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IN RE PENN CENT. TRANSP. CO.

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

 MEMORANDUM AND ORDER NO. 3228

 FULLAM, J.

 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 ...

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