Coal shippers say STB rule changes would ‘gut’ rate protections

Several coal shipper groups, including the Western Coal Traffic League, told the U.S. Surface Transportation Board that proposed changes in the board’s stand-alone cost (SAC) calculations would “gut” the current system and drive up coal haul rates charged by the nation’s railroads.

The board opened this matter for comment on July 25, with the WCTL, Concerned Captive Coal Shippers, American Public Power Association, Edison Electric Institute, the National Rural Electric Cooperative Association, Western Fuels Association (WFA) and Basin Electric Power Cooperative filing their collective opening comments on Oct. 23.

Their submission focuses on the board’s two proposed changes in how it develops SAC in coal rate cases, which the board calls the “Full-SAC” cases. The board characterizes these changes as “technical” in nature, and intended to “improve ways to protect captive rail shippers from unreasonable rates.”

“However, as Coal Shippers demonstrate, the Board’s two Full-SAC proposals are neither ‘technical,’ nor ones that ‘improve’ the SAC process,” they added. “Instead, the proposals in effect gut the SAC test, and will make it difficult, if not impossible, for most (if not all) shippers to obtain any relief in a ‘Full-SAC’ case.”

The board’s first proposal strikes at the heart of the SAC test: a complainant shipper’s right to “group” traffic in configuring a Stand-Alone Railroad (SARR), the coal organizations said. Shipper complainants at the board have to build a hypothetical railroad on paper, called an SARR, when trying to prove that rates they are being charged by a monopoly existing railroad are too high. The board, however, proposes to gut a shipper’s grouping rights, the groups said.

“Specifically, the Board proposes to preclude SARRs from carrying large classes of traffic in cross-over service, either by eliminating the SARR’s access to all cross-over traffic moving in ‘overhead service,’ – i.e., service where the SARR does not originate or terminate the traffic – or by eliminating the SARR’s access to all cross-over traffic moving in single-car or multi-car service.”

The board’s second proposal also strikes at the heart of the SAC test: a fair allocation of revenues to the SARR, they said. The board proposes changes in current revenue allocation procedures that will demonstrably under-allocate revenue to high-density segments in most cases, they added. The board proposes to do so by adopting a new alternative average total cost (Alternative ATC) method for allocating cross-over traffic revenues.

“The Board’s two proposed changes appear to be a response to the last two shipper ‘wins’ in coal rate cases: [Arizona Electric Power Cooperative] and WFA,” the organizations said. “If the Board’s new grouping principles were applied to the AEPCO SARR configuration, AEPCO would have lost its case. Similarly, if the Board’s new revenue allocation procedures were applied to WFA’s SARR configuration, its rate relief would have been gutted. The adverse impact of the Board’s proposed changes is not limited to past cases. If the Board adopts the proposals in their present form, it is highly unlikely that any shipper could prevail in a ‘Full-SAC’ case. Thus, SAC is likely to be relegated to the same regulatory graveyard as the other ‘constraints’ on rail pricing that were adopted in 1985 – management efficiency, revenue adequacy, and phasing. Since 1985, no rail shipper has obtained any relief under these three constraints.”

The coal shippers are requesting that the board make no changes to its current grouping/SARR configuration principles. “It appears to Coal Shippers that the Board’s grouping concerns really involve issues concerning the application of the Board’s Uniform Railroad Costing System (‘URCS’) Phase III program to cross-over moves. While Coal Shippers do not share the Board’s concerns, the appropriate place to address them would be in a proceeding addressing URCS. The Board should not throw the baby out with the bathwater by limiting traffic grouping due to its concerns with URCS.”

The coal shippers also urged the board not to adopt Alternative ATC, but instead to use a slightly corrected version of the method now employed by the board to divide revenues on cross-over traffic, or to adopt other suggested alternatives that are superior to Alternative ATC.

Finally, the shippers addressed the remaining noticed proposals. “Coal Shippers demonstrate that the Board’s Simplified SAC proposals are more harmful than helpful to captive coal shippers; that the Board’s proposed changes to the Three Benchmark (‘3BM’) relief caps are not sufficient in Coal Shippers’ view to meet the Board’s objectives to assist small shippers; and that the Board’s proposal to increase interest payments on reparations awards is sound, but unfortunately may be moot for large coal shippers in light of the Board’s Full-SAC proposals.”

BNSF likes some parts, but not others, of board proposals

As an example of the rail industry’s take on the board proposals, the BNSF Railway said in Oct. 23 comments that to address concerns about the complexity of rate reasonableness analyses, the board has adopted a three-tiered approach that involves trade-offs between the accuracy (and complexity) of the rate reasonableness analysis and the amount of relief available to a shipper.

“The preferred approach is the Full SAC test,” the BNSF said. “A Full SAC analysis is the most accurate test of rate reasonableness and as a result there are no limits on the relief available to successful complainants. The second tier is a Simplified SAC methodology that uses shortcuts to approximate the results of a Full SAC case, but since the simplifying assumptions necessarily produce some inaccuracies, there is a limit on available relief. The Three-Benchmark test is the most simplified approach but also the least accurate approach. Relief under the Three Benchmark test is currently limited to just over $1 million. This proceeding offers the Board the opportunity to refine its three-tiered approach to rate reasonableness analyses. A critical part of that refinement should be the elimination of crossover traffic altogether from Full SAC analyses. Full SAC cases have become dominated by issues arising from complainants’ use of cross-over traffic.”

The BNSF added: “The Board’s EP 715 Decision acknowledges the complications and distortions that can arise from the use of cross-over traffic in Full SAC analyses. Cross-over traffic was originally developed as a simplification tool at a time when complaining shippers had no alternative to the Full SAC test in a rate reasonableness challenge. Now that the Board has established a Simplified SAC methodology that is expressly intended to use simplifying assumptions, with corresponding limits on relief to compensate for inaccuracies that inevitably result from the use of simplifying assumptions, cross-over traffic should be limited to Simplified SAC cases. The Full SAC test should be used as originally conceived in Coal Rate Guidelines as a test involving a true stand-alone railroad without crossover traffic.”

BNSF said it supports additional refinements to the existing three-tiered rate reasonableness approach the changes proposed by the board to the revenue allocation methodology for cross-over traffic and the treatment of road property costs in the Simplified SAC methodology. “BNSF also would not be opposed to an increase in the relief limits available under the Simplified SAC and Three Benchmark tests as part of a package of refinements that includes the elimination of cross-over traffic from Full SAC analyses,” it added. “For reasons explained below, BNSF does not believe that it would be appropriate under any circumstances to eliminate altogether the limit on relief in Simplified SAC cases. Finally, BNSF does not believe that a change in the interest rate used to calculate reparations would be justified.”

CSX, NS have their own problems with board proposals

The two major eastern U.S. railroads, Norfolk Southern and CSX Transportation, filed combined comments on Oct. 23. They said the board has proposed a “profound change” to the simplified stand-alone cost (SSAC) approach for medium-sized rate cases that it adopted in an extensive notice-and-comment rulemaking barely five years ago. In particular, the primary change the board has proposed – to eliminate the limit on relief in SSAC cases – is inconsistent with the governing statute and would give inappropriate and unfair bargaining leverage to shippers, who could impose substantial discovery burdens on the railroads at little cost to themselves, the railroads added. “The Board should maintain the cap on relief for SSAC cases to protect against such abuse.”

Among other things, CSX and NS said the board’s proposal to eliminate all limits on the relief available in SSAC would violate its statutory mandate. “The express language of Section 10701(d)(3) requires that application of any method other than ‘full stand alone cost’ must be limited,” they said. “The statute requires the Board to consider both the value of the case and the cost of bringing a full SAC case in determining the types of rate cases to subject to simplified and less accurate approaches. By eliminating any limit on the far less reliable and less accurate SSAC approach, the Board’s proposal fails to conduct the balancing required by the statute and to restrict the use of methods other than ‘full stand alone cost.’ In addition, the proposal would eliminate any role for the statutorily mandated factors: the value of the rate case, the cost of bringing that case under the SAC methodology, and the relationship between those two factors. Accordingly, the Board’s proposal to eliminate any limit on recovery allowed under the ‘far simpler’ approach would violate the statute.”

If the board eliminates the limit on relief in SSAC cases without shifting any burden to shippers to develop their own SSAC evidence, it will encourage use of the SSAC process by shippers as leverage in rate negotiations and will provide shippers with a carrier-financed-and-developed view of their potential for recovery in a rate case, which under the board’s proposal would be limitless, the railroads added.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.