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Rail Reform Effort Gains Momentum

Chemical shippers want congress to tighten oversight of freight rates

by Glenn Hess
February 1, 2010 | A version of this story appeared in Volume 88, Issue 5

A broad coalition of shippers that includes chemical manufacturers, electric utilities, and agricultural groups is pushing Congress to pass legislation this year that would overhaul federal freight railroad transportation policy for the first time in 30 years.

“Because of consolidation in the rail industry, we face a marketplace that sometimes results in lack of competition,” says Calvin M. Dooley, president and chief executive officer of the American Chemistry Council (ACC), a trade group representing 135 major chemical manufacturers. “This leads to our industry paying significantly higher transportation rates than what could be justified if we had a more competitive marketplace.”

The shippers’ coalition, Consumers United for Rail Equity (CURE), is putting its support behind the Surface Transportation Board Reauthorization Act of 2009 (S. 2889), the bill that was unanimously approved on Dec. 17, 2009, by the Senate Commerce, Science & Transportation Committee (C&EN, Jan. 4, page 18).

“This is historic legislation,” says CURE Chairman Glenn English, a former 10-term Democratic congressman from Oklahoma. “It is the first bill since 1980 to move out of the Senate Commerce Committee with customer-advocated improvements in the freight rail regulatory program.”

English cautions, however, that “there is still much work to be done to see that consumer-oriented reforms included in this bill, as well as others advocated by freight rail shippers, are enacted into law and implemented. But this bill is an important step forward in the long effort to increase fairness and competition in the freight rail system.”

Credit: Office of Sen. John Rockefeller
Credit: Office of Sen. John Rockefeller

Sen. John D. Rockefeller IV (D-W.Va.), chairman of the Commerce Committee and the bill’s lead sponsor, says the measure addresses long-standing complaints by shippers about disadvantages they face when negotiating with the railroad industry over pricing. “We very much want the railroads to be successful, but we believe the playing field must be level,” Rockefeller remarked at the Dec. 17 committee meeting to debate S. 2889.

“I initially came to this issue 25 years ago, after hearing from so many West Virginia shippers—coal and chemical shippers mostly—who came to me frustrated that their local railroad held incredible power over them,” Rockefeller said. “Again and again, they told me that the two biggest cost factors pushing their operations overseas were energy costs and transportation costs.”

As a result, Rockefeller said, he set out to try to understand and solve the difficult and complicated issues the shippers were facing, such as bottlenecks and terminal access. “This bill would fix these problems and prepare our rail regulatory structure to encourage a vital, robust rail industry,” he said.

Since Congress passed the Staggers Rail Act of 1980, which largely deregulated the railroad industry, consolidation and mergers have left just a handful of large “Class I” carriers serving the U.S. market. There were 41 major freight railroads operating 30 years ago. Only seven remain today, and four of those companies—BNSF, CSX, Norfolk Southern, and Union Pacific—carry more than 90% of all rail freight. Shippers say this has resulted in regional monopolies, leaving many rail customers “captive” to a single railroad.

According to ACC, nearly two-thirds of chemical facilities that rely on railroads to deliver their products are served by only one carrier. “When a single railroad enjoys a monopoly, it does not need to quote reasonable rates to its customer or guarantee its service,” says an ACC issue brief. Consequently, captive shippers “are routinely subject to poor service and exorbitant prices,” ACC states.

The trade association says this is a significant problem for the chemical industry, which ships more than 170 million tons of chemicals and related products by rail each year. After coal, chemicals are the second-largest commodity transported by rail and represent more than 12%, or nearly $7 billion, of annual railroad revenue.

The Government Accountability Office (GAO), the investigative arm of Congress, has studied rail shipping rates several times over the past two decades. Reports released in 1999 and 2002 found rates generally decreased between 1985 and 2000. But a 2006 GAO analysis found that shipping rates increased slightly from 2001 to 2004. The report noted that even though rail rates across the industry have generally declined since enactment of the Staggers Act, “some shippers are paying significantly higher rates than others.”

In 1995, Congress created the Surface Transportation Board (STB) to settle rate and service disputes between railroads and captive shippers. But shippers say the board has not been responsive to their concerns. “STB has consistently turned a blind eye to the substandard service and predatory pricing practices that have become standard operating procedure in the rail industry,” says Robert G. Szabo, CURE’s executive director and counsel. “STB rarely says ‘no’ to a railroad.”

Credit: Office of Sen. Kay Bailey Hutchison
Credit: Office of Sen. Kay Bailey Hutchison

Cosponsored by Sens. Kay Bailey Hutchison (R-Texas), Frank R. Lautenberg (D-N.J.), John Thune (R-S.D.), and Byron L. Dorgan (D-N.D.), the STB reauthorization bill (S. 2889) would make the board an independent agency, removing it from within the Department of Transportation, where it currently resides. The board would be allowed to launch inquiries into railroad industry practices on its own, a reversal of current procedures that allow investigations only after a formal complaint is filed.

The bill would also expand the size of the board from three voting members to five and beef up STB’s budget. And it would set lower fees for shippers to file complaints in small and midsized rate cases as well as create a rail customer advocate to help resolve shippers’ concerns about service and rate issues.

In addition, S. 2889 would allow certain rate and practice disputes to be resolved by an arbitrator. And carriers would be required to quote a freight rate for each segment of a so-called bottleneck shipment, in which a single carrier serves an origin or destination facility, but another carrier has the ability to serve a portion of the movement from a nearby interchange point. Furthermore, the bill would authorize STB to require a railroad to make its terminals available to a competing carrier to provide access for captive traffic.

“Our legislation addresses rail shipper concerns while also taking into consideration the needs of the rail industry and the importance of maintaining a viable freight rail network,” Hutchison remarked after the Dec. 17 Commerce Committee vote. “I am pleased that we have been able to reach a bipartisan consensus on what has been an extremely divisive issue for years and look forward to moving the legislation through the full Senate as soon as possible.”

The bill is “an important step toward creating a more competitive and viable freight rail system,” ACC’s Dooley says. “We are glad to see that the bill enhances the role of STB and encourages it to proactively protect the rights of both the shippers and railroads.”

Edward R. Hamberger, president of the Association of American Railroads, the main lobbying group for the freight rail industry, says he has “concerns about certain provisions in the bill” but is willing to work with Congress and the White House to craft final legislation that “ensures railroads can continue to make the investments that sustain a healthy national rail network.”

Railroads have long warned that “re-regulating” the industry could threaten the profits that allow them to invest in track system upgrades. Since passage of the Staggers Act, freight railroads say they have invested more than $440 billion to revitalize the nation’s rail infrastructure.

“This bill would be the most significant rewrite of the railroad industry’s regulatory system in the past three decades,” Hamberger says. “Under the bill, Class I railroads would be required to open their privately owned and maintained rail networks and would face vastly expanded government involvement in railroad operations.”

Missing from the legislation is language that would end the railroads’ long-standing exemption from federal antitrust laws. Unlike other transportation industries, such as trucking and airlines, freight rail is exempt from Justice Department oversight and needs only STB approval for mergers, acquisitions, and collective rate-making agreements.

The railroad industry has used its antitrust immunity to “consolidate the country’s rail shipping down to four regional monopolies, giving these corporate behemoths tremendous monopoly pricing power that results in record profits at the expense of captive shippers,” CURE’s English says.

“We believe the bill needs to do more to fix outdated federal policies by including the antitrust measures approved last year by the Senate Judiciary Committee,” Dooley says.

In March 2009, the Judiciary Committee unanimously approved legislation (S. 146) that would strip railroads of their antitrust exemption (C&EN, March 16, 2009, page 34). But the Senate measure and a companion bill in the House of Representatives (H.R. 233) have been held up by strong opposition from the Association of American Railroads, which says the legislation would create a scenario where multiple agencies have overlapping authority over railroads.

That would cause “nothing but confusion for the railroads and those charged with enforcing the regulations,” Hamberger declares. “Overlapping regulatory schemes could derail the industry’s ability to meet the nation’s increased need for environmentally sound freight transportation.”

Many businesses besides the railroads, including agricultural marketing cooperatives, newspapers, and soft-drink bottlers, operate with limited antitrust exemptions, Hamberger points out. “All aspects of railroad practices exempt from antitrust laws are subject to STB jurisdiction,” he notes. “Eliminating the railroads’ exemptions would not fill any void in the law. There is no justification for singling out railroads.”

It’s unclear whether an antitrust reform amendment could muster the 60 votes it would need to clear the Senate floor. But Sen. Herbert H. Kohl (D-Wis.), chief sponsor of S. 146, says he will push to “include an effective repeal of the railroads’ antitrust exemption” in the STB reauthorization measure before the bill is considered by the full Senate later this year.

“The railroads’ antitrust exemption is wholly undeserved, shared by virtually no other industry, and clearly anticompetitive,” says Kohl, who chairs the Senate Judiciary Subcommittee on Antitrust, Business Rights & Competition.

Rockefeller says he has “long supported repealing the railroads’ antitrust exemptions and greater antitrust scrutiny of the rail industry.” And he will continue working with Kohl and other lawmakers, he vows, “to add antitrust reforms to our bill as it moves to the floor.”


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