Bill Pugh - Overhaul Freight Classification Panel

Classification Controversy

The Journal of Commerce recently reported on complaints concerning changes in the National Motor Freight Classification. At issue are reclassifications of footwear, adhesives and various other items by the National Motor Freight Traffic Association’s Commodity Classification Standards Board. In addition to challenging the reasonableness of the reclassifications, shippers of these products complain the changes were made collectively in violation of the antitrust laws.

The Justice Department dismissed the complaints, but Sen. Herbert Kohl, D-Wis., the American Apparel and Footwear Association and others have requested the DOJ and New York’s Attorney General reconsider this matter.

In the deregulatory battles of the 1980s, the NMFTA described classification as the “linchpin” of the class rate system. The present controversy recognizes the continuing importance of classification in motor carrier pricing because of its high positive correlation with freight charges. I am familiar with these issues, having been general counsel of the NMFTA for more than 20 years; I was the NMFC’s issuing officer until 2007.

I believe classification remains a useful tool in pricing transportation services, but with the perspective of three years away from the practice, I believe it should only be maintained by an organization that is truly independent or one subject to joint control by shippers and motor carriers.

The NMFC catalogs the myriad commodities moving in commerce and assigns them classes intended to reflect their “transportation characteristics” or service requirements. For more than 50 years, the commodity classification rules and other provisions of the NMFC were collectively developed and maintained by horizontal competitors (such as less-than-truckload motor carriers) under antitrust immunity.

As a prerequisite to this immunity, collective classification making was made subject to a stringent regulatory regime administered initially by the Interstate Commerce Commission and more recently by the Surface Transportation Board. The law required classification making to be conducted in strict compliance with procedures approved by regulators.

For many years, shippers complained carriers used classification as a “revenue-generating device.” In May 2007, the STB withdrew antitrust immunity from the motor carrier rate bureaus and the classification system. The board said it could not ensure it could prevent the NMFC from being used to generate revenue. In response, the new Commodity Classification Standards Board was created to continue development and maintenance of classification.

The CCSB is functionally similar to the NMFTA’s old National Classification Board, which was disbanded after the Motor Carrier Act of 1980. Like the current CCSB, the NCB was comprised of NMFTA staff employees. The Motor Carrier Act prohibited the staff from making decisions regarding classification and required such decisions to be made exclusively by elected motor carrier representatives. A quarter-century later, the NMFTA determined decisions should be returned to the NMFTA staff through the CCSB, but without antitrust immunity. So the CCSB brings classification back full cycle.

It may be argued the NMFC is a uniform standard being maintained by an independent organization in compliance with procedural requirements approved by the STB. But the use of previously approved classification procedures is not a substitute for a comprehensive regulatory regime to ensure the public interest was being served.

After January 2008, the STB no longer enacted rules to govern the classification-making process, nor were protests regarding reclassifications sent to informal administrative proceedings where the burden of proof was on the classifier. In fact, no organization has the responsibility to determine whether the system is predisposed to favor class increases or oversee the collective, price-related actions of its horizontal competitors.

Finally, the notion that the new CCSB is an autonomous organization cannot be reconciled with the reality that the board is subject to the administrative and financial control of an organization comprised of, governed by, and operating for, the benefit of, motor carriers — the NMFTA.

While classification is supposed to promote the equitable treatment of all shippers, this responsibility in practice is discharged primarily by searching for products having classes that appear (at least initially) to be too low in view of the involved transportation characteristics. Less attention is paid to products having classes that are too high.

When identifying products for research, staff employees rely primarily on data and suggestions from member carriers. At the early stages, shipper views are less likely to be heard. CCSB employees have little incentive to initiate research that may result in significant revenue reductions, or other financial harm for motor carrier owners and management.

To be sure, once a commodity is selected for research, staffers do their best to fairly evaluate the involved commodities, conscientiously obtaining information and applying recognized classification principles. This is why shippers who challenge the reasonableness of the reclassifications of footwear, adhesives, paint or other commodities seldom prevail.

Remedies to this situation would include providing shippers an equal voice in the determination of the products and rules selected for research. An alternative would be establishing a truly independent classification organization, free from control by carriers, shippers or any outside parties. Such an organization should be able to sustain itself, relying primarily on the revenue derived from sales of the classification or licensing fees.

A truly independent organization would go a long way toward dispelling the suspicion that classification changes are made primarily to generate revenue for carriers. And it would greatly reduce the likelihood of civil actions or complaints by private parties.

William W. Pugh
Attorney/Consultant
Former executive director, NMFTA

 

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