Paul R. Hitchcock is a Senior Policy Advisor in our Jacksonville office.
The Surface Transportation Board (STB) has adopted new rules to prevent abuse of offers of financial assistance (OFAs) under the ICC Termination Act of 1995. Under the OFA process, a party that wants to preserve rail service on a line about to be shut down can offer to subsidize, or even purchase, the line to continue operations.
A rail carrier needs authority from the STB to abandon or discontinue service on a line of railroad. A shipper or community for which rail service is important has the opportunity to preserve service, providing it is willing to make the financial contribution to justify continuing operations. Alternatively, a third party that believes it can be successful operating the line may seek to take on the role, if it is willing to purchase the assets.
The rail carrier must provide certain information to a party considering making an OFA. Then, if the interested party decides to proceed, it must submit its offer to the STB and the carrier with other information justifying its offer, including showing that it is "financially responsible." If the STB decides that the offeror is "financially responsible," the abandonment or discontinuance authority is postponed, and the railroad must continue operations to allow time for negotiation. If the parties fail to agree, they can ask the agency to set the terms. If the offeror finds the terms ultimately set by the STB are unacceptable, it can walk away. If the deal closes, the offeror must continue operations for at least two years and cannot sell the line for five years after it closes the purchase.
In recent years, the largest railroads have felt that some offerors have come forward with poor plans and insufficient funding. To their thinking, the OFA process had come to be abused. In 2015, a Class I railroad petitioned the STB to adopt new rules. The STB declined to take the approach advocated by that carrier, but instead opened a proceeding to consider other changes to its OFA process.
The STB's decision on June 29, 2017, announced new rules that require a party considering an OFA to provide a notice of intent to do so early in the process, and to make a preliminary showing of financial responsibility. This preliminary showing would be measured against formulas approximating annual maintenance costs and estimating what financial resources might be needed to purchase the line.
Finally, when the OFA is submitted, the new rules require that the offeror place 10 percent of the preliminary financial responsibility amount in escrow. In addition, the STB clarified that the offeror must prove financial responsibility for the full offer amount. Also at that time, the offeror will be required to demonstrate that there is a continued need for rail service.
Governmental entities will be required to file the notice of intent. However, the STB will presume those entities to be financially responsible, so that they need not meet the other new requirements or make the 10 percent escrow deposit with their OFA submission. Governmental entities that are most interested in acquiring the line for passenger/commuter purposes may justify the acquisition on that basis, but must commit to continue to meet the freight common carrier obligation.
These new rules will protect a line owner from having to provide extensive information about the line to parties that have only casual interest in operating it, or simply lack the financial wherewithal to close a deal. More importantly, the new rules should deter filings intended simply to delay the abandonment or otherwise abuse the STB's OFA process.
Parties interested in the OFA process may contact the author of this alert or Holland & Knight's Transportation Team. We will continue to monitor the OFA process and provide any new developments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
