Friday, February 06, 2015

Can Sen. Thune mediate a rail/shipper cease-fire?

Written by  Frank N. Wilner, Contributing Editor
Can Sen. Thune mediate a rail/shipper cease-fire?
Could it be that Republicans in control of Congress might facilitate an end to three decades of productivity sapping legislative fisticuffs between railroads and self-proclaimed captive shippers over an appropriate level of regulatory oversight?

Perhaps the sides aren’t as far apart as they appear—or certainly were when now-retired Senate Commerce Committee Chairman Jay Rockefeller (D-W.Va.) played the acerbic Charlie McCarthy to the captive shippers’ Edgar Bergen. The more judicious and less militant (toward railroads) new chairman, John Thune (R-S.D.), may well have the capacity to mediate a mutually acceptable armistice.

First, some background

Captive shippers assert they lack effective alternatives to rail transportation (such as trucks or barges) and thus are entitled to government intervention forcing, by various means, lower freight rates. They deny as ineffective the existence of product and geographic competition—the availability of natural gas as a substitute for coal, or the sourcing elsewhere by another railroad of the same product—that serve as market-based regulators of freight rates and service.

Railroads say many such shippers seeking congressional munificence are as large, or larger, than any railroad, more profitable, and lack any justifiable entitlement for special treatment. Indeed, among shippers begging favored treatment is Dow Chemical, whose annual revenue almost matches that of all Class I railroads, and whose earnings rose 56% over the past two years owing, in large part, to a government-protected monopoly in the form of patents.

Moreover, say railroads, the existing regulatory arrangement already is eminently equitable. In recent years, shippers have won more than half the rate complaint cases they filed with the Surface Transportation Board (STB).

The petitions to Congress of these self-described captive shippers for additional legislative protection are, say railroads, a cheeky quest for federally mandated cut-rate prices in exchange for high-quality rail service—a prescription that could return railroads to their nadir of the 1970s when more than 25% of rail mileage was operated in bankruptcy and investors recoiled from providing capital for renewal of deteriorated and deteriorating infrastructure.

Ah, play it again, Sam, as the argument has raged back-and-forth on Capitol Hill since President Jimmy Carter signed into law the 1980 Staggers Rail Act that partially deregulated railroads in expectation—now largely fulfilled—that the rail industry would recover and become self-supporting.

Ending hostilities

If hostilities are to end—and there is convincing rationale that they should—there must be moderation of shipper demands and equivalent compromise on the part of railroads. For sure, combatants on both sides are weary of a debilitating battle that has diverted crucial resources, including senior management expertise, from more productive imperatives.

One splinter of evidence in this direction is a shift in lobbying focus by Consumers United for Rail Equity (CURE), chief among captive-shipper combatants, toward Republicans, where railroads long ago established a well-fortified beachhead.

As curiouser and curiouser (to borrow a line from Lewis Carroll’s “Alice in Wonderland”) this may seem, it is, in fact, as much a step toward rapprochement as it is an anguished recognition by captive shippers that decades of investing in Democratic lawmakers to lug their not insubstantial legislative agenda too much resembled endowing Bernie Madoff.

CURE—a coalition of electric utilities, chemicals manufacturers, and shippers of agricultural, forest and paper products—recently terminated a decades’ long affiliation with attorney-lobbyist Bob Szabo, ideally connected with Democrats and one of the more articulate lobbyists on Capitol Hill, in favor of a government affairs consultant with Republican ties.

The Cliff Notes version is that having rolled craps with Rockefeller as their firebrand standard bearer, captive shippers are prepared now to deal, and are placing come-line bets on the more temperate Thune to be an effectual mediator.

Railroad skeptics, however, fret that Thune co-sponsored with Rockefeller failed captive-shipper inspired legislative initiatives. Yet more optimistic railroad lobbyists observe that Thune’s co-sponsorship first required moderation in that legislative language. Of course, even more moderation will be necessary if any new effort is to elicit railroad compromise. A hopeful happening is that captive shippers seem now prepared to adjust their expectations.

Roadblocks amidst road signs

Whether mediation and conciliation by Thune—a Catholic priest was once solicited to help resolve a less inflamed rail labor dispute—will generate the required moderation and compromise is a question for odds makers, not columnists.

Among roadblocks is that Thune has political interests more in synchronization with shippers. His native South Dakota, teeming with rail-dependent grain shippers, coal-burning electric utilities and newly arrived ethanol producers, has a prairie-state history of distrusting railroads. As a senator, Thune complained to the STB that the premium paid by Berkshire Hathaway to acquire BNSF should not qualify for a return on investment financed by higher freight rates.

Yet Thune also possesses a better than average understanding of railroads and railroad economics. His Norwegian immigrant grandfather and great-uncle laid rail across South Dakota during the early 1900s. As South Dakota’s state rail director during the 1990s, Thune had dominion over hundreds of miles of decrepit track inherited from bankrupt Chicago, Milwaukee, St. Paul & Pacific Railroad. As a lobbyist for Dakota, Minnesota & Eastern Railroad, he studied the reasons—largely excessive economic regulation—for Penn Central’s bankruptcy, Amtrak’s creation,8 and passage of the Staggers Rail Act.

Now, as Senate Commerce Committee chairman, Thune represents a distinctive opportunity to shepherd the moderation and compromise necessary to bring this three-decade shipper vs. railroad war of attrition to a mutually acceptable conclusion. With Rockefeller retired, the senior Democrat on the Senate Commerce Committee is now Bill Nelson of Florida, who has no recognized Rockefeller-like ties to captive shippers and thus should not be a distraction.

Mood and emotion separate Thune from Rockefeller.

Rockefeller, with inherited wealth of some $120 million, made an obsession of mocking railroad executives as a rotten crowd, with oafish comparisons to his robber-baron great-grandfather. He sneered at evidence that the Staggers Rail Act properly reversed a gallop by financially failing railroads to bankruptcy courts and was essential to restoring investor confidence.

Where Rockefeller accused the STB of “pandering” toward railroads and working against shippers, Thune speaks of “striking a better balance between railroads and their shippers,” a necessity “to be cautious in our approach,” and to “ensure that reform does not cause unintended economic harm to our freight railroad system.”

Rockefeller boldly pushed for outcome determinative legislation. He supported expanding railroad exposure to the antitrust laws by creating for railroads two masters—the Justice Department as well as the STB. And he sought to substitute legislative dicta in place of STB determinations of fact.

Thune, less combative in style, more modest in objectives and demonstrably supportive of STB expertise and independence, is, by contrast, capable of attracting constructive support from both sides.

An additional incentive

An additional incentive for railroads to work harmoniously with Thune is his special professional relationship with the lone Republican on the Surface Transportation Board (STB), Ann Begeman, also of South Dakota.

In 2010, as a Senate Commerce Committee staff member, Begeman met with railroads and shippers while working with now retired (but then senior Commerce Committee Republican) Kay Bailey Hutchison of Texas as a key architect of a joint Rockefeller-Hutchison bill (S. 2889) judged by railroads as largely favorable to captive shippers. Thune supported that failed bill, and he co-sponsored with Rockefeller a near duplicate of that bill in 2012 (S. 2777), which also failed Senate passage.

As railroads know, Begeman’s views reflect her role in helping to write that legislation. Historically, dissents are not typical among STB members, yet Begeman has distinguished herself as a dissenter in more than 20 board decisions since joining the STB in May 2011. Railroads agonize over some of her views, which not coincidentally converge with those of Thune.

Consider the so-called stand-alone cost test used to determine maximum reasonable rates—a complex computer modeling effort easily costing shippers $3 million or more and by which a shipper designs the most efficient stand-alone railroad to demonstrate it can serve its own and other selected traffic at lower rates.

Said Begeman of this test in a June 2014 dissent: “While I had been skeptical about the stand-alone cost (SAC) test prior to my service at the board, my concerns have only grown as I have seen the SAC process in action. The board has a duty to ensure that shippers have a viable means to challenge a rate. I already know that is not the case for grain shippers.”

A majority of two

Railroads are agonizing also over views of the STB’s Democratic member and now acting chairman, Deb Miller, who has said of the stand-alone cost test, “I am concerned that in some instances the task of designing a ‘winning’ [case] can be so burdensome, and a single error by the shipper in the design … can be fatal. I am eager to explore measures that can be taken to further improve the rate complaint process.” At a Transportation Research Board meeting in January, she criticized the concept of “building a paper railroad.”

Miller, who also questions whether STB processes are slowing decisions, has organized an internal task force to implement methods to speed and make less costly the decision making process. This sounds a lot like Thune, who has said, “We’ve got to provide an expedited way for shippers to have their grievances heard and settled, and hopefully [in] a less expensive way.”

Additionally, Miller has urged the board “to take a fresh look at how it determines railroad revenue adequacy.” Shippers contend that the process is flawed; that railroad revenue and profits are quite sufficient to attract—and have been attracting—investment capital. (The STB has found five of seven Class I railroads revenue adequate for at least one year—with railroads contending revenue adequacy must be demonstrated over the length of an entire business cycle that is typically five to seven years long.)

Revenue adequacy determination has become crucial. Shippers say once railroads are revenue adequate, the board should shift its emphasis from assuring railroads achieve revenue adequacy to promoting rail competition that drives down rates. In fact, the legislation Begeman helped to draft in 2010, and which was supported by Thune, would have added to National Transportation Policy a mandate that the STB promote competition. National Transportation Policy currently requires only that the STB work to assure railroads become revenue adequate.

Whether Begeman and her dissents will translate into an even greater winning record for shippers, assuming, of course, Miller is of a similar mind—or the third now-vacant seat is occupied by a board member more accommodating to shipper arguments—is unknown. Railroads taste succor in another Begeman statement: “It takes a lot of money to have a safe, efficient rail network … and they need to.”

A captive-shipper attorney, asking not to be identified, says, “The proof is whether [Begeman and Miller] change the policies adopted when railroads were revenue inadequate to policies that make sense when railroads are revenue adequate.”

Come let us reason together

Certainty trumps uncertainty, and a collaborative legislative settlement mediated by Thune could create mutually acceptable processes that avoid troubling uncertainties and another generation of the unproductive status quo. As an oft-quoted passage from the Bible reads, “Come let us reason together [lest] you shall be devoured by the sword.”

Known is that where Rockefeller sought outcome-determinative legislation—such as expansion of railroad antitrust exposure; requiring railroads to open sole-served terminal areas to competitors; and forcing railroads to quote separate rates over sole-served origin and destination segments of a through route where other railroads could compete over part of the route—Thune is less radical. Among railroad lobbyists, Thune evokes a measure of trust. Rockefeller evoked disdain.

Don’t expect resolution in the short term, but it could occur before this Congress adjourns in late 2016.

Among the difficulties is a Thune desired legislative requirement that the STB establish regulations to establish a voluntary, but binding, arbitration process to resolve rail rate, practice, and common carrier service expectation complaints subject to the jurisdiction of the STB. But negotiations are in their early stages.

Much of the Thune agenda, however, is more palatable to railroads, such as giving the STB authority to investigate service problems on its own motion, but still requiring formal complaints be filed before investigating freight rates; and expanding the size of the STB from three to five members. A Thune sought requirement that the board simplify and expedite methods for determining rate reasonableness already is underway via an STB initiative.

The impetus for the board expansion to five members is to avoid a Government in Sunshine law by which a quorum (in the STB case, two of the three board members) cannot discuss matters in private. Neither shippers nor railroads support this restriction. However, the objective also could be achieved through an amendment to the Sunshine Law, which would be considerably less costly to taxpayers—thus more palatable to Republicans—than adding two new STB members.

Let’s leave it that Sen. Thune may be best suited to mediate an end to decades of debilitating railroad/shipper unpleasantness that was only inflamed by Sen. Rockefeller. An era of better feelings conducive to a partnership working jointly to improve the fluidity, efficiency and safety of the nation’s rail network is an ambition worth exhaustive fortitude to achieve. There is an Irish saying that with time and patience, even a snail can reach an objective. The clock continues ticking.

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