Railroads, shippers size up competitive switching proposal at STB hearing

Railroads and rail shippers continued to cite the pros and cons about the National Industrial Transportation League's (NITL) competitive switching proposal at the Surface Transportation Board's (STB) hearing held yesterday. The board also held a hearing on the proposal on Tuesday.

NITL proposes that certain captive shippers located in terminal areas be granted access to a competing railroad if there is a working interchange within a reasonable distance, perhaps 30 miles.

If implemented, the proposal would create unpredictable traffic flows, reduce high levels of customer service achieved over the past few years and diminish railroads' incentive to keep investing at record levels in critically needed transportation infrastructure, CSX Corp. Vice President of Service Design Cressie Brown testified at the hearing. The Association of American Railroads also testified that the proposal would undermine railroads' investments and impact service quality for shippers.

In CSX advisory councils and through periodic surveys, customers said they need more reliability to grow their own businesses, said Brown, adding that the NITL's proposal "turns back the clock" on resource and infrastructure gains achieved over the past decade.

The proposal also would force railroads, in certain circumstances, to open up their private networks to competitors, creating artificial competition and transferring revenues from railroads to the handful of customers who recommended the proposal, she testified.

"I am very concerned that the proposal will force cars to locations where we do not have the resources or infrastructure to handle them," said Brown. "It is not in the broader public interest to experiment with a forced switching scheme, which would ultimately create less reliable and less cost effective service for our customers."

However, competitive switching agreements alone would not ensure there is real rail competition for the nation's farmers, manufacturers and consumers, a representative for The Chlorine Institute (CI) testified.

Nearly three-quarters of all shippers are captive to a single railroad, a situation that confers "unrivaled pricing power" on railroads, said DuPont's Sustainability Manager Eddie Johnston on behalf of CI. Requiring the nation's major railroads to enter into competitive switching agreements is necessary, but insufficient, he said.
 
"Competitive switching agreements stop short of actually creating competition. They [only] make competition possible," said Johnston.

He suggests the STB not lessen its oversight over end-to-end rail rates because "competitive switching cannot be interpreted as creating competition per se." The board also should unambiguously disallow the use of competitive switching alone as a defense against market dominance in a rate case and require all railroads subject to competitive switching rules to provide tariff rates when a shipper is not able to obtain a reasonable contract offer, Johnston believes.

Competitive switching would be a first step toward opening up freight rail to free market forces, an American Chemistry Council (ACC) official testified. A lack of freight-rail competition is harming U.S. chemical manufacturers, the official said.

The council recently released research results that determined chemical shippers paid a $4.5 billion premium on rail shipments in 2011, more than twice the premium paid in 2005. The findings echo other ACC research that found rail rates have risen 76 percent since 2001, nearly three times the rate of inflation and truck rate hikes, according to the council.

"The NITL proposal would reverse some of the anti-competitive effects from 30 years of rail consolidation by breaking some of the bottlenecks that have grown increasingly longer with each merger," the ACC official testified.

The ACC also earlier this week released a new rail report card council officials believe shows that Congress needs to reform U.S. freight-rail policy to better serve consumers and businesses.

Regulations intended to protect the economic health of railroads received an “A” on the report card, but regs overseeing the reasonableness of rates where there is an absence of effective competition earned an “F," ACC officials said. Other regs that allow market forces to set rates via effective rail competition, govern the handling and resolution of rate cases, and prevent undue concentrations of market power all rated "D" grades.

"Congress needs to modernize freight-rail policy and reform the STB so that American consumers and manufacturers benefit from increased access to competitive rail service and a more workable rate dispute process," ACC officials believe.