Rail Rate Ruling for Small Shipper is No Surprise

The DuPont small shipper ruling by the Surface Transportation Board (STB) is clearly a negative for the railroads, but the outcome wasn't a surprise, says William Greene, Morgan Stanley Research.

The Surface Transportation (STB), the main railroad regulatory body, granted rate relief to DuPont in a rate case against CSX, said Greene. The ruling is significant in that this was the first case decided using new simplified standards for rate cases for small shippers (the Three-Benchmark method). As a result, CSX's rates for several DuPont movements will be capped at a regulatory limit for 5 years.

More small shipper cases will likely be filed, but a simple cost-benefit analysis implies that most small shippers won't undertake the burden of filing a case, Greene observes.

Capacity remains in the forefront of regulators' minds. “We think it's unlikely regulators will push measures that restrict rail pricing and jeopardize much needed reinvestment in rail,” Greene adds. This ruling actually highlights the need for a regulatory framework based on replacement cost, which if adopted, would remove any near-term regulatory risk to rail pricing. A proposal for moving to a replacement cost methodology for rate cases is currently under review at the STB.

The new guidelines should result in more filed cases, but we don't expect a stampede, Greene continues. With relief capped at $1 million over five years, and an average litigation cost of $250,000 (probably over $500,000 after consultants and other fees), most shippers can't justify the investment.

Morgan Stanley expects a number of appeals to this decision, including attempts to change the methodology. The use of book value to measure returns in the smallest rate cases underscores the importance of the Association of American Railroads' replacement cost proposal. The STB is aware capacity is a concern, and we'd expect to see a stronger push for a replacement cost framework, said Greene.

The STB estimates that up to 45% of captive regulated traffic (that traffic earning more than 180% of variable cost) could be eligible for the Three-Benchmark relief method. However, it's unclear how much revenue this might represent.

While it is now easier for small shippers to seek and obtain rate relief, the potential dollar amounts awarded are likely modest. The STB needs to insure that any relief is small enough to support adequate returns and reinvestment. For those shippers who are larger in scale, the STB is not changing the rules, and a standard Stand-Alone Cost (SAC) model must still be employed. “We do not expect an increase in filings of large rate cases,” said Greene.

View more recent news from Outsourced Logistics.

TAGS: Archive
Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.