# Appendix — Southern Pacific Transportation Co. v. Interstate Commerce Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_2299%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1993 - **Citation:** 508 U.S. 950 ## Text Supreme Court of the GQnited States OcY’OBER TERM, 1992 SOUTHERN PACIFIC TRANSPORTATION COMPANY, and St. LOUIS SOUTHWESTERN RAILWAY COMPANY, Petitioners, Ww INTERSTATE COMMERCE COMMISSION and UNITED STATES OF AMERICA, et al., Respondents. Petition For A Writ Of Certiorari To The United States Court Of Appeals For The District Of Columbia Circuit APPENDIX TO PETITION FOR WRIT OF CERTIORARI C. Y. HARVEY PAUL A. CUNNINGHAM* CAROL A. HARRIS RICHARD B. HERZOG JOHN MACDONALD SMITH HARKINS CUNNINGHAM SOUTHERN PACIFIC 1300 19th Street, N.W. TRANSPORTATION COMPANY Washington, DC 20036 One Market Plaza (202) 973-7600 San Francisco, CA 94105 (415) 541-1756 Attorneys for Southern Pacific Transportation Company and St. Louis Southwestern Railway Company April 6, 1993 *Counsel of record PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203 INDEX TO APPENDIX Order of the U.S. Court of Appeals for the District of Columbia Circuit and Memorandum denying petitions for review (Oct. 30, 1992) .....0...0.0.... Order of the U.S. Court of Appeals for the District of Columbia Circuit denying petition for re- hearing (Jan. 6, 1993) wooceeccccccccsccsscescsceceeee. Order of the U.S. Court of Appeals for the District of Columbia Circuit denying suggestion for re- hearing en banc (Jan. 6, 1993) ....cccccccccccccceeess Decisions of the Interstate Commerce Commission in Finance Docket No. 30,000 (Sub-No. 16), St. Louis Southwestern Railway Company—Track- age Rights Over Missouri Pacific Railroad— Kansas City to St. Louis ee re Be 2 | aR Tem a Amn E.C.C.Bd GB (197) .......cccccccscsccascsccsessarovssees CSET HEHEHE OEE HEHEHE EEE EEE EEE EE EES 4 +) 8 1.C.C.2d 80 (1991) & CPPS HT OSES TEESE SESE EES ESE SESE SEEEOS eee eee eee ee ee ee et Page la 4a 5a la NOT TO BE PUBLISHED—SEE LOCAL RULE 14 United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT September Term, 1992 No. 88-1186 Union Pacific Corporation, et al., Petitioners v. Interstate Commerce Commission, et al., Respondents FILED OCT 30 1992 RON GARVIN CLERK and Consolidated Case Nos. 89-1443, 89-1483, 91-1529, and 92-1020 ON PETITIONS FOR REVIEW OF ORDERS OF THE INTERSTATE COMMERCE COMMISSION Before: MIKVA, Chief Judge, RUTH B. GINSBURG and SILBERMAN, Circuit Judges. JUDGMENT These petitions were considered on the record and on the briefs and oral arguments of counsel. The arguments have been accorded full consideration by the Court and occasion no need for a published opinion. See D.C. Cir. Rule 14(c). For the reasons stated in the accompanying memorandum, it is ORDERED AND ADJUDGED by this Court that the petitions for review be denied. 2a The Clerk is directed to withhold issuance of the man- date herein until sever (7) days after disposition of any timely petition for rehearing. See D.C. Cir. Rule 15. Per Curiam For the Court /s/ Ron Garvin Ron Garvin Clerk MEMORANDUM The petitioner railroads seek review of orders of the Interstate Commerce Commission (“ICC’”’ or ‘“Commis- sion’’) setting the rate of compensation that Standard [sic] Pacific (“SP’’) must pay Union Pacific (‘‘UP’’) for the ex- ercise of its right to use certain UP track. The Commission approved an ‘earlier railroad consolidation involving UP subject to certain conditions designed to counteract the potentially anti-competitive effects of the merger, including a requirement that the consolidated UP railroad grant trackage rights to SP and other specified railroads in order to allow competitive alternatives for travel across the Cen- tral Corridor of the United States between St. Louis and the West. Unable to reach a private agreement, the petitioners entered into proceedings with the Commission that lasted approximately seven years and produced the five trackage rights compensation orders that are the sub- ject of the petitions. This Court is limited in its scope of review and may only grant the petitions for review in this case if the ICC action was arbitrary, capricious, an abuse of discretion, or unsupported by substantial evidence on the record as a whole. See Simmons v. Interstate Commerce Commission, 934 F.2d 363, 367 (D.C. Cir. 1991); Cross-Sound Ferry Services v. Interstate Commerce Commission, 873 F.2d 395, 401 (D.C. Cir. 1989). There is substantial evidence on the 3a record to support the ICC’s calculation of tracking com- pensation and interest on delayed payments. Moreover, throughout the compensation proceedings, the Commission considered vast amounts of technical evidence, reevaluat- ing and reformulating its decisions in light of the objec- tions of the petitioners and the production of new evidence. Although the Commission did not fully explain why the petitioners’ suggested approaches were inferior to its own, the burden upon the petitioners is ‘‘not merely to put forth an acceptable alternative but rather to demonstrate clearly and convincingly a fatal flaw in the action taken.” Nader v. Federal Communications Commission, 520 F.2d 182 (1975), (quoting Goodman v. Public Service Commission, 309 A.2d 97, 101 (D.C. 1973)) (emphasis in original). The petitioners have failed to meet this burden and their petitions must therefore be denied. 4a United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT September Term, 1992 No. 88-1186 Union Pacific Corporation, et al., Petitioner V. Interstate Commerce Commission and United States of America, Respondent FILED JAN 06 1993 RON GARVIN CLERK and Consolidated Cases BEFORE: Mikva, Chief Judge; Ruth B. Ginsburg and Sil- berman, Circuit Judges ORDER Upon consideration of petitioners’ petition for rehearing, filed December 14, 1992, it is ORDERED, by the Court, that the petition is denied. Per Curiam FOR THE COURT: RON GARVIN, CLERK BY: /s/ Robert A. Bonner Robert A. Bonner Deputy Clerk 5a United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT September Term, 1992 No. 88-1186 Union Pacific Corporation, et al., Petitioner v. Interstate Commerce Commission, and United States of America, Respondent FILED JAN 06 1993 RON GARVIN CLERK and Consolidated Cases BEFORE: Mikva, Chief Judge; Wald, Edwards, Ruth B. Ginsburg, Silberman, Buckley, Williams, D. H. Ginsburg, Sentelle, Henderson, and Randolph, Circuit Judges ORDER Petitioners’ Suggestion Fcr Rehearing En Banc has been circulated to the full Court. No member of the Court re- quested the taking of a vote thereon. Upon consideration of the foregoing it is ORDERED, by the Court en banc, that the suggestion is denied. 6a Per Curiam FOR THE COURT: RON GARVIN, CLERK BY: /s/ Robert A. Bonner Robert A. Bonner Deputy Clerk Circuit Judge Randolph did not participate in this matter. Ta INTERSTATE COMMERCE COMMISSION REPORTS FINANCE DOCKET NO. 30,000 (SUB-NO. 16): ST. LOUIS SOUTHWESTERN RAILWAY COMPANY-- TRACKAGE RIGHTS OVER MISSOURI PACIFIC RAILROAD COMPANY—KANSAS CITY TO ST. LOUIS TRACKAGE RIGHTS COMPENSATION Decided August 20, 1984 1. In Finance Docket No. 30,000 (Sub-No. 25), the agree- ments of November 9, 1982, as supplemented January <1, 1983, governing trackage rights compensation be- tween Missouri-Kansas-Texas Railroad Company and Union Pacific Railroad Company and Missouri Pacific Railroad Company are approved. 2. In Finance Docket No. 30,000 (Sub-No. 18), trackage rights compensation will be calculated in three parts: (a) variable costs of operations, (b) a percentage share of all maintenance and operations expenses and taxes based upon tenant’s actual usage, and (c) an interest rental component representing return on investment and determined by a capitalized earnings approach. 3. In Finance Docket No. 30,000 (Sub-No. 16), the track- age rights awarded include operations to Missouri Pa- cific milepost 0.0 in St. Louis, and interchange operations along the Missouri Pacific lines. The inter- change rights do not embrace Labadie, MO. ‘This decision also embraces Finance Docket No. 30,000 (Sub-No. 18). Denver and Rio Grande Western Railroad Company—Trackage Rights—Missouri Pacific Railroad Company—Between Pueblo, CO and Kansas City, MO, and Finance Docket No. 30,000 (Sub-No. 25), Mis- souri-Kansas-Texas Railroad Company—Trackage Rights—Missouri Pa- cific Railroad Company—Between Kansas City, KS and Omaha, NE. 8a 4. In Finance Docket No. 30,000 (Sub-No. 16), trackage rights compensation will be determined in the same manner set forth in the Sub-No. 18 proceeding. The record is kept open for filing of supplemental infor- mation necessary to complete this calculation. 5. In Finance Docket No. 30,000 (Sub-No. 16), interim compensation will be paid as agreed by the parties at the level finally determined in this proceeding and ef- fective retroactively to January 6, 1983. Interest at the railroad industry’s current cost of debt will accrue on the difference in amounts actually paid and the com- pensation fixed in this proceeding. 6. In Finance Docket No. 30,000 (Sub-Nos. 16 and 18), landlord retains the right to make improvements to the property without tenants’ prior consent. Compensation for improvements will be at their actual cost times lan- dlord’s then current cost of capital times tenants’ usage share for each improvement. Tenants will have the op- tion to reimburse the landlord for a portion of the con- struction expense at the time of construction rather than increasing the improvements valuation base. J. Peter Byrne, Paul A. Conley, Jr., Mark M. Hennelly, Gregg H. Levy, William J. McDonald, Charles A. Miller, Arvid E. Roach II, C. Barry Schafer, M. Lauck Walton, and Nina K. Wuestling for Union Pacific Corporation, Pa- cific Rail System, Inc., Union Pacific Railroad Company, Missouri Pacific Corporation and Missouri Pacific Railroad Company. John H. Caldwell, Samuel R. Freeman, Denise M. O’Brien, and Kendall T. Sanford for Denver and Rio Grande Western Railroad Company. William R. Denton, Eva Polin, Michael A. Smith, Doug- las E. Stephenson, and Herbert A. Waterman for Southern Pacific Transportation Company and St. Louis Southwest- ern Railway Company. 9a Donald E. Engle, Nicholas P. Moros, and Donal L. Tur- kal for Burlington Northern Railroad Company. John O’B. Clarke, Jr. and John J. Sullivan for the United Transportation Union. Harold A. Ross for the Brotherhood of Locomotive En- gineers. Decision By the Commission: Background By decision served October 20, 1982, the Commission approved the consolidation of Union Pacific Railroad Com- pany (UPRR or UP), Missouri Pacific Corporation (MPC), Missouri Pacific Railroad Company (MP or MPRR), and the Western Pacific Railroad Company (WPRR or WP) under the common control of Union Pacific Corporation (UPC) and Pacific Rail System, Inc. (Pacific) (all referred to as the UP system). Union Pacific-Control-Missouri Pa- cific: Western Pacific, 366 I1.C.C. 459 (1982) (referred to as UP-MP or the Consolidation decision). Several railroads, including Southern Pacific Transportation Company (SP) and its subsidiary St. Louis Southwestern Railway Comany (SSW), Denver and Rio Grande Western Railroad Company (DRGW), and the Missouri-Kansas-Texas Railroad Com- pany (MKT), opposed the transaction and filed responsive applications for the imposition of trackage rights condi- tions. In Southern Pacific Transportation Company v. I.C.C., 82-2253 (D.C. Cir. May 22, 1984), the Court of Appeals affirmed the consolidation decision in all respects material to these proceedings but remanded for further consider- ation of an unrelated issue. In approving the consolidation the Commission identified several anticompetitive effects of the transaction which _—————————————eaxXxeow’S Fo. 10a could be remedied by grants of trackage rights to com- peting carriers. The greatest competitive impact was iden- tified in the central transcontinental corridor. Based on 1979 market shares, the UPRR share would increase with the consolidation from 75.7 percent to 85.1 percent (west- bound) and from 78.0 percent to 85.5 percent (eastbound) in the corridor east of Denver, UP-MP at pp. 510-11. These potential increases presume that all preconsolidation MP traffic would shift to the UP system. In order to preserve competition in the central corridor east of Denver, the Commission conditioned approval of the consolidation on a grant of trackage rights to DRGW between Pueblo, CO, and Kansas City, MO. Almost all of MP’s preconsolidation transcontinental traffic was delivered to or received from DRGW, UP-MP at 571. DRGW’s trackage rights to Kansas , City precluded DRGW’s foreclosure from this market, al- lowed it to reach major eastern carriers. at Kansas City, and-ensured a continued competitive presence in the cen- tral corridor. Solely on the basis of these trackage rights DRGW should be able to hold its present market share, for it is assured the ability to continue to handle the traffic it handled prior to the consolidation.? The Commission con- cluded that with the Pueblo-Kansas City trackage rights DRGW would remain a successful competitor to UP in the central corridor, UP-MP at p. 577. DRGW’s competitive " presence assures that any post-consolidation traffic shifts to the UP system will occur because UP offers superior service, and not through the exercise of undue market power. The direct, parallel competition in the central corridor east of Denver was the only market where traditional mar- ? The only exception would be exclusive MP originated or terminated traffic which will probably shift to UP single-system service. However, the shift of this traffic does not reflect a iessening of competition. See UP-MP at p. 543. Rather, it reflects the benefits of the consolidation. UP-MP at p. 488, and the efficient UP system service. lla ket shares, in terms of a percentage of a specific market, were available as a tool for analysis of the consolidation. Because of the prevalence of interchanges, the balance of the central corridor analysis necessarily relied on a meas- ure of “participation shares.”’ Participation shares were defined as the sum of all traffic in the corridor in which either UPRR, MPRR or WPRR participated. Participation shares cannot be treated in the same man- ner as traditional market shares in analyzing competitive impacts, although both are expressed in terms of a per- centage of an overall market. Market shares represent the business that a firm individually controls, while partici- pation shares, an artificial measure used to reflect inter- change, represent the business that a firm participates in with the cooperation of other firms. In the case of inter- changed traffic, neither firm exclusively controls the busi- ness; thus, one participant in an existing movement generally cannot unilaterally shift that traffic into new patterns as a result of consolidation. Analysis of participation shares demonstrated the po- tential impact of the WP acquisition. If showed the worst- case effect if all traffic moving anywhere on the compo- nents of the UP system stayed exclusively on the UP system after consolidation. UP-MP at p. 513, table 5, and p. 514, table 6. The greater portion of the traffic shown in each table was interchanged with SP at Ogden: 49.1 percent eastbound and 50.3 percent westbound. After con- solidation SP has a distinct disincentive to interchange its traffic with UP at Ogden. Granting of trackage rights to DRGW provides SP an alternative outlet to the east and ensures that most of the SP traffic will not move on the UP system. The SP-DRGW route is a strong competitive alternative in the central corridor, UP-MP at p. 516 and 579. The worst-case participation shares shown in tables 5 and 6-will be correspondingly reduced. 12a To further strengthen the central corridor alternative to UP, the Commission granted SP/SSW trackage rights between Kansas City and St. Louis. This allows an SP- DRGW-SP route which should provide excellent service in the corridor. UP-MP at pp. 587-88. The SP/SSW trackage rights will also result in a 400-mile shortening of SP’s southern corridor transcontinental route, further sharp- ening competition between SP’s southern corridor route and UP’s route in the central corridor. In order to address the loss of a horizontal competitor in the market between Kansas City and Omaha/Council Bluffs, UP-MP at p. 526, and to prevent foreclosure of MKT from a significant share of midwestern grain traffic moving to the Gulf, UP-MP at p. 530, the Commission conditioned approval on a grant of trackage rights to MKT in that corridor. These rights will preserve the opportunity for MKT to be an effective competitor for traffic, primarily grain, originating at Omaha/Council Bluffs, Lincoln, At- chison, and Topeka. Each grant of these trackage rights was designed to remedy a specific anti-competitive effect of the consoli- dation. However, we recognize that the key to the success of the conditions lies in the terms of compensation for use of the trackage rights. The Commission declined to set specific terms for the trackage rights in the consolidation decision, UP-MP at pp. 589-90. Cf. Louisville & N. R. Co.- Merger—Monon Railroad, 338 I.C.C. 134, 186 (1970). In- stead the Commission required the parties to attempt to reach agreement as to the terms of each grant of trackage rights. If the parties failed to agree, the Commission re- tained jurisdiction to set terms, UP-MP at p. 589. Consummation of the consolidation was allowed without final resolution of the terms of the trackage rights. How- ever, the trackage rights tenants were assured of an in- terim right to operate pending final settlement of the compensation, UP-MP at p. 590. 13a We now have before us a final agreement on trackage rights terms and compensation covering the MKT opera- tions, and petitions to set the terms and compensation applicable to SP/SSW and DRGW operations. We will ad- dress each matter separately. Summary DRGW and SP/SSW were unable to reach agreement with UP on terms of compensation for trackage rights over the Pueblo-Kansas City line (DRGW) and the Kansas City-St. Louis line (SP/SSW). They have requested us to set these terms. We have adopted a methodology for com- puting compensation designed to reimburse UP for (1) var- iable costs incurred as a result of tenants’ operations, (2) tenants’ share, on a car-mile percentage use basis, of main- tenance and operation (M&O) expense, and (3) tenants’ share on a usage basis of an interest rental component representing return on investment. The interest rental component is computed by applying MPC’s 1979 pretax rate of return to the value of the subject lines. As we believe that the latter figure should reflect the earnings potential of the lines, we have rejected valuation methods based upon replacement cost and book value urged by var- ious parties in favor of a capitalized earnings approach. An “earnings multiple,” representing the ratio of MPC value (outstanding liabilities plus stock purchase price) to 1979 MPC earnings (adjusted for time parity), was applied to 1979 earnings for the respective lines. For the Pueblo- Kansas City line, we have computed an interest rental component of $2,048,565 based on projected usage factors for each segment of the line. As no net revenue figures were available for the Kansas City-St. Louis line, we will direct the parties to submit, within 60 days, calculations based upon the methodology adopted in this decision. We have also disposed of a number of issues regarding the Kansas City-St. Louis line. We have determined (a) that the terminus of the line in St. Louis is milepost 0.0 l4a near Gratiot Tower, rather than milepost 2.3 near Grand Avenue, as contended by UP, (b) that the trackage rights granted to SSW contemplate interchange at five Missouri points, including Pleasant Hill, but not Labadie, and (c) that there is no basis for requiring SSW to compensate the Burlington Northern Railroad Company for the use of the Grand Avenue Interlocking. Also, we have provided for the payment by SSW of interest on retroactive ad- justments to compensation due under an interim operating agreement, and for the separate valuation and compen- sation of new improvements made to the line. Finally, we have approved the agreement between UP and MKT for trackage rights between Kansas City and Omaha/Council Bluffs. Preliminary Matter The United Transportation Union (UTU) and the Broth- erhood of Locomotive Engineers (BLE) have filed petitions in the Sub-No. 16 and Sub-No. 18* preceedings requesting that terms of trackage rights applicable to SP/SSW and DRGW operations respectively not be set by the Commis- sion prior to negotiation or arbitration of an implementing agreement between both the landlord and tenant in each case and labor representatives concerning the selection of employees for the operation of the trackage rights. UTU and BLE argue that 49 U.S.C. 11347 requires us to protect the interests of all employees involved in a consolidation proceeding and that this provision mandates a negotiated settlement between employee representatives and both the landlord and tenant carriers as to which employees, lan- dlords’ or tenants’, are to actually perform tenants’ op- erations. UTU and BLE contend that we cannot set the trackage rights terms absent such an agreement for two *The UTU petition was late-filed and accompanied by a Motion for Leave to File. We will accept the petition because it does not unduly broaden the issues before us. 15a reasons. First, they contend the 4R Act‘ narrowed our authority under 49 U.S.C. 11341 to exempt the approved transaction from the operations of other laws such as the Railway Labor Act (RLA).® Second, the labor interests argue that this exemption was not necessary for the rail- roads to carry out the approved transactions and that any exemption from the RLA falls outside of our authority under 49 U.S.C. 11341. We have specifically addressed UTU and BLE’s argu- ments concerning the scope of our jurisdiction, our ability to exempt the instant transaction from the RLA, and the extent of the exemption actually granted in these pro- ceedings. See Finance Docket No. 30,000 (Sub-No. 18), Denver and Rio Grande Western Railroad Company— Trackage Rights—Missouri Pacific Railroad Company—Be- tween Pueblo, CO and Kansas City, MO (not printed), served October 25, 1983. We specifically rely on our dis- cussion in that decision, which was issued in response to a petition for clarification of the DRGW and MKT trackage rights filed by the same parties now before us. In that decision we concluded that, contrary to the UTU and BLE assertion, use of tenants’ crews to perform tenants’ work does not constitute a unilateral change in the working conditions of the landlord’s employees that would fall within the purview of the RLA. Further, our jurisdiction over railroad consolidations under 49 U.S.C. 11343 is plenary and exclusive. Our approval exempts such a transaction from the requirements of all laws, including the RLA, as necessary to permit the transaction to be carried out. See Brotherhood of Loc. Eng. v. Chicago & North Western Ry. Co., 314 F. 2d 424, 432 (8th Cir. 1963), cert. denied 375 U.S. 819 (1963). The 4R Act did not limit our authority to preempt other laws in authorizing a transaction; it sim- ‘The Railroad Revitalization and Regulatory Reform Act of 1976. Public Law 94-210. *45 U.S.C. 157 et seq. 16a ply specified standards for the minimum level of employee protection to be imposed in cases such as this. The Con- solidation decision imposed the appropriate level of em- ployee protection under 49 U.S.C. 11347, and _ that protection is the full extent of labor relations involvement in these proceedings. If an MP employee is displaced by DRGW operations, for example, he or she will receive benefits under the conditions set for in Norfolk and West- ern Ry. Co.—Trackage Rights—BN, 354 I1.C.C. 605 (1978) as modified by Mendocino Coast Ry. Inc.—Lease and Op- erate, 360 I.C.C. 653, 664 (1980), which were imposed in these proceedings, MP-UP at pp. 621-22. That employee has no right absent a negotiated settlement to take part in the DRGW operations. The second argument advanced by the labor interests— that the exemption of selection of forces was not necessary for implementation of the transaction and therefore could not be approved—was disposed of in the Consolidation pro- ceeding. If the exemption was not necessary to implement the transaction as proposed, it can not now be argued that the RLA prevents implementation of the trackage rights. See MP-UP at p. 556, note 99. We conclude that there is no limitation on rights of the various tenants to use their own crews in these trackage rights operations, or on our ability to finally set the terms in these proceedings. Trackage Rights I. Between Pueblo and Kansas City A. General.—As part of the decision approving the UP- MP consolidation, the Commission imposed trackage rights in favor of DRGW over 619 miles of MP line between Pueblo, CO and Kansas City, KS. Finance Docket 30,000 (Sub-No. 18). The greater portion of this line is without substantial grades and has an authorized speed of 55 miles 17a per hour. There are 47 sidings on the line, of which 32 are over a mile long. The longest siding is 12,160 feet. Following the decision approving the consolidation, DRGW and UP negotiated for interim and permanent terms governing DRGW’s operations over the MP line re- quired by the Consolidation decision. On November 5, 1982 an agreement was reached setting interim rental which allowed DRGW to begin operations and cleared the way for consummation of the approved consolidation. DRGW has operated over trackage rights between Pueblo and Kansas City pursuant to this interim agreement since the consummation of the consolidation on December 22, 1982. However, DRGW and UP have been unable to agree on the permanent terms for trackage rights operation and have requested us to set the compensation. B. DRGW.—DRGW proposes to compensate UP for its usage of MP trackage in three parts: (1) the variable costs, including standard additives, of train operations, switching, and mechanical services incurred by MP as a result of DRGW operation; (2) DRGW’s allocated share, on a car- mile percentage use basis, of maintenance and operation (M&O) costs, taxes, and standard additives; and (3) interest rental of $1.58 million a year calculated by capitalizing MP’s expected earnings on the Pueblo line as specifically described below. The three elements of DRGW’s formula reimburse UP for, respectively, (1) its variable cost in- curred as a result of DRGW operations, (2) a share of its maintenance costs including part of UP’s fixed costs, and 3) a return on its investment. * [Interim operations of the required trackage rights was made a con- dition precedent to consummation of the consolidation. UP-MP at 590. The terms of the interim agreement called for DRGW to pay $1.5 million a year in rental plus the costs of operation to UP. The terms of the interim agreement were approved by decision served November 24, 1982. 18a The methodology employed by DRGW to calculate the variable costs of operations is the standard method em- ployed in the industry for trackage rights agreements. UP does not contest the calculation of this item. The treatment of M&O expenses is subject to some con- troversy. DRGW ultimately took the position that it would reimburse UP for its ratable share of these expenses as actually incurred by MP and based upon DRGW’s actual use.” This results in a variable annual payment for M&O expenses. In its initial petition DRGW cited an example of M&O expense reimbursement yielding a contribution to UP fixed costs of $4.8 million. UP construed this calcu- lation to be an additional “set payment’? by DRGW in addition to its interest rental described below; it inter- preted the DRGW position to be that the ‘overhead com- ponent” of M&O expense was offered by DRGW as an additional contribution to UP not necessary to offset any additional overhead costs to be actually incurred. In its response DRGW clarified that it did not contemplate bi- furcation of the fixed component of MP and M&O ex- penses, and considered the reimbursement of a percentage of these costs actually incurred to be the full extent of compensation for these expenses. In a subsequent Motion for Leave to File Reply and a Reply, which we will allow, filed August 2, 1983, UP argued that DRGW was oppor- tunistically changing its position and our decision should be limited to the initial proposals of the parties. DRGW replied on August 25, 1983. UP’s argument goes only to procedural considerations, for we are charged with determining the most appropriate result in this proceeding notwithstanding the positions of the parties. See Lamoille Valley R. Co. v. ICC, 711 F.2d 295 (D.C. Cir. 1983). However, our decision is bounded by 7 DRGW used Rail Form A estimates of these expenses in its petition in this proceeding, but acknowledges line-specific actual costs should be the basis for this calculation. 19a considerations of procedural fairness and the opportunity of an opposing party to address a proposal before us. In this proceeding we specifically allowed UP to file a reply to DRGW’s response, a pleading normally barred by our rules, 49 CFR 1104.13(c). There is no unfairness in our consideration of all positions advanced in this proceeding, and we will do so. Finally, DRGW proposed calculating the third element in its compensation formula, the interest rental portion, using a capitalized earnings approach. DRGW argues that a proper rental for the Pueblo line is the value of the line to UP measured by net earnings, multiplied by MP’s actual rate of return and adjusted by DRGW’s percentage of use. DRGW’s proposal calls for payment of $1,586,216 in in- terest rental to UP calculated as follows: 1. Divide MPC’s pretax operating profit for 1979 ($262,966,000) into the market value of eq- uity at time of merger ($998,910,000). This equals 3.8. Thus, the value of the equity was 3.8 times the pretax operating profit for 1979. 2. Develop MP’s 1979 net revenues for the Pueblo-Osawatomie line of $3,473,037; for the Os- awatomie to Kansas City line of $2,404,409; and for the total of the two lines of $5,877,446. 3. Multiply the figures in (2) by 3.8 to give valuation to the lines equal to $13,197,540 (Pueblo-Osawatomie); $9,136,754 (Osawatomie- Kansas City); and $22,334,294 (total). 4. Develop a rate of return by taking a 9.33 percent after-tax return for MP for 1979 and calculate a pretax rate of return of 11.38 percent using the MP’s 1979 effective tax rate (18 per- cent). 5. Multiply the results in (3) by the 11.38 per- cent rate of return to produce interest (for 100 percent use) of $1,501,880 for Pueblo-Osawatomie and $1,039,763 for Osowatomie-Kansas City. 20a 6. Apply DRGW usage factors to these num- bers to produce interest rental of $1,201,504 for Pueblo to Osawatomie (80 percent usage); $384,712 for Osawatomie to Kansas City (37 per- cent usage); and $1,586,216 total. The DRGW procedure is more specifically described in appendix A. UP did not dispute the basic concept underlying DRGW’s calculations but did argue for the inclusion of assumed liabilities of MPC ($1,361,814,000) as part of the purchase price, for a total of $2,360,724,000.° Inclusion of MPC liabilities as part of the purchase price results in a change in the earnings multiple of 3.8 used by DRGW to a mul- tiple of 9.0 proposed by UP. UP also argues for the use of the statutory, not the effective, tax rate in the com- putation of the rate of return element. Applying these changes to the DRGW’s figures produces the following: 1. Valuation of Pueblo-Osawatomie equals $31,257,657; Osawatomie to Kansas City equals $21,639,681; total equals $52,897,338. 2. Pretax rate of return at the statutory tax rate (48 percent, including 2 percent for State tax) equals 17.94 percent. 3. Multiplying the results in (1) by the 17.94 percent rate produces interest rental (for 100 per- cent usage) equal to $5,607,624 for Pueblo to Osawatomie and $3,882,159 for Osawatomie to Kansas City. 4. Utilizing the DRGW’s usage factors pro- duces interest rental of $4,486,099 for Pueblo to * DRGW argues that if liabilities are included in the purchase price for this calculation, then the value of MP’s equipment should be ex- cluded. Z2la Osawatomie; $1,436,399 for Osawatomie to Kan- sas City; and $5,922,498 total.? Finally, UP attacks the estimate of traffic on the line which DRGW used to determine the line specific earnings. DRGW assumed that 3 years after consummation of the consolidation, rerouting of traffic would divert all MP traffic except that originating or terminating on the line and a minimal amount of traffic interchanged at Pueblo between DRGW and MP which neither carrier could divert from the other. UP offers four specific categories of traffic allegedly increasing MP’s traffic and revenue over the Pueblo line: (1) Unit coal train movements originated on DRGW and interchanged at Pueblo contribute significant revenues. UP lists movements to Dan- iel, MS, Federal, IL, and Metropolis, IL as ex- amples. However, in reply DRGW notes that shippers in each of these accounts have changed the junction in favor of DRGW—to Kansas City on the Federal and Metropolis movements and to Osawatomie on the Daniels movement—leaving only a 55-mile haul in the MP account. (2) Movements between exclusive DRGW points and points in MP served States such as Arkansas and Louisiana constitute the second category. A 16-percent decline was registered for this traffic between the first 7 months of 1982 and the first 7 months of 1983. (3) On traffic from DRGW points through St. Louis, the third category, the year to year 7- month decline was 25 percent. *The $5,922,498 figure was calculated from the data given. UP’s calculation was slightly lower ($5,909,291). This difference was due to the way in which UP compared the effective and statutory tax rate adjustments. 22a (4) A final significant category is traffic be- tween western points on SP and MP points. How- ever, the Pueblo line year to year 7-month decline for this traffic totalled 74.8 percent. C. UP.—In its separate submission, UP also proposes to fix the compensation due from DRGW in three parts: (1) variable costs of operations, (2) allocated share of M&O expenses, but including half of the taxes attributable to the line, and (3) an interest rental of 50 percent of the ownership costs of the line. Ownership costs for this pur- pose are defined as the value of the line, calculated as the reproduction cost new less depreciation (RCNLD), multi- plied by an appropriate rate of return. UP conducted a study of the Pueblo line and concluded that (1) the appraised value of real estate on the line is $14,555,790,° (2) the value of existing facilities is $219,685,299," and (3) the total value of the Pueblo line is $234,241,089. The value for grading along the line, in- cluded within the figure for existing facilities, is $65,879,530 without depreciation adjustment. If grading were depreciated 75 percent, the total value of the line would be $184,831,422. UP considers the range of value of the line to be $184,831,422 to $234,241,089. UP does not offer a specific rate of return to be applied to its calculated value. Rather, it suggests that a number of guidelines might be appropriate including the railroad cost of capital (1981 determination—16.5 percent) and MP’s pretax return on net investment (1981—15.3 percent using the statutory tax rate). Ultimately, UP selects $10 million as an appropriate interest rental payment for the Pueblo line and works This figure does not reflect any assemblage premium. Including such a premium would result in a real estate value of $30,064,934. " This figure represents a total reproduction cost for existing facilities of $372,883,699 less depreciation of $153,198,400. ———EEeEVeVE 23a backwards through its RCNLD approach to show that the rental is justified. Using the lower end of the valuation range ($184,831,442), the $10 million annual rental reflects a rate of return of 10.8 percent. UP notes that this rate of return is less than MP’s pretax return on net invest- ment and below the rate of return used by DRGW in its calculations. UP suggests that such a result is justified for the Pueblo line because, while a high quality line of con- siderable length, it does not have the strategic importance to UP that characterizes the Kansas City to St. Louis lines. UP also notes that the Pueblo line trackage nights involve a significant market extension for DRGW with correspond- ing risks justifying a lower valuation and rate of return. DRGW argues that UP conceded the correctness of its earnings multiple approach and that we should not con- sider the RCNLD methodology. Additionally, DRGW ar- gues that fixing interest rental at the level of $10 million a year would render its service noncompetitive and defeat the purpose of the trackage rights. DRGW offers the fol- lowing annualized pro forma income statement to illustrate the asserted anticompetitive result of the proposed $10 million rental. It reflects actual revenues and line specific expenses experienced in operating the Pueblo line trackage rights during late 1982 and part of 1983 and gives effect to UP’s proposed $10 million annual interest rental and UP’s $5 million estimate of 1982 M&O expenses. Pro forma income statement based on 1982-88 traffic levels, revenues and expenses (Millions of Dollars) IE IIE, cserccsnstanansadsrerecoregntinntinsnensennnnabinnedinn $43.9 BE CE CIEE eccnccerecasncessnetnnnnsncsanncesenninntinnmninins $32.7 I: GEE GRIND, in csensisscrsccerennneninscntninninenciendindaints 5.0 IIIS OIE. sseccccisscenstcinnscensncciinnaniievsanmnnnatisineaneniennehalinneniinn _10.0 I: UTES GOED citrceinictarnectsiiierasiaticinmnnns ($3.8) 24a D. Discussion.—We adopt the earnings multiple ap- proach as the most appropriate technique of valuing the railroad assets at issue in this proceeding. This technique has been utilized in a number of contexts to value rail assets. See New Haven Inclusion Cases, 390 U.S. 392, 436- 482 (1970) and Ecker v. Western Pac. R.R. Corporation, 318 U.S. 448 (1943). A similar approach to valuation was also employed in the primary consolidation proceeding to determine the fairness of the financial terms of UP’s ac- quisition of WP stock. UP-MP at pp. 635-36. The decision noted at p. 635 that this method is predicated on the carrier continuing as a going-concern. This characteristic is perhaps the methodology’s greatest advantage in valuing assets using in trackage rnghts operation. In this context, the tenant railroad will enter the property of the ongoing, owning railroad to provide competitive service where we have found that competition to be required by the public interest. The purpose of this proceeding is to set compen- sation for the trackage rights which will put the tenant in the same position as the owning carrier. The owning road is now using and will continue to use the asset in the conduct of its ongoing operations as a railroad. We are favoring the methodology which values the asset for this use. The RCNLD approach does not value the asset as a going-concern business, but rather solely as individual parcels of land and specific existing structures. This is not to say that RCNLD valuation is inappropriate in other contexts, or that the methodology used here is appropriate outside the immediate setting where trackage rights have been imposed to remedy anticompetitive effects of a con- solidation. Where we are attempting to place the tenant in precisely the position of the owning road, however, the earnings multiple approach is more appropriate. Fortunately we have before us a specific sale to use to construct the earnings multiple analysis—the primary con- solidation transaction itself. This transaction effectively es- tablished the fair market value of MPC to UP. We ——— ; eE_ 25a recognize that applying the earnings approach to infer the value of a specific asset involves assumptions that (1) the rate of return on investment for the corporation as a whole applies to each of its component parts in an identical man- ner, and (2) all assets are financed using the same mix of equity and debt as that for the corporation as a whole. Absent an exhaustive study of proprietary data, no other procedure can be utilized. Notwithstanding the minimal disadvantages of these assumptions, the earnings multiple approach results in the best estimate of the fair market value of the Pueblo line in its ongoing use as a railroad. The use of this method predicated upon the actual pur- chase price paid by UP is especially appropriate here, for we must be particularly sensitive to this proceeding to avoid overstating the value of the subject lines. These trackage rights have been imposed to remedy anticom- petitive effects of the consolidation, and the tenant must be able to operate competitively. While we have accepted the earnings multiple method- ology, we have not accepted all of the calculations relied upon in the DRGW proposal. The specific terms of the formula are discussed below. 1. Interest Rental. a. Earnings multiple.—The capitalized earnings ap- proach requires the generation of a number, the earnings multiple, which relates corporate earnings to corporate value. The major issue presented in this area is whether the value of MPC used to generate the multiple should be the value of the MPC stock at the time of the consolidation ($998,910,000) or also should include the liabilities of MPC at the time of the consolidation (an additional $1,361,814,000). . We conclude that the value used to compute the earn- ings multiple must include the liabilities of MPC. We are attempting to estimate the value of an asset of MP. A return on investment approach using capitalized earnings el 26a measures a return on assets acquired and financed by both debt and equity capital. While there is disagreement among the parties as to whether the liabilities of MPC were “‘as- sumed” by UP as part of the purchase, we consider that distinction irrelevant in estimating the value of MPC’s as- sets. UP actually paid $998,910,000 for MPC’s stock. The purchase price for the company’s assets, on the other hand, would be the stock purchase price (equity) plus all out- standing MPC debt on the date the company’s stock was purchased, a total of $2,360,724,000. We note that this total value figure represents the price paid for MPC assets at the time of the consummation of the consolidation—1982. It is not significant that the value is stated in 1982 dollars and that other operational factors used in the formula (i.e. line specific earnings) are ex- pressed in 1979 figures. These items are not directly com- parable, for the 1982 value is used only to create a single abstract number, the multiple, which relates earnings to value. However, it is critical that the figures used to gen- erate the multiple be comparable. The use of values of equity and debt expressed in 1982 dollars in comparison with MPC earnings expressed in 1979 dollars, as proposed by UP, is inappropriate. We will instead use MPC’s 1979 earnings. This is the base year for the primary consoli- dation proceeding, the last year prior to the announcement of the consolidation, and the year’s results which formed the basis of the investment decision. Updating the nominal 1979 earnings to compare with the expression of value in 1982 dollars also avoids the distortions of the recent reces- sion. Thus, we have converted the 1979 earnings dollars to 1982 dollars using the Gross National Product Deflator issued by the Department of Commerce Bureau of Labor Statistics."2 This results in the nominal 1979 dollars of earnings being increased by 26.805 percent. 2 Other indices, such as the Consumer Price Index (CPI) or the Railroad Freight Price Index could have been used. However, we con- 27a Another significant change was made in the earnings calculations. The parties utilized only operating earnings for the MPC. The equity and liabilities assumed, however, financed all of the assets owned by the MPC. Many of these assets produced earnings classified as nonoperating income. In order to establish an earnings multiple for the entire corporation, we included both the operating income and the nonoperating income in our calculations.'* The ex- clusion of this nonoperating income would result in a mul- tiple that overstates the value of these lines. Finally, we are interested in valuing the rail assets of the rail company. To the extent that the value of other assets of the corporation along with their attributable earn- ings can be excluded from the calculation, the multiple generated will more accurately reflect the relation of rail- road earnings and value. One item lends itself to such exclusion. On August 10, 1983, UP announced that it had sold Mississippi River Transmission Company (MRTC), an MPC subsidiary, for $256.3 million. MRTC had 1982 earn- ings of $29.1 million. We will exclude MRTC’s liabilities just as we included MPC liabilities. We take official notice of the liabilities of MRTC reflected in its consolidated bal- ance sheet as of December 31, 1982 published in Moody’s Public Utility Manual, 1983, Volume 2 page 5,466. The total liabilities of MRTC, less common stock, capital sur- plus, and retained earnings, amount of $185,443,000. The total value of MRTC assets was $441,743,000. To more accurately reflect the relation of railroad earnings and value, we will exclude both the value and the earnings of MRTC from our calculation. sider the GNP deflator, which measures the effect of inflation through- out the economy, more appropriate for updating the value of a diverse collection of assets than these more specialized indices. ‘* Based on nominal 1979 dollars, nonoperating income for the MP Corporation was $36,541,000. Operating income was $262,966,000. To- tal income in 1979 dollars is $299,507,000. In 1982 dollars, income is $379, 790,900. 28a DRGW has argued that we should treat equipment as an extraneous asset in the same way that we have de- termined to treat MRTC. We cannot treat equipment val- ues in this way, for we have no definitive earnings attributable to equipment. It is inappropriate to reduce the value component of the rates without also reducing earn- ings. Total 1979 earnings before interest and taxes, expressed in 1982 dollars, less 1982 earnings of MRTC when divided into the total of the equity purchased and liabilities of MPC, less the value of MRTC, produces a multiple of 5.47. See appendix B. This is the earnings multiple we will use in our compensation calculation. b. Earnings of the Pueblo Line.—While there is a dispute among the rarties as to the appropriate level of traffic to be ascribed to MP on the Pueblo line, we conclude that DRGW has adequately demonstrated that the only MP traffic remaining on this line 3 years after consolidation will be originating and terminating traffic and a nominal amount of traffic interchanged with DRGW at Pueblo. UP has an alternative transcontinental line through Cheyenne and a line between Denver and Kansas City. These lines clearly make the Pueblo line largely surplus in the UP system. UP has acknowledged that the consolidation ef- fectively has converted the Pueblo line, formally a tran- scontinental link for MP, to a branch line for the UP system. We accept the DRGW traffic estimates. DRGW developed net revenues for the lien in twe sec- tions: Pueblo to Osawatomie, KS, and Osawatomie to Kan- sas City. These two segments were employed because the DRGW usage factors, as set forth below, are different on each segment. The development of costs for this traffic as set forth in appendix A. The 1979 net revenue was $3,473,037 for the Pueblo-Osawatomie line and $2,404,409 for the Osawatomie-Kansas City segment. The net reve- nues for the Osawatomie-Kansas City segment also include 29a net revenue from north-south traffic moving only between Kansas City and Osawatomie and not affected by the post- consolidation volume reductions. We are using 1979 revenue figures because (1) they are compatible with other figures to be used in this calculation such as 1979 rate of return, (2) the 1979 figures formed the basis for the investment decision, and (3) 1979 was the base year adopted in the consolidation proceeding.’ Use of 179 figures for the balance of our calculations is consistent with the practice throughout the consolidation proceeding. It also is not inconsistent with our use of 1982 figures in the calculation of the earnings multiple. As ex- plained above the multiple is a separate and independent calculation creating a unitless number (i.e., not 1979 dol- lars of 1982 dollars). In calculating the multiple we con- verted 1979 corporate earnings to 1982 dollars to directly compare with the purchase price paid and the corporate liabilities as they existed in 1982. That calculation is in- ternally consistent and yields a multiple that can be used independently (as a simple, unitless ratio) in an equation which is expressed wholly in terms of 1979 results—line specific earnings, tax rate, and rate of return. We de- parted from the use of 1979 base year figures only to incorporate liabilities into the calculation of the earnings multiple. c. Investment base.—Multiplying the line specific earn- ings by the 5.47 earnings multiple results in valuation of the Pueblo-Osawatomie segment at $18,997,512 and of the Osawatomie-Kansas City segment at $13,152,117. d. Pretax return on investment.—Both parties advocate the use of a pretax rate of return on investment for MPRR “The 1979 figures are used to determine the profitability of the traffic which MP handles on the line, not the volume of traffic. The traffic levels with which we are concerned are realized after the con- solidation. 30a for the year 1979 in developing the rate of return for these lines under the capitalized earnings methodology. DRGW advocates the use of the actual or effective tax rate to compute this return factor. UP, on the other hand, advocates the use of the statutory tax rate. The Consol- idation decision proceeding supports the use of the effec- tive tax rate: ‘“‘*** the landlord’s actual rate of return on the value of its rail property should be given considera- tion***,”” UP-MP at p. 590. We use effective tax rates in other contexts to determine valuation of rail properties and rates of return, see 49 CFR 1152.34(b) and 1154.35(a), and we will use the effective rate in this proceeding. MP’s effective tax rate in 1979 was 18 percent. Using MP’s annual report to the Commission (form R- 1) and our return on investment methodology in effect since 1978, MP’s after-tax return on investment was 8.37 percent. Backing out taxes at MP’s effective rate yields a pretax return of 10.21 percent. This is the rate of return we utilized in our calculations. e. Total return on Pueblo Line.—Multiplying the value of each line segment by the calculated 10.21 percent rate of return produces interest rental (for 100 percent usage) of $1,939,646 for the Pueblo-Osawatomie segment and $1,342,831 for the Osawatomie-Kansas City segment. f. DRGW usage factor.—DRGW developed usage factors based on its percentage of total traffic on each segment. DRGW’s percentage of post consolidation traffic on the Pueblo-Osawatomie segment is estimated to be 80 percent. Because additional UP traffic will move over the Osawa- tomie-Kansas City segment, the DRGW usage of this seg- ment is estimated at 37 percent. UP argues that the tenant share for purposes of cal- culating the interest rental portion of compensation should be considered to be 50 percent. UP considers the interest rental component of trackage rights compensation to be similar to a rental payment for the unlimited right to use 6 3la of the landlord’s property; the rent itself is not variable with usage. UP argues that DRGW will acquire a right of usage which is comparable to MP’s right in the property and that fairness requires a 50 percent share of the in- terest rental value be borne by the tenant. We disagree. The trackage rights imposed in favor of DRGW were imposed to redress a specific competitive problem which we identified in the consolidation proposal. It is not a forced sale, or a lease, of an individual one-half interest in the line as suggested by UP. Rather, the rights we have imposed are analogous to a license in the law of property, and compensation (rental) for licenses is often described in terms of usage. We will require rental from DRGW to be computed on the basis of its expected usage in each segment of the line. For DRGW, this will result in a higher rental for the Pueblo-Osawatomie segment and a lower rental for the Osawatomie-Kansas City segment. g. DRGW interest rental. Applying the estimated seg- ment usage factors to the total return by segment cal- culated above yields $1,551,716 for the Pueblo-Osawatomie segment and $496,848 for the Osawatomie-Kansas City segment. The total interest rental portion of compensation for the Pueblo-Kansas City line for the estimated DRGW usage is $2,048,564. 2. Portion of Maintenance and Operation Expenses. No real dispute remains as to the treatment of M&O expenses. Both DRGW and UP agree that the most ap- propriate means of sharing M&O expense is to allocate a portion of the actual expense incurred by MP to DRGW on a percentage use basis. This comports with standard practice in the industry for joint facility compensation. UP initially interpreted part of DRGW’s M&O pro, osal to be a fixed annual contribution to the interest rental portion of the compensation. We have discussed interest rental fully and we will not impose any element of M&O Se 32a expense as a set annual payment. DRGW’s obligation for M&O expenses will vary with use. This ensures that DRGW will not be obligated for greater than its proportionate share of expenses if its traffic volume does not reach ex- pected levels. It also ensures that UP does not cross-sub- sidized DRGW traffic if DRGW usage exceeds expectations. Put another way, UP presently has the total obligation for the line of railroad from Pueblo to Kansas City. We will require DRGW to relieve UP of its obligation to main- tain that line only to the extent of DRGW’s usage of that line. This limit ensures that DRGW’s traffic will be subject to the same cost structure on the Pueblo line as MP’s traffic. For the same reasons, we will also allocate State and local taxes'® on the line to DRGW on a percentage use basis. UP argues that because it is required to hold the line open for DRGW use, the latter should be considered a half-owner for purposes of property taxes associated with the line. We disagree. UP remains the sole owner of these properties and liable for all expenses attributable to them. Our imposition of trackage rights, in this setting, does not constitute a forced sale of a share in these lines. UP re- mains obligated as their owner, and our calculation of in- terest rental reimburses it for the use of its property. All expenses are allocated strictly on a usage basis. 3. Variable Costs of Operation. No dispute exists as to these costs. DRGW will reim- burse UP for all variable costs, including standard addi- tives, of train operations, switching, and mechanicai services incurred by MP as a result of DRGW operations. We approve this portion of the formula. ‘8 Taxes encompass all property and ad valorem taxes, assessments, fees and similar charges attributable to the lines. 33a 4. Conclusion. DRGW will be required to compensate UP for the use of its Pueblo-Kansas City line to the extent of (1) all var- iable costs, including standard additives, of train opera- tions, switching, and mechanical services incurred by MP as a result of DRGW operations; (2) a share of MP’s main- tenance and operation expenses, including taxes, attrib- utable to DRGW’s percentage use of the line; and (3) interest rental, as calculated above. We note that DRGW’s proposal contemplates a fixed annual rental payment calculated with the projected usage shares. This approach varies from the MKT agreement, discussed later, which contemplates updating the interest rental payment to reflect actual usage share on a monthly basis. We have set all the other terms of the rental pay- ment which fix UP’s right to receive a certain rate of return on a certain value. It is fairer to all parties not to fix the interest rental based on projections but to allow it to vary, along with the other compensation terms, with the tenant’s actual usage. This approach also comports with our characterization of the transaction as a license in DRGW rather than a lease of an individual interest in the property. For this reason, the figures giver. for DRGW’s interest rental are examples of the payment at a given usage. The actual payment will vary with DRGW’s actual usage. II. Between Kansas City and St. Louis A. General.—As part of the decision approving the UP- MP consolidation, trackage rights were imposed in favor of SSW over approximately 4380 miles of MP track between Kansas City and St. Louis. The route includes 124 miles of centralized traffic control (CTC) territory between St. Louis and Jefferson City, MO, and two separate lines from Jefferson City to Kansas City. The River Subdivision line is a 157-mile single track line controlled by automatic block signals. There are 11 principal sidings on this line, the 34a shortest of which is 5,810 feet. The continued Sedalia Sub- division line from Jefferson CIty to Kansas City is a 149- mile single track line. Automatic block signals control 116 miles of this line and CTC controls 34 miles. The sidings on the Sedalia Subdivision are generally shorter than those on the River Subdivision, and it has a 1.4 percent con- trolling grade. The River Subdivision does not have sub- stantial grades. These trackage rights, in conjunction with DRGW’s trackage rights between Pueblo and Kansas City, were designed to preserve efficient competitive alternatives for transcontinental traffic moving through the central corri- dor. Additionally, these rights improve the position of SP’s southern corridor transcontinental route as a competitive alternative to the consolidated UP. UP-MP, 366 I.C.C. at pp. 586-87, No agreement has been reached between UP and SP as to the terms and conditions to govern the trackage rights. The parties established certain interim terms al- lowing trackage rights operations to begin January 6, 1983, but those terms are subject to retroactive adjustment based on this decision. The effect of interim operations remains in dispute because SP has objected to the assignment of interest to the difference between the amount finally de- cided to be appropriate and the amounts it has paid as interim compensation. UP has proposed assessing interest at 15 percent annually on the difference beginning January 6, 1983. The interim agreement merely provides that the compensation terms which we shaii determine ‘‘shal]l be retroactive to the date hereof.”’ SP chose not to enter a specific interim operating agree- ment and submit that agreement for our approval. Instead it will rely on a single determination of the appropriate level of compensation in this proceeding and give our de- termination retroactive effect. Under the terms of such an agreement, we will treat the payments ultimately deter- 35a mined to be due as if they were due periodically through- out SP/SSW’s interim operation. The make UP/MP whole in this circumstance, interest will be allowed from the due date of each payment at a rate equal to the railroad in- dustry’s then current cost of debt. B. Threshold issuwes.—Two threshold issues must be re- solved before we address the compensation to be paid for SSW’s trackage rights operations. First, a question has arisen regarding the exact scope of the rights within the St. Louis terminal. Second, a dispute exists over the extent to which, or whether, our decision granting SSW trackage rights contemplated any interchange rights on the MP lines. 1. Scope of Trackage Rights. The dispute over scope concerns whether the trackage rights within the St. Louis terminal extend to MP milepost (.0 near the Gratiot Tower, as contended by SSW, or only to MP milepost 2.3 near Grand Avenue, as contended by UP. If the rights end at Grand Avenue, SSW’s operations through St. Louis would necessary have to be conducted through the Grand Avenue interlocking plant and over tracks of the Burlington Northern Railroad Company (BN) and the Terminal Railroad Association of St. Louis (TRRA). SSW estimates that this operation would add at least $2 million per year to its cost of operating the trackage rights. If the rights extend to Gratiot Tower, SSW will have the right to operate trains through both MP’s 12th Street and 23d Street yards. UP argues that SSW did not request service to Gratiot Tower and that, accordingly, we should not approve such service as part of the trackage mghts. However, UP ac knowledges our authority to require SSW operations over this terminal trackage under 49 U.S.C. 11103. Should these rights be prescribed under 49 U.S.C. 11103, UP advocates the use of condemnation principles to set compensation for their use in addition to the compensation which we will ee 36a set for the trackage rights granted in response to the consolidation. Since the consolidation UP has undertaken improvements at the MP yards, chiefly the addition of a second running track around the yards, intended to im- prove the handling of interchange traffic. According to UP, these improvements would also enable SP/SSW to move trains through the yards without unduly congesting op- erations in the immediate future. SSW acknowledges that it did not specifically include the 2.3 miles of MP line in its trackage rights operating plan,'® and that its application did not contain specifié mi- lepost designations. However, SSW argues that it re- quested the right to operate over MP’s Sedalia Subdivision which includes the disputed 2.3 miles of track. SSW al- legedly sought to use, to the extent possible, the same lines between Kansas City and its connections in East St. Louis that MP uses. BN filed a reply to UP’s petition for clarification in this matter, arguing that UP’s objection to SP operation over MP lines to Gratiot Tower is predicated on hypertechnical arguments. BN opposes the shift of SP/SSW operations from the MP lines to BN lines. BN objects to what it sees as an attempt to burden BN with the costs and obligations of conditions which should rightfully be borne by the con- solidation applicants. Trackage rights were granted SSW to enable it to pro- vide service competitive to the consolidated UP/MP in the transcontinental central corridor. In approving the SP/SSW request the Commission anticipated that the trackage ‘* SSW argues that it did not specifically include this trackage because at the time of its application the proposed improvements were unknown to it. SP/SSW had requested, in discovery, a list of all improvements proposed for the UP/MP system. SP Interrogatory 59, dated October 2, 1980. These improvements allegedly were not included in the UP/ MP response. SP/SSW did not include the then single-track line through two yards. emmaansea acai 37a rights would be operated in the most efficient manner possible. One of the most efficient routes through St. Louis is over the MP line to milepost 0.0 at Gratiot Tower. This trackage is included in the MP Sedalia Subdivision over which SP/SSW specifically sought to operate. Had the Commission been presented with the need for SSW to operate over trackage other than MP’s, such as BN’s track near the Grand Avenue interlocking plant, it would have been specifically addressed in the same manner that SSW operations over a portion of ATSF trackage near Kansas City were approved. UP-MP at pp. 586-88. We will there- fore treat the SSW trackage rights as commencing at MP milepost 0.0 near Gratiot Tower and include the disputed 2.3 miles of track in the calculation of compensation ad- dressed by this proceeding. Finally, BN has requested that SSW be required to com- pensate BN for the use of the Grand Avenue interlocking plant even if SSW operates over MP lines to Gratiot Tower. The Grand Avenue interlocking plant was con- structed pursuant to an 1895 agreement between MP and BN’s predecessor. The purpose of the plant is to allow BN to cross MP tracks in St. Louis. The 1895 agreement contemplates MP maintaining and operating the plant for the benefit of BN and BN reimbursing MP for all costs of maintenance and operation. BN alleges that SSW op- eration over the plant is of substantial value to SSW and that BN’s right to reimbursement should be recognized. We disagree. SSW will operate straight through the facility on MP tracks and will not be benefited by the interlocker. The interlocker benefits only BN by enabling it to cross MP lines. SSW will operate solely on MP trackage, will stand in the shoes of MP regarding the interlocker, and should not incur an obligation to support a facility operated for the benefit of BN. 38a 2. Interchange Rights. The second threshold issue regarding the SSW trackage rights is whether the grant to SSW included the right to interchange traffic along MP’s line. UP argues that SP/ SSW sought only bridge rights over MP’s lines and listed only Sedalia, MO as a possible interchange in its Sub-No. 16 application.!’? Thereafter an SP witness allegedly aban- | doned the interchange request.'* We disagree. SSW defined bridge trackage rights in its initial appli- cation as contemplating ‘“‘only the night to bridge traffic across [MP] tracks, plus the right to interchange at in- termediate points with other carriers.”"® SSW’s witness did riot abandon this request in admitting that no signif- icant interchange was identified in the SP traffic study. SSW has identified six points in Missouri at which it wishes to interchange traffic: Sedalia (MKT), Pacific (BN), Valley Park (BN), Marshall (ICG), Pleasant Hill (SSW), and Labadie (SSW). The application, approved in the consoli- dation decision, clearly encompassed interchange at the first four of these points. However, the dispute revolves | around Labadie and Pleasant Hill. UP argues that neither of these points can be interchanges, for an interchange is defined as the transfer of cars from the account of one carrier to the account of another.-See United States v. Terminal Railroad Association of St. Louis, 397 F. 2d 467, 471 (7th Cir. 1968) and Southern Railway Co. v. Louisville and Nashville Railroad Co., 185 F. Supp. 645, 651 (W.D. KY 1960), affirmed 289 F. 2d 934 (6th Cir. 1961). This definition does not bar approval of operations at Labadie ‘7 Finance Docket No. 30,000 (Sub-No. 16), Application, Volume 1, p. 19 (January 13, 1981). 18 Witness Owen Tr. 14066-14068. '* Finance Docket No. 30,000 (Sub-No. 16), Application, Volume 1, p. 4 (January 13, 1981). This language introduced the bridge rights sought in both the Sub-No. 15 and Sub-No. 16 applications. ) 39a and Pleasant Hill as “interchanges” simply because the operation after the consolidation would be between SSW over trackage rights and the same carrier on its own track. We would consider the point as an interchange point for purposes of the trackage rights if MP-SSW interchanges could have occurred at that point prior to the consolida- tion. Pleasant Hill appears to qualify as an interchange point. Labadie does not. The MP and SSW tracks do not meet at Labadie because they cross at different grades, and MP has never conducted interchange operations at Labadie. _ SSW argues that it should be able to serve a utility plant at Labadie from the MP line over the-utility’s tracks. SSW’s line from St. Louis connects with the utility’s trackage and SSW is currently able to serve the plant from the east. It anticipates moving DRGW originated coal traffic to the util- ity from the west using the trackage rights we have ap- proved. “The Commission and rail carriers in general have recognized a distinction between trackage rights for bridge purposes and trackage rights for local service on lease track- age.’ Atchison, T. & S. F. Ry. Co.—Operating Agreement, 331 1.C.C. 367, 371 (1967). Bridge rights may include in- terchange but are “granted upon the condition that the applicant shall not move over the joint line any traffic orig- inating at or destined to any point thereon.” Panhandle & S. F. Ry. Co.—Construction, 166 I.C.C. 681, 682 (1930). The operation contemplated by SSW at Labadie is local service to the utility and is outside the scope of its bridge trackage rights. SP also argues that we may authorize its service to the plant at Labadie under 49 U.S.C. 10902. Without deciding the scope of our authority under that section we will not entertain such a request as part of this proceeding to set compensation for the use of the trackage rights granted as a condition to the UP/MP consolidation. Service to the Labadie plant was never in issue in that proceeding. We have decided the issue of the scope of SSW’s trackage rights, and we will not adjudicate other issues here. 40a C. Compensation i. a In approaching the issue of compensation for SSW’s trackage rights, UP first examines the value of the specific lines to the UP system and of the trackage rights to the SP system. Kansas City and St. Louis are both key Mid- western gateways, and MP’s lines between them are of great strategic importance. UP states that the Kansas City- St. Louis lines were among the most valuable of the MP assets acquired by UP in the consolidation, and that they play a key role in realizing the benefits of the consoli- dation. Further, UP argues that these lines are of extraordinary value to SP, both operationally and strategically. SP has long sought direct access between Kansas City and St. Louis in order to reduce by some 400 miles the length of its present transcontinental route between the West Coast and St. Louis (over Corsicana, TX).?° UP alleges the op- erational savings accruing to SP as a result of SSW’s trackage rights will exceed $60 million a year. UP alleges further benefit in the form of nonrecurring savings of $71.8 million from avoidance of track structure expenses and other expenditures on the Corsicana route. Notwithstanding the significant operational benefits, UP argues that the greatest benefit of the trackage rights to SP is strategic: the enhancement of SP’s position as a transcontinental carrier. SP, with these trackage rights, has a greater ability to attract traffic to its lines, either for single-line SP movement between the St. Louis gate- way and the West Coast or in conjunction with DRGW in the central corridor. * See St. Louis S.W. Ry.—Pur.—Rock Island (Tucumcari), 363 1.C.C. 223 (1980); and Norfolk Southern Corp.—Control—Norfolk & W. Ry. Co., 366 1.C.C. 171 (1982). 4ia UP advocates consideration of the great value of these lines in determining appropriate compensation for their use. UP’s compensation proposal is similar to its proposal - regarding the DRGW rights. It has three basic parts. First, SSW should assume all variable costs of its operation. Second, it is argued that SP should pay a share of the M&O expenses attributable to the trackage rights lines, with that share being equal to SP’s proportion of total car-miles on the lines. SP should also pay half of the taxes attributable to the lines. Third, it is claimed that SP should make annual interest rental payments for use of the existing facilities on the lines in an amount equal to $19 million, which represents a 50-percent joint-user share of a total, fair annual return on the subject lines of $38 million.2) UP believes that this interest rental rate best reflects the value to the lines of SP as a source of substantial, low-risk financial benefits, as well as all other pertinent factors bearing on the value of the lines and the rate of return that UP/MP should receive on that value. Additionally, for any future new improvements” in the lines, UP proposes a separate annual interest rental be * UP proposes that this figure be fixed, with no indexing for inflation in subsequent years, and, correspondingly, no adjustments downward when existing facilities are removed and improvements installed. Sim- ilarly, in line with the usual practice in joint facility agreements, the rental would not be reduced to reflect year-to-year depreciation of the existing facilities, but SP would also not be charged with annual de- preciation expense as an element of M&O. * These are what were traditionally referred to as additions and betterments. However, for purposes of interest rental calculation, the full value of capital expenditures would be used and depreciation would be disregarded. Consequently the term “improvements” was employed to avoid the application of Alternative Methods of Accounting for Raul- road Track Structures, 367 I.C.C. 157 (1983), in which the Commission adopted depreciation accounting to replace the traditional “better- ments” approach in accounting for railroad track structures. 42a paid (until the new facility is itself replaced) in an amount equal to one-half of the cost of the improvement times a rate of return equal to the cost of capital for the im- provement. With respect to new improvements, UP’s proposed trackage rights agreement would, among other things: (1) allow SP to require the installation of any new facility that would not have a material adverse effect on opera- tions on the lines (subject to MP approval, which could not be unreasonably withheld), (2) entitle MP to undertake new improvements without first securing SP consent, and (3) require, as already noted, that SP pay a 50-percent share of interest rental on improvements (unless solely used by MP). UP’s proposal with regard to M&O expenses and taxes is identical to its proposal concerning the DRGW trackage rights. SP argues that all M&O expenses and taxes should be allocated on an actual use basis rather than a fixed 50 percent for the tenant, and that UP has not shown that another method is more equitable as required by the Con- solidation decision at p. 589. The area of greatest dispute, as with DRGW, is the determination of the interest rental component of com- pensation. UP computed the interest rental, defined as compensation to the landlord for the partial loss of the use of its assets, as the product of three terms: tenant share, asset value and rate of return. UP again argues that the tenant obtains an unlimited right to use the landlord’s property and a 50-percent share should be ascribed to SSW. SSW responds that its ex- pected proportionate usage of the line is about 30 percent and that it has bridge rights with a right of interchange which are not equal to MP’s retained right of ownership and service to all local points on the line. For these rea- sons, SSW seeks an allocation of interest rental on the basis of its percentage usage share. 43a UP conducted a study of the Kansas City-St. Louis lines and concluded that (1) the appraised value of the real estate on the line is $16,523,220,23 (2) the value of existing facilities is $368,826,711,%4 and (3) the total value of the Kansas City-St. Louis line is $385,349,931. SP argues that this valuation is grossly inflated.” It ar- gues that the actual purchase price paid for MP by UP provides the best evidence of value and indicates that the actual value of the MP lines is substantially below book value. SP offers its own valuation which will be addressed below. Again UP does not offer a specific rate of return which should be applied. It suggests a number of benchmark rates, as discussed previously with regard to DRGW’s trackage rights. UP concludes that no single, scientific principle can govern the selection of a rate of return, and that we should be guided by the revenue adequacy objec- tives of the Staggers Rail Act of 1980, the realities of today’s capital market and the high value and low risk of the trackage rights to SP. UP ultimately concludes that an appropriate overall an- nual return figure for these lines is $38 million. A 50- percent allocation to SP/SSW results in a $19 million an- nual interest rental. UP argues that $19 million is a con- servative rental when compared to amounts generated by * This figure does not include any assembladge premium. Including such a premium would result in a real estate value of $35,876,206. ™ The value of improvements was calculated as RCNLD. The resulting figure represents a total reproduction cost for existing facilities of $452,589,124 less depreciation of $83,762,413. No discount for depre- ciation of grading was included in these figures. UP argues that no depreciation is normally charged to grading. See Teras Midland Rail- road, 75 I.C.C. 1, 184 (1918), and that depreciation factors employed in the DRGW and MKT proceedings are justified by the special cir- cumstances of those proceedings. ** SP argues first that the value must be reduced by the 75 percent grading depreciation factor, yielding a value under the UP formula of $281 million... 44a various possible rates of return, even when these rates _ are applied to a valuation reflecting a depreciation of grad- ing by 75 percent, as shown in the following table: SP rentals assuming 50-50 allocation, $281 million property valuation, and various return rates Annual Return rate rental million 18.2 percent Current cost of capital Se Ne I ic coco mamcenademnanicceanceunveaviaceiaiuniens $25.6 16.5 percent Current cost of capital COTE erhs CUII TION osc ssevensconssscvecssecnecserersecenssnccononcces 23.2 15.3 percent MPRR pretax return on net investment CR GPIT IIT sansscheslclausiseclaseaeetitcemannlebuh dicate cbscamacpadibecioceatdaiaacauteaisanissaeiatin 21.5 14.2 percent Cost of debt (1982-AAR testimony).................. 20.0 13.7 percent Cost of debt (1981-ICC determination)............. 19.3 ‘The first two figures would be higher if the equity component of the cost of capital were stated on a pretax basis. * MP pretax rate of return was calculated using the statutory tax rate, not MP’s effective tax rate. SP cites the Consolidation at pp. 589-90 for the prop- osition that rates of return in this proceeding based on current cost of capital may not be reasonable. The highest rate of return in any existing trackage rights agreement between SP, UP, MP or WP is 8 percent. This rate ap- pears in the October 1981 agreement governing SP’s use of WP trackage between Lathrop and Niles Junction, CA. SP states that it does not participate in any trackage rights agreement with a rate of return greater than 8 percent. The effective rate of approximately 13.7 percent employed by UP is alleged to be manifestly unreasonable in light of the existing SP trackage rights return structure and the Commission’s stated intent to preserve competition and permit SP to compete on equal terms with UP. UP also proposes to treat new improvements in the following manner, First, MRPP may install new facilities 45a in its discretion. Unless such new facilities are exclusively for the use of MPRR, their cost would be placed in an Improvements Valuation Base and SP would pay a sepa- rate interest rental of them.” For each new facility, in- terest rental is calculated as one-half of the actual cost of the particular improvement, times the cost of capital at the time the improvement is made. When such a new facility is itself removed from service, interest rental pay- ments on that facility cease, and interest rental is paid on any replacement facility.?’ Second, SP may request a particular new facility, and it will then be installed by MPRR so long as it would not materially interfere with or hinder operations on the lines and MP approves the installation (which approval may not be unreasonably withheld). The cost of construction and maintenance of the facilities would he borne by SP, and no interest rental would be charged. SP objects to the suggested Improvements Valuation Base on several grounds. First, the concept of a separate rental calculation at a differing interest rate for improve- ments is unprecedented in any trackage rights agreément to which SP is a party. In every SP trackage rights ar- rangement that employs an interest rental calculation, new improvements are added to the total valuation base at their current cost, and rental is payable thereon pursuant to ** UP advocates the inclusion of its improvements in the St. Louis yards as the first entry in these accounts should we determine that SSW may operate to milepost 0.0 near Gratiot Tower. We have dev- ermined that SP’s trackage rights extend to Gratiot Tower. The im- provements to the running track wili benefit SP’s operation and they should be included in the improvements valuation base as calculated, infra. “ Depreciation would be disregarded both in the Improvements Val- uation Base and in the calculation of M&O expenses. Here, as with the calculation of interest rental for existing facilities. SP would neither be charged with annual depreciation as an operating expense nor cred- ited with annual depreciation in the calculation of interest rental. 46a the same formula as for the existing facilities. Second, the creation of a separate improvements rental base would be virtually unworkable from an accounting standpoint. In the ensuing years, as new improvements are gradually made to the lines, the parties will be required to make separate rental calculations on each individual new improvement, creating the prospect of numerous separate rental caicu- lations. SP argues that any reimbursement for improve- ments should be based on the percentage usage share and that, at least, it should retain the option to reimburse UP in advance for its share of the cost of new improvements rather than automatically including the cost in a separate valuation base. SP also objects to UP/MP’s proposed trackage rights terms that would not require SP’s consent in the event of significant or major improvements (defined as those in excess of $100,000). Such consents are commonly required in major trackage rights resolved through the arbitration mechanism provided in the proposed agreement. 2. SP/SSW. SP/SSW proposes to reimburse UP for (1) the variable costs of operation; (2) its percentage usage share of taxes, assessments and M&O expenses; and (3) rental based upon SSW’s percentage usage share, on a car-mileage basis, of 4 percent per year of the ledger value of the line plus subsequent additoins and betterments. SP/SSW’s offer is based on existing agreements beeween SSW and MP covering SSW’s use of MP trackage between Valley Junction, IL and North Junction, IL; and MP’s use of SSW trackage between Illmo, MO and Paragould, AR (collectively the Illmo agreements). The Illmo agreements cover the lines south of East St. Louis, IL, for a distance of approximately 230 miles. These lines form a significant part of SP/SSW’s Corsicana route. | 47a Using a ledger value of $68.2 million for the Kansas City-St. Louis lines and an SP/SSW usage share of 30 percent, the interest rental portion of SP/SSW’s compen- sation formula would amount to $820,000 annually. SP/SSW argues that a substantial portion of the traffic moving over the trackage rights will be traffic shifted from its Corsicana route, and that, therefore, it is appropriate to employ the terms of the Illmo agreements in setting terms for the new trackage rights. UP argues that the terms of the Illmo agreements pro- vide no basis for calculating the terms appropriate for the instant trackage rights because those agreements are re- ciprocal agreements. Originally negotiated in 1904 and re- newed in 1954, they involve SSW use miles of MP track and MP use of 110 miles of SSW track. The primary consideration passing between the parties—the exchange of reciprocal operating rights allowing each party to avoid building additional tracks—is reflected in the interest rental terms. UP argues that the Illmo agreements actually support its proposal to use an RCNLD methodology ad current cost of capital. The terms of the agreements were derived from the cost of constructing the Valley Junction-North Junction line, completed November 1, 1903 for $35,000 a mile, and the actual 4 percent ccupon rate on the bonds used to raise capital for its construction. UP concludes that the Illmo agreements provide no support for the terms proposed by SP/SSW in this proceeding. - UP also objects specifically to two items in the SP com- pensation proposal. First, UP argues that the 4 percent rate of return adopted 80 years ago in different circum- stances is inappropriate. Second, UP objects to the use of book value of its lines, or book value weights in reducing the price paid for MPC 48a to line-specific value,“ as the valuation used in this pro- ceeding because book values of rail assets bear no fixed relationship to their real economic values. First, because of betterment accounting, book value weights significantly overstate the relative share of MP’s total assets attrib- utable to equipment. Second, because book value is a func- tion of physical improvements in place and the dates of their installation, it gives no weight to the relative stra- tegic and economic importance of specific lines. UP notes that these lines are responsible for over one-third of the projected revenue gains reflected in the applicants’ rail traffic diversion study and more than one-half of the new revenue estimated in the nonrail traffic study. Finally, the SP/SSW proposal would require SSW’s con- currence prior to any major improvement of the line. SP/ SSW acknowledges that it would not refuse to concur in necessary improvements to the line. UP responds that such a veto power in SP/SSW is unnecessary in light of its undeniable motive to avoid unnecessary expenditures. 3. Discussion. The decision authorizing the consolidation statec that ‘“{vjaluation of the property should be the current fair market value, rather than book value or replacement value.” UP-MP at p. 589. Neither SP not UP has con- vincingly shown that we should accept their valuation methods based respectively on book value and replacement * As support for its use of MP’s ledger value for the Kansas City- St. Louis line, SP calculaetd interest rental compensation using five different formulae all reaching valuations less than ledger value. Each of these methodologies was, in one way or another, based on book value. One of them purported to allocate the actual purchase price paid for MPC on the basis of the relative book values of specific MP assets. Using this method, SP concludes that the value of these lines is $54.6 million. The result of this calculation is argued to justify SP’s use of ledger value notwithstanding the admonition that “[vjaluation *** should be the current fair market value, rather than book value ***’’ UP-MP at p. 589. 49a value. We have already discussed the drawbacks of UP’s RCNLD approach with regard to the DRGW trackage rights. The RCNLD approach does not value the asset as going-concern business, but solely as individual parcels of land and specific existing structures. Thus it ignores a characteristic vital to this proceeding: an asset’s income producing potential. The book value approach, either by direct use of ledger values as proposed by SP/SSW or through use of book value weighting of the purchase price, suffers from all of the same infirmities as the RCNLD approach with one addition: time. The ledger value simply reflects the cost of a given asset like the RNCLD approach, but the cost at a past time. Those historical costs arose at different times, in different markets, and should not be relied upon as an accurate indication of present value or as an accurate method of apportioning present value. We find the SP’s reliance on the Illmo agreements for rate of return particularly misplaced. An 80-year-old rate of return negotiated in a context of reciprocal trackage rights is wholly inappropriate here. The relatoin of these agreements to SP/SSW’s Corsicana route is irrelevant. The cost structure of the SP-system outside of these particular trackage rights is as irrelevant to our consideration here as is the value of these rights to the SP. = UP/MP has argued that we should consider the value of the trackage rights to SP in determining the valuation of the property. Such consideration are appropriate in de- termining the reasonableness of trackage rights terms in privately negotiated agreements. However, value to the tenant should not be determinative in calculating rental when trackage rights have been imposed by this agency to ameliorate the anticompetitive effects of a consolidation. We will not allow the consolidated UP/MP system to defeat that competition by extracting rents for these lines that reflect the value of SP/SSW operations. We have already ~ 50a specifically rejected this theory during the discovery phase of this proceeding*® and we reaffirm that rejection here. We have determined that the most appropriate method of determining the value of the Pueblo line is the capi- talized earnings approach applied by DRGW. We will apply the same methodology to the valuation of the Kansas City- St. Louis lines. All factors in the capitalized earnings cal- culation described above will remain the same except the usage share and the net revenues on the line. SP has suggested that their usage share for the line will be 30 percent. However, no figure for the net revenues of these lines are now before us. We will, therefore, require that both SP and UP prepare and submit calculations developed from the earnings multiple methodology and based on line- specific net revenues. Information necessary for making these calculations may not presently be available to SP. We except UP to cooperate in its expeditious discovery.* We are aware that using the earnings multiple approach on these lines reflects the strategic value of the facilities to UP through the higher net revenues attributable to these lines as a result of consolidated operations." This will result in a higher post-consolidation valuation. How- ever, the increase in UP traffic will also result in a lower SP usage share and these effects will, to some degree, offset. Nonetheless, we remain concerned that SP be able to operat with a cost structure competitive to that of the * Finance Docket No. 30,000 (Sub-No. 16) St. Louis Southwestern Railway Company—Trackage Rights Over Missoun Pacific Railway COmpany—Kansas City to St. Louis (not printed), decision served April 25, 1983, at sheet 2. * To the extent that proprietary information may be involved, ag- gregate figures, averages or any other appropriate techniques may be used to make these calculations. * As noted above, the Kansas City-St. Louis lines are alleged to be responsible for over one-third of the projected revenue gains reflected in applicants’ rail traffic diversion study and over one-half of the new revenue estimated in the nonrail traffic study. 5la UP on these lines*® As a point of reference for our review of these costs, we will also require each carrier to submit calculations using the net revenue generated on these lines during 1979, MP’s last year of operation before announce- ment of the consolidation. This is the base period for the consolidation proceeding and the information should be readily available. Actual net revenues should be developed where possible, or fully allocated costs may be developed using Rail Form A. For overhead traffic, revenues should be allocated to the line on a mileage prorate basis. The required calculations should be submitted as soon as possible, but not later than 60 days after service of this decision. With regard to improvements on the lines, we will not require UP to obtain SP consent prior to making improve- ments. In light of UP’s incentive not to undertake un- necessary improvements, we see little possibility of abuse. However, we retain continuing jurisdiction in this matter. and, should difficulties arise, SP may seek relief from the Commission. Accounting for the interet rental on improve- ments should be undertaken using a separate Improve- ments Valuation Base. This account should be generated using the actual cost of the new imprevement multiplied by the actual UP cost of capital at the time the improve- ment is made and by SP’s usage share. SP also must have the option to reimburse UP in advance for its share of the cost of new improvements rather than including the cost in a separate valuation base. Finally, the parties are directed to compute interest on the difference between payments under the interim op- “The premise of using the earnings multiple approach is that it reflects what UP actually paid for particular assets of the MP system based upon the earnings potential of those assets. Historic MP cost on these lines is less relevant. 52a erating agreement and compensation due as a result of our action here in the manner described above. III. Between Kansas City and Omaha/Council Bluffs As a condition to the consolidation, the Commission also granted trackage rights to MKT over Mp’s lines between Kansas City and Omaha, NE; between Union and Lincoln, NE; and over UP’s lines between Omaha and Council Bluffs, [A and between Kansas City and Topeka, KS, with use of related terminal facilities. On November 9, 1982, MKT entered agreements with both UP and MP, then separate corporations, setting the terms of operation and the compensation for these track- age rights. These agreements were modified by a supple- mental agreement entered January 21, 1983. The agreements as modified are submitted for our approval. As noted in the Consolidation decision, at p,. 589, we will approve any reasonable terms agreed to by the parties. The agreement contemplates MKT assuming the variable cost of its operations.* Additionally, MKT will pay a per- centage, based upon its uage share on each portion of the joint track, of M&O expenses plus standard additives and of taxes and assessments. Finally, interest rental will be determined by multiplying MKT’s usage share on each portion of the joint facility by the following amounts: Gillmore Jct.- Topeka- Co. Bluffs Kansas City First 6 months (December 22, 1982 to July 1, 1988)..... $775,000 $930.000 Second 7 months (July 1, 1983 to February 1, 1984)...... 2,305,000 3,014,000 Second year * The agreement requires UP/MP to conduct studies of the actual cost of switching services on the joint track and to bill MKT accord- ingly. a e 53a (February 1, 1984 to PE Be MR sthictavesercerccdetevecssccsens 4,610,000 6,028,000 Third and succeeding yearsS................. 6,500,000 8,500,000 Calculation of the interest rental for the third and suc- ceeding years is based on the reproduction cost new less depreciation of the track, track structure, grading,* roadbed, signal and communications facilities, and other appurtenant facilities on each portion of the joint track. The RCNLD value is then multiplied by the 1981 pretax rate of return of Pacific Rail Systems, Inc. (Pacific), the holding company controlling the railroads, of 14.23 per- cent. Usage share is calculated as the ratio of tenants’ gross- ton-miles to total gross-ton-miles of all users. All payments are to be made monthly in advance. UP has reserved the right to make improvements to the trackage without the prior approval of MKT. The cost of any improvements will be added to a separate Improve- ments Valuation Base. Interest rental for each improve- ment will be calculated using actual cost, Pacific’s pretax cost of capital at the time the improvement is completed, and MKT’s usage share based on the gross-ton-miles ratio. The terms agreed to by UP/MP and MKT are reasonable and will be approved. Findings The calculation of compensation and the terms of track- age rights agreed to by UP/MP and MKT are reasonable and will be approved. Compensation for the DRGW and SP/SSW trackage rights should be determined in three parts: (1) the variable “ Grading was depreciated 75 percent to reflect a variety of nego- tiating factors. ) 54a cost of operation including standard additives, (2) a pro- portionate share of maintenance and operations expenses and of taxes and assessments based on the tenant’s usage of the facility, and (3) an interest rental calculated using an earnings multiple approach as set forth in the decision. Neither DRGW nor SP/SSW shall have,the right of prior approval of improvements on the lines of UP or MP. Com- pensation for improvements will be determined using a separate improvements valuation base account. Compen- sation for improvements should be based on the actual cost of the improvement times the landlord’s then-current cost of capital times the tenant’s usage share for each improvement. However, each tenant will have the option to reimburse the landlord for a portion of the construction expense based upon its usage share of the facility at the time of construction rather than increasing the improve- ments valuation base. SP/SSW’s application contemplated trackage rights ex- tending to MP milepost 0.0 in St. Louis, and compensation for the St. Louis terminal trackage will be included in the overall compensation formula. SP/SSW was granted the right to interchange traffic with other carriers at points on the MP line. However, Labadie, MO, is not an inter- change point and SP/SSW does not have the right to serve local industry at Labadie from the MP line even though it may serve those industries from its own line. This decision will not significantly affect either the qual- ity of the human environment or energy conservation. It is ordered. 1. In Finance Docket No. 30,000 (Sub-No. 25), the agreements dated November 9, 1982 as supplemented Jan- uary 21, 1983 between Missouri-Kansas-Texas Railroad Company and Union Pacific Railroad Company and Mis- souri Pacific Railroad Company are approved. 55a 2. In Finance Docket No. 30,000 (Sub-No. 18), trackage rights compensation will be determined in three parts: (a) variable cost of operations, (b) a percentage share of main- tenance and operations expenses and of taxes and assess- ments based on tenant’s actual usage, and (c) an interest rental determined by the capitalized earning® approach set forth in the decision. ’ 3. The trackage rights granted in F.D. No. 30,000 (Sub- No. 16) include operations to Missouri Pacific Railroad Company milepost 0.0 in St. Louis and the right to in- terchange traffic at points on the line. 4. In F.D. No. 30,000 (Sub-No. 16), compensation will be calculated in the same manner as described for the rights in F.D. No. 30,000 (Sub-No. 18). The record will be kept open for 60 days from the date of service of this * decision for the parties to file appropriate information for the calculation of the interest rental component as de- scribed in the decision. 5. The difference between the compensation amounts finally determined in F.D. No. 30,000 (Sub-No. 16) and those actually paid for interim operations will bear interest at a rate equal to the railroad industry’s then-current cost of debt. 6. This decision is effective on August 30, 1984. By the Commission, Chairman Taylor, Vice Chairman Andre, Commissioners Sterrett and Gradison. Chairman Taylor was absent and did not participate. APPENDIX A DRGW Interest Rental Calculation After the consolidation has been in place for 3 years, re- routing of traffic will substantially reduce UP/MP’s volume on the Pueblo-Kansas City line. DRGW assumed all that will remain will be traffie originating or terminating on the line and a minimal amount of traffic interchanged be- | 56a tween MP and DRGW at Pueblo, which neither carrier could divert from the other. This will reduce the gross tonnage between Pueblo and Osawatomie, KS, from 15.4 million gross tons per mile in 1979 to approximately 3.4 million gross tons. A breakdown of this traffic is as fol- lows: \ Traffic segment Cars Net tons Gross tons DRGW-MP coal trains................... 5,138 498,728 827,786 DRGW-MP noncoal....................0... 7,515 379,838 861,217 Originating/terminating traffic....... 11,497 952,523 1,688,773 eecsccitdcmacantacitheheniuassavamacantaees 24,150 1,831,089 3,377,776 The DRGW projections were based on an analysis of 1979 traffic interchanged with MP by DRGW and Mp traffic originating and terminating on the line, including revenue and cost information, from data provided to DRGW by MP. This volume will require only one train in each direction per day, as opposed to three trains in each direction per day before consolidation. Costs associated with the traffic were develcped using 1979 MP Rail Form A unit costs. Since Rail Form A costs were used, all calculations are based on betterment ac- counting for track structure. These costs were determined by costing the average characteristics per car for the three traffic segments as they would have been handled in 1979 at the reduced volume. Certain modifications to Rail Form A were made to measure the costs more accurately. These modifications were designed to reflect those costs appropriate for inclu- sion in a pro forma income statement. The costs do not include the cost of capital components—return on road property and return on equipment. << 57a Car costs were based on the average car-hire rate paid by DRGW on foreign railroad owned cars.! These rates were developed for each of the Ex Parte No. 334 car type classifications. Empty return ratios were assumed to be 100 percent. A tare weight of 32 tons per car was used. Interchange switching costs and inter- and intra-train switching costs were computed on an estimated occurence basis. Loss and damage expenses were computed on a net ton- mile basis. Costs were developed by 5 digit STCC number from actual 1979 DRGW claim payments. Individual per car costing was initially done at the var- iable cost level. However, to estimate more accurately the costs associated with the traffic. MP fully allocated costs were also calculated using the ton/ton-mile method of es- timating constant costs. Per car costs were multipled by the number of cars in each segment to develop total fully allocated costs. Since the MP Form A unit costs excluded depreciation, the fully allocated costs were adjusted ac- cordingly. The methodology is similar to that employed in Finance Docket No. 30,000. The following table sets form the development of the costs relied upon by DRGW and the Rail Form A core locations: I. Development of car ownership costs per day or mile A. Railroad-Owned Cars 1. Mileage Rate x (1 + B2268) x B1175 2. Time Rate x (1 + B2268) x 24 x B1197 3. Ownership/Day = [(line 1 x B1181) + (line 2 x B1206)] (divided by) B290 4. Ownership/Mile = [(line 1 x B1180) + (line 2 x B1205)] (divided by) B74 ‘ DRGW suggests this standard is appropriate to reflect MP car cost, since the car—hire rates are uniform. 58a B. Rail Form A Core Locations Core Value Source Description i REPRO Sch. B. Col. 40, line 8.... Rev. car miles, excl. pvt. cars NO cesinseitaens Sch. A, Sheet 4.11, 9/ Car days switching, BND Sh ciscccevementenicanmtumencones leading, unloading 55) Sch. B. Col. 34, line 8.... Rev. car miles excel. pvt. cars 3) | Sch. A. Sheet 4.10 8/ Percent car mile run- TONE DP icscsnrnncnneiahinnebapinhtiininiae ning B1181.......... Sch. A. Sheet 4.10 8/ Percent car mile SE TNO ssnhacnenvicaibicmnatenente switching 1) er Sch. B. Col. 35, line 8.... Total car days RGD svricesnsc Sch. A. Shett 4.11 9/ Percent car day run- BG DW viniccinbuiatacisiacincanemsiiin ning BROS wnsscseess Sch. A. Sheet 4.11 9/ line Percent car day switch- DP i sssctisicnitinlcsishinbdaeaablanneaaaent ing EEE wccsaccoes Summ. 1. Col. 24, line 4, General overhead II. Development of variable cost of movement A. Carload Costs: Miles x GTM x lading Milex x empty return x GTM x tare Miles x empty return x B3186 Miles x empty return x ownership/mile (number of O&D) x [(4 x ownership/day + B3265 + B3273 + B3187 + (lading x B3276) + (2 x B3290)] 6. Empty return x .5 x number of I/I and (X) switches x ownership/day 7. Empty return x [(B3715 x number of (X) switches) + B3716 x number I/I switches)] 8. Lading x miles x loss and damage cost per net ton mile rr rrr 59a NOTE: (1) I/I = Intertrain and Intratrain; (X) = In- terchange; empty return = (1.0 + empty return ratio) (2) GTM = sume of B3261, B3262, B3263, and B3173 adjusted for number of locomotive units and training weights of trains handling each traffic segment. Way train (B3325) assumed on 20 percent of haul on traffic origi- nating or terminating. B. Rail Form A Sources Core Value Source Description ys See Sch. B. Col. 9, line 12...... Train Mile—Crew BOLGG cocssesse Sch. B, Col. 24, line 12.... TS&E—Running EE Sch. B, Col. 25, line 12.... TS&E—O&D | Sch. B, Col. 7, line 12...... Gross ton mile oo. : ae Sch. B, Col. 8, line 12...... Locomotive unit mile B3268 .......... Sch. B, Col. 10, line 12.... Train mile other ae Sch. B, Col. 14, line 12.... Station Clerical—CL BS278 .....0000- Sch. B, Col. 22, line 12.... Spec. Sves.—CL >, Sch. B, Col. 28, line 12..... Claims Clerical—CL ee Sch. B, Col. 51, line 12.... Switching—O&D—CL ROBES cccsesonss Sch. B, Col. 7, line 19, GTM Cost—way train «eS ERRORS R eRe B3715 ......... Summ. 1, Col. 3, line 3, Switching— OOF pithuibaiesnaspdedanuhenensanamanencids Interchange Be i cccbiacins Summ. 1, Col. 4, line 3, Switching—I/I PRETEEN RRM ENeonD Ro TT III. Development of fully allocated costs A. Constant cost related to distance (per ton mile) (B3393) and unrelated to distance (per ton) (B3395) cal- culated on a per car basis for each traffic segment. B. Constant costs per par added to variable cost per car to develop fully allocated cost per car. Fully allocated cost per car multiplied by total cars in each segment to arrive at total fully allocated cost. 60a IV. Adjustment of fully allocated costs to include de- preciation A. MP 1979 depreciation from R-1 = $62,144,000. B. Total operating expense, excluding depreciation from MP 1979 Form A (B2364) = $1,162,519,000. C. Ratio to increase fully allocated cost to include de- preciation = 1.053 [(A divided B) + 1)). D. Multiply ratio in C by fully allocated cost to develop total operating expenses associted with traffic. By deducting the fully allocated costs from the revenues on each of the three traffic segments described above, DRGW developed the estimated net revenues attributed to the reduced traffic between Pueblo and Kansas City. The net revenues were pro-rated between the Pueblo-Os- awatomie and Osawatomie-Kansas City segments on a mileage basis. Net revenues on north-south traffic moving only be- tween Osawatomie and Kansas City and not affected by the volume reductions were added to that line segment to develop total net revenues for each of the two line seg- ments. DRGW then developed the fair market value of each line segment as follows: Pueblo- Osawatomie- Total Osawatomie Kansas City 1. Operating revenue........ $15,824,894 $1,565,100 $17,389,994 2. Operating expenses....... 12,351,857 1,221,612 13,573,470 3. Net revenues................ $3,473,037 $ 343,487 $ 3,816,524 4. Additional traffic (1).... _ $2,060,922 _ 5. Total net revenues....... $ 3,473,037 $2,404,409 $ 5,877,446 6. Fair market value (2).. $13,197,540 $9,136,754 $22,334,294 (1) In 1979 north-south traffic moving only between Osawatomie and Kansas City amounted to 10.8 million net tons, based on MP density 6la chart. This is 6 times projected 1.8 million net tons moving between Pueblo and Kansas City. Line 3 ($343,487) x 6 = $2,060,922, estimated net revenues on north-south traffic. (2) Line 5 values x 3.8 which represents earnings multiple ($998,910,000 market value divided by $262,966,000 MPC 1979 pretax operating profit). DRGW developed its rate of return using MPRR’s 1979 after-tax return of 9.33 percent on its net investment in railroad property. ICC Bureau of Accts. Class I Line-Haul Railroads’ Selected Earnings Data for 12-Months ending December 31, 1980 and 1979. This is an after-tax rate of return which, when converted to a pretax rate of return by dividing 9.33 percent by .82 (1 — 0.18, MP’s effective 1979 tax rate) yields a pretax rate of return of 11.38 percent. The following table sets forth DRGW’s ultimate calcu- lation of the interest rental portions of compensation ap- propriate for the Pueblo-Kansas City line: Pueblo- Osawatomie- Osawatomie (Kansas City 1. Fair market value based on $13,197,540 $9,136,754 earnings multiple....... i I Sc aricnisnseestonaessens .1138 .1138 3. Interest rental for 100 per- 1,501,880 1,039,763 cent use (L.1 x L.2) 4. Rio Grande’s portion of total 0.8 0.37 Si scsianniisennsvidesenieicics 5. Rental per segment (L.3 x 1,201,504 384,712 ei icchidibhiakecnenissininsdeasnns The proposed combined rental of the two segments is $1,586,216. 62a APPENDIX B I.C.C. earnings multiple calculation of initial interest rental for MP line between Pueblo, CO, and Kansas City, MO I. DEVELOPMENT OF EARNINGS MULTIPLE MPC Value 1982 MPC stock price......... $998 ,910,000 1982 MPC liabilities ............ $1,361,814,000 Total 1982 MPC value..... $2,360,724,000 1983 MRTC stock price...... 256,300,000 1982 MRTC liabilities.......... 185,443,000 Total 1982 MRTC value... — 441,743,000 Total 1982 value .............. $1,918,981,000 MPC Earnings 1979 MPC operating $262,966,000 ER ee 1979 MPC nonoperating 36,541,000 Se eiennstanennmnahtnskennies Total 1979 income before $299,507,000 interest and taxes......... Times GNP Deflator ........... x 1.26805 MPC earnings expressed in 379,790,000 TS MI piece eanceasaracnsas 1982 MRTC earnings.......... -29,100,000 Total earnings expressed 350,690,000 in 1982 dollars .............. OE BI SUID selncsccviacadcencsnsteesatanateentensnnn $1,918,981,000 Total earnings expressed in 1982 dollars .......... + 351,197,000 63a Il. RATE OF RETURN CU BOL using MP 1979: Rel ....ccccccsecessccescoseeeses 8.37 percent 1-0.18 (MP’s 1979 effective tax rate) ............... + 0.82 10.21 percent III. INTEREST RENTAL Pueblo to Osawatomie Osawatomieto Kansas City BT CE i vicntrindacectcccsnvicesecsenas $3,473,087 $2,404,409 Earnings multiple ...........c00cccc000ee X 5.47 x 5.47 Valuation of investment base...... 18,997,512 13,152,117 i et oe 0.1021 0.1021 TE aici cetincstasancudindatenis 1,939,646 1,342,831 DRGW usage share..................00. 0.80 0.37 Interest rental (segment)............. 1,551,716 496,848 Total interest rental.................... $2,048,564 64a INTERSTATE COMMERCE COMMISSION REPORTS Finance Docket No. 30,000 (Sub-No.16)' ST. LOUIS SOUTHWESTERN RAILWAY COMPANY— TRACKAGE RIGHTS OVER MISSOURI PACIFIC RAILROAD COMPANY—KANSAS CITY TO ST. LOUIS TRACKAGE RIGHTS COMPENSATION Decided December 18, 1987 The Commission is modifying the formula for setting trackage rights compensation for trackage rights in the merger de- cision Union Pacific—Control—Missouri Pacific, Western Pacific, 366 1.C.C. 459 (1982). BACKGROUND BY THE COMMISSION: General. By decision in Finance Docket No. 30,000, the Commission approved the consolidation of the Union Pa- cific Railroad Company (UP), Missouri Pacific Railroad Corporation, Missouri Pacific Railroad Company (MP), and the Western Pacific Railroad Company (WP) under the common control of Union Pacific Corporation and Pacific Rail System, Inc. Union Pacific—Control—Missouri Pa- ‘This decision also embraces Finance Docket No. 30,000 (Sub-No. 18), Denver and Rio Grande Western Railroad Company—Trackage Rights—Missourn Pacific Railroad Company—Between Pueblo, CO and Kansas City, MO. The previous decision in these proceedings, St. Louis Southwestern Ry. Co.—Trackage Rights Compensation, 1. 1.C.C.2d 776 (1984), also included Finance Docket No. 30,000 (Sub-No. 25) Missouri- Kansas-Texas Railroad Company—Trackage Rights—Missouri Pacific Railroad Company—Between Kansas City, KS and Omaha, NE. In that decision, we approved the trackage rights a in Finance Docket No. 30,000 (Sub-No. 25.) ee 65a cific; Western Pacific (UP—Cont.—MP; WP), 366 I.C.C. 459 (1982) (consolidation or merger decision) aff'd in part sub nom. Southern Pacific Transp. Co. v. I.C.C., 736 F.2d 708 (D.C. Cir. 1984) (Southern Pacific). In approving the consolidation, the Commission identified several anticom- petitive effects of the transaction which could be remedied by grants of trackage rights to competing carriers. The greatest competitive impact was noted in the cen- tral transcontinental corridor. To preserve competition in that corridor east of Denver, the Commission conditioned approval of the merger on grants of trackage rights. One grant of such rights was to the Denver Rio Grande West- ern Railroad Company (DRGW) between Pueblo, CO and Kansas City, MO. In another, the Commission granted the Southern Pacific Transportation Company and the St. Louis Southwestern Railway Company (collectively re- ferred to as the SP) trackage rights between Kansas City and St. Louis. The Missouri-Kansas-Texas Railroad Com- pany (MKT) received the third grant of trackage rights over MP’s lines between Kansas City and Omaha, NE: between Union and Lincoln, NE; and over UP’s lines be- tween Omaha and Council Bluffs, IA and between Kansas City and Topeka, KS with use of related terminal facilities. We did not set the terms of compensation for the track- age rights. We preferred that the parties agree to the terms themselves. If they did not, we stated we would set those terms. UP—Cont.—MP; WP, supra, at 589-590. We delineated ‘general principles” for just and reasonable compensation for trackage rights imposed in merger pro- ceedings. Those principle applied to both voluntary and Commission-imposed agreements. An owning carrier was found entitled to recovery of costs and rent. Rent is based on an allocated share of return on the value of property. Valuation of the property should be based on current fair market value. Concerning rate of return we stated: 66a Current cost of capital or opportunity cost may not be reasonable. In order to provide a realistic opportunity to compete, the trackage rights ten- ant should operate over the involved lines under economic conditions similar to the landlord’s. Therefore, the landlord’s actual rate of return on its properties should be given consideration in determining just and reasonable rate of return. Id. at 589-90. Finally, we noted that, since the purpose of the trackage rights was to maintain a competitive balance where com- petition would otherwise be significantly lessened by the merger, ‘‘any terms so onerous to the tenant as to defeat the purpose of the trackage rights cannot be considered just and reasonable.” (Citation omitted). Jd. at 590. In Southern Pacific, supra, the Court of Appeals af- firmed the merger decision and remanded the case for reconsideration of the DRGW’s request for independent ratemaking authority, an issue unrelated to these pro- ceedings. Concerning the issue of trackage rights, the court stated that ‘(t]he Commission has extraordinarily broad discretion to impose protective conditions, 49 U.S.C. § 11244(c), and the courts have appropriately given the Com- mission's selection of such cond.tions great deference.”’ (Citations omitted.) Jd. at 721. Concerning trackage rights compensation terms, the court noted that we have in- structed the railroads to negotiate acceptable terms based on the general criteria we outlined, supra, and that we had reserved the authority to set terms in the absence of an agreement. The court also stated: This procedure was entirely rational, in that the ICC specifically provided that the terms, whether agreed to or imposed, must be such as to make the new transcontinental corridor (SP/DRGW) competitive with the merged system. (Citation omitted.) * * * [W]e trust the Commission to en- 67a sure that the compensation terms will not defeat the purpose of the trackage rights. The ICC has in fact guaranteed that it will see to the proper functioning of the trackage rights. (Citation omit- ted.) Id. The MKT entered into trackage rights agreements with the UP and MP which were submitted for our approval. In our decision in this proceeding concerning trackage rights, 1 I.C.C.2d 776 (1984) (the 1984 decision or the trackage rights decision) we found that the terms agreed to by the UP/MP and MKT were reasonable and were approved.? Jd. at 802-04. The DRGW and SP were unable to reach agreement with UP on the terms of compensation for the DRGW’s Pueblo-Kansas City trackage rights and the SP’s Kansas City-St. Louis trackage rights. They requested that we set terms. Jd. at 779. In the trackage rights decision, we found that the com- pensation should be determined in three parts: (1) the var- iable cost of operation including standard additives; (2) a proportionate share of maintenance and operation ex- * The trackage rights compensation agreements are set out in detail in the 1984 decision. Generally, the MKT assumed the variable costs of its operations. Additionally, MKT was to pay a percentage, based on its usage share on each portion of the joint track, of maintenance and operation expenses plus standard additives and of taxes and as- sessments. Finally, interest rental was to be determined by multiplying MKT’s usage share of each portion of the joint facility by specified amounts during the first two years. For the third and succeeding years, calculation of the interest rental is based on the reproduction cost now less depreciation. (RCNLD) of the track, track structure, grading, roadbed, signal and communications facilities, and other appurtenant facilities on each portion of the joint track. The RCNLD value is then multiplied by the 1981 pre-tax rate of return of Pacific Rail Systems, Inc., the holding company controlling the railroads, tat 14.23%. St. Louis Southwestern Ry. Co.—Trackage Rights Compensation, 1 I.C.C.2d 776, 802-804 (1984). 68a penses based on the tenant’s usage of the facility, and (3) interest rental. Jd. at 779-80. There was no dispute among the parties concerning var- iable costs and maintenance and operation expenses. /d. at 790-791 and 799. The parties disagreed about the in- terest rental factor. We found that interest rental should be based on the tenant’s usage and the MPC’s 1979 pre- tax rate of return to the value of the lines. In determining value, we rejected valuation methods based on replacement costs and book value and adopted a capitalized earnings approach. Jd. at 780. Under this method, developed principally from a pro- posal by the DRGW, the earnings of the line segments were ‘‘capitalized’’ using an earnings multiplier derived by dividing the consideration the Union Pacific Corporation paid to acquire the MP Corporation by MP’s earnings. It was assumed that all MP properties, standing alone, would yield the same return as the percentage relationship be- tween MP’s system earnings and the purchase price of the MP. Actual earnings of the particular line segment are then multiplied by the earnings multiple to arrive at an approximate value for the line segment. This figure was multiplied by the MP’s pre-tax rate of return on invest- ment to produce a total pre-tax return on investment. This amount was then multiplied by the percentage of usage of the tenant railroad (i.e., the DR [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_IA40386011_2299%3A2. Public record. Not legal advice.