On September 26, 2019, the Federal Maritime Commission issued a Notice of a series of new notices of proposed rulemakings that have significant potential effect on OTIs and vessel operators. At this point, the actual NPRMs have not been issued, so it is not clear what issues are to be specifically addressed. Nevertheless, the press release of the Commission’s votes on these proceedings provides interesting news.

The first NPRM will address a petition filed by the World Shipping Council in September 2018 in Docket Petition P3-18. In that proceeding, the World Shipping Council requested that the Commission issue an exemption so that the vessel operators would no longer need to file service contracts or publish the essential terms of those contracts in their tariffs. Essentially, the carriers were taking the position that since the Commission granted that relief to NVOCCs (due to the petition filed by NCBFAA with respect to NVOCC service arrangements), the same should be done for the carriers. However, according to the Notice, the Commission is moving forward only with a portion of the World Shipping Council request. The NPRM will only address eliminating the publication of essential terms, but not the filing of the service contracts themselves. It is not clear why the full Commission decided to continue service contract filing, but Commissioner Dye would have approved the entire request by the World Shipping Council.

Among other things, the second NPRM directly affects OTIs and is intended to update the Commission’s regulations to:

• Expand the class of persons that must be licensed as OTIs
• Expand the prohibition on vessel operators knowingly and willfully accepting cargoes for unlicensed/nonregistered NVOCCs
• Make clear that the OTI licensing requirements do not apply to agents of licensed OTIs

Until the NPRM is actually published, it is not entirely clear what changes in the OTI regulations are being contemplated. It will be important to review that once it is published. Finally, in closed session, the Commission voted to issue a Request for Comments on what would be a significant change to the enforcement procedures of the Bureau of Enforcement. The revised procedures would:

• (1) Provide notice to the subjects of investigations that BOE intends to recommend that the Commission initiate enforcement proceedings and allow these subjects an opportunity to respond before BOE submits those recommendations;
• (2) require full Commission approval before any formal or informal enforcement action is taken; and
• (3) require Commission approval of any proposed settlement agreements.

According to the FMC press release, that rule will become final 75 days from its publication in the Federal Register.

While the first NPRM noted above relating to VOCC service contracts really affects only the vessel operators, the other proposed actions by the FMC will likely have a substantial effect on OTI practices, and we will provide a complete description of these issues once the agency releases the final document.

Whom to Contact for More Information

If you have any questions about this issue or desire additional information, please do not hesitate to contact Ed Greenberg (egreenberg@gkglaw.com).

On September 12, 2019, the Surface Transportation Board (“Board”) issued a Notice of Proposed Rulemaking that constitutes another attempt by the Board to increase the ability and willingness of captive rail shippers to seek review of rail rates through formal complaint proceedings before the Board.  Under this latest proposal, the Board would establish a Final Offer Rate Review (“FORR”) procedure that is based in large part on final offer arbitration procedures used in Canada.   The Board has proposed such rules would be applied for cases where the total value of the case (overcharges and prescribed rates) did not exceed $4 million, but it has asked for comment on this proposed limit. 

The proposed rule has numerous components that are designed to expedite and simplify the process, thereby making it cheaper for shipper complainants to pursue.  A non-exhaustive list of the proposal’s features includes the following:

• The expedited procedural schedule would result in a decision within 135 days.
• Complainant and defendant would have the freedom to propose and support any methodology to demonstrate the appropriate maximum reasonable rate, taking into account certain statutory criteria.
• Complainant would provide advance notice to defendant, and the proceeding would begin at the time a complaint is filed, which also would mark the beginning of a discovery period of 21 days.
• Discovery would necessarily be narrowly tailored and litigation over discovery disputes would not be permitted.
• The defendant railroad would not be required to submit an answer to the complaint.
• Market dominance determinations would be evaluated separately using the Board’s proposed streamlined market dominance approach in Docket No. EP 756, Market Dominance Streamlined Approach. 
• At the conclusion of the 21-day discovery period, the parties would simultaneously submit their market dominance presentations and final offers addressing the reasonableness of the challenged rate and support for the rate in the party’s offer.
• The parties would simultaneously submit replies to each other’s presentations ten days later.
• One week after the parties submitted their replies, the complainant could elect to have the parties participate in a telephone hearing before an administrative law judge.
• If the Board finds that the complainant’s market dominance presentation and rate reasonableness analysis demonstrate that the defendant railroad has market dominance, the Board would then choose between the parties’ final offers no later than 90 days after the deadline of the parties replies.  

The proposal is a result of the Board’s acknowledgement that its current rate review methodologies are both too costly and time-consuming to be viable for smaller disputes. It is intended to provide a faster, less costly review of certain unreasonable railroad rate claims.

Opening comments are due by November 12, 2019 and replies are due by January 10, 2020.  The Board has not yet scheduled a public hearing on the proposal.

If you have any questions about this issue or desire additional information, please do not hesitate to contact our Rail Transportation Group: 

• Tom Wilcox (twilcox@gkglaw.com); 
• Ed Greenberg (egreenberg@gkglaw.com); 
• David Monroe (dmonroe@gkglaw.com); 
• Brendan Collins (bcollins@gkglaw.com); or
• Kristine Little (klittle@gkglaw.com).

Additional Recent STB Rail Rate Reform Agenda Items:

STB Proposes Streamlined Approach for Pleading Market Dominance in Rate Reasonableness Proceedings

STB Announces Hearing on Revenue Adequacy Recommendations of the RRTF

On September 12, 2019, the Surface Transportation Board (“Board”) announced it will hold a public hearing on December 12, 2019 in an area of railroad policy that is extremely important to the STB’s regulation of railroad rates and the procedures for challenging them:  railroad “revenue adequacy.”   How “revenue adequacy” is determined by the Board and factored into rate challenges is critical for rail shippers because the laws governing the regulation of railroads beginning with the Staggers Rail Act of 1980 were designed to encourage the then-failing nation’s Class I railroads to achieve the position where their revenues generally exceeded their cost of capital, i.e., they became “revenue adequate.”  Nearly all of the current Class I railroads have achieved this status on a consistent basis.  As such, the critical question for the STB and industry stakeholders has been how to modify and perhaps greatly simplify the Board’s regulations and policies for determining the reasonableness of rates charged to captive shippers by revenue adequate railroads who arguably have no basis to continue to differentially price their services.

In April 2014, the Board instituted a proceeding in Docket No. EP 722 and invited public comment regarding (1) the Board’s methodology for determining revenue adequacy pursuant to 49 U.S.C. 10704(a)(2) (2) how revenue adequacy should be factored into judging the reasonableness of rail freight rates, and (3) any changes to its methodologies and rules the Board should consider. A public hearing was held in on these issues in 2015, and there has been no further activity in EP 722. 

In January 2018, the Board established its Rate Reform Task Force (“RRTF”) for the purpose of developing recommendations to reform and streamline the Boards rate review process for large cases and how to provide a rate review process for smaller cases.   In the public hearing notice, the Board is asking for comment on the following recommendations from the RRTF: 

• The definition of “long-term revenue adequacy” for purposes of establishing a defendant railroad’s rates may be tested under procedures that take that revenue adequacy into account: The RRTF has recommended determining long-term revenue adequacy by looking at the annual determinations over “the shortest period of time, not less than five years, that includes both a year in which a recession began and a year that follows a year in which a recession began.”
• Limiting rate increases by long term revenue adequate railroads: The RRTF has recommended the Board consider a rate increase constraint for long-term revenue-adequate carriers, which would identify a point beyond which further application of differential pricing would be unwarranted.
• Not applying the STB’s “Bottleneck Rules” to long term revenue adequate railroads: Generally stated, under the so-called “bottleneck rules” adopted by the Board in the late 1990s, a captive rail shipper may not challenge the reasonableness of a rate charged for service to its captive facility from an interchange point between two railroads if the railroad owning the “bottleneck” segment serving the facility also serves the origin above the interchange point.  The rules were essentially adopted to protect the bottleneck railroad’s desire to quote rates only for the entire movement from origin to destination. The RRTF has recommended the Board consider suspending the Board’s “bottleneck rule” protections as applied to long-term revenue-adequate carriers, presumably to require such railroads to supply rates over bottleneck segments which would be subject to challenge under more manageable proceedings.
• Simplified Stand-Alone Cost (Simplified-SAC) changes: For purposes of considering whether a long-term revenue-adequate carrier’s rate is reasonable under the Board’s Simplified-SAC methodology, the RRTF has recommended reinstating the simplification of the Road Property Investment analysis.

The Class I railroads and the Association of American Railroads are expected to vigorously oppose these proposed changes, and they have previously opposed the STB’s conclusions that a determination a railroad is long term revenue adequate should result in limits on the rates the railroad can charge.   

The hearing will be held on December 12, 2019 and will begin at 9:30 a.m. in the James E. Webb Memorial Auditorium of the National Aeronautics and Space Administration, located at 300 E. Street S.W., Washington, DC.  Persons interested in speaking at the hearing must file a notice of intent to participate no later than October 31, 2019 and submit any written materials by November 26.

Notably, the Board is also accepting written submissions by parties who do not wish to appear and testify, which provides opportunities for many rail shippers to also participate.  Such submissions must also be filed by November 26, 2019.

If you have any questions about this issue or desire additional information, please do not hesitate to contact our Rail Transportation Practice: 

• Tom Wilcox (twilcox@gkglaw.com); 
• Ed Greenberg (egreenberg@gkglaw.com); 
• David Monroe (dmonroe@gkglaw.com); 
• Brendan Collins (bcollins@gkglaw.com); or
• Kristine Little (klittle@gkglaw.com).

On September 12, 2019, the Surface Transportation Board (“Board’) issued a Notice of Proposed Rulemaking that would streamline the process by which a rail shipper demonstrates the Board has jurisdiction to review whether the shipper’s rates are reasonable because the railroad has “market dominance” over the transportation, i.e., no effective competition exists to discipline the railroad’s rate levels.

By statute (49 U.S.C. §10707) the Board’s market dominance inquiry consists of two components: a quantitative threshold and a qualitative analysis.   Market dominance may only be present if the rate charged produces revenues that are greater than 180% of the variable costs of providing the service as calculated by the STB’s Uniform Rail Costing System formulas.  If the quantitative 180% R/VC threshold is met, the Board then performs a qualitative analysis, specifically whether there are any feasible transportation alternatives sufficient to constrain the defendant railroad’s rates through competition instead of STB intervention.

The qualitative component of market dominance phases of rate rates has proven over time to be extremely time consuming, complicated, and expensive in rate cases where transportation alternatives are theoretically possible.  These issues are magnified in cases where the potential rate overcharges are not significant.  On recommendation from its Rate Reform Task Force the Board has proposed to streamline the qualitative market dominance component by introducing several criteria that, if shown (in addition to the 180% quantitative threshold being exceeded), would result in the complainant making a prima facie showing of market dominance.  These proposed criteria are as follows:

• The movement at issue in the case exceeds 500 highway miles between origin and destination;
• There is no intramodal competition from other railroads;
• There is no barge competition;
• The complainant has used truck for 10% or fewer of its movements subject to the rate at issue over a five-year period; and
• The complainant has no practical build-out alternative due to physical, regulatory, financial, or other issues (or combination of issues).

The defendant railroad may try and refute the complainant’s prima facie showing in its reply evidence, and the Board has proposed that a 50-page limit would apply to the railroad’s reply and complainant’s rebuttal submissions under this streamlined process.  Complainants unable to demonstrate all of the above factors could still elect to establish market dominance using the traditional approach. The Board has also proposed that the streamlined approach would be made available to complainants for rate cases under all the Board’s rate review methodologies.  

The Board is seeking public comments on the proposed rulemaking.  Written comments are due by November 12, 2019 and replies are due by January 10, 2020.  Additionally, in 2018 the Board changed its rules to increase the extent to which industry stakeholders may confer with Board members and staff about pending informal rulemaking proceedings such as this one.  Industry stakeholders may now meet directly with individual Board members and staff to discuss proposed rules, subject to a requirement that a summary of the meeting – drafted by the visiting shipper – is included in the public record of the proceeding.

If you have any questions about this issue or desire additional information, please do not hesitate to contact any member of our Rail Transportation Practice: 

• Tom Wilcox (twilcox@gkglaw.com); 
• Ed Greenberg (egreenberg@gkglaw.com); 
• David Monroe (dmonroe@gkglaw.com); 
• Brendan Collins (bcollins@gkglaw.com); or
• Kristine Little (klittle@gkglaw.com).

On September 13, 2019, the Federal Maritime Commission issued a Notice of Proposed Rulemaking in its Docket No. 19-05, Interpretive Rule on Demurrage and Detention Under the Shipping Act. (A copy of the text of the NPRM can be found here). This NPRM arises out of the Commission’s Fact-Finding No. 28 Investigation which was undertaken and supervised by Commissioner Rebecca Dye.  And, of course, that investigation was initiated in response to the petition filed by the NCBFAA and a number of other trade associations that were concerned about the demurrage and detention problem.

As you may recall, Commissioner Dye issued the final report of that investigation on December 3, 2018, and the full Commission has now considered that report and voted to issue the NPRM.  Given the continuous and growing concern about carrier and port demurrage and detention practices, this proceeding is extraordinarily important to the NVOCC industry. 

The NPRM is based upon the conclusions reached in Fact-Finding No. 28.  Although detention and demurrage charges were intended to serve as financial incentives to encourage the productive use of containers and terminal space, the investigation provided significant evidence demonstrating that there is reason to question the reasonableness of these charges when they can’t facilitate the movement of cargo on or off the pier. 

Consequently, the interpretive rule is intended to provide guidance as to when demurrage and detention charges may be found to be unreasonable in violation of Section 46 U.S.C. §41102(c).  Essentially, the NPRM proposes that where carrier detention and demurrage tariffs and policies don’t provide for the suspension of charges when those charges either won’t or cannot accomplish their purpose, if brought to the FMC’s attention the imposition of charges would likely be found to be unreasonable in violation of the Act.  Accordingly, in situations where cargo cannot be timely retrieved or if empty containers cannot be returned to the ports for reasons that are not the fault of the cargo interest or trucker, the proposed interpretative rule would now make it significantly easier to avoid or challenge the propriety of the charges. 

The NPRM has laid out a number of general principles and now seeks public comment on these matters. The thrust of the proposed rule is:

• In order for carriers or marine terminal operators (MTOs) to commence the start of free time, the cargo must actually be available for a trucker to pick-up; if it isn’t, the proposed rule would conclude that application of demurrage and/or detention prior to availability  may be an unreasonable practice.  By the same token, it would be an unreasonable practice not to suspend existing demurrage charges or the running of free if the situation in the yard changes so that the trucker cannot get access to the container at this time.  Similarly, detention charges should not be applicable if a terminal is closed to the return of empty containers.
• This raises the issue of how one is to know if cargo is actually available.  The NPRM seeks comments as to whether the carriers should be required to issue a formal Notice of Availability that would be sufficient to apprise the cargo interest that the container is actually available; if they don’t should the carrier practice necessarily be deemed to be unreasonable and in violation of the Shipping Act?   Any comments on this might also address the issue of to whom that Notice of Availability should be sent, the format and method of its distribution, and whether there should be “push notifications” that can alert cargo interest s and truckers to any change in the status of the container.
• The NPRM next addresses the issue of government inspections of cargo and the propriety of assessing demurrage and detention during those holds.  While the NRPM does not go so far as to suggest that any assessment of demurrage or detention during these holds might be unreasonable, it does seek comments as to whether it was appropriate for the carriers and/or MTOs operators to escalate charges (i.e., impose penalty demurrage) in these situations.  Similarly, comments are requested as to whether the carriers should be required to provide for mitigation of those charges below their tariff levels during government holds or even whether the failure to have maximum caps on demurrage and detention during government holds is itself an unreasonable practice.
• The NPRM also focuses on the current lack of clear carrier policies for addressing complaints about the assessment of these charges and seeks comments as to whether the carriers and NVOs should have published dispute resolution policies.  Although the NPRM seeks public comment on what would be reasonable policies for the carriers to implement, it suggests that they should at least cover the following points:
  • Having points of contact for disputing charges
  • Providing clear time frames for raising, responding to and resolving disputes
  • Clearly explaining the process for disputing these charges
  • Having a dedicated dispute resolution staff
  • Allowing priority appointments when free time has expired
  • Having a mechanism to ensure that responses are made in response to requests for free time extensions or waiver of these charges
  • Having a process for elevating disputes after the carrier’s initial response
  • Allowing a trucker to do business with a carrier during the pendency of a dispute
  • Detailing the type of evidence that would be necessary in order to satisfy their dispute resolution process.  For example, what kind of information should truckers be required to have in order to demonstrate that their attempts to retrieve cargo; and should truckers be required to have log records tracking their attempts to make appointments.
  • Are those sufficient or are there other points that should be covered in these carrier policies?

Finally, the NPRM seeks comments as to whether the carriers and MTO tariffs should have clear terminology defining what is demurrage (which is typically thought of as a charge for the use of real estate assets) as compared to detention (which pertains to the use of containers). Today, there is a lack of consistency or understanding in the industry as to what is being assessed and whether there are duplicative charges from the carriers and MTOs for the same cost.

In view of the importance of this issue, we encourage you to review this carefully and consider taking the time to submit comments to the FMC on these issues.  There is a deadline of October 17, 2019 to provide comments.  And there is a mechanism for seeking confidential treatment for any information that is considered to be proprietary that should not be disclosed to the general public.  So, if you have any questions or wish assistance in drafting comments, please let us know by contacting Ed Greenberg at egreenberg@gkglaw.com.

Comments can be filed electronically by email to secretary@fmc.gov, or by mail to Rachel E. Dickon, Secretary, Federal Maritime Commission, 800 North Capitol Street, NW,; Washington, D.C. 20573-0001.  In all cases, the subject line should reflect Docket 19-05, Demurrage and Detention Comments.

NPRM – Detention and Demurrage

On August 29, 2019, the Surface Transportation Board issued a decision that further heightens the need for rail shippers to press the Board for revisions to the agency’s regulations and policies that test the reasonableness of rates paid by rail shippers captive to a single railroad for service.  All three of the current Board members have stated the agency’s current methodologies are not sufficiently accessible or useful to the vast majority of captive rail shippers.  Nevertheless, the August 29 decision revealed that a majority of the Board’s three members believes the reasonableness of a railroad “fuel surcharge” – even one that can be independently shown to be a profit center because it provides the railroad with revenues that exceed its actual fuel costs – may be legally challenged only pursuant to a formal complaint that also challenges the reasonableness of the line-haul rate using one of the Board’s rate reasonableness methodologies.  The decision was silent on whether rail shippers that cannot be considered captive to a single railroad for service who are assessed an identical fuel surcharge could challenge its reasonableness at the STB, but the logic of the majority leads to the conclusion that they cannot.

The decision discontinued Docket No. EP 661 (Sub-No. 2), Rail Fuel Surcharges (Safe Harbor), a proceeding started in 2014 after Cargill, Incorporated demonstrated to the Board in a separate complaint proceeding that revenues generated from the “fuel surcharge” assessed Cargill’s traffic by BNSF Railway calculated using the so-called Highway Diesel Fuel Index (“HDF Index”) exceeded BNSF’s actual fuel costs by over $181 million over a five year period.  Although the overcharge was proven by Cargill’s evidence, even as modified by the Board, the agency nevertheless held BNSF was not required to refund any of the overcharges because the agency had previously determined in a 2007 proceeding that the HDF Index was a “safe harbor provision” railroads could utilize if they assessed a “fuel surcharge.” 

The Board made this determination even though it concluded in the Cargill case that “it has become apparent from this first fuel surcharge case to go forward that the safe harbor provision provides rail carriers with an unintended advantage,” specifically, if a carrier’s fuel costs increased above the HDF Index it could simply adjust the surcharge upwards, but if its actual fuel costs decreased below the HDF Index, the “safe harbor” would provide a floor, leading to the over recovery of fuel costs.

Although it did not find for Cargill in its case, the Board nevertheless opened the EP 661 (Sub-No. 2) proceeding to take public comments on whether the HDF Index “safe harbor” should be eliminated because of the findings as to BNSF’s version and the recognized “advantage.”  The Board received 15 comments and 10 replies from trade associations, individual rail shippers, and railroads.  However, the proceeding then languished at the agency for the next five years, eventually prompting one trade association to take the unusual step of seeking a writ of mandamus from the Court of Appeals for the District of Columbia Circuit directing the STB to take action in the proceeding.  

In the August 29 decision, which was issued while the court action was pending, the Board stated it had been unable to reach a majority decision on what additional action it should take in response to the comments in EP 661 (Sub – No. 2), and so it unanimously agreed to discontinue the proceeding.  Each current Board member summarized their respective views in separate comments to the decision.  Chairman Begeman expressed her belief that the HDF Index “safe harbor” provision “should be eliminated.”  Vice Chairman Fuchs stated his view that the STB cannot separate out fuel surcharges from the rates, in part because to do so would “make it easier, in effect, for a complainant to receive relief on its fuel surcharge.”  Finally, Board member Oberman concurred with Vice Chairman Fuchs that a fuel surcharge may only be challenged in a proceeding that also challenges the base transportation rate.   Neither Fuchs nor Oberman addressed the legal rules that would apply outside of the rate case realm.

In discontinuing the EP 661 (Sub – No. 2) proceeding, the STB has permitted HDF Index fuel surcharge formulas assessed to the vast majority of Class I railroad customers to remain in place despite strong evidence that the formulas produce revenues that exceed their actual cost of fuel.   A majority of the current Board has also made it clear that, pending the addition of two other Board members that might feel differently, captive shippers may now only challenge the reasonableness of any fuel surcharge if they file a formal complaint that also challenges the transportation rate to which the surcharge applies.  As stated above, this decision heightens the urgency for the STB to propose and finalize promised changes to its rate reasonableness rules and policies.

As for all other shippers who are assessed fuel surcharges but cannot demonstrate they are captive, the decision is silent as to their options, perhaps presuming – erroneously – that sufficient competition is present in the rail industry to cause such provisions to be modified or eliminated in arm’s length negotiations, as they were previously in the rail industry, and are now in other industries where competitors check each other’s efforts to establish prices that are too far in excess of their actual costs.   This highlights the need for rail shippers to help educate the current STB and Congressional representatives about the lack of effective rail-to-rail competition and how it adversely affects individual rail customers and the overall economy.

Procedurally, parties may ask the Board to reconsider its decision or seek judicial review of it.  However, reconsideration petitions are rarely granted and the courts afford the Board substantial deference.

Whom to Contact for More Information

If you have any questions about this issue or desire additional information, please do not hesitate to contact our Rail Transportation Group: 

• Tom Wilcox (twilcox@gkglaw.com); 
• Ed Greenberg (egreenberg@gkglaw.com); 
• David Monroe (dmonroe@gkglaw.com); or 
• Brendan Collins (bcollins@gkglaw.com).