STB Proposes Rail Rate Review Reforms and Announces Revenue Adequacy Hearing

Transportation Update

Date: September 16, 2019

On September 12, 2019, the Surface Transportation Board issued two proposed rules that would streamline its current rail freight rate review process and make it more accessible. It also announced a hearing to explore policy changes concerning revenue adequacy, including changes that would make certain rate-related remedies available to shippers when a carrier becomes long-term revenue adequate.

These steps will help improve the STB’s rate review process and make it more accessible to shippers. Shippers are entitled to reasonable rates where a carrier has market dominance. However, the rate review process has become costly and time-consuming, effectively making rate relief inaccessible for many shippers and placing significant burdens on litigants where relief is viable. To address this, the STB established a Rate Reform Task Force, which issued a report on April 25, 2019 detailing recommended reforms. The STB’s latest actions advance many of those recommendations.

Final Offer Rate Review

The STB proposed a rule establishing a final offer process for challenging the reasonableness of railroad rates in smaller cases. Under this process, the complainant and defendant each would submit a final offer of a reasonable rate under an expedited procedural schedule that results in a decision within 135 days. The STB would decide a case by selecting the best offer, without making any modifications, using principle-based, non-prescriptive criteria that permit the parties to use their preferred rate review methodology or adopt new, innovative methodologies. Any resulting rate relief would be subject to a two-year limit on rate prescriptions and a $4 million monetary cap.

This proposal is intended to provide complainants with lower value rate cases a more accessible rate review option. The STB has recognized that existing rate review options are too time-consuming and expensive to be viable for smaller disputes. This final offer process is designed to remedy this issue by expediting small rate cases and lowering the cost of litigating them. It also is designed to encourage private settlements through an “either/or” final offer selection, which promotes reasonable offers.

The STB has invited interested parties to submit comments on this proposed rule by November 12, 2019, and reply comments by January 10, 2020.

Market Dominance Streamlined Approach

The STB proposed another rule that would streamline the market dominance component of rate cases. To challenge a rate, a shipper must show that the railroad has market dominance (i.e., a lack of effective competition) over the traffic to which the rate applies. Over time, market dominance presentations have grown costly and time-consuming, resulting in a significant burden on rate case litigants. The proposed rule allows a complainant to make a prima facie showing of market dominance over a movement by demonstrating that:

  • The movement has an R/VC ratio of 180% or greater.
  • The movement would exceed 500 highway miles between origin and destination.
  • There is no intramodal competition from other railroads for the movement.
  • There is no barge competition for the movement.
  • The complainant has used trucks for no more than 10% of its movements subject to the rate at issue over a five-year period.
  • The complainant has no practical build-out alternative due to physical, regulatory, financial, or other issues (or combination of issues).

Complainants who are unable to demonstrate these factors could still establish market dominance using the traditional, non-streamlined approach. Also, the railroad would have an opportunity to rebut a prima facie showing. Where a complainant has chosen to use the streamlined approach, a 50-page limit would apply to the parties’ reply and rebuttal submissions. This proposal is intended to reduce the substantial time and expense associated with the market dominance inquiry.

The STB has invited interested parties to submit comments on this proposed rule by November 12, 2019, and reply comments by January 10, 2020.

Revenue Adequacy

The STB announced a December 12, 2019 hearing to receive input on policy changes related to the determination and use of revenue adequacy. The STB has long held that a railroad’s revenue adequacy (i.e., its ability to earn a return on net investment at least equal to the industry’s cost of capital) operates as a constraint on its rates. In its April 25, 2019 report, the Rate Reform Task Force recommended that certain rate-related remedies would become available to shippers when a carrier achieves long-term revenue adequacy. This hearing seeks feedback on the following Task Force recommendations:

  • Long-term revenue adequacy definition. The Task Force recommended that long-term revenue adequacy be based on annual revenue adequacy over at least a five-year period, including a year in which a recession began and a year following a year in which a recession began.
  • Rate increase constraint. The Task Force recommended that long-term revenue-adequate carriers could not increase prices above a percentage rate that would result in differential pricing. This constraint would only be enforceable upon a shipper’s complaint if the carrier is market dominant over the traffic and the traffic is subject to the STB’s jurisdiction.
  • Bottleneck changes. The Task Force recommended that that long-term revenue-adequate carriers would not be entitled to regulatory protections that prevent a captive shipper from requiring the carrier to hand off a shipper’s traffic to another railroad at a shipper-designated location.
  • Simplified Stand-Alone Cost (Simplified-SAC) changes. The Task Force recommended certain simplifications to the Simplified-SAC rate review methodology that would apply when the railroad is long-term revenue adequate.

Persons wishing to speak at the hearing should file a notice of intent to participate no later than October 31, 2019. Written testimony and written submissions must be filed by November 26, 2019.

FOR MORE INFORMATION

For more information, please contact:

Karyn A. Booth
202.263.4108
Karyn.Booth@ThompsonHine.com

Sandra L. Brown
202.263.4101
Sandra.Brown@ThompsonHine.com

Jeff Moreno
202.263.4107
Jeff.Moreno@ThompsonHine.com

David E. Benz
202.263.4116
David.Benz@ThompsonHine.com

Jason D. Tutrone
202.263.4143
Jason.Tutrone@ThompsonHine.com

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment 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.

© 2019 THOMPSON HINE LLP. ALL RIGHTS RESERVED.