Guest Op-Ed: STB Proposal Makes the Right Switch Toward Rail Competition
September 14, 2016|Jennifer Hedrick
(Ed. Note: Last week’s ETW included a guest op-ed from the President of the Association of American Railroads criticizing several new economic regulations of the freight rail industry proposed by the Surface Transportation Board. In the interests of fairness, here is an opposing view.)
Last week’s guest editorial from the president of the Association of American Railroads maintained that new regulations from the Surface Transportation Board (STB) will have catastrophic consequences for America’s railroads. It’s an oft-repeated anthem of gloom, and it’s just not true.
Today, the nation’s Class I railroads bear no resemblance to the companies that endured smothering federal regulation prior to 1980. Deregulation was the right medicine for an ailing industry, and the surviving “big four” Class I’s that move more than 90 percent of the nation’s rail freight today are doing quite well. Three of the four are seeing their stock trading at between 15 and 18 times their earnings, and the other is the largest unit of Warren Buffett’s Berkshire Hathaway.
Deregulation, which was followed by an era of aggressive mergers and acquisitions, created strong companies with formidable market power. But those same events also created freight rail monopolies in some markets, leaving captive shippers with only one option for rail freight, and some have argued of having no choice but to pay excessively high rates. That is the status quo the railroads want to protect and preserve. Their customers have a different idea, however.
Captive shippers did not have to look far for a tool that could level the playing field ̶ it’s called competition, and it’s very familiar territory for most American businesses. Five years ago, my organization, the National Industrial Transportation League (NITL), asked the STB to change its rules on competitive switching to create opportunities for head-to-head competition between railroads for a customer’s business.
It is most important to note that the very same statute that deregulated the railroads (the Staggers Rail Act of 1980) also provides the STB with authority to promote rail competition by approving competitive switching arrangements when “practicable and in the public interest or necessary to provide competitive rail service.” (See sec. 223 of Public Law 96-448.) In other words, back in 1980, the Congress envisioned both a more deregulated rail industry and an industry with adequate levels of competition, with the latter being facilitated through competitive switching arrangements. But that was not what happened, when the Interstate Commerce Commission adopted rules in the mid-1980s that have prevented rather than promoted competitive switching.
The existing rules require a shipper to prove “competitive abuse” for competitive switching. Under that requirement, no shipper had ever successfully obtained an opportunity to receive a competing bid for its business from another nearby railroad. In NITL’s petition five years ago, we demonstrated that the agency’s current rules are a formidable barrier to any U.S. business whose facility is served by only one railroad from obtaining competitive rail service through an agency-approved competitive switch. Dozens of associations representing thousands of large and small manufacturers, farmers, and energy firms enthusiastically embraced our original proposal. At the end of July, the STB agreed it was time for a change.
In its proposed new rule, the STB rejected its existing “competitive abuse” criterion and went right to the underlying law to identify two alternative criteria for granting a competitive switch: the requested switching must be practicable and in the public interest, or necessary to provide competitive rail service. If granted, the shipper, not the railroad, will pay for the railcar switch. The Board’s proposal is explained in detail, and both shippers and railroads have the opportunity to try to shape the final rule during the formal rulemaking process that is currently underway.
Contrary to railroad claims, there is no forced access involved in competitive switching. Under the proposed rule, the STB would not order the second nearby railroad to operate physically over the tracks of the currently serving railroad to reach the shipper’s captive facility. Rather, the shipper’s rail traffic is “switched” to the second carrier at an interchange point that is already used or could be readily used to interchange rail cars between the two railroads. Eno Transportation Weekly readers should consider that for many decades now, our Canadian neighbors have had a far more liberal and automatic process for shippers to obtain competitive switching. There is no chaos in the rail yards in Canada because the incumbent railroad is incentivized to compete to keep its customer. There is no reason to believe increasing such arrangements in the United States would not have the same positive effect.
Class I railroads switch thousands of cars every week. Our goal is not to switch railcars; our goal is to create competition wherever possible. Competition works in every industry and makes every business better.
The STB is also considering restoring the rights of some companies to challenge the rates they are charged by their railroads in light of laws enacted after deregulation. They are also weighing the issue of the future of monopoly power and monopoly pricing now that our Class I’s have achieved the goals of deregulation and returned to stable profitability. After all, about the only resemblance between today’s railroads and the railroads of the 1970s is that they both use steel wheels on steel rails.
The STB is on the right track. Would Americans today accept a regulatory regime for our telecommunications industry based on rules written for “Ma Bell” as it existed in the 1970s? Of course not. And neither should we accept rules written to protect the bankrupt rail industry of that same period.
In this new day, we believe our railroads should be profitable, and they are. The “railroad renaissance” is not a fiction, it’s a reality. But some of the railroads’ success is due to arcane government rules that are tilted against shippers. Agency regulators designed those rules decades ago when the railroads were still struggling financially. Now it’s time to recalibrate and rebalance those rules in light of Congress’ original intent to balance deregulation against the need to promote rail competition via competitive switching.
The views expressed above are those of the author and do not necessarily reflect those of the Eno Center for Transportation.
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