How much regulation is enough regulation?

Congress will consider reauthorization of the Surface Transportation Board this year. The real issue, though, will be how the railroads should be regulated.

By Staff -- Logistics Management, 4/1/1999

In 1980, when the Staggers Act took a step toward deregulating the nation's railroads, many of the nation's 40-plus Class 1 railroads were on the brink of failure. The old regulatory regime under the Interstate Commerce Commission (ICC) essentially had forced the railroads to compete for 20th century freight under 19th century rules.

By most accounts, the Staggers Act has worked extraordinarily well, at least in economic terms. Rail rates have declined in real dollars, and service, though still far from flawless, has improved significantly. During the two decades since Staggers was enacted, market and business conditions also have led to consolidation after consolidation in the industry. Today there are five major railroads where there once were dozens.

Despite the Staggers Act's apparent success in achieving its aims, many shippers today are calling for changes in the law. Their concerns center on the concentration of market power in so few hands, and a widespread perception that the ICC's successor, the Surface Transportation Board, tends to rule too heavily in the railroads' favor.

The issue of whether and how to change the law is certain to come to the fore this year: Congress must act on reauthorizing the Surface Transportation Board before the agency's authorization expires at the end of December.

Watching out for shippers

Shipper groups in particular are urging Congress to change the STB's operating rules to foster a more competitive rail environment. In testimony before the Commerce Committee's Subcommittee on Surface Transportation and Merchant Marine last month, Edward L. Emmett, president of the National Industrial Transportation League (NITL), presented his group's case.

"[T]he STB's administration of the Staggers Act's [provisions] has created the impression among many shippers that the agency views its role more as the protector of the railroads' franchises than as the insurer of competition in the railroad industry," he told the subcommittee. "If nothing else, concentration of the industry should mandate a re-examination of an almost 20-year-old statute."

William E. Harvey, global logistics development manager for Lyondell Petrochemical Co., represented the Rail Customer Coalition, a group of agricultural, industrial, mining, and transportation intermediary organizations. He told the committee, "[W]e do believe that the pro-competitive intent of the Staggers Act has been undermined by years of protectionist decisions rendered by regulators." He then called for a number of reforms in the law.

The principal changes sought by shippers, including Harvey's group, would overturn the STB's December 1996 "bottleneck" decision and allow greater competition in terminal areas. The bottleneck decision, upheld earlier this year by the 8th Circuit Court of Appeals, applies when a single railroad has no competition on either the origin or the destination portion of a route--that's the bottleneck--but competing railroads offer service over other portions of the route. The ruling essentially allows the bottleneck carrier to control the whole route by refusing to offer a separate rate for the bottleneck segment.

The shipper groups want Congress to change the law so that railroads would have to offer "reasonable" rates for the bottleneck segments of a route. They argue that such a change would allow market forces to set rates along those portions of lanes on which competing service is available.

The terminal-access rules, in place since a 1986 ICC decision, allow railroads to avoid competition in terminal areas where other railroads' lines intersect. Shippers or competing railroads must demonstrate that "anti-competitive abuse" exists in order for the STB to force competing carriers to share a terminal. No anti-competitive charge has ever prevailed before the ICC or STB.

Rails: It ain't broke

Although Emmett told the subcommittee that Congress should require railroads to offer reciprocal switching and terminal-trackage rights to competing railroads, railroad executives are urging Congress to move cautiously toward changing a system they contend has worked well for both shippers and railroads. Edward R. Hamberger, president and CEO of the Association of American Railroads, disputes charges that the STB has been one-sided. "Over the years, the STB has rendered many decisions with which we have disagreed," he says. "[T]his clearly shows that this agency is not shy about using its extensive powers to protect rail users."

Hamberger criticizes shippers' proposals to allow competition at terminals and to overturn the bottleneck decision. "The real objective of these proposals is not competition," he charges, "but rather [to obtain] lower rates in the short term by ending the practice of market-based pricing."

Responding to a proposal by several farm- and coal-state senators that would require the STB to ensure competition among railroads and reduce the cost of the rate-relief process, Hamberger says, "Legislation to reregulate railroads ... would create a tidal wave of problems if it ever became law."

Some shippers agree. That proposed bill contains much of what shippers hope to accomplish, says Curt Warfel, manager of customer service and logistics for Eka Chemicals and chairman of NITL's Railroad Committee, but he adds that most shippers, even those that want changes in the law, oppose any major effort to reregulate the railroads. "We need some more competition," he says. "It would be preferable to do it through negotiations with the railroads rather than get the government involved."