PPL Montana, LLC v. Surface Transportation Board

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.