Full opinion text
ENGEL, Circuit Judge. Burlington Northern, Inc. (BN) and the Cleveland-Cliffs Iron Company (CC) seek review of a decision of the Interstate Commerce Commission, reported at 362 I.C.C. 625 (1980). That decision found BN’s proposed freight rate increases to be “unreasonable” and set the maximum reasonable rates for three separate line movements at levels established in preexisting rate agreements which the Commission found to exist between BN and three individual shippers. CC was one of these shippers. The two other shippers are utility companies, Minnesota Power & Light Company (MPL) and Detroit Edison Company (DE), both of whom have filed briefs as intervenors in support of the Commission’s decision as it applies to their respective freight rates. I. The facts regarding each shipper’s business activities, its decision to purchase western coal, and to ship this coal on the BN railroad are set forth in detail in the Commission’s decision. See 362 I.C.C. at 628-34. We briefly summarize them here. Minnesota Power & Light Company generates and transmits electric energy within Minnesota. Before 1970, MPL purchased and burned bituminous coal mined in West Virginia and Kentucky. In 1967, MPL decided to construct a new 350,000 kilowatt generating unit in Cohasset, Minnesota, where it already had in operation two 70,000 kilowatt generating units. The new plant was designed to burn western coal, and the two existing units were converted to burn western coal. The coal is supplied by Peabody Coal Company under a long-term contract and is transported by BN. Detroit Edison generates and transmits electricity to Detroit and generally throughout southeastern Michigan. Until 1973, DE purchased and burned eastern coal. In the early 1970’s it became interested in low-sulphur western coal because of EPA clean air standards. DE subsequently entered into a long-term contract with Decker Coal Company for the supply of western coal. BN provides rail transportation service. Cleveland-Cliffs manages four iron mines and five pelletizing plants located in the Upper Peninsula of Michigan. It also owns approximately 90% of the Upper Peninsula Generating Company and uses this company’s electrical power to operate these mines. A 1974 expansion of mine operations required a corresponding increase in electrical generating capacity, and in 1975 CC began construction of three additional 80,000 kilowatt generating units designed to use lowsulphur western coal. CC contracted with various coal suppliers for western coal from Montana. BN provides rail transportation service. In reaching a decision to construct new facilities or convert existing facilities to burn low-sulphur western coal, the shippers considered other options including the construction of plants that burned eastern coal and, in the case of MPL, the construction of a nuclear power plant. All three shippers entered into concurrent negotiations with coal companies and with BN (or its predecessor) for the supply and transportation of coal. In deciding to use western coal and to contract with western coal producers, each shipper reached an understanding with BN regarding the cost of transporting western coal to destinations in the Great Lakes region. Each agreement contained a basic freight rate with a built-in escalation formula for future rate increases, as well as a “gross inequity” clause for rate adjustments where circumstances so required. After the coal supply commitments and investments had been made and the shippers were receiving the coal, BN initiated negotiations seeking rate increases beyond those established under the agreements (as determined by the escalation formula), relying upon the gross inequity clause. When the shippers resisted the proposed increases, BN published the higher tariffs with the ICC, thereby superseding the lower rates under the agreements. Each shipper filed a complaint, and the ICC in each case began its own investigation into the reasonableness of the rate increases. The ICC initially determined that BN occupied a position of “market dominance” on the western rail routes involved. On December 26, 1979, the ICC issued a brief final decision finding BN’s published rates not reasonable and ordering BN to cancel the proposed rates and to refund any monies collected in excess of previously established rates. This was the last day of the ICC’s ten-month statutory deadline under 49 U.S.C. § 10707(b)(1) (1979 Supp. III) for issuing a final decision. On March 10, 1980, the ICC issued a longer opinion explaining its decision of December 26 and establishing the maximum lawful freight rates at the levels found in the individual BN-shipper agreements as escalated pursuant to the built-in formulas. In reaching this decision, the ICC stated that it had considered the privately negotiated rate agreements in its reasonableness determination according to its new “contract rates” policy, as well as the traditional criteria and cost analyses. It is this decision that we now review. II. We first address a preliminary jurisdictional matter raised by the railroad. BN argues that by deferring until March 10, 1980, the issuance of its final explanation of the December 26, 1979 decision, the ICC violated the ten-month deadline for a final decision imposed by 49 U.S.C. § 10707(b)(1); therefore, BN argues the ICC acted unlawfully and without jurisdiction when it declared the rates unreasonable. BN also claims that the ICC was without authority to order a refund of monies collected. Despite BN’s protests to the contrary, we find that the ICC acted properly. Its December 26, 1979 decision was final and appealable, declaring that BN’s proposed tariffs were not reasonable. While certainly it would have been preferable for the Commission to have published its entire decision on December 26, we are unable to read the statute as imposing any jurisdictional bar to ICC or judicial review due to the Commission’s failure to do so. Even if we assumed the final decision did not come until March 10, 1980, under 49 U.S.C. § 10707 the only consequence of failing to meet the ten-month period is that the rate, if suspended, becomes effective. Under subsection 10707(b)(2): “If an interested party has filed a complaint under subsection (a) of this section [as the shippers in this case did], the Commission may set aside a rate .. . that has become effective under this section if the Commission finds it to be in violation of this chapter.” Thus, the Interstate Commerce Act itself clearly allows the Commission to set aside a rate that has become effective if that rate is later found to be unlawful. See Houston Lighting & Power Co. v. United States, 606 F.2d 1131, 1142 (D.C.Cir.1979), cert, denied, 444 U.S. 1073, 100 S.Ct. 1019, 62 L.Ed.2d 755 (1980). Moreover, 49 U.S.C. § 11701 authorizes the ICC to begin an investigation on its own initiative and requires the Commission to complete the investigation within three years. Only if the ICC fails to meet this deadline is the investigation “dismissed automatically.” 49 U.S.C. § 11701(c). The Commission’s investigation did not contravene this deadline. Finally, the Commission was not precluded from ordering a refund in this case. We first note that the December 26, 1979 final decision explicitly ordered BN to refund any funds collected under the rate proposals that were declared unlawful. This action concededly fell within the statutory deadline. The refund order subsequently was stayed at the behest of BN. BN admits that the Commission’s refund power is coextensive with the Commission’s authority to declare rates unreasonable. Nothing in section 10707 indicates that the Commission is divested of refund authority as long as it retains the power to investigate and declare the rate unreasonable. In fact, if a rate is not suspended, 49 U.S.C. § 10707(d)(1) requires the Commission to order a refund of amounts collected under an unreasonable rate when final action is taken. Since we find that the March 10, 1980 decision was valid, the ICC’s refund order attending that decision was also valid, particularly in light of the prior refund order in the December 26 decision. III. The “contract rates policy” which : the ICC applied in each of these rate disputes was first formally announced on November 9, 1978. It was followed by an additional statement on April 10, 1979, and finally set forth in a statement dated February 21, 1980. Because of its importance to the decision here, it is reproduced in full as Attachment A. Basically, the contract rates policy announced that the ICC would take notice of and give evidentiary weight to privately negotiated rate agreements when determining the reasonableness of a proposed rate filed with the Commission. The policy statement distinguishes between those privately negotiated agreements entered into before the November 9, 1978 policy statement and those entered into after that date: In regard to contracts entered into after issuance of the Commission’s November 9, 1978 policy statement . . ., we will view the existence of such a contract as creating a presumption that a proposed rate change in excess of the contract rate is unreasonable in violation of the Interstate Commerce Act. However, there may be unusual and compelling circumstances which would rebut this presumption and warrant our upholding a rate change in excess of a contract rate. * * * * * * [W]ith respect to agreements entered into before our 1978 policy statement, the Commission will weigh the alleged agreement, together with all other factors bearing on the reasonableness of the proposed rate. Consideration of these factors may lead us to prescribe or approve a rate within a range from the contract rate to the maximum reasonable rate that would apply in the absence of a contract. Interstate Commerce Commission, Ex Parte No. 358-F “Change of Policy, Railroad Contract Rates” (decided February 21, 1980), Attachment A at pp. 571, 572. BN asserts that the ICC violated the language and intent of the Railroad Revitalization and Regulatory Reform Act of 1976, Pub.L. No. 94-210, 90 Stat. 31 (hereinafter referred to as the “4R Act”) by enforcing what it conceived to be binding contracts between BN and the various shippers. This was improper, it claims, because there were in fact no contracts to be enforced. Specifically, BN argues that (1) there were no actual contractual instruments, (2) there was an absence of mutual obligation between BN and each shipper because the shippers were not bound to transport specific amounts of coal at any particular time, and (3) there was no intent to be bound by the alleged agreements since the parties knew that contracts were per se illegal, according to the Commission’s decision in Guaranteed Rates, Sault Ste. Marie, Ontario to Chicago, 315 I.C.C. 311 (1961). These arguments are not persuasive. The Commission did not find that the agreements between BN and the shippers were “contracts” to be enforced as such as a matter of contract law. Instead, the Commission applied the agreements in a more limited fashion. It was sufficient, in the view of the ICC, to find that the parties intended to set the freight rates by mutual agreement and that each of the shippers relied upon those rates in deciding to use western coal instead of some other energy source. We respect the Commission’s effort to confine itself to considering these factors in an evidentiary fashion, without endeavoring to make a judicial or legal analysis of all the elements associated with formal contract formation and performance under the law of contracts. See Increased Rates on Coal, Burlington Northern, Inc. Montana to Superior, Wisconsin, Docket No. 37135 (decided April 4, 1980). At least with respect to agreements existing before the issuance of the first policy statement in 1978, the ICC has determined that it would give them great but not controlling weight if it was satisfied that (1) the parties intended to be bound by the agreement, (2) the shipper reasonably relied on the contract to its substantial detriment, and (3) public interest considerations warrant holding the parties to the agreement. There is substantial evidence in the record to support the Commission’s finding that the parties intended that the agreement should govern the freight rates between them and that each of the shippers did, in fact, rely upon the agreement in committing itself to ship coal across the particular rail lines at the established rates. As noted in the ICC’s decision, BN entered into extensive negotiations seeking an acceptable base freight rate. The parties exchanged a considerable amount of documentation and settled upon an escalation formula to govern future rate increases. These certainly were not empty gestures. Contrary to the petitioners’ claims, contract rates were never clearly illegal per se. Since H. P. Hood & Sons v. Delaware & Hudson Co., 17 I.C.C. 15 (1909), the ICC has given at least some consideration to privately negotiated contracts between shippers and rail carriers. See e. g., C. A. Wagner Construction Co. v. Chicago, Milwaukee, St. Paul & Pacific R.R. Co., 219 I.C.C. 317 (1936); Booth & Olson, Inc. v. Chicago, Burlington & Quincy R.R. Co., 222 I.C.C. 569 (1937); Ideal Cement Co. v. Atchison, Topeka & Santa Fe Railway Co., 280 I.C.C. 55 (1951). A fair summary of ICC’s historic perspective on private agreements is found in McConville Coal Co. v. Iowa Southern Utilities Co., 172 I.C.C. 627, 632 (1931): The Commission will not undertake to enforce, interpret, or determine the legal effect of an agreement, nor will it be bound thereby in the determination of the question in this case. The promise may, however, be regarded as of evidentiary value, to be considered together with all other facts, circumstances, and conditions, that may reasonably apply to the situation under investigation. H. P. Hood & Sons v. Delaware & Hudson Co., 17 I.C.C. 15. With respect to Guaranteed Rates, supra, its language regarding the illegality of privately negotiated contracts was primarily dictum to which only four members of the Commission agreed. Moreover, that case presented a peculiar factual situation in which the ICC was called upon to review an anticompetitive contract restraining competition between carriers. BN also asserts that the application of the contract rates policy to this case violates section 4 of the Administrative Procedure Act, 5 U.S.C. § 553 (1976), because the ICC failed to engage in a rule-making proceeding before establishing the policy. We agree with the Eighth Circuit in Iowa Power & Light Co. v. Burlington Northern, Inc., 647 F.2d 796 (8th Cir. 1981), that the claim is without merit. See 647 F.2d at 811. The APA defines a “rule” which is subject to the rule-making procedures of the Act as: The whole or part of an agency statement of general or particular applicability and future effect designed to implement, interpret or prescribe law or policy, or describing the organization, procedure, or practice requirements of an agency and includes the approval or prescription for the future of rates. 5 U.S.C. § 551(4). On the other hand, a “policy statement,” exempt from rule-making, has been defined as a statement issued to “advise the public prospectively of the manner in which the agency propose[s] to exercise a discretionary power.” Attorney General, Manual on the Administrative Procedure Act, at 30 n.43 (1947). The contract rates policy statement involved here clearly is intended to apply, although to a more limited extent, to rate agreements which were in effect before the statement was first promulgated, and it is on the basis that BN claims that it cannot be considered a general policy statement exempt from the APA rule-making procedure. In determining whether an agency statement qualified as a policy statement or as a binding rule, the courts generally have employed two criteria: First, courts have said that, unless a pronouncement acts prospectively, it is a binding norm. * * * # * * The second criterion is whether a purported policy statement genuinely leaves the agency and its decision-makers free to exercise discretion. * * * * * * ... If it appears that a so-called policy statement is in purpose or likely effect one that narrowly limits administrative discretion, it will be taken for what it is — a binding rule of substantive law. American Bus Association v. United States, 627 F.2d 525, 529 (D.C.Cir.1980) (citations omitted). In American Bus, the D.C. Circuit inquired whether the alleged policy statement was “ ‘finally determinative of the issues or rights to which it was addressed.’ ” Id. at 531. The court first looked to the language of the policy statement and found that “nothing in it even hints to those who will apply the statement that they may exercise any discretion in doing so.” Id. at 532. The court further found that the statement was “not ‘simply a general pronouncement of the broad policy considerations which will motivate the Commission as it addresses itself to its appointed tasks ... ’ but rather, ‘is in reality a flat rule of eligibility.’ ” Id. at 531-32. Comparing the language of the contract rates policy statement which appears in Attachment A, with the criteria set forth in American Bus, we are of the opinion that to the extent that the policy statement announces the ICC’s intention to accord weight to pre-1978 agreements, it cannot be said to impose a flat rule inflexibly governing the exercise of Commission discretion. Given the history of the Commission’s authority over railroad rates, its responsibility under the 4R Act to make an independent determination of rate reasonableness, and the fact that private agreements have been accorded evidentiary value in numerous past ICC decisions, we conclude that the contract rates policy statement imposes no new obligations which might invoke the requirement or rule-making under the APA. “The statement in no way established a binding norm for future rate cases, but instead left the Commission free to exercise considerable discretion in considering whether, and to what extent, to enforce contracts prior to 1978.” Iowa Power & Light, supra, 647 F.2d at 811-12. BN still maintains that the retroactive application of the contract rates policy to the agreements is arbitrary and capricious, in violation of section 10(e) of the APA, 5 U.S.C. § 706, since the Commission failed to consider and weigh the benefits of retroactive application against the adverse effects on private interests. BN further claims that retroactive application has precluded it from submitting evidence and arguments concerning the applicability of the contract rates policy to the current rate dispute, again in violation of sections 5 and 7 of the APA, 5 U.S.C. §§ 554, 556. In this respect, BN relies upon Port Terminal Railroad Assn. v. United States, 551 F.2d 1336 (5th Cir. 1977), and Hill v. FPC, 335 F.2d 355 (5th Cir. 1964), and argues that the ICC, by imposing new rate-making standards without notice to the parties, deprived it of a fair hearing. In NLRB v. E & B Brewing Co., 276 F.2d 594, 600 (6th Cir. 1960), cert. denied, 366 U.S. 908, 81 S.Ct. 1083, 6 L.Ed.2d 234 (1961), our court held that retroactive application of a change of policy should not occur where it will “work hardship upon a party altogether out of proportion to the public ends to be accomplished,” citing NLRB v. Guy F. Atkinson Co., 195 F.2d 141 (9th Cir. 1952). At the same time the court observed: “It is not suggested that under no circumstances may an administrative ruling apply retroactively. . .. [A]ny ‘case of first impression has a retroactive effect, whether the new principle is announced by a court or by an administrative agency.’ ” 276 F.2d at 600. These principles were in turn recognized by the D.C. Circuit in Retail, Wholesale and Department Store Union v. NLRB, 466 F.2d 380 (D.C.Cir.1972), which articulated the following considerations that should govern any determination to apply new administrative standards and rules retroactively: (1) whether the particular case is one of first impression; (2) whether the new rule represents an abrupt departure from well established practice; (3) the extent to which the party against whom the new rule is applied relied on the former rule; (4) the degree of the burden which a retroactive order imposes on a party; and (5) the statutory interest in applying a new rule despite the reliance of a party on the old standard. Id. at 390. With respect to the hearings in the joint investigatory proceedings and with respect at least to its decision as it affected MPL and DE, the Commission did not err in retroactively applying the policy statement. First, the record indicates that during the administrative proceedings BN presented evidence and argument regarding the existence of and effect to be given the rate agreements. Furthermore, since we have found substantial evidence in the record that BN intended to be bound by the agreements, it was not an abuse of discretion or arbitrary for the Commission to accord those agreements weight, pursuant to its contract rates policy, in reaching its decision as to the reasonableness of BN’s proposed rate increases. Retroactive application did not impose a hardship on BN that was out of proportion to the public purpose sought. Accord, Iowa Light & Power Co., supra, 647 F.2d at 812. In summary, we conclude, as a general matter, that it was neither unlawful nor an abuse of discretion for the ICC to have applied its policy statement in making its reasonableness determination in each of the three cases. The issue then becomes whether the policy was properly applied in each case or whether the ICC violated its statutory responsibility under the Interstate Commerce Act, as amended by the 4R Act. IV. As noted above, the contract rates policy states that, with respect to private rate agreements entered into before the 1978 policy statement, the Commission will weigh the alleged agreement with all other factors bearing on the reasonableness of the proposed rate, including the public interest. The Commission observed: “Consideration of these factors may lead us to prescribe or approve a rate within a range from the contract rate to the maximum reasonable rate that would apply in the absence of a contract.” ICC, Ex Parte No. 358-F, supra, Attachment A at p. 594. The foregoing language of the policy statement assured flexible application and avoided any conflict with the APA’s rule-making requirements. This language convinces us that, at least with respect to the consideration of rate agreements pre-dating the 1978 policy statement, the ICC did not intend to shirk its responsibility to investigate independently the reasonableness of rates. The policy statement obliges the Commission not only to consider the alleged agreement, but “all other factors bearing on the reasonableness of the proposed rate,” ICC, Ex Parte No. 358-F, supra, Attachment A at p. 594. The Commission still operated under the traditional statutory duty to protect shippers, and consequently the public, against rates which for one reason or another were found to be unreasonably high, particularly where the carrier enjoyed “market dominance” over the line movement or where the purchaser of rail service could be characterized as a “captive shipper.” While we therefore conclude that it was appropriate for the Commission to have promulgated its policy statement as it did, we likewise conclude that such a policy could not and was not intended to supplant the Commission’s normal responsibilities under the statute to determine rate reasonableness both from the point of view of the specific carrier and shipper, as well as the general public interest. It also follows that our court is not relieved of the obligation of reviewing the underlying record, at least to the extent necessary to determine that the Commission’s enforcement of the agreed rate was not arbitrary and capricious and did not amount to an abdication of its general responsibilities under the Interstate Commerce Act at the time. BN contends that the ICC failed to adhere to the ratemaking standards articulated in the 4R Act and failed to set a rate that accorded the railroad adequate revenue and a proper rate of return on capital investments. On the other hand, CC claims that the ICC abdicated its independent duty to investigate and set maximum reasonable freight rates in order to protect the general public interest as well as the specific interests of the individual shipper and carrier. We conclude that, with respect to the rates set for the BN-MPL and BN — DE line movements, the ICC carried out its statutory responsibility. However, with respect to its decision regarding the two separate BN-CC rates, We conclude that the ICC abdicated its independent review responsibility under the Interstate Commerce Act as it existed at the time, and therefore its determination cannot stand. In reviewing the reasonableness of the rates for each of the three shippers, the Commission received and considered the same evidence and made the same factual determinations that would have been made in determining questions of reasonableness where no contract agreement was in issue. Published with its opinion were detailed analyses of the cost of service data submitted by BN and the three shippers. While specific complaints with respect to certain methods of cost analysis will be addressed later, it is sufficient for our purpose here to observe that if the statistical data and the ICG’s conclusions concerning reasonableness are supported by the record, then the rates established by the BN-MPL and BN-DE agreements were consistent with those rates which would otherwise have been considered reasonable and lawful rates had such agreements not existed. Contrary to BN’s claim, the Commission performed a meticulous review of the cost of service and financial evidence. See 362 I.C.C. 625, 647-99 (1980). There is substantial evidence in the record that the Commission was concerned with BN’s rate of return on capital investments and its need to raise revenue. That the ICC did not readily accept certain portions of BN’s cost evidence does not, in itself, indicate that the ICC failed to abide by the 4R Act’s rate-making policy considerations and standards. Therefore unless there is some serious error in the Commission’s factual findings in these two instances, we conclude that the ICC did not fail to adhere to the rate-making standards under the 4R Act. The same conclusion, however, cannot be made with respect to the Commission’s determination of rates for the BN— CC movements from Colstrip and Kuehn, Montana. CC’s principal argument is that the ICC merely considered and adopted the rate agreement existing between BN and CC in reaching its reasonableness determination. While CC acknowledges that the ICC has authority to consider the rate agreement when reaching its determination, it argues with great reason that the Commission cannot rely solely upon that agreement, but must consider other factors — specifically the protection of the public interest, avoidance of discriminatory treatment (a discrimination which it asserts exists in this case due to the disparate rates between the shippers), and the protection of the shipper from rates that result in an unduly high or unjustified level of return for the market dominant carrier. Unlike the decision in the BN-MPL and BN-DE rate cases, the adoption of the BN— CC contract rates, pursuant to the strict application of the contract rates policy, leads to inconsistent results. This is most clearly evidenced by the Commission’s own opinion: If BN had not filed the increases under investigation, the annual escalation formula of its letter of understanding with CC would have produced a July 1, 1979, rate of $10.03 per ton. The rates which the Commission would have found to be reasonable rates based on costs plus the seven percent additive ($6.74 per ton from Kuehn and $6.59 from Colstrip) in absence of a letter of agreement, would have been lower than the rate agreed to by the shippers ($10.03 per ton from each origin) and lower than the proposed rate ($11.23 per ton) which is under investigation. 362 I.C.C. at 641. Nevertheless, the ICC decided to hold to the BN-CC agreed rate as escalated, stating: Although the rate increases under investigation on the CC movements are of a lesser magnitude than the increases applied to the MP & L and DE movements, our restatements of costs for these movements show the assailed increases to be completely unwarranted. We do not, however, believe that prescription of a maximum reasonable rate below the escalated letter-of-understanding rate would be proper. CC studied the delivered cost of both eastern and western low-sulphur coal before it signed the letter of agreement with BN. Its study showed that the delivered price of eastern and western coal would be approximately equal. CC specifically states that it decided to purchase Montana coal to be moved by BN on the assumption that the rates and annual escalation formula offered by BN and the economics of mining western coal would produce lower overall fuel costs in the future. It signed the letter of agreement with full knowledge that its rates were substantially higher than rates applicable to the MP & L and DE movements. CC certainly relied on the letter of understanding when it entered into three contracts to purchase coal and a contract for use of the Ortran dock facilities of Superior. On the other hand, CC has submitted testimony that the letter of understanding with BN was “negotiated at arm’s length and * * * provided significant benefits to both parties.”... We believe these parties should continue to receive the benefits of their agreement. Considering the cost evidence of record and the circumstances surrounding the letter of understanding between BN and CC, we conclude that the maximum reasonable rate for the Kuehn and Col-strip to Superior movements is the rate in effect prior to February 25, 1979, as escalated under the annual escalation formula of this letter of understanding. Id. at 641-42. Thus, the ICC determined that BN’s proposed increases for the CC traffic were completely unwarranted on the basis of the cost evidence. Further, the ICC appears to have made a determination that at the time in question a rate of $6.74 per ton from Kuehn and $6.59 per ton from Colstrip would have been reasonable. Beyond this, however, there is nothing to indicate, as a matter of cost analysis, that the rate finally approved (i. e., $10.03 per ton from each origin) was itself reasonable, or that it fell within the “zone of reasonableness,” other than as might be inferred from the fact that CC had agreed to it. In fact, there is much to support a conclusion that it was not reasonable, if one at least compares that rate with the substantially lower rates approved for DE and MPL. Most important, the Commission itself acknowledged that the rate it would have found reasonable absent the BN-CC agreement would have been substantially lower. In Unit Train Rates on Coal-Burlington Northern, Inc., I & S No. 9199, (decided September 29, 1980), the Commission explicitly acknowledged that traditional reasonableness standards were an important factor in its “public interest” analysis under the new policy. Yet the Commission’s decision here is quite the opposite. In short, we conclude that the ICC, in applying its contract rates policy in the BN-CC rate case, abdicated its independent review responsibility under the Interstate Commerce Act. The ICC has done precisely what its policy statement said would not be done with respect to rates which were agreed upon before November 1978; it has given them almost conclusively presumptive effect. Not only is this in violation of its own policy statement but such an application would, especially where made retroactive, raise serious questions regarding the need for rule-making under the APA. That portion of the ICC decision therefore must be vacated and the cause remanded for further proceedings, consistent with this opinion, regarding the BN-CC freight rates for coal from Kuehn and Colstrip, Montana. In doing so, however, we are obliged to review objections made by both BN and CC concerning certain alleged errors in the Commission’s cost analysis. We note at the outset that courts traditionally have applied deferential standards in reviewing rate determinations by any agency that possesses expertise to analyze complicated economic data. Atchison, Topeka & Santa Fe Railway v. Witchita Board of Trade, 412 U.S. 800, 93 S.Ct. 2367, 37 L.Ed.2d 350 (1973). Nevertheless, the courts retain authority to review agency decisions and to determine whether those decisions comport with applicable law, whether they are supported by the evidence, and whether the rationale employed is both discernible and defensible. San Antonio, Texas v. United States, 631 F.2d 831, 836 (D.C.Cir.1980). V. BN maintains that the Commission committed three specific accounting errors, all of which led to an understatement of its cost of service and need for revenue, and therefore, to an erroneous decision as to the reasonableness of the proposed rate. First, BN claims that the Commission improperly excluded all capital costs of pre-1977 roadway investments (listed in Rail Form A) from its variable and fully allocated cost analysis. To understand this claim, it is necessary to examine the nature of Rail Form A as a method employed by the ICC for determining the appropriate investment base for calculating costs to be covered by a particular rate proposal. “Rail Form A is a cost accounting procedure that allocates actual expenditures to various rail services. RFA procedures distinguish between variable and constant portions of each expense account.” Annual Volume Rates on Coal-Wyoming to Flint Creek, Arkansas, (decided May 30, 1980), p. 6. Among the costs that can be allocated proportionately by this formula are BN’s fixed plant investment costs. In determining costs for the particular freight movements under review (and thus, the reasonableness of BN’s proposed rates to cover these costs), the ICC indicated that it would allow the railroad a return on the road property listed in Rail Form A since the said coal traffic, to some extent, uses existing roadway investments included in the Rail Form A property. However, since the rate determinations focus on the cost of this particular type of coal haulage and seek to establish a rate to cover this cost, the ICC also indicated that the Rail Form A investment figures must exclude all coal-related fixed plant investments allowed as rate additives and recovered by rate increases in prior years. These investments had to be removed from the Rail Form A systemwide accounts. Otherwise a cost analysis which used the unadjusted Rail Form A would inevitably result in a “double-counting,” authorizing a rate that covered costs which had already been reflected in prior rate determinations. See San Antonio, supra, 631 F.2d at 842. The difficulty with the Rail Form A submitted by BN in this case was noted by the Commission: In this proceeding, CC notes that defendant admits that all 1976 coal-related investments were not removed from its Rail Form A return on road property and will, in this proceeding, result in a double-counting of some incremental fixed plant additives previously charged in other traffics. Inasmuch as the evidence of record precludes our restatement of this deficiency, we have disallowed, in its entirety, the return on existing road property as computed in Rail Form A. 362 I.C.C. at 657. BN argues that the ICC erred in relying upon the testimony of CC’s witness and claims that the operative expense portion as well as the capital portion of coal-related incremental capital expenditures for the entire BN system had been removed from Rail Form A. This claim, however, is contested by MPL and CC, both pointing out that one of the forms BN had filed previously with the Securities and Exchange Commission (Form 10-K) indicates capital expenditures on coal-related traffic of $154 million, while according to BN’s own witness only $128 million in capital investments had been removed from Rail Form A for the same years. Our review satisfies us that there was substantial evidence and a discernible rationale to support the ICC’s conclusion that not all coal-related expenses were removed from the 1976 Rail Form A accounts. BN’s own witnesses appeared uncertain regarding the accuracy of the Rail Form A calculations. BN’s economic expert stated that he did not know the actual coal-related expense numbers for 1976 and indicated that the procedures used for 1977 Rail Form A calculations were different from those used in 1976. At one point he acknowledged that the 1976 Rail Form A expenses would have been lower if the 1977 procedures had been applied properly. While BN contends that subsequent testimony demonstrates that any initial mistakes had been corrected, the testimony is ambiguous. The ICC could reasonably conclude that only Rail Form A 1976 accounts were corrected in part and that the form calculations still included investments which had already been recovered by other rate additives. As a result, the ICC disallowed the return in its entirety because “the evidence of record precludes our restatement of this deficiency.” 362 I.C.C. at 657. In other words, the ICC was unable to ascertain the amount which BN had failed to remove from Rail Form A and thus operated as a potential double-recovery. In such circumstances, we are unable to hold that the ICC erred in disregarding all Rail Form A investments. BN next contends that the Commission erred in allocating the incremental costs of its coal traffic to all traffic (i. e. non-coal shippers) using the lines in question. BN claims that this decision is directly contrary to the ICC’s cost calculations in Annual Volume Rates, Wyoming to Flint Creek, Arkansas, 361 I.C.C. 533 (1979) and Arkansas Power & Light Co. v. Burlington Northern, Inc., 361 I.C.C. 504 (1979). In each of these cases, the ICC refused to allocate a portion of the incremental costs of coal service to non-coal traffic and shippers. In so deciding, the Commission apparently employed a “but for” test for cost allocation and stated that since the railroads would not have made certain investments “but for” unit-train coal service, it would be unfair to impose a share of the costs on uninvolved shippers. While the ICC concedes that it has in the past used the “but for” test, it also cites its decision in Increased Coal Rates on Coal, Colstrip and Kuehn, Montana to Minnesota, 362 I.C.C. 30 (1979), as establishing a new policy that fixed plant investments will be allocated to all traffic that may benefit from the improvements, even though such investments would not have been made absent a specific type of traffic. The record contains evidence that non-coal traffic will obtain some benefit from the fixed plant investments necessitated by the unit-train movements under review, and in fact the ICC specifically so recognized in its March 10 decision: The Commission noted in the SWEPCO decision that the “railroads would not have made these investments (fixed plant) ‘but for’ unit coal train service.” Although BN’s evidence of record in this proceeding purporting to support the correlation between fixed plant investment and unit coal train service is quite similar to that shown in SWEPCO, we do not believe the entire claimed amount of fixed plant investment is necessitated only by unit-train coal service. Furthermore, we recognized that these investments, on the one hand, allow better service for noncoal shippers whose freight moves via the subject routes, and, on the other hand, will somewhat reduce the operating expenses of the BN on a per ton basis. Accordingly we agree with complainants that the railroad’s incremental fixed plant investments should be allocated to all traffic moving over the subject line segments. 362 I.C.C. at 656 (emphasis added). Thus, the Commission apparently credited the evidence of MPL and the other shippers refuting BN’s claim that its fixed plant investments were necessitated solely by the heavier coal traffic. It is true that in the prior cases using the “but for” test, the ICC recognized that non-coal shippers would receive some benefit from the investments. Nevertheless, in both Flint Creek and Arkansas Power the ICC had found that the coal traffic was the “sole reason” for the added investment. Here, however, the Commission has suggested that non-coal traffic necessitated to some extent the added investment. Under such circumstances, the Commission did not abuse its discretion or act arbitrarily by requiring the benefit-ted non-coal traffic to bear part of the cost of the coal-related investments. Finally, BN claims that the Commission erred in not recognizing the cost of its equity capital in determining an appropriate rate of return on the railroad’s locomotive and caboose investments. The ICC calculated the rate of return using 9.34% — the interest rate found in BN’s current equipment trust certificates. 362 I.C.C. at 685. BN claims that the equipment trust certificate rate reflects debt financing alone and does not take into account the higher cost of equity capital. BN argues that the 9.34% rate is lower than those approved in other cases and that this violates the 4R Act, which entitled railroads to earn a return on all “capital employed in the business” and to “raise needed equity capital.” 49 U.S.C. § 10704(a)(2). It is true that in Car Service Compensation — Basic Per Diem Charges, Ex Parte No. 334 (served August 10, 1977), the ICC explicitly authorized a return on capital which included equity and debt financing instruments. The ICC, however, distinguishes its decision in Basic Per Diem, claiming that decision arose in a different factual context and involved a different statutory provision. In the present case, because BN leased much of the equipment used for the freight movements under review, the Commission apparently did not believe that a return on capital including equity was full justified. It stated: BN witness Day advocates an annuity equipment costing methodology that treats the equipment as purchased wholly with corporate funds, but he also acknowledges the “rental payment” methodology ( — this method is referred to by BN as the interest plus depreciation method) used in prior proceedings. Since the BN is able to use some sort of lease rather than purchase this equipment, we have reservations about accepting a cost of capital that is not necessarily incurred. Consequently, we shall continue to employ the “rental payment” costing methodology. ... It is our belief that 9.34 percent represents the interest rate of BN’s current equipment trust certificates for this calculation. 362 I.C.C. at 685. In Annual Volume Rates on Coal—Wyoming to Flint Creek, Arkansas, 361 I.C.C. 533, 547 (1979), and San Antonio, Texas v. Burlington Northern, Inc., 362 I.C.C. 161, 165 (1979), the ICC indicated that it would use a rate of return for equipment based upon equipment trust certificates. Thus, there is ICC precedent for the method and supporting rationale employed here to calculate the rate of return on this equipment. Given BN’s witness testimony acknowledging this technique, as well as the evidence that many of the BN locomotives were acquired by lease instead of direct purchase, we cannot accept BN’s claim that the ICC erred or abused its discretion in fixing the return at the equipment trust certificate level in order to approximate the “rental” cost of this equipment. Accord, Iowa Public Service Co. v. Interstate Commerce Commission, 643 F.2d 542, 547-48 (8th Cir. 1981). With respect to CC’s cost-accounting arguments, we observe in the first instance that in vacating so much of the order as applies to the CC rates for Colstrip and Kuehn and remanding to the Commission, we conceive that the Commission will accord to both BN and CC the right to introduce such additional proofs as may be appropriate in the circumstances, particularly in the light of our findings here. CC contends that the ICC erred by allowing any return on capital for 80% of the locomotives in the Forsyth coal power pool used for the unit-train coal movements since these locomotive units were leased. CC argues that BN has incurred no cost of capital but merely an operating expense. According to the Interstate Commerce Act, the ICC is permitted to allow a return on “capital” employed in the business. 49 U.S.C. § 10704(a)(2). As indicated earlier, it appears that the ICC allowed a rate of return on leased locomotives in order to cover what the Commission viewed as the rental cost of the locomotives, a cost determined by reference to the rate of interest found in the equipment trust certificates which BN used to finance its acquisition of these locomotives. The Commission expressly stated: [T]his equipment is usually financed by equipment trust certificates, sale-and-lease back agreements, lease-purchase agreements, and the like. . . . Since this equipment is not dedicated to the service of a particular shipper [i. e. this equipment is “pooled” for all shippers to use as needed] and because of the different types of financing available, it is our belief that this method [i. e. depreciation and debt rates] approximates a reasonable compensation level .... 362 I.C.C. at 685. Based upon our prior discussion and the foregoing language, it appears to us that the ICC has answered both CC’s and BN’s complaints through this technique of allowing calculated “rental payment” rate of return. CC also argues that the Commission, in determining the cost of service for the BN-CC line movements, should have applied cost evidence submitted by MPL for the BN-MPL rate determination, since certain portions of the MPL and the CC line movements are virtually identical. It appears that the ICC used MPL’s evidence for railroad maintenance cost along the BN-MPL line, but then used BN’s higher system-wide average maintenance expense levels for the DE and CC lines, even though this traffic moved over line segments quite similar to the MPL line. Likewise, the ICC used MPL’s apportionment factors when determining the amount of incremental road investment to be allocated to the BN-MPL variable cost determination. Yet, the ICC refused to apply these apportionment factors to determine variable costs for the BN-DE and BN-CC line movements. For both of these cost determinations, CC claims that the ICC was required by 49 U.S.C. § 10701(b)(2)(B) to apply MPL’s specific cost evidence to other shippers’ rate determinations if they travel over the same line segments as MPL. The Commission justifies its refusal to apply MPL’s railroad maintenance cost evidence to CC on the basis that the evidence has not been broken down into line segment form and therefore the Commission could not ascertain what portions of the MPL evidence were pertinent to the CC movements. Similarly, with regard to apportionment of fixed plant investments to the various line movements, the ICC claims that the apportionment factors submitted by MPL could not be applied to the BN-CC and BN — DE line movements since the MPL evidence was not broken down into line segments. Thus, the Commission accepted BN’s higher apportionment factors in calculating the cost of service for CC and DE, it being the best evidence available. From our review of the record, it appears that MPL’s roadway maintenance cost analysis was performed on a line segment basis and that several of these line segments were coincident to certain portions of the CC movements. See 362 I.C.C. at 666-67, 644 — 46. There is also an indication that MPL developed line segment cost evidence for the allocation of incremental fixed plant investments. See 362 I.C.C. at 656-57. We recognize that with regard to the incremental fixed plant allocation factor, the ICC’s March 10 decision stressed that MPL’s calculations were based on “all” traffic applicable to the unit-train coal movement and that CC had failed to submit the necessary information which would have allowed the ICC to develop allocation factors for “all” other traffic on the BN — CC line. Inasmuch as we have found it necessary to remand the CC’s Colstrip and Kuehn rate determinations back to the ICC, we urge the Commission to explain the apparent discrepancy between, on one hand, its justification on appeal for refusing to use MPL’s railroad maintenance cost evidence and apportionment factors in the CC rate determination and, on the other, its express recognition in the March 10 decision that MPL’s evidence was broken down into line segments. Moreover, it is not clear why MPL’s apportionment factors, based on all traffic using the various segments comprising the BN — MPL unit-train movement, could not be applied to the BN-CC unit-train movement, at least for those line segments common to both movements. It may be that the ICC’s costing techniques were such that apportionment factors for common MPL-CC line segments could not be used in conjunction with BN’s evidence developed for separate CC line segments. On this issue, the ICC should more fully explain its reasoning. CC also argues that the ICC acted inconsistently and arbitrarily in determining the locomotive maintenance cost. It claims the Commission accepted specific evidenee offered by CC and DE demonstrating that the average repair cost for locomotives used in the unit-train service was 47.6% lower than the system average because of more efficient utilization of these locomotives. CC contends that this percentage decrease adjustment was in direct response to BN's claim that the heavier weight and greater complexity of the coal locomotives resulted in a 25% increase in locomotive maintenance cost relative to the system average. However, after the ICC accepted CC’s 47.6% adjustment, it nonetheless accepted BN’s 25% increase based on the size of the locomotive. This, it is argued, is patently inconsistent and erroneous. In its brief, the ICC explains this apparent inconsistency in terms of a two-step cost accounting process for determining locomotive maintenance expenses. First, the Commission apparently accepted BN’s 25% upward adjustment since the heavier weight and greater complexity of each coal locomotive results in higher average fuel and maintenance costs per locomotive unit. The ICC then apparently accepted CC’s 47.6% downward adjustment when computing the locomotive unit per mile maintenance cost because the higher than average utilization of unit-train locomotives and economies associated therewith results in a decrease in cost on a per-mile basis. We have carefully reviewed the Commission’s rationale on this issue and again find an inconsistency with the ICC arguments on appeal. According to the ICC’s decision, the BN upward percentage weight adjustment was premised upon the railroad’s belief that “repair cost per locomotive unit mile [was greater]. This is contrary to DE’s claim that the higher utilization of coal locomotives would result in lower unit repair cost per unit-mile.” 362 I.C.C. at 664 (emphasis added). We recognize that the Commission has allowed upward adjustment in unit-train locomotive fuel and maintenance costs in the past. See Incentive Rate on Coal-Hayden, Colorado to Kings Mill, Texas, 359 I.C.C. 749 (1979) and Annual Volume Rates on Coal-Wyoming to Flint Creek, Arkansas, 361 I.C.C. 533 (1979). In other cases, the ICC has opted not to allow the weight adjustment. See San Antonio, Texas v. Burlington Northern, Inc., 359 I.C.C. 1 (1978). But in this case the two adjustments seem to be juxtaposed by the ICC’s own analysis and therefore somewhat incompatible. Moreover, it appears from the ICC’s own rationale that the . BN weight adjustment was based on a per unit-mile theory, not just a per unit basis as argued in the ICC brief. We note, however, that BN argued before the ICC that this upward percentage weight adjustment was justified because of the relatively young age of the unit-train locomotives when compared to the average age of locomotives in the system. BN argued that as these unit-train locomotives get older, they become increasingly more expensive to maintain; therefore, the 25% upward adjustment was necessary to correct maintenance costs that would otherwise be understated due to the timing of the ICC rate determination. 362 I.C.C. at 664-65. If the available average repair cost figures were based upon relatively new locomotives that with time incur increased maintenance expenses, the upward adjustment may have been necessary despite the shippers’ percentage decrease due to increased efficiency and lower repair costs per unit mile. In this context, both adjustments could be applied consistently. Thus, we cannot say that the ICC abused its discretion and misapplied its expertise in reaching what may well have been a logical compromise between two otherwise flawed cost figures. Upon remand, the ICC should clarify its rationale for making these two adjustments in the CC rate case. CC also claims that the ICC erred in determining the appropriate rate of return on the railroad’s equity capital by applying the statutory rate of 46% instead of the computed effective tax rate of 25.96%. CC contends its expert demonstrated that the lower tax rate was the more accurate rate to apply in order to adjust the actual cost of equity upward to account for taxes paid to the government. CC argues that by arbitrarily using the higher statutory tax rate, the Commission gave BN a windfall since the freight rate would reflect a tax liability that would not be incurred. In our opinion, the short answer to this is found in San Antonio, supra. There the court held that the ICC can confer the tax benefit to the railroads by applying the statutory tax rate, since deferred taxes will eventually have to be paid and because use of the statutory tax rate will induce further capital investment. See San Antonio, supra, 631 F.2d at 846-47. San Antonio did not discuss the question whether forgiven taxes should be accorded the same treatment as deferred taxes under this rationale. While CC does not appear to dispute that forgiven taxes can be accorded the same treatment as deferred taxes, it does urge that if the ICC was correct in applying the higher statutory tax rate, the Commission had to subtract the deferred tax account from the net investment here. There is no suggestion in the record here that the ICC did or did not deduct any deferred tax or forgiven tax accounts from the investment base. On remand, the ICC should clarify whether this adjustment was indeed appropriate and in fact performed. In addressing this same question, the D.C. Circuit stated: As this court has recognized . . . the principle of excluding a deferred tax reserve from the rate base, as such reserve comes into existence, is an essential component of an agency’s election to [use the statutory tax rate].... The Commission’s own procedures set forth in Ex Parte No. 338 also underscore the necessity of subtracting the deferred tax reserve from the net investment base.... San Antonio, supra, 631 F.2d at 847. Finally, CC attacks the ICC’s purported use of the “seven percent solution” which is an additional return granted by the ICC to assure adequate revenue for the railroad. This increment is associated with the practice of “differential pricing” whereby the rates for profitable rail service are set so as to subsidize other less profitable but needed rail service. In the present case the ICC did not actually apply the seven percent additive in making its calculation. Rather, the Commission expressed the opinion that were it to set the maximum reasonable rate under its pre-contract rates policy standards, it may have added the seven percent additive above fully allocated costs. 362 I.C.C. at 641. In San Antonio, the D.C. Circuit chastened the Commission for failing to provide any justification for adding the seven percent increment above fully allocated costs. San Antonio, supra, 631 F.2d at 852. The D.C. Circuit relied upon a prior ICC decision that listed four criteria to be used to determine the need for the percentage increment; the court then directed the Commission “to explain more fully its reasons for selecting a particular increment, if any, above fully allocated costs . . . . ” Id., at 853. We agree that if the Commission should determine to provide an increment above fully allocated costs, it must offer some evidence and a rationale sufficient to support its decision. In making such a decision, the ICC should balance the interests of carriers, shippers, and the public, taking into account the need for railroads to earn adequate revenues yet recognizing its duty to protect captive shippers from monopoly profiteering. However, we do not agree with CC that the railroad must necessarily submit specific evidence on each of the four criteria listed in San Antonio. There may be reasons, wholly apart from these four criteria, that would justify the increment. It is the ICC’s duty to follow the rate-making standards found in the Interstate Commerce Act and to provide an adequate justification for its decision. VI. The foregoing rulings have all been made in accordance with what the court has conceived to be the appropriate law as it was in effect at the time the petitions were filed, namely the Interstate Commerce Act as amended by the 4R Act. However, the Staggers Rail Act of 1980, Pub.L. No. 96-448, 94 Stat. 1895 (1980), 49 U.S.C.A. § 10101 et seq. (1981 pamphlet), became effective between the date of filing of the petitions and the date of the hearing in our court. We therefore requested additional briefing on the issue of what effect, if any, this new statute may have on the disposition of this appeal. We conclude that we are bound to decide this case in accordance with the law as it existed before the Staggers Rail Act. We believe that such a ruling is in accord with the Staggers Rail Act and existing judicial precedent, and that a proper beginning for the operation of the new policy as applied to this case depends upon a proper disposition under the old statutory scheme. As we have held in The Hanna Mining Co. v. The Escanaba and Lake Superior Railroad Co., 664 F.2d 594, No. 80-1681, also decided today, we limit our discussion of the new Act to the extent only that it is required by the facts before us. The Staggers Rail Act of 1980 was signed into law by the President on October 14, 1980, and made effective as of October 1, 1980. The Act makes significant changes in the Interstate Commerce Act, particularly with regard to ICC jurisdiction to review proposed rates and to establish maximum reasonable rates. In essence, the Rail Act sought to deregulate the rail industry by allowing “to the maximum extent possible, competition and the demand for services to establish reasonable rates for transportation by rail.” Pub.L. No. 96-448, § 101(a), 49 U.S.C.A. § 10101a. Two provisions of the Staggers Rail Act are particularly relevant to determining the ICC’s and this court’s continued jurisdiction over the rate cases under review today. Section 202 establishes minimum threshold revenue-to-variable cost percentages, as a requirement for ICC jurisdiction to find market dominance which, in turn, is the necessary prerequisite for the ICC’s authority to investigate the reasonableness of a proposed rate. See 49 U.S.C. § 10709 (1979 Supp. III). For the relevant time frame of this appeal, (i. e., October 1, 1980 to September 30, 1981), the applicable percentage threshold is 160%. Under the Staggers Rail Act, any proposed rate that generated a revenue-to-variable cost percentage of less than 160% could not be reviewed by the ICC for reaso