States.

I understand tha t later in the hearing—in fact today—the committee will hear a representative of the Puerto Rico Economic Development Administration, who will present the views of the Governor of 

Puerto Rico, the Honorable Luis Munoz Marin, and will go into the 

matter in more detail.

The Foraker Act of 1900, the first Organic Act approved by Congress for Pureto Rico, provided in section 9 of that act, th at—

the coasting tra de between Puerto Rico and the United States shall be regulated 

in accordance with the provisions of law applicable to such trade betw’een any 

two great coas tal districts of the United States.

This provision was continued by the Organic Act of 1917, known 

as the Jones Act, by virtue of its section 58 which provided “tha t all 

laws or parts of laws applicable to Puerto Rico not in conflict with 

any of the provisions of this act, are hereby continued in effect.”

This section 58 of the Organic Act of 1917 was, in turn, continued 

as part of the Puerto Rican Federal Relations Act, referred to by 

section 3 of Public Law 600, 81st Congress. It was within the framework of Public Law 600, 81st Congress tha t the Commonwealth of 

Puerto Rico was created by the people of Puerto Rico and proclaimed 

171
172 DOMESTIC OFFSHORE SHIPPING

on July 25, 1952. Thus, the provisions of section 9 of the act of 

1900 concerning intercoastal shipping remain in effect today.

Under the Merchant Marine Act of 1936, both the operating and 

construction cost differential subsidies are limited to foreign trade.

It is generally agreed tha t the operation of U.S.-flag vessels is substantially more costly than the operation of ships under foreign flags. 

Consequently, tariff rates for American vessels operating in foreign 

trade would have to be substantially higher than tha t of foreign 

vessels, were it not for the differential cost Federal subsidy paid to 

U.S. vessels engaged in foreign trade. Tha t is to say, the subsidy 

permits American-flag vessels to meet foreign vessels in freig ht rate 

competition; otherwise they would not be able to compete.

There is no competition with foreign vessels in coastwise shipping. 

Neither is there a subsidy. Freight rates are supposed to be geared 

to the total cost of construction and operation. In other words, while 

the cost of maintaining the U.S. merchant marine in foreign trade is 

paid p artly by its American users and partly through general taxation, 

the cost in coastwise shipping is borne exclusively oy its users.

The impact of this situation on offshore domestic areas is not the 

same as it pertains to continental U.S. users of coastwise shipping for 

obvious geographical and logistic reasons. In the mainland trade, 

there is no competition between U.S. vessels and foreign trade registry 

vessels, but there is competition between U.S. vessels and overland 

transportation; namely, railroads and truck lines. Tha t is to say, 

users have a choice between coastal transp ortation and overland 

transportation. This has resulted in the reduction to minimal proportions of the actual coastwise trade between ports in the mainland. 

But in what pertains to offshore areas, it is obvious that there is no 

such alternative. All transportation must be by sea, regardless of 

freight rates.

This situation should be approached with full appreciation of its 

practical impact on the offshore areas. These areas are insular, or 

noncontiguous peninsular. Either an ocean or a foreign country 

separates them from the mainland. Ocean transportation is their lifeline. At the same time, since they are included within the U.S. tariff 

system and are a p art of the U.S. common market, most of their outside trade is with the United States proper. They depend on U.S. 

shipping for this trade. It is obvious that they should carry a proper 

share of the burden of maintaining and protecting the American 

merchant marine. But for the reasons above stated, the burden these 

areas carry is proportionately much greater than the burden carried 

by the mainland.

Because of ocean transportation costs, the economic development of 

these areas is affected. It evidently must add to the cost of living. 

The cost of living in Alaska has been found to be 25 percent higher 

than Washington, D.C.; the .cost of living in Hawaii has been found 

to be 17.5 percent higher than Washington; and the cost of living in 

Puerto Rico has been found to be 12.5 percent higher than Washington. Let me point out tha t this represents considerable expense to 

the Federal Government, because a cost-of-living differential payment 

is made to Federal employees in these areas. These Federal employees 

are compensated to the degree that their living costs are higher than 

in Washington, D.C.
DOMESTIC OFFSHORE SHIPPING 173

On the other hand, transp ortation costs are reflected in production 

wages paid in Puerto Rico. Most of the material for Puerto Rico 

industrial plants is shipped from continental United States to Puerto 

Rico, and manufactured products must then be carried back 

from Puerto Rico to the mainland. In order to meet competition and 

offset transportation costs, wages must be lower than in the mainland. 

It has not been possible to apply the minimum wage law in Puerto 

Rico on the same basis as in continental United States. The combination of a lower wage and a higher cost of living results in a lower 

level of existence.

Where an adjustment in wages to compensate for costs of trans portation is not feasible, industrialization is handicapped.

Domestic trade consists in fact not of one, but of two categories: 

Domestic coastwise trade and domestic noncontiguous trade. They 

cannot be treated identically because their situation and circumstances 

are different.

It is in the national interest and it is f air tha t the offshore areas 

should have the same opportunity for development and well-being as 

the continental areas insofar as this is possible. Nature has placed 

them in an unfavorable position because of distance and geographical 

isolation; manmade laws should not add to their natural limitations. 

Although they should carry’ a proportionate share in support of the 

U.S. merchant marine, they should not be called upon to assume a 

disproportionate share, lest their growth and development be stunted 

ana their welfare impaired.

I shall conclude with a comment with regard to a special situation 

which concerns Puerto Rico. The present service given by the various 

shipping lines is freight service, with some limited and unsatisfactory passenger service on these ships, a maximum of 12 passengers 

per ship. The tourist trade is one of the developing trades in the 

Caribbean, but other than by freighters there is no passenger shipping 

service between Puerto Rico and the United States, either regular or 

tourist. Tourists can reach Puerto Rico only by a ir or by freighter, 

except for those who occasionally may visit Puerto Rico on cruise 

ships. "Whoever lives in Puerto Rico can only get out of the island 

either by airplane or on freighters . The effect of this situation was 

dramatized by the recent strike against the airlines. All the rest of 

the Caribbean has tourist and regular shipping service.

Various suggestions might be made in this respect. First, subsidized regular American lines with passenger service and plying 

between the United States and countries neighboring Puerto Rico, 

now bypassing Puerto Rico, might be allowed to make San Ju an a port 

of caH without loss of subsidy. Second, American tourist ships cruising the Caribbean with subsidy might be allowed to carry passengers 

from the mainland to Puerto Rico and from Puerto Rico to the mainland without loss of subsidy. Third, foreign-flag ships might be allowed to carry passengers between Puerto Rico and the United States.

Thus, Puerto Rico might have regular passenger service plus some 

additional service, especially d uring the tourist season.

I thank this committee for the time it has given me.

Senator Bartlett. Thank you, Commissioner Femos, for a very 

well reasoned statement.

71709 o —e; -12
174 DOMESTIC OFFSHORE SHIPPIN G

You made a suggestion here , infere nti all y at least, which had not 

yet come to the attentio n of the committee, and th at is th at if an 

arr angeme nt c ould be m ade h ere to accom modate the situatio n which 

you describe and which is the genesis of the problem befo re the 

com mittee, it could res ult in a sav ing to the Fe de ral Government, 

because if tra ns po rta tio n costs are lowered, the cost of liv ing in these 

are as migh t be lowered and the Feder al Government would the reb y 

be able to lessen or eliminate the cost of liv ing allow ance to Fe deral 

employees.

Dr. F ernos. And the Federal employees would not suffer by th at 

because their differential pay me nt is geared to the high cost of living. 

I f th e cost of liv ing is so much hig her t ha n W ashing ton, th at is what 

the y get, t ha t perc enta ge. So the y always wou ld get a different ial if, 

in spite of better tra ns po rta tio n or less ex pensive tra ns po rta tio n they 

would have a hig her cost of liv ing the re anyhow . But the chances 

are th at the cost of living would be reduced and there fore the differentia l would be c orresp ond ingly reduc ed if g ear ed to the cost of living.

Se na tor Bartlett. I think th at is a very im po rtan t con side ration 

fo r the committee, because it could serve as a lar ge offset to wha tever 

ad dit ion al costs m igh t be a ccumulate d by reason of any paym ent made 

to thes e ca rriers.

How long is i t, Dr. F ern os, if you recall, since you hav e h ad regu lar 

pas sen ger service to P ue rto Rico ?

Dr. F ernos. We had no passenger servic e, of course, du ring the 

war. We had had up to the Second W orld W ar, but af te r the 

wa r there was an attempt on the pa rt of the Bul l In su la r Line 

to ru n a p assenger-service boat. I rememb er the name was the Puert o

Ric o. Bu t I think it is over 10 years now th at we haven’t had any, 

Because they discontin ued the service.

Se nator Bartlett. Of course, the service pro vid ed by the frei gh ters—12 passengers each as a max imum—is inconsequential as fa r as 

ca rryi ng any nu mb er of people to the island s ?

Dr. F ernos. Very sm all ; and also, although I have traveled in 

them and I can say th at the staterooms are pr et ty com fortable, there 

are no recrea tional or othe r ame nitie s of sea travel, and, na turally , 

because the y are fre igh ters.

Se na tor Bartlett. How man y days does th at tr ip tak e from San 

Ju an to New Yo rk by fre ig ht er ?

Dr . F ernos. About 3i£ day s.

Se na tor Bartlett. Mr. Go din g ?

Mr. Goding. I have one question.

You men tioned here am on? possible suggestion s on the passenger 

servic e, the pos sibility of allo win g Am erican tourist ships cru ising 

the Caribbea n with subsidies to be allow ed to c arry passengers— pr esum ably witho ut loss in subsidy. Is th at now possible? I di dn ’t 

know tn at we su bsidized th e cruise vessels.

Dr. F ernos. I f a cruisin g ship is board ed by somebody in New 

Yo rk and th at s hip is to make San Ju an a p or t of call, of course, the 

passengers may land, but they are supp osed to go back to the boa t 

and continu e with th ei r cruise. I don’t know if anyone just wan ted 

to sta y in San Ju an and the n come back by ai r or some othe r way 

could do i t ; b ut the cost of the tra ns po rta tio n would be f or the whole 

cruise.
DOMESTIC OFFSHORE SHIPPING 175

As I understand, the shipping lines could not sell a ticket just for 

New York-San Juan transportation, just for tha t much. That is my 

understanding.

Senator Bartlett. Thank you very much, Dr. Fernos. We ap preciate your coming over.

Mr. Moscoso, director, economic development administration, will 

be the next witness.

STATEMENT OF HON. LUIS MUflOZ -MA RlN, GOVERNOR OF PUERTO 

RICO, REA D BY TEODORO MOSCOSO

Senator Bartlett. Do you have a prepared statement ?

Mr. Moscoso. No, sir. I have a message from the Governor of 

Puerto Rico which I wish to read and then I shall have an extemporaneous message to make.

Senator Bartlett. Will you please identify yourself for the 

record.

Mr. Moscoso. I am Teodoro Moscoso, economic development administrator for Pu erto Rico.

Senator Bartlett. I may elaborate a little bit, if I may, upon tha t 

introduction.

One of the first men I met in Puerto Rico was dynamic Teodoro 

Moscoso, head of the Puerto Rico Ind ustrial Development Company. 

This organization was set up by the insular government in 1942 to 

bring industry to the island and thus reduce unemployment.

Through his resourcefulness and energy, Mr. Moscoso has induced 

100 industries, large and small, to locate on the island, thus furnishing 

about 14,500 new jobs. Other industry has arrived independently to 

create more work.

Mr. Moscoso’s first big development job back in the w ar yea rs was to build a 

government-owned glass facto ry to manufacture bottles.

Now tha t constitutes a quotation. As a matter of fact that was 

when your job was relatively new. As you come across old magazines—I found this in a dentist’s office dated April 1951, and although 

it doesn’t pertain directly to the subject matter of the hearing, I 

know it would be most interesting if we had the story of what has 

happened in the decade since this was published, but however tha t 

may be, I want to congratulate you upon a splendid job in this Operation Bootstrap.

Mr. Moscoso. Thank you, Mr. Chairman.

I read Governor Munoz-Marin’s statement addressed to the committee.

Senator Bartlett. Yes, sir; if you can get me away from flattering 

you, you can. Yes, sir: indeed.

Mr. Moscoso (reading) :

My de ar Mr. Chairman and committee members, I deeply regret my inability 

to be present today. There is no single problem of gre ater economic consequence to the people of Puerto Rico th an the problem which you have determined 

to investiga te and rem edy: the deepening crisis of our offshore shipping 

services.

For over half a century, Pue rto Rico has been in closest association with 

the Federal Union, first as a territo ry, since 1917 as U.S. citizens and since 

1952 as a self-governing Commonwealth. Basic to the relatio nship has been 

freedom of trad e between Puerto Rico an d the State s. The consequence of free-
176 DOMESTIC OFFSHORE SHIPPING

dom of tra de has been that Puerto Rico is now inte grated into the economy 

of the mainland. Almost half of everything we produce is shipped to the 

Sta tes each year. Over half of all we consume is exported from the States to 

Puerto Rico. The Commonwealth is one of the best customers of U.S. mainland 

ind ust ry and agricultu re.

Fo r thi s movement of vita l goods we depend prac tically exclusively on maritime transp ort. We have nothing else—no trucks, no railroads, no pipelines— 

to move the goods which we must sell, and import the commodities we must 

have, for survival as a viable company. We are, as you know, concentrating 

our energies on a unique program of economic deevlopment in Puerto Rico— 

Operatio n Bootstrap. Operation Bootstrap must succeed if we are to meet 

our goal of a decent standard of living for all the people of Pue rto Rico. But 

whether Operation Bootstrap succeeds or fails depends to a large degree upon 

whether the Commonwealth of Pue rto Rico is served by a merchant marin e 

of maximum efficiency and minimum cost.

Our deepest concern is with the high and mounting cost of our present services, 

and the looming threa t th at these costs will increase to levels beyond our 

capacity to pay, when new vessels are introduced into the service, as I am 

advised they must be shortly. These increasingly costly services are provided 

in vessels of U.S. registry. Vessels of foreign-flag registry are very much less 

costly, we understan d. Thus, the law restric ting our vita l services to U.S. 

vessels imposes a very heavy and inequitable cost burden on the people of the 

Commonwealth of Puerto Rico, a burden which we calculate at more than $10 

millio n per year.

This inequitable burden could be lifted from our shoulders by an amendment to the law perm ittin g the operation of foreign vessels. If, however, nation al intere st considera tions prevent this, then some other remedy must be 

found, such as, perhaps, a system of subvention, so that the costs of these nation al i nte res t considerations are borne equitably and evenly by all citizens of the 

United States.

The people of the Commonwealth of P uerto Rico are deeply gratified that your 

committee has set out to remedy this vital problem. I have asked Mr. Teodoro 

Moscosco, the adm inistrator of our economic development administration, to 

pre sen t this communication to you, on behalf of the Commonwealth government 

and to extend the resources of the Commonwealth government in every way in 

cooperation and aid of your program.

G ov. L u is Mun oz-MarIn .

Senator Bartlett. The committee appreciates this expression from 

the Governor, and for the record I will say tha t it is indeed a very 

deep interest, to my personal knowledge, which has been reflected not 

only in the presentation of this statement which you have just read, 

but which was long since generated.

When the Governor was here in Januarv, I recall that he participated in at least two meetings devoted to discussion of this very subject. Governor Egan, of Alaska, and Governor Quinn, of Hawaii, 

were also present, and it should be recorded th at the three Governors 

are intensely concerned about the maritime shipping problems in their 

respective areas.

You may proceed.

Mr. Moscoso. Mr. Chairman, from the biographical notes tha t you 

were kind enough to read, you will know that T have been living with 

this problem for quite a number of years and it has become increasingly burdensome to the industrial development program.

The net income of Puerto Rico in 1959 was $1,300 million. Now. 

during the fiscal vear 1960 we brought in from the United States $750 

million worth of goods, and we shipped to the continental United 

States $600 million worth of goods. Now if you add this two-way 

movement of oversea shipments, you will see that they add to a total 

which is larerer than the entire net income of Puerto Rico.

Now. I think tha t there are very few areas in the world t hat can 

match that kind of a situation.
DOMESTIC OFFSHORE SHIPPING 177

In the case of the continenta l Uni ted State s, the to tal im po rt and 

ex po rt tra de of the Un ite d State s, both over land and over wa ter is 

less th an 10 pe rce nt of th e n ati onal net income. In th e case o f Pu er to 

Rico, it is over 100 percen t. In othe r words, sh ipping t o us ove r the 

ocean lanes is fro m 10 to 12 times more im po rtan t th an it is to the 

economy of the Un ite d States. You can see why we give so much 

att entio n to this proble m.

The indu str ial izati on pro gra m, as the chair ma n mentio ned awhile 

ago, was originall y initiated to tr y t o solve th e pro blem of u nem plo yment in Pu erto Rico. I am s orr y t o say that ev en wi th the str ides we 

have made, we are still quite fa r fro m solvin g th at prob lem. Ou r 

unemployment rate now sta nds a t 14 percent of the la bo r force. Th at 

is a very substan tia l proportion.

Th e ocean a nd fre ig ht rates an d the in crea ses we hav e been suff erin g 

over a per iod of time are of grea t ma gnitu de. Since fiscal 1947-48, 

these ra tes hav e gone up close to 100 percent . In th e l ast 4 years alone 

the increases hav e been in the ma gnitu de of 29 percen t. Dur in g the 

same period , d ur ing thes e pa st 4 y ears, the foreig n-flag costs have in ­

creased, acc ord ing to the Un ite d Na tions Se cretariat, less th an 1 pe rcent. Th e r ate increases in the Un ite d St ates -P ue rto R ica n trad e over 

the las t 10 to 12 y ear s hav e rou ghly been three times the increase of 

the U.S. wholesale pri ce index.

Now, I notice th at one o f the witnesses fro m Ha wa ii, yeste rday, mention ed a com parison sim ila r to thi s, exc ept th at th e com parison was 

made between shipping costs of Ha wa ii and the H onolu lu consumers 

cost index. In this case, I am using as a basis of com parison, the 

U.S. wholesale cost index, and you can see th at the figu re ind ica tes 

an increase th ree tim es faste r in sh ipping costs th an in th e U.S. wholesale cost pr ice index.

Th e pre sen t frei gh t rat es rea lly impose an inequitab le bu rden on 

Pu er to Rico. As it is well known by the com mittee, foreign-flag vessels cost about one-h alf to build and opera te th an U.S .-flag vessels. 

We h ave estim ated th at t o Pu er to Ric o alone, this addit ion al cost rep ­

rese nts about $10 millio n pe r yea r. However, this im pact on Pu er to 

Rico must be viewed in the l ig ht of the fact th at our ne t incom e pe r 

ca pita is abo ut a fo ur th of the ave rag e net income pe r ca pita in the 

Un ite d Sta tes. So the $10 m illion rea lly m ust be compared to a figure 

closer to $40 millio n if you are going to look at it from th e po int 

of view of ou r m uch lowered ne t income pe r c apita.

The impac t d iffe ren tial in subsidies in th e U .S. m ain lan d is a bout 89 

cents pe r capit a, th at is, the cost of the maintaining of the sub sidy 

pro gra m of U.S -flag vessels in forei gn tra de . Wherea s the $10 million excess cost in the Pu er to Rican sh ipping rep res ent s abo ut $4.28 

pe r cap ita. In othe r words, it is cos ting Pu erto Rico abo ut five tim es 

more pe r ca pita than it is costing the main lan d citizens. However , 

aga in since our net income is about a fo ur th of wh at the mainlan d 

ne t income is, vou really have to multip lv t hi s by fo ur to ge t the tru e 

imp act in the liv es of the people of Pu er to Rico. In o ther wo rds, i t is 

costing, on the basis of our much low er net income pe r ca pita, abo ut 

20 t imes more to su pp ort this differential betw een the sh ipping costs 

of Americ an-flag vessels and w hat we could get i f for eig n-flag vessels 

were allow ed to ply between Pu er to Rico and the United Sta tes .
178 DOMESTIC OFFSHORE SHIPPING

Th is, of course, has hea vily affected the shipm ents to Pu er to Rico 

fro m ma inl and sup pliers. I t is alread y affe ctin g the shipm ent of 

Am eric an-made automobiles. I notice th at the H aw aii an gen tlem an, 

yesterda y, mentioned th at very same situatio n. We are star ting to 

see th at in P ue rto Rico, also.

As a matter of fac t, a considerable numb er of our automobiles are 

forei gn made today. Th e vessels we are now using are, as you are 

all awa re, obsolete o r obsolescent and t hey will have to be retir ed very 

soon. We all recognize th at up to now the tra de has been obtainin g 

a type of subsidy by being able to acquire these vessels fro m th e reserve fleet at a con side rabl y lower cost th an wh at it would be if they 

ha d to buy newT vessels. Eve n assu min g th at we were able to obta in con stru ctio n subsidy fo r the vessels which will be replaced in this 

tra de , I can see where the imp act of th is subsidy would no t be su fficient to m ain tai n fre ight rate s a t a level w hich would allow these offsho re area s to develop adequately.

Th e alt erna tiv e is eit he r we continu e op erating these obsolete vessels which, of course, would be almost wor thle ss in case of an emergency, or we replace them at hig h domestic cost, whic h, of course, 

will increase the rate s. These rat e increases may pro bab ly go beyon d 

a po int where we a re able to pay for th em. We m ust have some kin d 

of a release. We must hav e an opera tion of the lowest cost ca rri er 

reg ard les s of flag and a subsidy to enab le domestic carriers to compete. We mu st also strength en our regu latory pro ced ure s and our 

sta ndard s.

I think th at it has been well brou gh t out by oth er witnesses th at 

have come before th is committee t hat the reg ulato ry fun ctions of the 

Maritim e Commission are in a clash wi th the pro mo tional fun ctions 

of the Comm ission, and I am afra id th at th at is som ething th at will 

have to be resolve d sooner or later.

I notice th at Mr. Gr ue nin g brou gh t th at ou t very for cefully yester day.

Now, we have prep ared a study, copies of which are available, on 

Pu er to R ico’s problems wi th the U.S. mari tim e laws. Th is stu dy was 

prep ared almost 2 year s ago, b ut i t has been b ro ug ht up to date, as of 

Ja nuar y 1961. Copies of it will be ava ilable to the members of the 

committee.

I must say th at the firs t time we tri ed to br ing this matter to the 

attention of the Execu tive, we were assu red in a lette r by Preside nt 

Eis enh ow er of Jun e 16,1959—

th at the review of the U.S. maritim e policies, which I have asked the Secretary 

of Commerce to undertake, will Include a care ful consideratio n of th e difficulties 

faced by the Commonwealth of those In shipping. This review embraces not 

only the Merchant Marine Act of 1936, but ail other significant aspects of Federa l policy affecting the m erch ant marine.

Now, this was Ju ne 16, 1959. Th is lette r was received by the Governo r of Pu erto Rico as a result of the tra ns m itt al of the ori gin al 

stu dy o f the problem s o f the U.S. m aritim e laws ins ofar as they affect 

Pu er to Rico.

Now, the De partm ent of Commerce prepare d a rep ort dated M arch 

1960, c alled “F ed eral Tr an sportatio n Policy and Pr og ram,” and the
DOMESTIC OFFSHORE SHIPPING 179

only mention which I can see which pertains to this particular problem is the following, and I quote:

The economic problems of the noncontiguous States and territories arising 

from the high shipping costs and these protected trades have been called to our 

attention and it has been suggested that either foreign-flag partici pation in these 

trad es or subsidy must be provided. These issues tur n however on broader 

considerations than those of transp ortation policy herein discussed.

I am very happy, Mr. Chairman, that you have taken the initiative 

in this committee to study this very, very important problem which 

affects the life of the noncontiguous areas of the United States, and I 

am sure tha t as a result of the activities of your committee, we will 

now get positive action.

Thank you very much.

Senator Bartlett. We thank you.

My only regret is that every member of the full committee was 

not here to hear your statement. It was very convincing. How is 

Operation Bootstrap proceeding?

Mr. Moscoso. I am afraid between what we can now call a recession and the high shipping rates, we are not doing as well as we had 

expected this year. Our promotions are much slower than we had 

anticipated.

How much of that is due to the recession and how much of that is 

due to the fact that high shipping rates are making it very difficult 

for certain industries to establish themselves in the island, we have 

not been able to find out as yet. We are looking into the problem 

continuously, as you can see from the report tha t I have filed with 

the committee, and we hope to have an answer shortly.

But I must say tha t everything tha t we can do to make Operation 

Bootstrap successful should be done because it is the only hope we 

have in Puerto Rico of achieving a decent standard of living for our 

people.

Senator Bartlett. Well, if we can refer to Americans as being 

customers of Americans in this sort of trade, Puerto Rico must rank 

very high in respect to imports of American goods and exports to the 

United States in the whole worldwide scheme of things.

Mr. Moscoso. Yes, sir. We purchased approximately $800 million 

from the United States in the past year ana we shipped about $600 

million. Of course, there is a difference there which the balance-oftrade gap is closed by invisible exports such as tourist dollars which 

are spent in Puerto Rico and now tha t I mention tourist dollars, I 

am very happy to see Dr. Fern os brought out the fact we do not have 

passenger service to Puerto Rico. We have not had it in the last 8 

years.

If you are unable to fly for medical reasons or for psychological 

reasons, the only way you can get down to Puerto Rico and come 

back is by using a freighter, and one of the 12 staterooms which are 

normally available in freighters, except tha t these staterooms are 

usually set aside for large shippers that use the freighter services of 

these carriers.

Senator Bartlett. How many lines are serving Puerto Rico ?

Mr. Moscoso. We have Bull, Sealand, Waterman, Lykes, Alcoa, 

and one more company the name of which I do not recall now, and 

probably a smaller company that services primarily the—oh, yes, Is-
180 DOMESTIC OFFSHORE SHIPPIN G

brandtsen, whi ch also services us on a r ound-the-w orld service. Those 

are seven companies.

Se na tor Bartlett. W ha t is your situatio n as to adequacy and freque ncy of service ?

Mr. Moscoso. We have reas onably good freq uen cy of service, yes. 

T hat has not been o ur pa rti cu la r problem.

Se na tor Bartlett. H ow many people are the re in Pu er to Rico?

Mr. Mosooso. The isla nd has 2,380,000 inha bitants—2,380,000 inha bi ta nt s and it has an area of 3,500 square miles which gives a po pu ­

latio n den sity of ab out 650 per square mile.

Se na tor Bartlett. Tha t is very, very high in terms of thi ckly 

settled cou ntries of th e w orld, isn’t it ?

Mr. Moscoso. One o f th e highest in the wo rld, yes, sir.

Se na tor Bartlett. I s the population inc rea sin g rapidly?

Mr. Moscoso. It has been incr easing rapi dl y, at the rate of ap ­

pro xim ate ly 2i/£ percent per year. Th is has forced the mi gra tion of 

a conside rable num ber of P ue rto Ricans in search of jobs to come to 

the Un ite d States. A numb er of them hav e come int o New York. 

Fo rtun at ely now the y are sprea din g all over the country , prim arily 

in the northwe ste rn section of the Nation. Dur ing the pa st few years, 

however , the rat e of migration has come down considerably, pri ­

marily due to the f act that not enough jobs have been available. Th is 

is a good ind ication th at the Pu erto Ric ans will only migr ate if the y 

can get jobs.

Se na tor Bartlett. I t isn’t because the jobs are ava ilab le at home?

Mr. Moscoso. It is because jobs are not ava ilable at home. We 

have not been able throug h Op era tio n Bo otstr ap to create sufficient 

jobs to tak e care of not only of the backlog bu t also of the increase 

in the labor force ev ery year.

One of the difficulties th at we face, Mr. Ch air man, is the fac t th at 

at the same time th at we are indu str ial izing we hav e been ratio na liz ­

ing or mec hanizing our agric ult ure , so we hav e been destroying or 

pu sh ing people out of jobs in as large num bers as we have been 

crea tin g new jobs fo r them.

Se na tor Bartlett. Do you hav e any person al expla nation fo r the 

fa ct whi ch you sta ted th at American shipping costs are going up 

with such g reat ra pi di ty as c ompared with slow increases on the pa rt 

of forei gn ca rriers ?

Mr. Moscoso. There are undoubtedly a numb er of reasons fo r 

th at , sir. The me rch ant seamen of the Un ite d State s are extreme ly 

well pa id as com pared to forei gn seamen. I am very ha pp y th at is 

so. Th e only com pla int whi ch I have is t ha t Pu er to Rico is p rob ably 

the less able of several a reas to pay these wages.

Th e oth er reason, of course, is th at almo st ev ery thing t ha t perta ins 

to mari tim e tra ns po rta tio n has been goi ng up. Fuel, all the services 

th at they use, th e construct ion of piers and docks by some of the steamsh ip com panies, et cetera .

Se na tor B artlett. You mentioned the une mploy ment rate in Pue rto Rico as being 14 p ercent. Is th at a seasonal fac tor ?

Mr. Moscoso. No, sir, this is the yea rly average . We hav e times 

whe n th is dro ps, th at is, at the time when the su ga r season is at its 

high peak. But this is the average throug ho ut the year.

Se na tor Bartlett. W ha t is t he per capita income in Pu erto Rico ?

M r Moscoso. Now $565.
DOMESTIC OFFSHORE SHIPPING 181

Senator Bartlett. How does tha t compare, if you know, with 

Mississippi?

Mr. Moscoso. It is about one-half of that of Mississippi and about 

a fourth of the average per capita income of the whole United States.

Senator Bartlett. But it has been increasing very dramatically in 

the last decade ?

Mr. Moscoso. It has been, but it also has been increasing here in 

the States. We are really low men on the totem pole.

Senator Bartlett. You said, as I recall, shipping costs have gone 

up three times as much as U.S. wholesale prices—in what period?

Mr. Moscoso. In the last 12 years.

Senator Bartlett. In the last 12 years ?

Mr. Moscoso. The last 12 years, yes, sir.

Senator Bartlett. While testifying yesterday, the Chairman of 

the Federal Maritime Board suggested to the committee tha t there 

would be need to evaluate as a unit, as it were, all of the factors that 

enter into these increased costs. Did you have an opportunity to 

read his statement ?

Mr. Moscoso. I read it last night, sir, late last night.

Senator Bartlett. You will recall then, he said that freight rates 

by themselves constitute only one element of many and I should like 

to ask you if you care to answer—what weight you would give to 

those suggestions that Chairman Stakem made ?

Mr. Moscoso. Over the years we have been looking into this problem and we know pretty much how much an impact freight rates 

have on Puerto Rican costs. It is rath er simple to take our trade 

figure and to take our freight bill and work out the cost of moving 

tha t freight in and out of Puerto Rico.

Senator Bartlett. Do you know, of your personal knowledge, what 

consideration was given to those factors by the Federal Maritime 

Board in respect to proposed recent rate increases?

Mr. Moscoso. If they have taken into consideration the impact on 

the economy of Puerto Rico?

Senator Bartlett. Yes.

Mr. Moscoso. I have my doubts about that, Mr. Chairman. I 

don’t really know, but I have my doubts about that. Sometimes I 

believe th at they are strictly concerned with the profit-and-loss statements of the carriers.

Senator Bartlett. You feel that perhaps Senator Gruening had 

a point when he informed the committee yesterday tha t these two 

responsibilities didn’t always meet and blend, promotional and 

regulatory ?

Mr. Moscoso. I think it is very difficult to blow hot and cold out 

of the same side of your mouth. I think tha t perhaps we are asking 

them to do the impossible. Maybe this should be separated into two 

different agencies.

Senator Bartlett. You don’t believe, as I gathered from your statement, th at application of a construction differential for these trades 

would cure these ills?

Mr. Moscoso. No, sir, I don’t think it is sufficient, because rig ht 

now for all intents and purposes we have almost subsidized construction of these vessels by virtue of the fact that the carriers have 

been able to acquire them at a relatively low cost. I remember seeing
182 DOMESTIC OFFSHORE SHIPPING

th e testim ony of the att orne y general of Ha wa ii whe re he listed the 

value of the vessels now being used by the Matson Lin e. I can assure 

you that those vessels tod ay, if repla ced by new vessels, would prob ­

ably cost anywhere f rom 5 t o 10 tim es what is now the v alue of boats.

Se na tor Bartlett. By itself, th at might only 9erve to aggrav ate 

an ex isting bad situ ati on ?

Mr. Moscoso. Yes.

Se nator B utler. Did you say t ha t each citizen of th e Un ite d States 

now pays, wh eth er he knows it or not, and I susp ect he does not, 89 

cents of his tax mony for subsidization of U.S .-flag carriers ?

Mr. Moscosco. Eigh ty- nin e cents per capita fo r the entire sub sidiz ation pro gra m, and we pay $4.28 in Pu er to Rico.

Senator Bartlett. Of course, to calculate wha t it might cost if a 

prog ram of the na ture you recommended were appli ed fo r the benefit 

of P ue rto Rico and Guam a nd Ha wa ii and Alask a would be virtu ally 

impossible on t he basis of da ta availab le to you. You don’t know wh at 

th at w ould cost, do you ?

Mr. Moscoso. No, I don’t know wh at th at wou ld cost.

Se nator B artlett. Tha t isn ’t your business to i nfo rm us, of course.

I was very inte rested when you said th at the Go ver nor of Pu erto 

Rico had called this situatio n to the att en tio n of th e executive de pa rtme nt as fa r back as 1959, because the s itu ati on was alr eady then bad, 

an d th at the repo rt th at was made ducked the whole pro position , 

di dn ’t go into it at all, in spite of the assurances the Go ver nor had 

th at it would receive c loser inquiry .

Mr. Moscoso. Yes, sir.

Se na tor B artlett. You nev er he ard why it is t hat t he inq uir y was 

no t made ?

Mr. Moscoso. I hav e no idea, Mr. Ch air ma n, why this th in g was 

no t given the attentio n it rea lly merits. I am almost sure th at this 

was d ue to the fact t hat y ou r comm ittee had not tak en a ha nd in the 

ma tte r. I feel qui te confide nt th at the res ult s are going to be much 

different fro m now on.

Se na tor Bartlett. I mu st say, not in a question ing manner, bu t in 

a d eclar ato ry one, I hav e n eve r been able to un derst and why this committee should have to initiate the inq uiry, because it is pro perly , in' 

my opinion, the responsib ility o f th e exe cutive agencies.

You said the fleet ser vin g Pu erto Rico is becoming obsolete and 

obsolescent ?

Mr. Moscoso. Yes, sir.

Se na tor Bartlett. You are an economist. As I understand it, 

you are profess ionally an economist ?

Mr. Moscoso. No, si r; I am a pharm aci st.

Se na tor Bartlett. Pharm acist ?

Mr. Moscoso. Yes, sir.

Se na tor Bartlett. You haven’t had much chance lately to mix 

any dru gs, have you ?

Se na tor Butler. W ha t is th at cig are tte—you think for yours elf? 

Vice roy.

Se na tor Bartlett. Right here, I need t hem today .

You are g oin g to qu ali fy in my jud gm ent as an economist anyw ay. 

If no thing is do ne in th is are a-----

Mr. Moscoso. Pa rdon me.
DOMESTIC OFFSHORE SHIPPING 183

Senator Bartlett. If nothing is done in this area, if we fail to 

enact any legislation, if otherwise no action to alleviate is taken, what 

is going to be the consequence, in your judgment, so far as Puerto 

Rico is concerned ?

Mr. Moscoso. The consequence will be that rates are going to continue to increase because it is almost impossible to reduce costs with 

these obsolete vessels. I can see that wage rates are going to continue 

to increase among the seamen. It will be necessary to increase them 

as time goes on. There will be no possibility of increasing the productivity in these vessels because of tneir obsolete characteristics, and, 

therefore, it will be the consumer in Puerto Rico who will have to pay 

the price.

Senator Bartlett. What will this do to your program of industrialization?

Mr. Moscoso. The industrialization program is already suffering 

from these increases in rates. One of the things tha t it nas done is 

tha t it has forced us to limit ourselves to certain industries tha t are 

not affected too much by increases in freight rates. It almost virtually 

forces us into that, anything that is heavy and bulky, in which the raw 

materials are heavy and bulky or in which the finished product is 

heavy and bulky, is almost out of the question.

We have had to limit ourselves to light manufacturing, to electronics, light metal manufacturing, and things of tha t kind which, 

of course, hampers us tremendously.

Senator Bartlett. You are required to import a considerable percentage of your foodstuffs; are you not ?

Mr. Moscoso. Yes.

Senator Bartlett. How do the people live, with an average income 

of less than $600 t

Mr. Moscoso. We have been doing what we can in order to reduce 

those costs.

Since the ships apparently are not going to be changed unless something is done within the next few years, we have been try ing to better 

the loading and unloading facilities at the docks.

For instance, our main industry is sugar, and we now are shipping 

all of our raw sugar to the United States in bulk. Tha t has reduced 

costs.

We are now shipping in wheat instead of bagged flour and we are 

milling in Puerto Rico. We are now shipping in the raw materials 

for our cattle and poultry feed in bulk, and tha t has also reduced 

costs considerably.

Rice, which is the main staple in our diet, is also being brought in 

in bulk and we have been able, in tha t way, to hold the line on costs, 

but we cannot go any further. I do not think that there are very 

many more things that we will be able to ship in in bulk, so insofar as 

rationalization, as the term is concerned, I think we have about 

reached the limit.

Senator Bartlett. Then you told the committee tha t freig ht rates 

have increased 100 percent, almost, since 1947-48.

Mr. Moscoso. That is right.

Senator Bartlett. And 29 percent in the last 4 years ?

Mr. Moscoso. That is right.

Senator Bartlett. If this trend continues, under existing arrangements, inevitably this will mean a decline in the standard of living
184 DOMESTIC OFFSHORE SHIPPING

for Puerto Ricans, the average Puerto Rican who does not have now 

a very high standard.

Is that a fair assumption ?

Mr. Moscoso. That is a f air assumption for two reasons: First, the 

items of consumption for Puerto Ricans will increase considerably in 

price, because as I mentioned to you, over 50 percent of everything 

we consume has to be shipped in by boat, and it will also reduce the 

standard of living because I do not believe that the industrialization 

program can continue at the rate it is doing today if freig ht rates 

continue to increase at tha t fast a pace.

Senator Bartlett. I have read this study which you alluded to 

entitled “Puerto Rico’s Problems With the United States Maritime 

Laws,” dated January 1961, and I believe it is so valuable, tha t it 

ought to be incorporated as part of the record.

If there is no objection, it will be included.

(The study referred to appears as appendix A, p. 324.)

Senator Butler. I would like to ask one or two questions, Mr. 

Moscoso.

I must first beg your pardon for not having been here during your 

entire testimony.

You referred to an 89-cent subsidy per annum for each man, woman, and child in America ?

Mr. Moscoso. That is right, sir.

Senator Butler. You also referred to the high wages paid to 

American seamen ?

Mr. Moscoso. Yes, sir.

Senator Butler. What is the relationship between the two ? I don’t 

know the point that you were trying to make.

Mr. Moscoso. I am not tryin g to imply tha t the entire reason for 

the high shipping rates is due exclusively to the high wage costs. 

There are other reasons including the fact that our vessels are 

thoroughly obsolete.

The only point of contact between one figure and the other is as 

follows: The 89 cents is the result of the dividing the cost of the 

subsidy program-----

Senator Butler. Tha t is the construction differential ?

Mr. Moscoso. No; the operational subsidy.

Cenator Butler. Just the operational subsidy alone?

Mr. Moscoso. Which is about $150-some-million a year, by the 

population.

Senator Butler. Does that take into account the recapture under 

the Merchant Marine Act ?

Mr. Moscoso. No, sir; this is just exclusively the operation-----

Senator Butler. The money is paid out and you do not deduct 

from tha t any money tha t the Government recaptures under provisions of the law ?

Mr. Moscoso. I believe that this is a net figure, as far as I know.

Senator Butler. This is a net figure?

Mr. Moscoso. Yes, sir.

Senator Butler. And the purpose of that figure is what—why do 

you cite that figure? What do you do it for?

Mr. Moscoso. This figure is the cost of the subsidy program 

adopted through the Maritime Administration for the purpose of 

permitting U.S.-flag vessels to compete in foreign trade m order to
DOMESTIC OFFSHORE SHIPPING 185

have a ready fleet, in order to accomplish the purposes of the Maritime Act.

Senator Butler. In other words, t hat subsidy puts the American 

merchant marine operator on precisely the same basis as his foreign 

competitor ?

Mt. Moscoso. That is right.

Senator Butler. But it gives him no advantage and he suffers no 

detriment by reason of it ?

It merely puts him in a position to compete on equal terms with a 

foreign competitor?

Mr. Moscoso. Tha t is rig ht

Senator Butler. If he makes more than tha t amount of money, 

he has to pay some back to the Government under the provisions oi 

the act?

Mr. Moscoso. Tha t is right.

Senator Butler. You are for th at, are you, fo r the subsidy?

Mr. Moscoso. I am for that ; yes, sir.

My only contention is this, that the same subsidy should apply to 

the shipping freighters in the offshore areas of the United States.

Senator Butler. Let me get your reasoning on that.

Mr. Moscoso. The offshore areas of the United States are forced by 

the cabotage laws to trade exclusively in American flatbottoms. The 

purpose again is to have a ready fleet. Of course, it goes back to 150 

years ago and merchantilism, but the modern conecept is that this is 

being done in order to help the United States have a ready fleet in 

case of an emergency.

Now, our contention is just the same as we pay a subsidy to American vessels which trade in foreign trade, there should be a subsidy

f

iven to American vessels that apply to offshore areas, otherwise the 

urden is inequitably distributed.

In the case of Puerto Rico, we have found if we were allowed to 

trade in foreign-flag vessels, we would pay $10 million less.

Now in an economy such as ours, where the net income per capita 

is one-fourth tha t of the United States, that has the equivalent impact of $40 million freight bill, which we have to pay in addition to 

what normally would be paid, if we did not have to use Americanflag vessels. And tha t price, $4.28, multiplied by 5, gives us a total of 

about 20 times more.

Senator B utler. Thank you, sir.

Senator Bartlett. Mr. Grinstein ?

Mr. Grinstein. Mr. Moscosco, yesterday Chairman Stakem of the 

Maritime Board suggested that the committee study other costs besides shipping tha t are added to consumer goods, such as retail and 

distribution costs. Has Puerto Rico made a study of that ?

Mr. Moscoso. Yes, sir. Prof. John Kenneth Galbraith did a very 

fine study. I think he is ^oing to be the Ambassador to India. Professor Galbraith made this study about 8 years ago and it is called 

Marketing Efficiency in Puerto Rico. It was done under the auspices 

of the Social-Scientific Research Center of the University of Puerto 

Rico and results have been published in a book by Harvard University Press.

We acted on the basis of tha t report and whereas 8 years ago, 6 

years ago, Puerto Rico did not have a single supermarket, today we
186 DOMESTIC OFFSHORE SHIPPING

hav e 30. We have some of the l arg est retail exch anges in the U nited 

States operating in P ue rto Rico today.

We have modernized, by the way. We also have dr ug c hains th at 

hav e come into Pu erto Rico to compete with ou r local dru gstores. 

We have in every possible way stimu lated com petition to a point 

where quite a number of Pu erto Rican me rch ants are alm ost complaining th at the re is too much com petition . We ll, th at was bound 

to be expected and Profe ssor Ga lbr ait h said th at would hap pen .

In oth er words, we have been doing someth ing abo ut the di stribu ­

tiv e tra des—kn owing quite well th at there might be some hid den 

costs there that were inc reasing ou r costs of living.

You will notice th at the cost-of-living allo wan ce allowed Federal 

employees has been reduced in the case of Pu er to Rico in the past 

few yea rs and I think th at is pa rtl y due to th is p rogram o f commercial modern ization.

Mr. Grin stein. Mr. Moscosco, has the Com monwe alth pro tested 

th e rate increases ov er this, I guess, be gin ning in 1947-48 ?

Mr. Moscoso. Vociferously.

Mr. Grin ste in. All of them ?

Mr. Mosooso. Ev ery one.

Mr. Grin stein. These pro tests, I tak e it, were based no t only on 

rate for mu la and sta nd ards to be app lied bu t also i mp act o f the economy needs and in du str ial dev elop men t ?

Mr. Moscoso. Now, one case befor e the cou rt, as a matter of fac t, 

alr eady has been rem and ed to the Federal Mari tim e B oard fo r review.

Mr. Grinstein. Th is base on sta nd ards to be appli ed in rat em ak ­

ing formu la ?

Yesterday Senator Gr uenin g testified th at there was an absence of 

sta nd ards on the pa rt of the Feder al Mari tim e Bo ard in the rate p ro ­

ceedings. Do you have any view on th at ?

Mr. Moscoso. We ll, we have a view and th at has been expressed 

in our brief s before the courts to th e effect th at we do no t t hi nk t hat 

the y shou ld use a marke t valu e fo r est ablishin g a base fo r the ra te ­

mak ing. We think th at it should be cost of acq uisition less depre ciatio n and I believe th at the cou rts have seen fit to have the Bo ard review its method o f figu rin g the base ra te.

Se na tor B artlett. Mr. Bou rbon ?

Mr. Bourbon. Mr. Moscosco, I was read ing recently in one of the 

ma ritim e journals about a new service which you were g ettin g down 

the re, I think it may hav e been from T & T Tra iler Co., the peop le 

who had the un fo rtu na te experience with the Carib Queen, in which 

the y were supposed to hav e gotten away fro m conventional vessels 

and taken some LST’s, removed the p rop ulsion units, an d were t ak in g 

them down w ith tu gs. The ir idea was th at the y c ould do th at with an 

8-man crew on a tug, where it would be 35 or 40 on a ship . Now 

are you f am ili ar w ith t ha t oper ation ?

Mr. Moscoso. I know the ope ration a lit tle b it; yes, sir. I hav e 

seen th em opera te in a nd out of San Ju an .

Mr. Bourbon. I was wonde ring whethe r you c ould say wh eth er y ou 

ha d gotten any low er rat es because the y ha d been able to o perate so 

much more effectively ?

Mr. Moscoso. Th e rates are slightly low er than the usual fre ight 

rates. Of course, you have t o carry a full fre ighter.
DOMESTIC OFFSHORE SHIPPING 187

Mr. B ourbon. One other thing, last year, the last Congress passed 

a bill to give you some passenger service to the Virgin Islands by hy ­

drofoil and by the time we got the bill through, we found the man 

had decided not to operate out of your place. His reason was that 

your Commonwealth had not lived up to certain promises made to 

him about berthing facilities, et cetera, so now he is up in Puget Sound. 

Was he correct in saying that the reason he didn’t use the law that we 

passed was th at after making him certain promises you didn’t fulfill 

them ?

Mr. Moscoso. I think t hat he was partly right, the proportion being maybe 10 or 15 percent right. We were a little bit derelict in constructing the facilities, primarily due to the fact that his estimate of 

cost was way below what it actually turned out to be when we went 

out on bids. But the facilities were finally built for him and if he 

does not give us tha t service, we propose to buy the hydrofoils ourselves and provide that service.

Mr. Bourbon. One other question: How long does it take by boat 

to go from Miami to San Ju an?

Mr. Mosooso. From stateside.

Mr. Bourbon. From Miami?

Mr. Moscoso. From Miami, I think it would be about 3 days. I 

wouldn’t know. I know the New York-San Jua n much better; th at is 

31/2 days.

Mr. Grin8tein. You do have containerized shipments down there?

Mr. Moscoso. Yes, we are very lucky to have been able to establish 

the containerized service, which started about a year and a half ago, 

afte r quite a bit of difficulty, coming to an agreement with the labor 

unions. But, it is now operating and we have great hopes that eventually it will mean a reduction or at least a holding of the line insofar 

as freight rates are concerned.

Now, this is the kind of a breakthrough in maritime transp ortation 

tha t probably should have been inspired or encouraged quite a number of year ago. Much more of tha t I believe has to be done, especially with the problem of the noncontiguous areas prominently in 

mind.

Mr. Bourbon. Do you find the containerization is less expensive?

Mr. Moscoso. Less expensive for quite a number of products and, 

as a matter of fact, as we gain experience with the movement in containers, I believe th at we are going to find tha t with the exception of 

a few cargoes, most of the goods tha t we move back and forth can be 

moved in containers.

Mr. Bourbon. I s Sealand the only concern tha t uses containers?

Mr. Moscoso. Yes, Sealand is operating in Puerto Rico.

Mr. Bourbon. That is all I have.

Senator Bartlett. Do you have any questions, Mr. Goding?

Mr. Goding. I have only one question.

In your economic industrial development program, you have made 

quite a number of studies. Have you studied the failures as well as 

the successes and the reason for them? Do you have any figures relating to shipping costs as a factor in closings?

Mr. Moscoso. We have a complete analysis made every year of all 

the factory closings and, in a number of instances, tha t has been 

given as one of the reasons for the ir having to close, prim arily, when 

it is a heavy product. I remember in the case of automobile spring
188 DOMESTIC OFFSHORE SHIPPING

opera tio n, where the steel ha d to be b roug ht in, and the n the spr ing s 

had to be distr ibt ued, the manufacturer claimed th at was one of the 

reason s why he ha d to close down.

Now, one of ou r bigg est difficulties, ho wever, is not with the ind ustry 

th at we alread y have, b ut with the ind ustry that has n ot come in yet, 

con vincing them th at the y can operate with the spe cto r of a fre ight 

increase s tarin g them in th e face in the very n ear f utu re.

Se na tor Bartlett. Mr. Moscoso, it was testified here yeste rda y 

by a rep res entative from Hawaii th at the pin eap ple indu str y there 

is b ein g hu rt by foreign com petition, a nd he relate d th at one big pineap ple f actory on one of the islan ds is ab out to close down because pineapple s from Asia are bein g ship ped to the Un ite d Sta tes at a lower 

cost th an th e Haw aii an p roducers can meet.

Ar e you in a ny com parable sit uat ion ?

Mr. Moscoso. Yes, sir; we have a pin eapple can nery in Pu erto 

Ric o and the y fou nd themselves with a v ery s oft m arke t a year and a 

hal f ago and we asked our repres entative in Eu rope—we have a small 

office in Fra nkfu rt —to see if he could dispose of some of his inv ento ry in Europ e.

He is a very know ledgeable businessman. He knows th e Eu ropean 

marke t quite well and fo r almost 3 mo nth s he attem pte d to sell the 

pin eap ple s and he was faced with thi s com pet ition from Taiwan, to 

be specific. Th eir price wTas almost ha lf o f wh at we c ould sell it for.

Se nator Bartlett. Do you t hin k thi s was par tial ly or altog eth er on 

acc ount of hig her frei gh t rates?

Mr. Moscoso. No, sir ; pa rtly due to f reight.

Th ere were oth er fac tors involved, b ut i t was pa rtly due to fre ight.

Se nator B artlett. Par tly due to frei gh t ?

Mr. Moscoso. Yes, sir.

Senator Bartlett. Now the fac t of the matter is, is i t not, th at toge ther with all the benefits Pu erto Rico enjoys by being un de r the 

Am erican flag, it also suffers a dis crimination here in th at you are 

req uir ed to abide by the U.S . ma ritim e laws. Otherwis e you could 

have foreig n carriers se rving?

Mr. Moscoso. Yes, sir.

Se na tor Bartlett. And the people of Pu er to Rico bear the entire 

bu rden fo r main tai ning this me rchant ma rin e th at serves the Commo nwealth ?

Mr. Moscoso. We would be wil ling to bear a reasonable sha re of 

th at burden, jus t like any citizen of the Un ite d Sta tes. We are not 

tryin g to sh irk our du ty here , all th at we say is th at it shou ld not be 

an y hea vier than wh at it is on the sho ulders of any oth er citizen of 

th e Un ite d Sta tes.

Se na tor Bartlett. Th an k you for a most excellent statem ent.

You have been a first-class witness.

Now, it is Alask a’s tu rn and I believe the witn ess rep res entin g the 

St at e of Alask a is Mr. Bu rke Riley, executive assis tan t to Governor 

Eg an .

Do you have a pr ep ared state ment, Mr. Riley?

Mr. R iley. I have, Mr. Chairma n.

Se na tor Bartlett. Do you have any copies fo r the committee?

Mr. Riley. That I d on ’t know.
DOMESTIC OFFSHORE SHIPPING 189

Senator Bartlett. We will take a 5-minute recess and perhaps you 

will have copies of the statement.

(Sho rt recess.)

Senator Bartlett. The committee will be in order.

Mr. Riley, I apologize for the delay in hearing you and it is high 

time that we hear a witness from the 49th State and the biggest State. 

You may proceed.

STATEMENT OF BURKE RILEY , EXECU TIVE ASSISTANT TO THE 

GOVERNOR OF ALASKA

Mr. Riley. Mr. Chairman, for the record, my name is Burke Riley. 

I am executive assistant to Gov. William A. Egan of Alaska and appear for him.

I should like to convey Governor Egan’s regrets at not being able 

to be here personally. He believes the problems under consideration 

by this committee to be extremely important and would be here in 

person were it possible for him to leave Alaska at this time.

May I express my appreciation on behalf of the State of Alaska 

for this opportunity to appear. I know of no problem in Alaska more 

deserving of our collective efforts and attention than the critical problem of adequate and economical transportation. This problem is of 

highest priority and greatest urgency. Its proper solution is vital 

to the development of Alaska.

I should like particularly to thank the senior Senator from Alaska, 

the Honorable E. L. B artlett, for initiating these hearings. I am advised that it was Senator Bartlett’s persistent efforts, with the support of his able and distinguished colleague, Senator Ernest Gruening, 

which brought about this extremely worthwhile investigation. This 

is especially gratifying. It is a dividend of statehood. We in Alaska 

know that with Senators Bartlett and Gruening on the job in Washington our problems will have an attentive and sympathetic audience 

by the U.S. Senate.

I am of the impression tha t these hearings were called to consider 

a basic issue of national policy. That issue is whether the noncontiguous domestic areas of the United States such as Alaska, Hawaii, 

Puerto Rico, and Guam are to be forced to continue to bear the cost 

of national defense measures adopted for the benefit of the entire 

Nation. I refer to the policy of restricting waterborne commerce 

exclusively to American bottoms between those areas and other parts 

of the United States without benefit of any Government assistance. 

The continuance of that policy is unjust. Moreover, the cost of its 

continuance is becoming intolerable for the areas involved.

While I speak specifically about Alaska, the other noncontiguous 

domestic areas face the same problem. Those areas are rapidly approaching an economic crisis of great magnitude and that crisis in 

large measure is a result of the high cost of transportation. The 

ultimate question is whether the economies of these areas shall be allowed to develop and flourish or, instead, shall continue to be retarded 

by an outmoded and stultifying national policy. Certain characteristics of the Alaska trade must be borne in mind in considering its 

shipping problems.

71709 0—62----- 13
190 DOMESTIC OFFSHORE SHIPPING

Lik e the o the r nonconti guous area s, Alask a’s car rie rs a re faced with 

the pro blem of season ability of the tra de and an unbalanc ed movement. Th e difference is one o f degree. In the Alask a trad e the bulk 

of the no rth bo un d movemen t occurs in a period of appro xim ate ly 

6 mo nths, from Apr il throug h October. Other ma ritim e tra des are 

ge neral ly faced with the same problem but ove r a spa n of dif fering 

months.

Like the other trades, the Ala ska tra de has one po rt or are a of 

major importance in terms of volume of traffic. Th us, in the Alask a 

trad e the po rt of Seward with its command of the so-called rai l belt 

receives the g rea tes t portio n of n orthbound cargo. Following Sew ard 

come the ports of Valdez, Ko dia k, Ke tch ika n, and June au . These 

w’ould com pare , in imp ortance, to San Ju an , May aguez, and Ponce in 

the Pu er to Rican trade.

Alaska receives no service whatever f rom s ubsidized vessels op erating over c onnecting links with subsidized tra de ro utes . Consequ ently, 

Alask a has no sh ipping com pan y op erati ng to and fro m any of its 

po rts wi th vessels constru cted or acquire d wi th the aid of con struction-d iffere ntial subsidies.

Th e phy sical cha rac teristics of Alaska req uire th at year around , 

regu lar wa ter line service be su pplied to several areas of the S tate because there is no oth er w’ay of bri ng ing in the necessities of life and 

commerce. These are as include so utheas tern a nd southwestern Alaska, 

Ko diak Is lan d, B ristol B ay, and the B ering Sea.

Fina lly , A laska stan ds alone, wTith most of its b ack hau l traffic bound 

ine xtr ica bly to one commod ity, fish, which by na ture and resou rce 

ma nag ement is lim ited to pe rhaps 30 to 60 days du ring the summer 

mon ths.

So fa r as Alaska is concerned, it is of utmost importance to reduce 

or at lea st stab ilize the high costs of tra ns po rta tio n. Ap proxim ate ly 

95 perc ent o f all consumer goods used in Alaska must be imported by 

water, rai l, air, or truck. The ove rwh elm ing pr op ortio n of such impo rts comes by water, and w’ater tra ns po rta tio n rat es have risen incredibly.

I t has been mentioned alr eady in these heari ngs, th at wi thin the 

last 10 years, waterborne fre ight rates in the .A lask a tra de have increased 56.4 perc ent.

Since Ja nu ar y 1, 1958, w ate r rates have increased by 32.8 p ercent.

Th e cost of tran sp ortatio n is, o f course, a pa rt of the landed cost of 

the p rod uct. Th e high cost of trans po rta tio n is an elem ent in th e h igh 

cost of labor, and in tu rn in Alask a s h aving the hig hest cost of living 

of any St ate in the Natio n.

Al aska is ma kin g g rea t effo rts to develop its economy, with pa rtic ula r refe rence to the development of its na tural resources. Progres s 

is being made, bu t not because of the tra ns po rta tio n pic tur e. If 

tra ns po rtatio n and associated costs continue to rise, new and pro spectiv e indu str y will be pric ed out of the mark et before really sta rti ng . 

That must not hap pen .

Th e high cost of our wa ter tra ns po rta tio n is attributab le dir ectly 

to the n ational policy of req uirin g shipm ents between Alaska and the 

othe r St ates to be mad e on U.S .-flag vessels. I have no quarrel with 

th at po licy. But if we are to ma intain the p olicy of restr ictin g ocean 

tra ns po rtatio n between the non con tigu ous domestic areas and oth er
DOMESTIC OFFSHORE SHIPPING 191

po rts of the U nited S tates to U.S .-flag vessels b uil t in Am erican y ards 

and m ann ed by Am erican crews, we mu st be w illi ng t o recognize th at 

the cost of such a polic y is a national o bligation .

To impose the entire cost of th is policy on the citiz ens of Alask a, 

Ha wa ii, and Pu erto Rico is not only unco nscionable bu t also ineffective. I t has resu lted in the de ter ioratio n, ra th er t ha n the pro mo tion, 

of a sound me rch ant marine, and at the same tim e has frus trat ed the 

economic develop ment of those area s.

Since 1898 the Am eric an coastwise tr ad e has been ex pres sly reserved 

to U.S. vessels, and so fa r as Alask a is concerned, e arlie r sta tutes had 

been inter preted to the same effect. In 1900, the Fo ra ke r Ac t extended the coastwise sh ipping laws to trad e between Pu erto Rico and 

the continenta l Un ite d States. Th us, while these areas in terms of 

geo gra phy and economics ar e no t pa rt of th e domestic coastwise tra de, 

legalistic ally and artifi cia lly the y were so made.

Meanw hile, the cost of Am eric an sh ipping has rise n spe ctacul arly. 

In the subsidized tra de s those increases hav e been absorbed by the 

Na tion, in the non contigu ous dom estic tra de s these costs hav e been 

imposed entirely on the traffic to those non contigu ous area s.

Th e treme ndous rise in the cost of Am eric an sh ipping as com pared 

with foreig n shipping h as been recognized by the C ongress. In 1936, 

in the intere sts o f pre ser vin g a ma ritim e fleet for wa r, subsidies were 

exte nded to U.S .-fiag opera tors in foreig n trades .

Consequ ently, domestic coastwise s hipp ing in the c ontin ental Unit ed 

State s has virtu ally dis app ear ed. Tr an sp or tatio n by tru ck and rail 

has become more efficient in those yea rs, and the re is now alm ost no 

reserve domestic fleet.

The people of the offshore are as were not so fortu na te. They received no subsidy by the 1936 act. Bu t they were unable to tu rn to 

the more efficient me thods of la nd tr an sp ortatio n.

They have had to rely on ma ritim e tra ns po rta tio n. An d the y are 

now’ p ay ing the penalty in th e fo rm of high er rates .

A t the prese nt time, the entire burde n of lim iting these tra de s to 

the U.S. flag is borne by the traffic of these areas.

Now’ this outmoded system is fa lli ng ap art. Th e most dir ect evidence of the evils of th e present policy nas been its imp act on the cost 

of living in the are as affected. Th e W ar d Index of C onsumer Prices 

in seven Alask an cities, pub lish ed November 15, 1958, shows the follow ing com parison in cost-of-living index based on Seatt le, 1956, as 

100.0: Nome, 159.3; Fa irb anks, 154.6; Ancho rage, 143.7; Sew ard , 

131.4; Ju ne au , 129.0; Sitka , 135.8; and Ke tch ika n, 127.1. As alarming as those figures are, the corollary dif ferentials in the landed cost 

of capit al goods is more ala rm ing in th eir threat to the dev elopment 

of Ala ska.

I am not f am ili ar with the cost of livi ng in Ha wa ii and Pu er to Rico, 

yet I know th at they labo r un de r a sim ila r burden. A comp ara tive 

cos t-of-living survey released by the U.S . Civ il Serv ice Com mission 

in Fe brua ry 1960, showed the follow ing com parisons fo r the ye ar 

1959 w ith Wash ing ton , D.C., a notoriou sly hig h cost-of-living ar ea as 

100.0: Honolulu, 117.6; San Ju an , 111.9. The same stu dy showed 

Anc horage, 147.8; Fa irb anks, 152.0; and Ju ne au , 133.1.

Un fortu na tely, th is prob lem, created in grea t measure by hig h 

tra ns po rta tio n costs is accelera ting ra th er than dim inishing . These 

tra de s will soon face a massive problem of vessel replacement, which
192 DOMESTIC OFFSHORE SHIPPING

at cu rren t U.S . con stru ctio n costs would impose bac kbrea kin g 

burde ns.

U nd er pre sen t legisla tion the re is no vessel replace ment pro gra m 

req uir ed of carriers in the noncontiguous domestic tra des. Gener ally 

speaking the carriers have not under tak en new vessel constru ctio n. 

By and larg e, the y have acquire d vessels from the rese rve fleet of 

the United Sta tes, thu s dim inishing the valu e of th at reserve source. 

Obviously, such a p rogra m cannot be followed indefinitely .

In t he Ala ska trade the problem is partic ularly acute. Most o f the 

vessels in th at tra de were bu ilt du rin g the wa r and are alread y 

obsolete.

Va rio us possible solu tion s have been adv anced fo r thes e problem s 

of high tra ns po rta tio n costs and vessel replacement.

Mr. C larence G. Morse, for me r M aritime A dm inist rator, and C ha irman of the Federal Maritime Board , appeare d before this committee on Fe br ua ry 16, 1960, and sugg ested two alt erna tiv es: one, to 

subsidize the non contigu ous tra de s and the other to pe rm it fore ignflag vessels to o per ate to the noncontiguous domestic a reas. The same 

sug gestions were made in the D epartme nt of Commerce’s rep ort t o the 

Pr esiden t in March 1960, entitled “Federa l Tr an sp or tatio n Policy 

an d P ro gram .”

Th e elim ina tion of the pro tective cabotag e res tric tions and the 

opening up of the domes tic noncontiguous t rade s to foreign-flag p ar ­

tic ipation mig ht go fa r tow ard solv ing our high tran sp ortatio n cost 

problem . This, however, would collide with long-establis hed national 

policy of attempting to ma intai n and preserve a healt hy merch ant 

marine.

On balance I think it would be better, if possible, to adh ere to our 

policy of subsidiz ing U.S.-flag vessels, pro vided that, legislation could 

be deve loped th at would low er waterl ine frei gh t rat es and insure 

th at the benefits of such sav ing s are passed on to the rat e-p aying 

public.

In lig ht of fac tors discussed, I should like to mak e some general 

recommendations both abo ut the procedure to be follo wed in deve loping cura tiv e legisla tion and with respect to the content of the legisla ­

tio n itself.

First , as to pro cedure, I should like to tak e the lib ertv of suggesting to yo ur committee th at it would be ex trem ely w orthwhile to und ertak e seve ral specific case studies without, however, de ferri ng legisla ­

tive action based on the fac ts that cannot be esta blished.

I wou ld recommend th at the members of yo ur committee and its 

staff select the princ ipa l ca rrier in each of the non contigu ous trades 

and actua lly go back to the beg inn ing of its service and trace its his ­

tory to date. I t would be significa nt to esta blis h, for example, what 

equip me nt was purchased and ded icated to the tra de , the price at 

whi ch such equ ipm ent was acquire d, the replace ment experien ce of 

the ca rri er, the dep rec iation polic ies followed, the pro fits tak en from 

the trad e or the losses inc urred , the op erati ng problems entailed in 

maintaining efficient service, the existence or lack of com petition and 

the differential in cost of service between such U.S .-flag lines and 

for eig n-flag lines rend ering com parable services. I strongly believe 

th at if such actu al case studie s were undertaken, it would be possible 

to ga th er enough basic da ta to write legisla tion th at would serve the
DOMESTIC OFFSHORE SHIPPIN G 193

needs of the areas involved, prote ct the leg itim ate int ere sts of the 

carriers and take into account the requirements of natio nal defense. 

I would hope th at this case-by-case ap pro ach need n ot tak e too much 

time or delay legisla tion , the need fo r which is alr eady ap pa rent.

Stu die s should also be made of the effect on a ll pa rti es of the in stitu ­

tio n of car go van and unitized car go equ ipm ent, and pa rticul arly , in 

the Alask a tra de , of the relati on ship between contr act ca rri ers and 

common ca rri ers of cargo.

As to the form which legisla tion sho uld take, I wou ld suggest 

ge ne rally :

1. Ex ten sio n of the con struction dif ferential sub sidy pro vision s of 

the Me rch ant Ma rine Ac t of 1936 to vessels op erating in the noncontigu ous domestic trad es.

2. Pa ym en t o f o pe ratin g differential subsidies to vessels eng age d in 

these tra de s based on a com parison of op erating costs incu rre d in 

com parable foreign-flag op eration s.

3. Ad option of real istic r ate regu latory s tand ards to ins ure t hat th e 

benefits of subsidies are, in fac t, passed alo ng in the for m of lower 

rates, with the ca rri ers entitled to a reasonable re tu rn on ne t inv estment. How ever, policy sta nd ards sho uld be established lim iti ng such 

fa ir rate o f retu rn to the actual capit al investment based on the time 

actua lly employed in the common c ar rier service.

4. En largem en t of legal, acc oun ting , and ad minist rativ e staff of 

the Federal Maritim e Board , so th at ade quate help is ava ilable to 

Bo ard members to check statem ents and documents filed and to an alyze and repo rt on sign ific ant facts in timely, searc hin g manner.

5. Revision of repo rti ng pro ced ure s to show all interc om pany and 

affiliated c omp any transactions cle arly in consolidated as well as sep arate sta tem ent s o f p ar en t hold ing, s ubsid iar y and affiliated companies.

6. Elim ination of the intere st-fre e use o f fun ds sub ject to refun d by 

the carriers while inv estiga tions are in pro gre ss in line wi th pract ice 

in o the r Fed eral agencies.

7. Ex ten sio n of the sta tutory susp ension period in connection with 

rate increase inv estigation s, as con tem plated by S. 804 spo nsored by 

Senator s B ar tlet t and Gr uen ing.

8. Ex ce pt in unu sual circumstanc es, req uirin g th at repo rts and 

sta tem ent filed by all ca rriers be available to the public.

9. Es tab lishm ent of an org ani zed vessel repl acement prog ram fo r 

the non contigu ous tr ad es t hrou gh insti tutio n of the construc tion subsidy p rogram with present sa feg uards agains t abuse.

10. Certification o f th e entry in to and a ban don ment of service within the tra de s on the basis of public convenience and necessity. Th e 

carriers should be reasonably prote cte d again st uneconom ic com pet itio n while req uir ed to ren der ade quate service at reasonable rates.

I hav e touched on certain general con sidera tions to be tak en into 

account in dev eloping legisla tion to correc t the s hortco mings of presen t policy. I am confident th at leg islation embra cin g thes e general 

princ iples would be o f s ubsta nti al benefit to the ca rri ers as well as to 

the gen eral pu blic.

It is my sincere belief th at the enlighte ned self-inter est of the 

ca rri ers lies not in inc rea singly high er fre ight rates, bu t in a conscientious effo rt at low ering rat es to stimu late economic dev elopment
194 DOMESTIC OFFSHORE SHIPPING

in the offshore domestic areas. Th is effo rt to be who lly useful will 

req uir e a corre spo nding legi slative effort alo ng lines ind icated.

I t also seems clear to me th at a legislative prog ram to pe rm it the 

construction o f new and mod ern vessels would serve the best intere sts 

of na tio na l defense. Th e vessels in use in the offshore tra de s were 

bu ilt du ring W orld W ar II . Th e defense program , if i t needs U .S.- 

flag vessels in these trad es, needs vessels that ar e modern , efficient, and 

read ily av aila ble in time of emergency.

It is the pur pose of the St ate of Alaska to sta te the problem as 

known and experienced in Alaska—yet as noted ea rli er in these 

proceedings, the problem is general to the several are as mentioned 

and is natio nal in its significance. It s solu tion requires a change in 

na tio na l policy.

W hile I do not pres ume to tes tify as an expert, I hav e attend ed 

ma ny ma ritime hearings and I will ventu re the guess th at when all 

the testim ony is in on this occasion fro m Government, from the ca rrie rs, shipp ers and from the pub lic, it will show in many areas of 

discussion a unanim ity seldom found in a discussion of coastwise 

maritime ma tter s.

Th is, I believe, sh ould be cog ent and comp ellin g.

Tha nk you again for thi s op po rtu nity to appear. The State of 

Alaska is grateful for y ou r efforts and stan ds r ead y to co operate w ith 

yo ur comm ittee in every way.

Se na tor Bartlett. Th an k you, M r. Riley.

Do you have any questions, Mr. Gr ins tei n or Mr. Bourbon?

Mr. Bourbon. Ju st to keep the record stra ig ht , wThere the witness 

said the carriers have not undertaken new vessels un de r constru ctio n 

and there has been none, I might observe a grou p in St. Law rence 

have bu ilt two conta ine r vessels and Am eric an Ha wa ii has asked for 

mo rtg age help to build thr ee conta ine r vessels at a cost of abo ut $30 

million .

Mr. Riley. I s tan d corrected and will ask approv al fo r ame ndm ent 

and r evis ion o f my statement.

Se na tor B artlett. Mr. Godin g?

Mr. Goding. I have no questions.

Se na tor Bartlett. Mr. Riley, your s tatem ent noted th at in the las t 

10 ye ars, waterborne frei gh t rates in the Alask a tra de h ave increased 

56.4 p ercent. Those increases are not as gr ea t as the rat e boosts for 

Ha waii and Pu er to Rico, acc ord ing to testim ony previously sup plied 

to the committee. I supp ose as to the effect on the economy, we would 

hav e to know the original base upon which the increases were made, 

bu t can you tell the com mittee w hat the last increase was in p ercentage 

ter ms and when it was ap pli ed ?

Mr. Riley. We ll, it was applied within the las t year and a ha lf, 

if my mem ory serves me—relative ly recent in any event.

Se na tor Bartlett. Le t me in te rrup t you. You have pr etty well 

sta ted in here the perc enta ges. You said th at since Ja nu ar y 1958, 

the increase h as been 32.8 pe rcent. Tha t includes the late st?

Mr. Riley. Tha t includes the late st, th at is rig ht.

Se na tor Bartlett. Mr. Riley, you have sta ted th at the cost of liv ­

ing in Alask a is h ighe r than anywhe re else in the Nation. You have 

pre sen ted some ra th er ho rrifyi ng figures in th at respect. Ear lie r,
DOMESTIC OFFSHORE SHIPPING 195

Commissioner Fernos-Isern, testifying in behalf of Puerto Rico, stated 

this:

The cost of living in Alaska has been found to be 25 percent high er than 

Washington, D.C. The cost of living in Haw aii has been found to be 17.5 

percent higher than Washington, and the cost of living in Puerto Rico has 

been found to be 12.5 percent higher than Washington.

In reference to the 25 percent figure for Alaska, is it not a fact 

that that determination relates only to the upper limit of the socalled cost of living allowance which the Federal Government may 

pay to its employees in Alaska and does not necessarily relate at all 

to actual cost of living?

Mr. Riley. That is true, Senator Bartlett. It bears no relationship to the indexes over the years. There is no one figure th at could 

be reached that is applicable to all of Alaska unless it were an average, 

but a t least according to the latest W ard Index, I find no community 

has as little as 25 percent, although the Puerto Rican figure corresponds roughly with mine. I have 111.9.

Senator Bartlett. Tha t is to say t hat even in Ketchikan, Alaska, 

which according to this Ward Index, found the cost of living there to 

be 27.1 percent higher than Seattle, the Federal employee could not 

be compensated sufficiently under the law to meet tha t added cost of 

living?

Mr. Riley. Not within the 25 percent.

Senator Bartlett. I s this high cost of living having a detrimental 

effect upon the present economy of Alaska?

Mr. Riley. It certainly has, in many ways. The employment of 

labor by the householder, for example, is rendered far more difficult. 

The wage rate must bear a certain relationship to the cost of living.

Senator Bartlett. Mr. Riley, will you speak a little louder, please?

Mr. Riley. The effect of such higher living costs, the highest in the 

Nation, are fe lt in every part of life and endeavor in Alaska because 

it reaches everyone right at the purse. One could multiply examples. 

I don’t think tha t is the purpose of the question.

Senator Bartlett. What has been the main industry, if that is the 

right description, which I doubt, in Alaska during the post World 

War II period?

Mr. Riley. For the last several years it has been the construction 

industry and in the construction trades you find appreciably higher 

hourly rates than in most other fixed, hourly rates of pay. In construction, the Federal Government, being the prime builder, has felt 

at every turn these appreciably greater wage rates to the point where 

it has cost every builder, including the Government, far more to build 

in Alaska than it would any place else.

Senator Bartlett. The Federal Government has been engaged prin ­

cipally in this area in military construction?

Mr. Riley. Almost altogether military related or military.

Senator Bartlett. The necessity for building these defensive installations speedily has tended, has it not, to elevate the wage structure faster than otherwise might have been the case?

Mr. Riley. It has, primarily because of seasonality of the construction period; weather conditions prevent a year around construction program in many areas; the need for haste has been quite 

uneconomic, I should say, and in turn the wage scales have reflected 

all these factors.
196 DOMESTIC OFFSHORE SHIPPIN G

Se na tor B artlett. Ha ve those wage scales been tra ns lated in measure out of economic necessity to the civi lian economy? I f I don ’t 

mak e myself clear, let me say this. If a given cra fts ma n is pa id a 

given sum on a military construction job, does th at te nd to force up the 

wages of the clerks in service ind ustries in a given community close hv ?

Mr. Riley. Ind eed it does because the amount of money in cir culatio n has a great deal to do with costs as well as wi th other fac tors 

th at ten d to elevate costs, and the man in the service indu str y is di ­

rec tly affected by the money going into a com munity in lar ge pa yrol ls of th e con stru ctio n ind ust ry.

Se na tor Bartlett. Wo uld it be correct the n, in your opinion , to 

say th at the infla tion which has been noted throug ho ut the cou ntry, 

pa rti cu larly , let us say, in the l ast 15 y ears, h as been fel t in A laska in 

exaggerated form?

Mr. Riley. Altog eth er.

Se na tor Bartlett. Then on pag e 3 of yo ur state me nt, you said th is, 

an d I qu ot e:

Alaska is making great efforts to develop its economy, w ith partic ula r reference to the development of its natur al resources.

Now, is it not t rue , Mr. Riley, t ha t those resources in large measure 

or perhap s altoge the r, mu st be com petitive with like resources elsewhere in thi s land ?

Mr. Riley. They must. For the most part the y are of the ex tra ctiv e industries . We have see.n it illustra ted in lum ber and pu lp, in 

Alask a salmon, com peting with foreig n-c aught salmon. In every 

resp ect, when they can not compete the Alask an pro ducts rem ain un ­

sold. Tr an sportat ion is a lar ge element, of cours e, in ge tting those 

resources, those pro ducts to marke t. In turn, the lab or costs, which 

we w ere alluding to e arl ier, th at go into the extr act ion o r the processing of those resources, compound the p roblem o f c ompetitive position 

fo r Alaskan produc ts.

Se nator Bartlett. Wo uld you say the com pet itiv e disadvanta ge 

fo r Alaska in the use of thes e na tural resources increases with the 

sprea d of the cost of doing business between the othe r State s and the 

49th State ?

Mr. Riley. I think th at is q uite ap pa rent, Senat or.

Se na tor Bartlett. If Alask a can’t deve lop its na tural resources, 

wh at can it tu rn to in aid and abetment of its economy?

Mr. Riley. Th e entire industr ializa tio n of Alask a is depend ent, as 

I see it, on the utilizati on and develop ment of its reso urces: water, 

mineral, fish, ag ric ulture in lesser degre e, and if those resources can ­

no t be utilized and the re is any cessation of Fe deral spending, we 

will certainl y be up ag ain st it.

Se na tor Bartlett. Th en your prese nta tion hinges upon a belief 

on the pa rt of the St ate of Alask a th at Al aska can pla y its prop er 

role in the national economy only when it is placed in a com petitive 

position to do so and th is cannot be arriv ed a t w ith ocean frei gh t rates 

on a constan t rise ?

Mr. Riley. Precise ly. We are inc reasingly in a bind o f rising costs 

and com petitively fixed prices for the goods we have to sell.

Se na tor Bartlett. Mr. Riley, elsewhere and late r in yo ur statement, you made specific suggestion s which we welcome, but I did note 

th at you would not urg e the comm ittee to delay any leg isla tive action
DOMESTIC OFFSHORE SHIPPING 197

which it might be disposed to initiate until the case studies which you 

urged had been made. Do you think they are absolutely essential to 

a determination on the part of the committee as to need for corrective 

legislation ?

Mr. Riley. I think that there are many areas of substantial agreement from the testimony I have heard in the last 2 days as to which 

the committee could perhaps proceed at once. Other areas may require the gathering of additional data and I think tha t the most reliable means of gathering tha t information will be by case studies of 

the principal carriers serving each of the trades.

Senator Bartlett. Have you yourself lived long in Alaska, Mr. 

Riley?

Mr. Riley. Some years, 23.

Senator Bartlett. You live in Juneau ?

Mr. Riley. Yes, presently.

Senator Bartlett. Do you find that the average citizen is compensated adequately to take care of this added cost of living which is 

discovered there in one of the most southerly Alaskan cities?

Mr. Riley. I think in Juneau and most Alaskan communities, life 

is very marginal in an economic way, tha t most people just get by, 

if indeed they stay in the black.

Senator Bartlett. Aside from Federal employees, for whom special arrangements are made, I have often heard that the Alaskan 

citizen has a special tax problem because he must get a high income 

in order to subsist, but he has to pay his income taxes based upon the 

higher wage or salary rate. Do you believe that is a problem here?

Mr. Riley. Tha t feeling is generally entertained by non-Federal 

employees who recognize that they must have a higher dollar figure 

to subsist, and among those non-Federal employees there is an aware 

ness that living costs to the Federal employee, are no greater or no 

less than their own, but Federal employees have a cost of living differential which is not taxable and, therefore, is advantageous to the 

one category. That feeling is natural. In Juneau, for example there 

are many people in government.

Senator Bartlett. Take one commodity, for example, do you know 

the cost of a quart of milk in J uneau ?

Mr. Riley. It varies, about 40 cents now.

Senator Bartlett. Is that considerably higher than in Seattle, do 

you know?

Mr. Riley. I don’t know for a fact. I should say it is about 

double. Now, that is guesswork, just my memory.

Senator Bartlett. That must make it economically difficult for 

the parents of small children.

Mr. Riley. Let me put it on this basis, Senator Bartlett, and this 

is not a valid comparison because many years have elapsed, but I 

used to purchase buttermilk for a nickel in Seattle and it is now 35 

cents in Juneau. I was struck by the difference.

Senator B artlett. This must be an especial problem for the parents 

of small children buying all this milk.

Mr. Riley. I think I caught the implication.

Senator B artlett. I have no further questions.

Mr. Grinstein ?

Mr. Grinstein. Are you having an increase in barge traffic from 

the United States to Alaska?
198 DOMESTIC OFFSHORE SHIPPING

Mr. Riley. I cannot say whether the entire State is having an increase. I do know Alaskan Freight Lines has recently come into 

Juneau and I don’t know of any recent cessation of service elsewhere.

Mr. Grinstein. Are they operating under a Federal Maritime 

Board tariff ?

Mr. Riley. That I do not know. I just cannot answer the question.

Senator B artlett. Mr. Goding ?

Mr. Goding. Of industrial cargoes, say in pulp, specifically, how 

much of the traffic moves on the common carriers ?

Mr. Riley. It is my impression that none does, speaking of the products moving. Now the incoming material for construction of plant 

probably is another matter. I would suppose tha t common carriers 

have brought in a share of the construction materials. I can’t tell you 

of my own knowledge that tha t is true.

Mr. Goding. The pulp export is mostly on contract?

Mr. Riley. Yes.

Senator Bartlett. Thank you, Mr. Riley, and when you return to 

Juneau, I wish you would convey to Governor Egan our gratitude for 

having had the State so ably represented at this important meeting.

Mr. Riley. Thank you, Senator Bartlett.

Senator B artlett. We have Mr. Kendall and Captain Beck last on 

the agenda so I think we can complete our hearing this morning.

Thank you, Mr. Kendall and Captain, for appearing. You may 

proceed.

STATEM ENT OF LANE C. KEND ALL, COMMERCIAL SH IPPING ADVISER, ACCOMPANIED BY CAPT. CHARLES B. BECK, DSN, DIR ECTOR, WA TER TRAF FIC DIV ISIO N, MSTS, AND JOSEPH DALY,

OFF ICE OF THE ASSISTANT SECRET ARY OF DEFE NSE , INSTALLA ­

TION S AND LOGISTICS

Mr. Kendall. Mr. Chairman, it is a pleasure to be here. I am representing the Military Sea Transportation Service. I am the commercial shipping adviser to commander, Military Sea Transportation Service. I am here to supply information on the operation of MSTS between the United States and the noncontiguous States and territories 

of the United States.

I wish to explain very briefly the role of MSTS in the movement 

of passengers and cargo. By its charter, MSTS is the single manager 

for ocean transportation fo r the Department of Defense. It does not 

generate any cargo of its own, nor does it, under normal circumstances, 

handle any commercial business. The Army, Navy, Marine Corps, and 

Air Force are our main customers. They inform us of their requirements for transportation by sea and it is our responsibility to ship 

them on appropriate commercial or MSTS-controlled vessels.

There are 16 transports in active operation at this time and 1 

tran sport is on loan to the New York State Maritime College. This 

fleet of 17 transports was determined by the Joi nt Chiefs of Staff to 

lie the minimum number to be maintained in full operational status 

to take care of immediate mobilization requirements. Even if these 

ships are not used to carry troops and dependents they still must be 

continued in a state of full operational readiness at considerable ex-
DOMESTIC OFFSHORE SHIPPING 199

pense to the taxpayers, with no compensating return. To benefit in 

peacetime from the existence of this fleet, the transports are used by 

the Department of Defense to carry military personnel and their 

dependents between the United States and military outposts around 

the world. Fourteen of the 16 transports are fitted to carry dependent 

women and children in what MSTS calls cabin-class accommodations. 

Additionally, they have berths for 1,200 to 2,000 troops, depending 

upon the individual ship. The remaining two transports in operation carry troops and troop officers only, and have a normal capacity 

of about 3,100 men each. There is no commercial American-flag 

shipping with the troop-lift capability of these 16 ships. They provide rapid, safe, and economical transporta tion for large numbers of 

military personnel, and are essential to the Department of Defense.

About three-quarters of the cargo offered to MSTS by the shipper 

services, and by that term “shipper services,” we mean Army, Navy, 

Marine Corps, and Air Force, is allocated to American-flag commercial steamship companies. The balance is carried in vessels controlled 

by MSTS. These controlled ships are predominantly Government 

owned and MSTS operated, but some of them are chartered from 

American operators to meet specific transportation requirements. 

This controlled fleet, insofar as possible, is employed to carry cargo 

on routes not regularly served by American liner operators, or to 

handle many cargoes, such as ammunition and unit lifts, which are not 

truly susceptible of transportation in berth-service vessels, and the 

Arctic and Antarctic operations.

The operations of MSTS are governed by the 1904 law requiring 

tha t American-flag ships be used to transport Government cargoes 

when American-flag service is available, and by the 1954 law directing that at least h alf of all military cargo be lifted in American commercial shipping. In addition, the Secretaries of Defense and Commerce signed an agreement in 1954 by which MSTS was directed to 

support the American merchant marine to the maximum extent practicable. Following these directives, and to keep the nucleus fleet at 

the smallest size consistent with the responsibilities placed upon 

MSTS, about 75 percent of our business is channeled to the privately 

owned American maritime industry.

A basic reason for maintaining the nucleus MSTS fleet is to meet 

the requirements of the shipper services for transportation of goods 

on routes where commercial service under the American flag is not 

adequate in frequency, capacity, or ports of call. For example, from 

San Francisco, three Government-owned “reefers” are operated for 

us by an established liner-service company, and serve Hawaii, the 

Aleutian Islands, Guam, Okinawa, and Japan at approximately for tnightly intervals. The roll-on roll-off ships Comet and Taurus are 

operated by MSTS to provide a highly specialized service for the 

Army. These ships run between New York and France, carry ing selfpropelled or wheeled vehicles fully loaded with high priority cargoes 

deemed essential to the military readiness of troops in the European 

theater. There is no commercial counterpart fo r these vessels.

I would like to emphasize that MSTS carries only cargo sponsored 

by the armed services, or appropriate Government departments, and 

it is constantly working to insure tha t its nucleus shipping offers 

minimum competition to the privately owned American merchant fleet 

consistent with the military mission to be performed. It does provide
200 DOMESTIC OFFSHORE SHIPPING

an indispensable form of tra ns po rta tio n to remote points, such as the 

Al eutia n Islands, Pacific atolls, and the Caribbea n outposts, as well 

as high ly specializ ed sh ipping service fo r which there is no comme rcial co unter part.

We h ave a conti nuing concern th at th ere be adequ ate Am erican-f lag 

sh ippi ng service between the contine ntal Un ited State s and the non ­

con tiguous territo rie s and States. A substan tia l volume of tonnag e 

moves under militar y sponsorship in these tra de s; we are ha pp y to 

see it carried in priva tel y owned Ame rican ships.

Thi s committee may be inte rested in the fac t th at in calen dar year 

1960 MST S arr anged to move a total of 434,908 measurement tons of 

cargo from the Pacific coast to Hawaii. Of this, berth-service op era ­

tors ca rri ed 273,447 m easu rement tons, and MST S vessels handled the 

balanc e of 161,461 mea suremen t tons. A substan tia l pro portion of 

the MST S tonnag e was airc raft tra ns po rte d in MS TS-op era ted , 

ca rgo-aircraft carrie rs, for which the re is no commercial counter part. 

We booked 95,835 tons of carg o by comm ercial ca rri ers to A laska, an d 

sent 58,417 measurement tons by control led ships like the LST-822, 

which had to disc harge much of its loads over the beach. No commercial cap abi lity o f t his s ort was available . Also, we sent a qu an tity 

of refrigerated car<jo by the thr ee reefe r ships previo usly mentioned 

because there was either insufficient com mercial space o r the schedules 

of the commercial carriers were not s ati sfa cto ry to the shipp er services.

Our passenger busine ss to the noncontiguous State s and terri torie s 

is su bstan tial. Ex cept fo r Haw aii , no comm ercial p asse nge r sh ip s ervice to these areas is pr ovided by American steamship lines, and M STS 

has filled thi s gap at low cost to the taxp ay er and to the satisfaction 

of the services whose pe rsonnel we have carried.

In fiscal 1960, our passenger business w as :

O utb ound In b o u n d

C ab in T ro op C ab in T ro op

A la sk a (W h it ti er an d K o d ia k )............. ................... 1,790

271

1,922

12,166

1,503

1,12 8

282

1,588

4,534

1,842

1,590

244

2,294

13,981

2,017

988

647

1,72 0

5,95 2

1,678

A le u ti an s.................................... . .......... ...................

G u am ................................... ..............................

H aw aii ................... . .......................

P u erto R ic o................................. ........... .................

T o ta l.................................................................. 17,652 9,374 20,128 10,985

Since September 1960, because of the res tricti ons on tra ve l fun ds 

in th e military departm ents, the y have not booked any comm ercial 

pas sen ger space t hrou gh MSTS.

In sum mary, may I say t hat the Military Sea T ranspo rta tio n Servive, as the sing le ma nager fo r ocean tra ns po rta tio n fo r the e nti re D epa rtm en t of Defense, has a keen intere st in all matters rel ating to the 

economic well-being of the p riv ately owned Am eric an merch ant fleet. 

It desire s th at the re be as extensive Am erican-f lag service as is d etermin ed to be economically feasible. It is constan tly aware of the impo rta nce to the Am erican me rch ant ma rin e of militar y-s ponso red 

cargo. Und er the concept establishin g the single ma nager for ocean 

tra ns po rtatio n, efficiency and economy must be sou ght by MS TS at 

all times. We wa nt the lowest possible tra ns po rta tio n rat es we can
DOMESTIC OFFSHORE SHIPPING 201

negotiate with the carriers, but we accept the fact that these rates must 

be fair and reasonable.

Senator Bartlett. Thank you, Mr. Kendall.

Do you have any questions, Mr. Grinstein ?

Mr. Grinstein. Mr. Kendall, it has been stated during the course 

of the hearing tha t the cabotage laws which restrict trade between 

the domestic noncontiguous areas and the main United States are supported mainly by national defense reasons. They want a ready reserve of ships available. Is this consistent with the thinking of the 

Department of Defense and Department of the Navy?

Mr. Kendall. Yes, sir; we need an immediately available fleet of 

merchant-type vessels which can be mobilized in the event of emergency and the existence of these ships in the restricted trades is, of 

course, a mobilization potential. We are concerned, however, in the 

decline of ships in the protected trades.

Mr. Grinstein. Mr. Kendall, Mr. Stakem, in behalf of the Federal 

Maritime Board said the Board is constantly in contact with the Department of Defense in being advised as to how many ships are needed. 

Could you tell us how many American-flag ships are required under 

domestic noncontiguous trade for defense purposes?

Mr. K endall. No, sir; I have not made a study along that line.

Mr. Grinstein. Could we get t hat material for the record?

Mr. Kendall. I will try, sir, and see if we can find it. It may be 

classified material, sir, but I will see that it gets out.

Mr. Grinstein. Thank you.

During the course of the hearing, it has been pretty clearly developed there is a conflict between the needs of the carriers for higher 

rates to meet operating and replacement costs and, on the other hand, 

the need on the part or the noncontiguous areas for either stable rates 

or lower rates. If the rates were to remain the same then the carriers 

would not be in good economic health. If the rates continue to go up, 

then the areas served will be penalized. Does the Department of Defense or Department of Navy have any recommendations to make to 

the committee which might be helped in resolving this impasse?

Mr. Kendall. I think tha t properly belongs in the field of maritime policy and should be stated by Mr. Stakem as the Chairman of 

the Maritime Board. They make the policy in that re gard; we do not.

Mr. Grinstein. Mr. Stakem is advised as to how many ships are 

required for national defense purposes in this trade?

Mr. Kendall. I assume so.

Mr. Grinstein. Would the Department of Defense or the Department of Navy have any objection to allowing foreign-flag ships into 

dometsic noncontiguous trade; in other words, opening up our cabotage 

laws?

Mr. Kendall. This is a matter of high policy, sir, and I do not 

think I am in a position to make a statement. This is a Defense Department position and, frankly, I didn’t know that was one of the 

question which might be asked, so I did not clear tha t with the Department of Defense.

Senator Bartlett. Parenthetically, I might say, you never know 

what questions are going to be asked here and neither do we.

Mr. Godino. I have a question that is somewhat related. You say 

that the Department of Defense has a keen interest in matters rela ting to the economic well-being of the privately owned American
202 DOMESTIC OFFSHORE SHIPPING

merchant marine—this is the whole merchant marine—and desires 

there be as extensive American-flag service as is determined to be 

economically feasible. I would think tha t the interest of the Defense 

Department would run a little bit beyond what you might call bedrock economic feasibility or we might not have a merchant fleet of 

any description. Do you have any comment ?

Mr. Kendall. The Department of Defense, sir, is concerned tha t 

there be a merchant fleet under the American flag which can be 

mobilized in the event of emergency. The Department of Defense 

is not a subsidizing organization; it does not make national defense 

policy with regard to the merchant marine, its size or the amount of 

money which the Government is prepared to advance to keep this 

merchant marine in existence. Therefore, the matter of the size of the 

merchant marine and amount of subsidy to be paid which would involve this matter of economic feasibility is something which probably 

is determined by the Maritime Board.

We do realize, of course, that there are economic limitations on the 

size of the merchant marine which the Defense Department might like 

to have in the event of mobilization. We are deficient, for example, 

in the number of passenger ships which are in commercial operation 

at the present time viewed from the mobilization standpoint. We are 

not authorizing anybody to build ships at the Department of Defense 

expense.

Mr. Godino. The fundamental purpose behind the existing subsidy 

program is maintenance of a fleet irrespective of economic feasibility. 

That is the only thing I wanted to bring out. There are certain defense goals, certain mobilization requirements and they cannot be 

weighed on the scales of economic feasibility or we might be in a 

bad situation.

Mr. Grinstein. Mr. Kendall, when you are supplying material 

for the record, I wonder if you could also supply the views of the 

Department of Defense or the Department of Navy on the increasing 

use, as we understand it, of tug and barge service between mainly the 

United States and Alaska, as to the utility of these tug and barages 

in the event of a national emergency as opposed to the utility of selfpropelled vessels presently serving?

Mr. Kendall. I will do my best to comply with that, sir.

Senator Bartlett. Mr. Kendall, you said in ypur statement that 

under normal circumstances, the MSTS doesn't handle any commerical business. I take it that you do so under the most extraordinary circumstances when an emergency arises?

Mr. Kendall. This is correct, sir. In any event, the commercial 

cargo which we would handle would have to be authorized by a 

Government department, which in turn would ask the Department of 

Defense to sponsor it to us so that we, in no way, set up a commercial 

competition with the carriers.

Captain Beck has a comment in this regard.

Captain Beck. I think the best example, and I am not sure of the 

dates, but some years ago, there was a strike in Hawaii and the m ilitary department, the Department of Defense, did transport in MSTS 

vessels considerable food products for Hawaii.

Senator Bartlett. Upon a determination that an emergency had 

arisen?
DOMESTIC OFFSHORE SHIPPING 203

Captain Beck. That is correct.

Senator Bartlett. Mr. Kendall, on page 5, you noted tonnage to 

Alaska and said 58,000 tons plus had been sent up there by controlled 

ships like the LST-822, and, of course, that was a very large proportion of the total tonnage, because commercial carriers didn’t carry 

twice that amount, only 95,000 tons. This is my question, did all of 

that LST cargo go to situations like those found in the Aleutians?

Mr. Kendall. The figures which I have here, sir, were for the 

calendar year 1960. At that time, the LST-822 was carrying cargo 

into Whittier and discharged over the beach. The volume of tonnage 

which this partic ular vessel handled was about 7,500 tons. The rest 

of the cargo was refrigerated cargo which was taken up to the 

Aleutians by these controlled reefers, which are operated for us by a 

commerical carrier.

Senator Bartlett. I am wondering why an LST would be put into 

Whittier because commerical ships are available for service there, or 

were available for service there, when the Army controlled the facility. They had a big dock. They didn’t have to land over the beach.

Mr. Kendall. It probably, sir, lay in the nature of the cargo. It 

might have been very heavy, wheeled equipment, engineer equipment, 

which could not be lifted out of the ship with the facilities available 

either at the port or with the ship which might possibly have been 

nominated for the job.

Senator Bartlett. I wonder i f you would be good enough to file 

with the committee a supplementary statement relating to the LSTWhittier operation ?

Mr. Kendall. Certainly, I will be glad to.

Senator Bartlett. Now, going back to the question raised by Mr. 

Grinstein, which is essential to our study and inquiry and action, if 

any, I take it th at you gentlemen are here merely to inform us of the 

operations of the MSTS and cannot go into policy decisions that 

might involve, for example, the size of the fleet needed in the event 

of national defense ?

Mr. Kendall. This is correct, sir.

Senator Bartlett. Of course, we will have to know, it is essential 

that we know how close to the goal the U.S.-flag fleet engaged in foreign trade is to the need in case of a national emergency; the value, 

if any, of a larger domestic offshore fleet in being and other considerations which would have an essential bearing upon this subject. I 

don’t know that we should properly ask you to obtain this inform ation for the committee in open session or otherwise because tha t may 

not be your province, but in any case, this the committee must know 

before it can even hope to proceed.

Mr. Kendall. Mr. Bartlett, I have just been informed by Mr. Daly 

from the Office of the Assistant Secretary of Defense, tha t it is his 

opinion tha t the Chief of Naval Operations has written recently to 

Senator Butler, giving him this type of information. We will look 

into this, sir, and find out about it.

Senator Bartlett. This was a personal letter to Senator Butler?

Mr. Daly. Yes, sir.

Senator Bartlett. Then, I take it, the information is not classified ?

Mr. Daly. Certain of the questions you have asked, sir, are definitely classified, but general conclusions as to the overall adequacy 

of elements of the merchant marine would not necessarily be classified.
204 DOMESTIC OFFSHORE SHIPPING

Se na tor B artlett. I suggest th at since these h earin gs are going to 

be resumed at a late r date, the committee will req uir e this inform atio n, and pe rhaps some of it you would be willing to give us in executiv e session, if necessary . But in any case, we will have to have it 

before we hope to legisla te and we will have to have it broken down, 

as Mr. Gr ins tein suggested to me, with special reference to the offsho re areas, the very problem w ith which we are dea ling .

Mr. Daly. I f I can offer, sir, I believe the technicians in our office 

would be very happ y to consult with your staff as to what typ e of 

inform ation can be acceptable to you and rea dil y made available.

Se nator Bartlett. These are welcome words.

Th an k you, gentlem en, very much fo r y ou r app earance.

Mr. K endall. It has been a pleasure to be here, sir.

(The follow ing lette r was subsequ ently sub mitted for the rec ord:)

Depa rtm ent of th e Navy,

Milit ary Sea T ransportation Service,

Washington, D.C., March 28, 1961.

Hon. Warren G. Magn uso n,

Chairman, Senate Committee on Intersta te and Foreign Commerce,

New Senate Office Building, Washington, D.C.

My Dear Senator Magnuson : Pursuant to the requ est of Senator Ba rtle tt 

made to Depa rtment of Defense representa tives, I am happy to supply to your 

committee the following inform ation relating to the movement of military passengers and cargo to noncontiguous States and ter rito ries :

The first question w as : “Wh at was the natu re of the cargo carried to Alaska 

in noncommercial ships in calendar year 1960?”

In calen dar year 1960, the Military Sea Tra nsporta tion Service (MSTS) 

transporte d in MSTS-oi»erated or MSTS-controlled ships a tota l of 58,417 measurem ent tons (M/T) of cargo destined to Alaska and the Aleutian Islan ds for 

the Department of Defense (DOD). This tonnage was divided in this manne r:

Measurement

tons

Household goods and general cargo_______________________________ 32, 727

Vehicles (including privately owned ca rs )___________________________ 21,328

Aircr aft_______________________________________________________ 277

Ammunition____________________________________________________ <M)1

Refrigerated cargo_____________________________________________ 3,184

Total____________________________________________________ 58,417

This cargo was not subject to shipment in com mon-carrier vessels for a variety 

of reasons, such as priority of delivery which did not i>ermit waiting for the 

nex t commercial ship; “unit lift,” meaning the cargo of a military organization 

which had to move at one tim e; exceptionally heavy cargo beyond the ca pability 

of the commercial carrie rs to han dle; delivery to points when berth ing facilities 

for conventional shipping eith er were inadequa te or nonexistent, and lack of 

commercial service to outlying destinations. The following analysis will explain

these po ints:

Measurement

tons

“Reefer” cargo to Aleutian Island s________________________________ 3,184

Mobile Construction Battalion (MCB) 9, unit lif t to Adak___________ 6,056

MCB moves to Adak and Kodiak_________________________________ 1, 865

Locomotives (extra-heavy lift) on USNS Bro stro m_________________ 2,805

Locomotives and heavy-lift vehicles to Kodiak and Adak on USNS

Oammon_____________________________________________________ 4, 818

Cargo carried in USNS LST-822, including heavy engineering equipment 

for over-the-beach deliv ery____________________________________ 13, 057

Total------------------------------------------------------------------------------- 31, 785

The second question w as : “What is the Navy’s opinion as to the practicability 

in wartime of barge operations for trans portation of cargo to Alaska and Puerto 

Ric o?”
DOMESTIC OFFSHORE SHIPPING 205

The complete answer to this question involves two separate considerations. 

First, the construction and use of barges to supply these noncontiguous areas 

would require considerably less steel per ton of cargo carried tha n self-propelled 

vessels. The expansion of existing barge service in time of war also would 

release for oversea oi>eration oceangoing ships which otherwise would have 

to be assigned to service the noncontiguous area s. The military desirability of 

using barges would depend on the nature of the cargo requiring transporta tion , 

the schedule which could be followed by a barge service, the availability and 

capability of tugs, the capabilities of the barges themselves, and the cargohandling facilitie s in the ports of call. The second consideration encompasses the vulnerability of a barge-tow to 

submarine, surface, or air attack . The cha rac teristics of such an ocean tow do 

not permit any evasive action, and its low speed makes it a prime tar get for 

hostile a ttac k. The element of luck in accomplishing the voyage mu st ente r into 

the planning of transoceanic barge operations to greater extent than for selfpropelled equipment. .

Despite these reservatio ns, the DOD interposes no objection to the continued 

development of barge trans portation from the United Sta tes to the noncontiguous 

States and territories. The third question was: “Wh at is the position of the DOD on the use of 

foreign-flag shipping in trad es between the main and and noncontiguous States 

and territo ries of the United States? ” The DOD does not favo r the admission of foreign-flag shipping into these 

trades. The volume of cargo generated at any given time on a specific route 

will support only so many ships. To introduce foreign ships would broaden 

competition, and would mean a reduction in American ships. Such a reduction 

would be con trary to DOD desire for a stron g and substantial American mercha nt m arine. The fourth question w as : “What is the DOD position on the adequacy of 

the American merchan t marine for mobilization purposes? How close to the 

goal of readiness for an emergency does the present U.S.-flag fleet come?”

In the most recent study made of transp ortation requirements and capabilities for emergencies, the DOD concluded that the American merchant marine 

was not sufficient to meet minimum needs of the DOD. When ships of foreign 

(Panam a, Honduras, Liberia) registry but owned by American citizens and 

under effective U.S. control, are counted along with American-flag tankers, the 

tan ker fleet becomes marginally adequate. Dry cargo types and passenger 

ships were found to be inadequate, both in numbers and in quality. A comprehensive resurvey of tran spo rtation requirements is now unde rway and is 

to be completed this summer. A definitive answ er to the question can better 

be made after study and analysis of this survey.

The fifth question wa s: “What is the DOD position as to the number of 

ships that should be assigned to the trad es between the mainland and noncontiguous State s and territori es? ” The DOD regards the ships assigned to these trades as particu larly valua ble 

because of the probability that most of these ships will be relatively close 

to our shores at all times and thus readily available in an emergency. No attemp t has been made, however, to express this desirability in a numerical 

formula. We rega rd all American-controlled ships as desirable for national 

defense purposes.

Sincerely yours,

Roy A. Gano,

Vice Admiral, U.S. Navy,

Commander, Military Sea Transportation Service.

Senator Bartlett. Since Puerto Rico and Alaska and MSTS have 

been heard from this morning, the committee will stand in recess until 

10 a.m. on Monday, the 13th of March.

Thank you all for appearing.

(Thereupon, the hearing was adjourned at 12: 30 p.m., to reconvene 

on Monday, March 13,1961, at 10 a.m.)

71709 0 —62------ 14

DOMESTIC OFFSHORE SHIPP ING

MONDAY, MARCH 13, 1961

U.S. S enate,

Com mitte e on I nterstate and F oreign Commerce, 

Subc omm itte e on M erchant Mar ine and F ishe ries ,

Washington, D.G.

The subcommittee was called to order, pursuant to adjournment, at 

10:15 a.m. in room 5110, New Senate Office Building, Hon. E. L. 

Bartlett presiding.

Senator B artlett. The committee will be in order.

This is the thir d day of hearings on the problems of ocean tra ding 

with Alaska, Hawaii, Puerto Rico, and Guam. Previous witnesses 

from the areas concerned and Government offices have very ably set 

out issues of concern to the committee.

Today’s testimony will be from the carriers operating in the trade 

between the mainland States and offshore States and territories. 

Views and materials recorded in this hearing will provide the committee with another side of a complex story.

Let me say to you gentlemen who have come from so far away, 

and those who have come from near points, I wish to express the 

thanks of the committee for your having taken time out from busy 

schedules to come to Washington and appear before us. This is certainly an indication of the importance of the problems, as well as the 

spirit of cooperation needed for a solution of them.

The first witness this morning will be Mr. Randolph Sevier, president of the Matson Navigation Co. We are glad to have you here, 

Mr. Sevier. You may proceed as you desire.

STATEMENT OF RANDOLPH SEVIER, PRESIDENT OF T HE MATSON 

NAVIGATION CO.

Mr. Sevie r. Mr. Chairman, I am Randolph Sevier, president of 

Matson Navigation Co. I wish to express my company's sincere appreciation to the committee for the opportunity of presenting our 

views on H awaii’s domestic ocean shipping system and its problems.

This is a large and complex subject, not only vital to Hawaii and 

the steamship companies in the trade, but to the Nation as well. To 

cover it adequately requires a presentation of some length and detail. 

The principal points, however, are briefly reviewed in this summary 

statement, with supporting statistics and narratives contained in an 

appendix. We respectfully request permission to file a supplementary statement later to cover points raised in the 2 previous days of 

hearings which are not touched upon here.

(See letter of Mr. Pessel, p. 324.

207
208 DOMESTIC OFFSHORE SHIPPING

Se na tor B artlett. I f there is no objection, th at permission is 

gran ted.

Mr. Sevter. Th an k you.

Th ere are six principa l point s in thi s pr es en ta tio n:

First , the p resent vigorous chara cte r of Haw aii’s economy.

Second, the essentiality of reg ula r, depend able steam ship services 

to an island Sta te, as has been provide d by M atson.

Thi rd , the impac t on Haw aii’s economic well-being of f reig ht rates 

req uir ed to ma intain such regu lar service.

Fo ur th, the aspects of Haw aii ’s sh ipping system which makes its 

str en gth and adequacy matt ers of nat ion al concern.

Fifth , the specific problems faced by Matson , the principa l ca rri er 

in the tra de for nearly 80 years.

Fina lly , some areas where Ha wa ii’s ocean sh ipping system may be 

strength ened by assistance from the Fe de ral Government.

I. The Ha wa iian economy is vigorous and grow ing: Ha wa ii enter ed the decade of the 1960’s as the Na tio n’s newest S tate an d brought 

into the Federal Uni on a str on g economy. Dur in g the pa st decade, 

in pa rti cu lar, thi s island economy has experie nce d a gro wth un ­

precedented in its histor y and matched by few othe r areas in the 

Un ite d States. In a recent fre ight rate he ari ng, Gov. Willi am F. 

Qu inn said, in p a rt:

These islands have recorded remarkable economic advances in the past decade. 

And there is no doubt that the pace of growth has quickened substan tially since 

Haw aii became a State and that oUr economy will continue to grow at an 

accelerated pace during the nex t 10 years. Upon the growth of the economy 

are based our hopes for higher stand ard s of living for our people.

An d in the same proceeding, State Se na tor Ra nd olph Crossley, of 

the State of Haw aii, s aid :

The growth of the terr itory, and now the State of Haw’aii, as a whole over 

the past 10 years has been a healthy, substantial, and stead y growth.

A few sta tistics give some idea of the ma gn itu de of this gro wth. 

Between 1952 and 1958, gro ss pro duction o f the S tate increased from 

$1,141,304,000 to $1,400 million. Th e ave rag e annual rat e of gro wth 

was greater than th at of the mainland . Total pers onal income increased from $893 million in 1954 to an estimate d $1,209 million in

1959, an increase of 44.5 percen t, com pared to a 34.5 pe rce nt increase 

nat ion ally.

Pe r c ap ita income in H aw aii has also been rising , th e rat e of grow th 

being about the same for the United State s as a whole. It is v irt ua lly 

at the national average, des pite the fac t th at the per cen tage of pe rsons below usual emp loymen t age is ma ter ial ly greater in Hawaii 

th an in the Nation as a whole. Th is has the effect of dep ressing ab ­

norm ally the ind icated pe r capita income. Am ong the 50 states, 

Ha wa ii ran ks fourth in ann ual outpu t per far m worker, seventh in 

pe r residence use of electricity, and eig hth in life insurance pe r 

capit a.

Dr. Jame s H. Sho emaker, dir ector of busin ess research , Ba nk of 

Ha wa ii, a recognized specialist on the g ene ral economy of Ha wa ii, in

1960, commented on the fu ture sta tus o f the economy as follow s:

I would saj’ tha t there is in my view' no question but wh at there will be a 

sub stan tial advance in this economy.
DOMESTIC OFFSHORE SHIPPING 209

And Dr. Thomas K. Hitch, director of the department of business 

research, Fir st National Bank of Hawaii, also a recognized expert in 

this field, in his study entitled “A Brief Review of Hawaii for the 

Businessman,” said he expects the per capita income in Hawaii to 

continue to grow at about the national rate. According to him, 

Hawaii ‘‘is to the businessman a prosperous (3-percent unemployment rate ), affluent, modem, progressive, and diversified economy.”

Perhaps the most recent comment on the State of H awaii’s economy 

is contained in a report by Dean Witter & Co., investment bankers, 

dated February 20,1961, which, in part, said:

Hawaii’s rate of growth in the past 5 years has been nearly twice th at of the 

U.S. mainland, and about on a par with th at of California. Moreover, the 

dynamic forces in the Haw aiian economy have remained strong enough to overcome the downpull of the current mainlan d recession and to push business in 

the 50th State furth er ahead, even though at a slower pace tha n in 1959 and 

early 1960 * * ».

Therefore, it is not surprising to find the islands’ 1960 retail sales 11.3 percent ahead of 1959, as compared to a lean 2-percent incre ase on the mainland, 

and unemployment at a low 3.4 percent of labor force, as aga inst a recent 6.8- 

percent recession figure fo r the United States * * *.

The full account by Dean W itter is attached as exhibit No. 1.

II. Matson’s essential Hawaiian service: Hawaii, it must be remembered, is a unique State. It is the Nation’s only island State, separated 

from the other 49 by 2,100 nautical miles of ocean. It is almost totally 

dependent on commerce with other areas, mostly the mainland United 

States, to support its vigorous and growing economy. This commerce 

moves, and for the foreseeable fu ture must continue to move, by but 

one means of transpo rt—ocean shipping.

A Dean Witter & Co. special study in 1960 describes Hawaii’s 

economic profile, in part, as follows:

Insufficiently endowed with raw materials, these small islands could never 

have atta ined a high living sta ndard on the basis of a self-contained economy. 

Both economics and politics worked powerfully toward transform ing Haw aii 

from a prim arily agricultural self-contained economy in the early 19th century 

into an economy highly specialized and fully integrated with the mainlan d’s 

economy in the 20th century. Haw aii has been the perfe ct illu stration of an 

economy concentrating on its best potentialities, thereby raising its living standards to about the level of the larg er are a it prim arily serves, namely the 

United States.

The islands’ commanding geographical location, their good soil and climate, 

and their scenic beauty have become the main dete rminants of the ir economic 

destiny. The same is true, In a negative way, for their principal weaknesses— 

the lack of ores, coal, and minerals, and of a domestic mass market. The result 

to date has been an economy highly specialized in certain services—primarily 

defense and tourism, and in some agricultural specialities—mostly sugar, pineapple, and related food processing industries with limited activity in other fields 

of man ufac ture. Ancillary services such as public utilities, transp ortation, and 

banking have developed in step with the islands’ economy and are up to modern 

mainland standa rds.

And Dr. Shoemaker, in a 1959 report on Hawaii, says:

The integration of Hawaii’s economy into that of th e United States is not new. 

It began more than a century and a half ago with the early trade rela tion s of 

American sailing ships that stopped in Hawaii for provisions and sandalwood 

en route to China. Tra de gradually rose until 1872. There after, with the growth 

of sugar exports (and lat er the admission of Haw aii as a Te rrito ry), commercial. financial, and trade re’ations expanded at an accelerating pace—never more 

rapidly than during the past decade.

From the beginning, the growth of the economy of th e island s has been directly 

geared to such expansion. Hawaii’s last decade as a Territor y thu s has been
210 DOMESTIC OFFSHORE SHIPPING

the grea tes t decade of growth in production, income, and employment. In some 

ways, Haw aii is today as fully integrated into our national economy as is 

any State.

At this point it would seem proper to as k: What has been the character of the ocean shipping service that has made possible this integration of an island economy with the mainland United States?

Hawaii has received, for the most part from Matson as the principal 

carrier in the trade for nearly 80 years, frequent, dependable, and 

specialized steamship service which has connected the islands to the 

Pacific, gulf, and Atlantic coast ports, making it possible to market its 

two principal products—sugar and pineapple—and in turn to obtain 

from the mainland United States the goods it has needed to support 

its growing population, its tourist industry, the vast Defense Establishment, as well as its basic agricultural economy.

Through the years the Matson freighter fleet has had many configurations. Today it consists of 20 cargo vessels, including 6 C-3’s 

with capacity for 75 containers on deck, the all-container C-3, 

Hawaiian Citizen, which carries 408 containers, 2 elongated C-4’s, the 

Californian and Hawaiian, each with a capacity for 286 containers 

and which carry bulk sugar (16,000 tons) and molasses (3,000 tons) 

from Hawaii to California. Frequency of service from mainland 

U.S. ports is geared to tonnage requirements. From San Francisco, 

sailings average nearly three per week. From Los Angeles, service 

frequency exceeds one sailing per week, and from Northwest ports 

there is a sailing approximately every 2 weeks.

Matson and Isthmian Lines, under a joint service, provide a 14-day 

sailing frequency between Hawaii and Atlantic coast and gulf ports, 

and a 28-day frequency to South Atlantic ports from Hawaii.

In 1960 Matson operated 247 round freighter voyages between the 

continental United States and all the ports in the Hawaiian Islands. 

These vessels, averaging a call at Honolulu every 1U> days, carried a 

total of 3,893,000 revenue tons during the year.

In addition to those voyages, we made 58 round-trip voyages with 

our passenger liners, the Lurline and Hateonia.

No other island community of comparable size and remoteness enjoys such a regularity and frequency of service as Hawaii receives 

from Matson.

As a result, in the postwar era the Matson freighter has become 

Haw aii’s floating warehouse. Goods, in large volume, go directly 

from mainland warehouses to shipside, and from the docks in Hawaii 

to store shelves, eliminating multiple handling, reducing inventories 

and costly warehousing. In land-scarce Hawaii, the diminution of 

the need for warehouse space as well as the elimination of costly 

multiple handling, and other costs inherent in large-scale warehousing, holds down the price to the ultimate consumer. If such frequent 

service should cease, these benefits would cease.

II I. The impact of freight rates: Keeping in mind both the State 

of Hawaii's economy and the principal freight service that sustains 

it, the following questions appear proper to explore: What has been 

the impact of the freight rates? Have they constituted a burden on 

the economy ?

It would appear quite obvious that, to date, the level of rates for 

Hawaii’s essential freight service have not had a serious, adverse 

effect on the economy.
DOMESTIC OFFSHORE SHIPPING 211

Proof of this is found in the vigorous growth of the economy during 

the past decade. The reason freight rates have not retarded growth 

is simply that, contrary to assertions heard from time to time, the 

ocean cost of transp ortation is not a large part of the retail price at 

which common household items are sold in Hawaii.

For example, of the average 1959 Honolulu retail price of a 1-pound 

can of salmon (66.3 cents), the freight rate accounted for 2.01 cents; 

of the price of a pound of coffee (98.6 cents), the freig ht rate accounted for 3.7 cents; for a No. 303 can of peas, the average price was 

25.4 cents, the freight cost, 1.87 cent; for a 12-ounce can of lunch 

meat, the average price was 55.8 cents, the freight cost 1.73 cents. 

Other examples are shown on exhibit No. 3, attached.

While freight rates have risen, on the average, 150 percent since 

1946, the added cost, when placed against common commodities that 

p into most Hawaiian homes, it is not large nor burdensome. For 

instance, these increases from 1946 on some common commodities are 

as follows: about three-fourths of a cent on a pound of rice, a No. 1 

can of soup, and a pound of potatoes, and about 2 cents on a pound of 

coffee. The appendix contains several exhibits on this subject so it 

is not necessary to burden the committee with further statistics. Ex ­

hibits 2 and 4 contain some very interesting information.

We are aware that its residents may consider Hawaii to be a high 

cost of living area.

However, Dr. Hitch, in the study referred to earlier, commented 

upon the question of whether Hawaii is a high cost of living area by 

reason of its remoteness and dependence upon transportation from 

the mainland, in the following statement:

Most businessmen and economists who have been faced with this question 

have concluded that lighter clothing and no winter clothes, the need for less substantial housing and no heating, and the ready availability of att rac tiv e and 

inexpensive recreational areas counterbalance, largely if not entirely, the higher 

cost of imported consumption goods and the higher value of residentia l land.

Of 10 mainland cities, according to consumer price studies, 9 experienced large r increases in consumer prices than Honolulu did for 

the period 1947-49 to 1960. This is covered in greater detail in exhibit 4-A.

In any event, the price and freight rate d ata shown in the exhibits 

indicate tha t the effect of ocean freig ht rates on Hawaii’s cost of 

living has been overemphasized.

Since Hawaii’s cost of living, however, is a much debated and much 

misunderstood topic, it may be a proper endeavor to have a study made 

of the impact of transportation costs on the cost of goods to the ultimate consumer in Hawaii. I have noted with interest that such an 

inquiry—the relation of freight rates to the cost of offshore living— 

has been mentioned by another witness and has been the subject of 

committee questioning. It certainly appears to be a logical area of 

committee interest.

IV. Hawaii shipping is of national concern: Now I would like to 

take up the fourth point—the aspects of Hawaii’s shipping system 

which makes it eminently in the national interest, which has been 

touched upon by nearly every witness at this hearing. Matson Lines 

fully supports the national policy expressed in the Merchant Marine 

Act of 1936, concerning domestic ocean transportation.
212 DOMESTIC OFFSHORE SHIPPING

Th is policy says th at the United State s should foste r the develop ­

ment and enco urage the mainten ance of a me rchant marine sufficient 

to ca rry and ma int ain the flow o f its domestic waterborne commerce 

at all times, capable of servin g as a naval and military auxil iar y in 

tim es of or in national emergency, owned and opera ted under the 

Am eric an flag and man ned by U.S. citiz ens insofar as may be pr ac ­

tica ble, and composed of the best equippe d, safe st and most suitable 

typ es o f vessels constructed in the Uni ted States.

Th is is the policy which Matson, as Haw aii’s priva tel y owned pri ncip al carrier, has followed consisten tly. We believe it is sound and 

sho uld be continued.

Ce rta inly the well-being of th e 50th State , which supp lies 10 percen t 

of the Na tio n’s sugar, and 75 perce nt of its pin eap ple , s upports a key 

Defense Est abl ishme nt, utilizes about $500 m illion worth of goods an ­

nuall y from man y of the S tat es on th e ma inland, is of concern to more 

th an just its 630,000 citizens, inc lud ing the military. Because ocean 

shipping is so fun dam ental to the str en gth of the economy, it is most 

comm endable that thi s comm ittee of Con gress intere st itself in the 

problems.

A modern, efficient domestic freigh t fleet, not subject to bein g 

bottle d up in foreign p orts in time of war, is of vital importance to the 

Na tio n's defense posture. Th e history of the Matson fleets in Wo rld 

W ars I and II is ample evidence o f th e role this branch of the Na tio n’s 

mari tim e ind ust ry has played , and must continu e to play, in the 

Nation’s emergencies.

Presiden t Ken nedy, then Senator Kenne dy, in a lette r dated Ju ne 

29, 1960, to Senator Magnuso n, emphasized the imp ortanc e of the 

domestic m erc han t marine of thi s country when he st at ed :

When the United States entered World War II, the domestic merchant fleet 

was taken over almost in its entirety by the Government, for military logistics 

purposes. In any future emergency the need for such a fleet, ready at hand 

to serve defense needs, would be equally urgent. But there may not be any 

such fleet to requisition, from present indications, if we stan d idly by.

If the domestic merchant fleet, so strategic to the Nation’s economy and to 

its defense, is to be kept alive—and it must be—Government must lend a hand.

V. Matson 's problem s in the Ha wa iian service: From this bro ade r 

view of Haw aii’s shipping problems, I wou ld like to channel you r 

attention to some of those faced by Matson , as the State s’ p rin cip al 

ocean fre ight carrier.

One that Matson sha res with U.S . indu str y in general is th at of 

sp ira lin g costs of doing business.

Th e two princ ipa l elem ents of fre ight service costs are cargo ha ndling and vessel opera tin g. Cargo ha nd lin g is the larges t, am ounting to about 48 percent of the total cost of moving Haw aii’s commerce. Th is is followed by vessel expense which, inc lud ing d eprec iatio n, averages about 39 percen t. The principa l component of these 

expenses is labor, w hich accou nts for ap pro xim ate ly 56 percent of total 

cargo h an dling and vessel expense. Un lik e the foreig n commerce of 

the Un ite d Sta tes , which involves low cost cargo ha nd lin g in foreign 

po rts , domestic commerce is burden ed with high cost ha nd lin g at 

both ends of the voyage. Expen sive cargo ha nd lin g equipment and 

ter mi nal fac ilities are also required in both places. Ca rgo h an dli ng 

expense pe r ton, inc lud ing lab or and othe r costs, increased 167 pe rcent from 1946 to 1961. Altho ugh the re h ave been some price fluctua-
DOMESTIC OFFSHORE SHIPPING 213

tion s, bunker fuel oil pric es have been moving up wa rd ma ter ial ly 

du rin g the pa st decade. An d our wa r-b uilt fre ighters, which have 

been op erating from 16 to 18 yea rs, each ye ar become more expensive 

to ma intain . Vessel op erating costs pe r day since 1946 to date have 

incre ased 115 percen t.

Because lab or has been such a lar ge part of ou r increased cost 

prob lem, Matson, in concert with much of Americ an indu str y, has 

sou ght, where possible, to replace lab or wi th capit al when such pr ogra ms would mean suitab le savings.

Th is is not alw ays an easy course, fo r it br ings in its wage sociological and finan cial problem s of some ma gnitu de. Two examples of 

how Matson has tri ed to relieve the pressure of the grow ing cost 

burde n are the fre ight conta ine r service and the all-au to car rier.

In the fall of 1956 Matson Lines org anize d th e first integ rated research de pa rtm en t at the top manag ement level of an y Am eric an-flag 

steamship company. Th is was done in rec ognition of the need for 

careful stu dy of the cause and effect of po stw ar cost increases, and 

the necessity fo r practic al measures to stem the tide of fu rthe r cost 

increases. Ma tson’s long his tor y of ma ritim e inn ovatio n in the 

Ha wa iia n tra de has been stimu lated not by com petitive forces, bu t by 

or sincere int ere st in Haw aii’s conti nuing welfare.

Ou r research de pa rtm en t’s analysis o f th e cost of providing Ha waii’s 

ocean tran sp ortatio n ind icated th at cargo ha nd lin g of gen eral merchandis e mov ing from the Pacific coast to H aw aii offered th e most impo rtan t op po rtu nity fo r reduction of expenses. Th is led Matson to 

pioneer its p resent large scale con tain eriz ed sh ipping service between 

San Fra ncisco , Sto ckton , and Los Angeles po rt are as in Ca lifornia 

and Honolulu.

Cargo m ay be load ed and sealed in a conta ine r at a sh ippe r’s w arehouse in a Ca lifornia po rt area, and the good s not touched until the 

conta ine r is unsealed and unloaded at the consignee’s warehouse in 

Hon olulu. The res ultin g savings in car go ha nd lin g, vessel ope ration s, 

dam age and pilfe rage have enable Matson to name conta ine r rat es 

below the rat es charg ed fo r carriage of cargo in con ventional loose 

stowage.

In exhib it 4-B, we hav e com pared act ual frei gh t charg es pa id to 

Matson by the sh ippe r on typ ica l conta ine r service shipm ent s with 

wh at his costs would have been fo r carriag e in loose stowage. Since 

the conta ine r rate include s pic kup service, wh arf age, and insurance, 

in addit ion to ocean haul, these items are add ed to the ocean rate for 

conventional service, which does no t incl ude them. Th e sav ings 

shown in exh ibit 4—B ran ge f rom over 13 perce nt to above 31 percen t.

Matson’s present investm ent in this conta ine r system, inc lud ing 

ship conversion costs and lease obligations on conta ine rs and chassis, 

now tota ls $17,800,000.

The carriage of automob iles in the Ha waiian tra de posed special 

problem s for man ufacturers and dea lers as well as fo r Matson.

In Ja nu ar y 1961 Matson completed conv ersio n of the C- 3 type 

SS Ha waiian Fisherm an and plac ed into service the Na tio n's first 

oceango ing auto mobile carrier. Th is “floa ting garag e,” designed by 

our own eng ine ering staff, will sail th roug ho ut the year on a 14-day 

turnarou nd , ca rry ing up to 464 autom obiles on each voyage from San 

Fra nci sco and Los Angeles to the islands . Thi s is covered in gr ea ter 

detail in exhib it 5.
214 DOMESTIC OFFSHORE SHIPPING

These two problems— ris ing lab or costs and the need for offs etting 

technological improvem ents—are sub ord ina te, however , to a th ir d: 

the inab ility o f Matson to produce a fa ir and reasonable return to its 

share holde rs in ren derin g the scope of service with the spec ializ ed 

equ ipm ent the Ha wa iia n economy require s, while at the same tim e 

prov iding fo r an ade qua te ship repl acement or mo dernizatio n pr ogra m.

From 1952 throug h 1960, earnings on ou r combined Pacific and 

At lantic-G ulf Ha wa ii frei gh t service opera tions have averaged bu t 

$800,000 ann ually. Ac tua l losses were suffered in 1952, 1959, and in 

1960. On the average , du rin g the pa st 9 yea rs, these earnings have 

been at about one-f ourth the level fou nd reas ona ble by the Federal 

Mari tim e Board in docket 808, decided in December 1957 af te r 1 year 

of hearings.

I t is obvious tha t such a low e arn ing s record will make difficult the 

replacem ent o f the p resent fleet, even by conversion or modernizatio n 

of old er vessels, let alone by con stru ctio n of new fre igh ters. To replace the pres ent Matson fleet employed in the trad e is a sta ggeri ng 

financial underta kin g. Th e cost of new construc tion, dep endin g on 

vessel type s, would ran ge from $178 m illion to $268 million. Th is is 

covered in g reater detail in exhib it 6.

In September 1959 Matson filed a rate increase, follow ing the stand ­

ar d of reaso nable earn ings laid down by the B oar d in dock et 808. The 

Fe deral M aritime Board perm itte d the increase, docket 869, to go into 

effect, subject to inv estigation, with the pro viso th at any portion 

finally disallow ed be refu nded to the rat epayers . He aring s were held 

in four cities. Th ey were length y and costly, not only to Matson, 

bu t to th e Board and to the public. The case is now sub mitted fo r decision. The cost and consumption of perso nnel tim e of such hearings 

are und erstan dab le, but pose added burde ns fo r a reg ula ted co mpany.

At th is tim e it seems well to mention th at we are filing fo r a f ur th er 

rate increase of 10 percent within the next several days, even tho ugh 

ou r prev ious reques t is stil l to be decided by the Federal Maritim e 

Board. The 10-percent increase is necessary to offset op erating losses 

caused by increased op erating costs which hav e occurred since Se pte mber of 1959. In 1960, fo r example, Matson lost $35,000 before taxes 

on its Ha wa iia n frei gh t service on a gro ss revenue of $71 million. 

Obviously we cann ot continu e to ope rate this service at a loss.

Un der pre sen t con ditions , Matson, as Haw aii’s pri ncipa l freigh t 

ca rri er, does not rate high as an investment risk.

Inv est me nt ris k cha rac teristics of Ma tson’s f reig hter ope rations in 

Ha wa iia n service in clude t he fo llowin g:

1. The ear nin gs record of fre ighter opera tions in Ha wa iian tra de 

does not reflect finan cial soundness and is not conducive to att raction 

or retention of cap ital.

2. Ma tson’s freigh ter opera tions have been subject to com petition, 

strike s, steadily increa sing costs, and a lag in rate ad jus tments follow ­

ing wage increases.

3. Dur ing the pas t 9 years, Matson has retain ed, on the average , 

only li/ 2

 ce nts out o f each freight revenue dollar.

4. Matson’s prospec ts fo r significa nt gro wth in net revenu e-p rod ucing tonnag e are lim ited by lack of any prospect of ma terial gro wth
DOMESTIC OFFSHORE SHIPPING 215

in exports from Hawaii to the mainland. We have attached as exhibit 

7 some further information on this point.

The final Hawaii trade shipping problem I wish to set before the 

committee involves our passenger liner service. The Lurline and 

Mateonia are the last nonsubsidized liners flying the U.S. flag. They 

provide, in our estimation, not only an essential service to Hawaii's 

tourist industry, by giving tourists the choice of more than one mode 

of transportation, but are of vital importance to the U.S. defense posture. Both ships served notably as troop transports in World War 

II, are popular first-class modern vessels, and could again serve the 

Nation in any emergency.

The principal problem with these liners is the apparent lack of 

concern for their defense importance exhibited by the military. In 

September of 1960, afte r very short notice, approximately $1 million 

worth of Government business, on which the company had based its 

annual operating income for the balance of that year, was suddenly 

withdrawn. Efforts to date to restore this traffic to these vessels have 

been unavailing. For the past several years we have enjoyed approximately $3 million worth of Government business, being principally the 

dependents of military personnel moving between Hawaii and California ports.

The same kinds of high-cost operating problems detailed earlier also 

affect these two liners. The question of maintaining them both in the 

Hawaiian service in the face of these costs is a most serious one— 

and one to which Matson still does not have a suitable answer. Pa rt 

of it rests with the Government. There is a narrative attached as 

exhibit 8 which goes into this in greater detail.

Before taking up the final item—areas of possible Federal assistance—I would like to summarize the principal points I have made 

about Hawaii’s ocean shipping system and its problems:

Hawaii, as the Nation s only island State, is unique in that it must 

depend almost entirely on ocean transportation for the tra nsport of its 

essential commerce.

Hawaii’s economy has grown and prospered because this ocean 

transportation system has provided a pattern of schedules, ships, and 

specialized equipment, geared to the specific needs of its island 

economy.

Matson has been the principal carrier in H awaii’s ocean transportation system, investing private capital for more than 75 years to assure 

its continuance, but in recent years has not been able to earn a suitable 

return.

Emerging problems are of such a nature th at the future course and 

development of Hawaii’s ocean transportation system appear to be 

increasingly matters of national interest.

Matson has embarked on several programs designed to reduce the 

pressures of rising costs. All require substantial capital. The prospect for attracting added new capital into the venture of providing 

ocean transportation for Hawaii is not bright.

Passenger liner service, essential to the national defense posture and 

to the tourist economy, faces serious problems, partially because of the 

withdrawal of military dependents traffic.

VI. Suggestions for Federal assistance: In considering possible 

Federal assistance to Hawaii’s domestic shipping system, the problems of which are national in scope, this fundamental fact should be
216 DOMESTIC OFFSHORE SHIPPING

fo re m os t: Th e p ara mou nt need of th e H aw aii an economy has been and 

will con tinue to be, reg ula r, frequent, dependable, and modern sh ipping servic e.

I t is Ma tso n’s position th at th is need can be met best by a ca rri er 

or ca rri ers devoted exclusively to serving the Ha wa iia n tra de at 

reason able rates. By reasonable rates we mean rat es sufficient to meet 

op erating costs and to pro vide a fa ir ret urn, which will enable these 

ca rri ers, as par t of the Na tio n’s free enterprise system, to retain and 

at tr ac t the c apital ne cessary to co ntinue to pr ovide the Haw aii an tr ade 

with ade quate cap aci ty and imp roveme nts as ma ritim e technolo gy 

advance s.

Op ening the trad e to subsidized carrie rs, whose service to Hawaii 

wou ld be incide nta l to their p rin cipa l foreign trade routes, w ould have 

a serious adverse imp act on domestic carriers servin g only Hawaii. 

In the scra mble for premium carg o, chaotic rate s itu ati ons would d evelop, service would deteriorate , and the Ha wa iia n economy would be 

th e loser.

Briefly , may I expose the hidd en fallaci es in th is suggested app roach 

to Haw aii’s shipping futur e. Experience reve als th at throug h ca rrie rs w ou ld :

1. Ser ve only one Ha wa ii po rt, ca rry ing only the fa st handling 

high reve nue c arg o;

2. Sip hon this cargo from the domestic carriers , thus endangering 

rate levels, frequency of service and full ran ge of H aw aiian po rt calls 

on the p art of the domestic c ar ri er s;

3. Serve only at the convenience of the ca rri er, based on F ar Ea st 

trad e conditio ns, not the necessity or convenience of the Ha wa iian 

tra de .

Pr esen t laws which restr ict dom estic shi pp ing in th e Haw aii an tra de 

to U.S . flag carriers must be con tinued as an essential par t of our 

Haw aiian defense posture.

Upon this prem ise, the follow ing means of prov iding Federal assist anc e to the Ha wa iian shipping system are offered at th is time. 

Suc h assistan ce could be pro vid ed at little o r no cost to th e t ax pa ye r:

1. Simplify and stream line ratem aking procedures. A t best the re 

is some dela y in recovery by the carriers of cost increases, since t he ir 

im pact mu st be felt before incre ased rates can be filed. Collection 

of a nticipated cost increases is no t perm itted, howe ver firm ly manag ement may be convin ced of th ei r certaint y. We were plea°ed to learn 

th e Federal Ma ritime B oard is p lan ning to study ways of simp lifyin g 

and str eamlin ing rat em aking procedu res.

2. En actm en t of legislation un de r which wa ter carriers in these 

dom estic offshore tra de s may volun tar ily e stab lish th roug h rou tes and 

jo in t rat es with carriers sub ject to the jur isd iction of th e IC C and to 

th at of the CAB. coverin g throug h movement of shipm ent s between 

main lan d interio r p oin ts and H aw aii. Jo int rates would imm edia tely 

affo rd shipp ers single -ca rrier responsibility, sim plify ing s hipp ing ar ­

ran geme nts , tra cin g, and claims. Jo in t rat es should also make pos ­

sible a reduct ion of tra ns po rta tio n costs to shippers , just ified bv impro ved coo rdinat ion in ha nd lin g throu gh shipm ents by pa rti cipa tin g 

carriers.
DOMESTIC OFFSHORE SHIPPING 217

3. It is congressional policy of long standing, tha t terminal area 

pickup and delivery service by motor vehicle, incidental to interstate 

rail and water transportation, is regulated as p art of such line haul 

transportation, rather than as separate motor carrier service. We 

think this policy applies to water carriers such as Matson, operating 

under the Shipping Acts, as well as to carriers subject to the Inter ­

state Commerce Act. However, certain drayage carriers claim this 

policy does not apply to the Hawaiian trade and seek thereby to preclude Matson from offering pickup and delivery service within the 

terminal areas of the ports it serves. .Only if the application of this 

principle to container service in the Hawaiian trade be preserved can 

shippers and consignees realize maximum savings in transp ortation 

costs. We urge enactment of legislation which will make it clear that 

in the Hawaiian trade container pickup and delivery service, within 

our port areas, is regulated as part of our water transportation, in order to pu t our trade on a basis comparable with that of the transportation between the first 48 States.

4. Consider a Federal program of port, modernization for Hawaiian 

ports, including the possible transfer of military piers 39 and 40 in 

Honolulu to the State Government. Such a program would in many 

ways parallel the Federal assistance now given to airport and a ir terminal construction and modernization. It should be established in 

order to develop and enlarge the port, facilities that will be required 

to support modernized ships and systems of cargo handling. Such 

port facilities would then be available in time of national emergency, 

for port facilities, in offshore areas at least, are of national as well as 

local concern.

5. Amend the Vessel Exchange Act in order to give the domestic 

operator a priority on the purchase of turned-in subsidized freighters 

and assistance in defraying costs of purchases and modernization. 

This suggestion recognizes the stern reality tha t new construction for 

the Hawaiian trade is almost financially impractical and tha t the 

modernization of existing vessels, under the proper circumstances, 

currently offers the best method of fleet replacement.

6. Federal subsidies for the domestic offshore trades have been suggested by several witnesses before this committee. This would involve 

a basic change in national maritime policy and would require extensive study. Beyond what I have already said, we do not have a position on this subject. If legislation on domestic subsidies is prepared, 

we will be pleased to testify concerning it.

In concluding, I wish to thank you again for this opportunity of 

appearing before you to discuss the shipping system and problems of 

the Hawaiian trade. I wish to assure vou that utmost in cooperation 

will be afforded by the management of the Matson Navigation Co. in 

an endeavor to find long-range and orderly solutions to these very 

complex problems. We are confident tha t with the joint efforts of 

the Federal and State Governments, labor, management, and users of 

transportation service, workable solutions can be developed.

(Exhibits 1 through 8 follow:)
218 DOMESTIC OFFSHORE SHIPPING

D e a n "Wi t t e r & Co. in»«»t« snt

« • MOMTOOMCRV STR U T • U N FRABBCIOCO • . CAMP. • SXBROOK 1-TX1I

SEVIE R EXHIB IT NO. 1

S en a te M erc h an t M arin e and

F is h e r ie s S u b co m m it te e

•AM FRANCISCO

LOS A N O IL IS

N IW YORK

CHICAGO

3 /1 3 /6 1

MUBSSRS NIW TO«« STOCK IICMAMOt • PACIFIC COAST STOCK IICNANSI ■ MIOWKST STOCK (ICNAMOf ■ AMO MM MCI PAL COMMOOITT IICM ANalS

— RIBCA SCH OCFARTMCMT ----- - _

February 20, 1901

133 11

HAWAIIANA

Hawaii and Hawaiian Companies One Year Later

(A Brief Followup to Our Exte nsive I960 Reports)

Haw aii's rate of growth in the past five years has been nearly twice that of the United

States mainland, and about on a par with that of California. Moreover, the dynamic

forc es In the Hawaiian economy have remained stron g enough to overc om e the down

pull oi the current Mainland recession and to push business In the Fiftieth State further

ahead, even though at a slo wer pace than In 1959 and e arly 1960.

The tourist trade continues as one of the principal exp ansionist forc es In Hawaii, with

1960 arrl vala 21% above 1959 (1959 w as 41.7% ahead of 1958). In recent months,

obviously under the Influence of the Mainland rece ssion, tou ris t growth has somewhat

lev eled off, but it Is like ly to show renewed vigo r when the United States economy turns

up la ter in 1961.

In addition, militar y expenditures - the lar gest single Item In Hawaii's economy - was

again up about 10% In 1960. Third ly, construction In 1960, stimulated by the rising

number of tou ris ts and permanent res ide nts and by Increas ed government spending,

exceeded the prior yea r by 28%, dollarwlse . Oahu building perm its, indicating the

more Immediate construction trend, continue well above 12 months ago.

Therefore It la not sur prising to find the Islands' 1960 ret ail sa le s 11.3% ahead of 1959,

as compared to a lean 2% Increase on the Mainland, and unemployment at a low 3.4% of

labo r for ce, as against a recent 6.8% recessi on figure for the United Skates.

It would be foolish to think that the econ omic skies around the Islands are entirely without clouds and safe from occ asiona l shower s but they probably will continue to show a

bias toward "fair weather con ditions."

One of Hawaii's Immediate problem s re side s In the current renegotiation of the labor

con tracts In the sugar Industry. This year happens to be the fir st one when the State's

sugar output could recover to more normal leve ls from the effect of the 1958 str ike .

Even so, the expected production of about 1,10 0,0 00 tons would st ill fall short o f H awaii's

fir st quarter quota o f 1,2 15 ,41 2 tons (on an annual r ate ). While the Mainland sugar

Industry Is expanding plantings to benefit from the elimination of Cuban sugar from

U. S. markets (though the gap Is to be primarily filled from foreign sources) Hawaii now

Is In no position to benefit likewise from this situation. Despite the recent brief walkout of

VtOM TNI MATKBIAL COMTAIMKO MKBKIM W NOT tUSBANTIIB ItTMgK AB TO CO MN tlTINIM OB ACCVBACT TT NAI. HO WIVII OCKM

ootamsio pbom sou sci. wk .IBASO AO m l u k i ©SAM w ,t t «R a c o .
DOMESTIC OFFSHORE SHIPPING 219

labo r In some plantatio ns, labo r and management are mostly expected to have learned 

their lesson and to get together in a new co ntr act without a new and d isa str ou s str ike.

Technologically, the Hawaiian sug ar industry is in the lead. It may have solved the 

mechanization of sug ar cane harvesting which would elim inate the cost of cleaning the 

cane, reportedly as high a s milling costs on many plantation s. On the oth er hand, the 

economic use of bagasse as a raw ma terial for pap er in Hawaii will have to wait for 

another substan tial inc rease in the Sta te's population and ma rke t.

There are oth er sho rt range problems: Tremendous as the growth in tourism has been, 

the number of hotel room s has rece ntly inc rea sed even more rapidly - in 1960 alone 

from 7,266 to 9,627 - with the res ult that recent occupancy ra te s in m ajo r hotels have 

been relatively low. However, if the Hawaii Vi sit ors Burea u's forecast tur ns out to 

be co rrec t that tour ist arriva ls by 1965 will be about twice the 1960 number of 295,400, 

the pre sen t inbalance in hotel space would soon be co rrec ted . Oahu's well known land 

problem - only 11% of the Island acreag e is owned by private pa rti es holding les s than 

5, 000 a cres each - will again make headlines as holdover land laws exp ire next 

August 21 and a new land code must be enacted by th at tim e. Desp ite the differe nces 

between a Democrat-co ntrolle d State House and a Repu blican-controlled Senate and 

Governorship, a constru ctiv e comprom ise see ms likely. Connected with the land pro ­

blem is the rath er sta rtling upthrust in O ahu's rea l estate prices in recent ye ars, which 

could cause tem por ary problem s if Hawaii's boom should level off for a m ore extended 

period at some tim e.

We think that the se, and other problems, will not p revent Hawaii from having a very 

promising future, and mention them only for the sake of drawing a balanced and re al is ­

tic pic tur e. We believe that the positive facto rs will enable the Islands to enjoy a 

continued good basic growth tr end - though perhaps at a less h ecti c rate than in the 

past few yea rs, as -

1. the Fiftieth State has a young and e ager population, with high educational and living 

standard s, and unhampered by acrimon ious rac ial strif es ;

2. spe edier and more complete tra nspo rta tio n fac ilitie s are provided between the 

Mainland and the Fiftieth State, and also between the la tt er's various isla nds;

3. a growing population and domes tic marke t stimu lates dom estic manufacturing and 

farming;

4. substantial land on Oahu is being made availab le to the economy, mostly on a rental 

basis;

5. tou rism continues a v igorous uptrend and begins to injec t new life into the "oute r 

isla nds " of Hawaii, Kauai, and Maul; and
220 DOMESTIC OFFSHORE SHIPPIN G

6. other ser vic e ind ustries - such as banking, insurance, and public uti lities - have to 

keep up with the needs of a rising number of res ide nts and to ur ists.

With the long term outlook good, and Hawaii's economy fully resistan t to the cu rre nt 

Mainland business rec essio n, it is not surprising to find nearly all Hawaiian stocks 

selling at historica lly respec table lev els . However, most of them - with the exception of the leading utility and bank stoc ks, and American F actors - have not yet regained 

th ei r 1960 highs. The following are some brief comments on a number of Hawaiian 

sto cks.

Castle & Cooke - Considering me rger with two undisclosed Mainland companies after 

merge r with Dole and Columbia River Packe rs in April. Management con siders Mainland acquisitions and land development most prom isin g. There has been some discussion - 

though nothing final - about large sca le future development of some of the company's 

exte nsive landholdings in Hawaii. Company has no im mediate plans for subdividing its 

potentially valuable 6,556 ac re Blackhawk Ranch in Contra Costa County, California. 

Management is confident that it will soon sell its 160, 000 sh ares of Honolulu Oil, now 

worth about $12 1/2 million, to replenish its working capital and use the balance for 

oth er corpor ate need s. Since e arning s potential can probably be lifted materially above 

the $2.00 to $2.50 p er sha re his tor ica l leve l, stock around 40 see ms not out of line for 

long range comm itments; listing likely aft er Dole m erge r. More information may 

app ear in Proxy Statement to be Issued in M arch.

Am eric an Facto rs - We understand 1960 earnings, exclusive of Pio neer Mill and Oahu 

Sugar, were up from the 1959 figure of $1.27 per sh are. Merchandising, toge ther with 

Insu rance and other service s, accounts normally for about two-t hirds of ea rnings; the 

re st com es from sug ar. Expects to close deal with Sheraton Co. for firs t hotel on company's Maui luxury re so rt development which will eventually have 10 hotels. Also planning new re so rt on Kauai. Some relatively minor earnin gs dilution in c ase of full conversion 

of $8 m illion 5% conv ertible notes. Around 30, stock is reas ona ble long term speculation 

on land developments and sug ar rec overy .

C. Brewer - 1960 e arnings were d epres sed by poor sug ar opera tions; however, thi s yea r 

sug ar cro ps should be back to more norm al levels - union -managem ent rel ations, and 

weather permittin g. Company ha s con tract to develop Iran sug ar Indu stry and is negotiating management con tract in Ecu ador. Will acquire large sug ar operation in Puerto 

Rico including 8, 800 ac res of fee cane land and five sug ar mi lls with 230, 000 ton annual 

capacity (110 day seaso n) which it hopes to make profita ble. Financed by $18.8 million 

6 1/4% loan from Pruden tial, with no payback in next five ye ar s. Stock at 35, quite high 

on 1960 dep ressed earnin gs, is a specu lation on the Puerto Rican venture.

Oahu Railway & Land - Its tugs provide reg ula r freight service between the Sta te's 

islands. Some pro per ty lea ses coming up for renewal on more favorable ba sis . Company's docks may be taken over by State; standing on the books at $6 million, they are
DOMESTIC OFFSHORE SHIPPING 221

believed to have a rea l ma rke t v alue of p erha ps $30 million o r more. Stock at 55, with 

an earn ings potential of around $3.20 and paying $2.40 a ye ar, Is selling a t about on ehalf estim ated rea l as se t valu e.

Lew ers & Cooke - A me rch andis er of building materials benefiting from c urrent 

constructio n boom. Have recently gone Into tra ct housing de velopments; built 200 

houses In 1960 and gro sse d $3.6 million on them; plan to build 300 houses this year 

and 500 yearly t he re after. Company owns nea rly 15 ac re s next to the new Ala Moana 

Shopping C enter worth perhap s four tim es Its book val ue of $370, 000. Stock at 22 

has thin marke t (about 380,000 sh ares outstanding) but see ms attrac tiv e at about 

11 tim es 1960 e arnings which we estimate at $2.00 pe r share or slightly b etter.

Hawaiian Telephone - (See Report of March 28, 1960). Expects telephone additions at 

annual rat e of 5-7% In next five years ; 1961 capit al outlays $14-15 million . To issue 

$7 million bonds soon, sell $5 million equity late r this ye ar on rights b asis, which may 

keep 1961 earn ing s In neighborhood of last ye ar 's $1.50 or slig htly below. Intends to 

spl it stock 2-f or- l and raise dividend slightly . (Recent price : 29, cu rren t yield 3.7%).

Bank of Hawaii - (See Report of April 25, 1960). Company h as extended Its outstanding 

growth rec ord las t year when net operatin g earnin gs climbed to $6.78 per share from 

$6.14 In 1959, and net to $7.52 from $6.6 3. Despite the eas ing in Interest ra te s and a 

slowdown in Hawaii's growth rate, some fur the r earni ngs pr og re ss see ms likely this 

ye ar. The stock Is des ervedly attuned to growth. (Recent price 120, yield 2.0%, also 

paid 8% stock In 1960).

First National Bank of Hawaii - (See Report of July 15, 1960). In the last few yea rs,

Fir st National - the form er Bishop National Bank - ha s definitely stepped up Its pace 

In various ways, and las t year, the earnings improvement was Impressive: Net operating 

earnin gs of $4.05 ve rsus $3.25 in 1959, and net of $3.01 as against $2.78. Some furthe r 

earnin gs increm ent see ms likely In 1961. (Recent price 50, yield 2.8%).

Dean Witter & Co. an d/or Its pa rtn ers may in the norm al 

course of busin ess have a position in some of these se cu ritie s.

RAB:ln/SF

71709 O— e: -15
222 DOMESTIC OFFSHORE SHIPPIN G

SEVIER EXHIBIT NO . 2

SE NA TE MER CHA NT MARINE AN I*

FISHERIE S SU BCOM MITTEE - 3 /: b /6 1

MATSON NAVIGATION COM PANY

PA CIFIC CO AST/H AW All AN ISLANDS

FRE IGH T COST PE R SELLING UNIT

CURREN T RATES

COMMODITY

AVERAGE WT. OR

CUBIC MEASU REMENT

O f SH IPP ING UNIT SHIPPING UNIT

FREIGHT COST

PER UNIT

Cof fe e

Cof fe e

P or k and Be an s

Tom at o Ju ic e

Ca nn ed P each es

Ca nn ed Pea ches

Ca nn ed Peas

Ca nn ed Corn

Cann ed Salm on

Lim a Be an s

So up , Canned

Ev ap or ated Milk

Oni on s

E gg s Lar ge (R ef ri ge ra te d Stowage)

Egg s Lar ge (Ordina ry Stowage)

F lo ur, 5 lb . Pac ka ge s

B ut te r (R ef ri ge ra te d Stowa ge)

But te r (O rdinary Sto wa ge)

C hee se (R ef ri ge ra te d Stowa ge)

C hee se (O rd inar y Sto wa ge)

Ba con

M eat C arcass es (B ee f Loine)

Corn Fla ke s

Ca nn ed Dog Food

Baking Po wde r

B eer, Canned

S alt , Table

Aut om ob ile T ir e, P ass enger

F eed , Animal or Pou ltry

Rad io - Ph ono gra ph

Wa shi ng Ma chine

O ra nges and Le mon s

W hiskey

Wine (Sh erry)

Pota to es

R ic e, 5 lb . pa ck ag es

Lub rica ting O il - Autom ob ile

M en 's Sh oe s

R ef rig erato r, Hou seho ld

M en 's Sh irts

1. 31 5 Cu ft. per Carto n

1.1 88 Cu ft. pe r Carton

31 lb s. p er Carton

.8 02 Cu ft. pe r Carto n

.8 04 Cu ft. per Carton

1. 13 b Cuft. per Carto n

.6 66 Cu ft. per Carton

.6 66 Cu ft. per Carto n

1. 42 9 Cu ft. per Ca rto n

.6 66 Cu ft. per Carton

.4 2 Cu ft. per Carton

1.0 3 Cu ft. per Carton

5 0.5 lb s. per sack

53 lb s. per ca se

2.3 5 Cuft. pe r ca se

51 lb s. per bale

31 lb s. per Carton

.6 05 Cu ft. per Carton

39 .2 5 lb s. g r o ss wt . pe r Carton

.7 21 Cu ft. pe r Carton

52 lb s. g ro ss pe r Carton

6 0 .7 lb e. g ro ss pe r bale

2 .4 Cu ft. per Carton

1. 15 Cuft. pe r Carton

.2 3 Cu ft. pe r Ca rto n

.5 02 Cu ft. pe r Carton

.9 2 Cu ft. pe r Carto n

23.1 6 lb s. ea ch

5 0 .5 lb s. per sac k

28 Cuft. pe r Carton

22.1 Cu ft. pe r Carton

40 lb e. per Carton

1. 18 6 C uft pe r Carto n

.8 33 Cu ft. per Carton

101 lb e. per sack

61 lb s. g ro ss pe r bale

10 .7 5 Cuft. pe r ba rr el

3 Cuft. per Carto n

32.7 8 Cu ft. per Crate

5 Cuft. per Carton

2 4 / I f Reg ul ar pe r Ca rto n

2 4 /6 o s . Insta nt per Carto n

4 8 /8 Ca ns pe r Ca rton

2 4 /2 Ca ns pe r Ca rton

M l Ca ns pe r Ca rton

2 4 /2 -1 /2 Ca ns per Ca rto n

24/3 0 3 Can s pe r Carto n

24/3 0 3 Can s pe r Ca rto n

4 8 /1 6 o s . Ca ns per Carto n

24/3 0 3 Can s pe r Ca rto n

24/1 Can s per Carton

48 T ail s pe r Ca rton

50 lb s. ne t weigh t

30 do ze n pe r ca se

30 dos en pe r case

10 /5 lb . pa ck ag es pe r ba le

30/1 1 pr in ts pe r Ca rton

3 0 /I t pr in ts per Ca rto n

3 6 /I t pac ka ge s pe r Carton

3 6 /I t pa ck ag es per Carton

4 8 /I t pa ck ag es pe r Carton

1 Ba le Ne t - 60 lb s.

2 4 /8 o s. pac ka ge s p sr Carto n

4 8 /I t Can s pe r Ca rto n

12 /6 o s . Ca ns pe r Carto n

24/1 1 oa. Can s pe r Ca rto n

2 4 /2 6 oa. pa ck ag es pe r Carto n

L oo se

50# pe r sa ck net

One Unit pe r Ca rto n

On e Un it pe r Car ton

39 lb s. net pe r Ca rto n

1 2 /5th B ott le s pe r Carto n

12 /5 th Bott le s pe r Carton

100 lb e. net

12/5 lb . pa ck ag es

55 ga llons pe r bar re l

12 pair s pe r Ca rton

On e 9 Cuft. unit pe r Cr ate

A ve ra ge 48 sh ir ts per Carton

8 .0 353 per can

.0 318 pe r ja r

.0 083 per can

.0 215 pe r can

.0 216 pe r can

.0 305 pe r can

.0 179 pe r can

.0 179 pe r ca n

.0 19 1 pe r can

.0 179 pe r can

.0 113 pe r can

.0 1 38 pe r can

.0 130 pe r lb .

.0 843 pe r do se n

.0 50 1 pe r do sen

.0 626 pe r 5 lb . pkg

.0 402 pe r lb .

.0 130 pe r lb .

.052 1 pe r lb .

.0 129 pe r lb.

.0 518 pe r lb.

.0 5 75 pe r lb .

.0 644 pe r pa ck ag e

.0 154 pe r can

.0 123 pe r can

.0 134 pe r can

.0 247 pe r pa ck ag e

. 952 pe r ti re

.0 124 pe r lb .

18. 03 ea ch

14. 23 each

.025 1 pe r lb .

.069 1 pe r bo ttl e

.0 44 5 per bo ttle

.0 13 pe r lb .

.0 636 pe r 5 lb . pkg

.0 31 5 pe r qu ar t

. 16 08 pe r pa ir

21 . 11 pe r unit

.0 67 1 pe r eh irt
SEVIER EXHIBIT no. 3

SENATE MERCHANT MARINE ANS

PISHERIES SUBCOMMITTEE - 3 /1 3 /6 1

MATSON NAVIGATION COMPANY

Ann ual Av erage R e ta il Foo d P r ic e s

Hon olulu Vs. U .S . C it y Ave ra ge s (1 959 )

and Ocean T ra n sp ort ati on Cos t

U .S . C it y Avera ge

R e ta il Food P r ic e s

Hon olulu Av era ge

R e ta il Foo d P r ic e s

Ocean

T ra nsp ort ation

C os t Pe r U hit

xnmo dit y Item s 19 59 (2 ) 19 59 (2 ) D if f . (S ee Not e) R ef er en ce

sc on , S li c e d 1 lb . $ .6 51 $ .8 *9 ♦ .1 98 $ .0 52 5 (1 ) 52 # Gr oss per c tn - * 8 /l# pkgs .ilm on , Pi nk 16 o z . .6 22 .6 63 .0 *1 .0 20 1 l.* 2 9 c u ft p er c tn -* 8 /l 6 o x ca nsu tte r 1 lb . .7 59 .8 35 .0 76 .0 *08 (1 ) 31# Gross p er c t n - 3 0 /l lb p r in tsbee se 1 lb . .5 81 .6 7* .0 93 .0 528 (1 ) 39.2 5# Gr oss per c tn -3 6 /1 # pkgs .

il k ,E v n p o r ta te d l * i ox. .1 53 .1 76 .0 23 .0 1* 6 1 .0 * c u ft per c t n - * 8 /l* i ox ca ns

o ta to e s 1 lb . .0 66 .1 16 .OJO .0 13 6 10 1# per sa ck - 10 0# n etnio ne 1 l b . .1 12 .1 25 .0 13 .0 13 6 50.5 lb s per sa ck -5 0# n e t

e a ch es, Can # 2 j • 353 .U09 .0 56 .0 32 0 1 .1 3 6 c u ft p er etn -2 * /2 ^ ca ns

o m #3 03 .1 92 .2 *3 .0 51 .0 18 7 .6 66 c u ft p er ct n- 2* /3 O 3 ca ns

e a s #3 03 .2 02 .2 5* .0 52 .0 18 7 .6 66 c u ft per ctn -2 * /3 0 3 ca ns

lo ur, W hea t 5 lb . .5 ** .7 *2 .1 96 .0 659 51 # Gross p er b a le -1 0 /5 # pkgs .

o ff e e 1 lb . .7 ** .9 86 .2 *2 .0 37 1.3 15 c u ft p er c tn - 2 * /l # ca ns

.un ch. Meat, ca n 12 ox. .5 12 .5 58 .0 *6 .0 17 3 23# Gr oss pe r c tn - 2 * /l 2 ox pk ga

a te : In clu d es cu rren t oc ea n r a te , p lu s wha rfa ge a t P a c if ic Coa st p o r t o f sh ip oen t and H on ol ul u.

DOMESTIC OFFSHORE SHIPPING

L) R e fr ig er a te d ca rg o mov ing in r e fr ig e r a te d ca rg o sp ace. 2) So ur cv ; S t a t e 's E x h ib it No. 6 l , FMB Docket 869, Jun e 16, I9 60

t o8
MATSO N FREIG HT RA TE INC REASES

SIN CE 1946

With Exa m pl e Com mod ity Un it Coa ts

SE VIER EXHIB IT NO . 4SE NA TE ME RCHANT MA RIN E AND

FIS HE RIES SU BC OM MI TT EE - 3 /1 3 /6 1

G en . M dse ,

Ra te

RICE

100.5 #

MENS SHOES

4 CF per ct n.

PO TA TO ES

101 # per sk .

SOU PS

48/# 1 can

CO FF EE

24/1 #

E ff . D ate s (P er Ton) per sk . 12 p r s .p e r ct n. . 856 CF per c s . 1.2 89 CF

7 /1 /4 6 $ 10.3 0 $ .5 175 $ 1 .0 3 $ .5 201 .0 0459 per ca n $ .0 1383

3 /1 0 /4 7 12.3 5 .6 206 1 .2 4 .6 2 3 7 .0 0551 " " .0 1658

9 /1 /4 8 13.6 0 .6 8 3 4 1 .3 6 .6 868 .0 0606 " .0 1826

2 /1 /5 1 15.0 0 .7 5 3 7 1.5 0 . 7575 .0 0669 " ” .0 2014

1 /1 4 /5 2

(s urc har ge)

16.1 2 .8 100 1. 61 .8 140 .0 0716 •' " .0 2165

3 /1 /5 3 17.5 0 .8 7 9 4 1.7 5 .8 837 .0 0780 " " .0 235

3 /1 /5 5 18.5 5 .9 321 1.8 5 .9 368 .0 0827 •' " .0 249

2 /1 1 /5 7 20.3 1 1. 02 05 2 .0 3 1.0 256 .0 0905 " " .0 2727

7 /1 5 /5 7 2 1 .0 0 1.0 552 2 .1 0 1. 0605 .0 0936 " " .0 2819

1 /2 0 /5 8 2 2 .9 0 1.1 507 2 .2 9 1.1 56 5 .0 1021 •• •• .0 3074

9 /1 4 /5 9 2 5 .7 6 1.2 944 2 .5 7 1.3 009 .0 1148 " •• .0 3458

224 DOMESTIC OFFSHORE SHIPPING

Tot al In crease

7 /1 /4 6 to 9 /1 4 /5 9 00 77 p er lb . .1 3 per pr 00 78 per lb, 00 68 9 per can 02 07 5 per lb
DOMESTIC OFFSHORE SHIPPING 225

Sevie r Exh ib it No. 4 A

Senate Merchant Marine ,

and Fisheries Subcommittee 

5/15/61

CONSUMER PRICE INDEX

for

TEN U.S. MAINLAND CITIES, HONOLULU, AND TOTAL U.S.

September, i960

(1947-1949 - 100)

San Francisco 155.0

Chicago 150.4

Los Angeles 129.8

Baltimore 128.7

Atlanta 127.9

St. Louis 127.4

Philadelphia 127.2

Total U.S. 126.8

New York 125.5

Detroit 125.4

Honolulu 125.1

Cincinnati 124.8

Note: Honolulu Consumer Price Index base has been shifted 

from March 15, 1945 - 100 to 1947-1949 - 100.

Sources: Honolulu Consumer Price Index - 

State of Hawaii

Department of Labor & Industrial Relations 

Bureau of Research & Statistics 

Honolulu, Hawaii

Consumer Price Index for cities other than Honolulu - 

U.S. Department of Labor,

Bureau of Labor Statistics

Note: For the month of December i960 (1947-1949 ■ 100), the 

Honolulu Consumer Price Index was 126.1 and the total 

U.S. Consumer Price Index 127.5.
226 DOMESTIC OFFSHORE SHIPPIN G

SETTER EX HIBIT NO. 4-B 

S h e e t 1

S e n a te M e rc h a n t M ari n e 

and F i s h e r i e s S u b co m m it te e 

3 /1 3 /6 1

COMPARISON OF TRANSPORTATION COSTS ON 

REPRESENTATIVE SHIPMENTS - CONTAINER VS .

CONVENTIONAL SERVICE

BAKERY GOODSj V IZ : CRACKERS OR COOKIES

97 1 C a se s - 1 6 ,2 2 2 l b s . 1290 C u b ic f e e t 

TA RIFF NO. 1-N , ITEM NO. 5 (C o n v e n ti o n a l S to w ag e)

LOCAL DRAYAGE ( l )

1 6 ,2 2 2 l b s . 9 $ .3 2 p e r 10 0 l b s . $ 5 1 .9 1

SAN FRANCISCO WHARFAGE

12 90 C u b ic f e e t 9 $ .8 0 p e r 40 c u b ic f e e t $ 2 5 .8 0 

OCEAN FREIGHT CHARGES

129 0 C ubic f e e t 9 $ 2 5 .7 6 p e r 40 c u b ic f e e t $ 8 3 0 .7 6

HONOLULU WHARFAGE

12 90 C u b ic f e e t 9 $ .4 5 p e r 40 c u b io f e e t $ 1 4 .5 1 

INSURANCE

3 2 .2 5 T ons 9 $ .5 0 p e r to n $ 1 6 .1 3

TOTAL $939.11

TA RIFF NO. 1 4 , ITEM NO, 2 2 0 , (ZONE l/C F S ) - CONTAINER SERVICE*

1 6 ,2 2 2 l b s . 9 $ 4 .4 0 p e r 10 0 l b s . $ 7 1 3 .7 7

S a v in g p e r T a r i f f No . 14 $ 2 2 5 .3 4

P e r c e n t o f t o t a l c o s t s u n d e r T a r i f f No . 1-N 3 1 .5 7 #

* CL s h ip m e n ts do n o t r e q u i r e m a rk in g ; r a t e in c l u d e s 

p ic k u p , w h a rfa g e an d i n s u r a n c e .

(1 ) C i ty C a r r i e r s T a r i f f No . 1 -A , Ite m No . 3 6 O -I, R a te B a s is 

B, 3 rd c l a s s .
ADDITIONAL EXAMPLES OF SAVTNOS UNDER CONTAINER SERVICE 

(Calculated In Same Manner As Sheet l)

SEIVER EXHIBIT NO. 4-B 

Sheet 2Senate Merchant Marine 

and Fisheries Su bccmittee 

3/13/61

ORIGIN

PORT

COMMODITY WEIGHT

(Pounds)

FREIGHT COSTS

Conventional Container Savings $ Savings

San Francisco Bottles 11,853 $ 809.27 $ 673.25 $ 136.02 20.20 $

San Francisco Caimed Food 81,223 1,469.56 1,116.82 352.74 3 1 5 8

San Francisco Coffee 32,642 970.88 824.21 146.67 17.80San Francisco Feed, Animal 39,809 590.77 469-75 121.02 25.76San Francisco Rice 40,200 586.52 500.49 86.03 17.19

San Francisco Sodium

Hypiochlorite Solution 75,756 1,434.14 1,098.46 335-68 30.56

Los Angeles Bar Soap 39,668 1,203.57 1,036.06 167.51 16.17

Los Angeles Beverage, Malt 160,104 2,928.50 2,493.59 434.91 17-44

Los Angeles Cottonseed Oil Meal 202,000 3,002.73 2,383.60 619.13 25.97

Los Angeles Liquid Asphalt 40,824 .637.06 540.04 97-02 17.96

Los Angeles Paint 96,403 1,599.71 1,407-48 192.23 13.66

Los Angeles Shingles 42,636 672.36 562.80 109.56 19.47

NOTE: Container rate Includes r Ick-up at chipper's place of business, wharfage at San Frc .cisco or Los Angeles 

and H onolulu, and insurance. As conventional o cean rate does not include these items, cost of drayage 

at origin port, wharfage and insurance obtained separately are included in conventional cost.

DOMESTIC OFFSHORE SHIPPING 227
228 DOMESTIC OFFSHORE SHIPPING

SE VIE R EXHIB IT N O . 5 - S h eet 1

SE N A T E M ER CHANT M ARI NE AN D

FI SH ERIE S SU BC O M M IT TEE - 3 /1 3 /6 1

HA WAII'S SPE C IA L FR EI GHT SE RVIC E REQUIR EM ENTS

A lthou gh th e d evelo p m en t o f th e co n ta in er an d a u to m o b il e s e r v ic e s

hav e b een the m o s t d ra m a ti c p o st w ar c h a n g e s, th er e w e r e a n u m ber of oth er

im p orta n t M ats on im p ro v e m e n ts m ad e th ro ugh th e y e a r s to m e e t th e s p e c if ic

tr a n sp o r ta ti o n r e q u ir e m e n ts of th e H aw aiian tr a d e .

J u s t p r io r to W or ld W ar IIt

 M ats on w as in str u m e n ta l in c o n str u c ti o n of

a bulk su gar lea din g fa ci lit y at K ahulu i, an d a d is c h a r g in g g a n tr y at C ro ck ett ,

to e li m in a te th e ha nd lin g of ra w su g a r in b a g s. T h e se p ro v ed to be s u c c e s s fu l,

an d a ft e r th e w ar, M at so n c o n str u c te d a secon d bu lk lo ad in g fa c il it y at H il o and

o p e r a te d fo ur d is c h a r g in g g a n tr ie s a t C r o ck ett. A ll ra w su g a r no w m o v e s fr om

H aw aii in bulk . In ad d it io n , B u tt er w orth in g eq u ip m en t w as in s ta ll e d in deep

ta nks to red u ce th e ti m e r eq u ir ed an d th e c o s t of cle a n in g th em , en abli ng C 3 's

to c a r r y bu lk fu el o il to th e Isla n d s fo r pow er p la n ts , and m o la s s e s to th e

P a c if ic C o a st in th e sa m e ta n k s. S p ec ia l b ron ze fi tti n g s w e r e ad ded to c a r r y

aq ua am m on ia in bu lk fo r u se a s fe r tiliz e r in th e I s la n d s . R e fr ig er a ti o n b o x es

w e r e m o d if ie d to c a r r y c o n c en tr a te d fr e sh fr o z en p in eap p le ju ic e at m in us 10 °

te m p er a tu re to ne w m ain la n d m a r k e ts . P r o c e d u r e s w e r e d e v e lo p e d with

s h ip p e r s to c a r r y papaya an d fr e s h p in ea p ple in c h il le d s p a c e , m ak in g it p o s sib le

fo r H aw aii to d ev elo p an e n ti r e ne w m a rk et fo r it s tr o p ic a l fr u it p r o d u cts. The

lu m b e r tr ad e w as a s s is t e d in th e d e v elo p m en t of p ack aged lu m b e r, cutt in g do wn

tr a n sp o r ta ti o n c o s t s and red u cin g l o s s e s .
DOMESTIC OFFSHORE SHI PPING 229

EX HIB IT N O . 5

S h eet 2

M ats on is st udyin g m any oth er in n o v a ti o n s in th e co n st a n t b att le to

ste m th e r is in g ti de o f o p era ti n g c o s t s . E ach of th e se ch a n g es ta k es in gen u it y,

p a ti e n c e an d m o n e y . P r o b le m s im p o sed by n a ti o n a l, sta te and lo c a l la w s and

r e g u la tio n s , la b o r p r a c tic e s an d r e q u ir e m e n ts , an d p la n t p r o c e d u r e s and

eq uip m en t o f sh ip p ers an d c o n s ig n e e s , do not p e r m it o v ern ig h t s o lu tio n s .
230 DOMESTIC OFFSHORE SHIPPING

SE VIE R EXHIB IT NO. 6 - S heet 1 

MER CH AN T M ARIN E AN D 

FI SH ER IE S SU B C O M M IT TEE - 3 /1 3 /6 )

R E PLA C EM EN T CO ST O F HAWA IIAN SER V IC E VESS ELS

U n d er F e d e ra l la w s, v e s s e ls en gag ed in d o m e sti c H aw aii an tr a d e a re

r e s tr ic te d to th o se buil t in sh ip y a rd s lo c a te d in th e U nit ed S ta te s . Wh en it

b e c o m e s n e c e s s a ry to re p la c e H aw ai ia n tr a d e v e s s e ls w ith ne w v e s s e ls , it w il l 

be n e c e s s a ry to ha ve th em c o n s tr u c te d o r m o d ern iz ed in A m e ric a n sh ip y a rd s , 

pay in g A m e ric a n c o s ts .

V e s s e l re p la c e m e n t is not a new p ro b le m fo r M a ts o n . It h as been fa ced

m an y tim e s d u ri n g 79 y e a rs of o p e ra ti o n in th e H aw aii an tr a d e .

In 18 87 C apta in M ats on an d h is a s s o c ia te s c o n s tr u c te d th e f i r s t LURLIN E 

w it h a c a rg o c ap ac it y of 640 to n s . T h re e m o re sa il in g sh ip s w e re ad ded, in ­

clu din g th e RODER IC K DHU equip ped w ith a co ld sto ra g e p la n t an d e le c tr ic li g h ts . 

T he 3 ,6 3 0 to n E N T E R PR IS E , th e c o m p a n y 's f ir s t s te a m e r, p u rc h a se d in 19 01 , 

w as re b u ilt fo r th e H aw aii an tr a d e . The se co nd LU RLIN E w ith 8 ,0 0 0 to ns

c a p a c it y w as fo llo w ed by th e W IL HELM IN A in 19 09, th e 8 ,5 0 0 to n MA NOA in

19 13 an d th e f ir s t h ig h -p o w ere d g e a r, tu rb in e d riv e n v e s s e l on th e P a c ific . O th er 

f i r s t s hav e in cl uded tie FA LL S O F C LY D E, th e f ir s t oil ta n k e r in th e H aw ai ia n

tr a d e , th e e x te rn a l S p e rry g y ro fi n s ta b iliz e r s in sta ll e d on th e M O NTE REY an d 

M A RIP O SA , in A u s tr a li a n tr a d e ,w h ic h w e re th e f ir s t fo r any p a s s e n g e r lin e r, 

th e HA WA IIA N C IT IZ EN w hi ch w as th e f ir s t a ll -c o n ta in e r sh ip in th e P a c if ic , 

th e HA WA IIA N FI SH ER M AN w hic h w as th e f irs t au to m o b il e c a r r ie r in th e P a c if ic , 

and th e MAT SO NL A's ne w in te rn a l fl um e sta b il iz in g s y s te m , th e f ir s t fo r an y 

p a s s e n g e r lin e r .
DOMESTIC OFFSHORE SHIPPING 231

EXHIBIT NO. 6

Sheet 2

Matson's W.W. II fle e t was re qu isi tio ne d by the Government for war us e. In the iasnedlate post-war years Matson

aoqulred 15 C3 type ve ss el s and two Liberty type ve ss el s for

$20,352,880. In add ition approximately $8,03 8,165 was spent

between 1947 and May 31, 1955 on sp ec ia l fa c il itie s required to

serve the tra de. Since tha t time there have been sev eral sa le s

and ac qu isi tio ns so tha t the co st of the pre sen t fl e e t of 20

cargo ves se ls with mod ificatio ns, improvements and conversion s

is $41 ,554,672.

In looking to the future i t appears qu ite probable that the

Hawaiian serv ice may have to be sustained by a program of

modernization of old ves se ls , rather than the constru ction of

new. Should the time come, in the foresee ab le future, when a

new fl e e t of fr eigh ters is required by the tra de, i t is of in ­

te re st to con sider the po ssible co st of such a program. The

oost of rep lac ing the present fle e t with new ves se ls would be

many times the ac qu isi tio n co st of the prese nt fle e t.

Some oonoept of the magnitude of the oo st replacement

problem can be formulated on the ba sis of the testim ony of a

naval ar ch itec t and marine engineer presented by Matson as a

witnes s in the FMB hearing Docket 869 (concerning the co st of

rep lacing the Matson fle e t). This testimony was reviewed by

the Maritime Adm inistration's exp erts on ship con struction and

i t was sta ted on the record tha t they were sa ti sf ie d as to the

reas onab leness of the co sts developed.

The witne ss 's study was based on a fl e e t of 22 ve ss el s

co ns istin g of 14 C3’B ,o f whloh si x were fi tt ed with sp ec ial deok
232 DOMESTIC OFFSHORE SHIPPING

EXHIBIT NO. 6 

She et 3

co nta in er equipment, th re e AP3 type ves se ls , two Li be rty type 

vess els , one C3 con verted to a fu ll co nt ai ne r sh ip , and two C4's 

convert ed to combina tion bul k co nt aine r sh ip s. The pre-wa r 

dom estic co st of such ves se ls , as shown In the Federal Reg is te r, 

waa oompared with estim ate d co ns truc tio n co st s of new Maritime 

Ad minist ratio n des igned ves se ls , using American shipy ard bids 

opened in 1959 and i96 0.

Pre-war co ns truc tio n co st of a Lib erty was $1,278,000 

oompared with the estim ated i960 co ns truc tion co st of $8,550,000 

fo r a replace ment of the Freedom type , 670% of pre -w ar co st .

Pre-War co ns truc tio n oo st of a Vi cto ry was $2,130,000 

compared with the i960 co ns truc tio n oo st of $10,550 ,000 of a 

rep lacement of the new Cl ippe r des ign sh ip , 495% of pre -wa r 

oost .

The pre -war co ns truc tio n co st of a C3 was $2,460,000 

compared with the i960 co ns truc tio n co st of $11,550,000 fo r a 

rep lacement of the new Se af arer desig n, 470# of pre -war co st .

Reproduction of the 22 ve ss el s in the Jan uary, i960 

fr e ig h te r fle e t, th at is , bu ild in g new ve ss el s us ing the C3, 

Victory and Lib erty de sign s, would co st $178,55 9,430. Rep lace ­

ment co st of the Jan uary, i960 , fle e t with the new des ign 

Sea fa re r, Cl ippe r and Freedom type ves se ls , and th re e sp ec ia l 

type s fo r the co nt ai ne r sh ip and bu lk -c on ta in er com bination 

sh ip s, would be $27 2,144,000 . Replacement of the Jan uary, i96 0, 

f le e t with th re e Se af ar er s witho ut f a c ilitie s to ca rry conta in e rs on deck , fi ve Se af ar er s equipped to ca rry co nt ai ne rs on 

deo k, two bulk co nt ai ner sh ip s, two Clip pe rs and four f u llco nta in er sh ips would oo st $268,33 2,000.
DOMESTIC 0F F 8H 0R E 8H IP PI NG 233

EXHIBIT NO. 6 

Shee t 4

The desig ns and the number of sh ips In each desig n 

se le ct ed by the wi tness were use d fo r his own ca lc ula tions 

in orde r to prep are the study and pr es en t the testim ony In 

pro ceeding . Due to the changing req uir em ents of the trad e and 

changing co st fa cto rs , replacement ves se ls ac tu ally se le ot ed 

fo r Hawaiian trad e may be of su b sta n ti all y d if fe re n t de sign , 

and su b sta n ti all y d if fe re n t in number.

His fi ndin gs , however, do emphasize the tremendous 

in cr ea se th at has occ urred in reoe nt ye ars in the co st of constr ucti ng new ve ss el s with modern equipment sp ec ia lly des ign ed 

to f i t the req uirem ent s of the Hawaiian tr ade. A comparison 

of thes e es tim at es can be made with the bids which were opened 

on February 8, 1961, in New York Ci ty in the off ic es of the 

Federal Maritime Board fo r co ns truct io n of th re e co nt ai ne r sh ips 

fo r American Hawaiian Steam ship Company. The proposed ve ss el s 

would be app rox ima tely 900 fe et in le ng th , 101 fo ot beam, 24 

kn ots, 60,000 sh af t horsepower, twin-screw and would l i f t 1,000 

30’ x 8* x 8’ co nt aine rs between New York harbor and Los Angeles 

and San Fr an cisc o on a nin e-d ay turnarou nd . The appa ren t low 

bid was $21,400 ,000 fo r the f i r s t sh ip , $20,600,000 fo r eaoh 

of two, and $20,350 ,000 fo r each of th re e. The appa ren t high 

bid was $24,988 ,000 fo r the f i r s t sh ip , $23,173,000 fo r each 

of two, and $22,452,000 fo r eaoh of th re e.

Another example of pr es en t-da y co st s ia the co ntr ac t 

signed re ce ntly between Sta te s Line of San Franolsco and the 

FMB with the Na tional Ste el and Sh ipbu ild ing Company of
234 DOMESTIC OFFSHORE SHIPPIN G

EXHIBIT NO. 6

Sheet 5

San Diego for constm etion of two mariner type fr eigh ters at

more than $11,000,000 each. In each case, $71,000 was added

for nat ional defense featur es.

While no exact fig ur es oan be given today on the oost of

repla cin g the present Hawaiian fl e e t with new vess els . It Is

apparent to Matson management, and others al so , that the cost

w il l be extremely high - probably pr oh ibiti ve .
DOMESTIC OFFSHORE SHIPPING 235

SEVIER EXHIB IT NO . 7 - S hee t 1

ME RC HA NT MA RINE AN D

FISH ER IES SU BC OM MITTE E - 3 /1 3 /6 1

TH E CO MP ET ITION FOR CA PI TA L

Th e off sh ore d om est ic sh ip pi ng b u sin e ss, ju st as an y ot he r re gu la te d

b u sin ess, is en ti tl ed to an op po rtun ity to ea rn a ra te of re tu rn w hic h w il l

pr od uc e fo r it s sh arehold ers a re tu rn com m ensu rate with wh at th ey co uld

r ece iv e on in vest m en ts in ot he r b u sin e s se s ha ving co rr esp ondin g r is k s . The

re tu rn m ust be su ff ic ie n t to a ssu r e the fi nanci al in te grit y of the b u si n ess and

en ab le th e co m pa ny to att ra ct cap it a l. To pro vid e th e FM B a b a sis fo r find in gs

re sp ecti n g the fa ir ra te of re tu rn , M atso n ca u se d a stud y of it s fr eig h t se r v ic e

oper ati ons in the Haw aiian tr ad e to be m ad e by an in ves tm en t an aly st , who

te st if ie d in bo th D ock et s 808 and 869 . He ac quai nte d h im self wi th the econ om ic s

of su ch oper ati ons su ff ic ie n tl y to en ab le hi m to ev al uat e th em fr om an in ves tm en t

vi ew poi nt in co m pari so n with ot he r ty pes of b u si n ess e n te r p r is e s . C om pa ring

p ric e ea rn in gs ra ti os and di vide nd y ie ld s of 125 In dust ri al com p anie s, 24 u ti lity

co m pan ie s and 5 sh ip pi ng com p anie s, the an aly st foun d th at in v esto rs ex p ec t a

g rea te r re tu rn fo r th eir in ves tm en t in th e sh ip pi ng in dust ry tha n th ey do fo r

th eir in vest m en ts in u ti li ti e s or in d u str ia ls . He fu rt her fou nd tha t the ris k s

attend an t to an in ves tm en t in M atso n fr ei gh t oper ati on s are very m uc h grea te r

than th ose in the gas and e le c tr ic uti li ty fie ld . Gas and e le c tr ic co m panie s I

ha ve sh ow n a gen era ll y st ea dy gr ow th re su lt in g fr om in creasin g po pu latio n and

greate r co nsu m ption p er cu st o m er.

Th e p ro sp ec ts fo r gr ow th in M ats on 's fr ei ght oper ati ons are li m it e d .

Such gr ow th as M at so n m ay ex pec t in it s fr ei gh t oper ati ons w il l be p rim a ril y

in it s wes tb ou nd carg o, wi thou t a co m pen sa ti ng gr ow th in it s ea stbo un d ca rg o es.
236 DOMESTIC OFFSHORE SHIPPING

EX H IB IT NO . 7 

S h eet 2

w h ic h a re p rin c ip a ll y s u g a r, m o la s s e s an d p in e a p p le . T he r e s u lt w ou ld be a 

fu rth e r a g g ra v a ti o n of th e im b a la n c e w hi ch p re s e n tly e x is ts betw een w es tb ound 

and eastb o u n d c a rg o , w ith a co rre sp o n d in g a d v e rs e e ffe c t on th e eco n o m ic s of 

M a ts o n 's fre ig h t o p e ra ti o n s .

In so fa r a s s ta b il it y of e a rn in g s is c o n c e rn e d , th e re c o rd of M a ts o n 's 

f re ig h t o p e ra ti o n s is e x tr e m e ly p o o r in re la ti o n to th a t of g as an d e le c tric 

c o m p a n ie s . D uri ng th e p e rio d fro m 1952 th ro u g h 19 59 , M a ts o n 's e a rn in g s 

flu c tu a te d w id ely , w ith a lo s s in 19 52 , fo llow ed by it s h ig h e st le v e l of e a rn in g s 

in 19 53 d u ri n g th e p e rio d . T hen in 195 4 th e re w as a d ro p in e a rn in g s of m o re 

th an 50 %. S u b sta n ti al re c o v e ry in 1955 w as fo llow ed by a ste a d y d ecli n e 

th e r e a f te r . In 1959 M ats on o p e ra te d a t a su b s ta n ti a l lo s s . No sig n if ic a n t gas 

o r e le c tr ic u ti li ty has e x p e rie n c e d a c o m p a ra b ly p o o r an d sp o tt y e a rn in g s re c o rd 

d u rin g th is p e rio d .

If o ff ere d th e sa m e ra te of re tu rn on com m on eq u it y , c o n s id e ri n g M a ts o n 's 

e a rn in g s re c o rd an d p ro s p e c ts , an in v e s to r wou ld o b v io u sl y ch o o se a g as o r 

e le c tr ic u ti li ty in p re fe re n c e to M a ts o n .

T he r is k s of in d u s tr ia l m a n u fa c tu ri n g c o n c e rn s v a ry w id ely fro m in d u str y 

to in d u s tr y an d fro m com pany to co m p an y . H ow ever, in v e s to rs , by th e ir low 

v a lu a ti o n s of sh ip pin g in d u s tr y sto c k s , ha ve c le a rly in d ic a te d th a t ris k s of 

in v e s tm e n t in sh ip pin g a r e h ig h e r in re la ti o n to e a rn in g s re c e iv e d th an th e ris k s 

in m a n u fa c tu ri n g e n te r p r is e s .
DOMESTIC OFFSHORE SHIPPING 237

SEV IF R EXHIB IT NO. 8 - S h eet 1 

M ERCHANT MARI NE AND 

FIS H E R IE S SU B C O M M IT TEE - 3 /1 3 /6 1

TH E PA SS EN G ER LIN ER PR O B LE M

P r i o r to 19 01 , p a s s e n g e rs in th e H aw aii an tr a d e tra v e le d in c a b in s on

f r e ig h te r s . In th a t y e a r M ats on in tr o d u c e d th e SS E N T E R P R IS E , f ir s t o ilbu rn in g s te a m e r in th e P a c if ic . It w as eq u ip p ed w it h c o m fo rt a b le a c c o m m o d a ­

ti o n s fo r 22 p a s s e n g e r s . T he s e rv ic e g re w , an d p r io r to W orl d W ar II M ats on

o p e ra te d tw o la rg e p a s s e n g e r li n e rs * th e L U R L IN E and MA TSON LA . The

L U R L IN E w as b u il t in 1933 a t a c o s t of about $8 m il li o n , w it h acc o m m o d a ti o n s 

fo r o v e r 700 p a s s e n g e r s . The MA TSO NLA, fo rm e rly th e M A LO LO, w as b u il t 

in 1927 an d ha d acc o m m o d a ti o n s to c a r r y 575 p a s s e n g e r s and 2 ,0 0 0 to ns of

e x p re s s c a r g o .

The re c o n v e rsio n p e rio d a f te r th e w a r and tra n s itio n to p e a c e ti m e o p e ra ­

ti o n s w e re d if fi c u lt fo r th e sh ip pin g in d u s tr y g e n e ra ll y , and fo r th e H aw aii an

tr a d e in p a r tic u la r . The g o v ern m en t w as c o m m it te d to r e s to r e th e L U R L IN E an d 

MATSONLA to th e ir fo rm e r co ndit io n a f te r th e ir w a rti m e u se , but it w as a p p a re n t 

th a t p a s s e n g e r v e s s e ls to s e rv e H aw ai i an d e ls e w h e re in th e p o s t-w a r e r a w ou ld 

hav e to m e e t e n tire ly ne w s ta n d a rd s of m o d e rn d esig n an d c o m fo rt to ke ep pace 

w it h th e c o m p e ti ti o n of a i r tr a n s p o rta tio n .

M ats on m ad e th e d e c is io n to m o d e rn iz e th e MATSONLA p ro m p tl y to 

p ro v id e H aw ai i a t th e e a r lie s t p o ss ib le m o m en t w ith an in te rim s e rv ic e d u ri n g 

th e ti m e re q u ir e d to re b u il d an d re a c ti v a te th e L U R L IN E . T he L U R L IN E w as 

re tu rn e d to s e rv ic e in A p ril o f 19 48 . T he c o n v e rsio n c o s t ex ceed ed $1 9 m il li o n , 

w hic h in clu d ed a s e tt le m e n t re c e iv e d fro m th e U .S . G o v ern m en t of ab out 

$6 , 25 0, 0 00. S u b se q u e n t m o d e rn iz a ti o n h as c o s t an a d d it io n a l $4 00 , 000. S h o rt ly 

a fte r th e LU RLIN E w as re tu rn e d to s e rv ic e in A p ril , 19 48 , th e MATSO NLA w as

71708 O— 6! 18
238 DOMESTIC OFFSHORE SHIPPING

EXHIBIT NO. 8 

Sheet 2

retired from the trade and sold.

The LURLINE operated on a schedule of maximum utilization. 

It carried In excess of 40,000 passengers each year between the 

main land and Hawaii. By mid-1950, there appeared to be a need 

for a second liner to support the demand of a constantly growing 

Hawaiian tourist economy, despite the growth of air traffic.

The SS MONTEREY, which Matson had sold to the Government, was pur ­

chase d back as a running mate to the LURLINE. After extensive 

reconversion at a cost of over $20 million, the SS MATSONIA made 

her maid en voyage to Hawaii in June, 1957.

The LURLINE and the MATSONIA are no w operating in Hawaiian 

trade. The LURLINE has 720 salable berths, and on the basis of 

29 round voyages per year, an annual passenger capacity of 41,760. 

The MATSONIA has 750 salable berths, and on the basis of 50 round 

voyages per year, an annual passenger capacity of 45,800. These 

two vessels have a total capacity of 42,780 one-way passengers per 

year.

Passenger travel betwee n the mainland and Hawaii has 

increased substantially in the past five years, as forecast. However, two factors have developed which make It very difficult to 

predict the future volume of passengers movin g on ocean liners 

between the mainland and Hawaii. The first is Impact of Jet aircraft on the traveling public, and the second involves a change in 

the policy of the Defense Department with respect to the carriage 

of military personnel and their dependents.
DOMESTIC OFFSHORE SHIPPING 239

EXHIBIT NO. 8 

She et 3

There has been a su bst anti al growth In passe ng ers moving 

between C al if orn ia and Hawaii, and In th e Inroads made by Je t 

a ir c ra ft on the in cr ea si ng volume of Hawaii bound tr a v e le rs . The 

C iv il Aeronautlos Board is now proc essing ap plica tions by a number 

of a ir o arr ie rs to by-pa ss Pa oi fic Coa st po in ts and pro vid e nonsto p Je t fli g h ts between in te rio r main land po in ts and Hawaii.

The e ff ec t on pa ssen ge r li n e rs of suoh expanded op er at io ns , i f 

pe rm itt ed , is yet to be f e lt.

The second fa cto r Inv olv es the de ci si on by the Department 

of Defense to move alm ost a ll m il it ary pe rson ne l and th e ir depen den ts between the mainland and Hawaii by a ir In stea d of on 

commercial ocean li n e rs . Prom 1957 to September, i960 , Matson 

ca rr ie d 9633 suoh passen gers pe r ye ar on th e avera ge. Sinoe the 

adoption of the a ir l i f t po lioy , we do no t oa rry any m il it ary 

pa ssen ge rs.

Pas sen ger se rv lo e problems are fu rt h e r com plicated by 

ri sin g op erating oos ts . The average dai ly ve ss el expense co st 

of op erating a passe ng er li n e r durin g i960 in Hawaiian trad e was 

$18, 708, not Includ ing dep re ci at io n, ad vert is in g, mortgage oo sts 

and ve ss el layup exp ens e. The co st of la bor, includ ing crew 

wages and b en efi ts , is the la rg est si ngl e component of th is dai ly 

exp ens e, ave rag ing 52.4$.

The fi nan cia l re su lt s of our dom estic passe ng er se rv loe 

re fle c t the e ff e c t of th es e ri sin g oo sts and th e lo ss of passen gers
240 DOMESTIC OFFSHORE SHIPPING

EXHIBIT NO. 8 

She et 4

due to the comp etitio n of Je t a ir c ra ft and the change in Defense 

Department po lic y on the ca rria ge of m il it ary perso nnel and th e ir 

dependents.

In 1956 Matson opera ted the LURLINE a t 96% occupancy 

which is a high er load fa cto r than any experie nced in ot he r U.S. 

pa ssen ge r tr ades. The ne t p ro fit a fte r ta xe s was only $393,615. 

This was, ind eed , a wholly inadeq uate re tu rn on a si ze ab le in ­

vestme nt in passe nger se rv ic e, p art ic u la rl y co ns idering the 

ri sk s inv olved. In 1957 with the ad di tio n of th e MATSONIA, 

which doubled our se rv ic e du rin g the la s t half of the ye ar ,

Matson ne ve rthe le ss ach ieved an occupancy of 84% fo r both 

ves se ls fo r the en ti re ye ar . In th at ye ar th er e occ urred a 

net lo ss a fte r taxe s of $319,936. In 1958 occupancy was in ­

crease d to 90#, bu t, due to Increa sin g co sts , th e lo ss grew 

to $629,CXX). In 1959 sa le s eff o rt s were in crea se d to bu ild 

pa ssen ge r bu sine ss , re su lt in g in a 96% occupancy on the LURLINE 

and MATSONIA and a ne t p ro fit of $649,000 a fte r ta xe s.

In i960 the number of Je t fli g h ts between the Pa cifio 

Coa st and Hawaii increa se d gre atl y, and the change in the Defense 

Department po lic y on tr an sp ort ation of m il it ary per sonnel and 

th e ir dependents occu rre d. Occupancy on the LURLINE and MATSONIA 

dropped to 70%. Because of increa sed fa re s and seme suc ces s in 

co st co ntr ols , the two li n e rs showed a ne t p ro fit ,b u t only 

$247,000 a fte r ta xe s.
DOMESTIC OFFSHORE SHIPPING 241

Senator Bartlett. Thank you, Mr. Sevier. I should like to note 

first for the record tha t the subcommittee is honored this morning 

by the presence with us of Hawaii’s senior Senator, Senator Fong, 

who at the opening of these hearings last week appeared before us 

and offered a most useful statement on this subject. We are glad to 

have you with us, Senator Fong.

Senator F ong. Thank you, Mr. Chairman.

Senator Bartlett. Of course you will be given the privilege later 

on of asking any questions that you may desire.

Mr. Sevier, I congratudate you upon the statement which you have 

just made, and I want to say that when you return home, if anyone 

accuses you of not having done your homework before you appeared 

before the committee, you can get affidavits to the contrary from all 

of us.

Mr. Sevier. Thank you, sir.

Senator Bartlett. I think the fact tha t we are operating here on 

this complex problem in a very temperate climate, even though not 

a subtropic one, is made evident by the fact tha t not even Senator 

Fong screamed when you said another 10-percent rate increase was 

going to be requested. In another day it might have been otherwise.

Mr. Sevier. We wished to inform you.

Senator Bartlett. Senator Butler, would you care to start?

Senator Butler. Mr. Chairman, I want to congratulate Mr. Sevier 

on a very learned discussion of a very difficult problem. I feel that 

some of these matters could probably be handled better on an individual basis. Taking some of these suggested aids from the Federal 

Government would seem to be feasible, and handling them on the 

basis of individual legislation where they could be more thoroughly 

gone into.

I know t hat just last year we had a situation with the railroads 

which was somewhat similar to the first point th at you make, simplification and streamlining the ratemaking procedures. We did tha t for 

the railroads and it seems to be working very well. It is a fact that 

before you catch up with the benefit of the new rate tha t you have 

lost a considerable amount of money. The railroads have the same 

experience.

I was not aware of the fact tha t you could not have pickup and 

delivery services by motor carriage at the beginning or end of a 

shipment. I think certainly we could very well look into tha t and 

see w’hat could be done.

It seems to me, Mr. Sevier—I don’t know whether you agree with 

me or not—that from the facts and figures which you have submitted—of course I haven’t had an opportunity to study them—your 

problem is almost one of some type of aid through legislation by the 

Federal Government. You have pared yourself down to the bone in 

vessel maintenance and other costs. And as you have pointed out, a 

lot of these costs are above and beyond your control. They are inflicted upon you and you must pay them or cease to do business.

I have very much enjoyed this exposition and I will be very sympathetic in my approach to it, and I hope th at my good friend from 

Hawaii will do the same which I am sure that he will. I think facts 

and figures speak for themselves.
242 DOMESTIC OFFSHORE SHIPPING

On some of the other sugg estio ns th at you hav e made, which are 

of considerable intere st to me, I don’t know about these two piers. 

Are they the be rth ing pie rs th at you now reg ularly use in Ha wa ii?

Mr. Sevier. They were piers c onstructed, Se na tor Bu tler, just pr ior 

to Worl d W ar II. In fact I think they were com pleted at the ou tbre ak of th e w’ar.

Se nator Butler. An d you berth the re ?

Mr. Sevier. No. The y are used solely fo r military c argo. Some of 

ou r fre ighte rs do call the re to deliver military cargo, bu t the y are 

confined to use by the militar y services. An d I might add, they have 

min imu m use. Very lit tle use is made of them . They are idle most 

of the tim e.

Senator Butler. I think th at is som ething th at the Senator from 

Ha wa ii will have som ething to say abo ut, an d will pro bab ly hav e 

legisla tion at a fu ture date.

Mr. Sevier. I know’ t hat there was—2 o r 3 years ago—a study made 

by a committee rep res enting the Army , Nav y, and Air Force, concerning the use of those pier s and th ei r need by the mi litary . Obviously the results of th at were not made pub lic, bu t we do un de rsta nd th at their recommendation fav ore d the release of the piers by 

the milit ary .

Senator Butler. I am also inte rested in a fifth po int t ha t you made 

in connection w ith the operators in do mestic trad in g havin g a p rio rit y 

on the purchase of turne d-in subsidized fre ighte rs. Tha t may mean 

pu ttin g the Am eri ca into service on your run if she is retir ed on the 

At lan tic run , ra th er th an letting her lay in mo thballs or som ething 

of the kind.

Mr. Sevier. Th at would be an example. O f course, the ones we 

had in min d were fre ight vessels, prim arily .

Senator Butler. I would say th at it seemed to me to make a lot 

of sense to employ these vessels ra th er than lay them up, and if they 

can be pro fitably emp loye d by the domestic opera tor s, it would seem 

to me t hat the domestic opera tor, in the best int ere st of the national 

inte rest, shou ld have th at priorit y to use those vessels.

They are all turned in by the vessels owners in foreig n tra de, aren ’t 

they?

Mr. Sevier. Yes. Th e subsidized lines in th ei r replacement pr ogra ms tu rn the ships in with an allowance from the Governm ent.

Se nator Butler. Ha s this been tak en up with the Ma ritime Admi nis tra tio n?

Mr. Sevier. Yes, si r; it has, and it is my recollection—I am not 

sure th at I have my fac ts absolutely correct—that of the 2 or 3 

C- 3-typ e fre ighters th at have been turned in, the re are some 18 or 

20 appli cants fo r those vessels. We are amo ng them.

These vessels are more suit able fo r our purposes tha n some of the 

vessels we a re now opera tin g. Specific ally it would be ou r hope th at 

w’e could t ur n in some o f o ur less desirable vessels on these m ore desir ­

able vessels and be given a pr iorit y because of the essent iality of the 

service we are ren derin g, rath er than some tra mp service th at mig ht 

not be good.

Se na tor B utler. In conclusion, may I sav th at the sixt h po int th at 

you have made I think would meet tr em end ous resistance in the Congress. From my experience here I would think that you would meet 

formidable opposition even in th is com mittee to exten din g a dir ect
DOMESTIC OFFSHORE SHIPPING 243

subsidy to your domestic trade. I think tha t maybe the solution to 

this problem would lie in some other direction.

Mr. Sevier. I think, Senator, tha t I suspected th at tha t might be 

the case.

Senator Butler. I speak only for myself. From my experience on 

this committee, I would say that th at would meet with some resistance.

I say that anything that we can do in maintaining this essential 

trade with our sister State, we will certainly do. Your presentation 

and the suggestions tha t you have made will be most carefully 

studied. We certainly appreciate your coming here and giving us 

this information.

Mr. Sevier. Thank you, sir.

Senator Butler. It is a very beautiful and very well documented 

statement.

Mr. Sevier. Thank you, sir.

Senator Bartlett. Thank you, Senator Butler.

It has been suggested that Senator Fong might have a sympathetic 

interest in these problems. I suspect that is the case.

Do you have any questions, Senator Fong?

Senator Fong. Yes, Mr. Chairman.

First I want to say tha t we of Hawaii are very grate ful to you and 

to Senator Butler and Senator Cotton for your patience in listening 

to the testimony which has been presented to this committee. The

K

le of Hawaii certainly appreciate your patience and your interest 

e matter.

I would like to thank Mr. Sevier for his very comprehensive statement. It covered the situation very, very well. The six principal 

points th at he has presented to this committee give us a very fine idea 

of the magnitude and complexity of the problem.

I would like to thank Mr. Sevier and his company for the 80 years 

of very useful service of the Matson Navigation Co. to the people of 

Hawaii and to the United States in general.

Coming to the point of subsidy, did you mention, Mr. Sevier, that 

the two passenger ships th at you have are not under subsidy now ?

Mr. Sevier. They are not. They are completely without subsidy 

or Government aid of any kind.

Senator Fong. You said, I think, in your statement that these are 

the only two ships that are not under subsidy.

Mr. Sevier. The only two remaining ships in the American merchant marine tha t are not subsidized—passenger liners, yes.

Senator Fong. Would you please elaborate on that problem a little 

bit, on subsidies for other ships, as compared to no subsidy for these 

two ships?

Mr. Sevier. We made a uick calculation. Admittedly it has no 

validity because there is no precise formula. But we do operate two 

subsidized passenger ships under a subsidiary company, the Oceanic 

Steamship Co., which owns and operates the Mariposa and Monterey

by way of the South Pacific to Hawaii.

We took the established rates, the subsidy rates, as applied to those 

shins, and just for our own purposes we applied them to the Lurlirw

ana Matsonia operation. And for the year 1960, had we received subsidy to the same extent; tha t is, the same percentage of wages and 

subsistence that the Oceanic ships received, the Federal Government 

would have paid us $6 million in subsidy.
24 4 DOMESTIC OFFSHORE SHIPPIN G

Of course, the ships jus t abou t broke even so tha t would have been 

$6 millio n which would rep res ent profit had those rat es app lied.

Th e only assistance we have had from the Fe deral Gover nment on 

those ships has, as I men tioned, been the righ t to ca rry and ear n the 

revenu es derived from ca rrying depe nde nts o f military pers onnel being tran sfer re d to and from the mainla nd. Wh en th at was ab ruptly 

discontinued th at pu t a substan tia l crim p in ou r resources, and does 

im peril th e vessels.

I would say th at the c ontinued ope ration of those two ships is v ery 

much in th e balance.

Se na tor F ono. I und erstood you to say th at if you ha d secured a 

sub sidy equ iva len t t o the subsidy given to the other ship s, you would 

be re ceivin g $6 million ?

Mr. Sevier. $6 million in Gov ernment aid fo r those two ship s for 

th e yea r 1960, had we received t he same rates of subsid y as the Oceanic 

ships received.

Se na tor F ono. Ju st fo r 1 yea r?

Mr. S evier. One year.

Se na tor F ong. All these year s you have n ot received any subsidy at 

all, f or the past 80 ye ars th at you have been o perat ing ?

Mr. S evier. Not ships in t he Ha wa iian tra de , no, sir.

Sh ip s in the foreign tra de th at we operate, the Oceanic ship s, do 

receive the subsidy. They have subsidy contr acts with the Go ver nment and we receive subsidy p ayme nts annuall y fo r th e ope ration of 

the Oceanic f reighte rs a nd pa ssenge r vessels.

Se na tor F ono. Wo uld you like to comm ent a lit tle bi t on the modernizatio n o f yo ur ships in rel ation to rep lac ing them ?

Mr. S evier. In re lation to repla cin g them ?

Se na tor F ono. Yes.

Mr. Sevier. We acquire d wa r-b uil t ships, whi ch were gen eral purpose vessels, by and large, and we adapted them to ou r trad e at the 

tim e o f the ir acq uisition, or f ollo win g th eir acquisition. W ith cha nges 

in the method of mov ing cargoes, bulk cargoes, unitiz ed cargoes and 

co nta iner cargoes of various kinds, we fou nd th at the length of the 

lif e of a ship could be sub sta ntial ly extended by a modernizatio n pr ogram . We have done th at in the case of convers ions fo r con tainer 

car go, automobile carr iag e, and f or bulk s ug ar carria ge.

Th ere are fu rthe r modernizatio n pla ns th at we have. We haven’t 

proceed ed with them lar gely because of the cost and the ina bil ity to 

earn on the overall fre ight service.

We think th at an addit ion al conta ine r ship could be supported by 

the tra de . We think a pac kag e-lu mber ship could be devised out of 

an existing freigh ter th at would be a useful fac ility. Bu t as I say, it 

is difficult to get the cap ital to do that when you can’t earn on the 

money you alread y have invested in the service.

Se na tor F ono. You hav e a very difficult time at tr ac ting capital to 

yo ur com pan y ?

Mr. Sevier. As I m entioned, it is probabl y one o f the p oorest fina ncial risks th at I can think of. I think we would hav e a very difficult 

time findin g a buyer for any stock issue that we would attempt to pu t 

on the m arket.

Se na tor F ono. Ha s the com pany made a very definite decision on 

the No rth we st Lin e to Haw aii ? I think the re was a tim e when you
DOMESTIC OFFSHORE SHI PPI NG 245

were contemplating cutting out one of your ships, or cutting down 

the service from the Northwest to Hawaii ?

Mr. S evier. It goes beyond that. We gave very serious consideration to abandoning the service entirely. We lost a good deal of money 

in the service in 1959 and 1960. In fact we have never made any 

money up there. But in looking at it on the aggregate we felt that it 

was the type of thing that we should include in our service; there 

was a demand for goods from the Pacific Northwest. Matson had 

served that area since the beginning of the century. We therefore 

continued it. But we found tha t the inroads of foreign competition 

in the Canadian newsprint trade and foreign automobiles was such 

that we could no longer afford to call at British Columbia ports.

We found we had barge competition for the carriage of lumber out 

of some of the ports where most of the lumber originated. They were 

shallow draft and we couldn’t get into those ports. We have had to 

contract and discontinue a specialized lumber service.

We still will operate, at least for the time being, a service from 

Seattle, Tacoma, and Portland.

The frequency of the service between those ports and Honolulu 

will be an improvement over our past service. Our service to the 

out ports will be less satisfactory.

We will continue to carry approximately 20 million feet of lumber 

on those ships as contrasted with some 45 or 50 million feet.

We carried about 50 million feet last year, and in 1961 or in any 

full year, our present operation would be about 20 million feet.

Senator Fong. You apprised me sometime ago th at you were contemplating a request for another rate increase. You stated this morning that you are now7

 asking fo r a 10-percent increase ?

Mr. Sevier. Yes, sir.

Senator Fong. Can you give us some idea of what you are basing 

that on ?

Mr. Sevier. We are basing it on two fac tors: one, a portion of it, 

roughly half of it, will be applied towrard costs that have been experienced since our last increase went into effect. In other words, since 

September 1959. The costs we have realized arose out of collective 

bargaining agreements, the money we have paid and are paying to 

labor, money we have paid for fuel oil and other supplies and for 

shipyard labor costs; in other words, operating costs in the trade that 

have been experienced to date.

The remaining part of our 10 percent would at least be a contribution toward a profit in the trade; something to make up the loss in

1960, to avoid a substantial loss which we are confronted with in

1961, and possibly and hopefully provide something for profit.

Our forecasted loss in our freighter operation for 1961 at the present

time is $2 million. The loss for the year 1961. We obviously can’t 

go on on that basis.

Senator F ong. You say your loss in 1961 is $2 million ?

Mr. Sevier. Our forecasted loss in January was $2,600,000. We 

have since had this Northwest service adjustment, and other adjustments we have made. We have brought tha t forecasted loss down 

to slightly over $2 million. And that is where it stands today.

Senator Fong. That is, if you do not receive this 10-percent increase 

that you are asking for ?
246 DOMESTIC OFFSHORE SHIPPING

Mr. Sevier. Tha t assumes two things, Se na tor: it assumes th at we 

ge t no fu rthe r increase in rates, an d it assumes we ha ve no f ur th er cost 

increase s in 1961. I have my fingers crossed on th at one.

Se nator F ong. Does it assume also th at the increase th at you have 

asked for, 12i/2

 perc ent , will be susta ined ?

Mr. Sevier. We d on’t know. Tha t is u p for decision by the Bo ard , 

an d we haven’t any idea not only what the decision would be bu t 

when i t will be rendered.

Se nator F ong. My question to you is th is: Yo ur antic ipa ted loss 

of $2-million-some-odd is based on the fact th at you will tak e into 

con sidera tion th e fact th at your request fo r an incre ase will be g ran ted ?

Mr. Sevier. Th e 12y2

-percent increase?

Se nator F ong. Yes.

Mr. Sevier. Yes, sir. We are assuming th at we will not have to 

reb ate or refund any of the 12i/> percen t th at was granted to us in 

Septe mb er of 1959, subject to a hearing .

Senator F ong. An d the State of Ha waii has filed an objection to 

th at , is th at correct ?

Mr. Sevier. They were rather vigorous in th ei r pr otes t; yes, sir.

Senator F ong. And now you are say ing to th is committee th at even 

wi th th at increase of 121/2 perc ent, you an tic ipa te a loss of ap prox imately $2 million and more ?

Mr. Sevter. Tha t is co rrec t. And furth erm ore, even with th at 12y> 

perce nt which we enjo yed throughout 1960, we lost $35,000 on $71 

million revenue, with t he 1 2 ^ percent.

Senator F ong. And now you have an increase of 10 percen t which 

you are spe aki ng of. Do you anticipa te you will come out even in 

1961?

Mr. Sevier. We antic ipa te that we will have a modest pro fit bu t 

no t in excess o f an ything tha t was autho rized by the Bo ard in docket 

808.

Senator F ong. W ha t would th at amo unt to as f ar as y our ca pitaliz atio n is concerned ? W ha t percentage ?

Mr. Sevier. In the neighborhood of 7

l

/

2

 percent.

Senator F ong. Wh en do you expect to file this request for an 

increase ?

Mr. S evier. We have o ur accountants he re now, and a ttorneys. We 

will meet with the Bo ard pro bab ly on Wedne sday. We have alr ead y 

ha d preli mi nary discussions with the regulato ry section. And as soon 

as o ur figures a re finalized and verified—we have sub mitted the figures 

th at we have prepare d to dat e to the Bo ard and to the State —we 

wou ld ex pect to file this week sometime.

Senator Fong. I s there any possible way of deferrin g i t for a while 

un til this he aring has been concluded?

Mr. Sevier. If you will give us a special ap prop ria tio n so t hat we 

can stay in business.

Se na tor F ong. That I can’t prom ise you.

I have no fu rthe r questions.

Se na tor Butler. Mr. Ch airma n, I have one fu rthe r question.

Mr. Sevier, on the second point th at you made under yo ur g eneral 

he ading of No. 6, I think it is, suggestion s for Federal assistance, 

the second po int is th at you he given the righ t to make agreem ents 

with oth er carriers the same as the railr oa ds now do. and h ave a sh ipment go on a j oint rate from the orig in to des tination. I can see how
DOMESTIC OFFSHORE SHIPPING 247

that would simplify the handling of claims and it would certainly fix

single carriage responsibility. But how would tha t result in an increase in your revenue ?

Mr. Sevier. It doesn’t, necessarily. We feel that it is of more benefit to the shipper, the consignee, than it would be to the carrier. At 

the present time we can’t offer th at service to the trade, which we 

believe they are entitled to have. We can’t offer it because neither the 

ICC nor the Federal Maritime Board will take jurisdiction. I think 

in Alaska you have a somewhat different situation. I am not too 

familiar with that. But I know in Hawaii we can’t make a through 

arrangement of the kind that is contemplated by the joint board bill.

Senator Butler. Who would object to tha t arrangement being 

made ? Would anybody be hur t by that ?

Mr. Sevter. I believe you held hearings, some committee of Congress held hearings last year on that.

Senator Bartlett. Hearings were held before this committee. The 

Senate did pass a jo int board bill. No action was taken in the House 

of Representatives.

Senator Butler. I can’t see objection to tha t type of relief if it is 

going to help you.

Mr. Sevier. I think it would help Hawaii a great deal.

Senator Butler. I will join with the Senator from Hawaii and we 

will see if we can’t push it through again and get afte r the House.

Mr. Sevier. It would be good legislation, and both ICC and the Federal Maritime Board favor it, I believe. I think the railroads probably, and the trucklines may have some objections.

Senator B utler. It would seem to me that that would be good legislation, and tha t it would simplify the shipper’s shipping procedures.

Mr. Sevier. It would. Today it is a very awkward arrangement.

Senator Butler. I have no further questions, Mr. Chairman.

Senator Bartlett. I think I might say in reference to the joint 

board that, for information purposes, the truckers generally approved 

it, and that the ICC had some substantial doubts which have now been, 

if not removed, diminished, so that prospects for some future affirmative action are much better than they were in the last Congress.

Mr. Sevier. I see.

Senator Bartlett. Mr. Sevier, in the concluding sentence of your 

statement you said:

We a re confident that with the join t efforts of the Federal and Sta te Governments, labor, management, and users of tran spo rtation service, workable solutions can be developed.

For my own part, afte r two full hearings and this third hearing 

underway now, I would want to strike the word “confident” and 

replace it with “hopeful.”

Mr. Sevier. I think th at is probably more realistic.

Would you feel that today, if I may say so, Mr. Chairman, we have 

not had at all times that joint effort th at is referred to there. If we 

would get in and move in the same direction, I think there would be 

a better chance.

Senator Bartlett. I think this is the first time, as far as I am aware 

at least, that this joint effort has been attempted without creating a 

forum in which recriminations instead of constructive suggestions are 

put to the forefront.
248 DOMESTIC OFFSHORE SHIPPIN G

You quoted, on pages 3 and 4 of your statem ent, Dr. Sho em ake r; 

an d on page 4 the quotation was in these w or ds :

I would say that there Is, In my view, no question but what there will be a 

sub stantial advance in this economy.

Mr. Sevier, I don’t ask you to speak for Dr. Sho emaker, bu t I am 

wondering wh at migh t occur to cause con tinu ed substan tial advances 

in the economy of Hawa ii ?

Mr. Sevier. Ne ith er can I speak for him, Senator. I have talked to 

Dr . Sho emaker man y times. We used the quote in here to merely 

empha size the fact th at people who have studie d the problem in tima tely in Haw aii—and I am sure Dr. Sho emaker would be in th at 

cat egory —feel th at the economy is sound and will continu e to grow .

I believe th at t hat is ba sed in sub sta ntial measure on hopes th at th e 

to ur ist indu str y will continue. As you know, Ha wa ii has a d eli ghtfu l 

clim ate. I could pu t on a nice sales talk here, if you would be in terested. It is a 12-month recreation a rea. I t does have an app eal to the 

tra veler . It is a way of conservi ng the gold outflow, since it is all in 

ou r own economy. I think the re is a good deal of hope t ha t th at will 

tak e up the slack th at m igh t r esu lt from some decline in t he su gar and 

pin eapple revenues o r other typ es of revenues. Th ere have been new 

ind ustries attra cted the re in recent mon ths. The St an da rd Oil Co. 

has complete d a $60 million project for an oil refin ery. Two cement 

pl an ts have been con stru cted, one with ma inl and capit al, one pa rtl y 

main lan d and partly isla nd c apital.

Th ere have been oth er small ind ustries star ting up the re, and I 

think the re is some reason, some gro und for hope th at the economy 

will continu e to prosper.

Se na tor Bartlett. I wasn’t seeking to dispute his conclusion, but 

merely to verify it from you. You agree th at tourist expansion 

offers the best foreseeable op po rtu nity to cause the economy to increase and to enlarge.

Mr. Sevier. I do, sir. I do feel th at the economy has several legs 

to it, as you know, support ed by ag ric ultural commodities, ag ric ultu ra l pro duction, bv the m ilitary, the military spe nding, the Government ins tallation s there, and by the services and tourists. I thi nk 

the la tter is pro bab ly the most reliable of those sup ports.

Se na tor Bartlett. As expressed on page 8 of yo ur s tate ment, “th e 

level of rates for Haw aii ’s essen tial fre igh t services have not had 

a serious, adverse effect on the economy.” Tha t was the quo tation 

fro m your state ment.

Mr. Sevier. Yes, sir.

Se na tor B artlett. Do you believe th at fu rthe r ra te increases might 

possibly have tha t adverse effect ?

Mr. S evier. Yes, M r. Ch airma n, I am confident th at there will come 

a time, if rates keep going up and spira lling , and all other costs go 

up pro portionate ly, or even to a lesser ext ent , the re will come a time 

when they will become extrem ely burdensome. The y do have an 

effect. It would be foolish to say they have no effect, because you 

ca n't tra ns po rt good s 2,400 st atute miles w itho ut incu rring some costs, 

and t ha t has t o be borne a long with oth er costs.

So it does have an effect. We don't t hin k it has th e d am aging effect 

th at some believe the y have. Some of our exhib its are quite clear. 

Us ing inf orm ation sup plied by the State on the difference in costs
DOMESTIC OFFSHORE SHIPPING 249

between the mainland and Hawaii, we have attempted to show, in 

exhibit 4, that the freight has been a small part of that.

Senator Bartlett. It is my indistinct recollection that the rate increases for Hawaii since the end of the war have been on the order 

of 89 percent, or was that in error?

Mr. Sevier. Our rates have gone up on the average, since 1946,150 

percent. I believe the State used a figure of 172. But that was more 

on general merchandise. But on the average it has been 150 percent.

Senator Bartlett. 150 percent ?

Mr. Sevier. Yes.

Senator Bartlett. Let me ask you this : Have the numbers and 

degrees of those rate increases been on an accelerating basis ? By that 

I mean th is : Have the greater number and have the greater percentage amounts been applied in the last, say 8 years?

Mr. Sevier. I may have something on that.

Senator Bartlett. I ask th at because generally it seems tha t this 

has been the case, tha t these rate increase requests have come with 

greater frequency in the last few years.

Mr. Sevier. I have here a record that we prepared in anticipation 

of some questioning on that.

On March 10,1947, we had a 20-percent rate increase.

September 1,1948, we had a 10-percent increase.

February 1,1951, a 10-percent increase.

January 14,1952, a 71

/>-percent increase.

March 1,1953, an -percent increase.

March 19,1955, a 6-percent increase.

February 1957,9 percent.

July 1957,13.42 percent.

I am lost there. I don’t know which that should be. I think the 

Board allowed some of the rate increase to go into effect, and then 

held a hearing and granted the balance of it, that is my recollection.

Janu ary 1958,9 percent.

January 1959,12i/> percent.

Senator Bartlett. That would seem to reveal, then, tha t before 

1953, rates increased a bit less than 50 percent between the end of the 

war and tha t period, and a little over 100 percent since then. So this 

tends to prove, does it not, that the problem is becoming aggravated 

and inflationary pressures are to be noted more by Matson m the last 

8 years than in the previous 7.

Mr. Sevier. I haven’t chartered this out or plotted it out, but it 

would seem that the curve is fairly steady, Mr. Chairman. Our costs 

have gone up that same wav. I believe it is safe to say that the 

standard of living in Hawaii has increased, and the per capita income 

has likewise gone up. This Consumers Price Index that I mentioned 

earlier on the cost of living in Haw aii, only the city of Cincinnati had 

a lower increase in the Consumers Price Index than Honolulu.

Senator Bartlett. Would you not agree with me that although it 

may well be true, as you stated on page 8, th at freig ht costs do not 

constitute a large part of the retail prices, nevertheless when a rate 

increase is made, this tends to have a pyramiding effect on the cost 

of living. It isn’t only the added cost of carrying the freigh t; it 

is that others, down to the person who sells to the ultimate consumer, 

are likely to and may be forced to add to their prices. Is tha t a fair 

statement ?
25 0 DOMESTIC OFFSHORE SHIPPIN G

Mr. Sevier. T think th at is a fa ir statem ent, Mr. Chairma n. I 

could n’t quarrel with th at . I think any increased cost th at is passed 

on to the consumer does p ick up a little b it of som eth ing all alo ng the 

line. I f the sta tus quo could be ma inta ined it would be a much bette r 

sit ua tio n.

Th e las t th in g we wa nt to do, I might say, is to rais e our fre ight 

rat es, because it doesn’t b rin g us any happiness. Th ey don’t pu t a lei 

arou nd our neck in Ha wa ii when we announce th at we are going to 

raise freigh t rates. It is a very unple asa nt experience so fa r as we 

are concerned. Bu t we have to cover our frei gh t costs with freigh t 

revenues. We have no alter nativ e to t hat.

Se na tor Bartlett. I think the committee quite understands you r 

sit ua tio n.

Ano ther reason why you wouldn’t wa nt to raise rat es unless you 

felt obliged to is because thi s would subject you to com petitive pressur es th at otherwise migh t no t be imposed.

Mr. Sevier. Tha t is corr ect.

Se na tor Bartlett. You quoted Dr. Hicks, who imp lied in his statement as to the cost of living in Hawaii th at the absence of need for 

winter cloth ing an d h eatin g homes and such migh t coun terb alance the 

hi gh er cost of imported c onsump tion goods a nd re sident ial land. Bu t 

it is a fact, is it not, th at the Bureau of L ab or Statist ics of the U.S . 

La bo r De partm ent revealed the cost of liv ing in Ha wa ii to be substan tia lly hig her than in any city on the ma inl and?

Mr. Sevier. I h ave done no research on th at , Mr. Ch airma n, at all. 

I realize that the Federal Gov ernm ent does pay a cos t-of-living 

allowan ce to Federal employees there, but wh eth er th at is based on 

BL S statistics, I don’t know. If th at is a fact I will accept it as such.

Se nator Bartlett. Tha t is the case; yes.

Ho w about pr ivate indu str y? Does pr ivate indu str y have to pay 

its employees in Ha waii, notabl y in Honolulu, a cos t-of-living allo wance greater , for ex ample, th an m igh t be pa id in San Fra nci sco ? Do 

you know?

Mr. Sevier. No. Our perso nnel, we in ou r office in Honolulu have 

the same salar y ad mi nis tra tio n pro gra m for the employees there as 

we do in San Francisco. The star tin g salar y fo r mo nthly employees, 

I believe, is t he same. We m ake no cost-of-liv ing allowance. We do 

reco gniz e when a person is tra ns ferre d there th at he has some pr ob ­

lems and we try to recognize th at and help him in those problem s of 

tra ns ition , but n ot in the basic wage. Peo ple doing compa rable work 

in one place get the same salar y as in the other.

Se na tor Bartlett. I don’t know wh eth er any othe r companies do 

th is in Ha wa ii, either, but I do know th at seve ral, maybe all of them, 

do in Alask a—S tand ard Oil, P an American Airways —and I will seek 

elsew here inf orma tio n on th at po int as to wh eth er there is a cost 

of liv ing pa id to private employees in Ha wa ii.

Mr. Sevier. If I could just check?

Se na tor Bartlett. Surely.

Mr. Sevier. I was just checking with Mr. Sta nle y Pow ell, executiv e vice pre sid ent, who migh t be more famili ar wi th th at . He confirmed wha t I said was correct.

Se na tor Bartlett. If you don ’t hav e it rea dil y availab le, we can 

ge t it elsewhere if we need it.
DOMESTIC OFFSHORE SHIPPING 251

On page 14 of your statement you referred to the modernization 

methods that Matson has employed. It was stated here last week, 

and there is no dissent from anyone on the committee, Mr. Sevier, 

tha t these carriers engaged in so-called offshore trades have led the 

entire American merchant marine in this field, containerizing and the 

like, and all of you, in my judgment, are to be complimented for your 

forward-looking attitudes and actions in th at area.

However, it has occurred to me that there is so much you can do 

in respect to modernization, and using new methods, such as containers, and no more. There will be a period when you will just 

have to use what you have. And then again there will be, will there 

not, an adverse effect on the consumer in Hawaii if general costs continue to rise and you cannot make savings such as from 13 percent to 

above 31 percent ? There is a point of no return on that; is there not ?

Mr. S evier. Well, yes. I presume we will reach a point where we 

will have modernized everything that is suitable for that. Then we 

will have to look into new design. We have, as I mentioned, a very 

well-staffed, competently staffed research department which, among 

other things, works with shippers and consignees in suggesting ways 

that they might change their packaging or shipping methods, movement of cargoes th at lend themselves to bulk carriage and that type 

of thing. We do a good deal of research on tha t for the benefit of 

our customer.

We feel tha t the ocean transpo rtation part of serving an island area 

of this magnitude is only a small part of the total movement of tha t 

cargo from factory to consumer. We therefore are interesting ourselves in more than just the part tha t we perform.

Tha t is why we suggested some of these joint rates. We suggested 

legislation that clears up the point of jurisdiction and responsibility 

in the port areas. We believe tha t there is money to be saved in 

various areas that really aren’t our particula r business. We are try ing 

to point those things out in an effort to reduce the landed cost of merchandise in the State of Hawaii.

Senator Bartlett. You surely are to be congratulated for having 

instituted this research department. I think that is wonderful. But 

there will come a time, of course, when they can make only refinements upon the methods to which you have referred, and we can’t 

hope for the dramatic results which have been apparent in the last few 

years.

Mr. Sevier, how many troops can the Lwrlirw and Matsonia carry? 

Or how many did they carry durin g the war?

Mr. Sevier. During the war they carried in the Atlantic trade— 

we had two in the Atlantic trade and two in the Pacific—we had four 

ships of comparable size—they carried roughly 6,000 troops each.

Senator Bartlett. What happened in September 1960 when you 

had counted upon a million dollars worth of Federal Government 

business in transporting dependents and tha t was withdrawn? How 

did they send those people over ?

Mr. Sevier. By air, by military air transport, largely, and also 

MSTS surface transport.

Senator Bartlett. You said that you don’t know how’ you are going 

to maintain those liners in the H awaiian service because of the mounting costs and obsolescence. If you are not able to make any arrangement for modernizing them, how long will they last ?
252 DOMESTIC OFFSHORE SHIPPIN G

Mr. Sevier. Of course, the cost of maintaining them increases as 

the vessels get older—the tax life of the Lurline, will be complete in 

another 2 years. She can probably operate without major expenditure for probably the balance of this decade. The Matsonia will be 

somewhat longer, but th at ship has been more recently renovated and 

a great deal more money spent on it in 1957.

Senator Bartlett. If you went out in the money market and sought 

capital for the construction of new passenger liners, would you (a) in 

your opinion be able to secure it, and (£>) if you didn’t build those 

ships would you be able to keep the rates low enough so tha t people 

would travel on those ships ?

Mr. Sevier. I am afra id not, Senator. I say that with a good deal 

of regret, but I just do not believe that we would be able to get financing under title 11 or any other type of financing because I don’t believe we would prove the economic feasibility of such construction. 

It would cost approximately $40 million to replace either of those 

ships. And even if we had construction subsidy of—55 percent, is 

it now, Senator Butler?

Senator Butler. On a temporary basis.

Mr. Sevier. Even if we had 55 percent, I doubt we could justify 

the investment.

Senator Bartlett. You would have to charge the passenger much 

more than you do now if he were to go on a brandnew ship ?

Mr. Sevier. Probably not, no; I would think not. I think we 

might be able to, in a new ship design, eliminate certain things, certain 

stations that now have to be manned. We could eliminate those, 

perhaps reduce the crew, which would perhaps reduce the cost somewhat. We have less manning, for instance, on the Mateonia than we have on the Lurline.

Senator Butler. But your only hope of securing financing of those 

vessels would be through insurance ?

Mr. Sevier. That is right.

Senator Butler. You are not entitled to differential susidy?

Mr. Sevier. Oh, no; no. Tha t is pie in the sky. I realize we 

don’t have a construction differential subsidy available to us, but I 

said if we did even then it wouldn’t be economically feasible and certainly would not be on a domestic operation.

Senator Bartlett. Senator Fong ?

Senator Fono. Mr. Sevier, you alluded to possible Federal assistance for the Hawaiian shipping. And you mentioned the Federal 

program of modernization for Hawaiian ports, including the possible 

tran sfer of military piers 39 and 40 in Honolulu, and also tha t the 

Vessel Exchange Act be amended so that a priority would be given on 

the purchase of turned-in freighters, and assistance in defraying 

costs of purchase and modernization. You have not stated anything 

about subsidy; is that right?

Mr. Sevier. About what ?

Senator F ono. About subsidy.

Mr. Sevier. My only reference to subsidy is that we haven’t a position on it. We realize tha t the existing laws would have to be substantially modified and changed to make subsidy possible, to make it 

available to us. We would have to see what those changes meant 

and what they involved.
DOMESTIC OFFSHORE SHIPPING 253

Our recommendations would be to go along with what other witnesses have said, tha t this thing should be studied carefully, and 

then legislation drafted perhaps, and if it were drafted we would 

then be perfectly willing to testify on that legislation. At the present time we don’t know what subsidy would mean.

Senator Fong. Mr. Sevier, you are apprised of the action taken by 

the Hawaiian Legislature ?

Mr. Sevier. Yes, sir.

Senator Fong. Tha t a subsidy be given to the Matson Navigation 

Co. so that costs of shipping would be cut down ?

Mr. Sevier. I did not see the bill, but I am aware of the legislation.

Senator Fong. The present cabotage laws, present maritime laws, 

prejudice Hawaiian residents to this extent: tha t freig ht must be 

shipped on U.S.-flag vessels and may not be shipped by any other 

vessels; is that correct ?

Mr. Sevier. Cannot be shipped by any other vessels between two 

American ports; tha t is correct.

Senator Fong. So tha t the freight which comes to Hawaii from the 

west coast or from any American port must be shipped by a U.S.-flag 

ship.

Mr. Sevier. That is correct, under existing law s.

Senator Fong. A ship going to Japan—say, flying the Panamanian 

flag—cannot take cargo to Hawaii.

Mr. Sevier. That, is correct.

Senator Fong. Could you venture a guess, if these ships were allowed to take freig ht to Hawaii—that is, the Panamanian-flag ships, 

the Japanese-flag ships, and any flag ship that was operating between the west coast, Hawaii, and the Orient—would there be a saving in cost to the Hawaiian residents?

Mr. Sevier. There certainly should be, because their operating costs 

are less than half of the American-flag costs. Their construction 

costs are less than h alf of the American-flag costs. And they certainly 

should charge less freight rate. Our freight rates are based on our 

costs. If their freight rates are based on their costs, it certainly 

would be cheaper.

Senator Fong. Without arriving at a percentage, would you say 

tha t the people of Hawaii are in fact subsidizing the American merchant marine to tha t extent ?

Mr. Sevier. Well, I do say here th at because of the cabotage laws, 

and because of the fact that we must employ American citizens, we 

must buy our ships and equipment from American manufacturers, 

that tha t indicates tha t the subject is a matter of national concern. 

That is why I commented th at I think this committee should be congratulated for undertaking a review of the subject.

However, Senator, I think the record is amply borne out tha t even 

though it is subject to some debate and controversy in various places 

and at various times, it is borne out tha t that reliance on foreign-flag 

shipping to carry America’s commerce either in foreign trade or domestic trade is rather an insecure way of protecting the customer.

I believe t hat if the domestic operator is crowded out of the Ha ­

waiian trade and it were left to the foreigners, and they had the opportunity to charge what they wanted, tha t their rates would be at 

least as high as ours and probably higher.

7170!)—62---- 17
254 DOMESTIC OFFSHORE SHIPPING

Se na tor F ong. I br ou gh t this matter up not th at I am again st the 

cab otage law s; I am ju st as much fo r the cabotage laws as you are. 

I feel th at we should have a str ong me rch ant marine. Bu t I bro ught 

it up ju st to show th at th e Ha wa iia n reside nts are sub sidizing a pa rt 

of th e Am erican me rch ant ma rin e to th at ext ent . That being so, it 

would n ot be fa ir to the Ha wa iia n population to bear all the costs of 

the tra ns po rta tio n, wou ld it?

Mr. Sevier. I t would seem th at the re is some justifi cation in the 

Sta te ’s position fo r the Fe de ral Government to inter est itself in the 

problem. And I t hi nk t hat S enato r B ar tlet t’s committee is to be com ­

mende d for m aking such a thoro ugh e xamination of it.

How ever, I th in k these thi ngs are all sub ject to ra th er sudden 

change. Fre ig ht rates, where freigh t service is being render ed by 

dis int ere ste d parties. Tha t is certa inl y wha t the foreig n-flag operat or would be, o r even a subsidized op erator u nd er t he A me rican flag 

in foreig n tra de . His pr incipa l objective is his des tination.

We are a destinatio n carrier. Our service is to Ha wa ii, with tu rn ­

aro un d service. We tu rn aro und and go back again . So we hav e a 

vi ta l int ere st in it. And I th in k th at more attention, there for e, would 

be giv en to it.

I agree with you th at if we can get some relie f, it is a fine thing . 

B ut you rais ed the questio n of for eig n rates. I tel ety ped our office 

on Sa tu rd ay and asked fo r some in form ation wh ich came in this morning. I t is ra th er intere sting. I will agree th at I would n’t wa nt to 

swear t o th is or vouch fo r it, because it is sub ject to m any variables. 

All tra de s aren ’t the same, volume has a fa ctor to it, and so on. Bu t 

we checked on rates.

I believe the question may have arisen last Mo nday or Tue sday, 

here, on frei gh t rat es of subsidized lines. In the Caribbea n are a we 

too k some distance s. New Yo rk to Ca rta ge na , a distance of 1,800 

na utical miles. I have no id ea of the C artage na im po rts or exports, or 

th e volume, or an ything about it. But the distan ce is 1,800 miles, 

which is 300 less n au tic al miles t ha n our servic e. Th e n.o.s. me rch andise ra te is $70 a ton, weig ht or measuremen t.

New Yo rk to Trini da d, 2,000 nauti cal miles: the merchandise n.o.s. 

ra te ther e is $56.80, weig ht or measurement.

These are subsidized lines, Americ an-flag subsid ized car riers. Our 

ra te fo r 2,090 miles is $25.76.

We hav e an othe r conference rat e, New Or lea ns to Kingston, J a ­

maica, a dista nce less than o urs. Tha t is $72, weigh t or measu rement. 

That is the subsidized ca rrier or foreig n-flag carrier. I t is the same 

rat e.

As I say, those aren ’t exactly com parable wi th the Ha wa iia n situ atio n, bu t the y are ind ica tive of the fact th at frei gh t rates vary. Our 

rates h ave been fa ir and reaso nable, we believe, even though th ey have 

been going up.

Se nator F ong. T o the e xte nt t ha t the Ha waiian population is p ay ­

ing more fo r this frei gh t rate tha n it would be pa ying i f for eig n vessels w’ere allowed to op era te between the two po rts, wTould yo u say th at 

it would be fa ir t hat the National Government should bear a portion 

of th at expense, altho ug h you hav e no t sta ted wh eth er it should be 

sub sidy or otherwise? You are say ing th at some rel ief should be 

giv en in t hat res pect?
DOMESTIC OFFSHORE SHIPPING 255

Mr. Sevier. I am sure Senator B artlett’s questioning led to the point 

tha t sooner or later these rates will become burdensome. I think when 

that time comes—if it is here now and it can be demonstrated tha t it 

is here now—perhaps this is the time for Government aid. I believe 

the subject should be discussed and studied further.

I don’t believe we are in a position to say that we should have help. 

We don’t believe that the impact of our rates at the present time is that 

serious. They are serious; of course, any of it is. None of us like 

costs. I don’t like the cost of anything. But we know we have to live 

with them. We believe some of the suggestions tha t we have made 

here, in these live or six points at least, would enable us to hold the 

line on costs, at least to assist us in holding the line. I don’t believe 

we can expect a reduction in freight rates, although tha t would be the 

day th at 1 hope to live to see, when I can come in and say that we are 

going to reduce them. Don’t count on that, Senator.

Senator Fong. With the present rates tha t you have, there is a 

mounting protest in Hawaii due to the fact that these rates are p retty 

high, isn't tha t correct, as evidenced by the opposition filed by the 

Attorney General ?

Mr. Sevier. Senator, I am not being facetious. I don’t know 

whether this is political or whether it comes from the consumer, or 

just where it comes from, but I will admit tha t there has been 

opposition.

Senator Fong. You know furth er, tha t with your request for another 10 percent, that there will be further opposition ?

Mr. Sevier. I suspect it. I am going down next Frid ay. I will 

probably hear all about it.

Senator Fong. And you wish th is committee naturally to study the 

problem, and if relief can be given in the m atter of subsidy, it is for 

the committee to decide.

Mr. Sevier. I believe tha t is correct.

Senator F ong. Thank you.

Senator Bartlett. I have a good many more questions here, Mr. 

Sevier. I am not going to put them to you, nor will the staff members 

ask the questions they have prepared, because we have kept you on the 

stand for almost 2 hours now. With your permission, we should like 

an opportunity to submit questions, perhaps in writing, to you, and 

you can reply at your convenience.

I will only say, in concluding, th at the problem is, in my opinion, 

as related by Senator Fong, a national one. And it is national from 

two standpoints: The continuing development of the economies of 

Puerto Rico, Hawaii, and Guam, and Alaska, and national defense 

needs. Senator Butler said he thought there would be grave difficulties in persuading the Congress to adopt a subsidy program and I have 

no doubt tha t tha t is the case. This would be revolutionary but we 

may have to adopt some revolutionary tactics. The suggestions tha t 

you made to the committee will be carefully considered, as they ought 

to be, because they are constructive in their nature.

I do want to say, however, that no matter how desirable a Federal 

program of port modernization for Hawaiian ports might be—and I 

don’t doubt at all that it is desirable—it will perhaps be almost as 

difficult to go into a new area such as tha t as it would be to approach 

the broader problem to which Senator Fong and I have made previous 

reference.
256 DOMESTIC OFFSHORE SHIPPING

Thank you very much, Mr. Sevier.

Mr. Sevier. Thank you, sir.

I would be very happy to furnish any material or any information 

tha t the committee wants and would welcome any questions that you 

have to submit in writing.

Senator Butler. Thank you, Mr. Sevier.

Senator Bartlett. Now we turn north. The next witness is Mr. 

D. E. Skinner, president of the Alaska Steamship Co., a company that 

has some interest also in this problem.

We are glad to have you here, Air. Skinner.

STATEMENT OF D. E. SKINNER, PRESIDENT OF ALASKA 

STEAMSHIP CO.

Mr. Skinner. Thank you, Senator.

Mr. Chairman and members of the committee: I am D. E. Skinner, 

president of the Alaska Steamship Co. 1 should like to say in preface 

to my following remarks that having heard the testimony which Mr. 

Sevier gave on behalf of Matson Navigation Co., we would subscribe 

to all of the recommendations that Matson made in connection with 

the Hawaiian trade. We would subscribe in principle to those recommendations as they apply to the Alaska trade.

We appreciate this opportunity to meet cooperatively with your 

committee to try to work out some long-range solutions of the shipping 

problems of the domestic noncontiguous areas. We are pleased to 

rote that the nature of the testimony in these hearings with one exception has been constructive rathe r than destructive and it is in the 

former spirit th at we offer our comments.

We agree with the State of Alaska in favoring the establishment 

of certificates of convenience and necessity for both common and contract water carriers in the noncontiguous trades in much the same 

way Congress has recognized their need in other domestic areas. In 

the 65 years th at we have served all of Alaska, over 130 carriers have 

come and gone from that trade and for good reasons. The great distances and small tonnage available present a unique problem to any 

carrier. Probably nowhere else in the world does a private common 

carrier operate in a trade that provides him with less than 1 ton of 

cargo for every mile traveled. In addition there are the inherent 

hazards of the operation, such as one-way haul, seasonality, and the 

number of small ports. This pattern of maritime carriers coming 

and going in the Alaska trade over the years has worked a real hardship on all concerned. Each one of them has skimmed some of the 

cream off the trade and many of them have assumed little or no 

responsibility. Meanwhile, this surviving common carrier has been 

left to provide the reliable service that the Alaskan economy requires.

As a responsible common carrier serving Alaska it has long been 

our determination to provide complete service. To implement this 

goal we have spent substantial sums of money seeking the most complete service th at the people of the area could afford. Not all of our 

efforts have been successful but they all were part of our determination to provide comprehensive, frequent, and regular service at a 

reasonable rate.
DOMESTIC OFFSHORE SHIPPING 257

AVe have con tinuou sly sought to devise imp roved methods of cargo 

ha nd lin g in order to reduce costs. One of the key factors in this 

search for economy has been to pio neer fo r all the tra ns po rta tio n indu str y the use and appli cat ion of conta ine rs on boa rd ship s. Our 

actual experience with van s began in 1953 and since th at time we 

have invested approx im ate ly $3 millio n in ship impro vem ents and 

company-owne d con tain ers, and in ad ditio n at lea st an othe r $3 million wo rth of equip me nt to implement th is pro gra m.

Confirming ou r jud gm ent on the fu tu re of “co ntained cargo sh ipmen ts” we the n sought to deve lop a com plete conta ine rsh ip which 

could accommodate both rail frei gh t cars and vans. No tw ith sta nd ­

ing the fac t th at we had the affirm ative su pp or t of MAR AD and the 

De pa rtm ent of Defense we were forced to aba ndo n the project because the cost together with the ton nage foreca st wou ld have necessitate d a rate beyond the ability of the Alask an shipp ers to pay.

Being forced to abando n the roll-on, roll-off ship we con tinued to 

accommodate and expand the c on tai ner prog ram to our existing fleet. 

In 1957, fo r example, we ca rri ed 1,129 24-foot vans to Alaska. By 

1960 t his figure has increased to 8,445. Th is does not include a many 

times larg er movement of sma ller-sized conta ine rs rang ing from 4 to 

12 feet in len gth . Th is has been of gr ea t imp ortanc e to the Alaska 

consumer because the van prog ram has reduced both the freq uency 

and am ount of rate increases. Co nstan t impro vem ent of efficiency 

in cargo ha nd lin g is n ecessary if we are to surviv e in a labo r marke t 

whose cost in the last 14 yea rs has incr eased 137 percen t. You can 

appre cia te the etl'ect of thi s large increase on ou r tra de where 73 p ercent o f o ur o pe ratin g expense do lla r is pa id f or dir ect labor. In view 

of these substan tia l wage increases, I believe the ca rri ers sho uld be 

com plim ented ra th er tha n criticize d fo r lim iting gen eral tarif f increases to 56 perce nt over this p eri od o f time. Th e las t 3 ye ars of our 

passenger op era tion, 1952-54, were conducted at a loss of $D/2 million. 

App reciating the value of tou rism to the Alaska economy we made 

futile effo rts to increase the volume of traffic as well as to get off-season pa tro na ge or use fo r these vessels. Sinc e th at tim e there has 

been no Am eric an pas senger service to and fro m Alaska.

In 1958 we purch ase d lig htera ge equip me nt in the Nome area for 

$500,000. Th is investment was mad e in spite of a dep ressed local 

economy and no ind ication of any imp rov ement in sight. Th e pri ncipal obje ctive of the purchase was to assu re the people of th at area 

con tinued com plete wa ter tra ns po rta tio n service even thou gh the 

volum e of traffic did not give any promis e of a retu rn on th is inv estment.

We sub mit th at 45 percen t of ou r tra de is devoted to unpro fita ble 

voyages, bu t no responsible au thor ity in either the Gover nment of 

Alask a or Wash ington , D.C., has sug gested we abando n thes e services, or even ind ica ted a method by which these rou tes could become 

profitable. It is, of course, tru e th at such service is of benefit to the 

State of Alaska as well as to the Defe nse De partm ent of the Un ite d 

States.

The gre ate st need in Alaskan wa ter tra ns po rta tio n is sta biliz ation . The la ws and r egula tio ns sh ould ap ply alike t o all. We stro ng ­

ly recommend to yo ur committee th at the *Federa l Mari tim e Bo ard 

should be given sufficient effective pers onnel to acti vely police and 

enforce exist ing sta tut es. We need adequa te enforcement and more
258 DOMESTIC OFFSHORE SHIPPING

intelligent regulation and inspection of both contract and common 

carriers in this Alaska trade which has numerous totally or partially 

unregulated and uninspected carriers.

The Alaska trade is not only plagued by the unregulated financially irresponsible operator, but also by Government competition. For 

many years the Bureau of Indian Affairs has conducted an operation in Alaskan waters io service the native schools and hospitals. 

We ask this committee to study the operation to determine whether 

or not we could provide this service more economically for the 

Government.

Similarly the State of Alaska is currently considering authorizing 

the expenditure of about $23 million for the operation of a ferry system. We do not oppose this but we feel we must point out to this committee the impact tha t such an operation might have on the Alaska 

maritime situation. To the extent that these ferries haul cargo they 

will not create new tonnage, they will only further subdivide that 

which already is too small.

All Federal agencies require certain minimum standards for contrac ting with builders or suppliers. We think tha t this committee 

should recommend that, such a program be extended to the common 

carriers who are required to conform with all Federal laws and regulation. Thus if a Government project is to be built in Alaska, various 

statutes having to do with wages, working conditions, et cetera, are a 

necessary part of contracting with the Government. We ask tha t the 

Government show the same consideration by following the same procedure in their contract award so that an integral part of any contract be the shipment of materials and supplies on carriers who are 

serving Alaska m compliance with all Federal laws and regulations.

We seek more expeditious rate hearings and determination of simpler, more definite, and uniform regulatory rules. The use of the 

operating ratio theory is a possible solution but in any event it is 

important that we have fixed formulas to determine “capital necessarily employed” and a “fair rate of return.” We are pleased to hear 

the Chairman of the Federal Maritime B oard report that he feels he 

has answered the criticism of Dean Landis on what he termed the 

“inordinate delays in the disposition of adjudicatory proceedings before substantially all of our regulatory agencies.” The Federal Maritime Board Annual Report for 1960 shows 795 proceedings pending 

at the start of the year, and 901 on file at the end of the year. Every 

trad e represented in these hearings has had to contend with longdrawn-out hearings, several of which have been in process over a year 

at this moment. We would be opposed to any legislation that might 

cause additional unnecessary delays.

We feel that the Federal Maritime Board can further stabilize our 

operations by stating and defining more clearly the criteria for suspension of applications for a general rate increase. Similarly there 

nave been altogether too many rate investigations that have repetitiously covered the same subject matter at great loss of time and money 

to the State, Federal Government, and the carriers. To correct this 

we advocate a clearer and firmer statement of reasons or grounds for 

initiating and dismissing investigations, without infringement on the 

right of any parties to file formal complaints.

We endorse the position of Chairman Stakem seconded by Senators 

Bartlett, Fong, and Long as well as the State of Alaska that repeal
DOMESTIC OFFSHORE SHIPPING 259

of the cabotage laws is undesirable. At the same time, we wish to 

call to the attention of this committee that these cabotage laws do not 

protect our noncontiguous trades equally. Alaska faces a present 

threat of foreign-flag competition not true of any other of these areas 

because of the third proviso of section 27 of the Merchant Marine Act 

of 1920.

We maintain tha t Alaskan maritime transportation rates do not 

have as much impact on the prices or economy of Alaska as is often 

contended. The water transpo rtation charges of all carriers were increased on January 10, 1960. The University of Alaska Agriculture 

Extension Service, in cooperation with the U.S. Department of Agriculture, publishes a quarterly report on Alaska’s food prices. I have 

appended to my statement an attachment (No. I) showing the market 

basket prices in various cities in Alaska and Seattle during December

1959 and March 1960 and the freight revenue which would accrue to 

Alaska Steamship Co. if it transported the 40 food items which comprise the market basket. Obviously since the water transportation 

charges increased on Janu ary 10, 1960, and since the market basket 

price or cost to the housewife in the cities shown was increased in 

some instances and decreased in others, the transp ortation charge 

which must be a component of the final price or cost is certainly far 

from a controlling or even dominant factor. For further comparisons 

I have attached exhibit No. II.

We agree and heartily endorse the suggestion of the Federal M aritime Board for a precise study of the relationship of the ocean carrier’s charges to the ultimate consumers’ costs. We feel this would 

bring out many unregulated items and show tha t ocean transportation costs are not as significant a facto r as often claimed. In our 

opinion the problem is not th at transporta tion costs are too high, but 

rather tha t transportation is necessary at all. I have attached a list 

of five food items (No. I ll) mentioned by the State of Hawaii to 

show the great disparity between price differentials and tran spo rtation costs. We join with the Federal Maritime Board and the Matson 

Navigation Co. in recommending the passage of regulations establishing a joint board. This would then allow water carriers to offer 

through rates and joint rates with carrier subject to the jurisdiction 

of the ICC and CAB.

I have attached a list of the 62 ports (No. V) of call for the year

1960 to show the extent of our Alaskan operations.

I have also attached a comparison of freig ht rate increases from 

1947 through 1960 (exhibit No. IV) in several trades to correct and 

complete figures introduced into these hearings in various contexts. 

In the case of Alaska this shows the general across-the-board increases 

and does not include many rate reductions made by our company 

durin g that period. These include reductions on groceries, household 

goods, and a dozen other items as well as reduced charges for container 

cargoes and our assumption of cargo insurance formerly paid by 

shippers.

If the foregoing suggestions are favorably acted upon by your 

committee and the Government agencies involved, we feel tha t the 

concepts of subsidies, either construction or operating, as presently 

constituted and administered do not adapt themselves to our trade 

at this time.

(Exhibits I through V follow.)
2 G 0 DOMESTIC OFFSHORE SHIPPING

Exhibit I

> Baske t" r a U ll p rlo ss o f lls t a d 40 foo d item s in Alask a o i t i s s

3

I

3 f

1 

• •5 I

n
DOMESTIC OFFSHORE SHIPPIN G 261

Exhibit II

Tabulation of retail shelf prices effective Mar. 7. J961, on so-called market

basket food item s from a grocery chain which has stores in both Anchorage,

Alaska, and Seattle, Wash.

[Figures in p aren theses in dica te n um be r of uni ts]

Food item U ni t Price ,

Anchorage

Price,

Sea ttle

Flour _______________________________________ 5 po un ds ............. 0.85 0.59

Rolled o ats _______________________________ - _________ 42 ounces ....... . .77 .59

Corn flakes ______- ____________________________________ 12 ou nces........... . .33 .27

Bread ____________________________________________ 1 Vi p ou nd s_____ .47 .34

Rou nd s tea k ___________________________________________ Poun d________ 1.39 1.19

C hu nk ro ast _ _________________________________________ ____do .............. .89 .69

Gro un d beef ___________________________________________ ........do................... .69 .55

Bacon, sliced__________________________ ________________ ___ do ........... ....... .89 .73

Lu ncheon mea t ______________________________________ 12 ounces______ .75 .60

Fr ying c hicken _______________________________________ Pound________ .89 .55

Mi'lk ” ................................ . ............................................................ Qua rt................... .45 (2). 49

Ice cream _ _ _______________________________________ ___ do ................... .65 .43

B utter ________________________________________________ Pound ________ .80 .73

Milk, ev ap orated ______________________________________ 14 !4 oun ces____ (2). 37 (3). 47

Eggs, large A A .__ _____________________________ - - ____ Do zen......... ......... .67 .55

Strawb err ies ___________________________________________ 10 ounces........... .35 .25

Ora nge juic e. . _________________________________________ 6 ounces_______ .35 (2). 49

Apple s _________________________________________________ Pound____ ____ .33 (2). 45

Ban an as ______________________________________________ . .d o _ _______ .37 . 17

Oranges . ____________________________________________ ___ do _____ ___ .39 .21

Po tato es . ______________________________________________ ___ do ......... ......... .223 (5). 39

On ions . ____________________________________________ .. do _____ ___ . 19 (3). 29

C a rro ts ________________________________________________ ___ do _________ .25 (2). 29

L e tt u c e ________________________________________________ .39 . 19

Cabbage ______________________________________________ ___ do . . . . . . . . . . . .29 .10

To mato es ____________________________________________ __ do ____ _____ .59 .29

Ora nge juice ________________ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 ou nces_____ .79 .57

Beaches ______ ______________________________________ 2’4 ca n.. _____ .43 .33

Fru it co ckt ail __________________ _______________________ 303 can ________ .33 .27

Pe as. __ ____________________________________ -- __ ........do................... .29 (2). 43

To mato soup __ _____________________________________ 11 ounces ______ .17 (4). 45

Po rk a nd bean s__________________________________________ 16 ounces............. (2). 45 (2). 31

Jello ___ _____ ___ ______ ___________ ____ _______ __________ 3-4 ou nce s....... ... (3). 35 (4). 37

Bab y food______________________________________________ 414-5 ou nces....... (6). 73 (6). 63

Coffee. . ___________ _____ _____________ _______ _____ Pound ................. .79 .75

Sh or ten ing__________ __________ _____________ ___ _______ 3 p ounds. ........... 1.03 .87

O le o.._________ ________________________________________ Po un d................. .31 .29

Salad d re ssin g _________________ ________________________ Qua rt_________ .75 .59

Su ga r__________________________________________ _____ ___ 10 p ou nds ......... . 1.49 1.13

Exhibit III

Comparisons of 5 food item s in 2 Alaska cities and U.S. a ver age s1

Flou r (1 po un d) ................. ...........................

Bacon (sliced) (1 p ound).............................

B ut te r (1 p ou nd )........ ............ .................

Po tatoes (1 po un d) ___________________

Coffee (1 pou nd )............ ............ . ................

U.S . average Ketch ikan Nome Diff erence

0.56 0.76 0.20

.56 0.99 .43

.68 .76 .08

.68 .97 .29

. 76 .78 .02

. 76 1.05 .29

.07 . 10 .03

.07 . 13 .06

.75 .75 X X

.75 .94 .19

Fr eigh t

0.064

.11

.021

.038

.02

.039

.012

.022

.015

.029

1

 Th e dista nce betw een Ketch ikan an d Seattle is 649 miles; between No me an d Se attle 2,290 miles. All 

freight qu otations ar e tac kle t o tackle.
262 DOMESTIC OFFSHORE SHIPPIN G

E xh ib it V

Ala ska Ste am sh ip Co. P osts of Call, Year 1960

Ports shown in parentheses served on regular scheduled basis. Other ports, 

indicate d by asterisk (*), served as tonnage w arra nts.

•Metlaka tla 

•W ate rfa ll 

•W ard’s Cove 

♦George Inle t 

•Excursion Inlet 

♦Tamgass Harbor 

(Ke tchikan) 

(Wrangell) 

(Petersburg)

♦Kake

(Ju neau)

•Hood Bay 

•Chatha m 

♦Pelican 

•Hawk Inlet 

(Sitk a)

(Mount Edgecombe) 

(Ha ines)

(Skagway)' 

•Letnik of Cove 

•Yakuta t

•Orca 

(Cordova)

•Port San Jua n 

•Port Ashton 

(Valdez) 

(Sew ard) 

(Whittier) 

(Kodiak) 

(Womens Bay) 

•Ousinki 

•Alitak 

•Jap Bay 

•Port Wakefield 

•Sh ear water Bay 

•Uganik Bay 

•Po rt Williams 

•Larsen Bay 

•Port Bailey 

•Snug Harbor 

(Seldovia)

(Homer)

♦Kenai 

•King Cove 

•Cold Bay 

♦False Pass 

•Sand Poin t 

♦Squaw Harbor 

•Chignik 

•Dutch Harbor 

♦Captains Bay 

(Nushag ak) 

(Nak nek)

(Po rt Moller) 

(Goodnews Bay) 

(Bethel)

(Nome)

♦Port Clarence 

(St. Michael) 

(Unalak leet) 

(Teller) 

(Kotzebue)

Senator Bartlett. Thank you, Mr. Skinner. Assuming that the 

suggestions th at you have made are adopted, is i t your opinion t hat 

they would go a long way in enabling you to withhold further freight 

rate increases?

Mr. Skinner. I would say they would go a long way in helping us to 

minimize the effect of additional increases in our direct operating costs.

Wha t effect that would have on the freight rate itself, I am obviously 

not prepared to say at this time.

Senator Bartlett. You have suggested tha t in your opinion the 

freight rates to Alaska do not of themselves constitute the reason for 

the high costs to be found there, is tha t correct?

Mr. Skinner. Tha t is correct, sir.

Senator Bartlett. You and I know, and everyone else knows, that 

the cost of doing business, the costs of living in Alaska, are indeed 

very high. Wha t factors do you believe are chiefly responsible for 

these facts, mindful th at the cost of living in Fairbanks is on the order 

of 150 percent over and above that of Washington, D.C. My recollection is th at not too long ago the Corps of Engineers assigned a construction cost for Alaska of about 2.4 times tha t which would prevail on the average in the smaller and earlier 48 States. What are 

these factors which taken together account for that?

Mr. Skinner. I think the answer to that would vary, depending 

on what area we were discussing. So long as you mentioned F airbanks let us assume it is the railroad area, and I well know the 

economy up there is pretty well dependent upon the Defense Department. Even though it might be said th at it is a blessing that the 

Federal Government has decided to include Alaska in its defense 

program, that has been a blessing to the people who have lived there 

and has been directly responsible for many people moving there 

from the United States, it nevertheless is a burden also.

I think the fact that the defense program fluctuates as it has over 

say the past 15 years has contributed certainly to the higher cost of
E x h i b i t IV

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110%

100% -=

90% —

80%—=

70% —=

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20%.

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R E C A P I T U L A T I O N

P a c if ic C o ast- P u re to R ic an C on fe re nce

P a c if ic Co& st -H av ai ia n Tr ad e

We st Coa 3t R ail ro a d s

A la sk a Ste am sh ip Company

May,19^ 7-May,I9 60 

T o ta l Cum ul at iv e 

In c re a s e

111.6 6%

108.5 2%

76.97%

56.40%

♦ H o ri zo n ta l f ig u r e s (e xa m pl e +15 .00%) r e p re s e n t 

cum ula ti ve in c re a s e s in c e May, 19 47 .

iV e r tic a l f ig u r e s (e xa m pl e 17.50 %) r e p re s e n t a c tu a l 

t a r i f f in c re a s e sin c e p ro ceed in g in c re a s e .

$ 1

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CCMPARISON O f FREIGHT RATS INCREASES FROM 

--------- May, 1947 th ro ugh May, I9 60 ----------

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____ i

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P a c if ic C o a st- P u e rtc R ic an C on fe re nc e

P a c if ic C oas t- H aw ai ia n Tr ad e

_+7_ 5-26£ J 5

_ 1 1 6 ^ 7 % ._________

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+69.88%

<+6"5?e 5 £

W\|

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♦4 2. 18

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DOMESTIC OFFSHORE SHIPPING 263

living there than maybe some other comparable area that had in 

addition to a defense program a normal economy based on local 

industry. I think a good example in that case would be the Hawaiian 

Islands, which Mr. Sevier has just explained. The fact tha t there 

is such a large territory to serve, and so few people in it means that 

it becomes impractical economically for people to build large warehouses in the area, making it possible then to ship in carloads of 

groceries, for instance. The demand is not large enough to justify 

this expense and, therefore, it requires a frequency of sailings from 

Seattle, the principal port of supply, to the many areas throughout 

Alaska. This obviously creates a burden to the water carrier. In 

order for him to satisfy the trade it becomes necessary to offer at least 

two sailings a week. In many cases the carrier cannot justify that 

in view of the fact tha t the tonnage to so many of the ports is as 

low’ as it is. When I say tha t, to be specific, I would say that over 50 

percent of our arrivals in port are for the purpose of discharging less 

than 200 tons of cargo. I think for most water carriers this would 

be quite a burden.

Senator Bartlett. Let us desert the rail belt for a moment and go 

to Juneau where I believe the Federal Government figures show the 

cost of living to be something of the order of 25 percent above Washington, D.C.

What factors in your estimation would cause the price to be so high 

in Juneau in consideration of the fact tha t on the sea it is only 900 

miles north of Seattle?

Mr. Skinner. In Juneau, as you know’, tha t being the capital of 

the State, there is very little other industry in tha t city which contributes to its economy. The fact tha t the Federal Government, prior 

Io statehood, determined that the people in Alaska were entitled to 25 

percent higher salaries than people doing comparable work in the 

other 48 States, had a great effect, I think, on increasing the cost of 

doing business in Juneau, because the day the Government decided 

tha t those people were entitled to 25 percent more in salaries it automatically meant tha t other people doing business there also had to 

meet that salary scale or lose their employees.

This is just one of the reasons. I don’t know how far you want 

me to go.

Senator Bartlett. If you have any other reasons in mind, we would 

be glad to hear them.

Mr. S kinner. I don’t think Juneau is necessarily unique. I think 

tha t it is representative of the problems that the State has to face.

Senator Bartlett. You are being subjected to competition at this 

time and you have been for quite awhile from barge operators, are you 

not?

Mr. Skinner. Yes, sir, that is correct. We also are faced with competition in other forms as I testified in my statement.

Senator Bartlett. You mentioned the operation of the Bureau of 

Indian Affairs ship, and suggested as I recall that an effort might be 

made to inquire as to whether this could be done cheaper through 

your services than is now the case.

Have you made proposals to the Bureau of Indian Affairs citing 

rates that you would charge ?

Mr. Skinner. We haven’t been able to do that because until we 

knew’ w’hat service they would wish us to perform it would not lie
264 DOMESTIC OFFSHORE SHIPPING

very easy to tell them how much we would c harge. We d o know th at 

the Bu reau ’s ship services the same area th at we serve on a common 

ca rrier basis. We do know th at since the need fo r th at service was 

determ ine d some years ago, the n ature of th at need has cha nged also.

You p rob abl y recall th at t hat ship had passeng er fac ilities in o rder 

to tak e the native s fro m and to the villages, and had de nti st and 

doctor fac ilities on board in orde r to trea t those same natives.

I t is my un derst an ding th at since th at time, with the excellent air 

service which is be ing provide d, th at th at ship is no longer called u pon 

to pro vid e the tran sp ortatio n service, and th at the medical needs of 

the natives are handled by ta ki ng them to the med ical centers from 

those p artic ul ar v illages.

So I think th at now the job of th at ship is pr et ty much a tran spo rta tio n service, tra ns po rta tio n of cargo. I see no reas on why the 

common c arrie r ope ratin g in t hat tra de co uldn’t do th at a t a gr ea t saving to the Governmen t, All I suggested is th at we be allow ed to 

study it f or t hat purpose.

Se na tor Bartlett. I am going to ask Mr. Go din g in th at connection 

to prep are a let ter to th e Com missioner o f In di an Affairs on th at s ubject for my sig na ture o r th at of Chairma n Magnuson, so th at we may 

look into thi s m atter.

Mr. S kinn er. Th ank you, S ena tor.

Se na tor Bartlett. Mr. Skinn er, you relat ed to the im pact of military con stru ctio n thr ou gh ou t the railroad belt especially. As we 

know, th at is in the proce ss not of bein g leveled off bu t of drop ping 

very pre cip itously. The actual con stru ctio n dollars to be spe nt in 

th is field du rin g the coming season are pro bab ly no t more than 25 pe rcent of last ye ar’s, and there will be a fu rthe r dim inu tio n in the follow ing y ear if the Defe nse De partm ent plans are not alte red.

In light of this fac t, if th at is w hat i t turns out to be, th at m ilitary 

con struction will not have the beari ng on the Alask a economy th at it 

has ha d since the end of the wa r, what is your vision fo r the Alaska 

of 50 years from now, if this isn’t too a br up t a questio n ? You can say 

an ything th at you want, ho wever, because none of us will be a rou nd to 

challenge you i f you tu rn out to be wrong.

Mr. Skinn er. Th is is one of the few time s when I eve r h ad the o ppo rtun ity to ans wer a question when I myself won ’t be here either , in 

orde r to eat my words, probably.

Le t's look at it from the l ig ht of what was Alask a before the war. 

I would say th at we are quite prep ared—we w ouldn ’t look forw ard to 

it b ut I would say th at we are quite prepare d to serve an area such as 

Alask a, whose dem ands were no greater than the y were pr ior t o 1941. 

Tha t isn ’t a very ple asant outlook, but the company I rep resent has 

been serving it since 1895, and I thi nk as fa r as we a re concerned we 

are d edicated to servin g it no matt er how small or larg e it gets.

But for me to make a prediction as to wh at the economy of Alaska 

would be 50 yea rs from now I th ink would be un rea listic an d would be 

pre suming th at I am much more intellige nt on the subject than I 

know I am.

Se na tor Bartlett. Mr. Sev ier related the op erating experiences o f 

Matson d ur in g th e las t several y ears as to p rofi t and loss. Would you 

care on behalf of y ou r com pany, Mr. Skinn er, to tell us wheth er you 

are losing money or ma kin g money ?
DOMESTIC OFFSHORE SHIPPING 265

Mr. Skinner. I would say that fortunately we have, over the years 

since the war, certainly ended up in the black. But I could refer to 

testimony which was introduced in our freig ht rate hearing in 1958, 

where a representative from a nationally known bonding house testified that had we, instead of buying Alaska Steamship Co. stock from 

the Kennecott Copper Co. in 1944, had we taken that same amount of 

money and bought Government bonds, we would have had a considerably greater return on our investment than the one th at we did make.

That is hardly any compensation for the blood, sweat, and tears that 

those of us who are in the water transporta tion business have had to 

put up with since tha t time.

If you asked me whether or not we would have made the same decision again, knowing what we know now, I think probably we would 

have, because of our sincere interest in Alaska. But certainly as an 

investment we are in no different position than the Hawaiian trade.

Senator Bartlett. Mr. Skinner, we will ask you the same indulgence tha t Mr. Sevier granted, and th at is permission to put questions 

to you in writing, if you so desire, at a later date.

Mr. Skinner. We will be happy to accommodate you in any way.

Senator Bartlett. Thank you, sir.

(See questions submitted by Mr. Clark, p. 321.)

Senator Bartlett. We have a time problem. We always do. Before the committee goes into recess, we should like to hear from Mi-. 

Boss, secretary-treasurer of the Pacific Fa r East Line. We understand that he desires to depart Washington as soon as possible.

STATEMENT OF LEO C. ROSS, SECRETARY-TREASURER, PACIFIC 

FAR EAST LINE, INC.

Mr. Boss. Mr. Chairman, I too would like to say tha t the Pacific 

Fa r Fast Line welcomes this opportunity to address this committee 

on this most important issue.

Senator Bartlett. We are glad to have you do so, Mr. Boss.

Mr. Boss. Thank you.

My name is Leo C. Boss, and I am secretary-treasurer of Pacific Far 

Eas t Line. Inc., with main offices in San Francisco, Calif.

To understand better the experience of Pacific Fa r East Line in 

maintaining a service to Guam over the past 14 years, a brief resume 

of our overall operations, growth, and development appears to be 

in order.

Pacific Far East Line, Inc., a Delaware corporation, was formed 

in July 1946 to engage essentially in the trans-Pacific Ocean freight 

service. The company began operations with vessels chartered from 

the U.S. Government and in the first year of operation purchased five 

C-2 type vessels under terms and conditions set forth in the Ship 

Sales Act of 1946.

By the end of 1947, the company was operating a total of 32 vessels, 

5 owned and 27 under bareboat charter, all engaged in the transPacific service, including a monthly service to Guam. In 1951, the 

company purchased from the U.S. Government three AP- 3 Victory

type vessels and by the end of that year had in service 49 vessels—8 

owned, 27 charted, and 14 operated on behalf of the National Shipping Authority under a general agency agreement. Our service had
266 DOMESTIC OFFSHORE SHIPPING

been expended to the Indian Ocean area enroute to the Persian Gulf 

and, via the Panama Canal, to ports in the Mediterranean, and (he 

service to Guam was increased to two monthly sailings.

Effective January 1, 1953, Pacific Far East Line was awarded an 

operating-differential subsidy contract on Trade Route 29. The terms 

of the agreement provided in part for not less than 36 sailings nor 

more than 40 sailings per annum, employing five C-2 type vessels and 

three AP-3 type vessels. The company committed itself to replace the 

three AP-3 vessels with three Mariner type vessels and, in addition, 

agreed to the ultimate replacement of the five C-2 vessels with more 

modern tonnage satisfactory to the U.S. Government. Trade route 

29 embraces service from California to Japan, Korea, Okinawa, Formosa, Philippine Islands, Hong Kong, Indochina, and Thailand.

Continued operation of services to other than Trade Route 29 areas 

was dependent upon obtaining approval from the Federal Maritime 

Board, which resulted in reducing our fleet by the end of 1953 to 22 

vessels, 2 of which were operated under general agency agreement with 

the National Shipping Authority. We continued however, to maintain, with the approval of the Federal Maritime Board, a twicemonthly unsubsidized service to Guam.

In 1955, we took delivery of three Mariner type vessels contracted 

for in 1953 in substitution for the Victory type vessels and, in addition, purchased a fourth Mariner to augment our subsidized service, 

and the number of subsidized sailings w’as increased to a minimum of 

47 and a maximum of 57 sailings annually.

Pacific Fa r East Line became the first operator to purchase and 

place in service the Mariner class cargo ship, which basic design has 

become the accepted stan dard for most operators engaged in foreign 

commerce.

In 1956, three additional Mariners were purchased from the U.S. 

Government, thus leaving us with but two C-2 type vessels to be replaced by modern tonnage to complete our replacement obligations 

under subsidy. The last two Mariners were contracted for in 1959 

and are presently under construction with anticipated delivery early 

in 1962. Delivery of these last two vessels will complete our replacement obligations under our subsidy contract. Pacific F ar Ea st Line 

thus became the first company to complete its replacement obligations 

under the Merchant Marine Act of 1936. During this entire period 

and to date, in addition to meeting the substantial financial obligations involved with the acquisition of new tonnage, the company continued to maintain and expand as needed its service to Guam to meet 

not only the commercial requirements but the military as well.

Through the payment of operating differential subsidy funds and 

construction differential paid to domestic shipyards, we have been 

able to fulfill our obligations to the U.S. Government in building up 

a fast modern fleet of cargo vessels for our subsidized service in competition with foreign-flag vessels.

Pacific Fa r East Line is one of the few American-flag operators 

with an operating differential subsidy t hat has every year without 

exception refunded to the U.S. Government in the form of recapture a 

pa rt of operating subsidy accrued to the line. The financial return 

to the company resulting from maintaining continuous service to 

Guam, without financial assistance however, has been so marginal 

over the years tha t it has been impossible to modernize the fleet in
DOMESTIC OFFSHORE SHIPPING 267

this service. In fact, during the past 3 years, Pacific Fa r Eas t Line 

has suffered substantial losses in this trade.

The present tonnage in this service consists of three A P-3 Victory

type vessels and three C-2 vessels with an average age of 17 years 

from date of construction, all owned by Pacific Far E ast Line or its 

subsidiary company. These vessels must ultimately be replaced and, 

with continuing losses, it would be impossible to meet the obligations 

tha t would be imposed if we were to contract for new tonnage.

So long as the strategic location of Guam remains important to 

the national interest, as is evidenced by the continued movement of 

military cargoes to that area and commercial cargoes which in turn 

supports the military and defense needs of the area, we would desire 

to continue to serve Guam, providing a fai r return on the capital so 

employed could be realized.

However, since we are a publicly owned company and we have an 

obligation to our shareholders, we cannot justify the continued absorption of heavy losses by maintaining this service. It has been the 

policy of the company, in recognition of the economic limitations of 

Guam, to defer rate increases until all other means of meeting everincreasing costs had been exhausted. This is evident when one reviews the history of the rate increases in this area during the period 

January 25, 1951 to December 31, 1959, in relation to increased per 

diem vessel costs for the like period. During this period, there have 

been three rate increases aggregating 39 percent. Operating expense 

of vessels of the type employed in this service had, during this same 

period, risen from an average of $1,633 per day to $2,763 per day, or 

66 percent.

In view of the foregoing, justification for the most recent application for a commercial rate increase is, we feel, apparent. Operating 

results for the year 1961 predicated on income produced by the latest 

published tariff continues to reflect a loss in this service. One of the 

major problems in serving this area is tha t it is a one-way service, 

tha t is to say, the outbound tonnage movement, both military and 

commercial, must be in such volume and move at such a rate as to 

create revenues sufficient to meet the round voyage costs and overhead 

applied to this operation. Return cargo from Guam has been limited 

primarily to military household goods and m ilitary retrograde cargo. 

Commercial cargo has, for the most part, been limited to occasional 

shipments of scrap, trocus shells, and empty containers.

Schedule 1 to exhibit I II gives the comparison of outbound revenue 

to inbound revenue for the year 1959, which year is representative of 

our annual experience. Inbound commerical cargo constitutes less 

than 2 percent of total voyage revenue.

In order to justify the continued service to Guam, this company 

has in the past attempted to augment the inbound revenue by calls 

beyond Guam to Jap an and the Philippines. There are, however, 

limitations in cargo liftings from these areas since we must avoid competition with sizsidized vessels servicing these same areas.

Although no part of our service to Guam, including calls to foreign 

ports beyond Guam, permits of subsidy payments, in instances where 

the revenue derived in foreign areas on Trade Route 29 amounts to 

50 percent or more of the total voyage revenue, the net financial 

results of such voyages must be taken into account for purposes of determining the amount of recapture, if any, th at may be due the Gov-
268 DOMESTIC OFFSHORE SHIPPING

ern me nt. Re cap ture is an amount equal to 50 per cent of profits 

rea lized after sta tu tory retu rn on capital employed.

I t is now quite ap pa rent th at the volume of ava ilable tonnag e movin g in terp or t fro m most F ar Eas t por ts to Guam is n ot co mpensatory 

with the added vessel time in calling at such ports. However, since 

Gu am has in an effo rt to bolste r their own economy and to find 

marke ts for their lim ited pro ductio n engaged in modest trad e with 

Ja pan , and since Pacific F ar Ea st L ine is the only ocean ca rrier provi ding service for such movemen t, we conte mp late conti nuing this 

serv ice between G uam and J ap an f or the tim e being .

A proforma (ex hib it I), based on a ye ar ’s opera tio ns utilizing 5 

vessels serving west coast to Gua m and , in ad dit ion Ja pan , has been 

prep ared to show the an tic ipa ted finan cial res ult s of this service. 

Wherea s our calculatio ns ind icate a sub sta ntial reduct ion in losses 

presen tly bein g incurred, the net result of th is cu rta ile d service still 

rem ain s in a loss position . In addition , this revised service by lim iting c alls beyond Gu am -to -Ja pa n leaves us with one surplus vessel for 

whi ch we must find oth er employme nt or p lace in idle status , addin g 

fu rther to our costs.

We have also made a stud y of the net effect if our service were fu rth er reduced to limit calls to the mid-P acific islands and tu rn in g at 

Guam. This is submitted as exhib it II and ind icates appro xim ate ly 

the same financial results as is evidenced by exhib it I.

Wh en thi s committee has the op po rtu nity to review these exh ibits, 

it will be noted th at the overhea d allocated to this service is quite substa ntial. Since thi s com pany ope rate s its transp acific service un de r 

an op erating different ial subsidy con tract, the basis f or allocating overhea d between subsidized opera tions and uns ubsidized opera tions is 

pre scribed by the M aritim e Ad mi nis tra tio n. I f we can prevai l upon 

the Ad mi nis tra tio n to amend th eir allocation of overhea d, it will help 

mate ria lly in ju stify in g the possible con tinuan ce of th is service.

I f the volume of military an d commercial tonnag e outbound remains 

at th e level experienced du rin g the year s 1959 a nd I960—and we have 

been inf orm ally advised that the re appears to be no less ening in the 

mili tary cargo for 1961—th ere is need for a min imu m of 4 vessels of 

the C-2 an d/ or Victory class in thi s service, maintaining a freq uen cy 

of calls at Gua m not less tha n every 12 days.

We a re required by the M aritime Ad mi nis tra tio n to submit q ua rte rly op erating statem ents on the results o f our unsubsidized operation s, 

and the continu ance of this service is subject to the app rov al of the 

Fe de ral Ma ritime Board . Since the losses sus tain ed in this service 

du ring the past 2 ye ars exceed $1 million a y ear, such losses o bviously 

cannot continue. It is the ref ore quite a pp aren t that a solution to this 

problem must be fou nd with reasonable dispatch and , in our opinion, 

the answer is not to be fou nd by continued upwa rd revision of ocean 

frei gh t rates to the point where in time it will affec t the overall econom y o f Guam .

Th e pres ent comm ercial fre ight rates applicab le to Gua m are in 

excess of the rates to foreign ports in the F ar Ea st. The F ar Ea st 

rates are esta blished by the Pacific Westboun d Conference which is 

dom inated by foreig n-flag lines. Un de r the tw o-third votin g rul e in 

the conference, even if all Am eric an-flag lines voted in a block, they 

would still be outnu mb ere d by the foreig n-flag vote. Th is situation
DOMESTIC OFFSHORE SHIPPING 269

permits foreign-flag lines, whose op erating costs are less than American, to maintain a rate level which would not necessarily he in all 

cases compensatory to the American-flag operator.

With respect to the operation of American-flag vessels in the Far 

Eas t trade, all operators are either presently subsidized or have made 

application for subsidy contracts purs uant to public hearings conducted by the Federal Maritime Board. It therefore seems only 

proper that the aid for service to Guam should come from the Government the same as is the case in the Fa r Eas t instead of coming from 

the residents of Guam. Freight rates to Guam are based solely on the 

American-flag operator. Therefore, rates must be compensatory to 

American-flag operators with their higher operating costs. The net 

result is tha t the residents of Guam are, in effect, bearing the burden. 

This situation certainly appears to be an unreasonable and unrealistic 

position; nevertheless, if it were not the case, American-flag vessels 

could not profitably operate to Guam.

By its geographic location and at the same time its apparent 

strategic importance to the national interests of the United States 

and the desire on the part of the Navy to maintain the security for 

defense of this area, the problems confronting Guam are unique. 

Guam must be served solely by American-flag operators as no foreign 

lines are permitted to make calls. Vessel operations conducted at 

Guam are subject to limitations imposed by the Navy.

For example, vessels cannot arrive or depart or make an intraport 

shift between sunset and sunrise. All harbor floating equipment and 

services incident thereto, such as tugboats, launch hire, pilotage, floating cranes and barges, are controlled by the Navy, all with the apparent intent to maintain the defense security of the island. Whereas 

Guam is considered in the domestic trade, it lies over 5,000 miles west 

of continental United States, the most distant outpost on our defense 

perimeter containing major defense installations. The nearest land 

mass beyond Guam is Japan, approximately 1,300 miles northwest 

and, secondly, the Philippines, approximately 1,500 miles due west. 

Because of this relative isolated location, it is difficult to integrate 

service to Guam with any other area affording ample commercial 

tonnage for sustained operations.

Pacific Far E ast Line is the only commercial operator maintaining 

regular service to Guam except for one other commercial operator 

calling at Guam on an average of 14 times a year. Pacific Fa r East 

Line alone maintains service between Guam and Japan.

The foregoing constitutes in brief the service that Pacific F ar East 

Line has endeavored to maintain to this strategically important area, 

the steps we have taken to improve the economic conditions to permit 

of the continuance of such a service, and the conclusions reluctantly 

reached that without some form of financial assistance from the 

Government the maintaining of service to this area by Pacific Fa r 

East Tune is seriously questioned.

In support of our position and statements made today, we would like 

to submit for your study and evaluation the following exhibits and 

schedules:

Exhibit I: Pro forma of the projected annual operating results 

utilizing five vessels in the Guam service, including calls between 

Guam and Japan.

71709— 62 ------ 18
270 DOMESTIC OFFSHORE SHIPPING

Exh ib it I I : Pr o forma of the pro jected annual op erating results 

ut ilizing four vessels in the Gua m service, eli minati ng calls beyond 

Gua m.

Exh ib it I I I : Ope ratin g reven ue and expense sta tem ent—unsu bsidized service—do mestic leg (Guam ) for the ye ar 1959.

Sch edu le 1 to exhib it I I I : Vessel op erating sta tem ent—ye ar 1959 

an d analysis of ter mina ted voyage revenue and expense.

Exh ib it I V : Ope ratin g revenue and expense sta tem ent—un subsidize d service—dom estic leg (G ua m)—first 6 m onths 1960.

Schedu le 1 to exhib it I V : Vessel op erating sta tem ent—fir st 6 

mo nth s 1960 a nd ana lysis of terminated voyage reve nue and expense.

Exh ib it V : An aly sis of ann ual to nnage to Guam fo r the yea rs 1956 

th ro ug h 1959 and first ha lf 1960 based on voyage terminations.

Exh ib it V I : Charac teristics of vessels employed in the Guam service.

Exh ib it V II: Analy sis of increased vessel op erating cost pe r day 

1957 to I960.

I would lik e to a dd, M r. Chairma n, th at we wou ld like the p rivilege 

of supplem enting ou r testimo ny and thes e exhib its at some fu ture 

date, depending on oth er testimony given before this committee.

Senator Bartlett. Tha t permission is gran ted, Mr. Boss. Yours 

ha s been an excellent stat ement.

Mr. Ross. Th an k you.

Senator B artlett. We appre cia te y ou r giv ing it.

Specifically, I should like to infor m you th at the record is to be 

ke pt open for 6 weeks fro m the date of the las t heari ng. We would 

be, I know, especially intere sted in ha ving any concrete suggestions 

fro m you as to wh at for m the finan cial assistance from the Fe de ral 

Gover nm ent m igh t take, because, as you hav e sta ted , it m ust be given 

if this service is to be ma intain ed. If you fail to offer those specific 

suggestion s, we sha ll understand, because it is alr eady ap pa re nt th at 

th is isn’t sim ple at all.

Mr. Ross. No, sir, it isn’t.

Se nator Bartlett. In any case, you have aid ed us by stat in g the 

ex ten t and dee pen ing gr av ity of the sit ua tio n. I can well ima gine 

th at the most att entiv e au dito r of yo ur testim ony was Mr. Go din g 

on my righ t, as Pr es iden t Kenne dy has ann oun ced his intentio n of 

ap po intin g M r. G oding as H ig h Com mission er to th e Tru st T erritory. 

He will be liv ing at Gua m and will hav e the keen est int ere st in the 

conti nuati on of satis facto ry ma ritim e service to th at en tir e area.

Mr. Ross. Very good, sir.

Se nator B artlett. I sho uld like, in the inter est of sav ing tim e, Mr. 

Ross, to ask you if we m ight p ut to you questions in writ ing fo r yo ur 

answers in the same form ?

Mr. Ross. Ce rta inl y, sir. I would be very ha pp y to resp ond.

Ag ain , my than ks to you and yo ur com mittee fo r pe rm itt ing us 

the se moments.

Se na tor B artlett. We are especially gla d to he ar from you because 

we didn’t hear enough about Guam p reviou sly.

(E xh ibits to Mr . Ross’s stateme nt f ollo w:)
DOMESTIC OFFSHORE SHIPPING 271

Pacific Fab East Lin e, I nc.

E x n iB iT I.— Gua m se rv ice— 5-vessel fle et

Thr ee sai ling s a m on th (e ve ry 10 d ay s) as foll ow s: Average

turnaround

Itinerar y i n d a V»

1. W est co as t to Gua m an d re tu rn dir ect to w es t coas t-------------------------------- 40

2. W est co as t to K w aj al ei n, Gu am , Jap an an d re tu rn to w es t co ast --------------- 50

3. W est co as t to Hon olulu, Wake, Gu am , Ja pan, Gua m and re tu rn to w es t

co as t (inc lu de s P ort la nd ca ll ev er y 60 d a y s)---------------------------------------- 60

Note.—L os A ngele s ca ll to be m ad e ev er y 20 d ay s (o r as r eq u ir ed ).

Est im at ed r ev en u e: „ , . „ Projected

full year

Com mercia l fr eig ht outw ard ------------------------------------------------- $4, 533, 825

Com mercia l fr eig h t in te rm ed ia te :

Scr ap ______________________________________- 108, 000

G en er al _____________________________________ 611, 931

Com mercia l fr eig h t in w ard . 

Bu lk re ve nu e o u tw a rd :

Se ed _________________

Bulk asp h alt --------------

Cem en t----------------------

162,0 00 

13 ,87 2

288, (MX)

719, 931 

876, 015

463, 872

Hou seho ld goods v a n s:

O utw ard ---------------

In te rm edia te ______

In w ard ___________

161, 637 

9,89 7

326, 901

498, 435

Mail o u tw a rd : 

C iv ilia n— 

M i l i t a r y -

100, 386 

40, 986

141, 372

M ilitar y re ve nu e o u tw a rd :

Sp ac e________________

E xe m pt ______________

2, 579, 232 

250, 209

M ilitar y re ve nu e in te rm ed ia te .

M ilitar y re ve nu e in w ard --------

P ass en g ers :

O utw ard ________________

In te rm edia te ____________

In w ard __________________

2, 829, 441 

121,0 14 

47 7,6 18

O th er vo yage re ve nu e (H /L & Hdlg. $35,991.54, 

$1 6, 09 2.41 )___________________________________

19, 200 

1,60 0 

16 ,00 0 

W ak e Hdlg .

36, 801 

156, 252

T ota l est im at ed re ve nu e--------------------------------------------------854, 5 7 6

E st im at ed oper at in g ex pense s:

Vesse l oper at in g ex pe ns es ----------------------------------------------------- 5, 285, 796

Agency f ee s an d co mmiss ions-------- --------------------------------------- 29 0,65 5

P o rt ch ar ge s_______________________________________________ 841, 826

St ev ed or in g------------------------------------------------------------------------- 1> 494,

O th er ca rg o ex pe ns e------------------------------------------------------------- 58 5,3 74

ot her voyage ex pe ns e_______________________________________ 90, 000

Total es tim at ed op er at in g ex pe ns es ________________________ 9, 088, 434

D irec t pr of it------------------------------------------------------------------------------ 4, ‘66.14 2

D ep re ciat ion an d in te re st ----------------------------------------------------- 429,9 63

1, 33 6, 17 9

Ove rh ea d al lo ca tion--------------------------------------------------------------

N et loss b ef or e ta xes--------------------------------------------------------- 702 )
272 DOMESTIC OFFSHORE SHIPPING

Exh ibit II .—Guam service—j-vcssel fleet

Sailings every 12 days (voyages averaging 48 days) as follows:

Itin era ry

1. West coast to Guam and return direct to west coast.

2. West coast to Kwajalein, Guam, an d r eturn direct to west coast.

3. West coast to Honolulu, Wake, Guam, andre turn direct to west coast.

Note 1.—Sailing from Por tlan d every GO days.

Note 2.—Sailing from Los Angeles every 24 days.

Projected Estim ated revenu e: fu ll yea r Commercial freight outward____________________________ $4, 319, 178

Commercial freight inte rmediate________________________ 13, 905

Commercial freight inward_____________________________ 109,116

Bulk revenue ou tw ard:

Asphalt________________________________ $13, 872

Cement_________________________________ 273, GOO

------------ 287,472 Household goods v an s:

Outward_______________________________ 149, 067

Inw ard -------------------------------------------------- 255, 975

Mail outward:

Civilian________________________________ 95, 3G7

Military________________________________ 38, 937

Military revenue ou tw ard:

Space---------------------------------------------------- 2, 424, 279

Exempt________________________________ 237, 699

------------ 2, 6G1, 978 Military revenue inte rmediate__________________________ 11, 937

Military revenue inw ard________________________________ 353, 358

Pa sse ngers :

Outward------------------------------------------------ $5, 250

Inw ard _________________________________ 2, 625

_________ y 875

Other voyage revenue (Hdlg & H/L $34,139, Wake Hdlg 

$15,287--------------------------------------------------------------------- 148, 278

Total estim ate d rev enue____________________________ 8, 452, 443

Estimated operating expenses:

Vessel operating expenses______________________________ 4, 078, 518

Agency fees and commissions___________________________ 184, 854

Port charges__________________________________________ 289, 716

Stevedoring___________________________________________ 1,133, 523

ot he r cargo expense__________________________________ 1, 270. 263

Other voyage expense____________________________________ 75, 000

Total estim ated operatin g expense_____________________ 7,031,874

Direc t profi t__________________________________________ 1,42 0,56 9 Depreciation and intere st__________________________________ 323, 355

Total______________________________________________ 1, 097, 214

Ov erhead all ocati on _________________________________________ 1,176. 252

Net loss before tax es_______________________________ (79,038)
DOMESTIC OFFSHORE SHIPPING 273

Exhibit II I. —Water line operating reven ue and expense statem ent unsubsidized service, domestic leg 1or the period Jan. 1, 1959, through Dec. 31, 1959

T erm in ate d vo ya ge r es ul ts :

N u m b er of term in ati o n s___________________________

R ev enue......... . . . . . . . . . . . . . . . . . . . . . . . . . - ........................

Expense __________________________________________

G ro ss p ro fi t o r (loss) from vessel oper at io ns----------

O th er s hip pin g o per at io ns :

In co m e............. ................... .........................- ..........................

Expense .....................................................................................

Gro ss pro fi t or floss) from sh ip pin g oper at io ns

be fore o ver hea d an d dep re cia ti on............................

O ve rh ea d:

A d m in is tr ati v e a nd ge ne ra l ex pe ns e......................... ..

Le ss: A ge nc y fees, co m m ission s an d br oker ag e_____

A d v e rti sin g .. .. ...................... ............. . ........... ................... .

Tax es , o th er th a n F ed era l............................... .................

Gro ss pro fit or floss) from sh ip pin g oper at io ns

befo re dep re cia ti on.......................................................

D ep re ci at io n:

A m ort iz at io n, le a s e h o ld .. .. ...............................................

Flo at in g eq u ip m en t, ve ss els___ ________ __________

O th er f lo at in g e q u ip m en t...................................................

O th er sh ip pin g p ro p ert y an d e q u ip m en t__________

G ro ss p ro fit or floss) befo re sh ip pi ng op era ti o n s. - 

O th er ded uctions from in co me: D oubtful no te s an d 

ac co unt s re ce iv ab le ............................................ ........... ..........

N e t pr of it o r floss) be fo re m or tg ag e in te re st an d 

F ed er al inc om e ta x ......................................................

T o ta l C om m er ci al

cargo

M il it ary

ca rgo

24

$7,7 98, 228 .41

7,5 21,70 5.3 6

$5,015 ,313. 74 

5,225,33 1.0 5

$2,78 2,9 14.67

2,296,374.3 1

276 ,52 3.0 5 (210,017.31) 486,540.36

30,01 3.3 3

131 ,543.50

30,013 .33 

131,543. 50

101,530.17 101,530.17

174,992. 88 (311,54 7.48) 486,540.36

1,0 71,62 6.7 6 

136,278. 86

612,970. 51 

77,951.51

458,656.25 

58,327 .35

935,34 7. 90

35,80 3. 62 

9,124.9 6

535 ,019.00

35,80 3.6 2 

5,219. 48

400,328.90

3,905. 48

980,27 6. 48 576, (M2.10 404,234. 38

(805,283. 60) (887,589. 58) 82.305.9 8

3.3 26.04 

138,283. 44

6,9 13.54 

54,085. 25

1,9 02.49

70,109. 70

3,954. 54

30,93 6. 76

1,423.55

68,173. 74

2,9 59.00

23,148.4 9

202. 608. 27 106,903. 49 95, 704. 78

(1,007,8 91.87 )

85.184. 81

(994,493. 07)

85,184 .81

(13,398.8 0)

(1,093,0 76.68 ) (1,079 ,677. 88) (13,398.8 0)
274 DOMESTIC OFFSHORE SHIPPING

Schedule I.—Vessel operating statement for the period Jan. 1, 1959, through

Dec. SI, 1960, unsubsidized service, domestic leg

O utb ound In te rm edia te In b o u n d T ota l

F re ig h t pay able to ns of ca rgo carr ie d ............ . 212,122 15,564 37,8 83 265,569

(600) O per at in g re ve nu e, te rm in ate d vo yages: 

C om m er ci al c a r g o .......... .................... $3,573 ,240.18 

98,670.14 

2,076, 931 .87 

295,48 0.61 

11,725.00 

106,090.93 

140,800.97

$268,626.88 

3, 543.0 0 

170 ,656.64 

11,538 .60 

400.00

$72 ,522.48 

419 ,25 2.1 7 

502 ,718.00

$3,914,389.54 

521,465.31 

2, 750,306. 51 

307,019. 21 

26,806.2 5 

117 ,160 .85 

161,080.74

M il it ary ho us eh ol d goo ds .......................

M il it ary ca rg o___________ __________

B ulk carg o .______________ __________

Pas se ng er ___ _ . ............................. 14,68 1.2 5 

11,06 9.9 2 

2,1 17.54

C om m er ci al an d m il it ary m ail .............

O th er vo yage re ven ue. _______ _____ 18,162 .23

T ota l op er at in g r e v e n u e .. .................. 6,302,939. 70 472 ,927.35 1,0 22,36 1.3 6 7,798,2 28.41

(700) O pe ra ting e xp en se, te rm in ate d vo yage s:

Ve sse l e xp en se:

01 W ag es ......................................................................

08 P ay ro ll ta xes.........................................................

09 C o n tr ib u ti o n s___________________________

10 Sub sisten ce , dom est ic _____ ______________

14 Sub sisten ce , fo reign..... ......................................

15 Stores, su pp lie s, an d eq u ip m en t, do m es tic.

24 Stor es , su pp lie s, an d e q u ip m en t, forei gn . .

25 M ai nte nan ce e x p e n se ................... ...................

35 F uel o il ___ . . ______ ________________ ____

40 R ep ai rs , dom est ic ________________________

49 R ep ai rs , fo reig n.......................__.....................

55 In su ra nce , hull an d m a c h in e r y .. ............. ..

57 In su ra nce , P . & I ___ ___________ _____ _

59 In su ra nce , o th e r________________ ____ _

60 C h art er h ir e _______ _______________ _____

64 O th er ves sel e x p e n se .........................................

T o ta l vessel e x p e n se ..............................................

P o rt e xp en se:

65 A ge nc y fees a nd co m mission s ......................

70 W ha rfag e an d doc kag e___________ _______

79 P o rt ch ar ges ___________________ _______ _

T o ta l________________________________ _____

Cargo ex pe ns e:

80 Ste ved oring_________ ____ _______________

89 O th er c arg o ex pe nse ...........................................

T o ta l...........................................................................

Bro ke rage :

90 F re ig h t____________________________ _____

92 Pas se nger _______________________________

T o ta l................................................. ..........................

O th er vo ya ge exp en se:

99 O th er vo ya ge e xpen se __________ ______ _

T ota l vo ya ge e xp en se ____________ _____ _

T o ta l ves sel oper at in g e xp en se ..........

D ir ec t pr of it fro m vessel op er at io ns.

1,560,487.0 0 

59,649.39 

100,5 43.38 

134,472.10 

6, 587.44 

163,444.67 

5,229.0 4 

70,893.37 

.539,390.09 

185 ,467.15 

15,998.17 

257,996. 28 

226,169.31 

5,2.59.23 

851 ,225 .88 

56,709 .52

4,2 39,52 2.0 2

191,898.52

32,1 68.1 7

190,115.64

414 ,182.33

1,3 09, 720 .33 

1,494,57 1.2 7

2,8 04,29 1.6 0

17,799 .80

285.94

18.(18.’ 74

45,623.6 7 

3,2 82,18 3.3 4

7,5 21,70 5.3 6

276 ,523.05
DOMESTIC OFFSHORE SHIPPING 275

Exhibit IV.—Waterline operating revenue and expense statement, unsubsidised

service, domestic leg, for the period Jan. 1, i960, through June 30, 1960

T erm in ate d vo ya ge r es ults:

N u m b er of te rm in a ti o n s .. ____ ____________________

R ev enue____ _____ ____ ______ ______________ ____ -

E xp en se ___________ _____ _________________________

G ro ss p ro fi t or (los s) from vesse l oper at io ns.............

O th er s hip pin g o per at io ns :

In co m e___________________________________________

E xpense __________________________________________

G ro ss pro fi t or (loss) fro m sh ip pin g oper at io ns 

be fore o ve rh ea d an d dep re cia ti on____ _________

O ver he ad :

A d m in is tr ati v e an d g en er al e xp en se ___________

Le ss: Age nc y fees , co m m ission s an d br oker ag e.

A dver ti si ng............................

Tax es , oth er th a n Fed er al .

G ro ss pro fi t or (loss) fro m sh ip pin g oper at io ns

before dep re cia ti on........................................................

D ep re ci at io n:

A m ort iz at io n, le as eh ol d......................................................

F lo at in g e q u ip m en t, ve ssels............................................. .

O th er f lo at in g e q u ip m e n t. .................................................

O th er s hip pin g p ro p ert y an d e q u ip m en t......................

N e t pr of it or Goss) be fo re m or tg ag e in te re st an d 

F ed er al inc om e ta x _________ ____ __________

T ota l C om m er ci al

cargo

M il it ary

ca rgo

12

$3,9 04, 711 .51

3,8 35,05 9.9 1

$2,540 ,99 1.9 2

2,7 10,85 6.2 3

$1,363,719.59

1,124,203 .68

09,651 .60 (169,864.31) 239,515.91

2,6 57. 13 

62,1 79. 43

2,6 57.13 

62,179. 43

59,522 .30 59,522 .30

10,1 29.30 (229,386.61) 239,515.91

486 ,481.88 

34,5 64.8 1

285 ,078.3 8 

20,25 4.9 8

201 ,403 .50 

14,3 09.8 3

451 ,917.07 

11,973.61

264 ,823.40 

11,973.61 

2,5 25.95

187,093.67

4,3 10.50 1,78 4.55

468,201.18 279 ,322.96 188,878.22

(458,07 1.88) (508,70 9.57) 50,6 37.6 9

1,222. 42

90,310 .55

3,8 90.20

23,2 79.5 1

716.34 

51,115.7 7 

2,279.6 6 

13,641 .79

506.08 

39,194 .78 

1,610.54

9,6 37. 72

118,702.68 67,753. 56 50.949 .12

(576,77 4.56) (576,463.13) (311.43)
276 DOMESTIC OFFSHORE SHIPPING

Sched ule I. — Vessel operating statement for the period Jan. 1, 1960, through

June 30, 1960, unsubsidised service, domestic leg

O utb ound In te rm edia te In b o u n d T o ta l

F re ig h t pa yable to ns of ca rgo carr ie d .................... 107,590 5,618 23,2 10 136,418

(600) O per at in g rev en ue, te rm in ate d vo ya ge s:

C om m er ci al ca rg o .. .......... ................. .. $1,8 49,2 93.2 8 $100 ,601.20 $68.494.81 $2,018 ,389 . 29

M il it ary ho us eh ol d go od s....................... 40.9 48.7 5 891.00 188, 587.45 230 ,427.20

M il it ary ca rg o___ ____ _______ ______ 943,791. 72 38,4 31.91 358,950.26 1,3 41,17 3.8 9

B ulk ca rg o_________________ ______ 173,67 5.50 0 0 173,675. 50

Pas se nger ________ ________ ___ . . 3,850. 00 0 4,9 75. 00 8,8 25.00

Com m er ci al an d m il it ary m ail ............. 46,156.69 0 5,2 98.26 51,45 4.9 5

O th er v oy ag e re v en u e_____ _______ 71,525.51 8.2 06.46 1.033.71 80,76 5.6 8

T ota l oper at in g r ev en u e___________ 3,1 29, 241 .45 148,1 30.57 627,3 39. 49 3.904,711.5 1

(700) O per at in g exp en se , te rm in ate d vo yage s:

Ve sse l e xp en se:

01 W ag es __________ _________ __________ _________________________________

08 P ayro ll t axes.............. ..................... .....................................................................

09 C o n tr ib u ti o n s______ ______________________________________ ____________

10 Sub si st en ce , dom est ic ....................................................... ............................................

14 Sub si st en ce , fo re ig n .. ........ ....... ...................................................................................

15 St or es , su pp lies a nd eq u ip m en t, dom est ic _______________ ____ __________

24 M ai nte nan ce exp en se , fo reign......... ............................................................. ............... ..

25 M ai nte nan ce ex pe ns e.....................................................................................................

35 F uel o il .____ _____________________ ________ ____ ______ _______ ______ _

40 R ep ai rs , dom est ic ___________________ ________ _______ _____ ____________

49 R ep ai rs , fo reig n_____ ____ _______ _______ ______ ______ _______ ________

55 In su ra nce , hu ll a nd m ach in ery ...................................................................................

57 In su ra nce , P . & I __________________ _____ ______ ____________ __________

59 In su ra nce , o th er_____________________ ____________ _____________________

60 C h art er hir e................................................................................................................ ..

64 O th er vessel ex pen se _________ _____________ ___________ ________________

888 ,455.09

48,789 .43 

51,8 70.6 0 

79,660 .45 

2,291.13 

82,175. 77 

187.25 

34, 586. 42

258.976.95

114.620.95

11,719.25

114,001.93 

126,614.58 

3,130.31 

298 ,788.25 

28,424.84

T o ta l ve ssel expe ns e.

P o rt ex pe ns e:

65 A ge nc y fees a nd co mmission s.

70 W ha rfa ge an d do ck ag e......... ..

79 P o rt ch ar ge s.................................

Cargo e xp en se:

80 Ste vedori ng____ _________________________ _________ ____________ _______

89 O th er carg o e xpen se __________________________ ____ ________ ___________

Bro ke ra ge :

90 F re ig h t________________________________________________________________

93 P a s s e n g e r ... ._____ _____________ ____________ __________ ______ ________

O th er

99

99

vo ya ge e xp en se:

O th er vo ya ge e xpe ns e..................... ............................................ ..................................

T o ta l vo ya ge e xp en se ..................... . ................................ ............. ...........................

T o ta l vessel o per at in g exp en se ____ ___________________________________

D ir ec t pro fi t from vessel oper at io ns___________________________________

2,174,2 93.20

103 ,822.93

15,302.62

101 ,391.35

220. 516.90

665 ,198.81 

740,342.14

1,4 05, 540 .95

9,0 64.67 

183.75

9,248.4 2 

25,460 .44

1,660,766 .71 

3,835,05 9.9 1 

69,65 1.6 0
E x h ib it V.— Unsubsidized service, domestic leg, annual tonnage to G uam (based on voyage terminations')

C om m er ci al g en er al M il it ary h ou se hol d 

goods

M il it ary c arg o C om m er ci al b u lk C om m er ci al a n d m il it ary m ail T o ta l

2,000

pounds

R ev enue

to ns

2,000

p ounds

R ev enue

to ns

2,000

pounds

R ev en ue

to ns

2,000

p ounds

R ev enue

to ns

2,000

pounds

R ev enue

to ns

2,000

pounds

R ev enue

to ns

1956 .............................................. 57,8 48 82,2 90 84,8 66 132,983 1,590 1,590 770 770 145.074 217, 633

19 57 .--........................ - ............... 54^945 76^ 431 154 140 47,855 95.6 96 30,325 27,1 73 705 705 133. 984 200,145

1958........................................ ....... 53,1 10 74,051 244 244 41, 966 85,0 13 2,794 2,776 818 818 98,932 162,902

1959___________ ____________ 68.8 18 96,5 00 387 387 44,005 93, 818 35, 754 32,205 888 888 149,852 223, 798

1960 0 4 y ea r) .............................. 33,521 49,3 00 154 154 16,831 40, 298 22,2 60 19,968 365 365 73,131 110,085

E x h ib it VI.— Vessel characteristics— U nsubsidized service

V es se l D ate o f const ru cti on G ro ss

to nnag e

D ea dw ei ght B al e cu bi c 

ca pac it y

G ra in cu bi c 

ca p acit y

Spe ed Ree fer

capacit y

D ry ca rgo 

ca pac it y

L iq u id

ca p acit y

A la sk a B ea r. .................................... J u ly 1944___________________ 7,604 10,702 455, 947 526,797 16.0 (>) 455,947 (’)

C an a d a B e a r .............. M ar ch 1945________________ 7,601 10,753 453,210 523, 740 16.0 (' ) 453, 210 (’)

G uam Bea r J u n e 1944.......... ........................ 8,197 10,937 524, 406 561,853 14.8 (' ) 524,406 (’)

H aw ai i Bea r ___ F eb ru ary 1945........................... 7,628 10,658 455,947 526.797 17.0 (') 455,947 (’)In d ia Bea r S ep te m ber 1944_______ ____ 8,197 11, 149 524,585 562,052 15.0 (' ) 524, 585 (’)

Pa ci fic B ea r........................................ F eb ru ary 1944........ . ............. .. 8,157 11,268 530,529 570,992 14.5 (' ) 530,529 (’)

* N o ree fe r cap acit y . 1 N o l iq u id ca pac it y.

DOMESTIC OFFSHORE SHIPPIN G

PC

- I

- I
278 DOMESTIC OFFSHORE SHIPPING

Exhibit V II.—Increased costs in vessel operations

C O M P A R I S O N O F V E S S E L O P E R A T I N O C O S T S

1957

p e r

d ie m

1960

p e r

d ie m

P e rc e n t

in cre ase

o r

(d ecre ase )

P e rc e n t 

in cre ase o r 

(d ecre ase )

to to ta l

in cre ase

W ages:

S tra ig h t tim e ..................................................................................

O v e r tim e ............................ ......................................................... ..

F r in g e ______________ _________________________________

S u b s is te n c e ______________________________________________

S to re s a n d s u p p li e s ____ _____ ____________________________

R e p a irs a n d m a in te n a n c e ................................................ ...............

F u e l oil (p er se a-d ay ) 1

.....................................................................

I n s u r a n c e ................................................................................................

V ess el e x p e n se ........................................................................................

S u b to ta l................................. .....................................................

P o r t e x p a n s e .........................................................................................

T o ta l..................................................... ........................................

P e r d ie m p e r p o rt- d a y ______ _______________________ _____

$743

277

158

112

84

161

8.56

265

26

$877

335

263

114

124

223

707

314

69

18 .03 

20 .94 

66. 46 

1.79 

47. 62 

38. 51 

117 .41) 

18 .49 

26 5.38

38 .9 5 

16.86 

30 .5 3 

.5 8 

11 .63 

18 .02 

(43. 31) 

14. 24 

12 .50

2,6 82

289

3, 026

414

12 .83 

43 25

10 0.00

2,97 1 3, 440 15 .79 .........................

143 119 ( 1 6 .7 8 ) .........................

1

 A v era g e co st p e r p o rt- d a y n o t in clu d e d .

C O M P A R IS O N O F L O N G S H O R E W A G E -H O U R R A T E S , P A C I F I C W E S T C O A S T P O R T S

S u b s e q u e n t to J u n e 15, 1957 S u b s e q u e n t to J u n e 13, 1960

P e rc e n t

S tra ig h t in cre ase

tim e

ra te s

F rin g e T o ta l

S tra ig h t

ti m e

ra te s

F rin g e T o ta l

L o n g s h o re m e n ............................. ...... $2. 53 $0. 49 $3. 02 $2 .8 2 $0. 62*4 $3. 44’^ 14. 07

W in c h -li ft tru c k o p e ra to r............. 2.6 8 . 49 3. 17 2. 97 . 6 2 ^ 3. 59’^ 13. 41

G a n g bo ss.............................................. 2.7 3 .4 9 3.2 2 3.0 2 • 62 J3 3. 64 13. 20

W a lk in g b o s s __________________ 3.2 9 .4 9 3.7 8 3.8 6 . 56 4 42 16 93

C l e r k ....................................................... 2.6 8 .4 9 3.1 7 3.0 3 J'S . 62V£ 3. 66 15 46

C le rk s u p e rv is o r........................... 2.9 5 .4 9 3.4 4 3. 44 .62W 3 .96 Hi 15 .26

S u p e rca rg o ....... .................................... 3. 21 .4 9 3 .7 0 ^ 3.7 2 . 6 2 ^ 4 .34V§ 17 .27

C a r p e n te r ........... .................................. 2.6 8 . 1 6 ^ 2.8 4} ^ 3.0 0 .2 8 " 3.2 8 15 .29

C a rp e n te r fo re m en ........................... 3.1 8 . 1 8 ^ 3 .3 6 ^ 3.5 0 .2 9 3. 79 12 .63

Senator Bartlett. It is the conclusion of the committee to hear one 

more witness, Mr. Lykes.

Mr. Mark Sciileeer (counsel for Mr. Lykes). He was under the 

impression that he would be heard this afternoon, and will not be 

back until then.

Senator Bartlett. It was stated tha t Mr. Ross would be the last 

witness. However, we cannot continue this afternoon because of the 

situation on the floor of the Senate.

At this time the committee will stand in recess until 10 o’clock tomorrow.

(Whereupon, at 12:50 p.m., the subcommittee was adjourned, to 

reconvene at 10 a.m., Tuesday, March 14,1961.)
DOMESTIC OFFSH ORE SH IPP ING

TUESD AY, M A R CH 14, 19 61

U.S. Senate,

Committee on I nterstate and F oreign Commerce, 

Subcommittee on Merchant Marine and Fish eries,

Washington, D.G.

The subcommittee was called to order, pursuant to adjournment, 

at 10:15 a.m. in room 5110, New Senate Office Building, Hon. Clair 

Engle, presiding.

Senator E ngle. The Subcommittee on Merchant Marine and Fisheries will be in order. We will proceed this morning until a quarter 

past 11, or approximately tha t time, when the chairman of the full 

committee will arrive for the purpose of considering some nominations.

Our hearings continue this morning on the domestic offshore shipping. Our first witness is Vice Adm. Fra nk M. McCarthy, president 

of the Bull Lines.

Admiral, we will be very glad to hear you a t this time.

You may go righ t ahead. Do you have a prepared statement?

STATEMENT OF ADM. F. M. McCARTHY, PRESIDENT OF A. H. BULL 

STEAMSHIP CO.

Mr. McCarthy. I have, Mr. Chairman.

I am F. M. McCarthy, president of the A. H. Bull Steamship Co., 

the principal carrier in the Puerto Rico trade. Bull’s association with 

transportation to and from Puerto Rico has been over a 60-year 

period. It has likewise been our chief interest. During that period 

we have been part of the transition from sail to steam. We acted as 

banker, warehouseman, developer, and promoter of trade between 

the mainland and Puerto Rico. We have aided in the development 

of the island in the past, and have every intention of continuing to 

do so in the future.

Serving Puerto Rico as we have for more than a half century, let 

us assure you tha t there is no intention of harming the economy of 

Puerto Rico. Such a policy would be extremely harmful to us. Our 

basic general cargo services are exclusively Puerto Rican. We have 

no other trade—therefore the best interests of our company dictate 

a continued policy of cooperation and development. Significantly 

enough, while this has always been our policy for better than a half 

century, the first time tha t any freight rate adjustment needed to 

meet changing conditions, was challenged, was in docket 807.

279
280 DOMESTIC OFFSHORE SHIPPING

I mi gh t corre ct myself there, Mr. Ch airma n. Due to an inadve rte nt 

overs igh t, there was a previous frei gh t rat e case challen ged , docket 

500, which was befo re W orld W ar II.

The stea msh ip indu str y con trib ute s more th an $9 millio n annuall y 

to the isla nd's economy in the form of direct wages to ter mina l employees on the i slan d. Th is does not incl ude ad ministrativ e and office 

personnel, nor does it include expenditures in Pu erto Rico fo r any 

othe r services.

If I may digress a moment, sir, from my prepared sta tem ent, I 

wou ld like to po int out th at this as well does no t include wages pa id 

to crews on ships. On the B ull L ine, natives of P ue rto Rico com prise 

abo ut 70 perce nt of o ur crews. We o perat e six C- 2 ship s in the trad e 

in Pu erto Rico, and d ur ing 1960 th e wages pa id to crews a mounted to 

$2,098,462. Th is also was a benefit to the economy of Pu er to Rico, 

an d I am qui te certain th at to some of the same degree, other lines 

servin g Pu erto Rico likewise have a conside rable numb er of native 

Pu er to Ricans in th eir crew.

Wages in the ind ustry are amo ng the hig hest on the island. I hav e 

prep ared for the committee in this resp ect a tab ulation of the hourly 

wage pa tte rn fo r a num ber of years. They will be fou nd in the two 

statem ent s attach ed to th e wr itten statem ent.

The same da ta was prepared fo r stateside labor. I might add th at 

when the dock lab or in Pu erto R ico han dles certa in uni tized freigh t, 

the wages a re aut om atical ly increased to the same scale p aid in No rth 

Atla nt ic ports.

Ou r losses in the trad e have reache d sta gg ering pro portio ns. Th e 

prob lem confronting all o f th e lines is how th ey can continue to absorb 

such losses.

It has been contended here t hat the solu tion to this problem is ope ratin g and con stru ctio n subsidies. We are not a subsidized ca rrier in 

any trad e; however, we a re not taki ng a position one way or the o the r 

with resp ect to the sub sidy pro posals ad van ced by the Comm onwealth. 

I f th e Congress sh ould, in its judgme nt, see fit to cha nge ex isting laws 

wi th resp ect to su bsidies, we can readily ad ap t ourselv es to the changes, 

bu t we are not at all satisfied th at subsidies w ill produc e wh at every ­

one seems t o expect.

Tr ad ition ally, and wi thin the fra me wo rk of the Me rch ant Ma rine 

Act, 1936, subsidies are designed to establish a pa rity with low-cost 

foreig n-flag com petition. I t is im po rta nt, the ref ore, to examine the 

possible effect of such com petition in the pro tec ted trades, as well as 

th e effect o f subsid y on the present carri ers in these trades.

Th ere is no doubt th at the cost of con struction and opera tio n of 

Am erican sh ips is more expensive t ha n foreig n-flag vessels, b ut th at in 

its elf is no g ua rantee th at foreign-flag lines will provide service a t less 

th an prev ailin g rat es, no r will the y devo te th eir resources. In times 

of war or bette r business elsewhere, they are likely to serve t he most 

pro fita ble routes. The existing coastwise law, in addit ion to accom ­

plish ing its inte nde d purpose, also has h ad the effect o f prom oti ng intens e com petition among the Am eric an-flag lines who opera te thereunder .

Much of the C aribbean area, exclusive o f Pu erto Rico, is serv ed by 

for eig n-flag lines. We have prepared an exhib it fo r this he aring of 

the rates on some 60 or 70 commodities, which rep res ent a generous 

cross section of traffic to the entire area.

(E xh ibits follow :)
O U T W A R D H A T B C O M P A R I S O N

FOR»

TARIFF OTffORITIES 

ADDITIONAL CHARGES 

EXPLANATION OF ABBREVIATION AND FORMULA

SEE APPENDIX»

--------5 -

B

C

6

Z

COMMODITIES

A g ric u lt u ra l Im plem en ts

A sP h a lt, Roa d

B a rr e ls , Wood, S apty 13 *6 "(EACH) 

B a tte r ie s , V et 

Bea n g f p r ie d . In ba gs

B is c u its , in c a rto n s o r o ra te s 

board VA11 

Bri ck , F ir e 

B url ap

C an d le s, Common/

Ca nn ed an d B o tt le d Goods 

(F o^odst uff s) V

C arp ets

C am , R a il ro a d an d Ao o.

China wa re 

c ig a r e tt e s

C off ee , In bag s 

Co nf ou nd , B o ile r 

C o n fe c ti o n e ry 

Cordage

Co m, In ba gs 

C ro ck ery 

Dr’Bg s, N .0 .8 .

D ru s i, M et al (e ach )

Dry* Goa ds

E e c t r i o a l A pp., E q u ip . * M e ti s. 

Enaiotiw are, N.O.S.

F e e d s tu ff s . In ba gs 

F e r t i l i s e r , in ba gs 

FiSih, D ri e d , P lo k le d o r B elt ed 

F l o »ur, W he at, In ba gs 

F u rn itu re 

G la nsw are , C 

G re n se. L u b ric a ti n g 

G ro c e rie s , N .0 .8 . \/

Hardware

Ha6 e, P elt

in si ectl cld es

ir o n A S te e l, B ars R e in fo rc in g 

N a ll s , Common z

P la te s , Ir o n o r S te e l 

R a ils , Ir o n o r S te e l 

S h e e ts , Ir o n o r S te e l , C o rr. o r P la in 

S tr u c tu r a l, Iro n o r s t e e l .* *

Ka leo n in e ,5 5

Lltlo leum - .5 5

Lu mbe r,R ou gh ,Y ellow Pl ne -P Ae 1000 BPT

DOMINICAN H A V A N C U B A

PUERTO RICO REPUBLIC HAITI

c u f t 100#

R. H.

c u f t

TT D.

c u f t 100# c u f t 100# c u f t 100# 100#

$.6 5 $1.5 3 $1.0 0 $1.7 8 $ .7 7 $1.5 5 $ .6 5 $2.6 5 .3 5

.7 8 .8 0 1 .0 0 1 .3 5 .2 2

$2U * .3 0 .5 7 1.1 5 $3.3 0 $.6 2*

.6 9 .1 .7 0 1.2 0 2.1 6 .5 6 1 .1 2 2 .* 5 .*1

. .9 5 l.* 0 1 .8 0 1 .6 0 .1 6

.3 6 .66 i a I

.6 0 1 .2 0 3.7 5 .3 3

1 .2 5 1.7 8 2 .1 5 1.7 5 .1 1

♦80 1^08 1 .5 0 1.2 5 .2 3

.9 * .87 i;5 5 2 .0 0 3 .0 0 .1 9

.5 2 1.2 9 .68 1. 21 .9 0 1 .8 0 2 .2 0 .2 1

.* 9 1 .2 5 .89 1.5 9 1 .0 0 (3 )2 .0 0 1.8 5 .2 0

.5 9 1.5 5 1.0 0 1.7 8 1.0 7 2 .1 5 1.1 5 3 .0 0 .1 8

.3 9 .9 * .76 1.3 5 1 .0 0 2 .0 0 .5 3 2 .0 5 .2 9

.5 5 l.* 3 1.2 0 2.1 6 1.0 7 2 .1 5 .7 5 .* *

•58 l.* 3 1.0 0 1.7 8 1 .3 0 2 .6 0 1.1 5 .26

1.1 * 1.7 8 l.* 7 2 .9 5 3.5 0 .1 3

•66 1.6 1 1.2 0 2.1 6 1.0 0 2 .0 0 2 .7 0 .1 7

.* 5 1 .1 * 1.0 0 1.7 8 1.0 7 2 .1 5 .9 5 2 .2 0 .1 7 .6 6 1.6 1 .87 1.5 5 .9 0 1 .8 0 2 .5 0 .1 7

.9 0 l . * l 1 .1 3 l.* 0 .1 8

.* 9 1.0 0 1.7 8 1.0 7 2 .1 5 .7 5 .* *

.7 7 1 .9 2 1.2 0 2.1 6 l.* 7 2 .9 5 1 .2 0 3.* 5 .1 3

$1 .* 3 $3 .3 0 .57 1.1 5 $3.3 0 $.6 2*

.5 * .87 1. 55 l.* 7 2 .9 5 .6 5 .1 9

.6 9 1 .7 0 1.2 0 2.1 6 l.* 7 2 .9 5 l.* 0 3 .6 0 •22

.5 5 l-* 3 .8 7 1.5 5 1 .0 0 2 .0 0 .* 7

.8 0 1. 00 * 1 .5 0 1.2 5 .1 7

1 .3 0 :8 2.< 5

.8 5

1.0 2

1.0 8

1*15

1 .0 0

.9 5

• f 3 1 .2 9 .8 7 1.5 5 -75 1 .5 0 .5 0 .1 3

•*9 1 .2 5 .79 l . * l .9 0 1 .8 0 1.7 5

.5 5 l .* 3 .87 1.5 5 .9 0 1 .8 0 1.2 5

•*9 1 .2 5 .8 9 1.5 9 1 .0 0 2 .0 0 1.1 5 3 .0 0

.5 9 l .* 8 1 .2 0 2 .1 6 l.* 7 2 .9 5 1 .8 0 * .7 0

.5 5 l .* 3 1 .2 0 2 .1 6 - 1 .3 0 2 .6 0 .6 0 .1 6

.5 5 l .* 3 .7 9 l . * l / 1 .0 0 2 .0 0 2 .* 0

.8 2 1.3 * 1.3 3 l.* 5

1.3 3

1.3 3

1:8

l.* 5

o

00fM

rq

I

o

OS©I—

fMaaaronl

Machinery, Not X lo c tr lc sl

M a s h a s, S a fe ty 

O il, Lin se ed

L u b ri c a ti n g 

O li va 

S ala d

c io n s , in ba gs 

F la to e s . In ba gs 

p a Ik in g House P ro d u cts 

P a in t, D ry , Liqu Ad o r P a ste

.* 8

.6 5

.5 5

.6 6

.* 9

.6 6

.9 3

$

.9 3

1 .0 3

l .* 3

l .* 3

$30. 77

1 .5 3

1 .6 1 

l .* 3 

1 .2 5

1 .0 *

1 .0 *

1 .6 1

.8 3

.8 7

1 .0 0

1 .2 0

.8 7

1 .0 0

1 .0 0

1 .0 9

1.3 6

1.3 *

1.0 9

l.* 6

1.6 5

1.6 5

1.3 5

1.6 5

l.* 5

.1 5

: &

.* *

.1 7

.2 0

.1 7

.1 3

.2 9

.1 7

.2 9

.2 6

.2 9

.2 9

.9 8

.7 2 .7 5

1.5 5 1.0 0 2 .0 0 1.9 0 .2 2

1 . 7 8 1.0 0 2 .0 0 1.0 5 2.7 5 .1 1

►*8 $35. 00 $50. 00 $6.7 *

.9 8 .7 5 1 .5 0 2 .9 5 .2 3

2 .1 6 l.* 7 2 .9 5 .6 6 2 .7 0 .* 7

1.5 5 1.0 0 2 .0 0 1.8 0 * .7 0 .1 1

1.7 8 1.0 0 2 .0 0 l.* 0 .1 7

1 .7 8 .9 0 1 .8 0 1.9 0 .2 0

1.7 5 1.3 0 2 .6 0 1.1 5 3 .0 0 .2 0

1.5 9 1 .0 0 2 .0 0 2 .6 5 .1 7

1.3 * 2 .0 0 1.6 1 .2 1

1.3 * 1 .8 0 1.5 9 .1 7

1.9 9 1 .0 0 2 .0 0 2 .1 0 .1 7

1.7 5 1 .0 0 2 .0 0 1.9 0 .2 2

5

S a n t i a g o , c u b a

6

ARUE 

CUR AC

c u f t

LA OUAIRA

1A PTO. CABELLO

OA MARACAIBO

8

PUERTO SUCRE

9

TRINIDAD

B. W. I .

10

B. W. I . 

BARBADOS

11

LEEWARD IS . 

WINDWARD IS -

12

JAMAICA

B. W. I .

c u f t 1004

R. & H.

c u ft 100# 100?;- c u f t 100# c u ft 100?/ c u f t 100# c u f t 100# c u f t 100# c u f t 100#

$ .6 * $3 .0 1 .0 6 .185 $ .7 7 $1.5 5 $ .* 5 $ .9 0 $ .8 2 $1.6 5 $1.0 3 $2 .0 6 $1.1 8 $2.3 6 $1.3 1 $2.6 2 $ .8 5 $1.7 0

l.* 7 .0 6 .185 1.0 5 .85 1.1 5 1. 36 l.* 8 1 .8 2 1.1 5

.3 2 .0 6 .185 .4 7 $3.5 0 .5 2 $3.0 0 $* .25 $4 .8 0 $3.2 8

2.6 6 .0 6 .185 1 .1 5 2 .3 0 1.0 5 2.1 0 1.2 0 2 .4 0 l.* 3 2.8 6 1.6 8 3.3 6 1.8 7 3.7 * 1 .0 0 2.0 0

1.20 7 .0 5 .153 1.0 0 .8 0 1.1 0 1. 31 l.* 2 1.6 * l.* 5

3.81 .0 5 .1 53 .5 5 .* 7 .6 2 .6 2 .6 6 •91 .5 5

1. 93 .0 6 .185 .7 5 1.5 0 .* 2 .85 .8 0 1.6 0 1.0 8 2. 16 1.2 4 2 .* 8 1.4 3 2 .8 6 2.* 0

l.» 3 .0 6 .1 85 1.0 0 .8 0 1.1 0 1. 24 1.3 2 1.8 2 l.* 0

1591 .0 6 .1 85 .8 5 1 .7 0 .7 5 1.5 0 .9 0 1.8 0 l.* 2 2.8 * 1.6 1 3.2 2 1.8 7 3.7 * 1 .0 0 2.0 0

2. 26 .0 6 .185 I.0 7 2 .1 5 .9 7 1.9 5 1.1 2 2 .2 5 1.0 8 1.2 * l.* 3 1 .0 0 2 .0 0

1. 80 7 .0 5 .153 1.0 7 2 .1 5 .9 7 1.9 5 1. 12 2.2 5 1.0 3 2.0 6 1.2 6 2.5 2 1.5 0 3.0 0 .6 7 1 .3 *

1.0 7 2. 71 .0 6 .185 1.8 2 3.6 5 1.7 2 3.4 5 1.8 7 3.7 5 l.* 2 2.8 * 1.6 1 3.2 2 1.8 7 3.7 * 1.3 0 2 .6 0

.5* 2. 06 .0 6 .1 85 .7 5 1 .5 0 .6 5 1 .3 0 .8 0 1.6 0 .7 8 1.5 6 .8 6 1.7 2 1.1 6 2 .3 2 .8 0 1 .6 0

.7 6 .0 6 .185 1 .1 5 2 .3 0 1.0 5 2 .1 0 1.2 0 2 .* 0 .8 3 -93 1.1 5 1 .3 0 2 .6 0

1.0 7 .0 6 .1 85 .6 2 1 .1 0 2 .2 0 1.2 5 2.5 0 1.5 8 1.0 0 2.3 2 1.1 5

3.36 .0 5 .1 53 1.5 0 1.3 0 1.6 0 l.* 9 1.6 3 2 ,1 8 2 .6 0

2. 67 .0 6 .135 1.0 7 2 .1 5 .9 7 1.9 5 1.1 2 2 .2 5 2.0 6 2 .* 2 3.1 2 1.0 0 2 .0 0

.9 * 2. 26 .0 5 .1 53 1.0 7 2 .1 5 .9 7 1.9 5 1.1 2 2.2 5 1. 42 2.8 4 1.6 1 3.2 2 1.8 7 3.7 * 1.0 0 2 .0 0

2. 5* .0 6 .1 85 1.0 7 2 .1 5 .9 7 1.9 5 1.1 2 2.2 5 3.9 1 *.6 7 5 .2 0 1.0 0 2 .0 0

1. 42 .0 5 .1 53 1.1 5 .9 5 1.2 5 .7 5 .9 0 1.6 0 .8 5

.7 6 .0 6 .1 85 1.0 7 2 .1 5 .9 7 1.9 5 1.1 2 2.2 5 .83 .9 3 1.1 5 1 .0 0 2 .0 0

1.2 1 3. 50 .0 7 .217 1.8 2 3.6 5 1.7 2 3.4 5 1.8 7 3.7 5 1. 58 3.1 6 1.8 6 3.7 2 2.3 2 *.6 * 1.8 0 3 .6 0

$3. 21 .0 6 .185 .4 7 $3 .5 0 •52 $3 .0 0 $*.2 5 $*.8 0 $3.2 5

.7 8 .0 7 .2 17 l.* 2 2 .8 5 1.3 2 2.6 5 1.4 7 2.9 5 1. 38 1.6 1 1.8 1 .9 7 1.9 *

1.2 7 3.21 .0 6 .1 85 1.8 2 3.6 5 1 .7 2 3.* 5 1.8 7 3.7 5 1. 42 2.8 * 1.6 1 3.2 2 1.8 7 3.7 * 1.8 0 3.6 0

.51 .0 6 .185 .6 7 1.1 5 .5 7 1.3 5 .7 2 l.* 5 .83 .9 3 1.1 5 1.0 0 2.0 0

1.26 * .0 5 .1 53 1.1 5 .9 5 1.2 5 .75 .9 0 1.6 0 .7 5

1.33 .0 5 .1 53 .8 5 .6 5 .9 5 .74 .9 5 1.3 7 1.1 0

2. *8 .0 5 .1 53 .7 5 1 .5 0 .6 5 1.3 0 .8 0 1.6 0 .89 1.7 8 1.0 0 2 .0 0 1.2 * 2 .* 8 1.6 5

,90 2 .0 5 .1 53 I.0 5 .8 5 1.1 5 .8 5 .8 7 1.0 2 .87

.6 0 .0 6 .1 85 .7 5 1 .5 0 .5 0 1.0 0 .8 0 1.6 0 .83 .9 3 1.1 5 .7 2 1.* *

1. 36 .0 62 .1 86 .6 5 1 .3 0 .5 5 1 .1 0 .7 0 l.* 0 .83 .9 3 1.1 5 .6 5 1.3 0

.0 6 .185 1 .7 0 1.5 0 1 .8 0 .83 1. 66 •93 1.8 6 1.1 5 2 .3 0 1.0 0 2 .0 0

1.8 0* .0 5 .153 1.0 7 2 .1 5 .9 7 1.9 5 1.1 2 2 .2 5 1. 43 2.8 6 1.6 8 3.3 6 1.8 7 3.7 * 1 .3 0 2 .6 0

1.0 7 2.7T. .0 6 .1 85 1.8 2 3 .6 5 1 .7 2 3.* 5 1.8 7 3 .7 5 1.42 2.8 * 1 .6 l 3.2 2 1.8 7 3.7 * 1 .0 0 2 .0 0

.71 .0 7 .217 1.8 2 3.6 5 1.7 2 3.* 5 1.8 7 3.7 5 1. 43 1.6 8 1.8 7 1 .5 0 3 .0 0

2.3 6* -o j .217 .5 5 1 .1 0 .* 5 .9 0 .6 0 1 .2 0 .87 1. 7* 1.0 3 2.0 6 1.2 1 2 .* 2 1 .0 0 2 .0 0

1.19 .0 6 .185 I.0 5 .8 5 1.1 5 1. ** 1.5 7 2 .0 3 1 .2 0

1.52 .0 6 .1 85 1.1 0 .9 0 1 .2 0 1. ** 1.5 7 2 .0 3 1.1 5

1.4* .0 6 .1 85 1.0 5 .8 5 1 .1 5 1. ** 1.5 7 2 .0 3 1.2 5

l . g l .0 6 .1 85 1 .1 0 .9 0 1 .2 0 1. 2* 1.3 2 1.9 5 1.2 5

1.4* .0 6 .1 85 1.0 5 .8 5 1 .1 5 1. 2* 1.3 2 2 .0 3 1 .2 0

1.49 .0 6 .1 85 .5 7 1.1 5 .* 7 .9 5 .6 2 1 .2 5 .7* l.* 8 .8 1 1.6 2 1.1 2 2 .2 * .6 5 1 .3 0

1.82 .0 6 .1 85 .8 5 1 .7 0 .7 5 1 .5 0 .9 0 1 .8 0 2. 11 2.* 2 2.7 6 .8 5 1.7 0

2. 46 .0 6 .185 .9 7 1 .9 5 .8 7 1.7 5 1.0 2 2 .0 5 .74 l.* 8 .81 1.6 2 1.1 3 2.2 6 1.0 0 2 .0 0

$* *. 00 $6 . 25 $*2 .0 0 $35.0 0 $*7 .0 0 $35. 00 $*1 .75 $5 5. 00 $*0.0 0

s.tri .0 5 .153 .8 5 1.7 0 .7 5 1 .5 0 .9 0 1 .8 0 3. 49 * .1 3 * .5 0 .7 2

2.61 .0 6 .1 85 .9 7 1 .9 5 .8 7 1.7 5 1.0 2 2 .0 5 1. 13 2.2 6 1.3 0 2.6 0 l.* 5 2 .9 0 1 .0 0 2 .0 0

1.0 7 2.71 .0 6 .1 85 .9 5 1 .9 0 .8 5 1.7 0 1 .0 0 2 .0 0 1.02 2. 0* 1.1 6 2.3 2 1.3 8 2 .7 6 .7 2

1.22 .0 6 .185 1.0 5 .8 5 1 .1 5

1. 66 1.8 6 2.3 1 1 .0 0 2 .0 0

1. 32 .0 6 .1 85 .8 5 1 .7 0 .7 5 .9 0 1 .8 0 1. 66 1.8 6 2 .3 1 1.8 0

1.75 .0 6 .1 85 1.1 5 2 .3 0 1.0 5 2 .1 0 1.2 0 2 .* 0 1. 86 2.1 1 2.6 7 1.5 0 3.0 0

1.J 5 .0 6 .185 1.1 5 2 .3 0 1.0 5 2 .1 0 1 .2 0 2 .4 0 1. 86 2.1 1 2.6 7 1.8 0 3.6 0

1.67 7 .0 5 .1 53 1.7 0 1 .5 0 1 .8 0 l.* 9 1.6 3 2 .1 0 l.* 5

1.45 7 .0 5 .1 53 1 .5 0 1 .3 0 1 .6 0 1. 2* 1.3 2 1.7 3 1.3 0

2. 15 1 .0 5 .1 53 l.* 5 1 .2 5 1 .5 5

1. 62 2.1 1 2.6 7 1 .6 5

1.82 .0 6 .1 85 .8 5 1 .7 0 .7 5 1 .5 0 .9 0 1 .8 0 1. 28 2.5 6 l.* 9 2 .9 8 1.6 9 3 .3 8 .8 5 1 .7 0

PAQB 1

COMMODITIES

_ 0 U _

T W_A R _ P 5. A T_

K c _ 0 M P A R_I S 0 N _

PCR» SEE AP raron^

TARIF F AUTHOR IT U S A

AD DIT IONA L CHARGES Q

EXPLANATION OF ABBREVIA TIO N AND FORMULA C

PUERTO RI CO

ouft 100#

DOMINICAN

REPUBLIC

ou ft 100# euft

H I T i l A,C DB A

HAITI H A V R. H. ft D.

100# ouft 100# ouft 100#

I A N T I I • 0,C U B A

R le H •

eu ft 100# e u ft’ 100#

6

ARUBA

CURACAO

o u f t 1 0 0 #

LA OUAIRA

PTO. CABELLO

MARACAIBO

eu ft 1 W

8 9 10 11 12

TRINIDAD B. V. I . LEEWARD IS . JAMAICA

PUERTO SUCRE B. V. I . BARBADOS WINDWARD IS . B. W. I .

euft 100# eu ft 100# eu ft 100# eu ft 100# eu ft 100#

71 70 9 0 - 6 2 (Face p. 28 0) No.

Paperi Bags $ .9$ $1 .90 $ .70 $ l. $ 0

Bui ld in g l.O J $ .87 1.55- .90 1.8 0

Ne ws print, in R oll s .78 1.90 1. 50

Pri nting .9$ 1.90 .90 1. 80

Wrapping .8* 1.9 0 .57 1.15

Po ta sh , Ch lor ide o f $ .77 1. 92 1. 20 2.16 1. 00 2.0 0

Muriate o f. In beg s .65 1.00 l. $ 7 2.9 5

Sulph ate o f. In bags .65 1.00 1. 00 2.0 0

Su lphate o f Msg.,In bags .65 1.0 0 1.78 l. $ 7 2.9 5

R efr ig erato rs, Mash. .55 l.$ 3 1.0 0 1.78 1.0 7 2.1 5

R lc s, in bags .95 1.0 8 .98

S a lt , In bags 1. 03 .8 9 1.59 1.5 0

Sh oe s, Leather .55 1.2 0 2.1 6 1.0 7 2.1 5

Sho oks , Ba rrel or Box 1. 25 1.0 $ 2.6 0

Soap, sh ip s and fl ak es 1. 03 1.7 8 1.00 2.0 0

Soap, lau ndr y .8 0 1.29 1. 15

Soda, Ash .67 1.0 8 1. 12

Soda, S il ic a te o f 1.0 3 1.2 0 .75 1. 50

T il e , Floor end N ell 1.3 6 1.0 0 1.7 8 1.00 2.0 0

Tir es cad Tubs s,/A u to 3.0 9 6.08 1.0 0 2.0 0

$1 .2 0

1.1 0

.6 0

Voh lo le e, Auto,

Trucks

Fassangar

Na oto, Co tto n, Nylon,

Rayon, Wool

Nir o, Bra ss an t Copper

.32

.38

.<8

.52

.55

.55

1.1 0

1.1 0

.$ $

.$ $

.69

i.$ 2

1.7 0 l. fO

2. 00 .65 1. 30

8.1 6 1.3 0 2.6 0

$1 .$5

2.0 0

1. 20

l.$ 5

1. 70

3. $5

1. 30

1. 30

1.3 0

3.8 0

1. 33

1. 25

1. 50

2.0 5

2.0 5

1.8 5

1. 25

1.8 0

2.6 5

2.0 0

2.3 0

$ .13

.13

$ .65

.75

1. 15

1. 15

.*7

1. 07

.55

.97

1. 07

$1 9.27 EACH

25 .6 9 EACH

$19.2 7 EACH

19 .87 EACH

.22

.22

1. 1$

2. 17

.06

.06

.1 8 5

.18 5

I.0 7

.68

.6 8

.60

1. 15

$1 .30

1. 50

1. 00

1. 65

l.$ 0

2.3 0

1. 50

1. 00

1. 30

2. 15

1. 10

1.95

2. 15

1.05

1. 50

2. 15

5. 20

1.36

1.36

2. 30

.55

.65

1. 05

1. 05

.37

.87

.97

.97

.57

.57

.50

1. 05

$1 .1 0

U 30

.80

1. 25

1. 20

2.1 0

.65

2.1 0

1.3 0

.80

1. 10

1.95

.90

1.75

1.95

.75

1.30

1.95

5. 00

1.15

1. 15

2.1 0

%

1. 20

1. 20

1.12

.6 0

1.12

1.12

1.12

.73

.73

.65

1. 20

$i.$o

1.60

1.10

1.75

1.50

2.$0

, : 8

1.60

.52

1.1 0

l.$ 0

2.7 5

1. 20

2.2 5

2.2 5

1. 15

1.6 0

2.2 5

5.3 0

l.$ 6

l.$ 6

$1 .$ 2

l. $ 2

l. $ 2

.79

l.$ 3

$1 .$1

2. 86

1.66

2. 26

1.66

2. 8$

2.8$

1.58

1.05

1.06

$1.61

1.6 1

1.61

.91

.6$

1.86

1.66

19

.31

16

28

0$

1. 68

.73

2.$ 0

.5* 1.08

.5$ 1.0 8

2.1$

1. 30 2.60

• Tonporery Rata o f 75# par 100 lb s . w ill ex pire April 2 , 1961

/ Temporary Rata o f $5# pa r eu . f t . or 88# par 100 lb s . w ill ex pir e March 31 , 1961

3 Temporary Rata o f 75# par eu . f t . or $1.5 0 par 100 lb a . w ill ex pir e Apr il 2, 1961

APPENDIX A

OUTWARD RATE CO MPA RI SO N

T A R IF F AU TN OM IT T

A.H. B ull Ste em hlp C o. , Outward F re ig ht Tar iff D o.l FMB - F N o.l

fe lt e d S ta te s A tl antia ft ft ulf - Sa nt o Doalnge Con ference

Outward F reig h t T a r if f No . 16

3. Whited S ta te s A tl anti a ft ftulf - H a it i Conference

S o u t h b o u n d T a r i f f V e . 7

$• Havana Stea na hlp Co nferen ee, Southbound Freig ht T a rif f No .H -l$

Sa nt iago De Cuba Co nferen ee, Southbound Freight T a rif f No. S - l l

6, 7 ft S. Whited St at en A tl a n ti c ft S e lf - Te ne au ela ft Net herlands

A n ti ll e s Co nferen ee, Fre ig ht T a r if f No. Von .- 7

APPENDIX B

1.

ft.

9,1 0 ft

11.

IS .

ft Windward Is la nds ft Oulanas Conferen ee, Southbound

Fr eig ht T a r if f No. 8

N J . A tl anti c ft ft ulf Fo rts - Je na le a ( B . N . Z . ) Ste anahlp

Co nfe ren ee, Southbound Fre ig ht T a r if f No. J-6

1.86

2.61

1.82

3. 22 $1 .87

.95

3. 22

3. 22

1.82

1. 15

1.11

1.87

1.87

1.63

2. 11

1.86

1. 26

1. $2

2 . $8

l.$ 6

5.6 2

1. 87

.95

$2 .67 $

3. 75

2. 31

3.27

$. 55

3.

1

3

3.7$

3. 26

1. 75

1. 58

2.6 7

2.5 5

1.7 3

1.7 8

2.9 1

1.9 0

9.1 0

1.7*

.55

1. 00

2.5 0

.$5

1.3 0

1. 00

.77

$1 .65

1.55

1.55

1.20

2. 00

1. 10

1. 10

5. 00

.90

1. 10

.95

2.6 0

1. 70

2.0 0

1.2 0

.95

1. 65

2. 5$

5.5 0

.69 1. 38

.69 1.3 8

.92 1. 8$

.92 1. 8$

.55 1. 10

.55 1.1 0

1. 55

3.7 0 3.9 0 2.0 0

3.1 0 1. 75 3.5 0 1. 50 3.0 0

APPENDIX C

OOTVAND RA TE CO MP AR ISO N

A D D IT IO N A L ch arges

No addit io nal ch ar ge s, such as la nd in g, wh arfage ,

ar rl no (h an dl in g) li gh te rage, or ot he r po rt ch ar ge s, even

thou gh th ey ar e provide d fo r in th e Ru les and Reg ul at ions

o f th e T arif fs # er e refl ecte d In Rate Co nparlso n, ex ce pt

fo r Havana and Sa ntiag o, Cuba Re ception and Handling Charges.

OUTWARD RATE COMPARISON

EXPLANATION OF AB BR EV IATION S

R.R. ft D. Re ception , Handling and D el iv er y (Havana, Cube)

R.ft H. Rec eption and Handling (S an tiag o, Cuba)

Cuf t. Cubic Feet

10Q# One Hundred Founds

B F T Board Fee t

I . 0 .1 . Hot Otherwise Speo lfle d

Coa no dl tles 1

R ate s1

FONMULA

Rep resentative S ele cti o n o f ca rg oe s Having to a l l

Areas Analysed

Con tract Rates were used In Areas ob se rv in g th e u s e d

Co ntrast, Non-Contreot (T a rif f Rate

Lowest Rate was used In cate gorie s where esc ala te d

rate stru ct ur e based on ns aa ur en en t, va lu e or any

othe r rest ric te d fa cto r was used

ob se rv in g

t e ) Sys te n

Co nvers ion 1 When co nv ertin g rate s baaed on a we ight or ne as ur ens nt ton basi s (20 00 lb s. /$ O e u ft), to a oublo fo o t

or 100 pounds, a l l fr a cti o n s were dropped

DOMESTIC OFFSHORE SHIPPING 281

To go off my statement, Mr. Chairman, for a moment, because of 

the limited time involved prio r to these hearings I have not been 

able to have this statement reproduced. However, here is the original 

and one copy. Should the committee desire additional copies, we will 

be glad to have them prepared for you.

Senator Engle. This material, since it is not susceptible of being 

placed in the record, will be made a part of the file in this matter, 

but not a p art of the record, and that is the San Jua n Star of Thursday, March 9, 1961, and the other items.

Mr. McCarthy. Thank you, sir.

An examination of this will reveal that despite the fact tha t the 

area is serviced by foreign-flag or U.S. subsidized carriers, Puerto 

Rico enjoys a competitive or a lower level of rates, except to Venezuela where a major rate disturbance has developed. If those rates 

are any criteria of foreign-flag services or subsidized services, obviously they would not be beneficial to Puerto Rico.

At this point, Mr. Chairman, I would also like to make some comment on the effect of the rates. For example, if there was any freight 

disturbance or attempt to disturb the economy of P uerto Rico, probably the first place tha t it would affect would be in the matter of 

foodstuffs and the general commodities that are consumed by the people. I have only one copy of it here, which I will give to you, of a 

series of advertisements in the Puerto Rican press, specifically the 

San Juan Star, dated March 9, 1961, which is the closest one to these 

hearings that I could obtain.

T would like to call attention to the fact that in this advertisement 

on foodstuffs here is smoked ham, 45 cents, and there are some variations of this, half a shank, butt half, or the center steak; top quality 

fresh pork shoulders, 39 cents; all up and down the line; picnic hams, 

37 cents. There are likewise some sales advertised of consumer goods 

in the nature of dresses, bath towels, women’s wear, et cetera.

It would seem to us tha t this would belie the contention that the 

lines serving Puerto Rico are attempting—perhaps this is not the 

word—to strangulate the Puerto Rican economy.

Now, sir, if you would have a look at the exhibit of freig ht rates 

to the entire Caribbean, and for example look at groceries in the foodstuffs area, which is a ra ther wide commodity description embracing 

a great many items, the rate to Puerto Rico is either 49 cents a cubic 

foot or $1.25 a hundred, depending upon which is the greater. To 

the Dominican Republic the rate on the same commodity is 89 cents 

a cubic foot or $1.59 a hundred. And if you go clean across to the 12 

ports of the Caribbean which we have selected, you will find tha t 

Puerto Rico enjoys a lower rate.

May I also call attention to the rate on canned and bottled goods, 

foodstuffs, which embraces the next largest group of commodities 

under other than groceries, not otherwise specified.

The rate is 49 cents a cubic foot or $1.25 a hundred pounds to 

Puerto Rico; the Dominican Republic is 89 cents. And if we follow 

tha t clear across to the 12 ports we will see somewhat of a similar 

comparison.

Few, if any, of these areas enjoy the type of frequency of service 

enjoyed by Puerto Rico. The trade from the North Atlantic demands frequent sailings. Bull at present maintains a weekly sailing 

from Philadelphia and Baltimore and a twice weekly sendee from
282 DOMESTIC OFFSHORE SHIPPING

New York. A t the present time on all lines there are two weekly 

sailin gs fro m Ba ltimo re, one weekly sailing fro m Ph ila de lph ia, and 

five weekly sailin gs and one bim onthly sai lin g fro m New York. I 

doubt wh eth er there is a ny oth er are a th at enjoys such service.

No t only wou ld forei gn s hip s fail to meet t he re al prob lem, b ut su bsidy of the pres ent c arrie rs w ith out repeal of t he coastwise laws raises 

some problems.

Fi rs t, there is the problem of comp uting op erating subsidy in the 

absence of foreig n-flag com petition. I f th at question were satisfactoril y resolved, the n some analysis of the distr ibution of costs would 

be essential to a ny evalu ation of the effect o f a subsidy. For examp le, 

our cargo-handlin g costs—n ot s ubje ct to op erating subsidy and identic al wh eth er or no t for eig n ships are used —abs orb from 62 to 65 

perce nt of our reve nue dollar. Overhead, which also would not be 

affected by subsidy or foreig n opera tion, consumes abo ut 10 p erc ent 

of the revenue dollar. Th ere are other substan tia l items, such as fuel 

costs, po rt expense, et cete ra, which are the same wh eth er under sub ­

sidy or fo reign-fla g opera tion.

Ag ain , sir , if I may de pa rt from my prep ared statem ent, I would 

like to point out th at, while it would ap pe ar that the cost of hand lin g 

car go in the Pu erto R ica n tra de is higli, the fa ct o f t he matter is t hat 

it is high and there ar e reaso ns for it ove r a nd above wh at a steamship 

line is normally called upon to perfo rm . For example, the Pu erto 

Rican trad e is not indiv idu all y a volume tra de. W ha t I mean by 

th at is th at the ma jority of consignees in the Pu er to Rican tra de are 

no t lar ge volum e receivers. Th e lar ge volu me rece iver is in the 

minority.

I t is n ot unu sua l fo r ou r line to have 5,000 bills of la ding p er week 

on shipme nts moving to Pu er to Rico. A lar ge pe rce nta ge of them are 

min imu m bills of ladi ng. In othe r w ords, one or tw o packages whe re 

the cube or th e w eight of those package s does not come u p to the m ini ­

mum an d a min imu m is assessed.

On the l ar ge r volum e consignees, who are ad mi tte dly in the minority, the y will br ing into Pu er to Rico, fo r example, 10,000 sacks of 

feedstuffs, ani ma l feedstuff’s. Th ere may pe rhap s be 10 different 

typ es of feed in th at bill of ladi ng. We are req uir ed to firs t make an 

ass ort me nt of each and every type of feed t hat is in there. Then it is 

the custom in the tra de fo r th at receiver to adv ertise th at the cost of 

feed is 35 cents or 50 cents a bag less if you, as a consumer, will go to 

the dock and pick it up. His salesm en sell this ma ter ial and thev 

issue del ivery ord ers on us to th eir indiv idu al consignees, so th at 

people come down—consignees come down, the b uyer in this case, and 

he will h ave a d eliver y orde r fo r 2 sacks of b roile r mash, or an y o f th e 

othe r numb er of di fferen t typ es th at are in the re. We h ave to act as 

a wa reh ousem an; we have to keep an accou nting of th at, and then, 

aft er th at s hip me nt has been fully delivered or “ liq uid ate d,” as they 

ter m it, we are obliged to ren der him an acc ounting of ju st exa ctly 

wh at me rchand ise we delivered and ag ains t wh at delivery ord ers the 

del ive ry was made.

Obv iously in the han dling of cargo in th at fashio n you will run up 

ag ains t a trem end ous am ount of slackage because pe rhap s you may 

hav e m ade 50 or a hu nd red deliveries out o f th at to tal ship ment. Th is 

is likewise true and ju st as prevale nt wi th pac kingho use produc ts.
DOMESTIC OFFSHORE SHIPPIN G 283

Importers will bring in four, five, or six thousand cases of lard. The 

lard comes packed in tin cans, two to a case, sometimes just a can. We 

have to deliver those in the same fashion. So th at those are just a 

few of the things which make the Puerto Rican trade expensive insofar as handling costs are concerned.

Now, sir, if I may go back to my prepared statement.

With respect to insurance, crew wages, vessel construction costs, 

reflected in depreciation, and other subsidizable cost factors, any 

subsidy that has the effect of absorbing part of those costs obviously 

will be beneficial.

In order to aid the Congress in this investigation, we have made a 

study of our 1960 operation, on the assumption that both construction 

and operating subsidies were applicable to Pu erto Rico with the same 

number of ships, and under present freight rates in the trade the study 

showed t ha t such an operation would still not produce a profit. In 

our case, we estimate it would produce a loss of $439,106 annually, 

before any return on the capital invested. Additionally, the history 

of exceptionally poor showings of the carriers in the Puerto Rico trade 

makes it extremely doubtful that anyone would risk the capital necessary to build new ships.

All of the carriers in the Puerto Rico trade have been fully conscious of the need to retain freight rates at the lowest possible level 

consistent with service demands, and they have introduced technological advances as much as possible.

Since cargo-handling costs consume the largest percentage of the 

revenue dollar, Bull has engaged in a long-range program of containerization in order to reduce handling cost to a minimum. Because 

of the sensitive labor situation this has had to be introduced on a 

gradual basis to avoid sharp dislocations and labor disturbances. We 

learned our lesson in a long, costly strike which paralyzed the island 

for about 2 months, when the producers of sugar decided suddenly to 

move raw sugar in bulk instead of in bags, displacing stevedores with 

the bulk-loading facilities.

At tha t point, Mr. Chairman, I would also like to comment on the 

peculiarities of the labor situation in Puerto Rico. In the entire port 

of New York, for example, the longshore force consists of approximately 25,000 people. In Puerto Rico there are in excess of 10,000 

persons entered on the rolls in the longshore industry. Not all of 

those people earn what might even be termed a decent living because 

they do not get enough work. In the course of a year, on a tabulation 

tha t was just completed for other purposes, the number of persons who 

worked a minimum of 200 hours, and not exceeding 900 hours in one 

year, the total was approximately 5,200.

Puerto Rico being unfortunately plagued with the matter of unemployment, in dealing with the sensitivity of this labor and moving 

abruptly into automation, it is very easy to understand th at Fomento, 

for example, will spend an extraordinary amount of effort, and they 

feel successful, which they have every reason to feel, when they are 

able to promote a p lant to come to P uerto Rico to employ anywhere 

from 10 to 15 people in some cases, perhaps 50 people. But you 

realize how many plants would have to be established in P uerto Rico 

if, because of the introduction of automation or technological improvement, whatever we want to call it, just realize how many plants
284 DOMESTIC OFFSHORE SHIPPING

it wou ld ta ke to displace the 10,000 people th at ar e p res ently em ployed 

on the w aterfro nt.

We realize that tha t is a problem. We are working now with the 

unions in view of a new contract coming up, to try to find some 

solution, to get the casual worker out of the steamship industry. But 

we realize that after we get them out of our industry, what are they 

going to do if there isn’t any other work available ?

To go back to my prepared statement again : Gradual containerization was started by us in 1946, when commercial services were restored 

following World War IT. In 1954 Bull introduced a larg er van unit 

two and one-half times larger than the 1946 version. A short time 

later refrigerated units were introduced. In all, some 600 8-foot 

units and in excess of 400 15-foot units were placed in service by 1956 

along with the 17-foot refrigerator unit.

Labor problems in the United States delayed introduction of still 

larger units. Finally, in late 1959, labor and the New York Shipping 

Association agreed to arbitrate “automation.” Until those issues were 

resolved, Bull was unable to put, in service larger units of the 35-foot 

variety, and was even prohibited from adding any more units of the 

sizes then in service. With the labor issue being firmly resolved bv 

an arbitration award of November 16, 1960, further progression of 

automation was possible.

In December 1959, when the Statehood Line and the New York 

Shipping Association agreed to arbitrate the issue, the freeze, so 

called, on the introduction of any further automation, was resolved. 

We then introduced into the Puerto Rico trade 166 35-foot units, and 

we have plans for the introduction of still more.

At the same time a word of caution must be injected lest we expect 

automation to provide all the answers. It is the considered opinion 

in the industry that the capital expenditures required when added 

to the demand of labor to share in the fruits of increased productivity 

mav produce results far short of anticipation.

I reviewed generally the transcript of last week’s hearings, and I 

would like to comment on portions of the testimony which in our 

opinion is either erroneous or incomplete.

1. The Commonwealth has complained of high freight rates to 

Puerto Rico. I have shown above, in my exhibit which I discussed 

earlier, that rates to foreign areas in the Caribbean are generally 

higher than to Puerto Rico. It is also noteworthy th at rate increases 

to other noncontiguous areas since the war have exceeded ours—in 

some cases by as much as 80 percent. The general rate increases have 

been as follows:

May 10, 1948,10 to 12i/> percent.

In a statement introduced in the record by the Commonwealth 

there is a freight rate increase shown as being effective in 1946. 

Actually, what, that 1946 publication was is a gathering together of 

various surcharges, various charges that had been made when the 

War Shipping Administration was operating the services rathe r than 

the steamship lines. The net result was that when commercial services 

were restored it was necessary to bring out a composite tariff: tariff 

No. 3 came out in May 1946. It superseded tariff No. 1, which was 

published in January 1939.
DOMESTIC OFFSHORE SHIPPING 285

In the early portion of my statement I connected the relationship of 

docket 807 and docket 500. It was tariff No. 2, as I recall, th at was 

involved in docket 500, and it did not go into effect.

The next increase was on November 12, 1951, at which time the 

freight charges were adjusted on the basis of 10 cents per hundredweight on outward cargo, and only 3y2

 cents a hundredweight or 2 

cents a cubic foot on inward cargo. That increase amounted to approximately 15 percent overall.

At tha t point 1 think it might be significant to refer to the tables of 

wages which are attached to my statement, wherein you will note that 

in 1948 as a general proportion your wage rates in Puerto Rico and 

your wage rates in New York were comparatively low. You had 

tremendous increases in the period of those 3 years and since that time 

as well.

It is also necessary for us to call attention to the measure of the 

rate which was established on the northbound commodities. Those 

were the sensitive items; those were the so-called promotional rates 

established for the purpose of generating this industry in Puerto 

Rico as far as the steamship lines could do it. There is some furth er 

comment later on in my prepared statement. I don't want to take up 

too much of your time except to stress the point that here again we 

demonstrated tha t the carriers were fully cognizant of what was 

needed for Puerto Rico. Perhaps those rates could have been increased far more. If they were, there was no question it would have 

affected factories which were established in Puerto Rico.

There was no further freight rate increase until 1957, the carriers 

having absorbed all of the increased costs during that period—that 

was approximately 6 years—and were finally economically compelled 

on Ja nuary 10, 1957, to file increases amounting to 15 percent or 6 

cents per cubic foot, or 12 cents per hundredweight. Finally in 1958, 

the carriers were compelled to make a general further increase of 12 

percent. The total cumulated increases in this trade since World 

War II is slightly less than 05 percent.

2. The Commonwealth expressed the view th at freight rates have 

endangered its economy. To the contrary, the Bull Line has aided 

the establishment of industry in Puerto Rico, through the publication of rates designed to encourage the industrialization of the island. 

Many of those rates were noncompensatory years ago. Today those 

noncompensatory rates are at ruinous levels; others tha t were barely 

•compensatory fall far short of covering even handling costs today. 

For example, while refined sugar is not a promotional rate, none the 

less it is a rate tha t is very important to the economy of the island. 

The rate today produces the carriers’ revenues of approximately $13 

per gross ton. The actual cost of handling refined sugar exceeds the 

revenue because here again the methods and the demands of making 

•delivery of refined sugar are expensive. Shippers in Puerto Rico 

will forward to the ir brokers in the North Atlantic area shipments of 

anywhere from 10 to 50 thousand bags of sugar. Steamship lines are 

required to make delivery of that sugar in lots anywhere from 100 to 

500 bags. The average delivery is al>out 500 bags because tha t approximates a truckload.

To go back to my statement : Indeed, the promotional rates on inward industrial commodities were so low tha t not all the carriers
286 DOMESTIC OFFSHORE SHIPPING

were interested in the carriage of inbound cargo to North Atlantic 

ports. Even today other carriers either offer no service or are reluctant to provide full service northbound to the North A tlantic ports. 

Bull, however, has continued to provide the northbound service despite the inadequate rate level.

3. The Commonwealth has stated the “lower shipping costs have 

already been a factor in sh ifting most of Puerto Rico’s extensive lumber purchases from the United States to Canada.” The fact is th at 

the lumber rates of the principal Canadian carrier to Puerto Rico are 

10 percent higher than those from U.S. ports.

I would like to briefly recite the history of the Bull Line in handling lumber. Fo r a good many years Bull Line maintained a service from South Atlantic ports tha t originated large quantities of 

lumber destined to Puerto Rico. We maintained this service just 

as long as it was possible for us to do so. The level of rates was somewhat lower than it is today, but even on an increased level of rates 

we could not profitably sustain the service, and we were forced to 

abandon it.

4. It has also been stated tha t freight rates may have contributed 

to the heavy inroads made by European cars and trucks and some 

other manufactured goods. We do not share th at view. But import 

taxes levied by the Commonwealth itself have an important restrictive role in the movement of autos to Puerto Rico. The Commonwealth assesses an extremely high graduated excise tax on cars.

A car valued at more than $2,300 is assessed $660 plus 80 percent 

of the excess over $2,300. The ocean freight rates on automobiles are 

from $140 to $180 depending on size—less than half the Commonwealth’s excise tax. The tax has sharply reduced the movement of 

high-priced American cars.

Here again, if I may leave my prepared statement: While the 

rates on automobiles were adjusted upward in the last freight rate 

adjustment, they were immediately dropped back to the ir former level 

and today are on substantially the same level as they have been for 

a long number of years. Additionally, the type of car that moved to 

Puerto Rico years ago in quite some volume—Cadillacs, Buicks, 

Pontiacs, Oldsmobiles; in other words, the higher priced cars—today 

not too many of them move. I can’t recall our line moving a Cadillac 

to Puerto Rico in about 2 years. I do recall one about 2 years ago, 

but tha t was for a special purpose.

In prior years th at type of auto moved in considerable quantities— 

in other words, the larger car that I was just speaking of—and the 

small European car has largely taken its place.

As fo r other European imports, it would be logical that they should 

increase. The Commonwealth is promoting such imports as well as 

the establishment of European industry in Puerto Rico. A week or 

so ago I read an article in the Puerto Rican press to the effect th at 

Fomento—“Operaton Bootstrap”—was considering moving their 

European office from its present location to a more strategic one. 

The article further went on to state tha t activity in this European 

field would be increased, and in any event the ability of European 

goods to compete in U.S. markets is very well known to all of us. 

The essential base is lower wages as compared with our standards.
DOMESTIC OFFSHORE SHIPPING 287

Here it might be appropriate to comment tha t for a long number 

of years one of the basic volume moving commodities to Puerto Rico 

was iron and steel articles. Today very little iron and steel moves to 

Puerto Rico from the United States. It all moves from abroad.

5. It has been indicated by Commonwealth witnesses tha t a dire 

need for passenger services exists. I would like to point out that our 

experience operating a deluxe passenger liner service lead to near 

disaster. Alter some 2 years operating the SS Puerto Rico we were forced to withdraw and had to dispose of the ship fo r approximately 

one-half million dollars, a fraction of its initial cost. We found the 

passenger demand existed for a few short months in the winter season. 

Invariably at other times the crew outnumbered passengers—sometimes 3 to 1.

I realize the Commonwealth has grave problems confronting them. 

We have a similar one: we are caught between progress in Puerto 

Rico, which means increasing costs, and an inability to recover those 

costs from the rates. We will be faced in September of th is year with 

negotiating a new longshore labor contract in Puerto Rico. At the 

present time, we are negotiating a new contract with the Seamen’s 

Union. The constant increases in costs without corresponding increases in revenue are bound to result in deterioration of the kind of 

service Puerto Rico needs and demands.

We have noted tha t carriers in the other domestic trades have 

specific suggestions to improve th eir trades and services. These are 

suggestions peculiar and applicable to those trades.

Conditions in each of those trades are not the same. What is good 

for Alaska or for Guam or fo r Hawaii may not fit the uniqueness of 

Puerto Rico’s aspirations and economy.

The brief period afforded us in prep aring for these hearings has 

been insufficient to enable us to make the kind of study which would 

lead to a responsible recommendation. In the recent enacted vessel 

exchange legislation, which our company and Alcoa played a major 

part in formulating, we think we have found at least an interim 

solution.

I might add here th at there is another area in which the lines serving Puerto Rico could be aided considerably, and tha t is if the Commonwealth would undertake to clear up the differences between local 

laws and Federal laws.

Steamship lines operating in the Puerto Rico tra de have paid out 

millions of dollars in overtime suits, first trying to observe the local 

law in Puerto Rico, then later discovering through suits tha t were 

started by attorneys getting together a number of longshoremen, and 

other suits tha t raised serious question as to what was supervisory 

personnel. We went on the basis of the local law, which was to the 

effect, substantially, tha t any person who had the authority to hire 

and fire came under the category of an executive. That is a peculiar 

wav to interpre t it, but in a case which acted as precedent, the socalled major domo in the sugar industry, who did have the authority 

to hire and fire cane workers, was classed as an executive. On tha t 

precedent we went along. We found that we were in error.

To repeat, millions of dollars have been paid out by the steamship 

lines. There is a conflict there which could be cleared up, and we 

would most certainly welcome any suggestions or aid tha t could be 

given to the lines in tnat respect.
288 DOMESTIC OFFSHORE SHIPPIN G

To go back to my statement again: We pledge our complete cooperation to this committee and to Maritime on any investigation 

they deem fit to make with respect to the Puerto Rican trade.

Despite the heat tha t has generated over freig ht rates, I would 

like to take this opportunity to assure the Commonwealth that Bull 

has no desire whatsoever to disturb the economy by unwarranted rate 

demands. I feel safe in saying this is the attitude of all the lines.

Mr. Chairman, tha t completes my direct statement. I am very 

grateful for the opportunity of appearing before this committee.

(Appendixes to statement follow :)

Stevedore hourly wage schedule

P U E R T O R IC O

Eff ec tiv e Bas ic

hourl y

F u n d s T o ta l P er ce nt

Increa se

Ja n. 1, 1947 $0.90 $0.90

Jan . 1, 1948 _____________ ____________________ 1.00 1.00 11.1

Jan . L 1949 _____ ______ _____ _______________ 1.05 1.05 5.0

Jan . L 1950 ___ ______ _____ ____ _____________ 1.05 $0. 13 1. 18 12.4

Jan . L 1951..........................- .............. .........................- 1. 13 .13 1.26 6.8

Jan . L 1952 ................................................................... 1.23 . 15 1.38 9. 5

Jan . 1, 1953............ .......................................................... (*) (’) (’) («)

Jan . L 1954 ________ _________________________ 1.33 . 15 1.48 7. 2

Jan . 1’, 1955................ .......................................... ........... 1. 43 . 15 1.58 6. 8

Jan . li 1956_____ _____ ________ _______________ 1.53 .18 1.71 8. 2

Jan . L 1957 __________ __________ _______ _____ 1.63 .18 1.81 5.8

Jan . 1,1 958 __________ ____ _______ __________ 1.71 . 18 1.89 4 4

O ct . 1, 1958........................... ........... ........... ............. .. 1.81 .33 2.1 4 13.2

O ct . 1, 1959___________________________________ 1.91 .33 2.24 4.7

O ct . 1, 1960__________________________ ____ _ 2.01 .33 2.34 4.5

160.0

1

 N o inc re as e.

N O R T H A T L A N T IC P O R T S —N E W Y O R K

A ug . 21, 1947_________________________________ $1.75 $0.0 25 $1,7 75

A ug . 2L 1948_________________________________ 1.88 .09 5 1.975 11.3

Oct. 1, 1950_________________ _________________ 2.0 0 .1625 2.1625 9. 5

Oct. 1, 1951............. .................................___......... ....... 2.10 .1875 2.28 75 5.8

O ct. 1, 1952 .................... ......... ......... ......... ............... 2.27 . 1975 2. 4675 7.9

O ct . L 1953 _____ _______ ______ _______ _____ 2.35 .2225 2. 5725 4.3

O ct . 7', 1954 ______ __________ _______________ 2.42 .2925 2.7125 5.4

O ct . 1, 1955____________________________ ______ 2. 48 .2925 2.7725 2.2

Oct. 1, 1956 . _____ __________ ____ ___________ 2.66 42375 3.08375 11.2

O ct. l ’ 1957........................... . ........... ............... ............. 2. 73 .42375 3.15375 2.3

O ct . L 1958 _____________________ _________ 2.80 .4 6 3.2 6 3.4

O ct. L 1959_________________ ________ ________ 2.9 2 .653 3.573 9.6

O ct . 1, 1960 ........................... ........... . ......................... 2.97 . 66725 3.63725 1.8

O ct . 1, 1961........ . ........................ .................................. 3.0 2 .66725 3.68725 1.4

107.73

Senator Engle. Admiral McCarthy, this is a very fine statement.

Mr. Grinstein has some statements which he would like to submit 

to you for your answers for the record. Would that be all right?

Mr. McCarthy. Yes, indeed, sir.

Senator E ngle. I will ask only one question : I am always intrigued 

when somebody doesn’t want a subsidy. I understand that Alaska, 

Hawaii, and Puerto Rico, as governments, came in and asked for a 

subsidy. I understand that yesterday several shipping lines came 

in and, as does Bull, were opposed to subsidy. 1 nhappily, I couldn't 

be here. I was before the Committee on Education and Labor trying 

to continue the subsidy my people get for federally impacted school
DOMESTIC OFFSHORE SHIPPING 289

area s in Ca lifornia . T hat took the gr ea ter par t of the mo rning, and 

1 am n ot sure I rescued it.

Bu t most people do like to get ahold of a s ubsid y. Why d on’t you 

want a subsidy ? You say it isn’t necessary . Do you have a ny othe r 

reasons ?

Mr. McCarthy. Mr. Ch air man , le t’s look at it th is w ay: I do n’t 

know t hat I speak fo r all o f th e lines. I am only sp eakin g f or myself.

First of all, bei ng ra th er conscie ntio us abo ut the whole thing, I 

don’t th in k th at it is corre ct to acc ept som ething fo r no thing unless 

it is g oin g to do you some good. We have tak en a sit uatio n, a theoretical situatio n. 1 covered it somewhat in my testimo ny. We assumed 

th at to mo rrow mo rning we are going to be a subsidized line. We are 

no t only going to have a constru ction subsidy, b ut we are go ing to h ave 

an op erating su bsid y as well.

Th en you h ave to ask yo ur se lf : all r ig ht , wh at are you faced wi th ? 

To replace a vessel sim ila r to th e type th at we are op erating tod ay 

would ro ug hly cost about $11 millio n. I use th at figu re because 

Moo re-M cCormack have ju st d evelope d delivery of a numb er of vessels bu ilt un de r subsidy of ap prox im ately two of the ships th at we 

hav e in th at tra de. So Unc le Sam is going to, first of all, donate $5 

million on every ship—$5 million to $5,500,000, roughly, 50 to 52 pe rcen t subsidy—on ev ery ship t hat goes i nto th e tra de . W ha t is going to 

be gotten o ut of that?

Then the nex t question th at you have is, all righ t, th at is the constr uc tio n end of it.

Then you go to the op erating sub sidy. A good deal of the wages 

are g oin g to be pick ed up. Some of the i nsu ran ce will be subsidize d. 

But when you add it all up, yo u come u p on prese nt frei gh t rate s wi th 

a deficit of $139,000. It ha dn ’t cured the sit uatio n, and the con tri bu ­

tion th at has been mad e by th e ta xp ay ers is a very cons iderable amo unt 

of money.

Th at is our re aso nin g and o ur logic to o ur appro ach.

Se na tor E ngle. I susp ect th at any sh ipping line cou ld figu re ou t 

why it need ed a subsidy. You said th at you don’t need one because 

trad e req uir em ents don’t ju stify it. But you philosophica lly are 

opposed to the sub sidy principle and the Government in th is business, is t hat rig ht ?

Mr. McCarthy. No, sir, we are no t opposed to sub sidy, sir. My 

com ment was th at since the sub sidy will not pro duc e an ything —in 

othe r words the sub sidy would n’t help the sit ua tio n—the refore why 

ask the Fe de ral Gover nment to contr ibu te th at mu ch money fo r a 

zero acco mplish ment?

In our trad es we think, as I sta ted , th at the rec ent ly-ena cted ship 

exchan ge bill is a much more des irab le sit ua tio n. For example, if we 

go back to th e m at te r of ------

Se na tor E ngle. I like th at bill. I was th e au thor of it.

Mr. McCarthy. Yes, si r, I recall th at.

Fo r example, if we go back now to the construction sub sidy, and 

you have $5 millio n of money invested in each an d eve ry ship, Bu ll 

opera tes six C-2 ships in th at tra de . Tha t means an inv estme nt of 

$30 million . We can acco mplish the same purpo se much bette r by 

tr ad in g in old er vessels, un de r suitable vessels, and , fo r exa mple, a 

C- 4 ship which we hav e now pe nd ing before the Bo ard , we are attempting to acqu ire two C -4 vessels by the t rade -in o f a L ib erty sh ip.
290 DOMESTIC OFFSHORE SHIPPING

The swap as you know, Senator, will be practically ship for ship, 

and tha t is the way it works out.

For $1,200,000 in conversion costs we will have produced a ship 

that is just as good a ship as the one on which $11 million could have 

been spent in other directions.

In other words, there is more relief in your ship exchange bill than 

there is in the subsidy bill for this particular trade.

The conditions in the other trades are not the same. In other 

words, you have the case of Guam, where they travel tremendous distances with no return cargo.

You have Hawaii, where the Matson Line has a vessel roughly every 

day and a half. You have two-way trade there.

You have the third case of Alaska, with rather hazardous navigating conditions and other operational difficulties, including weather, 

and there is no substantial movement.

In Puerto Rico you have a fairly good movement in each direction. 

The southbound movement exceeds the northbound considerably. So 

there is a need for everyone of them. Perhaps for Guam a subsidy is 

the answer.

Mr. Sevier stated it is not the answer for Matson. I am not quite 

positive of the position of Alaska subsidy lines.

Senator E ngle. They were against it.

Mr. McCarthy. They were against it as well.

As I say, in Puerto Rico, and perhaps this same line of thinking 

was Matson’s as well, you can accomplish more in other ways with less 

expenditure of money because the Puerto Rican trade simply cannot, afford to have a $5 million ship in that trade. It won’t support 

it. It just will not support it.

Today, for example, the feeling is tha t the freight rates are too 

high. I doubt that there is a vessel in the Puerto Rican trade today, 

at least of the break bulk carriers, th at is on the books for much over 

$500,000.

Senator Engle. Have you read the statements submitted to this 

subcommittee by the Representative of the Puerto Rican government ?

Mr. McCarthy. I have, sir.

Senator Engle. You do not agree with it ?

Mr. McCarthy. I do not agree with some p arts of it. And the 

parts with which I disagree I have covered in this statement. Roughly 

there were five of them.

To go back to it, I don’t know whether they were the result of misinformation or what, but we wanted to get the record straight in 

tha t respect.

As to the general desires of Puerto Rico, we have no quarrel. We 

want to cooperate with them.

Senator Engle. As I understand it, their witness stated tha t the 

excess burden of rates for Puerto Rico was in excess of $10 million 

annually. Tha t is, if foreign ships could participate in that trade the 

rates would be $10 million less. As I listen to your statement-----

Mr. McCarthy. No, sir.

Senator Engle. You do not believe t hat to be true, and your exhibit has the purpose of proving tha t foreign trade ships to ports of 

equivalent distance actually charge rates tha t are higher than exists 

in Puerto Rico.
DOMESTIC OFFSHORE SHIPPING 291

Mr. McCarthy. Yes, sir , th at is the purpo se of th is exhib it, to 

dem onstrate th at o ut of the 12 po rts or cou ntries o r are as listed , th at 

Pu erto Rico enjoys a low er basis of rates than any of tho se points, 

with few exceptions, and practic ally all of the oth er po ints exc ept 

Pu erto Rico are served eit he r by foreign-flag lines or, in some cases, 

subsidized Am erican lines.

My con tention is t hat the level o f rates to Pu erto Rico t od ay is t he 

lowest in the entire Ca ribb ean .

Se na tor E ngle. W ha t about the density of traffic to Pu er to Rico ? 

Are we tal ki ng about eggs an d oran ges ?

Mr. McCarthy. I d id n’t hea r that .

Se na tor E ngle. W ha t about the density of traffic with reference 

to these rates. In th is ex hib it th at you have presen ted to the subcommittee you com par e rates, bu t you do n’t com pare volum e.

Mr. McCarthy. That is quite tru e, sir. I hav e made no attempt 

to com pare volume because while I am aw are of wh at the volu me of 

traffic is to Pu er to Rico, I mu st confess com plete ign orance of the 

volum e of traffic mo vin g to any of these o th er points.

My ex hib it was no t intended to show an ything bu t wh at th e rat es 

to these vari ous points are today.

Se na tor E ngle. I t seems to me th at th at would have a very heavy 

be ari ng on the rates. That is, if you get hea vy volume you can re ­

duce rate s, can’t yo u ?

Mr. McCarthy. No t in all respe cts, sir.

In the P ue rto Rican tra de , fo r e xam ple, t he m ore volume you have, 

it h as no t ha d the effect of red ucing y ou r cost because, as I outlin ed 

earlier, t he dem and s of t he Pu er to Rico trad e are such th at you pe rform an aw ful lot of work fo r the consignee, fo r the shipp er, in acting as ware hou sem an an d deli very. An d th e more volu me you had of 

th at kind of traffic, th e m ore you r expense w ill be.

Se na tor E ngle. Wou ld you mak e more money wi th an 80-p ercent 

load t ha n y ou w ould w ith a 100-percent lo ad ?

Mr. McCarth y. I t all depe nds, sir, on wha t the com modity is.

For example, if y ou were talking bulk , ob viou sly a 100-percent load 

wou ld prod uce more t ha n an 80-perce nt load.

Vol ume has a very gr ea t effect up to a po int . F or example, if a 

vessel were sa iling with insufficient cargo to pa y he r expenses, ju st 

sim ply because of a lack of volume, that is one thi ng .

I f th ere is ample vo lume a vail able, and there is ample volume a va ilable in th e Pu er to Rican tra de —I have no figures wi th me at th is 

mom ent, bu t as I rec all all of th at was gone int o very ela borately in 

docket 807, an d in th at docket there are the utilizatio n tab les of all 

the lines in the tra de . Th e volume is in the Pu er to Rican trad e, l et ’s 

not den y that.

Se na tor E ngle. I f a subsidy is gran ted, who g ets the subsidy?

Mr. McCarthy. W ho gets it ?

Se na tor E ngle. Yes.

Mr. McCarthy. Tha t, sir, I d on’t know.

Se na tor E ngle. Presum ab ly it wou ld be reflected in reduce d rates, 

would it not? In othe r words if the Fe de ral Governm ent gave the 

subsidy whi ch is requ ested, it would n’t do Pue rto R ico any good u nless 

the y got lowe r rates, w ould it?
292 DOMESTIC OFFSHORE SHIPPING

Mr. McCarthy. We ll, sir, as I pointed ou t in my sta tem ent, if we 

were to become a subsidized line tom orro w mo rning, and we carried 

ide nti cally the same volume an d ide ntical ly the same volume as we 

carried in 1960, we would be out of pocket $439,000. Tha t is a fa r 

cry fro m being out of p ock et alm ost $2 m illion on ou r 1960 operation .

Se na tor E ngle. You ju st w ould n’t go bro ke as fast.

Mr. McCarthy. That is exa ctly the point, Mr. Ch air ma n. In 

oth er words tw’o thing s hav e to happen in the Pu erto Ric an tra de , in 

either di re ct io n: the rates hav e to come up even tho ug h you were to 

subsidize t he trad e to mak e i t bre ak even.

Se na tor E ngle. When you arriv ed at th at $435,000 figure, w’ere 

you pre supposing the subsidy con tem pla ted by this bill, or the subsidies elsew here in existence?

I will with draw the question because we don’t have a specific pr oposal. But d id you base it upo n the m aritime op era tions a t the pres ­

en t t ime?

Mr. McCarthy. Tha t is correct, sir.

Se na tor E ngle. W ha t it boils down to is th at instea d of losing $2 

millio n you w ould lose $435,000, but you couldn ’t effect a r ate increase 

because you wou ld still be in th e r ed ?

Mr. McCarthy. Tha t is r ight.

Se na tor E ngle. H ow long can you go on losing $2 million ?

Mr. McCarthy. We hav e asked ourselves th at question over and 

over a gai n. As a m atter o f f ac t i t is rea ching the do ub tfu l p oin t r ig ht 

now.

Thi s has been going on fo r years, Mr. C hairm an. I don’t th ink any 

of th e lines in Pu erto Rico have m ade m oney in the tra de fo r several 

yea rs. The y di dn ’t mak e any money in 1960; there was no money 

made in 1959; the re was a s ligh t profit mad e in 1958 which amo unte d 

to $200,000. In 1957 ou r losses w ere $997,000.

Se na tor E ngle. I will have to confess th at I am still puzzled. You 

are going $2 million in the red an nu ally; you are no t in fav or of a 

subsidy ; the g overnment of Pu er to Rico has adv oca ted a subsidy and 

claims th at th e rate stru ctur e or the tarif f fo r br inging goods in costs 

them $10 m illion more th an it sh ould, a nnually.

I notice in your sta tem ent y ou say t h at you are no t prep ared now, 

because of the pre ssu res in p re pa ring this sta tem ent, whi ch is an excellen t s tate ment, to mak e any respon sible recommendations.

Mr. McCarthy. T hat is rig ht , sir.

Se na tor E ngle. You are going to hav e t o do som ething pre tty soon, 

aren ’t you ?

Mr. McCarthy. Yes, we are. No que stio n in th e wor ld abo ut it. 

We a re going to have to do som eth ing p re tty soon. Pe rh ap s I di dn ’t 

mak e myself sufficiently clear. I said th at we are no t oppo sed to a 

subsidy. W ha t we feel is th at yo ur vessel exchange legisla tion will 

accomplish the purpose be tte r.

F or e xample, if we w ere called on tom orrow m orn ing to go out and 

to replace our fleet, an d to pro duce $30 million as ou r pa rt of a $60 

million -odd vessel replace me nt pro gra m, we don’t hav e the money, and 

we cou ldn ’t get it.

Now, the fre ig ht ra tes to P ue rto Rico will be reflected in the amoun t 

of capit al th at is in vested th ere . Maritim e h as found, as I recall, th at 

we wou ld be entitled to roug hly a 7i/2-percent retu rn on ou r capital.
DOMESTIC OFFSHORE SHIPPING 293

Seven and a h alf percent of $5 million per ship is an awfully, awfully 

lot more than 7^2 percent of $1,200,000 in a converted vessel.

Senator E ngle. Why don’t you use that ship conversion bill ?

Mr. McCarthy. We are using it. We have an application in right 

now for two C-4 vessels. We have nominated the two Liberty ships 

to be exchanged. We have selected the two C-4’s that we want. We 

also have an application in for title I I insurance on them. That is in 

motion right now.

We hope, if all goes well, that within roughly 6 months time we will 

have two of those ships in the Puerto Rican trade. When we get them 

settled down then we hope to go to two more for our other trades.

Senator Engle. And this is the alternative that you have in

mind-----

Mr. McCarthy. 

Senator Engle. 

Mr. McCarthy. 

Senator Engle.

Senator E ngle. 

Mr. McCarthy. 

Senator E ngle. 

Air. McCarthy. 

Senator E ngle. 

Mr. McCarthy. 

Senator Engle.

That is right.

To the subsidy program ?

Right.

And which you think over the long haul will erase 

your $2 million annual deficit and put you back in business?

Mr. McCarthy. In the black.

Th at is correct.

That is correct, absolutely correct.

Now the light has dawned.

I am sorry I didn’t make myself clear.

I appreciate your very fine statement, Admiral.

Thank you, sir.

The next witness is Mr. J. M. Lykes, Jr. , senior

vice president of the Lykes Bros. Steamship Co.

Mr. Lykes, we will be very glad to hear your statement.

STATEMENT 0E J. M. LYKES, JR., SENIOR VICE PRESIDENT, 

LYKES BROS. STEAM SHIP CO.

Mr. Lykes. Thank you, Mr. Chairman. I appreciate the opportunity of appearing before this committee.

My name is J. M. Lykes, Jr., I am senior vice president of the Lykes 

Bros. Steamship Co. I have been associated with Lykes’ operations 

since 1930, and our Caribbean services, which include our service to 

Puerto Rico, are under my particula r charge.

I am appearing before this committee in view of Lykes’ long interest in Puerto Rico, and while I do not feel it necessary to go into 

all the facets of its operation, I believe the facts related below might 

be of assistance to the committee in resolving the matter at hand. 

From its testimony, undoubtedly the Commonwealth feels tha t it has 

its problems; we know we have one—namely a cost/revenue squeeze. 

We think this investigation therefore is most timely. We were particularly impressed by the testimony given by Air. Stakem, and much 

will be gained by a careful analysis of the alternatives put forward 

by him. While we have no specific suggestions or recommendations at 

this time, we do, as stated, have real interest and would be prepared 

to testify later when the committee has particular legislation before 

it.

Lykes commenced its operation of service to the Latin American 

area in 1907. This service was broadened to include Puerto Rico in
294 DOMESTIC OFFSHORE SHIPPING

1920, and af te r 1928—except for wartim e interru pt ions beyond our 

con trol—Lykes f urnish ed reg ul ar weekly service fro m west g ul f po rts 

to the principa l Pu er to Rico ports, un til very recently. Due to the 

heavy losses in the Pu er to Rican tra de suffered by the com pan y in 

rec ent years, we were compelled to redu ce service to Pu er to Rico to 

a f or tn ig ht ly basis i n Ju ly 1960.

Ly kes’ losses in the Pu er to Rico phase o f its o peration fo r t he years 

1957 throug h 1960 w’ere sub stantial. As the comm ittee is well awa re, 

the details of our op erating res ults a re on file with the Fe de ral M aritime B oard.

Th e cost squeeze which h as been referre d to stems, of course, fro m 

the continuin g increase in cost fac tor s w ith ou t c orres ponding inc reas e 

in ou r revenues. Th e follow ing is a resume of major elem ents of 

Lykes ’ cost increases 1951 to I960.

Lon gsh ore wages in clu din g fri ng e benefits 1951 compared with 1960 

wer e:

1951 1960 Percent

increase

West gulf ________________________________-............................ $1.97 $3.39 72 Total per hour cost to employer (fringe benefits included), Puerto 

Rico ___ _________________________________________ 1.26 2.34 94

Ca rgo ha nd lin g costs con sisting principa lly of longshore wages 

absorbs between 45 and 50 pe rce nt of Lyk es’ revenue dollar.

Vessel op erating costs, 1951, as again st 1960 fo r ou r C-1B and C-2 

type vessels w er e:

Vessel operating costs per diem (excluding depreciation, overhead, and

fue l) :

1951______________________________________________________ $1,008

1960______________________________________________________ $1, 805

Perc ent increase____________________________________________ 80

Th e 1960 figure is appro xim ate , in th at all of our accounts were not 

com pleted to get an act ual figure. Th is vessel op erating cost absorbed, in ad dit ion to cargo ha nd lin g costs mentio ned, appro xim ate ly 

45 p erc ent of Lykes ’ reve nue dollar. As noted, they exclude fuel and 

ove rhead which are constan tly increa sing cost fac tors, as well as depreciat ion w hich in itse lf is equa lly i mp ortan t.

Th e committee has before it the his tor ica l record of gen eral rate 

increas es in the P ue rto Rico trade. Lyk es, as a m ember of t he Pu erto 

Rico Conference, has ha d the same experience in th is resp ect as the 

othe r carriers . We do believe it would be he lpful in the lig ht of 

Ly kes’ p ar tic ul ar cost increases, w hich we hav e ju st ou tlin ed, to place 

in th e record the rate increases correspondin g to the same pe rio d; 

nam ely 1951 to 1960. On November 12, 1951, there was a general 

increase of 10 cents per h undredwe igh t, o r 5 cents per cubic fo ot, which 

per cen tagewise a pprox im ate s 15 per cent at th e most. From t his base 

the cumu lative rate increases up un til the prese nt time were 28.8 

percen t. In th e lig ht of majo r elements of cost increases rang ing from 

72 to 94 percen t, show n above, it is evid ent th at reve nues hav e failed 

to ke ep pace w ith sh arply r isi ng cost fac tors.

In conclusion, we rep eat th at Lyk es has a lon g-range and deep 

interest in the Pu er to Rican trade. We sha ll follow the proceedings
DOMESTIC OFFSHORE SHIPPING 295

closely and feel confident tha t at a very early date the Federal Maritime Board together with your staff will formulate proposed legislation. At tha t time we shall look forward to testifying concerning 

the specific proposals therein suggested.

Thank you, Mr. Chairman.

Senator E ngle. Mr. Lykes, I observe from your statement that 

you are going broke on this trade, too.

Mr. Lykes. It has been very costly, sir.

Senator Engle. Tha t is the understatement of the day.

Do you agree with Admiral McCarthy that this ship exchange bill 

could provide the route to get back in the black ?

Mr. Lykes. I am not familiar with the bill, Mr. Chairman. As I 

understand it, it is a vessel exchange and it would permit us to continue without building new vessels for a time, which as I understand 

it, would prolong the question of new construction, which is most 

costly.

Senator E ngle. We very much appreciate your statement, Mr. 

Lykes.

Thank you very much.

Mr. Lykes. Thank you, sir.

Senator E ngle. This subcommittee will stand in recess for a hearing by the full committee on some nominations.

At this point we would like to insert in the record the statement of 

Mr. G. C. Halstead, vice president and director of Alcoa Steamship Co.

Statement of G. C. Halstead, Vice President and Director, Alcoa

Steamship Co., I nc.

Mr. Chairman, my name is G. C. Halstead. I am vice president and director 

of Alcoa Steam ship Co., Inc., whose prin cipa l office is at 17 Ba ttery Place, New 

York City. Alcoa has operated U.S.-flag vessels without subsidy before, during, 

and since World Wa r II, in both foreign and domestic trad es. Our fleet consists of 10 Cl -B vessels and thre e C2 vessels. Alcoa has a long histo ry of serving the Caribbean area , having st arted its service in 1923.

We welcome the opportunity to partic ipa te in this study concerning the noncontiguous domestic trades. We are hopeful th at a careful and a complete 

study of the problems confronting the car riers, as well as any confronting the 

shipping public, will result in a solution fa ir and equitable to all concerned.

Our comments are limited to the Pue rto Rico trade. We do not offer any 

service to the oth er domestic offshore are as which are p art of this overall study. 

Alcoa commenced its service to Puerto Rico from east gulf por ts in 1951 and 

from North Atlantic ports in 1952.

In our gulf service we offer a regular weekly service from Mobile and New 

Orleans to San Jua n, Ponce, and Mayaguez. Cargo offerings have warra nte d 

recent service from Gulfport, Pensacola, Pan ama City, and Baton Rouge. 

From the North Atlantic we mainta in reg ular weekly service from Baltimore 

and New York to San Juan, Ponce, a nd Mayaguez. Again, cargo offerings have 

recently wa rrante d service from Searsport, Portland, Philadelphia, Norfolk, 

Charleston Georgetown, Savannah Jacksonville, Miami, and Tampa.

As pa rt of our gulf and North Atlantic services we offer the only regu lar, 

scheduled service to the Virgin Islands.

Common c arrie r services to and from Pue rto Rico have recently been the subject of a comprehensive investigation in Atlantic rf Gulf-Puerto Rico General

Increases in Rates and Charges, Board docket 807. Alcoa has contributed a 

gre at deal of time, effort, and expense in connection with the preparatio n and 

submission of evidence in this docket. The record in docket 807 is readily ava ilable and should be carefully considered by this committee. This record shows 

that even with the lates t increases in rat es on Janu ary 9, 1957, and Janu ary 5, 

1958, Alcoa is operating at a loss on its regu larly scheduled southbound services
296 DOMESTIC OFFSHORE SHIPPING

from continental U.S. ports to Puerto Rico. The actual operating resu lts since 

the close of the record show th at losses are continuing.

At the time of our entry into the Pue rto Rico trade, route conditions were 

carefully studied by management. We accepted the fact th at the trad e was restricted to American-flag ships and that there was no subsidy in the trade. We 

knew the term inal facilities were adequate although, partic ula rly in Puerto 

Rico, not the best or most modern. We, of course, accepted the fact th at we 

would be subject to American-style labor conditions on our ships and on our 

piers. We knew there was free entry into and exit from this trad e, and th at the 

active competition, including competition from MSTS, would be present. We 

were aw are that this trade was subject to regulation by the Federal Maritime 

Board and that there was considerable precedent in its decisions indic ating tha t 

with norm al service patterns rat es would be approved which perm itted the opera ting companies as a whole to earn a reasonable profit. These were the rules 

of the game.

Alcoa immediately upon entering into the trade commenced investing money 

in improvements in term inal facilitie s in Pue rto Rico and in other ways at ­

tempted to reduce costs. We invested money in our own tra de development 

program supplementary to Operation Bootstrap. The resulting increase in 

revenues proved insufficient to absorb the continually rising costs. It became 

obvious th at rat e adjustm ents must be made, and accordingly new rates were 

put into effect by the conference. Hearings before the Federal Maritime Board 

commenced in 1957 and after 4 years of litigation the proceedings are still not 

concluded.

The car riers and the shipping public are now in a sta te of uncertainty. Carrie rs’ costs are increasing daily. They have already absorbed sub stan tial increases in longshore and crew wages and now face fresh labor negotiations in 

the immediate futu re. Losses are mounting, and carriers’ confidence in the 

trade is decreasing.

We subscribe to rate regulation by hearings before the proper auth ority. We 

do not subscribe to rat e regulation by pressure tactics, irresponsible attacks in 

the public press, and the like. The political pressure by the government of 

Pue rto Rico with little regard for the facts is unfai r to the car riers, leads only 

to worsening relations between them and the Commonwealth, and will res ult 

in deterio rating steam ship service. The car riers must, of economic necessity, 

defend themselves aga inst such att acks and aga inst the delaying tactics of the 

Commonwealth.

Much has been written and spoken concerning the unfair burden of steam ­

ship rat es on the economy of Pue rto Rico. This is an are a for most care ful 

consideration and we are hopeful th at the committee will not make any recommendations until a comprehensive study of the effect of rate increases on the 

ins ula r economy is completed.

The situation is paradoxical. The conventional barometers of economic health 

indicate that the economic development in Puerto Rico over the past 10 years 

has been amazing. From the data of the Bureau of Economic Statistics of the 

Puerto Rico Plan ning Board and Pue rto Rico Wa ter Resources Authority, selected business indicators for the 10 year s ending 1959 indica te: Commonwealth 

net income increased 92.3 percen t; net income from manufactu ring is up 197.6 

percen t; disposable personal income increased 83.6 percen t; imports increased 

129.2 pe rcen t; exports increased 146.6 perce nt; bank deposits increased 102.4 

perce nt: and electrical energy consumption, 283 percent. Even as recently as 

March 7, 1961, a notice of sale for the $40 million Commonwealth of Puerto 

Rico bonds indicates like glowing statistic s. During the past 10-year period 

stea mship rates have been increased approximately 29 percent.

How can it be that such a healthy economic situa tion exists in the face of the 

claim of burdensome steam ship rates? Why is it that the steamship companies 

are denied a profit when responsible Puerto Rican author itie s were quoted only 

last week in the New York Times justifying 12 to 40 percent profit on investment for new Puerto Rican manufacturin g industries? What, exactly, is the 

total disadvantag e suffered by Puerto Rican industry which profits from substa nti al tax benefits, special depreciation privileges, absence of custom duties, 

low wages, etc.? This entire problem of the alleged burden on the economy 

caused by steamship r ates required the most carefu l study.

If, af te r careful and detailed study, It is found that an undue burden in fac t 

exists, then and only then should forms of subsidy be considered. But if 

there is no such burden, a reasonably compensatory rate structur e should be 

permitted without subsidy.
DOMESTIC OFFSHORE SHIPPIN G 297

We have carefully studied Mr. Stakem’s testimony before this subcommittee 

ou March G, aud we noted his comments concerning construction and operating 

subsidy payments, similar to those now existing in the foreign trades. This 

form of subsidy produces essentially the same effect on costs as if foreign ships 

were allowed to participate in the trade. The Commonwealth wants to effect 

substantial reductions in existing freight rates in the Puerto Rico trade. Our 

studies indicate that such reductions cannot be obtained through construction and 

operating subsidy plans.

We have analyzed the results of our North Atlantic service to Puerto Rico 

for the year 1960. This service has resulted in a loss. We have estimated the 

results of this same service using foreign-flag operating costs. There are no 

profits obtainable under this estimate. In fact, there is still a sizable loss. 

This may seem strange to persons not familiar with the details of the expenses 

in the trade. But most costs are identical for both foreign and American ships. 

Thus, cargo handling expenses, port expenses, fuel, and overhead comprise 

about 77 percent of all expenses. The remaining 23 percent of total expenses, 

comprising principally vessel expenses including depreciation, is the only part 

that can be reduced by substituting foreign-flag costs. If, in fact, the foreignflag costs were half as expensive as the American-flag costs, total expenses 

would only be reduced approximately 11 percent.

Mr. Stakem’s other proposals are certainly unique and appear to be such 

tha t competitive drive will be stifled, which effect is normally not desirable, 

and is certainly no solution to the continuous upward spiral of rates due to costs.

In our study of the testimony to date before this subcommittee we have found 

instances of statements or statistics which do not accurately reflect the facts. 

For example, there has not lieen a 100-i»ercent increase in ocean rates to Puerto 

Rico since 1947-48. The cumulative increases were in the neighborhood of 65 

percent. It is interesting to note t hat according to the Bureau of Labor Statistics, this compares with an increase in the Consumer Price Index for public 

transportation for the continental United States of 131 percent since 1947. 

There was also a statement that passenger accommodations are saved principally 

for the shipper. This is not true. We are not attempting to pick apart the Commonwealth’s statement because we realize that the subcommittee will scrutinize 

all testimony and check all the facts.

Thank you for this opportunity to appear before the subcommittee. It is 

obvious tha t further hearings, for the presentation of detailed and technical 

information, will be required to resolve this difficult problem. Possibly the type 

of investigation contemplated by section 212(f) of the Merchant Marine Act, 

1936, would be appropriate.

The Alcoa Steamship Co. will be most happy to take part in such hearings and 

to contribute such facts as are required.

Senator E ngle. The subcommittee stands in recess.

(Whereupon, at 11:23 a.m., the subcommittee adjourned.)

(The following information was subsequently submitted for the 

reco rd:)

Interstate Commerce Commission,

Washington, D.C., March 14,1961.

Hon. Warren G. Magnuson,

Chairman, Committee on Interstate and Foreign Commerce,

U.S. Senate, Washington, D.C.

Dear Chairman Magnuson : This is a reply to your letter of March 8, 1961, 

requesting information on changes in freight rates over the last 10 years.

We regret that no index is available showing the trend of rail, highway, 

and water freight rates combined. There is available, however, and it is shown 

on the attached table, an index based on a sample of rail carload terminations 

showing changes in average freight rates on carload traffic since 1950. Two 

statements are attached relative to this index, one explaining the method, and 

the other showing the indexes in detail for 1951 through 1958.

We have also provided on the attached table information on revenue per tonmile for class I railroads and for certain class I motor carriers as well as revenue per ton for maritime carriers. These averages, of course, reflect the influence of many factors in addition to rate changes and therefore should be 

used accordingly.

Please advise if we can be of further assistance in this matter.

Sincerely,

Everett Hutchinson, Chairman.
298 DOMESTIC OFFSHORE SHIPPING

Freight rate index and revenue per ton-mile for class I railroads, revenue per

ton-mile for class I motor carriers, and average reven ue per ton for maritime

carriers, 1950-59

Calendar year

Class I railroads

Class I motor carriers 

engaged In inte rcity 

service reporting revenue t on-miles3

Maritime carriers engaged in coastwise 

and intercoastal service ’

Index of 

average 

freight 

rates 1

Revenue 

per tonmile 

(cents)’

Num ber of 

carriers <

Revenue 

per tonmile 

(cents)3

Num ber of 

car riers7

Average 

revenue 

per ton 

(dollars)’

1960 _______ ____________ (’) n 1.403 (’) (•) (•) (’) 1959 .................. . ........... .......... 118 1.445 885 6.234 26 $19.73

1958 _____ _______________ 121 1.463 861 6.157 27 20.43 1957............. . ........................ 118 1.445 828 6.124 30 19.02 1956........................ ......... ........ 112 1.384 2,039 5.899 32 17.84 1955_____________________ 108 1.370 2,036 5.730 32 18. 65 1954 .................... 109 1.420 1,969 5.744 32 19. 51 1953_______ ____ _________ 111 1.478 L894 5.670 29 18.79 1952___________ _________ 109 1.430 1,748 5.532 29 18.81 1951 ....... ................... .......... 102 1.336 1,638 5.102 28 18.07 1950 .......................................... 100 1.329 1,617 4.959 34 17.23

• Source: Indexes of average freight rates on railroad carload traffic, 1051-58. statement RI-1, September 

1960. Figures for 1959 from tabulation n ot ye t released (1950=100 for this index) (data based on the 1-percent 

rail carload sample).

1

 Source: “ Transp ort Statistics in the United States,” pt. I, table 44, 1950-59. Stateme nt M220 for the 

1st 11 m onths in 1960.

• Source: “Tra nsp ort Statistics in the United States,” p t. 7, table 29 (1954-59); "Statistics of Class I Motor 

Carriers,” table 29, 1950-53, statements 5228, 5351, 5423, and 5515.

• From 1950 throu gh 1956 class I motor carriers were defined as those having average gross revenues of 

$200,000, or over annually from motor carrier property operations. Beginning with 1957 this amoun t was 

increased to $1,000,000 or more.

• Derived by dividing freight revenue from Intercity service by the num ber of ton-miles of In tercity 

service.

• Source: “Transp ort Statistics in the United States,” pt. 5 for 1954-59, and state men ts 521, 5439, 5442, 

and 552.

7

 N umber of carriers varies because of mergers, consolidations, new business, going out of business.

’ Derived by dividing freight revenue for coastwise and intercoastal service fcy number of tons carried in 

that service.

’ Not available.

10 For 1st 11 m onths of 1960.
DOMESTIC OFFSHORE SHIPPING 299

INTERSTATE COMMERCE COMMISSION, Bureau of Tra nsport Economics and Statistics

in d e x e s o£ av e ra g e

Fre ig ht R ate s on R ail ro ad C arl o ad T ra ff ic

1951 -1 958

1950 100

Statem ent R l - i

1951 - 1958

September I9 60

Washington, 0. C.

This release, Issued os inform ation, has not been ado pted by the Interstate Commerce Commission.
300 DOMESTIC OFFSHORE SHIPPING

Foreword

This stateme nt is the ninth in a series of annual indexes of average freigh t 

rate s on railr oad carload traffic. It includes information previously published 

for the years 1951-57 and adds results for the year 1958.

I ndex of Average Freight Kates, 1951-58

Table 1. Inde xes of average freight rates fo r commodity groups and selected commodity classes

Table 1 shows indexes for average freight rates for commodity groups and 

selected commodity classes for the calen dar years 1951 through 1958 with 1950 

equal to 100.

The index for all commodities combined rose to 121 in 1958, the highest level 

reached thus far, continuing the upward trend begun in 1950. This rise reflects 

the general increases in rates authorized in February and August 1957, by Ex parte 206 and the selective increases authorized in the interim and final decision 

in Ex parte 212.1

 It w as estim ated that the increases proposed in Ex parte 212 would raise the overall rat e level about 2.3 percent.

Trends in the indexes of average freight rate s, 1951-58, for the major commodity groups are similar. The indexes rise through 1953, decline moderately 

through 1955, then resume the upward trend in 1956, and att ain the highest level 

in 1958. Animals and products, however, decline 1 point to 122 in 1958.

The range of increase from the base year, 1950, and 1957 to 1958 varies considerably among the commodity groups as follows:

Commodity group

Percent change

1958 over 

1957

1958 over 

1950

Prod ucts of agriculture______ .

Animals and products. _ .................

1 7 19

Prod ucts of m ines................................

— 8 22

Prod ucts of forests............. ........... . .

2 6 18

Manu factures and miscellaneous.__ 2 4 27

Forw arder traffic............ ...... .. . 3 4 23

4.8 30

The i»ercentage increases between 1950 and 1958 and between 1957 and 1958 

also vary considerably among the various individual commodity classes shown 

in table 1. Increases in 1958 over 1950 range from 3 percent (633 cement: 

na tural and portland) to 45 percent (101 sugarbeets), distribu ted as follows:

10 percent or less_________________________________________________ 5

11 thro ugh 20 p ercent_____________________________________________ 18

21 through .‘50 percent_____________________________________________ 19

31 through 49 percent______________________________________________ 15

41 percent and above_____________________________________________~ 3

’ 2 9 9 I C C - 

5 5 7 ’ F p b

- 

4

- 

1 9 5 7 : 3 0 0 302 I.C.C. 605. Feb. 11, 1958 ; 304 I.C.C. 289 , Se pt. 9, 1958. I.C.C. 633 , Aug. 6, 1957 ; Ex pa rte 212, V
DOMESTIC OFFSHORE SHIPPING 301

Most of the individual commodity classes show index changes of from 2 to 5 

percent increase in 1958 over 1957; six individual commodity classes show decreases. Commodity classes showing the largest and least or no percentage 

increase, and those showing decreases in 1958 from 1957 are :

LA RG ES T

Com modity class

Percent increase

1958 over 

1957

1958 over 

1950

309 Iron o r e ____- ____________________________________________ 10.4 38 401 Logs, but ts and bolts__________________________________________ 10.4 38 573 Iron, pig __________________________________________________ 8.8 36 577 Iron and steel, bar, rod, and slab________________________________ 8.5 28 789 Scrap Iron and scrap stee l.................................................... . ....................... 8.2 32

LEAS T

501 Gasoline____ ________ __________________________ _____________ 0 6

763 Food products, not otherwise specified, in cans and packages, not

frozen_____________________________________________________ 0 10 759 Sugar.................. . ............................. ........... . ................... .......................... 0 19 003 Corn _______________________ ______ __ _ __________________ 0 24 773 Feed, anim al and poultry, n ot otherwise specified .................................. 0 28 409 Pulpwood____ _ _______ _______ __________________ ______ _ .8 19 659 Printing paper, not otherwise specified___________________________ .8 22 403 Posts, poles, and piling, wooden____ _______________ ___________ .8 27 669 Paperboard, fibreboard, and pulpbo ard___________________________ .9 11 329 Stone and rock, broken, ground, and crushed______________________ .9 18 671 Wallboard______________ ________ ____________________________ .9 18

DE CR EA SE S

Commodity class

Percent change

1958 over 

1957

1958 over 

1950

215 Meats, fresh, not otherwise specified.......... ........ ......... .......................... -4 .8 19 343 Phosphate rock..... .......... ...................... . ........... .................................... -4 .5 6

633 Cement, nat ura l and Portland___________ _______________________ -1 .9 3

085 Potatoes, o ther than sweet_____ _______________________________ -1 .7 18 Oil bearing crops 1_____________________________________________ -1 .7 19 Fresh vegetables 1

................... . ........................................... ..................... -1 .7 14 655 Scrap paper and rag s__________________________________________ -1 .5 30 749 Liquors, m al t____” ............... ............................. ......... ........... .................. —.9 11

1

 These groupings of indiv idual commodity classes are show n a t the request of the Depar tment of Agriculture. “ Oil bearing crops” include commodity classes 037 to 047, 097 and 105; “ freshf ruits,” classes049 

through 069; “fresh vegetables,” classes 077 through 089 (including 085 which is also shown separately).

Variation in the degree of change in average rate levels for the commodity 

classes, as shown herein, is due primarily to the effect of differing rate adjustments applied to traffic categories by the railroads. As explained elsewhere, the 

area of fluctuation in average revenue from causes other than rate adjustments 

should be relatively small in these indexes.1

 The upward trend in the level of 

rates which might have resulted from the general rate increases authorized by 

the Commission during the postwar period, which varied in percentage by territorial movements and were subject to numerous exceptions and holddowns, 

was furth er modified not only by the extent to which carriers applied the increases, but also by rate reductions in individual instances to meet competition. 

In 1954 and 1955 when no new general rate increases were authorized, the general level of rates trended downward, reflecting the effect of individual reductions. Ex parte No. 212 provided selective, rath er than horizontal, increases 

consisting of percentage increases, flat increases, and percentage increases sub1

 Statement RI-1, March 1958. 

71709—63------20
302 DOMESTIC OFFSHORE SHIPPING

ject to maxim ums or minimums. Certain commodities and movements were exempted entirely. The rate actions took into account many factors, including the 

need for increased revenues, cost of service, possible diversion of traffic to other 

modes of transp ortation, and an effort to distribute the burden of increase over 

as m any commodities as possible.

Commodity class 337, petroleum crude, has been dropped from the list of commodity classes which are shown sepa rately for two reasons. Fir st, the number 

of carload s of crude petroleum as reported in the sample has declined over the 

years to 345 in 1958. (See footnote 1 of table 1.) Second, a comparative examination of 1957 and 1958 sample waybills indicates that the operation of 

newly constructed pipelines has apparen tly diverted entirely certain carload 

traffic movements of crude petroleum and caused an appreciable distortion in 

the index for this commodity class.

T able 1 .— Indexes for average freigh t rates for commodity goups and selected

commodity classes1

[1960- 100 ]

It em

In dex App ro xi ­

m ate

sta n d ard

dev ia tion 1951 1952 1953 1954 1955 1956 1957 1958

AU c om m odit ie s.................... . ......... ........... .. 102 109 111 109 108 112 118 121 ft 5 G ro up I. P ro d u cts o f a g ri cu lt u re ..................

Class 001 W h eat________ _____ _____

102 108 no no 109 112 117 119 5

101 108 113 113 112 115 121 126 1 0 003 C o rn ___ _____ _____ _____ 102 108 109 112 111 116 124 124 1 0 033 C ott on in ba le s___________ 102 113 119 116 115 108 105 109 1 0 Oil be ar in g crop s 1

................. 103 112 113 114 113 116 121 119 4 0 Fre sh fr uits 2

..................... .. 101 106 107 107 106 109 114 116 5

Fre sh ve ge tabl es 2_________ 101 106 108 107 108 no 116 114 ’ 5

085 Pot at oe s, oth er th a n sw ee t. 101 108 no 109 no 112 120 118 1 0 101 S u g a rb e e ts ............... . ...........

199 P ro d u ct of ag ri cu ltur e,

106 no 122 124 125 126 137 145 3.0

n. o. s........................................ 99 112 114 114 109 117 120 124 a ft G ro up II. A ni m al s an d p ro d u cts ________

Cla ss 203 C att le a n d ca lves , S .D ........

102 n o 113 112 112 116 123 122 5

103 112 115 114 114 118 127 133 1 0 215 M ea ts , fresh, n .o .s ________ 103 111 114 114 113 118 125 119 1.0 G ro up III. P ro duct s of m in es ....................... 102 108 109 108 107 no 115 118 5

Cla ss 301 A n th ra cit e coal, n .o .s _____ 101 107 109 109 108 109 113 115 5

305 B it um in ous co al ............ ....... 101 107 108 106 105 109 111 113 . 5 307 C oke___________ ____ 102 108 109 107 107 no 113 118 1.5 309 Ir on o re ________ ______ _ 103 110 no 111 no 115 125 138 5

323 C la y a nd b en to n it e............... 103 112 115 114 114 119 129 136 1 0 325 San d, in d u str ia l__________ 105 114 113 109 108 113 121 128 1.0

1.0 327 G ra ve l an d s and, n.o .s ____

329 St on e an d ro ck : Bro ken ,

103 108 no 108 109 no 116 118

gr ou nd an d cru sh ed .........

331 Flu xin g st one a nd r aw dol103 108 no no 108 in 117 118 1.0

om it e............ ......................... 104 110 111 112 113 117 129 136 1.0 339 A sp h alt ........... ............. ........... 101 110 111 111 109 112 117 122 1.6 341 S alt _________ ______ . 102 108 109 107 108 109 112 118 1.0 343 P hosp hate r o ck ................ .. 102 109 112 113 105 108 111 106 1 5 399 P ro d u cts of m in es , n.o .s ___ 101 110 no 109 no 114 124 129 2 6 G ro up IV . Pro duct s of fo re st s___________ 102 no 113 113 113 117 124 197 5

Class 401 Lo gs, b u tt s, an d b o lt s.........

403 Pos ts, po les, an d pilin g,

102 108 114 no no 116 125 138 1.5

w oo de n__________ ____ 101 111 no 113 114 118 126 127 1. 5 409 P ulp w o o d ............................. 104 111 113 111 109 112 118 119 411 L um ber , s hing les, a n d la th . 102 no 112 113 113 117 124 127 5

499 P ro d u cts of forests, n .o .s .. . 

G ro up V . M an ufa ct ure s an d misce lla -

103 no 116 114 117 121 133 141 2. 5

neo us......... ........... . ........... . 102 no 112 no 108 112 119 123 5

Cla ss 501 G aso li n e .. ..............

503 Fuel , ro ad an d pet ro le um

99 104 105 104 100 102 106 106 .5

re si dual oil s, n.o .s ..........

505 L u b ri cati n g oils an d

99 104 106 104 103 104 no 114 1.0

gr ea se s............ . ............. .......

507 P et ro le um pro duct s, re100 107 111 111 no 114 125 129 1.0

fin ed , n.o .s ......... ............. 101 109 112 111 113 116 124 126 5

527 Che m ical s, n.o. s . 101 105 108 106 104 118 124 128 1 ft 533 8o di um (sod a) p ro d u cts __ 99 107 108 106 104 107 116 119 1 0 539 Fer tiliz er s, n.o .s ____ 102 no 114 113 111 112 119 121 1 0 573 Ir on , p ig ....................

575 Ir on an d stee l: B ille t,

104 113 114 113 114 117 125 136 1.6

bloo m , an d in got___

577 Ir on an d st ee l: B ar , ro d,

103 112 113 108 104 111 123 125 2. 0

an d s la b ..........................

583 M anufa ctu re d iron an d

101 108 no 107 105 109 118 128 2. 0

st eel..................................

S ee f o o tn o te s a t e n d o f ta b le .

103 111 113 102 97 104 114 116 1.0
DOMESTIC OFFSHORE SHIPPING 303

Table 1.—Indexes of average freight rates for commodity groups and selected

commodity classes 1—Continued 

[1950 = 100]

It em

In dex A ppro xim ate

sta n d a rd

1951 1952 1953 1954 1955 1956 1957 1958 dev ia ti on

G ro up V. M an u fa ctu re rs an d m is ce llane ou s— C o n ti n u ed

Class 587 Ir o n an d st ee l pip e an d 

fittin gs , n .o .s .---------------- 103 111 114 108 101 100 no 114 1. 0

595 M ach in ery an d m ac hi nes , 

n .o .s ................................. 103 112 116 115 116 121 128 133 1. 0

613 A ut om ob iles , pas se nger ___ 102 103 103 105 103 108 115 122 1.0

623 Veh icle p art s, n .o .s .............. 103 113 115 114 113 119 130 138 1.0

633 C em en t: N a tu ra l a n d po rt - 

la n d ......................................... 103 110 112 no 104 102 105 103 .5

645 L im e, n .o .s ....... .......................

Scr ap paper an d ra gs...........

102 no 113 113 111 116 125 131 1.0

655 104 113 115 114 116 122 132 130 1.0

659 P ri n ti n g p ap er, n .o .s ............ 103 no 113 112 109 111 121 122 1.0

669 P ap erb o ard , fibe rb oa rd , 

an d p u lp b o a r d ............ . .

W al l b o a rd .......... ................ .

103 111 114 111 104 104 no 111 1.0

671 102 111 114 no 108 no 117 118 1.0

697 Glass b o tt le s, ja rs , an d 

pa ckin g glasses, n .o .s ___ 101 108 109 109 109 115 124 131 1.0

707 R ef ri ger at ors , freezin g ap ­

p ara tu s, an d p a rts ........... 103 112 114 115 115 119 129 134 .5

715 F u rn it u re , n .o .s ..................... 102 no 112 113 114 118 127 134 1.0

749 L iq uors , m a lt .......................... 102 no 113 111 103 104 112 111 1.0

759 S ugar ....................................... 102 107 no no 109 114 119 119 1.5

763 Foo d pro d u cts , n .o .s ., in 

ca ns an d pa ck ag es , n o t 

froz en ............................. ....... 99 105 107 106 105 107 no no 1.0

773 Fee d, an im al an d p o u lt ry , 

n.o.s_________________ 103 112 115 116 118 124 128 128 1.5

779 C onta in er s, m e ta l................. 103 112 115 114 116 122 132 141 .5

783 C onta in ers , fiber boar d, 

an d p aperb oard , K .D ___

Scr ap iron an d sc ra p s te e l. .

103 112 114 117 115 119 130 133 1.5

789 105 112 115 111 108 113 122 132 .5

793 F urn ac e sl ag ............................ 102 107 107 107 105 109 116 119 1.0

797 W aste m ate ri al s, n .o .s ____ 103 108 113 112 112 122 129 137 4.0

799 M anufa ctu re s a n d m isce lla ne ou s, n .o .s ...................... 102 111 108 no 105 111 118 122 3. 5

G ro up V I. F orw ard er traf fic.......................... 103 113 114 112 112 115 124 130 1.0

i O nl y cla sses hav in g m or e th a n appro xim ate ly 1,000 ca rs in th e sa m ple ar e sh ow n separ at el y. T h e 

gro up in de xe s co ve r all classes in th e g ro up .

1

 T hese gr ou pi ng s of in d iv id u al co m m odit y c lasses ar e sh ow n a t th e r eq u est of th e D ep a rtm e n t of A gr icult ure . “ Oil be ar in g cr ops” in clu de com m odit y c las ses 037 to 047, 097 an d 105;“ Fre sh f ru it s,” cla sses 049 

th ro ugh 069; “ F re sh veg eta ble s, ” classes 077 t hro u g h 089 (i nclu din g 085 w hic h is a lso sh ow n s ep ara te ly ).

Table 2. Indexes of average freight rates for territorial movement in total and

by commodity group

Table 2 shows the indexes of average fre igh t rat es for intra terri toria l and 

inter ter ritorial movements in total and by major commodity groups for the 

period 1951 through 1958. The indexes show rate increases from 1950 through 

1958 higher within official and western trunkline tha n w’ithin the other territories. The percentage changes from 1957 to 1958 and from 1950 to 1958 

are as follows:

In tr a te rr it o ri al—All co m m od itie s

P er ce nta ge ch an ge

1958 ov er 

1957

1958 ove r 

1950

Official......................................................................... . ....................... ..................................... 3.4 23

S o u th ern .......... . ............................................................................................... ............. ......... - . 9 11

W es te rn tr u n k li n e ............................................................................................................ 4. 2 25

South w est ern .......................................................................... ............. ......... ......................... 1.7 18

M ounta in -P aci fi c.............. ......... . ......... ........... .......................................... ......................... 2. 6 19
304 DOMESTIC OFFSHORE SHIPPING

The largest percentage increases in average inter ter ritorial rate s, all commodities, for the year 1958 over 1957, are shown for movements from Western 

Tru nk Line to Mountain-Pacific (4.2 percent) Official to Southwestern (3.5 p ercen t), Mountain-Pacific to Official (3.4 percen t), and Official to Western Trunk 

Line, Official to Mountain-Pacific, and Southwestern to Western Trunk Line 

(all 3.3 percent). Perc enta ge decreases in 1958 from 1957 are shown for rates 

on movements from Western Tru nk Line to Official (0.8 percent) and Western 

Tru nk Line to Southwestern (0.9 percent).

The following table summarizes the percentage changes in rates on inter ­

terri toria l movements in 1958 over 1957 and from the base year 1950:

I N T E R T E R R IT O R IA L M O V E M E N T S —A L L C O M M O D IT IE S , P E R C E N T A G E C H A N G E 

1958 O V E R 1957

F ro m —

T o -

Officia l S outh er n W es te rn 

T ru n k Lin e

S outh ­

w es te rn

M ounta in -

I'ltcific

O fficial__________________________________ 1.7 3. 3 3. 5 3.3 S o u th ern ___ ........ ......... .......................... 0 0

W est er n T ru n k L in e.......................... . ........... .. - . 8 - . 9 4.2

S o u th w este rn __ ______ _________ _____ 1. 7 1.8 3. 3

M ounta in -P aci fi c....................... ......................... 3.4 2. 5 2. 6

I N T E R T E R R IT O R IA L M O V E M E N T S —A L L C O M M O D IT IE S , P E R C E N T A G E C H A N G E 

1958 O V E R 1950

O fficial______________________ ______ ____ 17.0 25 .0 18.0

14.0

26 .0 S o u th e rn ................................. ....... ....................... 18.0

W es te rn T ru n k L i n e ..______ ____________ 23 .0 12.0 24 .0 S o u th w este rn ___ ____ ___________________ 21.0 15. 6 27 .0

M o u n ta in -P a cif ic .. ................................... ......... 21.0 24 .0 20.0

Table 2.—In de xe s of average fre ight rates f or ter ritorial mo veme nt in tot al and

by com modity group 1

[1950=100]

It em

In dex A pp ro xi ­

m ate

sta n d a rd

1951 1952 1953 1954 1955 1956 1957 1958 dev ia ti on

Of ficial to Offici al:

All co m m odit ie s.......................................... 103 110 111 109 107 112 119 123 0. 5 I. P ro d u cts of a g ri cu lt u re ______ 102 109 112 112 111 115 123 126 1.0 II. A ni m al s an d p ro d u cts .............. 104 111 113 113 114 117 125 128 .5 II I . P ro d u cts o f m in es ...................... 102 108 109 107 106 110 115 119 .5 IV . P ro d u cts o f fore st s........... .........

V. M an ufa ct ure s an d misce lla -

104 114 114 115 115 119 130 134 1.0

ne o us ___ _______ - ________ 103 111 113 109 107 112 123 127 .5 V I. Forw ard er traf fic...................... . 103 113 115 116 116 119 133 142 1.0 Of ficial to S out her n:

A ll co m m odit ie s........................ .................

V. M an ufa ct ure s an d misc ella101 108 111 107 105 108 115 117 .5

neo us ................... . ......... . ......... .. 101 109 112 107 106 109 116 118 .5 Of ficial to W es te rn T ru n k Li ne :

A ll co m m od itie s ............. ........... ............

V. M an ufa ct ure s an d misc ella103 111 112 112 110 112 121 125 .5

neo u s............................................ 102 111 113 112 no 112 121 125 1.0 Of ficial to S out hw es te rn :

A ll co m m odit ie s..........................................

V. M an ufa ct ure s an d misce lla -

102 108 109 108 105 103 114 118 1.0

neo u s......... ................................... 102 109 109 109 105 103 114 117 1.0 Official to M ou nta in -P ac ific :

A ll co m m odit ie s..........................................

V . M an ufa ct ure s an d misc ella101 111 113 111 111 115 122 126 2.0

n eo us.............................................

S ee f o o tn o te a t e n d o f ta b le .

101 111 112 111 110 115 122 127 2.0
DOMESTIC OFFSHORE SHIPPIN G 305

Table 2.—Indexes of average freight rates fo r territorial movement in total and

by commodity group 1—Continued 

[1950 = 100]

It em

S outh ern t o Offici al:

A ll co m m odit ie s......... ............... ............... ..

I. P ro d u cts o f a g ri cu lt u re ............

II I . P ro d u cts o f m in es ___________

IV . P ro d u cts o f f ore st s__________

V . M an u fa ctu re s a n d m isce llan eo u s................. ........... .............

South er n t o S outh er n:

A ll co m m o d it ie s.......................... - .............

I. P ro d u cts o f a g ri cu lt u re ............

II I . P ro d u cts of m in es .................... ..

IV . P ro d u cts o f fore st s____ _____

V. M an u fa ctu re s a n d misce llan eo u s_____________________

S outh ern t o South w es te rn :

All co m m odit ie s............................. .............

W est ern T ru n k 1 in e to Official:

All com m odit ie s_____________________

II. A ni m al s an d p ro d u cts ________

V. M anufa ctu re s an d m isce llan e o u s .. .........................................

W est er n T ru n k L in e to W est er n T ru n k 

Lin e:

All c o m m o d it ie s .. ._____ ______ ____ _

I. P ro d u cts of ag ri cu lt u re ............

II. A nim al s an d p ro d u c ts ........... ..

III. P ro d u cts o f m in es........ .............

IV . P ro d u cts o f f ore st s..... ......... ..

V. M anufa ctu re s an d misce llane ou s _____________________

W est er n T ru n k I in e to S outh w es te rn :

All com m oditie s................. ....... .................

W est er n T ru n k 1 ine to M ounta in -P aci fi c: 

A ll co m m oditie s........... ...............................

V . M anufa ctu re s a n d misce llan eo us________ ________ ____

South w es te rn to Official:

A ll com m odit ie s_____________________

V . M anufa ctu re s an d m isce lla ­

neo us________________ _____

South w es te rn to S outh er n:

All co m m odit ie s......... ..................... ...........

South w es te rn to W est ern T ru n k Lin e:

All co m m oditie s_____ _____ _________

V . M an u fa ctu re s an d m isce lla ­

neo u s.............................................

S outh w es te rn to S outh w es te rn :

All co m m odit ie s..........................................

I. P ro d u cts o f a g ri cu lt u re ............

II I . P ro d u cts o f m in es___________

IV . P ro d u cts o f fo re st s......... ...........

V. M an u fa ctu re s a n d m is ce lla neo us____ _______________

M ounta in -P aci fi c to Of fic ial :

All c om m odit ie s..........................................

I. P ro d u cts o f a gri cult ure ______

IV . P ro d u cts o f fo re st s.....................

M ounta in -P aci fi c to W est er n T ru n k L in e:

All com m oditie s..........................................

I. P ro d u cts o f a g ri cu lt u re ______

IV . P ro d u cts o f fo re st s__________

M ounta in -P aci fi c to South w es te rn :

All co m m odit ie s..........................................

M ounta in -P aci fi c to M ounta in -P aci fi c:

Al l c o m m o d it ie s .. .. ______ __________

I. P ro d u cts o f a g ric u lt u re .. ........

II I . P ro d u cts o f m in es ......................

IV . P ro d u cts o f fo re st s__________

V. M an ufa ct ure s an d m isce lla neo us.......................................

In dex

1951 1952 1953 1954 1955 1956 1957 1958

102 109 112 112 109 112 118 118

100 105 108 108 108 112 116 107

102 108 111 no 107 no 116 119

102 112 115 115 115 121 129 134

102 111 115 113 109 111 117 116

102 109 112 109 106 108 112 111

101 107 112 111 109 108 105 104

101 107 109 107 104 106 no 108

104 112 116 114 113 116 121 119

102 109 113 108 105 108 112 113

101 109 112 109 107 108 114 114

102 110 112 112 112 116 124 123

102 111 113 113 112 117 124 120

101 1094 111 111 no 114 123 127

102 109 111 111 111 114 120 125

103 109 112 113 113 117 124 127

104 111 115 115 116 119 124 127

102 109 109 109 109 113 119 126

99 105 109 108 108 108 123 131

101 109 112 111 no 113 118 120

101 110 112 108 106 106 113 112

102 111 112 111 no 113 119 124

102 112 113 113 no 115 121 125

101 106 108 107 106 112 119 121

101 106 106 106 104 112 118 120

100 106 109 107 105 109 113 115

101 110 112 111 in 114 123 127

101 109 112 111 in 114 123 127

101 108 111 111 109 111 116 118

102 110 115 114 108 107 109 112

102 107 110 112 111 113 118 121

102 109 110 no 109 115 123 120

100 107 109 109 109 111 116 118

102 107 109 108 108 112 117 121

101 105 106 105 105 107 112 114

102 108 no no no 114 120 124

102 109 112 in no 114 121 124

102 109 no in 109 112 118 120

102 109 112 113 113 117 124 128

101 109 no 108 106 111 117 120

100 107 109 no 108 111 116 119

100 108 112 in no 112 119 119

101 106 106 108 107 109 114 117

100 109 112 113 114 117 124 129

100 107 108 109 106 108 113 117

A ppro xim ate

sta n d ard

dev ia ti on

0.5

1.5

.5

.5

.5

.5

1.5

.5

1.0

1.0

1.5

.5

1.0

1.5

.5

.5

1.0

.5

2. 5

.5

1.0

1.0

1.0

1.0

1.0

1.0

.5

1.0

.5

1.0

1.0

1.0

.5

.5

.5

1.0

.5

1.0

1.0

1.0

.5

1. 0

.5

.5

1.0

* O nly m ovem en ts h av in g a p pro xim ate ly 1,000 c ar s or m or e in th e sa m ple a re s how n. T err it o ri al to ta ls 

co ve r al l sh ip m en ts i n th a t m ovem en t, re ga rd le ss o f t h e n u m b e r of ca rs i n th e c om m odit y gro up.
306 DOMESTIC OFFSHORE SHIPPING

Table 3. Indexes of average freigh t rates for interstate and intrastate rates by

commodity group

Table 3 indicates that average int erstate and intra sta te rates for all commodities combined experienced approximately the same year-to-year changes for 

the 5-year period 1951 through 1955. Slight differences are shown in 1952 and 

1955 when the int ers tat e rate index was 1 point higher than the intra sta te rat e 

index. For 1956 and partic ularly for both 1957 and 1958, the level of inters tate 

rat es is somewhat higher. The more marked incre ase in inters tate rates is due 

mainly to the fact th at general rate increases in some States became effective at 

a lat er date than increases on inters tate traffic, and in some instan ces were not 

as large.

Between 1957 and 1958, all major commodity groups show increases with respect to both intersta te and intra sta te rates, except for intersta te rate s on animals and products which rema ined the same. The larg est increases appear for 

products of mines in inter sta te rates , and anim als and products in intra sta te 

rate s.

Table 3 also compares the degree of increase since 1950 in int erstate rates with 

intra sta te rates for each of the commodity groups. The 23-percent rise in int ersta te rate s for man ufactures and miscellaneous as compared with the 15-percent 

increase in intra sta te r ate s on the same group is the larg est spread. The intersta te index also shows greater increase since 1950 for products of mines (19 

percent versus 14 percent). The intra sta te indexes are slightly higher for products of agriculture (120 versus 119) and for prod ucts of forests (128 versus 

127). For 1957 the indexes for products of forests were identical. The intra ­

state index for anim als and products rose 6 points in 1958 from 1957 while the 

inter sta te index remained unchanged. As a result, the increase in intra sta te 

rat es since 1950 for this group again exceeded th at for inter sta te rates as it had 

in 1953,1954,1955, and 1956.

Table 3.—Indexes of average freight rates for interstate and intrastate rates by

commodity group

[1950=100]

It em

In dex A ppro xi ­

m ate

sta n d ard

1951 1952 1953 1954 1955 1956 1957 1958 dev ia tion

In te rs ta te r at es :

All co m m od itie s................. ......................... 102 109 111 109 108 112 119 122 0.5

I. P ro d u cts of a gri cult ure ............ 102 108 110 110 109 111 117 119 .5

II. A ni m al s an d p ro d u cts .............. 102 110 113 112 112 116 122 122 .5

III. P ro d u cts of m in es_____ _____ 102 108 109 108 107 111 115 119 .5

IV . P ro d u cts of for es ts .................... 102 110 112 112 112 116 124 127 .5

V. M anufa ct ure s an d m isce llane ou s.......................................... 102 110 112 110 108 112 120 123 .5

In tr a sta te r at es :

All co m m oditie s......... ........... ............. ....... 102 108 111 109 107 110 114 116 .5

I. P ro d u cts of a g ri cu lt u re ______ 102 110 113 115 113 115 118 120 1.0

II. Ani m al s an d p ro d u cts .............. 101 108 114 116 117 120 119 125 1.5

III. P ro d u cts of m in es ................ . 102 107 108 107 106 108 112 114 .5

IV . P ro d u cts of f or es ts ........... ......... 102 111 116 116 115 119 124 128 1.0

V. M an ufa ct ure s an d m isce llan e o u s . . . ______ 102 108 111 109 106 107 113 115 .5

Table 4- Indexes of average freight rates by comm odity groupings corresponding to Bureau of Labor Statistics classification for wholesale commodity

price in de x1

Table 4 is designed to conform as closely as possible to the classification of 

commodities utilized in the construction of the wholesale commodity price index 

of the BLS, Department of Labor. The sha rpe st increases in the indexes for 

1958 over 1957 are shown for machinery and motive products, 7 points (a t 134) ; 

metals and metal products and fur niture and household durables, 6 points each 

(at 126 and 133, respectively) ; and hides, skins, and leather products, 5 points 

(at 130). The index for the commodity grouping, tobacco manufac tures and bottled beverages (at 112), declined by 1 point from the 1957 level.

1

 Prepared nt the request of the Bureau of Labor Sta tistics which designated the commodity group classifications.
DOMESTIC OFFSHORE SHIPPING 307

Table 4.—Indexes of overage freigh t rates by commodity groupings corresponding to Bureau of Labor statistics classification for wholesale commodity

price index 1

[1950 *=100]

It e m

In dex A ppro xi ­

m ate

sta n d ard

1951 1952 1953 1954 1955 1956 1957 1958 d evia ti on

A ll co m m oditie s.................................. ............... 102 109 111 109 108 112 118 121 0.5

F ar m p ro d u cts .......................................... . 102 108 111 111 n o 112 118 120 .5

Pro ce ss ed fo od s............ ........................... 101 107 110 109 108 111 115 115 .5

Tex tile pro d u cts a n d ap p a re l________ 100 109 113 111 108 109 115 116 1.0

H id es , sk in s, an d le ath er p ro d u cts ___ 100 111 113 112 112 116 125 130 1.5

F u el, po w er , an d li ghti ng m a te ria ls .. . 101 107 109 106 106 109 113 114 .5

C he m ic al s an d a llie d p ro d u cts ........... 101 108 111 110 107 113 120 122 1.0

R u b b er an d ru b b er p ro d u cts ............... .. 100 109 111 110 110 114 121 122 1.5

L u m b er an d w oo d p ro d u cts ..... .............

P u lp , pap er, a n d a llie d p ro d u cts ..........

102 110 112 112 112 116 123 127 .5

102 111 113 111 108 n o 118 120 .5

M eta l an d m eta l p ro d u c ts .... ............... .. 103 111 113 108 105 n o 120 126 .5

M achin ery a n d m oti ve p ro d u cts _____ 102 111 113 113 113 118 127 134 .5

F u rn it u re a n d house hold d u ra b le s___ 102 111 113 113 113 118 127 133 .5

N onm et al li c m in er al s—s tr u c tu ra l____

Toba cc o m anufa ct ure s an d bott le d

103 110 112 111 109 111 119 121 .5

be ver ag es ................................ ................... 102 108 111 n o 105 107 113 112 1.0

M iscc lla ne ou s......................... ..................... 102 111 112 112 n o 115 122 125 2. 0

1

 P re p are d a t re q u est of B ure au of L abor Sta ti st ic s w hi ch desi gnate d co m m odit y gro up clas sific at ions .

GENERAL NOTES CONCERN ING TH E INDEX

The accuracy of these indexes is affected in p ar t by sampling fluctuation and in 

part by changes in the consist of the traffic. The traffic categories used in the 

study have been selected in a manner so as to minimize the revenue effect of 

changes in the consist of traffic. However, certain conditions do exist which may 

affect individual indexes. For example, in commodity class 203, cattle and 

calves, there are movements of feeder cattle and fa t cattle which have different 

rates. Consequently, a change in the proportion of these two tyi>es of cattle 

could affect the average revenue for the traffic categ ories within this class in 

such a way as not properly to reflect changes in rate . Sim ilar shifts in proportions are possible in other classes, especially in the miscellaneous not otherwise specified classes. In general, however, these shi fts are not serious.

Sometimes particular commodities are reclassified and shifted from one 

class to ano ther by the Freight Traffic Sta tistics Committee.1

 One such case 

occurred in 1950 when two heavy loading commodities moving in sub stan tial 

qua ntities (carbonate of potash and mu riate of potash) were shifted from class 

539, fertilizers, not otherwise specified, to class 527, chemicals, not otherwise 

specified. This shi ft made a sub stan tial reduction in the average revenue of 

the chemicals, not otherwise specified class, which, of course, was reflected in 

the index. It was also sufficiently larg e to have an appre ciable effect on the 

ter ritorial indexes of southwestern to official traffic for the years prior to 1950. 

A. change of this na ture would also result in a temp orary distortion of the 

index as computed und er the present chain procedure, but there would be an 

automatic compensation in the index for the following yea r and the discrepancy 

would not affect succeeding indexes. This inherent ability of the chain index 

to automatically adjus t for changes in consist is one of the reason s for adopting 

it f or th e computation of the ra te indexes.

Theoretically, each index could have been calculated from a 100-percent 

sample of the shipments. However, most of the indexes developed from the 

1 percent sample should not deviate from such indexes based upon all shipm ents 

by more than the associated sta ndard deviation. Occasional deviations of twice 

or more tha n twice th at amount, however, are possible. Consequently, approximate sta ndard devia tions’ are included in the tables to give an indication

1

 Comprises represe ntatives of the Association of American Railroads, the railroads, and 

this Bureau.

“These approximations are based upon two estim ates made by different methods for 

different periods of time which yielded substan tially similar results. In the first estimate, 

traffic categories were divided into 10 random subsamples, and. in the second estimate, the 

waybill cards were sepa rated into 5 subsamples and 5 sets of traffic categories were preCared. In each estimate, indexes were computed for each subsample and the differences 

etween these Indexes provided a measure of the stan dard deviation.
308 DOMESTIC OFFSHORE SHIPPING

of the sampling stability of each index. In other words, the indexes shown 

here may be eith er gre ate r or less than similar indexes computed from all of 

the traffic. Tlie possible magnitude of these differences is indicated by the 

applicable sta nda rd deviation which should be considered when making comparisons between the various indexes.

For a description of the methods used in constructing the rate index see 

statem ent R I- 1, 1948-56, March 1958.

INTERSTATE COMMERCE COMM ISSION, Bureau of Tr an sp or t Economics and Sta tistics

in d e x e s o£ a v e ra g e

Fre ig ht R ate s on R ail ro ad C arl o ad T ra ff ic

1948-1 956

St otem en t R l- 1

1 9 4 8 -1 9 5 6 March 1958

Washington, D. C.

This release, Issued os inform ation, hos not been ado pted by the In terstate Commerce Commission
DOMESTIC OFFSHORE SHIPPING 309

F oreword

This statem ent is the seventh in a series of annual indexes of average freigh t 

rat es on railroad carload traffic. It includes information previously published 

for the years 1948-55 and adds results for the year 1956.

The report was prepared by R. T. Smith. Other members of the staff participated directly or indirectly.

E. R. J elsma, Director.

I ndexes of Average F re ight R ates, 194 8-56

COMMODITY GROUPS AND SELECTED COMMODITY CLASSES

A marked increase over the 2 previous years, reversing the downward trend 

sta rte d in 1954, is reflected in the 1956 index of average freigh t rat es on tota l 

rail carload traffic. The all-commodities index for 1956 stands a t 112, an increase 

of 4 points over the 1955 level. An average incre ase of 5.5 percent in general 

freigh t rates was granted in Ex Parte 196, effective March 7, 1956. This 

accounts, in the main, for the rise in the index during 1956. The major changes 

in group indexes, with increases of 4 points, occurred in “Animals and prod ucts” 

(116), “Pro ducts of forests” (117), and “Manufactu res and miscellaneous” 

(112). Increases of 3 points took place in the indexes of the three remaining 

groups, with “Products of agriculture ” rising to 112, “Products of mines” to 

110 and “F orw ard er traffic” to 115.

Sharp increases occurred in a number of commodity classes. The idexes 

for class 575, “Iro n and steel: Billet, bloom, and ingot” and class 583, “Manufactured iron and stee l” now stand at 111 and 104 respectively, an increase for 

each class of 7 points over 1955, and 19 and 8 points respectively, above the 

1948 level. A 6-point increase in the indexes for classes 401, “Logs, b utts, and 

bolts” (a t 116) and 779, “Metal con tain ers” (a t 122), brings them to 23 and 31 

points respectively above the 1948 level. Other larger-than-ave rage increases 

include a 5-point rise for the following classes with accompanying 1956 inde xes :

No. 003, “Corn” (at 116). No. 309, “Iro n ore” (at 115), No. 323, “Clay and 

bentonite ” (a t 119), No. 325, “Sand, ind ustrial” (a t 113), No. 613, “Automobiles, passenger” (a t 108), No. 759, “Su gar” (a t 114) and No. 789, “Scrap iron 

and scrap stee l” (a t 113). Virtually the only significant decrease in the indexes 

during the yea r occurred for class 033, “Cotton in bales,” with a 7-point reduction to 108, the lowest level since 1951. The sha rp decline in this index is due 

to a marked reduction made in the rat es in order to meet competition.1

Table 1 shows the indexes for average freight rates for commodity groups and 

selected commodity classes with 1950 as 100. An estimate of the standa rd 

deviation for each index is also given and the table covers the cale ndar yea rs 

1948 through 1956. The indexes for all commodities combined rose during this 

period from 93 in 1948 to 111 in 1953 and then declined to 108 in 1955, but 

increased to 112 in 1956. Similar tren ds are noted in each of the major commodity groups althou gh, of course, they show moderate differences from the 

overall indexes. The upward trend produced by general rate increases has 

been modified in many insta nces by individual reductions. This modification of 

the tren d is clearly evident in the resu lts for 1954 and 1955, but also appeared 

in previous yea rs as, for example, in the group index for “Manufactu res and 

miscellaneous” which showed a reduction from 101 in 1949 to 100 in 1950.

Data for selected commodity classes for 1947 may be found in prior yea rs’ 

issues of these indexes. In 1947 the index for all commodities was 80 with 

“Prod ucts of agriculture ” and “Forward er traffic” also at 80. “Products of 

mines” a t 83 exceeded the overall index, but “Animals and prod ucts” (77), “Pro ducts of forests ” (79) and “Manufactures and miscellaneous” (78) were below 

the index for all commodities. Exam ples of commodities for which the indexes 

for 1956 were gre ate r than those for 1947 by more tha n 50 percent were as follows : No. 003, “Corn,” 55 perce nt; No. 331, “Fluxing stone and raw dolomite,” 

56 percent; No. 573, “Pig iron,” 63 p erce nt; No. 577, “Iron and stee l; bar rod 

and slab,” 51 percen t; No. 707, “Refrigerators , freezing apparatus and parts,” 

68 percent; No. 779, “Containers, metal,” 65 pe rcen t; and No. 789, “Scrap iron 

and scrap steel,” 53 percent.

1 1. & S. Docket No. 6588, “Cotton-Southwest to Southern Territory.'
310 DOMESTIC OFFSHORE SHIPPING

TERRITORIAL MOVEM ENT BY COMMODITY GROUPS

The ter ritorial pat tern of changes reflects a tendency for gre ate r increases 

in the Ea st althou gh there was a 3-point increase for both western tru nkline and mountain-Pacific. The 5-point increase in the index for official reflects a rise of 5 points in the “Manufactures and miscellaneous” index from 

107 to 112. The index for official now equals th at for all commodities while 

th at for western trunkline is 2 points gre ate r at 114 and the indexes for southwestern and mountain-Pacific are less at 111 each and for southern is less at 

108. Table 2 shows, in detail, differences in the 1956 ter ritorial indexes. Increases are shown in 1956 for all commodities for southwestern to official (at 

112) and mountain-Pacific to southwestern (at 111), with increments of 6 and 

5 points, respectively, in the indexes.

INTE R- AN D INTR ASTA TE RAT ES BY COMM ODITY GROUPS

Table 3 indicates a small but consistent difference between intersta te and 

intra sta te average rate increases since 1948. The indexes for int ers tat e rates 

during 1956 have increased more than those for intra sta te r ate s for all commodity groups except “Products of agriculture ” and “Produc ts of forests ” where 

the increments were 2 and 4 points, respectively, for both classes of rates.

The overall indexes for the two classes of traffic have moved in similar 

fashion since 1948. There was a sha rpe r increase from 1947 to 1948 in the 

inter sta te rate s, from 79 to 93 as aga inst 82 to 93 for intra state rate s, which 

was due principally to the fact that general rat e increases in some States were 

authorized at a lat er date than they became effective for interst ate traffic and 

the increases granted in many cases were not as great.’ The 1956 indexes also 

indicate differences in changes since 1950 in the major commodity groups. The 

greatest is in “Manufactures and miscellaneous” where the interst ate index 

for 1956 is 112 as aga inst the intra state index of 107. The inter sta te index is 

also high er for “Products of mines” but lower for “Products of agriculture,” 

“Animals and products,” and “Products of forests.”

COMM ODITY GROUPINGS CORRESPONDING TO WH OL ESAL E COMMOD ITY PRICE IND EX

Table 4 shows the indexes of average freigh t rates by a commodity grouping 

which has been designed to fit as nearly as possible the classification used by 

the Bureau of Labor Statistics for its wholesale commodity price index. The 

table w as prepared a t the request of the Bureau of Labor Sta tistics which designated the commodity group classifications. Highest increases in the indexes for 

1956 were 6 points for “Chemicals and allied prod ucts” (a t 113) and 5 points 

each for “Metals and metal products” (a t 110, “Machinery and motive products” 

(a t 118) and “Furniture and household durables” (a t 118).

GENERAL RATE INCR EA SES

The first postwar general ra te incre ase of about 6.5 p ercent became effective 

on Jul y 1, 1946, but the indexes cann ot be extended to cover this period by the 

present method because the basic waybill data was not collected for the year 

1946. An estimate has been made, however, of approxim ate indexes for the 

rate level a s of June 30, 1946, which may be of intere st for comparative purposes. 

The overall index on th at date (with 1950=100) was 67, “Prod ucts of agriculture,” 69; “Animals and products,” 64; “Products of mines,” 73; “Products of 

fore sts,” 66; and “Manufactures and miscellaneous,” 64.

There were a number of general rate increases during the years 1947 through 

1952. The increase on Jan uary 1, 1947, was estimated to average approximately 

10.4 percent and, subsequently, increases followed: October 13, 1947, 8.9 pe rce nt; 

Janu ary 5, 1948, 7.6 pe rcent; May 6,1948, 3.6 per cent; August 21, 1948,1 perce nt;

2

 See this Bureau’s statement No. 5237, “Indexes of Average Comparative Intra sta te 

Fre igh t Rates. 1950.”
DOMESTIC OFFSHORE SHIPPING 311

Jan ua ry 11, 1949, 5.2 per cen t; and on September 1, 1949, 3.7 percent. There 

were no general Increases in 1950 but additio nal ones w ere granted on April 4, 

1951, 2.4 pe rcen t; August 28, 1951, 4 pe rcen t; May 2, 1952, 6.8 p erce nt; and on 

March 7, 1956, 5.5 percent. It will be noted th at the indexes indicate a smaller 

effective change in average rat es tha n the arithm etic al accum ulation of these 

authorized increases due in pa rt to the fact th at some of the increases were 

not put into effect immediately upon authorization , and also to individual reductions following the general increases.

GENERAL N0T E8 CONCERNING THE INDEX

The accuracy of these indexes is affected in pa rt by sampling fluctuation and 

in pa rt by changes in the consist of the traffic. As explained below, the traffic 

categories used in the study have been selected in a manner so as to minimize 

the revenue effect of changes in the consist of traffic. However, cer tain conditions do ex ist which may affect individual indexes. For example, in commodity 

class 203, “Cattle and calves,” there are movements of feeder cattle and fa t 

cattle which have differen t rate s. Consequently, a change in the proportion 

of these two types of c attle could affect the average revenue for the traffic cat egories within this class in such a way as not properly to reflect changes in rate s. 

Similar shi fts in proportions are possible in other classes, especially in the 

miscellaneous n.o.s. classes. In general, however, these shifts are not serious.

Sometimes particular commodities are reclassified and shifted from one class 

to another by the F reight Traffic Sta tistics Committee.3 One such case occurred 

in 1950 when two heavy loading commodities moving in sub stantial qua ntities 

(carbona te of potash and mu riate of potash) were shifted from class 539, 

“Fertiliz ers, n.o.s.,” to class 527, “Chemicals, n.o.s.” This shi ft made a substantial reduction in the average revenue of the “Chemicals, n.o.s.” class, which, 

of course, was reflected in the index. It was also sufficiently large to have an 

appreciable effect on the ter ritorial indexes of southwestern to official traffic 

for the years prior to 1950. A change of thi s nature would also res ult in a 

temporary distortion of the index as computed und er the present chain procedure, but there would be an automatic compensation in the index for the following yea r and the discrepancy would not affect succeeding indexes. This 

inhe rent ability of th e chain index to auto matica lly adjust for changes in consist 

is one of the reasons for adopting it for the computation of the rate indexes.

Theoretically, each index could have been calcula ted from a 100 percent sample 

of the shipments. However, most of the indexes developed from the 1 percent 

sample should not deviate from such indexes based upon all shipments by more 

than the associated standard deviation. Occasional deviations of twice or more 

tha n twice th at amount, however, are possible. Consequently, approximate 

standa rd devia tions 4 are included in the tables to give an indication of the 

sampling stab ility of each index. In other words, the indexes shown here may 

be either greater or less than similar indexes computed from all of the traffic. 

The possible magnitude of these differences is indicated by the applicable standard deviation which should be conidered when making comparisons between the 

various indexes.

3

 Prior to Dec. 1, 1949, the Fre igh t Commodity Classification Committee.

4

 These approximations are based upon two estim ates made by different methods for 

different periods of time which yielded substan tially similar results. In the first estimate, 

traffic categories were divided into 10 random subsamples, and, in the second estimate, the 

waybill cards were separated into 5 subsamples and 5 sets of traffic categories were prepared. In each estimate, indexes were computed for each subsample and the differences 

between these indexes provided a measure of the standard deviation.
312 DOMESTIC OFFSHORE SHIPPIN G

T able 1 .— Indexes of average freigh t rates for commodity groups and selected

commodity clas ses 1

11950=100]

It em

In dex A ppro xim ate

sta n d ard

1948 1949 1951 1952 1953 1954 1955 1956 dev ia ti on

All co m m odit ie s__________ ____ _________ 93 99 102 109 111 109 108 112 0 .5

G ro up 1. P ro d u cts of a g ri cu lt u re ............... . 93 98 102 108 110 110 109 112 .5

Cla ss 001 W h e a t. ............. ....... ............... 93 95 101 108 113 113 112 115 1.0

003 C orn _______ _____________ 94 95 102 108 109 112 111 116 1.0

033 C otton i n bal es .................... 92 98 102 113 119 116 115 108 1.0

Oil be ar in g c ro ps 2.............. 91 99 103 112 113 114 113 116 4.0

Fre sh fr uits 2 ___ ______ . 95 99 101 106 107 107 106 109 .5

Fre sh ve ge ta bl es 2________ 95 99 101 106 108 107 108 no .5

085 Pot at oe s, oth er th a n sw ee t. 94 9!) 101 108 110 109 110 112 1.0

101 Sug ar b eets _____ _________

199 Pro duct s of ag ri cu lt ure ,

96 103 106 110 122 124 125 126 3. 0

n. o.s . _.......... ............. ........... 94 105 99 112 114 114 109 117 3.0

G ro up I f. A ni m al s a nd p r o d u c ts .. ............. 93 99 102 110 113 112 112 116 .5

Cla ss 203 C att le an d calves , s .d ............ 94 98 103 112 115 114 114 118 1.0

215 M ea ts , f res h, n .o .s ________ (XI 98 103 111 114 114 113 118 1.0

G ro up II I . P ro d u cts o f m in es ___________ 91 98 102 108 109 108 107 no .5

Cla ss 301 A nth ra cit e coal, n .o .s ........... 90 99 101 107 109 109 108 109 .5

305 B it um in ous co al __________ 89 98 101 107 108 106 105 109 .5

307 C o k e.................................. .. 91 97 102 108 109 107 107 no 1.5

309 Ir on o re ......................... ........... 95 99 103 110 110 111 110 115 .5

323 C la y a n d b en to n it e.......... 95 98 103 112 115 114 114 119 1.0

325 San d, in d u str ia l___ ______ 91 98 105 114 113 109 108 113 1.0

327 G ra vel a n d s an d, n .o .s ____

329 Sto ne an d ro ck : bro ken ,

98 102 103 108 110 108 109 no 1.0

gro un d an d cr ush ed ........ .

331 Flu xin g st one an d ra w

93 100 103 108 110 110 108 111 1.0

do lo m ite____ ___________ 88 98 104 110 111 112 113 117 1.0

337 Pet ro le um , cr u d e____ ____ 96 99 101 109 107 102 100 102 1.5

339 A sp h alt __________________ 94 100 101 110 111 111 109 112 1.0

341 S alt ______________________ 93 98 102 108 109 107 108 109 1.0

343 P h osp hate r ock ___________ 95 100 102 109 112 113 105 108 1.5

399 P ro d u cts o f m in es , n .o .s ___ 98 100 101 110 110 109 110 114 2. 5

G ro up IV . P ro d u cts of for es ts ............. ......... 93 98 102 110 113 113 113 117 .5

Cla ss 401 Lo gs, b u tt s, an d b o lt s____

403 Post s, poles , an d pilin g,

93 99 102 108 114 110 no 116 1.5

w oo de n_________ _______ 92 97 101 111 110 113 114 118 1.5

409 P u lp w o o d ________________ 98 100 104 111 113 111 109 112 .5

411 L um ber , s hing les, a n d la th . 92 98 102 110 112 113 113 117 .5

499 P ro d u cts of fores ts, n .o .s .. .. 

S ee f o o tn o te a t e n d o f ta b le .

95 100 103 110 116 114 117 121 2.5
DOMESTIC OFFSHORE SHIPPING 313

Table 1.—Ind exes of average freight rate s for commodity groups and selected

commodity classe s1—Continued 

]1050-100]

It em

•G ro up V . M an u fa ctu re s an d m is ce llaneo u s____ _____________________________

Cla ss 501 Q as oline...............- ...................

503 F uel , ro ad , an d pet ro le um

re si dual oils, n .o .s ..............

505 L u b r i c a t i n g o ils a n d

gr ea se s__________________

507 P etr o le u m p ro duct s, re ­

fine d, n.o .s _____ ________

527 C he m ic al s, n .o .s .................—

533 Sod iu m (sod a) p ro d u c ts .. ..

539 F er tilize rs , n .o .s __________

573 Ir o n , pig ........ . .........................

575 Ir on an d stee l: B ille t,

bl oo m , an d in g o t................

577 Ir o n an d stee l: B ar , ro d,

an d sla b ................................

583 M an u fa ctu re d iron an d

ste el............... ............. ...........

587 Ir o n an d st ee l pip e an d

fi ttin gs, n .o .s .......................

595 M ach in ery an d m ac hin es ,

n .o .s ........................................

613 A uto m ob iles , pa ss en ger ___

623 Veh icle p art s, n .o .s ...............

633 C em ent: N atu ra l a n d p or tla n d ........................................

645 L im e, n .o .s ...............................

655 Scr ap paper an d r ag s............

<159 P ri n ti n g pa jw r, n.o .s ........ .

669 P a p e r b o a r d , fib re b o a rd

an d p u lp b o a rd __________

671 W all b o ard ________________

697 G la ss bottle s, ja rs , an d 

pa ckin g gla sse s, n .o .s .... 

707 Ref rige ra to rs , free zing a p ­

p ara tu s, an d p a rts ______

715 F u rn it u re , n.o .s ......................

749 L iq uors , m a lt _____________

759 S ugar .........................................

763 Foo d pro d u cts , n.o .s ., in 

ca ns an d pa ck ag es , n o t

fr oz en ______________ _

773 Fee d, an im al an d p o u lt ry ,

n.o .s ........................................

779 C onta in er s, m e ta l.......... .......

783 C onta in er s, fi bre boar d an d

pap erb o ard , k .d .................

789 Scr ap iron an d sc ra p s te e l. .

793 F u rn ace s la g______________

797 W ast e m ate ri al s, n .o .s .........

799 M an u fa ctu re s an d m isce lla ne ous , n .o .s _______ ___

•G ro up V I. F o rw ard er traf fic_____________

In dex A ppro xi ­

m ate

sta n d a rd

1948 1949 1951 1952 19.53 1954 1955 1956 d evia ti on

94 101 102 110 112 110 108 112 0.5

99 104 99 104 105 104 100 102 .5

98 104 99 104 106 104 103 104 1. 0

100 108 100 107 111 111 110 114 1. 0

91 100 101 109 112 111 113 116 .5

105 114 101 105 108 106 104 118 1.0

92 105 99 107 108 106 104 107 1.0

93 98 102 110 114 113 111 112 1.0

90 96 104 113 114 113 114 117 1.5

92 97 103 112 113 108 104 111 2.0

92 99 101 108 110 107 105 109 2. 0

96 103 103 111 113 102 97 104 1.0

94 100 103 111 114 108 101 100 1.0

93 97 103 112 116 115 116 121 1.0

90 98 102 103 103 105 103 108 1.0

92 97 103 113 115 114 113 119 1.0

92 98 103 110 112 110 104 102 .5

90 97 102 110 113 113 111 116 1.0

92 99 104 113 115 114 116 122 1.0

90 99 103 110 113 112 109 111 1.0

94 100 103 111 114 111 104 104 1.0

92 97 102 111 114 110 108 110 1.0

94 103 101 108 109 109 109 115 1.0

89 97 103 112 114 115 115 119 .5

90 99 102 110 112 113 114 118 1.0

98 103 102 110 113 111 103 104 1.0

95 99 102 107 110 110 109 114 1.5

98 104 99 105 107 106 105 107 1.0

95 99 103 112 115 116 118 124 1.5

91 98 103 112 115 114 116 122 .5

91 99 103 112 114 117 115 119 1.5

90 97 105 112 115 111 108 113 .5

96 104 102 107 107 107 105 109 1.0

96 105 103 108 113 112 112 122 4. 0

100 103 102 111 108 110 105 111 3. 5

101 106 103 113 114 112 112 115 1.0

1 O nl y cl asses h av in g m or e th a n a ppro xim ate ly 1,000 c ar s i n th e s am ple ar e sh ow n se para te ly . T h e gro up 

in de xe s co ve r al l cl as se s in th e gr ou p.

’ T hese gro up in gs of in d iv id u al c om m odit y cl as se s are sh ow n a t th e request of th e D ep art m en t o f A gricu ltu re . "O il-b ear in g cr ops” in clu de co m m odit y cla sses 037 to 047, 097 an d 105; “ Fre sh fr u it s,” cla sses 049 

th ro ugh 069; “ Fre sh veg eta ble s, ” cla sses 077 th ro ugh 089 (inc lu di ng 085 w hi ch is also sh ow n se p ara te ly ).
314 DOMESTIC OFFSHORE SHIPPING

T ab le 2.—Inde xes of average freigh t rates for territorial movement in total and

by commodity group 1

[1950=100]

It em

In de x A pp ro xim ate

st an d ard

1948 1949 1951 1952 1953 1954 1955 1956 dev ia tion

Official to official:

All co m m o d it ie s,.............. ......................... 91 99 103 110 111 109 107 112 0. 5

I. P ro duct s of agri cult ure ................ 88 97 102 109 112 112 111 115 1.0

II. A ni m al s an d p ro d u cts _________ 91 99 10-4 111 113 113 114 117 .5

I ll . P ro d u ct of m in es .................... ....... 90 98 102 108 109 107 106 110 .5

IV . P ro duct s of fo rest ...................... 91 99 104 114 114 115 115 119 1. 0

V . M an ufa ct ure s an d misce lla ne -

ou s_________________________ 92 100 103 111 113 109 107 112 .5

V I. F o rw ard er_________ _________ _ 106 110 103 113 115 116 116 119 1. 0

Official to so uth er n:

All co m m od itie s_____________________ 92 100 101 108 111 107 105 108 .5

V. M an ufa ct ure s an d m isce lla ne -

OUS.............. .............................................. 92 100 101 109 112 107 106 109 .5

Of fici al to w es tern tr u n k lin e:

All co m m od itie s_____________ _______ 92 99 103 111 112 112 110 112 .5

V. M an ufa ct ure s an d misce lla ne -

ou s .............................................. 92 99 102 111 113 112 110 112 1. 0

Offici al to so uth w es te rn :

All co m m oditie s______ _______ ______ 94 97 102 108 109 108 105 103 1.0

V. M an ufa ct ure s an d misce lla ne -

ou s............... ....... ........................... 94 97 102 109 109 109 105 103 1. 0

Offici al to m ou nt ai n- Pac iflc :

All co m m od itie s................................ ......... 94 99 101 111 113 111 111 115 2. 0

V. M an ufa ct ure s an d m isce lla ne -

ous................................. . ............... 94 99 101 111 112 111 110 115 2. 0

South er n to official:

All co m m od itie s________ ____________ 91 98 102 109 112 112 109 112 .5

I. Pro duct s of ag ri cu lt ure ________ 94 99 100 105 108 108 108 112 1.5

I I 1. P ro duct s of m in es _____________ 90 97 102 108 111 110 107 110 . 5

IV . Pro duc ts o f for es ts ............... ......... 90 97 102 112 115 115 115 121 .5

V . M an ufa ct ure s an d m isce lla ne -

ous...... .................... ..................... 92 98 102 111 115 113 109 111 .5

S outh er n to so uth er n:

All co m m od itie s.......................... . ............. 95 101 102 109 112 109 106 108 .5

I. P ro duct s of ag ri cu lt ure ................ 96 101 101 107 112 111 109 108 1.5

III. P ro duct s of m in es____________ 94 100 101 107 109 107 014 106 .5

IV . P ro duct s of for es ts ____________ 94 98 104 112 116 114 113 116 1. 0

V. M an ufa ct ure s an d misce lla ne -

ou s............................... . ................. 97 104 102 109 113 108 105 108 1. 0

S outh er n to s outh w es te rn :

All co m m od itie s...... ................................... 91 99 101 109 112 109 107 108 1. 5

W es te rn tr u n k li n e to o ffic ial:

All com m oditie s.................. ....................... 91 98 102 110 112 112 112 116 .5

11. A ni m al s an d p ro d u cts ................. 91 98 102 111 113 113 112 117 1.0

V. M an ufa ct ure s an d m isce lla ne -

ous................................................... 93 100 101 109 111 111 110 114 1.5

W es te rn tr u n k li n e to w es te rn tr u n k li n e:

All co m m odit ie s......... . ............................... 95 99 102 109 111 111 111 114 .5

I. P ro d u cts o f a g ri cu lt u re ................ 92 96 103 109 112 113 113 117 .5

II. A ni m al s an d p ro d u cts _________ 94 98 104 111 115 115 116 119 1.0

II I . P ro duct s of m in es ...................... .. 96 99 102 109 109 109 109 113 .5

IV . Pro duct s of for es ts ......................... 93 98 99 105 109 108 108 108 2.5

V. M an ufa ct ure s an d misce lla ne -

OUS............................................................. 96 100 101 109 112 111 110 113 .5

W es te rn tr u n k li n e to s outh w es te rn :

All co m m o d it ie s.. _____ ______ ______ 96 100 101 110 112 108 106 106 1.0

W es te rn tr u n k li n e to m ounta in -P ac if lc :

All com m oditie s........... ............................... 95 99 102 111 112 111 110 113 1.0

V. M an ufa ct ure s an d m isce llan eous...... ............................................. 94 99 102 112 113 113 110 115 1.0

S outh w es te rn to official:

All com m oditie s......... ......... . . ................... 102 109 101 106 108 107 106 112 1.0

V . M an ufa ct ure s an d misce lla ne -

ous.............................................. 105 113 101 106 106 106 104 112 1.0 South w es te rn to s outh er n:

All com m oditie s......... ........... ....... ........... . 92 101 100 106 109 107 105 109 1. 0 S outh w es te rn to w es te rn tr u n k li n e:

All c o m m o d it ie s .. ..................................... 97 103 101 110 112 111 111 114 .5

V. M an ufa ct ure s an d m isce llan eous................................................... 98 104 101 109 112 111 111 114 1.0

S outh w es te rn to s outh w es te rn :

All com m oditie s........................ ............... 97 100 101 108 111 111 109 111 .5

I. P ro d u cts o f a g ri cu lt u re ................ 99 95 102 110 115 114 108 107 1.0

III. P ro d u cts o f m in es _____ ____ _ 93 99 102 107 110 112 111 113 1.0

IV . P ro d u cts o f fo re st s......................... 93 97 102 109 110 110 109 115 1.0

V. M anufa ct ure s an d misce lla ne -

ous................................................... 98 102 100 107 109 109 109 111 .5

S e e f o o tn o te a t e n d o f ta b le .
DOMESTIC OFFSHORE SHI PPI NG 315

Table 2.—Indexes of average freight rates for territorial movement in total and

by commodity group 1—Continued

] 1950 =100]

It e m

In dex A ppro xi ­

m ate

sta n d ard

1948 1949 1951 1952 1953 1954 1955 1956 dev ia ti on

M ounta in -P aci fi c to o ffic ial:

All c o m m o d it ie s .__ ____ ______ 95 99 102 107 109 108 108 112 0.5

I P ro d u cts of a g ri cu lt u re ________ 96 99 101 105 106 105 105 107 .0

TV. P ro d u cts of fo re st s. 94 99 102 108 110 no 110 114 1.0

M ounta in -P ac ific to w es te rn t ru n k li n e :

All co m m oditie s____ ________________ 95 99 102 109 112 111 110 114 .5

I P ro duct s of ag ri cu lt u re ________ 94 98 102 109 110 111 109 112 1.0

IV . P ro d u cts o f fore st s____________ 93 98 102 109 112 113 113 117 1.0

M ounta in -P aci fi c to s o u th w est ern :

A ll co m m od itie s ___________________ 95 99 101 109 110 108 106 111 1.0

M ounta in -P aci fi c to m o u n ta in -P acif ic

All co m m oditie s______________ ____ . . 96 99 100 107 109 110 108 111 .5

1. P ro duct s of ag ri cu lt u re ________ 93 98 100 108 112 111 110 112 1.0

III. P ro duct s of m in es .......................... 96 99 101 106 106 108 107 109 .5

IV . P ro d u cts of for es ts __________ 93 98 100 109 112 113 114 117 .5

V. M an u fa ctu re s an d m is ce llan eo u s. . . .... ............. ....................... 98 101 100 107 108 109 106 108 1.0

1

 O nl y m ovem en ts hav in g a ppro xim at el y 1,000 ca rs o r m or e in th e sa m pl e ar e sh ow n. T err it o ri al to ta ls 

co ve r a il sh ip m ents i n th a t m ovem en t.

Table 3.—Indexes of average freight rates for inter- and intrastate rates by

commodity group

[1950 = 100]

IN T E R S T A T E R A T E S

Ite m

In dex A ppro xi ­

m ate

sta n d ard

1948 1949 1951 1952 1953 1954 1955 1956 dev ia tion

All co m m oditie s.......... ....... ............................... 93 99 102 109 111 109 108 112 0.5

I. P ro d u cts of a g ri cu lt u re ........ ............... 93 98 102 108 110 110 109 111 .5

II . A ni m al s an d p ro d u cts ......................... 93 99 102 110 113 112 112 116 .5

III. P ro d u cts of m in es.................................. 91 98 102 108 109 108 107 111 .5

IV . P ro d u cts of f or es ts ___ _________ 92 98 102 110 112 112 112 116 .5

V. M an u fa ctu re s an d m is c ell an eo u s.. . 94 101 102 110 112 110 108 112 .5

IN T R A S T A T E R A T E S

All c o m m o d it ie s ___________ ____________ 93 99 102 108 111 109 107 110 0. 5

I. P ro d u cts of a g ri cu lt u re ........................ 92 97 102 110 113 115 113 115 1.0

II . A ni m al s an d p ro d u cts ......................... 96 98 101 108 114 116 117 120 1.5

III. P ro d u cts of m in es............ ..................... 93 99 102 107 108 107 106 108 .5

IV . P ro d u cts of fo re st s __ ____ ______ 95 98 102 111 116 116 115 119 1.0

V . M an ufa ct ure s a n d m is c ell an eo u s.. . 95 100 102 108 111 109 106 107 .5
316 DOMESTIC OFFSHORE SHIPPING

Table 4.—Indexes of average fre ig ht rates by com mo dity groupings corresp onding to Burea u of Lab or sta tis tic s classification f or wholesale comm odity price

ind ex 1

(1950=100]

It em

In de x A ppro xi ­

m ate

st an d ard

1948 1949 1951 1952 1953 1954 1955 1956 dev ia ti on

All co m m od itie s . . . _____ _____ ________ 93 99 102 109 111 109 108 112 .5 F arm p ro d u cts ....... ....... ............. ............... 94 99 102 108 111 111 no 112 .5 Pro ce ss ed fo od s___________________ ._ 93 100 101 107 110 109 108 111 .5 Tex tile pro duct s an d ap p are l________ 95 104 100 109 113 111 108 109 1.0 H id es , sk in s, an d le at her p ro d u c ts ___ 94 99 100 111 113 112 112 116 1.5 Fuel , po w er , an d lighting m a te ria ls .. . 91 99 101 107 109 106 106 109 .5 Che m ic al s an d allie d p ro d u cts _______ 96 104 101 108 111 110 107 113 1.0 R u b b er an d r u b b er p ro d u cts ................. 92 97 100 109 111 no no 114 1.5 1 um b er an d wo od p ro d u c ts .. ........ ....... 93 98 102 110 112 112 112 116 .5 P u lp , pap er, an d al lie d p ro d u cts _____ 93 100 102 111 113 111 108 n o .5 M et als a n d m eta l pro duct s . ____ _ 94 100 103 111 113 108 105 n o .5

M ach in ery a n d m otive p ro d u cts _____ 92 98 102 111 113 113 113 118 .5 F u rn it u re a n d ho us eh ol d d u ra b le s___ 91 100 102 111 113 113 113 118 .5 N onm et al li c m in er al s—str u ctu ra l . _. 

Toba cc o m an ufa ct ure s an d bott le d

94 99 103 n o 112 111 109 111 .5

be ver ag es ................................................... 97 102 102 108 111 no 105 107 1.0 M isce lla ne ou s............. ................. ............... 96 102 102 111 112 112 no 115 2. 0

1

 P re p are d a t th e req ues t of th e B ure au of Lab or S ta ti st ic s w hi ch d es ig nat ed t h e c om m odit y g ro up c la ss ific ations .

METHOD OF CONSTRUCTING THE RATE INDEX

The phrase “average freigh t rate” as used in connection with these indexes 

refers to the average price per hundredweight charged by the railroads for 

carlo ad shipments. To simplify handling, these shipments have been grouped by 

“traffic categories” determ ined by the commodity class, short-line length of haul 

(mileage block), tyjie of rate, and ter ritorial movement.1

 The sample shipments 

for each yea r fall into about 30,000 of these traffic categories. The Commission 

in its waybill tabu lations has published state ments showing for the years 1947 

through 1956 the number of carloads, tons, revenue, and average revenue per 

hundred ixiunds, for the traffic included in its 1 percent carload waybill sample, 

distrib uted according to these categories.2

 These stateme nts provide the basic 

data from which the indexes are computed.

The indexes of average freigh t rat es for the years 1947 through 1950 are 

ratios of weighted averages. The unit is the “traffic cate gory” defined above and 

the tonnages used as weights in constructing the averages are those which 

moved in each of th ese categories in the base year 1950. All of the traffic categories in each of the years for wrhich there was a corresponding category in 

1950 were used in construcing the indexes. Such categories included about

1

 Shi pm en ts ar e classif ied ac co rd in g to—

(a ) T he 261 ca rloa d co mmod ity clas se s list ed in ap pe nd ix I of th e Co mmiss ion’s or de r 

of Se pt. 24, 1946, In th e M atter of F re ig ht Co mmod ity Sta ti st ic s, St ea m Ro ads.

>(f») T he te rr it o ri al mov em en ts w ithin an d between th e te rr it o ri e s: (1 ) Offic ial ; (2 ) 

so u th e rn ; (3 ) wes te rn tr unk li n e ; (4 ) so uth w est ern ; (5 ) m on ntain- Pa cific.

(c ) (1 ) In tr a s ta te or (2 ) In te rs ta te ra te s. In te rs ta te ra te s are fu rt h e r cla ssified ac ­

co rd in g to (1 ) clas sifica tio n ra ti n g s; (2 ) commod ity ra te s ; an d (3 ) ex ce ption to th e 

cl as sifica tion ra tings.

•(d) Sho rt -l in e le ngth s of ha ul in 25 mile ag e blocks. 

s

 M ile ag e block dis tr ib ution of tra ffic an d revenu e.
DOMESTIC OFFSHORE SHIPPING 317

95 percent of the total tonnage in each of the years. The elimination of the 

unmatched traffic categories as between 1950 and each of the comparing years 

has little or no effect on the computed indexes.

Fro m — T o - Fro m T o - F ro m — T O - F ro m — T o - F ro m — T o -

1__________ 24 1.50 199 400 449 i 800 899 1,600 1, 799

2 5 ................. 49 200 249 450 499 1 900 999 1. 800 1,999 50 ................ 74 250 299 500 599 1.000 1. 199 2.000 2, 499

75.................. 99 300 349 600 699 ; 1,200 1,399 2. 500 2.999

100................ 149 350 399 700 799 1,400 1,599 3,0 00 O ve r

S ta te m en t num bers

1947 1948 1949 1950 1951 1952 19.53-56

P ro d u cts of a g ri cu lt u re ____ ________ _ _______ 4922 4912 .5039 5136 6248 j .5343 \1 B -1 A ni m al s an d n r o d u c ts .. __________ ___________ 4924 4947 .5040 5137 5249 5344 M B -2 P ro duct s of m in es.. 4925 .504 .5043 ,513s, >250 1 5345 \I B - 3 P ro d u cts o f f or es ts 4926 503 .'( li t 5139 5251 ’ 534ft M B -1

14934 5010 .5045 5132

• 501 .5014 5047 .5133 .6246 5347 M B-.5 1 502 5016 5048 5135 1

Computations were made for each of the indexes for the years 194“ and 1948. 

The traffic categories for the base and comparing years were matched, the base 

year tons converted to hundredweight, and the comparing yea r average revenue 

per hundredw eight applied to determin e the comparing y ear constructive revenue 

for the category. The base period revenue and the corresponding comparing 

yea r’s constructive revenue for each of the categories included in the group for 

which an index was to be calculated were then aggregated and the rati o determined. An improved procedure was used in developing the indexes for 1949 in 

that carlo ad traffic moving on less-carload or any-quantity rates, or which was 

rebilled, or was moved on transi t balances, wits excluded from each of the traffic 

categories in 1949 and 1950 before the index computations were made. Similar 

exclusions have been made from the 1951 through 1955 traffic. A change in computation procedure was also made effective sta rting with the indexes for 1951 

which a re linked to the old series in 1950.

The indexes for 1951 and 1952 were recomputed by the “chain’’ method and 

those for subsequent years added by the same method. This procedure consists 

essentially of calculating the percentage change in average rat es for adja cent 

years and then chain ing the resu lts to the previously calculated index to arrive 

at the index for the current year. An example will make this clear, using bitum ­

inous coal shipm ents at commodity rates in official te rritory.

The first step is to calculate the constructive revenues for each mileage block 

category by applying the revenue per ton for th at category for each pair of 

adjacent years to the av erage tonnage shipped in those years.

For example, in the first mileage block of the tex t table on page 13 the 

average tonnage for 1950 and 1951 was 2,380 and the revenue per ton was $0.89 

for 1950 and $1.05 for 1951. Applying these r ate s to the common tonnage figure 

yields a constructive revenue of $2,118 for 1950 and $2,499 for 1951. Similar 

computations were performed for the rest of the mileage block categ ories for the 

years 1950-51, and also for the paired years 1951-52. The next step was to add

71709—02----- 21
318 DOMESTIC OFFSHORE SHIPPING

these constructive revenues, which in the example total $6,472,886 and $6,605,518 

for 1050-51, and $6,522,893 and $6,806,857 for 1051-52. These show that the 

average change from 1950 to 1951 was 2 percent and from 1951 to 1952 i t was 

5.7 percent.

The next step is to “chain” these perce ntage increases to get the index series. 

Since 1950 is the base it set at 100 and the indicated ratio of 1951 to 1950 of 

102 percent gives direc tly an index of 102 for 1951. The 1952 index is secured by 

using the previously calcu lated 1951 index a nd the calculated percentage change 

from 1951 to 1952. The 1952 index is, therefore, 102 x 1.057=107.814, or 108 

after rounding. Similar computations would produce indexes for 1953 and succeeding years.

The change in procedure resulted in only minor corrections to the results 

obtained by the old method for the years 1951 and 1952. Most of these were of 

only 1 percentage point and the largest was a four point reduction in class 797, 

waste materials, n.o.s., from 112 to 108 for the yea r 1952. There was a three 

point reduction in class 527, chemicals, n.o.s., from 104 to 101 for the year 1951 

and a scatter ing of two point changes.

Bituminous coal at commodity rates in official territory1

} ti le b lo ck 

sta rt in g 

w it h —

A ve ra ge 

to ns 2

R ev en ue 

per to n

C onst ru ct iv e

re ve nu e Averag e 

to n s 3

R ev en ue 

p er to n

C onst ru ct iv e

re ven ue

1950 1951 1950 1951 1951 1952 1951 1952

1. - 2.380 $0.89 $1.05 $2,1 18 $2, 499 2, 732 $1.05 $0. 78 $2,869 $2,131

25-- 18.666 1.32 1.31 24, 639 24, 452 23.3 85 1.31 1.36 30, 634 31.804 50 .. 20,657 1.46 1.51 30, 159 31, 192 18.974 1.51 1.57 28, 651 29,789

75 .. 82, 787 1.41 1.43 116,730 118, 385 77,029 1.43 1. .50 110,151 115, 544 KM). 101,415 2. 18 2.2 7 221,085 230, 212 89, 383 2.2 7 2.41 202, 899 215,413

150. 111,773 2. 55 2.6 0 285, 021 290,610 113,644 2.6,0 2.7 7 295, 474 314, 794 200. 166,260 2.91 3. 05 483,817 507, 093 145,721 3. 05 3. 25 444,449 473, 593 2.50 189,778 3.2 2 3.3 2 611.085 630, 063 185,705 3. 32 3.54 616, 541 657,396 300. 249, 224 3.28 3.40 817,4 55 847, 362 225,318 3.40 3. 62 766, 081 815,651

350. 403,966 3.4 5 3. 57 1,393.683 1,442, 159 426,067 3. 57 3.76 1.521.059 1.602,012 400. 275,856 3.61 3.67 1,004. 116 1.012, 392 280, 586 3.67 3.87 1,029,751 1,085,868

uto 122,006 4. 11 4.0 2 501.445 490. 464 132, 422 4.0 2 4. 23 532, 336 560. 145 500. 188,875 4.36 4.3 3 823, 495 817. 829 184.674 4.3 3 4. 57 799, 638 843,960 000. 23,040 4.8 9 5.01 112, 666 115. 430 20, 847 5.01 5. 23 KM, 443 109.030 7IMI. 6,125 5. 26 5.53 32, 218 33,871 4,779 5. 53 5. 74 26, 428 27. 431 800. 1,953 5.7 5 4.8 9 11.23 0 9, 550 1,719 4.8 9 5.33 8, 406 9, 162 900. 319 6.0 3 6.1 3 1,924 1,955 503 6.1 3 6. 23 3,0 83 3,134

T o t a l . . . . 1.965,080 6,4 72, 886 6,6 05.51 8 1,933.488 6,522, 893 6,896.85 7

1

 Bas ic d ata from sta te m en ts Nos . 5138, 5250, a n d 5345. 

3

 T ota l to ns for 1950 and 1951 div id ed by 2.

3

 T o ta l to ns for 1951 an d 1952 divid ed by 2.

As previously stated, factors other tha n changes in freigh t rates might affect 

the average revenue per hund redw eight for a traffic category. The average 

revenue effect of such differences, however, must necessarily be small as compared to the effect of rat e changes if the resu lting indexes are to provide a satisfactory measure of changes in average rate s. Careful study indicates that this 

requirement is substantially satisfied in the method used here. The traffic categories chosen as units for comparison in this study were initially established 

to be as nearly homogeneous with respe ct to rate characteristics as is practicable. 

The mileage blocks are sho rter where changes in the rate progression are most, 

rapid, the various territorial movements are kept separa te, as are movements on 

int ers tat e and intra sta te rates, and there is furth er classification by commodity 

class and type of rate. Consequently, the a rea of fluctuation in average revenue 

from causes other than changes in the rate is relatively small in each of such 

traffic categories.

Under certain conditions, however, changes in the consist of the traffic within 

traffic categories can result in com parative revenues which do not so exactly 

reflect the actual changes in average rates. Such conditions occur most commonly in the commodity classes which are composed of many miscellaneous 

items, such as the various N.O.S. classes. There are also cases where specific 

commodity items have been shifted from one class to another during the years
DOMESTIC OFFSHORE SHIPPING 319

involved through the action of the Fre igh t Traffic Statistics Com mittee8

 consisting of represe ntatives of the Association of American Railroads, the railroads, and this Bureau. It is reasonable to expect that where haphaz ard fluctuations about the average do occur, they are likely to be as often above the 

average in one category as below the average in another, so that there is a 

tendency for these err ors to compensate rather than to accum ulate. The net 

effect is lhat the changes in the average revenues noted will usually reflect quite 

closely the actual changes in the average rates. However, in cases where whole 

commodities have been shifted from one class to ano ther the resu lting categories 

are no longer strictly comparable. This lack of comparability might affect the 

index temporarily but an automatic adjus tment will correct it in succeeding 

years.

May 1,1961.

Senator E. L. Bartlett,

Chairman, Merchant Marine and Fisheries Subcommittee, Sena te Comm ittee on

Inters tate and Foreign Commerce:

At the hea ring conducted by your subcom mittee on March 6, 1961, relatin g to 

the shipping problems of the noncontiguous are as of the United States, you 

requested that I submit for the record certain information as a supplement to 

the testimony which I presented in person. You asked for the follow ing: (1) 

the present cost of living differential for Federal employees in Hawa ii; (2) the 

present volume of barge operations between Hawaii and the mainland United 

States; (3) a list of the ocean freight rate increases in the Hawaii-mainland 

trade from World Wa r II to the presen t; and (4) a summ ary of the effect of 

ocean freig ht rat es on the Haw aiian pineapp le indu stry.

I am hopeful th at the following may serve as a response to your requ ests:

1. Cost-of-living differential

The cost-of-living differential now paid to classified employees of the Federal 

Government living in Haw aii is 17.5 percent.

2. Barge operations: Hawaii-mainland

I believe th at the volume of barge operation s between Haw aii and the mainland has not been a major factor, both in absolute terms and when considered 

in rela tion to the volume of conventional shipping in this trade. Although we 

have endeavored to verify this sta tistically with the Maritime Administration, 

the Census Bureau, the Corps of Engineers (Departme nt of the Army ), and our 

own board of harbor commissioners, unfortunately all have been unab le to fu rnish us with up-to-date statistics. However, we do know th at in 1958, there 

was a tota l absence of any dry-cargo movement on non-self-propelled vessels 

in the Hawaiian trade—other tha n between and among the component islands 

of the Haw aiian chain (cf. "Waterb orne Commerce of the United States, Calendar Year 1958,” D epartment of the Army, Corps of Engineers, pt. 4, p. 201).

3. Post-World War II freight rate increases

In attach ment VIII of the prepared stateme nt which I presented on March 6, 

1961. there is set for th a table of the increases in the ocean freight rates in the 

Pacific coast-IIawaii trade beginning with the increase which became effective 

on February 1, 1961. In exhibit No. 4 to the stateme nt presented to your subcommittee on March 13, 1961, by Mr. Randolph Sevier, president of Matson 

Navigation Co., there is included in the second column thereof a list of the 

increases in the rate per ton of general merchandise carried in this tr ade; th is 

list begins with the rate which was in effect on July 1, 1946 and indicates all 

of the increases which had become effective prior to April 15, 1961. On April 

13, 1961, the Federal Maritime Board suspended until August 15, 1961, the effective date of an additional general increase of approximately 19 percent in 

the Pacific coast-Hawaii trade and on shipments from ports in Hawaii to j>orts 

on the gulf and Atla ntic coasts of the mainland.

}. Effect of ocean freigh t rates on the Hawaiian pineapple indu stry

Pineapple is one of the principal bases of the Haw aiian economy. It provides year-round employment for over ,8,000 people and peak harv est sea on employment for a total of approximately 24.000. Annual payrolls are over $38 

million and local purchases by the industry are approxim ately $37 million. 

In total, the Haw aiian pineapple production is valued at $118 million.

’ Pri or to Dec. 1. 1049. the Freight Commodity Classification Committee.
320 DOMESTIC OFFSHORE SHIPPIN G

The in dust ry is now be ing face d w ith a co st-pric e sque eze in th e m ar ket of 

th e m ai nl an d I'nit ed S ta te s w he re it m us t co mpe te w ith oth er m ai nl an d fr u it s 

an d, of mo re sig nifica nce, witli an ev er-growi ng volum e of ca nn ed pine ap ple 

im po rte d fro m fo re ign are as . H aw ai i's an nual pr od uc tio n of ov er 12.5 million 

ca ses of ca nn ed pine ap pl e (2 4/ 2% ca se bas is) ac co un ts a t pr es en t fo r som e 55 

pe rc en t of the w or ld 's supp ly. Thi s re pr es en ts a de cline of some 16 pe rc en t from 

H aw ai i’s pe rc en ta ge o f th e world m ark et su pp ly in 1950. H aw aii ’s par tici pat io n 

in th e m ai nlan d m ar ket has si m ilar ly de cli ned w ith ocean fr eig ht co sts fo rm in g 

an i nc re as in gl y sign ifi ca nt el em en t in th is tr en d.

The to ta l of ca nn ed pine ap pl e im po rts into th e m ai nl an d ha ve i nc re as ed from 2 

mi llion ca ses (2 4/ 2% case bas is ) in 1958 to 2.3 mill ion in 1959 an d to 2.6 million in th e firs t 10 mon th s of 1960. Ov er hal f a mi llion ca se s of th is in cr ea se 

re pr es en ts im po rts of pine ap pl e fro m fo reign co unt ri es which are en te ri ng th e 

U.S. m ar ke t as new co m pe tito rs or, as in th e ca se of Tai w an , m ar ke dl y in cr ea sing an al re ad y firmly es ta bl ishe d foo thold . Ca ses im po rted from th es e are as 

fo r th e fir st 10 mon th s of 1960 w er e as fo llow s:

A ust ra lia____________________________________________________________ 81, 267

Ja p a n ----------------------------------------------------------------------------------------------- 3,38 3

M al ay a/ Sin ga por e___________________________________________________ 84, 292

South Afri ca_____________________________________________________ 84,084

Tai w an (F o rm o sa )__________________________________________________ 309,5 28

T ota l_________________________________________________________ 562, 554

The se foreign pine ap pl e ca n be sold in th e United S ta te s at lower prices 

th an H aw ai ia n pine ap ple, as in di ca ted by th e follo wing co m pa ra tive pr ices fo r 

a ca se of 2 4/2 choice sliced pin eapple :

From — West coast 

price

Eas t c oast 

price

H aw ai i__ ______ _______ ________ _________ _________________ . $5 60 $5 v0

M al av a______ ____ _ . _______ _________________________ ___ ____ 4 85 5 05 T aiw an____ ______ ___________________________________________. 4.75 4.70

Fo reign pine ap pl e ca n be sol d at low er pr ices be ca us e foreign co sts are low er. 

The se co sts includ e a nu m be r of differ en t ite ms , a su bst an tial fa cto r being th e 

ov er se a fr ei ght cos t. It is im port an t to no te th a t it co sts mo re to ship pine ­

ap pl e fro m H aw aii to th e m ai nl an d A tlan tic co as t of th e United Sta te s th an 

from an y oth er m aj or pr od uc in g ar ea , in sp ite of th e fa ct th a t man y of th e 

fo re ig n prod uc ing a re as are f a rth e r aw ay .

C om pa ra tive cu rr ent fr ei ght ra te s j>er ton on ca nn ed pine ap pl e fro m H aw aii 

an d from co mpe tin g foreign are as to U.S. A tlan tic port s are as follo ws:

H aw aii ---------------------------------------------------------------------------------------- $31.0 5

M al ay a---------------------------------------------------------------------------------------- 27. 68

P hil ip pin es______________________________________________________ 26. 34

Ta iw an (F orm osa )_______________________________________________ 26 .34

So uth A fric a_____________________________________________________ 17. sc,

M ex ic o---------------------------------------------------------------------------------------- 15. 88

Fre ig ht ra te s are also an im por ta nt fa ct or w ith resp ec t to th e co mpe tit ion of 

m ai nl an d fr u it s to H aw ai ia n pin eapp le. Pin ea pp le has to pa y $22.05 pe r ton 

to get its pr od uc t to th e wes t co as t wh ich is a cost no ne of th e m ai nl an d fr u it s 

ha ve to be ar. In ad di tion , pine ap pl e mus t st an d th e fr ei gh t co sts on ev er yt hi ng 

it br in gs fro m th e m ai nl an d to pr od uc e its pr od uc t. Thu s, oce an fr ei gh t co sts 

ha ve a do uble sig nif ica nce fo r pine ap pl e in H aw ai i, wh ich is ov er 2.060 mile s 

from th e so ur ce of supp ly of w hat is needed to pr od uc e th e prod uc t, an d th e 

sa m e d is ta nc e fro m the nea re st m ar ke t fo r th e finish ed prod uc t.

The fu tu re of th e H aw ai ia n pine ap pl e in dust ry an d to a pr op or tionat e de gree 

th e eco nom y of H aw ai i de pe nd s up on it s ability to co mpe te in th e m ai nlan d 

m ar ke tp la ce .

The re is no H aw ai ia n pine ap pl e pr od uc er wh o cou ld no t ex pa nd hi s pr es en t 

pr od uc tio n if th e m ai nl an d m ar ket wo uld pe rm it. Ho we ver, in st ea d of being 

ab le to in cr ea se pr od uc tio n, th e tr en d has been th e oth er wa y. On e pr od uc er
DOMESTIC OFFSHORE SHIPPING 321

went out of business in 1957. Another has substan tially reduced its planted 

acreage and ano ther has announced it is closing down operation s altogether. 

A larg e pineapple cann ery (Ha waiian Canneries) has announced th at it will 

discontinue operation s of its cannery at Kapaa, Kauai, aft er the completion of 

the 1962 harvest. This term ination is of dire consequences to the economy of 

Kauai in view of the fact that this cannery now engages some 300 year-around 

employees and increases its employment to approximately 1,500 during the 

summer months.

The pineapple industry of Hawaii is making a commendable effort to maintain top quality with lower costs and to improve efficiency. Our sole advantage 

now, however, is the demonstrably better qua lity of Hawaiian pineapple. In 

large part, because the ocean freight costs of U.S. ships are significantly higher 

than those of foreign lines bringing competing pineapple products to the main ­

land market, the Haw aiian pineapple industry is no longer able to enjoy any 

price advanta ge in the main land market even though it is closer to the mainland than any of the major foreign pineapple suppliers. As Mr. John J. 

Tolan, sec retary -tre asu rer of the Pineapple Growers Association of Hawaii, 

pointed out to Mr. Wilfred Goding, of your subcommittee, in a lette r dated 

December 14, 1960, quoting from a speech by Mr. Foster L. Wildron, direc tor 

of research of Matson Navigation C o.:

“• * * ‘With foreign ships costing less tha n half of ours and crew wages less 

than a third of ours it is not surpris ing th at Formosan pineapple can be delivered to the west coast at a transport rate as low as that for your own 

product.’ ”

Very tru ly yours,

Siiiro Kas hiwa,

Attorney General, State of Hawaii.

Alaska Ste am ship Co., 

Washington, D.C., April 18, 1961.

Hon. Warren Magnuson,

Senate Office Bu ild ing ,

Washington, D.C.

Dear Warren : At the close of the subcommittee hearings on the noncontiguous trades there was not sufficient time to question Mr. Skinner on his sta tement or on general problems connected with maritim e service to Alaska.

Senator Ba rtlett indicated that the committee would be interested in supplementary questions.

We have reviewed the general testim ony and wish to supplement our sta tement in the form of questions that might have been propounded by your 

committee in an effort to amplify our stateme nt. We subm it this material as an 

addendum to Mr. Skinner’s stateme nt.

Sincerely,

Henry W. Clark, Vice President.

Alaska Steam ship Co.,

April 18, 1961.

Question. We have seen freq uent references to barge competition in the 

Alaska trade. Do you feel barge transp ort has a future?

Answer. While the overall tonnage in the Alaska trade has not increased in 

the past 4 or 5 years th at proportion car ried by regulated barges has increased, 

and there are no acc urate statistics as to what has been carried by unre gulated 

barges. There is no question but what barge transp ort can be more economical 

because they have no manning on the barge and the tug carries a crew of 14 

whereas our ships carry crews of 42 to 48; and as I pointed out in my original 

statement, labor is 73 percent of our costs. This includes longslioring labor 

as well as the crew, nevertheless the crew costs are a major factor. On the 

other hand, barges do not adhere to a fixed schedule, partic ularly if they are 

forced to navigate in unprotected waters. This cur ren t win ter three barges 

were driven asho re in storms, one of them a total loss. Aside from this, the ir 

average time of tra ns it is 2 or 3 days longer tha n ours, and frequently many 

more days tha n t hat.

Cargo on barges is more exposed to the weathe r than on ships. It is our firm 

belief that the economy of Alaska is dependent on regular frequently scheduled 

steamship service.
322 DOMESTIC OFFSHORE SHIPPING

We believe there is a place for barge competition, but the only barge competition we have faced to date is that regulated service which has limited itse lf 

to the so-called rail belt. Because the overall volume of Alaska cargo is so 

small, the inroads made by contract barges and unre gulated barges has posed 

a serious t hrea t to our operations.

Question. In your testim ony you advocated additional personnel for the Federa l Maritime Board to perm it more extensive policing of the trades. Could 

you illus trate what you have in mind?

Answer. We face constant competition from barge operators who, in our 

opinion, do not comply with existing statutes of eith er the Coast Guard or the 

Maritime Board. They are able to attra ct certain cargoes by quoting rates 

which are not on file. With an adequ ate staff the M aritim e Board could investigate reports of such activities promptly and tak e those necessary steps th at 

would insure that laws were applied equally to all car riers serving the trade.

Question. You spoke of the small volume and the high costs of the Alaska 

trade. Would you re gard this is a marginal trad e?

Answer. We definitely do; the best proof is the fact th at 130 carrie rs have 

come and gone from the trade in 65 years. I append here with an exhibit from 

docket 881 showing the total revenues and expenses with the net resu lts after 

taxes for the 5 years 1955-59 in the Alaska trad e. This will show you that 

at no time have we made a fair return on our investment and th at in 1957 we 

operated at a loss and in 1959 with a total operation of .$16 million our profit 

was less tha n $100,000.

Question. You stat e that in your opinion maritim e rate s do not have as much 

impact in the prices or economy of Alaska as often contended. To what do you 

attribu te the high cost of living and doing business in Alaska? I apprecia te you 

covered this partly in a verbal answer to Senator Bartle tt in the hearing but 

you may wish to expand on this.

Answer. As I stated orally, the defense program which is the single biggest 

fac tor in the economy of Alaska is both a help and a burden. Alaska’s economy 

is based on defense construction wage levels, which were artificially too high in 

the days when (he contractors were actively bidding for labor. The distances to 

Alaska and within Alaska and the sparse population increase transportatio n 

costs. These facto rs, together with the weather, preclude many large warehouses so tha t the merchants in an effort to keep down inventories urge frequent 

sailings which are often made w ith small tonnage.

Question. Do you feel freigh t rates can hu rt the economy of Alaska?

Answer. There is no question but what any one of the spiraling costs if they 

continue with out any more control than they have had in the past will have a 

very profound impact.

As I have mentioned, between 1947 and 1960 longshoring costs in Alaska have 

increased over 120 percent. In that same period our crew costs have increased 

from 147 to 235 percent with an average increase of 157 percent. These do not 

include overtime costs.

We again urge strongly an impartial objective study of the relationship of 

transp ortation costs to the ultimate cost to the consumer be made. Such a study 

would give us more fac tual appreciation of the impact of tran spo rtation costs 

on the economy.

Question. Chairman Stakem stated that FMB did not favor certificates of 

convenience and necessity because he felt they would stifle competition. We 

note you favor these certificates. Why?

Answer. We felt that the improvements we have made in our operation 

notably unitization and containerization have not arisen from competition but 

from the rising costs in shipping. We desperately need better productiv ity if 

we are to keep even or nearly so with the spiraling costs. Certificates, as we 

understand them, would not be issued to a single carrier so we would still have 

competition from the leade rs in the trade. Our intere st in them is that they 

would eliminate the unregulated, irresponsible operator.

Question. Do you feel that th e suggestions you made can avoid rate increases?

Answer. As stated to you, I could not predict whether they would avoid 

rate increases, but they certa inly would minimize them.
DOMESTIC OFFSHORE SHIPPING 323

Question. You state tha t rate increases in the Alaska trade have totaled 56.4 

percent from 1947 to 1960, whereas evidence was presented showing a larger increase for both Hawaii and Puerto Rico in the same period. Is it not true tha t 

the base rate was higher for Alaska in 1947 and consequently the percentages do 

not reflect the same monetary increases?

Answer. It is difficult to compare rates between the various areas. In some 

cases the other areas are higher than Alaska and in other cases lower, but 

in any event the Alaskan consumer has not had to deal with as many or as 

great increases in his transportation costs since the war as the other noncontiguous areas. We can assume that he had adjusted himself to the Alaska 

economy the same as the consumers in the other areas have adjusted themselves to their economies in 1947.

Question. Your present fleet was acquired from war shipping. Have you any 

program for replacement?

Answer. Our ships are now carried by Maritime on a 25-year life basis, which 

gives us 10 more years according to all accounting procedures. We have kept 

our ships in A-l repair and have spent hundreds of thousands of dollars on 

modernization; consequently we regard this statutory ship life as a minimum.

Beyond this we have never been able to set aside any reserve for new 

construction. The possibility of using replacement ships from the subsidized 

lines does not offer much help because larger, more expensive ships are not 

enough faste r to make them as economical as the ships we are now operating. 

Frankly, we feel the replacement problem, while not immediately upon us, is 

one of our most serious concerns.

Question. Your statement refers to the fact tha t Alaska has unequal status 

with the other noncontiguous areas as regards cabotage because of the third 

proviso of section 27 of the Merchant Marine Act of 1920. Would you explain 

this in more detail.

Answer. Because of geographical position we face the possibility of carriage 

from interior United States through interior Canada to a Canadian port, thence 

to Alaska.

For example, Canadian National Railway has applied to the Trans-Continental Freight Bureau to publish rates between Prince Rupert and Ketchikan 

based on using Canadian National Railway from midwestern points to Prince 

Rupert and Canadian flag tug and barge Prince Rupert to Ketchikan.

The rate has not yet been published, and the service has not been inaugurated, 

but it is quite possible that such service may be offered in the near future thus 

draining cargo from U.S. rail lines and U.S. vessels. I know of no justification 

for permitting Canadian-flag vessels to participate in purely domestic U.S. commerce. Canadian law is explicit in reserving all Canadian domestic traffic to 

to Canadian-flag vessels.

Question. While you are not yet faced with direct competition from foreign 

carriers, is there any indirect impact?

Answer. In the past year foreign imports to Alaska have increased 100 percent. Practically all of this increase is from Japan. This means that American 

suppliers are losing par t of their usual market, and the American carriers 

lose the tonnage. There has been substantial increases in shipments of building supplies including cement, plywood, nails, reinforcing and structural steel, 

hardware, etc., by the Japanese. It is in this growing m arket tha t we are getting indirect foreign competition. The new pulpmill at Sitka, Alaska, which 

provides the Japanese owners with a source of raw material, also provides westbound cargo for Jap ships. It is perhaps natural that they should try to develop 

an eastbound cargo to Alaska—the 100-percent growth previously mentioned is 

proof of their success.

Henry W. Clark,

Vice President.
324 DOMESTIC OFFSHORE SHIPPING

[F ro m bri ef of A la sk a S te am sh ip Co. before th e Fed er al M ar it im e B oa rd in dock et N o. 881, Feb . 24, 1961, 

P. 29]

Table IV

Ye ar—

1955 1956 1957 1958 1959

T ota l r e v e n u e s _____ $14 ,285 ,065 

13.563,146

$14.644,466 

14.006 .732

$13,5 21,327 

13,53 9,369

$15,718,157 

14.848,824

$16 ,185 ,665 

T ota l ex pe ns es - ........................ . . . 15,992,656

N e t re su lt before Fed er al 

in co m e ta xes ___________ 721,919 637,734 

331,621

(18,042)

(*)

869,333

452,053

193,009

E st im ate d Fed er al inco me ta xes . 375,398 100,365

N e t re su lt af te r Fed er al 

in co m e ta xes..... ............... 346.521 306,113 ' (18,0 42) 417,280 92.644

O per at in p rati o ............................... 97.57 97.91 100.13 97.34 99.43

1

 Loss.

Matson Navigation Co., 

Washington, D.C., April 13, 1931.

Re domestic offshore shipping 

Mr. Gerald Grinstein,

Subcommittee on Merchant Marine and Fisheries,

Senate Offtce Building, Washington, B.C.

Dear Mr. Grinstein : On the conclusion of the hearing on domestic offshore 

shipping on March 13-14, 19(51, before the Subcommittee on Merchant Marine 

and Fisheries, Mr. Randolph Sevier requested our Honolulu office to asce rtain 

whethe r mainland companies pay a cost of living allowance to their employees 

in Hawaii, a subject discussed at the hearing.

We have only been able to find one company tha t definitely pays a differential. 

This is Pan American World Airways, who pay a 25 percent differential on base 

pay up to a maximum of $75 per month. We unofficially understand that this 

is being discontinued on July 1,1961.

United Air Lines, we understand, gives a small incre ase to nonmanagement 

personnel, hut it is not considered a cost of living differential. Also it is not 

taken away from the employee when the employee leaves Haw aii for reassignment. United apparen tly has several types of pay schedules based on where 

Ihe employee is stationed. As an example, wages for nonmanagement personnel 

in Los Angeles are less than in Hawaii, but more than in New York. There 

does not seem to be a st and ard set percentage increase.

We have checked with the Haw aii Employers Council, who indicate that 

Lockheed Aircraft provides a differential. However, we have been unable to 

learn what that is. There is no indication that any other company pays a 

differential. The Government seems to be the main source of such differential 

pay.

Sincerely,

A. J. Pessel.

Appendix A

P uerto Rico's P roblem With the U.S. Maritime Laws

The laws of the United States affect the maritim e commerce of Puerto Rico 

in numerous ways. However, Puerto Rico’s specific and peculiar problem to be 

discussed in this memorandum arises from the interaction of postwar economic 

developments with two particular provisions:

1. The application (by the For ake r Act of 1900) of the coastwise shipping 

laws to trade between Puerto Rico and the continental United States which is 

thus confined to service by American-built. American-operated, and Americanmanned vessels under the U.S. flag.

2. The limitation to foreign trades under the Merchant Marine Act of 1936 

of both the operating and construction cost differential subsidies which thus 

do not benefit trade between Pue rto Rico and the continen tal United States.
DOMESTIC OFFSHORE SHIPPING 325

Th e lim itat io n <»f th e sh ip pi ng tr ad e be tw ee n Pue rt o Rico an d th e co nt in en ta l 

1'n ite d S ta te s to U.S. ve ssels se rv es th e pri m ary pu rp os e of th e U.S. m ar itim e 

law s—to m ai nt ai n fo r re as on s of nat io nal polic y an ad eq uat e American m er ch an t 

marine. The co nseq ue nc e is th a t th e high co st of U.S. Hag se rv ic e is bo rn e by 

th e comm erc e a nd t he p eo ple of Puert o R ico.

As a re su lt of post w ar eco nomic de ve lopm en ts, th is co st bo rn e by P uert o Ri co 

ha s bec ome a he av y, dis cr im in at ory bu rd en , u n ju st to th e j>eople of P uert o Rico 

an d in co nflic t w ith th e nat io nal in te re st of th e United Sta te s. Ther e is no 

reason to be lie ve th a t th e Co ng ress e ve r in te nd ed to im po se s uc h a bu rd en , no r is 

it ne ce ss ar y to perp etu ate it in ord er to se rv e th e in te nd ed pu rp os es of th e U.S. 

m ar itim e law s.

The eco nom ic tr ends which are resp on sibl e fo r mak in g th is sp ec ia l bu rd en of 

P uert o Rico ex ce ss ive and dis cr im in at ory ha ve no t sto pp ed . In fa ct , consequ en ce s of th e de ve lopm en ts w hi ch ’ h av e alr ea dy oc cu rred ha ve no t yet bee n 

fu lly fe lt. It ca n cl ea rly b e fo rese en th a t th es e conseq ue nc es wi ll, w ithin an oth er 

fe w ye ar s, se riou sly im pe de th e ef fo rts of th e Co mmon we alth of P uert o Rico 

to im prov e it s econom y an d to ra is e th e se ve re ly de pr es se d liv in g st an d ard of its 

peo ple, un less c or re ct iv e ac tion i s take n.

It is th e pu rp os e of th is mem oran du m to show how th e unin te nd ed bu rd en 

on Pue rt o Ri co has ar is en , to dem ons trat e it s size an d to ex plor e m ea ns by 

which it ca n be al le via te d w ith ou t vi ola ting th e ba sic pu rp os e of m ai nta in in g 

an American m er ch an t m ar in e of a deq uat e size.

PUERTO RICO HEAV ILY DEPEN DS ON COMMERCE W IT H TH E CONTINEN TAL UNITE D STAT ES

Pue rt o Rico is a sm all isla nd but it also is th e ho me of mor e th an 2 million 

peo ple. Rh od e Is la nd an d D el aw ar e are th e only S ta te s w ith a sm al le r la nd 

are a but 25 of th e 50 S ta te s ha ve a sm al le r po pu latio n. Puert o Rico ’s po pu lation de ns ity of G85.1 per sq ua re mile (1000 ce ns us ) is ex ceeded only by th a t of 

Rh od e Is la nd (093 .5 pe r sq ua re mile ) an d is al m os t 12 tim es th e av er ag e of th e 

co ntinen ta l U ni te d S ta te s (58.9).

If th e United S ta te s w as as he av ily pop ul at ed as P uert o Rico, it s te rr it o ry 

wo uld ho ld ne ar ly all th e jieople in th e world. Ye t P uert o Ri co ’s natu ra l re ­

so ur ce s are na rr ow ly lim ite d. I’u er to R ic an s m ust sa tisf y m an y of th e ir ne ed s 

w ith goods gr ow n or m ad e else whe re an d th ey ha ve de pe nd ed on su ch goods 

ev er sin ce th e is la nd w as dis co ve red in th e da ys of Co lum bus. To de velop 

a de ce nt st an d ard of liv ing. I’u er to Rican s m us t bring in no t only a la rg e portio n of th eir ne ce ss iti es but also ca pit al good s an d ra w m ate ri als to m ak e pr od ­

uc ts f or sh ip m en t to o th er m ar ke ts .

W ith a ne t inc om e of $1,311 million in th e fisc al y ear 1900. P uert o Ri co bo ug ht 

goods fr om oth er are as in th e am ou nt of $912 mill ion (83 pe rc en t of it fr om th e 

co ntinen ta l U ni te d S ta te s) an d sold goods in th e am ou nt of $012 mill ion (97 

I»ercent to th e co ntinen ta l United S ta te s) . Th e to ta l of its tw o-way ov erse a 

tr ad e th u s am ou nt ed to mor e th an it s net inc om e. In contr as t, to ta l im po rts 

and ex po rt s of th e U ni ted S ta te s by la nd an d by w ate r ha ve in re ce nt yea rs bee n 

well under 10 per ce nt of net nat io nal inc om e. Puert o Ri co ’s de pe nd en ce on its 

ov er se a tr ad e w ith th e co nt in en ta l U ni ted S ta te s is a t le as t a dozen tim es gre ate r 

th an th e de pe nd en ce of th e U nited S ta te s on all it s fo re ig n comm erc e.

Th e se al an es be tw ee n Pue rt o Ric o an d th e m ai nl an d are th e hi gh w ay s conne ct in g Pue rt o Ri co w ith the St at es . The im po rtan ce of efficie nt in te rs ta te 

high w ay tr ansp ort ati on to econo mic pr og re ss an d national de fens e is we ll rec og ­

niz ed by th e in sti tu ti on of th e In te rs ta te H ig hw ay Syste m. Efficient tr an sp o rta ti on a t re as on ab le co st is needed w ith eq ua l ur ge nc y on th e se al an es th a t are 

th e high way s be tw ee n P uert o Ric o an d th e St at es .

Pue rto Ri co ’s st an d ard of liv ing has rise n ra pid ly in th e la st de ca de bu t pe r 

ca pita incom e st il l is unde r half th a t of Mississippi, th e lowe st ra nkin g am on g 

th e Sta te s, an d a li tt le un de r one -q ua rter of th e U.S. av er ag e. P uert o Rico 

ne ed s mu ch fu rth e r im prov em en t. As it s de ve lopm en t pr og re ss es in ev erin cr ea sing in te gra ti on w ith th e econom y of th e U ni te d Sta te s, its de pe nd en ce 

on ov erse a tr an sp o rt also is bound to in cr ea se fu rt h er. C ar ef ul est im at es in dicat e th a t to ta l dry ca rg o sh ip m en ts an d re ce ip ts mus t be ex pe cted to ri se by 

ab ou t tw o- th irds in th e nex t 15 y ea rs if Pue rto Ri co ’s de ve lopm en t is to pro ceed 

on its ex pe cted an d so re ly needed co urse. Bur de ns om e sh ip pi ng ra te s im pose 

a se riou s han di ca p on th is es se nt ia l pr og re ss.
326 DOMESTIC OFFSHORE SHIPPING

PUERTO RICO PAY S HEAVY FREIG HT CHARGES BO Tn WAYS

As the overwhelming proportion of Puerto Rico’s oversea trade is inter ­

changed with the continen tal United States, cargo has to be carried over a 

substantial distan ce—more tha n 1,000 miles to the nea rest Florida ports; about 

1,600 miles to New York, Philadelphia and Baltimore where the heaviest traffic 

is con centrate d; somewhat furth er to the important gulf ports of Mobile, New 

Orleans and Ho uston; and two or three times as far to the Pacific ports from 

which Pue rto Rico also receives heavy loads. Thus, freigh t charges necessarily 

are substantial. And Puerto Rico has to pay them both ways, coming and 

going.

Ordinarily, it is difficult to determine who bears the burden of transp ortation 

charges. In rega rd to any individual transaction, it is, of course, easy enough 

to find o ut whether the buyer or the seller'm akes the actu al freight payment to 

the carrie r. But, other important, though less obvious, factors must be considered. First, the freight-paying buyer may, because of competitive pressure, 

be able to reduce his price to the seller by the amount of the freight or by part 

of i t ; conversely, the freight-paying seller may be able to raise his price to the 

buyer by the amount of freigh t or part of it. Second, th e buyer who bears the 

freigh t cost without purchase price adjustment, may pass it on to his customer, 

or the seller who bears it may pass this cost back to his supplier. Moreover, 

when more than one transaction is to be considered, it must be recognized that 

market conditions create differing situations for different commodities and 

also for the same commodity at different times.

Because of all these difficulties, it has become an accepted convention in analysis covering any large aggregate of cargo movements to assum e that the 

freigh t cost is split evenly between sellers and buyers, shippers, and recipients. 

Because of the law of averages, it is assumed that the actu al distribu tion is more 

likely to approximate such an even split than any other division of transporta ­

tion cost. While this assumption may be valid in many cases, it is not at all 

realistic in regard to traffic between Puerto Rico and the continental United 

States.

Pue rto Rico’s purchases from the continent, while representing a large share 

of Pue rto Rican supplies, amount to only a very small fraction of demand on 

the many times larger U.S. market. Absorption of freigh t by mainland sellers 

might result in a reduction of price to ultimate consumers in Puerto Rico and 

thus lead to an increase in local demand. However, even if this increase were 

percentagewise large, it still would be a hardly noticeable addition to demand in 

the mainland market. Consequently, there is no incentive for mainland sellers 

to absorb freig ht charges to Puerto Rico. These charges must be borne by the 

economy and the people of Pue rto Rico, except under unusual and rar e circum ­

stances.

Similarly, Puerto Rico’s shipments to the continent, while representing a large 

share of Puerto Rico’s production, account for only a small frac tion of mainland 

supplies of most of the products concerned. There are some exceptions which 

will presently be discussed. In the ordinary situation, the Pue rto Rican share 

of mainland supplies is too small to affect mainland prices. That is, the Puerto 

Rican product delivered in New York will bring the same price as an identical 

prod uct made in that city. The freight must be borne by the Puerto Rican 

seller.

Among the apparent exceptions, raw sugar is most prominent, since Puerto 

Rico supplies the mainland market with a much larger shar e of this commodity 

tha n of any other important one. However, under the quotas and other features 

of the marketing system established by the Sugar Act, the delivered cost of 

the P uerto Rican supply cannot exer t any significant influence on the sug ar price. 

Puerto Rican producers get the same mainland price no ma tte r what their 

production and delivery costs may be. Thus, tran spo rtation charges for sugar 

are borne by Puerto Rico.

Puerto Rican manufacturers may also supply a substan tial proportion of the 

mainland market in a few specialty items, notably brassieres. In these instances, it may be more difficult to determine where the freight charges are 

ultimately borne, but these items have low transportati on costs, a re often shipped 

by air, and certain ly account for a minute portion of the total ocean freight 

bill. Another situation in which the freig ht charge distribution is difficult to 

appraise, may be that of Pue rto Rican tobacco. While this product does not account for a large portion of the total mainland tobacco supply, its cha racteristics 

are sufficiently d istinct to establish a sepa rate market and only a detailed analysis
DOMESTIC OFFSHORE SHIPPING 327

of that market would indic ate where the trans portation cost is borne. Yet, even 

if it were all borne by mainland buyers, it would not greatly affect the distrib ution of the tota l ocean freight bill for Pue rto Rico’s commerce with the continental United States.

It follows from all the foregoing that there may be some situatio ns in which 

Puerto Rico does not have to pay all of the freight for its shipm ents to the 

mainland. Without an exhaustive study, it is impossible to say that no similar 

situatio n exis ts from time to time in regard to Pue rto Rican cargo receipts 

from the continent. It is clear, however, t ha t the sha re of the total ocean freig ht 

bill paid by the mainland economy m ust be very small indeed. While the sta tement that Puerto Rico pays the total freigh t charg es both coming and going 

may not be lite rally and precisely correct, it certainly is so nearly accurate 

as to be descriptive of the actu al facts. Even if it can be said only with some 

qualifications that Puerto Rico pays the tota l freigh t bill both ways, there 

is no doubt but th at the burden of any differential between low and high tra nsportation costs falls on the economy and the people of Puerto Rico.

U.S. FLAG SERVICE IS ESP ECIAL LY EXP ENSIV E

Due to geographic and economic conditions, Pue rto Rico would in any event 

have to car ry a heavy burden of transp ort ation costs for its commerce with 

the continental United States. Its distance from mainland sources of supplies 

and markets necessarily involves a large freigh t bill. Much of its trade consists of bulky goods of limited value. The inevitably heavy freigh t burden is 

aggravated, however, by the mandatory and exclusive use of U.S. shipping services. It is not necessary here to explain that—or why—oi>eration of U.S. flag 

vessels is substan tially more expensive tha n ship operation under foreign flags. 

For vessels operatin g regu larly in foreign trade, the recognized operating cost 

differential is made up by Federal subsidy. In trade between Pue rto Rico and 

the continen tal United State s, this diffe rential is borne by the economy and the 

people of Puerto Rico as part of the freight charges they pay.

Operating cost diffe rentials recognized for subsidy purjxises in foreign services by the Maritime Adm inistration in 1056, 1957, and 1958 average 71.9 percent of wage costs, 21.4 percent of subsistence costs, 30.5 percent of maintenance 

and rep air costs, 18 percent of hull and mach inery insurance, and 55 percent 

of protection and indemnity insurance. Since then, some of the recognized 

differentials have been slightly revised, others increased. The net change has 

not been significant and the 1958 rates still provide the best basis for estimating the operatin g cost differential borne by Puerto Rico due to the obligatory 

use of U.S.-flag vessels for its shipping services to and from the continental 

United States.

The volume of cargo carried and the operatin g costs incurred by the car riers 

in regular service between Puerto Rican ports on the one hand and Atla ntic 

and gulf ports on the other hand are known in detail from the record of the 

investigation of rat es and charg es in these services conducted by the Federal 

Maritime Board between 1957 and 1959 (docket No. 807). Detailed computations based on these data and on the avera ge operating differentials quoted above 

are shown in appendix A. These computations indicate that the operatin g differential borne by Puerto Rico in these services averaged $4.04 per long ton 

of cargo in 1957.

The ca rri ers’ freight revenues in these same trades avera ged $29.93 per long 

ton in 1957. Fre ight rates in these services are subject to regulation by the 

Federal Maritime Board. If th e carri ers’ costs had been lower by the operating 

differential, their charges would have been lower by at leas t the same amount 

and would have averaged no more than $25.89 per long ton in 1957. The operating differential borne by the economy of Pue rto Rico thus was equal to a surcharg e of 15.6 percent on top of the freigh t cost that would have prevailed if the 

mandato ry U.S.-flag service did not involve especially high operating costs.

Equally detailed inform ation is not available for the services between Pue rto 

Rico and jsir ts on the Pacific coast. Because of the much longer distance, the 

operating cost differential per ton of cargo is certainly larger tha n on the Atlantic and gulf routes.1

 On the other hand, the operating cost differential is

1

 D at a av ai la bl e fro m th e Fed er al M ar itim e Boa rd in ve st ig at io n of th e ge ne ra l in cr ea se 

in Pa cific co as t-Pue rt o Ric o ra te s (d oc ke t No. 903). while not co nc lusiv e, wo uld su pport an 

es tim at e plnc lng th e op er at in g co st di ffer en tial n t $0.93 nnd th e su rc har ge a t 18.3 pe rc en t.
328 DOMESTIC OFFSHORE SHIPPIN G

prob ab ly so m ew ha t sm al le r fo r th a t po rtio n of dr y ca rg o which mo ves in bu lk 

betw ee n Pue rt o Iii co an d th e co ntinen ta l United S ta te s an d fo r which al so no 

de ta iled co st in fo rm at io n is av ai la bl e. Ho we ver, mu ch of th is bu lk tra ffi c is 

car ri ed by th e sa m e oper at ors an d in th e same or si m ilar ve ssels as th e line r 

traffic to an d from A tlan tic an d gul f po rts . Con sequ en tly , th e as su m pt io n of 

an oper at in g co st di ff er en tial eq ua l to th a t foun d in liner serv ice ca nn ot be fa r 

wrong fo r thes e bu lk mo veme nts . Pr ob ab ly th e on ly ex ce ption is the he av y 

mov em en t of ce men t to Flo ri da, a pri vate sh ipping op er at io n of th e ce men t 

pr od uc er . If th is mo ve men t is ex clud ed from co ns id er at io n, it ca n be assu med 

th at, on th e av er ag e, th e oper at in g co st differ en tial fo r all ca rg o tra ffi c (e xc ep t 

ce men t) be tw ee n Puer to Rico an d th e co nt in en ta l United Sta te s (in clud in g bu lk 

mov em en ts as we ll as mov em en ts from an d to Pacif ic port s) is ab ou t th e same 

as th e di ff er en tial co mpu ted fo r liner tra ffi c fro m an d to A tlan tic an d gu lf p o rts ; 

th a t is, $4.04 pe r lon g ton of ca rg o in 1957. W hile no de pe nd ab le fig ures are 

av ai la bl e fo r a more re ce nt yea r, th e pr es en t op er at in g co st diffe re nt ia l is lik ely 

to be so m ew ha t hi gh er.

THE BURDEN ON PUERTO RICO IS EXCESSIVE AND DISCR IMINATORY

Official st ati st ic s on th e to ta l volum e of o cea n tra ffi c betw ee n Puer to Rico an d 

th e co nt in en ta l United S ta te s are pr ov ided an d an al yz ed in ap pe nd ix B. Th ese 

d ata show th a t th e dry ca rg o mov em en t on which Puert o Rico bea rs th e su rch ar ge of th e o pe ra ting diffe re nt ia l fo r U.S.-flag sh ip m en t am ou nt ed to 2,738,000 

sh ort to ns in 1959. The prev io us ly compu ted 1957 oper at in g co st differ en tial 

of $4.04 per lon g ton (o r $3.61 pe r sh ort ton) th ere fo re am ou nt s to a to ta l o f 

al m os t $10 millio n. Sin ce sh ip oper at in g co st di ff er en tial s co ntin ue d to rise 

aft e r 1957, it is sa fe to sa y th a t th e co st of th e oper at in g diffe re nt ia l to th e 

peop le of P uer to R ico now e xc eeds $10 m illion .

Thi s su rc har ge on th e oc ean fr eig ht bil l is dis tr ib ute d th ro ug ho ut Pue rto 

Rico’s econom y in se ve ra l way s. The su rc har ge on inco ming goods is ref lec ted 

pri nci pal ly in hi gh er pr ic es to th e co ns um er an d th us is a redu ct io n of hi s real 

bu ying po wer. Ho we ver, it also af fe cts th e pr ices of pro du ce rs ’ goo ds an d th us 

th e co st of pr od uc tio n in Puert o Ric o. W he re th is pr od uc tion is fo r th e local 

m ar ke t, th e ultim at e effect on th e co ns um er is ap pr ox im at el y th e same as th at 

of th e su rc har ge on co ns um er goo ds. W he re th e pr od uc tion is fo r th e m ainlan d 

m ar ke t, th e effect of th e su rc har ge on inc om ing pro duc er s’ g oods is me rge d w ith 

th e eff ect of th e su rc har ge on pr od uct s going to th e m ai nl an d. Th e two combine to re du ce th e ne t re ve nu e of th e P uer to Rican fa cto rs of prod uc tio n. Som e 

of th is re du ct io n may be ab so rb ed by low er prof its of Puer to Rican en te rp rise 

bu t mos t of it is lik ely to be refle cted in lower wag e pa ym en ts. Th e to ta l su rch ar ge th u s lia s th e eff ect of re du ci ng th e st andard of liv ing of th e peo ple of 

Puert o Rico.

In ord er to ap pra is e th e sign ifica nc e of th is bu rd en , it is be st to co mpa re it 

w ith th e op er at in g diffe re nt ia l su bs id ie s pa id by th e Fed er al Gov ernm en t to 

sh ip oi> era tor s in fo re ign tr ad es . The se su bs idies are tlie mea ns by wh ich th e 

bu rd en of th e op er at in g diffe re nt ia l in ot he r U.S. sh ip pi ng se rv ices is dis tr ib ­

ut ed to th e ta xpay ers in th e co ntinen ta l United St at es . Th e ac co un ts of th e 

M ar itim e A dm in is trat io n sho w oper at in g di ffer en tial su bs idies of $152.7 mi llion 

fo r 1959. This am ou nt ed to $0.89 per ca pi ta fo r th e po pu latio n of th e co nt ine nta l U ni te d S ta te s (176,947.000 on Ju ly 1, 195 9). In co ntr as t, th e bu rd en of 

$10 mill ion on th e Puert o Rican peop le (2,340,000 on th e same dat e) am ou nt ed 

to $4.28 per ca pi ta . Th us , th e bu rd en on each pe rson is on th e av er ag e five 

tim es as he av y in Puer to Rico as it is in th e co nt in en ta l United St ates .

How ev er, av er ag e pe rson al inc om e in Pue rto Ri co in 1959 w as only $511 as 

ag ai nst $2,165 in th e co nt in en ta l U ni ted St ates . Th us , th e co st of th e m ar itim e 

oper at in g di ff er en tial to th e Pue rt o Rican people ab so rb ed 84 ce nt s ou t of ev ery 

$100 of th eir income, w hile th e cost to th e peo ple on th e co nt in en t am ou nted to 

on ly 3.8 c en ts p er $100 o f incom e. F or th e iden tic al pu rp os e of ke ep ing m er ch an t 

sh ip s in op er at io n un de r th e American flag, tlie people of Puer to Rico wh o can 

less affo rd it are c ontr ib uting 5 tim es as much jier pe rson an d 22 tim es as much 

in re la tion to inc om e as th e mu ch w eal th ie r po pu latio n of t he co ntine nta l T’ni te d 

St at es .

Yet, ev en th es e dra sti c fig ures do no t tell the full stor y. Th ey ref lec t only th e 

oper at in g co st di ff er en tial on the tra ffi c wh ich ac tu ally moved be tw ee n Pue rto 

Rico an d th e co nt in en ta l U nited S ta te s in 1959. Bu t, if th ere were no such 

bu rden , an d if fr ei ght ra te s were co rres po nd ingl y lower, the traffi c wo uld be 

la rg er . App ro xi m atel y 56 pe rc en t of th e va lu e of P uert o Rico ’s m er ch an dise
DOMESTIC OFFSHORE SHIPPING 329

sh ipmen ts (e xc lu di ng pe troleu m an d its pro du ct s) are pr od uc ts of som e GOO 

in dust ri al pla nts es ta bl ishe d in th e post w ar pe riod a s a re su lt of th e de te rm in ed 

an d wi dely rec og nized de ve lopm en t ef fo rts of th e Com mon we alth Gov ernm en t. 

Sin ce th e decis ion to loca te in P uert o Rico de pe nd s on co m pa ra tive co st an d 

sin ce fr eig ht co sts are fo r man y in dust ri es an im po rtan t fa ct or , th ere ca n be 

no do ub t th a t mor e new pla nts wo uld ha ve bee n es ta bl ishe d ea ch y ear if th ere 

ha d been no oper at in g cost di ff er en tial an d fr eig ht ra te s be tw ee n Puert o Rico 

an d th e m ai nl an d ha d been low er.

Th e m an da to ry us e of Am eri ca n-fla g se rv ic e th us ha s no t on ly im po sed a 

he av y su rc har ge on th e Puert o Rican pe op le fo r th e t raffi c th a t actu ally m oved ; 

it also ha s slo we d do wn in dust ri al de ve lopm en t an d, w ith it, th e re du ct io n of 

Puert o Ri co ’s h igh ra te of ch ro ni c un em pl oy men t an d the so rely ne ed ed im prov em en t in th e low living s ta ndard of i ts p eop le.

ECONOMIC TRENDS THR EAT EN TO AGGRAVATE TH E BURDEN

The ex ce ssive an d di sc rim in at or y bu rd en on th e P uer to Rican eco nom y 

de m on st ra te d ab ov e ari se s fro m th e m an dat ory us e of U.S .-flag sh ip s w ithout 

the benefit of oper at in g di ff er en tial su bs idy. When th is kind of su bs idy was 

con fined to fo re ig n tr ad es in th e M er ch an t M ar in e Ac t of 1936, eco nomic co nd ition s were di ffer en t. I t is du e to se ve ra l post w ar de ve lopm en ts th a t th e bu rd en 

ha s g rown to it s pr es en t impo rta nc e.

In 1936, th e econom y of Pue rto Rico w as fa r less develop ed. A part fro m the 

sh ip m en t of su ga r, its traffi c w ith th e co nt in en ta l United S ta te s was q uite sm all . 

Ther e was no in dust ri al deve lopm en t th a t co uld be slo wed down by th e high 

fre igh t, level. More over, th e effect of th e op er at in g co st diffe re nt ia l on the 

fr ei ght level w as fa r mo re mo dest. All th is be gan to ch an ge a ft e r th e w ar an d 

th e ch an ge ha s bee n a co ntin uo us one, w ith th e co nseq ue nc es becomi ng mor e im ­

port ant yea r a ft e r ye ar.

It is ha rd ly ne ce ss ar y to el ab ora te he re on th e pr og re ssin g tr ansf orm ati on of 

th e Pue rto Rican econo my . I t may suffice to po in t ou t th a t to ta l dry ca rg o 

traffi c w ith th e m ai nl an d, wh ich now ex ce ed s 2.7 mi llio n ton s, w as li tt le mo re 

th an 1 million tons in th e la st few yea rs be fo re th e w ar an d ar ou nd 1.5 m i'l io n 

tons in th e firs t few post w ar ye ar s. Thu s, th e ca rg o mo ve men t on which Puer to 

Rico be ar s th e oper at in g co st diffe re nt ia l has grow n gr ea tly. I t m ust co nt in ue 

to grow if th e de ve lopm en t of th e Pue rto Rica n eco nomy is to pr og re ss.

W hile th e ca rg o mo vement ha s been grow ing, th e op er at in g c ost dif fe re ntial i nclud ed in th e fr ei ght bill ha s been rising a t a mu ch fa ste r ra te . The oper at in g 

co st di ff er en tial recogn ize d by the M ar iti m e A dm in is trat io n in fo re ign tr ades ha s 

in cr ea se d al m os t ev ery year sin ce th e end of t he w ar . In th e f ir st fe w yea rs a ft e r 

th e w ar , su bs idies co ve red a li tt le mo re th an 45 pe rc en t of American ex pe nd itu re s fo r ite ms su bj ec t to ope ra ting cost diffe re nt ia l. To da y, th e ra ti o is mo re 

th an GG pe rc en t. T hi s mea ns th at th e reco gn ized dif fe re nt ia l has in cr ea se d fro m 

li tt le mo re th an SO per ce nt of fo re ign co sts to more th an 150 per ce nt—alm os t 

tw ice as mu ch. Ju s t as th e ope ra ting co st diffe re nt ia l in fo reign tr ades has 

grow n, a co ns ta nt ly in cr ea si ng pe rc en ta ge has also bee n ad de d to P uert o Rico 's 

fr ei gh t bill. Ther e is no reas on to be lie ve th at th is risi ng tr en d has ru n its 

co urse. On th e con tr ar y, it mus t be exp ec ted to c on tin ue .

Th e same econom ic fa cto rs which are re sp on sibl e fo r th e uptr en d in th e co st 

of Am erican sh ip op er at io n, also are a t work to in cr ea se anoth er port io n of 

Pue rto Rico’s frei gh t bill wh ich ha s no t ye t been co ns id er ed—th e co st of load in g 

an d di sc ha rg in g o f ca rgo. In stev ed or in g as in sh ip ping an d sh ip bu ild in g, wag es 

ha ve ke pt pa ce w ith th e rise in th e ge ner al American wage level wh ich ha s been 

su pp or ted by a ra pi d in cr ea se in pro du ct iv ity. R ut no su ch in cr ea se in pr od uc ­

tivity ha s oc cu rred in sh ip ping an d sh ip bu ild ing, o r in load in g an d dis ch ar gin g 

ca rgo. As a re su lt, stev ed or in g ex pe ns e also has st ea di ly becom e he av ier. In 

1957 it av er ag ed in liner s er vice b etw ee n P uer to Rico an d A tla nt ic a nd gulf p ort s 

$15.25 pe r lon g ton . or 51 ce nts ou t of e ve ry doll ar of f re ig ht ch ar ge s. In se rv ice 

betw ee n Pa cif ic co as t po rts an d Pue rto Rico in 1959. stev ed or in g an d re la te d ex ­

pe nses av er ag ed $18.38 per long ton. or 54 ce nts out of ev er y dollar of fr ei ght 

ch arge s.

Hi gh stev ed or in g ex pe ns es to ge th er w ith hig h-lev el op er at in g co sts ha ve ma de 

sh ip pi ng in or di na te ly ex pe ns ive in th e United Sta te s. Thi s is dra m ati call y illu str ate d by th e sh arp tra ffi c de cli ne in co as tw ise an d in te rc oas ta l sh ip o pe ra tion s. 

W hile to ta l econom ic ac tivity in th e United S ta te s fa s m ea su re d by GNP in co nst an t do llar s) has in th e la st few yea rs been mor e th an do ub le th a t of th e yea rs 

im m ed ia tely be fo re th e w ar . co as tw ise to nn ag e of deep sea oj> era tor s on th e At-
330 DOMESTIC OFFSHORE SHIPPIN G

lantic and gulf coasts, for example, has been only about one-quarter of the prewar level. Its rela tive importance thus has dropped to one-eighth, as shippers 

have found movement by rail and t ruck more economical for most cargoes.

No sim ilar diversion of cargo to more economical transp ortation is possible in 

oversea trade s. Yet, the technological lag and high cost of ocean shipping—and especially of ocean shipping under the American flag—is equally bothersome in 

these trades. The shipping industry is paying increasing atte ntio n to this problem. It is attempting to reduce costs by introducing vessels with lower operating 

expense and developing new methods of cargo handling in orde r to reverse the 

tren d of growing stevedoring costs. With its freight bill alre ady including a 

discriminatory, heavy, and growing surcharge to meet the operating cost differential of American vessels, Puerto Rico certainly needs to benefit from technological improvements to reduce its stevedoring cost.

Indeed, in the absence of such technological improvement the inevitable rise 

in stevedoring wages is bound to lead to a continuing increase in costs of tra ns ­

portation between Puerto Rico and the mainland. Cargo rates on the Puerto 

Rican routes have in recent years risen much more than the general price level. 

Rates of the most important service from Atla ntic and gulf ports to P uerto Rico 

have been increased almost 50 percen t in the past 10 years and rates from Pacific 

ports to Puerto Rico have risen even more. The upward trend in costs will necessarily continue unless the effect of wage increases can be neutralized by technological improvement. Yet. Puerto Rico’s ability to benefit from such improvement unhappily is sharp ly curtailed by the U.S. m aritime laws which require the 

use of American-built vessels but provide no means for getting such ships into 

service between Puerto Rico and the continental United States.

SH IP REPLACEM ENT COSTS IMPE DE TECHNOLOGICAL PROGRESS

While some limited reductions in stevedoring costs can be achieved with 

vessels of trad itio nal design by technological improvement in the handling of 

cargo, it is generally recognized that majo r reductions in both stevedoring and 

vessel operating costs depend on improved vessel design. This is dramatically 

illu strated by the profitable operation of vessels of modern construction in 

inte rnation al trades in which shipping rates now are so low that older vessels 

cannot earn the ir depreciation. In trades like those between Puerto Rico and 

the continental United States where voyages ar e relatively short, cargo handling 

accounts for an especially heavy share of tota l cost. Therefore, it becomes 

especially urgent to avert continuous cost increases by the replacement of older 

vessels.

The four car riers now rend ering the largest part of the services between 

Pue rto Rico and the continental United States are using war-built C- l and C-2 

vessels which were acquired nt relatively low prices. In their liner trad e to 

the Atlantic and gulf ports, they employ the full-time equivalent of 14 such 

vessels for which they paid about $16 million (including cost of betterments) 

and which have now been depreciated to about $7 million. A Maritime Administr ation estimate placed the marke t value of these vessels in October 1958 at 

$11.3 million. However, the cost of replacement by vessels built in American 

yards and of modern design—as, for example, the Maritime Adm inistration’s 

Clipper—is estimated at $164 to $187 million ((lie exact amount depending on 

the number ordered at any one time). Even to reproduce these vessels “as is ” in 

American yards today is estimated to cast $103 million.

A new investment of approximately $170 million over and above the amounts 

now invested in these ships would be needed to replace them with modern 

vessels. While these ships handle the major part of Pue rto Rico’s traffic, they 

do not carry all of it. To assure the most efficient ha ndling of all cargo between 

Pue rto Rico and the mainland would require a new investm ent of more than 

$200 million.

The need for such a vast investm ent over and above the capital now employed 

arises from the combination of three factors. First, a modern ship is a more 

complex piece of machinery and therefore more expensive. The significance 

of this factor may be indicated by the difference of about 70 percent between 

reproduction “ns is” and replacement with modern vessels (although the dif ­

ference would be considerably less if cost in foreign yards were considered). 

This additional investment needed to secure the modern design features is 

economically warranted, because it is more than offset by reduction in vessel 

operating and cargo expenses.
DOMESTIC OFFSHORE SHIPPING 331

Sec ond , th e ca pit al re quir ed fo r ac qu is itio n of th e pre se nt sh ip s w as kep t to 

a minim um by ac tion of th e Fed er al Gov ernm en t which m ad e th es e vessels 

av ai la bl e a t low pr ic es under th e Sh ip Sales Ac t of 15H6. If th e oper at ors ha d 

a t th a t tim e bee n comp elled to ac qu ire ve ssels a t pr ic es re la te d to th e co st of 

new co ns truc tion in American ya rd s, th ey wou ld no t ha ve bee n ab le to resu me 

no rm al service . Nor co uld they su bs eq ue nt ly ha ve ex pa nd ed th eir ope ra tion s 

w ith vessels pu rc ha se d on such term s. The enti re econom ic de ve lopm en t of 

Puer to Iii eo wo uld ha ve been sty mied w ithout th e po st w ar sh ip disp os al pr ogram s. The Sh ip Sales Act of 1946 th u s fo re st al le d th e de ve lopm en t of fa r 

more se riou s prob lems by tr eati ng oper at ors in P uert o Rican an d oth er do mestic 

tr ad es on an eq ua l ba sis w ith ope ra to rs in fo re ig n tr ad es .

Thi rd , lik e U.S .-flag ope ra to rs on “e ss en tial tr ad e ro ut es ,” th e oi> erators of 

se rv ices be tw ee n P uert o Ri co an d th e m ai nla nd m ust unde r ex is ting laws em ­

plo y ve ssels built in Am er ic an yard s whe re co sts a re fa r hi gh er th an in fo re ig n 

ya rd s. How ev er, un like th e Sh ips Sa les Act of 1946, th e sh ip re pl ac em en t pr ogr am es ta bl is he d in re ce nt ye ar s unde r th e M er ch an t M ar ine Ac t of 1936 does 

no t tr e a t oper at ors on Puert o Rican ro ute s on an eq ua l ba sis w ith thos e in 

fo reign se rv ices wh o are entitled to co nst ru ct io n dif fe re nt ia l su bs idies.

In fo re ig n tr ad es , th e re pl ac em en t of old ve ssels by mod ern sh ip s bu ilt in 

American yard s is m ad e po ssible by th es e co ns truc tion diffe re nt ia l su bs idies 

wh ich now co ve r ap pr ox im at el y 50 pe rc en t of th e co st of ne w ve ssels —p lus a 

nu m be r of oth er Gov er nm en t su pp or ts. In ad ditio n to pa ying half or al m os t 

half of th e co st of th e ne w vesse ls, th e G ov er nm en t ta kes ba ck th e old vessels 

a t a fa ir ly ge ne ro us trad e- in va lue, th us re duc in g th e ca sh ne ed to les s th an 

40 iie rcen t of th e new ve ss els’ cost. More over, it wi ll gra nt a 20 -yea r loa n 

eq ua l to 75 pe rc en t of th e oj ie ra to r’s co st o r els e it wi ll pr ov ide m or tg ag e insu ra nc e up to 90 pe rc en t. Per hap s even mor e im port an t, th e G ov er nm en t ha s 

ex em pted fro m co rp ora te incom e ta x, in ad ditio n to de pr ec ia tion , sh ip o pera to rs ’ 

profits se t as id e fo r th e pu rp os e of vessel re pl ac em en t. For fo re ign tr ad e oper at ors , th e tr u e co st of re pl ac in g an old ve ssel w ith a mod ern sh ip buil t in 

an American y ard is th us re du ce d to a sm all fr ac tion of th e new ve ss els’ const ru ct io n p rice.

O pe ra to rs in tr ad e b etwee n P uer to R ico an d th e co nt in en ta l U ni ted S ta te s als o 

are comp elled by la w to em plo y only A m er ic an -b ui lt ve ssels —b ut th ey wo uld 

ha ve to pa y th e fu ll co ns truc tion price . Th ey are no t eli gible fo r co ns truc tion 

di ff er en tial su bs idies no r is an y su bst it ute pr ov ision mad e to redu ce th e co st of 

vessels fo r se rv ice betw ee n Puert o Rico an d th e m ai nl an d, al th ou gh th is co st is 

vir tu al ly do ub led by th e re qu irem en t of th e U.S. m ar itim e laws th a t th e vessels 

m us t be built in American sh ip ya rd s. W hi le th e tr u e co st of American -b ui lt 

sh ip s fo r fo re ign tr ad e ope ra to rs is redu ce d by th e U.S. Gov ernm en t to a sm all 

fr ac tion of th e co nst ru ct io n cost, no Gov er nm en t as si st an ce is av ai la ble for 

sh ip s to s er ve P uert o Rico.

It is har dly ne ce ss ar y to em ph as ize th at, unde r th es e co nd iti on s, the huge 

ga p be tw ee n th e va lu e of th e old vessels no w se rv in g Puer to Rico an d th e cost 

of new on es is pr oh ib iti ve . The p ri vate opera to rs ca nnot be ex pe cted to ra is e 

$200 mi llion or more fo r in ve stm en t in ne w ships. No r wo uld vessel re pl ac emen t on th es e te rr as do Puert o Ri co mu ch good ; a re as on ab le re tu rn on the 

add itio na l $200 million ca pit al in ve stm en t wo uld ha ve to be covered by fr eig ht 

ra te s an d wo uld ou tw eigh th e sa vi ng to be ex pe cted fro m mo re efficie nt vesse ls. 

As th e be neficial eff ect of th e Sh ip Sa les Ac t of 1946 ru ns ou t, som e m ea ns m us t 

be foun d to fa cil it ate th e ex tens ion of th e sh ip re pl ac em en t pr ogra m to th e 

Pue rt o Rican ro ut es . O ther wise, Puert o Ri co has no pr os pe ct of rece iving se rv ­

ice w ith mo re mod ern ve ss els an d th u s stop pi ng th e tr en d to w ar d hig he r an d 

hi gh er fr eig ht ra te s which se riou sly th re ate n th e co nt in ua tion of it s econom ic 

develop me nt.

FEDERAL RATE REGULATIO N HAS NOT HELPED

Und er th e m ar itim e la w s of th e U nited Sta te s, P uert o Rico ’s tr ad e m us t be 

ca rr ie d in Amer ican -b ui lt ve ssels un de r th e American flag an d w ith American 

cre ws . Tl iis re qui re m en t pro te ct s th e sh ip pi ng co mpa nies again st fo re ign com ­

pe tit io n. The pe op le of Puert o Rico ha ve no pr ot ec tion fr om th e he av y bu rd en 

of high tr ansp ort ati on co sts which in ev itab ly ari se s from th e m an dat ory us e of 

American service . The la w s pr ov id in g fo r ra te re gula tion are de sig ne d on ly 

to pr ec lu de even hi gher ch ar ge s du e to ex plo itat io n of th e ca rr ie rs ’ pr ot ec te d 

po sit ion. Ev en th is mod es t aim of ra ta re gu la tion has bee n fr u str ate d by th e 

m an ne r in which th e F edera l M ar iti m e B oar d’s re gul at ory po wers ha ve been 

ex ercised.
332 DOMESTIC OFFSHORE SHIPPIN G

In recent years, due to the intervention of the Commonwealth of Pue rto Rico 

(and of Hawaii and Alaska) the Board has investigated the carriers ’ proposed 

tariffs. These investigations, however, have been ineffective and exceedingly 

slow—and meanwhile the rate increases have been allowed to go into effect. 

To cite but the most bla tan t example: A general increase of 15 percent in rates 

from Atlantic and gulf ports to Puerto Rico, liled by the car riers on December 

4, 1956, was allowed to go into effect on Jan uary 10, 1057, hut the Board did 

not pass on its justificatio n until April 28, 1960. The Commonwealth of Puerto 

Rico’s appeal of the Board’s approval of this and a subsequent rate increase 

provides the first court test of the stan dards of decision used by the Board since 

the inception of its responsibility for regulation of domestic shipping rate s. 

The U.S. court of appeals has not yet rendered its decision in this proceeding, 

hut, on key issues, the U.S. Department of Justice has supported the position 

of the Commonwealth rathe r than tha t of tin* Federal Maritime Board.

The ineffectiveness of regulatory control has combined with the economic 

tren ds of the postwar period to raise the transp ortation costs which Puerto 

Rico’s economy must bear. Shipping rates from Atla ntic and gulf ports to 

Pue rto Rico have been increased five times in the postwar period. Some of 

these tariff increases varied as between commodities; othe rs raised rates by 

uniform amounts or percentages. The average increases amounted to approximately the following pe rce ntages: Percent

Effective May 14, 1946____________________________________________ 25

Effective May 10, 1948____________________________________________ 11%

Effective Nov. 12, 1951___________________________________________ 14%

E ff ec tive Ja il . 10. 1957____________________________________________________ 15

Effective Jan. 15, 1958___________________________________________ 12

Due to the cumulative effect of these increases, the rat es are now more than 

twice as high as they were at the end of the wa r and 64 perce nt above the level 

established by the postwar a djustm ent of 1946. In the las t 10 years alone, they 

have risen almost 50 percent. A tariff recently filed by the carriers would 

make furthe r substan tial increases if and when it were allowed to go into effect. 

Rates from west coast ports to Pue rto Rico have risen even faster, some of 

them by almost 80 percent since 1951.

Because of the manner in which rat e regulation has been administered, it is 

not possible to determ ine what proportion of the increase in the freig ht charges 

borne by P uerto Rico was an inevitable consequence of the interactio n between 

U.S. maritime laws and postwar economic trends. More effective adm inistration of the regulatory power almost certainly would have kept firmer brakes on 

the uptrend of rates. If the car riers had not been able to obtain with little 

difficulty any rate increase they considered necessary to offset rising costs, they 

might have made ear lier and greater efforts to institute cost-saving methods of 

operation.

Although rate regulation has not heli)ed in stimulating technological progress, 

a st ar t has been made with the introduction of container ships, as the car riers 

have begun to recognize that indefinitely risin g freight rates are hound eventually to throttle the development of traffic. Containerization alone, however, is 

not enough to offset the burden arising from the combined impact of cabotage 

restric tion and high American operating expenses. Fa r more energetic efforts 

will have to be made to balance American wage levels by American technology, 

and these efforts depend on the feasibility of introducing vessels of modern 

design at costs which the traffic can bear.

FA IR N ESS RE QUIR ES REL IE F FOR PU ER TO RICO

Puerto Rico’s economy and its i»eople are caug ht in a squeeze between Federal 

martime laws and economic tren ds in shipping and shipbuilding. As the ma ritime laws now stand, they requ ire the carriag e of goods between Puerto Rico 

and the continental United States in American-built vessels under the American flag and with American crews. Economic tren ds have made this kind of 

shipping service inordinate ly expensive.

In foreign trades, where the maritime laws provide for similar service, the 

excesssive cost is borne by the Federal Government through operating and constru ctio n differential subsidies and other benefits provided for operators. None 

of these benefits are available to carry, or even share , the burden in trade between Puerto Rico and the continental United States which is the lifeline of the
DOMESTIC OFFSHORE SHIPPIN G 333

Pue rto Rican economy. Instead, the burden must be borne by the people of 

Puerto Rico—among all American citizens, those leas t able to pay.

The operating cost differential on the actually moving traffic between Puerto 

Rico and the continent taxes the Puerto Rican people with a surcharge 22 

times as heavy rela tive to the ir income as the taxes levied on continental citizens 

in order to make up for the operating differen tial in the ir oversea trade. This 

surcharge, which also is slowing down Pue rto Rico’s indu strial development and 

thus imi>osing an added burden, is bound to grow if present tren ds are allowed 

to run the ir course. It is furth er aggravated by the risin g tren d of stevedoring 

cost. Yet, the economically indicated remedy of technological progress is made 

inaccessible by the Federal mandate to use prohibitively costly American-built 

ships and the Government’s failure to make up for this extra cost.

The Federal Government surely never meant to put th is squeeze on the people 

of Puerto Rico. It required the use of American-flag service as pa rt of its 

policy to maintain an American merchant marine and in line with internatio nal 

custom in regard to coastal shipment. It provided no subsidy for this service 

because no such subsidy seemed needed where operators are protected against 

foreign competition. It had no reason to anticip ate th at these rules would 

provide a framework for the development of an unexpected and heavy burden 

on the people of Puerto Rico. Yet, economic tren ds of the postwar period 

operating with in this legal fram ework have brou ght the burden into existence. 

It clearly is an excessive and discrim inatory one. And it is one which Puerto 

Rico cannot escape by using alterna tive means of mass transp ort.

Fairness requires a change in the fram ework of maritim e laws which has 

given rise to this burden. A legally simple change in the fram ework would be 

the removal of the cabotage restric tion—the opening up of shipping between 

Pue rto Rico and the continental United States to the unr estricte d competition 

of foreign operators. It is not possible to anticipate the results of such a step 

with certainty. It might or might not provide Puerto Rico with adequate 

shipping service free of the surcha rge involved in the operating cost differentia l; 

and it might or might not attrac t modern tonnage with low operating cost and 

develop improved and cheaper cargo handling methods. Surely, however, the 

lower cost of foreign-flag operations and of shipbuilding abroad would reduce 

the surcharg e on the freight bill which must be paid by the people of Puerto 

Rico through an increase in their cost of living and a reduction in the ir income.

Removal of the cabotage restriction would not be a step with out precedent. 

No cabotage restriction is in effect between the Virgin Islands and the continental 

United State s. The restriction also has been suspended from time to time for 

traffic to Alaska and in other places where American operators could not or 

would not provide adeq uate service. Pue rto Rico, too, has at times suffered 

from complete lack of service from or to certain coastal are as of the mainland. 

At present, there is no service at all between Puerto Rico and the Great Lakes. 

Service between Pue rto Rico and the Atlantic ports south of Hatteras and 

westbound service to the Pacific ports are both relatively inadequa te. All these 

routes are of economic importance to Pue rto Rico. Certa inly, on routes where 

Puerto Rico does not obtain regu lar American-flag service, foreig n ships should 

be allowed to fill the gap.

On the principal routes between Pue rto Rico and the contine ntal United 

States the difficulty does not center on the ava ilab ility of service but on its 

high cost. While this is a very serious problem indeed, it can perhaps be solved 

without removal of the cabotage restriction. Its removal from these trades 

would affect a shipping activ ity much larger tha n those involved in any of the 

other insta nces cited above. In Pue rto Rican trade, removal of the cabotage 

restriction would hu rt ship operators who have been profitably serving Puerto 

Rico. It would also reduce the peacetime employment of American merchant 

vessels. This reduction would have a more serious impact on the national interest tha n is indicated by the mere number or tonage of the vessels now 

serving the trade. Apart from the fact th at this tonnage may be expected to 

grow with the development of Pue rto Rico and the increase in its shipping 

needs, these vessels are much more cer tain to be available in case of an emergency tha n those plying the seven seas in foreign service to dista nt areas.

The government of the Commonwealth recognizes these drawbacks of a complete elimination of the cabotage restriction. While it would have no reason to 

oppose th is approach to relie f for Pue rto Rico, other means of relief for Puerto 

Rico must be explored if the Federal Government does not desire to open up
334 DOMESTIC OFFSHORE SHIPPIN G

the tra de between Puerto Rico an d the continental United States to foreign-flag 

services.

TH E OPERA TING COST DIF FER ENT IAL SHOULD NOT BE BORNE BY PUERTO RICO

As long a s the maritime laws requ ire the use of American-flag vessels between 

Puerto Rico and the continen tal United State s, this service will be burdened with 

operating costs higher tha n those occurring for merely geographic and economic 

reasons. There is only one justification for incurring such higher costs—the 

national intere st in the American merchan t marine. This added cost should 

not be borne by the people of Puerto Rico but by all the people of the United 

States through the Federal Government. It can be done in a simple and fair 

way by extending the operating cost differential subsidy to shipping between 

Pue rto Rico and the co ntinental United States.

To be sure, operators in this trad e, in con tras t to those in foreign trade s, are 

not in competition with foreign flags. Basically, however, the subsidies provided to foreig n trad es are not intended to protect American-ship operators 

aga inst competition but to serve the national inte rest of maintaining an active 

merchan t marine. Since the same intere st is served by restrict ing Pue rto Rican 

operations to American-flag ships, it is equally justifiable that the operating cost 

differential be borne by the U.S. Government. As in foreign services, the 

subsidy payment would perm it the maintenance of the service with lower freight 

revenues tha n would otherwise be needed.

Adm inistration of operating cost differentials for Pue rto Rican trade would 

have to differ in some respects from their adm inistration for foreig n trades. 

However, the necessary adju stments should not be difficult. Subsidies in foreign trades are computed by comparing actu al American operating costs on 

each route with estim ated costs of the foreign competitors serving the same 

route or area. With no foreign comi>etition present, no such comparison could 

be made for the Puerto Rican routes. Instead, operating cost differentials 

could be assumed to equal the average of all diffe rentials recognized by the 

Maritime Adm inistration in foreign trades. This would have to be provided 

in the act. It would correspond to the underlying purpose of eliminating from 

freight rates that part of operating costs which is due to the difference between 

actual costs and foreign costs generally.

In foreign trades, the reflection in freigh t rates of the subsidy contribution 

to operatin g costs is assumed to be assu red by the competition of foreign flags. 

The absence of such competition in trade between Puerto Rico and the continental United States would make it necessary to assure the reflection of subsidies in freight rates by some other means. This would present no basic difficulty in regard to the regular liner services whose rate s are sub ject to regulatory 

control by the Federal Maritime Board, provided th at the Board’s regulatory 

control is administered more effectively than has been tru e in the past. Legislation extending operating differential subsidy to domestic offshore trades would 

have to assure that freigh t rates allowed by the Board would automatically be 

lowered as operators’ costs were reduced by subsidy. To make this assurance 

effective, the legislation should include both procedural and subs tantive provisions requiring clearly and specifically that the Board’s control over tariffs be 

exercised with dispatch and in accord with generally accepted principles of rat e 

regulation in the public interest.

A special situation arises in regard to bulk shipments car ried under charter 

parties, which in foreign trades are also supported by Government payments 

under sep ara te laws. No operatin g differential subsidies are being granted 

for tramp shipping in foreign trades. Instead, nearly all the bulk cargo ava ilable for such shipping under the American flag is provided by the legal requirement th at at least 50 percent of all shipments financed by the U.S. Government 

under the foreign aid, agr icultural surplus disposal, and similar programs be 

car ried in vessels under the American flag. This assuranc e of cargo by legal 

requirem ent is quite similar to the cabotage restriction applying to Puerto Rico. 

However, where the assu ranc e takes the form of the 50-50 provision, the U.S. 

Government pays all or part of the freight for the shipments on American-flag 

vessels, while it does not pay the freight for the corresponding shipments on 

foreign vessels. This procedure is a substitute for operating cost subsidy, although the Maritime Administration plays only an advisory role in carrying it 

out and other agencies make the actu al payments.

Extension of subsidy to bulk service between Pue rto Rico and the continental United States would be justified, since the use of American ships in this
DOMESTIC OFFSHORE SHIPPING 335

service is required by law, as it is under 50-50 provisions and for the same 

reason; namely, to ass ist in maintaining an American merchan t marine. The 

form of the subsidy would have to be different as the U.S. Government does 

not finance the cargo. It should not be too difficult, however, to work out a 

procedure under which a certain share of freigh t payments for shipments of 

this kind would be refun ded by the U.S. Government. Instead of payment by 

the agency in charg e of the foreign aid or sim ilair program under which the 

cargo is shipped, payment would have to be made by the Maritime Adm inistration which also would determine the app ropriate subsidy rate. This subsidy 

rate could most conveniently be based on the ratio between oi>erating cost differentia l and fre igh t charges prevailing in Pue rto Rica n liner trades.

These arra nge ments would shift the burden of the operating cost differential 

from the economy of Puerto Rico to the economy of the entire United States. 

They would do no more t han relieve the Pue rto Rican people of a surcharge now 

unfa irly imposed on them, arising solely from the purpose of the U.S. Government to maintain American merchan t ships in operation. This purpose could 

continue to be served by the cabotage restrictions, while the unduly high freight 

charges for cargo between Puerto Rico and the continental United States could 

be reduced.

PUERTO RICO NEEDS ACCESS TO TECHNOLOGICAL IMPROVEMENT

While operatin g differential subsidy would effect the most obviously discriminatory burden on Pue rto Rico’s trade with the continen tal United States, it 

would remedy only pa rt of the difficulty and would remedy it only for a short 

time. The benefit of operating differential subsidy would almost certain ly be 

wiped out again in a few years if Pue rto Rico were to receive no help in bridging the gap between the value of old vessels and the price of new ones. Without such help, the tra de would continue to be served with the old shi ps; and, 

without the benefit of technological progress in vessel design and cargo handling, 

stevedoring expenses would continue to driv e freigh t rates up, even if the differe ntia l in vessel o pera ting costs were covered by subsidy.

Lasting relief depends on the access to technological progress which requires 

the introduction of modern vessels and cargo handling methods. Only limited 

progress in this direction can be expected so long as operators in trade between 

Puerto Rico and the continental United States are obligated to have the ir 

vessels built in American yards but receive no assistance in defrayin g the prohibitive cost of such construction. Several ways, however, are available to 

remedy this difficulty.

One way of fac ilitating the acquisition of new American-built vessels for the 

Puerto Rican services is indicated by the precedent set when the vessels now 

serving the routes were acquired under the Ship Sales Act of 1946 which placed 

operators in these trades on the same footing as those in foreign services. The 

same can be done with the current vessel replacement program by an appropriate amend ments to th e Merchant Marine Act of 1936.

Like operators in foreign trades, those serving Pue rto Rico can be given the 

benefit of construction subsidies, trade -in privileges, and assistance in financing 

of vessel replacements. These benefits have been extended in connection with 

rebuilding of vessels designed for broken stowage into container ships as well 

as new construction. Both rebuilding and new construction might be helpful in 

service between Pue rto Rico and the continen tal United States where potential 

savings in cargo handling are probably more imp orta nt than those that can be 

obtained in vessel o perations.

A considerable variety of methods for reducing cargo handling costs have been 

developed in recent years. Some of these methods—like the use of pallets and 

containers—have been introduced in Pue rto Rico service as elsewhere. Three 

containe r ships are now in operation. These ships are rebuilt C-2 vessels and 

are not as well adopted to the most efficient operation possible as would be new 

vessels specifically designed for this kind of service. However, such new vessels would requ ire a much larg er investm ent. Those now in service were made 

possible only by the low price of war-built and rapidly obsolescing ships. The 

additional investment was limited to the cost of rebuilding. Nevertheless, the 

savings in operating expense which necessarily have occurred in the containership operation have thus fa r led to no reduction in freigh t charges. Evidently, 

improvisations will not solve the problem.

More extensive use of cost-reducing devices and introduction of additional 

improvements requ ire new ship designs. Only practic al experience can decide
336 DOMESTIC OFFSHORE SHIPPING

which of the various proposed improvements will be most efficient. They cannot 

be put to the test of practic al experience, however, if the entire investm ent has 

to be supplied by the operators and has to be supported by freight charges. A 

way must he found to finance the necessary investment without nullifying the 

savings due to lower operating costs. Federal financing assistance is needed— 

in this trade as in foreign service—if real progress is to be attained within the 

foreseeable future.

Federal assistance has, in some special cases, also been provided in another 

form. Vessels have been constructed for the account of the Maritime Administration and placed into service under bareboat charters to priv ate operators 

at rates which the traffic could reasonably bear. This procedure could also 

be applied to the development of new vessel types designed for rapid and costsaving cargo handling. For, while such vessels would find useful employment in 

tra de between P uerto Rico and the continental United State s, their design m ight 

also serve the national interest in other ways. It might help to revive coastwise and intercoa stal shipment and it might ass ist in the solution of wartime 

logistic problems of the militar y services.

There are many precedents in maritime and ai r transp ortation for Government action to stim ulate technological development in the inte rest of both the 

defense and the commerce of the United State s. Without such action, progress 

toward more efficient cargo handling in m aritime operations is bound to be slow. 

The logical place where such progress can be stimulated to greatest benefit— 

and, therefore, at lowest net cost—is in short-haul trades. However, Federal 

support of such development in coastwise and inte rcoasta l shipping would raise 

difficult problems as it would directly affect the competitive balance between 

shipping on the one hand and railroads and truck ing on the other.

No such problems would arise in noncontiguous domestic trade s. At the 

same time, the ultimate result of experiments with new vessel types and cargohandling methods in these trad es would accru e to the benefit of the entire U.S. 

economy and might well prove of considerable military value. Thus, it would 

seem a logical step for the Federal Government to pa rtic ipate in the delevopment 

of such new types and to make the ships available for service between Puerto 

Rico and the mainland.

Whether the Federal Government builds its own ships for use in Puerto Rico 

service or facilitates construction of new vessels and rebuilding of old ones by 

private operators is i>erhaps of secondary importance. It is of prim ary importance, however, that some means be found to remove the roadblock against 

technological progress which resu lts from the requirement that American-built 

ships be used, althou gh shipbuilding in American yards without Government 

assistance is prohibitively expensive and simply impra ctical.

PUERTO RICO ALSO REQUIRES PASSEN GER SERVICE

Before the war and during the first few postwar years, regular passenger 

service of satisfactory quality was provided by one or two American shipping 

lines between Pue rto Rico and the mainland. Today, passage is offered only in 

the few berths available on the cargo ships. Service by passenger vessels has 

become e xtinct as a victim of the same combination of economic trends and U.S. 

maritime laws which has made cargo fre ight unduly expensive.

Passenger ships under American and foreign flags do travel in Caribbean 

waters but—because of U.S. maritime laws—they cann ot serve Puerto Rico. 

Foreign ships are precluded by the cabotage restrictions from carryin g passengers between Puerto Rico and the continental United States. American 

shipping lines can receive subsidy only for service to foreign po rts; they would 

lose part of their subsidy if they included service between Puerto Rico and the 

mainland in their schedules. Thus, a change in U.S. maritime laws would be 

needed to restore passenger ship operation on this route. Such a change should 

not meet w ith serious objections.

The routes between Puerto Rico and the continental United States might 

well be treated for passenger ship service as parts of foreign trade routes. That 

is, American ships might be allowed to carry passengers between Puerto Rico 

and the mainland on the ir foreign voyages with out losing a proportion of their 

subsidy. At the same time, the cabotage restriction might be lifted from pas ­

senger service, so that foreign ships could also enter this trade. If both these 

measures were taken, Pue rto Rico would have a good chance of obtaining some 

passenger service of good quality.
DOMESTIC OFFSHORE SHIPPING 337

Turnaround service, however, would also seem essential. Such service would 

involve a sizable passenger ship or perhaps two. If the ship is to be of reasonably good quality and must be one built in an American yard, the capital investment clearly becomes so large that it cannot be supported by operating revenue alone. The problem is the same as tha t of American passenger ships in 

foreign trades where both operating and construction differential subsidies are 

substantially larger for passenger vessels than for freighters. In order to 

secure from a private operator the kind of passenger service needed between 

Puerto Rico and the continental United States, similar construction and operating differential subsidies would have to be made available. In the alternative, 

a suitable Government-owned vessel could be put into private operation in this 

service on appropriate charter and operating subsidj’ terms, or a carrier could 

be permitted to use a foreign-built ship with the benefit of operating differential 

subsidy.

BEL IEF FOR PUERTO RICO W ILL HE LP MAINLAND IND UST RY AND IMPROVE THE U.S. 

BALANCE OF PAYM ENTS

Measures to secure more adequate cargo and passenger shipping services between Puerto Rico and the mainland are amply justified by the need to remove 

an unfair and discriminatory burden. Technological progress to halt the continuing rise of freight rates is essential to avert a serious threat to the future 

development of the Commonwealth economy. But Puerto Rico will, by no means, 

be the sole beneficiary of Federal action to these ends. Much of the benefit will 

accrue to American industry.

Puerto Rico’s purchases from mainland industry and agriculture are large. 

In the fiscal year 1960, Commonwealth merchandise receipts amounted to $912 

million and 83 jiercent of this total came from the mainland. On a per capita 

basis, Puerto Rico is the largest oversea market of the continental United 

States, bar none. Sales to this market now are seven times as large as they 

were in 1939-40. There is only one limit to their further rapid expansion: 

Puerto Rico’s capacity to pay. Cargo rates have a very large impact on this 

limit of Puerto Rico’s mainland purchases.

The direct impact of freight charges on goods for Puerto Rican consumption is 

most readily apparent. Every dollar saved on these charges will be spent on 

additional purchases and will immediately increase the market for mainland 

merchandise by a dollar. The impact of freight savings on raw materials and 

equipment for production and on Puerto Rican products sent to the mainland is 

more difficult to trace but is relatively larger. These freight charges in the first 

instance affect Puerto Rican income from production, mainly wage payments, as 

was shown in an earlier section of this memorandum; thus, a dollar saved on 

freight for these goods, also adds a dollar to Puerto Rican purchases from mainland industries.

In addition, however, lower cargo rates for producers’ goods from the mainland and for shipments to continental markets will stimulate Puerto Rico’s industrial development, while higher freight charges will stultify it. As industry 

increases. Puerto Rican incomes rise and with it the purchases from mainland 

producers. To trace these relationships in quantitative detail would be difficult. 

It is clear, however, th at over a period of time a dollar saved in freight charges 

will result in far more than a dollar’s worth of increase in payments to mainland 

industries.

Along with the people of Puerto Rico, mainland industries will benefit from 

any measures taken to lighten the excessive burden of freight charges. Also, 

along with the people of Puerto Rico, the numerous mainland industries supplying their needs will be seriously harmed unless the thre at of higher and higher 

freight rates is eliminated.

Mainland industries have been and will certainly continue to be by far the most 

important suppliers of Puerto Rico. However, their share in the Puerto Rican 

market is apt to decline if there is no change in the maritime freight situation. 

While shipments from the continental United States bear the full weight of 

American shipping costs, supplies from foreign countries can be landed by foreign 

ships a t relatively lower freight rates. Lower shipping costs have already been 

a factor in shifting most of Puerto Rico's extensive lumber purchases from the 

United States to Canada. Freight charges also may have contributed to the heavy 

inroads into the Puerto Rican market made more recently by European cars and 

trucks and some other manufactured consumer goods.
338 DOMESTIC OFFSHORE SHIPPING

As the difference in the levels of American and foreign shipping costs continue 

to grow, foreign industries will tend to increase their share of Pu erto Rican markets at the expense of the present mainland suppliers. The high shipping costs 

between Puerto Rico and the mainland at the same time weaken the ability of 

Pue rto Rican producers to compete with foreign imports in mainland markets. 

As both mainland goods in Puerto Rico and Puerto Rican goods on the mainland 

are displaced by foreign imports, high shipping rates do double damage to the 

U.S. balan ce of payments. Conversely, relief from the excess burden on the cost 

of shipping services between Puerto Rico and the mainland will doubly improve 

the balance of payments.

SOLUTION OF PUERTO RICO’S PROBLEMS IS ESSENT IAL TO TH E U.S. MERCH ANT MARINE 

AND TH E NATIONAL DEF ENSE

While m ainland suppliers of the Pue rto Rican market will benefit from a solution of Puerto Rico’s shipping problem, such a solution is of fa r greater 

importance to the maritim e carriers. To be sure, as ma tters now stand, these 

carriers enjoy complete protection aga inst undercu tting by foreign competition, 

as such competition is excluded by the cabotage restriction. In time, however, 

this protection will prove to be worthless if risin g costs can be covered only 

by rising freight rat es which are bound to inhibit the grow th of traffic and 

even tually to stra ngu late a now thriving business.

This dire outcome would seem inevitable if no remedial action is taken. 

The continuing trend toward higher productivity in American indu stry generally 

is bound to result in risin g wages. Maritime and stevedoring labor cannot be 

excluded from this prospective uptrend in wages. At the same time, the old 

vessels now in service will get older and less efficient. With no buffer available 

in the form of eith er vessel replacement or operatin g subsidies, higher wages 

can be paid only out of higher freigh t charges, and higher freigh t charg es are 

bound to slow down and eventually stra ngu late the development of Puerto Rico. 

Instead of continuing to rise, cargo volume may decline, making it all the more 

difficult to cover costs of operation, thus leading to new rate increases, intensifying the process of spiraling decline and converting shipping profits into losses.

Reliance on the protection of cabotage may work for a few more years. In 

the end, i t is bound to prove futile. If its productive equipment steadily declines 

in efficiency and is not replaced, no indu stry can survive, no ma tter how well it 

may be protected aga inst competition. The cabotage restriction may keep 

competitors out but it will not supply new ships nor more efficient cargo handling 

methods. It will not keep freigh t charges at a level conducive to increasing, 

or even maintaining, the volume of traffic.

Timely replacement of the old vessels now in operation between Puerto Rico 

and the continental United States will eventually prove to be crucial to the 

survival of the car riers serving this trade. But, it also will be imp ortant to 

the American merchant marine generally. This short-haul and heavy-volume 

tra de is particularly well suited to develop the means which may serve to raise 

productivity in maritime transp ort. None of the world’s maritim e fleets is as 

dependent on such a productiv ity increase as the American merc hant marine 

with its inevitably high wage level. It can grea tly benefit on all its trade routes 

from such technological progress in ship operation and cargo handling as may 

be achieved by efforts to make Puerto Rico service more efficient.

The urgency of making ship operations and cargo handling more efficient has 

in the las t few years been increasingly emphasized by Government and indu stry 

expe rts, especially in the extensive studies recently completed under the auspices 

of the National Academy of Sciences (“P roje ct Wa lrus ”). As yet, however, 

little progress has been made. Numerous technical and human difficulties which 

stand in the way are likely to be overcome only by practic al experimentation. 

The best opportunity for such experimentation is offered by the domestic o ffshore services, the only sub stan tial overseas trades with both term inals under 

American jurisdiction. If such experimentation were sponsored by the Federal 

Government, the results would not only help Pue rto Rico, but would assist in 

raising the productiv ity of the entire American merchan t marine.

Solution of Puerto Rico’s shipping problems will also grea tly benefit the 

national defense. In con trast to the U.S.-flag ships sailing the seven seas, 

vessels serving Puerto Rico are certain to be in or near a U.S. port in the event 

of an emergency, and will be almost immediately available for defense service 

and will be relatively fa r less vulnerable to enemy captu re, destruction, or 

internment. Thus, it makes a gre at deal of difference whether they are up-to-
DOMESTIC OFFSHORE SHIPPING 339

da te and efficient or old and outmoded. From the point of view of national 

defense, there may well be a better ease for Government action to assure replacement of old vessels in this trade than for Government support of the replacement 

program well underway in the foreign trades. Moreover, the technological 

improvements which are especially necessary on these short-haul routes, may 

find wider application in military sea transp ort, ju st as they may be helpful in 

maintain ing a large merchan t fleet in peacetime service to be available in case 

of a war emergency.

There are, thus, many reasons beyond the int ere st of the Pue rto Rican people 

why a solution of Pue rto Rico’s prese nt maritim e problems is eminently in the 

public interest.

VARIOUS REMEDIES NEED TO BE INVESTIGATED

As technological progress in shipping during the postwar period has lagged 

behind the rapid advances made in man ufacturing, agriculture, and some other 

indu strie s, the United States has been faced with a continually widening gap 

between wages and productiv ity in maritim e tran spo rtation. The consequent 

rise in cost would have made it impossible for the American merchant marine 

to stay in operation if it had not received special support. In the inte rest of 

the national defense and the commerce of the United States, supp ort has been 

provided on foreign trade routes through a series of actions take n by the Federa l Government, with the cost distributed widely among the taxp ayers.

The segment of the American merchant marine serving Pue rto Rico has 

benefited from only one of these actions, the Ship Sales Act of 1946 whose effects 

are now rapidly vanishing as the wartim e vessels become obsolete. Otherwise, 

the Federal Government has relied on the cabotage restriction to maintain this 

segment of the merchant marine in operation, as if the rising costs resulting 

from the gap between maritime productivity and technological progress in other 

industries were a handicap only in competition with foreign operators. In 

reality, however, the cost rise resulting from this productivity gap creates a 

burden wherever maritim e transp ort under the U.S. flag is used. Unlike the 

form er main land users of maritime tra nspo rt in coastw ise and intercoastal 

service Pue rto Rico cann ot shift to land tran sp or t; and unlike the users of 

maritim e transport in foreign trade, it does not find this special burden assumed 

by the Federal Government and widely distribu ted among the taxpayers.

The burden on the Pue rto Rican people is, as has been shown, many times 

heavier than the burden on the main land taxp ayers. The clearly foreseeable 

furth er increase of thi s burden in the years to come threatens to strang le 

Puerto Rico’s economic development It thus also threaten s the continued expansion, and perhaps even the maintenance, of maritim e traffic between Pue rto 

Rico and the continen tal United State s. Yet, viable and growing U.S.-flag 

operation in this service is at least as imp ortant to the national defense as on 

any foreign route, entirely ap art from the national intere st in the continued 

improvement of Puerto Rico’s economy.

The most serious of the problems created for Pue rto Rico by present U.S. 

maritime policy is the lack of any prospect of replacement for the aging vessels 

now in service. This replacement might be made possible by following the 

precent of the Ship Sales Act of 3946 and extending to Pue rto Rico services the 

financial replacement assistance available to operators in foreign trade. Alternatively, vessels suitably designed for Pue rto Rico service might be built by the 

Federal Government and made available on term s the traffic can bear, or the 

ojierators migh t be permitted to have some new vessels built abroad. Any one of 

these measures, or any combination of them might be used to ass ure some substa nti al improvement in the prospects of fleet replacement.

The problem raised by the current high rate level also could be tackled in 

several altern ative ways. Operating subsidy might be made available in the 

manner previously outlined in this memorandum for all Pue rto Rican services. 

Carrie rs serving Pue rto Rico in the course of foreig n voyages could also be allowed to perfo rm this service withou t deduction from their operating subsidy. 

This could be done without removing the cabotage restrictions. On the other 

hand, removal of these restrictions might, at least in part, sub stitute for operatin g subsidy. In any event, either removal of cabotage res tric tions or introduction of operating subsidy might be employed to assure Pue rto Rico of such 

services as are now entirely lacking both on cer tain cargo routes and on the 

most essential passenger routes.

Thus, a variety of means are available by which to modify those features of 

U.S. maritime policy which combined w ith the productivity g ap to create Pue rto
340 DOMESTIC OFFSHORE SHIPPING

Rico’s maritime problems. These policies were never intended to create the 

problems tha t have arisen, let alone the thr ea t of more serious difficulties looming ahead. Yet, this has been the ir effect and changes are now needed. To be 

sure, proposals to revise any featu re of the maritim e policy of the United States 

must be appraised in the light of all the affected national interests. Fo rtu ­

nately, a variety of remedies is available to cure the difficulties now affecting 

and threate ning maritim e commerce between Puerto Rico and the mainland. 

Some suitable combination of such remedies surely can be fitted into a natio nal 

program.

Appendix A

Computation of operating costs differential, Puerto Ric o-A tlantic/G ulf Services,

1957

Cargo c ar ried (lo ng t ons) -

Kre ig ht r even ue____

F re ig ht pe r long t o n .

O per at in g c os t Ite ms:

W ag es _________________________________________

S ubsi st en ce __________________ . _________________

R ep air s______ __________________________________

In su ra nce , h u ll a n d m ach in ery ______ ___________

In su ra nce , pro te ct io n an d In d em n it y .......................

O per at in g cos t diffe re nt ia ls :

W ag es, 71.9 p erc en t.........................................................

Sub si st en ce , 21.4 p erc e n t__________________ _____

R ep air s, 30.5 p erc en t........................................ ..............

In su ra n ce, hull a n d m achin ery , 18 p e r c e n t- .........

In su ra nce , pr ot ec tion an d i n d e m n it y , 55 p erc e n t. 

T o ta l di ff ere ntial..........................................................

D if fe re ntial pe r l on g to n ...............

D if fe re ntial as per ce nt of frei ght.

B ull L ykes W ate rm an T o ta l, 3 

ca rrie rs

602,0 97 186,220 298,831 1,087,148

$20.686,957 

34.36

$3,7 37,7 24 

20.07

$3,114,991

27.1 6

$32, 539,592 

29.93

2,5 69, 702 

174,935 

344, 577 

157,801 

757,690

1,020, 298 

66,825 

333, 529 

63,0 40 

123,855

1,053,8 78 

84,245 

349,675 

61,395 

239,312

4,643,878 

326,005

1,027, 781 

282,236

1,12 0,85 7

1,84 7,6 16 

37,4 36 

105,096 

28,4 04 

416,730

733, 594

14,301

101,726

11,347

68,1 20

757,738

18,027

106,650

11,051

131,622

3,3 38, 948 

69, 764

313.472 

50,8 02

616.472

2,4 35,28 2 929,088 1,01 5,57 3 4,389,45 8

4.0 5 

11.77

4.9 9

24.86

3.4 0 

12.52

4.04

13.49

N o t e.—D ata o n cargo ca rr ie d, fr ei gh t re v en u e, an d oper at in g c ost ite m s a re f ro m e xhib its of th e c ar rier s 

in docket N o. 807. D ata from B ull nav e be en ad ju st ed to e li m in ate ex pe ns es of t h e pe riod w hen a str ik e 

in te rr u p te d se rv ice. D ata for Alco a have be en o m it te d as P u ert o Ri co se rv ic e is co nf in ed to th e so u th ­

b o u n d legs of Alco a vo ya ge s a n d th e r ec or d do es n o t co nta in su ff ic ie nt in fo rm at io n to ju dge w h eth er al lo ­

ca tions of c os t be tw ee n so u th b o u n d an d n o rth b o u n d legs are ap p ro p ri ate . B oth th e ad ju stm en t of B ull 

fig ur es a n d th e omission o f A lco a re du ce th e com pute d o pera ti ng c os t dif fe re ntial .

Appendix B

The Volume of Dry Cargo Between P uerto Rico and th e Continental

United States

The best available stati stic s are published a nnually by the Corps of Engineers 

in “Waterborne Commerce of the United States.” The latest available issue 

covers calen dar year 1959. It contains complete data on traffic in the ports of 

San Jua n, Ponce, and Mayaguez, broken down by commodities and showing 

separately receipts and shipments in “coastwise” trade (i.e., tra de between Pue rto 

Rico and the continental United State s), imports and expo rts in foreign trad e, 

and intrat err ito ry shipments (including shipments between Puerto Rico and the 

Virgin Island s). The data on “coastwise” tr ade may be summarized as fo llow s:
DOMESTIC OFFSHORE SHIPPING 341

Mainland cargo traffic of 3 majo r Puerto Rican port, 1959

[In thousands of sho rt tons]

San Ju an Pon ce Maya guez To ta l

Recei pts from ma inland :

To tal cargo....... ............................................................. 1,250 195 143 1.588

Tan ke r cargo 1

..................... ..... ...................... ................ 36

1,214

36

D ry cargo................ .......................................................... 195 143 1.553

Sh ipmen ts to m ainlan d:

To ta l carg o......... . ..................................................... 912 445 79 1,436

Tan ke r cargo 1_________________________________ 484 40

287

118

52 576

287

573

C em ent2

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __

Dry ca rgo ................................. ................. .......... ............ 428 27

Dry cargo in a nd o u t.............................................................. 1,642 313 170 2,126

1

 Moto r fuel, gas oil, keros ene, residu al fuel oil, a nd inedib le molasses.

2

 Ship pe d by p riv at e carrie r.

Shipments and receipts at other Puerto Rican ports are not covered in 

“Waterborne Commerce.” However, a special report of the 1

 Corps of Engineers 

to the Pue rto Rico Ports Auth ority shows dry cargo receipts of 59,462 tons and 

shipments of 128,105 tons at the port of Guanica and dry cargo receipts of 733 

tons and shipm ents of 158,653 tons at the port of Jobos. In addition, a study 

of the U.S. Departm ent of A griculture shows shipm ents of 265,000 tons of sugar 

at the port of Aguadilla.

Thus, total dry cargo movements between the continen tal United States and 

Pue rto Rico am ounted to 2,738,000 tons in 1959.

o