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Rockefeller calls out railroads for excessive rates

Rail execs, AAR state case for rate structure, cite being responsible for funding own rail networks
By Jeff Berman, Group News Editor
September 15, 2010

Earlier today, Senator John D. (Jay) Rockefeller (D-WV) released a report entitled “The Current Financial State of the Class I Freight Rail Industry,” which takes Class I railroads to task for what he described as earning record profit margins at the expense of shipper customers.

The report drafted by the Senate Committee on Commerce Science and Transportation, which Rockefeller chairs, highlights how since the Staggers Rail Act of 1980 was enacted, the goal of restoring financial stability to the U.S. rail system has been achieved. The objective of the Staggers Act was to aloe freight railroads to get rid of unprofitable lines and consolidate their operations, as well as allow railroads to charge lower rates to customers operating in a competitive environment and higher rates to customers captive to one railroad carrier for transportation service, the report noted.

Since 1980, the report said that the objective of Staggers Act—to restore financial stability to the U.S. rail system—has been achieved, with the four U.S.-based Class I railroads “dominating the U.S. rail shipping market and achieving returns on revenue and operating ratios that rank them among the most profitable businesses in the U.S. economy.”

What’s more, the report states that railroads have regained pricing power following the first few years after the Staggers Act and have maintained high profit margins during the recession and continue to push rate increases on their customers.

At a Committee on Commerce Science and Transportation hearing today on the “The Federal Role in National Rail Policy,” Rockefeller voiced his opinion on changes he thinks need to happen in the freight railroad industry.

“[T]hey act like it’s still 1980,” he said. “They say they’re barely making enough money to keep the lights on.  But when they’re on their quarterly calls with Wall Street investors, it’s a very different story.  These companies tout their high profit margins and their power to dictate prices to their customers.  And at the same time they’re telling Congress that they don’t have enough money to invest in needed capital projects, they’re using billions of dollars of their profits to reward their shareholders with dividends and stock buybacks.  This is all happening at a time when shippers all over our country are paying more than their fair share to transport their goods to their customers – paying more because they have no other alternative.”

This mindset is at the core of legislation introduced by Rockefeller in 2009, entitled “S. 2889, The Surface Transportation Act of 2009,” which could have a significant impact on how freight railroads operate and conduct business. The objective of this bill is to address the longstanding concerns of rail shippers regarding rates and service and making the railroad industry more competitive—points which are addressed in the report released today.

The legislation includes a wide-ranging array of action items that could significantly alter processes commonly viewed as “business as usual” in the railroad industry, including: raising the number of STB board members from three to five; establishing the STB as an independent agency; giving the STB investigative authority; creating a strong rail customer advocate to help resolve shippers’ concerns; protecting rail shippers and maintaining reasonable rates in non-competitive situations; preventing two or more rail carriers from collaborating on interline rates; requiring major railroads to quote “bottleneck rates” [rail bottlenecks occur when a railroad controls a bottleneck line segment owned by a carrier serving a specific origin or destination also served by another carrier]; and improving shipper access to regulatory relief.

As LM has reported, Class I railroad executives have repeatedly indicated that this bill fails to satisfy their needs, with several noting they cannot support the bill in its present form. Most pressing among them, according to independent rail analyst Anthony B. Hatch, principal of New York-based ABH Consulting, were the ability to earn returns and the lack of language regarding replacement costs, the undefined nature on costs of bottlenecks and other access issues in the form of caps on rates and returns, among other concerns.

S. 2889 is also currently absent of antitrust provisions and language regarding antitrust has still not been made publicly available. Legislation focusing on removing antitrust exemptions for the railroad industry passed in House and Senate committees in 2009.

In an interview with LM earlier this year, Association of American Railroads President and CEO Edward Hamberger said the Senate version of the antitrust bill introduced by Senator Herb Kohl (D-WI) would undo—or open to challenge—mergers, line sales or other things that have been approved by the STB and undo “years of progress in making the industry as efficient as it is and have a real impact on the railroad industry’s ability to serve its customers.”

And in a statement issued today Hamberger blasted the Senate committee’s report, saying there is no need to roll back the successes achieved since the Staggers Act.

“The report makes profits and corporate efficiency sound like dirty words,” said Hamberger. “The reality is the railroad industry’s return to financial health has resulted in private capital – not taxpayer dollars – getting turned back into building and maintaining the nation’s rail network. Even during the worst recession in 80 years, America’s freight railroads have kept investing, spending $21.8 billion of their own private capital in 2008 and $20.2 billion in 2009 to build, maintain and modernize the nation’s 140,000-mile rail network that serves both passengers and freight.”

A Class I railroad executive told LM at an industry conference that the existing regulatory railroad environment for has produced—for North American railroad shippers—a freight railroad system that is the best in the world. And 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.

About the Author

Jeff Berman headshot
Jeff Berman
Group News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. .(JavaScript must be enabled to view this email address).

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