2014: Railroads face problematic Washington landscape

An antitrust lawsuit alleging collusion in the setting of fuel surcharges, and what an STB official calls, “the mother of all rate cases” pending before the agency, have potential price tags in the billions of dollars if railroads fail to prevail.

Also, a shipper group is seeking to convert railroad private property into communal trackage; another continues its three-decade quest to roll back Staggers Rail Act freedoms, and subject railroads to greater antitrust exposure; short lines crave to preserve an investment tax credit and streamlining of financial disclosure rules for obtaining federal loans for capital investment; Amtrak funding is a perennial concern; the threat of truck size and weight liberalization is ever present; Congress is expressing concern over the safety of moving crude oil by rail; and a delay in implementation of Positive Train Control (PTC) may be legislated.

Following is summary of challenges railroads face in the nation’s capital and in federal courts in 2014.

Congress

Politicians, whose highest priority is reelection, are stereotypically chary of controversy in election years. Coupling to this a probability that the Senate will come under Republican control in 2015, and we have a prescription for the congressional leadership limiting 2014 lawmaking to matters of urgency.

In the House, Transportation & Infrastructure (T&I) Committee Chairman Bill Shuster (R-Pa.) says he has a bipartisan commitment to produce a comprehensive surface transportation reauthorization bill, which is primarily a highway funding and transit measure (historically split 80% for highways, 20% for transit), but which also includes funding for grade crossing safety, construction of efficient roadways linking ports and intermodal terminals, and rail relocation.

Although reauthorization of Amtrak is on the agenda given expiration this year of the Passenger Rail Improvement and Investment Act (PRIIA) of 2008, a standalone bill is highly unlikely to move amidst interparty bickering over the future of high speed rail and long-distance trains.

While there has been talk of including PRIIA reauthorization as part of a broad surface transportation reauthorization bill, this also is unlikely to occur. Thus, it will be up to the appropriating committees of both chambers to agree on funding to keep Amtrak running—a not uncommon outcome without a new authorization measure. In fact, Amtrak subsidies were appropriated by Congress, without accompanying authorization, from 2002 until PRIIA was passed in 2008.

Expect Amtrak’s current annual appropriation of $1.344 billion ($441 million for passenger train operations and the remainder for debt repayment and capital improvement) to be reduced by some 3% to match previously agreed to federal budget cuts known as sequester. That leaves for 2015 and a new Congress decisions on PRIIA reauthorization affecting Amtrak’s Northeast Corridor renewal and improvement, the fate of long-distance passenger trains, a previous edict that states fund almost 100% of corridor routes fewer than 750 miles, the future of high speed rail, and Amtrak’s desire for a multi-year appropriation.

Returning to surface transportation reauthorization, freight railroads will oppose attempts to liberalize truck size and weight limits. The Highway Trust Fund has been insolvent for several years (more than $40 billion in general tax revenue has been appropriated to bail it out since 2008 and provide needed funds for federal highway maintenance and reconstruction), and there is pressure to increase taxes on motor fuels, notwithstanding Republicans’ antithesis to raising taxes. American Trucking Associations President Bill Graves has voiced support for such a hike, but trucking interests are poised to ask, in exchange, for truck size and weight liberalization.

While short lines and regional railroads seek extension of an infrastructure renewal tax credit (H.R. 721 and S. 411, The Short Line Railroad Rehabilitation and Investment Act), congressional budget hawks seek to abolish what they term special interest tax breaks. Preserving that tax credit will be a steep uphill fight, but shouldn’t be assumed unwinnable—especially given a likelihood Sen. Chuck Schumer (D-N.Y.) gains chairmanship of the Senate Finance Committee if current chairman Max Baucus (D-Mont.) is confirmed as ambassador to China.

Short lines and regional railroads would also like the Railroad Rehabilitation and Improvement Financing (RRIF) Program (with $35 billion available) to provide for a more streamlined application process for smaller railroads seeking loans less than $5 million.

Surface transportation reauthorization is also a vehicle to delay implementation of Positive Train Control (PTC), which, under existing legislation (the Rail Safety Improvement Act of 2008), must be in place by Dec. 31, 2015, on some 60,000 miles of track carrying passengers and freight labeled as a toxic inhalation hazard (TIH). Railroads seek delay because of difficulties in obtaining and installing hardware and software, siting of communication towers, availability of the needed communications spectrum, and necessary system reliability testing.

Whether freight railroads gain federal financial assistance to help defray PTC installation costs—an unfunded Congressional mandate—is dicey, even with an authorization. Congress previously appropriated $50 million to assist commuter railroads with the cost.

Certainly don’t ignore self-proclaimed captive shippers seeking a rollback of Staggers Rail Act pricing freedoms and increased antitrust exposure for railroads. While it is unlikely that such language will be inserted by the Republican-controlled House, Senate Majority Leader Harry Reid (D-Nev.) indicated the Democratic-controlled Senate may draft its own surface transportation reauthorization bill.

That would be the vehicle for captive-shipper advocate and Senate Commerce Committee Chairman Jay Rockefeller (D-W.Va.) to insert in the Senate version language to rollback some Staggers Rail Act provisions, override previous Surface Transportation Board (STB) decisions unwelcome by some shippers, and instruct the STB to give more weight to shipper complaints.

Language creating greater antitrust exposure for railroads—such as limiting federal courts from deferring to STB jurisdiction complaints that might otherwise qualify as Clayton Act violations—would originate with the Senate Judiciary Committee, where Sen. Amy Klobuchar (D-Minn.), is chairman of the Antitrust Subcommittee and already author of the Railroad Antitrust Enforcement Act (S. 638).

Two influential Republicans—John Thune (R-S.D.), the senior Republican on Rockefeller’s Commerce Committee and chairman of the Republican Senate Conference; and David Vitter (R-La.), a Commerce Committee member, deputy Senate Republican Whip, and co-sponsor of the Klobuchar bill—are supportive of the Rockefeller and Klobuchar initiatives. It is unlikely railroads could derail such language in a Senate bill, meaning it could wind up in a House-Senate conference that would meld both versions into a final bill.

Rockefeller is retiring at the end of 2014, and some shippers—observing how his previous legislative efforts on their behalf languished—question his resolve on the Senate floor, notwithstanding his very vocal stance supporting captive shippers. Several years ago, shippers complained that one of his senior staff members—now departed—had been cozy with railroads, and they are shaking their heads anew after another of his senior policy advisers was hired in December to head the legislative department of the Association of American Railroads.

Additionally to be watched is potential new rail safety language in surface transportation reauthorization. The horrific July accident in Lac-Mégantic, Que., involving crude-oil tankers—followed by other fiery explosions in Alberta, Alabama, and North Dakota, and all involving crude oil shipped by rail from North Dakota’s Bakken shale oil formation—have caught lawmakers’ attention. More than 70% of Bakken formation crude oil is now moving by rail.

To parry Congressional action, the railroad industry urged the Department of Transportation to prescribe stringent new construction and retrofit requirements for flammable-liquid hauling tank cars, and to order an aggressive phase-out of older model tank cars not retrofitted to the new standards. Yet to be determined is why crude oil, which is not an explosive commodity, erupted into fireballs. Investigators are beginning to examine if the crude oil contains impurities from the fracking process or from naturally occurring highly flammable organic compounds.

As for the competing Keystone XL pipeline, which would stretch 1,700 miles south from Alberta’s oil-rich tar sands, environmental concerns are delaying its construction permit. Although oil will begin flowing this year through the already constructed southern leg of the pipeline from Cushing, Okla., to Texas Gulf Coast refineries, railroads are minimally concerned, as rail transportation of crude oil is more flexible in terms of refinery destination, and just 10 unit trains, of 120 tank-cars each, haul as much crude oil as the projected 850,000 barrel daily flow of the northern leg of the Keystone XL pipeline.

A standalone House bill (H.R. 3040, The Safe Freight Act) to require two-person crews nationwide on freight trains has but two Republican co-sponsors, and is unlikely to survive given Federal Railroad Administration safety oversight and existing labor agreements requiring two-person crews.

Surface Transportation Board

Senate confirmation of Democrat Deb Miller to the three-member STB, to succeed now departed Democrat Frank Mulvey, is expected. Chairman Dan Elliott’s first term expired Dec. 31, 2013, but the statute permits Elliott, a Democrat, to remain in place until Dec. 31, 2014, and he is expected to be renominated, confirmed, and retained by President Obama as chairman. The lone Republican is Ann Begeman.

The three face one of the busiest rail regulatory agendas since the years of mega-mergers. Here is a summary of the most significant cases currently before the STB:

• DuPont v. Norfolk Southern is a rate challenge involving 27 commodities (including chlorine) and 130 origin/destination pairs. Because of the complexity, some STB staff term it “the mother of all rate cases.” The potential exposure for Norfolk Southern is in the billions of dollars.

• National Industrial Transportation League, Petition for Rulemaking to Adopt Revised Competitive Switching Rules, seeks a ruling allowing shippers in origin or destination terminal areas served by one Class I railroad, and without effective truck or barge competition, to be granted access to a second railroad having an interchange point within 30 miles. The AAR says granting the petition could cost the industry $7.8 billion in revenue, which is equivalent to some 80% of the railroads’ entire annual capital budget.

• Sunbelt v. Norfolk Southern is a rate challenge on chlorine shipments between MacIntosh, Ala., and New Orleans, where the traffic is interchanged with Union Pacific. The potential exposure for NS is in the tens of millions of dollars.

• Intermountain Power Authority v. Union Pacific is a rate challenge on coal shipped from Provo, Utah, via Utah Railway and interchanged with Union Pacific at Lynndyl, Utah. The potential exposure for UP is in the tens of millions of dollars.

• Total Petrochemicals v. CSX is a rate challenge involving four commodities and 120 origin/destination points. The STB Jan. 2 denied a CSX petition to hold the case in abeyance pending a CSX appeal to a federal appeals court challenging a previous market dominance determination by the STB.

Federal Courts

Four major railroads—BNSF, CSX, Norfolk Southern, and Union Pacific—are defending themselves against charges they conspired to fix, raise, maintain, or stabilize fuel surcharges imposed on some 30,000 shippers, through bilateral contracts, between mid-2003 and 2008. Estimates of the liability exceed $10 billion. The case is unlikely to be resolved in 2014 and currently is back with a U.S. district court after the Court of Appeals for the District of Columbia remanded to the district court its earlier decision granting class action status.

The district court must now determine if the class action includes shippers who should not be included, and whether the class can be modified to avoid including such shippers. Individual shippers could file their own actions, but the cost could be prohibitive. A revised district court decision could be issued in 2014, but the matter is likely to drag on for years in the courts, or pre-trial settlements could occur.

Amtrak has its own legal headache languishing in a Cincinnati federal court, defending against American Financial Group’s (AFG) demand for reimbursement of Amtrak common stock it purchased from the trustee of bankrupt Penn Central.

In 1997, Congress instructed Amtrak to redeem all of its common stock at “fair market value.” Amtrak initially asked a federal court to declare the common shares “null and void,” with AFG asserting that would be an unconstitutional taking of private property. In a seeming replay of Dickens’ Bleak House—the generations-long Jarndyce v. Jarndyce lawsuit—the case has dragged on.

Amtrak subsequently offered AFG three cents per share ($158,000), with AFG demanding some $300 million—based on the original $52 million purchase price indexed to inflation—plus interest and unspecified damages. Binding arbitration was ordered, but on appeal by Amtrak, it was held that an arbitration clause in the original stock purchase by AFG had expired. Litigation resumed, with a federal court dismissing the lawsuit, holding the congressional instruction for redemption did not give shareholders a right to sue Amtrak and that AFG failed to demonstrate Amtrak had an obligation to provide common stockholders a profit by repurchasing the shares.

In March 2013, the Sixth Circuit Court of Appeals upheld the lower court’s dismissal of AFG’s monetary claims, but held that AFG’s ownership created a “protected property interest” entitling AFG to due process. The case was returned to the federal district court for further consideration and, presumably, to establish a value on the common stock.

(Penn Central, BNSF predecessor Burlington Northern, CN predecessor Grand Trunk Western, and CP predecessor Chicago, Milwaukee, St. Paul & Pacific, accepted Amtrak common stock in lieu of tax credits when most of the nation’s passenger rail operations were transferred in 1971 to Amtrak. BNSF, CN, and CP are not parties to the AFG lawsuit.)

Labor talks

Most Class I railroads and their labor unions will exchange Section 6 notices (objectives for a new national freight agreement) Nov. 1, two months ahead of the current five-year agreement coming open for amendment. During the previous round of bargaining, labor gained a 17% wage increase over five years, and a 78-month $200 cap on employee healthcare insurance premium cost-sharing.

There is unconfirmed speculation that the carriers might not bargain as a coalition this round, but seek individual agreements. In previous rounds, at least one rail labor union bargained individually, but with the merger of the United Transportation Union and the Sheet Metal Workers International Association, all rail unions may wish to bargain as a coalition (only the UTU bargained separately during the previous round). Without the ability to reach a pattern separately with a more aggressive union, the carriers may, for the first time in decades, seek individual railroad-by-railroad bargaining.

Healthcare cost sharing likely will be the thorniest of bargaining issues, but carriers continue to seek agreements for one-person crews, which a federal court previously ruled could not be sought in national bargaining (as those agreements initially were negotiated railroad-by-railroad). The Brotherhood of Locomotive Engineers and Trainmen previously made a one-person crew agreement on a single division of BNSF, but it cannot be put in force without the agreement of the UTU.

Timing in negotiations, which will begin in 12 months, is crucial because national freight labor talks often stretch for years. Should the Senate join the House under increasingly anti-labor Republican leadership next year, an impasse leading to Congressional action would be hazardous for rail labor. Should an impasse occur in 2017, there is the threat to labor of a Republican president’s appointment of a Presidential Emergency Board to make settlement recommendations.

This year will not be a road less taken, as railroads have oft traversed a problematic landscape in Congress, before the courts and the STB, and at the labor bargaining table. What lawmakers, regulators, shippers, and rail labor unions must comprehend is that railroads are to the nation’s commerce what human arteries are to the human body. Those arteries best not be clogged.