President’s Executive Order: For Rail, Much Ado About Not Very Much?

On July 9, as expected, President Joe Biden signed his latest Executive Order, “Promoting Competition in the American Economy.” The 6,861-word document contains very little language directly pertaining to the USDOT, STB and the railroad industry, with the possible exception of how a Class I merger could affect Amtrak. Railway Age has extracted what we consider relevant.

EXECUTIVE ORDER: PROMOTING COMPETITION IN THE AMERICAN ECONOMY (Excerpts) 

By the authority vested in me as President by the Constitution and the laws of the United States of America, and in order to promote the interests of American workers, businesses, and consumers, it is hereby ordered as follows: 

Section 1. Policy

A fair, open, and competitive marketplace has long been a cornerstone of the American economy, while excessive market concentration threatens basic economic liberties, democratic accountability, and the welfare of workers, farmers, small businesses, startups, and consumers. The American promise of a broad and sustained prosperity depends on an open and competitive economy. For workers, a competitive marketplace creates more high-quality jobs and the economic freedom to switch jobs or negotiate a higher wage. For small businesses and farmers, it creates more choices among suppliers and major buyers, leading to more take-home income, which they can reinvest in their enterprises. For entrepreneurs, it provides space to experiment, innovate, and pursue the new ideas that have for centuries powered the American economy and improved our quality of life. And for consumers, it means more choices, better service, and lower prices. 

Robust competition is critical to preserving America’s role as the world’s leading economy. Yet over the [past] several decades, as industries have consolidated, competition has weakened in too many markets, denying Americans the benefits of an open economy and widening racial, income, and wealth inequality. Federal Government inaction has contributed to these problems, with workers, farmers, small businesses, and consumers paying the price. Consolidation has increased the power of corporate employers, making it harder for workers to bargain for higher wages and better work conditions. 

Section 2. The Statutory Basis of a Whole-of-Government Competition Policy

The antitrust laws, including the Sherman Act, the Clayton Act, and the Federal Trade Commission Act, are a first line of defense against the monopolization of the American economy. The antitrust laws reflect an underlying policy favoring competition that transcends those particular enactments … The agencies that administer such or similar authorities include the Department of the Treasury, the Department of Agriculture, the Department of Health and Human Services, the Department of Transportation, the Federal Reserve System, the Federal Trade Commission (FTC), the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Federal Communications Commission, the Federal Maritime Commission, the Commodity Futures Trading Commission, the Federal Energy Regulatory Commission, the Consumer Financial Protection Bureau, and the Surface Transportation Board.  

Section 4. The White House Competition Council

There is established a White House Competition Council (Council) within the Executive Office of the President. The Council shall coordinate, promote, and advance Federal Government efforts to address overconcentration, monopolization, and unfair competition in or directly affecting the American economy … The Council shall work across agencies to provide a coordinated response to overconcentration, monopolization, and unfair competition in or directly affecting the American economy. The Council shall also work with each agency to ensure that agency operations are conducted in a manner that promotes fair competition, as appropriate and consistent with applicable law … The Council shall be led by the Assistant to the President for Economic Policy and Director of the National Economic Council, who shall serve as Chair of the Council. 

The Council shall consist of the  Secretary of the Treasury; Secretary of Defense, Attorney General; Secretary of Agriculture; Secretary of Commerce; Secretary of Labor; Secretary of Health and Human Services; Secretary of Transportation; Administrator of the Office of Information and Regulatory Affairs; and  the heads of such other agencies and offices as the Chair may from time to time invite to participate. 

The Chair shall invite the participation of the Chairs of the FTC, Federal Communications Commission and Federal Maritime Commission; the Director of the Consumer Financial Protection Bureau; and the Chair of the Surface Transportation Board. Members of the Council shall designate, not later than 30 days after the date of this order, a senior official within their respective agency or office who shall coordinate with the Council and who shall be responsible for overseeing the agency’s or office’s efforts to address overconcentration, monopolization, and unfair competition.

To further competition in the rail industry and to provide accessible remedies for shippers, the Chair of the Surface Transportation Board (Chair) is encouraged to work with the rest of the Board to:

• Consider commencing or continuing a rulemaking to strengthen regulations pertaining to reciprocal switching agreements pursuant to 49 U.S.C. 11102(c), if the Chair determines such rulemaking to be in the public interest or necessary to provide competitive rail service.

• Consider rulemakings pertaining to any other relevant matter of competitive access, including bottleneck rates, interchange commitments, or other matters, consistent with the policies set forth in Section 1 of this order.

• To ensure that passenger rail service is not subject to unwarranted delays and interruptions in service due to host railroads’ failure to comply with the required preference for passenger rail, vigorously enforce new on-time performance requirements adopted pursuant to the Passenger Rail Investment and Improvement Act of 2008 that will take effect on July 1, 2021, and further the work of the passenger rail working group formed to ensure that the Surface Transportation Board will fully meet its obligations.

• In the process of determining whether a merger, acquisition, or other transaction involving rail carriers is consistent with the public interest under 49 U.S.C. 11323-25, consider a carrier’s fulfillment of its responsibilities under 49 U.S.C. 24308 (relating to Amtrak’s statutory rights).

Editor’s Comment: The above section tying mergers to Amtrak’s statutory access rights most likely indicates, according to some observers, that the Executive Order is directly addressing the only two transactions currently in play before the STB: CN (or Canadian Pacific)+KCS, and CSX+Pan Am, and strongly suggests that the STB should consider the ultimate effect on Amtrak service of both when making a decision to approve or reject. Note that Amtrak’s Host Railroad 2020 Report Card gives CP an “A,” and CN and CSX both a “B+.” CN’s score improved from a “D” in 2019, while CSX maintained a B+. – William C. Vantuono

DOWNLOAD A PDF OF THE FULL EXECUTIVE ORDER:

Further Analysis: Biden Targeting Class I Rail Mergers? Report (UPDATED)

AMTRAK RESPONSE

“President Biden’s Executive Order will open the nation’s tracks to more frequent and reliable passenger rail service needed for the future mobility of this country,” said Amtrak CEO Bill Flynn. “Encouraging the Surface Transportation Board to protect Amtrak’s rights to use freight railroad tracks and prioritize passenger trains will provide more sustainable and equitable transportation options across America. We appreciate the President’s continued support for Amtrak’s plans to bring passenger rail service to more of America.”

AAR RESPONSE

AAR President and CEO Ian Jefferies issued the following in response to the Executive Order:

“The Biden Administration today announced an executive order that included a misguided direction to interfere with functioning freight markets that could ultimately undermine railroads’ ability to reliably serve customers. In part, the Executive Order called on the independent STB to consider a forced switching rule and other ill-considered policy changes.

“Competition is alive and well in the rapidly changing freight transportation market, with nearly three quarters of all U.S. freight shipments moving by a mode of transportation besides rail. With the logistics chain already challenged by the recovery from COVID, this executive order throws an unnecessary wrench into freight rail’s critical role in providing the service that American families and businesses rely on every day.

“As freight providers work to resolve issues at the ports and supply chain disruptions, the need for reliable, efficient transportation solutions has never been clearer. To meet today’s challenges and prepare for the 30% growth in freight demand projected by the U.S. Department of Transportation (USDOT) by 2040, a viable, thriving rail network is foundational to current and future economic health.

“Railroads—one of the most environmentally friendly freight transportation modes—compete against each other and other transportation modes to win business and remain viable. The significant investments in private infrastructure made by railroads—nearly $25 billion annually—are only possible under a market-based economic regulatory framework overseen by the STB. Thanks to those investments and productivity improvements, today’s average rail rates are 44% less than they were in 1981, when the current economic regulatory framework (the Staggers Act) was put into place.

“Any STB action mandating forced switching would put railroads at a severe disadvantage to freight transportation providers that depend upon tax-payer funded infrastructure. Such a rule would degrade rail’s significant benefits to both customers and the public by throttling network fluidity, disincentivizing investment, increasing costs to shippers and consumers, and ultimately diverting traffic onto trucks and the nation’s already troubled highways.

“For decades, large corporations dissatisfied with paying fair-market rates to ship products by rail have sought to leverage political influence to change that framework and force railroads to hand over traffic to competitors who might charge less. These proposals have varied over the years, but all had one thing in common: They would benefit select favored shippers at the expense of the efficiency of the whole rail network, including passenger operations.

“Just last year, a large and diverse coalition—including eight former USDOT Secretaries, crucial industry partners like ports, policy analysts and scores of state and local officials—wrote in support of today’s system and cautioned against wholesale changes. An open access regime, endorsed by today’s Executive Order, is in direct conflict with their message and would undermine the market system currently in place.”

Editor’s Comment: These are the same issues the AAR has been dealing with for generations. They never seem to go away, do they? SSDD (Same Stuff, Different Day), right? – William C. Vantuono

Railroad economist and Railway Age Contributing Editor Jim Blaze comments: “Open access has long been sought by the rail freight shipper community as an expected more-efficient and effective competitive business model. Almost every U.S. freight railroad company resists the idea that nearby railroad “A” can enter the privately built/owned/maintained tracks of railroad “B” in order to serve a customer otherwise served only by railroad B. The AAR and railroads, plus the financial analysts, argue that open access would decrease the value of the privately owned and maintained tracks of railroad B, in this case. They conclude that there would necessarily be a disincentive to continue to maintain and invest capital in such private track sections. Here is the counterpoint: Terminal railway districts and selected regional use of “open access” track use or reciprocal switching has been operational for long periods of time.  But no one ever cites multiple examples of “the owning carrier’s loss of track value.” The argument of an expected future loss of asset value when the owning carrier does in fact receive wear and tear and track usage compensation is unproven. It’s an advanced hypothesis that neither the STB nor the private railroads have proven. The pending CSX-Pan Am and CN (or CP)-KCS acquisition cases are perfect places for assessing this issue as to pro and con impacts, with case study evidence.”

OBERMAN WEIGHS IN

STB Chair Marty Oberman—never one to hesitate expressing his views publicly—issued the following statement:

“Today, the White House issued an Executive Order, Promoting Competition in the American Economy. The Executive Order affirms historical facts and principles that have underpinned our nation’s economic success: namely, that a ‘fair, open, and competitive marketplace has long been a cornerstone of the American economy,’ and that ‘[r]obust competition is critical to preserving America’s role as the world’s leading economy.’ The Executive Order further reaffirms the policy of the United States to combat excessive concentration of industry, abuses of market power, and the harmful effects of monopoly and monopsony.*

“While recognizing the independence of the Surface Transportation Board (STB), the Executive Order names the STB as one of the federal agencies statutorily charged with protecting the ‘conditions of fair competition’ through the exercise of its authority. More specifically, the Executive Order encourages the STB to consider actions that further competition in the rail industry; provide accessible remedies to shippers; and focus on vigorously enforcing and accounting for on-time performance standards to avoid unwarranted delays in passenger rail service.

“During my time on the Board, I have been continually concerned with the significant consolidation in the rail industry that happened as a result of a series of mergers decades ago, which dramatically reduced the number of Class I carriers. It is apparent that while consolidation may be beneficial under certain circumstances, it has also created the potential for monopolistic pricing and reductions in service to captive rail customers. Since consolidation, productivity gains often have been retained by carriers in lieu of being passed on to consumers, as would be expected in a truly competitive marketplace. For these reasons, I have previously stated my concerns with the sufficiency of competition in the rail industry and my interest in exploring ways the Board can improve the rail industry’s competitive landscape in order to ensure fairer pricing. In my opinion, competition in the freight marketplace is paramount. In the absence of a truly competitive marketplace, the Board can and should focus on using its competition-related authorities where feasible and reforming its competition policies where necessary.

“Accordingly, while underscoring that the STB is an independent agency and that maintaining its independence is vital, I welcome the nationwide policy contained in this new Executive Order. The President’s emphasis on improving the competitive landscape across the entire economy fits well with my view of the Board’s mission in the current rail environment.

“In harmony with the White House’s policy that the federal government should seek to boost competition nationwide, as I have previously indicated since being named as Chairman, I intend to urge my fellow Board members to prioritize and strongly consider the concepts embodied in several measures that are already pending or have been recommended by Board staff or stakeholders, including but not limited to reforming the Board’s competitive access policies; enhancing shipper visibility into first-mile/last-mile service; and increasing the practical accessibility of rate relief measures to shippers in market dominant situations.

“In addition, I know that the Board takes seriously the administration’s emphasis on ensuring that passenger rail is not subject to unwarranted delays and interruptions in service. Freight railroads have obligations to facilitate timely passenger rail service. Earlier this year, I formed an internal working group to advise the Board on the resources necessary to fulfill the agency’s responsibilities to investigate compliance with the new on-time performance standards and, starting next year, to ensure that those standards are enforced. I will be making an announcement about those efforts in the near future.

“I join the concerns raised by the White House in this Executive Order. Competition is critical to the health of the rail industry and the significant role rail serves in the larger economy, and this Executive Order will help focus attention on these important issues.”

* In economics, a monopsony is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers. The microeconomic theory of monopsony assumes a single entity to have market power over all sellers as the only purchaser of a good or service. This is a similar power to that of a monopolist, which can influence the price for its buyers in a monopoly, where multiple buyers have only one seller of a good or service available to purchase from.

CP RESTATES KCS MERGER POSITION

Canadian Pacific responded to the Executive Order by saying a CP-Kansas City Southern combination “supports the EO’s goals for competition and passenger access to the freight rail network, while a CN-KCS merger would reduce competition and impede passenger service. The EO sends clear messages: [There should be] no rail mergers that reduce competition or hurt passenger service, and the U.S. economy needs more competition among railways.”

“A CP-KCS combination would be a positive step toward more competition—not less—in the freight rail industry with no need for regulatory solutions,” CP stated. “In contrast, a proposed CN-KCS combination creates competitive issues and reduces options for rail customers that will require additional regulation to overcome.

“Additionally, CN-KCS brings with it more challenges for existing Amtrak service on CN’s lines south of Chicago that already have a history of operating issues and one of the worst on-time performance records in the industry, and challenges for the desired establishment of future passenger service in Louisiana.

“In contrast, CP has consistently received an A rating from Amtrak, leading the industry for the previous five years-plus, in its annual host railroad report card recognizing its industry-leading on-time performance record. CP is also the first Class I railroad to complete 100% certification of its Amtrak schedules. CP is supportive of working with all stakeholders to introduce intercity passenger rail service between New Orleans and Baton Rouge, an outcome that comes with far more capacity and operational flexibility, and less risk to Louisiana taxpayers.

“CN’s own map (below) highlights the parallel route structure of a combined CN-KCS system that would funnel all of its traffic through Chicago. CN wrongly argues that the only rail competition worth protecting is where a shipper would suffer a reduction from two to one serving railroad. Even for those shippers, CN cannot solve the problems its deal creates. The proposed divestiture solution for the Baton Rouge to New Orleans corridor fails to solve the underlying competitive problem as it touches only the last mile for certain shippers, while failing to address the reduction in competitive alternatives inherent in combining these two railroads’ parallel route structures. 

“Promises, promises: CN keeps adding promises that are no more than band-aid solutions to the competition problems CN-KCS would create. The promises keep stacking up and now include:

• “A rate-freeze for so-called 2-to-1 shippers.
• “A divestiture of a 70-mile segment, still lacking in important details.
• “Maintaining the level of capital spending on critical KCS lines south of Kansas City.
• “Keeping KCS intact if it’s divested.
• “A bottleneck rate commitment that CN claims would preserve CP-KCS routes as competition against CN.

“All of these promises would require regulatory oversight to enforce, and none would preserve true structural competition like the CP-KCS combination would create. A CP-KCS combination offers all the same benefits—and more—to rail shippers and the supply chain with none of these harms, or need to enforce CN’s growing list of promises through regulation. The CP-KCS combination:

• “Unlocks new capacity for Amtrak passenger service, rather than interfering with passenger service between Baton Rouge and New Orleans and south of Chicago.
• “Creates single-line routes to all the markets that a CN-KCS network would reach.
• “Brings new competition to and from Upper Midwest markets dominated by BNSF or Union Pacific that CN-KCS cannot address.
• “Creates new competition versus CN that CN-KCS actually eliminates.
• “Has a route network that does not funnel all of its traffic through the congested Chicago area.

“CP-KCS would be better for Amtrak and achieves the goals of President Biden’s executive order, while CN-KCS would reinforce the problems the order is trying to solve.

“CP-KCS remains the only viable Class 1 combination. CP is continuing to pursue its application process to acquire KCS so that the pro-competitive CP-KCS combination can be reviewed by the STB and implemented without undue delay, in the event KCS’ agreement with CN is terminated or CN is otherwise unable to acquire control of KCS.”