Surface Transportation Board focused on helping rail shippers get rate relief through two proposals

Editor’s note: This story has been updated with additional information.

In an effort to “further protect shippers from unreasonable rail rates,” the United States Department of Transportation’s Surface Transportation Board (STB) said this week it is rolling out two initiatives to help them on this front.

The initiatives include:
-a proposal to reform its rules on how it resolves rate disputes to ensure that all captive shippers have a meaningful way to challenge rates; and
-the STB is taking steps to consider a proposal submitted by the National Industrial Transportation League (NITL) to increase rail-to-rail competition.

In regards to the first initiative about rates, STB officials said that the STB is proposing to remove the limitation on relief for cases brought under the Simplified-Stand Alone Cost alternative.

“Our goal is to encourage shippers to use a simplified alternative to a Full-[Stand Alone Cost] analysis that is economically sound, yet provides a less complicated and less expensive way to challenge freight rates by discarding the requirement that shippers design a hypothetical railroad to judge a railroad’s real world rates,” the Board wrote in the decision issued yesterday, in Rate Regulation Reforms, EP 715.

Other rate-related changes the STB are proposing, include: doubling the relief available to shippers under the Three-Benchmark method, its other simplified approach; to make technical changes to the Full-SAC and simplified rate procedures; and to raise the interest rate railroads pay on reparations to shippers if railroads are found to have charged unreasonable rates.

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

This 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.

As for the NITL’s proposal to improve rail-to-rail competition, the STB said it is beginning a proceeding—Petition for Rulemaking to Adopt Revised Competitive Switching Rules, EP 711—to explore the NITL’s competitive access proposal.

The NITL proposal would require a Class I rail carrier to enter into a competitive switching arrangement whenever a shipper—or group of shippers—demonstrates that certain objective operating conditions exist. NITL officials said in mid-2011 that the League is asking the STB to eliminate existing competitive access rules and precedents as they apply to reciprocal switching and replace them with the following conditions:
-the shipper’s or receiver’s facilities for which switching is sought are served by only one Class I rail carrier;
-there is no effective inter- or intramodal competition for the rail movements;
-there is (or can be) a “working interchange” between a Class I rail carrier and another Class I within a “reasonable distance” of the shipper’s facilities; and
-the proposal states that a competitive switching agreement shall not be imposed if either rail carrier can establish that the arrangement is not feasible, or unsafe or, that it would unduly hamper the ability of either carrier to serve its shippers.

“We think this is a game changer,” said NITL President and CEO Bruce Carlton on a 2011 conference call. “This proposal is fair, equitable, and balanced…and treats the equities of shippers and Class I railroads equally. We think it is going to undo what we believe has been a highly restrictive and unfair set of rules brought forth by the ICC and STB for the last quarter century.”

Carlton said that for several decades, shippers and receivers of rail freight have been disadvantaged by ICC and STB reciprocal switching rules.  And he pointed to the STB hearing in June 2011 regarding competition on railroad competitiveness, which featured various shippers talking about a lack of competitive access on the rails and experiencing a lack of real head-to-head competition for their business on the rails.

STB officials said that under the NITL proposal “certain shippers located in terminal areas that lack effective transportation alternatives would be granted access to a competing railroad, if there is a working interchange within 30 miles.” They added that opening comments are due November 23, 2012 and replies are due February 21, 2013.

Dahlman Rose analyst Jason Seidl wrote in a research note that “while these announcements are not a huge victory for shippers, it could lead to more rate cases being filed over time.”

And he also noted that it could also lead rails to be more careful when applying rates to captive shippers. What’s more, coupled with a mild decrease in rail pricing power, Seidl said his firm is somewhat concerned about the railroad industry’s ability to price above its inflationary costs.

The STB’s actions were endorsed by the NITL’s Carlton this week.

“The Board has clearly signaled its intention to respond to the many stakeholders that testified at the Board’s 2011 hearings on the state of competition in the rail industry,” he said in a statement. “The League appreciates both of these initiatives, and we will be an active participant in both proceedings. Our Members believe strongly that marketplace competition is inherently good and should be enhanced whenever possible. That was the target of our proposal on competitive switching, and we will be focused on that outcome.”

And Glenn English, chairman of Consumers United for Rail Equity (CURE) was also encouraged, saying that the STB’s actions prove what freight rail shippers have been telling policymakers for a long time: there is a fundamental lack of competition in the freight rail industry and the process for rail-dependent shippers to get relief from monopolistic practices by industry is broken and in need of reform. 

“This environment has had serious consequences for our economy and U.S. companies and farmers trying to compete globally,” said English. “Shippers have long waited for the STB to act and welcome these first steps. The status quo is simply unacceptable.”