Wednesday, March 02, 2016

CP+NS and the Humpty Dumpty effect

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CP+NS and the Humpty Dumpty effect

The chasing by suitor Canadian Pacific of grand dame Norfolk Southern has reintroduced to the railroad chattering classes the nebulous term “public interest,” used often and broadly when mergers and other railroad maneuvers requiring regulatory approval are afoot.

That the term is so malleable is owed to Congress, the Interstate Commerce Commission (ICC), its successor Surface Transportation Board (STB), and the Supreme Court. As none has provided a precise definition, we might turn to Humpty Dumpty, who said in Lewis Carroll’s Alice Through the Looking Glass, “When I use a word, it means what I choose it to mean—neither more nor less.”

More than half century ago, ICC Commissioner Rupert L. Murphy termed public interest “the greatest good for the greatest number.” Yet if one robs St. Petersburg to pay St. Paul, the “good” accrues only to the latter; and what if the population of the former is greater?

In 1926, the ICC termed public interest “the aggregate of many individual and community interests.” In 1981, it termed public interest a balancing test, weighing “the potential benefits to applicants and the public against the potential harm to the public.” In 1996, the ICC’s successor STB said public interest “requires us to balance efficiency gains against competitive harm.” And in 2001, the STB said public interest might be met by demonstrating “the transaction would enhance competition where necessary to offset negative effects of the merger, such as competitive harm or service disruptions.”

The Supreme Court observed in 1932 that the public interest has direct relation to “adequacy of transportation service, to its essential conditions of economy and efficiency and to appropriate provision and best use of transportation facilities … [but] this is a mere general reference to public welfare without any standard to guide determinations.”

As for Congress, in the Transportation Act, 1920, and in statutes since, it instructs regulators to approve every railroad merger deemed to be in the public interest. Period. Were Congress of the opinion that regulators flubbed the dub in identifying public interest, lawmakers had opportunity to provide a precise definition in the 1980 Staggers Rail Act, the 1995 ICC Termination Act or the 2015 STB Reauthorization Act.

Dictionaries say public interest is the “welfare of the general public in which the whole society has a stake.” Fortune magazine once suggested regulators be astute in identifying rogue stakeholders “ignorantly or deliberately cadging special treatment in the name of the public interest.” Law professor Richard Epstein, among the most frequently quoted legal scholars, termed public interest “theft mediated by legislative behavior.”

So, might the discretion of the former Linda Morgan-led STB—which defined public interest so liberally as to allow four major rail mergers in nine years—thwart the current Dan Elliott-led STB to take a less liberal direction? (Not since 1998, under Morgan, has the STB voted on a Class I rail merger application.)

The three members of the current STB recently responded to congressional inquisitors that they are bound by the “new” merger rules created by Morgan in 2001, following a merger moratorium imposed while writing the new rules. While perhaps unintended, the moratorium derailed a then-proposed marriage between BNSF and Canadian National. These 2001 rules have yet to be applied, affording this STB substantial discretion in implementation.

And the STB might probe, for the first time, public interest in a possible tax inversion—relocating a corporate legal domicile to a lower-tax nation while retaining material operations in the higher-taxed U.S.

As for STB discretion, the Supreme Court held in 1984 that the power of an independent regulatory agency “to administer a congressionally created program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress.” If Congress fails to provide an “unambiguously expressed intent,” then courts must uphold a regulatory agency’s reasonable interpretation so long as it is neither arbitrary nor capricious.

This so-called Chevron deference, named for petitioner Chevron U.S.A., gives the current STB a relatively long leash. As with the term “fair,” public interest remains in the eyes of the beholder—and for rail merger purposes, that is the STB.

With two of five STB seats now vacant, and a third perhaps soon to be, there are a lot of unknowns in an environment of generous discretion. Humpty Dumpty was one smart dude.

 

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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