STB rejects AAR’s petition over rail rates for coal transportation

The Surface Transportation Board this week said that it declined a petition filed by the Association of American Railroads (AAR), whom was requesting that the STB institute a rulemaking proceeding to consider reintroducing indirect competition as a fact
or in determining the reasonableness of rail rates for coal transportation.

In its decision, the STB said that the AAR proposed that the STB consider evidence of product and geographic competition in its market determinations for coal rate cases only. It added that the AAR states that “changes in the wholesale power and natural gas markets have significantly increased the impact of indirect competition on rail rates used for coal for electric power generation.”

And it also noted how the AAR describes how several factors, including the falling cost of natural gas production and the resulting increased supply of natural gas, have intensified competition between natural gas-fired generation and coal-fired generation across many geographic markets. What’s more, with similar short-run marginal costs, STB said that AAR asserted that utilities may rapidly shift from coal-fired to natural gas-fired power generation. AAR states that, under these market conditions, a rail
carrier’s rate for transporting coal, which it said significantly impacts a co
al-fired plant’s short-run marginal cost, is constrained by indirect competition,
as small increases in its rate and thus increases in the short-run marginal costs for coal-fired generation, could result in losing sales.

“AAR has not persuaded us that the Board should depart from its existing policy and reconsider evidence of product and geographic competition,” the STB said. “Having reviewed AAR’s proposal, we find that AAR has not presented a practical framework that could be developed in a rulemaking proceeding for determining the existence of
effective indirect competition and that the sample analyses it offers fail to overcome the practical difficulties the agency has identified in previous decisions. Accordingly, we will deny AAR’s petition to institute a rulemaking proceeding.”

Indirect competition may, in certain circumstances, effectively constrain rail rates for transportation of coal for electric power generation and the STB has recognized as much, the STB added. And while AAR has provided a compelling portrait of changes in the wholesale power industry where indirect competition may well have an impact on coal transportation rates, STB said it has not presented evidence of rail rates that have been constrained by indirect competition or even offered a workable process for presenting and analyzing evidence of indirect competition. Instead, it said AAR has only provided two approaches or methods for applying publicly available information to evaluate indirect competition exerted by wholesale electric power markets on rail transportation of coal.

The STB’s decision was not met warmly by the AAR.

“We simply do not understand how the STB can refuse to acknowledge that the way Americans are getting their electricity is changing,” said AAR President and CEO Ed Hamberger in a statement. “The electric generating marketplace is undergoing a powerful transformation that the STB decision doesn’t take into account.  The availability and low price of natural gas are greatly influencing what kind of energy is being used today by electric utilities. It is deeply troubling that the STB decision ignores what economists, energy analysts and power companies already know: natural gas is displacing coal as the fuel for making electricity.  This decision not to consider the effect indirect competition has on coal rail rates seems to say the STB is siding with shippers who complain the loudest.”

AAR officials added that the STB has jurisdiction over rail rates only where a carrier does not face effective competition, adding that where railroads face effective competition, current law allows the market to determine the level of rail rates.

And since 1998, the AAR said that the STB has not considered indirect competition in rate cases, allowing then that it was too difficult or burdensome to find the information necessary to determine the effect indirect competition had on rail rates.

“AAR asserts today that there is ample public information available to help the STB determine what indirect competition exists in the wholesale power markets,” AAR officials said. “In its November 19, 2012 petition to the Board , AAR noted that nearly two-thirds of all rate cases over the last 15 years involved coal and, therefore, justifies the need to reassess the realities of today’s energy market and energy fuel sources when deciding whether or not to review rail rates for coal.”

Anthony B. Hatch, principal of New York-based ABH Consulting, sided with the AAR on this decision, explaining that from a pure reasoning perspective it is hard not to agree with Hamberger.

“What else goes into utility fuel decisions but product (gas v coal v other) and geographic (which plant to use, etc) competition,” he said.  “Isn’t that, in fact, really what they do (make product and geographic decisions)?”