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There is near universal agreement that the agency charged with resolving freight rail issues is stymied by its own outdated and overly-burdensome rules.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.
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.
New Rail Consultant Report Comes Up Short on Solutions
The shortcomings of today’s freight rail policies are not lost on the members of the Surface Transportation Board (STB), who have gone on the record numerous times to say that the Board’s process for handling rate cases are too costly, too time consuming and unnecessarily complex. This growing concern was clearly stated by Commissioner Ann Begeman, when she recently declared that developing a new approach “has to be a top Board priority.”
Unfortunately, this fact was lost on InterVISTAS Consulting Group when they released a flawed and poorly developed report. Unfortunately for all rail stakeholders, the report fails to offer any new ideas for improving how the STB operates and embraces the status quo that has been roundly rejected by Congress, the National Academy of Sciences, and the STB Board Members themselves in their published decisions.
The report was commissioned well before Congress provided a new direction for the STB by unanimously passing the Surface Transportation Reauthorization Act. Moreover, the report was under the control of a consultant who has represented the railroads in the past and did not reflect any outside input from rail customers.
All of these shortcomings stand in stark contrast to the independent study that Congress directed the National Academies Transportation Research Board to conduct. Unlike the InterVISTAS report, the National Academies study was performed by an independent panel of transportation experts and economists with input from a broad range witnesses. The National Academies study concluded that the STB’s current rate review process is “arbitrary and unreliable” and should be replaced with a “more reliable tool that compares disputed rates to those charged in competitive rail markets for comparable shipments.”
The National Academies analysis eliminates any remaining argument that the status quo is working. Tellingly, the InterVISTAS report is embraced only by the rail industry that has a vested interest in maintaining a virtually inaccessible STB.
The STB should not waste any more precious time on a report that fails to provide solutions for the very real and ongoing freight rail issues that are plaguing manufacturers, farmers and energy producers across America.
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.
Advancing STB Reform: Congress Puts Its Money Where Its Mouth Is
The Senate helped lead the way again on Surface Transportation Board (STB) reform last week, but it might have been easy to miss. As was widely reported, the Senate Transportation, Housing and Urban Development, and Related Agencies Appropriations Subcommittee passed a $57 billion measure to fund a number of transportation priorities for fiscal year 2017.
This was good news on many transportation fronts, but it was especially good for the STB. That’s because the bill includes a sizable increase to the Board’s budget by providing an additional $4.6 million.
This increase is most likely the largest the STB has seen in a long time and comes at a pivotal point in the Board’s history. The new funding will help ensure the Board has the necessary resources to fully implement the reforms President Obama recently signed into law that makes significant improvements to how the STB operates. Among other things, the new law requires the STB to—
- Expand voluntary arbitration procedures to make rate cases quicker and less costly
- Initiate investigations on matters other than rate cases when needed
- Set rate review timelines for the stand-alone cost test to ensure the STB efficiently decides on relief
- Establish a database of complaints and prepare quarterly reports on them
- Expand membership from three to five members and allow board members to talk with one another without a prior public hearing notice
The Rail Customer Coalition wholeheartedly welcomes the budget increase. In fact, the Coalition recently sent a letter to Congressional appropriators urging them to provide this additional funding so the STB could fulfill the intent of Congress.
We applaud the members of the Subcommittee for listening to our request and acting so quickly. This new funding will be critical to bringing the STB into the 21st century, and we call on the rest of Congress to make sure this increase makes it to the President’s desk this year.
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: