Rail shippers throw support behind STB Rate Reform Task Force report

A recent letter penned to leadership at the Surface Transportation Board (STB) by more than 20 rail shipper groups in the manufacturing, agriculture, and energy sectors, and some of the largest freight rail customers in the United States through the Railroad Customer Coalition (RCC), praised the STB’s Rate Reform Task Force for an April report issued by the Task Force comprised of recommendations for potential changes to the STB’s rate review processes and methodologies.

The letter, which was addressed to STB Chairman Ann Begeman, Vice Chairman Patrick Fuchs, and Member Martin Oberman, said that the report takes “bold action in outlining serious reforms to how the STB reviews excessive freight rail rates,” calling it “an important step towards establishing simpler and fairer Board procedures.”

Established in January 2018, the STB’s Rate Reform Task Force was tasked with recommending improvements to the STB’s existing rate review processes, as well as to propose new rate review methodologies “that are more attuned to the realities of the current transportation world,” STB said.

The main recommendations of the STB report included:

• offering proposals that the Board could adopt to reduce the cost and complexity of small rate disputes;
• calling for legislation that would permit the Board to require arbitration of small rate disputes;
• suggesting significant simplification of the existing Stand-Alone Cost (SAC) test;
• proposing an entirely new rate methodology called Incumbent Network Cost Analysis that would look at the cost structure of the defendant carrier itself instead of a hypothetical stand-alone carrier;
• suggesting a definition for long-term revenue adequacy and three structural remedies that could be tied to this finding: (1) a rate-increase constraint (limiting carriers from raising rates on certain traffic once long-term revenue adequacy has been achieved); (2) a reversal of the Board’s long-standing “Bottleneck” decisions so that shippers can direct long-term revenue adequate carriers to deliver movements to a feasible interchange of the shipper’s choosing; and (3) a restoration of certain simplifications in the existing Simplified SAC process;
• increasing the accessibility of the Three-Benchmark comparison approach by, among other things, removing limitations on the aggregation of claims, improving sampling procedures, and instituting page limits on arguments surrounding “other relevant factors;” and
• -seeking simplification of the market dominance determination

“We thank the Task Force for allowing interested parties the opportunity to share views on the shortcomings of the current Stand Alone Cost methodology and provide suggestions and insight into how to improve the rate review process through comprehensive reforms,” the letter said. “This open and collaborative process undoubtedly contributed to a stronger, more robust final report. We understand and greatly appreciate that rate reform is one of the Board’s top priorities. Your success in achieving thorough and comprehensive rate reform is critical to the future of affordable freight rail service to millions of our customers. To that end, we encourage the Board to move forward with rulemaking to improve the current rate review processes.”

Freight railroad observers toldLMthat this STB report, in some ways is viewed as “consensus,” with the caveat that some of the report’s recommendations, should they come to fruition, being potentially being big deals in the future and things for freight railroads to carefully consider.

Association of American Railroads (AAR) President and CEO Ian Jefferies said in April that AAR and its member railroads were pleased that the STB’s Rate Reform Task Force has completed its report and has affirmed the economic soundness of the Board’s Stand Alone Cost (SAC) test.

Looking ahead, Jefferies said that the AAR and its member railroads will carefully consider report’s proposals and offer constructive suggestions for how the Board can address its legitimate goals for improving its rate case processes and procedures, including procedures for the smallest rate disputes and improving the Stand Alone Cost test, while also complying with the law and preserving the core economic principles on which those analyses are based.

A research note by Morgan Stanley analyst Ravi Shanker explained that the STB report’s recommendations lean more pro-shipper than pro-rail are another indicative data point of rising regulatory risk for rails.

“We note that these recommendations are not all new policy and the task force is not a rulemaking entity, but its report will be considered by the STB in finalizing rulemaking – the timing of which is uncertain given the STB is currently understaffed and any action will take time (and likely be accompanied by court battles),” wrote Shanker.

Michael F. McBride, a partner at Washington, DC-based Van Ness Feldman, toldLMthat that the STB report can be viewed as a potential game changer.

“The current rules were mostly written in the 1980s, when the railroad industry needed governmental assistance to become profitable,” he said. “That has long-since changed. When Stand-Alone Costs was adopted as the primary rate-setting methodology, the ICC said there would be a ‘revenue-adequacy constraint,’ but it didn’t define it. One is now clearly needed, because, as the Report indicates, UP, BNSF, and NS are all long-term revenue-adequate.”