Date: November 12, 2019 

Before the U.S. Surface Transportation Board 

STB Docket No. EP 755 

Final Offer Rate Review 

STB Docket No. EP 756 

Market Dominance Streamlined Approach 

Comments of the 

U.S. Department of Agriculture 

Greg Ibach 

Under Secretary 

Marketing and Regulatory Programs 

U.S. Department of Agriculture 

Washington, D.C. 20250 
Authority and Interest 

The Agricultural Adjustment Act of 193 8 and the Agricultural Marketing Act of 1946 entrust the 

Secretary of Agriculture with representing the interests of agricultural producers and shippers in 

improving transportation services and facilities. As one of many ways to accomplish this 

mission, the U.S. Department of Agriculture (USDA) initiates and participates in Surface 

Transportation Board (STB or Board) proceedings involving rates, charges, tariffs, practices, and 

services. 

Introduction 

USDA appreciates the Board's attempt to make the rate reasonableness review procedures more 

usable and available to shippers. As the Board has recognized, these procedures are complicated 

and largely inaccessible to agricultural and other shippers. 

The concepts behind rate review and market dominance are deeply intertwined. In order to 

connect the concepts and provide a broader take, USDA has combined its comments on these 

proceedings into one submission. The first section briefly provides economic context for why the 

Board's measures are so important and why change is necessary. Later sections examine the 

concepts more deeply and offer more suggestions for the Board to consider as it evaluates these 

rulemakings. The final section summarizes USDA's recommendations. 

Preface: The Need for Change 

In its Final Offer Rate Review (FORR) proposal, the Board cites economic principles as guiding 

this choice-an approach that USDA commends. It is, therefore, worth briefly discussing key 

elements in the economics of railroad pricing to contextualize the remainder of these comments. 

USDA recognizes that because railroads have high fixed costs, they need to be able to price 

above marginal cost in some markets in order to obtain enough revenues to cover the costs of 

infrastructure needed for their network. In economic theory, marginal cost pricing is the "firstbest" approach, or what economists refer to as "efficient." However, in the presence of high 

fixed costs, economic theory considers Ramsey pricing, or "differential pricing" to be the 

second-best efficient approach. 

To recover fixed costs more effectively across its network, differential pricing allows· a railroad 

to impose higher rates on traffic with fewer transportation options, even though the 

characteristics of the movement may be the same as those experienced by shippers with more 

competitive transportation options. Thus, with differential pricing, a firm can price each of its 

customers according to the demand elasticity of that market, subject to the constraint that total 

revenues do not exceed total costs, including normal (reasonable) profits. In other words, 

railroads can charge higher rates in the places where they have the most market power. 

Because railroads have such high fixed costs, there are economies of scale to consolidation. 

When too many railroads compete, each individual railroad gets too little revenue to cover its 

fixed costs. Since the Staggers Rail Act of 1980, railroads have consolidated and gained market 

power. This has enabled railroads to cut costs while earning higher revenues. For a couple of 

decades, railroads cut costs enough to reduce prices for shippers. However, since around 2000, 

2 
average rates have generally increased. 1 In 2019, shippers are in the unenviable situation of . 

facing high rates and limited competition among carriers. 

This simple economic framework helps lay out the regulatory problem confronting the Board. 

There are essentially two economic problems with which the Board must grapple. The first is, 

while railroads can differentially price, rates over which the Board has jurisdiction must be 

reasonable. The railroads are common carriers, so while some differential pricing might .be 

second-best efficient, excessive rates can be unfair or unreasonable. In this and many other 

instances, economics explains what may be done but not what "should" be done. Therefore, the 

Board must balance the need for railroads to earn adequate revenues using differential pricing 

with the need for shippers to receive reasonable rates that are fair. For this to happen, shippers 

must have access to rate review processes that are indeed readily usable and available to 

shippers. 

The second related problem the Board must grapple with is the inefficiency of railroads earning 

revenues beyond their total cost ( or return on investment beyond their cost of capital). The fact 

that a railroad can charge monopoly prices to captive shippers·does not mean those captive 

shippers should pay monopoly premiums above what is necessary for the railroad to recover its 

fixed costs. The second-best efficiency justification for differential pricing relies upon the 

constraint in the theory that total revenues do not exceed total costs. If total revenues rise beyond 

total costs, the "efficiency argument" behind unconstrained use of differential pricing is gone. 

From the national perspective, economically healthy railroads are of little value without 

economically healthy shipping customers-a strong national economy depends on both. 

Therefore, the Board must balance the need for differential pricing that is reasonable and fair 

with the concern that the railroad's market power can extend too far. 

USDA believes FORR can be an effective addition to the STB procedures and, coupled with the 

streamlined market dominance test, it may give shippers a valuable rate review option. 

EP 755: Final Offer Rate Review 

USDA supports the Board's final offer approach to rate review and appreciates the Board has 

heard and incorporated prior recommendations from groups like USDA and the Transportation 

Research Board's (TRB) committee for a study of freight rail transportation and regulation. 

USDA believes final offer rate review (FORR) has the potential to create a low-cost but highvalue rate review process for shippers with unreasonable rates. The approach to substantially 

reduce procedural timelines and to provide methodological flexibility and innovation is 

commendable and worth trying. 

Final Offer Rate Review Is Accessible and Effective 

USDA commends the Board in its efforts to reduce litigation costs through procedural 

constraints rather than ornate and complicated substantive constraints that history shows tend to 

delay decisions and escalate the costs of shippers bringing a case. The tight timelines and other 

procedural limitations will help to make the process one that shippers can use. 

It is important to recognize the relationship between accuracy and accessibility. At face value, it 

seems like there is a tradeoff between the two, where more accurate tests are more costly and 

therefore less accessible. However, this is a too narrow view of accuracy that ignores whether a 

1 Wilson, W. 2019. "Rail Rates for Grain Shipments over Time." 

3 
test is actually used and, if not, what is missed. Although a test might be highly accurate, if it is 

too costly to use, then its practical accuracy is much lower. That is, some cases involving rates 

that the test would have deemed unreasonable are never actually seen and, thus, those rates are 

effectively deemed reasonable (i.e., false negatives). For example, although the stand-alone cost 

(SAC) test may have large shares of true positive and true negative results, it misses all of the 

cases that shippers cannot bring because of its high cost barrier. A complete accounting of these 

errors is necessary to truly gauge the accuracy of a test. USDA supports the FORR proposal 

because it is a more accessible test, whichwill enable the Board to get a more accurate view of 

real rate issues facing shippers. 

In addition, USDA believes tightening procedural constraints improves the quality of evidence 

that participants present. It reduces the need for substantive evidence constraints, which means it 

expands the realm of possible evidence participants can submit. At the same time, the procedural 

constraints incentivize participants to provide only their strongest evidence, while enhancing its 

simplicity and reasonableness. That is, the best evidence would never be ignored, and only the 

best evidence would ever be seen. 

Final Offer Rate Review Can Provide Clear Standards Along with Flexibility 

The Board's proposal also allows for more methodological flexibility, which creates a process 

. that better captures the broader principles behind STB's statutory requirement to provide 

effective rate review. As the Board points out, those principles should include the Rail 

Transportation Policy, the Long-Cannon factors, and sound economic reasoning. 

However, the difficulty is that no single methodology of rate review captures all of these broader 

principles. Each has strengths in capturing a particular aspect of the big picture of effective rate 

review, but none captures the whole picture. For instance, SAC-the notion that a shipper should 

not bear costs from inefficiencies or facilities from which it derives no benefit-is an important 

aspect of rate considerations and is measured thoroughly by a SAC analysis. However, it is far 

from the only consideration in effective rate review. Any one methodology that did capture the 

whole picture would be extremely complex and costly. 

In a recent letter to the Board, the Association of American Railroads (AAR) described FORR as 

"arbitrary" and having an "absence of standards by which rate reasonableness could actually be 

determined."2 USDA disagrees. As is discussed.in the preceding paragraph and in the Board's 

Notice of Proposed Rulemaking (NPRM), the principles of effective rate review, while multifaceted, are very clear. The only open question is how to determine whether one of those 

principles has been violated. 

USDA believes the Board could be more explicit in their final rulemaking about the types of 

actions that represent a violation of those principles. For instance, one action might be an 

"extreme markup of price above cost," which would be targeted toward 49 U.S.C. § 10101, 

avoiding "undue concentrations of market power." Being more explicit in this way would 

mitigate the concern of arbitrariness, while still leaving it up to case participants to determine the 

best methodology and evidence to demonstrate extreme markups. The Board could also be more 

explicit about how revenue adequacy principles in Rail Transportation Policy might translate into 

a determination of unreasonableness. 

2 Association of American Railroads. October 22, 2019. Comments in EP 755, Final Offer Rate Review. 

4 
In its letter, AAR suggests a "comparison group approach" to rate review. Although the details 

of what AAR suggests in the letter are vague, shippers have long criticized the comparison group 

approach in the Three-Benchmark (3B) procedure, not only for being too complex and costly to 

utilize but also for being, ultimately, an invalid measure of unreasonableness. This disconnect 

gets at the heart of why FORR is needed. If railroads truly believe their comparison group 

approach provides unambiguous evidence· of rate reasonableness, then they can submit that 

evidence in their final offer. However, shippers can also submit the evidence they believe shows· 

why the rate is unreasonable from their perspective. Each party having the flexibility to provide 

their best evidence is vitally important in getting an outcome that is reasonable. 

USDA believes the FORR process is a significantly better option than yet another round of 3B 

modifications and rejects the claim that it represents an absence of standards. However, while 

USDA commends the Board for trying something new, it also recognizes that with change comes 

some uncertainty. To mitigate those concerns, USDA suggests the Board establish FORR 

through an initial pilot phase to be evaluated after a set period or set number of cases. The idea is 

to craft something that can be used as a real-world experiment to try out new processes to see if 

they are used by shippers, work well, and are seen by the community as a positive step toward 

making rate review accessible. If the experiment works, the FORR process can be adopted 

permanently. If not, another approach can be tried. 

Request Simple Final Offers 

While maintaining the overall concept of flexibility in the evidence prese·nted, the Board should 

consider establishing additional constraints on what can be included in a final offer. While the 

"incentive effects" in the Board's proposal are likely to produce more simplified and reasonable 

evidence, it is still possible, especially without additional guidance, that both parties could 

present overly complicated evidence that will make it nearly impossible for the Board to assess 

in a short timeframe which party's offer is more reasonable. 

USDA believes the Board can help mitigate this concern with other procedural constraints, such 

as limiting the length of submissions, and perhaps by providing more general guidance on the 

types of evidence that should or should not be provided. For example, final offer processes used 

in other matters work best with each party providing only a single number (e.g., baseball-style 

arbitration). The Board might similarly attempt to restrict the content of the final offer. The more 

complicated the offered remedy is, the harder it will be to assess its reasonableness in a short 

timeframe. 

The Proposed Relief Cap Is Too Low 

USDA also recommends the Board raise the $4 million relief cap proposed for FORR. USDA 

recognizes the Board's aim to use relief caps as a means of channeling higher value complaints 

to the appropriate rate review process. However, there are three reasons to institute ·a higher cap, 

if not remove it altogether. 

The first is there is uncertainty for case participants as to whether they will win, which creates 

gaps in the current channeling structure. Unce1iainty in the case outcome means the expected 

value of the case before it is initiated by the shipper (ex-ante) is lower than the relief won after 

the fact ( ex-post). The Board is using the ex-post case value in its channeling structme when 

what matters is the ex-ante expected value when deciding whether to bring a case or not and 

which proceeding to use. In other words, setting the relief cap to the cost of the next-higher rate 

5 
review process assumes shippers believe they have a 100-percent chance of winning, which does 

not reflect what shippers actually expect. With a lower expected chance of winning (say 75 

percent), a shipper with a claim worth $5 million dollars if the case is won ( ex-post) has only a 

$3.75 million expected value (ex-ante) of bringing a case. However, if a shipper had an ex-ante 

expectation of a $4 million cost of bringing a Simplified SAC (SSAC) case, the Board has 

previously found that the shipper would not choose to use SSAC because the expected costs 

would outweigh the expected benefits. This shipper, therefore, has no way of obtaining the full 

relief it may be due if the rate is, in fact, unreasonable. 

Second, it is not clear FORR logically fits into the same channeling structure as SAC, SSAC, and 

3B. That structure makes the clearest sense for SAC and SSAC. SSAC is a less general case of 

the SAC test. In being less general, it is potentially less accurate, so it makes sense to channel 

higher valued cases towards the higher accuracy test. However, 3B is only weakly related to 

stand-alone cost, if at all. The 3B process seems to measure different aspects of rate 

reasonableness concerns-namely, the degree of differential pricing with respect to comparable 

traffic and revenue adequacy. Therefore, it is unclear why 3B would fall below the two SAC 

tests as a "very simplified SAC." The same is even more true of FORR, which could potentially 

cover any aspect of the broader rate review concerns, from stand-alone cost, to differential 

pricing extremes, to revenue adequacy concerns. It is also not obvious how much less accurate 

stand-alone cost evidence would be, if presented under FORR. Once the true accuracy of the test 

is accounted for, including the false negatives from inaccessibility, there is little reason to believe 

a process like FORR would be less accurate than SAC. In general, it is .not obvious FORR fits 

into the current channeling structure, which also makes it unnecessary to fit it to the current relief 

scale. 

Third, the design of the FORR process helps temper the remedy. It is worth noting that, with 

FORR, the Board would not be tied to a remedy in the way it might be with a more explicit 

method (e.g., SAC) that defines upfront precisely how much is reasonable. In the case ofFORR, 

there is no necessary, direct connection between the methodology or methodologies used to 

demonstrate unreasonableness and the final offer rate. For instance, if a shipper uses one or more 

methodologies that show unreasonableness but believes the methodologies contain some 

uncertainty or ambiguity, the shipper might offer a rate lower (more reasonable) than the direct 

functional result of those methodologies. 

In general, FORR incentivizes reasonable arguments and evidence, so there should be less 

concern about unreasonable remedies occurring. If, for example, a shipper makes a convincing 

case the rate is unreasonable, yet seeks an unrealistic remedy, then the Board, acting collectively, 

may not see that package as the more reasonable and accurate. On the other hand, if a shipper 

were to demonstrate very convincingly the rate is exceptionally unreasonable and ask for a 

remedy above the current proposed cap (say, amounting to $4.5 million based on the amount of 

traffic that was affected by the unreasonable rate), it is unclear why, the Board, upon finding the 

shipper's offer fair, should be prevented from accepting it. Without effective competition, the 

railroads' ability to price their service is essentially unconstrained. Unless relief from rate review 

is also unconstrained to check the railroads' potential excesses, the shipper is at a distinct 

disadvantage. Otherwise, an arbitrary cap signals an arbitrary extent for protection against 

unreasonable rates. 

6 
For these reasons, USDA believes the Board should remove the relief cap altogether. At the very 

least, there is significant rationale for the Board to raise the FORR relief limit beyond $4 million. 

The FORR Process Should Be Transparent 

Finally, USDA does not agree with the recent recommendation from the TRB study committee 

authors to keep case details as limited as possible. USDA believes transparency will allow for the 

methodological innovations the Board recognizes to be a valuable result of the FORR process. 

Transparency also reduces the uncertainty for shippers deciding whether to bring a case. The 

committee authors argue a lack of transparency prevents precedents from developing and a lack 

of precedents maintains the flexibility of the FORR process.3 However, it is unclear why 

precedent would be undesirable. Cases with similar facts should be decided similarly. Not only 

could that be a fair process, but a more efficient one when shippers have a better estimate of their 

case outcome, given the facts of their own situation and knowledge of how prior similar cases 

have played out in the FORR process. Flexibility should be maintained only when the facts 

change, and a transparent FORR process would allow that flexibility. Moreover, increased 

transparency will foster more responsible behavior on both sides of the market. 

Recommendations 

USDA has three recommendations to help improve the FORR process: 

• Set a pilot or evaluation period for FORR 

• Provide more guidance on the required content(s) of a final offer with an emphasis on 

simplicity 

• Remove or significantly increase the relief cap 

EP 756: Market Dominance Streamlined Approach 

USDA supports the Board's goal of reducing market dominance determination costs and offers 

the following considerations and recommendations. 

The Need for a Streamlined Market Dominance Approach 

The Board's decision displays an accurate assessment of the need for change, .and USDA will not 

belabor this point. The record is clear on this: "The market dominance inquiry is a costly and 

time-consuming undertaking, resulting in a significant burden on rate case litigants."4 Indeed, 

"An overly complicated and costly market dominance inquiry can itself be a barrier to rate relief, 

even in cases where there is no effective competitive restraint on rail rates."5 USDA appreciates 

the Board's recognition of this and its work to achieve a streamlined approach. USDA begins 

with this principle because the need for change is real and serves as an important and unfailing 

backdrop to reform. As discussed in the FORR section, improving the accessibility of a test can 

also improve its accuracy. For this reason, USDA strongly supports streamlined market 

dominance procedures. 

3 Boyer et al. October 17, 2019. Comments in EP 755, Final Offer Rate Review, and EP 756, Market Dominance 

Streamlined Approach. 4 Surface Transportation Board. Decision. Docket No. EP 756: Market Dominance Streamlined Approach. Decided 

September 11, 2019. 5 Ibid. 

7 
False Positives Are Better Than False Negatives 

A balanced approach to rate review and market dominance recognizes and weighs the costs of 

both false positives and false negatives. The cost of a false negative market dominance 

determination is at least as high as a false positive. In other words, a costly mistake is made when 

a railroad's rate is determined unreasonable when the railroad does not in fact have market 

dominance (false positive), but a costly mistake is also made when a shipper's case is 

inaccurately dismissed by the market dominance test when the shipper's rate is in fact 

unreasonable (false negative). In whatever is decided, there should be a balancing and awareness 

of these two errors. 

However, the latter case-where a market-dominant railroad is deemed to not be market 

dominant-is likely worse and should be more stringently avoided. A market dominance 

determination is always followed up by a rate-reasonableness test. That rate reasonableness test 

acts as a failsafe to help prevent the costly error of requiring a not-market-dominant railroad to 

pay relief. Market dominance and rate reasonableness, although legally distinct, are 

economically and statistically highly related concepts. Even if a market dominance test mislabels 

a railroad as market dominant but there is effective competition, the railroad's rates are less 

likely to be unreasonable in the subsequent rate reasonableness analysis. 

Contrast this false positive error with the mislabeling of a railroad as not being market dominant. 

In the case of this false negative error, a shipper facing unreasonable rates has no recourse once 

the incorrect market dominance decision is made-there is no subsequent rate review test. The 

structure of the market dominance and rate review sequence naturally protects railroads from 

false positives in the market dominance test. In designing a market dominance screen, the Board 

should be cognizant of this bias and make the screen relatively inclusive for shippers. 

In addition to the succession of market dominance and rate review providing a failsafe for 

market dominance decisions, the Board has proposed adding a failsafe in the form of the prima 

facie presumption. Even if a shipper meets the screening criteria, the railroad still can rebut 

before a Board determination is made and before a rate reasonableness test even begins. For this 

reason, the cost of a false positive with respect to the initial screen is especially low. Therefore, 

the Board should make the market dominance screen very inclusive. 

Perspective on the Proposed Market Dominance Factors 

The Board's proposal contains six factors that, together, would provide primafacie evidence of 

market dominance. In the Board's proposal, a shipper would have a presumption of market 

dominance when the movement at issue: (1) has a revenue to variable cost ratio of 180 percent or 

greater, (2) exceeds 500 miles between origin and destination, (3) has no intramodal competition, 

( 4) has no barge competition, (5) involves a complainant who has used truck for less than 10 

percent of its movements, and ( 6) involves a complainant who has no practical build out 

alternative. 

In general, USDA supports the approach to streamline market dominance through a set ofbrightline factors. However, USDA has some concerns over the factors chosen in the proposal. 

Specifically, USDA is most concerned with factor 5, the truck percentage factor of the proposed 

streamlined market dominance test, as discussed in the next section. More generally, USDA also 

has concerns over the definition of market dominance and how it relates to factors two through 

six. Both the specific and more general concerns are discussed in the subsequent sections. 

8 
Further, USDA suggests two alternative factors, a competitive benchmark factor or an additional 

(higher) revenue to variable cost (R/VC) threshold factor. 

Truck Percentage Factor Is Not Clearly Related to Market Dominance 

USDA has concerns about the impracticality of the fifth factor, the percentage of recent 

shipments moved by truck. The concern mainly stems from two reasons. First, the proposed 10 

percent number is arbitrary and should not preclude someone from using the streamlined market 

dominance approach. The Board's decision conveys this fact: in one case, almost 99 percent of 

the movements were by rail, yet effective competition was found; in another case, 20 to 25 

percent was by truck, yet that situation was found to be market dominant. 6 These findings 

suggest that one's dependence on rail transportation (i.e., rail's market dominance) is not 

strongly related to how much is shipped by truck. Therefore, a bright-line rule on the share of 

movements by truck would prevent potentially eligible shippers from bringing a case, thereby 

reducing the accuracy of identifying true market-dominant cases. 

In addition, the suggested criterion is flawed because whether and how much a shipper uses truck 

service is, in part, affected by the railroad's position. If the railroad has market dominance and is 

exhibiting market power, such behavior could push a shipper to use more and more truck 

transportation. In fact, because higher rates force some customers out of the rail market, this is 

precisely why differential pricing is second-best and not first-best efficient. High rail rates 

resulting from rail market dominance could boost a shipper's truck share over the threshold, 

which would preclude the shipper from opening a rate case. Thus, strong applications of market 

dominance could defeat the very purpose of the screen, to detect its application in the first place. 

Furthermore, trucks are not competitive with rail over long distances, and shippers may switch to 

trucks temporarily to access alternative markets ( often with a much lower offer price) within 

shorter distances as a last resort to recoup some of their fixed costs. However, these shippers are 

still beholden to railroads to access more distant markets ( often with much higher offer prices). 

Thus, these shippers remain captive to railroads for long-haul movements, which are integral to 

modem agricultural marketing and global compe!ition. · 

The Board should remove the truck-percentage constraint. 

Questionable if Factors 2 Through 6 Help Detect Market Dominance 

USDA appreciates the Board streamlining market dominance through a set of factors but 

generally finds the qualitative approach to market dominance unsatisfying. The problem is 

market dominance is never defined clearly. 

According to U.S. Code § 10707, " ... 'market dominance' means an absence of effective 

competition from other rail carriers or modes of transportation for the transportation to which a 

rate applies." At the surface, this might sound straightforward, but it is unclear what "effective" 

competition is. 

The difficulty lies in determining whether modal competition is "effective" or not. From an 

economic perspective, market dominance is about demand elasticity. Under perfect competition, 

the demand curve facing the railroad is perfectly flat and railroads are unable to mark-up above 

6 Ibid. 

9 
cost. With less competition, the railroad's demand curve becomes steeper and markup rises. The 

Board simply needs to define a point at which markup ( or elasticity) has gone too far. 

The problem with the existing factors is they only get at markup, elasticity, and market 

dominance indirectly. This is related to the Cellophane Fallacy in antitrust economics. The fact 

that a shipper has alternative options at a given rail price does not mean that the railroad has no 

market power in setting that price. A market dominant railroad will set its price just below the 

price of the alternative option, say trucking, but the price of trucking may still be significantly 

above the railroad's cost of the move. Thus, even though trucking is a substitute for rail at the 

railroad's set price, the railroad could still be market dominant. 

The Board could be more explicit in its final rulemaking about delineating at what distance, say, 

either barge or building-out becomes "practical" or an "effective" constraint. A bright-line screen 

would make it much clearer-who qualified for the streamlined test. However, USDA believes 

there are better factors to determine market dominance in a straightforward and economically 

valid way that help cope with these concerns, which are discussed in the next sections. 

Implement a Competitive Benchmarking Factor 

In their recent letter to the Board, the TRB committee authors recommended a competitive 

benchmark as one of the primafacie market dominance factors. 7 USDA agrees the competitive 

benchmark could be a powerful screen. However, given the above discussion, USDA believes 

the benchmark would be appropriate in lieu of factors 2-6. 

The competitive benchmark methodology focuses on measuring the degree of markup above 

cost. This would be an economically valid way to measure markup across the industry while 

controlling for a wide range of shipment characteristics and cost values. As described previously, 

the Board's task would be only to define a degree of markup beyond which the shipper would 

have a presumption of market dominance. For example, a threshold of two-standard deviations 

of markup above costs would cover over 95 percent of deviations around the predicted 

competitive rate (with a normal distribution) but could be too exclusive. Setting the threshold 

lower, at say a 1 or 1.5 standard deviation, would be more consistent with the fact the cost of 

false positive errors is low. In general, the idea is the Board could pick a level that grants a 

shipper the presumption of market dominance because that level effectively balances the need 

for accessibility and accuracy . 

. However, a practical issue for the Board to consider in using a competitive benchmark screen is 

whether the shipper has enough information to be able to bring a case. Having each shipper 

estimate and derive evidence from its own competitive benchmark model would not be 

consistent with the goal of streamlining the market dominance process. To address this issue, the 

Board could develop its own model for this use, with input from the broader community. The 

Board could provide the model results on its website, and shippers would have to know only 

their own shipment characteristics, similar to what shippers need to know to make use of the 

Board's Uniform Rail Costing System (URCS) Phase III program to estimate variable costs. 

With that information, it would just be arithmetic to determine whether the shipper fell outside 

7 Boyer et al. October 17, 2019. Comments in EP 755, Final Offer Rate Review, and EP 756, Market Dominance 

Streamlined Approach. 

10 
the limit. It would be a relatively simple matter to create a web form that, upon being filled out, 

would provide an immediate market dominance classification. 

Implement a Bright Line RIVC Factor 

As the Board noted, there is a statutory threshold requiring an R/VC percentage of at least 180 

before market dominance can be established and, ultimately, rate reasonableness can be 

explored. More specifically, according to U.S. Code§ 10707, this 180-threshold is necessary in 

order to proceed further in the process but does not suffice in building a "presumption" of market 

dominance. If the Board is unwilling to use the competitive benchmark approach, USDA 

believes as an alternative the Board could implement an R/VC screen at a higher threshold, 

where a complainant meeting or exceeding that threshold would show market dominance prima 

facie. This is because-on a continuum of increasing R/VC, especially above 180-it becomes 

more likely that the carrier at issue is in fact market dominant. Higher markups over cost reflect 

market power .. In very competitive scenarios, there is very little markup, as competition brings 

price down towards cost. Like the competitive benchmark, USDA envisions the R/VC threshold 

being an alternative rather than an addition to factors 2-6. Because factor 1 is a statutory 180-

percent R/VC threshold, USDA proposes that the screen be a single 200-percent threshold for a 

presumption of market dominance. 

In setting a screen, there is a trade-off between being too inclusive (risking false positive errors) 

and too exclusive (risking false negatives). As explained previously, USDA believes the Board 

should strive for balance, while also being aware of the greater risk of under inclusion. An R/VC 

screen of 200 strikes a reasonable balance between the concerns of railroads that worry about 

over inclusion and those of shippers that have a case for potential market dominance and need a 

useable screen. Despite the ambiguity in defining market dominance, it seems clear that a 

railroad facing "effective competition" would have a hard time charging a rate that is 200 percent 

of its variable costs. 

A benefit to this approach is that it is accessible. Notwithstanding the statutory requirement and 

academic literature surrounding the flaws of the URCS, USDA agrees it is relatively 

straightforward to calculate variable cost using the Board's URCS Phase III. · 

Recommendations 

USDA has three recommendations to help improve the streamlined market dominance process: 

• Focus on developing a market dominance screen that is not just streamlined but also 

inclusive 

• . Remove factor 5, the truck percentage, from the screen 

• Remove factors 2-6 and replace them with a measure of markup, either a competitiv.e 

benchmark or an RIV C threshold 

Summary 

USDA supports the Board's effort to find ways of making the rate review process more 

accessible and usable for agricultural and other shippers. USDA understands the Board faces a . 

difficult to task in balancing the variety of concerns in Rail Transportation Policy. USDA 

commends the Board's efforts in the proposals put forward to provide a more fair and balanced 

rail transportation system. 

11 
USDA believes the proposals put forth in EP 755 and EP 756 can be improved by the Board as 

follows: 

(1) Establish a pilot evaluation period for FORR 

(2) Provide additional guidance on final offer contents, with an eye toward simplicity 

(3) Remove or raise the final off er relief cap 

( 4) Focus on accessibility and inclusiveness in finalizing a streamlined market dominance 

approach 

(5) Remove the truck-percentage factor in the market dominance screen 

(6) Replace factors 2-6 with an improved measure of markup and market power, either a 

competitive benchmark or a higher R/VC threshold. · 

12 

G glb h 

Under Secretary 

Marketing and Regulatory Programs 

U.S. Department of Agriculture 

Washington, D.C. 20250