United States v. Chesapeake and Ohio Railway Company 26 27, 1976

• Decision Date: 17 June 1976
• Docket Number: No. 75-420,75-420
• Citation: 426 U.S. 500,96 S.Ct. 2318,49 L.Ed.2d 14
• Parties: UNITED STATES and Interstate Commerce Commission, Appellants, v. The CHESAPEAKE AND OHIO RAILWAY COMPANY et al. Argued April 26-27, 1976
• Court: U.S. Supreme Court

426 U.S. 500

96 S.Ct. 2318

49 L.Ed.2d 14

UNITED STATES and Interstate Commerce Commission, Appellants,

v The CHESAPEAKE AND OHIO RAILWAY COMPANY et al.

No. 75-420.

Argued April 26-27, 1976.

Decided June 17, 1976.

Syllabus

In April 1974, virtually all the Nation's railroads, including appellees, the Chessie System, filed with the Interstate Commerce Commission (ICC) a joint petition for a general revenue increase, stating as a reason therefor that "billions of dollars are needed immediately and in the coming decade for maintenance and improvement of the Nation's rail transportation plant." Though the ICC on June 3, 1974, suspended the operation of the new schedules, it authorized the railroads to file new tariffs subject to conditions that would assure that the additional revenue would be expended for "delayed capital improvements" and "deferred maintenance" of plant and equipment, defining those terms in a subsequent order, which also permitted up to 3% Of the revenue derived from the increase to be applied to higher nonfuel material and supply costs. Thereafter, appellees, alleging that they had no "deferred maintenance" or "delayed capital improvements" that would qualify under the ICC's definitions; that they were precluded from applying the additional revenues to earlier commitments; and that they were placed at a competitive disadvantage with railroads that could meet the ICC's conditions, sought reconsideration from the ICC. Dissatisfied with the ICC's response, appellees brought this suit attacking the lawfulness of the conditions imposed and seeking to have the ICC's orders set aside. The District Court issued an injunction prohibiting the ICC from enforcing against appellees those portions of the challenged orders that required revenues to be spent for specified purposes, concluding that "Congress has not authorized the (ICC) to control a carrier's expenditure of funds as a condition to withholding the suspension of rates." Held: The ICC may, as a condition for not suspending and subsequently investigating the lawfulness of a proposed tariff, require the railroads to devote the additional revenues for the purposes the carriers invoked in support of the increase. Pp. 509-515.

(a) Imposition of the condition precedent to the immediate

implementation of the rate increase was directly related to the C's statutory mandate to assess the reasonableness of the rates and to suspend them if there was a question as to their legality. Instead of suspending the proposed rates for the seven-month statutory period, as it could have done, the ICC offered an alternative more precisely tailored to the particular circumstances presented. P. 514.

(b) Since the District Court held that the ICC did not have the power to impose conditions on the refiling of the tariff, it did not consider appellees' contention that their inability to use the new revenues makes the ICC's action arbitrary and capricious as to them, and that question may, if appellees choose, be raised on remand. P. 515.

D.C., 392 F.Supp. 358, reversed and remanded.

Doyle S. Morris, Gen. Counsel, Cleveland, Ohio, for appellees.

Daniel M. Friedman, Washington, D. C., for appellants.

Mr. Chief Justice BURGER delivered the opinion of the Court.

This case is here on direct appeal, pursuant to 28 U.S.C. §§ 1253,¹ 2325, from an order of the District Court which permanently enjoined the Interstate Com- merce Commission from enforcing, against the appellee railway system,² an order requing the application of increased revenues to deferred capital improvements and deferred maintenance as a condition for the nonsuspension of the rate increases. 392 F.Supp. 358 (ED Va.1975).

In April 1974, the Nation's railroads,³ including the appellees, filed with the Interstate Commerce Commission a joint petition for a general revenue increase "with respect to the revenue needs of all carriers by railroad operating in the United States." App. 97. Ex parte No. 305, Nationwide Increase of Ten Percent in Freight Rates and Charges, 1974. The proposed tariffs included a 10% Increase in the level of freight rates. In their petition, the railroads alleged in part:

"The railroad industry is capital-intensive and must generate huge amounts of capital annually just to replace stationary facilities and equipment as it becomes worn out or obsolete. When earnings are inadequate to support this level of spending, as now, then a process of asset liquidation occurs accelerating as facilities and equipment are consumed by increased traffic. Even if the liquidation of assets is arrested by earnings sufficient to support maintenance and replacement there is a further need to modernize and expand capacity if the railroads are to be able to meet sharply increasing demands upon them for economic and efficient transportation. There is presently an abundance of data and analysis which reliably establishes that billions of dollars are needed immediately and in the coming decade for maintenance and improvement of the Nation's rail transportation plant." App. 107.

On June 3, 1974, the Commission entered an order which noted "that the nation's railroads are in need of additional freight revenues to offset recently incurred costs of materials, other than fuel, and to provide an improved level of earnings . . . ." Jurisdictional Statement 42a. The Commission found that the Nation's railroads were "in danger of further deterioration detrimental to the public interest . . .," Ibid., and recognized that "without the additional revenues to be derived from increased freight rates and charges, the earnings of the nation's railroads would be insufficient to enable them under honest, economical and efficient management to provide adequate and efficient railroad transportation services . . . ." Ibid. The Commission concluded that "the increases proposed would, if permitted to become effective, generate additional revenues sufficient to enable the carriers to prevent further deterioration and improve service." At the same time, it noted that "if the schedules were permitted to become effective as filed and without conditions designed to promote service improvements, the increases proposed would be unjust and unreasonable and contrary to the dictates of the national transportation policy . . . ." Id., at 42a-43a. The Commission, therefore, suspended the operation of the new schedules, but authorized the railroads to file new tariffs, subject to conditions providing that revenues generated by the increases "should be expended for capital improvements and deferred maintenance of plant and equipment and the amount needed for in- creased material and supply cost, other than fuel." Id., at 46a.⁴

On July 18, 1974, the Commission entered the second pertinent order in this case. This order defined "deferred maintenance" ⁵ and "delayed capital improvements." ⁶ T order also provided that "up to 3 percentage points of the 10-percent authorization may be applied to increased material and supply costs excluding fuel, provided such costs have been incurred." (Id., at 59a.) The order also permitted increased income taxes to be excluded in determining the balance of funds to be applied to deferred maintenance and delayed capital improvements.

On July 30, appellee Chessie System sought reconsideration of the Commission's order of July 18 "for the reason that under the Commission's definitions of deferred maintenance and delayed capital improvements they will be unable to apply any of the increased revenues derived from the Ex parte No. 305 proceeding (other than those earmarked for increased material and supply costs) to any projects now scheduled or which may be scheduled in the foreseeable future." App. 222. Chessie alleged it had no such "deferred maintenance" or "delayed capital improvements":

"No worthwhile project on Chessie System designed to improve its transportation service to the shipping public has ever been deferred because financing or funding was not available. None will be as long as Chessie System earnings are at levels adequate enough to attract capital. Chessie System has never stinted in its expenditures to provide adequate and efficient transportation service to its customers." (Emphasis in original.) Id., at 223.

Cheie further noted that it had made significant expenditures for capital improvements in the six months prior to the Commission order. It pointed out that these projects did not qualify under the Commission's definition because the funds had been committed before June 1, 1974, and the projects "had not been deferred because funding or financing was not available." Id., at 224. Unless it was permitted to apply these additional revenues to these earlier commitments, contended Chessie, "(t)hey will simply lie dormant in a sterile, segregated account which will result in several serious consequences both to Chessie System and the shipping public." Id., at 225. Basically, argued Chessie, the consequence of the order was to place Chessie "at a distinct competitive disadvantage vis-a-vis other railroads, which for one reason or another have deferred maintenance or delayed capital improvements within the meaning of the Commission's order. These lines will be able to use the additional revenues to buy cars and other equipment while Chessie System's money will lie fallow. In effect, the order penalizes Chessie System and other efficient carriers and rewards only those railroads which are inefficient." Ibid. Chessie specifically asked the Commission to permit the expenditure of funds generated by the increases for any valid corporate purpose if the railroad had no deferred maintenance or deferred capital improvements as defined by the Commission's order. Chessie, for the first time, also argued that the Commission, "exceeded its statutory authority by conditioning the use to which the revenues derived from Ex parte No. 305 might be applied." Id., at 226.

By order dated August 9, 1974, the...