Richard A. Allen

Although the Eighth Circuit’s decision upholding the STB may ultimately be reviewed by the Supreme Court, it has already added fuel to calls for legislative changes to overrule the STB’s position. Interestingly, the court’s decision affirming the STB appears to have misunderstood the grounds for the Board’s decision. It is also significant that the Board’s decision, while generally accepting the railroad industry’s position, rejected the railroads’ position in one situation. That exception could undermine substantially the benefits of the decision to the rail industry.

The STB’s Decisions

The "bottleneck" situation that is at the heart of this case can occur in several different configurations, but the common feature of all of them is that only one railroad is able to serve either the origin or destination of a movement and that two or more railroads can serve the other end of the movement. A simple example illustrating the issues would be of a coal-burning electric utility in the southeastern United States that is served at destination by only one railroad (Eastern) and that obtains its coal from mines in the Powder River Basin in Wyoming that are served by two railroads (Western 1 and Western 2). Suppose that reasonably efficient routes for this movement could be established by interchanging the traffic with either Western 1 or Western 2 at New Orleans (giving Eastern 200 miles of a total 2000-mile haul) or at St. Louis (giving Eastern 600 miles of a total 2100-mile haul.) Suppose also that Eastern says that it will only route this movement through St. Louis and refuses to interchange it at New Orleans, and that Eastern negotiates a "joint rate" with Western 1 by which the total rate for unit-train movements amounts to $20 a ton, of which Eastern’s division is $10.² (Alternatively, if Eastern could not negotiate a joint rate with either of the western railroads, it might offer the shipper a "proportional rate" of $10 per ton for its transportation between the St. Louis interchange and the power plant which the shipper could use only in connection with through movements from the Powder River basin origin; in this case, the total charge to the shipper would be this proportional rate plus whatever rate the origin carrier chooses to establish.) In this example, the bottleneck segment of the move would be the segment from St. Louis to the power plant, and Eastern would be the bottleneck carrier.

The railroad parties in the case contended that interlining railroads are legally entitled to establish any reasonably efficient interchange point they may mutually agree upon and that they have a right to establish joint rates for interline moves by mutual agreement or, if they cannot agree on joint rates, each may establish proportional rates.³ If either joint rates or proportional rates are established, the railroads argued that the shipper can only challenge the reasonableness of the total charge for the entire movement ($20 per ton in the above example). The shipper, they said, cannot challenge the reasonableness of just the bottleneck carrier’s portion of the total charge ($10 in the example). (Under the methodology established by the STB for major rate cases, a rate is unreasonable only if it is more than the "stand-alone cost" (or "SAC") of providing the transportation. In the example, the total charge would be reasonable if the SAC of the entire move was, say, $22 per ton, even if it could be shown that the SAC of moving over the bottleneck segment was only, say, $6 per ton, and thus that the bottleneck carrier was receiving an unreasonably high payment for its portion of the service.)

The shipper parties in this case contended two things. First, they contended that bottleneck carriers are required, upon a shipper’s request, to route their traffic through any reasonably efficient interchange. To use our example, they would contend that Eastern and the western railroads, if requested, would have to route the movement through New Orleans or any other reasonably efficient interchange, not just through St. Louis. Second, they contended that bottleneck carriers should be required to establish "local rates" over bottleneck segments between the destination and any reasonable interchange requested by the shipper, which local rates could be challenged by the shipper at the STB as unreasonable. Recognizing these rights, they believed, would enable shippers to maximize the potentially available competition on interline movements involving a bottleneck (by minimizing the bottleneck segment) and to prevent bottleneck carriers from abusing their monopoly power over bottleneck segments by charging more-than-SAC rates for their services on those segments.

While the shippers contended that the STB’s recognition of these rights was essential to carrying out the statutory mandate to maximize rail competition and prevent abuse of market power by railroad monopolies, the railroads contended that doing so would threaten the very survival of the railroad industry. It would do so, they claimed, by preventing railroads from engaging in "differential pricing" – i.e., receiving more than SAC for their service on bottleneck segments of interline movements to captive shippers.) The railroads argued that granting the relief sought by the shippers would cause the industry to lose more than $2.4 billion in annual net revenue.

In Bottleneck I, the STB concluded that the railroad’s position was basically correct as a matter of well-settled legal principles. It ruled that the statute⁴ allows interlining railroads in the first instance to determine routes and interchange points for particular movements, and when they have done so, it does not require them to "open an additional route through a different interchange simply because the shipper asks them to do so, without regard to the criteria of 49 U.S.C. 10705(a)." 1996 STB LEXIS at *13. The STB will override the carriers’ choice of route only if the shipper makes the difficult showing required by the STB’s "competitive access" regulations – that is, shows that prescribing a different route "(i) is necessary to remedy or prevent an act that is contrary to the competition policies of 49 U.S.C. 10101a or is otherwise anticompetitive, and (ii) otherwise satisfies the criteria of 49 U.S.C. 10705 and 11103." 49 C.F.R. § 1144.5(a)(1).⁵ This stringent showing will be required of shippers seeking prescription of new routes either when the interlining carriers have agreed on a route and interchange point or where the bottleneck carrier itself is also able to provide full single-line service between origin and destination and declines to establish a competing interline route. Id. at *16.⁶

The Board also ruled that carriers were legally entitled to choose whether to establish joint rates, proportional rates or local rates to apply to established through routes or segments of through routes. 1996 STB LEXIS at *11. If they choose to establish joint rates or proportional rates, then under well-settled precedents, a shipper can only challenge the reasonableness of the entire charge for the through movement. Id. at *27 (citing Louisville & N.R.R. Co. v. Sloss-Sheffield Steel & Iron Co., 269 U.S. 217, 231-34 (1925); Great Northern Ry. V. Sullivan, 294 U.S. 458, 462-63 (1935); and Metropolitan Edison Co. v. Conrail, 5 I.C.C.2d 385, 400-410 (1989)). With the exception of one situation, railroads cannot be required to file local rates for their segments of a through movement which could then be challenged as unreasonably high in a complaint to the Board.

In reaching its conclusions, the STB noted the economic and policy arguments made by the railroads and shippers, but it expressly declined to base its decision upon them. The Board stated: "Although we do not expect our decision here to produce the types of revenue disruptions projected by the railroads, our decision does not turn on whose projections are more accurate. Our decision is, in our view, mandated by the law." 1996 STB LEXIS at *27.

The exceptional situation is where the bottleneck carrier does not serve both origin and destination and where the shipper has a transportation contract with a non-bottleneck railroad covering the non-bottleneck portion of a reasonable route between origin and destination.⁷ In that situation, there is no established through route between origin and destination, and, the Board held, the two railroads have an obligation to establish a reasonable route. Neither railroad can dictate the route or interchange point to the other. If they cannot agree on one, the Board is required by 49 U.S.C. § 10742 to establish one, and will do so based on the comparative efficiencies of alternative routes and interchange points.

Once a route and interchange has been established (by carrier agreement or STB fiat), if the shipper has a transportation contract with a non-bottleneck carrier for service from origin to the interchange point, the Board held that "the bottleneck carrier cannot refuse to complete the transportation from that point simply because it cannot enter into a preferred joint rate with the origin carrier. . . . Rather, it must provide whatever rate is necessary to complete the transportation over the route the carriers established for the traffic. . . ." 1997 STB LEXIS at *20-21. Of greater importance, the Board also held that, because 49 U.S.C. § 10709 expressly provides that the STB has no jurisdiction to review the reasonableness of transportation contracts, "the rate provided by the bottleneck carrier in these circumstances (likely a proportional rate) would be separately challengeable on rate reasonableness grounds." Id. at *22.

The Board rejected the argument of most of the railroads that this conclusion was in conflict with the Supreme Court and ICC cases cited earlier which held that shippers could not challenge the reasonableness of rates for segments of through routes.

This exception could well prove to operate as a major check on the ability of bottleneck carriers to exploit their bottleneck positions, which ability the railroads claimed to be essential to their survival. In bottleneck situations where the bottleneck carrier does not itself serve both origin and destination, this STB decision plus competition between the non-bottleneck carriers should provide strong inducements for one or more of them to enter into contracts with the shipper and to decline to enter into joint rates with bottleneck carriers that are demanding excessive divisions, thereby forcing the bottleneck carriers to be modify their demands or to file rates for the bottleneck segments that can be separately challenged.

The Eighth Circuit’s Decision

In a decision issued on February 10, 1999, the Eighth Circuit affirmed the STB’s basic rulings in the Bottleneck Case, but it declined to review the Board’s position with regard to situations involving contracts on the ground that the issues were hypothetical and not ripe for review.

The court’s decision upholding the STB’s basic rulings, however, suggests that the court relied more on the parties’ briefs than on its reading of the STB decisions themselves. In language not likely to assuage railroad and STB critics in Congress, the court said:

In the present case, the Board determined that exploiting bottlenecks by refusing to provide separately challengeable bottleneck rates also assists carriers in achieving revenue adequacy. . . . .

Slip op. At 21. The court went on to elaborate:

Based on these economic factors and extensive expert testimony, the Board concluded that the Act did not require carriers to provide separate bottleneck rates. Regardless of how we would resolve the tension in the Act if we were to independently rule on the utilities’ claims, we cannot say that the Board’s interpretation was incorrect. The Board’s considerable expertise in the economic underpinnings of the railroad industry is entitled to a great degree of deference, and its decision to allow carriers to determine how they wish to fulfill their duties under the Act is consistent with the current national railroad policy of maximizing greater carrier discretion in setting routes and rates.

Slip op. At 22. The court’s assumption that the Board’s decision involved a discretionary policy choice based on economic analysis and the revenue needs of railroads, however, has no basis in the Board’s decisions, which expressly disclaimed those grounds and stated that "[o]ur decision is, in our view, mandated by the law." 1996 STB LEXIS at *26.

The court also noted the possibility that, under the Board’s decisions, shippers might find a "potential avenue[] of recourse . . . [by obtaining] contracts for service over the competitive segment of rail." Slip op. at 22. The court’s discussion of this point, however, again suggests a basic misunderstanding of what is involved. The court stated:

Indeed, as soon as a bottleneck shipper obtains a contract for non-bottleneck carriage, bottleneck carriers would have no incentive to refuse to provide a local rate for bottleneck service. The Board’s regulations clearly allow bottleneck carriers to charge up to SAC for bottleneck service, and carriers would not attempt to charge more than SAC because they would immediately be subject to rate reasonableness review by the Board.

Id. at 23.

Bottleneck carriers, however, usually have powerful incentives in those circumstances not to be required to quote local rates for service over the bottleneck segment. The reason that providing service over a bottleneck confers an important advantage on the bottleneck carrier -- an advantage the rail industry argued was essential to its long-term well-being – is that it enables the bottleneck carrier to charge more than SAC for its segment of the through movement. The total charge for the through movement can be no more than SAC, but to the extent that competition between other carriers on non-bottleneck segments of the movement drives their rates or divisions below SAC for their segments, the bottleneck carrier can use its position to extract more than SAC for its segment (or its full "lump," to use the nomenclature of the "one-lump" theory, which has been firmly accepted by the ICC and STB for the last 20 years). It can do so as long as the SAC for the total through charge does not exceed SAC and as long as the shipper is not able to challenge the reasonableness of rates or divisions for segments of the route. It is this ability that is what the railroads argued is necessary to enable them to engage in differential pricing, which they claim to be essential to their long-term financial health.

For these reasons, if a shipper in a bottleneck situation has a transportation contract covering a non-bottleneck segment of a through route, the bottleneck carrier would usually have strong incentives not to be required to quote a local, separately challengeable rate for the bottleneck segment. First, if it has its own single-line route between origin and destination, it would wish to protect its long-haul and to refuse to make establish an interline route giving it a shorter haul.⁸ Or, if it had an alternative interline route and joint rate with another carrier between origin and destination, it would usually much prefer to preserve that arrangement than be forced to establish another route chosen by the shipper and another railroad.⁹ Even in a situation where the bottleneck carrier does not serve the other end of the move (by itself or with another carrier), the bottleneck carrier would usually wish to be able to provide service only under joint rates or proportional rates that could not be separately challenged by the shipper. That is the position that most railroads asserted vehemently in this case.

Interestingly, despite the fact that the court seemed to rely on the shippers’ "avenue of recourse" through contracting with non-bottleneck carriers, the court concluded its opinion by declining to review the "Board’s determination that it may assess the reasonableness of bottleneck rates as soon as the utilities obtain contract rates over the non-bottleneck segments." Slip op. at 26. The court evidently accepted the railroads’ argument that that determination was not ripe for judicial review because none of the shipper parties in the case had a contract for non-bottleneck service. The Board, however, made that determination for the guidance of the public after soliciting and receiving public comment. That would seem to be a proper -- indeed commendable -- action for an administrative agency, particularly when the issue is purely one of law and when shippers and railroads need to know what the legal consequences will be of entering into contracts with one another. The Board’s ruling on the contract issue was functionally equivalent to issuing a rule or policy statement, such as the competitive access rules, which the D.C. Circuit had no difficulty finding sufficiently ripe for review. Baltimore Gas & Electric Co. v. United States, 817 F.2d 108 (D.C. Cir. 1987). In ruling otherwise, the Eight Circuit did not explain why the Board’s determination did not meet the criteria for ripeness established by decisions like Abbot Laboratories, Inc. v. Gardner, 387 U.S. 136 (1967) and Toilet Goods Association v. Gardner, 387 U.S. 158 (1967).

Accordingly, the validity of the STB’s views regarding the obligation of bottleneck railroads to establish separately challengeable rates for bottleneck segments when the shipper has a contract with a non-bottleneck railroad will have to await another case to be reviewed by the courts. A likely case is now pending in the District of Columbia Circuit is Union Pacific R. Co. v. STB, D.C. Cir. No. 98-1058, which seeks review of an STB order requiring UP, as a bottleneck origin carrier, to publish a common carrier rate that the shipper could use in connection with movements under a contract with a non-bottleneck destination carrier. FMC Wyoming Corp. v. Union Pacific R. Co., STB F.D. No. 33467, 1997 STB LEXIS 371 (served December 16, 1997).

Footnotes:

1 Central Power & Light v. Southern Pacific Transportation Co., STB Nos. 41242, 41295 and 41626, 1996 STB LEXIS 358 (Dec. 31, 1996)("Bottleneck I"), modified in part, 197 STB LEXIS 91 (April 28, 1997) ("Bottleneck II").

2 As the STB explained in Bottleneck I, there are three basic types of rates that railroads may establish. A "local" rate is a rate established unilaterally by a carrier for transportation between two points on its system without any conditions regarding prior or subsequent movements. A "joint" rate is a single rate established by two or more railroads for a movement from origin to destination. The carriers negotiate their respective "divisions" of joint rates among themselves; the divisions are not normally known to the shipper. A "proportional" rate, as the STB stated, "is set by a single carrier for applicability only to its portion of a through movement A proportional rate is different from a local rate because it is expressly conditioned to apply only to traffic having a prior or subsequent move on another carrier through a specified interchange point. A proportional rate is also different from a joint rate because it does not involve participation by another carrier in setting or applying the rate." 1996 STB LEXIS *3, n. 3.

3 A railroad can also decide to establish only local rates applicable to movements over its lines. If only a local rate were established on a segment of a railroad’s line used in a through movement, the total charge for the through movement would be the sum of the applicable local or proportional rates. Routing Restrictions Over Seatrains Lines, Inc., 296 I.C.C. 767, 774-75 (1953).

4 The statutory provisions governing these matters are contained in Subtitle IV of Title 49 of the U.S. Code. Before 1996, Subtitle IV was generally known as the Interstate Commerce Act. Effective January 1, 1996, Subtitle IV was substantially altered by the Interstate Commerce Commission Termination Act of 1995, Pub. L. No. 104-88, 102 Stat. 803 (1995), but the provisions pertinent to the Bottleneck Case were reenacted largely without change.

5 49 U.S.C. § 10705 authorizes the STB to prescribe through routes and joint rates. Subsection 10705(a)(2), however, provides railroads with so-called "long-haul" protection by prohibiting the Board from requiring any carrier to establish a through route that gives that carrier substantially less than its longest possible haul except on certain conditions, including the condition that a route with the longest haul for that carrier would be "unreasonably long when compared with a practicable alternative through route that could be established."

6 It is unclear from the Board’s decisions (at least to this writer) exactly what "competitive access" showing a shipper would need to make to induce the Board to prescribe a different route from the one established by the single-line carrier or the interlining carriers. The decisions suggest that the shipper need only show that the different route sought by the shipper is "more efficient" than the established route. Thus in Bottleneck I, the STB stated: "[U]nder the competitive access rules and the statutory criteria from which they are derived (see 49 U.S.C. 10705), carriers may generally protect their single-line or existing through routes, unless it can be shown that the alternative routes sought are more efficient." 1996 STB LEXIS at *16. Similarly, in Bottleneck II, the STB stated: "[W]here it is shown, pursuant to the rules, that a carrier’s refusal to establish an alternative through route would foreclose more efficient service, we will prescribe that route." 1997 STB LEXIS at *13. This would seem to entitle shippers to have alternative routes prescribed in a large variety of circumstances, including where the alternative route is shorter than the established route (all other things being equal). In the example used here, it would entitle the shipper to a route through New Orleans, which is shorter and presumably more "efficient" than the established route through St. Louis, even though doing so would greatly short-haul the bottleneck carrier.

The conclusion suggested by the decisions seems distinctly at odds with the competitive access rules, which require a showing of illegal or anticompetitive conduct in addition to the showings required by 49 U.S.C. § § 10705 and 11103. 49 C.F.R. § 1144.5(a)(1). It also seems to conflict with § 10705, which permits the Board to prescribe an alternative route that short-hauls a carrier only if the established route is "unreasonably long when compared with a practicable alternative through route that could be established" or "is needed to provide adequate, and more efficient or economic, transportation." 49 U.S.C. § 10705(a)(2)(b) and (c)(emphases supplied). These are important differences.

7 Although that situation was not presented by any of the rate complaints before the Board, the Board in Bottleneck II found it important and appropriate to elaborate and clarify its views on that situation for the guidance of the public.

8 The court seems not to have realized that in that circumstance, the STB’s decisions ruled that the bottleneck carrier is not required to establish a local rate for part of an alternative route unless the shipper can make a showing under the competitive access rules.

9 In that situation also the STB made clear in Bottleneck II that the bottleneck carrier is not required to establish a local rate over another route on which the shipper has a contract unless the shipper makes a showing under the competitive access rules.