Opinion ID: 445219
Heading Depth: 1
Heading Rank: 7

Heading: the icc's review of the indiana decision

Text: 57 In Utah Power & Light Co., supra, at 734, we held that while our review of the ICC's section 11501(c) decisions is necessarily deferential, the Commission's authority under that provision to review state commission decisions is plenary. Under the Staggers Act, the ICC, when reviewing rate determinations made by state authorities, is authorized and indeed obligated to penetrate below the surface of the state opinion to the substance. A state commission should not be allowed to effectively shield its decision from review by merely articulating the proper federal standards, while improperly finding the facts, misapplying law to facts, or giving inordinate weight to isolated concerns. Lip-service is not enough. The applicable federal standards must be faithfully applied. 58 In our view, the approach of the Indiana Commission to this case falls well short of evenhanded, correct and faithful application of federal standards. The state's handling of the case is so one-sided as to appear to have been purely result-oriented--the desired result being the lowest possible rate. The state commission apparently decided to believe all of the shippers' cost evidence, and to disbelieve all of the railroad's cost evidence, and to end up arriving at the lowest possible cost figure. Next, the Indiana Commission acknowledged, as it was bound to do, that the ICC had determined the L & N to be revenue inadequate. The state went on, though, to hold that the authority of the L & N to utilize differential pricing was further contingent on its demonstrating its efficiency. Having diverted the case onto the solitary efficiency track, the Indiana Commission then compared the L & N to the Southern which has a reputation as one of the nation's most efficient railroads, disbelieved all of the L & N's evidence, and ultimately found it to be inefficient. Finally, on that basis, the state commission reduced the existing rate to the jurisdictional threshold--the lowest level permitted by law. 59 In defense of the state commission's approach, petitioners argue that because the Indiana Commission announced that it was applying proper standards, and made detailed findings of fact, the ICC has no authority to set aside the Indiana rates. We reject this restricted view of the Commission's authority. Adoption of such principles would shield from review many, if not most, state rate decisions. As in this case, a state agency could accept all of the shippers' evidence and reject all of the railroad's evidence and then intrastate shippers could argue that determinations of the finder of fact cannot be reviewed. Or, as in this case, the state could compare any railroad to a more efficient competitor--only one railroad, after all, could ever be the most efficient--find the subject railroad to be inefficient, and set its rate at the jurisdictional threshold. We do not interpret the Staggers Act as allowing such shields to prevail. They are nothing more than transparent devices to evade the federal standards and procedures that Congress enacted in the Staggers Act to ensure that intrastate traffic would contribute a fairer share, in comparison with interstate and competitive traffic, of the revenue necessary to sustain a sound rail transportation system. Given the demonstrated historical propensity of state public service commissions to set intrastate rates at unreasonably low levels (Congress estimated a $400 million revenue shortfall in 1977 due to the gap between interstate and intrastate rates 10 ), petitioner's construct would effectively foil much of the congressional intent behind the Staggers Act. Accordingly, the ICC--like a court acting in a reviewing capacity--must have ample authority to carefully scrutinize the record to determine that the state agency has properly applied the law. 60 Scrutinizing the record in this case, the ICC found several basic flaws in the approach taken by the Indiana Commission: the state commission (1) held that the railroad was entitled to use differential pricing and to receive assistance in attaining revenue adequacy only if it was not inefficient; (2) transferred the burden of demonstrating efficiency to the railroad; (3) apparently used a mechanical test to hold that an inefficient railroad's rates should be set approximately at the jurisdictional threshold; (4) failed rationally to relate the rate reduction to the finding of inefficiency; and (5) relied on evidence insufficient as a matter of law to prove inefficiency. We find that each of the ICC's reasons for reversing the Indiana Commission is entirely sound. The ICC and the federal courts must be allowed to protect against this kind of narrow, parochial protectionism, violative of both the letter and spirit of the Staggers Act. We consider in turn each violation of the federal statute. 61 A. Conditioning Differential Pricing on Efficiency 62 In its central error of law, the Indiana Commission held that the L & N was entitled to use differential pricing to attain revenue adequacy only if its management was demonstrably efficient: 63 54. Under Staggers the L & N is entitled to assistance in attaining revenue adequacy only 'under honest, economical and efficient management'. 64 Indiana Decision at 19 (JA 153). The ICC ruled that this was a fundamental misconstruction of the statute. We agree. To be sure, the Staggers Act requires that railroad rates should be adequate, under honest, economical, and efficient management, to cover total operating expenses, ... including a reasonable and economic profit or return (or both) on capital employed in the business. 49 U.S.C. Sec. 10704(a)(2). This is far from saying, however, that the right to use differential pricing and the goal of revenue adequacy are entirely contingent upon demonstrating efficiency to a state agency's satisfaction. One statutory factor cannot be isolated out of context, or blindly exalted at the expense of others that are at least co-equal in importance. 65 In contrast with the restricted view of the Indiana Commission, the ICC held that carrier 'efficiency' [is] a factor that must be considered in determining the reasonableness of a challenged rate. ICC June Decision at 7 (JA 12). The Commission pointed to the Long-Cannon amendment to the Staggers Act, 49 U.S.C. Sec. 10707a(e)(2)(C), supra, which helps to explain how efficiency evidence is to be used. Under that section the ICC must consider: (1) the amount of traffic that does not pay its way; (2) the attempts made to minimize such traffic; (3) the amount of low-profit traffic; and (4) the attempts made to increase profits on such traffic. The ICC then indicated the role that efficiency must play: 66 The statute does not specify how these efficiency factors should be considered. It certainly does not mandate that a general showing of inefficiency bars any further rate increases or requires reduction of all existing rates to the jurisdictional threshold. Rather, by emphasizing the revenue adequacy policy, and making the efficiency factors considerations without specifying how they should affect the rate reasonableness issue, the statute leaves no doubt that the two considerations must be balanced together. 67 ICC June Decision at 7-8 (JA 12-13) (emphasis added). This ICC interpretation of the Staggers Act, a recent enactment, is entitled to substantial deference. Under Supreme Court precedent, it is well-established that a court should defer to the interpretation given [a] statute by the officers or agency charged with its administration ... '[p]articularly ... when the administrative practice at stake involves contemporaneous construction of a statute by the men charged with a responsibility with setting its machinery in motion, of making the parts work efficiently and smoothly while they are yet untried and new. '  Udall v. Tallman, 380 U.S. 1, 16, 85 S.Ct. 792, 801, 13 L.Ed.2d 616 (1965) (quoting Power Reactor Development Co. v. International Union of Electrical, Radio & Machine Workers, 367 U.S. 396, 408, 81 S.Ct. 1529, 1535, 6 L.Ed.2d 924 (1961); quoting in turn Norwegian Nitrogen Products Co. v. United States, 288 U.S. 294, 315, 53 S.Ct. 350, 358, 77 L.Ed. 796 (1933)) (emphasis added); see Quern v. Mandley, 436 U.S. 725, 744, n. 19, 98 S.Ct. 2068, 2079 n. 19, 56 L.Ed.2d 658 (1978); Fawcus Machine Co. v. United States, 282 U.S. 375, 378, 51 S.Ct. 144, 145, 75 L.Ed. 397 (1931) (citing cases); cf. Martin v. Hunter's Lessee, 14 U.S. (1 Wheat.) 304, 351-52, 4 L.Ed. 97 (1816) (approving legislative act as contemporaneous exposition of the Constitution, long continued). 68 In addition, as discussed supra, section III(B) of this opinion, the ICC's view that the Staggers Act requires a balance of factors in ratemaking is fully consistent with both the statutory language and legislative history. We adopt that interpretation. The whole thrust of ratemaking under the Act is balancing. By failing to balance efficiency against revenue adequacy--thereby, in effect, entirely eliminating consideration of the proper contribution to the attainment of revenue adequacy because of alleged inefficiency--the Indiana Commission misinterpreted the Staggers Act. That legal error pervades its entire opinion and alone justifies setting aside the rate determination of the Indiana Commission. B. The Burden of Proof 69 The Indiana Commission next took the following step: 70 55. Although the burden of proving the assailed rate is unreasonable is upon [the Utility], once it has come forward with evidence showing that the management of L & N is not honest, economical and efficient the burden of rebutting such allegation in order to demonstrate entitlement to differential pricing above the Staggers mandate of 165% shifts to the L & N. 71 Indiana Decision at 19 (JA 153) (emphasis added). The Indiana Commission thereby basically held that if a shipper who is challenging a rate presents allegations that the state agency considers to be a prima facie case of inefficiency--i.e., that the railroad is less efficient than one other railroad--the burden switches to the railroad to demonstrate entitlement to differential pricing above the Staggers Act jurisdictional threshold. Id. 72 The Indiana Commission offers no authority for this shifting of the burden of proof. Ordinarily, the shipper challenging a rate determination by the ICC based on market dominance has the burden of proving that such rate is not reasonable ... The shipper here, not the railroad, must prove that the rate is unreasonable. 49 U.S.C. Sec. 10701a(b)(2). There was no reason to deviate from or to ignore that rule, which constitutes a federal standard. While the Indiana Commission correctly quoted the Staggers Act standards, its conclusion that the burden of proof shifted to the L & N to prove the factors upon which the reasonableness of the rate rested renders its conclusion seriously defective. The state commission concluded: the L & N has not presented convincing evidence that its management is efficient and economical. Indiana Decision at 23 (JA 157). This is completely backwards, and constitutes error justifying the invalidation of the rate determination. While the burden of proceeding might shift on a complete showing, the burden of proof under the statute is upon the party challenging the rate. 49 U.S.C. Sec. 10701a(b)(2)(A). 73 C. The Mechanical Test of Setting the Rate at the Lowest Level 74 The Indiana Commission also held that if a railroad is found to be inefficient, the carrier is not entitle[d] to differential pricing above the Staggers mandate of 165%. Indiana Decision at 19 (JA 153). The ICC quite reasonably interprets this decision by the state commission as holding that the Staggers Act 165% jurisdictional threshold is presumptively the proper rate unless a railroad is found to be efficient. Such construction by the Indiana Commission is erroneous. The Staggers Act clearly states to the contrary, that a rate at or above the jurisdictional threshold does not establish a presumption that ... the proposed rate exceeds or does not exceed a reasonable maximum. 49 U.S.C. Sec. 10709(d)(4) (emphasis added). This statutory provision explicitly rejects the drawing of any inference that the 165% rate was presumptively the maximum valid rate, or that rates over 165% have to be specially justified. In holding that, because the rate exceeded 165%, the L & N was required to prove its efficiency, the Indiana Commission misinterpreted the Act. This mechanical test, as the ICC characterizes it, is contrary to the rate flexibility required by Staggers. D. Absence of Rational Basis 75 The ICC points out that the approach of the Indiana Commission apparently was to rule that a railroad it found to be inefficient could not set any rate above the jurisdictional threshold. As the ICC notes, this construction is entirely arbitrary, and could well result in reducing a fair rate to a point far out of proportion to the alleged wrong. If, for example, the L & N loses $10 million a year through inefficiencies, it is contrary to the purposes of the Staggers Act, and to common sense, to force its rates down to a level where its income is reduced by $20 million. No national congressional purpose could be served by cutting the revenues of an already revenue-inadequate railroad by an amount unrelated to the extent of the alleged inefficiency. In this case, the Indiana Commission never determined the amount of money that alleged inefficiencies cost the L & N; no evidence of dollar amounts appears to have been produced. It was, therefore, impossible for the ICC to tell, even if the state's theory was correct, whether the state's rate slashing was too much or too little. Such a crude approach falls well short of the reasoned decision making, in a balanced manner, required by the Staggers Act. The balancing aspect of the statute requires some attempt to tailor the remedy, rate reduction, to the goal, improving efficiency. 11 No such attempt was made here. E. Insufficiency of Evidence 76 Finally, the ICC held that even if the Indiana Commission correctly construed the law, the evidence was insufficient to support a finding of inefficiency. The evidence relied on by the Indiana Commission was as follows: 77 1. One witness, Professor Lerner, testified that L & N's profit margin of 6% was less than that of its parent company, CSX, which was 10%. He concluded that the management of L & N is not as efficient as the management in other parts of the CSX. He stated, however, that other reasons for differences in profit margin, for example differences in operating characteristics, might be responsible [for the discrepancy, but] ... he had not attempted to determine reasons for such differences. Indiana Decision at 19-20 (JA 153-54). 78 2. Another witness compared the L & N to the Southern Railway, and found that the Southern was more efficient in freight car, locomotive, labor, and track utilization. Indiana Decision at 19 (JA 153). 79 3. Testimony of L & N management indicating that the railroad L & N bases its pricing decisions on the expertise of its management, and does not rely on sophisticated marketing tools such as demand elasticity studies. Indiana Decision at 21, 24 (JA 155, 158). (Emphasis added.) 80 The Indiana Commission then, because the L & N relied solely on the expertise of its pricing officials, rejected its evidence of efficiency, and summarily dismissed L & N's efforts to improve efficiency as commendable but ... of limited scope. Indiana Decision at 22 (JA 156). The shippers' evidence in this case had some slight probative value on the issue of fact regarding efficiency. Petitioners contend, however, that the ICC was bound to leave undisturbed the fact-finding determinations of the Indiana Commission. As this court held in Yellow Taxi Co. of Minneapolis v. N.L.R.B., 721 F.2d 366, 382-84 & n. 37, 39 (D.C.Cir.1983), however, even federal agencies are not free to manipulate their findings of facts as a means of avoiding judicial review of their ultimate conclusions. In addition, the rate-determination responsibility vested in the ICC by section 11501(c) of the Act, supra, and the legislative history of that section, make it clear that the ICC, in order to carry out Congress' scheme, has ample authority to examine facts to the degree necessary to assure that the state is treating interstate rail carriers fairly. 81 In this case, the Indiana Commission's factual handling of the efficiency question suggests manipulation. In particular, for instance, the state commission focused on a comparison of the L & N to the Southern Railway, which has a general reputation of being one of the nation's most efficient and profitable railroads. See Petitioner's Brief at 28-29 (defending the comparison of the L & N to the Southern). If the Indiana Commission wants to inquire into efficiency, which it is certainly entitled to do, then it must do so on a more even-handed basis, in a manner that involves comparisons with a representative sampling of carriers during a relevant period of time (carriers having similar operating characteristics and profit potential) and that takes account of factors beyond the control of the railroad but potentially pertinent to its relative efficiency (e.g., differences in grades, operating characteristics, competition and other relevant factors). This the state commission did not do. 82 The Indiana Commission based its conclusion that the L & N was inefficient largely on a comparison of its profits with those of CSX, its parent, and with those of the Southern Railway based on financial operating data for one year, 1980. The comparison to the remaining subsidiaries of CSX can be ignored because the complainants' evidence did not probe any operating differences that might justify differences in profit margins. But see discussion below. Differences in operating characteristics, which were not considered, could well cause a difference in profits. 83 This left the finding by the Indiana Commission of inefficiency resting principally upon the comparison of L & N's operating performance to that of its closest competitor, the Southern Railway System. The comparative data in this respect indicated that for the year 1980 the L & N had a return on investment of 5.5 percent and the Southern had a return on investment of 7.8 percent. 365 I.C.C. 285-88. Here again complainants made an inadequate attempt to support their contention by failing to determine whether the different results could be attributed to differences in operating characteristics or other justifiable factors. It is absurd to determine the efficiency of a railroad by comparing it to another railroad without considering the differences, if any, between the two railroads' operating characteristics. And it is even more absurd to base such determination on a single year's operation. Railroad profits from year to year are highly volatile. They depend substantially upon the area the railroads serve, their operating conditions from year to year, financial conditions, their financial structure, the effect of the weather on crops, on operating conditions, the cost of fuel, the state of the local and national economy, the cost of disasters, and many other factors. 84 To illustrate the fatal defect of attempting to compare the rate of return of L & N to that of the Southern on the basis of the single year 1980, one need go no further than the financial data for the next two years. In 1981 the L & N increased its return to 7.04 percent while that of the Southern dropped slightly to 7.71 percent--a commendable showing by the L & N. 47 Fed.Reg. 52237-52238. But more importantly in 1982 the L & N bettered the Southern by earning 4.87 percent while the Southern's earnings fell to 4.36 percent. (ICC-Ex Parte No. 450 August 17, 1983). The Indiana Commission's highly selective comparison is self-evidently flawed. 85 The Indiana Commission's comparison of the L & N's 5.5 (6%) percent profit to the one year 10 percent profit of its parent CSX, however, is even more inapt. The CSX is not a railroad. It is a holding company--the parent of the Seaboard which absorbed the L & N by merger on December 29, 1982. Seaboard Brief at v. The Rule 8(c) certificate filed in this case by the Seaboard for itself and the L & N, both subsidiaries of CSX, indicates that the CSX is involved through subsidiary corporations in many other businesses other than railroads, including hotels and mineral and resources exploration and development. The listed affiliates of the L & N, through the parent CSX holding company, totalled 142 separate companies, Seaboard Brief at i-vi, and during this proceeding CSX acquired an additional 42 subsidiary companies. Id. at v-vi. So it was clearly erroneous for the Indiana Commission to rule that the L & N was inefficient because its holding company parent had a profit of 10 percent in 1980 and the L & N had a profit of 5.5 percent. The two companies are not comparable. 86 But let us pursue the Indiana Commission's theory further. The Rule 8(c) certificate, supra, indicates that CSX is the holding company for four Class I railroads as subsidiaries. Let us compare the profits for the last three years of these four railroads in the CSX portfolio. 87 ICC--Return on Investment L&N C&O (Chessie) Seaboard B&O 12 1980 13 5.5% 6.8% 7.0% 3.8% 1981 14 7.04 5.38 2.10 2.37 1982 15 4.87 5.33 1.38 0.35 ---- ---- ---- ---- Average 5.80% 5.86% 3.49% 2.17% 88 This data shows the complete folly of resting a finding of inefficiency on such irrelevant evidence as the 10 percent return that CSX earned from its entire operation as a holding company. If we make a relevant comparison--to other Class I Railroads--we find the L & N's average return on investment for the past three years exceeds that of two of CSX's Class I Railroad subsidiaries and is within 6/100ths (.06%) percent of the C & O, the best performing Class I Railroad in the CSX portfolio. In fact, of the 42 Class I railroads included in the 1982 ICC Revenue Adequacy Report, the most recent, the L & N ranked a very creditable 9th. 89 Based on 1980 data a railroad was found to be revenue adequate under the standards of the Staggers Act if it had a return on investment of 12.1 percent or higher. 365 I.C.C. 286. For 1981 the Railroad Cost of Capital had risen to 16.5 percent. 47 Fed.Reg. 52236. In 1982 it was 17.7 percent. ICC-Ex Parte No. 436, July 22, 1983. 90 Recognizing all of the foregoing, it is obvious that substantial evidence does not support the ruling of the Indiana Commission that the L & N was inefficient, or support the Commission's basic ruling that the burden of proceeding had shifted to the L & N to prove its efficiency. We agree with the ICC that complainants never satisfied the evidentiary requirements that would call for shifting the burden of proceeding to the L & N, much less placing upon the L & N the burden of proving that it was efficient. Thus, on this record there was insufficient credible evidence for the agency to reasonably find the L & N to be inefficient. 91