Stop the Surface Transportation Board from running off the rails

Regulators like to regulate. It could be argued that regulation is, in fact, the regulator’s job. In truth, the how, the when and the where of regulation is established by legislative bodies in the form of governing statutes. In many cases, legislatures direct regulators not to regulate, or even to deregulate, neither of which suit the activist’s tendencies.

For the Obama administration, however, limiting statutes and legal and regulatory precedent were things to be ignored and not followed when expedient. Such abuse was routine at the Federal Communications Commission, the Environmental Protection Agency and now, it appears, at the Surface Transportation Board (STB).

Take, for example, the desire of the STB to regulate the prices of freight rail service. Under its statutory mandate, the STB faces significant hurdles in regulating prices of rail service, and for good reason. It is widely acknowledged that the regulatory powers held, and actions taken, by the now-defunct Interstate Commerce Commission (ICC) — the predecessor to the STB — nearly destroyed the rail industry in this country.

In response, Congress passed the Staggers Rail Act of 1980, a legislative action aimed at revitalizing the rail industry by substantially curtailing regulatory influence. In fact, the law charged the agency with assisting railroads achieve revenue adequacy, essentially requiring the regulatory agency to monitor carefully the financial implications of its actions for the railroads.

The STB has over the years established stringent cost- and competition-based requirements for rate regulation and, consequently, rate remedies have been few and far between. As the heavy regulation of the rail industry subsided following the Staggers Act, the financial condition of the industry improved.

{mosads}Still, with vigorous competition from alternative transportation modalities, it’s hard to make money in the rail business.

Nevertheless, as the rail industry recovered and began to show signs of health, Obama’s STB proved unable to resist the siren call to sabotage the industry once again with price regulation. But regulating prices directly is very difficult.

Thus, like many pro-regulatory efforts, the STB looked for a way around the statute and its own procedures, wrapping up what could be unlawful and inconsistent with its own policies in the delightful package of promoting “competition.” Specifically, the STB has proposed to expand its use of a policy known as “reciprocal switching” to regulate prices.

The agency’s authority to order reciprocal switching first came into play with the largely deregulatory Staggers Act. Railroads already switch traffic by agreement where it makes operational and business sense. Voluntary reciprocal switching allows a competing carrier to create the illusion that it can offer can offer its own single-line rate across an entire route using another operator’s facilities, even if this competitor does not physically reach a customer.

But when ordered by the government, reciprocal switching is, in effect, forced access to private property. While the railroads involved in such arrangements have an opportunity to arrive at a negotiated rate for such reciprocal access, the failure to come to terms brings in the STB to regulate prices.

For over 30 years, the federal government — first, the ICC, and then at its relevant successor, the STB — imposed reciprocal switching only if it determined that it was “necessary to remedy or prevent an act that is contrary to the competition policies of [the Staggers Act] or is otherwise anticompetitive.” That is, reciprocal switching was not intended to function as price regulation, but rather as an attempt to remedy blatantly anticompetitive actions by rail companies.

Consistent with the deregulatory intentions of the Staggers Act, the bar for regulatory intervention was set high. Since the federal government first promulgated this standard in 1985, only a few requests for reciprocal switching were even filed, and none were granted.

With six months left in office, however, the Obama administration felt that it was time for a change. Although conceding that the Staggers Act routing provisions were “not designed to provide shippers with full, open access routing,” last summer the STB nonetheless opened a Notice of Proposed Rulemaking (NPRM) to abandon its 30-year old standard in favor of a more permissive standard which, in the STB’s view, would “encourage the availability of reciprocal switching where appropriate.”

While it is well-established that an administrative agency can change its policy so long as it provides a reasoned explanation for doing so, the STB’s justifications for abandoning its long-standing anticompetitive harm test are hardly compelling.

For example, the STB asserts that given the “dearth” of reciprocal switching cases brought over the past 30 years, it automatically follows that requiring a finding of anti-competitive harm has “effectively operated as a bar to relief rather than a standard under which relief could be granted.”

So, if we are to understand the STB’s logic correctly, the STB asserts that it does not have to demonstrate a market failure before it can intervene into the market; instead, it can impose regulation to benefit one set of political constituents as it pleases to achieve a predetermined outcome.

Similarly, the STB argues that it is important to weaken the anticompetitive standard due to the increased concentration of the industry. The STB’s argument is puzzling. Indeed, it is a bit disingenuous for the STB to complain about industry concentration when no rail merger can go through unless they approve it first. More importantly, as the STB admits in its notice, it approved such consolidation in order to remedy “decades of inefficiency and serial bankruptcies.”

Which brings us to the STB’s third argument: Now that the industry has returned to some modicum of financial health (made possible by reduced regulation and the government-approved consolidation mentioned a moment ago), lowering the reciprocal switching standard will allow the STB to “avoid obsolescence of the Board’s regulatory policies.”

Like I said, regulators like to regulate and thus hate feeling unnecessary for the healthy functioning of an industry. Moreover, simply because an industry is no longer on the brink of financial ruin does not imply that there are excess profits for the STB, at its discretion, to redistribute to select political constituencies through rate regulation.

At bottom, while some advocates of reciprocal compensation frame it as a “pro-competition policy,” in fact it is not. In fact, reciprocal switching is little more than a scheme to reduce prices for shippers, disguised as competition policy.

Which, of course, begs some interesting policy questions: Why bother use such a complex scheme? Why not just regulate prices directly?

The answer is straightforward: Because the STB’s own rate regulation standards, rooted in valid economic and financial concepts, represent a hurdle — and a legitimate one — to direct price regulation. Using reciprocal switching, alternatively, grants the flexibility for the STB to craft a new, less rigorous and a less economically justified approach to price regulation.

In effect, the STB is running around its own regulatory precedent, spinning its maneuvers as “competition” policy when all it really wants to do is regulate prices, irrespective of the inefficiencies imposed on rail transport. Reciprocal switching is regulatory activism, not competition policy.

Unfortunately, much of the pleading cycle in this notice will be complete by the time the Trump administration comes into office. Hopefully, the incoming administration will throw the switch before allowing this docket to run off the proverbial rails.

George S. Ford is the chief economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a nonprofit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.

The views expressed by contributors are their own and not the views of The Hill.