38326                                  SERVICE DATE – SEPTEMBER 5, 2007                                 

EB

This decision will be printed in the bound volumes of

the STB printed reports at a later date.

 

SURFACE TRANSPORTATION BOARD

 

DECISION

 

STB Ex Parte No. 646 (Sub-No. 1)

 

SIMPLIFIED STANDARDS FOR RAIL RATE CASES

 

The Board modifies its simplified rail rate guidelines, creating a simplified stand-alone cost approach for medium-size rail rate disputes and revising its three-benchmark approach for smaller rail rate disputes.  The Board also places limits on the total relief available over a 5-year period under these two simplified approaches.  

 

Decided:  September 4, 2007

 

TABLE OF CONTENTS

Existing RATE REASONABLENESS STANDARDS................................................................ 7

Regulatory Framework.......................................................................................................... 7

Constrained Market Pricing................................................................................................... 8

Simplified Guidelines Adopted in 1996................................................................................. 10

Revised simplified guidelines......................................................................................... 12

I.  Simplified-SAC Methodology..................................................................................................... 13

1.  Objective....................................................................................................................... 13

2.  Methodology.................................................................................................................. 15

II. Three-Benchmark Methodology.................................................................................................. 16

1.  Comparison Group......................................................................................................... 17

a.  Comparability Factors........................................................................................ 17

b.  Selection Process............................................................................................... 18

2.  RSAM Range................................................................................................................ 19

3.  Method To Calculate RSAM and R/VC_>180.................................................................... 19

4.  Rate Reasonableness Presumption & Other Relevant Factors.......................................... 21

III.  Procedural Matters................................................................................................................... 22

1.  Procedural Schedules..................................................................................................... 22

2.  Discovery....................................................................................................................... 24

3.  Jurisdictional Inquiry....................................................................................................... 26

IV. Eligibility Criteria....................................................................................................................... 26

1.  Relief Limits................................................................................................................... 27

2.  Carrier Objections.......................................................................................................... 29

3.  Litigation Cost Estimates................................................................................................. 30

4.  Risk Factor.................................................................................................................... 32

5.  Aggregation of Claims.................................................................................................... 32

6.  Carrier Manipulation of Dispute...................................................................................... 33

Regulatory Flexibility Act............................................................................................ 33

CONCLUSION............................................................................................................................. 34

Appendix A – Road Property investment.................................................................. 38

1.  Land.............................................................................................................................. 39

2.  Roadbed Preparation..................................................................................................... 39

3.  Track............................................................................................................................. 41

4.  Tunnels.......................................................................................................................... 42

5.  Bridges and Culverts...................................................................................................... 42

6.  Signals and Communication............................................................................................ 45

7.  Buildings and Facilities.................................................................................................... 46

8.  Public Improvements...................................................................................................... 47

9.  Mobilization, Engineering, and Contingencies................................................................... 48

Appendix B – Total SARR Operating Expenses......................................................... 49

I.  Background................................................................................................................................ 49

II.  Operating Expenses in Simplified-SAC Case.............................................................................. 49

Appendix C – Public Comments & Board ResponSeS............................................. 52

I.  Simplified-SAC Approach.......................................................................................................... 52

1.  Congressional Intent....................................................................................................... 52

a.  Three-Tiered Approach...................................................................................... 52

b.  Use of a SAC-Based Method............................................................................ 52

c.  Simplified and Expedited..................................................................................... 53

2.  Testing........................................................................................................................... 54

3.  Necessary Requirements for Simplification...................................................................... 55

a.  Use of Existing Infrastructure............................................................................... 55

b.  Use of Existing Route......................................................................................... 56

c.  Use of Existing Traffic Group.............................................................................. 57

4.  Use of URCS Data for Operating Expenses.................................................................... 57

a.  No Movement-Specific Adjustments................................................................... 58

b.  Limited Adjustments........................................................................................... 58

c.  Equipment Valuation........................................................................................... 60

d.  Indexing of URCS Data...................................................................................... 60

e.  URCS Variability Factor..................................................................................... 61

5.  Use of Rolling Averages for Road Property Investment................................................... 61

a.  High-Density vs. Low-Density RPI Costs............................................................ 61

b.  Eastern Costs vs. Western Costs........................................................................ 62

c.  Verification of Data............................................................................................. 63

6.  Internal Cross-Subsidy Analysis...................................................................................... 63

7.  Rate Reduction (Maximum Markup Methodology).......................................................... 64

8.  Computation of Rate Relief............................................................................................. 65

9.  Post-Prescription Follow-ups......................................................................................... 66

10.  Discovery..................................................................................................................... 66

a.  Disproportionate Burden..................................................................................... 66

b.  Other Issues....................................................................................................... 68

11.  Filing Fee..................................................................................................................... 69

12.  Procedural Schedule..................................................................................................... 70

13.  Results Compared to Full-SAC.................................................................................... 71

II.  Three-Benchmark Approach...................................................................................................... 72

1.  Union Pacific’s Objections to Three-Benchmark Approach............................................. 72

2.  Reliance on the Mean..................................................................................................... 74

3.  Other Relevant Factors................................................................................................... 76

4.  Access to Waybill Sample.............................................................................................. 78

5.  Changes to the RSAM and R/VC_>180 Benchmarks.......................................................... 80

6.  Comparison Group......................................................................................................... 82

7.  No Adjustments to URCS.............................................................................................. 84

8.  Regulatory Lag – Cost and Revenue Adjustments........................................................... 84

9.  Waybill Sample Revenue Adjustments............................................................................ 85

III.  Eligibility................................................................................................................................... 85

1.  Summary of Public Comments........................................................................................ 85

a.  NPRM Proposal................................................................................................ 85

b.  Public Comments on Original Proposal............................................................... 87

c.  Refinement of the Proposal................................................................................. 89

d.  Supplemental Comments on “Small Claims” Refinement...................................... 90

2.  Litigation Cost Estimates................................................................................................. 92

a.  Simplified-SAC.................................................................................................. 92

b.  Three-Benchmark.............................................................................................. 93

IV.  Jurisdictional Threshold............................................................................................................. 94

V.  Other Comments....................................................................................................................... 98

1.  Exempted Traffic............................................................................................................ 98

2.  Cross-Border Traffic...................................................................................................... 99

3.  Class II and Class III Carriers...................................................................................... 101

4.  The Kansas City Southern Railway Company............................................................... 102

5.  Mandatory Mediation................................................................................................... 103

 

BY THE BOARD:

 

In this rulemaking, the Board seeks to make its rail rate dispute resolution procedures more affordable and accessible to shippers of small and medium-size shipments, while simultaneously ensuring that the new guidelines do not result in arbitrary ratemaking.  In 1995, 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).[1]  In an effort to respond to this directive, the Board adopted the guidelines set forth in Rate Guidelines – Non-Coal Proceedings, 1 S.T.B. 1004 (1996) (Simplified Guidelines).  A decade has passed, however, without any shipper presenting a case that has been decided under Simplified Guidelines.[2]  The Board held public hearings in April 2003 and July 2004 to examine why those guidelines had not been used by shippers and to explore ways to improve them.[3]  The Board heard the views of rail shippers, railroads, rail labor, state governments, and other parts of the federal government.  In general, the shipper community perceives the existing guidelines as too vague, and as requiring prolonged litigation over whether a shipper even qualifies to use them. 

The Board concluded that significant changes to Simplified Guidelines were necessary to achieve the dual statutory goals of providing captive shippers meaningful access to regulatory remedies for rail rates that are unreasonable, while recognizing the need for 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.  Therefore, in 2006, the Board proposed to (1) create a simplified stand-alone cost (Simplified-SAC) procedure to use in medium-size rate disputes for which a full stand-alone cost (Full-SAC) presentation is too costly, given the value of the case; (2) retain the “Three-Benchmark” method of Simplified Guidelines, with certain modifications and refinements, for small rate disputes for which even a Simplified-SAC presentation would be too costly, given the value of the case; and (3) establish eligibility presumptions to distinguish between large, medium-size, and small rail rate disputes.[4]  Initial comments on this proposal were submitted in October 2006, reply comments in November 2006, and rebuttal comments in January 2007.  A hearing was held on January 31, 2007, and final comments were received in February 2007.   

These proposals received mixed reviews.  In general, the railroads favor the Simplified-SAC approach, urging the Board to either abandon the Three-Benchmark approach entirely or greatly modify it in a way that would complicate the approach.  In contrast, shippers favor the Three-Benchmark approach, arguing that the Board should either abandon attempts to use a simplified SAC approach or delay implementing the Simplified-SAC proposal until it is tested.  Shippers also urged the Board to dramatically increase the eligibility limits, to ensure that all captive shippers have an effective forum to pursue rate relief.  Carriers oppose any increase in the proposed eligibility limits.

We conclude that both the Simplified-SAC and Three-Benchmark approaches should be made available to shippers.  While neither approach offers as much precision and degree of confidence as a Full-SAC analysis, these alternative dispute resolution procedures address the concern that many shippers believe they cannot challenge their rail rates because the costs of litigation would exceed the amount in dispute.  Shippers’ litigation costs in recent Full-SAC cases have approached $5 million.  And while the reforms adopted in Major Issues in Rail Rate Cases, STB Ex Parte No. 657 (Sub-No. 1) (STB served Oct. 30, 2006) (Major Issues) may reduce those litigation costs, the reduction would not be large enough to make a Full-SAC case accessible to all rail shippers.  The Simplified-SAC approach provides a reasonable means of retaining the advantage of a Full-SAC presentation, in simplified form:  the ability to detect abuses of market power whereby a railroad forces a captive shipper to pay more than is necessary for the carrier involved to earn adequate revenues and thereby forces the captive shipper to cross-subsidize parts of the defendant’s rail network it does not use or benefit from.  But shippers have offered persuasive evidence that even a Simplified-SAC presentation would likely cost up to $1 million to litigate.  Captive shippers with rail rate disputes that cannot justify a Simplified-SAC presentation must have some forum for rate relief.  So, the Three-Benchmark approach is needed to fill the gap that would otherwise exist in rail rate protections.

We are persuaded, however, that the proposed eligibility approach must be modified to ensure that all captive shippers have a meaningful forum for seeking protection from unreasonable rates.  Accordingly, we will permit a captive shipper to select whether to pursue relief under a Simplified-SAC or Three-Benchmark approach, but place limits of $5 million on the relief available over a 5-year period under the Simplified-SAC method, and $1 million on the relief available over the same period under the Three-Benchmark approach.  This approach follows the small claims court model used in civil litigation, a long-accepted alternative dispute resolution process whereby procedures and discovery are expedited, but with limits placed on the relief available.  In this fashion, we will not try to assign a dispute to a particular simplified approach, which would require the Board to assess the value of the shipper’s case and analyze the potential merits of a dispute in advance of any evidence as to the reasonableness of the challenged rate.  Rather, the shipper will evaluate the value of its own case and select the methodology that it believes is best suited for the amount at stake.[5] 

Parties offered a wide variety of suggested refinements to the proposed Simplified-SAC and Three-Benchmark methods.  We have reviewed those suggestions and implement the following refinements to the original proposal:

§         Require parties to participate in a 20-day, non-binding mediation process at the outset of the case;

§         Expedite the procedural schedules to the maximum extent practical;

§         Address any request for revocation of an existing exemption before considering a related rate complaint under the simplified guidelines;

§         For the Simplified-SAC analysis:

o       require the SAC analysis to focus on the primary route during the test year for the traffic at issue;

o       exclude depreciation on equipment when calculating operating expenses;

o       change treatment of any trackage rights expenses to better reflect the particular route analyzed;

o       revise how prior Full-SAC cases will be used to simplify the road-property investment analysis;

o       remove the annual adjustment process for a rate prescription;

o       increase the filing fee to $10,600.

§         For the Three-Benchmark analysis:

o       provide access to the unmasked, confidential Waybill Sample upon the filing of a complaint, subject to the Board’s customary protective orders, but only for the traffic of the defendant carrier;

o       exclude traffic of a non-defendant carrier from the comparison group;

o       maintain the focus of the RSAM and R/VC_>180 benchmarks on potentially captive traffic, but revise the way these two benchmarks are calculated;

o       presume that the challenged rate is unreasonable if it falls outside a reasonable confidence interval around the mean of the adjusted comparison group;

o       permit either the shipper or the railroad to submit evidence of “other relevant factors” to rebut the presumption;

o       exclude from the Three-Benchmark approach challenges to local rates of a shortline or regional carrier, but permit challenges under the Simplified-SAC approach.

In the body of this decision, we describe the two simplified approaches adopted here and the limits on relief available under each.  With the exception of the modifications to our approach to eligibility, which are discussed in the body of this decision, we summarize in the appendix the public comments, our responses to them, and our reasons for the refinements to the original proposal.

Existing RATE REASONABLENESS STANDARDS

Regulatory Framework

Where a railroad has market dominance, its transportation rates for common carrier service must be reasonable.  49 U.S.C. 10701(d)(1), 10702.  Market dominance is defined as an absence of effective competition from other rail carriers or modes of transportation for the transportation to which a rate applies.  49 U.S.C. 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” of providing the service.  49 U.S.C. 10707(d)(1)(A).  Variable costs are the portion of railroad costs that have been determined to vary with the level of traffic, using the Board’s Uniform Rail Costing System (URCS).[6] 

Only the Board may determine if a common carrier rate is unreasonable.  49 U.S.C. 10501(b).  When a complaint is filed, the Board may investigate the reasonableness of the challenged rate, 49 U.S.C. 10704(b), 11701(a), or dismiss the complaint if the complaint does not state reasonable grounds for investigation and action.  49 U.S.C. 11701(b).  If, after a full hearing, the Board finds a challenged rate unreasonable, it will order the railroad to pay reparations to the complainant for past movements, 49 U.S.C. 11704(b), and may prescribe the maximum rate the carrier is permitted to charge for future movements, 49 U.S.C. 10704(a)(1).  However, the Board may not set the maximum reasonable rate below the level at which the carrier would recover 180% of its variable costs of providing the service.[7]

In examining the reasonableness of a rate, the Board is guided by the multifaceted rail transportation policy set forth at 49 U.S.C. 10101.  It must also give due consideration to the “Long-Cannon” factors contained in 49 U.S.C. 10701(d)(2)(A)-(C).[8]  And the Board must recognize that rail carriers should have an opportunity to earn “adequate revenues.”  49 U.S.C. 10701(d)(2).  Adequate revenues 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. 10704(a)(2).

In 1995, 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).  It further instructed the Board to establish procedures to ensure expeditious handling of 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).  As previously stated, Congress also 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). 

Constrained Market Pricing

The Board’s general standards for judging the reasonableness of rail freight rates, which will continue to be applied to large rail rate disputes, are set forth in Guidelines.  These guidelines adopt a set of pricing principles known as “constrained market pricing” (CMP).  The objectives of CMP can be simply stated.  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 cost of any facilities or services from which it derives no benefit.  Guidelines, 1 I.C.C.2d at 523-24.

CMP contains three main constraints on the extent to which a railroad may charge differentially higher rates on captive traffic.[9]  The revenue adequacy constraint ensures that a captive shipper will “not be required to continue to pay differentially higher rates than other shippers when some or all of that differential is no longer necessary to ensure a financially sound carrier capable of meeting its current and future service needs.”  Id. at 535-36.  The management efficiency constraint protects captive shippers from paying for avoidable inefficiencies (whether short-run or long-run) that are shown to increase a railroad’s revenue need to a point where the shipper’s rate is affected.  Id. at 537-42.  The stand-alone cost (SAC) constraint protects a captive shipper from bearing costs of inefficiencies or from cross-subsidizing other traffic by paying more than the revenue needed to replicate rail service to a select subset of the carrier’s traffic base.  Id. at 542-46.

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.”  A contestable market is defined as one that is free from barriers to entry.  The economic theory of contestable markets does not depend on a large number of competing firms in the marketplace to assure a competitive outcome.  Id. at 528.  In a contestable market, even a monopolist must offer competitive rates or lose its customers to a new entrant.  Id.  In other words, contestable markets have competitive characteristics which preclude monopoly pricing. 

To simulate the competitive price that would result if the market for rail service were contestable, the costs and other limitations associated with entry barriers must be omitted from the SAC analysis.  Id. at 529.  This removes any advantages that the existing railroad would have over a new entrant that create the existing railroad’s monopoly power.  A stand-alone railroad (SARR) is therefore hypothesized that could serve the traffic at issue if the rail industry were free of entry barriers.  Under the SAC constraint, the rate at issue cannot be higher than what the SARR would need to charge to serve the complaining shipper while fully covering all of its costs, including a reasonable return on investment.  This analysis produces a simulated competitive rate against which we judge the challenged rate.  Id. at 542.

To make a SAC presentation, a shipper designs a SARR specifically tailored to serve an identified traffic group, using the optimum physical plant or rail system needed for that traffic.  Using information on the types and amounts of traffic moving over the railroad’s rail system, the complainant selects a subset of that traffic (including its own traffic to which the challenged rate applies) that the SARR would serve.

Based on the traffic group to be served, the level of services to be provided, and the terrain to be traversed, a detailed operating plan must be developed for the SARR.  Once an operating plan is developed that would accommodate the traffic group selected by the complainant, the SARR’s investment requirements and operating expense requirements (including such expenses as locomotive and car leasing, personnel, material and supplies, and administrative and overhead costs) must be estimated.  The parties must provide appropriate documentation to support their estimates.

It is assumed that investments normally would be made prior to the start of service, that the SARR would continue to operate into the indefinite future, and that recovery of the investment costs would occur over the economic life of the assets.  The Board’s SAC analysis, however, only examines a set period of time.[10]  The analysis estimates the revenue requirements for the SARR based on the operating expenses that would be incurred over that period and the portion of capital costs that would need to be recovered during that period.  A computerized discounted cash flow (DCF) model simulates how the SARR would likely recover its capital investments, taking into account inflation, Federal and state tax liabilities, and the need for a reasonable rate of return.  The annual revenues required to recover the SARR’s capital costs (and taxes) are combined with the annual operating costs to calculate the SARR’s total annual revenue requirements.

The revenue requirements of the SARR are then compared to the revenues that the railroad is expected to earn from the traffic group.  There is a presumption that the revenue contributions from non-issue traffic (that is, the traffic of non-complaining shippers) should be based on the revenues produced by the current rates.  Traffic and rate level trends for the traffic group are forecast into the future to determine the future revenue contributions from that traffic.

The Board then compares the revenue requirements of the SARR against the total revenues to be generated by the traffic group over the SAC analysis period.  Because the analysis period is lengthy, a present value analysis is used that takes into account the time value of money, netting the annual over-recovery and under-recovery as of a common point in time.  If the present value of the revenues that would be generated by the traffic group is less than the present value of the SARR’s revenue requirements, then the complainant has failed to demonstrate that the challenged rate levels violate the SAC constraint.

If, on the other hand, the present value of the revenues from the traffic group exceeds the present value of the revenue requirements of the SARR, then the Board must decide what relief to provide to the complainant by allocating the revenue requirements of the SARR among the traffic group and over time.[11] 

Simplified Guidelines Adopted in 1996

Under Simplified Guidelines, the reasonableness of a challenged rate is to be determined by examining that challenged rate in relation to three benchmark figures.  Each benchmark is expressed as a ratio of revenues to variable costs of providing rail service.  The revenue-to-variable cost ratio is referred to as an R/VC ratio.

The first benchmark is called the Revenue Shortfall Allocation Method (RSAM).  As currently designed, this benchmark measures the average markup over variable cost that the railroad would need to charge all of its “potentially captive” traffic in order for the railroad to earn adequate revenues as measured by the Board under 49 U.S.C. 10704(a)(2).  Potentially captive traffic is defined as all traffic priced above the 180% R/VC level—which is the statutory floor for regulatory rail rate intervention.[12]  Simplified Guidelines provided for the calculation and publication of an RSAM range.  The upper end of the range reflects the average markup above variable cost that the railroad would need if it were to replace all of its assets as they wear out.  The lower end subtracts out any shortfall related to movements priced below the 100% R/VC level.  The lower end is an attempt to capture managerial inefficiencies.  In Simplified Guidelines, however, the Board recognized that an R/VC ratio below 100% does not necessarily reflect improper pricing or a money-losing service.  1 S.T.B. at 1028-29.  The precise RSAM benchmark the agency would use was therefore left unresolved, but was expected to fall within this range.  Id. at 1029. 

The second benchmark is called R/VC_>180.  As currently designed, this benchmark measures the average markup over variable cost earned by the defendant railroad on its potentially captive traffic.  It could be more narrowly tailored to focus on a subset of the railroad’s traffic that has transportation characteristics similar to the traffic moving under the challenged rate.

The third benchmark is called R/VC_COMP.  This benchmark is used to compare the markup being paid by the challenged traffic to the average markup assessed on other potentially captive traffic involving the same or a similar commodity moving similar distances.

The Board publishes tables each year showing the most recent RSAM range and the most recent R/VC_>180 ratio for each Class I railroad, as well as regional averages.  The R/VC_COMP ratios for appropriate comparison traffic were intended to be computed after a shipper files a rate complaint, using traffic data from the rail industry Waybill Sample,[13] and applying URCS costing.

The Board described these three benchmarks as “the starting point for a rate reasonableness analysis, not the end result.”  Simplified Guidelines, 1 S.T.B. at 1022.  The Board anticipated that both the shipper and railroad would present “whatever additional information is available that bears on the reasonableness of the pricing of the traffic at issue.”  Id.  The agency expressed confidence that careful analysis of these three benchmarks, together with whatever supplementary evidence is provided in a case, should enable the agency “to make at least a rough determination as to rate reasonableness in those cases where a more precise determination is not possible.”  Id. at 1041.

Simplified Guidelines was challenged in court by the Association of American Railroads (AAR).  The court dismissed the appeal, however, without ruling on the lawfulness of those guidelines, because the court concluded that it would benefit from seeing how the guidelines would be applied in a case.  See Association of Am. R.R. v. STB, 146 F.3d 942 (D.C. Cir. 1998).

As previously stated, the Board held public hearings in April 2003 and July 2004 to examine why Simplified Guidelines has not been used by shippers and to explore ways to improve those guidelines.  Based on these hearings, the Board concluded that revisions to the existing simplified guidelines appeared warranted.  On July 28, 2006, the Board put out a detailed proposal for public comments.  Initial comments were submitted in October 2006, reply comments in November 2006, and rebuttal comments in January 2007.  A hearing was held on January 31, 2007, and final comments were received in February 2007. 

Comments in this proceeding were submitted by:  Alliance for Rail Competition (ARC) and PPL Energy Plus, LLC (PPL) (collectively ARC/PPL), American Short Line and Regional Railroad Association (ASLRRA), Arkansas Electric Cooperative Corporation (AECC), Association of American Railroads (AAR), BASF Corporation (BASF), BNSF Railway Company (BNSF), Canadian National Railway Company (CN), Canadian Pacific Railway Company (CP), Cargill, Inc. (Cargill), CF Industries, Inc. (CF Industries), Chevron Phillips Chemical Company LP (Chevron Phillips), Dow Chemical Company, LLC (Dow Chemical), E. I. Du Pont De Nemours And Company (Du Pont), National Industrial Transportation League (NITL), Norfolk Southern Railway Company (NS) and CSX Transportation, Inc. (CSXT) (collectively, NS/CSXT), Occidental Chemical Corporation (OCC), Olin Chemicals (Olin), Paducah & Louisville Railway, Inc. (P&L), Snavely King Majoros O’Connor & Lee, Inc. (SKMOL), Terra Industries, Inc. (Terra Industries), Union Pacific Railroad Company (UP), Kansas City Southern Railway Company (KCS), United Transportation Union –  General Committee of Adjustment (UTU/GO-386), U.S. Clay Producers Traffic Association, Inc. (Clay Producers), U.S. Department of Agriculture (USDA), U.S. Department of Transportation (USDOT), United States Steel Corporation (US Steel), 11 wheat and barley commissions (Wheat & Barley Commissions), and six entities from the state of North Dakota (North Dakota).^[14]  A large group of shippers filed comments as a consolidated party (Interested Parties)^[15] and a large group of agricultural shippers filed comments jointly (Agricultural Shippers).^[16] After considering all of the comments, we are refining and adopting that modified proposal here. 

Revised simplified guidelines

Our revised simplified guidelines are presented in three parts.  Section I sets forth the Simplified-SAC method, designed to assess the reasonableness of challenged rates in medium-size rail rate disputes.  Section II sets forth the refined Three-Benchmark method, intended for smaller rate disputes.  Section III describes the procedural schedules and limits on discovery for both simplified methods.  Section IV explains the limitations on the relief available under each of these simplified methods.

I.  Simplified-SAC Methodology

CMP, with its SAC constraint, is the most accurate procedure available for determining the reasonableness of rail rates where there is an absence of effective competition.[17]  The SAC test, which judges the reasonableness of a challenged rate by comparison to the rate that would prevail in a competitive market, rests on a sound economic foundation and has been affirmed by the courts.  Under the SAC test, rate relief is available only where a captive shipper demonstrates that it is cross-subsidizing other parts of the defendant’s rail network or is bearing the costs of a carrier’s inefficiencies.

Any simplified methodology for assessing the reasonableness of rail rates should be designed to achieve the same objective, albeit in a less precise manner.  In 1996, AAR advocated that the Board use a simplified SAC approach,[18] but at that time the Board was unable to design a feasible way to simplify the SAC test sufficiently to be cost-effective for smaller rail rate disputes.  Our experience and expertise with SAC cases has grown substantially since then to the point where it is now possible to craft a Simplified-SAC approach.  In the following discussion, we describe the objective and mechanics of the Simplified-SAC approach.

1.  Objective

The principal objective of the SAC constraint 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 replacement 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.

It is the second objective that turns Full-SAC presentations into an intricate, expensive undertaking.  To replicate less than the existing rail infrastructure used to serve the captive shipper, the complainant must demonstrate that there would still be sufficient capacity to handle expected demand.  This requires the complainant to first select an appropriate subset of the railroad’s traffic for the SARR to serve, then design an operating plan that shows how an efficient railroad would serve this traffic group, and determine the optimal network configuration.  Parties use complex computer programs to simulate the hypothetical SARR and test the operating plan and configuration against the forecasted traffic group.  All these tasks are interrelated, such that changes to the traffic group may require reconfiguring the hypothetical network and revising the operating plan.  The parties must then develop detailed evidence to calculate both the direct operating expenses (such as the costs of locomotives, crew, and railcars) and the indirect operating expenses (such as general and administrative and maintenance-of-way).  The time and expense associated with this inquiry dwarfs the time and expense needed to examine the replacement cost of the necessary rail infrastructure.  

Accordingly, the inquiry under the Simplified-SAC method described below will be limited to whether the captive shipper is being forced to cross-subsidize other parts of the railroad’s rail network.  Such an approach will be a less precise application of CMP, because it will not identify inefficiencies in the current rail operation.  But it will allow us to determine whether a captive shipper is being forced to cross-subsidize parts of the defendant’s existing rail network the shipper does not use. 

To keep this critical inquiry as simple as possible, we will assume that all existing infrastructure along the predominant route used to haul the complaint traffic is needed to serve the traffic moving over that route.  This is a reasonable simplifying approach.  We recognize that in 1996 the Board rejected a different simplified SAC method that would have required a complainant to replicate the existing infrastructure.  Simplified Guidelines, 1 S.T.B. at 1015.  But rail capacity and traffic conditions have changed.  Railroads no longer are burdened by substantial excess capacity; rather, the rail industry now faces the opposite situation.  Rail capacity is strained, demand for transportation service is forecast to increase, and railroads must make capital investments to meet that demand.

Moreover, while a Simplified-SAC method may not fully implement CMP principles, see id., it more closely tracks CMP than does the Three-Benchmark approach.  The Simplified-SAC method we propose would assure that a railroad does not earn unreasonable profits on its investments.  As railroads enjoy increasing market power with rising demand for their services, the SAC test (in either its full or simplified form) will provide a critical restraint on their pricing of captive traffic, without deterring railroads from making the investments in their rail networks that are needed to meet rising demand.  Indeed, the Simplified-SAC method would incorporate those new capital investments and ensure that the maximum lawful rate includes a reasonable return on the replacement cost of those investments.

Using this Simplified-SAC method should not create incentives for railroads to make inefficient investments.  Our regulatory authority over rail rates is limited and competition controls the rates for most of a railroad’s traffic.  Thus, railroads will have little incentive to deliberately gold-plate their rail infrastructure or make inefficient investments to influence the returns and rates this agency would permit under a Simplified-SAC constraint.[19]  Rather, competition will force railroads to make prudent capital investments to meet forecast increases in demand for transportation services.  And even if the management of some railroads is not as efficient as possible, the burden of uncovering and quantifying existing inefficiencies is so substantial as to be impracticable in all but the largest rail rate disputes.  In any event, under this Simplified-SAC method, described in detail below, there will be some limited opportunities for a complainant to eliminate some costs associated with inefficiencies.  A complainant could argue that some existing facilities (e.g., track, sidings, yards) along the selected route have fallen into disuse and should not be included.

2.  Methodology

The Simplified-SAC presentation will differ from a Full-SAC presentation by eliminating or restricting the evidence parties can submit on certain issues.  The core analysis in a Simplified-SAC proceeding will address the replacement cost of the existing facilities used to serve the captive shipper and the return on investment a hypothetical SARR would require to replicate those facilities.  We will then seek to determine whether the traffic using those facilities is paying more than needed to cover operating expenses and a reasonable return on the replacement value of those facilities.

To hold down the cost of a Simplified-SAC presentation, various simplifying assumptions and standardization measures are essential.  Towards that end, we will impose the following structure on a Simplified-SAC presentation:

§         Route:  The analysis will examine the predominant route of the issue movements during the prior 12 months for the traffic at issue.

§         Configuration:  The facilities of the SARR will consist of the existing facilities along the analyzed route (including all track, sidings, and yards).  If a shipper presents compelling evidence that some facilities along the route have fallen into disuse by the railroad, and thus need not be replicated, those facilities will be excluded from the SAC analysis.

§         Test Year:  The Simplified-SAC analysis will examine the reasonableness of the challenged rates based on a 1-year analysis.  The Test Year would be the most recently completed 4 quarters preceding the filing of the complaint. 

§         Traffic Group:  The traffic group will consist of all movements that traveled over the selected route in the Test Year.  No rerouting of traffic will be permitted.

§         Cross-Over Traffic:  The revenue from cross-over traffic will be apportioned between the on-SARR and off-SARR portions of the movement based on the revenue allocation methodology used in Full-SAC proceedings.[20]

§         Road Property Investment:  The Board’s findings in prior Full-SAC cases will be used to simplify parts of the road property investment (RPI) analysis.  A more detailed discussion of how the RPI inquiry will be simplified is set forth in Appendix A.

§         Operating Expenses:  The total operating and equipment expenses of the SARR will be estimated using URCS.  This will avoid the substantial debates over the operating plans and network configurations that consume much of a Full-SAC analysis.  A more detailed discussion is set forth in Appendix B.

§         Discounted Cash Flow Analysis:  The DCF analysis will calculate the capital requirements of a SARR in the customary fashion and then compare the revenues earned by the defendant railroad against the revenue requirements of the SARR only for the Test Year. 

§         Internal Cross-Subsidy Inquiry:  The internal cross-subsidy test set forth in PPL,[21] as refined in Otter Tail,[22] will be an affirmative defense, with the evidentiary burden of production and persuasion on the railroad. 

§         Maximum Reasonable Rate:  The SAC costs (i.e., the revenue requirements of the SARR) will be allocated amongst the traffic group based on the methodology used in Full-SAC cases.[23]

§         5-Year Rate Relief:  The maximum lawful rate will be expressed as a ratio of revenue to variable costs, with variable costs calculated using unadjusted URCS.  This maximum R/VC ratio would then be prescribed for a maximum 5-year period.

II. Three-Benchmark Methodology

For some shippers who have smaller disputes with a carrier, even this Simplified-SAC method would be too expensive, given the smaller value of their cases.  These shippers must also have an avenue to pursue relief.  Accordingly, we will retain the Three-Benchmark method for those shippers, with refinements to lessen the uncertainties of the existing method. 

We will adopt the following changes to the method described in Simplified Guidelines:

§         Waybill Sample:  provide both parties access to the unmasked Waybill sample of the defendant carrier(s), subject to customary protective orders, upon the filing of a complaint;

§         Variable Cost Calculations:  use only unadjusted URCS to calculate the variable cost of the issue movement and all movements in the comparison group;

§         Non-Defendant Traffic: exclude non-defendant traffic from the comparison group;

§         R/VC_COMP:  use a final-offer procedure to select the comparison group most similar in the aggregate to the challenged movement;  

§         RSAM and R/VC_>180:  use an unadjusted RSAM figure and revise the way these benchmarks are calculated;

§         Rate Reasonableness Determination:  adjust each movement in the comparison group by the ratio of RSAM ÷ R/VC_>180, calculate a “confidence interval” around the estimate of the mean of the adjusted comparison group, and presume unreasonable a challenged rate that is above this confidence interval;[24] and

§         Other Relevant Factors:  permit either the shipper or the carrier to rebut the presumption with evidence of “other relevant factors.”

1.  Comparison Group

a.  Comparability Factors

The purpose of the R/VC_COMP 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.  As such, the comparison group should consist of only captive traffic over which the carrier has market power.  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.  Moreover, we are comparing mark-ups over variable cost to determine the reasonable level of contribution to joint and common costs for a particular movement.  This means that movements with different cost characteristics may be included in the comparison group.  For example, if a complainant challenged the rate for a 6-car to 25-car movement, it may argue for the inclusion of a comparable movement of a 50-car to 110-car unit train by another potentially captive shipper, or vice versa.  While the rate associated with the larger unit-train movement will be lower to reflect greater efficiencies, there is no reason, a priori, to presume that the R/VC ratios (or their share of joint and common costs) should be different.  However, because we are using URCS to develop the variable costs for the issue movement and comparison movements, we will favor a comparison group that consists of movements of like commodities so the variable cost calculation of the issue movement and comparison group will be similar.     

Accordingly, comparability will be determined by reviewing a variety of factors, such as length of movement, commodity type, traffic densities of the likely routes involved, and demand elasticity (although the comparison group need not have movements with identical demand).  The selection of the best comparison group will be governed by which group the Board concludes provides the best evidence as to the reasonable level of contribution to joint and common costs for the issue movement.

b.  Selection Process

The selection process will begin with the shipper and railroad simultaneously tendering their initial evidence regarding an appropriate comparison group.  The movements must be drawn from the Waybill Sample provided to the parties by the Board at the outset of the case.  Shortly after receipt of the initial tenders, designated Board staff may convene a technical conference with the parties to discuss and attempt to resolve any disputes as to the appropriateness of movements in the comparison groups.

Each party must then tender its “final offer” group of movements it believes should comprise the comparison group.  Only movements that had previously been submitted by one of the parties in its initial tender can be included in the final offer groups.  In other words, each party can select its final comparison group only from movements contained either in its first tender or in the first tender of the other side.  Any movement set forth in both sides’ initial tenders will be required to be included in each side’s final comparison group, unless the parties agreed to exclude the movement.  After the submission of the final offer comparison groups, each party will be given an opportunity to challenge the other party’s comparison group and support its own in simultaneous rebuttal filings. 

The Board will then select the comparison group that it concludes is most similar in the aggregate to the issue movements.  This will be an “either/or” selection, with no modifications by the Board.  A final offer procedure for determining the comparison group is in the public interest because it will encourage both parties to submit a reasonable comparison group.  Any final tender that is skewed too far in one direction might well result in the selection of a more reasonable final tender presented by the opposing party.  By having two rounds of simultaneous tenders and a technical conference, both sides will participate in the winnowing process.  Each side therefore should be able to provide a reasonable final offer comparison group, even if the two sides’ groups differ.  Thus, the Board will only have to determine which group is more reasonable.  This should enable a prompt, expedited resolution of the comparison group selection.  This approach will work as intended only if the parties know that the agency will not attempt to find a compromise position somewhere in the middle.[25]  To create the proper incentives for the litigants not to take extreme positions, we commit to selecting the more reasonable of the two groups as tendered.

2.  RSAM Range

The RSAM benchmark is intended to measure the average markup above variable cost that the carrier would need to charge to meet its own revenue needs.  However, when Simplified Guidelines were adopted in 1996, the Board did not settle on a single formula for computing this benchmark.  The Board explained that it “[did] not believe that the industry ha[d] yet become so efficiently sized that all of its current assets were used and useful and would warrant replacement as they wear out,” and it suggested that the necessary revenue contribution was therefore less than what would be needed to provide for the replacement of all existing assets.  Simplified Guidelines, 1 S.T.B. at 1029.  Accordingly, the Board decided to look at the effect on a carrier’s revenue needs of subtracting out any shortfall related to movements priced below the 100% R/VC level, which the Board referred to as a “managerial efficiency adjustment,” even though the Board acknowledged that an R/VC ratio below 100% does not necessarily reflect improper pricing or a money-losing service.  Id. at 1028.  The end result was publication of an RSAM range that would form “the relevant starting range for [the Board’s] consideration.”  Id. at 1030.  The RSAM benchmark the agency would use in a particular case was left unresolved, but was expected to fall within this range.

In the NPRM, we proposed to eliminate the range and use the unadjusted RSAM in the rate comparison approach.  As no party opposed that proposal, we will adopt it for the reasons set forth in the NPRM.

3.  Method To Calculate RSAM and R/VC_>180

We are changing the way RSAM is calculated to address a flaw in the existing method.  RSAM has been calculated by computing the uniform mark-up above variable cost that would be needed from all potentially captive traffic “for the carrier to recover all of its URCS fixed costs.”  Simplified Guidelines, 1 S.T.B. at 1027.[26]  When a carrier is not “revenue adequate” under the Board’s annual calculations, its RSAM figure (what it needs to collect) should be greater than its R/VC_>180 figure (what it is actually collecting).  Conversely, when a carrier is revenue adequate under that determination, its RSAM figure should be lower than its R/VC_>180 figure. 

But this relationship between RSAM and R/VC_>180 has not held true in the RSAM calculations.  For example, the 2002 RSAM and R/VC_>180 figures show that the unadjusted RSAM figure for the Norfolk Southern Railway Company (NS) (216%) was less than its R/VC_>180 figure (221%), suggesting that NS was revenue adequate.[27]  Yet NS was not revenue adequate in that year.[28]  The opposite, erroneous relationship between RSAM and R/VC_>180  can be seen in the most recent calculations, where the relationship between RSAM and R/VC_>180 would indicate that NS was revenue inadequate in 2004, even though NS in fact earned the target rate of return (the railroad industry’s average cost of capital) that year.[29]

To address this concern, we are altering slightly the way RSAM and R/VC_>180 are calculated.  The R/VC_>180 benchmark will be derived from the confidential Waybill Sample.  We will use that sample to estimate the total revenue earned by the carrier on potentially captive traffic (REV_>180) and the total variable costs of the railroad to handle that traffic (VC_>180).  We will not adjust these calculations to match the total revenue and cost information reported by the carriers in their annual filings to the Board, as has been our prior practice, as the entities may differ and we conclude the adjustments complicate the analysis without improving the accuracy of the estimate.  Accordingly, R/VC_>180 will be calculated as follows:

R/VC_>180 = REV_>180 ÷ VC_>180

To calculate RSAM, we will add to the numerator the carrier’s revenue shortfall (or subtract any overage) shown in our annual revenue adequacy determination (REV_{short/overage}).  RSAM will then be calculated as follows:

RSAM = (REV_>180 + REV_{short/overage}) ÷ VC_>180

Recalculated in this manner, the ratio of RSAM to R/VC_>180 will reflect how far the railroad is over or under the revenue adequacy target.

Table 1 shows the impact of these changes on the relationship between the two benchmarks for a sample year (2004).  In a rate case, we will not rely on the figures from a single year, but will use a 4-year average where possible.

Table 1

Benchmark Comparison (2004)

 

4.  Rate Reasonableness Presumption & Other Relevant Factors

Once the Board finds that the railroad has market dominance over the movements at issue, the Board will select the appropriate comparison group through the final-tender process described above.  Each movement in the comparison group would then be adjusted by the ratio of RSAM ÷ R/VC_>180.  The Board will 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 will be presumed unreasonable and, absent any “other relevant factors,” the maximum lawful rate will be prescribed at that boundary level.  Using the mean (R/VC_COMP) 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:[30] 

upper boundary = R/VC_COMP + t_n-1 × (S ÷ (n-1)^½)

This confidence interval would be a function of the number of movements in the comparison group and the standard deviation of those 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.

Parties may submit evidence of “other relevant factors” to demonstrate that the maximum lawful rate should be higher or lower.  Parties are required, however, to quantify the impact of these “other relevant factors” on the presumed maximum lawful rate.  For example, a shipper could not submit evidence that the railroads are not operating as efficiently as possible without quantifying the extent of the inefficiency and how that should affect the presumed maximum lawful rate.

To keeps these cases manageable, we must impose certain limits on the nature of the “other relevant factors” evidence we will consider and the breath of discovery we will permit.  Evidence of product and geographic evidence associated with particular movements will not be permitted, nor will we permit evidence of movement-specific adjustments to URCS.  We reserve the right to prohibit other categories of evidence if experience demonstrates that the introduction of such evidence would or does unduly complicate this process, which must be relatively simple and inexpensive to have any value.  Similarly, in reviewing discovery disputes by either party over evidence of other relevant factors, we will scrutinize the burden placed on the party from which discovery is sought.  Even if information requests are clearly relevant, if the burden is considerable we might not require the discovery.    

III.  Procedural Matters

1.  Procedural Schedules

We establish a tight procedural schedule for small rate disputes, using designated Board staff to assist in resolving discovery disputes and to chair technical conferences.  The schedules are set forth below.  If a deadline falls on a weekend or holiday, that deadline will be extended until the next business workday, but the remaining deadlines would remain unchanged.  The Board will consider deviations from this procedural schedule only upon a good cause showing by the party.  However, for a Simplified-SAC case, if there is a dispute between the parties over the predominant route of the issue movements during the Test Year, the Board will stay the close of discovery and the deadline for the railroad’s second request until that issue is resolved.

 

 

 

 

 

Table 2

Procedural Schedule for Three-Benchmark Case[31]

 

 

Table 3

Procedural Schedule for Simplified-SAC Case

 

The procedural schedules provide for a mandatory 20-day period of non-binding mediation.  Board staff will be appointed to mediate these disputes.  To protect the confidentiality of mediation discussions, the appointed Board staff will be recused from all subsequent involvement in the case should the case not be fully resolved through mediation.  The entire mediation process will be confidential, including all material used or exchanged and positions taken by the parties.  The mediation period can be extended at the consent of the parties.  Designated representatives from the parties with authority to settle the dispute shall participate in all meetings, unless the Board-appointed mediator concludes such involvement is not necessary.  In a Three-Benchmark case, the Board will release the confidential Waybill Sample, subject to the proper protective orders, before the mediation begins, to facilitate settlement.

If the traffic at issue is part of a class of traffic that has been exempted from Board regulation pursuant to 49 U.S.C. 10502(a), the complainant will need to file a separate request for revocation of the pertinent class exemption for the traffic at issue pursuant to 49 U.S.C. 10502(d).  The Board will generally consider the revocation request before permitting a rate challenge.  If a revocation request is accompanied by a complaint, the procedural schedule set forth above (including mediation) will generally be stayed automatically pending the outcome of the request for revocation.

2.  Discovery

To streamline the discovery process, certain standardized discovery will be required to be produced with the complaint and answer, and technical conferences will be held to resolve factual disputes early.  These and other matters related to discovery are set forth below.

Staff Conferences.  As has been our practice in Full-SAC cases, we will use designated Board staff to facilitate voluntary resolution of discovery disputes and to conduct technical conferences.

Meet and Confer Requirement.  Parties will be required to meet and confer on discovery and procedural matters within 7 business days after the mediation period ends.  As soon as possible, the parties must inform the Board whether there are unresolved disputes that require Board intervention and, if so, the nature of those disputes.

Complainant’s Initial Disclosures.  The complainant will be required to provide certain initial disclosures concurrent with the filing of its complaint.  At that time, the complainant will provide to the railroad its preliminary estimate of the variable cost of the challenged movements, using the unadjusted figures produced by the URCS Phase III program, demonstrating that the Board’s jurisdictional threshold has been met.[32]  The complainant will also provide to the railroad all documents that it relied upon to determine the inputs to the URCS Phase III program.  In addition, the complainant shall include with its complaint a narrative addressing whether there is any feasible transportation alternative for the challenged movements, and disclose to the railroad all documents relied upon in formulating that assessment.

Railroad’s Initial Disclosure.  The railroad will likewise be required to provide initial disclosures to the complainant concurrent with filing its answer.  Like the shipper, the railroad shall produce its preliminary estimate of the variable cost of each challenged movement, using the unadjusted figures produced by the URCS Phase III program.  And the railroad must provide to the complainant all documents that it relied upon to determine the inputs used in the URCS Phase III program.

Railroad’s Second Disclosure in Simplified-SAC Cases.  In Simplified-SAC cases, the railroad shall provide the following additional information to the complainant: 

§         Identification of all traffic that moved over the routes replicated by the SARR in the Test Year; 

§         Information about those movements, in electronic format, aggregated by origin-destination pair and shipper, showing the origin, destination, volume, and total revenues from each movement;

§         Total operating and equipment cost calculations for each of those movements, computed in accordance with Appendix B, and provided in electronic format, so the complainant can readily estimate the total operating and equipment costs of the SARR; 

§         Revenue allocation for the on-SARR portion of each cross-over movement in the traffic group, developed in accordance with the methodology used in Full-SAC cases, provided in electronic format;

§         Total trackage rights payments paid or received during the Test Year associated with the route replicated by the SARR; 

§         All workpapers and documentation necessary to support these calculations.

Discovery and Interrogatory Requests in Three-Benchmark Cases.  In Three-Benchmark cases, we will limit the number of discovery requests that either party can submit to the other party without obtaining advance authorization from the Board.  Each party would be limited to ten interrogatories (including subparts), ten document requests (including subparts), and one deposition.

Motions to Compel.  Motions to compel will be governed by 49 CFR 1114.31 (a)(2)‑(4).  Any appeals to the Chairman of a ruling by Board staff on a motion to compel will be due within 3 business days of the ruling.  Replies to the appeal will be due within 3 business days after the appeal is filed.  Criteria set forth in 49 CFR 1115.9(a) will govern the standard of review for such interlocutory appeals.

3.  Jurisdictional Inquiry

The Board may investigate the reasonableness of a challenged rate only where the revenues the carrier receives for transporting the movements at issue exceed 180% of its variable costs of providing the service.  This jurisdictional threshold for rail rate regulation also serves as the floor for regulatory relief, because the Board cannot prescribe a rate below the jurisdictional threshold.[33]  By statute, a carrier’s variable costs are to be determined using URCS with adjustment only where the Board finds it appropriate.[34] 

The Board will use its unadjusted URCS model to determine the variable costs for a rail carrier.  If the carrier is not a Class I carrier, the Board will use the most appropriate regional URCS data.  The only adjustments allowed to the URCS Phase III program would be those adopted in Ex Parte No. 431 (Sub-No 2).  See Review of the General Purpose Costing System, 2 S.T.B. 754 (1997); Review of the General Purpose Costing System, 2 S.T.B. 659 (1997).  Those adjustments include the so-called “270” volume shipment adjustments, the make-whole adjustments, TOFC/COFC adjustments, and RoadRailer adjustments.  In addition, the circuity factor is always set to one when actual miles are used to calculate the variable costs.

IV. Eligibility Criteria

While crafting the basic structure of the simplified approaches has been challenging, creating eligibility limitations on what cases should be decided under each approach has been especially difficult.  Captive shippers must have an effective forum to bring rail rate disputes.  But an overly simplified approach should not be applied to a case when the amount in dispute justifies the use of a more robust and precise approach.  Seeking the right balance is complicated by the lack of historical data on the cost of presenting evidence under a Simplified-SAC or Three-Benchmark approach.  A more profound complication flows from asking the Board to determine the likely “value” of a dispute at the outset of a case without prejudging the merits of the case.

In an effort to avoid prejudging the merits of a case, the Board proposed an eligibility criteria based on a more objective criterion:  the Maximum Value of the Case (MVC).  The MVC of a complaint would have been the maximum relief the shipper could attain over 5 years if the challenged rates were reduced to the jurisdictional floor (i.e., the level at which the R/VC ratio equals 180%).  The MVC would have been calculated by multiplying the difference between the challenged rate and the rate floor by the annual volume of the traffic at issue.  If a complaint challenged multiple rates covering different origins and destinations, the Board would have aggregated the MVC for each set of movements covered by the complaint.  In this fashion, the MVC would have been equal to the net present value, as of the time of the filing of the complaint, of the maximum relief that the shipper could obtain.

Based on the record compiled in this proceeding, it is clear that the MVC proposal is inadequate to the task.  It was our intent to carve out certain cases that could plainly qualify to use either the Simplified-SAC or Three-Benchmark approach based on objective criteria, and leave cases on the margin to be analyzed on a case-by-case basis.  But public comments demonstrated that few if any movements would actually qualify for simplified treatment under that approach.[35]  Creating a safe harbor based on the maximum value of the case would leave most captive shippers in the same situation they have been in for 10 years:  having to undertake a potentially expensive and uncertain process of proving their right to use the simplified methods at the outset of the case. 

In commenting on our initial MVC proposal, the carriers struck on an alternative approach—under which a complainant could stipulate to a limit on relief sought in order to use a simplified approach—that we believe achieves the right balance.  Accordingly, we adopt a “limit to relief” approach, under which a complainant may elect to use either the Simplified-SAC or Three-Benchmark approach, but will be limited in the relief available under those approaches.  Section 1 below describes this approach in detail.  Section 2 addresses the carriers’ reversal of position and opposition to their own refinement.  Section 3 sets forth our cost estimates to present a Full-SAC, Simplified-SAC, and Three-Benchmark case.  Section 4 then describes how the approach incorporates the “risk factor” sought by the shipper community.  Section 5 discusses our decision to remove the “aggregation” proposal and Section 6 discusses the potential for carriers to improperly force shippers to use a more expensive approach.

1.  Relief Limits

Complainants that proceed under the Three-Benchmark methodology will be limited to $1 million of rate relief over a 5-year period, and complainants that elect to proceed under the Simplified-SAC methodology will be limited to $5 million dollars of relief over the same period.[36]  Each limit is based on our estimates of the litigation cost to pursue relief under the next more complicated, and more precise method.  By permitting a shipper to use either of these simplified approaches, we ensure that the rate complaint process will be available for any size rate dispute.  But by placing limits on the relief available, we encourage shippers with larger disputes to pursue relief under the more appropriate methodology without the Board itself trying to determine the likely value of a case.  Instead, the complainant must evaluate its own claim, decide for itself the expected value of the case, and balance the value against the litigation costs and the potential relief it may receive.

Shippers have expressed concern that a captive shipper should not be required to commit to a particular approach before it has an opportunity for discovery that might lead it to revise its assessment of the value of the case.  We will address this concern by permitting a complainant to amend its complaint and seek relief under a different methodology at any time prior to the filing of opening evidence.  If a complainant wishes to amend its complaint to pursue relief under a more complex approach, it must pay the relevant filing fee and the procedural schedule would begin anew, except we would not again require the parties to submit to mandatory mediation.  However, to protect carriers from potentially endless amendments to the complaint, the shipper will have an automatic right to amend its complaint without prejudice only once.

The limit on relief will 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 will automatically terminate once the complainant has exhausted the relief available.  Thus, the actual length of the prescription may be less than 5 years if the shipper ships a large enough volume of traffic so that the relief is used up in a shorter time.  The complainant will be barred from bringing another complaint against the same rate for the remainder of the 5-year period. 

Once a rate prescription expires, the carrier’s rate making freedom will be restored with a regulatory safe harbor at the challenged rate for the remainder of the 5-year period, with appropriate adjustments for inflation using the rail cost adjustment factor, adjusted for inflation and productivity (RCAF-A).[37]  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.  In this way, the shipper will be discouraged from using a cruder methodology than the value of the case warrants, but a railroad does not get a potentially massive regulatory windfall from an exhausted prescription.

We believe that these limits on relief strike the appropriate balance.  Captive shippers with disputes of any size can now avail themselves of our rate review processes, while carriers can be assured that a large rate dispute will not be subjected to a more simplified process than necessary to achieve that objective.  

As illustrated above, shippers with disputes up to $1 million over 5 years may use the Three-Benchmark approach, our simplest rate reasonableness methodology.  Any shipper who believes the value of its dispute exceeds $1 million should pursue a Simplified-SAC case.  Likewise any shipper that believes the value of its case exceeds $5 million should offer a Full-SAC presentation.  There may be instances where a complainant will be faced with a difficult choice between forgoing some of the potential value of a dispute or pursuing greater relief despite increased costs.  But we conclude that it is appropriate to encourage litigants facing this choice to use the rate reasonableness approach that is best suited for the magnitude of the dispute.

By adopting clear lines of demarcation for eligibility, we will meet our stated goal of providing clear, usable guidance as to which complainants may use the simplified methods.  This limit of relief approach should expedite cases by avoiding protracted disputes over eligibility.  Further, bright line demarcations provide regulatory certainty that should foster negotiation.

2.  Carrier Objections

The Board’s original proposal was to place limits on the availability of these simplified procedures based on the maximum value of the dispute.  Because the calculation of the maximum value depended on the traffic volume of the disputed movement, we proposed that shippers would stipulate to the amount of traffic it intended to ship.  Recognizing that this approach would overstate the actual value of the case, the carriers suggested a further stipulation: that shippers could lower the maximum value of the case (and thus qualify for a more simplified approach) by stipulating to the minimum rate that they would seek.  This proposal was endorsed by all the Class I carriers without any reservations.[38]  Under the carriers’ proposed refinement, any shipper would be able to use the simplified procedures by stipulating to modest traffic volume, a little rate reduction, or a combination of the two.

Shippers were intrigued by the carriers’ proposal and sought an extension of the procedural deadline to consider the refinement.[39]  Ultimately, they could not support the proposal over concerns that a shipper would need to stipulate to a limit on relief without sufficient information to make an informed choice.

In advance of our hearing, we asked the parties to comment on a modest simplification of the carriers’ approach that would address the shippers’ concerns.[40]  Rather than have the shippers stipulate to both the maximum volume and minimum rate to use a simplified process, the Board would establish a limit on the total relief available.  To address shipper concerns over the lack of information needed to make an informed choice, the Board proposed to permit the shipper to amend its complaint anytime before the filing of opening evidence, and to opt into a more robust (or more simplified) approach based on its reassessment of the value of its case. 

Following our hearing, however, the carriers reversed course and opposed what was essentially their own proposal.  The AAR stated that it “could not endorse this approach in the abstract.  Whether it could be acceptable to AAR depends at a minimum on the eligibility criteria adopted by the Board, which is precisely the issue that remains unsettled.  Moreover, AAR has concerns that in application the small claims model might have nothing to do with small cases and everything to do with tactics.”[41]  UP stated that it was not its intent to permit any shipper to use a simplified approach.[42] 

The rules adopted here are very similar to the railroads’ refinement to the original proposal.  The fact that the carriers now oppose the approach, apparently not having foreseen the practical consequences of their own proposal, is difficult to understand or give considerable weight.  Moreover, the railroads’ concerns are unpersuasive.  Rather, we believe that the selected limits on relief we are placing on each simplified approach will provide an effective safeguard against misuse of either simplified approach.  They will also achieve the central objective that any captive shipper—regardless of its size or the amount it ships—will be able to pursue a level of relief appropriate to its case.

3.  Litigation Cost Estimates

Based on the record and our experience with Full-SAC litigation, we will base the limits on relief on our estimate that it should cost the shipper no more than $5 million to present a Full-SAC case and $1 million to conduct a Simplified-SAC analysis. 

Counsel for Otter Tail testified that it cost that company $4.5 million to pursue its Full-SAC case.[43]  While many of the comments received confirm our belief that the changes recently adopted in Major Issues will serve to lower these litigation expenses, the extent of the cost reductions remains to be seen.  Moreover, we cannot ignore the fact that Full-SAC litigation has been very costly and time consuming in recent years and the cost and complexity have increased over time.  We cannot predict what new or unforeseen issues will emerge.  But we are confident that the costs to present a Full-SAC case should be no more than the $5 million.  Thus, we will use $5 million as the limit on relief available under the Simplified-SAC approach.  If the reforms enacted in Major Issues have the intended effect and Full-SAC litigation costs decline, we can revisit the $5 million limit at a later date.

The litigation cost of a Simplified-SAC presentation is more difficult to discern, but should be dramatically less than the cost of presenting a Full-SAC case.  We carefully simplified and streamlined the SAC process to create the Simplified-SAC process, and the refinements to that process adopted—removing rerouting of traffic and the annual true-up—should simplify the analysis and reduce the costs further.

Interested Parties submitted a line-item estimate of the cost to prepare a Simplified-SAC complaint prepared by a transportation consultant.[44]  No other party has offered detailed evidence, though some critiqued the presentation by Interested Parties.[45]  In the absence of any better evidence, we are guided by Interested Parties’ estimate with the following modifications.  Interested Parties’ testimony was premised on the Simplified-SAC approach described in the NPRM.  As we have made further simplifying modifications to the proposal here, we have adjusted the witness’s estimate by deducting those cost elements that are no longer part of the Simplified-SAC analysis.  Further, where we conclude the estimates are overstated, we have reduced the number of consultant hours to a more reasonable amount.[46]  As a result, we conclude that a Simplified-SAC presentation will cost approximately $1 million in consulting and legal fees.  Thus, we will adopt $1 million as the limit to relief for Three-Benchmark cases.

We conducted a similar analysis, also set forth in Appendix C, to derive a cost estimate of $250,000 to present a case under the Three-Benchmark approach.  While this figure is also drawn from the shipper’s testimony, we believe this estimate is very conservative and reflects the most that a Three-Benchmark case should cost to litigate.  It includes a substantial increase in litigation cost to cover the possibility that a shipper may seek to submit “other relevant factors.”  Without such evidence, which is optional on the shipper’s part, the litigation estimate is below $200,000, and should be reduced further once a body of precedent is developed to guide the implementation of the Three-Benchmark approach.

These cost estimates are based on the best evidence of record.  As cases are brought under these two approaches, actual litigation costs will become available, and over time we will observe whether the reforms of Major Issues have had the desired effect of reducing litigation costs in Full-SAC cases.  At that time, parties may petition the Board to adjust the limit on relief as needed, assuming they provide detailed litigation cost estimates.

4.  Risk Factor

Shippers note that when any litigant considers pursing a legal claim, the potential relief must exceed the costs to litigate the case by a fair margin to justify the expense.  They refer to this cushion or margin between the costs and the potential relief as a “risk factor.”  While conceding that it would be difficult to develop a precise estimate of the proper risk factor, they ask that in setting limits on relief, we incorporate a risk factor of at least three. 

We agree with the general principle that a simplified presentation would not be cost-effective unless the potential relief exceeds the expected cost of obtaining the remedy by a sufficient margin to make it worthwhile to pursue the complaint.  Accord Simplified Guidelines,  1. S.T.B. at 1049.  The limit to relief approach should make it cost effective to pursue either a Three-Benchmark of Simplified-SAC presentation by providing an ample cushion between the cost to bring the case and the potential relief available.  Table 4 sets forth the expected litigation costs, potential relief, and risk factor associated with the three approaches.

Table 4

 

The shipper community would like the potential relief available to dramatically exceed these limits.  But their “risk factor” analysis is flawed as it approaches the question from the wrong direction.  The error flows from comparing the relief available under one approach to the cost of bringing a different approach.  They would establish the limit on relief under the Three-Benchmark approach by taking the cost to litigate the Simplified-SAC case and multiplying that cost by 3.  Under this approach, the limit on relief would be set at $15 million and $3 million for Simplified-SAC and Three-Benchmark approaches, respectively.  But the potential relief available under the Three-Benchmark approach would exceed 12 times the cost to litigate the case, and the risk factor for a Simplified-SAC presentation would exceed 15.  As such, while shippers start with the desire to create a risk factor of 3, their approach results in risk factors several times higher. 

5.  Aggregation of Claims

The limits on relief that we establish here do not include a mechanical mechanism to police against attempts to divide a large dispute into multiple smaller disputes.  It is not clear that such a mechanism is necessary at this time.  The Board has ample discretion to protect the integrity of its processes from abuse, and we should be able to readily detect and remedy improper attempts by a shipper to disaggregate a large claim into a number of smaller claims, as the shipper must bring these numerous smaller cases to the Board.

6.  Carrier Manipulation of Dispute

At least one shipper raised concerns that any eligibility approach premised on the challenged rate may permit the carrier to force the shipper into a more expensive methodology simply by raising the challenged rate.  So, for example, if a small shipper wanted to challenge a rate under the Three-Benchmark approach, but the carrier facing litigation elected to raise the rate so the annual transportation charges increased by $200,000, the small shipper would have little choice but to bring a Simplified-SAC case.

We acknowledge this potential and will carefully review any allegations of carrier misconduct on a case-by-case basis.  Should we conclude that the carrier has improperly sought to force the shipper to use a more expensive methodology by raising the challenged rate, we will either remove the limits on relief entirely for that case, or increase the limit on rate relief to the next threshold level, depending on the equities of the case.

Regulatory Flexibility Act

P&L argues that the Board must engage in a more detailed Regulatory Flexibility Act analysis explaining and providing support for the Board’s conclusion that the proposed rules would not adversely impact small businesses.  P&L maintains that the proposed guidelines could have a major economic impact on many small railroads, but that the Board has not weighed the costs that the proposed standards would impose on shortline and regional railroads.  P&L argues that the proposed guidelines do not take into account the increased administrative costs that smaller railroads would incur in evaluating and revising internal costing and ratemaking systems to comply with the proposed standards.  Additionally, P&L claims that carriers similarly situated to P&L would have to familiarize themselves with URCS and a regulatory scheme that, according to P&L, essentially imposes a Class I costing system on smaller railroads.[47] 

P&L’s arguments are without merit.  The URCS analyses contemplated here do not require any additional record keeping by Class II or Class III carriers and do not require any reporting of any additional information to the Board.  Moreover, local movements on Class II and Class III carriers are excluded from the Three-Benchmark method, reducing small carrier’s exposure to these rules.  Under the adopted rules, some small carriers would also have an opportunity to avoid litigation in conjunction with a Class I rate by rebilling their own separate rates.  And the majority of railroads and shippers likely to be involved in proceedings under these Simplified Guidelines are unlikely to be small entities within the meaning of the Regulatory Flexibility Act.  Finally, these carriers have been subject to the Simplified Guidelines since 1996, and while our decision to revise and reform those guidelines in this decision may change the approach in certain respects, it does not expand the universe of traffic subject to our regulation.  Accordingly, we certify that this action will not have a substantial adverse impact upon a significant number of small entities.

This action will not significantly affect either the quality of the human environment or the conservation of energy resources.

CONCLUSION

These new simplified rail rate guidelines address many of the concerns raised about Simplified Guidelines.  They provide shippers meaningful access to regulatory relief in those cases where a Full-SAC case is too costly, given the value of the case.  They also promote the rail transportation policy to protect captive shippers from unreasonable rates, 49 U.S.C. 10101, without precluding rail carriers from earning revenues that are adequate under honest, economical, and efficient management, 49 U.S.C. 10704(a)(2). 

Conflicting federal policies guided our analysis.  We must balance 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).  Moreover, Congress specifically directed the agency to create a simplified and expedited method for determining the reasonableness of challenged rail rates in those cases where a Full-SAC presentation is too expensive, given the value of the case.  49 U.S.C. 10701(d)(3).  Our analysis of the Waybill Sample, shown in Table 5, indicates that, Full-SAC presentation would be impractical for 73% of potentially captive traffic.  It also shows that, even a Simplified-SAC presentation would be too costly for 45% of potentially captive traffic.[48]  These simplified procedures will provide a meaningful forum for the resolution of rail rate disputes arising out of the at least 73% of traffic that previously was prevented from bringing rate complaints to the Board due to the high costs of developing a Full-SAC presentation.

Table 5

Revised Eligibility Estimate

 

We have resolved these conflicting policies by creating the Simplified-SAC process, retaining the Three-Benchmark approach, and placing reasonable limits on the relief available under both simplified approaches.  We conclude this strikes a reasonable balance between providing a simplified method that permits captive shippers to seek protections from unreasonable rates, while encouraging use of the most precise approach feasible for the amount in dispute.

As the guidelines are tested through application to actual rail rate disputes, we will garner greater understanding of the litigation costs of these approaches and whether the proposed structure is working.  And the creation of a body of precedent will provide guidance to the rail community on some of the remaining ambiguities in the approach.  Nonetheless, we intend to carefully monitor the application of these guidelines, and remain vigilant that the goals of simplification are not thwarted as parties begin to litigate cases under these guidelines.  While these new guidelines reflect an important step forward in creating a workable structure for resolving rate disputes of all sizes, we anticipate that further steps will be needed as the application of the guidelines reveal unanticipated issues or show that more or less simplification is warranted.

Changes to the Code of Federal Regulations needed to implement this proposal are set forth in Appendix D and will be published in the Federal Register.

It is ordered:

 

1.      The simplified rail rate guidelines discussed above are adopted. 

 

2.      This decision is effective on October 7, 2007. 

 

By the Board, Chairman Nottingham, Vice Chairman Buttrey, and Commissioner Mulvey.  Vice Chairman Buttrey concurring with a separate expression.

 

                                                                                                Vernon A. Williams

                                                                                                          Secretary

 

 

____________________________________

 

VICE CHAIRMAN BUTTREY, concurring:

           

The simplified rail rate case guidelines that we adopt here represent another step in this agency’s continuing effort to make meaningful rail rate dispute resolution accessible to small shippers in a timely and cost-effective manner.

 

            In 1887, the genesis of U.S. railroad regulation arose from concerns about rates for grain shippers.  Unfortunately, this concern is still with us.  Based on the Board’s own analysis and that of the U.S. Government Accountability Office (GAO) Report of October, 2006, the changes that have occurred in the rail industry since the Staggers Rail Act of 1980 have been largely positive, except for certain grain rates.  According to the GAO report, the amount of grain traffic with comparatively high markups over variable cost continues to increase.  The Board held a hearing on Rail Transportation of Grain on November 2, 2006, at which the concerns of grain shippers were heard.  The U.S. Congress has also expressed concern about the availability of meaningful rail rate dispute resolution for small grain shippers.

 

            The simplified guidelines we adopt today will make the Three-Benchmark methodology available for all small rail rate disputes including those involving small grain shippers.  A low filing fee ($150), mandatory mediation, fast-track schedule, early access to waybill sample information, use of unadjusted URCS data and the availability of substantial rate relief should all make this methodology attractive.  In the all-important selection of the comparison traffic group (the traffic to which the challenged movement will be compared), our decision makes clear that a small shipper can include traffic of other potentially-captive shippers of the same commodity, even if that traffic moves in larger blocks.  In other words, a 6-car grain shipper can include 50-car or 110-car unit-train traffic in its comparison group.  As the decision explains, the Three-Benchmark methodology will compare the mark-up over variable cost to determine the reasonable level of contribution to joint and common costs for a particular movement.  While the rates associated with the larger unit-train movement should, on average, be lower to reflect greater efficiencies, it is the R/VC ratios, not the rates, that will be compared in the Three-Benchmark methodology.

 

            Small grain shippers, and small shippers generally, need some assurance that our processes will give them a more reasonable opportunity to prevail in a small rate case if their rates are unusually high.  I join in support of this decision because I believe that it can offer that assurance.  I hope that small shippers will avail themselves of the new methodology, and I will be vigilant to make sure that the new rules are fairly applied in these cases.

Appendix A – Road Property investment

The RPI component of a Full-SAC analysis has remained fairly consistent in recent cases, even though the average investment includes a mix of heavy- and light-density lines, as well as varying yards along the route.  Segregating recent decisions regionally results in a very consistent set of RPI costs (indexed to 2005).  For example, as shown below, the average RPI cost per track mile has varied less than 10% in the last five western Full-SAC cases. 

Table A-1

Western SAC Case RPI Cost (2005 Dollars)

 

However, differences in geography and configuration can have a significant impact on the investment costs, as seen by comparing the RPI figures of the western Full-SAC cases to those of the eastern Full-SAC cases.  Thus, using an aggregate investment cost per mile could sacrifice too much accuracy for simplicity. 

Instead, we will use elements from prior cases that do not change significantly from case-to-case (such as the unit costs of earthwork), and adjust the Simplified-SAC RPI analysis for those features that will vary significantly from case-to-case (such as the number of bridges, miles of track, and acres of land).  The parties will account for inflation by applying an appropriate index to the findings from prior cases.  (The numbers reported below have not been indexed, except for the consolidated bridge trend curves.)  We will use a rolling average from past cases, such that as new Full-SAC cases are issued by the Board, older cases will be dropped from the comparison in subsequent Simplified-SAC proceedings.  We will not include decisions prior to TMPA, nor decisions that did not resolve all of the disputes between the parties, such as in PPL.

RPI is broken down into the following categories:  (1) land, (2) roadbed preparation, (3) track, (4) tunnels, (5) bridges and culverts, (6) signals and communication, (7) buildings and facilities, (8) public improvements, (9) mobilization, (10) engineering, and (11) contingencies.  See, e.g, Otter Tail at E1-E6.  We will simplify the calculation of each of these categories as set forth below.

1.  Land

We will use a rolling-average cost per acre from prior rate cases.  Table A‑2 below shows the Board’s land cost per acre findings, by category of land:[49]

Table A-2

Comparison of Per Acre Land Costs by Category

 

We recognize that land prices are affected by location, but the costs to present individualized valuation evidence outweigh the benefits.  The cost for a narrow corridor of land that is in virtually all cases predominately in rural areas is a very small part of the total RPI.  Thus, even a large change in land cost per acre will not have a significant impact on the overall analysis.  Moreover, developing land valuation evidence is expensive, as parties must hire an appraiser to conduct real estate appraisals for land across thousands of miles.  This typically includes paying the expert to survey the entire right-of-way (ROW).  On balance, we believe that, for a Simplified-SAC presentation, simplifying this component of the RPI analysis is warranted, as the added precision does not justify the high costs of developing more accurate land valuations.

2.  Roadbed Preparation

Roadbed preparation is a significant category of RPI that is less subject to simplification on a route-mile basis than the others, as it can be affected by both the terrain and makeup of the route being replicated.  For example, there are significant economies in preparing roadbed for double track rather than single track.  And roadbed preparation for a rail line over a mountain is much more costly than roadbed preparation for a rail line through the flat American heartland. 

Major simplifications remain possible, however.  The parties can and should continue to use the ICC Engineering Reports to determine the underlying quantities of material needed for line segments where these data have been reported.  They should convert the ICC-reported quantities to current engineering standards using the methodology currently in use in Full-SAC cases.  (The Board will make available sample spreadsheets from prior Full-SAC cases for parties to use upon request.)  For line segments for which there are no ICC data, the parties must present evidence on the quantities of material needed under current engineering standards.  Following current Board precedent in Full-SAC cases, we will assume that ditches should be 2 feet by 2 feet in size, that the right-of-way (ROW) will be 100 feet across, that adequate access roads are reflected in the current quantities, and that side slopes will be 1.5 to 1.

The unit costs for earthwork—by far the largest component of roadbed preparation—will be based on the rolling average from past Full-SAC cases.  The Board has been consistent in the mix of required equipment to perform roadbed preparation.  These costs can be expressed in unit cost per cubic yard of material for excavation, loose rock, solid rock, borrow, and in some cases, fine grading.  Table A-3 below shows the Board’s unit cost findings for roadbed preparation from prior Full-SAC cases.  (Fine grading costs per unit are available only for the Otter Tail and Xcel cases.)

Table A-3

Comparison of Earthwork Unit Costs (per cubic yard)

 

The remaining miscellaneous earthwork costs (such as seeding and topsoil) will be estimated on a route-mile basis.  While there is some variation in this expense category between cases, the total cost of these miscellaneous earthwork costs is a relatively minor part of the overall RPI analysis, so that more precise estimates would have only a modest, if any, impact on the SAC analysis.  Table A-4 below shows the Board’s findings from prior Full-SAC cases. 

Table A-4

Comparison of Other Earthwork Unit Costs