Association of American Railroads President and CEO Edward R. Hamberger said a report released by the Surface Transportation Board shows that changes to the existing regulatory structure would not benefit the larger transportation system.
Recent attempts to “re-regulate” the Surface Transportation Board’s (STB) railroad rate review process are “misguided,” according to Edward R. Hamberger, president and CEO of the Association of American Railroads.
Hamberger said that a report released earlier this week by the STB shows that “shippers have cost-effective alternatives to bring rate complaints to the STB, and changes to the existing regulatory structure – including different rate review approaches or new access regulations – would not benefit the larger transportation system.”
The report, which was conducted by InterVISTAS Consulting, LLC, concluded that the existing stand-alone cost (SAC) methodology recognizes economies of scope with respect to total costs via the contribution of bridge traffic to the fixed costs of a stand-alone railroad (SARR), there could be additional economies of scope effect in reducing the marginal/variable costs of the traffic in dispute, and the STB’s guidance on SAC submissions “allows and even encourages shippers to consider such economies.”
In addition, “at least one observer has recommended that the SAC methodology allows shippers to consider economies of scope between the SARR and all the other lines in the carrier’s network, even if in different regions,” the report said.
“This is not a recipe for simplification of the SAC methodology,” it noted. “It is, indeed, quite the opposite.
“It also seems to be at odds with the Staggers Act provisions for line rationalization and abandonment. These provisions indicate that policy requires rail lines to stand on their own financially and thus introducing revenue contribution from other lines seems inconsistent with the legislative provisions.”
The InterVISTAS report noted two “basic” methods for simplifying the SAC process: simplifying the definition of the “most efficient network,” and “simplifying the contribution of the cross-over traffic, especially now that the U.S. rail network is operated by only seven Class I railroads.”
At the same time, however, the report said “simplification of either the Three-Benchmark or Simplified-SAC tests risks moving the approaches further away from the bedrock CMP principles, undermines the reliability of the tests, and would not necessarily incentivize shippers to use those tests.”
InterVISTAS said one alternative to the STB’s Full-SAC approach would be a new regulatory regime focused on offering competitive access, but warned that if the board adopted such an approach, “A) Shippers would lose access to maximum rate regulation; shippers would have no assurance that the rates offered by a competitor would be less than that offered by the incumbent; B) There would still need to be a regulatory role to set carrier-to-carrier access prices; and C) Unless Congress is willing to abandon carrier revenue adequacy as a major legislated objective of U.S. freight rail policy, the rate reasonableness methodology for access charges will still require some form of SAC analysis for the most common disputes, such as those involving coal rates.”
The report concluded that STB’s Full-SAC rate review process has “stood the test of time as a maximum rate reasonableness methodology and is justifiable in some cases. However, the less expensive Simplified-SAC and Three-Benchmark methods are also available as options for shippers, and there is reason to believe that shippers can achieve similar results to Full SAC under these less-costly alternatives.”
According to Hamberger, five findings from the report “particularly validate the industry’s view that many of the currently proposed policy changes are misguided:
• Shippers have several avenues to challenge the reasonableness of rail rates, including not only the full-SAC method (which the report confirms is the correct, economically sound approach), but also two lower-cost and simpler alternatives that will produce similar outcomes.
• Artificially limiting the ability of railroads to earn adequate revenues, including through economically unsound methodologies such as rate caps, would be detrimental to the freight rail network and the majority of shippers it serves.
• Replacement cost, which recognizes the massive economic expense to build and maintain a railroad, is the economically correct measure to use.
• The STB’s rate regulation regime correctly reflects the economies of scale, scope and density of the railroad industry.
• Forced access would not provide an appropriate or cost-effective method of rate regulation, and would only inject further government intervention and rate reviews.”
“The InterVISTAS Consulting report rightly credits partial deregulation as the driver of today’s healthier freight rail industry,” said Hamberger. “Upending the positive effects that exist today from that landmark change through a series of policy ‘fixes’ is bad policy, particularly at a time when railroads face a permanently changed customer base and uncertain headwinds in the market.
“These market changes only increase the longstanding demand for intensive capital investment in the freight rail network,” he added. “We look forward to continued dialogue with the STB and hope the Board will incorporate these findings into its ongoing work.”
The STB earlier this month issued an Advance Notice of Proposed Rulemaking that proposed a new “streamlined” procedure to resolve small rate disputes between shippers and Class I railroads.
The board said in a statement it plans to hold an economic roundtable next month and has invited independent economists from InterVISTAS, the Transportation Research Board of the National Academy of Sciences, Georgetown University, and the Board’s economists to engage in a public discussion of the issues and conclusions contained in the InterVISTAS report.
“I am pleased that the InterVISTAS report is complete, and that the Board and industry stakeholders will have an opportunity to review and discuss its findings on rate reasonableness methodologies,” said STB Chairman Daniel R. Elliott III. “I take very seriously the impact that our rate case proceedings and methodologies have on industry and commerce. I look forward to thoughtful input from the transportation industry and a fruitful exchange of ideas as we forge a way ahead on this complex topic.”
AAR President: Re-regulation of STB rate review process ‘misguided’
