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Transportation - Pursuing Rate Issues by Glen W. Squires Wheat Life, June 2003

The message to the Surface Transportation Board (STB) in recent testimony given by Whiteside and Associates, representing the wheat and barley commissions in six states: “The small case, captive rail customer is looking at a railroad with deep pockets and a long memory. In most cases, the captive rail customers’ financial outlook is tied to shipping by rail, and without rail, they cannot generate income. One must be mindful that rate cases don’t come from non-captive rail customers.” The STB is currently evaluating rail rate challenges in small cases.

The testimony reminded the STB that the Staggers Rail Act of 1980 suggested two major themes: 1) increase rail economic health through deregulation; and 2) protection for the few captive rail customers that would occur due to the effects of deregulation. It is the protection for captive shippers, along with small rate cases, that are of specific concern.

Deregulation allowed the number of Class I railroads to shrink from 40 in 1980, to the degree that 92 percent of the U.S. railroad business is now being handled by just four carriers. As a result, the captive shipper base has grown with each successive rail merger—now estimated to be over 30 percent of all rail shippers—yet the regulatory oversight for small rate cases continues to function as if there are still 40 carriers.

The testimony points out that excessive rates are being applied to grain moving from inland origins to export points. Rates in excess of 180 percent of revenue to variable costs are considered by the STB to be the threshold for determining unreasonableness, yet grain rates for captive shippers in the six states of Colorado, Idaho, Kansas, Montana, North Dakota, South Dakota and Washington are as high as 210 percent to 330 percent of variable costs.

Added to this is the complicated nature of filing small rate cases, along with captive shippers’ fear of reprisal from market-dominant railroads for initiating a rate complaint. All are huge significant issues the STB needs to finally and fully address. Note that the last major agricultural case (McCarty Farms) took 16 years, at a cost of over $3-million to producers and the state of Montana (excluding attorney fees) before the STB ruled that rates in Montana in excess of 250 percent of variable were “not unreasonable.” Where is the protection for captive shippers? Widening concern prompted national legislation to be considered that is aimed at addressing captive shipper concerns.

Submitted comments made reference to testimony last year before the Senate Commerce Committee, during which a railroad agricultural pricing vice-president stated, “What we do as a rail transportation provider is look at the difference between the value of the grain at the origin and value of the grain at the destination, and try to determine the level of charges for transportation with enough margin for the elevators to operate and make money. . . . The fact that winter wheat off the Texas gulf at the destination has a lower value than hard spring wheat off the PNW . . . it is clear spring wheat has a higher value. Therefore, it can stand a higher transportation cost and still move in the marketplace.” Whiteside concluded by stating, “In a competitive marketplace, no single company could market in this way. Only a railroad with total market dominance over its traffic base can price in this manner.”

Suggestions to address rail captivity issues are countered as re-regulatory by the railroads that fear losing what they consider their right to charge high rates to captive shippers in areas where they are the sole railroad, also known as their “franchise” area. Railroads argue that government intervention is necessary to insure that they earn “adequate revenues,” while at the same time they argue that no government intervention is necessary to limit their market power. As it is now, a rail customer’s competitive position may be dictated by railroad actions or inactions. Through rate setting, one elevator may become uncompetitive, thus forcing the grain to another captive shipper. The reduced number of origins benefits the railroad’s desire to “hook and haul.” The railroad still gets the business, but it is the producer who bears the increased costs.

Suggested remedies from the wheat and barley commissions for the STB to consider relative to small rate cases include:

1. creation of a STB Small Case Advocacy Office to advocate for small case rail customer interests;
2. simplify market dominance test in small rate cases, i.e. if rates on a system-wide average basis are over 180 percent of revenue to variable costs and over 60 percent of shipments from a facility move via a single railroad, the railroad has market dominance over the subject traffic;
3. changes to rate analysis determination for small rate cases; and
4. under 49 USC 10101[6], the STB would become a proactive force for maintaining reasonable rates in the absence of effective competition.

The Washington Wheat Commission has been a strong advocate for the benefits of competition among transportation providers. In most cases, reduced competition stemming from STB-approved mergers is behind captive agricultural areas. Addressing market dominance issues as well as shipper access to relief is critical to the ultimate competitiveness of the wheat industry.

Related Pages:
Rail Solutions Sought: Competition by Glen Squires, Wheat Life 2/4