Opinion ID: 440434
Heading Depth: 2
Heading Rank: 3

Heading: Evaluation of the Review Board's Market Dominance Determination

Text: 15 Cognizant of these principles of review, we evaluate the Review Board's decision in this case that petitioner had not shown market dominance. We will evaluate the Review Board's conclusions with respect to each of the four types of competition considered under Market Dominance Determinations, supra, in order to determine whether these conclusions are the product of reasoned decisionmaking and are supported by substantial evidence in the record as a whole. 16 1. Intramodal competition. The Review Board noted that [the railroads] do not seriously contest market dominance on the ground of intramodal competition. Review Board Op. at 5, JA 486. Transportation of oil to petitioner is handled by the various defendants based on geographic considerations, id., in that transportation between a given origin and a given destination is handled by the railroad that serves that route. Therefore, the Review Board appropriately refused to find any intramodal competition that would be sufficient to keep the railroads from having market dominance on the several routes being challenged. 17 2. Intermodal competition. 18 (a) Truck transportation. The ALJ found that trucks did not provide effective intermodal competition with railroads for the shipments of oil at issue in this case. The Review Board reversed the ALJ's finding for the following reasons: 19 In [a prior case], it was concluded that although the railroads transported more than 90 percent of the subject traffic, motor carrier competition was, nevertheless, feasible. That is similar to the instant situation, where, as pointed out above, for the limited fuel oil movement that is utilized by the complainant, the [railroads] handle 88 percent and motor carriers transport 12 percent. Therefore, as in [the prior case], we conclude that motor carrier competition is feasible.    For competitive pressures to be present, a competing mode would not need to be capable of handling substantially all or even a majority of the subject traffic.    We conclude that complainant has failed to show that motor carriers do not exert competitive pressure upon rail carriers for the traffic in issue. 20 Review Board Op. at 5, JA 486 (citation and footnote omitted). 3 21 The Review Board's reasoning here seems to go as follows: Petitioner showed only that railroads carry a vastly greater percentage of the oil traffic than do trucks. Petitioner's use of railroads to transport its oil is consistent with the hypothesis that trucks provide effective competition for the railroads. This can be the case if, for example, truck rates are just slightly above rail rates and railroads can therefore maintain their market share only if they do not raise rates and provide services equal to or better than trucks. Therefore, petitioner has failed to prove that the railroads have market dominance in transporting oil on the challenged routes. 22 This argument is insufficient to support the Review Board's conclusion. ICC's own guidelines state that [e]ffective competition from motor carriage may be deduced from, inter alia, the amount of the product in question that is transported by motor carrier. Market Dominance Determinations, supra, 365 ICC at 133. Petitioner submitted probative evidence of precisely the kind that the Commission's rules encourage complainants to submit, and the Commission may not refute that evidence with the bald statement that such evidence is not absolutely conclusive on the issue. The reasoned decisionmaking requirements of Section 10 of the APA preclude setting this kind of trap for an unwary litigant. 23 Moreover, the Review Board's opinion inexplicably ignores considerable--and highly significant--evidence concerning market power that petitioner introduced in addition to the evidence as to relative market share of railroads and trucks. Most important was the evidence summarized above that truck rates were 30% to 50% higher than rail rates for transporting residual oil over the same routes, and 20% to 60% higher for distillate oil. The Commission's guidelines state that evidence of effective competition may include the transportation costs of the rail and motor carrier alternatives. Id. Such evidence is highly probative on the issue whether trucks provide effective competition for railroads for the given routes. At the core of the effective competition standard is the idea that there are competitive, market pressures on the railroads deterring them from charging monopoly prices for transporting goods. Of course, any such effective competition will always be relative to a particular price that the railroads charge. At some point the availability of an alternative such as the horse and buggy or even people carrying oil in buckets theoretically prevents railroads from raising their rates beyond an outer bound. But the mere existence of some alternative does not in itself constrain the railroads from charging rates far in excess of the just and reasonable rates that Congress thought the existence of competitive pressures would ensure. All record evidence in this case shows that truck rates are much higher than railroad rates for comparable services, and there is no suggestion in this record that the truck rates are higher because of any superiority in truck transportation of oil. Indeed, the record shows truck transport to be inferior due to the limited truck off-loading facilities at petitioner's plants. ALJ Op. at 14, JA 386. Nothing in the record tends to suggest that in the special circumstances of the particular market the truck rates exert significant competitive pressure on railroad rates, and the Review Board does not draw our attention to any such special circumstances. Thus, even given the requisite degree of deference under the substantial evidence test, this record will not support the conclusion that trucks provide effective competition for the railroads at current price levels. 24 (b) Pipeline transportation. Intervenor railroads urge that, even if the Review Board were incorrect concerning intermodal competition from trucks, the challenged railroads nonetheless face effective intermodal competition over the challenged routes from pipelines. In the section of its decision labeled Background the Review Board did briefly mention the fact that fuel oil by pipeline (mainly distillate oil) is much cheaper than comparable quantities by rail. Review Board Op. at 3, JA 484. See also ALJ Op. at 8, JA 380 (pipeline charge is 79.7 cents and rail rate is $2.72 to transport a barrel of oil over the identical route). It is far from clear that the Review Board relied on the existence of the pipeline in reaching its determinations; it is not mentioned in the Board's discussion of intermodal competition in the section of the opinion labeled Discussion and Conclusions. Thus intervenors' argument must be viewed as an impermissible post hoc rationalization of ICC's decision. 25 Even if ICC had relied on such a line of reasoning, however, we find no evidence in the record to support the conclusion that the pipeline provides competition for the challenged transportation. First, all parties agree that, contrary to the Review Board's statement, residual fuel cannot be transported via the available pipeline; the pipeline could therefore only provide intermodal competition--if at all--for transportation of distillate oil. Second, the ALJ's careful opinion notes several reasons why pipeline transportation is not generally available to petitioner: No pipeline service extends to any of the destinations of the assailed rates except the Phoenix power plant, ALJ Op. at 8, JA 380, and [petitioner] has shipped to Phoenix as much of its distillate requirements via the pipeline as the capacity allotments by [the pipeline company] to [petitioner] would permit. Id. Third, the difference in rates itself suggests that the challenged rail transportation is relatively unaffected by pipeline competition, for petitioner would presumably not use the railroads at all if the pipeline were available to supply service at a vastly lower price. 26 In short, petitioner introduced convincing evidence, of precisely the kind that the Commission's own guidelines call for, to the effect that--under current market conditions--motor carriers provided no effective competition whatever for the challenged transportation. In rejecting this evidence the Review Board pointed to nothing in the record that might reasonably be viewed as factual support for the position that intermodal competition constrains prices in this case. Thus the Review Board's conclusion with respect to intermodal competition must be viewed as arbitrary and capricious and lacking substantial supporting evidence in the record. 27 3. Product competition. The Review Board held that [a] more complete and total picture of product competition and, in fact, substitution, is difficult to imagine. Beyond question, product competition exists for this market. Review Board Op. at 6, JA 487. This conclusion is derived from the following discussion: 28 Product competition exists when a receiver or shipper can use a substitute for the product covered by the rail rate in issue.    The record here shows beyond doubt that product competition is present and controlling. Of the remaining 23 power plants still involved in the complaint, 4 of them use coal (except oil is used to a minor extent for igniting the generators) and 17 use and have used natural gas exclusively, for periods represented on this record as varying from 3 to 6 years. Only 2 of the power plants depend on oil as their fuel. 29 Id. (citation omitted). The Commission now concedes, as it must, that the Review Board made a factual mistake in finding that only two plants depend on oil as their only fuel. In fact, petitioner operates five plants that depend solely on oil. See brief for respondents at 19 n. 20. The question remains, nonetheless, whether the Review Board's holding that product competition exists beyond doubt was a product of reasoned decisionmaking based on the current record. 30 According to ICC's definition, [p]roduct competition occurs when a receiver or shipper can use a substitute(s) for the product covered by the rail rate. Market Dominance Determinations, supra, 365 ICC at 128. The fact that petitioner operates plants that burn coal and natural gas does not lead ineluctably to the conclusion that coal and natural gas provide product competition for oil. Such competition would only exist if, among other things, petitioner could readily substitute coal or natural gas for oil and if these alternative fuels were available in sufficient supply to restrain oil price increases (which of course include the railroads' cost of transporting oil). Petitioner introduced evidence--largely credited by the ALJ--on both substitutability and availability. The Review Board shows no indication of having looked at the record (or even the ALJ's decision) in this case closely enough to have been aware of this evidence. 31 (a) Coal as a substitute. We need not expend a great deal of time on the possibility that coal provides competition for oil in the context of this case, for we are unable to find any evidence that coal is in any way an acceptable substitute. To be sure, it is the fuel that petitioner uses to meet its base load requirements, see ALJ Op. at 9, JA 381, and we have no doubt that there may be many contexts in the national economy in which coal and oil are equally acceptable as fuel sources. However, the Review Board was adjudicating this case based on evidence submitted by these parties. In the context of this case oil is used for two purposes: (1) to stabilize combustion in the coal plants and (2) to meet peak load demands. See ALJ Op. at 9-10, JA 381-382. There was no evidence that coal itself can be used to stabilize combustion in the coal-fired plants. And there was no evidence that petitioner, having made the capital investment necessary to use oil or natural gas for the peak load plants, could use coal as a substitute to meet peak load demands. Therefore, petitioner demonstrated that its demand could not be satisfied by coal, and we find no support for the Review Board's evident conclusion to the contrary. 32 (b) Natural gas as a substitute. The question remains whether natural gas provided product competition for petitioner's use of oil. Petitioner introduced significant evidence that natural gas did not provide product competition for oil. 33 (i) Substitutability to stabilize combustion in coal-fired plants. First, we are unable to find any evidence that petitioner could have used natural gas in place of the oil used to stabilize combustion in its coal plants. The Review Board's only comment on this is that petitioner has minimal fuel oil requirements to merely ignite the generators. Yet the grounds for concluding that the 80,000 barrels per year used for this purpose, see ALJ Op. at 9, JA 381, are minimal and therefore in some way outside the protection of the Staggers Act are not clear in the Review Board's opinion. Even if applicable laws would give ICC some discretion to decline to regulate rates on routes over which relatively small quantities of a commodity are shipped, and we have found nothing in the statute or legislative history to so indicate, the Commission would have to exercise this discretion in a reasoned fashion. The Review Board here seems to have entirely disregarded petitioner's use of oil in its coal plants on the basis of pure administrative fiat. 34 (ii) Substitutability in peak load plants. Second, the ALJ found that petitioner could not substitute natural gas for oil in its peak load plants. The ALJ made it clear that petitioner's demand for oil had some unique characteristics. The nature of the electrical generating industry is such that a utility must have capacity to generate electricity as it is demanded by its customers; a utility does not generally have the option of limiting its output to what it is able to produce at its base load plants. The utility must thus be able to respond to higher demand levels quickly by making use of its peak load plants. Whatever fuel is used in these plants must be readily available in sufficiently large quantities to meet peak demands. In addition, these fuels must be available in the specific types that will enable petitioner to comply with state environmental regulations. 35 Petitioner uses natural gas and oil to meet its peak load demands. Under current circumstances petitioner in fact relies on natural gas for the bulk of its demand because natural gas is readily available, is much less expensive, and comports more easily with environmental regulations. Under these circumstances, natural gas is so vastly preferable to oil as a fuel to meet peak load demands that petitioner burns oil only when it must--that is, when natural gas is for some reason unavailable to meet petitioner's needs. In these situations natural gas cannot be considered a substitute for oil and the price of natural gas thus will not constrain the railroads' ability to charge excessive rates for shipment of oil. 4 36 Although the Review Board may be correct in its belief that natural gas is substitutable for oil in some places in our national economy, its conclusion that natural gas is substitutable in this case is pure conjecture, and cannot be squared with the facts found by the ALJ and left unrefuted by the Review Board. At the very least, evidence of product competition is inconclusive. Market Dominance Determinations, supra, 365 ICC at 130. Therefore, under the Commission's own guidelines this factor is to receive minimal consideration. Id. Congress' determination that economic concepts such as market dominance should be prerequisites to ICC regulation of a given rail rate was not a license for the Commission to adjudicate a party's rights on the basis of facts originating in its own imagination. We therefore find the Review Board's conclusion with respect to product competition to be arbitrary and unsupported by substantial evidence in the record. 37 4. Geographic competition. The Review Board found that the railroads faced geographic competition on the challenged routes. The Board noted that the origins listed in the instant complaint are complainant's principal sources but not its only sources. On account of the uncertainties surrounding oil production, complainant must maintain a broad spectrum of sources. Altogether, there are hundreds of refineries from which complainant can buy fuel oil. Review Board Op. at 6, JA 487 (emphasis in original). Although the Review Board's reasoning is far from clear, presumably it believed that these hundreds of other sources of oil in the country would be adequate for petitioner's needs. It would follow that the availability of oil from these other sources would put competitive pressures on the railroads to hold down their own rates on the challenged routes. 38 We reject the Review Board's conclusion. To be sure, there are indications in the record that petitioner has used oil from refineries not on the challenged routes in the past. If considered in isolation, that fact might provide some marginal support for the proposition that there is geographic competition in this case. However, our charge is to review the Commission's action to determine if it is supported by substantial evidence on the record as a whole. See NLRB v. Universal Camera Corp., supra. We find that it is not. 39 Petitioner submitted evidence indicating that oil from other sources, though occasionally useful in the past, was insufficient to meet its needs, which include sporadic, urgent demands for oil of the particular grades and qualities that would comport with environmental regulations. The ALJ found that [t]he origins involved in this proceeding are the principal sources available to [petitioner] of the residual and distillate fuel oils it needs and the rates assailed apply to the principal oil movements upon which it would have to depend when major burns or the greatest need for such oil occurs. ALJ Op. at 5, JA 377. 40 The Review Board did not disagree with the ALJ's findings. The Board instead attempted to capitalize on the ALJ's use of the word principal to construct an entirely hypothetical argument that geographic competition nonetheless exists. The Review Board believed that effective geographic competition is not contingent upon receivers being able to acquire identical tonnages from other sources. Review Board Op. at 6, JA 487. In some circumstances, the Review Board claimed, availability of a relatively small amount of oil from other sources may cause a sufficient long-term loss to the railroad that it would be deterred from raising prices above a competitive level. The potential loss to the railroad over the long term may thus allegedly exceed any short-term gains. 41 We need not decide whether, as a matter of abstract economics, the Review Board was correct that the availability of a relatively small amount of oil from other sources could bring market discipline to the railroads. For even if this proposition were true as a matter of abstract economics, it could not be presumed true in every case in which some amount of oil, however small, were available from alternative sources. The extent of competitive pressure that these alternative sources would bring to bear would depend (at least) on (1) whether the alternative sources were served by the railroads involved in this case or by other carriers, (2) the extent of the monopolist's profit that the railroads could reap by raising their prices, and (3) the amount of traffic that the railroads would lose by raising prices. The Review Board committed the error of accepting petitioner's evidence (which was, by ICC's own guidelines, clearly probative on the issue) at the same time as it rejected petitioner's conclusions on the basis of the pure speculation that effective competitive pressures could exist. The APA requires that the Review Board's conclusion instead be supported by substantial evidence, and, because we are unable to find such evidence in the record, we reject the Review Board's conclusion that there was effective geographic competition in this case.