USM v UP Oral Arguments

Earlier this year we saw US Magnesium (USM) win a decision before the Surface Transportation Board (STB) requiring the Union Pacific (UP) railroad to provide chlorine delivery service. In a blog about that decision I noted that: “That order clarified the requirement that UP has an ‘obligation to quote common carrier rates and provide service for the transportation of chlorine for the movements at issue in this case’ (pg 1).” The issue of reasonable rates was not addressed in that decision. Last week the STB announced that they would be hearing oral arguments on November 23rd on a petition by USM to address that subject. USM Position USM is asking the STB to require UP to establish ‘reasonable rates’ for the transportation of chlorine gas from the USM production facility in Utah to two customer facilities in Arizona. USM notes that they previously had reasonable contract rates for the carriage of chlorine gas, but that contract expired in March of this year. When contract renewal discussions were started last fall, UP announced that they would raise the rates to levels unacceptable to USM. Since the date that the contract expired USM has been forced to pay a common carrier tariff (UP Tariff 4949) established by UP. USM claims that the common carrier tariff rates are “dramatically higher than the contract rates previously paid by USM in 2008 for this transportation and are unreasonably high in violation of 49 U.S.C. §§10701 and 10704” (pg 5). USM notes that the rates “produce revenues substantially in excess of 180% of UP’s variable costs of providing the transportation” (pg 8). USM contends that the rates are 568% and 422% for the respective customer locations USM claims that they have no alternative transportation for their chlorine gas to these customers so they have been forced to pay the rates set by UP because of UP’s ‘market dominance’ in the area. UP owns the rail lines at both ends of the transportation routes and there are no reasonable alternative forms of transportation. USM is asking the STB to “order UP to establish reasonable rates for transportation of chlorine” on the indicated routes and “order that reparations be paid, plus interest, for any unlawful charges assessed by UP from and after March 3, 2009” (pg 9). UP Position UP agrees that the rates established by the Tariff Rate 4949 are substantially higher than those set under the previous contract. UP maintains that those higher rates are a reflection in recent and proposed regulatory changes for the shipment of toxic inhalation hazard (TIH) chemicals like chlorine and anhydrous ammonia. UP claims that the new tariff reflects a reasonable increase in the rate to support those new requirements. UP notes that the method that USM is asking the Board to use in its evaluation of the UP tariff (the Three-Benchmark Method) would not adequately reflect the changes in the market and regulation that make the new rate reasonable. The reason is that the method relies heavily on the rates and costs of the previous three year period (2004 through 2007 in this case) and does not reflect recent changes. UP questions the Board’s ability to adequately address the problem of ‘regulatory lag’ in this case using this method and proposes changes to the Three-Benchmark method to address that issue. UP maintains that they have incurred and continue to incur increased costs because of these new safety and security regulations reflected in new procedures and training requirements. UP notes that the most costly of these new regulatory requirements is the new requirement to install positive train control (PTC) on mainlines used to transport TIH chemicals like chlorine gas. In their Opening Evidence document, UP maintains that “These costs associated with TIH movements should be borne by TIH shippers, rather than UP’s other shippers, to avoid cross-subsidization of TIH shipments.” (pg 19) HAZMAT Shipping Implications There are a number of reasons that this decision may not be a ‘landmark’ case in controlling future rate setting cases for TIH chemicals. First, UP notes that all of their other chlorine shippers have been accepting routine increases in their shipping costs reflecting the changes in regulatory requirements. Next, USM is not a regular chlorine producer; they produce chlorine as a byproduct of their magnesium production process. This means that their chlorine shipments are irregular in frequency and destination, resulting in potentially higher costs. Having said that, UP has raised the issue of having TIH shippers essentially pay for the installation of PTC on lines where it is being required solely because of the shipment of TIH chemicals. There is certainly at least some justification for this, but it will raise some significant cost issues where there is only a single TIH shipper on a given line. This case certainly provides the STB the chance to establish a potentially landmark decision on the allocation of PTC costs.