[Federal Register Volume 81, Number 173 (Wednesday, September 7, 2016)]
[Proposed Rules]
[Pages 61647-61658]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21305]
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SURFACE TRANSPORTATION BOARD
49 CFR Chapter X
[Docket No. EP 665 (Sub-No. 1); Docket No. EP 665 (Sub-No. 2)]
Rail Transportation of Grain, Rate Regulation Review; Expanding
Access to Rate Relief
AGENCY: Surface Transportation Board.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: The Surface Transportation Board (Board) is seeking comments
and suggestions through this Advance Notice of Proposed Rulemaking
(ANPR) regarding the Board's effort to develop a new rate
reasonableness methodology for use in very small disputes, which would
be available to shippers of all commodities.
DATES: Comments are due by November 14, 2016. Reply comments are due by
December 19, 2016.
ADDRESSES: Comments and replies 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 Web site, at
``http://www.stb.dot.gov.'' Any person submitting a filing in the
traditional paper format should send an original and 10 copies to:
Surface Transportation Board, Attn: Docket No. EP 665 (Sub-No. 2), 395
E Street SW., Washington, DC 20423-0001.
Copies of written comments and replies will be posted to the
Board's Web site and will be available for viewing and self-copying at
the Board's Public Docket Room, Room 131. Copies will also be available
(for a fee) by contacting the Board's Chief Records Officer at (202)
245-0238 or 395 E Street SW., Washington, DC 20423-0001.
FOR FURTHER INFORMATION CONTACT: Allison Davis at (202) 245-0378.
Assistance for the hearing impaired is available through the Federal
Information Relay Service (FIRS) at (800) 877-8339.
SUPPLEMENTARY INFORMATION: In the Interstate Commerce Act, Congress
charged the Board with protecting the public from unreasonable pricing
by freight railroads, while fostering a sound, safe, and efficient rail
transportation system by allowing carriers to earn adequate revenues.
See 49 U.S.C. 10101. In the Staggers Rail Act of 1980, Public Law 96-
448, 94 Stat. 1895, and subsequent legislation, including the ICC
Termination Act of 1995 (ICCTA), Public Law 104-88, 109 Stat. 803,
Congress established a careful balance between these two important yet
conflicting goals. On the one hand, Congress permitted differential
pricing and removed regulatory controls over railroad pricing for
traffic with effective competition so that carriers would have greater
ability to earn the revenues necessary to attract capital and reinvest
in the network. On the other hand, Congress made clear that railroad
rates for traffic without effective competition must be reasonable (see
49 U.S.C. 10702, 10707), and that shippers of grain, in particular, are
entitled to some additional protections (see, e.g., 49 U.S.C. 10709(g)
(providing that shippers may file a complaint with the Board asking it
to review agricultural contracts on certain grounds)).
By decision served in Rail Transportation of Grain, Rate Regulation
Review, Docket No. EP 665 (Sub-No. 1) on December 12, 2013, the Board
invited public comment on how to ensure that the Board's existing rate
complaint procedures are accessible to grain shippers and provide
effective protection against unreasonable freight rail transportation
rates, including proposals for modifying existing procedures or new
alternative rate relief methodologies. The Board received opening and
reply comments from interested shipper, railroad, and government
entities. The Board then held a public hearing on June 10, 2015, to
further examine issues related to the accessibility of rate relief for
grain shippers and to provide interested persons the opportunity to
comment on the suggestions made during the public comment period.
Following the hearing, the Board received supplemental comments from
three parties.
The Board has considered all of the written comments and oral
testimony received in Docket No. EP 665 (Sub-No. 1).\1\ A number of
issues raised during the public comment period--related to the
accessibility of the Board's existing rate review processes,
modifications to those processes, and alternative rate review processes
set forth by parties--merit further discussion, and the Board is
seeking further comment on those issues.\2\ Based on the comments and
testimony received, the Board believes that the existing rate review
processes
[[Page 61648]]
present accessibility challenges for not only grain shippers, but also
small shippers of any commodity. The Board also recognizes that for
small rate disputes, regardless of commodity, the litigation costs
required to bring a case under the Board's existing rate reasonableness
methodologies can quickly exceed the value of the case. Therefore, the
Board is opening a proceeding in Docket No. EP 665 (Sub-No. 2) to
develop a new rate review process that would be more affordable and
accessible to shippers of all commodities with small disputes.
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\1\ For a list of the numerous parties that have participated in
Docket No. EP 665 (Sub-No. 1) at various stages, see Appendix A. To
the extent this decision refers to parties by abbreviations, those
abbreviations are listed in that appendix.
\2\ We note that other significant issues have been raised in
this proceeding, such as the Board's regulations concerning
agricultural rate transparency and the standing required to bring a
rate complaint. The Board will address these issues in a subsequent
decision.
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Before discussing ideas for use in a new rate reasonableness
methodology, we will discuss the Board's existing rate reasonableness
standards and the comments received in Docket No. EP 665 (Sub-No. 1).
Current Rate Reasonableness Standards
Statutory Framework
Where a railroad has market dominance--i.e., there is an absence of
effective competition from other rail carriers or modes of
transportation--its transportation rates for common carrier service
must be reasonable. 49 U.S.C. 10701(d)(1), 10702, 10707(a). The Board
is precluded, however, from finding market dominance if the revenues
produced by a challenged rate are less than 180% of the carrier's
``variable costs'' \3\ of providing the service. 49 U.S.C.
10707(d)(1)(A). If, upon complaint, the Board finds a challenged rate
unreasonable, it will order the railroad to pay reparations to the
complainant for past movements and may prescribe the maximum rate the
carrier is permitted to charge. 49 U.S.C. 10704(a)(1), 11704(b).
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\3\ Variable costs vary with the level of traffic and are
developed in rate proceedings using the Board's Uniform Railroad
Costing System (URCS). See Adoption of Unif. R.R. Costing Sys. as
Gen. Purpose Costing Sys. for All Regulatory Costing Purposes, 5
I.C.C.2d 894 (1989).
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In carrying out its regulatory functions, the Board is guided by
the rail transportation policy set forth at 49 U.S.C. 10101. And in
assessing the reasonableness of rail rates, it must also give due
consideration to the ``Long-Cannon'' factors contained in 49 U.S.C.
10701(d)(2)(A)-(C). The Board must recognize that rail carriers should
have an opportunity to earn ``adequate revenues,'' which are defined as
those that are sufficient--under honest, economical, and efficient
management--to cover operating expenses, support prudent capital
outlays, repay a reasonable debt level, raise needed equity capital,
and otherwise attract and retain capital in amounts adequate to provide
a sound rail transportation system. 49 U.S.C. 10701(d)(2), 10704(a)(2).
As part of ICCTA, Congress added a new provision to the rail
transportation policy calling for the ``expeditious handling and
resolution of all proceedings.'' 49 U.S.C. 10101(15). Congress further
instructed the Board to establish procedures for rail rate challenges
in particular, including ``appropriate measures for avoiding delay in
the discovery and evidentiary phases of such proceedings.'' 49 U.S.C.
10704(d). Congress directed the Board to ``establish a simplified and
expedited method for determining the reasonableness of challenged rail
rates in those cases in which a full stand-alone cost presentation is
too costly, given the value of the case.'' 49 U.S.C. 10701(d)(3). In
the Surface Transportation Board Reauthorization Act of 2015, Public
Law 114-110, 129 Stat. 2228 (2015), Congress directed the Board to
``initiate a proceeding to assess procedures that are available to
parties in litigation before courts to expedite such litigation and the
potential application of any such procedures to rate cases.'' 129 Stat.
2228. That proceeding is currently pending before the Board. See
Expediting Rate Cases, EP 733 (STB served June 15, 2016).
Regulatory Framework
Under the theory of ``constrained market pricing'' (CMP), adopted
by the agency in 1985 to judge the reasonableness of rail freight
rates, a captive shipper should not be required to pay more than is
necessary for the carrier involved to earn adequate revenues, nor
should it pay more than is necessary for efficient service, and a
captive shipper should not bear the costs of any facilities or services
from which it derives no benefit. Coal Rate Guidelines, Nationwide
(Guidelines), 1 I.C.C.2d 520, 523 (1985), aff'd sub nom. Consol. Rail
Corp. v. United States, 812 F.2d 1444 (3d Cir. 1987). CMP contains
three main limits on the extent to which a railroad may charge
differentially higher rates on captive traffic: The revenue adequacy
constraint, the management efficiency constraint, and the stand-alone
cost constraint.\4\ Of these three limits under CMP, the stand-alone
cost (SAC) constraint has been the most widely utilized before the
agency.
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\4\ A fourth constraint--phasing--is intended to limit the
introduction of otherwise-permissible rate increases when necessary
for the greater public good. Guidelines, 1 I.C.C.2d at 546-47. For a
more detailed discussion of CMP, see Guidelines, 1 I.C.C.2d at 534-
547.
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A SAC analysis seeks to determine whether a complainant is bearing
costs resulting from inefficiencies or costs associated with facilities
or services from which it derives no benefit. The SAC analysis does
this by simulating the competitive rate that would exist in a
``contestable market.'' \5\ Under the SAC constraint, the rate at issue
cannot be higher than what a hypothesized stand-alone railroad (SARR)
would need to charge to serve the complaining shipper while fully
covering all of its costs, including a reasonable return on investment.
The principal objective of the SAC approach is to restrain a railroad
from exploiting market power over a captive shipper by charging more
than it needs to earn a reasonable return on the cost of the
infrastructure used to serve that shipper. A second objective of the
SAC constraint is to detect and eliminate the costs of inefficiencies
in a carrier's investments or operations. See id. at 542-46.
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\5\ A contestable market is defined as one that is free from
barriers to entry. See Guidelines, 1 I.C.C.2d at 528 (citing William
J. Baumol, John C. Panzar & Robert D. Willig, Contestable Markets
and the Theory of Industry Structure (1982)). The economic theory of
contestable markets does not depend on a large number of competing
firms in the marketplace to ensure a competitive outcome.
Guidelines, 1 I.C.C.2d at 528. In a contestable market, even a
monopolist must offer competitive rates or potentially lose its
customers to a new entrant. Id.
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The agency recognized that the SAC methodology adopted in
Guidelines could be expensive and impractical for certain shippers. The
agency therefore adopted in 1996 a simplified methodology, the Three-
Benchmark methodology, under which the reasonableness of a challenged
rated is determined by examining that rate in relation to three
benchmark figures. Rate Guidelines--Non-Coal Proceedings, 1 S.T.B. 1004
(1996), pet. to reopen denied, 2 S.T.B. 619 (1997), appeal dismissed
sub nom. Ass'n of Am. R.Rs. v. STB, 146 F.3d 942 (D.C. Cir. 1998). A
decade passed, however, without any shipper bringing a case under that
methodology. Accordingly, in 2007, the Board modified the Three-
Benchmark test and created Simplified-SAC--a simplified alternative
under CMP where a full SAC analysis was too costly given the value of
the case. See Simplified Standards for Rail Rate Cases, EP 646 (Sub-No.
1) (STB served Sept. 5, 2007), aff'd sub nom. CSX Transp., Inc. v. STB,
568 F.3d 236 (D.C. Cir.), vacated in part on reh'g, 584 F.3d 1076 (D.C.
Cir. 2009).
In Simplified Standards, EP 646 (Sub-No. 1), slip op. at 13, the
Board acknowledged that it is the second objective--in which the
complaint seeks to detect and eliminate the cost of inefficiencies in
carrier's investments or
[[Page 61649]]
operations--that turns the case into an intricate, expensive
undertaking. Accordingly, the Board limited the inquiry under the
Simplified-SAC method to the first objective of SAC: whether a captive
shipper is being forced to cross-subsidize other parts of the
railroad's rail network. The Simplified-SAC test does so by comparing
the costs and revenues of the actual operations and services provided
under the assumption that all existing infrastructure along the
predominant route used to haul the complainant's traffic is needed to
serve the traffic on that route. Rate Regulation Reforms, EP 715, slip
op. at 1 n.2 (STB served Mar. 13, 2015); see also Simplified Standards,
EP 646 (Sub-No. 1), slip op. at 5. The core analysis in a Simplified-
SAC proceeding addresses the cost to build the existing facilities used
to serve the captive shipper and the return on investment a
hypothetical SARR would require to replicate those facilities. The
Board then determines whether the traffic using those facilities is
paying more than needed to cover operating expenses and a reasonable
return on the cost of those facilities. To hold down the cost of a
Simplified-SAC presentation, various simplifying assumptions and
standardization measures were adopted.\6\ Such an approach is a less
thorough application of CMP in that it would not identify
inefficiencies in the current rail operation.
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\6\ Simplifying assumptions are used in, for example, the issue
traffic's route, the configuration of the SARR, the traffic group,
operating expenses, the test year, and the discounted cash flow
analysis.
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Under the Three-Benchmark method, the reasonableness of a
challenged rate is determined by examining that rate in relation to the
following three benchmark figures, each of which is expressed as a
revenue-to-variable cost (R/VC) ratio: (1) Revenue Shortfall Allocation
Method (RSAM), which measures the average markup over variable cost
that the defendant railroad would need to charge all of its
``potentially captive'' traffic (traffic priced above the 180% R/VC
level) in order for the railroad to earn adequate revenues as measured
by the Board under 49 U.S.C. 10704(a)(2); (2) R/VC>180,
which measures the average markup over variable cost currently earned
by the defendant railroad on its potentially captive traffic; and (3)
R/VCCOMP, which is used to compare the markup being paid by
the challenged traffic to the average markup assessed on other
comparable potentially captive traffic. Rate Regulation Reforms, EP
715, slip op. at 11 (STB served July 25, 2012).
In Three-Benchmark cases, each party simultaneously proposes an
initial comparison group, and, after critiquing the other side's
proposal, a ``final offer'' comparison group. After receiving
simultaneous rebuttal filings, the Board selects without adjustment one
of the two ``final offer'' comparison groups. Each movement in the
comparison group is adjusted by a revenue need adjustment factor, which
is the ratio of RSAM / R/VC>180 (each of which is a four-
year average calculation). The Board then calculates the mean and
standard deviation of the resulting adjusted R/VC ratios (weighted in
accordance with the proper sampling factors). If the challenged rate is
above a reasonable confidence interval around the estimate of the mean
for the adjusted comparison group, it is presumed unreasonable and,
absent any ``other relevant factors,'' the maximum lawful rate is
prescribed at that boundary level. See Simplified Standards, EP 646
(Sub-No. 1), slip op. at 21.
Since Simplified Standards, only a few Three-Benchmark cases have
been decided by the Board, while no complaint has been litigated to
completion under the Simplified-SAC alternative.
There is no monetary limit on relief for a complainant that elects
to use the SAC or Simplified-SAC methods, see Rate Regulation Reforms,
EP 715, slip op. at 3 (STB served July 18, 2013) (removing relief limit
on Simplified-SAC cases), though rate relief in SAC cases is limited to
a 10 year period, see Major Issues in Rail Rate Cases, EP 657 (Sub-No.
1), slip op. at 62-66 (STB served Oct. 30, 2006), and relief in
Simplified-SAC cases is limited to a five-year period, Simplified
Standards, EP 646 (Sub-No. 1), slip op. at 27-29. The maximum potential
rate relief available to a complainant that elects to use the Three-
Benchmark method is limited to no more than $4 million per case over a
five-year period. See Rate Regulation Reforms, EP 715, slip op. at 2
(STB served Mar. 13, 2015); Simplified Standards, EP 646 (Sub-No. 1),
slip op. at 27-29.
Comments Received in Docket No. EP 665 (Sub-No. 1)
The shipper community argues that the Board's current rate review
processes are not useable to test the reasonableness of agriculture
commodity rail rates. Shippers argue that the Board's existing
methodologies are cost-prohibitive. (ARC Opening 21-22; NGFA Opening
13-15; AAI Reply 2.) For example, NGFA argues that even the simplest of
the Board's rate reasonableness methodologies, the Three-Benchmark
approach, is ineffective because railroad defendants raise numerous
expert-intensive ``other relevant factor'' arguments and arguments for
the use of current waybill data in the possession of the defendant
railroad, which greatly increase the complexity and costs of those
cases. (NGFA Opening 15.)
Even if the Three-Benchmark methodology were not cost prohibitive,
shippers argue that a comparison group approach is ineffective for
agricultural commodities because carriers have applied ``across-the-
board'' pricing. (ARC Opening 23; NGFA Opening 15; AAI Reply 2.)
Specifically, shippers claim that carriers use their market power to
impose a uniformly high rate across-the-board for certain commodities
or groups of commodities. (ARC Opening 23; NGFA Opening 15.) As a
result, shippers argue that the R/VCCOMP benchmark is
inherently problematic for grain shippers and producers because
railroad grain rates generally produce R/VCs that are uniform, or
uniform in geographic areas, for states or regions. (ARC Opening 23,
V.S. Whiteside 12.) According to NGFA, the fact that only defendant
traffic may be included in a Three-Benchmark comparison group compounds
this flaw. (NGFA Opening 15.)
NGFA also argues that SAC and Simplified-SAC are inaccessible
because many grain shippers are on low-density rural branch lines or
secondary lines, and the Board's holding regarding cross-subsidies in
PPL Montana, LLC v. Burlington Northern & Santa Fe Railway, NOR 42054
(STB served Aug. 20, 2002) and Otter Tail Power Co. v. BNSF Railway,
NOR 42058, slip op. at 11-13 (STB served Jan. 27, 2006) have
essentially eliminated the ability for grain shippers to use SAC rules
to test the reasonableness of rates for agricultural commodities. (NGFA
Opening 13-14, 21.)
Shippers propose both modifications to the existing methodologies
and new processes for rate review. Regarding the existing
methodologies, several shipper groups argue for changes to the Three-
Benchmark methodology. ARC argues that the comparison groups in the
Three-Benchmark method should include non-defendant traffic for grain
and grain products shippers because limiting comparison groups to
defendant traffic eliminates a significant amount of traffic with
similar demand characteristics. (ARC Opening 22-23,
[[Page 61650]]
V.S. Fauth 23.) \7\ NGFA and ARC both argue that expanding the
comparable traffic group to include non-defendant traffic would also
address ``across-the-board'' pricing practices. (ARC Opening 23; NGFA
Opening 15, 28, V.S. Crowley 9-11.) As NGFA notes, the inclusion of
non-defendant traffic in a comparison group approach would establish a
``market'' rate, and thereby address, to some extent, the current
practice of the Class I railroads to limit the ability of a captive
shipper or a group of captive shippers to reach desired markets by
setting rail rates that largely dictate where the shipper's commodity
goes on that railroad's system. (NGFA Opening 28, V.S. Crowley 9-11.)
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\7\ NGFA also includes non-defendant traffic in its proposed new
methodology, which is discussed in more detail below.
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Shippers also argue that comparison groups in the Three-Benchmark
methodology should include non-captive traffic, i.e., traffic priced
below the 180% R/VC level.\8\ (ARC Opening 23-24, V.S. Fauth 23-24;
NGFA Opening 29.) According to NGFA, including movements with R/VC
ratios below 180% is essential because captive agriculture commodity
producers and elevators compete in the marketplace against other
agriculture commodity shipments with rates both above and below the
180% R/VC threshold. (NGFA Opening 29.) Likewise, ARC argues that
restricting the comparison group to traffic moving at an R/VC ratio
greater than 180% significantly reduces the amount of traffic available
for the comparison group because the majority of grain and grain
products move at R/VC levels below 180%. (ARC Opening 23, V.S. Fauth
23-24.)
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\8\ NGFA also incorporates traffic with R/VC ratios below 180%
into its proposed new methodology, which is discussed in more detail
below.
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In addition, ARC proposes two adjustment factors that the Board
could apply in rate challenges related to grain shipments. First, it
proposes a Grain Cost Adjustment Factor (GCAF), which would be applied
to the Board's URCS Phase III costing program for railroad movements of
grain and grain products. ARC claims the GCAF would more accurately
reflect the fact that these movements generally have certain lower
costs than the system average costs, including switching, crew,
locomotive, and car costs. (ARC Opening, V.S. Fauth 7.) ARC also
proposes an export grain rate adjustment that takes into account the
economic relationship between grain prices and grain exports. (ARC
Opening, V.S. Fauth 30-31.)
ARC and NGFA also each propose new rate review processes. ARC sets
forth a ``Two-Benchmark'' approach for revenue adequate railroads,
which would eliminate the R/VCCOMP benchmark (and rely only
on the RSAM and R/VC>180 benchmarks by carrier).\9\
According to ARC's witness, the R/VCCOMP benchmark is
designed to reflect demand-based differential pricing and is
inappropriate under the revenue adequacy constraint announced many
years ago in Guidelines, 1 I.C.C.2d at 520. (ARC Opening, V.S. Fauth
25.) ARC, therefore, argues that the R/VCCOMP benchmark
should have no application in assessing the rates of revenue adequate
carriers because it provides a means of reflecting demand-based
differential pricing principles and differential pricing should not
affect rates on captive traffic to the extent those rates provide
revenues above revenue adequacy levels. (ARC Opening 17-19.) Under
ARC's proposed Two-Benchmark test, if grain shippers have rates which
generate R/VC ratios in excess of the 180%, then the R/VC ratio could
not exceed the RSAM level. (ARC Opening, V.S. Fauth 26.)
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\9\ As indicated earlier, ARC also proposes to expand the
comparison group in Three-Benchmark cases to include both non-
defendant traffic and traffic moving at an R/VC ratio below 180%.
(ARC Opening 20-24.)
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NGFA proposes an alternative method called the Ag Commodity Maximum
Rate Methodology (ACMRM). (NGFA Opening 27-31, V.S. Crowley 6-17.)
Under ACMRM, the issue traffic would be compared against all railroads
(not just the defendant railroad) and movements with R/VC ratios less
than 180% (although, the maximum reasonable rate produced by the
analysis would be subject to the statutory 180% floor). (NGFA Opening
28-29, V.S. Crowley 9-11.) Under NGFA's proposal, the comparison group
would be based on certain default factors, including a mileage band,
commodity type, railcar type, railcar ownership, and movement type.
(NGFA Opening, V.S. Crowley 6-7.) ACMRM also would eliminate the
confidence interval adjustment and the ``other relevant factors''
analysis so that captive agriculture commodity rate cases could be
decided quickly and at reasonable cost. (NGFA Opening 31.) The rate
prescription period would be 5 years, and there would be no limits on
the amount of relief that the complaining shipper or group of shippers
could receive if a rate challenge is successful. (NGFA Opening 31.)
ACMRM also includes a commodity-specific Revenue Adequacy Adjustment
Factor, which would be used to adjust the R/VC ratio of each movement
in the comparison group to account for the revenue adequacy status of
each railroad. (NGFA Opening 31.) \10\
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\10\ The formula for determining the RAAF is set forth in
Exhibit 5 of the verified statement of Crowley. (NGFA Opening, V.S.
Crowley Exhibit 5.)
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Carriers, on the other hand, argue that grain rates are not
unreasonable and the Board's existing rules provide ample opportunity
for grain shippers to pursue rate relief. (BNSF Opening 1, 26-29; UP
Opening 19-20.) Carriers cite the lack of grain rate litigation as
evidence that most grain rates are reasonable or not subject to the
Board's jurisdiction (R/VC ratios below 180%, contract movements, or
exempt commodities). (BNSF Opening 26-29; UP Opening 20; AAR Reply 9-
10; CSXT Reply 4; NSR Reply 24-25.) According to carriers, rail rates
for grain are effectively constrained by competition from truck, barge,
and other railroads, as well as by the competitive global market for
grain sales. (BNSF Opening 17-23, 27-29; UP Opening 15-20; CSXT Reply
2-3.)
Carriers also argue that the Board has already sufficiently
addressed shippers' concerns by limiting its market dominance inquiry
to direct competition (i.e., not allowing product or geographic
competition), creating two simplified rate reasonableness
methodologies, and eliminating or increasing the relief caps for those
methodologies. (AAR Opening 18-19; BNSF Opening 24-26; UP Opening 20;
CSXT Reply 8.) CSXT notes that the Board also eliminated the use of
movement-specific adjustments to URCS to reduce litigation costs. (CSXT
Reply 6 (citing Major Issues, EP 657 (Sub-No. 1), slip op. at 59-60).)
BNSF and CSXT also dispute the shippers' allegations that railroads
impose uniformly high rates for certain commodities or groups of
commodities. (BNSF Reply 14-15; CSXT Reply 8-9.) According to BNSF,
shippers' concerns about broad, industry-wide rate increases are purely
speculative and inconsistent with market realities. (BNSF Reply 14.)
Generally, carriers advocate maintaining the Board's current rate
review processes and ask the Board to reject the modifications and
alternatives set forth by the shipper community. (See AAR Opening 18;
BNSF Opening 24-26; NSR Opening 6; UP Opening 2.) Carriers argue that
NGFA's proposal would result in a ``ratcheting effect,'' whereby,
through repeated successful rate challenges, rates charged to captive
shippers could be systematically lowered to the jurisdictional floor.
(BNSF Reply 21, 24-25; NSR Reply 14-15; UP Reply 23-24.) Carriers also
argue that the Board should reject NGFA's
[[Page 61651]]
proposal because the methodology is not supported by sound economics
and is inherently biased for grain shippers. (CSXT Reply 2, 10; NSR
Reply 13-14.) According to CSXT, NGFA's proposal would eliminate
demand-based differential pricing for grain traffic, prevent the Board
from determining appropriate contribution to fixed costs, and
``adjust'' URCS in ways that would blatantly favor grain shippers over
other shippers. (CSXT Reply 10-11.) Carriers also oppose the unlimited
relief available under ACMRM. (BNSF Reply 29; UP Reply 34-35.)
Carriers also find flaws in ARC's proposal. Specifically, they
argue that ARC's proposal would create a disincentive for railroads to
expand competitive traffic through good business practices and would
result in an overall degradation of rail service, contrary to the
public interest. (AAR Reply 21-22; BNSF Reply 31; UP Reply 21-22, 37.)
UP further argues that ARC's proposal is inconsistent with the
competitive market principles embodied in the Board's governing statute
and with basic railroad economics because it disregards the railroad's
need for differential pricing to recover their joint and common costs.
(UP Reply 35; see also AAR Reply 16.)
The carriers also argue that modifications to the Three-Benchmark
approach, such as inclusion of non-defendant or non-captive traffic in
the comparison group, lack sound economic support. Railroads dispute
the idea of including non-defendant traffic in comparison groups,
arguing that comparisons that include traffic moving on other railroads
do not accurately establish the appropriate contribution to the
defendant railroad's fixed costs. (AAR Reply 17-18; BNSF Reply 27.)
BNSF further argues that including all traffic in the proposed
comparison group eliminates a railroad's ability to engage in
differential pricing, contrary to the basic economics of the railroad
industry. (BNSF Reply 23.) NSR notes that expanding the comparison
group would not simplify rate reasonableness determinations, but rather
would increase the cost and complexity of the Three-Benchmark approach
by requiring examination and evidence based on rates and costing from
other railroads. (NSR Reply 29.)
Likewise, carriers oppose the inclusion of non-captive traffic in
the comparison group. According to NSR, there is no basis for comparing
traffic over which the railroad is potentially market dominant to
traffic over which the railroad is not market dominant by statute. (NSR
Reply 17.) According to BNSF and UP, by seeking to include in the
comparison group traffic with competitive alternatives, NGFA seeks to
eliminate a railroad's ability to engage in differential pricing,
contrary to the basic economics of the railroad industry. (BNSF Reply
23; UP Reply 24-26.) According to BNSF and UP, including movements with
R/VC ratios below 180% in the comparison group will also lead to a
ratcheting down of R/VC ratios until the 180% R/VC ratio becomes the
rate ceiling. (BNSF Reply 24-25; UP Reply 23-24.)
USDA also provided comment, arguing that a new approach is
necessary and warranted, and should be explored, and that agricultural
shippers require specifically designed rail rate challenge procedures.
(USDA Opening 2.) USDA argues that none of the current rail rate
appeals procedures are suitable for agricultural shippers because they
are much too costly, complex, and time consuming, and agricultural
shippers do not move large enough quantities to justify the cost of
these procedures. (Id. at 6.) USDA also argues that, by the time a
decision could be rendered, the routes or rates may have changed to fit
new agricultural market conditions, nullifying most of the benefits
from winning the case. (Id.) USDA estimates that a rate reasonableness
methodology must have costs no greater than $50,000 in order to be a
viable option for agriculture shippers. (Id. at 7-8.)
Based on the comments and testimony received in this proceeding,
the Board is persuaded that the existing rate review processes present
accessibility challenges not only for small shippers of grain, but also
for small shippers of any commodity. The Board recognizes that, for
small disputes, the litigation costs required to bring a case under the
Board's existing rate reasonableness methodologies, even the Board's
most simplified method, Three-Benchmark, can quickly exceed the value
of the case. The Board appreciates receiving the alternative
methodologies proposed by ARC and NGFA; however, we are not convinced
that the alternative methodologies as proposed strike the proper
balance between the Board's statutory goals of providing captive
shippers meaningful access to regulatory remedies for unreasonable rail
rates, while permitting railroads to earn a reasonable return on their
investments so that they will have the resources to make the investment
needed to continue to serve the transportation needs of their
customers.
Although the Board has concerns with the proposals set forth by ARC
and NGFA, several of the ideas that parties have raised as part of
these methodologies, or on how to modify the Three-Benchmark
methodology, warrant further exploration. In particular, if the Board
could develop a process that reduces the litigation burden on parties
even more than the simplest existing rate reasonableness methodology,
it could achieve the goal of creating more accessible rate review
processes for small disputes where even a Three-Benchmark case would be
too costly, given the value of the case. Accordingly, we are
considering developing a set of procedures that could comprise a new
comparison-based rate reasonableness methodology for use by shippers of
all commodities in very small disputes. The Board is considering a new
process that would entail the following key elements.
First, the process would include a preliminary screen that would
limit its application to shippers that are more likely to be considered
captive and to have rates that are outliers. Such a screen might allow
for the Board to make market dominance and rate reasonableness
determinations based on an abbreviated evidentiary process. Second, the
process would contain a comparison-based analysis in which the Board
develops an initial comparison group and then allows parties to propose
modifications. By having the Board set the initial comparison group,
based on pre-determined criteria, the evidentiary process could be
simplified, as parties would only have to present evidence on
modifications rather than creating their own comparison groups (as is
currently the case in Three-Benchmark cases). Third, the process would
contain other procedural modifications that help expedite and
streamline the comparison-based assessment. In particular, the Board is
considering ideas such as limiting discovery, establishing mandatory
disclosures, limiting the length of filings, and establishing an
evidentiary hearing in lieu of rebuttal evidence. Finally, because the
process would only be intended for small disputes, the Board would
limit the amount of relief available.
It is the Board's goal that procedures evolving from this ANPR
would shorten the case timeline and reduce litigation costs, while
achieving the same objectives as the existing rate methodologies and
minimizing the loss of precision. The Board is guided by the concerns
raised during the public comment period in Docket No. EP 665 (Sub-No.
1), namely that the Board's current rate review processes are cost-
prohibitive for grain and other shippers with small disputes, and by
the rail transportation policy set forth at 49 U.S.C. 10101. The Board
must balance
[[Page 61652]]
the shippers' interest in being protected from unreasonable rates, see
49 U.S.C. 10101(6), against the need to promote a safe and efficient
rail transportation system by allowing rail carriers to earn adequate
revenues, see 49 U.S.C. 10101(3), 49 U.S.C. 10701(d)(2). We must also
consider all parties' needs for expeditious handling of proceedings,
see 49 U.S.C. 10101(15).
We are seeking comment in a new docket, Docket No. EP 665 (Sub-No.
2), as we believe this methodology should be available to shippers of
all commodities, not just grain, with small disputes. Many of the
concerns raised about the accessibility of the Board's existing rate
reasonableness procedures are general in nature. Indeed, some
commenters expressly acknowledged that such concerns may be equally
applicable to shippers of other commodities (see, e.g., ARC Opening 9-
10 (``Many of the deficiencies in the status quo may not be unique to
grain'')), while others argued that limiting the availability of a
methodology to a subset of shippers or commodities would be arbitrary
(see, e.g., NSR Opening 6 (``nothing in the Board's governing statutes
or prior considerations of rate regulation . . . suggests that the
economic basis or soundness of a [rate] methodology . . . should vary
based on the shipper or commodities at issue'')). Thus, we are
exploring how best to develop a new methodology available to shippers
of all commodities.
The Board seeks comment on whether the procedures set forth in this
decision--or variations on these procedures--would provide a reasonable
yet accessible methodology for use in very small rate disputes. The
Board also welcomes comments on other means the Board could implement
to keep the costs of a new process low.
New Methodology in Docket No. EP 665 (Sub-No. 2)
I. Availability of New Methodology
Although the concerns expressed by the agricultural community in
Docket No. EP 665 (Sub-No. 1) and elsewhere have been instrumental in
informing the Board of the need for a new approach, we do not believe
that a new methodology should be limited to small shippers of only
agricultural products. Instead, as discussed above, we are exploring
how best to develop a new methodology that would be available to
shippers of all commodities with small disputes.
We are considering limiting this methodology, however, to disputes
involving only Class I rail carriers. The Board does not envision that
the new process would apply to purely local movements of a Class II or
Class III carrier, which would be consistent with the Three-Benchmark
methodology. See Simplified Standards, EP 646 (Sub-No. 1), slip op. at
102 (explaining limitations of methodology with respect to Class II and
III carriers). However, we seek comment on whether this methodology, if
adopted, should or should not be applicable to Class II and III rail
carriers.
II. Comparison Group Approach
The new methodology the Board is considering would utilize a
comparison group approach to determine the reasonableness of the
challenged traffic's rate. Under such an approach, the issue traffic
would be compared against a comparison group of similar traffic drawn
from the preceding four years of data in the Board's Waybill Sample. In
order to reduce litigation costs, the Board would determine an initial
comparison group based on default parameters established in a
rulemaking, rather than having parties develop and tender a proposed
comparison group, as is done in Three-Benchmark cases. See Simplified
Standards, EP 646 (Sub-No. 1), slip op. at 18. As discussed in more
detail below, both the complainant and the defendant would have the
opportunity to present arguments regarding the appropriateness of the
initial comparison group determined by the Board and propose
modifications to the group. After considering the arguments proposed by
the parties, the Board would determine which movements would comprise
the final, adjusted comparison group, which the Board would use in its
rate reasonableness analysis.
The Board is considering the following default parameters for
selecting the initial comparison group and seeks comment on each.
Traffic at or Above 180% R/VC. The Board is considering including
other potentially captive traffic, i.e., traffic priced at or above the
180% R/VC level, in the comparison group, but not traffic priced below
the 180% R/VC level. Excluding traffic with an R/VC level below 180%
would be consistent with the Board's explanation that only captive
traffic over which the carrier has market power should be included in
the comparison group in the Three-Benchmark methodology. See Simplified
Standards, EP 646 (Sub-No. 1), slip op. at 17 (``[t]he purpose of the
R/VCCOMP benchmark is to use the R/VC ratios of other
`potentially captive traffic' (i.e., traffic priced above the 180% R/VC
level) as evidence of the reasonable R/VC levels for traffic of that
sort. . . . The rates available to traffic with competitive
alternatives would provide little evidence on the degree of permissible
demand-based differential pricing needed to provide a reasonable return
on the investment.''). Although the shipper community presented
arguments in favor of including traffic below 180% R/VC in comparison
groups, the Board is concerned that including shipments below 180% R/VC
may be contrary to the principle of demand-based differential pricing.
The Board invites comment on the advisability of including or excluding
non-captive traffic in comparison groups.
Traffic With Similar Shipping Characteristics. The comparison group
would also include traffic that shares similar shipping characteristics
as the issue traffic, as rail rates typically depend, at least in part,
on the length of haul, shipment type, and the type of commodity being
shipped. The Board, therefore, is considering limiting comparable
movements to those movements that satisfy all of the following
criteria:
(a) The movement is within a +/- 15% mileage band around the actual
miles travelled by the challenged traffic,
(b) the movement is of the same shipment type (e.g., unit train
traffic or non-unit train traffic), and
(c) the movement is of a commodity classified under the same
Standard Transportation Commodity Code (STCC).
With respect to the last of these parameters, the Board believes
that the most appropriate method of determining which commodities
should be used in the comparison group is to use the same five-digit
STCC as the issue traffic. Commodities listed at the five-digit STCC
generally should be similar enough in characteristics for inclusion in
the comparison group. However, certain other commodities differ at an
even more granular level, such as chemicals (i.e., any commodity with a
STCC starting with 28), and therefore may best be limited to
comparisons to the seven-digit STCC. Chemicals are highly varied at the
five-digit STCC designation and therefore may require a finer degree of
distinction when selecting the initial comparison group.
The Board invites comment on these comparison group procedures, and
also on which commodities would be appropriately compared at the seven-
digit STCC. The Board also invites comment on whether the Board should
consider expanding the comparison of commodities beyond the five- or
seven-
[[Page 61653]]
digit STCC level in the event that this parameter would result in the
initial comparison group containing insufficient observations. In order
for any study to be statistically valid, the study sample must contain
a minimum number of observations, and that minimum number varies
depending on the type and complexity of the analysis to be undertaken.
For the purposes of comparison-based rate reasonableness analyses, the
Board is concerned that fewer than 20 observations would be
insufficient. See e.g., E.I. du Pont de Nemours & Co. v. CSX Transp.,
Inc., NOR 42101, slip op. at 13 (STB served June 30, 2008) (deciding a
Three-Benchmark rate case where the comparison group included 23
observations and the sample size was uncontested). Therefore, the Board
seeks comments on whether the Board should, in instances where there
are insufficient observations, relax the default STCC limitation to the
next most specific STCC level that yields sufficient observations for
the comparison group. For example, if a comparison group based on a
seven-digit STCC code contains too few observations, we could examine
the corresponding five-digit STCC, then the four-digit STCC, and so on,
until the comparison group includes greater than 20 observations.
The Board invites comments on this possible approach of broadening
the STCC limitation in this manner and on whether a 20-observation
minimum would be an appropriate requirement.
Contract and Tariff Traffic. The comparison group would include
contract and tariff traffic from the defendant carrier, excluding the
issue traffic. As the Board noted in Simplified Standards, EP 646 (Sub-
No. 1), slip op. at 83, excluding contract movements from the
comparison group may leave insufficient movements from the Waybill
Sample to perform a statistically meaningful comparison analysis. The
Board is considering applying a common carrier adjustment to the
comparison group to account for the contract traffic similar to the one
applied in U.S. Magnesium, L.L.C. v. Union Pacific Railroad, NOR 42114,
slip op. at 18-19 (STB served Jan. 28, 2010), aff'd sub nom. Union
Pacific Railroad v. STB, 628 F.3d 597 (D.C. Cir. 2010). The Board
invites comment on the inclusion of contract traffic and a common
carrier adjustment. Additionally, the Board invites parties to propose
alternative means of calculating a common carrier adjustment.
Non-Defendant Carrier Traffic. The Board seeks comment on whether
to expand the comparison group in this new methodology to include
traffic from non-defendant carriers \11\ operating in the same URCS
region \12\ as the defendant carrier. The Board has, in the past,
acknowledged that varying joint and common costs can lead to inevitable
differences in R/VC ratios among different carriers. See Simplified
Standards, EP 646 (Sub-No. 1), slip op. at 82-83. We are mindful of the
concerns raised by the railroads, and previously acknowledged by the
Board, about comparing R/VC ratios across carriers. However, shippers
have also raised arguments as to why the Board should include non-
defendant traffic. (See, e.g., NGFA Opening 28-29; ARC Opening 23.)
Notwithstanding the Board's previously stated concerns and the concerns
raised by the railroads, the Board seeks comment on whether it should
reconsider this issue. Additionally, the Board is considering whether,
for the purposes of a new methodology, it may be appropriate to include
non-defendant traffic in the comparison group to ensure that the Board
can perform a statistically meaningful comparison analysis. Including
non-defendant movements could help ensure that the initial comparison
group includes sufficient movements from the Waybill Sample on which
the Board can base its rate reasonableness determination.\13\
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\11\ Because the Board is considering a new rate review process
for use against Class I carriers, the comparison group would
likewise include only rates charged by other non-defendant Class I
carriers.
\12\ In calculating regional data, URCS defines each of the
reporting Class I carriers as being either in the Eastern Region or
Western Region. The Eastern Region includes CN, CSXT, and NSR. The
Western Region includes BNSF, CP, KCS, and UP.
\13\ The Board intends to propose modifications to the Waybill
sampling rate in a subsequent decision, which would also help ensure
sufficient observations.
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The Board notes, however, that, including non-defendant traffic in
the comparison group likely would necessitate third-party discovery (as
to whether cost structure differences between carriers make certain
movements inappropriate for the comparison group) and would affect
whether parties would be required to hire outside counsel to manage the
receipt of confidential Waybill Sample data from other carriers. See 49
CFR 1244.9. We recognize that these issues would add a layer of
complexity to the process, potentially increasing the time and expense
required to bring a case.\14\ We seek comment on the advisability of
including non-defendant traffic in all or limited circumstances under
this simplified methodology, and how such inclusion would affect the
time and costs to bring a case.
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\14\ The necessity for third-party discovery, and what that
might entail, is discussed in more detail in section III(2), Limits
on Discovery, below.
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III. Procedural Considerations
The Board recognizes that it is essential that any procedures
comprising a new rate reasonableness methodology be both more
streamlined and less costly than the Board's existing rate review
processes. As a result, the Board is considering the procedures set
forth below with the goal of achieving a shortened procedural schedule
and including measures addressing concerns that the existing procedures
for challenging a rate are cost-prohibitive.
1. Preliminary Screen
Given the abbreviated evidentiary presentation in a simplified,
lower-cost process, the Board is considering requiring that challenged
traffic meet certain threshold criteria in order to be eligible to be
reviewed under the new methodology. This preliminary screen would seek
to identify those movements for which truck transportation alternatives
are unlikely and the rates are significant outliers, allowing the Board
to make market dominance and rate reasonableness determinations based
on the abbreviated evidentiary submissions described below. The issue
traffic would, of course, have to be priced above the 180% R/VC level,
which is the statutory floor for regulatory rail rate intervention. See
49 U.S.C. 10707(d).
Additionally, the Board is considering the following criteria for
the issue traffic as a preliminary screen and seeks comment on each of
the following potential criteria.
Issue Traffic Length of Haul. The origin and destination of the
issue traffic would be required to be located a certain minimum
distance apart. As noted in Review of Commodity, Boxcar, and TOFC/COFC
Exemptions, EP 704 (Sub-No. 1), slip op. at 7 n.12 (STB served Mar. 23,
2016) (with Commissioner Begeman dissenting), trucking becomes less
viable when the length of haul exceeds 500 miles because in many
instances a transport over that threshold cannot be completed in one
day. Thus, it may be appropriate to require that the origin and
destination be more than 500 highway miles apart. Traffic moving fewer
than 500 highway miles between origin and destination would not be
eligible to be challenged under the new methodology because trucking
alternatives for those movements are more likely. Such a criterion
could allow the Board to consider making market dominance
determinations on an abbreviated evidentiary presentation.
[[Page 61654]]
Issue Traffic Revenue Per Ton Mile. As noted, part of the
preliminary screen would be to determine if rates are significant
outliers. The Board is considering using revenue per ton mile to make
this determination. Specifically, the Board could require the revenue
per ton mile of the challenged traffic to be in the top 10% or 20% of
the initial, Board-determined comparison group. Another possibility
would be to require the issue traffic to be at least one standard
deviation above the mean revenue per ton mile of the comparison
group.\15\ Analyzing how a movement's revenue per ton mile compares to
the revenue per ton mile earned on similar movements would help
identify movements with outlier rates. The Board would complete this
revenue per ton mile analysis following the receipt of the defendant's
answer, in which the defendant would provide the actual miles traveled
by the challenged traffic. The Board invites parties to comment on
these or other measures that would achieve the same objective of
identifying movements in which rates are significant outliers.
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\15\ A standard deviation is defined as a measure of spread,
dispersion, or variability of a group of numbers equal to the square
root of the variance of that group of numbers. The variance of the
group of numbers is computed by subtracting the mean, or average, of
all the numbers, squaring the resulting difference, and computing
the mean of these squared differences.
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Prior Litigation. Lastly, the Board is considering a requirement
that the complainant must not have brought a case against the defendant
under this methodology within a certain number of years. This
limitation could correspond to the maximum rate prescription available
under the new process, which is discussed in more detail in the section
related to limits on relief below. By including this limitation, the
Board intends to prevent attempts to divide a large dispute into
multiple smaller disputes.
2. Limits on Discovery
The Board also is considering limiting discovery in order to reduce
litigation costs for very small disputes. In particular, the Board
could require that parties file certain initial disclosures with their
complaint and answer. Concurrent with the filing of its complaint, the
complainant could be required to disclose the nine standard inputs for
the URCS Phase III costing program.\16\ The complainant could also be
required to provide a preliminary estimate of the variable cost of the
challenged movements, using the unadjusted figures produced by the URCS
Phase III costing program on the Board's Web site,\17\ to demonstrate
that the Board's jurisdictional threshold has been met. The complainant
could also be required to provide to the Board and the defendant all
documents that it relied upon to determine the inputs to the URCS Phase
III costing program. The Board invites parties to comment on whether
the URCS Phase III costing program should be used as described, or
whether the availability of this new process would be improved by some
alternative, such as by creating a paper form for submitting URCS Phase
III inputs to the Board.
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\16\ The nine inputs include: (1) The carrier; (2) the type of
shipment (local, received-terminated, etc.); (3) the one-way
distance of the shipment; (4) the type of car; (5) the number of
cars; (6) the car ownership (private or railroad); (7) commodity
type (by STCC); (8) the weight of the shipment (in tons per car);
and (9) the type of movement (single-car, multi-car, or unit train).
In the event that a complainant does not have access to the actual
miles of the length of haul, a showing of highway miles between the
origin and destination pair would be sufficient for the purposes of
the complainant's initial disclosures.
\17\ The current version of the URCS Phase III costing program
is available at http://www.stb.dot.gov/stb/industry/urcs.html.
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With regard to qualitative market dominance, the complainant could
also be required to make certain required disclosures. For example, in
a verified statement by a company official, the complainant could be
required to submit: (i) A statement that the issue traffic has not
moved more than a de minimis amount on alternative transportation modes
between the same origin and destination within a certain number of
years, and (ii) a statement whether the complainant has made any
inquiries to, or received any responses from, alternative
transportation providers for the issue traffic within a certain number
of years, including copies of any such communications (if available).
The defendant could likewise be required to provide initial
disclosures to the complainant concurrent with filing its answer. Like
the complainant, the defendant could be required to produce its
preliminary estimate of the variable cost of the challenged movement,
using the unadjusted figures produced by the URCS Phase III costing
program. To the extent that the defendant disagreed with any of the
URCS inputs provided in the complaint, it could also be required to
provide the inputs that it used. The defendant could also be required
to provide to the Board and the complainant all documents that it
relied upon to determine the inputs used in the URCS Phase III costing
program. Finally, the defendant could be required to disclose the
actual route miles for the issue traffic and provide supporting data to
the Board and, upon request, to the complainant.
Another limit on discovery could be to limit the amount or type of
party-initiated discovery or eliminating such discovery altogether,
given that the need for such information would be significantly reduced
by the simplifications discussed here. For example, the fact that the
initial comparison group would be set by the Board (based on defined
criteria) and not the parties would eliminate one need for the parties
to seek discovery. In terms of limiting discovery, in preparing its
answer, the defendant could reply with information that is either
disclosed by the complainant in its complaint or opening evidence, or
developed independently by the defendant, but the defendant would not
be permitted to seek additional discovery from the complainant.
Likewise, the complainant would not be permitted to serve any discovery
on the defendant in preparation of its evidentiary submissions.
Additionally, as noted above, if the Board were to include non-
defendant traffic in the comparison group, the Board is concerned that
it would be required to permit discovery from the non-defendant
carriers whose traffic is included in the comparison group. In that
case, the Board could consider limits, such as five interrogatories
(including subparts) and five document requests (including subparts)
per party for each non-defendant carrier, and could require that such
discovery be completed by a specific number of days. Such third-party
discovery would occur prior to the submission of each party's evidence.
We therefore seek comment on whether to mandate certain initial
disclosures and, if so, what those disclosures should be, and any other
ways to limit or eliminate party-initiated discovery in a new,
streamlined comparison group methodology for small disputes.
3. Submission of Evidence
The Board seeks comment on the following procedures it is
considering for use in a new simplified rate reasonableness
methodology.
Complaint. A party would initiate a case by filing a complaint with
the Board. In its complaint, the complainant would be required to: (i)
Allege that the rates for certain traffic are unreasonable, (ii) allege
that the defendant has both quantitative market dominance (i.e., the
issue traffic must move at rates above 180% R/VC) and qualitative
market dominance (i.e., other modes of
[[Page 61655]]
transportation are not feasible); and (iii) submit the required initial
disclosures, as described above in the section on limits on discovery.
The complaint and initial disclosures would include information
sufficient for the Board to determine that the issue traffic meets a
preliminary screen, discussed in more detail above. Additionally, with
its complaint, the complainant would submit a signed confidentiality
agreement. The agreement would be standardized specifically for cases
brought under the new process and available for download on the Board's
Web site. By asking parties to submit the confidentiality agreement
early in the process, the Board could expedite the distribution of the
comparison group. The Board invites comment on the appropriate content
or other issues related to the filing of the complaint.
Answer. In its answer, the defendant would be required to admit or
deny each of the allegations in the complaint and submit its initial
disclosures, described above. The defendant would also file with its
answer a signed copy of the standardized confidentiality agreement. The
Board invites comment on the appropriate content or other issues
related to the filing of the answer.
Opening Evidence. Unlike in Three-Benchmark cases, the Board
envisions sequential rather than simultaneous filings of each party's
evidence. In its opening evidence, the complainant would address both
qualitative market dominance \18\ and the appropriateness of the
initial comparison group. With respect to qualitative market dominance,
given the information derived from the preliminary screen and the
initial disclosure requirements, the complainant would be permitted to
present an abbreviated evidentiary submission, but must explain why the
use of other transportation modes is not feasible. The complainant
could also expand on its initial disclosures to the extent necessary.
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\18\ Under the procedures envisioned, quantitative market
dominance would be decided by the Board prior to the filing of
opening evidence based on the information provided in the complaint
and answer.
---------------------------------------------------------------------------
In its opening evidence, the complainant would also have the
opportunity to state whether the initial, Board-determined comparison
group is appropriate. The complainant may propose adjustments to the
default initial comparison group and present ``other relevant factors''
evidence, such as a density adjustment or PTC adjustment, among others.
Reply Evidence. The defendant's reply would likewise address both
qualitative market dominance and the appropriateness of the default
initial comparison group. Specifically, in its reply evidence, the
defendant would have the opportunity to reply to the complainant's
qualitative market dominance evidence. As noted above, we are
considering limits on discovery as it relates to qualitative market
dominance. For example, in formulating its response to the
complainant's qualitative market dominance evidence, the defendant
could be limited to information disclosed by the complainant with its
complaint or opening evidence or developed independently by the
defendant.
The defendant would also have the opportunity to respond to the
complainant's arguments regarding the appropriateness of any proposed
adjustments to the default initial comparison group. The defendant
could also propose its own adjustments to the default initial
comparison group and set forth ``other relevant factors'' evidence.
Limitations on Opening and Reply Evidence. In order to minimize the
time and expense associated with litigating a small rate dispute, the
Board is considering placing limitations on the opening and reply
evidence, such as imposing word or page limits on the complainant's
opening evidence and the defendant's reply evidence. The Board seeks
comment on whether to include a word or page limitation and if so, what
the appropriate limitation would be.
We recognize that, even with a word limit and limits on or
exclusion of discovery, allowing parties' presentations to include
``other relevant factors'' evidence could substantially increase the
cost and time required to prepare for submission of a case. For
instance, we do not expect that the examples noted above--a density
adjustment or PTC adjustment--could be easily calculated by a small
entity without hiring outside consultants. Therefore, the Board invites
comment on the advisability of allowing parties' presentations to
include ``other relevant factors'' evidence. The Board also invites
parties to comment on the appropriateness of sequential as opposed to
simultaneous filings of each party's evidence, a reasonable time-frame
for considering qualitative market dominance arguments, a reasonable
word or page limit for opening and reply evidence, and any other issues
related to the filing of opening and reply evidence.
Evidentiary Hearing. In an effort to make the new process cost-
effective for small disputes, the Board is considering offering an
evidentiary hearing following the submission of opening and reply
evidence, in lieu of formal rebuttal filings and final briefs. The
evidentiary hearing, which would take place before Board staff, would
permit the Board to further examine and develop the evidentiary record
without requiring the parties to take on the higher litigation costs
associated with formal written submissions. At the evidentiary hearing,
the complainant would have the opportunity to rebut the defendant's
reply and respond to Board staff's questions. The defendant would also
participate in the hearing and could respond to any questions from
Board staff. Board staff would have the opportunity to further explore
the parties' arguments regarding the appropriateness of the comparison
group. A court reporter would be present, and the transcript would
become part of the record. The evidentiary hearing could also take
place by conference call. We invite parties to comment on whether an
evidentiary hearing in lieu of rebuttal filings and final briefs would
help minimize the time or expense associated with litigating a case
under a new rate methodology for small disputes.
4. Board Determinations
Under the procedures being considered as described in this
decision, the Board would issue two decisions. First, following receipt
of the defendant's answer, the Board would issue a preliminary decision
in which the Board would (i) resolve any URCS Phase III input disputes,
(ii) determine whether the challenged traffic meets the preliminary
screen based on the initial comparison group, and (iii) make a final
determination on whether the defendant carrier has quantitative market
dominance over the movements at issue. In the event that the issue
traffic fails to meet the preliminary screen based on the initial
comparison group, the Board would dismiss the complaint without
prejudice. For challenged traffic that satisfies the preliminary
screen, the Board would provide the initial comparison group data
pursuant to the standardized confidentiality agreements previously
filed by the parties.
Second, following the evidentiary hearing, the Board would issue a
final decision addressing qualitative market dominance and rate
reasonableness. With regard to qualitative market dominance, the Board
expects that its qualitative market dominance analysis could be far
more limited than in other rate reasonableness methodologies given the
preliminary screen and initial disclosure requirements. In particular,
because the screen would help identify movements that are more likely
to be captive, the Board envisions
[[Page 61656]]
determining qualitative market dominance without as extensive an
analysis as under the current methodologies. The Board seeks comments
on specific qualitative market dominance factors it could consider for
this type of new rate reasonableness methodology.
If the Board finds that the defendant carrier has qualitative
market dominance over the challenged traffic, the Board would address
each of the parties' arguments regarding the appropriateness of the
initial comparison group and adjustments thereto. If the comparison
group is adjusted, the Board would reevaluate the challenged traffic to
ensure that it continues to satisfy the preliminary screen based on the
adjusted comparison group. In the event that the issue traffic fails to
meet the preliminary screen based on the adjusted comparison group, the
Board would dismiss the proceeding with prejudice to the complainant
challenging the same movement under the new method for a certain
period, but without prejudice to the complainant challenging the same
movement under one of the Board's other rate review processes.
For the rate reasonableness determination, the Board would compute
the maximum R/VC ratio for the issue traffic in a manner similar to the
Three-Benchmark analysis, although with a potential modification.
Specifically, the Board would apply a revenue need adjustment--which is
the ratio of RSAM / R/VC>180 (each of which is a four-year
average calculation) \19\--to each movement in the final comparison
group. The Board would then calculate the mean and standard deviation
of the R/VC ratios for the adjusted comparison group (weighted in
accordance with the proper sampling factors). If the challenged rate is
above a reasonable confidence interval around the estimate of the mean
for the adjusted comparison group, it would be determined unreasonable
and the maximum lawful rate would be prescribed at that upper boundary
level.\20\
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\19\ The jurisdictional threshold for rail rate regulation, R/
VC>180, also serves as the floor for regulatory relief
because the Board cannot prescribe a rate below the jurisdictional
threshold. See 49 U.S.C. 10707(d); W. Tex. Utils. Co. v. Burlington
N. R.R., 1 S.T.B. 638, 677-78 (1996), aff'd sub nom., Burlington N.
R.R. v. STB, 114 F.3d 206, 210 (D.C. Cir. 1997).
\20\ The confidence interval would be a function of the number
of movements in the comparison group and the standard deviation of
those (potentially adjusted) R/VC ratios. A small standard deviation
or large number of observations would produce a tighter confidence
interval, so that we could have more ``confidence'' in the accuracy
of our estimate of the mean of the comparison group. Using the mean
(R/VCCOMP) and standard deviation (S) of the adjusted
comparison group, along with the number of movements in the
comparison group (n), the upper boundary of a reasonable confidence
interval around the estimate of the mean would be derived as
follows: Upper Boundary = R/VCCOMP + tn-1 x (S
/ (n-1) \1/2\). The Student's t-distribution parameter,
tn-1, will range from 3.078 to 1.28 depending on the
number of movements in the comparison group. The precise number can
be found in statistical tables for the Student's t-distributions.
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However, the Board is considering departing from Three-Benchmark
precedent with respect to the revenue need adjustment. As noted, in a
Three-Benchmark case, each movement in the final comparison group is
adjusted by a revenue need adjustment factor. During the public comment
period in Docket No. EP 665 (Sub-No. 1), NGFA proposed the creation of
an alternative revenue need adjustment factor--a Revenue Adequacy
Adjustment Factor (RAAF), which would be commodity-specific and would
account for the revenue adequacy status of each railroad. NGFA argues
that the RAAF is superior to the Board's current revenue need
adjustment factor because it takes into consideration the amount of
issue commodity traffic that is ostensibly captive to the railroad and
allocates the burden of a revenue need adjustment factor to those
commodities that provide the most revenue. (NGFA Opening, V.S. Crowley
12.) There may be merit to NGFA's suggestion that our current revenue
need adjustment factor could be adapted to reflect the differences in
rates and revenues carriers obtain from various commodity groups. Thus,
the Board is considering whether it could make the revenue need
adjustment factor commodity specific. However, if the Board were to
adopt a commodity specific revenue need adjustment factor, we must
ensure that we establish the most appropriate formula.
Therefore, we seek comment on whether the Board should modify its
revenue need adjustment factor to be commodity-specific, and if so, how
we can effectively disaggregate the existing RSAM on a commodity-by-
commodity basis. Because some commodities have a higher R/VC ratio than
others, the adjusted revenue need adjustment factor should allocate the
revenue shortfall in ways that reflect the different demand
elasticities faced by different commodities. However, the weighted
average of all commodities when totaled should equal the overall RSAM.
We believe that, on average, differences in demand elasticities are
reflected in R/VC ratios--those with higher R/VC ratios tend to enjoy
less direct and indirect competition while those with lower R/VC ratios
tend to enjoy somewhat more competition. In an individual proceeding,
we would consider applying a commodity-specific RSAM where the
resulting figure reflects this intuition. We believe such a mark-up
could be done in a manner consistent with Ramsey pricing
principles.\21\ If the Board were to adopt such a modified revenue need
adjustment factor, we also seek comment on whether the reliance on a
single year's data would be inappropriate. Because profits are pro-
cyclical, we believe an approach that considers a longer period of time
may be more appropriate. Finally, we also seek comment on whether
application of a modified revenue need adjustment factor, if adopted,
should be limited to a new methodology.
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\21\ Ramsey pricing refers to the pricing principals first
advocated by the British mathematician and economist Frank P.
Ramsey, whose economic pricing model was published in A Contribution
to the Theory of Taxation, 37 Econ. J. 47-61 (Mar. 1927). ``Ramsey
pricing'' is a widely recognized method of differential pricing--
that is, pricing in accordance with demand. Under Ramsey pricing,
each price or rate contains a mark-up above the long-run marginal
cost of the product or service to cover a portion of the
unattributable costs. The unattributable costs are allocated among
the purchasers or users in inverse relation to their demand
elasticity. Thus, in a market where shippers are very sensitive to
price changes (a highly elastic market), the mark-up would be
smaller than in a market where shippers are less price sensitive.
The sum of the mark-ups equals the unattributable costs of an
efficient producer. See Guidelines, 1 I.C.C.2d at 526-527.
While Ramsey pricing represents the most efficient way to price
above marginal cost, reliance on pure Ramsey pricing clashes with
the Long-Cannon factors because it would not maximize the revenue
contribution from traffic with more-elastic demand (competitive
traffic) before calling on traffic with less-elastic demand (captive
traffic) to make a differentially higher revenue contribution. For
these reasons, the Board has not adopted pure Ramsey pricing theory.
Rather, in SAC cases, the Board allocates stand-alone costs in
accordance with Ramsey pricing principles, by which the SARR (and
therefore the carrier) is permitted to engage in demand-based
differential pricing to recover the total SAC costs. Major Issues,
EP 657 (Sub-No. 1), slip op. at 12-13.
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5. Limits on Relief
Because of the abbreviated nature of the process described in this
decision, the Board is considering limiting relief available under this
process. The ideas presented in the ANPR describe a process that would
be significantly more streamlined than the process required to bring a
Three-Benchmark case. As such, the relief available under this method
would likewise need to be significantly less than the relief available
under the Three-Benchmark approach. The Board invites parties to
comment on the amount of relief that should be available and why that
amount of relief would be appropriate.
[[Page 61657]]
The limit on relief would apply to the difference between the
challenged rate and the maximum lawful rate, whether in the form of
reparations, a rate prescription, or a combination of the two. Any rate
prescription would automatically terminate once the complainant has
exhausted the relief available. Thus, the actual length of the
prescription may be less than the prescription period if the shipper
ships a large enough volume of traffic so that the relief is used up in
a shorter time. The complainant would be barred from bringing another
complaint against the same rate for the remainder of the prescription
period.
Where the shipper exhausts all of its relief before the end of the
prescription period, the carrier's rate making freedom would be
restored with a regulatory safe harbor at the challenged rate for the
remainder of the prescription period, with appropriate adjustments for
inflation using the rail cost adjustment factor, adjusted for inflation
and productivity (RCAF-A). See R.R. Cost Recovery Procedures--
Productivity Adjustment, 5 I.C.C.2d 434 (1989), aff'd sub nom. Edison
Elec. Inst. v. ICC, 969 F.2d 1221 (D.C. Cir. 1992). If, however, a
carrier establishes a new common carrier rate once the rate
prescription expires, and the new rate exceeds the inflation-adjusted
challenged rate, the shipper may bring a new complaint against the
newly established common carrier rate.
The Regulatory Flexibility Act
Because this ANPR does not impose or propose any requirements, and
instead seeks comments and suggestions for the Board to consider in
possibly developing a subsequent proposed rule, the requirements of the
Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612 (RFA) do not apply
to this action. Nevertheless, as part of any comments submitted in
response to this ANPR, parties may include comments or information that
could help the Board assess the potential impact of a subsequent
regulatory action on small entities pursuant to the RFA.
Conclusion
The Board seeks public input on how best to establish a new rate
reasonableness process for use in small disputes, available to shippers
of all commodities, to provide shippers with small disputes meaningful
access to regulatory relief in those cases where even a Three-Benchmark
case is too costly, given the value of the case. The Board welcomes
comments from interested parties on the issues and considerations
presented in this decision.
It is ordered:
1. Comments are due by November 14, 2016. Reply comments are due by
December 19, 2016.
2. A copy of this decision will be served upon the Chief Counsel
for Advocacy, Office of Advocacy, U.S. Small Business Administration.
3. Notice of this decision will be published in the Federal
Register.
4. This decision is effective on its service date.
Decided: August 30, 2016.
By the Board, Chairman Elliott, Vice Chairman Miller, and
Commissioner Begeman. Vice Chairman Miller commented with a separate
expression.
Kenyatta Clay,
Clearance Clerk.
VICE CHAIRMAN MILLER, commenting:
Today's decision is an important step forward for the Board.
Despite the agency's well-intentioned efforts over the years to create
simpler, timelier, and less costly rate dispute processes, I believe
that they are still inaccessible to shippers with small disputes,
denying them the opportunity to obtain rate relief. This decision
focuses on filling that gap in our processes.
While I applaud the Board for today's action, we still have work to
do. Even if the Board is able to develop an abbreviated rate case
methodology that can be used by shippers with small rate disputes, it
will not resolve the concerns that have been raised about the SAC test.
The methodology here is only intended to address small rate disputes
for shippers that meet certain criteria. As such, the Board still needs
to consider alternatives to the SAC test for shippers with larger
disputes. A reasonable starting point to address this issue would be
for the Board to publicly release the report prepared by our outside
consultant on SAC alternatives and conduct a hearing to obtain feedback
and reaction from our stakeholders on the report's conclusions.\22\
Hopefully the report will be issued soon and stakeholders given an
opportunity to comment.
\22\ Sunbelt Chlor Alkali P'ship v. Norfolk S. Ry., NOR 42130,
slip op. 44 (STB served June 30, 2016) (Miller concurrence).
Note: The following appendix will not appear in the Code of
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Federal Regulations.
Appendix A--Participants in Docket No. EP 665 (Sub-No. 1)
The Board received written comment and testimony from the
following parties in Docket No. EP 665 (Sub-No. 1).
Opening comments were received from:
Alliance for Rail Competition (ARC) (joined by Montana
Wheat and Barley Committee, National Farmers Union, Colorado Wheat
Administrative Committee, Idaho Barley Commission, Idaho Grain
Producers Association, Idaho Wheat Commission, Montana Farmers
Union, North Dakota Corn Growers Association, North Dakota Farmers
Union, South Dakota Corn Growers Association, South Dakota Farmers
Union, Minnesota Corn Growers Association, Minnesota Farmers Union,
Wisconsin Farmers Union, Nebraska Wheat Board, Oklahoma Wheat
Commission, Oregon Wheat Commission, South Dakota Wheat Commission,
Texas Wheat Producers Board, Washington Grain Commission, Wyoming
Wheat Marketing Commission, USA Dry Pea and Lentil Council, and
National Corn Growers Association)
Association of American Railroads (AAR)
BNSF Railway Company (BNSF)
CSX Transportation, Inc. (CSXT)
National Grain and Feed Association (NGFA)
Norfolk Southern Railway Company (NSR)
Union Pacific Railroad Company (UP)
U.S. Department of Agriculture (USDA)
Reply comments were received from:
AAR
Agribusiness Association of Iowa, Agribusiness Council of
Indiana, Agricultural Retailers Association, American Bakers
Association, American Farm Bureau Federation, American Feed Industry
Association, American Soybean Association, California Grain and Feed
Association, Corn Refiners Association, Institute of Shortening and
Edible Oils, Kansas Cooperative Council, Kansas Grain and Feed
Association, Grain and Feed Association of Illinois, Michigan
Agribusiness Association, Michigan Bean Shippers Association,
Minnesota Grain And Feed Association, Missouri Agribusiness
Association, Montana Grain Elevators Association, National Council
of Farmer Cooperatives, National Farmers Union, National Oilseed
Processors Association, Nebraska Grain and Feed Association, North
American Millers' Association, North Dakota Grain Dealers
Association, Northeast Agribusiness and Feed Alliance, Ohio
Agribusiness Association, Oklahoma Grain and Feed Association,
Pacific Northwest Grain and Feed Association, Pet Food Institute,
South Dakota Grain and Feed Association, Texas Grain and Feed
Association, USA Rice Federation, and Wisconsin Agribusiness
Association (collectively, AAI)
ARC (joined by the same parties that joined its opening
comment as well as the Nebraska Corn Growers Association)
BNSF
CSXT
Kansas City Southern Railway Company (KCS)
NGFA
NSR
Jay L. Schollmeyer for and on behalf of SMART-TD General
Committee of Adjustment (SMART-TD)
[[Page 61658]]
Texas Trading and Transportation Services, LLC, dba TTMS
Group, together with Montana Grain Growers Association (TTMS Group)
UP
USDA
Testimony at the June 10, 2015 hearing was received from:
AAR
ARC
BNSF
Canadian National Railway Company (CN)
Canadian Pacific Railway Company (CP)
CSXT
Michigan Agri-Business Association \23\
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\23\ Written testimony only.
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Montana Department of Agriculture
NGFA
NSR
SMART-TD
Transportation Research Board of the National Academy of
Sciences
TTMS Group
UP
USDA
Supplemental comments were received from:
AAR
ARC (joined by the same parties that joined its opening
comment)
NSR
[FR Doc. 2016-21305 Filed 9-6-16; 8:45 am]
BILLING CODE 4915-01-P