STB Takes “Bye” on Fuel Surcharge Case

Written by Frank N. Wilner, Capitol Hill Contributing Editor
image description

Imagine Surface Transportation Board (STB) members Ann D. Begeman, Patrick J. Fuchs and Martin J. Oberman dining family-style, where one entree is shared. Ann wants fish, Marty chicken, and Patrick says he wants neither and wishes to leave. Unable to agree on an order, the three depart the restaurant.

So it is that the three did just that—not at a meal, but with a regulatory decision of high-dollar consequence. Unable to agree on establishing new standards allowing railroads to avoid regulatory reprimand when assessing locomotive fuel surcharges, they terminated the rulemaking—Ex Parte No. 661, (Sub.-No. 2), Rail Fuel Surcharge (Safe Harbor)—thus preserving a status quo upsetting to shippers:

August 29, 2019 STB Decision

The collection of fuel surcharges is high-dollar because when railroads say, “fill ’er up,” almost four billion gallons of diesel fuel annually flow into locomotive tanks. Indeed, we are talking big bucks when rail shippers are dunned mileage-based fuel surcharges. How much? BNSF, CSX, Norfolk Southern and Union Pacific reported to the STB that during second-quarter 2019, they collectively assessed shippers more than $1 billion in fuel surcharges.

(Note that this STB decision on fuel surcharges applies only to traffic subject to economic regulation. It is separate from current court action where shippers of non-regulated—moving under contract or otherwise exempt—traffic allege that railroads conspired to set percentage-based fuel surcharges for the period 2003-2008.)

History of Rail Fuel Surcharges

The kerfuffle over fuel surcharges began some 15 years ago when railroads, hit with a spike in fuel prices, began passing the higher expense on to shippers through percentage-based surcharges that increased freight rates.

But shippers suspected revenue padding, with one consultancy saying that for each of 25 separate freight movements studied, the fuel surcharge exceeded the total cost of all the fuel required for the move. Double-dipping also was alleged, as freight rates first were being adjusted based on the STB-calculated Rail Cost Adjustment Factor (RCAF), which includes the price of fuel. Then the rates were increased again by the fuel surcharge.

Moreover, shippers paying higher rates—captives lacking effective transportation alternatives to rail as opposed to shippers with truck or waterways options—were being assessed higher-dollar fuel surcharges. For example, a 5% fuel surcharge on a base rate of $10 extracted greater revenue than the same 5% surcharge on a more competitive base rate of $8.

Yet because of partial economic deregulation—the 1980 Staggers Rail Act—only a small portion of aggrieved shippers could seek redress from what they considered excessive fuel surcharges. That is because in a less-regulated environment, unless a shipper proves it is captive to rail—“market dominance” in regulatory parlance—freight rates cannot be challenged. Shipper relief would have to be found other than through a rate challenge.

An “Unreasonable Practice”

In response to shipper unrest and queries from Congress, the STB in 2006 opened a rulemaking to consider, alternatively, whether the rate-based surcharges constituted an “unreasonable practice.” Unlike a rate challenge, so long as the traffic were subject to economic regulation, there was no minimum threshold barring some shippers from gaining relief.

To probe whether rail fuel surcharges “fairly reflect the increasing fuel costs of the particular movements to which they are applied,” the STB instructed each major (Class I) railroad to explain how it linked its fuel surcharges to the higher costs of fuel.

One year later, in 2007, the STB ruled that calculating a fuel surcharge as a percentage of the base rate, as well as double-dipping (applying the fuel surcharge on top of a rate already adjusted by the RCAF) are “unreasonable practices.”

Railroads were instructed to calculate fuel surcharges based on “those attributes of a movement that directly affect the amount of fuel consumed”—that is, have “a reasonable nexus to fuel consumption,” such as mileage.

“Safe Harbor” Created

To this end, the STB established as a “safe harbor”—insulating railroads from future regulatory challenges—a Highway Diesel Fuel (HDF) Index compiled by the U.S. Energy Information Administration. It is based on retail sales of No. 2 diesel fuel. Were railroads to use that index to establish a fuel surcharge, the surcharge “would not be subject to a reasonableness challenge,” said the STB.

Creation of this “safe harbor,” however, was hardly the end of the fuel-surcharge kerfuffle.

Cargill Challenges “Safe Harbor”

In 2010, agricultural shipper Cargill challenged the safe harbor provision, complaining that BNSF’s fuel surcharges remained an “unreasonable practice” because they exceeded what BNSF actually paid for fuel—the spread between the lower wholesale price paid by BNSF and the higher retail price reflected in the HDF Index.

In unanimously dismissing Cargill’s complaint in August 2013—Begeman then was a Board member, along with then-Chairman Daniel R. Elliott and Francis P. Mulvey—the STB said that even though BNSF recovered more than its incremental fuel costs, the safe harbor provision “entitled [railroads] to rely on the HDF Index as a proxy to measure changes in their internal fuel costs.” What safe harbor means, said the Board, “is that if a rail carrier uses the HDF Index to measure changes in its fuel costs, then that is how the Board will measure these changes as well, rather than by looking at evidence of changes in the rail carrier’s internal fuel costs.”

The STB then opened another rulemaking, inviting stakeholders to comment on whether the safe harbor provision should be modified or removed. It is that five-year-old 2014 rulemaking that the Board terminated on Aug. 29 for lack of agreement among Begeman, Fuchs and Oberman on a substantive outcome.

Begeman found no majority to repeal the safe harbor provision. Oberman found no majority to reverse allowing fuel surcharges to be challenged as an “unreasonable practice.” As a result, the outcome ended up consistent with Fuchs’s position—to discontinue the docket and focus on other matters. Each of the three wrote separate expressions.

The Three Explain Their Positions

Ann Begeman

Begeman said that while in 2013 she voted “reluctantly” with Elliott and Mulvey to dismiss the Cargill complaint, “it has been my position that the safe harbor provision should be eliminated … [that] the safe harbor gives carriers an unintended advantage.”

Since she could convince neither Fuchs nor Oberman to agree with scrapping the HDF Index as a “safe harbor,” Begeman said, “I will again reluctantly vote—this time, to close the proceeding rather than wait for a full complement of Board members in hopes that a majority view would be reached to repeal the safe harbor provision.”

STB watchers may find Begeman’s haste curious. As this column has frequently observed, the STB chairman controls the docket, and repeatedly since becoming chairman in early 2017, Begeman has delayed moving a variety of rulemakings pending arrival of that “full complement of Board members.”

Patrick Fuchs

Fuchs approached the issue with recognition of past practice—that when government sets rules, as the STB previously did, and industry adapts, regulators should not become unnecessarily disruptive. Of equal concern was that freight rates and fuel surcharges should be regulated on the same demand-based economic basis.

“Carriers have changed their fuel surcharge programs as a result of the [long-standing safe-harbor decision], and the record suggests that those carriers and many customers have come to rely on it,” Fuchs said. “I do not favor embarking on such a potentially disruptive course when no public commenter has made a compelling case to reverse the decision.”

“The Board has recognized that a fuel surcharge is part of the overall rate for rail transportation,” Fuchs said. While repeal of the safe harbor provision would make it easier for a shipper to challenge a fuel surcharge, “such a change could exacerbate a tension, [as] the standard by which the Board is to review part of the rate (the fuel surcharge) is completely different from the standard by which it is to review the overall rate.”

In reviewing the reasonableness of the overall rate, the Board allows for differential pricing—carriers charging different prices based on shipper demand. But in reviewing the fuel surcharge, the Board ignores such demand-based differential pricing. Fuchs said that because of this inconsistency, the 2007 decision “could be read as permitting the Board to award a form of rate relief to a complainant whose rate may be reasonable.” Rather than exacerbating this tension, Fuchs urged the Board to focus its attention elsewhere.

Marty Oberman

Oberman—the STB’s lone attorney member—concluded that the issue is exclusively one of rate relief, precluding the STB from considering complaints of an “unreasonable practice.”

Oberman said he found the 2014 Cargill decision “jarring, because the carrier was permitted to collect sums far in excess of its true incremental fuel costs.” It is “well settled,” he said, that the STB “may not evade the limits on its rate review process by treating a rate matter as an unreasonable practice case.”

Would Five Had Made a Difference?

Perhaps had the STB been at full strength with five members, a majority might have been found. In fact, there is chatter among reliable sources that the two vacant seats could be filled by year-end.

Republican nominee Michelle A. Schultz—having been recommended for Senate confirmation by the Commerce Committee—awaits Senate floor action. That is being delayed pending nomination by President Trump of a Democrat, so that the two names will proceed to the Senate floor simultaneously. Sources tell Railway Age that several Democrats are under consideration for nomination, and that Senate Minority Leader Chuck Schumer (D-NY) has been asked to sign off on one.

Congeniality Prevails

This is the first time since January—when Fuchs and Oberman joined Begeman on the STB—that the three have not found unanimity on positions. Their disagreement here should not be seen as a fissure, given their unanimity in dozens of previous cases. All indications—optics at public hearings and comments by STB staff—are that the three continue to enjoy a genuine congeniality.

Tags: , ,