Association of American Railroads v. Surface Transp. Bd.

• Decision Date: 30 June 1998
• Docket Number: No. 97-1020,97-1020
• Citation: 146 F.3d 942
• Parties: ASSOCIATION OF AMERICAN RAILROADS, 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

Page 942

146 F.3d 942

331 U.S.App.D.C. 1

ASSOCIATION OF AMERICAN RAILROADS, Petitioner v. SURFACE TRANSPORTATION BOARD and United States of America, Respondents Western Coal Traffic League, et al., Intervenors

No. 97-1020.

United States Court of Appeals District of Columbia Circuit.

Argued May 8, 1998.

Decided June 30, 1998.

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

Arvid E. Roach, II argued the cause for petitioner. With him on the briefs were Louis P. Warchot and Kenneth P. Kolson.

Thomas J. Stilling, Attorney, Surface Transportation Board, argued the cause for respondents. With him on the brief were Joel I. Klein, Assistant Attorney General, U.S. Department of Justice, Robert B. Nicholson and John P. Fonte, Attorneys, Henri F. Rush, General Counsel, Surface Transportation Board, and Ellen D. Hanson, Deputy General Counsel.

William A. Slover, C. Michael Loftus, Robert D. Rosenberg, Andrew P. Goldstein, Nicolas J. DiMichael and Fredric L. Wood were on the joint brief for intervenors Western Coal Traffic League, et al.

Before: WALD, WILLIAMS and TATEL, Circuit Judges.

TATEL, Circuit Judge:

Petitioner challenges Surface Transportation Board guidelines for determining the reasonableness of railroad rates in small cases. Finding the challenge unripe, we dismiss the petition.

I

For much of the nineteenth century, railroads possessed sufficient market power to set rates that were often unjust and unreasonable. See Western Coal Traffic League v. United States, 719 F.2d 772, 775 (5th Cir.1983) (en banc). Partially in response to this problem, in 1887 Congress created the Interstate Commerce Commission, which tightly controlled rates for almost ninety years and prohibited railroads from responding freely to market forces. See id. As a result of this regulation and the rise of shipping alternatives such as trucks in the mid-twentieth century, railroads increasingly experienced inadequate earnings, struggled to stay solvent, and often went bankrupt. See Western Coal Traffic League v. United States, 694 F.2d 378, 384 (5th Cir.1982), rev'd en banc in part on other grounds, 719 F.2d 772.

Responding to the continuing decline of railroads, Congress again acted, this time significantly deregulating the railroad industry through the Railroad Revitalization and Regulatory Reform Act of 1976, Pub.L. No. 94-210, 90 Stat. 31 (codified as amended in scattered sections of 45 and 49 U.S.C.), and the Staggers Rail Act of 1980, Pub.L. No. 96-448, 94 Stat. 1895 (codified as amended in scattered sections of 45 and 49 U.S.C.). Recognizing that railroads must often charge rates well above their variable costs to compensate for their very high fixed costs, these two acts prohibited the ICC, now the Surface Transportation Board, from regulating rates unless the railroad has "market dominance," Pub.L. No. 94-210, § 202(b), 90 Stat. at 35 (codified as amended at 49 U.S.C.A. § 10707(d)(1)(A) (1997)), meaning that railroads must have at least charged a rate with a revenue-to-variable-cost (R/VC) ratio higher than a specified figure--starting in 1980 at 160% and resting currently at 180%. Pub.L. No. 96-448, § 202, 94 Stat. at 1900 (codified as amended and reordered at 49 U.S.C.A. § 10707(d)(1)(A)); see also Burlington Northern R.R. Co. v. ICC, 985 F.2d 589, 595 (D.C.Cir.1993) (discussing Congress' deregulation efforts). Congress further directed that, "[i]n determining whether a rate established by a rail carrier is reasonable," the agency must "recognize the policy ... that rail carriers shall earn adequate revenues." Pub.L. No.96-448, § 201(a), 94 Stat. at 1899 (codified as amended and reordered at 49 U.S.C.A. § 10701(d)(2)). Although Congress wanted to ensure revenue adequacy for railroads, it was also concerned about shippers, urging the agency "to maintain reasonable rates where there is an absence of effective competition." Id. § 101(a), 94 Stat. at 1897 (codified and reordered at 49 U.S.C.A. § 10101(6)).

The ICC struggled for many years to develop guidelines for assuring the reasonableness of rates charged by railroads with market dominance. After some experimentation, see, e.g., Iowa Pub. Serv. Co. v. ICC, 643 F.2d 542, 548 (8th Cir.1981) (rejecting ICC rule allowing railroads to charge low-elasticity shippers 7% above full cost), the agency adopted a standard known as "Ramsey pricing," which allows railroads to charge markups in inverse proportion to shippers' demand elasticities, i.e., to charge "captive shippers"--those customers unable to use alternative forms of transportation--rates far above variable cost in order to compensate for their inability to charge high rates to shippers who can easily choose trucks or other forms of transportation. See Burlington Northern v. ICC, 985 F.2d at 595-96. Because accurately measuring elasticities is difficult, however, the agency also adopted a system called Constrained Market Pricing ("CMP") to set limits on how high above variable cost railroads can charge their captive shippers. See id. at 596. For purposes of this case, the most important of these limits--the "stand-alone cost constraint" ("SAC")--prohibits a carrier's rates from exceeding "the rates a hypothetical 'stand-alone railroad' would have to charge in order to recover the costs of building a rail system to carry the complaining shipper's traffic and earn a reasonable return." Burlington Northern R.R. Co. v. STB, 114 F.3d 206, 212 (D.C.Cir.1997).

Although the agency has consistently described the CMP/SAC constraint as the " 'preferred and most accurate procedure available for determining the reasonableness' of rates," Burlington Northern v. ICC, 985 F.2d at 596 (quoting McCarty Farms, Inc. v. Burlington Northern, Inc., 3 I.C.C.2d 822, 840 (1987)), it has also recognized that developing a full SAC study is expensive and therefore inappropriate for cases involving relatively small amounts of money. For this reason, the agency has spent over a decade searching for an alternative to SAC for use in small cases. It originally tried using a standard called R/VC subcomp , which compares the R/VC of the challenged traffic to the average R/VC charged by other railroads for similar traffic. But this court rejected R/VC subcomp , holding that the agency had failed to justify using it to strike a particular rate, especially since "employed regularly and repeatedly, it will reduce rates to the lowest R/VC used in the comparison group." 985 F.2d at 597. The agency therefore abandoned the formula as a bright-line test of reasonableness and resumed its search for another method. Apparently becoming impatient with this search, Congress directed the Board to establish by January 1997 "a simplified and expedited method for determining the reasonableness of challenged rail rates in those cases in which a full stand-alone cost presentation is too costly, given the value of the case." ICC Termination Act of 1995, Pub.L. No. 104-88, Title I, § 102(a), 109 Stat. 803, 810 (codified at 49 U.S.C.A. § 10701(d)(3)).

Responding to Congress' directive, the STB issued the guidelines challenged in this case. Rate Guidelines--Non-Coal Proceedings, Ex Parte No. 347 (Sub-No. 2), 1996 WL 741358 (STB served Dec. 31, 1996) ("December Decision"). Because the Board concluded that no one benchmark standing alone would suffice, the guidelines measure the reasonableness of rates in small cases by comparing the challenged rate to three ratios: R/VC subcomp ; R/VC sub 180 , which measures the average markup charged by the challenged railroad on all captive traffic; and RSAM, which represents the average markup over variable cost that the railroad would have to charge captive traffic to recover total costs and a reasonable profit. The Board found that this approach adequately balances the needs of shippers and railroads and explained how it would employ the three ratios While none of the benchmarks is perfect, we are satisfied that each is instructive for a simplified rate reasonableness analysis. Taken together, they allow us to consider each of the relevant statutory factors. At the same time, each measure serves as a check on the other two. Moreover, ... the three benchmarks are only the starting point for our analysis. They can and should be supplemented, as appropriate, with any particularized evidence that would qualify or modify what one or more benchmarks might otherwise indicate. We are confident that a careful analysis of these three benchmarks, together with whatever supplementary evidence is provided in a case, should enable us to meet our modest objective--to make at least a rough call as to rate reasonableness in those cases where a more precise determination is not possible.

Id. at * 21.

In issuing these guidelines, the Board rejected petitioner's argument that whenever complaining shippers use the three-ratio approach, railroads should be able to defend by presenting a simplified SAC analysis. Noting that it had already rejected petitioner's computer model for producing a simplified SAC figure--in a test the model had approved a rate with an R/VC exceeding 5,000%, see id. at * 5--the Board concluded that since shippers may only use the three-ratio approach when a SAC analysis would be economically infeasible, see id. at * 25-26 (describing when shippers may use the three ratios), railroads should not then be able to "transform the case into a SAC case," id. at * 28. "In any event," the Board said, "a SAC presentation by the defendant railroad(s) would not be persuasive, because the defendant railroad lacks the incentive to seek out the least-cost most-efficient standalone service--the objective of the SAC test." Id.

After the Board rejected its petition for rehearing, Rate Guidelines--Non-Coal Proceedings, Ex Parte No. 347 (Sub-No. 2), 1997 WL 586968 (STB served Sept. 24, 1997), petitioner sought review in this court, arguing that by promulgating what it refers to as "vague and unilluminating" guidelines,...