If one has enough resolve, one should always be able to find “ascertainable standards” embedded in a regulatory statue. Ascertainable standards are both (1) policy objectives that the regulatory agency must use in its decision-making, including rulemaking, and (2) what a reviewing court will use when determining if the agency has acted in an “arbitrary and capricious” manner or has crossed the boundaries of its statutory authority under Section 706 of the Administrative Procedure Act (APA). The identification of these ascertainable standards in the Staggers Rail Act of 1980 (“Act”) and there application in the context of actions taken by the Surface Transportation Board (“Board”), the regulator of the freight rail industry under the Act, is the focus of my new article, “The Ascertainable Standards that Guide and Limit the Surface Transportation Board’s Authority over the Railroads.” This post summarizes my article.
The identification of ascertainable standards begins with the “nondelegation” doctrine and its “intelligible principle” test. The nondelegation doctrine was created by the U.S. Supreme Court to help enforce our Constitutional separation of powers. It requires Congress to refrain from abdicating or transferring its legislative functions (Article I, Section 1 of the U.S. Constitution) to another branch of government (e.g., broad grants of discretionary authority to an administrative agency) unless Congress “shall lay down by legislative act an intelligible principle to which the person or body authorized to [exercise the delegated authority] is directed to conform….” Moreover, according to Professor Kevin Stack, “the doctrine marks a formal distinction between regulatory and nonregulatory statutes: regulatory statutes must include intelligible principles whereas nonregulatory statutes need not. In that formal sense, the doctrine makes regulatory statutes constitutionally distinctive.”
As stated by Justice Rehnquist in his concurring opinion in Industrial Union Dept., AFL-CIO v. American Petroleum Institute:
As formulated and enforced by this Court, the nondelegation doctrine serves three important functions. First, and most abstractly, it ensures to the extent consistent with orderly governmental administration that important choices of social policy are made by Congress, the branch of our Government most responsive to the popular will. Second, the doctrine guarantees that, to the extent Congress finds it necessary to delegate authority, it provides the recipient of that authority with an “intelligible principle” to guide the exercise of the delegated discretion. Third, and derivative of the second, the doctrine ensures that courts charged with reviewing the exercise of delegated legislative discretion will be able to test that exercise against ascertainable standards. (citations omitted).
The first function of the nondelegation doctrine is essentially one of feedback, promoting political responsibility by encouraging Congress to clearly identify important choices of social policy in its legislation and thereby discouraging the unmoored abdication or transfer of its legislative functions to other branches of government. The second function is to identify policy objectives and constraints that the designated agency can use in understanding its Congressionally delegated authority and its boundaries. According to Stack, an agency “has a duty to (1) develop an understanding of the purposes or principles of the statute, (2) evaluate alternatives for action in relation to those purposes or principles, (3) act in ways, other things equal, that best furthers those purposes or principles, and (4) adopt only interpretations permitted by the statute’s text.” Thus, agencies must carry out their regulatory powers that are granted under statutes “in accordance with the principles or purposes the statutes establish.”
Rehnquist’s third function refers to the “ascertainable standards” found in the underlying statutes that can be used by the courts when reviewing an administrative rule or other actions for compliance with the boundaries of an agency’s delegated authority. In my article, the policy objectives and constraints identified in the second function and the ascertainable standards in the third function are synonymous and are both referred to as ascertainable standards.
The Staggers Rail Act of 1980
The Act contains three ascertainable standards:
- Minimization of Regulation: The preamble of the Act directs the Board to minimize the regulation of the railroad industry subject to the various constraints identified in the fifteen policy statements found in the preamble. This deregulation objective is supported by the operative sections of the Act which allow carriers to offer rates without review under conditions of effective competition and does not allow the Board to review contracts between shippers and carriers.
- Reasonableness in Rates: Based on both the preamble and operative sections of the Act, the rates offered by carriers must be reasonable, whether under conditions of effective competition or market dominance by a specific railroad carrier. Where effective competition exists, the carriers, as directed by market forces, will be allowed to set the rates. These rates carry the presumption of reasonableness. Where market dominance exists and the Board has determined that unreasonable rates are being offered, then the Board must determinate what rates are reasonable.
- Adequate Revenues: Based on both the preamble and operative sections of the Act, the Board must establish standards and procedures that provide rail carriers with adequate revenue levels so that they can earn a reasonable and economic profit or return (or both) on the capital they employ.
In my article, I apply these ascertainable standards to four different complex matters: 1) the Board’s proposed rule on mandatory reciprocal switching; 2) the practicality of using the revenue adequacy constraint in constrained market pricing; 3) a recent Board decision involving a railroad’s common carrier obligation; and 4) the statutory limitations of the Board in restraining carrier stock buybacks. The overall result of these applications is that the Board appears to be much more legally restrained in its ability to regulate the railroads than is commonly understood. Short discussions of matters 1, 2, and 4 are provided below. A discussion of matter 3, which is fact-intensive, can be found in my Legal Backgrounder for the Washington Legal Foundation, Common Carrier Regulation of Railroads Must Abide by Statute’s Ascertainable Standards.
Mandatory Reciprocal Switching
The Board has recently proposed a new rule, Reciprocal Switching for Inadequate Service, that would allow the Board to prescribe a reciprocal switching agreement when a captive shipper can show that it has been suffering from poor service. To implement reciprocal switching, “a railroad with sole physical access to a shipper facility transfers shipper freight cars to a near-by junction point with a second competing railroad. The second railroad pays a compensatory per-car switching fee.” As a result, the competing carrier is allowed “to offer single-line service to the customer even though its track does not physically reach a customer’s facility.” Because the proposed rule does not adequately take into consideration ascertainable standards #1, #2, and #3, it is doubtful that some parts of the rule could survive a court review under the “arbitrary and capricious” standard found in Section 706(2)(A) of the APA.
Revenue Adequacy Constraint
“Constrained market pricing” (“CMP”) is the general framework that the Board uses when establishing reasonable rates under conditions of market dominance. Shipper advocates claim that now is the time for the Board to incorporate into its rate setting a long dormant constraint referred to as the “revenue adequacy constraint.” This constraint is one of the four constraints that make up CMP. When incorporated into CMP, this would put downward pressure on Board established rates if a railroad is found to be revenue adequate. Therefore, an accurate estimation of a railroad’s revenue adequacy is critical in identifying whether this constraint should be incorporated into any CMP calculation.
This constraint has never been incorporated into the Board’s CMP calculations because the Board’s required annual calculation of railroad revenue adequacy has always demonstrated that Class I railroads were not revenue adequate. However, given that a majority of Class 1 railroads have now been shown to be revenue adequate, at least according to this required calculation, the Western Coal Traffic League has petitioned the Board to develop a proposed rule on how the revenue adequacy constraint can be used “by shippers challenging the reasonableness of rates charged on market dominant rail traffic.”
The major impediment the Board faces in incorporating the revenue adequacy constraint into its CMP is that the Board’s annual calculation of revenue adequacy, based primarily on historical accounting data, cannot be applied in such a rate setting endeavor. The use of historical data simply overstates the revenue adequacy of Class I railroads and create the significant potential that the Board would be setting rates too low in order for the railroads to earn adequate revenues. This would be in violation of ascertainable standard #3 which requires the Board to establish standards and procedures that provide rail carriers with adequate revenue levels so that they can earn a reasonable and economic profit or return (or both) on the capital they employ. Instead, a revenue adequacy calculation based on current asset valuations which incorporate expectations of future cash flows, not historical accounting data, is required. If this cannot be done, then the incorporation of the revenue adequacy constraint into CMP calculations should not be allowed.
The AFL-CIO is currently calling on the CEOs of freight railroads to freeze their stock buybacks and instead use those funds to make improvements in the safety record of their companies. However, the AFL-CIO is not calling on the Board to restrict stock buybacks. This is because under the Act the Board has no legal authority to interfere in this aspect of corporate governance.
When we look at the Act through the lens of the three ascertainable standards, there is nothing to indicate that Congress is delegating the Board with any type of policy or operative authority to restrict the railroads from entering into stock buybacks with its shareholders. Moreover, corporations are creatures of state law and are governed under such law unless Congress so directs. The U.S. Supreme Court has authoritatively stated that agencies do not have the authority to interfere in the governance of corporations unless Congress has provided it with express authority to do so. This means that Board actions, cannot, without the express authority provided by federal statute, be used to trump the state laws that provide the parameters for corporate governance, including those state laws that allow for stock buybacks. There are no operative parts of the Act that provide the Board with such express authority.
Finally, the “major questions” doctrine may be applicable in this context. According to Justice Amy Coney Barrett, the major questions doctrine “serves as an interpretive tool reflecting ‘common sense as to the manner in which Congress is likely to delegate a policy decision of such economic and political magnitude to an administrative agency.’” Class 1 railroads, the railroads that account for “69% of the industry’s mileage, 90% of its employees, and 94% of its freight revenue,” engaged in $165 billion worth of equity stock buybacks since 2015. Common sense would dictate that significant restrictions on the stock buybacks of railroads, even if only targeting Class 1 railroads, would have a significant economic impact on the railroad industry.
It would also be politically significant. As Justice Gorsuch observed in West Virginia v. EPA, the major questions doctrine comes into play “when an agency seeks to intrude into an area that is the particular domain of state law.” Corporate governance, including stock buybacks, resides in that domain.
My article explains how the Board should be using the three ascertainable standards as a policy guide in its decision-making, including rulemaking, and how a reviewing court should be using these standards when determining if a Board decision is to be set aside. Interestingly, my article reveals a tendency by the current Board to prefer regulation over private contracting. Whatever the rationale, a Board preference for regulation over private contracting is in direct conflict with the Act’s primary objective of minimizing regulation (ascertainable standard #1). This is something that the current Board members need to reflect on and avoid when making future decisions.
Bernard S. Sharfman is a Research Fellow at the Law & Economics Center, George Mason University’s Antonin Scalia Law School.