STB Reform: Providing a Much Needed Dose of Reality

There is near universal agreement that the agency charged with resolving freight rail issues is stymied by its own outdated and overly-burdensome rules. The Surface Transportation Board’s (STB) Acting Chairman, Ann Begeman, perfectly encapsulated these concerns when she declared that the Board’s rate review process “is too costly, too time consuming, and too unpredictable.” As members of the Board continue to look for better and less bureaucratic ways to operate, a sensible proposal has emerged in the form of new legislation introduced by Senator Tammy Baldwin (D-WI), “Rail Shipper Fairness Act.”

Regulatory Morass

The heart of the problem plaguing the STB’s current rate review process stems from the Board’s arcane Stand-Alone-Cost (SAC) standard for measuring the reasonableness of rail rates. To successfully challenge a rate, a shipper must design, on paper, an entire railroad business, and prove that it could serve the same traffic at a lower cost than the rates charged by the existing railroad. If that sounds ridiculously complicated that’s because it is.

Recent SAC cases have taken an average of 5 years to complete and cost each shipper well over $5 million. Because of the incredible complexity involved, Russell Pittman of the US Department of Justice’s Antitrust Division concluded that SAC “has become what a reviewing court feared it would be: ‘a full employment bill for economists.’”

The cost and complexity might be somewhat tolerable if SAC truly was the “gold standard” for reviewing rates that some claim it to be. Unfortunately, SAC fails on economics grounds as well. In fact, Professor Gerald Faulhaber, the economist who first defined the SAC concept has testified to the Board that “The use of the stand alone cost test for STB rate making in the freight rail industry has no economic validity.” And if that was not enough, SAC also fails to answer the fundamental question of whether or not rates charged to captive shippers are unreasonable compared to competitive market rates.

Market Based Solution

The Rail Shipper Fairness Act introduced by Senator Baldwin directs the STB to develop an alternative rate review standard that would employ Competitive Rate Benchmarking. Under this approach, rail shippers that lack access to competitive transportation options could compare their rates to “benchmarks” for competitive rail traffic. The benchmarks would be based on real-world data for similar competitive traffic.

As they do now, railroads would remain free to set rail rates in competitive markets. A captive shipper, however, could challenge a rate that is substantially higher than its competitive benchmark. The STB would determine whether and to what extent such higher margins are necessary for the railroad to be financially strong, to maintain its network and to attract capital.

The concept of rate benchmarking is well-grounded in economics and widely-employed by businesses and government agencies. In fact, using benchmarking to address skyrocketing freight rail rates was endorsed in a 2015 report by the National Research Council’s Transportation Research Board, which constructed models demonstrating how the approach could be implemented in practice.

The Rail Shipper Fairness Act wisely pushes the STB to adopt a more transparent, predictable and efficient alternative to the SAC standard. Doing so would finally allow the Board to judge the reasonableness of rates using real world data on rates charged in competitive markets rather than hypothetical data derived from a fictitious railroad.

With the support of so many experts and stakeholders, it’s hard to deny that adopting this practical reform will go a long way in helping get the STB back on track and get our nation’s freight rail system back to work for American manufacturers, farmers and energy producers.