The Time Is Right for Freight Rail Reform

By Cal Dooley

Cal Dooley is president and CEO of the American Chemistry Council (ACC). In Congress, Dooley represented the 20th District of California as a member of the House from 1991 to 2004. He served on the House Agriculture Committee, as well as the House Resources Committee.

Unanimous consent. Those words are usually associated with the naming of a U.S. Post Office building or some other non-controversial piece of legislation. But in an era where Washington remains bitterly divided on so many issues, the U.S. Senate recently voted unanimously to modernize the nation's freight rail laws.

Freight rail provides a vital link that connects thousands of U.S. manufacturers, farmers and energy producers with consumers. Unfortunately, consolidation in the rail industry and antiquated policies have weakened this link by decreasing access to competitive and reliable freight rail service.

How did we get to this point and where do we go from here?

Congress last passed substantive freight rail legislation 35 years ago with the Staggers Rail Act of 1980. The law eliminated many burdensome regulations and helped foster a far healthier railroad industry. These reforms benefited not only railroads themselves, but also shippers, consumers and the entire economy. Since then, the market has changed dramatically while freight rail polices have stayed the same. For instance, there were 26 major railroads in 1980, but after a series of mergers, just four major railroads now dominate 90 percent of the market since the end of 2001.

This consolidation, along with policies designed to protect the economic health of the rail industry, has driven freight rail rates steadily higher. In fact, economic analysis of public data found that freight rail rates have doubled since 2001 – increasing at roughly three times the rate of inflation and far outpacing increases in the highly-competitive trucking market. Defying the basic principles of supply and demand, rates have risen even though the volume of freight carried by the railroads has barely increased in the past decade.

Preventing Railroad Abuse of Market Power

The same legislation that was passed in 1980 to revive the nation's freight rail system was also intended to prevent railroads from abusing their market power over their customers. To accomplish these two important goals, Congress created the Surface Transportation Board (STB) to ensure that railroads earn adequate returns and to promote access to competitive and efficient rail service. Under the Staggers Rail Act, Congress freed the railroads from government restrictions through deregulation and charged the STB with creating an equitable process for mediating disputes between railroads and shippers.

While the financial health of the railroads has improved significantly, the STB suffers from persistent administrative and policy problems that disadvantage freight rail customers. For instance, the STB estimates that it takes an average of three years and costs a shipper more than $5 million to complete a rate challenge. Some cases take longer and cost much more. STB Chairman Elliott acknowledged in a recent decision, “We should never be satisfied with a process that is so expensive and time consuming for all parties.”

The STB's arbitration system has also proven to be ineffective and has failed to create an incentive for parties to come to consensus and find solutions. Yet despite years of deliberation and extensive public input, the STB has not reformed its outdated policies. As a result, many shippers are left without access to competitive rail service and without a viable way to resolve rate and service issues.

This is not what Congress intended when it passed the Staggers Rail Act.

A large group of rail customers is calling for sensible reforms to modernize the STB so that it works better for both the railroads and the large and small American businesses that rely on them. Groups representing farmers, steel producers, automobile manufacturers, chemical producers and energy producers across the United States have come together to form the Rail Customer Coalition. This diverse coalition represents industries that provide 4.7 million jobs and contribute $2.4 trillion in economic output. The Coalition's members operate in just about every congressional district in the country and comprise the bulk of freight rail customers. Because of the growing problems associated with outdated freight rail policies, the Coalition is strongly urging Congress and the STB to adopt meaningful policy improvements. And they're not alone. 

The Transportation Research Board, a part of the National Academy of Sciences (NAS), issued a report recognizing that the rail system is in desperate need of reform and offering policy recommendations to improve it.

The report concludes: “While the U.S. freight railroad industry has become modernized and financially stable since the Staggers Rail Act of 1980, some of the industry's remaining economic regulations have not kept pace and should be replaced with practices better suited for today's modern freight rail system. … More appropriate, reliable and usable procedures are needed for resolving rate disputes; better data are required to assess railroad service quality; and certain functions left over from the previous regulatory era… serve purposes that are no longer valid.”

Fixing the STB

Thanks to the steady leadership of Sens. John Thune (R-S.D.) and Bill Nelson (D-Fla.), the Senate passed the “Surface Transportation Board Reauthorization Act of 2015,” which would make many important changes to how the Board operates. The Senate legislation is a very good start for helping the STB catch up with the times.

For example, the bill will expand voluntary arbitration procedures to resolve disputes more quickly and at less cost. It will also provide the STB with the authority to proactively initiate investigations on freight rail issues and to streamline the STB's overly burdensome rate review process. To increase transparency and encourage progress, the legislation would require the STB to establish a database of complaints and prepare quarterly reports on them. To facilitate better communications among the STB commissioners, the bill will allow board members to talk with one another without a prior public hearing notice. It would also expand membership from three to five members.

Competitive Switching

The task of fixing these problems, however, does not rest solely with Congress; the STB has the authority to enact policy reforms on its own. For example, rail customers continue to urge the STB to enact competitive switching reforms. Competitive switching would allow a rail customer that is captive to a single major railroad to have its traffic switched to a different carrier at a nearby interchange, letting the shipper seek competing bids for rail service. Competitive switching has proven to work well for our neighbor, Canada, and would help provide greater access to competitive service for rail customers in the U.S.

The STB can also enact changes that would make rate case procedures more efficient. As highlighted by the NAS report, the STB's procedures “lack a sound economic rationale and are unusable by most shippers.” Even the economists who defined the benchmark that plays a key role in rate case procedures acknowledge that the current approach taken by the STB is “the wrong answer.”

Alternative Rate Standards

The STB is currently exploring ways to implement alternative rate standards better suited for how the railroad industry looks today. Moving forward with these more rational and less burdensome standards would help ensure the economic health of the rail industry, while at the same time preventing the railroads from abusing their pricing power.

These smart policy reforms have attracted broad support, because they will allow the market and the STB to operate more effectively. If adopted, railroads will be able to operate freely in competitive markets, to earn profits and to invest in a healthy rail system. Any claim that these proposals are part of an effort to re-regulate the railroads by capping rates or forcing railroads to “share their tracks” is false and an attempt to undercut common sense reforms.

It's time to progress past these hollow claims and move our nation's freight rail policies forward. Through its unanimous action, the Senate has sent a strong message that the time is right to promote a more competitive, dependable freight rail system that meets the needs of today's economy.