Railroad news: Shippers say lack of antitrust enforcement hindering rail competition

Jeff Berman, Group News Editor -- Logistics Management, 4/7/2008

WASHINGTON—Earlier this year, seven U.S. senators penned a letter to Senate Majority Leader Harry Reid, regarding the topic of removing antitrust exemptions currently granted to the railroad industry.

At the heart of this matter is a piece of legislation—S. 772, the Railroad Antitrust Enforcement Act (in the House, the bill is labeled H.R. 1650)—which the senators, including co-sponsors Herb Kohl (D-Wisc.), Norm Coleman (R-Minn.), and Byron Dorgan (D-N.D.), among others, told Reid “would bring the freight rail system under the nation’s antitrust laws and provide needed protection to farmers, manufacturers, and electricity consumers.” They also opined that lack of railroad anti-trust compliance has promulgated in rail customers suffering from increased rates and decreased quality of service, which they contend is largely due to a lack of competition among freight railroad operators.

The antitrust legislation was passed by the Senate Judiciary Committee last September, and the House Judiciary Committee Antitrust Task Force held a hearing on it in late February. At this hearing, Congresswoman Tammy Baldwin (D-Wisc.), whom introduced the bill in the House as H.R. 1650, described it as a first step toward ensuring competition and eliminating price gouging in the consolidate railroad industry.

“This bill simply places the rail industry under the same antitrust laws that every other industry…faces,” said Baldwin. “This bill will not fix all of the problems with the railroad industry. But it will be a starting point for good faith negotiations between the rails and shippers. And, it will restore some of the public interest responsibilities to our nation’s rail system.”

Despite the viewpoint that railroad antitrust enforcement may be the key to leveling the playing ground and resulting in what some politicians and shipper groups perceive as a more level playing ground, removing anti-trust exemptions may not necessarily be the answer, say some industry experts.

“The bottom line is this goes back to the amount of private sector capital that is going to be required in the industry,” said William J. Rennicke, director of Oliver Wyman, a Boston-based management consultancy. “The DOT is predicting an 88 percent increase in railroad freight tonnage by 2035. So if you are going to have private capital come into an industry, investors want to invest in something where they are not going to be blindsided by changes in regulatory structure.”

Another reason for the case against railroad antitrust enforcement is that on average U.S. railroad freight rates are among the lowest in the world, said Rennicke. And the regulatory risk that this measure may bring may drive potential investors and private equity away from the railroad industry for things infrastructure and rail car investment at a time when it badly needs that capital in order to meet projected freight demand.

The shippers that are paying higher rates due to differential pricing are irritated by the current situation and are taking “artificial” action through antitrust to draw a line that cuts off the high end of the differential pricing curve, added Rennicke. And once this is done differential pricing goes away and drives funds out of a system, which is entirely dependent on private sector capital for future infrastructure and expansion, he said.

“If shippers are not willing to accept the higher cost of capital and government does not step in, the railroads are going to start pricing to cut off certain types of traffic, because if they cannot get the money to grow the system shippers will be affected because the capacity won’t be there,” he said.

According to Bob Szabo, executive counsel of Consumers United for Rail Equity (CURE), two main problems with the current lack of antitrust enforcement are paper barriers and bottlenecks, which he says give railroads an unfair and anticompetitive advantage over shippers on rates. If antitrust laws currently applied to railroads and the STB did not allow it to occur, these would be viewed as illegal transactions, he said.

“We want antitrust laws to apply to everything the railroads do,” he said. “If antitrust applied to them, paper barriers and bottlenecks would violate antitrust laws. You are not going to get more competition in the railroad industry, because nobody can build a railroad. But it would be more competitive if these two barriers were removed.”

Tom O’Connor, vice president of Snavely King Majoros O’Connor & Lee Inc, and economic and management consultancy, agreed with Szabo, stating that there is little downside risk and considerable upside potential gain in bringing the proposed legislation to the floor for a debate, discussion, and a vote.

“It is difficult to argue with the merits of asking the freight railroads to accept antitrust constraints similar to those borne by virtually all other U.S. industries,” he said. “The proposed legislation would be a welcome and productive counter balance to the sometimes daunting power of the major railroads in today’s transportation market.”

It appears that shippers agree with Szabo and O’Connor, when it comes to removing railroad antitrust exemptions. A recent Logistics Management survey of roughly 70 rail shippers said that 63 percent—or nearly 50 shippers—support this legislation, and some were succinct with how the industry is functioning without antitrust regulation.

“Under the present system, there is no competition by the railroads,” one rail shipper told LM. “That leads to complacency which contributes to the poor overall service provided by the railroads. There is little incentive to invest in infrastructure and capital goods by the railroad.”