Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-07-01372/USCOURTS-caDC-07-01372-0/pdf.json

Parties Involved:
Association of American Railroads
Petitioner
Surface Transportation Board
Respondent
United States of America
Respondent

Document Text:

United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 7, 2009 Decided June 9, 2009 

No. 07-1369 

CSX TRANSPORTATION, INC., ET AL., 

PETITIONERS

v. 

SURFACE TRANSPORTATION BOARD AND UNITED STATES OF 

AMERICA, 

RESPONDENTS

AMERICAN CHEMISTRY COUNCIL, ET AL., 

INTERVENORS

Consolidated with 07-1370, 07-1371, 07-1372, 07-1410,

08-1194 

On Petitions for Review of an Order 

of the Surface Transportation Board 

G. Paul Moates argued the cause for Railroad Petitioners. 

With him on the briefs were Paul A. Hemmersbaugh, Peter J. 

Shudtz, Paul R. Hitchcock, Louis P. Warchot, George A. 

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

Jr., Anthony J. LaRocca, Terence M. Hynes, and Michael L. 

Rosenthal. 

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Nicholas J. DiMichael argued the cause for petitioners 

The National Industrial Transportation League, et al. With 

him on the briefs were Jeffrey O. Moreno, Andrew P. 

Goldstein, and John M. Cutler, Jr.

Raymond A. Atkins, Associate General Counsel, 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, and Ellen D. Hanson, 

General Counsel, Surface Transportation Board. Anika S. 

Cooper, Attorney, entered an appearance. 

G. Paul Moates, Paul A. Hemmersbaugh, Peter J. Shudtz, 

Paul R. Hitchcock, Louis P. Warchot, George A. Aspartore, J. 

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

Anthony J. LaRocca, Terence M. Hynes, and Michael L. 

Rosenthal were on the brief of Railroad Intervenors. 

Nicholas J. DiMichael, Jeffrey O. Moreno, Andrew P. 

Goldstein, and John M. Cutler, Jr. were on the brief for 

Shipper Intervenors. 

Before: ROGERS, TATEL, and GRIFFITH, Circuit Judges. 

Opinion for the Court filed by Circuit Judge TATEL. 

TATEL, Circuit Judge: In this case we consider a set of 

challenges to a Surface Transportation Board regulation 

establishing a simplified method for resolving rail rate 

disputes too small to bring under ordinary procedures. The 

Board’s new regulation gives shippers—the complainants in 

rail rate disputes—a choice between using the usual 

procedures or either of two cheaper and simpler “small 

claims” alternatives better suited to uncomplicated cases. 

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Under each alternative, relief is capped due to the method’s 

lower accuracy. A group of railroads challenges the Board’s 

adoption of one of the alternative methods, and a group of 

shippers challenges the other, as well as the relief caps on 

both. Finding the Board’s balancing of the competing 

interests in accuracy and simplicity well within its statutory 

authority and neither arbitrary nor capricious, we deny the 

petitions for review in all respects. 

I. 

The Surface Transportation Board regulates the rates 

railroads charge shippers over which they have market 

dominance. 49 U.S.C. §§ 10501, 10701(d)(1). Because such 

captive shippers are unable to fend for themselves in the 

market, Congress allows them to challenge a rail rate as 

unjust or unreasonable before the Board, id. § 10707(b)–(c), 

which can impose retrospective relief in the form of 

reparations, id. § 11704(b), and prospective relief by 

prescribing a new rate, id. § 10704(a)(1). To understand this 

case, a brief whistle-stop tour through the history of the 

Board’s procedures for resolving these rate disputes is in 

order. All aboard! 

In 1985, the Interstate Commerce Commission, the 

Board’s predecessor, decided to resolve rate disputes under 

“constrained market pricing” (CMP) principles, under which 

the Commission would find reasonable a rate that (1) reflects 

the amount a captive shipper would have to pay to receive 

efficient service, (2) affords the railroad adequate revenues, 

and (3) does so without cross-subsidizing any service or 

facility from which the shipper receives no benefit. Coal Rate 

Guidelines, Nationwide, 1 I.C.C.2d 520, 523–24 (1985), aff’d 

sub nom. Consol. Rail Corp. v. United States, 812 F.2d 1444 

(3d Cir. 1987). Under these principles, shippers able to 

demonstrate that the railroad has market dominance had the 

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choice of one of several methods to prove that the challenged 

rates were unreasonable. They could opt to examine the 

railroad’s entire network for revenue adequacy or 

management efficiency, or alternatively, they could choose to 

examine only a subset of the network using the “stand-alone 

cost” (SAC) test—the choice of most shippers. 

A SAC presentation simulates a “stand-alone railroad,” a 

fully efficient hypothetical competitor railroad that serves the 

complaining shipper and other traffic sharing common 

facilities. BNSF Ry. Co. v. STB (“BNSF I”), 453 F.3d 473, 

477 (D.C. Cir. 2006). A challenged rail rate is unreasonable 

to the extent it exceeds the costs (including a reasonable 

profit) of running the stand-alone railroad. Id. A SAC 

presentation thus furthers CMP principles by promoting 

efficiency and eliminating cross-subsidization. It 

accomplishes the former by forcing the railroad to bear the 

cost of any inefficiencies, and the latter by preventing the 

shipper from paying for any facilities from which it receives 

no benefit. Due largely to the difficulty of modeling an 

efficient stand-alone railroad, however, this process is both 

expensive and time-consuming—each “full SAC” case can 

cost a shipper up to $5 million to litigate. Simplified 

Standards for Rail Rate Cases (“Decision”), STB Ex Parte 

No. 646 (Sub-No. 1), at 31 (served Sept. 5, 2007). In fact, 

coal companies are virtually the only shippers who deliver 

sufficiently large loads along fixed routes to justify using full 

SAC procedures. See Rate Guidelines—Non-Coal 

Proceedings (“1996 Guidelines”), 1 S.T.B. 1004, 1008 n.7 

(1996) (noting “prevalence” of coal rate challenges). 

Recognizing the expense of full SAC cases, the 

Commission soon began searching for a simplified 

alternative. Throughout the 1980s and early 1990s, it 

considered but ultimately discarded several alternatives. One 

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proposal, intended to create a simplified SAC procedure, 

came in the form of a computerized model from the 

Association of American Railroads (AAR). Because the 

AAR refused to provide the proprietary source code for its 

computer program (known as AAR-SSAC), the Commission 

ran sample cases through the program to test it. AARSSAC’s days were numbered when it labeled reasonable a 

rate set at 5000 percent of the railroad’s variable costs. 

 

By 1995, when Congress replaced the Commission with 

the Board, the Commission still had not settled on a 

simplified alternative. As a result, when Congress passed the 

ICC Termination Act of 1995, it gave the newly-created 

Board a year to “establish a simplified and expedited method 

for determining the reasonableness of challenged rail rates in 

those cases in which a full stand-alone cost presentation is too 

costly, given the value of the case.” Pub. L. No. 104-88, § 

102(a), 109 Stat. 803, 810 (1995) (codified as amended at § 

10701(d)(3)). Responding to this directive, the Board issued 

a set of simplified guidelines, which rejected AAR-SSAC and 

introduced a “three benchmark” system, 1996 Guidelines, 1 

S.T.B. at 1041, whereby the reasonableness of a challenged 

rate was assessed not by simulating any alternative railroad, 

but simply—at least as “the starting point for a rate 

reasonableness analysis”—by comparing it to similar existing 

rates, id. at 1022. When this approach went unused for years, 

the Board held hearings to find out why. During those 

proceedings, shippers testified that the three benchmark 

guidelines were too vague and that the question of whether a 

case was even eligible for resolution under the three 

benchmark system was so uncertain as to require litigation. 

Simplified Standards for Rail Rate Cases (“NPRM”), STB Ex 

Parte No. 646 (Sub-No. 1), at 3 (served July 28, 2006) (notice 

of proposed rulemaking). 

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In 2006, the Board issued a notice of proposed 

rulemaking, proposing (1) the retention of a slightly modified 

three benchmark system for the smallest cases, (2) the 

creation of a simplified SAC procedure more complicated 

than the three benchmark system but simpler than full SAC, 

for use in medium-size cases, and (3) clear eligibility 

thresholds for each procedure. Id. After reviewing comments 

submitted by railroads and shippers, the Board in 2007 issued 

its final rule—the rule challenged here—which gave the 

shippers the choice of a modified three benchmark system 

intended for the smallest cases, a new simplified SAC 

procedure intended for medium-size cases, or full SAC. 

Decision at 5–6. Absent from the final rule are the eligibility 

thresholds and with them the prospect of litigation over which 

method to use. Instead, the new rule allows each shipper to 

elect the three benchmark method, simplified SAC, or full 

SAC for any case. To channel larger cases to the more 

accurate methods, the rule limits the relief available to $1 

million over five years for a three benchmark case and $5 

million over five years for a simplified SAC case. Id. at 5; 

see also id. at 27–28. This limit applies to whatever 

combination of retrospective and prospective relief the Board 

imposes. Id. at 28. 

The three benchmark system compares the challenged 

rate to three benchmark figures, each expressed as a 

relationship between revenues and variable costs, id. at 10, 

i.e., “those costs that increase as traffic over the railroad 

increases,” BNSF Ry. Co. v. STB (“BNSF II”), 526 F.3d 770, 

773 (D.C. Cir. 2008). Calculating one of these benchmarks 

involves comparing the rail movement at issue with a group 

of similar movements. The Board selects a comparison group 

from groups proposed by the parties, who choose the 

comparison movements from the four most recent years of 

data in the “Waybill Sample.” Decision at 18. That sample, 

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compiled by the Board, is a survey of information from rail 

movements across the nation. Id. at 78. 

The Board’s simplified SAC procedure is similar to the 

full SAC method, but with a crucial difference. In a full SAC 

presentation, the stand-alone railroad is hypothetical and fully 

efficient. In a simplified SAC presentation, the stand-alone 

railroad is instead a portion of the actual railroad with limited 

modifications not relevant here. Id. at 15–16. 

This case involves two sets of challenges to the Board’s 

rule. A group of shippers argues that the Board set the relief 

caps too low and adopted simplified SAC with neither 

justification nor testing. Several railroads challenge the 

Board’s adoption of the three benchmark method, claiming 

that the Board sanctioned the use of stale data and barred 

railroads from presenting certain types of evidence in those 

cases. All railroad petitioners intervene to oppose the 

shippers’ petition, and most shipper petitioners intervene in 

opposition to the railroads’ petition. We review the Board’s 

orders using the Administrative Procedure Act’s standards, 

under which we will set aside agency action that is 

“‘arbitrary, capricious, an abuse of discretion, or otherwise 

not in accordance with law.’” BNSF II, 526 F.3d at 774 

(quoting 5 U.S.C. § 706(2)(A)). “In the rate-making area, our 

review is particularly deferential, as the Board is the expert 

body Congress has designated to weigh the many factors at 

issue when assessing whether a rate is just and reasonable.” 

Id. 

II. 

We begin with the shippers’ claims. They argue that the 

Board acted arbitrarily in setting the relief cap levels and in 

adopting simplified SAC. 

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Relief Caps 

The shippers bring an intriguing but ultimately unavailing 

challenge to the Board’s decision to set the relief limits at $1 

million under the three benchmark method and $5 million 

under simplified SAC. Although embracing the overall 

approach of setting relief caps, the shippers claim that the 

Board failed to make the findings necessary to ensure it 

complied with section 10701(d)(3)’s requirement that it 

“establish a simplified and expedited method for determining 

the reasonableness of challenged rail rates in those cases in 

which a full stand-alone cost presentation is too costly, given 

the value of the case.” According to the shippers, the Board 

failed to find that in those cases in which full SAC is too 

costly, the relief caps still allow simplified SAC to generate 

reasonable rates. Similarly, they claim that the Board failed 

to assure that in those cases in which simplified SAC is too 

costly, the relief caps still allow the three benchmark method 

to generate reasonable rates. 

The shippers start from the premise that at some point a 

limit on relief might be so low as to produce an unreasonable 

rate, either by making it infeasible to bring a case or by falling 

too far below the rate to which the shipper would otherwise 

be entitled. This premise follows from the shippers’ belief 

that any rate the Board prescribes as relief “must be 

reasonable” under section 10701(d)(1). See Shippers’ 

Opening Br. 12. If unduly low relief caps produce an 

unreasonable rate in a case in which full SAC is too costly, 

the shippers continue, then the shipper is left without a 

meaningful way to get a reasonable rate. If too many cases 

fall into this category—that is, if too many cases in which full 

SAC is too costly are also cases in which simplified SAC fails 

to produce a reasonable rate—then, they conclude, simplified 

SAC would not constitute “a simplified and expedited method 

for determining the reasonableness of challenged rail rates in 

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those cases in which a full stand-alone cost presentation is too 

costly, given the value of the case.” § 10701(d)(3). 

Thus, according to the shippers, the Board should have 

identified that subset of cases in which full SAC is too costly 

and ensured that in such cases simplified SAC produces 

reasonable rates. They take no issue with the Board’s 

estimate that full SAC cases cost $5 million to litigate. But 

according to them, the Board should have determined the 

minimum permissible potential recovery ratio—i.e., the ratio 

of available relief to litigation cost, a ratio the shippers 

confusingly call a “risk factor”—below which full SAC 

becomes too costly, and then ensured that for cases falling 

under the threshold produced by that ratio, simplified SAC 

provides enough relief to produce a reasonable rate. 

Shippers’ Opening Br. 20–21. For example, suppose the 

Board had picked a potential recovery ratio of 3.0. 

Multiplying that ratio by full SAC’s $5 million litigation cost 

would indicate that cases with anticipated relief of $15 

million or less are those “in which a full [SAC] presentation is 

too costly, given the value of the case,” § 10701(d)(3). After 

picking that ratio the Board would then have to set the 

simplified SAC relief caps high enough that, in cases with 

anticipated relief of less than $15 million, the rate produced 

by simplified SAC would still be reasonable. The shippers 

insist that the Board did none of this, but we think they ask 

too much. 

Section 10701(d)(1) requires that a rate “must be 

reasonable” only if established by a rail carrier with market 

dominance, not if prescribed by the Board. § 10701(d)(1) (“If 

. . . a rail carrier has market dominance over the transportation 

to which a particular rate applies, the rate established by such 

carrier for such transportation must be reasonable.” 

(emphasis added)). Therefore, contrary to what the shippers 

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believe, unlike railroad-set rates, the rates the Board 

prescribes as relief in simplified SAC cases, though subject to 

different requirements, need not themselves be “reasonable” 

within the meaning of section 10701(d)(1). Compare § 

10704(a)(2) (requiring revenue adequacy for rates prescribed 

by the Board) with § 10701(d)(2) (requiring revenue adequacy 

and setting out criteria for the Board to consider in 

“determining whether a rate established by a rail carrier is 

reasonable for purposes of [section 10701(d)(1)]” (emphasis 

added)). That said, section 10701(d)(3)’s requirement of a 

“simplified and expedited method for determining the 

reasonableness of challenged rail rates in those cases in which 

a full stand-alone cost presentation is too costly, given the 

value of the case,” clearly contemplates a method that may 

substitute for a full SAC proceeding in low-value cases—that 

is, a method for determining the reasonableness of rail rates 

not in the abstract, but for the purpose of awarding some relief 

to shippers. Thus, section 10701(d)(3) requires the 

“simplified and expedited method” to function as a 

meaningfully effective way to seek some degree of redress for 

unreasonable rail rates, and so excessively stingy relief caps 

could in theory render a method ineffective. In that sense, 

then, the shippers are correct: the Board was obliged to 

determine that the relief caps were sufficiently high to satisfy 

section 10701(d)(3). 

Although not using the methodology the shippers urge, 

the Board did just that: it clearly recognized its section 

10701(d)(3) obligation and made the necessary findings. It 

made clear that it understood the shippers’ precise concerns, 

describing them as complaining of a “Hobson’s choice” for 

certain case values and focusing on a hypothetical where a 

shipper who, pursuing relief under the simpler method, would 

“relinquish over half the value of its case,” while under the 

more complex method would stand to make only twice the 

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litigation costs. Simplified Standards for Rail Rate Cases

(“Rehearing Decision”), STB Ex Parte No. 646 (Sub-No. 1), 

at 7 (served Mar. 19, 2008). Though the precise example the 

Board mentioned compared the three benchmark method to 

simplified SAC, rather than simplified SAC to full SAC, it 

discussed both cases together, and its reasoning applies 

equally to the comparison between simplified SAC and full 

SAC. 

After correctly identifying the shippers’ concerns, the 

Board addressed them. It began by stating that cases which 

might net the same relief have different prospects for success 

and explained the desirability of encouraging a shipper who 

was “more confident of its prospects for obtaining greater 

relief” to use the more precise (and more costly) methods. Id.

at 8. Next, the Board stated that according to the table of case 

values and net relief submitted by the shippers, “the $1 

million and $5 million limits provide every shipper with a 

potential case with sufficient net relief after litigation costs to 

justify bringing a complaint under Three-Benchmark or 

Simplified-SAC method[s].” Id. The Board accordingly 

found that “every complainant will have a vehicle to pursue 

its complaint regardless of the value of the case.” Id. That is, 

the Board found that shippers subject to the relief caps retain 

a sufficient amount of relief, even after the cost of litigation, 

to make it feasible to bring their cases. 

The shippers insist that a too-low relief cap could violate 

section 10701(d)(3) in another way: even if not too close to 

the litigation cost of the case, a relief cap might be too far 

below the actual amount to which the shipper is entitled, thus 

requiring the shipper to forgo such an unreasonably large 

amount of relief as to prevent simplified SAC from serving as 

an effective “simplified and expedited method.” Perhaps so, 

but the Board addressed this possibility. It acknowledged that 

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wherever relief caps might be set, some shippers would face a 

difficult choice due to the effect of the cap. Id. The Board 

then concluded: 

Ultimately, we do not think it is improper for 

there to be some trade-off involved in using a 

simpler, faster, and less costly method that is 

inherently less precise. We believe the limits 

we have set strike the appropriate balance so 

that we do not open the door to excessive 

litigation under methods that are not justified 

for the amount at dispute. 

Id. This discussion clearly represents the Board’s assessment 

that the “trade-off” does not require shippers to forgo too 

much relief in order to get the benefit of a simpler proceeding. 

The Board thus fully responded to the shippers’ concern. 

To be sure, the Board’s analysis was qualitative instead 

of quantitative, but it rested on the Board’s expertise, as well 

as an assessment of the relief cap levels. Not every problem 

is appropriate for qualitative analysis, but this one is: the 

interest in channeling larger disputes into more accurate 

forums is “inherently incommensurable” with the interest in 

giving shippers meaningful access to a simpler forum, such 

that there is no way to balance the two without making a 

“judgment call,” BNSF II, 526 F.3d at 776 (upholding the 

Board’s refusal to adopt certain rate adjustments). Even had 

the Board explicitly considered a wider range of cases, at the 

end of the day it would still have had to make a policy 

judgment as to when full SAC is “too costly” and when a 

relief cap renders the rate produced by simplified SAC 

unreasonable. Cf. FCC v. Fox Television Stations, Inc., 129 

S. Ct. 1800, 1813 (2009) (“It is one thing to set aside agency 

action under the Administrative Procedure Act because of 

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failure to adduce empirical data that can readily be obtained. 

It is something else to insist upon obtaining the unobtainable.” 

(citation omitted)). Given this reality, we have no difficulty 

concluding that the Board explained itself adequately for us to 

“reasonably discern” its path as to the relief caps under both 

the three benchmark method and simplified SAC. ACS of 

Anchorage, Inc. v. FCC, 290 F.3d 403, 408 (D.C. Cir. 2002). 

Hinting at an additional challenge to the Board’s rule, the 

shippers argue in a single sentence in their opening brief that 

the relief caps are in fact too low to comply with section 

10701(d)(3) or the general requirement that rates charged to 

captive shippers “must be reasonable,” § 10701(d)(1). 

Shippers’ Opening Br. 12. Yet the shippers make no attempt 

to demonstrate this. They never pick a certain amount or 

percentage of relief forgone by relief caps and claim that such 

an amount renders the resulting rate unreasonable. Nor do 

they pick a particular potential recovery ratio and claim that 

cases falling under that ratio are necessarily those for which 

full SAC is too costly. They argue only that the Board 

arbitrarily failed to find that simplified SAC would provide a 

reasonable rate in cases in which full SAC was too costly, not 

that the Board’s findings on that point represent an 

unreasonable interpretation of the statute. Even assuming 

they have adequately raised the latter argument, the shippers 

have failed to convince us of its merit. 

True, as the shippers point out, at some case values 

neither full SAC nor simplified SAC affords much relief. For 

example, under full SAC a case with total relief of $7.5 

million would net only $2.5 million. This modest recovery, 

just half of the $5 million litigation costs, makes bringing the 

case under full SAC a risky venture. Under simplified SAC 

the case would net $4 million ($5 million capped relief minus 

$1 million litigation costs), but the relief cap would require 

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the shipper to forgo $2.5 million, a substantial sum equal to 

more than half of the shipper’s net relief. Even so, that hardly 

means the Board erred in finding simplified SAC to be a 

“simplified and expedited method of determining the 

reasonableness of challenged rail rates in those cases in which 

a full stand-alone cost presentation is too costly, given the 

value of the case,” § 10701(d)(3). In light of the obvious 

ambiguity inherent in this statutory language, we must uphold 

the Board’s interpretation unless it is unreasonable. See Ass’n 

of Am. R.Rs. v. STB, 237 F.3d 676, 680 (D.C. Cir. 2001) 

(citing Chevron U.S.A. v. Natural Res. Def. Council, 467 U.S. 

837, 843 (1984)). It isn’t. For one thing, as the Board points 

out, the $4 million recovery under simplified SAC is more 

valuable than would be the same amount obtained under full 

SAC. After all, it comes more quickly and, thanks to reduced 

litigation costs, with less downside risk, unquantifiable yet 

real benefits to expedited procedures. Respt.’s Br. 46. For 

another, as discussed above, the prescribed rate the Board 

imposes—that is, the relief limited by the cap—isn’t itself a 

rate that must qualify as reasonable under section 

10701(d)(1). Far from limiting the reasonableness of a rate, 

the relief cap represents a procedural mechanism necessary to 

the reliable adjudication of a challenged rate’s reasonableness. 

The very phrase “simplified and expedited method” 

contemplates that the method will impose some costs. And 

the costs imposed by the simplified SAC relief cap are 

unlikely ever to exceed the litigation costs of full SAC; 

because any case worth more than $9 million will yield more 

potential profit under full SAC, simplified SAC’s relief cap 

will presumably cause shippers to forfeit only $4 million, less 

than the $5 million cost to litigate full SAC. Perhaps the 

Board should treat relief caps differently than other 

procedural mechanisms which impose litigation costs, but the 

shippers make no such argument. We are thus unpersuaded 

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by their cursory suggestion that the Board’s interpretation of 

section 10701(d)(3) is unreasonable. 

Extending this argument to the choice between simplified 

SAC and the three benchmark method, the shippers claim that 

section 10701(d)(3) obligates the Board to identify the case 

value at which simplified SAC is too costly and to ensure that 

in those cases the three benchmark procedure produces 

reasonable rates. We disagree. Although the statute requires 

the Board to devise “a simplified and expedited method for 

determining the reasonableness of challenged rail rates in 

those cases in which a full stand-alone cost presentation [i.e., 

full SAC] is too costly, given the value of the case,” § 

10701(d)(3), it nowhere requires the Board to provide any 

procedure for those cases in which a simplified SAC 

presentation is too costly. So long as simplified SAC 

qualifies as a “simplified and expedited method,” nothing in 

the statute requires the Board to promulgate the three 

benchmark method at all. True, some cases will be too small 

to bring under simplified SAC, which costs an average of $1 

million, but that’s fully consistent with simplified SAC 

qualifying as a “simplified and expedited method.” Under 

any procedure, some cases will always be too small to be 

worth bringing. 

That said, having decided that it needed to implement a 

three benchmark system, the Board had to do so 

nonarbitrarily. See, e.g., Eagle Broad. Group v. FCC, 563 

F.3d 543, 551 (D.C. Cir. 2009). We are convinced it did. The 

Board analyzed the effect of the three benchmark relief caps 

together with that of the simplified SAC relief caps. Its 

findings that the relief caps “strike the appropriate balance” 

and afford “sufficient net relief after litigation costs,” 

Rehearing Decision at 8, apply to the three benchmark caps as 

well as to the simplified SAC caps. For reasons similar to 

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those discussed above, these findings amply justify the 

Board’s promulgation of the three benchmark caps. 

Simplified SAC 

In addition to challenging the relief caps, the shippers 

object to the Board’s adoption of simplified SAC itself. They 

claim that the Board’s decision not to require the simplified 

SAC stand-alone railroad to be optimally efficient guts the 

entire rationale for adopting simplified SAC in the first place. 

They also claim that the Board was required to evaluate 

simplified SAC using test data. We disagree on both counts. 

In promulgating the simplified SAC method, the Board 

eliminated the search for inefficiencies in the stand-alone 

railroad. The shippers argue that this constitutes so 

significant a deviation from CMP principles as to render the 

Board’s reliance on those principles to justify simplified SAC 

arbitrary and capricious. But the Board explained that the 

efficiency inquiry is precisely what renders full SAC 

presentations so costly, and that in its view modern railroads 

suffer from too little inefficiency to justify this expense for 

the purpose of simplified SAC. Decision at 55–56. 

Specifically, while acknowledging that in its 1996 rulemaking 

it had rejected the AAR-SSAC proposal because it failed to 

account for inefficiencies, the Board explained its change in 

position by observing that “rail capacity and traffic conditions 

have changed,” and railroads are no longer “burdened by 

substantial excess capacity.” NPRM at 14; see also Decision

at 55–56 (referencing NPRM). Given this, the Board 

concluded that “railroads, in most instances, are likely 

operating at a sufficiently efficient level so that it would not 

be worth the time and considerable expense required to 

attempt to measure the amount of inefficiency that could be 

eliminated” by a more efficient stand-alone railroad. 

Decision at 56. It further noted that railroads have little 

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incentive to build unnecessary facilities given the market 

realities governing most rail rates, NPRM at 14, that 

simplified SAC allows limited modifications based on certain 

easy-to-detect inefficiencies, Decision at 56, and that in any 

event simplified SAC conforms more closely to CMP 

principles than does the three benchmark approach, id. at 56. 

In our view, the shippers are simply second-guessing the 

Board’s determination of how closely simplified SAC must 

track CMP principles—principles the Board itself chose to 

retain. True, simplified SAC does nothing to serve CMP’s 

objective of eliminating inefficiencies, but it still perfectly 

serves CMP’s other objective: eliminating cross-subsidization 

of facilities for which shippers see no benefit. See id. at 55. 

The Board reasonably concluded that this was enough. As we 

have said: “[t]he pursuit of precision in rate proceedings, as in 

most things in life, must at some point give way to the 

constraints of time and expense, and it is the agency’s 

responsibility to mark that point.” BNSF I, 453 F.3d at 482. 

The shippers next take issue with the Board’s explanation 

for its change in position from its 1996 rejection of the AARSSAC proposal. Although “[a]n agency may not . . . depart 

from a prior policy sub silentio or simply disregard rules that 

are still on the books,” Fox, 129 S. Ct. at 1811, here the Board 

did no such thing. As we have pointed out, it adequately 

explained the turnabout by noting the decline in excess 

capacity and overall increase in railroad efficiency since the 

1996 rulemaking. See NPRM at 14; Decision at 55–56. The 

Board’s inference that excess capacity signals inefficiency, 

and the consequent finding that inefficiency had decreased to 

the point that uncovering it was no longer cost-effective, 

provide a sufficient explanation for jettisoning that inquiry in 

simplified cases. According to the shippers, in 1996 the 

Board treated certain capacity constraints (i.e., railroads 

USCA Case #07-1372 Document #1184542 Filed: 06/09/2009 Page 17 of 26
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running at full capacity in certain situations) as indicative of 

inefficiency, which they think contradicts its current treatment 

of capacity constraints as a sign of efficiency. The simple 

answer to this cryptic objection is that in 1996 the Board did 

not treat capacity constraints as indicative of inefficiency. 

The only evidence the shippers cite on this point is the Board 

making the very different point that existing double-track 

infrastructure was less efficient than more modern computercontrolled single-track architecture. 1996 Guidelines, 1 

S.T.B. at 1015 n.33. But this remark has nothing at all to do 

with capacity constraints, so it can hardly conflict with the 

Board’s current reasonable treatment of capacity constraints 

as signaling lower excess capacity and greater efficiency. 

Next, the shippers complain that the Board failed to test 

its simplified SAC procedure with sample data. 

Acknowledging that nothing in the statute requires such 

testing, the shippers nonetheless maintain that since the Board 

tested AAR-SSAC and found that it produced unreliable 

results, the Board acted arbitrarily by failing to test its own 

simplified SAC proposal. For its part, the Board explained 

that the Commission only tested AAR-SSAC because the 

AAR refused to provide the source code for the program, thus 

preventing the Commission from learning its precise details. 

Decision at 54. And although AAR-SSAC was similar to 

simplified SAC in disregarding inefficiencies, it also had very 

significant differences, as it expanded the stand-alone railroad 

to include other profitable traffic and excluded certain 

insufficiently profitable traffic, steps absent from the Board’s 

simplified SAC. Compare id. at 13 n.18 (describing AARSSAC method) with id. at 15–16 (describing the Board’s 

simplified SAC). Given this difference between the two 

methods, we see nothing arbitrary about the decision to test 

the first but not the second, even after the first’s poor 

showing. 

USCA Case #07-1372 Document #1184542 Filed: 06/09/2009 Page 18 of 26
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III. 

This brings us to the railroad’s challenges to the Board’s 

adoption of the three benchmark system. They make four 

arguments, which we consider in turn. 

Notice 

The three benchmark system involves a comparison of 

the challenged rates to a group of rates taken from the waybill 

sample. Under the Board’s initial proposal, parties could 

propose comparison groups drawn from the most recent year 

of waybill sample data. Under the final rule, however, the 

parties could draw from the four most recent years of data. 

Relying on APA section 553, the railroads argue that the 

Board failed to provide notice that it was considering this 

change. See 5 U.S.C. § 553 (requiring agencies to give notice 

of proposed rules). We needn’t address the merits of this 

argument, however, because the railroads failed to present it 

to the Board. As a general rule, “‘courts should not topple 

over administrative decisions unless the administrative body 

not only has erred but has erred against objection made at the 

time appropriate under its practice.’” Advocates for Highway 

& Auto Safety v. Fed. Motor Carrier Safety Admin., 429 F.3d 

1136, 1148 (D.C. Cir. 2005) (quoting United States v. L.A. 

Tucker Truck Lines, Inc., 344 U.S. 33, 37 (1952)). And as we 

recognized in Petroleum Communications, Inc. v. FCC, 22 

F.3d 1164 (D.C. Cir. 1994), and reaffirmed just last month in 

Globalstar, Inc. v. FCC, 564 F.3d 476 (D.C. Cir. 2009), the 

objection that an agency violated the APA’s notice 

requirement is a “classic example” of an issue that should be 

raised before the agency. Petroleum Commc’ns, 22 F.3d at 

1171; see also Globalstar, 564 F.3d at 484. 

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The railroads respond with two arguments. First, they 

claim that they had no way of objecting to any lack of notice 

until the Board promulgated its final rule. Fair enough, but 

they never dispute the fact that they could then have sought 

reconsideration, as did the shippers on other grounds. 

Second, the railroads think that cases like Petroleum 

Communications and Globalstar are distinguishable because 

the FCC’s organic statute, unlike the Board’s, expressly 

requires petitioners to present their objections to the agency. 

Railroads’ Reply Br. 13 n.6. But this distinction makes no 

difference because the FCC’s statute only “codifies the 

judicially-created requirement of exhaustion,” Petroleum 

Commc’ns, 22 F.3d at 1170, and we have described the statute 

as “requiring the same degree of exhaustion for the FCC as 

for other agencies,” Wash. Ass’n for Television & Children v. 

FCC, 712 F.2d 677, 682 (D.C. Cir. 1983). Given that the 

railroads argue neither that their claim falls within any of the 

“recognized exceptions” to the issue exhaustion doctrine, 

Petroleum Commc’ns, 22 F.3d at 1170, nor that the Board 

was “afforded a fair opportunity to pass on the argument in 

question,” Globalstar, 564 F.3d at 484 (internal quotation 

marks and brackets omitted), they may not raise their claim 

here. 

The railroads insist that courts have no authority to 

require parties to exhaust administrative procedures where a 

statute imposes no such requirement. They are correct that in 

Darby v. Cisneros, 509 U.S. 137 (1993), the Supreme Court 

held that where no statute or regulation requires a party to 

pursue administrative remedies, courts are without authority 

to require parties to exhaust administrative procedures as a 

precondition of seeking judicial review. Id. at 144–45. But in 

Darby, the only question before the Court was whether 

agency action was “final” for the purposes of judicial review. 

USCA Case #07-1372 Document #1184542 Filed: 06/09/2009 Page 20 of 26
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See id. at 143–47. Because Darby says nothing at all about 

other reasons courts might find certain claims barred, it leaves 

intact the general requirement that parties give the agency a 

chance to rule on all their objections. See ExxonMobil Oil 

Corp. v. FERC, 487 F.3d 945, 962 (D.C. Cir. 2007) 

(“Petitioners believe that the absence of a rehearing 

requirement in the [Interstate Commerce Act] means that they 

were not required to raise their complaints with FERC. 

Petitioners miss the point: Their error was not failing to seek 

rehearing, but rather failing to raise the issue at all.” (citations 

omitted)). Even where, as here, presenting a claim to the 

agency requires seeking reconsideration, nothing in Darby

permits parties to obtain judicial review of a claim they never 

gave the agency a chance to address. 

Regulatory Lag 

The railroads argue that the Board arbitrarily failed to 

account for the “regulatory lag” caused by the delay inherent 

in using waybill sample data. Due to the time it takes the 

Board to gather the data, the most current waybill samples are 

at least one year old, and the ability to draw comparison 

movements from the most recent four samples compounds the 

problem. Citing the rapid change in rail rates over time, the 

railroads argue that the use of outdated samples converts the 

three benchmark system into a comparison between current 

rates and historical rates. The Board recognized the problem 

of regulatory lag and established a mechanism for addressing 

it on a case-by-case basis. Although the three benchmark 

procedure uses waybill sample data to run the benchmarks 

and determine a presumed maximum lawful rate, it gives the 

parties an opportunity to present evidence of “other relevant 

factors” to rebut the presumption of lawfulness and seek to 

modify the maximum allowable rate. Decision at 17, 21–22. 

The railroads insist that this mechanism is insufficient for 

three reasons, none of which has merit. 

USCA Case #07-1372 Document #1184542 Filed: 06/09/2009 Page 21 of 26
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First, they argue that the opportunity to modify the 

presumed maximum lawful rate is illusory because it requires 

rebutting a presumption. But the Board has represented—and 

the railroads nowhere meaningfully dispute—that the 

presumption simply shifts the normal burden of persuasion to 

the party seeking a modification. Respt.’s Br. 29; Railroads’ 

Reply Br. 6–7. This clearly allows the railroads a reasonable 

opportunity to seek a modification. 

Second, the railroads complain that when they submit 

evidence of other relevant factors, the Board requires them to 

quantify the impact of the factors on the overall rate. True, 

this requires more of the railroads than would a rule allowing 

them to simply dump evidence in the Board’s lap without 

explanation, but it hardly poses an insurmountable hurdle. 

Even under the railroads’ preferred alternative, they would 

still need to present data sufficiently precise to have a 

quantifiable impact—the only difference is that under the 

Board’s system this process of adjustment occurs after 

calculating the benchmarks, not before. The railroads offer 

no reason to believe that quantifying the impact of changing 

conditions is feasible at the outset of the benchmark analysis 

but impracticable as an adjustment to the result of that 

analysis. According to the railroads, in a recent set of cases 

brought under the new guidelines, the Board was unpersuaded 

by their proffered “other relevant factors” evidence. E.g., E.I. 

du Pont De Nemours & Co., STB No. 42099 (June 30, 2008). 

But whatever its propriety, the Board’s decision in those 

cases, which we remanded to the agency unopposed, CSX 

Transp., Inc. v. STB, No. 08-1246 (D.C. Cir. Jan. 15, 2009) 

(remanding STB Nos. 42099, 42100, 42101), hardly 

impeaches the entire rule. 

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Third, the railroads complain that the Board forbids 

parties from submitting as “other relevant factors” evidence 

either of movement-specific adjustments to the cost estimates 

or of product or geographic competition. But these 

objections, to which we turn in the next two subsections, have 

no special force when applied to the regulatory lag problem. 

If, as we conclude in that discussion, the Board may exclude 

evidence of movement-specific costs or of competition 

generally, it may certainly exclude evidence of change in such 

costs or competition. 

Evidence of Movement-Specific Adjustments 

The three benchmarks evaluate ratios of revenues to 

variable costs. Although revenues generated by a specific rail 

movement are easy to measure, variable costs directly 

associated with that movement are not. See Adoption of the 

Uniform Railroad Costing System as a General Purpose 

Costing System for All Regulatory Costing Purposes, 5 

I.C.C.2d 894, 904 (1989) (“Given the degree of aggregation 

in the accounting data reported to the Commission, it is 

impossible for either Rail Form A or URCS [i.e., two 

alternative costing systems] to produce true marginal costs for 

particular movements . . . .”). To estimate these costs, the 

Board uses the Uniform Rail Costing System (URCS), a 

procedure that generates a statistical estimate of each 

railroad’s variable costs based on its “system-wide average 

variable costs.” BNSF II, 526 F.3d at 774. For years, the 

Board has used URCS to answer the threshold question 

whether a railroad has enough market dominance to allow the 

Board to regulate the rate in the first place. In that context, 

the Board originally allowed the parties to argue for 

movement-specific adjustments to the cost estimates, but 

recently decided to bar them, finding that “the cost savings 

and increase in predictability . . . outweigh any gains in 

accuracy from the railroads’ or shippers’ adjustment 

USCA Case #07-1372 Document #1184542 Filed: 06/09/2009 Page 23 of 26
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proposals.” Id. at 776. We upheld the Board’s decision as a 

permissible exercise of its judgment. Id. 

Here the railroads argue that although the Board could 

permissibly exclude movement-specific adjustments from 

cost estimates used in the threshold market dominance 

determination, it acted arbitrarily in barring them from 

estimates used in the three benchmark procedure. None of the 

railroads’ three arguments for this point has merit. 

First, they claim that the Board failed to address 

commenters’ proposals to use only certain such adjustments. 

But the Board specifically considered and rejected these 

intermediate proposals, explaining that it would be unfair to 

allow only certain adjustments without granting the opposing 

party an opportunity to “submit counter-adjustments,” as well 

as “access to broad discovery” for that purpose. Decision at 

97. 

Second, they claim that the need for accurate cost 

estimates is particularly acute in three benchmark cases given 

the methodology’s inherent crudeness. The Board, however, 

relied on its experience with such adjustments to conclude 

they are too costly in light of their limited effect on accuracy. 

Id. at 84. And although crude, the three benchmark method is 

used for small disputes where efficiency is paramount. 

Further, using movement-specific adjustments in a three 

benchmark presentation would be even more cumbersome 

than in the threshold market dominance determination, as it 

would require calculating movement-specific adjustments for 

every movement in the comparison group, not just the 

challenged movement. Given this, the Board’s conclusion 

that, as in the case of the threshold market dominance 

determination, movement-specific adjustments are too costly 

for three benchmark presentations, represents the “kind of 

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judgment call” that “balances inherently incommensurable 

costs and benefits” and “falls within the expertise of the 

agency,” BNSF II, 526 F.3d at 776. 

Third, the railroads argue that comparing movementspecific revenues with system-average costs is inherently 

arbitrary. But if that were true, then doing so in determining 

market dominance would have been equally impermissible. 

And in any event, there are sound reasons for the mismatch: 

getting movement-specific revenues is easy, whereas 

calculating movement-specific variable costs is difficult, and 

in the Board’s expert judgment not much more accurate. 

Evidence of Product or Geographic Competition 

Finally, the railroads complain about the Board’s 

preclusion of evidence of product or geographic competition. 

They argue that the Board never provided notice that it was 

considering barring such evidence, but given that the Board 

initially proposed barring all evidence offered to disturb the 

result of the three benchmark calculation, the Board’s 

eventual rule barring some evidence represented a “logical 

outgrowth” of the proposal. Ass’n of Battery Recyclers, Inc. 

v. EPA, 208 F.3d 1047, 1058 (D.C. Cir. 2000) (internal 

quotation marks omitted); see also id. at 1059 (“EPA 

proposed allowing alternative standards for remediated soils. 

. . . One would logically conclude that EPA could have ended 

up allowing alternative standards for all soils as the proposal 

suggested, for no soils, or—as it turned out—for some 

soils.”). 

On the merits, the railroads argue only that the Board 

failed to consider the possibility that parties could present 

such evidence without the need for discovery. But no 

commenter suggested to the Board that such evidence, which 

the Board had previously excluded from full SAC cases due 

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to the discovery and other burdens it caused, Market 

Dominance Determinations—Prod. & Geographic 

Competition, 3 S.T.B. 937, 946–47 (1998), could be presented 

without discovery. Given that, the Board hardly acted 

arbitrarily in failing to consider that point. 

V. 

For the reasons stated above, we deny the petitions for 

review in their entirety. 

So ordered. 

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