STB issues proposed rule change for railroad paper barriers

The Department of Transportation’s Surface Transportation Board (STB) last week announced it is requesting the disclosure of additional information in regards to a new rule regarding interchange commitments underlying a lease or rail-line sale filed with the STB, also known as paper barriers.

The STB defines paper barriers as “a contractual clause limiting the ability or incentive of the purchaser or lessee of a rail line to interchange traffic with railroads other than the line’s seller or lessor.”

It explained that STB rules currently require that a party seeking Board authority to sell or lease a line disclose an interchange commitment in the transaction. The Board’s proposed rule would require a party to include with its initial filing additional information on any interchange commitment’s impact on shippers and on the purchaser or lessee railroad.

STB officials said that as a result of both the Railroad Revitalization and Regulatory Reform Act of 1976 and the Staggers Rail Act of 1980, it has become easier for rail carriers to abandon, sell, or lease a line or part of a line by utilizing exemptions from regulatory procedures, adding that this flexibility has helped to revitalize the railroad industry. And it said that the issue of interchange commitments—or paper barriers—were often coming up in regards to short line railroads. The STB said that the existence of these restrictions in turn encouraged large railroads to sell or lease lighter-density lines at reduced prices because they were guaranteed to retain a portion of the future revenues from the traffic on those lines.

And STB also explained that these paper barrier commitments took varying forms, including lease payment credits for cars interchanged with the seller or lessor carriers, monetary penalties for traffic interchanged with another railroad, or a total ban on interchange with any carrier other than the seller or lessor carrier, with several of these provisions not having fixed termination dates.

Some of the major components of the proposed rule include:
-a list of shippers that currently use or have used the line in question within the last two years;
-the number of carloads those shippers originated or terminated;
-a certification that the railroad has provided notice of the proposed transaction and interchange commitment
-a list of third party railroads that could physically interchange with the line sought to be acquired or leased; and
-an estimate of the difference between the sale or lease price with and without the interchange commitment, among others.

The National Industrial Transportation League said that according to its counsel, the additional disclosure and notice requirements would enable affected shippers to object to any proposed transaction before the transaction is effective under the STB’s authority, and it would also facilitate changes to paper barriers that go into effect under the new rules.

The STB said that comments for this proposed rule are due by December 3 and reply comments are due by January 2.

In a January 2011 interview with LM, CURE (Consumers United for Rail Equity) Executive Counsel Bob Szabo said that the two main problems with the current lack of antitrust enforcement are paper barriers—or contractual obligations incurred when short lines acquire lines from the larger, connecting carriers—and other bottlenecks that he said gives railroads an unfair and anticompetitive advantage over shippers on rates. If antitrust laws currently applied to railroads and the STB did not allow it to occur, he said these would be viewed as illegal transactions.

Even if antitrust or paper barrier exemptions for the railroad industry were to be removed or altered, there are some that say that doing so would not necessarily make things better for shippers due to myriad factors.

According to William J. Rennicke, director of Oliver Wyman, a Boston-based management consultancy, one factor is that U.S. railroad freight rates are among the lowest in the world. Coupled with that, said Rennicke, is that the regulatory risk this measure may bring would drive private investors away from the railroad industry.

“The Department of Transportation is predicting an 88 percent increase in railroad freight tonnage by 2035,” said Rennicke. “So, if you are going to have private capital come into an industry, investors want to invest in something where they are not going to be blindsided by changes in regulatory structure.”