The U.S. Surface Transportation Board on Nov. 2 published a notice of proposed rulemaking related to the possibility of additional disclosure requirements for notices and petitions for exemption where the underlying lease or line sale includes an interchange commitment.
That is a subject that in the past has drawn attention from groups like the Western Coal Traffic League, which represents some coal-consuming power generators in the western U.S. Comments on the proposed rulemaking are due by Dec. 3, with reply comments due by Jan. 2.
Interchange commitments are “contractual provisions included with a sale or lease of a rail line that limit the incentive or the ability of the purchaser or tenant carrier to interchange traffic with rail carriers other than the seller or lessor railroad.” Currently, if a proposed acquisition of a rail line involves an interchange commitment, the party filing the notice or petition for exemption must inform the board that such a provision exists and must file a confidential, complete version of the document containing that provision with the board, said the notice, published in the Federal Register.
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, the board noted. This flexibility has helped to revitalize the railroad industry.
In 1998, the board held two days of hearings to examine rail access and competition. The issue of interchange commitments, or paper barriers, came up in the context of shortline railroads. Many of the transactions that created or expanded these new shortline railroads contained interchange commitments. These contractual restrictions encouraged large railroads to sell or lease lighter-density lines at reduced prices (in some cases at no cost), because they were guaranteed to retain a portion of the future revenues from the traffic on those lines, the board point out. In many instances, they also provided a means of helping to finance the acquisition by shortline railroads.
Interchange agreements come in several variations
Interchange commitments took varying forms, including:
- lease payment credits for cars interchanged with the seller or lessor carrier (in some instances the lease credit applied if the lessee interchanged with the lessor up to the same number of cars interchanged with the lessor in the prior year);
- monetary penalties for traffic interchanged with another railroad; or
- a total ban on interchange with any carrier other than the seller or lessor carrier.
Many of these agreements reportedly had no fixed termination date.
In September 1998, the American Short Line and Regional Railroad Association and the Association of American Railroads entered into a Railroad Industry Agreement (RIA), which in part stipulated that “[l]egitimate paper barriers are those that are designed as fair payment for the sale or rental value of the line that created the Short Line.”
In December 1998, the Western Coal Traffic League (WCTL) filed a petition for rulemaking asking the board to adopt rules of general applicability regarding interchange commitments. The board deferred action on WCTL’s petition in order to allow for industry experience under the RIA.
In 2005, responding to a renewed petition filed by WCTL, the board initiated a rulemaking proceeding to consider regulations restricting interchange commitment provisions included with a sale or lease of a rail line. WCTL argued that interchange commitments were anticompetitive because they prevented lessee/purchaser railroads from offering shippers all competitive routing options. WCTL asked the board to establish a rebuttable presumption that such provisions are unreasonable and contrary to the public interest if: they last longer than five years; include any financial penalty for interchanging traffic with another carrier; or include a credit for interchanging traffic with the seller or lessor railroad that would provide a return in excess of the railroad industry’s cost of capital.
The board ultimately declined to adopt a single rule of general applicability, deciding instead to consider the propriety of interchange commitments on a case-by-case basis. The board indicated that it would give especially close scrutiny to those interchange commitments that totally ban the lessee/purchasing railroad from interchanging with a third party carrier, and those commitments that were not time-limited.
To facilitate its review of transactions that include interchange commitments, the board proposed new disclosure requirements in 2007 to ensure appropriate advance regulatory scrutiny of sale and lease agreements containing interchange commitments, and in May 2008 it formally adopted the proposed rules. Thus, a purchaser or lessee railroad filing a notice or petition for exemption must advise the board if the sale or lease contract includes an interchange commitment and must file a confidential, unredacted copy of that contract and any related documents containing the terms of the interchange commitment with the board.
Interchange issue has come up 10 times since 2008
Since that May 2008 decision, the board has reviewed 10 notices or petitions for exemption involving interchange commitments. In the majority of these cases, the interchange commitment was styled as a lease credit for cars interchanged with the seller or lessor. At least one, however, involved a total ban on interchanges with any other railroad, the board said.
In four of those cases, third parties filed petitions to revoke the exemptions based on the interchange commitment. In another case, the board, on its own initiative, rejected the notice of exemption because the rail carrier had not filed a complete copy of the lease contract as required by regulations.
In this new rulemaking, the board proposes to require that additional information be provided in notices and petitions for exemption to include, among other things, specific details regarding the impact the interchange commitment will have on shippers and the purchaser or lessee railroad. The board said its goal is to ensure that both the agency and other interested parties have sufficient information to judge whether the exemption process is appropriate for a transaction. In particular, because the notice of exemption process involves very short deadlines, the board proposes to require disclosure of information about the transaction at the time of the notice itself, rather than during any subsequent requests to reject or revoke the exemption.