[Federal Register Volume 85, Number 251 (Thursday, December 31, 2020)]
[Proposed Rules]
[Pages 86876-86878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28864]


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SURFACE TRANSPORTATION BOARD

49 CFR Chapter X

[Docket No. EP 766]


Joint Petition For Rulemaking--Annual Revenue Adequacy 
Determinations

AGENCY: Surface Transportation Board.

ACTION: Petition for rulemaking.

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SUMMARY: The Surface Transportation Board (Board or STB) opens a 
rulemaking proceeding to consider a petition by several Class I 
railroads to change the Board's procedures for annually determining 
whether Class I rail carriers are revenue adequate. The Board seeks 
public comment on the petition and several specific related issues.

DATES: Comments are due March 1, 2021; replies are due March 31, 2021.

ADDRESSES: Comments and replies may be filed with the Board via e-
filing on the Board's website at www.stb.gov and will be posted to the 
Board's website.

FOR FURTHER INFORMATION CONTACT: Amy Ziehm at (202) 245-0391.
    Assistance for the hearing impaired is available through the 
Federal Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION: On September 1, 2020, Union Pacific Railroad 
Company (UP), Norfolk Southern Railway Company, and the U.S. rail 
operating affiliates of Canadian National Railway Company 
(collectively, Joint Carriers) filed a joint petition for rulemaking to 
change the Board's procedures for determining which Class I rail 
carriers are earning adequate revenues under 49 U.S.C. 10704(a)(3).
    The Board annually determines each Class I railroad's revenue 
adequacy in successive subdockets under Docket No. EP 552, most 
recently in Railroad Revenue Adequacy--2019 Determination, EP 552 (Sub-
No. 24) (STB served Oct. 1, 2020).\1\ Under the Board's procedures, ``a 
railroad is considered revenue adequate under 49 U.S.C. 10704(a) if it 
achieves a rate of return on net investment (ROI) equal to at least the 
current cost of capital for the railroad industry.'' Id. at 1.
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    \1\ In that decision, the Board found five carriers (BNSF 
Railway Company, CSX Transportation, Inc. (CSXT), Norfolk Southern 
Combined Railroad Subsidiaries, Soo Line Corporation, and UP) 
revenue adequate in 2019. R.R. Revenue Adequacy--2019 Determination, 
EP 552 (Sub-No. 24), slip op. at 2.
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    The Joint Carriers propose two changes to the Board's procedures 
for annually determining revenue adequacy. First, the Joint Carriers 
propose that the Board determine whether a railroad is revenue adequate 
by comparing the extent by which its ROI exceeds the rail industry's 
cost of capital to the extent by which companies in the S&P 500 exceed 
their cost of capital--in short, to examine railroads in comparison 
with the larger universe of S&P 500 companies (the Comparison 
Proposal). (Pet. 3, 8.) The Joint Carriers contend that railroads 
compete against other firms for capital, and that the financial health 
of the railroad industry ``must be considered in relation to the 
competition railroads face in the capital markets from other, 
unregulated firms.'' (Id. at 3.) More specifically, the Joint Carriers 
argue that the Board should define annual revenue adequacy to mean that 
a railroad's ``Adjusted STB ROI'' \2\ exceeds the rail industry cost of 
capital by more than the median S&P 500 firm's ROI exceeds its cost of 
capital. (Id. at 20-21.) Under the Comparison Proposal, the Board would 
direct the Association of American Railroads to submit ``Adjusted STB 
ROI'' and cost of capital calculations for every S&P 500 company, and 
the Board ``would calculate the median difference between the Adjusted 
STB ROI and the cost of capital for all companies in the S&P 500, 
except for banking and real estate companies.'' \3\ (Id. at 21.) As 
part

[[Page 86877]]

of the Comparison Proposal, the Joint Carriers also propose including 
non-goodwill intangible assets in the railroads' and S&P 500 companies' 
asset bases. (Id. at 35.)
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    \2\ The petition also proposes certain modifications to the 
calculation of ROI, as discussed below. (See also Pet. 35-36.)
    \3\ The Joint Carriers state that banking and real estate 
companies were excluded from the comparison groups because they have 
different capital structures than other firms; railroads were also 
excluded. (Pet. 35.)
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    The second proposal from the Joint Carriers is that the Board 
change how it treats deferred taxes in the revenue adequacy 
determination (the Deferred Taxes Proposal). Rather than the Board's 
current ``utility method,'' which removes annual deferred taxes from 
net operating income and removes accumulated deferred taxes from a 
company's investment base, the Joint Carriers propose a flow-through 
approach, under which annual deferred taxes and accumulated deferred 
taxes would not be removed from net operating income and the investment 
base, respectively. (Id. at 38.) The Joint Carriers state that the 
practical effect would be ``an annual measurement that is on a cash 
basis, where the impact of any deferred taxes is captured by the 
measurement of financial health if and when those taxes come due.'' 
(Id. at 38-39.)
    On September 21, 2020, the Board received three replies to the 
petition, one each from CSXT, the Western Coal Traffic League (WCTL), 
and a group of several shippers.\4\ CSXT supports the petition, while 
WCTL and the Joint Shippers oppose it.
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    \4\ The shippers are: The American Chemistry Council, Corn 
Refiners Association, American Fuel & Petrochemical Manufacturers, 
The National Industrial Transportation League, The Chlorine 
Institute, and The Fertilizer Institute (collectively, Joint 
Shippers).
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    CSXT urges the Board to grant the petition because doing so ``would 
provide a more accurate picture of railroad financial performance.'' 
(CSXT Reply 2.) CSXT also urges the Board to consider the use of 
replacement costs when determining long-term revenue adequacy and 
argues that the Board should abandon the revenue adequacy constraint in 
determining whether individual rates are reasonable. (Id. at 3-8.)
    WCTL argues that the petition misrepresents the role of revenue 
adequacy and is an attempt by the Joint Carriers to avoid being found 
revenue adequate and thus potentially subject to the revenue adequacy 
rate constraint. (WCTL Reply 4-5.) Regarding the Comparison Proposal, 
WCTL asserts that many S&P 500 firms have different capital structures 
than railroads and hundreds are not capital intensive. (Id. at 12.) 
WCTL also argues that the Comparison Proposal would result in revenue 
adequacy determinations at odds with the investment community's 
perception of railroads' financial health. (Id. at 13 (citing Joint 
Opening Comments of WCTL 11-12, Sept. 5, 2014, R.R. Revenue Adequacy, 
EP 722).) Regarding the Deferred Taxes Proposal, WCTL argues that the 
flow-through approach ignores tax deferrals and the fact that railroads 
pay taxes below the corporate rate. (Id. at 14-16.) WCTL also questions 
the relevance and accuracy of the Joint Carriers' examples of the 
utility and flow-through methods. (Id. at 17.)
    The Joint Shippers argue that the Comparison Proposal would 
``render all Class I railroads revenue-inadequate and likely maintain 
that status for decades to come.'' (Joint Shippers Reply 4.) They 
contend that the current annual revenue-adequacy determination already 
sets a conservatively high bar, (id. at 4-8), and assert that the Joint 
Carriers' rationales for the Comparison Proposal do not actually 
support the proposal, (id. at 11-12 (stating that the Joint Carriers' 
arguments ``assume a role for revenue adequacy as a measure of market 
power, competitive failure and monopoly profits that Congress never 
intended'')).
    On October 13, 2020, the Joint Carriers filed a motion for leave to 
respond to the reply comments, along with a response addressing WCTL's 
and the Joint Shippers' arguments against both proposals.\5\
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    \5\ Under 49 CFR 1104.13(c), a reply to a reply is not 
permitted. However, in the interest of a more complete record, the 
Board will grant the Joint Carriers' motion and accept their reply 
into the record. See City of Alexandria--Pet. for Declaratory Order, 
FD 35157, slip op. at 2 (STB served Nov. 6, 2008) (allowing a reply 
to a reply ``[i]n the interest of compiling a full record'').
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    The Board will open a rulemaking proceeding to further consider the 
Joint Carriers' petition and the issues that it raises.\6\ The Board 
invites comment on the issues raised in the petition generally as well 
as on the following specific questions:
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    \6\ The Board has also received testimony and comments in two 
informational dockets related to revenue adequacy. See Hearing on 
Revenue Adequacy, Docket No. EP 761; R.R. Revenue Adequacy, Docket 
No. EP 722.
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General Considerations

    1. With specificity, in what ways do each of the Joint Carriers' 
proposals advance or fail to advance each of the components of 49 
U.S.C. 10704(a)(2)? \7\
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    \7\ Under 49 U.S.C. 10704(a)(2), the Board shall maintain and 
revise as necessary standards and procedures for establishing 
revenue levels for rail carriers providing transportation subject to 
its jurisdiction under this part that are adequate, under honest, 
economical, and efficient management, for the infrastructure and 
investment needed to meet the present and future demand for rail 
services and 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. The Board 
shall make an adequate and continuing effort to assist those 
carriers in attaining revenue levels prescribed under this 
paragraph. Revenue levels established under this paragraph should: 
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 attract and retain capital in amounts 
adequate to provide a sound transportation system in the United 
States.
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    2. Are there other ways in which the Board's current procedures 
could be modified to further advance the statutory goals of 
10704(a)(2)?

The Comparison Proposal

    1. As noted above, the Joint Carriers propose that Class I carriers 
be considered revenue adequate only if their ROI exceeds their cost of 
capital by more than the median S&P 500 firm's ROI exceed its cost of 
capital. Why is the median S&P 500 firm's differential an appropriate 
benchmark and not, for example, the 25th, 33rd, or 75th percentile? 
Does the Joint Carriers' proposal assume that below-median S&P 500 
firms do not earn adequate revenues, and, if so, why is that assumption 
appropriate (or inappropriate)?
    2. WCTL and the Joint Shippers criticize the proposal to use the 
S&P 500 as a comparison group. (See WCTL Reply 12; Joint Shippers Reply 
9-10.) The Joint Carriers express openness to using a different 
comparison group and note that similar results are reached if railroads 
are compared to the S&P 500 Industrials sector group or a group of S&P 
500 railroad customers. (See Joint Carriers Response 11-12.) Would any 
of these alternative comparison groups be an appropriate benchmark? Are 
there other comparison groups that might be appropriate? Is it 
appropriate to compare regulated entities like railroads with a group 
that includes a significant number of non-regulated entities, and--if 
not--is there a set of regulated companies that could be used as a 
comparison group?
    3. A company is typically removed from the S&P 500 index if its 
market capitalization falls below a certain threshold. Does the 
changing constituency of the index pose a problem with respect to the 
Joint Carriers' proposed methodology?

The Deferred Taxes Proposal

    In Standards for Railroad Revenue Adequacy, 3 I.C.C.2d 261 (1986), 
the Board's predecessor, the Interstate Commerce Commission (ICC), 
based its decision to adopt the utility method on several grounds, 
including analogizing

[[Page 86878]]

captive rail shippers to utility customers, favoring an approach that 
conforms to Generally Accepted Accounting Principles (GAAP), and 
determining that removing the effect of deferred taxes led to a more 
accurate representation of railroad profitability. See id. at 272-75; 
Consol. Rail Corp. v. United States, 855 F.2d 78, 93 (3rd Cir. 1988) 
(affirming the ICC's decision and finding that the ``adjustment of its 
formula in the interests of accuracy is rational''). Does the ICC's 
reasoning for adopting the utility method remain valid, specifically 
with respect to analogizing captive shippers to utility customers, 
determining whether the utility method continues to conform with GAAP 
today, and finding that the utility method led to a more accurate 
representation of railroad profitability?
    Additionally, the Joint Carriers will be requested to file 
workpapers sufficient to replicate the analysis underlying their 
proposals and to make those workpapers available, upon request, to 
other participants in this proceeding, under an appropriate protective 
order.
    Interested persons may file comments by March 1, 2021. If any 
comments are filed, replies will be due by March 31, 2021.
    It is ordered:
    1. A rulemaking proceeding is initiated, as discussed above.
    2. Comments are due March 1, 2021; replies are due March 31, 2021.
    3. The Joint Carriers are requested to file workpapers sufficient 
to replicate the analysis underlying their proposals and to make those 
workpapers available, upon request, to other participants in this 
proceeding, under an appropriate protective order.
    4. Notice of this decision will be published in the Federal 
Register.
    5. This decision is effective on its service date.

    Decided Date: December 22, 2020.

    By the Board, Board Members Begeman, Fuchs, and Oberman.
Andrea Pope-Matheson,
Clearance Clerk.
[FR Doc. 2020-28864 Filed 12-30-20; 8:45 am]
BILLING CODE 4915-01-P