STB Proposes Major Changes in Rail Rate Regulation and Switching Rules
Date: July 26, 2012
On July 25, 2012, the Surface Transportation Board (STB) proposed to significantly modify two key parts of the national rail regulatory framework. First, it proposed to make six modifications to the rules it uses when evaluating the lawfulness of a railroad rate that has been challenged by a shipper. Second, the STB commenced a proceeding to evaluate and invite public comment on a Petition for Rulemaking to fundamentally expand the competitive switching options available to shippers. Both of these proceedings could have far-reaching impacts on the rates that businesses pay for rail service and whether a business has access to a competing railroad for service. The STB is seeking public comment in both cases.
Ex Parte No. 715, Rate Regulation Reforms
Current rail rate challenges can occur under either the Stand-Alone Cost (SAC) method, the Simplified SAC method or the Three-Benchmark Method. In its decision issued in Ex Parte No. 715, the STB proposed the following six modifications to these three methodologies:
- Remove the Simplified SAC $5 million relief cap. This would permit a shipper to pursue a less complex and expensive medium rate case without having any of its rate relief capped. The relief period would remain five years, as opposed to 10 years for a full SAC case. This proposal, however, is linked to the next proposed change. Because that change would increase the robustness of Simplified SAC, the STB has proposed to remove the relief cap.
- Modify the manner in which road property investment (RPI) expenses are calculated in Simplified SAC cases. Currently, RPI calculations in Simplified SAC cases are based upon an average from recent full SAC cases. The STB proposes to remove this simplification, which would require more extensive evidence. It estimates that this will increase the cost of Simplified SAC cases from $1.2 million to $2 million.
- Increase the Three-Benchmark Method relief cap to $2 million from the current $1.2 million. Because this relief cap is tied to the cost of litigating Simplified SAC, the estimated increase in Simplified SAC litigation costs if the preceding modification is adopted would warrant an increase in the Three-Benchmark cap.
- Restrict the ability of shippers to include so-called "cross-over" traffic in full SAC cases. Cross-over traffic is that which the hypothetical railroad created by the shipper in SAC cases would handle for a shorter distance than the defendant railroad actually handles. This is a long-accepted simplification of the SAC methodology without which it would be even more costly and difficult for a shipper to pursue a full SAC case.
- Modify the way in which revenue from cross-over traffic is allocated in SAC and Simplified SAC cases. This is an attempt by the STB to address a purported paradox in the current methodology that has been noted in recent SAC decisions.
- Increase the reparations interest rate. The STB proposes to increase the interest rate applicable to reparations for overpayments made by shippers to railroads from the T-Bill rate (currently 0.10 percent) to the U.S. Prime Rate (currently 3.25 percent).
Parties wishing to participate in this proceeding must notify the STB by August 24, 2012. Opening comments are due October 23, 2012; reply comments are due December 7, 2012; and rebuttal comments are due January 7, 2013.
Ex Parte No. 711, Petition for Rulemaking to Adopt Revised Competitive Switching Rules
The National Industrial Transportation League (NITL) petitioned the STB for a rulemaking in July 2011, asking it to adopt new competitive switching rules that would expand the competitive options available to captive shippers that are sole-served by a Class I railroad. Under the proposal, captive shippers located in terminal areas would be entitled to service from a competing railroad under a switching arrangement if the shipper is located within 30 miles of a working interchange and either the transportation rate charged to the shipper by the incumbent railroad is at least 240 percent of the railroad's variable costs or the incumbent carrier has transported 75 percent or more of the shipper's traffic in the past year. Certain other conditions would also apply.
In its decision, the STB requested the submission of empirical evidence and comments regarding the impact of the NITL's proposal, including:
- The impact on rates and service for shippers that would qualify for this competitive switching.
- The impact on rates and service for captive shippers that would not qualify.
- The impact on the railroad industry, including its financial condition and network efficiencies.
- A method to establish an access price that would be paid to the incumbent railroad.
The STB will make the most recent confidential waybill sample available to participants and will permit reasonably tailored discovery to facilitate development of these empirical analyses. Opening comments are due November 23, 2012. Reply comments are due February 21, 2013.
For More Information
Any business or entity that purchases rail transportation is potentially affected by these proceedings.
Please contact Karyn A. Booth, Sandra L. Brown, or Jeffrey O. Moreno or any member of our Transportation practice group for more information.