Western Coal Traffic League and Its Members v. United States of America and Interstate Commerce Commission

719 F.2d 772, 1983 U.S. App. LEXIS 15317

Opinions

JOHNSON, Circuit Judge:

Prior to 1976, the Interstate Commerce Commission (ICC) had unfettered authority to review all railroad rates under the “just and reasonable” standard promulgated by Congress.¹ Then, through enactment of the Railroad Revitalization and Regulatory Reform Act of 1976 (the 4R Act),² Congress sought to reduce regulatory restraints on railroad pricing decisions.³ Under the 4R Act, the ICC now has jurisdiction to review a rate only if it determines that the carrier can exclude effective competition to the extent that the carrier has “market dominance,” defined as “an absence of effective competition from other carriers or modes of transportation for the transportation to which a rate applies.”

Whether the ICC, in administering the “market dominance”⁴ standard, may consider evidence of product and geographic competition is the issue before the en banc Court.⁵ A divided panel of this Court concluded that the 4R Act “limits the definition of market dominance to transportation of the same product from the same origin to the same destination.” See Western Coal Traffic League v. United States, 694 F.2d 378, 382 (5th Cir.1982), reh’g en banc granted, Order of March 7, 1983. Since we conclude that such a result fails to afford the ICC the deference due under existing law and places undue emphasis upon certain terms contained in the 4R Act, we affirm the ICC’s orders allowing consideration of product and geographic competition. We also affirm the ICC’s guidelines as in conformance with the congressional directive to the ICC to establish standards and procedures to be utilized in making the market dominance determination.

I. Background and Procedural History⁶

Throughout the nineteenth century, railroads constituted the dominant mode of transportation in the United States'. Unaffected by any meaningful competition, the railroads were able to set rates that often proved to be unjust and unreasonable. As Justice Fortas noted in American Truck Associations v. Atchison, T. & S.F. Railroad Co., 387 U.S. 397, 87 S.Ct. 1608, 1613, 18 L.Ed.2d 847 (1967): “In this country, the railroads had a practical monopoly of freight transportation, and secret rebates, special rates to favorite shippers, and discriminations flourished.” Hence, in 1887, the Interstate Commerce Act was enacted and virtually all interstate railroad rates became subject to exacting scrutiny under the just and reasonable standard set forth in the Interstate Commerce Act. 49 U.S.C. § 1(5) (1976).

By 1976, however, many of the justifications for. extensive regulation of railroad rates no longer existed. The premise of railroad dominance had become outdated and, as the ICC found as early as 1971, “there are few significant commodities which are not practically susceptible to transportation by at least two competing modes of surface transportation.” Illinois Central Gulf Railroad-Acquisition G., M. & O, et al., 338 I.C.C. 805, 836 (1971). Additionally, as was noted by Congress in enacting the 4R Act, significant financial losses were being incurred by the railroads and extensive, industry-wide regulation was no longer justified. Sen.Rep. No. 499, 94 Cong.2d Sess. 2-3, reprinted at 1976 U.S. Code Cong. & Ad.News 14, 15-17. Nevertheless, recognizing that certain carriers still were unrestrained by effective competition, Congress refused to completely deregulate the railroad industry.

The 4R Act evidences Congress’ intent to deregulate the railroad industry only in the areas in which effective competition exists. Today, in order for the ICC to intercede in ratemaking practices, it must make an initial, jurisdictional determination that the carrier has market dominance. The 4R Act defines market dominance as “an absence of effective competition from other carriers or modes of transportation for the transportation to which a rate applies.” 49 U.S.C. § 10701a(b)(l) (Supp. IV 1980). Significantly, however, Congress empowered the ICC to adopt “standards and procedures” for determining whether a railroad possessed market dominance.⁷

Soon after the enactment of the 4R Act, the ICC embarked upon its attempt to provide standards and procedures to determine the market dominance issue. The ICC’s first attempt at establishing such standards and procedures occurred in Ex Parte No. 320. See Ex Parte No. 320, Spec.Proc. for Findings of Market Dominance, 353 I.C.C. 873, modified, 355 I.C.C. 12 (1976).⁸ One of the many issues presented involved the role of product and geographic competition in determining whether a carrier possessed market dominance. Although the Department of Justice, Department of Transportation, and the railroad industry urged the ICC to consider evidence of product and geographic competition, the ICC determined that such evidence would not be considered. Two reasons for this initial conclusion were advanced by the ICC. First, the ICC concluded that such evidence would create complex antitrust-type litigation and, second, the ICC felt that the statutory definition of market dominance precluded consideration of such competition. See Ex Parte No. 320, 353 I.C.C. at 904-05.

The regulations initially advanced by the ICC in Ex Parte No. 320 underwent judicial attack in Atchison, T. & S.F. Railroad v. ICC, 580 F.2d 623 (D.C.Cir.1978). As in the case sub judice, a major issue before the D.C. Circuit involved the ICC’s refusal to consider geographic and product competition. Although the D.C. Circuit ultimately upheld the ICC’s regulations, finding “sufficient basis in the statutory language and purpose to merit our deferral to the Commission’s view,” id. at 634, the court noted that the ICC’s construction “may appear to some as an attempt to attribute excessive significance to a terse statutory clause.” Id. In concluding, the D.C. Circuit emphasized that its role was one “of deference and deferral” and noted that “[t]he Commission will be in a position to evaluate the regulation more fully in light of experience.” Id.

After several years of experience with the regulations promulgated in Ex Parte No. 320 and after completion of several studies,⁹ the ICC proposed removal of many of the cost presumptions outlined in Ex Parte No. 320 and proposed that litigants present any relevant evidence on the issue of market dominance, specifically including evidence of geographic and product competition. See Ex Parte No. 320 (Sub-No. 1) Rail Market Dominance and Related Con siderations, 45 FecLReg. 3353 (proposed January 17, 1980). While the ICC was considering comments on its proposed decision, however, Congress enacted new legislation.

In an effort to hasten railroad rate deregulation, Congress, in 1980, enacted a second major deregulation statute, the Staggers Act. Staggers Rail Act of 1980, Pub.L. No. 96-448, 94 Stat. 1895, codified in various sections of 49 U.S.C. § 10101, et seq. By a new provision contained in the Staggers Act, 49 U.S.C. § 10709(d), Congress required the ICC to deregulate a rail rate insofar as the carrier’s rate of return falls below a specified percentage of the costs incurred by the carrier in providing the service. Additionally, even if the rail rate is above that percentage, the ICC still must determine whether market dominance exists. 49 U.S.C. § 10709(a), (b). Although Congress did revamp the ICC’s regulations in these respects, it did not alter the market dominance statute enacted in the 4R Act and, in fact, emphasized that it did not intend “in any way to restrict the ability of the Commission to apply [the market dominance] concept, both in its regulations and individual cases.” H.Rep. No. 96-1430,96th Cong., 2d Sess. 89 (1980), U.S.Code Cong. & Admin.News 1980, p. 3978, 4120. Also, it is important to note that Congress was aware of the ICC’s stated intent to consider product and geographic competition when the Staggers Act was debated. See 359 I.C.C. at 736-37.

Finally, following enactment of the Staggers Act, the ICC instituted Ex Parte No. 320 (Sub. No. 2), the proceeding that gave rise to this case, to consider changes in its market dominance rules. As noted previously, the ICC reaffirmed its decision to consider evidence of product and geographic competition in making the market dominance determination. On review in this Court, the petitioners attacked the ICC’s new rules on a variety of grounds, including a claim that product and geographic competition was inadmissible under the express terms of the 4R Act. A divided panel of this Court held that the ICC lacked statutory authority to consider evidence of product and geographic competition. Thereafter, this Court granted rehearing en banc and the case was orally argued before the en banc Court on June 7, 1983.

II. Product and Geographic Competition

The petitioners challenge the validity of the ICC’s regulations allowing consideration of product and geographic competition. They contend that the regulations exceed the ICC’s statutory authority.

We begin, as we must, with a recognition of the limited role this Court plays in reviewing an administrative agency’s construction of its statutory authority and the regulations promulgated pursuant thereto. Far removed from the practical realities of the day-to-day regulation of this nation’s railroads, we must defer to the agency’s interpretation of the statute and affirm that interpretation if “it has a reasonable basis in law.” See Aberdeen & Rockfish Railroad Co. v. United States, 682 F.2d 1092, 1096 (5th Cir.1982), quoting Volkswagenwerk Aktiengesellschaft v. EMC, 390 U.S. 261, 88 S.Ct. 929, 935, 19 L.Ed.2d 1090 (1968). That the members of this Court might have construed the statute differently is inconsequential. Batterton v. Francis, 432 U.S. 416, 97 S.Ct. 2399, 2405, 53 L.Ed.2d 448 (1977). Moreover, when an agency, pursuant to congressional mandate, has adopted regulations designed to effectuate its statutory duties, this Court will not set aside such regulations unless the agency has exceeded its statutory authority or if its regulations so far depart from the statutory authorization that they can be interpreted as “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A); Batterton v. Francis, 97 S.Ct. at 2405-06.

As we have seen, the 4R Act clearly evinces Congress’ intent to deregulate the railroad industry only in areas in which effective competition exists. In both the 4R Act and the Staggers Act, Congress stressed its conviction that competitive forces, rather than regulations should be used to set price and service levels where effective competition prevails. Nonethe less, Congress clearly intended to retain the protections of ICC rate regulation in areas in which no effective competition prevails. In determining whether the ICC’s decision to consider product and geographic competition exceeds its statutory authority, we must recognize Congress’ stated policy of deregulating rail rates only in areas in which effective competition exists. “[W]e must not be guided by a single sentence or member of a sentence, but look to the provisions of the whole law, and to its object or policy.”¹⁰ See Philbrook v. Glodgett, 421 U.S. 707, 95 S.Ct. 1893, 1898, 44 L.Ed.2d 525 (1975).

The 4R Act does not contain a detailed congressional formula for determining market dominance. Instead, it contains a generally phrased test designed to achieve a stated goal — deregulation of rail rates subject to effective competition. Congress not only expected but required the ICC to undertake the task of developing “standards and procedures” for determining “whether and when a [railroad] possesses market dominance.” Quite clearly, the ICC was given broad statutory authority to prescribe standards and procedures to be utilized in facilitating railroad rate deregulation. Well-established precedent requires us to uphold the ICC’s regulations unless they are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).

The regulations adopted by the ICC in Ex Parte No. 320 (Sub. No. 2) cannot be considered arbitrary, capricious, an abuse of discretion, or inconsistent with law. Adopted pursuant to congressional mandate, the regulations reflect considered judgment in light of practical experience. Although the ICC’s decision to consider product and geographic competition depart from prior ICC decisions, none can doubt the ICC’s authority to change its mind in light of experience. American Truck Associations v. Atchison T. & S.F. Railroad Co., 87 S.Ct. at 1613 (1967). Certainly, regulatory agencies “are neither required nor supposed to regulate the present and the future within the inflexible limits of yesterday.” Id.

The ICC advanced the following reasons in support of its decision to consider product and geographic competition in making the market dominance determination.

We believe that [our prior] interpretation was unnecessarily restrictive. There is no evidence in the 4R Act that we consider only “direct” competition from other carriers or modes. Since the traffic to which the rate applies faces competition from other sources or destinations of the same product or from substitute products the carriers transporting that traffic face “indirect” competition from other carriers .... “[Effective competition from other carriers or modes of transportation, for the traffic to which the rate applies” means that, if a carrier raises the rate for such traffic, then some or all of that traffic will be lost to other carriers or modes.

Additionally, the ICC responded to the contention that its new regulations were unmanageable by stating:

In general, geographic or product competition will be deemed to be present if it is established that alternative supplies of the same or a close substitute product exist and that carriers transporting these same or close substitute commodities from the various sources to the various destinations compete with one another for the traffic in question. Whether such competition is judged to be effective will depend on evidence concerning the substitutability of one supply source or destination for another or one product for another. If, in a particular case, the Commission finds that the evidence submitted is inconclusive, then such evidence will be given minimal weight in our determination of market dominance. We believe that this is an improvement over our 1976 position that evidence of geographic and product competition be always and automatically excluded from every proceeding.

365 I.C.C. at 130.

Indeed, nothing in the 4R Act evinces congressional intent to preclude consideration of indirect competition. As we have seen, Congress simply sought deregulation of rail rates subject to effective competition. Refusing to set forth a rigid standard for determining when effective competition exists, Congress authorized the ICC to establish appropriate standards and procedures for determining when market forces suffice to regulate rail rates. The ICC is in the best position to determine whether product and geographic competition play a role in the day-to-day fluctuations in rail rates and whether consideration of such evidence is feasible within the requirements of the 4R Act. See Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, Inc., 435 U.S. 519, 98 S.Ct. 1197, 1202, 55 L.Ed.2d 460 (1978). Nothing in the 4R Act requires the ICC to make its decisions in a regulatory vacuum ignoring the practical effects of indirect competition. Undoubtedly, if the ICC was required to ignore the effects of indirect competition, certain rates would become subject to regulatory intervention even though the rate is governed by market forces. Such a result flies in the face of Congress’ stated policy of deregulation of rates subject to effective market control. As the Final Conference Report to the Staggers Act emphasized, “Whenever there is effective competition, such competition should continue to function as the regulator of the rate rather than the Commission.” Hence, we cannot conclude that the ICC exceeded its statutory authority by adopting regulations that will allow it to consider the effects of indirect competition on rail rates in determining whether market dominance exists under the 4R Act. The ICC’s interpretation of the 4R Act, when viewed with the deferential attitude required under existing precedent, certainly has a reasonable basis in law. See Aberdeen & Rockfish Railroad Co. v. United States, 682 F.2d at 1096.

We also note that we find nothing inconsistent with this result in the Staggers Act. Indeed, the Staggers Act reflects a reinforced congressional intent to allow the ICC to continue to promulgate standards and procedures for making the market dominance determination. The Conference Commission Report specifically stated that Congress’ action was “not intended in any way to restrict the ability of the Commission to apply this concept, both in its regulations and individual cases.” H.Rep. No. '96-1430, 96th Cong.2d Sess. 88-89 (1980), U.S.Code Cong. & Ad.News 1980, 4120. This is particularly significant, since Congress was aware of the ICC’s stated intent to consider product and geographic competition when the Staggers Act was debated. See I.C.C. at 736-77.

III. The ICC’s Market Dominance Guidelines

The petitioners contend that the ICC’s guidelines are at variance with the congressional directive to the ICC in the 4R Act to “establish, by rule, standards and procedures for determining ... whether and when a carrier possesses market dominance .... Such rules shall be designed to provide a practical determination without administrative delay.” Section 202(b). The panel majority held that the ICC’s guidelines conform to the 4R Act’s “rule” requirement, but declined to address petitioners’ argument that the guidelines lacked the definiteness and predictability of standards and, hence, do not allow the ICC and parties to measure in a practical way whether there is effective competition in a particular situation. Western Coal Traffic League v. United States, 694 F.2d at 392. We have reviewed the ICC’s guidelines and hold that they satisfy the congressional directive.

The ICC’s guidelines do not, of course, enable a party to predict in each case whether market dominance exists. But, the object of the “standard” requirement in the 4R Act was not to establish hard and fast rules for every situation; the myriad individual circumstances in the complex world of rail transportation make that an impossibility. The guidelines do, however, provide a detailed guide as to what the ICC considers relevant, the placement of the burden of proof, and how to present a case to the ICC. We must remain cognizant of the Supreme Court’s direction “that the formulation of procedures [is] basically to be left within the discretion of the agencies to which Congress [has] confided the responsibility of substantive judgments.” Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Counsel, Inc., 98 S.Ct. at 1202. Only experience will demonstrate the ability of the ICC to manage its new guidelines. As the D.C. Circuit noted in Atchison, T. & S.F. Railroad v. ICC, 580 F.2d at 640, “the courts remain open if the Commission is slothful or unwilling to undertake appropriate reconsideration and fine tuning in the light of experience.” At this time, we cannot say that the ICC has failed to fulfill the congressional directive. Hence, we affirm the ICC’s guidelines.

IV. Conclusion

For the foregoing reasons we affirm the ICC’s decision to consider evidence of geographic and product competition. We also affirm the ICC’s guidelines since they fulfill the congressional directive to establish standards and procedures for making the market dominance determination.

The original panel of this Court was presented with several issues that are not at issue before the en banc Court. See Western Coal Traffic League v. United States, 694 F.2d at 385-89, part III, sections I, 2, 3, and 4. Judge Brown dissented only with regard to the majority’s decision on product and geographic competition (part II, section 5). This en banc opinion overturns the original panel’s opinion with respect to its decision on product and geographic competition (part III, section 5). In all other respects (part III, sections 1, 2, 3, and 4), the panel’s decision is adopted as the opinion of the en banc Court. Hence, all of the objections to the ICC’s decision in Ex Parte No. 320 (Sub. No. 2) are rejected and the ICC’s decision is AFFIRMED.

Footnotes

1

. Former section 1(5) of the Interstate Commerce Act provided that “[a]ll charges made for any service rendered or to be rendered ... shall be just and reasonable and every unjust and unreasonable charge ... is prohibited and declared unlawful.” The issues in this case are reflected in the revised language of the recodification and amended Act which now qualifies the reasonableness requirement: “If the Commission determines ... that a rail carrier has market dominance over the transportation to which a particular rate applies, the rate established by such carrier must be reasonable, 49 U.S.C. 10701a(b).”

2

. Pub.L. No. 94-210, 90 Stat. 31 (1976), to be incorporated into the U.S.Code as part of the Revised Interstate Commerce Act, 49 U.S.C. § 10101 et seq.

3

. See § 101 of the 4R Act.

4

. Market dominance was defined originally as “an absence of effective competition from other carriers or modes of transportation for the traffic or movement to which a rate applies.” Pub.L. No. 94-210, § 202(b), 90 Stat. 31 (1976), codified at 49 U.S.C. § l(5)(c) (1976). That language was revised and re-enacted without substantive change when the Interstate Commerce Act was recodified in 1978.

5

. Product competition refers to competition generated as a result of the availability of substitute products. For example, if a power plant in Texas generally operated on coal transported by rail from a mine in Wyoming but also could operate on natural gas from a field in Wyoming, the indirect competition from the natural gas industry would constitute “product competition.” Geographic competition refers to transportation of the same product from a different location. For example, if the Texas power plant could obtain coal from a source other than the mine in Wyoming (i.e., Pennsylvania), the indirect competition from the Pennsylvania mine would constitute geographic competition.

6

. For an exhaustive treatment of the history of the 4R Act see Western Coal Traffic League v. United States, 694 F.2d at 384-90.

7

. The pertinent statutory language, set forth in the 4R Act, § 202(b), codified at 49 U.S.C. § l(5)(d) (1976), repealed by Pub.L. No. 95-473, § 4(b), (c), 92 Stat. 1337, 1466-70 (1978), was:

Within 240 days after the date of the enactment of this subdivision, the Commission shall establish, by rule, standards and procedures for determining in accordance with Section 15(9) of this part, whether and when a carrier possesses market dominance over a service rendered or to be rendered at a particular rate or rates. Such rules shall be designed to provide for a practical determination without administrative delay.

8

. See Western Coal Traffic League v. United States, 694 F.2d at 385-86 for further explication of the provisions set forth in Ex Parte No. 320.

9

. See Western Coal Traffic League v. United States, 694 F.2d at 386 n. 33 and material cited therein.

10

. As we have seen, a divided panel of this Court held that the 4R Act’s definition of market dominance precluded consideration of indirect competition (i.e., product and geographic competition) since the definition “refers to ‘effective competition ... for the transportation to which a rate applies,’ not to competition with that transportation.” Western Coal Traffic League v. United States, 694 F.2d at 390. Although the panel majority conceded that indirect competition could be as effective as direct competition and that consideration of indirect competition would increase the number of rates immunized from regulation, id. at 382, it nonetheless concluded that Congress’ choice of the preposition “for” instead of “with” demonstrated congressional intent to preclude consideration of indirect competition. We are hesitant to rely heavily upon a vague congressional use of prepositions in determining the extent of the ICC’s jurisdiction to review rail rates.

As the panel majority conceded, to preclude the ICC’s consideration of indirect competition will increase the number of rates subject to ICC regulation. Such a result clearly is inconsistent with Congress’ repeated attempts to deregulate the railroad industry. Congress stressed the need for deregulation in enacting the 4R Act and re-emphasized that need in enacting the Staggers Act. In light of this congressional intent to deregulate all rates subject to effective competition, we are most hesitant to resolve the market dominance issue on the basis of a prepositional controversy. As the Supreme Court has repeatedly held, “the width of administrative authority must be measured in part by the purposes for which it was conferred.” Permian Basin Area Rate Cases, 390 U.S. 747, 776, 88 S.Ct. 1344, 1364, 20 L.Ed.2d 312 (1967). The ICC’s administrative authority undoubtedly was created in an attempt to deregulate all rates subject to effective competition. We should not interpret the 4R Act in a manner inconsistent with that purpose. Moreover, even if the plain terms of the 4R Act suggest such a result, we must heed the Supreme Court’s directive that “even when the plain meaning [does] not produce absurd results but merely an unreasonable one ‘plainly at variance with the policy of the legislation as a whole’ ” the Court should follow that policy instead of the literal words. See United States v. American Trucking Ass’n, 310 U.S. 534, 543, 60 S.Ct. 1059, 1063, 84 L.Ed. 1345 (1970), quoting Ozawa v. United States, 260 U.S. 178, 194, 43 S.Ct. 65, 67, 67 L.Ed. 199 (1922).