If the Surface Transportation Board carries out changes it proposed in how it regulates freight rail ratemaking, the railroads say they will seek to overturn them in court.
“The STB’s Final Offer Rate Review proposed rule is fatally flawed and exceeds the agency’s authority in determining rate reasonableness,” declared Ian Jefferies, president the Association of American Railroads, which represents the Class 1 rail lines.
“There is no rational way to connect overall firm- wide earnings with a determination of whether a single rate for a single customer is reasonable. Railroads are not public utilities and should not be regulated as such,” he added. “Freight railroads support a continuation of existing balanced regulatory policies.”
Jefferies reiterated his position during STB hearings held Dec. 12-13 in Washington, DC, where the board heard from railroads and their customers. For the last several years customers have complained damage to their businesses caused by rail practices imposed since widespread adoption of the Precision Scheduled Railroad (PSR) business model.
The hearings dealt with two proposed rulemakings opened by the board last year, suggesting changes designed to make easier and quicker how the STB handles shipper challenges to rail rate increases (AA, 10-31-19, P. 1).
Shippers have long complained that the cumbersome procedures offer them little or no real recourse to unreasonable rail rates. Among the absurdities they have pointed to for decades have been the annual findings of immensely profitable railroads not to be “revenue adequate” under the board’s present formula.
The STB proposals arose from its Rate Reform Task Force, whose 2019 staff report recommended changes that include a proposed redefinition of revenue adequacy.
“Many shippers find railroads largely uninterested in their business,” the STB report found. “Many shippers feel that they have little bargaining power with respect to the contracts they are offered.”
STB staff also noted that some believe they have less recourse available to them today than did shippers in the 19th Century, when the board’s predecessor agency, the Interstate Commerce Commission, was created by Congress to regulate discriminatory rail rate practices.
In its proposals, the board suggests changing the current standard for revenue adequacy. This is the method by which it figures a railroad’s cost of capital through utilizing a weighted average of the cost of debt and the cost of equity. The board observed that while the cost of debt is easy to assess, the cost of equity can only be estimated.
The STB currently relies on two methods for figuring cost of equity, and is proposing to add a third, which would incorporate the other two into a new model. to come up with a weighted average. The board said in its proposal this would help it deal better with rapid changes in the cost of equity, such as those stemming from the adoption of PSR.
Shippers are generally in favor of the STB’s proposed reforms, although some would like to see a number of changes, ranging from adopting a wholly different methodology to making relatively minor tweaks here and there.
The American Chemistry Council told the STB it should change its Stand Alone Cost method, which is used in rate cases involving captive shippers. It said recent cases using the SAC standard have taken an average of five years to complete and cost each shipper involved well over $5 million – and in some cases they can take longer and cost more.
To fix this problem, ACC and other rail shippers represented by the Rail Customer Coalition are urging the board to adopt a market-based solution called the Competitive Rate Benchmark Method, which compares a company against a number of competitors (or, because of their regional monopolies, railroad they don’t directly compete with) using a set collection of metrics.
In 2015, a report from the National Research Council’s Transportation Research Board recommended using this form of rate benchmarking to address the problem of dramatically rising freight rail rates, ACC pointed out.
“The Benchmark Method uses real world data to predict the rate that would be expected in a competitive market,” explained Dr. Kevin Caves, an economist testifying on behalf of ACC. “This allows the STB to transparently evaluate how much captive rates should be allowed to exceed competitive rates, taking into account criteria such as railroads’ financial performance.” Shelley Sahling-Zart, vice president and general counsel of Lincoln Electric System and president of the Freight Rail Customer Alliance, told the board, “I can attest from personal experience that even where SAC is utilized, it is slow and expensive. For most shippers, SAC and the existing alternatives do not work at all.”
<h2>Court Blocks CA Truck Driver Ban</h2>
A California state court struck down blocked a new law banning truck drivers from operating independent contractors.
The judge held that AB 5 is preempted by the Federal Aviation Administration Authorization Act. The case involved a driver who had sued trucking company NFI Industries two years ago, based on the California Supreme Court decision later codified by AB 5 when it was passed last year. The driver’s attorneys stated that they will appeal the decision.
In another case, a federal district court judge issued a temporary restraining order on Dec. 31, blocking AB 5, slated to go into effect Jan. 1, reclassifying about 70,000 truck owner-operators as employees. The TRO stands until he decides on granting a preliminary injunction.
The lawsuit was brought by the California Trucking Association. Bringing similar legal challenges are the Western States Trucking Association and American Trucking Associations.
Passed by the California legislature last year, AB 5 imposes a three-part ABC test for determining whether a worker is an employee or a contractor (AA, 9-30-19, P. 1). It says no workers can be classified as independent contractors if their work is in the same line of business as their employer.
“The parties now have some breathing room to fully litigate the issues without the ABC test being applied to truck drivers, and a final resolution will work itself out in the court system over the coming weeks and months,” notes attorney Richard R. Meneghello of the law firm of Fisher Phillips.
Ride share services Uber and Lyft, have joined the DoorDash in suing and mounting a campaign to get their drivers exempted through a public referendum.
Anther lawsuit has been filed by freelance writers and photographers and other independent artists who believe that AB-5 unfairly punishes them by putting arbitrary limits on the amount of work they can do for a single client. One magazine has fired all of its writers who are located in California rather than have to deal with the issue.