evidentiary requirements in railroad general increases to supplement existing regulations in 49 CFR 1102. That proceeding was instituted as Ex Parte No. 290 by order dated December 1, 1972. As an interim measure, we set forth cetain guidelines concerning financial evidence and expense and revenue data which would facilitate analysis of the financial posture and revenue needs of individual petitioning railroads, as well as groups of such railroads, and all railroads combined. These interim guidelines were used by the carriers in this proceeding.

In conformity with the interim guidelines, the railroads have supplied schedule A financial data for calendar years 1972, 1973, 1974, and for the 12 months ending September 30, 1975, and schedule B income statement data (actual, present, and constructed) and affiliate data for individual roads and by district. The railroads have not provided schedules C and D information, namely expense amd revenue data by commodity group (separated between single line and interline, transported by individual railroads and totals for each district and all districts combined) and expenses and revenues associated with special accessorial services, such as collection on delivery and wharfage charges.

Under our decision in Ex Parte No. 290, decided February 26, 1976, 351 I.C.C.C. 544, the Commission will require the submission of schedules C and D in railroad general increase proceedings after September 1, 1977. In recent proceedings, as in this one, the railroads have not filed such information. See, e.g., Increased Freight Rates and Charges, 1973, 344 I.C.C. 589, 606-07, and Ex Parte No. 310, supra, pp. 566-67. We have noted in prior proceedings that the interim guidelines used, pending the prescription of procedures in Ex Parte No. 290, were not to be interpreted as the prescription of formal evidentiary requirements, but were intended as guidelines to encourage the submission of more reliable data. See Ex Parte No. 295, supra, p. 607. Under the circumstances, we concluded in the Ex Parte No. 295 proceeding that, despite the railroads' failure to provide schedules C and D, the evidence submitted was sufficient to form a basis for a decision. We reach the same conclusion in this proceeding.

Based on the financial data of record, including the dangerously low level of working capital, insufficient cash flow, inadequacy of earnings and rate of return on net investment and equity, the Commission concludes there is a need for additional revenues if the

'Petitions for reconsideration of this proceeding are now pending before the Commission.

carriers are to provide adequate and efficient railway transportation service as contemplated by the Interstate Commerce Act and the national transportation policy.

Net working capital. -As a primary index of financial condition, resondents' net working capital position remains a matter of serious concern. Net working capital of class I railroads, excluding long-term debt due within 1 year, has reached a deficit of $318.6 million as of September 30, 1975. This figure is down sharply from the average annual net working capital position of $319.7 million for the 5-year period 1965 through 1969 and from the $658.8 million average for the period 1960 through 1964. The net working capital deficit has increased almost $250 million in the 9 months from yearend 1974 to September 30, 1975.

The following summary of net working capital on September 30, 1975, reveals that all territories have shared in this unfavorable trend, and that deficits were shown for each district.

'Current assets excluding (material and supplies) less current liabilities.

The further deterioration of net working capital from a deficit of $69.7 million from yearend 1974 to a deficit of $318.6 million shows the continuation of the declining financial posture of the rail industry. In 1958, when respondents' long-term debt maturing within 1 year was only $394 million, the Senate Committee on Interstate and Foreign Commerce referred to $600 million as "the minimum safe net working capital necessary for railroads."* While the actual minimum safe level today may be conjectural for several reasons, the present low level warrants real concern, as it results in 'S. Rep. No. 1647, 85th Cong, 2d Sess. 7 (1958).

increased dependence on cash flow to meet long-term debt obligations as they mature, obligations which consist largely of payments on equipment obligations not subject to refinancing.

Capital expenditures and cash flow. In every year since 1963, railroad capital expenditures for additions and betterments to transportation property and equipment have exceeded net cash flow. Since 1962, the cumulative deficiency amounts to approximately $7.5 billion. For the years 1970-74 the deficit amounts to $2.3 billion, for the 12 months ending September 30, 1975, the deficit amounts to $1.52 billion alone. As the following table shows, cash flow deficiencies have been experienced in all districts, as well as on a composite basis.

Represents ordinary net income, before deferred taxes and excluding equity in undistributed earnings of affiliated companies, plus depreciation and retirement charges, less cash dividends.

The Commission recognizes that the existing problem of inadequate cash flow has been compounded by the sharp earnings decline, with cash flow, after payment of cash dividends, down from $1,090.8 million in 1974 to $324.5 million for the latest 12 months ended September 30, 1975.

Since the amounts spent could not be met from earnings, extensive borrowing at high interest rates has been required. In previous proceedings, respondents have emphasized that the low level of railroad earnings in the past has not permitted the industry to adequately maintain track and replace needed ties, and that deferral of track and line improvement programs can only lead to deteriorating rail service. See, Ex Parte No. 295, supra, 609.

Protestants' evidence here is also convincing that service must be improved to avoid loss of traffic to other modes.

The inadequacy of the cash flow to meet necessary capital programs, plus service existing debt retirements, is further witnessed in the deferred maintenance and delayed capital expenditure filings required of class I railroads under Ex Parte No. 305. As of December 31, 1975, total deferred maintenance and delayed capital expenditures amounted to $6.6 billion. Individual spot checks of selected carriers, coupled with certain observed reporting deficiencies of deferred maintenance and delayed capital expenditures, indicate the dollar sums to be understated.

The high level of inflation has also contributed significantly to the railroads' cash flow/capital expenditure situation. As the railroads note, one of the consequences of inflation is that depreciation allowances, being based on the original cost of depreciable property, fail to provide sufficient cash to replace the property at higher prices when it reaches the end of its useful life. Therefore, the additional cost of replacements creates a need for additional retained income if consumption of assets or increased borrowing are to be avoided.

To substantiate this claim, the railroads note that freight cars retired in 1975 had a depreciable base of about $5,000 per car, and the average car in service cost originally about $11,000. New cars installed in 1975 cost five times the original cost of those retired, and more than twice the original cost of the average car in the national fleet. Total cars retired in 1974 represented about 3.4 million tons of carrying capacity, requiring 40,000 new cars averaging 85 tons capacity per car to replace them. The cost of 40,000 new cars in 1974 based on an average of $23,000 per car was approximately $920 million. However, the railroads submit that freight car depreciation charges in 1974 came to only $397 million, leaving $523 million of replacement costs to be covered in some other way. The railroads note that according to the Bureau of Labor Statistics, prices of railroad equipment in 1975 were 23 percent higher than in 1974, but railroad reports to this Commission for the first 9 months of 1975 show that equipment depreciation charges increased by only 3.8 percent over 1974. These figures show a worsening of the problem.

It is imperative that the railroads increase capital expenditures for service improvements. Some progress has been made as will be discussed in a subsequent section of this report, yet the need for funds remains. A recent Government study has noted that if capital

expenditures continued at historical trend levels, or about $13.5 billion in aggregate over the period 1971-80, a decrease in service of 62 billion ton-miles for 1980 would result, as compared to the 1970 levels. The study notes that, "if this program of investing from 1971 through 1980 were followed, the condition of the industry in 1980 would be such that its working capital would be at a minimum, its ability to incur and service new debt would be limited severely, and its ability to generate capital from retained earnings nonexistent." In regard to future capital investments, however, we agree that the shipping public should not be expected to finance all capital expenditures; that such funds are not necessarily to be obtained from increases in rates and charges. See, Increased Freight Rates, 1970 and 1971, 339 I.C.C. 125, 180 (1971). However, two severe problems exist. First, the shortage of internally generated funds has caused working capital to be consumed, equipment debt to be increased, and heavy lease obligations incurred. Second, to the extent money must be borrowed to finance these future improvements because of a shortage of generated income, and to meet the public's need for an effective rail transportation system, the credit level of the railroads must be sustained by an adequate level of earnings. See, Ex Parte No. 295, supra, at page 610. In this proceeding, approval of respondents' rate increases would fall short of meeting respondents' increased costs. Therefore, approval will not provide the solution to capital need problems of the railroads; it will only prevent the deterioration in earnings which would occur without this rate increase.

Equipment obligations, interest charges, and equipment rents. Because cash flow has been insufficient, continued borrowing to finance equipment purchases has resulted. Equipment obligations outstanding and interest rates thereon have increased in every year since 1962, with total outstanding debt increasing from $2.5 billion at the end of 1962 to $4.7 billion at yearend 1974. The average interest rate on this debt was 7.37 percent in 1974, up from 3.93 percent in 1962. The record shows that such rates were an estimated 9.5 percent on obligations issued during 1974, and interest rates on new issues continued to rise.

Respondents' lack of cash has also necessitated greater use of equipment leasing which, together with increased interest rates, has resulted in rapid acceleration of total interest charges and equipment rents, and has also resulted in a shifting of interest expenses from fixed charges to operating rents. Despite this shift, fixed interest charges have almost doubled since 1962-increasing