762 F.2d 1053 (D.C. Cir. 1985), 83-2331, Salt River Project Agr. Imp. and Power Dist. v. United States

Docket Nº:83-2331.
Citation:762 F.2d 1053
Party Name:SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, Petitioner, v. UNITED STATES of America and Interstate Commerce Commission, Respondents, Southern Pacific Transportation Company, Intervenor.
Case Date:May 31, 1985
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit

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762 F.2d 1053 (D.C. Cir. 1985)


DISTRICT, Petitioner,


UNITED STATES of America and Interstate Commerce Commission,


Southern Pacific Transportation Company, Intervenor.

No. 83-2331.

United States Court of Appeals, District of Columbia Circuit

May 31, 1985

Argued Jan. 11, 1985.

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[Copyrighted Material Omitted]

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Petition for Review of an Order of the Interstate Commerce commission.

Richard S.M. Emrich, Chicago, Ill., for petitioner.

Henri F. Rush, Associate Gen. Counsel, I.C.C., Washington, D.C., with whom J. Paul McGrath, Asst. Atty. Gen., Robert S. Burk, Acting Gen. Counsel, I.C.C., John J. Powers, III, George Edelstein, Attys., Dept. of Justice, Timm L. Abendroth, and Lawrence H. Schecker, Attys., I.C.C., Washington, D.C., were on the brief, for respondents. John P. Fonte, Atty., Dept. of Justice, Washington, D.C., also entered an appearance for respondent U.S. of America.

Louis P. Warchot, San Francisco, Cal., with whom Stuart E. Vaughn, Chicago, Ill., was on the brief, for intervenor. Thormund A. Miller, San Francisco, Cal., also entered an appearance for intervenor.

Before TAMM and WALD, Circuit Judges, and MacKINNON, Senior Circuit Judge.

Opinion for the court filed by Circuit Judge TAMM.

Concurring opinion filed by Circuit Judge WALD.

TAMM, Circuit Judge:

Salt River Project Agricultural Improvement and Power District (Salt River) petitions this court to review a final decision of the Interstate Commerce Commission (ICC or Commission) that Southern Pacific Transportation Company (Southern Pacific) lacks market dominance. As a result of its market dominance determination, the ICC lacks jurisdiction under 49 U.S.C. Sec. 10709(b) (1982) to determine the reasonableness of the rail rates charged by Southern Pacific for delivery of fuel oil from three refineries in California to two of Salt River's fourteen generating facilities in Arizona. Salt River contends, inter alia, that the ICC's determinations are arbitrary and capricious and not supported by substantial evidence. We agree that the ICC's findings on intramodal and intermodal competition lack record support, but we uphold its determination that Southern Pacific lacks market dominance on the basis of the ICC's findings on product and geographic competition.


Salt River, a political subdivision of the State of Arizona, is a public utility providing electricity to over 341,000 residential, commercial, industrial, and agricultural customers in Maricopa, Gila, and Pinal Counties. It generates power at 14 generating stations with an aggregate generating capacity of 3,156 megawatts. Six of the plants burn coal, five use hydro power, and the other three can burn either fuel oils or natural gas.

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Salt River generates power at three levels. Its base load is generated by its coal burning plants. When demand exceeds these plants' capacity, power is supplied by its intermediate level units. When the output of the intermediate units is exceeded in emergencies or during sudden but short demand surges, Salt River's peak load units are activated.

The two plants involved in this case, which together account for approximately 19% of Salt River's generating capacity, are the Kyrene Steam Plant at Helena, Arizona, and the Santan Generating Plant at Gilbert, Arizona. Kyrene consists of two steam units that use either residual fuel oil or natural gas, and four simple cycle combustion turbines that burn either distillate fuel oil or natural gas. The Kyrene steam units operate at the intermediate level and the turbines operate at the peak level. The Santan plant consists of four combined cycle turbines, similar to the Kyrene combustion turbines. Until 1981, Santan could use only distillate fuel oil. In that year, however, the plant was converted and can now burn either distillate fuel oil or natural gas. The Santan turbines operate at the peak level.

The distillate and residual fuel oils used by Salt River must meet exact specifications to protect its generating equipment and satisfy environmental emission standards. In recent years, it has obtained suitable distillate fuel oil from nine refineries and residual fuel oil from twelve refineries. Salt River transports fuel oil to Kyrene and Santan via pipeline, rail, and truck. The preferred mode of transportation for distillate fuel oil is via Southern Pacific Pipe Lines, Inc. (SPPL), an affiliate of Southern Pacific. SPPL can move distillate from Watson and Norwalk, California to Salt River's tank farm in Phoenix. The distillate is then trucked to Santan and Kyrene. SPPL also has an east line to Phoenix from El Paso, Texas. The aggregate pipeline-truck transportation cost is far lower than transporting oil via rail or truck.

Salt River prefers to transport the remainder of its distillate and, because residual fuel oil cannot be transported by pipeline, all its residual shipments by rail. Consistent with that preference, Salt River maintains its own fleet of 193 Jumbo Class (23,500 gallon) rail tank cars. Southern Pacific can transport distillate and residual fuel oil from three refineries located in Bakersfield, Harperstown, and Maltha, California, to Salt River's Kyrene and Santan plants. The Atchison, Topeka and Santa Fe Railway Company (Santa Fe) serves each of the three origins, but not the destinations. For the remainder of its fuel oil needs, Salt River uses trucks. Because motor carrier rates are significantly higher than either pipeline-truck or rail rates, however, trucks are the least-preferred mode of transportation.

Salt River determines whether to use natural gas or fuel oils based on the price and availability of the fuels. In recent years, it has increasingly relied on natural gas because it is readily available and much less expensive than fuel oils. 1 Consequently, Salt River last used Southern Pacific to transport fuel oils during the winter of 1979 when it experienced an emergency need for fuel after its coal supplies froze. Natural gas was curtailed so Salt River was forced to rely on oil. Joint Appendix (J.A.) at 23.

Even though it was not currently shipping oil via Southern Pacific, on March 27, 1981, Salt River filed a complaint challenging the reasonableness of Southern Pacific's rates on its routes from Bakersfield, Harperstown, and Maltha (hereinafter referred to as the Southern Pacific origins) to Kyrene and Santan. Unless Salt River filed its complaint at that time, Southern Pacific's rates would have been deemed reasonable under the recently passed Staggers Rail Act of 1980 (Staggers Act), Pub.L. No. 96-448, 94 Stat. 1895 (codified at 49 U.S.C. Secs. 10101a et seq. (1982)). Section

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229 of the Staggers Act allowed shippers and receivers 180 days from the effective date of the Act (October 1, 1980) to challenge the reasonableness of existing railroad rates. See 49 U.S.C. Sec. 10701a note (1982); Arizona Public Service Co. v. United States, 742 F.2d 644, 647 (D.C.Cir.1984).

Under the regulatory scheme, the ICC may not examine the reasonableness of rates unless it first determines that the railroad is market dominant. 49 U.S.C. Sec. 10709(b) (1982). The ALJ found that Southern Pacific is market dominant but held that the rates had not been shown unreasonable. Salt River appealed the reasonableness determination, and Southern Pacific appealed the market dominance determination. The ICC Review Board, considering evidence of the four types of competition set forth in Ex Parte No. 320 (Sub-No. 2), Market Dominance Determinations and Consideration of Product Competition, 365 I.C.C. 118 (1981), reversed the ALJ and found that Southern Pacific lacks market dominance and that the ICC therefore has no jurisdiction to determine the reasonableness of the rates. Salt River petitioned this court for review of that determination.


  1. The Review Board's Jurisdiction

    Salt River argues, as a threshold matter, that Southern Pacific's administrative appeal of the ALJ's initial decision was improper under the ICC's rules of practice and therefore the Review Board acted ultra vires. In essence, Salt River argues that Southern Pacific merely asked the Review Board to reweigh the evidence of market dominance, in contravention of ICC regulations limiting the issues that can be raised on appeal to factual, legal, policy, or procedural errors. 2

    We reject this argument. Southern Pacific challenged the ALJ's market dominance determination on the grounds that the ALJ "fail[ed] to consider properly evidence of product [and geographic] competition in accordance with the Commission's market dominance guidelines." J.A. at 167. Under the Staggers Act, a threshold finding of market dominance is necessary to the Commission's jurisdiction to determine whether the railroad's rates are reasonable. 49 U.S.C. Sec. 10709(b). Whether a railroad is market dominant is a legal conclusion based on evidence submitted in accordance with the Commission's guidelines. A finding of market dominance is therefore a "necessary legal conclusion." 49 C.F.R. Sec. 1115.2(b)(2). Southern Pacific, though not couching its appeal in the precise words of the regulations, essentially challenged as "contrary to law" the ALJ's market dominance determination. Id. The Review Board therefore lawfully acted on Southern Pacific's administrative appeal.

  2. The Standard of Review

    The parties also dispute the proper standard of review in this case. Salt River contends that the "substantial evidence" test of 5 U.S.C. Sec. 706(2)(E) applies as well as the "arbitrary and capricious" test of 5 U.S.C. Sec. 706(2)(A). 3 The Commission argues

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    that only the "arbitrary and capricious" test...

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