STB decision on rail rate reasonableness procedures could benefit small rail shippers

The Department of Transportation’s Surface Transportation Board (STB) last week came out with a unanimous decision regarding Rate Regulation Reforms, Ex Parte 715, which it said adopts revised rules to its railroad rate-reasonableness procedures as part of an ongoing effort to augment its rate regulation processes, specifically the ones focused on resolving smaller rail rate disputes.

STB officials said that this decision removes limitations on relief for medium-sized rate disputes and raises the available relief under small rate disputes to $4 million, and it added that the decision is also comprised of technical changes to its rate complaint procedures and also sets the U.S. Prime Rate as the interest rate on reparations that railroads must pay to shippers for charging unreasonable rates.

“For years, the shipper community has argued that only the largest freight rail shippers can justify the time and expense to bring rate disputes to our agency,” said STB Chairman Daniel Elliott in a statement. “The Board has worked diligently to address that concern and offer captive shippers a simplified, expedited, and practical way to bring smaller rate disputes to the agency. Today we are taking another much-needed step to provide captive shippers with better access to a neutral forum to judge the reasonableness of their freight rates, as Congress intended.”

The STB noted that since its 2011 hearing, Competition in the Railroad Industry, Ex Parte 705, it has considered various concepts to “determine the best way to promote a competitive and economically viable rail network,” adding that in its May decision regarding Assessment of Mediation and Arbitration Procedures, Ex Parte 699, it revamped STB meditation and arbitration rules with an objective to encourage greater use of dispute resolution procedures among railroad stakeholders.

Prior to making its ruling, the STB sought comments on six proposed changes, including: 1-removing the limitation on relief for cases brought under the Simplified-SAC (stand-alone cost) alternative; 2-improving the accuracy or the Road Property Investment component of the Simplified-SAC test; 3-raising the relief available under the Three-Benchmark method (created for small rate cases and compares the markup over cost paid by the challenged traffic to the average markup on other comparable traffic) to $2 million; 4-curtailing the use of “cross-over traffic” in Full-SAC cases; 5-modifying the approach used to allocate revenue from cross-over traffic; and 6-raising the interest rate that the railroads must pay when reparations are assessed because the railroad has collected unreasonable rates.

Subsequently, the STB proceeded to take the following actions:
1-remove the relief limit in Simplified-SAC cases;
2-require the use of full RPI presentations in Simplified-SAC cases;
3-raise the relief limit in Three-Benchmark cases to $4 million;
4-adopt alternative “Average Total Cost” as the Board’s revenue allocation method for crossover traffic; and
5-raise the interest rate that a railroad must pay to complainants when the carrier has charged unreasonable rates

The STB’s decision was positively received by the American Chemistry Council (ACC).

“ACC and its members are encouraged by the ongoing efforts by Chairman Elliott and his fellow commissioners to review current policies to help ensure the Board works on behalf of both shippers and railroads,” the organization said. “We commend the STB for its recent decision to increase the relief cap for the small Three-Benchmark cases from $1 million to $4 million and to eliminate the $5 million relief cap for the medium size ‘simplified Stand Alone Cost’ procedures.  This change will help make the rate dispute process more accessible since the current relief caps have served as a strong disincentive for shippers considering challenges to unreasonably high rail rates.”

The ACC also commended the STB’s decision not to restrict the use of cross-over traffic in rate cases, explaining that the STB avoids complicating an already very complex, expensive and lengthy process, adding that the STB maintains cross-over traffic ‘is now a well-established practice in [the large Stand Alone Cost] cases’ and are the only procedures to “offer the only means to protect rail shippers against excessive freight rates and the proposed restrictions would have denied shippers effective access to relief.”

What’s more, the ACC cited recent research it released which found that freight rail rates have increased 76 percent since 2001, with chemical shippers paying $4.1 billion alone in 2011. These increases, it said, make U.S. manufacturers less competitive in a global marketplace.  

As previously reported, the topic of rail rates for shippers is a tried and true subject for the STB. The June 2011 STB public hearing explored the current state of competition in the railroad industry, as well as possible policy alternatives to facilitate more competition.

That hearing followed previous efforts led by members of Congress and railroad shipper groups to “re-regulate” the freight railroad industry on the grounds that there are multiple barriers to competitive access for captive shippers such as improving the rate challenge process at the STB, getting relief from what shippers view as monopoly pricing power held by the railroads, establishing the STB as an independent agency and giving the STB investigative authority, creating a strong rail customer service advocate to help resolve shippers’ concerns, and protecting rail shippers and maintaining reasonable rates in non-competitive situations, among others.

But from the railroads’ perspective, pricing power is a necessity, because in order to be able to make investments into their networks and infrastructure, railroads need to maintain their current pricing leverage, which has been firmly intact for the last 10 years.

This is where things get prickly with rail shippers—many of whom maintain that they’re not getting what they pay for in terms of service and value as annual rates rise about 5 percent year over year.

While there has been much made by shipper groups about re-regulating the industry, addressing the lack of railroad antitrust, fuel surcharges applied by the rails, and reciprocal switching, these efforts have largely stalled out in Washington.

“The mysterious thing is that you hear how rail prices have risen, yet the railroads that are earning their cost of capital are barely earning it,” says Stifel Nicolaus Analyst John Larkin. “People forget that it is such a major capital intensive industry, with new locomotives $200 million each or more. Ties are not cheap, nor is keeping right-of-ways in safe condition to allow for the passage of trains at a reasonable velocity. It is a very expensive proposition.”