Implications of FRA PTC Revisions – STB Rate Disputes

A couple of weeks ago I did a posting about the Federal Railroad Administration’s (FRA) notice of proposed rulemaking (NPRM) concerning revisions to the criteria that would be used to determine which rail lines would be required to have expensive positive train control (PTC) equipment installed. Today I would like to take a look at the possible implications such a change would have for shippers of toxic inhalation hazard (TIH or PIH, poisonous inhalation hazard if you prefer) chemicals.

Background

Generally speaking the railroads would prefer to not provide transportation for TIH chemicals. The potential liability issues that could arise from a catastrophic accident that resulted in the wholesale release of a TIH chemical in a populated area are quite possibly corporate killing. Given the fact that they are not currently able to charge a potential liability premium on their TIH rates, one can sympathize with their position.

On the other hand, rail shipment of bulk TIH chemicals is undoubtedly the safest way to transport these materials from producer to consumer. Railroads have an outstanding safety record with hands down the fewest accidents per ton-mile of any transportation mode other than pipelines. Add to that the fact that the robust design of TIH railcars makes a catastrophic release of TIH chemicals unlikely in all but the most violent accidents. That design also makes them relatively hard targets for terrorist attack.

Fortunately for shippers, railroads are not able to deny carriage of TIH chemicals under what is known as their ‘common carrier obligation’. Since most railroads have a near physical monopoly on ownership of the lines over which they travel Congress set out a number of rules that prevented railroads from charging monopolistic rates. One of those rules required them to provide transport to any ‘properly presented shipment’.

The PTC requirements mandated by Congress in Section 104 of the Railroad Safety Improvement Act of 2008 (Public Law 110-432, 122 Stat. 4854) added an additional cost burden on the railroads that transported TIH chemicals. They are being required to add expensive automated control systems on any line that carries TIH chemicals and annually carries 5 million gross tons of freight.

The original PTC rule required that any line that met the TIH transport requirements as of 2008 and any line that added TIH transport and met the gross tons requirement would have to have PTC equipment added to the line. This rule does not change that basic requirement, but it does make it significantly easier to remove a line segment from PTC installation requirements if it no longer carries TIH chemicals as of January 1^st, 2016.

Rule of Unintended Consequences

It certainly makes sense to allow the railroads to not equip lines with PTC equipment that do not currently meet the requirements for that installation. Unfortunately, this proposed change, if implemented, would give railroads an even greater financial incentive to deny carriage of TIH chemicals on certain lines.

Since legally railroads cannot not actually deny carriage of properly offered shipments (conforming to government shipping, safety and security regulations and ‘reasonable’ railroad rules) the railroads would have to rely on financial incentives or disincentives to get shippers to not ship TIH commodities on specific rail lines. The easiest way to do that would be to charge excessive shipping rates for those shipments.

The Surface Transportation Board (STB) regulates and moderates the setting of rail shipping rates. They have seen a number of cases in the last couple of years where various railroad have effectively tried to price TIH shipments off of their lines. While a number of these rate disputes are still pending, the STB has generally resisted the more egregious efforts by the railroads to price TIH chemical shipments off of their lines.

I would expect that if this rule goes into effect there will be even more such disputes brought before the STB. In fact I would expect a whole slew of them to appear in late 2014 and 2015 as the deadline approached. This would be due to the wording of . This would be due to the proposed wording of §236.1005(b)(4)(ii)(C):

“The cessation or expected cessation [emphasis added] of PIH traffic over the involved track segment prior to January 1, 2016”

With no standard for what constitutes ‘expected cessation’ a railroad could argue that they expect that the STB would rule in their favor in a rate dispute and that would result in the shipper no longer using their service over a particular line segment. A good example of the type of complaint where this argument might be legitimately used would be the current dispute between Canexus Chemicals Canada and the BNSF railroad (STB Docket: FD 35524).

Even if the railroad had to subsequently add that segment back to the PTC covered list, it might be able to avoid the installation cost for a number of years as it wouldn’t be covered under the initial installation plan. Additionally, it would be better able to justify to the STB using the cost of the PTC system for that added line segment as part of the cost equation for setting ‘reasonable’ rates for transporting the TIH chemical over that line. That would allow the railroad to recoup at least a portion of their PTC costs from a single shipper.

More Unintended Consequences to Come

I’ll look at some further implications of this rule in future blogs.