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So again, it is my wish that we remove the USDA completely from regulating the sales commissions for stockyards, large and small.

Thank you, Mr. Poage, for scheduling this hearing, and thanks again, Mr. Thornton, for giving me this opportunity to express my views.

STATEMENT OF Hon. JAMES R. JONES, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF OKLAHOMA Mr. Chairman, I regret not being able to personally attend the hearing being conducted today on the Thornton bill, H.R. 9482, and other companion pieces of legislation. I ask the committee to accept this statement, and include it in the official record of the proceedings.

I would like to go on record as endorsing and supporting this bill on stockyard rates. In my three terms in Congress, I have learned that any piece of legislation bearing Ray Thornton's name deserves a stamp of approval by those Members of Congress who support clear, concise, and reasoned approaches to the problems of our country.

I would like to commend you, Mr. Chairman, for recognizing an urgent problem, and moving swiftly and skillfully to solve it. I'urge my fellow colleagues gathered with you today to support your bill, and you can rest assured that I stand ready to work for the speedy passage of this legislation when it reaches the floor of the House.

The Thornton approach to this problem makes good sense. It would increase free competition among stockyards and auction barns, and decrease unnecessary government interference in the agriculture industry. There are over 1,900 stockyards and auction barns in the United States, and 77 are in Oklahoma alone. I know Oklahomans will support the approach of H.R. 9482, as will the vast majority of stockyard and auction barn owners who would be freed from the red tape burdens currently imposed by the Department of Agriculture.

H.R. 9482 represents the mood of America by trimming back the bureaucracy and eliminating burdensome rep ing requirements for the average citizen. It deserves our whole-hearted support, and I again commend the chairman for his leadership in this area.

STATEMENT OF Jack SHELTON, DELHI LIVESTOCK AUCTION, DELHI, LA.

I am in full support of H.R. 9482, S. 2195, and H.R. 9369. Any help you can give us will be deeply appreciated.

CALDWELL Sales Co.,

January 13, 1978. COMMITTEE ON AGRICULTURE, U.S. House of Representatives, Longworth House Office Building, Washington, D.C.

DEAR MR. THORNTON AND COSPONSORS OF H.R. 9482 AND S. 2195: We have received earlier information regarding the proposed acts by the Packers and Stockyards division of the Department of Agriculture to revise the commission charges made by public auction. We feel it would put many of us out of business in a very short time. It is hard enough to keep things going with what regulations we now have to meet; such as, minimum wages and higher social security (which is set by government), high insurance, higher utilities and just all expenses in general.

We sincerely support these bills and you can count us as a vote for them. We appreciate your concern and efforts in our behalf. Sincerely,

CLIFFORD WILLIAMS.
DAVE WILLIAMS.

STATEMENT OF GLOVER BROS., UNION STOCKYARD, PINE BLUFF, ARK. Concerning H.R. 9482 introduced by you to limit the authority of Packers and Stockyards Administration on regulating sales commission on stockyards we are in full support of this bill and appreciate your concern in getting this bill passed We are in 100 percent support in your Senate race.

Mr. THORNTON. Before we begin the hearing by calling our first witness, I would like to recognize my distinguished colleague from Texas, my good friend Jack Hightower, for any remarks that he may wish to make.

REMARKS OF HON. JACK HIGHTOWER, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TEXAS

Mr. HIGHTOWER. Thank you very much, Mr. Chairman.

I appreciate being in Arkansas, as I know you do, even though I am just passing through.

I want to express the appreciation of Chairman Poage to you for your willingness to chair these hearings here today, and also his regrets that he could not be here, and other members of the subcommittee.

As I'm sure many of these people are aware, there are a good many things going on right now in Washington and around the country that demanded that members of the committee be at other places, such as Congressman Hammerschmidt's problem as has been detailed, but I see no reason why we should not have a good hearing here today. We want these witnesses to feel free to tell us their experience and their ideas about this legislation, because at a committee hearing we have the only chance for the public generally to make an impression on legislation. This is the opportunity for the people to speak. At this point in time we are looking at the legislation. Later on we'll be meeting in other meetings to actually draft the final result. But a great deal of what happens from now on depends upon the testimony of people that take the time to show an interest, to become involved, to give us the benefit of your experience.

I have looked over the list of witnesses, and I'm sure that we are going to have a good hearing here today, and I hope to be able to have the kind of record that we'll submit to the full committee that will show that there is much that needs to be done in this area.

Mr. THORNTON. Thank you very much, Mr. Hightower.

Our first witness this morning is the chairman of the Arkansas Public Service Commission, Dr. John C. Pickett.

STATEMENT OF DR. JOHN C. PICKETT, CHAIRMAN, ARKANSAS

PUBLIC SERVICE COMMISSION

Dr. PICKETT. Thank you, Mr. Chairman and Congressman Hightower.

My name is John Pickett. I'm currently the chairman of the Arkansas Public Service Commission.

I have participated in regulatory hearings before the Packers and Stockyards Administration, and am generally familiar with the methodology that they employ in setting rates for both local livestock auction barns and terminal facilities. I am also familiar with their outlook and basic philosophy that they employ when attempting to regulate livestock auction facilities.

The thrust of my testimony today is in three directions:

First, to demonstrate as an economist that the interpretation of the act establishing the Packers and Stockyards Administration by the USDA is probably incorrect;

Second, to demonstrate as an economist that the underlying market conditions supporting livestock auction barns are not those that underpin public utilities;

Third, to recommend changes in the Packers and Stockyards Act which will reflect the actual market conditions underlying the economics of local livestock auction barns.

The Packers and Stockyards Adminstration has chosen to assert that the 1958 amendment to the Packers and Stockyards Act requires that all livestock auction facilities be treated as public utilities. This assertion is supported by the methodology that the Packers and Stockyards Administration pursues when it sets just and reasonable rates for a livestock auction facility. These rates are based on costs of service principles generally used for public utilities.

Although the Packers and Stockyards Administration may set costs based on area averages rather than on the individual markets areas, this fact alone does not temper the methodology the Packers and Stockyards Administration pursues. The Packers and Stockyards Administration treats local livestock auction facilities as if they were public utilities.

In order for Government agencies to be charged with regulating certain lines of activity, the need for utility regulation must be based upon certain sound economic principles reflecting the market conditions in which an industry operates.

During an examination of competitive market performance one may observe that this market performance fails. Market failure is evidenced by excessive monopoly power. Monopoly power is demonstrated when a firm operating within an industry restricts output and/or simultaneously sets a price which will allow the firm to earn above average profits. Two straightforward tests for the existence of market monopoly power exist. First, one may observe excessive earnings on invested risk capital. Second, customer abuse is evident.

There is no evidence that I am aware of indicating local livestock auction facilities are earning above average rates of return on investment. There are no outraged customers complaining of unfair or unsafe services provided by auction barns.

Regulation is designed to supplant noncompetitive markets, and not just to supplement it. It seems to be extremely relevant to point out that the Packers and Stockyards Administration wants to supplement the market activity surrounding local livestock auction facilities, and not merely to replace it. It is fundamental to public utility regulation that a commission replace the market mechanism entirely when it sets prices and the quantity of goods and services produced.

The use of monopoly power is eliminated by regulation. There are many sources of monopoly power. A natural monopoly is said to exist when a certain level of investment is able to satisfy all of the market demand. If unrestrained, monopoly profits would invite unrestricted entry into the market, which will lead to prices set so close to marginal costs that firms incur losses. This will lead to the abandonment of investments that have been previously made. Abandonment of previously invested resources that still have a useful life is a characteristic of inefficient markets and is wasteful of national resources.

In order to allow only one firm to make the investment in a particular market area, public utilities must be the only supplier within a specified market area. Only one supplier in a particular market is allowed so that all economies of scale can be achieved, and thereby lower the average cost of production for all consumers.

The packers and stockyards' current position is that they would like to see small, inefficient, local livestock barns cease doing business. The Packers and Stockyards Administration's position will, by necessity, require territorial allocation to block entry whenever unprofitable operations cause an owner to cease doing business.

In order for the Packers and Stockyards Administration to prohibit another inefficient operation to spring up, the Administration must in the future block entry. Consequently, in the future the Packers and Stockyards Administration will exercise authority or ask the Congress for legislation to authorize it to allocate the territory to be served by any one auction facility.

It is sometimes asserted that buyer ignorance will allow the producers to debase the quality of services offered. We see that regulation of physicians, attorneys, tree surgeons, and massage parlors is designed to protect the consumer from untrained and unqualified individuals. The Packers and Stockyards Administration asserts that the American livestock producer is ignorant of all services offered by competing auction barns. It seems clear that all barns in Arkansas offer the same services precisely because if they did not, the astute Arkansas livestock producer would never patronize that auction ring offering deficient services. Similar service offerings by all producers of livestock auction facilities is a characteristic of competitive and not monopoly markets.

After the 1958 amendment to the Packers and Stockyards Act, approximately 1,600 additional auction barns were made subject to the Secretary's authority to regulate rates. It is questionable whether the intent of Congress was to establish rates with a public utility cost of service for local livestock auction facilities.

There is an alternative currently available to the Packers and Stockyards Administration that will allow them to meet the intent of the statute rather than going through this taxing and expensive public utility rate regulation. This alternative is nothing more than comparing a local livestock auction barn's posted rates to rates posted by competing barns in the surrounding areas. Not only must posted rates be compared, but also the delivery conditions, health standards, check payment requirements, and other conditions surrounding the sale must be compared.

The Packers and Stockyards Administration's current position is that the major users of livestock auction barns are low-income livestock producers. There is no data in any of the Census of Agriculture which clearly establishes that users of local livestock auction facilities are also low-income individuals. There is no source of information which will establish the relationship between income and users of livestock auction barns.

The Packers and Stockyards Administration asserts that many auction facilities do not håve annual volumes necessary to achieve efficient market operations. Consequently, they are encouraging some owners to cease offering livestock auction facilities in their particular area. The technique that the Administration has employed is to set a barn's rates based on the average area costs of doing business. This results in the firms which have a high cost of operations to incur losses, and the firms that have lower than average cost to earn higher profits.

Those businessmen that experience operating losses will cease doing business. Their departure will deprive some areas of their auction facilities, causing the area producers to incur higher transportation costs when marketing their livestock at a more distant auction barn. This activity will further aggravate our balance-of-payments problem caused by imported fuel oil, it is certain to increase the marketing costs in an amount equal to the increased transportation costs, and will promote the monopoly process of the remaining barns by eliminating the market alternatives to local producers.

Other regulatory agencies of government have set areawide prices which has produced unfavorable results. It is clear when prices are based on area or industry costs, the industry will prepare a joint filing before the Packers and Stockyards Administration establishing area rates which are equal to the highest cost producer in a particular area. Examples of such activity are seen in the ratemaking for bus, railway, airline, insurance, and other common carriers. There is no need to cite examples other than the Federal Power Commission's field pricing of natural gas, and to generally refer to the consequences of this activity today.

Mr. Chairman, I recommend to the committee that it exempt small livestock auction facilities from public utility type regulation from the Packers and Stockyards Act. I recommend that a section be written into the act which will exempt a local livestock auction barn from Packers and Stockyards rate regulation if the preceding 5-year annual average number of animal marketing units is 100,000.

It is important that the exemption be based on animal marketing units, and not be based upon the physical size of the marketing facilities.

The exemption should be based upon the average of the past 5 years in order to avoid whipsawing those barns that market close to the 100,000 units each year and are also subject to annual variation in the number of animal units.

I assert, Mr. Chairman, that once a barn ever comes under Packers and Stockyards regulation with an exemption, that the Packers and Stockyards Administration will never cease regulating that business, once it comes under rate jurisdiction.

That's the conclusion of my comments, Mr. Chairman. I thank you and Congressman Hightower, and if you have any questions I'll be glad to try to answer them.

Mr. THORNTON. Thank you very much, Dr. Pickett. In summary, you are not only familiar with the economic theories of monopolies and competition, but have you familiarized yourself with the actual marketing arrangement which exists in the State of Arkansas or in some areas of the State of Arkansas? Are

you

familiar with the number of barns that exist in the State, and their sizes?

Dr. PICKETT. Mr. Chairman, at one time I was familiar. It's been 9 months since I've reviewed the actual operation of some of the barns that I did some work for. I do not know how many barns there are in Arkansas at present.

Mr. THORNTON. I wanted to get your opinion on whether the situation is more competitive than monopolistic? Is this not also reflected in the actual number of barns that exist in this State and their close proximity to each other? Is it your observation that they are in a competitive situation in reality?

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