South Carolina Elec. & Gas Co. v. I.C.C., s. 83-1384
| Decision Date | 08 May 1984 |
| Docket Number | 83-1410,Nos. 83-1384,s. 83-1384 |
| Citation | 734 F.2d 1541 |
| Parties | SOUTH CAROLINA ELECTRIC & GAS COMPANY, Carolina Power & Light Company, Duke Power Company, Petitioner, v. INTERSTATE COMMERCE COMMISSION and United States of America, Respondents. EDISON ELECTRIC INSTITUTE, Petitioner, v. INTERSTATE COMMERCE COMMISSION and United States of America, Respondents, Association of American Railroads, Western Coal Traffic League, Intervenors. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Petitions for Review of an Order of the Interstate Commerce commission.
John F. Donelan, Jr., Washington D.C., with whom Frederic L. Wood, John F. Donelan, Harry H. Voigt and Leonard M. Trosten and Michael F. McBride, Washington, D.C., were on the brief, for petitioners in Nos. 83-1384 and 83-1410.
Craig M. Keats, I.C.C., Washington, D.C., with whom John Broadley, Gen. Counsel, Ellen D. Hanson, Associate Gen. Counsel, I.C.C., J. Paul McGrath, Asst. Atty. Gen., Barry Grossman and John P. Fonte, Attys., Dept. of Justice, Washington, D.C., were on the brief, for respondents in Nos. 83-1384 and 83-1410.
Kenneth P. Kolson, Washington, D.C., with whom Richard B. Allen, Chicago, Ill., Robert B. Batchelder, Omaha, Neb., Emried D. Cole, Jr., Louisville, Ky., James L. Howe, III, Richmond, Va., Milton E. Nelson, Chicago, Ill., Hanford O'Hara, and J. Thomas Tidd, Washington, D.C., were on the brief for intervenor, Association of American Railroads in No. 83-1410.
William L. Slover and C. Michael Loftus, Washington, D.C., entered appearances for intervenor, Western Coal Traffic League in No. 83-1410.
Before BORK and SCALIA, Circuit Judges, and SWYGERT, * Senior Circuit Judge for the United States Court of Appeals for the Seventh Circuit.
Opinion for the Court filed by Circuit Judge SCALIA.
In 1978 the Interstate Commerce Commission ("ICC") proposed a study to consider adopting depreciation accounting for the "track structures" accounts of regulated railroads. Track structures include rails, ties, ballast and related materials, and the labor and overhead costs of installing or removing them. The study led to a rulemaking proceeding, which in 1983 produced a final order directing the railroads to adopt depreciation accounting for track structures, and in connection with that change to restate existing track structure accounts, for reporting purposes, at the cost of their most recent replacement. Alternative Methods of Accounting for Railroad Track Structures, 367 I.C.C. 157 (1983). Petitioners support the change to depreciation accounting, but challenge the requirement for restatement of track accounts. In our view the only issue that need be resolved is whether this dispute is ripe for review.
For many years, the ICC directed railroads to maintain their track structures accounts according to the retirement-replacement-betterment method of accounting ("RRB" or "betterment" accounting). Under this method, the original capital investment in track structures, including labor costs, was capitalized as an asset but was not depreciated. Instead, the labor and material costs of subsequent replacements were charged to expense in the year incurred. Betterments, that is, the replacement of track structures with material of a superior quality, were not treated the same as replacements. The added cost of the superior material over the cost of replacing the material removed was added to the (nondepreciable) asset base, while labor costs were expensed in the period in which the betterment was undertaken. The track structure would be carried on the books at its original cost, plus betterment material cost, until abandonment, when the totality would be recovered by charging it as an expense against current earnings. Although betterment accounting had theoretical appeal as a systemwide method of recovering costs, it allowed railroads to manipulate their earnings. In profitable years they could increase their track replacements and, by fully expensing the cost, decrease their earnings. Conversely, they could defer maintenance in unprofitable years and make their financial statement (which did not include depreciation of track structures) appear more profitable than reality would justify.
Depreciation accounting provides for a steady recovery of the cost of an investment over its useful life. The cost of an asset is capitalized in the year in which the investment is made, and a portion of that cost over the asset's salvage value is charged to expense for each period in the asset's life. This system is less subject to manipulation and allows the railroad to recover the costs of an asset in regular increments over its life, rather than only when it is replaced.
The differences between these systems of accounting can be seen in the following examples, used by the Commission in its opinion. See Alternative Methods of Accounting for Railroad Track Structures, 367 I.C.C. 157, 174-75 (1983) ("Commission opinion"). In an inflation-free world, had a railroad using RRB accounting installed track with a twenty-year life at the cost of $100 in 1960, and replaced it in 1980 with track of identical quality at the same cost, it would have listed the asset at a book value of $100 in 1960, and would have taken a $100 expense in 1980, continuing to value the asset at $100 on its books. Had the railroad used depreciation accounting, it would have taken a $5 depreciation expense annually until 1980, when the book value of the asset would have been written down to zero (assuming no salvage value), and it would then have increased the book value to $100 again with the 1980 investment. Although the two methods distribute the cost of the investment differently over the assets's life, a not insubstantial difference, they both allow the railroad to recover the $100 cost of the original investment and to carry the new asset at its initial cost. Inflation, however, complicates the accounting problem. Had the RRB railroad replaced its 1960 track in 1980 with track of identical quality but at the inflated price of $200, it would have taken a $200 expense in 1980, and would have carried the asset on its books at the old value of $100. The depreciation accounting railroad would have valued the newly purchased track on its books at $200, and taken $10 annual depreciation expenses over its useful life.
In soliciting comments about the merits of replacing RRB accounting with depreciation accounting, the ICC also sought comments on whether existing track structures accounts should be restated in order to implement the new system. Notice of Proposed Rulemaking, 46 Fed.Reg. 32,289, 32,291-92 (1981); Supplemental Notice of Proposed Rulemaking, 47 Fed.Reg. 11,539, 11,540-41 (1982). The petitioners filed comments opposing this idea, while the railroads supported it. See Commission opinion at 173-74. In the order under review the Commission directed the railroads, in changing from RRB to depreciation accounting, to restate the value of their assets; track structures previously carried on the railroads' books at initial cost were to be restated at the cost of the most recent replacement, depreciated from that higher figure. To use the figures presented above, a railroad adopting depreciation accounting in 1983 (the first year the ICC ordered reports using depreciation accounting to be prepared) would restate the value of an asset historically carried at $100 to $170 ($200 minus three years of annual depreciation of $10). 1
The petitioners assert that the result of this system is impermissible double counting. They argue that it allows railroads that have already expensed the most recent replacement cost under RRB to recoup the same cost again, as depreciation in future years. Again returning to the Commission's example, a railroad that has made a total of $300 in track investment ($100 in 1960, $200 in 1980) can take a total of $370 in expenses ($200 in 1980 under RRB, $170 over the period of 1983-1999 under depreciation accounting). Under the old RRB system the railroad would only have recovered its actual costs ($200 in 1980, any future replacement costs, and $100 upon line abandonment).
The Commission and intervenor railroads argue that sound accounting practice requires depreciation to be computed on the basis of historical cost, which in the case of replaced track structure is the actual cost of replacement. Any distortion, they claim, is the consequence of the prior RRB system rather than of the new depreciation proposal. They assert, moreover, that RRB never was, and never was meant to be, an accurate reflection of structure-by-structure costs, but was thought to present an approximation of overall costs only when applied to the system as a whole, whereby the annually expensed replacement costs of a relatively few track structures would approximate the overall depreciation of the system as a whole. Applying depreciation accounting as petitioners desire would, they argue, produce for the future a hybrid of two distorted systems: depreciation based on inaccurate costs, and RRB without the original ability to expense replacements. They claim that, system-wide, double counting can only occur if a railroad reduces its track replacement costs to less than the level of its depreciation charges, which would mean allowing track condition to deteriorate. Finally, they note that even structure-by-structure the restatement system would not always overcount. 2
We do not reach the merits of this dispute, since we agree with the preliminary argument of respondent and intervenor that the order is not ripe for judicial review. The purpose of the doctrine of ripeness in the context of reviewing agency action is to "prevent the courts, through avoidance of premature adjudication, from entangling themselves in abstract disagreements over administrative policies, and also to protect the agencies from judicial...
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