July 26, 2016 Derailed

Volume 11 | Issue 3

Outdated railroad policies point to need for a competitive freight rail system.

Like the business of chemistry, most industries in the United States operate in a fierce and highly competitive global marketplace. Each day, the challenge to remain competitive mounts in the face of low-cost producers from every corner of the world coupled with rising costs for energy, transportation, and labor.
While operating in such an environment might not always be easy, competition between industries ultimately benefits not only the consumer, but also, the competitor. Where the free market reigns companies grow stronger by offering their customers improved service at a competitive price. In order to thrive, companies find innovative and efficient solutions to meet the demands of the market place.

Regrettably, access to competitive and reliable freight rail service continues to be a growing concern for the chemical industry and other industries. Rail transportation is vital to our businesses because of the unique composition and characteristics of many chemical products and the large volumes required by our customers. Each year, we depend on the nation’s freight rail system to deliver approximately 170 million tons of our products, making chemicals the second-largest railroad commodity, behind only coal in terms of volume.

Unfortunately, outdated federal policies have trumped free market principles when it comes to the nation’s freight rail system. And unlike other American industries, railroads have the power to deny customers access to competition.

In 1980, Congress began an ambitious and necessary project to deregulate the railroads, seeking to restore the vitality of the railroads while ensuring a healthy, reliable and competitive freight rail system for the nation.

Fast-forward to 2008: Market share for freight rail traffic has grown and railroads are now enjoying record profits. The major railroads are benefiting from an influx of capital, through higher stock prices and growing interest, by large investors while still being able to buy back their own stock. By any measure, the overall financial health of the railroads has been restored.

While we can declare victory when it comes to restoring the financial health of the railroads, there is still much work to be done in order to establish a reliable and competitive freight rail system.

MERGERS AND EXEMPTIONS
Since 1980 we have seen 40 major railroads merge into less than 10 railroads that control more than 90 percent of the nation’s freight. While no one would argue that some consolidation was necessary, it has also created a competitive imbalance amongst the nation’s railroads. This imbalance combined with outdated federal protections that limit competition between railroads has allowed the major railroads to operate like regional monopolies.

To make matters worse, the sole federal regulatory body addressing anti-competitive rail practices – the Surface Transportation Board (STB) – is largely reactive rather than proactive and for the most part, inaccessible as a venue to resolve commercial issues. For example, over the course of four years, several of the nation’s largest railroads overcharged their customers $6.4 billion through unjust fuel surcharges. Once the STB felt compelled to review the charges, it eventually confirmed the incorrect fuel surcharges but did not direct the railroads to compensate the shippers for improperly paid fees. Compare that to a strikingly similar situation in the passenger airline industry where British Airways and Korean Air were fined a combined $600 million for excessive fuel surcharges.

Further, the railroads continue to enjoy an exemption from the nation’s antitrust laws. While there may have been a need for such exemptions when the federal government played an outsized role in management of the railroads, it is clear that is no longer the case. There is no reason why railroads should be allowed to operate any differently from the customers they serve.

Some have also raised concerns regarding possible capacity challenges throughout the rail system. To the extent there is a shortage of capacity to serve all categories of rail traffic – especially customers that are paying the highest rates – it is important to look for ways to make sure the nation’s freight rail system will meet those needs in the interest of maintaining a strong U.S. economy.

Any effort to increase capacity involving the use of public funds would need to benefit all rail customers. To avoid focusing infrastructure investments only where rail-to-rail competition already exists – such as intermodal facilities – the freight rail needs of U.S. based producers should be weighed along with increased demand created by foreign imports.

It is important that concerns regarding capacity should not become the rationale for actions that would harm shippers or continue to shield the railroads from competitive economics. If the railroads’ projections of increased demand are correct, the nation should focus on all of the issues to improve rail capacity – specifically competition and efficiency, as well as infrastructure, and prepare for that increased demand.

COMPETITION IS NECESSARY
It is also foolish to accept the notion that increasing competition between railroads across the board for all rail customers will put future investment into the freight rail system at risk. Industry wide, chemical producers spend $23.5 billion annually on capital investment in the face of stiff competition from all sides without capital flight. It is a fundamental part of doing business in a free market.

If we truly want a strong and healthy freight rail system for the next century, it’s time to extend the full benefits of competition to the railroads. In a free market, competition is what keeps the economy strong, promotes growth and ensures that tomorrow will be better than today. To that end, Congress needs to charge the STB with completing the mission to promote competition between railroads rather than relying on broken or outdated regulations.

Monopolies are the enemy of a free market that can put everyone at risk – employers, workers and consumers. History has proven that promoting competition can be an effective regulator to guard against market power abuses for other industries. With that in mind, America has spent the last century exporting free market capitalism to all parts of the world. Isn’t it time we restored it to our rail system, too?

Jack N. Gerard is President and CEO of the American Chemistry Council, which represents the companies that make the products that make modern life possible, while working to protect the environment, public health, and the security of the nation. Visit: www.americanchemistry.com.

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