Railroads Say Freight ate Reforms Could Derail Capacity

May 14, 2015, Chemical News & Intelligence, By Joe Kamalick


WASHINGTON (ICIS)–US chemicals producers and a broad range of other manufacturers this week tried to get railroad freight rate reform back on track in Congress, but rail carriers again warned legislators to avoid reforms that could derail capital investments.

In [1]a hearing before the House [2]Subcommittee on Railroads, Pipelines and Hazardous Materials, American Chemistry Council ([3]ACC) president Cal Dooley argued that the 35-year-old rail regulation Staggers Act badly needs an update to allow more flexibility in federal oversight of freight rail rates.

Dooley [4]told the subcommittee that as the US chemicals sector is undergoing a renaissance due to greatly improved natural gas feedstock resources from shale deposits, his industry will be even more dependent on rail freight and vulnerable to what many producers consider unreasonable rates.

He said that [5]the 1980 Staggers Act – credited with rescuing US railroads from potential financial collapse – “has been successful in many ways, but the freight rail service landscape has changed dramatically since its passage”.

“Consolidation has reduced the number of Class I railroads from 26 in 1980 to only seven today, with four essentially operating like regional duopolies that control 90% of the market,” Dooley said.

US Class I railroads control some 100,000 miles of the nation’s total 140,000 miles of track. So-called short-line railroads operate various segments of the 40,000-mile balance of rail track capacity.

As he has so often in the past, Dooley cited in particular the plight of many chemicals producers and other manufacturers who are “captive shippers”, those dependent on only a single rail carrier to deliver bulk raw materials and to ship out products.

“Today, more than three-quarters of US rail stations are served by only one rail company,” Dooley told the panel, “leaving customers captive to a single freight rail provider with no alternative if service or rates are unsatisfactory.”

He said that rail freight rates have increased by nearly 100% over the past decade, about three times the rate of inflation.

Those increases, he said, are “forcing shippers to divert significant resources from research and development [R&D], operations, investment, expansion and hiring to pay extremely high rail shipping rates”.

Joined by 47 other industrial groups heavily dependent on rail freight services, Dooley urged Congress to make changes to the Surface Transportation Board ([6]STB) so that the agency can be more proactive and efficient in monitoring and addressing freight rail rate issues.

The STB, also known as the SurfBoard, was created under the Staggers Act and is supposed to ensure fair freight pricing.

Among other reforms, Dooley said that “The STB should eliminate outdated exemptions and allow shippers to seek review of unreasonable rates for shipping certain products such as automobiles, food, lumber and metals”.

“The board should no longer automatically assume that shippers of these products have access to competitive service,” he said.

To address the problem of captive shippers, Dooley asked that STB allow shippers to use one Class I rail carrier to move products to a nearby rail connection with another Class I provider.

He also asked that the board institute a more efficient, workable and lower-cost method for review of freight rail rates, a process that now can cost hundreds of thousands of dollars and take years to resolve.

The chemicals sector and other rail-dependent industries support a bipartisan Senate bill, the “Surface Transportation Board Reauthorization Act” ([7]S-808), that would mandate many of the freight rail review reforms sought by industry.

In addition to chemicals and fuels producers, the Rail Customers Coalition ([8]RCC) includes the American Farm Bureau Federation, the Alliance of Automobile Manufacturers, the American Forest & Paper Association, the American Public Power Association, the Fertilizer Institute, the National Association of Chemical Distributors ([9]NACD), and steel manufacturers and cement producers.

For its part, NACD said that “modest reform” of the Staggers Act and STB procedures “is an issue vital to the chemical distribution industry, as nearly 40% of chemical distribution businesses rely on freight rail to receive their products”.

As did the ACC, NACD president Eric Byer argued that since the Staggers Act was passed in 1980, “the rail industry has changed dramatically … with drastic consolidation and decreased access to competitive rail service which has led to soaring rates”.

“The lack of freight rail competition has been costly to American businesses and NACD members that rely on safe, reliable and affordable rail service,” Byer said.

Citing change in the rail sector since 1980, Byer said that “now is the time to re-evaluate and modernise our rail policy framework to meet present and future needs”.

“We strongly believe that modest reforms to our outdated rail policies today will lead to less government intervention later,” he added.

But Edward Hamberger, president of the Association of American Railroads ([10]AAR), countered that what chemicals producers and other high-volume rail shippers are seeking in rates reform would amount to immediate and renewed government intervention and controls that were purposefully lifted by the Staggers Act.

“When one looks behind the actions that proponents of reregulation are urging upon Congress and the STB to `reform’ freight rail policy,” [11]he told the panel, “it is clear that `reform’s is a euphemism for `force railroads to subsidize us’ and that the needs of railroads and the general public are a distant second to their own narrow desires.”

Hamberger warned that if legislators undo the “balanced regulatory framework embodied by the Staggers Act”, they could unwittingly undermine the nation’s critical rail network.

“If artificial regulatory or legislative restraints are put into place that unnecessarily and unreasonably restrict rail earnings,” he said, “rail spending on infrastructure and equipment will shrink.”

“Either taxpayers will have to make up the difference or the industry’s physical plant will deteriorate, needed new capacity will not be added, and rail service will become slower, less responsive and less reliable,” Hamberger said, adding: “Why would anyone want an outcome like that?”

He also emphasized that rail carrier investor-owners expect that “railroad capacity investments must have a reasonable expectation that they will generate an adequate return over a long period of time”.

“For this reason, adequate rail earnings – again, over the long term – are critical for capacity investment,” he said.

“Railroads acknowledge that their financial performance in recent years has been much improved compared to earlier years, with some railroads recording `record profits’,” Hamberger said.

However, “until recently, rail profitability was generally poor compared to most other industries” so “an improvement from earlier years may be a `record’ yet may still yield levels of profitability that are only about average compared with earnings achieved by most of the other industries against which railroads compete for capital”, he said.

“It would be a tremendous mistake for policymakers to view recent improvements in rail earnings as a reason to cap rail earnings through price controls, artificial competitive constraints or by other means,” he argued.

“This would encourage capital to flee the industry, threatening railroads’ ability to reinvest in their networks,” he said, concluding: “Take away rail earnings today and you limit rail capacity and service capability for tomorrow.”

The Senate STB reform bill was approved by a unanimous committee vote in that chamber and is awaiting a full vote on the Senate floor. That bill, if passed in the Senate, would then be heard in the House unless a separate companion bill is introduced.

Paul Hodges studies key influences shaping the chemical industry in [12]Chemicals and the Economy