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November 3, 1977

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor; In re Proposed Agreement with Amtrak Proceedings for the Reorganization of a Railroad

The opinion of the court was delivered by: FULLAM

Re: Proposed Agreement with Amtrak



 An unresolved issue which has long been pending before this Court is whether or not a proposed amended agreement between the Trustees and the National Rail Passenger Corporation ("Amtrak") should be approved. Initially, disposition of this matter was deferred so that the proposed contract, and various other possible alternatives, could be compared on the basis of actual, rather than projected, figures. Thereafter, the energies of the parties and of the Court were diverted to other more pressing matters in connection with the implementation of the Rail Act, and the development of a proposed Plan of Reorganization. The termination of the Debtor's involvement in railroad operations on April 1, 1976, marked the end of the period for which the Debtor was to receive compensation from Amtrak, under the proposed agreement or any other alternative thereto, and seemed to transfer the pending proposed agreement to the category of "loose ends" which should be cleared up eventually, but need not be resolved immediately.

 Because of its relationship to the pending litigation over the proposed Plan of Reorganization, and the possible impact of other litigation between the Trustees and Amtrak, resolution of the pending issues should not be further postponed.

 In 1970, the Government responded to the dual problems of customer dissatisfaction with passenger service and staggering deficits from passenger operations by enacting the Rail Passenger Service Act of 1970, 45 U.S.C. ยงยง 501 et seq. The Act created Amtrak and charged it to provide modern and efficient intercity rail passenger service. After the Secretary of the Department of Transportation designated the service routes, Amtrak was to negotiate contracts with the private rail carriers for the necessary service. Failing agreement, the Interstate Commerce Commission was empowered to order carriers to provide the designated service for such "just and reasonable" compensation as the Commission might determine.

 This Court approved an initial agreement between the Trustees and Amtrak, covering the start-up period. In re Penn Central Trans. Co., 329 F. Supp. 477 (E.D. Pa. 1971). Under that agreement, in return for providing specified passenger service, the Trustees were to receive compensation equal to the expenses "reasonably and necessarily incurred by the [Debtor] which are solely for the benefit of the [Amtrak] service." Article 5.1. Solely related costs do not include "common expenses which are inseparably incurred for the simultaneous or general benefit of more than one service" (Appendix A). The compensation provision applied to the 10-year contract term, but after May 1, 1972, either party was free to initiate negotiations for modification of the compensation formula. If a negotiated agreement could not be reached within 90 days, the Interstate Commerce Commission was to fix a just and reasonable compensation for the period beginning July 1, 1973.

 From the outset, Penn Central's creditors opposed approval of the agreement, alleging that the compensation provision was constitutionally inadequate. I approved the agreement despite these objections. In doing so I stated:


"It may be argued that, at least on any prolonged basis, the 'solely related' concept of reimbursement may run afoul of constitutional limitations. The statute on its face does not require any such result, and I am not prepared to assume that the ultimate determination, by negotiation or by ICC decision, will have that effect . . . The Court also wishes to make clear that approval of the contract and its arbitration provisions does not constitute approval of a waiver of constitutional rights after the initial period, nor a judgment that such rights would or would not be impaired thereafter." In re Penn Central Trans. Co., 329 F. Supp. 477, 479-90 (E.D. Pa. 1971).

 Pursuant to the contract the Trustees, in 1972, initiated negotiations for modification of the compensation formula. No agreement was reached, and the Commission was asked to fix the compensation. On September 19, 1973, the Commission set out the general principles applicable to a determination of just and reasonable compensation. In summary, the Commission concluded:


(a) Compensation for the Amtrak service over passenger lines where the passenger service predominates and is therefore an integral part of the Debtor's entire system should be equal to the full cost of that service. Full cost is the solely related fixed and variable costs plus a portion of the unattributable fixed and variable common cost associated with the service.


(b) Compensation in instances where the Amtrak service is ancillary to the Debtor's system should equal avertible costs. Avertable costs include fixed and variable costs traceable to the service plus variable common costs associated with the service.


(c) An incentive and penalty system tied to a standard service level is to be implemented.


(d) A rate of return of 7-1/2% or a portion of the investment base of the assets used for the Amtrak service is also to be paid to the Trustees.

 The Commission determined that the Amtrak service in the Boston-to-Washington corridor should be considered as integral to the Debtor's system and therefore compensated on a full-cost basis, whereas the remainder of the Debtor's Amtrak service should be considered to be ancillary, and therefore compensated on an avertible cost basis.

 Applying a similar distinction, the Commission determined that the rate of return should be computed only on the investment base of the corridor. The Commission accepted as correct the Trustees' evidence that 39.6% of the corridor's investment base represented an appropriate allocation for the purpose of computing a return on investment for the passenger service. This percentage, when applied to an investment base of $400 million, resulted in an annual return on investment of $12 million, at the Commission's 7-1/2% rate of return. The investment base figure of $400 million was derived by the Commission itself, using an "historical" approach, and not from the submissions of any of the parties. Detailed implementation of the Commission's principles was left, in the first instance, to the negotiation process.

 Before the process of further negotiation was completed, Congress changed the rules of the game. On November 3, 1973, the Amtrak Improvement Act of 1973 was enacted. Section 562 of the Rail Passenger Service Act was amended by the addition of the following language:


"In fixing just and reasonable compensation for the provision of services ordered by the Commission under the preceding sentence, the Commission shall, in fixing compensation in excess of incremental costs, consider quality of service as a major factor in determining the amount (if any) of such compensation." *fn1"

 Rather than returning to the Commission, the parties proceeded to negotiate against the background of both the Commission's Order and the new statutory language. In March of 1974, an amended agreement covering the period January 1, 1974 through December 31, 1975, was reached, and it is this agreement which is now before the Court for approval. *fn2"

 Under the amended agreement, the cost of train and engine crews, commissary operations, on-board service, fuel and electricity, and certain supplies would be passed through to Amtrak. In addition, a flat annual fee of $68 million would be paid by Amtrak to the Trustees. The contract also includes an incentive-penalty arrangement tied to the quality of service. After July 1, 1975, either party would have been permitted to initiate another round of negotiations. If no agreement were reached, the Commission was to fix the compensation levels for the period beginning January 1, 1976. Comparison of the amended agreement with the original agreement and with the Commission's order can best be shown by applying each formula to a given set of operating results. Based on the results for the year 1974, the comparison is as follows: n3 Original Agreement Amended (actually paid) Agreement ICC Order (All figures in millions) $123.0 $134.4 (basic) $137.9 (basic) 5.1 (net incentive) 12.0 (return on investment) 123.0 $139.5 $149.9


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