Monday, July 07, 2014

STB's newest: Status quo beware

Written by 

Moving homogeneous electrons through wires, or freight in trucks over publicly financed highways, is hardly akin to moving cargo over privately owned and maintained railroads.

Numerous missteps by regulators past, insensitive to the differences, assured that in business downturns, railroads were unable to meet fixed costs, much less invest in renewal or demand-driven expansion of plant and equipment. For nine decades following creation of the Interstate Commerce Commission (ICC), a pandemic of insolvencies periodically ensued, notwithstanding well-meaning attempts to substitute the government leviathan for the invisible hand of market forces.

The Staggers Rail Act of 1980 allowed some 80% of all rail traffic to avoid regulatory oversight, while the ICC and its Surface Transportation Board (STB) successor insulated differential (a/k/a value-of-service or Ramsey) pricing from unwarranted attack. Railroad financial health is now the strongest in modern history, attracting envy from shippers and investors.

Differential pricing makes railroads competitive with rights-of-way subsidized trucks and barges in that rail rates may be set slightly above the variable costs of moving the freight, generating a small contribution to fixed costs. On freight with no effective alternatives to rail (captive traffic), shippers pay higher rates that cover a larger proportion of fixed costs. Collectively, a railroad achieves revenue adequacy.

Captive coal, chemicals and grain shippers, much of whose freight remains subject to potential regulation, most frequently seek regulatory redress. Often, they don't prevail; and their commotions attracted congressional interest. Regulators developed ever more complex and expensive formula to decide complaints of excessive rates. Yet the high-cost of pursuing such cases — $5 million is average for shippers — begs for reform.

Indeed, bringing a rate case under the STB's Stand Alone Cost (SAC) cost test requires the shipper -- on paper and employing for the task a flock of accountants, attorneys, economists, rail operating experts and statisticians -- to construct, operate and maintain a hypothetical railroad built from scratch. There are as many suggestions for reform as there are attorneys representing rail and shipper interests.

secmiller.JPGThe newest member of the STB, former Kansas transportation secretary Deb Miller (at left), just two months on the job, already recognizes something is amiss. Her ability to nurture cooperative focus among disparate interests – "gain consensus to deliver a better product faster" -- resulted in her being retained in her Kansas cabinet post by a far-to-the-right governor whose predecessor was left of center.

"The complexity and cost of SAC is astounding," Miller says. "If one could find an approach that wouldn't require the enormous time and cost that SAC requires would be beneficial. It is not going to be a perfect approach, but an extremely interesting intellectual endeavor to turn up alternatives that are economically desirable." This is especially so, she says, with non-coal, non-unit-train cases, such as chemicals and grain shipments.

Can an alternative to a SAC-type process "that captures all the complexities" of such cases be "satisfying to the parties? I don't know. Nobody does."

In acknowledging the issue will remain before the STB -- it is unlikely Congress will amend the statute near-term -- Miller would welcome greater opportunity for the STB's three members to share ideas, an approach dissuaded by federal ethics rules that prohibit even informal in-camera conversations. "I regret it is not easier to have open conversations and an exchange of ideas, but I appreciate the [ethics rules]."

Miller also wants the STB's decision process to be more transparent and functional. Drawing on her Kansas DOT background, she favors setting interim goals and monitored performance schedules for interdisciplinary staff teams. "I fully understand" complaints that parties sometimes have difficulty learning the status of STB cases and where they are in the decision process."

For an agency oft criticized for opaque procedures and being disinclined toward risk taking, Miller offers refreshing outspokenness. As a shipper attorney said during her nomination process, "She may have this odd idea that staff works for her, and not vice versa. And if she knows enough not to take the railroads, and Washington, at face value, then she could have lots of potential."

Frank N. Wilner

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.