New way sought for captive grain shippers to challenge rail rates

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National Grain and Feed Association (NGFA) has submitted an extensive proposal urging the federal Surface Transportation Board (STB) to establish new rules and procedures that captive grain shippers could use to challenge rail freight rates they believe are unreasonable.

The STB on Dec. 9, 2013 launched a new proceeding (EP 665, Sub. No.-1) to explore whether a new approach is needed to allow captive shippers to challenge grain rail rates.  The STB initiated the proceeding in large part in response to previous filings by the NGFA at the STB that maintained the agency's current procedures for challenging unreasonable rail rates are unworkable for agricultural shippers. 

"The NGFA commends the STB for commencing this long-overdue review...," the NGFA said.  "We are pleased the STB has recognized that its current rate case procedures and rules are not amenable to challenges to rail rates for agricultural commodities, and that it is willing to consider adopting rate rules and procedures that are specific to...the unique aspects of the agricultural industry and commodity markets...that are both domestic and international in nature." 

The NGFA noted that current ineffective procedures for challenging unreasonable rail rates have enabled railroads to extract "excessive monopoly profits" from captive agricultural shippers and given carriers the power to pick "winners and losers in the marketplace" by setting freight rates at levels that make commodities price-uncompetitive in certain markets.

Under the Staggers Rail Act of 1980, shippers may challenge a rail rate that exceeds 180 percent of the rail carrier's variable cost of providing the service (revenue-to-variable cost ratio), as long as there is no effective intermodal competition (such as truck or barge) for the transportation movement.  The NGFA's economic analysis found that for five commodities analyzed using the most recent (2012) aggregated rail rate data available, the Class I (major) carriers on average exceeded the 180 percent threshold on nearly 31 percent of corn shipments; 49 percent of wheat shipments; 43 percent of soybean shipments; 21 percent of soybean meal and soybean hull shipments; and 65 percent of ethanol shipments.

The NGFA's statement reiterates its view that the STB's existing three methods for challenging unreasonable rates - the  "stand-alone cost" (SAC), "simplified SAC" and "three-benchmark"  methods - are inappropriate because they are too cumbersome, costly and time-consuming given the nature and characteristics of agricultural commodity shipments. Characteristics that distinguish agricultural commodity shipments from other types of movements, such as coal and other bulk commodities, include the fact that they: 1) involve multiple, versus static, origin-and-destination pairs; and 2) are affected by fluctuating supply/demand fundamentals that can change shipping patterns more frequently and more rapidly than occurs for non-agricultural commodities.  Further, the NGFA said, the STB's current rate-challenge procedures do not account for instances where a railroad excessively increases rates across-the-board for specific commodities, rather than singling out a particular shipper for market abuse.

The NGFA's proposal features a new rate-reasonableness methodology - the "agricultural commodity maximum rate methodology" - that the association recommends be used by the STB for rail rate cases involving all commodities eligible for rail arbitration under NGFA's Rail Arbitration Rules. This includes all grains and oilseeds, products derived therefrom (including corn and soybean meal and oil, flour, distillers grains and other feed ingredients), and ethanol and biodiesel. The NGFA's main objectives in proposing the new methodology are to simplify the process for challenging unreasonable rail rates, while greatly reducing the cost of bringing a rate challenge and expediting the timeliness of STB decisions. 

The NGFA's statement noted that the current revenue-adequate - or near revenue-adequate - status of North America's Class I carriers provides an unparalleled opportunity for the STB to adopt a new rate-challenge methodology, such as the one proposed by the NGFA. The NGFA noted that even under the STB's current calculations, the BNSF Railway, Union Pacific Railroad and Norfolk Southern Railway are revenue adequate, with the CSX Transportation Co. nearing revenue-adequacy status. Further, the Canadian National Railway would be deemed revenue adequate and the Canadian Pacific Railway would be close to revenue adequate if the STB adopted the NGFA's recommendation that those carriers' status be based upon the revenues of their entire North American (rather than just U.S.) operations.

Key Elements of NGFA's Proposed New Methodology:  The NGFA's proposed new methodology utilizes both rail revenue-adequacy determinations and the current market for the type of captive traffic whose rate is being challenged to determine a maximum reasonable rate for such shipments. 

The NGFA-proposed methodology relies upon comparable traffic to the challenged rail movement drawn from all railroads using the STB's waybill data sample.  The NGFA methodology then makes commodity-specific adjustments to the revenue-to-variable-cost ratios of the comparison group movements using a "revenue adequacy adjustment factor" to reflect each Class I railroad's revenue-adequacy status. 

In determining such comparability, the NGFA proposal assesses such factors as distance of the movement; the type of commodity being hauled; the railcar type; whether the railcar is shipper- or railroad-owned; and the type of movement, such as single-car multi-car or unit-train shipments. 

In determining whether a specific railroad's rates are unreasonable on a given movement, the NGFA's proposal compares the revenue-to-variable cost of that shipment against the revenue-to-variable cost of shipments in the comparable traffic group. Under this concept, the revenue-to-variable costs of the comparable movements of each Class I carrier, adjusted by the revenue adequacy adjustment factor, would be averaged to produce a maximum reasonable revenue-to-variable cost figure for the given shipment(s). This calculation then would be subject to the 180 percent STB jurisdictional floor for maximum reasonable rates.

The result would determine a maximum reasonable rail rate that could be charged by the carrier for the affected movement for a period of five years, while still maintaining the carrier's revenue-adequate status.

To provide a much simpler and less-costly rate-challenge procedure, the NGFA-proposed methodology uses information obtainable from the STB or available publicly. NGFA's proposal also does not allow the use of "other relevant factors" or other methods that have been utilized by carriers in the past to complicate rate-challenge proceedings.

Finally, the NGFA proposal would not place any limits on the amount of rate relief that a challenging shipper could receive if a rate challenge was successful.

The NGFA also proposes a procedural schedule under which the STB could issue a final decision in 170 days or less after a complaint is filed.  Further, the NGFA's proposal urges the STB to reconfirm existing rules that allow parties directly or indirectly affected by unreasonable rail rates to seek relief.  That would permit parties, such as agricultural producers, who do not directly pay rail rates to challenge the reasonableness of the rail rates charged to grain elevators and other intermediaries to whom they sell their crops. 

Next steps: The STB has set an Aug. 25 deadline for parties involved in this proceeding to submit reply comments in reaction to the opening statements that have been filed. The STB has indicated it likely will conduct a public hearing in the grain rail rate proceeding later this year.


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