Bnsf Railway Company v. Surface Transportation Board and United States of America

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 6, 2013 Decided May 23, 2014
No. 12-1042
BNSF R AILWAY COMPANY,
PETITIONER
v.
SURFACE TRANSPORTATION BOARD AND UNITED STATES OF
AMERICA ,
RESPONDENTS
ARIZONA ELECTRIC POWER COOPERATIVE , I NC.,
I NTERVENOR
Consolidated with 12-1045, 12-1046, 12-1246
On Petitions for Review of Final Orders of the
Surface Transportation Board
Michael L. Rosenthal argued the cause for petitioners
BNSF Railway Company and Union Pacific Railroad
Company. With him on the briefs were Carolyn F. Corwin,
Henry B. Liu, Gayla L. Thal, Louise A. Rinn, Danielle E.
Bode, Samuel M. Sipe, Jr., Anthony J. LaRocca, Linda S.
Stein, Richard E. Weicher, and Jill K. Mulligan.

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Robert D. Rosenberg argued the cause for petitioner
Arizona Electric Power Cooperative, Inc. With him on the
briefs were William L. Slover, Christopher A. Mills, and
Daniel M. Jaffe.
James A. Read, Attorney, Surface Transportation Board,
argued the cause for respondents. With him on the brief were
William J. Baer, Assistant Attorney General, U.S. Department
of Justice, Robert B. Nicholson and Nickolai G. Levin,
Attorneys, Raymond A. Atkins, General Counsel at the time
the brief was filed, Surface Transportation Board, and Craig
M. Keats, Deputy General Counsel. John P. Fonte, Attorney,
entered an appearance.
Carolyn F. Corwin, Michael L. Rosenthal, Henry B. Liu,
Gayla L. Thal, Louise A. Rinn, Danielle E. Bode, Samuel M.
Sipe, Jr., Anthony J. LaRocca, Linda S. Stein, Richard E.
Weicher, and Jill K. Mulligan were on the brief for
intervenors BNSF Railway Company and Union Pacific
Railroad Company.
William L. Slover, Robert D. Rosenberg, Christopher A.
Mills, and Daniel M. Jaffe were on the brief for intervenor
Arizona Electric Power Cooperative, Inc.
Before: TATEL and KAVANAUGH , Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge
KAVANAUGH .
KAVANAUGH , Circuit Judge: Congress has directed an
independent agency, the Surface Transportation Board, to
ensure that railroads with market dominance charge

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reasonable rates to shippers. To assess whether a dominant
railroad’s rate is reasonable, the Board employs a
sophisticated methodology derived from economic principles.
If the Board determines that the current rate is not reasonable,
the Board sets the maximum rate that the railroad may charge.
In setting the maximum rate in such cases, the Board relies on
a formula that ensures that the railroad can still receive a
reasonable rate of return.
In this case, the Board addressed a rate dispute between a
shipper and two railroads. In cross-petitions coming from
their contrary perspectives, the shipper and the railroads
separately challenge the Board’s decision. The railroads
contend that the Board’s decision was too favorable to the
shipper. The shipper contends that the Board’s decision was
too favorable to the railroads. We deny the petitions for
review.
I
The Surface Transportation Board, an independent
federal agency, regulates the rates charged by interstate
railroads. See 49 U.S.C. § 10501. Under federal law, a
shipper may file a complaint with the Board challenging as
unreasonable the rate that is “charged or collected” by a
railroad for “transportation” of the shipper’s goods. Id.
§ 10704(a)(1); see id. §§ 10704(b), 11701(b).
After receiving a complaint, the Board first determines
whether it has authority over the challenged rate.
As relevant here, the Board has authority to review a
railroad’s rate only if the complaining shipper is “captive” to
the railroad. See id. §§ 10701(d)(1), 10707(b)-(c). A shipper
is captive if a railroad has “market dominance” over the

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transportation of the shipper’s freight; that is, if there is “an
absence of effective competition from other rail carriers or
modes of transportation for [that] transportation.” Id.
§ 10707(a).
The Board has devised the Stand-Alone-Cost test to
ensure that railroads charge captive shippers reasonable rates.
See Coal Rate Guidelines, Nationwide, 1 I.C.C.2d 520, 542-
46 (1985), affirmed sub nom. Consolidated Rail Corp. v.
United States, 812 F.2d 1444 (3d Cir. 1987). That test
“ensures that a captive shipper does not pay for services that
provide it no benefits – in other words, that it does not cross-
subsidize other shippers.” BNSF Railway Co. v. STB, 526
F.3d 770, 776-77 (D.C. Cir. 2008). The ultimate aim of the
Stand-Alone-Cost test is to require that “railroads functioning
in a noncompetitive market . . . price as if alternatives to their
services were available” to the captive shipper. Coal Rate
Guidelines, 1 I.C.C.2d at 542.
To achieve that aim, the Board allows the complaining
captive shipper to propose a hypothetical railroad that the
shipper could use as an alternative source of transportation.
See BNSF Railway Co., 526 F.3d at 777. That hypothetical
railroad is called a Stand-Alone Railroad and is designed to be
optimally efficient. See id.
In order to simulate a competitive market for the captive
shipper’s business, the complaining shipper may construct the
hypothetical Stand-Alone Railroad as if there were no barriers
to entry or exit in the railroad industry. See PPL Montana,
LLC v. STB, 437 F.3d 1240, 1242 (D.C. Cir. 2006). For
example, to simulate the absence of entry barriers, the
hypothetical Stand-Alone Railroad can be constructed using
track that has not been laid in reality and facilities that do not

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exist in reality. See Coal Rate Guidelines, 1 I.C.C.2d at 543.
Or it could traverse a circuitous route of existing track in
order to take advantage of higher density traffic on certain
segments. The hypothetical Stand-Alone Railroad does not
even have to be a railroad at all, if a pipeline or other
alternative form of transportation would be more efficient.
See id. & nn.60-61. The Board requires only that the
complaining shipper explain and justify the elements of the
hypothetical Stand-Alone Railroad. See id. at 543-44.
Ordinarily, the Board considers the rate that the
hypothetical Stand-Alone Railroad would charge the
complaining shipper in a competitive market to be the
maximum rate that the actual railroad may reasonably charge.
The theory is that the rate of the hypothetical Stand-Alone
Railroad represents the rate that the actual railroad would
charge if the industry were competitive. But under the statute,
the Board may not set a maximum rate that results in revenues
of less than 180 percent of the actual railroad’s variable costs.
See 49 U.S.C. § 10707(d)(1)(A). So the Board will not
require that a railroad charge less than that threshold. See
Burlington Northern Railroad Co. v. STB, 114 F.3d 206, 210
(D.C. Cir. 1997). Thus, if the rate deemed reasonable under
the Stand-Alone-Cost methodology would result in actual
revenues of less than 180 percent of the actual railroad’s
variable costs, the Board will set the maximum reasonable
rate to be a rate resulting in revenues equal to 180 percent of
the actual railroad’s variable costs.
This case involves Arizona Electric Power Cooperative,
Inc., which supplies its power plant near Cochise, Arizona,
with coal brought from mines in New Mexico, Wyoming, and
Montana. Two railroads transport coal from the mines to
Arizona Electric’s plant: Burlington Northern Santa Fe

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Railway Company and Union Pacific Railroad Company.
Depending on the origin of the coal, Burlington Northern
transports it to either Deming, New Mexico, or Pueblo,
Colorado. Burlington Northern contracts with a smaller,
short-line railroad, Southwest Railroad, to transport the coal
part of the way to Deming over track owned by Burlington
Northern. From Deming and Pueblo, Union Pacific transports
the coal to Arizona Electric’s power plant in Arizona.
Because the railroads transfer responsibility for Arizona
Electric’s coal at Deming and Pueblo, those two cities are
known as the “interchange locations” for the routes taken by
that coal.
Under the statute, a route where two railroads must carry
the shipment to get from origin to destination is known as a
“through route.” On a through route, as relevant here, the
railroads typically either together charge a single “joint rate”
or individually charge “proportional rates.” See, e.g., Western
Resources, Inc. v. STB, 109 F.3d 782, 789 (D.C. Cir. 1997).
In 2008, Arizona Electric challenged the reasonableness
of the joint rates charged by Burlington Northern and Union
Pacific for transportation of Arizona Electric’s coal over these
through routes. To demonstrate that the rates charged were
unreasonably high, Arizona Electric submitted into evidence a
proposed hypothetical Stand-Alone Railroad. Arizona
Electric’s proposed hypothetical Stand-Alone Railroad did not
use Deming and Pueblo as its interchange locations. The
Board accepted Arizona Electric’s hypothetical Stand-Alone
Railroad.
Relying on that hypothetical Stand-Alone Railroad, the
Board concluded that the railroads’ joint rates were
unreasonable. The Board then prescribed the maximum rates

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that the railroads could charge for the service provided to
Arizona Electric. Those rates ordinarily would be equivalent
to the rates charged by the hypothetical Stand-Alone Railroad.
But the Board concluded that the hypothetical Stand-Alone
Railroad’s rates would result in revenue that is less than 180
percent of Burlington Northern and Union Pacific’s actual
variable costs in providing service to Arizona Electric, which
is the statutory floor in these circumstances. See 49 U.S.C.
§ 10707(d)(1)(A). The Board therefore prescribed maximum
rates that would provide revenue equal to 180 percent of the
railroads’ variable costs.
In this Court, the railroads argue that their prior rates
were not unreasonable. For its part, Arizona Electric argues
that the Board correctly determined that the railroads’ prior
rates were unreasonably high, but it contends that the Board’s
remedy was flawed because the Board prescribed rates that
were still too high.
This Court reviews the Board’s authoritative statutory
interpretations under the Chevron framework. See Village of
Barrington v. STB, 636 F.3d 650, 658-60 (D.C. Cir. 2011).
We must uphold the Board’s interpretation if it is dictated by
statute or is a reasonable interpretation of an ambiguity or gap
in the statute. To review the Board’s exercise of its statutory
discretion, the Court applies the Administrative Procedure
Act’s arbitrary and capricious standard of review. See 5
U.S.C. § 706(2)(A); Manufacturers Railway Co. v. STB, 676
F.3d 1094, 1096 (D.C. Cir. 2012). “[T]he APA requires that
an agency’s exercise of its statutory authority be reasonable
and reasonably explained.” Manufacturers Railway Co., 676
F.3d at 1096.

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II
We first address the railroads’ argument that their prior
rates were reasonable and that the Board erred in concluding
otherwise.
The Board’s unreasonableness determination was based
on a hypothetical Stand-Alone Railroad that used interchange
locations different from those actually used by the railroads
when they haul Arizona Electric’s coal. The railroads argue
that the hypothetical Stand-Alone Railroad should have used
the railroads’ actual interchange locations. The railroads
contend that the Board would have found the existing rates
reasonable if the Board used a hypothetical Stand-Alone
Railroad with the railroads’ actual interchange locations.
In considering the railroads’ argument, we start with the
statutory text. In determining the reasonableness of a rate, the
Board assesses the rate actually “charged or collected” by the
railroad. 49 U.S.C. § 10704(a)(1). Section 10701(d)(2) of
Title 49 in turn outlines three broad factors that the Board
should consider when assessing the reasonableness of the rate:
(A) the amount of traffic which is transported at revenues
which do not contribute to going concern value and the
efforts made to minimize such traffic;
(B) the amount of traffic which contributes only
marginally to fixed costs and the extent to which, if any,
rates on such traffic can be changed to maximize the
revenues from such traffic; and
(C) the carrier’s mix of rail traffic to determine whether
one commodity is paying an unreasonable share of the
carrier’s overall revenues.

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Id. § 10701(d)(2). Under the statute, the Board is not limited
to those three factors when determining the reasonableness of
a rate.
To help account for those three broad reasonableness
factors and to determine reasonableness, the Board has used a
Stand-Alone-Cost test that employs a hypothetical Stand-
Alone Railroad that is optimally efficient. The rate that the
hypothetical Stand-Alone Railroad would charge is generally
considered the maximum reasonable rate because it represents
what the actual railroad would charge if the railroad industry
were competitive. See Coal Rate Guidelines, Nationwide, 1
I.C.C.2d 520, 542 (1985), affirmed sub nom. Consolidated
Rail Corp. v. United States, 812 F.2d 1444 (3d Cir. 1987).
The statute does not dictate how the hypothetical Stand-
Alone Railroad may be constructed. Importantly, under
longstanding Board rules and precedent, the hypothetical
Stand-Alone Railroad need not follow the same route used by
the actual railroad. See id. at 542-46 & nn.60-61. Indeed, in
practice, the hypothetical railroad almost never reproduces the
operations of the existing real-world carrier. Rather, it
typically operates over hypothetical routes.
The one wrinkle here, according to the railroads, is that
this case involves “through routes.” Those are routes where
two or more railroads are needed to move the traffic from the
origin to the ultimate destination. The traffic goes “through”
an interchange location where the two railroads connect. See
49 U.S.C. § 10703. Often, and as is true in this case, the
railroads will charge a single “joint rate” to the shipper for a
through route.
In a case like this that involves a “through route,” the
railroads argue that the hypothetical Stand-Alone Railroad

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must use the actual interchange locations used by the actual
railroads, even when the railroads charge and collect a single
joint rate from the shipper. In other words, the railroads want
to make the hypothetical Stand-Alone Railroad less
hypothetical. But Congress did not unambiguously mandate
that the reasonableness inquiry for through routes focus on the
reasonableness of the rates for the constituent segments rather
than the reasonableness of the rates for the route as a whole.
See Western Resources, Inc. v. STB, 109 F.3d 782, 789 (D.C.
Cir. 1997) (“Shippers[,] . . . if charged either a joint or
proportional rate, must challenge the rate for the entire
through movement; they cannot challenge individual
segments.”). Nor has Congress mandated that the
hypothetical Stand-Alone Railroad in a through route case use
the same interchange locations as the actual railroads. As the
Board reasonably explained in this case, the hypothetical
Stand-Alone Railroad in a through route case is logically and
legally no different from the hypothetical Stand-Alone
Railroad in an ordinary single-railroad case. In neither
situation, the Board reasoned, must the hypothetical Stand-
Alone Railroad use the same route that is used by the actual
railroads.
The railroads point to Section 10703 of Title 49, which
states, as relevant here, that railroads “shall establish through
routes (including physical connections) with each other.” 49
U.S.C. § 10703. The railroads focus on the phrase “including
physical connections.” That phrase requires railroads to
establish physical connections with one another on through
routes. But the Board could reasonably conclude that Section
10703 does not tell the Board how to assess the
reasonableness of a rate on a through route. And the Board
likewise could reasonably conclude that Section 10703 does

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not say how the hypothetical Stand-Alone Railroad should be
constructed in a through route case.1
Contrary to the railroads’ argument, moreover, the statute
does not distinguish joint rates from other rates for purposes
of the Board’s reasonableness determination. On the
contrary, as the Board explained in its decision here, the
relevant legislative history states that “the rate standard for
the reasonableness of joint rates shall be the same as for all
rates.” H.R. REP . NO. 96-1430, at 90 (1980) (Conf. Rep.),
reprinted in 1980 U.S.C.C.A.N. 4110, 4121. That history
supports the Board’s conclusion that the hypothetical Stand-
Alone Railroad in joint rate cases, like the hypothetical Stand-
1 The railroads argue that regardless of the merit of their
Section 10703 point, the Board failed to respond to it. We disagree.
The Board explained that the statutory scheme treats interchange
locations no differently from other features of railroad
“transportation.” See 49 U.S.C. § 10102(9) (defining
“transportation” as including the facilities and equipment of a
railroad); id. § 10704(a)(1) (allowing shippers to challenge the
reasonableness of rates “charged or collected by a rail carrier for
transportation”). Under the Board’s interpretation, the interchange
locations of the actual railroads do not constrain the flexibility
shippers generally enjoy when designing the hypothetical Stand-
Alone Railroad any more than do the facilities or equipment of the
actual railroads. In the course of rejecting the railroads’ arguments
on interchange locations, the Board thus at least implicitly rejected
the railroads’ Section 10703 point. We grant significant deference
to the Board’s determinations of the reasonableness of a rate, and
we can “uphold a decision of less than ideal clarity if the agency’s
path may reasonably be discerned.” FCC v. Fox Television
Stations, Inc., 556 U.S. 502, 513-14 (2009) (internal quotation
marks omitted). We conclude that the Board adequately addressed
the railroads’ Section 10703 point.

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Alone Railroad in single-railroad cases, need not follow the
actual route used by the railroads.
The necessary implication of the railroads’ argument is
that a joint rate (for a route from A to C) must be divided into
two rates (between A and B and between B and C), each of
which must be assessed for reasonableness. Congress has not
said as much. And that argument overlooks the unity of joint
rates, a principle that the Board and the courts have long
recognized. See generally Great Northern Railway Co. v.
Sullivan, 294 U.S. 458 (1935). As the Board stated here, “for
practical purposes, when carriers elect to offer a through rate,
they are treated as a single legal entity.” Arizona Electric
Power Cooperative, Inc. v. BNSF Railway Co., 2011 WL
5872084, at *12 (STB served Nov. 22, 2011). So the Board
concluded that “the reasonableness of the joint rates charged
and collected is in this case properly being judged against a
simulated competitive price of a single hypothetical” Stand-
Alone Railroad. Id. at *14 (emphasis omitted) (internal
quotation marks omitted).
In short, the railroads concede that the hypothetical
Stand-Alone Railroad ordinarily may travel any route
between the freight’s origin and destination. The railroads
offer no persuasive reason why the same principle should not
govern when the Board evaluates a unitary joint rate charged
by multiple railroads on a through route.
We conclude that the Board’s interpretation and
application of the statute on this issue were at least
reasonable, and also were reasonably explained.

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III
From the other direction, Arizona Electric argues that the
Board correctly determined that the railroads’ prior rates were
unreasonably high, but that the Board’s remedy did not
suffice because the Board prescribed maximum rates that
were still too high.
Recall that the Board may not set a maximum rate that
results in revenues of less than 180 percent of the actual
railroads’ variable costs, as required by statute. See 49 U.S.C.
§ 10707(d)(1)(A). (The railroads’ variable costs are the costs
that vary depending on the volume of traffic, such as the cost
of fuel.) The dispute here turns on what those variable costs
were for the railroads.
Pursuant to statute, the Board calculates variable costs
using a methodology called the Uniform Rail Costing System.
See id. § 10707(d)(1)(B); BNSF Railway Co. v. STB, 526 F.3d
770, 774-75 (D.C. Cir. 2008). The system receives numerous
inputs about the characteristics of the transportation at issue
and computes the variable cost for that transportation based
on average costs associated with each characteristic. See
BNSF Railway Co., 526 F.3d at 774-75.
Burlington Northern leases a portion of its line to
Southwest Railroad. Pursuant to the lease, Southwest
Railroad carries Arizona Electric’s coal over a short distance.
When calculating the variable costs of that portion of the
route, the Board inputted Southwest Railroad as the relevant
railroad. Arizona Electric argues that the Board instead
should have inputted Burlington Northern and, had it done so,
would have found lower variable costs for the railroads and
thus would have further reduced the maximum rates that the
railroads could charge Arizona Electric.

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When inputting Southwest Railroad, the Board relied on
its prior decision in Kansas City Power & Light Co. v. Union
Pacific Railroad Co., 2008 WL 2091413 (STB served May
19, 2008). In Kansas City Power, the Board decided that
when one railroad moves a shipper’s freight over lines leased
from another railroad, the railroad that actually moves the
shipper’s freight must be inputted as the relevant railroad for
purposes of the Uniform Rail Costing System. See id. at *5-6.
As the Board explained in its decision in this case, the Kansas
City Power rule ensures that the Uniform Rail Costing System
output reflects reality: that even when a shipment occurs over
lines owned exclusively by one railroad, there may be costs
associated with moving the shipper’s freight between
railroads operating on those lines. Basing the cost
determination on an assumption that only one railroad was
moving the freight would in some cases inaccurately reflect
the railroad’s actual costs. Here, Southwest Railroad actually
moved Arizona Electric’s freight over the relevant portion of
the route. Following Kansas City Power, the Board thus
inputted Southwest Railroad into the Uniform Rail Costing
System to reflect the real-world operation of the railroads
carrying Arizona Electric’s coal.
Put simply, Arizona Electric has not demonstrated that
the Board’s reasoning in Kansas City Power is unreasonable
or contrary to statute, or that the Board unreasonably applied
Kansas City Power to the facts here. We conclude that the
Board’s calculation of the railroads’ variable costs was
reasonable and reasonably explained.
IV
After the Board’s decision, the railroads switched from
joint to proportional rates. In response to a complaint from

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Arizona Electric that the switch would lead to over-charging,
the Board denied relief. See Arizona Electric Power
Cooperative, Inc. v. BNSF Railway Co., 2012 WL 1864787
(STB served May 22, 2012). The Board allowed the
proportional rates. See id. But importantly, the Board made
clear that the combined proportional rates may not exceed the
maximum rates prescribed by the Board. See id. at *2-3. For
that reason, we detect no current injury to Arizona Electric
from the Board’s decision on this point. Arizona Electric
therefore lacks standing to raise this issue at this time.
* * *
We have carefully considered all of the parties’
arguments. We deny the petitions for review.
So ordered.

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