Break the Bottleneck
Recent Decisions Ensure That Bottleneck Rates Remain a Problem on the Rails
By Kelvin J. Dowd and Robert D. Rosenberg

    To the detriment of many captive rail shippers nationwide, the Surface Transportation Board, in two decisions issued in December 1996 and March 1997, limited the ability of rail shippers to secure an STB-prescribed rate for service over a "bottleneck" segment of a longer haul. The issues raised by those decisions are the subject of multiple appeals before the U.S. Court of Appeals for the 8th Circuit, and several shipper groups are also engaged in remedial legislative efforts. Bottleneck rates thus remain a significant and ongoing area of dispute in the commercial and regulatory relationships between the railroads and some of their most important customers.

    In those recent cases, three utility shippers sought to combine a prescribed rate for the bottleneck portion of a longer movement-usually the final delivery segment, in which the shippers were captive to a single carrier-with a market rate set by rail-to-rail competition over the longer, so-called origin haul. The rail carriers argued that the shippers were seeking forced "open access" over the entire rail system, which would jeopardize the carriers' ability to engage in differential pricing and threaten their financial viability. Central Power & Light Co. v. Southern Pacific Transportation Co., No. 41242; Pennsylvania Power & Light Co. v. Consolidated Rail Corp., No. 41295; Mid-American Energy Co. v. Union Pacific Railroad Co., No. 41626.

    The STB, successor to the Interstate Commerce Commission, largely sided with the railroads and dismissed the shippers' complaints. While unpersuaded by the railroads' claims of potential financial ruin, the agency construed the governing statute to limit shippers to challenging the entire interline transportation charge, even if only a small portion was subject to monopoly. The STB did hold out the prospect for relief where a bottleneck shipper obtained service over the competitive segment under a contract, since transportation contracts lie outside the agency's jurisdiction. It is unlikely, however, that shippers will be able to secure such contracts.

    Consider the shippers' case: In a classic bottleneck scenario, two railroads (A and B) offer service from an origin point (x) to a common interchange (y) not far from the shipper's ultimate destination (z). But only one carrier (A, B, or C) has track between y and z. All else being equal, competition on the x-y segment will drive rates down below monopoly levels.

    Absent regulatory constraint, however, the bottleneck carrier on the y-z segment-and not the shipper-will receive all the economic rents resulting from the origin competition. Therefore, in the bottleneck cases, shippers sought to constrain through regulation only the rates for the y-z bottleneck segment.

    Rate regulation limited to bottleneck segments naturally would have significant benefits for shippers. Absent bottleneck rate relief, the best that a captive shipper can now obtain from the STB in a regulatory proceeding is a rate equal to the higher of (a) 180 percent of the variable cost of service over the entire movement from origin to destination or (b) the lowest charge that could be set by a hypothetical, least-cost efficient carrier that faced no barriers of entry or exit.

    Bottleneck relief, on the other hand, would enable shippers to obtain a regulated rate for only the captive portion of the movement, while taking advantage of lower, market rates for the competitive segments. This, the shippers urged, was consistent with the deregulatory purposes of the Staggers Rail Act of 1980 and other important rail legislation.

    Besides reducing the monopoly rents available to bottleneck railroads, bottleneck relief would foster increased competition between carriers over nonbottleneck segments, thus promoting greater efficiency and productivity. Shippers would gain a valuable bargaining tool at a time of growing consolidation in the rail industry, as evidenced by the recent mergers of Union Pacific-Chicago and North Western, Burlington Northern-Santa Fe, and Union Pacific-Southern Pacific, and the now pending CSX-Norfolk Southern-Conrail transaction.

    The economic and public policy rationales advanced by the bottleneck shippers have some parallels in the policy rationales guiding other regulated industries, such as electric power and telecommunications, to unbundle competitive and monopoly segments and to promote competition. Bottleneck relief would enable a shipper to rely on market forces to determine the rate for the competitive segment and to obtain a regulated rate (albeit one based on a competitive surrogate) for the monopoly bottleneck segment.

    The shippers' principal legal position before the STB rested on the historic and statutory duty of a common carrier railroad to provide transportation between any two points on its lines "on reasonable request." 49 U.S.C. ñ11101(a). Where a movement involved more than one railroad, the shippers argued, the party paying the freight had the right to select the route and-if it so chose-to deal separately with each railroad participating in the movement. A shipper confronted with a bottleneck had the right to obtain a separate rate for that segment and, if the rate was unreasonably high, to seek prescription of a reasonable rate from the STB. 49 U.S.C. ñ10701(d).

    In the modern era, most interline rail movements occur under so-called joint rates-single charges that the participating railroads establish voluntarily for the entire origin-destination haul. Under applicable precedent, a shipper could challenge only the joint rate. See Louisville & Nashville R.R. v. Sloss-Sheffield Steel & Iron Co., 269 U.S. 217 (1925). In the bottleneck cases, the shippers acknowledged this rule, but went on to argue that where there was no joint rate covering the chosen route, or the shipper elected to deal separately with each carrier and waive joint and several liability, the bottleneck railroad's common carrier duty required it to establish a separate rate for the service requested by the shipper, subject to STB adjudication as to reasonableness. See Routing Restrictions Over Seatrain Lines Inc., 296 I.C.C. 767 (1953).

    As one would expect, the railroads vigorously contested each of the shippers' claims.

    Regarding the shippers' statutory arguments, the railroads asserted a right in the first instance to select both the route and the type of rate that would be used to meet a shipper's request for service. Invoking a statutory right to protect a carrier's long haul service, the railroads argued that shippers could not demand separate rates and service over a particular bottleneck segment if the railroad (in conjunction with another carrier) was prepared to offer interline service via another route and interchange. See 49 U.S.C. ñ10705(a)(2). Simply stated, the railroads said that if a joint rate was in place or available, shippers had no ability to challenge the rate over any individual segment.

    On the policy side, the railroads claimed that allowing bottleneck rate relief would open the floodgates of litigation and result in dramatic reductions in operating revenue, depriving the railroads of necessary capital. Moreover, the resulting rates on the nonbottleneck segments would prove unsustainable, with the result being higher rates and/or a sole surviving carrier, to the ultimate detriment of both captive and noncaptive shippers.

    The railroads also denied that bottleneck carriers exploited their market power to nullify the effects of origin competition. They claimed that even without bottleneck relief, railroads had ample incentive to be as efficient as possible, even if that meant using a competitor to provide service. The railroads stressed their statutory duty to exchange traffic with each other, and argued that this duty was equivalent to the open access obligation that had only recently been imposed upon electric utilities (who are the lead shippers seeking bottleneck relief).

    As noted, the STB's decisions strongly favored the railroads: The shippers were denied relief, and the pending complaints were dismissed.

    The STB gave little explicit attention to economic or policy issues in its decisions, basing its rulings instead on statutory interpretation. In particular, the STB found that the law gave railroads substantial discretion in how they fulfilled their common carrier responsibilities. The agency held that the railroads could, if they chose, provide common carrier bottleneck services only in combination with service over the entire route, thus precluding the STB from exercising rate jurisdiction specifically over the bottleneck segment.

    The STB opined that bottleneck relief might be available if a shipper were able to obtain transportation over the nonbottleneck segment under an individual contract; the STB has no jurisdiction over such contracts. Given that all major U.S. railroads are joined together in opposing a legal requirement that they deal separately with shippers, however, shippers questioned whether such contracts would even be obtainable. With little comment, the STB dismissed the shippers' concerns.

    Alternatively, the STB suggested that where a bottleneck carrier acted in a blatantly anti-competitive fashion, shippers could seek "competitive access" either through reciprocal switching or terminal trackage rights. See 49 U.S.C. ñ11102(a) and (c). But here again, experience has shown this remedy to be illusory, and shippers have been reluctant to pursue it in recent years. Whether a shipper could ever satisfy whatever eased standard the STB has in mind is only speculative.

    Multiple petitions for review of the STB's bottleneck decisions are now pending before the 8th Circuit, and briefing will be completed shortly. The result could be reversal or remand of one or more aspects of the decisions, which would bring the legal and policy issues once again before the STB.

    Alternatively, some rail shipper organizations have launched legislative efforts to obtain relief through statutory change. One concept involves establishing a measure of open access by allowing one railroad to operate over the lines of another in exchange for a fee. Proponents argue that separation of ownership of the railroad lines from their physical operation parallels the open access obligations imposed by the Federal Energy Regulatory Commission on electric utility transmission systems. Such a regime has already been adopted for railroads in other countries, including Canada.

    It is also possible that shippers will be driven to utilize the existing legal and regulatory remedies, despite their limitations. For example, if railroads continually and uniformly refuse to enter into transportation contracts over nonbottleneck segments and thus foreclose separate access to bottleneck segment transportation, shippers may be motivated to bring antitrust claims. See, e.g., United States v. Terminal Railroad Association, 224 U.S. 383 (1912). One shipper has already filed an "essential facilities"-type complaint with the STB, seeking to break the Burlington Northern Santa Fe monopoly in the Northern Powder River Basin coal fields.

    The STB's bottleneck decisions have provided a focal point for both shippers and rail carriers. Captive shippers had hoped that the cases would prompt the STB to counterbalance what the shippers perceived as a pro-railroad trend in rail regulation-specifically the approval of recent rail mergers and the increased deregulation that has accompanied the STB's replacement of the ICC. Captive shippers also may have believed that pro-competitive policies embraced by Congress in the Staggers Rail Act and adopted by regulators elsewhere would lead the STB to recognize a right to bottleneck relief.

    While those expectations have yet to be met, the economic stakes for utility coal and other similarly situated shippers are too high to permit resignation. In various forums, the issues raised by the STB's rulings in the bottleneck cases are likely to remain a source of contention.

Kelvin J. Dowd and Robert D. Rosenberg are partners in D.C.'s Slover & Loftus, an energy and transportation firm whose clients include utility coal and other bulk commodity rail shippers. Slover & Loftus represents the complainant in Central Power & Light Co.

Reprinted with permission of Legal Times, 1730 M St., N.W., Suite 802, Washington, D.C. 20036. Phone: 202-457-0686.
Copyright, Legal Times, 1997.

  back to top
  Please click here for the Publications and Presentations Archive