Point/Counterpoint: STB Annual Rail Rate Index Study

Written by Railway Age Staff
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Editor’s Note: The following is the conclusion to a respectful exchange of ideas between former Surface Transportation Board Director and Chief Economist Dr. William Huneke and Jay Roman, President of Escalation Consultants, Inc. about the STB’s annual Rail Rate Index Study, the most recent of which can be accessed here. Thank you to Railway Age Capitol Hill Contributing Editor Frank N. Wilner for his input and assistance. Most important, thank you to Jay Roman and Bill Huneke for adding some color to what us non-economists sometimes call “the dismal science,” a disrespectful alternative name for economics coined by the Scottish historian Thomas Carlyle in the 19th century. I’ll climb out of the regulatory weed patch now and allow you, the reader, to take a deep dive. – William C. Vantuono

Jay Roman:

The following is provided in response to criticism received on my Railway Age article Annual Rail Rate Index Study: A Deeper Dive, which critiqued the results of the STB’s Annual Rail Rate Index Study (STB Study).

My major criticism of the STB Study is that it leaves the impression that current rail rates are “reasonable.” The STB Study can and will likely be used by lobbyists, politicians and railroads to show that there are no major problems with rail rates. This may not be the STB’s purpose for the Study, but this is likely how companies that benefit from railroads ability to continually increase rates will use the findings in the Study.  In other words, if rates are “reasonable” there is no need to change STB regulations to have a more effective process for shippers to challenge rates. 

My critique was not based on an in-depth analysis of the methodology the STB used in developing its rate index over the 1985 to 2019 time frame. My criticism primarily focused on the fact that railroad rates and expenses have both been significantly impacted by the big change in railcar ownership, as well as the large increase in the average length of haul for rail movements. 

Dr. Huneke’s critique of my analysis indicates that the STB did attempt to adjust rates for changes in car ownership and the increase in the length of haul in its Rate Index Study. The STB did use a complex process to try and adjust the trend in rates for the change in the composition of rail movements over time. However, the STB’s ability, or lack of ability, to accurately accomplish this does not provide guidance to help determine if current rail rates are reasonable. By only considering the impact of the change in the composition of rail movements on revenue and ignoring the impact it has had on expenses, one only gets the half of the picture that supports the position that rates are reasonable. When the change in expenses and revenue are both considered, the picture of whether current rates are reasonable is very different.

Dr. Huneke also states that, “Merely asserting the need for new regulation to reduce rates needs more justification than Jay Roman provides.” I was not proposing new regulations designed to reduce rail rates. There simply needs to be a leveling of the playing field for shippers’ chance of succeeding in a rate challenge. This is sorely needed, as no one is using the existing rate regulation process as demonstrated by the fact that there are no rate cases pending before the STB. 

The graph below was used to summarize my conclusion for why current rail rates are not reasonable. The Illustration shows that, between 1985 and 2004, the Real Premium Above Expenses changed roughly proportionately with the rate of inflation. After 2004, the Real Premium Above Expenses increased 313% from where it was in 2004. The large increase in the Premium represents a big success story for railroads as it is the highest it has ever been. This is not reflected in the STB Rail Rate Index Study.

In my experience, benchmarking of things like revenue, operations and expenses are almost always undertaken to help improve performance. This type of analysis is successful when it shows where things are working properly vs. where there are problems that need to be corrected. The large increase in the premium above rail expenses, shown in the Illustration, is a good example. The Illustration creates questions that need to be answered to help improve the current system. Questions such as: 

  • Why has the premium above rail expenses continued to increase since 2004?
  • Is most of the revenue generated from the premium going to capital investment that improves the rail system or is it leaving the system and going to stock dividends, stock buybacks or distributions to a holding company?
  • If the amount of revenue railroads collect from moves with RVC’s above the STB 180% Jurisdictional Threshold is increasing, then why are there no rate cases before the STB?

The STB Rate Index Study does not raise these types of questions. It indicates that in real terms, rates are better now than they have been in the past. As a result, the Study may send the message to many shippers that the STB believes there are no significant problems with rates. For this reason, it would be good for the STB to clarify what its take away is from the Rate Index Study. The STB could clarify what the rate changes in the Study represent as well as what they don’t represent. This would be very helpful in clearing up any confusion with how the Study should be used by shippers, railroads, politicians, lobbyists and consultants. 

When looking at the continuous increases in the Premium Above Rail Expenses since 2004, I am reminded of a negotiation that I was involved with several years ago. In the negotiation, I asked the question “When is Enough, Enough?” The response was, “It is Never Enough!” Based upon the continuous increase in the Premium Above Rail Expenses, it would be good for the STB to help establish when enough, is enough. 

Under existing rate regulations, it is the shipper’s primary responsibility to demonstrate that a rate is not reasonable. It would be very helpful for the STB to establish a process that when Revenue to Variable Cost Ratios get to a certain level above the norm, the primary responsibility would switch to the railroad. The railroad would then have the primary responsibility for demonstrating that a rate is reasonable.

Though this change may initially seem like semantics, it could have a very big impact. This change could:

  • Impact the ease with which a shipper could initiate a rate case at the STB
  • Provide a better picture of the likelihood of prevailing in a rate case 
  • Make it easier for shippers and railroads to reach a negotiated resolution on problem rates without involving the STB.
  • Create shipper confidence in the STB process for challenging rates.

Everything indicates that rail shippers believe that rate cases are slanted in the favor of railroads:

  • The premium above rail expenses continues to increase and it is the highest it has ever been. 
  • An analysis Escalation Consultants performed for the Rail Customer Coalition showed that revenue subject to potential STB oversight increased by almost 100% since 2004 (27% to 50% of all revenue). 
  • Yet, there are no rate cases before the STB

It would be good for the STB to send a clear message that it appreciates rail shippers’ concerns. Establishing when the primary responsibility for proof in a rate case changes from the shipper to the railroad would go a long way to creating confidence in the rate regulatory system.

This would also help establish clear guidelines for both shippers and railroads to determine “When Enough is Enough?”

Courtesy Washington University Political Review

Dr. William Huneke (Responding to the Above):

Jay Roman states his major criticism of the STB Study “is that it leaves the impression that current rail rates are ‘reasonable.’” I can understand that conclusion if you only consider the whole period. The graphs do show that rates have been rising since 2004, and shipper advocates like Mr. Roman have been bringing that to STB’s attention. It is a concern that the STB should study, which it did in 2007 with the Christensen study, but that was 15 years ago, and rates continue to rise.

“Dr. Huneke’s critique of my analysis indicates that the STB did attempt to adjust rates for changes in car ownership and the increase in the length of haul in its Rate Index Study,” Mr. Roman says. “The STB did use a complex process to try and adjust the trend in rates for the change in the composition of rail movements over time. However, the STB’s ability, or lack of ability, to accurately accomplish this does not provide guidance to help determine if current rail rates are reasonable.” If Mr. Roman has an alternative methodology to adjust the rate index for changes in traffic composition, it would be good for him to bring it to STB’s staff attention. The phrase “or lack of ability” is a bit gratuitous and somewhat unfair to apply to STB staff if Mr. Roman is not familiar with a Tornqvist approach to adjusting an index for changes in composition  as his writing implies.

Mr. Roman notes, “By only considering the impact of the change in the composition of rail movements on revenue and ignoring the impact it has had on expenses, one only gets the half of the picture that supports the position that rates are reasonable. When the change in expenses and revenue are both considered, the picture of whether current rates are reasonable is very different.” I agree. That’s why I advocate STB do another study like Christensen did in 2007. What Mr. Roman has shown about the rate premium is very suggestive. I would argue that it is not quite enough to justify major changes the current rail rate regulatory regime.

“[It] would be good for the STB to clarify what it’s take away is from the Rate Index Study,” Mr. Roman contunues. “The STB could clarify what the rate changes in the Study represent as well as what they don’t represent. This would be very helpful in clearing up any confusion with how the Study should be used by shippers, railroads, politicians, lobbyists and consultants.” We should remember that this is a staff data product, not a policy paper. To answer Mr. Roman’s request would require STB member input and approval. Without a doubt, this would lengthen the process and delay or even eliminate future rate index study releases. I’m not sure we want that. My view has always been that because STB collects so much data, it should make as much as possible available to the general public. Without a doubt, these releases should comply with the usual confidentiality protections.

Mr. Roman quoted me: “Merely asserting the need for new regulation to reduce rates needs more justification than Jay Roman provides.” His response: “I was not proposing new regulations designed to reduce rail rates. There simply needs to be a leveling of the playing field for shippers’ chance of succeeding in a rate challenge. This is sorely needed, as no one is using the existing rate regulation process as demonstrated by the fact that there are no rate cases pending before the STB.” Mr. Roman says “he was not proposing new regulations designed to reduce rail rates.” However, he is pointing to his analysis showing that rail premiums are rising because of rising rates. He asserts that rail premiums have to fall, but there are only two ways to do that: rates fall or expenses rise. The latter is not in play, so the implication of his advocacy for a fairer result for shippers has to mean lower rates. This may be justified, but it requires study beyond the analysis that Mr. Roman provides.

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