Switch to fair competition for freight rail transportation

Next week, the Surface Transportation Board (STB) will hold a public hearing on proposed reforms to rules that underlie the nation’s freight rail policy.  While the STB and freight rail policy rarely garner much attention or make many headlines, the topic of this hearing has important ramifications for the future economic health of many American industries.  Specifically, the STB will hear testimony on a proposed new rule that would give rail customers (“shippers”) that are served by a single major railroad the ability to seek competing bids for service from a nearby railroad through the use of “competitive switching.”  Proponents of the new rule are attempting to introduce a modicum of competition and bring market forces to bear on freight rail service where none exists today.

Competition would benefit railroads, rail shippers, their customers and the economy as a whole.  However, U.S. railroads adamantly oppose such reforms, as well as most actions by the STB that would change the current freight railroad regulatory regime, by labeling any proposal that promotes competition as “reregulation,” a truly dirty word in the modern era.  No one wants to go back to the days of heavy-handed economic regulation of our transportation industries; those days are far behind us and should stay there.

{mosads}How did the U.S. freight rail system get off track?  The industry has consolidated from 26 major (“Class I”) railroads in 1980 to only seven today.  Of those seven just four railroads (CSX, Union Pacific, Norfolk Southern and BNSF) handle over 90 percent of U.S. freight rail traffic.  The regional footprint of these railroads further limits where they actually compete with each other for business. A recent analysis by Escalation Consultants estimates that 78 percent of the stations in the U.S. where rail freight is picked up or dropped off are served by a single major railroad. 

The lack of competition has led to soaring costs for many rail shippers, with rates for freight rail service rising nearly three times faster than inflation since 2001.  With very limited access to competitive options, shippers have little recourse.  They can file a rate challenge with the STB, but such challenges are extremely complex, slow and expensive.  A large rate case at the STB can cost more than $5 million and take more than three years to resolve.   Not surprisingly, very few rate cases are ever undertaken.  Imagine if consumers had to use the same process to change their cell phone service!

In 1980 when America’s freight railroads were going under, Congress agreed that competition should be part of the way forward as it deregulated the rail industry.  In passing the Staggers Rail Act of 1980, Congress called for the establishment of switching arrangements that are “practicable and in the public interest” or “necessary to provide competitive rail service.” Unfortunately, what followed were agency rules so onerous that not one shipper has successfully obtained competitive switching service since the rules were adopted in the mid-1980s.   

Fortunately, there is a better way.  Greater access to competitive freight rail service through competitive switching arrangements offers a far more efficient way to temper soaring freight rail rates and would also reduce the need for government intervention.  Furthermore, market-based competition can lead to innovation and increased efficiencies in rail service, just as it does throughout all sectors of the U.S. economy.

The National Industrial Transportation League (NITL), representing a broad range of freight shippers, has urged the STB to adopt a rule that would open the way for shippers to obtain competitive switching when the shipper or receiver can demonstrate that its facility is served by only one Class I railroad, that there is a lack of effective competition, and that there is or can be a working rail interchange within a reasonable distance (i.e., 30 miles) of the shipper’s or receiver’s facility.  If the switch is shown to be unsafe or harmful to other customers, the railroad can block it. And there is no “free lunch” for the shipper–they would have to pay an appropriate “access” fee to cover the railroad’s costs.  These criteria are indeed conservative and intended to provide reasonable limits on where competitive switching can be applied. 

Competitive switching was an essential mandate in the Staggers Act, the forward looking legislation that saved America’s freight railroads from financial ruin.  Restoring this unfulfilled promise is a modest, common-sense proposal that reduces the need for government intervention and introduces some free-market forces into a freight rail system that has evolved into regional government-protected monopolies.

Next month’s hearing is an opportunity for the STB to take a step forward with the important competitive switching reforms proposed by the NITL.  The STB can help remove existing barriers to competition, and in doing so help both U.S. railroads and a wide range of their customers, including automobile, chemical, glass, paper, fertilizer and steel manufacturers.  Greater competition through increased switching arrangements is the right path forward and lies at the heart of the free-market principles of our nation’s economy.

Carlton is president and CEO of the National Industrial Transportation League.