STB waiting too long for Godot

Watching Washington, January 2019: Prominently on Harry Truman’s Oval Office desk was a sign, “The buck stops here.” Newly confirmed members of the Surface Transportation Board (STB) may wish to reflect on that acknowledgment of accountability as they wade through a troubling backlog of unfinished rulemakings—some disregarded for years.

Whatever the reason for such fecklessness—perhaps timidity in dealing with contentious policy issues, or preferring vacant seats first be filled—justice is delayed and denied for captive shippers lacking effective alternatives to rail, and for whom residual regulatory protection was retained by Congress following partial economic deregulation in 1980.

While some railroads and investors with short-term outlooks encourage the status quo versus timely resolution of thorny matters, delay breeds its own risk. Administrations, which nominate STB members, change, and there is threat of congressional backlash fueled by shipper discontent. Economic efficiency also is a victim of regulatory delay. Uncertainty undermines long-range capital spending decisions, impedes efficient strategic planning and can sour commercial dealings with customers.

Especially exasperating to captive shippers are disregarded STB promises to simplify and make more efficient and less costly maximum freight-rate-review methodologies; develop standards for imposing fuel surcharges; revise how revenue adequacy is determined, and its relationship to maximum reasonable rates; and establish regulations allowing captive shippers access to a second railroad.

Given the level of shipper frustration with the delay, it is surprising none has sued in federal court to force the STB to cease impersonating a regulatory agency and perform the uncomfortable functions ignored.

Shipper disquiet is especially loud over an unfulfilled promise from December 2013, when then-Chairman Dan Elliott, current Chairman Ann Begeman and then-board member Frank Mulvey initiated a new proceeding (what became Ex Parte No. 722) to evaluate the impact of railroad revenue adequacy on maximum freight rates. The STB held a two-day public hearing on the subject in 2015. However, four years later, the STB has not even issued a proposed change, much less adopted any.

When revenue adequacy was first defined by Congress in 1976—when the rail industry was on financial skid row, with prospects equally bleak—the intent was to assist railroads in achieving a level of earnings sufficient to allow a carrier to meet all of its expenses, retire a reasonable amount of debt, recover the costs of depreciation and earn a sufficient return on investment to attract new capital.

In 1985, with railroads in recovery mode following 1980 partial deregulation and favorable 1981 tax legislation, STB predecessor Interstate Commerce Commission ruled that when a railroad becomes revenue adequate, it must demonstrate “with particularity” its need for higher revenue, the harm it would suffer if it could not collect higher revenue and why a captive shipper should pay higher rates.

Captive shippers say most railroads became revenue adequate by the 1990s, citing Burlington Northern’s $4.1 billion acquisition of Santa Fe; Union Pacific’s (UP) $4 billion purchase of Southern Pacific, and CSX and Norfolk Southern (NS) acquiring Conrail for $10 billion. In 2009, Berkshire Hathaway paid $34 billion to acquire BNSF—a 31% premium over market value.

Subsequently, the STB declared BNSF and UP revenue adequate for eight consecutive years (2010-2017); NS in five of eight years, and CSX within a single percentage point of revenue adequacy in six of eight years. No major railroad tells its shareholders it is revenue inadequate.

Moreover, Precision Scheduled Railroading is further pounding down already-record-low operating ratios; UP completed $10 billion in stock buybacks; CSX is buying back $5 billion of its shares, and NS has repurchased $12 billion of its stock since 2006.

For sure, each side has strong arguments as to whether and how a revenue adequacy constraint on rates should be applied. Shippers consider the attainment of revenue adequacy a trigger for rate caps, while railroads say it is an “aspirational goal” and not an event to establish new “wide-ranging price controls.” The Supreme Court has called the determination of maximum reasonable rates an “embarrassing question,” but one for the regulator to answer.

While some further process may be unavoidable, an STB continuing to wait for Godot—more or different colleagues, another task force report, or more data—is contrary to the public interest. Stakeholders deserve a final decision by year’s end, and timely final STB action on other long-delayed rulemakings.

Frank N. Wilner is author of six books, including Amtrak: Past, Present, Future; Understanding the Railway Labor Act; and Railroad Mergers: History, Analysis, Insight, all published by Simmons-Boardman Books. Wilner 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 Leadership (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.