Railroad antritrust legislation passed by House Judiciary Committee

Jeff Berman, Group News Editor -- Logistics Management, 5/2/2008

WASHINGTON—The topic of railroad re-regulation was back on the table this week, as the House Judiciary Committee passed legislation that has the potential to dramatically alter the freight railroad landscape in the United States.

The legislation, entitled, H.R. 1650: The Railroad Enforcement Act of 2007, would create a dual regulatory system for our nation’s railroad industry and retroactively undo agreements, decisions and rulings currently in effect, according to the American Association of Railroads.

And 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.

But AAR President and CEO Edward R. Hamberger refuted that notion in a statement, saying that: “This legislation will severely hamper the ability of the nation’s railroad industry to expand and deliver the goods and products our country depends on. It will force more freight off the railroad and onto the highway, dramatically increasing pollution and traffic congestion.”

The AAR added that the legislation’s retroactive nature has the potential to create tremendous economic uncertainty for the industry, causing the railroads to curtail robust expansion plans underway. It added that this would result in tighter rail capacity and shift more freight to our nation’s already overcrowded highways.

The point of not being able to go forward with expansion plans is something which is sure to resonate with U.S. Class I rail carriers, with cumulative investments in recent years on infrastructure improvements and initiatives approaching the $10 billion mark. What’s more, a study released last fall by the AAR in conjunction with Cambridge Systematics last September reported that approximately $148 billion needs to be invested to expand the nation’s freight railroad infrastructure over the next 30 years to ensure that adequate rail capacity is in place to meet the expected demand. The report also said that investments put toward infrastructure improvements will allow the freight rail industry to ease highway congestion, reduce stress on highways and bridges, and lower transportation-related energy costs and emissions, among other things. And, the report added, if this investment is not made, 30 percent of the rail miles in the primary corridors will be operating above capacity by 2035, causing severe congestion that will affect every region of the country and potentially shift freight to an already heavily congested highway system.

The companion piece of legislation to H.R. 1650—S. 772— 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.”

A major 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 William J. Rennicke, director of Oliver Wyman, a Boston-based management consultancy. And he added that 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.

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 Surface Transportation Board 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.”

It appears that shippers agree with Szabo, 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.”