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Surface Transportation Board report recommends shipper-friendly changes to rate reviews

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Rail shippers could gain more leverage in rate disputes should the Surface Transportation Board (STB) proceed with its staff recommendations for how to reform rate review methodologies.

The Board has published recommendations made by its rate reform task force on how to improve existing rate review processes while also establishing new rate review methodologies that “are more attuned to the realities of the current transportation world,” the STB said in its report, released on April 25.

“Balancing between rates set by market forces and rates limited by government regulation is not a new challenge,” the report said. What has changed “is the financial health and competitive landscape of the railroad industry. Our proposals attempt to account for these changes.”

The recommendations address making changes to existing methodologies such as the stand-alone cost test, in which the STB judges how reasonable a challenged rail rate is based on how that rate compares to a competitive market, while also proposing new methodologies such as an incumbent network cost analysis, which would look at the cost structure of the defendant carrier instead of a hypothetical carrier.

The report asks the STB to establish a definition for long-term revenue adequacy, which is related to the financial health of a railroad. The Association of American Railroads says revenue adequacy used improperly can cap rail rates, while shippers question the STB’s treatment of revenue adequacy in helping to determine appropriate rail rates.

The report and its recommendations are here.

The report also suggests adopting measures to reduce the cost and complexity of small rate disputes, simplifying how to determine market dominance and calling for legislation that would require arbitration of small rate disputes.

The report also recommends making the three-benchmark comparison more accessible by removing the limitations on the aggregation of claims, improving sampling procedures and instituting page limits on arguments surrounding “other relevant factors,” the STB said.

While the recommendations are non-binding, they come at a time when the Class I railroads are posting sizeable profits while transitioning to precision scheduled railroading, an operating tool that seeks to cut costs.

The recommendations also appear to side more with shippers, according to initial reactions.

“We note that these recommendations lean pro-shipper rather than pro-rail and are another indicative data point of rising regulatory risk for rails,” Morgan Stanley analyst Ravi Shanker said in a research note.

“We note that these recommendations are not all new policy and the task force is not a rulemaking entity, but its report will be considered by the STB in finalizing rulemaking – the timing of which is uncertain given the STB is currently understaffed and any action will take time (and likely be accompanied by court battles),” Shanker said.

Meanwhile, some shippers reacted positively to the report.

“We are pleased to see that the report offers recommendations for modifying the current rate review methodologies and processes, including decreasing the costs and complexities of bringing a rate case before the Board,” said National Industrial Transportation League (NITL) president Jennifer Hedrick. NITL has been involved in board proceedings involving revenue adequacy.

Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.