`THE SURFACE TRANSPORTATION BOARD S STATE OF MAINE DECISION A PRESENTATION BY JOHN D. HEFFNER BEFORE THE 2011 SCORT CONFERENCE CHARLOTTE, NC

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1 `THE SURFACE TRANSPORTATION BOARD S STATE OF MAINE DECISION A PRESENTATION BY JOHN D. HEFFNER BEFORE THE 2011 SCORT CONFERENCE CHARLOTTE, NC Good afternoon ladies and gentlemen. I want to thank Leo Penne and Pat Simmons of North Carolina DOT for inviting me to discuss with you the implications of obscure decision by the late lamented Interstate Commerce Commission [now the Surface Transportation Board or STB] on the decision s 20 th anniversary! Commonly called the State of Maine decision, 1 this case can either be regarded as a valuable tool in the preservation of rail lines for future freight or passenger use or an intimidating regulatory hurdle to achieving rail service preservation and enhancement. Let s start with some basic concepts from ICC Law 101. Under the STB s governing statute known as the ICC Termination Act or ICCTA the acquisition and/or operation of actively used 2 railroad lines requires prior approval from the STB regardless of whether the applicant is a railroad, a noncarrier (i.e., someone seeking to become a railroad), a public agency, or some other entity. 49 U.S.C Thus any time a public agency acquire a line of railroad, whether by 1 Me., Dep t of Transp.-Acquisition & Operation Exemption-Me. Cent. R.R., 8 I.C.C.2d 835 (1991). 2 The term actively used means the line has not been the subject of a consummated abandonment. 1

2 purchase or lease of the line or an interest in a line or obtains a right to operate an interstate freight or passenger train over that line, it becomes a common carrier railroad and that transaction requires Board approval. The mere fact of acquisition subjects your agency to the Board s jurisdiction as well as the jurisdiction of a host of other federal agencies and laws including the Federal Railroad Administration (safety issues, track standards), the National Mediation Board (railroad labor laws), the Railroad Retirement Board (retirement and unemployment benefits), and the Federal Employers Liability Act (a workmen s comp-like statute governing railroad liability for injured or deceased railroad employees). Moreover, many states are prohibited by their constitutions or other laws from becoming railroads or common carriers. Absent some mechanism like the State of Maine case, the common carrier obligation that goes along with the purchase of a rail line would discourage many public agencies from preserving railroad lines and corridors through public acquisition. So what was the State of Maine case all about? Simply stated, State of Maine involved the acquisition of two little used but unabandoned lines of railroad by Maine s Department of Transportation for possible future passenger rail use at some future date. What distinguished this transaction from the normal garden variety rail line purchase was the fact that the State acquired the right of way, the track structure, and associated physical assets (bridges, buildings, signals, etc.) but 2

3 not the common carrier obligation. The seller [the Maine Central Railroad] retained the common carrier obligation along with an operating easement over the track and right of way. In approving the transaction, the ICC established three principles that are crucial to approval of such transactions: 1) the easement the selling railroad (or its successor) retains or reserves from the sale must be exclusive, permanent, and unconditional; 2) the public agency purchaser must not have the ability to inhibit or impair in any way the common carrier obligation of the serving railroad; and 3) a party seeking a State of Maine ruling must submit evidence in the form of the transaction documents (typically the purchase agreement, an agreement between the public agency purchaser and the operating carrier showing how operations will be conducted and indicating that there will be no ability to unreasonably impair freight service or the railroad s common carrier obligation, deeds, leases, etc.). In the 20 years following issuance of the State of Maine ruling, the ICC and now the Board have issued over 60 similar rulings. All but a handful have approved such transactions. State of Maine transactions typically involve any of the following scenarios. Usually a public agency seeking a State of Maine ruling (approving the acquisition without the need for the agency to seek STB acquisition authority for the rail line and without the acquisition rendering it a common carrier) wants to acquire a light density rail line (1) to prevent its abandonment on 3

4 account of limited freight use and to preserve it for continued or future rail use and/or (2) to acquire the line for some form of passenger rail use, be it light rail, commuter rail, or intercity rail passenger service. In some cases the owning carrier sold (or sometimes leased) the physical assets to a public agency while retaining for itself the railroad easement and common carrier obligation. In others the owning railroad split the bundle of assets, selling the physical assets to a public agency and selling (or perhaps continuing to own and then leasing) the railroad easement and common carrier obligation to another carrier, usually a short line railroad. Procedurally, State of Maine cases have either involved a typical STB entry filing such as a verified Notice of Exemption or an individual Petition for Exemption accompanied by a motion to dismiss on the grounds that the public agency acquisition transaction is not subject to STB s approval jurisdiction. Alternatively, other parties have sought the STB s blessing by filing a Petition for Declaratory Relief seeking a ruling that the agency acquisition does not require Board approval. Regardless of the means, the result is usually the same: the transaction is not subject to STB approval. Timing-wise, the usual gestation period runs between three and six months absent complications or a demonstrated need for expedition. 4

5 So far that sounds simple enough. You merely file either a Notice of Exemption along with a Motion to Dismiss for lack of jurisdiction or a Petition for Declaratory Relief and the required transaction documents, the requisite filing fee along with a fee waiver request for a public agency, and take a few months off. But it s not quite so simple. While those transactions merely involving public preservation of light density rail lines have generally gone smoothly, acquisitions of lines for joint use involving continued freight service along with new or existing passenger service have presented some challenges. Those of you from California may remember the monumental efforts by transit officials in the Los Angeles area to initiate commuter rail service over a network of lines radiating out of Los Angeles Union Passenger Terminal. The first several acquisitions did not go smoothly from a regulatory perspective owing to the substantial control that the ICC found the coordinating agency [then known as the Los Angeles County Transportation Commission, now Metrolink] appeared to exercise over the affected rail lines. In one of those decisions, the ICC concluded: Santa Fe has not retained sufficient ability to serve freight shippers to justify a finding that we lack jurisdiction over the acquisition of the rail assets by the Transit Agencies. The commuter service restrictions on Santa Fe's freight service in the shared use agreements are so extensive 5

6 as to substantially impair the effect of the permanent easement for freight service retained by Santa Fe in the deed. Freight shippers are subject to hour-of-service restrictions, transit agency control of dispatching, transit agency approval of scheduling, and other restrictions for the benefit of passenger service. The maintenance needs of freight service must generally accede to the needs of passenger service. Although Santa Fe is not as restricted against opposing abandonments as Southern Pacific was in Southern Pacific, freight shippers are still faced with new uncertainties created by shared use agreements that allow the Transit Agencies to remove or relocate facilities. Orange County Transp.-Exempt-Atchison, T. &SF. Ry., Co., 10 I.C.C.2d 78 (1994). So where does this leave us in terms of what a public agency owner can or cannot do? Since that decision was issued, I believe the STB has mellowed a bit as to what the agency can or cannot do. Let s discuss by category of restrictions: Permanent and exclusive: The easement must be perpetual although a railroad s use of it may be limited under the terms of an access agreement. The agency owner is prohibited from providing freight service under any circumstances and cannot grant operating or trackage rights to other freight carriers or limit the freight carrier s ability to grant such rights. Only the tenant railroad can do that. 6

7 Shared use corridors: These are clearly acceptable whether they involve dedicated freight and passenger trackage on the same right of way or shared use of track. Operating windows on shared track with prohibitions on freight operations during certain times of the day: These are also acceptable provided that the freight use is unrestricted or minimally restricted during certain parts of the day or night and freight use is sufficiently modest as to allow the Board to find that there will be no impairment of operations or the ability to serve a shipper. Owning agency s consent required for tenant railroad actions such as frequency of service, rates, side track construction issues, commodity restrictions: Not acceptable. Termination or expiration of agreement; eviction upon termination; abandonment: While the easement itself is permanent and irrevocable, the owner can replace an operator at the end of the agreement term or can replace a deficient operator with a better one. However, the STB will not allow language that authorizes or directs any sort of discontinuance of service or abandonment absent STB authority or prohibits the operating carrier from seeking that authority. The owning agency can remove the incumbent carrier through what is known as an adverse abandonment or discontinuance application. Moreover, the STB requires that the carrier be given an opportunity to cure for a default or material breach and 7

8 in one case allowed an arrangement that entailed two default procedures (the giving of a notice of default then triggered a second notice of default if the carrier failed to cure at the end of the first default period) procedures for removal upon an event of default. Dispatching and maintenance: The cases have generally found that the transfer of these two functions to the public agency did not present any problem so long as the agency could not unreasonably discriminate in dispatching to the disadvantage of the freight service (see above re operating windows) and also because passenger track standards are so much more rigorous than freight standards. Agency review of railroad operating and safety practices: Unacceptable. Agency consent to incumbent tenant railroad s rights to a third party carrier: This is a murky one. I think I ve seen decisions that go both ways. While most State of Maine transactions have progressed through the STB with minimal hassle, there have been a few glitches most recently. Going back ten to twelve years ago, I believe the STB s review of some transactions, particularly those that were freight only, was much more cursory than two. For example, in a series of sale and lease back style acquisitions involving the State of Georgia where the incumbent short line sold its track and right of way to the State and retained a permanent operating easement along with the common carrier 8

9 obligation, the STB blessed these transactions without reviewing the underlying documents. It merely said, 9