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41181 SERVICE DATE – NOVEMBER 22, 2011







Docket No. NOR 42113







Digest:[1] The Board finds that the complaining shipper does not have a feasible shipping alternative to defendant railroads for the transportation at issue, and that the challenged rates those railroads charge the complaining shipper are unreasonably high. Therefore, the Board prescribes maximum reasonable rates for future at-issue shipments and orders the defendant railroads to pay reparations for past, excessive charges.


Decided: November 16, 2011







BNSF’s Motion to Hold in Abeyance. 2



A. Constrained Market Pricing.. 3

B. SAC Test. 4


A. System Configuration.. 5

1. Single-SARR Issue. 8

2. Movement of Interchanges. 10

B. Cross-Subsidy Analysis. 15

C. Traffic Group. 16

1. Base-Year Volumes. 17

2. Volume Projections. 21

3. Traffic Group Revenues. 23

a. Montana Rail Link Traffic. 23

b. Revenue Projections. 24

c. Fuel Surcharge Projections. 26

D. Operating Expenses. 28

1. Operating Plan. 28

2. Configuration. 30

3. Peaking Factor 32

4. Operating Expenses. 33

E. Road Property Investment. 33

F. DCF Analysis. 34

G. Rate Prescription.. 35

1. Non-Issue Traffic Costing. 35

2. New Mexico Issue Traffic R/VC.. 36

3. The Southwest Railroad. 38

4. Montana and Wyoming Issue Traffic. 38

5. Rate Prescription. 39

Appendix A—Operating Expenses. 40

A. Locomotives. 41

1. Locomotive Requirements. 41

2. Maintenance. 41

3. Fuel 42

a. Fuel Costs. 42

i. West Vaughn. 42

ii. West El Paso. 43

iii. Direct-to-Locomotive (DTL) Fueling. 44

b. Fuel Consumption. 45

c. Servicing (Sand and Lubrication) 45

B. Railcars. 46

C. Train Crew Personnel.. 46

1. Operating Personnel 46

a. Road Crews. 46

b. Helper Crews. 47

c. Switch and Work Train Crews. 47

D. Non-Train Crew Personnel.. 48

1. Transportation Department 48

a. Managers and Assistant Managers of Train Operations. 48

b. Terminal Managers. 48

c. Manager of Locomotive Operations. 49

d. Crew Management 49

e. Dispatch. 49

f. Locomotive Distribution. 50

2. Mechanical Department 51

3. Compensation. 52

a. Train and Engine Personnel 52

b. Executive Compensation. 53

4. Materials, Supplies, and Equipment 53

5. Information Technology. 54

6. Travel Expenses. 55

E. General and Administrative.. 55

1. Staffing. 55

a. Marketing & Customer Service Department 55

i. Outsourcing. 55

ii. Department Head. 56

iii. Staff. 56

b. Finance and Accounting Department 57

c. Law and Administration Department 59

i. Legal Staff. 59

ii. Information Technology. 60

iii. Human Resources, Training, and Other Staff. 61

iv. Environmental Staff. 62

v. Police Force. 62

2. Compensation. 63

3. Materials, Supplies, and Equipment 63

a. Start-up and Training Costs. 63

4. Other 64

a. Bad Debt 64

F. Maintenance-Of-Way (MOW) 65

1. Staffing. 65

a. Track Department 66

i. Roadmasters and Assistant Roadmasters. 66

ii. Track Crews. 67

iii. Roadway Machine Operators. 68

iv. Welder/Helper/Grinders. 69

v. Rail Lubrication Repairmen. 69

vi. Ditching Crews. 70

vii. Roadway Equipment Mechanics. 70

viii. Smoothing Crews. 70

b. Signals & Communication Department 72

i. Signals System Maintenance. 72

ii. Communications System Maintenance. 73

c. Bridge & Building Department 74

i. Multi-Skilled Tradesman. 74

2. Non-Program Maintenance-of-Way Work Performed by Contractors. 75

a. Snow Removal 75

b. Storm Debris Removal and Washouts. 75

c. Environmental Cleanup. 76

3. Equipment 76

4. Incremental Cost Additive Associated with the Absence of Maintenance Roads. 76

5. Contract Maintenance (Capitalized) 77

G. Leased Facilities. 78

H. Insurance.. 78

I. Ad Valorem Tax.. 79

J. Other.. 80

a. Texico Train Expense Additive. 80


A. Land.. 81

B. Roadbed Preparation.. 82

1. Clearing, Grubbing and Stripping. 83

a. Clearing and Grubbing. 83

b. Stripping. 84

2. Earthwork. 85

a. Specifications. 85

b. Common Earthwork Unit Costs. 86

c. Embankment and Borrow Unit Costs. 88

d. Fine Grading Unit Costs. 88

e. Loose Rock Excavation Unit Costs. 88

f. Solid Rock Excavation Unit Costs. 89

g. Earthwork Quantities. 90

h. Shrinkage and Swell 92

i. Over-excavation. 92

3. Drainage. 92

a. Lateral Drainage. 92

b. Yard Drainage. 94

4. Culverts. 94

5. Retaining Walls. 95

6. Rip Rap. 96

7. Utility Relocation Costs. 97

8. Seeding/Topsoil Placement 97

9. Water for Compaction. 97

10. Road Surfacing: Detour Roads. 98

11. Environmental Compliance. 98

12. Land for Waste Excavation. 98

C. Track Construction.. 99

1. Ballast 99

a. Specifications and Quantities. 99

b. Unit Costs. 99

2. Subballast 101

3. Geotextiles. 103

4. Cross-Ties. 103

5. Rail 104

6. Other 105

a. Field Welds. 105

b. Other Materials. 106

c. Rail Lubricators. 106

d. Derails and Wheel Stops. 106

7. Turnouts. 107

8. Labor 108

9. Materials Transportation and Construction Schedule. 108

D. Tunnels. 109

E. Bridges. 111

F. Signals and Communications. 112

1. Centralized Traffic Control 112

a. Highway Grade Crossing Warning Signals. 112

b. Control Point Interlocking (Turnout Insulated Joints) 113

c. Control Point Interlocking (Switch and Helper Switch Machines) 113

d. Dispatching Center (CTC Office Equipment) 114

e. Intermediate Signals. 114

f. Association of American Railroads (AAR) Units. 115

2. Detectors. 115

a. Failed Equipment Detectors (FEDs) and Setouts. 115

b. Automatic Equipment Identification (AEI) Detectors. 116

c. High Water and Slide Detectors. 116

3. Communication System.. 116

a. Fiber Nodes (Fiber Optic Interface Equipment) 117

b. Microwave Towers. 118

c. Mobile Radios. 118

d. Fencing. 118

G. Buildings and Facilities. 118

1. Headquarters Building. 118

2. Fueling Facilities. 120

3. Locomotive Inspection Pit and Locomotive Shops. 120

a. Locomotive Inspection Pit 120

b. Locomotive Shops. 121

4. Car Repair Shop. 122

5. Crew Change Facilities and Yard Offices. 122

a. Locations and Square Footage. 122

b. Unit Costs. 123

6. MOW Buildings (Roadway Buildings) 124

7. Wastewater Treatment 125

8. Yard Site Costs. 125

9. Intermodal Facilities. 126

H. Public Improvements. 127

1. Fencing. 127

a. Right-of-Way Fencing. 127

b. Snow and Slide Detector Fencing. 128

2. Roadway Signs. 128

3. Crossing Protection Signs. 129

4. Crossing Protection. 130

5. At-Grade Crossings. 131

6. Grade-Separated Crossings. 131

I. Mobilization.. 132

J. Engineering.. 132

K. Contingencies. 133


A. Cost of Capital.. 135

1. Cost of Equity. 135

2. Equity Flotation Costs. 137

B. Inflation of Land Values. 138

C. Capital Cost Recovery in a 10-year DCF Analysis. 140

1. DCF Results. 142



AEPCO Arizona Electric Power Cooperative, Inc.

ANR The hypothetical “Arizona & Northern Railroad”

ANR-NM The hypothetical “Arizona & Northern Railroad-New Mexico”

ANR-PRB The hypothetical “Arizona & Northern Railroad-Powder River Basin”

ATC Average Total Cost

BNSF BNSF Railway Company

CMP constrained market pricing

DCF discounted cash flow

G&A general and administrative

MOW maintenance-of-way

MRL Montana Rail Link

MMM Maximum Markup Methodology

PRB Powder River Basin

PTC Positive Train Control

R-1 Annual Report Form R-1

ROW right-of-way

RTC Rail Traffic Controller

R/VC revenue-to-variable cost

SAC stand-alone cost

SARR stand-alone railroad

T&E train and engine

UP Union Pacific Railroad Company

URCS Uniform Railroad Costing System

WP workpaper


On December 30, 2008, Arizona Electric Power Cooperative, Inc. (AEPCO), filed a complaint challenging the reasonableness of the joint rates established by BNSF Railway Company (BNSF) and Union Pacific Railroad Company (UP) (collectively, defendants) for unit train coal transportation service from New Mexico and the northern portion of the Powder River Basin (PRB) in Wyoming and Montana to AEPCO’s Apache Generating Station (Apache) located near Cochise, Ariz. AEPCO requests that the Board prescribe reasonable rates and order reparations for past overcharges. An oral argument before the Board was held in this proceeding on September 28, 2010.

AEPCO pursued relief under the agency’s stand-alone cost (SAC) test. Under this test, the parties must hypothesize a stand-alone railroad (SARR) that could serve the traffic at issue if the rail industry were free of entry barriers.  Under the SAC test, the challenged rates cannot be higher than what the SARR would need to charge to serve the complaining shipper while fully covering all of its costs, including a reasonable return on investment.  This SAC analysis produces a simulated competitive rate against which we judge the challenged rates.

In this case, AEPCO has demonstrated that the challenged rates are unreasonable under the SAC test. Accordingly, we will order defendants to pay reparations to AEPCO (with interest) for prior shipments, and we will prescribe the maximum lawful rate that defendants can charge through 2018. The maximum lawful rate is expressed as a revenue-to-variable cost (R/VC) ratio. The agency may not prescribe a rate below the 180% R/VC ratio set forth in the statute. Here, the SAC analysis places the maximum reasonable rate below that threshold. Accordingly, we will order the railroads to establish transportation rates no higher than the 180% jurisdictional floor, which will provide AEPCO a 28% reduction in the transportation rate for 2009, and an average reduction of 37% over the 10-year period for which AEPCO is entitled to relief.

Although the record does not provide the data needed to calculate precisely the total amount of reparations due to AEPCO, we estimate that reparations are roughly $4.5 million in 2009. We further estimate that the total relief AEPCO will obtain as a result of this order – including both reparations and the lower prescribed rate through 2018 – will approximate $63 million (in current dollars).

Following our standard practice, the parties are to calculate the total amount of reparations and interest due, in accordance with this decision. If they cannot agree, the parties should bring the dispute to our attention for prompt resolution.


BNSF’s Motion to Hold in Abeyance

On October 18, 2010, BNSF filed a motion regarding the Board’s revenue allocation methodology for cross-over traffic contained in the analysis. BNSF notes that the Board’s use of the modified Average Total Cost (ATC) methodology to allocate revenues from cross-over traffic in SAC analyses, as opposed to the ATC methodology adopted in Major Issues in Rail Rate Cases, EP 657 (Sub-No. 1) (STB served Oct. 30, 2006), was remanded to the Board in BNSF Railway v. STB, 604 F.3d 602 (D.C. Cir. 2010), cert. denied, 131 S.Ct. 244 (2011). BNSF states that it does not believe the choice of methods to allocate revenues from cross-over traffic is likely to have an effect in this proceeding. However, BNSF requests that if the choice of revenue allocation method results in a different outcome, the Board should hold this case in abeyance until it resolves the revenue allocation issue on remand.

AEPCO replied to BNSF’s motion on October 22, 2010. AEPCO argues that the Board should proceed using the governing methodology, which AEPCO states is modified ATC, until the Board alters its precedent in a legally permissible manner. AEPCO further states that the choice of revenue allocation methodology is immaterial to this proceeding, and the ATC issue should not delay resolution of its rate complaint.

The motion to hold in abeyance will be denied as moot. The choice of revenue allocation methodology, whether original or modified ATC, is inconsequential to the outcome of this case as the resulting reasonable rate is below the 180% R/VC jurisdictional floor under either method. The Board will address the remanded ATC issue in Western Fuels Ass’n v. BNSF Railway, NOR 42088, at a later date.


The Board may consider the reasonableness of a challenged rail rate only if the carrier has market dominance over the traffic involved. 49 U.S.C.  10701(d)(1). There are two components to the Board’s threshold market dominance inquiry – a quantitative and qualitative analysis. The quantitative analysis requires a conclusive presumption that a railroad does not have market dominance if the rate it charges produces revenues that are less than 180% of its variable costs of providing the service. 49 U.S.C.  10707(d)(1)(A). Thus, the 180% R/VC ratio is the floor for regulatory scrutiny of rail rates. That statutory 180% R/VC level is also the floor for any rate relief. See Burlington N. R.R. v. STB, 114 F.3d 206, 210 (D.C. Cir. 1997).

Here, the parties agree that the R/VC ratios exceed the 180% threshold for all coal movements at issue, thus satisfying the quantitative test. The parties also agree that the Board’s qualitative market dominance test has been satisfied.


A.    Constrained Market Pricing

The Board’s general standards for judging the reasonableness of rail freight rates are set forth in 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), as modified in Major Issues in Rail Rate Cases.  These guidelines adopt a set of pricing principles known as “constrained market pricing” (CMP).  The objectives of CMP can be simply stated.  A captive shipper should not be required to pay more than is necessary for the carrier involved to earn adequate revenues.  Nor should it pay more than is necessary for efficient service.  And a captive shipper should not bear the cost of any facilities or services from which it derives no benefit.  Coal Rate Guidelines, Nationwide, 1 I.C.C. 2d at 523-24.

CMP contains three main constraints on the extent to which a railroad may charge differentially higher rates on captive traffic.  The revenue adequacy constraint ensures that a captive shipper will “not be required to continue to pay differentially higher rates than other shippers when some or all of that differential is no longer necessary to ensure a financially sound carrier capable of meeting its current and future service needs.”  Id. at 535-36.  The management efficiency constraint protects captive shippers from paying for avoidable inefficiencies (whether short-run or long-run) that are shown to increase a railroad’s revenue need to a point where the shipper’s rate is affected.  Id. at 537-42.  The SAC constraint protects a captive shipper from bearing costs of inefficiencies or from cross-subsidizing other traffic by paying more than the revenue needed to replicate rail service to a select subset of the carrier’s traffic base.  Id. at 542-46.  As stated, AEPCO seeks relief under the SAC constraint.

B.     SAC Test

A SAC analysis seeks to determine whether a complainant is bearing the cost of any inefficiencies or the cost of any facilities or services from which it derives no benefit; it does this by simulating the competitive rate that would exist in a “contestable market.”  A contestable market is defined as one that is free from barriers to entry.  The economic theory of contestable markets does not depend on a large number of competing firms in the marketplace to ensure a competitive outcome.  Id. at 528.  In a contestable market, even a monopolist must offer competitive rates or lose its customers to a new entrant.  Id.  In other words, contestable markets have competitive characteristics that preclude monopoly pricing.

To simulate the competitive price that would result if the market for rail service were contestable, the costs and other limitations associated with entry barriers must be omitted from the SAC analysis.  Coal Rate Guidelines, Nationwide, 1 I.C.C. 2d at 529.  This removes any advantages the existing railroad would have over a new entrant that create the existing railroad’s monopoly power.  A SARR that could serve the traffic at issue if the rail industry were free of entry barriers is therefore hypothesized.  Under the SAC constraint, the rate at issue cannot be higher than what the SARR would need to charge to serve the complaining shipper while fully covering all of its costs, including a reasonable return on investment.  This analysis produces a simulated competitive rate against which we judge the challenged rate.  Id. at 542.

To make a SAC presentation, a shipper designs a SARR specifically tailored to serve an identified traffic group.  Using information on the types and amounts of traffic moving over the defendant’s rail system, the complainant selects a subset of that traffic (including its own traffic to which the challenged rate applies) that the SARR would serve.

Based on the traffic group to be served, the level of services to be provided, and the terrain to be traversed, a detailed operating plan must be developed for the SARR.  Once an operating plan is developed that would accommodate the traffic group selected by the complainant, the system-wide investment requirements and operating expense requirements (including such expenses as locomotive and car leasing, personnel, material and supplies, and administrative and overhead costs) must be estimated.  The parties must provide appropriate documentation to support their estimates.

It is assumed that investments normally would be made prior to the start of service, that the SARR would continue to operate into the indefinite future, and that recovery of the investment costs would occur over the economic life of the assets.  The Board’s SAC analyses, however, are limited to a finite period of time and examine the revenue requirements for the SARR based on the operating expenses that would be incurred over that period and the portion of capital costs that would need to be recovered during that period.  A computerized discounted cash flow (DCF) model simulates how the SARR would likely recover its capital investments, taking into account inflation, Federal and state tax liabilities, and a reasonable rate of return.  The annual revenues required to recover the SARR’s capital costs (and taxes) are combined with the annual operating costs to calculate the SARR’s total annual revenue requirements.

The revenue requirements of the SARR are then compared to the revenues that the defendant railroad is expected to earn from the traffic group, presuming that the revenue contributions from non-issue traffic are based on the revenues produced by the current rates.  Traffic and rate level trends for that traffic group are forecast into the future to determine the future revenue contributions from that traffic.

The Board then compares the revenue requirements of the SARR against the total revenues to be generated by the traffic group over the SAC analysis period.  A present value analysis is used that takes into account the time value of money, netting annual over-recovery and under-recovery as of a common point in time.  If the present value of the revenues that would be generated by the traffic group is less than the present value of the SARR’s revenue requirements, then the complainant has failed to demonstrate that the challenged rate levels violate the SAC constraint.  If the present value of the revenues from the traffic group exceeds the present value of the revenue requirements of the SARR, then the Board must decide what relief to provide to the complainant by allocating the revenue requirements of the SARR among the traffic group and over time.


Set forth below is the Board’s analysis of the SAC evidence presented in this case. The evidence demonstrates that the challenged rates exceed the level permitted by the SAC test. The more significant issues are discussed in this decision, with more technical issues described in the attached appendices.

A.    System Configuration

The system configuration of the SARR is the most controversial and critical matter in this proceeding. There are two overarching issues regarding the SARR put forth by AEPCO and challenged by defendants in this proceeding: (1) whether the rates from New Mexico and the PRB can be challenged together in a single SARR configuration; and (2) whether AEPCO may change the location of real world interchanges in its hypothetical SARR. After a brief overview of the SARR submitted by AEPCO in this case, we turn to these contested issues.

In its SAC presentation, AEPCO submitted a hypothetical SARR that it called the Arizona & Northern Railroad (ANR). The ANR would be a 2,235-mile railroad. It would begin at Laurel, Mont., and run south through the PRB to the following locations: Pueblo, Colo.; Amarillo, Tex.; and west-southwest to Vaughn, N.M.; El Paso, Tex.; and Cochise. A second point of origin, at Defiance, N.M., would run from west to east, connecting at Vaughn. The ANR system would run through eight states: Montana, Wyoming, Nebraska, Colorado, Oklahoma, Texas, New Mexico, and Arizona. Through its system, the ANR would directly serve 20 coal mines and 5 power plants.

The ANR would construct and operate most of its network, but would use trackage rights on the Montana Rail Link (MRL) between Laurel and Jones Jct., Mont. The ANR would also use private trackage to reach certain coal mine origins and power plant destinations. The ANR configuration would not use any trackage rights over BNSF or UP lines, but would have a number of interchange points with the residual BNSF and UP.[2] The ANR would also interchange traffic with the Nebraska Kansas Colorado Railway and the Ferrocarril Mexicano, S.A. de C.V. (FXE). Below is a schematic of the ANR proposed by AEPCO.[3]


Exhibit III-A-1

1.      Single-SARR Issue

A key issue in this proceeding is the appropriateness of AEPCO’s construction of a single SARR to handle traffic from both New Mexico and PRB mines. Defendants argue that the ANR may not properly include non-issue traffic from the PRB, because a majority of that traffic never shares track or facilities with the New Mexico issue traffic. Defendants argue that the use of a single SARR conflicts with previous guidance to these same parties issued by the Board in 2002 that discouraged the presentation of a combined challenge to New Mexico and PRB rates:

[A] party is not permitted to ‘game’ the SAC process in attempting to gain a substantive advantage by combining into a single, consolidated complaint what are essentially [two] separate rate challenges. . . . [A party] may not include any traffic or revenues (or exclude any costs) that could not have been treated in the same manner had [the complainant] filed a separate complaint for that set of rates.

Ariz. Elec. Power Coop. v. Burlington N. & Santa Fe Ry. (Arizona Electric Power Cooperative 2002), 6 S.T.B. 322, 329-30 (2002). Defendants argue that AEPCO’s complaint should be dismissed because AEPCO’s SARR violates this concept by challenging the rates for both New Mexico and PRB traffic in one complaint, and by so doing “AEPCO creates an impermissible cross-subsidy in favor of the issue traffic.”[4] In reply, defendants redesigned AEPCO’s configuration and offered two separate SARRs to judge the reasonableness of their joint rates. The first, labeled the “ANR-PRB,” would be used to analyze the rates from the PRB and Montana mines.[5] The second, labeled the “ANR-NM,” would be used to analyze the rates from the New Mexico mines.[6] Both SARRs submitted by defendants would mirror their real-world configurations, with interchanges in the same location as those used by defendants to move AEPCO’s issue traffic.

Defendants’ objections to the basic design of the ANR are misplaced for three interrelated reasons. First, the design of the ANR does not violate the precedent in Arizona Electric Power Cooperative 2002. Second, Board policy has evolved since the quoted language in question was published – the Board has adjudicated a number of rate cases since that time, and the agency now has an internal cross-subsidy approach to address the concerns in Arizona Electric Power Cooperative 2002. And finally, circumstances existed in the prior proceeding that are not present here. We elaborate on each point below.

First, AEPCO’s submission does not violate the precedent in Arizona Electric Power Cooperative 2002. AEPCO has not included any traffic or revenues that could not have been treated in the same manner had it filed separate complaints for the New Mexico coal traffic and the PRB coal traffic. A complainant is permitted to design a hypothetical SARR to utilize the most efficient traffic group, and to use revenues from the PRB traffic to help pay for common costs. And it is well established that there is no requirement that the issue traffic share facilities with all of the traffic on the SARR. See, e.g., Duke Energy Corp. v. CSX Transp., Inc. (Duke/CSXT), 7 S.T.B. 402, 424-26 (2004). The most robust discussion of current Board policy, and its rationale for the general principle that the traffic group need not always share facilities in common with the issue traffic, can be found in Otter Tail Power Co. v. BNSF Railway, NOR 42071, slip op. at 9-10 (STB served Jan. 27, 2006), aff’d sub nom. Otter Tail Power Co. v. STB, 484 F.3d 959 (8th Cir. 2007). While it is clearly to defendants’ benefit to strip the high-density, non-issue PRB traffic from the New Mexico issue traffic’s group, the railroads offer no reasoned basis to depart from this agency precedent.

Second, the Board’s concern in Arizona Electric Power Cooperative 2002 over improper “gaming” is no longer a concern here in light of the Board’s now established, and judicially affirmed, internal cross-subsidy analysis. The heart of the railroads’ objection here is their claim that permitting this single-SAC analysis creates an impermissible internal cross subsidy within the SARR itself. But the Board now has a well-documented, court-affirmed, internal cross-subsidy analysis to avoid such gaming. See PPL Mont., LLC v. Burlington N. & Santa Fe Ry., 6 S.T.B. 286 (2002), reconsideration denied, PPL Mont. v. Burlington N. & Santa Fe Ry., NOR 42054 (STB served Mar. 24, 2003), aff’d sub nom. PPL Mont. v. STB, 437 F.3d 1240 (D.C. Cir. 2006); Otter Tail Power Co., slip op. at 23-30. Defendants offer no reasoned basis for us to conclude that the internal cross-subsidy approach first developed in PPL Montana and later refined in Otter Tail Power Co. is insufficient. Nor do they apply that analysis to show that the ANR results in an impermissible internal cross subsidy.

Finally, there is a critical factual difference between the Arizona Electric Power Cooperative 2002 case and the one before us: the presence in the former of challenged single-line UP rates. When the agency issued Arizona Electric Power Cooperative 2002, AEPCO was challenging through rates for joint BNSF/UP movements from New Mexico and PRB mine origins and rates for UP single-line service from mines in Colorado. The agency was properly concerned that the combining of costs and sharing of revenues between joint movements and the UP-only movements was improper. In those circumstances, a SAC analysis of the single-line rate should not be combined in a rate complaint that also challenges the jointly-issued through rate. A complaint that combines into a single challenge jointly issued through rates and single-line rates would raise different issues and might, as was suggested in Arizona Electric Power Cooperative 2002, require separate SAC analyses. But with no single-line movements in this case,[7] the concern in Arizona Electric Power Cooperative 2002 is not present here.

In sum, AEPCO’s single-SARR approach is acceptable. If defendants had concerns about an internal cross-subsidy within the SAC analysis, they should have used existing Board precedent to detect and remedy their concerns, or at least offered some explanation for why those tests were insufficient. We will not, however, permit the railroads to undermine fundamental tenets of the SAC analysis by redesigning the geographic scope of the SARR offered by the complainant to test the reasonableness of the challenged joint rates.

2.      Movement of Interchanges

In a full-SAC case, complainants are permitted to propose a hypothetical SARR that would provide service in a different way and would use rail configurations different from the actual operations of the defendant railroad. For example, the complainant may propose a SARR that would run longer trains, use fewer locomotives, change crew districts, modify maintenance practices, move the location of yards, single-track lines that are now double-tracked (or vice versa), or make a myriad of other operating or configuration changes to serve the selected group of shippers in the traffic group. Tremendous flexibility is permitted in the design of the SARR. But we require that these hypothetical operations be feasible and supported and that they provide shippers included in the analysis the same or superior service as provided by the actual operations of the defendant railroads.

In this case, AEPCO followed these well-established principles and routed the issue traffic over higher-density corridors in three primary areas: (1) it rerouted the New Mexico issue traffic through El Paso; (2) it rerouted PRB traffic between Stratford and Vaughn; and (3) it rerouted PRB traffic between Donkey Creek and Northport. These reroutings result in the movement of the historical point of interchange between BNSF and UP.[8] In addressing this issue, we will focus on the rerouting of the New Mexico traffic through El Paso, which is the most significant to the outcome of this proceeding. It should be noted, however, that the concerns of defendants are the same for, and our analysis here is applicable to, all of the contested reroutings.

Defendants object to how AEPCO proposes to reroute the New Mexico traffic. They claim that AEPCO has impermissibly moved real world interchange points in its proposed ANR, moving the issue traffic to higher density lines and changing the locations of where BNSF and UP interchange this traffic. Defendants make two arguments to support their objection. First, they maintain AEPCO ignores the legal consequences of moving the interchange locations. Second, they argue that moving the interchange points distorts the SAC test, because the results reflect hypothetical and non-existent revenue-sharing arrangements between BNSF and UP.[9] We disagree.

Defendants’ arguments run contrary to established SAC theory and are contrary to agency precedent. First, as discussed above, general SAC rules provide AEPCO great flexibility in the design of the hypothetical SARR. Indeed, a SAC analysis by definition is hypothetical in nature; virtually no aspect of the proposed SARR comports exactly with how defendants provide service in the real world. It would be entirely proper for AEPCO to design a hypothetical SARR that would reroute the New Mexico traffic directly on a straight line from the coal mine to the utility plant, replicating none of the facilities used by either railroad. There is nothing wrong with using a different routing for the SARR, including one that would replicate the Vaughn-El Paso route so that it could share the costs of the expensive rail infrastructure with more traffic.

Following these general principles, the agency has previously rejected this precise argument (proffered by the same defendants in a case brought by the same shipper). We observed:

BNSF and UP are themselves free to alter or vary their routing of AEPCO’s movements . . . at any time (by mutually changing the interchange point) without needing AEPCO’s consent and without affecting the joint rate charged to (and challenged by) AEPCO. Therefore, basing a SAC presentation on such an alternative routing for the issue traffic would seem to be permissible, so long as AEPCO has not itself specifically requested the routing that the defendants currently use.

Arizona Electric Power Cooperative 2002, 6 S.T.B. at 327.[10] Defendants bear the burden of justifying a departure from this precedent.

Defendants attempt to meet this burden by pointing out (and emphasizing repeatedly at oral argument) that they are distinct entities with distinct responsibilities for the movement of the issue traffic. They cite to Texas Municipal Power Agency v. Burlington Northern & Santa Fe Railway for the general SAC principle that “the analysis of the reasonableness of a defendant carrier’s rate should be based on the extent of the defendant carrier’s participation in the movement.” 7 S.T.B. 803, 821 (2004). They also argue that the incumbent railroad has a statutory right to select the point of interchange, and that if the shippers want an alternative routing they must first satisfy the requirements of 49 U.S.C.  10705 and the Board’s competitive access rules.[11]

We reject defendants’ position that their separate status trumps the flexibility that a complainant usually enjoys in designing the SARR. First, their argument ignores the legal realities of jointly-issued through rates. A jointly-issued through rate is provided to a shipper in a single quote; the shipper does not deal independently with each carrier that moves its product.[12] Carriers participating in a joint movement are jointly and severally liable in civil court (and at the agency) for actions arising from this movement.[13] As such, for practical purposes, when carriers elect to offer a through rate, they are treated as a single legal entity.[14] Indeed, the unitary nature of joint rates is reflected in the Congressional language indicating that “the rate standard for the reasonableness of joint rates shall be the same as for all rates.” H.R. Rep. No. 96-1430 at 90 (1980).

Second, defendants are attempting to use selectively their joint and separate status to their benefit, having earlier asserted (successfully) that the Board should not look behind the joint rate to determine each carrier’s individual responsibilities, costs, and revenues. In a prior case brought by AEPCO against defendants, AEPCO sought discovery of the division between the railroads. UP objected to the discovery request, arguing that rate divisions are not relevant to the development of either variable costs or stand-alone costs. Ariz. Elec. Power Coop. v. Burlington N. & Santa Fe Ry., NOR 42058, slip op. at 7 (STB served Dec. 31, 2001). At the urging of defendants, the Board denied AEPCO access to that information. Now, defendants want to be able to issue a single joint rate, deny the shipper access to their internal divisions of that single rate, but then also be treated as different legal entities for purposes of the SAC analysis. They cannot have it both ways.

Third, defendants could have insulated themselves from a joint-rate challenge by issuing separately challengeable rates to the chosen point of interchange instead of a single joint rate. For example, UP could have quoted a transportation rate from the interchange point with BNSF to the utility plant. Had it done so, AEPCO could have challenged this rate from the interchange to the utility. But because such a rate challenge would not have extended to the service provided by BNSF from the mine to the interchange point, AEPCO’s SARR would replicate only the service offered by UP, and not that provided by BNSF. For that reason, the point of interchange would have been fixed for purpose of the rate analysis because that would be the “origin” of the movement for purposes of that rate challenge.

Instead, defendants here made a different choice and quoted a single joint rate for service from the coal mines to the plant. As a result, in a challenge to that rate, AEPCO’s only recourse for rate relief is to challenge the single joint rate for service from the origin to the destination. Under agency precedent, the shipper cannot demand separate rates from each of the carriers involved in the movement of its product. Accordingly, we will not treat the single joint rate as we would two separately challengeable rates. BNSF and UP both decided that it was to their mutual benefit to move AEPCO’s traffic under a single rate. They cannot now ask the Board to treat them as if they had established a different kind of rate.

Finally, defendants’ proposal is inconsistent with core tenets of our SAC test. It is true that a shipper cannot demand a routing of its choice in the real world; such a choice of routing rests first with the railroads. To obtain an alternative routing in the real world, the shipper would need to satisfy the requirement of  10705 and our competitive access rules. But it is also true that a shipper cannot tell the railroad where to place its yards, or where to build its bridges, or where to double track, or whether to use bridges or culverts, or what to pay its executives, or how to maintain its rail infrastructure. Yet in its SAC analysis, the complainant can propose a hypothetical SARR that would change all these features of the real world operation, as long as the alternative service would itself be feasible and supported. A complainant can propose a hypothetical SARR that would relocate yards, or replace bridges with culverts, or double track what is now single track, or reroute traffic. The basic idea behind this approach to our rate reasonableness inquiry is well established. Using a hypothetical SARR, “railroads functioning in a noncompetitive market will be required to price as if alternatives to their services were available. That is, their rates will be judged against simulated competitive prices. As a result, the efficiencies of a contestable market will serve as the guide for establishing maximum rates on captive coal traffic.” Coal Rate Guidelines, Nationwide, 1 I.C.C. 2d at 542.

Under these guiding SAC principles, rerouting the issue traffic to take advantage of economies of density is plainly permissible. As was observed in Coal Rate Guidelines, Nationwide: “In selecting the route of a SAC railroad, for instance, an overriding factor may be the effort to lower costs by taking advantage of economies of density. . . . Thus, the [SARR] may not represent the shortest route for the captive shipper, but the one with the highest traffic densities.” Id. at 543-44. In the end, the reasonableness of the joint rates “charged and collected” is in this case properly being judged against a simulated competitive price of a single hypothetical SARR.[15]

Defendants assert that their position is supported by our precedent in Texas Municipal Power Agency and West Texas Utilities v. Burlington Northern Railroad, 1 S.T.B. 638 (1996), but they are incorrect. The issue in West Texas Utilities was whether the SAC analysis could ignore the contractual rights of a third-party connecting railroad. The agency held that a complainant may not assume an operating plan that would divert traffic away from other railroads as the analysis of the reasonableness of the defendant carrier’s rate should be based on the extent of the defendant carrier’s participation in the movement. W. Tex. Utils., 1 S.T.B. at 658 n.41. But there is a material difference between those circumstances (where the complainant proposed to divert traffic from a third-party carrier in violation of express contractual terms) and the situation here, where UP and BNSF provide joint service to AEPCO under a joint rate. Where a third-party, non-defendant connecting carrier is involved, our precedent requires evidence that the connecting carrier would not object to the new routing. Tex. Mun. Power Agency, 7 S.T.B. at 821.[16] In this case, however, the SARR steps into the shoes of both UP and BNSF, and as such, when analyzing the SARR, there is no third party connecting carrier in the movement, making West Texas Utilities and Texas Municipal Power Agency inapplicable.

Equally misplaced are claims that AEPCO’s SAC analysis is inconsistent with SAC principles because it allegedly assumes a fictional revenue- or cost-sharing agreement between BNSF and UP. Defendants’ argument is that the SARR should not replicate BNSF and UP lines that are not used to move the issue traffic because the carriers do not have agreements on divisions of rates and costs for the hypothetical routing. This argument ignores the complainant’s latitude in designing the SARR, replicating portions of the defendant’s network or none of it at all.

When pressed at oral argument with the proposition that their position is fundamentally at odds with the idea that the complainant could use a coal slurry pipeline or a barge-rail operation to judge the reasonableness of the challenged joint rates, defendants seemed to concur, but then shifted the debate to the traffic that the complainant could properly include in the traffic group. The key issue, they said, “is what traffic is available to offset the costs of the stand-alone facility.”[17] They seem to concede (but not clearly so) that AEPCO could design a SARR that goes from the New Mexico mines, to Vaughn, to El Paso, to the plant. But they then seem to object to the non-issue traffic that AEPCO selected to offset the costs of those stand-alone facilities. Yet there is nothing impermissible or improper about the traffic selected. For example, having proposed to construct rail lines from the New Mexico mines and east to Vaughn, AEPCO quite reasonably included in the traffic group BNSF intermodal traffic that travels over the same route. As long as the SARR would provide equivalent or superior service to those shippers, the non-issue traffic included in the SAC analysis is permitted to share the expense of those rail facilities. Similarly, having proposed to construct rail facilities from the utility plant east to El Paso and then north to Vaughn, AEPCO again reasonably proposed to include in the traffic group UP intermodal traffic that travels over that same route. There may be other reasons to exclude the selected non-issue traffic from the SAC analysis, but the absence of a cost- or revenue-sharing agreement between UP and BNSF is not one of them.

For the foregoing reasons, we reject defendants’ position that this case must be dismissed because the complainant proposed a hypothetical SARR that would reroute the issue traffic over longer, but higher density, routes in its SAC analysis challenging joint rates.

B.     Cross-Subsidy Analysis

Defendants argue that the issue traffic from New Mexico fails the PPL Montana test that we use to determine if a SARR produces an improper cross subsidy. However, defendants only perform the cross-subsidy test on their own ANR-NM SARR, finding that the Belen to Deming segment fails. Defendants do not show that any segment on the ANR fails the PPL Montana test.

Defendants do state that the Board should conduct a PPL Montana cross-subsidy analysis on the ANR to determine whether the revenues generated by traffic using the Vaughn-El Paso segment cover the costs of that segment, and also an analysis of the prescribed rate to ensure that the rate reduction does not itself result in an impermissible cross subsidy, in accordance with guidance in Otter Tail Power Co.[18] However, defendants make no effort to perform these analyses themselves.[19] Defendants have performed a cross-subsidy analysis on the ANR-NM SARR, and give no reason why they have not repeated their efforts on the ANR submitted by AEPCO. Defendants could have also easily performed the Otter Tail Power Co. analysis by using the revenues associated with AEPCO’s opening evidence, but have not provided the Board with evidence that the prescribed rate would necessarily have to rise to avoid creating a cross subsidy.

As the Board accepts the ANR SARR configuration, defendants have failed to challenge the relevant SARR utilizing the Board’s internal cross-subsidy test. As the Board found in Western Fuels Ass’n v. BNSF Railway (Western Fuels Ass’n 2007), NOR 42088, slip op. at 10 (STB served Sept. 10, 2007), when a defendant fails to identify a section of the SARR that is not self-supporting, it has not met its burden to demonstrate an internal cross subsidy, and the disputed traffic shall be included in the SAC analysis.

C.    Traffic Group

A complainant creates a traffic group by using information on the types and amounts of traffic moving over the defendant’s rail system, and selecting a subset of that traffic (including its own traffic to which the challenged rate applies) that the SARR would serve. W. Fuels Ass’n v. BNSF Ry. (W. Fuels Ass’n 2009), NOR 42088, slip op. at 8 (STB served Feb. 17, 2009). The selected traffic group is representative of that which would move on the SARR in the future. Carolina Power & Light Co. v. Norfolk S. Ry., 7 S.T.B. 235, 250 (2003). The composition of the traffic group, as with all assumptions used in the SAC analysis, must be realistic, i.e., consistent with the underlying realities of real-world railroading. See W. Fuels Ass’n 2009, slip op. at 15.

AEPCO claims its forecasting methodology fully accounts for the effect of the 2009 economic recession. This claim is disputed by defendants, who allege that AEPCO’s traffic group is unrealistic for failing to reflect the full impact of the 2009 economic recession in the volumes of its traffic group, in addition to other concerns. Defendants also allege that the ANR’s revenues are overstated, based on several factors. We examine the major issues associated with the traffic group below.[20]

1.      Base-Year Volumes

One of the central disputes between the parties is whose evidence best addresses the recent economic recession and the corresponding rebound in rail traffic. In this section, we review key issues within the context of coal traffic and non-coal traffic. Our analysis reveals that, although complex, AEPCO’s approach is logical, transparent, and fully supported. Generally, AEPCO utilizes actual BNSF/UP traffic volumes provided in discovery for 2Q08 through 1Q09.[21] Thereafter, AEPCO forecasts volume growth.[22]

The parties agree to use AEPCO’s actual 2009 volumes as base-year issue coal volumes.[23] For the last three quarters of 2009, AEPCO developed non-issue coal traffic volumes using the Annual Energy Outlook April Update Coal Production Forecast of the EIA (April EIA Forecast).[24]

AEPCO used a complicated approach to calculate non-coal volumes. In general, for base-year 2009 non-coal volumes, AEPCO used actual 1Q09 traffic data from BNSF and UP, and estimated 2Q09-4Q09 traffic volumes by adjusting 2Q08-4Q08 volumes through use of a calculated growth or reduction factor for each commodity group.[25] AEPCO determined BNSF consumer and industrial traffic volumes for 2009 by identifying both types of traffic for 1Q08 and 1Q09 from the BNSF traffic data and determining an ANR reduction factor.[26] The ANR reduction factors for both consumer and industrial traffic were then respectively applied to the BNSF system-wide reduction amount for the consumer and industrial traffic categories, resulting in a year-over-year reduction percentage.[27] The year-over-year reduction percentage was then applied to 2Q08-4Q08 consumer and industrial volumes on a movement-by-movement basis to determine 2Q09-4Q09 volumes.[28] AEPCO treated the intermodal traffic of J.B. Hunt Transport Services, Inc. (JB Hunt) separately, by applying a growth factor of 8.5%, derived from the Securities and Exchange Commission (SEC) Form 10-Q reports of JB Hunt for 2Q09-3Q09, to 2Q08-4Q08 intermodal moves identified as moving under JB Hunt contracts in the BNSF waybill data.[29]

AEPCO determined BNSF agricultural traffic based on the 2009 USDA Agricultural Projections to 2018 report (2009 USDA Report), which shows a 4.5% reduction in aggregate crop production from 2008 to 2009.[30] The 4.5% reduction was applied to 2Q08-4Q08 agricultural traffic volumes to derive 2Q09-4Q09 levels.

Similarly, for UP non-coal traffic, AEPCO calculated volumes for 2009 through use of actual 1Q09 UP traffic data, and through forecasted 2Q09-4Q09 traffic volumes.[31] The 2Q09-4Q09 traffic volumes were developed by calculating a percentage factor reflecting the change between 2Q08-4Q08 waybill data and 2Q09-4Q09 data provided in discovery.[32] The factor was then applied to system-wide projected volume changes for UP automotive traffic, industrial traffic, and intermodal traffic, with minor variations for each category.[33] As stated earlier, the forecasting for both BNSF and UP non-coal volumes was more complicated than the straightforward approach used for coal traffic.

Defendants argue that AEPCO’s forecasting approach does not adequately address the economic recession experienced by these carriers in 2009. In response, defendants look at actual shipments for the entire year of 2009 from their traffic data files, claiming that this method more accurately reflects the recession. Defendants also state they made a number of other complex alterations to better calculate coal volumes.

For single-line BNSF coal moves, these alterations include accounting for origin switching between mines for PRB movements and for movements originating outside the PRB by developing regional growth factors for each destination; categorizing the mines into 6 origin groups and comparing 2Q08-4Q08 volumes from each region to 2Q09-4Q09 volumes from each region for each individual destination in the coal traffic group to develop a destination-specific growth factor; and applying the destination-specific growth factor to the 2Q08-4Q08 traffic levels to project 2Q09-4Q09 traffic levels, which was then added to the actual 1Q09 traffic.[34] For the base-year non-issue coal volumes of single-line UP moves, defendants state that as origin shifting is not an issue, 2009 coal volumes for single-line UP moves are calculated by identifying actual movements between UP origin/destination pairs in UP’s 2Q09 through 4Q09 waybill data, and adding those volumes to 1Q09 volumes identified by AEPCO in its opening evidence.[35] For joint BNSF/UP coal movements, defendants develop 2009 volumes using the same waybill data used by AEPCO.[36] Defendants additionally argue that AEPCO had no reason not to use the post-1Q09 waybill data, and state that this information was provided to AEPCO as soon as it became available.

Defendants also assert that AEPCO’s methodology for calculating consumer and industrial traffic volumes results in an overstatement of 2009 volumes for these categories, although defendants accept AEPCO’s approach of using non-coal traffic volumes for 1Q09 as reported in BNSF’s traffic data.[37] Defendants also claim that AEPCO’s use of the 2009 USDA Report results in an overstatement of agricultural traffic volumes for 2009, and should be rejected.[38]

Defendants propose their own complex forecasting approach for non-coal traffic volumes. Defendants use a two-step process to calculate base-year BNSF non-coal traffic volumes for 2Q09-4Q09 in which they: (1) use BNSF train symbols from 2Q08-4Q08 and BNSF waybill records from 2Q09-4Q09 to match BNSF train symbols with actual BNSF shipments; and (2) develop an ANR growth rate for each commodity group, based on a comparison of 2Q08-4Q08 BNSF non-coal traffic volumes to 2Q09-4Q09 BNSF non-coal traffic volumes, and apply it on a movement-by-movement basis to 2Q08-4Q08 ANR non-coal traffic, to determine ANR 2Q09-4Q09 non-coal traffic volumes.[39] Defendants also reject AEPCO’s separate adjustment of JB Hunt traffic, and claim that AEPCO’s method results in a “double count” of JB Hunt traffic within BNSF’s volumes.[40] Instead, defendants apply the overall change derived for 2009 base-year volumes for BNSF intermodal traffic in the group to all BNSF intermodal volumes in the traffic group, including JB Hunt.[41] Defendants’ methodology results in a slight increase in BNSF consumer traffic volume for 2Q09-4Q09 and significant decreases in volume for the industrial and agricultural categories.[42]

For UP non-coal traffic, defendants accept the 2Q08-1Q09 traffic identified by AEPCO, as well as AEPCO’s division of UP non-coal traffic into the following commodity groups: agricultural; auto; chemical; industrial; and intermodal.[43] For the remaining three quarters of 2009, defendants use a calculation methodology, similar to that used for BNSF Consumer and Industrial traffic, to determine UP commodity group-specific volumes for 2009.[44]

In its rebuttal, AEPCO claims that defendants’ method for calculating volumes systematically understates SARR traffic and is ultimately an infeasible approach due to the time constraints of the procedural schedule of a rate case.[45] AEPCO also claims that UP provided only a summary of its waybill data instead of the actual waybill data, and states that it also has not received the full 2009 car and train movement data to be used with the BNSF waybill data received previously.[46] AEPCO further claims defendants’ overall method of using historical traffic data to determine the base-year traffic group is not a viable method, as it would force a shipper to begin the development of its traffic group fifteen months after filing the case, among other delays.[47] AEPCO further states that defendants fail to adequately incorporate the full effects of origin-shifting, as they do not reflect traffic that may be lost at one destination and gained at another in the 2Q09-4Q09 period, or traffic moving to a destination that is switched from one origin region to another.[48] Finally, AEPCO states that defendants’ approach artificially constricts the base-year traffic[49] and uses a different traffic group than the one selected by AEPCO.[50]

Our role is to decide which party’s base-year volumes are the best evidence of record. In this case, the parties have offered complex dueling calculations for coal and non-coal shipments. But the submission of the defendant railroads is unsupported. They relied on internal traffic data to develop actual 2009 volumes. While defendants represented to the Board in reply testimony that they provided the 2009 traffic information to AEPCO, this does not appear to have happened.[51] Indeed, at oral argument, counsel for AEPCO emphasized that it had still not received the underlying data from defendants.[52] Counsel for defendants did not attempt to rebut this contention during oral argument. For this reason, we accept AEPCO’s entire rebuttal evidence on base-year volumes as the best evidence of record.[53]

Moreover, we compared AEPCO’s evidence to the public Quarterly Commodity Statistics Reports (QCS Reports) filed by the railroads with the Board.[54] We found that AEPCO’s estimates of the coal and non-coal traffic volumes reasonably match the system-wide decline in traffic levels of the carriers between 2008 and 2009, unlike the forecasts submitted by defendants.

For example, the QCS Reports reflect a 3.9% reduction in BNSF coal traffic and a 15.4% reduction in UP coal traffic, based on a comparison of 2Q08-4Q08 against 2Q09-4Q09. Because the overwhelming preponderance of the traffic subject to the complaint (over 99%) is carried by BNSF, the overall coal traffic reduction for the SARR, as reflected in the QCS reports, would be just over 4%. For its traffic group, AEPCO shows a 7% reduction in BNSF coal traffic volumes and a 10.2% reduction in UP coal traffic volumes in its coal traffic forecast rebuttal workpapers, which, when weighted to reflect volume of traffic subject to the complaint, would produce a reduction of slightly over 7% for the coal traffic in the SARR. While that figure is higher than the figure derived from the QCS Reports, defendants’ approach produces an even larger discrepancy. Defendants show a 9.3% reduction for BNSF coal traffic and a 6.1% reduction for UP coal traffic in their coal traffic forecast reply workpapers. That figure, when weighted to reflect volume, would produce an aggregate reduction of over 9%, a reduction much more extreme than that derived using the QCS Reports. A similar comparison of QCS Reports for non-coal traffic shows that AEPCO’s evidence appears reasonable. Our workpapers comparing the traffic changes shown in the public QCS Reports and the dueling forecasts are available to the parties upon request.

Accordingly, we accept AEPCO’s rebuttal base-year volumes as the best evidence of record.

2.      Volume Projections

On opening, AEPCO developed coal volume forecasts using the April 2009 EIA Forecast,[55] but capped the annual coal consumption for each individual plant at the greater of 85% of the plant’s capacity or the base-year volume. Defendants used the EIA AEO 2010 Early Release December 2009 forecast (AEO December 2009 Forecast).[56] On rebuttal, AEPCO updated its presentation. It used the most current EIA forecasts that were available when it submitted its rebuttal testimony, which is the final 2010 AEO forecasts released by the EIA in May 2010 (AEO May 2010 Forecast).[57]

After the record closed in this case, the U.S. Department of Energy released revised EIA rate and volume forecasts for PRB coal shipments. Our practice is to use these updated forecasts if the change is significant. W. Fuels Ass’n 2007, slip op. at 27. Here, the revised forecasts are significantly different from the EIA forecasts used by the parties to forecast coal volume and revenues through the 10-year DCF period. And while the parties do not agree on how to use the EIA forecasts, they do appear to agree that we should use the best available EIA forecasts (as each party used the most recent forecast on opening, reply, and rebuttal). As such, we take official notice of these revised forecasts and incorporate them into the SAC analysis here.[58]

AEPCO utilized a variety of forecasting models for the non-coal traffic. The BNSF consumer and industrial traffic volumes for 2010 to 2014 were developed by adjusting prior-year traffic volumes for each movement by the forecasted percentage change in BNSF’s internal forecasts.[59] For 2015 through 2018, BNSF consumer and industrial volumes were developed in a similar manner, through an adjustment of the 2013-2014 growth rate, as reported in BNSF’s internal forecasts.[60] BNSF agricultural traffic for 2010 to 2018 was projected by adjusting prior- year traffic volumes for each movement by a forecasted aggregate crop production change, as reported in the 2009 USDA Agricultural Projections to 2018 Report.[61] UP non-coal volumes for 2010 were developed by adjusting 2009 volumes for each movement by the forecasted percentage change acquired by comparing system-wide UP 2010 data to system-wide UP 3Q09 data derived from the UP SEC Form 10-Q report plus UP 4Q09 data.[62] UP non-coal volumes for 2011 to 2018 were developed by adjusting prior-year traffic volumes for each movement.[63]

Defendants accept AEPCO’s methodology for projecting volumes for BNSF consumer and industrial traffic.[64] Defendants also accept AEPCO’s volumes for UP auto, chemical, industrial, and intermodal traffic for 2010 through 2018.[65] However, for BNSF agricultural traffic, defendants calculate volumes from 2010 through 2014 by adjusting the prior year’s volumes by the volume assumptions for agricultural traffic in BNSF’s long-range plan.[66] For 2015 to 2018, defendants propose adjusting the prior year’s volumes for agricultural traffic based upon the 2013 to 2014 growth rate in BNSF’s long-range plan.[67] Similarly, defendants reject AEPCO’s calculations for UP agricultural traffic from 2010 through 2018, and instead use a different methodology that relies upon a forecasted percentage change and BNSF’s internal forecasts.[68]

In the categories where the parties disagree on traffic projections, defendants tend to use their own internal long-range plan, while AEPCO uses a public forecast. The USDA agricultural projection does not seem to be significantly different from BNSF’s long-range plan. Both are top-down and depend on macroeconomic data, which are not shipper- or lane-specific. We accept AEPCO’s traffic projections under these circumstances because they rely on government forecasts that are unbiased, independent and updated regularly.

3.      Traffic Group Revenues

a.      Montana Rail Link Traffic

Defendants claim that AEPCO improperly includes millions of tons of cross-over traffic that never use a SARR-constructed facility. AEPCO accomplishes this via the use of BNSF’s trackage rights over MRL’s line between Laurel and Jones Junction, Mont. Defendants state that this results in the inclusion of millions of dollars of revenue associated with cross-over movements that AEPCO assumes would move over portions of the ANR, solely based on trackage rights over the MRL line, before interchange with BNSF.[69] Defendants accept AEPCO’s right to assume that its SARR steps into BNSF’s shoes with respect to BNSF’s trackage rights over MRL in order to bridge traffic between the BNSF lines replicated by the SARR, but claim that AEPCO is not entitled to include MRL trackage rights traffic in its traffic group, as that traffic does not share any facilities with the ANR, and therefore its revenues should not contribute to the costs of the ANR facilities.[70] Defendants therefore exclude MRL trackage-rights traffic.[71]

In its rebuttal, AEPCO claims that the ANR has the right to stand in BNSF’s place with respect to the MRL trackage rights, as it uses the MRL trackage rights in the same way.[72] AEPCO also claims that defendants’ approach would constitute an impermissible entry barrier,[73] and that AEPCO should retain the inclusion of MRL trackage rights, associated traffic, and associated revenues.[74]

We find that AEPCO has satisfied all the necessary conditions to use these trackage rights, and that defendants’ objections to the ANR’s utilization of MRL trackage rights are unfounded. BNSF already utilizes these trackage rights in its real-world rail operations. As AEPCO states in its rebuttal, AEPCO is not attempting to reroute any traffic over the trackage rights; instead, AEPCO is merely incorporating into its traffic group traffic that BNSF already handles over this segment.[75] The only traffic moving over the MRL that is included in AEPCO’s traffic group is BNSF traffic.[76] AEPCO also states that the ANR would compensate MRL on the same basis that BNSF does under its trackage rights agreement.[77] Because it is permissible for the ANR to use the MRL trackage rights, we find that the MRL traffic and associated revenues may be included to defray the joint and common costs (e.g., executive salaries) of the SARR.[78]

b.      Revenue Projections

Defendants accept AEPCO’s base rates and revenues for issue coal traffic, with defendants’ modifications to the base-year issue traffic volumes described previously in this decision.[79] Defendants also generally accept AEPCO’s approach to calculating base-year revenues for non-issue coal traffic, but substitute the AEO 2010 Transportation Rates Escalator-West (2010 AEO Escalator) for AEPCO’s use of the April EIA Forecast to project forward contract rates at the end of the contract term.[80]

Defendants object to AEPCO’s method of developing 2008 rates per unit, exclusive of fuel surcharge, for certain classes of UP non-coal traffic.