2019 May - June Highlights: Railroads

This article summarizes the recent Surface Transportation Board (STB or Board) activities and decisions.

Rate Reform Task Force Report Released

On May 25, 2019, the Rate Reform Task Force submitted to the Board its report containing proposals for changes to rate review methodologies and processes. Rate Reform Task Force, Report to the Surface Transp. Bd. (April 25, 2019). The report reviews the development of rate reasonableness methodologies, discusses issues with the current rate reasonable process, and makes detailed recommendations for rate review.

The report begins by exploring the history of rate cases and explaining that stand-alone cost (SAC) cases have become increasingly complex and costly over time. Id. at 5-6. According to the report, recent SAC cases require the Board to make hundreds of “calls” regarding modeling an efficient stand-alone railroad (SARR) based on the conflicting evidence presented by the complainant shipper and the defendant railroad. Id. at 6. Litigation in recent cases has reportedly cost as much as $10 million. Id. The report also describes the simplified rate methodologies—the Three-Benchmark test and Simplified SAC procedure—and explains that the Board has initiated proceedings to explore further simplifying these processes. Id. at 6-8.

The Task Force received feedback from interested parties which is described in the report. Shipper interests expressed various concerns regarding the current rate reasonableness process to the Task Force, including the complexity and cost of even simplified rate methodology cases. Id. at 8-9. Coal shippers and railroads generally expressed satisfaction with the SAC process and argued it should not be changed. Id. at 10. In addition, many shippers expressed their belief that railroads are now revenue adequate, meaning that the regulatory structure should change. Id. at 11.

The following is a brief summary of the proposals made by the Task Force.

1. Create New Method for Resolving Small Rate Disputes

The Task Force report provides several recommendations intended to reduce the cost of the small rate dispute methodology. It suggests that Congress should pass legislation permitting mandatory arbitration of small rate disputes (due to the fact that the Board has held that it lacks the authority to mandate arbitration of a dispute). Id. at 14-15.

The report also recommends imposing procedural limitations to reduce the time and cost of rate reasonableness review. Id. at 15-16. The report states that adopting a final offer process could be an effective way to implement procedural limitations (other than with market dominance). Id. at 16. Under this process, which would be subject to fast, inflexible timelines, the Board would choose between final rate reasonableness offers presented by the parties without making any modifications. Id. at 17-19. The market dominance presentation would be submitted at the same time as the final offer, but it would be considered separately; if the evidence did not demonstrate market dominance, the Board would not consider the final offers. Id. at 17. The Task Force suggests a 90-day timeline for the final offer process. Id. at 19.

Finally, the report notes that the Board’s recent efforts in Ex Parte 665 (Sub-No. 2) to create procedures for the smallest rate cases were not well-received. The Task Force recommends setting aside the comparison group process proposed in Ex Parte 665 if the Board believes that another approach, like the final offer process, is acceptable. If the Board decides to proceed with the comparison group methodology, the Task Force recommends changes, including: “(1) allowing the comparison group to include similar traffic with R/VC ratios below 180%, as long as they are above the carrier’s RSAM figure; and (2) setting the revenue need adjustment factor at 1 when the carrier is long-term revenue adequate” (also discussed below, under the Three Benchmark recommendations). Id. at 20.

2. Standardize and Streamline SAC

The Task Force report notes that the STB Reauthorization Act, Pub. L. No. 114-110, 129 Stat. 2228 (2015), imposed shorter timelines for SAC cases and states that the current SAC process cannot be completed within those statutory timelines. Id. at 22. Therefore, the Task Force recommends standardizing certain aspects of the SAC. Id. For example, the Task Force proposes that the Board standardize the following three expense areas: General and Administrative (G&A); Maintenance of Way (MOW); and Buildings and Facilities. Id. at 23-26. The Task Force believes the following additional areas are candidates for standardization: Roadbed Preparation, Track, Bridges, Signals and Communications, Drainage, Lighting, Wages, Locomotive Maintenance, Locomotive Fuel, Loss and Damage, and Freight Car Costs. Id. at 26-27.

3. Offer a Different Rate Methodology for Large Disputes

The report next recommends a different rate methodology, called the Incumbent Network Cost Analysis (INCA), that would remove the hypothetical component of the SARR and instead would judge “the issue rate against a proper cost allocation centered on the operations of the actual railroad.” Id. at 28. Under this approach, “the Board would establish a just and reasonable rate based on the assets and operating expenses the incumbent employs (not those of the hypothetical entrant).” Id. The test period would be the two years prior to the date of the complaint, thereby removing forecasts, indexing, and 10-year operating horizons from the analysis. Id. at 30.

To determine the amount of relief, “the Board would sum up all the direct operating expenses (including depreciation), apportion all overhead expenses (G&A, taxes, etc.), and provide for an economic return on capital assets attributed and assigned to the footprint.” Id. The Board would then “compare the totality of these expenses to the revenues the carrier obtains from the traffic group that operates over the footprint, using the existing cross-over revenue allocation method.” Id. The Board would apply the Maximum Markup Methodology (MMM) to any overage, and if the carrier’s rate is greater than MMM, rate relief would be ordered. Id.

4. Change Treatment of Revenue Adequate Railroads

The Task Force report makes various recommendations concerning revenue adequacy. The report suggests that the Board adopt a working definition of long-term revenue adequacy to use with the revenue adequacy constraint. Id. at 33. The report proposes determining long-term revenue adequacy by looking at an entire business cycle, which would be “the shortest period of time, not less than five years, that includes both a year in which a recession began and a year that follows a year in which a recession began.” Id. at 33. The report recommends that long-term revenue adequacy be calculated under the annual Ex Parte 552 proceeding. Id. at 35.

The report also suggests adoption of a rate increase constraint (RIC) that would apply to carriers that are long-term revenue adequate. Id. at 36. This constraint would identify “the point at which the existing application of differential pricing is enough.” Id. For rates found to be above the RIC, shippers would not be entitled to a rebate and would not have their rates reduced; instead, “carriers would be forbidden from raising non-contract, non-exempt rates by more than the rate of inflation.” Id.

In addition, the report proposes suspending the “Bottleneck” protections as applied to rates that are above RSAM for revenue adequate carriers because “Board intervention limiting the carriers’ ability to price differentially is appropriate where market forces are unable to constrain rates.” Id. at 40-41.

The report also proposes to reinstate the simplifications of Road Property Investment (RPI) in Simplified SAC cases when the carrier is long-term revenue adequate. Id. at 42. The report recommends eliminating Simplified-SAC for non-revenue-adequate defendant railroads because it has never been used and because the Task Force has proposed an alternative (INCA). Id.

5. Modify the Three-Benchmark Methodology

The Task Force report recommends many changes to the Three-Benchmark methodology. The report proposes removing the limit on aggregating claims and allowing “the comparison group to include similar traffic with R/VC ratios below 180%, as long as they are also above the carrier’s RSAM figure.” Id. at 43-46. The report also recommends, for carriers that have achieved long-term revenue adequacy, to “set the RSAM/R/VC>180 ratio at 1 and allow the market itself to dictate what represents a reasonable rate.” Id. at 46-47.

Further, the report suggests modifications to the waybill sampling rates. Specifically, the report recommends increasing the sampling rates for all small, carload shipments and reducing in the aggregate the sample rates for all large movements. Id. at 48. The report also proposes to reduce the current five sample rates for carload shipments to a single sampling rate. Id. For intermodal shipments, the report recommends reducing the five sampling rates to the following two categories: 1 to 2 carloads on waybill and 3 and over carloads on waybill. Id. at 48-49.

Finally, the report recommends imposing limits on the “other relevant factors” evidence submitted by the parties to demonstrate that the maximum reasonable rate should be different than the presumed maximum reasonable rate determined using the three benchmarks. Id. at 49. Specifically, the report suggests imposing page limits to address “other relevant factors.” Id. at 51-52.

6. Revise the Market Dominance Inquiry

The Task Force report notes that the market dominance inquiry can be a “costly and time-consuming undertaking” and therefore proposes two alternative solutions to streamline the analysis. First, the report proposes “setting a list of criteria that once pled will lead to a finding by rule that the complainant has made its prima facie case of market dominance over the issue traffic.” Id. at 53. To make a prima facie case of market dominance, a shipper would have to show the following:

    • The movement exceeds 500 miles by rail;
    • There is no intramodal competition;
    • There is no barge competition; and
    • Any truck movements are used only in rare situations, at times of supply chain duress.

Id. at 53. As an alternative, the report suggests instituting procedural constraints—i.e., a very short timeline—for conducting the market dominance analysis. Id. at 54.

The Board Announces Oversight Hearing on Demurrage and Accessorial Charges

On April 8, the Board announced that it will hold a public hearing on railroad demurrage and accessorial charges on May 22, 2019. Oversight Hearing on Demurrage and Accessorial Charges, Ex Parte 754 (STB served April 8, 2019). The purpose of the hearing is to receive information from railroads, shippers, and other interested parties about recent experiences with demurrage and accessorial charges, “including matters such as reciprocity, commercial fairness, the impact of operational changes on such charges, capacity issues, and effects on network fluidity.” Id. at 2. The Board explained that the hearing “arises from concerns expressed by users of the freight rail network and other stakeholders about changes to demurrage and accessorial tariffs being implemented by various Class I carriers, and follows related letter inquiries to Class I carriers, including requests for information on quarterly revenue from demurrage and accessorial charges for 2018 and 2019.” Id.

On May 3, the Board announced that the hearing will be held over two days (May 22-23), Oversight Hearing on Demurrage and Accessorial Charges, Ex Parte 754 (STB served May 3, 2019), and on May 9, the Board issued an updated hearing schedule. Oversight Hearing on Demurrage and Accessorial Charges, Ex Parte 754 (STB served May 9, 2019).

The Board Dismisses Ameropan’s Complaint against CN for Lack of Jurisdiction

On April 17, the Board dismissed a complaint filed by Ameropan Oil Corporation (Ameropan) against Canadian National Railway Company (CN) for lack of jurisdiction. Ameropan Oil Corp. v. Canadian Nat’l Ry. Co., Docket No. NOR 42161 (STB served April 17, 2019). In its complaint, Ameropan alleged that CN had provided service to Ameropan’s Chicago, Illinois, facilities five days per week for many years. Id. at 1. Ameropan claimed that in November 2018, CN reduced service to the facilities to two days per week without any justification or explanation. Id. at 2. Ameropan alleged that the service reduction harmed Ameropan by causing lost business and profits; potentially increasing demurrage charges assessed by CN; and causing Ameropan to face penalties for failing to meet CN’s minimum annual volume commitments. Id. at 2. Specifically, Ameropan argued that the service reduction constituted “a failure to provide adequate rail service in violation of 49 U.S.C. § 11101(a); a failure to provide adequate notice of a change in common carrier service terms as required by 49 U.S.C. § 11101(c); and an unreasonable practice in a matter related to transportation and service in violation of 49 U.S.C. § 10702(2).” Id. (citing Ameropan Compl. at 5).

In response, CN filed a motion to dismiss, arguing that its rail service to Ameropan is governed by a rail transportation contract between the parties and that 49 U.S.C. § 10709(c)(1) prohibits challenges before the Board regarding transportation covered by a contract. Id. Ameropan acknowledged that the rail service to its Chicago facilities is provided pursuant to a contract but argued that the contract does not address frequency of service, and that therefore frequency of service is a common carrier term subject to Board jurisdiction. Id. at 2-3.

The Board rejected Ameropan’s argument, explaining, “To the contrary, § 10709(b) states that ‘[a] party to a contract entered into under this section shall have no duty in connection with services provided under such contract other than those duties specified by the terms of the contract.’” Id. at 3. According to the Board, “The natural reading of this provision is that common carrier duties do not apply to transportation provided under contract, even where those duties are not specifically addressed by the contract.” Id. Further, the Board explained that Ameropan’s argument is inconsistent with congressional intent in enacting § 10709, which was to exempt rail service provided under contract from all requirements of the Interstate Commerce Act. Id. at

4. Therefore, the Board dismissed Ameropan’s complaint, concluding that “for purposes of § 10709, where transportation is provided pursuant to a contract, the Board lacks regulatory authority over the terms and conditions related to that transportation, whether or not explicitly addressed in the contract.” Id. at 4.

The Board Permits Ex Parte Communications in Exemptions Review Proceeding

On March 19, the Board issued a decision waiving its prohibition on ex parte communications in Ex Parte 704 (Sub-No. 1), Review of Commodity, Boxcar, and TOFC/COFC Exemptions, which was in effect when this proceeding was initiated. Review of Commodity, Boxcar, and TOFC/COFC Exemptions, Ex Parte 704 (Sub-No. 1) (STB served March 19, 2019).

The Board explained that, although it adopted a final rule in 2018 permitting ex parte communications in informal rulemaking proceedings, that rule applies only to proceedings initiated on or after the rule’s effective date. Id. at 2. Because Ex Parte 704 (Sub-No. 1) was initiated in 2016, the revised ex parte communications rule does not apply to it. Id.

In February 2019, the Board received a petition requesting that the Board waive its ex parte communication prohibition in this proceeding. Id. at 1. The petition asserted that ex parte communications would facilitate progress in this proceeding due to the fact that years have passed since comments were filed in the proceeding and the fact that the Board has two new members. Id.

The Board found good cause to waive the ex parte communications prohibition and established procedures for ex parte communications in this proceeding. Id. at 2. Meetings may be held until June 17, 2019. Parties that engage in ex parte communications must submit a memo stating the date and location of the communication, providing the names and titles of participants, and summarizing the information presented. Id. The memos must be submitted no later than two business days after the ex parte communication, and the Board will post the memo on its website within five days of submission. Id. Parties will have 10 days to comment on the memo. Id.

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