Railroad shipping: STB-commissioned study focuses on factors impacting rate increases in recent years
Jeff Berman, Group News Editor -- Logistics Management, 2/3/2010
WASHINGTON-The follow-up to a 2008 study on various aspects of the freight railroad industry found that overall railroad rates have been steadily increasing since 2004, with 2008 showing a particularly steep increase.
Entitled "A Study of Competition in the U.S. Freight Railroad Industry and Analysis of Proposals that Might Enhance Competition," the study, like its predecessor, was conducted by Madison, Wisconsin-based Christensen Associates, who was contracted by the Department of Transportation's Surface Transportation Board (STB). And like the previous study, this version comes at a time when there are myriad issues occurring in the freight railroad industry, including: the recently introduced Surface Transportation Board Reauthorization Act (also viewed as a railroad re-regulation bill); the potential for increased railroad infrastructure improvements and the need-from railroad carriers' perspective-for higher levels of capital investment for capacity expansion to accommodate future traffic growth; and rate-related issues, among others.
This new version includes data from 1987-2008. And while it found that rates have increased in recent years, the primary reasons for rate escalation were due to fluctuating fuel prices and other costs and did not appear to reflect a greater exercise of railroad market power over captive shippers, which has been a consistent point of objection or railroad shippers.
STB officials explained that this updated study "painted a portrait of a healthy rail industry that, since 2006, has remained largely revenue sufficient, meaning railroads are able to cover their operating costs and earn a rate of return that enables them to attract investment capital to pay for more locomotives, railcars and make other improvements."
Other key findings of the updated study include:
-trends in input price and productivity growth being generally consistent with the pattern of rate changes; in 2007 and 2008, input
prices continued to increase faster than productivity growth, resulting in unit cost increases, and increases in fuel prices have driven
the input price increases;
-in the two-year period 2007-2008, real revenue per ton-mile for the industry increased by about 12 percent, with coal and chemicals experiencing above
average increases;
-railroad industry marginal cost has been increasing at a faster average annual rate than railroad revenue per ton-mile, leading to the measure of railroad market power decreasing; and
-the lack of a consistent relationship over time between changes in the exercise of market power and changes in cost conditions.
Perhaps the most interesting takeaway of the report was that "because the railroad industry has remained approximately revenue
sufficient in recent years, we reemphasize one of our original conclusions: providing significant rate relief to some shippers will
likely result in rate increases for other shippers or threaten railroad financial viability."
Anthony B. Hatch, principal of New York-based ABH Consulting, said that Christensen's findings are generally supportive of the rail industry position, citing how, the study notes a greater share of traffic in 2007 and 2008 moved at rates less than 180 percent of variable costs than in 2005 and 2006-or, as Hatch, said-"put another way, a smaller percentage of traffic moved at ‘market dominant' rates, adding that "this independent, STB-sponsored report could well have a real impact on the debate in DC [regarding STB Reauthorization]."
The STB Reauthorization, which calls for raising the number of STB board members from three to five; establishing the STB as an independent agency; giving the STB investigative authority; creating a strong rail customer advocate to help resolve shippers' concerns; protecting rail shippers and maintaining reasonable rates in non-competitive situations; preventing two or more rail carriers from collaborating on interline rates; requiring major railroads to quote "bottleneck rates"; and improving shipper access to regulatory relief.
Not surprisingly, this bill, has received mixed reactions from carrier and shipper concerns.
"We are delighted there is a bill moving that addresses some of our concerns," said Bob Szabo, president of Consumers United for Rail Equity (CURE), a rail shipper concern. "There are many things we like in this bill...but it does not address all of our concerns. We think it is a vast improvement over current law and policy and so we are very excited about the prospect moving forward."
While Szabo and CURE are optimistic about this legislation, Association of American Railroads President and CEO Edward R. Hamberger said that this bill would be the most significant rewrite of the railroad industry's regulatory system since the Staggers Act of 1980-which effectively de-regulated the railroad industry.
Hamberger also noted that under this bill Class I railroads would be required to open their privately owned and maintained rail networks and would face vastly expanded government involvement in railroad operations.
Industry experts told LM that while much of this bill centers around pricing and rates, the railroad industry-in its present regulatory framework-has been able to do a good job in reinvesting earnings into the infrastructure needed, which is critical in order to handle future growth.
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