WASHINGTON (Reuters) - U.S. government-owned passenger rail company Amtrak wields improper and coercive regulatory power over private freight carriers under a law that lets it help set rules that competing railroads must follow, a federal appeals court ruled on Friday.

A northbound Amtrak train passes scorched hillsides in the aftermath of a wildfire in the Solimar Beach area of Ventura County, California December 26, 2015. REUTERS/Patrick T. Fallon

The U.S. Court of Appeals for the District of Columbia Circuit struck down parts of the 2008 law, called the Passenger Rail Investment and Improvement Act, saying it infringes on the rights of private freight carriers.

The court said the problem stems from the fact that Amtrak, a government-owned, nominally for-profit entity, has regulatory authority over the industry in which it participates. Freight carriers and Amtrak compete for the use of the same tracks, the court noted. The railroad law allows Amtrak and the U.S. Federal Railroad Administration to work jointly on the regulations.

Freight carriers own the tracks that Amtrak uses. They have objected to Amtrak’s regulatory role because they can be forced to pay damages if Amtrak trains fail to meet performance targets. Under the 1970 arrangement with private rail companies that led to Amtrak’s creation, Amtrak trains get top priority on the tracks.

In return, private railroads no longer had to provide passenger service.

Judge Janice Rogers Brown wrote for the unanimous three-judge panel that “there are limits to how far Congress may go to ensure Amtrak’s on-time performance.”

She noted that Amtrak is required to boost its own revenue while also developing metrics that others must meet.

“Armed with coercive regulatory power, Amtrak wields a weapon of considerable advantage in its competitive battle for scarce track,” Brown wrote.

In another part of the decision, the court ruled against a provision of the law that allows a different government regulatory entity, the Surface Transportation Board, to appoint an arbitrator if Amtrak and the Federal Railroad Administration disagree over the performance metrics.

Ed Greenberg, a spokesman for the Association of American Railroads, the industry group that brought the challenge, welcomed the ruling. Greenberg said the group “felt there was a fundamental constitutional flaw in allowing Amtrak to regulate freight railroads.”

Amtrak spokeswoman Kimberly Woods said the rail company was disappointed with the ruling, adding, “We hope that this legal morass will be resolved soon.”

The railroad association sued after objecting to 2010 regulations that freight carriers contend set unrealistic performance targets. Association members include BNSF Railway Company and CSX Transportation Inc.

The appeals court backed the challengers on a different legal question in 2013. The Supreme Court reversed that ruling last year.