UP, NS & CN File Joint Petition for Rulemaking to Modernize Annual Revenue Adequacy Determinations

On September 1, 2020, Petitioners Union Pacific Railroad Company (UP), Norfolk Southern Railway Company (NS), and the U.S. rail operating affiliates of Canadian National Railway Company (collectively, CN) filed a joint petition urging the Surface Transportation Board (STB or Board) to initiate a rulemaking proceeding to adopt rules that would revise and modernize annual revenue adequacy determinations under 49 U.S.C. § 10704(a).  Joint Petition for Rulemaking to Modernize Annual Revenue Adequacy Determinations, Ex Parte 766 (filed Sept. 1, 2020).

Petitioners stated that Congress charged the Board with annually measuring the financial health of the rail industry and assisting each railroad in achieving revenue adequacy, and the Board has committed itself to “evidence-based decision-making,” using tools that were designed three decades ago.  Id., slip op. at 1.  According to Petitioners, the Board currently relies on accounting measures of return on investment (ROI), rather than the current economic value of those investment assets, then removes billions of dollars of accumulated deferred taxes from that investment base, which adds yet another distortion, and analyzes these findings without considering evidence about typical rates of return for the companies with which railroads compete for capital.  Id., slip op. at 1-2.

The petition focuses on the following question: “are the Board’s annual revenue adequacy determinations designed so that the Board may fulfill its statutory duties in accurately measuring and properly promoting railroad revenue adequacy?”  Id., slip op. at 2.  Petitioners state that “[t]he answer is clearly no.”  Id.

On behalf of Petitioners, two University of Chicago professors, Kevin Murphy and Mark Zmijewski, analyzed data on the relative performance of every company in the S&P 500 from 2006 to 2019, and used the Board’s methodologies to derive a revenue adequacy calculation for nonrailroads in the S&P 500.  Id., slip op. at 4.  The results were “striking,” finding that “a substantial majority of major public companies in nearly every industry is ‘revenue adequate’ under the Board’s current definition—but by margins that dwarf those achieved by any railroad.”  Id., slip op. at 5.  The professors applied economic principles to develop a methodology to modernize how the STB monitors the financial health of the freight rail industry.

Petitioners set forth two proposals to address the “flaws” in the Board’s current approach, and “improve the evidence the Board considers to assist railroads in earning ‘a reasonable and economic profit or return (or both) on capital employed in the business.’”  Id., citing 49 U.S.C. § 10704(a)(2).  First, Petitioners proposed that “the Board should use a comparison approach that contrasts its annual revenue adequacy determinations (however calculated) against the performance of other companies in the S&P 500, using the same methodology for both” (the Comparison Proposal).  Id., slip op. at 3.  Under this proposal, “the Board should define annual revenue adequacy to mean that a railroad’s Adjusted STB ROI exceeded the industry cost of capital by more than the median S&P 500 firm’s ROI exceeded its cost of capital.”  Id., slip op. at 20-21.  The Comparison Proposal is the centerpiece of the petition. 

Second, Petitioners proposed that “the Board should modify its treatment of deferred taxes in annual revenue adequacy determinations in order to provide an accurate view of railroad returns” (the Flow-Through Proposal).  Id., slip op. at 3.  Petitioners stated that the Board should use the flow-through method for deferred taxes when calculating ROI.  Id., slip op. at 8.  This method was originally advocated by the U.S. Department of Transportation in the mid-1980’s.  Id., slip op. at 38.

According to Petitioners, the Comparison Proposal provides a “reasoned way to include a ‘reasonable and economic profit or return’ in the annual determination, as directed by Congress,” and provides a reasoned way to address the known measurement error in the current annual calculations.  See id., slip op. at 25-32.  Additionally, the Comparison Proposal would offer a richer dataset to measure the relative financial success of the rail industry, and it is easily implemented and verifiable.  See id., slip op. at 32-37.  Petitioners also argued that the flow-through approach avoids absurd results, unlike the current utility-based method; it is a better fit for the rail industry; and it has many benefits.  Id., slip op. at 40-46.

Petitioners stated that the modernization of annual revenue adequacy determinations would bring these determinations closer to Congress’s original purpose, and they urged the Board to initiate a rulemaking proceeding to solicit public comment on the proposals.  Id., slip op. at 2, 8.


Five Class I Railroads File Joint Petition for Rulemaking to Establish an Alternative Voluntary Arbitration Program for Small Rate Disputes


On July 31, 2020, five Class I railroads, Canadian National Railway Company (CN), CSX Transportation, Inc. (CSX), Norfolk Southern Corporation (NS), Union Pacific Railroad Company (UP), and the Kansas City Southern Railway Company (KCS) (collectively, Petitioners), submitted a joint petition requesting that the Board initiate a rulemaking proceeding to establish a new voluntary arbitration program for small rate disputes.  Joint Petition for Rulemaking to Establish an Alternative Voluntary Arbitration Program for Small Rate Disputes, Ex Parte 765 (filed July 31, 2020).

Petitioners stated that Congress had instructed the Board to develop “simplified and expedited methods for determining the reasonableness of challenged rates in those cases in which a full stand-alone cost presentation is too costly, given the value of the case.”  Id., slip op. at 1.  Over the last thirty years, “the Board has responded by creating multiple new simplified, and increasingly less precise, rate review methodologies.”  Id.  However, some stakeholders in the shipping community have continued to complain that the Board’s implied methodologies are insufficient in regard to flexibility, cost, and speed.  Id.

Petitioners presented a proposal for a voluntary arbitration program that would be aimed at small rate cases (the Small Case Arbitration Program).  The program was shaped by discussions between Class I railroads and other stakeholders.  Id., slip op. at 2.  Notably, Petitioners stated that they were prepared to consent to arbitrate cases under the Small Case Arbitration Program for a five-year period, provided that the Board adopts the program according to the terms set forth in the petition.  Id.

            The Small Case Arbitration Program would function alongside the Board’s existing arbitration program, established in 49 C.F.R. Part 1108.  The program would apply to rate disputes that involve rates for regulated commodities that are not subject to a rail transportation contract.  Id., slip op. at 11.  Shippers would be limited to bringing only one arbitration at a time against a specific carrier, and would be permitted to challenge rates for multiple traffic lanes in a single case.  Id.  A shipper would initiate a case by notifying a railroad in writing.  Id.  The parties would be required to mediate the dispute for at least 30 days without the Board’s involvement.  Id.  If mediation is unsuccessful, the parties would jointly file a confidential notice of their intent to arbitrate.  Id.  Arbitrations would be confidential to the maximum extent possible, and the parties would need to agree to a confidentiality agreement.  Id., slip op. at 16.

            The arbitration panel would consist of three arbitrators.  Id., slip op. at 12.  Each party would select an arbitrator, and the two party-selected arbitrators would choose a third arbitrator from a joint list provided by the parties.  Id.  The Board would only become involved in the selection process in two rare circumstances: (1) if a party objects to the other side’s selected arbitrator “for cause,” such as a lack of impartiality or a conflict of interest; or (2) if the two party-appointed arbitrators cannot agree on a third arbitrator.  Id.

            The Small Case Arbitration Program would set forth an expedited schedule.  Id., slip op. at 13.  Within seven days of filing the joint notice of intent to arbitrate, the Board’s Office of Economics would provide each party with certain unmasked, confidential Waybill Sample data.  Id.  Discovery would need to be completed within 45 days of filing the joint notice, and would be limited to 20 written document requests, five interrogatories, and no depositions.  Id.  The final decision from the arbitration panel would be required within 120 days of the joint notice.  Id.

            The arbitration panel would be charged with deciding market dominance, “follow[ing] the streamlined market dominance test proposed in Ex Parte 756, in the form that is finally adopted by the Board.”  Id.  The panel would also be charged with deciding rate reasonableness, following the standards in 49 U.S.C. § 11708(c)(3) and (d)(1).  Id., slip op. at 14.  The panel would be required to consider but not necessarily to follow an existing rate methodology but “would be prohibited from basing their decisions on a system-wide revenue adequacy constraint.”  Id.  The panel would be permitted to award relief up to $4 million dollars over two years, indexed for inflation annually.  Id., slip op. at 11.  Rate prescriptions would be limited to one year.  Id.

            Each party would be permitted to appeal the panel’s decision to the Board within 20 days of the decision.  Id., slip op. at 15.  In accordance with 49 U.S.C. § 11708 and 49 C.F.R. § 1108.11, the Board’s review would be limited to determining the following: “(a) the decision is consistent with sound principles of rail regulation economics; (b) a clear abuse of arbitral authority or discretion occurred; (c) the decision directly contravenes statutory authority; or (d) the arbitral award limit was violated.”  Id.

            A participating carrier or shipper would be able to withdraw their consent to arbitrate, in accordance with the rules of the program.  The program would include rules permitting withdrawal due to change in law, case volume, and at-will withdrawal.  Id., slip op. at 16-18.

            Petitioners urged the Board to institute a rulemaking proceeding, stating that the Small Case Arbitration Program would permit efficient rate dispute resolution on reasonable terms, and would provide a “win-win-win solution for railroads, customers, and the Board.”  Id., slip op. at 21, 28.

On August 26, 2020, the Board issued a decision stating that, before deciding whether to institute a rulemaking proceeding, it would benefit from having Petitioners’ reaction to filings by the National Grain and Feed Association (NGFA) and other parties regarding suggested modifications to the arbitration program.  Joint Petition for Rulemaking to Establish an Alternative Voluntary Arbitration Program for Small Rate Disputes, Ex Parte 765 (STB served Aug. 26, 2020).  Petitioners submitted a supplemental pleading on September 10, 2020, responding to NGFA and other commenters.

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