Association of American Railroads v. I.C.C., s. 90-1014

• Decision Date: 13 November 1992
• Docket Number: Nos. 90-1014,90-1428,91-1015 and 91-1329,s. 90-1014
• Citation: 978 F.2d 737
• Parties: ASSOCIATION OF AMERICAN RAILROADS, Petitioner, v. INTERSTATE COMMERCE COMMISSION and United States of America, Respondents, National Industrial Transportation League, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 737

978 F.2d 737

298 U.S.App.D.C. 240

ASSOCIATION OF AMERICAN RAILROADS, Petitioner, v. INTERSTATE COMMERCE COMMISSION and United States of America Respondents National Industrial Transportation League, Intervenor.

Nos. 90-1014, 90-1428, 91-1015 and 91-1329.

United States Court of Appeals District of Columbia Circuit.

Argued Sept. 18, 1992.

Decided Nov. 13, 1992.

[298 U.S.App.D.C. 241] Petitions for Review of Orders of the Interstate Commerce commission.

Paul A. Cunningham, with whom Robert M. Jenkins, III, Marc D. Machlin, Robert W. Blanchette, Washington, D.C., Kenneth P. Kolson, Vienna, Va., Constance L. Abrams, Philadelphia, Pa., Robert B. Batchelder, Basil Cole, Washington, D.C., James L. Howe, III, Roanoke, Va., Robert T. Opal, Chicago, Ill., Charles C. Rettberg, Jacksonville, Fla., Michael E. Roper, Fort Worth, Tex., John MacDonald Smith, San Francisco, Cal., Myles L. Tobin, Chicago, Ill., and Richard E. Weicher, Schaumburg, Ill., were on the brief, for petitioner.

Jon B. Jacobs and J. Thomas Tidd, Washington, D.C., also entered an appearance for petitioner.

Charles A. Stark, Atty., I.C.C., with whom Ellen D. Hanson, Sr. Associate Gen. Counsel, I.C.C., James F. Rill, Asst. Atty. Gen., John J. Powers, III, and John P. Fonte, Attys., Dept. of Justice, Washington, D.C., were on the brief, for appellee.

Frederic L. Wood and Nicholas J. DiMichael, Washington, D.C., were on the brief, for intervenor National Indus. Transp. League. Before WALD, SILBERMAN, and SENTELLE, Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge:

This is a petition for review by the Association of American Railroads ("AAR") of the revenue adequacy determinations of the Interstate Commerce Commission ("ICC" or "Commission") for 1988 ¹ and 1989. ² The issue before us is whether the Commission's decision to adopt acquisition cost valuation in computing railroad revenue adequacy, rather than continuing to use original cost valuation, was rational and lawful. Because the ICC has presented a reasoned explanation for its change in policy, we decline to substitute our judgment for the Commission's. We therefore affirm the Commission's modifications in valuating the railroads' investment bases.

I

Pursuant to Congress's direction that it develop standards to determine adequate railroad revenue levels and assist carriers in attaining them, 49 U.S.C. § 10704(a)(2) (1988), the ICC determines which railroads are attaining an adequate level of revenues on an annual basis. 49 U.S.C. § 10704(a)(3), (4). Revenues are deemed adequate when a railroad earns a rate of return on its investment at least equal to the current cost of capital, i.e., the market cost of debt and equity, otherwise understood as the "minimum necessary to attract and maintain capital in the railroad ... industry." Standards For Railroad Revenue Adequacy, 364 I.C.C. 803, 809-10 (1981), aff'd, Bessemer & Lake Erie R.R. Co. v. ICC, 691 F.2d 1104 (3d Cir.1982), cert. denied sub nom. Western Coal Traffic League v. United States, 462 U.S. 1110, 103 S.Ct. 2463, 77 L.Ed.2d 1340 (1983).

To calculate revenue adequacy, the Commission divides a carrier's net railway operating income by its net investment base to determine its return on investments for that year. It then compares the railroad's return on investment with the industry's cost of capital for that year. When the cost of capital exceeds the return on investment, the carrier is deemed revenue inadequate. The more a railroad's net investment base shrinks relative to its net operating income, the greater the likelihood that a railroad will be found to be revenue adequate.

Notwithstanding the pejorative connotations inherent in the term, a determination of "revenue inadequacy" is generally advantageous to a carrier. Such a finding permits a railroad to raise its rates without regulatory scrutiny by as much as 4% above the rate of inflation each year. 49 U.S.C. § 10707a(d)(1), (3), (e). In addition, revenue adequacy is a factor in ICC assessment of the reasonableness of any railroad rates the agency reviews.

In calculating revenue adequacy for 1988, the ICC identified five proposed computational adjustments to its revenue adequacy standards. Only one of these is at issue here: the proposal to evaluate railroad assets acquired from other railroads based on their "acquisition cost" (cost to the acquirer) rather than on their "original" or "predecessor" cost (book value to the seller). The latter represents the costs to the railroads when assets are first dedicated to public service by the seller and allows the seller's book value to be carried over to its successor, while the former is defined as the fair market value of an asset as established by its purchase price when acquired and as shown on the seller's railroad books, less depreciation. 1988 Determination, 6 I.C.C.2d at 164 & n. 3. Under acquisition costing, the purchasing carrier will report its own higher value when it acquires another's property for a price in excess of the seller's book value; conversely when the purchaser pays less than the seller's book value, the purchaser's net investment base will reflect its lower value. Id. at 935 n. 3.

Because economic conditions in the railroad industry affect the value of railroad assets, a net investment base calculated by acquisition costs will often be smaller than one calculated using original cost. The ICC issued tentative 1988 revenue adequacy determinations for potentially affected carriers pending a final decision on whether to adopt the proposed revisions.

One carrier, some shipper groups, and the AAR filed comments on the proposed computational adjustments, and the ICC subsequently resolved several of the disputed issues. Having recomputed revenue adequacy for 1988, the Commission ultimately found two of the fifteen railroads with operating revenues of $50 million or more to be revenue adequate. Revenue Adequacy--1988 Determination, 6 I.C.C.2d 933, 55 Fed.Reg. 32318 (Aug. 8, 1990) (C.L. 88-10) ("1988 Determination "). Despite the introduction of the new valuation methodology, the two carriers affected by the use of acquisition cost rather than original cost were deemed revenue inadequate in 1988. Id. at 951.

The following year, the ICC found two carriers to be revenue adequate. Railroad Revenue Adequacy--1989 Determination, 7 I.C.C.2d 158, 55 Fed.Reg. 48177 (Nov. 19, 1990) (C.L. 89-1) ("1989 Determination "). In granting AAR's motion for reconsideration, the ICC agreed to review the investment base valuation issue, but ultimately refused to amend its methodology. 1989 Determination, 7 I.C.C.2d 580, 585 (1991) (C.L. 89-8). AAR petitioned this Court for review of the 1988 and 1989 determinations, both of which utilized the acquisition cost valuation.

II

We note at the outset that our role in reviewing agency regulations or modifications thereof is a limited one. This Court is not to inquire as to whether the agency's decision is wise as a policy matter; indeed, we are forbidden "from substituting [our] judgment for that of the agency." Ethyl Corp. v. EPA, 541 F.2d 1, 34 (D.C.Cir.) (en banc), cert. denied sub nom. E.I. du Pont de Nemours & Co. v. EPA, 426 U.S. 941, 96 S.Ct. 2662, 49 L.Ed.2d 394 (1976). Rather, we must affirm unless the regulations are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. 5 U.S.C. § 706(2)(A) (1966); United States v. Allegheny-Ludlum Steel Corp., 406 U.S. 742, 749, 92 S.Ct. 1941, 1947, 32 L.Ed.2d 453 (1972). We presume the agency's action is valid. ICC v. Jersey City, 322 U.S. 503, 512, 64 S.Ct. 1129, 1133, 88 L.Ed. 1420 (1944); Ethyl Corp. v. EPA, 541 F.2d at 34.

This "highly deferential" standard would not permit us to substitute our judgment for that of the agency. We may vacate the ICC's decisions if the agency "has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before an agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise." Motor Vehicle Mfrs. Ass'n v. State Farm Mutual Auto Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 2867, 77 L.Ed.2d 443 (1983). Indeed, because Congress has specifically delegated the responsibility to develop revenue adequacy standards to the ICC, 49 U.S.C. § 10704(a)(2), the Commission here is operating "at the zenith of its powers." Central and Southern Motor Freight Tariff Ass'n v. United States, 777 F.2d 722, 729 (D.C.Cir.1985) (citing Batterton v. Francis, 432 U.S. 416, 425-26, 97 S.Ct. 2399, 2405-06, 53 L.Ed.2d 448 (1977)).

When, as in the present matter, the Commission revises or even reverses previous rules rather than promulgating new ones, deference nonetheless remains in order, so long as the Commission presents a reasoned analysis supporting its action. Center For Science v. Department of Treasury, 797 F.2d 995, 999 (D.C.Cir.1986) (citing Motor Vehicle Mfrs. Ass'n v. State Farm, 463 U.S. at 42, 103 S.Ct. at 2866). We find that the ICC did indeed make a rational choice between conflicting policy alternatives.

III

At the heart of the AAR's challenge to the ICC's valuation modifications as arbitrary and capricious is the claim that acquisition costing is inconsistent with the Interstate Commerce Act's mandate that revenue levels be established adequate to permit railroads to earn "a reasonable and economic profit or return (or both) on capital employed in the business." 49 U.S.C. § 10704(a)(2).

First, the AAR contends that acquisition cost valuation will both deny railroads capital return sufficient to meet public demand for rail service and prevent carriers from recovering adequate depreciation charges. Without an "objective starting point" such as original cost for valuation, the AAR contends, a "vicious cycle" may emerge. Under...