A Surface Transportation Board study on the Board’s SAC (stand-alone cost) rate reasonableness methodology is complete and can be downloaded at the link below.
The Board commissioned the 181-page study from InterVISTAS Consulting LLC (a Canadian firm, and reportedly the only consultant bidding on the contract) “to provide an independent assessment of the Board’s SAC) rate reasonableness methodology. Among other things, the scope of the work required InterVISTAS to look for alternative methodologies to SAC that could be used to reduce the time, complexity, and expense historically involved in rate cases; determine whether SAC is sufficient for large rate cases; and whether the Board’s simplified methodologies were appropriate alternatives to SAC.”
STB commissioned the study pursuant to Section 15 of the Surface Transportation Board Reauthorization Act of 2015, Public Law 114-110.
From the Executive Summary:
“The existing SAC methodology does recognize economies of scope with respect to total costs via the contribution of bridge traffic to the fixed costs of [an] SARR (stand-alone railroad). Conceptually there could be additional economies of scope effect in reducing the marginal/variable costs of the traffic in dispute. The STB’s guidance on SAC submissions allows and even encourages shippers to consider such economies. At least one observer has recommended that the SAC methodology allows shippers to consider economies of scope between the SARR and all the other lines in the carrier’s network, even if in different regions. This is not a recipe for simplification of the SAC methodology. It is, indeed, quite the opposite. It also seems to be at odds with the Staggers Act provisions for line rationalization and abandonment. These provisions indicate that policy requires rail lines to stand on their own financially and thus introducing revenue contribution from other lines seems inconsistent with the legislative provisions.
“There are two basic ways to simplify the SAC. First, the definition of the ‘most efficient network’ could be simplified. Considering the consolidation and line discontinuance that has occurred throughout the industry over the past four decades, the existing railroads have much more direct routes than they formerly had. As a result, this expensive and time-consuming aspect of the stand-alone costing of determining the optimal route is perhaps no longer required (as already done in Simplified SAC). Second, STB could consider simplifying the contribution of the cross-over traffic, especially now that the U.S. rail network is operated by only seven Class I railroads. It is quite possible that they probably already have the maximum traffic that can be expected for a SARR.”
“These changes are only possible now, given the wave of rail mergers that were authorized since deregulation, which implicitly suggests that perhaps the U.S. no longer needs to debate potential efficient routings as in the past, when networks were fragmented. At the same time, however, the [study team] believes that simplification of either the Three-Benchmark or Simplified-SAC tests risks moving the approaches further away from the bedrock CMP principles, undermine the reliability of the tests, and would not necessarily incentivize shippers to use those tests. An alternative regulatory regime focused on offering competitive access may be an alternative to STB’s Full-SAC approach. However, if such an approach was adopted:
• Shippers would lose access to maximum rate regulation; shippers would have no assurance that the rates offered by a competitor would be less than that offered by the incumbent.
• There would still need to be a regulatory role to set carrier-to-carrier access prices
• Unless the Congress is willing to abandon carrier revenue adequacy as a major legislated objective of U.S. freight rail policy, the rate reasonableness methodology for access charges will still require some form of SAC analysis for the most common disputes, such as those involving coal rates.
In summary, STB’s Full-SAC has stood the test of time as a maximum rate reasonableness methodology and is justifiable in some cases. However, the less expensive Simplified-SAC and Three-Benchmark methods are also available as options for shippers, and there is reason to believe that shippers can achieve similar results to Full SAC under these less-costly alternatives.”
Wilner Weighs In
Railway Age contributing editor Frank N. Wilner, who writes the print edition’s monthly “Watching Washington” column, and who is an economist and a former White House-appointed STB chief of staff, made the following observations on the study:
“Railroads are likely to be quite satisfied with the study’s status quo conclusion that the Stand Alone Cost test, its derivative simplified form, and the even less complex Three Benchmark test are sound and deserving of preservation. This will be a flashpoint for captive shippers—those lacking effective rail transportation alternatives—who contend the expense and complexity of these methods negate the requirement that their rail rates be reasonable. While railroads emphasize that the existing tests favor captive shippers as often as they do railroads, aggrieved shippers challenge the arithmetic of what constitutes a shipper victory, particularly as even so-called rate case ‘wins’ often deliver far less rate relief than was sought.
“As a ‘full-blown SAC test’ can easily cost a shipper northward of $5 million, they contend they are inequitably discouraged from filing deserving cases in favor of only those with a much higher probability of victory. Grain shippers, who perpetually assert they are subject to unreasonable rail rates, have not brought a rate complaint to the STB in more than 30 years, while the Three Benchmark test has long been boycotted by small shippers and even larger shippers of smaller quantities of freight where the SAC tests are not practical. Shippers question the ability of the Three Benchmark test to deliver accurate results.
“Among the three currently sitting STB members, Democrat Deb Miller and Republican Ann Begeman have repeatedly panned these tests for a variety of reasons, largely echoing shipper complaints. Democratic Chairman Dan Elliott, who lacks the background in economics possessed by Miller and Begeman, could be alone in accepting the study’s recommendations, if even he does so.
“As Begeman must depart the STB Dec. 31 (it is unlikely she will be renominated and Senate-confirmed before then), and as there are two other seats on this five-person STB to be filled, the decision on whether to retain the status quo or seek alternatives to the existing rate reasonableness tests will be determined by a currently unidentified majority. The most pregnant question will be whether the SAC test is truly the only, much less most efficient and effective means, of determining rate reasonableness.
“Shippers and railroads have much at stake in the nominating and confirmation process to fill the vacant STB seats, whose determination rests heavily with the outcome of White House and Senate political control following the November elections.”
STB plans to hold an economic roundtable in October and has invited independent economists from InterVISTAS, the Transportation Research Board of the National Academy of Sciences, Georgetown University, and the Board’s economists to engage in a public discussion of the issues and conclusions contained in the InterVISTAS report. Chairman Daniel Elliott said he “also hopes to schedule a public hearing after the roundtable for all stakeholders and interested parties to participate in this important discourse. The Board will deliberate on a regulatory path forward concerning large rate cases after consideration of expert and stakeholder views in open and transparent forums.”
Download attachments: STB SAC methodology study