Publications

Overview

On September 5, 2007, the Surface Transportation Board (STB) issued its much-anticipated decision to modify its procedures for small rail rate cases, in Simplified Standards for Rail Rate Cases, Ex Parte No. 646. The STB originally proposed new rules a year ago. It subsequently received five rounds of public comments and held a public hearing, a process that concluded in February 2007. The STB has adopted its proposed rules, but with some significant changes.

Three Methodologies

The STB retained its proposed three-tiered approach for small, medium and large rail rate cases. The standalone cost (SAC) methodology, which continues to be the Board’s preferred approach, will apply to large rate cases. The STB has adopted, with some modifications, its proposal for a new simplified SAC for medium rate cases. Finally, the Board has retained a modified version of its three-benchmark approach for small cases.

Eligibility Criteria

Although the STB adopted its three-tiered approach, it significantly modified its proposal for determining whether a complaint qualifies as a small, medium or large case. Instead of classifying cases based upon a measure of the maximum value, the Board will permit a complainant to select any of the three approaches. The approach selected, however, will cap the maximum rate relief available over a five-year period. The maximum relief will be $1 million under the three-benchmark approach, $5 million under the simplified SAC approach and unlimited under a full SAC approach. These limits are signif icantly greater than the Board originally had proposed, although still below what most shippers had requested. In addition, the STB abandoned its proposed requirement that complainants aggregate the rate relief obtained for traffic lanes with common origins or destinations to determine when these limits are reached.

Three-Benchmark Standard

The final rule retains the STB’s three-benchmark approach with the following modifications:

• Complainants will be given access to the unmasked confidential waybill sample of the defendant carrier within 10 days of filing a complaint. This was an important change requested by shippers.
• Unadjusted URCS will be used to calculate the variable cost of the issue movement and all movements in the comparison group.
• Non-defendant traffic will be excluded from the comparison group, but contract traffic will be permitted, despite railroad objections.
• A final-offer procedure will be used to select the comparison group.
• Each movement in the comparison group will be adjusted by the ratio of RSAM divided by R/VC>180. A “confidence interval” will be calculated around the estimate of the mean of the adjusted comparison group. A rate will be presumed unreasonable if it is above the confidence interval. The parties may rebut this presumption with evidence of “other relevant factors,” but only if the parties can quantify the impact of these factors.
• The entire process will conclude in a decision by the STB within 240 days, which is 30 days less than originally proposed.

Simplified SAC

The final rule retains the STB’s proposed simplified SAC approach over shipper objections. This approach will determine whether all traffic over the route in question is paying the railroad more than is needed to cover the operating expenses, plus a reasonable rate of return on the replacement value of the facilities utilized. If so, the challenged rate is unreasonable and will be reduced. The STB adopted some modifications to its original proposal that are intended to further reduce the complexity of this approach:

• Reasonableness of the challenged rates will be based on analysis of a single test year.
• The predominant route of the issue movements will be used for the analysis.
• The traffic group will consist of all movements that traveled over the selected route in the test year. No rerouting of traffic will be permitted.
• The analysis will include the existing facilities along the analyzed route, unless the complainant can demonstrate a facility is unnecessary.
• The total operating and equipment expenses will be estimated using URCS.
• The internal cross-subsidy test may be used as an affirmative defense by the railroad.
• The maximum lawful rate will be expressed as a ratio of revenue to variable costs, with variable costs calculated using unadjusted URCS. This maximum R/VC ratio would then be prescribed for a maximum five-year period.
• The STB abandoned its original proposal to require an annual true-up of the simplified SAC analysis over the five-year prescription period.
• The entire process will conclude in a decision by the STB within 510 days, which is 30 days less than originally proposed.

Although the new rules are now in effect, we expect various parties to file petitions for reconsideration of this decision within the next 20 days. Interested persons will be able to reply to those petitions within another 20 days, and the STB is likely to consider those petitions for two to three months before issuing its decision.

For More Information

Please contact Karyn A. Booth, Nicholas J. DiMichael, or Jeffrey O. Moreno or any member of our Transportation practice group for more information.

Disclosure

This advisory may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgement of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel. This document may be considered attorney advertising in some jurisdictions. Some of the design images and photographs in this document may be of actors depicting fictional scenes.