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with the State. They say the requirements are "confusing, burdensome, never though to require what the PSC now says thay do but admittedly probably not impossible to comply with." The railroads label the rules as merely "technical and unimportant grounds" for rejecting a tariff.

The railroads' arguments are not pursuasive. Notice requirements are important. The public must have notice and opportunity to oppose the increases, for the public will have to pay them. The railroads have not presented reasons for the Commission to exercise its discretion to assume jurisdiction.

Under section 13(5), the 120-day period has not begun to run. It will when the railroads file properly with the State. The Commission will not now assume jurisdiction.

It is ordered:

The order dated March 8, 1978, instituting this investigation is vacated.

The petitions to intervene are denied.

This proceeding is discontinued.

357 I.C.C.

No. 36612

INCENTIVE RATE ON COAL-GALLUP, NEW MEXICO TO COCHISE, ARIZONA

Decided November 28, 1977

Proposed capital incentive rate schedule found qualified for consideration under section 15(19) of the Interstate Commerce Act. Proposed rate found lawful.

Robert A. Hewlett, C. Michael Loftus, and William L. Slover for protestant.

Charles W. Burkett, Harry L. DeLung, Jr., Harvey Huston, Milton E. Nelson, Jr., Louis P. Warchot, and Richard E. Weicher for respondents.

REPORT AND ORDER OF THE COMMISSION

BY THE COMMISSION:

This proceeding is brought under section 15(19) of the Interstate Commerce Act' generally in accordance with the procedures set forth in regulations' adopted by the Commission in Ex Parte No. 327, Rate Incentives for Capital Investment, 353 I.C.C. 760 (1977). Due and timely execution of our functions under section 15(19) of the act imperatively and unavoidably requires the omission of a recommended decision in this proceeding. Requested findings and evidentiary rulings not specifically discussed in this report nor reflected in our findings or conclusions have been considered and found not justified or their resolution not necessary for the appropriate disposition of the proceeding.

On June 1, 1976 respondents, The Atchison, Topeka and Santa Fe Railway Company (Santa Fe) and Southern Pacific Transportation Company (Southern Pacific) filed a notice of intent to file schedules containing a capital incentive rate of $8643 on coal in unit-train service from Gallup, N. Mex., to Cochise, Ariz., subject to shipment of a minimum of 1 million tons per year. The proposed schedule* states an alternative per-car rate of $11.81 where the tonnage requirement is not met. The proposed schedule applies only to movements in shipper-supplied cars. The route of movement will be 'As revised by section 205 of the Railroad Revitalization and Regulatory Reform Act of 1976, Public Law No. 94-210 (the 4R Act).

"See 49 CFR 1109.20 et seq.

'Rates and costs are stated per net ton, unless otherwise indicated. 'The proposed schedule is set forth in appendix A.

via Santa Fe from Gallup to Deming, N. Mex., and via Southern Pacific from Deming to Cochise, Ariz., for a total distance of 523 miles-371 via the Santa Fe and 152 via the Southern Pacific. Affidavits accompanying respondents' notice of intent indicate that respondents anticipate that the following capital investments are required to implement the proposed schedules:5

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Arizona Electric Power Company (AEPC) of Benson, Ariz., produces and markets electric power to customers throughout the State of Arizona. It is a nonprofit, rural electric cooperative operating pursuant to the Rural Electrification Act of 1936 and the program administered by the Rural Electrification Administration. AEPC is engaged in the construction of two new electric-generating units at its Apache Station located at Cochise, Ariz. The bituminous coal-burning units will cost in excess of $270 million and the first will be completed in early 1978. When both are operational, coal consumption will be approximately 1 million tons per year. Coal supplies have been secured from sources near Gallup, N. Mex., the named origin point in respondents' proposed schedule. That schedule is designed to apply to the movement of AEPC's coal.

AEPC filed a protest to the proposed schedule on July 15, 1977. Pursuant to that protest and its obligations under section 15(19) of the act, the Commission initiated an investigation of the proposed schedule and ordered that the modified procedure set forth in Ex Parte No. 327, supra, be followed. Three pleadings were filed-an initial presentation by protestant, respondents' reply statement, and protestant's rebuttal statement.

The parties are in substantial disagreement on four major issues: (1) whether the proposed schedule qualifies for treatment under section 15(19); (2) the proper method for computing the cost of

Respondents subsequently reevaluated the amount of investment required to implement the new service. In their reply statement, they state in excess of $12 million will be required-$4,795,050 for eight locomotives and way cars and $7,967,730 for upgrading roadway on the Santa Fe's line.

service and the weight that should be accorded cost evidence in determining maximum reasonableness of rates; (3) the validity of allegedly comparable rates presented by both parties as a basis for determining maximum reasonable rates; and (4) the lawfulness of other conditions of the proposed tariff, including switching charges, volume requirements, and respondent's failure to offer service in carrier-supplied cars.

POSITIONS OF THE PARTIES

Does the proposed schedule qualify for treatment under section 15(19)?-Protestant believes that no capital investment is "required" to implement the proposed schedule as that term is used in section 15(19). Protestant asserts that respondents' claim that they must purchase eight locomotives to implement the new service implies that the new locomotives be dedicated exclusively to the AEPC coal traffic. Only in this way, protestant contends, can the claimed capital investment be directly indentified with the AEPC coal traffic. However, exclusive dedication would, in protestant's view, constitute contract carriage and violate part I of the act.

Protestant offers testimony, based upon a field survey, that locomotives are not dedicated to high-volume unit-train service, but rather are pooled and used on a systemwide basis. In the absence of a connection between particular locomotives and specific trains or traffic increments, the purchase of locomotives would have a uniform effect on all system traffic and lack the requisite "identifiable effect" on protestant's traffic which is a prerequisite for capital incentive treatment under section 15(19). Moreover, protestant argues that the evidence does not support or document the Santa Fe's need to acquire five new locomotives in order to transport AEPC's coal traffic, except inferentially through respondent's inclusion of locomotive costs in its cost evidence. Respondents' 1976 Annual Reports, showing 3,887 locomotives in service and 75 locomotives leased to others, are cited to demonstrate that new locomotives are not required to implement the new service.

In response to respondents' assertion that a $7.9 million capital. investment in construction and upgrading projects will be required, protestant has introduced the testimony of two witnesses, both of whom made on-site inspections of the Santa Fe portion of the route "See Ex Parte No. 327, supra, at 765.

(between Gallup and Deming, N. Mex.) on which the major portion of the investment is contemplated by respondents. Both witnesses, on the basis of a detailed examination of the proposed construction and upgrading, conclude that while all the proposed improvements suggested by respondents are desirable, none is required (in the form and at the expense proposed) to handle AEPC's unit-trains. Protestant states that the entire line from Gallup, N. Mex., to Cochise, Ariz., is currently handling traffic similar in character to the traffic involved and that the new traffic could move tomorrow. Furthermore, the method by which the cost of these improvements is attributed to AEPC coal traffic is allegedly unexplained and unsupported in the record.

Protestant cites Ex Parte No. 327, supra, at 764, where the Commission observed that railroad investment devoted to rebuilding main line served by many shippers could not ordinarily serve as the basis for capital incentive rates, for the proposition that projects of this very kind have been ruled out as qualifying investments. The ineligibility of these improvements is further underscored, in protestant's view, by testimony of one of respondents' witnesses that certain of the improvements will be undertaken after commencement of the AEPC traffic.

In reply, respondents aver that they are required to purchase eight locomotives and waycars in order to handle the AEPC movements and that capital investments of $3,246,000 (Santa Fe) and $1,549,050 (Southern Pacific) for this purpose are directly attributable to the new AEPC traffic. Respondents do not deny protestant's assertion that locomotives purchased will not be exclusively dedicated to the AEPC traffic. However, they point out that under AEPC's theory, no capital investment in rolling stock could qualify for capital incentive rate treatment because AEPC insists that dedication of rolling stock to specific traffic is forbidden by the act. Moreover, respondents argue that the Commission itself recognized in San Antonio, Tex. v. Burlington Northern Inc., 355 I.C.C. 405 (1976); affirmed Burlington Northern v. United States, 555 F. 2d 637 (1977), that new unit-train coal service requires the purchase of new rolling stock by including the cost of additional locomotives and cabooses in its own calculation of the variable cost of moving that traffic.

Respondents perceive AEPC's position as internally inconsistent: on the one hand it desires a customized unit-train operation capable of delivering 1 million tons of coal annually and requiring reliable scheduling commitments, while on the other hand, it denies that

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