Opinion ID: 421082
Heading Depth: 2
Heading Rank: 4

Heading: Guilford's Incentives to Downgrade Interchange Service

Text: 119 The ICC's third reason for rejecting protective conditions at Danville and Yarmouth Junctions was that it would not appear to be to [Guilford's] benefit for such deterioration [of interchange service] to take place, since substantial traffic through those interchanges is nondivertable. Boston & Maine Merger, 366 I.C.C. at 352. 45 We think that the Commission failed to analyze properly Guilford's incentives to downgrade interchange service. 120
121 The Maine Central is the only railroad providing east-west service to the Maine paper industry. Moreover, Canadian National claims, and the Commission does not dispute, that most of the Maine Central's traffic is captive to rail--trucks are not a significant source of competition. 46 Thus, the Maine Central has market power over rail traffic to and from Maine. As a theoretical matter, then, the Maine Central may be able to increase profits by altering its interchange service. 122 The merger of the Maine Central with the Boston & Maine is, in antitrust terminology, a vertical merger. Ordinarily, a vertically integrated monopolist has no incentive to use its monopoly power over one level of production (rail service in Maine) to increase profits at another level (rail service from Maine to the midwest). As the leading treatise puts it, there is but one maximum monopoly profit to be gained from a monopoly of one level of production, and that profit may be gained directly at the monopolized level (here, rail service in Maine) through appropriate pricing. 3 P. Areeda & D. Turner, Antitrust Law § 725b (1978). There is an exception to this rule, however, for a regulated monopolist, which may be able to obtain from a second level of production the monopoly profits which effective regulation of the franchised monopoly precludes. Id. p 726e (footnote omitted). 47 123 [229 U.S.App.D.C. 41] The Maine Central is, of course, a regulated monopolist. It is barred by the ICC from charging a monopoly price for rail service to Maine, 48 but may be able to use its control over service at Danville and Yarmouth Junctions to shift its potential monopoly profit to the Boston & Maine. Indeed, the ICC itself has recently recognized the risk of such conduct. See Union Pacific--Control--Missouri Pacific, supra note 21, 366 I.C.C. at 529: 124 [In an end-to-end merger], the consolidated system may profit by limiting the downstream competition [from connecting carriers] and routing traffic over its own lines from origin to destination.... This vertical foreclosure effect will occur, if at all, at the gateways served commonly by the consolidating carriers. 125 We do not know whether Guilford will in fact profit by downgrading interchange service, but the risk is substantial. Indeed, Areeda and Turner believe that the probability that a vertically integrated, regulated monopolist will abuse its market power is peculiarly high. Id. p 726e, at 218. They would forbid vertical integration by a regulated monopolist except in cases where regulatory authorities can more or less easily exercise the power to prohibit refusals to sell and to specify the price and other terms of sale. Id. p 726e, at 219 (footnote omitted). In this case, the ICC permitted vertical integration but declined to exercise its power to control the terms of sale between the Maine Central and the Canadian National. The question is whether that decision was reasonable.
126 We do not think that the Commission gave Guilford's possible incentives to downgrade interchange service the scrutiny they deserve. As we understand its terse explanation, the Commission's conclusion that Guilford has no incentive to downgrade rests on two premises, the first explicit, the second implicit. First, Guilford will continue to transfer substantial amounts of traffic to Canadian National at Danville and Yarmouth Junctions. Second, if Guilford downgrades interchange service, it will earn less profit on nondivertible traffic. 127 The first premise is undisputed in the record, though Guilford and Canadian National disagree on how much traffic will be diverted. 49 There is no record evidence regarding the second premise. The premise is plausible, if only because reduced service will lead some shippers to switch to trucks or produce fewer goods. But the magnitude of this effect is uncertain and may well be small. Little traffic will be lost to trucks because, for most of the Maine Central's shippers, trucks are not a feasible alternative to rail. And the record is silent on how much business Maine producers will lose to competitors elsewhere in the country if they lose fast service to the midwest. 50 128 The Commission not only failed to quantify Guilford's costs from downgrading interchange service at Danville and Yarmouth Junctions, it also ignored the benefits to [229 U.S.App.D.C. 42] Guilford from increased diversion. The Commission does not dispute that some additional diversion will occur. We can only speculate as to the amount of diversion and how profitable the diverted traffic will be to Guilford. 129 Without quantifying the costs or even discussing the benefits to Guilford from downgrading interchange service, the ICC could not rationally conclude that Guilford will not have an incentive to downgrade. On remand, the Commission must ascertain more carefully where Guilford's incentives actually lie. 130 We do not suggest that the Commission will be able to predict Guilford's future behavior with absolute accuracy. Rather, Guilford's incentives or disincentives to downgrade will be primarily a question of probabilities, and thus peculiarly subject to the expert experience, discretion, and judgment of the Commission. Missouri-Kansas-Texas Railroad v. ICC, 632 F.2d 392, 406 (5th Cir.1980), cert. denied, 451 U.S. 1017, 101 S.Ct. 3004, 69 L.Ed.2d 388 (1981). But our deference to its ultimate choice does not relieve the Commission of the duty to explain, based on substantial evidence in the record, whether Guilford will or will not have an incentive to downgrade interchange service.