By Daniel Elliott, III
People familiar with the modern freight rail network in the United States know that regulation, not competition, is the invisible hand that guides the industry. This reality impacts everyone, from manufacturers to consumers, through delayed shipments and higher prices.
Lack of rail competition exacerbates U.S. inflation and supply chain crises because railroads can, in effect, charge whatever they want for whatever delivery timeframe best suits them. In the end, consumers get products slower and at a higher cost.
The rail industry’s ongoing problems are a direct result of decisions made by the railroads themselves. They implemented massive job cuts during the COVID-19 pandemic, which left them unprepared for the uptick in demand as the U.S. economy began to return to normal. Moreover, the railroads were incredibly slow to react to this problem, and their job numbers continue to leave them understaffed to provide adequate service.
Equally problematic has been the unrelenting decline in service provided by railroads in recent years. This problem has been on full display amid supply chain issues felt by consumers across the U.S. landscape. Unilateral actions by several railroads to curtail shipments of fertilizer inputs and grains could cause major supply chain disruptions, hurt American farmers, and worsen the food crisis.
A bipartisan group of 51 members of Congress recently wrote to the U.S. Surface Transportation Board (STB) urging it to “ensure critical commodities reach essential industries and workers, such as America’s farmers, who are essential to feeding our nation and the world.” After all, as the legislators noted, “food is a national security issue, and we must treat it as such.”
As recently as 1980, more than two dozen major railroads competed with one another. Over the years, mergers and acquisitions have led to an industry comprising just four mega-railroads running de facto monopolies across broad swaths of the United States.
Shippers that must rely on one of these railroads to move their products are rightfully known as “captive” shippers. According to data from the Freight Customer Coalition, an astounding 78 percent of freight rail stations are captive to a single major railroad—and captive shippers who use those stations are 100 percent at the whim of the railroads’ market power and dominance. This phenomenon has resulted in skyrocketing prices and diminished service.
In 2009, I was sworn in as Chairman of the STB, the independent federal agency charged with regulating the U.S. freight rail network. The STB serves as umpire between freight railroads and the thousands of manufacturers, producers, and farmers who need railroads to ship goods across the United States.
As Chairman, I was constantly hearing complaints from rail shippers and their political allies on Capitol Hill, emphasizing that the STB needed to find a way to increase competition among railroad companies.
I came to realize that these shippers had a compelling reason to push for change in how the STB did its job. Competition was indeed missing in the marketplace of Class I freight rail, and the STB’s practical ability to regulate unfair rates had become severely limited. As a result, I came to believe that the Board needed to reexamine the state of competition in the rail industry.
In 2011, I asked for comments and held a hearing on the state of rail competition, which led an industry group to file a petition to allow for reciprocal shipping. This approach would let captive shippers switch their cargo from one railroad to another along the route—reintroducing competition among railroads.
In 2016, the STB issued a proposed rule to make this approach a reality. Unfortunately, that proposed rule has never been formally adopted and remains in limbo to this day.
The railroads have claimed that reciprocal shipping could lead to financial ruin, but I have full confidence in the STB’s ability to balance railroads’ need to earn adequate revenues against captive shippers’ need for fair transportation rates. Reciprocal switching has been used in Canada without the collapse of that country’s extensive railroad system—in fact, Canadian railroads are considered among the most efficient in the world.
The railroads may be looking at these proposed changes from the wrong perspective. Reciprocal switching could lead to growth in carload traffic if used to provide shippers with more frequent service at their facilities. The reintroduction of competitive transportation costs would allow railroads to compete better with other modes of transportation, specifically trucks and ships. The current truck driver shortages and seaport bottlenecks pose a unique opportunity for U.S. railroads to fill the gaps and inefficiencies in our supply chain.
From the perspectives of both railroads and shippers, reciprocal shipping is an opportunity for growth. Railroads can increase revenues while shippers benefit from competition. Although change is always hard, now is time to employ reciprocal switching to benefit the entire U.S. economy.
In March, the STB held a virtual hearing on the reciprocal switching proposed rule from 2016. A decision on this matter is expected soon. Reciprocal switching could be a great opportunity for rail shippers if the proposed rule is adopted in some form that makes this remedy available again.
Daniel Elliott is a principal at GKG Law in Washington, D.C.