Appendix — Public Service Co. of Indiana v. Interstate Commerce Commission

Supreme Court brief1985

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IN THE

Supreme Court of the Huited Stairs

OCTOBER TERM, 1984

PUBLIC SERVICE COMPANY OF INDIANA, INC.,

Petitioner

Vv.

INTERSTATE COMMERCE COMMISSION and

UNITED STATES OF AMERICA,

Respondents

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

J. RAYMOND CLARK *

MARY TODD FOLDES

Suite 1120

1155 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 659-0770

GREG K. KIMBERLIN

1000 E. Main

Plainfield, Indiana 46168

(317) 838-1234

CLARK & FOLDES Attorneys for Petitioner

Of Counsel * Counsel of Record

WILSON - EPES PRINTING Co.. INC. - 789-0096 - WASHINGTON. D.C. 20001

TABLE OF CONTENTS

Page

Appendix A (court of appeals’ opinion (11/23/84) ......... la

Appendix B (court of appeals’ judgment (11/23/84) ..... 35a

Appendix C (court of appeals’ order denying sugges-

tion of rehearing en bane (1/29/85) ....00022... lee. 37a

Appendix D (court of appeals; order denying rehear-

Be NE hace cas iseatnichincets eceaadcaetdipaiig thitatchigandatininn 39a

Appendix E (ICC decision—No. 38946 (6/23/83) ........ 4la

Appendix F (ICC decision—No. 38946 (11/23/82)...... 74a

Appendix G (Relevant statutory provisions) ................ 88a

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 82-2399

PUBLIC SERVICE COMPANY OF INDIANA, INC.,

PEABODY COAL COMPANY,

. Petitioners

INTERSTATE COMMERC: COMMISSION and

UNITED STATES OF AMERICA,

Respondents

LOUISVILLE & NASHVILLE RAILROAD COMPANY,

ASSOCIATION OF AMERICAN RAILROADS,

NATIONAL ASSOCIATION OF

REGULATORY UTILITY COMMISSIONERS,

Intervenors

No. 83-1691

PUBLIC SERVICE COMPANY OF INDIANA, INC.,

PEABODY COAL COMPANY,

- Petitioners

INTERSTATE COMMERCE COMMISSION and

UNITED STATES OF AMERICA,

Respondents

NATIONAL ASSOCIATION OF

REGULATORY UTILITY COMMISSIONERS,

ASSOCIATION OF AMERICAN RAILROADS,

SEABOARD SYSTEM RAILROAD, INC.,

Intervenors

Petitions for Review of an Order of the

Interstate Commerce Commission

Argued March 28, 1984

Decided November 23, 1984

J. Raymond Clark, with whom Mary Todd Foldes and

C. Michael Loftus were on the brief for petitioners.

Charles D. Gray, with whom Paul Rodgers and Gene-

vieve Morelli were on the brief for intervenor NARUC.

Deborah A. Dupont also entered an appearance for

NARUC in No. 82-2399.

Edward O’Meara, Attorney, Interstate Commerce Com-

mission, with whom John Broadley, General Counsel, and

Lawrence H. Richmond, Deputy Associate General Coun-

sel, Interstate Commerce Commission, John J. Powers,

III and John P. Fonte, Attorneys, United States Depart-

ment of Justice, were on the brief for respondents.

Rutherford Lyle Key, Jr., for intervenors Seaboard

System Railroad, Inc. Charles M. Rosenberger also en-

tered an appearance for Seaboard System Railroad, Inc.

in No. 83-1691.

Stephen Ailes, Betty Jo Christian and Samuel M. Sipe,

Jr. were on the brief for intervenor Association of Amer-

ican Railroads.

Before: GINSBURG, Circuit Judge; MACKINNON, Senior

Circuit Judge; and HAROLD H. GREENE”, Dis-

trict Judge.

Opinion for the Court filed by Senior Circuit Judge

MACKINNON.

* Of the United States District Court for the District of Colum-

bia, sitting by designation pursuant to Title 28 U.S.C. § 292 (a).

MACKINNON, Senior Circuit Judge: This case involves

a challenge under the Staggers Act to an order of the

Interstate Commerce Commission (“ICC”) that vacated

a rate authorized by the Public Service Commission of

Indiana (“Indiana Commission”) for the intrastate rail

carriage of coal, and reinstated the railroad’s prior ex-

isting rate. Petitioners challenge the ICC’s authority to

set the rate aside. The ICC’s opinion demonstrates that

the Indiana rate was unlawfully set under the Staggers

Act. Our nation’s railroads have been subjected to in-

tense Government regulation since 1887. The Staggers

Act, enacted in 1980, sought to alleviate the tremendous

financial problems plaguing the railroad industry. The

enormity of the problem was indicated by Congress’ find-

ing, inter alia, that—

(6) earnings of the railroad industry are the lowest

of any transportation mode and are insufficient to

generate funds for necessary capital improvement;

(7) By 1985, there will be a capital shortfall within

the railroad industry of between $16 [billion] and

$20 [billion] ...

Pub. L. No. 96-448, § 2, 96th Cong., 2d Sess., 94 Stat.

1896 (Oct. 14, 1980). Because we find that the ICC

properly exercised its authority, we affirm.

I. BACKGROUND

Public Service Company of Indiana (the Utility) op-

erates a bituminous coal-fired electric generating station

at Cayuga, Indiana. Virtually all of the coal used in the

plant is supplied by the Peabody Coal Company (Pea-

body) Universal Mine at Clinton, Indiana, which is 26.4

miles south of the Utility’s generating station. The coal,

about 2.5 million tons annually, is carried between the

mine and the generating plant by the Louisville & Nash-

ville Railroad (L&N),' using cars owned by the Utility.

1The L&N no longer has a separate corporate existence. It is

now part of the Seaboard System Railroad, Inc. (Seaboard). Sea-

board is an intervening party in this case.

The route lies entirely within the state of Indiana. The

Indiana Commission has initial jurisdiction under the

Staggers Act over such intrastate rates.”

A. The Indiana Commission Proceedings

Before this case was initiated the Indiana Commission

had, on September 12, 1980, upheld as reasonable the ex-

isting rate of $.69 per net ton for carriage of coal be-

tween the two points. By 1981, further increases raised

L&N’s rate to $.94/ton (Joint Appendix (JA) 140).*

On March 27, 1981, the Utility and Peabody challenged

the rate in an action before the Indiana Commission; a

year and a half later, the complainants prevailed.‘

At the hearing before the state commission, petitioners

offered evidence that the L&N’s variable cost of service in

carrying the coal was $.39.1/ton. The L&N countered,

claiming that its variable cost was $.46.6/ton. Calling

2 The Indiana Commission is a three-member body; each Com-

missioner is appointed by the Governor for a four-year term. Two

of the three must be lawyers, and no more than two can be members

of the same political party. Ind. Stat. Ann. § 8-1-1-2 (Burns 1973).

3 The actual rate structure is very complicated, because various

parts of the rate were subject to litigation in the Seventh Circuit,

and some increases were not being collected because of that litiga-

tion (JA 140). Some increases had been instituted and abandoned,

pending the outcome of litigation. The total rate, assuming the

L&N prevailed in the other litigation, would have been $1.03/ton.

The $.94/ton figure, however, is the actual rate in effect at the

time of this case, and constitutes the rate determined and author-

ized by the ICC in this case. The other litigation appears irrele-

vant to this case.

4 Complaint Against and Request for Reduction in the Intrastate

Freight Local Unit Train Tariff on Bituminous Coal, Carloads from

Clinton to Cayuga, Indiana, as Presently Set Forth in Louisville &

Nashville Railroad Company Freight Tariff L&N 4278 and Supple-

ments Thereto: Order Determining Threshold Jurisdiction Market

Dominance and Rate Reasonableness, Clause No. 36431 (Public

Service Commission of Indiana) (Sept. 17, 1982) (hereinafter

“Indiana Decision”) (JA 135).

the L&N’s figures inaccurate, the Indiana Commission

adopted the petitioners’ $.39.1 figure. Indiana Decision at

16 (JA 150). The Indiana Commission determined that

the full cost of service was $.55.8/ton, and that under

ICC standards the “fully allocated costs of the subject

movement are now 59 cents per net ton;” these costs, ac-

cording to the Indiana Commission, included a pre-tax

return on investment of 25.8%. Id. The Indiana Com-

mission then acknowledged that the L&N was a revenue

inadequate railroad, and that the L&N was thus entitled

to use differential pricing—i.e., to charge rates above

fully allocated costs to captive customers such as the

Utility and Peabody. In the pivotal aspect of its decision,

however, the Indiana Commission further held that the

L&N could adopt differential pricing only if its manage-

ment was “honest, efficient, and economical.”* Indiana

Decision at 19 (JA 153).

In support of the “inefficiency” contention, the Indiana

Commission placed substantial reliance upon L&N’s pric-

ing practices. The Commission also observed that the

L&N did not rely on sophisticated marketing tools in set-

ting its rates; that the profit margin of the L&N was

lower than that of the CSX Corporation (CSX),° its par-

ent corporation, and lower than that of the Southern

Railway System (Southern), a competitor; and that in-

efficient management could be a cause of those discrep-

ancies. Expert testimony also made several efficiency

comparisons with Southern, and stated that the L&N was

less efficient than Southern. The Indiana Commission

found that a prima facie case of inefficiency had been

established, and placed the burden of rebutting it upon

the L&N. Indiana Decision at 19 (JA 153). The L&N

5 See 49 U.S.C. § 10704(a) (2) (1982); see also id. § 10707a(e)

(2) (B) (Long-Cannon amendment).

6 The CSX Corporation is a holding company that also includes

two other Class I railroads, the old Chesapeake and Ohio (Chessie)

and Seaboard Railroad.

allegedly did not meet that burden: The Indiana Com-

mission held that because of “inferior profit margin”

(Ind. Comm. Order, {| 66) and inferior use of equip-

ment, the L&N was inefficient. The Commission also

found that the railroad merely guessed at the best rate

to charge on competitive traffic, and then tried to make

up the difference on captive traffic. 7d. at 24 (JA 158).

Because the L&N was thus “inefficient,” the Indiana

Commission held that the “just and reasonable rate”

would be $.55.8/ton—the fully allocated cost of service.

Id. The Indiana Commission, though, is forbidden by the

Staggers Act from setting rates below a certain point;

at the time of its decision it could not set a rate below

165% of variable cost. See 49 U.S.C. § 10709(d) (2)

(1982).7 Under that provision, which constitutes a juris-

749 U.S.C. § 10709 (d) (2) provides:

In making a determination under this section, the Commis-

sion shall find that the rail carrier establishing the challenged

rate does not have market dominance over the transportation

to which the rate applies if such rail carrier proves that the

rate charged results in a revenue-variable cost percentage for

such transportation that is less than—

(A) 160 percent during the period beginning on the

effective date of the Staggers Rail Act of 1980 and ending

September 30, 1981;

(B) 165 percent during the period beginning October 1,

1981, and ending September 30, 1982;

1982, and ending September 30, 1983;

(D) 175 percent or the cost recovery percentage, which-

ever is less, during the period beginning October 1, 1983,

and ending September 30, 1984; and

(E) the cost recovery percentage, during each 12-month

period beginning on or after October 1, 1984.

For purposes of subparagraphs (D) and (E) of this para-

graph, the cost recovery percentage shall in no event be less

than a revenue-variable cost percentage of 170 percent or more

dictional threshold, the minimum rate that could be set

was $.65/ton (i.e., 1.65 x $.89.1). So in its Order, the

Indiana Commission set the rate, based on their con-

struction of the facts and the law, at the lowest possible

rate of $.65/ton. Indiana Decision at 24-25 (JA 158-59).

B. The ICC Decision

The L&N promptly appealed the Indiana Decision to

the ICC, which has jurisdiction to review intrastate rates

under the Staggers Act. 49 U.S.C. § 11501(c); see gen-

erally Utah Power & Light v. ICC, No. 83-1276, slip op.

(D.C. Cir. Oct. 30, 1984). The ICC found that the In-

diana Commission had applied federal law incorrectly,

and vacated the $.65 rate. Petition of Louisville & Nash-

ville Railroad Co. for Review of a Decision of the Public

Service Commission of Indiana Pursuant to 49 U.S.C.

11501, No. 38946, slip op. (1.C.C. Nov. 22, 1982) (here-

inafter “ICC November Decision”) (JA 69). In its deci-

sion the ICC determined that the L&N’s existing $.94

rate was “appropriate,” and authorized the railroad to

continue that rate.

The Utility and Peabody promptly petitioned for re-

view in this court and the National Association of Regu-

latory Utility Commission (NARUC) intervened; that

proceeding is No. 82-2399. In addition, the Utility and

Peabody subsequently moved the ICC to reopen its deci-

sion, and the L&N moved for clarification. The ICC re-

opened its proceedings, and moved this court to stay our

consideration pending final administrative resolution of

the matter; petitioners responded that they did not op-

pose a limited stay. On March 28, 1983, this court issued

an order that, in effect, stayed our review and allowed

than a revenue-variable cost percentage of 180 percent. (em-

phasis added. )

It is worth noting that the Indiana PSC decided to set the rate

at the 165 percent threshold just two weeks before the threshold

was to be increased to 170 percent. Jd.

the ICC to conduct its reopened proceedings. Public

Service Co. of Indiana v. ICC, No. 82-2399 (D.C. Cir.

Mar. 28, 1983) (interim order). As a result, while

No. 82-2399 was pending before us, but before orai argu-

ment, the ICC issued a second opinion in this case. Peti-

tion of Louisville & Nashville Railroad Co. for Review of

a Decision of the Public Service Commission of Indiana

Pursuant to 49 U.S.C. 11501, No. 38946, slip op. (I.C.C.

June 17, 1983) (hereinafter “ICC June Decision’) (JA

6). The ICC acknowledged that its first opinion was un-

clear, and therefore it offered a fuller explanation of

its decision. Petitioners seek review of the second opin-

ion in No. 83-1691, now consolidated with No. 82-2399

for our review. In attacking the decision of the ICC, pe-

titioners defend the decision of the Indiana Commission

as consistent with all applicable federal standards, con-

tend that the ICC impermissibly substituted its judgment

for the factual findings of the state Commission, and

argue that the ICC unlawfully authorized the existing

LEN rate.

II. THE PROPRIETY OF ICC’s SECOND OPINION

We must address a threshold procedural issue before

turning to the merits of the case. Petitioners contend

that the second opinion issued by the Commission should

not be considereu in this case, but that our review must

be limited to the first opinion. We decline to so limit our

review in this case. As we have already indicated, the

ICC’s second opinion was issued in response to petition-

ers’ motion to reopen and to the L&N’s motion for clarifi-

cation. The second opinion reflects a change in Com-

mission membership and_participation—Commissioner

Simmons, who dissented from the first opinion, left the

Commission; Chairman Taylor, who did not take part in

the first opinion, dissented in the second opinion. More-

over, the second opinion, adopted by the Commission on a

3-1 vote, shows that the issues were reconsidered by the

full Commission.

Petitioners request that we ignore the Commission’s

second opinion is based on the theory that it is nothing

more than an impermissible “post hoc rationalization un-

supported in the original decision.” Petitioners’ Decem-

ber, 1983 Brief at 7. They claim reliance on two cases:

S.E.C. v. Chenery Corp., 318 U.S. 80 (1948), and Na-

tional Nutritional Foods Association v. Weinberger, 512

F.2d 688 (2d Cir. 1975), cert. denied, 423 U.S. 827

(1976). Neither case, however, stands for the proposition

that a reviewing court may not consider a clarifying

opinion, on the grounds that such an enlargement of judi-

cial perspective would allow the agency to evade its re-

sponsibility to accompany its exercise of discretion with

reasoned analysis. The Supreme Court’s analysis in

Chenery was founded on tie principle that when Congress

delegates to an administrative agency the discretion to

administer and interpret a statute in light of its ex-

pertise and the public interest, it is the agency that must

carry out that mandate. 317 U.S. at 92-95. Thus the

reviewing court may not step into the breach by adopt-

ing a position not offered by the agency itself acting in

its statutory capacity. Insofar as is here relevant,

Chenery holds only that an agency’s decision must reflect

the reasons for its action, and that subsequent ration-

alizations cannot be substituted on appeal for contem-

poraneous reasoned decisionmaking. /d.; see Burlington

Truck Lines, Inc. v. United States, 371 U.S. 156, 168-69

(1962) (courts may not accept appellate counsel’s ex

post facto arguments as a substitute for exercise of dis-

cretion by the agency itself). Similarly, National Nutri-

tional Foods requires that an agency “adequately .. .

explain its actions,” but specifically permits the court to

seek and to consider further explanation. 512 F.2d at

701.

The agency in this case offered further explanation

without judicial prompting. For that the ICC cannot be

faulted. In addition, it must be recognized that petition-

10a

ers specifically requested reopening of the ICC’s decision.

The ICC reopened, reconsidered, reviewed the record, and

issued a new opinion, authorized by a majority of the

acting Commissioners. Petitioners observe correctly that

if the lawyer’s brief for the ICC had simply announced

its clarifying analysis in the form of allegations or new

explanations, such would constitute pure post-hoc ration-

alization not entitled to any consideration by this court.

The clarifying opinion of the Commission, however, dif-

fers sharply from after-the-fact rationalizations made by

attorneys or by courts. Here, we are presented with the

authorized explanations considered, adopted, and issued

by a majority of the Commission panel, in the legitimate

exercise of its statutory responsibility and discretion.

Concerning the impact of the second decision on our

reviewing role, the procedure used by the ICC in this case

was implicitly approved by the Supreme Court in Ameri-

can Farm Lines v. Black Ball Freight Service, 397 U.S.

5382 (1970). There the Court held that the ICC had

power to reopen decisions and “add to the findings or

firm them as the Commission deems desirable, absent any

collision or interference” with the court. Jd. at 541 (em-

phasis added). Dual jurisdiction in this circumstance is

not irregular. A petition for judicial review does not

terminate the ICC’s authority over a matter, though any

subsequent administrative action must be consistent with

the court’s exercise of its jurisdiction. Jd. at 541-42. In

this case, as in American Farm Lines, there can be no

argument that the ICC’s second decision exceeded the au-

thority delegated to it by Congress or interfered with

this Court’s jurisdiction. It is significant that we took

cognizance of the ICC’s decision to reopen, and deferred

our review accordingly. Moreover, the Commission’s im-

proved decision undoubtedly facilitates this court’s review

by clarifying the issues involved. In terms of judicial

economy, it would be a waste of time to review only the

first opinion when the efforts of the parties and particu-

lla

larly the ICC have produced a better considered clarify-

ing decision. We hold that the second, more closely con-

sidered decision is the agency action that should be the

focus of our review.

Ill. STATUTORY BACKGROUND TO THE ICC DECISION

A. ICC Authority Over Decisions of State Commissions

The Staggers Act specifically reserved to the state

jurisdiction over intrastate rail rates, but with significant

specific limitations:

A State authority may only exercise jurisdiction

over intrastate transportation provided by a rail

carrier providing transportation subject to the juris-

diction of the Commission . . . if such State author-

ity exercises such jurisdiction exclusively in accord-

ance with the provisions of this subtitle.

49 U.S.C. § 11501(b) (1) (emphasis added). The ICC

must review the “standards and procedures” used by the

state commissions to ensure that they “are in accordance

with the standards and procedures applicable to regula-

tion of rail carriers by the [ICC].” Jd. § 11501(b) (3)

(A). State rail regulation thus must conform to the

Interstate Commerce Act, as amended by the Staggers

Act.

The ICC has a duty “to assure that intrastote regula-

tory jurisdiction is exercised in accordance with the [fed-

eral] standards.” Jd. §10101a(9) (emphasis added).

Accordingly, the ICC is required to review the standards

and procedures of each state commission in order to de-

termine whether they comply with federal law. Jd.

§ 11501(b) (2), (3). Those states which do not comply

will not receive ICC certification and may not regulate

intrastate traffic. Id. § 11501(b) (4) (A). In addition,

and more importantly for our purposes, even after the

states are certified, their regulatory decisions may still be

subjected to ICC review:

12a

Any rail carrier providing transportation subject to

the jurisdiction of the [ICC] ... may petition the

Commission to review the decision of any State au-

thority, in any administrative proceeding in which

the lawfulness of an intrastate rate, classification,

rule, or practice is determined, on the grounds that

the standards and procedures applied by the State

were not in accordance with the provisions of this

subtitle. The Commission shall take final action on

any such petition within 30 days after the date it is

received. If the Commission determines that the

standards and procedures were not in accordance

with the provisions of this subtitle, its order shall

determine and authorize the carrier to establish the

appropriate rate, classification, rule, or practice.

Id. § 11501(c) (emphasis added). This continuing ICC

supervision was necessary, in the eyes of Congress, given

the prior history of the inadequacy of intrastate rates as

set by state public service commissions, “to ensure that

the price and service flexibility goals of the [Staggers]

Act are not undermined by state regulation of rates,

practices, etc., which are not in accordance with these

[federal] goals.” H. Conf. Rep. No. 96-1430, 96th Cong.,

2d Sess. 106 (1980), reprinted in 1980 U.S. Code Cong.

& Ad. News 4110, 4118; see H.R. Rep. No. 96-1035, 96th

Cong., 2d Sess. 61 (1980) (estimating $400 million short-

fall in railroad revenues for 1977 alone, due to disparity

between interstate and intrastate rates). Congress in-

tended to stop the evil of interstate traffic rates being

forced to subsidize intrastate carriage. In this particular

case the ICC’s review revealed a situation which author-

ized it to set aside the order of a state commission since

“the standards and procedures applied by the State were

not in accordance with the provisions of [the Staggers

Act.]” 49 U.S.C. § 11501 (c).

We recently held in Utah Power & Light Co., supra,

at 27, after extensive analysis of the Staggers Act and

13a

its legislative history, and in particular the text and

background of section 11501(c), that the ICC has broad

authority to review state commission rate decisions. The

ICC’s section 11501(c) jurisdiction is not of a limited ap-

pellate nature, but in a proper case is plenary, and may

allow the ICC to delve into the factual record before the

state agency. Id.

B. The Staggers Act and its Balancing Approach in

Ratemaking

The Staggers Act specifically removes ICC and state

jurisdiction over railroad rates applicable to competitive

rail traffic. The ICC and the states, however, continue to

exert jurisdiction over rates where a railroad “has mar-

ket dominance over the transportation to which the rate

applies.” 49 U.S.C. § 10709(c). Under the Act, a rail

carrier does not have market dominance with respect to a

particular rate if the rate is less than 175% (165% at

the time this case arose) of the railroad’s variable cost.

Id. § 10709(d) (2). Yet Congress specifically provided

that a rail rate greater than 175% of variable costs does

“not establish a presumption” either that the railroad is

market dominant, or that the rate is unreasonable. Id.

§ 10709(d) (4) (emphasis added). Those issues must be

determined on a case-by-case basis.

In ratemaking as well as generally, the present statu-

tory system of national rail regulation is designed to ac-

complish a number of objectives:

In regulating the railroad industry, it is the policy

of the United States Government—

(3) to promote a safe and efficient rail transpor-

tation system by allowing rail carriers to earn ade-

quate revenues, as determined by the Interstate

Commerce Commission; ®

8 The problem addressed by Congress is currently reflected by

the fact that the ICC determined that the composite railroad cost

l4a

(4) to ensure the development and continuation

of a sound rail transportation system with effective

competition among rail carriers and with other

modes... ;

(6) to maintain reasonable rates where there is

an absence of effective competition and where rail

rates provide revenues which exceed the amount nec-

essary to maintain the rail system and to attract

capital ;

(9) to cooperate with the States on transportation

matters to assure that intrastate regulatory juris-

diction is exercised in accordance with the standards

established in this subtitle; [and]

(10) to encourage honest and efficient manage-

ment of railroads and, in particular, the elimination

of noncompensatory rates for rail transporta-

49 U.S.C. § 10101la (emphasis added). These policy pro-

nouncements serve as an apt introduction to an act that

requires the ICC to balance various factors in determin-

ing rail rates; they are just as applicable to interstate

rates as they are when the ICC is required to review

intrastate rates.

Among the primary concerns of the Congress that en-

acted the Staggers Act—and concerns recurrently ad-

dressed by the Act—was to ensure that railroads receive

revenues adequate “to cover total operating expenses...

for a sound transportation system...” (emphasis added)

and to provide a reasonable return on their enormous

of capital—1982 was 17.7 percent (ICC-Ex Parte No. 436, July 22,

1983) and that every Class I Railroad in America was revenue

inadequate (ICC-Ex Parte No. 450, August 17, 1983). The Norfolk

& Western had the highest return on investment—8.03 percent. Jd.

AS Or ak ovate

15a

capital investments. 49 U.S.C. § 10704. Given such focus,

it is not surprising to find Congress explicitly providing

that the importance of revenue adequacy must be stressed

in ratemaking under the Act. In one important provi-

sion, Congress required:

In determining whether a rate established by a rail

carrier is reasonable . . . the commission shall rec-

ognize the policy of this [sub]title that rail carriers

shall earn adequate revenues, as established by the

Commission... .

Id. § 10701a(b) (3) (emphasis added). The Commission’s

responsibility to “allow rail carriers to earn adequate rev-

enues,” id. § 10101a(3), is elsewhere reinforced:

The Commission shall maintain and revise as nec-

essary standards and procedures for establishing

revenue levels for rail carriers providing transpor-

tation subject to its jurisdiction under that subchap-

ter that are adequate, under honest, economical, and

efficient management, to cover total operating ex-

penses, including depreciation and obsolescence, plus

a reasonable and economic profit or return (or both)

on capital employed in the business. The Commis-

sion shall make an adequate and continuing effort to

assist those carriers in attaining revenue levels pre-

sen hed under this paragraph.

Id. § 10704(a) (2) (emphasis added) ; see also H.R. Rep.

No. 96-1035, 96th Cong., 2d Sess. 54 (1980) (expressing

a “clear directive to ensure financially sound railroads’’).

Revenue adequacy is not, of course, the only considera-

tion in Staggers Act ratemaking. Indeed, concern that

some captive shippers would be forced to shoulder an un-

fair burden in the provision of revenues to the railroads

prompted Congress to include other efficiency related

factors for mandatory consideration. For example, the

Staggers Act provides:

16a

(B) In determining whether to investigate or not

to investigate any proposed rate increase . . . the

Commission shall set forth its reasons therefor, giv-

ing due consideration to the following factors:

(i) the amount of traffic which is transported

at revenues which do not contribute to going

concern value and efforts made to minimize such

traffic;

(ii) the amount of traffic which contributes

only marginally to fixed costs and the extent to

which, if any, rates on such traffic can be

changed to maximize the revenues from such

traffic; and

(iii) the impact of the proposed rate or rate

increase on the attainment of the national en-

ergy goals and the rail transportation policy

under section 10101la of this title, taking into

account the railroads’ role as a primary source

of energy transportation and the need for a

sound rail transportation system in accordance

with the revenue adequacy goals of section

10704 of this title.

the Commission shall consider, among other factors,

evidence of the following: :

(i) the amount of traffic which is transported

at revenues which do not contribute to going

concern value and efforts made to minimize such

traffic;

(ii) the amount of traffic which contributes

only marginally to fixed costs and the extent to

which, if any, rates on such traffic can be

changed to maximize the revenues from such

traffic; and

(iii) the carrier’s mix of rail traffic to deter-

mine whether one commodity is paying an un-

17a

reasonable share of the carrier’s overall reve-

nues.

49 U.S.C. § 10707a(e) (2) (B), (C) (Long-Cannon amend-

ment); see also id. § 10704(a)(2) “honest, economical,

and efficient management”). Even in including these so-

called “Long-Cannon factors,” however, Congress care-

fully avoided attaching any particular weights to the

various concerns that must be taken into account. Nor

did Congress attempt to prescribe the relative weights

that state commissions should assign to these various fac-

tors in determining reasonableness: the overall scheme

calls for a flexible, non-mechanical approach to ratemak-

ing. Each factor must be given genuine consideration

and some weight in setting both interstate and intrastate

rates. By the same token, neither the ICC nor the state

agencies can select any one factor as controlling.

The ICC has not issued, through any rulemaking pro-

ceeding, further specific guidelines as to rate reasonable-

ness, although it has annually determined the revenue

adequacy (or inadequacy) of the operating railroads.®

The absence of any standard-setting by administrative

rulemaking, however, does not leave a complete void. The

Staggers Act itself sets certain standards that must be

followed by the ICC and state commissions alike. See

Wheeling-Pittsburgh Steel Corp. v. ICC, 723 F.2d 354-

55 (3d Cir. 1983). Here, the ICC determined that the

decision of the Indiana Commission did not comport with

® The ICC’s on-going proceeding, Ex Parte No. 347, Coal Rate

Guidelines—Nationwide, has resulted in no uniform standard of

reasonableness or across-the-board formula. Instead, the ICC in

that proceeding has stated little more than that differential pricing

is “an important tool in assisting the railroads toward revenue

adequacy,” and that “strict cost approach” is not a proper solu-

tion. Ex Parte No. 347, Coal Rate Guidelines—Nationwide (Sub.

No. 1) 3, 8 (1.C.C. Dec. 21, 1981); see also Ex Parte No. 347, Coal

Rate Guidelines—Nationwide (Sub. No. 1) (I.C.C. Feb. 24, 1983)

(proposed guidelines) .

18a

certain standards directly established by the Staggers

Act. It is that determination that we must review.

IV. THEICC’s REVIEW OF THE INDIANA DECISION

In Utah Power & Light Co., supra, at 27, we held

that while our review of the ICC’s section 11501(c) de

cisions is necessarily deferential, the Commission’s au-

thority under that provision to review state commission

decisions is plenary. Under the Staggers Act, the ICC,

when reviewing rate determinations made by state au-

thorities, is authorized and indeed obligated to penetrate

below the surface of the state opinion to the substance.

A state commission should not be allowed to effectively

shield its decision from review by merely articulating

the proper federal standards, while improperly finding

the facts, misapplying law to facts, or giving inordinate

weight to isolated concerns. Lip-service is not enough. The

applicable federal standards must be faithfully applied.

In our view, the approach of the Indiana Commission

to this case falls well short of evenhanded, correct and

faithful application of federal standards. The state’s

handling of the case is so one-sided as to appear to have

been purely result-oriented—the desired result being the

lowest possible rate. The state commission apparently de-

cided to believe all of the shippers’ cost evidence, and to

disbelieve all of the railroad’s cost evidence, and to end

up arriving at the lowest possible cost figure. Next, the

Indiana Commission acknowledged, as it was bound to

do, that the ICC had determined the L&N to be revenue

inadequate. The state went on, though, to hold that the

authority of the L&N to utilize differential pricing was

further contingent on its demonstrating its efficiency.

Having diverted the case onto the solitary “efficiency

track,” the Indiana Commission then compared the L&N

to the Southern which has a reputation as one of the na-

tion’s most efficient railroads, disbelieved all of the L&N’s

evidence, and ultimately found it to be “inefficient.”

i tm

1 cae As Nd

19a

Finally, on that basis, the state commission reduced the

existing rate to the jurisdictional threshold—the lowest

level permitted by law.

In defense of the state commission’s approach, peti-

tioners argue that because the Indiana Commission an-

nounced that it was applying proper standards, and made

detailed findings of fact, the ICC has no authority to set

aside the Indiana rates. We reject this restricted view

of the Commission’s authority. Adoption of such prin-

ciples would shield from review many, if not most, state

rate decisions. As in this case, a state agency could ac-

cept all of the shippers’ evidence and reject all of the

railroad’s evidence and then intrastate shippers could

argue that determinations of the “finder of fact” cannot

be reviewed. Or, as in this case, the state could compare

any railroad to a “more efficient” competitor—only one

railroad, after all, could ever be the most efficient—find

the subject railroad to be inefficient, and set its rate at

the jurisdictional threshold. We do not interpret the

Staggers Act as allowing such shields to prevail. They

are nothing more than transparent devices to evade the

federal standards and procedures that Congress enacted

in the Staggers Act to ensure that intrastate traffic

would contribute a fairer share, in comparison with in-

terstate and competitive traffic, of the revenue necessary

to sustain a “sound” rail transportation system. Given

the demonstrated historical propensity of state public

service commissions to set intrastate rates at unreason-

ably low levels (Congress estimated a $400 million reve-

nue shortfall in 1977 due to the gap between interstate

and intrastate rates’), petitioner’s construct would ef-

10 H.R. Rep. No. 96-1035; 96th Cong., 2d Sess. (May 16, 1980):

This disparate treatment of intrastate and interstate traffic is

reflected in the difference between the average revenue to var-

iable cost ratios for each type of traffic: 1.20 for intrastate

traffic and 1.36 for interstate traffic in 1977. If the intrastate

ratio had been equal to the interstate ratio that year, the

20a

fectively foil much of the congressional intent behind the

Staggers Act. Accordingly, the ICC—like a court acting

in a reviewing capacity—must have ample authority to

carefully scrutinize the record to determine that the state

agency has properly applied the law.

Serutinizing the record in this case, the ICC found

several basic flaws in the approach taken by the Indiana

Commission: the state commission (1) held that the rail-

road was entitled to use differential pricing and to re-

ceive assistance in attaining revenue adequacy only if it

was not “inefficient;” (2) transferred the burden of dem-

onstrating efficiency to the railroad; (3) apparently used

a mechanical test to hold that an inefficient railroad’s

rates should be set approximately at the jurisdictional

threshold; (4) failed rationally to relate the rate reduc-

tion to the finding of inefficiency; and (5) relied on evi-

dence insufficient as a matter of law to prove “ineffi-

ciency.” We find that each of the ICC’s reasons for re-

versing the Indiana Commission is entirely sound. The

ICC and the federal courts must be allowed to protect

against this kind of narrow, parochial protectionism, vio-

lative of both the letter and spirit of the Staggers Act.

We consider in turn each violation of the federal statute.

A. Conditioning Differential Pricing on Efficiency

In its central error of law, the Indiana Commission

held that the L&N was entitled to use differential pricing

to attain revenue adequacy only if its management was

demonstrably efficient:

54. Under Staggers the L&N is entitled to assist-

ance in attaining revenue adequacy only ‘under hon-

est, economical and efficient management’.

Indiana Decision at 19 (JA 153). The ICC ruled that

this was a fundamental misconstruction of the statute.

railroads would have earned $400 million in additional reve-

nues.

Id. at 61.

2la

We agree. To be sure, the Staggers Act requires that

railroad rates should be “adequate, under honest, eco-

nomical, and efficient management, to cover total operat-

ing expenses, . . . including a reasonable and economic

profit or return (or both) on capital employed in the

business.” 49 U.S.C. § 10704(a) (2). This is far from

saying, however, that the right to use differential pric-

ing and the goal of revenue adequacy are entirely con-

tingent upon demonstrating “efficiency” to a state agen-

cy’s satisfaction. One statutory factor cannot be isolated

out of context, or blindly exalted at the expense of oth-

ers that are at least co-equal in importance.

In contrast with the restricted view of the Indiana

Commission, the ICC held that “carrier ‘efficiency’ [is] a

factor that must be considered in determining the rea-

sonableness of a challenged rate.” ICC June Decision at

7 (JA 12). The Commission pointed to the Long-Cannon

amendment to the Staggers Act, 49 U.S.C. § 10707a(e)

(2) (C), supra, which helps to explain how efficiency evi-

dence is to be used. Under that section the ICC must

consider: (1) the amount of traffic that does not pay its

way; (2) the attempts made to minimize such traffic; (3)

the amount of low-profit traffic; and (4) the attempts

made to increase profits on such traffic. The ICC then

indicated the role that efficiency must play:

The statute does not specify how these efficiency

factors should be considered. It certainly does not

mandate that a general showing of “inefficiency”

bars any further rate increases or requires reduction

of all existing rates to the jurisdictional threshold.

Rather, by emphasizing the revenue adequacy policy,

and making the efficiency factors “considerations”

without specifying how they should affect the rate

reasonableness issue, the statute leaves no doubt that

the two considerations must be balanced together.

ICC June Decision at 7-8 (JA 12-13) (emphasis added).

This ICC interpretation of the Staggers Act, a recent en-

22a

actment, is entitled to substantial deference. Under Su-

preme Court precedent, it is well-established that a court

should defer to “the interpretation given [a] statute by

the officers or agency charged with its administration

... [p]articularly . . . when the administrative practice

at stake “involves contemporaneous construction of a

statute by the men charged with a responsibility with

setting its machinery in motion, of making the parts

work efficiently and smoothly while they are yet untried

and new.”’” Udall v. Tallman, 380 U.S. 1, 16 (1965)

(quoting Power Reactor Development Co. v. Interna-

tional Union of Electrical, Radio & Machine Workers,

367 U.S. 396, 408 (1961); quoting in turn Norwegian

Nitrogen Products Co. v. United States, 288 U.S. 294,

315 (1933)) (emphasis added); see Quern v. Mandley,

436 U.S. 725, 744, n.5 (1978); Faweus Machine Co. v.

United States, 282 U.S. 375, 378 (1931) (citing cases) ;

cf. Martin v. Hunter’s Lessee, 14 U.S. (1 Wheat.) 304,

351-52 (1816) (approving legislative act as contempo-

raneous exposition of the Constitution, long continued).

In addition, as discussed supra, section III (B) of this

opinion, the ICC’s view that the Staggers Act requires a

balance of factors in ratemaking is fully consistent with

both the statutory language and legislative history. We

adopt that interpretation. The whole thrust of ratemak-

ing under the Act is balancing. By failing to balance

efficiency against revenue adequacy—thereby, in effect,

entirely eliminating consideration of the proper contribu-

tion to the attainment of revenue adequacy because of

alleged inefficiency—the Indiana Commission misinter-

preted the Staggers Act. That legal error pervades its

entire opinion and alone justifies setting aside the rate

determination of the Indiana Commission.

B. The Burden of Proof

The Indiana Commission next took the following step:

55. Although the burden of proving the assailed

rate is unreasonable is upon [the Utility], once it

23a

has come forward with evidence showing that the

management of L&N is not “honest, economical and

efficient” the burden of rebutting such allegation in

order to demonstrate entitlement to differential pric-

ing above the Staggers mandate of 165% shifts to

the LEN.

Indiana Decision at 19 (JA 153) (emphasis added). The

Indiana Commission thereby basically held that if a

shipper who is challenging a rate presents allegations

that the state agency considers to be a prima facie case

of inefficiency—i.e., that the railroad is less efficient than

one other railroad—the burden switches to the railroad

“to demonstrate entitlement to differential pricing” above

the Staggers Act jurisdictional threshold. Jd.

The Indiana Commission offers no authority for this

shifting of the burden of proof. Ordinarily, the shipper

challenging a rate determination by the ICC based on

market dominance has “the burden of proving that such

rate is not reasonable .. .” The shipper here, not the

railroad, must prove that the rate is wnreasonable. 49

U.S.C. § 10701a(b) (2). There was no reason to deviate

from or to ignore that rule, which constitutes a federal

standard. While the Indiana Commission correctly quoted

the Staggers Act standards, its conclusion that the bur-

den of proof shifted to the LEN to prove the factors upon

which the reasonableness of the rate rested renders its

conclusion seriously defective. The state commission con-

cluded: “the L&N has not presented convincing evidence

that its management is efficient and economical.” Indiana

Decision at 23 (JA 157). This is completely backwards,

and constitutes error justifying the invalidation of the

rate determination. While the burden of proceeding

might shift on a complete showing, the burden of proof

under the statute is upon the party challenging the rate.

49 U.S.C. § 10701 (b) (2) (A).

24a

C. The “Mechanical Test” of Setting the Rate at the

Lowest Level

The Indiana Commission also held that if a railroad is

found to be inefficient, the carrier is not “entitle{d] to

differential pricing above the Staggers mandate of

165%.” Indiana Decision at 19 (JA 153). The ICC

quite reasonably interprets this decision by the state

commission as holding that the Staggers Act 165% juris-

dictional threshold is presumptively the proper rate un-

less a railroad is found to be “efficient.” Such construc-

tion by the Indiana Commission is erroneous. The Stag-

gers Act clearly states to the contrary, that a rate at or

above the jurisdiction threshold “does not establish a

presumption that . . . the proposed rate exceeds or does

not exceed a reasonable maximum.” 49 U.S.C. § 10709

(d) (4) (emphasis added). This statutory provision ex-

plicitly rejects the drawing of any inference that the

165% rate was presumptively the maximum valid rate,

or that rates over 165% have to be specially justified.

In holding that, because the rate exceeded 165%, the

L&N was required to prove its “efficiency,” the Indiana

Commission misinterpreted the Act. This “mechanical

test,” as the ICC characterizes it, is contrary to the rate

flexibility required by Staggers.

D. Absence of Rational Basis.

The ICC points out that the approach of the Indiana

Commission apparently was to rule that a railroad it

found to be “inefficient’”’ could not set any rate above the

jurisdictional threshold. As the ICC notes, this construc-

tion is entirely arbitrary, and could well result in reduc-

ing a fair rate to a point far out of proportion to the

alleged wrong. If, for example, the L&N loses $10 mil-

lion a year through inefficiencies, it is contrary to the

purposes of the Staggers Act, and to common sense, to

force its rate down to a level where its income is reduced

by $20 million. No national congressional purpose could

25a

be served by cutting the revenues of an already revenue-

inadequate railroad by an amount unrelated to the extent

of the alleged inefficiency. In this case, the Indiana Com-

mission never determined the amount of money that al-

leged inefficiencies cost the L&N; no evidence of dollar

amounts appears to have been produced. It was, there-

fore, impossible for the ICC to tell, even if the state’s

theory was correct, whether the state’s rate slashing was

too much or too little. Such a crude approach falls well

short of the reasoned decision making, in a balanced man-

ner, required by the Staggers Act. The balancing aspect

of the statute requires some attempt to tailor the remedy,

rate reduction, to the goal, improving efficiency.1! No

such attempt was made here.

E. Insufficiency of Evidence

Finally, the ICC held that even if the Indiana Commis-

sion correctly construed the law, the evidence was insuffi-

cient to support a finding of “inefficiency.” The evidence

relied on by the Indiana Commission was as follows:

1. One witness, Professor Lerner, testified that

L&N’s profit margin of 6% was less than that

of its parent company, CSX, which was 10%. He

concluded that “the management of L&N is not

as efficient as the management in other parts of

the CSX.” He stated, however, that “other rea-

sons for differences in profit margin, for example

differences in operating characteristics, might be

responsible [for the discrepancy, but] . . . he had

not attempted to determine reasons for such di-

ferences.” Indiana Decision at 19-20 (JA 153-

54).

11][t is obvious that the Indiana Commission’s approach could

result in even less efficiency, since frequently an influx of additional

cash may be necessary to pay for system improvements. Drying up

revenues may not result in efficiency; it may only result in less

efficiency, and eventually in bankruptcies.

26a

2. Another witness compared the L&N to the South-

ern Railway, and found that the Southern was

more efficient in “freight car, locomotive, labor,

and track utilization.” Indiana Decision at 19

(JA 153).

3. Testimony of L&@N management indicating that

the railroad L&N bases its pricing decisions on

the expertise of its management, and does not

rely on sophisticated marketing tools such as de-

mand elasticity studies. Indiana Decision at 21,

24 (JA 155, 158). (Emphasis added.)

The Indiana Commission then, because the L&N relied

solely on the expertise of its pricing officials, rejected its

evidence of efficiency, and summarily dismissed L&N’s

efforts to improve efficiency as “commendable but. . . of

limited scope.” Indiana Decision at 22 (JA 156). The

shippers’ evidence in this case had some slight probative

value on the issue of fact regarding efficiency. Petitioners

contend, however, that the ICC was bound to leave un-

disturbed the fact-finding determinations of the Indiana

Commission. As this court held in Yellow Taxi Co. of

Minneapolis v. N.L.R.B., 721 F.2d 366, 382-84 & n.37, 39

(D.C. Cir. 1983), however, even federal agencies are not

free to manipulate their findings of facts as a means of

avoiding judicial review of their ultimate conclusions. In

addition, the rate-determination responsibility vested in

the ICC by section 11501(c) of the Act, supra, and the

legislative history of that section, make it clear that the

ICC, in order to carry out Congress’ scheme, has ample

authority to examine facts to the degree necessary to as-

sure that the state is treating interstate rail carriers

fairly.

In this case, the Indiana Commission’s factual handling

of the efficiency question suggests manipulation. In par-

ticular, for instance, the state commission focused on a

comparison of the L&N to the Southern Railway, which

has a general reputation of being one of the nation’s most

27a

efficient and profitable railroads. See Petitioner’s Brief

at 28-29 (defending the comparison of the L&N to the

Southern). If the Indiana Commission wants to inquire

into efficiency, which it is certainly entitled to do, then it

must do so on a more even-handed basis, in a manner

that involves comparisons with a representative sampling

of carriers during a relevant period of time (carriers

having similar operating characteristics and profit poten-

tial) and that takes account of factors beyond the control

of the railroad but potentially pertinent to its relative

efficiency (e.g., differences in grades, operating character-

istics, competition and other relevant factors). This the

state commission did not do.

The Indiana Commission based its conclusion that the

L&N was “inefficient” largely on a comparison of its

profits with those of CSX, its parent, and with those of

the Southern Railway based on financial operating data

for one year, 1980. The comparison to the remaining sub-

sidiaries of CSX can be ignored because the complainants’

evidence did not probe any operating differences that

might justify differences in profit margins. But see dis-

cussion below. Differences in operating characteristics,

which were not considered, could well cause a difference

in profits.

This left the finding by the Indiana Commission of

“inefficiency” resting principally upon the comparison of

L&N’s operating performance to that of its closest com-

petitor, the Southern Railway System. The comparative

data in this respect indicated that for the year 1980 the

L&N had a return on investment of 5.5 percent and the

Southern had a return on investment of 7.8 percent. 365

I.C.C. 285-88. Here again complainants made an inade-

quate attempt to support their contention by failing to

determine whether the different results could be attrib-

uted to differences in operating characteristics or other

justifiable factors. It is absurd to determine the “effi-

ciency” of a railroad by comparing it to another railroad

28a

without considering the differences, if any, between the

two railroads’ operating characteristics. And it is even

more absurd to base such determination on a single year’s

operation. Railroad profits from year to year are highly

volatile. They depend substantially upon the area the

railroads serve, their operating conditions from year to

year, financial conditions, their financial structure, the

effect of the weather on crops, on operating conditions,

the cost of fuel, the state of the local and national econ-

omy, the cost of disasters, and many other factors.

To illustrate the fatal defect of attempting to compare

the rate of return of L&N to that of the Southern on the

basis of the single year 1980, one need go no further

than the financial data for the next two years. In 1981

the L&N increased its return to 7.04 percent while that

of the Southern dropped slightly to 7.71 percent—a com-

mendable showing by the L&N. 47 Fed. Reg. 52237-

52238. But more importantly in 1982 the L&N bettered

the Southern by earning 4.87 percent while the South-

ern’s earnings fell to 4.36 percent. (ICC-Ex Parte No.

450 August 17, 1983). The Indiana Commission’s highly

selective comparison is self-evidently flawed.

The Indiana Commission’s comparison of the L&N’s

5.5 (6%) percent profit to the one year 10 percent profit

of its parent CSX, however, is even more inapt. The

CSX is not a railroad. It is a holding company—the

parent of the Seaboard which absorbed the L&N by

merger on December 29, 1982. Seaboard Brief at v. The

Rule 8(c) certificate filed in this case by the Seaboard

for itself and the L&N, both subsidiaries of CSX, indi-

cates that the CSX is involved through subsidiary corpo-

rations in many other businesses other than railroads, in-

cluding hotels and mineral and resources exploration and

development. The listed affiliates of the L&N, through

the parent CSX holding company, totalled 142 separate

companies, Seaboard Brief at i-vi, and during this pro-

ceeding CSX acquired an additional 42 subsidiary com-

29a

panies. Jd. at v-vi. So it was clearly erroneous for the

Indiana Commission to rule that the L&N was “ineffi-

cient” because its holding company parent had a profit

of 10 percent in 1980 and the L&N had a profit of 5.5

percent. The two companies are not comparable.

But let us pursue the Indiana Commission’s theory

further. The Rule 8(c) certificate, supra, indicates that

CSX is the holding company for four Class I railroads as

subsidiaries. Let us compare the profits for the last three

years of these four railroads in the CSX portfolio.

ICC—Return on Investment

L&N C&O (Chessie) Seaboard B&O”

1980 18 5.5% 6.8% 7.0% 3.8%

1981 14 7.04 5.38 2.10 2.37

1982 1* 4.87 5.33 1.38 0.35

Average 5.80% 5.86 % 3.49 % 2.17%

This data shows the complete folly of resting a finding

of “inefficiency” on such irrelevant evidence as the 10 per-

cent return that CSX earned from its entire operation as

a holding company. If we make a relevant comparison—

to other Class I Railroads—we find the L&N’s average

return on investment for the past three years exceeds

that of two of CSX’s Class I Railroad subsidiaries and is

within 6/100ths (.06%) percent of the C&O, the best

performing Class I Railroad in the CSX portfolio. In

fact, of the 42 Class I railroads included in the 1982 ICC

Revenue Adequacy Report, the most recent, the L&N

ranked a very creditable 9th.

12 The Baltimore & Ohio Railroad is also affiliated with the CSX

Corporation. See Seaboard Brief, Rule 8(c) Certificate at i, ii.

13 365 I.C.C. 288.

14 47 Fed. Reg. 52238.

15 [CC-Ex Parte No. 450, August 17, 1983.

80a

Based on 1980 data a railroad was found to be revenue

adequate under the standards of the Staggers Act if it

had a return on investment of 12.1 percent cr higher.

365 I.C.C. 286. For 1981 the Railroad Cost of Capital

had risen to 16.5 percent. 47 Fed. Reg. 52236. In 1982

it was 17.7 percent. ICC-Ex Parte No. 436, July 22,

1983.

Recognizing all of the foregoing, it is obvious that sub-

stantial evidence does not support the ruling of the In-

diana Commission that the L&N was “inefficient,” or sup-

port the Commission’s basic ruling that the burden of

proceeding had shifted to the LEN to prove its efficiency.

We agree with the ICC that complainants never satisfied

the evidentiary requirements that would call for shifting

the burden of proceeding to the L&N, much less placing

upon the L&N the burden of proving that it was “effi-

cient.” Thus, on this record there was insufficient cred-

ible evidence for the agency to reasonably find the L&N

to be “inefficient.”

VI. THE FEDERAL STANDARDS ESTABLISHED IN THE

STAGGERS ACT

Beyond their defense of the Indiana decision, petition-

ers’ chief argument is that the Indiana Commission could

not have violated a federal standard or procedure, within

the meaning of section 11501(c), because the ICC has

not adopted any national standard of revenue adequacy.

This contention has a certain disingenuous appeal, but

ultimately fails. It is true that the ICC has not promul-

gated, through any generic rulemaking, any national

standard for maximum rail rates or overall revenue ade-

quacy. The problem with the petitioners’ argument,

though, is that the ICC found that the approach of the

Indiana Commission violated the provisions of the Stag-

gers Act, not ICC revenue adequacy standards. The Act

itself establishes federal standards that must be observed.

See Utah Power & Light Co., supra, at 33; Wheeling-

Se ee ee

3la

Pittsburgh Steel Corp. v. ICC, 723 F.2d 346, 354-55 (3d

Cir. 1983). This the complainants did not do.

Petitioners rely heavily on Kentucky Utilities Co. v.

I.C.C., 721 F.2d 537 (6th Cir. 1983), in which the ICC

reversed the Kentucky Utilities Commission for using a

rate method which, though consistent with the Staggers

Act, differed from the formula subsequently approved by

the ICC. The Sixth Circuit struck down the ICC’s action:

the ICC could not, according to the court, reverse a state

commission for violating an ICC promulgated standard

when it had not adopted any general standard. 7/d. at

544-45. There is a clear distinction, however, between

Kentucky Utilities and this case. Here, the ICC has found

the state decision to be in direct violation of the Staggers

Act and the balancing approach that it entails. The ICC

is challenging not the use or misuse of a particular rate

formula, but rather the misinterpretation of the statute,

the failure to balance faithfully and fairly the statutory

factors. Thus, Kentucky Utilities simply has no applica-

tion to this case. The rule sought to be applied by the

petitioners would mean that the ICC would be entirely

impotent to effectuate Congress’ intent unless and until

final revenue adequacy guidelines are adopted. Such a

holding would immediately gut much of the Staggers Act.

While modern regulatory practice has increasingly focused

on the promulgation and enforcement of standards through

rulemaking, it is well to remember that Congress itself

can—and often does—establish federal standards. In the

immediate context, the Staggers Act required the weigh-

ing of a number of statutory factors, and that some con-

siderable weight be accorded to revenue adequacy. State

proceedings that fail to heed these congressional pro-

nouncements must be reversed by the ICC in the exercise

of its section 11501(c) jurisdiction.

VII. REINSTATEMENT OF THE L&N RATE

Having determined that the Indiana Commission’s de-

cision was inconsistent with federal standards, the ICC

32a

was further obligated by the statute to “determine and

authorize the carrier to establish the appropriate rate

..”’ 49 U.S.C. 11501(¢c). The Commission’s rate-

determination responsibility is distinct from its review

of state proceedings, but both responsibilities must be

discharged within the statutory thirty-day period for

final action. As the Commission itself has recognized in

this very proceeding, it “cannot remand the case to the

state authority, but must establish an appropriate rate

in the same decision... .”” ICC June Decision at 20. In

Utah Power & Light Co., supra, at 36, we accepted that

interpretation of the Commission’s authority.

In this case, the ICC determined that the “appropriate

rate” was the existing rate of $.94/ton that had been set

by L&N. In arriving at that determination, the Commis-

sion calculated a revised figure for variable costs, found

the resulting ratio of revenue to variable costs to lie

within the “reasonable” range established hy applicable

ICC precedents, and noted its concern for the railroad’s

revenue inadequacy. ICC November Decision at 6 (ac-

companied bv appendix on costs) (JA 74, 77-79); ICC

June Decision at 20-21 (JA 25-26). In its second opin-

ion, the ICC added that the ex‘sting rate was “well below

that of other intrastate en. interstate unit-train coal

rates in the area,” the latter comparison being relevant

due to the statutory policy of closing the gap between

intrastate and interstate rates. ICC June Decision at 20

(JA 25). Finally, the ICC held that in the absence of a

showing by complainants of unreasonableness, the car-

rier’s rate would be allowed to stand; this was not a

maximum reasonable rate, said the Commission, but only

a reasonable rate that should not be lowered on the rec-

ord in these proceedings. Jd. at 21 (JA 26).

Petitioners challenge the ICC’s rate determination, com-

plaining that the Commission did not explain its decision

to authorize the existing rate, and indeed allegedly ig-

nored various statutory concerns in so doing. This argu-

33a

ment appears to be a variant of petitioners’ complaint,

discussed supra, that the Commission has established no

general standard of rate reasonableness. In addition, it

should be emphasized that petitioners have launched a

sweeping attack on the ICC’s exercise of its authority,

rather than pointing to any specific deficiencies in the

cost findings or analysis of revenue-to-cost ratios. Before

this court, petitioners have merely defended the finality

of the Indiana Commission’s fact finding concerning costs,

without regard to the substance.

We must decide whether the Commission has ade-

quately supported and justified its “appropriate rate”

determination. In so doing, we are mindful that the ICC

has been setting railroad rates for close to a century now,

and that its accumulated expertise in such matters far

exceeds that of any court. Our review in ratemaking

cases is deferential. See supra. We are also aware that

the Commission is presently working under a fairly

fresh, and substantially reformed congressional mandate,

in the form of the Staggers Act. [Congress did not de

fine what it meant by the term “appropriate” as em-

ployed in section 11501(c). Moreover, the Commission

has not yet interpreted the relationship of section 11501

nations elsewhere required by the Staggers Act.] See

Utah Power & Light Co. v. ICC, supra, at 29. Nor need

we do so in order to decide this case. We note only that

the section 11501(c) mandate to “determine and author-

ize... the appropriate rate” does not call for the Com-

mission to “prescribe” a rate within the meaning of

Arizona Grocery Co. v. Atchison, Topeka & Santa Fe

Railway, 284 U.S. 370 (1932).

In the absence of any specific criticisms by petitioners

of the ICC’s cost findings, we cannot find inadequate the

cost evidence supporting the Commission’s rate determi-

nation. Nor were the figures and use of precedents for

revenue to variable cost ratios inadequately reasoned or

34a

presented. From its opinion and cost appendix, it appears

that the Commission articulated and took into considera-

tion relevant statutory factors. In the absence of any

specific statutory guidance as to how an “appropriate

rate’ must be derived, we cannot require more from the

Commission than the provision of substantial evidence,

consistency with the statute, and reasoned decision-

making. We are thus constrained to find that from its

decision and opinions, the ICC’s “path may reasonably be

discerned.” Bowman Transportation, Inc. v. Arkansas-

Best Freight System, Inc., 419 U.S. 281, 286 (1974).

VIII. CONCLUSION

For the reasons herein before stated, we affirm the de-

cisions of the ICC in 83-2399 and 83-1691 in their en-

tirety.

Judgment accordingly.

35a

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

SEPTEMBER TERM, 1984

No. 82-2399

PUBLIC SERVICE COMPANY OF INDIANA, INC.,

PEABODY COAL COMPANY,

- Petitioners

INTERSTATE COMMERCE COMMISSION and

UNITED STATES OF AMERICA,

Respondents

LOUISVILLE & NASHVILLE RAILROAD COMPANY,

ASSOCIATION OF AMERICAN RAILROADS,

NATIONAL ASSOCIATION OF

REGULATORY UTILITY COMMISSIONERS,

Intervenors

No. 83-1691

PUBLIC SERVICE COMPANY OF INDIANA, INC.,

PEABODY COAL COMPANY,

. Petitioners

INTERSTATE COMMERCE COMMISSION and

UNITED STATES OF AMERICA,

Respondents

NATIONAL ASSOCIATION OF

REGULATORY UTILITY COMMISSIONERS,

ASSOCIATION OF AMERICAN RAILROADS,

SEABOARD SYSTEM RAILROAD, INC.,

Intervenors

36a

Petitions for Review of an Order of the

Interstate Commerce Commission.

[Filed Nov. 28, 1984]

Before: GINSBURG, Circuit Judge; MACKINNON, Senior

Circuit Judge; and HAROLD H. GREENE *, Dis-

trict Judge.

JUDGMENT

These causes came on to be heard on the petitions for

review of an order of the Interstate Commerce Commis-

sion, and were argued by counsel. On consideration

thereof, it is

ORDERED and ADJUDGED, by this Court, that the

order of the Interstate Commerce Commission under re-

view herein is hereby affirmed, in accordance with the

Opinion for the Court filed herein this date.

Per Curiam

For the Court

/s/ George A. Fisher

GEORGE A. FISHER

Clerk

Date: November 23, 1984

Opinion for the Court filed by Senior Circuit Judge

MacKinnon.

* Of the United States District Court for the District of Colum-

bia, sitting by designation pursuant to Title 28 U.S.C. § 292(a).

37a

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

SEPTEMBER TERM, 1984

No. 82-2399

PUBLIC SERVICE COMPANY OF INDIANA, INC.,

PEABODY COAL COMPANY,

Petitioners

INTERSTATE COMMERCE COMMISSION and

UNITED STATES OF AMERICA,

Respondents

And Consolidated Case No. 83-1691

[Filed Jan. 29, 1985]

Before: ROBINSON, Chief Judge, WriGHT, TAMM,

WALD, MIKVA, EDWARDS, GINSBURG, BOoRK,

SCALIA and STARR, Circuit Judges, MAcKIN-

NON, Senior Circuit Judge and HARoLp

GREENE, District Judge, U.S. District Court

for the District of Columbia

88a

ORDER

The Suggestions for Rehearing en banc of the Public

Service Company of Indiana, Inc., et al. and the Na-

tional Association of Regulatory Utility Commissioners

have been circulated to the full court and no member has

requested the taking of a vote thereon. Upon considera-

tion of the foregoing it is

ORDERED, by the Court en bance, that the aforesaid

Suggestions are denied.

Per Curiam

For the Court:

GEORGE A. FISHER,

Clerk

By: /s/ Robert A. Bonner

ROBERT A. BONNER

Chief Deputy Clerk

89a

APPENDIX D

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

SEPTEMBER TERM, 1984

No. 82-2399

PUBLIC SERVICE COMPANY OF INDIANA, INC.,

PEABODY COAL COMPANY,

Petitioners

Vv.

INTERSTATE COMMERCE COMMISSION and

UNITED STATES OF AMERICA,

Respondents

And Consolidated Case No. 83-1691

[Filed Jan. 29, 1985]

Before: GINSBURG, Circuit Judge, MACKINNON, Senior

Circuit Judge and HAROLD GREENE, District

Court Judge, U.S. District Court for the

District of Columbia

ORDER

Upon consideration of the Petitions for Rehearing of

the Public Service Company of Indiana, Inc., et al and

40a

the National Association of Regulatory Utility Commis-

sioners, it is

ORDERED, by the Court, that the aforesaid Petitions

are denied.

Per Curiam

For the Court:

GEORGE A. FISHER,

Clerk

By: /s/ Robert A. Bonner

ROBERT A. BONNER

Chief Deputy Clerk

ae ee

Ala

APPENDIX E

[Service Date June 23, 1983]

INTERSTATE COMMERCE COMMISSION

DECISION

No. 38946

PETITION OF LOUISVILLE AND NASHVILLE

RAILROAD COMPANY FOR REVIEW OF A DECISION

OF THE PUBLIC SERVICE COMMISSION OF INDIANA

PURSUANT TO 49 U.S.C. 11501

Decided: June 17, 1983

Intrastate rate prescribed by state agency found not

rationally based on the evidence and inconsistent with

preemptive federal standards.

R. Lyle Key, Jr., for railroad petitioner.

J. Rawmond Clark, Mary Todd Foldes, and Greg K.

Kimberlin for public utility intervenor.

By the Commission:

By decision served March 23, 1983, we reopened this

proceeding for reconsideration on the present record.

Based on our further careful review, we conclude that

while our prior decision did not adequately articulate

our reasons for the result reached, the result itself was

proper. Accordingly, in this decision we provide a fuller

explanation of our action. We will repeat the relevant

facts and background of this proceeding only as neces-

sary to clarify our present discussion.

EEE

42a

A. Decision of the Public Service Commission of In-

diana and Petition of Louisville and Nashviile

Railroad Company.

On September 17, 1982, the Public Service Commission

of Indiana issued an order finding the applicable intra-

state coal rate of 94 cents per net ton published by

Louisville and Nashville Railroad Company (L&N)’ un-

reasonable. The state commission determined the reason-

able rate to be not more than 65 cents per net ton upon

its finding that L&N’s variable cost for the subject traffic

was 39.1 cents per net ton,’* Indiana set the rate at a

level that exactly yields a revenue to variable cost ratio

of 165 percent, the jurisdictional threshold at the time.’

Recognizing that the Interstate Commerce Act directs

this Commission to make an “adequate and continuing

effort” to assist carriers in attaining revenue adequacy,°

49 U.S.C. 10704 (a) (2), and further recognizing both the

1In January, 1983, L&N merged with its affiliate Seaboard Coast

Line Railroad to form Seaboard System Railroad, Inc.

la LEN argued that its variable cost for the traffic was 46.6 cents

per net ton. L&N stipulated that it possessed market dominance

over the traffic and that its published rate exceeded the jurisdic-

tional threshold for regulatory purposes.

2 The jurisdictional threshold rose to 170 percent on October 1,

1982. See 49 U.S.C. 10709 (d) (2).

3 Pursuant to 49 U.S.C. 10704(a) (4), we must annually deter-

mine which rail carriers are earning “adequate revenues” as that

term is define’ under standards and procedures adopted by us

under Section 10704(a) (2). L&N has not achieved revenue ade-

quacy. In 1980, L&N had a 5.5 percent return on investment, which

was below the 12.1 percent return determined to be the appro-

priate level for revenue adequacy. Ex Parte No. 416, Railroad

Revenue Adequacy—1980 Determination, 365 I.C.C. 285 (1981).

In our latest revenue adequacy determination, we found that L&N’s

1981 return on investment was 7.04 percent, below the 16.5 percent

level for current cost of capital. Ex Parte No. 439, Railroad Reve-

nue Adequacy—1981 Determination, —— I.C.C. (1982).

43a

need for differential pricing and its favored use in rail

pricing decisions (Indiana Findings Nos. 45-50), the

state commission ostensibly undertook to examine the

“reasonableness” of L&N’s rate within the framework of

those policies (Indiana Findings Nos. 51-71). Indiana

stated, however, that although L&N is entitled to differ-

ential pricing, its entitlement to assistance in attaining

revenue adequacy depends on the carrier’s business being

conducted “under honest, economical and efficient man-

agement” (Indiana Finding No. 54). See 49 U.S.C.

10704(a) (2). The state commission then held that, once

complainants had come forward with evidence showing

that the management of L&N is not “honest, economical

and efficient,’ the burden of rebutting that showing

shifted to the carrier seeking to use differential pricing

to set its rate above the jurisdictional threshold (Indiana

Finding No. 55). The state concluded that on this rec-

ord L&N had been shown to be inefficiently managed, and

that although the carrier was entitled to the benefit of

some differential pricing because of its revenue inade-

quacy, it should not be permitted to price its service above

the jurisdictional threshold.‘

On October 25, 1982, pursuant to 49 U.S.C. 11501(c),

L&N sought our review of Indiana’s decision. L&N

sought relief on the grounds that the decision was incon-

sistent with federal standards and procedures. The car-

*In Arkansas Power & Light Co.-Amendment-Staggers Act, 365

I.C.C. 983 (1982) (Long-Cannon) review pending sub nom. Arkan-

sas Power & Light Company v. ICC, Nos. 82-1484, 82-2219, and

82-2307 (D.C. Cir.), we recently described how carriers and ship-

pers should introduce evidence in individual rate cases concerning

the so-called “Long-Cannon” factors set forth at 49 U.S.C.

10707a(e) (2)(B) and (C) and the related “honest, economical,

and efficient management” language in 49 U.S.C. 10704(a) (2).

In Ex Parte No. 347 (Sub-No. 1), Coal Rate Guidelines, Nation-

wide (not printed), served February 24, 1983, 48 Fed. Reg. 8362

(Feb. 28, 1983), we proposed standards governing differential

pricing.

44a

rier sought to have us revoke the provisional certification

of Indiana (which allows the state to exercise jurisdic-

tion over intrastate rail transportation), and to have us

establish as appropriate a rate of 94 cents per ton at the

October 1, 1981 level, subject to any later increases.

B. Our Prior Decision. By decision served November

24, 1982, we found that in holding down L&N’s rate to

the jurisdictional threshold based on its finding that L&N

is inefficiently managed, Indiana had failed to apply

standards and procedures consistent with federal law. In

our discussion, we focused on Indiana’s inappropriate

reliance on L&N’s failure to employ demand elasticity

studies in pricing its traffic. We concluded that by rely-

ing on a questionable finding of inefficient carrier man-

agement to prescribe the rate at the lowest level jurisdic-

tionally possible, Indiana had failed to give “genuine”

consideration to revenue adequacy, and had thereby vio-

lated one of the most important federal standards. We

overturned Indiana’s prescription of a maximum reason-

able rate of 65 cents per net ton, and reinstated L&N’s

applicable rate of 94 cents per net ton at the October 1,

1981 level, subject to later increases.®

C. Petition to Reopen. On December 14, 1982, the Pub-

lic Service Company of Indiana, Inc. (PSI), a comp!ain-

ant in the state proceeding, petitioned us to reopen our

prior decision for reconsideration.® L&N replied. PSI

argues that in our prior decision we erred both in our

5In a pleading filed December 1, 1982, L&N filed a Petition for

Clarification requesting us to “authorize” the rate rather than

“prescribe” the rate as we did in our prior decision. See discus-

sion, infra.

6 Immediately following issuance of our prior decision, PSI and

Peabody Coal Company (the other complainant at the state level),

filed a petition for review in the United States Court of Appeals

for the District of Columbia Circuit. Public Service Company of

Indiana, Inc. et al. v. Interstate Commerce Commission and United

States of America, No. 82-2399.

Sh thei eh Pe OS >

Selaithd aaachie ans sR

45a

substantive analysis of the state’s action and in our anal-

ysis of the variable costs (upon which Indiana based its

rate prescription, pegged to the jurisdictional threshold).

DISCUSSION AND CONCLUSIONS

We have carefully reviewed our prior decision, PSI’s

petition to reopen, L&N’s reply, the record before the

state commission and the applicable law in this area.

We are persuaded that in our prior decision we correctly

overturned the state agency’s decision. Although we be-

lieve this case presents very difficult issues concerning an

evolving area of regulation, we are convinced that by

first finding L&N to be an “inefficiently” managed rail-

road, and then by reducing the railroad’s published rate

to a level that exactly meets the jurisdictional threshold

(based on the inefficiency finding), the state commission

reached a decision that was neither rationally based nor

in accordance with federal standards.

We reopened this proceeding because we believed that

our prior decision inadequately articulated our reasons

for our conclusion. Specifically, our prior decision em-

phasized only one aspect of Indiana’s determination of

the degree to which L&N is “entitled” to the benefits of

differential pricing on the involved traffic. Our decision

cited the state commission’s criticism of L&N’s failure to

employ quantifiable or sophisticated marketing tools such

as demand elasticity studies (Prior decisions at 4-5). We

concluded that the state’s “reliance” upon failure to em-

ploy these tools in finding L&N to be inefficient “was im-

proper in and of itself.” Jd. at 5. In its petition to re-

open, PSCI argues, among other things, that the impres-

sion left by the cited language is that the state agency

totally relied upon that single finding in determining that

L&N is inefficient. Because we agreed that the statement

regarding Indiana’s “reliance” on that single factor was

too broad, we reopened this proceeding for reconsidera-

tion.

ous,

46a

Upon further analysis, we find, however, that the ulti-

mate conclusions in the prior decision were correct. In

the discussion that follows, we will discuss our reasons

for so finding. Summarizing those reasons, we find that

the state’s decision violated the Act’s requirement that

regulation of rates assist railroads toward adequate reve-

nues. The state’s error is its mechanistic view that any

railroad rate above the jurisdictional threshold is un-

reasonable if there has been a showing that the railroad’s

management is not “honest, economical, and efficient.”

The Interstate Commerce Act and our standards imple-

menting the Act impose no such mechanical and absolute

restraint on rates. To the contrary, the federal stand-

ards plainly require that a delicate balance be struck be-

tween the strong revenue adequacy policy and the need

for efficiency. The state’s mechanistic approach improp-

erly subordinates revenue adequacy to efficiency, and thus

violates the Act.

In addition, even if the state’s decision were correct in

its assumption as to revenue adequacy, we find that the

centerpiece of that decision—the finding that L&N is

“inefficient” —itself reflects standards in direct conflict

with federal standards, and is unsupported by the record.

Specifically, federal standards as we have interpreted

them mandate that claims of inefficiency be more particu-

larized if they are to influence the reasonableness deter-

min«cion, and specifically state that the failure to con-

duct demand elasticity studies does not constitute “ineffi-

ciency.” Moreover, as a factual matter, the evidence

cannot support an inefficiency finding. Thus, the general

evidence presented in this case cannot and does not es-

tablish inefficiency under federal standards.

Finally, we also find that the state’s decision ignored

the requirement of federal standards and procedures that

there be a reasonable relationship between the wrong

(the railroad’s alleged inefficiency) and the remedy (the

rate reduction).

47a

I. The Federal Standards

A. Railroad Revenue Adequacy

Congress has made acaievement of railroad revenue

adequacy a crucial factor in individual rate cases. See

49 U.S.C. 1070la(b) (3) and 10704(a) (2); Ex Parte

No. 393, Standard for determining Railroad Revenue

Adequacy, 364 I.C.C. 802 (1981), aff'd sub nom. Bes-

semer & Lake Erie R.R. Co. v. ICC, 691 F.2d 1104,

1108 (8rd Cir. 1982) (cert. denied, No. 82-1369, June 6,

1983), and we have determined that differential pricing

is necessary if railroads are to achieve the Congression-

ally-mandated goal of revenue adequacy. See Ex Parte

No. 347 (Sub-No. 1), Coal Rate Guidelines, Nationwide

(not printed), served February 24, 1983, 48 Fed. Reg.

8362 (Feb. 28, 1982), pages 7-8. Under differential (or

demand-based) pricing, a railroad may charge shippers

in competitive markets a rate returning less profit than

a rate charged to shippers in captive markets.’

The legislative history of the Staggers Rail Act of

1980 demonstrates just how important Congress believed

railroad revenue adequacy is in any individual rate case.

For the period 1969 to 1979, the combination of low

earnings and a significant increase in the cost of capital

resulted in an average rate of return on investment in

transportation for Class I railroads of less than three

percent per year. H.R. Rep. No. 1035, 96th Cong., 2d

Sess. 101 (1980) (House Report). Inadequate railroad

revenues began to take a toll on the industry’s physical

plant. S. Rep. No. 470, 96th Cong., 1st Sess. 3 (1979)

(Senate Report). Faced with the prospect of dwindling

revenues and deteriorating physical plant, Congress at-

tempted a legislative solution in 1976 by passing the

7 Differential pricing reflects the varying demand for a carrier’s

service. The Commission and courts have often affirmed the role

of differential pricing in railroad ratemaking. See, e.g., San

Antonio, Texas v. United States, 631 F.2d 831, 851-852 (D.C. Cir.

1980).

48a

4R Act.? Because the root of so many railroad problems

appeared to be the inability of carriers to generate

enough revenue to maintain the needed quality of service,

a prime intention of the 4R Act was to limit the Sub-

commission’s regulation over ratemaking.® The rationale

for this jurisdictional limit was the “strong Congres-

sional conviction” that, when a railroad was forced to

compete for traffic with other modes of transportation

(or another railroad), competitive forces would result in

the setting of rates at reasonable levels, with no need for

regulatory control. See Potomac Electric Power Co. V.

United States, 584 F.2d 1058, 1067 (D.C. 1978).

Congress was soon forced to conclude, however, that

the 4R Act “has not provided the flexibility in rates that

the industry needs to earn revenue sufficient to maintain

and improve the rail system.” House Report at 38. The

financial problems of the industry had worsened to the

point that Congress determined that the “failure to

achieve increased earnings within the railroad industry

will result in either further deterioration of the rail sys-

tem or the necessity for additional Federal subsidy.”

Congressional Declaration of Findings, Pub. L. No. 96-

448, § 2(8), 94 Stat. 1895, 1896 (1980).

The purpose of the Staggers Act was:

to provide for the restoration, maintenance and im-

provement of the physival facilities and financial

stability of the rail system of the United States.

Pub. L. 96-448, § 3; 94 Stat. 1895, 1897 (1980). Con-

gress recognized that this goal could be achieved only by

placing “primary emphasis on the adequacy of railroad

8 Railroad Revitalization and Regulatory Reform Act of 1976,

Pub. L. No. 94-210, 90 Stat. 31 (1976).

®The House Committee on Interstate and Foreign Commerce

reported that “the significant reason for the decline in railroads’

business has been the inflexibility of existing regulation.” House

Report at 38.

49a

revenues and the financial needs of the industry.” 126

Cong. Ree. H5901 (daily ed. June 30, 19800) (remarks

of Rep. Madigan).

The principal mechanism adopted by Congress to pro-

rote the revenue adequacy goal was allowing rail car-

riers greater flexibility to set their own rates and to re-

strict drastically the Commission’s jurisdiction to regu-

late rates. To prevent this Commission from continuing

' to assert jurisdiction over rates that Congress wished to

deregulate, the Staggers Act explicitly deprived the Com-

mission of jurisdiction over the reasonableness of any

rate below a specified revenue-to-variable cost percentage

(the jurisdictional threshold). 49 U.S.C. 10709(d) (2).

And, to make it clear that a rate cannot be regarded as

unreasonable simply because it is above the threshold,

Congress further provided that such a fact “does not

establish a presumption” that a rate “does or does not

exceed a reasonable maximum.” 49 U.S.C. 10709 (d) (4).

Most significantly for the purposes of this proceeding,

Section 201(a) of the Staggers Act provided that, even in

those cases where we retain jurisdiction over rail rates,

we must “recognize the policy of this title that rail car-

riers shall earn adequate revenues” in determining

whether a challenged rate is reasonable. 49 U.S.C. 10701a

(b) (3). The House committee that drafted Section 201

(a) explained its purpose (House Report at 54)

(emphasis added) :

This provision sets forth for the first time a stand-

ard for the Commission to use in determining if a

rate is reasonable, and that standard goes to assur-

ing that railroads can continue to operate as private

enterprises. The bill requires the Commission to rec-

ognize the policy that efficient rail carriers shall earn

adequate revenues. Previous admonitions by the Con-

gress that the Commission assist carriers in earning

adequate revenue levels (49 U.S.C. 10704) have not

50a

achieved their goals. As a result, the Committee is

establishing a more straight forward mandate. This

is a clear directive to ensure financially sound rail-

roads, and the Commission is not to misuse the term

“reasonable” to circumvent this directtive.

Thus, the revenue adequacy mandate of the Staggers Act

could not have been more emphatic.

The railroads’ right to adequate revenues is not entirely

unrestrained, because the statute explicitly makes carrier

“efficiency” a factor that must be considered in determin-

ing the reasonableness of a challenged rate. Thus, Section

10704 (a) (2) requires the Commission to ensure that rail-

roads earn adequate revenues “under honest, economical,

and efficient management,” and Section 10707a(e) (2) (C)

directs the Commission in a rate reasonableness proceed-

ing to consider, among other factors, evidence of: (1) the

amount of the carrier’s traffic which fails to contribute

to going concern value or contributes only marginally to

fixed costs; (2) the carrier’s efforts to minimize such

traffic and the extent to which rates on such traffic can be

raised; and (3) the carrier’s mix of rail traffic to deter-

mine whether one commodity is paying an unreasonable

share of the carrier’s overall revenues.’°

The statute does not specify how these efficiency factors

should be considered. It certainly does not mandate that

a general showing of “inefficiency” bars any further rate

increases or requires reduction of all existing rates to the

jurisdictional threshold. Rather, by emphasizing the

revenue adequacy policy, and making the efficiency factors

“considerations” without specifying how they should af-

fect the rate reasonableness issue, the statute leaves no

doubt that the two considerations must be balanced to-

gether. Thus, we have established that the statutory pro-

visions bearing on the issue of management efficiency

were not intended to thwart the other goals of the Act,

10 These three factors are the so-called “Long-Cannon factors.”

5la

most notably the very important goal of railroad revenue

adequacy, or to be the basis for an entire regulatory

scheme. Long-Cannon, supra, 365 I.C.C. at 988." Indeed,

Senator Long, one of the co-sponsors of the amendment

that put the Long-Cannon factors into the statute, indi-

cated that his principal concern in proposing the amend-

ment was with the power of revenue adequate railroads

to extract an unfair profit from captive shippers (em-

phasis added) :

The question I have maintained throughout examina-

tion of this legislative proposal has been whether

railroads that have already achieved revenue ade-

quacy should be free to extract monopoly profits

without proper justification, without Interstate Com-

merce Commission scrutiny and without attempts to

maximize the revenues from noncaptive traffic.”

We have elaborated on that basic theme in Ex Parte No.

347 (Sub-No. 1), where we said (Feb. 24, 1983 decision,

at 14, n. 40) that a rate might be found unreasonable

through application of the efficiency factors if it were

shown, for example, for example, that a railroad had

rates below going concern value and the railroad could

achieve revenue adequacy if it were to raise such rates.

In short, the federal standard for applying the effi-

ciency factors is, and has been since enactment of those

factors, to consider and balance the factors in such a way

that railroads can work toward revenue adequacy and

efficiency at the same time. Neither the statute nor our

decisions have been hinted that the necessary balancing

can be achieved by simple formulae or general allegations.

Rather, the statute inevitably requires, as we have re-

peatedly stated, that there be a balancing and that it be

1! Long-Cannon was issued two weeks before the state agency

issued its decision.

126th Cong. Rec. 14003 (daily ed., September 30, 1980), quoted

in Long-Cannon, supra, 865 I.C.C. at 988.

52a

focused and based on specific evidence. See Long-Cannon,

supra.

B. Railroad Efficiency

In our Long-Cannon decision,’ we established federal

standards for considering the Long-Cannon and efficiency

factors in rail rate cases. Under those standards, the

party with the burden of proof in the Commission pro-

ceeding has the burden of producing relevant Long-

Cannon evidence. Thus, in a complaint case, as here, the

complainant must produce the relevant evidence. 65

LC.C. at 997, 999. Only if the complainant produces

relevant evidence need the railroad try to rebut it with

its own evidence. Jd. at 997. We emphasized that the

Long-Cannon evidence of a complainant must be specific

by identifying particular commodities or rates or routes

that it believes appropriate for Long-Cannon analysis.

Id. Accordingly, while we said we would honor reason-

able requests to discover specific information from rail-

roads, we also stressed that we would not sanction fish-

ing expeditions for cost studies for all of a carrier’s move-

ments such as were sought here. In that vein, we spe-

cifically rejected the suggestion that demand elasticity

studies are a necessary basis for optimal railroads pric-

ing. Id. at 992. Instead, we stated that a carrier’s mar-

keting efforts, conducted through negotiations with ship-

pers, and based on its rate officers’ knowledge of the

presence and level of competition, are generally adequate

for constructing an optimal price structure. Jd.

In short, the federal standard for showing a railroad

inefficient requires a specific showing grounded in facts.

Sweeping general allegations of system-wide inefficiency

were rejected, and indeed neither the statute nor any of

our pronouncements hints that carriers can or should be

labeled “efficient” or “inefficient” system-wide. Rather,

13 See footnote 4, supra.

bia tenidmeeeneeaieteenenlll

53a

federal standards in effect when the state issued its deci-

sion (and still in effect now), require a far more precise

showing of “inefficiency,” to product a downward adjust-

ment in an otherwise reasonable rate.

C. Relationship Between The Wrong And The Remedy

In addition to its requirements pertaining to revenue

adequacy, the Act requires a reasonable relationship be-

tween the wrong committed and the remedy." See, e.g.,

49 U.S.C. 11705(b) (3) (a common carrier is liable for

“damages” resulting from imposition of rates for trans-

portation or service found to be in violation of the Act) ;

49 U.S.C. 10707(d) (1) (reparations only for amount of

rate found to be unreasonable). Thus, when carrier effi-

| ciency is a consideration in a rate reasonableness case,

| complainants must establish a relationship between the

| harm inflicted because of the inefficiency and the remedy

| (resulting rate level). In judging the reasonableness of

a rate, the states are required to apply all standards and

procedures in accordance with the provisions of the Act,

including general principles underlying the Act.

For example, if it is demonstrated that a carrier is

carrying certain traffic in another part of its system at

below directly variable cost and, as a consequence, is sus-

taining a loss on such traffic amounting to $1 million

over a given period, the remedy of lowering the rate to

the jurisdictional threshold based on the existence of the

“inefficiency” would bear no relation to the “wrong” if so

lowering the rate would deprive the carrier of $2 million

over that same period. Such a remedy would be punitive

and would drive the carrier farther into revenue inade-

quacy, in violation of the Congressional mandate.

We emphasize that to demonstrate inefficiency shippers must

follow the evidentiary standards set out in Long-Cannon, which

require some specificity in evidence.

54a

D. The States Must Apply The Federal Standards

There can be no doubt that the problem of inadequate

railroad earnings that Congress sought to remedy in the

Staggers Act was not solely attributable to restrictive

ICC regulation of interstate rates. For over a century,

the various states had exercised independent jurisdiction

over intrastate rates charged by rail carriers. Regulatory

lag at the state lev-’ and the application of state rate-

making standards differing from federal standards

resulted in even lower revenues on intrastate rail trans-

portation than those generated by interstate transporta-

tion. See Indianapolis Power & Light Co. v. ICC, 687

F.2d 1098, 1100 (7th Cir. 1982).

The effect of intrastate traffic on overall railroad reve-

nues is substantial. In 1979, intrastate traffic accounted

for $2.2 billion in total railroad freight revenues (or 9

percent of such revenues). See C. Rockey, A Case For

Uniform Regulation of Railroad Freight Rates, 48 ICC

Pract. J. 45 (1980).

The establishment of maximum rates on intrastate

traffic by state regulatory bodies resulted in lower rates

and revenues on intrastate traffic. Thus, in 1980 the

House Committee found that (House Report at 61):

[T]he disparate treatment of intrastate and inter-

state traffic is reflected in the difference between

average revenue to variable cost ratios for each type

of traffic: 1.20 for intrastate traffic and 1.36 for in-

terstate traffic in 1977. If the intrastate ratio had

been equal to the interstate ratio that year, the rail-

roads would have earned $400 million in additional

revenues.

In enacting the Staggers Act, Congress recognized that

its objective of restoring the nation’s railroads to finan-

cial health would be significantly undermined if the incon-

sistent rate standards were to continue to prevail in the

area of intrastate rates. See Indianapolis Power & Light

55a

Co., supra, 687 F.2d at 1100. Accordingly, Congress in

Section 214 of the Staggers Act placed limits on the

states’ authority to regulate intrastate rates in the fu-

ture. All state jurisdiction over general rate increases,

inflation-based rate increases, and fuel surcharges was

expressly preempted. As to other types of intrastate rate

adjustments, the statute provided that a state will be per-

mitted to continue to regulate those rates in the future

only if it acts exclusively in accordance with the provi-

sions of the Interstate Commerce Act. 49 U.S.C. 11501

(b) (1).

The Conference Report on the Staggers Act describes

the unambiguous purpose underlying Section 214:

The conferees’ intent is to insure that the price and

service flexibility and revenue adequacy goals of the

Act are not undermined by state regulation of rates,

practices, etc., which are not in accordance with

these goals. Accordingly, the Act preempts state

authority over rail rates, classifications, rules and

practices.

H.R. Rep. No. 1430, 96th Cong., 2 Sess. 106 (1980).

II. The State’s Decision Is Inconsistent

With The Federal Standards

A. Erroneous Consideration Of Revenue Adequacy

In a complaint against an established rate (as was the

case here), the complainant has the burden of proof to

show by convincing evidence that the assailed rate is

unreasonable, because the carrier’s published rate is pre-

sumed to be reasonable. 49 U.S.C. 1070la(a). As we

have shown, the federal standard that governs this case

requires a careful balancing of the revenue adequacy and

efficiency considerations. Nevertheless, despite the very

forceful Congressional mandate that carriers be allowed

to earn adequate revenues, the state agency here found

that a showing of inefficiency automatically makes any

56a

rate above the jurisdictional threshold unreasonable.

Thus, in Indiana Finding No. 55 (emphasis added), the

state held: “Although the burden of proving that the

assailed rate is unreasonable is upon PSI, once it has

come forward with evidence showing that the manage-

ment of L&N is not ‘honest, economical and efficient’ the

burden of rebutting such allegation in order to demon-

strate entitlement to differential pricing above the Stag-

gers mandate of [the jurisdictional threhold] shifts to

L&N.” This analytical framework directly contravenes

the governing federal standard by subordinating revenue

adequacy to efficiency, and by setting up the jurisdictional

threshold as a standard of maximum reasonableness. The

state’s analytical framework especially conflicts with the

statute because it would apply to every L&N rate. (See |

Indiana Finding No. 66). Thus, because the “inefficiency”’

finding extends to L&N’s entire system, rates on all of

L&N’s market dominant traffic could be held to the

threshold. The state never explained how forcing L&N to

set all of its rates on market dominant traffic at the jur-

isdictional threshold would permit L&N to achieve reve-

nue adequacy when L&N is free to set its rates at that

level without the state’s permission. While carrier effi-

ciency is clearly one factor that the trier of fact must

consider in determining the reasonableness of an assailed |

rate, a finding of some carrier inefficiency is certainly no

absolute bar to a railroad pricing any given traffic abcve |

the jurisdictional threshold. The state’s mechanistic and

absolute rule ignors entirely the practical problems inher-

ent in balancing the two important statutory goals.

The state claims (Indiana Finding No. 69) that by

holding L&N’s rate to the jurisdictional threshold it has

given L&N the benefit of differential pricing because it

has allowed a rate that exceeds fully allocated costs. This,

in the state’s view, constitutes compliance with the Steg-

gers Act’s requirement that railroads be permitted to

achieve revenue adequacy through differential pricing.

57a

We find this reasoning to be nothing more than a

superficial bow to the Staggers Act. By law, railroads

are entitled to charge rates at the jurisdictional thres-

hold. Thus, the fact that a rate at that level contains

some differential above full cost is entirely irrelevant to

the issue now before us, which is whether the railroad

should be permitted to have a rate above the threshold.

Under the state’s reasoning, there would be little need

for regulation because most rates at the threshold would

3 probably cover full costs and more. There would have

: been no need for the numerous other rate related statu-

tory changes in the Staggers Act if Congress believed

that setting rates at the threshold would produce revenue

adequacy. The only reason the state has provided for

holding this rate to the threshold is that it is required

when there is a showing of “inefficiency.” But, as we dis-

cussed above, that reason is directly contrary to the gov-

erning standards. In the absence of any other rationale

for holding L&N’s rate to the threshold, we must conclude

that the state has simply presumed any rate above that

level to be unreasonable. That, however, is directly con-

trary to the Staggers Act. 49 U.S..C 10709(d) (4).*

The state agency purported to consider the carrier’s

need to achieve revenue adequacy vy allowing some meas-

ure of differential pricing, but only up to the jurisdic-

tional threshold. We are convinced, however, that by its

approach the state agency in fact failed to consider

genuinely L&N’s revenue inadequacy when it prescribed

the rate at the jurisdictional threshold. If a carrier has

15 We note that the state found (Indiana Finding No. 68) that

the “just and proper rate” should “not exceed the fully allocated

cost of service.” We specifically rejected a maximum rate policy

based solely on a strict cost-based approach in December, 1981

(some nine months before the state decision in this case) in an

interim decision in Ex Parte No. 347 (Sub-No. 1). The state’s

subscribing to that rejected methodology is clearly contrary to

governing federal standards which set rate thresholds at levels

higher than fully allocated costs.

58a

not achieved revenue adequacy, this Commission (or a

state authority) is required under Section 10701a(b) (3)

to ensure that the rate established in a rate reasonable-

ness proceeding makes a meaningful contribution to the

revenue adequacy goal. In fact, Indiana concluded that

the “proper” rate would not exceed fully allocated costs

(Indiana Finding No. 68). It raised the rate to the low-

est jurisdictionally possible level, ostensibly giving effect

to the revenue adequacy goal. Its admitted limited use of

revenue adequacy (Indiana Finding No. 69) amounts to

little or no consideration of the revenue need concept

because Indiana could have prescribed no rate below the

jurisdictional threshold even if revenue adequacy were

nowhere mentioned in the law.

The fundamental inconsistency between the state’s

decision and federal standards is clearly illustrated by

the fact that the rate prescribed in this proceeding is

lower than the rate the state prescribed for the same

movement in 1980.° By order entered September 12,

1980 in Docket No. 35884, the state agency set a rate of

69 cents per net ton, subject to applicable increases. That

rate had been in effect since June 22, 1979. We find it

inexplicable that the state agency can be said to have

given any real consideration to L&N’s revenue inadequacy

when, following enactment of the Staggers Act, it has

16 As explained more fully in the state agency’s decision (Indiana

Finding No. 5) and pleadings on petition here, the rate history is

complex. Following the state agency’s September 12, 1980 decision,

prescribing a rate of 69 cents per net ton on this traffic. L&N

legally applied several general and selective increases to bring the

rate up to $1.03 per net ton as of October 1, 1981. The application

of the rates themselves, however, were subject to various stipula-

tions and agreements not to collect various portions of the rate

subject to the outcome of certain litigation. The agreements left

the rate at 94 cents as of October 1, 1981. In Indianapolis Power

& Light Co. v. ICC, 687 F.2d 1098 (7th Cir. 1982), L&N prevailed

in the subject litigation. Therefore, increases approved by this

Commission subsequent to the state agency’s decision in No. 35884

would bring the rate to $1.11 per net ton as of September 1, 1982.

59a

chosen to reduce a rate that it previously has found rea-

sonable (at a level that reflects subsequent authorized

increases). The state agency’s order in the instant case

does not explain the reason for this drastic rollback below

the approved rate level for past years, and is inconsistent

with the clearly stated policy of the Staggers Act.

Standing alone, the state’s erroneous conclusion that

the efficiency factors in the statute automatically force

the state commission to hold L&N’s rates to the jurisdic-

tional threshold compels reversal of the state’s decision.

b. Improper Application of Carrier Efficiency Factors

Even if the state agency’s approach to determining the

reasonableness of the assailed rate were valid, we would

still have to overturn the state’s decision because its find-

ings (Indiana Findings No. 63 and 64) that L&N is “in-

efficient” reflect standards that are contrary to federal

standards and are unsupported by the record.

The state agency concluded that complainants had met

their burden of proving the “overall inefficiency” of L&N

on the basis of evidence, submitted by two witnesses (In-

diana Findings Nos. 56 and 57).'7 One witness suggested

that inefficient management at L&N is responsible for the

profit margin of L&N being lower than that of its cor-

porate parent, CSX Corporation. Specifically, the witness

testified that although the ratio of sales to assets and the

ratio of assets to equity are very similar for CSX and

L&N, the ratio of net revenue to sales (6 percent for

L&N, 10 percent for CSX) differed. Although the witness

very generally stated that in his opinion the reason the

profit margins differed was because L&N is not as effi-

ciently managed as other parts of the CSX system, he ad-

mitted that there are other possible reasons for the differ-

17—ndiana Finding No. 66: “PSI established the overall ineffi-

ciency of L&N system-wide, establishing its inferior profit margin

and its inferior utilization of locomotives, cars, labor and track.”

60a

ences, ¢.g., differences in types of operating characteris-

tics for the various CSX subsidiaries. The witness ad-

mitted that he did not attempt to determine which reason

or reasons “actually cause said difference in the profit

margin.” Transcript p. 65.

The second witness tried to show that the Family Lines

Rail System (of which L&N is a part) is inefficient by

comparing selected statistical measures of its operating

efficiency with those of one, and only one, other railroad

system—Southern Railway—which is recognized as one

of best performers in the railroad industry. The statistics

selected for comparison do indicate that Southern had a

better operating performance in certain areas than did

the Family Lines. However, the witness did not determine

whether or not there are differing characteristics which

would cause inherent differences in operating perform-

ances. The witness conceded that differences in gradients

could have an impact on the operating statistics and that

he had not attempted to determine whether there was such

a difference in gradients and, if so, the extent of the dif-

ference. Tr. pp. 273-274.

Based on this evidence the state agency concluded that

complainants had met their prima facie case of showing

L&N’s “overall inefficiency.” Accordingly, the state con-

cluded that the burden to rebut shifted to L&N. We find

that the state’s conclusion on this point was wrong because

complainants’ evidence is so general, and admittedly in-

complete. Thus it is so unconvincing that no basis for

shifting the burden existed.

The state’s finding amounts to nothing more than an

attempt to classify entire railroads as “efficient” or ‘in-

efficient.” But we specifically rejected that approach in

Long-Cannon, supra, 365 I.C.C. at 991. No company, rail-

road or otherwise, is perfectly efficient and the state’s

approach is simplistic, at best.

First, the admission by complainants’ witness that vari-

ous unexplored reasons exist for the different profit mar-

eel

6la

A tl ae

gins of L&N and CSX completely negates his very general-

ized statement that L&N is inefficiently managed. Second,

even if a trier of fact were to accept that Southern is

more efficient than L&N, that finding in no way is

equivalent to a finding that L&N is inefficient enough to

compel a downward adjustment in an otherwise reason-

able rate. Efficiency in the railroad industry must be

judged using generally accepted standards.'* As a general

proposition, if comparisons are to have any validity at all,

they must involve at least a representative sample of

various members of the railroad industry, not just one

railroad which is one of the industry’s best performers.

If complainants’ approach were a valid measure of effi-

ciency, the management of virtually every railroad in the

nation would be found inefficient (and, presumably, under

the state agency’s construct, not “entitled” to price its

service above the jurisdictional threshold). We must con-

clude that complainants’ evidence was so inconclusive that

the burden to rebut never shifted to LEN.

Nevertheless, L&N did introduce evidence of its efforts

to eliminate excess capacity and reduce operating costs,

as well as evidence regarding its pricing policies. The

state agency concluded, however, that the carrier had not

“presented convincing evidence that its management is

efficient and economical” (Indiana Finding No. 63). Even

if we were to find that the state agency was correct in

finding that complainants had come forth with evidence

sufficient to shift the burden to the carriers, we find that

L&N offset sufficiently whatever limited demonstration

of general inefficiency was made by complainants.

Although complainants submitted no counter-balancing

evidence to establish that L&N’s pricing policies were not

generally accepted in the industry as appropriate, the

state agency found those policies wholly inadequate. In-

diana Finding No. 58. The state pointed to failure to

18 See, Coal Rate Guidelines, Nationwide, supra, at 14,

62a

conduct formal elasticity studies, reliance on information

gleaned from shippers, and reliance on the experience and

best judgment of the railroad’s pricing officers. Contrary

to the position taken by the state agency, we stated in

Long-Cannon, supra, 365 I.C.C. at 992, that optimum

pricing of marginal traffic does not necessarily require

elasticity studies:

In our opinion, railroad management is best suited,

and has every incentive, to determine when formal

elasticity studies are necessary. The cost of perform-

ing formal] elasticity studies for all competitive traffic

would be prohibitive.

We further found that pricing policies like those described

by L&N conform with reasonable standards (ibid.) :

In more instances than not, a carrier’s rate officers,

through their marketing efforts, negotiations with

shippers, and knowledge of the presence and level of

competition, are far more capable than we of con-

structing an optimal rate structure, using elasticity

studies where needed.

A systematic or mathematical formula for allocating rev-

enue shortfall is probably impossible and clearly is in-

consistent with the market-based pricing the Staggers Act

directs. |

With respect to L&N’s evidence regarding its efforts to

eliminate excess capacity and reduce operating costs, the

state agency found that, while those efforts were com-

mendable, “they are projects of Hmited scope which can

therefore only constitute a very limited demonstration of

proper management efforts.” Indiana Finding No. 59.

The state agency apparently relied upon the testimony of

complainants’ witness Corbin who claimed that such ef-

forts did not go far enough. Complainants’ Exhibit 6,

pp. 39-42. Mr. Corbin did not, however, provide any

sound basis for his opinion that L&N was not going far

enough and fast enough in those areas, and he conceded

63a

that railroads are not free to improve their efficiency by

abandoning deficit rail lines or closing deficit producing

agency stations; they must obtain authority to do so from

the appropriate state or federal agency. These structural

difficulties in achieving system-wide efficiency were part

of the reason we rejected a suggestion in Long-Cannon

that we by rule quantify system-wide revenue shortfall

due to inefficiency. See Long-Cannon, supra, 365 I.C.C. at

992.

While in all likelihood L&N is not as efficient as it

could be, it is clearly taking steps to improve its perform-

ance. Its pricing practices have not been shown to pro-

duce inequitable results, nor does complainants’ evidence

demonstrate specific improprieties warranting a reduction

in the challenged rate.

The state also castigated L&N for having no system for

allocating revenue shortfall. Indiana Finding No. 58.

Again, however, in Long-Cannon we specifically found

such systems unnecessary. 365 I.C.C. at 986, 993.

The state agency also based its finding of carrier ineffi-

ciency on L&N’s failure to maintain data sufficient for it

to determine how much of its traffic is non-compensatory

and how much of its traffic falls below full costs. Indiana

Findings Nos. 58 and 65. These conclusions are based on

answers given by L&N to interrogatories submitted by”

complainants. Specifically, in Interrogatory No. 13, com-

plainants asked L&N to provide data on the volume and

freight charges, if any, attributable to traffic transported

by L&N below variable cost and traffic transported below

full cost. L&N replied that it did not have the requested

information and that it would have to conduct special

studies to develop it. See Opening Statemeni of P.E.

Corbin, Complainants’ Exhibit 2, p. 42.

In Long-Cannon, supra, 365 I.C.C. at 997, we discussed

Y the complainant’s burden of coming forward with evi-

dence relevant to the Long-Cannon factors. We stated

lien

64a

that in seeking discovery relevant to those factors, the

complainant must focus its request as narrowly as pos-

sible (ibid.) :

We will not sanction “fishing exhibitions” in which

a complainant asks a carrier to reveal cost studies for

all its movements. Complainants must identify par-

ticular commodities or rates or routes that it believes

appropriate for Long-Cannon analysis and so focus

their discovery requests.

Although the state decision was issued two weeks after

Long-Cannon, it contains no reference to these governing

federal standards. Indeed, under Long-Cannon, L&N

would not have been required to answer many of the

complainants’ broadly-phrased interrogatories. Complain-

ants offered no “particular commodities or rates or

routes” that they believe appropriate for Long-Cannon

analysis, although Rail Form A evidence was available to

them. Indiana could have reopened the record to pro-

vide complainants further opportunity to justify their

discovery requests in light of Long-Cannon, but it did

not do so. Instead the state found that the absence of

data requested provided L&N “inefficient.”

Nevertheless, we find L&N’s answer to interrogatory

No. 13 disturbing. Interrogatory No. 13 closely resembles

Document Request No. 3 in The Dayton Power & Light

Company Vv. Louisville and Nashville Railroad Company,

366 I.C.C. 365, n.3. Yet in Dayton L&N did not

argue that the requested data did not exist. Rather,

L&N tacitly admitted that the data exists. It appears as

though L&N was not being entirely forthright when it

replied to Interrogatory No. 13 by saying it did not have

the data. While not the same as a refusal to provide any

timely response to a reasonable discovery request, which

we found unacceptable in Long-Cannon, 365 I.C.C. at

997, L&N’s response here was not what we expect from

railroads responding to discovery requests.

65a

L&N’s inexplicable behavior cannot and does not per-

mit us to affirm the state’s decision, however. This is a

proceeding under Section 11501(c), and if we find that

the standards and procedures applied by a state are in-

consistent with the Act, we must determine and authorize

the appropriate rate. Here, as we discussed above, the

Stave applied standards plainly inconsistent with the Act’s

revenue adequacy provisions. Because that error would

persist even if L&N were shown to be “inefficient” in

some degree, we must reverse the state and authorize an

appropriate rate.

We emphasize, however, that we are not convinced that

L&N has been shown to be “inefficient” in any respect.

Here, the burden of showing “efficiency” never shifted to

L&N. Even if it had, L&N stated clearly that it is not

carrying traffic at uncompensatory rates,’ and we know

now (from our Dayton proceeding) that L&N does have

the cost evidence found absent here. Thus, no factual

basis exists for the state’s finding of an irrational pric-

ing structure. While the carrier may not have been com-

pletely forthright concerning the answer it gave to In-

terrogatory No. 13, the fact remains that the state had

no basis in the record for assuming that L&N is carry-

ing traffic at uncompensatory rates. The state’s findings

on efficiency must fail because our decisions, and thus

19 LEN’s witness, Mr. McCormack, on cross-examination denied

that L&N in fact carried any traffic below variable costs (Tran-

script, p. 111):

Judge York: You’re not saying, are you, that the railroad

carries any traffic that makes them less money than the cost to

run the traffic?

Witness McCormack: Not from a directly variable cost stand-

point.

Judge York: Well, putting aside semantics or whatever, does

the railroad carry traffic that costs them more to run than they

make?

Witness McCormack: Not to my knowledge, no.

66a

the state’s as well, must be based on substantial evidence

of record and not assumptions or presumptions based on

failed attempts to shift the burden of producing evidence.

Finally, the state can reopen this proceeding to allow

the shipper to make the showing required by Long-

Cannon. L&N could then be required to respond to rea-

sonable, particularized discovery requests. Thus, L&N’s

apparent lack of cooperation on discovery here will not

deny the shippers a remedy against any unreasonableness

in the rate, if such unreasonableness is later found in

accordance with the standards and procedures of the

Interstate Commerce Act.

The state acted as though we had not decided Long-

Cannon, and effectively imposed on L&N the very re-

quirements we rejected in that case. The state’s approach

assumes that L&N is in fact carrying traffic at rates

below going concern value, because only the strong pos-

sibility that such rates exist would justify punishing

L&N for not having information to prove it has no such

rates. But again, we have specifically rejected that as-

sumption. See Long-Cannon, supra, 365 I.C.C. at 990,

991, 992; Ex Parte No. 347 (Sub-No. 1) (dec. served

Feb. 24, 1983 at p. 14). Given the timing of Long-Cannon

and this decision, and their conflicting nature, the state

could have either reopened the matter so that the com-

plainants could comply with the requirements of Long-

Cannon, or ruled against complainant on the efficiency

issues.”

20 We recognize that in Dayton Power & Light, supra, decided

after Long-Cannon was issued, we did not require a complainant

who had not met the Long-Cannon requirements to resubmit its

discovery request after making the necessary specific showing of

inefficiency. The circumstances there were unique, however, and

we stressed that our decision to waive the Long-Cannon require-

ments for specific showings of inefficiency was similarly unique.

Specifically, the unique factors motivating the exception in Dayton

were: (1) the fact that the discovery requests had been pending

67a

We find that the state agency’s findings regarding

L&N’s management “inefficiency” are not supported by

the evidence. Complainants failed to carry their burden

of proof, and the very inconclusive evidence with which

they did come forward was sufficiently rebutted by L&N.

C. Improper Remedy 7 |

As we discussed supra, the Act requires a reasonable

relationship between the wrong committed and the

remedy. Here, as applied by the state, a reasonable rela-

tionship between the alleged wrong (carrier inefficiency)

and the remedy (the rate reduction) is lacking. There

is no evidence to measure the cost of the alleged in-

efficiency. Thus, the effect of any inefficiency, if proven,

could have been very minor in comparison to the rate

reduction which was ordered. We find that the state

erred in ordering a specific rate reduction when it had

no estimate of the dollar value of the alleged inefficiency.

III. Determination of Appropriate Rate

Section 11501(c) requires us to “determine and au-

thorize” the railroad to “establish the appropriate rate”

if the standards applied by the state are inconsistent with

the federal standards. “Final action” must be taken

within 30 days from the date we receive the petition

for review of the state decision. We cannot remand the

case to the state authority but must establish an appro-

for well over a year by the time we resolved them in Dayton; (2)

the fact that the discovery requests were relatively narrow; (3)

the fact that the information requested was at least in part sought

merely to confirm the validity of evidence already in the shipper’s

possession; and (4) she fact that the shipper making the discovery

request had no advance notice of the Long-Cannon requirements.

Given those unique factors, we concluded that it would be in-

equitable to require the complainant to resubmit its discovery re-

quests after making a showing of specific inefficiency. Those factors

do not exist here, and the state could have reopened its case to

conform to the federal standards.

68a

priate rate in the same decision within the 30-day time

period. In this case, we determine that L&N’s existing

rate is appropriate and authorize the carrier to continue

charging it.

In our prior decision, we analyzed the evidence of the

costs to operate over the subject line and found that the

variable cost is 46.5 cents per ton and the fully allocated

cost is 62.1 cents per ton. We reaffirm our cost findings,

as contained in our prior decision’s Appendix. Based on

those costs, we found that the revenue to variable cost

ratio of the assailed 94-cent per ton rate (October 1,

1981 level) is 202 percent. We also reaffirm our finding

in the prior decision that that level is comparable to

other levels we have found to be reasonable, especially

where considerations of revenue adequacy are significant.

(See cases cited in our prior decision, p. 6).

We wish to emphasize the following points, however.

First, complainants bear the burden of showing that an

existing rate is unreasonable. Absent such a showing,

the railroad’s rate stands. Here, the state decision hold-

ing down L&N’s rate rests upon the “inefficiency” find-

ing we have found inconsistent with federal standards

and factually unsupported. Nothing else in the state’s

decision supports a finding of unreasonableness.

Second, L&N’s rate is well below that of other intra-

and interstate unit-train coal rates in the area. See

Witness Strouse, L&N, Ex. 8. Given the strong Con-

gressional policy embodied in Section 11501 against un-

founded disparities between intra- and interstate rates

on similar movements, we find no basis here for holding

as unreasonable rates that do not even fully close the

gap between intra- and interstate rates.

Third, we emphasize that we are not setting a maxi-

mum reasonable rate, but are merely finding L&N’s rate

to be reasonable. In short, absent any showing that

L&N’s rate is unusually high, and given the defective

basis of the state’s decision, we can find no basis for

lowering L&N’s rate.

69a

L&N’s PETITION FOR CLARIFICATION

Consistent with the provisions of 49 U.S.C. 11501(c),

and our prior decision in No. 38809, Louisville and Nash-

ville—Petition to Review Decision of Kentucky Railroad

Commission (not printed), served April 15, 1982, we

will grant L&N’s requested relief that we “determine

and authorize the carrier to establish the appropriate

rate”. In using that language in the statute, Congress

clearly evinced an intention that rates set under the

mechanism of section 11501(c) not be considered pre-

scribed within the meaning of Arizona Grocery Co. V.

Atchison, T. & S.F. Ry., 284 U.S. 370 (1932).

INTRASTATE CERTIFICATION ISSUE

Finally, because of our findings on the merits, we need

not reach L&N’s request that we revoke Indiana’s pro-

visional certification to regulate intrastate rates. In this

regard, however, we note that the relief sought is not

authorized by section 11501(c) but rather is a collateral

attack on our findings in Ex Parte No. 388, State In-

trastate Rail Rate Authority (not printed), served Feb-

ruary 8, 1982, and subsequent decisions thereunder.

Where a state’s standards and procedures are discordant

with the preemptive federal requirements, we have ample

remedial authority under section 11501(c). See No.

38905, Burlington Northern Railroad Company v. Public

Utilities Commission of the State of Colerado (not

printed), served October 25, 1982. We have consistently

rejected challenges to the provisional certification process

raised outside the context of Ex Parte No. 388. See, e.g.,

No. 39020, Petition for Review of a Decision of the Pub-

lic Service Commission of Indiana (not printed), served

January 21, 1983. Consequently, we take this oppor-

tunity to put railroads on notice that future attempts to

question the certification process itself in proceedings un-

der section 11501(c) will be summarily rejected.

70a

It is ordered:

1. Upon -econsideration on the present record, L&N’s

petition fo review is granted to the extent set forth in

this decisiun. We determine that the appropriate rate is

94 cents per net ton at the October 1, 1981 level, subject

to intervening increases.

2. L&N’s petition for clarification is granted.

3. This decision is effective on the date of service.

4. This proceeding is discontinued.

By the Commission, Chairman Taylor, Vice Chairman

Sterrett, Commissioners Andre and Gradison. Commis-

sioner Andre concurred with a separate expression.

Chairman Taylor dissented with a separate expression.

AGATHA L. MERGENOVICH

Secretary

[SEAL |

COMMISSIONER ANDRE, concurring:

! fully agree with the majority’s position that the state

commission had no evidence before it that inefficiency or

cross-subsidization actually existed, much less that it was

large enough to justify the revenue reduction that was

ordered. The evidence before the state commission in no

way justified the remedy that it ordered.

Let us assume, however, that the evidence of record

had demonstrated the existence of avoidable loss traffic

and had quantified the extent of the loss. I submit that,

even if this had been shown, the Act does not necessarily

entitle a shipper to have its rates reduced to the jurisdic-

tional threshold. We would be totally ignoring the reve-

nue adequacy provisions of the Act if we were to assume

that the mere existence of loss traffic (or some other in-

efficiency) could automatically justify pushing a revenue

inadequate carrier further into revenue inadequacy by

Tla

reduction of rates on profitable traffic. Before rate re-

ductions are ordered for a revenue inadequate railroad

as a response to inefficiency, the following steps should

be taken at the very least:

(1) First, the revenue inadequate railroad should be

given an opportunity to submit a plan for the elimination

of the loss traffic or inefficiency. (This was not done

here.) In order to satisfy the statutory concern for effi-

cient operations, revenue reductions for profitable traffic

may be allowed if the railroad refuses to take feasible

and lawful steps to eliminate the inefficiency.

(2) The loss from inefficient operations (after verifi-

cation and quantification) should first be applied as an

offset to the carrier’s total revenue inadequacy shortfall

before it is applied to justify revenue reductions. (This

was not done here.) Revenue reductions should be re-

quired only to the extent that the dollar amount of the

inefficiency exceeds the revenue inadequacy shortfall. If

the inefficiency is less than the extra revenues that are

entitled to be earned to attain revenue adequacy, we

would be ignoring the revenue adequacy provisions of

the Act if we were to require an immediate revenue re-

duction equal to the entire dollar amount of the ineffi-

ciency.

(3) Finally, revenue reductions should not be ordered

as a response to inefficiency unless the regulatory body

first makes a reasoned determination of which traffic

should benefit from the revenue reduction. The entire

amount of the rate reductions should not necessarily be

absorbed by one particular shipper since other shippers

may also be disadvantaged by the inefficiency. Here, the

state commission simply assumed that the complainant

in this docket should be the main beneficiary of its re-

sponse to the alleged inefficiency of the railroad, even

though the alleged inefficiency was not shown to be

peculiar to the operation serving the complainant.

72a

CHAIRMAN TAYLOR, dissenting:

After a careful review of the Commission’s earlier

decision, the pleadings, and the staff’s recommendations,

I am convinced that the decision of the Indiana Com-

mission was incorrectly overturned. While I agree with

the majority that this case presents difficult issues, many

of which are still unresolved, I believe that the Indiana

PSC, given the facts before it ard the lack of federal

standards, had a rational basis to rule as it did. I would

not disturb that decision except for correcting certain

of the state agency’s findings regarding variable costs

attributable to the service in question.

In this case, the Indiana Commission issued a very

detailed decision. It set forth the factual determinations

underlying its ultimate conclusion in 71 separate find-

ings, relying upon our standards whenever available,

with citations, for example, to the market dominance

guidelines established in Complaints Filed,—229—Stag-

gers Rail Act of 1980, 365 1.C.C. 507 (1982) and Market

Dominance Determinations, 365 I.C.C. 118 (1981).’

As pointed out by the majority, the statutory pro-

visions require a consideration and balancing of “revenue

adequacy” and “management efficiency” factors, includ-

ing the closely related Long-Cannon factors. But, while

our views on revenue adequacy have been clearly enunci-

ated in numerous cases, this Commission has yet to give

concrete meaning to the Long-Canno~ factors or to es-

tablish standards for “economical and efficiency manage-

ment”. Thus, there are at present no clearly identifiable

1 The Indiana Commission’s inefficiency finding ultimately rests

upon the state agency’s conclusion that, based on the evidence

presented, L&N had no quantifiable marketing tools and was using

inefficient pricing practices. These conclusions are supported by

the record. In this regard, I would also note that L&N’s assertic™

here that the data did not exist cannot be ignored because of co..

trary representations in a proceeding involving a different state,

behavior which the majority correctly terms “inexplicable.”

73a

federal standards to guide the states in applying these

factors in particular cases, and this Commission is simply

substituting its judgment for that of the Indiana PSC.

Were this matter initially before us, I might well reach

a different conclusion than the state agency. But that

is not the statutory scheme. Absent inconsistency with

federal standards and procedures, the decision by the In-

diana Commission must stand.

The same rationale applies to the remedy selected by

the Indiana PSC. As yet, there exists no federal stand-

ard by which to judge the Indiana Commission’s setting

of the appropriate rate once it determined L&N’s rate to

be unreasonable. Given this fact, I would not disturb

the state agency’s remedy, except to adjust the actual

rate based on our finding that the variable cost figure

was incorrectly derived. The administrative process, af-

ter all, is not modeled on “The Price is Right”? The

Indiana Commission should not be required to guess—

and guess again—as to the appropriate remedy, absent

enunciation by this Commission of a federal standard.

2See Trans Alaska Pipeline Rate Cases, 436 U.S. 631, 653

(1978).

74a

APPENDIX F

Service Date—Nov. 24, 1982

INTERSTATE COMMERCE COMMISSION

DECISION

No. 38946

PETITION OF LOUISVILLE AND NASHVILLE RAILROAD

COMPANY FOR REVIEW OF A DECISION OF THE

PUBLIC SERVICE COMMISSION OF INDIANA

PURSUANT TO 49 U.S.C. 11501

Decided: November 22, 1982

By petition filed October 25, 1982, the Louisville and

Nashville Railroad Company (L&N) seeks review pur-

suant to 49 U.S.C. 11501(c) of a decision of the Public

Service Commission of Indiana (PSCI) which prescribed

the maximum reasonable rate for certain intrastate coal

movements.’ L&N requests relief on the basis that the

PSCI failed to apply standards and procedures consistent

with the Interstate Commerce Act (Act). Accordingly,

L&N requests that we find that PSCI’s decision exceeded

its jurisdiction and is void ab initio, that we establish

a rate of $1.11 per net ton as the appropriate rate for

the transportation in issue, and that we revoke the pro-

visional certification of PSCI to exercise jurisdiction over

intrastate rail transportation. A reply was filed by the

Public Service Company of Indiana, Inc. (PSI).

1(PSCI) Cause No. 36431, approved September 17, 1982.

75a

BACKGROUND

Facts. At issue are the rates for the movement of bi-

tuminous coal, in unit trains, from Universal Mine at

Clinton, IN, to PSI’s electric generating station at

Cayuga, IN. PSI’s Cayuga station is fueled exclusively

with coal provided pursuant to a long-term contract with

Peabody Coal Company from its Universal Mine. The

annual volume of coal shipped under this contract

amounts approximately to 2.5 million tons per year. PSI

provides the cars for these shipments which are handled

on a round-trip basis over the 26.43 miles between Uni-

versal Mine and the Cayuga generating station. L&N

engines used in this service are also regularly shared

with certain unit train coal movements provided by

LEN for Indiana & Michigan Electric Company.

On March 27, 1981, PSI and Peabody Coal Company

(complainants) filed a complaint requesting that the

PSCI investigate the reasonableness of the rate for this

transportation. The assailed rates are set forth in

Freight Tariff LN 4278 and supplements thereto.? Fol-

lowing evidentiary submissions by the parties and oral

hearings, the PSCI found that: (1) L&N had market

dominance over the involved traffic; (2) the applicable

rate at the October 1, 1981, level of 94 cents per net

2 As explained more fully in the PSCI decision, and the pleadings

on petition here, the rate history is fairly complex. The application

of the rates themselves are subject to various stipulations and

agreements not to collect various portions of the rate subject to

the outcome of various litigation. See, e.g., Indianapolis Power &

Light Company v. ICC, No. 81-1916 (7th Cir. U.S.C.A.), decided

September 3, 1982, and <PSCI) Cause No. 36549, stipulation of

August 12, 1981. For purposes here, in (PSCI) Cause No. 35884,

decided September 12, 1980, PSCI prescribed a rate of 69 cents

per net ton on this traffic. Subsequent increases would have brought

the applicable rate to $1.03 per net ton as of October 1, 1981. How-

ever, the agreements discussed above left the rate at 94 cents as

of that date. Subsequent increases, if totally applied, would bring

the rate to $1.11 per net ton as of September 1, 1982.

76a

ton was unreasonable; and (3) the maximum reasonable

rate at the October 1, 1981, level, subject to the inter-

vening increases, was 65 cents per net ton (165 percent

of variable costs).

Petition for review. L&N argues that PSCI failed to

act in accordance with Federal standards in the following

respects: (1) in not applying ICC guidelines with respect

to establishing maximum reasonable rates; (2) in ignor-

ing L&N’s rate comparison evidence; (3) in finding that

L&N’s management is not efficient and economical; (4)

in rejecting certain of L&N’s cost adjustments; and (5)

in failing to explain why the maximum reasonable rate

is now lower than it was two years ago.

DISCUSSION AND CONCLUSIONS

Under 49 U.S.C. 11501(c), a rail carrier may seek

Commission review of a decision made by a State au-

thority in an administrative proceeding in which the

lawfulness of an intrastate rate is determined. The

grounds for review are that the standards and procedures

applied by the State were not in accordance with Federal

law. After reviewing the record, we conclude that

PSCI’s decision is inconsistent with Federal standards

and procedures in certain critical respects.

1. Market Dominance and Costs

The PSCI properly set out as guidelines our recent

standards regarding qualitative and quantitative market

dominance in Complaints Filed—§ 229—Staggers Rail

Act of 1980, 365 LC.C. 507 (1982), and Market Domi-

nance Determinations, 365 I.C.C. 118 (1981). Using

these standards, the parties eventually stipulated that

L&N had market dominance over the involved traffic.

Through an independent review of the cost evidence of

record, we were able to corroborate that the PSCI’s over-

all development of variable costs was consistent with our

evidentiary guidelines and was adequate in determining

77a

that the challenged 94-cent rate exceeded the jurisdic-

tional threshold.

In its decision, PSCI concluded that variable costs were

39.1 cents per net ton and prescribed a rate based on 165

percent of those variable costs, the minimum, jurisdic-

tionally possible, rate. However, as explained in the Ap-

pendix, we conclude that certain adjustments should have

been made to those costs which would in fact raise the

variable cost level to 46.5 cents per net ton. Accordingly,

PSCI’s prescription of a rate of 65 cents per net ton

results in a revenue to variable cost ratio of approxi-

mately 140 percent which is below the Federal jurisdic-

tional standards in effect on October 1, 1981 of 165%

(now 170% as of October 1, 1982).

II. Revenue Adequacy

Even assuming, arguably, that the Commission could

adjust the rate to be consistent with the PSCI prescrip-

tion of 165 percent of variable costs (1.65 x 46.5 cents or

77 cents per net ton), we must conclude that, in this

case, PSCI’s prescription at the jurisdictional level was

not consistent with Federal standards of revenue ade-

quacy.

One of the primary goals of the Staggers Rail Act of

1980 is promotion of railroad revenue adequacy so that

the railroads can attract and retain capital in amounts

sufficient to provide a sound national transportation sys-

tem. 49 U.S.C. 10101a(3) and 10701a(a) (3). This is

an unequivocal Congressional mandate. In our latest

revenue adequacy determination, we noted that peti-

tioner’s most recent figures for return on investment

(7.04 percent) fell far short when compared to our de

termination of the current cost of capital (16.5 percent),

Ex Parte No. 439, Railroad Revenue Adequacy—1981

Determination (not printed), served November 18, 1982.

In No. 38793, Petition for Review of a Decision of the

Public Service Commission of West Virginia Pursuant to

78a

49 U.S.C. 11501 (not printed), served March 18, 1982,

the Commission found that a comprehensive explanation

and rationale was required for a State agency attempt-

ing to set rail rates at or near jurisdictional threshold

levels, especially for revenue inadequate carriers. PSCI

correctly found that due to L&N’s revenue inadequacy

it is entitled to the benefit of differential pricing on

captive traffic (pricing above full costs) to reach the

revenue adequacy goal. PSCI then went on to consider

the complainants’ allegations of L&N’s lack of efficiency

in determining the degree of differential pricing which

this traffic should bear.’

PSI attempted to obtain information regarding the

Long-Cannon factors through the use of interrogatories,

but the L&N claimed that it did not have the data re-

quested. Subsequently, PSI attempted to establish L&N’s

inefficiency through the cross-examination of L&N’s pric-

ing witness and by producing witnesses who compared

L&N’s profitability to its parent corporation, and com-

pared the operating performance of the Family Lines

System (of which L&N is a part) to a competitor, the

Southern Railway Company. The PSCI found that PSI

had submitted enough relevant evidence on efficiency

factors to require L&N to rebut, and that L&N’s rebuttal

evidence constituted only “a very limited demonstration

of proper management efforts.” (Finding No. 59) Ac-

cordingly, PSCI found that L&N had “not presented con-

vincing evidence that its management is efficient and

economical.” (Finding No. 63) Because of this finding,

3 Standards for the handling of evidence regarding rail efficiency

in complaint proceedings were just recently issued in No. 38754,

Arkansas Power & Light Company, et al.-Petition to Institute

Rulemaking Proceeding-Implemenitation of Long-Cannon Amend-

ment to the Staggers Rail Act (Long-Cannon) (not printed), served

September 3, 1982, in which we issued a policy statement regarding

the so-called “Long-Cannon” factors set forth at 49 U.S.C.

10707a(e) (2) (B) and (C). See also 49 U.S.C. 10704(a) (2), 49

U.S.C. 10707a(e) (2) (C) and Long-Cannon, supra.

79a

PSCI also found that L&N was not entitled to use

differential pricing to raise the rate on this coal move-

ment above the then applicable jurisdictional threshold

of 165 percent. (Finding Nos. 55 and 69) The PSCI

rationalized that it did provide for some degree of differ-

ential pricing, since it prescribed a rate in excess of the

fully allocated cost of the movement, including the current

cost of capital.

In finding L&N inefficiently managed, the PSCI criti-

cized L&N’s pricing policy as one based on “the arbitrary

‘judgment’ of its pricing officers on a case-by-case basis,

unaided by any quantifiable sophisticated marketing tools

such as demand elasticity studies.” (Finding No. 67) We

recently considered the “efficiency” language in 49 U.S.C.

10704 (a) (2) and the connected Long-Cannon factors in

Long-Cannon, supra, and, in denying a rulemaking re-

quest in that proceeding specifically refused to require

carriers to undertake such studies. In fact, in Long-

Cannon, supra, at page 9, we said:

“We also disagree with petitioners’ contention that

optimum pricing of marginal traffic necessarily re-

quires elasticity studies. In our opinion, railroad

management is best suited, and has every incentive,

to determine when formal elasticity studies are nec-

essary. The cost of performing formal elasticity

studies for all competitive traffic would be prohibi-

tive. In more instances than not, a carrier’s rate

officers, through their marketing efforts, negotiations

with shippers, and knowledge of the presence and

level of competition, are far more capable than we of

constructing an optimal rate structure, using elas-

ticity studies where needed.”

Accordingly, the PSCIs reliance upon failure to employ

these tools in finding L&N to be inefficient was improper

in and of itself, and because it cut short any thought of

permitting L&N to raise its rates on this movement above

the jurisdictional threshold. The concept of revenue ade-

80a

quacy is too important for such a consideration to be

dismissed this quickly.

Although PSCI ostensibly considered the L&N’s need

to achieve revenue adequacy in allowing some measure of

differential pricing, it actually gave only lip service to

the goal of revenue adequacy. In fact, PSCI concluded

that the “proper” rate would not exceed fully allocated

costs. (Finding No. 68) Because PSCI set the rate at the

lowest, jurisdictionally possible, level, it is not clear to us

how, if at all, the concept of revenue adequacy was

- eonsidered.

In using the questionable finding of inefficient manage-

ment‘ to avoid genuine consideration of revenue ade-

quacy, PSCI violated one of the most important Federal

standards—one that permeates the present statutory

scheme of railroad rate regulation. We conclude that the

PSCI failed to give proper consideration to revenue ade-

quacy. The rate level it ultimately prescribed is an

indication of this because it could have set the rate no

lower if it had admittedly not considered revenue ade-

quacy at all.

DETERMINATION OF APPROPRIATE RATE

Under 49 U.S.C. 11501(c), when we determine, as

here, that the standards and procedures applied by the

State authority are not in accordance with Federal law,

4In addition to problems relating to evidence on “efficiency”

previously cited, PSCI interpreted the Long-Cannon Amendment

as creating a strict burden of proof analysis. Contrary to PSCI’s

approach, the statute provides simply that evidence of inefficiency

is to be a factor in analyzing the reasonableness of rates. The

statute, furthermore, addresses issues from a much more technical

perspective than PSI employed and PSCI found convincing. Con-

sistent with our decision in Long-Cannon, supra, we do not believe

that PSI tendered sufficient, specific evidence of mismanagement

and other Long-Cannon criteria to warrant denying a revenue in-

adequate carrier the opportunity to become profitable.

8la

we must determine and authorize the carrier to establish

the appropriate rate. By statute we must take final

action within 30 days after receipt of the underlying

petition for review. PSCI held a full hearing to estab-

lish the appropriate rate and we have reviewed the record

in its entirety. Additionally, we note that, at the October

1, 1981, rate level of 94 cents per net ton, which was the

applicable level under consideration by the PSCI, the

revenue to variable cost ratio based upon our revised

figure for variable costs is 202 percent. We have in the

recent past determined rates to be reasonable where they

resulted in similar or substantially higher ratios, espe-

cially where considerations of revenue adequacy are sig-

nificant. See Agrico Chemical Co. v. Seaboard Coast Line

R. Co., 361 1.C.C. 333 (1979), aff'd Agrico Chemical Co.

v. 1.C.C., 652 F.2d 195 (D.C. Cir. 1981), where a group

rate was found to be reasonable which produced a ratio

of revenue to variable cost of 228 percent. See also: No.

37014, EF. I. DuPont de Nemours & Co. v. St. Louis South-

western R. Co., Et Al. (unprinted, svd. March 30, 1979)

(209 %-235% of variable costs); Nat'l Electric Manu-

facturers Ass’n V. Aberdeen & Rockfish R. Co., 349 I.C.C.

502, 509-10 (1974), remanded, 407 F. Supp. 598 (W.D.

Pa. 1976), supplemented and aff'd, 355 I.C.C. 597 (1977)

(159.6%-230.1% of fully allocated costs); Trainload

Rates On Radioactive Materials, Eastern Railroads, 362

I.C.C. 756, 775 (1980), affd mem., 646 F.2d 642 (D.C.

Cir. 1981) (213.8%-225.7% of variable costs).

Here, as stated earlier, L&N realizes a return on in-

vestment substantially below that is necessary for revenue

adequacy. Balancing the goals reflected in Title 49 of

the United States Code, especially in section 11501 and

its history, the evidence before us, and practical con-

siderations, we determine that the appropriate rate, pre-

scribed at the October 1, 1981 level, subject to intervening

increases, is the rate of 94 cents per net ton.

Given our decision here, we need not reach the other

issues raised by L&N.

82a

This decision will not significantly affect either the

quality of the human environment or conservation of

energy resources.

It is ordered:

The relief sought in the petition is granted to the

extent set forth in this decision. The prescribed rate is

set at 94 cents per net ton at the October 1, 1981 level,

subject to intervening increases.

By the Commission, Chairman Taylor, Vice Chairman

Gilliam, Commissioners Sterrett, Andre, Simmons, and

Gradison. Commissioner Simmons dissented with a sepa-

rate expression. Chairman Taylor and Commissioner

Sterrett were absent and did not participate.

AGATHA L. MERGENOVICH

Secretary

[SEAL]

Commissioner Simmons, dissenting:

In matters involving state regulation of intrastate

rates, this Commission may intervene only if it finds

that a state has violated a federal procedure or definable

federal standard. Because I believe that PSCI did not

violate either a federal standard or procedure, I would

dismiss the appeal and affirm Indiana’s decision.

The majority finds that PSCI complied with our stand-

ard and procedures up until its discussion of revenue

adequacy. The majority agrees that Indiana did offer a

framework for application of the revenue adequacy con-

cept and its use in the ultimate result as we required in

No. 38793, Petition for Review of a Decision of the

Public Service Commission of West Virginia, and that it

correctly found that due to L&N’s revenue adequacy, the

railroad is entitled to the benefit of differential pricing

on captive traffic to reach the revenue adequacy goal.

83a

According to the majority, so far so good. However, the

majority asserts that PSCI’s findings concerning the

efficiency of L&N failed to “comply with Federal law’.

I fail to see such a violation. In Long-Cannon, supra, the

Commission stated: “With respect to implementation of

the closely related honest, economical, and efficient man-

agement issue, we continue to recognize the difficulty of

giving effect to the requirement”. From this statement

and the Long-Cannon discussion of revenue adequacy, a

State agency is supposed to ascertain our standards with

regard to efficient management? Webster defines stand-

ard as “something established by authority, custom or

general consent as a model or example.” Standards must

be clear and unambiguous. Our discussion of economical

and efficient management is far from clear and un-

ambiguous.

Even if the majority is correct, it, again, does not spell

out the correct approach states should follow in consider-

ing this factor, but only says what is wrong with PSCI’s

approach. What is the state to do without clear guide

lines?

Although the Commission may have reached different

conclusions regarding the efficiency of L&N’s manage-

ment and the amount of differential pricing to which

LE&N is entitled, I do not believe PSCI violated current

Federal standards, especially since our standards are far

from clear and precise. Absent of violation, the Commis-

sion is substituting its judgment for that of Indiana’s.

84a

APPENDIX

After accepting a number of PSI’s costing adjustments

during the course of this proceeding, L&N calculates the

variable cost, at the embedded debt level, for the traffic

in issue to be 46.6 cents per net ton. PSI’s calculation

resulted in a variable cost of 39.1 cents per net ton. In

its petition for review, L&N argues that the difference

results from five separate cost issues which should have

been resolved in its favor. Our analysis of these issues

is as follows:

Cost Issues

1. Year of Rail Form A application

L&N—The railroad notes that the shippers declined to

use unit costs updated from a 1979 application of Rail

Form A, ostensibly because such costs were found un-

acceptable to an initial decision served June 22, 1981, in

ICC Docket No. 37338, South Carolina Public Service

Authority v. Clinchfield Railroad Company. L&N indi-

cates, however, that in a decision served April 7, 1982,

the Commission began to prefer 1979-basis costs over

those of a previous year.

PSI—The shipper’s opening and rebuttal verified state-

ments were dated March 1 and April 30, 1982, respec-

tively. Having used in its opening evidence costs based

upon 1977 data, the final year in which railroad annual

reports were filed in a format directly comparable with

Rail Form A, PSI did not modify its base year in the

rebuttal evidence to accord with the ICC’s decision of

April 7, 1982, in No. 37338, supra.

Conclusion—In the absence of compelling reasons for

the use of costs from a prior period, the most reliable

estimate of costs for the immediate future would be

historical costs from the immediate past. Influences upon

costs such as fluctuating maintenance are commonplace

85a

in the railroad industry and do not justify a departure

from this practice. We accept L&N’s unit costs.

2. Train supplies and expenses at origin and destina-

tion

L&N—The railroad included terminal train supplies

and expenses based upon the Burden Study factor 8.515

percent of system average. Special services at origin and

destination were excluded.

PSI—The shipper contends that of the various miscel-

laneous components of this unit cost and the companion

special services, only inspection/policing and caboose sup-

plies “could be remotely identified with . . . PSI’s unit

trains.” They aver that the ICC recently modified its

position respecting the inclusion of such costs in the

decision served July 17, 1981, in Docket No. 37450,

Central Illinois Light Company v. Atchison, Topeka and

Santa Fe Railway Company, et al. A portion of the

decision referring to the nonapplicability of “special serv-

ices” cost in connection with unit trains was cited in

support.

Conclusion—Separate unit costs are developed in Rail

Form A for special services and train supplies and ex-

penses. While exclusion from unit train costs may be

justified for special services, we believe the purpose of

the 8.515 percent residual train supply cost applicable

to volume movements of the nature herein was, and is,

sound. L&N’s costs are acceptable.

3. Investment value of locomotives

L&N—Locomotive depreciation and cost of capital were

predicated upon four units per train in the GP-38-2 and

GP-40-2 series for which the average ledger value was

$585,022 per unit. Such locomotive usage was determined

in a study of actual time tickets for September 1981.

86a

PSI—Citing the ICC decision served December 21,

1981, in Ex Parte No. 347 (Sub-No. 1), Coal Rate Guide-

lines—Nationwide, in which PSI claims our policy to be

one of assigning investment cost directly to the traffic

which requires equipment acquisition, it is contended that

since the instant movement began 12 years ago, the cost

of locomotives of similar vintage should be used herein.

For this proceeding PSI uses costs for such locomotives

taken from another proceeding.

Conclusion—PSI did not challenge the validity of

L&N’s study, and we know of no rationale for holding

that equipment acquired for specific movements cannot be

replaced by modernized versions as the origin] equipment

ages. It would appear to be good management practice

to install newly acquired locomotives in such demanding

services as 100-car bulk commodity trains. To hold other-

wise would discourage replacement of obsolete physical

property. L&N’s cost is acceptable.

4. Fuel Cost

L&N—On three consecutive days in September 1979

and also in January 1980, fuel was metered. Thus,

average consumption per trip of 984 gallons was applied

to an October 1, 1981 price of $1.17 per gallon charged

by L&N’s supplier, Bruno’s Fuel Service. Transportation

and general overheads were included.

PSI—The shipper accepts the railroad’s methodology

except that it applies the Rail Form A 97-percent vari-

ability ratio. PSI alleges that use of a 100-percent vari-

ability ratio cannot be acceptable unless the locomotives

consumed all their fuel in handling a single traffic move-

ment. In the instant proceeding, the locomotives also

service the Indiana-Michigan movement from Terre

Haute, which, coupled with empty mileage apportionable

between the two movements, necessitates recognition of

the constant portion of fuel expense.

87a

Conclusion—We agree with PSI that the use made of

the locomotives has not been differentiated on the record

from ordinary railroad operations for which variability

of the fuel expense accounts has been established at 97

percent. Accordingly, our restatement of L&N’s cost per

car to incorporate Rail Form A variability results would

lower the figure by $.32 per car.

5. Tonnage divisor

L&N—tThe railroad contends that the total costs per

car should be divided by the average car lading weight—

96 tons.

PSI—PSI uses 98 tons as a divisor, which figure is

based upon the minimum tariff weight for cars actually

loaded at a lower weight.

Conclusion—In determining the cost per ton of han-

dling the subject traffic, it is proper to employ as a di-

visor the number of tons actually moved. While the ap-

plication of the tariff rate may take into account tonnage

minima, ascertainment of handling cost is governed only

by tons moved, whether that figure is less or greater than

the minimum. Thus, L&N’s methodology is acceptable.

Summary of cost analysis

Having found that L&N used acceptable procedures

(with one exception) in developing its cost, it is neces-

sary to recalculate the per car cost resulting in its figure

of 46.6 cents per ton in order to reflect the 97 percent

fuel expense variability. Thus, in lieu of $44.96 total

variable cost per car, the fuel adjustment procedures

$44.64 per car or 46.5 cents per ton. Based upon L&N’s

factors of 1.33449 to convert variable cost at embedded

debt to fully allocated cost (ratio basis) using a 19 per-

cent pre-tax current cost of capital, the fully allocated

cost at that level is 62.1 cents per ton.

Dieser!

&8a

APPENDIX G

RELEVANT STATUTORY PROVISIONS

Staggers Rail Act of 1980,

P.L. 96-448, 94 Stat. 1895 (October 14, 1980)

GOALS

Sec. 3. The purpose of this Act is to provide for the

restoration, maintenance, and improvement of the physi-

cal. facilities and financial stability of the rail system of

the United States. In order to achieve this purpose, it is

hereby declared that the goals of this Act are—

(1) to assist the railroads of the Nation in re-

habilitating the rail system in order to meet the

demands of interstate commerce and the national

defense;

(2) to reform Federal regulatory policy so as to

preserve a safe, adequate, economical, efficient, and

financially stable rail system;

(3) to assist the rail system to remain viable in

the private sector of the economy;

(4) to provide a regulatory process that balances

the needs of carriers, shippers, and the public; and

(5) to assist in the rehabilitation and financing of

the rail system.

Interstate Commerce Act, Subtitle IV of Title 49,

United States Code, Transportation

§ 10101. Rail transportation policy

In regulating the railroad industry, it is the policy of

the United States Government—

(1) to allow, to the maximum extent possible,

competition and the demand for services to establish

reasonable rates for transportation by rail;

89a

(2) to minimize the need for Federal regulatory

control over the rail transportation system and to re-

quire fair and expeditious regulatory decisions when

regulation i

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