A new U.S. Surface Transportation Board test for “market dominance” is flawed and should not be used, particularly in coal rate cases, said Nov. 28 comments filed with the board by the Western Coal Traffic League and the coal-burning Arkansas Electric Cooperative.
On Sept. 27, the board issued a decision in a non-coal case, M&G Polymers USA v. CSX Transportation, that set a new market dominance test that could be applied in coal rate cases. The board then asked for comment on that new test, called the “refined qualitative market dominance methodology.”
WCTL is a voluntary association, whose membership is composed of organizations that purchase and ship by rail more than 140 million tons of coal annually from origins west of the Mississippi River. It is not a party to this proceeding and it takes no position on whether CSX exerts market dominance in the matter covered in the Sept. 27 decision. “WCTL notes, however, that it strains credibility that rates at the levels set by CSXT in this case reflect any effective competition,” it added.
WCTL wrote: “In this maximum rate case, the Board introduces a new, assertedly ‘refined’ approach to determine ‘market dominance.’ This approach was not addressed, or sought, by either party to the proceeding. The statutory market dominance inquiry employs a two-step analysis: a quantitative review and a qualitative review. The refined approach is ostensibly focused on the second, ‘qualitative’ portion of the market dominance analysis. Under this new approach, in cases where the Board finds that a shipper has ‘feasible’ transportation alternatives, the Board proceeds to compare what it calls a ‘limit price’ rate-to-variable cost (‘RIVC’) ratio to the defendant carrier’s Revenue Shortfall Allocation Method (‘RSAM’) ratio for purposes of making a ‘preliminary conclusion’ of whether the ‘feasible’ alternative is providing ‘effective’ competition. This new approach has significant legal and economic flaws.”
- First, this approach is fundamentally flawed at its core, as it is based on a five-year average RSAM – i.e. the average amount a carrier would need to charge all its captive traffic (traffic priced above 180% of variable costs) in order to be determined revenue adequate, the league said. “However, where effective competition exists, rates are driven down towards marginal costs, not up to average carrier RSAM ratios that currently run from 2.5 to 3 times variable service costs.”
- Second, the board’s refined approach conflicts with the board’s statutory directives. Congress has set the quantitative RIVC ratio for market dominance purposes at 180%, not RSAM, the league pointed out.
- Finally, the refined approach improperly introduces forms of geographic competition into the board’s market dominance analysis, WCTL added.
“For these reasons, WCTL respectfully submits that the refined approach, as currently constituted, should not be utilized by the Board in future cases,” the league said.
Arkansas Electric had a number of its own criticisms of the new dominance test in its Nov. 28 brief and said that it is “neither necessary nor appropriate in coal rate cases.”