Opinion ID: 421082
Heading Depth: 2
Heading Rank: 3

Heading: The Essential Services Test

Text: 70 The ICC's policy statement on railroad mergers explains that there are two potential results from consolidations which would ill serve the public--reduction of competition and harm to essential services. 49 C.F.R. § 1180.1(c)(2) (1982). The Commission defines essential services as: 71 A service is essential if there is a sufficient public need for the service and adequate alternative transportation is not available. 72 Id. § 1180.1(c)(2)(ii). The ICC treats the existence of harm to competition or to essential services as a threshold test for when conditions may be needed to reduce the adverse effects of a merger. It will never impose protective conditions unless a merger will cause significant reduction in competition or harm to essential services. If a merger will reduce competition or harm essential services, the Commission will decide whether conditions are desirable by balancing the costs and benefits of imposing conditions. This subsection considers the ICC's use of conditions to protect essential services; subsection D considers the ICC's use of conditions to preserve competition. 73 In general, the ICC's use of the essential services test as a threshold test for when protective conditions deserve further consideration is unobjectionable. Leaving aside the requirement--not at issue in this case 20 --of a sufficient public need, the ICC defines an essential service as one for which an adequate alternative ... is not available. This definition simply restates the statutory requirement that the ICC consider adequacy of transportation to the public. 49 U.S.C. § 11,344(b)(1)(A). 21 Accord Brotherhood of Maintenance of Way [229 U.S.App.D.C. 32] Employees v. ICC, 698 F.2d 315, 319 n. 14 (7th Cir.1983) (Essential services are basically those the deprivation of which would result in inadequate service to the public.); cf. Missouri-Kansas-Texas Railroad v. United States, 632 F.2d 392, 400-04 (5th Cir.1980) (approving the ICC's use of an earlier definition of essential services), cert. denied, 451 U.S. 1017, 101 S.Ct. 3004, 69 L.Ed.2d 388 (1981). 74 It remains to consider whether the ICC properly applied the essential services test to Lamoille Valley. The ICC gave three reasons for concluding that there were adequate alternatives to Lamoille Valley's rail service. First, all three shippers who testified in favor of Lamoille Valley's request for protective conditions are either presently being served in part, or have been served previously, by truck. Furthermore, one shipper, E.T. & H.K. Ide Co., has access to [Canadian Pacific] rail in St. Johnsbury, [Vt.] Finally, no shipper claimed that it would be forced out of business if [Lamoille Valley] discontinued service. Boston & Maine Merger, 366 I.C.C. at 353.
75 The Commission's first reason for believing that Lamoille Valley's service is not essential has some probative force. It is plausible that a shipper formerly served by truck can again use trucks and that a shipper now served partially by truck can adequately be served entirely by truck. We must still determine, however, whether the record supports the Commission's belief that the individual shippers now served by the Lamoille Valley can be adequately served by truck. 76 We pass quickly over the one shipper, E.T. & H.K. Ide Co., which has access to Canadian Pacific's rail service, for that service is surely an adequate substitute for Lamoille Valley's service. For a second shipper, Lamoille Grain, the record shows that the price difference between rail and truck service is small. Indeed, as recently as 1980, Lamoille Grain switched from rail to truck because truck rates were slightly lower. It switched back only after Lamoille Valley reduced its rates to make them competitive with truck rates. 22 Thus, Lamoille Grain can be served adequately by truck. 77 The third shipper, Eastern Magnesia Talc Co., presents a much harder case. It operates a talc mine from which it ships talc by truck to some nearby locations and by rail (usually 100-ton hopper cars) to more distant locations. Eastern Magnesia Talc explained to the ICC that the cost of loading to truck, hauling to a [railhead], unloading, ... and loading to railroad cars would be prohibitively expensive and would effectively prevent it from serving distant locations. 23 78 In light of Eastern Magnesia Talc's uncontradicted statement about the need for rail service for a substantial part of its business, the Commission could not reasonably conclude that because Eastern Magnesia Talc uses trucks for part of its business, trucks are an adequate substitute for rail for the remainder of its business. We turn therefore to the Commission's alternate reason for concluding that Eastern Magnesia Talc could switch to truck service--that Eastern Magnesia Talc had not asserted that it would be forced out of business if it loses rail service.
79 As an initial matter, and despite Commission counsel's denial, it seems clear to us that the ICC is indeed using a business termination test to determine whether a substitute for rail service is adequate. The ICC's explanation, though terse, is unambiguous:[229 U.S.App.D.C. 33] While motor carrier service is more costly, it is a reasonably adequate substitute for [rail] service. None of the supporting shippers has indicated that it would be forced out of business if [Lamoille Valley] discontinued service. 80 Boston & Maine Merger, 366 I.C.C. at 353 (footnote omitted). Similarly, in approving Guilford's acquisition of the Delaware & Hudson, the ICC explained that the north-south service provided by Canadian National was not essential because, in part: 81 Nowhere in the record has it been shown that any of [its] customers would go out of business if [Canadian National's] rail service would be terminated. 82 Delaware & Hudson Merger, supra note 1, 366 I.C.C. at 420. The ICC has used similar phraseology in several recent cases approving abandonment of rail service. See, e.g., Missouri Pacific Railroad--Abandonment--Between Port Barre & Jefferson Island, Docket No. AB-3 (Sub-No. 27), slip op. at 5 (July 21, 1982) (not printed) (protesting shipper did not contend that the loss of rail service would put it out of business). 24 83 We can find no justification in the statute for use of a business termination test to determine whether alternative service is adequate, and indeed neither the ICC nor Guilford offers any. 25 The legislative history does not explain what Congress meant when it instructed the ICC to consider adequacy of transportation to the public. 26 Thus, we must give the word adequate its ordinary meaning. 84 A refusal to consider protective conditions unless alternative service is so expensive that shippers will be forced out of business does not comport with the statutory directive to take into account adequacy of transportation. The term adequate, as the Supreme Court noted long ago in a similar context, is a relative expression. Atlantic Coast Line Railroad v. Wharton, 207 U.S. 328, 335 (1907). For a shipper, loss of a service that it currently uses generally portends some decrease in profit, which can be anywhere from minor to devastating. If the additional cost involved in using an alternative service is small, the ICC need not be concerned. At the other extreme, if the added cost is so grave as to force bankruptcy, the alternate service is clearly inadequate, at least for that shipper. Somewhere between these two extremes, we pass from adequate to inadequate service. Within reason, the Commission has discretion to draw the dividing line as it sees fit. The business termination test, however, is too far to one extreme to be a reasonable definition of adequacy. 85 In seeking on remand to draw a better line, the Commission should inquire into how much more costly a proposed alternative is and whether loss of existing service will cause substantial harm to the local economy or to shippers who now use that service. With regard to individual shippers, if a shipper can use alternate service and still earn a fair return on capital, sufficient to generally maintain current operations and justify reinvestment of earnings, the [229 U.S.App.D.C. 34] alternate service would seem adequate. The same is true if the shipper can switch production to another plant without serious harm to the local economy. On the other hand, if a shipper cannot earn a fair return, or can do so only by sharply curtailing operations, the Commission probably ought to inquire further into the desirability of protective conditions. It is worth stressing that the essential services test is not a test for imposing conditions, but a test for when it is worthwhile to consider doing so. The ICC may do well, in close cases, to err on the side of reaching the merits of the underlying question whether protective conditions are in the public interest. 86 Sometimes, the profitability of individual shippers may be hard to assess, or a railroad may serve a large number of small shippers, insignificant individually but important in aggregate. The Commission may then want to consider whether most shippers in a particular industry rely on rail service. If not, that suggests that alternate transportation is probably an adequate substitute for shippers in that industry. If most shippers do rely on rail service, then alternate service is probably not an adequate substitute. 87 The Commission will also need to assess the importance of individual shippers. If the major shipper or shippers on a rail line can switch to truck, the Commission can reasonably find that truck service is adequate even if a few minor shippers cannot switch. Conversely, alternate service may be inadequate if a major shipper whose facility is important to the local economy cannot switch, even if most shippers can use the alternate service. Again, we urge the Commission, in cases of doubt, to proceed beyond the threshold essential services stage of its inquiry. 88 We note that our interpretation of adequacy of alternative transportation as meaning more than just not going out of business is consistent with past ICC interpretations. While there is no useful case law involving protective conditions for mergers (until recently, the ICC imposed a set of standard conditions on virtually every rail merger 27 ), abandonment cases provide a close analogy. 28 The abandonment cases do not define adequacy, but they do show that the ICC, in determining the public need for rail service, has inquired into the relative costs of rail and truck service. For example, in Northwestern Pacific Railroad Abandonment (Portion) Sausalito Branch, 312 I.C.C. 783, 789 (1962), the Commission found that abandonment was not warranted even though most of the shippers objecting to the abandonment use motortrucks for part of their shipments. The Commission noted that a distiller would be handicapped by the narrowing of the area in which it could purchase raw materials; a dealer in heavy diesel engines would incur added expense in shipping disassembled [229 U.S.App.D.C. 35] engines by truck and assembling them at destination; and a sailboat manufacturer would incur 40 to 50 percent higher [costs] in shipping sailboats by truck. Id. The Commission did not insist that the affected shippers claim they would be forced out of business by loss of rail service. 29 89 Recent court decisions are in accord. See Georgia Public Service Commission v. United States, 704 F.2d 538, 545 (11th Cir.1983) (reversing ICC approval of a rail abandonment): 90 The uncontroverted testimony ... is that ... the additional transportation costs [of truck service] would be prohibitive .... If the phrase alternative [transportation] is to have any meaning it must be interpreted to include transportation both logistically and economically feasible. 91 See also Indiana Sugars, Inc. v. ICC, 694 F.2d 1098, 1101 (7th Cir.1982) (abandonment would inflict serious hardships on sugar company that depended on rail for much of its inbound traffic).
92 We conclude that the ICC misconstrued its governing statute and failed to justify its belief that Eastern Magnesia Talc can be served adequately by trucks. Therefore, we remand to the ICC to reconsider Eastern Magnesia Talc's ability to switch to trucks. If Eastern Magnesia Talc cannot switch, the Commission will also need to consider two questions this opinion does not address--whether the needs of a single shipper make Lamoille Valley's service essential and, if so, whether the protective conditions sought by Lamoille Valley are in the public interest. 30 We order as follows: As discussed in part II supra, the merger as a whole is approved, but the ICC shall expeditiously consider whether it is in the public interest to impose protective conditions in order to preserve the Lamoille Valley's service. 31