1	STB COAL RATE LITIGATION: CURRENT STATUS AND RECENT DEVELOPMENTS C. Michael Loftus Partner Slover & Loftus Platts 25^th Annual Coal Marketing Days The Westin Convention Center Pittsburgh, Pennsylvania September 24, 2002
2	PRESENTATION OVERVIEW Standards Used By STB Current Case Status Reasons For Upsurge In Cases
3	MAXIMUM RAIL RATE JURISDICTION Obtain Common Carrier Rate (No Jurisdiction Over Contract Rates) File Complaint (Filing fee $61,400.00) Must Establish Market Dominance (Absence of Effective Transportation Competition) Rate Exceeds Both (i) 180% of Variable Cost and (ii) Stand-Alone Cost Relief Rate Prescription at Greater of (i) 180% of Variable Cost or (ii) Stand-Alone Cost Reparations for Past Amounts Paid to Railroad in Excess of Prescribed Rate
4	STATUTORY AND AGENCY RULES FOR SCHEDULE ICC Termination Act of 1995 Directed STB to devise “Expeditious” Case Procedures Maximum Rate Cases Must be Decided 9 Months after the Close of the Administrative Record 1996 STB Procedural Rules 16-Month Schedule 7 Months for Discovery/Evidence 9 Months for Board to Decide
5	EX PARTE NO. 638 – Procedures To Expedite Resolution Of SAC Cases Served - September 3, 2002 Mandatory Mediation " FERC Administrative Law Judges " 60-day Confidential Process Restrict Discovery Expedited Process For Resolving Discovery Disputes
6	VARIABLE COST CALCULATIONS WPL DECISION-ANTELOPE TO EDGEWATER (1Q 2000)
7	STAND-ALONE COSTS “The Board evaluated the reasonableness of the rate [in WPL] using the stand-alone cost (SAC) test. The SAC test seeks to determine the lowest cost at which a hypothetical, efficient railroad could provide the transportation service needed by a complaining shipper. Under the SAC test, the complaining shipper designs a hypothetical railroad specifically tailored to serve its needs and the needs of other traffic it designates. The costs of building and operating such an efficient railroad are then compared to the revenues that such a system could expect to earn. If, as in this case, the shipper demonstrates that the stand-alone railroad would earn more than necessary to cover all of its costs (including a reasonable return on investment), the shipper is entitled to rate relief.” STB Press Release, Sept. 13, 2001
8	STAND-ALONE COSTS WPL Decision Findings Stand Alone Cost Found To Be Below 180% of Variable Cost Principal SAC Findings Generally Accepted WPL’s Traffic Group, Route, Tonnage and Revenue Projections STB Generally Defaults to UP’s Operating Costs as “Shortcut” Since SAC Result Still Comes in Less Than 180% of Costs WPL Calculates Road Property Investment at $2.2 Billion; UP at $3.3 Billion; STB at $2.9 Billion WPL Allocates Pro Rata Share of Investment Costs to Each Ton of Traffic; STB Allocates an Equal Amount of Investment to Each Year
9	STAND-ALONE COSTS PPL Montana Decision Focused on Legitimate Grouping Versus Cross Subsidies “Grouping permits the complaining shipper to take full advantage of any economies of scope, scale and density associated with shared facilities by spreading the joint and common costs among a larger traffic base.”
10	STAND-ALONE COSTS PPL Montana Decision – cont’d. “[R]evenues from non-issue traffic should not be relied upon to pay for portions of a SAC system over which that non-issue traffic would not move.” “[T]he appropriate inquiry is not, as BNSF suggests, whether a particular subset of [the SARR’s] traffic is generating revenues in excess of the SAC associated with serving that subset of traffic, but whether there is a readily identifiable subset of traffic that would not cover the collective attributable costs associated with serving the traffic.”
11	STAND ALONE COSTS PPL Montana Decision- cont’d The PPL Montana SARR “can be viewed in two distinct parts” – a western part and a north-south part. “[W]e examine whether the western leg would earn sufficient revenue to cover its attributable costs or whether it would require a cross-subsidy in order to be viable...” “We find that ... the western segment ... would not be self-sustaining.”
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13	FOUR MOST RECENT COAL RATE CASE DECISIONS 2002 PPL Montana v. BNSF (No. 42054) – Challenged Rate: $5.33 - $7.74 – Complaint Dismissed 2001 WPL v. BNSF (No. 42051) Challenged Rate: $14.66 Prescribed Rate: $12.71(BT)/$13.30 (Ant) 1997 APS/PCorp v. ATSF (No. 41185) Challenged Rate: $6.31 Prescribed Rate: $3.46 1996 WTU v. BNSF (No. 41191) Challenged Rate: $19.36 Prescribed Rate: $13.46
14	STB Rate Prescription Methodology WTU Case: Establish and Maintain Rates at 180% of Variable Costs WPL Case: Establish and Maintain Rates at 180% of Variable Costs Unless SAC Higher APS/P Corp. Case: SAC Rates Prescribed For 20 Year DCF Period
15	COAL RATE CASES AT ICC/STB FROM 1980 TO PRESENT 1980 -- Lots of Major Cases Initiated in Wake of Staggers Rail Act 1981-1989 -- Pending Cases Decided or Settled 1990-1999 -- Fewer Cases Instituted 2000-2002 -- Upsurge in Major Case Filings
16	Pending STB Rate Cases WTU v. BNSF (6/00) PPL Mont v. BNSF (7/00) TMPA v. BNSF (10/00) PSCo v. BNSF (12/00) AEPCO v. BNSF/UP(12/00) NSP v. UP (6/01) Duke v. NS (12/01) Duke v. CSX(12/01) Otter Tail v. BNSF (1/02) Carolina Power v. NS (2/02)
17	West. Tex. U. v. BNSF (No. 41191) First filed 1/12/94, challenging PRB Rates for 3 MMTPY to Oklaunion (1,222 miles) STB decided 5/3/96, prescribing 12.2 mills and $11.4 million reparations BNSF reactivates 6/16/00, raising rates to 14 mills On 11/7/00, STB holds 1996 prescription only applies to Rawhide, allows increase and reopens case
18	PPL Montana v. BNSF (No. 42054) Filed 7/5/00, challenging PRB Rates for 0.75 MMTPY to Corette (263/166 miles) at 25/32 mills Decision issued August 20, 2002 Petition for reopening filed September 1, 2002
19	TMPA v. BNSF (No. 42056) Filed 10/2/00, challenging PRB Rates for 2 MMTPY to Gibbons Creek (1,414 miles) at 13.5 mills Briefs filed June 27, 2002 Decision expected by March 27, 2003
20	Public Service Co. of Colorado v. BNSF (No. 42057) Filed 12/20/00, challenging PRB Rates for 2.6 MMTPY to Pawnee Station (389 miles) at 23 mills Case is in Discovery, Procedural Schedule Suspended
21	Arizona Electric Power Cooperative, Inc. v. BNSF and UP (No. 42058) Filed 12/29/00, (Amended 3/9/01) challenging NM, CO and PRB Rates for 1.5 MMTPY to Apache Station (493 (NM), 1217(CO), 1284(WY), 1610(MT) miles) at 19(NM), 17(CO), 15(WY), 13(MT) mills Case is in Discovery, Procedural Schedule Suspended
22	Northern States Power Company v. UP (No. 42059) Filed 1/26/01, challenging Rates for 2.4 MMTPY to King, Black Dog Plants, from PRB (1,025 miles), and from Twin Cities (30 miles) at 11-11.5 (PRB), 70 (Twin Cities) Opening evidence filed July 19, 2002 Reply evidence due October 4, 2002 Rebuttal evidence due November 1, 2002
23	Duke Energy v. CSX (No. 42070) Filed 12/19/01, challenging Central Appalachian (VA, WVA, KY) Rates for 1.9 MMTPY to Cliffside, Lee, and Riverbend Stations (350 miles) at 51 mills Opening evidence filed May 24, 2002 Reply evidence filed September 20, 2002 Rebuttal evidence due November 12, 2002
24	Duke Energy v. Norfolk Southern (No. 42069) Filed 12/19/01, challenging Central Appalachian (VA, WVA, KY) Rates for 7.4 MMTPY to Allen, Belews Creek, Buck and Dan River Stations (364 miles) at 46 mills Opening evidence filed May 24, 2002 Reply evidence filed September 27, 2002 Rebuttal evidence due November 19, 2002
25	Otter Tail Power v. BNSF (No. 42071) Filed 01/02/02, challenging Wyoming PRB Rates for 2.0 MMTPY to Big Stone Station (910 miles) at 15-17 mills Case is in Discovery, Procedural Schedule Suspended
26	Carolina Power & Light Co. v. Norfolk Southern (No. 42072) Filed 02/01/02, challenging Central Appalachian (VA, WV, KY) Rates for 8 MMTPY to Roxboro and Mayo Stations (335 miles) at 49 mills Opening evidence filed June 10, 2002 Reply evidence due October 11, 2002 Rebuttal evidence due November 27, 2002
27	REASONS FOR UPSURGE IN MAXIMUM COAL RATE CASES Railroad Side of Equation Extended Decline in Rail Rates 2000 STB Report-Average rail rate fell 45.3 percent (real dollars), 19.7 percent (nominal dollars) from 1984 to 1999 Breakdown: East West Real -40.7% -48.8% Nominal -13.2% -24.7%
28	REASONS FOR UPSURGE IN MAXIMUM COAL RATE CASES Railroad Side of Equation Primary Driver of Rate Reductions Has Been Huge Productivity Gains 2000 STB Report, pp. 4-5 “Comparing 1998 to 1980, Class I railroads produced 50% more ton-miles using 61% fewer employees, 28% fewer locomotives, 38% fewer track miles and 28% fewer freight cars in service. It is this improvement in productivity that has driven the decline in rail rates…”
29	REASONS FOR UPSURGE IN MAXIMUM COAL RATE CASES Railroad Side of Equation Capital Demands are Substantial Wall Street Has Been Urging Increased Rates Raising Rates on Competitive Traffic is Difficult Natural Result is Reliance Upon Rail-Dependent, Non-Competitive Traffic for Increased Revenues
30	REASONS FOR UPSURGE IN MAXIMUM COAL RATE CASES Shipper Side of Equation Deregulation has Made Many Utilities More Concerned About Being a Low-Cost Producer In Some Cases, Utilities Can No Longer Pass Delivered Coal Costs Directly on to Electric Consumers
31	REASONS FOR UPSURGE IN MAXIMUM COAL RATE CASES Shipper Side of Equation Captive Shippers have not Benefited as Much from Rail Productivity, Leading to Increased Rate Disparities Absent Competition, STB Rate Regulation is Shipper’s Only Recourse Utilities Filing Complaints have Perceived STB as Offering Reasonable Prospects for Relief from Unreasonable Rates