On Jan. 11, 2018, the Surface Transportation Board (STB) handed a win to a coal shipper in a maximum rate reasonableness case. In the first rate case victory by a shipper in seven years, the STB has ordered CSX Transportation, Inc. (CSXT) to pay refunds to Michigan-based Consumers Energy Company (Consumers), and has prescribed a formula that places caps on CSXT's rates to Consumers over a ten-year period.

The case began in January 2015, when Consumers brought a complaint at the STB alleging that CSXT was charging excessive prices for unit train coal movements from a CSXT interchange with BNSF in Chicago to the Consumers energy plant at West Olive, Michigan.

The agency only has authority to regulate rail rates where there is an absence of effective competition. While the complaining shipper has the burden of proof on the issue, it usually falls to the railroad to raise the issue and establish a factual basis for the claim that it faces competitive forces that restrain its pricing power.

CSXT challenged the STB's jurisdiction to regulate its rates, contending that Consumers has viable competitive alternatives in the form of rail transportation from coal mines in the west to Chicago and water shipment from Chicago to the power plant. CSXT pointed to the plant's location on Lake Michigan and to the fact that a nearby Consumers power plant, also on Lake Michigan, had long received coal by lake vessel. The STB was unimpressed by that argument, apparently concluding that the rail-water option was not viable. The market dominance analysis turns heavily on confidential information, and the STB will not release a public version of its reasoning until a suitably redacted version can be stipulated to by the parties.

Having found that the railroad had market dominance, the agency then proceeded to address the reasonableness of CSXT's rates.

It first addressed a curious argument by Consumers. The shipper contended that CSXT is "revenue adequate" -- a term the STB equates with earning its cost of capital. Yet, in over 29 years of annually evaluating carrier cost of capital, and CSXT's revenue adequacy, CSXT has never been found to be revenue adequate. Still, because the STB's precedent provides that these annual findings "are not necessarily conclusive" in a rate case, the STB had to deal with the question, and the issue had to be argued and briefed. The STB concluded that the numerous financial ratios offered by Consumers, and CSXT's payment of dividends and repurchases of stock did not rise to a level that could overcome CSXT's long history of failing to earn its cost of capital. The agency was careful to limit its decision to the record before it, and did note that CSXT is in the process of making profound changes to its operations and its cost structure in an effort to improve profitability.

As an aside, it should be noted that the rail industry steadfastly maintains that the statute makes revenue adequacy no more than a measurement of the success or failure of regulatory policy, and that the wording of the statute does not support the notion that revenue adequacy should operate as a regulatory standard. (The subject of revenue adequacy will be the subject of a future blog.)

The STB then analyzed the detailed, and generally conflicting, presentations of the two parties under its stand alone cost (SAC) standard. The SAC standard is designed to answer the question: What would a hypothetical least-cost, most-efficient competitor that might theoretically enter into the market in competition with the railroad have to charge in order to cover all of its costs, including its cost of capital? This process entails designing such a railroad from the ground up and presenting a workable operating plan that would provide the same level of service to the customer as the defendant railroad currently provides.

The SAC process requires the STB to resolve evidentiary issues relating to cost of construction, cost of overhead, and myriad other issues. The STB resolved enough of the factual issues against the railroad that the Stand Alone Railroad was shown to be able to more than recover all of its costs, and as a consequence, CSXT was ordered to make refunds to Consumers, and to limit its future rates on Consumers' traffic between the BNSF Chicago interchange and the West Olive, Michigan plant.

While the SAC process has been much criticized by shippers (and the two sitting members expressed their own continuing dissatisfaction with the process) it clearly worked to the advantage of the shipper in this proceeding.