Are Paper Barriers Ripe for STB Review?

WATCHING WASHINGTON, JULY 2019: If paper smothers rock, scissors cut paper and rock smashes scissors, short line railroads, controlling neither the paper nor rock, face a grim outcome in a quest to “cut up” so-called paper barriers erected by Class I railroads and sanctioned by the Surface Transportation Board (STB).

A paper barrier is a contractual provision attached to a Class I line sale or lease, limiting the ability and/or incentive of the short line purchaser or tenant to interchange traffic with competitors of that Class I. STB approval of such transactions exempts them from the antitrust laws that could otherwise define paper barriers as competition-reducing tying agreements in restraint of trade.

As short lines originate or terminate more than 20% of rail traffic, the matter rivals a related controversy as to whether shippers are entitled to two-railroad access at sole-served facilities. Whether the paper barrier issue is ripe for inclusion in that long-pending rulemaking (Ex Parte No. 711, Reciprocal Switching) depends on views of two new STB members and its second-term Republican chairman.

Paper barriers were spawned following 1980 partial economic deregulation that facilitated spin-offs by Class I railroads of low-density lines.

Former Burlington Northern (now part of BNSF) CEO Darius W. Gaskins Jr. said in 2008, “We developed a campaign to sell segments of our network to locally based entrepreneurs who could achieve lower costs than Class I railroads. In every case, the new short lines were bound to our network through contracts, which kept the benefit of their feeder traffic for our system.”

That remains the case industry-wide.

Class I railroads defend paper barriers as voluntarily bargained in exchange (although never proven) for discounted sales or leases. The Association of American Railroads (AAR), representing Class I carriers, says discounts were “the only economic basis upon which a short line operator could afford to take over the line.”

In 1999, the AAR and American Short Line and Regional Railroad Association (ASLRRA) negotiated a Rail Industry Agreement allowing a spinoff of a Class I to obtain access to a competitor of the Class I seller or lessor under narrow circumstances generally involving new traffic.

But many short lines said Class I sellers or lessors still “resolutely refused” to make revisions to paper barriers under any circumstances.

Class I railroads understandably oppose regulators rewriting agreements made between consenting adults, especially given an increased number of short lines owned by sophisticated holding companies. Yet a drumbeat is that paper barriers impede shippers from gaining competitive routing that could translate to lower freight rates.

In 2007, after rejecting a recommendation to create a rebuttable presumption that a paper barrier in effect more than five years has succeeded in compensating the Class I for the alleged sale or lease discount, the STB said it would consider revising paper barrier restrictions—but only on a case-by-case basis.

Individual short lines, however, have been reluctant to seek regulatory relief, says Clark Hill law firm attorney John D. Heffner, who has negotiated many spinoff agreements. They cite dependence on Class I connections for adequate car supply and timely interchange, plus congressional lobbying assistance to secure periodic renewal of an oft-in-danger investment tax credit.

A changing economic environment could bring the matter back to the STB should its new members—Democrat Martin J. Oberman and Republican Patrick J. Fuchs—pressure Republican Chairman Ann Begeman to re-examine paper barriers. In 2012, before becoming chairman, Begeman dissented from a majority decision to make paper barrier restrictions more transparent as part of the sale or lease
application process.

Notable today are strong Class I profits expected to improve with implementation of Precision Scheduled Railroading; reduced train-crew size flowing from Positive Train Control’s artificial intelligence; and a new wave of line sales and leases. With coal traffic fading and a slowing economy adversely affecting total carloads, short lines are more crucial to attracting new business—able to market their services more effectively were there fewer restrictions on their competitive options.

Short lines, says Heffner, “want as many Class I connections as possible.” So do shippers. Whether the STB takes action is of significant concern to them, he says.

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.