What Will STB Do With URCS?

Written by Dr. William Huneke, Consulting Economist
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Surface Transportation Board

Will this be the year STB revises or reforms URCS, the agency’s Uniform Rail Costing System? I doubt it. From my experience at STB, it is very hard to get the STB members to give URCS much attention. These days, with all the other items on STB’s agenda, I can’t imagine URCS has much priority, but STB is asking for comments.

Moreover, it took a year after STB received the report before it asked for comments: certainly not any sign of eagerness to delve into URCS. STB has had other opportunities to review URCS, notably after the TRB report in 2015 (Transportation Research Board, Special Report 318, “Modernizing Freight Rail Regulation”). STB walked away from an attempt to update URCS in 2019, which I lamented in a previous column (URCS: Love It or Hate it, We’re Stuck With It – Railway Age).

I doubt STB will do anything different this time. Most likely, STB will receive the comments, file them away and move on to what it believes are more pressing matters.

Stakeholders are deadlocked on URCS reform. Shippers would like URCS to produce movement-specific costs, which the railroads oppose. There will not be any pressure on STB to fix URCS until Congress or more likely a court declare that URCS needs fixing, replacing or abandoning.

But something needs to be done about URCS, which relies on special studies from the 1930s and on rules of thumb that underlay Rail Form A, URCS’s predecessor. And remember, the agency adopted URCS more than 30 years ago.

Moreover, STB uses URCS in many activities from rate cases to abandonments to costing a carload waybill sample and more. One would think that STB, stakeholders and anyone who cares about good public policy would want a more accurate cost system underlying STB decisions that can affect tens of billions of dollars.

STB is asking for comments on a report, Alternatives to URCS, that Laurits R. Christensen Associates Inc. (Christensen) did. STB hired Christensen to evaluate URCS (download report below).

The firm has done some very fine work for STB in the past. (Christensen did 2 studies on rail competition in 2008 and 2010, which you can get on STB’s website. While there is some good material in the current URCS report, it starts from a poor premise.

The report presents a radically different approach to URCS and the jurisdictional threshold from the structure Congress enacted in the Staggers Act. As example, on p. 3: “Since the main application of URCS relates to measurement of railroads’ exercise of market power, the appropriate time horizon for URCS costs should be a form of the economic ‘short run.’”

That is not true. If you read the Congressional reports that accompanied the Staggers Rail Act of 1980 (Staggers), which I have, the 180% RVC was meant as a rate-making safe harbor for revenue adequacy. As Michael Redisch, my predecessor as STB’s chief economist, used to say “FCC’s goal might be competition, but STB’s goal is revenue adequacy before competition.”

It is important to remember the origin of URCS. In Staggers, Congress established a critical function for URCS: to set the regulatory threshold. This threshold would determine what movements would be subject to regulatory oversight. Congress set this threshold to allow the railroads a safe harbor for pricing and incorporated an implicit return on investment. This is a critical fact to remember about URCS’s role in the regulatory framework: URCS establishes a pricing safe-harbor incorporating a return on investment,

The deregulatory legislation came after a decade of severe financial challenges for the railroad industry. The Administration and Congress were concerned about the long-term health of the railroad industry. Incorporating some protection for investment return would provide incentive to attract private capital. But this political mission for URCS had important implications for what URCS became. URCS did not become a marginal-cost system. A marginal-cost system would not have incorporated an implicit return on investment.

Christensen discusses the possibility of creating a “bridging” mechanism to maintain that the same amount of traffic is subject to regulation after STB adopts a new system. That is what ICC did when it switched from its old system Rail Form A to URCS.

I have a different idea. Let the costs from a new system incorporate a markup above marginal cost. That could provide a pricing safe harbor and revenue adequacy. This “bridging” might have to become part of the STB’s annual revenue adequacy determination. Maybe the RSAM calculation becomes the “bridging” factor calculation. Adjust New System costs so that 180% RVC provides the pricing safe harbor contemplated in Staggers.

But recognizing that the regulatory threshold is about revenue adequacy rather than testing for market power begs STB to answer the question: What does it intend to do about revenue adequacy? STB’s Rate Reform Task Force had some intriguing ideas in its April 2019 report on pp. 32-42 (download the full report below), but did not include consideration of URCS and the regulatory threshold.

Maybe STB could have an updated URCS that is more accurate and fulfills its legislative mission regarding revenue adequacy and the regulatory threshold. The bridging factor would change as the industry becomes more or less revenue adequate. If it was more revenue adequate, more traffic would be subject to regulation, and vice versa.

URCS needs updating. Stakeholders should remember what URCS was meant to do when they comment. Another round of comments that decry how URCS does not generate marginal costs or that it has no basis in sound economic theory and practice would be futile. Those comments will get filed away, and URCS will stay the way it is for another 30 years.

Dr. William Huneke is the former Director and Chief Economist at the Surface Transportation Board. He has more than 40 years’ experience in economics, transportation, railroad regulatory policy, management consulting, business analysis and teaching in the commercial and government sectors. He provides economic consulting on regulatory and arbitration matters. At the STB, Dr. Huneke led the Board’s analytical work and oversaw the collection of economic and financial data. Since leaving the STB, he has provided economic and litigation support to Class I railroads and other private-sector clients. He worked with the OECD (Organisation for Economic Co-operation and Development) to advise the Mexican government on its future rail regulatory policy.  He represented the United States at an OECD conference on railroad industry structure. His private-sector experience included executive and management positions at UUNET, Freddie Mac and the Association of American Railroads. Dr. Huneke has taught graduate business courses at the University of Maryland, Robert H. Smith School of Business. He holds a doctorate from the University of Virginia and a B.A. from Swarthmore College.