STB chief predicts legal challenges to railroad rate reform

If one thing could be taken away from two days of hearings on railroad rate reform, it was that neither railroads nor their customers will be happy with whatever rule federal regulators propose.

That’s because both sides are as dug in as ever on their respective viewpoints, with shippers looking for ways to make challenging rates less costly and less onerous but railroads claiming any change would stunt revenue growth and deter investment.

“I’m not too surprised,” Surface Transportation Board (STB) Chairman Ann Begeman told FreightWaves on Dec. 13 during the second day of oral comments. “I’m confident based on what I’m hearing on all of the things that we’re proposing that we will probably be challenged [in court] on everything. Which is why I believe there’s no way we could propose something, and have it go through the court process, while I’m still here.”

Begeman is one of three members on the five-member board (two seats are currently unfilled). Her current term expires Dec. 31, 2020.

Despite the likelihood of a court challenge, however, Begeman did not rule out a rate reform proposal next year. “If my colleagues and I are doing things by consensus and we can reach an agreement on what we think is the most legal and appropriate step, we’ll take it. And if we don’t, that doesn’t mean it won’t be taken up” by the next complement of board members, she said.

The two-day hearing in Washington on the issue of railroad revenue adequacy was meant to give railroads and shippers an opportunity to comment on recommendations by the STB’s Rate Reform Task Force (RRTF), including:

  • Defining long-term revenue adequacy: The task force recommended defining this by looking at the annual determinations over “the shortest period of time, not less than five years, that includes both a year in which a recession began and a year that follows a year when a recession began.”
  • Applying a rate increase constraint: The rate increase constraint would apply to long-term revenue adequate carriers, and it would seek to identify a point beyond which further application of differential pricing would be unwarranted.
  • Suspending bottleneck provisions: The task force recommended that STB consider suspending the bottleneck provisions applied to long-term revenue adequate carriers.
  • Modifying the simplified stand-alone cost (SAC) standard: The RRTF suggested reinstating the simplification of the Road Property Investment analysis to help determine whether a long-term revenue adequate carrier’s rate is reasonable.

The first day featured representatives from AAR, BNSF (NYSE: BRK), Norfolk Southern (NYSE: NSC), Canadian National (NYSE: CNI) and Canadian Pacific (NYSE: CP). Shipper groups included the American Chemistry Council, the National Coal Transportation Association, the Western Coal Traffic League, Auriga Polymers, Olin Corp. (NYSE: OLN), the Freight Rail Customer Alliance and PBF Energy (NYSE: PBF).

Shippers on the second day included representatives from the National Grain and Feed Association, the Fertilizer Institute, and the American Fuel & Petrochemical Manufacturers, and railroads CSX (NASDAQ: CSX) and Union Pacific (NYSE: UNP). Others invited to speak at the hearing on the railroads’ behalf were academics and those representing their investors.

Scott Group, a senior analyst at Wolfe Research, said competition from trucks could compound the effects of any rate regulation the STB decides to impose. “The railroads are healthier than they were 10 years ago, but there are clearly some real competitive threats over the next decade,” Group told the board.

In addition to coal shipments being in a long-term decline, Group said, “at some point you have the risk of your biggest competitor seeing a materially improved cost structure if they move to autonomous and electric trucks. We want to create a regulatory backdrop that incentivizes the rails to continue to invest, and to compete against what could become a tougher competitor.”