By Randy Gordon, President and CEO
The five Class I railroads that petitioned the federal Surface Transportation Board (STB) to create a rail rate arbitration program on Sept. 10 filed supplemental comments with the agency responding to a series of changes that had been recommended by NGFA.
In its 14-page Aug. 20 statement to the STB, the NGFA had advised the agency to proceed with a rulemaking on the petition only if doing so does not delay the agency’s issuance of a final rule implementing a new, streamlined regulatory process that shippers could use to challenge unreasonable rail rates – known as the “final offer rate review” (FORR) procedure. In addition, NGFA advised the STB that it still had significant concerns about two major aspects of the railroads’ petition that may prove to be insurmountable. One of those involve the insistence by the five railroads that they be granted a waiver by the STB that would prevent their freight rates from being challenged under the FORR procedure so long as they agree to participate in the proposed rate arbitration approach. The other is the carriers’ demand that any rate arbitration decisions rendered be kept mostly confidential.
As reported in the Aug. 7 NGFA Newsletter, the five Class I railroads (the Canadian National Railway, CSX Transportation Inc., Kansas City Southern Railway Co., Norfolk Southern Corp. and Union Pacific Railroad Co.) on July 31 submitted a 45-page petition to the STB urging that it create a separate set of rules under the agency’s existing voluntary, binding rail arbitration program to resolve rail rate complaints between carriers and their customers. Only the BNSF and Canadian Pacific Railways did not join the petition.
The FORR rate-challenge procedure was proposed by the STB on Sept. 11, 2019, and is scheduled to be finalized before the end of the year, although that timetable may be affected by the addition of two new members to the agency who soon may be confirmed by the Senate and join the STB this fall. Further, the Association of American Railroads already has warned that it likely will challenge the legality of FORR in court.
Under the proposed FORR procedure, a rail customer could file a rate complaint and submit what it considers to be a reasonable rate using whatever methodology it chooses to justify its rate offer. Likewise, the defendant railroad could utilize its choice of methodology to justify its current rate or offer a different rate that it believes is lawful. The STB then would choose between the two rate offers based upon the evidence presented (in essence, picking a winner and loser), utilizing process that generally would resolve the rate case within 135 days.
Two Major Contentious Issues: In its supplemental comments to the STB, the five Class I railroads accepted many of the NGFA’s recommended changes but objected strongly to NGFA’s insistence that there be more transparency in rate arbitration decisions. The carriers also proposed to address the FORR waiver issue in a way that may not be acceptable to NGFA and other shipper groups. Here’s how the five Class I railroads responded on these two critical components of their proposal:
- Waiver from FORR: NGFA had offered three concepts for potentially resolving the railroads’ demand for a waiver from FORR if they agree to participate in rate arbitration, without specifically endorsing any of the three. The railroads responded that they could agree to a concept of shortening their originally proposed five-year initial term of the FORR waiver to three years, and agreed with NGFA’s conceptual idea that the STB then be required to conduct a review of the rate arbitration program to see if it – and the waiver –should be continued, amended or rescinded, with the FORR waiver revoked in the latter determination. But the railroads did not agree with another NGFA concept, under which rail customers would file their first rate challenge using the arbitration approach, but thereafter be able to choose to use either the FORR or arbitration procedure to pursue additional rate challenges against any carrier. The railroads also were silent about another NGFA suggestion, under which a rail carrier voluntarily could waive its right to the FORR waiver, likely because none of the five railroads signing the petition would agree to do so.
However, the railroads did agree with an NGFA-recommended clarification that rail customers still would have the ability to challenge a rail rate using one of the STB’s other three rate-challenge methodologies, including the so-called three-benchmark method that is designed to be less complicated and costly than the other two STB procedures – Stand-Alone Cost (SAC) and Simplified SAC. No agricultural freight rate cases have been filed using any of these thee methodologies, and NGFA has urged the STB to modify the three-benchmark standard to make it more workable for agricultural shippers.
The railroads also agreed to an NGFA clarification that any carrier withdrawing from the arbitration program immediately would be subject to having its rates challenged using any of the STB’s rate-challenge methodologies, including FORR if it is finalized.
- Confidentiality of STB Rate Arbitration Decisions: The railroads rejected NGFA’s proposal to increase the transparency of arbitration decisions that would be rendered under their proposed STB rate arbitration process. Under the railroads’ proposal, quarterly summaries of rate arbitration decisions would be published by the STB on its website, containing limited information on: 1) the geographic region of the rail movement(s) at issue in the case (but not the specific origin-destination pairs involved); 2) the commodities involved in the case; 3) the amount of time it took to complete the arbitration case; and 4) a “high-level, generic” description of how the case was resolved [e.g., settled, withdrawn, dismissed because market dominance of the carrier was not proven (a statutory requirement) or the rate challenged was found to be reasonable or unreasonable)].
NGFA had urged that the carriers to support increased transparency by providing the following additional information in arbitration decisions: 1) the names of the rail customer and railroad involved in the case; 2) a general description of the reason the rate was challenged; 3) the general rationale used by the arbitrators in reaching their decisions; 4) the total amount of rate relief and reparations provided (if awarded); and 5) the names of the arbitrators.
“Maintaining the confidentiality of arbitration decisions will not only incentivize the parties to participate in the program, but goes hand-in-hand with the program’s pro-shipper features of efficiency and increased flexibility,” the five Class I railroads argued in their Sept. 10 supplemental comments to the STB. “Without confidentiality, (the five railroads) would not be willing to submit something as complex as a rate reasonableness claim to an arbitral panel using an expedited process with extremely limited discovery and limited appellate rights.
“[B]ecause confidentiality would lower the stakes of arbitrating a rate dispute, it would enable the parties to focus solely on resolving the specific rate dispute at hand, without worrying about the outcome’s effect on the marketplace,” the carriers contended. “Indeed, the effect of rate cases on the marketplace is one reason that rate reasonableness cases are litigated so vigorously on so many issues….[I]f a grain shipper prevails in a rate reasonableness arbitration against a railroad and the decision is published, other grain shippers around the country may use that decision as a bargaining tool in contract negotiations with railroads to drive down rates. Conversely, the many shippers who deal with multiple railroads would be incentivized to litigate aggressively to avoid outcomes that could affect their contractual negotiating position with other railroads.” [Emphasis added.]
Railroads’ Concurrence with NGFA-Recommended Changes: The five petitioning Class I railroads did state that they agreed with many of NGFA’s other recommended changes to their original proposal. Those include the following:
- Consideration of “Flexible, Market-Based Factors”: The carriers agreed to NGFA’s proposal to allow arbitrators to consider “flexible, market-based factors” when deciding arbitration cases, such as: 1) the rate levels on comparative traffic; 2) market factors for similar movements of the same commodity; 3) overall costs of providing the rail service; and 4) other market-based factors that may be identified during a rulemaking on the petition or by those parties arbitrating cases.
- Mediation: The carriers agreed to NGFA’s proposal that the mediation period under the arbitration program be limited to 30 days, unless an extension mutually is agreed to by the parties involved, and that mediation could be waived by mutual consent of the parties.
- Market Dominance Test: To meet the statutory requirement that the rail customer demonstrate that a carrier has market dominance (e.g., the customer lacks competitive transportation alternatives) for the challenged traffic, the carriers agreed with NGFA that the customer could utilize either the STB’s new streamlined market dominance or the agency’s non-streamlined approaches.
- Number of Cases Brought Against Single Carrier: The railroads’ petition states that a rail customer could bring no more than one rate case at a time against the same railroad. The railroads agreed to NGFA’s recommendation that the end point of a decision would occur when the original decision is issued by the arbitrators, regardless of whether the decision is appealed to the STB.
- Challenging the Exit of a Party from Arbitration if the STB or Congress Makes “Material Change” to Rate-Challenge Procedures: The railroads’ proposed that either the rail customer or railroad could unilaterally exit the arbitration program if Congress or the STB make a “material change” in the rules governing rate challenges. The carriers agreed with NGFA’s proposal that either party be able to challenge the others’ determination of whether a “material change” has occurred by appealing to either an STB-retained administrative law judge or the STB chairman. The railroads’ statement was silent on whether adoption of FORR would constitute a “material change,” but in conversations with their lead attorney, he has indicated it would not be.
Next Steps: After reviewing the comments submitted by the five Class I railroads and other shipper organizations, the STB will decide whether to initiate a formal rulemaking reflecting the changes agreed to by the carriers to their original petition and soliciting public comments. NGFA’s efforts on this important matter are being led by its Rail Shipper/Receiver Committee and a Rail Rate Arbitration Working Group that also includes industry representatives from NGFA’s Rail Arbitration Rules Committee. The proposal also is being discussed at this months’ virtual meetings of NGFA’s Executive Committee and Board of Directors.