Surface Transportation Board seeks input on class exemption methods

New approach looks at evaluating market conditions in question about exemptions; board also declares five Class Is to be revenue adequate

The Surface Transportation Board (STB) is seeking input on a new approach that looks at how it considers class exemption and revocation issues.

The board’s request came a day before it declared that five of the seven Class I railroads were revenue adequate for 2019.

Shippers for commodities such as forest products and scrap recycling have sought for their exemptions to be lifted so that the STB has greater oversight over them. These shoppers say that lifting the exemptions would give them  access to the STB’s regulatory authority when it comes to disputes over rail rates or service.

The board said last Wednesday that the STB’s Office of Economics developed the new approach, which “would serve as a potential tool for evaluating market conditions governing a commodity, including changes in conditions over time, but would not serve as a mechanical test for determining whether the commodity exemptions at issue should be revoked or whether a new exemption should be issued.” 

STB said it was seeking comment on the approach, including whether and how it should be used in a proceeding and its viability for future proceedings. Comments are due Dec. 4 and replies to initial comments are due by Jan. 4, 2021. 

The board has been considering this issue for several years. In March 2016, STB issued a notice of proposed rulemaking for a proposal to revoke the existing class exemptions for the following commodities: crushed or broken stone or rip rap; hydraulic cement; coke produced from coal; primary iron or steel products; and iron or steel scrap, wastes or tailings.  

The American Forest & Paper Association (AF&PA) and the Institute of Scrap Recycling Industries were also interested in this issue, and the board agreed in March 2019 to waive a rule that prevented board members from engaging in informal discussions with interested parties. 

“We are encouraged that the STB is considering reevaluating certain commodity exemptions as well as establishing a framework for evaluating market conditions. We will continue to analyze this proposal as it relates to the paper and forest products industry,” AF&PA said Friday. 

Certain commodities have been exempt from the STB’s oversight for decades. The Interstate Commerce Commission, which was the predecessor to the STB, used the commodity exemption as a way to ease the financial burdens of the rail industry by lessening their regulatory burdens. During the late 1980s and the early 1990s, the railroad industry had many more Class I railroads, but the industry was also facing financial hurdles. 

However, shippers argue that since the late 1980s, the Class I railroads have become financially solvent even though the railroads have hefty capital expenditures. 

Five Class Is were revenue adequate

In a separate, unrelated announcement Thursday, STB declared that five out of the seven Class I railroads were revenue adequate in 2019.

When a railroad is revenue adequate, it has achieved a rate of return on net investment that is equal to at least the current cost of capital for the railroad industry for 2019, according to STB. The board determined 2019’s rate to be at 9.34%.

The Association of American Railroads defines revenue adequacy as a tool that helps determine the ability of a railroad to operate and maintain its network while also attracting investments.

The Class I railroads that were revenue adequate in 2019 were CSX (NASDAQ: CSX), Norfolk Southern (NYSE: NSC), Union Pacific (NYSE: UNP), BNSF (NYSE: BRK) and the U.S. operations of Canadian Pacific (NYSE: CP).

STB determines annually which Class I railroads are revenue adequate per a congressional mandate. 

Click here for more FreightWaves articles by Joanna Marsh.

Related articles:

Forest products and scrap recycling rail shippers seek oversight

Surface Transportation Board adopts rule to improve data collected from freight railroads

Shippers approve of Surface Transportation Board’s decisions

Class I railroads, shippers alike weigh in on federal agencies’ feedback request

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.

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