Congress Warms To Freight Rail Reform

The nation’s four largest freight railroads have been enjoying a renaissance over the past 10 years, an era of growing profits, lofty stock prices, and ambitious investments. But for the bulk of freight rail customers—chemical manufacturers, farmers, and energy producers—it has been a decade of skyrocketing rates and, they say, increasingly unreliable service.

When adjusted for inflation, shipping rates declined for decades until the early 2000s, according to data from the Association of American Railroads, a trade association. They began rising in 2003, and since then, they’ve increased by about one-third for shippers across all sectors of the economy.

Some analysts say that a large part of the shift in pricing power resulted from the consolidation of the railroad industry during the past 35 years, which greatly reduced competition. The mergers and acquisitions began after Congress passed the Staggers Rail Act, which largely deregulated the freight rail industry.

Signed into law by President Jimmy Carter in 1980, the Staggers Act replaced the outdated railroad regulatory structure that had been in place since 1887. The statute largely ended almost a century of tight government control and gave the railroads substantially more freedom to set rates and manage their operations. It also facilitated the exit of failing firms.

Since the last merger in 2001, only seven major North American rail companies remain. Moreover, in the U.S., four companies essentially operate like regional duopolies that control more than 90% of freight rail traffic—CSX and Norfolk Southern in the East, and BNSF and Union Pacific in the West.

This consolidation has created a market for rail services where the majority of U.S. chemical manufacturers are “captive shippers” that rely on one carrier to bring in bulk raw materials and ship out products. “More than three-quarters of U.S. rail stations are served by only one railroad, leaving customers captive to a single freight rail provider with no alternative if service or rates are unsatisfactory,” explains Calvin M. Dooley, chief executive officer of the American Chemistry Council, a chemical industry trade group.

With drastically reduced access to competitive service, Dooley says, captive shippers have seen freight rail rates surge by nearly 100% over the past decade, about three times the rate of inflation. But higher rates are not translating into better service for many rail customers, he asserts.

Shipping delays remain a persistent problem for rail customers, beyond the weather-related slowdowns experienced last winter, according to Dooley.

“Poor rail service continues to be pervasive across the freight rail industry and is making it more difficult for our members to meet the needs of their customers,” Dooley says. “Many of the service issues that our members are experiencing stem from a lack of freight rail competition, which offers railroads little incentive to focus on customer needs.”

Although the Staggers Act is widely credited with rescuing the railroads from potential financial collapse, chemical industry representatives say the law needs to be updated to reflect the altered freight rail service landscape.

“With the dramatic changes in the rail sector, now is the time to reevaluate and modernize our rail policy framework to meet present and future needs,” says Eric R. Byer, president of the National Association of Chemical Distributors, which represents nearly 440 companies. “We strongly believe that modest reforms to our outdated rail policies today will lead to less government intervention later.”

The chemical industry is urging Congress to reform freight rail policy by overhauling the Surface Transportation Board (STB), a small federal agency created under the Staggers Act that is supposed to foster a competitive rail system and ensure fair pricing.

As competition among railroads has diminished, STB’s role has become more important. But shippers say the agency is ill-equipped to oversee a railroad industry that is now dominated by a handful of major players.

For example, Congress directed the board to evaluate the reasonableness of rates when a railroad has market dominance over a shipper. However, STB’s policies and the cost of challenging a rate make the agency “virtually inaccessible for many rail customers,” Byer says. A rate case, he explains, can cost a shipper $3 million to litigate and take more than three years to resolve.

STB also does not have authority to proactively investigate alleged service failures and other problems and lacks a publicly available database of complaints. The board’s three members are barred from discussing pending matters with each other outside of a public meeting.

To address these problems, the chemical sector and other rail-dependent industries, such as steel manufacturers and fertilizer producers, are supporting a bipartisan Senate bill that would mandate many of the freight rail reforms sought by shippers.

The STB Reauthorization Act (S. 808) would bolster the agency’s authority and streamline its procedures to settle disputes between railroads and shippers more quickly. The bill has key bipartisan support—Sen. John Thune (R-S.D.), chairman of the Senate Committee on Commerce, Science & Transportation, and the panel’s ranking member, Sen. Bill Nelson (D-Fla.), sponsored it.

The legislation, which the committee unanimously approved on March 25, would expand STB from three to five members and allow them to discuss pending matters privately. In addition, the bill would allow the board to initiate some investigations rather than just respond to complaints. Moreover, the bill would codify an arbitration process for certain rate disputes.

“Congress rarely creates a perfect regulatory agency,” Thune says. “These reforms will help make STB a more efficient, effective, and accountable agency for the benefit of shippers and railroads alike.”

Unlike previous attempts to reform freight rail policy that failed, S. 808 appears to have a good chance of passing the full Senate because its moderate approach avoids controversial mandates that the railroads and their congressional allies adamantly oppose.

For instance, legislative proposals in past years would have forced rail carriers to allow captive shippers such as chemical companies to seek competing bids for service from other railroads at an interchange point—a junction where freight can be switched from one carrier’s line to another’s. Railroads argue that this would create unpredictable traffic flows and cost the industry up to $8 billion in annual revenue.

But the Thune-Nelson bill “takes into account the vital need for freight railroads to earn revenues that allow for billions of dollars in private spending each year to build, maintain, and grow the nationwide rail network, so taxpayers don’t have to,” says Edward R. Hamberger, CEO of the railroad association. The industry, he adds, supports passage of the bill “by both the Senate and House in the year ahead.”

No similar rail reform bill has been introduced in the House of Representatives. But Rep. Bill Shuster (R-Pa.), chair of the House transportation panel, has indicated that he is open to moving an STB package forward this year. He says his committee will consider S. 808.