Bnsf Ry. Co. v. Surface Transp. Bd.

• Decision Date: 20 May 2008
• Docket Number: No. 06-1374.,No. 06-1398.,No. 06-1421.,No. 06-1372.,No. 06-1373.,No. 06-1399.,No. 06-1401.,No. 06-1404.,No. 06-1409.,06-1372.,06-1373.,06-1374.,06-1398.,06-1399.,06-1401.,06-1404.,06-1409.,06-1421.
• Citation: 526 F.3d 770
• Parties: BNSF RAILWAY COMPANY, Petitioner v. SURFACE TRANSPORTATION BOARD and United States of America, Respondents Western Coal Traffic League, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

526 F.3d 770

BNSF RAILWAY COMPANY, Petitioner v. SURFACE TRANSPORTATION BOARD and United States of America, Respondents Western Coal Traffic League, et al., Intervenors.

No. 06-1372.

No. 06-1373.

No. 06-1374.

No. 06-1398.

No. 06-1399.

No. 06-1401.

No. 06-1404.

No. 06-1409.

No. 06-1421.

United States Court of Appeals, District of Columbia Circuit.

Argued February 5, 2008.

Decided May 20, 2008.

On Petitions for Review of an Order of the Surface Transportation Board.

John H. LeSeur argued the cause for Shipper Petitioners. With him on the briefs were Christopher A. Mills, William L. Slover, Kelvin J. Dowd, C. Michael Loftus, Andrew B. Kolesar III, and Peter A. Pfohl.

Samuel M. Sipe, Jr. and Michael L. Rosenthal argued the cause for Railroad Petitioners. With them on the briefs were

Richard E. Weicher, Anthony J. LaRocca, Peter J. Shudtz, Paul R. Hitchcock, George A. Aspatore, John M. Hemmer, Louise A. Rinn, Terence M. Hynes, G. Paul Moates, and Paul A. Hemmersbaugh.

Raymond A. Atkins, Associate General Counsel, Surface Transportation Board, argued the cause for respondents. With him on the brief were Robert B. Nicholson and John P. Fonte, Attorneys, U.S. Department of Justice, and Ellen D. Hanson, General Counsel.

Richard E. Weicher, Samuel M. Sipe, Jr., and Anthony J. LaRocca were on the brief for intervenor BNSF Railway Company.

C. Michael Loftus, Andrew B. Kolesar III, and Peter A. Pfohl were on the brief for intervenor Western Coal Traffic League.

Before: GINSBURG, ROGERS, and KAVANAUGH, Circuit Judges.

Opinion for the Court filed by Circuit Judge KAVANAUGH.

KAVANAUGH, Circuit Judge:

In a recent rulemaking, the Surface Transportation Board changed aspects of its rail rate-setting methodology. Railroads and shippers both petition for review — railroads arguing that certain changes improperly benefit shippers and shippers arguing that certain changes improperly benefit railroads. We conclude that the Board's changes are reasonable and reasonably explained. We therefore deny the petitions.

I

Since Congress enacted the Interstate Commerce Act in 1887, the Federal Government has regulated the rates of interstate railroads. Until 1995, the Interstate Commerce Commission regulated the rates; since then, the Surface Transportation Board has done so. See ICC Termination Act of 1995, Pub.L. No. 104-88, §§ 101, 201, 109 Stat. 803, 804, 933-34.

Under federal law, a party may file a complaint with the Board challenging a railroad's rate. See 49 U.S.C. § 10704(b). After receiving a complaint, the Board first must determine whether it has jurisdiction over the challenged rate. The Board's jurisdiction covers only those railroads that possess "market dominance." See §§ 10701(d)(1), 10707(b)(c). To have market dominance, a railroad must have revenue that meets or exceeds 180 percent of its variable costs for the traffic to which the rate applies. See § 10707(d)(1)(A). (Variable costs are those costs that increase as traffic over the railroad increases — for example, the cost of fuel.)

After the Board determines that it has jurisdiction over a challenged rate, the Board must decide whether the rate is reasonable. See § 10701(d)(1). If the Board finds the rate unreasonable, it sets the maximum rate the railroad may charge. See § 10704(a)(1). In setting that rate, the Board must permit the railroad to cover its costs "plus a reasonable and economic profit or return (or both) on capital employed in the business." § 10704(a)(2).

Part of what makes railroad rate regulation complex is that a railroad incurs many costs that cannot be attributed to any one shipper — costs that the Board has appropriately termed "unattributable costs." See Rate Guidelines — Non-Coal Proceedings, 1 S.T.B. 1004, at 2-5 (1996) (Non-Coal Guidelines). For example, how does the railroad allocate the cost of a railroad terminal shared by multiple shippers? Allocation is difficult, moreover, because railroads serve a mix of "competitive" shippers and "captive" shippers — competitive shippers can secure alternative transportation relatively cheaply but captive shippers cannot. See id. Therefore, a railroad cannot simply charge each shipper a pro rata share of the unattributable costs without the risk of losing competitive shippers to other carriers. See id.

In 1985, the Board promulgated guidelines to calculate rates for shipping coal. See Coal Rate Guidelines, Nationwide, 1 I.C.C.2d 520, 1985 WL 56819 (1985) (Guidelines). The Guidelines approach, which has since been extended to non-coal rates, established certain principles to resolve rate disputes. Those principles sought to approximate "Ramsey pricing," which sets rates for individual shippers in inverse proportion to those shippers' demand elasticities. See Non-Coal Guidelines, at 2-5. Ramsey pricing enables a railroad to collect a higher share of unattributable costs from captive shippers than from competitive shippers. Because captive shippers have inelastic demand, the railroads can charge them higher rates with a lower risk of losing their business.

Recently, however, the Board decided that the Guidelines approach had become increasingly complex and costly, and in some respects contrary to congressional intent. To address those problems, it began a rulemaking proceeding in early 2006. The Board completed the rulemaking later that year, changing how to determine its jurisdiction and how to evaluate rate reasonableness. Both railroads and shippers filed timely petitions for review challenging various aspects of those changes.

We review Board decisions under the deferential standards of the Administrative Procedure Act. As relevant here, we will set aside a Board decision if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). The Board may depart from its own precedent, moreover, so long as it provides a reasoned explanation. PPL Mont., LLC v. STB, 437 F.3d 1240, 1246 (D.C.Cir.2006). In the rate-making area, our review is particularly deferential, as the Board is the expert body Congress has designated to weigh the many factors at issue when assessing whether a rate is just and reasonable.

II

We first consider the Board's new method for determining whether it possesses jurisdiction over a challenged rate.

As a general matter, the Board has jurisdiction over a rate if the railroad's ratio of revenue to variable costs (R/VC) for the traffic to which that rate applies is at least 180 percent. Therefore, to determine whether it has jurisdiction, the Board must have a method to calculate variable costs. The statute requires that the Board use a method called the Uniform Rail Costing System, referred to as URCS, or an adequate substitute. See 49 U.S.C. § 10707(d)(1)(B); Adoption of the Uniform R.R. Costing Sys., 5 I.C.C.2d 894, 1989 WL 246927 (1989). The railroad submits various data to the Board, and the Board, via a computer program, plugs the data into URCS to produce a figure for system-wide average variable costs. See generally Surface Transp. Bd., Industry Data — Economic Data: URCS, http://www.stb. dot.gov. The amount of revenue from the relevant traffic is then divided by a figure incorporating the system-wide average variable costs and a number of operating characteristics of the shipment to arrive at the R/VC ratio. If the R/VC ratio is less than 180 percent, the Board has no jurisdiction.

In the past, the Board has permitted parties to propose "movement-specific adjustments" to the average variable costs figure produced by URCS. In other words, parties could argue that a higher or lower figure better reflected the variable costs of a particular movement. Shippers, of course, propose adjustments that would lower the variable-costs figure, because that would result in higher R/VC ratios and thus make Board review more likely. Railroads favor adjustments that would raise the variable-costs figure, thereby lowering R/VC ratios and making Board review less likely.

In the rulemaking at issue here, the Board eliminated the ability of parties to suggest movement-specific adjustments. Both the railroads and the shippers challenge that change as an unreasonable departure from agency precedent. The Board acknowledged that permitting movement-specific adjustments has been its "longstanding practice," but nevertheless concluded that "these adjustments may not serve a useful public purpose." Major Issues in Rail Rate Cases, STB Ex Parte No. 657, at 48 (Oct. 30, 2006). The Board gave seven interrelated reasons for the change:

First, the analysis of proposals for movement-specific adjustments is complex, expensive, and time consuming. Second, the Board believed that Congress intended, in adopting the 180% R/VC limitation on Board rate review, to create an administratively quick and easy-to-determine regulatory safe harbor for the railroads. Third, the URCS program already tailors the variable cost calculation to the movement at issue. Fourth, disallowing movement-specific variable cost adjustments would eliminate substantial uncertainty in the current rail rate adjudication process. Fifth, railroads do not consistently keep certain types of information that shippers have relied on for favorable movement-specific adjustments. Sixth, adjustments to URCS may not provide more reliable results than using the system-average expenses. Finally, piecemeal or incomplete adjustments to URCS are suspect.

Id. (emphases added). The Board ultimately concluded that it "must balance the costly burden and complexity created by movement-specific adjustments against any improvements in the resulting variable cost," and it found that "notwithstanding [its] past allowance of these adjustments, such expense and complexity are not justified." Id. at 50.

The railroads, except BNSF, challenge the Board's decision on statutory grounds. Section 10707 of Title 49 directs that "variable costs for a rail carrier shall be determined only by using...