Washington is a rat hole worth watching because, as the politically savvy know, lawmakers and regulators can inflict unexpected, unprovoked and unjustified wounds.
Typically, in a Presidential election year, legislative output by Congress is a slow order. This Presidential election year may be atypical, owing to the agenda, energy and aura of relatively new House speaker Paul Ryan (R-Wis.).
As for the industry’s principal regulatory agencies—the Federal Railroad Administration (FRA), the Pipelines and Hazardous Materials Safety Administration (PHMSA) and the Surface Transportation Board (STB)—expect their resources this year to be sweated toward accelerated delivery of angst-creating rulemakings affecting rates, practices and safety.
Washington perennially is a rat hole worth watching because, as the politically savvy know, lawmakers and regulators can inflict unexpected, unprovoked and unjustified wounds. Recall, for example, 2008 legislation that imposed on the industry an estimated $10 billion unfunded mandate called Positive Train Control (PTC). This year’s watch list includes an FRA attempt to mandate minimum crew size.
Likely to energize Congress this election year is the impatient 46-year-old wunderkind Ryan, so esteemed by fellow Republicans that some speculate his becoming the brokered GOP presidential candidate, should mainstream Republicans revolt against the current front-running candidates.
Ryan says he wants the House to pass—with the Senate to follow—all 12 fiscal year 2017 government funding bills by late October, a rare accomplishment, even in non-election years. Such haste, although admirable as it would avert the perennial budget gridlock that typically threatens a government shutdown, raises the probability of accepting, in a quest for expedient compromise, problematic special-interest floor amendments.
One such amendment could permit a blanket increase in allowable truck lengths and weights, carrying significant highway safety and economic implications—more crash-related injuries; additional pavement damage from increased truck traffic; added highway-bridge stress from increased gross weights; an increased gap separating truck user charges from their higher cost responsibility; and freight diversion from rail to subsidized and less environmentally friendly motor carriers.
Expect Ryan to propose a broad overhaul of the tax code, which intrigues railroads. Unlike most industries, railroad revenue and profit is 100% on-shore generated, preventing them from escaping America’s high corporate tax rate (almost twice an 80-nation average and the highest among 34 industrially advanced nations) by booking earnings overseas and outside the reach of U.S. tax collectors as is done by many U.S. corporations.
A lower U.S. corporate tax rate—cut from 35% to a more competitive 25%—would entice repatriation of earnings booked overseas, improve tax compliance and encourage all U.S. corporate entities to plow back more of their earnings into domestic job-creating plant and equipment modernization and expansion. That could provide railroads an additional benefit of more freight.
Again in 2016, short line railroads must convince Congress to preserve, under the current tax code, their investment tax credit (Section 45G) that makes possible many capital investments that otherwise might not be affordable.
Important to all railroads is pending congressional reauthorization of the Transportation Security Administration, with which railroads share information crucial to protecting from terrorist attack hazmat shipments and infrastructure. Railroads say the existing collaborative relationship functions well.
Regulatory landscape
A wise woman once said, “You can write the legislation if I can write the regulations.” The latter puts flesh and sinew on the legislative skeleton—the devil appearing in the details.
The Surface Transportation Board Reauthorization Act of 2015, which was the first congressional revision of railroad regulatory law since a reduced-in-size STB succeeded the Interstate Commerce Commission in 1995, assigned the STB several consequential rulemakings, gave the STB power to initiate investigations into issues that are of national or regional significance such as service quality, and imposed new deadlines on STB decision-making.
The law also enlarged the number of STB members from three to five, which will allow a maximum of two board members to speak with each other directly without constituting a quorum and violating government sunshine laws. As for the two new members, there is palpitation the Senate will await a new President in 2017 before confirming nominees. If so, the STB would be reduced by then to two members, as the current lone Republican, Ann Begeman, is in her single holdover year and may even voluntarily depart the agency before Dec. 31.
Rulemaking tasks Congress assigned the STB include developing, within new statutory time lines, a streamlined process for deciding rate cases utilizing a complex stand-alone cost (SAC) method—by which the challenged rate is compared against costs of service if alternatively provided by a perfectly efficient railroad. Congress also ordered a rulemaking process to establish a framework for less expensive, less complex and less time-consuming voluntary and binding arbitration to settle railroad/shipper disputes.
The STB additionally is expected in 2016 to hand down numerous decisions affecting railroad ratemaking. Among them are whether to ease the standard for pronouncing railroads revenue adequate; whether to modify the procedure for calculating the railroads’ cost of equity capital, which is a component of revenue adequacy determination; whether to utilize replacement costs rather than historical costs in computing revenue adequacy; and whether to restrict a revenue-adequate railroad’s rate flexibility, such as limiting its ability to impose rate increases in excess of railroad inflation.
Also, the STB is considering whether to grant shippers that are captive to a single railroad within terminal areas access to a second railroad (so-called competitive switching or terminal trackage rights), with the STB establishing the level of compensation to the railroad whose track is used by a competitor.
Shippers are pushing for change because, says one of their attorneys, “The lack of shipper filings shows that the policies of the STB too often don’t work for most shippers, who try to avoid going to the STB if they can.” Railroads are of a different opinion, contending shippers win more rate challenges than they lose, and that if regulators want railroads to continue taking financial risks and invest in rail infrastructure, then STB actions should not impede their ability to generate revenue and satisfy investors.
Among pending shipper complaints to be decided in 2016 are whether the SAC method of determining rate reasonableness is appropriate for chemical shippers whose carloads move between multiple origins and destinations; whether and how to cap rail rates of revenue-adequate railroads without harming non-revenue-adequate railroads; and whether agricultural shippers unable to afford pursuing a case under the SAC method have meaningful access to an efficient alternative.
The STB also may rule on acceptable procedures for imposing fuel-cost surcharges amidst complaints they have recovered more than is justified or reasonable. Pending in federal court is an antitrust action alleging unlawful collusion in setting fuel surcharges. Complainants are seeking class action status, with the railroads’ exposure said to be in the billions of dollars.
The STB Reauthorization Act provides for barely enough additional revenue to cover the cost of two new board members and their staff. Thus, resources will be especially tested if one or more merger applications, which carry decision deadlines, are filed.
At the FRA, a notice of proposed rulemaking (NPRM) may be issued in 2016 requiring two-person train crews. Railroads say that PTC can make a second crew member redundant, that two-person crews can be less safe than single-engineer operation, and that short line railroads and Amtrak have long operated single-engineer trains with exceptional safety records. A final rule likely will be challenged in federal court, and Congress could pass legislation making such a rule moot. Major railroads currently operate collectively bargained two-person crews, and the issue could take years to play out.
PTC extension
A provision of the Surface Transportation Extension Act of 2015 delayed for three years, until Dec. 31, 2018—and as late as 2020 under certain circumstances—the deadline for PTC implementation on some 60,000 route-miles carrying toxic-by-inhalation (TIH) hazmat and all commuter and intercity trains. Technological challenges and delay by the Federal Communications Commission in approving aspects of PTC was the reason. (Amtrak, over its Northeast Corridor—far less complex than freight railroad networks—met the 2015 deadline, as did some commuter railroads on short stretches of track they own.) The FRA will monitor compliance with the new deadline.
FAST Act
Congress in 2015 also passed the Fixing America’s Surface Transportation (FAST) Act, with rail provisions affecting installation of electronically controlled pneumatic (ECP) brakes and tank car construction standards, both requiring regulatory action.
In response to a PHMSA rule requiring ECP brake installation on certain hazmat trains as early as 2021, Congress ordered an independent evaluation of the rule by the Government Accountability Office, and a second look by PHMSA of its rule following additional testing of ECP brakes by a National Academy of Sciences chosen independent evaluator. Railroads that have tested ECP brakes in their own operations say they have reliability problems, do not prevent derailments and provide only minimal safety enhancements compared with other technologies. Notably, the FRA—prior to the PHMSA rule—declined to require their installation, finding safety benefits do not outweigh the costs.
The FAST Act also expands to all tank cars used in transporting crude oil and other hazmat liquids—and regardless of train consist—a May 2015 PHMSA final rule on new construction and retrofit specifications to enhance tank car safety. This creates a more comprehensive tank car rule from what it was. Some 40,000 additional tank cars are affected, and a new timeline applies to a phaseout of non-compliant tank cars.
AMTRAK
The FAST Act marks the first time since Amtrak’s creation that it has been included in a surface transportation act and its funding cycle. The law orders changes to Amtrak’s financial structure such as creating distinct accounts for its Northeast Corridor and national network, and requires cost-accounting improvements; increases the size of the Amtrak board of directors from nine to 10 (the new member must be confirmed by the Senate); and increases Amtrak’s liability cap from $200 million to $295 million for the Philadelphia accident last May. The Secretary of Transportation will set future liability caps.
Amtrak also has pending at the STB two rulemakings—a final rule on the definition of on-time performance when freight railroads host and dispatch on their track Amtrak passenger trains; and a policy statement on how the STB will evaluate Amtrak’s statutory right to passenger train preference when operating on freight railroad track.
As for the level of Amtrak’s fiscal year 2017 appropriation, expect it to be problematic, as always.