Ppl Montana, LLC v. Surface Transp. Bd.

• Decision Date: 17 February 2006
• Docket Number: No. 04-1369.,04-1369.
• Citation: 437 F.3d 1240
• Parties: PPL MONTANA, LLC, Petitioner v. SURFACE TRANSPORTATION BOARD and United States of America, Respondents BNSF Railway Company, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

437 F.3d 1240

PPL MONTANA, LLC, Petitioner v. SURFACE TRANSPORTATION BOARD and United States of America, Respondents

BNSF Railway Company, Intervenor.

No. 04-1369.

United States Court of Appeals, District of Columbia Circuit.

Argued: November 17, 2005.

Decided February 17, 2006.

John M. Cutler, Jr. argued the cause and filed the briefs for petitioner.

Raymond A. Atkins, Attorney, Surface Transportation Board, argued the cause for respondent. With him on the brief were Robert H. Pate, III, Assistant Attorney General, U.S. Department of Justice, Robert B. Nicholson and John P. Fonte, Attorneys, Ellen D. Hanson, Deputy General Counsel, Surface Transportation Board, and Thomas J. Stilling, Attorney. Rachel D. Campbell, Attorney, entered an appearance.

Richard E. Weicher, Michael E. Roper, Samuel M. Sipe, Jr., and Anthony J. LaRocca were on the brief for intervenor.

Before: GINSBURG, Chief Judge, and GARLAND and BROWN, Circuit Judges.

Opinion for the Court filed by Circuit Judge BROWN.

BROWN, Circuit Judge:

PPL Montana, LLC (PPL) filed a complaint with the Surface Transportation Board, alleging the rail rates charged by intervenor BNSF Railway Company (BNSF) were unreasonably high. The Board disagreed and dismissed the complaint. PPL now petitions for review. Finding no basis for upsetting the Board's decision, we deny the petition.

I

When a shipper files a rate complaint, see 49 U.S.C. §§ 10704(b), 11701, the Board is charged with determining whether the carrier targeted by the complaint has "market dominance," id. § 10707(b)—that is, whether there is "an absence of effective competition from other rail carriers or modes of transportation for the transportation to which a rate applies," id. § 10707(a).¹ If so, the carrier's rate for the captive traffic must be "reasonable." Id. § 10701(d)(1). If the Board determines the rate is unreasonable, see id. § 10707(c), it may prescribe the maximum rate that can be charged, id. § 10704(a)(1).

The Board determines reasonableness according to the "constrained market pricing" (CMP) principles enunciated in COAL RATE GUIDELINES, NATIONWIDE, 1 I.C.C.2d 520, 1985 WL 56819 (1985) (GUIDELINES), aff'd sub nom. Consol. Rail Corp. v. United States, 812 F.2d 1444 (3d Cir.1987).² GUIDELINES indicates that CMP meets the Board's "dual objectives of providing railroads the real prospect of attaining revenue adequacy while protecting captive coal shippers from `monopolistic' pricing practices." Id. at 524-25, 1985 WL 56819. CMP consists of three main constraints on a railroad's rates: revenue adequacy, management efficiency, and stand-alone cost (SAC). Id. at 534-46, 1985 WL 56819.

A SAC analysis seeks to determine the lowest cost at which a hypothetical efficient carrier could provide service to the complaining shipper or a group of shippers that benefits from sharing joint and common costs. Id. at 528, 1985 WL 56819; see also id. at 529, 1985 WL 56819 ("The stand-alone cost, as we define it here, approximates the full economic costs, including a normal profit, that need to be met for an efficient producer to provide service to the shipper(s) identified."). The Board assumes away barriers to entry and exit so as to treat the otherwise non-competitive railroad industry as a contestable market. Id. at 528-29, 1985 WL 56819. Under the SAC constraint, then, the rate at issue can be no higher than what the hypothetical carrier would have to charge to provide the needed service while fully covering its costs, including a reasonable return on investment. Id. at 528-29, 542-43, 1985 WL 56819. In this way, under the Board's watchful eye,

railroads functioning in a noncompetitive market will be required to price as if alternatives to their services were available. That is, their rates will be judged against simulated competitive prices. As a result, the efficiencies of a contestable market will serve as the guide for establishing maximum rates on captive coal traffic.

Id. at 542, 1985 WL 56819. The SAC test is a means to insure that a captive shipper does "not bear the costs of any facilities or services from which it derives no benefit." Id. at 523, 1985 WL 56819; see id. at 528, 1985 WL 56819.

To proceed under the SAC constraint, a complaining shipper designs and presents to the Board a hypothetical stand-alone railroad (SARR) to serve the traffic group; the traffic group may contain both the complaining shipper's traffic—the issue traffic—as well as other traffic selected to take advantage of the "benefits of any inherent production economies." Id. at 543-44, 1985 WL 56819; see also, e.g., MCCARTY FARMS, INC. v. BURLINGTON N., INC., 2 S.T.B. 460, 466-67, 1997 WL 472908 (1997). The ability to group traffic of different shippers is "essential" to the theory of contestability. GUIDELINES, 1 I.C.C.2d at 544, 1985 WL 56819. As the Board has not seen a need to set general restrictions on the "traffic that may potentially be included in a stand-alone group," id., a complainant is afforded flexibility in selecting a traffic group for its SARR, see, e.g., ARIZ. PUB. SERV. CO. V. ATCHISON, TOPEKA & SANTA FE RY. CO., 2 S.T.B. 367, 381, 1997 WL 420253 (1997) ("In a SAC analysis, the complaining shipper may select any subset of available traffic to determine the least cost at which that subset of traffic could be served independently of other traffic."). Nevertheless, the potential traffic draw is "open to scrutiny in individual cases," and "[t]he proponent of a particular stand-alone model must identify, and be prepared to defend, the assumptions and selections it has made." GUIDELINES, 1 I.C.C.2d at 544, 1985 WL 56819. The Board then compares the SARR's costs to the revenues the SARR can expect from the traffic group; if the latter is greater, the Board can conclude the challenged rate levels are too high. See, e.g., MCCARTY FARMS, 2 S.T.B. at 467, 1997 WL 472908.

II

PPL ships coal by rail via BNSF from mines in Wyoming's Powder River Basin to PPL's Corette generating facility at Billings, Montana. In July 2000, PPL filed a complaint with the Board, challenging the reasonableness of the rail rates charged by BNSF.

PPL invoked the SAC constraint and, accordingly, proffered a SARR that can be viewed as consisting of two segments: a high-density "north-south" segment and a low-density "western" segment. The north-south segment, extending south from Buckskin, Wyoming—through Campbell—to Converse, Wyoming, was used to originate coal in the Powder River Basin. The longer western segment, branching off the north-south segment at Campbell, extended westward out of the Powder River Basin for more than 200 miles to PPL's plant in Billings and to other Montana locations. All of the traffic PPL included in the SARR, with the exception of PPL's own traffic, is "cross-over" traffic, which originates or terminates on the residual real-world railroad and is interchanged with the SARR. Most of the cross-over traffic moved no more than 26 miles on the north-south segment.

BNSF challenged PPL's SAC presentation, arguing, in relevant part, that "PPL has impermissibly cross-subsidized the issue traffic (and other traffic [traveling on the western segment]) as a result of the exorbitant revenues that are assumed to be earned by a subset of its cross-over traffic." Joint Appendix ("J.A.") 14. To demonstrate this cross-subsidy, BNSF calculated revenues from cross-over traffic that used only the north-south segment to be far in excess of the stand-alone cost of the north-south segment.

PPL recognized that BNSF was advocating a rule, in part, "designed to exclude the possibility that non-issue traffic on the SARR is subsidizing issue traffic." Id. at 61. Discounting such concerns, PPL suggested the SAC test only prevented the complaining shipper from being forced to subsidize other traffic, and that the complaining shipper was free to design a SARR in which other traffic subsidized the complaining shipper. Nonetheless, in the event the Board was troubled by such cross-subsidies, PPL offered an alternative to examining the revenues and SAC of the north-south segment:

Assuming [cross-subsidization of the issue traffic by non-issue traffic] is a legitimate concern . . ., there is a more direct test for cross subsidy that would not impose prohibitive litigation burdens and expenses on complainants. Traffic that is covering its attributable cost is not being subsidized. This test has been met both for the issue traffic and for the cross-over traffic . . . .

Id. (emphasis added).

The Board did consider cross-subsidization of the issue traffic to be a legitimate concern, observing that "PPL's contention that non-issue traffic may be used to cross-subsidize the complaining shipper's rate is inconsistent with CMP principles." PPL MONTANA, LLC V. BURLINGTON N. & SANTA FE RY. CO., STB Docket No. 42054, Dec. No. 31155, 2002 WL 1905118, at *5 (Aug. 19, 2002) (Decision I). The Board explained that "PPL does not adequately distinguish between cost sharing (the grouping of traffic to share the joint and common, i.e., unattributable, costs of providing rail service), which GUIDELINES permits, and cross-subsidization (the recovery of a shipper's attributable costs from other shippers), which GUIDELINES proscribes." Id. (footnote omitted). While the Board rejected BNSF's alternative (i.e., an inquiry into whether the north-south traffic generated revenues in excess of SAC), id. at *5 & nn. 19-20, the Board determined the real issue was "whether there is a readily identifiable subset of traffic that would not cover the collective attributable costs associated with serving the traffic," id. at *5.

Thus, the Board conducted a threshold cross-subsidy inquiry to determine "whether the western leg of the [SARR] would earn sufficient revenues to cover its attributable costs or whether it would require a cross-subsidy in order to be viable over the 20-year analysis period." Id. The Board accepted "the majority of the evidence...