While RPC believes that we should only consider the return the assets invested in the line to be abandoned would yield if reinvested in other rail uses, it would not limit carriers to simply relocating tangible assets. Instead RPC would allow evidence regarding proposed use of proceeds resulting from the sale of these assets. As to the evidentiary burden on the carrier, RPC suggests that carriers be required to demonstrate where on the system the reinvestment will be made and why it will be a more productive (not simply more profitable) investment. Elcor, the protesting shipper in the Texas and Pacific case, argues that the carrier's opportunity costs should be reduced by the real economic loss shippers and communities suffer when forced to use alternative modes of transportation. The resulting figure would be the appropriate opportunity cost to be considered in abandonment proceedings. Vistron takes an altogether different approach. It suggests that railroads establish a "base investment" related to the general return and that opportunity costs be compared to that base level. Thus, a carrier that earns an overall 5-percent return on investment would, therefore, not be allowed to abandon a line with a 6-percent return even though by selling the line's assets and using the proceeds elsewhere the carrier could recover a substantially higher return. Support. The remaining parties, which include the rail interests, DOT, New York, and Virginia disagree strongly with any limitations. Arguing that carriers should be allowed to function in a free market type economy, these parties believe that we should allow unfettered use of opportunity costs as a factor in abandonment proceedings. They argue that railroads like other businesses must be free to make rational investment decisions without undue government interference. They stress that without the ability to invest resources so as to receive the best possible return, railroads will be unable to compete with other businesses for investor dollars. Furthermore, by allowing carriers to use their funds elsewhere, the public will benefit from a financially healthier rail industry through lower rates and better service. For this reason they assert that carriers must not be forced to live with a bad investment decision. Noting that investments once made are not thereafter ignored, they argue that if at a later point the company determines that the cost of disinvestment does not exceed the cost of continuing the investment, the company should be able to divest. They maintain that a railroad should be free to reinvest the proceeds in any alternative manner. DOT supports the application of a broad economywide concept of opportunity costs in determining the total cost to society of continuing service. It argues that the test of public convenience and necessity should compare all costs of maintaining service with all reasonably perceived public benefits. Evidence of any alternative. investments should be allowed as part of this test. Frisco argues that the failure to consider opportunity costs frustrates carrier attempts to maintain and upgrade their systems. Its comments discuss at length how and when the opportunity costs factor should be used in abandonment proceedings. Frisco distinguishes between two situations where a railroad might invoke opportunity costs as a factor in seeking abandonment. The first is when a line's assets are of no use other than scrap and the carrier would like to reinvest the proceeds more profitably. In such a case, the enormous rehabilitation and maintenance costs involved in keeping the line operational are properly the focus of analysis. Opportunity costs will have little significance in this context. It is where the assets are both in good condition and needed elsewhere, Frisco asserts, that opportunity costs should play a significant role. Frisco identifies three instances in which a carrier might be operating a marginally profitable line which is in good repair and made up of materials with high alternate railroad use potential. One is when a branch line which was once a highly developed and well maintained connection between carriers has since lost the bridge traffic which originally justified the construction and maintenance expenditures received. The second is when a branch line which is the stub-end of a formerly highly developed and well maintained trunk line has been severed. The third is when a branch line is recently constructed to reach new or potential markets which failed to materialize or ceased to exist. This situation, of little out-of-pocket costs and marginal profitability, does not fit easily into the traditional balancing test. Since Frisco believes the opportunity costs factor will be most relevant in the situation outlined above, it discounts the charges of wholesale branch line abandonment. Further, it notes that since most branch line rail is too light for main line use, and since the trend is to use continuously welded rail on main lines, most redevelopment will occur on other branch lines. Thus, it follows that branch line service will actually improve. In terms of the evidentiary burden Frisco believes the carrier should be able to present evidence concerning the condition and character of the rail and the new uses to which it can be put. The cost of taking up the old rail or moving the old assets must also be considered, but this item must be balanced against the cost of buying new assets if the old were not moved. DISCUSSION AND CONCLUSIONS After examining the public comments we find that opportunity costs must be a factor used in determining whether the public convenience and necessity permits abandonment. This finding reflects our belief that opportunity costs are a real, and, in some cases, very significant factor in determining whether the line at issue is imposing a burden on interstate commerce. We, therefore, advise carriers that in all future abandonment cases they are welcome to offer evidence of their opportunity costs. Such evidence may include the costs incurred in keeping assets tied up in less profitable operations as opposed to more profitable uses elsewhere, including nonrail uses. The two hypothetical cases offered by the Frisco are instances in which evidence of opportunity costs may be particularly relevant. However, since we believe that there are numerous situations in which the Commission should consider such a factor, we do not propose an exact rule of general applicability. We believe that in the abandonment area we must look ultimately to how productivity assets are used. Lines consisting of valuable rail assets which are underutilized should be allowed to be abandoned so that those assets may be better used elsewhere. Furthermore, it should be kept in mind that if we require a carrier to operate marginally profitable lines, it will be necessary for the carrier to earn more than a reasonable rate of return on other lines in order for the carrier to achieve an overall rate of return sufficient to attract investment capital. This hidden form of cross-subsidization is highly questionable as a matter of national transportation policy. If a carrier seeks to abandon a line in good physical condition it most likely is because a forecasted return was not realized. Holding a carrier responsible for a poor investment decision by denying abandonment would serve the public poorly. If a carrier has made an investment which proves unwise, it should be allowed to minimize its losses. Despite this announced policy of allowing carriers to introduce evidence of opportunity costs in the form of net salvage value or productivity of rail assets we are not altering our traditional balancing test. Protestants are of course free to respond to the applicant's opportunity costs evidence. For example questions as to ownership of the line or the land on which it is constructed, the source of funds used for construction or rehabilitation, contracts between shippers and carriers, et cetera, can be introduced by parties in an attempt to persuade the Commission, that, on balance, the equities in a particular case require denial of the abandonment. The abandonment process has always involved balancing. By this statement we merely wish to inform the public that we are willing to listen to additional arguments advanced by carriers to support their contention that operation of a given line is a burden on interstate commerce. We believe that the judicious consideration of opportunity costs as one of the factors in abandonment cases will enable us to fulfill better our statutory duty to ensure the development, coordination, and preservation of a transportation system that meets the needs of the United States. This decision does not have any significant environmental or energy consequences. The environmental and energy consequences of individual abandonments will continue to be assessed in the context of the involved proceeding, of course. COMMISSIONER ALEXIS, joined by COMMISSIONER CLAPP, Concurring: I agree that opportunity costs should be given consideration in abandonment cases cases in applications involving lines that are marginally profitable. There are several criteria that should be included in considering opportunity costs of capital: 1. We should look at the return on investment of the specific line in relation to a particular carrier's long-term cost of capital. 2. The burden of proof should be on the railroad seeking abandonment of the line to show that its return on investment (for this line) is below its cost of capital. 3. The railroad should also show that the assets could be employed somewhere else in its system at a higher rate of return, would improve its overall financial performance, and, or, would improve the services that it would offer to other shippers. We should not place limits on how assets are transferred from one transportation use to another e.g., movement of lines to other location, sales of assets and reinvestment in other transportation assets, and the like. However, I would oppose sales of nonmarginal lines if the proceeds are not reinvested in other transportation assets. |