Chapter 11

Rail Relief 

Processes for 

Shippers
351

Chapter 11: Rail Rate Relief 

Processes for Shippers 

In the legislative language requiring this study on agricultural transportation issues, Congress 

requested a discussion on “the accessibility to shippers in rural areas of Federal processes for 

the resolution of grievances arising within various transportation modes.”217 Our reading of 

this requirement is that Congress desired information about how shippers can contest rates, 

and whether these processes are practical and 

effective. Over the years, shippers have raised 

many concerns about the grievance processes 

for rail rates. It is important to note that truck 

and barge rates are not regulated by the Federal 

government and are driven by competitive 

markets. Captive rail rates—those where there 

is no cost-competitive transportation 

alternative—are subject to regulation by the 

Surface Transportation Board (STB). A grievance 

process is available to shippers who use oceangoing common carriers, and is described in 

Chapter 14. This chapter limits its scope to the 

rate relief processes for rail shippers. 

 

Regulating Railroads 

The Interstate Commerce Commission (ICC) began regulating railroads in 1887. Those early 

regulations controlled rail rates, prohibited most forms of price discrimination, published tariffs 

and enforced adherence to them, and prohibited the practice of pooling. Over time, ICC 

regulation of the railroads evolved to the point where almost every action by a railroad 

required prior approval by the ICC, including track construction, route abandonment, rates, and 

even the method for depreciation of capital investment. By the latter half of the twentieth 

century, railroads had begun to decline, at least in part due to stifling economic regulation; by 

the 1970s the industry was in desperate straits. 

The Railroad Revitalization and Regulatory Reform Act of 1976 and the Staggers Rail Act of 1980 

(Staggers Act) sought to revitalize the financial health of railroads by minimizing Federal 

regulatory control and providing flexibility in establishing rates, which could allow railroads to 

generate adequate revenues. When Congress enacted the Staggers Act, it made clear that it 

wanted to alter significantly the balance between regulation and the forces of the competitive 

marketplace. 

Figure 11-1: The STB seal 

Source: Department of Transportation
352

To improve the financial prospects of railroads, the 

Staggers Act transformed the regulatory process, 

allowing, “to the maximum extent possible, 

competition and demand for services to establish 

reasonable rates for transportation by rail.”218 In this 

regard, the Act provided for confidential contracts 

between shippers and their rail carriers, authority for 

the ICC to exempt classes and types of rail 

transportation from regulation when not needed to 

foster competitive rates and service, and set rate 

thresholds below which the Commission had no 

jurisdiction to regulate rates. These reforms 

effectively exempted a substantial percentage of 

traffic (estimates range from 75 to 85 percent) from 

economic regulation. Residual rate regulation 

focused on maintaining reasonable rates where 

there was an absence of effective competition. 

Some regulatory provisions were, however, retained. 

At a very basic level, U.S. carriers retained a 

“common carrier obligation,” requiring them to 

provide transportation services on “reasonable 

request.” Railroads remain under general 

obligations to serve all customers without 

discrimination, charge reasonable rates, and 

interchange traffic with connecting carriers. 

Notwithstanding this requirement, shippers have 

frequently complained that railroads can—and quite 

often do—price movements beyond the range of 

economic feasibility to discourage or eliminate traffic 

they want to avoid. 

Differential Pricing 

Flexibility in setting rates also afforded railroads the 

opportunity to use differential pricing to raise 

sufficient revenues to operate, maintain, and (where 

appropriate) expand their networks. To recover 

fixed costs more effectively across the system, 

differential pricing allows a railroad to impose higher 

rates on traffic with fewer transportation 

alternatives, even though the characteristics of the 

movement may be the same as those for a shipper 

facing more competitive transportation options. 

The ICCTA 

The Interstate Commerce Commission 

Termination Act of 1995 (ICCTA) 

replaced the ICC with a much smaller 

STB.*

 The ICCTA imposed time limits on 

rate proceedings and required the STB 

to establish rate reasonableness 

standards to apply to cases involving 

smaller shippers. In December 1996, 

the STB adopted Simplified Guidelines 

that used three revenue-to-variable cost 

benchmarks as starting points for rate 

reasonableness analysis. These 

Simplified Guidelines were not used by 

shippers as they did not consider them 

cost-effective and were unsure how the 

benchmarks would be applied. In 2008, 

STB established new small rate appeals 

procedures, which have been affirmed 

by the district court after appeals from 

both railroad and shippers. 

In addition, the ICCTA eliminated the 

requirement for railroads to file tariffs 

with the STB and does not allow the STB 

to suspend any rail rates except to 

prevent irreparable harm. A railroad’s 

common carriage rates and service 

terms for all commodities have to be 

disclosed upon request and published in 

some form for agricultural products and 

fertilizer. Increases in these rates or 

changes in service terms require that 20 

days advance notice be given to any 

person who had requested such rates or 

made arrangements for shipment under 

the rate. 

*

 TP.L. 104-88, December 29, 1995 
353

Differential pricing assumes that when it 

lowers its rates, the railroad can attract 

additional business from shippers who 

may otherwise transport via alternate 

modes. Generally these lower rates 

under differential pricing cover the 

directly attributable variable costs of the 

movement and a relatively minor 

contribution to the railroad’s overall fixed 

costs. 

Customers with few or no practical 

alternatives to the railroad—captive 

shippers—are asked to pay a greater 

proportion of fixed costs. Although those 

with more transportation alternatives 

pay a lower share of the railroad’s fixed 

costs, their smaller contribution reduces 

the share of those costs that captive 

shippers would pay absent that traffic. 

Despite the fact that the presence of 

competitive traffic on the railroad 

effectively lowers the captive shipper’s 

share of fixed costs, the concept of 

differential pricing is viewed by some 

shippers as inherently discriminatory. 

Differential pricing does not mean, 

however, that a railroad can charge a 

captive rail customer any price they wish. 

Under the Staggers Act, railroads can 

generally charge any customer whatever 

rate they want, but if the railroad has 

market dominance for the shipment and 

the rate exceeds 180 percent of the 

variable (direct) cost to the railroad, the 

rate can be challenged at the STB. The 

fact that Congress directed the ICC, then 

later the STB, to establish a rate 

challenge process means Congress 

intended to place limits on differential 

pricing to prevent unrestrained rail rates 

for captive customers. The debate 

 

Railroads Are No Longer a Decreasing-cost Industry 

Recent data indicates that railroads are no longer a 

decreasing cost industry, which is an industry in which 

average costs per unit of output decrease as output 

expands. While revenue ton-miles of output 

decreased 15 percent during the first 9 months of 

2009 compared to the same period in 2008, operating 

costs decreased 25 percent. Although these 

percentage changes varied for each of the U.S. Class I 

railroads, all seven U.S. Class I railroad operating costs 

decreased more rapidly than output. 

According to this recent data, costs will increase—

rather than decrease—as the economy recovers from 

recession unless the railroads make sufficient 

investments in additional capacity. It is apparent that 

the rapid growth of rail traffic since 2004 has 

exhausted the economies of traffic density available 

to railroads. In addition the Christensen study 

commissioned by STB in 2008 found that recent 

railroad rate increases were largely the result of 

increased costs. 

Historically, railroads have been a decreasing-cost 

industry. Since railroads were a decreasing cost 

industry, some economists were concerned that the 

presence of too much rail-to-rail competition could 

result in prices decreasing to the extent that their 

fixed costs would not be covered. Railroads face high 

fixed and common costs to maintain an extensive 

network, including the costs of right-of-way 

acquisition, roadbed preparation, installation of track 

and signals, etc. This network must be in place before 

any freight can move. Once an initial investment has 

been made to provide a given level of capacity, 

per-unit costs decline as production increases, up to 

capacity. As output increases to that point, per-unit 

fixed costs and common costs decrease because they 

are spread over more and more units. Conversely, as 

railroad traffic shrinks, fixed and common costs are 

spread over a smaller traffic base, resulting in higher 

costs per unit. As traffic expands beyond capacity, as 

indicated by recent data, per-unit costs rise as output 

expands. 
354

before Congress and the Executive today is whether this rate challenge process is workable and 

allows captive rail customers a reasonable chance to obtain relief from rates that are 

unreasonably high. 

Differential pricing is credited with fostering a viable railroad industry with average rates that 

have declined for twenty years, but it has not meant universally lower rates for every shipper. 

Captive shippers generally have not shared in the rate reductions that shippers with 

transportation alternatives have enjoyed. Consequently, captive shippers feel that they have 

borne a disproportionate part of the burden of revitalizing the rail industry and have 

complained that rate relief remedies have been unavailable in practice due to the cost and time 

required to resolve rate complaints. Some believe that the rail regulation remaining today is 

still too expensive and time-consuming for carriers, shippers, and the STB. 

Balancing the conflicting objectives of ensuring reasonable rates for shippers against the 

railroads’ needs to obtain adequate revenues has not been easy. Rates that are too high can 

harm rail-dependent businesses, while rates that are too low deprive railroads of the revenues 

necessary to fund the infrastructure investments necessary to promote efficient service and 

improve rail capacity. Shippers—particularly grain and coal shippers—have called for 

regulatory relief, including removal of burdensome, costly, and unresponsive barriers to 

regulatory relief. In response, Congress in 1995—through the ICCTA—added a new provision to 

the rail transportation policy calling for the “expeditious handling and resolution of all 

proceedings.”219 It ordered the STB to establish procedures to ensure expeditious handling of 

rail rate challenges, focusing on resolving delay in the discovery and evidentiary phases of 

proceedings. Congress also directed the STB to establish a simplified and expedited method for 

determining reasonableness in cases where a full stand-alone cost analysis is too costly, given 

the value of the relief sought.220 

STB’s Rate Regulation 

To alleviate concerns about the imposition of differential pricing, the Staggers Act established a 

rate relief process whereby shippers could contest rates they believed to be unreasonable. To 

successfully pursue a rate challenge, a shipper must first demonstrate that the rate for the 

traffic is subject to STB jurisdiction—that the traffic has not been exempted and is not under 

contract (with the exception of some specific agricultural commodities). After clearing these 

hurdles, the rate must meet the statutory jurisdictional threshold, set at 180 percent of the 

variable cost to the railroad for the movement in question, and the shipper must show that the 

railroad has market dominance over the traffic at issue. 
355

Jurisdiction 

Under federal rules, railroads are required, upon request, to 

quote to shippers a rate for common carriage 

transportation.221 The STB has jurisdiction (subject to some 

exceptions for exempt commodities) over disputes arising 

out of common carriage (non-contract tariff) rates.222 

Contract rates are generally not subject to challenge before 

the STB; the exclusive remedy for any alleged breach of a 

contract is in an appropriate State court or United States 

district court, unless the parties otherwise agree. Grain or 

grain product contract issues can be arbitrated through the 

National Grain and Feed Association’s (NGFA) rail 

arbitration system if either the shipper or the carrier is an 

NGFA member and both parties agree to arbitration. 

Although STB has no jurisdiction over contract rail rates or 

service terms, it has oversight responsibilities on contracts 

for the movement of agricultural commodities (including 

grain, soybeans, sunflower seeds, grain products, and 

fertilizer) that are not specifically exempted from 

regulation. Rail carriers are required to file with the STB a 

summary of each contract for the transportation of 

agricultural products.223 Any shipper or port has 18 days 

after the contract summary is filed to file a complaint with 

the STB. The STB may disapprove the contract if it finds the 

contract unreasonably discriminates against a port or 

shipper, the contract impairs the ability of the railroad to 

meet its common carrier obligation to a shipper, or that it 

constitutes a destructive competitive practice.224 With such 

a finding, the STB can also order the rail carrier to provide 

rates and service substantially similar to the contract with 

such differentials in terms and conditions as are justified by 

the evidence. However, some assert this oversight is 

limited because there is often too little time to file a 

complaint and not enough information in the contract summary. 

Many agricultural commodities—but not grain, soybeans, and sunflower seeds—are exempt 

from STB regulation. This includes such items as meat, poultry, fish, sugar beets, and dairy 

products.225 However, according to the 2006 Waybill Sample, grain, soybeans, and sunflower 

seeds constitute almost 95 percent of the tonnage of farm products carried by rail. The STB 

also has exempted certain boxcar movements from rate regulation. In addition, intermodal rail 

transport of commodities has been exempted from STB rate regulation. However, STB has the 

authority, upon receipt of a request from a complainant, to revoke the exemption for specific 

traffic where necessary to achieve the regulatory objectives of the statute. 

Contracts 

More recently, railroads have 

offered contracts that are priced at 

tariff rates and the same service 

terms as shipments moving at tariff 

rates. Due to shipper concerns 

regarding this practice, and the 

inability to appeal contract rates, 

this practice resulted in a STB 

proceeding regarding the definition 

of contracts. Although contract 

service terms as well as rates 

historically have been negotiated—

which has differentiated contracts 

from tariff rail rates—railroads 

have begun to exercise their 

market power by not negotiating 

with shippers regarding contract 

service terms. Without rate or 

service benefits, there is nothing to 

distinguish many of these contracts 

from service under tariff rail rates, 

except for the inability to file rate 

appeals with the STB. In 2009, the 

STB proposed a rule that would 

require the railroad to specify that 

it is a contract on the front page for 

it to be considered a contract. 
356

Rate Reasonableness Complaints—Finding Market Dominance 

For complaints involving the reasonableness of tariff (non-contract) rates, the STB first 

determines if the specific rail carrier has market dominance over the transportation to which 

the rate applies.226 Market dominance is defined as an absence of effective competition from 

other rail carriers or modes of transportation (trucks, barge, and pipelines) for the movement 

to which a rate applies.227 

The second prerequisite for the STB’s jurisdiction is whether the proposed rate produces 

revenues that exceed 180 percent of the movement’s variable costs. Consideration of product 

or geographic competition—the availability of substitute products from other carriers or the 

ability to ship the same product from other sources or to other destinations—was repealed by 

the STB in a December 1998 decision. In the decision, STB determined that discovery regarding 

product and geographic competition had become a source of process abuse, unduly 

complicating the market dominance determination and acting as a litigation obstacle to a 

shipper's ability to pursue a rate complaint. The burden of proof is on the shipper to show that 

there is no effective form of competition. If intermodal competition exists, the STB has no 

authority to review the rate challenge, even if the revenues exceed 180 percent of the variable 

costs of providing the service. 

If the two conditions are met, the STB may then consider if a common carrier rate is 

unreasonable, via appropriate tests. Should the STB ultimately determine that the challenged 

rate is unreasonable, it will order the railroad to pay reparations to the complainant for past 

movements, and prescribe the maximum rate the carrier is permitted to charge for future 

movements.228 Some examples of when the STB has ordered reparations and set new rates for 

the future are provided in Coal Rate Guidelines. 

However, the STB may not set the maximum reasonable rate below the level at which the 

carrier would recover 180 percent of its variable costs of providing the service. The STB must 

recognize that rail carriers should have an opportunity to earn “adequate revenues,” defined as 

those 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 sufficient to provide a sound rail transportation 

system. 

Types of Cases 

The STB distinguishes two types of rate cases: “coal rate” and “non-coal-rate.” Coal rate cases 

are those involving large volumes of traffic; non-coal-rate cases involve shippers that transport 

either smaller shipments or large shipments transported infrequently. To provide greater 

flexibility for shippers in challenging a rate, recent STB reforms allow a complainant to select 

the methodology under which it wants the rate to be judged: Full Stand-Alone Cost (SAC), 

Simplified SAC, or Three-Benchmark. However, a limit is imposed on the rate relief available 

under each method. 
357

Standard Guidelines for Assessing Rate Reasonableness— 

Coal Rate Guidelines

To assess whether rates are reasonable, the STB whenever possible uses a concept known as 

“constrained market pricing” (CMP) set forth in the Coal Rate Guidelines.229 CMP principles 

limit a carrier's rates to levels necessary for an efficient carrier to make a reasonable profit. 

CMP principles recognize that, in order to earn adequate revenues, railroads need the flexibility 

to price their services differentially by charging higher mark-ups on captive traffic, but the CMP 

guidelines impose constraints on a railroad's ability to price differentially. 

Stand-Alone Cost 

The most commonly used CMP constraint is the Stand-Alone Cost (SAC) test. Under the SAC 

test, a railroad may not charge a shipper more than it would cost to build and operate 

efficiently—at current costs—a hypothetical new railroad, tailored to serve a traffic group that 

includes the complainant's traffic. CMP protects the captive shipper from bearing the cost of 

any facilities or services from which it derives no benefit and from cross-subsidizing other 

traffic. The SAC analysis requires that the shipper construct a hypothetical, perfectly efficient 

railroad that would replace the shipper’s current carrier, and simulate the competitive rate that 

would exist in a “contestable market” free from legal or financial barriers to entry and exit. 

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 first to select an appropriate subset of the railroad’s 

traffic for the hypothetical stand-alone cost railroad (SARR) to serve, 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 forecast traffic group. 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). 

STB compares the challenged rate to a newly derived contestable market rate. As part of the 

lengthy rate relief process, both the railroad and the shipper have the opportunity to seek 

discovery of evidence, and present facts and views to STB. Although the STB has used this test 

to resolve rate complaints, the time and expense associated with the process have encouraged 

settlement of some rate complaint cases and discouraged others entirely. Although the standalone cost is a conceptually sound methodology, the regulatory process involved in a maximum 

rate case can be daunting, long, and costly. The complexity and costs of litigating an SAC case 

have increased over time; shippers’ litigation costs in recent Full-SAC cases have approached $5 

million and consumed 2–4 years. 

 

Over time, the STB has modified, refined, and endeavored to reduce the burden associated 

with the SAC analysis. Recently, the STB revised procedures for deciding large rate relief cases, 

imposing restraints on the evidence and arguments allowed in these cases, replacing the 
358

percent reduction approach with a "maximum markup methodology" to calculate maximum 

lawful rates, adopting an "average total cost" approach to allocate revenue from cross-over 

traffic, and shortening the analysis period to 10 years. The revisions reflect STB’s ongoing effort 

to reduce litigation costs, create incentives for private settlement of disputes, and shorten the 

time required to develop and present large rail rate cases to the STB. 

From the shippers’ perspective, however, the STB’s efforts have not provided effective, 

practical, or worthwhile relief under the SAC standard. Whenever it takes a shipper 2 to 4 years 

and millions of dollars to bring a case, the rate challenge is too burdensome for most rail 

customers, who deem it to be patently unfair. Furthermore, because agricultural production is 

widely spread and is shipped to many destinations there are too many origin-destinations pairs 

to analyze to make the SAC test workable for agricultural shippers. 

Other CMP Constraints 

Constrained market pricing embodies two additional constraints: 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”—i.e., 

when a carrier is revenue adequate. Although several railroad firms have been revenue 

adequate when using the Capital Asset Pricing Model for a number of years, STB has still not 

determined how long a railroad has to be revenue adequate before using this constraint. 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. 

SAC Process is Complex and Expensive 

The complexity and evolution of the SAC process is best illustrated by the landmark McCarty 

case.230 Originating as a class action suit in the United States District Court for the District of 

Montana on behalf of approximately 10,000 Montana farmers and grain elevators (the McCarty 

group), the court referred the matter to the ICC where a formal complaint was filed on March 

27, 1981.*

 The McCarty group sought reparations on past shipments of wheat transported by 

Burlington Northern (BN) from origins in Montana to ocean ports in the Pacific Northwest 

(PNW) and establishment of reasonable rates for future moves. In an initial decision served 

December 14, 1981, an Administrative Law Judge found that BN had market dominance over 

the wheat and barley traffic at issue, and that the rates assessed were unreasonable. 

Numerous delays and challenges ensued while the parties pursued discovery and the ICC 

reevaluated its rate reasonableness standards. It was not until May 27, 1987, that the ICC 

found that BN had market dominance over the movement of wheat and barley from Montana 

to PNW ports and subsequently ordered reparations and rate prescription. BN further 

contested this decision and in August 1997, STB reversed itself, concluding that the rates had 

not been shown to be unreasonable, and dismissed the complaint. 

 

*

 In 1981, the ICC had not yet settled on its rate challenge guidelines. The coal rate guidelines were not adopted 

until 1985. The STB did not establish non-coal guidelines until 1996. 
359

The shippers sought judicial review, but ultimately the 

decision was reaffirmed almost 20 years after the initial 

complaint. This complaint action cost the producers and 

the State over $3.4 million in out-of-pocket costs for 

economic modeling; attorney fees were estimated to 

reach millions of dollars more. 

For years, shippers complained that ICC and STB rate 

reasonableness decisions seemed to be skewed in favor 

of the railroads. The record shows that since 1996 seven 

SAC cases have been decided in favor of shippers and 

eight SAC cases decided against shippers.231 

An example of a favorable shipper ruling is the West 

Texas Utilities Company decision in May 1996, using the 

SAC test. The STB found a Burlington Northern Santa Fe 

Railway (BNSF) rate from a mine near Gillette, Wyoming, 

to a generating station in Vernon, TX, to be unreasonably 

high. As a consequence, the STB limited the rate that 

could be charged for that transportation in the future, 

and required payment of approximately $11 million in 

reparations for past shipments. STB’s decision was 

challenged by the railroad and affirmed in court. 

Finding the challenged rates unreasonably high, the STB 

also ruled in favor of shippers in various other cases, 

including its July 1997 decision for the Arizona Public 

Service Commission against BNSF, and its 2003 decision 

in favor of the Texas Municipal Power Agency (TMPA) against BNSF. 

In May 2008, STB issued its first decision under the 2007 revisions to rules calculating the rail 

industry’s cost of capital. In a rate challenge by Kansas City Power & Light (KCPL) against Union 

Pacific (UP), STB found that the rates paid by KCPL's Montrose Generating Station for coal 

moves from Wyoming's Powder River Basin were unreasonable. STB ordered UP to pay an 

estimated $30 million to the shipper in reduced rates and reparations. Approximately half of 

the referenced relief in this case was attributable to the STB's revision of the calculation of the 

railroad industry’s cost of capital, using a Capital Asset Pricing Model (CAPM) instead of the 

single-stage Discounted Cash Flow (DCF) model that had been used in the past. 

In February 2009, STB ruled in favor of Basin Electric Power Cooperative and the Western Fuels 

Association on what it called “the single largest reduction in rail rates ever ordered by the 

agency.” In its decision, STB found the transportation rates BNSF charged were roughly six 

times the variable cost of providing service and the rates were ruled to be unlawfully high. 

Using the SAC test, STB required BNSF Railways to reduce rates by about 60 percent, through 

Cost of Capital Models 

In January 2009, STB modified their 

initial decision to exclusively use 

CAPM and decided instead to use a 

simple average of CAPM and a 

multi-stage DCF to determine revenue 

adequacy. Although initially this 

change results in a higher estimated 

cost of capital, over time the use of 

this average is expected to minimize 

the variability in the cost of capital 

calculations. In addition, there may 

be years when the use of the average 

results in a lower cost of capital than 

estimated with CAPM alone. 

Theoretically, over the long term, the 

cost of capital estimates should 

average out to be nearly the same 

under either method. 
360

2024, for the coal delivered from mines in Wyoming’s Powder River Basin to the Laramie River 

Station, near Wheatland, WY, and provide reparations and rate reductions of an estimated 

$345 million. 

STB also has reversed its decisions in several cases where additional evidence was submitted 

that altered an initial determination of rate reasonableness. In a May 26, 2006, decision, the 

STB found on reconsideration that the BNSF rate challenged by Otter Tail Power Company232

was not unreasonably high. In October 2004, STB issued a decision reversing its prior finding 

that rates had been unreasonable for three cases referred to collectively as the Eastern cases, 

which were consolidated for consideration due to similarities in the evidence and issues at 

hand.233 STB revisited its calculations of cost of capital, and tonnage and revenue projections 

for Appalachian coal, which altered the findings of the SAC test. 

In the course of reviewing complaints, the STB has made a number of alterations to the SAC 

analysis to perfect the model’s ability to reflect more accurately the actual railroad operating 

environment. For the STB, rate relief consideration is a dynamic process. 

New Simplified Guidelines for Assessing Reasonableness—

Non-Coal Rate Guidelines, or Small Dispute Cases 

Although the CMP guidelines provide the most authoritative procedures for evaluating the 

reasonableness of rail rates from an economic perspective, a rate challenge using CMP 

(particularly SAC) can be quite complex, expensive to litigate, time consuming and impractical; 

often the money at issue is not enough to justify the expense of such an evidentiary 

presentation. The Interstate Commerce Commission Termination Act of 1995 (ICCTA) directed 

STB to develop a simplified alternative procedure to CMP.234 

Accordingly, in December 1996, STB adopted Simplified Guidelines that, although upheld in a 

court challenge, provided no perceived effective relief.235 Shippers expressed concerns about 

the uncertainties of the new rules, and brought no cases under them. Subsequently, in 

September 2007, the STB issued revised Simplified Guidelines with the intent of streamlining 

and expediting procedures to make the rate relief process more feasible for those with smaller 

disputes. 

 
361

These revised Simplified Guidelines provide two avenues 

to pursue in seeking rate relief; the first is geared toward 

medium sized disputes. It uses a modified and simplified 

SAC test, is to be decided by the STB within 17 months of 

complaint, and limits potential cost recovery to $5 million 

over 5 years. The second vehicle, called the Three 

Benchmark approach, is an abbreviated process that is to 

be decided within 8 months of filing a complaint and limits 

recovery to $1 million over five years. While neither 

approach offers as much precision and degree of 

confidence as a Full-SAC analysis, these alternative dispute 

resolution procedures address the concerns of many 

shippers that they cannot challenge rail rates because the 

costs of litigation would exceed the amount in dispute. 

Both shippers and railroads have appealed the STB’s 

decision in district court. Shippers contended that the 

monetary limits for each simplified rate appeal procedure 

were set too low, which could result in shippers receiving 

little, if any, more than the cost of using these procedures 

if they win the rate appeal. Furthermore, the shipper risks 

losing the rate appeal while investing the cost of pursuing 

the simplified rate appeals procedures. The Court affirmed 

the STB decision in this case.236

For both simplified approaches, STB requires the parties to 

engage in non-binding mediation for 20 days before it will 

consider the case. The mediation requirement encourages railroads and shippers to reach 

consensus on issues and avoid costly litigation. For example, a small rate case involving 

Williams Olefins, LLC, and Grand Trunk Corporation was resolved privately within only a few 

weeks pursuant to mediation by STB staff. 

STB staff are appointed to mediate these disputes. To protect the confidentiality of mediation 

discussions, the appointed STB staff is recused from all subsequent involvement in the case if it 

is not fully resolved through mediation. The entire mediation process is 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 participate in all meetings unless the STB-appointed mediator 

concludes such involvement is not necessary. To facilitate settlement, STB releases the 

confidential Waybill Sample, subject to the proper protective orders, before mediation begins. 

 

STB Analysis of Simplified 

Procedures 

The STB performed an analysis of a 

Waybill Sample, and concluded that 

a Full-SAC presentation would be 

impractical for 73 percent of 

potentially captive traffic and a 

Simplified SAC presentation would 

be too costly for 45 percent of 

potentially captive traffic. STB 

estimated that Simplified 

Procedures would provide a 

meaningful forum for the resolution 

of rail rate disputes arising out of 

the at least 73 percent of traffic that 

previously was prevented from 

bringing rate complaints to the STB 

due to the high costs of developing 

a Full-SAC presentation. 
362

To simplify the process compared to a standard rate case, the Simplified Guidelines use 

standard industry averages for revenue data, rather than construction of a hypothetical 

efficient railroad. Accuracy suffers somewhat but time is expedited. For both processes, the 

STB has established limits on discovery to avoid protracted delays in deciding the case. 

Simplified SAC 

Constrained Market Pricing, with its SAC constraint, has been affirmed by courts and is deemed 

the most accurate procedure available for determining the reasonableness of rail rates where 

there is an absence of effective competition. As indicated earlier, the rigors of the procedure 

lead to great expense in both litigation and time. And while the reforms adopted for the FullSAC procedure in the Coal Rate Guidelines (see previous section) are intended to reduce 

litigation costs, the potential reductions are still insufficient to provide a feasible vehicle to 

contest rates for medium-sized shipments.237 Simplified SAC attempts to create a cost-effective 

alternative for smaller rail rate disputes. However, challenging a rate under the Simplified SAC 

methodology is still estimated to cost about $1 million. 

The Simplified SAC approach retains some of the advantages of a standard SAC analysis to 

detect market abuses. It focuses on whether the captive shipper is being forced to subsidize 

parts of the defendant’s rail network from which it derives no benefit. To maintain simplicity, 

STB assumes that given current rail system capacity constraints, all existing infrastructure along 

the predominant route used to haul the complaint traffic is needed to serve the traffic moving 

over that route. Simplified SAC incorporates new capital investments (no gold plating) and 

ensures that the maximum lawful rate incorporates a reasonable return on the replacement 

cost of those investments. This process assumes that competition will force railroads to make 

prudent capital investments to meet forecast increases in demand for transportation services 

but provides only limited opportunity for the shipper to dispute costs associated with 

inefficiencies. For example, a shipper might successfully dispute costs in a case where some 

existing facilities along the selected route have fallen into disuse and should not be included in 

the analysis. 

The Simplified SAC presentation differs 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 addresses the replacement cost of the existing facilities used to serve the 

captive shipper and the return on investment that a hypothetical SARR would require to 

replicate those facilities. STB then determines whether the traffic using those facilities is paying 

more than needed to cover operating expenses and gain a reasonable return on their 

replacement value. To constrain the cost of a simplified SAC presentation, STB has established 

various simplifying assumptions and standardization measures, including: 

• The reasonableness of the challenged rates for a single year (the four quarters 

preceding the filing of the complaint) on the predominant route used to transport the 

contested traffic; no rerouting of traffic is permitted. 
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• The revenue from cross-over traffic is apportioned between the on-SARR and off-SARR 

portions of the movement based on the revenue allocation methodology used in FullSAC proceedings. 

• The analysis includes the existing facilities (including all track, sidings, and yards) along 

the analyzed route, unless the complainant can demonstrate a facility is unnecessary or 

in disuse. 

• The total operating and equipment expenses will be estimated using the STB’s Uniform 

Rail Costing System (URCS); depreciation on equipment is excluded when calculating 

operating expenses. 

• Because the railroad is not allowed to use the shipper’s traffic to cross-subsidize other 

shippers, traffic moving at higher rates is not allowed to cross-subsidize the shipper’s 

traffic. 

• The maximum lawful rate will be expressed as a ratio of revenue to variable costs 

(R/VC), with variable costs calculated using unadjusted URCS. This maximum R/VC ratio 

would then be prescribed for a maximum 5-year period. 

• The entire process will conclude in a decision by the STB within 510 days. 

Simplified SAC also imposes procedural requirements to expedite the processing of the 

complaint. To streamline the discovery process, certain standardized discoveries are required 

to be submitted by both parties with the complaint and answer. Technical conferences 

facilitated by STB staff are held to resolve factual disputes within 7 business days after the 

required mediation period ends. 

At the initial filing, the complainant provides to the railroad its preliminary estimate of the 

variable cost of the challenged movements, using the unadjusted figures produced by the URCS 

program, demonstrating that the STB’s jurisdictional threshold has been met. In addition, the 

complainant provides documenting evidence with its complaint, and a narrative addressing 

whether there is any feasible transportation alternative for the challenged movements. The 

railroad will provide to the complainant its preliminary estimate of the variable cost of each 

challenged movement. For its second disclosure, the railroad will provide identification of all 

traffic that moved over the routes replicated by the SARR in the test year, information 

aggregated by origin-destination pair and shipper, volume, and total revenues from each 

movement. They will also provide total operating and equipment cost calculations for each of 

those movements, revenue allocations for cross-over traffic, and total trackage rights 

payments. 

If the STB finds the rate unreasonable, the limit on relief applies to the difference between the 

challenged rate and the maximum lawful rate, either in the form of reparations or a rate 

prescription, or a combination of the two. Any rate prescription automatically terminates once 

the complainant has exhausted the relief available, even if, due to large volumes, that period is 

less than 5 years. The complainant is barred from bringing another complaint against the same 

rate for the remainder of the 5-year period. 
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Three Benchmarks 

For some shippers who have smaller disputes with a carrier, even this Simplified SAC method 

would be too expensive, given the more limited potential return for a successful rate challenge. 

These shippers can avail themselves of a less rigorous, more expedited relief process with a less 

lucrative potential remedy. The Three Benchmarks approach looks at the carrier’s overall 

revenue needs, how the railroad prices its other captive traffic, and how comparable traffic is 

priced. 

Under Simplified Guidelines, the reasonableness of a challenged rate is to be determined by 

evaluating that challenged rate in relation to three benchmarks. Each benchmark is expressed 

as a ratio of revenues generated from particular traffic to the variable costs of providing the rail 

service—the revenue-to-variable cost, or R/VC ratio, using the STB’s Uniform Rail Costing 

System (URCS). 

First Benchmark 

The first benchmark is the Revenue Shortfall Allocation Method (RSAM). It allows the STB to 

account for the defendant railroad’s overall revenue needs by measuring the average markup 

above a carrier’s variable cost that the carrier would need to charge all its potentially captive 

traffic (traffic priced above 180 percent of variable costs) in order for the carrier to recover all 

of its non-variable costs under URCS. RSAM accounts for a railroad’s need to earn adequate 

revenues, as required by law.238 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 the railroad would need if it replaced all its assets as they wear out. The lower 

end subtracts out any shortfall related to movements priced below the 100 percent R/VC level. 

The lower end is an attempt to capture managerial inefficiencies. In Simplified Guidelines, 

however, the STB recognized that an R/VC ratio below 100 percent does not necessarily reflect 

improper pricing or a money-losing service. The RSAM benchmark the agency would use was 

therefore left unresolved, but was expected to fall within this range. 

Second Benchmark 

The second benchmark is called R/VC>180. The R/VC>180 percentage represents the average 

mark-up above variable cost that a carrier receives on its captive high-rated traffic (traffic 

priced above 180 percent of variable cost). 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. 

Third Benchmark 

The third benchmark is called R/VCCOMP. 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. 

 
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STB described these three benchmarks as “the starting point for a rate reasonableness analysis, 

not the end result.”239 STB 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.”240. 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.”241 

STB updates the RSAM and R/VC>180 tables annually for each Class I railroad, as well as 

regional averages. The R/VCCOMP ratio for appropriate comparison traffic is to be computed 

after a shipper files a rate complaint, using traffic data from the rail industry Waybill Sample 

and applying URCS costing. Upon filing a complaint, the shipper is provided access to the 

unmasked, confidential Waybill Sample for the traffic of the defendant carrier. Non-defendant 

traffic is excluded from comparison group analysis. STB then calculates the variable cost of the 

traffic covered by the complaint, as well as the variable costs of all movements included in the 

comparison group using the URCS model. To maintain simplicity and eliminate extensive delays 

in discovery and litigation over movement specific adjustments, STB does not consider 

movement-specific costing. 

The entire process concludes in a decision by the STB within 240 days. 

To calculate the R/VCCOMP benchmark, the parties to the complaint are required to submit initial 

evidence regarding an appropriate comparison group of movements of traffic. Any movement 

set forth in both sides’ initial tenders would be automatically included in each side’s final 

comparison group, unless the parties later agreed to exclude the movement. After a 

conference with the STB staff to resolve disputes in the selection of an appropriate comparison 

group, each party submits its final offer, contests the opponent’s traffic selections, and STB 

selects the most reasonable comparison group, which is then be used to calculate the R/VCCOMP

benchmark. 

In Three-Benchmark cases, STB limits the number of discovery requests that either party can 

submit to the other party without obtaining advance authorization from STB. Each party is 

limited to ten interrogatories (including subparts), ten document requests (including subparts), 

and one deposition. 

The first rate case considered pursuant to the simplified Three Benchmark test was filed on 

May 23, 2005, by BP Amoco challenging the reasonableness of rates for the shipment of 

paraxylene from Decatur, AL, to Kingsport, TN.242 Shortly after filing, the complaint was 

dismissed when resolution was reached via mediation. 

 
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The first substantive test of the revised Three Benchmark approach was an amended complaint 

filed on October 30, 2007, wherein DuPont challenged the reasonableness of rates charged by 

CSX Transportation for three movements: 

• The movement of synthetic plastic powder from Ampthill, VA, to Wyandotte, MI, a 

distance of approximately 820 miles 

• The movement of plasticizers from Heyden, NJ, to Duart, NC, a distance of 

approximately 714 miles 

• The movement of plasticizers from Heyden, NJ, to Washington, WV, a distance of 

approximately 646 miles 

STB found the rates challenged to be unreasonable and prescribed maximum reasonable rates 

and reparations (with interest) for DuPont. DuPont followed up its victory with the first three 

cases filed under Three-Benchmark rules by filing a large number of rate complaints covering 

commodities moving over most of a single Class I railroad’s network, a case that would have 

been impossibly complex and expensive to address using SAC or Simplified SAC. Before the 

proceeding could begin, agreement between DuPont and the railroad was reached in 

arbitration. 

The Three-Benchmark procedures were specifically designed to address movements from a 

variety of origins to diverse destinations, by avoiding the need to specify a route as in SAC and 

Simplified SAC. STB believes agricultural shippers should be able to make effective use of the 

Three-Benchmark process, which is simple and relatively quick, to address rate disputes with 

railroads. While this procedure was essentially designed for agricultural shippers, they have not 

taken advantage of it to date because they are concerned that the resulting rate relief, if any, 

would not adequately compensate for the time and expense of bringing such a case. 

Conclusions 

Tariff rail rates can be challenged before the STB when revenue exceeds variable cost by 180 

percent and the railroad has market dominance. Rail rates for contract and exempt 

movements may not be challenged; STB has no jurisdiction over those movements. 

STB has developed three methods to appeal rate cases: 

• The Stand-Alone Cost (SAC) method takes millions of dollars and two to four years to 

pursue. There are no restrictions on the amount of the award if the rate is higher than 

180 percent of the railroad’s variable costs. 

• The Simplified SAC method requires a mandatory 20-day non-binding mediation before 

the case can be filed. It is limited to a potential cost recovery of $5 million over five 

years and must be decided within 17 months of the complaint. 

• The Three-Benchmark approach also requires non-binding mediation. It limits recovery 

to $1 million over five years and must be decided within 8 months of the complaint. 
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Development of the latter two procedures was mandated by Congress in response to shipper’s 

complaints about the cost in both time and money required by the SAC method. STB hopes 

that by improving the Full-SAC approach, creating the Simplified SAC process, and refining the 

Three-Benchmark approach, it has provided meaningful relief for rail shippers. 

Shippers contend that the monetary limits for the Simplified SAC and Three-Benchmark 

procedures are too low and could result in shippers receiving little more than the cost of using 

these procedures. In addition, shippers believe that the cost of pursuing these rate appeal 

procedures is too expensive for many agricultural shippers, eliminating them from effective 

relief. Chemical companies have successfully used the Simplified Procedures, but no 

agricultural shipper has yet appealed rates using them. 

 
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