All things considered, $80 million seemed a pretty good price to pay for freedom.

After years of suffering as a "captive" shipper served by a single railroad, Charles Platz decided to take action. If Platz, president of chemical manufacturer Basell North America Inc., couldn't get the one railroad serving his Bayport, Texas, plant to give him the 13 miles of access he needed to get to another carrier's track—a move that would allow him to get competing rate quotes—then he'd simply build his own rail line.

When Platz mentioned his plan to other shippers in the area, he found that he wasn't alone in his thinking. They, too, believed they'd been held captive by one railroad long enough—and that the time had come to break free, whatever the cost.

All across the country, captive rail shippers like Basell are becoming restless. No longer viewing themselves as individual victims with little or no recourse, they are banding together to change the way they're treated by the railroads that serve them. And whether they do so by applying legislative pressure or by building their own rail lines, captive shippers are determined to gain the right to take advantage of competitive markets—a right shippers using other transportation modes often take for granted.

Although captive rail shippers have protested their treatment in the past, their voices have typically been heard one at a time, echoing through the halls of the Surface Transportation Board (STB) as they trudged through the time- and money-consuming process of filing a rate complaint. Now, however, those voices are being heard in chorus through groups such as Consumers United for Rail Equity (CURE), headed by Platz. Comprising 16 associations from a diverse group of industries, including chemical, agricultural, coal-fueled power, plastics, and paper, CURE may represent the first time that captive rail shippers have addressed their problems en masse.

The group appears to have the critical mass it needs to get the railroads to listen to what it has to say. "That list of associations represents about 55 percent of the railroads' revenue," Platz says. "This is a fairly significant group of customers, and we're getting more associations coming on board all the time. There has [probably] been more discussion about railroads in the last six months than there has been in the last six years."

That's encouraging, but it doesn't mean captive shippers' problems will be resolved quickly. This is a subject that's mired in history and has suffered from a "that's-just-the-way-things-are" mindset. It's also a matter that rubs up against one of the core concepts of economics: If you're the only provider of a service, why shouldn't you be able to name your price?

As far as government regulators are concerned, rail carriers have the right to do just that. "Right now our precedents recognize that railroads are private networks owned and operated by private companies, and therefore they can price the way they want to," observes Roger Nober, chairman of the Surface Transportation Board.

The right to price captive business higher than service to other shippers dates back to the creation of the Interstate Commerce Commission (ICC) in the late 1800s, says James Blair of Reebie Associates, a transportation consulting firm in Stamford, Conn. "The premise under the original creation of the ICC was that differential pricing is the foundation of railroad marketing," he explains. "Certain shippers were going to pay more than others, and that was necessary. A railroad would argue that if there weren't captive shippers, there wouldn't be sufficient returns generated from the rail industry overall to justify reinvestment."

The issue today, though, is not just that captives pay more; it's that they pay substantially more. Railroads typically charge shippers rates that are roughly 180 percent above the variable costs of the haul—the sum needed to ensure something close to revenue adequacy. (Revenue adequacy, the ability of a railroad to reap a return on investment that's higher than its cost of capital, is a "holy grail" the railroads strive for but have not achieved in some time.) But the 2001 Revenue Shortfall Allocation Methodology study conducted by the STB showed that on average, the four largest U.S. railroads—the BNSF, CSX, Norfolk Southern, and Union Pacific—charged captives rates averaging 237 percent above their variable costs.

Platz believes the railroads are using captive rail rates to subsidize other business. "They say they need 180 percent to be revenue-adequate," he observes. "Where they have competition they're only making about 108 percent." The carriers, he suggests, are plugging that gap with the differential they charge captive shippers.

There's one word that crops up in every conversation with captive shippers: bottleneck. A bottleneck exists when a shipper's premises are served by a single rail carrier that connects further down the line to another railroad.

Here's why that's a problem: Suppose a shipment must travel 500 miles, but only the first 20 miles are on the sole-serving carrier's line. The shipper would like to pay the first carrier for just the 20-mile segment and negotiate a separate rate with the second railroad for the remaining 480 miles. But because the first carrier owns the one and only connection to the shipper's premises—the bottleneck—the shipper is required to pay that carrier for the entire 500 miles.

What shippers want instead, Nober says, is for the railroads to be forced to quote a bottleneck rate rather than a through rate from point of origin to destination. The railroads, however, say that since they've invested in the entire rail system and not just that small portion of it, it's unfair to ask them to price their services based on that shorter leg.

Railroads also claim that being forced to quote bottleneck rates would too harshly impact their bottom line, says Blair. "The railroads have been able to consolidate volumes toward bigger trains and more effective use of resources," he explains. "They've been able to pass the lower costs on to shippers. Carriers believe that destroying those volumes by making every touch point between railroads an open interchange will also destroy much of the efficiency they've spent 30 years trying to create."

Shippers have in the past unsuccessfully petitioned the STB to require carriers to negotiate bottleneck rates. But such a ruling would restructure the railroads' ability to earn revenues. And that, Nober says, falls outside of the STB's powers. "If Congress wanted to change that to cap what the railroads can charge, they can do that. But I'm not going to, and that has been frustrating to many of the shippers."

It's easy to understand their frustration; pushing change through Congress has been about as easy as getting the railroads themselves to change. But shippers may have cause for optimism this time around. The captives have a voice on the Hill in Congressman Richard Baker (R-La.), who introduced H.R. 2924, the Railroad Competition Act, just before the August recess.

Because the bill has picked up six cosponsors, prospects for passage seem promising. "The chairman of the Surface Transportation Committee has voiced support," says Michael Grisso, director of the Alliance for Rail Competition, a group of rail shippers and trade associations that's based in Washington, D.C. "[Senator] Kay Bailey Hutchison was rather vocal in the markup in July, saying that we need to be talking about solutions. We have indications from House leadership at the Transportation Committee that they'll [hold] a hearing on this if not this year, then early when they convene next year."

In an address before the House in July, Rep. Baker referred to differential pricing as "the thriving legacy of regulatory control" and said that, in essence, it allows the railroads to "institutionalize price gouging." The Railroad Competition Act aims to end that legacy by imposing controls on several fronts. One provision would require railroads to quote point-to-point rates regardless of how short the distance. Another would remove the so-called "paper barriers"—agreements made between some competing railroads when they sold sections of their systems to short lines and regional carriers. Those agreements require that all or most of the traffic on these segments be delivered exclusively to the carrier that sold the track. Finally, another provision reduces filing fees for disputes—currently $65,000—to the level of any other civil litigation, which is presently $150.

As captive shippers try to find a legislative avenue for reducing their transportation costs, rail carriers are attempting to beat back that threat, Blair says. So far those opposing efforts have resulted in a stalemate.

But perhaps it doesn't have to be that way. CURE's members believe carriers could benefit by changing the way they treat captive shippers. "The business model that the railroads are pursuing is flawed," Platz says. As they push more costs onto captive customers, he believes, those customers will respond by taking their business elsewhere—by changing modes of transportation, for example, or moving to another location with more transportation options.

When that happens, the railroads raise rates for the remaining captive shippers, which in turn accelerates the exodus. The end result: "If you lose your customers, you're out of business," Platz says. Instead, he suggests, shippers and carriers could work together to find ways to take costs out of the entire supply chain.

"The railroads have woken up to this," Platz continues. "They've actively tried to meet with the people involved. We're getting ready to talk about the issues, and that's very positive. It doesn't solve the overall issue around bottlenecks, but it does begin a dialogue that's necessary to make some fundamental changes."

As Nober sees it, the railroads have little choice but to consider changing their approach. "The reality is that they have all the captive business they're going to have," he says. "Any plant or manufacturing company that is captive to a railroad is already there. And people are reluctant to build new ones. If railroads want to grow their business and increase their revenues, it's not going to be by increasing the number of captive customers. It's got to be by attracting business that can go on other modes."

If railroads don't work with their customers to find a solution, Nober adds, continued economic pressure could end up pushing captive shippers out of the country. It's no secret that manufacturing costs are lower overseas, and for captive shippers, it sometimes is cheaper to ship internationally than it is to move product domestically. "That's crazy," Nober says. "What you don't want is a situation where a parent [company] will say the cost of doing business here is too high, and shift production to Asia or Europe."

Although captive shippers and the railroads that serve them often paint each other as the bad guys, in reality, both sides are trying to conduct business in what each perceives to be the best way possible. "There is no good or evil," says Grisso. "[The railroads] have a responsibility to their shareholders, a fiduciary responsibility to maximize the return and the revenue for capital—so I don't think the railroads are acting in any sort of untoward or evil capacity. It's the policy that's broken. A policy that was good in 1980 when you had 42 railroads just doesn't work when you have six."

Neither side, however, appears capable of fixing government policy on its own. Nothing can change until both sides gather at a single table and work out the issues. And when you get down to it, that's what captive shippers would like to see most of all.