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Consolidated Rail Corp. v. United States and Interstate Commerce Commission

decided: March 28, 1980.

CONSOLIDATED RAIL CORPORATION, PETITIONER
v.
UNITED STATES OF AMERICA AND INTERSTATE COMMERCE COMMISSION, RESPONDENTS, CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY; WILLIAM M. GIBBONS, TRUSTEE OF THE PROPERTY OF THE CHICAGO, ROCK ISLAND & PACIFIC RAILROAD, AS TRUSTEE, AND NOT INDIVIDUALLY, THE ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY, BURLINGTON NORTHERN INC., MISSOURI PACIFIC RAILROAD COMPANY, PITTSBURGH AND LAKE ERIE RAILROAD COMPANY, SOUTHERN PACIFIC TRANSPORTATION COMPANY, UNION PACIFIC RAILROAD COMPANY, WESTERN PACIFIC RAILROAD COMPANY, SOO LINE RAILROAD COMPANY, INTERVENORS ; THE ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY, BURLINGTON NORTHERN INC., MISSOURI PACIFIC RAILROAD COMPANY, PITTSBURGH AND LAKE ERIE RAILROAD COMPANY, SOUTHERN PACIFIC TRANSPORTATION COMPANY, UNION PACIFIC RAILROAD COMPANY, WESTERN PACIFIC RAILROAD COMPANY, PETITIONERS V. THE UNITED STATES OF AMERICA AND THE INTERSTATE COMMERCE COMMISSION, RESPONDENTS, CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY, SOO LINE RAILROAD COMPANY, STANLEY E. G. HILLMAN, TRUSTEE OF THE PROPERTY OF THE CHICAGO, MILWAUKEE, ST. PAUL AND PACIFIC RAILROAD COMPANY, DEBTOR ("MILWAUKEE RAILROAD"), INTERVENORS ; CONSOLIDATED RAIL CORPORATION, CHICAGO AND NORTHWESTERN TRANSPORTATION COMPANY AND SOO LINE RAILROAD COMPANY, PETITIONERS V. UNITED STATES OF AMERICA AND INTERSTATE COMMERCE COMMISSION, RESPONDENTS, THE ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY, BURLINGTON NORTHERN INC., MISSOURI PACIFIC RAILROAD COMPANY, PITTSBURGH AND LAKE ERIE RAILROAD COMPANY, SOUTHERN PACIFIC TRANSPORTATION COMPANY, UNION PACIFIC RAILROAD COMPANY, AND WESTERN PACIFIC RAILROAD COMPANY, INTERVENORS



Petition for Review of Orders of the Interstate Commerce Commission (ICC Ex Parte No. 334)

Before Aldisert, Hunter and Higginbotham, Circuit Judges.

Author: Aldisert

Opinion OF THE COURT

Petitioners in these consolidated cases have asked us to review final orders of the Interstate Commerce Commission that formulate and partially implement new car service rules governing the rates paid by the railroads for the use of each other's freight cars. The ICC formulated the new rules pursuant to a 1976 amendment to the Interstate Commerce Act, but chose to implement the new car service rate formula piecemeal, giving immediate effect only to the revised cost of capital portion of the car service formula while leaving other portions of the formula unaltered. We determine that the ICC does not have authority under § 1(14)(a) of the Interstate Commerce Act, 49 U.S.C. § 11122, to order implementation of only one factor in the car service formula when other factors specifically mentioned by statute are also in need of revision and implementation. We therefore order a stay of the effective date of new basic per diem rates until all factors have been updated by the commission. Although we are ordering a stay, we do uphold the ICC's formulation for the cost of capital portion of its car service rate formula, including its determination to use the effective tax rate of the rail companies in the cost of capital formula used to calculate the basic per diem car service rates.

I.

The various petitions*fn1 before us request our review of two final orders of the Interstate Commerce Commission in Ex Parte No. 334, Car Service Compensation Basic Per Diem Charges Formula Revision in Accordance with the Railroad Revitalization and Regulatory Reform Act of 1976, reflecting decisions of April 3, 1978 (Order 2), and of April 6, 1979 (Order 3).*fn2 The commission proceeding in Ex Parte 334, as its title indicates, was designed to implement § 212 of the Railroad Revitalization and Regulatory Reform Act of 1976 (4R Act) which modified § 1(14)(a) of the Interstate Commerce Act to require that charges paid by a railroad for the use of freight cars that it does not own must be fixed on the basis of the costs of ownership, including a fair return on the cost of owning and maintaining each type of freight car.*fn3

Petitioners in Nos. 78-1575 and 79-1640, Consolidated Rail Corporation, Chicago and Northwestern Transportation Company, and Soo Line Railroad Company, argue that the commission's per diem rates were formulated by ignoring or misapplying statutory criteria. They argue that the statute calls for a "fair return" and that the agency's orders are the result of an unfair and illegitimate interpretation of the statute, that "current costs of capital" was not properly interpreted, and that costs of repair must be updated. In addition, they urge that the revised rates are too high and violate the policies and purposes of railroad legislation.*fn4

Intervenors, the Seven Railroad Group, see note 1 supra, argue that the commission's revision of the current costs of capital portion of the per diem formula was sufficient to meet the statutory mandate of § 212, without concurrent implementation of revised repair costs, or other revisions based on new data. Finally, the Seven Railroad Group, petitioning in No. 78-1740, objects to the commission's decision, in the revised cost of capital formula, to use the railroads' effective tax rate rather than their statutory tax rate. The commission, naturally enough, supports its actions as in compliance with the statute.

II.

Since the turn of the century, railroads have paid for the use of each other's freight cars on the basis of a per diem rate. This rate, originally based solely on the number of days that a railroad had possession of another's cars, had been fixed by mutual agreement. In order to facilitate interstate commerce, railroads are required to accept from originating railroads loaded freight cars in route to their final destination, rather than shifting the freight between the cars of connecting roads. This is called the car pool system. See generally United States v. Allegheny-Ludlum Steel Corp., 406 U.S. 742, 743, 92 S. Ct. 1941, 1944, 32 L. Ed. 2d 453 (1972); Baltimore and Ohio Chicago Terminal Railroad v. United States, 583 F.2d 678, 681 (3d Cir. 1978), cert. denied, 440 U.S. 968, 99 S. Ct. 1520, 59 L. Ed. 2d 784 (1979). These self-regulating agreements broke down, however, when several railroads refused to pay the per diem rates, and the commission then instituted a proceeding under § 1(14)(a) of the Interstate Commerce Act for the purpose of prescribing, under a code of car service rules, the compensation to be paid for rental of freight cars.

In 1966, Congress first amended § 1(14)(a). The amendments were the product of congressional concern that serious and recurrent freight car shortages were being caused by per diem rates that were too low to encourage car construction but, rather, encouraged terminating railroads to hold cars on their sidings rather than send them back to the owning roads. Because these amendments failed to relieve the endemic car shortages, however, Congress again attempted to solve the problem by passing § 212 of the 4R Act in 1976 to encourage car ownership through adoption of per diem rates that would more accurately reflect the actual costs of purchasing, owning, and maintaining freight cars. By requiring rates that were fully compensatory, Congress hoped to discourage the use of cars not owned and thereby maximize efficient car utilization.

The legislative history of the 4R Act shows that Congress saw the act as a remedy to the major problems of the railroads, among them the fact that the return on investments had been insufficient to enable the railroads to finance capital expenditures. Because the rate of return had been less than the cost of investment for many years, rail car acquisition had not been meeting the needs of the industry. Congress specifically found, for example, that "(not) only the Consolidated Rail Corporation ("ConRail'), but the Nation's rail industry at large is today faced with the clearly demonstrable need to make massive capital expenditures to . . . acquire equipment in quantities to enable the National Rail System to properly discharge its common carrier public interest responsibility for prompt and efficient transport;" Congress also foresaw the expenditure of almost two billion dollars for the acquisition of rolling stock and other equipment. S.Rep.No.499, 94th Cong., 2d Sess. 1, 21, reprinted in (1976) U.S.Code Cong. & Admin.News 14, 35. Section 212 of the 4R Act was designed to attack these problems.

The per diem rates in effect prior to the commission's Ex Parte 334 proceedings were those established in the commission's 1968 Per Diem Report. Chicago Burlington & Quincy Railroad v. New York Susquehanna & Western Railroad, 332 I.C.C. 176 (1968), aff'd sub nom. Union Pacific Railroad v. United States, 300 F. Supp. 318 (D.Neb.), aff'd sub nom. Boston & Maine Railroad v. United States, 396 U.S. 27, 90 S. Ct. 196, 24 L. Ed. 2d 142 (1969). The 1966 amendments to § 1(14)(a) required the commission to consider the national level of ownership of a type of freight car and other factors affecting the adequacy of the national freight car supply and then,

on the basis of such consideration, determine whether compensation should be computed solely on the basis of elements of ownership expense involved in owning and maintaining such type of freight car, including a fair return on value, or whether such compensation should be increased by such incentive element or elements of compensation as in the Commission's judgment will provide just and reasonable compensation to freight car owners, contribute to sound car service practices (including efficient utilization and distribution of cars), and encourage the acquisition and maintenance of a car supply adequate to meet the needs of commerce and the national defense.

Union Pacific Railroad v. United States, 300 F. Supp. at 321.

Section 212 of the 4R Act amended § 1(14)(a) in several significant respects. The 1976 amendment begins by stating: "It is the intent of the Congress to encourage the purchase, acquisition, and efficient utilization of freight cars." For the full text of § 212, see note 3 supra. The aim of encouraging the purchase of new freight cars, as well as their acquisition and efficient utilization, was thus included in a statutory pronouncement for the first time. The inclusion clarifies, we think, congressional intent with regard to another new development, the statutory call for consideration of current costs of capital. The commission is now required to determine compensation for the use of a per diem freight car after giving consideration to "current costs."

Other substantive changes in 1976 were that the commission should give consideration to the transportation use of each type of freight car and that the elements of ownership expense should include, not just "a fair return on value," but specifically "a fair return on the cost of such type of freight car (giving due consideration to current costs of capital, repairs, materials, parts, and labor)."

III.

Normally this court's standard of review is set forth in § 10(e) of the Administrative Procedure Act, 5 U.S.C. § 706, under which the commission's orders would be reviewed to see if they were "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." The scope of our review of the commission's actions is generally narrow, limited to whether the commission's conclusions are rationally supported. United States v. Allegheny-Ludlum Steel Corp., 406 U.S. 742, 749, 92 S. Ct. 1941, 1946, 32 L. Ed. 2d 453 (1972). A different standard of review applies to issues of statutory construction. We are, of course, not bound by the commission's conclusions if they are based on a misinterpretation of the act. The courts are the final authorities on the proper interpretation of the statute. Volkswagenwerk Aktiengesellschaft v. Federal Maritime Commission, 390 U.S. 261, 272, 88 S. Ct. 929, 935, 19 L. Ed. 2d 1090 (1968). Therefore, we will examine the statute to see if the commission has the statutory authority for its actions. The question of whether § 212 of the 4R Act should be construed as permitting the commission to adopt new rates only after consideration of all the statutorily enumerated factors is a fundamental question that goes to the basis upon which the agency is empowered by Congress to act. This court need not defer to the agency in drawing its conclusion as to the meaning of the statute or the nature of the agency's power to act. Volkswagenwerk Aktiengesellschaft, 390 U.S. at 272, 88 S. Ct. at 935. Administrative discretion and the appropriate scope of review thereof are not relevant until the court first resolves the issue of statutory construction. Allegheny General Hospital v. NLRB, 608 F.2d 965, 970 (3d Cir. 1979).

It is well established that an agency must consider all factors specifically included in its statutory mandate. Shannon v. HUD, 436 F.2d 809, 819 (3d Cir. 1970); Pennsylvania v. Lynn, 163 U.S. App. D.C. 288, 501 F.2d 848, 855 (D.C. Cir. 1974). See also ICC v. J-T Transport Co., 368 U.S. 81, 89, 82 S. Ct. 204, 209, 7 L. Ed. 2d 147 (1961). The courts then perform their function of insuring that the commission has considered all the relevant factors brought to its attention by interested parties and has reached a reasoned decision. National Industrial Sand Association v. Marshall, 601 F.2d 689, 699-700 (3d Cir. 1979).

Using these precepts, we will first examine the commission's decision to proceed with the implementation of one revised factor in its new basic per diem formula, the cost of capital factor, even though other factors have not been revised since 1968 and an additional factor, the transportation use of each type of freight car, has been added. We will examine closely, as a matter of statutory construction, the congressional direction to use current costs as a basis for the rates. Our examination of the revised basic per diem formula itself, including the formula for calculating the cost of capital, will then be examined under a narrower scope of review to see that the commission has reached a rationally supported determination.

IV.

In Orders 2 and 3 the commission has prescribed a formula that went into effect on June 1, 1979, and included a new current cost of railroad capital factor, adjusted depreciation rates, to which no objections are raised, and a car repair factor that was adjusted upward for inflation but was still based on data over a decade old. Significantly, the rate effective June 1 was not derived directly from the new formula prescribed in Ex Parte 334. See note 5 infra. The rate did not incorporate any change in the basic car repair factors themselves and thus may not reflect current costs.

The commission has not considered current repair costs up until this time, having postponed review of the repair cost component of its formula until new data were collected. Data were requested by the commission in Order 3, and were originally due to the commission on May 30, 1979. The Association of American Railroads, an industry-wide organization of which all the roads party to this litigation are members, finally submitted the necessary information to the commission on November 26, 1979, shortly before oral argument in this case. As an interim measure, until a new repair cost factor could be computed, the commission factored the old repair cost into an interim rate. According to Conrail, the old repair costs may be significantly higher than the new repair costs still to be computed; at the same time, the new current costs of capital calculated in Orders 2 and 3 are higher than the old costs. The interim per diem rate may thus be higher than the final rate resulting from the use of repair costs which would be updated at the same time as costs of capital. Thus, the result of the agency's action may have been to increase the basic per diem rates beyond the intent of Congress in amending § 1(14)(a). This would not be a proper interpretation of § 212, "(s)uch compensation shall be fixed on the basis of the elements of ownership . . . including a fair return . . . giving due consideration to current costs of capital, repairs, materials, parts, and labor," because current repair costs would be eliminated from consideration; the resulting basic per diem rate would be distorted.

What Conrail and the other petitioners in Nos. 78-1575 and 79-1640 object to is the commission's determination that, because the cost of capital section of the new formula, unlike the other sections of the formula, would not require the data by car type first available for the year 1978, and then not until the end of 1979, it would order immediate implementation of the cost of capital section. Conrail argues that the commission's action of partial ...


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