STB report takes a long look at rate review methodologies and processes

The Surface Transportation Board (STB) recently announced that its Rate Reform Task Force completed a report with its recommendations for potential changes to the STB’s rate review processes and methodologies.

Established in January 2018, the STB’s Rate Reform Task Force was tasked with recommending improvements to the STB’s existing rate review processes, as well as to propose new rate review methodologies “that are more attuned to the realities of the current transportation world.”

STB officials said it met with various industry stakeholders, including: shippers and carriers, academics, practitioners, and other U.S.-based parties, in which it said it developed a greater understanding about the challenges involved with the STB’s existing rate review methodologies, coupled with challenges that could augment them, as well as new ideas for methodologies.

The main recommendations of the STB report included:

• offering proposals that the Board could adopt to reduce the cost and complexity of small rate disputes;
• calling for legislation that would permit the Board to require arbitration of small rate disputes;
• suggesting significant simplification of the existing Stand-Alone Cost (SAC) test;
• proposing an entirely new rate methodology called Incumbent Network Cost Analysis that would look at the cost structure of the defendant carrier itself instead of a hypothetical stand-alone carrier;
• suggesting a definition for long-term revenue adequacy and three structural remedies that could be tied to this finding: (1) a rate-increase constraint (limiting carriers from raising rates on certain traffic once long-term revenue adequacy has been achieved); (2) a reversal of the Board’s  long-standing “Bottleneck” decisions so that shippers can direct long-term revenue adequate carriers to deliver movements to a feasible interchange of the shipper’s choosing; and (3) a restoration of certain simplifications in the existing Simplified SAC process;
• increasing the accessibility of the Three-Benchmark comparison approach by, among other things, removing limitations on the aggregation of claims, improving sampling procedures, and instituting page limits on arguments surrounding “other relevant factors;” and
• seeking simplification of the market dominance determination.

“I want to thank the Rate Reform Task Force for its hard work and dedication to this difficult assignment,” said STB Chairman Ann Begeman in a statement. “I asked the Task Force to think boldly and they delivered. I also want to thank the many stakeholders and other interested parties who met with the Task Force during the past year to share their views and ideas. Rate reform is my top priority and the only option not on the table is one where we do nothing.”

Freight railroad observers told LM that this STB report, in some ways is viewed as “consensus,” with the caveat that some of the report’s recommendations, should they come to fruition, being potentially being big deals in the future and things for freight railroads to carefully consider.

Association of American Railroads (AAR) President and CEO Ian Jefferies said that AAR and its member railroads are pleased that the STB’s Rate Reform Task Force has completed its report and has affirmed the economic soundness of the Board’s Stand Alone Cost (SAC) test.

“We continue to be committed to participation in a constructive conversation among freight railroads, shippers and the Board regarding possible improvements to the Board’s rate reasonableness procedures,” he said. “We are concerned, however, that the report lacks balance and objective support for many of its conclusions, mischaracterizes the law, and that many of the proposals in the report would move the Board backward towards discredited methods of heavy-handed rate regulation. As recently as 2015, Congress made clear that the STB’s role is to assist freight railroads in earning revenues adequate for the infrastructure and investment needed for present and future freight demand. The Task Force’s proposals recommending profit regulation through rate caps and forced access as a result of achieving revenue adequacy goes in the opposite direction, and would hobble the railroads’ ability to serve current and future demand for transportation.

Looking ahead, Jefferies said that the AAR and its member railroads will carefully consider report’s proposals and offer constructive suggestions for how the Board can address its legitimate goals for improving its rate case processes and procedures, including procedures for the smallest rate disputes and improving the Stand Alone Cost test, while also complying with the law and preserving the core economic principles on which those analyses are based.

From a rail shipper perspective, Chris Jahn, president and CEO of The Fertilizer Institute, praised the report, calling it good news for rail shippers.

“With rate review cases costing an average of $5 to $10 million and taking 3 to 5 years to litigate, the current process clearly does not work,” said Jahn. “Since 2005, rail rates for anhydrous ammonia, an essential fertilizer used by farmers, have spiked over 200%. Modernizing oversight of rail rates is much needed and long overdue. TFI and our members look forward to working closely with the STB to adopt reforms that better reflect the modern-day rail marketplace. The fertilizer industry thanks Chairman Ann Begeman and the Board for their interest in making the rate review process work for shippers and for railroads. That’s how we are going to keep the U.S. economy on track.”