# Opposition — Western Coal Traffic League v. United States

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition
- **Published:** January 1, 1983
- **Citation:** 462 U.S. 1110

## Text

- & to Ee Ge

APR 99 1993 |
No. 82-1369

——- -— ——4

IN THE

Supreme Court of the United States
OCTOBER TERM, 1982

WESTERN COAL TRAFFIC LEAGUE, £7 AL.,

: Pettioners,

UNITED STATES, ETAL.

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

BRIEF FOR
THE ASSOCIATION OF AMERICAN RAILROADS
IN OPPOSITION

Of Counsel: Paul A. Cunningham

Harry N. Babcock Robert M. Jenkins, LII*

Robert B. Batchelder Arthur W. Adelberg

Curtis H. Berg PEPPER, HAMILTON & SCHEETZ
Emried D. Cole, Jr. 1777 F Street, N.W.

James L. Howe, Ill Washington, D.C. 20006

Thormund A. Miller (202) 842-8100

Hanford O'Hara

Charles C. Rettberg

James L. Tapley

Michael Thompson

J. Thomas Tidd

Richard C. Weicher *Counsel of Record

QUESTIONS PRESENTED

1. Whether the court of appeals erred in affirming the In-
terstate Commerce Commission’s adoption of a single standard
for determining the adequacy of railroad revenues which ac-

complishes all of the objectives of the governing provision of

the Interstate Commerce Act.

2. Whether the court of appeals erred in upholding the In-
terstate Commerce Commission's choice of procedures to imple-
ment its standard for determining the adequacy of railroad
revenues.

oo

TABLE OF CONTENTS

Page
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TABLE OF AUTHORITIES
Page

Cases:
Atchison, T. & S.F. Ry. v. Wichita Bd. of Trade,

Se NS oso eek acu nce cou ee's ssw ebekapun ies 1}
Bowman Transp., Inc. v. Arkansas-Best Freight Sys., Inc.,

ED bs caieciels'cuctck $e) ceukwcewesa oe ek 11,12
Cleveland-Cliffs Iron Co. v. ICC,

ee ae Sls FUMED cock dia necnedvosccesscounsevans 15
lowa Public Serv. Co. v. ICC,

ee a NN, BUD ic icccceGasvectctonvdcesseeetvens 15
Power Reactor Dev. Co. v. International Union

of Electricians, 367 U.S. 396 (1961) 2... cc eee 11

Regional Rail Reorganization Act Cases,
SE PINOUT coco ue agcmecsbecbusnectcebeceen towards 2

San Antonio, Texas v. United States,
631 F.2d 831 (D.C. Cir. 1980), clarified, 655 F.2d
1341 (D.C. Cir. 1981), rev'd on other grounds
sub nom. Burlington Northern, Inc. v. United States,

mk ee a: ROE Aa cae eee
Statutes:

Administrative Procedure Act

SUS. OTOO 3 ecanvcd cvecevcaxes conbachauaaeeene 13
Interstate Commerce Act

U.S.C. 5 TRU iv io kes beceteeecn tite 7,8

SOU SA. 5 FP 6c ko eenes at caceuh> sock eae 7

SOU BA. BRO 6 cv ccccascaveckschuatsheyveneeee 8
Milwaukee Railroad Restructuring Act, Pub. L.

No. 96-101, 95 Saat. TISGTNTED ac cvcnvecssteccackeceeee es 3
Railroad Revitalization and Regulatory Reform Act

of 1976, Pub. L. No. 94-210, 94 Stat. 31 (1976)... 2.0.0... y
Rock Island Transition and Employee Assistance Act,

Pub. L. No. 96-254, 94 Stat. 399 (1980) ......... 0.000005. 3
Staggers Rail Act of 1980, Pub. L. No. 96-448

OE Biak. FURS OID oc nb a toes csneeeedstsaseseee 4,7,8

Agency Proceedings:

Ex Parte No. 338, Standards and Procedures for

the Establishment of Adequate Revenue Levels,

SOOT IA BOOTS va 0-00500ssbcsawcediiedy i daneeans 3
Ex Parte No. 347 (Sub-No. 1), Coal Rate Guidelines —

POI oii nik sa Na gs 08 ss we ees BARS at Cease Ee 9
Ex Parte No. 353, Adequacy of Railroad Revenue

(1978 Determination), 3621.C.C. 199 (1980) 2... eee 3
Ex Parte No. 393 (Sub-No. 1), Standards for Railroad

Revenue Adequacy,

GB Fok. Tan, TOGGS CORE. vices ishsaentvvesssaneneewaas 6

Ex Parte No. 415, Railroad Cost of Capital - 1981,
Eads COOCOUUED 6c ccsvccccccececcascecsececeunnete

Ex Parte No. 416, Railroad Revenue Adequacy - 1980
Determination, 365 1.C.C. 285 (1981) 6. ee

Ex Parte No. 436, Railroad Cost of Capital - 1982,
Se We MUN BAOUUENOUED cc cccccnncccvccsncvecucccaessc

Miscellaneous:

Conrail Reauthorization: Hearings before the Subcomm.
on Surface Transp. of the Comm. on Commerce,
Science and Transp., Serial No. 97-13, 97th Cong.,
SEED vaca hcisekd sak enaveeckeucunsLesanen

S. Rep. No. 94-499, 94th Cong., Ist Sess. 2-4
SCL Cce ase ehw hess eed4be ke oops veseeawtawenanes
TET CEC ESTPRTLTETOCOLTCTET TTT EC TE TT

CPO EET ETT eT ETT EPEC EEE T ere TTT ey

RE eer rer ee keer Teer eT eT ere rere Terre 2,4,8

Cong. Rec. H5998-99 (daily ed. July 2, 1980) ...........0.....

GOCLE.R. § VIDD.2S (IDTE) on cccccccccccccccccvccccccecs

IN THE

Supreme Court of the United States
OCTOBER TERM, 1982

No. 82-1369

WESTERN COAL TRAFFIC LEAGUE, ET AL.,

. Petitioners,

UNITED STATES, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

BRIEF FOR
THE ASSOCIATION OF AMERICAN RAILROADS*
IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. la-35a) is
reported at 691 F.2d 1104. The opinion of the Interstate Com-
merce Commission (Pet. App. 1b-24b) is reported at 364 1.C.C.
803.

*A list of the members of the Association of American Railroads is
provided in the Appendix to this brief.

———<“«o.7---

JURISDICTION

The judgment of the court of appeals was entered on October
19, 1982. Timely petitions for rehearing were denied on Novem-
ber 15, 1982. The petition for a writ of certiorari was filed on
February 14, 1983. The jurisdiction of this Court is invoked
under 28 U.S.C. § 1254(1).

STATEMENT

For several decades, the Interstate Commerce Commission's
regulation of railroads focused on protecting shippers and ig-
nored the railroads’ revenue requirements. This one-sided ap-
proach to regulation was a primary cause of the railroads’ chro-
nic financial difficulties.’ In the aftermath of the bankruptcy of
the Penn Central and several other railroads, which imperiled
the industrial base of the Northeast and Midwest,’ Congress
passed a series of remedial acts, including the Railroad
Revitalization and Regulatory Reform Act of 1976, Pub. L. No.
94-210, 94 Stat. 31 (1976) (“4R Act”), to enhance the financial
viability of the nation’s railroads. In section 205 of the 4R Act,
Congress directly addressed the Commission's neglect of the
railroads’ revenue needs. It required the Commission to
establish standards and procedures for assessing the adequacy
of railroad revenues, and directed the Commission to “make an
adequate and continuing effort to assist * * * carriers in attain-
ing such revenue levels.”

'See H.R. Rep. No. 96-1430, 96th Cong., 2d Sess. 89 (1980); S.
Rep. No. 94-499, 94th Cong., Ist Sess. 2-4, 10-11 (1975).

*See generally Regional Rail Reorganization Act Cases, 419 U.S.
102, 107 (1974).

Section 205 provided in pertinent part:

[T]he Commission shall * * * develop and promulgate (and thereafter
revise and maintain) reasonable standards and procedures for the
establishment of revenue levels adequate under honest, economical,
and efficient management to cover total operating expenses, including
depreciation and obsolescence, plus a fair, reasonable, and economic
profit or return (or both) on capital employed in the business. Such
revenue levels should (a) provide a flow of net income plus deprecia-
tion adequate to support prudent capital outlays, assure the repay-

The Commission conducted a series of rulemaking pro-
ceedings to implement section 205.* While acknowledging that
ultimately the adequacy of railroads’ revenues could be judged
solely by reference to a competitive return On investment stan-
dard, the Commission adopted initial rules which gave it broad
discretion to examine any “pertinent financial indicators” in
making revenue adequacy determinations.’ Applying these rules
in a necessarily subjective manner, the Commission found that
railroads earning a rate of return on their investment as low as
four percent (which was less than half what the Commission
determined to be a competitive return) had “adequate” reve-
nues.* However, the Commission pledged to revise the rules as
experience dictated.’

The financial plight of the railroad industry did not improve.
Large government subsidies remained necessary to maintain rail
service in the Northeast," and two more major railroads went
bankrupt. Faced with this continuing crisis, Congress passed
emergency legislation.’ In addition, Congress once again found

ment of a reasonable level of debt, permit the raising of needed equity
capital, and cover the effects of inflation, and (b) insure retention and
attraction of capital in amounts adequate to support a sound
transportation system in the United States. The Commission shall
make an adequate and continuing effort to assist such carriers in at-
taining such revenues levels * * *.

“See Ex Parte No. 338, Standards and Procedures for the Es-
tablishment of Adequate Revenue Levels, 358 1.C.C. 844 (1978); Ex-
Parte No. 353, Adequacy of Railroad Revenue (1978 Determination),
362 1.C.C. 199 (1980).

‘See Ex Parte No. 338, supra, 358 1.C.C. at 910; Ex Parte No. 353,
supra, 362 1.C.C. at 216, 222-24. The rules were codified at 49 C.F.R.
§ 1109.25 (1978).

*Ex Parte No. 353, supra, 362 1.C.C. at 327-29.

"Ex Parte No. 338, supra, 358 1.C.C. at 896.

*See Conrail Reauthorization: Hearings before the Subcomm. on
Surface Transp. of the Comm. on Commerce, Science and Transp.,
Serial No. 97-13, 97th Cong., 2d Sess. 13 (1981).

*Rock Island Transition and Employee Assistance Act, Pub. L. No.
96-254, 94 Stat. 399 (1980); Milwaukee Railroad Restructuring Act,
Pub. L. No. 96-101, 93 Stat. 736 (1979).

it necessary to revise the Interstate Commerce Act to mandate
greater attention to the railroads’ revenue needs. Congress
enacted the Staggers Rail Act of 1980, Pub. L. No. 96-448, 94
Stat. 1895. In that Act, Congress found that without improved
earnings, railroads would suffer a capital shortfall of 16 to 20
billion dollars by 1985, with disastrous effects on the nation’s
freight transport system. /d., section 2. Congress therefore
declared that it was its “overall purpose * * * to provide,
through financial assistance and freedom from unnecessary
regulation, the opportunity for railroads to obtain adequate
earnings to restore, maintain and improve their physical faci-
lities while achieving the financial stability of the national rail
system.” H.R. Rep. 96-1430, 96th Cong., 2d Sess. 80 (1980)
(conference report).

In section 205 of this Act, Congress amended the revenue
adequacy provision of the 4R Act by adding a directive for the
Commisssion to “revise as necessary” its revenue adequacy
rules, and to complete a proceeding for that purpose within 180
days. While Congress left it to the Commission to devise the
proper means to give effect to the statute, Congress made it
quite clear that the Commission's previous efforts had been un-
satisfactory. For example, the House Commerce Committee
stated in its report on the legislation that “previous admonitions
by the Congress that the Commission assist carriers in earning
adequate revenue levels (49 U.S.C. 10704) have not achieved
their goals. As a result, the Committee is establishing a more
straightforward mandate. This is a clear directive to ensure
financially sound railroads.” H.R. Rep. No. 96-1035, 96th
Cong., 2d Sess. 54 (1980). The Senate Commerce Committee
echoed this sentiment, stating that “the very positive substantive
and far reaching changes of [the 4R Act] have not achieved their
intended results * * *." S. Rep. No. 96-470, 96th Cong., Ist
Sess. 5 (1979). And, in floor debate on the House bill, key Con-
gressmen expressed their agreement with the observation of one
member that the Commission's then effective rules had pro—
duced revenue adequacy thresholds which were so low as to be
“totally unrealistic” and “ludicrous.” Cong. Rec. H5998-99
(daily ed. July 2, 1980) (remarks of Reps. Harsha, Matsui).

In response to Congress’ strengthened mandate, the Commis-
sion conducted a new rulemaking proceeding and decided, on
the basis of expert testimony in an extensive administrative
record, to adopt the single “cost of capital” standard of revenue
adequacy (Pet. App. 5b). Under this standard, railroads are
deemed to have adequate revenues when they earn a rate of
return on their net investment competitive with returns available
on other investments of similar risk.'° The Commission also
adopted procedures to implement this standard, including the
use of original cost (less depreciation) as the measure of the in-
vestment on which railroads were to have the opportunity to
earn a competitive return (Pet. App. 9b).''

Numerous shipper interests petitioned for review. They
argued, inter alia, that the Interstate Commerce Act precluded
the Commission from adopting a single standard of adequate
revenues, and that the Commission was arbitrary and capricious
and abused its discretion in its choice of procedures to measure
the investment and the rate of return which railroads need the
opportunity to earn on that investment. The Third Circuit court
of appeals affirmed the Commission's order in a unanimous
decision (Pet. App. la-35a), finding that the Commission had
reasonably interpreted the Interstate Commerce Act, and had
acted within its discretion in choosing between alternative
means to implement the Act.

‘What actually constitutes a competitive return may vary over
time. In the decision under review, the Commission found that 11.7
percent was a competitive return for the railroad industry in 1979 (Pet.
App. 19b). The Commission has since updated that figure in annual
rulemakings. See Ex Parte No. 416, Railroad Revenue Adequacy —
1980 Determination, 365 1.C.C. 285 (1981); Ex Parte No. 415,
Railroad Cost of Capital — 1981, 365 1.C.C. 734 (1982); see also Ex
Parte No. 436, Railroad Cost of Capital — 1982, 47 Fed. Reg. 33344
(1982).

''The Commission also expressed its intent to consider switching to
replacement cost as the measure of railroad investment in a subse-
quent proceeding (Pet. App. 17b-18b). The Commission has in fact
now initiated a rulemaking procecding to adopt a replacement cost

ARGUMENT

The petition presents no issue warranting review by this
Court. Congress established the policy that railroads need the
revenues to attract additional capital and directed the Commis-
sion to establish objective standards tor measuring that need.
The court of appeals found that the Commission reasonably im-
plemented Congress’ policy.

Nevertheless, the shippers'? feel that rates should not be as
high as the appplication of the standard may allow and that
some railroads need lower revenues than the standard might in-
dicate. On the assumption that their feelings are correct, they
conclude that the Commission has transgressed congressional
policy and abdicated its duty to maintain reasonable rates. And
on this basis, the shippers argue that this case “raises critical
questions” (Pet. 9) warranting review by this Court.

However, the mere fact that this standard is inconsistent with
the shippers’ subjective impressions does not warrant review
here. This is especially true since the possibility of higher rates
was anticipated by Congress, and Congress has provided an in-
dependent process by which the Commission and the courts can
determine whether any higher rates that may result from this
standard are unreasonable.

The shippers also question the economic technicalities of the
Commission's choice of methods to ensure that railroads have
the opportunity to earn adequate revenues. These are all matters
in which the Commission has broad discretion. The shippers
have identified no flaw in the court of appeals’ reasons for
upholding the Commission's exercise of discretion. Moreover,
the Commission is currently seeking to improve its technical im-
plementation of Congress’ mandate.

method of asset evaluation and otherwise to modify its method of
measuring a railroad’s rate of return. See Ex Parte No. 393 (Sub-No.
1), Standards For Railroad Revenue Adequacy, 48 Fed. Reg. 10144
(1983).

'2 “The shippers” is used herein to refer to all of the parties which
filed the petition for a writ of certiorari.

Finally, the shippers argue that the court of appeals’ decision
conflicts with decisions of other circuits in deferring to the
Commission’s choice of a method to achieve the purposes of a
provision of the tax code designed to stimulate investment. But
there is no conflict among the circuits, only a change in agency
policy.

1. The shippers claim that the Commission has adopted a
standard of adequate revenues that is much too high (Pet. 9). As
proof, they assert that the difference between existing earnings
levels and levels considered adequate under the standard is “im-
mense,” and that rates will have to increase dramatically to
cover that difference (Pet. 9-13). Putting aside for the moment
the uncertain relationship between this standard and individual
rate reasonableness determinations, the fact that revenue levels
under the standard may be significantly higher than existing
revenue levels does not indicate that the standard is incorrect; it
just as easily proves that existing revenue levels are woefully in-
adequate. Indeed, the latter conclusion is more consistent with
the Staggers Act, in which Congress found that vastly higher
earnings would be needed to restore the financial health of the
railroad industry. /d., sections 2(6), 2(7).

The shippers’ position is reminiscent of the approach to rate
regulation which Congress sought to eliminate when it enacted
the 4R and Staggers Acts. Prior to those Acts, the Commission
decided the reasonableness of rates essentially on an ad hoc
basis, with no attention to overall carrier revenue needs. Based
on its judgment that this approach had contributed to the de-
cline of the railroad industry, Congress directed the Commis-
sion in those Acts to adopt an objective standard of adequate
revenue levels for railroads, and made the attainment of those
levels the only explicit standard governing rate reasonableness
determinations. See 49 U.S.C. §§ 10701a(b)(3), 10704(a)(2).
Thus, whereas determinations of the reasonableness of rates are
now supposed to depend on the carrier's need for adequate reve-
nues under an objective standard, the shippers are claiming in
effect that a carrier’s overall revenue opportunities should de-
pend (as they did in the past) on subjective notions of the
reasonableness of rates.

cs ee ee: ee

Even if the shippers correctly anticipate higher rates, there is
no basis for their claim that higher rates are necessarily contrary
to Congressional policy. The purpose of the Staggers Act was
not to require the Commission to accord greater protection to
shippers. Quite the contrary, while the Act preserved the Com-
mission’s powers to protect captive shippers,'' Congress’
primary concern was that the Commission had for too long been
overly solicitous of shipper interests and too neglectful of the
railroads’ financial needs. Congress recognized that “earnings
by the railroad industry are the lowest of any transportation
mode and are insufficient to generate funds for necessary
capital improvements,” and that rate increases would be re-
quired to attract an additional 16 to 20 billion dollars by 1985.
Staggers Act, supra, section 2. Moreover, Congress adopted the
policy that “rail carriers sha// earn adequate revenues,” and
made that policy the only explicit standard governing rate
reasonableness determinations. 49 U.S.C. § 10701a(b)(3) (em-
phasis added). Thus, Congress plainly contemplated that the
opportunity to earn revenues adequate to attract capital was
consonant with the maintenance of reasonable, albeit higher,
rates.

Congress not only anticipated that a proper revenue adequacy
standard might allow higher rates, but it provided a process to
ensure that any such rates would be reasonable. If the shippers
are dissatisfied with the results of that process, they will have
ample opportunities to seek redress. Thus, there is no basis for
the argument that Supreme Court review is necessary to ensure

Staggers Act, supra, § 202, codified at 49 U.S.C. § 10709. Under
this provision, the Commission’s jurisdiction is preserved only in those
instances where railroads have market dominance over their shippers.
While it is well accepted that the number of such instances is relatively
small compared to the total number of shippers served by railroads
(see H.R. Rep. No. 96-1430, supra, at 92), the record below contains
no evidence of what those instances are. Accordingly, there is no basis
to accept the assertion (Pet. 7-8) that railroads have market
dominance over most of the shippers who have challenged the Com-
mission’s decision.

y

that they receive “the maximum rate protections which Congress
intended them to have” (Pet. 9).

As part of that process, the Commission is currently address-
ing the issue of how to protect shippers in another, ongoing
rulemaking proceeding, Ex Parte No. 347 (Sub-No. 1), Coal
Rate Guidelines — Nationwide. Shippers have an opportunity
to shape the Commission's general rate policy in that pro-
ceeding.'* In addition, whether any potentially higher rates for
individual shippers would in fact be reasonable would be a mat-
ter for the Commission to decide in individual adjudications.
The shippers would also be free to seek judicial review of any
rule or individual rate decision.'* Until the Commission actually
makes those decisions, it would be beyond the province of this
Court to determine ex ante the reasonableness of either the
Commission’s rate policy or any particular rate.'°

'4In its decision served February 24, 1983, in that proceeding, the
Commission essentially overruled the earlier statement of one of its
administrative law judges cited by the shippers (Pet. 12) that no rate of
a revenue inadequate carrier could now be found unreasonable. The
Commission also stated (at p. 20) that it had not yet determined in
which respects it will judge the reasonableness of rates of railroads not
earning adequate revenues differently from those of railroads that are
earning adequate revenues. Thus, it is premature to conclude whether
the findings of revenue adequacy or inadequacy resulting from the ap-
plication of the standard adopted by the Commission in this case will
even matter once that proceeding is complete.

'SMany shippers have already petitioned for review of the Commis-
sion’s rulemaking proposal. See Western Coal Traffic League v.
United States, No. 83-1204 (D.C. Cir.) and consolidated cases.

'6Railroads profit more from hauling coal than from hauling alter-
native fuels, and therefore will continue to encourage the maximum
use of coal, regardless of what the Commission might allow. For this
reason, no prediction of the level of increases which might result from
a more permissive rate regulation policy is possible without an
understanding of the discrete market forces governing each separate
rail coal service. Similarly, because railroads do not want to lose coal
traffic, the petition raises no issue relating to the national energy
policy of increased reliance on coal rather than alternative fuels such
as imported oil.

10

2a. While the shippers are quite concerned that their rates
may increase, they do not contest the economic soundness of
the measure of a proper rate of return adopted by the Commis-
sion. Indeed, they have never identified an alternative basis to
measure adequacy of revenues that could be applied objectively
as a standard. (The Commission’s prior rules, which the ship-
pers evidently prefer, gave the Commission unfettered discre-
tion to choose between numerous financial indicators.) Instead,
they seek review on the grounds that the court of appeals erred
as a matter of law in holding that the Commission could employ
a single standard to determine adequacy of railroad revenues
(Pet. 14-18). They contend that because the statute specifies
other criteria which the standard must satisfy while allowing
railroads the opportunity to earn a “reasonable and economic
profit or return (or both) on capital employed in the business,”
the court should have held that the Commission was precluded
from adopting “a rate of return on investment equal to the cur-
rent cost of capital” as the standard of adequate revenues (Pet.
14). They cite several authorities, including a 4R Act Senate
Report, dictum from a decision of the D.C. Circuit,'’ and prior
statements of the Commission and a member of its staff, all of
which state that a reasonable return on investment is not the
only statutory objective which the revenue adequacy standards
must address (Pet. 15-18).

The flaw in this argument is clear. As the court of appeals
recognized (Pet. App. 23a-27a), nothing in the statute or any of
these other authorities precluded the Commission from adopt-
ing “a single standard encompassing [all of] the objectives listed
in section 205 * * * .” And that is precisely what the Commission
did, after examining the record (Pet. App. 7b-9b). Since the
shippers do not suggest that the Commission’s rulemaking pro-
cedures were unfair, or that the record is inadequate to support
the finding that the cost of capital standard gives effect to all of

'7San Antonio, Texas v. United States, 631 F.2d 831, 850 n.104
(D.C. Cir. 1980), clarified, 655 F 2d 1341 (D.C. Cir. 1981), rev'd on
other grounds sub nom. Burlington Northern, Inc. v. United States,
___ U.S. ___, 74 L. Ed. 2d 311 (1982).

the statutory objectives, this issue does not merit Supreme
Court review.

The shippers’ contention that by adopting this single standard
the Commission altered its interpretation of the Interstate Com-
merce Act (Pet. 17-18) does not make this case any more ap-
propriate for this Court’s review.'* This Court does not sit to
review asserted conflicts in decisions of a single administrative
agency. In any event, the court of appeals properly held that an
agency has broad discretion to revise its policies, “so long as the
policies it is pursuing can be discerned from its opinion, and
those policies are consistent with congressional directives * * *”
(Pet. App. 20a, citing Alfchison, T., & S.F. Ry. v. Wichita Bd.
of Trade, 412 U.S. 800, 809 (1973)). The court also found that it
was reasonable for the Commission to revise its revenue ade-
quacy standards and procedures in light of the Staggers Act’s
purpose to “create a regulatory environment more favorable to
investment in railroads,” and the Commission’s experience with
its prior rules (Pet. 25a-26a). There is no need for this Court fur-
ther to scrutinize the integrity of the Commission's decision-
making process, especially in light of the soundness of the end
result of the Commission’s order here.'’

Finally, with regard to a single standard, the shippers argue
that it was improper for the Commission to adopt a standard

'®The objection that “the Commission’s decision did not even ad-
dress the statutory question of whether Section 10704(a)(2) permitted
the use of a single standard” (Pet. 17; emphasis in original) is easily
answered. As the agency charged with administering a new staiute, the
Commission is entitled to great deference in its interpretation. See
Power Reactor Dev. Co. v. International Union of Electricians, 367
U.S. 396, 408 (1961). It need not make explicit its ruling on every
possible statutory issue, so long as the basis for its interpetation, as the
court of appeals found, was reasonably discernable. See Bowman
Transp., Inc. v. Arkansas-Best Freight Sys., Inc., 419 U.S. 281, 286
(1974). This is especially the case here since no party in the rulemaking
raised the single standard issue.

''The fact that the siatute directs the Commission to “revise [its

standards] as necessary” makes it especially inappropriate to fault the
Commission for a change in position.

12

which looks to the adequacy of returns on investment, since
“the ‘used and useful’ character of significant portions of this
[investment] has been called into serious question” (Pet. 14).
This objection does not go to the legitimacy of a single standard,
but to the measurement of the investment base. In fact, how-
ever, the only evidence of record indicated that the amount of
property that might be deemed unused and nonuseful was de
minimis (Pet. App. 9b-10b). Moreover, this issue may soon be
moot because the Commission has proposed a new method of
valuing rail investment.?°

b. The shippers also raise arguments concerning the Commis-
sion’s procedures for implementing the cost of capital standard.
As the court of appeals recognized, all of these points essentially
involve “choice[s] by an agency among alternative means for
satisfying a statutory mandate, [which are] exclusively for that
agency” (Pet. App. 20a). See, e.g., Bowman Transp., Inc. v.
Arkansas Best Freight Sys., Inc., 419 U.S. 281, 285-86 (1974).

i. In an argument closely related to their objection to the
Commission’s use of a single standard, the shippers assert that
the court of appeals erred in affirming the Commission’s deci-
sion to include “unused and nonuseful assets” in the investment
base on which railroads are to be permitted the opportunity to
earn a return (Pet. 19-20). However, as the shippers themselves
acknowledge (Pet. 20), neither the court nor the Commission
disputed their position that those assets (which the shippers
have never identified) should be excluded where practicable.
The court merely held that the Commission’s decision not to ex-
clude the value of any unused and nonuseful assets in its initial
revenue adequacy determination was not arbitrary, capricious,
or an abuse of discretion, “because no likelihood of substantial
overvaluation was established” (Pet. App. 3la).?' Therefore,

20°See mote 11, supra. Under the Commission’s proposal, the
possibility of any overstatement in investment values would be
eliminated (see Pet. App. 10b).

2'The shippers cite evidence submitted by the railroads showing the
value of these assets to be less than $225 million (Pet. 20 n.14) but
omit to note evidence that that amounts to no more than a fraction of

13

the error, if any, did not prejudice the shippers, and provided
no basis for the court of appeals to reverse the Commission's
order. See 5 U.S.C. § 706 (in reviewing agency decisions, “due
account shall be taken of the rule of prejudicial error”).??

ii. The shippers contest the court of appeals’ holding that
the Commission acted within its discretion in deciding to
measure the current cost of capital by examining the current
cost of debt (together with the current cost of equity), rather
than the embedded cost of debt. Since the current cost of debt
can exceed the embedded cost of debt, they argue that the Com-
mission’s decision conflicted with the statutory directive that
revenue levels deemed adequate should “assure the repayment
of a reasonable level of debt” (Pet. 20-21). This argument,
which is premised on a serious misconstruction of the statute,
provides no basis for review by this Court. The shippers do not
argue that the standard adopted by ihe Commission will not
“assure the repayment of a reasonable level of debt.” Instead
they argue, in effect, that the statute should be interpreted to
read “earnings may not exceed a level sufficient to cover the
embedded cost of debt.” Nothing in the statute or Congress’
policy requires that reading. As the court of appeals noted,
“The specific objectives listed in Section 205 should not * * * be
read as /imitations on revenue * * *” (Pet. App. 25a; emphasis
added).

In deciding to use the current cost of debt, which can ob-
viously fall above or below the embedded cost of debt, the
Commission was properly seeking to allow railroads the oppor-
tunity to earn an overal/ return on debt and equity that is com-
petitive in current capital markets (Pet. App. 13b-14b). In af-

one percent of total investment, which is about $27 billion (Pet. App.
10b, citing J.A. 316-17). In fact, the Commission has directly
repudiated the suggestion that the investment figures on the railroads’
books are significantly overstated (Pet. App. !0b).

221n any event, this issue may become moot when the Commission
considers adopting its new method of asset valuation. See note 11,
supra.

14

firming the Commission on this point, the court of appeals aptly
noted that “[ijf the railroads could not gain a rate of return on
investment represented by old debt in excess of the old interest
rates on such debt, they would be unlikely to attract new equity
capital, and their shareholders would insist on investment of in-
ternally generated funds outside the rail industry” (Pet. App.
28a). The sisippers have identified no flaw in this reasoning.
Thus, the Coramission acted consistently with the capital attrac-
tion goal of Congress and there is no indication that the court of
appeals failed to understand the issue.

iii. The shippers contest the court of appeals’ affirmance of
the Commission’s decision not to reduce the railroads’ invest-
ment bases by the amount of investment equal to the reserves
for deferred taxes made possible by the use of accelerated
depreciation. They argue that since this investment is “cost-free”
to the railroads, it should not be included in the total investment
on which railroads are permitted the opportunity to carn a
return (Pet. 22-23).?’ The court of appeals soundly disposed of
this point, however, when it observed:

25The shippers have consistently ignored the fact that funds
represented by deferred tax accounts are provided by the government,
which defers taxation to stimulate investment, rather than the rate
payers, who would pay no less if taxes were not deferred. The shippers
also assert that they are not seeking to deny railroads the opportunity
to earn a return on investment financed by deferred taxes, and that
they did not argue below against affording railroads that opportunity.
In fact, however, that would be the outcome of accepting their posi-
tion, and they did so argue below. See Brief of Edison Electric In-
stitute, et al. dated January 6, 1982, at 42-43 (“Utilities are not permit-
ted to earn a return on deferred tax accounts. * * * There is no reason
why the railroads should do so [sic]”); Brief of Western Coal Traffic
League dated January 6, 1982, at 47 (“the Commission has reversed its
position, holding that carriers should be accorded a return on deferred
taxes. Obviously, this holding * * * must be set aside”). That outcome
would result because under their proposal assets equivalent in amount
to the deferred tax reserve would be deducted from the investment
base on which a return is allowed.

15

The simple fact remains * * * that for all businesses
accelerated depreciation is a source of funds which
may be reinvested. If the railroad industry were to be
put in the position that unlike unregulated industries
it could not earn a rate of return on investment of
such funds it would be at a competitive disadvantage
in seeking equity capital, and it would be encouraged
to invest the funds generated from accelerated depre-
ciation elsewhere than in the railroad business [Pet.
App. 33a].

The shippers also cite no error in this rationale.

3. Finally, the shippers’ further argument that the court of
appeals’ ruling on the treatment of assets equal to deferred tax
revenues conflicts with decisions of three other circuits (Pet.
22-23) is not borne out by a reading of those decisions. In all
three of those cases, which involved the lawfulness of particular
rates and not the adequacy of overall railroad revenues, the
court faulted the Commission for failing to follow its earlier
policy of excluding amounts equal to the deferred tax reserve ac-
count from the investment base.?* In this case, the court of ap-
peals has upheld the Commission’s decision to change that
policy. Thus, the courts have been consistent in deferring to the

24Cleveland-Cliffs Iron Co. v. ICC, 664 F.2d 568, 586 (6th Cir.
1981); Jowa Public Serv. Co. v. ICC, 643 F.2d 542, 546-47 (8th Cir.
1981); San Antonio, Texas v. United States, supra, 631 F.2d at 847.
While the court in San Antonio stated that excluding deferred taxes
from the investment base is “an essential component of an agency’s
election to normalize taxes for ratemaking purposes” (id; footnote
omitted), that statement was dictum in light of the holding that the
Commission had disregarded its own policy. Moreover, the author-
ities cited by the court suggest that it was not aware of the fundamen-
tal distinction between railroads, which operate in predominantly
competitive markets, and regulated utilities, which do not. As a result
of this distinction, tax incentives which may be unnecessary to en-
courage investment in a public utility are vital to railroads. See J.A.
567-68.

16

Commission’s judgment on this issue, even as that judgment has
changed, and there is no conflict.

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

Of Counsel: Paul A. Cunningham

Harry N. Babcock Robert M. Jenkins, III*

Robert B. Batchelder Arthur W. Adelberg

Curtis H. Berg PEPPER, HAMILTON & SCHEETZ
Emried D. Cole, Jr. 1777 F Street, N.W.

James L. Howe, Ill Washington, D.C. 20006

Thormund A. Miller (202) 842-8100

Hanford O’Hara

Charles C. Rettberg
James L. Tapley
Michael Thompson
J. Thomas Tidd
Richard C. Weicher

April 1983 *Counsel of Record

Al
APPENDIX

ASSOCIATION OF AMERICAN RAILROADS
MEMBERSHIP LIST

Akron, Canton & Youngstown R.R.
Alton & Southern Ry.

Amtrak

Atchison, Topeka & Santa Fe Ry.
Atlanta & St. Andrews Bay Ry.
Baltimore & Ohio R.R.

Baltimore & Ohio Chicago Term. R.R.
Bangor & Aroostook R.R. Co.

Belt Ry. Company of Chicago
Bessemer & Lake Erie R.R.

Boston & Maine Corporation
Burlington Northern Railroad Co.
Canadian Pacific Ltd.

Chesapeake & Ohio Ry.

Chicago & Illinois Midland Ry.
Chicago & North Western Transportation Co.
Chicago & Western Indiana R.R.
Chicago, Milwaukee, St. Paul & Pac. R.R.
Clinchfield R.R.

Colorado & Southern Ry.
Consolidated Rail Corporation
Denver & Rio Grande Western R.R.
Detroit & Mackinac Ry.

Detroit & Toledo Shore Line R.R.
Detroit, Toledo & Ironton R.R.
Duluth, Missabe & Iron Range Ry.
Elgin, Joliet & Eastern Ry.

Fort Worth & Denver Ry.

Galveston Houston & Henderson R.R.
Georgia R.R.

Grand Trunk Lines

Green Bay & Western R.R.

Houston Belt & Terminal Ry.

Illinois Central Gulf R.R.

Kansas City Southern Ry.
Kentucky & Indiana Terminal R.R.
Lake Superior & Ishpeming R.R.
Louisiana & Arkansas Ry.
Louisville & Nashville R.R.
McCloud River R.R.

Maine Central R.R.

Manufacturers Ry.

Minneapolis, Northfield and Southern Ry., Inc.
Missouri-Kansas-Texas R.R.
Missouri Pacific R.R.

Norfolk & Western Ry.

Peoria & Pekin Union Ry.
Pittsburgh & Lake Erie R.R.
Pittsburg & Shawmut R.R.
Prescott & Northwestern R.R.
Richmond, Fredericksburg & Potomac R.R.
St. Louis Southwestern Ry.
Seabord Coast Line R.R.

Soo Line R.R.

Southern Pacific Transportation Co.
Southern Ry. Co.

Texas Mexican Ry.

Union R.R. (Pittsburgh)

Union Pacific R.R.

Vermont Ry.

Western Maryland Railway
Western Pacific R.R.

Western Railway of Alabama
Winston-Salem Southbound Ry.

CANADIAN LINES

Algoma Central Ry.

Canadian National Rys.
Canadian Pacific Limited
Ontario Northland Ry.

Toronto, Hamilton & Buffalo Ry.

A3

MEXICAN LINES

Chihuahua-Pacific Ry.

Direccion General De Ferrocarriles En Operacion
National Railways of Mexico

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385010_0472%3A3. Public record. Not legal advice.