Railroads Brace as Regulator Signals Willingness to Take On Industry

WASHINGTON—The obscure federal regulator that threw a wrench into a $30 billion railroad merger this week could have more in store for the nation’s freight railways—with implications for both business and consumers.


Like other federal agencies, the five-member Surface Transportation Board has been tasked by President Biden to root out what it considers to be corporate monopolies that hurt smaller companies and consumers.


In a closely watched action, the board in coming months is expected to consider a rule to mandate so-called reciprocal switching, the practice in which railroads can be compelled to share access to their tracks with competitors. That would allow shippers to seek competitive bids for moving freight, which in theory could lower shipping costs and the prices ultimately paid by consumers.

Freight railroads oppose the plan, saying it would be detrimental to their operations and profits. Trucking already serves as a competitive counterweight, they argue. Freight railroads also warn that such a mandate could have unintended consequences, including lower capital investments in infrastructure they are forced to share with rivals.


There are also threats beyond reciprocal shipping. Martin Oberman, who was appointed chairman of the STB by Mr. Biden earlier this year, has also mused about the possibility of the STB moving to regulate storage fees at so-called intermodal railroad terminals—which handle containers across multiple modes of transport, like rails, trucks and ships—to address clogs in the supply chain. Intermodal shipping is currently exempt from STB regulation.


That triggered a warning from the Association of American Railroads, the industry trade group, that doing so wouldn’t help congestion and would exceed the board’s authority.


“Railroads compete in a multimodal market to deliver efficient and effective transportation services,” AAR Chief Executive Ian Jefferies said. “Claims to the contrary ignore today’s on-the-ground realities and conveniently disregard how technology is reshaping freight transportation.”


In its ruling this week, however, the STB made clear its willingness to upset industry players as it pushes to broaden competition, in concert with Mr. Biden’s economic agenda.


In a unanimous decision, the board of three Republicans and two Democrats said Canadian National Railway Co. can’t use a temporary voting trust as part of its $30 billion acquisition of the Kansas City Southern railroad. The move complicates the deal without killing it outright.


The board, which must still weigh in on the overall acquisition, said Canadian National hadn’t shown the trust would be in the public interest.


In an interview, Mr. Oberman declined to address specific cases before the board but said the STB’s members were driven by a desire to ensure competition.


“This is an industry with very few entrants in it, and they tend to be very monopolistic or, at best, duopolistic,” Mr. Oberman said. ”So we just have to live with the existing limited entrants in the field, but at least build in competition where we can.”


“The railroad industry is not just about maximizing profits for railroads, it’s also about the public interest in the economy, and the Congress has made that clear,” he said.

Mr. Oberman’s focus on competition and skepticism of some of the railroad industry isn’t a departure from his predecessor, Ann Begeman —but his tone is, said Tony Hatch, a veteran railroad analyst.


Previous STB leaders rarely shared their opinions on hot-button topics in the rail industry, but Mr. Oberman has been more vocal, Mr. Hatch said, attending conferences with shippers and sending pointed requests for information on the container-congestion issues to railroad leaders.


“It’s…a lot more vocal board,” he said.


The STB is a vestigial remnant of the first federal regulatory agency of all, the Interstate Commerce Commission, which once wielded immense influence across railroads and swaths of economic activity.


The board, created amid the demise of the preceding commission, has a staff of 120, including lawyers and economists who help it adjudicate shipping rate disputes and applications by railroads to abandon out-of-use lines.


In addition to reviewing the possible acquisition of Kansas City Southern— Canadian Pacific Railway Ltd. is also a suitor—the board is also adjudicating a dispute on the Gulf Coast between Amtrak and two freight railroads.


Amtrak wants to resume passenger rail service that has been suspended since Hurricane Katrina. CSX and Norfolk Southern, who own the tracks along that route, say that adding passenger trains will require billions of dollars of investment and interfere with freight traffic.


A resolution in Amtrak’s favor could substantially change the passenger railroad’s ability to extend new service on existing freight lines, a right that exists under federal law but that has been little exercised in part because of concerns it would interfere with the movement of goods.


Mr. Oberman also established a new passenger rail working group that is preparing to begin enforcing new on-time performance standards beginning next year.


Under those rules, which freights, Amtrak, and the government battled over for a decade, freight railroads could face penalties for delaying passenger trains, which run over freight-owned tracks across most of the country. Rulings favorable to passenger railroads in both matters could help make feasible Mr. Biden’s vision of vastly expanding train travel in the country.


By far the biggest fight is over reciprocal switching. The STB under a former chairman considered a rule on the topic in 2016 but it has languished in the years since. Mr. Biden’s executive order on competition urged STB to revive the rule-making, something Mr. Oberman has said the STB will do.


That brought immediate outrage from AAR and the freight railroads as well as warnings from some members of Congress that the STB shouldn’t meddle in the operations of the railroads.


“Forced switching would not increase real competition but instead is being sought as a backdoor attempt to drive down rates to below-market levels,” AAR’s Mr. Jefferies said. “Such government intervention would undermine railroads’ efforts to maximize network efficiency and push more freight to already overburdened and underfinanced highways.”


Mr. Oberman countered that many of the mergers that consolidated the rail industry 20 years ago included contracts for reciprocal switching among railroads, which have operated without major problems since.


“The railroads would prefer that we do nothing ever, except pre-empt everybody else from regulating the railroads,” Mr. Oberman said. “I think the reaction, and I’ve told them, by the way, was way overdone and exaggerated.”


Corrections & Amplifications

The Surface Transportation Board of three Republicans and two Democrats said Canadian National Railway Co. can’t use a temporary voting trust as part of its $30 billion acquisition of the Kansas City Southern railroad. An earlier version of this article incorrectly said the board was made up of three Democrats and two Republicans. (Corrected on Sept. 2.)


This article originally appeared on Wall Street Journal

2 views0 comments