Editor’s Note: This is another in our series of 100-year anniversary articles commemorating the founding of our Section just over a century ago in 1917.
April 24, 2019 Feature
A 100-Year Journey Along the Rails
By Timothy J. Strafford
A hundred years ago, a student of the law and regulation of railroads could have been excused for feeling rather confident that he or she had already seen it all. By 1919, American railroads had been subject to a wide range of regulation, from complete laissez-faire treatment of a new and emerging technology, robust safety and economic regulation by the Federal government, and complete nationalization and government control. Yet the last 100 years have continued to bring dramatic changes in the regulation of railroads reflecting changing national attitudes and policy preferences regarding the proper roles of federal and state government, the economics of network industries, and the function of competition in the marketplace.
A National Industry with National Regulation
The railroad industry first matured into a truly national network in the middle of the nineteenth century. Intercity rail connections were completed in the eastern United States in the 1840s, and Chicago was connected by rail to the East Coast and the Gulf of Mexico in the 1850s. The importance of the railroads in the Civil War has been thoroughly explored elsewhere and is far beyond the scope of this article. By 1868, passengers could travel from New York to Chicago on Cornelius Vanderbilt’s New York Central Railroad without changing trains and in a mere 24 hours. The iconic meeting of the Union Pacific and Central Pacific and the driving of the golden spike in Promontory, Utah, 150 years ago on May 10, 1869, marked the initiation of truly transcontinental rail service.1
Reaction to perceived railroad market power led to political activity in the second half of the nineteenth century. Groups such as the National Grange of the Patrons of Husbandry actively and loudly sought regulation of the railroads, and the growing economic influence of railroads did not go unnoticed by Congress. Between 1868 and 1886, more than 150 bills and resolutions were introduced by Congress, touching on various aspects of railway operation and control.2 Similarly, the first Congressional resolution regarding railroad safety dates back to 1871.3 State legislatures also focused on railroads in this period with a patchwork of economic and safety laws.4
The Act to Regulate Commerce of 1887 was the first comprehensive regulation of an industry in the United States and created the first independent national regulatory body, the Interstate Commerce Commission (“ICC”). The Act applied to common carriers engaged in the interstate transportation of persons or property wholly by railroad, or partly by railroad and partly by water when both were used under a common control, management, or arrangement for continuous shipment. The Act focused on economic regulation and required “reasonable and just” railroad rates, but it did not authorize the ICC to set rates. The Act also required publication of railroad shipping rates and prohibited undue discrimination among short-haul and long-haul rates. Later referred to as the Interstate Commerce Act, the 1887 law serves as the sturdy trunk of most of the American regulatory family tree in industries such as telecommunications, electricity, and energy transportation.
After enactment of the Interstate Commerce Act, in response to a high casualty rate among railroad workers, Congress soon turned its attention to rail safety and enacted the first national railroad safety legislation, the Federal Safety Appliance Standards Act, in 1893. Initially, the law required rail cars to be equipped with automatic couplers so that employees would not need to go between cars to complete coupling operations. The law’s coverage was soon expanded to empower the ICC to enforce requirements on other rail car components. Two other federal safety laws, the Hours of Service Act and the Boiler Inspection Act, soon followed, focusing, respectively, on the number of consecutive and total hours certain railroad employees could work, and locomotive boilers and eventually other locomotive components.5
100 Years Ago
A hundred years ago, the nation was embroiled in the First World War, and the rail regulatory scene was markedly different than today. On January 1, 1918, the federal government took over the nation’s railroads, citing a wartime necessity for a unified transportation authority. Interestingly, the ICC continued its regulatory work during federal ownership, though it did not find any rates set by the President to be unreasonable, and many of the restrictions on routing that had been imposed on private railroads were eased for government-provided service. As an aside, the Standard Time Act of 1918 provided for the establishment of time zones and authorized the Commission to prescribe the limits of such zones, presaging several decades to come of expanding jurisdiction of the ICC.6
After the War, the Transportation Act of 1920 terminated federal control, established mechanisms for resolving disputes between carriers and employees and established the Railroad Labor Board, and renamed the Act to Regulate Commerce to the Interstate Commerce Act and made amendments to it. Labor unrest had been one of the factors contributing to nationalization in 1918. Upon return of the railroads to the private sector, Congress passed the Railroad Labor Act (“RLA”) in 1926. The RLA was the product of negotiations between the major railroads and their employees’ unions and was built around boards of adjustment, established by the parties, to resolve labor disputes, with a government-appointed Board of Mediation in place to resolve disputes that could not be settled. The RLA promoted voluntary arbitration as the best method for resolving those disputes that the Board of Mediation could not settle. Congress strengthened the procedures in the 1934 amendments to the Act, which created a procedure for resolving whether a union had the support of the majority of employees in a particular “craft or class,” while turning the Board of Mediation into a permanent agency, the National Mediation Board, with broader powers. Congress extended the RLA to cover airline employees in 1936, and the RLA continues to cover them today.
After nationalization, railroads were left in poor financial condition with a large amount of deferred maintenance, and Congress turned to regulation by the ICC as the tool it would use to attempt to revitalize the industry. The Transportation Act of 1920 vested great authority in the ICC over every aspect of railroad management, including entry and exit licensing, consolidation, rates, routing, and other service parameters. The Transportation Act of 1920 also recognized that many of the newly reprivatized railroads would not be financially viable, and it tasked the ICC with considering a plan for the consolidation of the railway properties into a limited number of systems.
But the railroads struggled under heavy regulation and the effects of the Great Depression. The Emergency Railroad Transportation Act of 1933 created an office of Federal Coordinator of Transportation, which was directed to divide the lines of the carriers into three groups, an eastern group, a southern group, and a western group, and it was authorized to make such changes or subdivisions in the groups from time to time as it deemed necessary or desirable. Regional coordinating committees were created for each group.
During the 1930s, Congress built off the ICC model and created the alphabet soup of the modern administrative state: the Federal Power Commission, Federal Communications Commission, Securities and Exchange Commission, National Labor Relations Board, and Civil Aeronautic Authority. The ICC also began regulating motor carriers after passage of the Motor Carrier Act of 1935 and did so in some capacity until 1995, when the Commission was sunsetted.
The Transportation Act of 1940 contained a new National Transportation Policy that directed the ICC to “provide for fair and impartial regulation of all modes of transportation subject to the provisions of the Act, so administered to recognize and preserve the inherent advantages of each.” The Transportation Act of 1940 also extended the ICC’s jurisdiction to all domestic water carriers.
The common thread running through the regulation of railroads in the interwar years and through the 1970s was a focus on strengthening weak carriers, often through collective action. While odd relative to the modern regulatory lens that views regulation as a means to preserve competition rather than competitors, regulation of railroads by the ICC often focused on the weakest of competitors, with poor results.7
The post-World War II years are generally regarded as strong ones for the U.S economy, but the railroad industry continued to struggle well into the mid-1950s. President Eisenhower appointed the Weeks Committee to examine the health of the industry, and it concluded that transportation in the United States was suffering from too much regulation and that legislation should be enacted to allow carriers more freedom to set rates and act competitively.8 It would take dramatic events and nearly two decades for Congress to fully heed that call.
Rail Safety Regulation and the FRA
In the interim, regulation of rail safety shifted to the Federal Railroad Administration (“FRA”) when Congress established the Department of Transportation Act in 1966. FRA was the consolidated successor to agencies previously housed in the Departments of Commerce and Interior and the Interstate Commerce Commission. FRA inherited responsibilities from the Bureau of Railroad Safety and Service of the ICC, the Office of High Speed Ground Transportation of the Office of the Under Secretary for Transportation of the Department of Commerce, and the Department of Interior.
Congress soon passed the Rail Safety Act of 1970 with the stated purpose to “promote safety in all areas of railroad operations and to reduce railroad related accidents and to reduce deaths and injuries to persons and to reduce damage to property caused by accidents involving any carrier of hazardous materials.”9 The creation of FRA as an expert body on rail safety issues was thought by some at the time to alleviate the need for Congress to legislate in the area. In practice, however, Congress has passed specific rail safety legislation frequently, doing so in 1974, 1976, 1978, 1980, 1982, 1988, 1992, and 2008.10
The most significant piece of rail safety legislation in recent years was the Rail Safety Improvement Act of 2008, which originally called for passenger railroads and Class I freight railroads to install positive train control (“PTC”) by the end of 2015 on mainlines used to transport passengers or toxic-by-inhalation materials. PTC describes technologies designed to automatically stop a train before certain accidents caused by human error occur. Specifically, PTC as mandated by Congress must be designed to prevent train-to-train collisions, derailments caused by excessive speed, unauthorized incursions by trains onto sections of track where maintenance activities are taking place, and the movement of a train through a track switch left in the wrong position. PTC is not an off-the-shelf technology for railroads to implement. To date, railroads have spent more than $10 billion in private capital to develop and install PTC. In October 2015, the statutory deadline for PTC installation was extended to the end of 2018, with further extensions available up to the end of 2020 to allow time for railroads to adequately test their systems.
A PTC system consists of three main elements: (1) an onboard or locomotive system monitors a train’s position and speed and activates brakes as necessary to enforce speed restrictions and prevent unauthorized train movements; (2) a wayside system monitors railroad track signals, switches, and track circuits to communicate data on this local infrastructure needed to permit the onboard system to authorize movement of a locomotive; and (3) a back office server stores all information related to the rail network and trains operating across it (e.g., speed restrictions, movement authorities, train compositions, etc.) and transmits this information to individual locomotive onboard enforcement systems. PTC must also be interoperable over all of the railroad companies that comprise the national rail network.11
Economic Deregulation and the Railroad Renaissance
On June 21, 1970, the Pennsylvania Central Railroad filed for bankruptcy protection, shocking the nation. At the time, it was largest corporate bankruptcy in history despite the fact that there had been little public indication that it was in trouble financially. The Penn Central bankruptcy was not an isolated event. During the 1970s, virtually every major railroad in the Northeast (including Penn Central), and several major Midwestern railroads filed for bankruptcy. More than 20 percent of the nation’s rail route-miles were on railroads operating under bankruptcy protection.
As inflation rose during the 1960s, the ICC granted rate increases infrequently and only after protracted administrative proceedings. Traffic migrated from railroads to trucks during this period. The combination of the publicly funded interstate highway system, competition from trucks, and heavy-handed regulation by the ICC handicapped the railroads for decades. By 1978, the rail share of inter-city freight had fallen to 35 percent, down 75 percent from the 1920s. Between 1970 and 1979, the rail industry’s return on net investment never exceeded 2.9 percent and reached a low of 1.2 percent. The average rate of return had been falling for decades: it was 4.1 percent in the 1940s, 3.7 percent in the 1950s, 2.8 percent in 1960s, and 2.0 percent in the 1970s.12
These low returns meant that railroads lacked capital to maintain their infrastructure. In 1976, over 47,000 route-miles had to be operated at reduced speeds because of track conditions. Deferred maintenance was in the billions of dollars and the railroads experienced “standing derailments”—rail cars at rest simply fell off the track due to poor maintenance. Congress faced a stark choice: nationalization or deregulation.
The 1970s were marked by three significant deregulatory pieces of legislation. First, Congress passed the Rail Passenger Service Act of 1970, which created the National Railroad Passenger Corporation (“Amtrak”) and relieved the railroads of the obligation to provide passenger service. The second was the Regional Railroad Reorganization Act of 1973, often referred to as the 3-R Act, which authorized the federal government to purchase bankrupt rail assets and create the Consolidated Rail Corporation, or Conrail. Third was the Railroad Revitalization and Regulatory Reform Act of 1976, often referred to as the 4-R Act. The 4-R Act directed the ICC to assist carriers in earning adequate revenues, allowed pricing freedoms, eliminated minimum rate regulation, and limited maximum rate regulation to instances where the carrier was found to have market dominance over the traffic at issue.13
More was needed, though. As the U.S. Department of Transportation noted in 1978, “The current system of railroad regulation . . . is a hodgepodge of inconsistent and often anachronistic regulations that no longer correspond to the economic condition of the railroads, the nature of intermodal competition, or the often-conflicting needs of shippers, consumers, and taxpayers.”14 Two years later, Congress continued deregulation. In the Staggers Rail Act of 1980, Congress recognized that railroads operate in competitive markets but that the existing regulatory framework prevented railroads from earning adequate revenues and competing effectively with other modes of transportation. Staggers allowed railroads to price competing routes and services differently to reflect market demand; allowed confidential transportation contracts; abolished collective rate making; expanded the ICC’s authority to exempt traffic from regulation; streamlined exit licensing for unprofitable lines; and, in the limited instances where the ICC retained authority over rail rates, directed the ICC to take into account the adequacy of railroad revenues to attract capital and invest in infrastructure in judging whether or not those rates were reasonable.
The effects of deregulation were overwhelmingly positive for railroads, their customers, and the public at large. Since 1980, average rail rates (defined as average inflation-adjusted rail revenue per ton-mile) have declined over 40 percent, railroad productivity has skyrocketed, and accidents have declined sharply. Conrail became profitable again, was privatized, and was sold and split among two other railroads.15 Since the Staggers Act, the freight railroads have spent close to $700 billion of their own funds and funneled it back into their privately owned networks.
The Era of Big Government Is Over
Railroad deregulation occurred during a period of broad bipartisan consensus that government should not intervene in the marketplace absent a market failure. Everyone recalls that President Clinton famously declared in his 1996 State of the Union speech that the era of big government was over. Perhaps fewer people recall that he also made a similar declaration a year earlier. In his 1995 State of the Union speech, President Clinton announced,
There’s going to be a second round of reinventing Government. We propose to cut $130 billion in spending by shrinking departments, extending our freeze on domestic spending, cutting 60 public housing programs down to three, getting rid of over 100 programs we do not need, like the Interstate Commerce Commission and the Helium Reserve Program. And we’re working on getting rid of unnecessary regulations and making them more sensible. The programs and regulations that have outlived their usefulness should go. We have to cut yesterday’s Government to help solve tomorrow’s problems.”16
Just less than a year later, President Clinton signed into law the ICC Termination Act of 1995 (“ICCTA”), bringing to a close the history of the nation’s oldest regulatory commission.
A small detail that may be forgotten as time passes: a blizzard dumped 17 inches of snow on Washington, D.C., the following week as the calendar turned to January 1996. The snowstorm effectively shut down the city and the government for a week. But when the former employees of the ICC returned to work, they did so as employees of the newest federal regulatory agency at the time, the Surface Transportation Board (“STB”). The ICC, which had once numbered some 2,700 employees, was replaced by the 150-person STB.
The STB was not reauthorized by Congress for nearly 20 years, though it received appropriations each year and continued its work. Disputes over attempts to roll back the deregulatory reforms of Staggers and ICCTA prevented Congress from passing a reauthorization bill. The Surface Transportation Board Reauthorization Act of 2015 finally reauthorized the agency and reaffirmed the deregulatory model that has been in place since Staggers. Though the Act established the STB as a wholly independent federal agency, few substantive changes were made to the regulatory paradigm governing railroads. Instead, the Act focused on Board composition and procedure. Among other things, the Act expanded the STB’s membership from three to five members; allowed a majority of STB Board Members to meet in private to discuss agency matters, subject to certain rules and procedures; gave the STB authority to independently investigate issues of national or regional significance; and shortened timelines applicable to large rate case proceedings, including time limits for discovery and development of the evidentiary record.17
The Next 100 Years
After this whirlwind journey through the last 100 years of the regulation of railroads, it is tempting to believe that we have now seen everything. If history is any guide, though, the next century will likely be as eventful as the last.
Endnotes
1. U.S. Bureau Stat., ICC Activities: 1887–1937, 25 (1937).
2. Id. at 29.
3. Id. at 34.
4. Id. at 28.
5. Charles MacDonald, The Federal Railroad Safety Program: 100 Years of Safer Railroads (1993).
6. Bureau of Statistics, U.S. ICC, Interstate Commerce Commission Activities: 1887–1937, 43 (1937), https://babel.hathitrust.org/cgi/pt?id=umn.31951p00927557s;view=1up;seq=5.
7. Paul Stephen Dempsey, The Rise and Fall of the Interstate Commerce Commission: The Tortuous Path from Regulation to Deregulation of America’s Infrastructure, 95 Marquette L. Rev. 1151 (2012).
8. Laurits R. Christensen Associates, Inc., STB, A Study of Competition in the U.S. Freight Railroad Industry and Analysis of Proposals That Might Enhance Competition, Revised Final Rep., Vol. 1 (2009) (hereinafter “Christensen Report”).
9. Pub. L. 91-458, § 101. Declaration of Purpose (1970).
10. MacDonald, supra note 5, at 20–25.
11. Ass’n Am. R.R.s, Freight Railroads & Positive Train Control, aar.org, https://www.aar.org/article/freight-rail-positive-train-control/ (last visited Mar. 24, 2019).
12. Comments of the Ass’n of Am. R.R.s, STB Ex Parte No. 658, The 25th Anniversary of the Staggers Rail Act of 1980: A Review and Look Ahead (filed Oct. 12, 2005)
13. Christensen Report, supra note 8, at 2–5.
14. U.S. Dep’t Transp., A Prospectus for Change in the Freight Railroad Industry 25 (Oct. 1978).
15. Marc Scribner, Competitive Enterprise Inst., Slow Train Coming, Misguided Regulation of U.S. Railroads, Then and Now (2013).
16. See http://www.let.rug.nl/usa/presidents/william-jefferson-clinton/state-of-the-union-1995-(prepared-version).php.
17. See Surface Transportation Board Reauthorization Act of 2015 and Related Reports, Surface Transportation Board, https://www.stb.gov/stb/rail/ReauthorizationAct.html.