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The Surface Transportation Board held a very important hearing for rail shippers—especially captive shippers—last month. The hearing lasted two days regarding Ex Parte 722 on railroad revenue adequacy and Ex Parte 664 on calculating the railroad’s cost of equity capital.

AAR officials and other representatives from various Class I’s insisted that the STB had no legal power to force railroads to lower rates just because a railroad’s profitability has made them “revenue-adequate.”  AAR President Ed Hamberger stated that the STB will be at risk of “upending numerous national economic goals if they choose to pursue re-instituting revenue caps on freight rail companies.” Additionally, CSX Corporation Executive Vice President and Chief Financial Officer Fredrik Eliasson agreed that railroads that are revenue-adequate and earn their cost of capital should not be punished with capped shipping rates. Rail advocates believe that any regulation of revenue levels by the government would contradict the Staggers Act of 1980, which partially deregulated the rail industry, in order to promote efficiency and economic growth.

In testimony presented by the Concerned Shipper Associations (NITL, The Fertilizer Institute, The Chlorine Institute and the American Chemistry Council), witnesses urged the STB to create new rules to help captive shippers by lowering prices through competitive switching or rate caps. The NITL, Allied Shippers and Consumers United for Rail Equity said STB rate policies must be changed. They argued that while rail profits have grown, STB’s mechanisms for reviewing rates have not kept pace. Kelvin Dowd, a Washington attorney appearing for Allied Shippers, argued that “a revenue-adequate carrier should not be allowed to impose further rate increases on a shipper’s captive traffic. Once a shipper can show market dominance and revenue adequacy, further increases should be illegal.”

The STB annually determines whether Class I’s are revenue-adequate, a concept that describes whether a railroad is earning sufficient revenue to cover its costs and earn a reasonable return sufficient enough to attract capital. The hearing explored how the board should regulate railroads that are revenue adequate, and how such an adequacy finding should impact the regulation of rail rates, among other issues. The STB will now have to determine what revenue adequacy means and how a revenue adequacy determination will be utilized in the future. Both shippers
and railroads will now be awaiting to see what actions the Board will propose.

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