Surface Transportation Board signals revival of heavy-handed freight rail regulation
Photo 26660691 © Thomas Vieth |


Surface Transportation Board signals revival of heavy-handed freight rail regulation

The STB should review the history of unintended consequences of railroad regulation and avoid repeating the mistakes of the past.

After decades of excessive economic regulation nearly destroyed the U.S. railroad industry, Congress responded by encouraging market mechanisms to replace regulators’ whims. Unfortunately, in a decision involving a large coal shipper and a major railroad, the Surface Transportation Board has attempted to expand its narrow power to police rail carriers’ common carrier obligations in a manner that undermines Congress’s preference for private contracting between carriers and their customers. In doing so, the Surface Transportation Board privileged one customer over its competitors and other rail shippers, which also contradicts congressional intent.

In U.S. and British common law, a common carrier is a company “that carries goods, people, or services for the benefit of the general public without discrimination.” Offered common carrier service rates, routings, and other terms must be made publicly available in advance of any service being provided, in contrast to private service contracts that are negotiated between carriers and customers on a case-by-case basis.

Until Congress partially deregulated the railroad industry in the 1970s and 1980s, one-size-fits-all common carrier service with government-prescribed rates was the only option for railroads and their customers. The Staggers Rail Act of 1980 broadly legalized rail contracts, under which carriers and customers could negotiate private agreements “to provide specified services under specified rates and conditions.”

While most customers now choose better-tailored rail service made available under contracts, common carrier service remains an option, especially for small shippers of low-value commodities. Congress also explicitly requires the Surface Transportation Board (STB) not to hold a railroad in violation of its common carrier obligations merely “because it fulfills its reasonable commitments under contracts … before responding to reasonable requests for [common carrier] service.”

A case before the STB raises questions about whether the agency is committed to heeding Congress’s direction on common carrier service and contracts. According to the STB’s public record, Navajo Transitional Energy Company (NTEC), the third-largest coal producer in the U.S., and BNSF Railway had been attempting to negotiate a long-term service contract to transport coal from NTEC’s Spring Creek Mine in Montana to Westshore Terminals’ export facility in British Columbia, Canada. These negotiations were ultimately unsuccessful.

In years prior, NTEC and its predecessor had long-term contracts with BNSF for these coal movements, but NTEC had recently failed to meet contractual volume minimums, which subsequently required NTEC to pay damages to BNSF.

After contractual negotiations failed in November 2022, NTEC requested common carrier service in lieu of a new contract. NTEC was not satisfied with the common carrier service it began receiving. BNSF argued it faced capacity limitations, especially from insufficient crew in the Pacific Northwest and train availability. In April 2023, NTEC requested from the STB either an emergency service order or preliminary injunction that would require BNSF to provide NTEC a minimum of 29 trains per month. NTEC also filed a related complaint alleging BNSF had violated its common carrier obligations.

On June 23, the STB issued a preliminary injunction in a 3-2 vote ordering BNSF to transport a minimum of 4.2 million tons of coal from the Spring Creek Mine to Westshore in 2023 (roughly 23 trains per month), as well as an additional million tons of coal “to the extent that additional train sets and crews are available to serve NTEC.” The STB majority found the preliminary injunction was necessary to prevent irreparable harm to NTEC.

One of the two STB board members to vote against granting NTEC’s preliminary injunction, Patrick Fuchs, issued a lengthy and pointed dissent. Fuchs argued the majority erred in numerous important respects, including:

  • NTEC failed to establish it would face irreparable harm if its injunction application was not granted. Because alleged economic losses are calculable and redressable, they cannot constitute irreparable harm. But even if economic losses are considered irreparable harm, “NTEC does not show its economic losses are certain, great, and imminent or beyond calculation and remedy.” Fuchs noted that NTEC had recently submitted damage calculations in a federal court case involving BNSF service levels.
  • The STB’s decision granting the preliminary injunction failed to establish that NTEC has a substantial likelihood of succeeding on the merits. The bolster its merits case, the STB majority relies heavily on a confidential draft contract to prove BNSF had sufficient capacity to move the ordered coal tonnage. The problem, Fuchs wrote, is that “capacity for a particular customer is a dynamic concept.” This is to say, contracts negotiated among customers across the rail network can impact a given customer’s capacity in a variety of ways over time: Contracts negotiated today can impact future contract negotiations, network investment decisions, and operational planning. Significantly, the draft contract the majority uses to justify its capacity claims included “a mechanism for BNSF satisfying the terms of the contract while moving less than NTEC nominates,” so interpreting proposed minimum and maximum service commitments as hard service capacity floors and ceilings is wrong.
  • The STB majority’s decision privileges NTEC above its competitors and risks harm to other rail customers. NTEC’s coal-shipper competitors—Arch Resources, the Crow Tribe, and Global Coal Sales Group—all cited BNSF’s ongoing capacity constraints and desire for additional rail service in their opposition to NTEC’s application. Fuchs argued that even if the STB did not intend to prioritize NTEC over its competitors, the uncertainty in the STB’s contingent order to supply additional capacity to NTEC when it is “available” may lead to an outcome where “BNSF—fearing another unjustified Board order that might be worse than other suboptimal actions—simply shifts capacity to NTEC, and away from other shippers, including NTEC’s competitors, to limit the damage of this case.”
  • With respect to the interaction between contracts and common carrier service, Fuchs argued the STB majority’s decision “undermin[es] incentives for carriers and shippers to use contracts as means to enhance business planning and communication,” which is contrary to Congress’s encouragement of private rail service contracting under the Staggers Act.

Fuchs and his fellow dissenting STB Board Member Michelle Schultz argued the Surface Transportation Board majority made a variety of faulty determinations that disregard the STB’s own precedent, federal court precedent, and Congress’ statutes.

On July 17, BNSF filed a petition for a partial stay of the preliminary injunction with the STB, specifically challenging the contingent part of the STB’s order that requires BNSF to transport an additional million tons of coal “to the extent that additional train sets and crews are available to serve NTEC.” The following week, BSNF filed a petition for review of the STB’s preliminary injunction with the U.S. Court of Appeals for the Fifth Circuit. On Aug. 14, the STB denied BNSF’s stay petition, with board members Fuchs and Schultz again dissenting. BNSF’s case in federal court against the STB remains pending.

In addition to these legal issues, the Surface Transportation Board’s decision lacks a grounding in the economics that led Congress, courts, and this STB majority’s predecessors to develop the legal framework within which the agency is supposed to operate.

The STB needs to recognize that major rail capacity expansions were enabled by the Staggers Act’s broad legalization of contracts. Rail economists Douglas W. Caves, Laurits R. Christensen, and Joseph A. Swanson wrote in 2010 that BNSF predecessor Burlington Northern’s expansion into the Powder River Basin coal country where NTEC’s Spring Creek Mine is located depended on the railroad’s “ability to contract privately with its shippers. … To be certain, it is those contracts that provided assurance that the capital expenditures would, through time, be made.”

The STB should also accept that the market freedom granted to rail carriers under the Staggers Act has allowed for technological progress, which had stagnated under heavy-handed regulation. Brookings Institution economist Clifford Winston argues that this failure to innovate not only contributed to railroads’ financial difficulties in the 1960s and ’70s, but it also worsened the service carriers provided their customers. “The combination of regulatory constraints on behavior and the lack of economic incentives deterred the industry from improving its operations and offering new services to shippers,” wrote Winston in a 2005 paper. “For example, shippers frequently voiced dissatisfaction with the unreliability of railroad service. When they would ask carriers for information about the location of a shipment and when it might arrive at its destination, carriers could not offer a satisfactory reply.”

The late regulatory economist Jerry Ellig made a similar point on partial freight rail deregulation and innovation in a 2017 essay. Contracts authorized by the Staggers Act facilitated lower rates for better service, as well as enabled then-new intermodal container and trailer service. This benefited not only shippers and consumers of rail transportation, but users of highways and consumers of products moved on highways through the expansion of “highway capacity by getting trucks off the road for most of the route.”

Current rail service problems are largely attributable to the fallout of the COVID-19 pandemic, which sent waves of logistics chaos up and down domestic and global supply chains. At the onset of the pandemic, many firms—including railroadscut their workforces while much of the world locked down and demand abruptly cratered. A large shift in consumption from services to durable and nondurable goods occurred shortly thereafter, while total consumption quickly rebounded to its prior trend in the U.S. due, in part, to generous government assistance that kept personal incomes high throughout the pandemic.

Rather than going out, people ordered in at record levels. Stimulus checks and general anxiety about the disease caused many to delay their return to the workforce, preventing sufficient staffing needed to address overwhelmed logistics hubs and spokes.

The railroad industry and the broader economy are now recovering from these supply and demand shocks, but challenges are expected to remain for some time. These unprecedented events and lingering uncertainty call for patience, restraint, and humility on the part of politicians and their regulators.

Unfortunately, these qualities appear to be lacking at the Surface Transportation Board. Rather than evaluating carrier decisions made in response to the sudden onset of an unforeseen global pandemic through the benefit of hindsight, the STB should review the history of unintended consequences of railroad regulation and avoid repeating the mistakes of the past.