It’s time for a more efficient and workable process for reviewing freight rail rates 

What action is STB taking?

Following an extensive hearing to examine the state of freight rail competition, the STB opened up several proceedings to review options for improving how the Board operates. One of the more significant dockets that the Board is pursuing involves a review of its outdated rate review standards.

In its current proceeding (Ex Parte 722), the STB is seeking public input on how it should apply a “revenue adequacy” standard in rate cases. This tremendous opportunity would provide a more practical and fair process for resolving rate disputes between shippers and railroads.

What does “revenue adequacy” mean, and why is it important to STB’s oversight of freight rail rates?

The term “revenue adequacy” recognizes that to provide a healthy U.S. rail network, railroads must be able to earn enough revenues to cover costs, make long-term investments, and earn a reasonable profit.

The STB’s current rate review standards were put in place more than three decades ago when the railroad industry faced severe financial hardships and no railroad was considered “revenue adequate.” Since that time, the STB has relied solely on its Stand-Alone Cost (SAC) standard, which allows a railroad to charge its captive shippers rates that are higher, even many times higher, than the rates charged to shippers with competitive transportation options.

In addition to the SAC standard, the STB also says that captive shippers should not be required to pay “differentially higher rates” beyond what is necessary for a railroad to be “revenue adequate.” Despite evidence that railroads are now highly profitable, the STB has never applied this “revenue adequacy” standard when reviewing rate cases. In effect, the STB still assumes that all railroads are not earning sufficient revenues.

Why is a “revenue adequacy” rate standard needed?

The STB’s rate review procedures are increasingly unworkable. To successfully challenge a rate under the SAC standard, a shipper must prove that it could build and operate its own railroad for less than what the railroad currently charges. The STB estimates that a SAC standard challenge takes more than three and a half years and costs a shipper $5 million plus the higher tariff rates that it must pay while the case is pending. Many rail customers find that they simply are unable to afford to challenge a rate under these onerous procedures. Even former STB Chairman Dan Elliott has stated, “We should never be satisfied with a process that is so expensive and time consuming for all parties.”

These procedures are largely unnecessary because many railroads are financially strong and no longer need the protection of the SAC standard. According to a recent U.S. Senate report, the railroad industry is setting records for earnings and has been outpacing the broader transportation market for years on Wall Street. Professor Gerald Faulhaber, the economist who defined Stand-Alone Cost, recently submitted testimony to the STB concluding:

“In today’s world of highly profitable railroads, it becomes clear that charging close-to-monopoly prices for rail service to captive shippers is not necessary…and this model of price-setting loses whatever value it ever had. Bottom line: whatever minimal use the stand alone cost test may have had, it now has none.”

How would adopting this new standard improve upon the status quo?

Implementing the “revenue adequacy” standard will help ensure the STB’s rate review procedures meet the current needs of both railroads and shippers. It would provide a fairer determination of “reasonable rates” for shippers that lack competitive rail service while maintaining each railroad’s ability to be profitable and attract investment. In addition, it would provide a more workable, less burdensome process and allow the STB to operate more efficiently.

This guest blog post is by Chris Jahn, President of The Fertilizer Institute.

The Fertilizer Institute (TFI) is the leading voice of the nation’s fertilizer industry. Tracing its roots back to 1883, TFI’s membership includes fertilizer producers, wholesalers, retailers and trading firms. TFI’s full-time staff, based in Washington, D.C., serves its members through legislative, educational, technical, economic information and public communication programs. Find more information about TFI online at TFI.org and follow us on Twitter at @Fertilizer_Inst. Learn more about TFI’s nutrient stewardship initiatives at nutrientstewardship.org and on Twitter at @4rnutrients.