BNSF Railway Co. petitions for review of an order of the Surface Transportation Board rejecting as unreasonable certain rates the railroad charged the Public Service Company of Colorado, d/b/a Xcel Energy, to ship coal from the Powder River Basin in Wyoming to Xcel’s electric generating plant in Colorado. BNSF argues first the Board should have dismissed the rate proceeding three years after the complaint was filed, pursuant to the limitation in 49 U.S.C. § 11701(c). In the alternative BNSF argues we should, for a number of reasons, set aside the Board’s order as arbitrary and capricious. We hold BNSF’s first argument is forfeit and its other arguments are unpersuasive, wherefore we deny its petition for review.
I. Background
With the passage of the Staggers Rail Act of 1980, the Congress limited regulation of railroad rates to markets in which a single carrier exercises “market dominance,” defined as “an absence of effective competition from other rail carriers or modes of transportation.” 49 U.S.C. §§ 10701(c)-(d), 10707(a). Furthermore, it provided in the ICC Termination Act of 1995 that the Surface Transportation Board may begin an investigation into the reasonableness of a carrier’s rates “only on [the] complaint” of an affected shipper. Id. § 11701(a). If the Board finds the carrier dominates the relevant market, then it must determine whether the rate charged the shipper is “reasonable.” Id. § 10701(d)(1). If the rate is “unreasonable,” id. § 10707(c), then the Board may prescribe the maximum lawful rate, id. § 10704(a)(1), and order the railroad to pay reparations to the complainant, id. § 11704(b). The Board is precluded, however, from finding market dominance and in turn regulating the rate if the revenue generated thereby does not exceed 180% of the carrier’s variable cost of service. Id. § 10707(d)(1)(A).
The Board evaluates the “reasonableness” of rail rates in light of the standards promulgated by its predecessor, the Interstate Commerce Commission,
see Coal Rate Guidelines, Nationwide,
A shipper may challenge a rate either on a system-wide basis, by arguing that the rate charged exceeds the amount necessary for the railroad to achieve “revenue adequacy [as] adjusted for demonstrated management inefficiencies,”
id.
at 534 & n. 35, or as in this case, under the stand-alone cost (SAC) test, which is designed to prevent “cross-subsidization.”
Id.
at 541. Regardless of a railroad’s overall revenue adequacy, therefore, the rate charged a captive shipper is further constrained by the principle that a “captive shipper should not bear the costs of any facilities or services from which it derives
A shipper challenging a rate under the SAC test must hypothesize an efficient “stand-alone railroad” (SARR) that would serve the “captive shipper or a group of shippers who benefit from sharing joint and common costs.” Id. at 528. The test assumes a “contestable market,” that is, a market without any barriers to entry or exit. Id. If the rate being challenged is more than would be required by the hypothetical new entrant to cover its costs (including a reasonable return on investment), then that rate is unreasonable. See id. at 528-29.
A SAC proposal must be comprehensive, taking into account a host of variables from capital expenses for trains and track to the operating plan and routing of traffic on the SARR. The complaining shipper has “broad flexibility” to design the route of the SARR in order “to lower costs by taking advantage of economies of density.” Id. at 543. Although there are no “restrictions on the traffic that may potentially be included in a stand-alone group,” the proponent “must identify, and be prepared to defend, the assumptions and selections it has made.” Id. at 544. There is a rebuttable presumption that “non-issue” traffic, that is, the traffic of non-complaining shippers, will contribute revenue “at the level of their current rates.” Id. When such traffic is routed over a SARR for only a part of its through movement, the method for allocating the revenue from this “cross-over traffic” may be hotly disputed, as it is in this case — of which more later.
Xcel filed its complaint with the Board in December 2000 challenging rates BNSF charged for the transportation of coal from the Powder River Basin to Xcel’s Pawnee electric generating station near Brush, Colorado. In January 2003 Xcel submitted its opening evidence, including its proposed SARR, which replicated a section of the traffic handled by BNSF’s rail lines between the Eagle Butte mine in Northern Wyoming and the Pawnee plant. Crossover traffic, which would move on the SARR for only a part of its overall movement before reaching an interchange point where it would be transferred to BNSF for carriage to its destination, accounted for more than 90% of all traffic on the SARR. See Appendix (map showing route of SARR and residual BNSF lines that handle cross-over traffic).
BNSF moved in February 2003 to dismiss the complaint on the ground that Xcel’s operating plan was infeasible and it had therefore failed to make out a prima facie case. The Board denied the request, holding BNSF had “not demonstrated that the alleged errors in Xcel’s evidence are so large in magnitude or so egregious as to warrant dismissing the complaint at this early stage in the proceeding.” BNSF then submitted its own evidence, which focused upon four points: (1) BNSF must be allowed to charge shippers with highly inelastic demand, such as Xcel, high rates in order to achieve revenue adequacy; (2) the use of cross-over traffic, upon which Xcel’s SARR so heavily relied, distorted the results of the SAC analysis by allocating excessive revenues to the SARR’s portion of the overall movement; (3) the single largest movement on the SARR, coal destined for Western Resources’ Jeffrey Energy Center (the “Jeffrey traffic”), was unreasonably diverted from its present route to a longer route on the SARR; and (4) Xcel’s operating plan was infeasible.
In June 2004 the Board ruled in favor of Xcel, rejecting BNSF’s challenges to Xcel’s SAC presentation and holding BNSF’s rates unreasonable.
See Pub. Serv. Co. of Colo, d/b/a Xcel Energy v.
II. Analysis
As a threshold matter, BNSF argues Xcel’s complaint should have been dismissed pursuant to 49 U.S.C. § 11701(c) in December 2003, three years after it was filed. In the alternative the carrier claims the Board’s decision is, in a number of respects, arbitrary and capricious.
A. Three-Year Time Limit
Subsections 11701(a) and (c) of Title 49 provide in pertinent part:
(a) Except as otherwise provided in this part, the Board may begin an investigation under this part only on complaint.
(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.
BNSF contends this rate proceeding was “begun by the Board under subsection (a),” 49 U.S.C. § 11701(c), when Xcel filed its complaint on December 20, 2000. Therefore, BNSF urges, the case was dismissed “automatically” on December 20, 2003, nearly six months before the Board issued its decision.
The Board counters that BNSF forfeited this argument because, even if the three-year limitation applied, BNSF did not raise the point until long after three years had elapsed and the Board had ruled; indeed BNSF first made the argument in a footnote to its petition for reconsideration. On the merits the Board reasons that because the 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.” This it does by reading the phrase “formal investigative proceeding,” as used in § 11701(c), to refer not to an investigation begun “on complaint” of a captive shipper, pursuant to the second clause of § 11701(a), but rather to a Board-initiated investigation “otherwise provided in this part” and thus within the first or exception clause of § 11701(a).
See, e.g.,
49 U.S.C. § 722(c) (Board may reopen an investigation);
id.
§ 10704(b) (Board may extend an investigation). The Board contends its interpretation of “formal investigative proceeding” is consistent with the Commission’s reading of the preceding version of § 11701.
See
49 U.S.C. § 11701 (1978) (amended 1995). The Commission read the three-year limit in that version of § 11701(c) to apply only to Commission-initiated investigations under § 11701(a), which at the time provided the Commission could begin an investigation not only on complaint but also “on its own initiative,”
id.
§ 11701(a).
See Complaints Filed Pursuant to the Savings Provisions of the Staggers Rail Act of 1980,
The Board’s concern with due process for shippers may be well-founded.
See Logan v. Zimmerman Brush Co.,
Without identifying the exact moment the argument was forfeited, we are confident it could not have been later than when the Board decided the case because the criteria for granting reconsideration are limited by statute; the Board may not grant a petition for reconsideration except for “material error, new evidence, or substantially changed circumstances.” 49 U.S.C. § 722(c). The three-year limitation obviously was not new evidence or a changed circumstance, and if it was a “material error,” the error was induced by BNSF’s own failure to raise the argument in good time.
Cf. Canady v. SEC,
Still, BNSF protests, the statutory provision for “automatic” dismissal is a “mandatory directive” and therefore leaves no discretion to the agency to treat its claim as having been forfeited. Even a defect in the jurisdiction of an agency, however, when not timely raised before that agency is forfeit,
see USAir, Inc. v. DOT,
Because the investigative proceeding initiated by Xcel’s complaint was not dismissed, we shall go on to consider BNSF’s arguments concerning the merits of Xcel’s case. As usual, we review the Board’s findings of fact for substantial evidence and ask whether its 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,”
McCarty Farms v. Surface Transp. Bd.,
1. Revenue Adequacy
BNSF first argues the Board’s decision to lower the carrier’s rates when, according to the Board’s own calculations, BNSF’s revenues were not adequate to provide a reasonable return on its investment, violated the Board’s statutory duty to look out for the adequacy of the carrier’s revenues.
See
49 U.S.C. § 10704(a)(2) (the Board “shall make an adequate and continuing effort to assist ... carriers in attaining revenue levels” that are “adequate, under honest, economical, and efficient management, to cover total operating expenses, including depreciation and obsolescence, plus a reasonable and economic profit or return (or both) on capital”);
see also id.
§ 10101(3) (policy in regulating railroad industry “to promote a safe and efficient rail transportation system by allowing rail carriers to earn adequate revenues”). In order to attain revenue adequacy, reports BNSF, it must be allowed to “chargfe] relatively high rates to coal shippers, like Xcel, with highly inelastic demand.”
See Coal Rate Guidelines,
Although the Board explained that the SAC test “inherently addresses” a railroad’s need for adequate revenues, see Decision II, at 6, BNSF argues the Board must “address the revenue adequacy mandate in the context of individual cases.” The Board responds that it is charged with seeking not only adequate revenues for carriers but also reasonable rates for shippers, see 49 U.S.C. §§ 10101(6), 10702, and that it seeks both via the SAC test, which is designed to “accommodate the[se] dual objectives” by assuring “captive shippers that they are not cross-subsidizing other parts of the defendant’s network, while assuring railroads that any [given] rate prescription will provide a reasonable return on the replacement of facilities needed to serve the shipper.”
The Board is on solid ground here. Regardless whether BNSF as a system is revenue-adequate, system-wide revenue inadequacy is not a basis upon which a carrier may defend an unreasonable rate over a segment of its system.
See Coal Rate Guidelines,
Nor are we persuaded by BNSF’s argument that it was arbitrary and capricious for the Board to lower its rates below the rates indicated by the Board’s Revenue Shortfall Allocation Method (RSAM). The RSAM is the Board’s way of calculating the average percentage by which revenues received from captive shippers must exceed the variable costs (R/VC) of serving those shippers if the railroad is to achieve revenue adequacy.
See Rate
Guidelines—
Non-Coal Proceedings,
The RSAM figure is not dispositive, however, it is but one of three “benchmarks” established by the Board for use in smaller rate proceedings, where a full-blown SAC analysis would be prohibitively expensive.
See Ass’n of Am. R.Rs.,
In sum, BNSF has not shown us that the Board arbitrarily applied its SAC test. We will not disturb its decision on this ground.
2. Cross-over Traffic
BNSF next objects to the heavy reliance of Xcel’s SARR upon cross-over traffic. According to the railroad, the allocation of revenues between the SARR and the off-SARR portions of a through movement “is distorted because a railroad does not charge rates for discrete portions of a through movement,” as a result of which
In response the Board acknowledges that the use of cross-over traffic “introduces ... imprecision into the SAC analysis” but argues that excluding such traffic would “risk being intractable.”
Decision I,
at 16. The SAC analysis must reflect the cost sharing and production economies derived from sharing facilities on the SARR.
See Decision I,
at 14 (quoting
Coal Rate Guidelines,
The 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. Our role is limited to determining whether the balance it struck is arbitrary.
See Burlington N. R.R.,
Here, the Board’s explanation for its decision to allow cross-over traffic as a simplifying mechanism, which the Board has described as “now a standard feature of SAC cases,”
Decision I,
at 17, was both reasonable and intelligibly explained. The Board must balance, among other concerns, the need for a reasonably accurate methodology and the need to avoid unduly protracting already complex and expensive SAC proceedings.
See
49 U.S.C.
Our view of this matter might be different if BNSF had presented evidence to establish that the imprecision implicit in the use of cross-over traffic tends to overestimate the revenues generated by a SARR to a degree that outweighs any efficiency gains. Instead, lacking such evidence, we are struck by the irony of BNSF calling for a dramatic increase in the complexity of the SAC proceeding even as it argues the case should be dismissed because the Board failed to resolve it more speedily.
In sum, we do not think the Board unreasonably concluded that the “value of this evidentiary tool outweighs its limitations.” Decision II, at 7.
More persuasive, but also ultimately unconvincing, is BNSF’s argument that the specific method by which the Board allocates revenue to cross-over traffic is flawed. The appropriate allocation of revenue from cross-over traffic is a perennial issue in SAC proceedings and one the Board even now has not resolved definitively.
See, e.g., PPL Mont., LLC v. Burlington N. & Santa Fe Ry.,
STB Docket No. 42054,
BNSF criticized the MSP approach for its failure to take into account economies of density, that is, the principle that as the density of traffic increases over a stretch of rail, average costs diminish,
see Coal Rate Guidelines,
11.C.C.2d at 526, at least initially. BNSF therefore proposed an alternative method it called the “Density Adjusted Revenue Allocation” (DARA). Under this approach, revenues are allocat
Although we take BNSF’s point that the MSP method of allocating revenue to cross-over traffic does not take into account economies of density, we believe the Board gave an adequate reason for rejecting the DARA method, namely, its failure to take into account the diminishing nature of those economies. Each method has a limitation and, faced with a choice between them, the Board reasonably stayed on the course it had long ago adopted.
See Atchison, Topeka & Santa Fe Ry. v. Wichita Bd. of Trade,
BNSF correctly points out that the Board has not adopted a “single preferred procedure,” PPL Mont., at 7 n. 14, but we see that it has for more than a decade used a mileage-based allocation of revenue. In its order denying rehearing in this case, the Board recognized there “may well be a better revenue allocation procedure that could be practical for SAC cases” and invited proposals, whether submitted in future rate proceedings or as requests for rulemaking. See Decision II, at 11. Were the Board presented with a model that took account both of the economies of density and of the diminishing returns thereto, a decision to adhere to its MSP model would be on shaky ground indeed. But that day is yet to come.
3. Challenges to Xcel’s Evidence
BNSF also challenges the Board’s reliance upon certain evidence in Xcel’s SAC presentation. As detailed below, we do not find its arguments persuasive.
a. Operating Plan
BNSF contends the Board should have dismissed Xcel’s complaint either (1) when BNSF, in its motion to dismiss, identified what it described as “obvious, elementary, and fundamental errors” in Xcel’s operating plan, which assumed trains would travel at unrealistic speeds on the SARR, or (2) in its decision on the merits, when the Board instead substituted BNSF’s proposed operating plan, with slower estimated train speeds and higher estimated costs, for Xcel’s flawed plan.
First, the Board denied BNSF’s threshold motion to dismiss after reviewing Xcel’s SAC presentation and concluding the errors in Xcel’s operating plan, upon which the motion to dismiss was based, appeared to be “readily correctable without a significant redesign of the SARR” and were not “so large in magnitude or so egregious as to warrant dismissing the complaint” at that early stage.
Pub. Serv. Co. of Colo. d/b/a Xcel Energy v. Burlington N. & Santa Fe Ry.,
STB Docket No. 42057,
Although Xcel does bear the burden of persuasion,
see Coal Rate Guidelines,
Second, the Board’s substitution for Xeel’s flawed operating plan of a modified version of BNSF’s own plan, did not relieve Xcel of the need to prove BNSF’s rates were unreasonable. Rather the Board concluded that Xcel could and did meet its burden by using evidence submitted by (and more favorable to) BNSF. So long as the record supports that conclusion, BNSF has no cause to complain about the source of the evidence.
Cf. Consol. Edison Co. v. FERC,
b. Rerouting of Jeffrey Traffic
BNSF also argues the Board should have excluded the largest movement on the SARR—the movement of coal to Western Resources’ Jeffrey plant, which currently moves on a shorter and less congested route—because Xcel did not submit competent evidence that the rerouting was “reasonable and would meet the shipper’s transportation needs.”
Tex. Mun. Power Agency v. Burlington N. & Santa Fe Ry.,
STB Docket No. 42056,
Finally, BNSF objects to the Board’s reliance, in estimating revenues available to the SARR, upon a rate forecast produced by the Energy Information Administration (EIA) of the United States Department of Energy in preference to either of the forecasts proffered by the parties. BNSF, invoking “[fundamental principles of administrative law” and due process, argues it was entitled to advance notice that the Board would take official notice of extra-record evidence so it could “parry its effect.”
See Union Elec. Co. v. FERC,
Due process requires only a “meaningful opportunity” to challenge new evidence,
Mathews v. Eldridge,
III. Conclusion
For the foregoing reasons, BNSF’s petition for review is
Denied.
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Notes
Despite the routine use of cross-over traffic in SAC proceedings since the
Nevada Power
decision, a/k/a
Bituminous Coal
— Hiawatha,
Utah, to Moapa, Nev.,