D.C. Circuit Affirms Surface Transportation Board's Finding of Unreasonable Rates in U.S. Magnesium Three Benchmark Case
January 3, 2011
By:
On December 28, 2010, the United States Court of Appeals for the D.C. Circuit denied the Union Pacific Railroad Company’s petition for review of the STB’s January, 2010 decision awarding U.S. Magnesium LLC $1,000,000 in reparations and future rate relief from the common carrier rates UP established for two movements of USM’s chlorine. USM had challenged the reasonableness of the rates in STB Docket NOR 42114, under the Three Benchmark framework adopted by the Board in Simplified Standards for Rate Cases, STB Ex Pate No. 646 (Sub. No.1). The opinion and order were issued by the court in Case 10-1019, Union Pacific Railroad Company v. Surface Transportation Board. GKG Law, PC was counsel for USM before the STB and as the intervenor in the D.C. Circuit proceeding. Set forth below are several comments and observations on the court’s opinion and the underlying STB decision.
UP’s appeal challenged the Board’s selection of USM’s comparison traffic groups for the Three Benchmark rate analysis. Under the Three Benchmark process, the parties – using data provided by the STB - assemble and submit groups of movements that they believe are most comparable to the movements at issue in the case. These comparison groups are submitted in a “final offer arbitration” format, and the rules provide for simultaneous rounds of evidence and a discretionary technical conference before the Board staff. While the rules don’t require oral argument, the current Board has added it to the process. Under the rules, the Board must accept one group or the other without any modifications. While the STB concluded in its January decision that neither party’s groups were ideal, it determined that USM’s groups provided a better gauge of the proper comparison to the issue movements. This was primarily because UP’s groups had included “re-billed” traffic (traffic UP interchanges with other railroads as part of a longer joint line movement. Rebilled movements are also called Rule 11 movements). More specifically, in addition to being operationally different than the issue single line movements, UP’s rates for rebilled movements had margins that were well in excess of single line rates, indicating that the re-billed movements had much different demand characteristics than the movements at issue, which meant they were not comparable to the issue movements and therefore distorted the overall results.
There are several aspects of the case that bear on future Three Benchmark cases, particularly cases challenging the reasonableness of chlorine rates.
1. Comparison Group Makeup – In the USM case, the Board backed away from its previous acceptance of a comparison group that contained chlorine and other TIH commodities in E. I DuPont de Nemours and Co. v. CSX Transportation, STB Docket 42100 (served June 30, 2008). In that case, which also involved challenges to chlorine rates, the Board accepted a mixed TIH traffic group in part based on the rationale that the operating and transportation demand characteristics of other commodities – primarily anhydrous ammonia – were reasonably comparable to chlorine. While the STB in USM ultimately accepted USM’s mixed TIH groups, it clearly retreated from its prior acceptance of mixed TIH traffic groups in DuPont and indicated it would favor chlorine-only comparison groups in future such cases. While this does not necessarily preclude a mixed TIH comparison group in future Three Benchmark cases challenging chlorine rates, complainants would appear to now have a heavier burden of demonstrating other TIH commodity movements are comparable to chlorine.
2. Rebilled Movements – The USM case was the first Three Benchmark case where rebilled movements were included in a comparison group to test the reasonableness of single line rail rates. The Board rejected UP’s attempt to include rebilled chlorine rates primarily because UP never explained the large discrepancy between the revenues associated with the rebilled movements in its group and the revenues associated with the single line movements in the group. The STB’s determination in the USM case does not necessarily mean that re-billed rates can never be used in a comparison group in a case challenging single line rate, but the overall comparability of such movements to the issue movements would have to be demonstrated.
3. STB Participation in Three Benchmark cases - When the STB proposed the Simplified Standards it included a mandatory technical conference immediately after opening evidence in Three Benchmark cases. This was part of the agency’s overall intent to have a collaborative process of preparing final comparison traffic groups. However, the final version of the rules made technical conferences in Three Benchmark casesdiscretionary, and STB staff did not seek to hold technical conferences in either DuPont or USM. Nevertheless, the Board (and the court) criticized both parties in USM for choosing not to modify their opening comparison group submissions. Complainants in future Three Benchmark cases should weigh the pros and cons of requesting Board staff involvement during the evidentiary process, since proactive STB involvement has not yet occurred despite being a stated purpose of the Three Benchmark rules.
Click to view the Court’s opinion. (UP v. STB) If you have questions, please contact Thomas Wilcox at twilcox@gkglaw.com or (202) 342-5248.