The Urethane Blog

Rail Legislation

Making the switch to a more competitive freight rail industry

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Both Democrats and Republicans underscored the importance of a strong national transportation network when they rolled out their political platforms. And it’s clear both parties recognize changes are needed to transport our nation’s economy into the future. Last year Congress took a big step when it unanimously passed the Surface Transportation Board (STB) Reauthorization Act of 2015, legislation introduced by Sens. John Thune (R-S.D.) and Bill Nelson (D-Fla.). The STB, a small and largely unknown agency, has made a solid start in carrying out the will of Congress by proposing innovative policies that will help provide American businesses with greater access to competitive freight rail service.  Large and small freight rail customers across the United States were encouraged by the Board’s landmark decision, but true to form the nation’s railroads have reacted with a litany of false claims.

The STB oversees the nation’s freight rail industry, balancing the needs of railroads and shippers. The mergers and acquisitions that followed the Staggers Act (which deregulated the rail industry in 1980) left the nation with only four very large railroads.  They are strong and financially sound, and they control more than 90 percent of the country’s rail traffic.  No one questions their importance to American industry and their critical role in the economy, least of all their customers.  But many rail customers have only one railroad serving their farm or factory. They are “captive” shippers.  Captive shippers confront the realities of textbook monopoly power:   no choice of rail carrier frequently means very high rates and unreliable service with minimal incentive for the railroad to work with their customers.

The National Industrial Transportation League, the nation’s premiere freight shippers’ association, asked the STB to overturn its old rules that prevent genuine rail-to-rail competition and to allow for “competitive switching”.  Competitive switching would give qualified captive shippers that are paying very high rates the opportunity to seek a competitive bid from a second railroad in the vicinity of the shipper’s sole-served facility.The Rail Customer Coalition, which represents the largest users of freight rail service and a broad cross section of manufacturing, agricultural, and energy industries, strongly supported our proposal.  Furthermore, the Department of Agriculture has said that “Competitive switching offers a market based solution to balance the needs of the railroads and shippers and is in keeping with the goals of the Staggers Act.”

In a decision last week, the Board struck down its outdated and ineffective reciprocal switching rules and proposed a new, pro-competition policy which, if adopted, will open up opportunities for more competition between railroads for a captive shipper’s business.  The Board’s proposal is not everything we asked for, but it holds the promise of facilitating competition between railroads for rail dependent shippers across America who currently have none.

Despite a number of false claims coming from the rail industry, the proposed rule is limited in scope and contains many operational and other safeguards.  It would not empower the STB to authorize operations by one railroad over the tracks of another railroad; instead, the new rules would simply facilitate the interchange of traffic between railroads who would continue to operate on their own tracks and networks.  The proposed rules would not burden the rail industry with cumbersome regulations, as even the railroads admit they switch thousands of cars between them on a weekly basis.  And the Board’s rule is designed to ensure that new competitive switching arrangements would not clog the rail system, lead to operational inefficiencies, or create a regime of “open access”.

The railroads say that today’s industrial rail system already provides shippers with access to competitive switching opportunities based on voluntary agreements between railroads to switch traffic. That’s simply not true.  The current rules allow railroads to maintain total control of their captive customer’s transportation needs and block requests for switching traffic by simply refusing to agree to “switch” a shipper’s traffic.

The STB correctly decided that they have the legal authority to authorize such competitive switching arrangements and that no new laws are needed.  In fact, their decision complements President Obama’s April 15th Executive Order encouraging competition in the American economy.

Competitive switching arrangements are commonplace and a legal right for captive shippers in Canada.  Their experience with switching demonstrates that rail competition and competitive switching work well for both railroads and their customers.  Competition will spur railroads to negotiate more competitive rate and service terms.  That’s how companies keep their customers, not by relying on outdated government regulations that prevent fair competition.

The STB has affirmed that the driving force of the American economy is competition.  They relied on an extensive record of public comment in reaching a decision to promote healthy competition in a markedly non-competitive segment of the freight rail industry.  Their proposed rule doesn’t guarantee any outcome; it only gives captive shippers an opportunity to seek the benefits of competition they are now denied.  The new rule is not perfect but the STB has taken the right first step.

Jennifer Hedrick is the Executive Director of the National Industrial Transportation League, a trade association that serves as the voice of the shipper on freight transportation issues.