# Appendix — Public Service Co. of Indiana v. Interstate Commerce Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385018_0149%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1985 - **Citation:** 474 U.S. 909 ## Text 84-16 oq” En 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 la 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 2a 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). 3a 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. 4a 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). oa 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. 6a 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; (C) 170 percent during the period beginning October 1, 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 Ta 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. 8a 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. 9a 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- ee 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 nr 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. (C) In determining whether a rate is reasonable, 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 ee 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 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 (c) “appropriateness” to the “reasonableness” determi- 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 v. 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 eS 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.” 3 | > 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 ee 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 require [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385018_0149%3A2. Public record. Not legal advice.