AMERICAN LINES v. L. & N. R. CO.(1968)

No. 797

Argued: Decided: June 17, 1968

[ Footnote * ] Together with No. 804, American Trucking Assns., Inc., et al. v. Louisville & Nashville Railroad Co. et al., No. 808, American Waterways Operators, Inc. v. Louisville & Nashville Railroad Co. et al., and No. 809, Interstate Commerce Commission v. Louisville & Nashville Railroad Co. et al., also on appeal from the same court.

Since 1953 ingot molds have moved almost exclusively by combination barge-truck service from Neville Island and Pittsburgh, Pa., to Steelton, Ky. The overall service charge since 1960 has been $5.11 per ton. In 1963 appellees Pennsylvania Railroad and the Louisville & Nashville Railroad, in order to compete for this traffic, lowered their joint rate from $11.86 to $5.11 per ton. The barge lines, joined by intervening trucking interests, protested to the Interstate Commerce Commission (ICC) that the new railroad rate impaired or destroyed the barge-truck service’s “inherent advantage” and thus violated 15a (3) of the Interstate Commerce Act and the National Transportation Policy. Under 15a (3) a carrier’s rates “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.” The congressional intent stated in the National Transportation Policy is to provide for fair regulation of all transportation modes subject to the Act, administered so as to preserve “the inherent advantage of each.” The ICC found that the per ton fully distributed cost of moving the traffic was $7.59 for the railroads and $5.19 for the barge-truck service, and the long-term out-of-pocket cost was $4.69 for the railroads and estimated to be about $5.19 for the barge-truck service and in any event higher than $4.69. Uncontroverted shipper testimony was that price solely determined which service would be used, but that all traffic would go to the railroads if their rates were the same as those of the barge-truck combination. The ICC rejected the railroads’ contention that out-of-pocket costs should be the [392 U.S. 571, 572] basis on which “inherent advantage” should be determined, observing that it had regularly viewed fully distributed costs as the proper basis for determining the lower cost mode of two competing modes for particular traffic; that legislative history indicated that Congress intended fully distributed costs to be the basis for comparison when it inserted into 15a (3) the reference to the National Transportation Policy; and that a rulemaking proceeding was pending involving the whole question of costing in situations involving intermodal competition and that a radical departure from the fully distributed cost norm would not be warranted on the record before it. Utilizing the fully distributed costs comparison to determine inherent advantage, the ICC ordered the railroads’ rate canceled, having concluded that such a rate would infringe upon the barge-truck carriers’ ability competitively to assert their inherent advantage because it would compel them to go well below their own fully distributed costs to recapture the traffic from the railroads. The District Court reversed. After analyzing this Court’s opinion construing 15a (3) in ICC v. New York, N. H. & H. R. Co., 372 U.S. 744 (1963) (“New Haven”), and the legislative history of 15a (3), it concluded that the ICC order contravened the Act and held that Congress intended that inherent advantage should be determined in most cases by a comparison of out-of-pocket costs and that therefore competing carriers should generally be free to offer any rates as long as they were compensatory. It also held that the ICC had not articulated the reasons for deciding that inherent advantage should be determined by reference to fully distributed costs. Held: The ICC properly exercised its discretion in disallowing the rate reduction proposed by the appellee railroads as inconsistent with 15a (3) of the Interstate Commerce Act and the National Transportation Policy and adequately articulated its reasons for disallowing the proposed rate. Pp. 579-594.

[392 U.S. 571, 573]

(b) The District Court erred in concluding from the New Haven decision and its own interpretation of 15a (3) that the ICC had the burden of justifying a departure from using out-of-pocket cost to determine inherent cost advantage, since New Haven did not require any particular method of costing to be used as a standard. Pp. 583-584.

(c) Section 15a (3) in conjunction with the National Transportation Policy was not enacted to enable the railroads to price their services in such a way as to obtain the maximum revenue therefrom. P. 589.

(d) The ICC has the authority to exercise its informed judgment in determining the method of costing which is to be used under 15a (3), and has reasonable latitude to determine where and how it will resolve that complex issue. Pp. 590-592.

(e) The District Court erred in not recognizing the ICC’s ample authority to decline to deal with the railroads’ broad contentions in this individual case pending its evaluation in the context of a rulemaking proceeding of the effects on the transportation industry as a whole of the alternatives of a departure from the fully distributed cost standard which the ICC had been using in passing upon individual rate reductions. See Permian Basin Area Rate Cases, 390 U.S. 747 . Pp. 590-593.

(f) The ICC was not required to explain why it permitted out-of-pocket ratemaking for unregulated carriers and not where the competition was regulated, since 15a (3) by its own terms applies only to regulated carriers. P. 593.

(g) The ICC adequately explained how the railroads’ rate would impair the barge-truck inherent advantage, for as the ICC pointed out, the ratemaking principle proposed by the railroads would have permitted them to capture all the traffic presently handled by the barge-truck combination because the railroads’ out-of-pocket costs were lower than those of the barge-truck service. Pp. 593-594.

268 F. Supp. 71, reversed and remanded.

Leonard S. Goodman and Harry C. Ames, Jr., argued the cause for appellants in all cases. With Mr. Goodman on the brief for appellant in No. 809 were Robert W. Ginnane and Fritz R. Kahn. With Mr. Ames on the brief for appellants in No. 797 were J. Raymond Clark, [392 U.S. 571, 574] Robert E. Webb, and T. Randolph Buck. Peter T. Beardsley, Bryce Rea, Jr., Thomas M. Knebel, and Nuel D. Belnap filed briefs for appellants in No. 804. A. Alvis Layne and Robert L. Wright filed briefs for appellant in No. 808.

Daniel M. Friedman argued the cause for the United States. On the brief were Solicitor General Griswold, Assistant Attorney General Turner, and Howard E. Shapiro. Carl Helmetag, Jr., argued the cause for appellee railroads in all cases. With him on the brief were Stanfield Johnson, Elbert R. Leigh, James H. McGlothlin, James A. Bistline, Thormund A. Miller, William M. Moloney, Harry J. Breithaupt, Donal L. Turkal, Joseph E. Stopher, and R. Lee Blackwell.

MR. JUSTICE MARSHALL delivered the opinion of the Court.

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 [392 U.S. 571, 575] Court. 1 389 U.S. 1032 (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.

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.

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 cost 3 to the railroads of this service [392 U.S. 571, 576] 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 service 5 was $5.19 per ton. 6 The out-of-pocket cost 7 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 [392 U.S. 571, 577] 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.

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.

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 [392 U.S. 571, 578] 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.

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.

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 [392 U.S. 571, 579] 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.

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 (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.

So far as relevant here, 15a (3) provides that:

“[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.”

The National Transportation Policy, 49 U.S.C. preceding 1, states that it is the intention of the Congress:

[392 U.S. 571, 580]

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 . 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. [392 U.S. 571, 581]

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).

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. And 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:

[392 U.S. 571, 582]

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 [392 U.S. 571, 583]

The District Court, however, ignored the above portion of the New Haven opinion and seized on certain other language therein to the effect that:

“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 .

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.

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 [392 U.S. 571, 584] 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.

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 [392 U.S. 571, 585] 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.

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 [392 U.S. 571, 586] eventual complete triumph of the railroads in intermodal competition because of their ability to impose all their constant costs 14 on traffic for which there was no competition.

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 [392 U.S. 571, 587] 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 [392 U.S. 571, 588] 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 [392 U.S. 571, 589] 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

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, [392 U.S. 571, 590] 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.

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.

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 [392 U.S. 571, 591] 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 .

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.

We have already observed that the District Court erred in interpreting the New Haven decision to require [392 U.S. 571, 592] 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.

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 (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. 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 [392 U.S. 571, 593] this individual rate case and that the District Court erred in failing to recognize that authority.

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.

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 [392 U.S. 571, 594] 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.

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