Petition — Lehigh & New England Railway Co. v. Interstate Commerce Commission

Supreme Court brief1977

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oct 6 wt

R., CLERK

Supreme Court of the Uniter' sas ——-—

Ocroser Term, 1976

No.

LEHIGH AND NEW ENGLAND RAILWAY

COMPANY,

Petitioner,

Vv.

INTERSTATE COMMERCE COMMISSION, UNITED

STATES OF AMERICA and COMMONWEALTH OF

PENNSYLVANIA (Intervenor Below),

Respondents.

— ——-—_——

_—_—_ —

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

THIRD CIRCUIT

—

_ —_

Srantey WEIss,

744 Broad Street,

Newark, New Jersey 07102

Counsel for Petitioner, Lehigh

and New England Railway Com-

pany.

CarPENTER, Bennett & Morrissey,

Attorneys for Petitioner.

Rosert E.

On the Brief.

October, 1976

: ‘Adame Prese Corp.. 11 Commune Serest, Newark, N. 7. 07102—-(201) 623-8611

ain ——

TABLE OF CONTENTS

PAGE

Oprrnions BELow .........

J URISDICTION 2

Questions PRESENTED - a

ConstiTuTIONAL Provisions, StaTuTe, AND ReEGuLA-

TIONS INVOLVED * 4

STATEMENT OF THE CASE 4

ReasoNs ror GRANTING THE WRIT:

I—This case involves the first judicial con-

struction and the first administrative ap-

plication of the recently enacted 49 U.S.C.

§1(16)(b), a statute of potentially great

significance in the present environment of

railroad failures, and Supreme Court re-

view at this time will provide necessary

guidance for the statute’s further applica-

tion . 10

Ii—The Court of Appeals’ conclusion that the

Commission may require a railroad to con-

tinue to provide rail service, despite a lack

of cash, unrecoverable operating losses, or

a contrary court order, which conclusion

was central to the Court’s holding that no

Fifth Amendment taking is involved in a

directed service operation, conflicts with

applicable decisions of this Court, other

Courts of Appeals and with other decisions

of the Court of Appeals for the Third Cir-

cuit 12

ii TABLE OF CONTENTS

TABLE OF CONTENTS ‘iii’

UI—The Court of Appeals’ holding that the

taking of possession of the other carrier’s

property during a directed service opera-

tion does not constitute a taRing within the

meaning of the final clause of the Fifth

Amendment involves an important, unre-

solved issue of federal law which should be

settled by this Court es to whether, and in

what circumstances, the government may

take actual physical possession of an own-

er’s property for a public use without such

actual taking constituting a taking within

the meaning of the Fifth Amendment ....... =

CoNncLUSION

APPENDIX:

A—Opinion of United States Court of Appeals

for the Third Circuit filed June 9, 1976 ......

B—Regulations, 49 C.F.R. Part 1126, 40 Fed.

Reg. 16066-16069

C—Order of Interstate Commerce Commission

and Accompanying Report, March 14, 1975

D—Corrected Order of Interstate Commerce

Commission and Corrected Page of Report,

March 24, 1975

E—Judgment of United States Court of Ap-

peals, June 9, 1976

F—Order of United States Court of Appeals

denying Petition for Rehearing, July 8,

1976

PAGZ

97a

PAGE

G—49 U.S.C. §1(16)(b), §601(e) of the Re

gional Rail Reorganization Act of 1973, as

Amended 10la

H—Corrected Revised Service Order Nos. 1207

and 1208 . : 104a

Cases Cited

American-Hawaiian §.S. Co. v. U.S., 124 F.Supp.

378 (Ct. of Cl. 1954), cert. den. 350 U.S. 863

(1955) 23

Asbury v. Chesapeake & Ohio Ry. Co., 264 F.Supp.

437 (D.C.D.C. 1967) 14

Baca v. C.LR., 326 F.2d 189 (5th Cir. 1964)... a

Brooks-Seanlon Co. v. R.R. Commissioner, La., 251

U.S. 396 (1920) 14,17

Bullock v. R.R. Commissioner of Fla., 254 U.S. 513

(1921) 14

Central Railroad Company of New Jersey v. Manu-

facturers Hanover Trust Co., 421 F.2d 604 (3d

Cir. 1970) 17

City of Alexandria, La. v. Chicago, R.I. & Pac. R.

Co., 311 F.2d 7 (5th Cir. 1963) 14

Crawford v. Duluth Street Ry. Co., 50 F.2d 213

(7th Cir. 1932) 14, 15

Erie R.R. Co. v. Pub. Util. Commission, 254 U.S. 394

(1921) 14

Eyherabide v. U.S., 345 F.2d 565 (Ct. of Cl. 1965)... 23

Garner v. Louisiana, 368 U.S. 157 (1961) 9

iv TABLE OF CONTENTS

PAGE

In re Central Railroad Company of New Jersey, 485

F.2d 208 (3d Cir. 1973) 15

In re N.Y., N.H. & H.R. Co., 304 F.Supp. 793 (D.

Conn. 1969) 15

In re Penn Central Transportation Co., 384 F.Supp.

895 (Special Court, RRRA, 1974) 15.

In re Penn Central Transportation Co. (Appeal of

Smith), 508 F.2d 270 (3d Cir. 1975) 18

In re Penn Central Transportation Company (Colum-

bus Options), 494 F.2d 270 (3d Cir.) cert. den. 419

U.S. 883 (1974) 17,19

In re Third Avenue Transit Corp., 198 F.2d 703 (2d

Cir. 1953) 17-19

International Paper Co. v. United States, 282 U.S.

399 (1931) 23

Kimball Laundry Co. v. United States, 338 U.S. 1

(1949) 23

King v. United States, 364 F.2d 235 (5th Cir. 1966) 24

Marbury v. Madison, 1 Cranch 137 (1803)... 16

Matter of Boston Terminal Co., 71 F.Supp. 472 (D.

Mass. 1947) : 14

McGrody v. Baltimore & Ohio R.R., 217 F.Supp. 252

(E.D. Pa. 1963) 14

Meyers v. Arkansas & Ozark Ry., 185 F.Supp. 36 (D.

Ark. 1960) 14

Meyers v. Jay Street Connecting R.R., 259 F.2d 532

(2d Cir. 1958) 14

Monongahela Navigation Co. v. United States, 148

U.S. 312 (1893) . 7

TABLE OF CONTENTS Vv

PAGE

National Board of YMCA v. United States, 395 U.S.

85 (1969) wes, 28

New Haven Inclusion Cases, 399 U.S. 392 (1970)....13, 17-20

New York, N.H. & H.R. Co. Bondholders Comm. v.

United States, 289 F.Supp. 418 (S.D. N.Y. 1968)... 15

Niagra Falls Bridge Comm. v. United States, 76 F.

Supp. 1018 (Ct. of Cl. 1948), 23

North Car. R.R. v. Lee, 260 U.S. 16 (1922).............. 23

Northern Pac. R.R. v. North Dakota, 250 U.S. 135

(1919) 23

Ohio Bell Tel. Co. v. Public U. Comm. of Ohio, 301

U.S. 292 (1937) - 9

Powell v. United States, 300 U.S. 276 (1937)...-.......-. 13

R. D. Widen Co. v. United States, 357 F.2d 988 (Ct.

of Cl. 1966) 23

R.R. Comm’r v. Eastern Texas Ry., 264 U.S. 79

(1924) * 14

Regional Rail Reorganization Act Cases, 419 U.S.

102 (1974) " 17, 18, 21

Stapelton v. $2,438,110, 454 F.2d 1210 (3d Cir. 1972)

cert. den. 409 U.S. 894 24

State of Iowa v. Old Colony Trust, 215 Fed. 307

(8th Cir. 1914) — 15

United States v. Peewee Coal Co., 341 U.S. 114

(1951) 23

Warner v. United States, 201 F.2d 327 (Ct. of Cl.

1962) 24

vi TABLE OF CONTENTS

PAGE

Wheeling & Lake Erie Ry. v. Pittsburgh, 33 F.2d 390

(6th Cir. 1929) 14

Wheelock Bros. v. United States, 88 F.Supp. 278

(Ct. of Cl. 1950) vacated on other grounds, 341

U.S. 319 (1951) 23, 24

Zirn v. Hanover Bank, 215 F.2d 63 (2d Cir. 1954)....13, 14

United States Constitution Cited

Fifth Amendment

3-5, 7-9, 11, 12, 18-24

Statutes Cited

Federal Bankruptcy Act, Sec. 77 11,14

Federal Control Act, March 21, 1918, ¢. 25, 40 Stat.

451 23

Tucker Act 17,18

28 U.S.C.:

See. 1254(1) y

Sec. 2101(c) 2

See. 2321(a) 7

See. 2342(5) 7

wane: Gh ly GO iceman 10

49 US.C.:

Ns. SUID ssllipiecicscistiiacen ieicnaihdaiathcla ata i Ti ete 10

ENE SS RENE EM IE SEE 10

TABLE OF CONTENTS Vii

ee -

PAGE

49 U.S.C.:

Section 601(e), Regional Rail Reorganization

Act of 1973, as Amended, 49 U.S.C. Sec. 1(16)

a 2-12, 16, 20, 24

See. 1(16)(b)(E) 5,8

Sec. 1(18) 8,13

See. 3(5) 10

Rules Cited

Cost Form Regulations, 49 C.F.R. Part 1126, 40 Fed.

Reg. 16066-16069 2, 5-9, 11

Report of Interstate Commerce Commission issued

in Ex Parte No. 293 (Sub-No. 3), March 14,

1975 2, 6,7

Other Authorities Cited

ICC Proceeding, Ex Parte No. 293 (Sub-No. 3) -......... 2,5

ICC Corrected Revised Service Order Nos. 1207 and

1208 6,7

A. ee oA

a) ae

IN THE

Supreme Court of the United States

Octoper Term, 1976

No.

—»>

LEHIGH AND NEW ENGLAND RAILWAY

COMPANY,

Peittioner,

INTERSTATE COMMERCE COMMISSION, UNITED

STATES OF AMERICA and COMMONWEALTH OF

PENNSYLVANIA (Intervenor Below),

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

THIRD CIRCUIT

Petitioner, Lehigh & New England Railway Company

(referred to herein as “L&NE’’), respectfully prays that

a writ of certiorari issue to review the judgments and

opinion of the United States Court of Appeals for the

Third Circuit entered in this proceeding on June 9, 1976,

July 8, 1976 and July 16, 1976.

Opinions Below

The Opinion of the United States Court of Appeals,

filed June 9, 1976, is not yet reported and is reproduced

in the Appendix hereto (App. la-25a).

The regulations of the Interstate Commerce Commis-

sion, which are the subject of this proceeding, were prom-

ulgated in the Commission’s proceeding, Ex Parte No.

293 (Sub-No. 3), Implementation of Public Law 93-236,

Section 601( €), Regional Rail Reorganization Act of 1973

—Submission of Cost Data To Justify Reimbursement,

and were published in the Federal Register on April 9,

1975, 40 Fed.Reg. 16066—16069 as 49 C.F.R. Part 1126

(App. 26a-36a). The Order promulgating the regulations

and the accompanying Report of the Interstate Commerce

Commission, which Report is incorporated by reference

into the regulations, were issued on March 14, 1975 (App.

37a-93a). A corrected Order and corrected page of the

Report were issued by the Commission on March 24, 1975

(App. 94a-96a).

Jurisdiction

L&NE seeks review of the judgment of the United

States Court of Appeals which was entered on June 9,

1976 (App. 97a) and of the order of July 8, 1976 denying

L&NE’s petition for rehearing in bane (App. 99a). A cer-

tified copy of the judgment of June 9, 1976 was issued on

July 16, 1976 in lieu of a formal mandate (App. 97a). This

Court’s jurisdiction is invoked under 28 U.S.C. $1254(1)

and §2101(c).

ana

Questions Presented

1. Whether a directed service operation pursuant to 49

U.S.C. §1(16)(b) which, as a matter of fact, involves a

temporary, possessory taking by the government of the

property of the railroad over whose lines the operation is

conducted, effects a taking of that property within the

meaning of the final clause of the Fifth Amendment to

the United States Constitution ;

2. Whether the Interstate Commerce Commission has

the power to compel, and whether a railroad has a con-

comitant duty to provide continued service, where (a)

the railroad lacks the cash to operate; or (b) its con-

tinued operations (prospectively viewed) will result in

losses which will not foreseeably be recaptured or com-

pensated for; or (c) there is a final Court order in effect

prohibiting continued operations ;

3. Assuming that a railroad is under a duty to con-

tinue its operations under the circumstances set forth in

Question 2, supra; whether the failure or inability of the

railroad to continue operations removes the carrier and its

property from the protection otherwise afforded by the

final clause of the Fifth Amendment to the United States

- Constitution ;

4. Whether the opinion and judgment of the United

States Court of Appeals for the Third Circuit create a

judicially declared forfeiture of property rights, unau-

thorized by Congress;

5. Whether the Commission exceeded its statutory rule-

making authority when it determined when, and by what

standards, compensation may be paid for the use of the

property over which a directed service operation is con-

ducted ;

6. In the event that Question 1, supra, should be an-

swered in the affirmative; whether the Commission wrong-

fully usurped the function of the Judiciary when it de-

termined when, and by what standards, compensation may

be paid for the use of the property over which a directed

service operation is conducted and whether the standards

so established by the Commission fail to provide for just

compensation. .

Constitutional Provisions, Statute, and Regulations

Involved

The Constitutional provision involved is the final clause

of the Fifth Amendment which provides:

Nor shall private property be taken for public use,

without just compensation.

The statutory provision involved is Section 601(e) of

the Regional Rail Reorganization Act of 1973, as amended,

which has been codified as 49 U.S.C. §1(16)(b), set forth

in the Appendix at App. 10la through 103a. As stated,

supra, the regulations invelved are the Regulations of the

Interstate Commerce Commission, 49 C.F.R. Part 1126,

and the accompanying Report which is incorporated by

reference into the regulations. The Regulations and Re-

port are set forth in the Appendix at App. 26a through

36a and 37a through 96a.

Statement of the Case

This Petition seeks review of a decision of the United

States Court of Appeals for the Third Cireuit which

decision (a) held that a directed service operation pur-

suant to Section 601(e) of the Regional Rail Reorganiza-

RL eR hw ae BNE lh

ee ee ee ee ed

tion Act of 1973, as amended, codified as 49 U.S.C. $1(16)

(b), does not constitute a taking of the property of the

carrier over whose lines the operation is conducted with-

in the meaning of the final clause of the Fifth Amend-

ment to the United States Constitution and (b) upheld

the validity of certain “cost form” regulations promul-

gated by the Interstate Commerce Commission (“Com-

mission”) under rulemaking authority conferred by 49

U.S.C. §1(16) (b) (EB).

The enactment of 49 U.S.C. §1(16)(b) in January, 1974

filled a perceived deficiency in the Commission’s statu-

tory power to deal with the emergent situation of a car-

rier’s inability to provide rail services. 49 U.S.C. $1(16)

(b) specifically authorizes the Commission, in such cases,

to direct a carrier (the “directed carrier”) to provide

rail service over the lines of the carrier unable to pro-

vide such service (the “other carrier”) for a period of up

to 240 days. That provision also permits the directed

carrier to recover from the Government, a sum equal to

the excess of costs over revenues associated with the di-

rected service operation; defines “costs” as “. . . those

expenditures made or incurred in or attributable to the

operations as directed, including the rental or lease of

necessary equipment, plus an appropriate allocation of

common expenses, overheads, and reasonable profit;” and

directs the Commission, by general order, to establish a

cost form to be used by a directed carrier for the record-

ing of costs and for submission to the Commission in

connection with its request for Government reimburse-

ment of excess costs over profit.

The Commission’s rulemaking proceeding, Ex Parte No.

293 (Sub-No. 3), resulted in a general order, dated March

14, 1976 (App. 80a); in the challenged “cost form” regu-

lations, 49 C.F.R. Part 1126 (App. 26a), which became

effective on March 31, 1975; and in an accompanying

Report (App. 37a), which is incorporated by reference

into the challenged regulations. L&NE’s primary objec-

tion to the cost form regulations and Report is that they

prohibit, almost without exception, the inclusion on the

cost form, and the recovery by the directed carrier, of

payments of rent for the use and occupancy of the prop-

erty of the other carrier, with the practical result that

the other carrier will receive no compensation whatever

for the use of its property in a directed service opera-

tion* (App. 57a-59a).

L&NE’s Interest — Petitioner, L&NE, was a carrier by

railroad, which, in January, 1975, notified the Commis-

sion that its cash position made continued rail operations

impossible. Thereafter, the Commission entered two serv-

ice orders, subsequently revised, pursuant to 49 U.S.C.

§1(16)(b) directing the Lehigh Valley Railroad Company

(“LVRR”) and the Reading Company (“Rdg”) to pro-

vide directed service over the rail lines of L&NE. Copies

of the Commission’s corrected Revised Service Order Nos.

1207 and 1208, establishing these directed service opera-

tions are set forth in the Appendix at App. 104a through

123a.

The Commission’s promulgation of the cost form regu-

lations, after the commencement of the directed service

operations over L&NE’s lines, was therefore an adminis-

trative determination that L&NE was not entitled to any

compensation for the use at the Commission’s direction,

* A small amount of rent may be allowable if the directed service

operation is profitable to the directed carrier. (App. 59a through

60a).

of its property by LVRR and Rdg.* L&NE, concerned

that it might be barred by the collateral attack doctrine

from challenging the cost form regulations in a Court of

Claims proceeding for compensation, thereupon promptly

brought its petition for direct review of the regulations

in the United Sti.es Court of Appeals.**

L&NE’s Contentions —L&NE did not contend in the

Court of Appeals (nor does it now contend) that 49 U.S.C.

$1(16)(b) is unconstitutional or that Service Order Nos.

1207 and 1208, establishing directed service operations on

L&NE’s lines, are in any way improper or invalid. L&NE’s

sole challenge is to the validity of Commission Regula-

tions, 49 C.F.R: Part 1126, promulgated by the Commis-

sion’s March 14, 1975 Order and to the validity of the

Report accompanying that Order and incorporated into

the regulations by reference.

In the Court of Appeals L&NE argued that (a) di-

rected service operations under 49 U.S.C. $1(16) (b) con-

stitute a taking of the property of the other carrier within

the meaning of the final clause of the Fifth Amendment

and that, as a result, the United States must pay just

compensation for the use of that property; (b) the Com-

mission in violation of the principles of Monongahela

Navigation Co. v. U.S., 148 U.S. 312 (1893), usurped the

function of the Judiciary by promulgating regulations

which establish standards for determining when compen-

sation is to be paid for a directed service operation taking

* As noted above, the regulations would permit a small amount

of compensation to L&NE if the directed service operations proved

profitable to LVRR and Rdg.

** Jurisdiction in the Court of Appeals was predicated upon the

provisions of 28 U.S.C. §2342(5) and §2321(a).

and for determining the measure of such compensation;

tions, do not provide for just compensation for a directed

service operation taking; and (d) the regulations are

otherwise arbitrary, capricious and incapable of reasoned

and uniform application.*

The Court of Appeals, in denying L&NE’s petition for

review, held that a directed service operation under 49

U.S.C. §1(16)(b) does not constitute a taking within the

meaning of the Fifth Amendment. (Slip Opinion, pp. 19-

24, App. 19a-24a). That holding was premised upon the

Court’s conclusions that the Commission has the power

to require continued operations by a railroad which has

not received Commission abandonment authority under

49 U.S.C. §1(18) despite a cash deficiency, unrecoverable

operating losses or a Court order requiring cessation of

operations and that the exercise of such power by the

Commission would merely constitute a postponement of

the right to abandon and not a taking within the meaning

of the Fifth Amendment. From this the Court reached

its ultimate conclusion, to-wit: “. . . we think it follows

directly that [the Commission] could place another car-

rier on the lines of the carrier unable or unwilling to con-

tinue service for a limited period without effecting a

taking within the meaning of the fifth amendment.” (Slip

opinion, p. 20, App. 20a).

Accordingly, the Court declined to rule on the ques-

tions of whether the Commission, in promulgating its cost

* L&NE also argued that the Commission exceeded the statu.ory

rulemaking authority conferred on it by 49 U.S.C. §1(16)(b)(E)

when it determined when, and by what standards, compensation may

be paid for the use of the other carrier’s property. The Court of

aan rejected this argument (Slip opinion, pp. 13-16, App. 13a-

form regulations, usurped the function of the Judiciary

to determine what constitutes just compensation and of

whether the “benefits” conferred on the other carrier in a

directed service operation obviate the need to provide

rental to it as a matter of law. (Slip opinion, pp. 19-20,

fn. 32, App. 19a, 20a).* The Court of Appeals went on to

conclude that the Commission’s regulations comport with

Congress’ intent in enacting 49 U.S.C. §1(16)(b) (Slip

opinion, pp. 16-19, App. 16a-19a), and it rejected L&NE’s

argument that the regulations are arbitrary and capri-

cious (Slip opinion, pp. 24, 25; App. 24a, 25a). According-

ly, the Court of Appeals denied L&NE’s petition to review

and to set aside the regulations (App. 25a). L&NE

thereupon filed a petition for rehearing with suggestion

for in banc consideration. By Order of July 8, 1976, the

Court of Appeals denied L&NE’s petition for rehearing

(App. 99a).

* The Court of Appeals did, however, consider what it deemed

to be “benefits” to L&NE as a result of the directed service opera-

tions over its lines in reaching the conclusion that no taking of

property within the meaning of the Fifth Amendment results from

a directed service operation under 49 U.S.C. §1(16)(b). See Slip

opinion, pp. 19, 23, 10 (App. 19a, 23a, 10a). We contend that while

such “benefits” may bear on the issue of just compensation, they are

immaterial to the question of whether a taking has occurred within

the intention of the Fifth Amendment. In any event evidence of

the so-called benefits received by L&NE as a result of the directed

service operations over its lines is completely lacking in the record

of this proceeding for the review of Commission rulemaking. To

the extent that the Court of Appeals relied on these “benefits”, it

denied L&NE a full hearing and, consequently, due process of law.

See Garner v. Louisiana, 368 U.S. 157, 173 (1961); Ohio Bell Tel.

Co. v. Public U. Com. of Ohio, 301 U.S. 292, 300-306 (1937).

REASONS FOR GRANTING THE WRIT

POINT I

This case involves the first judicial construction and

the first administrative application of the recently

enacted 49 U.S.C. §1(16) (b), a statute of potentially

great significance in the present environment of rail-

road failures, and Supreme Court review at this time

will provide necessary guidance for the statute’s

further application.

For many years Congress recognized that circumstances

might require one carrier to perform the duties or obli-

gations of another carrier or make desirable the use by

one carrier of the assets of another. Thus, §3(5) of the

Interstate Commerce Act empowers the Commission to

direct a carrier to use the terminal facilities of another

carrier; §1(15) empowers the Commission to direct a car-

_ Tier to use the rolling stock of another carrier; and §1(16)

(a) (formerly §1(16) before the enactment of §1(16)(b))

empowers the Commission to direct a carrier to move over

its own lines the traffic of another carrier. The enactment

of §1(16)(b) in January 1974 as §601(e) of the Regional

Rail Reorganization Act of 1973, as amended, filled what

was considered to be a substantial gap in the Commis-

sion’s regulatory authority by authorizing the Commission

to direct one carrier to move the traffic of another carrier

over the other carrier’s lines. The codification of §601(e)

of the Regional Rail Reorganization Act as a part of the

Interstate Commerce Act—rather than as part of Title

45—constitutes a significant Congressional understanding

of the depth and significance of railroad problems in the

United States today and the likelihood that that statutory

provision will have frequent applicability to distressed

pet

railroads, regardless of whether such railroads are under-

going reorganization under §77 of the Federal Bankruptcy

Act.

The Commission regulations which have been challenged

by L&NE in this proceeding are the first comprehensive

regulations issued by the Commission in implementation

of 49 U.S.C. §1(16)(b); the opinion and judgment of the

Court of Appeals in this proceeding constitute the first

judicial interpretation and construction of the statute and

the regulations, involving, as well, substantial issues of

constitutional magnitude. We respectfully urge the Su-

preme Court to grant certiorari to review the decision of

the Court of Appeals in order to provide definitive guid-

ance as to the meaning and future applicability of the

statute and the proper scope of regulations thereunder.

Unless certiorari is granted, the opinion of the Court of

Appeals for the Third Circuit—which we respectfully con-

tend is erroneous, see Points II and III, infra—will pro-

vide a far reaching precedent, both with respect to the

application of 49 U.S.C. §1(16)(b) and, equally impor-

tantly, with respect to the more general question of what

governmental interferences with private property consti-

tue takings within the meaning of the Fifth Amendment.

12 ”

POINT II

The Court of Appeals’ conclusion that the Com-

mission may require a railroad to continue to provide

rail service, despite a lack of cash, unrecoverable

operating losses, or a contrary court order, which

conclusion was central to the Court’s holding that

no Fifth Amendment taking is involved in a directed

service operation, conflicts with applicable decisions

of this Court, other Courts of Appeals and with other

decisions of the Court of Appeals for the Third Circuit.

The Court of Appeals’ conclusion that the Commission

has the power to compel operations for as much as 240

days, despite a cash deficiency, unrecoverable operating

losses, or a contrary Court order, conflicts with established

law; denigrates from judicial supremacy; and overlooks

the distinction between an abandonment of a line or op-

erations and a mere suspension of operations. Indeed,

both Congress and the Commission long recognized the ab-

sence of any power on the Commission’s part to compel

such operations and the absence of any duty on the part

of a railroad to operate under such circumstances. 49

U.S.C. §1(16)(b) was enacted to deal with this recognized

absence of Commission power and to greatly enlarge the

Commission’s authority to handle emergencies involving

a carrier’s inability or failure to operate—but, signifi-

cantly, Congress did not authorize the Commission to di-

rect continuing operations; rather Congress empowered

the Commission to place another carrier on the property

of the first upon the Commission’s finding of any of three

conditions set forth in 49 U.S.C. §1(16)(b); ie., a lack

of cash; a Court order not to operate; or operating losses.

The first two of these conditions—a cash deficiency and

a final Court order not to operate—present clear circum-

DPSS ol ms hana ee Fa ee

stances of impossibility on the part of a carrier to provide

continued service. Such circumstances of impossibility

have repeatedly been held to justify a carrier’s failure to

operate—without the need for prior Commission approval.

The conclusion of the Court of Appeals that a duty exists

to do the impossible was clear error. Furthermore, we

respectfully submit that the Court of Appeals, in reach-

ing its additional erroneous conclusion that the Commis-

sion may, without effecting a taking, require continued

operations at a loss without examining the foreseeability

of the prospects of recapture or compensation therefor,

misconstrued the New Haven Inclusion Cases, 299 U.S.

392 (1970) and wholly ignored numerous relevant deci-

sions of this and other Courts.

Clearly, not every cessation of operations constitutes

an abandonment within the meaning of 41(18) of the

Interstate Commerce Act; and it is a question for the

courts and not for the Commission, to determine whether

particular conduct constitutes an abandonment. Powell

v. U.S., 300 U.S. 276 287 (1937). As was stated in Zirn

v. Hanover Bank, 215 F.2d 63, 69 (2d Cir. 1954):

To ‘abandon’ in this context means, we think to give

up permanently, not merely to suspend operations

for lack of physical equipment. No Commission

approval is necessary where the cessation of opera-

tions results, not from the volition of the railroad

or its bankruptcy-trustee, but from the exercise of

the supervening rights, here recognized by the Bank-

ruptey Act, of third persons.

There have been numerous additional instances in which

it has been held that mere suspensions of service, com-

pelled by events beyond the carrier’s reasonable control,

are not abandonments or discontinuances requiring Com-

mission approval. Thus, it has been held that the follow-

ing were not abandonments requiring Commission ap-

proval: (a) enforcement of a city’s lien against a railroad

roadbed by execution sale, City of Alexandria, La. v. Chi-

cago, R.I. d& Pac. R. Co., 311 F.2d 7 (5th Cir. 1963), contra,

Matter of Boston Terminal Co., 71 F.Supp. 472 (D. Mass.

1947); (b) cessation of operations caused by washouts

of the line which the railroad was unable to repair on a

financially feasible basis, Meyers v. Arkansas & Ozark

Ry. Corp., 185 F.Supp. 36 (D.C. Ark. 1960) and see also

Asbury v. Chesapeake & Ohio Ry. Co., 264 F.Supp. 437

(D.C.D.C. 1967); (ce) cessation of operations when there

is no service demand, McGrody v. Baltimore & Ohio R.R.,

217 F.Supp. 252 (E.D. Pa. 1963); (d) cessation of rail

services in a terminal in order to facilitate the construc-

tion of a new and different terminal which would provide

alternative service, Wheeling & Lake Eric Ry. Co. v.

Pittsburgh, 33 F.2d 390 (6th Cir. 1929); and (e) cessa-

tion of operations due to a lack of physical equipment

arising from a proper repossession by a third party, Zirn

v. Hanover Bank, supra.* |

The propriety of ceasing operations without adminis-

trative approval has been frequently upheld where neces-

sary to the protection of constitutional rights. Brooks-

Scanlon Co. v. R.R. Commissioner La., 251 U.S. 396

(1920) ; Bullock v. R.R. Commissioner of Fla., 254 U.S. 513

(1921); R.R. Commissioner v. Eastern Texas Ry., 264 U.S.

79 (1924); Erie R.R. Co. v. Pub. Util. Commission, 254

U.S. 394 (1921); Crawford v. Duluth Street Ry. Co., 50

* But see Meyers v. Jay Street Connecting R.R., 259 F.2d 532

(2d Cir. 1958) where the Court sustained a preliminary injunction

enjoining a financially impoverished railroad from ceasing opera-

tions without Commission approval, suggesting that the railroad

could seek protection by petitioning for a reorganization under §77.

F.2d 213 (7th Cir. 1932); State of Iowa v. Old Colony

Trust, 215 Fed. 307 (8th Cir. 1914); In re Central Rail-

road Company of New Jersey, 485 F.2d 208 at 215 and

n. 42 (3d Cir. 1973). Also see N.Y., N.H. & H.R. Co.

Bondholders Committee v. United States, 289 F.Supp. 418

at 441 (S.D.N.Y. 1968); In re N.Y., N.H. & H.R. Co., 304

F.Supp. 793 at 804 (D.C. Conn. 1969). While the Special

Court in Jn re Penn Central Transportation Co., 384 F.

Supp. 895, 918-920 (Special Court, RRRA, 1974), has sug-

gested that the constitutional right to abandon loss opera-

tions is procedurally qualified by an obligation to seek

approval from the pertinent administrative authority, it

has also recognized that such qualification is inapplicable

where the railroad has inadequate cash resources avail-

able both to pay the cost of operations and to permit an

orderly liquidation. Thus, the Special Court stated at p.

919 fn. 31:

We assume neither of the qualifications mentioned

below could apply if, after all reasonable efforts, a

reorganization trustee was faced with an imminent

depletion of cash that would make it impossible for

him to pay current bills for wages, supplies, inter-

line balances, and similar expenses, and still leave

an amount sufficient to permit an orderly liquida-

tion.

Another instance of impossibility involves conflicting

oaders of Court and Commission.* If a court should di-

* While the present proceeding involves a general challenge to

the Commission’s regulations and does not specifically involve an

instance of a court order in conflict with a Commission order, the

reference here to a conflicting court order illustrates a particular

type of instance in which intervening circumstances, beyond the

control of the carrier involved, compel the cessation of operations—

rendering nugatory Commission power and altering the nature of

the carrier’s duty.

rect a carrier not to operate; the present holding of the

Court of Appeals would, nevertheless, recognize Commis-

sion power to direct operations to continue. Such a no-

tion, t.e., that the Commission may require a railroad to

continue operations in the face of a final court order to

the contrary, creates a power in our administrative agen-

cies unanticipated by and intoierable to our rule of law,

‘Marbury v. Madison, 1 Cranch 137 (1803), and plaees such

railroad in a position of having to comply with conflicting

decrees. Congress, however, avoided the problem of pos-

sible conflicting decrees when it enacted 49 U.S.C. §1(16)

(b) for it did not authorize the Commission to override

a court order and direct continuing operations; rather it

specifically empowered the Commission to place another

carrier on the property. The holding of the Court of

Appeals in this case sows the seeds of future mischief

because it creates, by judicial decision, the very problem

which Congress avoided when it enacted 49 U.S.C. §1

(16) (b).

We contend that the foregoing establishes beyond ques-

tion that where a railroad ceases operations pursuant to

a court order; or because it has run out of the cash neces-

sary to meet payroll and other expenses of operations;

or where it is necessary to protect the constitutional rights

of the parties involved; or where other factors make con-

tinued operations impossible; such railroad has no con-

tinuing duty to do the impossible, and the Commission

has no errant power te compel the impossible. The Court

of Appeals’ holding to the contrary is clear error and the

regulation posited upon the existence of such continuing

duty and power should be set aside.

The third condition enumerated in 49 U.S.C. §1(16) (b)

to justify a directed service operation, i.e., operating

losses (which term, when read in the context of the con-

stitutional decisions of this Court, e.g., Brooks-Scanion

Co. v. R.R. Commissioner of La., swpra, must mean op-

erating losses for which there is no foreseeable likelihood

of recapture or of being compensated), does not neces-

sarily involve the impossibility of a carrier’s being able

to provide service. ‘The Court of Appeals’ analysis of

the Commission’s power to require continued service with-

out effecting a taking focused only on this uncompensated

operating loss factor—in effect, an “erosion of assets”

analysis. We respectfully submit that the Court’s analysis

and conclusion are wholly unsupportable and are based

upon an erroneous reading of the New Haven Inclusion

Cases, 399 U.S. 392 (1970) and its failure to take into

account the Regional Rail Reorganization Act Cases, 419

U.S. 102 (1974); In re Third Avenue Transit Corp., 198

F.2d 703 (2d Cir. 1953); and the line of cases following

Third Avenue Tramsit*.

We respectfully submit that the Court of Appeals er-

roneously construed the New Haven Inclusion Cases as

establishing the unjustifiable proposition that a railroad

may be made to suffer interim losses—even though pros-

pectively perceived as unrecoverable—for a reasonable

time without effecting a taking of its property (Slip opin-

ion, p. 21, 22; App. 21a, 22a). In doing so, the Court totally

ignored the need for the presence of at least one of two

alternative “safety valves” to justify the requirement of

continued interim loss operations in a given case; i.e., the

availability of a Tucker Act remedy to compensate for

such loss, Regional Rail Reorganization Act Cases, supra,

or the ability to make “Third Avenue” type findings at

*See The Central Railroad Company of New Jersey v. Manu-

facturers Hanover Trust Company, 421 F.2d 604 (3d Cir. 1970);

In re Penn Central Transportation Company (Columbus Options),

494 F.2d 270 (3rd Cir.) cert. den. 419 U.S. 883 (1974).

the time the continued operations are ordered, which pro-

vide at least reasonable assurance that future events will

allow for the recapture of the losses. The Third Avenue

case stands for the proposition that before erosion will

be permitted to continue in the future, certain findings

must be made which provide reasonable assurances to the

parties involved that the benefits of a future reorganiza-

tion or other disposition will compensate for the interim

loss. A creditor’s hand may be stayed to permit the re-

organization process to unfold, since such unfolding will

likely protect the creditor involved, as well as junior in-

terests. The Regional Rail Reorganization Act Cases stand

for the proposition that the Tucker Act remedy provides

a full and sufficient substitute for such findings—in a

sense giving to the stayed creditor greater assurances than

do the findings. See Jn re Penn Central Transportation

Co. (Appeal of Smith), 508 F.2d 270 (3d Cir. 1975).

Under Third Avenue, the creditor must pray that the

“findings” prove out; if not, so be it. Under the Regional

Rail Reorganization Act Cases, further prayer is unneces-

sary. Accordingly, we contend that the Third Avenue line

of cases establish that a railroad may be required to

continue to operate at a loss without effecting a taking

of its property only if the necessary “findings” can be

made providing adequate assurance of recapture. Other-

wise, such continued loss operations constitute a taking

within the meaning of the Fifth Amendment, but, under

the Regional Rail Reorganization Act Cases, such loss

operations will be permitted if a Tucker Act remedy is

available to compensate the owner for that taking.

The holding in the New Haven Inclusion Cases is not

to the contrary. The New Haven Inclusion Cases in-

volved the balancing of issues of fairness and equity be-

tween two private parties in determining the amount that

the Penn Central would be required to pay for the assets

of the New Haven. The New Haven bondholders claimed

that the Penn Central should compensate it for the losses

incurred from the inception of the reorganization to the

time of inclusion. This Court underscored the facts that

the bondholders had not shown what the losses attribu-

table to the prevaluation period were and that no bond-

holder had petitioned for dismissal of the proceeding until

after the valuation date.* This Court further noted that

from the inception of the New Haven proceeding, it had

been recognized that a merger with a large trunk line was

the proper solution for the New Haven estate—a deter-

mination which, in effect, filled the requirement of the

Third Avenue findings. The fact that it was there retro-

spectively considered not fair and equitable to saddle the

Penn Central with the amount of the ensuing erosion for

purposes of valuation of assets does not constitute a

holding that some or any erosion—prospectively foreseen

as not subject to recapture—is permissible and does not

constitute a Fifth Amendment taking. The case does not

speak to, or foreclose, the question of whether the public

must compensate for erosion knowingly imposed upon a

railroad through continued operations for a public pur-

pose. Therefore, the New Haven Inclusion Cases opinion

*In this regard see In re Penn Central Transportation Company

(Columbus Options), supra, 279-282. There, Judge Gibbons, speak-

ing for the Court of Appeals for the Third Circuit, noted this Court’s

statement in the New Haven Inclusion Cases that the bondholders

had acquiesced in continuing the proceedings rather than moving

for liquidation and also stated the issue of the “. . . constitu-

tionality of the erosion which had taken place prior to the valuation

date was never presented to the court in any proceeding in which it

could have passed upon that issue.” Judge Gibbons then concluded that

“The New Haven Inclusion Cases decided no more than that Penn

Central does not have to pay for erosion which took place prior to

its purchase of the assets.

does not conclude the issues raised here, and the Court

of Appeals erred in concluding that that opinion dictates

the holding that directed service under 49 U.S.C. §1(16)

(b) does not constitute a taking within the meaning of

the Fifth Amendment. (Slip opinion, p. 23; App. 23a).

We, therefore, ask this Court to grant certiorari to deter-

mine whether directed service operations under 49 U.S.C.

§1(16)(b) constitute a taking of the other carrier’s prop-

erty within the meaning of the Fifth Amendment.

POINT III

The Court of Appeals’ holding that the taking of

possession of the other carrier's property during a

directed service operation does not constitute a taking

within the meaning of the final clause of the Fifth

Amendment involves an important, unresolved issue

of federal law which should be settled by this Court

as to whether, and in what circumstances, the govern-

ment may take actual physical possession of an owner’s

property for a public use without such actual taking

constituting a taking within the meaning of the Fifth

Amendment.

The Court of Appeals, having first concluded that a

railroad may be required to continue loss operations with-

out effecting a taking of its property, then concluded that

the distinction between requring such continued opera-

tions, on the one hand, and ordering directed service op-

erations by another carrier, on the other, is formalistic

and does not require a “. . . holding here that the latter

constitutes a taking but the former does not.” (Slip opin-

ion, p. 24; App. 24a). The Court went on to state:

It might be anomalous indeed if the ICC could

order forced deficit operations by a railroad and

not effect a taking, but could not order another

carrier to discharge those same duties, thereby in

_. the usual case saving that railroad operating costs,

without such action constituting a taking. (id).

In Point II, supra, we have shown that the Court of

Appeals’ underlying premise, i.e—that continued loss op-

erations may, without exception, be required without ef-

fecting a taking of property, is erroneous. Thus, the

Court’s further conclusion that the substitution of pos-

session of one carrier for the owning carrier is likewise

not a taking, must also be wrong. However, even assum-

ing arguendo that the Court of Appeals was correct in

its underlying premise, we, nevertheless, contend that

the substitution of possession of one carrier for the own-

ing carrier is not a formalistic distinction but constitutes

a taking within the meaning of the Fifth Amendment.*

The concept of possession and control is at the heart

of the Anglo-American property law jurisprudence, and

the plain meaning of the word “taken” in the Fifth

Amendment must be read as having reference to such

jurisprudence. Indeed, the tension in our constitutional

doctrine between a taking, on the one hand, and merely a

harsh regulation on the other, has traditionally centered

on the issue of what governmental conduct, short of an

actual interference with possession and control, should be

regarded as a taking rather than a regulation because of

* We believe the Court of Appeals, while recognizing the distinc-

tion between an “erosion taking” and a “conveyance taking”,

Regional Rail Reorganization Act Cases, supra, (See Slip opinion,

pp. 23, 24; App. 23a, 24a), gave insufficient weight to that distinction

in reaching its conclusion.

the substantial deprivation of the use and benefit of the

property involved. The essence of regulation is the con-

trol over the manner in which an owner uses his prop-

erty, while the essence of a taking is the deprivation of

such use. The Court of Appeals has moved the center of

tension to a new and unexplored frontier—far beyond

the point that divided this Court in National Board of

YMCA v. United States, 395 U.S. 85 (1969)—with the

relevant question now becoming which planned physical

takings for the benefit of the public are not legal takings.*

In National Board of YMCA, a case denying compensa-

tion for damages to private buildings while occupied by

the Army during a riot in the Canal Zone, the Court di-

vided over a fact question, ie—whether the occupation

was spontaneous and primerily in defense of the build-

ings, or whether it was specifically for shelter and use as

a fortress from which to seal off the Canal Zone border.

From the opinions it appears that all of the Justices were

in agreement that had the occupation been part of a

planned use of the building as a fortress in a riot situa-

tion, a taking would have been effected within the meaning

of the Fifth Amendment. A fortiori, the planned taking

of possession of the other carrier’s property for a public

use during a directed service operation must be a taking

within the intention of the Fifth Amendment.

Upon analysis, all of the elements of a taking within

the meaning of the Fifth Amendment are present. Di-

rected service necessarily transfers the right of posses-

sion and control from the owning carrier to the directed

carrier. This transfer is admittedly for an important

* We respectfully submit that in so doing the Court of Appeals

was significantly influenced by the judgment that the L&NE had

not been injured—a matter which we have never litigated, nor in

fairness, have had the opportunity to litigate

public use, t.e.—the continued provision of rail service

over the owning carrier’s lines. That such use is tempo-

rary, and conducted by a private carrier at the Commis-

sion’s order rather than by the government itself, is of

no constitutional significance, see United States v. Peewee

Coal Co., 341 U.S. 114 (1951); Kimball Laundry Co. v.

U.S., 338 U.S. 1 (1949) ; International Paper Co. v. United

States, 282 U.S. 399 (1931); R. D. Widen Co. v. U.S., 357

F.2d 988 (Ct. of Cl. 1966); Eyherabide v. U.S., 345 F.2d

565 (Ct. of Cl. 1965); Wheelock Bros. v. U.S., 88 F.Supp.

278 (Ct. of Cl. 1950), vacated on other grounds, 341 U.S.

319 (1951); Niagara Falls Bridge Commission v. U.S., 76

F.Supp. 1018 (Ct. of Cl. 1948); American-Hawauan 8.8.

Co. v. U.S., 124 F.Supp. 378 (Ct. of Cl. 1954), cert. den.,

350 U.S. 863 (1955).

In view of the foregoing, the decision of the Court of

Appeals must be read to mean that action which would

otherwise constitute a taking of property within the mean-

ing of the Fifth Amendment, does not constitute such a

taking where the property belongs to a carrier which,

because of regulation, is required to provide service and

fails to do so. We submit, however, that neither the fact

that the carrier is under a duty to provide service, nor

its failure or inability to provide such service, removes

the carrier or its property from the protection afforded

by the Fifth Amendment when that property is seized by

the government and used in the public interest. See

North Carolina Railroad Company v. Lee, 260 U.S. 16

(1922) where Justice Brandeis stated that the govern-

ment’s operation of the railroads during World War I

under the Federal Control Act, March 21, 1918, e. 25, 40

Stat. 451. was. “. . . under a right in the nature of eminent

domain”; and Northern Pacific Railroad Company v. North

Dakota, 250 U.S. 135 (1919) in which decision it was im-

plicit that the government seizure of the railroads during

World War I constituted a compensable taking of prop-

erty. See also, Wheelock Bros. v. United States, supra,

where the business of plaintiff, an ICC regulated motor

carrier, was seized by the government and temporarily

operated by plaintiff’s management under government con-

trol. The Court of Claims held this action to constitute

a compensable taking of property within the meaning of

the Fifth Amendment.

The consequence of the decision below is to declare a

judicial forfeiture of property rights—unauthorized by

Congress. Valid forfeitures are created by statute, which,

being penal in nature, must be strictly construed. Staple-

ton v. $2,438,110, 454 F.2d 1210, 1216 (3d Cir. 1972) cert.

denied, 409 U.S. 894. Courts look with disfavor on for-

feitures, and absent a clear statutory basis, will not lightly

ascribe to Congress the intention to create a forfeiture,

King v. United States, 364 F.2d 235 (5th Cir. 1966); Baca

v. C.I.R., 326 F.2d 189 (5th Cir. 1964); Warner v. United

States, 201 F.2d 327 (Ct. Cl. 1962). Nothing in 49 U.S.C.

§1(16)(b) indicates that Congress intends a forfeiture to

result from a directed service operation; such forfeiture

should not be created by judicial decision. We therefore

ask the Court to grant certiorari to decide the issue of

whether, and in what circumstances, an actual Govern-

mental taking for a public use is not a taking within the

intention of the Fifth Amendment.

CONCLUSION

For these reasons, the Court should issue a writ of

certiorari to review the judgments and opinion of the

United States Court of Appeals for the Third Circuit

in this case.

Respectfully submitted,

Sran.ey WEIss,

744 Broad Street,

Newark, New Jersey 07102

Counsel for Petitioner, Lehigh

and New England Railway Com-

pany.

CarPENTER, Bennett & Morrissey,

Attorneys for Petitioner,

Rosert E. Turrz,

On the Brief.

October, 1976

[Apprennices FoLLow]

- APPENDIX A

Opinion of the United States Court of Appeals for the

Third Circuit

UNITED STATES COURT OF APPEALS

For tHe Tump Crmcuvit

No. 75-1518

LEHIGH AND NEW ENGLAND RAILWAY

COMPANY,

Petitioner,

INTERSTATE COMMERCE COMMISSION and

| UNITED STATES,

Respondents,

COMMONWEALTH OF PENNSYLVANIA,

Intervenor

Ow Petition ror Review or Orper or INTERSTATE

Commerce COMMISSION

Argued February 24, 1976

Before Apams, Hunter and Gartu, Circuit Judges

Carpenter, Bennett & Morrissey

Richard B. Wachenfeld

Attorneys for Petitioner

John H. Broadley

Thomas E. Kauper

Henri F. Rush

Fritz BR. Kahn

Attorneys for Respondents

Robert P. Kane

Michael von Moschzisker

Lawrence Barth

Gordon P. MacDougall

Attorneys for Intervenor

[la]

Appendix A

OPINION OF THE COURT

(Filed June 9, 1976)

Hunter, Circuit Judge:

The Lehigh and New England Railway Company

(‘‘L&NE’’) petitions this court to review and set aside

an order of the Interstate Commerce Commission (‘‘ICC’’)

entered in Ex Parte No. 293 (Sub-No. 3), entitled ‘‘Sub-

mission of Cost Data to Justify Reimbursement,’’ and cost

form regulations, 49 C.F.R. § 1126, promulgated by that

order.' The regulations sought to implement section

1(16)(b) of the Interstate Commerce Act, 49 U.S.C. §1

(16)(b) (Supp. IV, 1974), which permits the Commission,

in certain specified instances, to direct a railroad carrier

to operate temporarily over the lines of another carrier

unable or unwilling to provide essential rail service.

L&NE challenges the regulations insofar as they fail to

provide for the payment of rent, except in certain limited

circumstances, to the railroad unable or unwilling to con-

tinue service for the use of its properties by the carrier

directed by the ICC to operate temporarily on those prop-

erties: The Commonwealth of Pennsylvania has inter-

vened in general support of the regulations. For the rea-

sons set forth below, we deny L&NE’s petition to review

and set aside the regulations.

A. Section 1(16)(b) and the Cost Reimbursement

Regulations

Section 1(16)(b) of the Interstate Commerce Act,

49 U.S.C. § 1(16)(b),? grants the ICC emergency authority

1. We have jurisdiction to review the Commission’s regulations by virtue

of 28 U.S.C. §§ 2321(a), 2342(5) (Supp. IV, 1974).

2. Section 1(16) (b) provides:

(b) Whenever any carrier by railroad is unable to transport the traffic

offered it because—

Appendi« A

to make just and reasonable directions with respect to the

handling, routing and movement of traffic available to a

railroad carrier that is unable to transport the traffic of-

2. (Cont’d.)

(1) its cash position makes its continuing operation impossible ;

(2) it has been ordered to discontinue any service by a court; or

(3) it has abandoned service without obtaining a certificate from

the Commission pursuant to this section;

the Commission may, u the same procedure as provided in paragraph

135) of Gils cettion, waaite cath fast and sunsensiie Gectione etth saneamt

to the handling, routing, and movement of the traffic available to such

carrier and its distribution over such carrier’s lines, as in the opinion of

the Commission will best promote the service in the interest of the public

and the commerce of the people subject to the following conditions:

(A) Such direction shall be effective for no oy than 60 days

unless extended by the Commission for cause shown an additional

designated period not to exceed 180 days.

(B) No such directions shall be issued that would cause a carrier

to operate in violation of the Federal Railroad Safety Act of 1970 or

that would substantially impair the ability of the carrier so directed to

serve adequately its own patrons or to meet its outstanding common

carrier obligations.

_ (C) The directed carrier shall not, by reason of such Commission

direction, be deemed to have assumed or to become responsible for the

debts of the other carrier.

(D) The directed carrier shall hire employees of the other carrier

to the extent such employees had previously performed the directed

service for the other carrier, and, as to such employees as shall be so

hired, the directed carrier shall be deemed to have assumed all existing

employment obligations and practices of the other carrier relatin

thereto, including, but not limited to, eements governing rate

pay, rules and working conditions, and all employee protective condi-

tions commencing with and for the duration of the direction.

(E) Any order of the Commission entered pursuant to this para-

graph shall provide that if, for the period of its effectiveness, the cost,

as hereinafter defined, of handling, routing, and moving the traffic of

another carrier over the other carrier’s lines of road shall exceed the

direct revenues therefor, then upon request, payment shall be made to

the directed carrier, in the manner hereinafter provided and within 90

days after expiration of such order, of a sum equal to the amount by

which such cost has exceeded said revenues. The term “cost” shall

mean those expenditures made or incurred in or attributable to the

operations as directed, including the rental or lease of necessary equi

general order may be prescribed the Commission and shall

mitted to and subject to audit iA Commiesion, The Comniseina

Appendix A

fered it because (1) its cash position makes continued oper-

ation impossible, (2) it has been ordered by a court to

discontinue service or (3) it has abandoned service without

prior Commission approval. Specifically, the ICC may

direct a carrier (hereinafter the ‘‘directed carrier’’) to

operate over the lines of the carrier unable to transport

its own traffic (hereinafter the ‘‘other carrier’’). The

duration of this directed service is specifically limited to

60 days, unless extended by the ICC for cause shown for

an additional period not to exceed 180 days. 49 U.S.C.

§1(16)(b) (A).

Subsection (b) was added to section 1(16) of the

Interstate Commerce Act by section 601(e) of the Regional

Rail Reorganization Act of 1973 (‘‘Rail Act’’).2 The

legislative history of the Rail Act has been extensively

documented by other courts and will not be reviewed here.*

It is sufficient to state that the Act was a congressional

attempt to provide imaginative and innovative solutions

to avoid a national disaster threatened by the bankruptcy

of railroads in Northeastern United States. Subsection

(b) was considered necessary to ensure that essential rail

service provided by the bankrupt carriers in the Northeast

would be continued pending development and implementa-

tion of a longer term reorganization of the bankrupt lines.®

3. 87 Stat. 986, 1921. Prior to the addition of subsection (b), section 1(16)

did not specifically authorize the ICC to direct a carrier to operate over the

lines of another carrier that was unable to transport the traffic offered it.

4. See, c.g., Regional Rail Reorganization Act Cases, 419 U.S. 102 (1974),

Connecticut General Ins. Corp. v. United States Railway Ass'n, 383 F. Supp.

510 (E.D. Pa.) (three-judge court), rez’d, 419 U.S. 102 (1974) : In re Penn

Central Transportation Co., 384 F. ‘Supp. 895 (Regional Rail Reorganization

Act Special Court 1974).

5. The Senate Report accompanying the Rail Act stated:

The purpose of subsection (e) is to assure the continuance of essential

rail service in the Northeast and Midwest region in case one or more of

the seven railroads presently in reorganization under section 77 of the

Bankruptcy Act ceases operations prior to the adoption, approval, and

implementation of the final system plan. By authorizing the Commission

to direct a carrier to operate over the lines of a non-operating carrier for

an interim period, transportation chaos and economic disaster can be

avoided while the planning and implementation process provided for in the

bill moves forward in a careful and orderly manner.

S. Rep. No. 93-601, 93d Cong., Ist Sess. 52-53 (1973 ted

Cove Conc. & Apmin. News 3242 (1974). ( ), reprinted in 2 U.S.

Appendiz A

Section 1(16)(b)(E) permits the directed carrier to

recover from the government, upon request, a sum equal

to the amount by which the cost of directed operations

exceeds the revenues derived from that operation. ‘‘Cost’’

is defined by subsection (E) as ‘‘those expenditures made

or incurred in or attributable to the operations as directed,

including the rental or lease of necessary equipment, plus

an appropriate allocation of common expenses, overheads,

and a reasonable profit.’’ The subsection requires the

ICC to prescribe a form on which the directed carrier can

record costs.and revenues of the directed operation and

which must then be submitted by the directed carrier to

the Commission for audit. The ICC then is authorized to

certify to the Secretary of Treasury the amount of pay-

ment to be made to the directed carrier.

In an effort to implement section 1(16)(b), the ICC

issued on April 9, 1975, effective March 21, 1975,° a form

._ for the recordation of costs and revenues by the directed

carrier, rules governing the procedure for submission of

cost data, and a report setting forth the Commission’s

policy on what costs and revenues, incurred in or attribut-

able to the conduct of directed operations, are allowable

for purposes of inclusion in the cost form.’ ICC viewed

its role under section 1(16)(b) as follows:

6. The ICC had commenced a rulemaking proceeding known as Ex Parte

No. 293 (Sub-No. 3) on July 11, 1974 for the purpose of promulgating the

cost form and regulations. Representatives of the railroad industry, inc

the Central Railroad Company of New Jersey (“CNJ”) but not LENE. ship-

pers and labor participated in the proceedings.

7. The cost form and rules, but not the report, are found in 49 C.F.R.

§1126. The ICC report, “Implementation of Public Law 93-236, Section

601(e), Regional Rail Reorganization Act of 1973—Submission of Cost Data

to Justify Reimbursement,” ny age? ) appears at 348 1.C.C. 251 & 320 (1975).

pe ea of the Report to the cost form was stated by the ICC as

Ss:

The comments and discussions in the report and order of the Commis-

frm isl shall be used by difectedcarier applying of the cost

form itself. shall be used by 2 directed carrier applying the cost form a8

recording revenues and expenses and as a general statement of

fesion policy, subject to revision, regarding ‘emergency directed

epg Bape yh Do ky ke LT amended

by section 601(e) of the Regional Rai Reorganization Act of 1973. ICC

Report, Joint App. at A-199.

Appendix A

The Commission views its role as that of mediator

between the directed carrier and the other carrier in

terms of charges to which they must mutually agree

and as that of overseer of the general reasonableness

of expenses incurred in performance of a directed

operation, and hopes that, with the cooperation of al!

parties, it can maintain that limited role. The stand-

ards established in the final cost form are intended to

simplify and standardize the admittedly complex ac-

counting procedures imposed upon a directed carrier

and to limit those expenditures which may be reim-

bursable by the Federal government to those essential

to performance of a directed service within the guide-

lines established by section 1(16)(b) itself and within

the clear intent of Congress to keep Federal expendi-

tures to a minimum.*

As is pertinent to the instant controversy, in its Report

the ICC considered the question whether it should recognize

rent paid by the directed carrier to the other carrier for

use of its facilities as a reimbursable cost under section

1(16)(b). The Commission concluded that in the usual

case, where the directed carrier’s costs of directed opera-

tions exceeded revenues, no compensation or rent for the

use of the other carrier’s lines and facilities would be

required and thus a directed carrier would not be reim-

bursed by the government for any rent paid to the other

carrier.” The practical effect of this rule is to deny the

other carrier rent for the use of its lines and facilities

All Pree sy

references in this opinion to “cost reimbursement regulations” i

on tole A hey J dh ~¥ Report. All citations to the ty 4

8. ICC Report, Joint App. at A-165 to -166.

9. Id. at A-173 to -174. The Commission further Stated, however

say “rental agreements already exist under which the other carrier 4.

ines or properties, . . . for its operations, the directed carrier shall the

a ae ae bh and other properties which 4°

ormance of a directed operation, and h payments shall recognized

as a reimbursable cost... .” Jd. at A170. ss -

Appendiz A

during the period of an unprofitable directed operation.

Where the costs of directed operations do not exceed

revenues, i.e., a profitable operation, the Report provides

that rent should be paid to the other carrier by the directed

carrier. In this event, the amount of rent would be meas-

ured by the lessening of the other carrier’s economic value

due to the directed operations (i.e., normalized deprecia-

tion), reduced by amounts expended during the period of

directed service that benefited the other carrier or its

estate.’°

The Commission stated two reasons for its denial of

rent to the other carrier in the usual case. First, it be-

lieved that by ordering directed service it was fulfilling

the other carrier’s legal obligation to continue service

until obtaining a certificate of abandonment from the ICC

and that to permit reimbursement for rent would provide

a monetary incentive for the ‘‘unlawful abandonment of

service.’’ Second, the Commission was of the view that

its ordering of directed service would confer substantial

benefits on the other carrier which in most instances would

be sufficient to discharge any obligation to pay rent.”

L&NE instituted these proceedings on May 20, 1975

to set aside that portion of the ICC’s cost reimbursement

regulations which denies rent to the other carrier when

directed operations are not profitable.

B. Service Orders 1207 & 1208

L&NE’s interest in the Commission’s refusal to reim-

burse a directed carrier, in the usual case, for rent paid

the other carrier during the period of directed service can

be traced to two orders issued by the ICC, Service Orders

1207 and 1208. A review of events leading up to and sur-

rounding the issuance of these orders, which directed the

Reading Company and the Lehigh Valley Railroad Com-

pany (‘‘LVRR’’) to operate for a limited period of time

10. Id. at A-174 to -175.

11. Id. at A-171 to -174, see notes 28 & 29, infra.

Appendia A

over the lines of L&NE, is necessary tu an understanding

of the instant controversy.”

L&NE is a carrier by railroad whose lines are located

solely within the Commonwealth of Pennsylvania."* In

1972, L&NE, because of a decrease in coal and cement

traffic, experienced a substantial decline in net income and

by 1973 it was operating at an annual deficit of over

$100,000." Because of these losses, representatives of

L&NE and CNJ allegedly approached the ICC in the latter

part of December 1974 to determine whether the Commis-

sion would be willing to enter an order directing another

railroad to provide service over L&NE’s lines.* L&NE

indicated that according to its projections for 1975 oper-

ating losses ranging up to as much as $400,000 might be

expected for the first six to nine months of 1975. L&NE

further indicated its intention to embargo all traffic to,

12. This action was instituted by L&NE, as it candidly admits, primarily

to clear the way for a suit against the United States in the Court of Claims

based on L&NE’s contention that Service Orders 1207 and 1208 constituted a

taking of L&NE’s property for which just compensation is required. L&NE

brought the instant proceeding first because it feared that the Court of Claims

might view L&NE’s suit for just compensation as a collateral attack on the

ICC regulation. Brief for Petitioner at 15 n.*. We, of course, express no

opinion as to the effect of our decision on any action that might be instituted

in the Court of Claims.

13. L&NE was formed in 1961 as a wholly owned subsidiary of the Central

Railroad Company of New Jersey ( ee iy Following a default by CNJ of

certain loans guaranteed by the ICC, all L&NE stock, bonds and i

Never.

were transferred to, and registered in the name of, the United States.

theless, the CN) Trustee continues to vote the L@NE stock and manage t

L&NE on a day-to-day basis without supervision by the United States Depart-

ment of Justice.

The recent conveyance of certain railroads in the Northeast and Midwest

on April 1, 1976 to Rail under the “Final System Plan” adopted pursuant

to the Rail Act has had no effect on the instant litigation. While the imple-

mentation of the Final System Plan resulted in a transfer of certain assets of

LENE to ConRail, L&NE’s corporate status remains unmodified. In addition,

ConRail did not acquire the stock of L&NE and L&aNE’s corporate relationship

both to CNJ and to the United States has remained unaffected.

14. In re Application of Lehigh and New England Railway Com ,

Under a > ae (18) to (20), Inclusive, of the Interstate oo

merce Act, as For a Certificate of Public Convenience and N i

Authorizing Abandonment of Operations, at 10 & Exhibit 2b, (filed Sept.

1975), reprinted in Exhibit | to Brief of Respondent.

15. L&NE disputes the government's assertion that it solicited or requested

& Commission to ay directed —. A, - — Carpenter, Bennett &

orri to Thomas F. Clerk nited States Court ppeals

for the Third Circuit, at § Apr. 8, 1976. wn

Appendia A

from and over its lines, effective January 24, 1975. Brief

for Respondent at 21.

During meetings in December and in the early part of

January various alternatives to directed service were dis-

cussed by the ICC, L&NE and shippers in L&NE’s area,

but no solution was reached. On January 7, 1975, L&NE

issued an embargo covering all traffic moving from, to and

over its lines, effective January 24, 1975. To avoid the

disruption that would result from implementation of the

embargo, the ICC entered Service Orders 1207 and 1208

on January 17, 1975, which directed LVRR and Reading

to provide service over L&NE’s lines for 60 days (from

January 24 to March 24, 1975). The service orders were

subsequently extended for an additional 180 days ( from

March 24 to September 21, 1975) by the Commission after

being notified on March 3, 1975 that L&NE would not be

able to resume operations upon the expiration of the

original service orders.”*

The Service Orders required the directed carriers,

LVRR and Reading, and L&NE ‘‘to negotiate . . . agree-

ment[s] ... on all aspects of the directed operation sub-

ject to their determination,’’ and subject to Commission

approval.'* During these negotiations, L&NE sought to

be paid rent for the use of its facilities during the period

of directed service. Negotiations broke down after the

ICC advised the parties that no basis had been shown for

allowing rent to L&NE. Shortly thereafter, the instant

proceeding was commenced by L&NE.

On September 9, 1975, immediately prior to the ex-

piration of Service Orders 1207 and 1208 as extended,

ot ae wees th te mappestion aut “Lilt Ge cominuntion of Gass

services is essential to your company, I would suggest that you get in touch

with Mr. Brooks [at the ICC] . . and that the Interstate Commerce

parently, these shippers ‘

demonstrate their need for continued rail services. Id.

17. Corrected Revised Service Orders 1207 & 1208, reprinted in Brief of

Petitioner, Exhibits I & II, at 5.

10a

Appendiz A

L&NE filed for the first time an ‘‘Application for Au-

thority to Abandon Operations.’’ Thereafter, an agree-

ment was reached between L&NE and LVRR and Reading

whereby the two carriers would continue to provide service

over L&NE’s lines ‘‘on a ‘no-loss guaranty basix.’’’ The

agreement was underwritten by funds provided by the

United States Department of Transportation under sec-

tion 213 of the Regional Rail Reorganization Act of 1973,

45 U.S.C. § 723 (Supp. IV, 1974).

In November of 1975, LVRR and Reading submitted

claims for reimbursement of costs in excess of revenues

that resulted from the directed operations under Service

Orders 1207 and 1208. The amounts claimed reflected total

operating losses of $325,891.15, of which $120,372.88 con-

sisted of maintenance of way expenses required to permit

safe operations over L&NE’s preperties."* Brief for Re-

spondent at 26.

L&NE makes several arguments in support of its peti-

tion to set aside the Commission’s regulations regarding

reimbursement for rent charged by the other carrier.

First, it contends that the ICC exceeded its rulemaking

authority under section 1(16)(b) by determining what

costs are reimbursable because that section authorizes the

Commission only to prescribe a form for recordation of

costs as defined in section 1(16)(b) and does not grant it

authority to make substantive rules. Second, L&NE as-

serts that directed service constitutes a taking of property

for a public use within the meaning of the fifth amend-

ment and that the Commission’s rules concerning reim-

bursement for rent deprive the other carrier of the just

compensation to which it is entitled under the fifth amend-

18. In addition $51,232.51 was expended by LVRR, with prior ICC ap-

po = rehabilitate L&NE’s tracks to conform them to safe operating

standards.

A —

lla

Appendiz A

ment."* As a subsidiary argument, L&NE claims that by

adopting a rule that rent is payable only where the directed

service is profitable, the ICC has usurped the judicial func-

tion of determining what constitutes just compensation.

Finally, L&NE attacks as arbitrary and capricious the

regulations’ distinction between profitable and unprofitable

operations for payment of rent and the method of cal-

culating the amount of rent to be paid in the event of a

profitable operation.

The Commission contends first that L&NE is equitably

estopped from attacking Service Orders 1207 and 1208 as

constituting a taking and the cost reimbursement regula-

tions as providing inadequate compensation because L&NE

sought and obtained substantial benefits from the directed

operations. The authority to adopt regulations determin-

ing what expenditures constitute reimbursable costs under

section 1(16)(b) is found, the Commission asserts, both in

its inherent power to supervise the flow of federal funds

to railroads and in the preamble to the Rail Act, in which

Congress expressed its desire to provide federal assistance

to railroads at the lowest possible cost to the general tax-

payer. 45 U.S.C. §701(b)(6) (Supp. IV, 1974). The ICC

disputes L&NE’s assertion that directed service effects a

taking under the fifth amendment; it contends that by

ordering directed service the Commission is merely ful-

filling the other carrier’s obligation to continue rail service

until receiving a certificate of abandonment and that in

the usual case the other carrier receives substantial bene-

fits as a result of directed service,” which benefits consti-

on :

constitutes a taking within the meaning of the fifth amendment; L&N

i will bring. suit 1 _—

See note 12 supra.

12a

Appendiz A

tute just compensation as a matter of law. Finally, the

ICC asserts that L&NE lacks standing to challenge those

portions of the regulations concerning the payment of rent

in the event of a profitable operation because such a situa-

tion is only a hypothetical one and because there is cur-

rently pending before the Commission a challenge to those

portions of the regulations.

IIL

A. Equitable Estoppel

The Commission argues that L&NE cannot now be

permitted to attack the cost reimbursement regulations

because it actively sought directed service and still retains

substantial benefits resulting from the directed operations.

In support of its argument, the ICC quotes a statement

by the Supreme Court in FPC v. Colorado Interstate Gas

Co., 348 U.S. 492, 502 (1955) that a plaintiff ‘‘cannot now

be allowed to attack an officially approved condition of the

merger while retaining at the same time all of its

benefits.’’ **

On the record before us, we cannot rely on the estop-

pel doctrine to avoid reaching the difficult issues raised in

L&NE’s petition. FPC is inapposite. In that case the

party which sought the merger was aware prior to accept-

ing the merger’s benefits of the conditions imposed on the

merger by the government.” There is no evidence in the

record that prior to accepting directed service, LENE was

aware that it would not receive compensation for the

20. (Cont’d.)

directed service led directly to agreements between LANE and LVRR and

Reading to continue service over L&NE’s lines; and (5) directed service

facilitated inclusion of L&NE’s properties in the Fina! System Plan. Brief

Civil

oe at 40-41.

See also irr Route Carriers Ass'n v. United States,

7204 (E.D. Mich. 5, 1974) (three-judge court) fon Opinion ),

II of Brief of Respondent; Admiral-Merchants Motor Inc. v.

yyy — (D. Colo. 1971) Tinceiaies aa aff'd per

>. (

22. 348 U.S. at 302.

13a

Appendix A

directed carrier’s use of its properties. The service orders

were issued on January 17, 1975 and extended on March

21, 1975, but the ICC did not issue its cost form regulations

and report until April 9, 1975, effective March 21, 1975.

In addition, paragraph (i) of each service order provided

that the directed carrier and L&NE were to negotiate an

agreement ‘‘on all aspects of the directed pperation sub-

ject to their determination, including, but not limited to

. . . rental for the use of rights-of-way and other rail

facilities.’’** Finally, L&NE disputes the ICC’s asser-

tion that it sought or requested directed service.™

B. ICC Authority to Determine Reimbursable Costs

The ICC, like other administrative agencies, is of

course a creature of statute and cannot exceed the specific

statutory authority granted it by Congress.” While the

precise wording of section 1(16)(b)(E) could be construed,

as L&NE asserts, to grant the Commission only the minis-

terial duty to prescribe a mere form for the recordation

of cost and revenue figures, we reject such a narrow view

of ICC authority here. In our view, the Commission’s au-

thority to determine what are reimbursable costs, while not

explicitly set forth in the Rail Act or section 1(16)(b), is

fairly implied, assuming a reasonable exercise of that

authority. See American Iron ¢ Steel Institute v. EPA,

526 F.2d 1027, 1037 (3d Cir. 1975) ; Niagara Mohawk Power

Corp. v. FPC, 379 F.2d 153, 158 (D.C. Cir. 1967); Akron,

Canton & Youngstown R.R. v. United States, 370 F. Supp.

1231, 1235-36 (D. Md. 1974) (three-judge court). We con-

sider a reading of section 1(16)(b) to limit Commission

power in determining reimbursable costs to be unwar-

ranted absent compelling evidence that such was Congress’s

23. Corrected Revised Service Orders 1207 & 1208, Brief for Petitioner,

Exhibits I & II, at 5. .

24. See note 15 ayve.

25. American Trucking Ass’ns, Inc. v. United States, 242 F. 597,

ae Tb D.C. a Pe ir yh aff'd 382 U.S. 373 (1966). See

'y Zuber v 68 (1969) ; CAB v. Delta Air Lines, Inc.

US. 316 C1961) Reardon v. United States, 491 F.2d 822 (10th Cir. i974)”

14a

Appendix A

intent. See United States v. Southwestern Cable Co., 392

U.S. 157, 177 (1968); Permian Basin Area Rate Cases,

390 U.S. 747, 780 (1968) ; American Trucking Associations,

Inc., v. Atchison, Topeka &@ Santa Fe Ry., 387 U.S. 397,

409-12 (1967).

In support of our conclusion, we note that the Com-

mission is given the authority in section 1(16)(b)(E) to

‘‘audit’’ the costs incurred and revenues obtained by the

directed carrier and to certify to the Secretary of the

Treasury the amount of payment due the carrier. We

interpret these grants of authority to require the ICC to

do more than merely check to see that the particular

amounts recorded actually were expended or received by

the carrier. Rather, in our view, it has a duty to deter-

mine that the amounts expended by the directed carrier

were the type of expenditures for which Congress in-

tended the carrier to receive reimbursement.

Even more importantly, we note that the preamble to

the Rail Act declares Congress’ intention to provide for

‘‘necessary Federal financial assistance [for essential rail

service] at the lowest possible cost to the general tax-

payer.’’ 45 U.S.C. §701(b)(6) (Supp. IV, 1974). This

court has recently stated that ‘‘[wlje read this lan-

guage as an earnest entreaty to economize, addressed to

those who are authorized to spend many millions, ulti-

mately billions, of dollars in preserving. and subsidizing

essential rail service.’’ In re Penn Central Transporta-

tion Co., No. 75-1902, at 11 (3d Cir. Mar. 3, 1976).%* This

express Congressional policy would be undermined if the

ICC was required to reimburse a directed carrier for every

26. We recognize that the directed service provision of the Rail Act was

enacted as an amendment to the Interstate Commerce Act and that it has

force and effect outside the context of the regional rail reorganization contem-

plated by the Rail Act. See note 3 supra and accompanying text. Neverthe-

less, we do not feel that the scope of administrative authority granted the

Commission under section 1(16)(b) can be measured without consideration of

the purposes for which this section was originally enacted—namely, to preserve

essential rail service in the short-run, pending longer term regional rail reor-

ganization. J/d.; see Permian Basin Area Rate Cases, 390 U.S. 747, 776

(1968) ; United States v. Pennsylvania R.R., 323 U.S. 612, 618-19 (1945).

lda

Appendiz A

expenditure made in connection with directed service, re--

gardless of its reasonableness. We agree with the Com-

mission that ‘‘[i]t would be en‘irely unacceptable for all

claimed costs, subject only to technical audit, to be paid

without evaluation of their propriety.’’

L&NE argues that a preamble cannot confer powers

on the Commission that are not conferred by the operative

language of the statute.2”7 But we have not concluded that

the preamble to the Rail Act confers powers on the ICC

not granted it in the operative language of the statute.

Rather, we have merely used the preamble as a guide to

aid us in determining the legitimate scope of the admin-

istrative authority that is clearly reposed in the Commis-

sion by the operative language of section 1(16)(b). In

analogous situations, the Supreme Court has relied on the

National Transportation Policy set forth in the preamble

to the Interstate Commerce Act to determine the extent

of authority granted the Commission in specifie sections

of that Act. See, e.g., American Trucking Associations,

Inc. v. Atchison, Topeka & Sante Fe Ry., 387 U.S. 397,

409-10 (1967); United States v. Pennsylvama R.R., 323

U.S. 612, 618-19 (1945).

Finally, the Interstate Commerce Act and the Rail

Act entrust a broad subject matter to administration by

the ICC. Surely, the scope of the Commission’s responsi-

bilities under the Act requires a generous construction of

its statutory authority. In deciding a question concern-

ing the scope of Commission authority in a different con-

text, a three-judge court in Florida East Coast Ry. v.

United States, 259 F. Supp. 993, 997 (M.D. Fla. 1966),

aff’d 386 U.S. 544 (1967) stated:

No one who reviews the history and language of the In-

terstate Commerce Acts can doubt that Congress has

entrusted the ICC with plenary power to regulate al-

27. See, e.g., Carter v. Carter Coal Co., 298 U.S. 238, 289-90 (1936);

Varco’ & ‘Missusippi ‘Valley RR. v. ‘Thomas. 132 US. 174, 188 (18899:

Hughes Tool Co. v. Meier, 486 F.2d 593, 596 (10th Cir. 1973).

l6a

Appendiz A

most every aspect of the rail industry.... The ICC is

in many ways a super-management often making man-

agerial-type . decisions affecting the transportation

industry, with but one overriding duty—to protect the

public interest.

We think these observations particularly applicable to the

ICC’s broad emergency power to order and regulate di-

rected service under section 1(16)(b). See also 49 U.S.C.

§§ 1(14)-(15).

Having concluded that the Commission has authority

to determine what costs are reimbursable consistent with

section 1(16)(b), does not, of course, mean that the exer-

cise of that power here was proper. In section 1(16)(b)

(E), Congress intended that the directed carrier be reim-

bursed for all reasonable expenses necessary to providing

directed service. Thus, the Commission’s rules denying

reimbursement to the directed carrier for rent paid to the

other carrier in the event of an unprofitable operation can

only be upheld as a reasonable exercise of its authority

if, as both a statutory and a constitutiona] matter, the

directed carrier is not required to pay rent to the other

carrier in that instance.

C. ICC’s Construction of Section 1(16)(b)

While not specifically argued by L&NE, we must first

determine whether the ICC’s cost reimbursement regula-

tions denying rent to the other carrier where the cost of

directed operations exceeds revenue comport with Con-

gress’ intent in enacting section 1(16)(b). See Hagans v.

Lavine, 415 U.S. 528, 543 (1974); Allen v. Aytch, No. 75-

1924, at 6 (3d Cir. Apr. 29, 1976). Im deciding this ques-

tion we are mindful of the Supreme Court’s statement in

Udall v. Tallman, 380 U.S. 1, 16 (1965) :

When faced with a problem of statutory construc-

tion, this Court shows great deference to the interpre-

pe a ea le la RE et

17a

Appendix A

tation given the statute by the officers or agency

charged with its administration. ‘‘To sustain the Com-

mission’s application of this statutory term, we need

not find that its construction is the only reasonable

one, or even that it is the result we would have reached

had the question arisen in the first instance in judicial

proceedings.’’ Unemployment Comm’n v. Aragon,

329 U.S. 143, 153. See also, e.g., Gray v. Powell, 314

U.S. 402; Universal Battery Co. v. United States, 281

U.S. 580, 583. ‘‘Particularly is this respect due when

the administrative practice at stake ‘involves a con-

temporaneous construction of a statute by the men

charged with the responsibility of setting its machinery

in motion, of making the parts work efficiently and

smoothly while they are yet untried and new.’ ’’

Power Reactor Co. v. Electricians, 367 U.S. 396, 408.

See also Lucas Coal Co. v. Interior Board of Mine Opera

tions Appeals, 522 F.2d 581, 584 (3d Cir. 1975).

The statutory language of section 1(16)(b)(E) does

not specifically provide for the payment of any monies to

the other carrier; rather, it requires a payment solely to

the directed carrier of the costs incurred in performing

the directed service. ‘‘Cost’’ is defined as follows:

The term ‘‘cost’’ shall mean those expenditures made

or incurred in or attributable to the operations as di-

rected, including the rental or lease of necessary

equipment, plus an appropriate allocation of common

expenses, overheads, and a reasonable profit.

Thus, the ICC concluded that if rent for use of the other

carrier’s properties were to qualify as a ‘‘cost,’’ it must

result from the inference that such rent is an expenditure

to be ‘‘incurred’’ by the directed carrier. The Commis-

sion rejected such an inference based on its views that it

was highly unlikely that Congress intended to provide a

18a

Appendiz A

monetary incentive to the other carrier to abandon rail

service without prior ICC approval,”* and that the other

carrier would derive substantial benefits from directed

service so as to render compensation in the form of rent

unnecessary as a matter of law in the case where costs

exceeded revenues.”

The ICC has given careful consideration to this ques-

tion. We cannot say that its interpretation of section

1(16)(b) is unreasonable so long as the interpretation does

not contravene the fifth amendment—the L&NE conten-

28. The Commission's reasoning was stated in its Report as follows:

Under the Interstate Commerce Act, all common carriers by railroad

must fulfill their common carrier obligation to continue service to the public

(Section 1(4)), unless and until a certificate of abandonment is authorized

by the Commission pursuant to the provisions of section 1(18) of the Act.

Under the requirements of section 1(16)(b), in order for the Commission

to issue a directed service order, the operated carrier, havi ceased

operations without obtaining a certificate of abandonment from Com-

mission, must be in dereliction of its statutory duty to continue to provide

such service. Smith v. Hoboken R. Co., 328 U.S. 123, 130 (1946). It is

highly unlikely that Congress in its consideration of section 1(16)(b)

desired to provide a monetary incentive for the unlawful abandonment of

rail service. Rewarding a railroad for avoiding such a legal obligation

would be contrary to public policy.

ICC Report, supra note 7, Joint App. at A-172.

29. The Report continued :

Whatever consideration is given to the economic loss of the operated

carrier because of the ordering of directed service over its properties m must

be balanced by a consideration of the benefits conferred by such an order.

First, the carrier avoids incurring any additional operati com which

might impair the jy of its creditors or further its invested

capital. Further, the period of the directed service, the ty

will be maintained iy to continue service and all employee obligations

for those employees hired by the directed carrier will be satisfid. Conse-

quently, in ordering directed service, the Commission both fulfills the

carrier’s legal obligation to continue to provide service and preserves the

value that the operated properties might have for continued use in their

dedicated purpose.

Id. at A-173.

Additionally, since the authority to abandon ibe rail properties has not

yet been approved, the carrier cannot legaily convert the capital it has

invested in the property to a non-rail use. Until such an abandonment is

Id. at A-172 to -173.

19a

Appentia A

tion—for a statute should be construed to be constitutional

where possible.”

D. Directed Service and the Fifth Amendment

Essential to L&NE’s argument that the ICC’s denial

of rent, in the usual case, to the other carrier deprives the

other carrier of just compensation as required by the fifth

amendment, is the assumption that directed service con-

stitutes a taking within the meaning of that constitutional

provision. We decline to accept that assumption. The

line between a taking of property for which just compensa-

tion must be provided and a legitimate exercise of regula-

tory authority by the government, which may result in a

loss but which does not require compensation, is a thin

one, indeed.“ And we recognize that on which side of

this line directed service falls may be a close and difficult

question. Nevertheless, we are satisfied from a review of

the obligations imposed on a railroad to continue service

until receiving Commission approval to abandon, even

when continuation results in not unreasonable losses, and

from an examination of the effects on the other carrier of

directed operations that directed service, when unprofita-

ble and as currently implemented by the ICC, does not

constitute a taking for which compensation in the form of

rental to the other carrier for the use of its lines must be

provided.”

30. See, e.g.. Regional Rail Reorganization Act Cases, 419 U.S. 102, 134

(1974) ; United States Civil Serv. Comm'n v. National Ass’n of Letter Carriers,

413 U.S. 548, 571 (1973).

31. We note that both courts and leading commentators have encountered

difficult conceptua! problems in attempting to develop a comprehensive approach

to defining the legitimate scope of the takings clause and, in particular, in

differentiating between “takings” and “mere r geo See, ¢.9., Sax,

Takings, Private Property and Public Rights, Yate L.J. i49 ( 1971) ;

Michelman, Property, Utility, and Fairness: ee on the Ethical Founda-

tions of “Just “Pohice Poxer Law, 80 Harv. L. Rev. 1165 (1967); Sax,

Takings and the Police Power, 74 Yaue L.J. 36 (1964); Dunham, Griggs v.

Allegheny County in Perspective: Thirty Years of Supreme Court Expropria-

tion Law, 1962 Sup. Cr. Rev. 63.

32. Because of our conclusion we need not and do not reach the questions

whether the benefits conferred on the other carrier as a result of directed

20a

Appendix A

Fundamental to our holding are two conclusions: (1)

that the ICC has the power to order a carrier that has not

obtained a certificate of abandonment under 49 U.S.C.

§1(18) * to continue to provide service for as much as

240 days, the maximum period of directed service, despite

a cash deficiency or operating losses “* or, indeed, a court

order to the contrary;* and (2) that such action by the

Commission would not constitute a taking for which com-

pensation must be provided, but rather would be merely

a postponement of the carrier’s right to abandon.” If the

ICC could take the above recited action without such action

constituting a taking, we think it follows directly that it

could place another carrier on the lines of the carrier un-

able or unwilling to continue service for a limited period

without effecting a taking within the meaning of the fifth

amendment.

In a line of cases in the 1920’s, the Supreme Court did

hold that if a railroad ‘‘be taken to have granted to the

public an interest in the use of the railroad it may with-

draw its grant by discontinuing the use when that use can

be kept up only at a loss.’’ Brooks-Scanlon Co. v. Rail-

32. (Cont’d.)

service as a matter of law obviate the necessity to provide rent to the other

carrier and whether the ICC in promulgating its cost reimbursement regulations

has usurped the judicial function of determining what constitutes just com-

pensation.

33. Section 1(18) provides, in pertinent part:

[No carrier by railroad subject to this chapter shall abandon all or any

portion of a line of railroad, or the operation thereof, unti

there shall first have been obtained from the Commission a certificate

the present or future public convenience and necessity permit

abandonment.

49 U.S.C. §1(18) (1970).

34. See New Haven Inclusion Cases, 399 U.S. 392, 461, 491-92 (1970) ;

In re Penn Central Transportation Co., 384 F. Supp. 895, 919 (Regional Rail

Reorganization Act Special Court 1974).

35. See In re Erie Lackawanna Ry., 517 F.2d 893, 896-98 (

In re Central RR. of New Jersey. F.2d 208, 211-12 (3d

banc), cert. denied, 414 U.S. 1131 (1974).

36. See New Haven Inclusion Cases, 399 U.S. 392, 490-93 (1970); Con-

tinental Illinois Nat'l Bank & Trust Co. v. Chicago, Rock Island & Pacific

Ry., 294 U.S. 648, 680-81 (1935).

}

of B

21a

Appendix A

road Comm’n, 251 U.S. 396, 399 (1920); see Railroad

Comm’n v. Eastern Texas R.R., 264 U.S. 79, 85 (1924);

Bullock v. Florida ex rel. Railroad Comm’n, 254 U.S. 513,

520-21 (1921). While these decisions have never been

repudiated by the Supreme Court, and this court does not

dispute their fundamental principles, the rights of the

owners of railroads have never been considered absolute;

they are qualified by consideration of the public’s interest

in continued essential rail service.** Thus, a railroad may

not abandon service without prior Commission approval,

New Haven Inclusion Cases, 399 U.S. 392, 461 (1970); In

re Central R.R. of New Jersey, 485 F.2d 208, 214 (3d Cir.

1973) (en bane), cert. denied, 414 U.S. 1131 (1974), be-

cause prior ‘‘administrative review assures than an agency

with substantial expertise . . . will provide that the ap-

propriate amalgam of public concerns for rail transport

and private rights of property is achieved.’’ Jd. at 215.

Second, a railroad or its estate may be made to suffer in-

terim reasonable losses, without compensation, for a rea-

sonable period of time during which solutions accommo-

Brooks-Scanlon line of cases. See The New England Divisions

U.S. 184, 190-92 (1923) ; Dayton-Goose Creek Ry. v. United States,

456, 479-83 (1924). A more recent and forceful statement by the

Gass is found to Gus Pra trnmné Bistorr ond Hane Seen

1s in enn-Cen erger Norfolk & Western

Cases, 389 U.S. 486, 510-11 (1968) : ~

While the rights of the bondholders are entitled to respect,

command Procrustean measures. They certainly do i

operations vital to the Nation be jettisoned despite the avai

feasible alternative. _ The public interest is not merely a

ficed for the strategic purposes or protection of a class of security

eRe ad

cet

22a

Appendiz A

able length of tim: without effecting a taking.” New

Haven Inclusion Cases, supra at 493; In re Penn Central

Transportation Co., 384 F. Supp. 895, 919 (Regional Rail

Reorganization Special Court 1974); see RFC v. Denver

é Rio Grande Western R.R., 328 U.S. 495, 535-36 (1946) ;

Continental Illinois Nat’l Bank & Trust Co. v. Chicago,

Rock Island & Pacific Ry., 294 U.S. 648, 677 (1935).

The Supreme Court’s decision in the New Haven In-

clusion Cases is instructive in this respect.” While await-

ing implementation of a plan of reorganization and

inclusion in the Penn Central system, the New York, New

Haven & Hartford Railroad had been required to continue

to provide rail service and as a result to incur ‘‘substan-

tial losses.’’** In holding that the forced deficit operation

did not constitute a taking for which compensation was

required, the Court stated, 399 U.S. at 491-92:

The rights of the bondholders are not absolute. As we

have had occasion to say before, security holders

‘‘ecannot be called upon to sacrifice their property

so that a depression-proof railroad system might

be created. But they invested their capital in a

public utility that does owe an obligation to the

public. ... [B]y their entry into a railroad enter-

prise, [they] assumed the risk that in any depres-

sion or any reorganization the interests of the

38. We emphasize that we are only speaking to the situation where the

carrier is forced to incur losses for a reasonable limited period of time such

as is involved with directed service, the maximum period of which is limited

to 240 days. We do not address the question whether a carrier or its estate

may be forced to bear large losses, without compensation, for an unlimited

period of time where solutions are not likely to be forthcoming. See Jn re

Penn-Central Transportation Co., 384 F. Supp. 895, 919 (Regional Rail Reor-

ganization Special Court (1974) ).

39. See generally Note, Conrail and Liquidation Value: Creditors’ and

Stockholders’ Entitlement wm the y- 4 Rail Reorganisation, 85 Yate L.J.

371 (1976) ; Note, Takings and the Public Interest in Railroad Reorganisation,

82 Yate L.J. 1004 (1973).

40. The reorganization court had stated “ ‘the losses reasonably incident to

working out the solution most consistent with the public interest’ [have] eroded

the debtor’s estate in excess of million.” In re New York, New Haven &

_—" R.R., 304 F. Supp. 793, 800 (D. Conn. 1969), modified, 399 U.S. 392

Ge —-

23a

Appendiz A

public would be considered as well as theirs.’’

Recovetruction Finance Corp. v. Denver @

R.G.W.R. Co., 328 U.S. 495, 535-536.

In our view, the New Haven Inclusion Cases dictate

a holding that directed service does not constitute a taking,

at least in the factual circumstances presented here. Un-

like New Haven, where the railroad was required to con-

tinue to operate for a period of six years, directed service

can last only 240 days. More importantly, whereas in

New Haven the carrier was forced to incur ‘‘substantial’’

operating losses, the other carrier during a directed opera-

tion sustains no operating losses because the directed car-

rier transports the other carrier’s traffic for it. Such was

the case with L&NE which, as a result of the directed

service, was spared losses it might otherwise have been

legally required to incur. Finally, the other carrier’s

properties are maintained and in some cases upgraded

during the directed operation." These factors convince

us that rather than suffering a diminution of their col-

lateral, the most that the owners of a carrier suffer as a

result of directed service is a postponement of their

remedy of abandonment, for which no compensation is

necessary. See Continental Illinois Bank 4 Trust Co. v.

Chicago, Rock Island & Pacific Ry., supra at 677.

L&NE counters that all of the above cases are dis-

tinguished because they dealt with ‘‘erosion takings’’—

where the railroad’s estate is eroded by deficit operations

—and not with ‘‘conveyance takings’’—where the physical

properties of the carrier are taken. Directed service, it

contends, involves a conveyance taking. The Supreme

Court did recognize the distinction between an erosion

taking and a conveyance taking in the Regional Rail Re-

A. She Commiaien te te cost selnburcement teguiations ssovites fer

maintenance of way expenses expenses to bring the

lines into compliance with the Federal Rail Selety Act of tone et

note 7 supra, Joint App. at A-175, -188; 49 CF.R §1126. For the specific

expenditures made on E’s behalf see note 18 supra and accompanying text.

24a

Appendia A

organization Act Case, 419 U.S. 102 (1974).® Also, in

deciding the question whether a fifth amendment taking

has occurred, many courts seem to have considered as de-

terminative the physical occupation by the government of

property belonging to the claimant.”

While we do not discount the importance of this fac-

tor, we eschew such a formalistic approach to the takings

question. Although as a conceptual matter, ordering a

carrier to continue operations for 240 days may differ

from placing another carrier on those lines for 240 days,

we do not think this possible difference dictates a holding

here that the latter constitutes a taking but the former

does not. It might be anomalous indeed if the ICC could

order forced deficit operations by a railroad and not effect

a taking, but could not order another carrier to discharge

those same duties, thereby in the usual case saving that

railroad operating costs, without such action constituting

a taking. The ICC does not take title to the other car-

rier’s property during directed service. The other carrier’s

rights to sell or dispose of its property for non-railroad

use are no more qualified during directed service than they

are normally since prior ICC approval is required in either

case.“

E. Reimbursement for Rent During a Profitable

Operation

L&NE’s final contentions regarding the Commission’s

cost reimbursement regulations are that the distinction

between profitable and unprofitable directed operations for

the purpose of determining whether rent should be paid

the other carrier is arbitrary and capricious and that the

Central T 384 F. 895

rae tae poerpuattotion het Special Comt 504). Seve.

generally Michelman, Property, Utility, and Fairness: Comments

on the Ethical Foundations of "Yuet Compensation” Tow, 80 Haxv L. Rev.

1165, 1184-90 (1 .

44. It should be noted here that L&@NE did not even seek ICC approval

to abandon until nearly 9 months after it had issued its embargo.

Cel te ea =

25a

Appendix A

method of calculating the rent in the event of a profitable

operation is also arbitrary and capricious. Neither con-

tention convinces us to set aside the [CC’s regulations.

We decline to resolve L&NE’s challenge to the method

of determining rent in the event of profitable directed

operations at this time because directed service under

Service Orders 1207 and 1208 was not profitable, LENE

did not raise this contention before the ICC and the ICC is

currently considering this issue as a result of a petition by

the Rock Island Railroad. As to L&NE’s argument con-

cerning the distinction between profitable and unprofitable

operations,” the ICC made this distinction because it was

concerned that the benefits normally received by the other

carrier as a result of directed service might not be suf-

ficient where the operation was profitable. We do not

consider that decision to be arbitrary or capricious or with-

out rational basis.

IV.

Accordingly, the petition of L&NE to review and set

aside the Commission’s cost reimbursement regulations

insofar as they do not provide, except for profitable oper-

ations, for the payment of rent to the other carrier will be

denied.

45. The Commission asserted that L&NE had no standing to challenge the

differential treatment accorded profitable and unprofitable operations because

operations under Service Orders 1207 and 1208 did not result in a profit. Brief

for Respondent at 46. However, L&NE is clearly aggrieved by the application

r this —_ ->~ 3 t and thus in s view has standing to chal this

istinction. See generally Association o ta Processing Serv. Organizations,

Inc. v. Camp, 397 U.S. 150 (1970).

46. ICC Report, supra note 7, at A-174.

A True Copy:

Teste:

>»

Clerk of the United States Court of Appeals

for the Third Circwit.

40 Fed. Reg. 16066

Title 49—Transportation

Cuaprer X—InrterstaTe Commerce ComMMISSION

SUBCHAPTER B—PRACTICE AND PROCEDURE

(Ex Parte No. 293 (Sub-No. 3)]

Part 1126—Svusmission or Cost Data to Justiry Rem-

BURSEMENT FOR DrrecTeD SERVICE

Implementation of Pub. L. 93-236, section 601(e), Re-

gional Rail Reorganization Act of 1973: submission of

cost data to justify reimbursement.

On July 17, 1974, the Commission served a notice of

proposed rulemaking (39 FR 26172) under the subject

docket in order to promulgate a form and procedures as

required of the Commission in section 601(e) of the Re-

gional Rail Reorganization Act of 1973 (RRRA), which

section constitutes an amendment of the Interstate Com-

merce Act by the addition of subparagraph (b) to the pres-

ent section 1(16). This new provision, hereafter referred

to as section 1(16)(b), authorized the Commission to re-

spond to those cessations of service by a carrier by rail-

road which it finds to constitute an emergency situation

by directing another railroad (the directed carrier) to tem-

porarily provide for the handling, routing, and movement

of traffic over the lines of the carrier no longer able to

perform that service (the other carrier).

The Commission may invoke this emergency authority

only when a cessation of service occurs under one or more

of three specified circumstances (the cash position of the

27a

Appendiz B

carrier makes continued operations impossible, a court has

ordered that service be discontinued, or service has been

abandoned without a certificate from the Commission) and

only after making certain findings as to the effect of such

a direction on public commerce and on the directed car-

rier.

Section 1(16)(b) also provides for the reimbursement

of the directed carrier or carriers by the Federal Govern-

ment in the amount by which the cost, as referred to

in subparagraph (e), of handling, routing and moving the

traffic of the other carrier over that carrier’s lines exceeds

the direct revenues therefrom. To provide an expedited

and uniform method for obtaining reimbursement, Con-

gress required the Commission to promulgate a form on

which the directed carrier would concurrently record the

cost and revenues of the directed operation and which

would then be submitted by the directed carrier to the

Commission for audit. The Commission is then authorized

to certify to the Secretary of the Treasury the amount

of the payment to be made to the directed carrier which

payment shall be made from funds authorized to be ap-

propriated under section 1(16)(b).

The form proposed in the notice of proposed rulemak-

ing served July 17, 1974, as modified, and accompanying

procedures have been promulgated and are adopted in

furtherance of this Congressional directive. All comments

submitted with respect to the proposal were given due con-

sideration.

As a result of comments received various changes were

made, several of which follow:

1. Subsidies provided by state, regional, or local an-

thorities to the directed carriers are to be treated and

28a

Appendix B

recorded as revenues, but such revenues are to be excluded

from the base upon which profit is determined.

2. Expenditures for deferred maintenance and/or re-

habilitation of track, facilities and equipment of the other

carrier, only insofar as essential to safety or to maintain

such property at its level of repair at commencement of

the directed service can be made without prior Commis-

sion approval. All other maintenance and capital expen-

ditures require the prior approval of the Commission.

3. Monies initially borrowed for the conduct of directed

operations are limited to the amount of loss suffered by

the other carrier in the 60 day period in the year prior

to directed service comparable to the period of directed

operation. Commission approval is required for any other

borrowings if reimbursement is to be sought for the in-

terest on such additional borrowings.

These rules are issued under the authority of Part I

of the Interstate Commerce Act (49 U.S.C. 1, et seq.) and

the Administrative Procedure Act (5 U.S.C. 553 and 559).

Effective date. This part becomes effective on March

21, 1975.

Issued in Washington, D.C., on the 14th day of March,

1975.

[seaL] Rosert L. Oswatp,

Secretary.

Accordingly, Title 49 of the Code of Federal Regula-

tions is amended by adding a new Part 1126, reading as

follows:

29a

Appendix B

Part 1126—Svupmission or Cost Data to Justiry ReE-

IMBURSEMENT FOR DirEcTED SERVICE

Sec.

1126.1 Seope of rules in this part.

1126.2 Cost form and certification.

Avutuority: See. 601(e), Pub. L. 93-236, 87 Stat. 1021

(49 U.S.C. 1(16)).

§ 1126.1 Scope or ruLEs IN THIS PART.

The rules in this part govern the procedures for the

submission of costs and revenues to be followed by ear-

riers subject to Part I of the Interstate Commerce Act

which are directed to perform service over the lines of

other carriers in accordance with orders of the Commis-

sion under and pursuant to the provisions of section 1(16)

(b) of said act. The report and order of the Commis-

sion in Ex Parte No. 293 (Sub-No. 3), Implementation

of Public Law 93-236, Regional Rail Reorganization Act

of 1973—Submission of Cost Data to Justify Reimburse-

ment, served on March 21, 1975, appearing at —— I.C.C.

——, should be used by directed carriers for guidance in

the preparation of the cost form. This report and its

appendix set forth the Commission’s policy as to just what

costs and revenues, incurred in or attributable to the eon-

duct or directed operations, are allowable for purposes

of inclusion in the cost form. Only such allowable costs

and revenues will be considered by the Commission in

its computation of payments due to the directed carrier

under the provisions of section 1(16)(b) of the Interstate

Commerce Act.

30a

Appendix B

§ 1126.2 Cost FoRM AND CERTIFICATION.

The expenses and revenues incurred in the conduct of

directed service shall be recorded in accordance with the

cost form and its instructions as they appear below:

Instructions to Cost Form

1. Enter in column (2) the expenses directly assign-

able to the directed traffic moved. This includes wages,

rentals and other expenses paid or ineurred by the ap-

plicant and chargeable only to the directed traffic.

2. Enter in column (3) the portion of common expenses

allocable to the directed traffic. Common expenses means

those expenses paid or incurred for the movement of the

directed traffic which are common or jointly incurred for

the movement of other traffic. All expenses should be

assigned direct wherever possible. Expenses not directly

assignable should be apportioned on the basis of the

factor suggested in column (5) or if necessary, on the

basis of a more readily available and equitable factor, if

such use is justified to the Commission. The relationship

of the carriers’ own revenues and the directed traffie rev-

enues is an acceptable apportionment factor in cases where

there are no other available apportionment factors.

3. Enter in column (4) the total of columns (2) and

(3).

4. The cost of rehabilitation of the line necessary to

permit operation should be shown in the maintenance of

way accounts. Expenditures for substantial improvements

shall require authorization by the Commission.

5. Expenses included in lines 13, 23, 38, 42, 47, and 53

should be identified on a separate sheet.

a *& & W

202, 212, 214, 216, 218,

and 220

227 and 249

231, 233, and 247

235

229, 237, 239, 241, 243,

and 265

244

206, 208, 210, and 221

8 274

201, 275-277, and 282

266, 267, 269-273, and

281

253 and 257

278 and 279

All other expenses

Total of maintenance

of way and struc-

tures.

Maintenance of

equipment.

311 (yard)

311 (other)

314

3la

Appendix B

COST FORM

Suggested apportionment factors

(5)

Equated track miles.

Carloads handled.

Revenue tons.

Total repairs—expenses.

Miles of road.

Trailers handled loaded and

empty.

Equated track miles.

Direct.

Accounts 202-265.

Miles of road.

Accounts 311 and 314—expenses.!

Miles of track.

Direct.

Locomotive unit-miles.

Gross ton-miles.

Freight train car-miles cars-loaded

and empty.

1 Railroads having electrified systems should use electric locomotive unit-miles.

Directed traffic Directed traffic

: Account No. Direct Suggested apportionment factors

. apportionment

Account No Direct ons Suggested factors Line Common Total

- per saan j

(1) 2? «@ (4) (5) (1) @ ® (4) (5)

19 318 Vehicle miles loaded and empty. 38 All otf Direct

21 301, 326, 328, 332-335 Total repairs-—expenses.

and 3 Miscellaneous operations

ay 56 and 337 37 o oe 4 449 xxx Direct.

23 All other expenses xxx Direct. a 46 —*. =e. 2 we

24 be of maintenance xxXxX XXX 42 All off ane Direct.

43 Total miscellaneous xxx Xxx

Transportation

— General and traffic

25 372 Train-miles.

27 +389 Yard switching locomotive unit- 45 451-455, 457-462 a Apportion on the basis of total.

28 371, 409-411, 444 and 420 Accounts 372, 373, 376 and 389— 24, 39

29 404-407 and 415-419 Train-miles. 46 351-360 Accounts 451-462 expenses.

30 376 Revenue tons. 47 All other expenses Direct.

31 374, 375, 408 xxx Direct. 48 Total general and

32 377-380, 382-384, 388, Yard switching locomotive unit-

390 and 391. miles. 49 Total —— limes XXX XXX

14, 24, 39 43 and 48.

33 392 and 404 Accounts 392 and 401 direct as-

= 532 Railway tax accruals

34 394-396, 400, 412 and 413 -—-~" epee including 30 P r — Direct

35 402 Freight train car-miles loaded and 51 Property taxes Miles of road.

empty including caboose. 52 State income taxes xxx Direct.

3% 403 Passenger train car-miles. 53 Other taxes excluding Miles of road.

income taxes.

2 Assign train enginemen and traimmen expenses direct to carrier’s own traffic and directed 54 Total taxes, lines 50- xxx xxx

oe Apportion common expenses on the basis of direct assignments of accounts 392 and

(5)

(1)

76 Local/State subsidies

Total income line 75 xxx xxx

7 :

Hu j EE

y Sy #8

wip is

eal Le

pon Ged

oppo: Mya

: a uy

in te it iT :

. ose oe Pun

“) 10

: 55 *

& fi

tie

Homey

SRERSTRR° Z i

SSStEsssSss Near

77 is larger than line 84, enter 0.

36a

Appendiz B

Attention

Knowing and willful misstatements or omissions of ma-

terial facts constitute federal criminal violations punish-

able by up to five years imprisonment and fines of up

to $10,000 for each offense. (See 18 U.S.C. 1001, 1003,

287.)

Each person by whom this document is signed certifies

that the representations appearing herein and in the ap-

pendices attached hereto (including any accompanying

schedules and statements) are, to the best of his knowl-

edge and belief, true, correct, and complete, based upon

all the information required to be included therein, of

which he has any knowledge.

Dated this day of , 19-——.

(Signature of Accounting Officer)

(Title)

[FR Doe. 75-9151 Filed 4-8-75; 8:45 am]

37a

APPENDIX C

Report of the Interstate Commerce Commission

INTERSTATE COMMERCE COMMISSION

Ex Parte No. 293 (Sub-No. 3)

IMPLEMENTATION oF Pusiic Law 93-236, Secrion 601(e),

RearonaL Ram Orcanization Act or 1973—SusMission

or Cost Data to Justiry Re™sBuRsEMENT

Service Date March 21, 1975

Dated March 14, 1975.

Upon investigation and consideration of views, at guments,

and representations of the parties following the issuance

of a Notice of Proposed Rulemaking and Order (not

printed), the adoption of a general form and accom-

panying procedures for submission of costs, revenues,

and other pertinent information to justify reimburse-

ment by the Secretary of the Treasury found to be in

the public, interest. Appropriate order entered.

Paul R. Duke, C. E. Futcher, A. W. Hesse, Jr., William

P. Higgins, Charles E. Mechem, F. C. Nash, Bernard O.

Phillips, D. Scott Railsback, and Thomas E. Tisza, for the

railroad respondents.

Robert L. Calhown and David M. Schwartz for the

Lehigh Coal and Navigation Company.

38a

Appendix C

William L. Bush, C. P. Ellenwood, Jr., and John H.

King for shippers.

James I. Collier, Jr. and William M. Maloney for the

Association of American Railroads.

John M. Cleary and John F. Donelan for the National

Industrial Traffic League.

Edward J. Hickey, Jr., William J. Hickey, and Geoffrey

N. Zeh for the Railway Labor Executives’ Association.

Constance L. Abrams, Rodney E. Eyster, and James C.

Schultz for the Department of Transportation.

Report oF THE ComMMISSION

By the Commission:

On July 11, 1974, a Notice of Proposed Rulemaking and

Order (Implementation of Public Law 93-236, Section 601

(e), Regional Rail Reorganization Act of 1973—Submis-

sion of Cost Data to Justify Reimbursement, dated June

28, 1974 (not printed)), was served initiating this rule-

making proceeding to promulgate a form and procedures

as required of the Commission in section 601(e) of the

Regional Rail Reorganization Act of 1973 (RRRA). In

brief, that section constitutes an amendment of the In-

terstate Commerce Act by adding a subparagraph (b) to

the present section 1(16). This new provision, hereafter

referred to as section 1(16)(b), authorizes the Commis-

sion to respond to those cessations of service by a car-

rier by railroad which it finds to constitute an emergency

39a

Appendiz C

situation by directing another railroad (the directed car-

rier) to temporarily provide for the handling, routing,

and movement of traffic over the lines of the carrier no

longer able to perform that service (the other carrier).

The Commission may invoke this emergency authority

only when a cessation of service occurs under one or more

of three specified circumstances (the cash position of the

carrier makes continued operations impossible, a court has

ordered that service be discontinued, or service has been

abandoned without a certificate from the Commission) and

only after making certain findings as to the effect of

such a direction on public commerce and on the directed

carrier.

Section 1(16)(b) also provides for the reimbursement

of the directed carrier or carriers by the Federal Govern-

ment in the amount by which the cost, as referred to in

subparagraph (e), of handling, routing and moving the

traffic of the other carrier over that carrier’s lines exceeds

the direct revenues therefrom. To provide an expedited

and uniform method for obtaining reimbursement, Con-

gress required the Commission to promulgate a form on

which the directed carrier would concurrently record the

cost and revenues of the directed operation and which

would then be submitted by the directed carrier to the

Commission for audit. The Commission is then authorized

to certify to the Secretary of the Treasury the amount

of the payment to be made to the directed carrier, which

payment shall be made from funds authorized to be ap-

propriated under section 1(16)(b).

The form proposed in the Notice of Proposed Rule-

making dated June 28, 1974, as modified herein, and the

accompanying procedures have been promulgated and are

adopted in furtherance of this Congressional directive.

40a

Appendiz C

STATEMENTS OF PARTICIPANTS

Statements recommending revision of the proposed cost

form were filed by 7 carriers by railroad, 3 shippers, the

Lehigh Coal and Navigation Company, the Association of

American Railroads, the National Industrial Traffic

League, the Railway Labor Executives’ Association, and

Department of Transportation. None of the respondents

questioned the propriety of issuing the proposed cost

form. In general, the comments were addressed to spe-

cific errors and deletions in the cost form as it was pro-

posed, to the need for further and more detailed ex-

planatory materials or regulations governing application

of the cost form, and to the nature of and procedures

to be followed under an actual Commission order direct-

ing emergency operations.

The statement of the Central Railroad of New Jersey,

R. D. Timpany, Trustee, objects to the lack of a provi-

sion recognizing rent paid by the directed carrier to the

carrier no longer able to perform the service as a cost

item. CNJ recommends that guidelines as to the value

of the property be included in the final cost form regu-

lations. These guidelines would, in turn, form a frame-

work for negotiations between the directed carrier and

the other carrier in establishing acceptable rental. To

protect the interests of the U.S. Treasury, CNJ further

suggests that the rental negotiations be conducted between

the carriers involved and the ICC. CNJ also raises ques-

tions as to the definition of “deferred maintenance” as

that term is used in the proposed cost form, the extent

of the obligations incurred by the directed carrier with

reference to employees of the other carrier hired to per-

form the directed service, and the ultimate effect of recog-

4la

Appendiz C

nition by the Commission of certain capital expenditures

as a cost of the directed operation.

The Delaware and Hudson Railway Company requests,

in its statement, that the final cost form include more

specific guidelines as to the extent and duration of em-

ployment obligations and practices which will be assumed

by the directed carrier in relation to the employees of

the other carrier, the nature of these common expenses

which the Commission will recognize as a cost of the di-

rected operation, the division of revenues when subdivi-

sion of established divisions is required or when no ap-

propriate division has been published, and the extent to

which expenses related to certain contingent liabilities

will be recognized as a compensable cost. D&H also seeks

clarification with regard to its assumption that the prin-

cipal amount borrowed for necessary operating funds as

well as the interest thereon will be treated as a recogniz-

able cost.

The submission by the trustees of the Penn Central

Transportation Company seeks inclusion in the final cost

form of regulations on (1) acceptable division of revenues,

(2) recognition of expense and revenue items resulting

from new operations on the lines of the directed carrier

necessary to performance of the directed operation, and

(3) the methods of record-keeping necessary to meet the

requirement that detailed separations in accounting rec-

ords be kept. Penn Central also questions the propriety

of the proposed apportionment factors for certain ex-

pense accounts, suggests preferable factors, and concludes

that a flat 6 percent of revenue allowance for profit may,

where revenue from the directed operation is low, be less

than adequate to reflect a return on investment.

42a

Appendiz C

The Detroit, Toledo & Ironton Railroad Company’s state-

ment deals specifically with the problems which could

arise under a Commission directive to the DT&I or an-

other railroad to operate the currently suspended Ann

Arbor Railroad Company car ferry service. From this

specific example, DT&I concludes that greater attention

should be paid, in either the cost form or the actual Com-

mission directing order, to the ownership or acquisition

of equipment to be used in performing the directed serv-

ice, including the need to establish appropriate rents for

use of equipment, and for the Commission to approve

capital and deferred maintenance expenditures for pur-

chase of equipment necessary to conduct the directed

operation. DT&I also requests that the final cost form

contain regulations on allocation of revenues and suggests

certain factors which should be considered. DT&I also

favors negotiations, prior to issuance of a directive be-

tween the Commission and the carrier involved.

Reading Company suggests that a provision be adopted

for adjustment of interline accounts between carriers to

reflect accounts arising after the date of submission of

the cost form by the directed carrier and to determine

the proper party to handle collections, settlements, dis-

bursements, ete. after submission of the cost form. Read-

ing, in common with other railroad respondents, recom-

mends that an expedited procedure be established in the

final cost form for obtaining Commission approval of

necessary capital and deferred maintenance expenditures,

that a clear definition of rent income be established, and

that a formula to determine a fair rent for use of non-

operating carrier’s railroad and facilities be established

prior to any order for directed service.

43a

Appendia C

The Union Pacific Railroad Company contends that sec-

tion 1(16)(b) does no’ give the Commission authority to

exclude certain expenses from the reimbursable costs and

that the procedure for cost reimbursement established in

that section requires tie reimbursement of all costs in-

curred in the performance of a directed service, with the

cost figures subject only to technical Commission audit.

On this basis, UP objects to the requirement that all ex-

penditures for deferred maintenance and capital expendi-

tures be subject to prior Commission approval and main-

tains that protection against unjustifiable use of Treasury

funds can be provided through review and audit subse-

quent to reimbursement with provision for refund of im-

properly claimed amounts. UP further suggests that poli-

cies, procedures, and standards be clarified in terms of

deferred maintenance vs. necessary rehabilitation, expendi-

tures meeting the “essential to safety” criteria, approv-

able capital expenditures, and timing and appeal from a

final request for reimbursement. UP also seeks specific

clarification of the following: whether lease payments on

equipment leases under which the directed carrier is the

lessor constitute a compensable cost, whether the directed

carrier may terminate employees of the other carrier who

it believes are unnecessary to performance of the directed

service, and whether compensable common expenses of a

directed operation include those incurred in use of a di-

rected carrier’s facilities, employees, and equipment. UP

objects to both the allowable profit and the interest factor

as being too low and recommends that the Commission

establish in its final cost form a minimum profit factor

of 6 percent with allowance for a reimbursable profit

above that amount at the profit level of the directed car-

rier and an interest factor at the prime rate or the di-

dta

Appendix C

rected carrier’s return on invested assets, whichever is

higher. UP also requests that the actual procedures for

obtaining final reimbursement be more clearly set forth,

including specific time limits within which reimbursement

must be made and a specific appeal procedure.

In its statement, the Lehigh Valley Railroad Company

points out that, especially if the directed carrier is it-

self undergoing reorganization, obtaining the cash or

credit necessary to perform a directed operation may pre-

sent some difficulty and should be the subject of advance

planning. Lehigh Valley further notes the difficulty it

might face in maintaining required detailed separations

in accounts with its present personnel. While the pro-

posed cost form provides for the establishment of a rea-

sonable reserve for liabilities determined after submis-

sion by the directed carrier of the final cost form, Lehigh

Valley suggests that this provision also provide for re-

covery of final settlements which are in excess of the

initial estimated reserve. Lehigh Valley questions the pro-

priety of certain apportionment factors and accounts and

recommends alternatives. It also suggests that the final

cost form provide for payment by the directed carrier

to the other carrier of rental for the use of its lines and

other facilities and contain guidelines under which the

carriers could establish an appropriate rental rate.

The Lehigh Coal and Navigation Company, owner of

certain rights which are currently leased to and operated

by Lehigh Valley, is specifically concerned with the ef-

fect of a cessation of these particular Lehigh Valley op-

erations on its receipts of rental payments under its exist-

ing lease with Lehigh Valley. LC&N requests that the

final cost form clearly indicate that such lease payments

45a

Appendix C

are a compensable cost of a directed operation whether

or not operations over that particular leased line are

profitable and, in general, clarify the right of the other

carrier or the owner of a line leased to the other car-

rier to receive adequate compensation for use of its prop-

erty.

The representatives of shipper interests which filed

statements in this proceeding included the Georgia-Pacific

Corporation, Weyerhauser Corporation, the American

Plywood Association, and the National Industrial Traffic

League. These parties did not, in general, comment di-

rectly on the content or scope of the proposed cost form,

but, rather, concentrated on the effect of an actual Com-

mission service directive on shippers and on orderly con-

tinuation of rail service. Their recommendations include:

(1) a Commission order should require that the equip-

ment and facilities as well as trackage of the other car-

rier be made available to and used as necessary by a

directed carrier, (2) arrangements should be made with

a directed carrier prior to issuance of a Commission or-

der so that implementation and operations planning may

be completed and directed service may commence within

24 hours after cessation of service by the other carrier;

(3) affected shippers should be fully informed in advance

of all details of a directed operation; (4) advance opera-

tional planning should take precedence over procedural

and accounting details; and (5) expenditures with respect

to employees of the other carrier should be treated as

a compensable cost only when those employees are ac-

tually hired to perform the directed service, as other em-

ployee payments constitute a social cost to be borne by

the Federal Government, not by the shipping public.

46a

Appendix C

The Association of American Railroads initially directs

its statement toward basic problems involved in any di-

rection of service by the Commission arising under sec-

tion 1(16)(b). The AAR anticipates that a directed car-

rier may have to provide the employees, supervisors,

equipment and maintenance necessary to performance of a

directed operation, may be required to initially absorb all

the costs arising out of such an operation, and may have

to undertake the full operational and financial burden

of a directed service without advance notice. The AAR

concludes that the financial ability of a potential directed

carrier to assume the immediate costs of a directed op-

eration out of its own funds or to raise sufficient capi-

tal to cover those costs should be a controlling factor

in the scope of a directing order and that the danger in

directing a marginally solvent railroad to undertake a

directed operation should be fully considered. As to the

introductory statements and instructions accompanying the

proposed cost form, the AAR points out the potential

difficulty for some railroads of maintaining detailed sep-

arations in accounting records and suggests a construc-

tion of the term “common expenses” which would include

those incurred on movements over the lines of a directed

carrier or the lines of multiple directed carriers continu-

ing on the lines of the other carrier. The AAR further

assumes that normal maintenance expenditures to main-

tain existing service standards as well as expenditures

to meet minimum safety requirements are compensable

costs. The AAR recommends that a particular person

or office be designated to expedite Commission approval

of expenditures for deferred maintenance and capital ex-

penditures and that any such expenditures be directly and

immediately reimbursed at cost plus 10 percent. Re-

47a

Appendiz C

imbursable expenditures with respect to personnel of the

other carrier should, according to the AAR, be limited

to those incurred during the directed operation and should

not include amounts previously earned but claimed dur-

ing the period of the directive. The AAR requests that

the Commission’s language covering existing subsidies be

revised so that a directed carrier will not be penalized

for subsidy withdrawal and to allow a carrier, upon with-

drawal of a subsidy, to cease the formerly subsidized

operation or to be compensated in full for its cost. As

to the amount of interest recognized in the cost form, the

AAR suggests that the weak financial condition of the

railroad industry precludes borrowing of the working cap-

ital necessary for a directed operation at the prime rate,

that the rate of interest allowed as a compensable cost

should be the average prime rate plus one percent, and

that the average prime rate would most appropriately

be calculated on an annual basis compounded monthly for

each month of the directed operation. The AAR ques

tions the adequacy of a reserve for contingent liabilities

as protection for a directed carrier, contends that only

a zero deductible insurance policy covering all contingen-

cies during a directed operation, though extremely ex-

pensive, could provide adequate protection, and further

concludes that such insurance should also cover poten-

tial liability to those employees of the other carrier hired

by the directed carrier. The AAR statement also com-

ments extensively on the inclusion and exclusion of numer-

ous specific cost and revenue accounts, the identification

and apportionment of common expenses, and the impro-

priety of certain apportionment factors suggested in the

proposed cost form. In conclusion, the AAR recommends

that both the final cost form and any accompanying regu-

48a

Appendia C

lations adopted by the Commission remain open to future

necessary changes and to allow for reimbursement for con-

tingent liabilities not covered by insurance.

The Railway Labor Executives’ Association requests

that any Commission order directing emergency rail serv-

ice include the conditions for protection of employees pre-

scribed in the New Orleans Union Passenger Terminal

Case, 282 I.C.C. 271, as the protective provisions of Title

V of the RRRA are inapplicable and as section 601(e)

itself provides inadequate protection for affected em-

ployees. RLEA also indicates a potential problem in de-

termining which employees of the other carrier should

be hired by the directed carrier to perform the directed

service. It contends that the final cost form should spe-

cifically recognize as a compensable cost the expenditures

resulting from the imposition of protective conditions.

The Department of Transportation alleges that the meth-

od for computation of reimbursable expenses included in

the proposed cost form would promote operational ineffi-

ciency by the directed carrier and, in fact, provides an

incentive for the directed carrier to expand expenses, es-

pecially common expenses, as much as possible. The DOT

suggests that the final cost form require the directed car-

rier to keep separate accounts for common expenses as

well as for all other accounts in which apportionment

is not essential. Where apportionment factors for cer-

tain expenses are suggested, the Commission should

set forth the rationale for each particular selection. The

DOT recommends that apportionment of common expenses

only be allowed where the overhead of the directed car-

rier is affected so that only actual expenditures for di-

rected services will be reimbursed and that for any neces-

49a

Appendix C

sary apportionment factors suggested in the final cost

form, the correlation between factor and expense should

be demonstrated. The DOT further believes that the

recognized profit factor should contain an incentive ele-

ment and suggests such a factor which would permit the

directed carrier to claim a larger percent of gross reve-

nues as profit when the directed operation moves toward

profitability.

Tue Score anp Purpose or Secrion 1(16)(b)

Section 1(16)(b) was enacted by Congress in response

to, among other factors, threatened cessations of service

by those bankrupt carriers operating in the Northeast and

Midwest which are the concern of the Regional Rail Re-

organization Act of 1973. While its applicability to rail-

roads operating beyond the region and after the period

of the Regional Rail Reorganization Act is indicated by

making this ememgency service provision an amendment

to the Interstate Commerce Act, section 1(16)(b) is strict-

ly limited in scope to clear emergency situations where

immediate action must be taken to prevent severe trans-

portation and economic dislocations and is further limited

in time to a stop-gap measure to be continued only until

a permanent solution to the other carrier’s difficulties can

be found.

The available legislative history supports this Commis-

sion in its conclusion that section 1(16)(b) is not intended

to provide a permanent method of dealing with cessa-

tions of service or the causes of such cessation or a defini-

tive cure for railroad service problems. In the Report

of the Senate Commerce Committee on Senate Bill No.

50a

Appendix C

1925 (the original source of the provision with which

we are concerned herein), the duration of a Commission

emergency service directive is strictly limited, in other

than extraordinary circumstances, to only the initial 60

days and only “while a permanent solution is being formu-

lated.” (Essential Rail Services Continuation Act of 1973.

Senate Report 93-302, 1973.) This Committee discussion

further indicates that Congress did not intend that all

the operations of the other carrier be undertaken by the

directed carrier but that emphasis be placed upon preserv-

ing operations over main lines which could be operated

by the directed carrier at a profit. The Commission be-

lieves that the narrow intended scope of section 1(16)(b)

should guide its issuance of any ultimate orders direct-

ing service and its formation of policies and explanations

with regard to the final cost form herein.

Because of the clear Congressional intent that section

1(16)(b) not be viewed or used as a cure for the numer-

ous ills of troubled railroads, and the expressed desire

that federal financing of such temporary stop-gap meas-

ures be kept to the statutory minimum, the Commission

concludes that its powers under section 1(16)(b) are not

limited to merely ordering directed service. That section

specifically requires the Commission to promulgate a gen-

eral cost form, with which we are concerned herein, to

standardize and simplify the final reimbursement proced-

ure and states that each directed carrier shall submit that

form, upon completion of a directed service, to the Com-

mission. Only after completion of an audit shall the

Commission certify to the Treasury the amount which

should be paid to the directed carrier to reimburse it for

the amount by which the total cost of the directed op-

eration exceeded the direct revenues derived therefrom.

5la

Appendiz C

The emphasis in the legislative discussions of section 1(16)

(b) on the temporary nature and profit potential of a

directed operation indicates to the Commission that guide-

lines and policies accompanying the general cost form

should emphasize limited, short-term expenditures and

should make clear to the directed carrier that only ex-

penditures absolutely necessary to performance of the serv-

ice directed will be considered in determining the amount

of final payment to the directed carrier. Thus the legis-

lative discussion states specifically that the Commission,

in its cost form, shall determine appropriate allocations

and what constitutes a reasonable profit. The Commission

in its original proposed cost form and in the final form

has not attempted to dictate that certain costs be re-

jected but has sought to establish guidelines as to those

expenditures which would be acceptable within the frame-

work of section 1(16)(b). While the explanatory ma-

terials to the final cost form, as well as anticipated prior

discussions between the carriers involved in a directed op-

eration and Commission representatives are intended to

avoid the need for Commission challenge to any claimed

expenses, it would be entirely unacceptable for all claimed

costs, subject only to a technical audit, to be paid with-

out evaluation of their propriety. The Commission views

its role as that of mediator between the directed carrier

and the other carrier in terms of charges to which they

must mutually agree and as that of overseer of the gen-

eral reasonableness of expenses incurred in performance

of a directed operation, and hopes that, with the coopera-

tion of all parties, it can maintain that limited role. The

standards established in the final cost form are intended

to simplify and standardize the admittedly complex ac-

counting procedures imposed upon a directed carrier and

52a

Appendix C

to limit those expenditures which may be reimbursable

by the Federal government to those essential to perform-

ance of a directed service within the guidelines established

by section 1(16)(b) itself and within the clear intent of

Congress to keep Federal expenditures to a minimum.

Section 1(16)(b) is phrased in terms of the transpor-

tation of “traffic” rather than the performance of “car

service,” as defined in section 1(10). While section 1(10)

limits “ear service” to the transportation of property, sub-

sections (15) and (16) of section 1, as supported by lan-

guage in subsection (17) of that section, appear to ex-

tend the Commission’s authority beyond the narrow scope

of “car service” to cover additional items included in the

broader term traffic. Any cessation of passenger service

would create inconvenience, if not an emergency to the

users of the service. Obviously, cessation of any pas-

senger service creates an immediate public awareness, but

commuter service is generally supported by State and

local funds. It must be remembered that the true emer-

gency situation more likely lies in the cessation of es-

sential freight service. For it is the cessation of freight

service that could result in massive industry shutdowns

with resulting unemployment which in toto would result

in local, if not national, economic distortions.

Section 1(16)(b) envisions that a directed carrier will,

to the extent that the Commission orders it to perform

a particular operation, step into the shoes of the other

earrier in relation to that operation. Thus, in addition

to the actual physical performance of the operation with

the employees of the other carrier, the directed carrier

will collect and disperse all revenues and expenses aris-

ing out of the directed operation, handle all purchasing

etter

tte

7 Hilt

RSH

7 HF

Sta

Appendiz C

Commission order directing emergency service would be

handled under expedited procedures without formal plead-

ing compels us, in the present proceeding, to comment

briefly on the general problems and policies concerning

any future Commission directives under section 1(16)(b)

of the Interstate Commerce Act. Any action which the

Commission takes under section 1(16)(b) will mecessarily

be tailored to the particular emergency situatiom involved,

thus our statements must deal solely with general policy

matters.

Initially, every effort will be made by the Commission

to inform all interested persons, including shijppers and

employee representatives, as far in advance as possible

of any imminent order directing service. The timing of

such public notice will, of course, be limited by the Com-

mission's desire to avoid causing undue public alarm over

situations which do not immediately or definitely demand

Commission action and by the advance warning of a ces-

sation of service which the Commission itselif receives.

In the same vein, while recognizing the significant value

of prior discussions between the carrier parties to a sec-

tion 1(16)(b) order and other interested parties, the Com-

mission's opportunity to initiate such discussions will be

limited by the notice which it has of an impemding emer-

gency.

While emphasizing the need for adequate advance no-

tice of a pending Commission directizve, several of the

statements submitted also insist thait emergency directed

service must commence within 24 hours of any cessation

of essential service. Under certain circumstances, sach

as a cessation of service upom little or no notice to the

Commission, a regulation requiring prior negotiations be-

tween affected parties would be in direct conflict with a

55a

Appendiz C

requirement that essential services be resumed within 24

hours. The potential for just such a situation to arise

emphasizes the necessity for the Commission to retain

ultimate flexibility as provided by the expedited proced-

ures in section 1(15).

Several of the parties to this proceeding express con-

cern with the actual availability of equipment and facili-

ties to a directed carrier for the performance of a di-

rected service and request that any Commission directive

deal specifically with this subject. The language of sec-

tion 1(16)(b) itself, by including within the term “cost”

service, and to insure that such equipment will actually

be at the disposal of the directed carrier, the cost

specifically provides (Account 542) that the rental paid

to the other carrier for use of such equipment will be

tionally leased equipment, or to the actual owner of equip-

56a

Appendix C

ment necessary to performance of the directed service. It

is anticipated that all equipment charges will be estab-

lished on the basis of existing AAR codes.

The Commission holds a similar view with respect to

the use of other railroad facilities and property of the

earrier no longer able to perform a transportation serv-

ice. Any order of the Commission directing emergency

service, in addition to requiring operations to be per-

formed over the lines of the other carrier, will also re-

quire that those facilities and railroad properties of that

carrier which are necessary to performance of the di-

rected service shall be made available to the directed car-

rier. As discussed below, the Commission shall determine

the rents, if any, which shall be paid the carrier no longer

its properties.

Should rental agreements already exist under which the

other carrier leases lines or properties, other than the

previously discussed rolling equipment, for its operations,

the directed carrier shall pay the existing rental for those

lines and other properties which are necessary to the per-

formance of a directed operation, and such payments shall

be recognized as a reimbursable cost of that operation

and shall be so recorded on the cost form (Account No.

542). The directed carrier will assume the applicable eb-

ligations of the other carrier under such agreements. Such

agreements shall be applicable, subject of course to Com-

mission audit, even if the lines and property involved are

leased from the directed carrier or an affiliate. As the

other carrier is thus relieved from certain of its monetary

and other obligations under outstanding agreements, the

other carrier is not entitled to any additional payment

itself for use of lines and facilities which it has previously

operated under lease.

57a

Appendix C

Questions have been raised whether or not the carrier

whose operations are being performed by a directed car-

rier should be compensated for the use of its lines and

facilities, and if so, what factors should be considered in

computing the measure of the compensation to a carrier

who has defaulted on its legal obligation to provide serv-

ice to the public.

The statutory language of section 1(16)(b) does not

speak to this issue. Nor does the legislative history pro-

vide any indication of the intention of Congress. The

relevant portion of this section requires a payment from

the funds of the United States solely to a directed car-

rier of the costs incurred in performing the directed serv-

ice with a reasonable profit. In defining costs, the statute

provides as follows:

The term “cost” shall mean those expendi-

tures made or incurred in or attributable to

the operations as directed, including the rental

or lease of necessary equipment, plus an ap-

propriate allocation of common expenses,

overheads, and a reasonable profit.

It would appear from the foregoing that if rent or com-

pensation for the use of an operated carrier’s property is

the inference that such rent is an expenditure to be “in-

curred” by a directed carrier. There is no other logical

wording in the statute which lends support for the inelu-

sion of rent as such an item of cost. However, the oppo-

i i that Congress did not intend that the

carrier ceasing operations to be compensated for the use

of its properties, may also be inferred by the absence of

any statuory reference to such a payment. Consequently,

58a

Appendix C

this question must be resolved by an examination of the

legal obligations of the carrier whose operations are being

performed under directed service.

Under the Interstate Commerce Act, all common car-

riers by railroad must fulfill their common carrier obliga-

tion to continue service to the public (S ction 1(4)), un-

less and until a certificate of abandonment is authorized

by the Commission pursuant to the provisions of section

1(18) of the Act. Under the requirements of section 1(16)

(b), in order for the Commission to issue a directed serv-

ice order, the operated carrier, having ceased operations

without obtaining a certificate of abandonment from the

Commission, must be in dereliction of its statutory duty

to continue to provide such service. Smith v. Hoboken R.

Co., 328 U.S. 123, 130 (1946). Tt is highly unlikely that

Congress in its consideration of section 1(16)(b) desired

to provide a monetary incentive for the unlawful aban-

donment of rail service. Rewarding a railroad for avoid-

ing such a legal obligation would be contrary to public

policy.

Additionally, since the authority to abandon the rail

properties has not vet been approved, the carrier cannot

legally convert the capital it has invested in the property

to a non-rail use. Until such an abandonment is approved,

these assets would be unutilized and thus be subject to de-

terioration since the carrier has no funds available either

to continue operations or maintain its properties. The

defaulting carrier, in most foreseeable situations, would

not then have any return on the value of its invested capi-

tal. Consequently any economic loss to the defaulting car-

rier, from a direction of service over these lines and facili-

ties, would be minimal.

59a

Appendiz C

Whatever consideration is given to the economic loss of

the operated carrier because of the ordering of directed

further erode its invested capital. Further, during the

period of the directed service, the property will be main-

tained in order to continue service and all employee obli-

gations for those employees hired by the directed carrier

will be satisfied. Consequently, in ordering directed serv-

ice, the Commission both fulfills the carrier’s legal obliga-

tion to continue to provide service and preserve the value

that the operated properties might have for continued

use in their dedicated purpose.

Accordingly, it is our view that in the usual situation,

where costs exceed revenues, no compensation or rent for

the use of the defaulting carrier’s lines and facilities is

required. It must be emphasized that the Commission

would not be able to order directed service if the carrier

elected to continue operating or, if the carrier with appro-

priate authorization, could convert its properties to an-

other use. Consequently, there is no economic loss to the

defaulting carrier resulting from the Commission’s order-

ing of directed service. Further, the Commission’s order-

ing of such service confers certain substantial benefits, as

discussed supra, which in most cases are sufficient to dis-

charge any obligation to pay such compensation or rent.

However, situations may arise where temporary opera-

tions may be profitable to a directed carrier, and in those

situetions the defaulting carrier may be entitled to some

payment. In the situation of such a profit, compensation

should be minimal. The property is being used tempo-

60a

Appendix C

pers ad yeti Bad ay be moe

domain. And, the overall economic loss of the carrier, as

discussed above, should be slight since the provisions of

section 1(18) prohibit the use of the property for any

other purpose until such time as authority to abandon is

granted.

Under the circumstances of a profitable operation, com-

pensation to be paid to a carrier for the temporary use

of its rail associated property should be measured by the

lessening of its econom’: value on the same basis that

the carrier itself, if operating, would compute the decrease

in value in accordance with its accounting records. This

loss would not exceed the amount of normalized depre-

ciation on the recorded net book value of the defaulting

eatrier’s property used in the directed operation. In the

event that a betterment system of accounting if used for

certain property accounts, depreciation will be allowable

in a manner to be determined by the Commission. The

amount of rent, if any, to be paid to the other carrier

shall be determined by the Commission during its audit

of the accounts of the directed carrier.

The amount of the rent, if any, shall be reduced by the

amounts expended duri: ~ the period of directed operation,

with Commission approval, which provide a direct benefit

to the other carrier or its estate. These deductions in-

clude, hut are not limited to, the following expenditures:

capital improvements, catch-up of deferred maintenance,

betterments to permit operations or compliance with safety

standards, and satisfaction of certain liabilities of the

other carrier, such as the payment of accrued vacation

pay.

6la

Appendix C

Subparagraph D of section 1(16)(b) requires that a di-

rected carrier hire those employees of the other carrier

to the extent that such employees had previously per-

formed the directed service for the other carrier, and the

introductory statement to the Commission’s proposed cost

form recognizes as a compensable cost of a directed opera-

tion expenditures for wages, salaries, and payments of

benefits to certain persons having an employment rela-

tionship with the directed carrier for purposes of per-

formance of a directed service. While section 1(16)(b)

does not require a directed carrier to hire all former em-

ployees of the other carrier, and the proposed cost form

recognizes as compensable only those expenditures made

to or for the benefits of employees necessary to perform-

ance of a directed service, the language, at least as to such

employees and related carrier obligations and practices, is

mandatory, and no provision is made, as suggested by the

Union Pacific, for termination of certain employees by

the directed carrier. It is assumed by the Commission, and

will be so ordered in each particular situation, that only

necessary employees, as that term is used in the proposed

cost form, will be hired and, in turn, compensated and that

any additional affected employees will have been termi-

nated by action of the other carrier as a result of its

cessation of service and not by action of either the directed

carrier or the Commission. Similarly, employment ob-

ligations and practices and expenditures resulting there-

from will only be imposed upon the directed carrier as to

employees actually hired and only during the actual period

of a directed operation. Amounts attributable to events

which occurred prior to commencement of a directed op-

eration or which arise out of employee terminations upon

the other carrier’s cessation of service remain obligations

@ae~

Appendia C

of that other carrier or its successors. The directed car-

rier assumes only existing employment obligations and pol-

icies and must make payments thereunder only as to events

“commencing with and for the duration of” the direction.

While the contention of the Railway Labor Executives’

Association that labor protective conditions imposed by

Title V of the RRRA are inapplicale to situations requir-

ing action by the Commission under section 1(16)(b) is

undoubtedly correct, the employee provisions of section

1(16)(b) do not provide the Commission with broad au-

thority to impose protective conditions upon either the

other or the directed carrier. In contrast with an actual

abandonment of operations by a railroad, a cessation of

services which would precipitate an order under section

1(16)(b) is specifically an action taken without Commis-

sion approval. The Commission is empowered under that

section merely to respond to the service emergency, to

impose only limited direction in terms of track safety

standards and reemployment, to promulgate and audit a

cost form, and to certify the amount of payment to the

Treasury. The Commission authorizes neither the orig-

inal cessation of service nor the end of the emergency

directed operation (which is mandated by the maximum

period established in section 1(16)(b)), and thus could

not appropriately impose upon either cessation the em-

ployee protective conditions prescribed in the New Orleans

Union Passenger Terminal Case, 282 I.C.C. 271, or any

similar conditions where not mandated by statute. Pro-

tection will continue to be available to employees under

previously imposed conditions or prior agreements.

The Commission anticipates that the involved labor or-

ganizations and the carrier parties to a Commission di-

rective will enter into immediate discussions upon notifi-

63a

Appendix C

cation of a threatened cessation of operations to deter-

mine which former employees of the other carrier actually

previously performed the services included in the directed

operation and must thus be hired by the directed carrier

to perform that directed service. Assurances to this effect

have been received by the Commission from numerous em-

ployee organizations. All parties to such discussions will

be bound by the statutory language, as well as by the

Commission order and the cost form under consideration

herein, which limits those employees to be hired by the

directed carrier to those who had actually previously per-

formed the directed service for the other carrier. It is

anticipated by the Commission that should operations be

directed over only a portion of an existing system, the

portion of the total employees of the other carrier which

must be hired by the directed carrier will be subject to

a commensurate reduction.

In addition to the frequently mentioned concern of all

parties with preliminary procedural details, Union Pacific

has requested that specific procedures and time limits be

established for obtaining final reimbursement and for ap-

peals from any disagreements. Section ¢(16)(b) itself

specifically requires that reimbursement to the directed

carrier, in the amount of the excess of cots of the directed

operation over the revenue derived therefrom, shall occur

within 90 days after expiration of a Commission direc-

tive. With the cooperation of the Secretary of the Treas-

ury and the Congress in seeking and approving a neces-

sary appropriation, the Commission anticipates that re-

imbursement, to the extent of amounts immediately certi-

fied by the Commission to the Treasury, will be obtained

within this statutory period. General discussions with the

various Federal bodies concerned are underway to assure

that such expedited treatment will be available.

64a

Appendix C

Section 1(16)(b) also requires that any Commission

action be taken in accordance with the procedures estab-

lished in section 1(15) of the Interstate Commerce Act.

That section specifically

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