January 31, 2001 From JoC Online (Journal of Commerce) Opinion by Lawrence H. Kaufman

When The Regulator's Objectivity Is Tainted By The Appearance of Bias

To one's surprise, Union Pacific Railroad is lobbying the new Bush administration to retain Linda J. Morgan as chairman of the Surface Transportation Board. That might be good for UP, but would it be good for the railroad industry?

Morgan, a Democrat appointee of President Clinton, has a term that doesn't expire until December 31, 2003, but she serves as chairman of the regulatory agency at the pleasure of the president. It would take only a stroke of the pen to name the STB's lone Republican, Wayne Burkes as chairman.

Most observers of the regulatory scene believe Morgan would resign her position if she were demoted. That's what Democrat Gail McDonald did in 1995 after Clinton replaced her with Morgan as chairman.

While UP may be making no secret of its wishes that Morgan remain as chairman, other major railroads and interested parties either are neutral or outspoken in their view that it's time for her to go.

Neutral is a Washington code-word for "don't ask me to stick my neck out. Remember, she holds my company's fate in her hands.' It's not considered smart for the regulated to come out against the regulator. But you can read between the lines when other carriers refuse to commit themselves on the question of whether Morgan should remain as chairman. After all, the easiest thing for the regulated to do in such circumstances is to endorse the regulator who's already there.

Shippers, it would seem, have nothing to lose, because they have had a virtually unbroken string of defeats and adverse decisions from the STB. Increasingly, they are outspoken that the chairman's effectiveness is at an end. Coming out for the replacement of the embattled chairman comes at no cost to them. What further harm can she do to customer interests?

UP has benefitted from Morgan's interpretation of the law, so it is natural that the nation's largest railroad would want her in the chairmanship.

If nothing else, Morgan is consistent. She has the same interpretation today of the law that she administers as she did yesterday and will tomorrow. Her supporters like to point out that the courts have upheld her interpretation of the law. Actually, the courts rarely rule on the substance of STB decisions, but only on the process and procedures followed by the agency. The STB is good at complying with the Administrative Procedures Act, and few have been able to make a valid claim that they have been denied due process.

The biggest case currently before the STB is its merger rule-making, which was triggered by the ill-fated December 1999 announcement that Burlington Northern Santa Fe and Canadian National planned to combine and form the largest rail system in North America.

Following a vigorous campaign by UP, Canadian Pacific, CSX Transportation and Norfolk Southern in opposition of BNSF and CN, Morgan conducted a four-day public hearing in which few witnesses specifically opposed the BNSF-CN combination but many presented a litany of horror stories about recently approved mergers - involving none other than UP, CSX and NS. Morgan and the two other members of the STB determined that existing merger rules and policy adopted 20 years earlier were not sufficient to deal with the reality of the railroad environment in 2000.

Only a month before the BNSF-CN announcement, however, the STB announced that it was sticking with its "one-case-at-a-time" merger procedures and that it saw no reason to change the 20-year -old rules.

The STB imposed a 15-month moratorium on mergers involving major railroads and began developing the new merger rules that are scheduled to be in effect by June when the mandatory halt in merger activity comes to an end.

The draft rules were bitterly disappointing to just about everyone but the four railroads that sought the moratorium. The October draft would not have prevented any of the previous mergers from occurring, nor are they likely to prevent any future mergers, lawyers who regularly appear before the STB say.
"All the new rules do is provide a blueprint for the railroads' lawyers as how to craft their next application, which, historically the agency always has accepted at face value," one veteran practitioner said.

To put it uncharitably, the STB didn't so much protect competition as it protected railroads with weak post-merger balance sheets from having to deal with another round of mergers.

The merger moratorium and other anti-shipper STB decisions have convinced many that Morgan does not regulate with an even hand. This is increasing the pressure for legislative changes, and for the third year in a row shippers will try to tie pro-shipper measures to the legislation to reauthorize the STB.

UP's ardent support of Morgan, coupled with a string of pro-UP regulatory decisions, unfortunately – and perhaps unfairly – taints her with the stigma of bias.