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Of hypothetical railroads and western coal rates: In two rulings, STB considers cross-subsidy questions

Surface Transportation Board Aug. 20 issued what it termed two "significant" cross-subsidy-related rulings involving challenges by electric utilities to railroad rates for coal transportation.

STB typically evaluates rail rate reasonableness using the stand-alone cost (SAC) test in which the board seeks to determine the lowest cost a hypothetical, efficient railroad could provide the service in question. Each of the two recent decisions emphasizes the SAC principle that traffic carried by a hypothetical railroad "would pay its own way," the board said,

In the first rail rate case, PPL Montana L.L.C. had filed a complaint with STB, contending the rates Burlington Northern Santa Fe charged the utility to ship coal were "unreasonably high."

The utility had argued that, while it shouldn't be required to cross-subsidize facilities from which it receives no benefit, there was no comparable prohibition in the SAC test against other traffic subsidizing its traffic.

Under the SAC test, the complaining shipper designs a hypothetical railroad (the "stand-alone railroad") tailored to serve its needs — and those of other selected traffic — as efficiently as possible. The shipper then compares the costs of building and operating the railroad with the revenue the hypothetical railroad could expect to generate from the traffic it'd serve. If the shipper demonstrates the stand-alone road wouldn't need to charge as much as the defendant railroad charges, then the shipper would be entitled to rate relief.

PPL Montana, STB said, failed to make its case; the utility didn’t demonstrate that BNSF's rates were unreasonably high. The board also concluded "permitting cross-subsidies from traffic not using many of the facilities needed by PPL Montana's traffic would fundamentally undermine the SAC principle."

In the second case, for which evidence had yet to be filed as of Aug. 20, the board denied a request by BNSF and Union Pacific Railroad to order rate-relief-seeking Arizona Electric Power Cooperative Inc. (AEPCO) to make three separate evidentiary presentations.

STB concluded AEPCO could pursue a single, three-tiered approach — as long as it avoids any cross-subsidy among the three sets of mine origins. The board also determined AEPCO could assume its hypothetical railroad could avail itself of the same joint ownership or track-sharing arrangements currently available to BNSF and UP, and that AEPCO could assume its traffic would move over different routings than those currently used by BNSF and UP — as long as the utility has not requested the routing the railroads currently use.

But because AEPCO is challenging UP's single-line rates for its shipments from the Colorado mines, AEPCO's hypothetical railroad may not be designed to include traffic that UP does not now serve, STB added. Although shippers have discretion in designing SAC cases, "there are limits on the creativity with which a complainant . . . may develop its [hypothetical railroad]," the board concluded.

Contact Progressive Railroading editorial staff.

More News from 8/22/2002