DECISION

No. 36651

S & K FARMS, INC., AND FREIGHT USERS ASSOCIATION OF LONG ISLAND, INC. v THE LONG ISLAND RAIL ROAD COMPANY, ET AL

Decided June 16, 1978

The railroads (described below) allowed joint rates on fresh fruits and vegetables to points served by the Long Island Rail Road to expire because of a dispute over division of the revenue. Higher combination rates are applicable as a result. In this situation, nonrenewal of the joint rates is an unjust and unreasonable practice in violation of section 1(6) and creates an undue preference and prejudice in violation of section 3(1). The nonrenewal is found to be an attempt to circumvent specific orders of the Commission and the courts that the commodities in question move at the Ex Parte No. 295 general increase level. Further, the Commission will not allow innocent shippers to suffer because of the railroads' disputes. Establishment of incentive rates ordered.

PROCEDURAL HISTORY

S & K Farms, Inc. and Freight Users Association of Long Island, Inc. (complainants), filed a complaint August 8, 1977, alleging that the act of defendant railroads in allowing the joint commodity rates on fruits and vegetables to Long Island destinations to expire is an unjust and unreasonable practice in violation of section 1(6) and results in an undue preference and prejudice in violation of section 3(1) of the act. Defendant railroads are the Long Island Rail Road Company (LIRR), and all its connecting carriers involved in the shipments which are the subject of the complaint, including but not limited to the Southern Pacific Transportation Company, Rock Island and Pacific Railroad Co., Consolidated Rail Corporation (ConRail), and Brooklyn Eastern District Terminal Rail Road (BEDT). (The latter railroads will be referred to as the transcontinental railroads.) Complainants asked that the defendants be ordered to cease and desist from the violations, that just and reasonable joint through rates and charges be prescribed for points on the LIRR, and for an award of reparations.

The Administrative Law Judge (ALJ), found that the rates and charges assessed were not shown to be unlawful. We disagree. Complainants and LIRR have appealed the initial decision. The Port Authority of New York and New Jersey (Port Authority), filed a petition for leave to intervene and an appeal from the decision. Its petition is accepted. The transcontinental railroads replied.

THE BACKGROUND

There is a long and complicated history behind the instant proceeding. It began with the Railroad Retirement Amendments of 1973, Public Law 93-69, 87 Stat. 162, which substantially increased the taxes levied upon the railroads for their employees' retirement benefits. The statute specifically provides for recoupment of the additional taxes by a general increase in the rates.'

On August 15, 1973, the Nation's railroads other than the LIRR filed a joint petition seeking a general rate increase of 2.8 percent. On August 24, 1973, LIRR filed an individual petition requesting a terminal surcharge of 12.5 percent on all traffic moving to and from points on LIRR.

The decision to take independent action and impose a terminal surcharge rather than join the other railroads in a general increase was prompted by circumstances peculiar to LIRR. Had LIRR joined in the 2.8-percent general increase, it would have received only $269,000 in additional revenue to meet $6 million in increased retirement taxes.

Independent action by the LIRR and its attempt to recoup its retirement taxes as authorized by law has been the focus of several proceedings before the Commission.

Ex Parte No. 299 and Ex Parte No. 299 (Sub-No. 1).-On September 13, 1973, in Ex Parte No. 299 and Ex Parte No. 299 (SubNo. 1), Increases in Freight Rates and Charges-1973, 346 I.C.C. 305, the Commission authorized interim freight rate increases to recoup the retirement taxes and rejected without prejudice the filing of LIRR's terminal surcharge tariff.

'This statute is an amendment to the Railroad Retirement Act and a companion amendment to the Interstate Commerce Act. The amendment to the Railroad Retirement Act imposed increased tax liabilities on the railroads, shifting some tax liability from railroad employees to employers. As a companion to that action, the Interstate Commerce Act was amended to provide for the prompt pass-through of the increased tax liability be means of increases in the general rate level. The amendment to the Interstate Commerce Act, termed the Railroad Rate Adjustment Act of 1973, is set forth in title II of public law 93-69, an amendment to section 15a. In Ex Parte No. 298, Requirements and Procedures Relating to Railroad Rate Adjustment Act of 1973, set forth in 49 CFR 1107, the Commission specified the data and information which the carriers must furnish in these proceedings.

On October 18, 1974, the United States District Court for the Eastern District of New York held in Long Island Railroad v. United States, 388 F. Supp. 943, that the Commission misconstrued section 15a(4)(b) of the act and that this provision does not prohibit a terminal surcharge of the type filed by LIRR. The court set aside the Commission's order in Ex Parte No. 299 (Sub-No. 1), and enjoined the Commission from rejecting the LIRR's terminal surcharge as an interim rate increase. While holding that the LIRR's proposal of a terminal surcharge was an appropriate method of effecting an interim rate increase under section 15(4)(b), the court expressed no view with respect to its propriety as a final solution to the problem of recouping the increased costs due to the retirement taxes.

Thereafter, the Commission approved the terminal surcharge of LIRR in its second supplemental report and order in Ex Parte No. 299 and Ex Parte No. 299 (Sub-No. 1), Increases in Freight Rates and Charges-1973, 350 I.C.C. 673, entered August 15, 1975. Additionally, the Commission gave the other railroads 2 years from the date of service of the report and order to incorporate the terminal surcharge into all the tariffs naming joint rates from and to points on LIRR's lines.

On appeal, the United States Court of Appeals, Fifth Circuit, on December 27, 1977, set aside the Commission's order of August 15, 1975, and remanded the proceeding to the Commission for further proceedings in conformity with its decision. The court found the Commission failed to articulate the reasons for its November 23, 1976 order denying the railroads' petition for reconsideration. The court, however, did order railroads subject to the set aside order to incorporate the 12.5-percent terminal surcharge, as an interim charge, into all tariffs naming rates from and to points on LIRR. LIRR was ordered to keep a separate trust fund of the proceeds of the surcharge. Aberdeen & Rockfish R. Co. v. United States, 565 F. 2d 327 (1977).

LIRR has appealed the decision of the Fifth Circuit to the Supreme Court. Pending resolution of the LIRR's petition for a writ of certiorari, the Supreme Court has stayed that part of the order which requires the LIRR to hold the proceeds of the surcharge in a trust fund.

In addition to "flagging out" of Ex Parte No. 299, LIRR has also flagged out of a number of other general freight increases since 1969. While LIRR's initial efforts to "flag out" were unsuccessful, its right not to participate in general increase proceedings was eventually established in Ajayem Lumber Co. v. Penn Central

Transportation Co., 487 F. 2d 179 (2d Cir. 1973), opinion clarified and affirmed on rehearing, 496 F. 2d 21 (1974), cert. denied, Long Island R. Co. v. I.C.C., 419 U.S. 884 (1974). However, when ConRail was created in 1973, it was permitted to adopt or reject its predecessors' existing joint rates. After ConRail refused to adopt existing joint rates with LIRR because they did not reflect the more recent general rate increases, the LIRR eventually agreed to modify its position and to concur in prior general increase proceedings (except Ex Parte No. 299 and Ex Parte No. 305) in exchange for ConRail's adopting the existing joint rates with it. Since the Ex Parte No. 299 (2.8 percent) and the Ex Parte No. 305 (10 percent) increases roughly approximated the 12.5-percent terminal surcharge authorized in Ex Parte No. 299 (Sub-No. 1), the agreement enabled the railroad to keep its surcharge and otherwise preserve rate parity with its railroad competitors in the New York area.

Docket No. 35690.—On January 11, 1974, three large citrus fruit shippers2 filed a complaint, docketed as No. 35960, Sunkist Growers, Inc. et al. v. The Akron, Canton & Youngstown Railroad Company, et al. (Sunkist Growers), contending that the then existing rates on fresh citrus fruit from California and Arizona to points throughout the United States and Canada violated sections 1(5), 1(6), and 3(1) of the act. They sought cancellation of the existing rates and prescription of incentive rates in their place.3

On February 24, 1975, the ALJ found that the failure of defendant railroads to establish and maintain alternative rates and minima of fresh citrus fruits constituted a violation of sections 1(5) and 1(6) of the act. He ordered the carriers to establish incentive rates based on the general revenue increase level authorized in Ex Parte No. 305. On July 29, 1976, the Commission's division 2 affirmed and adopted the initial decision of the ALJ except with respect to the prescribed rates and minima to LIRR destinations. The Commission ordered LIRR and other railroads which participate in joint rates with LIRR, to establish and maintain incentive rates to Long Island destinations on the basis of the Ex Parte No. 295 general increase level.

The Ex Parte No. 295 rate level was prescribed because LIRR was authorized to increase the level of its interstate freight rates by imposing a 12.5-percent terminal surcharge on all traffic moving to

"Sunkist Growers, Inc.; Pure Gold, Inc.; and Haggblade-Margules-Tenneco, Inc.

"Incentive rates encourage shippers to fill cars to the maximum extent possible. Here, the shippers had generally been filling cars to two thirds of their capacity.

and from points on the LIRR in Ex Parte No. 299 (Sub-No. 1), in lieu of taking the 2.8-percent general increase authorized for the other railroads in Ex Parte No. 299. If incentive rates as to the LIRR were based on the subsequent Ex Parte No. 305 level, the total freight charges paid by Long Island shippers would be approximately 12.5 percent higher than charges paid by consignors shipping to nearby New York points on other railroads such as ConRail. The rate disparity would occur because Ex Parte No. 305 involved a 10-percent increase and also included the Ex Parte No. 299 increase of 2.8 percent.

The Commission found such a rate disparity to be unjust and unreasonable in violation of section 1(5) and 1(6) of the act. In order to remedy the situation and aid Long Island shippers the Commission prescribed rates to Long Island based on the lower general increase level authorized in Ex Parte No. 295. That level, when combined with the 12.5-percent terminal surcharge, approximated the level prescribed by the Commission for the other railroads in Ex Parte No. 305.

Sunkist Growers, supra., is currently pending on appeal in The Atchison, Topeka & Santa Fe Railway Co. v. Interstate Commerce Commission, civil action No. 77-1946 (5th Cir. 1977).

Docket No. 36432.-In 1976 the southwestern railroads and their eastern and southern connections (other than the LIRR) filed a comprehensive revision of rates on fresh fruit and vegetables originating in southwestern territory. While the Commission refused to suspend the proposed rates, it did institute an investigation into their lawfulness. By their proposal the railroads sought to provide reasonably compensatory rates on fresh fruits and vegetables. They contended that the existing rates were based on the use of old ice bunker cars which have a maximum capacity of about 40,000 pounds. Since 1949, however, these cars have been gradually replaced by much larger mechanically refrigerated cars having a maximum capacity of up to 90,000 pounds. In the railroads' view the existing rates failed to reflect the current economics of handling perishables by rail.

The incentive rates provided for both increases and decreases in the existing rates. Higher rates were imposed in the lower weight brackets and lower rates in the higher brackets. The built-in incentive to ship heavier loads was designed to produce overall higher-per-car revenues and better cost-to-revenue ratios.

On February 7, 1977 in docket No. 36432, Fresh Fruits and Vegetables From the Southwest, the ALJ found that the rates under