Freight Rail Customer Alliance Responds to Association of American Railroads

In an ongoing series of paid content articles, guest editorials, and “third party submissions” in traditional and digital media outlets around the country, along with lobbying efforts on Capitol Hill, the Association of American Railroads (AAR) warns that pending regulatory action could hurt the nation’s economy.

The freight railroad lobby is targeting pending Surface Transportation Board (STB) rulemakings on competitive switching, railroad revenue adequacy, and commodity exemptions.  The STB is undertaking these and other proceedings to help it meet one of its primary missions: to resolve railroad rate and service disputes.  The STB has longstanding statutory authority to undertake these proceedings – many of which have been stalled before the STB for years due in large part to railroad opposition and shortcomings in how the STB functions.

In December 2015, the U.S. Congress passed and the President signed into law the Surface Transportation Board Reauthorization Act of 2015 (Act).  The new law, with strong bi-partisan support, is already achieving its goal of improving how the STB operates:  fostering long needed process reforms allowing the STB to function more efficiently including, acting on pending proceedings and meeting its various new responsibilities required under the Act.   

The following discusses the three STB proceedings in further detail and why they are important to both freight rail carriers and shippers, especially those freight rail-dependent shippers.  Properly structured, regulations developed with stakeholder input benefits the economy by driving competition. This nation has seen a decline in rail competition since Congress partially deregulated the railroad industry with the Staggers Rail Act of 1980.  Over the past 35 years, the number of major or Class I freight railroads has declined from 40 to seven, with four essentially operating like regional duopolies controlling 90 percent of all traffic.

These STB efforts are not “re-regulation” as the AAR wants us to believe.  Rather, it is the STB simply doing its job. 


The Competitive Switching Debate

The Surface Transportation Board (STB) is currently considering a proposal that would allow shippers with access to only a single rail line to request that their freight be moved by a nearby rail line.  On July 27th, the STB announced a notice of proposed rulemaking (NPRM) to determine the pros and cons of requiring railroads to provide requested switching arrangements (Docket No. EP 711 (Sub No.-1), Reciprocal Switching).

While the issue of competitive switching has been around for some time, the current rulemaking is the result of a 2011 petition filed before the STB by the National Industrial Transportation League (NITL) and other shipper groups, including FRCA’s predecessor organization.

The NITL petition asked the STB to issue new rules allowing a captive rail shipper to “switch” its traffic to a nearby rail carrier where a shipper must show:  1) captivity; 2) lack of inter/intra-modal competition (RVC ratio of 240% or more or RR handles 75% of all traffic); 3) and reasonable distance to an interchange (30 miles).  A carrier could avoid switching if unsafe, infeasible or harmful to existing service.

In its July 27th decision, the STB granted in part the NITL petition by initiating this NPRM for new rules on competitive switching arrangements and remedies.  The STB has proposed two possible paths for shippers to obtain a competitive switching remedy:

  1. Switching must be practicable and in the public interest, or;
  2. Be necessary to provide competitive rail service.

The Issue
Since the U.S. Congress passed the Staggers Rail Act of 1980 (partially de-regulating the freight rail industry), the number of major or Class I freight railroads has declined from 40 to seven, with four essentially operating like regional duopolies controlling 90 percent of all traffic.

While Congress included the concept of reciprocal shipping in the Staggers Act, the Interstate Commerce Commission (ICC and predecessor agency to the STB) actually made it more difficult for shippers to obtain competitive rail service. 

NITL asserts in its petition, that STB’s longstanding competitive shipping rules and processes has been rendered meaningless.  No shipper has attempted to obtain a reciprocal switching order for more than 15 years because of the burden of proving abusive service under these STB  procedures and the changed market conditions for both railroads and shippers during the past 30 years.

The STB has the statutory authority – again dating back to the Staggers Act – to modify its rules.  No additional congressional action is necessary.  As such, the recently enacted STB Reauthorization Act of 2015, P.L. 114-110, is silent on this competitive access issue.

The Railroad Industry View
The Association of American Railroads (AAR) refers to competitive switching as “forced” access.  AAR believes that it would undo the efficiencies and benefits recognized by all rail customers under today’s routing operations for the benefit of a few shippers would hurt the overwhelming majority of businesses that rely on rail.  According to AAR, competitive switching is an anti-competition move that will slow rail traffic, increase shipment delivery time, and result in higher costs to both shippers and consumers. Since the U.S. Congress did not include this matter in the STB Reauthorization Act of 2015, there is no Congressional support for the STB to undertake this NRPM.

The Transportation Research Board’s View
On June 10, 2015 the National Research Council’s Transportation Research Board (TRB) of the National Academy of Sciences released a report confirming what freight rail shippers have long asserted: 35 years after passage of the Staggers Rail Act and 20 years after passage of the ICC Termination Act (which created the STB), economic regulation of the nation’s freight railroads must be modernized to take into account the market changes for both railroads and shippers.

Citing Canada’s requirement that railroads provide reciprocal switching regardless of rate levels, the TRB concluded that one possible starting point for assessing reciprocal switching on a more limited basis is to allow its use as an optional remedy for rates that have been ruled unreasonable and thus perhaps as an alternative to a prescribed rate.

FRCA’s View
FRCA supports competitive access and was, through its predecessor organization, a co-signer of the 201l NITL proposal.

Next Steps
Comments are due October 26th.    Reply Comments are due January 13, 2017.  Requests for Meetings with Board Members are due January 13, 2017.  Meetings with Board Members will occur between January 30 and February 17, 2017.

Refer to related story, FRCA Participation in STB Proceedings, for additional information.


The Revenue Adequacy Debate

The STB is considering comments exploring its methodology for determining railroad revenue adequacy, as well as the revenue adequacy component used in judging the reasonableness of rail freight rates via two pending proceedings:

  • Docket No. EP 722, Railroad Revenue Adequacy
  • Docket No. EP 664 (Sub-No. 2), Petition of the Western Coal Traffic League to Institute a Rulemaking Proceeding to Abolish the Use of the Multi-Stage Discontinued Cash Flow Mode in Determining the Railroad Industry’s Cost of Equity Capital.

The Issue
The Railroad Revitalization and Regulatory Reform Act of 1976 (separating freight rail from passenger rail) mandated that the STB’s predecessor, the Interstate Commerce Commission (ICC), promulgate and thereafter, revise and maintain standards and procedures for establishing railroad revenue adequacy.

Later the Staggers Act (which partially de-regulated the freight rail industry), revised the nation’s freight rail transportation policy to promote a safe and efficient rail transportation system by allowing freight rail carriers to earn adequate revenues, as determined by the agency.  Moreover, the Staggers Act required the ICC to begin determining annually which rail carriers are earning adequate revenues.  To implement this requirement, the ICC began a proceeding to adopt standards for determining railroad revenue adequacy.  In that proceeding, the ICC concluded that “the only revenue adequacy standard consistent with the requirements of [Staggers] is one that uses a rate of return equal to the cost of capital.” 

These U.S. Congressional mandates still govern the STB (like the ICC before it) when annually determining which rail carriers are revenue adequate by comparing a carrier’s rate of return with the cost of capital.  Over the years, the ICC/STB has made adjustments to the methodologies used in determining revenue adequacy.

The ICC declared that once a railroad has become revenue adequate over a period of time, shippers should be able to challenge the railroad’s rates on the ground that the railroad is financially healthy, thus, not needing to charge such high rates.  However, there is no consistency in how STB (or the previous ICC) calculates revenue adequacy and the methodologies used today do not necessarily reflect today’s market conditions.  Moreover, neither the ICC nor the STB have fully defined the process for shippers when challenging a rate on this basis.

When reviewing just the past few years alone, STB determined that four of the seven Class I carriers were revenue adequate while two others fell shy of meeting the determination in 2015 and 2014.  In 2013, five of the Class I carriers were deemed “revenue adequate.”

The concept of revenue adequacy is also a component of the STB’s standard for judging the reasonableness of rail freight rates, as set forth in the Coal Rate Guidelines.

The Board announced that the Revenue Adequacy Docket EP 722 proceeding would be initiated in 2013 [included in the STB announcement that Docket No. EP 664 (Sub-No.2) would be initiated].

The Railroad Industry View
The AAR asserts that efforts to revise methodologies used in determining revenue adequacy would result in capping rates that railroads charge shippers based on their overall level of revenue, a step that would amount to government price control.

It should be noted that in 2008 the AAR submitted a petition to the STB requesting that the Board use replacement cost methodologies when evaluating revenue adequacy (Docket No. EP 679, Replacement Cost).

The Transportation Research Board’s View
On June 10, 2015 the TRB released a report recommending an end to the annual determinations of railroad revenue adequacy. This recommendation includes that the U.S. Congress should repeal the 180 percent revenue-to-variable-cost formula and require the U.S. DOT to develop, test, and refine competitive rate benchmarking methods that can replace the Uniform Rail Costing System (URCS) in screening rates for eligibility to be challenged before the STB.

FRCA’s View
One of the goals of the Staggers Act was to restore financial stability to the U.S. rail system.  By all accounts, this goal has been achieved, as demonstrated by the industry’s continued high levels of capital investment and shareholder returns including dividends, buybacks, and stock appreciation.

FRCA and its predecessor organization have long been concerned that the STB’s annual determinations of “revenue adequacy” for Class I carriers does not reflect the true health of the industry and its members.

FRCA believe that the carriers’ falsely perceived lack of adequate revenues has served to shield the railroads’ exercise of their monopoly pricing power from STB scrutiny and has prevented shippers from obtaining appropriate relief.  For that reason, FRCA continues to support elimination of the statutory requirement for the annual determination.

Further, FRCA strongly opposes railroad efforts to evaluate revenue adequacy on the basis of replacement costs.  The replacement cost issue has been examined repeatedly, including by the Railroad Accounting Principles Board, and the use of replacement cost methodologies has always soundly been rejected.  Given the financial strength of the railroads today, including publicly available information indicating that the railroad industry is revenue adequate, there is no plausible basis for the STB to adopt a replacement cost approach to evaluate revenue adequacy or limit the availability of rate relief.

Next Steps
The STB requested written Comments and Reply Comments in Docket Nos. EP 722, and EP 664 during July and August 2014, respectfully.  The STB held a public hearing on both of these Dockets the following year in July 2015. Further action on Docket No. EP 722 is not expected until June 2017.

Refer to related story, FRCA Participation in STB Proceedings, for additional information.


The Commodity Exemption Debate

The STB is currently reviewing allowing various commodities to seek rate and/or service relief from the STB [Docket No. EP 704 (Sub-No. 1), Review of Commodity, Boxcar, and TOFC (Trailer on Flat Car)/COFC (Container on Flat Car) Exemptions]

On March 23rd the STB issued its notice of proposed rulemaking (NPRM) to revoke the existing class exemptions under 49 C.F.R. Part 1039 for (1) crushed or broken stone or rip rap; (2) hydraulic cement; and (3) coke produced from coal, primary iron or steel products, and iron or steel scrap, wastes or tailings.  In this NPRM, the STB also sought public comment regarding the possible revocation of other commodity class exemptions.

The Issue
As part of the Railroad Revitalization and Regulatory Reform Act of 1976 (separating passenger rail from freight rail), the U.S. Congress gave the ICC, STB’s predecessor agency, broad authority to exempt rail carriers from regulation when such regulation was not needed to protect against abuses of market power.  Shippers of exempt commodities would not be allowed to see rate or service relief from the ICC/STB.

The ICC first exercised its exemption authority in 1979 by categorically exempting the transportation of certain fresh fruits and vegetables from its regulations [Rail General Exemption Authority—Fresh Fruits & Vegetables, 361 I.C.C. 211 (1979)].

The U.S. Congress expanded the statutory exemption standard in the Staggers Act (partially de-regulating the freight railroad industry), mandating that the agency shall exempt a person, class of persons, or a transaction or service when it finds that the application of this statutory requirement is not necessary to protect shippers from the abuse of market power.

The Staggers Act also gave the ICC authority to revoke an exemption (partially or completely) if the agency later determines that the exemption is not needed.  In other words, the Staggers Act anticipated that market conditions could change over time, resulting in commodities being adversely affected by railroad market dominance.  Therefore, according to Staggers, the shippers of those commodities should be allowed to seek rate and or service relief from the ICC (later the STB).

The ICC’s exemption decisions were instrumental in the U.S. rail system’s transition from a heavily regulated, financially weak component of the economy into a mature, healthy industry that operates with limited economic oversight.  However, more than 35 years have passed since many of the commodity exemptions were adopted, and there have been many changes in the financial health of railroads and exempt commodity shippers.

The STB began reviewing this set of exemptions, Docket No. EP 704 (Sub-No. 1), in 2010.  The Board then held a public hearing in 2011 on this issue after receiving informal inquiries questioning the relevance or necessity of some of the existing commodity exemptions.  In addition to the 21 individuals who testified, the STB received numerous written comments from parties representing a diverse group of stakeholders including railroads, shippers, and the U.S. Department of Transportation.  The STB encouraged all hearing participants to address the: effectiveness of the exemptions in the marketplace; whether the rationale behind any of these exemptions should be revisited; and, whether the exemptions should be subject to periodic review. The STB considered these comments when developing this NPRM.

The STB has the statutory authority – again dating back to the Staggers Act – to modify its rules.  No additional congressional action is necessary.  As such, the recently enacted STB Reauthorization Act of 2015, P.L. 114-110, is silent on this commodity exemption issue.

The Railroad Industry View
The AAR asserts that since the agency previously determined that these commodities are subject to competition and that the STB proposed this major reversal without any evidence that market conditions have changed adversely.  As such, the AAR asserts that this is another government step towards “re-regulation” where the government would be encroaching on the railroads’ operating decisions.  Since the U.S. Congress did not include it in the STB Reauthorization Act of 2015, there is no Congressional support for the STB to undertake this NPRM.

FRCA’s View
FRCA believes that the exemptions are no longer needed and have become counterproductive especially given the market changes for both railroads and shippers. FRCA also advocates, that all freight rail shippers regardless of commodity, should be able to seek rate and/or service relief before the STB.  The STB should give meaningful consideration to reviewing, reducing, or eliminating most or all of its other existing commodity, boxcar, and TOFC/COFC exemptions.

Next Steps
The STB sought comments – technical data and policy perspectives – from industry stakeholders which were due July 26th. The Reply Comments were due August 26th.

Refer to related story, FRCA Participation in STB Proceedings, for additional information.

View other articles in the October 2016 Newsletter