[Federal Register Volume 81, Number 173 (Wednesday, September 7, 2016)]
[Proposed Rules]
[Pages 61647-61658]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21305]


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SURFACE TRANSPORTATION BOARD

49 CFR Chapter X

[Docket No. EP 665 (Sub-No. 1); Docket No. EP 665 (Sub-No. 2)]


Rail Transportation of Grain, Rate Regulation Review; Expanding 
Access to Rate Relief

AGENCY: Surface Transportation Board.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Surface Transportation Board (Board) is seeking comments 
and suggestions through this Advance Notice of Proposed Rulemaking 
(ANPR) regarding the Board's effort to develop a new rate 
reasonableness methodology for use in very small disputes, which would 
be available to shippers of all commodities.

DATES: Comments are due by November 14, 2016. Reply comments are due by 
December 19, 2016.

ADDRESSES: Comments and replies 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 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: Docket No. EP 665 (Sub-No. 2), 395 
E Street SW., Washington, DC 20423-0001.
    Copies of written comments and replies will be posted to the 
Board's Web site and will be available for viewing and self-copying at 
the Board's Public Docket Room, Room 131. Copies will also be available 
(for a fee) by contacting the Board's Chief Records Officer at (202) 
245-0238 or 395 E Street SW., Washington, DC 20423-0001.

FOR FURTHER INFORMATION CONTACT: Allison Davis at (202) 245-0378. 
Assistance for the hearing impaired is available through the Federal 
Information Relay Service (FIRS) at (800) 877-8339.

SUPPLEMENTARY INFORMATION: In the Interstate Commerce Act, Congress 
charged the Board with protecting the public from unreasonable pricing 
by freight railroads, while fostering a sound, safe, and efficient rail 
transportation system by allowing carriers to earn adequate revenues. 
See 49 U.S.C. 10101. In the Staggers Rail Act of 1980, Public Law 96-
448, 94 Stat. 1895, and subsequent legislation, including the ICC 
Termination Act of 1995 (ICCTA), Public Law 104-88, 109 Stat. 803, 
Congress established a careful balance between these two important yet 
conflicting goals. On the one hand, Congress permitted differential 
pricing and removed regulatory controls over railroad pricing for 
traffic with effective competition so that carriers would have greater 
ability to earn the revenues necessary to attract capital and reinvest 
in the network. On the other hand, Congress made clear that railroad 
rates for traffic without effective competition must be reasonable (see 
49 U.S.C. 10702, 10707), and that shippers of grain, in particular, are 
entitled to some additional protections (see, e.g., 49 U.S.C. 10709(g) 
(providing that shippers may file a complaint with the Board asking it 
to review agricultural contracts on certain grounds)).
    By decision served in Rail Transportation of Grain, Rate Regulation 
Review, Docket No. EP 665 (Sub-No. 1) on December 12, 2013, the Board 
invited public comment on how to ensure that the Board's existing rate 
complaint procedures are accessible to grain shippers and provide 
effective protection against unreasonable freight rail transportation 
rates, including proposals for modifying existing procedures or new 
alternative rate relief methodologies. The Board received opening and 
reply comments from interested shipper, railroad, and government 
entities. The Board then held a public hearing on June 10, 2015, to 
further examine issues related to the accessibility of rate relief for 
grain shippers and to provide interested persons the opportunity to 
comment on the suggestions made during the public comment period. 
Following the hearing, the Board received supplemental comments from 
three parties.
    The Board has considered all of the written comments and oral 
testimony received in Docket No. EP 665 (Sub-No. 1).\1\ A number of 
issues raised during the public comment period--related to the 
accessibility of the Board's existing rate review processes, 
modifications to those processes, and alternative rate review processes 
set forth by parties--merit further discussion, and the Board is 
seeking further comment on those issues.\2\ Based on the comments and 
testimony received, the Board believes that the existing rate review 
processes

[[Page 61648]]

present accessibility challenges for not only grain shippers, but also 
small shippers of any commodity. The Board also recognizes that for 
small rate disputes, regardless of commodity, the litigation costs 
required to bring a case under the Board's existing rate reasonableness 
methodologies can quickly exceed the value of the case. Therefore, the 
Board is opening a proceeding in Docket No. EP 665 (Sub-No. 2) to 
develop a new rate review process that would be more affordable and 
accessible to shippers of all commodities with small disputes.
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    \1\ For a list of the numerous parties that have participated in 
Docket No. EP 665 (Sub-No. 1) at various stages, see Appendix A. To 
the extent this decision refers to parties by abbreviations, those 
abbreviations are listed in that appendix.
    \2\ We note that other significant issues have been raised in 
this proceeding, such as the Board's regulations concerning 
agricultural rate transparency and the standing required to bring a 
rate complaint. The Board will address these issues in a subsequent 
decision.
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    Before discussing ideas for use in a new rate reasonableness 
methodology, we will discuss the Board's existing rate reasonableness 
standards and the comments received in Docket No. EP 665 (Sub-No. 1).

Current Rate Reasonableness Standards

Statutory Framework

    Where a railroad has market dominance--i.e., there is an absence of 
effective competition from other rail carriers or modes of 
transportation--its transportation rates for common carrier service 
must be reasonable. 49 U.S.C. 10701(d)(1), 10702, 10707(a). The Board 
is precluded, however, from finding market dominance if the revenues 
produced by a challenged rate are less than 180% of the carrier's 
``variable costs'' \3\ of providing the service. 49 U.S.C. 
10707(d)(1)(A). If, upon complaint, the Board finds a challenged rate 
unreasonable, it will order the railroad to pay reparations to the 
complainant for past movements and may prescribe the maximum rate the 
carrier is permitted to charge. 49 U.S.C. 10704(a)(1), 11704(b).
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    \3\ Variable costs vary with the level of traffic and are 
developed in rate proceedings using the Board's Uniform Railroad 
Costing System (URCS). See Adoption of Unif. R.R. Costing Sys. as 
Gen. Purpose Costing Sys. for All Regulatory Costing Purposes, 5 
I.C.C.2d 894 (1989).
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    In carrying out its regulatory functions, the Board is guided by 
the rail transportation policy set forth at 49 U.S.C. 10101. And in 
assessing the reasonableness of rail rates, it must also give due 
consideration to the ``Long-Cannon'' factors contained in 49 U.S.C. 
10701(d)(2)(A)-(C). The Board must recognize that rail carriers should 
have an opportunity to earn ``adequate revenues,'' which are defined as 
those that are sufficient--under honest, economical, and efficient 
management--to cover operating expenses, support prudent capital 
outlays, repay a reasonable debt level, raise needed equity capital, 
and otherwise attract and retain capital in amounts adequate to provide 
a sound rail transportation system. 49 U.S.C. 10701(d)(2), 10704(a)(2).
    As part of ICCTA, Congress added a new provision to the rail 
transportation policy calling for the ``expeditious handling and 
resolution of all proceedings.'' 49 U.S.C. 10101(15). Congress further 
instructed the Board to establish procedures for rail rate challenges 
in particular, including ``appropriate measures for avoiding delay in 
the discovery and evidentiary phases of such proceedings.'' 49 U.S.C. 
10704(d). Congress directed the Board to ``establish a simplified and 
expedited method for determining the reasonableness of challenged rail 
rates in those cases in which a full stand-alone cost presentation is 
too costly, given the value of the case.'' 49 U.S.C. 10701(d)(3). In 
the Surface Transportation Board Reauthorization Act of 2015, Public 
Law 114-110, 129 Stat. 2228 (2015), Congress directed the Board to 
``initiate a proceeding to assess procedures that are available to 
parties in litigation before courts to expedite such litigation and the 
potential application of any such procedures to rate cases.'' 129 Stat. 
2228. That proceeding is currently pending before the Board. See 
Expediting Rate Cases, EP 733 (STB served June 15, 2016).

Regulatory Framework

    Under the theory of ``constrained market pricing'' (CMP), adopted 
by the agency in 1985 to judge the reasonableness of rail freight 
rates, a captive shipper should not be required to pay more than is 
necessary for the carrier involved to earn adequate revenues, nor 
should it pay more than is necessary for efficient service, and a 
captive shipper should not bear the costs of any facilities or services 
from which it derives no benefit. Coal Rate Guidelines, Nationwide 
(Guidelines), 1 I.C.C.2d 520, 523 (1985), aff'd sub nom. Consol. Rail 
Corp. v. United States, 812 F.2d 1444 (3d Cir. 1987). CMP contains 
three main limits on the extent to which a railroad may charge 
differentially higher rates on captive traffic: The revenue adequacy 
constraint, the management efficiency constraint, and the stand-alone 
cost constraint.\4\ Of these three limits under CMP, the stand-alone 
cost (SAC) constraint has been the most widely utilized before the 
agency.
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    \4\ A fourth constraint--phasing--is intended to limit the 
introduction of otherwise-permissible rate increases when necessary 
for the greater public good. Guidelines, 1 I.C.C.2d at 546-47. For a 
more detailed discussion of CMP, see Guidelines, 1 I.C.C.2d at 534-
547.
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    A SAC analysis seeks to determine whether a complainant is bearing 
costs resulting from inefficiencies or costs associated with facilities 
or services from which it derives no benefit. The SAC analysis does 
this by simulating the competitive rate that would exist in a 
``contestable market.'' \5\ Under the SAC constraint, the rate at issue 
cannot be higher than what a hypothesized stand-alone railroad (SARR) 
would need to charge to serve the complaining shipper while fully 
covering all of its costs, including a reasonable return on investment. 
The principal objective of the SAC approach is to restrain a railroad 
from exploiting market power over a captive shipper by charging more 
than it needs to earn a reasonable return on the cost of the 
infrastructure used to serve that shipper. A second objective of the 
SAC constraint is to detect and eliminate the costs of inefficiencies 
in a carrier's investments or operations. See id. at 542-46.
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    \5\ A contestable market is defined as one that is free from 
barriers to entry. See Guidelines, 1 I.C.C.2d at 528 (citing William 
J. Baumol, John C. Panzar & Robert D. Willig, Contestable Markets 
and the Theory of Industry Structure (1982)). The economic theory of 
contestable markets does not depend on a large number of competing 
firms in the marketplace to ensure a competitive outcome. 
Guidelines, 1 I.C.C.2d at 528. In a contestable market, even a 
monopolist must offer competitive rates or potentially lose its 
customers to a new entrant. Id.
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    The agency recognized that the SAC methodology adopted in 
Guidelines could be expensive and impractical for certain shippers. The 
agency therefore adopted in 1996 a simplified methodology, the Three-
Benchmark methodology, under which the reasonableness of a challenged 
rated is determined by examining that rate in relation to three 
benchmark figures. Rate Guidelines--Non-Coal Proceedings, 1 S.T.B. 1004 
(1996), pet. to reopen denied, 2 S.T.B. 619 (1997), appeal dismissed 
sub nom. Ass'n of Am. R.Rs. v. STB, 146 F.3d 942 (D.C. Cir. 1998). A 
decade passed, however, without any shipper bringing a case under that 
methodology. Accordingly, in 2007, the Board modified the Three-
Benchmark test and created Simplified-SAC--a simplified alternative 
under CMP where a full SAC analysis was too costly given the value of 
the case. See Simplified Standards for Rail Rate Cases, EP 646 (Sub-No. 
1) (STB served Sept. 5, 2007), aff'd sub nom. CSX Transp., Inc. v. STB, 
568 F.3d 236 (D.C. Cir.), vacated in part on reh'g, 584 F.3d 1076 (D.C. 
Cir. 2009).
    In Simplified Standards, EP 646 (Sub-No. 1), slip op. at 13, the 
Board acknowledged that it is the second objective--in which the 
complaint seeks to detect and eliminate the cost of inefficiencies in 
carrier's investments or

[[Page 61649]]

operations--that turns the case into an intricate, expensive 
undertaking. Accordingly, the Board limited the inquiry under the 
Simplified-SAC method to the first objective of SAC: whether a captive 
shipper is being forced to cross-subsidize other parts of the 
railroad's rail network. The Simplified-SAC test does so by comparing 
the costs and revenues of the actual operations and services provided 
under the assumption that all existing infrastructure along the 
predominant route used to haul the complainant's traffic is needed to 
serve the traffic on that route. Rate Regulation Reforms, EP 715, slip 
op. at 1 n.2 (STB served Mar. 13, 2015); see also Simplified Standards, 
EP 646 (Sub-No. 1), slip op. at 5. The core analysis in a Simplified-
SAC proceeding addresses the cost to build the existing facilities used 
to serve the captive shipper and the return on investment a 
hypothetical SARR would require to replicate those facilities. The 
Board then determines whether the traffic using those facilities is 
paying more than needed to cover operating expenses and a reasonable 
return on the cost of those facilities. To hold down the cost of a 
Simplified-SAC presentation, various simplifying assumptions and 
standardization measures were adopted.\6\ Such an approach is a less 
thorough application of CMP in that it would not identify 
inefficiencies in the current rail operation.
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    \6\ Simplifying assumptions are used in, for example, the issue 
traffic's route, the configuration of the SARR, the traffic group, 
operating expenses, the test year, and the discounted cash flow 
analysis.
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    Under the Three-Benchmark method, the reasonableness of a 
challenged rate is determined by examining that rate in relation to the 
following three benchmark figures, each of which is expressed as a 
revenue-to-variable cost (R/VC) ratio: (1) Revenue Shortfall Allocation 
Method (RSAM), which measures the average markup over variable cost 
that the defendant railroad would need to charge all of its 
``potentially captive'' traffic (traffic priced above the 180% R/VC 
level) in order for the railroad to earn adequate revenues as measured 
by the Board under 49 U.S.C. 10704(a)(2); (2) R/VC>180, 
which measures the average markup over variable cost currently earned 
by the defendant railroad on its potentially captive traffic; and (3) 
R/VCCOMP, which is used to compare the markup being paid by 
the challenged traffic to the average markup assessed on other 
comparable potentially captive traffic. Rate Regulation Reforms, EP 
715, slip op. at 11 (STB served July 25, 2012).
    In Three-Benchmark cases, each party simultaneously proposes an 
initial comparison group, and, after critiquing the other side's 
proposal, a ``final offer'' comparison group. After receiving 
simultaneous rebuttal filings, the Board selects without adjustment one 
of the two ``final offer'' comparison groups. Each movement in the 
comparison group is adjusted by a revenue need adjustment factor, which 
is the ratio of RSAM / R/VC>180 (each of which is a four-
year average calculation). The Board then calculates the mean and 
standard deviation of the resulting adjusted R/VC ratios (weighted in 
accordance with the proper sampling factors). If the challenged rate is 
above a reasonable confidence interval around the estimate of the mean 
for the adjusted comparison group, it is presumed unreasonable and, 
absent any ``other relevant factors,'' the maximum lawful rate is 
prescribed at that boundary level. See Simplified Standards, EP 646 
(Sub-No. 1), slip op. at 21.
    Since Simplified Standards, only a few Three-Benchmark cases have 
been decided by the Board, while no complaint has been litigated to 
completion under the Simplified-SAC alternative.
    There is no monetary limit on relief for a complainant that elects 
to use the SAC or Simplified-SAC methods, see Rate Regulation Reforms, 
EP 715, slip op. at 3 (STB served July 18, 2013) (removing relief limit 
on Simplified-SAC cases), though rate relief in SAC cases is limited to 
a 10 year period, see Major Issues in Rail Rate Cases, EP 657 (Sub-No. 
1), slip op. at 62-66 (STB served Oct. 30, 2006), and relief in 
Simplified-SAC cases is limited to a five-year period, Simplified 
Standards, EP 646 (Sub-No. 1), slip op. at 27-29. The maximum potential 
rate relief available to a complainant that elects to use the Three-
Benchmark method is limited to no more than $4 million per case over a 
five-year period. See Rate Regulation Reforms, EP 715, slip op. at 2 
(STB served Mar. 13, 2015); Simplified Standards, EP 646 (Sub-No. 1), 
slip op. at 27-29.

Comments Received in Docket No. EP 665 (Sub-No. 1)

    The shipper community argues that the Board's current rate review 
processes are not useable to test the reasonableness of agriculture 
commodity rail rates. Shippers argue that the Board's existing 
methodologies are cost-prohibitive. (ARC Opening 21-22; NGFA Opening 
13-15; AAI Reply 2.) For example, NGFA argues that even the simplest of 
the Board's rate reasonableness methodologies, the Three-Benchmark 
approach, is ineffective because railroad defendants raise numerous 
expert-intensive ``other relevant factor'' arguments and arguments for 
the use of current waybill data in the possession of the defendant 
railroad, which greatly increase the complexity and costs of those 
cases. (NGFA Opening 15.)
    Even if the Three-Benchmark methodology were not cost prohibitive, 
shippers argue that a comparison group approach is ineffective for 
agricultural commodities because carriers have applied ``across-the-
board'' pricing. (ARC Opening 23; NGFA Opening 15; AAI Reply 2.) 
Specifically, shippers claim that carriers use their market power to 
impose a uniformly high rate across-the-board for certain commodities 
or groups of commodities. (ARC Opening 23; NGFA Opening 15.) As a 
result, shippers argue that the R/VCCOMP benchmark is 
inherently problematic for grain shippers and producers because 
railroad grain rates generally produce R/VCs that are uniform, or 
uniform in geographic areas, for states or regions. (ARC Opening 23, 
V.S. Whiteside 12.) According to NGFA, the fact that only defendant 
traffic may be included in a Three-Benchmark comparison group compounds 
this flaw. (NGFA Opening 15.)
    NGFA also argues that SAC and Simplified-SAC are inaccessible 
because many grain shippers are on low-density rural branch lines or 
secondary lines, and the Board's holding regarding cross-subsidies in 
PPL Montana, LLC v. Burlington Northern & Santa Fe Railway, NOR 42054 
(STB served Aug. 20, 2002) and Otter Tail Power Co. v. BNSF Railway, 
NOR 42058, slip op. at 11-13 (STB served Jan. 27, 2006) have 
essentially eliminated the ability for grain shippers to use SAC rules 
to test the reasonableness of rates for agricultural commodities. (NGFA 
Opening 13-14, 21.)
    Shippers propose both modifications to the existing methodologies 
and new processes for rate review. Regarding the existing 
methodologies, several shipper groups argue for changes to the Three-
Benchmark methodology. ARC argues that the comparison groups in the 
Three-Benchmark method should include non-defendant traffic for grain 
and grain products shippers because limiting comparison groups to 
defendant traffic eliminates a significant amount of traffic with 
similar demand characteristics. (ARC Opening 22-23,

[[Page 61650]]

V.S. Fauth 23.) \7\ NGFA and ARC both argue that expanding the 
comparable traffic group to include non-defendant traffic would also 
address ``across-the-board'' pricing practices. (ARC Opening 23; NGFA 
Opening 15, 28, V.S. Crowley 9-11.) As NGFA notes, the inclusion of 
non-defendant traffic in a comparison group approach would establish a 
``market'' rate, and thereby address, to some extent, the current 
practice of the Class I railroads to limit the ability of a captive 
shipper or a group of captive shippers to reach desired markets by 
setting rail rates that largely dictate where the shipper's commodity 
goes on that railroad's system. (NGFA Opening 28, V.S. Crowley 9-11.)
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    \7\ NGFA also includes non-defendant traffic in its proposed new 
methodology, which is discussed in more detail below.
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    Shippers also argue that comparison groups in the Three-Benchmark 
methodology should include non-captive traffic, i.e., traffic priced 
below the 180% R/VC level.\8\ (ARC Opening 23-24, V.S. Fauth 23-24; 
NGFA Opening 29.) According to NGFA, including movements with R/VC 
ratios below 180% is essential because captive agriculture commodity 
producers and elevators compete in the marketplace against other 
agriculture commodity shipments with rates both above and below the 
180% R/VC threshold. (NGFA Opening 29.) Likewise, ARC argues that 
restricting the comparison group to traffic moving at an R/VC ratio 
greater than 180% significantly reduces the amount of traffic available 
for the comparison group because the majority of grain and grain 
products move at R/VC levels below 180%. (ARC Opening 23, V.S. Fauth 
23-24.)
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    \8\ NGFA also incorporates traffic with R/VC ratios below 180% 
into its proposed new methodology, which is discussed in more detail 
below.
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    In addition, ARC proposes two adjustment factors that the Board 
could apply in rate challenges related to grain shipments. First, it 
proposes a Grain Cost Adjustment Factor (GCAF), which would be applied 
to the Board's URCS Phase III costing program for railroad movements of 
grain and grain products. ARC claims the GCAF would more accurately 
reflect the fact that these movements generally have certain lower 
costs than the system average costs, including switching, crew, 
locomotive, and car costs. (ARC Opening, V.S. Fauth 7.) ARC also 
proposes an export grain rate adjustment that takes into account the 
economic relationship between grain prices and grain exports. (ARC 
Opening, V.S. Fauth 30-31.)
    ARC and NGFA also each propose new rate review processes. ARC sets 
forth a ``Two-Benchmark'' approach for revenue adequate railroads, 
which would eliminate the R/VCCOMP benchmark (and rely only 
on the RSAM and R/VC>180 benchmarks by carrier).\9\ 
According to ARC's witness, the R/VCCOMP benchmark is 
designed to reflect demand-based differential pricing and is 
inappropriate under the revenue adequacy constraint announced many 
years ago in Guidelines, 1 I.C.C.2d at 520. (ARC Opening, V.S. Fauth 
25.) ARC, therefore, argues that the R/VCCOMP benchmark 
should have no application in assessing the rates of revenue adequate 
carriers because it provides a means of reflecting demand-based 
differential pricing principles and differential pricing should not 
affect rates on captive traffic to the extent those rates provide 
revenues above revenue adequacy levels. (ARC Opening 17-19.) Under 
ARC's proposed Two-Benchmark test, if grain shippers have rates which 
generate R/VC ratios in excess of the 180%, then the R/VC ratio could 
not exceed the RSAM level. (ARC Opening, V.S. Fauth 26.)
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    \9\ As indicated earlier, ARC also proposes to expand the 
comparison group in Three-Benchmark cases to include both non-
defendant traffic and traffic moving at an R/VC ratio below 180%. 
(ARC Opening 20-24.)
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    NGFA proposes an alternative method called the Ag Commodity Maximum 
Rate Methodology (ACMRM). (NGFA Opening 27-31, V.S. Crowley 6-17.) 
Under ACMRM, the issue traffic would be compared against all railroads 
(not just the defendant railroad) and movements with R/VC ratios less 
than 180% (although, the maximum reasonable rate produced by the 
analysis would be subject to the statutory 180% floor). (NGFA Opening 
28-29, V.S. Crowley 9-11.) Under NGFA's proposal, the comparison group 
would be based on certain default factors, including a mileage band, 
commodity type, railcar type, railcar ownership, and movement type. 
(NGFA Opening, V.S. Crowley 6-7.) ACMRM also would eliminate the 
confidence interval adjustment and the ``other relevant factors'' 
analysis so that captive agriculture commodity rate cases could be 
decided quickly and at reasonable cost. (NGFA Opening 31.) The rate 
prescription period would be 5 years, and there would be no limits on 
the amount of relief that the complaining shipper or group of shippers 
could receive if a rate challenge is successful. (NGFA Opening 31.) 
ACMRM also includes a commodity-specific Revenue Adequacy Adjustment 
Factor, which would be used to adjust the R/VC ratio of each movement 
in the comparison group to account for the revenue adequacy status of 
each railroad. (NGFA Opening 31.) \10\
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    \10\ The formula for determining the RAAF is set forth in 
Exhibit 5 of the verified statement of Crowley. (NGFA Opening, V.S. 
Crowley Exhibit 5.)
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    Carriers, on the other hand, argue that grain rates are not 
unreasonable and the Board's existing rules provide ample opportunity 
for grain shippers to pursue rate relief. (BNSF Opening 1, 26-29; UP 
Opening 19-20.) Carriers cite the lack of grain rate litigation as 
evidence that most grain rates are reasonable or not subject to the 
Board's jurisdiction (R/VC ratios below 180%, contract movements, or 
exempt commodities). (BNSF Opening 26-29; UP Opening 20; AAR Reply 9-
10; CSXT Reply 4; NSR Reply 24-25.) According to carriers, rail rates 
for grain are effectively constrained by competition from truck, barge, 
and other railroads, as well as by the competitive global market for 
grain sales. (BNSF Opening 17-23, 27-29; UP Opening 15-20; CSXT Reply 
2-3.)
    Carriers also argue that the Board has already sufficiently 
addressed shippers' concerns by limiting its market dominance inquiry 
to direct competition (i.e., not allowing product or geographic 
competition), creating two simplified rate reasonableness 
methodologies, and eliminating or increasing the relief caps for those 
methodologies. (AAR Opening 18-19; BNSF Opening 24-26; UP Opening 20; 
CSXT Reply 8.) CSXT notes that the Board also eliminated the use of 
movement-specific adjustments to URCS to reduce litigation costs. (CSXT 
Reply 6 (citing Major Issues, EP 657 (Sub-No. 1), slip op. at 59-60).) 
BNSF and CSXT also dispute the shippers' allegations that railroads 
impose uniformly high rates for certain commodities or groups of 
commodities. (BNSF Reply 14-15; CSXT Reply 8-9.) According to BNSF, 
shippers' concerns about broad, industry-wide rate increases are purely 
speculative and inconsistent with market realities. (BNSF Reply 14.)
    Generally, carriers advocate maintaining the Board's current rate 
review processes and ask the Board to reject the modifications and 
alternatives set forth by the shipper community. (See AAR Opening 18; 
BNSF Opening 24-26; NSR Opening 6; UP Opening 2.) Carriers argue that 
NGFA's proposal would result in a ``ratcheting effect,'' whereby, 
through repeated successful rate challenges, rates charged to captive 
shippers could be systematically lowered to the jurisdictional floor. 
(BNSF Reply 21, 24-25; NSR Reply 14-15; UP Reply 23-24.) Carriers also 
argue that the Board should reject NGFA's

[[Page 61651]]

proposal because the methodology is not supported by sound economics 
and is inherently biased for grain shippers. (CSXT Reply 2, 10; NSR 
Reply 13-14.) According to CSXT, NGFA's proposal would eliminate 
demand-based differential pricing for grain traffic, prevent the Board 
from determining appropriate contribution to fixed costs, and 
``adjust'' URCS in ways that would blatantly favor grain shippers over 
other shippers. (CSXT Reply 10-11.) Carriers also oppose the unlimited 
relief available under ACMRM. (BNSF Reply 29; UP Reply 34-35.)
    Carriers also find flaws in ARC's proposal. Specifically, they 
argue that ARC's proposal would create a disincentive for railroads to 
expand competitive traffic through good business practices and would 
result in an overall degradation of rail service, contrary to the 
public interest. (AAR Reply 21-22; BNSF Reply 31; UP Reply 21-22, 37.) 
UP further argues that ARC's proposal is inconsistent with the 
competitive market principles embodied in the Board's governing statute 
and with basic railroad economics because it disregards the railroad's 
need for differential pricing to recover their joint and common costs. 
(UP Reply 35; see also AAR Reply 16.)
    The carriers also argue that modifications to the Three-Benchmark 
approach, such as inclusion of non-defendant or non-captive traffic in 
the comparison group, lack sound economic support. Railroads dispute 
the idea of including non-defendant traffic in comparison groups, 
arguing that comparisons that include traffic moving on other railroads 
do not accurately establish the appropriate contribution to the 
defendant railroad's fixed costs. (AAR Reply 17-18; BNSF Reply 27.) 
BNSF further argues that including all traffic in the proposed 
comparison group eliminates a railroad's ability to engage in 
differential pricing, contrary to the basic economics of the railroad 
industry. (BNSF Reply 23.) NSR notes that expanding the comparison 
group would not simplify rate reasonableness determinations, but rather 
would increase the cost and complexity of the Three-Benchmark approach 
by requiring examination and evidence based on rates and costing from 
other railroads. (NSR Reply 29.)
    Likewise, carriers oppose the inclusion of non-captive traffic in 
the comparison group. According to NSR, there is no basis for comparing 
traffic over which the railroad is potentially market dominant to 
traffic over which the railroad is not market dominant by statute. (NSR 
Reply 17.) According to BNSF and UP, by seeking to include in the 
comparison group traffic with competitive alternatives, NGFA seeks to 
eliminate a railroad's ability to engage in differential pricing, 
contrary to the basic economics of the railroad industry. (BNSF Reply 
23; UP Reply 24-26.) According to BNSF and UP, including movements with 
R/VC ratios below 180% in the comparison group will also lead to a 
ratcheting down of R/VC ratios until the 180% R/VC ratio becomes the 
rate ceiling. (BNSF Reply 24-25; UP Reply 23-24.)
    USDA also provided comment, arguing that a new approach is 
necessary and warranted, and should be explored, and that agricultural 
shippers require specifically designed rail rate challenge procedures. 
(USDA Opening 2.) USDA argues that none of the current rail rate 
appeals procedures are suitable for agricultural shippers because they 
are much too costly, complex, and time consuming, and agricultural 
shippers do not move large enough quantities to justify the cost of 
these procedures. (Id. at 6.) USDA also argues that, by the time a 
decision could be rendered, the routes or rates may have changed to fit 
new agricultural market conditions, nullifying most of the benefits 
from winning the case. (Id.) USDA estimates that a rate reasonableness 
methodology must have costs no greater than $50,000 in order to be a 
viable option for agriculture shippers. (Id. at 7-8.)
    Based on the comments and testimony received in this proceeding, 
the Board is persuaded that the existing rate review processes present 
accessibility challenges not only for small shippers of grain, but also 
for small shippers of any commodity. The Board recognizes that, for 
small disputes, the litigation costs required to bring a case under the 
Board's existing rate reasonableness methodologies, even the Board's 
most simplified method, Three-Benchmark, can quickly exceed the value 
of the case. The Board appreciates receiving the alternative 
methodologies proposed by ARC and NGFA; however, we are not convinced 
that the alternative methodologies as proposed strike the proper 
balance between the Board's statutory goals of providing captive 
shippers meaningful access to regulatory remedies for unreasonable rail 
rates, while permitting railroads to earn a reasonable return on their 
investments so that they will have the resources to make the investment 
needed to continue to serve the transportation needs of their 
customers.
    Although the Board has concerns with the proposals set forth by ARC 
and NGFA, several of the ideas that parties have raised as part of 
these methodologies, or on how to modify the Three-Benchmark 
methodology, warrant further exploration. In particular, if the Board 
could develop a process that reduces the litigation burden on parties 
even more than the simplest existing rate reasonableness methodology, 
it could achieve the goal of creating more accessible rate review 
processes for small disputes where even a Three-Benchmark case would be 
too costly, given the value of the case. Accordingly, we are 
considering developing a set of procedures that could comprise a new 
comparison-based rate reasonableness methodology for use by shippers of 
all commodities in very small disputes. The Board is considering a new 
process that would entail the following key elements.
    First, the process would include a preliminary screen that would 
limit its application to shippers that are more likely to be considered 
captive and to have rates that are outliers. Such a screen might allow 
for the Board to make market dominance and rate reasonableness 
determinations based on an abbreviated evidentiary process. Second, the 
process would contain a comparison-based analysis in which the Board 
develops an initial comparison group and then allows parties to propose 
modifications. By having the Board set the initial comparison group, 
based on pre-determined criteria, the evidentiary process could be 
simplified, as parties would only have to present evidence on 
modifications rather than creating their own comparison groups (as is 
currently the case in Three-Benchmark cases). Third, the process would 
contain other procedural modifications that help expedite and 
streamline the comparison-based assessment. In particular, the Board is 
considering ideas such as limiting discovery, establishing mandatory 
disclosures, limiting the length of filings, and establishing an 
evidentiary hearing in lieu of rebuttal evidence. Finally, because the 
process would only be intended for small disputes, the Board would 
limit the amount of relief available.
    It is the Board's goal that procedures evolving from this ANPR 
would shorten the case timeline and reduce litigation costs, while 
achieving the same objectives as the existing rate methodologies and 
minimizing the loss of precision. The Board is guided by the concerns 
raised during the public comment period in Docket No. EP 665 (Sub-No. 
1), namely that the Board's current rate review processes are cost-
prohibitive for grain and other shippers with small disputes, and by 
the rail transportation policy set forth at 49 U.S.C. 10101. The Board 
must balance

[[Page 61652]]

the shippers' interest in being protected from unreasonable rates, see 
49 U.S.C. 10101(6), against the need to promote a safe and efficient 
rail transportation system by allowing rail carriers to earn adequate 
revenues, see 49 U.S.C. 10101(3), 49 U.S.C. 10701(d)(2). We must also 
consider all parties' needs for expeditious handling of proceedings, 
see 49 U.S.C. 10101(15).
    We are seeking comment in a new docket, Docket No. EP 665 (Sub-No. 
2), as we believe this methodology should be available to shippers of 
all commodities, not just grain, with small disputes. Many of the 
concerns raised about the accessibility of the Board's existing rate 
reasonableness procedures are general in nature. Indeed, some 
commenters expressly acknowledged that such concerns may be equally 
applicable to shippers of other commodities (see, e.g., ARC Opening 9-
10 (``Many of the deficiencies in the status quo may not be unique to 
grain'')), while others argued that limiting the availability of a 
methodology to a subset of shippers or commodities would be arbitrary 
(see, e.g., NSR Opening 6 (``nothing in the Board's governing statutes 
or prior considerations of rate regulation . . . suggests that the 
economic basis or soundness of a [rate] methodology . . . should vary 
based on the shipper or commodities at issue'')). Thus, we are 
exploring how best to develop a new methodology available to shippers 
of all commodities.
    The Board seeks comment on whether the procedures set forth in this 
decision--or variations on these procedures--would provide a reasonable 
yet accessible methodology for use in very small rate disputes. The 
Board also welcomes comments on other means the Board could implement 
to keep the costs of a new process low.

New Methodology in Docket No. EP 665 (Sub-No. 2)

I. Availability of New Methodology

    Although the concerns expressed by the agricultural community in 
Docket No. EP 665 (Sub-No. 1) and elsewhere have been instrumental in 
informing the Board of the need for a new approach, we do not believe 
that a new methodology should be limited to small shippers of only 
agricultural products. Instead, as discussed above, we are exploring 
how best to develop a new methodology that would be available to 
shippers of all commodities with small disputes.
    We are considering limiting this methodology, however, to disputes 
involving only Class I rail carriers. The Board does not envision that 
the new process would apply to purely local movements of a Class II or 
Class III carrier, which would be consistent with the Three-Benchmark 
methodology. See Simplified Standards, EP 646 (Sub-No. 1), slip op. at 
102 (explaining limitations of methodology with respect to Class II and 
III carriers). However, we seek comment on whether this methodology, if 
adopted, should or should not be applicable to Class II and III rail 
carriers.

II. Comparison Group Approach

    The new methodology the Board is considering would utilize a 
comparison group approach to determine the reasonableness of the 
challenged traffic's rate. Under such an approach, the issue traffic 
would be compared against a comparison group of similar traffic drawn 
from the preceding four years of data in the Board's Waybill Sample. In 
order to reduce litigation costs, the Board would determine an initial 
comparison group based on default parameters established in a 
rulemaking, rather than having parties develop and tender a proposed 
comparison group, as is done in Three-Benchmark cases. See Simplified 
Standards, EP 646 (Sub-No. 1), slip op. at 18. As discussed in more 
detail below, both the complainant and the defendant would have the 
opportunity to present arguments regarding the appropriateness of the 
initial comparison group determined by the Board and propose 
modifications to the group. After considering the arguments proposed by 
the parties, the Board would determine which movements would comprise 
the final, adjusted comparison group, which the Board would use in its 
rate reasonableness analysis.
    The Board is considering the following default parameters for 
selecting the initial comparison group and seeks comment on each.
    Traffic at or Above 180% R/VC. The Board is considering including 
other potentially captive traffic, i.e., traffic priced at or above the 
180% R/VC level, in the comparison group, but not traffic priced below 
the 180% R/VC level. Excluding traffic with an R/VC level below 180% 
would be consistent with the Board's explanation that only captive 
traffic over which the carrier has market power should be included in 
the comparison group in the Three-Benchmark methodology. See Simplified 
Standards, EP 646 (Sub-No. 1), slip op. at 17 (``[t]he purpose of the 
R/VCCOMP benchmark is to use the R/VC ratios of other 
`potentially captive traffic' (i.e., traffic priced above the 180% R/VC 
level) as evidence of the reasonable R/VC levels for traffic of that 
sort. . . . The rates available to traffic with competitive 
alternatives would provide little evidence on the degree of permissible 
demand-based differential pricing needed to provide a reasonable return 
on the investment.''). Although the shipper community presented 
arguments in favor of including traffic below 180% R/VC in comparison 
groups, the Board is concerned that including shipments below 180% R/VC 
may be contrary to the principle of demand-based differential pricing. 
The Board invites comment on the advisability of including or excluding 
non-captive traffic in comparison groups.
    Traffic With Similar Shipping Characteristics. The comparison group 
would also include traffic that shares similar shipping characteristics 
as the issue traffic, as rail rates typically depend, at least in part, 
on the length of haul, shipment type, and the type of commodity being 
shipped. The Board, therefore, is considering limiting comparable 
movements to those movements that satisfy all of the following 
criteria:
    (a) The movement is within a +/- 15% mileage band around the actual 
miles travelled by the challenged traffic,
    (b) the movement is of the same shipment type (e.g., unit train 
traffic or non-unit train traffic), and
    (c) the movement is of a commodity classified under the same 
Standard Transportation Commodity Code (STCC).
    With respect to the last of these parameters, the Board believes 
that the most appropriate method of determining which commodities 
should be used in the comparison group is to use the same five-digit 
STCC as the issue traffic. Commodities listed at the five-digit STCC 
generally should be similar enough in characteristics for inclusion in 
the comparison group. However, certain other commodities differ at an 
even more granular level, such as chemicals (i.e., any commodity with a 
STCC starting with 28), and therefore may best be limited to 
comparisons to the seven-digit STCC. Chemicals are highly varied at the 
five-digit STCC designation and therefore may require a finer degree of 
distinction when selecting the initial comparison group.
    The Board invites comment on these comparison group procedures, and 
also on which commodities would be appropriately compared at the seven-
digit STCC. The Board also invites comment on whether the Board should 
consider expanding the comparison of commodities beyond the five- or 
seven-

[[Page 61653]]

digit STCC level in the event that this parameter would result in the 
initial comparison group containing insufficient observations. In order 
for any study to be statistically valid, the study sample must contain 
a minimum number of observations, and that minimum number varies 
depending on the type and complexity of the analysis to be undertaken. 
For the purposes of comparison-based rate reasonableness analyses, the 
Board is concerned that fewer than 20 observations would be 
insufficient. See e.g., E.I. du Pont de Nemours & Co. v. CSX Transp., 
Inc., NOR 42101, slip op. at 13 (STB served June 30, 2008) (deciding a 
Three-Benchmark rate case where the comparison group included 23 
observations and the sample size was uncontested). Therefore, the Board 
seeks comments on whether the Board should, in instances where there 
are insufficient observations, relax the default STCC limitation to the 
next most specific STCC level that yields sufficient observations for 
the comparison group. For example, if a comparison group based on a 
seven-digit STCC code contains too few observations, we could examine 
the corresponding five-digit STCC, then the four-digit STCC, and so on, 
until the comparison group includes greater than 20 observations.
    The Board invites comments on this possible approach of broadening 
the STCC limitation in this manner and on whether a 20-observation 
minimum would be an appropriate requirement.
    Contract and Tariff Traffic. The comparison group would include 
contract and tariff traffic from the defendant carrier, excluding the 
issue traffic. As the Board noted in Simplified Standards, EP 646 (Sub-
No. 1), slip op. at 83, excluding contract movements from the 
comparison group may leave insufficient movements from the Waybill 
Sample to perform a statistically meaningful comparison analysis. The 
Board is considering applying a common carrier adjustment to the 
comparison group to account for the contract traffic similar to the one 
applied in U.S. Magnesium, L.L.C. v. Union Pacific Railroad, NOR 42114, 
slip op. at 18-19 (STB served Jan. 28, 2010), aff'd sub nom. Union 
Pacific Railroad v. STB, 628 F.3d 597 (D.C. Cir. 2010). The Board 
invites comment on the inclusion of contract traffic and a common 
carrier adjustment. Additionally, the Board invites parties to propose 
alternative means of calculating a common carrier adjustment.
    Non-Defendant Carrier Traffic. The Board seeks comment on whether 
to expand the comparison group in this new methodology to include 
traffic from non-defendant carriers \11\ operating in the same URCS 
region \12\ as the defendant carrier. The Board has, in the past, 
acknowledged that varying joint and common costs can lead to inevitable 
differences in R/VC ratios among different carriers. See Simplified 
Standards, EP 646 (Sub-No. 1), slip op. at 82-83. We are mindful of the 
concerns raised by the railroads, and previously acknowledged by the 
Board, about comparing R/VC ratios across carriers. However, shippers 
have also raised arguments as to why the Board should include non-
defendant traffic. (See, e.g., NGFA Opening 28-29; ARC Opening 23.) 
Notwithstanding the Board's previously stated concerns and the concerns 
raised by the railroads, the Board seeks comment on whether it should 
reconsider this issue. Additionally, the Board is considering whether, 
for the purposes of a new methodology, it may be appropriate to include 
non-defendant traffic in the comparison group to ensure that the Board 
can perform a statistically meaningful comparison analysis. Including 
non-defendant movements could help ensure that the initial comparison 
group includes sufficient movements from the Waybill Sample on which 
the Board can base its rate reasonableness determination.\13\
---------------------------------------------------------------------------

    \11\ Because the Board is considering a new rate review process 
for use against Class I carriers, the comparison group would 
likewise include only rates charged by other non-defendant Class I 
carriers.
    \12\ In calculating regional data, URCS defines each of the 
reporting Class I carriers as being either in the Eastern Region or 
Western Region. The Eastern Region includes CN, CSXT, and NSR. The 
Western Region includes BNSF, CP, KCS, and UP.
    \13\ The Board intends to propose modifications to the Waybill 
sampling rate in a subsequent decision, which would also help ensure 
sufficient observations.
---------------------------------------------------------------------------

    The Board notes, however, that, including non-defendant traffic in 
the comparison group likely would necessitate third-party discovery (as 
to whether cost structure differences between carriers make certain 
movements inappropriate for the comparison group) and would affect 
whether parties would be required to hire outside counsel to manage the 
receipt of confidential Waybill Sample data from other carriers. See 49 
CFR 1244.9. We recognize that these issues would add a layer of 
complexity to the process, potentially increasing the time and expense 
required to bring a case.\14\ We seek comment on the advisability of 
including non-defendant traffic in all or limited circumstances under 
this simplified methodology, and how such inclusion would affect the 
time and costs to bring a case.
---------------------------------------------------------------------------

    \14\ The necessity for third-party discovery, and what that 
might entail, is discussed in more detail in section III(2), Limits 
on Discovery, below.
---------------------------------------------------------------------------

III. Procedural Considerations

    The Board recognizes that it is essential that any procedures 
comprising a new rate reasonableness methodology be both more 
streamlined and less costly than the Board's existing rate review 
processes. As a result, the Board is considering the procedures set 
forth below with the goal of achieving a shortened procedural schedule 
and including measures addressing concerns that the existing procedures 
for challenging a rate are cost-prohibitive.
1. Preliminary Screen
    Given the abbreviated evidentiary presentation in a simplified, 
lower-cost process, the Board is considering requiring that challenged 
traffic meet certain threshold criteria in order to be eligible to be 
reviewed under the new methodology. This preliminary screen would seek 
to identify those movements for which truck transportation alternatives 
are unlikely and the rates are significant outliers, allowing the Board 
to make market dominance and rate reasonableness determinations based 
on the abbreviated evidentiary submissions described below. The issue 
traffic would, of course, have to be priced above the 180% R/VC level, 
which is the statutory floor for regulatory rail rate intervention. See 
49 U.S.C. 10707(d).
    Additionally, the Board is considering the following criteria for 
the issue traffic as a preliminary screen and seeks comment on each of 
the following potential criteria.
    Issue Traffic Length of Haul. The origin and destination of the 
issue traffic would be required to be located a certain minimum 
distance apart. As noted in Review of Commodity, Boxcar, and TOFC/COFC 
Exemptions, EP 704 (Sub-No. 1), slip op. at 7 n.12 (STB served Mar. 23, 
2016) (with Commissioner Begeman dissenting), trucking becomes less 
viable when the length of haul exceeds 500 miles because in many 
instances a transport over that threshold cannot be completed in one 
day. Thus, it may be appropriate to require that the origin and 
destination be more than 500 highway miles apart. Traffic moving fewer 
than 500 highway miles between origin and destination would not be 
eligible to be challenged under the new methodology because trucking 
alternatives for those movements are more likely. Such a criterion 
could allow the Board to consider making market dominance 
determinations on an abbreviated evidentiary presentation.

[[Page 61654]]

    Issue Traffic Revenue Per Ton Mile. As noted, part of the 
preliminary screen would be to determine if rates are significant 
outliers. The Board is considering using revenue per ton mile to make 
this determination. Specifically, the Board could require the revenue 
per ton mile of the challenged traffic to be in the top 10% or 20% of 
the initial, Board-determined comparison group. Another possibility 
would be to require the issue traffic to be at least one standard 
deviation above the mean revenue per ton mile of the comparison 
group.\15\ Analyzing how a movement's revenue per ton mile compares to 
the revenue per ton mile earned on similar movements would help 
identify movements with outlier rates. The Board would complete this 
revenue per ton mile analysis following the receipt of the defendant's 
answer, in which the defendant would provide the actual miles traveled 
by the challenged traffic. The Board invites parties to comment on 
these or other measures that would achieve the same objective of 
identifying movements in which rates are significant outliers.
---------------------------------------------------------------------------

    \15\ A standard deviation is defined as a measure of spread, 
dispersion, or variability of a group of numbers equal to the square 
root of the variance of that group of numbers. The variance of the 
group of numbers is computed by subtracting the mean, or average, of 
all the numbers, squaring the resulting difference, and computing 
the mean of these squared differences.
---------------------------------------------------------------------------

    Prior Litigation. Lastly, the Board is considering a requirement 
that the complainant must not have brought a case against the defendant 
under this methodology within a certain number of years. This 
limitation could correspond to the maximum rate prescription available 
under the new process, which is discussed in more detail in the section 
related to limits on relief below. By including this limitation, the 
Board intends to prevent attempts to divide a large dispute into 
multiple smaller disputes.
2. Limits on Discovery
    The Board also is considering limiting discovery in order to reduce 
litigation costs for very small disputes. In particular, the Board 
could require that parties file certain initial disclosures with their 
complaint and answer. Concurrent with the filing of its complaint, the 
complainant could be required to disclose the nine standard inputs for 
the URCS Phase III costing program.\16\ The complainant could also be 
required to provide a preliminary estimate of the variable cost of the 
challenged movements, using the unadjusted figures produced by the URCS 
Phase III costing program on the Board's Web site,\17\ to demonstrate 
that the Board's jurisdictional threshold has been met. The complainant 
could also be required to provide to the Board and the defendant all 
documents that it relied upon to determine the inputs to the URCS Phase 
III costing program. The Board invites parties to comment on whether 
the URCS Phase III costing program should be used as described, or 
whether the availability of this new process would be improved by some 
alternative, such as by creating a paper form for submitting URCS Phase 
III inputs to the Board.
---------------------------------------------------------------------------

    \16\ The nine inputs include: (1) The carrier; (2) the type of 
shipment (local, received-terminated, etc.); (3) the one-way 
distance of the shipment; (4) the type of car; (5) the number of 
cars; (6) the car ownership (private or railroad); (7) commodity 
type (by STCC); (8) the weight of the shipment (in tons per car); 
and (9) the type of movement (single-car, multi-car, or unit train). 
In the event that a complainant does not have access to the actual 
miles of the length of haul, a showing of highway miles between the 
origin and destination pair would be sufficient for the purposes of 
the complainant's initial disclosures.
    \17\ The current version of the URCS Phase III costing program 
is available at http://www.stb.dot.gov/stb/industry/urcs.html.
---------------------------------------------------------------------------

    With regard to qualitative market dominance, the complainant could 
also be required to make certain required disclosures. For example, in 
a verified statement by a company official, the complainant could be 
required to submit: (i) A statement that the issue traffic has not 
moved more than a de minimis amount on alternative transportation modes 
between the same origin and destination within a certain number of 
years, and (ii) a statement whether the complainant has made any 
inquiries to, or received any responses from, alternative 
transportation providers for the issue traffic within a certain number 
of years, including copies of any such communications (if available).
    The defendant could likewise be required to provide initial 
disclosures to the complainant concurrent with filing its answer. Like 
the complainant, the defendant could be required to produce its 
preliminary estimate of the variable cost of the challenged movement, 
using the unadjusted figures produced by the URCS Phase III costing 
program. To the extent that the defendant disagreed with any of the 
URCS inputs provided in the complaint, it could also be required to 
provide the inputs that it used. The defendant could also be required 
to provide to the Board and the complainant all documents that it 
relied upon to determine the inputs used in the URCS Phase III costing 
program. Finally, the defendant could be required to disclose the 
actual route miles for the issue traffic and provide supporting data to 
the Board and, upon request, to the complainant.
    Another limit on discovery could be to limit the amount or type of 
party-initiated discovery or eliminating such discovery altogether, 
given that the need for such information would be significantly reduced 
by the simplifications discussed here. For example, the fact that the 
initial comparison group would be set by the Board (based on defined 
criteria) and not the parties would eliminate one need for the parties 
to seek discovery. In terms of limiting discovery, in preparing its 
answer, the defendant could reply with information that is either 
disclosed by the complainant in its complaint or opening evidence, or 
developed independently by the defendant, but the defendant would not 
be permitted to seek additional discovery from the complainant. 
Likewise, the complainant would not be permitted to serve any discovery 
on the defendant in preparation of its evidentiary submissions.
    Additionally, as noted above, if the Board were to include non-
defendant traffic in the comparison group, the Board is concerned that 
it would be required to permit discovery from the non-defendant 
carriers whose traffic is included in the comparison group. In that 
case, the Board could consider limits, such as five interrogatories 
(including subparts) and five document requests (including subparts) 
per party for each non-defendant carrier, and could require that such 
discovery be completed by a specific number of days. Such third-party 
discovery would occur prior to the submission of each party's evidence.
    We therefore seek comment on whether to mandate certain initial 
disclosures and, if so, what those disclosures should be, and any other 
ways to limit or eliminate party-initiated discovery in a new, 
streamlined comparison group methodology for small disputes.
3. Submission of Evidence
    The Board seeks comment on the following procedures it is 
considering for use in a new simplified rate reasonableness 
methodology.
    Complaint. A party would initiate a case by filing a complaint with 
the Board. In its complaint, the complainant would be required to: (i) 
Allege that the rates for certain traffic are unreasonable, (ii) allege 
that the defendant has both quantitative market dominance (i.e., the 
issue traffic must move at rates above 180% R/VC) and qualitative 
market dominance (i.e., other modes of

[[Page 61655]]

transportation are not feasible); and (iii) submit the required initial 
disclosures, as described above in the section on limits on discovery. 
The complaint and initial disclosures would include information 
sufficient for the Board to determine that the issue traffic meets a 
preliminary screen, discussed in more detail above. Additionally, with 
its complaint, the complainant would submit a signed confidentiality 
agreement. The agreement would be standardized specifically for cases 
brought under the new process and available for download on the Board's 
Web site. By asking parties to submit the confidentiality agreement 
early in the process, the Board could expedite the distribution of the 
comparison group. The Board invites comment on the appropriate content 
or other issues related to the filing of the complaint.
    Answer. In its answer, the defendant would be required to admit or 
deny each of the allegations in the complaint and submit its initial 
disclosures, described above. The defendant would also file with its 
answer a signed copy of the standardized confidentiality agreement. The 
Board invites comment on the appropriate content or other issues 
related to the filing of the answer.
    Opening Evidence. Unlike in Three-Benchmark cases, the Board 
envisions sequential rather than simultaneous filings of each party's 
evidence. In its opening evidence, the complainant would address both 
qualitative market dominance \18\ and the appropriateness of the 
initial comparison group. With respect to qualitative market dominance, 
given the information derived from the preliminary screen and the 
initial disclosure requirements, the complainant would be permitted to 
present an abbreviated evidentiary submission, but must explain why the 
use of other transportation modes is not feasible. The complainant 
could also expand on its initial disclosures to the extent necessary.
---------------------------------------------------------------------------

    \18\ Under the procedures envisioned, quantitative market 
dominance would be decided by the Board prior to the filing of 
opening evidence based on the information provided in the complaint 
and answer.
---------------------------------------------------------------------------

    In its opening evidence, the complainant would also have the 
opportunity to state whether the initial, Board-determined comparison 
group is appropriate. The complainant may propose adjustments to the 
default initial comparison group and present ``other relevant factors'' 
evidence, such as a density adjustment or PTC adjustment, among others.
    Reply Evidence. The defendant's reply would likewise address both 
qualitative market dominance and the appropriateness of the default 
initial comparison group. Specifically, in its reply evidence, the 
defendant would have the opportunity to reply to the complainant's 
qualitative market dominance evidence. As noted above, we are 
considering limits on discovery as it relates to qualitative market 
dominance. For example, in formulating its response to the 
complainant's qualitative market dominance evidence, the defendant 
could be limited to information disclosed by the complainant with its 
complaint or opening evidence or developed independently by the 
defendant.
    The defendant would also have the opportunity to respond to the 
complainant's arguments regarding the appropriateness of any proposed 
adjustments to the default initial comparison group. The defendant 
could also propose its own adjustments to the default initial 
comparison group and set forth ``other relevant factors'' evidence.
    Limitations on Opening and Reply Evidence. In order to minimize the 
time and expense associated with litigating a small rate dispute, the 
Board is considering placing limitations on the opening and reply 
evidence, such as imposing word or page limits on the complainant's 
opening evidence and the defendant's reply evidence. The Board seeks 
comment on whether to include a word or page limitation and if so, what 
the appropriate limitation would be.
    We recognize that, even with a word limit and limits on or 
exclusion of discovery, allowing parties' presentations to include 
``other relevant factors'' evidence could substantially increase the 
cost and time required to prepare for submission of a case. For 
instance, we do not expect that the examples noted above--a density 
adjustment or PTC adjustment--could be easily calculated by a small 
entity without hiring outside consultants. Therefore, the Board invites 
comment on the advisability of allowing parties' presentations to 
include ``other relevant factors'' evidence. The Board also invites 
parties to comment on the appropriateness of sequential as opposed to 
simultaneous filings of each party's evidence, a reasonable time-frame 
for considering qualitative market dominance arguments, a reasonable 
word or page limit for opening and reply evidence, and any other issues 
related to the filing of opening and reply evidence.
    Evidentiary Hearing. In an effort to make the new process cost-
effective for small disputes, the Board is considering offering an 
evidentiary hearing following the submission of opening and reply 
evidence, in lieu of formal rebuttal filings and final briefs. The 
evidentiary hearing, which would take place before Board staff, would 
permit the Board to further examine and develop the evidentiary record 
without requiring the parties to take on the higher litigation costs 
associated with formal written submissions. At the evidentiary hearing, 
the complainant would have the opportunity to rebut the defendant's 
reply and respond to Board staff's questions. The defendant would also 
participate in the hearing and could respond to any questions from 
Board staff. Board staff would have the opportunity to further explore 
the parties' arguments regarding the appropriateness of the comparison 
group. A court reporter would be present, and the transcript would 
become part of the record. The evidentiary hearing could also take 
place by conference call. We invite parties to comment on whether an 
evidentiary hearing in lieu of rebuttal filings and final briefs would 
help minimize the time or expense associated with litigating a case 
under a new rate methodology for small disputes.
4. Board Determinations
    Under the procedures being considered as described in this 
decision, the Board would issue two decisions. First, following receipt 
of the defendant's answer, the Board would issue a preliminary decision 
in which the Board would (i) resolve any URCS Phase III input disputes, 
(ii) determine whether the challenged traffic meets the preliminary 
screen based on the initial comparison group, and (iii) make a final 
determination on whether the defendant carrier has quantitative market 
dominance over the movements at issue. In the event that the issue 
traffic fails to meet the preliminary screen based on the initial 
comparison group, the Board would dismiss the complaint without 
prejudice. For challenged traffic that satisfies the preliminary 
screen, the Board would provide the initial comparison group data 
pursuant to the standardized confidentiality agreements previously 
filed by the parties.
    Second, following the evidentiary hearing, the Board would issue a 
final decision addressing qualitative market dominance and rate 
reasonableness. With regard to qualitative market dominance, the Board 
expects that its qualitative market dominance analysis could be far 
more limited than in other rate reasonableness methodologies given the 
preliminary screen and initial disclosure requirements. In particular, 
because the screen would help identify movements that are more likely 
to be captive, the Board envisions

[[Page 61656]]

determining qualitative market dominance without as extensive an 
analysis as under the current methodologies. The Board seeks comments 
on specific qualitative market dominance factors it could consider for 
this type of new rate reasonableness methodology.
    If the Board finds that the defendant carrier has qualitative 
market dominance over the challenged traffic, the Board would address 
each of the parties' arguments regarding the appropriateness of the 
initial comparison group and adjustments thereto. If the comparison 
group is adjusted, the Board would reevaluate the challenged traffic to 
ensure that it continues to satisfy the preliminary screen based on the 
adjusted comparison group. In the event that the issue traffic fails to 
meet the preliminary screen based on the adjusted comparison group, the 
Board would dismiss the proceeding with prejudice to the complainant 
challenging the same movement under the new method for a certain 
period, but without prejudice to the complainant challenging the same 
movement under one of the Board's other rate review processes.
    For the rate reasonableness determination, the Board would compute 
the maximum R/VC ratio for the issue traffic in a manner similar to the 
Three-Benchmark analysis, although with a potential modification. 
Specifically, the Board would apply a revenue need adjustment--which is 
the ratio of RSAM / R/VC>180 (each of which is a four-year 
average calculation) \19\--to each movement in the final comparison 
group. The Board would then calculate the mean and standard deviation 
of the R/VC ratios for the adjusted comparison group (weighted in 
accordance with the proper sampling factors). If the challenged rate is 
above a reasonable confidence interval around the estimate of the mean 
for the adjusted comparison group, it would be determined unreasonable 
and the maximum lawful rate would be prescribed at that upper boundary 
level.\20\
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    \19\ The jurisdictional threshold for rail rate regulation, R/
VC>180, also serves as the floor for regulatory relief 
because the Board cannot prescribe a rate below the jurisdictional 
threshold. See 49 U.S.C. 10707(d); W. Tex. Utils. Co. v. Burlington 
N. R.R., 1 S.T.B. 638, 677-78 (1996), aff'd sub nom., Burlington N. 
R.R. v. STB, 114 F.3d 206, 210 (D.C. Cir. 1997).
    \20\ The confidence interval would be a function of the number 
of movements in the comparison group and the standard deviation of 
those (potentially adjusted) R/VC ratios. A small standard deviation 
or large number of observations would produce a tighter confidence 
interval, so that we could have more ``confidence'' in the accuracy 
of our estimate of the mean of the comparison group. Using the mean 
(R/VCCOMP) and standard deviation (S) of the adjusted 
comparison group, along with the number of movements in the 
comparison group (n), the upper boundary of a reasonable confidence 
interval around the estimate of the mean would be derived as 
follows: Upper Boundary = R/VCCOMP + tn-1 x (S 
/ (n-1) \1/2\). The Student's t-distribution parameter, 
tn-1, will range from 3.078 to 1.28 depending on the 
number of movements in the comparison group. The precise number can 
be found in statistical tables for the Student's t-distributions.
---------------------------------------------------------------------------

    However, the Board is considering departing from Three-Benchmark 
precedent with respect to the revenue need adjustment. As noted, in a 
Three-Benchmark case, each movement in the final comparison group is 
adjusted by a revenue need adjustment factor. During the public comment 
period in Docket No. EP 665 (Sub-No. 1), NGFA proposed the creation of 
an alternative revenue need adjustment factor--a Revenue Adequacy 
Adjustment Factor (RAAF), which would be commodity-specific and would 
account for the revenue adequacy status of each railroad. NGFA argues 
that the RAAF is superior to the Board's current revenue need 
adjustment factor because it takes into consideration the amount of 
issue commodity traffic that is ostensibly captive to the railroad and 
allocates the burden of a revenue need adjustment factor to those 
commodities that provide the most revenue. (NGFA Opening, V.S. Crowley 
12.) There may be merit to NGFA's suggestion that our current revenue 
need adjustment factor could be adapted to reflect the differences in 
rates and revenues carriers obtain from various commodity groups. Thus, 
the Board is considering whether it could make the revenue need 
adjustment factor commodity specific. However, if the Board were to 
adopt a commodity specific revenue need adjustment factor, we must 
ensure that we establish the most appropriate formula.
    Therefore, we seek comment on whether the Board should modify its 
revenue need adjustment factor to be commodity-specific, and if so, how 
we can effectively disaggregate the existing RSAM on a commodity-by-
commodity basis. Because some commodities have a higher R/VC ratio than 
others, the adjusted revenue need adjustment factor should allocate the 
revenue shortfall in ways that reflect the different demand 
elasticities faced by different commodities. However, the weighted 
average of all commodities when totaled should equal the overall RSAM.
    We believe that, on average, differences in demand elasticities are 
reflected in R/VC ratios--those with higher R/VC ratios tend to enjoy 
less direct and indirect competition while those with lower R/VC ratios 
tend to enjoy somewhat more competition. In an individual proceeding, 
we would consider applying a commodity-specific RSAM where the 
resulting figure reflects this intuition. We believe such a mark-up 
could be done in a manner consistent with Ramsey pricing 
principles.\21\ If the Board were to adopt such a modified revenue need 
adjustment factor, we also seek comment on whether the reliance on a 
single year's data would be inappropriate. Because profits are pro-
cyclical, we believe an approach that considers a longer period of time 
may be more appropriate. Finally, we also seek comment on whether 
application of a modified revenue need adjustment factor, if adopted, 
should be limited to a new methodology.
---------------------------------------------------------------------------

    \21\ Ramsey pricing refers to the pricing principals first 
advocated by the British mathematician and economist Frank P. 
Ramsey, whose economic pricing model was published in A Contribution 
to the Theory of Taxation, 37 Econ. J. 47-61 (Mar. 1927). ``Ramsey 
pricing'' is a widely recognized method of differential pricing--
that is, pricing in accordance with demand. Under Ramsey pricing, 
each price or rate contains a mark-up above the long-run marginal 
cost of the product or service to cover a portion of the 
unattributable costs. The unattributable costs are allocated among 
the purchasers or users in inverse relation to their demand 
elasticity. Thus, in a market where shippers are very sensitive to 
price changes (a highly elastic market), the mark-up would be 
smaller than in a market where shippers are less price sensitive. 
The sum of the mark-ups equals the unattributable costs of an 
efficient producer. See Guidelines, 1 I.C.C.2d at 526-527.
    While Ramsey pricing represents the most efficient way to price 
above marginal cost, reliance on pure Ramsey pricing clashes with 
the Long-Cannon factors because it would not maximize the revenue 
contribution from traffic with more-elastic demand (competitive 
traffic) before calling on traffic with less-elastic demand (captive 
traffic) to make a differentially higher revenue contribution. For 
these reasons, the Board has not adopted pure Ramsey pricing theory. 
Rather, in SAC cases, the Board allocates stand-alone costs in 
accordance with Ramsey pricing principles, by which the SARR (and 
therefore the carrier) is permitted to engage in demand-based 
differential pricing to recover the total SAC costs. Major Issues, 
EP 657 (Sub-No. 1), slip op. at 12-13.
---------------------------------------------------------------------------

5. Limits on Relief
    Because of the abbreviated nature of the process described in this 
decision, the Board is considering limiting relief available under this 
process. The ideas presented in the ANPR describe a process that would 
be significantly more streamlined than the process required to bring a 
Three-Benchmark case. As such, the relief available under this method 
would likewise need to be significantly less than the relief available 
under the Three-Benchmark approach. The Board invites parties to 
comment on the amount of relief that should be available and why that 
amount of relief would be appropriate.

[[Page 61657]]

    The limit on relief would apply to the difference between the 
challenged rate and the maximum lawful rate, whether in the form of 
reparations, a rate prescription, or a combination of the two. Any rate 
prescription would automatically terminate once the complainant has 
exhausted the relief available. Thus, the actual length of the 
prescription may be less than the prescription period if the shipper 
ships a large enough volume of traffic so that the relief is used up in 
a shorter time. The complainant would be barred from bringing another 
complaint against the same rate for the remainder of the prescription 
period.
    Where the shipper exhausts all of its relief before the end of the 
prescription period, the carrier's rate making freedom would be 
restored with a regulatory safe harbor at the challenged rate for the 
remainder of the prescription period, with appropriate adjustments for 
inflation using the rail cost adjustment factor, adjusted for inflation 
and productivity (RCAF-A). See R.R. Cost Recovery Procedures--
Productivity Adjustment, 5 I.C.C.2d 434 (1989), aff'd sub nom. Edison 
Elec. Inst. v. ICC, 969 F.2d 1221 (D.C. Cir. 1992). If, however, a 
carrier establishes a new common carrier rate once the rate 
prescription expires, and the new rate exceeds the inflation-adjusted 
challenged rate, the shipper may bring a new complaint against the 
newly established common carrier rate.

The Regulatory Flexibility Act

    Because this ANPR does not impose or propose any requirements, and 
instead seeks comments and suggestions for the Board to consider in 
possibly developing a subsequent proposed rule, the requirements of the 
Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612 (RFA) do not apply 
to this action. Nevertheless, as part of any comments submitted in 
response to this ANPR, parties may include comments or information that 
could help the Board assess the potential impact of a subsequent 
regulatory action on small entities pursuant to the RFA.

Conclusion

    The Board seeks public input on how best to establish a new rate 
reasonableness process for use in small disputes, available to shippers 
of all commodities, to provide shippers with small disputes meaningful 
access to regulatory relief in those cases where even a Three-Benchmark 
case is too costly, given the value of the case. The Board welcomes 
comments from interested parties on the issues and considerations 
presented in this decision.
    It is ordered:
    1. Comments are due by November 14, 2016. Reply comments are due by 
December 19, 2016.
    2. A copy of this decision will be served upon the Chief Counsel 
for Advocacy, Office of Advocacy, U.S. Small Business Administration.
    3. Notice of this decision will be published in the Federal 
Register.
    4. This decision is effective on its service date.

    Decided: August 30, 2016.

    By the Board, Chairman Elliott, Vice Chairman Miller, and 
Commissioner Begeman. Vice Chairman Miller commented with a separate 
expression.
Kenyatta Clay,
Clearance Clerk.

VICE CHAIRMAN MILLER, commenting:

    Today's decision is an important step forward for the Board. 
Despite the agency's well-intentioned efforts over the years to create 
simpler, timelier, and less costly rate dispute processes, I believe 
that they are still inaccessible to shippers with small disputes, 
denying them the opportunity to obtain rate relief. This decision 
focuses on filling that gap in our processes.
    While I applaud the Board for today's action, we still have work to 
do. Even if the Board is able to develop an abbreviated rate case 
methodology that can be used by shippers with small rate disputes, it 
will not resolve the concerns that have been raised about the SAC test. 
The methodology here is only intended to address small rate disputes 
for shippers that meet certain criteria. As such, the Board still needs 
to consider alternatives to the SAC test for shippers with larger 
disputes. A reasonable starting point to address this issue would be 
for the Board to publicly release the report prepared by our outside 
consultant on SAC alternatives and conduct a hearing to obtain feedback 
and reaction from our stakeholders on the report's conclusions.\22\ 
Hopefully the report will be issued soon and stakeholders given an 
opportunity to comment.

    \22\ Sunbelt Chlor Alkali P'ship v. Norfolk S. Ry., NOR 42130, 
slip op. 44 (STB served June 30, 2016) (Miller concurrence).

    Note: The following appendix will not appear in the Code of 
---------------------------------------------------------------------------
Federal Regulations.

Appendix A--Participants in Docket No. EP 665 (Sub-No. 1)

    The Board received written comment and testimony from the 
following parties in Docket No. EP 665 (Sub-No. 1).
    Opening comments were received from:

 Alliance for Rail Competition (ARC) (joined by Montana 
Wheat and Barley Committee, National Farmers Union, Colorado Wheat 
Administrative Committee, Idaho Barley Commission, Idaho Grain 
Producers Association, Idaho Wheat Commission, Montana Farmers 
Union, North Dakota Corn Growers Association, North Dakota Farmers 
Union, South Dakota Corn Growers Association, South Dakota Farmers 
Union, Minnesota Corn Growers Association, Minnesota Farmers Union, 
Wisconsin Farmers Union, Nebraska Wheat Board, Oklahoma Wheat 
Commission, Oregon Wheat Commission, South Dakota Wheat Commission, 
Texas Wheat Producers Board, Washington Grain Commission, Wyoming 
Wheat Marketing Commission, USA Dry Pea and Lentil Council, and 
National Corn Growers Association)
 Association of American Railroads (AAR)
 BNSF Railway Company (BNSF)
 CSX Transportation, Inc. (CSXT)
 National Grain and Feed Association (NGFA)
 Norfolk Southern Railway Company (NSR)
 Union Pacific Railroad Company (UP)
 U.S. Department of Agriculture (USDA)

    Reply comments were received from:

 AAR
 Agribusiness Association of Iowa, Agribusiness Council of 
Indiana, Agricultural Retailers Association, American Bakers 
Association, American Farm Bureau Federation, American Feed Industry 
Association, American Soybean Association, California Grain and Feed 
Association, Corn Refiners Association, Institute of Shortening and 
Edible Oils, Kansas Cooperative Council, Kansas Grain and Feed 
Association, Grain and Feed Association of Illinois, Michigan 
Agribusiness Association, Michigan Bean Shippers Association, 
Minnesota Grain And Feed Association, Missouri Agribusiness 
Association, Montana Grain Elevators Association, National Council 
of Farmer Cooperatives, National Farmers Union, National Oilseed 
Processors Association, Nebraska Grain and Feed Association, North 
American Millers' Association, North Dakota Grain Dealers 
Association, Northeast Agribusiness and Feed Alliance, Ohio 
Agribusiness Association, Oklahoma Grain and Feed Association, 
Pacific Northwest Grain and Feed Association, Pet Food Institute, 
South Dakota Grain and Feed Association, Texas Grain and Feed 
Association, USA Rice Federation, and Wisconsin Agribusiness 
Association (collectively, AAI)
 ARC (joined by the same parties that joined its opening 
comment as well as the Nebraska Corn Growers Association)
 BNSF
 CSXT
 Kansas City Southern Railway Company (KCS)
 NGFA
 NSR
 Jay L. Schollmeyer for and on behalf of SMART-TD General 
Committee of Adjustment (SMART-TD)

[[Page 61658]]

 Texas Trading and Transportation Services, LLC, dba TTMS 
Group, together with Montana Grain Growers Association (TTMS Group)
 UP
 USDA

    Testimony at the June 10, 2015 hearing was received from:

 AAR
 ARC
 BNSF
 Canadian National Railway Company (CN)
 Canadian Pacific Railway Company (CP)
 CSXT
 Michigan Agri-Business Association \23\
---------------------------------------------------------------------------

    \23\ Written testimony only.
---------------------------------------------------------------------------

 Montana Department of Agriculture
 NGFA
 NSR
 SMART-TD
 Transportation Research Board of the National Academy of 
Sciences
 TTMS Group
 UP
 USDA

    Supplemental comments were received from:

 AAR
 ARC (joined by the same parties that joined its opening 
comment)
 NSR

[FR Doc. 2016-21305 Filed 9-6-16; 8:45 am]
 BILLING CODE 4915-01-P