Claiming railroads are taking them for a ride, leaders in the chemical industry are sounding the whistle for rail competition. The railroads say they’ve got it all wrong
QUOTE 1:‘When there is only one railroad available to a plant, as is the case for 63 percent of the chemical industry, it becomes a monopoly provider.’ —Tom Schick, American Chemistry CouncilQUOTE 2:‘The argument that these groups are making is, to put it politely, horse manure.’ —Tom White, American Association of RailroadsQUOTE 3:‘The fact of the matter is the railroads are making money hand over fist.’ —Dan Borne, Louisiana Chemical AssociationQUOTE 4:‘We’re asking for fairness and a bit of relief.’ —Bob Szabo, Consumers United for Rail Equity By Joy LePree About 250 rail customers, a significant percentage of them from the chemical industry, appeared on Capitol Hill this spring to advocate changes in law and federal policy that would provide more competition between the railroads. The group, headed by Consumers United for Rail Equity (CURE), a coalition of rail customers, claims that the railroad industry holds monopolistic power, which it wields in the form of high prices and poor service. Speaking from the other side of the tracks, the railroad industry says if such laws are passed, it will not be able to improve service.
Take It Or Leave It
KEY POINTS• Since de-regulation, the railroad industry has consolidated from about 40 major railroads to four that provide 90 percent of the rail transportation in the nation today. • The coalition Consumers United for Rail Equity is advocating changes in law and federal policy to provide more competition between railroads. • The American Association of Railroads disputes allegations of high prices and monopolies and says its record speaks for itself. • It can be expensive to fight the system. According to the American Chemistry Council, it can cost $2 to $3 million to bring a case against the railroads. |
CURE claims de-regulation in the ’80s and the absence of antitrust laws have created a railroad system that is holding many shippers captive, meaning there is only one railroad that provides service to some facilities including a large percentage of chemical plants. “Since de-regulation, the railroad industry has consolidated from about 40 major railroads to four that provide 90 percent of the rail transportation in the nation today,” says Dan Borne, president of the Louisiana Chemical Association. “At the same time, railroads are exempt from the nation’s antitrust laws and are not being effectively restrained by their governing agency, the Surface Transportation Board. This has created a monopoly in some areas.” “Saying there’s only four major railroads doesn’t paint the whole picture. The situation is even more concentrated than it seems,” notes Tom Schick, senior director of distribution for the American Chemistry Council (ACC). “In many cases, there’s only one railroad that services a chemical plant. So for that plant, it doesn’t matter if other major railroads exist, there is only one for them. No other railroad can or will take traffic to or from that plant. We surveyed our members and 63 percent of the chemical-producing plants that use rail service said they had only one railroad with access to the plant, meaning 63 percent of our industry is held captive by a monopolistic carrier.” However, Raymond Atkins, associate general counsel for the Surface Transportation Board (STB), disagrees that this much of the chemical industry is captive. “There is a test created by Congress that says if people’s rates are below 180 percent of their variable cost, then it is presumed that they have competition and there’s no market dominance. Right now at least 60 percent of chemical rail traffic falls beneath that threshold and is deemed competitive by Congress,” says Atkins. However, chemical industry spokespeople maintain there are plenty of captive plants that are being abused. “When there is only one railroad available to a plant, as is the case for 63 percent of the chemical industry, it becomes a monopoly provider and the service isn’t particularly good,” says Schick. “When there is no alternative railroad, the one that has you captive knows it is going to get your business no matter how bad the service so there is no incentive for them to improve.” The chemical industry believes this situation creates an environment that not only permits poor service but also fosters higher rates. “When the railroad operates on a virtual monopoly, they can charge whatever they want and the shipper must take that quote, whatever it is,” says Borne. “It’s really a case of take it or leave it, meaning if the chemical plant doesn’t take the quote, the railroad will leave the cargo.” In addition, the railroad will not, according to chemical industry representatives, provide rate quotes to interchanges — areas where one rail service provider’s line meets with another — where a plant’s cargo could be shipped and then transferred to another railroad to be carried to the final destination. Obviously, pricing from this point would become more competitive. “When this happens, we are not able to get competitive rates from the origin to the termination of our shipments even though part of the route might be competitive,” says Borne. However, the American Association of Railroads (AAR) disputes allegations of high prices and monopolies that don’t allow competition. “The argument that these groups are making is, to put it politely, horse manure,” says Tom White, spokesperson for the AAR. “In fact, our rates have gone down ever since railroads were partially deregulated in the 1980s. I think a 25-year record of rate reductions speaks very strongly of the fact that there is not a rail monopoly. What has happened over that period of time is that railroads have made a lot of productivity improvements and almost all of those improvements have gone to their customers in the form of lower rates. “As a matter of fact,” White continues, “the average rail rates for chemicals went up four-tenths of one percent over the last 10-year period ending in 2004.” “You can make numbers sing any tune you want,” argues Borne. “The fact of the matter is the railroads are making money hand over fist. They are bragging about it and saying they are doing so without raising rates on the average. Maybe this is true according to ‘the average,’ but ask any of the captive chemical shippers if their rates have been raised and they’ll tell you some stories.” It seems Borne has a point. Barbara Little, vice president of government relations at Albemarle’s Magnolia, Arkansas, plant, tells a dramatic one. “There is only one railroad that can service our Magnolia plant and over the past few years they started to raise rates. The situation came to a head this fall when the railroad representative informed us that our contract was cancelled and they would discontinue our service if we didn’t sign a new one,” she says. According to Little, when contract negotiations were fruitless, the railroad implemented drastic rate hikes. Following a 20,000 percent increase in storage fees and a 350 percent increase in switching fees, Albemarle’s rail rates increased from $250,000 to more than $20 million annually. “When they kept adding more charges and threatening to stop service, we went to court and got a restraining order against them so they had to keep servicing our plant. But since the court has no jurisdiction over rates, we had to take the case to the STB and that’s where we are now,” she says. “The good news is we are currently paying our previous contract rates until the case is settled. The bad news is filing the complaint costs a lot of money, and, if we lose, we will have to pay the railroad retroactive fees at the rates they wanted to charge before the restraining order. However, filing the complaint is our only hope because there’s nothing else that can stop the railroad from doing this.” Little isn’t kidding about the cost of complaining. According to ACC’s Schick, it costs $2 to $3 million to bring a case against the railroad, and he says their method of determining rate reasonableness is unfair. “According to the STB’s Maximum Rate Reasonableness Regulation, their philosophy on how high is too high regarding rates for captive shippers, the most the railroad can charge is what it would cost to build a railroad, purchase locomotives and pay for labor, maintenance and upkeep,” he says. “This might make sense for shippers that use the same repetitive route for 20 years, but it doesn’t work for chemical shippers with very dynamic and broadly distributed shipping patterns.”
Struggling to Stay on Track
While the STB can’t discuss the Albemarle case, they do stand behind their methods. Atkins says that filing costs depend on the type of case. “There are two procedures chemical or any shippers can use to challenge a rate. The first is a stand-alone cost analysis. This is a big, complicated proceeding and is reserved for cases where a lot is at stake. The filing fee for this type of case is $140,000, which reflects 40 percent of the cost of the agency to process the case. Frankly, this is just a fraction of the total cost of bringing such a case because there are also legal fees for consultants and attorneys. Estimates of $2 to $4 million are not out of the park. “We have a second set of procedures, the simplified guidelines, which are designed for shippers who can’t justify a large proceeding. The fee for simplified guidelines is $150.” Atkins also confirms ACC’s account of how the STB determines rate reasonableness and even agrees that it doesn’t always work for chemical shippers. “When a shipper complains about a rate, they are asked to construct a paper railroad and figure out what it would cost a hypothetically efficient railroad to provide service to them. If that hypothetical railroad could do so at a lower price than the railroad is charging, it means the rates are too high. “I have heard arguments that this is unfair for the chemical industry, and they do have a point. This sort of case would be complicated to bring if they ship to various destinations. And, if they don’t ship regularly, the value of the case is not as high as it is for repetitive shippers. This is a genuine point, but we have the simplified guidelines in place for this type of situation. If they can show a full analysis is too expensive given the value of that case, then they can proceed under the simplified guidelines.”
Longer Term Solutions
The Debate Continues: De-Railed by Legislation? The current debate between shippers and rail carriers can be tracked back to the Stagger’s Rail Act of 1980, which de-regulated the railroad industry, and the Sherman Antitrust Law, which was created to prevent American businesses from gaining monopolistic power but exempted the railroad industry. Prior to the enactment of the Staggers Rail Act, the railroads were, to put it kindly, a mess — accident rates were astronomical, maintenance of the tracks and infrastructure was almost non-existent and most of the 40 major railroads faced bankruptcy. De-regulation that permitted consolidation and downsizing helped the industry return to profitability. The author of a January 2006 Morgan Stanley report on the financial health of the railroad industry says the firm “continues to recommend over weighting (in stock portfolios) the North American railroads, as we believe the stocks will have 10 to 20 percent annual earnings per share growth between now and 2010” and “we believe the six major North American railroads will see their stock appreciate 50 to 100 percent over the next four years.” Under the Stagger’s Rail Act and in the absence of antitrust laws, the Surface Transportation Board is the sole government agency responsible for reviewing railroad rates, mergers and service and is the agency where shippers file rate and service complaints. |
While filing a case with the STB offers a shot at relief, chemical and other shippers are looking to the federal government for longer term solutions inthe form of legislation. CURE is hoping Congress will pass H.R. 2047, the Railroad Competition Improvement and Reauthorization Act, and S.919, the Railroad Competition Act. If made into law, the legislation would mandate that the STB ensure effective competition among rail carriers at origins and destinations and reasonable rates in the absence of competition. There is also a requirement that railroads must quote rates to their customers between any two points on their systems where freight movements can originate, terminate or be transferred when requested by a customer. And this action would put a cap on STB filing fees. Another piece of legislation currently before the House, H.R. 3318, would subject the railroads to antitrust laws. “This legislation would subject the railroads to the nation’s antitrust laws and force them to provide competitive rates and make sure that the STB is doing the job that Congress initially instructed them to do,” explains Bob Szabo, executive director of CURE. “We’re asking for fairness and a bit of relief, and our trip to Capitol Hill has caused quite a few members of Congress to express interest in the issue.” “There is, in fact, a lot of support for these laws in Congress, but not much from the railroads,” says Schick. “Their opposition is kind of an oxymoron. They are opposed to H.R. 2047 and S.919 on the grounds that this would re-regulate the railroads and to HR 3318 because they say they don’t need to be subjected to antitrust laws since they are already regulated by the STB.” The fact that the railroads don’t like these laws is about the only place where both parties connect. “If these laws pass, the result would be the same as it was before the industry was de-regulated,” says AAR’s White. “You would have revenues lost to the railroads, have them unable to invest properly, and they would be unable to keep up with maintenance. There’s one definition of insanity and that’s to do the same thing and expect different results. To re-regulate it in the way that they want to, as it was regulated in the 1970s, and expect different results, well, that’s insanity.” “We aren’t asking for re-regulation, that’s just a buzzword. All we want is some competition. They should have to quote a rate to interchange points and be subjected to the same antitrust laws as the rest of us,” counters Borne. “For the railroads to trot out this red herring of re-regulation is simply ridiculous.”
Joy LePree is a contributing writer for CHEM.INFO. She has worked as a journalist for 13 years, covering a variety of issues and trends involving chemicals, processing, engineering and maintenance. To share your comments about the content of this article, send an e-mail to Lisa Arrigo, editorial director, at [email protected].