You are here

Surface Transportation Board Seeks to Impose Backdoor Railroad Price Controls

The infamously destructive Interstate Commerce Commission (ICC) may be history, but many outside of the railroad policy world are unfamiliar with its predecessor: the Surface Transportation Board (STB). Created under the ICC Termination Act of 1995 to take on the remaining economic regulatory responsibilities of the ICC left over from the Staggers Rail Act of 1980 that partially deregulated the railroads, the STB has through most of its history been a conservative regulatory agency—conservative in that it judiciously exercised its authority over rates and service, rather than seeking to expand its power and budget. Until now, that is.

One issue that has repeatedly dogged the STB and ICC before it is known as competitive access. Disgruntled shippers for decades have complained when they are served by a single railroad and are frustrated about paying market shipping rates. A major point of contention is over mandatory reciprocal switching.

Reciprocal switching refers to an arrangement, succinctly described by former STB Chair Linda Morgan, “whereby the incumbent railroad, for a fee, must handle the cars of a competing carrier, enabling the latter carrier, even though it cannot physically serve the shipper’s facility, to offer a single-line rate to compete with the incumbent’s single-line service.”

These shippers, dominated by chemical giants such as Dow Chemical and large agribusinesses such as Cargill, have long sought to ratchet up regulations on rail carriers in order to politically force shipping rates down below market prices.

Early in the post-deregulation days, many industry observers realized that the debate over competitive access was really just a rent-seeking exercise on the part of major shippers and that harsh access rules would be functionally similar to the heavy-handed rate regulations that nearly drove the railroad industry to ruin in the 1970s—a backdoor approach to price controls.

The economic case against forced reciprocal switching is that it ignores the risk to sunk investments. Imposing cost-based mandated access rates will deter investment, particularly on the low-demand segments shippers complain about most frequently, and threaten the financial health of the railroad industry. MIT economics professor Jerry Hausman has much more detail on these dangers in this 1999 CEI paper.

Unfortunately for the rent-seeking shippers, in the years following rail deregulation in the 1980s, the ICC repeatedly ruled against them.

Two decisions—Intramodal Rail Competition, 1 I.C.C.2d 822 (1985) and Midtec Paper Corp. v. Chicago & North Western Transportation Co., 3 I.C.C.2d 171 (1986)—formally established what is known as the anticompetitive conduct requirement, which is the bane of rent-seeking shippers. The regulation was adopted in the Intramodal Rail Competition proceeding and is presently codified at 49 C.F.R. § 1144.2(a)(1). It states that reciprocal switching would only be mandated if it “is necessary to remedy or prevent an act that is contrary to the competition policies of 49 U.S.C. § 10101 or is otherwise anticompetitive.”

The Midtec decision the year following Intramodal Rail Competition interpreted the rule as requiring a showing that a carrier has either (1) “used its market power to extract unreasonable terms,” or (2) “shown a disregard for the shipper’s needs by rendering inadequate service” due to its monopoly position.

Both of these interpretations of 49 U.S.C. § 11102(c) were upheld by the courts and the anticompetitive conduct requirement has been the law of the land for the past three decades (see Baltimore Gas and Elec. Co. v. United States, 817 F.2d 108 (D.C. Cir. 1987) and Midtec Paper Corp. v. United States, 857 F.2d 1487 (D.C. Cir. 1988)). Rent-seeking shippers hate it because it actually requires them to present evidence of anticompetitive behavior, rather than just complain about market rates being above whatever level they believe to be adequate (something I suspect is close to zero).

The good news is that over the last 30 years, no shipper has presented evidence of anticompetitive conduct on the part of the railroads. The bad news is that rather than celebrate carriers’ good behavior, the STB is now looking to eliminate the anticompetitive conduct requirement in an attempt to force railroads into more reciprocal switching arrangements.

The proposed rule, Petition for Rulemaking to Adopt Revised Competitive Switching Rules; Reciprocal Switching, was published in the Federal Register on August 3, 2016. CEI’s comments to the STB can be found here.

As we note, the STB rejects an argument made earlier by two carriers that Congress ratified the Midtec anticompetitive conduct requirement when it enacted the ICC Termination Act without amending 49 U.S.C. § 11102(c) to eliminate the requirement. The STB responds that there is no “legislative history in which Congress even mentioned the agency’s interpretation of § 11103 (now § 11102), much less voiced approval for it.”

While ratification may be a stretch, another legislative inaction doctrine does apply and is supported by the legislative history: acquiescence. As we note in our comments, in the last 20 years alone, there have been numerous attempts in Congress to eliminate the anticompetitive conduct requirement, including a bill introduced by a Republican chairman of the House Transportation and Infrastructure Committee and another introduced by the Democratic ranking member. As recent as this 114th Congress, Sen. Tammy Baldwin (D-Wisc.) attempted to go even further by proposing a bill containing conclusive presumptions that would automatically impose forced switching if certain arbitrary conditions are met, which even the STB believes is ridiculously anti-market. Every single one of these bills failed.

In Bob Jones University v. United States, 461 S. Ct. 574 (1983), the Supreme Court noted that “[n]onaction by Congress is not often a useful guide, but the nonaction here is significant.” The Court stressed legislative acquiescence because ever since the Internal Revenue Service had first interpreted the charitable tax exemption as not applicable to racially discriminatory corporations in 1970, a vigorous public debate had taken place and numerous unsuccessful bills were introduced in Congress to reverse the IRS interpretation. “It is hardly conceivable that Congress ... was not abundantly aware of what was going on. In view of its prolonged and acute awareness of so important an issue, Congress’ failure to act on the bills proposed on this subject provides added support for concluding that Congress acquiesced in the IRS ruling.”

Congress has been given a meaningful opportunity to express disapproval of the Intramodal Railroad Competition and Midtec Paper Corp. interpretations, yet has repeatedly and consistently rejected attempts to do so over the last three decades. In opening this rulemaking proceeding, the STB is ignoring Congress’s acquiescence to the anticompetitive conduct requirement and is unlawfully attempting to reinterpret the statute in a manner inconsistent with congressional intent.

We urged the STB to withdraw its proposed rule and recognize the harm that backdoor price controls via mandated reciprocal switching could do to railroad capital investment, which has seen a sharp decline in recent years as coal and petroleum traffic fell. This reduced investment will lead to declining service quality for shippers over time and consumers will ultimately suffer as goods prices rise as a result.

The railroad industry has recovered from its life-support status following deregulation. Since the Staggers Rail Act of 1980, average inflation-adjusted rail rates are down 45 percent, employee injuries are down 84 percent, shipping volumes and productivity have doubled, and the industry has invested more than half a trillion dollars of its own funds back into its private rail networks. Railroad deregulation represents perhaps the single greatest economic policy reform success story in American history.

The STB says its main reason for attempting to reverse the 30-year-old anticompetitive conduct requirement is because of the improved health of the railroad industry following deregulation. In light of diminished industry performance, we ask how poorly must railroads perform, and for how long, in order for the STB to justify re-imposing the anticompetitive conduct requirement sometime in the future, assuming it gets its way today.

CEI has been involved in this issue for nearly 20 years and will continue to advocate free market rail policy reforms and defend railroad deregulation from rent-seeking industries and their allied politicians. More detail is found in our comments to the STB in the current proceeding here.

In addition, CEI Founder and Director of the Center for Advancing Capitalism Fred Smith and I coauthored a recent case study of railroad regulation and deregulation, Reviving Capitalism: Lessons from the Near-Death and Rebirth of American Railroads. I provide more context for these recent re-regulatory attempts in papers here and here. And below are all the public comments CEI has submitted to the STB in previous competitive access proceedings.

Ex Parte 705, Competition in the Railroad Industry

Ex Parte 711, Petition for Rulemaking to Adopt Revised Competitive Switching Rules