[Federal Register Volume 79, Number 66 (Monday, April 7, 2014)]
[Proposed Rules]
[Pages 19042-19044]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-07722]


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DEPARTMENT OF TRANSPORTATION

Surface Transportation Board

49 CFR Chapter X

[Docket No. EP 722; Docket No. EP 664 (Sub-No. 2)]


Railroad Revenue Adequacy: Petition of the Western Coal Traffic 
League To Institute a Rulemaking Proceeding To Abolish the Use of the 
Multi-Stage Discounted Cash Flow Model in Determining the Railroad 
Industry's Cost of Equity Capital

AGENCY: Surface Transportation Board, DOT.

ACTION: Notice.

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SUMMARY: The Surface Transportation Board will receive comments in 
Docket No. EP 722 to explore the Board's methodology for determining 
railroad revenue adequacy, as well as the revenue adequacy component 
used in judging the reasonableness of rail freight rates. The Board 
will also receive comments in Docket No. 664 (Sub-No. 2) on how it 
calculates the railroad industry's cost of equity capital. The Board is 
seeking written comments on these matters, as described below, and 
later will hold a hearing to address these issues.

DATES: Comments in both dockets are due on July 1, 2014. Reply comments 
are due on August 15, 2014. Following receipt of comments, the Board 
will schedule a public hearing at the Board's headquarters located at 
395 E Street SW., Washington, DC, to allow participants to appear and 
discuss the submissions that were made. The Board will provide more 
details regarding the hearing in a future decision.

ADDRESSES: All filings may be submitted either via the Board's e-filing 
format or in the traditional paper format. Any person using e-filing 
should attach a document and otherwise comply with the instructions at 
the ``E-FILING'' link on the Board's ``www.stb.dot.gov'' Web site. Any 
person submitting a filing in the traditional paper format should send 
an original and 10 copies of the filing to: Surface Transportation 
Board, Attn: Docket No. [EP 722 or EP 664 (Sub-No. 2), as the case may 
be], 395 E Street SW., Washington, DC 20423-0001.
    Copies of written submissions will be posted to the Board's Web 
site and will be available for viewing and self-copying in the Board's 
Public Docket Room, Suite 131. Copies of the submissions will also be 
available (for a fee) by contacting the Board's Chief Records Officer 
at (202) 245-0236 or 395 E Street SW., Washington, DC 20423-0001.

FOR FURTHER INFORMATION CONTACT: For EP 722: Scott Zimmerman at (202) 
245-0386; for EP 664 (Sub-No. 2): Amy Ziehm at (202) 245-0391. 
Assistance for the hearing impaired is available through the Federal 
Information Relay Service (FIRS) at (800) 877-8339.

SUPPLEMENTARY INFORMATION: In Section 205 of the Railroad 
Revitalization and Regulatory Reform Act of 1976, Public Law 94-210, 90 
Stat. 127, Congress mandated that the Board's predecessor, the 
Interstate Commerce Commission (ICC), promulgate--and thereafter revise 
and maintain--standards and procedures for establishing railroad 
revenue adequacy. Four years later, in the Staggers Rail Act of 1980 
(Staggers), Public Law 96-448, 94 Stat. 1895, the agency's rail 
transportation policy was revised to include, among other things, 
``promot[ing] a safe and efficient rail transportation system by 
allowing rail carriers to earn adequate revenues, as determined by the 
[agency].'' Additionally, Section 205 of Staggers required the ICC to 
begin determining annually ``which rail carriers are earning adequate 
revenues.'' To implement this requirement, the ICC began a proceeding 
to adopt standards for determining railroad revenue adequacy. In that 
proceeding, the ICC concluded that ``the only revenue adequacy standard 
consistent with the requirements of [Staggers] is one that uses a rate 
of return equal to the cost of capital.'' Standards for R.R. Revenue 
Adequacy, 364 I.C.C. 803, 811 (1981), aff'd sub nom. Bessemer & Lake 
Erie R.R. v. ICC, 691 F.2d 1104 (3d Cir. 1982).
    These statutory requirements, now codified at 49 U.S.C. 10704(a)(2) 
and (3),\1\ still govern, and the Board (like the ICC before it) 
annually determines

[[Page 19043]]

which rail carriers are revenue adequate by comparing a carrier's rate 
of return with the cost of capital.\2\ Since the issuance of Standards 
for Railroad Revenue Adequacy in 1981, adjustments have been made to 
the agency's methodology in order to improve the agency's ability to 
determine accurately revenue adequacy. See, e.g., Use of a Multi-Stage 
Discounted Cash Flow Model in Determining the R.R. Industry's Cost of 
Capital, EP 664 (Sub-No. 1) (STB served Jan. 28, 2009); R.R. Revenue 
Adequacy--1988 Determination, 6 I.C.C.2d 933 (1990), aff'd sub nom. 
Ass'n of Amer. R.Rs. v. ICC, 978 F.2d 737 (D.C. Cir. 1992); 
Supplemental Reporting of Consol. Info. for Revenue Adequacy Purposes, 
5 I.C.C.2d 65 (1988); Standards for R.R. Revenue Adequacy, 3 I.C.C.2d 
261 (1986), aff'd sub nom. Consol. Rail Corp. v. United States, 855 
F.2d 78 (3d Cir. 1988).
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    \1\ Section 10704(a) of title 49 states with respect to adequate 
revenues:
    * * * * *
    (2) The Board shall maintain and revise as necessary standards 
and procedures for establishing revenue levels for rail carriers * * 
* that are adequate, under honest, economical, and efficient 
management, to cover total operating expenses, including 
depreciation and obsolescence, plus a reasonable and economic profit 
or return (or both) on capital employed in the business.* * * 
Revenue levels established under this paragraph should--
    (A) provide a flow of net income plus depreciation adequate to 
support prudent capital outlays, assure the repayment of a 
reasonable level of debt, permit the raising of needed equity 
capital, and cover the effects of inflation; and
    (B) attract and retain capital in amounts adequate to provide a 
sound transportation system in the United States.
    (3) On the basis of the standards and procedures described in 
paragraph (2), the Board shall annually determine which rail 
carriers are earning adequate revenues.
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* * * * *
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    \2\ The Board annually publishes the annual rates of return of 
each Class I railroad, as well as the cost of capital experienced by 
the rail industry, in sub-numbered proceedings of Dockets No. EP 552 
and EP 558, respectively. See, e.g., R.R. Revenue Adequacy--2012 
Determination, EP 552 (Sub-No. 17) (STB served Oct. 17, 2013) 
(summarizing Class I rail carriers' return on investment in Appendix 
A); R.R. Cost of Capital--2012, EP 558 (Sub-No. 16) (STB served Aug. 
30, 2013) (finding industry cost of capital to be 11.12%).
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    The concept of revenue adequacy is also a component of the Board's 
standard for judging the reasonableness of rail freight rates, as set 
forth in Coal Rate Guidelines, Nationwide (Coal Rate Guidelines), 1 
I.C.C.2d 520 (1985), aff'd sub nom. Consol. Rail Corp. v. United 
States, 812 F.2d 1444 (3d Cir. 1987).\3\ Coal Rate Guidelines 
established a set of pricing principles known as ``constrained market 
pricing,'' which imposes three main constraints on the extent to which 
a railroad may charge differentially higher rates on captive traffic: 
Revenue adequacy, management efficiency, and stand-alone cost. Id. at 
534.\4\ With respect to the revenue adequacy constraint, the ICC 
observed
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    \3\ Smaller rate cases can be evaluated under the Three-
Benchmark methodology, which includes a benchmark (Revenue Shortfall 
Allocation Method) that is tied to the Board's annual revenue 
adequacy calculations. See Simplified Standards for Rail Rate Cases, 
EP 646 (Sub-No. 1), slip op. at 5 (STB served Mar. 19, 2008).
    \4\ A fourth constraint--phasing--can be used to limit the 
introduction of otherwise-permissible rate increases when necessary 
for the greater public good. Coal Rate Guidelines, 1 I.C.C.2d at 
546-47.

    [The] revenue adequacy standard represents a reasonable level of 
profitability for a healthy carrier. It fairly rewards the rail 
company's investors and assures shippers that the carrier will be 
able to meet their service needs for the long term. Carriers do not 
need greater revenues than this standard permits, and we believe 
that, in a regulated setting, they are not entitled to any higher 
revenues. Therefore, the logical first constraint on a carrier's 
pricing is that its rates not be designed to earn greater revenues 
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than needed to achieve and maintain this ``revenue adequacy'' level.

Id. at 535.
    As the Board has explained, the revenue adequacy constraint 
``employ[s] a `top-down' approach, examining the incumbent carrier's 
existing operations.'' W. Texas Utils. Co. v. Burlington N. R.R., 1 
S.T.B. 638, 655 (1996). ``If the carrier is revenue adequate (earning 
sufficient funds to cover its costs and provide a fair return on its 
investment), or would be revenue adequate after eliminating unnecessary 
costs from specifically identified inefficiencies in its operations, a 
complaining shipper may be entitled to rate relief.'' Id.
    The Board has not yet had the opportunity to address how the 
revenue adequacy constraint would work in practice in large rail rate 
cases. Nearly all large rate reasonableness cases to date have relied 
upon the stand-alone cost constraint. The few revenue adequacy-based 
complaints have either settled or involved other transportation modes. 
See S. Miss. Elec. Power Ass'n v. Norfolk S. Ry., NOR 42128 (STB served 
Aug. 31, 2011) (proceeding in which revenue adequacy constraint raised 
in complaint was subsequently settled); CF Indus., Inc. v. Koch 
Pipeline Co., 4 S.T.B. 637 (2000) (finding rate increases for pipeline 
transportation unreasonable under 49 U.S.C. 15501 using revenue 
adequacy constraint), aff'd sub nom. CF Indus., Inc. v. STB, 255 F.3d 
816 (D.C. Cir. 2001).
    Both the structure of the rail industry and the flow of commerce 
have continued to change substantially over the past decade. In the 
last several years, questions have been raised regarding the agency's 
methodology for determining revenue adequacy and whether it 
appropriately measures the financial condition of the railroad 
industry. These questions cover a range of issues, such as the 
viability of the Board's current methodology and possible alternative 
methodologies, what it means to be revenue adequate and how such a 
finding should impact the railroads, and how to apply the revenue 
adequacy constraint in regulating rates, among many others.
    At this point, the Board believes an examination of revenue 
adequacy is in order. The Board will now institute a proceeding to 
address the issues discussed above. This proceeding is intended as a 
public forum to discuss the Board's methodology in fulfilling its 
statutory mandate to determine railroad revenue adequacy, as well as 
the revenue adequacy component of the Board's standard for judging the 
reasonableness of rail freight rates, with a view to what, if any, 
changes the Board can and should consider. The Board is providing an 
opportunity for any person or entity that wishes to participate to file 
written prepared comments. Subsequently, the Board will hold an oral 
hearing at the agency to explore the issues in more depth.
    The Board also recently instituted a rulemaking proceeding in 
Docket No. EP 664 (Sub-No. 2) to address how it determines the railroad 
industry's cost of equity capital.\5\ The cost of capital calculation 
is a component of the methodology that the Board uses to determine 
revenue adequacy, and the Board therefore stated that it would 
coordinate the processing of these two proceedings. Accordingly, the 
Board now invites any person or entity who wishes to participate in EP 
664 (Sub-No. 2) to submit written comments addressing the cost of 
capital calculation in that proceeding, pursuant to the schedule set 
forth below.
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    \5\ Petition of the W. Coal Traffic League to Institute a 
Rulemaking Proceeding to Abolish the Use of the Multi-Stage 
Discounted Cash Flow Model in Determining the R.R. Industry's Cost 
of Equity Capital, EP 664 (Sub-No. 2) (STB served Dec. 20, 2013).
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    Decisions and notices of the Board, including this notice, are 
available on the Board's Web site at ``www.stb.dot.gov.''
    This action will not significantly affect either the quality of the 
human environment or the conservation of energy resources.
    It is ordered:
    1. Comments in both dockets are due on July 1, 2014. Reply comments 
are due on August 15, 2014.
    2. A public hearing will be announced in a subsequent Board 
decision.
    3. This decision is effective on the date of service.

    Decided: April 1, 2014.


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    By the Board, Rachel D. Campbell, Director, Office of 
Proceedings.
Derrick A. Gardner,
Clearance Clerk.
[FR Doc. 2014-07722 Filed 4-4-14; 8:45 am]
BILLING CODE 4915-01-P