BNSF Railway Co. v. Surface Transportation Board

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 8, 2005 Decided June 16, 2006

No. 05-1030

BNSF RAILWAY COMPANY,
PETITIONER

v.

SURFACE TRANSPORTATION BOARD AND
UNITED STATES OF AMERICA,
RESPONDENTS

PUBLIC SERVICE COMPANY OF COLORADO, D/B/A XCEL
ENERGY, INC.,
INTERVENOR

On Petition for Review of an Order of the
Surface Transportation Board

Samuel M. Sipe, Jr. argued the cause for petitioner. With
him on the brief were Anthony J. LaRocca, Alice E. Loughran,
Richard E. Weicher and Michael E. Roper.

Raymond A. Atkins, Attorney, Surface Transportation
Board, argued the cause for respondent. With him on the brief
were Thomas O. Barnett, Acting Assistant Attorney General,
U.S. Department of Justice, John J. Powers, III and John P.
Fonte, Attorneys, Ellen D. Hanson, General Counsel, Surface
 2

Transportation Board, and Thomas J. Stilling, Attorney. Rachel
D. Campbell, Attorney, entered an appearance.

Peter S. Glaser argued the cause for intervenor Public
Service Company of Colorado. With him on the brief were
Thomas W. Wilcox and David E. Benz.

Before: GINSBURG, Chief Judge, and RANDOLPH, Circuit
Judge, and EDWARDS, Senior Circuit Judge.

GINSBURG, Chief Judge: 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
 3

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, 1 I.C.C.2d 520 (1985), aff’d sub nom. Consol. Rail
Corp. v. United States, 812 F.2d 1444 (3d Cir. 1987). In the
Coal Rate Guidelines the Commission adopted the principles of
Constrained Market Pricing (CMP) to set upper limits on the
rates a railroad may charge its “captive shippers” -- those
customers who do not have practical access to an alternative
carrier and who, because of their inelastic demand, the railroads
may charge rates that significantly exceed the variable cost of
service. Id. at 521. The Commission concluded that these
principles would “meet [its] dual objectives of providing
railroads the real prospect of attaining revenue adequacy while
protecting coal shippers from ‘monopolistic’ pricing practices.”
Id. at 524-25. Under CMP, rail carriers set their own rates for
rail service, subject to three main constraints: revenue
adequacy, management efficiency, and stand-alone cost. See id.
at 534-46.

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
 4

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
no benefit,” that is, should not be required to cross-subsidize
other shippers. Id. at 523.

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.
 5

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. Cross-over 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
 6

BNSF’s rates unreasonable. See Pub. Serv. Co. of Colo. d/b/a
Xcel Energy v. Burlington N. & Santa Fe Ry., STB Docket No.
42057, 2004 WL 1428724 (STB served June 8, 2004) (Decision
I). BNSF petitioned for reconsideration, which the Board
denied in relevant part, see Pub. Serv. Co. of Colo. d/b/a Xcel
Energy v. Burlington N. & Santa Fe Ry., STB Docket No.
42057, 2005 WL 126476 (STB served Jan. 19, 2005) (Decision
II), and then petitioned this court for review.

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
 7

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, 367 I.C.C. 406
(1983). According to the Board, because by 1995 “the term
‘formal investigative proceeding’ had an established meaning,”
the Congress “is presumed to have been aware of [that
interpretation] when it retained that term.” See Lorillard v.
Pons, 434 U.S. 575, 580-81 (1978). Further, the Board argues
 8

that reading the revised statute differently than the Commission
read the preceding version would produce an “absurd, unfair,”
and perhaps unconstitutional result because it would “depriv[e]
Xcel of a decision on the merits of its rate complaint where the
delay was not Xcel’s fault”; more generally, it would, quite
perversely, reward any railroad that managed to prolong a rate
proceeding beyond the three-year time limit.

The Board’s concern with due process for shippers may be
well-founded. See Logan v. Zimmerman Brush Co., 455 U.S.
422, 428, 433-34 (1982) (holding “a cause of action is a species
of property protected by the Fourteenth Amendment’s Due
Process Clause” and therefore could not constitutionally be
extinguished by expiration of 120-day period for state agency to
convene fact-finding conference). We need not resolve the issue
of the three-year limit, however, because BNSF failed to raise
the argument in a timely manner. A reviewing court generally
will not consider an argument that was not raised before the
agency “at the time appropriate under its practice.” United
States v. L.A. Tucker Truck Lines, Inc., 344 U.S. 33, 37 (1952).
BNSF raised this argument when, after three and one half years
of proceedings, the Board had ruled against it on the merits and
the carrier was petitioning for reconsideration. Assuming its
relegation of the argument to a footnote was not itself fatal, cf.
United States v. Whren, 111 F.3d 956, 958 (D.C. Cir. 1997)
(“absent extraordinary circumstances ... we do not entertain an
argument raised for the first time ... in a footnote”), the timing
surely was.

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.”
 9

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, 230
F.3d 362, 364 (D.C. Cir. 2000) (agency decision that statute of
limitations defense was forfeited by failure to raise argument
until motion for reconsideration held not arbitrary or
capricious); see also Tex. Mun. Power Agency v. Burlington N.
& Santa Fe Ry., STB Docket No. 42056, 2004 WL 2619767, 3
(STB served Sept. 27, 2004) (Board “generally does not
consider new issues raised for the first time on reconsideration
where those issues could have and should have been presented
in the earlier stages of the proceeding”). In sum, BNSF’s
argument came too late to command the attention of the Board,
let alone that of this court.

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, 969 F.2d 1256, 1259-60 (D.C. Cir.
1992) (challenge based upon 90-day deadline for agency action
forfeit when not raised before agency), unless it “concerns the
very composition or ‘constitution’ of [that] agency,” Mitchell
v. Christopher, 996 F.2d 375, 378 (D.C. Cir. 1998), which
BNSF’s objection does not. Compare Arbaugh v. Y & H Corp.,
126 S. Ct. 1235, 1244 (2006) (“subject matter jurisdiction,
because it involves the court’s power to hear a case, can never
be forfeited or waived”) (citation omitted).

B. The Merits

Because the investigative proceeding initiated by Xcel’s
complaint was not dismissed, we shall go on to consider BNSF’s
 10

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., 158 F.3d 1294, 1301 (D.C. Cir.
1998). As detailed below, we find no fault with the Board’s
reasoning and therefore leave its decision undisturbed.

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 “charg[e] relatively high
rates to coal shippers, like Xcel, with highly inelastic demand.”
See Coal Rate Guidelines, 1 I.C.C.2d at 526-27 (owing to
significant production economies “the cost structure of the
railroad industry necessitates differential pricing of rail services”
based upon diverse shippers’ sensitivities to price).

Although the Board explained that the SAC test “inherently
 11

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, 1 I.C.C.2d at 536 (“[A] rate may be unreasonable
even if the carrier is far short of revenue adequacy”). As the
Board explained in denying BNSF’s petition for reconsideration,
the SAC test is designed to take into account the railroad’s need
for revenue adequacy “on the portion of its system that is
included in the system of the SARR.” Decision II, at 6; see also
Burlington N. R.R. v. ICC, 985 F.2d 589, 597 (D.C. Cir. 1993)
(“CMP explicitly builds in the idea of revenue adequacy (subject
to the SAC constraint)”). The test therefore reasonably
“excludes revenue needs associated with other traffic” traveling
over other parts of the system. Decision II, at 6. To be sure, a
railroad may still charge a captive shipper more than it charges
non-captive shippers for the use of shared facilities. The SAC
test, however, is designed to ensure the carrier does not cross-
subsidize revenue-inadequate portions of the system by charging
its captive shippers “more than they should have to pay for
efficient rail service,” Coal Rate Guidelines, 1 I.C.C.2d at 524,
and thereby recovering from them “the costs of ... facilities or
 12

services from which [they] derive[] no benefit,” id. at 523.

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, 1 S.T.B. 1004 (1996);
see also Ass’n of Am. R.Rs. v. Surface Transp. Bd., 146 F.3d
942, 944-45 (D.C. Cir. 1998). BNSF contends the rates
prescribed by the Board in this case yield a R/VC ratio of not
more than 273%, significantly below its RSAM figure of about
316% for the relevant time period. Because a railroad in order
to cover its fixed costs must be allowed to charge its highest
rates to shippers with the least elastic demand, BNSF claims it
must be able to charge them rates equal to or greater than the
rates indicated by the RSAM in order “to have any chance of
achieving revenue adequacy.”

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., 146
F.3d at 944-45. As the Board points out, the RSAM figure
merely provides a test of “system-wide revenue need” and
therefore “provides no guidance on the rates Xcel should be
charged for the particular facilities and services Xcel uses.” In
contrast, the Board has “consistently affirmed that CMP, with its
SAC constraint, is the preferred and most accurate procedure
available for determining the reasonableness of rates in markets
where the rail carrier enjoys market dominance.” Burlington N.
R.R., 985 F.2d at 596 (internal quotation marks and citation
omitted). Of course, a railroad does need to recover a higher
 13

percentage of its fixed costs from shippers with relatively
inelastic demand, but that is not to say it may charge a price that
cross-subsidizes other shippers. The SAC test constrains rates
precisely to that end. As a result, where fixed costs are
relatively low, even a shipper with inelastic demand may be
charged less than the average derived by the RSAM; indeed, this
will inevitably occur to some extent because the average derived
by the RSAM is the average for captive shippers only, so the
ratios for some captive shippers must be above and some below
that figure. Here, the rates prescribed by the Board were well in
excess (indeed, 273%) of variable cost.

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 there must be “an arbitrary allocation of through
revenue between the two portions of the through movement.”
Likewise, the “cost side of the comparison is distorted because
the costs of the off-SARR portions of the movements are
ignored altogether.” Therefore, contends BNSF, a properly
performed SAC test must use only end-to-end movements and
must “examine[] the full costs of all facilities used to provide
service to the shipper group and the total revenues generated by
that traffic.”*

*
Despite the routine use of cross-over traffic in SAC
proceedings since the Nevada Power decision, a/k/a Bituminous Coal
 14

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, 1 I.C.C.2d at 544: “Without grouping, SAC would
not be a very useful test, since the captive shipper would be
deprived of the benefits of any inherent production economies”);
Nevada Power, 10 I.C.C.2d at 265 n.12. Therefore, to exclude
cross-over traffic from a SAC analysis “would dramatically
enlarge the geographic scope of a SARR” needed to serve the
group of shippers selected for the SARR by the complainant.
Decision I, at 14. In this case, the Board estimated that in order
“to serve the same 37 shippers without any cross-over traffic,
the SARR would need to be at least 10 times larger than the
[SARR that Xcel proposed].” Id. The complexity of the
consequent proceeding, the Board concluded, “would expand
exponentially” beyond what is already “a dauntingly large and

-- Hiawatha, Utah, to Moapa, Nev., 10 I.C.C.2d 259 (1994), BNSF
argues the Board’s acceptance of cross-over traffic, without a showing
that the full costs of off-SARR portions of the movement will be
covered, is inconsistent with precedent, to wit Omaha Pub. Power
Dist. v. Burlington N. R.R., 3 I.C.C.2d 123 (1986) (OPPD) (finding
substantial evidence that off-line revenues would support off-line
costs). In its administrative filings, however, BNSF did not argue as
it does here that the Board’s acceptance of cross-over traffic since
Nevada Power has been inconsistent with its decision in OPPD or that
Xcel should be required to make the same type of showing as the
shipper in OPPD made. BNSF cited OPPD only to support its
argument that the Board should adopt a cost-based approach to the
allocation of revenue. Because BNSF did not give the agency an
opportunity to consider the argument, we do not consider it here. See
Military Toxics Project v. EPA, 146 F.3d 948, 956-57 (D.C. Cir. 1998)
(argument not raised before agency may not be heard on appeal).
 15

detailed task.” Id. at 16.

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., 985 F.2d
at 597 (“the Commission is free to make reasonable trade-offs
between the quality and cost of possible regulatory approaches
.... and of course we owe the Commission’s judgment on the
point great deference” so long as it “intelligibly explained why
the trade-off chosen was reasonable”).

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. § 10101(15) (Board must provide for “expeditious
handling and resolution of all proceedings”); Ass’n of Am. R.Rs.
v. Surface Transp. Bd., 306 F.3d 1108, 1111 (D.C. Cir. 2002)
(“[I]t is up to the Board to arrive at a reasonable accommodation
of the conflicting policies set out in the Staggers Act”). In view
of the Board’s estimate that presentation and analysis of the
SARR, which already involved “dozens of volumes of
evidence,” would have burgeoned tenfold without the
simplifying mechanism of cross-over traffic, Decision I, at 16,
it was not unreasonable for the Board to conclude that barring
cross-over traffic from the SARR would be not only inefficient
but infeasible. See Decision II, at 7 (“We remain concerned
that, without cross-over traffic, captive shippers could lack a
practicable means by which to prosecute rate complaints”).
 16

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, 2002
WL 1905118, 7 n.14 (STB served Aug. 20, 2002) (“We have not
adopted a single preferred procedure for developing revenue
divisions on cross-over traffic”). The Modified Straight-
Mileage Prorate (MSP) procedure, which was applied in this and
several other recent proceedings, “is a refinement of a mileage-
based formula long used in SAC cases to allocate cross-over
traffic revenues.” Decision II, at 8; see, e.g., Duke Energy Corp.
v. CSX Transp., Inc., STB Docket No. 42070, 2004 WL 250254
(STB served Feb. 4, 2004); Duke Energy Corp. v. Norfolk S. Ry.,
STB Docket No. 42069, 2003 WL 22673026 (STB served Nov.
6, 2003); Carolina Power & Light Co. v. Norfolk S. Ry., STB
Docket No. 42072, 2003 WL 23109610 (STB served Dec. 23,
2003). Under MSP, revenues from a movement are allocated to
the SARR based upon the movement’s “proportionate share of
the combined mileage” and upon the assumption that “average
 17

costs are a continuous function of distance (holding other factors
constant).” Decision II, at 8. In recognition of the
proportionally higher costs associated with originating and
terminating traffic, for each movement that originates or
terminates on the SARR, a 100-mile additive is included in the
calculation “as a surrogate in the absence of any better evidence
as to the costs of those functions.” Id.

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, 1 I.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 allocated between the SARR
and off-SARR segments of a cross-over movement “in
proportion to each segment’s relative variable cost, distance, and
density.” Decision I, at 17. The Board rejected DARA because,
although it does allocate a higher proportion of revenues to
lower density lines, it “ignor[es] the well-accepted principle that
economies of density will vary with different levels of output.”
Decision II, at 8-9. Thus, even where “economies of density
have been, for practical purposes, exhausted, DARA would
continue to allocate greater revenue to the part of the movement
using the lighter-density line.” Id. at 11. The Board therefore
concluded that DARA had “not been shown to be superior” to
the MSP approach ordinarily used in SAC cases. Decision II, at
11.

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
 18

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, 412 U.S. 800, 807-08 (1973) (“A settled
course of behavior embodies the agency’s informed judgment
that, by pursuing that course, it will carry out the policies
committed to it by Congress. There is, then, at least a
presumption that those policies will be carried out best if the
settled rule is adhered to”).

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
 19

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, 2003 WL 1788666, 2 (STB served April 4, 2003). The
Board later explained that Xcel had made out a prima facie case
by virtue of its “good faith effort to present reasonable evidence
on all of the basic components of the SAC test.” Decision II, at
6. BNSF argues that by permitting Xcel to proceed with an
admittedly flawed operating plan, the Board relieved Xcel of its
burden of proving every element of its claim.

Although Xcel does bear the burden of persuasion, see Coal
Rate Guidelines, 1 I.C.C.2d at 547 (“[T]he complainant must
demonstrate that the challenged rate is unreasonable”), the
complainant’s initial presentation need not be flawless in order
to resist a motion to dismiss. See 49 U.S.C. § 11701(b)
(requiring dismissal of the complaint if it does not state
“reasonable grounds for investigation and action”); McCarty
Farms v. Burlington N., Inc., ICC Docket No. 37809, 1995 WL
55449, 8 (ICC served Feb. 13, 1995) (“Unless the model is
patently incapable of meeting the shipper’s needs, we will
presume that the stand-alone system is feasible unless and until
its feasibility is challenged in the railroad’s case-in-chief”).
Because of the sheer size of a SAC presentation, it will almost
inevitably have some flaws to which the carrier can point.
Therefore, we do not think the Board unreasonably refused to
 20

dismiss Xcel’s complaint merely because its presentation was
less than perfect. See Decision II, at 5 (“Were we to entertain
only those rate complaints where the railroad could not poke
holes in the operating plan devised by the shipper for its SARR,
almost every rate challenge [would have to be dismissed]”).

Second, the Board’s substitution for Xcel’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, 165 F.3d 992,
1008 (D.C. Cir. 1999) (“[T]he burden of proof requirement ...
relates to the burden of persuasion ..., not to the burden of
production, and thus the identity of the party submitting
evidence is not dispositive”).

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, 2003 WL 1523335, 21-24 (STB served Mar. 24,
2003). The Board used the data in BNSF’s operating plan to
compare the travel times and lengths of the two routes and
concluded they would provide comparable service; it also added
$150 million for additional capital investment in order to cover
the costs of any congestion created by moving the traffic on the
SARR. Decision I, at 20-22, 30. In so doing, the Board, we
 21

think, reasonably applied its own expertise to fill a minor gap in
the record. See Balt. & Ohio R.R. v. United States, 386 U.S.
372, 430 (1967) (Board “is not the prisoner of the parties’
submissions” but rather has a duty “to weigh alternatives and
make its choice according to its judgment how best to achieve
and advance the goals of the National Transportation Policy”)
(Brennan, J., concurring).

c. EIA Rate Forecast

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
“[f]undamental 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, 890 F.2d 1193,
1202-04 (D.C. Cir. 1989) (citation omitted). BNSF protested
generally the use of the EIA data in its motion for
reconsideration, but unlike the petitioner in Union Electric, did
not make “a good showing it [could] contest the evidence.” 890
F.2d at 1203 (citing Market St. Ry. v. R.R. Comm’n, 324 U.S.
548, 562 (1945)). In fact, the carrier failed to identify any flaw
in the evidence or even to request an additional opportunity in
which to do so.

Due process requires only a “meaningful opportunity” to
challenge new evidence, Mathews v. Eldridge, 424 U.S. 319,
349 (1976), which opportunity BNSF failed to take in its
application for rehearing. Cf. Opp. Cotton Mills, Inc. v. Adm’r
of Wage & Hour Div., 312 U.S. 126, 152 (1941) (“The demands
of due process do not require a hearing, at the initial stage or at
a particular point or at more than one point in an administrative
 22

proceeding so long as the requisite hearing is held before the
final order becomes effective”); Gutierrez-Rogue v. INS, 954
F.2d 769, 773 (D.C. Cir. 1992) (an opportunity to rebut
officially noticed facts satisfies due process). We have no
occasion, therefore, to overturn the Board’s decision on this
ground.

III. Conclusion

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

Denied.
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APPENDIX