USA: Freight railroads have expressed concern about the implications of an Executive Order issued by President Biden on July 9 aimed at ‘promoting competition in the American economy’.
The order calls on regulatory bodies to facilitate ‘robust’ competition and reduce monopoly power in various sectors ranging from pharmaceuticals and hospitality to technology and transport.
In the rail freight sector, the Surface Transportation Board has been instructed to look at strengthening regulations to facilitate ‘reciprocal switching agreements’, which would give customers access to more than one carrier. If necessary, the board must address potential issues around competitive access, bottleneck rates and interchange commitments, in order to encourage on-rail competition.
Responding to the announcement, STB Chairman Martin Oberman noted that he had long been concerned about the ‘significant consolidation in the rail industry’ as a result of previous mergers, which had ‘dramatically reduced the number of Class I carriers’.
‘It is apparent that while consolidation may be beneficial under certain circumstances, it has also created the potential for monopolistic pricing and reductions in service to captive rail customers’, he said. ‘Productivity gains often have been retained by carriers in lieu of being passed on to consumers, as would be expected in a truly competitive marketplace.
‘For these reasons, I have previously stated my concerns with the sufficiency of competition in the rail industry and my interest in exploring ways the Board can improve the rail industry’s competitive landscape in order to ensure fairer pricing. In my opinion, competition in the freight marketplace is paramount. In the absence of a truly competitive marketplace, the Board can and should focus on using its competition-related authorities where feasible and reforming its competition policies where necessary.’
‘Misguided direction’
However, the Association of American Railroads described the Executive Order as ‘a misguided direction to interfere with functioning freight markets that could ultimately undermine railroads’ ability to reliably serve customers’. It believed that STB had been instructed to consider ‘ill-considered policy changes’.
‘Competition is alive and well in the rapidly changing freight transportation market, with nearly three quarters of all US freight shipments moving by a mode of transportation besides rail’, insisted AAR President & CEO Ian Jefferies. ‘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.’
According to AAR, private sector investment in rail infrastructure totalling almost $25bn a year is ‘only possible under a market-based economic regulatory framework overseen by the STB. Thanks to those investments and productivity improvements, today’s average rail rates are 44% less than they were in 1981, when the current economic regulatory framework was put into place.’ It emphasised that a ‘viable, thriving rail network’ would be essential to meeting the estimated 30% growth in freight demand by 2040 as currently projected by the federal Department of Transportation.
The association has long been fighting efforts by major shippers and lobby groups to increase regulation and encourage open access, arguing that this would weaken the rail sector as a whole and reduce its ability to compete with other modes including road, waterways and aviation.
‘Any STB action mandating forced switching would put railroads at a severe disadvantage to freight transportation providers that depend upon taxpayer funded infrastructure’, said Jefferies. ‘Such a rule would degrade rail’s significant benefits to both customers and the public by throttling network fluidity, disincentivising investment, increasing costs to shippers and consumers, and ultimately diverting traffic onto trucks and the nation’s already troubled highways.’
Facilitating passenger services
The Executive Order also instructs STB to ‘ensure that passenger rail service is not subject to unwarranted delays and interruptions in service due to host railroads’ failure to comply with the required preference for passenger rail’, and ‘vigorously enforce’ the latest regulations for monitoring on-time performance.
Any consideration of mergers between railroads must consider the potential implication on Amtrak’s statutory rights.
‘We appreciate the President’s continued support for Amtrak’s plans to bring passenger rail service to more of America’, said Amtrak CEO Bill Flynn. ‘President Biden’s Executive Order will open the nation’s tracks to more frequent and reliable passenger rail service needed for the future mobility of this country. Encouraging the Surface Transportation Board to protect Amtrak’s rights to use freight railroad tracks and prioritise passenger trains will provide more sustainable and equitable transportation options across America.’
Merger implications
Responding to the announcement, Canadian Pacific noted that the Executive Order ‘sends clear messages: no rail mergers that reduce competition or hurt passenger service and that the US economy needs more competition among railways’.
It argued that the merger of CP with Kansas City Southern as proposed earlier this year ‘would be a positive step toward more competition — not less — in the freight rail industry with no need for regulatory solutions’.
By contrast, CP believes that ‘a proposed CN-KCS combination creates competitive issues and reduces options for rail customers that will require additional regulation to overcome.’
KCS shareholders are scheduled to vote on August 19 whether to accept the deal with CN, which is currently favoured by the railway’s board. However, both CP and Amtrak filed objections with STB in June to a revised application for CN to place KCS in a voting trust pending a regulatory review of its proposed merger.
