[Federal Register Volume 72, Number 64 (Wednesday, April 4, 2007)]
[Proposed Rules]
[Pages 16316-16318]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-6215]



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DEPARTMENT OF TRANSPORTATION

Surface Transportation Board

49 CFR Parts 1300 and 1313

[STB Ex Parte No. 669]


Interpretation of the Term ``Contract'' in 49 U.S.C. 10709

AGENCY: Surface Transportation Board, DOT.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Surface Transportation Board seeks public comments on a 
proposal to interpret the term ``contract'' in 49 U.S.C. 10709 as 
embracing any bilateral agreement between a carrier and a shipper for 
rail transportation in which the railroad agrees to a specific rate for 
a specific period of time in exchange for consideration from the 
shipper, such as a commitment to tender a specific amount of freight 
during a specific period or to make specific investments in rail 
facilities.

DATES: Comments are due by June 4, 2007. Reply comments are due August 
2, 2007.

ADDRESSES: Comments may be submitted either via the Board's e-filing 
format or in the traditional paper format. Any person using e-filing 
should comply with the instructions at the E-FILING link on the Board's 
Web site, at http://www.stb.dot.gov. Any person submitting a filing in 
the traditional paper format should send an original and 10 copies to: 
Surface Transportation Board, Attn: STB Ex Parte No. 669, 395 E Street, 
SW., Washington, DC 20423-0001.
    Copies of written comments will be available from the Board's 
contractor, ASAP Document Solutions (mailing address: Suite 103, 9332 
Annapolis Rd., Lanham, MD 20706; e-mail address: [email protected]; 
telephone number: 202-306-4004). The comments will also be available 
for viewing and self-copying in the Board's Public Docket Room, Room 
755, and will be posted to the Board's Web site at http://www.stb.dot.gov.

FOR FURTHER INFORMATION CONTACT: Joseph H. Dettmar at 202-245-0395. 
[Assistance for the hearing impaired is available through the Federal 
Information Relay Service (FIRS) at 1-800-877-8339.]

SUPPLEMENTARY INFORMATION: Until the late 1970s, the Board's 
predecessor, the Interstate Commerce Commission (ICC), had found 
contract rates between a railroad and a shipper to be per se unlawful. 
They were regarded as a destructive competitive practice that would 
have the effect of damaging existing rate structures and reducing 
competition.\1\ In 1978, the ICC changed course, issuing a policy 
statement acknowledging that contract rates may be beneficial in many 
circumstances because ``a shipper is guaranteed a certain rate for the 
period of the contract while the carrier knows what service that 
shipper will receive.'' \2\ In that proceeding, the ICC adopted the 
following definition of a rail ``contract rate'':
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    \1\ See Contract Rates on Rugs and Carpeting from Amsterdam, 
N.Y., to Chicago, 313 I.C.C. 247, 254 (1961); Guaranteed Rates from 
Sault Ste. Marie, Ontario, Canada, to Chicago, 315 I.C.C. 311, 323 
(1961).
    \2\ Change of Policy Railroad Contract Rates, Ex Parte No. 358-F 
(ICC served Nov. 9, 1978).

a railroad freight rate arrived at through mutual agreement between 
a railroad * * * and a shipper in which the railroad agrees to 
provide service for a given price and the shipper agrees to tender a 
given amount of freight during a fixed period.\3\
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    \3\ See former 49 CFR 1039.1 (1979).

Rather than finding all such agreements lawful, however, the ICC 
undertook to review the legality of contract rates on a case-by-case 
basis.
    Congress viewed the ICC's changed policy as insufficient, because 
it had ``a number of restrictions and uncertainties and [had] resulted 
in the limited use of contracts.'' \4\ To ensure that shippers and 
railroads would be free to enter into rail transportation contracts 
``without concern about whether the ICC would disapprove a contract,'' 
\5\ in the Staggers Rail Act of 1980 (Staggers Act),\6\ Congress 
amended the statute to provide that railroads ``may enter into a 
contract with one or more purchasers of rail services to provide 
specified services under specified rates and conditions.'' Former 49 
U.S.C. 10713(a) (1995) (now codified at 49 U.S.C. 10709(a)). When 
originally enacted, the provision further stated that ``a rail carrier 
may not enter into a contract with purchasers of rail service except as 
provided in this section.'' Former 49 U.S.C. 10713(a) (1995).
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    \4\ H.R. Rep. No. 96-1035, 96th Cong., 2nd Sess. (May 16, 1980) 
at 57 (House Report); see also S. Rep. No. 96-470, 96th Cong., 1st 
Sess. (Dec. 7, 1979) at 24 (Senate Report) (the changes are 
``intended to clarify the status of contract rate and service 
agreements in an effort to encourage carriers and purchasers of rail 
service to make widespread use of such agreements'').
    \5\ House Report at 58; see also Senate Report at 24.
    \6\ Pub. L. No. 96-448, 94 Stat. 1895 (1980).
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    Congress also expressly removed all matters and disputes arising 
from rail transportation contracts from the ICC's (and now the Board's) 
jurisdiction. See former 49 U.S.C. 10713(i) (1995) (now codified at 49 
U.S.C. 10709(c)). If the parties have a dispute regarding such a 
contract--such as whether there has been adequate performance or 
whether the contract is void because it was signed under duress--such 
matters are to be decided by the courts under applicable state contract 
law. See former 49 U.S.C. 10713(i)(2) (1995) (now codified at 49 U.S.C. 
10709(c)(2)). Congress also explained that, if someone believes that a 
contract is anticompetitive, ``the antitrust laws are the appropriate 
and only remedy available.'' \7\ Congress considered the contract rate 
provision of the Staggers Act to be ``among the most important in the 
bill.'' \8\ But there is no clear distinction in the statute or our 
precedent between a contract and a common carrier rate.
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    \7\ House Report at 58.
    \8\ Senate Report at 9.
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    In a recent proceeding, Kansas City Power & Light Company v. Union 
Pacific Railroad Company, STB Docket No. 42095 (KCPL), the Board asked 
the parties to submit briefs to discuss a hybrid pricing mechanism that 
the carrier designated a common carrier pricing arrangement, but could 
be viewed as a rail transportation contract. See Kansas City Power & 
Light Co. v. Union Pac. R.R., STB Docket No. 42095 (STB served July 27, 
2006). The parties took the position that the rates at issue were 
common carrier rates subject to the Board's jurisdiction. The parties 
cited agency precedent for the proposition that a common carrier rate 
``is nothing more than a special kind of contract between a carrier and 
its shippers,'' citing National Grain & Feed Assoc. v. BN RR. Co., et 
al., 8 I.C.C.2d 421, 437 (1992), and whether a contract or common 
carrier rate exists has been examined on a case-by-case basis in light 
of the parties' intent, citing Aggregate Volume Rate on Coal, Acco, UT 
to Moapa, NV, 364 I.C.C. 678, 689 (1981) (Utah). The parties also 
pointed out that the agency has in the past stated that the purpose of 
allowing for contract rates is to establish negotiated, mutually 
agreeable rates to which parties intend to be bound. See Utah, 364 
I.C.C. at 689; see also Product and Geographic Competition, 2 I.C.C.2d 
1, 11 (1985); Market Dominance Determinations, 365 I.C.C. 118, 125 
(1981). The Union Pacific Railroad Company (UP) also argued that it can 
enter into any kind of bilateral agreement with a shipper, but maintain 
Board jurisdiction by labeling the agreement a common carrier rate 
rather than a contract rate. It contended that a carrier has the 
authority to designate what type of rate it is establishing, based on 
section 10701(c),

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arguing ``[u]nless a specific prohibition applies, `a rail carrier may 
establish any rate for transportation or other service provided by the 
rail carrier.' Rail carriers thus have broad flexibility to design 
common carrier offerings as alternatives to rail transportation 
contracts in response to business needs.'' \9\ Because the parties 
could have reasonably relied on prior agency precedent to conclude that 
this kind of hybrid pricing mechanism is subject to Board jurisdiction, 
we concluded that it would be inappropriate to set aside or reexamine 
that ICC precedent in that adjudication.
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    \9\ See STB Docket No. 42095, UP's Response to Order to Show 
Cause, at 8 (filed Sept. 25, 2006).
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    Nevertheless, we have serious concerns about the lack of any clear 
demarcation between contract and common carrier rates because of the 
boundaries on our jurisdiction. The carrier in the KCPL proceeding has 
crafted a hybrid pricing mechanism that appears to have all of the 
characteristics of a rail transportation contract, but avoids some 
important consequences of entering into such a contract by its choice 
of label. Traditionally, common carrier pricing has been a holding out 
to the public to provide a specified transportation services for a 
given price that a shipper accepts by tendering traffic. Under these 
unilateral contracts,\10\ the carrier has the right to change the 
common carrier rates or terms upon 20 days' notice under 49 U.S.C. 
11101(c). In other words, where there is no mutuality of consideration, 
a carrier can unilaterally withdraw one offer and replace it with 
another.
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    \10\ A unilateral contract is one in which one party makes an 
express engagement or undertakes a performance, without receiving in 
return any express engagement or promise of performance from the 
other. The essence of a unilateral contract is that neither party is 
bound until the promisee accepts the offer by performing the 
proposed act. Black's Law Dictionary 277 (6th abr. Ed. 1991).
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    The new pricing structures we are witnessing as reflected in the 
KCPL proceeding, however, contain a mutuality of obligation between the 
carriers and shippers that appear to have the hallmarks of a 
contractual relationship. These bilateral agreements mutually bind both 
the shipper and the carrier for a given period of time. In exchange for 
some sort of consideration from the shipper, the carrier commits to a 
specific rate or service for a specific term. While Congress intended 
to permit carriers to have the pricing flexibility to enter into these 
kinds of agreements, we believe that Congress also intended for these 
contractual agreements to be confidential, outside Board jurisdiction, 
and subject to the scrutiny of the antitrust laws, rather than 
regulation under the Interstate Commerce Act.
    We also have concerns that the increased used of these hybrid 
pricing mechanisms could create an environment where collusive 
activities in the form of anticompetitive price signaling could occur. 
Whereas the terms and conditions of common carrier rates must be 
publicly disclosed under section 11101,\11\ the terms of a rail 
transportation contract are to be kept confidential, a factor that 
makes collusion in this highly concentrated industry more 
difficult.\12\ Thus, a carrier's hybrid pricing mechanism may not 
contain the same protections against collusion as do traditional 
confidential transportation contracts. An important competitive benefit 
of contracts is that they often enable shippers to obtain service 
commitments and lower rates that carriers might not otherwise offer 
through the public tariff process.
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    \11\ See 49 CFR 1300.2 (``A rail carrier must disclose to any 
person, upon formal request, the specific rates(s) requested * * *. 
as well as all charges and service terms * * *.'').
    \12\ See, e.g., Canadian National, et al.--Control--Illinois 
Central, et al., 4 S.T.B. 122, 149 (1999) (``As we explained in the 
UP/SP decision affirmed by the court, there are three elements, all 
of which are present here, that each make tacit collusion unlikely 
for markets in which two railroads operate. First, tacit collusion 
cannot flourish where, as in railroading, rate concessions can and 
are made secretly through confidential contracts.''); see also Water 
Transport Ass'n v. ICC, 722 F.2d 1025 (2d Cir. 1983) (``[I]t has 
long been recognized under the antitrust laws that public disclosure 
of contract terms can undermine competition by stabilizing prices at 
an artificially high level.''); see generally Petition To Disclose 
Long-Term Rail Coal Contracts, ICC Ex Parte No. 387 (Sub-No. 961) 
(ICC served July 29, 1988) (lengthy discussion of the 
confidentiality of rail transportation contracts).
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    We also question whether the position advanced by UP that these 
sorts of rates are authorized by section 10701(c) is consistent with 
the statutory scheme. Read in context with the other provisions of 
section 10701, we believe that subsection (c) addresses the level of 
the rate that a carrier may set in the first instance, and does not 
allow the carrier to control the designation of the type of rate that 
is involved. Moreover, under the railroad's interpretation, there would 
appear to be no type of agreement between a carrier and a shipper--no 
matter how long the term or how individually tailored or bilateral the 
responsibilities created--that a carrier could not unilaterally label 
common carrier rate and service terms. If that were so, the contract 
provision in section 10709 would become largely superfluous.
    Similarly, the carrier's interpretation would render section 10722 
redundant. In that provision, Congress expressly authorized rail 
carriers to establish premium charges in common carrier rates for 
special services or special levels of service in order to encourage 
more efficient use of freight cars. See 49 U.S.C. 10722. If, however, 
section 10701 authorizes common carrier tariffs that embrace any kind 
of special rates and terms, it would not have been necessary for 
Congress to separately authorize special rates in section 10722.
    We are inclined to find that a more reasonable interpretation of 
the statute is that section 10701 does not authorize carriers to enter 
into either special common carrier rates or bilateral contractual 
agreements. Both the authority for, and limitations on, those types of 
rates are set forth in sections 10722 and 10709, respectively. Section 
10709, in turn, removes those contracts from the regulatory scheme 
associated with common carrier service.
    In light of the above concerns, we seek public comment on our 
proposed interpretation of the term ``contract'' in section 10709 as 
embracing any bilateral agreement between a carrier and a shipper for 
rail transportation in which the railroad agrees to a specific rate for 
a specific period of time in exchange for consideration from the 
shipper, such as a commitment to tender a specific amount of freight 
during a specific period or to make specific investments in rail 
facilities. Under the proposed interpretation, notwithstanding any 
carrier representation that the rate specified in the agreement is a 
common carrier rate, such a bilateral agreement would be regarded by 
the Board as a rail transportation contract under section 10709 and 
therefore outside the Board's jurisdiction. See Columbia Gas 
Transmission Corp. v. FERC, 404 F.3d 459, 463 (D.C. Cir. 2005) 
(``jurisdiction cannot arise from the absence of objection, or even 
from affirmative agreement. To the contrary, as a statutory entity, 
[the agency] cannot acquire jurisdiction merely by agreement of the 
parties before it.''); see also Weinberger v. Bentex Pharms., Inc., 412 
U.S. 645, 652 (1973) (only Congress, not parties, may confer 
jurisdiction).
    Though we need not seek public comments before issuing an 
interpretative rule of this nature, we do so here to ensure that we 
have fully considered the issues and ramifications before taking this 
action. We do not intend to stifle innovation in transportation markets 
or otherwise disadvantage any party.
    To the extent this interpretation could be seen as contradicting 
past agency statements regarding whether a bilateral agreement can 
constitute a common carrier rate, we would apply this

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interpretation prospectively only. However, we do not want to create 
incentives for a carrier to rush to put into place as many rates as 
possible in hybrid ``common carrier'' agreements during the period of 
unavoidable delay associated with seeking public comments. Therefore, 
should we adopt this interpretative rule, we intend to apply the rule 
to all agreements entered into after the date of publication of this 
decision in the Federal Register. Parties are hereby placed on notice 
that if this proposal is adopted, the reasonableness of a rate 
reflected in a bilateral agreement entered into after this date will be 
treated as a confidential contract governed by section 10709 and 
outside the Board's jurisdiction.
    Our proposed changes to the Code of Federal Regulations are set 
forth in the appendix. Parties are specifically invited to comment on 
the proposed rules, particularly concerning 49 CFR 1313.1(c). Parties 
are asked to consider whether the proposed changes would have 
unforeseen consequences for agricultural contracts and whether there 
are differences between agricultural and other types of rail 
transportation contracts.
    Pursuant to 5 U.S.C. 605(b), the Board certifies that this action 
will not have a significant economic effect on a substantial number of 
small entities within the meaning of the Regulatory Flexibility Act.
    This action will not significantly affect either the quality of the 
human environment or the conservation of energy resources.

    Authority: 49 U.S.C. 721, 49 U.S.C. 10709.

    Decided: March 28, 2007.

    By the Board, Chairman Nottingham, Vice Chairman Buttrey, and 
Commissioner Mulvey.
Vernon A. Williams,
Secretary.
    For the reasons set forth in the preamble, the Surface 
Transportation Board proposes to amend part 1300 and 1313 of title 49, 
chapter x, of the Code of Federal Regulations as follows:

PART 1300--DISCLOSURE, PUBLICATION, AND NOTICE OF CHANGE OF RATES 
AND OTHER SERVICE TERMS FOR RAIL COMMON CARRIAGE

    1. The authority citation for Part 1300 continues to read as 
follows:

    Authority: 49 U.S.C. 721(a) and 11101(f).

    2. Amend Sec.  1300.1 by adding paragraphs (c)(1) and (c)(2) to 
read as follows:


Sec.  1300.1  Scope; definitions.

* * * * *
    (c) * * *
    (1) The term contract in 49 U.S.C. 10709 is defined as any 
bilateral agreement between a carrier and a shipper for rail 
transportation in which the carrier agrees to a specific rate for a 
specific period of time in exchange for consideration from the shipper, 
such as a commitment to tender a specific amount of freight during a 
specific period or to make specific investments in rail facilities.
    (2) Notwithstanding any representation that a rate specified in an 
agreement is a common carrier rate, a bilateral agreement as described 
in paragraph (c)(1) of this section will be treated by the Board as a 
rail transportation contract authorized under 49 U.S.C. 10709 and 
therefore outside the Board's jurisdiction.
* * * * *

PART 1313--RAILROAD CONTRACTS FOR THE TRANSPORTATION OF 
AGRICULTURAL PRODUCTS

    3. The authority citation for Part 1313 continues to read as 
follows:

    Authority: 49 U.S.C. 721(a) and 10709.

    4. Amend Sec.  1313.1 by revising the first sentence of paragraph 
(c) to read as follows:


Sec.  1313.1  Scope; definitions of terms.

* * * * *
    (c) For purposes of this part, the term contract means a contract 
as defined in 49 CFR 1300.1(c), including any amendment thereto, to 
provide specified transporation of agricultural products (including 
grain, as defined in 7 U.S.C. 75 and products thereof). * * *

 [FR Doc. E7-6215 Filed 4-3-07; 8:45 am]
BILLING CODE 4915-01-P