Opinion ID: 413436
Heading Depth: 1
Heading Rank: 4

Heading: past profitability of the line

Text: 22 The fundamental contested issue in this case has always been whether the Flora line has been and will continue to be operated at a financial loss. See Illinois v. United States, 666 F.2d 1066, 1075 (7th Cir.1981). Petitioners contend that the railroad incurred no deficit on the line prior to the filing of the abandonment application and therefore that abandonment never should have been sought. They claim that evidence of postapplication losses should be disregarded because it is inherently unrepresentative of normal operations on the line. 23 Petitioners assert that B & O enjoyed profits on the Flora line for 1974 and 1975, the two preapplication years for which evidence is in the record. In his 1977 initial decision, the ALJ concluded that there was a net profit of $2545 on the line in 1974 and the Commission, in its 1980 decision, adopted a profit figure of $71,563 for 1975. In its January 1982 decision, however, the ICC listed a Flora line deficit of $37,039 in 1974 and $66,762 in 1975, based upon what it said was updated data from the railroad. Petitioners claim that the ICC acted arbitrarily and capriciously in accepting these deficit figures without explaining why it was rejecting the profit figures it had accepted earlier. 24 In Lehigh Valley Railroad Abandonment, 338 I.C.C. 793, 800 (1972), the Commission stated that [w]henever it is found that two railroads exist as part of a railroad 'system' or 'family' the public interest dictates that for the purposes of analyzing financial data pertaining to a proposed abandonment by one, the financial effect on the other must be taken into consideration. Petitioners speculate and we think it is clear that what the Commission was doing was not considering net family line income in deriving its updated figures. 25 Petitioners construe Lehigh Valley more strictly than is warranted, however. Requiring a consideration of the railroad family factor does not mean that the actual revenue of the line cannot be considered in isolation. Thus we find no fault with the ICC's figures because the Commission stated that these figures were revenues and avoidable costs for the line. There is no reason why the Commission cannot list or examine the actual figures for the line, because the line's actual profits or losses are the most important pieces of information in an abandonment proceeding. 26 Nevertheless, we agree with petitioners that the Commission should have considered family line income. Even if one adjusts the figures by the approximately $90,000 family line income in 1975, however, the line's profit margin is so small as to be nearly insignificant. The gain in 1974 was merely $2454 and, in 1975, either $23,835 or $72,000, depending upon whether one adjusts the Commission's updated figures or the earlier figures. These amounts are trivial in comparison to the large deficits from 1976 to 1980, ranging to more than $700,000. That a line shows a slight profit does not preclude a railroad from abandoning it, especially when large rehabilitation expenses are necessary. Maine Department of Transportation v. ICC, 587 F.2d 541, 543 (1st Cir.1978); Baltimore & Ohio Railroad Abandonment, 342 I.C.C. 751, 753 (1970); Northern Pacific Railway Abandonment, 342 I.C.C. 1, 6 (1970). Thus we hold that the 1974-1975 figures are not inconsistent with B & O's abandonment application and do not render the Commission's approval of the abandonment arbitrary and capricious. 27 Petitioners do not dispute that B & O suffered losses on the Flora line in the postapplication years. Rather, they contend that the financial evidence for those years is inherently nonrepresentative of normal operations precisely because it is postapplication evidence. The Commission, in its 1980 decision, failed to mention the nonrepresentativeness issue. We termed the failure to consider such a vital and serious challenge arbitrary and capricious. Illinois, 666 F.2d at 1079. Petitioners first argue that 49 C.F.R. Sec. 1121.32(c), (d)(2), (d)(4), (d)(5), which require a railroad to submit operating data for the two years prior to the filing of an abandonment application, imply that postapplication evidence should not be used. Second, they argue that the losses for the years in question are directly related to a major track rehabilitation project undertaken to cure the defects of long-deferred maintenance, and hence are expenses that should be discounted. 28 This court has held that the two-year evidence regulation does not bar the Commission from accepting and considering more recent, postapplication evidence. The reopening of a hearing to take new evidence is a matter entrusted to an agency's broad discretion. Illinois, 666 F.2d at 1071. 29 As for the claim that the postapplication evidence was inherently nonrepresentative because of earlier deferral of maintenance, we agree with the Commission that it was not. The ICC stated that the evidence was not inherently nonrepresentative because, first, there was no evidence of deliberate downgrading of the line; second, the deferral of maintenance was justified by the financial condition of the line; third, the postapplication maintenance expenditures were necessary to keep the line operative; and, fourth, a railroad might never be able to abandon a losing line if a rule of per se unrepresentativeness were adopted. 30 These explanations adequately address our concerns in Illinois; the Commission's explanations need not fully satisfy petitioners to be legally sufficient. While it is true that the ICC is obliged adequately to address the evidence presented by one protesting an abandonment, ... the requirement cannot be carried beyond any reasonable necessity. International Minerals & Chemical Corp. v. ICC, 656 F.2d 251, 261 (7th Cir.1981). 31 Evidence of postapplication losses should not be considered unreliable per se; rather, the evidence should be evaluated with other evidence. A protestant could establish that the evidence is unrepresentative by showing that the railroad intended to downgrade the line, which entails ascertaining whether certain actions by a carrier have been taken to stifle a potentially profitable service or whether the action represents an effort to maintain a marginal service for as long as is reasonable. Missouri-Kansas-Texas Railroad Abandonment, 338 I.C.C. 728, 745 (1971). 32 To show that the line was intentionally downgraded, petitioners contend that the large maintenance cost incurred on the line in the years 1976-1980 and the need for $7,751,081 in rehabilitation of the line were due to improperly deferred maintenance on the line. Because the conditions for proper deferral of maintenance were not present when deferral was begun, they argue, the maintenance expenses should be discounted entirely. Specifically, petitioners state that there is no evidence showing the financial condition of the line for the ten to fifteen years before the application was filed, the time when one B & O witness testified that he believed deferral began. In fact, petitioners say, looking at the earliest evidence available--1974-1975--shows that the line was profitable and thus that deferral was improper. Petitioners claim that the deferral, instead of being justified by economic necessity, was an attempt to downgrade the line so that the railroad could later inflate its maintenance and rehabilitation costs to support its abandonment claim. 33 As an initial matter, we reject petitioners' claim that rehabilitation costs are relevant to an abandonment case only where the rehabilitation costs are occasioned by events wholly beyond the control of the railroad. Increased rehabilitation costs may be the result of proper deferral of maintenance. In International Minerals & Chemical Corp. v. ICC, 656 F.2d 251 (7th Cir.1981), we upheld the ICC's consideration of rehabilitation costs that were made larger by deferral of maintenance that we held was justified by the line's unprofitability. Id. at 260. Rehabilitation costs are not necessarily beyond the railroad's control because they may result from a justified decision to defer, nor are they less valid as a result. 34 Concerning the claim that the lack of financial data for the time when deferral allegedly began makes the grant of abandonment improper, we believe that it would be manifestly unfair to the railroad to deny the abandonment on this ground. It appears that petitioners never raised this issue prior to this appeal except in a single question to one B & O witness, who said that he thought that deferral had begun ten to fifteen years earlier. Petitioners do not claim that they raised the significance of that fact prior to this appeal. If they had raised it, B & O would have had an opportunity to show the line's financial situation at the time of the deferral of maintenance. Although B & O does have the burden of proof in establishing that a line may be abandoned, 49 U.S.C. Sec. 10904(d)(1), the railroad is not required to rebut challenges to its case that are not made prior to appeal. Accordingly, we will consider the deferral of maintenance as it is justified by the financial information available, beginning in 1974. 35 We hold that the Commission properly decided that the deferral of maintenance was justified by the financial state of the line. This is true whichever figures we accept, either the Commission's determination of deficit operations or petitioners' figures of marginal profits for 1974-1975. The Flora line was at best marginally profitable and may have been operating at a deficit; thus, deferral of maintenance was proper. There is little doubt that the line would have had a substantial deficit were it not for the deferral of maintenance, because the 1974 and 1975 figures included virtually no maintenance expenses. 36 Nevertheless, petitioners claim that the railroad has failed to rebut their claim that the deferral of maintenance was a deliberate attempt to downgrade. They cite Missouri-Kansas-Texas Abandonment, 338 I.C.C. 728 (1971), in which the ICC announced criteria that a railroad should address in showing that its deferral of maintenance or downgrading of service was economically justified rather than a deliberate attempt to downgrade: 37 (1) whether, on a systemwide basis, this carrier is either only marginally profitable or operating at a deficit; (2) whether the particular line under consideration is marginally profitable, operated at a deficit, or would have been operated at a deficit were it not for the deferral of maintenance and rehabilitation costs; and (3) whether the carrier can clearly show that its available funds for maintenance and rehabilitation are required for those portions of line within its system for which a greater public need has been demonstrated and which offers a larger profit potential for the carrier, and that the carrier has definite proposals as to how such expenditures are being made or will be made. 38 Id. at 746. Petitioners claim that the railroad has failed to show that any of these criteria apply. 39 We agree that the railroad has not shown (1) and (3) above, but we do not find that that mandates denial of the abandonment. First, the Commission stated that none of those criteria are controlling in a case and that the weight to be accorded to each will vary with the facts presented. Id. Subsequent cases have shown that the Commission is far more concerned when there is evidence that the railroad has taken concrete steps to downgrade the line for the purpose of later abandoning it. For example, in Southern Pacific Transportation Co.--Abandonment, 354 I.C.C. 752, 755 (1978), the indications of intentional downgrading were reducing service to shippers to Saturdays only, refusing to accept full carloads, and discontinuing certain privileges continued on other lines of the carrier. The Commission stated that downgrading is a concept that must be separately tested within the context of each case. Id. at 755. 40 Similarly, in Chicago & North Western Transportation Co. Abandonment, 354 I.C.C. 292, 303 (1977), abandonment was denied where the railroad downgraded service by failing to maintain the line, where it reduced train service on the line, where it failed without excuse to furnish rail cars, and where it abandoned the line without authorization. 41 We hold that reversal is not warranted for the ICC's failure to consider the two other criteria where there is no serious evidence of intentional downgrading. We have previously indicated that this is our view. For example, in International Minerals & Chemical Corp. v. ICC, 656 F.2d 251, 260 (7th Cir.1981), while noting the petitioners' claim that the Commission had ignored the three criteria, we said that [t]he ICC properly stated that once it had made its determination that deferring maintenance was financially justified, the governing standard required it to accept [the railroad's] decision to defer maintenance for economic reasons unless the evidence showed 'some ulterior motive to downgrade deliberately.'  42 Where there is no significant evidence of improper downgrading, the concern of the Commission is and should be on whether the deferral of maintenance was economically justified for that line, which is equivalent to the second factor of the Missouri-Kansas-Texas case. 4 The only claims here of intentional downgrading are, first, that shippers could not obtain railroad cars from B & O, and, second, that the filing of an abandonment application discourages shippers. As to the first, the reason for the failure to supply cars was not B & O's bad intent, but rather a nationwide shortage of grain cars. As to the second, the claim is purely conclusory and there is no way to prove that there is such an effect. In the absence of any more weighty evidence of downgrading, such as diminution of service without excuse, we hold that economic conditions justified the deferral of maintenance.