[Federal Register Volume 79, Number 66 (Monday, April 7, 2014)]
[Proposed Rules]
[Pages 19042-19044]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-07722]
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DEPARTMENT OF TRANSPORTATION
Surface Transportation Board
49 CFR Chapter X
[Docket No. EP 722; Docket No. EP 664 (Sub-No. 2)]
Railroad Revenue Adequacy: Petition of the Western Coal Traffic
League To Institute a Rulemaking Proceeding To Abolish the Use of the
Multi-Stage Discounted Cash Flow Model in Determining the Railroad
Industry's Cost of Equity Capital
AGENCY: Surface Transportation Board, DOT.
ACTION: Notice.
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SUMMARY: The Surface Transportation Board will receive comments in
Docket No. EP 722 to explore the Board's methodology for determining
railroad revenue adequacy, as well as the revenue adequacy component
used in judging the reasonableness of rail freight rates. The Board
will also receive comments in Docket No. 664 (Sub-No. 2) on how it
calculates the railroad industry's cost of equity capital. The Board is
seeking written comments on these matters, as described below, and
later will hold a hearing to address these issues.
DATES: Comments in both dockets are due on July 1, 2014. Reply comments
are due on August 15, 2014. Following receipt of comments, the Board
will schedule a public hearing at the Board's headquarters located at
395 E Street SW., Washington, DC, to allow participants to appear and
discuss the submissions that were made. The Board will provide more
details regarding the hearing in a future decision.
ADDRESSES: All filings may be submitted either via the Board's e-filing
format or in the traditional paper format. Any person using e-filing
should attach a document and otherwise comply with the instructions at
the ``E-FILING'' link on the Board's ``www.stb.dot.gov'' Web site. Any
person submitting a filing in the traditional paper format should send
an original and 10 copies of the filing to: Surface Transportation
Board, Attn: Docket No. [EP 722 or EP 664 (Sub-No. 2), as the case may
be], 395 E Street SW., Washington, DC 20423-0001.
Copies of written submissions will be posted to the Board's Web
site and will be available for viewing and self-copying in the Board's
Public Docket Room, Suite 131. Copies of the submissions will also be
available (for a fee) by contacting the Board's Chief Records Officer
at (202) 245-0236 or 395 E Street SW., Washington, DC 20423-0001.
FOR FURTHER INFORMATION CONTACT: For EP 722: Scott Zimmerman at (202)
245-0386; for EP 664 (Sub-No. 2): Amy Ziehm at (202) 245-0391.
Assistance for the hearing impaired is available through the Federal
Information Relay Service (FIRS) at (800) 877-8339.
SUPPLEMENTARY INFORMATION: In Section 205 of the Railroad
Revitalization and Regulatory Reform Act of 1976, Public Law 94-210, 90
Stat. 127, Congress mandated that the Board's predecessor, the
Interstate Commerce Commission (ICC), promulgate--and thereafter revise
and maintain--standards and procedures for establishing railroad
revenue adequacy. Four years later, in the Staggers Rail Act of 1980
(Staggers), Public Law 96-448, 94 Stat. 1895, the agency's rail
transportation policy was revised to include, among other things,
``promot[ing] a safe and efficient rail transportation system by
allowing rail carriers to earn adequate revenues, as determined by the
[agency].'' Additionally, Section 205 of Staggers required the ICC to
begin determining annually ``which rail carriers are earning adequate
revenues.'' To implement this requirement, the ICC began a proceeding
to adopt standards for determining railroad revenue adequacy. In that
proceeding, the ICC concluded that ``the only revenue adequacy standard
consistent with the requirements of [Staggers] is one that uses a rate
of return equal to the cost of capital.'' Standards for R.R. Revenue
Adequacy, 364 I.C.C. 803, 811 (1981), aff'd sub nom. Bessemer & Lake
Erie R.R. v. ICC, 691 F.2d 1104 (3d Cir. 1982).
These statutory requirements, now codified at 49 U.S.C. 10704(a)(2)
and (3),\1\ still govern, and the Board (like the ICC before it)
annually determines
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which rail carriers are revenue adequate by comparing a carrier's rate
of return with the cost of capital.\2\ Since the issuance of Standards
for Railroad Revenue Adequacy in 1981, adjustments have been made to
the agency's methodology in order to improve the agency's ability to
determine accurately revenue adequacy. See, e.g., Use of a Multi-Stage
Discounted Cash Flow Model in Determining the R.R. Industry's Cost of
Capital, EP 664 (Sub-No. 1) (STB served Jan. 28, 2009); R.R. Revenue
Adequacy--1988 Determination, 6 I.C.C.2d 933 (1990), aff'd sub nom.
Ass'n of Amer. R.Rs. v. ICC, 978 F.2d 737 (D.C. Cir. 1992);
Supplemental Reporting of Consol. Info. for Revenue Adequacy Purposes,
5 I.C.C.2d 65 (1988); Standards for R.R. Revenue Adequacy, 3 I.C.C.2d
261 (1986), aff'd sub nom. Consol. Rail Corp. v. United States, 855
F.2d 78 (3d Cir. 1988).
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\1\ Section 10704(a) of title 49 states with respect to adequate
revenues:
* * * * *
(2) The Board shall maintain and revise as necessary standards
and procedures for establishing revenue levels for rail carriers * *
* that are adequate, under honest, economical, and efficient
management, to cover total operating expenses, including
depreciation and obsolescence, plus a reasonable and economic profit
or return (or both) on capital employed in the business.* * *
Revenue levels established under this paragraph should--
(A) provide a flow of net income plus depreciation adequate to
support prudent capital outlays, assure the repayment of a
reasonable level of debt, permit the raising of needed equity
capital, and cover the effects of inflation; and
(B) attract and retain capital in amounts adequate to provide a
sound transportation system in the United States.
(3) On the basis of the standards and procedures described in
paragraph (2), the Board shall annually determine which rail
carriers are earning adequate revenues.
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* * * * *
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\2\ The Board annually publishes the annual rates of return of
each Class I railroad, as well as the cost of capital experienced by
the rail industry, in sub-numbered proceedings of Dockets No. EP 552
and EP 558, respectively. See, e.g., R.R. Revenue Adequacy--2012
Determination, EP 552 (Sub-No. 17) (STB served Oct. 17, 2013)
(summarizing Class I rail carriers' return on investment in Appendix
A); R.R. Cost of Capital--2012, EP 558 (Sub-No. 16) (STB served Aug.
30, 2013) (finding industry cost of capital to be 11.12%).
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The concept of revenue adequacy is also a component of the Board's
standard for judging the reasonableness of rail freight rates, as set
forth in Coal Rate Guidelines, Nationwide (Coal Rate Guidelines), 1
I.C.C.2d 520 (1985), aff'd sub nom. Consol. Rail Corp. v. United
States, 812 F.2d 1444 (3d Cir. 1987).\3\ Coal Rate Guidelines
established a set of pricing principles known as ``constrained market
pricing,'' which imposes three main constraints on the extent to which
a railroad may charge differentially higher rates on captive traffic:
Revenue adequacy, management efficiency, and stand-alone cost. Id. at
534.\4\ With respect to the revenue adequacy constraint, the ICC
observed
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\3\ Smaller rate cases can be evaluated under the Three-
Benchmark methodology, which includes a benchmark (Revenue Shortfall
Allocation Method) that is tied to the Board's annual revenue
adequacy calculations. See Simplified Standards for Rail Rate Cases,
EP 646 (Sub-No. 1), slip op. at 5 (STB served Mar. 19, 2008).
\4\ A fourth constraint--phasing--can be used to limit the
introduction of otherwise-permissible rate increases when necessary
for the greater public good. Coal Rate Guidelines, 1 I.C.C.2d at
546-47.
[The] revenue adequacy standard represents a reasonable level of
profitability for a healthy carrier. It fairly rewards the rail
company's investors and assures shippers that the carrier will be
able to meet their service needs for the long term. Carriers do not
need greater revenues than this standard permits, and we believe
that, in a regulated setting, they are not entitled to any higher
revenues. Therefore, the logical first constraint on a carrier's
pricing is that its rates not be designed to earn greater revenues
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than needed to achieve and maintain this ``revenue adequacy'' level.
Id. at 535.
As the Board has explained, the revenue adequacy constraint
``employ[s] a `top-down' approach, examining the incumbent carrier's
existing operations.'' W. Texas Utils. Co. v. Burlington N. R.R., 1
S.T.B. 638, 655 (1996). ``If the carrier is revenue adequate (earning
sufficient funds to cover its costs and provide a fair return on its
investment), or would be revenue adequate after eliminating unnecessary
costs from specifically identified inefficiencies in its operations, a
complaining shipper may be entitled to rate relief.'' Id.
The Board has not yet had the opportunity to address how the
revenue adequacy constraint would work in practice in large rail rate
cases. Nearly all large rate reasonableness cases to date have relied
upon the stand-alone cost constraint. The few revenue adequacy-based
complaints have either settled or involved other transportation modes.
See S. Miss. Elec. Power Ass'n v. Norfolk S. Ry., NOR 42128 (STB served
Aug. 31, 2011) (proceeding in which revenue adequacy constraint raised
in complaint was subsequently settled); CF Indus., Inc. v. Koch
Pipeline Co., 4 S.T.B. 637 (2000) (finding rate increases for pipeline
transportation unreasonable under 49 U.S.C. 15501 using revenue
adequacy constraint), aff'd sub nom. CF Indus., Inc. v. STB, 255 F.3d
816 (D.C. Cir. 2001).
Both the structure of the rail industry and the flow of commerce
have continued to change substantially over the past decade. In the
last several years, questions have been raised regarding the agency's
methodology for determining revenue adequacy and whether it
appropriately measures the financial condition of the railroad
industry. These questions cover a range of issues, such as the
viability of the Board's current methodology and possible alternative
methodologies, what it means to be revenue adequate and how such a
finding should impact the railroads, and how to apply the revenue
adequacy constraint in regulating rates, among many others.
At this point, the Board believes an examination of revenue
adequacy is in order. The Board will now institute a proceeding to
address the issues discussed above. This proceeding is intended as a
public forum to discuss the Board's methodology in fulfilling its
statutory mandate to determine railroad revenue adequacy, as well as
the revenue adequacy component of the Board's standard for judging the
reasonableness of rail freight rates, with a view to what, if any,
changes the Board can and should consider. The Board is providing an
opportunity for any person or entity that wishes to participate to file
written prepared comments. Subsequently, the Board will hold an oral
hearing at the agency to explore the issues in more depth.
The Board also recently instituted a rulemaking proceeding in
Docket No. EP 664 (Sub-No. 2) to address how it determines the railroad
industry's cost of equity capital.\5\ The cost of capital calculation
is a component of the methodology that the Board uses to determine
revenue adequacy, and the Board therefore stated that it would
coordinate the processing of these two proceedings. Accordingly, the
Board now invites any person or entity who wishes to participate in EP
664 (Sub-No. 2) to submit written comments addressing the cost of
capital calculation in that proceeding, pursuant to the schedule set
forth below.
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\5\ Petition of the W. Coal Traffic League to Institute a
Rulemaking Proceeding to Abolish the Use of the Multi-Stage
Discounted Cash Flow Model in Determining the R.R. Industry's Cost
of Equity Capital, EP 664 (Sub-No. 2) (STB served Dec. 20, 2013).
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Decisions and notices of the Board, including this notice, are
available on the Board's Web site at ``www.stb.dot.gov.''
This action will not significantly affect either the quality of the
human environment or the conservation of energy resources.
It is ordered:
1. Comments in both dockets are due on July 1, 2014. Reply comments
are due on August 15, 2014.
2. A public hearing will be announced in a subsequent Board
decision.
3. This decision is effective on the date of service.
Decided: April 1, 2014.
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By the Board, Rachel D. Campbell, Director, Office of
Proceedings.
Derrick A. Gardner,
Clearance Clerk.
[FR Doc. 2014-07722 Filed 4-4-14; 8:45 am]
BILLING CODE 4915-01-P