STB OKs Rate Review Process That Could Increase Its Cases
This story appears in the Oct. 8 print edition of Transport Topics.
The Surface Transportation Board on Sept. 27 outlined a new process for determining whether rail freight rates charged to shippers are excessive, and the new process could increase the number of cases before the agency.
The ruling, made in a decision involving CSX Corp. and chemical shipper M&G Polymers USA LLC, describes a new three-step process for determining whether rates are excessive. It would replace a standard based on 180% of variable cost.
That percentage amount to determine whether there is effective rail or other competition has been in place since the 1980s. If the disputed rate is determined to be above that amount, STB can exert jurisdiction in what it calls “market dominance” cases. If the rate is below that amount, the railroad’s rates cannot be challenged.
While prices for intermodal traffic are exempt from STB regulations, rate cases often involve trucking because over-the-road shipments can be an alternative to rail carload moves that can be under STB’s jurisdiction.
The CSX/M&G case highlighted the issues raised by rail/truck competition as well as the problems with the current approach, STB said.
“Market dominance is a complicated issue to resolve in this case,” the decision said. “There is a compelling need for an objective approach, given the rapidly escalating complexity of the market dominance inquiry in rate cases.”
“Over the last two decades, rate cases were brought almost exclusively by utilities challenging rates for the transportation of large coal volumes,” STB said, referring to cases where it found shippers were overcharged by more than $300 million. “Truck or truck/rail alternatives are rarely a feasible alternative to direct rail service in such cases.”
“The board has been striving to make its rate review process more broadly available to shippers other than large utilities. Many of these new cases — involving challenges to dozens, if not hundreds, of transportation rates — raise complex market dominance issues.”
The case began in 2010, when M&G, the U.S. subsidiary of an Italian company, challenged rates for shipping polyethylene terephthalate. That chemical, also known as PET, is used in packaging.
CSX asked, and both sides agreed last year, to split the case. STB in one part would review the process of determining “market dominance” and in the other part would determine whether CSX’s rates exceeded the threshold.
What STB decided to do, in effect, was to create a variable cost standard with different amounts based on the circumstances of each individual case.
The new approach was justified, the decision said, because M&G has used both trucking and intermodal service as an alternative to rail carload shipments whose rates were being challenged.
The first step in the new review process is for STB to determine a “limit price,” or the rate that is the most a railroad could charge without triggering a diversion of freight to trucks. Then the “limit price” would be compared to the ratio of revenue to variable costs. Finally, the “limit price” would be compared with the average markup CSX would need to achieve revenue that would justify reinvestment.
After doing those calculations, the agency would decide whether the rates were excessive or not.
STB also said the new approach was meant to speed up future cases as well as encourage the filing of more rate actions.
Shippers have been contending since the 1980s that the agency’s rate case review procedure is cumbersome, slow and costly, with costs that can run into the millions of dollars.
One of those rate cases was before the agency for nearly 15 years.
The existing method of determining “market dominance” uses the concept of creating a hypothetical railroad and calculating its costs relative to the actual disputed rates.
The Sept. 27 ruling also found that CSX did have market dominance in 36 of 42 rates that were challenged. After the comments are reviewed, the agency will decide penalties.
