Ex Parte 646 Oral Testimony Nicholas DiMichael
Chairman Nober, Vice Chairman Mulvey, and Commissioner Buttrey: My name is Nicholas DiMichael, and I appear here today on behalf of a
large number of national organizations representing users of the rail
transportation system. These
organizations represent an extremely broad spectrum, among them a
variety of agricultural interests including major national farm and
agricultural organizations and various important state wheat and barley
interests. These
organizations also include chemical producers, industrial producers,
fertilizer shippers, and a number of others.
A number of these organizations have representatives in the
hearing room. Though I have
been designated as the spokesman of the group for this hearing, if the
Board has any questions dealing with particular commodities, I will be
able to call upon assistance for those questions.
I would
also like to inform the Board that the National Petrochemical and
Refiners Association has asked me to convey to the Board their desire to
be added to the list of organizations sponsoring the Joint Written
Testimony that was submitted on July 16, and I will be submitting a
letter to that effect later today. The
participation of these organizations demonstrates the substantial
interest of the community of rail users in this proceeding. The fact that all of these organizations have joined in a single
submission of written testimony testifies to the unity of the community
of rail users that substantial changes need to be made to the
Board’s “small rate case” procedures.
It also testifies to the desire of these organizations to be as
helpful as possible to the Board in presenting a single set of
recommendations. I would
note that the Joint Written Testimony submitted on July 16 by these
organizations incorporates and builds upon Joint Comments submitted last
year by seventeen of the organizations submitting the current Joint
Written Testimony to the Board. Need for This Proceeding There is
no doubt that a change in the Board’s rules for small rate cases is
sorely needed. Under the
Board’s statute, all captive shippers have a right to a
“reasonable” rate. As Chairman Nober testified before the Congress in May 20 of
last year, “shippers who feel they have been charged an unreasonable
rate have a right to have that complaint heard by the Board in a
fair, impartial, expeditious and economical manner.
That is part of our fundamental charge from the Congress . . .
.” We emphatically agree
with you, Chairman Nober. The
Board’s processes and procedures must allow for the practical
exercise of a captive shipper’s right to have the Board decide a
reasonable rate, not only for large coal shippers but also for other
shippers with movements that are far smaller.
It has
been almost eight years since the Board, at the request of Congress,
issued its small rate case guidelines, and since that time, not a single
case has been filed under those guidelines.
Though some would argue that this lack of use of the Board’s
small rate case procedures demonstrates that there are no shippers
“out there” who are unsatisfied with the rates that they are being
charged, that is emphatically not the case.
In 1999, a GAO report found that, of 700 rail shippers surveyed,
a significant percentage reported paying rates that they regarded as
excessive, but felt that they had no regulatory recourse.
Shippers in that survey cited the time, cost, and complexity of
rate cases and poor prospects for relief.
In fact,
the Board’s current small case rules unintentionally establish
substantial barriers to bringing a small rate case.
Instead of guarding against complexity, they invite it; instead
of speed, they set few if any time limits on the litigation or the
decision. Potential
complainants do not know whether small rate case procedures will be
used; what evidence will be considered; how long the case will take; and
therefore what the case will cost.
These Interested Parties emphatically agree with
Chairman Nober in recent Congressional testimony, that the
uncertainty of the small rate case procedures “appears to be a major
reason why no cases have been brought using the small-case process.”
The goal
of the small rate case process must be to provide a balanced, simple,
clear, quick, and inexpensive process for deciding such cases.
Complexity
drives up the cost of any litigation, including litigation before the
Board, and given the smaller amounts at stake by definition in a
“small rate case,” complexity and cost will terminally chill the
exercise of the statutory right to reasonable rates for many small rate
disputes. Parties
also need the assurance of a system featuring relatively straightforward
eligibility and substantive standards, so that they can predict to some
reasonable (though necessarily imperfect) degree what cases qualify for
small rate case procedures and which rates are likely to be found
unreasonable. I would note that we are not asking for a rote
determination of reasonableness, or perfect certainty “going in.”
We understand that any standards will have to be fleshed out in
actual litigation. However,
the level of uncertainty in the Board’s current guidelines can and
should be reduced, and later in my statement I will address some of the
specifics. It
is similarly crucial for small rate cases to be decided expeditiously.
Our economy is changing rapidly.
The Board’s procedures must reflect business needs, and
procedures that results in a decision in years, rather than a few
months, will simply not be relevant to the business needs of
transportation users. Most
importantly, clarity, predictability and speed will enhance the
potential of private settlements, since both parties will be able to
make more accurate assessment of their risks, and both parties will know
that the risk will come to pass quickly.
In short, if the small rate case process becomes more effective,
it is more likely that customers and suppliers will conduct balanced
negotiations leading to private resolutions rather than Board-ordered
relief. Bright Line
Test Let me address what we have characterized as a “bright line test”
for eligibility. Under the
statute, the Board is required “to establish a simplified and
expedited method for determining the reasonableness of challenged rail
rates in those cases in which a full stand-alone cost presentation is
too costly, given the value of the case.”
49 U.S.C. § 10701(d)(3). The
statute thus clearly links the use of the small rate case standard to
the cost and value of the small rate case compared to the
cost of the stand-alone presentation.
This is most important – in deciding who should qualify for
small rate case procedures, the Board must take into account the
very high cost of a stand-alone cost presentation.
The cost of a SAC case, we believe, is at least $3 million.
These
Interested Parties believe that there should be a greatly simplified
bright-line standard of eligibility, so that potential complainants will
know what movements qualify for small rate treatment, and what movements
do not. The
Interested Parties believe that the simplest and most objective way of
determining the link between the cost and value of the small rate case
and the cost of a Stand Alone Cost presentation would be to utilize the
amount of the shipper’s annual freight bill between an origin and
destination pair, combined with certain reasonable judgments. As noted
above, the Interested Parties believe that a conservative estimate of
the cost of a typical SAC rate case is $3 million; that a multiplier of
three would reasonably compensate for litigation risk; a potential 25%
rate reduction over five years is a reasonable, indeed probably very
generous, potential recovery in a small rate case.
Combining these four factors leads to a mathematical calculation
that the shipper’s annual freight bill from the complained-of rates
would need to be at least $7.2 million to justify a SAC case, and
therefore any freight bill lower than that between a single
origin-destination pair should automatically qualify for small rate case
treatment. These
Interested Parties also believe that the Board’s eligibility rules
should provide for the possibility that, in a particular case, a
movement whose yearly freight bill is larger than might still qualify
for small case treatment, but only after a specific showing of
eligibility by the shipper. In
other words, where a case does not qualify for small rate case
procedures under the bright-line test, the Board should not, at this
early stage, assume that SAC litigation is feasible.
Finally, these Interested Parties strongly oppose the position of
the AAR that the Board should identify a “sub-class of cases brought
by truly small shippers.” The
AAR’s suggestion is contrary to the statute, which recognizes only two
categories of complaints: those litigated under the Stand-Alone Cost
standard, and “those cases in which a full stand-alone cost
presentation is too costly, given the value of the case.”
There is no provision in the statute for special eligibility
rules for the “truly small shipper” as a third category of
complainant. The AAR’s
argument is inconsistent with the statute’s focus on the “value of
the case,” not the size of the shipper.
There is no support for the AAR’s suggestion in a letter last
year that non-coal cases would be less costly than coal cases.
In sum, the Board should develop rules that attempt to fairly and
reasonably identify the universe of possible cases which qualify for
small rate case treatment under the statutory “value of the case”
standard, leaving a degree of flexibility to account for individual or
unusual circumstances. Clarification
of Board’s Substantive Standards The existing small rate case guidelines do not provide a clear standard
that complainants know they must satisfy in order to obtain relief.
The Joint Written Testimony that was submitted last week
summarizes suggestions given to the Board last year regarding areas for
clarification of the substantive standards.
We believe that the Board can and should: ·
Clarify
what type of “individualized pricing considerations” might be
relevant in a particular case (2003 Joint Comments, p. 10) ·
Clarify
the types of efficiency considerations that might be significant in
resolving the issue of whether or not to use the efficiency –adjusted
RSAM (2003 Joint Comments, p. 11); ·
Grant
complainants’ access to the confidential waybill sample for purposes
of evaluating a potential rate complaint (2003 Joint Comments, p. 11) ·
Clarify
what should be considered “similar” traffic for purposes of the R/VC[Comp]
benchmark (2003 Joint Comments, p. 11) ·
Clarify
how the Board is thinking of weighing the three factors by preparing
responses to eight hypothetical examples applying various combinations
to the three benchmarks (2003 Joint Comments, p. 12) The
Interested Parties urge the Board to implement these suggestions.
Revising
the RSAM Among
the three benchmarks developed by the agency to assess the
reasonableness of a rate under the simplified procedures is the Revenue
Shortfall Allocation Method, or RSAM.
The Board has stated that RSAM supplies a “key component” of
a simplified rate reasonableness analysis “because it accounts for a
railroad’s need to earn adequate revenues, as required by 49 U.S.C.
10704(a)(2).” However,
it appears that the methodology by which the Board calculates the RSAM
is flawed. Indeed, it
appears that the RSAM, as calculated by the Board, does not in
fact measure the carrier’s existing “shortfall” from revenue
adequacy. In fact, under
the Board’s existing RSAM methodology, a carrier’s revenue might
equal or exceed the level for “adequacy” found by the Board in its
yearly determinations of revenue adequacy, and yet the RSAM could still
show the existence of a substantial “shortfall.” The
reason for this anomaly appears to lie in the technicalities of the RSAM
calculation. After
recently looking at this matter, we understand that, under the Board’s
procedures, revenue being obtained from captive traffic never figures in
to the calculation of a revenue “shortfall.”
If that is so, then a carrier can be revenue adequate, or
even have revenues that exceed revenue adequacy, and still have a
high “revenue shortfall” denoted by a very high RSAM, as long as a
significant portion of its revenues is obtained from the carrier’s
captive shippers. This
methodology also means that if a carrier that over time increases
revenues from its captive traffic and decreases revenues from its
non-captive traffic, it will have a higher and higher “shortfall”
and thus a higher and higher RSAM.
A higher RSAM will apparently permit a carrier to increase
revenues on its captive traffic still further, since the RSAM is
one of three factors that the Board will consult in determining the
reasonableness of a captive shipper’s rail rate. The
Interested Parties submit that the Board should, in any rulemaking,
explain its methodology for calculating the RSAM, explain its rationale
for that methodology, and seek comments from the public on the
appropriate way to calculate the RSAM.
New
Procedures for Small Rate Cases Let me finally shift to the topic of procedures for small rate cases.
We
believe that the Board should make very substantial changes in its
procedures for litigating small cases, and adopt procedures to expedite
those cases. These new
procedures should include: ·
Active
management of a small rate case by an Administrative Law Judge, with
high standards for interlocutory appeals; ·
Standardized
discovery to expedite the initial processing of a case, and limited
additional discovery in specified areas; ·
Expedited
determinations of small case eligibility by the ALJ; ·
Access
to the confidential waybill sample upon certification by a potential
complainant that information will be used to evaluate a possible small
rate case complaint; ·
Expedited
processing of motions to compel; ·
Expedited
time frames for the submission of evidence, with briefs filed at the
same time as the evidence ·
A
specified time for decision by the ALJ, within 5 to 6 months after the
filing of the complaint; ·
Expedited
appeals to the full Board, with a specified time frame for decision. We
believe that adoption of these reforms would go a long way in assuring
that small rate cases can be adjudicated in a timely manner. Conclusion The Interested Parties very much appreciate the opportunity to appear
before the Board, and applaud the Board for initiating a process
designed to lead to substantial changes in its small rate case rules. We
respectfully request the Board to review the suggestions in our Joint
Written Testimony and to take steps to adopt these suggestions as
revisions to the Board’s rules.
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