There has been a growing tide of sentiment against regulatory overreach. This has culminated in President Trump’s recent executive order that seeks the repeal of regulations “that clearly exceeds the agency’s statutory authority or is otherwise unlawful.”[1]
To identify if an executive branch department or agency is exceeding its authority, a close look at the relevant statute must be undertaken. This type of analysis is provided in my current writing, “The Significance of ‘Adequate Revenues’ Under the Staggers Rail Act of 1980” (forthcoming, Transportation Law Journal).[2]
The writing focuses on what it means for freight railroads (“carriers”) to earn “adequate revenues” under the Act. This statutory focus on carriers earning adequate revenues was necessary given that carriers were far from earning such revenues when the Act became law in 1980 and had been under financial stress for decades prior to that time.
Forty-five years later, even though the Act has been credited for turning around the freight rail industry, there is still debate on how to define adequate revenues, how adequate revenues are to be calculated, whether the Act allows the Surface Transportation Board (“STB”) to put an upper bound on a carrier’s revenues, and how revenue adequacy impacts rate setting in market dominant situations. These are the issues addressed in my writing.
Adequate Revenues
Section 10704(a)(2) of the Act requires that the STB be proactive in making sure carriers earn “adequate revenues.”[3]These revenues must be sufficient to allow carriers to achieve a multitude of financial targets, including earning “a reasonable and economic profit or return (or both).”[4]However, earning adequate revenues to achieve various financial targets is not an end in itself. These revenues must also be used to create “the infrastructure and investment needed to meet the present and future demand for rail services” and “attract and retain capital in amounts adequate to provide a sound freight rail transportation system.”[5]
Calculation of Adequate Revenues
Section 10704(a)(3) directs the STB to annually identify which rail carriers are earning adequate revenues.[6] In its calculations, the STB must focus on all the financial targets and then connect those targets to the system-wide objectives.[7] This requires a solving of simultaneous equations. Not only is one solving for the revenues necessary to meet all the identified financial targets but also for the correct level of revenues required to achieve the two system-wide objectives.
The STB does not take a simultaneous equation approach or take into consideration the entire range of financial targets identified in Section 10704(a)(2) or the system-wide objectives.[8]The STB bases its determinations only on whether a railroad achieves a return on investment (“ROI”) equal to at least the current cost of capital (“COC”) for the railroad industry.[9]
This simplified approach only makes sense if it leads to approximating what the statute requires. It does not. Therefore, this calculation must not be considered a “permissible alternative”[10] for any type of regulatory use.
To properly make the calculations, the STB needs to establish a high-level team of in-house industry, rail transportation, economic, and financial analysts. The establishment of such a team is the only way the STB can become compliant with the Act. This will require the STB to set aside a sizable budget for the team’s establishment and its ongoing work.
Earning More than Adequate Revenues
Does the Act allow the STB to impose limits on earning greater than adequate revenues? The answer is no.
Consistent with the omitted-case canon is the major questions doctrine. This doctrine limits an agency’s power to act on issues of “economic and political significance” without clear authorization from Congress.[13] Common sense dictates that restrictions on the ability of carriers to earn more than adequate revenues would have a significant economic impact on carriers and on those persons and institutions who invest in and lend money to those companies. Such a revenue cap would also be politically significant. This is based on the ongoing political debate, recently fueled by President Trump’s executive order.
Having no upper bound on revenues is also consistent with Section 10709 of the Act, the operative section that allows carriers and shippers to enter into long-term contracts that cannot be reviewed by the STB.[14]Hypothetically, all freight rail rates could be established via contract. If so, then it is quite possible that one or more carriers could establish rates that would earn them more than adequate revenues.
Finally, under Section 10704(a)(2), the STB is obligated to be proactive in helping carriers earn adequate revenues.[15]For the STB to help carriers earn revenue levels to meet the financial targets and system-wide objectives, the STB’s approach must be to allow carriers to exceed those targets. The risk of falling short of these financial objectives becomes exponentially multiplied when the STB takes the position that the objectives are maximums to be targeted, not minimums. In sum, the statutory language requires us to understand the term “adequate revenues” as creating “a lower bound below which firms would eventually face insolvency.”[16]
Maximum Allowable Rates
While the Act creates the optimal conditions for a carrier and a shipper to establish reasonable rates through a negotiated contract, the entering into a contract is not required. Moreover, a shipper can subject a carrier’s offered rates to STB review and possible reduction if it can demonstrate “market dominance”—“an absence of effective competition from other rail carriers or modes of transportation for the transportation to which a rate applies.”[17]
The ability of a shipper to appeal a carrier’s offered rate gives rise to an issue that has yet to be resolved—can the successful earning of adequate revenues be used as a factor in constraining or reducing the STB’s rate determination in market dominant situations? The answer is no.
Section 10707 provides the general outline for the STB’s determination of a reasonable maximum rate under market dominance.[18] In sum, if the rate offered by a carrier is beyond a reasonable maximum, then it is subject to reduction by the STB.[19]
Notably, the rate setting framework presented in Section 10707 makes no mention of adequate revenues or Section 10704, the operative section on adequate revenues. Conversely, Section 10704 does not reference rate setting in market dominant situations or Section 10707. Therefore, there is no statutory link that provides the STB with authority to reduce a reasonable maximum rate just because a carrier is earning adequate revenues. Again, the omitted case canon provides a rationale for this lack of authority.[20]
The use of adequate revenues as a limiting or capping factor in the STB’s determination of a reasonable maximum in market dominant situations is beyond the STB’s statutory authority. This conclusion has significant implications for the STB. Currently, if a carrier is earning adequate revenues, then that information could be utilized in reducing the reasonable maximum rate. Because this approach lacks statutory authority, it needs to be eliminated.
Bernard S. Sharfman is a Research Fellow at the Law & Economics Center at George Mason University's Antonin Scalia Law School and a member of the Journal of Corporation Law's editorial advisory board.
We have previously determined, in Ex Parte No. 393, Standards for Railroad Revenue Adequacy, 364 I.C.C. 803 (1981), affirmed, Bessemer & Lake Erie R. Co. v. United States, 691 F. 2d 1104 (3d Cir. 1982), cert. denied, 103 S. Ct. 2473 (1982), that "adequate" revenues are those which provide a rate of return on net investment equal to the current cost of capital (i.e., the level of return available on alternative investments). This is the revenue level necessary for a railroad to compete equally with other firms for available financing in order to maintain, replace, modernize, and, where appropriate, expand its facilities and services. If railroads cannot earn the fair market rate of return, their ability both to retain existing investments and obtain new capital will be impaired, because both the existing and prospective funds could be invested elsewhere at a more attractive rate of return.
Interstate Commerce Commission, Coal Rate Guidelines, Nationwide, Ex Parte No. 347 (Sub-No. 1), 1985 ICC Lexis 254 (August 8, 1985) at 36-37.
[10]Bessemer & Lake Erie R. Co. v. United States, 691 F. 2d 1104, 1113 (3d Cir. 1982) (“While some other standard or combination of standards might also accomplish the overall objectives of the 4R and Staggers Acts, the choice among permissible alternatives is to be made by the agency to which rulemaking authority has been delegated, not by this court.”)
[11] Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts (West 2012) at 101.
[13]West Virginia v. EPA, 142 S. Ct. 2587, 2607–2608 (2022) (“[O]ur precedent teaches that there are ‘extraordinary cases’ that call for a different approach—cases in which the ‘history and the breadth of the authority that [the agency] has asserted,’ and the ‘economic and political significance’ of that assertion, provide a ‘reason to hesitate before concluding that Congress’ meant to confer such authority.”)
[16] Gerard J. McCullough, Constrained Market Pricing and Revenue Adequacy: Regulatory Implications for Shippers and Class I U.S. Freight Railroads, Staff Paper P15-5, University of Minnesota, Dept. of Applied Econ. at 28, http://ageconsearch.umn.edu/handle/207766.
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