[Federal Register Volume 86, Number 63 (Monday, April 5, 2021)]
[Rules and Regulations]
[Pages 17548-17551]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-06963]


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SURFACE TRANSPORTATION BOARD

49 CFR Part 1201

[Docket No. EP 763]


Montana Rail Link, Inc.--Petition for Rulemaking--Classification 
of Carriers

AGENCY: Surface Transportation Board.

ACTION: Final rule.

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SUMMARY: The Surface Transportation Board (STB or Board) is adopting a 
final rule amending the thresholds for classifying rail carriers.

DATES: The rule is effective June 4, 2021.

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: Under 49 CFR part 1201, General Instructions 
section 1-1(a), rail carriers are grouped into one of three classes for 
purposes of accounting and reporting.\1\ The Board's classification of 
rail carriers affects the degree to which they must file annual, 
quarterly, and other operational reports, see, e.g., 49 CFR pt. 1243 
and also is used in a variety of other contexts, including 
differentiating the legal standards and procedures that apply to 
certain transactions subject to Board licensing, see, e.g., 49 U.S.C. 
10902, 11324, 11325, and prescribing labor protection conditions, see, 
e.g., 49 U.S.C. 10903(b)(2), 11326, among others.
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    \1\ The agency ``has broad discretion to require rail carriers 
to report financial and operating data, and to prescribe an 
underlying accounting system to produce that information.'' Mont. 
Rail Link, Inc. & Wis. Cent. Ltd., Joint Pet. for Rulemaking with 
Respect to 49 CFR part 1201 (1992 Rulemaking), 8 I.C.C.2d 625, 631 
(1992); see also 49 U.S.C. 11144, 11145, 11161-64.
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    The class to which any rail carrier belongs is determined by its 
annual operating revenues after application of a revenue deflator 
adjustment. 49 CFR pt. 1201, section 1-1(b)(1). Currently, Class I 
carriers have annual operating revenues of $504,803,294 or more, Class 
II carriers have annual operating revenues of less than $504,803,294 
and more than $40,384,263, and Class III carriers have annual operating 
revenues of $40,384,263 or less, all when adjusted for inflation. 
Section 1-1(a) (setting thresholds unadjusted for inflation); Indexing 
the Annual Operating Revenues of R.Rs., EP 748 (STB served June 10, 
2020) (calculating revenue deflator factor and publishing thresholds 
adjusted for inflation based on 2019 data).\2\ The revenue 
classification levels for railroads set forth at 49 CFR part 1201, 
General Instructions section 1-1(a) were adopted in 1992 by the Board's 
predecessor, the Interstate Commerce Commission, in the 1992 
Rulemaking.
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    \2\ Instruction section 1-1(a) currently defines Class I 
carriers as those with annual operating revenues (in Year 1991 
dollars) of $250 million or more. To prevent this threshold from 
being influenced by the effects of inflation, each year the STB 
calculates a ``deflator'' factor that converts the value of today's 
dollar into its equivalent 1991 value. This deflator factor is then 
applied to a carrier's current revenues and the result is compared 
to the $250 million threshold. The railroad revenue deflator 
formula, which is based on the Railroad Freight Price Index 
developed by the Bureau of Labor Statistics, is as follows: Current 
Year's Revenues x (1991 Average Index/Current Year's Average Index). 
49 CFR pt. 1201, section 1-1 Note A. The Board publishes annually an 
updated deflator factor. In addition, the Board applies the 
reciprocal of the deflator factor to identify where the $250 million 
threshold lies expressed in current dollars. The current Class I 
revenue threshold, as noted above, corresponds to $504,803,294 in 
2019 dollars. The Class II/Class III threshold, which is listed in 
Instruction section 1-1(a) as $20 million, corresponds to 
$40,384,263 in 2019 dollars.
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Background

    On February 14, 2020, Montana Rail Link, Inc. (MRL), filed a 
petition for rulemaking to amend the Board's rail carrier 
classification regulations. In its petition, MRL requested that the 
Board increase the revenue threshold for Class I carriers to $900 
million. (Pet. 1.) MRL contended that it continues to be a regional 
carrier operationally and economically but may exceed the Class I 
revenue threshold within two years. (Id.) Citing principles drawn from 
the 1992 Rulemaking, in which the revenue thresholds were last raised, 
MRL asked that the Board address ``whether a regional carrier such as 
MRL should be treated as a Class I carrier, taking into account (1) the 
financial and operational differences between MRL and existing Class I 
carriers, and (2) the cost-benefit analysis of imposing Class I 
requirements on MRL.'' (Id. at 12.)
    MRL submitted eight letters in support of its petition.\3\ No 
replies to MRL's petition were received.
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    \3\ Letters of support were from the Montana Contractors' 
Association, Montana Agricultural Business Association, Montana 
Grain Elevator Association, Montana Petroleum Association, Inc., 
Montana Taxpayers Association, Montana Chamber of Commerce, Treasure 
State Resources Association, and Montana Wood Products Association.
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    On May 14, 2020, the Board initiated a rulemaking proceeding to 
consider MRL's petition and consider issues related to the Class I 
carrier revenue threshold determination. The Board invited ``comment 
about whether it should amend 49 CFR part 1201, General Instructions 
section 1-1(a), to increase the revenue threshold for Class I carriers, 
and, if so, whether $900 million or another amount would be 
appropriate.'' Mont. Rail Link, Inc.--Pet. for Rulemaking--
Classification of Carriers, EP 763, slip op. at 2 (STB served May 14, 
2020).
    The Board received two comments in response to its May 14, 2020 
decision. On June 15, 2020, the American Short Line and Regional 
Railroad Association (ASLRRA) filed in support of MRL's petition, 
arguing, among other things, that Class II carriers such as MRL are 
distinctly different from Class I carriers and should continue to be 
classified in their current category. (ASLRRA Comment 2-4, June 15, 
2020.) ASLRRA stated that there is a ``massive'' revenue gap between 
the largest Class II and the smallest Class I carrier, (id. at 3), and 
that the accounting, financial, and other burdens imposed on a Class II 
carrier by becoming a Class I carrier would outweigh any resulting 
benefits, (id. at 2-4). Also on June 15, 2020, the Transportation 
Trades Department, AFL-CIO (TTD), a coalition of 33

[[Page 17549]]

affiliate unions, filed in opposition to MRL's petition. Among other 
things, TTD raised concerns about the impact on MRL employees with 
respect to labor protective conditions if the Class I threshold were 
raised and argued that MRL had not shown that raising the threshold is 
appropriate or necessary. (TTD Comment 1-2, June 15, 2020.) MRL filed a 
reply on July 2, 2020, reiterating that its operating and financial 
profiles are distinct from those of the current Class I carriers 
(noting, for example, that in 2018 it operated only about 720 miles of 
mainline track, nearly all of which is in one state, whereas the 
smallest current Class I carrier operated 3,397 miles of track across 
10 states and two countries) and that significant burdens would be 
imposed on MRL if the threshold is not increased, while limited, if 
any, benefits would accrue to the public. (MRL Reply 2, 5, July 2, 
2020.)
    On September 30, 2020, the Board issued a Notice of Proposed 
Rulemaking to amend its rail carrier classification regulations. The 
proposed amendments would raise the Class I revenue threshold from 
$504,803,294 (as adjusted for inflation) to $900 million and have the 
effect of excluding MRL and other similarly situated carriers from 
Class I status unless they have met the proposed revenue threshold for 
three years. Mont. Rail Link, Inc.--Pet. for Rulemaking--Classification 
of Carriers (NPRM), EP 763 (STB served Sept. 30, 2020). The Board 
sought comment on the proposed amendments.

Comments on the NPRM

    In response to the NPRM, the Board received comments from ASLRRA on 
October 29, 2020, and from TTD and the National Grain and Feed 
Association (NGFA) on November 2, 2020. On December 1, 2020, MRL 
submitted its reply.
    ASLRRA fully supports the Board's proposed amendments and 
references and reiterates the arguments it made in support of MRL's 
proposal in its June 15, 2020 comment. (ASLRRA Comment 2, Oct. 29, 
2020.) According to ASLRRA, the Board's proposal recognizes that Class 
II carriers, such as MRL, are operationally and financially different 
from Class I carriers and would enable regional railroads to continue 
to serve their customers efficiently. (Id.) ASLRRA further notes that 
the Board's proposal would not deprive regional carriers of the benefit 
of the Short Line Rehabilitation Tax Credit, which has provided MRL 
almost $3 million per year in additional funds to invest in 
infrastructure, and the Railroad Industry Agreement, which provides a 
mechanism for short lines to work together to increase rail traffic. 
(Id.; ASLRRA Comment 4, June 15, 2020.)
    TTD opposes the Board's proposed amendments. (TTD Comment 1, Nov. 
2, 2020.) TTD also reiterates its concern that the proposed amendments 
would deny employees certain protective conditions that would have 
otherwise applied. (Id. at 2.) TTD argues that its position in its June 
15, 2020 comment was not that status quo conditions would worsen for 
employees, but rather that maintaining MRL's Class II status would deny 
employees coverage that they would otherwise be entitled to if MRL 
became a Class I carrier. (Id. at 2.) TTD states that the Board should 
give greater consideration to how the proposed amendments may impact 
the application of employee protective conditions. (Id.) TTD also 
states that it believes that MRL and the Board have failed to document 
the undue burden that Class I status would place on MRL, or a similar 
carrier. (Id.) TTD argues that MRL has provided no information that 
suggests that the costs of becoming a Class I carrier would be overly 
burdensome. (Id.) TTD requests that the Board either withdraw its NPRM 
or, in the alternative, alleviate only reporting/accounting burdens on 
MRL, instead of ``permitting the evasion of protective conditions.'' 
(Id. at 3.)
    NGFA does not oppose the proposed amendments but argues that the 
Board needs to guard against exempting Class II carriers from 
regulatory oversight and standards as it increases the revenue 
thresholds. (NGFA Comment 2-5.) NGFA states that it does not oppose 
increasing the Class I revenue threshold to $900 million for freight 
carriers and acknowledges that MRL's petition is supported by its 
Montana affiliate, the Montana Grain Elevator Association. (Id. at 2.) 
NGFA also states that denoting MRL as a Class I carrier would make it 
ineligible for assistance such as the short line rehabilitation tax 
credits; the Federal Railroad Administration's Railroad Rehabilitation 
and Infrastructure Express Program, which provides funds to Class II 
and III carriers to repair tracks; and the Railroad Industry Agreement, 
which outlines ways Class I and short line carriers are allowed to 
collaborate to resolve issues concerning car supply, service quality, 
routing, and interchange requirements. (Id. at 2-3.)
    Nonetheless, NGFA argues that MRL is a significant regional carrier 
that has a virtual monopoly on all rail traffic in the state of Montana 
and that MRL often exercises that market power with its customers in a 
manner not dissimilar from Class I carriers. (Id. at 3-4.) NGFA 
contends that regulatory oversight should apply to Class II carriers. 
(Id. at 3-5.) For example, NGFA argues that (1) simplified standards 
being considered by the Board for rail customers to challenge 
unreasonable rail rates, such as Final Offer Rate Review,\4\ should 
apply to Class II carriers; (2) the Board should examine whether to 
require larger Class II carriers like MRL to submit data sufficient to 
enable rail customers to analyze whether to bring a rate challenge 
under the STB's Three-Benchmark methodology; and (3) the Board should 
consider applying to at least Class II carriers any new rules related 
to reciprocal switching.\5\ (Id. at 4-5.)
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    \4\ The Board, in September 2019, proposed a new rate 
reasonableness review process that features certain attributes of a 
final offer selection process. See Final Offer Rate Review, EP 755 
(STB served Sept. 12, 2019).
    \5\ The Board, in July 2016, proposed to modify its regulations 
governing competitive rail access, including reciprocal switching. 
See Pet. for Rulemaking to Adopt Revised Competitive Switching Rules 
(Reciprocal Switching), EP 711 (Sub-No. 1) (STB served July 27, 
2016).
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    In reply, MRL reasserts that it continues to function as a Class II 
carrier, not a Class I carrier, and requests that the Board adopt the 
amendments put forth in the NPRM. (MRL Reply 4, Dec. 1, 2020.) In 
response to TTD's argument that increasing the Class I threshold will 
deprive MRL employees of enhanced labor protections, MRL argues that 
the current level of labor protection is fair and appropriate because 
its operating and financial characteristics continue to be that of a 
Class II carrier, even with rising revenues. (Id. at 1-2 (citing Pet. 7 
n.4).) MRL also argues that TTD gives no rationale to support why MRL 
should be excused only from the Class I accounting and reporting 
requirements and not the Class I labor protection requirements. (MRL 
Reply 2, Dec. 1, 2020.) MRL reiterates that the Class I accounting and 
reporting requirements would impose a significant burden on MRL, 
without any significant offsetting public benefit. (Id.) As to NGFA's 
comments about MRL having a monopoly on traffic in Montana, MRL argues 
it does not generally have ratemaking authority for its freight 
movements because BNSF Railway Company, its sole interchange partner, 
sets the freight transportation rates for approximately 96% of MRL's 
traffic, excluding switching. (Id. at 3.) MRL asserts that NGFA's 
argument that the Board's regulatory oversight should apply to Class II 
carriers is beyond the scope of this rulemaking. (Id.)

[[Page 17550]]

Final Rule

    After considering the record, the Board agrees that MRL and any 
other Class II carriers that may be approaching the current revenue 
threshold are properly classified as regional carriers rather than as 
Class I carriers. The operational characteristics of regional carriers, 
like MRL, significantly differentiate them from Class I carriers. See 
NPRM, EP 763, slip op. at 4. The record establishes that even the 
largest Class II carriers, such as MRL, have much smaller rail networks 
and service territories than Class I carriers, have local or regional 
service territories, and lower traffic densities, (MRL Reply 3, Dec. 1, 
2020; MRL Reply 2, July 2, 2020; ASLRRA Comment 2, June 15, 2020); are 
heavily dependent in many critical ways on their Class I interchange 
partners, (ASLRRA Comment 2, June 15, 2020); and have more limited and 
less diverse traffic bases than Class I carriers, (MRL Reply 2, July 2, 
2020; ASLRRA Comment 3, June 15, 2020). Similarly, even the largest 
Class II carriers generate far less revenue than the smallest Class I. 
(MRL Reply 1, July 2, 2020; ASLRRA Comment 3, June 15, 2020.)
    Based on this record, including the comments and reply received in 
response to the NPRM, regional carriers, such as MRL, do not possess 
the comparative attributes of Class I carriers. Considering the 
operating and financial characteristics of these carriers, it is 
appropriate to continue to classify these railroads as Class II 
carriers, rather than classifying them as Class I carriers and imposing 
on them the burdens associated with a Class I classification. Doing so 
maintains an appropriate balance between ensuring the availability of 
accurate cost information and avoiding imposing additional regulatory 
requirements on railroads when expanded regulation is not necessary; 
this also furthers the rail transportation policy. See 49 U.S.C. 
10101(2), (13). Additionally, the Board determines that $900 million is 
a reasonable demarcation between Class I railroads and Class II 
railroads because it is sufficiently above the current Class II annual 
revenue level and below the revenue level of the smallest Class I 
carrier, maintaining an appropriate division between the two classes of 
carriers for the foreseeable future. See NPRM, EP 763, slip op. at 5-6. 
No commenter raised specific concerns with the Board's proposed $900 
million figure.
    TTD's argument that the Board should not change the revenue 
threshold due to the impact on labor protections remains unpersuasive. 
(See TTD Comment 2, Nov. 2, 2020.) MRL's employees have long been 
subject to the labor protections applicable to Class II carriers, and 
that will not change as a result of this rulemaking. With respect to 
TTD's argument that MRL employees will be denied the additional labor 
protections that would be available to them if MRL were classified as a 
Class I carrier, the Board finds that because MRL is more appropriately 
classified as a Class II carrier based on its operational and financial 
characteristics, it is also appropriate for MRL to continue to provide 
the labor protections of a Class II carrier. Nothing in the record, 
including TTD's comments, indicates that MRL's employees are being 
inadequately protected today. Moreover, there is nothing that indicates 
that MRL's operational or financial characteristics have changed 
significantly as it approached the current revenue threshold.
    The Board also disagrees with TTD's assertion that there is no 
record evidence of the undue burden that Class I status would place on 
MRL or similarly situated carriers. There is no question that Class I 
railroads face much more substantial financial reporting and accounting 
requirements under the Board's regulations than Class II or III 
railroads do. NPRM, EP 763, slip op. at 5. Among other requirements, 
Class I carriers must submit annual R-1 reports, see 49 CFR 1241.11, 
quarterly operating reports, see 49 CFR pt. 1243, and service 
performance data, see 49 CFR pt. 1250. Each of these reports, while 
important to the Board's regulation with regard to larger carriers, has 
an associated compliance burden. MRL's petition discussed the increased 
burden it would face complying with just a subset of the Class I 
reports.\6\ (Pet. 8-9; see also ASLRRA Comment 2-4, June 15, 2020.) The 
NPRM also recognized that the regulatory compliance burden of a Class I 
designation by the Board extends beyond the Board's regulations, see 
NPRM, EP 763, slip op. at 5, and MRL's reply provided several examples 
of these regulatory impacts, including in programs administered by the 
Federal Railroad Administration, (MRL Reply 2-3). Moreover, as the NPRM 
indicated, the Board is concerned not just with the absolute burden, 
but also with the relative lack of benefits associated with such 
reporting by carriers with MRL's characteristics. NPRM, EP 763, slip 
op. at 5.\7\
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    \6\ In its petition, MRL estimated it would have to expend at 
least $150,000 annually to prepare the required reports, in addition 
to the costs associated with converting its accounting system, 
training employees, and maintaining and recording the reports. (Pet. 
9.)
    \7\ TTD does not argue that there would be potential benefits to 
classifying carriers like MRL as Class Is (other than TTD's labor-
related arguments addressed above). Nor has TTD made the case for 
its hybrid approach that would treat MRL and similar carriers as 
Class II railroads for accounting purposes but as Class I railroads 
for other purposes. As the decision indicates, there are material 
differences between larger Class II railroads and Class I railroads. 
TTD has not demonstrated that particular regulatory issues exist 
that would warrant ignoring these material differences.
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    While NGFA does not oppose the proposed amendments, NGFA does 
express concern that MRL operates as a monopoly, and NGFA maintains 
that regulatory oversight should apply to Class II carriers. (NGFA 
Comment 3-5.) As a Class II carrier, MRL will continue to be subject to 
Board regulation and the applicable provisions of the Interstate 
Commerce Act, including those governing rate reasonableness and 
reasonable practices. NGFA's argument that specific proposed 
regulations, such as those related to particular rate case processes 
and reciprocal switching procedures, should apply to Class II carriers 
is beyond the scope of this proceeding.\8\
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    \8\ The Board notes that NGFA has raised similar concerns in 
other dockets, which are currently under consideration. See, e.g., 
NGFA Comment 10, Nov. 12, 2019, Final Offer Rate Review, EP 755; 
NGFA Comment 4-5, Oct. 26, 2016, Reciprocal Switching, EP 711 (Sub-
No. 1); NGFA Reply 20, Jan. 13, 2017, Reciprocal Switching, EP 711 
(Sub-No. 1).
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    For the foregoing reasons, the Board will adopt as a final rule the 
amendments to its rail carrier classification regulations as proposed 
in the NPRM, without modification. The final rule set forth below will 
raise the Class I revenue threshold to $900 million and round the 
current Class II/Class III threshold to $40.4 million. The final rule 
also will amend Note A to replace the 1991 Average Index with the 2019 
Average Index, as the new threshold levels will be calculated in 2019 
dollars.

Regulatory Flexibility Act

    The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601-612, 
generally requires a description and analysis of new rules that would 
have a significant economic impact on a substantial number of small 
entities. In drafting a rule, an agency is required to: (1) Assess the 
effect that its regulation will have on small entities; (2) analyze 
effective alternatives that may minimize a regulation's impact; and (3) 
make the analysis available for public comment. Sections 601-604. In 
its final rule, the agency must either include a final regulatory 
flexibility analysis, section 604(a), or certify that the proposed rule

[[Page 17551]]

would not have a ``significant impact on a substantial number of small 
entities,'' section 605(b).
    Because the goal of the RFA is to reduce the cost to small entities 
of complying with federal regulations, the RFA requires an agency to 
perform a regulatory flexibility analysis of impacts on small entities 
only when a rule directly regulates those entities. In other words, the 
impact must be a direct impact on small entities ``whose conduct is 
circumscribed or mandated'' by the proposed rule. White Eagle Coop. v. 
Conner, 553 F.3d 467, 480 (7th Cir. 2009).
    The amendments to the Board's regulations adopted here are intended 
to update the Board's class classifications and do not mandate or 
circumscribe the conduct of small entities. For the purpose of RFA 
analysis for rail carriers subject to the Board's jurisdiction, the 
Board defines a ``small business'' as only including those rail 
carriers classified as Class III rail carriers under 49 CFR part 1201, 
General Instructions section 1-1. See Small Entity Size Standards Under 
the Regulatory Flexibility Act, EP 719 (STB served June 30, 2016) (with 
the Board Member Begeman dissenting). Here, no substantive changes are 
being made to the Class III threshold, as the Board is only updating 
the regulations to reflect the current Class III threshold in 2019 
dollars (rounded) as opposed to 1991 dollars. Therefore, the Board 
certifies under 5 U.S.C. 605(b) that these proposed rules, if 
promulgated, would not have a significant economic impact on a 
substantial number of small entities within the meaning of RFA.

Paperwork Reduction Act

    The Board's proposal does not contain a new or amended information 
collection requirement subject to the Paperwork Reduction Act of 1995, 
44 U.S.C. 3501-3521.

Congressional Review Act

    Pursuant to the Congressional Review Act, 5 U.S.C. 801-808, the 
Office of Information and Regulatory Affairs has designated this rule 
as a non-major rule, as defined by 5 U.S.C. 804(2).

List of Subjects in 49 CFR Part 1201

    Railroads, Uniform System of Accounts.

    It is ordered:
    1. The Board adopts the final rule set forth in this decision. 
Notice of the final rule will be published in the Federal Register.
    2. A copy of this decision will be served upon the Chief Counsel 
for Advocacy, Office of Advocacy, U.S. Small Business Administration.
    3. This decision is effective on June 4, 2021.

    Decided: March 30, 2021.

    By the Board, Board Members Begeman, Fuchs, Oberman, Primus, and 
Schultz.
Brendetta Jones,
Clearance Clerk.

    For the reasons set forth in the preamble, the Surface 
Transportation Board amends title 49, chapter X, part 1201 of the Code 
of Federal Regulations as follows:

PART 1201--RAILROAD COMPANIES

0
1. The authority citation for part 1201 continues to read as follows:

    Authority:  49 U.S.C. 11142 and 11164.


0
2. In subpart A, amend the General Instructions, by revising Sec.  1-
1(a) and Note A to Sec.  1-1 to read as follows:

Subpart A--Uniform System of Accounts

* * * * *

General Instructions

    1-1 Classification of carriers. (a) For purposes of accounting and 
reporting, carriers are grouped into the following three classes:
    Class I: Carriers having annual carrier operating revenues of $900 
million or more after applying the railroad revenue deflator formula 
shown in Note A.
    Class II: Carriers having annual carrier operating revenues of less 
than $900 million but in excess of $40.4 million after applying the 
railroad revenue deflator formula shown in Note A.
    Class III: Carriers having annual carrier operating revenues of 
$40.4 million or less after applying the railroad revenue deflator 
formula shown in Note A.
* * * * *

    Note A: The railroad revenue deflator formula is based on the 
Railroad Freight Price Index developed by the Bureau of Labor 
Statistics. The formula is as follows: Current Year's Revenues x 
(2019 Average Index/Current Year's Average Index).

* * * * *

[FR Doc. 2021-06963 Filed 4-2-21; 8:45 am]
BILLING CODE 4915-01-P