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January 03, 2024 Feature

VI. Railroad

Linda Stein, Tim Strafford, Sally Mordi, and Tara Woods

A. Introduction

The Surface Transportation Board (Board or STB) approved the Canadian Pacific and Kansas City Southern merger, subject to conditions. The Board also adopted a final rule establishing a new procedure for challenging the reasonableness of railroad rates in smaller cases, and a final rule modifying the Board’s regulations to establish a voluntary arbitration program for small rate disputes. The Board’s decisions approving the Canadian Pacific and Kansas City Southern merger and adopting the two final rules are being challenged in federal court.

B. Recent STB Regulatory Developments

1. Mergers

a. The Board Approved the CP/KCS Merger

On March 15, 2023, the Board issued a decision approving, with conditions, the combination of the Canadian Pacific Railway system with the Kansas City Southern Railway system.1 Chairman Oberman held a press conference on March 15, 2023 regarding the Board’s decision.

Applicants Canadian Pacific Railway Limited, Canadian Pacific Railway Company, and their U.S. rail carrier subsidiaries (collectively CP) and Kansas City Southern and its U.S. rail carrier subsidiaries (collectively KCS), filed an application on October 29, 2021, seeking Board approval for the proposed combination of CP and KCS (collectively CPKC). In a decision served on November 23, 2021, the Board accepted the application for consideration.2 The Board had found the transaction to be a major transaction under 49 C.F.R. § 1180.2(a)3 and to be subject to the regulations set forth at 49 C.F.R. part 1180, subpart A, in effect before July 11, 2001.4 Additionally, the Board had determined that the proposed voting trust arrangement was acceptable with certain modifications.5

On February 28, 2022, a number of third parties submitted comments either supporting the merger, commenting on certain aspects of the merger, or requesting conditions to any Board approval of the merger. On March 16, 2022, the Board suspended the procedural schedule and directed Applicants to address an apparent inconsistency in certain data they had submitted.6 On April 27, 2022, the Board directed Applicants to amend their application to further explain and support the analysis underlying their Operating Plan, as well as address technical issues with the workpapers associated with the Operating Plan.7

On July 22, 2022, the Board announced that it would hold a public hearing.8 The public hearing commenced on September 28, 2022, and concluded on October 7, 2022. Over twenty panels consisting of railroads, shippers, government officials, and other interested parties spoke at the hearing.9 On January 27, 2023, the final Environmental Impact Statement was issued.10

In the approval decision served on March 15, 2023, the Board stated that, given the current realities and the limited opportunities to provide meaningful competition for the largest Class I railroads, the Board concluded that the transaction should improve rather than degrade the performance of the industry, and, for these reasons, the Board approved the merger.11

The Board stated that it expects that the new single-line service will foster the growth of rail traffic; support investment in infrastructure, service quality, and safety; drive employment growth across the CPKC system; and foster new National Railroad Passenger Corporation (Amtrak) passenger rail opportunities.12 The Board further stated that, “[t]o ensure that the expected public benefits from this merger are realized to the fullest extent possible, the Board is establishing an unprecedented seven-year oversight period along with extensive data-reporting requirements.”13

The Board denied the responsive applications filed by Canadian National Railway Company (CN) and Norfolk Southern Railway Company (NSR) and denied all other conditions sought by the various parties to the proceeding.14 Furthermore, the Board stated that it is formally modifying the agency’s position on the “one-lump” theory, an economic doctrine used in past proceedings to inform the agency’s assessment of the competitive impacts of vertical combinations.15 Board Member Primus dissented with a separate expression.

The approval decision became effective on April 14, 2023.16 The Board has announced that three court actions were instituted seeking judicial review of the Board’s decision.17

2. Ex Parte Proceedings

a. The Board Adopted Final Rule Establishing a New Procedure for Challenging the Reasonableness of Railroad Rates in Smaller Cases

On December 19, 2022, the Board adopted a final rule in Docket No. EP 755 to establish a new procedure for challenging the reasonableness of railroad rates in smaller cases.18 The Board also terminated its proceeding in Docket No. EP 665 (Sub-No. 2), Expanding Access to Rate Relief. On the same day, the Board also adopted a final rule in a related proceeding, Docket No. EP 765, modifying its regulations to establish a voluntary arbitration program for small rate disputes.19

In a notice of proposed rulemaking (NPRM) issued on September 12, 2019, the Board had proposed to establish a new rate case procedure for smaller cases, the Final Offer Rate Review (FORR) procedure.20 The Board received numerous comments on the FORR NPRM, and, to permit information discussions with stakeholders, the Board waived the general prohibition on ex parte communications.21

On November 15, 2021, the Board issued a supplemental notice of proposed rulemaking (SNPRM), which made minor changes to the proposal in the FORR NPRM.22 The Board stated that it was seeking further comments “so that the modified FORR proposal may be considered in parallel with the proposal in Docket No. EP 765 to establish an arbitration program that could include an exemption from FORR for carriers that participate in the program.”23 The Board received several comments and reply comments on the FORR SNPRM.

In its December 19, 2022, decision, the Board stated that, “[a]fter considering the comments filed in response to the NPRM and SNPRM and information received in meetings with stakeholders, the Board will adopt its proposal in Docket No. EP 755 as modified in the SNPRM.”24 In summary, under the new rate review procedure, “the Board will decide a case by selecting either the complainant’s or the defendant’s final offer, subject to an expedited procedural schedule that adheres to firm deadlines.”25

The Board also issued a related final rule in Docket No. EP 765, establishing a voluntary arbitration program for small rate disputes, discussed below.26 Under the new arbitration program, participating carriers would be exempted from challenges under the FORR process under certain circumstances.27

In the December 19, 2022, decision in Docket No. EP 755, Board Members Fuchs and Schultz dissented with separate expressions. Board Member Fuchs stated that, although he voted to propose FORR and twice solicited public comment, after careful consideration of those comments, he has concluded that “FORR is not the answer.”28 Board Member Fuchs stated that “FORR is an evasion of the Board’s fundamental responsibility because it makes the Board entirely dependent on litigants’ self-determined rate review methodologies, gives little meaningful guidance for those methodologies, and prohibits the Board from devising its own remedy where necessary.”29 He noted that, rather than issuing the FORR final rule, “the Board should have recognized the irreparable problems with FORR and instead pursued other reforms while it facilitates an additional process to resolve rate disputes via the agency’s new arbitration program.”30

Board Member Schultz also dissented, stating that, while she voted in favor of the FORR SNPRM, she did so because she “thought it was important to meet with stakeholders about both FORR and the Board’s proposed small case rate arbitration program . . . in Docket No. EP 765, as well as for stakeholders to be able to review and comment on both proposals at the same time.”31 She stated that she “was not in favor of the Board adopting both rules, and the Board’s action today—simultaneously issuing final rules in this docket and in Docket No. EP 765 while tying them together—is unprecedented and unnecessary.”32 Board Member Schultz further stated that “the Board has injected a level of uncertainty and unpredictability into a process that should be predictable and consistent.”33 She believes that the new arbitration program in Docket No. EP 765 “is a much better option for both shippers and carriers.”34

The final rule in Docket No. EP 755 became effective sixty days after notice of the Board’s decision was published in the Federal Register.35 The termination of Docket No. EP 665 (Sub-No. 2) became effective on January 3, 2023.36

On January 24, 2023, a petition for reconsideration of the final rule was filed by the American Chemistry Council, the Fertilizer Institute, the National Industrial Transportation League, the Chlorine Institute, and the Corn Refiners’ Association.

The Board has announced that two court actions were instituted seeking judicial review of the Board’s December 19, 2022, decision.37

b. The Board Adopted Final Rule Modifying Its Regulations to Establisha Voluntary Arbitration Program for Small Rate Disputes

On December 19, 2022, the Board adopted a final rule in Docket No. EP 765, modifying its regulations to establish a voluntary arbitration program for small rate disputes.38 As discussed above, on the same day, the Board adopted a final rule in a related proceeding, Docket No. EP 755, to establish a new procedure for challenging the reasonableness of railroad rates in smaller cases.39

On September 12, 2019, the Board had proposed FORR as a new procedure for challenging the reasonableness of railroad rates in smaller cases.40 On July 31, 2020, five Class I carriers—CN, CSX Transportation, Inc. (CSXT), the Kansas City Southern Railway Company, Norfolk Southern Corp. (NS), and Union Pacific Railroad Company (UP)—filed a petition for rulemaking, requesting that the Board add a new arbitration program focused specifically on resolving small rate disputes.41 The carriers’ proposed arbitration program would function alongside the existing arbitration program at 49 C.F.R. part 1108, but included changes that the carriers argued would create a more streamlined and flexible arbitration process that, in turn, would better incentivize both railroad and shipper participation.42 The carriers argued that the proposed arbitration program was better than FORR in fairness, legality, and economic integrity.43 Several parties representing shipper interests opposed the petitioners’ request and urged the Board to adopt FORR.44

The Board instituted a rulemaking proceeding to consider the petition for rulemaking on November 25, 2020, and issued a notice of proposed rulemaking setting forth the Board’s arbitration proposal on November 15, 2021.45 The Board’s proposal in the Arbitration NPRM was modeled on some, but not all, aspects of the proposal set forth in the petitioners’ petition for rulemaking.46 The Board also proposed that carriers that participate in the new small rate case arbitration program would be exempt from rate challenges under the process being proposed in FORR.47

In the December 19, 2022, final rule in Docket No. EP 765, the Board made certain modifications to its proposal in the Arbitration NPRM. The Board stated that it found that it is important that shippers across the rail network have access to the same means of rate relief.48 Thus, the Board required that all Class I carriers agree to participate in the arbitration program before the program becomes effective.49 Class I carriers had twenty days from the effective date of the regulations to decide whether to participate in the program.50 The decision stated that, if all Class I carriers agreed to participate, the Board would issue a notice that commenced the new program, allowing it to be used and initiating the FORR exemption.51 If not all Class I carriers indicated their intent to participate, the Board would not issue a notice commencing the new arbitration program, which would result in the program being inoperable, and all Class I carriers would be subject to rate challenges under the FORR process.52 Additionally, by agreeing to participate, carriers would commit to participate in any arbitrations brought against them under this program for a five-year term.53

Board Member Fuchs concurred, stating that he agrees with the Board’s decision because it creates an efficient, beneficial voluntary program to resolve rate disputes.54 However, he expressed concern that the decision includes “an unnecessary and potentially counterproductive condition” because the new program cannot be used by any shipper or carrier if just one Class I carrier chooses not to participate.55

Board Member Schultz separately commented, stating that the goals of both FORR in Docket No. EP 755 and the new arbitration program in Docket No. EP 765 are “to reduce the cost and complexity of small rate disputes.”56 Board Member Schultz stated that, in her opinion, the Board’s intended goals are only met through the issuance of the arbitration program.57 Board Member Schultz also expressed concerns regarding the requirement that all Class I carriers must participate for the arbitration program to become effective.58

On December 29, 2022, four Class I carriers—CSXT, NSR, UP, and the U.S. operating subsidiaries of CN—filed a petition for stay, requesting that the Board stay the requirement that all Class I carriers decide whether to commit to the program within twenty days of the rule becoming effective (i.e., by February 23, 2023).59 On January 24, 2023, the Board issued a decision denying the Class I carriers’ request for stay.60 On the same day, petitions for reconsideration of the final rule were filed by CSXT and jointly by UP and NSR.

The final rule became effective on February 3, 2023. On February 14, 2023, the Board issued a decision denying a second petition by the four Class I carriers to stay the “opt-in” requirement.61

On February 23, 2023, each Class I carrier filed a notice or comment in Docket No. 765, addressing the “opt-in” requirement. Several Class I carriers expressed concerns about the new arbitration program and did not expressly “opt-in” to the program.

The Board has announced that two court actions were instituted seeking judicial review of the Board’s December 19, 2022, decision.62

Endnotes

1. Can. Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served Mar. 15, 2023).

2. Can. Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served Nov. 23, 2021).

3. Can. Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served Apr. 21, 2021).

4. Can. Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served Apr. 23, 2021).

5. Can. Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served May 6, 2021).

6. Can. Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served Mar. 16, 2022).

7. Can. Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served Apr. 27, 2022).

8. Can. Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served July 22, 2022).

9. See Can. Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served Sept. 27, 2022).

10. Can. Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served Jan. 27, 2023).

11. Can. Pac. Ry. Ltd.—Control—Kansas City S., FD 36500, slip op. at 5 (STB served Mar. 15, 2023).

12. Id., slip op. at 3.

13. Id., slip op. at 5.

14. Id., slip op. at 13.

15. Id.

16. Id., slip op. at 174.

17. See Can. Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served May 10, 2023); Can. Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served May 12, 2023); Can. Pac. Ry. Ltd.—Control—Kansas City S., FD 36500 (STB served May 17, 2023).

18. Final Offer Rate Review, EP 755 (STB served Dec. 19, 2022).

19. See Joint Petition for Rulemaking to Establish a Voluntary Arbitration Program for Small Rate Disputes, EP 765 (STB served Dec. 19, 2022).

20. Final Offer Rate Review (FORR NPRM), EP 755 (STB served Sept. 12, 2019).

21. See Final Offer Rate Review, EP 755 (STB served May 15, 2020).

22. Final Offer Rate Review (FORR SNPRM), EP 755 (STB served Nov. 15, 2021).

23. FORR SNPRM, slip op. at 9.

24. Final Offer Rate Review, EP 755, slip op. at 2 (STB served Dec. 19, 2022).

25. Id., slip op. at 1.

26. See Joint Petition for Rulemaking to Establish a Voluntary Arbitration Program for Small Rate Disputes, EP 765 (STB served Dec. 19, 2022).

27. Id., slip op. at 2.

28. Final Offer Rate Review, EP 755, slip op. at 34 (STB served Dec. 19, 2022).

29. Id.

30. Id.

31. Id., slip op. at 39.

32. Id.

33. Id.

34. Id.

35. Id., slip op. at 33.

36. Id.

37. See Final Offer Rate Review, EP 755 (STB served Jan. 4, 2023); Final Offer Rate Review, EP 755 (STB served Jan. 30, 2023).

38. Joint Petition for Rulemaking to Establish a Voluntary Arbitration Program for Small Rate Disputes, EP 765 (STB served Dec. 19, 2022).

39. Final Offer Rate Review, EP 755 (STB served Dec. 19, 2022).

40. Final Offer Rate Review, EP 755 (STB served Sept. 12, 2019).

41. See Joint Petition for Rulemaking to Establish a Voluntary Arbitration Program for Small Rate Disputes, EP 765, slip op. at 4 (STB served Dec. 19, 2022).

42. Id.

43. Id.

44. Id.

45. See Joint Petition for Rulemaking to Establish a Voluntary Arbitration Program for Small Rate Disputes (Arb. NPRM), EP 765 (STB served Nov. 15, 2021).

46. Joint Petition for Rulemaking to Establish a Voluntary Arbitration Program for Small Rate Disputes, EP 765, slip op. at 5 (STB served Dec. 19, 2022).

47. Id., slip op. at 2.

48. Id., slip op. at 6.

49. Id.

50. Id., slip op. at 7.

51. Id., slip op. at 6.

52. Id.

53. Id.

54. Id., slip op. at 64.

55. Id.

56. Id., slip op. at 66.

57. Id.

58. Id.

59. See Joint Petition for Rulemaking to Establish a Voluntary Arbitration Program for Small Rate Disputes, EP 765, slip op. at 1–2 (STB served Feb. 14, 2023).

60. Joint Petition for Rulemaking to Establish a Voluntary Arbitration Program for Small Rate Disputes, EP 765 (STB served Jan. 24, 2023).

61. Joint Petition for Rulemaking to Establish a Voluntary Arbitration Program for Small Rate Disputes, EP 765 (STB served Feb. 14, 2023).

62. See Joint Petition for Rulemaking to Establish a Voluntary Arbitration Program for Small Rate Disputes, EP 765 (STB served Jan. 4, 2023); Joint Petition for Rulemaking to Establish a Voluntary Arbitration Program for Small Rate Disputes, EP 765 (STB served Jan. 4, 2023).

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Linda Stein, Tim Strafford, Sally Mordi, and Tara Woods

Linda Stein and Tim Strafford are Partners, and Sally Mordi and Tara Woods are Associates, at Steptoe & Johnson LLP in Washington, DC.