Market Matters Blog

Shipper Groups, Railroads at Odds Over Rules Regarding Railroads' Revenue-Adequate Status

Mary Kennedy
By  Mary Kennedy , DTN Basis Analyst
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A BNSF train heads east through Randall, Minnesota, on the Northern Transcon. (DTN photo by Mary Kennedy)

MINNEAPOLIS, Minn. (DTN) -- Testimony presented during a hearing last week on whether railroads should be able to continue to differentially price rail service to captive shippers once they reach revenue-adequate status showed a wide divide between railroads and shipper groups on the issue.

The hearing was conducted July 22-23 by the federal Surface Transportation Board. DTN listened to the hearing online.

Newly reinstated Surface Transportation Board Chairman, Dan Elliot, opened the two-day public hearing by stating, "We are in the midst of a rail renaissance." In his opening remarks, Elliot said that the railroad industry carries a "vast range of commodities, with traffic accounting for 1.7 billion tons of freight each year."

"Now that the industry is both financially healthier and restructured with fewer large railroads, the STB needs to examine core practices to meet the goals Congress has laid out for the agency," Elliot said. "The board's reexamination of its economic regulatory policies does not mean that significant changes to these policies are in order."

"Assessing the effects of any proposed regulatory actions in these proceedings is a consideration of the utmost importance. The goal is that the board policies reflect thoughtful, balanced decision-making that takes into account a modernized railroad industry and sound economic principles," said Elliot.

Vice Chairman Ann Begeman said that while she had definite views on the subject, she would remain "open minded" and stated she was not looking "to turn the clock back on the rail industry."

Progressive Railroad reported that, "The STB annually determines whether Class I railroads are revenue adequate, a concept that describes whether a railroad is earning sufficient revenue to cover its costs and earn a reasonable return sufficient to attract capital. The hearing explored how the board should regulate railroads that are revenue adequate, and how such an adequacy finding should impact the regulation of rail rates, among other issues."

A group representing concerned shippers presented their arguments for change, stating, "The four major railroads consistently carried fewer carloads between 2005 and 2014, and during that time, operations have not improved." They also presented graphs showing that rail industry earnings were above revenue adequate level between 2011 through 2014. (For the full testimony of the shipper associations, visit:…)

Consumers United for Rail Equity (CURE) President David Sauer, in his written comments to the STB said, "CURE has long been concerned that the STB's annual determinations of the 'revenue adequacy' for Class I carriers does not reflect the true health of the industry and its members. Further, CURE believes that the carriers' falsely perceived lack of adequate revenues has served to shield the railroads' exercise of their monopoly pricing power from STB scrutiny and prevented shippers from obtaining appropriate relief. This should change, especially as the carriers have achieved revenue adequacy."…

During their presentation to the STB, the BNSF stated that, "BNSF's investment is unprecedented; investment is driving improved service and efficiency for customers and customers are responding with investment and volumes on our railroad. Regulatory changes that disrupt the current balance will have unintended consequences and lower capital investment. Any board consideration of long-term revenue adequacy should only occur within individualized rate review process."…

The Association of American Railroads (AAR) leaders from its member railroads and economic experts urged the STB during the hearing to "beware of upending numerous national economic goals if they choose to pursue re-instituting revenue caps on freight rail companies."

AAR President and CEO Edward R. Hamberger told the board that "misapplying regulations would have far-reaching impacts on the freight rail industry's ability to sustain the billions of private funds spent by railroads each year to build, maintain and upgrade the nation's 140,000-mile rail network," according to the AAR press release of their testimony on July 22.

"Now comes a handful of interest groups that want you to cut their transportation costs by direct government intervention at the expense of the greater good. Let's call it what it is: They want you to institute a regime of wide-ranging price controls on freight railroads," Hamberger testified.

"Regulation of railroads' overall revenue levels would run counter to Congress' goals in the Staggers Act of 1980 that partially deregulated the freight rail industry to allow railroads to earn sufficient revenue to meet their long-term needs without having to rely on the federal government. As Dr. Roger Brinner, chief economist with SandPointe LLC testified, the concept of revenue adequacy should be a goal, and not a directive to constrain revenues; railroads should not be penalized for improved financial performance."

NGFA Chief Operating Officer Randy Gordy said in a press release on July 24 that, "Under the Staggers Rail Act, rail users are authorized to challenge rates for revenue-adequate railroads that have market dominance and whose rates exceed 180% of the variable cost of providing the service."

Gordon wrote that STB member Debra Miller stated that it was "time to give meaning to the concept of revenue adequacy" and reiterated her earlier statements made at the June 10 STB hearing, at which the NGFA testified on the agency's grain rail rate proceeding. At that meeting, the NGFA said that it was time to review revenue adequacy and rail rate policy in the context of other ongoing STB proceedings, including one on competitive switching.…

Gordon said that the STB commissioners, while reserving judgment, did appear to indicate that a review was necessary.

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