STB Rulemaking Could Reduce Captive Rail Shipper Protections
Date: January 05, 2021
On December 30, 2020, the Surface Transportation Board (STB) issued a decision opening a rulemaking proceeding to consider proposals by three Class I railroads – Canadian National Railway, Norfolk Southern Railway and Union Pacific Railroad (“Joint Carriers”) – that would change how it determines whether a railroad is revenue adequate. If adopted, the proposals could further insulate railroads’ ability to charge captive shippers higher rates than they charge shippers with competitive transportation options. They also could reduce the availability of competitive access remedies, under which a railroad would be required to deliver its captive traffic to a competing railroad at an interchange that reduces the length of captivity. Opening comments on the proposals and related issues are due March 1; replies are due March 31.
Congress has directed the STB to assist railroads in becoming revenue adequate (49 U.S.C. § 10704(a)(2)). A railroad is revenue adequate if it achieves a return on net investment (ROI) equal to at least the current rail industry cost of capital. The STB determines both the rail industry cost of capital and the revenue adequacy of each Class I railroad annually. In the latest revenue adequacy determination, five of the nation’s seven Class I railroads were revenue adequate. BNSF Railway, Norfolk Southern Railway and Union Pacific Railroad have been revenue adequate nearly every year since 2011.
Under the STB’s rate regulations, revenue adequacy limits a carrier’s pricing power over its captive traffic. Generally, a carrier is entitled to charge captive traffic differentially higher rates than competitive traffic only to the extent the differential is necessary for the carrier to achieve revenue adequacy.
Revenue adequacy also impacts the STB’s use of competitive access remedies. Because the STB must assist railroads in achieving revenue adequacy, revenue inadequacy would weigh against enhancing competition that could reduce rates.
The Joint Carriers have proposed two key changes to how the STB determines revenue adequacy. First, a railroad’s ROI would have to exceed the rail industry’s ROI by more than the median amount by which S&P 500 firms exceed their industry’s cost of capital. According to the Joint Carriers, this is an appropriate measure of revenue adequacy because railroads primarily compete with S&P 500 firms for capital. Second, the Joint Carriers would change how the STB treats accumulated deferred taxes when calculating a railroad’s ROI. If adopted, these proposals would lead to determinations that no Class I railroad is currently revenue adequate, or even close.
Although the STB is not currently proposing a specific rule, it seeks comments on issues raised by the Joint Carriers’ proposals and on several specific questions concerning the proposals.
FOR MORE INFORMATION
For more information, please contact:
Karyn A. Booth
Sandra L. Brown
David E. Benz
Jason D. Tutrone
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