January 2, 2021

Biden's "Second Great Railroad Revolution": STB Impact

Part 1 of a 3-Part Series
Holland & Knight Transportation Blog
William P. Byrne | Jameson B. Rice | Amanda Barbour | Shemario O. Winfrey
Election Impacts on Transportation & Infrastructure with Transportation themes

During the presidential campaign, candidate Joe Biden called for "Sparking the second great railroad revolution." Biden pledged to "make sure that America has the cleanest, safest, and fastest rail system in the world – for both passengers and freight." During his time in Washington, D.C., Biden has been a staunch supporter of Amtrak. For years, he commuted by rail daily between Washington and his home in Delaware, and it is likely that the focus of this "railroad revolution" will be on passengers. Specifics on his administration's likely position on freight rail are less clear but will undoubtedly be influenced heavily by his dedication to passenger rail transportation and reduced reliance on fossil fuels.

Key Surface Transportation Board Matters

On the economic regulation front, the new administration comes to power with a number of high-profile proceedings pending at the Surface Transportation Board (STB), which is the focus of Part 1. The administration's immediate impact on that agency will be limited to appointing a new chair, as well as a replacement for current Chair Ann Begeman, a Republican whose term ended on Dec. 31, 2020. The other four positions are filled, and their terms will not soon expire. Given the glacial pace with which the most recent appointees moved through the confirmation process, Begeman will likely continue to sit on the Board during much of the one-year holdover period permitted by law.

Still, the major matters pending before the STB could have a tremendous effect on the regulatory regime faced by the freight railroads. A recent proposal by the agency to adopt a series of economic tests against which to consider revoking exemptions from regulation could lay the groundwork for expanding the Board's regulatory authority to set railroad rates. In Ex Parte 704 (Sub No. 1), Review of Commodity, Boxcar and TOFC/COFC Exemptions, the Board is seeking comments on a proposed approach to evaluating requests to revoke exemptions from regulation. In the two major rail deregulatory acts in 1976 and 1980, Congress gave the Board's predecessor, the Interstate Commerce Commission (ICC), sweeping powers to exempt broad categories of rail transportation from its regulatory authority. This power was used actively by the ICC in the decade following deregulation but has fallen out of use in recent decades. Rail customer interests have spoken out against some of these exemption decisions, and the new proposal would provide a guide map to approaches to reregulate areas such as sand and crushed stone or manufactured motor vehicles. It is nearly unthinkable, however, that the Board would act to reregulate containerized intermodal service.

Customer interests have also been critical of railroad profitability and have challenged whether railroad pricing freedoms should be constrained by Washington in some yet-to-be specified way. This debate revolves around the concept of "revenue adequacy" – a term used in the deregulatory statutes. The core of that debate is over congressional intent. The railroads contend that Congress intended that the regulatory agency monitor railroad profitability and evaluate the rail industry's progress toward earning adequate revenues – but not impose limits on profitability. (At the time of deregulation, Penn Central and other major railroads of the Northeast had just emerged from bankruptcy and had been taken over by the government in the form of Conrail, and there was deep concern that the entire industry was failing.) Customer trade associations today maintain that Congress intended that the agency impose some limits upon railroad pricing freedom once carriers achieved sufficient revenues to cover their costs, including cost of capital, and make reasonable levels of capital investment in their physical plants. With the industry thriving today, the question is ripe for decision.

Another potential game-changing proposal is the Board's most recent idea to address the persistent customer complaint that it is too difficult, too expensive and too time-consuming to bring challenges to railroad prices. This proposal, commonly known as Final Offer Rate Review, would impose a new procedure with, as yet, no clear standard, for rate challenges. Upon customer complaint, both the railroad and the customer would simultaneously submit a proposed rate for a movement of the commodity in dispute. The agency would select one or the other and impose it as the legally prescribed maximum rate for a period of time. The amount of relief that could be awarded would not exceed $4 million and any rate prescription would expire at the end of two years, unless the $4 million cap were reached sooner. Ex Parte No. 755, Final Offer Rate Review. If eventually adopted, and if customers were to achieve early successes, one can well imagine litigation over railroad rates proliferating.

As an alternative, five major railroad companies have proposed a voluntary small case arbitration process. They indicate they would participate in the proposed program for five years, provided that Final Offer Rate Review is not adopted. Although generally opposed by rail shippers, the Board has found this proposal of sufficient interest to open a rulemaking proceeding to consider it. Ex Parte No. 765, Joint Petition for Rulemaking to Establish a Voluntary Arbitration Program for Small Rate Disputes.

Conclusion

In the rail industry, economic regulation issues have typically not been highly politicized. Republican STB majorities have tended to be less inclined to expand regulation than Democratic majorities, but the differences have been highly nuanced rather than highly contrasted. The appointment of a new (and Democratic) member and a new chair may make the agency more likely to edge toward outcomes that lean toward more regulatory intervention, but it is far from inevitable that the difference will necessarily be significantly adverse to the industry.

20 Posts in 20 Days Leading to Inauguration Day on Jan. 20

Holland & Knight's Transportation & Infrastructure Industry Sector Group is prepared to assist industry clients in adapting to the anticipated changes by the new administration. Our team is writing new blog posts each day leading up to President-Elect Joe Biden's inauguration, with insights as to likely impacts on the various segments of the industry, including Aviation, Construction, Maritime, Freight Rail, Motor Carriers, Transit and Autonomous Transportation. Bookmark our Election Impacts on Transportation & Infrastructure resource page to follow along.

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