New government report fails to clear the air over railroad rate disputes

Three options for rate testing include a ‘full’ test that costs shippers millions of dollars

Train Magazine
By Bill Stephens | September 27, 2016
WASHINGTON, D.C. — The complex, expensive, and often cumbersome way that federal regulators determine whether railroad rates are reasonable does not need an overhaul.

That’s the conclusion of an independent analysis of the three methods the Surface Transportation Board uses to determine freight rate cases. The 181-page report, released last week, generally supports the existing regulatory framework for settling rate disputes between shippers and railroads.

The rail industry, wary of additional regulation, applauded the conclusions of the study by InterVistas Consulting. Shipper groups, which have been seeking a simpler way to challenge rail rates, were disappointed with the report and its findings.

The STB uses three main methods to test rail rates:

The Stand-Alone Cost Test, a highly complex, multi-million-dollar process that requires shippers to determine the lowest cost at which an efficient, hypothetical railroad could provide service.
The Three Benchmark Procedure, a seldom-used method that simplifies the cost and rate analysis.  
The Simplified Stand-Alone Cost Test, which reduces shippers’ litigation costs by streamlining the underlying principles of the full stand-alone cost test.

InterVistas concluded that the system, while not without its flaws, is a reasonable way for shippers to challenge rail rates.

“In sum, STB’s Full-[stand alone test] has stood the test of time as a maximum rate reasonableness methodology and is justifiable in some cases,” the report says. “However, the less expensive Simplified-[test] 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 [test] under these less-costly alternatives.”

Ann Warner, executive director of the Freight Rail Customer Alliance, a lobby group for captive shippers, says the InterVistas report missed the mark.

The alliance “… had understood that the purpose of this report was to evaluate current rate reasonableness methodologies used by the STB, other federal agencies and foreign entities, along with developing alternatives to the Stand-Alone Cost test,” Warner wrote in an email to Trains News Wire. “Upon an initial review, the report instead starts by assuming the [full test] is a sound and even ideal railroad rate reasonableness methodology, regardless of the costs incurred in utilizing the [test] and its complexity.”

The InterVistas report, Warner points out, reached the opposite conclusions of a study released last year by the Transportation Research Board and National Academy of Sciences. That report recommended tossing out the existing rate review framework and starting over with a new method of reviewing rate cases.

The Association of American Railroads said the InterVistas report underscores the importance of not tinkering with a system that works.

“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,” AAR President and CEO Edward R. Hamberger says.

The AAR warned that rate caps, or other ways of limiting railroads’ ability to earn adequate revenues, would harm the freight rail network and the shippers who depend upon it.

Shippers and the rail industry welcomed the opportunity to air their views at an economic roundtable the STB has scheduled for October.

“I take very seriously the impact that our rate case proceedings and methodologies have on industry and commerce,” STB Chairman Daniel R. Elliott III said in a prepared statement. “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.”

The National Industrial Transportation League, the largest shippers’ group, did not respond to Trains News Wire’s requests for comment.

The report is available online.