Otter Tail Power Co. v. Surface Transportation Board

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 06-1962/2412
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Otter Tail Power Company, *
*
Petitioner, *
* Petitions for Review of a
v. * Decision of the
* Surface Transportation Board.
Surface Transportation Board; *
United States of America, *
*
Respondents, *
*
BNSF Railway Company, *
*
Intervenor on Appeal. *
*
____________________ *
*
Edison Electric Institute; American *
Public Power Association; National *
Rural Electric Cooperative Association; *
National Association of Regulatory *
Utility Commissioners; Minnesota *
Public Utilities Commission; Montana *
Public Service Commission; North *
Carolina Utilities Commission; North *
Dakota Public Service Commission; *
South Dakota Public Utilities *
Commission, *
*
Amici on Behalf of *
Petitioner. *
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Submitted: January 16, 2007
Filed: May 1, 2007
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Before MURPHY and SMITH, Circuit Judges, and READE,1 District Judge.
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SMITH, Circuit Judge.
Otter Tail Power Company ("Otter Tail") challenges the determination of the
Surface Transportation Board ("the Board") that rates proposed by Burlington
Northern Santa Fe Railway (BNSF) were reasonable. We affirm.
I. Background
Otter Tail ships coal from its mining facility in Wyoming to South Dakota via
BNSF. Otter Tail has no railroad transportation alternative to BNSF and is thus
considered a captive shipper. Under federal law, railroad companies, or carriers, are
required to charge captive shippers, such as Otter Tail, a reasonable rate. 49 U.S.C.
§ 10701(a). If a shipper believes the rate charged by the carrier is unreasonable, then
the shipper can challenge the rate before the Board. Congress vested the Board with
the authority to promulgate rules for determining a reasonable rate. Id. § 10707(d)(1).
Congress also vested the Board with the authority to impose a rate upon a carrier if the
proposed rate is deemed unreasonable. Id. § 10704(a)(1). Here, BNSF proposed a rate
of $13.49 per ton to Otter Tail for shipping its coal. Otter Tail considered the rate
unreasonable and sought relief from the Board.
The Board applies economic models to analyze the reasonableness of a carrier's
proposed rate. The principles behind the economic models employed are set forth in
the Board's Coal Rate Guidelines ("the Guidelines") promulgated by the Board in
1
The Honorable Linda R. Reade, Chief Judge, United States District Court for
the Northern District of Iowa, sitting by designation.
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1985. Id. § 10701(d)(3). The Guidelines are based upon the theory of Constrained
Market Pricing (CMP), which, in short, is designed to prevent monopolistic behavior
by carriers. The Guidelines identify potential monopolistic pricing through an
analytical device called a Stand-Alone-Cost test ("SAC test"). Under the SAC test, a
shipper and carrier each hypothesize what rate might be charged if the carrier
participated in a competitive rail market. Coal Rate Guidelines, Nationwide, 1
I.C.C.2d 520, 540–545. "In this way, railroads functioning in a noncompetitive market
will be required to price as if alternatives to their services were available." Id. at 541.
If the rate charged by the actual carrier is greater than the rate charged by a fictional
competitor, then the Board will presume the proposed rate is unreasonable. The
hypothetical rail competitor designed by the parties is known as a Stand-Alone
Railroad (SARR). Id. at 543.
In its consideration of BNSF's proposed rate, the Board required Otter Tail and
BNSF to each develop a SARR that included the possibility of a prohibited cross-
subsidization in their SARR analysis. Cross-subsidization occurs when the price a
shipper pays to the carrier includes costs for the maintenance of a rail route the shipper
does not use. Id. at 521. A "[c]aptive shipper should not bear the costs of any facilities
or services from which it derives no benefit." Id. Of particular note in this case, the
Board instructed the parties to determine whether a cross-subsidy existed by applying
what is now known as the PPL-test—the test first announced in PPL Montana, LLC
v. The Burlington Northern and Santa Fe Ry. Co., 6 S.T.B. 286 (2002).
Otter Tail's SARR consisted of a single 1,208-mile route stretching from
Converse, Wyoming, to Big Stone, South Dakota. However, the SARR adopted by the
Board assumed the existence of two smaller railways: (1) a 100-mile, high-density,
profitable north-south segment and (2) a 1,108 mile low-density, less-profitable east-
west segment. The 100-mile route runs from Campbell, Wyoming, to Converse,
Wyoming. After applying the PPL cross-subsidy test to its preferred model, the Board
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determined that carriers on the popular and prosperous 100-mile, high-density route
were subsidizing carriers on the less-profitable 1,108-mile, low-density route.
BNSF proposed a rate of $13.49/ton for Otter Tail's coal shipments. Otter Tail
ships roughly two-million tons of coal a year and wisely seeks to keep its shipping
costs low. Otter Tail challenged BNSF's proposed rate, contending that the one-
railway SARR was more appropriate and would produce a more favorable shipping
rate of $11.99/ton. Employing the Board's preferred two-rail SARR, a shipping rate
as high as $29.97/ton could be found reasonable. The Board found BNSF's proposed
$13.49/ton rate to be reasonable. Otter Tail appeals.
II. Discussion
A. PPL-test
On appeal, Otter Tail principally argues that the Board violated the Guidelines
by adopting and applying the PPL-test rather than the SAC-test it previously used.
Otter Tail requests that we hold that the Board's decision was arbitrary and capricious.
In response, the Board first argues that Otter Tail's failure to properly present these
issues in the administrative proceedings precludes us from a review of its
determination. After reviewing the record, we agree with the Board and decline to
review its use of the PPL-test.
Courts apply a judicially imposed issue-exhaustion requirement when reviewing
administrative decisions, which is "analog[ous] to the rule that appellate courts will
not consider arguments not raised before trial courts." Sims v. Apfel, 530 U.S. 103,
108–109 (2000).
Neither the Supreme Court nor this court has articulated with precision the
requirements an appellant must fulfill to successfully claim that it has properly raised
and exhausted an issue before the Board. However, the Court has articulated a
standard of specificity that arguments submitted to an administrative agency such as
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the Board must meet to obtain judicial review. An argument must be more than a
"cryptic and obscure reference to matters that 'ought to be' considered." Vermont
Yankee Nuclear Power Corp. v. Natural Resources Defense Council, Inc., 435 U.S.
519, 553–554 (1978). Instead such arguments must be forthright and "forcefully
presented." Id.; See also Appalachian Power Co. v. E.P.A., 251 F.3d 1026, 1036 (D.C.
Cir. 2001) ("Generalized objections to agency action or objections raised at the wrong
time or in the wrong docket will not do.")
We note that the joint appendix submitted by the parties consists of over 300
pages of motions, exhibits, and other relevant material excluding Otter Tail's final
brief. Out of these 300 pages, Otter Tail can only point to twenty-one words spread
over two sentences found in two different proceedings where it referenced the Board's
adoption of the PPL-test. In the first reference, Otter Tail states, "Otter Tail is
uncertain why the Board has posed the cross-subsidy question . . ." The second
citation by Otter Tail states "Otter Tail . . . continues to object to the PPL-test . . . "
These two statements provide an insufficient record that the principal issue
raised on appeal was adequately raised to the administrative body below. These
statements could not have put BNSF and the Board on notice that Otter Tail planned
to challenge the adoption of the PPL-test. These two generalized and undeveloped
statements are not structured in a way that " alerts the agency to the [parties'] position
and contentions in order to allow the agency to give the issue meaningful
consideration." Dep't of Transp. v. Public Citizen, 541 U.S. 752, 764 (2004).
Otter Tail correctly notes that it first officially raised a challenge to the use of
the PPL-test in its final brief. We agree that this challenge was sufficient to put the
Board and BNSF on notice of its objection to the PPL-test. However, this notice was
fatally late. The parties submitted final briefs simultaneously. Therefore, BNSF had
no opportunity to investigate or respond to the PPL-test challenge nor did the Board
have the opportunity to receive evidence relating to Otter Tail's challenge. We believe
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that under such circumstances our review would violate the exhaustion rule's principle
of "[s]imple fairness to those who are engaged in the tasks of administration, and to
litigants . . ." United States v. L. A. Tucker Truck Lines, Inc., 344 U.S. 33, 37 (1952).
We therefore decline to review Otter Tail's challenge to the PPL-test.
Otter Tail argues that even if it failed to properly challenge the PPL-test, then
we should apply a narrow exception carved out by the Ninth Circuit in Great Falls
Community TV Cable Co. v. F. C. C., 416 F.2d 238, 239–240 (9th Cir. 1969). This
exception exempts litigants from exhaustion when an agency has repeatedly and
consistently decided the issue being appealed. Assuming, without deciding, that such
a rule should be adopted, we believe the narrow exception is not applicable here. The
PPL decision is relatively recent and does not have the type of subsequent reiterative
decisions contemplated by Great Falls. Throughout its argument, Otter Tail attempts
to distinguish the instant case from PPL Montana, LLC v. STB, 437 F.3d 1240 (D.C.
Cir. 2006)—the sole appellate decision addressing the validity of the PPL-test. Otter
Tail on the one hand argues that the PPL is invalid and imprudently adopted and on
the other hand contends that the use of the test is so settled it need not be raised before
the Board. This inconsistency renders the argument untenable.
We hold that Otter Tail has waived its challenge to the PPL-test. Otter Tail
points to other record examples to substantiate its claim that it timely raised objections
to the Board's application of the test. Specifically, Otter Tail mentions the calculation
and allocation of various costs. However, we believe that those arguments also lack
the required forceful presentation necessary to give BNSF and the Board adequate
notice.
B. Exclusion of Evidence
"An administrative agency enjoys broad discretion in carrying out the mandates
of its governing statutes and we will set aside an agency's action only upon a showing
that the action is arbitrary, capricious, an abuse of discretion, or otherwise not in
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accordance with law." Mausolf v. Babbitt, 125 F.3d 661, 667 (8th Cir. 1997) (internal
citations and quotations omitted). "Procedural issues . . . lie largely within the
discretion of the agency."City of St. Louis v. Dep't of Transp., 936 F.2d 1528, 1538
(8th Cir. 1991).
Otter Tail submitted a SARR based upon certain debt-related calculations.
BNSF accepted this calculation as true. Despite the lack of an objection by BNSF,
Otter Tail entered a new calculation in its reply. The Board refused to admit into
evidence this new debt-related calculation, pursuant to its long-held rule limiting
rebuttal statements to issues raised in the reply statements by the opposing party.
Otter Tail argued that the new information was not a rebuttal statement, but
merely an update of its earlier calculation based upon newly-discovered information
which could not have been determined earlier. The Board rejected this argument after
reviewing the data, determining Otter Tail was attempting to change the entire
methodology used to make the relevant calculation. Because the Board's conclusion
is supported by record evidence, we cannot say that it abused its discretion in refusing
to admit the revised debt-related calculation.
III. Conclusion
For the forgoing reasons, the petition for review is denied.
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