[Federal Register Volume 73, Number 128 (Wednesday, July 2, 2008)]
[Notices]
[Pages 38025-38026]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-15024]


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DEPARTMENT OF TRANSPORTATION

Surface Transportation Board

[STB Ex Parte No. 646 (Sub-No. 2)]


Simplified Standards for Rail Rate Cases--Taxes in Revenue 
Shortfall Allocation Method

AGENCY: Surface Transportation Board.

ACTION: Notice.

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SUMMARY: The Surface Transportation Board seeks public comments on a 
proposal to adjust its Revenue Shortfall Allocation Method (RSAM), 
which is a component of its simplified standards for reviewing the 
reasonableness of a challenged rail rate, in order to account for 
taxes.

DATES: Comments are due by August 1, 2008. Reply comments are due by 
September 2, 2008. Rebuttal comments are due by September 22, 2008.

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 file a document and otherwise 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. 646 (Sub-No.2), 395 E Street, SW., Washington, DC 
20423-0001.
    Copies of written comments will be available for viewing and self-
copying in the Board's Public Docket Room, Room 131, and will be posted 
to the Board's Web site.

FOR FURTHER INFORMATION CONTACT: Timothy Strafford at 202-245-0356. 
[Assistance for the hearing impaired is available through the Federal 
Information Relay Service (FIRS) at 1-800-877-8339.]

SUPPLEMENTARY INFORMATION: The RSAM figure is one of three benchmarks 
that together are used to determine the reasonableness of a challenged 
rail rate. Each benchmark is expressed as a ratio of revenues to 
variable costs (R/VC ratio). RSAM is intended to measure the average 
markup that the railroad would need to collect from all of its 
``potentially captive traffic'' (traffic with an R/VC ratio above 180%) 
to earn adequate revenues as measured by the Board under 49 U.S.C. 
10704(a)(2) (i.e., earn a return on investment equal to the railroad 
industry cost of capital). The second benchmark, the R/
VC>180 benchmark, measures the average markup 
over variable cost currently earned by the defendant railroad on its 
potentially captive traffic. The third benchmark, the R/
VCcomp benchmark, is used to compare the markup being paid 
by the challenged traffic to the average markup assessed on other 
comparable potentially captive traffic.
    In Simplified Standards for Rail Rate Cases, STB Ex. Parte 646 
(Sub-No. 1) (STB served Sept. 5, 2007) (Simplified Standards), the 
Board changed the way the RSAM benchmark is calculated to address a 
flaw in that calculation.\1\ Under the current RSAM formula, the Board 
uses the confidential Carload Waybill Sample \2\ to estimate the total 
revenues earned by the carrier on potentially captive traffic 
(REV>180) and the total variable costs of the 
railroad to handle that traffic (VC>180). The 
Board also uses the carrier's revenue shortfall (or overage) shown in 
the Board's annual revenue adequacy determination 
(REVshort/overage). RSAM is then calculated as follows:
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    \1\ Previously, RSAM had been calculated by computing the 
uniform markup above variable cost that would be needed from all 
potentially captive traffic ``for the carrier to recover all of its 
URCS fixed costs.'' Rate Guidelines--Non-Coal Proceedings, 1 S.T.B. 
1004, 1027 (1996). When a carrier is not ``revenue adequate'' under 
the Board's annual calculations, its RSAM figure (what it needs to 
collect) should be greater than its R/VC >180 
figure (what it is actually collecting) and, conversely, when a 
carrier is ``revenue adequate'' its RSAM figure should be less than 
or equal its R/VC>180 figure. The problem was 
that this relationship between RSAM and R/
VC>180 did not hold true under the Board's 
prior method. See, e.g., Simplified Standards at 19-20.
    \2\ The Carload Waybill Sample is a statistical sampling of 
railroad waybills that is collected and maintained for use by the 
Board and by the public (with appropriate restrictions to protect 
the confidentiality of individual traffic data). See 49 CFR 1244.

RSAM = (REV>180 + REVshort/overage) / 
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VC>180

    In E.I. DuPont de Nemours and Co. v. CSX Transportation, Inc., STB 
Docket

[[Page 38026]]

Nos. 42099, 42100, and 42101 (the DuPont cases), CSX Transportation, 
Inc. (CSXT) raised an issue with this RSAM formula. It observed that 
the revenue shortfall (REVshort/overage)--which is 
calculated as the difference between the return on net investment that 
a carrier needs to earn in order to achieve revenue adequacy and the 
amount that the carrier actually earns--is calculated after all taxes 
have been paid, and are thus stated on an ``after-tax'' basis. However, 
the revenues to which the revenue adequacy shortfall is added 
(REV>180), are calculated before any allowance 
for taxes, and are thus stated on a ``pre-tax'' basis. Therefore, CSXT 
asserted that the inclusion of an ``after-tax'' revenue shortfall would 
not provide sufficient revenues to achieve adequate revenues once the 
additional revenues are subject to taxes.
    In the DuPont cases, CSXT proposed that, to correct this 
deficiency, the Board change the RSAM formula adopted in Simplified 
Standards by applying the Federal statutory tax rate of 35% in 
conjunction with CSXT's railroad-specific state tax rate of 4.9% to 
convert the after-tax shortfall to a pre-tax level. But DuPont argued 
that no adjustment to the RSAM formula was necessary because the 
revenue adequacy adjustment factor is overstated. It argued that this 
overstatement occurs because the variable costs used to calculate the 
RSAM and R/VC>180 benchmarks include an over-
recovery of income taxes as measured by the Uniform Rail Costing 
System. This over-recovery of income taxes raises the variable costs, 
thereby understating the total revenue from potentially captive traffic 
with R/VC greater than 180% (REV>180). Less 
revenue from traffic moving at R/VC greater than 180%, in turn, 
increases the revenue adequacy adjustment factor. Alternatively, DuPont 
argued that, if the Board were to adjust the RSAM formula to account 
for taxes, it should use an ``effective'' or ``marginal'' tax rate, 
rather than the statutory tax rate advocated by CSXT.
    In this rulemaking, the Board seeks broader public input on whether 
to modify the RSAM formula adopted in Simplified Standards and, if so, 
what tax rate should be used to adjust the revenue adequacy shortfall. 
Commenters are asked to address the following issues. First, does the 
treatment of taxes in URCS make the adjustment to RSAM unnecessary, as 
DuPont suggested? Second, if an adjustment is appropriate, should the 
statutory, effective or marginal tax rate be used? Third, should the 
Board use the railroad's individual tax rate or an industry average tax 
rate? Finally, how should the appropriate tax rate be applied to 
calculate a pre-tax revenue shortfall? \3\
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    \3\ In abandonment cases, the Board applies Federal and state 
taxes to convert the cost of capital to a pre-tax cost of capital by 
dividing the cost of equity by one minus the sum of the Federal and 
state tax rates.
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    The Board seeks comments on these questions and on any other 
methodologies that could be used in accounting for taxes under the RSAM 
benchmark.
    Pursuant to 5 U.S.C. 605(b), the Board certifies that the proposed 
action will not have a significant economic effect on a substantial 
number of small entities within the meaning of the Regulatory 
Flexibility Act. No new reporting requirements will be instituted.
    This action will not significantly affect either the quality of the 
human environment or the conservation of energy resources.

    Decided: June 25, 2008.

    By the Board, Chairman Nottingham, Vice Chairman Mulvey, and 
Commissioner Buttrey.
Anne K. Quinlan,
Acting Secretary.
 [FR Doc. E8-15024 Filed 7-1-08; 8:45 am]
BILLING CODE 4915-01-P