Friday, October 22, 2010

RAILWAY AGE COMMENTARY: Is the STB only conducting an inquiry?

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By Lawrence H Kaufman, Contributing Editor

larry-kaufman-2007.jpgThe Surface Transportation Board announced Oct. 21 that it will hold a public hearing Dec. 9 to consider whether continued exemption from rate regulation for hundreds of commodities and any boxcar or intermodal service is justified or necessary.

Coming at this time—while railroads are embroiled in a battle with Sen. John D. Rockefeller (D-W.Va.) over his proposed legislation that would bring railroads back under a degree of economic regulation they haven’t seen since the Staggers Rail Act of 1980—an STB administrative action, which would not require Congressional approval, would not be a positive for railroads.

Whether it is good policy or bad, there is no question the STB has the authority under the Staggers Rail Act to undo what its predecessor agency, the Interstate Commerce Commission, did. The commodity and service exemptions were granted initially by the ICC, and the STB can modify or eliminate them—or do nothing.

In embarking on its most significant policy exercise since the Board imposed a 15-month moratorium on mergers between Class I railroads almost a decade ago, the STB is playing things close to its vest. It has not proposed a new rule or specific action. The only thing the Board has done is schedule a hearing.

Washington and transportation industry observers don’t believe for a second, though, that the STB is simply conducting an inquiry. The decision to undertake the December hearing is consistent with testimony by STB Chairman Daniel Elliott III before Sen. Rockefeller in September, in which the Senator suggested that if he couldn’t get his legislation enacted the STB should undertake administrative steps to redress some of the ills he had identified. Elliott indicated then that he was prepared to do precisely that.

The existing exemptions were granted following positive findings by the ICC that continued regulation of rail transportation of the commodities and services affected was not necessary in the public interest. At the time, railroads were in a fierce competitive battle with motor carriers for the commodities, and the ICC action was intended to help the railroads. Most shippers supported exempting the commodities from further regulation.

Before regulation can be reimposed, the STB will be forced to make a positive finding that regulation now is required. That poses the question: What has changed?

One thing that has changed is that railroads are financially and operationally healthy today. Railroads now compete with trucks over shorter lengths of haul. The landscape has changed, and many formerly supportive shippers now contend that they are captive to railroad market dominance and need the reimposition of regulation to level the playing field.

The STB chairman has a lot of latitude and can structure a hearing to reach a predetermined conclusion. There is no evidence that Elliott is doing this, but the possibility that billions of dollars of revenue could be brought back under regulation is a serious concern for the railroad industry.

The scheduling of the hearing presents an interesting contrast between Elliott and Linda Morgan, who chaired the ICC and the STB in the 1990s. Where Elliott clearly is following the lead of Sen. Rockefeller, Morgan, on the other hand, was consistent in her regulatory approach. When she was accused of favoring railroads in her decisions, she maintained that Congress knew exactly what she and the Board were doing and could change the law whenever it chose, and she and the Board would follow whatever legal mandate was given.

There are short- and long-term aspects of the re-regulation issue. Will the hearing feature a parade of shippers seeking regulatory change that will serve their short-term interests? With rail rates increasing faster than inflation, shippers can be expected to argue that railroads have market dominance that they clearly did not have three decades ago, and that they should be given access to the regulatory redress procedures of the STB.

Will the STB consider longer-term issues like railroad access to capital markets, necessary if they are to have the funds required to add capacity that will be required in the years to come? Rail capacity is relatively tight now, one reason why some shippers are willing to sign longer-term contracts, trading service and rate certainty for guaranteed volumes.

Any action seen as increasing regulation is likely to force rail rates down, and if earnings are affected, capital will become harder and more expensive to obtain.

Commissioner Charles Nottingham, himself a former STB chairman and the only Republican on the Board, recently announced that he will not seek reappointment to another term when his current term expires at the end of the year. A lobbying battle can be expected over the appointment of his successor.
William Vantuono

With Railway Age since 1992, Bill Vantuono has broadened and deepened the magazine's coverage of the technological revolution that is so swiftly changing the industry. He has also strengthened Railway Age's leadership position in industry affairs with the conferences he conducts on operating passenger trains on freight railroads and communications-based train control.