Modern Railroading: Unrestrained Monopoly Power

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Modern Railroading Unrestrained Monopoly Power
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Defining the Problem

• Congress passed the Staggers Act in 1980 to
  partially deregulate the railroad industry.
• The Surface Transportation Board (STB) has been
  an unintended roadblock to full deregulation,
  continually preventing rail customers from
  accessing transportation competition.
• In 1980, Congress also failed to remove railroad
  exemptions from antitrust laws.

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STB Falls Short

• On its watch the STB has
• Approved mergers and acquisitions that have left
  only four rail major carriers in the country.
• Handed down policies that consistently favor
  railroad companies.
• Created a costly and time consuming rate
  challenge process that is inaccessible to rail
  customers.

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Mergers, Rail Consolidation

• The STB has allowed Union Pacific, BNSF, CSX and
  Norfolk Southern to control over 90 percent of
  the nations freight traffic.

Remainder of American Railroads
Four Major Railroads
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Consequences of Mergers

• Many Rail Customers Face
• Little to no competitive alternatives for rail
  and
• Drastic price increases in shipping rates and
  service failures.
• Railroads know they face little to no
  consequences from the STB.

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STB Policy Favors Railroads

• The STB continues to give their stamp of approval
  on issues that favor the railroads bottom lines.
  
• Examples
• Paper Barriers
• Bottlenecks
• Terminal Switching Arrangements

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Paper Barriers

• Paper barriers are financial agreementsapproved
  by the ICC and the STBbetween rail companies and
  short lines.
• In the agreements, short lines that lease track
  from a major railroad are required to serve just
  that major railroadcreating a barrier to
  competition.
• The STB continues to approve paper barriers,
  denying shippers access to competition.

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Bottlenecks

• A bottleneck occurs when a railroad controls a
  length of track that can prevent a rail customer
  from reaching a competing railroad.
• In the 1996 bottleneck decision, the STB ruled
  that
• A railroad controlling a bottleneck line segment
  does not have to provide a rail customer with a
  rate quote over that segment to a point where the
  rail customer would have access to a competing
  major railroad.

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Terminal Switching Agreements

• Terminal switching agreements are historical
  arrangements by which railroads changed traffic
  with other railroads. Congress required the ICC
  and STB to maintain terminal agreements on
  reasonable terms when to do so is in the public
  interest.
• The agencies have decided they will only maintain
  these agreements where monopoly abuse is shown.

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STB Failures Mean Higher Rates for Captive
Customers
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Rate Relief Process

• An October 2006 Government Accountability Office
  (GAO) report found STB processes to be
  inaccessible to rail customers.
• The complaint process allows the railroads to
  collect any rate they desire while rail customers
  bear all burdens of proof to try to challenge the
  rate.

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Bearing the Burden of Proof

• Rail customers bear all burdens of proof in a
  rate challenge.
• In contrast, the railroad does not have to
  justify its rate.
• CURE knows of no other American regulatory
  process where the monopolist does not have to
  justify its rates.

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Stand Alone Costs

• To the STB, a rail rate is not unreasonably high
  unless the rail customer can build and maintain
  its own railroad at current costs to ship its
  freight at a lower cost.
• Determining these Stand Alone Costs is a
  multimillion dollar exercise.
• No rail customer has won meaningful relief since
  2001.

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Case Study Basin Electric

• When Basin Electrics contract expired in 2004,
  BNSF doubled their rail rates.
• Basin Electric filed a rate challenge with the
  STB in 2004.
• On September 10, 2007, the STB denied Basin
  Electric relief from the outrageous rate despite
  Basin showing that the railroad was charging five
  times what it costs railroads to move its coal.
• 26 expert witnesses 1,200 pages of narrative
  testimony 116 exhibits 7,223 pages of
  hardcopy working pages
• 6 million dollars

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Case Study DuPont Kevlar Facility

• CSX increased the rates it charges DuPont to
  transport raw materials.
• The rates increased by 9 to 102 depending on
  the move and product despite poor service. The
  increases amounted to over 2 million annually.
• DuPont was threatened with plant closure due to
  late delivery of goods and forced to increase
  their cost of goods.

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STB is in Need of Reform

• The STB has turned a blind eye to unfair
  practices and unreasonable rates of the major
  railroads.
• The agency charged with protecting customers has
  created policies that reinforce the monopoly
  power of the major railroads.

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STB Reform Legislation

• The Rail Competition and Service Improvement Act
  (HR 2125, S. 953) directs the STB to do its job
  and regulate railroad monopoly power.
• This reform legislation would also repeal the
  railroad industrys antitrust exemptions, forcing
  the railroads to allow rail customers access to
  competition.

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For More Information on CURE or the Captive Rail
Issue Contact

• Bob Szabo
• Executive Director and Counsel
• Consumers United for Rail Equity
• Member, Van Ness Feldman
• (202) 298 1920
• rgs_at_vnf.com
• www.railcure.org