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

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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

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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

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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

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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

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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