STB reprimanded over rail revenue constraint
When Congress partially deregulated railroad rates and practices in 1980 (Staggers Rail Act), it instructed regulators to consider revenue adequacy in determining the reasonableness of railroad rates charged to captive shippers – those who had no efficient transport alternatives to rail. More than four decades later, neither the Interstate Commerce Commission (ICC) nor its successor Surface Transportation Board (STB) has enacted the intended regulatory rules.
The patience of captive shippers has long waned as the Western Coal Traffic League (WCTL) on Aug. 24 called on the STB to stop dithering and get the job done. The WCTL represents utilities that ship mined coal west of the Mississippi River.
Some background information, including definitions, is needed before further explaining the WCTL petition:
- Revenue adequacy is an economic concept applied to railroads by Congress in 1976 through the 4R Act (Railroad Revitalization and Regulatory Reform Act). Rail regulators have been instructed to help railways achieve “adequate revenue levels under honest, economical and efficient management to cover full operating expenses, including depreciation and l ‘obsolescence, plus a profit or a fair, reasonable and economic return (or both) on the capital employed in the business.’
- In 1981, the ICC, filling in some loopholes, ruled that a railroad becomes sufficient revenue if it achieves a return on investment (ROI) at least equal to its current cost of capital. The ICC, however, questioned whether revenue adequacy is achieved by meeting the standard in just one year or over a longer period, ruling somewhat indirectly that “in any industry there are business cycles producing profits during which [those] revenues exceed projections and years when they are below target. Our concept is simply that a railway does not use [its market power] to consistently earn, over time, a return on investment that exceeds the cost of capital.
- The failure to define a calendar time period rendered impotent a crucial captive shipper protection later incorporated into the 1985 ICC coal tariff guidelines (applicable to other commodities as well). This protection is a revenue adequacy constraint, providing that once revenue adequacy is achieved, a railway would be forced to take further rate increases unless it can demonstrate, “with particularity” , its need for higher revenue, the harm it would suffer if it could not collect higher revenue, and why a shipper should pay higher rates. In the absence of further details as to its application, captive shippers were left without a procedure to claim the tariff protection provided.
- Thus, 42 years after the passage of the Staggers Rail Act and 37 years after the ICC’s promulgation of its Coal Rate Guidelines, rail regulators have yet to establish how the revenue adequacy constraint should be applied. Among the unanswered questions are: How many years should a railway have sufficient revenue before applying the constraint (the business cycle)? Will the imposition of the hardship prevent or impede railways with insufficient revenues from achieving revenue adequacy? Are there situations – an economic downturn, for example – where the constraint should not be imposed or, if in place, be lifted?
- Although the STB in 2014 initiated proceedings to determine how it should apply the income adequacy constraint, it remains at the “pre-regulation” stage nine years later.
- In 2019, an internal STB Tariff Reform Task Force (RRTF) posed new questions that needed to be answered, warning that a railway could be deemed revenue adequate in a single year, but still not in terms of long-term revenue; or, conversely, that the income is deemed insufficient in a single year even if it is sufficient income in the long term.
- The RRTF recommended that the STB determine the shortest period that constitutes long-term income adequacy, but not less than five years, and include both a year in which a recession began and a Next year ; and, identify a point beyond which railways could use their market power, in the words of the WCTL, “to collect from captive shippers differentially higher rates than other shippers when all or part of that differential no longer necessary to ensure a financially sound carrier.”
In its August 24 filing (downloadable below), the WCTL urged the STB to “take administrative action now by proposing new rules that implement the revenue adequacy constraint in a way that will allow shippers to achieve significant and cost-effective tariff relief. case of complaint. “Further delays,” he said, “not only harm captive shippers, but also contravene Council’s Congressional guidelines to complete procedures in a timely manner.”
The WCTL said the revenue adequacy constraint is “of no practical use” in its current form – in the absence of a definition of a business cycle – because captive shippers cannot reach a non-existent threshold .
“As the Commission knows, rail shippers are 0 for the [past] 37 to obtain relief under the income adequacy constraint,” the WCTL said. “This will likely remain the case unless the Commission issues rules in this proceeding that implement the revenue adequacy constraint in a way that provides meaningful and easily enforceable relief for captive shippers.”
The WCTL attached to its filing a chart showing that, in each of the 11 years between 2010 and 2020 (the latest data available), the STB concluded that Union Pacific’s revenue was sufficient; BNSF in 9 of 11 years (and within one percentage point of income adequacy the other two); Norfolk Southern for seven of 11 years (and within one percentage point of income adequacy for the remaining four); and CSX for three of the 11 years (and within one percentage point of revenue adequacy for another six years).
Although the WCTL does not say so, shippers of all stripes have long claimed that, by Wall Street standards, every Class I railroad has long generated sufficient revenue to enforce the revenue adequacy constraint. Not lost for shippers:
- CSX’s 1994 annual report stated, “Over the past two years, CSX has earned more than its cost of capital,” even though the STB concluded that CSX was not sufficient income. The railroads generally make no mention in their annual reports to shareholders of the inadequacy of their revenues.
- Union Pacific, has found adequate revenues in each of the past 11 years, the return on investment (ROI) calculated by STB, has also shown a return on investment of 41.9% for 2021. And over the past five years since 2017, UP has repurchased $5.8 billion of its Stock. The railroads “free up” significant amounts of cash (free cash flow), which amounted to approximately $6 billion for UP in 2021. Free cash flow is calculated after paying taxes and after satisfying network maintenance and growth investment needs. It is inconceivable that a railroad would find investment opportunities consuming so much money.
Railway Age Capitol Hill Editor Frank N. Wilner was previously assistant vice president for policy at the Association of American Railroads, a White House appointed chief of staff (Bill Clinton) at the Surface Transportation Board, and president of the STB bar association. Among his seven books is the soon to be published “Railroads & Economic Regulation”.