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BP Amoco Chemical Co. v. Norfolk Southern

Date: May 26, 2005


BP Amoco has filed what we believe constitutes the first "small shipments" rate complaint (Non-Coal Rate Procedures) since the small shipment complaint procedure was adopted by the STB in late 1996. The complaint is filed against Norfolk Southern and concerns the movement of a hazardous chemical within the southeast. The rate and variable cost information has been redacted from the complaint, but the essence of the complaint is that NS has proposed a substantial increase over the prior contract rate and the parties have reached an impasse. BP Amoco represents that it cannot pass the increase along to its customer without losing the business.

BP Amoco asks the STB to mediate the complaint, and only if unsuccessful to consider a rate prescription. BP Amoco also has asked for an injunction against application of tariff rates higher than the last offered contract rate pending disposition of the complaint. NS, under a direction from the STB to respond promptly to the mediation request, has agreed to the mediation, provided it is non-binding, is conducted on a confidential basis, and is mediated by a neutral third-party appointed by the Board. In its reply, NS states that BP had demanded a 28% rate reduction for 7 years. It further states that the tariff rate constitues a 15% increase over the last contract offer when that rate is adjusted to account for the fuel surcharge and mileage allowance, and that the R/VC on the movement is 250%. NS vigorously contests BP Amoco's request that it be enjoined from charging the tariff rate.

The 250% R/VC ratio cited by NS is above two of the three benchmarks the STB has recognized for evaluating small shipments rate cases based on 2002 data. According to data released by the STB in 2004, the average R/VC of NS traffic in 2002 for traffic with an R/VC above 180% (the threshhold for rate reasonableness jurisdiction) was 221%. The R/VC needed in 2002 on that same traffic for NS to achieve revenue adequacy was 179-216%. The third benchmark is a rate comparison---data obtained from the STB's waybill files only after a case is filed. This benchmark information will have to be updated to 2004 levels if this case proceeds to adjudication. With rates having risen over the past several years, we expect the first R/VC comparison will show a higher average R/VC for captive traffic than in 2002, and the third benchmark analysis may not be pretty based on current rate levels. Since there have been no cases and the third benchmark utilizes the STB's confidential waybill data, there is no accurate way to predict what this benchmark will show. Finally, the manner in which the STB will weigh the 3 benchmarks also is unknown.

We expect that NS's acquiesience to the mediation request is designed to play into STB Chairman Nober's urging of shippers and railroads to seek commercial resolution of issues. If the complaint is not settled or withdrawn as an outcome of the mediation process, NS suggests in its reply that it will challenge whether BP Amoco has qualified to use the Non-Coal Procedures, e.g., whether it has demonstrated that use of the stand-alone cost procedure is impractical. (Due to the redaction of certain specific information from the complaint, it is difficult to determine if the complaint contains the detailed information called for by the STB to invoke the small shipments procedure.) Moreover, if the outcome of a rate adjudication were to favor BP Amoco, NS and likely the AAR would challenge the Non-Coal Guidelines themselves. The railroads attempted to challenge the Non-Coal Guidelines when first promulgated; but lacking an actual case to demonstrate how they are applied, that appeal was dismissed as premature. Finally, we expect the filing of this case will serve to side-track the STB's open proceeding looking to revise the small shipments rate case procedure. That proceeding was initiated to address why those procedures had not been utilized since their adoption and what changes would be appropriate. In over two years the agency has held two hearings but has failed to propose any rule or policy changes. With the filing of this case, and another likely on the horizon, we would be surprised to see a proposal for rule changes in the near future.

As with almost all proceedings before the STB, we expect this picture to develop very slowly. It bears watching to see whether Board sponsorship of the mediation/negotiation process can produce a negotiated disposition the parties could not reach by themselves. At the very least, it will sharpen the focus of each party on the position of the other which could lead to a softening of positions. If the mediation does not bring agreement, the ensuing rate case will be revealing about the small rate case procedure and how it works in an actual situation.

For more information, please contact Marty Bercovici at 202-434-4144 or bercovici@khlaw.com.