A dispute at the Surface Transportation Board between Navajo Transitional Energy Co. in Montana and BNSF Railway, America’s largest freight railroad, is headed to the courts. The STB will likely lose on administrative grounds for forcing the discount shipment of millions of tons of coal.
The case demonstrates how common carriage, which requires freight rail service for regulated traffic such ascoal and chemicals, is increasingly difficult to support as a regulatory concept. Common carriage lacks political consensus, grows less relevant in competitive markets, and threatens to undermine climate goals.
Contract negotiations between NTEC and BNSF broke down last year, and NTEC complained to the STB, the agency where shippers and freight rail resolve such issues. NTEC charged that BNSF failed to meet its common carrier obligation, which by law requires a railroad to serve all customers at reasonable rates and levels of service.
NTEC asked for 29 trains a month, but BNSF could only provide 23. However, the STB ordered that BNSF must provide an additional six trains to deliver a staggering 4.2 million tons of coal annually at the tariff rate, a discount from the market rate.
The STB further ruled that BNSF could ship an additional 1 million tons if it can secure additional capacity. However, failure to supply this could be construed as a violation of BNSF’s common carriage obligations. Moreover, NTEC isn’t obliged to purchase the capacity—it can change its mind.
BNSF countered that it never refused service but merely refused to meet NTEC’s extreme demands, largely due to capacity concerns. BNSF has appealed the ruling and will likely prevail. The STB rejected a request to stay the ruling while it pursues litigation.
Lack of Consensus
Common carriage for freight rail is codified in the US Code to ensure service on reasonable request for regulated traffic such as coal and chemicals.
Last year, STB Chairman Martin Oberman testified in Congress on his view to update common carriage statutes. The update didn’t happen, and the House has since changed parties and committee leadership.
The STB voted on party lines in the NTEC-BNSF dispute. This makes it easy for BNSF to argue that the STB was unreasonable, overstepped its authority, and overinterpreted the statute.
STB Commissioner Michelle Schultz dissented on the matter, noting that “the decision muddies the concept of the common carrier obligation because of uncertainties over what the board might consider in determining the railroad’s capacity.”
More generally, I have argued that common carrier obligations are obsolete in the face of growing shipper competition and should be replaced with empirical findings of significant market power.
The US has multiple state-of-the-art shipping networks. Shippers can use other freight railroads, trucks, barges, pipelines, airplanes, and so on. NTEC has other options to get its Montana coal to Vancouver.
Let the Market Work
Amid a global energy crunch, the price of coal has exploded. US coal shippers are speeding their stocks to Asian customers who pay more. It’s rational for NTEC to ship more coal, but this doesn’t entitle them to a discount, particularly when other shippers have contracts to ship critical goods on the same networks. BNSF ensures that it best meets the demands of all its customers through flexible pricing.
By ruling that BNSF must supply the six extra cars no matter what, the STB forces BNSF to reduce service and capacity for other shippers. The STB puts BNSF into a situation where it fails to meet contracted obligations and violates common carrier obligations.
Networked industries require accurate information and transparent pricing to work. If railroads can’t adapt their prices and service based on supply and demand, they can’t deliver goods or run their networks.
Consumers are negatively impacted when regulators like the STB decide which goods should be shipped at which price. The grant of a shipping discount for NTEC makes a price distortion to favor coal, a hypocritical action from an administration claiming to protect the climate.
In general, regulators try not to overinterpret the statutes, but STB has lost the balance. The courts will likely show that common carriage has limits and that STB overstepped them.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Roslyn Layton, PhD is a regulatory policy expert of networked industries.
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