American Commercial Lines, Inc. v. Louisville & Nashville R.R. Co., 392 U.S. 571 (1968)

do not, however, believe that the Court’s position is really supported by its references to the area pricing and moratoria systems approved by the Court in the Permian Basin Area Rate Cases, 390 U. S. 747. The Court’s opinion in those cases emphasized that those administrative devices were warranted in light of the terms of the Natural Gas Act and of the extraordinary difficulties of regulating independent producers of that commodity. I should not have thought it useful or desirable to extrapolate from those unusual circumstances any general extension of the discretion of administrative agencies. Of course, the specific proposition taken by the Court today from the opinion in those cases, which had in turn been taken from Los Angeles Gas Co. v. Railroad Commission, 289 U. S. 287, 304, may be regarded as a general principle sustained by a number of the Court’s opinions. The difficulty, I should have supposed, is that even that general proposition is only dimly relevant to the questions now before us.

The appearance and disappearance of the suggestion that these questions must be deferred pending the Commission’s rulemaking proceedings on the presentation of cost evidence deserves a more complete chronicle than the Court has given. In 1965, more than three years after the Commission initiated its rulemaking proceeding, 27 Fed. Reg. 4102, and some two months before it decided these cases, the Commission held that “a comparison of out-of-pocket costs is the most appropriate method for ascertaining . . . inherent competitive advantage” where one of the competing modes is unregulated. The Commission found it unnecessary to defer that question, or even to mention its separate rulemaking proceeding. Grain in Multiple-Car Shipments — River Crossings to the So., 325 I. C. C. 752, 772. In the present case, the report and order of the Commission’s Division 2 indicated that it “adhere [d] to the utilization of fully distributed costs as the standard for determining the inherent advantage of low cost in the situation presented.” 323 I. C. C. 758, 762-763. The opinion did not pause to refer to the rulemaking proceeding. In the report and order of the full Commission on reconsideration, the only reference to the rulemaking proceeding was the brief passage quoted by the Court from the opinion’s final section. 326 *596I. C. C. 77, 84. The three dissenting members of the Commission found it unnecessary to refer to the rulemaking proceeding. Id., at 85, 86, 90. One year after its decision in these cases, the Commission had occasion to review its approach to these problems. Although the Commission adhered to its decisions in these cases and in Grain in Multiple-Car Shipments—River Crossings to the So., supra, it did not find it necessary to advert to its separate rulemaking proceedings. It concluded that where the competition from a regulated carrier is “relatively limited” it would apply the rule from Grain in Multiple-Car Shipments, and not that from these cases. There is no evidence whatever that the Commission regarded these two lines of authority merely as temporary expedients, useful only until more careful analysis is possible. Wine, Pacific Coast to the East, 329 I. C. C. 167, 171-175. And see the concurring opinions of Vice Chairman Tucker and Commissioner Freas, id., at 176, as well as the separate opinion of Commissioner Murphy, dissenting in part, id., at 177. Although the three-judge District Court set aside the Commission’s order in these cases, it did not mention the rulemaking proceeding. 268 F. Supp. 71. In its jurisdictional statement to this Court, the Commission adverted to the rulemaking proceeding only in a single sentence, with an identifying footnote, contained in the statement’s conclusion. Jurisdictional Statement in No. 809, at 17. In the memorandum of the United States, urging that probable jurisdiction be noted, it was said that these cases “present a major issue reserved by this Court” in New Haven, which was “whether out-of-pocket costs, fully distributed costs, or ‘some different measure’ should be the criterion for determining which mode of transportation has the inherent advantage . . . .” Memorandum for the United States 3-4. In the various briefs presented to the Court in these four cases, including the briefs of the United States and of the Commission, I have looked in vain for any suggestion that, as the Court now holds, the Commission’s opinion was intended merely to defer resolution of the question reserved in New Haven. Indeed, I have *597searched unsuccessfully in the Commission’s brief for any reference, however fleeting, to the rulemaking proceeding. One might have supposed that if, as the Court now finds, the existence of the rule-making proceeding was, in the Commission’s view, decisive to the result of this ease, the Commission would have found room in its brief of 51 pages at least to cite those proceedings. It is difficult to escape the inference that the Court has, on a basis that will doubtless prove as surprising to the parties as it did to me, simply postponed decision of a difficult issue.

It is, however, proper to add that I have found no support in the record for the Court’s suggestion that “the railroad appellees here determined to attempt to raise precisely the same issues [as in the rulemaking proceeding] in a much more circumscribed proceeding by unilaterally reducing their rates on one item of traffic.” Ante, at 590-591.

The long-term out-of-pocket costs were computed under an ICC-sponsored formula which generally holds that 80% of rail operating expenses, rents and taxes are out-of-pocket in that they will vary with traffic. To this is added a return element of 4% on a portion of the investment (all the equipment and 50% of the road property), which is apportioned to all traffic on a proportional basis. Compare n. 3, supra.

This figure is not precisely a cost figure. Rather it is the barge fully distributed cost, plus the charge made for the truck portion of the service and the charge for barge-truck transfer. Since all parties seem willing to treat the figure as one of fully distributed cost for the barge-truck combination, no further mention will be made of its disparate elements.

Because the barge-truck rate of $5.11 was below the fully distributed cost of the service, Division 2 of the ICC initially concluded that the barge-truck combination had forfeited its right to claim that its inherent advantage of lower fully distributed cost was being impaired by the railroads’ setting of a matching rate. On reconsideration, the full Commission reversed this ruling by Division 2, observing that there was no evidence that the failure of the barge-truck rate to equal fully distributed cost was due to anything but the barge lines’ ignorance of the precise amount of their fully distributed cost for this service. This determination is not challenged here by any party and we express no opinion on it.

Out-of-pocket costs have been regarded generally in these cases as equivalent to what economists refer to as “incremental” or “marginal” costs. Accordingly we shall equate the terms likewise, although we have no intention of vouching for the accuracy of that equation as a matter of pure economics. Cf. n. 4, supra. Such costs are defined generally as the costs specifically incurred by the addition of each new unit of output and do not include any allocation to that unit of pre-existing overhead expenses.

A rate is compensatory in the sense used by the District Court any time it is greater than the out-of-pocket cost of the service for which the rate is set. The term fully compensatory is sometimes used to describe a rate in excess of fully distributed costs.

An illustration of such a case is the decision of the ICC that was reversed in the New Haven case. There the ICC had refused to permit the railroads to set a rate which was not only above their out-of-pocket cost for the service but was also above their fully distributed cost for approximately half of the movements involved. The Commission did not rely on a determination of which of the competing carriers had the inherent advantage as to costs, but instead decided broadly that the rate would eventually destroy the coastwise shipping industry and therefore should be prohibited. This Court held that, in general, the ICC was required to determine which of the competing carriers possessed the inherent advantage before a rate could be ordered cancelled in order to protect a carrier’s present rate. While the Court indicated that the Nation’s defense needs might permit protection of even a higher cost carrier in some cases, it held that the ICC had not adequately shown New Haven to be such a case.

The appellees also contend, and the District Court held, that the statements in the legislative history of § 15a (3) that Congress intended to compel the Commission to return to the approach to competitive rate regulation it had utilized in the case of New Automobiles in Interstate Commerce, 259 I. C. C. 475 (1945), indicate that out-of-pocket ratemaking was intended to be the rule in such cases. However, the passage quoted from New Automobiles simply states that the rates of one mode of transportation should not be held up merely to protect competing modes. It says nothing at all about inherent advantages. The railroads argue that the basic thrust of the New Automobiles case was to compare costs on an out-of-pocket basis. And it is true that many of the comparisons there made were on that basis. However, an examination of what the Commission actually said and did in New Automobiles compels the conclusion that no flat rule of comparison of out-of-pocket costs was there laid down. For example, the Commission concluded that on the basis of a comparison with the railroads' out-of-pocket costs for shipping automobiles, the truckers were the lower cost mode only up to 120 miles. On a fully distributed cost comparison the truckers were the lower cost mode up to 230 miles. 259 I. C. C., at 528. After discussing at some length the concept of reasonable minimum rates, the Commission ultimately concluded that generally the truckers had the cost advantage at distances up to 200 miles and that the railroads should be permitted to set rates that would permit them to compete for the longer-haul trafflc. 259 I. C. C., at 539. Given the fact that the Commission was dealing with an attempt by the truckers to get it to hold up railroad rates for distances even greater than 600 miles, it is not surprising that the issue of measuring inherent advantage as between fully distributed and out-of-pocket costs did not receive detailed consideration, since by either method the truckers were the low cost mode only up to a little more than 200 miles. Thus it cannot fairly be said that New Automobiles represents a considered choice between the two meth*583ods of cost comparison. Rather what it stands for is the principle emphasized in the New Haven case that the rates of one mode should not be held up to protect the revenues of a competitor without regard to which is the low cost carrier. In any event, what matters so far as § 15a (3) is concerned is not what the Commission meant in New Automobiles but what Congress thought it meant in 1958 when the section was enacted. As we have shown in the text of the opinion above, Congress considered New Automobiles to stand for the principle that the rate structure of a competing mode should not be protected by the Commission simply to prevent it from losing business through competition.

The District Court also relied on the rejection of a similar proposal by truck and barge interests that fully distributed costs be the floor for reasonable minimum rates in the course of the enactment of the National Transportation Policy in 1940. It seems clear, however, that one of the major reasons for the rejection of the so-called Miller-Wadsworth amendment by Congress was the possibility that its enactment would prevent low-value industrial and agricultural commodities from being carried at a rate low enough to make it economically feasible to ship them in interstate commerce. See generally Nelson, Rate-Making In Transportation — Congressional Intent, 1960 Duke L. J. 221, 228-238.

While it is true that, for varying and sometimes unexplained reasons, the Commission has not invariably used fully distributed costs as the basis for cost comparisons in situations involving inter-modal competition, see 268 F. Supp., at 78, it is also true that it has generally declared fully distributed cost comparisons to be preferable. Thus in the hearings on the bill that was to become §15a(3), Commissioner Freas stated:

The District Court ascertained the legislative purpose to promote “hard competition” from the following passage from the New Haven opinion: Since the sentence following the term “hard competition” described an example of the competition prohibited by the National Transportation Policy that is identical to the facts of the present case, the District Court’s use of the term to reverse the ICC’s decision here seems somewhat peculiar.

Constant costs are, broadly speaking, those items of expense which are incurred by a business regardless of the scale of its operations. They are essentially the equivalent to what is commonly called overhead expenses. For railroads constant costs include such items as real estate taxes, certain rents, much right-of-way maintenance expense and similar expenses.

Unequal allocation of constant costs as an element of the rate charged also occurs commonly where a bulky commodity is so low valued on a per ton basis that setting a rate by reference to the fully distributed cost of carrying the commodity would make it uneconomic to ship it. See n. 11, supra.

This Court is not particularly suited to pass on the merits of the economic arguments made by the railroads’ expert witnesses in these cases. Moreover, their soundness is not especially relevant to the result we reach in the present posture of this controversy. However, because the economic testimony is emphasized so heavily by both the railroads and the United States in their arguments to us, we shall venture a few observations on it. Most of the economic testimony is directed towards proving that the utilization of out-of-pocket costs in setting rates permits the railroads to maximize their profits. To the extent that out-of-pocket costs are accurately computed, that proposition appears uncontro-vertible. The economists then go on to argue, in effect, that what is good for the railroads is good for the country. This argument is developed as follows. Whenever a railroad lowers its rate, the shipper to whom that rate is available benefits. As long as the rate is above the out-of-pocket cost of the service, the railroad benefits by obtaining the profits from traffic it formerly did not carry. The fact that a competing carrier may lose the revenue it *587previously earned by carrying the traffic is immaterial because the railroad’s ability to make a profit by charging the lower rate shows that it is, in some sense, more efficient than its competitor. In order to evaluate the foregoing argument certain other aspects of a railroad’s operation must be kept in mind. The reason why a railroad’s fully distributed costs are substantially greater than its out-of-pocket costs on any given traffic is, inter alia, because certain constant costs, see n. 14, supra, are allocated to that traffic on a proportional basis despite the fact that those costs will be incurred by the railroad whether it carries the particular traffic or not. These constant costs must be earned if the railroad is to stay in business. They are allocated proportionally on the theory that, all other factors being equal, such an allocation will be the best way of assuring that each shipper contributes his fair share towards covering the constant costs. Obviously to the extent that any shipper pays more of the constant costs than another without any good reason for so doing that shipper is, in some sense, discriminated against. The railroad economists point out that, because constant costs by definition are not attributable to the carriage of any particular traffic, it is to some extent arbitrary to allocate them to particular traffic. They further contend that all shippers presently utilizing a railroad’s services are benefited when the railroad obtains additional traffic at a profit to it, because that profit can be used to pay a portion of the constant costs currently being charged wholly to them. The fact that charging a rate less than its fully distributed cost of carrying the traffic results in the shipper of that freight paying a disproportionally low share of the railroad’s constant costs is considered to be outweighed by the overall benefit to the other shippers of having the absolute amount borne by them of the constant costs decreased by the profit earned on the traffic. It seems apparent, however, that in a case where the sole reason that a rate below fully distributed cost is necessary to attract such additional traffic is the competition of another mode of transportation, the continued existence of that competition is also the sole economic justification for maintaining the rate at a relative level that favors one shipper over others. If the competing carrier is *588driven out of business because of its inability to match the railroad’s lower rates set on an out-of-pocket basis, the economic justification for permitting the continuation of those low rates would seem to disappear. Yet the railroad economists assert that in such a situation the railroad should be required by the ICC to maintain the rate at its original level. The obvious reason for this position is that permitting a railroad to raise its rates once it had effectively destroyed a competitor in one area would enable it to price on an out-of-pocket basis in competition with another carrier in a different area thereafter and, in turn, drive that carrier out of business. Eventually a railroad could eliminate all its competitors whose out-of-pocket costs were higher than its own. After this was accomplished the railroad could re-price all its services on a fully distributed cost basis thereby eliminating all discrimination between its shipper customers. Of course, the shippers formerly served by competing modes at rates profitable to them but lower than the railroad’s fully distributed costs would at that point have lost the advantage of the low cost service. The only way to perpetuate the advantage previously enjoyed by those shippers would be, as the railroad economists recognized, artificially to maintain their rates at the former level despite the absence of present economic justification for such a low rate. (It is true that were the barriers to re-entry into the transportation market low, as asserted by the railroad economists, the potential competition created by the possibility of such re-entry by a competing mode could furnish an economic justification for the continuance of the original low rate. However, there is no factual evidence in this record from which it can be concluded that barriers to re-entry are low enough to create such potential competition.) If the only justification for the maintenance of a disproportionally low rate to some shippers is the fact that competition existed once upon a time for their business, would it be irrational to conclude that it would be preferable to keep the original competition in business to serve those shippers and to require the railroad to look elsewhere for additional revenue? Would it, for example, be possible for railroads to increase their revenues instead by increasing, through selective rate decreases, the volume of traffic shipped by *589persons who presently pay amounts in-excess of the fully distributed cost for the service afforded them? These are only a few of the questions that come to mind when we attempt to evaluate the economic arguments made in this ease. We do not pretend to be able to answer them. We merely note their existence as evidence that we do not find the arguments made to the ICC here as compelling as did the District Court. Our discussion here should not be interpreted as a rejection of the basic economic points made by the railroads. It is merely intended to illustrate the desirability of having the initial resolution of these issues made by a tribunal, and in a proceeding, more suitable than the present one.

It is, of course, true that such discriminations need have no necessary relationship to a railroad’s cost of service, whether that is computed on a fully distributed or out-of-pocket basis. On the other hand, it is also evident that what is basically at issue is a carrier’s right to price discriminatorily, either between shipments or shippers, in order to maximize revenues by competition. By contrast it can be noted that the railroads have apparently retained their prior rate of $11.86 per ton on ingot molds in areas where they have no competition from barge-truck service. The discrimination thus created is not too dissimilar from that embodied in the above examples.

do not, however, believe that the Court’s position is really supported by its references to the area pricing and moratoria systems approved by the Court in the Permian Basin Area Rate Cases, 390 U. S. 747. The Court’s opinion in those cases emphasized that those administrative devices were warranted in light of the terms of the Natural Gas Act and of the extraordinary difficulties of regulating independent producers of that commodity. I should not have thought it useful or desirable to extrapolate from those unusual circumstances any general extension of the discretion of administrative agencies. Of course, the specific proposition taken by the Court today from the opinion in those cases, which had in turn been taken from Los Angeles Gas Co. v. Railroad Commission, 289 U. S. 287, 304, may be regarded as a general principle sustained by a number of the Court’s opinions. The difficulty, I should have supposed, is that even that general proposition is only dimly relevant to the questions now before us.

The appearance and disappearance of the suggestion that these questions must be deferred pending the Commission’s rulemaking proceedings on the presentation of cost evidence deserves a more complete chronicle than the Court has given. In 1965, more than three years after the Commission initiated its rulemaking proceeding, 27 Fed. Reg. 4102, and some two months before it decided these cases, the Commission held that “a comparison of out-of-pocket costs is the most appropriate method for ascertaining . . . inherent competitive advantage” where one of the competing modes is unregulated. The Commission found it unnecessary to defer that question, or even to mention its separate rulemaking proceeding. Grain in Multiple-Car Shipments — River Crossings to the So., 325 I. C. C. 752, 772. In the present case, the report and order of the Commission’s Division 2 indicated that it “adhere [d] to the utilization of fully distributed costs as the standard for determining the inherent advantage of low cost in the situation presented.” 323 I. C. C. 758, 762-763. The opinion did not pause to refer to the rulemaking proceeding. In the report and order of the full Commission on reconsideration, the only reference to the rulemaking proceeding was the brief passage quoted by the Court from the opinion’s final section. 326 *596I. C. C. 77, 84. The three dissenting members of the Commission found it unnecessary to refer to the rulemaking proceeding. Id., at 85, 86, 90. One year after its decision in these cases, the Commission had occasion to review its approach to these problems. Although the Commission adhered to its decisions in these cases and in Grain in Multiple-Car Shipments—River Crossings to the So., supra, it did not find it necessary to advert to its separate rulemaking proceedings. It concluded that where the competition from a regulated carrier is “relatively limited” it would apply the rule from Grain in Multiple-Car Shipments, and not that from these cases. There is no evidence whatever that the Commission regarded these two lines of authority merely as temporary expedients, useful only until more careful analysis is possible. Wine, Pacific Coast to the East, 329 I. C. C. 167, 171-175. And see the concurring opinions of Vice Chairman Tucker and Commissioner Freas, id., at 176, as well as the separate opinion of Commissioner Murphy, dissenting in part, id., at 177. Although the three-judge District Court set aside the Commission’s order in these cases, it did not mention the rulemaking proceeding. 268 F. Supp. 71. In its jurisdictional statement to this Court, the Commission adverted to the rulemaking proceeding only in a single sentence, with an identifying footnote, contained in the statement’s conclusion. Jurisdictional Statement in No. 809, at 17. In the memorandum of the United States, urging that probable jurisdiction be noted, it was said that these cases “present a major issue reserved by this Court” in New Haven, which was “whether out-of-pocket costs, fully distributed costs, or ‘some different measure’ should be the criterion for determining which mode of transportation has the inherent advantage . . . .” Memorandum for the United States 3-4. In the various briefs presented to the Court in these four cases, including the briefs of the United States and of the Commission, I have looked in vain for any suggestion that, as the Court now holds, the Commission’s opinion was intended merely to defer resolution of the question reserved in New Haven. Indeed, I have *597searched unsuccessfully in the Commission’s brief for any reference, however fleeting, to the rulemaking proceeding. One might have supposed that if, as the Court now finds, the existence of the rule-making proceeding was, in the Commission’s view, decisive to the result of this ease, the Commission would have found room in its brief of 51 pages at least to cite those proceedings. It is difficult to escape the inference that the Court has, on a basis that will doubtless prove as surprising to the parties as it did to me, simply postponed decision of a difficult issue.

It is, however, proper to add that I have found no support in the record for the Court’s suggestion that “the railroad appellees here determined to attempt to raise precisely the same issues [as in the rulemaking proceeding] in a much more circumscribed proceeding by unilaterally reducing their rates on one item of traffic.” Ante, at 590-591.

Together with No. 804, American Trucking Assns., Inc., et al. v. Louisville & Nashville Railroad Co. et al., No. 808, American Waterways Operators, Inc. v. Louisville & Nashville Railroad Co. et al., and No. 809, Interstate Commerce Commission v. Louisville & Nashville Railroad Co. et al., also on appeal from the same court.