Railroad reregulation does not pass muster with political group

Jeff Berman, Group News Editor -- Logistics Management, 8/15/2008

WASHINGTON—Showing support in opposing the concept of re-regulating U.S. freight railroads, a political consortium yesterday spoke out against rail re-regulation in the form of a resolution passed earlier this week.

The resolution, passed by The Eastern Regional Conference of the Council of State Governments—which is described on its Web site as a non-profit, non-partisan organization serving legislative, executive and judicial branch officials from the ten Northeastern states, Puerto Rico, the U.S. Virgin Islands, and six Canadian provinces— said that “congressional proposals to reregulate the railroads may significantly reduce income and in turn reduce [railroads’] ability to raise capital needed for future railroad expansion.”

The organization also noted that the northeastern region of the U.S. will require significant railroad corridor development through railroad company/state government partnerships to accommodate future goods and passenger movement. And it also explained that expanding the capacity of rail freight networks would result in impressive public benefits by relieving worsening congestion, reducing highway costs, and providing a critical intermodal link to international trade and improving air quality and fuel efficiency. Another item it called for is an investment tax credit program to encourage new private capital investment to expand railroad capacity. (A piece of legislation introduced in May 2007—H.R. 2116, The Freight Rail Infrastructure Act of 2007—promises to let not only railroads, but all businesses, earn a tax credit for various investments in the railroad network’s infrastructure.)

In order for railroad capacity expansion to come to fruition, the resolution said that higher levels of capital investment are needed to accommodate future freight train traffic.

This suggestion of increased capital investment is not to be overlooked, considering that in recent years Class I railroad carriers have cumulatively invested roughly more than $10 billion in recent years on infrastructure improvements and initiatives. And a 2007 study released by the Association of American Railroads (AAR) in conjunction with Cambridge Systematics reported that approximately $148 billion needs to be invested to expand the nation’s freight railroad infrastructure to ensure that adequate rail capacity is in place to meet the expected demand. According to the Department of Transportation that demand will be in the form of an 88 percent increase in railroad freight tonnage by 2035.

The topic of railroad re-regulation is alive in the form of a piece of legislation—H.R. 2125: The Railroad Competition and Service Act—which was introduced last year. The objective of this legislation is “to ensure competition in the rail industry, enable rail customers to obtain reliable rail service, and provide those customers [shippers] with a reasonable process for challenging rate and service disputes.”

U.S. Senators John D. Rockefeller, IV (D-W. Va.) and Byron Dorgan (D-N.D.)—the politicians that first introduced the bill in the Senate under the title S. 953—U)—said its main intention was to repair what they contend is a broken railroad system that is a detriment to shippers moving freight on the rails and hinders the country’s competitiveness.

What some politicians and shippers may be overlooking with this legislation, according to William J. Rennicke, director of Oliver Wyman, a Boston-based management consultancy, is that U.S.-based rail shippers pay lower rates than any other country, coupled with the fact that the U.S. rail system does not rely on any direct government support.

In testimony he gave on H.R. 2125 last year, Rennicke said that over time, the argument can be made that the single biggest issue shippers have with the railroads is rates. Rennicke said that differential pricing used by railroads is "the most effective path to railroad pricing."  He also said that this type of pricing is quite common in other industries like the airlines, where it is not uncommon for a passenger to sit next to someone who paid three or four times the amount for a ticket compared to another passenger’s fare.

In an interview with Logistics Management, Rennicke said that until recently—and over the course of time in nominal dollars—there has been a “freefall” in rail rates for the last 25 years for a country without government subsidies for major expenses such as operating costs and needed infrastructure improvements. 

“There seems to be a sense that differential pricing is unfair..but if you ask an economist at Yale about it, he will say it is the most effective way to do transportation pricing, because it recognizes in some instances there are very competitive situations, and certain [shippers] cannot contribute sufficiently to capitalize or pay for the capital expenditures,” said Rennicke. “In other cases, you have less competitive situations, and that [shipper] may pay more, but at the end of the day everyone is still paying less.”

Association of American Railroads President Edward R. Hamberger lauded the The Eastern Regional Conference of the Council of State Governments’ initiative to halt railroad regulation.

"The Council understands the importance of expanding freight rail capacity and gaining the public benefits that would bring,” said Hamberger in a statement. “They also understand that reregulation would dry up the very capital needed for that expansion, putting more burden on already-congested highways and forcing taxpayers to pay out even more money for highway expansion."

Some railroad shipper groups maintain that railroad regulation is needed on many levels. Bob Szabo, executive director of CURE (Consumers United for Rail Equity) has told LM in past interviews that in recent years when railroads began having issues regarding domestic coal freight services, the demand for rail services began to outstrip the ability of the railroads to provide that service and that put them in a favorable position when it came to setting rates.

“Now, they can price their services anyway they want to and choose to move what they like. What they have done is focus on their most profitable movements,” said Szabo.