AAR: FORR NPRM “Unlawful”; SMDA Should Be Limited in Scope

Written by William C. Vantuono, Editor-in-Chief
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“This CRISI grant will pay dividends beyond Chicagoland to customers and families across the country,” said Ian Jefferies, President and CEO, AAR.

The Association of American Railroads (AAR) on Nov. 12 filed comments with the Surface Transportation Board (STB) regarding two NPRMs (Notice of Proposed Rulemakings): Final Offer Rate Review (FORR) and Streamlined Market Dominance Approach (SMDA). The former, AAR said, should be scrapped because it is “unlawful” and lacks standards. The latter requires substantial limitations in scope.

AAR, acting “on behalf of the freight rail industry,” called on the STB to withdraw the FORR NPRM because it “is fatally flawed and exceeds the agency’s authority in determining rate reasonableness,” said President and CEO Ian Jefferies. He added that the proposal is “standard-less,” “abdicates the agency’s statutory responsibility to judge the reasonableness of rail rates,” and “abandons careful deliberation vital to a balanced regulatory structure. Freight railroads oppose FORR because it is unlawful and undermines the fundamental legal and economic principles established by Congress.”

“The Board’s proposed rule would establish a new rate review procedure that would deny shippers and railroads alike their right to a full hearing as required by law and represents a radical departure from the market-based, economic principles that have traditionally guided the Board’s maximum rate determinations,” AAR said. “The model is a winner-take-all approach that disregards due process rights and undermines the important principle of regulatory predictability.”

Download AAR’s FORR Comments

On Dec. 12, the rail industry will present arguments on STB’s NPRM regarding its methodology for determining revenue adequacy, which the STB uses to assess the financial health of individual railroads.

In its comments on STB’s SMDA NPRM, AAR said the NPRM “can be improved in several respects. Specifically, the Board should adopt the following modifications/clarifications in its final rule:

• SMDA procedures should be available only for cases in which a full stand-alone cost (SAC) presentation is too costly, given the value of the case.

• The Board should consider a distance longer than 500 miles, as rail and trucks are competitive for longer distances.

• The Board should make a prima facie* finding of market dominance only if, in addition to other factors, there is no pipeline competition.

• The complainant should be required to disclose the defendant and submit to the Board all studies of competitive alternatives that it has undertaken.

• Railroads should have an equal right to request an ALJ (Administrative Law Judge) hearing.

• The page limitation should be 50 pages of narrative, excluding exhibits, and increase by 10 pages per additional lane included in the complaint (up to 100 pages of narrative);

• The Board should add a modest element of indirect competition by precluding use of these streamlined procedures where the complainant ships less than a specified percentage of the product to the destinations (or from the origins) at issue.

• The Board should not undermine the coherence of the prima facie factors by applying its recent interpretation of the DMIR case to the streamlined approach.

• The Board should expressly and formally abandon the Limit Price Test in any future rate reasonableness proceeding.

Download AAR’s SMDA Comments

Railway Age Contributing Editor and FreightWaves commentator Jim Blaze offers these observations:

“In a bold move, the AAR is aggressively attacking the STB’s proposed rate review process. For most of the past three to four decades, the STB seldom got heavily involved in rate regulation. When it did, the process was highly litigious, and complicated with engineering-based railway costing formulas that, frankly, very few people understand—perhaps not even many STB members.

“Those previous deliberations using complex economic formulas are extremely expensive for plaintiffs. They involved complex engineering estimates often of a hypothetical stand-alone railroad case. STB is proposing something far less costly—but perhaps less accurate. It seems to be moving toward simpler analytics. AAR member rail companies clearly feel threatened.

“AAR is also filing about about both market dominance and the realistic cost of capital. What is market dominance when rail share is so small overall—almost niche-like in some commodities and in many market lanes?

“And is rail cost of capital in a highly profitable market 12%-14% or higher, particularly when government rates are below 2% and nominal capital corporate financing is in the 7% or lower range? Something in these differences is clearly out-of-whack.”

*Prima facie may be used as an adjective meaning “sufficient to establish a fact or raise a presumption unless disproved or rebutted.” An example of this would be to use the term “prima facie evidence.” A prima facie case is the establishment of a legally required rebuttable presumption.

For further analysis:

STB Moves to Rehab Antique URCS

Forcing Round Pegs Into Square Holes

STB’s Cost of Capital Dilemma

STB No Place for Transactional Decision-Making

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