Petitioners in these consolidated cases have asked us to review final orders of the Interstate Commerce Commission that formulate and partially implement new car service rules governing the rates paid by the railroads for the use of each other's freight cars. The ICC formulated the new rules pursuant to a 1976 amendment to the Interstate Commerce Act, but chose to implement the new car service rate formula piecemeal, giving immediate effect only to the revised cost of capital portion of the car service formula while leaving other portions of the formula unaltered. We determine that the ICC does not have authority under § 1(14)(a) of the Interstate Commerce Act, 49 U.S.C. § 11122, to order implementation of only one factor in the car service formula when other factors specifically mentioned by statute are also in need of revision and implementation. We therefore order a stay of the effective date of new basic per diem rates until all factors have been updated by the commission. Although we are ordering a stay, we do uphold the ICC's formulation for the cost of capital portion of its car service rate formula, including its determination to use the effective tax rate of the rail companies in the cost of capital formula used to calculate the basic per diem car service rates.

The various petitions1 before us request our review of two final orders of the Interstate Commerce Commission in Ex Parte No. 334, Car Service Compensation Basic Per Diem Charges Formula Revision in Accordance with the Railroad Revitalization and Regulatory Reform Act of 1976, reflecting decisions of April 3, 1978 (Order 2), and of April 6, 1979 (Order 3).2 The commission proceeding in Ex Parte 334, as its title indicates, was designed to implement § 212 of the Railroad Revitalization and Regulatory Reform Act of 1976 (4R Act) which modified § 1(14)(a) of the Interstate Commerce Act to require that charges paid by a railroad for the use of freight cars that it does not own must be fixed on the basis of the costs of ownership, including a fair return on the cost of owning and maintaining each type of freight car.3

Petitioners in Nos. 78-1575 and 79-1640, Consolidated Rail Corporation, Chicago and Northwestern Transportation Company, and Soo Line Railroad Company, argue that the commission's per diem rates were formulated by ignoring or misapplying statutory criteria. They argue that the statute calls for a "fair return" and that the agency's orders are the result of an unfair and illegitimate interpretation of the statute, that "current costs of capital" was not properly interpreted, and that costs of repair must be updated. In addition, they urge that the revised rates are too high and violate the policies and purposes of railroad legislation.4

Intervenors, the Seven Railroad Group, see note 1 supra, argue that the commission's revision of the current costs of capital portion of the per diem formula was sufficient to meet the statutory mandate of § 212, without concurrent implementation of revised repair costs, or other revisions based on new data. Finally, the Seven Railroad Group, petitioning in No. 78-1740, objects to the commission's decision, in the revised cost of capital formula, to use the railroads' effective tax rate rather than their statutory tax rate. The commission, naturally enough, supports its actions as in compliance with the statute.

Since the turn of the century, railroads have paid for the use of each other's freight cars on the basis of a per diem rate. This rate, originally based solely on the number of days that a railroad had possession of another's cars, had been fixed by mutual agreement. In order to facilitate interstate commerce, railroads are required to accept from originating railroads loaded freight cars in route to their final destination, rather than shifting the freight between the cars of connecting roads. This is called the car pool system. See generally United States v. Allegheny-Ludlum Steel Corp., 406 U.S. 742, 743, 92 S. Ct. 1941, 1944, 32 L. Ed. 2d 453 (1972); Baltimore and Ohio Chicago Terminal Railroad v. United States, 583 F.2d 678, 681 (3d Cir. 1978), cert. denied, 440 U.S. 968, 99 S. Ct. 1520, 59 L. Ed. 2d 784 (1979). These self-regulating agreements broke down, however, when several railroads refused to pay the per diem rates, and the commission then instituted a proceeding under § 1(14)(a) of the Interstate Commerce Act for the purpose of prescribing, under a code of car service rules, the compensation to be paid for rental of freight cars.

In 1966, Congress first amended § 1(14)(a). The amendments were the product of congressional concern that serious and recurrent freight car shortages were being caused by per diem rates that were too low to encourage car construction but, rather, encouraged terminating railroads to hold cars on their sidings rather than send them back to the owning roads. Because these amendments failed to relieve the endemic car shortages, however, Congress again attempted to solve the problem by passing § 212 of the 4R Act in 1976 to encourage car ownership through adoption of per diem rates that would more accurately reflect the actual costs of purchasing, owning, and maintaining freight cars. By requiring rates that were fully compensatory, Congress hoped to discourage the use of cars not owned and thereby maximize efficient car utilization.

The legislative history of the 4R Act shows that Congress saw the act as a remedy to the major problems of the railroads, among them the fact that the return on investments had been insufficient to enable the railroads to finance capital expenditures. Because the rate of return had been less than the cost of investment for many years, rail car acquisition had not been meeting the needs of the industry. Congress specifically found, for example, that "(n)ot only the Consolidated Rail Corporation ('ConRail'), but the Nation's rail industry at large is today faced with the clearly demonstrable need to make massive capital expenditures to . . . acquire equipment in quantities to enable the National Rail System to properly discharge its common carrier public interest responsibility for prompt and efficient transport;" Congress also foresaw the expenditure of almost two billion dollars for the acquisition of rolling stock and other equipment. S.Rep.No.499, 94th Cong., 2d Sess. 1, 21, reprinted in (1976) U.S.Code Cong. & Admin.News 14, 35. Section 212 of the 4R Act was designed to attack these problems.

The per diem rates in effect prior to the commission's Ex Parte 334 proceedings were those established in the commission's 1968 Per Diem Report. Chicago Burlington & Quincy Railroad v. New York Susquehanna & Western Railroad, 332 I.C.C. 176 (1968), aff'd sub nom. Union Pacific Railroad v. United States, 300 F. Supp. 318 (D.Neb.), aff'd sub nom. Boston & Maine Railroad v. United States, 396 U.S. 27, 90 S. Ct. 196, 24 L. Ed. 2d 142 (1969). The 1966 amendments to § 1(14)(a) required the commission to consider the national level of ownership of a type of freight car and other factors affecting the adequacy of the national freight car supply and then,

on the basis of such consideration, determine whether compensation should be computed solely on the basis of elements of ownership expense involved in owning and maintaining such type of freight car, including a fair return on value, or whether such compensation should be increased by such incentive element or elements of compensation as in the Commission's judgment will provide just and reasonable compensation to freight car owners, contribute to sound car service practices (including efficient utilization and distribution of cars), and encourage the acquisition and maintenance of a car supply adequate to meet the needs of commerce and the national defense.

Union Pacific Railroad v. United States, 300 F. Supp. at 321.

Section 212 of the 4R Act amended § 1(14)(a) in several significant respects. The 1976 amendment begins by stating: "It is the intent of the Congress to encourage the purchase, acquisition, and efficient utilization of freight cars." For the full text of § 212, see note 3 supra. The aim of encouraging the purchase of new freight cars, as well as their acquisition and efficient utilization, was thus included in a statutory pronouncement for the first time. The inclusion clarifies, we think, congressional intent with regard to another new development, the statutory call for consideration of current costs of capital. The commission is now required to determine compensation for the use of a per diem freight car after giving consideration to "current costs."

Other substantive changes in 1976 were that the commission should give consideration to the transportation use of each type of freight car and that the elements of ownership expense should include, not just "a fair return on value," but specifically "a fair return on the cost of such type of freight car (giving due consideration to current costs of capital, repairs, materials, parts, and labor)."

Normally this court's standard of review is set forth in § 10(e) of the Administrative Procedure Act, 5 U.S.C. § 706, under which the commission's orders would be reviewed to see if they were "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." The scope of our review of the commission's actions is generally narrow, limited to whether the commission's conclusions are rationally supported. United States v. Allegheny-Ludlum Steel Corp., 406 U.S. 742, 749, 92 S. Ct. 1941, 1946, 32 L. Ed. 2d 453 (1972). A different standard of review applies to issues of statutory construction. We are, of course, not bound by the commission's conclusions if they are based on a misinterpretation of the act. The courts are the final authorities on the proper interpretation of the statute. Volkswagenwerk Aktiengesellschaft v. Federal Maritime Commission, 390 U.S. 261, 272, 88 S. Ct. 929, 935, 19 L. Ed. 2d 1090 (1968). Therefore, we will examine the statute to see if the commission has the statutory authority for its actions. The question of whether § 212 of the 4R Act should be construed as permitting the commission to adopt new rates only after consideration of all the statutorily enumerated factors is a fundamental question that goes to the basis upon which the agency is empowered by Congress to act. This court need not defer to the agency in drawing its conclusion as to the meaning of the statute or the nature of the agency's power to act. Volkswagenwerk Aktiengesellschaft, 390 U.S. at 272, 88 S.Ct. at 935. Administrative discretion and the appropriate scope of review thereof are not relevant until the court first resolves the issue of statutory construction. Allegheny General Hospital v. NLRB, 608 F.2d 965, 970 (3d Cir. 1979).

It is well established that an agency must consider all factors specifically included in its statutory mandate. Shannon v. HUD, 436 F.2d 809, 819 (3d Cir. 1970); Pennsylvania v. Lynn, 501 F.2d 848, 855 (D.C. Cir. 1974). See also ICC v. J-T Transport Co., 368 U.S. 81, 89, 82 S. Ct. 204, 209, 7 L. Ed. 2d 147 (1961). The courts then perform their function of insuring that the commission has considered all the relevant factors brought to its attention by interested parties and has reached a reasoned decision. National Industrial Sand Association v. Marshall, 601 F.2d 689, 699-700 (3d Cir. 1979).

Using these precepts, we will first examine the commission's decision to proceed with the implementation of one revised factor in its new basic per diem formula, the cost of capital factor, even though other factors have not been revised since 1968 and an additional factor, the transportation use of each type of freight car, has been added. We will examine closely, as a matter of statutory construction, the congressional direction to use current costs as a basis for the rates. Our examination of the revised basic per diem formula itself, including the formula for calculating the cost of capital, will then be examined under a narrower scope of review to see that the commission has reached a rationally supported determination.

In Orders 2 and 3 the commission has prescribed a formula that went into effect on June 1, 1979, and included a new current cost of railroad capital factor, adjusted depreciation rates, to which no objections are raised, and a car repair factor that was adjusted upward for inflation but was still based on data over a decade old. Significantly, the rate effective June 1 was not derived directly from the new formula prescribed in Ex Parte 334. See note 5 infra. The rate did not incorporate any change in the basic car repair factors themselves and thus may not reflect current costs.

The commission has not considered current repair costs up until this time, having postponed review of the repair cost component of its formula until new data were collected. Data were requested by the commission in Order 3, and were originally due to the commission on May 30, 1979. The Association of American Railroads, an industry-wide organization of which all the roads party to this litigation are members, finally submitted the necessary information to the commission on November 26, 1979, shortly before oral argument in this case. As an interim measure, until a new repair cost factor could be computed, the commission factored the old repair cost into an interim rate. According to Conrail, the old repair costs may be significantly higher than the new repair costs still to be computed; at the same time, the new current costs of capital calculated in Orders 2 and 3 are higher than the old costs. The interim per diem rate may thus be higher than the final rate resulting from the use of repair costs which would be updated at the same time as costs of capital. Thus, the result of the agency's action may have been to increase the basic per diem rates beyond the intent of Congress in amending § 1(14)(a). This would not be a proper interpretation of § 212, "(s)uch compensation shall be fixed on the basis of the elements of ownership . . . including a fair return . . . giving due consideration to current costs of capital, repairs, materials, parts, and labor," because current repair costs would be eliminated from consideration; the resulting basic per diem rate would be distorted.

What Conrail and the other petitioners in Nos. 78-1575 and 79-1640 object to is the commission's determination that, because the cost of capital section of the new formula, unlike the other sections of the formula, would not require the data by car type first available for the year 1978, and then not until the end of 1979, it would order immediate implementation of the cost of capital section. Conrail argues that the commission's action of partial implementation contravenes congressional intent. We agree, but first we will consider another of Conrail's arguments.

Conrail argues first that the commission misapplied statutory criteria by not giving adequate consideration to whether the promulgated formula resulted in a "fair return" to the owner of the car. The essence of Conrail's argument is that it would not be fair to charge the higher current costs of capital without permitting Conrail the benefit of the lower current cost of car repairs. Although the statute calls for rates determined by the expense of ownership "including a fair return on the (freight car's) cost . . . giving due consideration to current costs . . . ," to the extent that Conrail suggests that the commission could somehow determine the expense of freight car ownership by deciding what would constitute a "fair return" without considering the current costs of any of the various factors enumerated by Congress, it is urging a statutory construction of dubious validity. "Fair return" simply is not a concept that can be isolated from its statutory context. Congress inserted the phrase "fair return" into an economic context and gave the phrase an economic meaning relative to the current costs of various factors. "Fair," in short, has no intrinsic, objective meaning, but should be used in relation to the circumstances of the case. To the extent that Conrail argues that the commission has an obligation to look beyond current costs to some objective standard of fairness outside the statute, we think this would disserve the statutory purpose of the section. Certainly, Conrail is not entitled to any specific rate of return; indeed, its losses have outweighed its gains every year. What constitutes a fair return cannot be determined apart from an economic consideration of costs.

Conrail's stronger argument is that "fair return on the cost . . . giving due consideration to current costs of capital, repairs, materials, parts, and labor" cannot mean that Congress intended further agency consideration to be suspended, even temporarily, after consideration of costs of capital. Capital is only one of five factors listed in that sentence. Although the other four factors were already part of the per diem formula, being factors which were carried forward from the ICC's implementation of the 1966 version of § 1(14) (a), as presently incorporated they do not reflect current costs. The pre-1976 version of § 1(14)(a) did not include the word "current." "Current" was added in 1976 in the phrase "current costs of capital." Must the cost of repairs, materials, parts, and labor be "current," as well as the cost of capital? We conclude that they must.

Conrail maintains that the repair cost factor is outdated and results in allowances for repair costs which are much higher than actual repair costs. Conrail's position is that this failure, and the similar failure of the commission to make any attempt to relate its new per diem rates to "factors affecting the adequacy of the national freight car supply" present an issue of statutory construction: should the statute be construed as permitting the commission to order that new per diem rates must be paid, when one or more factors necessary to the establishment of new rates have not been included in the determination?

The intervenors suggest that the issue of repair cost is not really before this court. They argue that on June 11, 1979, the commission declined to open an inquiry into repair costs, that Conrail did not appeal from that order, and that therefore, Conrail cannot now raise a repair cost issue. Conrail is, however, appealing from Order 3, which promulgated new basic per diem rates without review by the commission (as required by the statute) of the same current costs of car repairs; we will therefore consider this issue.

The commission, claiming administrative discretion, contends that it can and will address the other statutorily mandated factors besides cost of capital at some undetermined future date. But this failure to specify any contemplated date for completion of its statutory assignment is of particular concern to this court. We determine that the commission's orders violate § 1(14)(a) because the commission did not complete its work under § 1(14)(a) before prescribing final orders.

The commission may have felt that promulgation of an interim per diem rate while it completed its determination, based on current data, of new permanent rates for each type of freight car was justified by § 212(b) of the 4R Act, which called for implementation of the statutory amendment within eighteen months, or by August 1977. See note 3 supra for text of § 212(b). Although it is regrettable that the commission's work has already taken more than four years from the passage of the amendment, we do not consider this a fact justifying imposition of an interim formula that, by introducing some new factors but not others, distorts the old rate basis without conforming to the congressional purpose behind the new compensation rate.

While the commission seeks to justify its approach on the grounds that until it institutes the permanent formula, continued use of the previously determined factors is a reasonable and rational approach, citing American Commercial Lines v. Louisville & Nashville Railroad, 392 U.S. 571, 590-93, 88 S. Ct. 2105, 2115, 20 L. Ed. 2d 1289 (1968), this court cannot accept an improper melding of the old and the new rates as reasonable. In American Commercial Lines the Supreme Court sanctioned the commission's adherence to previously established rates until it completed its overall examination of whether new rates would be just and reasonable and in accordance with the statutory standard. Here, the commission does not seek to continue to apply an old rate, but rather to introduce a modified rate on an interim basis.

The threshold issue is whether the commission, in Ex Parte 334, has properly construed its statutory mandate under § 1(14)(a) of the Interstate Commerce Act, 49 U.S.C. § 11122. In this case, the commission erroneously determined that it could set interim rates under § 1(14)(a) using a formula that included new calculations for the "current costs of capital" but relied on the old data and calculation for, inter alia, the repair costs of the railroad cars. This determination was made notwithstanding the commission's initial decision in Order 1 of Ex Parte 334 that it would be necessary to compute actual, current repair costs. App. at 1003a.

In addition to the five factors specifically enumerated, "capital, repairs, materials, parts, and labor," § 212 also requires the ICC to consider "the transportation use of each type of freight car, . . . the national level of ownership of each such type of freight car, and . . . other factors affecting the adequacy of the national freight car supply." These factors are designated, we think, as important factors to be used in encouraging the efficient use of freight cars. We are persuaded that these factors were also not considered, as they should have been, by the ICC before it proceeded to implement the cost of capital part of its new 334 formula.

The failure to consider current costs of car repairs in the face of evidence that the existing factors may be overcompensatory, the additional failure of the interim formula to prescribe rates for each type of freight car, and the failure to make any findings as to "factors affecting the adequacy of the national freight car supply" are all errors in the application of the statute. These errors convince us to suspend the imposition of the new interim per diem rates until the commission has determined exactly the current costs of all the factors Congress enumerated in § 212. Since the data on repair costs have now been submitted to the commission, it should not be too long until the commission can fully implement the formula it set out in its initial order in Ex Parte 334. In this regard, we note that the railroads themselves will assist the commission by submitting suggested rates based on current data.

The fact that the statutory formula could not be implemented until after receipt of the data by car type late in 1979 is only reason to suspend implementation of the cost of capital factor until such time as all portions of the new basic per diem formula can be implemented. It is not a reason to vacate the commission's orders in their entirety. The commission did consider all of the statutory factors in determining a new basic per diem formula. It has not yet, however, implemented the results of its consideration. As soon as the commission is able to implement those results, the factors will become part of the enforceable rate and the statutory mandate will be fulfilled.

The commission having fully determined a permanent basic per diem formula, there is no reason that the formula, qua formula, should not be reviewed at this time. Although we will reverse that part of Order 3 which sought to implement the cost of capital factor of the revised basic per diem formula, in reviewing that factor with the other factors analyzed in Orders 2 and 3 we uphold the commission's determination, including its formulation of the current cost of capital.

The ICC developed the following formula for calculating the cost of capital:

new debt ........ Ex Parte No. 353, 8.4

Determination).

equity .......... Ex Parte No. 353, 13.0

Determination).

equity .......... Line 2 divided by 14.30

(1 minus the

effective tax

rate) (for 10

selected roads 1). 2

debt ............ Line 1 multiplied by 3.36

equity .......... Line 3 multiplied by 8.58

6 Cost of capital ... Sum of lines 4 and 5 11.94