Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-12-01327/USCOURTS-caDC-12-01327-0/pdf.json

Parties Involved:
BNSF Railway Company
Petitioner
Basin Electric Power Cooperative, Inc.
Intervenor for Respondent
Surface Transportation Board
Respondent
United States of America
Respondent
Western Fuels Association, Inc.
Intervenor for Respondent

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 11, 2013 Decided January 31, 2014

No. 12-1327

BNSF RAILWAY COMPANY,

PETITIONER

v.

SURFACE TRANSPORTATION BOARD AND UNITED STATES OF 

AMERICA,

RESPONDENTS

BASIN ELECTRIC POWER COOPERATIVE, INC. AND WESTERN 

FUELS ASSOCIATION, INC.,

INTERVENORS

On Petition for Review of an Order

of the Surface Transportation Board

Richard P. Bress argued the cause for petitioner. With 

him on the briefs were Michael J. Gergen, Lori Alvino 

McGill, Paul T. Crane, Richard E. Weicher, Samuel M. Sipe,

Jr., and Anthony J. LaRocca. 

Erik G. Light, Attorney, Surface Transportation Board, 

argued the cause for respondents. With him on the brief were 

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William J. Baer, Assistant Attorney General, U.S. Department 

of Justice, Robert B. Nicholson and Nickolai G. Levin, 

Attorneys, Raymond A. Atkins, General Counsel, Surface 

Transportation Board at the time the brief was filed, and 

Craig M. Keats, Deputy General Counsel.

John H. LeSeur argued the cause for intervenors. With 

him on the brief were Christopher A. Mills and Peter A. Pfohl. 

Before: KAVANAUGH, Circuit Judge, and SENTELLE and 

RANDOLPH, Senior Circuit Judges.

Opinion for the Court filed by Senior Circuit Judge

SENTELLE.

Dissenting opinion filed by Senior Circuit Judge

RANDOLPH.

SENTELLE, Senior Circuit Judge: BNSF Railway 

Company (“BNSF”) petitions for review of the decision of the 

Surface Transportation Board (“Board”) to adhere to a 

revenue-allocation methodology known as Modified ATC in 

determining that the rates BNSF charged Western Fuels 

Association, Inc. and Basin Electric Power Cooperative, Inc. 

(collectively “WFA”) were unreasonably high. BNSF first 

challenged this Modified ATC methodology in this Court in

2009. In 2010 we remanded the case to the Board so that it 

could address one of BNSF’s objections to Modified ATC in 

the first instance. On remand, the Board concluded that 

portions of BNSF’s arbitrary and capricious challenge fell 

outside the scope of the case given the specificity of our 2010 

remand. This conclusion was in error. Because we never 

actually resolved BNSF’s arbitrary and capricious challenge 

to Modified ATC, we grant the petition, vacate the Board’s 

decision, and again remand the case to the Board.

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I. BACKGROUND

Until 2004, BNSF transported coal for WFA under a 

long-term contract. When the parties could not successfully 

negotiate a replacement contract, BNSF established a 

common carrier rate for WFA. Unsatisfied with this rate, 

WFA complained to the Board, alleging that the new rate was 

unreasonable. 

The Board employs a “Stand-Alone-Cost” (“SAC”) test

to determine whether a railroad’s rates are unreasonable. 

BNSF Ry. Co. v. STB, 526 F.3d 770, 776–77 (D.C. Cir. 2008). 

Under the SAC test, complainants design a hypothetical

optimally efficient stand-alone railroad (“SARR”) that serves 

a subset of movement in the railroad’s network, including the 

traffic to which the challenged rate applies. Id. at 777. The

SAC test then calculates what a railroad would charge if 

operating the SARR. Id. The SARR’s projected revenues are 

determined based on the real-world rates charged by the 

railroad servicing the traffic group included in the SAC 

presentation. This calculation is straightforward when 

complainants model the entire traffic group, but becomes 

more complex when SAC presentations include movements 

that travel a portion of their journey on the hypothetical 

SARR and a portion on actual railroads. Id. at 782. Such

“cross-over” traffic requires the Board to allocate revenue 

between the SARR and the real-world railroad. Id.

When WFA first complained, the Board apportioned 

cross-over traffic revenues based on the percentage of miles a 

shipper used the SARR, a method known as Modified 

Straight-Mileage Prorate (“MSP”). Though simple, MSP “did 

not take into account ‘economies of density’—the principle 

that the more traffic on a given stretch of rail, the lower the 

average cost (and hence the lower the cross-over-traffic 

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revenue that should be attributed to it).” Id. In February of 

2006—after WFA had submitted its SAC presentation—the 

Board held this matter in abeyance while it considered and 

ultimately adopted a new revenue allocation method called 

Average Total Cost (“ATC”). Under ATC, revenues are 

allocated to the hypothetical railroad based on the average 

total cost of a traffic pattern’s on-SARR movement. The 

Board explained that ATC successfully takes account of 

economies of density because it is centered on average total

costs rather than average variable costs. 

In September 2007, the Board concluded that WFA had 

failed to make its case. In reaching that conclusion, the Board 

discarded ATC—in its first chance to apply it—and applied a 

new methodology: Modified ATC. The Board adopted 

Modified ATC to address an “illogical and unintended result” 

of ATC. Under ATC, WFA’s traffic patterns had produced 

scenarios in which revenue generated by some movements 

would not cover the variable costs of those movements onSARR (“below-cost traffic”). To address this problem, 

Modified ATC proceeds in two steps. First, revenue is 

allocated to the on-SARR and off-SARR portions of a 

crossover movement to cover its respective variable costs. 

Second, remaining revenue is allocated between the SARR 

and defendant railroad in proportion to the relative average 

total costs of serving the on- and off-SARR segments. 

The Board allowed WFA to redesign its presentation in 

light of the changed rule. To best take advantage of Modified 

ATC, WFA reengineered its SARR, and all but eliminated

below-cost traffic patterns. After reviewing WFA’s revised 

presentation, the Board concluded that BNSF’s rates were 

unreasonably high and ordered $345 million in relief. 

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In 2009, BNSF petitioned this Court for review, 

challenging the Board’s decision on several grounds. As to 

Modified ATC, BNSF argued that the Board acted arbitrarily 

and capriciously by departing from ATC. BNSF argued that

Modified ATC double counts variable costs—first to cover 

variable costs, and then again as a component of total costs—

and thus fails to account for economies of density. BNSF Ry. 

Co. v. STB, 604 F.3d 602, 604 (D.C. Cir. 2010) (WFA I). 

Because the Board had not “specifically mention[ed] doublecounting” in earlier proceedings, we granted in part BNSF’s 

petitions in order to allow the Board on remand to address this 

objection, but otherwise denied the petitions. Id. at 613.

On remand, BNSF maintained that Modified ATC was an 

irrational response to the problem created by ATC. It 

advocated reversion to ATC, but also argued that even if the 

below-cost allocations under ATC were problematic, 

Modified ATC represented a disproportionate response to this 

problem. Thus BNSF suggested a different approach that 

would proportionately adjust ATC to address the problem it 

created. Under BNSF’s suggestion (“Alternative ATC”), the 

Board would first apply ATC to all movements with revenues 

exceeding variable costs. Then, for below-cost traffic, the 

Board would allocate additional revenues to eliminate the 

shortfall. 

A divided Board upheld its use of Modified ATC and

refused to consider BNSF’s proportionality critique, 

concluding that it fell outside the scope of our remand. It 

observed that we did not specifically direct the Board to 

address any proportionality problem with Modified ATC, or 

to consider Alternative ATC as a solution to this problem. At 

the same time, the Board recognized the merits of Alternative 

ATC, and noted that it would initiate a rulemaking to consider 

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whether Alternative ATC might in fact be a better allocation 

method than Modified ATC. 

The Board also considered placing this matter in 

abeyance again pending the rulemaking, but decided against it

for three reasons. First, the Board feared that so doing would 

incentivize litigants to propose theories late in litigation. 

Second, it found that the interests of administrative finality 

weighed in favor of ending the matter. Finally, the Board 

noted that applying yet another method to this case would 

prolong it even further since WFA would then be entitled to 

revise its SARR again.

After ruling on this case, the Board initiated rulemaking 

and ultimately adopted a version of Alternative ATC for 

future cases. See Rate Regulation Reforms, STB Ex Parte 

No. 715 (July 18, 2013), at 30.

BNSF petitioned this Court for review.

II. ANALYSIS

We review Board decisions under the Administrative 

Procedure Act, and 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). BNSF brings 

two principal challenges on appeal. First, it contends that the 

Board erred in refusing to address its proportionality 

argument below. Second, it contends that the Board should 

have held this matter in abeyance while it evaluated (and 

ultimately adopted) a form of Alternative ATC. We agree 

with BNSF’s first contention.

BNSF argues that the Board misconstrued our holding in 

WFA I. There, we remanded without addressing BNSF’s 

substantive challenges to Modified ATC. We summarized 

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BNSF’s argument that Modified ATC counts “variable costs 

. . . twice,” and therefore “fails appropriately to consider 

economies of density.” WFA I, 604 F.3d at 612. But because

the Board had not addressed BNSF’s double-counting

objection, we granted in part BNSF’s petitions so that the 

Board on remand could address this objection. Id. at 613. 

According to BNSF, because we did not address the arbitrary 

and capricious challenge to Modified ATC in WFA I, this 

challenge remained for the Board to address on remand.

The Board’s reasoning to the contrary is terse: “In 

remanding the case,” the Board noted, we “did not direct the 

Board to address either . . . the disproportionate-remedy 

argument [or] the proposed alternative ATC method.” And 

because we had not specifically directed the Board to address 

proportionality, the Board concluded that it could only 

address the issue by expanding the remand on its own 

initiative. It appears the Board understood WFA I as 

essentially approving its use of Modified ATC so long as the 

Board could furnish a satisfactory response to BNSF’s

double-counting objection. This conclusion was in error.

Our decision in WFA I neither explicitly nor implicitly 

ruled on BNSF’s substantive challenge to Modified ATC. We 

simply never reached the merits of BNSF’s arguments. 

Instead we returned the case to the Board so that it could

address the double-counting objection. This allowed the 

Board to justify Modified ATC as against BNSF’s objections 

in the first instance so that we could, if need be, later evaluate 

that justification. This instruction did nothing to insulate 

Modified ATC from any of the substantive charges BNSF

brought against it in WFA I. Thus the only question is 

whether BNSF’s proportionality argument was in fact 

preserved and presented in WFA I. See, e.g., W. Va. v. EPA, 

362 F.3d 861, 871–72 (D.C. Cir. 2004) (rejecting as forfeited 

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claims that “petitioners never raised . . . to the agency in the 

administrative proceedings . . . or in the earlier challenges in

this Court”).

The Board argues that BNSF forfeited its proportionality 

argument. First, the Board characterizes BNSF’s 

proportionality argument as fatally at odds with the doublecounting objections it presented in WFA I. Where BNSF’s 

double-counting objection embraces below-variable-cost 

allocations under ATC, the disproportionate argument starts 

from the opposite premise: such allocations are problematic. 

Thus, the Board concludes, the double-counting argument 

could not logically have encompassed the proportionality 

argument in WFA I, because the two flow from contradictory 

suppositions. We disagree.

There is no incompatibility between BNSF’s doublecounting and proportionality arguments. In fact, one flows 

logically from the other. Modified ATC only double counts 

variable costs with respect to cross-over traffic for which 

revenues exceed variable costs. For such movements, 

Modified ATC includes variable costs in its initial allocation 

and then again when allocating remaining revenues. The less 

below-cost traffic a complainant includes in its SARR, the

more irrational Modified ATC becomes. In other words, 

Modified ATC over-corrects the hypothetical problems 

created by ATC in cases such as this in which WFA has all 

but eliminated the traffic that produces the problem.

The Board also argues that BNSF forfeited its 

proportionality argument by failing to present it earlier. The

record belies this contention. BNSF has presented the basics 

of its proportionality argument throughout these proceedings. 

In its Petition for Reconsideration of the Board’s 2007 

Decision, BNSF argued that “even if the Board’s concern 

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about the effect of ATC on low rated traffic justified 

suspension of the average total cost approach on that traffic, 

there is no conceivable justification for applying the modified 

ATC methodology to all cross-over traffic.” Petition for 

Reconsideration at 3 (emphasis added). And BNSF noted that 

“for movements that generate [Revenue/Variable Cost] ratios 

well in excess of variable costs, there is no risk that ATC will 

allocate to the SARR less than the incumbent’s . . . variable 

costs.” Id. at 19. BNSF adjusted its argument when WFA 

changed its traffic group, but the point remained. The Board 

had justified its adherence to Modified ATC because “it was 

unwilling to apply a methodology that risked allocating 

revenues below the costs incurred by the SARR,” but “[w]ith 

that risk removed by the reformulated traffic group, there 

[was] no basis for continuing to apply a modified ATC 

methodology . . . .” BNSF’s Third Supplemental Reply 

Evidence at III.A-22 (July 14, 2008). 

BNSF preserved this argument in its petition in WFA I. 

In its opening brief, BNSF argued that the Board had failed to 

provide any reasoned “explanation for persisting to apply the 

Modified ATC approach after WFA had overhauled its case 

to eliminate all low-rated traffic.” The Board argued in 

response that WFA had not excluded all such movements—

apparently three remained—and thus the Board was justified 

in maintaining Modified ATC. BNSF’s point survived

nonetheless. “By . . . applying Modified ATC to the traffic 

WFA selected, the Board allocated to the SARR an 

unwarranted increase in revenue.” Though this challenge was 

not articulated in terms of “proportionality,” it represents the 

basics of BNSF’s argument on remand. And had we ruled on 

the merits of BNSF’s challenges in WFA I, we would have 

had to have approved the continued application of Modified 

ATC to WFA’s revised traffic group, both categorically, and 

as a proportionate response to the problems with ATC. We 

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never reached this argument in WFA I due to the remand, but 

it is and always has been inherent in BNSF’s double-counting 

critique.

In short, the Board erred in its failure to address BNSF’s 

proportionality challenge on remand. As we noted above, we 

review the Board’s decision under the “arbitrary and 

capricious” standard drawn from the Administrative 

Procedure Act. While it is a forgiving standard, it does not 

create a rubberstamp. We remind the Board on remand that 

the APA requires that it “examine the relevant data and 

articulate a satisfactory explanation for its action including a 

‘rational connection between the facts found and the choice 

made.’” Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm 

Mut. Auto Ins. Co., 463 U.S. 29, 43 (1983) (quoting 

Burlington Truck Lines Inc. v. United States, 371 U.S. 156, 

168 (1962)). We further remind the Board that “an agency’s 

‘failure to respond meaningfully’ to objections raised by a 

party renders its decision arbitrary and capricious.” PSEG 

Energy Resources & Trade LLC v. FERC, 665 F.3d 203, 208 

(D.C. Cir. 2011) (quoting Canadian Ass’n of Petroleum 

Producers v. FERC, 254 F.3d 289, 299 (D.C. Cir 2001) (other 

citations omitted)).

If it is true, as Petitioner asserts, that the Board has 

adopted an alternative revenue allocation method applicable 

to all future cases, we would expect its opinion to advise why 

that method is not equally applicable to this case. While we 

do not suggest that all such changes must be made

retroactively, we must at least know that the Board has

exercised reason, not arbitrariness and capriciousness, in 

treating this Petitioner differently.

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III. CONCLUSION

For the reasons set forth above, we grant the petition, 

vacate the order, and remand the matter to the Surface 

Transportation Board for further proceedings consistent with 

this opinion.

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RANDOLPH, Senior Circuit Judge, dissenting: I would deny

the petition for review. 

The last time BNSF Railway Company petitioned for

judicial review in this matter, our court remanded the case to the

Surface Transportation Board. We disposed of BNSF’s

petitions in these words: “Accordingly, we grant the petitions in

part, so that the Board on remand can address BNSF’s doublecounting objection to modified ATC, and we otherwise deny the

petitions.” BNSF Ry. Co. v. Surface Transp. Bd., 604 F.3d 602,

613 (D.C. Cir. 2010). Anyone reading this sentence would think

the court was remanding the case for the Board to perform one

function, and one function only—rule on BNSF’s doublecounting objection. “[W]e otherwise deny the petitions” can

only mean that the court was rejecting the other arguments

BNSF made in its petitions. Yet the majority tells us that the

opinion’s closing paragraph opened the door to allow BNSF to

raise a host of new objections to Modified ATC. Maj. Op. at 7-

8. With respect, I think that is mistaken.

The language of disposition, usually found at the end of a

judicial opinion, should be clear enough that the parties do not

have to guess about what the court has decided. In this case, if

the court had remanded to the Board to consider or reconsider

several issues one would have expected the court to have said

so. That is, if the court had wanted the Board to address BNSF’s

other substantive arguments it would have specified them, as the

court did for example in Somerset Welding & Steel, Inc. v.

National Labor Relations Board, 987 F.2d 777, 782 (D.C. Cir.

1993). I admit that we are sometimes less precise, as when we

remand for “proceedings consistent with [our] opinion,” see,

e.g., City of Cleveland v. Fed. Power Comm’n, 525 F.2d 845,

857 (D.C. Cir. 1976), disapproved on other grounds, Ark. La.

Gas Co. v. Hall, 453 U.S. 571 (1981), or when we direct the

agency to address “first” a particular issue, which implies that

the agency may also consider other issues, see, e.g., John Cuneo,

Inc. v. Nat’l Labor Relations Bd., 792 F.2d 1181, 1184 (D.C.

USCA Case #12-1327 Document #1477714 Filed: 01/31/2014 Page 12 of 14
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Cir. 1986). But there was no imprecision here—the court

remanded to the Board for it to “address” one argument, and

otherwise denied the petitions. The Board was therefore given

a “narrow task.” Wash. Gas Light Co. v. Fed. Energy

Regulatory Comm’n, 603 F.3d 55, 56 (D.C. Cir. 2010). The

Board fully complied when, on remand, it addressed and

rejected BNSF’s double-counting objection. W. Fuels Ass’n, Inc.

v. BNSF Ry. Co., Dkt. No. NOR 42088, 2012 WL 2194142, at

*9-10 (Surface Transp. Bd. June 13, 2012) (decision). BNSF

now barely challenges that ruling.

Even if the limited remand order required the Board to

address more than double-counting I would still deny the

petition for review. BNSF forfeited its current slate of arguments

when it failed to raise them in its previous petitions for review.

See Nw. Ind. Tel. Co., Inc. v. FCC, 872 F.2d 465, 470-71 (D.C.

Cir. 1989). The Board therefore had the discretion to decline to

evaluate BNSF’s newly-minted arguments or to hold them to the

statutory reopening standard. 

The majority nowhere shows where or when BNSF had

raised its Alternative ATC proposal before the proceedings on

remand. Nothing in BNSF’s previous petitions for review even

hints at the Alternative ATC approach. Instead, the majority

points to BNSF’s argument that Modified ATC became

unnecessary once Western Fuels eliminated low-rated traffic

from its model. Maj. Op. at 9-10. That might be called a

proportionality argument of sorts, but it is not the same one

BNSF raises here. BNSF’s earlier argument would allocate

revenue differently depending on the traffic selection in a

shipper’s model. BNSF now suggests, for all models, that there

is a revenue allocation method that better balances the Board’s

competing concerns. By changing the object of comparison,

BNSF created an altogether new argument because the Board’s

decisions about revenue allocation rise or fall with the quality of

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the suggested alternative. See BNSF Ry. Co. v. Surface Transp.

Bd., 453 F.3d 473, 483-84 (D.C. Cir. 2006).

I also believe the Board acted within its discretion when it

declined to hold the case in abeyance. Maj. Op. at 6. I have

serious doubts whether an agency’s decision to hold a case in

abeyance is even judicially reviewable. Such docketmanagement choices are the sort of discretionary “decision[s] to

structure the proceedings” that are left in the agency’s hands.

See Vt. Yankee Nuclear Power Corp. v. Natural Res. Def.

Council, 435 U.S. 519, 543-47 (1978). And even if an abeyance

decision is reviewable, I would sustain the Board’s decision.

The Board was sensibly concerned with rising litigation costs

and the need for finality. These concerns would grow even more

pressing if this decades-old case dragged on.

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