reasonable return on its investment, which I think for want of a better description could be called its capital cost.

It should be emphasized that in this process the Board carefully examines the carrier's operations and its reported results to make sure that the figures with which the Board is dealing accurately reflect the results of the carrier's operations and that the expenses allowed are only those expenses which have been incurred under honest, economical, and efficient management, the standards set in the act.

And, finally, the Board undertakes to make sure that all revenues which the carrier, by the exercise of good management, could reasonably be expected to have realized are offset against its expenses.

I would like to emphasize again that special care is taken in these rate cases to determine whether the costs incurred and the revenues realized by the carrier conform to the standard of honest, economical, and efficient management which is imposed by the Civil Aeronautics Act. In applying this standard, the Board has on many occasions made substantial disallowances for items such as excessive scheduling, unreasonably high aircraft-maintenance costs, equipment in excess of reasonable need, and similar items. In like manner, the revenues received are also examined to determine whether inefficient or imprudent management has resulted in a lesser income than reasonably could have been earned, and, if so, in a case like that the revenue figure will be properly adjusted by the Board.

The mail rate is fixed only on the basis of figures, remember, that are accepted after such review. Furthermore, mail rates are fixed in a formal proceeding to which both the carrier and the Postmaster General are parties, and in which either is entitled to a hearing upon any issue that may be in dispute.

The act directs that the mail rate fixed by the Board shall be paid by the Postmaster General out of appropriations for that purpose. Hence, the entire amount of mail pay, including the subsidy provided those air carriers which are entitled to it, is appropriated to the Post Office Department and paid out by it in the accordance with the rates fixed by the Board. That is the present procedure and system.

As pointed out by Mr. Hughes awhile ago, the proposed reorganization plan would transfer to the Board the task of paying in the case of "need" carriers that part of the total amount of mail payments which is in excess of the amount found to be reasonable compensation for the carriage of the mail.

To accomplish this division the Board is directed to fix a rate under the reorganization plan which will be referred to here as the "service mail rate." This service mail rate would be determined by the Board solely for the purpose of establishing the division of the function of payment between the Postmaster General and the Board. It would in no way affect the statutory rate of compensation fixed by the Board pursuant to the standards of section 406 of the act, which, depending on the carrier's situation, may or may not include elements of sudsidy.

Once the new plan becomes effective, there would thereafter be included in the Post Office Department appropriation only the amounts necessary to pay the service mail rates, in other words, to compensate the air carriers for services performed for the Post Office Department.

All amounts needed to pay subsidy would be eliminated from the Post Office Department's budget, and would be included in the Board's

appropriation, which would be responsible for justifying such appropriations before Congress and for the disbursement of the amounts appropriated.

As a means of implementing this division of the paying function, there would be established a new class of proceedings to be heard and decided by the Board in which the service mail rate to be paid by the Postmaster General would be fixed. Such a proceeding could be initiated by petition of the Post Office Department or of an air carrier or by the Board on its own motion.

Before fixing any service mail rate, the Board is required to give interested parties notice and hearing except for the initial rates fixed under the new reorganization plan. It is worth noting that such a proceeding could be instituted to determine whether the division of the total mail pay being paid the carrier between service mail pay and subsidy was a proper division, even though the total amount of the mail pay being received by the carrier under section 406 of the act was not being challenged at all.

These proceedings under the plan would be in addition to the rate proceedings now held to fix nail rates under section 406 of the act, although as a matter of procedural convenience the two undoubtedly would frequently be consolidated for hearing and decision in the same

case.

At this point it may be useful to pause briefly to explain that, because of its views as to the desirability of a separation of subsidy from compensation, the Board has on its own initiative taken steps toward such a separation. Some 2 years ago the Board undertook studies designed to provide it with the most accurate estimates available as to the respective amounts of compensation and of subsidy included in the mail rates of all United States air carriers.

These studies, as you are no doubt aware, have resulted in a series of reports entitled "Administrative Separation of Subsidy from Total Mail Payments." Each of these reports was submitted to the Congress when issued, and sets forth the amount of compensation and subsidy which it is estimated each air carrier received or will receive during the fiscal years 1952 through 1954.

In addition, since these reports have been issued, every rate decision handed down by the Board has contained a statement of the amount of subsidy, if any, included in the rate fixed therein. However, it should be emphasized that the reports prepared by the Board, and the statements contained in its decisions, represented only an informal, administrative determination by the Board for purposes of information and guidance, but no legal consequences flowed therefrom.

The Board's administrative separation did not affect the need for the reorganization plan now before this committee for these reasons: First, the amount of subsidy included in the mail rates continued to be included in the appropriations of the Post Office Department and to be paid by the Postmaster General. There is no authority at this time for including in the Board's appropriations the amounts of subsidy to be paid air carriers, or for the Board or to make payments to the carriers.

Mr. McCORMACK. I notice you left out the words "to obtain such appropriations."

Mr. RYAN. I will repeat that. The amount of subsidy included in the mail rates continued to be included in the appropriations of the Post Office Department and to be paid by the Postmaster Gencral. There is no authority at this time for including in the Board's appropriations the amounts of subsidy to be paid air carriers or for the Board to obtain such appropriations or to make payments to the carriers. I am sorry that I left that out.

Mr. McCORMACK. To me that is a very important part and I am sure it would be very important to the other members of the committee later on.

Mr. RYAN. The proposed plan would transfer the function of obtaining and paying out appropriations for this purpose from the Postmaster General to the Board.

Second, the requirement that there be a formal separation of subsidy from compensation as contained in the reorganization plan, instead of the informal administrative separation previously made by the Board, will tend to induce a more comprehensive analysis of the standards for separation and a more confident acceptance of the results by the parties to the mail-rate proceedings, the Congress, and to the public.

Certain other aspects of the plan warrant brief discussion. In order to implement the plan intially the Board is authorized to fix the initial rates under the plan without notice and hearing. Obviously, in the relatively short time before the plan becomes effective, it will not be possible for the Board to undertake any extensive review of the data which was used in arriving at the service mail rates which are contained in the administrative subsidy separation studies of the Board. In the absence of special or unusual circumstances, therefore, the Board doubtless will initially make effective for each air carrier the service mail rate set forth in the then current subsidy separation studies with respect to that carrier. No one will be prejudiced by such action, since at any time thereafter the Post Office Department and each of the carriers concerned are entitled by filing a petition to have the rate reviewed from the date of such filing. The Board can also at any time initiate a proceeding to review such rate.

As I hope I have made clear, the Board regards the plan as a constructive step forward in the responsible and efficient administration of the airmail compensation program, and believes that a longterm result of the plan may well be a reduction in the amount of subsidy required to achieve the objectives of the Civil Aeronautics Act.

We believe it is necessary to recognize, however, that the plan does involve some additional administrative expenses.

Thus, the plan requires that separate rates be fixed for compensation and for subsidy where only one rate now exists, and that the amount shall be disbursed from separate appropriations. This will inevitably result in some increase in the amount of expense incurred in the disbursement of the funds over the present cost. This problem of how to administer the subsidy payments most efficiently and economically is now under joint study by the Bureau of the Budget, the Post Office Department, and the Board. We hope that means may be found whereby the additional expenses can be absorbed without adversely affecting other importnt programs.

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The plan will inevitably increase in some degree the Board's workload in respect to mail-rate proceedings. This is the necessary consequence of the fact that the Board will not only continue to have the statutory resopnsibility for determining through a formal proceeding the total amount of mail compensation due air carriers, but will now have the added task of determining in a proceeding the portion of the total mail pay which will be paid by the Postmaster General for the mail service. The Postmaster General, a carrier, or the Board will have the right at any time to institute a proceeding for a review of the rate being paid by the Postmaster General. Whether this issue be in a separate proceeding or included in a proceeding to determine the total mail pay of the carrier, there will inevitably be an increase either in the number of proceedings involving mail-rate matters coming before the Board, or an increase in the difficulty and complexity of the issues in such proceedings. The Board is unable to make at this time an accurate estimate of the extent of the increased workload. If it should prove to be substantial in amount, it will pose a serious problem with respect to continued progress by the Board toward its mail-rate program goal of disposing of mail-rate cases on a reasonably current basis. Nevertheless, the Board believes that the long-term interest in efficiency and economy in Government will be served by the separation of subsidy from total airmail compensation effected by this plan.

For the various reasons given, Madam Chairman, the Board recommends the approval of the President's Reorganization Plan No. 10 of 1953.

Mrs. CHURCH. Thank you, Mr. Ryan. Do you have any questions, Mrs. St. George?

Mrs. ST. GEORGE. There was only one question I wanted to ask. In the breakdown of these figures, is it at all possible that one could develop the fact that the airmail actually does pay its way if it is taken entirely separate from the subsidies? We know the subsidies have to be paid for other things. I realize and recognize that, especially in view of the defense, and so forth, but I notice in part of someone else's testimony that they stated that the compensation of about $1 million, which was paid and apparently covered the actual carriage of the mail, that those lines received between $7,300,000 and $6,300,000. Mr. RYAN. I am not familiar with that testimony, Mrs. St. George. Mrs. ST. GEORGE. I was wondering if your figures would show that airmail came pretty close to paying its own way if it was actually taken completely away from subsidy.

Mr. RYAN. I am quite sure that if under separation the proper cost allocation is made to the carriage of air mail it would be found that air mail is paying its way.

Mrs. ST. GEORGE. I was under that impression, if you take it entirely apart from the subsidy that it would pay its own way.

Mr. RYAN. That involves matters of costing within the Post Office Department and there has been some controversy over that.

Mrs. CHURCH. Would you like to develop your question, Mr. McCormack, concerning the double capacity in which the Board will serve?

Mr. McCORMACK. You heard the question I asked Mr. Hughes, didn't you?

Mr. RYAN. Yes; and if I interpret your question correctly, it was based on a fear that the Board's judicial function might be compromised by having to defend its decision before a committee of the Congress in fixing the amount of the subsidy.

Mr. McCORMACK. That would be substantially correct.

Mr. RYAN. As you may be aware, you touched me on a tender point and because I have always believed that it was highly in the public interest that the administrative process should move toward a more complete judicial character than it has ever had, even in the past. It is one of the very real problems and it may be that the sword of a possible attack by members of the Appropriations Committee upon the amount of subsidy which would be handed out in a particular decision which would be reached by the judicial process might have an influence upon the Board. That, however, would be a two-edged sword. It might have a wholesome influence. In some instances it might have a different kind of an influence.

Mr. McCORMACK. The two-edged sword does exist. There is a reasonable possibility.

Mr. RYAN. Yes.

Mr. McCORMACK. And it is rather bad to have a two-edged sword existing in relation to a judicial or quasi-judicial body.

Mr. RYAN. That is inherent in this proposal. There is no question

about that.

Mr. McCORMACK. That is not impugning the motives of anyone. I am just dealing with the separation of powers that we have, fortunately. We are all human beings. We have our own thoughts. Here is a quasi-judicial board and taking evidence under oath and sitting as judges and then it has to come before another body and testify in terms of dollars on your judicial decision.

Mr. RYAN. That is right. That is inherent in the system.

Mr. McCORMACK. And that another body or group can put you on trial as to your judicial decision after it is made.

Mr. RYAN. That is inherent in this system in the administrative process as affected by this reorganization order. The other side of the shield, of course, is this

Mr. McCORMACK. Pardon me. I am for the plan because I believe it should get out of the Post Office Department. Now, where it should go is another question, but I have my serious doubts about putting the responsibility in the body that has got to pass upon the rates.

Mr. RYAN. There is some merit in that argument, and that is inherent in the system. But it has to be weighed against the fact that somebody who knows about this decision must be in a position to advise the Appropriations Committee, and I assume that the reorganization order proceeds upon the assumption that the Board would know more about it than the Post Office Department or any other agency because it would be more familiar with the evidence and with the policies that would explain the decision.

Mr. MCCORMACK. That is true. We have courts that pass upon it, our Federal courts that now pass upon tort cases. The court does not have to come before the committee and justify its verdict.

Mr. RYAN. That is right.

Mr. MCCORMACK. That comes back to the verdict. When you have to justify the figures you are in a position where you have got to justify your verdict.