STB hearing highlights differences between carriers and shippers over railroad revenue adequacy

The ongoing friction between rail shippers and freight railroad carriers is front and center at the Department of Transportation’s Surface Transportation Board (STB) this week, with a hearing on railroad revenue adequacy.

Ahead of the hearing, the STB said the objective of the hearing is to “explore how the Board should regulate rail carrier that are revenue adequate,” with the Board currently determining each year whether carriers are earnings sufficient revenue to cover its costs and earn a reasonable return sufficient to attract capital.

The STB explained that its predecessor, the Interstate Commerce Commission declared that when a railroad becomes revenue adequate over a certain period, shippers should be able to challenge the railroad’s rates “on the ground that the railroad is financially healthy and thus does not need to charge such high rates.”

That premise serves as the primary backdrop for years-, if not decades-long differences between rail shippers and carriers.

On one side are the carriers continuing to make record annual capital expenditure investments into the infrastructure and networks to meet shipper objectives for things like improved transit times and increased efficiency. To put that into perspective, according to the Association of American Railroads, U.S. freight railroads are set to spend an estimated $29 billion on the country’s rail network, ahead of 2014’s $27 billion. But even with such a high level of investment, shippers’ perspective remains the same in that they are less than pleased with rates.

Making the case for rail carriers was AAR President and CEO Ed Hamberger at the STB hearing.

“As you take up the issue of revenue adequacy, you are painting on a much, much larger canvas than just the inside of this room,” Hamberger said. “What you are considering and may decide here in this hearing room a stone’s throw from the U.S. Capitol will ripple across the economy and ultimately impact most every American.”

AAR officials explained that regulating railroads’ revenue levels would not be consistent with the goals Congress laid out in the Staggers Act of 1980, which partially deregulated the freight railroad industry and allowed revenues to earn sufficient revenue to meet long-term needs and not have to count on the government.

What’s more, Hamberger said that instituting “a regime of wide ranging price controls on freight railroads would not serve any party well, considering that that such measures would hinder the rail industry’s ability to: continue improving rail safety, efficiency and reliability; increase U.S. exports; support U.S. energy independence; and provide a healthy commuter rail network, too.

CSX CFO Fredrik Eliasson said at the hearing that revenue adequate railroads that earn their cost of capital should not be punished by capping rates as it would lessen the impact of private investment railroads make each year.

“Revenue adequacy should be a benchmark of railroad health, and not a tool for re-regulation,” Eliasson said. “To apply revenue adequacy to companies in competitive markets as a rationale to cap rates is to diminish incentives to aspire to innovation, efficiency and quality service. Railroads today are healthier and benefits are flowing to customers, shareholders, employees and the communities we serve. Let’s keep it that way.”

The Alliance for Rail Competition (ARC), a rail shipper group, had a different take at the hearing, explaining that implementing rate capping constraints is fair to captive shippers (those with direct access to only one railroad line) and producers that have paid higher rates for decades compare to those shippers that are non-captive, and have subsequently suffered competitive disadvantages in marketplaces for key commodities.

“Such penalties for being captive should not continue once railroads are found to be long-term revenue adequate, absent compelling justification from the railroad,” ARC said. 

The group added that railroads have been able to impose differential pricing on captive traffic with little regulatory oversight as to operate like unregulated monopolies, noting that railroads have not shown that future rate increases are not distorted by differential pricing (charging shippers different rates on the same movement) where they are market dominant will not meet their revenue needs.