Burlington Northern & Santa Fe Railway Co. v. Surface Transportation Board

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 16, 2005 Decided April 8, 2005

No. 04-1162

BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY,

PETITIONER

v.

SURFACE TRANSPORTATION BOARD AND

UNITED STATES OF AMERICA,

RESPONDENTS

AEP TEXAS NORTH COMPANY,

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 briefs were Alice E. Loughran, Richard E. Weicher,

and Michael E. Roper.

Rachel Danish Campbell, Attorney, Surface Transportation

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Board, argued the cause for respondents. With her on the brief

were Robert H. Pate, III, Assistant Attorney General, Robert B.

Nicholson and John P. Fonte, Attorneys, Ellen D. Hanson,

Deputy General Counsel, Surface Transportation Board, and

Thomas J. Stilling, Attorney.

Kelvin J. Dowd argued the cause for intervenor. With him

on the brief were Karen H. Herren, William L. Slover, and

Kendra A. Ericson.

Before: ROGERS, TATEL and GARLAND, Circuit Judges.

Opinion for the Court filed by Circuit Judge ROGERS.

ROGERS, Circuit Judge: Burlington Northern and Santa Fe

Railway Company (“BNSF”) petitions for review of the decision

of the Surface Transportation Board vacating the rate

prescription governing its transportation of coal from the

Rawhide coal mine in the Powder River Basin of Wyoming to

a coal-fired electric generating station owned and operated by

intervenor AEP Texas North Company (“AEP Texas”). W. Tex.

Utils. Co. v. Burlington N. & Santa Fe Ry. Co., 2004 WL

542864 (Mar. 19, 2004) (“Decision”). BNSF contends that the

Board contravened Congress’ policy of minimizing federal

regulation of the railroad industry in two ways: first, by granting

AEP Texas’s motion to vacate the rate prescription without

requiring the shipper to satisfy the evidentiary requirements for

reopening under the Interstate Commerce Commission

Termination Act of 1995 (“the Act”), 49 U.S.C. § 722(c) (2000),

and second, by endorsing disparate treatment of shippers and

carriers seeking to vacate a rate prescription. We reject AEP

Texas’s challenge to BNSF’s standing, and hold that the Board’s

explanation for disparate treatment of shippers and carriers

bound by the same rate prescription is arbitrary and capricious.

Accordingly, we grant the petition, vacate the Decision, and

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remand the case to the Board.

I.

Under the Act, a railroad ordinarily may establish any rate

it chooses for the transportation it provides, provided it does not

discriminate against connecting lines. See 49 U.S.C. § 10701(c).

However, where a railroad has “market dominance over the

transportation to which a particular rate applies,” its rate must be

reasonable. Id. §10701(d)(1); see id. § 10709(a). A carrier is

conclusively presumed not to have market dominance where it

shows that the revenues produced by the rate are less than the

statutory floor for regulatory intervention: 180 percent of the

carrier’s variable cost of providing the transportation. Id. §

10707(d)(1)(A). Even where a carrier has market dominance,

the Board may not examine the reasonableness of the carrier’s

rate except upon complaint filed by an affected shipper. See id.

§ 10704(b).

Where, after filing a complaint, a shipper demonstrates that

a carrier’s rate is unlawful, the Board may prescribe the

maximum rate that the carrier may charge for transportation. Id.

§ 10704(a)(1). The Board determines the reasonableness of the

challenged rate based on “constrained market pricing” (“CMP”)

principles set forth in the 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) (“Coal Rate

Guidelines”), which the Board concluded would “meet [its] 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

establishes three main constraints on rates that may be charged

to captive traffic: revenue adequacy, management efficiency,

and stand-alone cost (“SAC”). Under the SAC analysis, carriers

are to use observed market demand as the basis for pricing,

while ensuring that a shipper not bear the cost of facilities and

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services from which it derives no benefit. Coal Rate Guidelines,

1 I.C.C.2d. at 528. The Board utilizes the SAC test to set the

variable rate over the period covered by the SAC analysis, based

on the rate an optimally efficient stand-alone railroad would

hypothetically need to charge to serve the traffic of the

complaining shipper to fully recover its costs, including a

reasonable return on investment. Id.

The underlying dispute involves AEP Texas’s challenge to

BNSF’s tariff for transporting coal from the Rawhide mine to

the Oklaunion Generating Station after the expiration of the

parties’ rail transportation contract in 1994. The background to

the current appeal appears in Burlington N. R.R. v. Surface

Transp. Bd., 114 F.3d 206 (D.C. Cir. 1997). See also Burlington

N. R.R. v. Surface Transp. Bd., 75 F.3d 685 (D.C. Cir. 1996). In

1996, responding to AEP Texas’s predecessor’s challenge, the

Board found that BNSF’s rate was excessively high, and based

on a twenty-year SAC analysis (covering 1995 to 2014)

prescribed the maximum reasonable rate level at 180 percent of

BNSF’s variable cost of providing service. W. Tex. Utils. Co. v.

Burlington N. R.R. Co., 1 S.T.B. 638, 661 (Apr. 25, 1996)

(“West Texas I”). The Rawhide Mine closed in 1997. For

several years thereafter, BNSF voluntarily charged AEP’s

predecessor the Rawhide rate for traffic from its other mines.

Then, in June 2000, BNSF announced its intention to increase

the rate from non-Rawhide mines. W. Tex. Utils. Co. v.

Burlington N. R.R. Co., 2000 WL 1665124 (Nov. 3, 2000). AEP

Texas’s predecessor objected, arguing the Rawhide prescription

applied more broadly to other mines in the Powder River basin.

Id. at 2. The Board disagreed but stated it would consider

supplemental evidence and reopen the proceeding to receive

evidence concerning other mines. Id. at 5.

When the Rawhide Mine reopened in 2002, BNSF sought

clarification of the West Texas I rate prescription, requesting the

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Board rule, in light of the fact that the SAC rate no longer fell

below the regulatory floor, that BNSF was entitled to charge the

higher of the SAC rate or the regulatory floor. The Board

obliged, observing that while the analysis in West Texas I

showed that the SAC rate initially fell below the jurisdictional

threshold, it should have been clear that the rate might exceed

that threshold in future years, and therefore the Board should

have prescribed a maximum reasonable rate at the higher of the

SAC rate or the statutory jurisdictional rate threshold, as the

Board had done in subsequent proceedings. W. Tex. Util. Co. v.

Burlington N. & Santa Fe Ry. Co., 2003 WL 21359571, 3-4

(May 28, 2003 ) (“West Texas II”). The Board rejected the

argument by the shipper that it first should have the opportunity

to re-litigate the SAC rate, explaining that to reopen the

proceedings based on new evidence or substantially changed

circumstances, the shipper would need to file an appropriate

petition for reopening. Id. Two months after denying

reconsideration, W. Tex. Utils. Co. v. Burlington N. R.R. Co.,

2000 WL 1665124 (Nov. 7, 2000), the Board clarified that the

invitation to submit evidence of substantially changed

circumstances should not be construed as “allowing a change in

the fundamental assumptions upon which the original SAC

analysis was based,” W. Tex. Utils. Co. v. Burlington N. & Santa

Fe Ry. Co., 2003 WL 21704153, 3 (July 22, 2003) (“West Texas

III”). The Board instructed that:

If a shipper wishes to establish a current maximum

reasonable rate using a SAC analysis that is based on

different assumptions than originally used, its recourse is to

have the rate prescription vacated, allow the railroad to

establish a new common carrier rate, and then file a

complaint challenging the railroad’s new rate.

Id. at 3. The Board added: “This limitation is necessary to

achieve a proper balance between the interests of fairness to all

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parties and of administrative finality and repose. Id. (citing Ariz.

Pub. Serv. Co. v. Atchison, T.& S.F. Ry., 3 S.T.B. 70, 75

(1998)).

Thereafter, on August 11 and September 3, 2003,

respectively, AEP Texas filed a new rate complaint and a

petition to vacate the rate prescription to enable BNSF to

establish a new common carrier rate which, if necessary, AEP

Texas could then challenge and seek reparations, which it

subsequently did. On March 19, 2004, the Board granted AEP

Texas’s petition and vacated the rate prescription. Decision,

2004 WL 542864 at 1. The Board stated:

As the proponent and beneficiary of the rate prescription,

the complaining shipper should be entitled to have that

prescription vacated upon request, without having to show

that the prescription is now defective. [1] This policy is

appropriate to ensure that a captive shipper who prevails on

its rate complaint in the first instance does not later end up

in a worse position–by having to bear a higher rate than

would be justified under a new SAC analysis–than if it had

not earlier challenged the rate or had been unsuccessful in

its earlier challenge. This is a particular concern given the

long period of time covered by a SAC analysis (usually

looking forward 20 years) and any resulting rate

prescription. [2] The economic and regulatory conditions

reflected in the SAC analysis can change significantly over

that time period. The rate prescription, which was imposed

to protect the captive shipper from unreasonably high rates,

should not become the source of a rate that would now be

considered unreasonable under a SAC analysis.

Id. at 3. The Board rejected BNSF’s concern that it would be

subject to repetitive rate litigation over the same traffic, stating

that “nothing prevents an unsuccessful complainant from

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pursuing a new complaint immediately, and nothing binds that

shipper to its prior evidentiary presentation.” Id. The Board

also observed that while the carrier is restored to rate setting

freedom, the shipper has relinquished the benefits of a prior rate

prescription, must take service under the new rate established by

the carrier, and bears the risk that a new rate complaint may be

unsuccessful. Id. BNSF petitions for review.

II.

As a threshold matter, we address AEP Texas’s challenge

to BNSF’s standing to petition for review of the Board’s

Decision. AEP contends that BNSF is not aggrieved by the

Decision because the vacated rate prescription “was entered

solely for the benefit of AEP Texas, and the only effect of the

[Decision] on BNSF was to restore the carrier’s discretion to set

any rate it chose on AEP Texas’[s] coal traffic–which discretion

BNSF exercised.” Br. of Intervenor-Resp’t at 2. Although

acknowledging its present challenge to BNSF’s discretionary

rate, AEP Texas points out that BNSF’s “rate-setting freedom

cannot be constrained unless and until the [Board] issues a final

decision finding the rate unreasonably high and ordering it

reduced.” Id. Hence, AEP Texas contends, BNSF cannot show

any “injury in fact” arising from the Decision.

Under the Hobbs Act, a party seeking review of a decision

by the Board must demonstrate that it has been aggrieved by the

agency action. 28 U.S.C. § 2344 (2000). Proof of such

aggrievement requires a showing of both Constitutional and

prudential standing. See Shell Oil Co. v. FERC, 47 F.3d 1186,

1200-01 (D.C. Cir. 1995). For the Court to find Constitutional

standing, BNSF must establish that: (1) it has suffered an injury-

in-fact, that (2) was caused by the decision of the Board, and

that the injury (3) would be redressed by the relief sought from

the court. Raytheon Co. v. Ashborn Agencies, Ltd., 372 F.3d

451, 453 (D.C. Cir. 2004).

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As a consequence of the Decision vacating the rate

prescription, BNSF’s rate-making freedom was restored. But,

contrary to AEP Texas’s contention, it does not follow that

BNSF cannot show injury-in-fact. AEP Texas is seeking to have

it both ways: On the one hand, AEP Texas contends that BNSF

cannot show injury-in-fact as a result of the Decision setting

aside the rate prescription, while on the other hand it has filed a

complaint alleging that the identical discretionary rate BNSF is

imposing is unreasonably high and that reparations are due. As

BNSF responds, “its injury is obvious” because prior to the

Decision, the rate prescription would have remained in effect

until 2014. Instead, although BNSF in the exercise of its

discretion set the rate for Rawhide coal traffic at the same rate

as the previously prescribed rate, BNSF is presently a defendant

in an action by AEP Texas seeking reparations for charges made

at that rate.

Had the revised rate prescription remained in effect, BNSF

would be shielded from liability for reparations to AEP Texas if

the Board determined the prescribed rate was unlawful. BNSF

no longer enjoys this protection. This is a cognizable injury

sufficient to confer standing. See Rio Grande Pipeline Co. v.

FERC, 178 F.3d 533, 536, 540 (D.C. Cir. 1999); Int’l Bhd. of

Elec. Workers v. ICC, 862 F.2d 330, 334 (D.C. Cir. 1988). “The

possibility that AEP Texas will be unsuccessful in that action

does not eliminate the injury caused by the risk of an adverse

action or the burdens of the litigation itself.” Reply Br. of Pet’r

at 3. AEP Texas’s reliance on Shell Oil Co., 47 F.3d at 1186, is

misplaced; in that case, the challenged agency order did not

deprive the company of a previously-held protection. Moreover,

the measure of certainty for the arrangement of BNSF’s business

affairs as a result of the rate prescription ceased with the

Decision, for the longevity of any future rate prescription would

be subject to a shipper’s mere request to vacate and expose

BNSF to increased litigation over the reasonableness of its rates.

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See Raytheon Co., 372 F.3d at 454; Idaho Power Co. v. FERC,

312 F.3d 454, 460 (D.C. Cir. 2002). There also can be no doubt

that BNSF satisfies the remaining Article III standing

requirements, because its injury flows from the Decision and

may be redressed if the court grants its petition for review.

There is no merit to Intervenors’ contention that BNSF

cannot satisfy the requirements of prudential standing because

“[r]ailroads . . . are not within the zone of interests intended to

benefit from prescription orders.” Br. of Intervenor-Resp’t at

10. “In deciding whether a litigant has prudential standing . . .

[t]he court ‘should not inquire’ whether Congress intended to

benefit or regulate the litigant. It is enough that the litigant’s

interest is ‘arguably’ one regulated or protected by ‘the statutory

provision at issue.’” PDK Labs. v. U.S. D.E.A., 362 F.3d 786,

791 (D.C. Cir. 2004) (quoting Nat’l Credit Union Admin. v.

First Nat’l Bank, 522 U.S. 479, 488-89, 92 (1998)). Because

BNSF is subject to the rate prescription, its interest in preventing

dissimilar treatment of carriers and shippers seeking to vacate a

rate prescription is within the zone of interests regulated by the

Act. We turn, then, to the merits of BNSF’s petition.

III.

An agency must provide an adequate explanation to justify

treating similarly situated parties differently. Petroleum

Communications Inc. v. FCC, 22 F.3d 1164, 1172 (D.C. Cir.

1994) (and cases cited therein); Willis Shaw Frozen Express,

Inc. v. ICC, 587 F.2d 1333, 1336 (D.C. Cir. 1978); Ace Motor

Freight, Inc. v. ICC, 557 F.2d 859, 862 (D.C. Cir. 1977). Where

an agency applies different standards to similarly situated

entities and fails to support this disparate treatment with a

reasoned explanation and substantial evidence in the record, its

action is arbitrary and capricious and cannot be upheld. Willis

Shaw Frozen Express, Inc., 587 F.2d at 1336; Ace Motor

Freight, Inc., 557 F.2d at 862.

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Prior to the challenged Decision, the Board and its

predecessor, the Interstate Commerce Commission, have

required that the party seeking to vacate a rate prescription

demonstrate a change in legal or factual circumstances which

would render the prior rate analysis invalid. See, e.g., CF Indus.

Inc. v. Kaneb Pipe Line Partners, 2004 WL 1802304 (2004);

San Antonio v. Burlington N., 364 I.C.C. 887 (1981); Ark. Rice

Traffic Bureau v. Aberdeen & Rockfish R.R. Co., 219 I.C.C. 5,

46-47 (1936); Cherry-Burrell Corp. v. Atchison, Topeka &

Santa Fe Ry. Co., 210 I.C.C. 148 (1935); Cady Lumber Corp. v.

Apache Ry. Co., 155 I.C.C. 56, 57 (1929). Under the new policy

announced in the Decision, shippers and carriers are subject to

different standards when seeking to vacate a rate prescription:

A shipper will be granted vacatur upon request, while a carrier

must show a change in circumstances which would call into

question the prior rate analysis.

The Board gave three reasons for granting a shipper’s

petition to vacate a rate prescription without an evidentiary

showing of material error, new evidence, or changed

circumstances. First, the Board wanted to ensure that a captive

shipper who prevails on its rate complaint does not subsequently

find itself in a worse position as a result of having to pay a

higher rate than would have been justified under a new SAC

analysis. Decision, 2004 WL 542864 at 3. Second, the Board

took account of the fact that vacation of the rate prescription

affords the carrier rate-making freedom while the shipper bears

a substantial burden to show a new rate is unreasonable. Id.

Third, the Board was satisfied that BNSF’s concerns about

repetitive rate litigation failed to account for the fact that

“nothing prevents an unsuccessful complainant from pursuing

a new complaint immediately, and nothing binds that shipper to

its prior evidentiary presentation.” Id. For the following

reasons, we conclude that the Board’s justification in the

Decision for disparate treatment is flawed.

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Reference to the relative procedural postures of the parties

before the Board cannot alone substantiate the Board’s disparate

treatment of the parties. See Ace Motor Freight, Inc., 557 F.2d

at 865. Allowing differential treatment on the basis that the

shipper is the proponent and beneficiary of a rate prescription

fails to account for the fact that both shipper and carrier are

bound by a prescribed rate: A carrier may not charge more than

the rate ceiling while the shipper cannot avoid paying that rate

should it choose to take service from the carrier. See Ariz.

Grocery Co. v. Atchison, T. & S.F. Ry. Co., 284 U.S. 370, 387-

89 (1932). This remains true even though the rate prescribed

may be higher than the rate sought by the shipper in a rate

challenge proceeding. While a rate prescription exists only after

the Board finds that a carrier’s established rate was unlawful, the

rate prescribed must satisfy the dual purpose of protecting the

shipper from monopolistic practices while ensuring a carrier

adequate revenues. Consol. Rail Corp., 812 F.2d at 1450. And

while a carrier may have charged an unlawful rate prior to the

rate prescription, so long as its rate thereafter is made pursuant

to the rate prescription, its conduct is lawful and shielded from

liability for reparations.

Additionally, the Board does not explain how a change in

circumstances would impact carriers or shippers differently for

purposes of seeking vacation of a rate prescription. In its

Decision, the Board states that “the economic and regulatory

conditions reflected in the SAC analysis can change

significantly” over the long period of time covered by the

analysis, and that a shipper should not be held captive to a rate

prescription it initially sought. Decision, 2004 WL 542864 at 3.

This may be so, but it does not indicate why a carrier, who also

may be adversely impacted by changes in economic and

regulatory conditions, should not be afforded similar

consideration. Regardless, the Board cannot justify eliminating

the evidentiary burden requiring that a shipper show a change in

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circumstances based on the likelihood that a shipper will suffer

from a change in circumstances. The circularity of this

reasoning is evident, and Board counsel was unable during oral

argument to articulate any reason other than changed

circumstances that would render the rate prescription at issue

unreasonable.

Finally, the Board overlooked binding precedent in stating

that nothing constrained a shipper from filing repeated petitions.

Decision, 2004 WL 542864 at 3. In Traugott Schmidt & Sons v.

Michigan Central Railroad Co., 23 I.C.C. 684 (1912), the ICC

dismissed “as a matter of course,” a complaint because it

contained identical claims by the same party whose complaint

had been dismissed one year and three months earlier. Id. at

685. “[W]hen a matter has been once fully considered and

decided it must be regarded as settled unless it appears from new

facts presented that the Commission was wrong.” Id. Counsel

for the Board conceded during oral argument that Traugott

Schmidt & Sons is binding on the Board. Yet the Board stated

that “nothing binds [a] shipper to its prior evidentiary

presentation.” Decision, 2004 WL 542864 at 3. The Board

cannot rely on an erroneous description of its precedent to

justify a new policy treating carriers and shippers dissimilarly.

See generally Petroleum Communications, Inc., 22 F.3d at 1172;

Pub. Media Ctr. v. FCC, 587 F.2d 1322, 1331 (D.C. Cir. 1978).

Undoubtedly, the Board’s effort to protect captive shippers

is not easily accomplished in the complex task of rate making.

See Coal Rate Guidelines, 1 I.C.C.2d at 524, 549-52 (Statements

of Comm’rs Simmons and Strenio); see also W. Va. Pub. Servs.

Comm’n v. U.S. Dep’t of Energy, 681 F.2d 847, 853 (D.C. Cir.

1982). While the Board has suggested additional considerations

on appeal to support the Decision, e.g., Br. of Resp’t at 22, the

court is confined to review of the reasons set forth by the Board

in the challenged Decision. El Rio Santa Cruz Neighborhood

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Health Ctr., Inc. v. U.S. Dep’t of Health & Human Servs., 396

F.3d 1265, 1276 (D.C. Cir. 2005); SEC v. Chenery Corp., 318

U.S. 80, 95 (1943). Absent inclusion of a reasoned basis for

determining that rate prescriptions should be more readily

subject to vacation upon the petition of a shipper than a carrier,

the Board’s Decision is arbitrary and capricious. See Willis

Shaw Frozen Express, 587 F.2d at 1336; Ace Motor Freight, 557

F.2d at 862.

Accordingly, we grant the petition, vacate the Decision, and

remand the case to the Board. See San Antonio v. United States,

631 F.2d 831 (D.C. Cir. 1980), clarified by 655 F.2d 1341 (D.C.

Cir. 1981), rev’d on other grounds, Burlington N., Inc. v. United

States, 459 U.S. 131 (1982). In light of our disposition we need

not reach BNSF’s other contentions, including whether vacatur

is governed by the substantive standards in 49 U.S.C. § 722(c)

rather than the notice provisions of 49 U.S.C. § 722(b).