STB Arbitration Program Sidelined

Written by Marybeth Luczak, Executive Editor
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The Surface Transportation Board’s (STB) arbitration program for small rate disputes will not go forward as written in its Dec. 19, 2022, rule.

All the Class I railroads were required to opt into the program for it to be operable. While BNSF committed to the program, Union Pacific (UP), CSX, Norfolk Southern (NS), and CN did not opt in. Both Canadian Pacific (CP) and Kansas City Southern (KCS) wrote in separate filings that since other railroads had not opted in, their decisions were rendered moot. All responded by the STB’s Feb. 23, 2023, deadline.

On Dec. 19, 2022, the STB adopted a final rule to establish a voluntary arbitration program for small rate disputes, with a Feb. 3, 2023, effective date.

According to the STB, “unless all Class I carriers voluntarily agree to participate, the Board will not issue the notice to commence the new arbitration program, and the program will not become operable.” If all Class I’s opt in, they would “be committed to participating in the arbitration program for a term of five years,” but “any carrier may choose to withdraw if a material change is made to the program or the Board’s existing rate reasonableness methodologies.”

On Dec. 29, 2022, four Class I’s—CSX, NS, UP and CN (through its U.S. operating subsidiaries)—filed a petition for stay. “They requested that the Board stay what they call the ‘Pre-Review Opt-in Requirement’—the requirement that all of the Class I carriers decide whether to commit to the program within 20 days after the final rule becomes effective,” according to the STB, which on Jan. 24 denied their request. STB stated that they “had failed to satisfy the necessary criteria for a stay.” However, the decision was made “without prejudice” to the railroads filing a new petition for a stay. They did so on Feb. 3.

The STB wrote in its Feb. 14 decision (download below) denying the stay for a second time that the railroads “appear to seek a stay based on the argument that the opt-in requirement is unlawful. … The carriers argue that the four criteria for issuance of a stay are satisfied. … In particular, they assert that ‘[f]orcing a railroad to make an uninformed choice [whether to opt into the program] before the parameters of the program have been settled creates irreparable harm,’ either because (1) the carriers, should any of them not opt in, will not have an opportunity to opt into the program in the event they succeed in having it changed, or because (2) the carriers, should all of them opt in, will not have an opportunity to opt out of the program in the event their reconsideration petitions and appeal are denied.” According to the STB, the four Class I’s “failed to show they would suffer irreparable harm if a stay is not granted.”

Class I’s Opt-In, Opt-Out Decisions

(Scroll down for downloadable filings)

BNSF on Feb. 23 notified the STB of its “consent to participate in the Small Rate Case Arbitration Program (‘Arbitration Program’) as it is currently constituted in the Final Rule, should the program go into effect upon the consent of all Class I railroads. …” The Class noted that it “is an outspoken advocate of arbitration and believes an industrywide Arbitration Program is a far better path forward than the deeply flawed Final Offer Rate Review (FORR) process to address the needs of shippers with smaller rate disputes that may be less suited for the Board’s existing rate case procedures.”

CSX, one of four other Class I’s to reject participation, told the STB that it “believes the arbitration program has the potential to form the backbone of a more accessible regime of railroad rate regulation for smaller rate disputes.” However, it was “concerned about certain aspects of the Arbitration Rule as proposed by the Board. Those shortcomings have led CSXT to conclude reluctantly that it is unable to participate in the program as currently structured.”

CSX said it “supports voluntary alternative dispute resolution procedures.” It pointed out that “the Arbitration Rule itself had its origin in the efforts to establish a new arbitration program initiated by CSXT and four other Class I carriers in July 2020. We engaged in productive discussions with many stakeholders and ultimately petitioned the Board to adopt a new arbitration program tailored for small rate disputes. In the joint petition, we advised that we would agree to have such disputes resolved through binding arbitration if the Board were to adopt the program that was proposed. Throughout the proceeding, CSXT and the other carriers made significant concessions in support of a workable small rate case arbitration program that would be attractive and fair to all parties involved.

“The program adopted by the Board, however, makes a number of substantial changes to our proposal that, taken together, render it unacceptable as a means of ensuring that the Board’s authority to regulate rates would continue to be administered in a manner consistent with Congress’s statutory framework.

“Most significantly, the Arbitration Rule would allow arbitrators to consider claims that a railroad’s rates to a customer are too high based only or primarily on a determination that the railroad was too profitable as an entity—regardless of whether the railroad’s rates to that customer are fair. Concepts of revenue adequacy and other forms of profit regulation are a bad idea legally, economically, and as a matter of public policy. It is an especially bad idea for revenue adequacy claims to be subject to individual arbitrations, where the quick timeline would make it impossible for arbitrators who don’t have the benefit of the STB’s expertise and resources to consider the economic and policy issues at stake. An issue this important should be carefully considered by the Board on a full record, not decided for the first time in this manner.

“At CSX, our goal is to deliver a superior service product for our customers. We work hard to ensure that we are charging fair rates that reflect the value of the service we provide. Our rates are constantly under competitive pressure from trucks, other railroads, water carriers, geographic and product competition, and other market forces. If a customer believes that its rate for regulated traffic is nonetheless too high, CSXT recognizes that such a customer has a legitimate right to come to the Board to seek relief. …

“We hope that the Board reconsiders the path that it has taken and re-establishes the arbitration program in a way that makes it possible for our company to join the program.”

Like BNSF and CSX, NS told the STB it was “a strong advocate for alternative dispute resolution for small rate disputes,” and noted that the “critical features of a workable … process are speed, confidentiality, and a fair and neutral arbitrator. As history has demonstrated, rate disputes that cannot be resolved through commercial negotiations are rare. But when they arise, an expeditious and efficient process reduces litigation costs associated with lengthy battles between lawyers and experts, permitting a quick resolution of the controversy without fracturing the commercial relationship. Confidentiality, in turn, encourages broad participation by carriers and customers alike and creates an environment conducive to achieving settlements and stipulations of legal and factual issues between the parties. Confidentiality also reduces formality, which contributes to the overall efficiency of the proceeding with processes that streamline the submission of evidence, reducing overall time and costs for all the participants. Finally, the selection of neutral arbitrators is key to instilling confidence in both sides that the process is administered fairly.”

The Class I said that while it does “not agree with all aspects of the program that the Board ultimately adopted, Norfolk Southern has evaluated the final rule carefully and in good faith. Ultimately, we decided to pursue reconsideration of those elements which impact the company’s willingness to opt in to the program or which jeopardize the existence of the program itself. As explained in its petition, Norfolk Southern is concerned that certain provisions of the adopted program will encourage excessive litigation, undermine confidence in the arbitration panel, and discourage participation in the program. Because the Board denied the stay request, today’s [Feb. 23] opt-in deadline remains in effect, despite the important issues raised in the pending petition for reconsideration.

“For decades, the STB, railroads, and customers have struggled to craft a workable alternative dispute resolution program for small rate disputes. Norfolk Southern strongly believes that such a program is within our collective grasp. Indeed, for these last three years, the Board and the industry have labored tirelessly to create a fair, just, and rational arbitration program. Norfolk Southern wants the rate arbitration program to succeed. The adopted voluntary program has the potential to provide customers with a reliable and reasonable way to pursue rate relief through alternative dispute resolution. Norfolk Southern stands ready to opt into the program upon the resolution of the issues raised by the parties on reconsideration.”

UP told the STB that while it supports the STB’s efforts “to create the Voluntary Arbitration Program for Small Rate Disputes (‘ADR Program’),” it is “concerned” about several aspects. Those include:

  • “Authorizing freight customers to use the deeply flawed and poorly defined revenue adequacy constraint as a basis for relief;
  • “Requiring all Class I carriers to participate in the program for it to become operative;
  • “Requiring all Class I carriers to decide whether to opt-in to the program within 20 days after the effective date of the rule;
  • “Having the lead arbitrator selected by the STB rather than by the parties’ selected arbitrators; and,
  • “Referencing ‘regulated commodities’ rather than ‘regulated traffic.’”

UP concluded by saying that “looks forward to participating fully in the Board’s ADR program once the above concerns have been satisfactorily resolved.”

CN told the STB that it “regretfully is unable to make an informed decision regarding participation at this time.” There are “significant uncertainties about the final parameters of the Small Rate Case Arbitration Program. CN has filed a petition for review in the United States Court of Appeals for the Seventh Circuit. Three other Class I’s have filed petitions for reconsideration with the Board raising numerous issues, many of which overlap with the issues CN anticipates raising on appeal. … For example, … [there are] serious concerns regarding the selection process for the lead arbitrator, the negative consequences associated with having precedential decisions on appeal, and the lawfulness of the opt-in deadline and requirement that all Class I carriers participate in order for the program to become operable. Additionally, there remains significant controversy regarding the use of system-wide revenue adequacy in general, and in particular in the context of fast-track arbitration proceedings.” Questions have also been raised, CN said, “about the status of exempt traffic under the program. Finally, although one of the fundamental aspects of the program is an exemption from Final Offer Rate Review, that final rule has likewise been appealed and is also the subject of a petition for reconsideration.

“Against this multi-faceted uncertainty, carriers have been asked to decide now whether to make a five-year commitment in the Small Rate Case Arbitration Program. CN is disappointed that the Board declined to extend the opt-in deadline at this time, as the resolution of these issues will inform CN’s decision on whether to opt in to the Program. CN hopes that the Board will grant a future opportunity for opt in after the resolution of reconsideration petitions and appeal, consistent with the original proposal in the Notice of Proposed Rulemaking to permit opt ins at any time. CN continues to support the use of alternative dispute resolution procedures, including arbitration, and will evaluate carefully whatever program is ultimately established after reconsideration and judicial review.”

CP told the STB that it “continues to believe that a workable, reasonable, and accessible Alternative Dispute Resolution (ADR) program for small rate cases would be in the interests of all carriers, shippers, and the public. CP considers the Board’s December 19 Final Rule a constructive step in the direction of implementing such a program, and while taking no position on the specific changes sought by several of the Joint Carriers in their Petitions for Reconsideration, CP hopes that the Program established by the Final Rule can be amended sufficiently that all Class I’s would choose to opt into the Program alongside CP so that such a Program can be implemented successfully.”

KCS said it “had hoped to be able today [Feb. 23] to opt into a Small Rate Case Arbitration Program established by the Board …” but because of the other “carriers’ announced choice not to opt into the program while important issues are under review, and because of the Board’s requirement that all Class I carriers opt in by February 23, there is, by terms of the Board’s order, no program for KCSR to opt into. … KCSR hopes that, upon resolution of the issues … there will be an opportunity for individual Class I carriers to opt into a Small Rate Case Arbitration Program, a program that the Board has said is preferable to formal adjudication (such as Final Offer Rate Review).”

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