Rail Carriers, Shippers Battle Over Regulation Before the Surface Transportation Board

On behalf of the Competitive Enterprise Institute, I’ve been involved in an ongoing proceeding before the Surface Transportation Board, the independent Department of Transportation agency charged with regulating the freight-rail industry. The proceeding, Competition in the Railroad Industry, is the culmination of a decades-long series of frivolous complaint-filing on the part of a minority of mostly western U.S. shippers in the agriculture industry, the coal industry, and the chemical industry. The first hearing in Ex Parte 705 took place yesterday and today.

These shippers claim the four major Class I railroads — Union Pacific, BNSF, Norfolk Southern, and CSX — have been charging so-called “captive shippers” who lack access to another rail carrier or economical transport mode such as a river barge rates that are too high. They are also trying to force railroads to accept regulator-determined “open access” and “reciprocal switching” contract requirements that are favorable to this small group of shippers. Railroads counter that enacting price controls, forced access, and forced switching agreements will reduce revenue, which will cause their investors to demand more dividends and stock repurchases, rather than allowing railroads to continue investing billions of dollars annually into much-needed network upgrades.

I didn’t speak before the STB, but have filed two comment letters and a reply comment letter so far. In our comments, CEI argues:

  1. “Bottleneck” pricing faced by “captive” shippers reflects low-demand and risks to capital investment
  2. Increasing regulation on “bottleneck” carriers would enhance neither competition nor economic efficiency.
  3. “Open access” regulation would increase the risk of investment, particularly to underserved areas.
  4. Regulatory inefficiencies in the railroad industry do exist. However, this is a matter more appropriately addressed by Congress, not through STB rulemaking.
  5. The shippers (in this case, Consumers United for Rail Equity, or “CURE”) ignore 49 U.S.C. § 10101(6) and fail to show that current “rail rates provide revenues which exceed the amount necessary to maintain the rail system and to attract capital.”
  6. CURE’s case for forced access does not consider the economic literature on the peculiarities of network industries and the dangers of overregulation.
  7. CURE and the firms it represents have long engaged in a pattern of rent-seeking behavior in which they have heavily criticized adequate rate-setting in the railroad industry.

Indeed, even the Surface Transportation Board’s own commissioned report found that recent increases in revenue per ton-mile (RPTM) were not the result of an alleged “increased exercise of market power by the railroads.” [PDF, page 5-20] These shippers are either illiterate with respect to the economics of network industries and competition policy or they are merely playing a rent-seeking game. (It’s probably a bit of both.) As I noted in our first round of comments, there are regulatory inefficiencies — especially with respect to union-created workplace rules — in the U.S. railroad industry. However, this cannot be remedied by the Surface Transportation Board; only Congress can make the necessary tweaks.

But these shippers haven’t stopped at trying to rig the regulatory process. They recently convinced retiring Sen. Herb Kohl (D-Wisc.) to introduce S.49, “The Railroad Antitrust Enforcement Act of 2011,” which would essentially roll back all the progress made in the post-Staggers Act deregulatory environment — one that saved the private railroad industry from extinction. It constantly amazes me how short the memories of some of our elected megalomaniacs representatives in The World’s Greatest Deliberative Body™ can be.