Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-05-01136/USCOURTS-caDC-05-01136-0/pdf.json

Parties Involved:
Arizona Electric Power Cooperative, Inc.
Petitioner
BNSF Railway Company
Intervenor
Surface Transportation Board
Respondent
Union Pacific Railroad Company
Intervenor
United States of America
Respondent

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 13, 2006 Decided July 18, 2006

No. 05-1136

ARIZONA ELECTRIC POWER COOPERATIVE, INC.,

PETITIONER

v.

SURFACE TRANSPORTATION BOARD AND

UNITED STATES OF AMERICA,

RESPONDENTS

BNSF RAILWAY COMPANY AND

UNION PACIFIC RAILROAD COMPANY,

INTERVENORS

On Petition for Review of an Order of the

Surface Transportation Board

William L. Slover argued the cause for the petitioner. Robert

D. Rosenberg and Andrew B. Kolesar, III were on brief.

Thomas J. Stilling, Attorney, Surface Transportation Board,

argued the cause for the respondent. Thomas O. Barnett, Acting

Assistant Attorney General, and Robert B. Nicholson and John

P. Fonte, Attorneys, United States Department of Justice, and

Ellen D. Hanson, General Counsel, and Rachel Danish

Campbell, Attorney, Surface Transportation Board, were on

brief.

USCA Case #05-1136 Document #980639 Filed: 07/18/2006 Page 1 of 12
2

Carolyn F. Corwin, David L. Meyer, Michael L. Rosenthal,

J. Michael Hemmer, Louise A. Rinn, Samuel M. Sipe, Jr.,

Anthony J. LaRocca, Richard E. Weicher and Michael E. Roper

were on brief for the intervenors. Alice E. Loughran entered an

appearance.

Before: HENDERSON and GARLAND, Circuit Judges, and

EDWARDS, Senior Circuit Judge.

Opinion for the court filed by Circuit Judge HENDERSON.

KAREN LECRAFT HENDERSON, Circuit Judge: Petitioner

Arizona Electric Power Cooperative (AEPCO) seeks review of

a decision of the Surface Transportation Board (STB or Board)

dismissing AEPCO’s challenge to the joint rate charged by the

Burlington Northern Santa Fe Railroad (BNSF) and the Union

Pacific Railroad (UP) (collectively Railroads) to transport coal

from mines in North Tipple and Lee Ranch, New Mexico (New

Mexico mines), near Defiance, New Mexico, to AEPCO’s

Apache power plant in Cochise, Arizona. Using the STB’s

“Stand Alone Cost” (SAC) methodology, AEPCO hypothesized

the costs an imaginary “Stand-Alone Railroad” (SARR) would

incur in shipping the coal from the same origin point to the same

destination as the Railroads but using an alternative route.

AEPCO’s hypothetical SARR cost was substantially lower than

the Railroads’ joint rate, in large part because it relied on the

trackage rights BNSF held over a segment of track owned by

UP. The Board rejected AEPCO’s SAC analysis on the ground

that a shipper hypothesizing costs in a joint rate case may not

rely on the trackage rights that one defendant railroad (here

BNSF) holds over track belonging to a second defendant

railroad (here UP) because the trackage rights fee does not fully

reflect the joint costs of the two defendant Railroads, including

the costs of building and maintaining the track. Because the

Board’s decision was not arbitrary or capricious, we deny the

petition for review.

USCA Case #05-1136 Document #980639 Filed: 07/18/2006 Page 2 of 12
3

I.

On December 29, 2000 AEPCO filed a complaint

challenging as unreasonably high the joint rates the Railroads

charged AEPCO to transport coal from the New Mexico mines

to AEPCO’s Cochise, Arizona power plant. On March 9, 2001

AEPCO filed an amended complaint to challenge in addition the

joint rates the Railroads charged to transport coal from mines in

the Powder River Basin (PRB) of Wyoming and Montana and

the single-line rates UP charged for transport from mines in

Colorado. To support its challenges AEPCO relied on a SAC

analysis. As we recently explained:

A SAC analysis seeks to determine the lowest cost at which

a hypothetical efficient carrier could provide service to the

complaining shipper or a group of shippers that benefits

from sharing joint and common costs. The Board assumes

away barriers to entry and exit so as to treat the otherwise

non-competitive railroad industry as a contestable market.

Under the SAC constraint, then, the rate at issue can be no

higher than what the hypothetical carrier would have to

charge to provide the needed service while fully covering its

costs, including a reasonable return on investment. 

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

(internal citations omitted); see generally 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). 

On February 15, 2002 the Railroads filed a “Petition for an

Order Requiring Separate Evidentiary Submissions for Each

Rate Challenged by AEPCO,” contending AEPCO was

“engaged in an effort to manipulate the Board’s SAC

procedures” by “attempting to include in its stand-alone railroad

the vast revenues from Powder River Basis shipments that never

touch the routes of the Colorado and New Mexico traffic.” 

USCA Case #05-1136 Document #980639 Filed: 07/18/2006 Page 3 of 12
4

Joint App. (JA) 276. In a decision served August 20, 2002

(AEPCO I), 2002 WL 1905116, the STB offered its “guidance

on the permissible parameters of a SAC presentation in these

circumstances.” AEPCO I at 1-2. The Board advised that (1)

AEPCO could assume a different route for the New Mexico

mines from the one the Railroads had been jointly using, id. at

6; (2) AEPCO could not propose joint service for the Colorado

shipping because the shipping was done under a single rate by

UP alone, id.; (3) AEPCO could not rely on non-UP traffic

(which would not produce revenues to UP) to reduce the cost of

the single-rate UP Colorado transport, id.; and—most significant

here—(4) “where UP has cost-sharing arrangements in place

with BNSF (for example, joint ownership of a line-segment or

trackage rights arrangements)”—as, the Board noted, UP

enjoyed over three segments of the Colorado route belonging to

BNSF—“[i]n designing a SARR to replicate UP’s single-line

service, AEPCO may assume these same economies,” id. at 7.

The Board elaborated:

 These guiding principles—that a SARR may replicate the

existing cost-sharing arrangements but may not hypothesize

non-existent revenue or cost-sharing arrangements—apply

with equal force to SARRs designed to test the BNSF-UP

joint rates from the PRB and New Mexico origins. Thus, for

each segment of a route used to test the respective joint

rates, only the traffic and revenues of the carrier whose

portion of the route is being replicated should be included in

the SARR's traffic group. But the SARR may be assumed to

have the same cost-sharing arrangements as the defendant

carriers have on each segment, so long as the terms of those

arrangements (including operational provisions and terms of

compensation) are the same as those applicable to the

defendant carriers.

Id. 

USCA Case #05-1136 Document #980639 Filed: 07/18/2006 Page 4 of 12
5

On February 5, 2003 AEPCO advised the STB that it had

reached a settlement with UP regarding the Colorado and the

PRB rates, leaving in dispute only the shipping rates from the

New Mexico mines to the Cochise, Arizona power plant.

AEPCO filed its opening evidence on these rates on February 7,

2003, hypothesizing a SARR (the “Apache, Cochise & Eastern

Railroad”) that used a different—and longer—route than did the

Railroads. The Railroads’ route ran east on BNSF’s track from

Defiance, New Mexico to Belen Junction, New Mexico, then

south on BNSF’s track (through Rincon, New Mexico) to

Deming, New Mexico, and finally west on UP’s track to

Cochise, Arizona; AEPCO’s hypothetical route ran east on

BNSF’s track from Defiance, New Mexico (past Belen Junction,

New Mexico) to Vaughn, New Mexico, then south on UP’s

track (over which BNSF had trackage rights) from Vaughn, New

Mexico to El Paso, Texas, then west on UP’s track running

south of Deming, New Mexico to Cochise, Arizona. To

establish its SARR shipping costs for the two east-west

segments, AEPCO submitted evidence of the actual costs of

building and maintaining the segments; for the north-south

segment from Vaughn, New Mexico to El Paso Texas, however,

AEPCO assumed it would pay BNSF’s trackage rights fee over

UP’s track, which was 3.2 mills per gross ton-mile (GTM).

On April 18, 2003 UP filed a petition requesting the Board

alternatively either to require AEPCO to submit new evidence

or to dismiss AEPCO’s complaint, specifically objecting to

AEPCO’s reliance on BNSF’s trackage rights because payment

of the trackage rights fee alone would not replicate the “total

costs” of traffic which “UP and BNSF together incur.” JA 340-

41 (emphasis original). In rebuttal, AEPCO submitted, inter

alia, evidence to support the 3.2-mill/GTM rate.

In a decision served November 19, 2003 (AEPCO II), 2003

WL 22717853, the STB rejected AEPCO’s trackage rights fee

assumption, concluding that “using [cost-sharing or cost-saving]

USCA Case #05-1136 Document #980639 Filed: 07/18/2006 Page 5 of 12
6

arrangements between joint-rate defendants to avoid a

significant portion of the capital costs of providing service

would defeat the SAC test assumption” because “the SAC test

could not serve its purpose if the SAC analysis failed to take into

account the full costs of providing and maintaining the physical

plant needed to serve the traffic—costs which the joint-rate

defendants collectively must bear.” AEPCO II at 6. The Board

determined “[i]t would not be appropriate, however, to dismiss

AEPCO's case on this ground, in view of the Board's statements

in [AEPCO I]”—about taking into account cost-saving

arrangements such as trackage rights in calculating the costs of

SARR routes from the “New Mexico origins,” AEPCO I at

7—and “the expectations that may have been created” by the

statements, AEPCO II at 6. The Board then advised AEPCO it

“w[ould] be allowed to rely on its rebuttal SAC presentation as

its case-in-chief, if it d[id] not wish to prepare a new

case-in-chief.” Id. If AEPCO chose to rely on its rebuttal

evidence, the Board advised, the Railroads “w[ould] be entitled

to demonstrate the inadequacy (for purposes of the SAC

analysis) of the usage fee reflected in the existing BNSF-UP

trackage rights agreement and to show the level at which a usage

fee would need to be set to satisfy the objectives of the SAC

test.” Id. AEPCO “would then have an opportunity to present

rebuttal evidence on that issue.” Id. 

In response to AEPCO II, AEPCO informed the Board on

November 26, 2003 that it intended to “rely on its previouslyfiled evidence” rather than submit a new case-in-chief. JA 156.

On January 26, 2004 the Railroads filed a supplemental

evidentiary response, arguing, inter alia, that “the trackage rights

fee AEPCO use[d] in its evidence would be inadequate to cover

the full costs of providing service between Vaughn and El

Paso.” JA 462. AEPCO responded on April 12, 2004 with

supplemental rebuttal evidence, asserting that the 3.2-mill/GTM

fee was appropriate because Southern Pacific Transportation

Company (UP’s predecessor on the track segment) had

USCA Case #05-1136 Document #980639 Filed: 07/18/2006 Page 6 of 12
7

voluntarily agreed to the fee in 1995 when it dropped its

opposition to the merger of Burlington Northern and Santa Fe

Railroads (BNSF’s predecessors) and because in the subsequent

UP/Southern Pacific Transportation Company merger

proceeding, both parties “offered a very vigorous defense of the

reasonableness of the ‘nearly identical’ trackage rights fee,” JA

520. AEPCO also submitted alternative trackage rights fees of

8.32 mills/GTM and 9.05 mills/GTM.

In a decision served March 15, 2005 (AEPCO III), 2005 WL

638319, the STB dismissed AEPCO’s complaint on the merits,

concluding: “[W]e cannot complete a rate reasonableness

analysis in this case because AEPCO, which chose to contest the

reasonableness of the challenged rates using the Board’s

stand-alone cost (SAC) test, presented an incomplete SAC case

and, even when afforded the opportunity to provide a more

complete case, failed to do so.” AEPCO III at 1. Specifically,

the Board found that “AEPCO did not provide either evidence

of the costs of constructing and maintaining the Vaughn-to-El

Paso line or evidence to link the trackage rights fee to

stand-alone costs.” Id. at 15. 

With regard to trackage rights, the Board acknowledged that

“[c]omplainants in rail rate cases have long been permitted to

hypothesize a SARR that would utilize trackage rights over

another railroad’s line for a portion of the route where those

trackage rights have replicated how the defendant railroad was

actually moving the issue traffic, and where the line has

belonged to a third-party, i.e., a railroad that was not a defendant

in that rate case.” AEPCO III at 10. The Board distinguished

this case, however, on the ground that AEPCO sought to rely on

trackage rights over a co-defendant railroad’s track, explaining

that “[b]ecause it is the collective revenue requirements of UP

and BNSF that are being tested, all necessary costs of providing

facilities for the Vaughn-to-El Paso portion of the joint line

movement must be taken into account.” Id. at 11. The Board

USCA Case #05-1136 Document #980639 Filed: 07/18/2006 Page 7 of 12
8

*

 The ICC Termination Act of 1995, Pub. L. No. 104-88, 109 Stat.

803, abolished the ICC, created the STB, transferred the ICC’s

remaining regulatory authority to it and provided that ICC precedent

applies to the STB.

advised that, although it would “not completely close the door

on using trackage rights as part of a SARR,” “the fee must

reflect the full costs of assembling and operating the essential

facilities required to provide the service” and that AEPCO had

not demonstrated its proposed trackage rights fees did so. Id.

AEPCO filed a timely petition for review of AEPCO III.

II.

We recently set out the standard for reviewing a rate

decision by the Board:

We will set aside a Board decision only if it is “arbitrary,

capricious, an abuse of discretion, . . . otherwise [unlawful,

or] . . . unsupported by substantial evidence.” 5 U.S.C. §

706(2)(A), (E); see Burlington N. R.R. v. Surface Transp.

Bd., 114 F.3d 206, 210 (D.C. Cir. 1997). In ascertaining

whether a railroad’s rate is reasonable, the Board is at the

“zenith of its powers” and thus entitled to “particular

deference.” Burlington N. R.R., 114 F.3d at 210 (internal

quotation marks and citations omitted). 

PPL Mont., LLC, 437 F.3d at 1244-45 (alterations in original).

AEPCO offers three grounds for setting aside AEPCO III. We

conclude that none of them meets the stringent criteria of our

highly deferential review standard. 

First, AEPCO contends the Board impermissibly deviated

from past decisions of the STB and of its predecessor the

Interstate Commerce Commission (ICC),*

 including AEPCO I,

when it rejected AEPCO’s reliance on BNSF’s trackage rights

over UP’s Vaughn-to-El Paso segment. See N.Y. Cross Harbor

USCA Case #05-1136 Document #980639 Filed: 07/18/2006 Page 8 of 12
9

R.R. v. STB, 374 F.3d 1177, 1181 (D.C. Cir. 2004) (“An agency

acts arbitrarily and capriciously if it ‘reverse[s] its position in

the face of a precedent it has not persuasively distinguished.’ ”

(quoting La. Pub. Serv. Comm’n v. FERC, 184 F.3d 892, 897

(D.C. Cir. 1999) (alteration in original)). We conclude the STB

persuasively distinguished its treatment of trackage rights here

from other Board decisions.

In all of the previous decisions AEPCO cites, the trackage

rights lay over track belonging to a non-defendant third party

railroad and not, as here, over track belonging to a co-defendant

railroad sharing a joint rate. See Opening Br. 25-27 (citing

Bituminous Coal–Hiawatha, Utah, to Moapa, Nev., 1 I.C.C.2d

1, 54-55 (1989); W. Tex. Utils. Co., 1 S.T.B. 638, 684 (1996);

Wis. Power & Light Co., 2001 WL 1075821, at *28 & n.120

(served Sept. 13, 2001); Tex. Mun. Power Agency, 2003 WL

1523335, at *5 n.21 (served Mar. 24, 2003)). The Board’s

discussion of trackage rights in AEPCO I likewise addressed

single line trackage rights. There the Board authorized AEPCO

to “assume the[] same economies” that UP enjoys—such as

“joint ownership of a line-segment or trackage rights

arrangements”—“[i]n designing a SARR to replicate UP’s

single-line service” in Colorado. AEPCO I at 7 (emphasis

added). It is true the Board acknowledged that “the[] same

guiding principles—that a SARR may replicate the existing

cost-sharing arrangements but may not hypothesize non-existent

revenue or cost-sharing arrangements—apply with equal force

to SARRs designed to test the BNSF-UP joint rates from the

PRB and New Mexico origins,” id., but it did not state that they

would apply if the trackage rights run over a joint rate codefendant’s track. In contrast to the situation addressed in

AEPCO I and in previous precedent, in AEPCO III the Board

was “presented . . . with novel issues of reliance in a SAC

presentation on trackage rights over a co-defendant

carrier,”AEPCO III at 11 (emphasis added). Thus, “[i]n none of

the cases pointed to by [AEPCO], did the Board (or its

USCA Case #05-1136 Document #980639 Filed: 07/18/2006 Page 9 of 12
10

predecessor) ‘expressly’ speak to the ‘precise issue’ in the

present case.” PPL Mont., LLC, 437 F.3d at 1246 (quoting Cal.

Edison Co. v. FERC, 805 F.2d 1068, 1071 (D.C. Cir. 1986))

(internal citations omitted). We therefore conclude that this case

is reasonably distinguishable from Board precedent governing

single-line trackage rights. 

Second, AEPCO asserts the Board’s decision in AEPCO III

should be accorded no deference because it is the product of an

unfair procedure. AEPCO complains that in AEPCO II the

Board purported to offer it the option to either rely on its

previous evidence, which incorporated BNSF’s 3.2 mill/GTM

trackage rights fee, or file a new case-in-chief but that the Board

in fact “had already made up its mind that only new construction

costs would suffice.” Opening Br. 33. We perceive no

unfairness in the Board’s procedure—quite the opposite. In

AEPCO II the Board plainly stated that “using [cost-sharing or

cost-saving] arrangements between joint-rate defendants to

avoid a significant portion of the capital costs of providing

service would defeat the SAC test.” AEPCO II at 6.

Nonetheless, out of concern that language in AEPCO I might

have given AEPCO a false impression about the appropriateness

of trackage rights fees, the Board offered AEPCO a second

opportunity to make its case—either by submitting an entirely

new case-in-chief that did not rely on the suspect trackage rights

fee or, alternatively, by relying for its case-in-chief on its

previously submitted rebuttal evidence supporting the 3.2

mill/GTM rate. At the same time, however, the Board made

clear that, in its view, there was “good cause to believe that the

existing usage fee would not be adequate to reflect the full SAC

costs of providing service over the Vaughn-to-El Paso line

segment,” id. (citing Union Pacific/Southern Pacific Merger, 1

S.T.B. 233, 415 & n.168 (1996)), and warned that “if AEPCO

cho[se] to rely on its rebuttal SAC evidence, the defendants

w[ould] be entitled to demonstrate the inadequacy (for purposes

of the SAC analysis) of the usage fee reflected in the existing

USCA Case #05-1136 Document #980639 Filed: 07/18/2006 Page 10 of 12
11

BNSF-UP trackage rights agreement and to show the level at

which a usage fee would need to be set to satisfy the objectives

of the SAC test,” id. When AEPCO declined the invitation to

submit a new case and, notwithstanding the Board’s contrary

warnings and advice, opted to stick by the 3.2 mill/GTM rate, it

did so at its own peril and cannot now reasonably complain of

surprise at the outcome or of unfairness in the process.

Third, AEPCO contends the Board’s “new rule,” Opening

Br. 34—foreclosing reliance on a defendant railroad’s trackage

rights over a co-defendant’s tracks—is arbitrary and capricious

because it violates SAC’s “core notion,” “that the SARR is the

mechanism to determine the price that would result if the market

were competitive, that is, free from barriers and exit.” Id. 35.

Under SAC principles, AEPCO argues, the SARR must be

entitled to “the same production technique as the incumbent,”

including the discounted trackage rights fee that BNSF enjoys.

We disagree. As the Board explained in AEPCO III, in past

cases “use of trackage rights was allowed in the SAC analysis

because the third-party carrier was not responsible for providing

the service and the revenue requirements of the third-party

carrier were not at issue in the rate case,” stressing that

“allowing the SARR to have the benefit of the same trackage

rights arrangement as the defendant railroad uses to move the

traffic involved, at the same trackage rights fee, is necessary for

the SARR to ‘stand in the shoes’ of the defendant.” AEPCO III

at 10. The Board rationally explained in AEPCO III, however,

that “the usual trackage rights fee arrangement, in which the

tenant carrier’s fee does not reflect the full cost of ownership,

would not be appropriate” for the Vaughn-to-El Paso segment

because “it is the collective revenue requirements of UP and

BNSF that are being tested” and therefore “all necessary costs

of providing facilities for the Vaughn-to-El Paso portion of the

joint line movement must be taken into account.” AEPCO III at

11. The Board reasonably concluded that the SARR rate should

include UP’s costs in building and maintaining the Vaughn-to-El

USCA Case #05-1136 Document #980639 Filed: 07/18/2006 Page 11 of 12
12

Paso track and “[w]e are not empowered to substitute our

judgment for that of the Board.” PPL Mont., LLC, 437 F.3d at

1245 (citing Gen. Chem. Corp. v. United States, 817 F.2d 844,

849 (D.C. Cir. 1987); Citizens to Preserve Overton Park, Inc. v.

Volpe, 401 U.S. 402, 416 (1971)).

For the foregoing reasons, AEPCO’s petition for review is

denied.

So ordered.

USCA Case #05-1136 Document #980639 Filed: 07/18/2006 Page 12 of 12