Opinion ID: 403665
Heading Depth: 3
Heading Rank: 3

Heading: The Commission's Remaining Justification

Text: 51 More troubling are the Commission's remaining policy justifications for omitting a productivity adjustment. These policy arguments suggest that the Commission may be taking the position that a productivity adjustment would never be appropriate, or at least would never be appropriate during periods of revenue inadequacy. 30 If it were so, our doubts as to the Commission's rationale would be multiplied. We reiterate that in the event that the Commission's experience with the modified AAR index indicates that it provides significantly distorted estimates of railroad costs, the Commission would have to provide a more adequate explanation of its rationale for ignoring the impact of productivity on railroad costs. 52
53 The Commission's decision suggests that the effect of a productivity adjustment on railroads with below average productivity performance justifies omitting productivity as a factor in its cost index. The Commission explained that a productivity adjustment would reduce the ability of railroads to recoup their costs even if their below average performance is beyond their control. As a hypothetical example, the Commission posed the case of a productivity breakthrough for bulk commodities. It noted that such a breakthrough would improve industry average statistics, but would be of little benefit to railroads whose traffic was predominantly nonbulk in nature. 364 I.C.C. at 847; J.A. 931. 54 Petitioners argue that the fallout of any statistical average on individual carriers is not a proper concern in developing an index. While we see no need to decide whether the Commission could ever bias its index in favor of those railroads that experience above average costs, we think it noteworthy that the Commission has elsewhere rejected such a biased methodology. In particular, the Commission rejected a proposal by the railroads that would have allowed railroads to increase their rates by either the national index or a regional index. Its ground for rejecting that proposal was precisely the ground urged by petitioners in this case: that such an approach would permit the actual national average level of rates to increase more rapidly than the national average of costs. 364 I.C.C. at 852; J.A. 934. Should the Commission adhere to its penalty analysis, we would expect it to explain why productivity should not be averaged, while disparate regional prices are averaged into the same index. 55
56 A familiar principle of rate regulation is that regulated rates should approximate rates under competitive conditions. See A. Kahn, 1 The Economics of Regulation 65 (1970). Relying on this principle, shippers argued that under competitive conditions, productivity gains would be passed along to consumers. See, e.g., Verified Statement of Leroy E. Peabody, J.A. 820-21. The Commission rejected this justification for a productivity adjustment, reasoning that productivity gains are not passed along to consumers under competitive conditions when a firm's revenues fail to cover its costs. See 364 I.C.C. at 847; J.A. 931. Since the Commission had previously found in revenue adequacy proceedings that railroads were receiving inadequate revenues, it concluded that productivity savings should not be passed along to shippers. See id. 57 We agree with petitioners that revenue adequacy is not a proper justification for omitting a productivity adjustment. The Staggers Act provides a twofold process for assuring revenue adequacy: an inflationary cost index and a rate flexibility zone for rate increases above costs. Under this two part structure, the purpose of the inflationary cost index is simply to allow railroads to raise their rates to reflect current costs. See pp. 16-20 supra. While the statute does not prohibit adoption of an index that incidentally boosts a railroad's net revenues, increasing net revenues is not a proper reason for refusing to make otherwise appropriate adjustments. Nonetheless, as we have observed, the inadequate state of rail revenues does provide the Commission with grounds for caution in the light of the unreliability of productivity measurements. Thus, while we disagree with the Commission that inadequate revenues provide an independent reason for not adjusting the index, we do concede that the Commission properly concluded that an imprecise adjustment would pose greater risks in times of revenue inadequacy. 58
59 We also fail to find a reasoned basis for the Commission's assumption that an average productivity adjustment would undermine incentives for productivity growth. Although the Commission retreated from its original statement that a productivity adjustment would eliminate such incentives, it has continued to assert that a productivity adjustment would have an adverse effect on incentives for productivity growth. 31 In adhering to this position, the Commission has failed to provide any supporting analysis, or answer cogent arguments made by the shippers' witnesses. These witnesses argued that an average adjustment for productivity growth should not affect the incentives facing any individual railroad. 32 They suggested that if automatic rate increases were adjusted for average productivity growth, individual railroads would have an incentive to recoup gains from above average performance or to avoid the penalty effects of below average performance. While we recognize that the science of quantifying economic incentives is far from exact, we would expect the Commission to provide some indication of its answer to these significant comments. Otherwise, the Commission's bald assertion that a productivity adjustment would adversely affect incentives for productivity growth is an inadequate basis for ignoring potentially significant element of railroad costs.