CSX Transportation, Inc. v. Surface Transportation Board

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 7, 2009 Decided June 9, 2009

No. 07-1369

CSX TRANSPORTATION, INC., ET AL.,

PETITIONERS

v.

SURFACE TRANSPORTATION BOARD AND UNITED STATES OF

AMERICA,

RESPONDENTS

AMERICAN CHEMISTRY COUNCIL, ET AL.,

INTERVENORS

Consolidated with 07-1370, 07-1371, 07-1372, 07-1410,

08-1194

On Petitions for Review of an Order

of the Surface Transportation Board

G. Paul Moates argued the cause for Railroad Petitioners.

With him on the briefs were Paul A. Hemmersbaugh, Peter J.

Shudtz, Paul R. Hitchcock, Louis P. Warchot, George A.

Aspatore, J Michael Hemmer, Louise A. Rinn, Samuel M. Sipe

Jr., Anthony J. LaRocca, Terence M. Hynes, and Michael L.

Rosenthal.

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Nicholas J. DiMichael argued the cause for petitioners

The National Industrial Transportation League, et al. With

him on the briefs were Jeffrey O. Moreno, Andrew P.

Goldstein, and John M. Cutler, Jr.

Raymond A. Atkins, Associate General Counsel, Surface

Transportation Board, argued the cause for respondents. With

him on the brief were Robert B. Nicholson and John P. Fonte,

Attorneys, U.S. Department of Justice, and Ellen D. Hanson,

General Counsel, Surface Transportation Board. Anika S.

Cooper, Attorney, entered an appearance.

G. Paul Moates, Paul A. Hemmersbaugh, Peter J. Shudtz,

Paul R. Hitchcock, Louis P. Warchot, George A. Aspartore, J.

Michael Hemmer, Louise A. Rinn, Samuel M. Sipe, Jr.,

Anthony J. LaRocca, Terence M. Hynes, and Michael L.

Rosenthal were on the brief of Railroad Intervenors.

Nicholas J. DiMichael, Jeffrey O. Moreno, Andrew P.

Goldstein, and John M. Cutler, Jr. were on the brief for

Shipper Intervenors.

Before: ROGERS, TATEL, and GRIFFITH, Circuit Judges.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge: In this case we consider a set of

challenges to a Surface Transportation Board regulation

establishing a simplified method for resolving rail rate

disputes too small to bring under ordinary procedures. The

Board’s new regulation gives shippers—the complainants in

rail rate disputes—a choice between using the usual

procedures or either of two cheaper and simpler “small

claims” alternatives better suited to uncomplicated cases.

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Under each alternative, relief is capped due to the method’s

lower accuracy. A group of railroads challenges the Board’s

adoption of one of the alternative methods, and a group of

shippers challenges the other, as well as the relief caps on

both. Finding the Board’s balancing of the competing

interests in accuracy and simplicity well within its statutory

authority and neither arbitrary nor capricious, we deny the

petitions for review in all respects.

I.

The Surface Transportation Board regulates the rates

railroads charge shippers over which they have market

dominance. 49 U.S.C. §§ 10501, 10701(d)(1). Because such

captive shippers are unable to fend for themselves in the

market, Congress allows them to challenge a rail rate as

unjust or unreasonable before the Board, id. § 10707(b)–(c),

which can impose retrospective relief in the form of

reparations, id. § 11704(b), and prospective relief by

prescribing a new rate, id. § 10704(a)(1). To understand this

case, a brief whistle-stop tour through the history of the

Board’s procedures for resolving these rate disputes is in

order. All aboard!

In 1985, the Interstate Commerce Commission, the

Board’s predecessor, decided to resolve rate disputes under

“constrained market pricing” (CMP) principles, under which

the Commission would find reasonable a rate that (1) reflects

the amount a captive shipper would have to pay to receive

efficient service, (2) affords the railroad adequate revenues,

and (3) does so without cross-subsidizing any service or

facility from which the shipper receives no benefit. Coal Rate

Guidelines, Nationwide, 1 I.C.C.2d 520, 523–24 (1985), aff’d

sub nom. Consol. Rail Corp. v. United States, 812 F.2d 1444

(3d Cir. 1987). Under these principles, shippers able to

demonstrate that the railroad has market dominance had the

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choice of one of several methods to prove that the challenged

rates were unreasonable. They could opt to examine the

railroad’s entire network for revenue adequacy or

management efficiency, or alternatively, they could choose to

examine only a subset of the network using the “stand-alone

cost” (SAC) test—the choice of most shippers.

A SAC presentation simulates a “stand-alone railroad,” a

fully efficient hypothetical competitor railroad that serves the

complaining shipper and other traffic sharing common

facilities. BNSF Ry. Co. v. STB (“BNSF I”), 453 F.3d 473,

477 (D.C. Cir. 2006). A challenged rail rate is unreasonable

to the extent it exceeds the costs (including a reasonable

profit) of running the stand-alone railroad. Id. A SAC

presentation thus furthers CMP principles by promoting

efficiency and eliminating cross-subsidization. It

accomplishes the former by forcing the railroad to bear the

cost of any inefficiencies, and the latter by preventing the

shipper from paying for any facilities from which it receives

no benefit. Due largely to the difficulty of modeling an

efficient stand-alone railroad, however, this process is both

expensive and time-consuming—each “full SAC” case can

cost a shipper up to $5 million to litigate. Simplified

Standards for Rail Rate Cases (“Decision”), STB Ex Parte

No. 646 (Sub-No. 1), at 31 (served Sept. 5, 2007). In fact,

coal companies are virtually the only shippers who deliver

sufficiently large loads along fixed routes to justify using full

SAC procedures. See Rate Guidelines—Non-Coal

Proceedings (“1996 Guidelines”), 1 S.T.B. 1004, 1008 n.7

(1996) (noting “prevalence” of coal rate challenges).

Recognizing the expense of full SAC cases, the

Commission soon began searching for a simplified

alternative. Throughout the 1980s and early 1990s, it

considered but ultimately discarded several alternatives. One

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proposal, intended to create a simplified SAC procedure,

came in the form of a computerized model from the

Association of American Railroads (AAR). Because the

AAR refused to provide the proprietary source code for its

computer program (known as AAR-SSAC), the Commission

ran sample cases through the program to test it. AAR-

SSAC’s days were numbered when it labeled reasonable a

rate set at 5000 percent of the railroad’s variable costs.

By 1995, when Congress replaced the Commission with

the Board, the Commission still had not settled on a

simplified alternative. As a result, when Congress passed the

ICC Termination Act of 1995, it gave the newly-created

Board a year to “establish a simplified and expedited method

for determining the reasonableness of challenged rail rates in

those cases in which a full stand-alone cost presentation is too

costly, given the value of the case.” Pub. L. No. 104-88, §

102(a), 109 Stat. 803, 810 (1995) (codified as amended at §

10701(d)(3)). Responding to this directive, the Board issued

a set of simplified guidelines, which rejected AAR-SSAC and

introduced a “three benchmark” system, 1996 Guidelines, 1

S.T.B. at 1041, whereby the reasonableness of a challenged

rate was assessed not by simulating any alternative railroad,

but simply—at least as “the starting point for a rate

reasonableness analysis”—by comparing it to similar existing

rates, id. at 1022. When this approach went unused for years,

the Board held hearings to find out why. During those

proceedings, shippers testified that the three benchmark

guidelines were too vague and that the question of whether a

case was even eligible for resolution under the three

benchmark system was so uncertain as to require litigation.

Simplified Standards for Rail Rate Cases (“NPRM”), STB Ex

Parte No. 646 (Sub-No. 1), at 3 (served July 28, 2006) (notice

of proposed rulemaking).

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In 2006, the Board issued a notice of proposed

rulemaking, proposing (1) the retention of a slightly modified

three benchmark system for the smallest cases, (2) the

creation of a simplified SAC procedure more complicated

than the three benchmark system but simpler than full SAC,

for use in medium-size cases, and (3) clear eligibility

thresholds for each procedure. Id. After reviewing comments

submitted by railroads and shippers, the Board in 2007 issued

its final rule—the rule challenged here—which gave the

shippers the choice of a modified three benchmark system

intended for the smallest cases, a new simplified SAC

procedure intended for medium-size cases, or full SAC.

Decision at 5–6. Absent from the final rule are the eligibility

thresholds and with them the prospect of litigation over which

method to use. Instead, the new rule allows each shipper to

elect the three benchmark method, simplified SAC, or full

SAC for any case. To channel larger cases to the more

accurate methods, the rule limits the relief available to $1

million over five years for a three benchmark case and $5

million over five years for a simplified SAC case. Id. at 5;

see also id. at 27–28. This limit applies to whatever

combination of retrospective and prospective relief the Board

imposes. Id. at 28.

The three benchmark system compares the challenged

rate to three benchmark figures, each expressed as a

relationship between revenues and variable costs, id. at 10,

i.e., “those costs that increase as traffic over the railroad

increases,” BNSF Ry. Co. v. STB (“BNSF II”), 526 F.3d 770,

773 (D.C. Cir. 2008). Calculating one of these benchmarks

involves comparing the rail movement at issue with a group

of similar movements. The Board selects a comparison group

from groups proposed by the parties, who choose the

comparison movements from the four most recent years of

data in the “Waybill Sample.” Decision at 18. That sample,

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compiled by the Board, is a survey of information from rail

movements across the nation. Id. at 78.

The Board’s simplified SAC procedure is similar to the

full SAC method, but with a crucial difference. In a full SAC

presentation, the stand-alone railroad is hypothetical and fully

efficient. In a simplified SAC presentation, the stand-alone

railroad is instead a portion of the actual railroad with limited

modifications not relevant here. Id. at 15–16.

This case involves two sets of challenges to the Board’s

rule. A group of shippers argues that the Board set the relief

caps too low and adopted simplified SAC with neither

justification nor testing. Several railroads challenge the

Board’s adoption of the three benchmark method, claiming

that the Board sanctioned the use of stale data and barred

railroads from presenting certain types of evidence in those

cases. All railroad petitioners intervene to oppose the

shippers’ petition, and most shipper petitioners intervene in

opposition to the railroads’ petition. We review the Board’s

orders using the Administrative Procedure Act’s standards,

under which we will set aside agency action that is

“‘arbitrary, capricious, an abuse of discretion, or otherwise

not in accordance with law.’” BNSF II, 526 F.3d at 774

(quoting 5 U.S.C. § 706(2)(A)). “In the rate-making area, our

review is particularly deferential, as the Board is the expert

body Congress has designated to weigh the many factors at

issue when assessing whether a rate is just and reasonable.”

Id.

II.

We begin with the shippers’ claims. They argue that the

Board acted arbitrarily in setting the relief cap levels and in

adopting simplified SAC.

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Relief Caps

The shippers bring an intriguing but ultimately unavailing

challenge to the Board’s decision to set the relief limits at $1

million under the three benchmark method and $5 million

under simplified SAC. Although embracing the overall

approach of setting relief caps, the shippers claim that the

Board failed to make the findings necessary to ensure it

complied with section 10701(d)(3)’s requirement that it

“establish a simplified and expedited method for determining

the reasonableness of challenged rail rates in those cases in

which a full stand-alone cost presentation is too costly, given

the value of the case.” According to the shippers, the Board

failed to find that in those cases in which full SAC is too

costly, the relief caps still allow simplified SAC to generate

reasonable rates. Similarly, they claim that the Board failed

to assure that in those cases in which simplified SAC is too

costly, the relief caps still allow the three benchmark method

to generate reasonable rates.

The shippers start from the premise that at some point a

limit on relief might be so low as to produce an unreasonable

rate, either by making it infeasible to bring a case or by falling

too far below the rate to which the shipper would otherwise

be entitled. This premise follows from the shippers’ belief

that any rate the Board prescribes as relief “must be

reasonable” under section 10701(d)(1). See Shippers’

Opening Br. 12. If unduly low relief caps produce an

unreasonable rate in a case in which full SAC is too costly,

the shippers continue, then the shipper is left without a

meaningful way to get a reasonable rate. If too many cases

fall into this category—that is, if too many cases in which full

SAC is too costly are also cases in which simplified SAC fails

to produce a reasonable rate—then, they conclude, simplified

SAC would not constitute “a simplified and expedited method

for determining the reasonableness of challenged rail rates in

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those cases in which a full stand-alone cost presentation is too

costly, given the value of the case.” § 10701(d)(3).

Thus, according to the shippers, the Board should have

identified that subset of cases in which full SAC is too costly

and ensured that in such cases simplified SAC produces

reasonable rates. They take no issue with the Board’s

estimate that full SAC cases cost $5 million to litigate. But

according to them, the Board should have determined the

minimum permissible potential recovery ratio—i.e., the ratio

of available relief to litigation cost, a ratio the shippers

confusingly call a “risk factor”—below which full SAC

becomes too costly, and then ensured that for cases falling

under the threshold produced by that ratio, simplified SAC

provides enough relief to produce a reasonable rate.

Shippers’ Opening Br. 20–21. For example, suppose the

Board had picked a potential recovery ratio of 3.0.

Multiplying that ratio by full SAC’s $5 million litigation cost

would indicate that cases with anticipated relief of $15

million or less are those “in which a full [SAC] presentation is

too costly, given the value of the case,” § 10701(d)(3). After

picking that ratio the Board would then have to set the

simplified SAC relief caps high enough that, in cases with

anticipated relief of less than $15 million, the rate produced

by simplified SAC would still be reasonable. The shippers

insist that the Board did none of this, but we think they ask

too much.

Section 10701(d)(1) requires that a rate “must be

reasonable” only if established by a rail carrier with market

dominance, not if prescribed by the Board. § 10701(d)(1) (“If

. . . a rail carrier has market dominance over the transportation

to which a particular rate applies, the rate established by such

carrier for such transportation must be reasonable.”

(emphasis added)). Therefore, contrary to what the shippers

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believe, unlike railroad-set rates, the rates the Board

prescribes as relief in simplified SAC cases, though subject to

different requirements, need not themselves be “reasonable”

within the meaning of section 10701(d)(1). Compare §

10704(a)(2) (requiring revenue adequacy for rates prescribed

by the Board) with § 10701(d)(2) (requiring revenue adequacy

and setting out criteria for the Board to consider in

“determining whether a rate established by a rail carrier is

reasonable for purposes of [section 10701(d)(1)]” (emphasis

added)). That said, section 10701(d)(3)’s requirement of a

“simplified and expedited method for determining the

reasonableness of challenged rail rates in those cases in which

a full stand-alone cost presentation is too costly, given the

value of the case,” clearly contemplates a method that may

substitute for a full SAC proceeding in low-value cases—that

is, a method for determining the reasonableness of rail rates

not in the abstract, but for the purpose of awarding some relief

to shippers. Thus, section 10701(d)(3) requires the

“simplified and expedited method” to function as a

meaningfully effective way to seek some degree of redress for

unreasonable rail rates, and so excessively stingy relief caps

could in theory render a method ineffective. In that sense,

then, the shippers are correct: the Board was obliged to

determine that the relief caps were sufficiently high to satisfy

section 10701(d)(3).

Although not using the methodology the shippers urge,

the Board did just that: it clearly recognized its section

10701(d)(3) obligation and made the necessary findings. It

made clear that it understood the shippers’ precise concerns,

describing them as complaining of a “Hobson’s choice” for

certain case values and focusing on a hypothetical where a

shipper who, pursuing relief under the simpler method, would

“relinquish over half the value of its case,” while under the

more complex method would stand to make only twice the

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litigation costs. Simplified Standards for Rail Rate Cases

(“Rehearing Decision”), STB Ex Parte No. 646 (Sub-No. 1),

at 7 (served Mar. 19, 2008). Though the precise example the

Board mentioned compared the three benchmark method to

simplified SAC, rather than simplified SAC to full SAC, it

discussed both cases together, and its reasoning applies

equally to the comparison between simplified SAC and full

SAC.

After correctly identifying the shippers’ concerns, the

Board addressed them. It began by stating that cases which

might net the same relief have different prospects for success

and explained the desirability of encouraging a shipper who

was “more confident of its prospects for obtaining greater

relief” to use the more precise (and more costly) methods. Id.

at 8. Next, the Board stated that according to the table of case

values and net relief submitted by the shippers, “the $1

million and $5 million limits provide every shipper with a

potential case with sufficient net relief after litigation costs to

justify bringing a complaint under Three-Benchmark or

Simplified-SAC method[s].” Id. The Board accordingly

found that “every complainant will have a vehicle to pursue

its complaint regardless of the value of the case.” Id. That is,

the Board found that shippers subject to the relief caps retain

a sufficient amount of relief, even after the cost of litigation,

to make it feasible to bring their cases.

The shippers insist that a too-low relief cap could violate

section 10701(d)(3) in another way: even if not too close to

the litigation cost of the case, a relief cap might be too far

below the actual amount to which the shipper is entitled, thus

requiring the shipper to forgo such an unreasonably large

amount of relief as to prevent simplified SAC from serving as

an effective “simplified and expedited method.” Perhaps so,

but the Board addressed this possibility. It acknowledged that

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wherever relief caps might be set, some shippers would face a

difficult choice due to the effect of the cap. Id. The Board

then concluded:

Ultimately, we do not think it is improper for

there to be some trade-off involved in using a

simpler, faster, and less costly method that is

inherently less precise. We believe the limits

we have set strike the appropriate balance so

that we do not open the door to excessive

litigation under methods that are not justified

for the amount at dispute.

Id. This discussion clearly represents the Board’s assessment

that the “trade-off” does not require shippers to forgo too

much relief in order to get the benefit of a simpler proceeding.

The Board thus fully responded to the shippers’ concern.

To be sure, the Board’s analysis was qualitative instead

of quantitative, but it rested on the Board’s expertise, as well

as an assessment of the relief cap levels. Not every problem

is appropriate for qualitative analysis, but this one is: the

interest in channeling larger disputes into more accurate

forums is “inherently incommensurable” with the interest in

giving shippers meaningful access to a simpler forum, such

that there is no way to balance the two without making a

“judgment call,” BNSF II, 526 F.3d at 776 (upholding the

Board’s refusal to adopt certain rate adjustments). Even had

the Board explicitly considered a wider range of cases, at the

end of the day it would still have had to make a policy

judgment as to when full SAC is “too costly” and when a

relief cap renders the rate produced by simplified SAC

unreasonable. Cf. FCC v. Fox Television Stations, Inc., 129

S. Ct. 1800, 1813 (2009) (“It is one thing to set aside agency

action under the Administrative Procedure Act because of

13

failure to adduce empirical data that can readily be obtained.

It is something else to insist upon obtaining the unobtainable.”

(citation omitted)). Given this reality, we have no difficulty

concluding that the Board explained itself adequately for us to

“reasonably discern” its path as to the relief caps under both

the three benchmark method and simplified SAC. ACS of

Anchorage, Inc. v. FCC, 290 F.3d 403, 408 (D.C. Cir. 2002).

Hinting at an additional challenge to the Board’s rule, the

shippers argue in a single sentence in their opening brief that

the relief caps are in fact too low to comply with section

10701(d)(3) or the general requirement that rates charged to

captive shippers “must be reasonable,” § 10701(d)(1).

Shippers’ Opening Br. 12. Yet the shippers make no attempt

to demonstrate this. They never pick a certain amount or

percentage of relief forgone by relief caps and claim that such

an amount renders the resulting rate unreasonable. Nor do

they pick a particular potential recovery ratio and claim that

cases falling under that ratio are necessarily those for which

full SAC is too costly. They argue only that the Board

arbitrarily failed to find that simplified SAC would provide a

reasonable rate in cases in which full SAC was too costly, not

that the Board’s findings on that point represent an

unreasonable interpretation of the statute. Even assuming

they have adequately raised the latter argument, the shippers

have failed to convince us of its merit.

True, as the shippers point out, at some case values

neither full SAC nor simplified SAC affords much relief. For

example, under full SAC a case with total relief of $7.5

million would net only $2.5 million. This modest recovery,

just half of the $5 million litigation costs, makes bringing the

case under full SAC a risky venture. Under simplified SAC

the case would net $4 million ($5 million capped relief minus

$1 million litigation costs), but the relief cap would require

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the shipper to forgo $2.5 million, a substantial sum equal to

more than half of the shipper’s net relief. Even so, that hardly

means the Board erred in finding simplified SAC to be a

“simplified and expedited method of determining the

reasonableness of challenged rail rates in those cases in which

a full stand-alone cost presentation is too costly, given the

value of the case,” § 10701(d)(3). In light of the obvious

ambiguity inherent in this statutory language, we must uphold

the Board’s interpretation unless it is unreasonable. See Ass’n

of Am. R.Rs. v. STB, 237 F.3d 676, 680 (D.C. Cir. 2001)

(citing Chevron U.S.A. v. Natural Res. Def. Council, 467 U.S.

837, 843 (1984)). It isn’t. For one thing, as the Board points

out, the $4 million recovery under simplified SAC is more

valuable than would be the same amount obtained under full

SAC. After all, it comes more quickly and, thanks to reduced

litigation costs, with less downside risk, unquantifiable yet

real benefits to expedited procedures. Respt.’s Br. 46. For

another, as discussed above, the prescribed rate the Board

imposes—that is, the relief limited by the cap—isn’t itself a

rate that must qualify as reasonable under section

10701(d)(1). Far from limiting the reasonableness of a rate,

the relief cap represents a procedural mechanism necessary to

the reliable adjudication of a challenged rate’s reasonableness.

The very phrase “simplified and expedited method”

contemplates that the method will impose some costs. And

the costs imposed by the simplified SAC relief cap are

unlikely ever to exceed the litigation costs of full SAC;

because any case worth more than $9 million will yield more

potential profit under full SAC, simplified SAC’s relief cap

will presumably cause shippers to forfeit only $4 million, less

than the $5 million cost to litigate full SAC. Perhaps the

Board should treat relief caps differently than other

procedural mechanisms which impose litigation costs, but the

shippers make no such argument. We are thus unpersuaded

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by their cursory suggestion that the Board’s interpretation of

section 10701(d)(3) is unreasonable.

Extending this argument to the choice between simplified

SAC and the three benchmark method, the shippers claim that

section 10701(d)(3) obligates the Board to identify the case

value at which simplified SAC is too costly and to ensure that

in those cases the three benchmark procedure produces

reasonable rates. We disagree. Although the statute requires

the Board to devise “a simplified and expedited method for

determining the reasonableness of challenged rail rates in

those cases in which a full stand-alone cost presentation [i.e.,

full SAC] is too costly, given the value of the case,” §

10701(d)(3), it nowhere requires the Board to provide any

procedure for those cases in which a simplified SAC

presentation is too costly. So long as simplified SAC

qualifies as a “simplified and expedited method,” nothing in

the statute requires the Board to promulgate the three

benchmark method at all. True, some cases will be too small

to bring under simplified SAC, which costs an average of $1

million, but that’s fully consistent with simplified SAC

qualifying as a “simplified and expedited method.” Under

any procedure, some cases will always be too small to be

worth bringing.

That said, having decided that it needed to implement a

three benchmark system, the Board had to do so

nonarbitrarily. See, e.g., Eagle Broad. Group v. FCC, 563

F.3d 543, 551 (D.C. Cir. 2009). We are convinced it did. The

Board analyzed the effect of the three benchmark relief caps

together with that of the simplified SAC relief caps. Its

findings that the relief caps “strike the appropriate balance”

and afford “sufficient net relief after litigation costs,”

Rehearing Decision at 8, apply to the three benchmark caps as

well as to the simplified SAC caps. For reasons similar to

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those discussed above, these findings amply justify the

Board’s promulgation of the three benchmark caps.

Simplified SAC

In addition to challenging the relief caps, the shippers

object to the Board’s adoption of simplified SAC itself. They

claim that the Board’s decision not to require the simplified

SAC stand-alone railroad to be optimally efficient guts the

entire rationale for adopting simplified SAC in the first place.

They also claim that the Board was required to evaluate

simplified SAC using test data. We disagree on both counts.

In promulgating the simplified SAC method, the Board

eliminated the search for inefficiencies in the stand-alone

railroad. The shippers argue that this constitutes so

significant a deviation from CMP principles as to render the

Board’s reliance on those principles to justify simplified SAC

arbitrary and capricious. But the Board explained that the

efficiency inquiry is precisely what renders full SAC

presentations so costly, and that in its view modern railroads

suffer from too little inefficiency to justify this expense for

the purpose of simplified SAC. Decision at 55–56.

Specifically, while acknowledging that in its 1996 rulemaking

it had rejected the AAR-SSAC proposal because it failed to

account for inefficiencies, the Board explained its change in

position by observing that “rail capacity and traffic conditions

have changed,” and railroads are no longer “burdened by

substantial excess capacity.” NPRM at 14; see also Decision

at 55–56 (referencing NPRM). Given this, the Board

concluded that “railroads, in most instances, are likely

operating at a sufficiently efficient level so that it would not

be worth the time and considerable expense required to

attempt to measure the amount of inefficiency that could be

eliminated” by a more efficient stand-alone railroad.

Decision at 56. It further noted that railroads have little

17

incentive to build unnecessary facilities given the market

realities governing most rail rates, NPRM at 14, that

simplified SAC allows limited modifications based on certain

easy-to-detect inefficiencies, Decision at 56, and that in any

event simplified SAC conforms more closely to CMP

principles than does the three benchmark approach, id. at 56.

In our view, the shippers are simply second-guessing the

Board’s determination of how closely simplified SAC must

track CMP principles—principles the Board itself chose to

retain. True, simplified SAC does nothing to serve CMP’s

objective of eliminating inefficiencies, but it still perfectly

serves CMP’s other objective: eliminating cross-subsidization

of facilities for which shippers see no benefit. See id. at 55.

The Board reasonably concluded that this was enough. As we

have said: “[t]he 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.” BNSF I, 453 F.3d at 482.

The shippers next take issue with the Board’s explanation

for its change in position from its 1996 rejection of the AAR-

SSAC proposal. Although “[a]n agency may not . . . depart

from a prior policy sub silentio or simply disregard rules that

are still on the books,” Fox, 129 S. Ct. at 1811, here the Board

did no such thing. As we have pointed out, it adequately

explained the turnabout by noting the decline in excess

capacity and overall increase in railroad efficiency since the

1996 rulemaking. See NPRM at 14; Decision at 55–56. The

Board’s inference that excess capacity signals inefficiency,

and the consequent finding that inefficiency had decreased to

the point that uncovering it was no longer cost-effective,

provide a sufficient explanation for jettisoning that inquiry in

simplified cases. According to the shippers, in 1996 the

Board treated certain capacity constraints (i.e., railroads

18

running at full capacity in certain situations) as indicative of

inefficiency, which they think contradicts its current treatment

of capacity constraints as a sign of efficiency. The simple

answer to this cryptic objection is that in 1996 the Board did

not treat capacity constraints as indicative of inefficiency.

The only evidence the shippers cite on this point is the Board

making the very different point that existing double-track

infrastructure was less efficient than more modern computer-

controlled single-track architecture. 1996 Guidelines, 1

S.T.B. at 1015 n.33. But this remark has nothing at all to do

with capacity constraints, so it can hardly conflict with the

Board’s current reasonable treatment of capacity constraints

as signaling lower excess capacity and greater efficiency.

Next, the shippers complain that the Board failed to test

its simplified SAC procedure with sample data.

Acknowledging that nothing in the statute requires such

testing, the shippers nonetheless maintain that since the Board

tested AAR-SSAC and found that it produced unreliable

results, the Board acted arbitrarily by failing to test its own

simplified SAC proposal. For its part, the Board explained

that the Commission only tested AAR-SSAC because the

AAR refused to provide the source code for the program, thus

preventing the Commission from learning its precise details.

Decision at 54. And although AAR-SSAC was similar to

simplified SAC in disregarding inefficiencies, it also had very

significant differences, as it expanded the stand-alone railroad

to include other profitable traffic and excluded certain

insufficiently profitable traffic, steps absent from the Board’s

simplified SAC. Compare id. at 13 n.18 (describing AAR-

SSAC method) with id. at 15–16 (describing the Board’s

simplified SAC). Given this difference between the two

methods, we see nothing arbitrary about the decision to test

the first but not the second, even after the first’s poor

showing.

19

III.

This brings us to the railroad’s challenges to the Board’s

adoption of the three benchmark system. They make four

arguments, which we consider in turn.

Notice

The three benchmark system involves a comparison of

the challenged rates to a group of rates taken from the waybill

sample. Under the Board’s initial proposal, parties could

propose comparison groups drawn from the most recent year

of waybill sample data. Under the final rule, however, the

parties could draw from the four most recent years of data.

Relying on APA section 553, the railroads argue that the

Board failed to provide notice that it was considering this

change. See 5 U.S.C. § 553 (requiring agencies to give notice

of proposed rules). We needn’t address the merits of this

argument, however, because the railroads failed to present it

to the Board. As a general rule, “‘courts should not topple

over administrative decisions unless the administrative body

not only has erred but has erred against objection made at the

time appropriate under its practice.’” Advocates for Highway

& Auto Safety v. Fed. Motor Carrier Safety Admin., 429 F.3d

1136, 1148 (D.C. Cir. 2005) (quoting United States v. L.A.

Tucker Truck Lines, Inc., 344 U.S. 33, 37 (1952)). And as we

recognized in Petroleum Communications, Inc. v. FCC, 22

F.3d 1164 (D.C. Cir. 1994), and reaffirmed just last month in

Globalstar, Inc. v. FCC, 564 F.3d 476 (D.C. Cir. 2009), the

objection that an agency violated the APA’s notice

requirement is a “classic example” of an issue that should be

raised before the agency. Petroleum Commc’ns, 22 F.3d at

1171; see also Globalstar, 564 F.3d at 484.

20

The railroads respond with two arguments. First, they

claim that they had no way of objecting to any lack of notice

until the Board promulgated its final rule. Fair enough, but

they never dispute the fact that they could then have sought

reconsideration, as did the shippers on other grounds.

Second, the railroads think that cases like Petroleum

Communications and Globalstar are distinguishable because

the FCC’s organic statute, unlike the Board’s, expressly

requires petitioners to present their objections to the agency.

Railroads’ Reply Br. 13 n.6. But this distinction makes no

difference because the FCC’s statute only “codifies the

judicially-created requirement of exhaustion,” Petroleum

Commc’ns, 22 F.3d at 1170, and we have described the statute

as “requiring the same degree of exhaustion for the FCC as

for other agencies,” Wash. Ass’n for Television & Children v.

FCC, 712 F.2d 677, 682 (D.C. Cir. 1983). Given that the

railroads argue neither that their claim falls within any of the

“recognized exceptions” to the issue exhaustion doctrine,

Petroleum Commc’ns, 22 F.3d at 1170, nor that the Board

was “afforded a fair opportunity to pass on the argument in

question,” Globalstar, 564 F.3d at 484 (internal quotation

marks and brackets omitted), they may not raise their claim

here.

The railroads insist that courts have no authority to

require parties to exhaust administrative procedures where a

statute imposes no such requirement. They are correct that in

Darby v. Cisneros, 509 U.S. 137 (1993), the Supreme Court

held that where no statute or regulation requires a party to

pursue administrative remedies, courts are without authority

to require parties to exhaust administrative procedures as a

precondition of seeking judicial review. Id. at 144–45. But in

Darby, the only question before the Court was whether

agency action was “final” for the purposes of judicial review.

21

See id. at 143–47. Because Darby says nothing at all about

other reasons courts might find certain claims barred, it leaves

intact the general requirement that parties give the agency a

chance to rule on all their objections. See ExxonMobil Oil

Corp. v. FERC, 487 F.3d 945, 962 (D.C. Cir. 2007)

(“Petitioners believe that the absence of a rehearing

requirement in the [Interstate Commerce Act] means that they

were not required to raise their complaints with FERC.

Petitioners miss the point: Their error was not failing to seek

rehearing, but rather failing to raise the issue at all.” (citations

omitted)). Even where, as here, presenting a claim to the

agency requires seeking reconsideration, nothing in Darby

permits parties to obtain judicial review of a claim they never

gave the agency a chance to address.

Regulatory Lag

The railroads argue that the Board arbitrarily failed to

account for the “regulatory lag” caused by the delay inherent

in using waybill sample data. Due to the time it takes the

Board to gather the data, the most current waybill samples are

at least one year old, and the ability to draw comparison

movements from the most recent four samples compounds the

problem. Citing the rapid change in rail rates over time, the

railroads argue that the use of outdated samples converts the

three benchmark system into a comparison between current

rates and historical rates. The Board recognized the problem

of regulatory lag and established a mechanism for addressing

it on a case-by-case basis. Although the three benchmark

procedure uses waybill sample data to run the benchmarks

and determine a presumed maximum lawful rate, it gives the

parties an opportunity to present evidence of “other relevant

factors” to rebut the presumption of lawfulness and seek to

modify the maximum allowable rate. Decision at 17, 21–22.

The railroads insist that this mechanism is insufficient for

three reasons, none of which has merit.

22

First, they argue that the opportunity to modify the

presumed maximum lawful rate is illusory because it requires

rebutting a presumption. But the Board has represented—and

the railroads nowhere meaningfully dispute—that the

presumption simply shifts the normal burden of persuasion to

the party seeking a modification. Respt.’s Br. 29; Railroads’

Reply Br. 6–7. This clearly allows the railroads a reasonable

opportunity to seek a modification.

Second, the railroads complain that when they submit

evidence of other relevant factors, the Board requires them to

quantify the impact of the factors on the overall rate. True,

this requires more of the railroads than would a rule allowing

them to simply dump evidence in the Board’s lap without

explanation, but it hardly poses an insurmountable hurdle.

Even under the railroads’ preferred alternative, they would

still need to present data sufficiently precise to have a

quantifiable impact—the only difference is that under the

Board’s system this process of adjustment occurs after

calculating the benchmarks, not before. The railroads offer

no reason to believe that quantifying the impact of changing

conditions is feasible at the outset of the benchmark analysis

but impracticable as an adjustment to the result of that

analysis. According to the railroads, in a recent set of cases

brought under the new guidelines, the Board was unpersuaded

by their proffered “other relevant factors” evidence. E.g., E.I.

du Pont De Nemours & Co., STB No. 42099 (June 30, 2008).

But whatever its propriety, the Board’s decision in those

cases, which we remanded to the agency unopposed, CSX

Transp., Inc. v. STB, No. 08-1246 (D.C. Cir. Jan. 15, 2009)

(remanding STB Nos. 42099, 42100, 42101), hardly

impeaches the entire rule.

23

Third, the railroads complain that the Board forbids

parties from submitting as “other relevant factors” evidence

either of movement-specific adjustments to the cost estimates

or of product or geographic competition. But these

objections, to which we turn in the next two subsections, have

no special force when applied to the regulatory lag problem.

If, as we conclude in that discussion, the Board may exclude

evidence of movement-specific costs or of competition

generally, it may certainly exclude evidence of change in such

costs or competition.

Evidence of Movement-Specific Adjustments

The three benchmarks evaluate ratios of revenues to

variable costs. Although revenues generated by a specific rail

movement are easy to measure, variable costs directly

associated with that movement are not. See Adoption of the

Uniform Railroad Costing System as a General Purpose

Costing System for All Regulatory Costing Purposes, 5

I.C.C.2d 894, 904 (1989) (“Given the degree of aggregation

in the accounting data reported to the Commission, it is

impossible for either Rail Form A or URCS [i.e., two

alternative costing systems] to produce true marginal costs for

particular movements . . . .”). To estimate these costs, the

Board uses the Uniform Rail Costing System (URCS), a

procedure that generates a statistical estimate of each

railroad’s variable costs based on its “system-wide average

variable costs.” BNSF II, 526 F.3d at 774. For years, the

Board has used URCS to answer the threshold question

whether a railroad has enough market dominance to allow the

Board to regulate the rate in the first place. In that context,

the Board originally allowed the parties to argue for

movement-specific adjustments to the cost estimates, but

recently decided to bar them, finding that “the cost savings

and increase in predictability . . . outweigh any gains in

accuracy from the railroads’ or shippers’ adjustment

24

proposals.” Id. at 776. We upheld the Board’s decision as a

permissible exercise of its judgment. Id.

Here the railroads argue that although the Board could

permissibly exclude movement-specific adjustments from

cost estimates used in the threshold market dominance

determination, it acted arbitrarily in barring them from

estimates used in the three benchmark procedure. None of the

railroads’ three arguments for this point has merit.

First, they claim that the Board failed to address

commenters’ proposals to use only certain such adjustments.

But the Board specifically considered and rejected these

intermediate proposals, explaining that it would be unfair to

allow only certain adjustments without granting the opposing

party an opportunity to “submit counter-adjustments,” as well

as “access to broad discovery” for that purpose. Decision at

97.

Second, they claim that the need for accurate cost

estimates is particularly acute in three benchmark cases given

the methodology’s inherent crudeness. The Board, however,

relied on its experience with such adjustments to conclude

they are too costly in light of their limited effect on accuracy.

Id. at 84. And although crude, the three benchmark method is

used for small disputes where efficiency is paramount.

Further, using movement-specific adjustments in a three

benchmark presentation would be even more cumbersome

than in the threshold market dominance determination, as it

would require calculating movement-specific adjustments for

every movement in the comparison group, not just the

challenged movement. Given this, the Board’s conclusion

that, as in the case of the threshold market dominance

determination, movement-specific adjustments are too costly

for three benchmark presentations, represents the “kind of

25

judgment call” that “balances inherently incommensurable

costs and benefits” and “falls within the expertise of the

agency,” BNSF II, 526 F.3d at 776.

Third, the railroads argue that comparing movement-

specific revenues with system-average costs is inherently

arbitrary. But if that were true, then doing so in determining

market dominance would have been equally impermissible.

And in any event, there are sound reasons for the mismatch:

getting movement-specific revenues is easy, whereas

calculating movement-specific variable costs is difficult, and

in the Board’s expert judgment not much more accurate.

Evidence of Product or Geographic Competition

Finally, the railroads complain about the Board’s

preclusion of evidence of product or geographic competition.

They argue that the Board never provided notice that it was

considering barring such evidence, but given that the Board

initially proposed barring all evidence offered to disturb the

result of the three benchmark calculation, the Board’s

eventual rule barring some evidence represented a “logical

outgrowth” of the proposal. Ass’n of Battery Recyclers, Inc.

v. EPA, 208 F.3d 1047, 1058 (D.C. Cir. 2000) (internal

quotation marks omitted); see also id. at 1059 (“EPA

proposed allowing alternative standards for remediated soils.

. . . One would logically conclude that EPA could have ended

up allowing alternative standards for all soils as the proposal

suggested, for no soils, or—as it turned out—for some

soils.”).

On the merits, the railroads argue only that the Board

failed to consider the possibility that parties could present

such evidence without the need for discovery. But no

commenter suggested to the Board that such evidence, which

the Board had previously excluded from full SAC cases due

26

to the discovery and other burdens it caused, Market

Dominance Determinations—Prod. & Geographic

Competition, 3 S.T.B. 937, 946–47 (1998), could be presented

without discovery. Given that, the Board hardly acted

arbitrarily in failing to consider that point.

V.

For the reasons stated above, we deny the petitions for

review in their entirety.

So ordered.