FTC Staff Comment to the Hon. James J. Florio and Norman F. Lent Concerning H.R. 1140, The Railroad Antimonopoly Act of 1986

OFFICE OF
THE CHAIRMAN
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
June
Honorable 	James 	J. 	Florio
Chairman
Subcommittee 	on 	Commerce,
Transportation 	and 	Tourism
united 	States 	House 	of
Representatives
Washington, 	D.C. 	20515
Honorable 	Norman 	F. 	Lent
Rank ing 	Minor i ty 	Member
Subcommittee 	on 	Commerce,
Transportation 	and 	Tourism
United 	States 	House 	of
Representatives
Washington, 	D.C. 	20515
Dear 	Mr. 	Chairman and 	Congressman 	Lent:
Thank 	you 	for 	requesting 	the 	views 	of 	the 	Federal 	Trade
Commission 	on 	H.R. 	1140, 	"The 	Railroad 	Antimonopoly 	Act of
1986." 	The 	Federal 	Trade 	Commission 	is 	pleased 	to 	provide 	its
views 	on 	the 	bill's 	likely 	competitive 	impact. 	Commissione~
Andrew 	J. 	Strenio, 	Jr. 	has 	recently 	completed 	a 	15-month 	term as
a 	member 	of 	the 	Interstate 	Commerce 	Commission 	and 	these 	comments
also 	reflect 	his 	specific 	expertise 	in 	railroad 	regulation.
H.R. 	1140 	deals 	with 	situations 	in 	which 	a 	rail 	carrier 	owns
or 	controls 	the 	only 	track 	or 	other 	railroad 	facility 	that 	can be
used 	to 	move 	certain 	bulk 	commodities 	into or 	out of 	a 	particular
area. 	Shippers 	located 	in 	these 	areas 	are 	sometimes 	referred 	to
as 	"captive 	shippers." 	H.R. 	1140 	would 	amend 	the 	Clayton 	Act 	to
make 	it 	a 	violation 	of 	the 	antitrust 	laws 	to 	deny 	to 	any 	shipper,
receiver, 	or 	rail 	carrier 	the 	use 	of 	such 	a 	facility 	on
"reasonable 	terms" 	if 	this 	denial 	will 	have 	the 	"effect 	of
monopolizing." 	A denial 	is 	deemed 	to 	have 	the 	"effect of
monopolizing" 	if, 	as 	a 	result 	of 	the 	facility 	owner's 	exercise 	of
market 	power, 	however 	obtained, 	prices, 	rates, 	orlother
conditions 	of 	service 	exceed 	a 	competitive 	level.
The 	Federal 	Trade 	Commission 	opposes 	the 	proposed
legislation. 	Although 	the 	revised 	version 	of 	H.R. 	1140 	corrects
1 More 	precisely, 	"effect 	of 	monopolizing" 	is 	defined 	as:
"Prices, 	rates, 	or 	other 	conditions 	of 	service 	resulting 	from
the 	use 	of 	market 	power, 	however 	obtained, 	to 	establish 	such
prices, 	rates, 	or 	conditions 	that 	could 	not 	otherwise be
established 	if 	effective 	competition 	existed 	with 	operators
of 	rail 	or 	nonrail 	modes 	of 	transportation 	between 	the
terminal 	points 	of 	the 	sole 	railroad 	facility 	involved."
'.

Honorable 	James 	J. 	Florio
Honorable 	Norman 	F. 	Lent 2
several 	of 	the 	problems 	that 	existed 	in 	the 	original 	version,2 	at
least 	three 	serious problems 	remain. 	First, 	it 	conflicts 	with
the 	antimonopoly 	provisions 	of 	the 	Sherman 	Act. 	Second, 	the 	bill
could 	have 	significant 	adverse 	effects 	on 	the 	rail 	transportation
system. 	Third, 	the 	proposed 	legislation 	deals 	with 	an 	issue 	that
is 	addressed 	by 	existing 	regulatory 	law. 	These 	three 	points 	will
be 	discussed 	in 	sequence.
In 	our 	opinion, 	a 	major 	problem with 	the 	bill 	is 	its
proposal 	to 	amend 	the 	antitrust 	laws 	to provide 	what 	amounts 	to
industry-specific 	price 	control 	legislation. 	This 	proposal 	is
inconsistent with 	the 	antitrust 	laws' 	generally 	broad, 	flexible
approach 	to 	the 	prevention 	of 	anticompetitive 	behavior 	and, 	more
particularly, 	with 	appropriate 	enforcement 	of 	the 	antimonopoly
provisions 	of 	the 	Sherman 	Act. 	The 	bill 	imposes 	monopolization
standards 	that 	are 	radically 	different 	from 	those 	ordinarily
applicable 	under 	Section 	2 	of 	the 	Sherman 	Act. 	The
monopolization 	inquiry 	under 	Section 	2 	involves 	a 	two-step
approach 	to 	determining 	whether 	particular 	conduct 	has, 	or 	is
likely 	to 	have, 	anticompetitive 	effects: 	(1) 	the 	relevant 	market
must 	be 	defined, 	taking 	account 	of 	all 	possible 	constraints 	on
the 	exercise 	of 	market 	power; 	and 	(2) 	a 	determination 	then 	must
be 	made 	of 	whether 	effective 	competition 	is 	present 	in 	that
market 	and 	whether 	the 	practice 	or 	conduct 	at 	issue 	threatens
that 	competition. 	Under 	the 	Sherman 	Act, 	unlawful 	monopolization
requires 	proof 	of 	market 	power 	in 	the 	relevant 	market 	together
with 	exclusionary 	or 	predatory 	conduct 	designed 	to 	maintain 	or
increase 	that power.
The 	proposed 	legislation 	dispenses 	with 	this 	approach 	and
adopts 	a 	concept 	of 	monopolization 	that 	is 	at 	odds 	with
Section 	2. 	By 	focusing 	on 	a 	single 	shipper's 	transportation
options 	between 	two 	particular 	points, 	it 	establishes 	a 	novel
definition 	of 	the 	relevant 	market 	and 	hence 	of 	market 	power. 	The
market 	is 	defined 	in 	advance 	as 	competing 	rail 	and 	nonrail 	modes
of 	transportation 	between 	the 	terminal 	points 	of 	the 	sole
railroad 	facility 	serving 	a 	particular 	shipper. 	In 	the 	absence
of 	"effective 	competition" 	from 	other 	rail 	or 	non-rail 	modes 	of
transportation 	serving 	the 	same 	route, 	there 	is 	a 	presumption
that 	exclusive 	control 	of 	such 	a 	facility 	confers 	market 	power.
But 	even 	if 	a 	particular 	shipper 	has 	access 	to 	only 	one 	means 	of
transportation 	between 	two 	points, 	that 	does 	not 	mean 	that 	the
2 The 	Commission's 	opposition 	to 	S. 	447, 	the 	Senate 	counterpart
to 	the 	original 	version of 	H.R. 	1140, 	was 	set 	forth 	in 	a
May 	15, 	1985 	letter 	to 	the 	Honorable 	Strom Thurmond, 	Chairman
of 	the 	Senate 	Judiciary 	Committee •
.'

.'
Honorable 	James 	J. 	Florio
Honorable 	Norman 	F. 	Lent 3
owner 	of 	the 	rail 	facility 	has 	market 	power 	in 	any 	relevant
transportation 	market. 	Geographic 	and 	product 	competition, 	both
of 	which 	the 	revised 	bill 	ignores, 	must 	also 	be 	considered.
Geographic 	competition 	exists 	where 	a 	shipper 	of 	a 	commodity
competes 	with 	other 	shippers 	of 	the 	same 	commodity 	but 	from
different 	origins. 	For 	example, 	grain 	stored 	in 	a 	grain 	elevator
served 	by 	a 	sole 	railroad 	facility 	may 	be 	sold 	at 	a 	common
destination 	in 	competition 	with 	grain 	stored 	in 	elevators 	served
by 	other 	railroads' 	lines. 	Product 	competition 	exists 	where 	a
shipper 	of 	a 	commodity 	competes 	with 	sellers 	of 	other 	commodities
that 	are 	substitutes 	for 	the 	shipper's 	commodity. 	For 	example,
coal 	from 	a 	mine 	served 	by 	a 	sole 	railroad 	facility 	may 	compete
with 	oil 	supplied 	by 	pipeline. 	The 	ability 	of 	an 	owner 	of 	a 	sole
rail 	facility 	to 	charge 	supracompetitive 	rates 	is 	limited 	if
either 	geographic 	or 	product 	competition 	is 	present. 	Because
under 	such 	circumstances 	shippers' 	customers 	have 	alternative
sources 	of 	supply, 	an 	owner 	railroad 	must 	be 	careful 	not 	to 	~rice
its 	captive 	shipper 	out of 	the 	market. 	This 	would 	not 	be 	to,the
advantage 	of 	either 	the 	shipper 	or 	the 	railroad. 	Thus, 	even
though 	a 	shipper 	has 	no 	rail 	or 	nonrail 	transportation 	'
alternatives, 	the 	owner 	railroad 	may 	nevertheless 	have 	no 	market
power. 	In 	general, 	an 	owner 	railroad 	will 	have 	less 	market power
than 	indicated 	by 	the 	extent 	of 	rail 	and 	nonrail 	competi~ion
between 	the 	terminal 	points 	of 	a 	sole 	railroad 	facility.
The 	bill 	also 	dispenses 	with 	Section 	2's 	requirement 	that
there 	be 	proof 	of 	deliberate 	predatory 	or 	exclusionary 	conduct 	by
the 	owner 	of 	the 	sole 	railroad 	facility. 	Under 	the 	proposed 	test
of 	liability 	there 	would 	be 	a 	violation 	if 	the 	owner 	of 	such 	a
facility 	merely 	restricted 	access 	to 	it 	by 	charging 	prices 	or
rates 	that 	exceeded 	a 	competitive 	level. 	However, 	this 	would 	not
be 	sufficient 	to 	violate 	Section 	2. 	Section 	2 	condemns 	the
willful 	acquisition 	or 	maintenance 	of 	monopoly power. 	Where 	a
firm 	possesses 	legitimately 	acquired 	monopoly 	power, 	there 	must
be 	proof 	that 	it 	engaged 	in predatory 	or 	exclusionary 	conduct
3 	The 	process 	of 	defining 	a 	relevant 	antitrust 	market 	in 	a
Section 	2 	monopolization 	case 	often 	reveals 	many 	sources 	of
effective 	competition. 	There 	is 	no 	reason 	to 	believe 	that
bulk 	commodity 	transportation 	markets 	are 	an 	exception. 	In
this 	regard, 	we 	are 	pleased 	to 	note 	that 	the 	revised 	version
of 	H.R. 	1140 	recognizes 	the 	potential 	importance 	of 	nonrail
as 	well 	as 	rail 	carriers. 	Nonetheless, 	as 	discussed 	in 	the
text, 	the 	proposed 	legislation's 	market 	definition 	procedure
is 	inconsistent 	with 	the 	procedure 	used 	under 	Section 	2 	of
the 	Sherman 	Act.

Honorable 	James 	J. 	Florio
Honorable 	Norman 	F. 	Lent 4
designed 	to 	maintain 	that 	power. 	In 	contrast 	to 	the 	bill's
proposed 	standard 	of 	illegality, 	Section 	2 	does 	not 	condemn 	the
exploitation 	of 	a 	lawfully 	acquired 	monopoly 	by 	means 	of 	charging
supracompetitive prices. 	"[A] 	lawful 	monopolist 	[is 	not]
ordinarily 	precluded 	from charging 	as 	high 	a 	price 	for 	its
product 	as 	the 	market 	will 	accept." 	Berkey Photo, 	Inc., 	v.
Eastman 	Kodak 	Co., 	603 	F.2d. 	274 	n.12 	(2nd 	Cir. 	1979). 	"[E]ven 	a
monopolist 	is 	free 	to 	exploit 	whatever 	market power 	it 	may
possess 	when 	that 	exploitation 	takes 	the 	form 	of 	charging
uncornpetitive 	prices." 	Kartell 	v. 	Blue 	Shield 	of 	Massachusetts,
Inc., 	749 	F.2d. 	922, 	927-28 	(1st 	Cir. 	1984).
It 	has 	been 	argued 	that 	the 	proposed 	legislation does 	no
more 	than 	authorize 	captive 	shippers 	to 	pursue 	two 	causes 	of
action 	that 	~re already 	well-recognized 	under 	Section 2 	of 	the
Sherman 	Act. 	These 	causes 	of 	action 	are: 	(1) 	the 	denial 	to
competitors 	of 	access 	to 	so-called 	"essential 	facilities" 	and 	(2)
a 	monopolist's 	refusal 	to 	deal. 	In 	fact, 	however, 	the 	bill's
standard 	of 	liability 	is 	broader 	than 	the 	scope 	of 	either 	of
these 	Section 	2 	offenses.
The 	"essential 	facilities" 	doctrine 	limits 	the 	freedom 	of 	a
firm 	with 	market power 	to 	choose 	its 	own 	customers. 	Under
certain 	circumstances, 	a 	firm 	with 	monopoly 	control 	of 	a 	facility
necessary 	to 	its 	competitors' 	business 	may 	have 	a 	duty 	to 	make
that 	facility 	available 	to 	those 	competitors 	on 	reasonable
4 	Antitrust 	damage 	suits 	brought 	by 	shippers 	might 	be 	barred 	by
the 	Keogh 	doctrine, 	in 	which 	event 	they 	could 	not proceed
without 	either 	legislative 	authorization 	or 	legislative
repeal 	of 	the 	doctrine. 	Injunctive 	actions 	are 	barred 	by 	the
proviso 	to 	Section 	16 	of 	the 	Clayton 	Act 	which 	prohibits
equitable 	actions 	against 	common 	carriers 	subject 	to 	the
Interstate 	Commerce 	Act. 	The 	Keogh 	doctrine, 	attributable 	to
Keogh 	v. 	Chicago 	& N.W. 	Ry., 	260 	U.S. 	156 	(1922), 	prohibits
antitrust 	damage 	actions 	based 	upon 	rates 	filed 	by 	a 	common
carrier 	as 	part 	of 	an 	I.C.C. 	tariff. 	The 	Supreme 	Court
recently 	refused 	to 	overrule 	Keogh, 	leaving 	that 	decision 	to
Congress. 	See 	Square 	D Co. 	v. 	Niagara 	Frontier 	Tariff
Bureau, 	No. 	85-21 	(May 	27, 	1986). 	Because 	both 	Keogh 	and
Square 	D involved 	horizontal 	price-fixing, 	it 	is 	not 	entirely
clear 	that 	Keogh 	would 	operate 	to 	bar 	a 	suit 	based 	on 	the
kind 	of 	unilateral, 	single-firm, 	conduct 	the 	bill 	addresses •
•

Honorable 	James 	J. 	Florio
Honorable 	Norman 	F. 	Lent
5
terms. 5 	The 	function 	of 	the 	doctrine 	is 	to 	prevent 	the 	use 	of
market 	power 	in 	one 	market 	or 	at 	one 	stage 	of 	production 	to
distort 	or 	eli~inate competition 	in 	an 	adjacent 	market 	or 	stage
of 	production. 	In 	the 	captive 	shipper 	context, 	however, 	the
fact 	that 	a 	railroad 	is 	able 	to 	exclude competing 	carriers 	from
its 	track, 	making 	it 	the 	exclusive 	source 	of 	transportation 	for 	a
particular 	shipper 	along 	a 	particular 	route, 	does 	not 	necessarily
mean 	that 	the 	railroad 	is 	able 	to 	control 	competition 	in 	any
properly-defined 	transportation 	market. 	A carrier's 	exclusive
access 	to 	one 	shipper 	does 	not 	automatically 	translate 	into 	the
ability 	to 	exclude 	competitors 	from 	the 	relevant 	transportation
market 	so 	as 	to 	increase 	the 	carrier's 	power 	over 	rates 	in 	that
market. 7 	But 	without 	an 	increase 	in 	market 	power 	in 	the
transportation 	market 	there 	can 	be 	no 	violation 	of 	Section 	2
based 	on 	the 	essential 	facilities 	doctrine 	or 	any 	other 	theory 	of
5
6
7
The 	reasonableness 	requirement 	is 	ordinarily 	interpreted 	only
to 	mandate 	non-discriminatory 	terms. 	For 	example, 	in 	MCI
Communications 	v. 	AT&T, 	708 	F. 	2d 	1081, 	1132 	(7th 	Cir.-r983) ,
the 	Seventh 	Circuit 	recently 	held 	that 	"the 	antitrust 	laws
have 	imposed 	on 	firms 	controlling 	an 	essential 	facility 	the
obligation 	to 	make 	the 	facility 	available 	on 	non-
discriminatory 	terms." 	(emphasis 	added). 	The 	essential
facilities 	doctrine 	has 	not 	been 	extended 	to 	compel 	prices
that 	yield 	only 	a 	competitive 	return, 	as 	the 	bill 	apparently
contemplates.
As 	the 	Seventh 	Circuit 	observed 	in MCl, 	the 	reason 	for
holding 	monopolistic 	control 	of 	an 	essential 	facility
unlawful 	is 	that 	the 	monopolist 	can 	use 	such 	control 	to
"extend 	monopoly 	power 	from 	one 	stage 	of 	production 	to
another, 	and 	from 	one 	market 	to 	another." 	MCI 	Communications
v. 	AT&T, 	708 	F.2d 	1081,1131 	(7th 	Cir. 	1983).
In 	United 	States 	v. 	Terminal 	Railroad 	Assoc., 	224 	U.S. 	383
(1912), 	a 	group 	of 	railroads 	acquired 	ownership 	of 	the
bridges 	and 	other 	facilities 	constituting 	the 	only 	feasible
terminal 	for 	rail 	traffic 	entering 	the 	city 	of 	St. 	Louis 	from
the 	east. 	The 	Court 	ruled 	that 	the 	terminal 	owners 	had 	to
make 	the 	facility 	equally 	accessible 	to 	other 	railroads. 	It
appears 	that 	the 	owner 	group 	had 	been 	able 	to 	successfully
extend 	its 	monopoly 	control 	over 	the 	terminal 	facilities 	to
the 	local 	transportation 	market. 	In 	any 	event, 	the 	group's
activities 	obviously 	had 	a 	much 	greater 	competitive 	impact
than 	that 	likely 	to 	result 	from 	any 	particular 	carrier's
exclusive 	access 	to 	a 	single 	shipper.

Honorable 	James 	J. 	Florio
Honorable 	Norman 	F. 	Lent 6
liability. 	The 	bill's 	standard 	of 	liability 	is 	thus 	broader 	than
the 	essential 	facilities 	doctrine.
The 	second 	cause 	of 	action 	that 	the 	bill 	would 	supposedly
authorize, 	refusals 	to 	deal 	in violation 	of 	Section 	2, 	ordinarily
involve 	a 	monopolist's 	use 	of 	its 	market 	power 	to 	eliminate 	an
otherwise 	viable 	competitor 	by 	inducing 	some 	or 	all 	of 	its
customers 	not 	to 	purchase 	from 	the 	would 	be 	competitor. 	For
example, 	in 	the 	leading 	case 	of 	Lorain 	Journal 	v. 	United 	States
342 	u.s. 	143 	(1951), 	a 	monopolist 	newspaper 	that 	was 	an
indispensable 	source 	of 	advertising 	to 	local 	businesses 	refused
to 	sell 	advertising 	space 	to 	any 	customer 	who 	bought 	advertising
on 	a 	new 	local 	radio 	station. 	The 	monopolist 	unlawfully 	used 	its
market 	power 	in 	the 	local 	advertising 	market 	to 	prevent 	a 	would-
be 	rival 	from 	obtaining 	access 	to 	customers 	who, 	in 	the 	absence
of 	coercion 	by 	the 	monopolist, 	would 	presumably 	have 	been
interested 	in purchasing 	advertising 	from 	the 	new 	entrant.
It 	is 	possible 	that 	an 	owner 	railroad 	might 	attempt 	to
exclude 	competing 	railroads 	from 	its 	tracks 	by 	inducing 	shippers
not 	to 	deal 	with 	the 	competitors. 	This 	behavior 	would 	seem
unlikely, 	however, 	since 	an 	owner 	railroad 	will 	not 	ordinarily
require 	the 	cooperation 	of 	shippers 	if 	it 	already 	controls 	a
facility 	to 	which 	competing 	railroads 	desire 	access.
Nevertheless, 	should 	such 	a 	case 	arise, 	then 	as 	in 	any 	Section 	2
inquiry 	into 	the 	captive 	shipper 	situation 	the 	real 	issue 	would
be 	whether 	the 	denial 	of 	access 	enables 	the 	owner 	railroad 	to
increase 	its 	market 	power 	in 	a 	relevant 	transportation 	market.
Because 	the 	bill 	would 	not 	require 	such 	a 	showing, 	it 	cannot
accurately 	be 	characterized 	as 	merely 	authorizing 	suits 	under 	any
established 	Section 	2 	theory.
H.R. 	1140 	also 	fails 	to 	recognize 	the 	possibility 	that,
under 	certain circumstances, 	an owner 	railroad 	might 	have
legitimate 	business 	reasons 	for 	restricting 	access 	to 	a 	sole
railroad 	facility. 	In 	other 	words, 	exclusive 	use 	by 	the 	owner
railroad 	may 	occur 	for 	efficiency 	reasons 	rather 	than 	for 	the
purpose 	of 	monopolization. 	For 	example, 	exclusive 	use 	may 	entail
lower 	signalling 	and 	train 	control 	costs. 	An 	owner 	railroad 	may
deny 	trackage 	rights 	to 	reduce 	these 	costs 	while 	maintaining 	a
desired 	level 	of 	safety. 	Denial 	of 	trackage 	rights 	may 	also
enable 	an 	owner 	railroad 	to 	take 	advantage 	of 	economies of
density, 	lowering 	its 	costs 	by 	concentrating 	traffic 	on 	its 	own
trains 	over 	the 	sole 	rail 	facility. 	A refusal 	to 	interchange
freight 	at 	a 	terminal 	point 	of 	a 	sole 	rail 	facility 	may 	also 	be
efficiency-increasing 	by 	reducing 	switching 	and 	other 	transfer
costs. 	By 	lowering 	costs, 	a 	denial 	of 	access 	may 	lead 	to 	lower
rates 	to 	shippers 	in 	such 	instances. 	Because 	H.R. 	1140 	does 	not
recognize 	this 	possibility, 	it 	risks 	discouraging 	owner 	railroads

Honorable 	James 	J. 	Florio
Honorable 	Norman 	F. 	Lent
from 	attempting 	to 	operate 	more 	efficiently, 	and 	it 	may, 	as 	a
result, 	harm 	shippers 	and 	the 	u.s. 	economy.
7
On 	close 	examination 	the 	bill 	seems 	to 	be 	addressed 	more 	to
providing 	shippers 	with 	another 	form of 	rate 	relief 	than 	to
assuring 	that 	the 	antitrust 	laws 	are 	applied 	to 	protect 	rail
competition and 	to promote 	efficient 	rail 	operations 	that 	benefit
shippers. 	Although 	we 	are 	pleased 	to 	note 	that 	the 	revised
version 	of 	the 	bill 	omits 	its 	predecessor's 	requirement 	that 	a
court 	set 	rates 	on 	a 	sole 	railroad 	facility 	according 	to 	an
arbitrary 	formula, 	the 	bill 	continues 	to 	require 	rail 	carriers
to 	offer 	their 	sole 	railroad 	facilities 	to 	competitors on
"reasonable" 	terms. 	But 	deciding 	what 	constitutes 	a 	"reasonable"
price 	is 	a 	difficult 	and 	critical 	task. 	In 	Sherman 	Act 	cases,
the 	courts 	have 	abstained 	from 	such 	efforts, 	recognizing 	the
theore5ical 	and 	practical 	difficulties 	of 	arriving 	at 	"reasonable"
rates. 	Under 	the 	proposed 	legislation, 	the 	federal 	courts 	would
be 	required 	to 	become 	involved 	in 	the 	process 	of 	setting 	~
"reasonable" 	terms 	for 	the 	use 	of 	sole 	facilities 	-- 	the 	terms
which, 	in 	the 	language 	of 	the 	bill, 	would 	have 	prevailed 	if 	the
owner 	railroad 	had 	faced 	"effective 	competition" 	from other 	forms
of 	rail 	and 	nonrail 	transportation. 	The 	courts 	would 	be 	injected
into 	individual 	rate 	disputes 	on 	an 	ad 	hoc 	basis 	and 	forced 	to
determine 	the 	terms 	on 	which 	one 	carrier 	should 	be 	allowed 	to
operate 	over 	the 	lines 	of 	another. 	Indeed, 	a 	single 	owner 	might
actually 	find 	itself 	facing 	conflicting 	standards 	set 	by
different 	courts 	for 	different 	shippers 	on 	its 	lines. 	Moreover,
inconsistent 	court 	decisions 	could 	give 	some 	shippers 	an
artificial 	rate 	advantage 	over 	other 	shippers 	with 	which 	they
compete.
If, 	in 	the 	long 	run, 	railroads 	are 	forced 	to 	share
facilities 	at 	court-determined 	rates 	which, 	on 	average, 	do 	not
fully 	reflect 	their 	opportunity 	cost, 	incentives 	for 	new 	capit31
investment 	to 	maintain 	or 	improve 	existing 	facilities 	or 	to
construct 	new 	facilities 	will 	be 	reduced. 	An 	excellent 	example
of 	what 	happens 	when 	property 	owners 	are 	unable 	to 	retain 	all 	the
benefits 	of 	investments 	in 	capital 	assets 	can 	be 	found 	within 	the
rail 	industry 	itself. 	The 	requirement 	that 	freight 	cars 	be
interchanged 	among 	railroads 	at 	non-market-determined 	rates
8 	See 	lIP. 	Areeda 	& D. 	Turner, 	Antitrust 	Law, 	§§5l2-l4
(1978). 	As 	previously 	explained 	in 	note 	5, 	the 	courts 	limit
their 	review 	in 	this 	context 	to 	whether 	a 	price 	is 	non-
discriminatory, 	not 	whether 	it 	is 	"competitive."

Honorable 	James 	J. 	Florio
Honorable 	Norman 	F. 	Lent 8
caused 	the 	railroads 	to 	purchase 	low quality 	freight 	~ars and
hindered 	technological 	advance 	in 	freight 	car 	design.
In 	addition, 	inflexibility 	of 	regulated 	rates 	in 	response 	to
cyclical 	or 	seasonal 	demand 	fluctuations 	is 	likely 	to 	impose
significant 	costs 	on 	the 	U.S. 	economy. 	When 	the 	demand 	for
transportation 	increases, 	rates 	set 	too 	low 	would 	result 	in
shortages 	of 	railroad 	capacity. 	During 	periods 	of 	reduced
demand, 	rates 	that 	are 	too 	high 	would 	increase 	the 	amount 	of
railroad 	capacity 	that 	remains 	idle. 	Even 	if 	the 	courts 	were
able 	to 	set 	rates 	that 	were 	socially 	optimal 	at 	the 	time 	of
trial, 	in 	order 	to 	avoid 	the 	problems 	associated 	with 	demand
fluctuations 	it 	would 	be 	necessary 	for 	them 	to periodically
readjust 	these 	rates. 	This 	would 	further 	increase 	the
expenditure 	of 	time 	and 	effort 	that15he 	courts 	would 	be 	required
to 	devote 	to 	captive 	shipper 	cases.
Another 	problem 	in 	the 	setting 	of 	rates 	results 	from 	the
desirability 	of 	permitting 	railroads 	to 	price 	partly 	on 	the 	basis
of 	the 	demand 	for 	their 	services. 	Some 	variation 	in 	markups 	of
rates 	over 	marginal 	costs 	to 	reflect 	differences 	in 	elasticities
of 	demand 	may 	be 	needed 	to provide 	sufficient 	revenues 	to 	cover
railroads' 	fixed 	costs 	and 	a 	competitive 	rate 	of 	return 	on
overall 	railroad 	investment. 	If 	adequate 	markups 	are 	not
permitted 	on 	traffic 	moving 	over 	sole 	railroad 	facilities, 	owner
railroads 	may 	be 	unable 	to 	earn 	a 	competitive 	return 	on 	their
system-wide 	investments. 	This 	may 	occur 	because 	some 	of 	the
owner 	railroad's 	fixed 	costs 	are 	common 	to both 	its 	sole 	railroad
facility 	and 	to 	the 	rest 	of 	its 	system, 	for 	example, 	the 	costs 	of
locomotives 	and 	cars 	that 	run 	over 	both 	segments 	of 	the 	system.
9
10
According 	to 	one 	study, 	"an 	investment 	in 	the 	improvement 	of
quality 	will 	not 	payoff 	to 	the 	owner 	of 	the 	car 	because 	the
additional 	returns 	that 	are 	generated 	by 	the 	improvement 	are
collected 	by 	other 	roads." 	Yehuda 	Grunfeld, 	"The 	Effect 	of
the 	Per 	Diem 	Rate 	on 	the 	Efficiency 	and 	Size 	of 	the 	American
Railroad 	Freight Car 	Fleet," 	Journal 	of 	Business, 	January
1959, 	p. 	73.
Since 	the 	mid-1970's 	regulated 	freight 	car 	per 	diem 	charges
have 	exceeded 	a 	market 	clearing 	level 	and 	have 	caused 	an
inefficient 	over-investment 	in 	box 	cars, 	many 	of 	which 	have
been 	idle. 	Before 	that 	time 	regulated 	charges 	were 	below 	a
market 	clearing 	rate 	causing 	car 	shortages. 	James 	Sloss 	and
Carl 	D. 	Martland, 	"Government 	Intervention 	In 	Railroad
Freight 	Car 	Per 	Diem: 	An 	Historical 	Perspective,"
Transportation 	Journal, 	Summer 	1984, 	pp. 	83-95 •
..

Honorable 	James 	J. 	Florio
Honorable 	Norman 	F. 	Lent 9
Markups 	that 	vary 	with 	elasticities 	of 	demand 	provide 	railroads
an 	opportuni!l 	to 	cover 	such 	common 	costs 	while pricing
efficiently. 	If 	regulated 	markups 	are 	inadequate, 	the 	owner
railroad 	may 	fail 	to 	maintain 	and 	replace 	its 	capital, 	which 	may
eliminate 	portions 	of 	the 	rail 	network, 	reduce 	service 	quality
and 	reliability, 	and 	increase 	shippers' 	transportation costs.
A final 	problem with 	the 	bill 	is 	that 	it 	addresses 	an 	issue
already 	covered 	by 	other 	legislation. 	Portions 	of 	the 	Interstate
Commerce 	Act 	already 	deal 	with 	access 	to 	rail 	facilities 	by
competing 	railroads. 12 	In 	addition, 	the 	Interstate 	Commerce
Commission 	has 	recently 	issued 	decisions 	in 	two 	proceedings
dealir~ with 	market 	dominance 	and 	intramodal 	rail 	competi-
tion. 	These 	decisions 	essentially 	implement 	compromises
negotiated 	by 	shippers 	and 	railroads 	and 	directly 	address 	the
issues 	raised 	in 	the 	proposed 	legislation. 	They 	also
significantly 	red~~e the 	burden of 	proof 	on 	shippers 	who 	allege
market 	dominance. 	However, 	because 	these 	decisions 	are 	or 	such
recent 	origin, 	it 	would 	be 	premature 	at 	this 	time 	to draw 	any
final 	conclusions 	about 	their 	adequacy 	to 	address 	any 	leg~timate
market 	dominance 	problems 	that 	captive 	shippers 	may 	experience.
Accordingly, 	rather 	than 	creating 	an 	entirely 	new procedure 	now
that 	would 	enmesh 	the 	federal 	courts 	in 	railroads' 	daily
operations, 	we 	believe 	it 	would 	be 	more 	prudent 	to 	give 	the
11
12
13
14
The 	need 	for 	demand-based 	pricing 	or 	"differential 	pricing"
of 	rail 	services 	was 	explicitly 	recognized 	by 	the 	ICC, 	for
example, 	in 	establishing 	its 	maximum 	rate 	guidelines 	for 	rail
transportation of 	coal. 	Interstate 	Commerce 	Commission, 	Ex
Parte 	No. 	347 	(Sub-No.1), 	Coal 	Rate 	Guidelines, 	Nationwide
(decided 	August 	8, 	1985), 	pp. 	7-8.
See 	e.g., 	49 	U.S.C. 	§ 	11103.
Interstate 	Commerce 	Commission, 	Ex 	Parte 	320 	(Sub-No.3),
Product 	and 	Geographic 	Competition, 	50 	Fed. 	Reg. 	46,189
(November 	6, 	1985); 	Ex 	Parte 	445 	(Sub-No.1), 	Intramodal 	Rail
Competition, 	50 	Fed. 	Reg. 	46,066 	(November 	6, 	1985). 	Ex
Parte 	445 	has 	been 	challenged 	in 	the 	District of 	Columbia
Court 	of 	Appeals. 	See, 	Baltimore 	Gas 	& Electric 	Co. 	v.
united 	States, 	No. 	85-1761 	(filed 	November 	19, 	1985).
For 	example, 	in 	proceedings 	to 	determine 	whether 	or 	not 	a
railroad 	has 	market 	dominance, 	the 	ICC 	decision 	in 	Ex 	Parte
320 	adopts 	a 	shipper-railroad 	compromise 	which 	shifts 	the
burden 	of 	proof 	of 	effective 	geographic 	or 	product
competition 	to 	the 	railroad.

Honorable 	James 	J. 	Florio
Honorable 	Norman 	F. 	Lent
recently 	modified 	ICC 	process 	an 	opportunity 	to 	address 	these
issues 	and 	to provide 	appropriate 	relief.
10
In 	conclusion, 	we 	are 	opposed 	to 	this 	kind 	of 	industry-
specific 	antitrust 	legislation, 	especially 	when 	it 	would 	impose
new 	substantive 	standards 	that 	conflict 	with 	sound 	prevailing
antitrust 	doctrine. 	If 	it 	is 	the 	intent 	of 	Congress 	to 	give
shippers 	a 	source 	of 	relief 	in 	addition 	to 	that 	which 	is 	now
available, 	we 	believe 	that 	legislative 	repeal 	of 	the 	Keogh
doctrine, 	which 	would 	remove 	whatever 	obstacle 	it 	may 	now 	pose 	to
captive 	shipper 	antitrust 	suits, 	together 	with 	repeal 	of 	the
proviso 	to 	Section 	16 	of 	the 	Clayton 	Act 	which 	prevents
injunctive 	actions against 	common 	carriers 	subject 	to 	the
Interstate 	Commerce 	Act, 	would 	be 	a 	better 	response 	than 	would
H.R. 	1140. 	Shippers 	would 	then 	be 	free 	to 	pursue 	antitrust
actions 	on 	the 	same 	basis 	as 	other 	private 	litigants.
Of 	course 	there 	are 	important 	questions 	that 	we 	suggest
should 	be 	carefully 	addressed 	before 	any 	legislative 	decisioh 	is
made 	to 	adopt 	this 	alternative. 	When 	the 	owner 	of 	a 	sole 	rail
facility 	has 	in 	fact 	used 	its 	control 	of 	that 	facility 	to 	,
increase 	its 	market 	power 	in 	the 	relevant 	transportation 	market,
what 	form 	should 	relief 	take? 	If 	relief 	is 	to 	take 	the 	form 	of
ordering 	that 	access 	be 	permitted 	at 	a 	"reasonable" 	rate, 	who
should 	determine 	this 	rate 	and 	how? 	In 	light 	of 	its 	ratemaking
expertise, 	the 	ICC would 	seem 	to 	be 	the 	logical 	arbiter. 	If 	the
ICC 	were 	to 	be 	sunsetted, 	regulatory 	oversight 	might 	be
transferred 	to 	the 	Department 	of 	Transportation. 	A legislative
provision 	permitting 	the 	courts 	to 	refer 	the 	reasonable 	rate
issue 	to 	the 	ICC might 	thus 	be 	worth 	considering. 	Moreover,
given 	the 	ICC's 	specialized 	expertise 	and 	its 	ability 	to 	act
faster, 	at 	lower 	cost, 	and 	with 	greater 	certainty 	than 	the 	courts
on 	rate-setting 	issues, 	Congress 	might 	want 	to 	consider 	other
ways 	of 	retaining 	some of 	the 	ICC's 	present 	role 	in 	their
resolution. 	Given 	the 	lure 	of 	treble 	damages 	in 	private
antitrust 	actions, 	injured 	parties 	will 	almost 	surely pursue
court 	actions 	where 	at 	all 	feasible. 	Thus 	Congress 	might, 	for
example, 	want 	to 	limit 	successful 	litigants 	in 	such 	cases 	to
actual 	damages, 	thus 	reducing 	the 	incentive 	to 	pursue 	a 	remedy 	in
the 	courts 	rather 	than 	at 	the 	ICC.
In 	any 	event, 	we 	suggest 	that 	careful 	consideration 	needs 	to
be 	given 	to 	the 	general 	workability 	of 	a 	system of 	dual
redress. 	Other 	problems, 	such 	as 	the 	standards 	for 	temporary
restraining 	orders 	and 	preliminary 	injunctions 	based 	on
allegations 	of 	unreasonable 	rates 	also 	warrant 	consideration.
The 	questions 	raised 	here 	are 	by 	no 	means 	exhaustive, 	but 	are
intended 	solely 	to 	illustrate 	the 	complexity 	of 	the 	captive
shipper 	issue. 	From our 	brief 	examination of 	this 	alternative 	it

Honorable 	James 	J. 	Florio
Honorable 	Norman 	F. 	Lent 11
would 	appear 	to 	involve 	some 	of 	the 	same 	difficult 	issues 	raised
by 	H.R. 	1140. 	For 	the 	reasons 	discussed 	in 	this 	letter, 	however,
we 	believe 	that, 	on 	balance, 	H.R. 	1140 	is 	more 	problematic 	and 	we
reiterate 	our 	strong 	opposition 	to 	it.
By 	direction 	of 	the 	Commission,
Daniel 	Oliver
Chairman