Competition the American Way

Competition the American Way

Competition is the backbone of America’s economy, leading to innovation and helping companies become more efficient and productive. When companies compete with one another, the result is better prices, better quality in goods and services, and better customer service. 

And yet, America’s $60 billion freight rail industry has been largely immune from competition for nearly 35 years, and they are doing everything they can to keep it that way.

Although there are more than 140,000 miles of rail lines crossing the United States, only seven railroad companies are currently in operation. The four largest railroad companies control more than 90 percent of U.S. rail traffic, and approximately three-quarters of freight rail stations in the U.S. are served by only one major railroad. 

The Surface Transportation Board (STB), which is tasked with resolving rail-rate and service disputes, is considering a number of proposals that would provide rail customers with increased competition by changing requirements for competitive switching and adopting a streamlined approach to resolving rate disputes.

The freight rail industry claims that these changes are a result of a “handful of large companies lobbying for the changes” in a “cynical back door effort to lower transportation costs for themselves at the expense of a healthy freight rail industry.” But the truth is small businesses have been hard hit by reduced rail competition, freight rail prices that have nearly doubled over the past 10 years, and excessive burdens of proof, costs, and time required to bring anti-competition or rate cases before the STB. 

The STB is following a statutory mandate to promote a healthy rail system that not only allows railroads to earn revenues, but also ensure effective competition and maintain reasonable rates where competition is not available.

It’s not only multinational corporations that depend on railroads to conduct business. Small, family-owned businesses — like the many chemical distributors I work with — also need railroads both to receive products from upstream partners and to sell into downstream markets. The National Association of Chemical Distributors’ (NACD) members deliver approximately 50 tons of product every minute. Shipping by rail is a critical conduit to reaching the nearly 750,000 end users chemical distributors supply in nearly every industry sector. And while chemical distribution is big business, most NACD members are small businesses that on average generate $26 million in sales, have 26 employees, and operate on extremely low margins.

For example, a small chemical distributor recently moved into a suburban Chicago facility partly because of the access to rail lines that were used extensively by the previous owner of the property. But the new company was denied service on the same rail spur by the sole railroad company providing service there, despite repeated requests, hampering its ability to grow or even maintain jobs and revenues. 

With so called “competitive switching,” shippers currently served by one major rail carrier can gain access to another at a nearby switch point served by more than one railroad. Rail customers pay the costs involved in the switch, but they gain access to all of the benefits of free-market competition, benefits that are sorely needed. The STB is proposing to revise the unrealistically high threshold that requires shippers to prove anti-competitive conduct in order to obtain competitive switching approval. Since rail reform in the 1980s, not a single shipper has been able to request successfully that their freight be transferred from one railroad to another.

The STB is also looking at the way rate cases are handled. The Board estimates that today the main remedy to address rate disputes, a stand-alone cost challenge, takes 3.5 years and $5 million to litigate and requires the plaintiff shipper to create an entire fictional railroad scenario from scratch in order to prove that rates are excessive. The costs and time investment are so high that most shippers choose not to file claims and remain subject to the whims of rail operators.

A large and diverse group of trade associations and businesses from the manufacturing, distribution, energy, and agricultural industries — including many small, family-owned businesses that depend on reliable and affordable rail service — came together to support STB reform in hopes that it would provide a much-needed infusion of rail competition throughout the country. Today, the STB is signaling its intent to do just that, while multi-billion dollar railroads fight every single initiative.

Allowing market forces to set rates and improve service by ensuring effective competition among rail carriers is the American way — and it’s the way forward for the many small businesses that help power America. 

Eric R. Byer is President of the National Association of Chemical Distributors.

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