Analysis
President Biden’s recent executive order seeking to inject more competition into the U.S. economy could have a major impact on freight railroads and significantly benefit their customers, assuming that everything goes according to plan.
However, for various reasons many of the announced plans for injecting more competition into the rail industry could end in disappointment—especially given the size of the major railroads’ potential legal war chests—but if the federal government can pull this off, it could turn out to be a great thing for America’s shippers and consumers.
The July 9 executive order is an extraordinarily wide-ranging document containing 72 separate directives regarding wildly different industries. For the most part, it seeks to establish regulations and policies to strengthen the hands of federal regulators, ostensibly to boost competition and benefit consumers.
Essays have been written about how this is seen as the most effective strategy for liberal pro-government advocates to weaken private sector opposition to government intervention while extending effective controls over business opposition. It is an interesting approach, advocating the increased competition within these industries through additional regulation instead of embracing deregulation.
Titled “Promoting Competition in the American Economy,” Biden’s executive order is a real grab bag, touching on everything from limiting airline baggage and cancellation fees, to eliminating non-compete agreements employers impose on their employees (something already done in several states) and hearing aid pricing. Industries affected range from agriculture to pharmaceuticals and various kinds of companies in the healthcare industry.
It also takes a clear shot across the bow of the increasingly unpopular tech industry giants. Biden states in the order that it is “the policy of my Administration to enforce the antitrust laws to meet the challenges posed by new industries and technologies, including the rise of the dominant Internet platforms, especially as they stem from serial mergers, the acquisition of nascent competitors, the aggregation of data, unfair competition in attention markets, the surveillance of users, and the presence of network effects.”
The presidential command is frequently granular in its approach. For example, it directs the Department of Transportation (DOT) “to consider issuing clear rules requiring the refund of fees when baggage is delayed or when service isn’t actually provided—like when the plane’s WiFi or in-flight entertainment system is broken.”
In places, the order can be just that detailed, but it also can be sweeping in its scope. When it comes to freight rail competition, the President makes it clear he finds it lacking. “In 1980, there were 33 Class I freight railroads, compared to just seven today, and four major rail companies now dominate their respective geographic regions,” the executive order’s accompanying fact sheet stated.
“The President encourages the Surface Transportation Board (STB) to require railroad track owners to provide rights of way to passenger rail and to strengthen their obligations to treat other freight companies fairly,” the sheet declared. The passenger rail part refers to Amtrak, which recently raised concerns about trackage rights if the proposed Canadian National-Kansas City Southern merger is ultimately approved by the STB.
Yes to Reciprocal Switching
The President’s order explicitly encourages the chair of the STB and other board members to issue an order allowing reciprocal switching—a practice requiring that one railroad grant access to its tracks for equipment from another railroad. Rail shippers have sought this change for many years, and the STB opened a proceeding to consider it in 2016—but nothing else has happened since then.
The railroads strenuously oppose reciprocal switching, claiming that it would do serious economic damage to them and reduce their operational efficiency. However, the practice has been common in Canada for many years without creating any of the problems American railroads claim will be created if the practice is imposed in the U.S.
The STB also is directed by the order to consider rulemakings pertaining to “any other relevant matter of competitive access, including bottleneck rates, interchange commitments or other matters.”
STB chairman Martin J. Oberman (D) was present for Biden’s signing of the executive order and released a statement making it clear that he is a willing ally. Although the five-member board currently has a Republican majority, that is expected to change at the end of this year.
“During my time on the board, I have been continually concerned with the significant consolidation in the rail industry that happened as a result of a series of mergers decades ago, which dramatically reduced the number of Class I carriers,” Oberman observed.
The productivity gains they achieved have not been passed on to customers, he said. “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.”
He added, “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.”
Oberman said the board currently or in the future will consider reforming its competitive access policies; enhancing shipper visibility into first mile/last mile service; and stated that the board takes seriously the administration’s emphasis on ensuring that passenger rail is not subject to unwarranted delays and interruptions in service imposed by freight rail lines.
STB Already at Work
Oberman noted the formation of an internal working group to advise about resources needed to fulfill the STB’s responsibilities to investigate compliance with the new on-time performance standards and, starting next year, to ensure that those standards are enforced. He also said the board will address practical accessibility of rate relief measures to shippers in market dominant situations.
However, with the exception of promising that the board will ensure freight railroads’ obligations to facilitate timely passenger rail service, he made no mention of the STB’s policy on rail mergers, including the CN-KCS proposal currently before it.
Speaking four days after the order was released, Oberman told a meeting of the Midwest Association of Rail Shippers that he is concerned about service failures and accessorial and demurrage fee abuse that has followed several major railroads’ adoption of the Precision Scheduled Railroad (PSR) operations model, driven by shareholder pressure organized and led by Wall Street hedge fund managers.
Although railroads began adopting the PSR model several years ago to squeeze out labor, equipment and other costs, shippers say service failures continue to plague the rail systems that adopted it, and complain about rapacious demurrage and accessorial fees designed simply to drive profits to the bottom line.
“I have wondered whether the combination of the reductions in workforce, the interruptions in service, and the demarketing all implicate the common carrier obligation that railroads have and have had really since the beginning of the railroad industry, and it’s something that I continue to focus my attention on,” Oberman told the gathered shippers.
In regard to the CN-KCS merger proposal he indicated that its approval by the board will not be quick and easy. The fact that the board has not applied rail merger rules adopted in 2001 before now and the new stress on competition voiced by President Biden will make sure this will be no simple process.
The railroads were quick to voice their unhappiness with the prospect of having to adopt reciprocal switching. “Any STB action mandating forced switching would put railroads at a severe disadvantage to freight transportation providers that depend upon taxpayer-funded infrastructure,” said Association of American Railroads president Ian Jefferies, referring to the railroads’ trucking competitors.
On the other hand. the rail reform proposals drew vocal support from the Freight Rail Customer Alliance, National Industrial Transportation League and American Chemistry Council, all of which represent the public policy interests of companies that are major rail shippers.
