Interstate Commerce Commission
Surface Transportation Board

Son of the ICC

by William E. Thoms

The nation's oldest regulatory agency, the Interstate Commerce Commission, shut its doors for good on New Year's Eve 1995. At one time the ICC controlled every aspect of the management and operation of railways; for the last 15 years of its existence (due largely to provisions of the Staggers Act of 1980), railroad regulation was relatively relaxed.

Still, in his 1995 State of the Union speech, President Clinton cited the ICC as an agency that should be done away with. Since most motor-carrier regulation had gone by the boards, and railroad tariffs had largely given way to contracts, much of the rationale for the agency's existence had passed into the dustbin of history. In the end, the agency had few defenders.

But deregulation always leaves some loose ends. Elimination of tariff requirements still left a number of ICC functions that, unless oversight was to be removed altogether, needed a place to lodge. The same law that "sunsetted" the ICC established a new agency, the Surface Transportation Board, within the Department of Transportation.

The STB (or "Surf Board," as it is known by insiders) is a three-member panel whose first appointees were the last ICC commissioners. During 1996, the board was housed in the old ICC building at 12th and Constitution, but that was to be vacated, and the treasured ICC library was shipped to the University of Denver.

The birth of the STB was by no means automatic. Deregulation of an industry usually means there are no barriers to entry and exit, and consolidations are subject only to antitrust regulation. This is what happened with aviation: one day there was a Civil Aeronautics Board, and when that went away, nothing took its place. But once again, the specter of massive abandonments haunted our lawmakers and (with a push from Union Pacific's Drew Lewis, who feared what antitrust might do to his proposed UP-SP merger if merger oversight were to go to the Department of Justice), the dying ICC was supplanted by a "Son of ICC" to take care of what loose ends remained of rail and motor-carrier regulation.

The Surf Board has met its Andy Warhol 15 minutes of fame, and then some, first with the approval of the Union Pacific takeover of SP, and, more currently, with the plan by CSX and Norfolk Southern to acquire and divide up Conrail. Mergers, consolidations, and trackage rights are the principal responsibilities of the STB. The Conrail battle has given this agency the most visibility, although its first action in early 1996 was the obscure granting of trackage rights of New York short line Livonia, Avon & Lakeville to serve the Rochester area.

But more to the point, whatever functions were left with the Interstate Commerce Commission at its demise have been transferred to the new board, and all statutory references to the ICC now refer to the STB. Entry and exit regulation for railroads still require government approval, and the Surf Board is the place to look. Although the new board retains some residual functions over trucks, barges, and pipelines that are not exercised directly by the Secretary of Transportation, the main concern of the agency is our nation's railroads.

Tariff regulation, originally the main rationale for the ICC, is no more, nor is much rate regulation whatsoever. In fall 1996, approximately 100 STB employees moved to new digs at 1925 K Street N.W. Sixty ICC motor carrier authorities went to a new Section of Licensing in the Federal Highway Administration.

The new STB has, at least on paper, a broad grant of authority over transportation by rail common carriers, both interstate and intrastate. Private carriers (such as industrial railroads) are not subject to the board's jurisdiction. The whole tariff system has been junked, but there is a new binding quotation requirement: a railroad must give its rates in writing to a shipper, and be bound by the writing. Contracts need not be filed with the STB, and filing of contract summaries is required only with respect to agricultural products. Railroads are'required to operate as a national network, maintaining reasonable through routes.

If you want to start a new railroad, you have to get an STB certificate. Not many folks are interested in laying track nowadays, but the board must approve a request unless it finds it contrary to the public interest (a reversal of the old test). Line sales, by which a Class 1 railroad spins off a branch or secondary main, fall within the STB's jurisdiction. If the public convenience and necessity, permit, the transaction will be approved.

With respect to the always awkward issue of labor protection, the tee of six years' severance benefit (unique to the rail industry) if the purchaser of the line is another Class 1 railroad (annual revenues of $255.9 million or more). If the line is going to be transferred to a Class 2 carrier ($20.5 million-$255.8 million), only one year's labor protection is required. No labor protection benefits accrue if the buyer is a Class 3 railroad (less than $20.5 million) or a non-carrier; the STB's powers overrule any collective bargaining agreement reached under the provisions of the Railway Labor Act.

The new board also inherits the ICC's authority to approve or reject abandonments under the "public convenience and necessity" standard. The board may require the abandoning carrier to sell the line for other public purposes (hiking trail, transmission lines, transit facilities) if continued rail use is not required. The STB may also require the railroad to accept financial assistance for the continuing operation of the line or sell it to another financially responsible railroad. Unlike motor carriers and airlines, there is no freewheeling freedom to enter and leave markets. This remaining protection reflects the consequences of abandonment and the unlikelihood of resurrection of a line once the tracks have been ripped up and the property has reverted to underlying landowners.

The new regulatory regime in the U.S. carries forward many of the features of government approval that apply to entry, exit, and merger of railroads. The resulting regulatory framework is more extensive than that in Canada, Britain, and other countries which , have privatized their railways.

The ICC Termination Act, which established the Surf Board, also rejected the idea that railroads were like any other business and could be handled by antitrust regulation. Changes must meet advance approval, which is why the plan to break up Conrail is bound to keep the Surf Board and the whole concept of railroad regulation in the public eye as we enter the new millennium. (William E. Thoms practices law in Denver. This is his 31st TRAINS byline.)

ICC Sunset -- After months of political wrangling in Congress and a threatened veto, President Clinton signed the ICC Termination Act of 1995 on Dec. 29--two days before funding for the Interstate Commerce Commission was set to run out. This brought an end to the nation's oldest regulatory body on Dec. 31. The House and the Senate had approved the bill a week earlier in separate votes, after considerable argument over labor issues. The president had hoped for greater deregulation of the transportation industry and stated this bill fell short of his intended goals.

During its 108 years of existence, the ICC had been responsible for the economic regulation of rail; since 1935, it had also regulated both domestic water and motor carriers. Now the commission has been effectively abolished, and its remaining responsibilities have been transferred to the Surface Transportation Board, a new arm of the Department of Transportation. This shift is wel come news for Union Pacific and Southern Pacific because it ensures their merger proceeding will progress as scheduled before the STB, rather than the Justice Department. The potential of Justice Department review was a significant concern for UP and SP; many felt the Justice Department, by applying its standard anti-trust criteria, would view the consolidation unfavorably.

STB's responsibilities include the review of rail mergers, construction, abandonments and trackage rights, rate undercharge issues, and reasonable-rate determination. The STB also handles limited rate regulation issues under the standards set by the Staggers Act of 1980.

As under ICC jurisdiction, a basic "public interest" standard has been retained for mergers and consolidations. However, the STB has been given a new time limit of 15 months for reviewing Class I rail mergers, rather than the 31 months previously allowed by the ICC. Procedures for the review of rail abandonment applications have been streamlined, while public convenience and service necessity standards have been retained. One area of change is the broadening of the public interest standard to encompass the "national rail system" rather than just the affected region, as was the case with the ICC. The STB has the power to require merged railroads to divest paralleling routes or grant trackage rights to competing railroads. These changes are in response to increasing concerns about the effects of recent rail mergers, presumably Burlington Northern Santa Fe and UP-SP.

At press time, the ICC's published procedural schedule for review of the proposed UP-SP merger had not changed.