Thursday, December 10, 2009

Senate draft rereg bill lacks sharp claws and teeth—for now

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The Senate Committee on Commerce, Science and Transportation, chaired by Sen. Jay Rockefeller (D-W.Va.) has released a draft version of its so-called “reregulation bill,” the Senate Railroad Competition and Service Improvement Act, and what the industry has feared most—onerous regulations that would severely curtail railroad capital investment—isn’t in the draft. Industry observers are urging caution at this early stage.

The Association of American Railroads is in the midst of “a comprehensive, careful evaluation” of the draft bill, Vice President-Communications Patti Reilly told Railway Age. “This is the most significant rewrite of railroad regulatory legislation in 30 years—since the Staggers Act of 1980.”

“Compared to where we were two years ago, we appear to have a bill that the rail industry and investors can live with,” says Dahlman Rose Director-Equity Research and Railway Age Contributing Editor Jason Seidl. “There are few antitrust provisions. At first glance, some investors will likely have a sense of relief now that the initial draft appears not to subject the railroads to any major restrictive or punishing regulation. While the bill does appear to grant more regulatory power to the Surface Transportation Board—which could in turn introduce and enforce new regulation—we believe that the STB is the proper authority to handle rail matters. Bear in mind, though, that there are still a lot of unanswered questions.” The draft bill is yet to be marked up and is expected to be passed in the spring of 2010.

The draft bill expands the STB to five commissioners from three and places much of the power to oversee the agency in the hands of the  U.S. Department of Transportation Inspector General. It grants the STB investigative authority, gradually transforming it “from a passive agency that reacts to issues brought about by other parties to a more active agency that monitors the industry and initiates cases where it sees a need to do so,” Seidl notes.

The draft bill adds a ninth voting member to the Railroad-Shipper Transportation Advisory Council. It provides funding for an Office of Public Assistance that would act as the STB’s point of contact and have the authority to mediate disputes, monitor railroad operations, and appoint a customer advocate to address customer inquiries, serve as a technical advisor, and review overall rail operations. Also of importance, the draft bill establishes that the URCS (Uniform Railroad Costing System) must be examined by the STB and requires the agency to conduct a study on replacement costs within six months and report the findings to Congress.

Other provisions of the draft bill include granting the STB the power to eliminate paper barriers, appropriating funds to assist short lines in purchasing property, establishing that a carrier must provide a rate and service when requested, and directing the STB to introduce regulation to establish a binding arbitration process.

Morgan Stanley analysts William Greene, Adam Longson, and John Godyn also expressed cautious optimism: “ We've long argued that the unveiling of the bill andelimination of tail risk removes an overhang on rail stocks and maysupport multiple expansion. While the ultimate interpretation of thelanguage will fall on courts and regulators, we do not see anythingthat is likely to result in a wholesale change to rail economics. Thedraft includes something for all constituents, but as a compromise, thebill may be by definition unsatisfactory to all parties.”

Many key clauses in the draft bill, say Morgan Stanley's analysts, “are unchangedfrom early speculation. [However,] much of the language is vague andsubject to interpretation, but the STB remains the key rail regulatorand will ultimately interpret the legislation. Some anti-trustexemptions are removed, but it appears that antitrust actions will bebrought under federal law, not state law—a key rail concern. Many keyissues—URCS, replacement costs, interchange rules, and many railpractices—have been left to the STB to study, deferring any ultimatechange or decision. As well, there are reduced complaint fees, as well as changes to policygoals and STB powers.

“There are clear provisions to increase competition and limit anticompetitive practices, but much of the language surrounding these clauses is vague and offers plenty of room for interpretation (words such as ‘reasonable,’ ‘injured party,’ etc. are prevalent throughout the bill). Given that much of the interpretation and establishment of precedent will ultimately fall on the STB’s expertise, the practical application of such stipulations may prove to be well grounded within a balanced railroad regulatory framework. Many of the bill’s key issues have been deferred to the STB for future studies and determination, which may  ultimately be a victory for railroads.”

A number of events remain before the rail bill can become law, and weexpect the language to evolve from the current draft,” say Greene, Longson, and Godyn. “The bill islikely to be introduced on Tuesday, with markup scheduled for Dec 17.Even if the bill is passed by the Senate, a similar rail bill will needto be introduced and passed by the House. The two bills will then needto be reconciled in a conference committee where a number of changescould still take place. It's important to note that the conference willtake place during an election year where lobbyists may have moreinfluence. Given such a late timeline and competing priorities in Washington, there is little tolerance for using precious Senate floor time to debate a contentious rail bill. As a result, the bill will need almost unanimous consent and cannot, by definition, be overly onerous. Lastly, a conference committee that occurs during the middle of an election year could provide lobbyists one last opportunity to affect final legislation at a time when legislators are most easily influenced.”

Kaufman weighs in: Railway Age Contributing Editor Larry Kaufman, who has been in the thick of rail industry regulatory battles for the better part of 40 years, offers this commentary:

“I am inclined to agree with most of the analysts who see the draft bill as a pretty good compromise and not the punitive legislation many of were concerned about.  It does give shippers more relief in the most egregious of cases, but doesn’t cost railroads enough that future investment is threatened. The antitrust provision, if any, isn't in the draft. That could be a deal-breaker. Would you want to put your business and future before 12 ordinary citizens? There was a reason why Congress originally gave the ICC and later the STB sole authority to administer the antitrust laws as they affect rail transportation. A certain amount of knowledge and understanding of network business is required, and neither the Department of Justice nor the Federal Trade Commission have that knowledge. Railroads, by the way, are not exempt from  antitrust laws, despite the bleats and rants of certain members of Congress, aided and abetted by CURE.  They are not permitted to violate antitrust laws, but they have a different agency enforcing them.”