Aug 29, 2018

Reform Opportunities for the Surface Transportation Board

Patrick McLaughlin Senior Research Fellow

After the Senate ended its work week last night, focus is quickly shifting to a host of pressing matters, including the confirmation of Supreme Court nominee Brett Kavanaugh and government funding.

Yet most observers still expect the Senate to confirm a number of lingering nominees to posts at federal agencies. This includes vacancies at the Surface Transportation Board (STB), a five-seat commission with just two positions currently filled. As the spotlight falls on STB and its nominees (all of whom have already cleared the Senate Commerce Committee) we should consider some of the potential reforms that could lead to improvements in regulation at this independent agency.

As I described recently in The Hill:

"One reform that enjoys some bipartisan support is a requirement that independent regulatory agencies conduct a Regulatory Impact Analysis (RIA) before issuing major regulations. Independent agencies would incorporate a few basic economic principles into their decisionmaking process, helping them focus on actions that are more likely to create positive economic outcomes while avoiding misguided actions that could cause more harm than good…

"An RIA provides crucial information necessary to make decisions about whether and how to regulate. A complete RIA includes evidence about the nature and cause of the problem regulators seek to solve, alternative possible solutions and the benefits and costs of these alternatives.

"However, the executive order that requires executive branch agencies to perform RIAs for significant rulemakings does not apply to the independent regulatory agencies, including the STB (although legal scholar C. Boyden Gray argues that the RIA requirements could and should be extended by executive order to independent agencies)."

I also highlighted the recently proposed rule on “competitive switching” as an example of how RIAs might improve STB regulation:

"In January [2017], the STB finished taking public comments on a proposed regulation defining when a shipper can require a railroad to switch the cars carrying the shipper’s freight to another, competing railroad without physical access to the shipper…

"The proposed changes would adopt expansive and open-ended criteria that give the STB wide discretion to decide when to impose competitive switching in response to a shipper’s request.

"The board could impose competitive shipping if it is “practicable and in the public interest” — allowing it to consider virtually any factors — or “necessary to provide competitive rail service” — even if the railroad’s rates are reasonable and no anticompetitive abuse has occurred.

"Board member Ann Begeman noted in dissenting from much of the proposal that the STB was essentially in the dark about the likely effects: “I firmly believe that what we do here, ultimately, could cause greater harm than good. Or, it may result in nothing more than an empty promise to prospective applicants.

"That kind of uncertainty should alarm both shippers and railroads. A high-quality RIA would have addressed those concerns and examined alternatives that could be more effective or less burdensome."

For example:

"The most direct and obvious solution would be to provide more specific and direct guidance on what constitutes evidence of anticompetitive abuse. This would give shippers a clearer idea of the kind of evidence needed to win a case.

"It could also help deter anticompetitive conduct by warning railroads about the kinds of behavior regulators believe is questionable.

"Another solution was proposed in 2015 by a Transportation Research Board committee (on which my colleague Jerry Ellig served). The committee suggested that the STB develop a screening model to identify whether a shipper appears to be paying unusually high rates, and then allow a shipper paying unusually high rates to take its case to an arbitrator. The shipper could ask for competitive switching as a remedy."

Another issue created by the lack of RIA is the absence of a consistently defined problem and of convincing evidence that the problem exists:

"...current policy defines the problem as anticompetitive abuse and requires shippers to furnish evidence of this abuse to qualify for competitive switching.

"The new STB proposal defines the problem differently; it simply claims that proving anticompetitive abuse is too difficult. Its sole evidence is that there have been very few competitive switching cases brought before regulators since the current policy was adopted in 1985, and shippers have never won a case. But these facts are not sufficient proof.

"Perhaps it is too difficult to prove anticompetitive abuse under current policy — or perhaps little anticompetitive abuse has occurred. A thorough RIA would have systematically examined that question to determine whether there is a major problem."

Because these components of RIAs are essential parts of a good decision making process, I come to a simple conclusion: “regulatory impact analysis is not just a good idea; it should be the law.”

Photo credit: Dirk Lammers/AP/Shutterstock

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