United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 17, 2005 Decided February 17, 2006
No. 04-1369
PPL MONTANA , LLC,
PETITIONER
v.
SURFACE TRANSPORTATION BOARD AND
UNITED STATES OF AMERICA ,
RESPONDENTS
BNSF RAILWAY COMPANY ,
INTERVENOR
On Petition for Review of an Order of the
Surface Transportation Board
John M. Cutler, Jr. argued the cause and filed the briefs for
petitioner.
Raymond A. Atkins, Attorney, Surface Transportation
Board, argued the cause for respondent. With him on the brief
were Robert H. Pate, III, Assistant Attorney General, U.S.
Department of Justice, Robert B. Nicholson and John P. Fonte,
Attorneys, Ellen D. Hanson, Deputy General Counsel, Surface
Transportation Board, and Thomas J. Stilling, Attorney. Rachel
D. Campbell, Attorney, entered an appearance.
2
Richard E. Weicher, Michael E. Roper, Samuel M. Sipe, Jr.,
and Anthony J. LaRocca were on the brief for intervenor.
Before: GINSBURG , Chief Judge, and GARLAND and
BROWN , Circuit Judges.
Opinion for the Court filed by Circuit Judge BROWN .
BROWN , Circuit Judge: PPL Montana, LLC (PPL) filed a
complaint with the Surface Transportation Board, alleging the
rail rates charged by intervenor BNSF Railway Company
(BNSF) were unreasonably high. The Board disagreed and
dismissed the complaint. PPL now petitions for review. Finding
no basis for upsetting the Board’s decision, we deny the petition.
I
When a shipper files a rate complaint, see 49 U.S.C.
§§ 10704(b), 11701, the Board is charged with determining
whether the carrier targeted by the complaint has “market
dominance,” id. § 10707(b)—that is, whether there is “an
absence of effective competition from other rail carriers or
modes of transportation for the transportation to which a rate
applies,” id. § 10707(a).1 If so, the carrier’s rate for the captive
traffic must be “reasonable.” Id. § 10701(d)(1). If the Board
determines the rate is unreasonable, see id. § 10707(c), it may
prescribe the maximum rate that can be charged, id.
§ 10704(a)(1).
1
A carrier is conclusively presumed not to have market
dominance if it proves that the rate results in revenues that are less
than 180 percent of the carrier’s variable cost of providing the
transportation. 49 U.S.C. § 10707(d)(1)(A); see also Burlington N. &
Santa Fe Ry. Co. v. Surface Transp. Bd., 403 F.3d 771, 773 (D.C. Cir.
2005).
3
The Board determines reasonableness according to the
“constrained market pricing” (CMP) principles enunciated in
Coal Rate Guidelines, Nationwide, 1 I.C.C.2d 520 (1985)
(Guidelines), aff’d sub nom. Consol. Rail Corp. v. United States,
812 F.2d 1444 (3d Cir. 1987).2 Guidelines indicates that CMP
meets the Board’s “dual objectives of providing railroads the
real prospect of attaining revenue adequacy while protecting
captive coal shippers from ‘monopolistic’ pricing practices.” Id.
at 524-25. CMP consists of three main constraints on a rail-
road’s rates: revenue adequacy, management efficiency, and
stand-alone cost (SAC). Id. at 534-46.
A SAC analysis seeks to determine the lowest cost at which
a hypothetical efficient carrier could provide service to the
complaining shipper or a group of shippers that benefits from
sharing joint and common costs. Id. at 528; see also id. at 529
(“The stand-alone cost, as we define it here, approximates the
full economic costs, including a normal profit, that need to be
met for an efficient producer to provide service to the shipper(s)
identified.”). The Board assumes away barriers to entry and exit
so as to treat the otherwise non-competitive railroad industry as
a contestable market. Id. at 528-29. Under the SAC constraint,
then, the rate at issue can be no higher than what the hypotheti-
cal carrier would have to charge to provide the needed service
while fully covering its costs, including a reasonable return on
investment. Id. at 528-29, 542-43. In this way, under the Board’s
watchful eye,
railroads functioning in a noncompetitive market will be
required to price as if alternatives to their services were
available. That is, their rates will be judged against simu-
2
The Board’s predecessor, the Interstate Commerce Commission,
was abolished by the ICC Termination Act of 1995, Pub. L. No.
104-88, 109 Stat. 803. See N.Y. Cross Harbor R.R. v. Surface Transp.
Bd., 374 F.3d 1177, 1179 n.2 (D.C. Cir. 2004).
4
lated competitive prices. As a result, the efficiencies of a
contestable market will serve as the guide for establishing
maximum rates on captive coal traffic.
Id. at 542. The SAC test is a means to insure that a captive
shipper does “not bear the costs of any facilities or services from
which it derives no benefit.” Id. at 523; see id. at 528.
To proceed under the SAC constraint, a complaining
shipper designs and presents to the Board a hypothetical stand-
alone railroad (SARR) to serve the traffic group; the traffic
group may contain both the complaining shipper’s traffic—the
issue traffic—as well as other traffic selected to take advantage
of the “benefits of any inherent production economies.” Id. at
543-44; see also, e.g., McCarty Farms, Inc. v. Burlington N.,
Inc., 2 S.T.B. 460, 466-67 (1997). The ability to group traffic of
different shippers is “essential” to the theory of contestability.
Guidelines, 1 I.C.C.2d at 544. As the Board has not seen a need
to set general restrictions on the “traffic that may potentially be
included in a stand-alone group,” id., a complainant is afforded
flexibility in selecting a traffic group for its SARR, see, e.g.,
Ariz. Pub. Serv. Co. v. Atchison, Topeka & Santa Fe Ry. Co., 2
S.T.B. 367, 381 (1997) (“In a SAC analysis, the complaining
shipper may select any subset of available traffic to determine
the least cost at which that subset of traffic could be served
independently of other traffic.”). Nevertheless, the potential
traffic draw is “open to scrutiny in individual cases,” and “[t]he
proponent of a particular stand-alone model must identify, and
be prepared to defend, the assumptions and selections it has
made.” Guidelines, 1 I.C.C.2d at 544. The Board then compares
the SARR’s costs to the revenues the SARR can expect from the
traffic group; if the latter is greater, the Board can conclude the
challenged rate levels are too high. See, e.g., McCarty Farms, 2
S.T.B. at 467.
5
II
PPL ships coal by rail via BNSF from mines in Wyoming’s
Powder River Basin to PPL’s Corette generating facility at
Billings, Montana. In July 2000, PPL filed a complaint with the
Board, challenging the reasonableness of the rail rates charged
by BNSF.
PPL invoked the SAC constraint and, accordingly, prof-
fered a SARR that can be viewed as consisting of two segments:
a high-density “north-south” segment and a low-density “west-
ern” segment. The north-south segment, extending south from
Buckskin, Wyoming—through Campbell—to Converse,
Wyoming, was used to originate coal in the Powder River Basin.
The longer western segment, branching off the north-south
segment at Campbell, extended westward out of the Powder
River Basin for more than 200 miles to PPL’s plant in Billings
and to other Montana locations. All of the traffic PPL included
in the SARR, with the exception of PPL’s own traffic, is “cross-
over” traffic, which originates or terminates on the residual real-
world railroad and is interchanged with the SARR. Most of the
cross-over traffic moved no more than 26 miles on the north-
south segment.
BNSF challenged PPL’s SAC presentation, arguing, in
relevant part, that “PPL has impermissibly cross-subsidized the
issue traffic (and other traffic [traveling on the western seg-
ment]) as a result of the exorbitant revenues that are assumed to
be earned by a subset of its cross-over traffic.” Joint Appendix
(“J.A.”) 14. To demonstrate this cross-subsidy, BNSF calculated
revenues from cross-over traffic that used only the north-south
segment to be far in excess of the stand-alone cost of the north-
south segment.
PPL recognized that BNSF was advocating a rule, in part,
“designed to exclude the possibility that non-issue traffic on the
SARR is subsidizing issue traffic.” Id. at 61. Discounting such
6
concerns, PPL suggested the SAC test only prevented the
complaining shipper from being forced to subsidize other traffic,
and that the complaining shipper was free to design a SARR in
which other traffic subsidized the complaining shipper. None-
theless, in the event the Board was troubled by such cross-
subsidies, PPL offered an alternative to examining the revenues
and SAC of the north-south segment:
Assuming [cross-subsidization of the issue traffic by non-
issue traffic] is a legitimate concern . . ., there is a more
direct test for cross subsidy that would not impose prohibi-
tive litigation burdens and expenses on complainants.
Traffic that is covering its attributable cost is not being
subsidized. This test has been met both for the issue traffic
and for the cross-over traffic . . . .
Id. (emphasis added).
The Board did consider cross-subsidization of the issue
traffic to be a legitimate concern, observing that “PPL’s
contention that non-issue traffic may be used to cross-subsidize
the complaining shipper’s rate is inconsistent with CMP princi-
ples.” PPL Montana, LLC v. Burlington N. & Santa Fe Ry. Co.,
STB Docket No. 42054, Dec. No. 31155, 2002 WL 1905118, at
*5 (Aug. 19, 2002) (Decision I). The Board explained that “PPL
does not adequately distinguish between cost sharing (the
grouping of traffic to share the joint and common, i.e.,
unattributable, costs of providing rail service), which Guidelines
permits, and cross-subsidization (the recovery of a shipper’s
attributable costs from other shippers), which Guidelines
proscribes.” Id. (footnote omitted). While the Board rejected
BNSF’s alternative (i.e., an inquiry into whether the north-south
traffic generated revenues in excess of SAC), id. at *5 & nn.19-
20, the Board determined the real issue was “whether there is a
readily identifiable subset of traffic that would not cover the
collective attributable costs associated with serving the traffic,”
id. at *5.
7
Thus, the Board conducted a threshold cross-subsidy
inquiry to determine “whether the western leg of the [SARR]
would earn sufficient revenues to cover its attributable costs or
whether it would require a cross-subsidy in order to be viable
over the 20-year analysis period.” Id. The Board accepted “the
majority of the evidence submitted by PPL regarding the
operations and construction of the western segment,” id., and
credited to the western segment the revenues of all traffic that
used any portion of the western segment, id. at *6. Nonetheless,
the Board concluded the western segment would still “not be
self-sustaining,” id. at *5, as its attributable costs outstripped its
revenues by $9.26 million, id. at *7. Accordingly, because PPL
had “failed to show that the rates charged by BNSF for trans-
porting coal traffic to the Corette power plant are unreasonably
high,” id., the Board dismissed PPL’s complaint.
PPL moved for reconsideration, contending, inter alia, that
it should be allowed to revise its evidentiary presentation to
comport with the Board’s threshold cross-subsidy test. However,
the Board ultimately declined to revive PPL’s complaint. See
PPL Montana, LLC v. Burlington N. & Santa Fe Ry. Co., STB
Docket No. 42054, Dec. No. 33265, 2003 WL 1474407 (Mar.
21, 2003) (Decision II) (reopening proceedings only for limited
purpose of recalculating expenses on western segment and
otherwise denying reconsideration), reconsideration denied,
Dec. No. 33783, 2003 WL 21501898 (June 27, 2003) (Decision
III), and on reconsideration, Dec. No. 34579, 2004 WL
1926886 (Aug. 30, 2004) (Decision IV) (recalculating expenses
and adhering to original disposition).
PPL petitions for review.
III
We will set aside a Board decision only if it is “arbitrary,
capricious, an abuse of discretion, . . . otherwise [unlawful, or]
. . . unsupported by substantial evidence.” 5 U.S.C. § 706(2)(A),
8
(E); see Burlington N. R.R. v. Surface Transp. Bd., 114 F.3d
206, 210 (D.C. Cir. 1997). In ascertaining whether a railroad’s
rate is reasonable, the Board is at the “zenith of its powers” and
thus entitled to “particular deference.” Burlington N. R.R., 114
F.3d at 210 (internal quotation marks and citations omitted).
Where the Board’s findings rest on “such relevant evidence as
a reasonable mind might accept as adequate to support a conclu-
sion,” and where the Board has articulated a “rational connec-
tion between the facts found and the decision made,” we will not
disturb its judgment. Id. (internal quotation marks, citations, and
brackets omitted). In dealing with complex matters within its
expertise, the Board has “wide discretion in formulating
appropriate solutions.” Sec’y of Agric. v. United States, 347 U.S.
645, 652 (1954); see also Guidelines, 1 I.C.C.2d at 525 (noting
that “CMP is based on rather sophisticated economic theories
which require careful interpretation and application”). We are
not empowered to substitute our judgment for that of the Board.
Gen. Chem. Corp. v. United States, 817 F.2d 844, 849 (D.C. Cir.
1987); see also Citizens to Preserve Overton Park, Inc. v. Volpe,
401 U.S. 402, 416 (1971).
PPL contends the Board’s reliance on its threshold cross-
subsidy test to reject PPL’s complaint is inconsistent with
Guidelines; that it represents a departure from Board precedent
without proper explanation or notice; and that the Board should
have reopened the proceeding to allow PPL to adjust its SARR
presentation. We are not persuaded.
The Board’s application of its cross-subsidy test is neither
arbitrary nor capricious but rather a reasonable interpretation of
the principles articulated in Guidelines. See High Plains
Wireless, L.P. v. FCC, 276 F.3d 599, 606 (D.C. Cir. 2002)
(stating that an agency’s interpretation of its own rule is given
“controlling weight unless it is plainly erroneous or inconsistent
with the regulation” (internal quotation marks and citation
omitted)); see also CMC Real Estate Corp. v. ICC, 807 F.2d
9
1025, 1034 (D.C. Cir. 1986) (“It is well established that an
agency’s interpretation of the intended effect of its own orders
is controlling unless clearly erroneous.”). Guidelines explains
the SAC test is a means of assuring that a “captive shipper
should not bear the costs of any facilities or services from which
it derives no benefit.” 1 I.C.C.2d at 523. The Board reasonably
extrapolated from this that a basic principle of Guidelines, and
the primary purpose of the SAC test, is to guard against “both
cross-subsidization by and cross-subsidization of the captive
issue traffic” when determining the reasonableness of the issue
traffic’s rates. Decision I, 2002 WL 1905118, at *5. As previ-
ously described, the SAC test, rooted in the concept of contest-
able markets, “is used to compute the rate a competitor in the
market-place would need to charge in serving a captive shipper
or a group of shippers who benefit from sharing joint and
common costs.” Guidelines, 1 I.C.C.2d at 528. In a contestable
market, a competitor would always enter the market to compete
for, and charge a lower price for, any traffic that is subsidizing
other traffic on the line. Therefore, just as a “captive shipper
should not bear the costs of any facilities or services from which
it derives no benefit,” id. at 523, it was not unreasonable for the
Board to require the captive shipper in this case to hypothesize
its SARR in accordance with the same standard—i.e., the
viability of the western segment (including the issue traffic)
could not depend on a cross-subsidy. Faced with PPL’s SARR,
the Board’s decision advances the reasonable proposition that
the captive issue traffic cannot be improperly subsidizing other
traffic if the issue traffic cannot even cover its own attributable
costs; in other words, it is difficult to steal from a penniless
Peter to pay Paul. Thus, the Board’s threshold cross-subsidy
inquiry sought to determine whether the western segment of the
SARR would be “self-sustaining,” Decision I, 2002 WL
1905118, at *5; answering in the negative, the Board saw no
danger of the issue traffic subsidizing other traffic, perceiving
10
instead that the western segment’s survival relied on subsidies
from other traffic.3
PPL’s argument that its SARR would charge lower rates to
all of its customers than they currently pay the incumbent
railroad misses the mark. See Petitioner’s Br. at 21 (“So long as
the SARR as a whole covers its attributable and unattributable
costs while charging lower rail rates than its shipper customers
would otherwise pay, there is no cross-subsidy.”). While BNSF
may be charging excessive rates to non-issue traffic on a
different section of the line, that does not mean the Board must
permit any (or every) captive shipper (such as PPL) to obtain on
its own section of the line a rate reduction even though the
current rate is already insufficient to cover its attributable costs.
If other shippers are being overcharged, they may bring their
own challenges. It is of no moment that a full-fledged SAC
analysis might normally proceed by comparing the costs and
revenues of the SARR as a whole; the Board’s cross-subsidy test
acts as a threshold inquiry, reasonably allowing the Board to
halt the SAC analysis in its tracks.4
Further, we perceive no inconsistency with post-Guidelines
Board precedent. While an agency changing course must supply
a reasoned explanation, see, e.g., Motor Vehicle Mfrs. Ass’n v.
3
PPL’s contention that the Board “does not have jurisdiction
over, or any statutory obligation to protect from abuse, whether in the
form of cross-subsidization or in any other form, the traffic and rates
of non-complaining shippers,” Petitioner’s Br. at 22, is unavailing, as
the Board here has remained focused on the issue traffic in
determining that the western segment’s inability to cover its own
attributable costs allows the Board to end the analysis.
4
PPL’s attack on the Board’s calculation of the western
segment’s costs, see Decision IV, 2004 W L 1926886, at *3-6, lacks
merit; the Board proceeded reasonably and its calculations were
supported by substantial evidence.
11
State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 57 (1983); Sec’y of
Agric., 347 U.S. at 653; N.Y. Cross Harbor R.R. v. Surface
Transp. Bd., 374 F.3d 1177, 1181 (D.C. Cir. 2004);
Ramaprakash v. FAA, 346 F.3d 1121, 1124 (D.C. Cir. 2003);
Hatch v. FERC, 654 F.2d 825, 834-35 (D.C. Cir. 1981), the
present case represents no such abrupt departure. In none of the
cases pointed to by PPL, see Ariz. Pub. Serv. Co., 2 S.T.B. 367;
Rate Guidelines—Non-Coal Proceedings, 1 S.T.B. 1004 (1996);
W. Tex. Utils. Co. v. Burlington N. R.R. Co., 1 S.T.B. 638
(1996); Bituminous Coal—Hiawatha, Utah, to Moapa, Nev., 10
I.C.C.2d 259 (1994); Bituminous Coal—Hiawatha, Utah, to
Moapa, Nev., 6 I.C.C.2d 1 (1989); Metro. Edison Co. v. Conrail,
5 I.C.C.2d 385 (1989); McCarty Farms v. Burlington N. Inc., 4
I.C.C.2d 262 (1988); Omaha Pub. Power Dist. v. Burlington N.
R.R. Co., 3 I.C.C.2d 853 (1987), did the Board (or its predeces-
sor) “expressly” speak to the “precise issue” in the present case.
So. Cal. Edison Co. v. FERC, 805 F.2d 1068, 1071 (D.C. Cir.
1986). That is, in the cited cases, the Board never indicated that,
in the course of fulfilling its statutorily assigned role in policing
the reasonableness of captive shippers’ rates, it would tolerate
a SARR presentation—which is itself a Board
construct—wherein the issue traffic depended on a cross-
subsidy. In any case, the Board itself distinguished a number of
its prior cases, see Decision II, 2003 WL 1474407, at *4 n.20,
and we afford deference to that effort. See Inland Lakes Mgmt.,
Inc. v. NLRB, 987 F.2d 799, 805 (D.C. Cir. 1993) (“[T]he
[agency’s] attempt to distinguish its prior cases, while terse, is
entitled to deference.”); cf. N.Y. Cross Harbor R.R., 374 F.3d at
1183 (faulting Board for failing to distinguish case from
“uniform” precedent and providing no reasoned explanation of
why it ignored “factors and reasoning it has previously—and
consistently—found controlling”). In short, agency precedent
poses no barrier to the Board’s decision in the present case.
In turn, PPL’s argument that the Board failed to give
adequate notice of its cross-subsidy test is unavailing. Regard-
12
less of whatever notice is due before an agency “reverse[s] a
policy that had been the subject of reasonable reliance,”
Williams Natural Gas Co. v. FERC, 3 F.3d 1544, 1555 (D.C.
Cir. 1993) (internal quotation marks and citation omitted), notice
is not required before every clarification or extension of an
agency’s principles to novel scenarios, see So. Cal. Edison, 805
F.2d at 1071 & n.4. Moreover, BNSF argued—and PPL
responded to the argument—that “PPL ha[d] impermissibly
cross-subsidized the issue traffic.” See J.A. 14, 61. Even though
the Board ultimately rejected BNSF’s reasoning as to how that
cross-subsidy came about—through allocating “exorbitant
revenues . . . [to] a subset of [the SARR’s] cross-over traffic,”
id. at 14—the objection was raised and the rationale for rejecting
cross-subsidies in this case is sound without respect to the cause
of the cross-subsidization.
Finally, the Board did not abuse its discretion in rejecting
PPL’s request to reopen the proceeding so PPL could alter the
traffic pattern on its SARR in light of the Board’s cross-subsidy
test. See E. Carolinas Broad. Co. v. FCC, 762 F.2d 95, 103
(D.C. Cir. 1985) (noting that we “normally reverse an agency’s
decision not to reopen the record only for abuse of discretion”);
see also Bowman Transp., Inc. v. Arkansas-Best Freight Sys.,
Inc., 419 U.S. 281, 296 (1974); Advanced Commc’ns Corp. v.
FCC, 376 F.3d 1153, 1156-58 (D.C. Cir. 2004); Omaha Pub.
Power Dist., 3 I.C.C.2d at 862. PPL, having the responsibility to
engineer a SARR and present it to the Board in the first instance,
cannot seek to modify it simply because the Board finds that
SARR unacceptable based on a reasonable application of the
Guidelines principles. As the Board noted, were it “to allow a
disappointed party to revise its case in response to [the Board’s]
rulings, there could be no end to an administrative proceeding.”
Decision II, 2003 WL 1474407, at *7.
13
IV
For the foregoing reasons, the petition for review is
Denied.