Competition: What’s Needed to Make Freight Rail Really Work

December 1, 2015

America loves the story of the little guy. Hard work and optimism in the face of difficulties creates winners, and when the ‘Little Engine That Could’ finally scales the hill, we collectively applaud. Unfortunately, in today’s freight railroad world, the little guy is too often left standing on the sidelines and with no options to seek corrective action.

America’s railway system has a long and storied history, playing a starring role in the growth of our nation. Until recently, there were 26 major railroads in business, carrying goods from companies of all sizes to their customers. Today, that number is down to seven, with just four dominating the market. This lack of competition often means only the largest companies that can pay the most are getting service. The little guys, like many chemical distributors who are primarily small businesses, are usually lower-volume rail shippers and get nudged off the tracks.

For example, last year a company employing 25 moved into a suburban Chicago facility with an already-existing rail spur that had been used extensively by the previous owner of the property. When the new company attempted to initiate service, the only railroad company running on that track denied the request. After repeated meetings and discussions, the railroad has continued to deny service and referred the would-be shipper to its legal department. Despite being willing to pay freight rail rates that have doubled since 2001, this captive shipper can’t get any service at all, regardless of cost.

Nearly 20 years ago, Congress created the Surface Transportation Board (STB) to evaluate the reasonableness of rates when a railroad has market dominance over a customer and to provide an equitable process for mediating disputes between railroads and shippers. Today, the Board estimates that their main remedy, a stand-alone cost challenge, takes 3.5 years and $5 million to litigate, and requires the plaintiff shipper to create from scratch an entire fictional railroad scenario to prove the rates are excessive.

The typical National Association of Chemical Distributors member averages approximately $26 million in annual sales and operates on extremely low margins. We don’t have the resources required to roll the dice on an STB case. The costs and time investment are so high that most shippers, including many small businesses that are typically lower-volume freight rail users, choose not to file a claim and consequently remain subject to the whims of rail operators. Indeed, the Transportation Research Board affirms in their report titled “Modernizing Freight Rail Regulation” that our freight policies are outdated and in need of reform. The Board found that “more appropriate, reliable, and usable procedures are needed for resolving rate disputes,” the kind of reforms that would help level the playing field for chemical distributors and other small businesses.

Fortunately, relief is on the horizon. In June, the U.S. Senate passed the Surface Transportation Board Reauthorization Act of 2015 (S. 808). The reforms included in S. 808 mark a very important step in the effort to promote access to competitive freight rail service and provide a more efficient venue to address rate and service issues between railroads and their customers. With the Senate’s passage of S. 808 earlier this year, it is vital the House of Representatives vote quickly to approve STB reform legislation and send a final bill to President Obama for his signature.

The lack of freight rail competition is costly to American businesses, especially for the little guys – the small businesses that make a large impact on our economy, accounting for approximately 60 percent of net new jobs since 1993. With the dramatic changes in the rail sector, now is the time to re-evaluate and modernize our rail policy framework to meet present and future needs.

This guest blog post is by Eric R. Byer, president of the National Association of Chemical Distributors (NACD). NACD is an association of more than 440 companies that provide products to more than 750,000 end users in industries as diverse and essential as construction, healthcare, electronics, pulp and paper, water treatment and many others.