WASHINGTON, D.C. — Railroad freight rates may change as a result of a two-day hearing in front of the U.S. Surface Transportation Board (STB) focused specifically on how shipping rates are determined.

Around the 1970s and ’80s, railroads were in danger of becoming bankrupt. The federal government stepped in to limit regulations, giving the railroad industry more flexibility to determine freight rates.

Arguments from shippers and railroad legal counsel last week focused in part on the fact rates are set based on averages between economic predictors called Capital Asset Pricing Model (CAPM) and the Multi-Stage Discounted Cash Flow Model (MSDCF).

Raymond Atkins, legal counsel for the Assoc. of American Railroads, said averaging the two systems is meant to maintain steadier rates than either system could do independently. The CAPM was providing higher rates at one point; now the MSDCF is providing higher rates. Using the MSDCF to average rates means the rates are currently higher than they would be using CAPM alone.

The gap between the two programs is closing, he said.

“We use an averaging model because it smoothes the line,” Atkins said, with the rates set neither significantly higher nor lower than any other economical model.

“MSDCF can’t be fixed to do the job you want it to do … CAPM can be fixed,” said Eric Von Salzen, attorney for the Arkansas Electric Cooperative Corp. “What we really want is a good model, and we think you can fix the CAPM and make it the model to do what you want.”

Hervey Levine, with Levine Consulting Services, said the STB should review more solid data than just the economic models, using annual reports to shareholders to help determine how much profit a railroad actually has.

The Staggers Act deregulated railroad rates in the 1980s, allowing railroads more flexibility in determining their rates without government oversight. Provisions in the act were put in place to stop the railroads from abusing the privilege, to limit the amount of revenue the industry could make. The program was put in place to save railroads from bankruptcy and help the industry be profitable again.

Bruce Carlton, president and CEO of the National Industry Transportation League (NITL), said the Staggers Act clearly states when railroads become revenue-adequate, shippers should not have to pay outrageously high rates. He argued the railroads have been profiting in recent years to such an extent that freight rates should go down. Railroads are currently able to make repairs, buy new equipment and profit investors.

“Shippers across the board don’t want the government setting the rates. What (the shippers) want is something that approaches real market pricing,” Carlton said.

He explained some shippers, called captive shippers, can only transport freight using one railroad. Others have access to multiple rail companies, trucks or waterways and, with more options, lower rates from the rail companies.

For a captive shipper to challenge the rates, lawyers have to be employed to bring the issue to the STB. In four years, after spending millions while paying higher shipping rates, the STB may decide shipping rates are too high for that shipper. Most small shippers don’t have the time or money to fight for a different rate, Carlton said.

A few years ago, the NITL introduced a request for a new rule that would allow some captive shippers to be charged competitive rates rather than high monopoly shipment rates. If a railroad car can be switched near the point of origin, the shippers should have a right to make that change and decrease the rates charged.

Carlton hopes to see the proposal in whatever new guidelines the STB may release. The issue of determining revenue adequacy has been discussed in front of the STB several times in recent years, he added.

The STB will be considering the testimony provided. Comments can be submitted for about a week, to be added for consideration. For more information about the hearing and to comment, visit www.stb.dot.gov