STB to Probe Rail Competition
Move Follows Report Questioning Rates
By Eric Miller, Staff Reporter
This story appears in the Sept. 3 print edition of Transport Topics.
The Surface Transportation Board said it will conduct a sweeping analysis of competition in the U.S. railroad industry, after a new government report raised suspicion that some rail freight rates in selected markets might not be justified or reasonable.
The Government Accountability Office recommended the study after documenting in a report a 7% increase in rail freight rates in 2005 from a year earlier, the largest increase in more than 20 years.
“GAO recommended that the STB conduct a rigorous analysis of the state of competition in the U.S. railroad industry and consider actions to address problems associated with potential abuses of power,” the STB said in its request for bids from contractors.
The board said its study will attempt to “review and analyze various proposals that might enhance competition.”
GAO said it was particularly concerned that freight railroads’ miscellaneous revenue — a category that includes fuel surcharges — had tripled to $1.7 billion in 2005 from $633 million in 2004.
The STB said that, in the years following the Staggers Rail Act of 1980, rail transportation rates declined steadily as freight volumes steadily increased.
“In the last few years, however, capacity constraints have emerged in key corridors, and rates have in some cases increased sharply,” the STB said on its Web site. “The government believes that changes in railroad rates should reflect the operations of a competitive marketplace and not an abuse of market power.”
The board is not commenting publicly but said it is budgeting up to $1.2 million for the study and targeted a November 2008 completion date. The STB originally agreed to do the study in June after receiving an advance copy of the GAO report, which was released Aug. 15.
Michael McBride, a Washington D.C., lawyer who represents shippers, said the GAO report and STB study signal a new direction by the STB. For the first time in 27 years, McBride said, the STB now is taking seriously the concerns of shippers and that the agency’s “pro-railroad, pro-deregulatory approach” is going to have to change.
“I don’t think there’s any doubt about it,” McBride, a partner in the law firm of LeBoeuf, Lamb, Greene & MacRae LLP, told TT. “In captive markets, the
railroads are acting in their own self-interest and are raising rates substantially.”
But Anthony Hatch of abh consulting, said, “I think you’ll find very few such abuses.” Hatch, an independent rail analyst in New York, said, “It’s hard to prove that there’s abuse of market power, so my guess is that’s what the study will say.”
Tom White, spokesman for the Association of American Railroads, told Transport Topics the GAO’s 2005 rate increase analysis “confirms what our data had shown,” and he said, “We’ll participate if they do a study.”
“But you have to understand, this is after 25 years of rate reductions, and average rail rates in 2005 were still less than they were in 1981,” White said. “That’s a pretty impressive record.”
Spokesman for the four largest U.S. railroads — Burlington Northern Santa Fe Corp., CSX Corp., Union Pacific Corp. and Norfolk Southern — deferred comment on the study to the AAR.
“We feel that, basically, we have nothing to fear from studies,” White said.
“Every study that’s been conducted in the past has indicated that, since railroads were partly deregulated, the law has worked pretty much as it was supposed to work, in that it strengthened the railroad industry, it allowed
the railroad industry to invest more, and it provided on balance cheaper rates for customers,” he added.
Since 2005, the year cited in the GAO report, rail freight rates generally have continued to increase.
CSX, for example, said in June that, despite softer freight volume, the company will raise its prices as much as 7% this year and up to 6% in 2008. Likewise, Union Pacific also said in June it expects “price improvement” from 2007 to 2009 and beyond (6-25, p. 6).
By statute, the STB generally does not have jurisdiction in “captive” freight markets, those without carriers or other rail competitors, unless the ratio of the railroad’s rate revenue to variable costs is more than 180%. That means, for example, that if it costs a railroad $100 for a specific shipment, it cannot charge a shipper more than $180, or it risks rate adjustment actions from the STB. Rates charged below the 180% threshold are mostly considered competitive by the STB.
The GAO report expressed concern because captive freight traffic was declining in 2005, but rates significantly above the 180% threshold rate were increasing.
This story appears in the Sept. 3 print edition of Transport Topics.
The Surface Transportation Board said it will conduct a sweeping analysis of competition in the U.S. railroad industry, after a new government report raised suspicion that some rail freight rates in selected markets might not be justified or reasonable.
The Government Accountability Office recommended the study after documenting in a report a 7% increase in rail freight rates in 2005 from a year earlier, the largest increase in more than 20 years.
“GAO recommended that the STB conduct a rigorous analysis of the state of competition in the U.S. railroad industry and consider actions to address problems associated with potential abuses of power,” the STB said in its request for bids from contractors.
The board said its study will attempt to “review and analyze various proposals that might enhance competition.”
GAO said it was particularly concerned that freight railroads’ miscellaneous revenue — a category that includes fuel surcharges — had tripled to $1.7 billion in 2005 from $633 million in 2004.
The STB said that, in the years following the Staggers Rail Act of 1980, rail transportation rates declined steadily as freight volumes steadily increased.
“In the last few years, however, capacity constraints have emerged in key corridors, and rates have in some cases increased sharply,” the STB said on its Web site. “The government believes that changes in railroad rates should reflect the operations of a competitive marketplace and not an abuse of market power.”
The board is not commenting publicly but said it is budgeting up to $1.2 million for the study and targeted a November 2008 completion date. The STB originally agreed to do the study in June after receiving an advance copy of the GAO report, which was released Aug. 15.
Michael McBride, a Washington D.C., lawyer who represents shippers, said the GAO report and STB study signal a new direction by the STB. For the first time in 27 years, McBride said, the STB now is taking seriously the concerns of shippers and that the agency’s “pro-railroad, pro-deregulatory approach” is going to have to change.
“I don’t think there’s any doubt about it,” McBride, a partner in the law firm of LeBoeuf, Lamb, Greene & MacRae LLP, told TT. “In captive markets, the
railroads are acting in their own self-interest and are raising rates substantially.”
But Anthony Hatch of abh consulting, said, “I think you’ll find very few such abuses.” Hatch, an independent rail analyst in New York, said, “It’s hard to prove that there’s abuse of market power, so my guess is that’s what the study will say.”
Tom White, spokesman for the Association of American Railroads, told Transport Topics the GAO’s 2005 rate increase analysis “confirms what our data had shown,” and he said, “We’ll participate if they do a study.”
“But you have to understand, this is after 25 years of rate reductions, and average rail rates in 2005 were still less than they were in 1981,” White said. “That’s a pretty impressive record.”
Spokesman for the four largest U.S. railroads — Burlington Northern Santa Fe Corp., CSX Corp., Union Pacific Corp. and Norfolk Southern — deferred comment on the study to the AAR.
“We feel that, basically, we have nothing to fear from studies,” White said.
“Every study that’s been conducted in the past has indicated that, since railroads were partly deregulated, the law has worked pretty much as it was supposed to work, in that it strengthened the railroad industry, it allowed
the railroad industry to invest more, and it provided on balance cheaper rates for customers,” he added.
Since 2005, the year cited in the GAO report, rail freight rates generally have continued to increase.
CSX, for example, said in June that, despite softer freight volume, the company will raise its prices as much as 7% this year and up to 6% in 2008. Likewise, Union Pacific also said in June it expects “price improvement” from 2007 to 2009 and beyond (6-25, p. 6).
By statute, the STB generally does not have jurisdiction in “captive” freight markets, those without carriers or other rail competitors, unless the ratio of the railroad’s rate revenue to variable costs is more than 180%. That means, for example, that if it costs a railroad $100 for a specific shipment, it cannot charge a shipper more than $180, or it risks rate adjustment actions from the STB. Rates charged below the 180% threshold are mostly considered competitive by the STB.
The GAO report expressed concern because captive freight traffic was declining in 2005, but rates significantly above the 180% threshold rate were increasing.
