Opinion ID: 403665
Heading Depth: 3
Heading Rank: 2

Heading: Adequacy of the Commission's Decision

Text: 47 Despite the narrowness of the issue and the scope of review in this case, we find the Commission's decision is only minimally adequate. The Commission has not responded to some important comments and has relied, in part, on inappropriate considerations. Nonetheless, it has sketched out a sufficient justification to omit a productivity adjustment from its initial cost indexing methodology. 48 The crux of the Commission's rationale is that available productivity measures are sufficiently unreliable, and the consequences of overestimating productivity growth are sufficiently grave, that it is inappropriate to adjust the cost index on the assumption of continued productivity growth. The Commission's assessment of the unreliability of productivity measures finds support in the record. Although one witness baldly stated that a productivity adjustment is simply an exercise in applied econometrics, see Verified Statement of Dr. George H. Borts, J.A. 566, the record before the Commission indicated that estimates of productivity growth are hardly a simple exercise. Some estimates are not proper measures of the impact of productivity growth on overall costs because they look at a single input. For example, the Bureau of Labor Statistics' output per manhour index fails to account for inputs other than labor. See Reply Verified Statement of Dr. Harvey A. Levine, J.A. 511. Efforts to estimate total factor productivity (output per unit of input), however, post significant methodological problems. The critical difficulty facing these studies is establishing a proper measure of railroad output. Witnesses explained that the conventional measure of railroad output-the ton-mile-produces distorted estimates of productivity trends. Under the ton-mile measure, one ton carried over ten miles and ten tons carried over one mile are treated as the same amount of railroad output. When the mix of rail traffic shifts to heavier items, like coal, ton-miles may increase independent of changes in railroad productivity. See id.; J.A. 508, 513. Such a shift may represent no net increase in railroad revenues; indeed, if railroads charge low rates for heavier commodities, increased ton-miles may even represent a decline in revenues. See id.; J.A. 508. In these circumstances, a downward adjustment in the cost index would be inappropriate. 49 The difficulties of accurately estimating productivity growth are also reflected in the diverse results of past studies. One study, by Dr. John W. Kendrick, found productivity growth to be as high as 5.2 percent per year. See id. (citing J. W. Kendrick, Post War Productivity Trends in the United States, 1948-1969, 78-79 (1973)), J.A. 512. Another study estimated that average productivity growth was low as 0.8 to 1.8 percent per year. See id. (citing Council on Economic Advisers & National Commission on Productivity, Task Force on Railroad Productivity, Improving Railroad Productivity 78 (1973)), J.A. 512. But even if the Commission could reconcile the expertise in estimating past productivity growth, it is by no means clear that it could develop a satisfactory mechanism for evaluating current productivity trends. This exercise in applied econometrics may yield a formula too low in predictive value to be reliable. Furthermore, it may be considerably more difficult to gather the relevant productivity data on a current basis than it is to price items in a market basket. Reliable current estimates, however, are of central importance to section 203's function of allowing railroads to recover costs promptly. Were the Commission to simply follow the shippers' suggestions and assume that future productivity trends will match past experience, it could over-deflate the cost index, thereby denying railroads the timely and unencumbered rate increases they deserve. 28 50 These methodological problems take on greater importance in the light of the Commission's short statutory deadline for developing a cost index 29 and the generally inadequate state of rail revenues. In times of inadequate rail revenues, erroneous assumptions about efficiency gains pose a more serious threat to the solvency of railroads. As the Commission noted in its Notice of Proposed Rulemaking, crude measures of productivity growth, such as the Bureau of Labor Statistics' output per manhour series, tend to be distorted by short run cyclical factors. 45 Fed.Reg. 81218; J.A. 601. Similarly, a simple assumption that productivity growth will follow average trends, ignores the impact of the business cycle on a railroad's ability to reduce its costs through efficiency measures. See Verified Statement of Dr. Paul O. Roberts & Dr. Brian C. Kullman, J.A. 69. Rather than adopt one of these measures and risk the possibility of overdeflating the cost index at times when railroads are also suffering adverse effects of the business cycle, the Commission opted for an index that provides a greater assurance of cost recovery. So long as the Commission follows through on its stated intention to review the index against current cost data, taking appropriate action in the event of overrecovery, we cannot say that its decision to err on the side of assuring cost recovery is arbitrary.