Union Pac. R. Co. v. Surface Transp. Bd.

• Decision Date: 28 December 2010
• Docket Number: No. 10-1019,10-1019
• Citation: 628 F.3d 597,393 U.S.App.D.C. 369
• Parties: UNION PACIFIC RAILROAD COMPANY, Petitioner v. SURFACE TRANSPORTATION BOARD and United States of America, Respondents. US Magnesium, LLC, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

628 F.3d 597 393 U.S.App.D.C. 369 UNION PACIFIC RAILROAD COMPANY, Petitioner v. SURFACE TRANSPORTATION BOARD and United States of America, Respondents. US Magnesium, LLC, Intervenor. No. 10-1019. United States Court of Appeals, District of Columbia Circuit. Argued Oct. 21, 2010. Decided Dec. 28, 2010.

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

Jonathan Marcus argued the cause for petitioner. With him on the briefs were J. Michael Hemmer, Louise A. Rinn, and Michael L. Rosenthal.

James A. Read, Attorney, Surface Transportation Board, argued the cause for respondent. With him on the brief were Robert B. Nicholson and John P. Fonte, Attorneys, U.S. Department of Justice, Craig M. Keats, Deputy General Counsel, Surface Transportation Board, and J. Frederick Miller, Jr., Attorney. Ellen D. Hanson, General Counsel, entered an appearance.

Thomas W. Wilcox and David K. Monroe were on the brief for intervenor U.S. Magnesium, L.L.C. in support of respondent.

Before: GRIFFITH and KAVANAUGH, Circuit Judges, and EDWARDS, Senior Circuit Judge.

Opinion for the court filed by Senior Circuit Judge EDWARDS.

EDWARDS, Senior Circuit Judge.

US Magnesium, L.L.C. ("USM") operates a magnesium production facility in Rowley, Utah, and relies on the Union Pacific Railroad Company ("UP") to ship its chlorine co-product from Rowley to two receiving facilities in Arizona. In May 2009, USM filed a complaint before the Surface Transportation Board ("STB" or the "Board"), arguing that UP's rates for the two chlorine shipments, also called "movements," were unreasonably high. USM opted to bring its challenge under the Three Benchmark framework set forth in Simplified Standards for Rail Rate Cases, STB Ex Parte No. 646 (Sub-No. 1), 2007 WL 2493509 (STB served Sept. 5, 2007), aff'd sub nom. CSX Transp., Inc. v. STB, 568 F.3d 236 (D.C.Cir.2009), vacated in part on other grounds on reh'g, 584 F.3d 1076 (D.C.Cir.2009). Under this framework, both the shipper and the rail carrier submit groups of comparison rates (or "offers") for the movements in question, from which the Board makes an "either/or" choice, with no modifications allowed once the final submissions have been made. In January 2010, after oral arguments and the submission of opening evidence, reply evidence, and rebuttal evidence from both parties, the Board selected USM's comparison rate groups. Using the USM groups, the Board found UP's rates for the two chlorine movements to be unreasonable. US Magnesium, L.L.C. v. Union Pac. R.R., STB Docket No. 42114, 2010 WL 319727 (STB served Jan. 28, 2010) (" STB Decision "), reprinted in Joint Appendix ("J.A.") 823-47. UP now petitions for review of the Board's decision, arguing that the Board's selection of USM's comparison rate groups was arbitrary and capricious and seeking vacatur of the judgment and remand for a re-application of the Three Benchmark framework using UP's proffered comparison rate group.

We find no grounds to reverse the Board's decision, particularly given the deference owed to the Board in rate-making disputes. Under the Three Benchmark framework, the Board was obliged to choose between two positions, neither of which was ideal. USM's comparison rate groups were problematic, because they were primarily comprised of anhydrous ammonia shipments. UP's comparison rate group was flawed, because it includedan unduly heavy sample of rebilled traffic. However, based on the quantitative data and the residual differences between the comparison rate groups, the Board determined that USM's submission was more representative of the ideal comparison group—namely, single-line chlorine traffic. Because the Board's decision "articulated a rational connection between the facts found and the decision made," N. Am. Freight Car Ass'n v. STB, 529 F.3d 1166, 1170-71 (D.C.Cir.2008) (quoting PPL Mont., LLC v. STB, 437 F.3d 1240, 1245 (D.C.Cir.2006) (internal quotation marks omitted)), we deny the petition for review.

I. Background

A. The Three Benchmark Framework for Rate Reasonableness

By statute, rail carriers are authorized to engage in a certain amount of demand-based differential pricing in order to earn "adequate revenues," 49 U.S.C. § 10701(d)(2), whereby "captive" shippers who are more dependent on rail service due to the lack of transportation alternatives may be charged a higher markup as compared to "competitive" shippers who are free to pursue lower-cost transportation options. See BNSF Ry. v. STB, 526 F.3d 770, 776 (D.C.Cir.2008) (noting that rail carriers would lose revenue if they imposed a strict pro rata share of the joint and common costs to each shipper regardless of the shipper's degree of captivity). However, in order to protect captive shippers from shouldering an unconscionable share of carriers' general operations costs, Congress has provided that, in situations when "a rail carrier has market dominance over the transportation to which a particular rate applies, the rate established by such carrier for such transportation must be reasonable." 49 U.S.C. § 10701(d)(1). In reviewing rate challenges, the Board must therefore consider whether carriers are maximizing revenue from competitive shippers, id. § 10701(d)(2)(B), and whether "one commodity is paying an unreasonable share of the carrier's overall revenues," id. § 10701(d)(2)(C).

Mindful of the high litigation costs associated with full stand-alone cost ("SAC") presentations in cases involving rate challenges, Congress instructed the Board to "establish 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." Id. § 10701(d)(3); see also Simplified Standards at 5 (commenting that recent full-SAC presentations had incurred nearly $5 million in litigation expenses and that even simplified-SAC presentations could run to a cost of $1 million). Pursuant to this congressional mandate, the Board adopted the Three Benchmark framework, a relatively straightforward, "final offer" methodology that measures the reasonableness of a rate by comparing the revenue-over-variable cost ("R/VC") ratio of the challenged rate to the R/VC ratios of a comparison group of similar movements. The challenged rate is held presumptively unreasonable if it has a higher R/VC ratio than the calculated upper boundary of the comparison group. See Simplified Standards at 21-22 & n. 30 (explaining that the upper boundary is the 90 percent confidence interval from a one-sided hypothesis test constructed around the mean of the comparison group).

The Three Benchmark framework allows both the rail carrier and the challenging shipper to submit a comparison rate group, with the only requirement being that all movements included must be "captive movements." Id. at 17 (explaining that a captive movement is defined as a movement with a R/VC ratio greater than 180 percent, meaning that the revenueproduced from shipping the movement was enough to cover 100 percent of the variable costs and still left a surplus in the amount of 80 percent of the variable costs to be applied towards the rail carrier's joint and common costs). The movements are drawn from an unmasked sample of a carrier's Waybill data—a comprehensive database that includes detailed information on all of the movements shipped by a rail carrier, including origin and destination points, type of commodity shipped, tonnage shipped, and revenue. There are multiple rounds of revisions, during which each party is given an opportunity to adjust its proposed comparison rate group. After the parties submit their final offers, the Board then selects the comparison rate group that is "most similar in the aggregate to the [challenged] movement[ ]." Id. at 18.

In making its selection, the Board considers "a variety of factors, such as length of movement, commodity type, traffic densities of the likely routes involved, and demand elasticity." Id. at 17. While "movements with different cost characteristics may be included in the comparison group," the Board "will favor a comparison group that consists of movements of like commodities." Id. To encourage both parties to offer competitive and reasonable comparison groups, the Board's selection is an "either/or" choice between the parties' final offers, with no modifications allowed. Id. at 18.

After a comparison rate group is selected, the R/VC ratio of each movement in that chosen group is then multiplied by the carrier's "revenue need adjustment factor," a figure that serves to "reflect demand-based differential pricing principles." STB Decision at 12-13, J.A. 834-35. If the challenged rate's R/VC ratio is greater than the upper boundary of the adjusted comparison group, the rate will be presumed unreasonable. Since the revenue need adjustment factor is derived from static figures published annually by the Board, the Three Benchmark framework's reasonableness determination generally turns on the Board's selection of a comparison group. The shipper bringing the rate challenge will naturally have an economic incentive to pick movements with low R/VC ratios while the rail carrier defending the reasonableness of the rate will have an equal incentive to pick comparison movements with high R/VC ratios. Although the Board recognizes that the Three Benchmark framework has some inherent limitations, neither party challenges the validity of the framework itself in this case.

B. Factual History and Proceedings Before the Board

USM operates the nation's only primary magnesium production facility in Rowley, Utah, and generates chlorine as a co-product of the magnesium production process. Due to chlorine's status as a toxic inhalation hazard ("TIH"), USM relies on UP to transport the chlorine as liquefied compressed gas by rail service to two receiving facilities in Eloy and Sahuarita, Arizona. In March 2009, USM began shipping its chlorine under UP's common...