Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-09-01190/USCOURTS-caDC-09-01190-0/pdf.json

Parties Involved:
BNSF Railway Company
Petitioner
Basin Electric Power Cooperative, Inc.
Intervenor for Respondent
State of North Dakota
Amicus Curiae
State of South Dakota
Amicus Curiae
State of Wyoming
Amicus Curiae
Surface Transportation Board
Respondent
United States of America
Respondent
Western Fuels Association, Inc.
Intervenor for Respondent

Document Text:

Notice: This opinion is subject to formal revision before publication in the

Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify the

Clerk of any formal errors in order that corrections may be made before the

bound volumes go to press.

 

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 18, 2010 Decided May 11, 2010

No. 09-1092

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

Consolidated with Nos. 09-1190, 09-1234

On Petitions for Review of Orders 

of the Surface Transportation Board

USCA Case #09-1190 Document #1244053 Filed: 05/11/2010 Page 1 of 21
2

Richard P. Bress argued the cause for petitioner. With him

on the briefs were Maureen E. Mahoney, Lori Alvino McGill,

Richard E. Weicher, Samuel Sipe Jr., and Anthony J. LaRocca.

Erik G. Light, Attorney, Surface Transportation Board,

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

Robert B. Nicholson and John P. Fonte, Attorneys, U.S.

Department of Justice, Ellen D. Hanson, General Counsel,

Surface Transportation Board, and Thomas J. Stilling, Attorney. 

Raymond A. Atkins, Attorney, entered an appearance.

John H. LeSeur argued the cause for intervenors Basin

Electric Power Cooperative, Inc., et al. in support of

respondents. With him on the brief were Christopher A. Mills

and Peter A. Pfohl.

Marty J. Jackley, Attorney General, Attorney General’s

Office of the State of South Dakota, Roxanne Giedd, Assistant

Attorney General, Wayne K. Stenehjem, Attorney General,

Attorney General's Office of State of North Dakota, Charles M.

Carvell, Assistant Attorney General, and Bruce A. Salzburg,

Attorney General, Attorney General's Office of State of

Wyoming, were on the brief for amici curiae in support of

intervenors and affirmance. 

Before: HENDERSON, ROGERS and GARLAND, Circuit

Judges.

Opinion for the Court by Circuit Judge ROGERS.

ROGERS, Circuit Judge: BNSF Railway Company

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

Transportation Board (“Board”) that rates challenged in 2004 by

Western Fuels Association, Inc., and Basin Electric Power

Cooperative, Inc. (hereinafter, collectively, “WFA”) are

USCA Case #09-1190 Document #1244053 Filed: 05/11/2010 Page 2 of 21
3

unreasonably high maximum reasonable rates, prescribing future

maximum rates, and ordering BNSF to pay reparations.1

 BNSF

contends that the Board’s decision was contrary to law because

the three-year limit in 49 U.S.C. § 11701(c) had expired before

its February 17, 2009 Decision, and so the Board’s orders

prescribing maximum reasonable rates and ordering the payment

of reparations must be vacated and the proceeding dismissed. 

Alternatively, BNSF contends there was a reopening after the

Board’s September 7, 2007 Decision,2 and hence any reparations

would be limited from that time forward. On the merits, BNSF

contends the Board was arbitrary and capricious by allowing

WFA to revise its traffic route in response to the Board’s

adoption of new retroactive methodologies for calculating rates,

and by modifying the average total cost methodology for

allocating revenue from cross-over traffic.

We hold BNSF forfeited the statutory argument by failing

to raise it in a timely manner before the Board. On the merits,

we conclude that BNSF’s challenge to traffic rerouting is

unpersuasive and a matter within the Board’s expertise, and that 

a remand is required for the Board to address BNSF’s objection

to the modified average total cost methodology as biased

1

 BNSF petitions for review of three Board decisions: The

February 17, 2009 Decision, as modified by the June 3, 2009

Decision, and the July 23, 2009 Decision on BNSF’s compliance. See

W. Fuels Ass’n, Inc. and Basin Elec. Power Coop. v. BNSF Ry. Co.,

STB Docket No. 42088, 2009 WL 415499 (Feb. 17, 2009); W. Fuels

Ass’n, Inc. and Basin Elec. Power Coop. v. BNSF Ry. Co., STB

Docket No. 42088, 2009 WL 1567606 (Jun. 3, 2009); W. Fuels Ass’n,

Inc. and Basin Elec. Power Coop. v. BNSF Ry. Co., STB Docket No.

42088, 2009 WL 2221011 (July 23, 2009).

2

 W. Fuels Ass’n, Inc. and Basin Elec. Power Coop. v. BNSF

Ry. Co., STB Docket No. 42088, 2007 WL 2590251 (Sept. 7, 2007)

(“September 2007 Decision”).

USCA Case #09-1190 Document #1244053 Filed: 05/11/2010 Page 3 of 21
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because it double counts variable costs; otherwise we affirm. 

Accordingly, we grant the petitions in part and deny the

petitions in part. 

I.

A.

In the Interstate Commerce Commission Termination Act

of 1995, Pub.L. 104-88, 109 Stat. 803 (1995) (“ICCTA”),

Congress carried forward the shipper protections in the Staggers

Rail Act of 1980, Pub. L. 96-448, 94 Stat. 1895 (1980), while

continuing the deregulation of the railroad industry it had

previously endorsed in the Staggers Act and the Railroad

Revitalization and Regulatory Reform Act, Pub. L. 94-210, 90

Stat. 31 (1976). See H.R. Conf. Rep. 104-422 (1995), at 194,

reprinted in 1995 U.S.C.C.A.N. 850; S. Rep. No. 104-176

(1995), at 2-3, 5-6; H.R. Rep. No. 104-311 (1995), at 82-83,

reprinted in 1995 U.S.C.C.A.N. 793. Thus, a party may file a

complaint with the Board, which succeeded the Interstate

Commerce Commission (“I.C.C.”) as the regulator of the rail

industry, challenging the reasonableness of a rate. 49 U.S.C.

§§ 11701(b), 10704(b). The Board, upon determining that it has

jurisdiction, id. §§ 10701(d)(1), 10707(b)-(c), which covers only

those railroads that possess “market dominance,”3

 must consider

the system-wide pricing policies, id. § 10701(d)(2)(A)-(C), and

ensure the rail carrier has the opportunity to earn “adequate

revenues,” id. § 10704(a)(2). If the Board finds the challenged

rate unreasonable, it “may prescribe” the maximum rate the

railroad can charge going forward, id. § 10704(a)(1), and the

railroad “is liable” for reparations to the complainant, id.

§ 11704(b).

3

 A railroad has “market dominance” if its revenues meet or

exceed 180 percent of its variable costs for the traffic to which the rate

applies. 49 U.S.C. § 10707(d)(1)(A). 

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The complexity of railroad rate regulation stems in part

from determining the proper attribution of costs to those using

the railroad’s services and facilities. In 1985, the Board

promulgated guidelines to calculate rates for shipping coal. See

Coal Rate Guidelines, Nationwide, 1 I.C.C.2d 520 (1985)

(“Guidelines”), aff’d sub nom. Consol. Rail Corp. v. United

States, 812 F.2d 1444 (3d Cir. 1987). The Guidelines approach,

which was extended to non-coal rates, adopted Constrained

Market Pricing (“CMP”), in which rates are set in inverse

proportion to shippers’ respective demand elasticities, so called

“Ramsey pricing.” Guidelines at 547-48. Under CMP, rates are

limited to what is necessary for the carrier to earn adequate

revenues based on efficient management and pricing practices. 

Guidelines at 534-42. This determination is made in part based

on the stand-alone-cost (“SAC”) of a hypothetical carrier or

“stand-alone railroad” (“SARR”) designed by the complainant

to be optimally efficient in providing those lines and facilities

needed to serve the complaining shipper. The SAC test

determines the maximum rate that the railroad may charge the

traffic group by accounting for all the costs of running the

SARR, including the cost of building and operation and a

reasonable return on investment. Under this test the Board had,

over the years, applied Modified Straight-Mileage Prorate

(“MSP”), a mileage-based revenue allocation procedure. See

BNSF Ry. Co. v. STB, 453 F.3d 473, 483-84 (D.C. Cir. 2006)

(hereinafter “Xcel”).

In October 2006, the Board revised the Guidelines

approach upon concluding the regulatory proceedings had

become too complex and too costly. See Major Issues in Rail

Rate Cases, STB Ex Parte No. 657 (Sub-No.1) (Oct. 30, 2006)

at 3 (“Major Issues Rulemaking”). Previously, the Board had

used the “percent reduction” method, by which it reduced the

challenged rate by the same percentage by which the total

revenues exceeded the SAC costs. In the final rule, the Board

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changed how it would evaluate rate reasonableness by adopting

the Maximum Markup Methodology (“MMM”)4

 and the

Average Total Cost (“ATC”) methodology.5 This court upheld

the final rule, including its retroactive application. See BNSF

4

 Under MMM, the parties calculate the revenue-to-variable

cost (“R/VC”) needed to cover the SARR’s total costs in one year to

determine the Benchmark R/VC Ratio. The Board then compares the

Benchmark R/VC Ratio to the actual R/VC ratio for each shipper in

the traffic group on the SARR to determine if the SAC costs assigned

to that shipper’s traffic would exceed what the SARR could charge the

shipper for the traffic. “Where the actual charge is less than the share

of SAC costs that would otherwise be allocated” to a particular shipper

under the Benchmark R/VC ratio, “the difference should be

reapportioned to the remaining traffic group” and this should be

repeated “until no movement in the traffic group is assigned a higher

share of the SAC costs than its actual charge.” Major Issues

Rulemaking at 14. 

5

 To allocate revenues for cross-over traffic between the

defendant railroad and the SARR, the Board abandoned MSP, which

it had used for over a decade, see Xcel, 453 F.3d at 484. According to

this court, the “critical flaw” in this procedure was that it failed to

account for “‘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 revenue that should be attributed to

it).” Major Issues Appeal, 526 F.3d at 782-83 (citing Xcel, 453 F.3d

at 473). To address the economies of density and “the fact that at

some point, higher density no longer results in lower average costs,”

id. at 783, the Board adopted ATC “to derive a system-average fixed

cost per route mile,” Major Issues Rulemaking at 34. Average fixed

cost is added to average variable cost to set the average total cost per

ton. Id. To determine the proper allocation of revenues for the

segment, the Board divides the average total cost of the segment by

the average total cost of the railroad system. Id. 

USCA Case #09-1190 Document #1244053 Filed: 05/11/2010 Page 6 of 21
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Ry. Co. v STB, 526 F.3d 770 (D.C. Cir. 2008) (“Major Issues

Appeal”). 

B.

From 1984 to 2004, BNSF transported WFA’s coal under

a long-term contract in which the rate gradually decreased from

$4 per ton in 1984 to $3 per ton in 2004. When the contract

expired, BNSF and WFA were unable to reach a new agreement

and BNSF set a common carrier rate of $6 per ton. Although

this rate was, due to the proximity to the Powder River Basin,

“one of the lowest transportation rates any utility pays to

acquire PRB coal,” September 2007 Decision at 2, the revenue

to variable cost ratio for these movements was very high,

beginning at 481 percent and adjusting upward over time to 843

percent according to WFA.

On October 19, 2004, WFA filed a verified complaint with

the Board, seeking to demonstrate the unreasonableness of

BNSF’s rates under the SAC test. WFA designed a SARR

called the Laramie River Railroad (“LRR”), which contained

some cross-over traffic and allocated revenues from the crossover traffic using MSP. BNSF filed an answer and the Board

granted a motion allowing mediation to continue through

January 31, 2005. Once mediation efforts ended, the parties

filed evidentiary presentations and in December 2005 they filed

final briefs in accordance with a briefing schedule that had been

extended a number of times.

Then, in February 2006 the Board held in abeyance the

pending WFA and AEP Texas North Company (“AEP”)

proceedings while it conducted the Major Issues Rulemaking. 

At the time, the Board announced its intent to apply to the

pending cases whatever new methodology it adopted in three

areas, including cross-over traffic. It also stated that at the end

of the rulemaking parties in the pending cases would be

USCA Case #09-1190 Document #1244053 Filed: 05/11/2010 Page 7 of 21
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afforded an opportunity to submit supplemental evidence

comporting with changes adopted in the rulemaking, and that

“the time frames for issuing a Board decision in those two cases

are tolled.” Notice of Proposed Rulemaking, STB Ex Parte, No.

657 (Sub-No.1) (Feb. 26, 2006) (“NPRM”) at 3; see 49 U.S.C.

§10704(c) (requiring the Board to issue a decision within 90

days of the close of the record). In October 2006, the Board

promulgated the final rule replacing the percentage reduction

methodology with MMM and the mileage-based revenue

allocation methodology (“MSP”) with ATC. See Major Issues

Rulemaking at 14, 31. On November 8, 2006, the Board

ordered the parties to submit supplemental evidentiary

presentations, based on the existing SARR proposal, so the

Board could apply the new methodologies; the parties

completed their supplemental filings by April 2007.

In the September 2007 Decision, supra note 2, the Board

found that BNSF has market dominance over the transportation

at issue. It also found that WFA had failed to establish “on this

record” that the challenged rates are unreasonably high, id. at 3,

but offered WFA an opportunity to submit supplemental

evidence bearing on the new retroactive methodologies. Noting

the warning of this court, see supra note 5, the Board rejected

the idea of continuing to apply “flawed or discredited

procedures” while concluding that “fairness dictates that WFA

have an opportunity to modify its SAC presentation in light of

the new revenue allocation methodology.” September 2007

Decision at 20. The Board stated: “Generally, it is not the

Board’s practice to permit complainants to redesign their case

in light of subsequent Board decisions”; however, “[i]n this

case, . . . the change from MSP to ATC would affect the basic

design of a SAC case” because WFA might not have included

all of the traffic offering limited revenue contribution or might

have changed the configuration of the LRR under ATC. Id.

The Board gave WFA thirty days to decide, allowing WFA to

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increase or decrease the traffic group and change the

configuration of the LRR and to submit evidence on all related

issues. The Board stated it “will discontinue this proceeding”

if WFA does not seek to present new SAC evidence. Id.

Upon denying the parties’ petitions for reconsideration, the

Board explained further that “WFA could have been unfairly

prejudiced by not knowing when it designed the LRR that the

ATC revenue allocation procedure would be applied to its

case.” February 2008 Denial of Reconsideration at 2.6

 In

response to BNSF’s argument that there was nothing unfair

about applying ATC to WFA’s case, the Board emphasized that

“[u]sing ATC rather than MSP changes the incentives for a

shipper in the selection of the traffic group to be used.” Id. at

3. Acknowledging that allowing the supplemental evidentiary

presentation “is an unusual measure,” the Board cited cases to

show “it is not unprecedented,” id., and noted that the parties

had agreed to a procedural schedule through July 2008 that

would include time for additional discovery.

In a supplemental evidentiary presentation filed on May 13,

2008, WFA redesigned its SARR to change LRR’s traffic route

to exclude some marginally profitable traffic and to include

high revenue traffic destined for the WestStar Jeffrey Energy

Center (“Jeffrey traffic”). BNSF, in reply of July 14, 2008,

argued that the complaint should be dismissed because WFA’s

use of rerouted traffic was “inconsistent with the limited

reopening right afforded by the Board”and a “blatant attempt to

game the Board’s new Maximum Mark-Up Methodology

(‘MMM’).” BNSF July 2008 Reply at 5, 6. BNSF also

renewed a double-counting objection to the modification of

6

 W. Fuels Ass’n, Inc. and Basin Elec. Power Coop. v. BNSF

Ry. Co., STB Docket No. 42088, 2008 WL 542600 (Feb. 28 , 2008)

(“February 2008 Denial of Rehearing”).

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ATC adopted in the September 2007 Decision that it had raised

in petitioning for reconsideration. And, for the first time, BNSF

argued that the WFA proceeding would have to be dismissed in

view of the three-year limit in section 11701(c), which, BNSF

asserted, commenced with the filing of WFA’s verified

complaint of October 19, 2004 and the Board’s initiation of a

formal investigation on that date. See id. at 47-49. 

Alternatively, BNSF argued that the September 2007 Decision

was a final decision, such that the extended WFA proceeding

was a reopening and no reparations could be awarded for rates

charged prior to that time, citing Arizona Grocery Co. v.

Atchison, Topeka & Santa Fe Ry. Co., 284 U.S. 370, 389-90

(1932). 

In rebuttal of August 15, 2008, WFA noted that “[l]ong

after the record initially closed in this case, the Board adopted

several new SAC standards in [the] Major Issues [Rulemaking]

and retroactively applied them,” and that WFA had “repeatedly

objected to the Board’s actions, [arguing] that WFA[] would

have modeled a different SARR had the new . . . rule the Board

adopted in [the] Major Issues [Rulemaking] to set SARR crossover traffic revenue divisions been in effect when it modeled the

LRR.” WFA August 2008 Rebuttal at 2-3. WFA also called

the Board’s attention to the due process requirements identified

in Logan v. Zimmerman Brush Co., 455 U.S. 422, 433 (1982),

that a complainant has the right to an “opportunity to present his

case and have its merits fairly judged,” and in Hatch v. FERC,

654 F.2d 825, 835 (D.C. Cir. 1981), that where rules have

changed in the middle of the case “litigants must have a

meaningful opportunity to submit conforming proof.” See

WFA August 2008 Rebuttal at 65. WFA emphasized that

BNSF had not objected to the procedural schedules advancing

the proceeding to July 2008 and had stated in filings during the

Major Issues Rulemaking that delay caused by the rulemaking

would not prejudice WFA’s case. See id. at 66.

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In the Decision of February 17, 2009, supra note 1, the

Board found that the challenged rates were unreasonable,

prescribed maximum lawful rates, and ordered BNSF to pay

reparations to WFA. In response to the parties’ joint petition,

the Board, by Decision of June 3, 2009, incorporated technical

corrections to the February 2009 Decision. In the Decision of

July 23, 2009, the Board found that although BNSF had

generally used the correct method to calculate the maximum

lawful rates, it erred in its indexing approach, and ordered

BNSF to establish rates, within thirty days, in accordance with

the approach in Oklahoma Gas & Elec. v. Union Pacific R.R.,

STB Docket No. 42111, 2009 WL 2205337 (July 23, 2009). 

BNSF petitions for review.7

 See 28 U.S.C. §§ 2321, 2342,

2344. 

II.

BNSF contends that section 11701(c) required the Board to

dismiss the WFA proceeding three years after WFA filed its

verified complaint on October 19, 2004. The Board responds

that this ignores statutory text in section 11701(a) that

introduces ambiguity as to whether the three-year limit applies

only to investigations initiated by the Board rather than by

complaint, and would raise serious constitutional concerns

because dismissal without a final decision on the merits would

likely deprive complainants of due process. WFA concurs with

the Board’s interpretation of section 11701(c) and agrees

application of the three-year limit to its complaint would violate

its basic due process right to receive a final decision on its claim

after a full and fair hearing. 

7

 On October 21, 2009, the Board ordered BNSF within thirty

days to pay reparations (with interest) to WFA. W. Fuels Ass’n, Inc.

and Basin Elec. Power Coop. v. BNSF Ry. Co., STB Docket No.

42088, 2009 WL 3398892 (Oct. 21, 2009).

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Section 11701 provides:

(a) Except as otherwise provided in this part, the

Board may begin an investigation under this part only

on complaint. If the Board finds that a rail carrier is

violating this part, the Board shall take appropriate

action to compel compliance with this part.

(b) A person . . . may file with the Board a complaint

about a violation of this part by a rail carrier providing

transportation or service subject to the jurisdiction of

the Board under this part. * * * The Board may

dismiss a complaint it determines does not state

reasonable grounds for investigation and action.

However, the Board may not dismiss a complaint . .

.because of the absence of direct damage to the

complainant.

(c) A formal investigative proceeding begun by the

Board under subsection (a) of this section is dismissed

automatically unless it is concluded by the Board with

administrative finality by the end of the third year after

the date on which it was begun.

49 U.S.C. § 11701 (emphasis added). 

 BNSF contends the plain text of section 11701(c) provides

that the three-year limit applies only to “formal investigative

proceeding[s] begun by the Board under subsection (a).” Pet’r’s

Br. 28. Subsection (a) authorizes the Board to initiate, BNSF

maintains, only one type of proceeding: those brought on

complaint. WFA filed a complaint and so, BNSF concludes, the

three-year limit in subsection (c) applies to the WFA

proceeding, commencing to run on the date WFA filed its

complaint. BNSF notes that, in amending subsection (a) to

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strike text authorizing the Board’s predecessor to begin an

investigation under this subtitle “on its own initiative,” 49

U.S.C. § 11701(a) (as recodified in 1978), Congress in the

ICCTA cut back on the Board’s authority to initiate formal

investigations. See H.R. Conf. Rep. 104-422, at 194. BNSF

rejects the notion that due process is implicated, suggesting

WFA’s complaint is not a protected property interest and

recasting WFA’s “real objection” to be that the rules of the

game changed after it filed its complaint in a way that prevented

“fair” adjudication within the three-year limit, a claim under

Hatch that BNSF maintains was rejected in the Major Issues

Appeal, 526 F.3d at 784. See Pet’r’s Br. 36-40. BNSF thus

concludes, the WFA proceeding should have been terminated

automatically pursuant to section 11701(c) on October 19, 2007

and the Board’s subsequent orders should be vacated as

contrary to law.

The Board does not suggest the deregulatory context is not

a relevant indicator of Congress’ intent, only that Congress’

failure in the ICCTA to amend section (c) (other than making

technical revisions) indicates that Congress intended the

Board’s interpretation — that the three-year limit applies only

to Board-initiated investigations — to continue in force. It

notes Congress’ contemporaneous addition to subsection (a) of

the phrase “except as otherwise provided in this part,” such that

the ICCTA did not disturb the Board’s authority to initiate

certain formal investigations under other provisions of Title 49,

as, for example, to exercise temporary authority to direct rail

operations in rail service emergencies pursuant to 49 U.S.C.

§ 11123. See also id. §§ 10745, 10706(d), 10502(b). 

Essentially, the Board maintains, as it did in Xcel, 456 F.3d at

478-79, that because Congress cannot have intended to punish

a complainant for agency inaction, the three-year limit must be

read to apply only to investigations begun by the Board on its

own initiative. It thus reads “formal investigative proceeding”

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to refer to such proceedings pursuant to the “otherwise

provided” clause of subsection (a). The Board notes its

interpretation is consistent with the I.C.C.’s reading of 49

U.S.C. §11701 (as recodified in 1978). Because the term

“formal investigative proceeding” had an established meaning

before the ICCTA was enacted, the Board suggests Congress is

presumed to have been aware of that interpretation when it

retained the phrase in section 11701(c) in 1995. Any other

reading, it maintains, would produce an absurd, unfair, and

perhaps even unconstitutional result by depriving a complainant

of a decision on the merits of its rate complaint where the delay

was not the complainant’s fault, perversely rewarding the

railroad that managed to prolong a rate proceeding beyond the

three-year limit. WFA’s right to due process, the Board

maintains, would be violated in two ways: lack of a fair

opportunity to present its case after the Board changed the rule

on revenue allocation for cross-over traffic and failure to

receive a final agency decision on the merits. 

The conflicting statutory interpretations reprise the

arguments made by BNSF and the Board in Xcel, 453 F.3d at

479 (D.C. Cir. 2006). This court observed then that:

The Board’s concern with due process may be wellfounded. See Logan v. Zimmerman Brush Co., 455

U.S. 422, 428, 102 S. Ct. 1148, 71 L. Ed.2d 265

(1982) (holding “a cause of action is a species of

property protected by the Fourteenth Amendment’s

Due Process Clause” and therefore could not

constitutionally be extinguished by expiration of the

120-day period for state agency to convene a factfinding conference). We need not resolve the issue of

the three-year limit, however, because BNSF failed to

raise the argument in a timely manner.

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Id. So too here.

In Xcel, the court explained that “[a] reviewing court

generally will not consider an argument that was not raised

before the agency ‘at the time appropriate under its practice.’” 

453 F.3d at 479 (quoting United States v. L.A. Tucker Truck

Lines, Inc. 344 U.S. 33, 37 (1952)). In that case, BNSF raised

the three-year limit argument after three and one half years of

proceedings, when the Board had ruled against it on the merits

and BNSF was petitioning for reconsideration. Without

identifying “the exact moment the argument was forfeited,” the

court concluded “it could not have been later than when the

Board decided the case because the criteria for granting

reconsideration are limited by statute.” Id. (citing 49 U.S.C.

§ 722(c) (requiring “material error, new evidence, or

substantially changed circumstances”)). The court further

rejected BNSF’s objection that the “automatic” dismissal

provision in section 11701(c) was a “‘mandatory directive’ . . .

leav[ing] no discretion in the [Board] to treat its claim as having

been forfeited,” stating that “[e]ven a defect in the jurisdiction

of an agency . . . when not timely raised before that agency is

forfeit. . . unless it ‘concerns the very composition or

constitution of that agency,’. . . which BNSF’s objection does

not.” Id. (internal citations omitted).

In the instant case, BNSF first argued before the Board that 

the three-year limit required the WFA proceeding be dismissed

in July 2008, after three and three-quarters years of proceedings

and nine months after, according to BNSF, the three years had

run from the filing of WFA’s verified complaint. This also was

ten months after the September 2007 Decision and five months

after the Board denied BNSF’s petition for reconsideration of

the September 2007 Decision. BNSF mentioned the three-year

limit in its petition for reconsideration but, as it conceded during

oral argument, it did not argue the proceeding had to be

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dismissed, only that it was “unfair to BNSF to allow this

proceeding to continue beyond the three-year cut off . . . when

the complainants, who have the burden of proof, failed to

demonstrate in their original SAC evidence that they are entitled

to any relief.” BNSF October 2007 Pet. for Reconsideration at

2. In denying reconsideration the Board noted the parties had

agreed to a procedural schedule (through July 2008) that would

include time for additional discovery. February 2008 Denial of

Reconsideration at 8. These are circumstances of forfeiture

similar to those identified in Xcel, 453 F.3d at 479. 

BNSF’s explanation during oral argument for its delay in

raising the three-year limit argument, that it viewed the

September 2007 Decision as a final decision and the later

proceeding as a reopening, does not negate the forfeiture. The 

September 2007 Decision indicated on its face it was not a final

decision, affording WFA thirty days to decide whether it wanted

to submit supplemental evidence on a new or revised SARR and

stating that unless WFA decided to supplement its evidence the

proceeding “will be discontinued.” September 2007 Decision

at 20 (emphasis added). Even though BNSF could have filed a

motion to dismiss at any point in the WFA proceeding, see 49

C.F.R. § 1111.5, it stood silent before the Board after the denial

of its petition for reconsideration in February 2008 and while

WFA prepared and presented a revised SARR to the Board in

May 2008. BNSF also stood silent before the Board after the

Board filed a motion on May 19, 2008 to dismiss the appeal of

the September 2007 Decision as premature,8

 waiting two

months after the Board’s motion to argue the three-year limit

before the Board, see BNSF July 14, 2008 Reply at 47-49, even

though BNSF had argued before this court in response to the

8 This court dismissed the appeal. See W. Fuels Ass’n, Inc.

and Basin Elec. Power Coop. v. BNSF Ry. Co., Docket No. 08-1167

(D.C. Cir. Jun. 3, 2009).

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Board’s motion to dismiss that the pending proceedings were

otherwise improper because they extended beyond the threeyear limit, citing Xcel’s holding on “waiver,” 453 F.3d at 480. 

See June 3, 2008 BNSF Resp. to Board’s Mot. to Dismiss at 14-

15, W. Fuels Ass’n, Inc. and Basin Elec. Power Coop. v. BNSF

Ry. Co., Docket No. 08-1167 (D.C. Cir. Jun. 3, 2009). Under

the circumstances BNSF did not timely present the three-year

limit argument to the Board. See Xcel, 453 F.3d at 479.

Although this court has held that a forfeiture can be

forfeited by failing on appeal to argue an argument was

forfeited, see Empagran S.A. v. F. Hoffman-Laroche, Ltd., 388

F.3d 337, 344 (D.C. Cir. 2004); Bowden v. United States, 106

F.3d 433, 438-39 (D.C. Cir. 1997), that precedent is

inapplicable. The Board never acquiesced in BNSF’s view that

section 11701(c)’s three-year limit applied to complaintinitiated investigations and rejected BNSF’s argument on the

merits when it was first raised in July 2008.

III.

On the merits, BNSF contends the Board’s Decision is

arbitrary and capricious for allowing WFA to reroute traffic in

its May 2008 evidentiary presentations and in modifying ATC. 

Our review is deferential, looking to see whether the decision is

“‘arbitrary, capricious, an abuse of discretion, or otherwise not

in accordance with law,’” 5 U.S.C. § 706(2)(A), (E), bearing in

mind that ‘[w]here an agency has rationally set forth the

grounds on which it acted, . . . this court may not substitute its

judgment for that of the agency.’” Xcel, 453 F.3d at 480

(internal citation omitted). 

BNSF maintains that the Board did not hold WFA to its

burden to justify its traffic selection and failed to explain why

WFA’s re-routing of traffic was consistent with SAC principles. 

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BNSF objected in July 2008 to WFA’s revised traffic selection

that included high rated “Jeffrey traffic” on the ground that it

was beyond what the Board had authorized in the September

2007 Decision. On appeal, BNSF suggests that the “Jeffrey

traffic” “shares virtually no facilities with WFA’s traffic,”

Pet’r’s Br. 46, and that together with the dropped profitable but

lower-rated traffic it did nothing to advance the objectives of the

SAC test. 

The Board determined that WFA’s replacement of the

lower-rated 19 million tons of traffic with higher-rated “Jeffrey

traffic” was within the “broad flexibility” allowed by the

Guidelines at 543-44. Explaining that “every choice made by

a complainant in designing a SARR will be done with an eye to

reducing the maximum lawful rate produced under the SAC

test” and that the traffic choice is valid “[s]o long as the

complaint does not violate any SAC rule or principle in the

process,” February 2009 Decision at 7, the Board concluded the

“Jeffrey traffic” met the criteria for inclusion by demonstrating

that “the route is reasonable and would meet the shipper’s

transportation needs,” id. at 11 (citing Tex. Mun. Power Agency

v. BNSF, 6 STB 573, 589 (2003)). 

The court will defer because the Board’s determination

invokes its expertise, see Major Issues Appeal, 526 F.3d at 774,

and we find no fault with the Board’s reasoning. The Board’s

approval of the rerouted traffic is consistent with the Board’s

precedent that the complainant designing the system from

scratch has “broad flexibility to develop the least costly, most

efficient plan” and to select the traffic group, including crossover traffic, for its SARR. Guidelines at 543-44; see Duke

Energy Corp. v. CSX Transp., Inc., 7 STB 402, 417 (June 2003-

Dec.2004), 2004 WL 250254, at *10-*11. BNSF presents no

persuasive argument to question the Board’s reasonable

distinction between requiring a compelling justification for

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changing a traffic route only where the selected traffic shares no

facilities in the real world, and requiring only that the

complainant account for any off-SARR changes where the

selected traffic shares at least some facilities in the real world,

as does the “Jeffrey traffic.” See February 2009 Decision at 11

n.16; see also Duke Energy, 7 STB at 418, 2004 WL 250254, at

*11; Pub. Serv. Co. of Colo. d/b/a Xcel v. Burlington N. and

Santa Fe Ry. Co., 7 STB 589, 607-08 (June 2003-Dec.2004),

2004 WL 1428724, at * 12.

BNSF also contends the Board’s modification of ATC in

the September 2007 Decision was arbitrary and capricious

because modified ATC fails appropriately to consider

economies of density and artificially inflates the revenues

attributable to the SARR. It suggests that in the Major Issues

Rulemaking “[t]he Board recognized that it must consider the

relative average total costs of each segment, rather than their

average variable costs, in order to take adequate account of

economies of density.” Pet’r’s Br. 50 (citing the Major Issues

Rulemaking at 34-35 and the NPRM at 20). BNSF maintains

that under the Board’s two-step approach — by assigning

revenues to cover the variable costs in step one without

reflecting economies of density, and by then allocating any

remaining revenues to cover the fixed costs plus the variable

cost in step two taking economies of density into account —

variable costs are counted twice. In BNSF’s view, this “all but

ignores the fundamental purpose of ATC (accounting for the

economies of density).” Pet’r’s Br. 51. The effect, BNSF

claims, is that the high-density SARR segments tend to receive

a disproportionately large share of revenues leaving the

incumbent carrier with insufficient revenues to cover the

proportionally higher cost of lower-density off-SARR lines. 

The Board determined upon applying ATC, as adopted in

the Major Issues Rulemaking, that it had not accounted for a

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situation in which low-rated cross-over traffic did not cover its

own variable costs for portions of the rail movement. See

September 2007 Decision at 14. The Board explained that

“[b]ecause the traffic group includes considerable traffic with

total revenue either below or barely above variable cost, and

because the off-SARR segments of the movements have lower

densities, the practical effect of the parties’ approach would be

to drive the R/VC percentages of the movements below 100%,”

meaning “the on-SARR revenue allocation for those movements

would be insufficient to cover the variable cost . . . of handling

traffic for the highest-density portion of a movement.” Id. at 14.

“To avoid such an illogical and unintended result,” id., the

Board modified ATC. “Instead of applying ATC allocation

procedure to total revenue, we will apply the same allocation

procedure to total revenue contribution” so that “the revenue

assigned to the on-SARR part of a cross-over movement will

equal the variable cost to haul the traffic over the facilities

replicated by the SARR plus the portion of available revenue

contribution allocated in accordance with ATC.” Id. (emphasis

in original).

On appeal the Board acknowledges that it “did not

specifically mention ‘double-counting’” in denying BNSF’s

petition for reconsideration of the September 2007 Decision. 

Resp’t Br. 63. Rather, the Board stated that modified ATC

would not reintroduce bias because it is “even-handed.” 

February 2008 Denial of Reconsideration at 4-5. The Board 

noted that BNSF had previously suggested adoption of a similar

methodology, the Density Adjusted Revenue Allocation

(“DARA”). Id. at 5. However, the Board had rejected DARA

as being “insensitive to the actual economies of density

associated with particular movements” and observed that ATC,

as adopted in the Major Issues Rulemaking, “does not suffer

from the deficiency that led to the Board’s rejection of DARA.”

Major Issues Rulemaking at 26. WFA has offered a response in

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its brief at 35-36, explaining that BNSF’s concern with doublecounting is not problematic because step one recognizes that

average variable costs do not vary with density, while step two

recognizes that average total cost declines as density increases

because the fixed costs are “spread over a larger number of

traffic units,” WFA Br. at 36. However, the Board never relied

on this rationale and so cannot do so on appeal. See SEC v.

Chenery Corp., 332 U.S. 194, 196 (1947). 

Accordingly, we grant the petitions in part, so that the

Board on remand can address BNSF’s double-counting

objection to modified ATC, and we otherwise deny the

petitions.

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