Earl Warren: Number 13 and Number 15, the Baltimore and Ohio Railroad Company et al., appellants, versus Aberdeen and Rockfish Railroad Company et al., and Interstate Commerce Commission, appellant versus Aberdeen and Rockfish Railroad Company et al. Mr. Kaier, you may proceed with your argument.
Edward A. Kaier: Mr. Chief Justice and may it please the Court. This is an appeal from a decree of a three-judge court for the Eastern District of Louisiana setting aside an order of the Interstate Commerce Commission which prescribe the joint -- the divisions of joint rates to be received by Northern and Southern Railroads respectively from freight traffic moving between official territory and southern territory in both directions. Official territory may generally be described as that part as the northeastern part of the United States and the southern territory the southeastern part. More particularly, official territory would be the territory east to the Mississippi river north of the Ohio and certain cities in Virginia such as Richmond. Southern territory is east of the Mississippi and south of official territory. The appellants are the Interstate Commerce Commission and the Northern Railroads and the appellees are the Southern Railroads and two associations, one the southern governor's conference and the other Southeastern Association of Railroad and Utility Commissioners. Your Honors will recall I believe that a joint rate is one which applies over two or more railroads but is stated in a single sum. The divisions in issue in this case were primary divisions. That is to say divisions which applied to and from the certain gateways between Northern and Southern railroads and if there was more than railroad north to the gateway those two railroads over three railroads would get their share of the revenue from subdivisions of the primary division and likewise south of the gateways. Those subdivisions were not in issue in this case only the primary divisions. The railroad's evidence both that submitted by the Southern lines and that's submitted by the Northern lines was on a group basis in which all the Northern lines were grouped together and there figures submitted by on the group basis and likewise for the Southern lines. And it was decided by the Commission on a group basis except that the Norfolk Southern Railroad one of the Southern group, was awarded division higher than that granted to the Southern lines generally. This was in recognition of its greater revenue needs and there is no issue about that before the Court. The Commission is empowered by paragraph 6 of Section 15 of the Interstate Commerce Act to prescribe just and reasonable divisions whenever after hearing in its opinion it finds that the existing divisions are unjust unreasonable or inequitable. The case before the Commission was one that was originally decided in 1953. Before that decision, the divisional factors prescribed for Southern lines were generally 25% higher mile per mile than those prescribed for Northern lines. And on the very important item of citrus fruit which moves in great larger in South to the North, the -- an earlier case had fixed the divisions as high as 85% higher than the Northern lines factors. Now, I should correct that. The Northern lines -- the Southern lines didn't get divisions 85% higher but the factors which go into make that were 85% higher so that the Southern line got something a lesser percentage than the 85% but very substantially more than the Northern lines. In the 1953 decision, which is in a decision in the same docket of the Commission as the order here under review -- in the 1953 decision, the Commission concluded that if it were to give controlling weight to the Northern lines cost studies, it would have to give them higher divisions than the Southern lines. But it regarded the sum elements of the cost as being transient in nature and it's found that it would be the safest assumption for the future that neither group of railroads would have a substantially lower basis of operating expenses than the other. So, it prescribed equal fact to divisions for both groups of lines. In 1959, that same proceeding was reopened upon petition of the Northern Railroads. They alleged in the petition that the experience of the intervening years had confirmed their contention that their cost were higher than those of the Southern lines. The Commission reopened the case; evidence was taken between 1959 and 1961 resulting in what the lower court called a massive record. There were extensive briefs proposed report by two examiners recommending increase divisions for the Northern lines, exceptions, replies and oral argument. The Southern lines contended before the Commission that the relative costs of performing the service involved constitute the decisive measure in determining just and reasonable divisions. They urged the Commission to find such cost on the basis of the average territorial costs as shown by the Commission's Rail Form A formula for official territorial lines and for Southern territorial lines respectively but subject to 12 adjustments in those territorial average cost which Southern lines proposed. The Commission accepted five of the adjustments and rejected seven. The result in unit costs, cost per ton for certain services per ton mile for certain for train mile for others, those unit costs were then applied to the Southern lines traffic study which those lines stated and the Commission agreed accurately measured the transportation characteristics of the precise traffic to which the divisions involved applied. The Commission found that the cost that which it thus arrived that is the Form A territorial cost with five adjustments that were permitted were reasonably accurate and reliable for determining the relative contribution by the groups on a cost of service basis. It found that both groups of carriers are being efficiently operated. It examined each of the other factors specified by Section 15, paragraph 6 and on all the other facts of record and it concluded that everything was equal except the cost of performing the service. It found also --
Earl Warren: Except the cost for what did you say --
Edward A. Kaier: The cost of performing the service involved.
Earl Warren: Yes.
Edward A. Kaier: As to which it found the Northern lines cost higher than those of the Southern lines. And it concluded therefore that the relative cost of the parties in performing the service but properly serve as a guide for the determination of just reasonable and equitable divisions. That then was the end of everything except to translate its cost findings into division scales. The Southern lines asked the Commission to base the divisional scales to be prescribed on their cost evidence as modified to the extent that any of their proposed adjustments might be rejected and the Commission did precisely that. Its formal finding of course was at the present divisions were unjust and unreasonable and inequitable. It prescribed the new divisional scales from the Southern lines cost as adjusted. Ten of the 11 Commissioners concurred in the majority opinion. One Commissioner thought that the Northern line should have increased divisions but not as rate in increase as had been prescribed in the majority opinion. Overall, the divisions of the Southern lines were reduced by 3% that's a stipulated figure. Upon suit by the Southern lines and the two conferences that I have mentioned the southeastern association and the southern governors, the District Court held that the cost evidence should have been more refined than the territorial averages that the Commission itself was obliged to see the evidence of the cost of performing the specific traffic was of record and that the order should therefore be set aside for lack of substantial evidence and adequate findings. The District Court's order was stayed pending disposition of this appeal. The Northern lines have been receiving revenues based upon the higher divisions since April of 1965. But subject to a refund provision under which if the Commission's order is permanently set aside, the Northern lines would have to refund the difference and amount now approximately $30 million.
Earl Warren: We'll recess. Mr. Kaier, you may continue your argument.
Edward A. Kaier: Thank you Mr. Chief Justice. I would like now to discuss the question whether the use of official and Southern territorial costs is supported by substantial evidence and adequate findings of the Commission or whether in truth, the District Court's opinion represents a substitution of its judgment without of the Commission as to the weight to be given evidence and the degree of refinement necessary with respect to the complex question of railroad cost evidence. Then I plan to discuss the passenger deficit issue. The Commission having included in the freight service costs a portion of passenger deficits on a pro rata basis for both Northern and Southern lines.
Byron R. White: Did you just before you started -- just straighten me out. What's the difference between cost and revenue?
Edward A. Kaier: Well, cost if Your Honor please --
Byron R. White: Is that fully distributed?
Edward A. Kaier: It is fully distributed cost and revenue need --
Byron R. White: But that excludes any need for profit?
Edward A. Kaier: No, there's a return element in that --
Byron R. White: In fully distributed?
Edward A. Kaier: In fully distributed cost, there's a return of 4% on value of property.
Byron R. White: Well then, what would the revenue need?
Edward A. Kaier: Revenue need then is something over and above that kind of cost. If a Railroad --
Byron R. White: For investments?
Edward A. Kaier: -- is -- no, it's just to continue it on operation for Railroad is in badly need of revenue and divisions based upon relative cost alone even fully distributed are not sufficient then the Commission has the power to award higher divisions to keep that railroad in operation.
Byron R. White: The railroads need revenues except to pay its loss for the return.
Edward A. Kaier: Well, the cost involved, Your Honor, would be just the cost of performing the particular service involved but it would have all the cost of performing the other service not involved in a given case. Here, you see the cost related only to the cost of performing the North-South freight service but the Commission does have that power to grant something over and above the cost of performing the service on the basis --
Byron R. White: For what, for example?
Edward A. Kaier: For nothing. I mean to say it doesn't relate to anything. The Railroad needs the money and therefore, --
Byron R. White: It does?
Edward A. Kaier: Pardon me?
Byron R. White: It does?
Edward A. Kaier: Yes.
Byron R. White: What's it needed for?
Edward A. Kaier: It needs it to continue operation. It's not getting enough money to continue operation and therefore it has to have something over and above its fully distributed cost. Now, the classic case on that is the New England division's case decided back in 20th by Justice Brandies, in which that kind of revenue need -- was used by the Commission. It was not here. Now, first as to the Commission's findings I believe, Your Honors, that a review of appendix B to the Commission's report which contains 42 pages of discussion of the adjustments proposed by the Southern lines in the Form A territorial costs will convince -- will be convincing that the Commission has with unusual thoroughness set forth the reasons why it disposed of these cost issues in the manner which it did. And I will not at this point have anything further to say about findings in general. As to the factual support for the use of territorial average costs, I'd like to point out these things to the Court. First, the investigation brought in issue the divisions of rates on virtually all articles moving between the North and the South from every station in the North to every station in the South over every Northern Railroad and every Southern Railroad. It was territory wide both of the Northern end and on the Southern end. The fact that the proceeding was of such great scope a territory wide proceeding itself I submit established a strong case for the use of territorial cost. Both generally, and with respect to such factors as car costs, switching, empty return ratios and other large factors of that nature as to which the Southern lines said, “Our higher costs” that is they said that the high cost of the Northern lines were attributable to these factors. Now, in the class rate case, which was affirmed by this Court in New York versus United States back in 1947, the Commission said, “There are different degrees of cost of refinement in costs depending upon the purposes for which they are intended. The ascertainment of the cost of transporting a particular commodity over a single railroad or group of railroads obviously requires more refinement in procedure and the calculation of relative cost for transporting all traffic or important and well define segments of traffic by territorial groups of carriers.” The present case was clearly one involving relative costs for transporting important segments of traffic by territorial groups of carriers. Next, in the 1953 decision in this same case, --
Abe Fortas: Well, do the Northern roads and the Southern roads devote the same percentage of their cars and their property and so on to the North-South traffic?
Edward A. Kaier: No, I don't think they do, Your Honor.
Abe Fortas: What are those percentages, give me an illustration in some respect?
Edward A. Kaier: Well, the only illustration I can give you Your Honor is that the traffic involved in the North-South traffic involved for Southern lines is very much greater than for Northern lines. I believe that it's about 20% for Southern lines and about 6% for Northern.
Abe Fortas: Well, that's just offhand and matter of first impression that's would make some kind surprising offhand that the Commission would use a totality of cost of any of these items as the basis instead of correcting it for the particular traffic involved.
Edward A. Kaier: Well, if Your Honor please in that --
Abe Fortas: That is what it did, isn't it?
Edward A. Kaier: It did that except to the extent that it allowed five of the adjustments that were submitted by the Southern lines and declined seven. So do you see Your Honor on the great body of this cost evidence the territorial cost evidence; the Southern lines themselves used the territorial costs. It amount to almost 90% of all the cost that they submitted where the territorial averages.
Abe Fortas: I know, but however that might be, it did strike me is being rather odd that the Commission would use this aggregate basis in considering such a relatively small factor of the business of the Northern roads particularly and of the Southern roads and especially in view of the fact that the percentage of -- was different in the case of the North and the South and radically different.
Edward A. Kaier: Now, if Your Honor please, in the class rate case which was the first case in which the Commission used cost evidence under this formula and before this formula was devised, they had no reliable way of getting service cost. In that case, the percentage that class rate traffic was of total traffic of the railroads involved was an even lower percentage than that involved here for either Northern or Southern lines. And then, there was the Mountain Pacific class rate case in which it was lower than this, very substantially lower. And in the transcontinental divisions case which Your Honors decided very recently in Chicago and North Western versus Santa Fe Railway Company. In that case, the Commission made a number of adjustments and it concluded that in a case dealing with territorial wide application of rates or divisions that the territorial costs and the refine costs are substantially the same. I don't mean to suggest that there was more refinement there than there was here.
Abe Fortas: Well, was there such finding here?
Edward A. Kaier: No, Your Honor.
Abe Fortas: That's what I missed in this --
Edward A. Kaier: There was not a finding in those words.
Abe Fortas: Was there anything like it, that's what I've been finding.
Edward A. Kaier: Yes, there was a finding that the costs as adjusted accurately and reliably represented the cost of performing the North-South service.
Abe Fortas: I know, but that's not quite pinpointed to the problem that I have in mind, is it? Well, I think you're going to get to the commuter problem.
Edward A. Kaier: Yes, Your Honor.
Abe Fortas: And to my mind, that perhaps most vividly presents the issue that has troubled me.
Edward A. Kaier: Very well, Your Honor.
Potter Stewart: There wasn't a commuter problem isolated as such in the Chicago and North-Western railroad?
Edward A. Kaier: No, there was not Your Honor. But I just like to say in pursuance for a moment of the point that I have been arguing that the present record establishes that the North-South traffic has handled as an indiscriminate part of the whole with all the other traffic of the Northern railroads, and our witness said in view of the fact the way a railroads are operated, he was sure the same thing was true in the South. And this related to all the upper -- all the large operations switching in origin terminal, line whole service in road trains or freight or weight trains, empty return ratios and all of those various large categories of traffic. Now, if Your Honors please, I will go now -- I was going to say more in this first point, but I think I better get to the passenger deficit point. And at the outset, I want to point out that when the Northern lines brought forth their cost study, they predicated it upon the freight service costs alone. They have nothing in it for any kind of passenger service. The Southern lines complained that contrary to the practice of the cost finding section of the Commission, we have not included the passenger deficit, and they said and I quote their words, “The Northern line study is defective in computing constant costs without consideration of passenger deficits.” Now, although it was to the disadvantage of the Northern lines that the Commission consider passenger deficits because we would have done better just on freight service cost alone, we stated that we would have no objection to their -- in their inclusion. But that we did object to the Southern line's proposal that there be called out of the passenger deficits so much thereof as might be attributable to commutation service, which was the proposal of the Southern lines. They sought to justify that proposal, proposal to exclude commutation deficits upon the theory that --
Hugo L. Black: Exclude what? Commutation deficits. Upon the theory that commutation service is frequently performed over facilities that are used for that purpose alone, and not used for freight or other passenger service. Whereas they said, it is generally true that the kind of passenger service other than commutation incurs a deficit principally or almost wholly because of the allocation of expenses to the service, for the passenger service which are common with freight. They say that in the case of the regular passenger service, intercity passenger service, if the freight -- if the passenger service were discontinued, the cost would go on and have to be born by freight service. Now, the Commission analyzed the Southern lines contention in the context of the distinction which the Southern lines thus urged between commutation deficits as being direct deficits and the others as being allocated. Commission found that although many individual items of expense could be regarded as solely related to suburban service that this was not true of the services as a whole. And it found that it could not be treated entirely apart from the freight service. And in concluding its analysis, the Commission said that because the suburban service deficit includes common cost which must be incurred to provide freight service and intercity passenger service, the deficits from commutation service should not be excluded from the constant cost allocated to the North-South traffic.
Hugo L. Black: Was either side challenge that finding? It could not be computed?
Edward A. Kaier: Well Your Honor, I didn't intend to say that they could not be computed. I wouldn't say one way or another about that. The Commission's finding was that the cost, the suburban service deficit includes common cost with freight service. The deficits from commutation service should not be excluded from the constant costs.
Hugo L. Black: I asked you that question because I've been wondering here, how much, how strongly one can say that the Commission can accurately figure cost passenger service and the cost of freight service, the whole system of railroads, North and South?
Edward A. Kaier: Your Honor, it imposes very great problems.
Hugo L. Black: How much of its judgment, how much of it is finding and how much of it is guessed worth?
Edward A. Kaier: If Your Honor please, in a case called rail passenger train deficit, in 306 ICC at 714 decided in 1959, I believe that you will find there an expression of the Commission to the extent to the effect that in deciding how much of the common cost should be allocated is largely a question of judgment, and a rather speculative factor.
Hugo L. Black: 306 ICC, what page?
Edward A. Kaier: 306 at 417.
Hugo L. Black: Well now, you started off as I recall it by saying that they found that the cost of carriage for the Northern railroad was more in the cost of the Southern railroad?
Edward A. Kaier: Yes Your Honor.
Hugo L. Black: Is that accurate? Can they make that finding?
Edward A. Kaier: Oh yes.
Hugo L. Black: How?
Edward A. Kaier: Well, they make that on the basis of the application of a cost formula, which they used day in and day out. This is a formula used by the Commission and by all the parties before including the Southern lines, we can and we got --
Hugo L. Black: I understand that so far.
Edward A. Kaier: Oh this, and I'm speaking now of the formula for determining --
Hugo L. Black: Is that the that was whole formula that takes sample?
Edward A. Kaier: Oh, there are some sampling in it Your Honor, but by and large it's an analysis of the accounts of the railroads which are kept in accordance with the Commission's uniform system of accounts, and they'll get a unit cost of performing this service or that, and then a traffic study is made to find out how many units of the cost -- how many units of that service are involved in the service your studying. They'll apply the unit cost to that. This is done day in and day out before --
Hugo L. Black: I understand it's done, but how much of it must we consider to really as you read that from that 306 Illinois is a question of judgment?
Edward A. Kaier: Well Your Honor, I did --
Hugo L. Black: How much is a question of accurate findings of facts.
Edward A. Kaier: It might reference to it being a matter of judgment had to do with the passenger service and only those expenses of the passenger that are common with freight. I didn't mean to say that this formula of the Commission for determining freight service cost was dependent upon judgment.
Hugo L. Black: Do they have to get it from the books of the railroad?
Edward A. Kaier: They get it from annual reports of the railroads which account by the account are submitted to the Commission.
Hugo L. Black: Do they analyze it in any way to see if it is correct?
Edward A. Kaier: Well, the Commission regularly has investigators going checking books of railroads.
Hugo L. Black: Kind of an over supervision.
Edward A. Kaier: Yes Your Honor.
Hugo L. Black: But do they ever investigate those cost to see if they are put down on the books accurately? Or do they just kind of accept it and add them all up?
Edward A. Kaier: Your Honor, I don't know the extent to which that audit how deep it goes.
William J. Brennan, Jr.: Mr. Kaier, may I ask --
Edward A. Kaier: Yes sir.
William J. Brennan, Jr.: Do I get this correctly. The initial Northern lines position as I understood you was that all these cost status should be limited to freight?
Edward A. Kaier: Yes Your Honor.
William J. Brennan, Jr.: And the Southern line insisted that no, they should also be taken under consideration, passenger to the extent of intercity, but not commuter?
Edward A. Kaier: Correct.
William J. Brennan, Jr.: That's what it is?
Edward A. Kaier: Yes Your Honor.
William J. Brennan, Jr.: I gather intercity uses the same facilities for freight and passenger?
Edward A. Kaier: Well, sometimes it does. Other times, there's enough of it that there has to be an extra track, and certainly, there has to be stations, and then you got direct expenses you are such as a train true wages, locomotives, cars, couch yards, you've own these facilities which are attributable only to passenger service on the intercity side as well as the commuters.
Byron R. White: But anyway, this was the purported justification of distinguishing between intercity --
Edward A. Kaier: It was.
Byron R. White: And commuter service.
Edward A. Kaier: Yes Your Honor, it was.
Byron R. White: Because the South I gather does not have the commuter problem as Northern line?
Edward A. Kaier: That is correct. There's one Southern line that has a big commuter operation, the Illinois Central, but by and large, they do not. Now, I would like to develop that point that the non-commutation passenger service has a great deal of expenses that are solely related to that service. The kind of service that's rendered down South, a local train service, intercity passenger train service, they have these solely related expenses, and the Commission didn't exclude those when it made it's calculation of the commuter -- passenger deficit to the allocated to this North-South freight service. I believe it to be of great importance in connection with this point Your Honors to point out to you that the Commission allocated the overall deficit; that is from all passenger operations to the North-South service, both for Northern and Southern lines. The Northern lines passenger revenues exceeded the solely related passenger costs. We had a deficit only when common costs were added. Now, the Southern lines on the other hand, their direct passenger costs, their solely related passenger costs exceeded their passenger revenues. The District Court found that it was proper in the North-South traffic, North-South service in costing it out to include common expenses, but not solely related. On -- we are the ones therefore who satisfy that standard. The Commission's allocation of costs included for us only common expenses which the Court said could be allocated, but for the Southern lines, it included not only common, but the solely related expenses too.
Hugo L. Black: What do you mean by common?
Edward A. Kaier: Common is between freight and passenger. Now, I should like to call attention to the fact that there's not question of the Commission's power to consider passenger deficits in making freight rates and I submit in the divisions. You held in the King case that it was proper for the Commission to consider passenger deficit and fixing freight rates, and the Court did not distinguish there between solely related cost and the other kind of cost.
Hugo L. Black: Is any question of freight rates involved here or just --
Edward A. Kaier: Well, this is just --
Hugo L. Black: Limited to division?
Edward A. Kaier: This is limited to the divisions Your Honor. Of course, the Commission has considered the passenger deficits in fixing the general level of freight rates, and it seems fare therefore to consider the passenger deficits in dividing the freight rates. But if they do it ought to be the overall deficits. I like to take just a minute from my rebuttal if I -- it's that's proper Your Honor? I would like to say that -- in the CNNW case which you decided very recently, fixing divisions between transcontinental lines that called Mountain Pacific and the Mid-western lines; you have substantially the same cost questions involved here, except that you didn't have this passenger deficit matter.
Hugo L. Black: Are they the most expensive to operate?
Edward A. Kaier: Oh, I don't think so Your Honor and I really don't know. I haven't compared those.
Hugo L. Black: Over the mountains, I believe?
Edward A. Kaier: Over the mountains. Well, for that factor that they would be surely, but that they're not involved here. I just cite that case as a precedent. In that case Your Honors, the two conferences which are here aligned with the Southern railways filed a petition for leave to file an amici brief. They made the point that if this Court where to decide the cost issues in that case, it would prejudice the decision and it would control the decision in our case in the lower court. They said that to all intents and purposes, the cost issues in that case where exactly the same as the cost issues in the present case. And I submit to Your Honors that that decision is a very important precedent in the decision of this case. Thank you.
Arthur J. Cerra: If it please the Court, my name is Arthur Cerra and I'm an Assistant Associate General Counsel of the Interstate Commerce Commission. These appeals present a question of major importance to the Interstate Commerce Commission's Section 156 duty to ensure just reasonable and equal divisions as between connecting rail carriers. Now, as Mr. Kaier's indicated, District Court held that Rail Form A territorial cost not a proper yardstick for measuring North-South traffic, and that the Commission was required to produce more refine data to ascertain the actual cost of that service. In reaching that conclusion, the court below disregarded key determinations made by the Commission. First, they disregarded first in rejecting the Commission's comprehences of analysis of Rail Form A, and its application to all the units of service that were rendered in North-South traffic, and these units are service being the ones that comprise what is being measured. The District Court paid little attention to these findings and analysis of the Commission. And secondly, the Court disregarded the findings made by the Commission after its review of all the evidence submitted by the parties that this cost reliably and accurately reflect the traffic in question. Now, those findings were based on evidence that the traffic moves over all railroads and between all stations in both territories, and it's not handled as a distinct entity at all, but rather, it's average traffic handled as an indiscriminate part of all traffic and it possesses no distinguishing characteristics. Now, this Court observed in the CNNW case that the ascertainment of cost and the treatment of accounting problems concern factual matters relating entirely to the -- and directly pertaining -- excuse me, relating entirely to the special and complex matters of the railroad industry. The court had no familiar -- the court below had no familiarity with these problems and either sought here to obtain more accuracy or to restrict the consideration that the Commission could give to these matters solely to the cost directly pertaining to the traffic in question. We believe that such an effort to achieve a theoretically perfect cost formula really does constitute an unwarranted incursion into the administrative domain. And for this reason, railroads are multi-purpose facilities. They produce a number of transportation services for the common use of physical facilities and employee services. Now, how do we obtain the cost for these services? When there are direct cost, we can allocate them to the traffic. When there are not direct cost, they are common cost, there have to be some kind of judgment, empirical judgments made on determining how to allocate this, or how is it done. It's done on the revenue basis.
Hugo L. Black: (Inaudible)
Arthur J. Cerra: Between different kinds of traffic of railroads Mr. Justice Black, for example, a car of North-South traffic might travel in the train with traffic from various other areas of the country when it reaches the border. The same engine is used. The same fuel is used. The same switching crews. How do you allocate the cost running that train between the traffics? Well, you allocate it on the basis of the revenue used that it produces. You find out what the costs are, and each traffic bears that portion of those cost. That's what the Commission did in this case. As I was saying, where a railroad -- as all these railroads are a multi-purpose facilities and they produce a number of transportation services. When we try to ascertain whereas here, if any given body a traffic uses physical facilities in common and employee services in common with other traffic, and it's been shown that it has not distinguishing characteristics from any other type of traffic, it would appear to us that the application of Rail Form A cost is plainly proper.
Abe Fortas: Well, that really cuts very deep doesn't it? Would you apply that principle to all problems under the Act?
Arthur J. Cerra: I didn't quite understand your question, Your Honor.
Abe Fortas: Well, suppose you had a particular plain ascertainment cost of kind particular types of commodities, you do that don't you?
Arthur J. Cerra: We do, Your Honor.
Abe Fortas: And that most to those cost are a part of a joint cost that involved many other operations. But somehow rather by the wizardry of accounting techniques we do disentangle them and do make the segregation. I'm not saying that it always makes sense and to do that or it's always worthwhile if that's a duty that always should be imposed on the ICC. But certainly, you do it in some instances for some purposes. And what I have not got clear in my mind is, what are the special reasons here why you did not do it? Particularly in view of the relatively small amount of the overall cost or an overall traffic represented by the North-South traffic and especially on the Northern roads? That's what I haven't heard yet or read, so far as I recall.
Arthur J. Cerra: Mr. Justice Fortas, this is precisely what the Commission did here. This traffic we shown to be not distinguishable in any characteristic from any other traffic that the railroad handles. Now, that being solely --
Abe Fortas: Well, it's distinguishable. It's got a different point of origin, different point of destination. It's North-South through traffic and I don't suppose you're going to say that it would be impossible or even impractical as a matter of accountancy to breakout cost for that segment of the traffic. You wouldn't say that, would you?
Arthur J. Cerra: Well, the question I would have to ask in that, how do we get these cost Your Honor? We would have to get this cost by starting out with Rail Form A. Starting out with Rail Form A and trying to make a segregation of all the services that were performed on North-South traffic.
Abe Fortas: I just think that'd be a very sensible way of going about it.
Arthur J. Cerra: And that's precisely what happened in this case.
Abe Fortas: But you did not break it down. What you relied on was Rail Form A aggregate cost as I understand it without making any segregation whatever.
Arthur J. Cerra: But the aggregate cost Your Honor are all the services that are performed by the railroad to provide all the work units in expenses that takes to provide any amount of traffic that the railroads handle. And when you throw this all in one pool and they're using common facilities, a unit cost for each type of service, then you go to the railroad's traffic study for a year which shows all the services units that were rendered in performing North-South traffic, and you multiply those unit cost of service against the revenue units, and you come out with the cost for the traffic. That is what the Commission did here.
Abe Fortas: Yes, but a further or refinement beyond that would be possible, would it not? For example, don't we have -- isn't it necessary to decide here whether it was or was not appropriate just to take an illustration to use these commuter costs? Now, I understand you're -- I think I understand the Commission's reason for it. The Commission says that there are no separate facilities that are used for the commuter-passenger traffic. And therefore, the Commission says “We did not break out those cost and eliminate them for this particular purpose.” But that presents a problem. Wouldn't you agree that that presents a problem of standards?
Arthur J. Cerra: The standards that it would present arise from the problem that here, the Commission used fully distributed cost. Now in the CNNW case, they used out of pocket cost. They didn't consider any of these overhead items and distributed as to that traffic. So the distinguishing feature here is that the Commission used fully distributed cost. Now --
Abe Fortas: I know, but you get the question of should it.
Arthur J. Cerra: Should it?
Abe Fortas: Of course you did, but should it?
Arthur J. Cerra: And this is the determination of cost which depends on policy. The Commission has formulated a policy of saying following this Court's decision in North Dakota in 1915, the North Dakota case we cited in our brief that when cost are being considered, the Commission must not only ascertain the cost directly pertaining to the service, but it also must ascertain in a portion those causes which are joint or not directly pertaining to it. And every railroad has certain overhead expenses. Now, if we have these overhead expenses and we're going to say that it should not be portioned on a revenue unit basis between all given bodies of traffic, we're going to find out that sooner or later, the railroads are not being able to recouped this overhead expenses from anybody of traffic. So as a policy matter, the Commission has said here fully distributed cost, meaning an apportionment of all overhead burdens must be divided and that part will be divided here in accordance that this North-South traffic bears to the total traffic of both groups of railroads.
Abe Fortas: Well, I'm not going to pursue any further beyond suggesting to you that basic problem here is as I understand it, arises from the fact that the Commission said, “We're going to make the -- we're going to review these divisions on the basis of comparative cost.” Isn't that right?
Arthur J. Cerra: That is correct Your Honor.
Abe Fortas: Not of the factors cost, not what the railroad's need, but cost. Then, the Commission I should think would have a duty if any standards are to be applicable here to show that it has -- and reasonable limits applied cost standards. Namely that it has ascertained cost on some proper sensible basis. I'm very much in favor of latitude to the ICC and this -- its terrible jobs as I have expressed in various times, but they have to be some standards here. And instead of that, what the ICC did here was to take a gross figure, cost of a total operations, including some rather elements that offhand, there of surprising, such as computed charges and the unsegregated kind charges or whatever that item is. And -- then you have arrived at your conclusion on that basis and that's what's bothers some here, and it's not because you could not make a further refinement of these costs, is it?
Arthur J. Cerra: Your Honor, the refinement we made based on the Rail Form A computations and based on the fact that parties who seek to show that there are differences in one given body of traffic as compared to average traffic were shown here. The Commission reviewed the attempts by the Southern lines to show these bodies of traffic do distinguishing from average traffic, and they rejected seven and accepted five. So, -- that means I'm through. I'm sorry Your Honors. I did want to cover just quickly the point of the Southern Governor's Conference. They parrot the arguments of the Southern lines, but they claim as a matter of law that even if the Northern lines experience higher cost of service, the Commission must find that such higher cost reflect inherent territorial disadvantages before it may give effect to such cost and then territorial division's case. And this contention is based on the premise that the Commission made no adequate findings to dispose of their claim and therefore, its order is going to produce dire consequences and upon the economy of the South and effectively nullify the present and future economic gains that the South was scheduled to receive as by virtue of the New York case. Well, we ask the Court only to consider the findings that the Commission did make in response to each one of these contentions, and the findings that rejected these contentions or explain why the Commission couldn't accept them or clearly expressed in its report. We don't think any further findings are required.
Carl E. Sanders: May it please the Court. My name is Carl Sanders. I represent the Southern Governor's Conference. I represent the Southeastern Association of Railroad and Utility Commissioners. I come to the Court with a little different version, a little different view of what this case is all about. Of course, I have two. We've been in this case since the very beginning, and we've had to listen to the arguments between the Northern and Southern railroads, and we've heard all of these evidence about the question of cost. But we contend and we respectfully insist today that this not just a private dispute over revenue between Northern and Southern railroads, but that this case involves a much bigger question, and that this case really involves the fact that the Commission has abandoned the territorial relationship of equality between the North and the South. And they've done this without any explanation whatsoever so far as we've been able to ascertain. This is -- sir?
Hugo L. Black: The equality of cost?
Carl E. Sanders: Equality of -- that they are differences this Court in 1947 in New York versus Unites States determined that they were no differences between the official territory of the North and the Southern territory, and by virtue of that, you established the uniformity of rates and then subsequent to that, the uniformity of divisions. We have been in this case. It's been our observation that there has been no determination, no reasons given. No adequate reasons given why the decision in the New York versus United States case is not just as sound today as it was in 1947. And that this business about it being costing more money to run the railroads in the North as compared with running a railroad in the South is not based on any inherent difference, which is the words that this Court used when it became necessary to just divisions or just rates that they should be some inherent difference. And so, you put us on an equal basis, and we've been on that equal basis and we see no reason under the evidence that was submitted before the Commission. We see no reason to change this basis and give the North now a preference in divisions for operating railroads in the North when they have not proven to anybody satisfaction that it cost any more money to operate a railroad in the North and it does in the South today. If Your Honor please, it's of course, it is inflation matter, and what it amounts to is this, it simply amounts to the fact that under this order of the Commission, they are going to give them an average of 17% more, up to a maximum of 34% more, but carrying the same amount of freight over the same distance in the North as it relates to the South. And that's what it amounts to. Now, --
Potter Stewart: I'd understood that the net average change in the divisions with 3%.
Carl E. Sanders: 17%, that's a net average change in the amount of money we cost the Southern railroads. I think is what --
Potter Stewart: Yes.
Carl E. Sanders: -- Mr. Kaier said, but the division preference that they are giving in this case is an average of 17% more to the Northern railroad for carrying -- if you got a whole of 50 miles in the North and we've got an identical whole of 50 miles in the South, they are going to give them an average of 17% more in the North for carrying that same amount of traffic over that same distance as we would get for carrying the same amount of traffic over the same distance in the South. And it does go as high as 34% in the record. And so, this is not something new from --
Potter Stewart: And now, tell me what is the 3%?
Carl E. Sanders: The 3% that they're talking about is the amount of money that is going to take away from the Southern railroads operating revenues. I believe it's the correct interpretation of that.
Hugo L. Black: What's the theory on which they based the finding, if they even have a finding can you argue with that --
Carl E. Sanders: All right sir.
Hugo L. Black: -- with the increased cost of operating in the North?
Carl E. Sanders: The theory, if there is a theory, is that they say that there is a difference. They say there's -- it cost more money to operate a railroad in the North.
Hugo L. Black: Why?
Carl E. Sanders: They don't give any reasons. This is our point. This is what the Southern Governor's Conference and the Southeast Railroad Commissions are complaining about. We say that if they made a finding that under the Administrative Procedure Act, they've got to give the reason for the finding. And we say that if there is a finding, they've got to have evidence to support that finding. Now, I can quote what they have said in this case. The ICC said this, this is from the record, “Other factors being equal, the cost differences between the North and the South are the product of and reflect inherent advantages and disadvantages in the two territories.” Now, this is what they said. We contend it of course --
Hugo L. Black: Which one do they claim has the most advantages?
Carl E. Sanders: Sir?
Hugo L. Black: Which one do they claim as the most inherent advantages or disadvantages?
Carl E. Sanders: Well, they claim that the North has the greatest disadvantage may it please Mr. Justice and --
Hugo L. Black: What is that disadvantage they point out?
Carl E. Sanders: The only disadvantage that we can ascertain from this record is one, perhaps an over capacity of railroad facility in the North. We think that if there's any cost difference between operating a railroad in the North today as compared with this operating one in the South from this record, it would be because they've got more capacity in the North than we have in the South. And of course, they did not -- they recognize --
Hugo L. Black: Do you mean the competition was keen?
Carl E. Sanders: No sir, I mean that back in the day and times when the Northern Railroad System was first built, to be perfectly candid about it, all industry in this country was located in the Northern part of the country. And at that time of course, there was a great deal of railroads that were built. Since that time, of course, much of the industry in this country, some of it thank goodness, has come to the south. And now the fact that we do have industry in the south, we have an overcapacity of railroads in the north. And so they say, well as a result of that they've got maybe more wages. They've got perhaps some of these transitory costs that are tendered to operating an oversized railroad. Now, since that time, since this decision and they recognize this in the Commission but they didn't do anything about it. They said “We raise the question what's going to happen when they have these merges?” And they said, “We can't go into merges. We can't consider that other than to recognize that there are going to be merges.” And since that time in the Pan Central Merger case, the Commission found that the Pan Central merger would save $80 million a year. And yet there's not any recognition given whatsoever in this proceeding for these savings that are taking place in the north. What we are trying to do, Mr. Justice Douglas in his opinion in New York versus United States said that of all things that we don't want to happen is that we don't want to create a manmade trade barrier. And if we are going to have a manmade trade barrier as the rate structure then existed, and so we're going to equalize the rates and at the same time they equalize the divisions. Now what this northern railroads' are asking this Court to do now in a subtle fashion is to re-impose in another manner the same manmade trade barrier between the north and the south, except instead of doing it through the structure of rates. They are now asking you to do it through preferences and divisions. And it creates the same problem that we had 25 years ago.
Thurgood Marshall: What's the difference in consequences?
Carl E. Sanders: The difference in consequences is that if you allow this situation to stand as it stands now with the preference in division, the difference in consequence is this. First of all, we are going to have to pay for this inflation. It's going to come out of the hide of the southern shipper. It's going to come out of the hide of the southern economy. It's going to come out at one fashion or another. We can't operate railroads in the south and give the north 17% more for that same traffic. So we either going to have to raise the rates in the south. That means that the southern rate goes back up and we have a rate in the south that's greater than the north. O, if we don't raise the rate in the south, we're going to have to reduce the service. And that means that instead of being able to provide the same service that you can get in the north that instead of being able to buy say with the amount of money that's involved in this case, we can buy several hundred freight cars in the south for these railroads that are operating in the south. But if this Commission order is allowed to stand, that means that these freight cars that we could buy and be using in the south, they're going to be using them in the north.
Abe Fortas: But Governor, what percentage of the total revenues of the southern railroads are we talking about here?
Carl E. Sanders: We're talking about 3%, I believe.
Abe Fortas: No, I mean overall? What's the -- how much of their revenues, what percentage of their total revenues to the southern roads does the southern division derive from these does--
Carl E. Sanders: 20%.
Abe Fortas: -- the southern roads derive from the division then?
Carl E. Sanders: 20%, Mr. Justice.
Abe Fortas: 20% from all of their revenues?
Carl E. Sanders: Yes sir.
Abe Fortas: Now the next thing I want to ask you is this. As I understand it, what you're seeking is an affirmance of the District Court order?
Carl E. Sanders: Yes sir, I sure am.
Abe Fortas: And the question before us is whether we'll affirm the District Court order not whether we --
Carl E. Sanders: Yes sir.
Abe Fortas: -- like what's happening or we don't like it.
Carl E. Sanders: Yes sir. And I think if may it please Mr. Justice Fortas, that if this Court will affirm the other point that I'm seeking. And I want to conclude my argument, but this Court will affirm the district judge's decision. All we want and all we've ever asked for, and we've raised the question at every level from the beginning up, is to ask the Commission to go in to all of the economic facets and all of the economic factors in the northern territory and in the south. And if they go in to all of those factors, which they did not do in this case, then we are perfectly willing to stand by whatever the decision might be. But we have never been --
Abe Fortas: Well provided it comes out right.
Carl E. Sanders: No sir. We would like -- we believe it will come out right. The other point I want to make before I sit down, if might. And this is the other thing that the Commission is doing in this case that I think is very significant is that for 30 odd years, they have followed the principle of primary local responsibility. And that is that the territory where the cost factor is involved should bear the course to that territory, not super impose it on some other territory. And what they're asking us to do in the south is subsidize the northern railroads. And one other factor and I will sit down because my time is up and I know Mr. Trienens is a much better lawyer than I ever hope to argue this case. But the other factor is these commuter deficits. Now, you gentlemen know, may it please the Court, that the south has come a long way in the last 20 years. You also know that according to every economic indicator in this country today, we are still below any other section of the country regardless of the progress that we have made. They have settled us, the Commission has in this case, with commuter deficits in the north, which have no relationship whatsoever to us in the south at this time. However, I happen to have the privilege this month of heading up a committee in Atlanta, Georgia to go to the people in metropolitan Atlanta for a $433 million bond issue, nothing to do with the railroads now, $433 million bond issue for rapid transit. And we are coming to grips with that problem because we know we have to come to grips with that problem, and we don't think that we should have to subsidize the commuter deficits in the north, and at the same time come to grips with the problem ourselves in the south and pay that ourselves. We simply, in conclusion, we simply feel this way. We want equal treatment with all sections of the country. We want a free economy unhampered by any manmade trade barriers. And certainly if we think we are entitled to equality of equal treatment with any other section of the country, and certainly if we are going to receive less than that, we think that the Commission should at least give us some explanation while we are going to have to be relegated to a second class status. Thank you very much.
Howard J. Trienens: May it please the Court. I'm Howard Trienens, I represent the Southern Railroads. When we started out this case, we were equal partners with the Northern Railroads and we were dividing uniform and equal basis of rates. As Governor Sanders has pointed out, this case has changed that relationship. We are now not -- unequal. This case was tried on the expressive mission of the Northern Railroads. They were seeking a disproportionate division of a uniformed structure of rates. They wanted a disproportionate share. And they got it, for performing exactly the same service on the same car moving between the territories. They have given a 17% inflation, 17% more for performing the same service on the same car. I'll show where that came from and why that's not supported by any evidence.
Hugo L. Black: You mean about per mile?
Howard J. Trienens: Per mile, yes sir. 300 miles on the south, same car, 300 in the north they get 17% more compensation for doing that same work on that same car under this order.
Hugo L. Black: You say before the Commission acted the amount was equal?
Howard J. Trienens: 50-50. We split it equally when there were -- we each perform half the service with an equal haul. We split it 50-50, and we were splitting it equally and we were splitting a uniformed system of rates which were --
Hugo L. Black: Who filed the petition?
Howard J. Trienens: Northern Railroads.
Byron R. White: Mr. Trienens, do you on your side of the case, question the principle that if were so that the cost of the northern road in handling this class --
Howard J. Trienens: This train.
Byron R. White: -- was (Inaudible) and the southern (Inaudible) can make this kind of effect. Do you question the division based on profit?
Howard J. Trienens: We would question it unless they carry through, and did two more things. First found that these differences in cost, just because a fellow spends more money shouldn't get a medal for that. But these differences in cost were inherent, inherent in the difficulty of the territory. They couldn't cure it by consolidations. They couldn't cure it by becoming more modern. They couldn't cure it, it was inherent. Now if it wasn't inherent difference like that amount in the Goldberg that'd be something else. And also --
Hugo L. Black: You mean necessary?
Howard J. Trienens: Necessary. That's right, a necessary difference in the cost. Not just they happen to spend the more money --
Potter Stewart: Or do you mean just they had to make a finding as to efficiency?
Howard J. Trienens: Well, efficiency in this case is a somewhat slippery word. Now, I think they found they were equally efficient. But that meant they found that they were --
Potter Stewart: Well you know they found that then.
Howard J. Trienens: They were operating the systems as they then existed with equal efficiency. They didn't say, because obviously they merged Pan and Central, and they merged a new haven to create efficiencies that these separate railroad managements could not achieve by themselves. There's quite a difference in there. Well now, this situation of unequality puts the south in a uniquely different position. Throughout the country, east of the Rockies, the rates are uniform. The east and the west, Midwest, the east and the southwest, the divisions relate to the rates and they're uniform. Even out in Mount Pacific territory where there is an inflation, it's related directly to the higher level of rates and the Commission related them on a basis of consistency as was pointed out in this Court's opinion in the Transcontinental case. This is the only case, the first case where inter-territorial rates have been divided so that one railroad gets a disproportionate division of uniform rates. This is the only case. Now how'd it get that way? Here's how it happened. They used Rail Form A as to which there is no quarrel. Rail Form A is a formula that chops these railroads costs into various elements. We have no quarrel with how it divides the cost as between elements vital, terminal or otherwise. What we did was we analyzed this Rail Form A cost, and we said “How come these Form A averages are 17% higher? How does it happen?” Well, we looked at that sort of thing we would all think of as railroad cost first. The sort of thing Mr. Cerra indeed talked about. Running a train, paying the crew, buying the locomotive, fuel, maintaining the roadway, stations, all the sort of things you first think of in railroad costs. Are they higher in the north on an average basis? No, it doesn't cost anymore to run a train in the north. And that's true whether you use these Form A averages or you don't. The Rail Form A and these averages have nothing to do with this inflation when it's the items that you think of is running trains, maintaining the roadway and that sort. So, where did this inflation come from? Here's where it came from. It came from a handful of items. Commuter deficits, border point interchanges, car cost, empty return ratios and just a handful of items that we discussed in our briefs. Now, it's not surprising and shouldn't be surprising that the cost for some items are higher in the north. After all, the north is a very different place. It's a highly industrialized territory. Of course they got a lot of commuter service in the south as of now. It hasn't anything to do with north-south freight traffic. And indeed the Commission found as a finding of fact that many items, many items of suburban service are solely related to suburban service. Meaning the finding that these cost haven't anything to do with north-south freight traffic.
Abe Fortas: Well may I interrupt you there --
Howard J. Trienens: Surely.
Abe Fortas: -- if you don't mind? In fixing freight rates, the Commission does take into account deficits on passenger service, am I right on that?
Howard J. Trienens: In so far as fixing relationships between north and south.
Abe Fortas: No, no. I'm not talking about that. Just in fixing freight rate. Freight rates, does the Commission take into account deficits on passenger service?
Howard J. Trienens: The Commission has in the past, and I can't say -- I can't look behind what they think of it, has in the past said that it did consider deficits from passenger service. It has also said --
Abe Fortas: Pardon, go ahead and finish that sentence then.
Howard J. Trienens: It has also said that they've treated commuter deficits as a separate problem which should not be dealt with by the freight shipper subsidizing the service, but rather should be dealt with by the local community. Excuse me.
Abe Fortas: The answer to my answer to my question yes?
Howard J. Trienens: The answer is yes. It's the passenger deficits, but no as to commuter service.
Abe Fortas: And you say there are Commission rulings to the effect that commuter service will -- deficits on commuter service as distinguished from passengers other intercity passenger service, will not be considered.
Howard J. Trienens: As a matter of Commission policy.
Abe Fortas: In fixing freight rates?
Howard J. Trienens: Yes sir. And that --
Abe Fortas: But here, your point is that they have considered deficits on commuter service in fixing these divisions?
Howard J. Trienens: That's right. And I want to draw another line here though. Because in these rate cases, the reason they consider passenger deficit at all was to meet the revenue needs of these carriers. They needed more money so they raised the rates to give them these -- give them these money including -- and they took into consideration passenger deficits. In this case, they have expressly disclaimed revenue needs as a basis for decision. They say that their order is based on the cost of north-south freight traffic, freight traffic. And they have found that the commuter deficits are based at least many items of the cost are --
Abe Fortas: And you're saying that they have not used -- let me see if I can be precise about this. If I correctly understand your last statement, you're telling us that the Commission has not used the cost of passenger service, intercity passenger service, except for the cost of common facilities for the purpose of arriving at the cost for purposes of fixing freight rates?
Howard J. Trienens: Not quite sir. Not quite.
Abe Fortas: Let me hear you state it.
Howard J. Trienens: They picked as their standard of this whole case the cost of north-south freight traffic. They further found that many items of commuter cost solely and then --
Abe Fortas: I know that as to this case.
Howard J. Trienens: -- or then as to this case, they nevertheless went in and put the whole passenger deficit into this --
Abe Fortas: I understand as to this case. I'm asking you generally, when the Commission figures cost for purposes of a freight rate case, not a division case, a freight rate case. Does the Commission take into account the cost of passenger service or does it not?
Howard J. Trienens: I can't answer that Your Honor. And the reason I can't is that in the early 50's, they did say they would reflect the passenger deficits in a rate increase. In 1959, they went to Congress and have been finished this passenger deficit investigation, they said that as to commuter, commuter deficit should not be subsidized by freight shippers. And they have acted consistent with that since that time. There were no freight rate increases from about '59 to '67. And in the latest decision, I just can't answer your question. I just don't know. I do know in their last decision, they said this. And this bears upon the argument that we got to use Form A cost and these averages because it's essential to our rate cases. In that case, they had among other freight commodities not merely citrus fruit, but all perishables from north-south, territory wide, and somebody put in Rail Form A unadjusted cost with respect to these rates that they were increased. And the Commission said “Territorial average cost are entitled to little weight in determining the cost of handling particular movements. And by that they mean a territorial wide movement of this very traffic. So the idea of anything you do here about Rail Form A is going to embarrass them and all in their administration rate cases. That's how by their own state --
Hugo L. Black: Does it mean how to pocket cost?
Howard J. Trienens: In that case, they were showing both.
Hugo L. Black: When you've been referred to cost, the Commission had been referred to cost, has it been out of pocket cost?
Howard J. Trienens: No sir.
Hugo L. Black: What does it include?
Howard J. Trienens: It includes -- what I regard as a --
Hugo L. Black: Value of the property used?
Howard J. Trienens: The full cost of performing this north-south service. It would include a return on the value of the property. For example, return of the value of the car used to all this traffic. That's right sir, all of full cost of handling this north-south carrier. That's what I understood the Commission to mean, and I don't quarrel with that feature of it.
Hugo L. Black: What you claim is that they take a shipment of oranges in Florida that the south now will get -- hardly going through the south. Those railroads will get 17.5% less of the division of the cost?
Howard J. Trienens: Yes sir, 17% less than the north for doing the same service. Now let's see how it got this way. I've already said that it wasn't operating the trains and it wasn't the roadway. It was a handful of items. And I think I can illustrate how this inflation came to be by giving an example as to one of these items. I will take again a car coming from the south that moves across over (Inaudible) Potomac area, right across 14th St.Bridge. That's an interchange point. That's where the Southern Railway comes in into Pan Central and the B&O goes north. And there is a service performed there. It's the cost of interchanging these cars. These same cars come in, same car go out and there is a cost involved in interchanging them. Now when you look at the Commission's order in this case and see how they construct it, there's a separate factor which they call cost of interchanging gateways. This is a separate factor. It's isolated and we can think about just how this works. The railroad operate this joint yard and the record makes it perfectly clear uncontroverted that the cost for each railroad coming in that yard and going out of that yard is exactly the same. Exactly the same and you'd know that'd be the same. They're in the same yard dealing with the same cars through the same joint facility. The record is uncontroverted that the costs are exactly the same. The record also shows the same thing at these other interchange points, Cincinnati, Evansville, Louisville. We're all in the same yards interchanging the same cars. Alright, now how did they get the inflation? Well, they said, “Here is an element of cost of interchange. We will use the territorial average. The territorial average per car interchange throughout the south is used and the territorial average throughout the north is used.” And it happens that those averages are 58% higher than the north. Now I don't question that on the average for all the traffic, the average cost is 58% higher than the north. After all, as was pointed out earlier, 94% of the northern total traffic is something else. It's not this traffic, it's something else. It's interchanging with western lines in the expense of Chicago district, its lots of other things. It's --
Hugo L. Black: Does the increase cost of the depot, the station and the tracks and the land of the railroad of the north and south enter into the competition?
Howard J. Trienens: They do enter, Your Honor. And as to those items, stations, land there was no difference in the averages or -- there's no quarrel about it. There's just wasn't -- that doesn't where this inflation came from. It came from just a handful of items like this border interchange which was 58% higher, these car costs for the same car which are 32% higher and throwing in the commuter deficits. It's that kind of thing that counted for this whole inflation.
Hugo L. Black: You say the car cost was 32% of it?
Howard J. Trienens: You take the average car cost, meaning all the cars of all different kinds throughout the south and all the cars of all different kinds throughout north, and the average cost is 32% higher per mile than the north.
Hugo L. Black: Is that suppose to be due to the fact that they have better cars?
Howard J. Trienens: Well --
William O. Douglas: Some of it is due to a specialized equipment, isn't it?
Howard J. Trienens: Some of it is due to more specialized equipment. The north after all is the manufacturing center. They have more specialized equipment. Some of it is due to the fact that the north uses more coal, and it rents coal cars and coal rentals enter into all this. But when we're talking about a boxcar handling north-south traffic and it's the same car moving from the south through an interchange into the north. The same car, there's no rational explanation or even an effort to explain why for that car, it could be 32% higher than the north. That's the whole question here. We're talking about north-south freight traffic. And the question is, whether there is any evidence to support these higher costs for the items where the whole inflation comes from and show they in fact happen on this north-south freight traffic.
Hugo L. Black: Would you deny if they actually had shown in the evidence that the cost is 35% more on the north that they would be entitled to a bigger division?
Howard J. Trienens: Well I would deny it because I can't conceive of it being so. The northern lines didn't really try to show it was so as to these cars. They just --
Hugo L. Black: That's it. Suppose they did?
Howard J. Trienens: If they did and if it was inherent, and I'm not making to do to avoid it.
Hugo L. Black: You mean natural?
Howard J. Trienens: Natural, and the result of efficient operations as to these cars. And the northern -- and this was something peculiar of the north-south freight traffic, then they would, under the Commission's standard here, they would be entitled to it.
Hugo L. Black: Well is the main challenge then due to the findings?
Howard J. Trienens: It's due part --
Hugo L. Black: Or of increased cost in the north?
Howard J. Trienens: Partly to the findings which go to the -- where they don't go to the questions of how the cost could be higher on these cars in north-south traffic, partly the findings which don't respond to that and in large part to the evidence. There is no substantial evidence that the cost of these items, these items that account for the whole inflation. There's no substantial evidence or any evidence that these costs are in fact higher in the north on these cars. So it's both findings which don't really address themselves to this question and the lack -- complete lack of evidence.
Hugo L. Black: Is that what the court found?
Howard J. Trienens: Yes sir. And I would -- I think it's important here at this stage to say exactly what this Court found in three or four sentences here, and also say what they didn't found, because just what this court below found is critical here. The Court analyzed the facts as follows. They pointed out that only a few, relatively few elements of the cost are higher. And it's uncontroverted that many items of cost are no higher on northern railroads and southern railroads. The inflation is attributable to relatively few cost items, and they list -- the court lists, commuter, interchanging cars, cost of freight cars and a few others. As to these controverted items, the court below said, and they're all denying this, “The Commission relied exclusively on territorial average cost.” Now, here's the holding of the court. Judge --
Hugo L. Black: What does that mean precisely?
Howard J. Trienens: It means that as to such things as the interchange work out here at Potomac Yard, they used territorial average cost of all traffic in the north and all traffic in the south, bulk of which had nothing to do with this north-south freight traffic. And the average was 58% higher. So they divided these rates just as though it cost us 58% more to do the same work in the same yard in the same car. They used these averages. And it's like, in that point Your Honor, it's like the -- like this Court said in the Mechling Barge case, this was a barge rail relationship. The Court said, “The un-sifted averages put forward by the Commission do not measure the allegedly greater cost of the carriers nor indeed show they exist.” These territorial average don't show that the cost are 58% higher in doing this workout in Potomac Yard nor indeed show that there's any difference at all. And the record shows that's causing the same --
Byron R. White: You don't -- you don't really deny the fact that on some segments of this traffic -- of their traffic in northern roads have higher cost.
Howard J. Trienens: Yes I do.
Byron R. White: Like for example car cost, on segments of traffic they really do have the substantially higher car cost.
Howard J. Trienens: No sir.
Byron R. White: Your point is that -- no?
Howard J. Trienens: No. If you -- if your question was on this traffic they have --
Byron R. White: No, I said on some segments of their traffic. And your point is that you ought to look at this north-south traffic to determine car cost.
Howard J. Trienens: Alright.
Byron R. White: It's maybe to between New York and Buffalo carrying some kind of the traffic car cost or two or three times this high?
Howard J. Trienens: Or different cars on a different something else.
Byron R. White: But your point is that that cost shouldn't be used major north-south traffic cost.
Howard J. Trienens: That's right. Not only shouldn't be used as a matter of principle, but shouldn't be used under the very standard selected by the Commission itself, which was the cost of north-south freight traffic.
Byron R. White: Yes.
Howard J. Trienens: And it isn't that I say that somewhere else they spend more on these cars. It's different cars, I mean, 94% of their traffic is different, commodity is different, traffic or specialized cars. They're just different things apparent light with light. Well, I was about to give the basis of the decision below, and I'd like to read slowly if I may, just exactly what the court below held.
Potter Stewart: But can you tell us what page of the --
Howard J. Trienens: It's on 349 of the appendix, volume 1 of the appendix.
Potter Stewart: Thank you.
Howard J. Trienens: The Commission stated its exclusive standard to be the relative cost of handling the specific freight traffic to which the divisions apply. We are persuaded that the order is not based on substantial evidence nor supported by recent findings within the meaning of Sections 8 (b) and 10 (e) of the Administrative Procedure Act, because the use of territorial averages accounting for the northern inflation has not been supported with findings or evidence relating any such inflation to the north-south freight traffic. That is the holding below. Now, let me also quote from the Court to make it plain what the holding below is not, because this morning, it was suggested that the Court had substituted its view of the case, that the court below had rewaived the evidence, that's not so. Here's what the Court said, “With the Commission's expertise in mind, it is our duty to review the record and the conclusions reached as required by the provisions of the Administrative Procedure Act. As to the sufficiency of the evidence to support the order, it is not the proper function of this Court to substitute its judgment or to weigh evidence. On the other hand, it is our duty to ascertain whether or not the findings and conclusion are supported by substantial evidence.” Couldn't find a clearer statement of what the court's function is, and what the court's function is not. And I want to emphasize again, it was not the District Court that substituted any view of its own that the test here ought to be north-south freight traffic cost, that was the Commission's own announced standard. This Court took that standard as it had to, and determine whether there was substantial evidence to support this inflation with respect to those several cost items that accounted for the entire inflation.
Abe Fortas: How old is the cost material in this record?
Howard J. Trienens: 1956 cost.
Abe Fortas: And I suppose if this case goes back, the whole thing left be done over again, won't it?
Howard J. Trienens: It took the southern line six months between the time the north completed their case to we completed our case. The rest of this time was taken in the northern lines deciding to use ‘56 cost in 1959 in another procedure in which we played no part. I don't -- I know it's a great problem for this Court to have one of these old stale cases come up here. I don't think we should be penalized and we should have to forego uniform division, because other people and other agencies took an inordinate amount of time. We were not accountable for any delay before the Commission.
Abe Fortas: This case was in the Commission nine years?
Howard J. Trienens: Oh, 1959 was when the north got around to starting this really, to 1965. Six years, something like that.
Abe Fortas: Six years, and then in the courts since then?
Howard J. Trienens: Yes sir. Then we'd be back trying it out now if the Commission, I presume, would not decide to appeal this. But to that, we have no control over that.
Abe Fortas: Well, they say the whole proceeding would've been over if you haven't decided before the Court.
Howard J. Trienens: That's right. Now, I think I will emphasize that the District Court not only use the standard that the Commission itself had selected, north-south freight cost. But the District Court did its duty under the Administrative Procedure Act. This is in a matter where that court had any choice. Administrative Procedure Act directs the reviewing court shall set aside Commission action, found to be unsupported by substantial evidence. That's the part of a District Court's job to the reviewing court to look into these records and see whether there is substantial evidence. That's all this District Court did and found none to support these inflations and the items that they actually occurred. I also realized that this Court is very busy with many constitutional issues and it can't take upon itself the job of reviewing these administrative records. But I do submit that the District Court is the initial responsibility and it was fulfilled in this case in a well reasoned opinion, and using precisely the standards that the statute required. Now, there was statement this morning that this Court had somehow immunized from judicial review, cost findings and anything as complicated as the Railroad Divisions case and citing the so called Transcontinental case of two terms ago. Now that just didn't so. At the time that case was tried, there were common issues. The east was involved in that case when the Transcontinental case was first brought, and there were common issues. Some of these car costs and other issues were involved. Commuter never was. By the time it got to this Court, the eastern roads, the northern roads it settled up. And this Court observed that many of these issues just didn't have to be reached and weren't reached. And when this Court itself reviewed, because the District Court hadn't even reached the question, when this Court itself reviewed the cost determinations of the Commission, it didn't say, “You're immune from judicial review.” It looked as to whether there was substantial evidence. And on the only item where there -- which is common to the two cases that there was evidence, there was a study of the specific traffic in that case. There is no study in this case and the north refused to make a study. Now there is a feature of the Transcontinental case.
Hugo L. Black: How long would it take for the Commission to make its study and use it through with the case?
Howard J. Trienens: Well, Your Honor, the way I look at it this way. The -- it would be very easy for the Commission to get through with this case correctly. The northern lines wanted an inflation in their divisions. Commission says, “All right, the test is cost of north-south freight traffic.” On this record, and in any record we've seen yet, there is no evidence that as to these items that make up the inflation has any evidence that cost more on the north on this traffic. Now what the Commission ought to do is say “Dismissed, you haven't proved your inflation.” That's easy, dismissed.
Hugo L. Black: But I say, how long would it take for them to have a full interview and make the kind of finding which you think should be made?
Howard J. Trienens: I didn't find -- I think should be made right now until the northern lines or anybody presents some evidence that the costs are in fact higher on this traffic. The findings ought to be they haven't proved their case and ought to be dismissed.
Abe Fortas: So, your direct answer is somewhere between five minutes and 15 years, isn't it?
Howard J. Trienens: The lower court recognized, Your Honor that in saying that there wasn't substantial evidence. It didn't mean that the Commission was the captive of the Northern Railroad's failure to present evidence. That the Commission had the right and the power to go out and make any kind of comprehensive cost that it wanted. Now, if it did that, that would take time. But the Commission has no duty to do that. The Commission's duty is to decide the case on the record, and if there's no evidence to support an inflation, their duty is not to give it.
Abe Fortas: Well, that didn't quite it, is it? Because Commission's made a finding that the existing divisions are not fair and reasonable. And that finding is not being presented for decision here. The District Court didn't make a judgment on it as I read it, isn't that right?
Howard J. Trienens: District Court said that the -- that the --
Abe Fortas: The District Court said the Commission's result was an error in making these adjustments. It did not find that the existing divisions were fair and reasonable, did it?
Howard J. Trienens: Well I --
Abe Fortas: Alright, so that the --
Howard J. Trienens: No, I don't think it did either.
Abe Fortas: -- the parties here, the northern roads or whoever wants to do it has a right to obtain a Commission determination as to what adjustments would be necessary to make the rates fair and reasonable. So that if the decision of the ICC is set aside here, it will necessarily follow, will it not, that there'll have to be further Commission proceedings. And that those proceedings will be on the track record will be quite lengthy, it's just a fact of life.
Howard J. Trienens: I don't agree with that in this situation for this reason. This isn't the case like southern case was 15 years ago, like the Transcontinental case was a couple of years ago, where the divisions were a big scattered mess that everybody agreed were wrong. This is a case where they had found a uniform scale of divisions to fit the uniform rates that are now in existence. If this case is sent back to the Commission, the present order set aside, you don't go back to some chaos that everybody recognize it has to be changed. You go back to the uniform equal partner divisions of rates. Now, if they want to persist, if the northern lines wish to persist in obtaining an inflation, let them start by presenting some evidence that the cost --
Hugo L. Black: You keep saying obtaining inflation. What do you mean by that?
Howard J. Trienens: I mean Your Honor that has contrasted with the way it was before this order where we were equal partners. And we each --
Hugo L. Black: You mean if they want to insist on getting more than the south gets?
Howard J. Trienens: If they want more than equal share, they ought to prove it. That's right Your Honor.
Byron R. White: You see the way this works out probably if they get a dollar you just get $0.50, is that right?
Howard J. Trienens: Up until this order.
Byron R. White: That's right. And under this order, what is it? Something like 58-42 or something, 58 or?
Howard J. Trienens: Well, specifically the way it's worked is that there are two scales, a northern scale and a southern scale. Under this order of the northern scale is 17% higher at 300 miles. You run these scales through --
Byron R. White: How do you get --
Howard J. Trienens: $0.56 and $0.44. 56-44 instead of being equal partners.
Byron R. White: Yes.
Howard J. Trienens: That's the way it works.
Byron R. White: Well I suppose the same finding why the Commission looks for the increased rate with an increased joint rate?
Howard J. Trienens: It didn't so indicate. They --
Byron R. White: I mean that's normal (Inaudible).
Howard J. Trienens: No, I don't believe so Your Honor. Ability to move the traffic, ability to meet truck and barge competition, revenue needs of the railroads. The cost --
Byron R. White: The cost is --
Howard J. Trienens: Well, they have a very low --
Byron R. White: They thought, for example and said “Right, we are thinking it has to do this.”
Howard J. Trienens: Well they used to 15 years ago, yes sir. But you can read these last few rate cases, and I'm just not able to recite as to what they based it on it, except the revenue needs of the railroads not cost as -- not -- certainly not cost of specific 6% of the traffic.
Byron R. White: How it represents -- certainly some of the part of the revenue needs that the -- or --
Howard J. Trienens: Well, some part of it yes. But of course the northern revenue needs are dominated by the 94% of their freight traffic that's not this segment. So it's a larger more commingle we'd miss. Now, I'd like to turn to the last illustration. And I think all these are merely illustrations of the use of these averages to inject something into the cost that really have nothing to do with cost of north-south freight traffic. And this is this passenger deficit problem. Now it's -- in the Transcontinental case, this Court noted in an argument in which the western worlds were urging that their passenger deficits be reflected. This Commission -- this Court said “While the Commission has sometimes acted to offset passenger deficits and freight rate cases, the issues are quite different. When in a division's case, it is argued that carriers in one part of the country should subsidize the passenger operations of carriers elsewhere.” The Court didn't get into that matter in the prior case because the east was out of it, and they held that they -- it should really dropped out of the case. Now here, the Commission has included the total passenger deficits, and I think we're all entitled to ask how come and why. Should any passenger deficits be included when we're talking about north-south freight cost? Well the southern lines theory and this was brought out earlier. The southern lines theory is that there are common costs. Taken again as a bridge across the 14th St.-- right next to the 14th St. Bridge is a railroad bridge, and it's got be painted. It's got to be repaired and it's used by passenger trains and it's used by freight trains. And if we just cut out all the passenger trains, we're still going to have to paint it and we're still going to repair it. It's a common cost and it's proper if the passenger revenues can't pay for the pay. It's proper to charge that common cost against the freight. Now, I don't quarrel with the Commission on that concept. Commission adopted that concept. They said that common cost should be reflected. I don't quarrel that. The northern lines, and indeed Commission counsel have some quarrels with that in their brief. They have quite a number of theories of how this passenger deficit ought to be treated. They were not accepted by the Commission and many of them are inconsistent with what the Commission did. What the Commission did was say that where there are common costs that must be incurred to provide freight service, such costs are properly chargeable to freight service, so far so good. The problem here is that these commuter lines up north contain many items of cost, many items of cost. Tracks, yards, stations, separate facilities that can be considered solely related to suburban service, solely and exclusively related to suburban passenger service. Those aren't my words. Those are the findings of the Commission in this case.
Byron R. White: Just about a generalization that --
Howard J. Trienens: Many individual items of suburban service can be considered solely related as suburban.
Abe Fortas: Well the same thing is true of intercity passenger cars, isn't it? The fact of the matter is that isn't that southern roads have cery large cost for intercity passenger servicing and deficits. And the northern roads have great cost and deficits with respect to commuter service. And the impact of those two things held very differently. But if you're going to talk about segregating common cost and then making an allocation, are you really arguing for a difference between passenger cost on the one hand and commuter cost on the other hand, or are you -- how can you do that? Except on the basis that it's better for the south to do it on that basis, but logically you can't argue that way, can you?
Howard J. Trienens: When this --
Abe Fortas: Don't you have to say that the right thing to do to make your argument, right thing to do is to take your common cost as between passenger or commuter and -- on the one hand, and freight on the other hand and then allocate it.
Howard J. Trienens: That's right. That's exactly --
Abe Fortas: And as between freight on the one hand and passenger plus commuter on the other hand.
Howard J. Trienens: That's exactly what we argue. Exactly what we argued and what we did was go in and say that there is a large body of cost that aren't common and shouldn't be allocated, because this large body of cost are solely related to these northern commuters. They have nothing to do with the cost of north-south freight traffic. We got our evidence on that from a presentation of the Northern Railroads. Mr. Justice Black asked the question “How do you find our these things?” We got from a presentation of the Northern Railroads to Congress at the time that they were going to Congress as they still are and saying that local communities ought to support this commuter service.
Byron R. White: Mr. Trienens, didn't the Commission say that even if there are a lot of cost in the commuter service that are not common but solely related to commuter service, nevertheless they should be included and allocated?
Howard J. Trienens: That isn't the way I read it. They say because the commuter deficit includes common cost which should be incurred to provide -- which must be incurred to provide freight service. Such costs are properly chartered.
Byron R. White: Well, but they also conceded there were some solely related costs?
Howard J. Trienens: That's right.
Byron R. White: But they nevertheless included them.
Howard J. Trienens: Yes, and that's the point -- exactly the point on which the District Court said “You've given no reason of why you should flip in the solely related cost.” Yet they did. Now the other side of this question is, well if that so, why don't you throw out any solely related passenger cost in the south? Now that's exactly what we suggested to the Commission when this point was first made by the examiner. We said, “If you think there are solely related costs in the south, and we can mention those for you, throw them both out. Under your standard of the cost of freight traffic, throw them both out.” And we would still -- the south would still be better off from the way you did it. And the Commission never even mentioned that exception, and the northern lines keep saying “Well, the south has all these.” Sure we do. Sure it ought to be out. If south and north and ought to be out in the south. And the Commission should exclude them in both territories. We don't question that. We've urged it. We've gotten brushed off from that one. Now, I've given two illustrations. I've given the border interchange situation. I've given the commuter. I've briefly addressed myself to this car cost feature. All these items are essentially the same situation. It's an inclusion in north-south freight cost of things that have not been shown to have anything to do with this inflation. I want to simply summarize by saying that the District Court did exactly what the Administrative Procedure Act required it do. Reviewed the Commission's findings and it reviewed the record to determine whether this inflation which is granted the north was supported by reason finding and substantial evidence. Without invading in any way the province of the Commission to set the policy standards upon which division should be made. The court below found as it had to find on this record that the inflation was not supported by substantial evidence relating the higher averages to this source --
Abe Fortas: Excuse me sir. This is what bothered me. It's on page 31 in your brief. This is what I recall. You say it is generally agreed that the intercity passenger deficits must be considered as part of the cost of providing freight service. For such deficits are usually the result of cost allocated in the passenger operations from common facilities, which must be maintained in order to provide freight service.
Howard J. Trienens: Yes sir.
Abe Fortas: Suburban passenger deficits however, required another matter. Now do I understand what you have just said in the colloquy with me to supersede this statement and that you do agree that the solely -- that the cost solely allocable to passenger -- intercity passenger operations on the one hand and to commuter operations on the other hand, should be treated the same way and they should both be eliminated?
Howard J. Trienens: Yes sir. And I don't regard this as superseding it because the testimony I refer to says that the great bulk of the passenger deficit is --
Abe Fortas: Well I haven't checked the testimony. I'm checking what you said in your brief.
Howard J. Trienens: I'm saying that to the extent that you have to qualify this by the existence of solely related deficits. To that extent, they ought to go out in both territories. I noted that the District Court had not intruded in any way on the policy decisions of the Commission. It's not like the barge railing at Mole case last year where a District Court had decided that it, the District Court would decide what the standard ought to be. Here the Commission fixed the standard. The District Court did not touch it at all. It simply found whether there was substantial evidence to support the Commission's decision under that standard. Now we believe that the District Court having performed its duty as required by the Administrative Procedure Act that its judgment remanding the case of the Commission should be affirmed. Thank you sir.
Edward A. Kaier: May it please the Court.
Earl Warren: Mr. Kaier.
Edward A. Kaier: Mr. Trienens agreed that the Form A cost formula is a good cost formula. The territorial cost as developed by that cost formula were applied to the precise elements of service incurred in performing this north-south traffic as revealed by the southern lines cost study. The southern lines know where to look for situations in which territorial average costs may not proper -- accurately reflect the cost of this service. They looked for those places. They presented to the Commission their reasons why they thought that territorial average cost were not good. The Commission minutely examined each one of those reasons in appendix B to its report, and showed that these adjustments of southern lines were based upon assumptions and wholly invalid evidence. And they showed why they thought the territorial average cost were good. I commend to Your Honors a reading of Section (b) to the Commission's report. And I believe you will be satisfied about that. Mr. Trienens talked about car costs. They said that they wanted to get the cost closer to the north-south traffic. And what do you suppose they offered in substitution for the northern and southern lines cost, on car cost? They used the average car cost of all the railroads in the United States. And the Commission minutely examined that and said no that that wasn't representative. That the northern and southern lines own cost were more representative of the car cost than the U.S.car cost. The southern line said, “The car cost of the northern and southern lines are not representative here because mostly in this service boxcars are use, whereas the northern and southern lines have more open hopper cars.” The Commission analyzed that, and it found that it cost more to own and maintain open hoppers than boxcars. So to that extent, the territorial cost would over -- would be an overstatement, rather than an understatement. Now, if Your Honors please, they also said that there was a difference in utilization. The Commission analyzed that and found that that wasn't a factor. The Commission said, “It is known what the facts -- what factors caused the northern lines to have higher car cost than southern.” In the first place, northern lines have more -- have higher wages, pay higher wage rates than southern lines. They said the northern lines pay higher taxes than southern lines and that overall there is a greater utilization in the south than in the north. I think we pretty adequately covered that on our brief. Your Honors, in the Transcontinental case --
Hugo L. Black: Is it true that the railroad rates in the north are higher than those in the south for the regular employees?
Edward A. Kaier: If Your Honor please --
Hugo L. Black: -- to the unions?
Edward A. Kaier: Let me answer by reference to a decision of the Commission. I wanted to get to that point. Our friends on the other side have said that the rates are equal. They're talking only about class rates. Class rates boom only 1% of the traffic. The Commission said in the cases cited on page 14 of our reply brief, “Rate levels within the north have become higher than within the south.” And they said that in a case back in '56, and we've shown that since that time in general freight rate increase cases, the Commission has allowed even greater increases within the north and from and to the north that --
Hugo L. Black: The north in weight, as I had an idea that the rates of the employees that belong to the general and the national union are the same, is that it?
Edward A. Kaier: No Your Honor. The increases are generally the same, but they are imposed on higher base wages than the south. I submit Your Honors that this case really could be controlled by the CNNW case. To all intents and purposes, the questions on these costs issues are the same. Thank you.
Earl Warren: I think we'll adjourn now.