Filed: Feb. 10, 1999
Latest Update: Mar. 02, 2020
Summary: United States Court of Appeals FOR THE EIGHTH CIRCUIT _ No. 97-1081 _ MidAmerican Energy Company, * * Petitioner, * * Western Coal Traffic League, * * Intervenor on Appeal, * * v. * * Petition for Review of an Order Surface Transportation Board; * of the Surface Transportation Board. United States of America, * * Respondents, * * Norfolk Southern Railway Company; * Union Pacific Corporation; Southern * Pacific Transportation Company; * Consolidated Rail Corporation; * Association of American Rai
Summary: United States Court of Appeals FOR THE EIGHTH CIRCUIT _ No. 97-1081 _ MidAmerican Energy Company, * * Petitioner, * * Western Coal Traffic League, * * Intervenor on Appeal, * * v. * * Petition for Review of an Order Surface Transportation Board; * of the Surface Transportation Board. United States of America, * * Respondents, * * Norfolk Southern Railway Company; * Union Pacific Corporation; Southern * Pacific Transportation Company; * Consolidated Rail Corporation; * Association of American Rail..
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United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 97-1081
___________
MidAmerican Energy Company, *
*
Petitioner, *
*
Western Coal Traffic League, *
*
Intervenor on Appeal, *
*
v. *
* Petition for Review of an Order
Surface Transportation Board; * of the Surface Transportation Board.
United States of America, *
*
Respondents, *
*
Norfolk Southern Railway Company; *
Union Pacific Corporation; Southern *
Pacific Transportation Company; *
Consolidated Rail Corporation; *
Association of American Railroads, *
*
Intervenors on Appeal. *
___________
No. 97-1284
___________
Central Power & Light Company, *
*
Petitioner, *
*
Western Coal Traffic League, *
*
Intervenor on Appeal, *
*
v. *
*
Surface Transportation Board; *
United States of America, *
*
Respondents, *
*
Norfolk Southern Railway Company; *
Union Pacific Corporation; Southern *
Pacific Transportation Company; *
Consolidated Rail Corporation; *
Association of American Railroads, *
*
Intervenors on Appeal. *
___________
No. 97-1331
___________
National Industrial Transportation *
League, *
*
Petitioner, *
*
Western Coal Traffic League, *
*
Intervenor on Appeal, *
*
v. *
*
Surface Transportation Board; *
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United States of America, *
*
Respondents, *
*
Pennsylvania Power & Light Company; *
Norfolk Southern Railway Company; *
Union Pacific Corporation; Southern *
Pacific Transportation Company; *
Consolidated Rail Corporation; *
Association of American Railroads, *
*
Intervenors on Appeal. *
___________
No. 97-1332
___________
Union Pacific Railroad Company; *
Southern Pacific Transportation *
Company, *
*
Petitioners, *
*
v. *
*
Surface Transportation Board; *
United States of America, *
*
Respondents, *
*
Pennsylvania Power & Light Company; *
Norfolk Southern Railway Company; *
MidAmerican Energy Company; *
National Industrial Transportation *
League; Union Pacific Corporation; *
Consolidated Rail Corporation; *
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Association of American Railroads; *
Western Coal Traffic League, *
*
Intervenors on Appeal. *
___________
No. 97-1333
___________
Consolidated Rail Corporation, *
*
Petitioner, *
*
v. *
*
Surface Transportation Board; *
United States of America, *
*
Respondents, *
*
Pennsylvania Power & Light Company; *
Norfolk Southern Railway Company; *
National Industrial Transportation *
League; Union Pacific Corporation; *
Southern Pacific Transportation *
Company; Association of American *
Railroads; Western Coal Traffic League, *
*
Intervenors on Appeal. *
___________
No. 97-1335
___________
Association of American Railroads, *
-4-
Petitioner, *
*
v. *
*
Surface Transportation Board; *
United States of America, *
*
Respondents, *
*
Pennsylvania Power & Light Company; *
Norfolk Southern Railway Company; *
National Industrial Transportation *
League; CSX Transportation, Inc.; *
Union Pacific Corporation; Southern *
Pacific Transportation Company; *
Consolidated Rail Corporation; *
Western Coal Traffic League, *
*
Intervenors on Appeal. *
___________
No. 97-1583
___________
Western Coal Traffic League, *
*
Petitioner, *
*
v. *
*
Surface Transportation Board; *
United States of America, *
*
Respondents, *
*
Union Pacific Corporation; Southern *
-5-
Pacific Transportation Company; *
Consolidated Rail Corporation; *
Association of American Railroads, *
*
Intervenors on Appeal. *
___________
No. 97-2204
___________
Western Resources, Inc., *
*
Petitioner, *
*
Western Coal Traffic League, *
*
Intervenor on Appeal, *
*
v. *
*
Surface Transportation Board; *
United States of America, *
*
Respondents, *
*
Consolidated Rail Corporation; Union *
Pacific Railroad Company; Southern *
Pacific Transportation Company; *
Association of American Railroads; *
Norfolk Southern Railway Company, *
*
Intervenors on Appeal. *
___________
No. 97-2206
-6-
___________
Association of American Railroads, *
*
Petitioner, *
*
v. *
*
Surface Transportation Board; *
United States of America, *
*
Respondents, *
*
Pennsylvania Power & Light Company; *
Norfolk Southern Railway Company; *
Western Coal Traffic League; National *
Industrial Transportation League; *
MidAmerican Energy Company; *
Western Resources, *
*
Intervenors on Appeal. *
___________
No. 97-2260
___________
Consolidated Rail Corporation; *
*
Petitioner, *
*
Association of American Railroads, *
*
Intervenor on Appeal, *
*
v. *
*
-7-
Surface Transportation Board; *
United States of America, *
*
Respondents, *
*
Pennsylvania Power & Light Company; *
Norfolk Southern Railway Company; *
Western Coal Traffic League; National *
Industrial Transportation League; *
MidAmerican Energy Company, *
*
Intervenors on Appeal. *
___________
No. 97-2303
___________
Union Pacific Corporation; Southern *
Pacific Transportation Company, *
*
Petitioners, *
*
Association of American Railroads, *
*
Intervenor on Appeal, *
*
v. *
*
Surface Transportation Board; *
United States of America *
*
Respondents, *
*
Pennsylvania Power & Light Company; *
Norfolk Southern Railway Company; *
Western Coal Traffic League; *
-8-
National Industrial Transportation *
League; MidAmerican Energy Company,*
*
Intervenors on Appeal. *
___________
No. 97-2328
___________
Western Coal Traffic League, *
*
Petitioner, *
*
v. *
*
Surface Transportation Board; *
United States of America, *
*
Respondents, *
*
Consolidated Rail Corporation; *
Association of American Railroads; *
Norfolk Southern Railway Company; *
Union Pacific Railroad Company; *
Southern Pacific Transportation *
Company, *
*
Intervenors on Appeal. *
___________
No. 97-2462
___________
National Industrial Transportation *
League; *
-9-
*
Petitioner, *
*
Western Coal Traffic League, *
*
Intervenor on Appeal, *
*
v. *
*
Surface Transportation Board; *
United States of America, *
*
Respondents, *
*
Union Pacific Railroad Company; *
Southern Pacific Transportation *
Company; Association of American *
Railroads; Consolidated Rail *
Corporation, *
*
Intervenors on Appeal. *
___________
No. 97-2464
___________
MidAmerican Energy Company, *
*
Petitioner, *
*
Western Coal Traffic League, *
*
Intervenor on Appeal, *
*
v. *
*
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Surface Transportation Board; *
United States of America, *
*
Respondents, *
*
Union Pacific Railroad Company; *
Southern Pacific Transportation *
Company; Association of American *
Railroads; Consolidated Rail *
Corporation, *
*
Intervenors on Appeal. *
___________
Submitted: November 18, 1997
Filed: February 10, 1999
___________
Before WOLLMAN and HANSEN, Circuit Judges, and STEVENS,1 District Judge.
___________
WOLLMAN, Circuit Judge.
This is a consolidated action involving MidAmerican Energy Company
(MidAmerican), Central Power & Light Company (CP&L), and Pennsylvania Power
& Light Company (PP&L) (collectively the utilities). They petition for review of two
orders of the Surface Transportation Board (the Board) dismissing their complaints
against rail carriers. The carriers cross-appeal from the portion of the Board’s
decisions regarding reasonableness review of contractual shipping rates, arguing that
1
The HONORABLE JOSEPH E. STEVENS, United States District Judge for
the Western District of Missouri, sitting by designation. Judge Stevens died on
December 18, 1998. This opinion is consistent with the views he expressed at our
post-argument conference.
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the issue was not ripe for adjudication. We affirm the dismissal of the utilities’
complaints. We dismiss the cross-appeal for lack of jurisdiction.
I.
MidAmerican ships coal approximately 750 miles from the Powder River Basin
in Wyoming to its generating facility near Sergeant Bluff, Iowa. At the time it filed
its complaint, MidAmerican was shipping the coal from origin to destination under
contract with the Union Pacific Railroad (UP). This contract was scheduled to expire
at the end of 1997. Anticipating the contract’s expiration, MidAmerican began to
compare UP’s rates with those of other carriers to obtain the most favorable shipping
rates. The only other carrier offering rail service originating in the Powder River
Basin is the Burlington Northern Railroad (BN).
BN does not service the final 90 miles of the route, a stretch from Council
Bluffs, Iowa, to the generating station. Such a rail segment is commonly termed a
“bottleneck,” because it is serviced by only one carrier. Thus, MidAmerican could
not directly compare the rates of BN and UP, as UP is the only carrier capable of
shipping all the way to the generating station. To obtain a competitive rate for the
660-mile stretch from Wyoming to Council Bluffs, MidAmerican requested that UP
provide a rate for its service over the bottleneck.
UP refused to provide the rate. Instead, it provided a rate for the entire route
from the Powder River Basin to the generating station. This precluded MidAmerican
from using BN as a carrier from Wyoming to Council Bluffs, essentially extending
the bottleneck over the entire 750-mile route. Consequently, MidAmerican brought
an action before the Board requesting a rate prescription over the 90-mile bottleneck
segment. Although MidAmerican could not challenge a local “unit-train” rate for the
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bottleneck service, it asked the Board to prescribe a reasonable rate for the bottleneck
if it found the published “class” rate for the 90-mile stretch unreasonable.2
CP&L transports coal from the Powder River Basin in Wyoming to its Coleto
Creek generating station in Texas. Although both BN and UP offer rail service
originating at the coal mines, the Southern Pacific Railroad (SP) is the only carrier
from an interchange point in Victoria, Texas, to Coleto Creek.3 UP’s lines run from
Wyoming to Victoria; BN’s lines run from Wyoming to Fort Worth, Texas, where
SP’s service to Victoria and Coleto Creek begins. Therefore, UP and BN directly
compete on the portion of the route from Wyoming to Forth Worth. SP and UP
directly compete on the portion from Fort Worth to Victoria. After both BN and UP
indicated a willingness to offer competitive rates for their service, CP&L requested
that SP provide it a local unit-train rate for the segment from Fort Worth to Coleto
2
A local unit-train rate is a published rate applicable to transport of a trainload
of a specific good between two points on a carrier’s line. A local class rate, on the
other hand, is a published rate applicable to transport of a certain type of good in
smaller quantities between two points on a carrier’s line. Railroads must maintain
class rates because of their common carrier obligation to transport goods to any point
on their lines upon request by a shipper. See Thompson v. United States, 343 U.S.
549, 558 (1952); Westinghouse Elec. Corp. v. United States,
388 F. Supp. 1309, 1311
(W.D. Pa. 1975) (citing New York v. United States,
331 U.S. 284, 289-90 (1947)).
Because it is more costly for carriers to offer service for unspecified quantities of
goods, however, class rates are seldom used and are generally significantly higher
over the same stretch of rail. See Routing Restrictions over Seatrain Lines, Inc., 296
I.C.C. 767, 773 (1955); Burlington Northern, Inc. v. United States,
555 F.2d 637, 639
(8th Cir. 1977) (noting that a class rate for coal shipment was more than double the
unit-train rate).
3
Based on stipulations entered into by the parties prior to the Board’s hearing,
we will disregard the fact that SP and UP have merged since the initiation of this
action, resulting in UP’s ability to offer unit-train service from Wyoming to Coleto
Creek.
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Creek, which represented SP’s longest haul, or for the bottleneck from Victoria to
Coleto Creek.
SP refused to provide either rate, offering instead to provide a joint rate with
UP. CP&L chose to obtain a unit-train rate from UP for service from Wyoming to
Victoria, and to ship from Victoria to Coleto Creek under SP’s class rate.4 It could
thus take advantage of neither the competition between UP and BN from Wyoming
to Fort Worth, nor the competition between SP and UP from Fort Worth to Victoria.
Subsequently, CP&L brought a complaint before the Board challenging the class rate
as unreasonable and requesting a rate prescription for the bottleneck segment.5
PP&L can transport its coal from either of two mines in central Appalachia to
its four generating facilities on the eastern seaboard. One of the mines is serviced by
the Norfolk Southern Railroad (NS), the other is serviced by CSX. Neither NS nor
CSX offers service all the way to PP&L’s generating stations. NS transfers its
shipments to the Consolidated Rail Corporation (Conrail) at an interchange point in
Hagerstown, Maryland; CSX transfers to Conrail in Lurgan, Pennsylvania. Conrail
thus controls a bottleneck that services PP&L’s four generating facilities. To obtain
competitive rates for the portion of the route serviced by NS and CSX, PP&L
4
SP’s class rate for the coal shipment from Victoria to Coleto Creek was $19.95
per ton. At the Board’s hearing, CP&L offered the testimony of eight expert
witnesses that the highest reasonable rate for this stretch was $0.63 per ton, less than
one-thirtieth of the actual class rate charged.
5
Some shippers have eschewed the role of supplicant to the Board and have
constructed connecting lines on their own. See Daniel Machalaba, Tired of Costs,
Delays of Railroads, Firms Lay Their Own Tracks, Wall St. J., February 6, 1998, at
A-1.
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requested that Conrail provide it local unit-train rates from the interchange points to
the generating stations.6
Conrail refused to provide such rates. Consequently, PP&L filed a complaint
challenging Conrail’s class rates from the interchange points to the stations and
requesting that Conrail be required to provide local unit-train rates instead.7 Conrail
maintained that class rates were inappropriate for the route in question and asked the
Interstate Commerce Commission (ICC)8 for an opportunity to provide unit-train
rates. The ICC ordered Conrail to do so in a decision dated January 17, 1995.
Rather than providing the rates, however, Conrail negotiated a joint rate for
origin-to-destination service with CSX and a proportional rate for similar service with
6
As is by now well known, subsequent to the submission of this case the Board
approved the division of Conrail between NS and CSX. See Bruce Ingersoll, U.S.
Approves Plan to Divide Conrail in Two, Wall St. J., June 9, 1998, at A-3 (“‘This
transaction, as conditioned, creates two strong competitors in the East that can handle
the transportation needs of an expanding economy,’ said [Board] Chairwoman Linda
Morgan”). See also Norfolk Southern, CSX assume control of Conrail, Railroad
NewsWire (Aug. 27, 1998) .
What effect the NS’s acquisition of Conrail’s lines in Pennsylvania will have on
PP&L’s transportation needs remains to be seen.
7
Although Conrail admits that PP&L sent test shipments from the interchange
points to its generating stations prior to filing the complaint, it denies that such
shipments were sent using a class rate.
8
The ICC was subsequently replaced by the Board in the ICC Termination Act
of 1995, Pub. L. No. 104-88, 109 Stat. 803 (Dec. 29, 1995). The Termination Act
also substituted the new Interstate Transportation Act for the earlier Interstate
Commerce Act, both located at Subtitle IV of Title 49 of the United States Code.
Pub. L. No. 104-88 §§ 102, 103, and 106. Although most of the provisions of the
Interstate Commerce Act were re-enacted in the Interstate Transportation Act, the
parties have relied, and we will base our decision, on the provisions of the old act
because these cases were initiated before passage of the Termination Act.
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NS. As a result, Conrail, rather than PP&L, took advantage of the competition
between NS and CSX for service from the central Appalachian mines. PP&L then
petitioned the Board for rate prescription on the bottleneck based on a renewed
challenge to the class rates.
Although petitioners’ cases involve distinct facts, they were consolidated by
the Board for adjudication on common issues regarding “the extent to which
bottleneck carriers may exert their market power over the routes and rates made
available to shippers for needed rail service.” Central Power & Light Co. v. Southern
Pac. Transp. Co., No. 41242, 1996 STB LEXIS 358, at *8-*9 (Surface Transp. Bd.
Dec. 27, 1996) (Bottleneck I). Before reaching its decision, the Board solicited
commentary on bottleneck regulation from all potentially affected shipper and carrier
organizations. After oral argument and consideration of the submitted materials, the
Board denied the utilities’ requests for bottleneck relief.9
In considering the utilities’ requests, the Board grappled with the tension
between two competing policies expressed in the Interstate Commerce Act (the Act).
Under 49 U.S.C. § 10701a(a) (1995) (now 10701(c)), rail carriers possess broad
discretion in setting rates and routes. This reflects Congress’s goal of deregulating
the railroad industry and allowing railroads to achieve revenue adequacy by
competing on a free-market basis. See id. § 10101a(3) (now 10101(3)) (providing for
adequate revenues);
id. § 10101a(1) (now 10101(1)) (allowing “the demand for
services” to dictate reasonable rail rates). Under sections 10101a(6) and 10701a(b)
9
The complaints of MidAmerican and CP&L were dismissed in full; that
portion of PP&L’s complaint requesting rate prescription over the bottleneck
segments was also dismissed. PP&L had amended its complaint to also challenge the
joint and proportional rates with CSX and NS; the Board allowed this challenge to
proceed, and the parties subsequently reached a settlement on that issue. We will thus
address only the utilities’ requests for rate prescription on the bottleneck segments in
this appeal.
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(now 10101(6) and 10701(d)), however, some rate regulation is required when
carriers possess monopoly power over a section of rail. These provisions codify
railroads’ common carrier obligations, which require them to provide service at
reasonable rates to all shippers upon request.
The Board resolved this tension in favor of the “rate freedom” of bottleneck
carriers. Specifically, it held that bottleneck carriers satisfy their common carrier
duties and thus comply with the Act by providing origin-to-destination service that
includes the bottleneck, as in MidAmerican’s case, or by providing joint or
proportional service with other carriers that includes transportation over the
bottleneck, as in CP&L’s and PP&L’s cases. In addition, the Board held that shippers
may not challenge class rates as an “indirect basis for obtaining prescription of a local
unit-train rate” for bottleneck segments. Subsequently, the utilities moved for
clarification and reconsideration of the decision. The Board responded by issuing a
second decision, granting in part the motion for clarification and denying the motion
for reconsideration. See Central Power & Light Co. v. Southern Pac. Transp. Co.,
No. 41242, 1997 STB LEXIS 91, at *28 (Surface Transp. Bd. Apr. 28, 1997)
(Bottleneck II). The utilities appeal from both rulings.
II.
Before we address the specific issues raised in these cases, we briefly review
the relevant history of railroad regulation. From its passage in 1887 until the mid-
1970s, the Interstate Commerce Act provided for a strict regulatory framework to
govern the federal railroad industry. This legislative approach resulted in an industry
chronically plagued by capital shortfalls and service inefficiencies. See H.R. Rep.
No. 96-1035, at 33 (1980), reprinted in 1980 U.S.C.C.A.N. 3978, 3978; Coal
Exporters Ass’n of United States v. United States, 745 F.2d 76, 81 (D.C. Cir. 1984).
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To assure railroads greater freedom in establishing routes and rates, Congress
modified the Act with the Railroad Revitalization and Regulatory Reform Act (4R
Act), Pub. L. No. 94-210, 90 Stat. 31 (1976), and the Staggers Rail Act (Staggers
Act), Pub. L. No. 96-448, 94 Stat. 1895 (1980). See H.R. Conf. Rep. No. 96-1430,
at 79 (1980), reprinted in 1980 U.S.C.C.A.N. 3978, 4110. These acts were intended
to end “decades of ICC control over maximum rates and to permit carriers not having
market dominance to set rates in response to their perception of market conditions.”
Midtec Paper Corp. v. United States, 857 F.2d 1487, 1506 (D.C. Cir. 1988).
Underlying these reform efforts was the notion that market forces would
operate in the rail industry as they do in other spheres. Congress believed that free
competition for rail services would ensure that consumer demand dictated the optimal
rate level, while facilitating enough long-term capital investment to maintain
adequate service. Congress was also mindful, however, that the free market would
protect consumers only if there was “effective” competition. Therefore, the new
enactments included provisions allowing regulatory intervention where competition
would not control prices. See 4R Act § 101(b), 90 Stat. 31, 33; Staggers Act §
101(a), 49 U.S.C. § 10101a(6) (now 10101(6)); Coal Exporters, 745 F.2d at 81 n.6.
Indeed, in bottleneck situations the Staggers Act actually “increased the ICC’s
regulatory power -- by authorizing the agency to require railroads to enter into
agreements to ‘switch’ other railroads’ cars to and from shippers located along each
other’s lines . . . .” Baltimore Gas & Elec. Co. v. United States, 817 F.2d 108, 113
(D.C. Cir. 1987); see 49 U.S.C. § 11103 (now 11102). After the 4R and Staggers
Acts, the agency (previously the ICC, now the Board) is still required to use rate
prescription and other remedies such as reciprocal switching arrangements to ensure
reasonable shipping rates on bottlenecks. It is also responsible for ensuring that free
competition is preserved to the greatest extent possible on non-bottleneck segments.
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Congress’s decision to deregulate the railroad industry has been largely
successful. Experts for both sides in these cases have acknowledged that competition
has led to more efficient routes, increased profits, better service, and an enhanced
ability to attract capital investment. See, e.g., Verified Statement of William J.
Baumol & Robert D. Willig at 6-7, J.A. at 1111-12; Verified Statement of Alfred E.
Kahn at 15-16, J.A. at 2931-32. However, the experts dispute the role of bottleneck
rail segments in increasing profits and facilitating the overall revenue adequacy of the
railroad industry.
III.
We have jurisdiction under 28 U.S.C. §§ 2321 and 2341 (Supp. 1998), which
provide for review of the Board’s decisions. Because Congress has entrusted the
Board with interpreting and administering the Act, in reviewing its decisions we ask
only whether they are “‘based on a permissible construction of the statute.’” Caddo
Antoine & Little Missouri R.R. Co. v. United States, 95 F.3d 740, 746 (8th Cir. 1996)
(quoting Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
467 U.S.
837, 843 (1984)). Notwithstanding this narrow standard of review, we must
thoroughly examine the record and inquire whether the Board correctly applied the
proper legal standards. City of Cherokee v. ICC,
641 F.2d 1220, 1226-27 (8th Cir.
1981). We are obligated to overturn the Board’s decisions if there are “compelling
indications that the Board’s interpretations were incorrect.” GS Roofing Prods. Co.
v. Surface Transp. Bd.,
143 F.3d 387, 391 (8th Cir. 1998).
As the utilities and shipper organizations assert, carriers are bound both at
common law and under the Act to “provide . . . transportation or service on
reasonable request” to any shipper. GS Roofing, 143 F.3d at 391. This duty not only
requires carriers to provide service on their lines, but also requires rates for such
service to be reasonable. See
Thompson, 343 U.S. at 554; 49 U.S.C. § 10701a(b)
(now 10701(d)).
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As the Board and the railroads assert, however, there are significant limitations
to the common carrier duties. It is usually at the discretion of the carrier how it
wishes to satisfy its duty to provide rates and service. See 49 U.S.C. § 10701a(a)
(now 10701(c)). Consequently, a carrier may in most circumstances provide service
in the form of a joint rate with another railroad, such as Conrail did with CSX in
PP&L’s case, or a proportional rate, as Conrail did with NS. See, e.g., Great Northern
Ry. Co. v. Sullivan, 294 U.S. 458, 463 (1935) (holding that a shipper may not recover
damages based upon the carrier’s portion of a rate if the carrier chooses to offer only
a joint rate with another carrier, unless the entire joint rate is unreasonable); Routing
Restrictions, 296 I.C.C. at 774 (stating that nothing in the Act requires carriers to
establish routes over all possible interchanges).
Further, a carrier generally may provide common carrier service in a manner
that protects its “long hauls.” See 49 U.S.C. § 10705(a) (now 10705(a)). The Board
may order a carrier to provide service over a shorter haul than it wishes only if the
Board first makes specific findings under the Act. See id. § 10705(a)(2). Thus, a
carrier such as UP may normally choose to provide service to a shipper such as
MidAmerican over a route longer than the 90 miles from Council Bluffs to Sergeant
Bluff, unless the longer route would be “unreasonably long” or inefficient. See
Thompson, 343 U.S. at 559-60 (holding that the ICC was required to make findings
regarding the short-hauling exceptions before compelling a railroad to provide service
over a shorter portion of rail than it wished).
Therefore, the Act protects both shippers and carriers. It guarantees that
shippers will receive rail service at reasonable rates, and it allows carriers to provide
such service in a manner that achieves revenue adequacy.
The Board has recognized that an important part of achieving revenue
adequacy is differential pricing. See Consolidated Rail Corp. v. United States, 812
F.2d 1444, 1453-54 (3d Cir. 1987) (citing Coal Rate Guidelines, Nationwide, 1
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I.C.C.2d 520 (1985)). This is a practice by which carriers charge a higher mark-up
on rail segments where demand elasticity is low, such as bottlenecks, to compensate
for low mark-ups on competitive segments. See Coal Rate Guidelines, 1 I.C.C.2d at
526-27. Therefore, “services may be priced above their attributable costs according
to observable market demand, but only to the extent necessary to cover total costs,
including return on investment of an efficient carrier.” Id. at 533-34. Accordingly,
in reviewing the reasonableness of bottleneck rates, the Board allows bottleneck
carriers to charge up to stand-alone cost (SAC), a level that is significantly higher
than marginal cost.10 See
id. at 526-29.
In the present case, the Board determined that exploiting bottlenecks by
refusing to provide separately challengeable bottleneck rates also assists carriers in
achieving revenue adequacy. Specifically, in the MidAmerican case, allowing UP to
provide only an origin-to-destination rate enables it to charge up to SAC over the
entire 750-mile route, rather than just over the 90-mile section from Council Bluffs
to Sergeant Bluff. Were UP required to provide a separate bottleneck rate, it would
be forced to charge lower competitive rates from the mine to Council Bluffs.
Similarly, in the CP&L and PP&L cases, allowing the bottleneck carriers to negotiate
through rates and joint rates for origin-to-destination service enables them, rather than
the shippers, to take advantage of the competition between non-bottleneck carriers.
After negotiating competitive rates for the non-bottleneck carriage, the bottleneck
carriers will be able to charge the bottleneck shippers up to SAC for the entire route,
rather than just over the bottleneck. See Western Resources, Inc. v. Surface Transp.
10
Stand-alone cost represents the minimum amount that a hypothetical carrier,
or the shipper itself, would have to spend to build a new rail line to compete over the
bottleneck segment. See Coal Rate Guidelines, 1 I.C.C.2d at 528-29. This measure
better allows railroads to achieve true revenue adequacy, because it takes into account
profits and the cost of long-term capital investment, while marginal cost does not.
See id. at 526.
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Bd., 109 F.3d 782, 787 (D.C. Cir. 1997) (describing the behavior of bottleneck
carriers).
Based on these economic factors and extensive expert testimony, the Board
concluded that the Act did not require carriers to provide separate bottleneck rates.
Regardless of how we would resolve the tension in the Act if we were to
independently rule on the utilities’ claims, we cannot say that the Board’s
interpretation was incorrect. The Board’s considerable expertise in the economic
underpinnings of the railroad industry is entitled to a great degree of deference, and
its decision to allow carriers to determine how they wish to fulfill their duties under
the Act is consistent with the current national railroad policy of maximizing carrier
discretion in setting routes and rates. Because the utilities have not demonstrated that
the Board’s rulings were incorrect, we affirm the Board’s dismissal of the utilities’
complaints.
We note that the Board’s decisions explicitly provide the utilities three
potential avenues of recourse. First, bottleneck shippers may obtain contracts for
service over the competitive segments of rail. See Bottleneck I, 1996 STB LEXIS
358, at *30-*31; Bottleneck II, 1997 STB LEXIS 91, at *22. Once a contract is
secured, the bottleneck carrier will be required to provide local service over the
bottleneck in light of its common carrier obligations. Bottleneck II, at *22. Because
such service will be actually “held out” to bottleneck shippers,11 the Board will be
11
Historically, a shipper could not challenge a rate unless the carrier held out
service at that rate. See Routing Restrictions, 296 I.C.C. at 774-75 (stating that
shippers cannot force carriers to ship over shorter rail segments than they wish unless
carriers hold out such service to the public). If a carrier denied holding out service
for a given rail segment, however, a shipper could show that the carrier implicitly
held out service. Shippers did this by showing either that the carrier was required to
provide such service under its common carrier obligations, or by demonstrating an
“established interchange” for such service with another carrier. See id. at 774.
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required to review the bottleneck rate for reasonableness. See Bottleneck I, at *12-
*14 (refusing to review class rates over the bottlenecks in these cases because the
carriers did not hold out such rates for bulk coal shipments). For an example of the
Board’s willingness to review bottleneck rates that are held out to shippers, see
Burlington Northern Railroad Company v. Surface Transportation Board, 114 F.3d
206, 215 (D.C. Cir. 1997) (West Texas II) (engaging in reasonableness review of a
bottleneck rate, and finding a rate of $19.36 per ton for coal unreasonable).
Indeed, as soon as a bottleneck shipper obtains a contract for non-bottleneck
carriage, bottleneck carriers would have no incentive to refuse to provide a local rate
for bottleneck service. The Board’s regulations clearly allow bottleneck carriers to
charge up to SAC for bottleneck service, and carriers would not attempt to charge
more than SAC because they would immediately be subject to rate reasonableness
review by the Board. See Western Resources, Inc. v. Surface Transp. Bd., 109 F.3d
at 789-90 (noting that bottleneck carriers will likely negotiate reasonable rates with
bottleneck shippers to avoid Board review of bottleneck rates).
Second, if the utilities can adequately demonstrate an absence of effective
competition12 over the entire origin-to-destination route, they may challenge the
12
Under the Act, effective competition exists if the complaining shipper cannot
establish the existence of market dominance under the criteria set forth in 49 U.S.C.
§ 10709(d) (now 10707(d)). Under that provision, a carrier has market dominance
if its revenue to variable cost percentage for the rail segment in question is greater
than 180 percent. See 10709(d)(2); Midtec, 857 F.2d at 1504. If the shipper can
make this showing, the carrier must respond by demonstrating adequate “competitive
alternatives” that provide effective competition. See Metropolitan Edison Co. v.
Conrail, 5 I.C.C.2d 385, 410-16 (1989) (discussing and dismissing carriers’ argument
that intermodal, geographic, and product competition prevented it from having market
dominance).
There is substantial evidence that bottleneck carriers possess market
dominance. See, e.g., West Texas II, 114 F.3d at 211 (summarily affirming the
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origin-to-destination rate provided by the carrier. See Bottleneck I, at *38-*39
(noting that PP&L properly challenged the joint and proportional rates that Conrail
negotiated with CSX and NS); Bottleneck II, at *9 (same). Although this would not
allow the utilities to take advantage of the competition over the non-bottleneck
segments, it would ensure that carriers will exploit bottleneck segments only to the
extent needed to achieve revenue adequacy. For the Board’s rate review authority
was meant to ensure that “‘rail rate flexibility would not result in [captive] shippers
bearing a disproportionate share of responsibility for the needed improvements in the
railroads’ financial position.’” Midtec, 857 F.2d at 1506 (quoting Arkansas Power
& Light Co. v. ICC,
725 F.2d 716, 719 (D.C. Cir. 1984)). See also Coal Rate
Guidelines, 1 I.C.C.2d at 523-24 (stating that a bottleneck shipper must not be forced
to “subsidize long-term excess capacity” and pay for “facilities or services from
which it derives no benefit”).
Third, the utilities could request relief under the competitive access rules, 49
C.F.R. § 1144.5 (1997), over the entire origin-to-destination route. See Bottleneck
I, at *20-*26; Bottleneck II, at *6. To invoke these rules, the utilities would be
required to show that the carrier engaged in “anticompetitive” conduct. See
Board’s holding that there was an absence of effective competition over a bottleneck).
Conrail was found to be market dominant over its bottleneck in a proceeding by
PP&L nearly fifteen years ago. See Pennsylvania Power & Light Co. v. Consolidated
Rail Corp., No. 38186S (ALJ July 24, 1984). Numerous scholars have declared that
consistent price discrimination is a strong indication that there is no effective
competition in the market reaping higher returns, in this case, the bottleneck
segments. See Coal Exporters, 745 F.2d at 91 (citing 2 P. Areeda & D. Turner,
Antitrust Law 342; R. Bork, The Antitrust Paradox 395 (1978); R. Posner, Antitrust
Law 63 (1976); and L. Sullivan, Handbook of the Law of Antitrust 89 (1977)).
Indeed, the Board appeared to acknowledge that the bottleneck segments lack
effective competition when it stated that its task in these cases was to ascertain the
extent to which bottleneck carriers may “exert their market power . . . .” Bottleneck
I, at *3.
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Bottleneck I, at *26; Midtec, 857 F.2d at 1507; 49 C.F.R. § 1144.5(a)(1). Potential
relief under the competitive access rules would include ordering the bottleneck carrier
to enter into a switching arrangement with another carrier or prescribing a new
through route over the bottleneck. 49 C.F.R. § 1144.5(a). Admittedly, invoking these
rules has proved difficult for shippers, but the Board has indicated an intent to
enforce the rules to their fullest extent in the future. See Bottleneck I, at *22, *26.
The utilities rely on San Antonio v. Burlington Northern, 355 I.C.C. 405
(1976), aff’d sub nom. Burlington Northern, Inc. v. United States, 555 F.2d 637 (8th
Cir. 1977), for the argument that they should be allowed to challenge class rates for
the bottleneck segments. In that case, however, a utility brought an action to the
Commission requesting rate prescription over a complete origin-to-destination
shipment.
See 555 F.2d at 639. Like the D.C. Circuit’s recent decision in West
Texas II,
114 F.3d 206 (1997), San Antonio simply demonstrates that the Act allows
shippers to challenge origin-to-destination rates, regardless of how carriers choose
to provide such service. In the present cases, the shippers did not challenge complete
origin-to-destination rates, but challenged class rates over a segment of the route as
an indirect means of preventing the carriers from exploiting bottleneck profits. That
“creative rate reduction strategy” undermined the national railroad policy of deferring
to carrier discretion in setting routes and rates.
Nothing in the Act explicitly requires carriers to provide separate local rates
for bottleneck service. Furthermore, requiring carriers to provide separately
challengeable rates on bottlenecks would prevent them from exploiting bottlenecks
and charging rates up to SAC for complete origin-to-destination service. In the
Board’s view, this would impede the industry’s efforts to achieve revenue adequacy,
which is necessary for long-term capital investment and, ultimately, for a safe and
efficient rail system. The Board therefore properly reconciled the competing policies
of the Act when it deferred to carrier discretion in setting routes and rates and held
that carriers are not required to provide separately challengeable bottleneck rates.
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The Board’s dismissal of the utilities’ complaints is affirmed.
IV.
The railroads cross-appeal the Board’s determination that it may assess the
reasonableness of bottleneck rates as soon as the utilities obtain contract rates over
the non-bottleneck segments. Under Article III of the Constitution, we may only rule
on existing cases or controversies. Because none of the utilities possesses a contract
rate for non-bottleneck service, none has an existing claim for bottleneck rate review
on this basis. As the railroads themselves point out, the Board’s ruling on the
contract issue presents no live controversy for adjudication. Thus, we dismiss the
cross-appeal for want of jurisdiction.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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