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Legal Briefs: Should rail rates be regulated again?

April 4, 2006
An often misunderstood concept among shippers is the extent to which railroad rates are regulated, if indeed they are regulated at all. In practice few

An often misunderstood concept among shippers is the extent to which railroad rates are regulated, if indeed they are regulated at all. In practice few rail rates are regulated. Most rail traffic flows under agreements between a shipper and a rail carrier, or by a shipper tendering traffic to a rail carrier in accordance with the carrier's announced rate schedule. Many shippers believe that all rail rates are somehow regulated by the Surface Transportation Board (STB), the successor to the Interstate Commerce Commission (ICC). Not so.

A little history can help. Starting in the 19th Century, through the ICC, the government began to regulate rail rates. During World War I the railroads were even nationalized. The Depression hurt the rail industry badly, and into the 1970s there were a series of bankruptcies and consolidations. Some of these consolidations forced financially stable railroads to absorb those in trouble. Throughout this period all rail rates were regulated and a complicated system of rail tariffs administered by the ICC developed.

Beginning in 1973 Congress stepped in to rationalize the rail rate regulatory structure and make it more responsive to market forces. Finally, with passage of the Staggers Rail Act of 1980, government regulation of most rail rates ended. Today the STB has the potential to regulate certain rail rates although in only a few instances has the STB actually exercised this authority.

Under the ICC Termination Act of 1995 (the current version of the Interstate Commerce Act), the STB has no jurisdiction over rates that the shipper and railroad have agreed to in a written contract. Even when there is no contract, the STB may take regulatory jurisdiction over a rail rate to ensure that it is reasonable only if the rail carrier has "market dominance" over the transportation to which the rate in question applies. No market dominance, no regulation.

"What in the world is market dominance?" a shipper may wonder. Basically it means the absence of effective competition from other rail carriers or other transportation modes for the traffic in issue. It presents threshold questions of whether other rail carriers, motor carriers or water carriers already serve the traffic or could readily serve it.

Under the statute it is conclusively presumed that a railroad does not have market dominance if its rates result in revenues that are less than 180% of its variable cost of providing the transportation. This presents a major barrier to the STB assuming control over a rail carrier's rate, and Congress intended it to be that way. Under the ICC many rail carriers became financially shaky because often a rate increase would result in a lengthy and complicated proceeding before the ICC to determine if the resulting rate was reasonable. The 180% standard was designed to stop the practice of practically all rate increases being challenged in a regulatory setting.

Even if a threshold of market dominance is shown, it does not mean that the STB will order a rate changed. If market dominance exists, then the STB must determine if the applicable rate is reasonable. The STB determines whether or not a given rate is reasonable according to a concept known as "constrained market pricing." Among other things, constrained market pricing includes what is known as "stand-alone cost" (SAC) analysis.

Under SAC analysis a rail rate cannot be higher than what a hypothetical carrier would charge to provide the service in a competitive market. With SAC, it is assumed that the carrier would need to cover all of its costs, including earning a reasonable profit. The SAC concept places the burden on the complaining shipper to design for the STB a hypotheticalstandalone rail carrier to serve the traffic in issue. This can be a complicated process for a shipper, replete with issues related to cost and cross-subsidization.

Market dominance actions before the STB are very complicated and take considerable time to resolve. This was evident in a decision this February by the U.S. Court of Appeals in Washington, D.C., which rejected an appeal by a coal shipper, PPL Montana, of an STB decision finding that the BNSF Railway did not have market dominance over certain coal movements originating in Wyoming.

The STB has recognized that problems do arise between rail shippers and rail carriers. It recently began an expedited rulemaking to reexamine the SAC test and its impact on captive shippers. In the rulemaking the STB wants to make sure that under the SAC test rate relief, if needed, will be applied fairly.

In addition, pursuant to legislation, the STB has established a Railroad-Shipper Transportation Advisory Council to discuss matters of concern to small rail shippers and small railroads. The 15-member council consists of representatives from both large and small shippers, small railroads, unions, and intermodal carriers. The Council is supposed to consider general rail problems and does not decide or intervene in specific shipperrailroad disputes. The STB also has a Rail Consumer Assistance Program within the Office of Compliance and Enforcement ([email protected]) for shippers to present rail carrier issues.

At the present time few rail rates are regulated and the process for having a rate regulated is complicated and time consuming.

James Calderwood is a partner with the law firm of Zuckert, Scoutt & Rasenberger L.L.P., in Washington, D.C., where he concentrates on transportation matters. He can be reached at [email protected]. This column is designed to provide information of general interest. It cannot substitute for in-depth legal analysis of particular problems. Readers are urged to seek counsel concerning individual situations.

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