So, What Do Rail Shippers Really Want?

Written by Michael F. McBride, Partner, Van Ness Feldman, LLP
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Periodically, pundits who are not active participants in Surface Transportation Board (STB) proceedings offer for publication in a variety of newspapers—presumably aimed at members of Congress and other public policy opinion leaders—guest opinion columns containing warnings of dire results should railroads be “re-regulated.”

These pieces generally recycle the same tired old arguments—that rail customers want “re-regulation” (a favorite canard dreamed up by the Association of American Railroads in the 1980s about legislative initiatives that have no applicability to today’s debate), that Congress should completely deregulate the railroads as it did for the trucking and aviation industries in 1980, and generally that any effective regulation of the railroads would be harmful to investment in rail service, and therefore the public interest.

These opinions are uninformed and miss much of the point. Shippers are only advocating that the still-in-force 1980 Staggers Rail Act provisions be followed by regulators as to its provisions applying to freight rates, accessorial charges and other railroad practices where shippers lack effective transportation alternatives to rail.

While no one denies that there have been benefits from the partial deregulation of the railroads, it hardly follows that things would be even better if there were complete economic deregulation—yet, these opinion columns endorse that.

The reason Congress completely deregulated the trucking and aviation industries, but not the railroad industry, is that there are few barriers to entry in trucking and aviation, whereas railroads have substantial market power over many customers. Other entities that possess market power (e.g., utilities) remain regulated for that reason.

Railroads acquired substantial additional market power through a series of mergers and acquisitions, low-density line abandonments and administrative decisions by regulators.

Overall, these actions reduced effective competition in the rail industry—the opposite of what Congress intended in the Staggers Act, whose Rail Transportation Policy preamble states that competition, and not regulation, “to the maximum extent possible,” should govern in the railroad industry. Instead, four large railroads now control more than 90% of the rail traffic in the United States, and many markets have only one rail carrier.

The authors of these opinion columns misstating the objectives of captive rail shippers seem most upset about what they call the “Forced Switching Rule” under consideration by the STB. It is not clear that the STB will adopt such a rule. But if it does, these authors seem not to be aware that reasonable compensation will be required if an incumbent railroad must switch cars to another railroad. There is no basis to conclude that such compensation will be inadequate, because the terms have not been proposed.

Most large railroads are earning more than the STB’s cost of capital, which the STB now acknowledges has been quite generous, rising from less than 9% in 2016 to more than 12% in 2018, during a time when inflation is almost non-existent and interest rates are falling.

When utilities earn more than the cost of capital, it is grounds for the regulator, often on its own volition, to determine generally if rates are too high. Utility customers typically do not have to file complaints to trigger rate review. Yet, rail customers must file an individual complaint against each rate, and endure proceedings that go on for several years and cost several million dollars. It is obvious, though, that most rail rates will never be regulated, given the necessity and cost of filing a complaint to challenge each one. This is just one of many practical realities that are never acknowledged by railroad advocates.

I have been practicing before the STB (and its predecessor Interstate Commerce Commission) for more than 43 years (largely, representing railroad customers) and have never seen these opinion-column authors—typically advocates of less government generally—at an STB proceeding. Maybe they should come around, and discuss things with the affected community, to better understand the need for regulation of entities with substantial market power. If they had, they might have noticed that, as an industry with substantial “barriers to entry,” and with returns well in excess of the 12.22% cost-of-capital figure generously determined by the STB (let alone the 7% determined by Wall Street), the railroads clearly possess market power.

Entities with substantial market power are generally regulated because competition is not fully effective. The authors’ warning of economic regulation’s perils do not pick up on that, perhaps because they fail to look at the actual circumstances, but instead choose to just make generalized arguments that do not apply to the large portion of the railroad industry not subject to effective competition.

Rail shippers lacking effective alternatives to rail service face a most uneven playing field in negotiations with railroads, as they must accept the price demanded or risk going out of business because they cannot, in most instances substitute trucks or barges. These captive shippers do not advocate returning to the pre-Staggers Act days when virtually every action of the railroads was subject to close regulatory scrutiny.

Captive rail shippers ask only that, where based on provisions of the 1980 Staggers Rail Act, railroads possess market dominance as determined by a formal regulatory review, rates not exceed a regulatory determined maximum reasonable rate—and that access to the regulatory process be simplified so as to reduce what are now transaction costs in the millions of dollars that deny all but the largest shippers access to regulatory relief.

Michael F. McBride is partner at the law firm Van Ness Feldman, LLP, in Washington, D.C. He has been practicing before the ICC and STB for more than 43 years, mostly on behalf of captive rail customers, but also for ports and other entities that deal with the railroads. He has not appeared on behalf of railroads. McBride twice served as President of the Association of Transportation Law Professionals, the only person to have done so twice. He also practices nuclear, energy and environmental law, and advises clients on commercial contracts, including rail transportation. McBride is involved in a great deal of negotiation, mediation, arbitration or litigation concerning a wide variety of matters, including appellate review of STB actions and the actions of several other governmental agencies. Additional information is available at https://www.vnf.com/mmcbride.

Categories: Class I, Freight, Regulatory, Short Lines & Regionals, Switching & Terminal Tags: , , ,