Client Alert
STB Announces Hearing on Revenue Adequacy Recommendations of the RRTF
September 19, 2019
On September 12, 2019, the Surface Transportation Board (“Board”) announced it will hold a public hearing on December 12, 2019 in an area of railroad policy that is extremely important to the STB’s regulation of railroad rates and the procedures for challenging them: railroad “revenue adequacy.” How “revenue adequacy” is determined by the Board and factored into rate challenges is critical for rail shippers because the laws governing the regulation of railroads beginning with the Staggers Rail Act of 1980 were designed to encourage the then-failing nation’s Class I railroads to achieve the position where their revenues generally exceeded their cost of capital, i.e., they became “revenue adequate.” Nearly all of the current Class I railroads have achieved this status on a consistent basis. As such, the critical question for the STB and industry stakeholders has been how to modify and perhaps greatly simplify the Board’s regulations and policies for determining the reasonableness of rates charged to captive shippers by revenue adequate railroads who arguably have no basis to continue to differentially price their services.
In April 2014, the Board instituted a proceeding in Docket No. EP 722 and invited public comment regarding (1) the Board’s methodology for determining revenue adequacy pursuant to 49 U.S.C. 10704(a)(2) (2) how revenue adequacy should be factored into judging the reasonableness of rail freight rates, and (3) any changes to its methodologies and rules the Board should consider. A public hearing was held in on these issues in 2015, and there has been no further activity in EP 722.
In January 2018, the Board established its Rate Reform Task Force (“RRTF”) for the purpose of developing recommendations to reform and streamline the Boards rate review process for large cases and how to provide a rate review process for smaller cases. In the public hearing notice, the Board is asking for comment on the following recommendations from the RRTF:
- The definition of “long-term revenue adequacy” for purposes of establishing a defendant railroad’s rates may be tested under procedures that take that revenue adequacy into account: The RRTF has recommended determining long-term revenue adequacy by looking at the annual determinations over “the shortest period of time, not less than five years, that includes both a year in which a recession began and a year that follows a year in which a recession began.”
- Limiting rate increases by long term revenue adequate railroads: The RRTF has recommended the Board consider a rate increase constraint for long-term revenue-adequate carriers, which would identify a point beyond which further application of differential pricing would be unwarranted.
- Not applying the STB’s “Bottleneck Rules” to long term revenue adequate railroads: Generally stated, under the so-called “bottleneck rules” adopted by the Board in the late 1990s, a captive rail shipper may not challenge the reasonableness of a rate charged for service to its captive facility from an interchange point between two railroads if the railroad owning the “bottleneck” segment serving the facility also serves the origin above the interchange point. The rules were essentially adopted to protect the bottleneck railroad’s desire to quote rates only for the entire movement from origin to destination. The RRTF has recommended the Board consider suspending the Board’s “bottleneck rule” protections as applied to long-term revenue-adequate carriers, presumably to require such railroads to supply rates over bottleneck segments which would be subject to challenge under more manageable proceedings.
- Simplified Stand-Alone Cost (Simplified-SAC) changes: For purposes of considering whether a long-term revenue-adequate carrier’s rate is reasonable under the Board’s Simplified-SAC methodology, the RRTF has recommended reinstating the simplification of the Road Property Investment analysis.
The Class I railroads and the Association of American Railroads are expected to vigorously oppose these proposed changes, and they have previously opposed the STB’s conclusions that a determination a railroad is long term revenue adequate should result in limits on the rates the railroad can charge.
The hearing will be held on December 12, 2019 and will begin at 9:30 a.m. in the James E. Webb Memorial Auditorium of the National Aeronautics and Space Administration, located at 300 E. Street S.W., Washington, DC. Persons interested in speaking at the hearing must file a notice of intent to participate no later than October 31, 2019 and submit any written materials by November 26.
Notably, the Board is also accepting written submissions by parties who do not wish to appear and testify, which provides opportunities for many rail shippers to also participate. Such submissions must also be filed by November 26, 2019.
If you have any questions about this issue or desire additional information, please do not hesitate to contact our Rail Transportation Practice: