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Southeastern Pennsylvania Transportation Authority v. Interstate Commerce Commission

decided: March 12, 1981.



Before Gibbons, Weis and Sloviter, Circuit Judges.

Author: Sloviter



SEPTA has filed a petition for review alleging that (1) the RSPO erred in promulgating a Standard requiring a commuter rail subsidizer to pay interest to Conrail on late payments without also promulgating a Standard requested by SEPTA which would mandate payment of penalties by Conrail for substandard service; and (2) the RSPO erred in failing to amend the Standards to provide that the liability of SEPTA for any payment to Conrail be limited to SEPTA's rail commuter assets and revenues.

SEPTA, the acronym for Southeastern Pennsylvania Transportation Authority, is a public authority organized in corporate form pursuant to a Pennsylvania statute, the Metropolitan Transportation Authorities Act of 1963, Pa.Stat.Ann. tit. 66, §§ 2001-2043 (Purdon Supp.1980). The RSPO is the Rail Services Planning Office of the Interstate Commerce Commission, which in addition to its other duties, is required to issue regulations containing "standards for the computation of subsidies for rail passenger service." 4R Act, § 309, currently codified at 49 U.S.C. § 10362 (Supp. III 1979). Intervenor Conrail is the Consolidated Rail Corporation, a Pennsylvania corporation which, inter alia, operates SEPTA's commuter rail services.

The legislative background for the formation of Conrail and the RSPO is set forth in some detail in our opinion filed today in the companion case of Southeastern Pennsylvania Transportation Authority v. ICC, 644 F.2d 238 (3d Cir. 1981) (SEPTA I ), and will not be repeated here except to the extent reference is required for the specific issues raised in this appeal.*fn1

As we noted in SEPTA I, the RSPO has the statutory obligation to promulgate Standards for determining commuter rail service continuation subsidies. SEPTA and Conrail are to negotiate an agreement governing the terms and conditions under which Conrail will provide commuter rail service. Such an agreement may modify the Standards as promulgated, subject only to the review of such modification by the RSPO. Standards, § 1127.3(d)(1).

In the course of negotiating their agreement, Conrail and SEPTA reached an impasse with regard to the payment by SEPTA of interest on late subsidy payments and the assessment of penalties against Conrail for substandard performance. These questions were presented to the RSPO for mediation.*fn2 The mediator, Alan M. Fitzwater, Director of the RSPO, sent the parties a letter March 9, 1977 reflecting his views. Thereafter, SEPTA sought reopening of the prior rulemaking proceeding to consider amendments to the Standards in order to adopt SEPTA's proposals. The RSPO declined. This petition for review concerns the RSPO's failure to modify the Standards in two respects requested by SEPTA.


Mandatory Interest Payments

SEPTA contends that it should not be required to pay interest on late payments in the absence of imposition on Conrail of penalty provisions which SEPTA feels are necessary to insure a satisfactory level of service. The Standard requiring payment of interest provides, in part, "Interest on overdue subsidy payments shall accrue ... for such period as they remain unpaid and the railroad has not terminated the service." Standards, § 1127.3(e). Under the scheme established by the Standards, a subsidizer is required to make estimated payments monthly, in advance. If the actual amount of the subsidy payment is determined to be less than the estimated amount paid by the subsidizer, Conrail must refund the difference with interest. When SEPTA is late in making its payments, it must pay interest. Id.

SEPTA first challenges the RSPO's authority to promulgate a standard requiring a subsidizer to pay interest on late subsidy payment installments on the ground that the provision of this Standard exceeds the RSPO's rulemaking authority. SEPTA contends that the RSPO is only empowered to determine the appropriate amount of the subsidy payments to insure that Conrail is compensated for its avoidable costs and return on value. It views the requirement of interest as the imposition of a penalty, and argues that the statutory provision permitting Conrail to discontinue rail passenger service if an applicable payment is not made when due. 3R Act, § 304, currently codified at 45 U.S.C. § 744(e)(2)(C) (1976), constitutes Conrail's exclusive remedy for late payments.

Some background into the evolution of the Standard may be useful to a full understanding of the statutory basis the RSPO uses to support its authority. When the RSPO initially considered Conrail's request that the subsidizers should be assessed a late payment charge equal to 12% simple interest a year, the RSPO refused to provide for such interest. Its reasoning for failing to do so was similar to that maintained by SEPTA in this appeal. The RSPO stated that such interest "would be in the nature of a penalty to discourage late payments, rather than a return on investment; inasmuch as (the statute) provides that the penalty for late payment may be service discontinuance, it does not appear that an additional monetary penalty would be warranted." 41 Fed.Reg. 20104, 20108 (1976). On further consideration, the RSPO promulgated the mandatory interest standard. At that time it explained that "(i)t would be impracticable and undesirable if the operator's (Conrail's) only recourse in the event of delayed payments were to be abrupt service discontinuance or threats thereof." 41 Fed.Reg. 26936, 26939 (1976). Additionally, the RSPO noted the difficulties faced by Conrail's predecessor railroads in collecting their subsidy payments from states or transportation authorities. 41 Fed.Reg. 32546, 32553 (1976).

If these were the only bases on which to ground the RSPO's statutory authority to promulgate the interest Standard, we might share SEPTA's view that it is insufficient. However, as the RSPO subsequently explained, the requirement that subsidizers pay interest stems from its implementation of the statutory prohibition of cross-subsidization. The RSPO's obligations are defined in Section 205(d) of the 3R Act, as amended, currently codified at 49 U.S.C. § 10362(b) (Supp. III 1979), the relevant portion of which provides, that the RSPO shall

(5) maintain regulations that contain

(A) standards for the computation of subsidies for rail passenger service ... that are consistent with the compensation principles described in the final system plan ... and which avoid cross-subsidization among commuter, intercity, and freight rail transportation ; and

(6) maintain, and from time to time revise and republish ... standards for determining the revenue attributable to the rail properties, the avoidable costs of providing transportation, (and) a reasonable return on the value ... (as those terms are used in 45 U.S.C. § 744).

(emphasis added).

The RSPO explains that it has implemented the congressional mandate against cross-subsidization by promulgating the interest Standard which is designed to insure that Conrail will not utilize its own working capital to finance SEPTA's commuter service. Rather the funds needed by Conrail to operate the commuter service will be received in advance, since both passenger fares and subsidy payments are paid in advance. Accordingly, in computing the investment base on which SEPTA is required to pay Conrail a reasonable return on value, no working capital component is included. 41 Fed.Reg. 20104, 20108 (1976); 41 Fed.Reg. 26936, 26939 (1976); 41 Fed.Reg. 32546, 32553 (1976). The quid pro quo, as it were, for not including a working capital component as part of this investment base is that the capital needed to operate the commuter service be received in advance by Conrail. When the payments are not received in advance i. e., are not timely made, the justification for excluding a working capital component in the investment base is no longer applicable. Late payments by SEPTA would ...

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