582 F.2d 1043 (7th Cir. 1978), 76-2283, Chicago & North Western Transp. Co. v. United States

Docket Nº:76-2283, 77-1008 and 77-1487.
Citation:582 F.2d 1043
Party Name:CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY et al., Petitioners, v. UNITED STATES of America and Interstate Commerce Commission, Respondents. Commonwealth of Pennsylvania, Intervenor.
Case Date:May 30, 1978
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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582 F.2d 1043 (7th Cir. 1978)



UNITED STATES of America and Interstate Commerce Commission,


Commonwealth of Pennsylvania, Intervenor.

Nos. 76-2283, 77-1008 and 77-1487.

United States Court of Appeals, Seventh Circuit

May 30, 1978

Argued Sept. 12, 1977.

As Modified on Denial of Rehearing July 31, 1978.

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Gordon P. MacDougall, Sp. Asst. Atty. Gen., Washington, D. C., R. Eden Martin, Chicago, Ill., William G. Mahoney, Washington, D. C., Robert S. Sugarman, Chicago, Ill, for petitioners.

Henri F. Rush, Associate Gen. Counsel, ICC, Washington, D. C., Robert Lewis Thompson, Dept. of Justice, Washington, D. C., for respondents.

Before FAIRCHILD, Chief Judge, and SPRECHER [*] and TONE, Circuit Judges.

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TONE, Circuit Judge.

New provisions governing the abandonment of railroad lines and the discontinuance of rail service were adopted by Congress as part of the Railroad Revitalization and Regulatory Reform Act of 1976 (the 4-R Act), 90 Stat. 127, 146, §§ 802, 809(c), and codified as § 1a of the Interstate Commerce Act, 49 U.S.C. § 1a. 1 Pursuant to these provisions, the Interstate Commerce Commission adopted implementing regulations. 41 Fed.Reg. 48520 as amended 42 Fed.Reg. 25327 (to be codified in 49 C.F.R. §§ 1121.10, et seq.). The several petitions for review before us challenge these regulations as inconsistent with the statute insofar as they (a) permit indefinite postponement of the issuance of a certificate of abandonment when a subsidization offer has been made but an agreement is not reached between the railroad and the potential subsidizer within six months, (b) prescribe certain factors to be omitted or included in the Commission's determination of avoidable cost and reasonable return on line for the purpose of determining the adequacy of a subsidization offer, (c) require that a petition to investigate be verified and be filed within 35 days after the filing of the application for abandonment or discontinuance, and (d) omit certain information from the revenue data to be submitted by a railroad in support of an application for abandonment or discontinuance. This court has jurisdiction under 28 U.S.C. §§ 2321 and 2342. We sustain challenges (a) and (b) and reject (c) and (d).


The Petition of the Railroads

In No. 76-2283 a group of railroads attack the provision permitting the Commission to postpone indefinitely the issuance of a certificate authorizing abandonment or discontinuance when a subsidization offer has been made but the railroad and the potential subsidizer fail to reach a financial assistance agreement within six months. They also challenge the regulations dealing with the determinations of "the avoidable cost of providing rail freight service on such line," and the "reasonable return on the value of such line," § 1a(6) (a)(ii)(A) and (7), insofar as these regulations (a) interpret the term "current costs" in the statutory definition of "avoidable cost," § 1a(11) (a), to mean that portion of historical costs that are allocated to the current period; (b) limit "expenditures to eliminate deferred maintenance," § 1a(11) (a), to expenditures necessary to meet federal railroad administration safety standards for Class I track (safe at speeds up to 10 miles per hour); and (c) do not adequately allow for the difference between the cost of equity capital and the cost of debt capital or the effects of income taxes.

Background of the Statute

Inability to find relief from the burden of uneconomical branch lines was one of the problems of the Penn Central Transportation Company and other northeastern railroads that suffered financial disaster in the period preceding the 4-R Act. See In re Penn Central Transportation Co., 382 F.Supp. 831, 836-837, 841 (E.D.Pa.1974). A bankrupt railroad attempting to rid itself of such a line in a proceeding under 49 U.S.C. § 1(18) (22), would find itself enmeshed in "drawn-out hearings before the Interstate Commerce Commission." In re Reading Company, 378 F.Supp. 474, 480 (E.D.Pa.1974); see In re Penn Central Transportation Co., 384 F.Supp. 895, 903 (Sp.Ct.R.R.R.A.1974). Congress was acutely aware of this problem by reason of having subsidized the successor of these railroads, Consolidated Rail Corporation, in the years preceding the adoption of the 4-R Act. 2 The Senate

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Committee on Commerce, which, after holding hearings on the subject, originated the version of § 1a that was eventually enacted, recognized that the abandonment problem plagued the entire railroad industry, S.Rep. No. 94-499, 94th Cong., 1st Sess. 39-44 (1975), observing that "the regulatory climate constrained management's ability to . . . abandon obsolete properties and lines," and concluding that "the railroad industry should not be forced to continue to internalize all losses from branch line operations, thereby further jeopardizing the industry's already precarious economic health." Id. at 3, 44, U.S.Code Cong. & Admin.News 1976, pp. 14, 17, 58. Although the Congressional focus was primarily upon the abandonment problem, Congress recognized discontinuance of service as part of the same problem and treated it like abandonment in the statute.

When Congress had addressed the problem as it affected the northeastern lines in the Regional Rail Reorganization Act of 1973, Pub.L. 93-236, 87 Stat. 986, 3 it had prohibited abandonment or discontinuance when a potential subsidizer had offered a "continuation subsidy" covering the difference between revenues and avoidable cost plus a reasonable return attributable to the line or had offered to purchase the line. Section 304(c), 45 U.S.C. § 744(c). Instead of itself defining "avoidable cost" and "reasonable return," as it was to do three years later in the 4-R Act, Congress left them to be defined by the ICC's Rail Services Planning Office. 4 Section 205(d) (3), 45 U.S.C. § 715(d)(3).

As we shall see, significant departures from this approach were made in § 1a. That section provides that, when a "financially responsible person" makes a "continuation subsidy" offer that is likely to cover the difference between revenues and avoidable cost plus a reasonable return on line, abandonment or discontinuance is not flatly prohibited, but instead is postponed for a "reasonable time, not to exceed 6 months." The new statute not only itself defines the terms "avoidable cost" and "reasonable return" but defines them differently than did the Commission's Rail Services Planning Office under the 1973 Act. These and other provisions of § 1a pertinent to the consolidated reviews before us are discussed in connection with specific challenges to the regulations.

The Statute

The 4-R Act repealed the abandonment and discontinuance provisions contained in § 1(18) (22) of the Interstate Commerce Act and provided a new abandonment and discontinuance procedure in new § 1a. That section is to apply to railroads other than the northeastern railroads, which remain subject to the abandonment and discontinuance provisions of the 1973 Act, as amended by the 4-R Act. New § 1a establishes a procedure for Commission consideration of an application by a railroad for a certificate of abandonment or discontinuance. The Commission first decides whether the proposed abandonment or discontinuance is in the public interest. Upon a determination that it is, the Commission issues a certificate of abandonment or discontinuance, unless it finds that a financially responsible person has made an offer of financial assistance to enable the service to be continued that is likely to meet certain criteria. If it finds such an offer has been made, the Commission is to postpone issuance of the certificate for "a reasonable time, not to exceed 6 months" to permit the negotiation of a financial assistance or purchase and sale agreement between the railroad and the prospective subsidizer.

Paragraphs (1) through (5) of § 1a cover the procedure for considering and ruling on applications, except for the procedure relating to subsidization offers. Paragraph (1)

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provides that a railroad may not abandon a line or discontinue any service without first obtaining from the Commission a certificate declaring that the "present or future public convenience and necessity require or permit such abandonment or discontinuance." An application for a certificate must be submitted to the Commission, together with a notice of intent to abandon or discontinue, at least 60 days before the proposed effective date of the abandonment or discontinuance. 5 Paragraph (2) requires the railroad to give interested parties notice of its intent to abandon or discontinue. Paragraph (3) provides that during the 60-day period between submission of the application and the proposed effective date the Commission may on its own initiative, and must upon petition, institute an investigation of the proposed abandonment or discontinuance. "If no such investigation is ordered, the Commission shall issue such a certificate, in accordance with this section, at the end of such 60-day period." If, however, an investigation is ordered, the Commission is to order a postponement of the proposed effective date "for such reasonable period of time as is necessary to complete such investigation." 6 Paragraph (4) provides that if a certificate is issued without an investigation, the abandonment or discontinuance may take effect 30 days after the certificate is issued. If an investigation is conducted, the Commission may issue the certificate as requested, issue it with modifications or subject to terms and conditions, or refuse to issue it. When a certificate is issued after an investigation, abandonment or discontinuance may take effect 120 days after the certificate is...

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