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Before a Senate hearing on federal rail policy began yesterday, Sen. John “Jay” Rockefeller (D-W.Va.), who chairs the Senate Committee on Commerce, Science and Transportation, released a committee staff report that shows Class Is are charging shippers “extraordinarily high” rates and suggests the Staggers Rail Act of 1980 needs to be reformed.

Titled “The Current Financial State of the Class I Freight Rail Industry,” the report shows the “largest American freight railroad companies have been earning record profit margins at the expense of their shipper customers,” said Rockefeller — who late last year introduced the Surface Transportation Board Reauthorization Act of 2009 (S. 2889), which seeks rail regulatory reform — in a prepared statement.

“If you listen to what the railroads tell their regulators in Washington, they are barely keeping the lights on,” he said. “But the reality is that Class I railroads have become some of the most profitable companies in the United States. They enjoy substantial market power, yet the current railroad regulatory system regards them as incapable of both making needed capital investments and remaining healthy.”

The report notes that in 2008, railroads reported to the Surface Transportation Board (STB) that their profitability was lagging behind other sectors, but Fortune magazine rated railroads as one of the top five most profitable U.S. industries. Although railroads have told regulators they aren’t making high enough profits to cover all of their long-term capital investment needs, they’re using billions of dollars to buy back shares and boost the short-term values of their stocks, said Rockefeller, referring to the report.

“It’s past time to update our rail policies to change a system that allows railroads to grossly overcharge captive shippers and to better meet our nation’s future transportation needs,” he said.

The Association of American Railroads (AAR) “vehemently disagrees” with the report’s findings and the need to reform the Staggers Act, according to a statement issued yesterday. Imposing new federal regulations will undermine railroads’ ability to sustain investments in their rail networks, which serve as a foundation for both freight and passenger rail, AAR officials said

“The report makes 'profits' and 'corporate efficiency' sound like dirty words. The reality is the railroad industry’s return to financial health has resulted in private capital — not taxpayer dollars — getting turned back into building and maintaining the nation’s rail network,” said AAR President and Chief Executive Officer Ed Hamberger. “This report is aimed not at leveling the playing field, but at justifying attempts to regulate lower rates for some large shippers, like chemical companies, agribusiness and electric utilities. And as the Surface Transportation Board’s own report found, lowering rates for some shippers through re-regulation would result in increased rates for other shippers, or decreased investments in the rail network.”

However, Consumers United for Rail Equity (CURE) officials — who back S. 2889 and efforts to re-regulate the rail industry — believe the report shows how railroads “paint a bleak picture of their finances” to help delay rail reform efforts, yet “tout strong profits and robust growth to investors,” according to a statement released yesterday.   

“This report shows the railroads will stop at nothing to fight off common-sense reforms that would protect American businesses and consumers,” said Glenn English, who chairs CURE, a coalition of freight-rail shippers. “The railroads plead poverty to protect their monopoly and charge excessive rates to shippers, then turn around and boast of their strong profits to Wall Street.”

During the Senate hearing held after Rockefeller released the committee report — which was titled “The Federal Role in National Rail Policy” — U.S. Department of Transportation Deputy Secretary John Porcari and STB Chairman Daniel Elliott III testified along with Rockefeller.

The nation’s economy depends on an efficient, safe and reliable transportation system, and the Obama Administration believes rail can play an increasingly important role in meeting America’s freight and passenger mobility needs, said Porcari.

“But this cannot be just a responsibility of the Administration and Congress. It requires commitments from our states and local partners,” he said. “They too need to put into place the appropriate policies, program structures and investments, both public and private, to achieve this enhanced opportunity for rail.”

Macroeconomic trends inevitably affect the dynamics of railroad/customer relationships, and the allocation of labor and resources throughout the transportation industry, said Elliott.

“As conditions continue to improve in the coming months, the STB will need to monitor how and to what degree it should reexamine and tailor its regulatory policies to meet new conditions,” he said.

During his testimony, Rockefeller said he — along with Sens. Byron Dorgan (D-N.D.), Kay Bailey Hutchinson (R-Texas), Frank Lautenberg (D-N.J.) and John Thune (R-S.D.), who are S. 2889 co-sponsors — have engaged a dialogue with stakeholders to address their concerns before the bill is brought to the Senate floor.

“I want everybody in this room to know that whether we do it this year or next year, railroad reform is going to happen,” said Rockefeller. “Either Congress will do it, or it will need to be done through regulation.”