Welcome

Rail Competition, Switching Under Scrutiny After Biden Order

July 16, 2021, 9:44 AM

A longstanding debate over competitive access to freight railroads resurfaced following President Biden’s wide-ranging executive order that seemingly favors shippers.

The July 9 order, targeting consolidation in numerous industries, asks the Surface Transportation Board—the agency overseeing railroads—to “further competition in the rail industry and to provide accessible remedies for shippers.”

The order emphasizes remedies that compel railroads to allow shippers more flexibility in switching carriers, such as being able to switch carriers mid-route. For shippers, it’s a step forward in their decadeslong fight against a rail industry they argue has hiked rates and neglected reliable service since deregulation in the 1990s.

Some experts question if the executive order will significantly advance an issue that’s stalled for years. A pending rail merger and rail’s pro-environment contributions complicate the matter, they say.

“The urgency and necessity of the executive order is recognizing that the railroad industry is not really operating the way it should as far as being able to provide affordable and reliable transportation,” said Scott Jensen, a spokesman for the Rail Customer Coalition, an advocacy group for shippers across the manufacturing, agricultural, and energy industries.

Railroads are uniquely exempted from the nation’s antitrust laws, falling under the STB’s regulatory authority instead.

There are currently seven Class I, or major, rail companies in the U.S. that own and operate train cars and railways, down from 33 in 1980, according to an April statement from the House Committee on Transportation and Infrastructure. A proposed merger between Kansas City Southern and Canadian National Railway Co. could decrease that number to six.

There have been a flurry of lawsuits against railroads alleging excessive fees, and shippers commonly complain that the STB’s process for bringing rate grievances against carriers is expensive and cumbersome. Rail companies’ shipping rates, adjusted for inflation, have risen more than 30% since 2000, despite real costs born by carriers increasing by 3%, according to RCC data.

But railroads portrayed shippers as “the large corporations dissatisfied with paying fair-market rates,” in a July 9 statement from the Association of American Railroads.

“With the logistics chain already challenged by the recovery from COVID, this executive order throws an unnecessary wrench into freight rail’s critical role in providing the service that American families and businesses rely on every day,” AAR President and CEO Ian Jefferies said in the statement.

Reciprocal Switching

Biden’s executive order specifically asks the STB to reconsider the question of reciprocal switching “if the Chair determines such rulemaking to be in the public interest or necessary to provide competitive rail service.”

Reciprocal switching would allow shippers to initially load their cargo with the railroad that services their facility, and then potentially switch it onto a different carrier at an intersection, known as an interchange point. Currently, switching only is allowed if the STB determines it necessary to prevent anticompetitive conduct, a high bar for shippers to meet.

Shippers argue that switching would allow them to get competing bids for service, thus lowering rates. “So, you’re still captive to a railroad but only for maybe 10 miles instead of 500,” Jensen said.

Railroads argue the practice would undermine the efficiency and productivity of the network, resulting in higher costs. Allowing more switching might not have much of an effect, as there are only small portions of the national rail network where a competing railroad would consider a shipper’s remaining distance worth picking up as business, said Bloomberg Intelligence analyst Lee Klaskow.

An abandoned 2016 STB proposal tried to relax rules to allow shippers to switch if “practicable and in the public interest” or “necessary to provide competitive rail service.” Jensen said the RCC is asking the STB to finalize this 2016 proposal, which contains language similar to Biden’s order.

Shippers in 2016 asked the STB to go even further and mandate switching whenever there is a “working interchange” and another carrier is within “reasonable distance” from the shipper’s facility. They also specified this only would be the case if switching were safe and feasible.

In the face of heightened competition scrutiny, railroads have started to compromise. The Kansas City Southern-Canadian National merger faces an uphill battle because of overlapping tracks, Klaskow said, and may be under even more pressure because of the executive order.

KCS and CN have offered keeping their gateways open as a remedy. Doing so would allow shippers to choose partial routes outside of the two companies’ networks, even if the merged line could handle the shipment itself.

As an independent agency, the STB has ultimate say over continued pushes for and against reciprocal switching. The board is composed of one Obama and four Trump appointees, Klaskow noted.

“Whether the executive order sways any of the members’ votes on how to proceed within the context of those proceedings, it’s anyone’s guess,” said David Rifkind, a transportation lawyer at Stinson LLP.

Railroad Antitrust Exemptions

Rail suffered financially in the 1970s with the rise of trucking and barging, as well as regulations imposed by the now-defunct Interstate Commerce Commission. The Staggers Rail Act of 1980 allowed railroads to set their own rates, and is credited with significantly improving rail’s viability—particularly through consolidation.

“There has been maybe a bit of an over-correction to one aspect of the Board’s mission to protect the financial health of the railroads,” Jensen said.

But rail needs revenue to maintain its tracks and remain competitive against other modes of transportation, said Nick Little, director of Michigan State University’s Center for Railway Research and Education.

The rail system moves about 40% of the nation’s freight, but contributes only about 2% of greenhouse gas and other emissions, according to Little. He said he’s disappointed the order doesn’t incentivize a greater shift from roads to rail, particularly considering the Biden administration’s focus on environmental concerns.

If the railways can’t charge a realistic rate that would enable them to reinvest in their own infrastructure, interstate commerce and transporting products will suffer and would entail more dangerous modes of transport, Little said.

“I think it’s a trade off, as are most business decisions,” he said.

To contact the reporter on this story: Claire Hao at chao@bloombergindustry.com

To contact the editors responsible for this story: Roger Yu at ryu@bloomberglaw.com; Laura D. Francis at lfrancis@bloomberglaw.com

To read more articles log in.

Learn more about a Bloomberg Law subscription.