CEI letter to House and Senate leadership focuses on STB’s proposed revenue adequacy rules

A letter sent today to Senate and House leaders, for the Senate Subcommittee on Commerce, Science, and Transportation and the House Subcommittee on Railroads, Pipelines, and House Subcommittee on Railroads, Pipelines, and Hazardous Materials, from leadership at the Washington, D.C.-based Competitive Enterprise Institute (CEI), a non-profit libertarian think tank, in advance of the Surface Transportation Board’s (STB) December 12-13 hearing on railroad revenue adequacy, raised concerns over what it called the potential for the STB to use revenue adequacy as a means to institute price controls, which is viewed as troubling by CEI.

The impetus for this letter stems from new rules proposed by the STB in September as part of its ongoing effort to make its rate review procedures more accessible, efficient, and transparent, including for small customers. These proposed rules followed a spring report issued by the STB comprised of recommendations for potential changes to the STB’s rate review processes and methodologies. 

STB officials said in September that it is proposing rules to establish a new rate review option for smaller cases and provide a streamlined market dominance process that could be used in any rate review proceeding.

Included in this are a new rate review option for smaller cases, entitled the Final Offer Rate Review (FORR), which STB said utilizes procedural limitations to constrain the cost and complexity of a rate case, which would include principle-based, non-prescriptive criteria to allow for innovation with respect to rate review methodologies.

STB also proposed what it called a Market Dominance Streamlined Approach, which is designed to reduce the burden on rate cases by establishing that a complainant can make a prima facie (accepted as correct until proven otherwise) showing of market dominance, when the complainant has demonstrate:

• The movement has a revenue-to-variable cost ratio of 180% or greater;
• The movement would exceed 500 highway miles between origin and destination;
• There is no intramodal competition from other railroads;
• There is no barge competition;
• The complainant has used trucks for 10% or fewer of its movements subject to the rate at issue over a five-year period; and
• The complainant has no practical build-out alternative due to physical, regulatory, financial, or other issues (or combination of issues)

STB officials said that comments on the FORR and the Market Dominance Streamlined Approach are due by November 12, 2019, with replies due by January 10, 2020. And they added that it will hold a public hearing on Thursday, December 12, 2019, on revenue adequacy issues raised by the RRTF in its report. The RRTF recommended, among other things, that the Board establish a definition of long-term revenue adequacy and that the Board consider providing different remedies for rate cases involving carriers that are long-term revenue adequate.

In the letter to House and Senate leadership, CEI said that going forward, it recommends that Congress exercise close oversight of the STB and its remaining authorities.

“Partial freight rail deregulation by Congress has allowed this industry to become highly efficient in recent decades,” the letter noted. “As a result, America’s private freight railroads provide innumerable benefits to U.S. businesses and the economy.”

The letter cited various concerns regarding the STB’s approach to revenue adequacy that were raised in the 2015 report “Modernizing Freight Rail Regulation for the National Research Council’s Transportation Research Board of the National Academies of Sciences. These concerns, which were submitted to the STB in late October, include:

• Arbitrary calculations: “The proposal would establish rate increase caps based on the relationship of a shipper’s rates to a benchmark calculated using costs derived from the inherently arbitrary Uniform Rail Costing System (URCS) and arbitrary allocations of profits that exceed the cost of capital”;
• Divorced from economic reality: “We are deeply concerned that this approach creates a rate increase constraint that is divorced both from economic reality and from a well-articulated goal that the proposal is designed to achieve”; and 
• Contrary to stated intent: “This proposal could move STB rate regulation in the direction of public utility regulation rather than the protection of captive shippers.”

The letter said this approach runs counter to the intent by Congress to partially deregulate the railroad industry and would also threaten the future health of U.S. railroads, which would risk the massive gains to consumers from reforms enacted over the last four decades.

“We urge you to closely monitor the December 12 and 13 hearing and the two revenue adequacy proceedings at issue to ensure the United States will preserve these societal benefits far into the future,” the letter added.  

When the STB initially issued these proposed rules in September, they were given a sound endorsement by American Chemistry Council President & CEO Cal Dooley.

“We applaud the members of the STB for their thoughtful leadership and commitment to getting our nation’s freight rail policies back on track,” he said in a statement. “Chemical manufacturers across the country have been negatively impacted by excessive freight rail charges and lack of competitive rail service for too long. The Board’s proposed reforms are a positive step toward improving how the STB addresses freight rail problems, and we look forward to working with the commissioners and their staff on modernizing and streamlining outdated regulations.”

And Association of American Railroads President and CEO Ian Jefferies said at the time that AAR is still reviewing the proposed rules, adding that AAR and its members will remain fully engaged with the Board and rail customers about how best to create more efficient processes.

“We continue to urge caution with respect to changes that violate the fundamental legal and economic principles that must bind the Board and warn against unintended consequences,” he said in a statement. “The current regulatory balance has allowed railroads to invest in their networks in order to improve safety and meet the current and future needs of customers. During the December hearing, railroads will reiterate that revenue adequacy reflects the industry’s financial soundness and stability under the current regulatory scheme and must not be a trigger for new government intervention and rate regulation.”