[Federal Register Volume 76, Number 10 (Friday, January 14, 2011)]
[Notices]
[Pages 2748-2751]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-774]


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DEPARTMENT OF TRANSPORTATION

Surface Transportation Board

[Docket No. EP 705]


Competition in the Railroad Industry

AGENCY: Surface Transportation Board.

ACTION: Notice.

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SUMMARY: The Surface Transportation Board will receive comments and 
hold a public hearing to explore the current state of competition in 
the railroad industry and possible policy alternatives to facilitate 
more competition, where appropriate. The Board is seeking written 
comments prior to the hearing addressing the legal, factual, and policy 
matters described below.

DATES: Initial comments are due on February 18, 2011. Reply comments 
are due 28 days thereafter, on March 18, 2011. The hearing will begin 
at 9:30 a.m., on Tuesday, May 3, 2011, in the Board's hearing room at 
the Board's headquarters located at 395 E Street, SW., Washington, DC. 
The Board plans to hold the hearing in a single day, but may extend the 
hearing if the number of participants or the breadth of submitted 
written testimony so requires. The hearing will be open for public 
observation. However, only parties who have notified the Board of their 
intent to participate will be permitted to speak. Any party wishing to 
speak at the hearing shall file with the Board a notice of intent to 
participate (identifying the party, the proposed speaker, and the time 
requested) no later than April 4, 2011. With the notice of intent, the 
party shall provide written testimony on the issues it will address at 
the hearing.

ADDRESSES: All filings may be submitted either via the Board's e-filing 
format or in the traditional paper format. Any person using e-filing 
should attach a document and otherwise comply with the instructions at 
the ``E-FILING'' link on the Board's ``www.stb.dot.gov'' Web site. Any 
person submitting a filing in the traditional paper format should send 
an original and 10 copies of the filing to: Surface Transportation 
Board, Attn: Docket No. EP 705, 395 E Street, SW., Washington, DC 
20423-0001.

[[Page 2749]]

    Copies of written submissions will be posted to the Board's Web 
site and will be available for viewing and self-copying in the Board's 
Public Docket Room, Suite 131. Copies of the submissions will also be 
available (for a fee) by contacting the Board's Chief Records Officer 
at (202) 245-0236 or 395 E Street, SW., Washington, DC 20423-0001.

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

SUPPLEMENTARY INFORMATION: The rail network in the United States is a 
series of interconnected lines owned by various rail carriers. Because 
of the high fixed cost associated with building a rail network, 
sometimes there is only one railroad serving a particular destination 
and origin. Some companies that either ship by rail, or would like to 
do so, have complained about being physically limited to a single rail 
carrier and would like to have greater access to competition from other 
railroads. Some shippers have suggested that mandated access by a 
second carrier to singly served businesses would be in the public 
interest. Railroads have responded that such an action would undermine 
their ability to price their services differentially based on demand 
and that, as a result, they would be unable to earn enough revenue to 
invest sufficiently in their networks. Over the years, various possible 
measures that would change the way rail shippers currently obtain 
access to rail service have been debated, including: (1) Requiring 
railroads to quote a rate between any two points they serve to allow 
another railroad to serve the shipper from an intermediate point to the 
final destination; and (2) imposing new rules for competitive access, 
such as mandated reciprocal switching or mandated terminal use 
arrangements, including trackage rights.
    It has been some time since the agency has conducted a thorough 
analysis of these issues. More than a decade ago, the Board conducted a 
comprehensive analysis of ``captive shippers'' and their available 
remedies for rate relief, as well as the incumbent railroad's rights 
and obligations. This analysis culminated in a series of decisions 
collectively known as the ``Bottleneck'' cases. Cent. Power & Light v. 
S. Pac., et al., 1 S.T.B. 1059 (1996) (Bottleneck I), clarified, 2 
S.T.B. 235 (1997) (Bottleneck II), aff'd sub nom. MidAmerican Energy 
Co. v. STB, 169 F.3d 1099 (8th Cir. 1999).
    The Board also conducted a review of its competitive access 
standards in Review of Rail Access & Competition Issues, 3 S.T.B. 92 
(1998).\1\ More recently, in response to a recommendation of the United 
States Government Accountability Office (GAO),\2\ the Board 
commissioned Christensen Associates, Inc. (Christensen Associates), to 
perform an independent study to examine these issues. The resulting 
report, A Study of Competition in the U.S. Freight Railroad Industry 
and Analysis of Proposals That Might Enhance Competition (November 
2009), is available on the Board's Web site or at http://www.lrca.com/railroadstudy/.\3\
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    \1\ The competitive access standards were originally adopted by 
the Interstate Commerce Commission (ICC), the Board's predecessor 
agency, in the mid-1980s. Intramodal Rail Competition, 1 I.C.C. 2d 
822 (1985), aff'd sub nom. Balt. Gas & Elec. v. United States, 817 
F.2d 108 (DC Cir. 1987); and applied in Midtec Paper Corp. v. Chi. & 
Nw. Transp. Co., 3 I.C.C. 2d 171 (1986), aff'd sub nom. Midtec Paper 
Corp. v. United States, 857 F.2d 1487 (DC Cir. 1988).
    \2\ Government Accountability Office, Freight Railroads: 
Industry Health Has Improved, but Concerns about Competition and 
Capacity Should Be Addressed, GAO-07-94, October 6, 2006, pp. 1-2. 
The GAO stated: ``We are recommending that STB conduct a rigorous 
analysis of the state of competition nationwide and, where 
appropriate, consider the range of actions available to address 
problems associated with the potential abuse of market power.''
    \3\ In addition to the original November 2008 report (which was 
revised as of November 2009), Christensen Associates has provided 
the Board with two supplemental reports: An Update to the Study of 
Competition in the U.S. Freight Railroad Industry (January 2010) 
(Christensen Update); and Supplemental Report to the U.S. Surface 
Transportation Board on Capacity and Infrastructure Investment 
(March 2009). These reports are also available in the E-Library on 
the Board's Web site under ``Studies,'' and at the URL provided 
above. In this notice, ``Christensen Study'' refers collectively to 
the original and supplemental reports.
     The Board solicited and received public comments on the 
Christensen Study. Supplemental Report on Capacity & Infrastructure 
Inv., EP 680 (Sub-No. 1) (STB served Apr. 8, 2009); Study of 
Competition in the Freight R.R. Indus., EP 680 (STB served Nov. 6, 
2008). Many of the issues discussed in the Christensen Study are 
also relevant to the proceeding that is being initiated here. As 
such, parties are invited to discuss in EP 705 any aspect of the 
Christensen Study that is relevant to the topic of competition in 
the railroad industry. Because EP 680 and EP 680 (Sub-No. 1) have 
served their limited purpose of initiating a discussion on 
competition and capacity in the United States freight rail industry, 
and because a significant portion of that discussion can continue in 
the proceeding being initiated here, EP 680 and EP 680 (Sub-No. 1) 
will be discontinued on the service date of this decision.
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    The United States railroad industry has changed in many significant 
ways since the Board's competitive access standards were originally 
adopted in the mid-1980s. Among the more salient developments have been 
the improving economic health of the railroad industry, increased 
consolidation in the Class I railroad sector,\4\ the proliferation of a 
short line railroad network, and an increased participation of rail 
customers in car ownership and maintenance, as well as other activities 
previously undertaken by the carrier. Since 1980, railroad productivity 
improved dramatically, resulting in lower transportation rates. 
However, productivity gains appear to be diminishing and, since 2004, 
overall rail transportation prices have increased. See Christensen 
Update at i & 3-26. Taken together, these events suggest that it is 
time for the Board to consider the issues of competition and access 
further.
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    \4\ The Board designates 3 classes of freight railroads based 
upon their operating revenues, for 3 consecutive years, in 1991 
dollars, using the following scale: Class I--$250 million or more; 
Class II--less than $250 million but more than $20 million; and 
Class III--$20 million or less. These operating revenue thresholds 
are adjusted annually for inflation. 49 CFR pt. 1201, 1-1. Today, 
there are 7 Class I carriers and approximately 550 short line 
carriers (i.e., Class II and Class III carriers) operating in the 
United States.
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    The Bottleneck Issue. A rail bottleneck rate issue arises when more 
than one railroad can provide service over at least a portion of the 
movement of a shipper's goods from an origin to a destination, but 
where either the origin or destination is served by only one carrier, 
i.e., the bottleneck carrier. In each of the Bottleneck cases, an 
electric utility company sought to require the bottleneck carrier to 
establish a ``local rate'' for a segment of the through movement that 
was served only by that carrier, so that the utility could combine that 
local rate with a rate for the remainder of the movement by another 
carrier. The utilities further sought to be able to separately 
challenge the reasonableness of the rate for the bottleneck segment of 
the movement, rather than having to challenge the origin-to-destination 
rate in its entirety. Each of the utilities in the Bottleneck cases 
sought to divide the bottleneck carrier's long-haul and through rate 
into smaller portions that could be priced and, accordingly challenged, 
independently. The utilities believed that the total charges would be 
lower if the reasonableness of the rates were adjudicated only for the 
bottleneck portion of the movement (with the rate set by head-to-head 
rail competition for the remainder of the movement), rather than for 
the entire movement. Because the Bottleneck cases raised issues of 
broad importance, the Board provided for extensive public input and 
held an oral argument.
    In the resulting decisions, the Board concluded that a shipper 
could not routinely direct a bottleneck carrier that

[[Page 2750]]

was capable of providing origin-to-destination rail service for that 
shipper to ``short-haul'' itself by routing traffic over the lines of 
the non-bottleneck carrier. Rather, the Board held that a shipper could 
seek to force an alternative routing that would include the line of the 
non-bottleneck carrier only if it could show, under 49 U.S.C. 10705 and 
the Board's ``competitive access'' rules developed in Intramodal Rail 
Competition, that there would be sufficient benefits associated with 
the alternative routing.\5\ The Board also held that, under 49 U.S.C. 
11101(a) and 10742, a bottleneck carrier generally cannot refuse 
traffic from other carriers originating at sources that the bottleneck 
carrier does not serve, even if the bottleneck carrier can carry the 
identical commodity in its own single-line service from another source. 
Bottleneck I, 1 S.T.B. at 1063-64.
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    \5\ Specifically, the Board's rules state that the shipper must, 
in such a case, demonstrate the requested alternative route ``is 
necessary to remedy or prevent an act that is contrary to the 
competition policies of 49 U.S.C. 10101 or is otherwise 
anticompetitive, and otherwise satisfies the criteria of 49 U.S.C. 
10705 * * *'' The Board will also consider several other enumerated 
factors, including efficiency, revenues, costs, and rates charged. 
The Board must further find that the complaining shipper (or 
carrier) would use the alternative route for a ``significant portion 
of its current or future service * * *'' See 49 CFR 1144.2.
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    Finally, for either type of movement--same-source movements for 
which a shipper has successfully obtained an alternative routing, or 
different-source movements that the bottleneck carrier cannot handle in 
single-line service--the Board held that it could not force the 
bottleneck carrier to quote a separately challengeable rate for the 
bottleneck segment unless the requesting shipper had already entered 
into a rail contract for the non-bottleneck segment at the time that 
the bottleneck rate was requested. In so ruling, the Board relied on 
the Supreme Court decision in Great Northern Railway v. Sullivan, 294 
U.S. 458, 463 (1935), which held that the reasonableness of through 
rates established by carriers should in general be evaluated from 
origin-to-destination, rather than on a segment-by-segment basis.\6\
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    \6\ The Board rejected the notion that the shipper could first 
request the bottleneck rate, and then enter into a contract for the 
remaining portion of the route. Rather, under Great Northern 
Railway, the Board considered the contract to be a condition 
antecedent to the request for the bottleneck tariff quote.
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    Competitive Access. Competitive access can take the form of 
mandated reciprocal switching, terminal use, or trackage rights. 
Reciprocal switching involves the incumbent railroad transporting 
traffic, usually for a short distance, over its own track on behalf of 
a competing railroad for a fee. Reciprocal switching thus enables the 
competing railroad to offer its own single-line rate, even though it 
cannot physically serve the shipper's facility, to compete with the 
incumbent's single-line rate. The agency has in the past held that 
reciprocal switching should not be ordered absent a showing of 
competitive abuse. More specifically, the complaining party must show 
that the incumbent railroad has used its market power to extract 
unreasonable terms or, because of its monopoly position, has 
disregarded the shipper's needs by rendering inadequate service. 
Midtec, 3 I.C.C. 2d at 181.
    Unlike reciprocal switching, forced terminal arrangements 
(including some forms of trackage rights) involve the physical presence 
of a competing carrier on a host carrier's facilities owned by the 
incumbent railroad. Under terminal agreements, an incumbent railroad 
grants access to its terminal facilities or tracks to another carrier's 
trains for a fee so that the non-incumbent can serve traffic it would 
otherwise be unable to access.
    Interchange Commitments. Interchange commitments can also fall 
under the broad rubric of competition and competitive access in the 
railroad industry. These are contractual provisions included with a 
sale or lease of a rail line that limit the incentive or the ability of 
the purchaser or tenant carrier to interchange traffic with rail 
carriers other than the seller or lessor railroad. The Board has 
addressed interchange commitments in Review of Rail Access and 
Competition Issues--Renewed Petition of the Western Coal Traffic 
League, EP 575, et al. (STB served Oct. 30, 2007), and Disclosure of 
Rail Interchange Agreements, EP 575 (Sub-No. 1) (STB served May 29, 
2008). There are also several pending cases before the Board that will 
continue to develop, on a case-by-case basis, the Board's policies. 
Because we will continue to consider these issues and look to improve 
the processes associated with transactions involving interchange 
commitments, this hearing will not focus on interchange commitments or 
the approach adopted in EP 575.

Procedures

    This proceeding is intended as a public forum to discuss access and 
competition in the rail industry, and with a view to what, if any, 
measures the Board can and should consider to modify its competitive 
access rules and policies; whether such modification would be 
appropriate given changes over the last 30 years in the transportation 
and shipping industries; the effects on rates and service these rules 
and policies have had; and the likely effects on rates and service of 
changes to these policies. The Board is providing an opportunity for 
any person or entity that wishes to participate to file written 
prepared comments in advance of the hearing, and the Board will provide 
an opportunity to parties to file replies to those comments. 
Subsequently, the Board will hold an oral hearing at the agency to 
explore the issues in more depth.
    In particular, we urge the parties to focus their comments, and 
subsequent testimony and statements for the hearing, as follows:
    1. The Financial State of the Railroad Industry. Parties are 
invited to comment on the evolving economic state of the railroad 
industry. The industry has changed significantly since 1980, when 
Congress passed the Staggers Act of 1980, Public Law 96-448, 94 Stat. 
1895 (1980) (Staggers) and the ICC began the process of devising the 
current competitive access rules and policies. Today, the industry is 
in substantially stronger condition financially. In this regard, 
parties should address both the findings and conclusions of recent 
studies of the railroad industry, including (but not limited to) the 
Christensen Study and the joint study of United States Departments of 
Agriculture and Transportation.\7\
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    \7\ Study of Rural Transportation Issues, http://www.ams.usda.gov (follow ``Publications'' hyperlink; then follow 
``Agricultural Transportation'' hyperlink; then follow 
``Congressional Studies'' from the dropdown menu; then follow ``04-
10: Study of Rural Transportation Issues'' hyperlink).
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    2. 49 U.S.C. 10705 (alternative through routes). Parties are 
invited to discuss how to construe this provision in light of current 
transportation market conditions. In this regard, parties may address 
pre-Staggers practice, Staggers' effect on this issue, and whether 
there are statutory constraints on the Board's ability to change policy 
at this time. Parties are specifically invited to comment on the 
differences between Sec. Sec.  10705(a)(1) and 10705(a)(2), the 
circumstances under which carriers may seek to protect their long hauls 
under Sec.  10705(a)(2), and whether Sec.  10705(a)(2) should apply 
where multiple carriers can originate the traffic, but only a single 
carrier can deliver the traffic to its destination.
    3. 49 U.S.C. 11102(a) (terminal facilities access). Parties are 
invited to discuss how to construe the terminal access provision in 
light of current transportation market conditions. Again,

[[Page 2751]]

parties may address pre-Staggers practice, Staggers' effect on this 
issue, and whether there are statutory constraints on the Board's 
ability to change policy at this time. The Board is also interested in 
how the definition of ``terminal facility'' evolved over time.
    4. 49 U.S.C. 11102(c) (reciprocal switching agreements). Parties 
are invited to discuss, separately from the terminal facilities access 
provision, how to construe this provision in light of current 
transportation market conditions. Again, parties may address pre-
Staggers practice, Staggers' effect on this issue, and whether there 
are statutory constraints on the Board's ability to change policy at 
this time. In particular, parties should address whether the broad 
``practicable and in the public interest'' standard in the statute 
should be constrained by the provision permitting relief ``where * * * 
necessary to provide competitive rail service.'' Finally, parties may 
discuss the distance limitations, if any, associated with this 
provision.
    5. Bottleneck Rates. Parties are invited to discuss whether the 
Board could and should change its precedent finding only narrow 
authority to compel a railroad to quote a separately challengeable rate 
for a portion of a movement. Parties are also asked to comment on how 
the Great Northern Railway decision--holding that the reasonableness of 
a through rate established by carriers is only relevant to the shipper 
as to the total rate charged, and thus should be evaluated from origin 
to destination rather than on a segment-by-segment basis--can 
reasonably be applied in today's transportation world. In particular, 
we want to explore how the agency would evaluate the reasonableness of 
the more elaborate through rates used in today's global transportation 
industry including, for example, a local truck movement at origin, a 
transload to rail for shipment to a port, an international water 
movement, and finally a foreign rail or truck movement to destination. 
In such an example, do Great Northern Railway and other precedent 
require the agency to evaluate the reasonableness of the rates 
exclusively from origin to destination? If so, how could the agency 
evaluate the entire through rate when a portion of that rate includes 
transportation outside the Board's jurisdiction? Or does the agency 
have the discretion to permit the shipper to challenge just the rail 
carrier's division of the international through rate? Does the agency 
have discretion in other purely domestic settings? Participants may 
also address the role that short lines play in through rates, and 
whether the reasoning in Great Northern Railway encompasses 
``bottleneck'' situations and a more highly concentrated rail industry. 
Should freight rail customers be allowed to determine intermediate 
origin and destination points that would enable a competing carrier or 
mode to serve the shipper's final destination?
    6. Access Pricing. If the Board were to modify its competitive 
access rules, it would also need to address the access price. The Board 
seeks comments on what tools it can and should consider using (within 
statutory and constitutional limits) in evaluating how the carriers can 
assess terminal access prices, reciprocal switch fees, or segment 
rates, such as Constrained Market Pricing principles, or an alternative 
set of principles, such as cost-based pricing principles or Efficient 
Component Pricing. What role, if any, should a carrier's current 
financial standing and future prospects bear in this determination? \8\
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    \8\ A basis for the Board's historic pricing policy under 
Staggers and ICCTA was to permit demand-based differential pricing 
and allow captive shippers to bear a greater share of the carriers' 
fixed and common costs to help the railroads achieve revenue 
adequacy.
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    7. Impact. Finally, we invite comments from all interested parties 
on the positive and negative impact any proposed change would have on 
the railroad industry, the shipper community, and the economy as a 
whole. The introduction of greater rail-to-rail competition could 
improve service and lower rates for captive shippers. But a loss of 
revenue could lead to less capital investment, constraining capacity 
and deteriorating service for future traffic. Any party advocating a 
change should address these impacts.

    In addition to the guidance provided above, parties are welcome to 
offer their comments on any other aspect of our competitive access 
rules. Parties are also invited to comment on the specific questions in 
our prior order on this similar subject. Policy Alts. to Increase 
Competition in the R.R. Indus., EP 688 (STB served Apr. 14, 2009). 
Board Releases and Live Video Streaming Available Via the Internet: 
Decisions and notices of the Board, including this notice, are 
available on the Board's Web site at http://www.stb.dot.gov. This 
hearing will be available on the Board's Web site by live video 
streaming. To access the hearing, click on the ``Live Video'' link 
under ``Information Center'' at the left side of the home page 
beginning at 9 a.m. on May 3, 2011.
    This action will not significantly affect either the quality of the 
human environment or the conservation of energy resources.
    It is ordered:
    1. A public hearing in this proceeding will be held on Tuesday, May 
3, 2011, at 9:30 a.m., in the Surface Transportation Board Hearing 
Room, at 395 E Street, SW., Washington, DC, as described above.
    2. Initial comments are due on February 18, 2011.
    3. Reply comments are due on March 18, 2011.
    4. By April 4, 2011, parties wishing to speak at the hearing shall 
file with the Board a notice of intent to participate identifying the 
party, the proposed speaker, and the time requested. With the notice of 
intent, the party shall provide written testimony on the issues it will 
address at the hearing. Written submissions by interested persons who 
do not wish to appear at the hearing are also due by April 4, 2011.
    5. This decision is effective on the date of service.

    Decided: January 11, 2011.

    By the Board, Rachel D. Campbell, Director, Office of 
Proceedings.
Andrea Pope-Matheson,
Clearance Clerk.
[FR Doc. 2011-774 Filed 1-13-11; 8:45 am]
BILLING CODE 4915-01-P