BEFORE THE

SURFACE TRANSPORTATION BOARD

_______________________

Ex Parte No. 646

RAIL RATE CHALLENGES IN SMALL CASES

________________________

Joint Written Testimony of the

American Chemistry Council, American Farm Bureau Federation, American Soybean Association, Colorado Wheat Administrative Committee, The Fertilizer Institute, Idaho Barley Commission, Idaho Wheat Commission, Kansas Wheat Commission, Montana Wheat & Barley Committee, National Association of Wheat Growers, National Barley Growers Association, National Council of Farmer Cooperatives, National Farmers Union, National Grain and Feed Association, National Grain Sorghum Producers, The National Industrial Transportation League, North Dakota Grain Dealers Association, North Dakota Public Service Commission, the North Dakota Wheat Commission, South Dakota Wheat Commission, Texas Wheat Producers Board, Washington Barley Commission, Washington Wheat Commission, Alliance for Rail Competition, Consumers United for Rail Equity

I.            INTRODUCTION AND BACKGROUND

In accordance with the Notice of Public Hearing served June 29, 2004 in this proceeding, the above-listed parties (“Interested Parties”) submit this Joint Written Testimony to be included in the record of the public hearing scheduled for July 21, 2004.  That hearing is intended to provide a forum for the expression of views regarding rail rate challenges in small cases to be considered by the Board.  The hearing is also intended to offer an opportunity to discuss proposals for handling small cases involving a challenge to the reasonableness of rates charged by a rail carrier and the discussion of views as to how “small rate cases” should be defined or identified.  Notice of Public Hearing, p. 2.  In its 1996 decision in Ex Parte 347 (Sub-No. 2), Rate Guidelines – Non-Coal Proceedings [1996 Decision], served December 27, 1996, the Board set out “simplified evidentiary guidelines” to be used in proceedings to determine the reasonableness of challenged rail rates charged on captive traffic where the agency’s Constrained Market Pricing guidelines[1] cannot practicably be applied.

One year ago, on July 11, 2003, seventeen separate organizations,[2] each of which is also joining in this Joint Written Testimony, submitted Joint Comments in this proceeding (“2003 Joint Comments”), after Chairman Nober, at a hearing held in this case on April 22, 2003, asked shipper interests to identify common ground and, where possible, to present the Board with more specific proposals addressing their concerns.[3]  The 2003 Joint Comments were the product of intensive discussions and comprehensive agreement among the seventeen named shipper groups in response to Chairman Nober’s request.[4] 

Observing that no case had ever been filed under the 1996 Decision because of its many uncertainties, the 2003 Joint Comments set forth several fundamental principles that should guide the Board in revising its small rate case procedures.  2003 Joint Comments, pp. 3-5.  The 2003 Joint Comments also proposed a “bright-line test” to determine the eligibility of a shipper to use the small case guidelines (2003 Joint Comments pp. 5-7), and requested the Board to clarify how it would determine the reasonableness of rates in small rate cases (2003 Joint Comments pp. 9-12).  The 2003 Joint Comments lastly set forth detailed suggestions for simplifying and expediting procedures for small rate cases, with the goal of obtaining an initial decision from an Administrative Law Judge within at most five to six months from the date of the filing of the complaint, and a decision on appeal to the Board within at most nine months. 

Finally, on August 21, 2003, the seventeen 2003 Joint Commenters sent a letter to the Chairman responding to a letter sent by counsel for the Association of American Railroads that discussed several of the proposals discussed in the 2003 Joint Comments.

Since the 2003 Joint Comments were submitted on July 11, 2003, additional parties[5] have determined to participate in this proceeding along with the parties submitting the 2003 Joint Comments.  These organizations represent an extremely broad spectrum of users of the nation’s rail system, including a variety of agricultural interests, chemical producers, industrial producers, fertilizer shippers, coal shippers, and others. 

These Interested Parties here adopt and incorporate the 2003 Joint Comments, which are attached to this submittal in their entirety for the convenience of the Board.  These Interested Parties also supplement those 2003 Joint Comments as set forth in this Joint Written Testimony. 

II.        THE BOARD’S SMALL RATE CASE RULES MUST PROVIDE FOR A BALANCED, CLEAR, QUICK AND INEXPENSIVE PROCESS FOR ADJUDICATING SMALL RATE CASE DISPUTES

As discussed in more detail in the 2003 Joint Comments, the goal of the small rate case process must be to provide a balanced, simple, clear, quick, and inexpensive process for deciding such cases in accord with the intent of Congress that a “simplified and expedited” methodology be made available as an alternative to a “full stand-alone cost presentation” when such a process is “too costly, given the value of the case.”  The rules, processes and standards that currently exist for small rate cases do not meet these goals, and these Interested Parties applaud the Board for initiating a process designed to lead to substantial changes. 

Simplicity is crucial.  Complexity and undue uncertainty drive 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 the very large majority of captive users of rail services.  In this regard, the Board’s experience in Stand-Alone Cost cases is an object lesson in what should not happen in small rate case proceedings.  Since the Interstate Commerce Commission decided the first Stand-Alone Cost case eighteen years ago,[6] the complexity, size and cost of a SAC case before the agency has increased astronomically.  But instead of guarding against complexity in small rate cases, the Board’s current small rate case rules invite complexity at the very outset: they define little, rule nothing out, and identify virtually no standards for decision. 

While this gives the Board maximum flexibility and discretion, it makes it impossible for potential complainants to know whether small rate case procedures will be used; what evidence will be considered; how long the case will take; and what the case will cost.  These problems, formidable in the best of cases, become insurmountable when combined with defendants’ litigation incentives to make small rate cases long, complex and expensive in order to discourage future complaints.  The issue was summed up by Chairman Nober in recent Congressional testimony: 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.”[7]

Clarity is similarly important.  If parties are going to avail themselves of the rate complaint process, they need the assurance of a system featuring relatively straightforward eligibility and substantive standards, so that they can predict to some reasonable degree what cases qualify for small rate case procedures and which rates are likely to be found unreasonable.  This does not mean that the outcome of small rate case litigation must be perfectly and entirely predictable.  It does mean that the eligibility for small rate cases should be clearer and that processes for determining eligibility should be defined.  It also means that the substantive inquiry should be sufficiently transparent to allow exercise of reasonable, though necessarily imperfect, judgment. 

Most importantly, clarity and predictability will enhance the potential of private settlements, since both parties will be able to make more accurate assessment of their risks.  Where there is good reason to conclude that rates are reasonable, neither side has an incentive to litigate.  Where rates appear unreasonable, regulatory uncertainty should not protect the status quo.  And where cases fall between these points, clarity promotes negotiated solutions.  In short, if the small rate case process becomes clearer, it is even more likely that customers and suppliers will conduct balanced negotiations leading to private resolutions rather than Board-ordered relief.

Finally, it is most important for the Board’s rules on small rate cases to establish a process under which a complainant can be assured of expeditious action.  Unlike coal movements that generally continue for years and even decades, small rate cases are likely to involve movements that may last for only a few years.  The need to spend two years litigating rates for a movement that may last only three to five years would discourage most if not all potential complainants.  Moreover, increased litigation time usually means increased litigation cost. 

The Board’s current small rate case standards do not appropriately balance the rights of shippers and carriers.  The complexity, uncertainty and cost that are inherent in the current small case procedures and standards, combined with the astronomical cost, time and uncertainty of a Stand-Alone Cost case, make it virtually impossible for any captive shippers, other than the largest coal shippers, to exercise their right to a reasonable rate under the ICC Termination Act.  As Chairman Nober testified before Subcommittee on Railroads of the House Committee on Transportation and Infrastructure on May 20, 2003, “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.  That is not the case now, and our agency can and will offer some solutions to that problem.”  Nober Testimony, May 20, 2003, p. 9 [emphasis added].[8]

III.       THE BOARD SHOULD ADOPT A “BRIGHT-LINE” TEST TO DETERMINE A SHIPPER’S ELIGIBILITY TO USE THE SMALL CASE GUIDELINES, WHICH SHOULD BE BASED UPON THE COMPLAINANT’S ANNUAL FREIGHT BILL FOR TRANSPORTING A COMMODITY BETWEEN AN ORIGIN-DESTINATION PAIR

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 agency’s current rules provide no guidance to potential complainants as to how the Board will decide whether a shipper will qualify for small rate case procedures or not.  2003 Joint Comments, p. 6.  The 2003 Joint Commenters strongly believed that there must be a less onerous and greatly simplified bright-line standard of eligibility, and strongly urged the Board to adopt a bright-line small case eligibility standard utilizing the shipper’s annual rail freight bill between each origin-destination pair.  The Board was correct in concluding that eligibility for the simplified standard must turn on the dimensions of the “case” and not the size of the shipper bringing the case, in order to accurately reflect the Congressional intent behind the “small rate case” provisions. [9] 

The 2003 Joint Comments argued that where a dispute involved an annual freight bill of $4.8 million per commodity for a single origin-destination pair, a full stand-alone cost complaint would clearly be “too costly, given the value of the case.”  Such cases would therefore plainly qualify for the small case procedures.  The calculation of this bright line was directly linked to the cost of bringing a full stand-alone case and reasonable assumptions as to the value of a potential complainant’s case.

Specifically, the 2003 Joint Comments began with a conservative estimate of the cost of a typical SAC rate case of $2 million, and then made three additional very conservative assumptions, namely a multiplier of three to compensate for litigation risk; a potential 25% rate reduction; and a five-year recovery period.  Combining these four factors led to a mathematical calculation that the shipper’s annual freight bill from the complained-of rates would need to be at least $4.8 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.[10]  See 2003 Joint Comments, pp. 6-7.

The Interested Parties endorse the methodology set out in the 2003 Joint Comments, but wish to supplement that analysis with a few additional points.

First, in the year since the 2003 Joint Comments were filed, it has become very clear that the complexity and cost of bringing a SAC case has increased.  The 2003 Joint Comments indicated that the cost of a typical large rate case for a complainant was $2 to $3 million for legal fees, consultants and other expenses.[11]  The calculation of the $4.8 million eligibility figure was predicated on a cost for a SAC case at $2 million, the low end of this range.  However, more recent experience with SAC cases indicates that $2 million is no longer even close to the actual amount for bringing a SAC case, which now exceeds $3 million, and is heading upward. 

The Interested Parties understand that the Board has a difficult time balancing the need for predictability in SAC cases with the need to be responsive to the evidence submitted by the parties.  Yet, the Board must understand the “downstream” consequences of its own actions on both SAC cases and on the “value of the case” standard for determining eligibility for small rate cases.  For example, in the recent Xcel Energy case (STB Docket No. 42057, Public Service Company of Colorado D/B/A/ Xcel Energy v. The Burlington Northern and Santa Fe Railway Company, decision served June 7, 2004), the Board made a number of changes to its rulings in prior cases.  The nature of SAC cases and the Board’s rulings tend to lead to greater cost and complexity.  But as the cost of bringing a SAC case rises, any threshold for determining eligibility for small rate case procedures must also rise, given the statutory “value of the case” standard.

Using a multiplier of three as a necessary margin between the expected costs and expected recovery in a rate case in order to justify the risk; an assumption that the relief sought is a 25% rate reduction; and that the period of potential relief is five years,[12] the shipper’s annual freight bill between each origin-destination pair would now have to be at least $7.2 million to justify a SAC case, simply using the SAC cost of $3 million rather than a SAC cost of $2 million.[13]  Thus, these Interested Parties believe that a $7.2 million annual freight bill from a single origin-destination pair should be the eligibility threshold for small case status, under which a shipper is automatically entitled to utilize the small case procedures to challenge the rate.[14]

Second, these Interested Parties 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 that set forth above might still qualify for small case treatment.  Thus, although a movement with a freight bill below $7.2 million should automatically qualify for small case treatment, a movement above that level might also qualify, but only after a specific showing of eligibility by the shipper.  The $7.2 million threshold was predicated, for example, on an assumed potential rate relief of 25% -- a very high figure.  However, a particular complainant might allege, at the outset in its complaint, that it is seeking a 15% rate reduction, or a rate reduction for fewer than five years.  In that case, the “value of the [complainant’s] case” is even lower than the figure used to calculate the threshold, and the complainant should be given the opportunity to show that it should be able to qualify for small case treatment even if its freight bill for the movement is somewhat in excess of the threshold.  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.”  See Letter from the Association of American Railroads, August 4, 2003.  The AAR’s letter takes issue with the premise that SAC cases typically cost $2 million.  However, there is no support for the AAR’s suggestion that non-coal cases under CMP would be less costly than coal cases.  Experience and logic show otherwise.  There have been two non-coal cases litigated under the SAC standard, and both at least equaled or exceeded the cost of coal cases.[15]  Non-coal shippers typically transport multiple commodities to many destinations that change every few years, if not more frequently.  Thus, a non-coal SAC is likely to involve a larger stand-alone system, to more destinations, with more complex rail operations. This suggests that non-coal SAC case costs would at least be equal to, but certainly not lower than, coal rate cases.

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.”  49 U.S.C. §10701(d)(3).  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 in favor of rules applicable to the “truly small shipper” is inconsistent with the statute’s focus on the “value of the case,” not the size of the shipper.  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. 

IV.       THE BOARD SHOULD CLARIFY HOW IT WILL DETERMINE THE REASONABLENESS OF RATES IN SMALL RATE CASES.

In the 2003 Joint Comments, the commenters indicated that 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 Commenters noted that the Board adopted three benchmarks only as a “starting point,” without any guidance as to how those benchmarks will be applied, and with the expectation that complainants will augment these benchmarks with additional, vaguely identified, evidence.  1996 Decision, at 1045.  The Joint Commenters sought clarification from the Board as to how it will apply these benchmarks as a standard of reasonableness in small rate cases, and how various types of additional evidence might alter the benchmark results.  Specifically, the 2003 Joint Comments asked the Board to:

·        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);

·        Clarify the application of the R/VC>180 benchmark when the complainant’s R/VC ratio is less than the average published by the Board (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 in this respect adopt the 2003 Joint Comments in their entirety, and urge the Board to implement the suggestions therein. 

In this regard, the Board has sought suggestions on substantively revising the small case standards, and has indicated that no party has yet come forward with any such revisions.[16]  However, the Interested Parties are painfully aware that it took the ICC and the Board ten years – from 1986 to 1996 -- and a Congressional directive to the agency in the 1995 ICC Termination Act (49 U.S.C. 10709(d)(3)), to come up with the benchmark approach set forth in the 1996 Decision.  Before embarking on a wholesale new path, the Interested Parties believe that the sounder approach would be for the Board to better define what the 1996 standards mean and how they will be applied, as requested in the 2003 Joint Comments.

V.        THE BOARD SHOULD REVISE ITS METHODOLOGY FOR CALCULATING THE REVENUE SHORTFALL ALLOCATION METHOD (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 in its 1996 Decision that the RSAM benchmark measures the uniform markup above variable cost that would be needed from every shipper of potentially captive traffic (i.e., the >180 traffic group) in order for the carrier to recover all of its fixed costs.  1996 Decision, 1 S.T.B. at 1027.  The Board noted in its 1996 Decision 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).”

Assuming that Board’s small rate case standards should include a factor assessing a railroad’s “shortfall” from revenue adequacy, 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 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, technicalities that are not apparent from the Board’s 1996 Decision.  A short summary of our understanding of the RSAM calculation is in order:

Step 1:             The Board first calculates a carrier’s total variable cost from the Waybill File, and the carrier’s total freight revenues from the Waybill File and the R-1. 

Step 2:             The Board inflates to carrier’s total variable cost by a “markup” in order to develop the carrier’s Fully Allocated Costs. 

Step 3:             The Board subtracts from the Fully Allocated Cost figure the carrier’s total variable cost (obtained in Step 1) and any non-line haul revenues (such as switching, demurrage, and joint facility revenues), to obtain a figure for the carrier’s “Unattributable Costs.”

Step 4:             The Board subtracts the variable costs of the non-competitive (i.e., traffic with a revenue to variable cost ratio of less than 180%) from the revenue of the non-competitive traffic, to obtain the “revenue contribution” of the non-competitive traffic.

Step 5:             The Board then subtracts the revenue contribution of the non-competitive traffic from the “Unattributable Costs” developed in Step 3, to obtain “residual” unattributable costs.

Step 6:             The Board calculates the RSAM by dividing the residual unattributable costs by the variable cost of the captive (i.e., greater than 180% r/vc ratio) traffic.

A quick review of these steps reveals that the revenue being obtained from captive traffic never figures in to the calculation of a revenue “shortfall.”  Particularly in view of the Board’s ruling that the RSAM is intended to account “for a railroad’s need to earn adequate revenues,” the implications of this methodology are anomalous:

1)            Because revenue from existing captive traffic never figures in to the calculation of the RSAM under the Board’s current methodology, 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.

2)            A carrier that over time increases revenues from its captive traffic and decreases revenues from its non-captive traffic will have a higher and higher “shortfall” and thus a higher and higher RSAM.  Under the Board’s existing small case guidelines, all other things being equal, 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.[17]

3)            Two carriers can have precisely the same total revenue and precisely the same relationship to revenue adequacy, yet one carrier’s RSAM can be very different from the other, if one carrier is obtaining a larger proportion of its revenue from captive traffic, compared to the other carrier that is maximizing revenues from its non-captive traffic.  Oddly enough, the carrier with the higher RSAM will be the carrier obtaining a greater proportion of its revenue from captive traffic – thus permitting that carrier to obtain even more revenue from captive traffic, since that carrier’s RSAM will be higher than the RSAM of the carrier maximizing revenues from all of its traffic.

The Interested Parties submit that the Board should, in any rulemaking, seek comments from the public on the appropriate way to calculate the RSAM.  The Interested Parties submit that the methodology for calculating the RSAM utilized by the Board appears to incorrectly increase the level of the RSAM, create inappropriate incentives for rail carriers, and establish unlawful considerations for the Board in determining whether a particular rate is reasonable.

VI.       THE BOARD SHOULD DEVELOP NEW PROCEDURES FOR SMALL RATE CASES.

The 2003 Joint Comments set forth a detailed discussion of procedures that the Board should adopt to expedite small rate cases.  These suggestions included:

·        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.

These Interested Parties adopt in their entirety the suggestions on these matters set forth in the 2003 Joint Comments, and urge the Board to implement them in refining its small rate case guidelines.

VII.            CONCLUSION

The undersigned organizations respectfully request the Board to review the suggestions in these Comments and to take steps to adopt these suggestions as revisions to the Board’s rules.

Respectfully submitted,

American Chemistry Council

American Farm Bureau Federation

American Soybean Association

Colorado Wheat Administrative Committee

The Fertilizer Institute

Idaho Barley Commission

Idaho Wheat Commission

Kansas Wheat Commission

Montana Wheat & Barley Committee

National Association of Wheat Growers, National Barley Growers Association

National Council of Farmer Cooperatives

National Farmers Union

National Grain and Feed Association

National Grain Sorghum Producers

The National Industrial Transportation League

North Dakota Grain Dealers Association

North Dakota Public Service Commission

North Dakota Wheat Commission

South Dakota Wheat Commission

Texas Wheat Producers Board

Washington Barley Commission

Washington Wheat Commission

Alliance for Rail Competition

Consumers United for Rail Equity

By:             Nicholas J. DiMichael

            Thompson Hine LLP

            1920 N St. N.W., Suite 800

            Washington, D.C. 20036

            Representative of the Interested Parties

Dated:  July 16, 2004