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Why Is the Government Still Regulating the Railroads?

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Donald Trump recently nominated two new members for Republican seats on the Surface Transportation Board (STB): Patrick Fuchs of Wisconsin and Michelle A. Schultz of Pennsylvania.

Fuchs is a senior Senate Commerce Committee staffer who “has participated in the drafting and passage of five bills directly affecting freight and passenger railroads.” He was previously “a policy analyst with the White House Office of Management and Budget, a State Department Presidential Management Fellow serving in The Hague, Netherlands, and a research assistant at the National Center for Freight and Infrastructure Research and Education.”

Schultz has been the deputy general counsel for the Southeastern Pennsylvania Transportation Authority (SEPTA) since 2014. There she focuses primarily on “procurement, major capital projects and commuter-rail regulation.” She was previously “an associate with the Philadelphia-based law firm of White and Williams, dealing with bankruptcy and commercial litigation, and a law clerk with the U.S. Bankruptcy Court for the Eastern District of Pennsylvania.”

The Board is authorized to have five members, but there can be no more than three members from a single political party. The party in control of the White House earns the right to have a majority of STB members. Board members are appointed by the president and confirmed by the Senate, each with a five-year term of office. A person can serve only two terms on the STB. The president designates a chairman from among the board members. The Surface Transportation Board Reauthorization Act of 2015 expanded the board from three to five members, but the two additional seats have never been filled. There is also an unfilled Democratic seat that has been vacant since September 2017. That means that there are at this time only two members of the STB: Democrat Deb Miller, the vice chairman, and Republican Ann Begeman, who was recently designated chairman by Trump after having served as acting chairman since January 2017.

Outside of those who work in the railroad industry and those of us who write about government inefficiency, regulation, and corruption, few Americans have ever heard of the STB, and even fewer of the agency’s board members.

The STB “is an independent adjudicatory and economic-regulatory agency charged by Congress with resolving railroad rate and service disputes and reviewing proposed railroad mergers.” The agency

has jurisdiction over railroad rate and service issues and rail restructuring transactions (mergers, line sales, line construction, and line abandonments); certain trucking company, moving van, and non-contiguous ocean shipping company rate matters; certain intercity passenger bus company structure, financial, and operational matters; and rates and services of certain pipelines not regulated by the Federal Energy Regulatory Commission. The agency has authority to investigate rail service matters of regional and national significance.

The STB is the successor to the Interstate Commerce Commission (ICC), which operated from 1887 to 1995. It began operation on January 1, 1996, after being created by the Interstate Commerce Commission Termination Act of 1995. The STB was administratively aligned with the U.S. Department of Transportation from 1996 to December 2015. It became an independent federal agency (like the EPA, FCC, and FTC) with the passage of the STB Reauthorization Act of 2015. According to the STB’s annual report for fiscal year 2017, its congressional appropriation was $35,750,000 and it employed an average of about 130 people.

The Interstate Commerce Act of 1887 created the ICC to regulate the railroads. It established the right of Congress to regulate private corporations engaged in interstate commerce. The ICC was the first independent federal agency and the railroads were the first industry subject to federal regulation. The ICC later regulated most other forms of surface transportation involved in interstate commerce, including trucking, bus lines, and even pipelines.

In the late 1970s and early 1980s, during the presidency of Jimmy Carter, Congress passed several deregulation measures that curtailed the power of the ICC, especially the Staggers Rail Act of 1980. According to the Federal Railroad Administration (another federal railroad regulatory agency),

Prior to 1980, economic regulation prevented railroads from any flexibility in pricing needed to meet both intra as well as intermodal competition. Regulation also prohibited carriers from restructuring their systems, including abandoning redundant and light density lines, a necessity for controlling cost. Added to these problems was the industry’s inability to cover inflation due to the regulatory time lag in rate adjustments. As a consequence, nine carriers were bankrupt, the industry had a low return on investment and was unable to raise capital, and faced a steady decline in market share.

But after the passage of the Staggers Rail Act “many regulatory restraints on the railroad industry were removed, providing the industry increased flexibility to adjust their rates and tailor services to meet shipper needs and their own revenue requirements.” As a result of deregulation, “The railroad industry’s financial health has improved significantly, service to rail customers has improved while overall rates have decreased, and rail safety, regardless of the measure, has improved.”

So why is the government still regulating the railroads?

Why was the STB created when the ICC was abolished? Why is it that roughly 20 percent of rail traffic is still regulated? Why is it that only half of all railroad traffic on a revenue basis is exempt from regulation?

The airlines were once regulated even more strictly than the railroads. The defunct federal Civil Aeronautics Board (CAB) regulated all domestic interstate airline flights, actually setting airline fares, routes, and schedules. But after the CAB was finally abolished beginning in 1985, prices fell, airlines expanded their routes and modernized their equipment, and the volume of air travel dramatically increased.

So why is the government still regulating the railroads?

It is unconstitutional and an illegitimate purpose of government to regulate the railroads. In a free society, the only possible legitimate functions of government are defense, judicial, and policing activities. There is no justification for any government action beyond keeping the peace, prosecuting and punishing those who initiate violence against person or property, providing a forum for dispute resolution, and constraining those who would attempt to interfere with people’s peaceful actions. But what about the Commerce Clause in Article I, Section 8, Paragraph 3 of the Constitution?

The Commerce Clause says that Congress has the power “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” It is the most abused clause in the Constitution. It has been used by the federal government to increase its power over the states and their citizens and to decrease the power of the states and their citizens. It has been used by the federal government to force farmers to destroy crops and pay a fine for growing “too much” wheat (Wickard v. Filburn) and to criminalize marijuana for medical use even where states approve its use (Gonzales v. Raich).

Contrary to the federal government, James Madison — the father of the Constitution — had a different opinion of the Commerce Clause. As he explained in a letter in 1829, the Commerce Clause

grew out of the abuse of the power by the importing States in taxing the non-importing, and was intended as a negative and preventive provision against injustice among the States themselves, rather than as a power to be used for the positive purposes of the General Government.

And even if Congress has the power to do something it doesn’t follow that it should exercise it.

There is absolutely no reason why there cannot exist a genuinely free market in freight and passenger rail service. That means that the STB — if it is to exist — should be a purely private entity. And it also means that the assets of the federal government’s National Railroad Passenger Corporation (Amtrak) — which costs taxpayers more than a billion dollars a year in subsidies — should be auctioned off to the highest bidder and all passenger rail service made private again.