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Automobile Club of New York Inc. v. Port Authority

decided: October 10, 1989.

AUTOMOBILE CLUB OF NEW YORK, INC., AND AAA CLUBS OF NEW JERSEY, APPELLANTS
v.
THE PORT AUTHORITY OF NEW YORK AND NEW JERSEY, PHILIP D. KALTENBACHER, ROBERT F. WAGNER, RICHARD C. LEONE, JAMES G. HELLMUTH, HENRY F. HENDERSON, JR., WILLIAM K. HUTCHISON, H. CARL MCCALL, JOHN G. MCGOLDRICK, WILLIAM J. RONAN, HOWARD SCHULMAN, ROBERT VAN BUREN, HAZEL FRANK GLUCK, AS COMMISSIONERS OF THE PORT AUTHORITY OF NEW YORK AND NEW JERSEY, APPELLEES



Appeal from a judgment of the United States District Court for the Southern District of New York, Milton Pollack, Judge, holding that, with the Port Authority Trans-Hudson Railroad, PATH, included in the rate base of the Port Authority's bridges and tunnels, the tolls on the bridge remained "just and reasonable," as required by 33 U.S.C. § 508 (Supp. V 1987).

Oakes, Chief Judge, Van Graafeiland and Pratt, Circuit Judges. Van Graafeiland, Circuit Judge, dissenting.

Author: Oakes

Oakes, Chief Judge,

The issue in this case is whether the Port Authority of New York and New Jersey may subsidize the operations of its Port Authority Trans-Hudson ("PATH") Railroad with revenues collected from tolls on its bridges and tunnels. The subsidy is achieved by including PATH in the rate base of the tolls that the Port Authority charges on its bridges and tunnels. The question is then whether the bridge tolls are "just and reasonable," as required by section 135(i) of the Federal-Aid Highway Act of 1987, 33 U.S.C. § 508 (Supp. V 1987).

The Automobile Club of New York and five AAA Clubs of New Jersey (the "Auto Clubs") sued the Port Authority after it raised its bridge and tunnel tolls (along with PATH fares) in 1987. The Auto Clubs claimed that, with PATH in the rate base, the new bridge tolls were not just and reasonable. Judge Milton Pollack found that the Port Authority's bridges, tunnels, bus terminal, bus programs and PATH form an "integrated, interdependent transportation system." Automobile Club v. Port Auth., 706 F. Supp. 264, 280 (S.D.N.Y. 1989). Accordingly, he decided, it is proper to include PATH in the rate base, from which it follows that the tolls are just and reasonable. Id. at 276-77. We agree and affirm the decision below.

BACKGROUND

New York and New Jersey created the Port Authority by interstate compact in 1921, N.Y. Unconsol.Law §§ 6401 et seq. (McKinney 1979),*fn1 with the consent of Congress, Act of Aug. 23, 1921, ch. 77, 42 Stat. 174. The two states recognized that, with the development of commerce, the territory in and around the port of New York had become "commercially one center or district." N.Y. Unconsol. Law § 6401. In creating the Port Authority, they sought to achieve "better co-ordination of the terminal, transportation and other facilities of commerce in, about and through the port of New York." Id.

The Port Authority owns and operates a transportation network which provides river crossings linking southern New York and northern New Jersey. This network consists of four bridges, the George Washington Bridge (including a bus station), the Bayonne Bridge, the Goethals Bridge, and the Outerbridge Crossing; two tunnels, the Lincoln Tunnel and the Holland Tunnel; the bus terminal at 40th Street and 8th Avenue in Manhattan; the Port Authority Bus Programs; and the PATH railroad system. PATH's lines run from Newark and Hoboken, New Jersey to various points in New York's central business district ("CBD," the area of Manhattan south of 59th Street).

The Port Authority's bridges, tunnels and bus terminal, taken together, operate at a profit. For example, in 1986 (before the toll increases at issue here), they produced $243.7 million in revenues and incurred $213.4 million in expenses (including depreciation), yielding $30.3 million in net income. In the same year, PATH lost $92.2 million ($49.0 million in revenues against $141.2 million in total expenses). Thus, the inclusion of PATH (along with $28.8 million in expenses attributable to the depreciation and amortization of the Port Authority's Bus Programs) resulted in a net operating loss that year of $90.7 million for the Port Authority's Interstate Transportation Network. Automobile Club, 706 F. Supp. at 283; Court Exhibit I, Exhibit F.

Tolls on the Port Authority's bridges must be "just and reasonable." This requirement originated in section 4 of the Bridge Act of 1906, 33 U.S.C. § 494 (1982). In 1987, Congress repealed the statutory provision that gave the Secretary of Transportation the power to prescribe "just and reasonable" tolls. Federal-Aid Highway Act of 1987, Pub.L. No. 100-17, § 135(a), 101 Stat. 134, 173 (the "Highway Act"). At the same time, Congress retained the requirement that tolls be "just and reasonable." Id. § 135(i), 101 Stat. at 174 (codified at 33 U.S.C. § 508 (Supp. V 1987)). The House Conference Report accompanying the Highway Act explained that the "just and reasonable" requirement

is not intended to interfere with or in any way restrict existing authority granted to multi-modal transportation agencies, such as the Port Authority of New York and New Jersey, that operate bridges along with other facilities to use bridge toll revenues for non-bridge purposes or the pooling or combination of the revenues from all of their facilities.

H.R.Conf.Rep. No. 27, 100th Cong., 1st Sess. 175, reprinted in 1987 U.S.Code Cong. & Admin.News 66, 159.

In 1987, the Port Authority decided to engage in a $1.5 billion capital improvement program. Capital spending was necessary in order to maintain and modernize its interstate transportation network as use of its facilities increased rapidly. The Port Authority planned to spend $830 million to improve the PATH system, $495 million on Port Authority bridges, tunnels and bus terminals, and $150 million to establish a ferry service between Hoboken and lower Manhattan. The existing level of tolls and fares would be inadequate to operate the transportation network and to finance this capital program. Automobile Club, 706 F. Supp. at 281. The Port Authority therefore increased the tolls on its bridges and tunnels, as well as the fares for travel on PATH. For example, non-discounted, eastbound -- no toll is charged for vehicles traveling west -- passenger car tolls on bridges and tunnels rose from $2.00 to $3.00, and the price of twenty commuter discount tickets to pay such tolls rose from $20.00 to $40.00. PATH fares, which are charged for travel in each direction, were increased from $.75 to $1.00. Id. at 267-68.

The Auto Clubs are non-profit organizations which promote the interests and welfare of motor vehicle users. They sued for a declaratory judgment that the 1987 increase in the Port Authority's bridge tolls violated the Highway Act's requirement that tolls be just and reasonable. See 33 U.S.C. § 508 (Supp. V. 1987). They also alleged that the Port Authority's action violated 42 U.S.C. § 1983 (1982) and the Commerce Clause of the Constitution. The Auto Clubs claim that PATH should not be included in the rate base of the Port Authority's bridges and tunnels because PATH is unrelated to the other river crossings and because its fares remain too low, even after the 1987 increase. They then assert that, if PATH is excluded from the rate base, the Port Authority's rate of return on its unamortized investment in use is excessive. The Auto Clubs do concede, however, that the rate of return is reasonable if the replacement cost method of accounting is used. In addition, they accept that the rate of return is reasonable, regardless of the method of accounting used, if PATH is properly included in the rate base. Automobile Club, 706 F. Supp. at 268-69 & n.3. Thus, the principal issue in their lawsuit was the propriety of including PATH in the rate base.

Most of the relevant facts were stipulated by the parties; Judge Pollack received the evidence and heard testimony from witnesses during a two-day bench trial. In his decision, he observed that the legislative histories of the Bridge Act and the Highway Act shed little light on the "just and reasonable" requirement. The 1987 Conference Report did, however, indicate sufficient "flexibility" to permit the Port Authority to include facilities other than bridges, tunnels and terminals in its rate base. Id. at 273.

Judge Pollack also canvassed the case law. He found that City of Burlington v. Turner, 336 F. Supp. 594 (S.D.Iowa 1972), modified and aff'd, 471 F.2d 120 (8th Cir. 1973), simply established that the "just and reasonable" rule must include a reasonable return on the investment of capital. Automobile Club, 706 F. Supp. at 273 n.9. The case of Clarksburg-Columbus Short Route Bridge Co. v. Woodring, 67 App. D.C. 44, 89 F.2d 788 (D.C.Cir.), remanded for dismissal as moot, 302 U.S. 658, 58 S. Ct. 365, 82 L. Ed. 509 (1937), had greater relevance: it involved two competing bridges. The Secretary of War (exercising the power later entrusted to the Secretary of Transportation) ordered the tolls on one bridge lowered. The court held that the Secretary erred in considering only the bridge owner's return on his investment. Competitive factors should also be considered, as in I.C.C. ratemaking. The other bridge might be driven out of business by the reduced tolls; therefore, the owner of that bridge had a right to be heard before the tolls were lowered. 89 F.2d at 793-94. Clarksburg-Columbus thus "established the principle that a toll producing a seemingly unreasonably high rate of return may in fact be reasonable if its rate base does not include other facilities which are related to the facility in question." Automobile Club, 706 F. Supp. at 273. In this case, we are concerned with different facilities that are owned and operated by one entity, the Port Authority. The principle in Clarksburg-Columbus would, mutatis mutandis, support the inclusion of those facilities in a single rate base if they are related to each other.

Finally, there was Automobile Club v. Cox, 592 F.2d 658 (2d Cir. 1979), a prior incarnation of the present case. In Cox, the Auto Clubs contested the decision of the Federal Highway Administrator to approve increases in the Port Authority's bridge tolls that went into effect in 1975. The Auto Clubs adopted an "all or nothing" strategy in the lawsuit: They resisted the inclusion of any other river crossing facility -- i.e., not just PATH but the tunnels and the bus terminal, as well -- in the rate base of the four bridges. The underlying factual issue thus was whether PATH was sufficiently related to the Port Authority's bridges to justify subsidizing PATH with revenues from bridge tolls. The court reviewed that action under the "arbitrary [and] capricious" standard of 5 U.S.C. § 706(2)(A), since the administrative approval of toll rates for the future constitutes rulemaking. Id. at 664. Writing for a unanimous panel of this court, Judge Henry J. Friendly sustained the action of the Administrator because it was not arbitrary or capricious. Id. at 673.

Judge Pollack looked beyond this "sparse" case law construing the Highway Act's "just and reasonable" requirement, Automobile Club, 706 F. Supp. at 273, to consider public utility ratemaking cases where the same requirement is applied to gas and electricity rates, id. at 274. In those cases, courts apply the "used and useful" principle to decide whether different facilities may be included in one rate base. Id. at 274-75 (quoting Tennessee Gas Pipeline Co. v. FERC, 196 U.S. App. D.C. 187, 606 F.2d 1094, 1109 (D.C.Cir. 1979), cert. denied, 445 U.S. 920, 63 L. Ed. 2d 605, 100 S. Ct. 1284 (1980)); see also Smyth v. Ames, 169 U.S. 466, 546, 42 L. Ed. 819, 18 S. Ct. 418 (1898). In reviewing utility rates, courts take into consideration the cost of efforts to improve the quality and quantity of service "systemwide." E.g., Natural Gas Pipeline Co. v. FERC, 247 U.S. App. D.C. 1, 765 F.2d 1155, 1164 (D.C.Cir. 1985), cert. denied, 474 U.S. 1056, 88 L. Ed. 2d 771, 106 S. Ct. 794 (1986).

The utility ratemaking cases "suggest by analogy" that "Port Authority activities which represent efforts to improve the quality and quantity of its services systemwide . . . may be included in the Port Authority's rate base." Automobile Club, 706 F. Supp. at 276. Judge Pollack also concluded that a "systemwide" approach to this case precludes the use of a narrow "origin and destination" analysis to decide whether all of the Port Authority facilities at issue are sufficiently related to each other to justify including them in the same rate base. Id.

Applying these principles, Judge Pollack held that it was proper to include PATH in the same rate base with the Port Authority's bridges and tunnels: There is a "spillover" effect by which an interruption of service on PATH would disrupt the flow of traffic on the bridges and tunnels. The existence and smooth functioning of PATH therefore benefits those other facilities, and they would suffer serious congestion if PATH ceased to exist. The "spillover" effect means that PATH is "related" to the bridges and tunnels, notwithstanding the absence of a substantial "origin and destination" relationship between PATH and some of the bridges. See id. at 269-70, 276. Judge Pollack also found that users of PATH pay their fair share of the expenses of crossing the Hudson River. Id. at 277. Thus, with PATH properly included in the rate base, the Port Authority's bridge and tunnel tolls were held to be just and reasonable. Id.*fn2

Discussion

The standard of our review is a threshold issue. Appellants of course urge plenary review of the decision below; appellee points out that the district court's legal conclusions rest upon factual findings that must be accepted unless they are clearly erroneous.

Judge Pollack based his decision upon several legal conclusions. For example, he decided that it was not necessary to use a narrow "origin and destination" analysis to show that PATH is related to the Port Authority's bridges and tunnels; the "spillover" effect could also show the requisite relationship. He then applied that rule to the facts of this case and concluded that PATH is properly included in the rate base with the bridges and tunnels. It followed from that conclusion that the tolls are "just and reasonable," as required by the Highway Act.*fn3 These legal conclusions are subject to plenary review in this court. See Karavos Compania Naviera S.A. v. Atlantica Export Corp., 588 F.2d 1, 8 (2d Cir. 1978) (application of a legal standard is not a question of fact within Fed.R.Civ.P. 52(a)).

Judge Pollack's legal conclusions rested upon numerous findings of fact which, under Fed.R.Civ.P. 52(a), we must accept unless they are clearly erroneous. Among the most important of those findings was the fact that closing one of the Port Authority's facilities, for example PATH, would increase congestion on the others -- the "spillover" effect. Automobile Club, 706 F. Supp. at 279-80. This contributed to his factual finding that the Port Authority's bridges, tunnels, bus terminal, bus programs and PATH form "an integrated interdependent transportation system." Id. at 280.

Thus, our standard of review depends upon what we are reviewing. It is a factual finding, subject to Rule 52(a)'s "clearly erroneous" requirement, to decide whether a "spillover" effect exists. It is then a legal conclusion, subject to plenary review, to decide what relevance any "spillover" effect might have -- i.e., whether it shows that PATH is related to the bridges and tunnels. Cf. Patel v. Wargo, 803 F.2d 632, 634 (11th Cir. 1986) (whether company was an employer under Fair Labor Standards Act was a legal determination, but "individual findings of fact which led to that legal determination must be examined under the clearly erroneous standard").

The dispositive issue in this case is whether there is a close relationship between PATH and the Port Authority's bridges and tunnels. Both sides agree that PATH must be "related" to the bridges and tunnels if it is to be included in their rate base. They disagree over how to define what they refer to as a "functional relationship" between river crossings, how to identify a functional relationship and how to measure it.

The Auto Clubs contend that the relationship must be "direct and significant" and that this can only be shown by "origin and destination" analysis. A functional relationship based upon "origin and destination" analysis means that one river crossing substitutes relatively easily for another. If a large percentage of the people traveling between A in New Jersey and B in New York freely choose to use either river crossing X or river crossing Y, then X and Y have a functional relationship that the Auto Clubs consider direct and significant. Using this "origin and destination" analysis, the Auto Clubs concede that there is a relationship between PATH and the Holland and Lincoln tunnels, but argue that PATH has only "some small" functional relationship with the George Washington Bridge and practically no functional relationship with the three Staten Island bridges.*fn4

The Port Authority acknowledges the importance of "origin and destination" analysis. It carries out "origin and destination" studies of its own and relies upon them for its planning. The Port Authority does not claim that "origin and destination" analysis would show that PATH is related to all of the other river crossings. However, it insists that "origin and destination" analysis alone is too narrow for the complete description or measurement of a "functional relationship." Another component of a functional relationship, the Port Authority argues, is the "spillover" effect.

According to the Port Authority, each of its river crossing facilities will suffer if any one of them is eliminated; this results from the "spillover" (or "domino") effect. The reason for this is that use of the river crossings is now close to capacity during peak morning hours. The Port Authority does not claim that, without PATH, significant numbers of PATH riders would travel as far afield as the Outerbridge Crossing. Clearly, the Holland and Lincoln tunnels are the most direct alternatives to PATH. However, nearly 70,000 passengers use PATH during the peak morning hours. If they were to use the tunnels instead, the tunnels would become overcrowded. Congestion in the tunnels would lead many travelers (including some who normally use PATH) to use the George Washington Bridge. Others (for example, those whose destination is Long Island, rather than the CBD) could shift to the Staten Island bridges. Indeed, there is even a significant "origin and destination" relationship between the George Washington Bridge and the Outerbridge Crossing: The former serves as a northern bypass of the CBD, while the latter is a southern bypass. If, then, the George Washington Bridge is congested, some people traveling between New Jersey and Long Island will choose instead to use the Outerbridge Crossing. Congestion on one Staten Island bridge will divert traffic to the other Staten Island bridges. Thus, PATH benefits the entire interstate transportation network because the effects of eliminating PATH would extend all the way north to the George Washington Bridge and south to each of the Staten Island bridges. In short, concludes the Port Authority, the "spillover" effect demonstrates that there is a functional relationship between PATH and the other river crossings.

We agree with the position taken by the Port Authority and accepted by the district court. Measuring the relationship between river crossings by means of "origin and destination" data is useful but not sufficient. This approach is fine when all lanes are open and traffic flows smoothly, but it does not adequately describe what happens when traffic is disrupted. It fails to take into account the full extent of the Port Authority's responsibilities. As anyone who has ever sat in a line of traffic or a railroad station for a length of time is aware, the Port Authority's employees cannot think only in terms of traffic flowing smoothly and trains running on time; they must also anticipate and respond to disruptions and delays. The Port Authority is entitled to prove that PATH is related to the bridges and tunnels with evidence that a "spillover" effect links even those river crossings that travelers do not normally use interchangeably. A functional relationship exists, then, among those facilities that contribute to the Port Authority's performance of its duty efficiently to provide transportation to travelers over and under the waterways between southern New York and northern New Jersey. See Automobile Club, 706 F. Supp. at 276.*fn5 Thus, Judge Pollack was correct in following the analogy of the utility ratemaking cases and in deciding not to measure PATH's relationship to the other river crossings narrowly in terms of "origin and destination" data alone. We agree that, as a matter of law, the "spillover" effect should also be considered.

Judge Pollack found that direct relationships exist between different river crossing facilities -- for example, between PATH and the two tunnels, and between the Holland Tunnel and the Staten Island Bridges. He found that closing one or more of those facilities increases congestion in the others -- the "spillover" effect. Evidence also established that it was most efficient and cost-effective to operate the Port Authority's interstate transportation facilities as an integrated system. These and other factual findings formed the basis for Judge Pollack's finding that the Port Authority's bridges, tunnels, bus terminal, bus programs and PATH constitute an "integrated, interdependent transportation system." See Automobile Club, 706 F. Supp. at 279-80.

Our review of the record convinces us that these factual findings are not clearly erroneous; indeed, it requires us to agree with Judge Pollack's findings. The evidence of increased use of the Port Authority's facilities is particularly significant. The number of passengers traveling east via those facilities by auto, bus and rail during the morning peak period (7:00-10:00 a.m.) has increased since 1967 as follows:

1967 1977 1980 1987

Automobile 55 ,200 66,900 ...


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