The Interstate Commerce Commission denied gateway elimination applications by three irregular route motor common carriers of household goods. The applicants and the Secretary of the Army have filed petitions for review. The sole issue we must reach is whether the Commission should have considered evidence of military traffic in passing on these applications.1 We hold that the Commission's refusal to do so was arbitrary, and direct the Commission to reconsider petitioners' applications giving full weight to military traffic.

For years, the Commission has acquiesced in a practice known as "tacking." A carrier with authority from "A" to "B" and from "B" to "C" was permitted to transport goods from "A" to "C" so long as the traffic was transported through "B", the gateway. The need to honor the gateway could be eliminated either by obtaining fresh authority from "A" to "C"2 or by, as explained below, satisfying the Childress gateway elimination criteria.3 A carrier unable to remove its gateway under Childress was permitted to continue to tack its authority by transporting goods through the gateway.

In the early 1970's, the Commission determined that the circuity inherent in tacking was inefficient and wasteful of gasoline. Consequently, the Commission by regulation prospectively prohibited tacking on movements of longer than 300 miles. Ex Parte MC-55, 119 M.C.C. 530 (1974). As relevant here, when the circuity of such a tacked route is over 20%, the carrier must cease transporting goods through the gateway if unable to obtain fresh authority or to satisfy Childress. In other words, a carrier no longer may tack its authorities "A" to "B" and from "B" to "C" in order to provide service from "A" to "C" through "B". Service from "A" to "C" must be direct, and can under Childress be provided if the carrier:

1) actually is transporting a substantial amount of traffic through the gateway, and in so operating, is effectively and efficiently competing with existing direct service carriers; and

2) elimination of the gateway would not enable the applicant to institute a new service or service so different from that presently provided as to materially improve the applicant's competitive position to the detriment of existing carriers.

In determining the "substantiality" of traffic moved through the gateway, only the two-year period prior to November 23, 1973 is considered. 49 C.F.R. § 1065.1.

O.K. Transfer, A. Arnold and Sons, and Sherwood Van Lines, Inc., are irregular route carriers that sought elimination of gateways as required by Ex Parte MC-55. They sought to do so by satisfying Childress. In a consolidated order dated February 25, 1975, the Commission denied the applications of O.K. and Arnold. It found that neither applicant had transported enough non-military traffic through their gateways to satisfy the substantiality requirement of Childress ; military traffic was given only "the most minimal weight" because the Commission concluded that such traffic was dispensed on a rotational basis and hence was not "competitive." Thus, the Commission reasoned, O.K. and Arnold were not "effectively competing with existing competitors." The Department of Defense (DOD), which had not previously participated in this proceeding,4 sought leave to intervene and sought, along with O.K. and Arnold, rehearing and reconsideration of the February 25 order. In support of its claim that it dispenses its traffic through a competitive process, DOD filed an affidavit by Herbert Paige, Senior Traffic Management Specialist, Military Traffic Management Command. By order of May 27, 1975, the Commission granted DOD's motion to intervene, but denied the motions for reconsideration. The Commission reaffirmed its holding that military traffic is non-competitive, spelling out its reasoning with greater specificity. The Secretary of the Army, on behalf of DOD, O.K. and Arnold all seek review of this order.5 The application for gateway elimination filed by Sherwood Van Lines was denied on June 30, 1975. Again, the Commission refused to consider Sherwood's military traffic. Reconsideration was denied October 8, 1975 and Sherwood petitioned for review. The petitions of the three carriers and the Secretary have been consolidated on appeal.

The Competitive Nature of DOD's System of Traffic Distribution

When transporting the household goods of private shippers, the Interstate Commerce Act provides that no common carrier shall charge a different rate than that provided for by the applicable tariff. 49 U.S.C. § 317(b). However, the Act also provides that the United States may obtain reduced rates. 49 U.S.C. § 22. Cf. 49 U.S.C. § 5b(6). Consequently, as its regulations reflect, DOD seeks to obtain the lowest possible rates consistent with efficient service. "The means of transportation selected shall be that which will meet DOD requirements satisfactorily at the lowest overall cost from origin to the final known destination." 32 C.F.R. § 178.3(c).

The Commission first held that military traffic was non-competitive and hence incompetent in gateway elimination proceedings in 1960. Von Der Ahe Lines, Inc., 83 M.C.C. 821 (not printed in full, reconsideration subsequently denied). The Commission found that DOD traffic was distributed on an automatic rotational basis and that, in effect, carriers merely were passive recipients of the traffic tendered to them. DOD was not a party in Von Der Ahe. Since then, the Commission has more or less consistently refused to give weight to military traffic in gateway elimination proceedings, relying largely on Von Der Ahe.6 DOD participated unsuccessfully in several of these cases.

In seeking reconsideration in Arnold and O.K. Transfer, DOD filed an affidavit prepared by its Senior Traffic Management Specialist, Mr. Paige, detailing the method by which DOD now allocates its traffic. Mr. Paige testified that the system found in Von Der Ahe to be non-competitive was no longer employed by DOD. Under the current system, carriers must be on the Traffic Distribution Roster (roster) to be eligible to receive shipments. According to Mr. Paige, a carrier must meet rigorous standards concerning its facilities and service to be placed on the roster. Army Appendix 104-05.7 Traffic is then distributed to carriers with the lowest rates on file available to perform the service in a timely fashion. Id. at 105; DOD reg. 4500.34R. If no carriers with the lowest rates are available, traffic is then distributed to carriers with the next lowest filings. Traffic is not, however, rotated automatically among those on the roster. A serviceman may veto the carrier next in rotation or, affirmatively, select any carrier on the applicable roster. Army App. at 105; DOD reg. 4500.34R, P 6002(c)(2). Furthermore, during the summer months when most traffic is carried, the rotational system is often discarded. Army App. at 105-06. Carriers awarded little or no traffic during periods of roster suspension are not awarded proportionately larger shares during other periods. Id. Finally, volume moves are typically awarded on the basis of individualized bidding. Id.; DOD reg. 4500.34R P 6013.

Although nothing in the record contradicts Mr. Paige's testimony, the intervenors, several major national carriers, suggest it is not complete. In order to establish the various rosters, they point out, DOD has two two-part filing cycles a year. First, each carrier submits its bid for particular routes. Then, during the so-called "Me-Too" period, other carriers may indicate whether they are willing to provide service at the lowest rate filed during the initial period. Those carriers willing to do so comprise the roster from which DOD makes its initial selections. Intervenors submit a "Me-Too" system cannot be competitive.

In concluding that DOD's system of traffic distribution is not competitive, the Commission stressed that during the pertinent time period DOD employed "no real rating of the carrier's rendered service."8 and that "all carriers placed on allotment rosters are now tendered shipments," J.A. at 626. However, we find no rational connection between these observations and the conclusion drawn by the Commission. Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 285-6, 95 S. Ct. 438, 42 L. Ed. 2d 447 (1974). The Commission neither articulated its definition of "competition" nor explained why private non-military traffic is competitive. More importantly, the record demonstrates that the DOD system creates incentives for individual carriers to provide higher quality and lower cost service than other carriers in order to acquire a larger share of its traffic. Consequently, DOD traffic must be considered "competitive."

First of all, by emphasizing that all carriers on the rosters receive shipments, the Commission was indicating that it regarded those carriers as passive recipients of traffic.9 However, it is misleading to focus, as the Commission did, on the method by which traffic is distributed to those on the roster without also considering how the roster is made up. As noted above, the roster is comprised of only those carriers willing to do business at the lowest price filed. Under this system, each carrier has an incentive to underbid other carriers in order to increase its market share. In other words, the roster is created by price competition. And this system does not lose its competitive nature because of its "Me-Too" aspect. Indeed, the "Me-Too" system enables DOD to obtain the lowest possible rates in the aggregate. Without "Me-Too," DOD would have to pay higher rates for all shipments that the lowest filer could not handle. Furthermore, if the Commission were affirmed in disregarding military traffic, the likely result would be anti-competitive: with fewer carriers bidding for each route, the rates charged by those remaining might be higher. Finally, the competitiveness of DOD's system is heightened by the fact that the roster is discarded during summer when the majority of shipments are transported10 as well as for bulk movements.

Second, even if rates were uniform and not set by the carriers, carriers could still compete by offering better service. The Commission obviously had this point in mind when it relied on DOD's failure to employ a formal rating system. However, even though there is no formal rating system, the record clearly demonstrates that the DOD system encourages service competition. A shipper may veto the next carrier on the roster or, affirmatively, request any particular carrier that happens to be on the roster. Carriers thus have a strong incentive to provide superior, on-time service.

For the reasons expressed above, we find that the Commission erred in concluding that military traffic is not competitive and need not be considered in gateway elimination proceedings. Consequently, we grant the petitions for review and direct the Commission to reconsider petitioners' applications giving full weight to military traffic.

It is so ordered.