Rail shippers and carriers plead their cases at STB hearing

Earlier this week, the Surface Transportation Board (STB) held a public hearing to explore the current state of competition in the railroad industry, as well as possible policy alternatives to facilitate more competition.

This hearing follows previous efforts led by members of Congress and railroad shipper groups to “re-regulate” the freight railroad industry on the grounds that there are multiple barriers to competitive access for captive shippers such as improving the rate challenge process at the STB, getting relief from what shippers view as monopoly pricing power held by the railroads, establishing the STB as an independent agency and giving the STB investigative authority, creating a strong rail customer service advocate to help resolve shippers’ concerns, and protecting rail shippers and maintaining reasonable rates in non-competitive situations, among others.

Many of these items were included in a bill introduced by Senator Jay Rockefeller (D-WV), chairman of the Senate Commerce Committee last year.

While rail shippers maintain that they are subject to monopoly-like practices by the railroads, with captive shippers saying they are forced to deal with a “take it or leave it” pricing approach by the railroads, coupled with poor service at times, the railroads have repeatedly stated that that the existing regulatory railroad environment has produced—for North American railroad shippers—a freight railroad system that is the best in the world.

And they have also said that if the railroad industry lost the ability to earn its cost of capital it could have a negative effect on capital investments to support traffic growth and reverse the strides made post-Staggers Act in the areas of rail safety and service reliability.

Not surprisingly, these differing opinions were on full display at this week’s hearing.

In his testimony, Rockefeller said that the Staggers Act’s goal of restoring financial stability to the U.S. rail system has been achieved and that significant consolidation has occurred so that four Class I railroads dominate the industry, adding that one-sided policies whose sole focus is protecting the health of the railroads is outdated.

“We need to restore balance to protect the shippers against the virtual monopoly of the railroads and modernize the STB’s rules to reflect the railroads’ profitability and new industry structure,” said Rockefeller.

These things can be done, he explained, by increasing competition and fixing current rules, laws, and policies to give captive shippers competitive service options as a method to control rates and improve service, improving the regulatory process to make the STB more accessible and more robust to resolve shipper-carrier disputes in a more timely and cost-effective manner.

Shippers and shipper groups testifying at the hearing were on the same page as Rockefeller.

Curt Warfel, sourcing manager for bulk transportation, Akzo Nobel, North America operations, speaking on behalf of the National Industrial Transportation League, said that the railroad industry today operates very differently than it did 25 years ago, when the

STB adopted its competitive access policies and bankruptcies and mergers having left just 7 Class I railroads operating today.

“This major structural change has provided the railroads with substantial power over their captive customers and resulted in steadily rising freight rates and mediocre service for many such companies,” he said. “Year-after-year rate increases prevent rail-dependent companies from effectively competing effectively against their domestic competitors.”

And a NITL survey cited by Warfel indicated that the group’s rail shippers faced rates up to 50 percent higher at captive facilities than dual-served facilities, adding that for various reasons these captive shippers cannot readily shift traffic to other modes of transport.

Railroads executives at the hearing made their case for the current rate practices and operating network management practices.

They explained that any attempt to “re-regulate” the industry would have a significant negative impact on the railroads ability to increase in infrastructure and equipment, which have been north of $10 billion in recent years and 2011 expected to top $12 billion, according to the Association of American Railroads (AAR).

“Railroads have done what Congress expected when it enacted the Staggers Act,” said Lance M. Fritz, Executive Vice President-Operations for Union Pacific Railroad Company. “They became highly efficient and passed along many of the benefits to customers in lower rates. They became amazingly safer. They improved infrastructure. They invested hundreds of billions of dollars to carry out their objectives of providing more reliable on-line service and the best service possible over limited interchanges. The ICC and the Board encouraged them to build larger systems that have invested more and improved safety and service. The Board should not destroy these successes by moving backwards to reduce rates for some shippers.”

Oliver Wyman Managing Director Bill Renicke furthered the case for the railroads in his testimony, explaining that railroad input costs are up 210 percent since 2000, while rates—revenue per ton-mile—are down about 15.2 percent, proving to be a good value proposition for shippers.