Opinion ID: 388140
Heading Depth: 1
Heading Rank: 2

Heading: Cost Determinations.

Text: 14 Courts traditionally have applied a deferential standard in reviewing rate determinations by an agency, Atchison, Topeka & Santa Fe Railway v. Wichita Board of Trade, 412 U.S. 800, 806, 93 S.Ct. 2367, 2374, 27 L.Ed.2d 350 (1973), but the courts have an obligation to determine whether the Commission's decision comports with applicable law, whether there is evidence in the record to support the Commission's findings, and whether the agency's rationale is both discernible and defensible. San Antonio, Texas v. United States, 631 F.2d 831, 836 (D.C.Cir.1980); Burlington Northern, Inc. v. United States, 549 F.2d 83, 88-89 (8th Cir. 1977). Our analysis of the cost issues tracks closely the well-reasoned analysis of similar issues by the District of Columbia Circuit in San Antonio, Texas v. United States, 631 F.2d at 837-53, and the Fifth Circuit in Celanese Chemical Co. v. United States, 632 F.2d 568, 572-78 (5th Cir. 1980). Our analysis is also influenced by the Commission's reconsideration of some of these issues in Unit Train Rates on Coal Burlington Northern, Inc., I.& S. No. 9199 (served October 1, 1980). We believe it is necessary to remand certain of these cost issues to the Commission so that uniform policies can be developed and applied. 15
16 IPS argues that the Commission's use of both a fixed plant investment additive and Rail Form A in computing the maximum reasonable rate for this transportation double-counted the cost of certain items such as rails, ties, ballast, shops, engine houses and other fixed plant investments. In Unit Train Rates on Coal Burlington Northern, Inc., I.&S. No. 9199 (served October 1, 1980), the Commission admitted that the use of the additive and Rail Form A double-counted these costs. Id., slip op. at Appendix A, 8-9. The District of Columbia Circuit also noted the double counting error in San Antonio, 631 F.2d at 841-44. We remand for reconsideration of this issue in light of these decisions. 17
18 IPS next argues the Commission's treatment of federal taxes resulted in overestimation of the rate base. 8 IPS argues that the Commission neglected to deduct the deferred tax account from the net investment base prior to calculating the rate to be assessed, contrary to the policy expressed in Ex Parte No. 338, 358 I.C.C. 844, aff'd as modified, 359 I.C.C. 270 (1978). The Commission admitted its error in I.&S. No. 9199 (served October 1, 1980) (Once the decision to normalize taxes is made, however, deferred taxes should be deducted from the net investment base prior to the calculation of any overall cost of capital. Slip op. at Appendix A, 10). Accord San Antonio, 631 F.2d at 847. We remand to the Commission for reconsideration of this treatment of the deferred tax account. 19
20 IPS also argues that the Commission's decision to adopt the statutory tax rate in railroad ratemaking proceedings is not appropriate in this case because there is no evidence to support the Commission's findings that the sum of actual income taxes, deferred taxes, and the investment tax credit approximates the statutory tax rate. The Commission's decision to use the statutory tax rate was based in part on its policy to assure that accelerated depreciation and the investment tax credit remain an incentive to capital spending. Ex Parte No. 338, 358 I.C.C. at 893-94. Accord San Antonio, 631 F.2d at 847. Because the use of the statutory tax rate is consonant with previous Commission policy, has found judicial support, see San Antonio, 631 F.2d at 846-47, and is a reasonable substitute for computation of actual taxes, we will not second-guess the Commission's approach in this regard. 21
22 The railroads argue that the inconsistent use of the ratio and ton-ton/mile methods of allocating fixed costs will result in a revenue shortfall for the railroads. In San Antonio, the D.C. Circuit found that the use of the ratio method of allocating fixed costs in coal cases was reasonable and consonant with the general course of Commission practice in Western coal cases. We agree with the D.C. Circuit's reasoning. San Antonio, 631 F.2d at 841 & nn.48-49. 23
24 The railroads argue that the Commission should have computed the rate base for this transportation on the basis of the full cost of new power units that had to be acquired because of the Sergeant Bluff movement, rather than the average cost of the locomotives in the pool of diesels that serves this movement. This argument was rejected by the D.C. Circuit in San Antonio, 631 F.2d at 838, and for the reasons stated therein we reject the railroads' argument. 25
26 The railroads next argue that the rate of return figured on locomotive investment should have taken into account the railroads' need to raise equity capital as provided for by the ratemaking provisions of the 4-R Act. 49 U.S.C. § 10704(a)(2). The Commission applied a 9.34% cost of capital rate to locomotives and cabooses, representing the interest rate of the railroads' current trust certificates. The railroads argue that the cost of capital in railroad equipment is the overall cost of capital rate of the railroad, including equity and debt, and not the particular financing rate of debt instruments that use the equipment as collateral. The railroads would apply to this equipment the same cost of capital as that applied to other investments, here 10.6%. 27 The Commission reasoned that the 10.6% rate of return needed on general corporate funds was inapplicable because locomotive and caboose equipment is not purchased with general corporate funds. Evidence in the record shows that all of the locomotives in the pool acquired by BN in 1977 and 1978 were obtained by leasing. The railroads did not rebut this evidence of large-scale leasing. Accordingly, the Commission with reason declined to accept a cost of capital not necessarily incurred, applying instead a rental payment costing methodology to this equipment. 9 We note also that the cost of capital determinations now challenged by the railroads were presented to the Commission by the railroads as an alternative. 28 In sum, the Commission's treatment of locomotive capital costs withstands the arbitrary and capricious standard of review which applies to its ratemaking. Burlington Northern, Inc. v. United States, 555 F.2d at 640; see also Atchison, Topeka and Santa Fe Railway v. Wichita Board of Trade, 412 U.S. at 806, 93 S.Ct. at 2374 (plurality opinion); Arizona Grocery Co. v. Atchison, Topeka and Santa Fe Railway, 284 U.S. 370, 387-88, 52 S.Ct. 183, 185, 76 L.Ed. 348 (1932). 29