Automobile Club of New York, Inc. v. Port Authority of New York and New Jersey

• Decision Date: 10 October 1989
• Docket Number: D,No. 1281,1281
• Citation: 887 F.2d 417
• Parties: AUTOMOBILE CLUB OF NEW YORK, INC., and AAA Clubs of New Jersey, Appellants, v. The PORT AUTHORITY OF NEW YORK AND NEW JERSEY, Philip D. Kaltenbacher, Robert F. Wagner, Richard C. Leone, James G. Hellmuth, Henry F. Henderson, Jr., William K. Hutchison, H. Carl McCall, John G. McGoldrick, William J. Ronan, Howard Schulman, Robert Van Buren, Hazel Frank Gluck, as Commissioners of the Port Authority of New York and New Jersey, Appellees. ocket 89-7267.
• Court: U.S. Court of Appeals — Second Circuit

Page 417

887 F.2d 417

58 USLW 2240

AUTOMOBILE CLUB OF NEW YORK, INC., and AAA Clubs of New Jersey, Appellants, v. The PORT AUTHORITY OF NEW YORK AND NEW JERSEY, Philip D Kaltenbacher, Robert F. Wagner, Richard C. Leone, James G Hellmuth, Henry F. Henderson, Jr., William K. Hutchison, H Carl McCall, John G. McGoldrick, William J. Ronan, Howard Schulman, Robert Van Buren, Hazel Frank Gluck, as Commissioners of the Port Authority of New York and New Jersey, Appellees.

No. 1281, Docket 89-7267.

United States Court of Appeals, Second Circuit.

Argued June 15, 1989.

Decided Oct. 10, 1989.

Anthony S. Genovese, Kissam & Halpin, New York City (Dennis J. Crossley, John D. D'Ercole, New York City, of counsel), for appellants.

Arthur P. Berg, New York City (Joseph Lesser, Milton H. Pachter, Sholem Friedman, Carlene V. McIntyre, New York City, of counsel), for appellees.

Before OAKES, Chief Judge, VAN GRAAFEILAND and PRATT, Circuit Judges.

OAKES, Chief Judge:

The issue in this case is whether the Port Authority of New York and New Jersey may subsidize the operations of its Port Authority Trans-Hudson ("PATH") Railroad with revenues collected from tolls on its bridges and tunnels. The subsidy is achieved by including PATH in the rate base of the tolls that the Port Authority charges on its bridges and tunnels. The question is then whether the bridge tolls are "just and reasonable," as required by section 135(i) of the Federal-Aid Highway Act of 1987, 33 U.S.C. Sec. 508 (Supp. V 1987).

The Automobile Club of New York and five AAA Clubs of New Jersey (the "Auto Clubs") sued the Port Authority after it raised its bridge and tunnel tolls (along

                with PATH fares) in 1987.  The Auto Clubs claimed that, with PATH in the rate base, the new bridge tolls were not just and reasonable.  Judge Milton Pollack found that the Port Authority's bridges, tunnels, bus terminal, bus programs and PATH form an "integrated, interdependent transportation system."    Automobile Club v. Port Auth., 706 F.Supp. 264, 280 (S.D.N.Y.1989).  Accordingly, he decided, it is proper to include PATH in the rate base, from which it follows that the tolls are just and reasonable.  Id. at 276-77.    We agree and affirm the decision below
                

BACKGROUND

New York and New Jersey created the Port Authority by interstate compact in 1921, N.Y. Unconsol.Law Secs. 6401 et seq. (McKinney 1979), ¹ with the consent of Congress, Act of Aug. 23, 1921, ch. 77, 42 Stat. 174. The two states recognized that, with the development of commerce, the territory in and around the port of New York had become "commercially one center or district." N.Y.Unconsol.Law Sec. 6401. In creating the Port Authority, they sought to achieve "better co-ordination of the terminal, transportation and other facilities of commerce in, about and through the port of New York." Id.

The Port Authority owns and operates a transportation network which provides river crossings linking southern New York and northern New Jersey. This network consists of four bridges, the George Washington Bridge (including a bus station), the Bayonne Bridge, the Goethals Bridge, and the Outerbridge Crossing; two tunnels, the Lincoln Tunnel and the Holland Tunnel; the bus terminal at 40th Street and 8th Avenue in Manhattan; the Port Authority Bus Programs; and the PATH railroad system. PATH's lines run from Newark and Hoboken, New Jersey to various points in New York's central business district ("CBD," the area of Manhattan south of 59th Street).

The Port Authority's bridges, tunnels and bus terminal, taken together, operate at a profit. For example, in 1986 (before the toll increases at issue here), they produced $243.7 million in revenues and incurred $213.4 million in expenses (including depreciation), yielding $30.3 million in net income. In the same year, PATH lost $92.2 million ($49.0 million in revenues against $141.2 million in total expenses). Thus, the inclusion of PATH (along with $28.8 million in expenses attributable to the depreciation and amortization of the Port Authority's Bus Programs) resulted in a net operating loss that year of $90.7 million for the Port Authority's Interstate Transportation Network. Automobile Club, 706 F.Supp. at 283; Court Exhibit I, Exhibit F.

Tolls on the Port Authority's bridges must be "just and reasonable." This requirement originated in section 4 of the Bridge Act of 1906, 33 U.S.C. Sec. 494 (1982). In 1987, Congress repealed the statutory provision that gave the Secretary of Transportation the power to prescribe "just and reasonable" tolls. Federal-Aid Highway Act of 1987, Pub.L. No. 100-17, Sec. 135(a), 101 Stat. 134, 173 (the "Highway Act"). At the same time, Congress retained the requirement that tolls be "just and reasonable." Id. Sec. 135(i), 101 Stat. at 174 (codified at 33 U.S.C. Sec. 508 (Supp. V 1987)). The House Conference Report accompanying the Highway Act explained that the "just and reasonable" requirement

is not intended to interfere with or in any way restrict existing authority granted to multi-modal transportation agencies, such as the Port Authority of New York and New Jersey, that operate bridges along with other facilities to use bridge toll revenues for nonbridge purposes or the pooling or combination of the revenues from all of their facilities.

H.R.Conf.Rep. No. 27, 100th Cong., 1st Sess. 175, reprinted in 1987 U.S.Code Cong. & Admin.News 66, 159.

In 1987, the Port Authority decided to engage in a $1.5 billion capital improvement The Auto Clubs are non-profit organizations which promote the interests and welfare of motor vehicle users. They sued for a declaratory judgment that the 1987 increase in the Port Authority's bridge tolls violated the Highway Act's requirement that tolls be just and reasonable. See 33 U.S.C. Sec. 508 (Supp. V. 1987). They also alleged that the Port Authority's action violated 42 U.S.C. Sec. 1983 (1982) and the Commerce Clause of the Constitution. The Auto Clubs claim that PATH should not be included in the rate base of the Port Authority's bridges and tunnels because PATH is unrelated to the other river crossings and because its fares remain too low, even after the 1987 increase. They then assert that, if PATH is excluded from the rate base, the Port Authority's rate of return on its unamortized investment in use is excessive. The Auto Clubs do concede, however, that the rate of return is reasonable if the replacement cost method of accounting is used. In addition, they accept that the rate of return is reasonable, regardless of the method of accounting used, if PATH is properly included in the rate base. Automobile Club, 706 F.Supp. at 268-69 & n. 3. Thus, the principal issue in their lawsuit was the propriety of including PATH in the rate base.

                program.  Capital spending was necessary in order to maintain and modernize its interstate transportation network as use of its facilities increased rapidly.  The Port Authority planned to spend $830 million to improve the PATH system, $495 million on Port Authority bridges, tunnels and bus terminals, and $150 million to establish a ferry service between Hoboken and lower Manhattan.  The existing level of tolls and fares would be inadequate to operate the transportation network and to finance this capital program.  Automobile Club, 706 F.Supp. at 281.    The Port Authority therefore increased the tolls on its bridges and tunnels, as well as the fares for travel on PATH.  For example, non-discounted, eastbound--no toll is charged for vehicles traveling west--passenger car tolls on bridges and tunnels rose from $2.00 to $3.00, and the price of twenty commuter discount tickets to pay such tolls rose from $20.00 to $40.00.  PATH fares, which are charged for travel in each direction, were increased from $.75 to $1.00.  Id. at 267-68
                

Most of the relevant facts were stipulated by the parties; Judge Pollack received the evidence and heard testimony from witnesses during a two-day bench trial. In his decision, he observed that the legislative histories of the Bridge Act and the Highway Act shed little light on the "just and reasonable" requirement. The 1987 Conference Report did, however, indicate sufficient "flexibility" to permit the Port Authority to include facilities other than bridges, tunnels and terminals in its rate base. Id. at 273.

Judge Pollack also canvassed the case law. He found that City of Burlington v. Turner, 336 F.Supp. 594 (S.D. Iowa 1972), modified and aff'd, 471 F.2d 120 (8th Cir.1973), simply established that the "just and reasonable" rule must include a reasonable return on the investment of capital. Automobile Club, 706 F.Supp. at 273 n. 9. The case of Clarksburg-Columbus Short Route Bridge Co. v. Woodring, 89 F.2d 788 (D.C.Cir.), remanded for dismissal as moot, 302 U.S. 658, 58 S.Ct. 365, 82 L.Ed. 509 (1937), had greater relevance: it involved two competing bridges. The Secretary of War (exercising the power later entrusted to the Secretary of Transportation) ordered the tolls on one bridge lowered. The court held that the Secretary erred in considering only the bridge owner's return on his investment. Competitive factors should also be considered, as in I.C.C. ratemaking. The other bridge might be driven out of business by the reduced tolls; therefore, the owner of that bridge had a right to be heard before the tolls were lowered. 89 F.2d at 793-94. Clarksburg-Columbus thus "established the principle that a toll producing a seemingly unreasonably high rate of return may in fact be reasonable if its rate base does not include other facilities which are related to the facility in question." Automobile Club, 706 F.Supp. at 273. In this case, we are concerned with different facilities that are owned and operated by one entity, the Port Authority. The principle in Finally, there was Automobile Club v. Cox, 592 F.2d 658 (2d Cir.1979), a prior incarnation of the present case. In Cox, the Auto Clubs contested the decision of the Federal Highway Administrator...