Rail economist: STB’s new rule helping ‘captive’ shippers needs testing

A photograph of a rail yard with several rows of parked intermodal containers and hopper cars.

The Surface Transportation Board (STB) has established a final rule aimed at streamlining the process to determine market dominance in rate reasonableness proceedings, although whether the rule will function as intended remains to be seen.

“This appears to be a significant step in the right direction for shippers and railroads. It streamlines the market dominance test for rate cases that had turned into an incredibly burdensome and complex process,” said former STB chairman and transportation attorney Dan Elliott III. 

“The proof will of course be in how it is applied in future cases to see if it is effective. I do have an optimistic view that it will make rate cases easier to litigate from now on,” Elliott said.

The board says the new rule, part of STB’s broader efforts to make rate review procedures more accessible, efficient and transparent, provides shippers with a way to simplify the procedure to determine market dominance. 

According to U.S. code, market dominance happens when there is an absence of competition from other rail carriers or other modes of transportation. A shipper in this situation is called a “captive” shipper.

STB hopes this option will make the exploration less costly and time-consuming for smaller cases. The rule becomes effective on Sept. 5. 

Some shippers viewed the final rule favorably because it reflects STB’s willingness to make reforms that are viewed as shipper-friendly. 

The American Chemistry Council “commends the Board for providing a streamlined alternative to demonstrate railroad market dominance in certain rate cases. This is an important step in the Board’s ongoing reform efforts. It is critically important for all shippers to have a workable process to challenge excessive, non-competitive rail rates,” the group said.

But others say there are still ambiguities over how to apply the determining factors to a proceeding. The board may need to go through a rate reasonableness proceeding to determine the rule’s effectiveness.

“On the surface (no pun intended), the STB’s seven new rules don’t impress this rail economist. There doesn’t seem to be a clear logic that deals with defining ‘monopoly rents,’” said JIm Blaze, FreightWaves contributor

“The STB speaks as if all conditions are linear between an origin and a destination. It doesn’t consider alternate sourcing as a competitive offsetting condition for an aggrieved shipper. … The 500-mile rule [also] appears arbitrary. Why wouldn’t 350 miles or even 700 miles be relevant? It is as if the regulators are ignorant of how competition by mode and by different corridors exhibit very different competitive and pricing share shifts,” Blaze said. 

He continued, “From a practical business value view, is this a big-deal or a little-deal STB rule? We can’t tell. We will likely need litigation in order to see if these ‘tests’ are of value.”

What is the final rule?

The board has been looking at this issue over the past year, issuing a notice of proposed rulemaking on the subject in 2019. 

After a public comment period, the final rule defines seven factors that a complainant must demonstrate:

  • The movement has a revenue-to-variable cost ratio of 180% or greater.
  • The movement would exceed 500 highway miles between origin and destination.
  • There is no intramodal competition from other railroads.
  • There is no barge competition.
  • There is no pipeline competition.
  • The complainant has used trucks for 10% or less of its volume (by tonnage) subject to the rate at issue over a five-year period.
  • The complainant has no practical build-out alternative (regardless of transportation mode) due to physical, regulatory, financial, or other issues (or combination of issues).

If a complainant doesn’t meet these criteria, a shipper may still use the non-streamlined market dominance approach during a rate reasonableness proceeding. For either scenario, defendant railroads would have an opportunity to rebut a complainant’s evidence, a shipper said. 

STB is also planning to initiate a proceeding to explore whether to apply mileage thresholds for certain commodities, such a chlorine and agricultural products. 

The 52-page final rule is part of the proceeding Ex Parte 756, and it may be found here

Click here for more FreightWaves articles by Joanna Marsh.

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