System Fuels, Inc. And Arkansas Power & Light Company v. The United States of America and the Interstate Commerce Commission

Citations: 642 F.2d 112; 1981 U.S. App. LEXIS 14513Docket: 79-2491

Court: Court of Appeals for the Fifth Circuit; April 8, 1981; Federal Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Arkansas Power and Light Company (AP&L) and System Fuels, Inc. (SFI) filed a complaint with the Interstate Commerce Commission (ICC) to establish a maximum reasonable rate for rail shipment of coal from Wyoming to a new Arkansas power facility. After five years of unsuccessful negotiations, the railroads proposed a rate of $12.78 per ton. The ICC conducted extensive hearings, during which an administrative law judge determined a fully allocated cost rate of $12.27 per ton. However, the ICC upheld the railroads' proposed rate, citing it as just and reasonable, particularly due to a differential pricing increment that accounted for the 51-cent difference from the ALJ’s computation. The utility's complaint was dismissed, prompting an appeal to the court. 

Judicial review of ICC rate decisions is highly deferential, allowing for intervention only if the decisions lack evidentiary support, were made without a hearing, exceed constitutional limits, or constitute an abuse of power. The court noted that findings should only be set aside if deemed arbitrary, capricious, or not in accordance with law, emphasizing the substantial nature of the evidence and testimony presented during the ICC proceedings.

Justice Frankfurter's assertion highlights that ratemaking is an empirical process influenced by fluid and changing factors, necessitating a responsive expert body to enforce transportation policy. The court addresses challenges from petitioners regarding the Commission's rate decision, particularly focusing on alleged computational errors in determining fully allocated costs. After reviewing these claims, the court finds no evidence that the Commission's cost determinations were arbitrary or an abuse of power, affirming the agency's judgments.

However, the court criticizes the Commission for its automatic application of a differential pricing additive, arguing that this practice signifies a departure from reasoned decision-making. The principle of differential pricing is recognized as essential for allowing railroads to achieve reasonable returns, as some traffic must bear higher charges to support competitive traffic. While petitioners do not dispute the principle, they object to its automatic application, suggesting it undermines the Commission's expertise.

The Commission justified its decision by referencing past cases where a seven percent rate increment was deemed reasonable. However, it failed to provide a compelling rationale for applying this increment in the current case, merely citing the need for consistency. The court finds that consistency alone does not warrant deference in specific instances, indicating that the rationale for the Commission's decision is flawed and lacks a substantive basis for its conclusion on the seven percent increment.

The Commission accepted a differential pricing additive during the San Antonio III rate proceeding, contemplating a rate exceeding fully allocated costs by seven percent. It noted the challenge of balancing the financial viability of the rail system against the burden placed on certain shippers to subsidize others. The Commission required specific data to justify significant burdens on shippers, including: identification of subsidized traffic and reasons for not raising rates; details on unprofitable branch line services; potential contributions from other commodities; and quantification of excess capacity in the rail system.

Despite recognizing the absence of a straightforward formula for these determinations, the Commission established the "seven percent solution," suggesting that burdens exceeding this threshold would warrant scrutiny, while those within it would not. This arbitrary approach faced criticism, with dissenting opinions from Commissioners Gresham and Christian denouncing the choice of the seven percent figure as capricious. Judicial review followed, with the District of Columbia Circuit Court remanding the case and demanding a more detailed explanation for the selected increment above fully allocated costs, highlighting flaws in the Commission's decision-making process.

The record lacks findings, evidence, or rationale to justify the seven percent differential pricing solution. The Commission's vague reference to revenue requirements and differential pricing economics is insufficiently detailed to serve as a meaningful standard, as it could equally apply to any arbitrary additive percentage. In a previous case, Celanese Chemical Co. v. United States, the court rejected a Commission rate determination due to its unreasoned application of a 19 percent additive. The court mandated that on remand, the Commission must clearly identify the traffic needing subsidization, explain the necessity, quantify the subsidy, and assess the burden on the coal service in relation to the overall burden and available shippers. 

The railroad and Commission argue that their case does not invoke the seven percent solution since the approved rate exceeded fully allocated costs by only 3.7 percent, suggesting it falls within a reasonable range. However, the court finds this additive arbitrary and insufficiently justified, asserting that the Commission's own criteria for substantial differential pricing must be addressed regardless of the percentage. The court does not dismiss the concept of differential pricing, noting that while some differential pricing may be acceptable, it requires thorough consideration of relevant factors. The Commission’s earlier concerns regarding captive coal traffic were not adequately addressed in its decision, which too heavily favored railroad revenue needs without balancing the interests of carriers, shippers, and the public as mandated by the 4R Act.

Restoration, maintenance, and improvement of the U.S. rail system is a public interest, particularly in light of national oil and gas shortages. Promoting alternative energy sources, such as coal-fired electrical generation by AP&L, is also vital. The establishment of railroad rates for coal transportation significantly impacts national energy policy. The Commission's decision did not adequately consider how a 3.7 percent differential pricing additive might affect the utility’s ability to provide coal-fired electric service, and it has been ordered to reassess this issue.

Petitioners challenged the reasonableness of the railroads’ alternating rate of $20.42 per ton, applicable when the shipper receives less than three million tons of coal annually. The Commission’s order, supported by the court, indicates that the alternating rate was not thoroughly contested, as complainants failed to present sufficient evidence against it. The AP&L president did not suggest modifications to this rate, reinforcing the Commission's decision.

Despite petitioners' previous inattention to the alternating rate, the Commission is required to reevaluate the proposed rates following the court’s remand. The Commission expressed openness to negotiations regarding the alternating rate prior to coal transport starting in late 1979, with the utility being allowed to present additional evidence if needed.

In conclusion, the Commission's approval of a rate exceeding fully allocated costs lacks sufficient justification and fails to consider the public interest in alternative fuel development. The court finds merit in System's complaint regarding the differential pricing additive and remands the case for further examination and rationale for the additive's inclusion. Petitioners also raise concerns about cost misallocations related to leased locomotives and new fixed plant investments.

Commissioner Christian expressed her dissatisfaction with the use of a seven percent increment above fully allocated costs as a benchmark for maximum reasonableness in determining carrier revenue needs. She, along with Commissioner Gresham, believes this figure is artificially low, with carriers also contesting its adequacy in other proceedings. The court views the seven percent figure as arbitrary rather than definitively low or high. The excerpt references 49 U.S.C. 10704(a)(2), which mandates that the Commission establish revenue standards for rail carriers that cover all operating expenses, provide a reasonable return on capital, and support prudent capital investments. Rates may be maintained to protect another carrier's traffic only if it can be shown that such rates would harm the charging carrier's going concern value. Revenue levels must ensure adequate net income and depreciation to support capital needs, service debt, attract equity, and account for inflation, thereby ensuring a robust transportation system in the U.S.