STB Releases Report on Rate Case Methodologies Conclusions Reached of Concern to FRCA
On September 22nd, the Surface Transportation Board (STB or Board) issued the long-awaited final report examining rate case methodologies, An Examination of the STB’s Approach to Freight Rail Rate Regulation and Options for Simplification (Report).
The study was commissioned by STB Chairman Daniel R. Elliott to provide an independent assessment of the Board’s stand-alone cost (SAC) rate reasonableness methodology. It was conducted by InterVISTAS Consulting LLC.
According to an STB press release, the scope of the work required InterVISTAS to: 1) look for alternative methodologies to SAC that could be used to reduce the time, complexity, and expense historically involved in rate cases; 2) determine whether SAC is sufficient for large rate cases; and, 3) consider whether the Board’s simplified methodologies were appropriate alternatives to SAC.
According to the report’s executive summary, ongoing interest in the possibility of providing an additional path to potentially lower rates through competitive access motivated a request to expand the study to include an analysis of means for regulating access charges to bottlenecks – railroad segments that are controlled by one carrier with exclusive access to either a shipper or consignee.
The report concluded that:
- The existing stand-alone cost methodology does recognize economies of scope with respect to total costs via the contribution of bridge traffic to the fixed costs of the “stand alone railroad” (SARR).
- Conceptually there could be additional economies of scope effect in reducing the marginal/variable costs of the traffic in dispute. The STB’s guidance on SAC submissions allows and even encourages shippers to consider such economies.
- At least one observer has recommended that the SAC methodology allows shippers to consider economies of scope between the SARR and all the other lines in the carrier’s network, even if in different regions.
“In sum,” the study found: “STB’s Full-SAC has stood the test of time as a maximum rate reasonableness methodology and is justifiable in some cases. However, the less expensive Simplified-SAC and Three-Benchmark methods are also available as options for shippers, and there is reason to believe that shippers can achieve similar results to Full SAC under these less-costly alternatives.”
In a press release, Chairman Elliott said, “I am pleased that the InterVISTAS report is complete, and that the Board and industry stakeholders will have an opportunity to review and discuss its findings on rate reasonableness methodologies,” said Chairman Elliott. “I take very seriously the impact that our rate case proceedings and methodologies have on industry and commerce. I look forward to thoughtful input from the transportation industry and a fruitful exchange of ideas as we forge a way ahead on this complex topic.”
Chairman Elliott said the Board plans to hold an economic roundtable in October and has invited independent economists from InterVISTAS, the Transportation Research Board of the National Academy of Sciences, Georgetown University, and the Board’s economists to engage in a public discussion of the issues and conclusions contained in the InterVISTAS report. Chairman Elliott also hopes to schedule a public hearing after the roundtable for all stakeholders and interested parties to participate in this important discourse. The Board will deliberate on a regulatory path forward concerning large rate cases after consideration of expert and stakeholder views in open and transparent fora.
In a press release, Edward R. Hamberger, president and CEO of the Association of American Railroads (AAR), praised the report, saying, “the findings are clear: shippers have cost-effective alternatives to bring rate complaints to the STB, and changes to the existing regulatory structure – including different rate review approaches or new access regulations – would not benefit the larger transportation system.”
“The InterVISTAS Consulting report rightly credits partial deregulation as the driver of today’s healthier freight rail industry,” concluded Hamberger. “Upending the positive effects that exist today from that landmark change through a series of policy ‘fixes’ is bad policy, particularly at a time when railroads face a permanently changed customer base and uncertain headwinds in the market. These market changes only increase the longstanding demand for intensive capital investment in the freight rail network. We look forward to continued dialogue with the STB and hope the Board will incorporate these findings into its ongoing work.”
FRCA Executive Warner Ann Warner expressed concern about the report. “FRCA had understood that the purpose of this InterVISTAS report, was to evaluate current rate reasonableness methodologies used by the STB, other Federal agencies and foreign entities, along with developing alternatives to the SAC test,” Warner said. “Upon an initial review, the report instead starts by assuming the SAC is a sound and even ideal railroad rate reasonableness methodology, regardless of the costs incurred in utilizing the SAC and its complexity. It does consider and finds some value in other existing alternatives (or ways to simplify the SAC) only insofar as they incorporate SAC principles or approximate SAC results.”
“It is also concerning that the conclusions reached in this InterVISTAS report are vastly contrary to the ones reached by the Transportation Research Board (TRB)/National Academy of Sciences in its 2015 report, Modernizing Freight Rail Regulation, which recommends developing a whole new structure/methodology for rate cases,” Warner added. Read the TRB report.
FRCA will continue reviewing this Report especially in preparation for the anticipated STB-held economic roundtable and follow-on public hearing where the TRB and other economists, FRCA, and particularly freight-rail dependent shippers’ voices, can be heard. The STB announced it will host the economic roundtable discussion on October 25 at its Washington, DC Headquarters.