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4 REVIEW OF OTHER REGULATORY PROVISIONS
4 REVIEW OF OTHER REGULATORY PROVISIONS
Pages 145-178
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From page 145... ...
e committee's assessment of its continued relevance and of the need for changes follows. COMMON CARRIER SERVICE OBLIGATION Requirements and History e obligation of railroads to provide service under terms of common carriage can be traced to English common law and requirements
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From page 146... ...
ird, even as regulators were required to establish rules governing the mechanics of a common carrier service offering, such as tariff disclosure and dissemination practices, they were not given well-defined authorities to prescribe and enforce the substance of these offerings, such as minimally acceptable levels of service speed and reliability. More than 30 years after the Staggers Rail Act, the common carrier service obligation remains poorly defined.
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From page 147... ...
.5 Although railroads have substantial freedom to set the rates for this common carrier service, STB establishes the rules governing tariff terms such as the allowance of indemnity clauses that can shift liability risks.6 In situations in which TIH shipments are moved in markets lacking effective competition, railroads complain that the threat of rate regulation restricts their ability to raise rates to compensatory levels. ey contend that STB's regulatory costing methodology [the Uniform Railroad Costing System (URCS)
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From page 148... ...
As common carrier rates were deregulated, so too was service quality, since a product's price and quality will be interlinked. e common carrier obligation was thus retained without a regulatory framework that could be used to ensure a minimal service response by railroads.
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From page 149... ...
is does not mean that exempt or contract shippers lack similar concerns; however, contractual remedies are available to them and are enforced through the courts. e complaint record must be considered with caution, because service complaints associated with common carriage dominate STB hearings and there will always be common carrier shippers with service complaints.
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From page 150... ...
In view of these uniformly high ratios, a reason for railroads seeking to modify the common carrier obligation for TIH traffic may be to counter biases in URCS. Regulators face many complexities in resolving the scope of the common carrier obligation; however, this aspect of the problem, an artifact of a flawed regulatory process, should not be difficult to fix.
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From page 151... ...
in attaining such revenue levels" as needed to "provide a flow of net income plus depreciation adequate to support prudent capital outlays, assure the repayment of a reasonable level of debt, permit the raising of needed equity capital, and cover the effects of inflation."11 Four years later, the Staggers Rail Act added the requirement that regulators "maintain and revise as necessary standards and procedures for establishing revenue levels for all carriers .
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From page 152... ...
e cost of capital estimate, for example, is used in determining the capital costs associated with building a stand-alone railroad in a stand-alone cost proceeding, in determining the compensation to be awarded to shippers when a rate is found to be unreasonable, and in reviewing line abandonment applications.17 However, the annual revenue adequacy determination itself, which uses the cost of capital figure as its denominator, does not play a meaningful role in any regulatory decisions.18 Whether STB intends to use the results of its annual determinations for more substantive regulatory purposes remains unclear. As discussed in Chapter 3, the Coal Rate Guidelines imply that a railroad's revenue adequacy status "over time"19 may be used in making 17 e cost of capital methodology has been modified periodically in response to complaints from shippers and railroads.
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From page 153... ...
. e provision calling for the development of revenue adequacy standards resides in the section of the Staggers Rail Act that prescribes the adjudication of rate disputes.20 is positioning may explain ICC's original interest in linking the results of the annual determination to its decisions about reasonable rates.
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From page 154... ...
First, Congress likely intended that the annual determinations inform affirmative steps to help railroads regain financial viability. at purpose is consistent with the requirement for revenue adequacy standards that first appeared in the 4-R Act, when rescuing the industry from its financial distress was a priority.25 A related possibility is that the annual determination was meant to gauge the reformed regulatory program's impact on the ability of railroads to keep investing and perhaps to monitor the industry for sustained supracompetitive rates of return that might indicate an excess of market power.
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From page 155... ...
However, such information is not provided by a regulatory agency annually making what are largely perfunctory comparisons of each railroad's rate of return with an estimate of the industrywide cost of capital. Continuation of the determinations of revenue adequacy might be considered innocuous if they did not prolong the misguided view that a single annual pass/fail measure of railroad profitability can be used to regulate rates.
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From page 156... ...
STB inherited this review authority from ICC, which under the Staggers Rail Act retained its exclusive power to approve all railroad mergers and acquisitions.27 e railroad industry therefore remains exempt from Section 7 of the Clayton Act, which requires economically significant mergers in most industries to be reviewed by the Antitrust Division of the U.S. Department of Justice (USDOJ)
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From page 157... ...
the interest of rail carrier employees affected by the proposed transaction; and (5) whether the proposed transaction would have an adverse effect on competition among rail carriers in the affected region or in the national rail system."31 e Staggers Rail Act added the competition criterion for merger reviews, but the remaining public interest criteria originated in the Transportation Act of 1940 (Phillips 1962, 9)
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From page 158... ...
With this perspective and the worsening financial condition of the railroads during the 1970s in mind, the retention of the public interest standard by the Staggers Rail Act is understandable, despite its deregulatory tenor. Coupled with the act's imposition of decision deadlines, the public interest standard was viewed as more flexible in allowing the railroad industry to shed uneconomic capacity and achieve financial stability.
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From page 159... ...
In opposing the 1996 merger, USDOJ argued that a reduction in rail competitors in the West from three to two could cause "overwhelming competitive harm" in a large number of markets as the unified railroad exercised market power unilaterally and through coordinated behavior with the single remaining competitor (BN) .34 In granting approval, STB placed greater emphasis on the financial benefits of the merger.
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From page 160... ...
STB declared a 15-month moratorium on further reviews until a reassessment of its merger evaluation criteria was complete.38 During the moratorium, BN and CN withdrew their application to merge. In June 2001 STB introduced its Major Rail Consolidation 36 STB Ex Parte No.
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From page 161... ...
It stated that while further consolidation of the few remaining Class I carriers could result in efficiency gains and improved service, the Board believes additional consolidation in the industry is also likely to result in a number of anticompetitive effects, such as loss of geographic competition, that are increasingly difficult to remedy directly or proportionately.41 After the new merger procedures were announced, some railroads expressed concern that STB's emphasis on "enhanced" competition imposed a more restrictive standard than the traditional antitrust policy of preventing the substantial lessening of competition.42 Because no Class I railroads have applied to merge since 1999, there is no precedent to show how STB would apply its new burdenof-proof standards. During the past decade, nearly all STB actions pertaining to its merger and acquisition authorities have involved regional and short-line railroads leasing or buying branch lines from 39 STB Ex Parte No.
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From page 162... ...
e Staggers Rail Act requires that STB promptly approve proposed transactions not involving two or more Class I railroads unless it finds a likelihood of lessened competition or the creation of a monopoly and it determines that the anticompetitive effects from these outcomes outweigh the public interest in meeting transportation needs.43 Nevertheless, STB has faced criticism over certain approved transactions, particularly those involving interchange commitments that limit the ability of the regional or short-line railroad to interchange traffic with major railroads other than the seller or lessor.44 Such interchange commitments can be viewed as anticompetitive because they prevent the short-line railroad from offering shippers more competitive routing alternatives.45 Shippers have referred to interchange commitments as "paper barriers" to competition and have petitioned STB to prohibit commitments lasting longer than 5 years.46 In response, STB has mentioned the important role that these contractual commitments can play in preserving rail service on low-volume lines. ey enable smaller railroads to finance the lines by guaranteeing traffic to the major railroad that sells or leases them.47 However, in acknowledging that such commitments can lead to abuse, STB concluded that decisions about their propriety should be made on a case-by-case basis.
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From page 163... ...
If USDOJ concludes that the transaction could lessen competition in violation of the Clayton Act, it will seek to stop the transaction by filing a complaint in federal court. is step is often unnecessary, since the threat of action alone often persuades the parties to address the concerns or abandon the merger.49 e Horizontal Merger Guidelines, which USDOJ develops jointly with FTC, are central to its review process.
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STB does not bear the burden of proof to deny a merger; railroad applicants bear the burden of making a convincing case for why the merger should be approved in light of STB's stated principles about what constitutes the public interest. Applicants are thus required to explain "the purpose sought to be accomplished by the proposed transaction, such as improving service, enhancing competition, strengthening the nation's transportation infrastructure, creating operating economies, and ensuring financial viability."50 e procedures emphasize that other claimed benefits of a merger should not be pursued at the expense of competition.
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From page 165... ...
Firms considering a merger should have a clear understanding of expectations and be able to structure the transaction accordingly or be dissuaded from pursuing it in the first place. A main purpose of the Horizontal Merger Guidelines is to offer guidance that the business community can use in assessing the antitrust enforcement risks of a proposed transaction.51 Similar transparency of purpose and articulation of procedure are not offered in STB's Major Rail Consolidation Procedures.
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From page 166... ...
However, STB can invoke other authorities to minimize such effects from mergers that pass the competition scrutiny of USDOJ.54 AUTHORITY TO ORDER RECIPROCAL SWITCHING Before the Staggers Rail Act, when regulated rates were largely equalized, shippers had limited incentive to seek alternative railroad routings 52 Major Rail Consolidation Procedures, p.
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From page 167... ...
. Provisions in the Staggers Rail Act had the practical effect of allowing a railroad to cancel many interline and terminal access agreements for traffic that it could serve on its own, which reinforced the ability of railroads to control bottleneck traffic (GAO 1987)
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As explained in Figure 4-1, this practice is referred to as mandated "reciprocal switching." A key distinction between reciprocal switching and the other access authorities is the stipulation in the Staggers Rail Act that regulators can order such arrangements not only if practical and in the public interest but also if deemed "necessary to provide competitive rail service."58 e specific reference to competition in the act represents a new regulatory power (rather than a holdover authority as applicable to the designation of through routes and terminal access)
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From page 169... ...
e agency contended that actions to "initiate an open-ended restructuring of service to and within terminal areas solely to introduce additional carrier service" would run counter to the law's directive to minimize regulatory control.62 ICC further maintained that any interventions for the express purpose of enhancing competition in sole-served markets must respect the law's rate reasonableness criteria. e Staggers Rail Act, for example, is explicit in stating that railroads have a safe harbor in pricing traffic up to 180 percent of its "variable cost." If a rate in a market lacking effective competition exceeds this threshold, aggrieved shippers are eligible to file a rate case.
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From page 170... ...
could cause the shipper's rate to fall below the 180 percent level, regulators concluded that such an intervention would violate the law's safe harbor provision.63 e counterargument put forth by shippers was that Congress had given ICC a new regulatory power to order reciprocal switching when necessary to provide competitive rail service. In doing so, Congress meant to increase the options available to STB in addressing the concerns of aggrieved shippers and in providing a mechanism for controlling railroad market power through competitive access rather than only by prescribing maximum rates after disputes.
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. e review panel recommended keeping the requirement to serve its current purpose of providing competitive access but recommended against proposals to expand the distance beyond 30 kilometers, expressing satisfaction with the status quo (Minister of Public Works and Government Services Canada 2001, 63)
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First, in proposing reciprocal switching in addition to (rather than as a replacement for) the current rate relief process, NITL recognizes that an access mileage limit (i.e., 30 miles)
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From page 173... ...
In particular, any reciprocal switching proposal with a short mileage limit would lead to variability in shipper access to relief by commodity type, since some commodities may be produced at locations farther from interchange points than others (e.g., wheat versus chemicals) .71 Other empirical questions concern the practical effect that a reciprocal switching order would have on competition and thus on the rate and service levels in individual markets.
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From page 174... ...
CHAPTER SUMMARY Common Carrier Service Obligation Until passage of the Staggers Rail Act, all railroad traffic was moved in common carriage, and thus all rates were publicly posted, with service terms and conditions that were to a large extent homogeneous. By allowing common carrier rates to vary widely, the law increased the likelihood that service attributes would also become more heterogeneous.
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From page 175... ...
us, the rationale for retaining STB's role in reviewing mergers according to a public interest standard is not compelling. Authority to Order Reciprocal Switching The Staggers Rail Act gave regulators authority to order reciprocal switching arrangements when "necessary to provide competitive rail service." Reciprocal switching has been ordered on rare occasion in the United States to address competitive abuses that led to in adequate service.
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From page 176... ...
One possible starting point for assessing reciprocal switching on a more limited basis is to allow its use as an optional remedy for rates that have been ruled unreasonable and thus perhaps as an alternative to a prescribed rate. REFERENCES Abbreviations AAR Association of American Railroads ICC Interstate Commerce Commission AAR.
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From page 177... ...
2014. Revenue Adequacy: e Good, the Bad and the Ugly.
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From page 178... ...
1962. Railroad Mergers: Competition, Monopoly and Antitrust.
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