STB Reform: Providing a Much Needed Dose of Reality
There is near universal agreement that the agency charged with resolving freight rail issues is stymied by its own outdated and overly-burdensome rules. The Surface Transportation Board’s (STB) Acting Chairman, Ann Begeman, perfectly encapsulated these concerns when she declared that the Board’s rate review process “is too costly, too time consuming, and too unpredictable.” As members of the Board continue to look for better and less bureaucratic ways to operate, a sensible proposal has emerged in the form of new legislation introduced by Senator Tammy Baldwin (D-WI), “Rail Shipper Fairness Act.”
The heart of the problem plaguing the STB’s current rate review process stems from the Board’s arcane Stand-Alone-Cost (SAC) standard for measuring the reasonableness of rail rates. To successfully challenge a rate, a shipper must design, on paper, an entire railroad business, and prove that it could serve the same traffic at a lower cost than the rates charged by the existing railroad. If that sounds ridiculously complicated that’s because it is.
Recent SAC cases have taken an average of 5 years to complete and cost each shipper well over $5 million. Because of the incredible complexity involved, Russell Pittman of the US Department of Justice’s Antitrust Division concluded that SAC “has become what a reviewing court feared it would be: ‘a full employment bill for economists.’”
The cost and complexity might be somewhat tolerable if SAC truly was the “gold standard” for reviewing rates that some claim it to be. Unfortunately, SAC fails on economics grounds as well. In fact, Professor Gerald Faulhaber, the economist who first defined the SAC concept has testified to the Board that “The use of the stand alone cost test for STB rate making in the freight rail industry has no economic validity.” And if that was not enough, SAC also fails to answer the fundamental question of whether or not rates charged to captive shippers are unreasonable compared to competitive market rates.
Market Based Solution
The Rail Shipper Fairness Act introduced by Senator Baldwin directs the STB to develop an alternative rate review standard that would employ Competitive Rate Benchmarking. Under this approach, rail shippers that lack access to competitive transportation options could compare their rates to “benchmarks” for competitive rail traffic. The benchmarks would be based on real-world data for similar competitive traffic.
As they do now, railroads would remain free to set rail rates in competitive markets. A captive shipper, however, could challenge a rate that is substantially higher than its competitive benchmark. The STB would determine whether and to what extent such higher margins are necessary for the railroad to be financially strong, to maintain its network and to attract capital.
The concept of rate benchmarking is well-grounded in economics and widely-employed by businesses and government agencies. In fact, using benchmarking to address skyrocketing freight rail rates was endorsed in a 2015 report by the National Research Council’s Transportation Research Board, which constructed models demonstrating how the approach could be implemented in practice.
The Rail Shipper Fairness Act wisely pushes the STB to adopt a more transparent, predictable and efficient alternative to the SAC standard. Doing so would finally allow the Board to judge the reasonableness of rates using real world data on rates charged in competitive markets rather than hypothetical data derived from a fictitious railroad.
With the support of so many experts and stakeholders, it’s hard to deny that adopting this practical reform will go a long way in helping get the STB back on track and get our nation’s freight rail system back to work for American manufacturers, farmers and energy producers.
STB’s Competitive Switching Proposal: Is the Sky Falling or is the Tide Rising?
In one of its more important proceedings to date, the comment period just closed on the Surface Transportation Board’s (STB) long-awaited proposed changes to its outdated competitive switching rules. A large and growing chorus, including a broad range of manufacturers, farmers, and energy producers, weighed in with comments of strong support for the STB’s proposal, which would fulfill the Board’s mandate to provide greater access to competitive rail service.
As one would expect, the rail industry is not keen on losing its regulatory protections and is making dire and inaccurate claims that allowing the free market to work is actually a bad thing. Despite these dubious charges, the STB commissioners can take comfort in the fact that the sky will not come crashing down. Competitive switching will not make railroad operations less efficient, will not degrade service, and will not hinder railroad investments.
Testimony submitted to the STB demonstrates that claims by the rail industry are without merit. In his statement to the Board, John Orrison, a railroad operations expert with over 40 years of Class I railroad experience, concludes that competitive switching “will have little effect on the operating efficiencies that railroads have realized over the past three decades.”
As explained by Orrison, competitive switching often requires no additional handling of trains. Typically rail cars leaving a shipper facility are already taken to a local switch yard, where they are switched from a local train to an outbound train. In these scenarios, competitive switching simply allows a shipper to choose whether that outbound service is provided by the incumbent railroad or a competing carrier. Railroads are fully equipped to handle new traffic patterns and overall rail efficiency will not be degraded.
Furthermore, the STB would review competitive switching requests on a case-by-case basis. The Board would have discretion to deny a request in specific situations where switching would impose unreasonable challenges to railroad operations.
Orrison goes on to explain that competitive switching “is unlikely to chill a Class I railroad’s investment in its network.” While railroads claim that the potential loss of traffic will drive down investment incentives, experience shows that railroads actually invest heavily in areas where they face competition. They invest to capture greater market share and to lower operating costs. Competitive switching will provide similar investment incentives.
STB members should look skeptically at the hypothetical and baseless concerns that competitive switching will somehow grind rail operations to a halt, especially when there is also clear evidence that a similar system has worked well for more than a century in Canada. As stated by the Canadian Pacific Railway, railroads subject to Canada’s competitive switching requirements are “the two most efficient carriers in the industry today, demonstrating that a low-cost, service-focused carrier can increase revenues, operate efficiently, and reinvest in infrastructure in a competitive environment.”
The STB can take heart in the fact that testimony from a rail industry veteran and real-world experience in Canada demonstrates that competitive switching will help drive railroad efficiency and investment, just like it does in other industries. Now that’s a rising tide that everyone can benefit from.
Free Market Reforms Are the Bedrock of Competitive Freight Rail Service
The Surface Transportation Board (STB) has proposed long-overdue reforms that will remove regulatory barriers and help promote greater competition within the freight rail industry. Instead of embracing these free market reforms, the railroads are claiming that STB’s proposal for “competitive switching” is unlawful.
Competition is the cornerstone of a strong and efficient economy and is typically embraced by industry as a better alternative to regulatory protections for establishing prices for goods and services. The fact that the STB’s proposal recognizes that the marketplace is preferable to regulatory oversight should be welcome news to the railroads as it is to the broad array of businesses across America – big and small – that use freight rail.
The STB should be given credit for adhering to the law that directs the Board to ensure effective competition among rail carriers. That law, the Staggers Rail Act of 1980, established competition as a fundamental goal of U.S. freight rail policy. The same law is heralded as saving the railroad industry from the brink of destruction.
Under the statute, the STB’s first responsibility is “to allow, to the maximum extent possible, competition and the demand for services to establish reasonable rates for transportation by rail.” In other words, the Board is required to promote rail competition wherever possible.
As if that were not clear enough, Congress went further to define one of the key tools that the STB can use to further this objective. The Staggers Act states,
“The Board may require rail carriers to enter into reciprocal switching agreements…where such agreements are necessary to provide competitive rail service.”
Reciprocal switching, also known as competitive switching, would allow a shipper that is served by a single major railroad to request to have its freight “switched” to another major railroad at a nearby interchange. Switching simply allows rail customers such as farmers, manufacturers and energy providers to choose a rail carrier that provides the most competitive rates and best service.
This proposal is needed because outdated rules in place at the STB impose such high regulatory hurdles that no rail customer has ever been able to successfully request switching. As stated by the Board itself, the current rules have “effectively operated as a bar” rather than as “a standard under which [switching] could be granted.”
Railroads argue that it is somehow illegal for STB to require competitive switching unless a railroad is found guilty of “abusive” practices. This argument perversely views competition as a punishment rather than recognizing it as the bedrock of American commerce. As highlighted recently by a bipartisan group of Senators and a former STB official and longtime railroad industry employee, STB’s authority to use reciprocal switching to promote rail competition could not be clearer.
Furthermore, the National Academies of Science’s Transportation Research Board has urged STB to update its policies, concluding,
“Some of the [railroad] industry’s remaining economic regulations have not kept pace and should be replaced with practices better suited for today’s modern freight rail system.”
Moving away from the STB’s outdated protections for the railroads and obstacles to commerce is not only legal, it is smart. It’s time for the STB to remove regulatory barriers and put competition back on the tracks.
Big and Small: There Is a Lot at Stake for Everyone When It Comes to Repairing Our Nation’s Freight Rail Policies
When the railroads claim that exercising their monopoly-like power only impacts a “narrow” group of big businesses, don’t believe it. Some of the hardest hit rail customers are small and medium sized businesses, including America’s farmers who are heavily reliant on freight rail.
Competitive switching, which simply allows a shipper to choose its service provider in limited circumstances, is already permitted under statute. However, the STB regulations put in place following the passage of the 1980 Staggers Rail Act made it virtually impossible for a shipper to access any railroad other than the one that directly serves their facility. The bureaucratic red tape invented by regulators has prevented any rail shipper from ever being approved for competitive switching.
As Bob Stallman, President of the American Farm Bureau Federation, explains, “All forms of transportation play a critical role in moving agricultural products, but farmers and ranchers can be especially dependent on freight rail.”
So it should come as no surprise that the agricultural sector is one of the biggest supporters of freight rail reform and a strong backer of competitive switching reforms. After the STB released a Notice of Proposed Rulemaking designed to reform their regulations around competitive switching Roger Johnson, President of the National Farmers Union, underscored the significance of the STB’s action to farmers, “Transportation of goods to market in a cost-effective manner is critical to our nation’s family farmers and ranchers. The Surface Transportation Board’s recently proposed rule on competitive switching is an important step in fostering fair and competitive shipping costs for the agricultural sector. NFU appreciates this action and looks forward to continued engagement with STB for the benefit of our nation’s producers.”
Richard Gupton from the Agricultural Retailers Association offered more support on behalf of the agriculture sector, “We appreciate the STB’s efforts to try to foster competition in the freight railroad industry. ARA believes this is a step in the right direction that will hopefully lead to more efficient and dependable rail service. Access to rail transportation through cost-effective switching between carriers is of critical importance to the agricultural industry, which is a seasonal business with retail- distribution facilities located in more rural areas.”
The U.S. Department of Agriculture has also recorded it support saying, “Competitive switching offers a market- based solution to balance the needs of the railroads and shippers and is in keeping with the goals of the Staggers Act.”
That is why the competitive switching proposals to open access to additional freight rail options have the strong support from a broad array of U.S. enterprises that depend on competitive and reliable rail service. In fact, more than 48 trade associations representing a broad range of manufacturing, agricultural and energy industries sent a letter to Congressional leaders urging them to support competitive switching reforms. As the letter explains, competitive switching works and it can work well for everybody, including the railroads:
“Competitive switching has been available for decades in Canada, and it works well. As stated by the Canadian Pacific Railroad, railroads that operate under Canada’s competitive switching system are “the two most efficient carriers in the industry today, demonstrating that a low-cost, service-focused carrier can increase revenues, operate efficiently, and reinvest in infrastructure in a competitive environment.” The notion that an improved competitive environment will damage the fundamental economics of the U.S. freight rail system is simply unfounded and runs counter to basic free market principles.”
So, don’t let the railroads sidetrack you. Freight rail reform is important to a great number of rail customers – both big and small.
U.S. Manufacturing, Agricultural and Energy Industries Welcome Proposal to Provide Regulatory Relief and Allow for Greater Access to Competitive Freight Rail Service
WASHINGTON (July 27, 2016)— The Surface Transportation Board (STB) announced a proposed rule today that would permit shippers without access to other transportation options to request that their freight be moved to a competing rail line if another Class I railroad is reasonably accessible. The proposed reform, referred to as competitive switching, was envisioned by the Staggers Rail Act more than three decades ago, but it has never been allowed at the STB.
Competitive switching has the strong support of the Rail Customer Coalition, which represents the largest users of freight rail service and a broad cross section of manufacturing, agricultural and energy industries. Furthermore, the U.S. Department of Agriculture has gone on record as saying, “Competitive switching offers a market based solution to balance the needs of the railroads and shippers and is in keeping with the goals of the Staggers Act.”
STB’s decision follows years of deliberation and strong calls from shippers to adopt reforms in response to soaring freight rail rates and poor service. While the details of the STB proposal will need to be reviewed carefully over the coming days, the following organizations issued statements in response to STB’s announcement:
“We appreciate STB’s support of the revised reciprocal switching regulations proposed by the National Industrial Transportation League (NITL). Our member companies across a host of industries need this type of competitive, market-based rail transportation alternative. NITL is grateful that the Board is providing a forum for stakeholder comment, and we look forward to responding on behalf of our members following further review and analysis of the STB’s decision.”
Jennifer Hedrick, Executive Director
National Industrial Transportation League (NITL)
“We welcome STB’s decision to move forward on competitive switching, which will help put the marketplace back in the driver’s seat and improve the flow of goods throughout our economy. Easing regulatory barriers to competitive switching will help reduce the need for government intervention and foster a healthy and efficient freight rail system. We look forward to working with the Board to ensure that its final rule will provide our industry, and other major freight rail customers, with better access to competitive and reliable service.”
Cal Dooley, President & CEO
The American Chemistry Council
“We appreciate the STB’s efforts to try to foster competition in the freight railroad industry. ARA believes this is a step in the right direction that will hopefully lead to more efficient and dependable rail service. Access to rail transportation through cost-effective switching between carriers is of critical importance to the agricultural industry, which is a seasonal business with retail- distribution facilities located in more rural areas.”
Richard Gupton, Senior Vice President, Public Policy & Counsel
Agricultural Retailers Association
“Any effort that seeks to increase competition in the rail industry would decrease costs for the chemical industry while providing better options to ship and receive product. NACD is pleased STB is moving forward with this long awaited proposed rulemaking, and we welcome this advancement in light of exorbitant rail costs due to the lack of competition in the rail industry.”
Eric R. Byer, President
National Association of Chemical Distributors
“The timely transportation of fertilizer is of critical importance to the fertilizer industry and its farmer customers. We are very pleased that STB has moved forward with this important proposal and look forward to reviewing the details and providing comments on the matter.”
Chris Jahn, President
The Fertilizer Institute
“Steel shippers rely upon efficient, competitive rail service. As such, the SMA views expanded access to competitive switching as a useful method to maximize efficiency within the existing rail network.”
Philip K. Bell, President
Steel Manufacturers Association
“We’re pleased to see the STB move forward with this proposal. Nearly 70 percent of all ethanol is shipped by rail, so improving access to competitive rail service is essential for our members to get low-cost, renewable fuels to consumers at the pump.”
Emily Skor, CEO
“Transportation of goods to market in a cost-effective manner is critical to our nation’s family farmers and ranchers. The Surface Transportation Board’s recently proposed rule on competitive switching is an important step in fostering fair and competitive shipping costs for the agricultural sector. NFU appreciates this action and looks forward to continued engagement with STB for the benefit of our nation’s producers.”
Roger Johnson, President
National Farmers Union
“The Freight Rail Customer Alliance (FRCA) is pleased that the Surface Transportation Board has issued its Decision on a request to adopt revised competitive switching rules – a pending matter before the Board since 2011. The alliance has long supported efforts at the STB to increase competition in the railroad industry and spread its benefits more widely, especially for rail-dependent captive shippers. Competitive switching is one avenue to help achieve this. FRCA views this NPRM as an important step, and will be reviewing the proposal in the coming weeks.”
Ann Warner, Executive Director
Freight Rail Customer Alliance
THE RAIL CUSTOMER COALITION
The coalition is a large collection of trade associations representing a broad cross section of manufacturing, agricultural, and energy industries with operations and employees throughout the United States, including: