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Rail Reform On Track

Chemical shippers back measures to boost freight rail competition

by Glenn Hess
June 29, 2009 | A version of this story appeared in Volume 87, Issue 26

Credit: Shutterstock
A bill that would put the largest railroads under antitrust law already applied to most businesses has begun moving through Congress.
Credit: Shutterstock
A bill that would put the largest railroads under antitrust law already applied to most businesses has begun moving through Congress.

Shippers of chemicals, coal, and other bulk commodities are one step closer to achieving their long-sought goal of ending what they contend is the railroad industry’s monopoly pricing power. Earlier this month, two Senate committee chairmen agreed to join forces in crafting comprehensive legislation to reform federal rail policy.

Efforts are also under way in the House of Representatives to repeal exemptions that freight rail companies enjoy from federal antitrust law. These congressional efforts are supported by the Justice Department’s Antitrust Division.

On the Senate side, a floor vote on legislation to repeal the exemptions was canceled on June 1 after Sens. Herb Kohl (D-Wis.), the bill’s chief sponsor, and John D. Rockefeller (D-W.Va.) agreed to include the antitrust provisions in a broader measure being developed to overhaul the Surface Transportation Board (STB), the regulatory agency that referees rate and service disputes between rail shippers and carriers.

Kohl, who chairs the Senate Judiciary Committee’s antitrust panel, and Rockefeller, who heads the Senate Commerce, Science & Transportation Committee, asked Majority Leader Harry Reid (D-Nev.) to remove the Railroad Antitrust Enforcement Act of 2009 (S. 146) from Senate consideration while they work together on a new joint bill (C&EN, June 8, page 43).

“We share the common goals of addressing the concerns of rail shippers and making the rail industry more competitive,” Kohl and Rockefeller said in a joint statement. “We hope to shortly have a bipartisan package that reforms STB and repeals the railroads’ antitrust exemption available for consideration by the full Senate. We are working on harmonizing our two efforts to produce a robust reform package.”

Railroads have steadfastly opposed Kohl’s bill, arguing it would impose a confusing, overlapping regulatory scheme that would boost operating costs, threaten jobs, and discourage private investment. But congressional support for rail reform has grown since Democrats won control of Congress in 2006.

“When two powerful chairmen in the Senate agree to find a way to move legislation that would address our two main concerns, you can only view that as a positive development,” said Martin J. Durbin, vice president of federal affairs at the American Chemistry Council (ACC), an industry trade group. “Both senators have made it quite clear they are committed to moving a bill as soon as possible.”

ACC is a member of Consumers United for Rail Equity (CURE), a coalition of rail customers seeking changes in federal law that would require railroads to provide more competitive pricing and reliable service. The group contends that the antitrust exemptions give freight railroads dominant market power, which they have abused by charging excessive rates and providing poor service, particularly on routes where only one carrier operates.

Nearly two-thirds of chemical facilities that rely on rail to bring in raw materials and deliver finished products are “captive,” meaning they are served by only one rail company, according to ACC. “When a railroad enjoys a monopoly, it does not need to quote reasonable rates to its customer or guarantee its service,” Durbin noted.

Rail mergers and acquisitions have reduced the number of large railroads from more than 60 in 1977 to seven today. Moreover, two railroads in the East, CSX and Norfolk Southern, and two in the West, Union Pacific and Burlington Northern Santa Fe, control more than 90% of freight rail traffic in the U.S. As a result of the consolidation, whole states and regions are now served by a single railroad.

Credit: Courtesy of Herb Kohl
Credit: Courtesy of Herb Kohl

Kohl’s bill, which was approved by the Senate Judiciary Committee in March, would require railroads to obtain approval from both the Justice Department’s Antitrust Division and the Federal Trade Commission (FTC) for proposed mergers and acquisitions. These transactions are now reviewed solely by STB, whose oversight has been criticized by shippers as being too friendly to the railroads.

Durbin said STB has made several fundamental rulings that prevent customer access to railroad competition. “For example,” he said, “one of the STB rulings allows the railroads to refuse to provide rates to their captive customers for moving their freight to a point where the customer can gain access to a competing railroad.”

Kohl’s bill would eliminate these bottlenecks in the freight rail network by requiring railroads to quote rates and provide service between captive shipping locations and points where railroad traffic overlaps.

Another key provision of the legislation would allow the federal government, states, and private parties to sue railroads for damages and pursue court orders to stop “anticompetitive” behavior.

“Freight railroads have the luxury of being protected from the competition other industries face,” Kohl said. “They can name their price, and the consumer pays. We have seen the result of this outdated policy in Wisconsin, where our utilities were forced to absorb staggering cost increases for shipping coal.”

Credit: Courtesy of Tammy Baldwin
Credit: Courtesy of Tammy Baldwin

A companion measure in the House (H.R. 233) sponsored by Rep. Tammy Baldwin (D-Wis.) is currently pending in the House Judiciary Committee. “This legislation is long overdue and absolutely necessary to begin to end the railroad monopolies that are driving consumer prices up and service down,” Baldwin said.

“This virtual monopoly by the freight rail industry is unnecessary, unfair, and unacceptable. It’s time for Congress to apply our antitrust laws more equitably, and I’m optimistic that this legislation will be on track for passage in this session of Congress,” she added.

Freight rail executives say the antitrust bills are based on the misconception that railroads are exempt from most antitrust laws. “That is simply not true,” Union Pacific Chairman, Chief Executive Officer, and President James R. Young said at the annual meeting of the North American Rail Shippers Association in Chicago last month. “Railroads are subject to almost all antitrust laws, including those that prohibit agreements to set rates, allocate markets, or unreasonably restrain trade.”

Like many U.S. businesses, Young noted, railroads have a few limited federal antitrust exemptions but only in areas where STB already has regulatory authority. The exemptions, he explained, prevent dual oversight of railroads by STB and the courts.

“The proposed legislation would subject railroads to conflicting regulatory schemes, creating inefficiencies that would cause operating costs to increase. Eventually, those cost increases would reach our customers, causing their costs to increase as well,” Young said.

Testifying before a subcommittee of the House Judiciary Committee on May 19 on behalf of the railroad industry, Union Pacific Senior Vice President and General Counsel J. Michael Hemmer said H.R. 233 “is not just about antitrust law, it is an attempt to overturn long-established regulatory policies that have provided enormous benefits to shippers and American consumers.”

The real purpose of the legislation, Hemmer asserted, is to overturn STB decisions that shippers don’t like. “The bill even creates new regulatory law on matters unrelated to antitrust and, in doing so, treats railroads differently than other regulated industries,” he said.

He pointed to provisions that would allow FTC to regulate rail carriers but not other carriers, thereby creating a “glaring conflict” with another law that grants STB “exclusive” jurisdiction over rail transportation. The legislation would also be retroactive, potentially leading to antitrust attacks on the continuing operation of every federally approved trans­action in rail history, Hemmer charged.

“The bill would damage the public interest and severely distort the relationship between regulation and antitrust laws,” he told the Judiciary Subcommittee on Courts & Competition Policy. “Moreover, using an antitrust bill to achieve regulatory objectives will produce unintended consequences and virtually guarantee confusion and disruptive litigation.”

Hemmer said the current regulatory regime has provided significant public benefits, and he predicted that the proposed changes would create conflicts and uncertainty, making it more difficult for rail companies to raise capital from the private sector.

But a study released at the May hearing by a consumer watchdog group contends that “rampant consolidation” and lax federal oversight have “allowed railroads to abuse their monopoly pricing power” and overcharge consumers and shippers by $3 billion per year.

“The rail industry is a textbook case of market power run amok,” said Mark Cooper, research director at the Consumer Federation of America (CFA), an association of more than 280 consumer groups that support the antitrust legislation.

He told the subcommittee that consumers ultimately pay a large portion of those overcharges in their electricity bills because coal is the dominant fuel for power generation in the U.S., and two-thirds of all coal shipments delivered to utilities have only one rail transport supplier.

“Farmers, chemical companies, and other shippers of heavy bulk commodities are also the victims of rail-pricing abuse, which costs the economy output and jobs,” Cooper said.

Shippers without rail-competitive options pay 75–100% more for rail shipments compared with similar movements in competitive markets, and captive shippers’ costs have been rising substantially over the past five years, according to the CFA study.

In addition to eliminating the railroads’ exemptions from federal antitrust laws, the study also calls for greater oversight by STB to protect shippers from abuse. It urges changes in the board’s procedures for calculating railroad costs and the reasonableness of rail rates so that they more fairly estimate costs to shippers.

Lawmakers in both parties expressed support for the legislation. Rep. Rodney Alexander (R-La.), a cosponsor of H.R. 233, said the measure would level the playing field by providing competition in the rail industry.

Noting that Louisiana is the second-largest chemical manufacturing state in the nation, Alexander said that chemical companies in his district “do not see the railroads as a reliable source of transportation, especially when you compare that service to the rates they are forced to pay.

“Companies that are not allowed access to competition in rail shipments are seeing excessive rate hikes that they must pass on to their customers,” he continued. “I want to see my constituents relieved of this ‘cost of captivity’ through the enactment of this legislation.”


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