Opinion ID: 370390
Heading Depth: 3
Heading Rank: 3

Heading: Need to Attract Equity Capital

Text: 64 A more difficult question is posed by the Commission's treatment of the need to attract equity capital. The Commission concluded that the need to attract equity capital justified the excess revenues above variable or fully allocated costs that would be generated by the proposed rates. In view of petitioners' objections, the Commission did not incorporate the cost of equity capital directly into its cost calculations. But it did take that factor into account. We are convinced that the consideration of rail need to attract equity investment is appropriate in a capital incentive rate proceeding. HL& P J.A. at 56; See AEPC J.A. at 65-67. 65 The Commission found guidance in another section added to the Interstate Commerce Act by the Reform Act. That section, now revised and codified as 49 U.S.C. § 10704(a)(2), 49 mandates a continuing effort by the Commission to assist (rail) carriers in attaining revenue levels that are adequate . . . to cover total operating expenses . . . plus a reasonable and economic profit or return (or both) on capital employed in the business. The statute goes on to prescribe that such revenue levels should permit the raising of needed equity capital and attract and retain capital in amounts adequate to provide a sound transportation system in the United States. 66 While it did not prescribe specific standards by which to determine the adequacy of revenue levels deeming that effort inappropriate in view of the then-pending rulemaking directed to the question 50 the Commission in both cases felt that consideration of overall revenues was nonetheless desirable in light of the strong congressional policy embodied in § 10704(a)(2). The Commission emphasized the particular importance of this consideration in capital incentive rate proceedings, where the congressional purpose to encourage large-scale investment with the concomitant need to raise capital was especially acute. Thus, recovery of revenues in excess of fully allocated costs was justified in these cases. The Commission explained its reasoning (also implicit in the HL&P decision) in its AEPC order: since much railroad traffic moves at rates below fully allocated costs because of competitive pressures, a railroad must be allowed to set some rates in excess of their full cost level where competition, market conditions and demand permit. AEPC J.A. at 67. 67 Petitioners assert that the new rule of ratemaking enunciated in § 10704(a)(2) was intended by Congress to apply only where railroads do not have market dominance I. e., where the play of competitive forces can be expected to hold rates down without the need for regulatory intervention. Within the zone of market dominance, petitioners argue, Congress intended continued and unchanged regulation of rates. HL&P Brief at 59. And, under traditional principles, a carrier's revenue needs had no relevance to the determination of the reasonableness of any individual rate. 51 68 Application of the policy of § 10704(a)(2) to the rates at issue in capital incentive rate proceedings represents a permissible exercise of the Commission's ratemaking discretion. 69 Absence of market dominance deprives the Commission of jurisdiction to find a rate unreasonably high. 52 Nothing in the language, structure or history of the Reform Act suggests that § 10704(a)(2) is limited to situations where market dominance is absent. Indeed, since the Commission's jurisdiction to review rates at all where dominance is not present is limited, Congress must have intended the modification in regulatory approach effected by § 10704(a) (2)'s command to apply primarily where the regulatory regime still prevails, I. e., where market dominance is present. The legislative history is not to the contrary. The House Committee noted: where effective market competition does not exist, regulation to protect against abuse of market power must be and is retained. 53 Obviously, however, the retention of a regulatory regime where abuse of market power is a danger does not preclude congressional modification of the regulatory approach. 70 The same analysis in effect disposes of AEPC's objection to the Commission's consideration of value of service the relative inelasticity of demand for the transportation of coal in determining the reasonableness of the $8.64 rate applicable to AEPC's coal traffic. The Commission concluded that § 10704(a) (2)'s command permits some rates to be set at a level exceeding fully allocated costs in order to compensate for those rates which must be set at less than fully allocated costs to meet competition from other transport modes. This was neither arbitrary nor forbidden by the Act. It is pertinent to the objective of providing an adequate overall level of earnings. If traffic with a high value of service is viewed in isolation it bears a heavy burden. Yet all shippers ultimately benefit when the rail carriers are able to generate revenues needed for survival. 71 It is not a fatal flaw that some traffic is carried at rates above total cost; the revenues from such traffic when added to revenues from traffic that competition requires be carried at less than full cost (but with some contribution to fixed costs), yield adequate overall revenues. This does not imply that the rail carriers are free to charge whatever the traffic will bear. In this very case, the Commission did put limits on some proposed rates, rejecting the $16.54 rate proposal of the carriers for HL&P's traffic. 72 Finally, HL&P questions the two proxy tests adopted by the Commission as indicia of revenue need in the absence of regulations prescribing specific standards for measuring revenue requirements. One proxy employed an 11 per cent cost of equity capital in the restated computation of costs. The other seems to add a weighted before-tax rate of return based on a percentage of cost. We acknowledge problems in tracking and understanding the Commission's approach. Several interrelated considerations ease our task. First, there is a judicial disposition to withhold intervention in rate matters when, as here, the complaint is not to the level of return but to the methodology. See FPC v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S.Ct. 281, 88 L.Ed. 333 (1943). The court still has a duty to assure application of reasonable standards. However, the standard of judicial review, which is narrow in general for ratemaking, and which is tightened for incentive ratemaking when agency and court are under constraints of expedition, is pinched to the point of exiguity when what is involved is an agency action under a temporary approach in force only pending completion of a more fully considered proceeding. 54 Although the path of the agency is only dimly discerned, we are not prepared to say it is an abdication from reason.