Federal Policies Need Reform
Freight rail customers are being hurt by federal policies that favor the railroads:
- The Bottleneck Problem
Under current deregulation policy, when a railroad controls a bottleneck line segment (a line owned by a single carrier that serves a particular origin or destination), it is not required to provide the rail customer with a rate for transportation over that segment to a point where the rail customer can reach a competing railroad.
- The Competitive Access Problem
The Staggers Rail Act of 1980 provided the STB with the authority to order cooperation between the railroads concerning terminal facilities and interchange agreements when it is in the “public interest.” These agreements are the means to move rail cars between rail systems and are critical to the existence of a competitive rail system. In the mid-1980s, the ICC ruled that interventions are only in the “public interest” when the ICC (now STB) finds “monopoly abuse,” which requires a complainant to prove a “mini-antitrust” case. Since this ruling, rail customers have not been successful with competitive access complaints at the STB.
- Paper Barriers
The Staggers Rail Act of 1980 led to the formation of hundreds of short line railroads that operate track formerly run by a major railroad. Paper barriers are provisions in lease agreements for this track that prevent the short line railroad from providing rail customers access to competing major railroads.
- Rate Reasonableness
When a rail customer has no transportation alternative except a single railroad, the rail customer is subject to railroad monopoly power for that movement and lacks leverage to negotiate acceptable rates and service. In the Staggers Rail Act, Congress directed the ICC (now the STB) to establish a “rate reasonableness” process for rail customers to challenge rates. Unfortunately, the process set by the STB is time-consuming, complex, extremely costly and unworkable. Under the process, the only unreasonable rate is the one that is higher than what it would cost the shipper to build its own railroad – at current day costs. Not surprisingly, rail customers rarely win. Even though the rail industry effectively operates without government supervision, the industry enjoys extensive exemptions from the nation’s antitrust laws.
Even though the rail industry effectively operates without government supervision, the industry enjoys extensive exemptions from the nation’s antitrust laws.
In 1996, the STB issued the “bottleneck decision” in Central Power & Light Co. v. Southern Pac. Transp. Co., Nos. 41242 et al. (STB served Dec. 31, 1996).
The STB ruled that a railroad controlling a bottleneck line segment (a line owned by a single carrier that serves a particular origin or destination), does not have to provide a rail customer with a rate for transportation over that segment to a point where the rail customer would have access to a competing major railroad.
The STB’s bottleneck decision was affirmed by the United States Court of Appeals for the Eighth Circuit in MidAmerican Energy Co. v. Surface Transp. Bd. Nos. 97-1081 et al. (Feb. 10, 1999) as not being “arbitrary or capricious.” The court did not say it agreed with the STB decision and, in fact, actually hinted at the opposite. However, the court deferred to the interpretation by the federal agency, as is normal under the federal law.
CASE STUDY: City of Lafayette
The municipal utility of Lafayette, La., owns 50 percent of a coal-fired power plant in Boyce, La. The remainder of the facility is owned by CLECO, an investor-owned utility in Louisiana, and 19 municipalities through the Louisiana Electric Power Authority. The facility uses Powder River Basin coal.
Both the Burlington Northern Santa Fe Railway (BNSF) and the Union Pacific Railroad (UP) originate coal in the Powder River Basin. Only the UP serves the last 20 miles into the plant in Boyce. Through established interchange points with the UP and the Kansas City Southern Railway, the BNSF could deliver coal approximately 1,480 of the 1,500 miles to the plant. The Boyce plant would be captive to the UP for the last 20 miles of the movement but would have access to rail competition for 1,480 miles.
However, the UP has been able to extend its 20 miles of monopoly power over the plant to the full 1,500 miles of coal movement from the Powder River Basin. The UP has accomplished this by simply refusing to provide the city of Lafayette separate rates for the 1,480 mile competitive segment of the movement and the 20 miles of captive movement. The UP only provides one rate from the Powder River Basin to the Boyce plant. The city is thus locked out of the competitive transportation alternative that is otherwise available for 1,480 miles of the movement. The result: on 50 percent of the power from the captive plant, Lafayette officials estimate they are paying $6 million in excessive costs each year. This cost is passed through to the ratepayers in the city of about 125,000 citizens.
The options: Lafayette can “build out” its own track to the Burlington Northern Santa Fe/Kansas City Southern at a cost of about $60 million (including a rail bridge across the Red River), or the city can bring a rate case to the Surface Transportation Board. Filing fees for the rate case are $140,000. On top of that, the city would bear all the burdens of proof and spend approximately $3 million or more to prove that a hypothetical railroad they would build to the Powder River Basin could move the coal at a cheaper rate than they are being charged by the UP (the stand alone cost). The entire process would take at least two years, during which time the ratepayers would still be paying the monopoly price. Finally, based on an analysis of the results of recent STB rate cases, Lafayette would stand little chance of winning any meaningful relief.
The Staggers Rail Act of 1980 provided the ICC (now the STB) with the authority to order cooperation between the railroads concerning terminal facilities and interchange agreements when it is in the “public interest.” The ICC ruled in the mid-1980s that interventions are only in the “public interest” when the ICC, now STB, finds “monopoly abuse,” which requires proof of a “mini-antitrust” case. Since this ruling, rail customers have not been successful with competitive access complaints at the STB.
Terminal Facility Agreements
Terminal facilities are located at ports or in a city where it is efficient for only one railroad to own and operate the facilities. Within the boundaries of these “terminal facilities,” other railroads can operate their trains over the tracks on terms and conditions acceptable to the host railroad.
The “terminal railroad” receives an appropriate fee for allowing access to its system. The STB has the power to intervene in this area when the host railroad either prevents access to another railroad or imposes rates and conditions that are not in the “public interest.”
Reciprocal Switching Agreements
Railroads cross each other’s tracks at “interchange” points. There are normally “reciprocal switching” agreements between the railroads to exchange traffic with each other at these points. These agreements facilitate the efficient movement of traffic throughout the national rail system.
When a railroad controls the interchange and does not want to lose traffic to a competitor, it can impose a very high “interchange” fee for moving rail cars from one railroad to another. Federal law authorizes the STB to intervene in such instances to ensure appropriate conditions when it is in the “public interest.”
Mini-Antitrust Case Required
In the mid-1980s, in the Midtec decision, the ICC, predecessor to the STB, increased the standard for relief required by Congress. In the Midtec decision, the ICC ruled that it henceforth would only find action to be in the “public interest” when the applicant proved “monopoly abuse,” thus turning a rather straight forward proceeding into a “mini-antitrust” case. Congress did not establish the “monopoly abuse” standard; the agency developed this standard. The STB has continued to require a showing of “monopoly abuse.” Since Midtec, no applicant has succeeded in obtaining relief in a terminal access or reciprocal switching case.
Rail customers have been asking Congress to remove the “monopoly abuse” test from the statutory “public interest” test created by the ICC/STB during the Midtec ruling. Rail customers have not been successful with competitive access complaints at the STB.
During the 1980s and 1990s, major railroads “rationalized” their systems by transferring operations of their less profitable tracks to short lines and regional railroads, while focusing operations on their densely traveled “trunk lines.” In the financial arrangements approved by the STB, major railroads required all traffic on the short line to be delivered exclusively to them as a condition of the long-term lease of the tracks.
Since many of the short lines have the physical ability to deliver or receive traffic from more than one major railroad, paper barrier agreements are impediments to effective competition within the rail industry. If the nation’s antitrust laws applied to the railroads, these likely would be seen as illegal “tie-in” agreements.
Captive rail customers are subject to railroad monopoly power and lack leverage to negotiate acceptable rates and service. In the Staggers Rail Act, Congress directed the ICC, now the STB, to establish a “rate reasonableness” process for these customers. Unfortunately, the process developed by the ICC, now the STB, is time-consuming, complex, costly and unworkable. The STB has exclusive jurisdiction over rate disputes between railroads and captive rail customers. Several problems with the process include:
Burdens of Proof
To prevail in a rate reasonableness case, a rail customer must succeed with three burdens of proof:
- Prove that they are subject to railroad “market dominance” (i.e. no transportation option, except a single railroad, is available to the rail customer);
- Prove that the rate being charged is jurisdictional to the STB (i.e. rates that are in excess of 80 percent more than the direct cost to the railroad of moving the freight); and,
- Prove that the railroad’s rate is “unreasonably high.”
By contrast, the railroad does not have to justify its rate under the current “rate reasonableness” process and the rail customer must pay the rate while the case is pending. CURE knows of no other American regulatory process where the monopolist is not required to justify its rates. CURE believes the burden of proof that the rate is reasonable should be shifted to the railroad.
Revenue-to-Variable Cost Ratio
One of the initial challenges facing a rail customer in a rate proceeding case is to convert the rail rate it pays to a “revenue-to-variable cost (R/VC) ratio”:
- The “revenue” is the amount a railroad charges a customer to ship a commodity.
- “Variable cost” refers to the costs directly attributable to the movement in question, including fuel, labor, and a portion of the cost to use the railroads’ locomotives.
Railroads do not share the R/VC ratios with their customers. The railroad customer must hire a railroad consultant to make this R/VC determination.
Under today’s captive rail customer rate system, the captive customer cannot obtain rate relief from the STB unless the railroad is charging more than 180 percent revenue to variable cost ratio – in other words, the railroad is charging 80 percent more than the direct cost to the railroad of the movement. (By contrast, competitive rail traffic averages less than 120 percent R/VC.) The STB has no jurisdiction to reduce the rate to less than 180 percent revenue-to-variable cost.
Stand Alone Cost
“Stand alone cost” refers to the expenses associated with a captive rail customer building and operating its own hypothetical efficient railroad. To develop this hypothetical railroad, the captive rail customer must retain lawyers, accountants, railroad economists and other such experts in this multi-million dollar exercise.
The STB uses “stand alone cost” to determine if a captive rail customer rate is “unreasonably high.” In a rate reasonableness case, the STB will reduce the rate to the “stand alone cost” (except that a rate may not be reduced below 180 percent revenue-to-variable cost ratio).
The only successful rate cases under this process have involved those coal movements that are moved over densely traveled rail lines.