Transcript
392 U.S. 571
88 S.Ct. 2105
20 L.Ed.2d 1289
AMERICAN COMMERCIAL LINES, INC., et al.,
Appellants,
v.
LOUISVILLE & NASHVILLE R. CO. et al. AMERICAN
TRUCKING ASSOCIATIONS, Inc., et al., Appellants, v.
LOUISVILLE & NASHVILLE R. CO. et al. The
AMERICAN WATERWAYS OPERATORS, INC.,
Appellant, v. LOUISVILLE & NASHVILLE R. CO. et al.
INTERSTATE COMMERCE COMMISSION, Appellant,
v. LOUISVILLE & NASHVILLE R. CO. et al.
Nos. 797, 804, 808, 809.
Argued April 23 and 24, 1968.
Decided June 17, 1968.
[Syllabus from pages 571-573 intentionally omitted]
Leonard S. Goodman, Washington, D.C., Harry C. Ames, Jr., Washington,
D.C., for appellants.
Peter T. Beardsley, Bryce Rea, Jr., Thomas M. Knebel, Washington, D.C.,
and Nuel D. Belnap, Chicago, Ill., for appellants American Trucking
Associations, Inc., and others.
Daniel M. Friedman, Washington, D.C., and Carl Helmetag, Jr.,
Philadelphia, Pa., for appellees.
Mr. Justice MARSHALL delivered the opinion of the Court.
1
The basic issue in these cases is whether the action of the Interstate Commerce
Commission in disallowing a rate reduction proposed by the appellee railroads,
326 I.C.C. 77 (1965), was consistent with the provisions of § 15a(3) of the
Interstate Commerce Act, 49 U.S.C. § 15a(3), added by 72 Stat. 572 (1958),
which governs ratemaking in situations involving intermodal competition. A
subsidiary but related issue is whether the Commission adequately articulated
its reasons for disallowing the proposed rate. A statutory three-judge court,
upon appeal of the Commission's decision by the appellee railroads, held that
the Commission's decision was erroneous on both of the foregoing grounds.
268 F.Supp. 71 (D.C.W.D.Ky.1967). Because of the importance of § 15a(3) as
the primary guide to ICC resolution of rate controversies involving intermodal
competition, we noted probable jurisdiction of the appeal taken by the
Commission and the competing carriers from the decision of the District
Court.1 389 U.S. 1032, 88 S.Ct. 782, 19 L.Ed.2d 820 (1968). For the reasons
detailed below, we conclude that the District Court erred in its rejection of the
Commission's decision, and the grounds on which it was based, and we reverse.
I.
2
Since 1953 the movement of ingot molds from Neville Island and Pittsburgh,
Pennsylvania, to Steelton, Kentucky, has been almost exclusively by
combination barge-truck service, and since 1960 the overall charge for this
service has been $5.11 per ton. In 1963 the Pennsylvania Railroad and the
Louisville & Nashville Railroad lowered their joint rate for this same traffic
from $11.86 to $5.11 per ton. The competing barge lines, joined by intervening
trucking interests, protested to the ICC that the new railroad rate violated §
15a(3) of the Interstate Commerce Act because it impaired or destroyed the
'inherent advantage'2 then enjoyed by the barge-truck service. The Commission
thereupon undertook an investigation of the rate reduction.
3
In the course of the administrative proceedings that followed, the ICC made the
following factual findings about which there is no real dispute among the
parties. The fully distributed cost3 to the railroads of this service was $7.59 per
ton, and the 'long term out-of-pocket costs'4 were $4.69 per ton. The fully
distributed cost to the barge-truck service5 was $5.19 per ton.6 The out-ofpocket cost7 of the barge-truck service was not separately computed, but was
estimated, without contradiction, to be approximately the same as the fully
distributed cost and higher, in any event, than the out-of-pocket cost of the
railroads. The uncontroverted shipper testimony was to the effect that price was
virtually the sole determinant of which service would be utilized, but that, were
the rates charged by the railroads and the barge-truck combination the same, all
the traffic would go to the railroads.
4
The railroads contended that they should be permitted to maintain the $5.11
rate, once it was shown to exceed the out-of-pocket cost attributable to the
service, on the ground that any rate so set would enable them to make a profit
on the traffic. The railroads further contended that the fact that the rate was
substantially below their fully distributed cost for the service was irrelevant
since that cost in no way reflected the profitability of the traffic to them. The
barge-truck interests, on the other hand, took the position that § 15a(3) required
the Commission to look to the railroads' fully distributed costs in order to
ascertain which of the competing modes had the inherent cost advantage on the
traffic at issue. They argued that the fact that the railroads' rate would be
profitable was merely the minimum requirement under the statute. The
railroads in response contended that inherent advantage should be determined
by a comparison of out-of-pocket rather than fully distributed costs, and they
produced several economists to testify that, from the standpoint of economic
theory, the comparison of out-of-pocket, or incremental, costs was the only
rational way of regulating competitive rates.
5
The ICC rejected the railroads' contention that out-of-pocket costs should be
the basis on which inherent advantage should be determined. The Commission
observed that it had in the past regularly viewed fully distributed costs as the
appropriate basis for determining which of two competing modes was the lower
cost mode as regards particular traffic. It further indicated that the legislative
history of § 15a(3) revealed that Congress had in mind a comparison of fully
distributed costs when it inserted the reference to the National Transportation
Policy into that section in place of language sought by the railroads. The
Commission also emphasized that there was a rulemaking proceeding pending
before it in which the whole question of the proper standard of costing in
situations involving intermodal competition was being examined in depth, and
stated that 'a radical departure from the fully distributed cost norm' would not
be justified on the basis of the record before it in this case.
6
Having decided to utilize a comparison between fully distributed costs to
determine inherent advantage, the Commission then concluded that the rate set
by the railroads would undercut the barge-truck combination's ability to exploit
its inherent advantage because the rate would force the competing carriers to go
well below their own fully distributed costs to recapture the traffic from the
railroads. Moreover, since the result sought by the railroads was general
permission to set rates on an out-of-pocket basis, the Commission concluded
that eventually the railroads could take all the traffic away from the barge-truck
combination because the out-of-pocket costs of the former were lower than
those of the latter and, therefore, in any rate war the railroads would be able to
outlast their competitors. Accordingly, the Commission ordered that the
railroads' rate be canceled.
7
The District Court read the statute and its accompanying legislative history to
reflect a congressional judgment that inherent advantage should be determined
in most cases by a comparison of out-of-pocket costs and that, therefore,
railroads should generally be permitted to set any individual rate they choose as
long as that rate is compensatory.8 The court also held that the Commission had
failed adequately to articulate its reasons for deciding that the proper way of
determining which mode of transportation was the more efficient was by
comparison of fully distributed costs rather than out-of-pocket costs. Although
this latter holding appears first in its opinion, it is evident that it must logically
follow its ruling on the meaning of § 15a(3), since if Congress in enacting that
section had already decided that inherent advantage should be determined by
reference to fully distributed costs, there would be no special burden on the
Commission to justify its use of them.
II.
8
This Court has previously had occasion to consider the meaning and legislative
history of § 15a(3) of the Interstate Commerce Act in ICC v. New York, N.H.
& H.R. Co., 372 U.S. 744, 83 S.Ct. 1038, 10 L.Ed.2d 108 (1963) ('New
Haven'), and both the ICC and the District Court have relied heavily on that
decision as support for the conflicting results reached by them in these cases.
Because the statute and its relevant legislative history were so thoroughly
canvassed there, we shall not undertake any extended discussion of the same
material here. Instead, we shall refer to that opinion for most of the relevant
history.
9
So far as relevant here, § 15a(3) provides that:
10
'(r)ates of a carrier shall not be held up to a particular level to protect the traffic
of any other mode of transportation, giving due consideration to the objectives
of the national transportation policy declared in this Act.'
11
The National Transportation Policy, 49 U.S.C. preceding § 1, states that it is
the intention of the Congress:
12
'to provide for fair and impartial regulation of all modes of transportation
subject to the provisions of this act, so administered as to recognize and
preserve the inherent advantages of each * * *.' The enactment of § 15a(3) in
1958 was due primarily to complaints by the railroads that the ICC had
maintained rates at artificially high levels in order to protect competing modes
from being driven out of business by railroad competition. 9 The bill that
eventuated in the language that is presently § 15a(3) originally provided that
the ICC in considering rate reductions, should, in a proceeding involving
competition with another mode of transportation, 'consider the facts and
circumstances attending the movement of the traffic by railroad and not by
such other mode.' (Emphasis added.) 372 U.S., at 754, 83 S.Ct., at 1045. This
language was objected to strongly by both the ICC and representatives of those
carriers with which the railroads were in competition, See Hearings on S. 3778
before the Senate Committee on Interstate and Foreign Commerce, 85th Cong.,
2d Sess. (1958). The basic ground of objection was that by looking only to the
effect of a rate reduction on the carrier proposing it, the ICC would be unable to
protect the 'inherent advantages' enjoyed by competing carriers on the traffic to
which a rate reduction was to be applied.
13
Unfortunately, the meaning of the term 'inherent advantage,' which is what the
Commission is supposed to protect, is nowhere spelled out in the statute. The
railroads argue, and the District Court held, that Congress intended by the term
to refer to situations in which one carrier could transport goods at a lower
incremental cost than another. The fallacy of this argument is that it renders the
term 'inherent advantage' essentially meaningless in the context of the language
and history of § 15a(3).
14
Since the pricing of railroad services below out-of-pocket or incremental cost
would result in a net revenue loss to the railroad on the carriage, the ICC could
prohibit such practices without reference to the costs of any other competing
carrier. Any this is precisely what the language of the bill as originally
endorsed by the railroads would have provided by its use of the phrase 'and not
by such other mode.' See supra, at 580. This language was, however, rejected
by the Congress and the alternative formulation proposed by the ICC, see
Hearings, supra, at 169, was substituted for it.
As this Court said in the New Haven case:
15
'The principal reason for this reference (to the National Transportation Policy)
* * * was to emphasize the power of the Commission to prevent the railroads
from destroying or impairing the inherent advantages of other modes. And the
precise example given to the Senate Committee, which led to the language
adopted, was a case in which the railroads, by establishing on a part of their
operations a compensatory rate below their fully distributed cost, forced a
smaller competing lower cost mode to go below its own fully distributed cost
and thus perhaps to go out of business.' 372 U.S., at 758, 83 S.Ct., at 1047.
16
Since these cases are identical to the example just described, it would seem
that, at the very least, the result reached by the Commission here is
presumptively in accord with the language of the statute and with the intent of
Congress in utilizing that language.10
17
The District Court, however, ignored the above portion of the New Haven
opinion and seized on certain other language therein to the effect that:
18
'It may be, for example, that neither a comparison of 'out-of-pocket' nor a
comparison of 'fully distributed' costs, as those terms are defined by the
Commission, is the appropriate method of deciding which of two competing
modes has the cost advantage on a given movement.' 372 U.S., at 760, 83 S.Ct.,
at 1048.
19
It coupled this language with its interpretation of § 15a(3) as having the
purpose to promote 'hard competition,' and concluded that the Commission had
the burden of justifying any departure from using out-of-pocket cost as the
means of determining inherent cost advantage.
20
We think that the District Court erred in its reading both of the prior New
Haven decision and of the extent to which Congress intended to foster
intermodal competition. We note first that nothing in the language of the New
Haven opinion indicates a preference for either out-of-pocket or fully
distributed costs as a measure of inherent advantage; rather, all that is said is
that the appropriate measure 'may be' neither. Given the fact that the insertion
of the reference to inherent advantage into s 15a(3) came about at the insistence
of carriers that were demanding that fully distributed costs be the sole measure
of that advantage,11 we think that the clear import of the foregoing statement in
the New Haven opinion was that the Commission could, after due
consideration, decide that some other measure of comparative costs might be
more satisfactory in situations involving intermodal competition than the one it
had traditionally utilized.12 That is a far cry from saying that it must.
21
The District Court apparently believed that the Commission was required to
exercise its judgment in the direction of using out-of-pocket costs as the rate
floor because that would encourage 'hard' 13 competition. We do not deny that
the competition that would result from such a decision would probably be
'hard.' Indeed, from the admittedly scanty evidence in this record, one might
well conclude that the competition resulting from out-of-pocket ratemaking by
the railroads would be so hard as to run a considerable number of presently
existing barge and truck lines out of business.
22
We disagree, however, with the District Court's reading of congressional intent.
The language contained in § 15a(3) was the product of a bitter struggle between
the railroads and their competitors. One of the specific fears of those
competitors that prompted the change from the original language used in the
bill was that the bill as it then read would permit essentially unregulated
competition between all the various transportation modes. It was argued with
considerable force that permitting the railroads to price on an out-of-pocket
basis to meet competition would result in the eventual complete triumph of the
railroads in intermodal competition because of their ability to impose all their
constant costs14 on traffic for which there was no competition.
23
The economists who testified for the railroads in this case all stated that such an
unequal allocation of constant costs among shippers on the basis of demand for
railroad service, i.e., on the existence of competition for particular traffic,15 was
economically sound and desirable. Apart from the merits of this contention as a
matter of economic theory,16 it is quite clear that it was a contention that was
not by any means wholly accepted by the Congress that enacted § 15a(3). One
of the specific examples given of an undesirable practice, and accepted by the
members of the Commerce Committee that drafted the statute as such, was a
case in which certain railroads had engaged in day-to-day differential pricing on
the carriage of citrus fruit from Florida depending on whether competitive
carriage was available by ship that day. See Hearings, supra, at 153—155.
Similar complaints were made about seasonal variations in rates by railroads
depending on whether winter conditions interfered with the carriage of freight
by water. Id., at 162—163. Yet, from an economic standpoint, such rate
variations make perfect competitive sense insofar as maximization of railroad
revenues is concerned.17
24
The simple fact is that § 15a(3) was not enacted, as the railroads claim, to
enable them to price their services in such a way as to obtain the maximum
revenue therefrom. The very words of the statute speak of 'preserv(ing)' the
inherent advantages of each mode of transportation. If all that was meant by the
statute was to prevent wholly noncompensatory pricing by regulated carriers,
language that was a good deal clearer could easily have been used. And, as we
have shown above, at least one version of such clear language was proposed by
the railroads and rejected by the Congress. If the theories advanced by the
economists who testified in this case are as compelling as they seem to feel
they are, Congress is the body to whom they should be addressed. The courts
are ill-qualified indeed to make the kind of basic judgments about economic
policy sought by the railroads here. And it would be particularly inappropriate
for a court to award a carrier, on economic grounds, relief denied it by the
legislature. Yet this is precisely what the District Court has done in this case.
25
We do not mean to suggest by the foregoing discussion that the Commission is
similarly barred from making legislative judgments about matters of economic
policy. It is precisely to permit such judgments that the task of regulating
transportation rates has been entrusted to a specialized administrative agency
rather than to courts of general jurisdiction. Of course, the Commission must
operate within the limits set out by Congress in enacting the legislation it
administers. But nothing we say here should be taken as expressing any view as
to the extent that § 15a(3) constitutes a categorical command to the ICC to use
fully distributed costs as the only measure of inherent advantage in intermodal
rate controversies. As was stated in the New Haven case, it 'may be' that after
due consideration another method of costing will prove to be preferable in such
situations as the present one. All we hold here is that the initial determination of
that question is for the Commission.
26
It is in this connection that the timing of this case takes on particular
significance. We have already observed that the ICC has presently pending
before it a broad-scale examination of the whole question of the cost standards
to be used where comparisons of intermodal cost advantages are required.
Rather than await the result of that rulemaking proceeding, the railroad
appellees here determined to attempt to raise precisely the same issues in a
much more circumscribed proceeding by unilaterally reducing their rates on
one item of traffic. The District Court totally ignored the temporary nature of
the ICC's action in this case and the pendency of the rulemaking proceeding.
Instead, it went ahead and, in the guise of resolving this particular controversy
over a single rate reduction rendered a decision which, for all practical
purposes, made the rulemaking proceeding moot. While there might be some
justification for such a course when the applicable statute clearly requires the
agency to arrive at a given result, this case is emphatically not such a situation.
As this Court stated in New Haven, '(t)hese and other similar questions should
be left for initial resolution to the Commission's informed judgment.' 372 U.S.,
at 761, 83 S.Ct., at 1048.
27
The Commission stated here that it intended to exercise its informed judgment
by considering the issues presented here in the context of a rulemaking
proceeding where it could evaluate the alternatives on the basis of a
consideration of the effects of a departure from a fully distributed cost standard
on the transportation industry as a whole. Until that evaluation was completed,
the Commission took the position that it would continue to follow the practice
it had observed in the past of dealing with individual rate reductions on a fully
distributed cost basis. The District Court, in effect, refused to permit the
Commission to deal with the complex problems of developing a general
standard of costing to use in determining inherent advantage in situations
involving intermodal competition in the broad context of a rulemaking
proceeding. Instead, it ordered the Commission to resolve those problems in the
narrow context of this individual rate reduction proceeding.
28
We have already observed that the District Court erred in interpreting the New
Haven decision to require the Commission to permit out-of-pocket pricing in
most instances. Given the fact that New Haven indicated that the Commission
was to exercise its informed judgment in ultimately determining what method
of costing was preferable, it is clear that the District Court also erred in refusing
to permit the Commission to exercise that judgment in a proceeding it
reasonably believed would provide the most adequate record for the resolution
of the problems involved. We can see no justification for denying the
Commission reasonable latitude to decide where it will resolve these complex
issues, in addition to how it will resolve them. The action by the District Court
here not only deprives the Commission of the opportunity to make the initial
resolution of the issues but also prevents it from doing so in a more suitable
context.
29
This Court has just recently held that the Federal Power Commission had the
authority to fix rates on an area-wide basis rather than on an individual
producer basis and that, in order to make such a procedure feasible, it had
statutory authority to impose a moratorium upon rate increases by producers for
a period of 2 1/2 years after the setting of the area rate. Permian Basin Area
Rate Cases, 390 U.S. 747, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1968). The basis for
this holding was the principle that the 'legislative discretion implied in the rate
making power necessarily extends to the entire legislative process, embracing
the method used in reaching the legislative determination as well as that
determination itself.' Id., at 776, 88 S.Ct., at 1365. That principle is equally
applicable to rate regulation carried out by the ICC, especially where, as here,
the determination made on an interim basis is in general accord with both the
legislative history of the statute involved and the results in prior cases decided
by the agency. Accordingly, we hold that the Commission had ample authority
to decline to deal with the broad contentions advanced by the railroads in this
individual rate case and that the District Court erred in failing to recognize that
authority.
30
The District Court also objected to the failure of the Commission to explain
why it permitted out-of-pocket ratemaking where the competing carrier was
unregulated and not where the competitor was regulated. The short answer to
this is that § 15a(3) by its own terms applies only to 'modes of transportation
subject to this Act,' which by definition means regulated carriers. As a result
any arbitrariness that may flow from the distinction recognized by the
Commission between regulated and unregulated carriers in situations of
intermodal competition is the creation of Congress, not of the Commission.
31
The District Court also appears to have held that the Commission did not
adequately explain how the rate set by the railroads would impair or destroy the
barge-truck inherent advantage. Yet the Commission pointed out that the
principle proposed by the railroads would, if recognized, permit the railroads to
capture all the traffic here that is presently carried by the barge-truck
combination because the railroads' out-of-pocket costs were lower than those of
the combined barge-truck service. The District Court seems to have been
impressed by the fact that the railroads were merely meeting the barge-truck
rate, despite the uncontroverted evidence that given equal rates all traffic would
move by train. Given a service advantage, it seems somewhat unrealistic to
suggest that rate parity does not result in undercutting the competitor that does
not possess the service advantage. In any event, regardless of the label used, it
seems self-evident that a carrier's 'inherent advantage' of being the low cost
mode on a fully distributed cost basis is impaired when a competitor sets a rate
that forces the carrier to lower its own rate below its fully distributed costs in
order to retain the traffic. In addition, when a rate war would be likely to
eventually result in pushing rates to a level at which the rates set would no
longer provide a fair profit, the Commission has traditionally, and properly,
taken the position that such a rate struggle should be prevented from
commencing in the first place. Certainly there is no suggestion here that the
rate charged by the barge-truck combination was excessive and in need of
being driven down by competitive pressure. We conclude, therefore, that the
Commission adequately articulated its reasons for determining that the
railroads' rate would impair the inherent advantage enjoyed by the barge-truck
service.
32
The judgment of the District Court is reversed and the cases are remanded to
that court with directions to enter a judgment affirming the Commission's order.
It is so ordered.
33
Reversed and remanded with directions.
34
Mr. Justice HARLAN, concurring in the result.
35
As I understand the Court's position, it is that the Commission has not decided,
and thus the Court need not decide, the question expressly left open in ICC v.
New York, N.H & H.R. Co., 372 U.S. 744, 83 S.Ct. 1038, 10 L.Ed.2d 108:
whether out-of-pocket costs, fully distributed costs, or some third standard
should be the criterion for determining, under § 15a(3) of the Interstate
Commerce Act, 49 U.S.C. § 15a(3), and the National Transportation Policy
(preceding § 1 of the Act), which mode of transportation has the inherent
advantage. The reasoning of the Court's opinion is, I take it, that the
Commission may properly adhere to a fully distributed costs standard pending
its decision in a separate rulemaking proceeding, entitled Rules Governing the
Assembling and Presenting of Cost Evidence, Docket No. 34013.
36
Although I do not doubt that an administrative agency may, where the orderly
processes of adjudication or rulemaking require, defer the resolution of issues to
more appropriate proceedings,1 I should have had the greatest difficulty in
saying that in fact this had occurred, or had been intended to occur, in these
cases.2 Nonetheless, given both the Court's conclusion and the isolated
statements in the Commission's opinion consistent with that conclusion, I
believe it best to acquiesce in the result reached by the Court, rather than to
express my views as a single Justice upon the issue which the Court shuns.3
37
I would be less than candid if I did not say that I regard this disposition of these
cases as unsatisfactory, for what is now done leaves this important question just
where our decision of five years ago in the New Haven case left it, and new
litigation will now be necessary to resolve the issue.
38
Mr. Justice DOUGLAS, dissenting.
39
I would affirm the judgment below for the reasons stated by the District Court
in 268 F.Supp. 71.
1
2
The United States, a statutory defendant in the District Court, supported
the railroads' position there and has participated in support of them in the
proceedings before this Court.
The term 'inherent advantage' comes from the National Transportation
Policy, 49 U.S.C. preceding § 1, and is incorporated by reference into §
15a(3) of the Interstate Commerce Act. The meaning of the term is the
central issue in these cases and will be discussed in considerable detail,
infra, at 579—594.
3
4
5
6
7
8
Fully distributed costs are defined broadly by the ICC as the 'out-ofpocket costs plus a revenue-ton and revenue ton-mile distribution of the
constant costs, including deficits, (that) indicate the revenue necessary to a
fair return on the traffic, disregarding ability to pay.' New Automobiles in
Interstate Commerce, 259 I.C.C. 475, 513 (1945).
The long-term out-of-pocket costs were computed under an ICCsponsored formula which generally holds that 80% of rail operating
expenses, rents and taxes are out-of-pocket in that they will vary with
traffic. To this is added a return element of 4% on a portion of the
investment (all the equipment and 50% of the road property), which is
apportioned to all traffic on a proportional basis. Compare n. 3, supra.
This figure is not precisely a cost figure. Rather it is the barge fully
distributed cost, plus the charge made for the truck portion of the service
and the charge for barge-truck transfer. Since all parties seem willing to
treat the figure as one of fully distributed cost for the barge-truck
combination, no further mention will be made of its disparate elements.
Because the barge-truck rate of $5.11 was below the fully distributed cost
of the service, Division 2 of the ICC initially concluded that the bargetruck combination had forfeited its right to claim that its inherent
advantage of lower fully distributed cost was being impaired by the
railroads' setting of a matching rate. On reconsideration, the full
Commission reversed this ruling by Division 2, observing that there was
no evidence that the failure of the barge-truck rate to equal fully
distributed cost was due to anything but the barge lines' ignorance of the
precise amount of their fully distributed cost for this service. This
determination is not challenged here by any party and we express no
opinion on it.
Out-of-pocket costs have been regarded generally in these cases as
equivalent to what economists refer to as 'incremental' or 'marginal' costs.
Accordingly we shall equate the terms likewise, although we have no
intention of vouching for the accuracy of that equation as a matter of pure
economics. Cf. n. 4, supra. Such costs are defined generally as the costs
specifically incurred by the addition of each new unit of output and do not
include any allocation to that unit of pre-existing overhead expenses.
A rate is compensatory in the sense used by the District Court any time it
is greater than the out-of-pocket cost of the service for which the rate is
set. The term fully compensatory is sometimes used to describe a rate in
excess of fully distributed costs.
9
An illustration of such a case is the decision of the ICC that was reversed
in the New Haven case. There the ICC had refused to permit the railroads
to set a rate which was not only above their out-of-pocket cost for the
service but was also above their fully distributed cost for approximately
half of the movements involved. The Commission did not rely on a
determination of which of the competing carriers had the inherent
advantage as to costs, but instead decided broadly that the rate would
eventually destroy the coastwise shipping industry and therefore should be
prohibited. This Court held that, in general, the ICC was required to
determine which of the competing carriers possessed the inherent
advantage before a rate could be ordered cancelled in order to protect a
carrier's present rate. While the Court indicated that the Nation's defense
needs might permit protection of even a higher cost carrier in some cases,
it held that the ICC had not adequately shown New Haven to be such a
case.
10
The appellees also contend, and the District Court held, that the statements
in the legislative history of § 15a(3) that Congress intended to compel the
Commission to return to the approach to competitive rate regulation it had
utilized in the case of New Automobiles in Interstate Commerce, 259
I.C.C. 475 (1945), indicate that out-of-pocket ratemaking was intended to
be the rule in such cases. However, the passage quoted from New
Automobiles simply states that the rates of one mode of transportation
should not be help up merely to protect competing modes. It says nothing
at all about inherent advantages.
The railroads argue that the basic thrust of the New Automobiles case was
to compare costs on an out-of-pocket basis. And it is true that many of the
comparisons there made were on that basis. However, an examination of
what the Commission actually said and did in New Automobiles compels
the conclusion that no flat rule of comparison of out-of-pocket costs was
there laid down. For example, the Commission concluded that on the basis
of a comparison with the railroads' out-of-pocket costs for shipping
automobiles, the truckers were the lower cost mode only up to 120 miles.
On a fully distributed cost comparison the truckers were the lower cost
mode up to 230 miles. 259 I.C.C., at 528. After discussing at some length
the concept of reasonable minimum rates, the Commission ultimately
concluded that generally the truckers had the cost advantage at distances
up to 200 miles and that the railroads should be permitted to set rates that
would permit them to compete for the longer-haul traffic. 259 I.C.C., at
539.
Given the fact that the Commission was dealing with an attempt by the
truckers to get it to hold up railroad rates for distances even greater than
600 miles, it is not surprising that the issue of measuring inherent
advantage as between fully distributed and out-of-pocket costs did not
receive detailed consideration, since by either method the truckers were
the low cost mode only up to a little more than 200 miles. Thus it cannot
fairly be said that New Automobiles represents a considered choice
between the two methods of cost comparison. Rather what it stands for is
the principle emphasized in the New Haven case that the rates of one
mode should not be held up to protect the revenues of a competitor
without regard to which is the low cost carrier.
In any event, what matters so far as § 15a(3) is concerned is not what the
Commission meant in New Automobiles but what Congress thought it
meant in 1958 when the section was enacted. As we have shown in the
text of the opinion above, Congress considered New Automobiles to stand
for the principle that the rate structure of a competing mode should not be
protected by the Commission simply to prevent it from losing business
through competition.
11
12
The District Court also relied on the rejection of a similar proposal by
truck and barge interests that fully distributed costs be the floor for
reasonable minimum rates in the course of the enactment of the National
Transportation Policy in 1940. It seems clear, however, that one of the
major reasons for the rejection of the so-called Miller-Wadsworth
amendment by Congress was the possibility that its enactment would
prevent low-value industrial and agricultural commodities from being
carried at a rate low enough to make it economically feasible to ship them
in interstate commerce. See generally Nelson, Rate-Making In
Transportation—Congressional Intent, 1960 Duke L.J. 221, 228—238.
While it is true that, for varying and sometimes unexplained reasons, the
Commission has not invariably used fully distributed costs as the basis for
cost comparisons in situations involving intermodal competition, see 268
F.Supp., at 78, it is also true that it has generally declared fully distributed
cost comparisons to be preferable. Thus in the hearings on the bill that was
to become § 15a(3), Commissioner Freas stated:
'Whenever conditions permit, given transportation should return the full
cost of performing carrier service. * * * In many instances, however, the
full cost of the low-cost form of transportation exceeds the out-of-pocket
cost of another. If, then, we are required to accept the rates of the high cost
carrier merely because they exceed its out-of-pocket costs, we see no way
of preserving the inherent advantages of the low cost carrier.' Quoted at
372 U.S., at 755, 83 S.Ct., at 1045.
13
The District Court ascertained the legislative purpose to promote 'hard
competition' from the following passage from the New Haven opinion:
'Section 15a(3), in other words, made it clear that something more than
even hard competition must be shown before a particular rate can be
deemed unfair or destructive. The principal purpose of the reference to the
National Transportation Policy, as we have seen, was to prevent a carrier
from setting a rate which would impair or destroy the inherent advantages
of a competing carrier, for example, by setting a rate, below its own fully
distributed costs, which would force a competitor with a cost advantage on
particular transportation to establish an unprofitable rate in order to attrack
traffic.' 372 U.S., at 759, 83 S.Ct., at 1048.
Since the sentence following the term 'hard competition' described an
example of the competition prohibited by the National Transportation
Policy that is identical to the facts of the present case, the District Court's
use of the term to reverse the ICC's decision here seems somewhat
peculiar.
14
15
16
Constant costs are, broadly speaking, those items of expense which are
incurred by a business regardless of the scale of its operations. They are
essentially the equivalent to what is commonly called overhead expenses.
For railroads constant costs include such items as real estate taxes, certain
rents, much right-of-way maintenance expense and similar expenses.
Unequal allocation of constant costs as an element of the rate charged also
occurs commonly where a bulky commodity is so low valued on a per ton
basis that setting a rate by reference to the fully distributed cost of carrying
the commodity would make it uneconomic to ship it. See n. 11, supra.
This Court is not particularly suited to pass on the merits of the economic
arguments made by the railroads' expert witnesses in these cases.
Moreover, their soundness is not especially relevant to the result we reach
in the present posture of this controversy. However, because the economic
testimony is emphasized so heavily by both the railroads and the United
States in their arguments to us, we shall venture a few observations on it.
Most of the economic testimony is directed towards proving that the
utilization of out-of-pocket costs in setting rates permits the railroads to
maximize their profits. To the extent that out-of-pocket costs are
accurately computed, that proposition appears uncontrovertible. The
economists then go on to argue, in effect, that what is good for the
railroads is good for the country. This argument is developed as follows.
Whenever a railroad lowers its rate, the shipper to whom that rate is
available benefits. As long as the rate is above the out-of-pocket cost of
the service, the railroad benefits by obtaining the profits from traffic it
formerly did not carry. The fact that a competing carrier may lose the
revenue it
previously earned by carrying the traffic is immaterial because the
railroad's ability to make a profit by charging the lower rate shows that it
is, in some sense, more efficient than its competitor.
In order to evaluate the foregoing argument certain other aspects of a
railroad's operation must be kept in mind. The reason why a railroad's
fully distributed costs are substantially greater than its out-of-pocket costs
on any given traffic is, inter alia, because certain constant costs, see n. 14,
supra, are allocated to that traffic on a proportional basis despite the fact
that those costs will be incurred by the railroad whether it carries the
particular traffic or not. These constant costs must be earned if the railroad
is to stay in business. They are allocated proportionally on the theory that,
all other factors being equal, such an allocation will be the best way of
assuring that each shipper contributes his fair share towards covering the
constant costs. Obviously to the extent that any shipper pays more of the
constant costs than another without any good reason for so doing that
shipper is, in some sense, discriminated against.
The railroad economists point out that, because constant costs by
definition are not attributable to the carriage of any particular traffic, it is
to some extent arbitrary to allocate them to particular traffic. They further
contend that all shippers presently utilizing a railroad's services are
benefited when the railroad obtains additional traffic at a profit to it,
because that profit can be used to pay a portion of the constant costs
currently being charged wholly to them. The fact that charging a rate less
than its fully distributed cost of carrying the traffic results in the shipper of
that freight paying a disproportionally low share of the railroad's constant
costs is considered to be outweighed by the overall benefit to the other
shippers of having the absolute amount borne by them of the constant
costs decreased by the profit earned on the traffic.
It seems apparent, however, that in a case where the sole reason that a rate
below fully distributed cost is necessary to attract such additional traffic is
the competition of another mode of transportation, the continued existence
of that competition is also the sole economic justification for maintaining
the rate at a relative level that favors one shipper over others. If the
competing carrier is
driven out of business because of its inability to match the railroad's lower
rates set on an out-of-pocket basis, the economic justification for
permitting the continuation of those low rates would seem to disappear.
Yet the railroad economists assert that in such a situation the railroad
should be required by the ICC to maintain the rate at its original level. The
obvious reason for this position is that permitting a railroad to raise its
rates once it had effectively destroyed a competitor in one area would
enable it to price on an out-of-pocket basis in competition with another
carrier in a different area thereafter and, in turn, drive that carrier out of
business. Eventually a railroad could eliminate all its competitors whose
out-of-pocket costs were higher than its own. After this was accomplished
the railroad could re-price all its services on a fully distributed cost basis
thereby eliminating all discrimination between its shipper customers.
Of course, the shippers formerly served by competing modes at rates
profitable to them but lower than the railroad's fully distributed costs
would at that point have lost the advantage of the low cost service. The
only way to perpetuate the advantage previously enjoyed by those
shippers would be, as the railroad economists recognized, artificially to
maintain their rates at the former level despite the absence of present
economic justification for such a low rate. (It is true that were the barriers
to reentry into the transportation market low, as asserted by the railroad
economists, the potential competition created by the possibility of such reentry by a competing mode could furnish an economic justification for the
continuance of the original low rate. However, there is no factual evidence
in this record from which it can be concluded that barriers to re-entry are
low enough to create such potential competition.)
If the only justification for the maintenance of a disproportionally low rate
to some shippers is the fact that competition existed once upon a time for
their business, would it be irrational to conclude that it would be
preferable to keep the original competition in business to serve those
shippers and to require the railroad to look elsewhere for additional
revenue? Would it, for example, be possible for railroads to increase their
revenues instead by increasing, through selective rate decreases, the
volume of traffic shipped by
persons who presently pay amounts in excess of the fully distributed cost
for the service afforded them? These are only a few of the questions that
come to mind when we attempt to evaluate the economic arguments made
in this case. We do not pretend to be able to answer them. We merely note
their existence as evidence that we do not find the arguments made to the
ICC here as compelling as did the District Court.
Our discussion here should not be interpreted as a rejection of the basic
economic points made by the railroads. It is merely intended to illustrate
the desirability of having the initial resolution of these issues made by a
tribunal, and in a proceeding, more suitable than the present one.
17
It is, of course, true that such discriminations need have no necessary
relationship to a railroad's cost of service, whether that is computed on a
fully distributed or out-of-pocket basis. On the other hand, it is also
evident that what is basically at issue is a carrier's right to price
discriminatorily, either between shipments or shippers, in order to
maximize revenues by competition. By contrast it can be noted that the
railroads have apparently retained their prior rate of $11.86 per ton on
ingot molds in areas where they have no competition from barge-truck
service. The discrimination thus created is not too dissimilar from that
embodied in the above examples.
1
2
I do not, however, believe that the Court's position is really supported by
its references to the area pricing and moratoria systems approved by the
Court in the Permian Basin Area Rate Cases, 390 U.S. 747, 88 S.Ct. 1344,
20 L.Ed.2d 312. The Court's opinion in those cases emphasized that those
administrative devices were warranted in light of the terms of the Natural
Gas Act and of the extraordinary difficulties of regulating inpendent
producers of that commodity. I should not have thought it useful or
desirable to extrapolate from those unusual circumstances any general
extension of the discretion of administrative agencies. Of course, the
specific proposition taken by the Court today from the opinion in those
cases, which had in turn been taken from Los Angeles Gas & Electric
Corp. v. Railroad Commission of California, 289 U.S. 287, 304, 53 S.Ct.
637, 643, 77 L.Ed. 1180, may be regarded as a general principle sustained
by a number of the Court's opinions. The difficulty, I should have
supposed, is that even that general proposition is only dimly relevant to the
questions now before us.
The appearance and disappearance of the suggestion that these questions
must be deferred pending the Commission's rulemaking proceedings on
the presentation of cost evidence deserves a more complete chronicle than
the Court has given. In 1965, more than three years after the Commission
initiated its rulemaking proceeding, 27 Fed.Reg. 4102, and some two
months before it decided these cases, the Commission held that 'a
comparison of out-of-pocket costs is the most appropriate method for
ascertaining * * * inherent competitive advantage' where one of the
competing modes is unregulated. The Commission found it unnecessary to
defer that question, or even to mention its separate rulemaking proceeding.
Grain in Multiple-Car Shipments River Crossings to the So., 325 I.C.C.
752, 772.
In the present case, the report and order of the Commission's Division 2
indicated that it 'adhere(d) to the utilization of fully distributed costs as the
standard for determining the inherent advantage of low cost in the
situation presented.' 323 I.C.C. 758, 762—763. The opinion did not pause
to refer to the rulemaking proceeding. In the report and order of the full
Commission on reconsideration, the only reference to the rulemaking
proceeding was the brief passage quoted by the Court from the opinion's
final section. 326
I.C.C. 77, 84. The three dissenting members of the Commission found it
unnecessary to refer to the rulemaking proceeding. Id., at 85, 86, 90.
One year after its decision in these cases, the Commission had occasion to
review its approach to these problems. Although the Commission adhered
to its decisions in these cases and in Grain in Multiple-Car Shipments—
River Crossings to the So., supra, it did not find it necessary to advert to its
separate rulemaking proceedings. It concluded that where the competition
from a regulated carrier is 'relatively limited' it would apply the rule from
Grain in Multiple-Car Shipments, and not that from these cases. There is
no evidence whatever that the Commission regarded these two lines of
authority merely as temporary expedients useful only until more careful
analysis is possible. Wine, Pacific Coast to the East, 329 I.C.C. 167, 171
—175. And see the concurring opinions of Vice Chairman Tucker and
Commissioner Freas, id., at 176, as well as the separate opinion of
Commissioner Murphy, dissenting in part, id., at 177.
Although the three-judge District Court set aside the Commission's order
in these cases, it did not mention the rulemaking proceeding. 268 F.Supp.
71.
In its jurisdictional statement to this Court, the Commission adverted to the
rulemaking proceeding only in a single sentence, with an identifying
footnote, contained in the statement's conclusion. Jurisdictional Statement
in No. 809, at 17. In the memorandum of the United States, urging that
probable jurisdiction be noted, it was said that these cases 'present a major
issue reserved by this Court' in New Haven, which was 'whether out-ofpocket costs, fully distributed costs, or 'some different measure' should be
the criterion for determining which mode of transportation has the inherent
advantage. * * *' Memorandum for the United States 3—4. In the various
briefs presented to the Court in these four cases, including the briefs of the
United States and of the Commission, I have looked in vain for any
suggestion that, as the Court now holds, the Commission's opinion was
intended merely to defer resolution of the question reserved in New
Haven. Indeed, I have
searched unsuccessfully in the Commission's brief for any reference,
however fleeting, to the rulemaking proceeding. One might have supposed
that if, as the Court now finds, the existence of the rulemaking proceeding
was, in the Commission's view, decisive to the result of this case, the
Commission would have found room in its brief of 51 pages at least to cite
those proceedings. It is difficult to escape the inference that the Court has,
on a basis that will doubtless prove as surprising to the parties as it did to
me, simply postponed decision of a difficult issue.
3
It is, however, proper to add that I have found no support in the record for
the Court's suggestion that 'the railroad appellees here determined to
attempt to raise precisely the same issues (as in the rulemaking
proceeding) in a much more circumscribed proceeding by unilaterally
reducing their rates on one item of traffic.' Ante, at 590-591.