Petition for Review of a Decision of the Interstate Commerce Commission
Before Fairchild, Chief Judge, Swygert, Circuit Judge, and Campbell, Senior District Judge.*fn*
This appeal presents the question of whether Consolidated Rail Corporation's (ConRail) cancellation of joint rates with the Ann Arbor Railroad System (Ann Arbor) is consistent with the public interest, within the meaning of 49 U.S.C. § 10705(d). The Commission approved the cancellation of joint rates. Petitioners seek appellate review of the Commission's order in this Court. Jurisdiction is predicated on 28 U.S.C. § 2321, 2342(5). We reverse.
The petitioning railroads in this case are the Ann Arbor and the Green Bay and Western Railroad Co. (GB&W). The Ann Arbor operates a 300 mile line of railroad between Toledo, Ohio and Frankfort, Michigan. At Frankfort, the Ann Arbor line connects with its car ferries which transport railroad cars across Lake Michigan to Kewaunee, Wisconsin. At Kewaunee the car ferries connect with the GB&W which operates a line of railroad to Winona, Minnesota. The majority of freight traffic on these railroads moves from the west to the northeast. The GB&W connects with several major western railroads at Winona, including the Soo, the Chicago and North Western, the Milwaukee Road and the Burlington Northern at East Winona, Wisconsin. The Ann Arbor connects with seven eastern railroads at Toledo: ConRail; Grand Trunk Western; Baltimore & Ohio; Chesapeake & Ohio; Detroit, Toledo & Ironton; Norfolk & Western; and Toledo Terminal. The Ann Arbor, its car ferries and the GB&W together serve as a bridge carrier of rail traffic between the west and the northeast.
The Ann Arbor and GB&W compete with several other railroads for a share of transcontinental traffic. ConRail, for example, provides service between Chicago and numerous cities in the northeast. Burlington Northern and other large western lines also service Chicago from the west. Thus, a shipper in the western United States would have several alternative railroad routes for freight destined for the east coast. The freight could travel via the Chicago Gateway, via the GB&W and Ann Arbor, or on several southern routes. The competition for this transcontinental traffic gave rise to this litigation.
In 1978 the Interstate Commerce Commission (the Commission) approved a seven percent nationwide increase in rail freight rates, in Ex Parte No. 357, Increased Frt. Rates & Charges, Nationwide 8 Percent, 395 I.C.C. 740 (1978). The Ann Arbor elected not to participate in the increased rate and "flagged out" of the increase on 22 commodities.*fn1 The effect of this flag out was to prevent any railroad engaged in joint traffic with Ann Arbor from taking the seven percent rate increase with respect to the 22 selected commodities. This is so because joint rates may be increased only with the concurrence of all participating railroads. Thus, certain freight traffic originating in the west and destined for points east of Toledo would incur a lower freight cost if routed via the GB&W and the Ann Arbor than if that same traffic were routed via Chicago. The 22 selected commodities on which the Ann Arbor "flagged out" of the rate increase already had revenue to variable cost ratios in excess of 150 percent, which indicates that the existing rates were not predatory or unreasonable under the Commission's guidelines.*fn2 Ann Arbor's decision to forego the rate increase suggests a business judgment that maintaining the existing rates would result in increased traffic and ultimately prove more profitable.
In response to Ann Arbor's flag out, ConRail cancelled joint rates on five of twenty-two commodities.*fn3 These joint rates were replaced by proportional rates. A proportional rate is one which covers only a portion of movement of freight traffic. The new proportional rates covered only those portions of the movement of west to east traffic which moved over ConRail from Toledo to points east. In the majority of cases the new proportional rates exceeded rates for west to east traffic routed via the Chicago Gateway. ConRail's proportional rates also exceed what ConRail's share of the 7% increase would have been had the Ann Arbor not flagged out of the increase.
The Ann Arbor, GB&W, the State of Michigan and numerous affected shippers objected to ConRail's proportional rates. The Ann Arbor and GB&W objected to the cancellation of joint rates on the theory that it violated Ann Arbor's right of independent action, and that ConRail had failed to establish that the cancellation was "consistent with the public interest."*fn4 The Ann Arbor and GB&W were obviously concerned about the amount of traffic that would be lost to the Chicago Gateway railroads as a result of the new proportional rates. Faced with the prospect of paying several hundred dollars more for freight service via the Ann Arbor, a shipper would route shipments via the Chicago Gateway instead.
The State of Michigan manages and operates the Ann Arbor and owns a substantial portion of its track. The State had spent a considerable amount in aiding the Ann Arbor, and was committed to maintaining it as a self-sustaining railroad, serving shippers in Michigan. The State Department of Transportation was concerned about insufficient regional and intrastate traffic and feared that unless the Ann Arbor could serve as a bridge carrier*fn5 for transcontinental movements it would not survive. The cancellation of joint rates was, therefore, viewed as a very serious threat to the Ann Arbor and the GB&W's financial viability.
The central issue before the Commission was whether ConRail's actions were consistent with the public interest. ConRail has the burden of demonstrating that the cancellations are consistent with the public interest. 49 U.S.C. § 10705(d). The Interstate Commerce Act requires that the Commission, in considering joint rate cancellations;
(1) compare the distance traveled and average transportation time and expense required using (A) the through route, and (B) alternative routes, between places served by the through route;
(2) consider any reduction in energy consumption that may result from cancellation; and
(3) consider the overall impact of cancellation on the shippers and carriers that are affected by it.
The Commission considered these factors and concluded that ConRail's cancellation of joint rates was consistent with the public interest.
In an effort to show that time and distance factors supported the cancellation, ConRail introduced a 24 shipment sample comparing routes with and without Ann Arbor's participation. The sample indicated the Ann Arbor routes were, on the average, longer, more time consuming and less profitable. The sample also reflected higher costs to the shippers using the Ann Arbor route. In response to the argument that the cancellation of joint rates was, in effect, a route closure, ConRail cited the relatively small number of shipments via the Ann Arbor, suggesting that the loss would be minimal. ConRail also projected significant losses for itself and other joint line carriers as a result of the Ann Arbor's flag out of the seven percent increase. The cancellation of joint rates, ConRail argued, was simply a reasonable response to the Ann Arbor flag out.
The Commission found the ConRail sample inconclusive. It noted that California and Indiana origins accounted for 11 of the 24 movements in the sample and that such movements were not likely to be routed via the Ann Arbor.*fn6 The Commission also noted that the ConRail sample included no movements originating in Washington, Idaho, Canada, or the upper midwest. The sample included no Minnesota, Wisconsin or Michigan origins or destinations, though U. S. Railway Association data indicates that the majority of Ann Arbor's shipments originate in those states.*fn7 The Commission noted that when traffic between the Pacific Northwest, Montana and the Upper Midwest was considered, the Ann Arbor routes were shorter, or no more than 10 percent more circuitous than the Chicago Gateway.*fn8
The Commission considered energy consumption and efficiency considerations to be more significant. Here, the Commission focused on use of the cross-lake car ferries in the GB&W and Ann Arbor route. There was considerable dispute as to the efficiency and potential efficiency of the car ferry. The Ann Arbor presently operates car ferry service between Frankfort, Michigan and Kewaunee and Manitowoc, Wisconsin. In the late 1960's the Ann Arbor operated five vessels between Frankfort and four ports on the Wisconsin side of Lake Michigan. In 1970 the Penn Central and seven other Northeast Railroads, including the Ann Arbor, went bankrupt. Car ferry service to Menominee and Manistique, Michigan was discontinued and two vessels were sold. In 1972 a third vessel was eliminated from cross-lake service.*fn9 In 1972 a total of 50,957 cars were carried across Lake Michigan on the Ann Arbor car ferries.*fn10 Of that number 33,206 were full cars, and the remaining 17,751 were empty.*fn11 In 1973 the total number of cars was reduced to 39,666 cars due to the abandonment of the Manitowoc service and the scrapping of a vessel. Approximately one-third of those cars were empty.*fn12 In 1973 the vessel A. K. Atkinson broke a crankshaft and was not repaired. That left one vessel, the Viking, providing service between Frankfort and Kewaunee from 1973 until the restoration of a second vessel in January 1979.*fn13
While several car ferry routes were discontinued during the early 1970's, the Kewaunee-Frankfort traffic showed a slight increase in total carloads through 1974.*fn14 There was also testimony that while repairs to the Atkinson's broken crankshaft would have been costly, there was adequate insurance to cover the repairs.*fn15 The picture which emerges from uncontradicted testimony before the Commission's Administrative Law Judge (ALJ) is a general lack of concern by the Ann Arbor's parent company for the Railroad's future. Given the poor financial condition of the railroad and the entire industry at the time, that low level of interest is understandable.
On April 1, 1976 much of the Ann Arbor's property was conveyed to the State of Michigan. ConRail then entered into a contract with the State to operate the Ann Arbor. The State looked to ConRail only after negotiations with other viable railroads in the region broke down.*fn16
ConRail's operation of the Ann Arbor was very much a marriage of last resort. ConRail included a clause in its contract with the State which relieved ConRail of any liability for diversion of traffic from the Ann Arbor.*fn17 ConRail made no effort to restore the Ann Arbor to financial viability. Ann Arbor routes were not listed in ConRail's system-wide maps or guides. The ConRail sales office informed shippers that the car ferries did not run in winter, and, in fact, car ferry service was reduced to three times per week. Train service was also reduced to every other day.*fn18 There was ...