Opinion ID: 383816
Heading Depth: 1
Heading Rank: 12

Heading: C.C. at 380

Text: 46 The revenue need level is contrasted with a calculation of costs at what is called the strict cost level, which incorporates no return on equity capital, but utilizes only the embedded debt rate. (J.A. III, p. 1966). In this opinion we have referred to the strict cost level as the imputed interest level. The Commission, in arriving at its variable cost figure, calculated the Rail Form A figure at the strict cost level but calculated the additives at the revenue need level. (J.A. III, pp. 1968-1973). The Commission did not attempt to explain the propriety of using the revenue need level which reflects a return on equity capital in excess of the cost of borrowed capital 47 We note that Congress now mandates that in calculating cost for purposes of market dominance, the return on equity capital be limited to a rate equal to the embedded cost of debt. § 202, Staggers Rail Act of 1980 47a Although Texas does not address the distinction between the traditional notion of return on equity, which would include a profit or risk of ownership element, and what we have called the imputed interest level or cost of debt capital, we assume Texas is referring to the traditional notion. 48 The terseness of the Commission's explanation creates an ambiguity we cannot resolve. To understand the ambiguity, one must distinguish among: (1) the incremental fixed plant investment calculated by the additive, (additive incremental fixed plant investment), (2) the incremental fixed plant investment calculated by Rail Form A (Rail Form A incremental fixed plant investment), and (3) the existing fixed plant investment which does not increase with a movement (existing fixed plant investment). The ambiguity arises because the Commission does not indicate whether it considers all Rail Form A incremental fixed plant investment to have been eliminated by its modifications. When the Commission states that the cost overstatement results because there is some remaining system investment in Rail Form A, it does not specify whether this is a portion of Rail Form A incremental fixed plant investment or existing fixed plant investment. Its statement that CP&L uses a portion of the existing fixed plant suggests that it means existing fixed plant investment. If the Commission means that the overstatement results from an allocation of existing fixed plant investment to CP&L's movement, then the Commission has apparently allocated a portion of constant costs to CP&L's traffic. Under the Commission's definition of variable cost for the revenue/cost presumption, see 353 I.C.C. at 911, such an allocation of constant costs is improper. On remand, the Commission should set forth whether all Rail Form A incremental fixed plant investment has been eliminated, and if not, why the resulting double count is insignificant. It also should explain the extent of duplication between the additive incremental fixed plant investment and the existing fixed plant investment, if any, why any such double count is insignificant, and why an allocation of existing fixed plant investment, which is a constant cost, is necessary or proper in calculating variable costs. 49 In San Antonio I, 361 I.C.C. at 487, the Commission indicated that it was unable to precisely calculate the overstatement. The Commission has used the same reasoning in rate-making cases to justify its methodology in that context despite the overstatement. BN-Iowa at 43; Kings Mill at 34. We express no opinion as to the reasonableness of the Commission's approach in rate-making cases 50 We can only agree with the District of Columbia Circuit's comment that the Commission's reasoning and methodology respecting the additive are murky at best. San Antonio II, 631 F.2d 831 p. 842 (D.C. Cir. 1980) 51 The Commission indicates without elaboration it has adopted the railroads' method of modifying Rail Form A to remove the double count. (J.A. III, p. 2050). The railroads most fully describe their method for eliminating the double count of incremental fixed plant investment from Rail Form A in the testimony of John Darling. (J.A. III, pp. 1378-1382) Regardless of whether our portrayal of the modification to Rail Form A is accurate, we believe that CP&L's objections were not frivolous and merited a fuller discussion than that afforded by the Commission. CP&L strenuously objected that the justification of its methodology given by the Commission in prior cases indicated that the Commission misunderstood fundamental mechanics behind the Rail Form A calculation. 52 As an example, the railroads maintain that a distinction has been made in the incremental investment in ties and ballast between that incurred solely as a result of CP&L's unit coal train movement and that incurred as a result of increased traffic volumes, including CP&L's movement. Although not stated explicitly, the railroads apparently mean by an investment being incurred solely as the result of unit coal train traffic an investment which would not occur but for the existence of the coal train or is attributable to special characteristics of coal trains not found in other trains, such as the need for heavier than average rail. That portion of incremental investment in ties and ballast incurred solely by CP&L's unit coal train movement has allegedly been included in the additive while that portion resulting merely from increased volume allegedly is reflected in the Rail Form A calculation. (J.A. II, p. 1381) 53 J.A. III, p. 2040. We are concerned that the figures actually relied upon by the Commission did not as a matter of fact include any modification to the Rail Form A calculation. While the Commission stated that it had adopted the railroads' methodology in justifying its conclusion that no significant overstatement of cost occurred, it used predominantly CP&L's Rail Form A calculations, for which there was no such modification, to derive variable costs. See J.A. III, p. 1968. The District of Columbia Circuit was concerned that the same mistake was made in the calculation in San Antonio II, supra, p. 843 n.65. On remand the Commission shall specifically address this concern 54 In the past and in the context of rate-making, the Commission has justified the use of the additive and adjustment on the grounds that without the modification Rail Form A adds the predicted increment in plant to the existing plant and then allocates all the costs, which includes constant and variable costs, associated with this total plant investment to all movements. The Commission argues that the allocation of the heavier than average investment necessitated by unit-coal trains to other shippers is unfair. BN-Iowa, at p. 41; Arkansas Power, San Antonio I, Flint Creek, Kings Mill, Smithers Lake. By including in the additive, and excluding from Rail Form A, the increment in fixed plant occasioned solely by the unit coal trains, this figure is not used in the allocation of costs to all shippers. It very well may be that this reasoning, in the context of rate-making in which constant cost is a relevant concern, is legitimate and proper. We express no opinion on the Commission's rationale in that context. However, comparison should be made to San Antonio II, supra, which apparently rejected this reasoning 55 The Commission has suggested that the additive reflects the difference between larger coal related investments and the system average investments. BN-Iowa, at p. 43. The record, however, fails to make clear whether the additive has only the excess of the incremental investments over the systemwide average incremental increase associated with a volume increase. For example, we are unable to determine whether the additive has only the excess cost of the heavier than average rail required by coal trains over the cost of normal rail required by ordinary traffic, or whether the additive contains all the costs of the heavier than average rail. See the suggestion in the text immediately below that the entire cost of ties and ballast on part of the line, rather than only the excess, was included in the additive. On remand, the Commission should clarify this point 56 Although our Celanese opinion does approve in principle the analysis of the San Antonio II opinion, as we do in the instant case, we do not read Celanese as requiring the adoption of the remedy suggested in San Antonio II as the only possible remedy for the double count problem. The remedy suggested in San Antonio II was the absolute elimination of all rail investment from Rail Form A if the additive includes investment in new rail. We are not sure that San Antonio II itself mandates this as the only remedy for the double count. See San Antonio II, at 842, note 62, and especially at 844, note 71. We leave open the possibility that the Commission on remand might, for example, include in the additive only the excess costs for the heavy coal rail, while leaving in Rail Form A the costs for normal rail. See also San Antonio II, supra, at 844 note 71 (suggesting that including in the additive only such excess costs and leaving such normal costs in Rail Form A would satisfy the San Antonio II principle that cost categories in the additive and in Rail Form A be mutually exclusive). While we do not mandate a particular remedy, we do mandate that the double count be eliminated, and that the Commission demonstrate how the elimination is accomplished. Accord Celanese 57 CP&L claimed it had made investments of over $40,000,000 consisting of automated rail-car unloading facilities and support equipment, construction of 5.3 miles of loop track, and over 340 special coal cars. (J.A. I, pp. 40 and 364). CP&L, however, offered evidence of the cost of only the coal cars, indicating these cars cost in excess of $15,500,000. (J.A. I, p. 364). The Commission did not specify which equipment it concluded CP&L had purchased, but used only the figure 58 The railroads argue that CP&L has failed to prove that this investment is substantial because CP&L failed to come forward with a comparison of this investment with its total production and transportation costs. The railroads argue that in Ex parte No. 320, Final Report, the Commission required evidence of such a comparison in considering the substantial investment presumption. 355 I.C.C. at 20. It is not clear that this citation is in point since the Commission was there noting that with a small shipper an investment may be substantial even though small in absolute amount when compared with that shipper's total production and transportation costs. Although the thrust of Ex parte No. 320, Final Report, taken in its entirety, would seem to suggest that an investment as large as $15,500,000 would, by itself, qualify as substantial, the Commission has stated elsewhere, If the capital investment represents substantial portion of the total transportation cost, then the rail carrier may be in a position to increase its rates substantially without fear of diverting a significant amount of traffic to the other mode. Ex parte No. 320, Interim Report, 353 I.C.C. at 916. On remand, the Commission should clarify whether a $15,500,000 investment alone is sufficiently substantial, whether a comparison must be made with other transportation cost, and who has the burden of making the comparison 59 We read the Commission's finding of the existence of competing rail carriers to be that there are existing rail carriers capable of competing for the movement from Axial to Coleto Creek; we do not think the finding was addressed to the possible existence of rail carriers serving other sources of coal to which CP&L might have turned. The Commission made a separate, specific finding that alternative domestic sources exist, with rail service or other transportation available to serve those sources. The separate finding makes it clear that the finding of available competing rail carriers refers to the Axial-Coleto Creek movement; otherwise, the two findings would be redundant 60 There is no indication that the Commission took official notice of any fact not appearing in the record as provided for in 5 U.S.C. § 556(e), which might bear on the existence of rail lines which could serve the bridge segment 61 While CP&L did ask for a quote from the Missouri Pacific for the bridge segment, the Missouri Pacific refused to bid for this segment. The Missouri Pacific's refusal to bid effectively eliminated this rail carrier as a competitor for the bridge segment 61a There is an indication that CP&L once met with officials of SP and Burlington Northern to have Burlington Northern work out a joint rate with D& RGW and with SP. (J.A. II, pp. 859-860). There is also a reference to a complaint by a CP&L official that CP&L had received no rate figures from the three bridge carriers, Santa Fe, Burlington Northern and Missouri Pacific. (J.A. II, p. 806). Of course, Missouri Pacific declined to quote. 62 Below, in Part VIII.C., Commission's Finding of Geographic Competition after the Colowyo Contract, we discuss the strong possibility that CP&L was locked into the Colowyo contract and was thus committed to purchasing coal from Axial, Colorado. If CP&L is thus locked in, there could be no consideration of alternative domestic sources 63 See below, Part VIII. Geographic Competition 64 Below, in Part VIII.C., Commission's Finding of Geographic Competition after the Colowyo Contract, we discuss the strong possibility that CP&L was locked into the Colowyo contract and thus locked into purchasing coal from Axial, Colorado. If CP&L is thus locked in, there could, of course, be no consideration of alternative modes utilizing Texas seaports 65 The time for the round trip from Axial, Colorado, and back is 172 hours (J.A. III, p. 1936), while an exhibit for CP&L indicates that a round trip for a truck from Corpus Christi harbor and back is approximately 4 hours. (J.A. I, p. 142) 66 The Commission likewise needs to amplify its reasoning as to why it believes the coal from South Africa makes the sea-rail mode a viable alternative. We see nothing in the Commission's findings indicating that it looked to the long-range availability of the South African coal or to the quantities necessary to make this alternative truly competitive with the coal, and the concomitant transportation, from Axial, Colorado 67 Geographic competition is described by the Commission as shipper use of alternative destinations or sources for the products to which the rate applies. Ex parte No. 320, Interim Report, 353 I.C.C. at 900 While the Commission at one point in its decision here noted that alternative product competition (i. e., a substitute for coal) had been shown, its decision at all other points emphasizes the existence of geographic competition. Because there is no evidence in the record concerning alternative product competition, we vacate the Commission's finding of the existence of alternative product competition. 68 The Commission explains neither in its opinion nor in its brief why the existence of geographic competition would rebut only the revenue/cost presumption. We do not place any significance on this peculiar feature of the ICC's opinion, but treat in general whether there may be rebuttal evidence of geographic competition after the establishment of any of the presumptions 69 The assignment clause reads: This agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Either party may assign its interests herein without obtaining the consent of the other party (a) to provide security in connection with any financing, expressly including, by way of example and not limitation, assignments of royalty, overriding royalty or net profits interests or production payments; or (b) as a part of any merger, consolidation or other reorganization or transfer by operation of law or by purchase of the business of, or substantially all of the assets of, one of the parties. Except as so provided, neither party may assign its interests herein unless the assignee assumes in writing Assignor's obligations hereunder and without the prior written consent of the other party, which will not be unreasonably withheld. No assignment shall operate to relieve the Assignor of its obligations under this agreement. 70 Section 10709 was originally passed as part of § 202 of the Reform Act. The definition of market dominance in § 202 was  'market dominance' refers to an absence of effective competition from other carriers or modes of competition, for the traffic or movement to which a rate applies. In the 1978 recodification of the Interstate Commerce Act, the phrase traffic or movement was changed to transportation. Section 3(a) of Pub.L. 95-473, 92 Stat. 1466, the act implementing the recodification, provides that the recodification shall not be construed as making a substantive change in the prior law 71 The Commission may want on remand to consider any enlightenment the Staggers Rail Act of 1980, together with its legislative history, has upon the meaning of market dominance as used within the Interstate Commerce Act 72 In their briefs, CP&L and Texas state that the District of Columbia Circuit has held in Atchison, Topeka & Santa Fe Railway Co. v. ICC, supra, that the language of § 10709 bars the Commission from considering geographic competition. We do not so read Atchison, Topeka & Santa Fe. There, the District of Columbia Circuit held that the Commission's initial reading of § 10709 as precluding geographic competition was reasonable. 580 F.2d at 634. Not addressed there was the question we now decline to address-whether a reasonable reading of § 10709 would permit consideration of geographic competition in determining effective competition 73 The reasoning of the Commission deserves extensive quote: The focus of our analysis is section 202 of the 4R (Reform) Act which defines market dominance as 'an absence of effective competition from other carriers or modes of transportation for the traffic or movement to which the rate applies.' With only this brief definition as a guideline, this Commission is specifically directed to establish both standards and procedures for making market dominance determinations, and to design rules to provide for 'a practical determination without administrative delay.' After assessing the statutory language and considering the need for quickly identifying whether effective competition is present, we have concluded that the appropriate market is the market for transportation services which directly compete with the services outlined in the tariff under consideration. Limiting consideration to direct carrier competition is consistent with the express language of the legislative definition, and is essential to making practical determinations in a short time period. The contention of some of the parties that use of the word 'traffic' in conjunction with the word 'movement' requires consideration of a broad range of movements of various commodities moving from various sources to various destinations must be rejected. The 4R Act speaks of 'the traffic or movement to which the rate applies.' When used in this context in the transportation industry, the word 'movement' refers to transportation from a single origin point to a single destination point, while the word 'traffic' commonly denotes transportation services from a named set of points to another point or set of points; from specific origin points or areas to rate groups or blanket areas; or between stated mileage brackets on particular commodities in a given territory. There is no language in the legislation which would warrant the extension of the phrase 'the traffic or movement to which the rate applies' beyond transportation services which are comparable to that described in the issue tariff. Even if the market definition of the 4R Act were not so explicit, practical considerations would force us to the same conclusion. It is true that the forms of competition which the railroads, Justice, and DOT have discussed, such as product substitution and geographic competition, could have an impact upon the ability of rail carriers to raise their rates. Nevertheless, determining whether these factors have a significant impact in a particular case would require lengthy antitrust-type litigation, as the interplay which affects competition for the sale of a product and competition for transportation services is very complex. If the parties concentrate their efforts on gathering and presenting evidence of direct carrier competition, then the Commission will be able to make these threshold determinations promptly, and the expense to the parties and the public will be minimized. 353