Friday, April 22, 2016

A new regulatory rat hole worth watching

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A new regulatory rat hole worth watching

News item: Executive Order No. 13725, issued April 15 by President Obama, and published in the April 20 Federal Register, mandates that Executive Branch federal agencies take specific actions to promote competition.

News reminder: The Surface Transportation Board (STB) Reauthorization Act of 2015 removed the STB from the cabinet level Department of Transportation, amputating all administrative ties with DOT and establishing the STB as an independent federal agency. 

Thus, you might think that the STB, as an independent federal agency, is not subject to Executive Orders. Think again.

Notwithstanding the STB’s independent status, its three voting members—especially the two of the same political party as the president—have a strong self-interest incentive to comply, which should disturb the sleep of railroad management and investors, while raising the hopes of captive rail shippers having few or no effective alternatives to rail transportation. 

The Executive Order, entitled, in part, “Steps to Increase Competition,” instructs Executive Branch federal agencies—while encouraging independent federal agencies, such as the STB—to take “actions in their areas of responsibility to address undue burdens on competition.”

This Executive Order could be a catalyst for action favoring rail captive shippers on two already pending matters. 

One is whether to grant shippers, captive to a single railroad within terminal areas, access to a second railroad, with the STB establishing the level of compensation to the railroad whose track is used by the competitor. The result could cap or reduce affected freight rates.

Compounding concern among opponents is that Canadian Pacific (CP) offered voluntarily to grant such access were it permitted by the STB to acquire Norfolk Southern (NS)—a hostile takeover attempt subsequently scrapped by CP in the face of intimidating opposition in the U.S. Strongly opposing such terminal trackagerights are BNSF, CSX, NS and Union Pacific.

The concern acknowledges that if the tightest run railroad in North America—CP—is comfortable with the result, the opposing arguments may be interpreted by the STB as less than sincere.

STB Chairman Dan Elliott has staff working on a draft decision that has yet to be seen by fellow members—Democrat Deb Miller or Republican Ann Begeman—although they are said to have been briefed informally by staff that reports to Elliott. Miller and Begeman are said to have concerns with the draft, but to what extent is not known. 

The Executive Order could well nudge Elliott more into the captive shipper camp. He still smarts from a near five-month hiatus from the STB in 2015 after President Obama failed to renominate him during Elliott's first-term holdover year in 2014, forcing Elliott to depart the agency Dec. 31, 2015, pending renomination that didn't occur until May 2015. Speculation had captive-shipper friendly Democrats in the Senate—steered by now-retired West Virginia Democrat Jay Rockefeller—collectively encouraging the delay to create an unemployment period during which Elliott would reflect on his first-term record. Also evident to Elliott is that Senate Commerce Committee Chairman John Thune, although a Republican, represents South Dakota where adoration of railroads is a relatively scarce commodity. That Begeman, with incomparable political savvy, is a fellow South Dakotan injects similar peppery intrigue to speculative endeavors as does the emergence of this Executive Order.

The second pending matter, which also could fit the template of the Executive Order, is whether to ease the standard for pronouncing railroads revenue adequate, and whether to restrict the rate-making freedom of revenue adequate railroads. Begeman and Miller reportedly have yet to be briefed on progress. 

Harmony has not been typical of the Miller and Begeman relationship with Elliott. Begeman, in the holdover year of her first term, and with no indication of whether she will be renominated—indeed, even wishes a renomination—has issued 40% of all STB dissents in the 21-year history of the STB. While Miller and Begeman have exhibited philosophical differences on issues, they are seen and said to be more collegial in their interaction.

It has been a year since Elliott promised the Senate Commerce Committee—at his confirmation hearing for a second term—expedited action on the terminal trackage rights issue. It will be “one of the top things for me to do,” Elliott then said. And just six months ago, he told the STB’s bar association that the STB would act within three to six months. Whether failure to obtain consensus is because of discord or inability to find intellectual common ground with Begeman and Miller is unknown.

Meanwhile, it is appearing increasingly unlikely that expansion of the STB from three members to five, as provided by the Surface Transportation Board Reauthorization Act of 2015, will occur in 2016. President Obama has yet to make nominations, and Senate confirmation of new STB members could be problematic given this election year’s escalating political polarization.

If Elliott is unable to find a second vote for his terminal trackage rights or revenue adequacy draft decisions, each could remain dormant pending arrival of two—or perhaps three, if Begeman departs—new STB members. 

Moreover, Elliott serves as chairman at the pleasure of the President, and even were another Democrat elected to the White House in November, that President could select a different chairman (although Elliott’s term as a STB member—his second term runs through 2018; Miller’s through 2017—would not be affected). 

The takeaway is that notwithstanding the Executive Order, the STB may not act on these two cases in the near term. To act on either requires two votes (among the current three STB members), and that second vote could remain elusive. With a new president in the White House come Jan. 20, 2017, the incentive to comply could dissolve, or the Executive Order could be revoked. 

For railroads, this Executive Order—and the STB decisions on which it could impact—creates yet another regulatory rat hole worth watching.

To read Executive Order No. 13725, click on this link:

Frank N. Wilner, Contributing Editor

Frank N. Wilner is author of six books, including, Amtrak: Past, Present, Future; Understanding the Railway Labor Act; and, Railroad Mergers: History, Analysis, Insight. He earned undergraduate and graduate degrees in economics and labor relations from Virginia Tech. He has been assistant vice president, policy, for the Association of American Railroads; a White House appointed chief of staff at the Surface Transportation Board; and director of public relations for the United Transportation Union. He is a past president of the Association of Transportation Law Professionals. Wilner drafted the railroad section of the Heritage Foundation’s Mandate for Change (Volumes I and II), which were policy blueprints for the two Reagan Administrations; and was a guest columnist for the Cato Institute’s Regulation magazine.

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