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BNSF Railway Co. v. Surface Transportation Board

May 11, 2010


On Petitions for Review of Orders of the Surface Transportation Board

The opinion of the court was delivered by: Rogers, Circuit Judge

Argued February 18, 2010

Before: HENDERSON, ROGERS and GARLAND, Circuit Judges.

BNSF Railway Company ("BNSF") petitions for review of the decision of the Surface Transportation Board ("Board") that rates challenged in 2004 by Western Fuels Association, Inc., and Basin Electric Power Cooperative, Inc. (hereinafter, collectively, "WFA") are unreasonably high maximum reasonable rates, prescribing future maximum rates, and ordering BNSF to pay reparations.*fn1 BNSF contends that the Board's decision was contrary to law because the three-year limit in 49 U.S.C. § 11701(c) had expired before its February 17, 2009 Decision, and so the Board's orders prescribing maximum reasonable rates and ordering the payment of reparations must be vacated and the proceeding dismissed.

Alternatively, BNSF contends there was a reopening after the Board's September 7, 2007 Decision,*fn2 and hence any reparations would be limited from that time forward. On the merits, BNSF contends the Board was arbitrary and capricious by allowing WFA to revise its traffic route in response to the Board's adoption of new retroactive methodologies for calculating rates, and by modifying the average total cost methodology for allocating revenue from cross-over traffic.

We hold BNSF forfeited the statutory argument by failing to raise it in a timely manner before the Board. On the merits, we conclude that BNSF's challenge to traffic rerouting is unpersuasive and a matter within the Board's expertise, and that a remand is required for the Board to address BNSF's objection to the modified average total cost methodology as biased because it double counts variable costs; otherwise we affirm. Accordingly, we grant the petitions in part and deny the petitions in part.



In the Interstate Commerce Commission Termination Act of 1995, Pub.L. 104-88, 109 Stat. 803 (1995) ("ICCTA"), Congress carried forward the shipper protections in the Staggers Rail Act of 1980, Pub. L. 96-448, 94 Stat. 1895 (1980), while continuing the deregulation of the railroad industry it had previously endorsed in the Staggers Act and the Railroad Revitalization and Regulatory Reform Act, Pub. L. 94-210, 90 Stat. 31 (1976). See H.R. Conf. Rep. 104-422 (1995), at 194, reprinted in 1995 U.S.C.C.A.N. 850; S. Rep. No. 104-176 (1995), at 2-3, 5-6; H.R. Rep. No. 104-311 (1995), at 82-83, reprinted in 1995 U.S.C.C.A.N. 793. Thus, a party may file a complaint with the Board, which succeeded the Interstate Commerce Commission ("I.C.C.") as the regulator of the rail industry, challenging the reasonableness of a rate. 49 U.S.C. §§ 11701(b), 10704(b). The Board, upon determining that it has jurisdiction, id. §§ 10701(d)(1), 10707(b)-(c), which covers only those railroads that possess "market dominance,"*fn3 must consider the system-wide pricing policies, id. § 10701(d)(2)(A)-(C), and ensure the rail carrier has the opportunity to earn "adequate revenues," id. § 10704(a)(2). If the Board finds the challenged rate unreasonable, it "may prescribe" the maximum rate the railroad can charge going forward, id. § 10704(a)(1), and the railroad "is liable" for reparations to the complainant, id. § 11704(b).

The complexity of railroad rate regulation stems in part from determining the proper attribution of costs to those using the railroad's services and facilities. In 1985, the Board promulgated guidelines to calculate rates for shipping coal. See Coal Rate Guidelines, Nationwide, 1 I.C.C.2d 520 (1985) ("Guidelines"), aff'd sub nom. Consol. Rail Corp. v. United States, 812 F.2d 1444 (3d Cir. 1987). The Guidelines approach, which was extended to non-coal rates, adopted Constrained Market Pricing ("CMP"), in which rates are set in inverse proportion to shippers' respective demand elasticities, so called "Ramsey pricing." Guidelines at 547-48. Under CMP, rates are limited to what is necessary for the carrier to earn adequate revenues based on efficient management and pricing practices. Guidelines at 534-42. This determination is made in part based on the stand-alone-cost ("SAC") of a hypothetical carrier or "stand-alone railroad" ("SARR") designed by the complainant to be optimally efficient in providing those lines and facilities needed to serve the complaining shipper. The SAC test determines the maximum rate that the railroad may charge the traffic group by accounting for all the costs of running the SARR, including the cost of building and operation and a reasonable return on investment. Under this test the Board had, over the years, applied Modified Straight-Mileage Prorate ("MSP"), a mileage-based revenue allocation procedure. See BNSF Ry. Co. v. STB, 453 F.3d 473, 483-84 (D.C. Cir. 2006) (hereinafter "Xcel").

In October 2006, the Board revised the Guidelines approach upon concluding the regulatory proceedings had become too complex and too costly. See Major Issues in Rail Rate Cases, STB Ex Parte No. 657 (Sub-No.1) (Oct. 30, 2006) at 3 ("Major Issues Rulemaking"). Previously, the Board had used the "percent reduction" method, by which it reduced the challenged rate by the same percentage by which the total revenues exceeded the SAC costs. In the final rule, the Board changed how it would evaluate rate reasonableness by adopting the Maximum Markup Methodology ("MMM")*fn4 and the Average Total Cost ("ATC") methodology.*fn5 This court upheld the final rule, including its retroactive application. See BNSF Ry. Co. v STB, 526 F.3d 770 (D.C. Cir. 2008) ("Major Issues Appeal").


From 1984 to 2004, BNSF transported WFA's coal under a long-term contract in which the rate gradually decreased from $4 per ton in 1984 to $3 per ton in 2004. When the contract expired, BNSF and WFA were unable to reach a new agreement and BNSF set a common carrier rate of $6 per ton. Although this rate was, due to the proximity to the Powder River Basin, "one of the lowest transportation rates any utility pays to acquire PRB coal," September 2007 Decision at 2, the revenue to variable cost ratio for these movements was very high, beginning at 481 percent and adjusting upward over time to 843 percent according to WFA.

On October 19, 2004, WFA filed a verified complaint with the Board, seeking to demonstrate the unreasonableness of BNSF's rates under the SAC test. WFA designed a SARR called the Laramie River Railroad ("LRR"), which contained some cross-over traffic and allocated revenues from the crossover traffic using MSP. BNSF filed an answer and the Board granted a motion allowing mediation to continue through January 31, 2005. Once mediation efforts ended, the parties filed evidentiary presentations ...

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