Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-12-01046/USCOURTS-caDC-12-01046-0/pdf.json

Parties Involved:
Surface Transportation Board
Respondent
Union Pacific Railroad Company
Petitioner
United States of America
Respondent

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 6, 2013 Decided May 23, 2014 

No. 12-1042 

BNSF RAILWAY COMPANY, 

PETITIONER

v. 

SURFACE TRANSPORTATION BOARD AND UNITED STATES OF 

AMERICA, 

RESPONDENTS

ARIZONA ELECTRIC POWER COOPERATIVE, INC., 

INTERVENOR

Consolidated with 12-1045, 12-1046, 12-1246 

On Petitions for Review of Final Orders of the 

Surface Transportation Board 

Michael L. Rosenthal argued the cause for petitioners 

BNSF Railway Company and Union Pacific Railroad 

Company. With him on the briefs were Carolyn F. Corwin, 

Henry B. Liu, Gayla L. Thal, Louise A. Rinn, Danielle E. 

Bode, Samuel M. Sipe, Jr., Anthony J. LaRocca, Linda S. 

Stein, Richard E. Weicher, and Jill K. Mulligan. 

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Robert D. Rosenberg argued the cause for petitioner 

Arizona Electric Power Cooperative, Inc. With him on the 

briefs were William L. Slover, Christopher A. Mills, and 

Daniel M. Jaffe. 

James A. Read, Attorney, Surface Transportation Board, 

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

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

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

Attorneys, Raymond A. Atkins, General Counsel at the time 

the brief was filed, Surface Transportation Board, and Craig 

M. Keats, Deputy General Counsel. John P. Fonte, Attorney, 

entered an appearance. 

Carolyn F. Corwin, Michael L. Rosenthal, Henry B. Liu, 

Gayla L. Thal, Louise A. Rinn, Danielle E. Bode, Samuel M. 

Sipe, Jr., Anthony J. LaRocca, Linda S. Stein, Richard E. 

Weicher, and Jill K. Mulligan were on the brief for 

intervenors BNSF Railway Company and Union Pacific 

Railroad Company. 

William L. Slover, Robert D. Rosenberg, Christopher A. 

Mills, and Daniel M. Jaffe were on the brief for intervenor 

Arizona Electric Power Cooperative, Inc. 

Before: TATEL and KAVANAUGH, Circuit Judges, and 

WILLIAMS, Senior Circuit Judge. 

Opinion for the Court filed by Circuit Judge

KAVANAUGH. 

KAVANAUGH, Circuit Judge: Congress has directed an 

independent agency, the Surface Transportation Board, to 

ensure that railroads with market dominance charge 

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reasonable rates to shippers. To assess whether a dominant 

railroad’s rate is reasonable, the Board employs a 

sophisticated methodology derived from economic principles. 

If the Board determines that the current rate is not reasonable, 

the Board sets the maximum rate that the railroad may charge. 

In setting the maximum rate in such cases, the Board relies on 

a formula that ensures that the railroad can still receive a 

reasonable rate of return. 

In this case, the Board addressed a rate dispute between a 

shipper and two railroads. In cross-petitions coming from 

their contrary perspectives, the shipper and the railroads 

separately challenge the Board’s decision. The railroads 

contend that the Board’s decision was too favorable to the 

shipper. The shipper contends that the Board’s decision was 

too favorable to the railroads. We deny the petitions for 

review. 

I 

The Surface Transportation Board, an independent 

federal agency, regulates the rates charged by interstate 

railroads. See 49 U.S.C. § 10501. Under federal law, a 

shipper may file a complaint with the Board challenging as 

unreasonable the rate that is “charged or collected” by a 

railroad for “transportation” of the shipper’s goods. Id.

§ 10704(a)(1); see id. §§ 10704(b), 11701(b). 

After receiving a complaint, the Board first determines 

whether it has authority over the challenged rate. 

As relevant here, the Board has authority to review a 

railroad’s rate only if the complaining shipper is “captive” to 

the railroad. See id. §§ 10701(d)(1), 10707(b)-(c). A shipper 

is captive if a railroad has “market dominance” over the 

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transportation of the shipper’s freight; that is, if there is “an 

absence of effective competition from other rail carriers or 

modes of transportation for [that] transportation.” Id. 

§ 10707(a). 

The Board has devised the Stand-Alone-Cost test to 

ensure that railroads charge captive shippers reasonable rates. 

See Coal Rate Guidelines, Nationwide, 1 I.C.C.2d 520, 542-

46 (1985), affirmed sub nom. Consolidated Rail Corp. v. 

United States, 812 F.2d 1444 (3d Cir. 1987). That test 

“ensures that a captive shipper does not pay for services that 

provide it no benefits – in other words, that it does not crosssubsidize other shippers.” BNSF Railway Co. v. STB, 526 

F.3d 770, 776-77 (D.C. Cir. 2008). The ultimate aim of the 

Stand-Alone-Cost test is to require that “railroads functioning 

in a noncompetitive market . . . price as if alternatives to their 

services were available” to the captive shipper. Coal Rate 

Guidelines, 1 I.C.C.2d at 542. 

To achieve that aim, the Board allows the complaining 

captive shipper to propose a hypothetical railroad that the 

shipper could use as an alternative source of transportation. 

See BNSF Railway Co., 526 F.3d at 777. That hypothetical 

railroad is called a Stand-Alone Railroad and is designed to be 

optimally efficient. See id.

In order to simulate a competitive market for the captive 

shipper’s business, the complaining shipper may construct the 

hypothetical Stand-Alone Railroad as if there were no barriers 

to entry or exit in the railroad industry. See PPL Montana, 

LLC v. STB, 437 F.3d 1240, 1242 (D.C. Cir. 2006). For 

example, to simulate the absence of entry barriers, the 

hypothetical Stand-Alone Railroad can be constructed using 

track that has not been laid in reality and facilities that do not 

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exist in reality. See Coal Rate Guidelines, 1 I.C.C.2d at 543. 

Or it could traverse a circuitous route of existing track in 

order to take advantage of higher density traffic on certain 

segments. The hypothetical Stand-Alone Railroad does not 

even have to be a railroad at all, if a pipeline or other 

alternative form of transportation would be more efficient. 

See id. & nn.60-61. The Board requires only that the 

complaining shipper explain and justify the elements of the 

hypothetical Stand-Alone Railroad. See id. at 543-44. 

Ordinarily, the Board considers the rate that the 

hypothetical Stand-Alone Railroad would charge the 

complaining shipper in a competitive market to be the 

maximum rate that the actual railroad may reasonably charge. 

The theory is that the rate of the hypothetical Stand-Alone 

Railroad represents the rate that the actual railroad would 

charge if the industry were competitive. But under the statute, 

the Board may not set a maximum rate that results in revenues 

of less than 180 percent of the actual railroad’s variable costs. 

See 49 U.S.C. § 10707(d)(1)(A). So the Board will not 

require that a railroad charge less than that threshold. See 

Burlington Northern Railroad Co. v. STB, 114 F.3d 206, 210 

(D.C. Cir. 1997). Thus, if the rate deemed reasonable under 

the Stand-Alone-Cost methodology would result in actual 

revenues of less than 180 percent of the actual railroad’s 

variable costs, the Board will set the maximum reasonable 

rate to be a rate resulting in revenues equal to 180 percent of 

the actual railroad’s variable costs. 

This case involves Arizona Electric Power Cooperative, 

Inc., which supplies its power plant near Cochise, Arizona, 

with coal brought from mines in New Mexico, Wyoming, and 

Montana. Two railroads transport coal from the mines to 

Arizona Electric’s plant: Burlington Northern Santa Fe 

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Railway Company and Union Pacific Railroad Company. 

Depending on the origin of the coal, Burlington Northern 

transports it to either Deming, New Mexico, or Pueblo, 

Colorado. Burlington Northern contracts with a smaller, 

short-line railroad, Southwest Railroad, to transport the coal 

part of the way to Deming over track owned by Burlington 

Northern. From Deming and Pueblo, Union Pacific transports 

the coal to Arizona Electric’s power plant in Arizona. 

Because the railroads transfer responsibility for Arizona 

Electric’s coal at Deming and Pueblo, those two cities are 

known as the “interchange locations” for the routes taken by 

that coal. 

Under the statute, a route where two railroads must carry 

the shipment to get from origin to destination is known as a 

“through route.” On a through route, as relevant here, the 

railroads typically either together charge a single “joint rate” 

or individually charge “proportional rates.” See, e.g., Western 

Resources, Inc. v. STB, 109 F.3d 782, 789 (D.C. Cir. 1997). 

In 2008, Arizona Electric challenged the reasonableness 

of the joint rates charged by Burlington Northern and Union 

Pacific for transportation of Arizona Electric’s coal over these 

through routes. To demonstrate that the rates charged were 

unreasonably high, Arizona Electric submitted into evidence a 

proposed hypothetical Stand-Alone Railroad. Arizona 

Electric’s proposed hypothetical Stand-Alone Railroad did not 

use Deming and Pueblo as its interchange locations. The 

Board accepted Arizona Electric’s hypothetical Stand-Alone 

Railroad. 

Relying on that hypothetical Stand-Alone Railroad, the 

Board concluded that the railroads’ joint rates were 

unreasonable. The Board then prescribed the maximum rates 

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that the railroads could charge for the service provided to 

Arizona Electric. Those rates ordinarily would be equivalent 

to the rates charged by the hypothetical Stand-Alone Railroad. 

But the Board concluded that the hypothetical Stand-Alone 

Railroad’s rates would result in revenue that is less than 180 

percent of Burlington Northern and Union Pacific’s actual 

variable costs in providing service to Arizona Electric, which 

is the statutory floor in these circumstances. See 49 U.S.C. 

§ 10707(d)(1)(A). The Board therefore prescribed maximum 

rates that would provide revenue equal to 180 percent of the 

railroads’ variable costs. 

In this Court, the railroads argue that their prior rates 

were not unreasonable. For its part, Arizona Electric argues 

that the Board correctly determined that the railroads’ prior 

rates were unreasonably high, but it contends that the Board’s 

remedy was flawed because the Board prescribed rates that 

were still too high. 

This Court reviews the Board’s authoritative statutory 

interpretations under the Chevron framework. See Village of 

Barrington v. STB, 636 F.3d 650, 658-60 (D.C. Cir. 2011). 

We must uphold the Board’s interpretation if it is dictated by 

statute or is a reasonable interpretation of an ambiguity or gap 

in the statute. To review the Board’s exercise of its statutory 

discretion, the Court applies the Administrative Procedure 

Act’s arbitrary and capricious standard of review. See 5 

U.S.C. § 706(2)(A); Manufacturers Railway Co. v. STB, 676 

F.3d 1094, 1096 (D.C. Cir. 2012). “[T]he APA requires that 

an agency’s exercise of its statutory authority be reasonable 

and reasonably explained.” Manufacturers Railway Co., 676 

F.3d at 1096.

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II 

We first address the railroads’ argument that their prior 

rates were reasonable and that the Board erred in concluding 

otherwise. 

The Board’s unreasonableness determination was based 

on a hypothetical Stand-Alone Railroad that used interchange 

locations different from those actually used by the railroads 

when they haul Arizona Electric’s coal. The railroads argue 

that the hypothetical Stand-Alone Railroad should have used 

the railroads’ actual interchange locations. The railroads 

contend that the Board would have found the existing rates 

reasonable if the Board used a hypothetical Stand-Alone 

Railroad with the railroads’ actual interchange locations. 

In considering the railroads’ argument, we start with the 

statutory text. In determining the reasonableness of a rate, the 

Board assesses the rate actually “charged or collected” by the 

railroad. 49 U.S.C. § 10704(a)(1). Section 10701(d)(2) of 

Title 49 in turn outlines three broad factors that the Board 

should consider when assessing the reasonableness of the rate: 

(A) the amount of traffic which is transported at revenues 

which do not contribute to going concern value and the 

efforts made to minimize such traffic; 

(B) the amount of traffic which contributes only 

marginally to fixed costs and the extent to which, if any, 

rates on such traffic can be changed to maximize the 

revenues from such traffic; and 

(C) the carrier’s mix of rail traffic to determine whether 

one commodity is paying an unreasonable share of the 

carrier’s overall revenues. 

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Id. § 10701(d)(2). Under the statute, the Board is not limited 

to those three factors when determining the reasonableness of 

a rate. 

To help account for those three broad reasonableness 

factors and to determine reasonableness, the Board has used a 

Stand-Alone-Cost test that employs a hypothetical StandAlone Railroad that is optimally efficient. The rate that the 

hypothetical Stand-Alone Railroad would charge is generally 

considered the maximum reasonable rate because it represents 

what the actual railroad would charge if the railroad industry 

were competitive. See Coal Rate Guidelines, Nationwide, 1 

I.C.C.2d 520, 542 (1985), affirmed sub nom. Consolidated 

Rail Corp. v. United States, 812 F.2d 1444 (3d Cir. 1987). 

The statute does not dictate how the hypothetical StandAlone Railroad may be constructed. Importantly, under 

longstanding Board rules and precedent, the hypothetical 

Stand-Alone Railroad need not follow the same route used by 

the actual railroad. See id. at 542-46 & nn.60-61. Indeed, in 

practice, the hypothetical railroad almost never reproduces the 

operations of the existing real-world carrier. Rather, it 

typically operates over hypothetical routes. 

The one wrinkle here, according to the railroads, is that 

this case involves “through routes.” Those are routes where 

two or more railroads are needed to move the traffic from the 

origin to the ultimate destination. The traffic goes “through” 

an interchange location where the two railroads connect. See 

49 U.S.C. § 10703. Often, and as is true in this case, the 

railroads will charge a single “joint rate” to the shipper for a 

through route. 

In a case like this that involves a “through route,” the 

railroads argue that the hypothetical Stand-Alone Railroad 

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must use the actual interchange locations used by the actual 

railroads, even when the railroads charge and collect a single 

joint rate from the shipper. In other words, the railroads want 

to make the hypothetical Stand-Alone Railroad less 

hypothetical. But Congress did not unambiguously mandate 

that the reasonableness inquiry for through routes focus on the 

reasonableness of the rates for the constituent segments rather 

than the reasonableness of the rates for the route as a whole. 

See Western Resources, Inc. v. STB, 109 F.3d 782, 789 (D.C. 

Cir. 1997) (“Shippers[,] . . . if charged either a joint or 

proportional rate, must challenge the rate for the entire

through movement; they cannot challenge individual 

segments.”). Nor has Congress mandated that the 

hypothetical Stand-Alone Railroad in a through route case use 

the same interchange locations as the actual railroads. As the 

Board reasonably explained in this case, the hypothetical 

Stand-Alone Railroad in a through route case is logically and 

legally no different from the hypothetical Stand-Alone 

Railroad in an ordinary single-railroad case. In neither 

situation, the Board reasoned, must the hypothetical StandAlone Railroad use the same route that is used by the actual 

railroads. 

The railroads point to Section 10703 of Title 49, which 

states, as relevant here, that railroads “shall establish through 

routes (including physical connections) with each other.” 49 

U.S.C. § 10703. The railroads focus on the phrase “including 

physical connections.” That phrase requires railroads to 

establish physical connections with one another on through 

routes. But the Board could reasonably conclude that Section 

10703 does not tell the Board how to assess the 

reasonableness of a rate on a through route. And the Board 

likewise could reasonably conclude that Section 10703 does 

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not say how the hypothetical Stand-Alone Railroad should be 

constructed in a through route case.1

Contrary to the railroads’ argument, moreover, the statute 

does not distinguish joint rates from other rates for purposes 

of the Board’s reasonableness determination. On the 

contrary, as the Board explained in its decision here, the 

relevant legislative history states that “the rate standard for 

the reasonableness of joint rates shall be the same as for all 

rates.” H.R. REP. NO. 96-1430, at 90 (1980) (Conf. Rep.), 

reprinted in 1980 U.S.C.C.A.N. 4110, 4121. That history 

supports the Board’s conclusion that the hypothetical StandAlone Railroad in joint rate cases, like the hypothetical Stand-

 1

 The railroads argue that regardless of the merit of their 

Section 10703 point, the Board failed to respond to it. We disagree. 

The Board explained that the statutory scheme treats interchange 

locations no differently from other features of railroad 

“transportation.” See 49 U.S.C. § 10102(9) (defining 

“transportation” as including the facilities and equipment of a 

railroad); id. § 10704(a)(1) (allowing shippers to challenge the 

reasonableness of rates “charged or collected by a rail carrier for 

transportation”). Under the Board’s interpretation, the interchange 

locations of the actual railroads do not constrain the flexibility 

shippers generally enjoy when designing the hypothetical StandAlone Railroad any more than do the facilities or equipment of the 

actual railroads. In the course of rejecting the railroads’ arguments 

on interchange locations, the Board thus at least implicitly rejected 

the railroads’ Section 10703 point. We grant significant deference 

to the Board’s determinations of the reasonableness of a rate, and 

we can “uphold a decision of less than ideal clarity if the agency’s 

path may reasonably be discerned.” FCC v. Fox Television 

Stations, Inc., 556 U.S. 502, 513-14 (2009) (internal quotation 

marks omitted). We conclude that the Board adequately addressed 

the railroads’ Section 10703 point. 

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Alone Railroad in single-railroad cases, need not follow the 

actual route used by the railroads. 

The necessary implication of the railroads’ argument is 

that a joint rate (for a route from A to C) must be divided into 

two rates (between A and B and between B and C), each of 

which must be assessed for reasonableness. Congress has not 

said as much. And that argument overlooks the unity of joint 

rates, a principle that the Board and the courts have long 

recognized. See generally Great Northern Railway Co. v. 

Sullivan, 294 U.S. 458 (1935). As the Board stated here, “for 

practical purposes, when carriers elect to offer a through rate, 

they are treated as a single legal entity.” Arizona Electric 

Power Cooperative, Inc. v. BNSF Railway Co., 2011 WL 

5872084, at *12 (STB served Nov. 22, 2011). So the Board 

concluded that “the reasonableness of the joint rates charged 

and collected is in this case properly being judged against a 

simulated competitive price of a single hypothetical” StandAlone Railroad. Id. at *14 (emphasis omitted) (internal 

quotation marks omitted). 

In short, the railroads concede that the hypothetical 

Stand-Alone Railroad ordinarily may travel any route 

between the freight’s origin and destination. The railroads 

offer no persuasive reason why the same principle should not 

govern when the Board evaluates a unitary joint rate charged 

by multiple railroads on a through route. 

We conclude that the Board’s interpretation and 

application of the statute on this issue were at least 

reasonable, and also were reasonably explained. 

 

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III 

From the other direction, Arizona Electric argues that the 

Board correctly determined that the railroads’ prior rates were 

unreasonably high, but that the Board’s remedy did not 

suffice because the Board prescribed maximum rates that 

were still too high. 

Recall that the Board may not set a maximum rate that 

results in revenues of less than 180 percent of the actual 

railroads’ variable costs, as required by statute. See 49 U.S.C. 

§ 10707(d)(1)(A). (The railroads’ variable costs are the costs 

that vary depending on the volume of traffic, such as the cost 

of fuel.) The dispute here turns on what those variable costs 

were for the railroads. 

Pursuant to statute, the Board calculates variable costs 

using a methodology called the Uniform Rail Costing System. 

See id. § 10707(d)(1)(B); BNSF Railway Co. v. STB, 526 F.3d 

770, 774-75 (D.C. Cir. 2008). The system receives numerous 

inputs about the characteristics of the transportation at issue 

and computes the variable cost for that transportation based 

on average costs associated with each characteristic. See 

BNSF Railway Co., 526 F.3d at 774-75.

Burlington Northern leases a portion of its line to 

Southwest Railroad. Pursuant to the lease, Southwest 

Railroad carries Arizona Electric’s coal over a short distance. 

When calculating the variable costs of that portion of the 

route, the Board inputted Southwest Railroad as the relevant 

railroad. Arizona Electric argues that the Board instead 

should have inputted Burlington Northern and, had it done so, 

would have found lower variable costs for the railroads and 

thus would have further reduced the maximum rates that the 

railroads could charge Arizona Electric. 

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When inputting Southwest Railroad, the Board relied on 

its prior decision in Kansas City Power & Light Co. v. Union 

Pacific Railroad Co., 2008 WL 2091413 (STB served May 

19, 2008). In Kansas City Power, the Board decided that 

when one railroad moves a shipper’s freight over lines leased 

from another railroad, the railroad that actually moves the 

shipper’s freight must be inputted as the relevant railroad for 

purposes of the Uniform Rail Costing System. See id. at *5-6. 

As the Board explained in its decision in this case, the Kansas 

City Power rule ensures that the Uniform Rail Costing System 

output reflects reality: that even when a shipment occurs over 

lines owned exclusively by one railroad, there may be costs 

associated with moving the shipper’s freight between 

railroads operating on those lines. Basing the cost 

determination on an assumption that only one railroad was 

moving the freight would in some cases inaccurately reflect 

the railroad’s actual costs. Here, Southwest Railroad actually 

moved Arizona Electric’s freight over the relevant portion of 

the route. Following Kansas City Power, the Board thus 

inputted Southwest Railroad into the Uniform Rail Costing 

System to reflect the real-world operation of the railroads 

carrying Arizona Electric’s coal. 

Put simply, Arizona Electric has not demonstrated that 

the Board’s reasoning in Kansas City Power is unreasonable 

or contrary to statute, or that the Board unreasonably applied 

Kansas City Power to the facts here. We conclude that the 

Board’s calculation of the railroads’ variable costs was 

reasonable and reasonably explained. 

IV 

After the Board’s decision, the railroads switched from 

joint to proportional rates. In response to a complaint from 

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Arizona Electric that the switch would lead to over-charging, 

the Board denied relief. See Arizona Electric Power 

Cooperative, Inc. v. BNSF Railway Co., 2012 WL 1864787 

(STB served May 22, 2012). The Board allowed the 

proportional rates. See id. But importantly, the Board made 

clear that the combined proportional rates may not exceed the 

maximum rates prescribed by the Board. See id. at *2-3. For 

that reason, we detect no current injury to Arizona Electric 

from the Board’s decision on this point. Arizona Electric 

therefore lacks standing to raise this issue at this time. 

* * * 

We have carefully considered all of the parties’ 

arguments. We deny the petitions for review. 

So ordered. 

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