Full opinion text
TABLE OF CONTENTS Introduction 1199 I. Procedural History 1201 II. Positions of the Parties 1204 A. Joint Terminals 1205 B. Penn Central 1205 C. Erie Lackawanna 1206 D. Lehigh Valley 1207 E. Reading 1208 F. Central Railroad of New Jersey 1209 G. Ann Arbor 1209 H. Lehigh & New England 1209 I. Government Parties 1209 III. Introductory Analysis 1210 IV. General Background Considerations 1214 V. Bargaining for Properties Having Earnings Value 1217 VI. The Effect of Inflation on Earnings Forecasts 1222 VII. Valuation Methodology 1225 A. DCF vs. EBIT 1225 1. Timing 1225 2. Taxes 1226 3. Capital Expenditures Needed to Maintain Income 1227 B. Discount Rate 1230 1. Debt-to-Equity Ratio 1231 2. Cost of Equity 1232 (a) Railroad Risk 1233 (b) Special Risk 1233 3. Cost of Debt 1235 4. Calculating AWCC 1236 VIII. Rehabilitation Costs and Maintenance of Way Expenses 1236 A. The Government Parties’ Study *237 1. Track 12^8 (a) Rail Replacement 1238 (b) Turnouts and Crossings *242 2. Bridges 1243 3. Yards 1244 4. The Government Parties’ Defense 1245 5. Conclusion 1246 B. Erie Lackawanna's Study 1247 C. Lehigh Valley's Study 1251 D. Ann Arbor 1254 E. Annual Maintenance of Way Expenses 1257 F. Conclusion 1259 IX. Labor Protection Costs 1260 A. Introduction 1260 B. Level of Labor Protection 1261 1. Existing Agreements 1261 2. Action of the Reorganization Courts 1262 3. ICC Action 1263 4. The Negotiating Process 1264 C. Calculation of Labor Protection Costs 1270 1. Erie Lackawanna 1271 (a) Operating Employees 1271 (b) Nonoperating Employees 1282 2. Lehigh Valley 1286 3. The Effect of Bargaining and Other Factors on the Amount of the LPC Deductions 1290 4. Ann Arbor 1291 5. Lehigh & New England 1293 Timing and ICC Conditions 1293 A. The Parties’ Positions 1294 B. Analysis 1298 1. Likely Congressional Initiatives in the Alternative Scenario 1298 2. Probable Actions of the ICC 1306 (a) Conditions Reducing Value 1306 (b) Early ICC Approval of Particular Transferors’ Sale and Abandonment Applications 1308 (c) Necessary Transactions Following Approval 1310 C. Conclusion 1311 Acquisition by Public Bodies 1311 A. The Joint Freight Terminals Case 1313 B. Predominantly Passenger Lines in Northern New Jersey 1316 1. Legal Capacity 1316 2. Public Acquisition 1317 3. Financial Capacity 1320 4. Pricing 1324 (a) Ene Lackawanna's Claim for a Premium in Excess of X 1324 (b) Government Parties’ Claim for Deductions from X 1333 (c) Bargaining with Public Bodies 1334 (d) Magnitude of the Deductions 1337 5. Trackage Rights Fees 1342 XII. Proffers of Freight Lines at Capitalized Earnings — Issues Not Heretofore Considered 1346 A. The EL-LV Combination 1346 1. The Existence of Competitive Bidding 1347 2. The Earnings Projections for EL-LV 1351 (a) Laurie’s and Adik’s Traffic and Revenue Studies 1351 (b) Jennison’s and Adik’s Cost Studies 1353 (c) Shannon's Further Adjustments 1355 3. The Addition of $100,000,000 to Reflect a Grant by the State of New York 1359 4. Consequences to the EL-LV Earnings Case of Our Rejection of the Joint Terminals Concept 1361 B. Ann Arbor 1364 1. The Position of the State of Michigan 1365 2. Competitive Bidding 1366 3. The Extent to which Off-Segment Earnings Should be Taken into account in Determining Capitalized Earnings Value 1369 4. American Motors Jeeps 1370 5. The Cost of Handling Off-Segment Traffic 1371 6. Use of 1973 Traffic as the Base for Projecting Revenue 1372 C. Lehigh & New England 1373 Xlll. Central Railroad of New Jersey 1374 A. Central Railroad of New Jersey's “Real Life” Sale to New Jersey 1375 B. Central Railroad of New Jersey’s Alternative Scenario 1379 1. Purchase for Rail Use 1379 2. Timing 1379 3. Price 1382 Glossary Before FRIENDLY, Presiding Judge, and WISDOM and THOMSEN, Judges. PER CURIAM: We here set forth such conclusions as we have been able to reach with respect to the value the transferors (Ts) which have not settled their cases could have obtained for properties that would have continued in rail use. We state the scope of this long opinion thus modestly because of several factors that could not have been anticipated when our CMV Opinion, 445 F.Supp. 994, (Sp.Ct.R.R.R.A.1977), and our initial pre-trial orders were issued. During the course of the proceedings, although after the evidentiary hearings were concluded, Penn Central (PC), the largest T, representing some 80% of the case in terms of property value, settled with the Government Parties (GPs) — the United States and the United States Railway Association (USRA). This was quickly followed by settlements on the part of several small Ts— the Lehigh & Hudson, the New York & Long Branch, the Pennsylvania-Reading Seashore Lines, and the Dayton Union. After the case had been briefed and argued and this opinion had been partially drafted, another important T, Reading (R) and its subsidiaries, also settled. Shortly thereafter, the independent owners of rail property operated by R, the Philadelphia, German-town & Norristown, the Delaware & Bound Brook, and the North Pennsylvania, reached settlements with the GPs. Then the Niagara Junction Railroad, jointly owned by PC, Lehigh Valley (LV), and Erie Lackawanna (EL); the Kalamazoo, Allegan & Grand Rapids Railroad, an independent line leased by PC; and the Norwich & Worcester agreed in principle to a settlement of each of their claims with the GPs. This left EL, LV, Central Railroad of New Jersey (CNJ), Ann Arbor (AA), and Lehigh & New England (L&NE) as the only Ts whose claims are still at issue. When this opinion had been substantially completed, save only for minor textual revision, final checking, and typing, EL and the GPs, on October 22,1981, filed a motion for an order suspending litigation activities between them. The motion stated that on October 19 negotiators for the United States, USRA, and the EL Trustees had reached an agreement for a settlement subject to necessary approvals of their principals. Government counsel explained, at a conference with the Presiding Judge of this court, that the obtaining of all necessary Government approvals might take several weeks. Upon these being obtained, the EL Trustees and the GPs proposed to submit the settlement agreement to us for approval. An order to show cause why the order suspending litigation should not be entered was issued on October 22,1981, Sp. Ct. Rep. N 37875; no objections having been filed, the order was entered. On November 17, 1981, the GPs and the EL Trustees petitioned for approval of the settlement, and this court has entered an order to show cause specifying the procedure for intervention and the filing of objections, and setting a hearing for January 25, 1982. As pointed out in a memorandum accompanying the motion to suspend litigation, our hearing on the approval of the settlement must take account of Order No. 1094 of the District Court for the Northern District of Ohio in the EL reorganization proceedings. In this order, dated September 9, 1981, Judge Krupansky, the reorganization judge, authorized the EL Trustees to enter into a settlement agreement with the GPs subject to our approval and without the necessity of further proceedings in the reorganization court respecting the terms of the settlement. This authorization was conditioned on the Trustees’ giving “reasonable notice to all parties customarily notified in these [reorganization] proceedings of any hearing before the Special Court concerning approval of such settlement agreements and shall support any such party’s right to be heard by the Special Court concerning any such settlement agreement”. In the event that any party to the reorganization proceeding filed a timely petition to intervene in this court and we did not permit it to intervene and be heard, the authority granted the Trustees by Order No. 1094 was made subject to further order of the reorganization court at which such party would be given an opportunity to be heard. Our order to show cause with respect to the settlement takes account of Judge Krupansky’s Order No. 1094. We have concluded that, despite these developments, we should not defer the filing of this opinion until after the approval hearings on the EL settlement have been concluded. As will appear hereafter, we cannot and do not here arrive at the figure which, in our view, EL would have obtained in these proceedings; the greatest unknown and at present unknowable is the value of the passenger lines in Northern New Jersey which we conclude that the State would have purchased despite their negative earnings value. Release of the opinion in advance of the settlement approval hearing should assist the parties to the reorganization proceeding and ourselves in appraising the fairness of the settlement without, however, precluding its approval as an opinion setting total value might have done. We say “might” since even if we had arrived at a total figure higher than the value of the settlement (including the significant benefit to EL of receiving the proceeds now rather than on December 31, 1987, see Regional Rail Reorganization Act of 1973, § 306(c)(1)), account would have had to be taken of the possibility of disagreement by the Supreme Court with some or even all of our conclusions that are favorable to EL. Moreover, we think justice requires that the railroads that have not settled should be advised of our conclusions as soon as we are ready to announce them, both because the scheduling of the nonrail use phase of the case is geared to such announcement, Sixth Pre-Trial Order, ¶ 7, Sp. Ct. Rep. at N 35967, and because the announcement may facilitate settlement by them. When EL and the GPs have deferred their settlement so long, we' perceive no obligation on our part completely to rewrite the opinion at this late date so as to eliminate the lengthy discussion of EL’s case, with the possibility of having to restore this if the settlement should be disapproved. One major obstacle has prevented our accomplishing as much as we had hoped in this opinion. In a good many instances Ts have argued that rail use properties would have been sold at a price equal to or at a premium above their value for nonrail use. Analysis has made clear that the parties entertain widely different views as to what nonrail use value is and, for reasons developed in Part III of this opinion, the determination of that issue must await the non-rail use phase of the case, although we do here rule on whether premiums would have been paid or deductions made. While, as we recognized long ago, CMV Opinion, 445 F.Supp., at 1044, no amount of evidence, argument, deliberation and study can produce a single demonstrably right figure, we had hoped to be able to produce in this phase of the case definite figures of value for rail use. Although we have not been able fully to achieve this goal, we have been able to decide a large number of issues, to set forth the general method we intend to pursue in completing our work, and to focus the parties’ attention on certain problems that must be dealt with in the ensuing phase of the case dealing with nonrail use value. Conceivably, this may cause the remaining parties and the GPs to do what we recommended over four years ago, CMV Opinion, 445 F.Supp. at 1045-46, and what finally was done in the cases of PC, R, and EL as well as those of smaller railroads, namely, to arrive at reasonable settlements. We shall begin our opinion with two expository sections, Part I recounting the procedural history of the case since the CMV Opinion and Part II summarizing the positions of the parties. Part III contains a legal analysis of certain problems, particularly as to what we may or may not properly now decide, that have surfaced during the presentation of this phase of the case. This is followed by six parts dealing with “cut-across” issues relating to claims for values based on earnings power, to wit, the claims of the GPs that the Ts’ assertion of earning power should be rejected out of hand because of the allegedly hopeless conflict between them and the history that led to enactment of the Rail Act (Part IV); the nature and effect of bargaining (Part V); the GPs’ claim that purchasers would have sharply reduced the Ts’ estimates of future earnings because of inflation (Part VI); the method for translating estimated future earnings into earnings value (Part VII); the deductions that a purchaser would have made because of the need to rehabilitate and maintain the properties (Part VIII); the deductions that a purchaser would have made to reflect the cost of labor protection conditions (Part IX); and the timing of projected sales and the conditions, if any, that the Interstate Commerce Commission (ICC) would have affixed (Part X). In Part XI we deal with a number of vexing issues concerning proposed acquisitions by public bodies. Part XII is devoted to problems not theretofore considered relating to the sales for earnings value proposed by EL, LV, AA, and L&NE. Finally, in Part XIII, we deal with special contentions made by CNJ. I. Procedural History The CMV Opinion, 445 F.Supp. at 1009, set out a schedule designed to initiate a phase of the case intended to determine values the Ts could have obtained for their properties for continued rail use in the absence of the Rail Act. Each T claiming values from sales for rail use was required to exchange its proposal with all other Ts by January 9, 1978, so that they could meet among themselves to facilitate resolution of inconsistencies and deliver their resulting proffers to the GPs by March 9, 1978. The GPs were given 30 days to indicate objections relating to inconsistencies and the Ts were to file their finally revised proffers with the court within 30 days after receiving the objections. The First Pre-Trial Order, dated April 18, 1978, Sp. Ct. Rep. N 10078, further required that each T specify the principal rail use issues it believed had to be tried, along with a description of the evidence it intended to offer to demonstrate what it would have been able to realize for transferred properties in the absence of the Rail Act. This information and other reports from the parties provided the basis for a pre-trial conference on June 21-22, 1978, that led to the Second Pre-Trial Order, dated June 23, 1978, Sp. Ct. Rep. N 11796. It established a schedule for the submission of direct evidence by the Ts, and by the GPs on “affirmative defenses”. The latter issues included, among others, the cost of rehabilitating the properties proposed for transfer, the abilities of private purchasers and public agencies to finance the transfers, and the impact of labor protection obligations upon the values the Ts would have received for their properties. Most importantly, all direct evidence was ordered to be presented in writing. The court rejected the proposals of various Ts that there be separate trials on separate issues because a single trial encompassing all rail use issues was believed conducive to more rapid progress. We also directed each T to submit its direct rail use case in such form as would permit us to make necessary adjustments where we found some but not all of a T’s contentions persuasive. The significance of this order and the failure, perhaps in part inevitable, fully to comply with it, will become apparent in later parts of this opinion. Finally, as developed in Part III, preparation for trial of issues related to the values of the Ts’ properties in nonrail use was deferred. The Ts each submitted their direct evidence, accompanied by a memorandum summarizing the submission, in December 1978; the GPs’ submission arrived as scheduled on January 31, 1979. The Third PreTrial Order, dated January 11, 1979, Sp. Ct. Rep. N 15287, provided that the parties should conduct discovery and cross-examination by means of the deposition process, with discovery to be conducted by the exchange of information outside of the formal discovery process to the fullest extent practicable. One result of the dual requirement that all testimony be in writing and cross-examination be by deposition was to avoid what had been expected to be the need for a multitude of special masters in this phase of the case. This also permitted the parties to make their own agreements on how the discovery and cross-examination process should be handled and to conduct as many as a half-dozen cross-examinations simultaneously. The remainder of the order limited the number of depositions to which each witness could be subjected, provided that depositions may be offered for admission as testimony, and established procedures for the expeditious processing of objections. The Fourth Pre-Trial Order, dated May 16, 1979, Sp. Ct. Rep. N 17130, effected a more precise division between the rail and nonrail use phases of the case. We granted a motion of the GPs to defer consideration of evidence of nonrail use values or of appraisal methodologies for determining non-rail use values of any properties. However, evidence indicating that certain lines would have been kept in rail use for reasons other than their earnings power as well as evidence that purchasers of lines sold for rail use would have paid prices based in whole or in part with reference to nonrail use values was to be included in the rail use phase of the proceedings. All parties were directed to begin preparation of their non-rail use evidence at this time, although our consideration of that evidence was to be delayed until after this decision. The Fourth Pre-Trial Order also directed the GPs to file their remaining evidence on rail use issues by November 1, 1979. This demand was less than successful; on October 23, 1979, the GPs filed a motion for a 90-day extension of time, Sp. Ct. Rep. N 18191, which was opposed by the Ts. The court could discern no adequate basis for the GPs’ waiting until October 23 to call the problem to the court’s attention, and also considered there was no justification for the requested delay. Yet the public interest in fully developing the facts in this litigation required granting the motion of the GPs. The Fifth Pre-Trial Order, dated March 27, 1980, Sp. Ct. Rep. N 19675, scheduled rebuttal evidence and started the briefing schedule. The Ts were given until October 10, 1980, to file any additional rail use evidence by way of rebuttal. The GPs were ordered to file their schedule of depositions with respect to the Ts’ rebuttal evidence by November 10, 1980. On October 24, 1980, the GPs moved to strike a substantial portion of the Ts’ rebuttal evidence as not constituting proper rebuttal, Sp. Ct. Rep. N 22028. This motion was granted in part; we struck witnesses’ repetition of initial testimony and other evidence that could and should have been presented years before, Sp. Ct. Rep. N 22621. In the interest of expedition we ordered two simultaneous exchanges of briefs rather than sequential filings. The initial briefs were prepared on the basis of the Ts’ and GPs’ direct rail use cases, thus avoiding the delay that would have resulted from awaiting completion of the taking of rebuttal evidence. On May 8, 1980, in a separate order, Sp. Ct. Rep. N 20410, we denied the Ts’ request that the initial briefs be accompanied by separate proposed findings of fact and conclusions of law to which opposing parties must respond. Initial briefs were scheduled to be due by December 2, 1980. Both sides were ordered to include in their briefs discussion of evidence developed by the opposing parties in their direct eases. Given the many statements of position and extensive testimony, each party was sufficiently aware of its opponents’ cases to permit effective coverage in the initial brief subject to only minor supplementation later. The parties were also directed to include in their briefs the extent to which any claims of value to one T depended upon particular outcomes for other Ts. The proceedings in this case were briefly interrupted when PC and its affiliated Ts, including the New York & Long Branch, 50 percent of which was owned by CNJ, and the GPs entered into a settlement agreement on November 16, 1980. The net liquidation value of all rail properties transferred and conveyed by PC and its affiliated Ts was stipulated to be $1.46 billion. The parties further stipulated the value of other benefits and compensable unconstitutional erosion (CUE), see CUE Opinion, 439 F.Supp. 1351, 1355 (Sp.Ct.R.R.R.A.1977), applicable to PC and its affiliated Ts to be zero. Each group of settling parties released essentially all its claims arising under the Rail Act against the other. The agreement provided that the Conrail securities, stipulated to have been without fair market value, to be received by the PC and its affiliated Ts were to be assigned to USRA. PC and its affiliated Ts thus received Certificates of Value with April 1, 1976, principal amounts equal to the stipulated net liquidation value, which were to be redeemed immediately. One frivolous objection was filed in response to the court’s November 17, 1980, order to show cause why the agreement should not be approved; after hearing, the objection was promptly overruled, and the settlement was approved on December 5, 1980, Sp. Ct. Rep. N 23314. This settlement, and the consequent disappearance of PC as a litigant which had taken the lead role for the Ts, complicated the task of the parties in preparing their opening briefs. In our separate December 5, 1980, order, Sp. Ct. Rep. N 23420, we therefore extended the date for filing initial briefs until January 12, 1981, and fixed April 20, 1981, as the date for reply briefs. The GPs’ opening brief included 9 volumes of argument totaling almost 5000 pages, 49 maps, and a 32 volume supplemental appendix. The bankrupt Ts still in the case submitted 12 volumes of briefs accompanied by 52 volumes of appendices, in addition to various other submissions. Upon motion of the Ts, our March 24, 1981, order extended the due date for reply briefs until May 5,1981. This time the GPs limited themselves to only 3 volumes and each T submitted only one, in addition to some additional volumes of appendices. Oral argument was set for June 8-10, 1981. We heard for a day each from the Ts and GPs, with the former presenting rebuttal argument on June 10, followed by a few brief comments from the GPs. Prior to the argument, we had indicated to the parties a number of issues upon which they should comment at argument. In addition, the court in constructing this opinion has had the benefit of written clarifications and elaborations of the parties’ arguments and positions which it has requested, in each case affording opposing parties an opportunity to respond. On August 5, 1981, when considerable progress on the writing of this opinion had been made, the court received a petition of the GPs and the Reading Company, which had succeeded to the interest of the reorganization trustees of R, for approval of a settlement, Sp. Ct. Rep. N 36420. The agreement, which followed the general format of the PC settlement so far as practicable, settled the claims of R and five other companies for which it was (or expected soon to be) in a position to speak. The settlement for R and those five companies was for a base value of $87,497,489. With respect to several other lines which had not become bankrupts and in which R did not own a majority of the stock, the so-called NBIO’s (non-bankrupt independent operators), the settlement contained a table of “Statutory Values”, aggregating $33,475,095. These were sums at which the GPs were prepared to settle with each of these Ts. The Reading Company agreed to indemnify the GPs, subject to certain conditions, against any recovery by an NBIO in excess of its stipulated statutory value. A hearing with respect to approval of the settlement was had on September 2, 1981. Objection was made by North Pennsylvania Railroad Company (North Penn), the largest of the NBIO’s, for which the settlement established a statutory value of $21,593,547. North Penn did not attack the reasonableness of the $120,973,484 fixed as the base value for the entire Reading System but sought an evidentiary hearing to determine a “fair and proper allocation” of that sum to North Penn. Concluding that North Penn had no right to such a hearing since it was left free to prosecute its own claim against the GPs, we entered orders approving the settlement and making certain provisions with respect to North Penn’s prosecution of its claim, Sp. Ct. Rep. N 36847. Later North Penn decided to join the other NBIO’s in entering into settlement agreements similar to R’s at the “Statutory Values” set forth in the R agreement. No objection was made to these settlements. II. Positions of the Parties Given the dependence of each T’s prospects upon what would have become of other Ts in the absence of the Rail Act, as well as the substantial overlap of issues across the claims of various Ts, it is useful to present at the outset a summary of the major contentions of the parties. In this portion of the opinion we make no attempt at completeness and express no judgment on the merits. A. Joint Terminals Four Ts (PC, EL, R, and LV) developed a proposal, not envisioned in our earlier consideration of the case, that freight properties within what are described as the Philadelphia and Northern New Jersey/New York terminal areas would have been purchased and consolidated by public bodies in the absence of the Rail Act. Public bodies allegedly would have been motivated by the necessity of keeping the freight terminals in operation and the desirability of rationalizing the freight transportation system through elimination of duplicative and obsolete facilities and coordination to reduce the facilities necessary to perform terminal services, and to enhance integration of freight operations with commuter and passenger service. These Joint Terminals (JTs) would have handled the switching, origination, and termination of all freight traffic within the area, interchanged cars delivered by main line trains, and provided service within the terminal areas, including service to and from the New York/New Jersey and Philadelphia ports. The Northern New Jersey/New York terminal (NJ/NYTerm) properties were located in New Jersey, and concentrated along the Hudson River and New York Harbor, but extended north as far as commuter service or the New York state line, west to the Pennsylvania state line, and south to the Raritan River, and also included lines going beyond that to Trenton, West Trenton, and Bay Head, New Jersey. The Philadelphia terminal (Philaterm) included PC’s and R’s freight properties in the Philadelphia area up to the Delaware and New Jersey state lines and extended west in Pennsylvania as far as the limits of the electrified commuter network. Both terminals had some operating responsibility beyond these boundaries. Under this scenario, the Joint Terminals Ts (JTTs) thought that public bodies would have purchased terminal freight properties for salvage value, with terminal operating costs to be recouped through switching charges covering the costs (other than capital costs) of services actually performed. Those JTTs with commuter lines argue in their individual cases that public bodies, not necessarily the same ones as those purchasing the JTs properties, would have acquired commuter and intercity passenger lines in the area at premiums in excess of nonrail use value. Both the GPs and the JTTs conducted JTs studies to determine how high the switching charges would have had to be to operate the terminals on a breakeven basis. The requisite switching charges calculated by the GPs are on the order of twice those presented by the JTTs. B. Penn Central Although PC is no longer in the case, it is still necessary to understand its proffers since the probable dispositions and earnings values of other Ts’ lines are to some extent dependent upon what would have become of parts of PC. PC contended that its high-density freight lines that connected major metropolitan areas and provided interchanges with Western and Southern railroads would have been acquired by profitable railroads. Eight Intercity Freight Lines (IFLs) were to comprise this network: four major east-west routes — Chicago to New York (via Cleveland and Buffalo), Chicago to Pittsburgh, St. Louis to Cleveland, and St. Louis to Pittsburgh and Harrisburg with an extension to Perryville, Maryland, where it would join the “spine” of the Northeast Corridor — and four shorter routes — Chicago to Detroit, Chicago to Cincinnati, Detroit to Cincinnati, and Youngstown to Ashtabula. Individual Western and Southern railroads were identified as the most likely acquirers, each motivated by the fear of losing traffic if the IFLs were abandoned or purchased by competitors. Projections were also made for the possible acquisition of all the IFLs by a consortium of the Western and Southern railroads, as well as for purchase by the profitable Eastern railroads — Chessie and Norfolk & Western. PC contended that its Northeast Corridor properties would have been acquired by public bodies for continued rail use absent the Rail Act. Amtrak was identified as a likely buyer for the spine, the main line of the Northeast Corridor running between Boston and Washington, D.C. State, regional, and local bodies would supposedly have acquired commuter lines connecting to the spine, and, if the negotiations already begun with Amtrak did not come to fruition, portions of the spine as well. One aspect of PC’s valuation case was. that an acquisition agreement for the spine would have included free trackage rights for PC’s freight traffic. Other Ts were affected by the destiny of the Northeast Corridor since some proffered scenarios involved freight traffic originating, terminating, or moving over some of these lines. Extensive evidence was taken in support of and in opposition to PC’s claims. The issues are discussed at length in the GPs’ opening brief, which was in an advanced stage of preparation at the time of the PC settlement, but the remaining Ts by and large have not addressed these questions. C. Erie Lackawanna In 1973, the EL system included 2,627 miles of track (exclusive of trackage rights) between Chicago and the NJ/NYTerm. Its principal line connecting the two points ran 970 miles; the system also included three feeder lines: from Marion, Ohio, to Dayton and Cincinnati; from Leavittsburg, Ohio, to Cleveland; and from Cuba and Hornell, New York, to Buffalo and Suspension Bridge, New York. Freight operations were conducted over the entire system, and commuter passenger traffic over 165 miles in Northern New Jersey. Two thousand ninety-five miles of EL’s system were conveyed under the Rail Act. EL’s major contention is that a substantial portion of its freight lines would have been sold to a profitable railroad for continued rail use. EL argued that the road’s chief problem was a lack of cash, which purchase by a profitable carrier could remedy. Western railroads — Santa Fe, Burlington Northern, Missouri Pacific, Southern Pacific, and Union Pacific — needed to preserve their connections to the East and thus were principal candidates. EL claims that an acquisition package suiting a Western acquirer’s needs would have included the EL main freight lines between Chicago and Jersey City, as well as feeder lines to Cleveland and Buffalo and heavy density branch lines — 1,741 miles in all, of which 1,455 were conveyed pursuant to the Rail Act. EL labelled this package the EL Western acquisition. EL contends, however, that the potential acquirers would have been more likely to purchase a combination of EL and LV lines. This second package, the EL-LV Western acquisition, would have included the LV main line between the NJ/NYTerm and its connection with EL’s main line near Waverly, New York, in place of EL’s line between NJ/NYTerm and Binghamton, New York, (via Scranton, Pennsylvania)— 1,538 miles of the EL system in all, of which 1,252 were conveyed. EL’s development of the EL-LV combination assumed that both EL and LV freight lines in New Jersey would have been part of the NJ/NYTerm, although they also claimed that the earnings value of this combination would have been enhanced by inclusion of their individual New Jersey freight lines (other than those proposed for abandonment by EL) had the JTs not come into existence. EL argues that Chessie and Norfolk & Western, concerned by an invasion of the East by Western railroads, also would have had an interest in purchasing its east-west lines. The EL Chessie acquisition package includes the same EL properties as the EL Western acquisition except for the EL lines west of Sterling, Ohio, the junction between EL’s and Chessie’s main line to Chicago — a total of 1,382 miles of EL track, of which 1,315 were conveyed. A fourth package featured an EL-LV Chessie acquisition, with a configuration similar to the EL Chessie acquisition — 1,145 miles of EL’s lines, of which 1,078 were conveyed. Similar configurations for acquisitions by Norfolk & Western were proffered, although not specifically developed in EL’s financial submissions. The Norfolk & Western packages would have included EL’s lines east of Huntington, Indiana, the junction with Norfolk & Western’s system. EL’s analysis shows the following earnings values for these lines: Acquisition Earnings Value (in $1000’s) Western (EL) $225,908 Chessie (EL) $244,985 Western (EL-LV)/JT $278,077 Chessie (EL-LV)/JT $251,561* Western (EL-LV) $294,660* Chessie (EL-LV) $293,693* EL argues, however, that opportunity costs, including traffic lost if EL and other bankrupts were to shut down, traffic lost if competitors made the acquisition, reductions in car hire deficits, and other factors, see 1 ELF at 108-09, and New York’s willingness because of the importance of EL’s line into and through New York State to make $100 million available to a private acquirer to facilitate the purchase, would have induced an acquirer to pay more than earnings value. In particular, EL asserted that it would have received a higher price based on “net salvage value”, which it computed for its properties as follows: Acquisition Salvage Value (in $1000’s) Western (EL) $370,653 Chessie (EL) $333,540 Western (EL-LV) $310,854 Chessie (EL-LV) $273,741* Source: 3 GP at H 12. EL also contends that New Jersey would have purchased EL commuter lines (in addition to public acquisition of its JT area freight lines) for continued rail use due to their central role in New Jersey’s commuter rail system. EL claims that the acquisition price would have included a 10 percent premium over net salvage value, reflecting a combination of $5.7 million for the difference between net and gross liquidation value and $4.9 million for “going concern value”. The State supposedly would have been willing to pay these additional amounts based upon a fear that a condemnation award would be even higher and a desire to avoid the litigation costs of condemnation proceedings. D. Lehigh Valley The LV had operated a 430-mile main route between Buffalo/Niagara Falls and Oak Island Yard near Newark, and 425 miles of branch lines. Five hundred thirty-nine miles of these lines were conveyed pursuant to the Rail Act. In addition, LV leased 128 miles of the Lehigh & Susquehanna that paralleled LV’s main line in Pennsylvania on the opposite side of the Lehigh River. These lines were also conveyed, and are included as part of LV’s rail use proffers. LV suggested three possible rail use packages in which its properties would have been purchased in the absence of the Rail Act. The first involves sale as part of the EL-LV combination. This would have included LV’s conveyed lines in Pennsylvania that continue from NJ/NYTerm and connect with EL just outside of Waverly, New York, near Sayre, Pennsylvania, as well as its lines from Sayre northward through Ithaca to Ludlowville, New York, and its terminal properties in the Buffalo area— 382 miles, plus 113 miles in the NJ/NY-Term area and the leased L&S lines in Pennsylvania. The earnings values of the EL-LV combination in the Western and Chessie acquisitions were included above in our discussion of EL’s proffers. The net salvage values for LV’s properties are claimed to be $39.6 million (the same lines are involved for either acquirer), in addition to $34.9 million for its lines that it claims would be included in NJ/NYTerm. At oral argument EL and LV agreed that an award for an EL-LV combination based on earnings value should be divided in accordance with estimated salvage values. Tr. at 67, 107. In addition to the EL-LV acquisition, LV claims that another possible outcome would have been the acquisition of its rail use properties, totalling 641 miles including the Lehigh and Susquehanna and LV’s New Jersey properties (thus assuming the absence of a JT purchase by public bodies), as a single package by a large railroad capable of carrying freight between LV’s lines and more southern and western gateways. This package would yield an earnings value of approximately $75 million in early 1974 and $95 million as of April 1, 1976. Finally, LV argues that if none of the possibilities for private acquisition had materialized, 609 miles of its track would have been acquired at “non-earnings appraisal value” for the most part by the states where its lines were located. The salvage value claimed for the New Jersey lines is the $34.9 million noted above in connection with valuation of the EL-LV combination. The lines in Pennsylvania were suggested to have a salvage value of $20 million and the New York lines of nearly $3.5 million. This proffer does not include LV’s Buffalo area properties that it contends would have been kept in rail use as part of a Buffalo terminal system. Although included in the EL-LV capitalized earnings studies, as public acquisitions they would be valued as “specialized properties”, a determination that has been deferred to a later phase in the case. Second Pre-Trial Order ¶ 12, Sp. Ct. Rep. at N 11802. E. Reading As in the case of PC, despite the settlement of claims of all components of the Reading System, it will be useful to summarize R’s case because of its bearing on those of other Ts. In 1973, R’s lines covered 1160 miles, mostly in eastern Pennsylvania with some lines extending into Delaware and New Jersey. Its principal freight lines connected Reading, Pennsylvania, with Lurgan, Pennsylvania, (via Harrisburg), Reading with Allentown, Reading with Philadelphia, and Philadelphia and Allentown (the latter using trackage rights) with Bound Brook, New Jersey. R’s passenger services were in the Philadelphia area. Eighty-eight percent of its lines were conveyed under the Rail Act. R claimed that 347 miles of its freight properties, designated “class (a)”, would have been sold to a private purchaser in the absence of the Rail Act, at an earnings value of $200 million. Chessie was identified as the most likely purchaser; Norfolk & Western and the acquirer of PC’s lines west of Harrisburg would also have been interested. “Class (b)” properties — 265 miles of freight and passenger properties— it alleged would have been purchased by unspecified public bodies: $67 million for the freight properties (as part of the JTs submission) and $61 million for its passenger properties. Memorandum Accompanying Dec. 31,1978 Evidentiary Submission at 10-11. The latter claim included a 50 percent premium over net salvage value, which was predicated upon estimates based upon examinations of past negotiated acquisitions between public and private bodies, the social importance of the property, and arguments that public bodies would pay to avoid condemnation risks and costs. Finally, although R concurred in the latter portion of LV’s arguments which R claims indicate the likelihood that its remaining conveyed properties, labelled “class (c)”, would have been purchased for rail use by public authorities or groups of shippers, it does not contend that the acquisitions would have been at prices in excess of nonrail use value. F. Central Railroad of New Jersey In 1973, the CNJ system included 825 miles of freight and passenger lines within New Jersey, 756 of which were conveyed under the Rail Act. CNJ contends that it would have sold all its New Jersey rail assets (including those not conveyed) to the State of New Jersey for $100 million in the absence of the Rail Act. The CNJ’s case emphasizes its value as perceived by a prospective purchaser, the State of New Jersey, as opposed to calculations of hypothesized earnings or scrap value performed after the fact by external sources. Its $100 million estimate is based upon discussions it had with state officials that were terminated as a result of our decision in the 180-Day Appeals, 384 F.Supp. 895 (Sp.Ct.R.R.R.A. 1974), holding that the CNJ should be reorganized under the Rail Act. The CNJ claims further support for this valuation based upon appraisals of its scrap value that ranged from $80 to $121 million. G. Ann Arbor The AA had operated approximately 290 miles of lines from Toledo, Ohio, just south of the Michigan border, through Ann Arbor to Frankfort, Michigan, where car ferries operated to two points in Wisconsin. Two segments of its lines were conveyed. AA claims that the Ann Arbor-Toledo segment, approximately 54 miles, would have been purchased by the State of Michigan for $9.7 million based on the line’s earning value. With respect to the conveyed segment running 131.2 miles between Durand and Cadillac, Michigan, AA does not claim more than its value for nonrail use. H. Lehigh & New England In 1973, the L&NE consisted of two segments of line in Pennsylvania: the first, a 22-mile line from a connection with R and LV at Bethlehem to Uhler, Pennsylvania, interchanging with EL at Bath; the second, a 5-mile line connecting with R at Tamaqua, Pennsylvania. L&NE had been a subsidiary of CNJ and, while not abandoned when CNJ withdrew from most of its operations in Pennsylvania, no longer connected physically with any CNJ line. L&NE contends that all its property would have been acquired for continued rail use based upon its earnings value to a solvent carrier acquiring the above-mentioned connecting lines. The earnings value of the Bethlehem segment was estimated to range from $1.05 to $3.2 million, and of the Tamaqua segment from $1.2 to $2.45 million, depending on the acquirer. I. Government Parties The GPs advance a broad general denial of the Ts’ claims. Their basic position is that, whether or not particular segments would have continued in rail use, the Ts would have realized no more than nonrail use values for their assets. Earnings values are claimed to be either negative or insufficient to justify offers in excess of scrap value, and public bodies would not have been compelled to offer premiums to acquire any properties. Moreover, the GPs proffer a “Master Liquidation Plan” wherein all the properties of the Ts would have been sold for scrap in a short period of time, with the resulting glut depressing the values of their properties. This so-called “benchmark” value for all Ts including PC was originally stated to be $630 million. At oral argument the GPs indicated that this would be revised upward to approximately $1.26 billion and that roughly 20 percent of this, equivalent to approximately $252 million, would provide “some notion” of the then nonsettling Ts’ share. Tr. at 563. During oral argument, the GPs continued to emphasize their claim that the Ts still had not discharged their burden of showing non-speculative solutions to their predicament in the absence of the Rail Act that would have yielded values better than offered by the Master Liquidation Plan. Since the GPs’ various contentions will be discussed at length in the course of our opinion, there is no need to detail them further here. III. Introductory Analysis The CMV Opinion established that the Ts are entitled to compensation for the properties conveyed by them under the USRA’s Final System Plan (FSP) for whatever they could have realized for them in the absence of the Rail Act. Determination of that amount is the issue we must ultimately decide in this case. In this phase of the proceeding the issue is the more limited one stated in paragraphs (1), (2), and (3) of the Second Pre-trial Order, to wit, “the values that would have been received for disposition of .. . [the Ts’ ] properties for continued rail use in the absence of the Rail Act”. In so phrasing the issue for this phase of the case, the court had in mind a model, developed in considerable part from earlier proceedings, somewhat as follows: (1) The Ts would endeavor to prove that certain freight lines would have continued in rail use and would have had a realizable positive earnings value exceeding “scrap value”, however “scrap value” might ultimately be determined. (2) The Ts would endeavor to prove that other lines, primarily passenger lines, although without a positive and even with a decidedly negative earnings value, would have continued in rail use as a result of purchase by public bodies and that these purchases would have been made at more than scrap value. (3) The GPs would contest the Ts’ assertions as to the amount of mileage that would have remained in rail use. (4) In other instances and, as a secondary position in the cases described in (3), the GPs would contest the Ts’ ability to have realized more than scrap value. (5) In cases where the court sustained the GPs’ arguments described in (3) or (4), it would reserve the determination of scrap value to the second phase of the proceeding, which would also include the valuation of properties that the Ts conceded would not have continued in rail use. The proceeding did not develop that way. One complicating factor was the introduction of the concept of the JTs, with public bodies assumed to have purchased the predominantly freight lines at “net salvage value" and the predominantly passenger lines within the JTs at a premium above this. Another was the proposal of several Ts that lines would be sold for continued rail use at “net salvage value”. This is a concept the components of which have not yet been fully explored and as to which different Ts may hold different views. Clearly, however, there is a wide gap between the Ts’ concept of “net salvage value” and the GPs’ concept of scrap value as embodied in the Master Liquidation Plan. As a result of these factors and perhaps others, the vast record and the exhaustive briefs contain little discussion of which of the proffered lines would have been continued in rail use even if a T’s estimate of earnings value were not realized. In order to be sure that the court was not misapprehending the GPs’ apparent unwillingness to challenge the Ts’ proffers on the ground that lines without substantial earnings value would not have continued in rail use, the court, on May 26,1981, addressed a letter to the Chairmen of the GPs’ and the Ts’ Steering Committees, Sp. Ct. Rep. N 36201. After noting that its reading of the briefs indicated that “the debate appears to be not so much over what lines would be continued in rail use but as to what the transferors would have obtained for them”, the letter said that the court would be assisted by the GPs stating prior to the oral argument “which, if any, of the proffered lines the Government Parties contend would not have been continued in rail use regardless of sales price.” The GPs’ answer of June 3, 1981, Sp. Ct. Rep. N 35829, essentially accepting the court’s characterization of what the debate had been, declined to furnish such a list. They stated that they “cannot and do not contend that any particular proffered line (indeed, any conveyed line) would certainly not have been continued in rail use regardless of sales price.” The letter went on to say that this was not a concession “that the proffered lines would have been likely to continue in rail use in the absence of the Rail Act”. It proceeded to argue that the GPs’ evidence showed that “even the most valuable of the transferors’ lines would have had negative or very low earnings values”; that accordingly “sales to private purchasers may well have been impossible for virtually all of the transferors’ properties”; that, in contrast, “sales of some lines to public bodies could not be entirely ruled out”; but that this possibility did not matter because public bodies would not pay more than the Ts’ best private marketplace alternative, to wit, sale at scrap value. In the absence of any adversarial position by the GPs with respect to continued rail use of any particular line, the court would be justified in considering that all proffered lines would have been continued in rail use except in those instances where the development of a T’s own case demonstrated that if a particular acquisition were posited, portions of its railroad would have been abandoned. This course would involve no procedural unfairness to the GPs; the court’s May 26 letter gave them an opportunity to argue which proffered lines would not have continued in rail use at any price and they chose not to make the gambit since in their view of the law it made no difference. Despite this, the court is not inclined to abandon all inquiry into whether a particular line would have continued in rail use. The GPs did offer extensive evidence that public bodies would not have acquired proffered properties at any price, not because these were insufficiently important from a transportation standpoint but because the public bodies lacked legal power or financial ability to make the acquisition. We shall never be in a better position to pass on such arguments than we now are. Moreover, despite the GPs’ unwillingness to engage in debate over whether lines would or would not have continued in rail use, we cannot ignore the Ts’ argument that in weighing the likelihood or unlikelihood of their proposed dispositions, the court must consider that the discontinuance of essential rail service was the most unlikely outcome of all, with the consequence that in the absence of the Rail Act some basically nonfederal solution to the problems of rail service in the Northeast would have been found. The foregoing and other developments have caused the court to be increasingly concerned with what it may properly decide in this opinion. This concern led us to begin the final day of the argument by addressing a series of questions on this subject to counsel for both sides. Tr. at 408-16. Our questioning made clear that the parties were using terms sounding like scrap value in many different senses. We shall start at the bottom, with the GPs’ Master Liquidation Plan, which would price all the Ts’ properties on the theory that all properties of all Ts, including those that would have continued in rail use, and even some of those so continued because of high earnings value if such there were, would have been sold for scrap at substantially the same time. Another model, characterized by CNJ as “the residual scrap model”, CNJRB at 30, “would price the property remaining in rail use by looking at a market affected by the simultaneous scrapping of all properties that would be withdrawn from rail use”. A third is what CNJ calls the “stand-alone” model, wherein the scrap value of any T’s property would be computed without regard to the fate of the property of other Ts. Presumably this could encompass pricing either on the basis of a scrap sale of all properties or of only those that would in fact have been withdrawn from rail use. Highest on the scale is the net salvage value theory, already discussed, see note 16, supra, and accompanying text, which deducts only some of the costs of sale. One point that is quite clear to us and, indeed, seems to be agreed upon by all the parties except CNJ is that at this stage of the proceeding we cannot properly decide among these theories or endeavor to apply the chosen one or ones. In ¶ 1 of the Fourth Pre-Trial Order, filed May 16, 1979, we granted the motion of the GPs “to the extent it seeks to defer the consideration of evidence with respect to determining non-rail use values of any properties or appraisal methodologies for determining non-rail use values of any properties”, Sp. Ct. Rep. at N 17130-31. Properly relying on this, the GPs did not cross-examine or rebut statements by the Ts’ witnesses relating to the Ts’ net salvage value, appraisal value, etc. On the other hand, in the same paragraph of the Fourth Pre-Trial Order we directed that “evidence that purchasers of lines sold for continued rail use would have paid prices established in whole or in part with reference to various different types of non-rail use values shall be presented during the rail use phase of these proceedings”. Much such evidence was presented, briefed, and argued. We believe that judicial economy would be promoted by deciding, at this stage of the proceeding, which properties would have been acquired at prices related to their nonrail use value and whether or not the acquirer would have paid premiums above or negotiated deductions from scrap value. For simplicity we shall sometimes refer to the values that we will determine in the second phase of the proceeding simply as X. We shall expect the parties to give us maximum assistance in expert testimony, briefs and arguments on what now seems the most important “cut-across” issue in the nonrail use phase, namely, what properties should be considered in determining “glut” for a particular T. See Sixth Pre-Trial Order, ¶ 7, Sp. Ct. Rep. at N 35968. We recognize that this solution does not provide as neat a distinction between the first and second phases of this proceeding as we had anticipated, but it seems dictated by the manner in which the case has unfolded. IV. General Background Considerations The court is confronted in this case with a task of almost insuperable difficulty. That is to determine what action would have been taken by interests of all kinds-— the Ts, other railroads, state and local public bodies, the United States, the ICC, labor, and shippers, in order to avoid a shutdown of the Ts (including PC) which would have entailed disaster for all. As witness Charles Shannon said, testifying for the PC, “any attempt to determine how the Northeast rail crisis might have been resolved if Congress had not enacted the Rail Act in 1973 is an essentially unrealistic enterprise”, since “[t]here was never any realistic likelihood that the federal government would allow market forces to play a prominent role in the way in which rail service in the Northeast would be restructured”. Shannon (S) (PC) (Dec. 31, 1978) at 2. The GPs come close to suggesting that this unreality should foreclose our consideration of the Ts’ proposals concerning what might have occurred. They repeatedly call our attention to the statement in Olson v. United States, 292 U.S. 246, 257, 54 S.Ct. 704, 709, 78 L.Ed. 1236 (1934), that [elements affecting value that depend upon events or occurrences which, while within the realm of possibility, are not fairly shown to be reasonably probable, should be excluded from consideration However, that sentence must be read along with the previous statements that in respect of each item of taken property the court must estimate market value, deemed to be the sum which, considering all the circumstances, could have been obtained for it; that is, the amount that in all probability would have been arrived at by fair negotiations between an owner willing to sell and a purchaser desiring to buy; that [i]n making that estimate there should be taken into account all considerations that fairly might be brought forward and reasonably be given substantial weight in such bargaining; and finally that [t]he determination is to be made in the light of all facts affecting the market value that are shown by the evidence taken in connection with those of such general notoriety as not to require proof. Moreover, Olson involved a taking for a new use which the Court concluded no person other than the condemnor could accomplish and the statement relied upon by the GPs was addressed to that situation. While we agree with the GPs that the Ts bear the burden of proof, this does not require them to show with something like mathematical certainty that hypothetical transactions would have occurred and hypothesized prices exactly realized. Their burden is simply to show by a preponderance of the evidence that transactions such as those proposed by them were more likely to have occurred than what the GPs argue was the Ts’ next best alternative — abandonment and subsequent dismantlement. When they have satisfied that burden, the court must ultimately determine, as best it can, what the price would have been. The GPs begin their assault on the Ts’ proposals, more particularly their freight line proposals, by painting a dismal picture of the conditions of the railroad industry, especially in the Northeast as this appeared in 1973. A summary of this will suffice. For the facts the GPs relied heavily on a staff report of the Senate Committee on Commerce, dated December 1972, entitled The Penn Central and Other Railroads. They cite the report, 1 GP at A 17&-77, as concluding that railroads in this area suffered from [sjteadily declining freight volume, particularly in traditionally rail-carried bulk commodities such as coal, steel and forest products; outdated terminals that could not efficiently handle current volume, let alone any hoped-for increased volume; service problems, including an unbelievably high incidence of damage to shipments and inability to meet delivery schedules; steadily increasing competition from the more efficient motor and water carriers; deteriorated physical plants; outdated work rules and large job protection commitments; concerns of shippers, local governments and unions that would inevitably delay abandonments of unprofitable lines; and continued losses from fulfilling obligations to provide passenger service. A significant source of the industry’s problems was the relative decline in share of the gross national product represented by bulk items as distinguished from services. Hence railroad shipments and revenues could fall even when the general economy was growing. Shifts in population away from the Northeast and the relocation of industrial plants into suburban industrial complexes and to points closer to the new population centers operated further to the disadvantage of the Northeastern railroads, many of which were left with substantial amounts of little used freight track into cities. For short and even for longer hauls of manufactured products, the railroads, because of lesser reliability and greater proneness to loss and damage, were unable to compete successfully with trucks. The GPs cite a gloomy report of the PC Trustees dated September 17,1971, to the PC reorganization judge on the basic problems of the Northeastern carriers; on July 24,1972, the LV Trustees rendered an even gloomier report to the same judge, claiming that, however bad PC’s situation might be, PC was managing to maintain its strength at the expense of its smaller competitors. Declining earnings had led to deferral of maintenance, which led in turn to a further decline in service and revenue. The GPs’ brief extensively recites statements by PC trustees as to the devastating effect of the number and expense of the freight terminals it was obliged to operate. On the other hand efforts in 1972 and early 1973 on the part of the R, LV, and CNJ Trustees to consolidate some operations in Northern New Jersey came to nothing, in part because representatives of the State were concerned over the impact of immediate large scale layoffs on organized labor. Antiquated work rules constituted a heavy burden, and the threat of labor protection payments clouded proposed shrinkage and mergers. Relativel