Shippers hoist by own petard at House hearing

Poor Mr. Dooley—Calvin, that is, president of the American Chemistry Council and not the fictional Mr. Dooley created during the late 19th century by humorist Finley Peter Dunne. The latter gained library space in Teddy Roosevelt’s White House; the former seemed to hoist himself by his own petard—Shakespeare speak (“Hamlet”) for the bomb maker managing to blow himself up with his own device.

It happened during Calvin Dooley’s testimony May 13 before the House Rail Subcommittee that was reviewing—and largely celebrating—35 years of partial deregulation under the 1980 Staggers Rail Act.

Twice Dooley wrongly suggested to the House Rail Subcommittee that the bipartisan leadership of the Senate Commerce Committee is supporting, in Senate Bill 808, the Surface Transportation Board Reauthorization Act of 2015, open access (also called reciprocal switching). Open access would mandate that two Class I railroads be available to compete for freight carloads even if the tracks of only one railroad serve a shipper’s facility—and without a shipper first demonstrating a pattern of railroad anticompetitive conduct or showing any competitive need for such interference in railroad business dealings.

There is no House version of S. 808, which, if passed by the entire Senate, would be sent to the House for consideration. Actually, S. 808 is supported by railroads and major shipper groups (including the American Chemistry Council, although its president seemed confused as to its provisions). This is a link to S. 808.

Dooley’s American Chemistry Council, and other shippers asserting few or no effective transportation alternatives to one railroad, have long sought open access as a device to lower their freight rates through government fiat. The National Industrial Transportation League (NITL) has petitioned the Surface Transportation Board (STB) to use its regulatory authority to mandate open access. By Dooley’s own admission, an open access requirement would strip $1.2 billion annually from railroad revenue at the same time Dooley’s members, who produce and ship an inventory of the most toxic commodities, require and demand adequate, efficient and safe rail transportation. Railroads assert the revenue hit would be far greater.

There is another unintended consequence to open access beyond reducing revenue and retarding capital investment in railroad infrastructure as profit falls. Open access, by giving shippers a second railroad, could snuff-out any captivity assertion, meaning were a shipper still dissatisfied with the rate offerings, there would be no option to file a rate complaint with the STB—where, in fact, rate relief could be greater. While it is unlikely either the Senate or House will impose an open access requirement, the STB could, as will be explained.

Two mainstream economists—Harvard-trained Robert Gallamore, in an op-ed article published May 12 in a Capitol Hill newspaper; and Georgetown University economist John W. Mayo, who testified May 13—independently cited boundless and conspicuous evidence that a “light touch regulatory approach” (Mayo’s words) since passage of the Staggers Rail Act is responsible for the railroads’ record capital investment and that Congress should use extreme caution in tinkering with the law.

Gallamore, author of a recent textbook on railroad deregulation—in conjunction with the late Harvard and Yale economics Professor John R. Meyer—wrote in his op-ed that open access “would vastly complicate rail operations, labor agreements and, perhaps, compromise safety while reducing money needed to expand capacity.”

Association of American Railroads President Ed Hamberger told the subcommittee that while “pundits across the political spectrum” are calling for more private-sector investment in infrastructure, and “Congress is wrestling to find money, [it is] thanks to the Staggers Rail Act [that] the freight rail industry quietly goes about its business spending $29 billion” annually on new and expanded rail infrastructure and maintenance—19% of its revenue reinvested vs. only 3% for American industry in general.

Hamberger quoted one of Dooley’s own members, implying the hypocritical position of the American Chemistry Council with respect to railroads: “Why do we deserve to maintain our [pricing margin]? So that we can continue to invest and create new products for our customers … [I]f we don’t do that, then our margins will go down. Then in order to keep the investors happy, we would have to cut R&D, we would have to cut development, and as a result five years from now, our customers wouldn’t have what they need. So, it’s really for the good of our customers that we need to be a viable organization.”

As with publicly traded chemical manufacturers and other publicly traded companies, railroads “must provide their shareholders a return commensurate with what those shareholders could obtain in other markets with comparable risk,” Hamberger said. “If railroads are viewed as returning less to shareholders (because of misguided regulations or any other reason) than comparable investment opportunities, then capital will flee the rail industry or will only be available at much higher costs than we see today.”

Transportation & Infrastructure Committee Chairman Bill Shuster (R-Pa.), who attended the subcommittee hearing, confronted Dooley over his lament that so-called captive shippers require government intervention beyond protections already available through the Staggers Rail Act. Shuster said many of these manufacturers “build facilities to be captive shippers” and they must see other benefits in consciously making themselves captive to one railroad.

Subcommittee Chairman Jeff Denham (R-Calif.) praised the Staggers Rail Act as substituting “market-driven rates [for] ones handed down by Washington bureaucrats.”

Shuster said, “[We] need to make sure we are doing the right things in Congress to stay out of the way where necessary and assist where necessary.” Shuster called S. 808, “intriguing,” saying that while “we need to take a careful look at it, [we also must] make sure we retain the strength of our railroad system that is the envy of the world.”

In a bipartisan leadership statement prior to the hearing, Shuster was joined by Peter DeFazio of Oregon, the Transportation & Infrastructure Committee’s senior Democrat, in writing that “freedom to set rates means that technological and productivity enhancements can be pursued since costs can be recovered. And where cost savings were found, shippers have shared in that reduction.”

In previous years, the Transportation & Infrastructure Committee took an even stronger stance in support of the Staggers Rail Act. In a January 2011 letter to the STB, the committee’s bipartisan leadership said, “Any policy change made by the STB which restricts the railroads’ ability to invest, grow their networks and meet the nation’s freight transportation demands will be opposed by the committee.” Signing that letter were John Mica (R-Fla.), then committee chairman; Nick Rahall of West Virginia, then the committee’s senior Democrat; Shuster, who was then chairman of the Rail Subcommittee; and the subcommittee’s then senior Democrat, Corrine Brown.

Captive shippers drew some comfort from the testimony of STB Acting Chairman Deb Miller, whose recurring theme in written and oral testimony, and in response to lawmaker questions, was that while the economics and facts of each rate complaint may not favor the shipper position, they won’t be disrespected in the process as many shippers have come to perceive.

Miller was contrite in acknowledging that STB procedures in deciding rate complaints are time consuming and extremely costly to shippers. At the same time, Miller said the complexity of many rate cases, with outcomes worth hundreds of millions of dollars, cannot be decided in six months. She assured lawmakers that the STB is seeking alternatives to lower the cost to shippers of advancing rate complaints and shorten the time required by the STB to investigate and reach a decision.

Without attaching any merit to the NITL petition for STB action in mandating open access, Miller said it is time to give the petition formal consideration. “I regret to say that this proceeding has been pending at the board for far too long. The board asked for extensive data about the impact the proposal would have on the industry back in July 2012. Despite the fact that our stakeholders spent significant resources to provide the board with this requested information, it has not acted. The board owes them a decision on what it plans to do with the proposal. She suggested that could occur as early as fall.

“With an improved network and more reliable rail service, Staggers can be said to have benefitted all rail industry stakeholders, even those captive shippers forced to bear the costs of the higher rates,” Miller said.

Although possessing no railroad background and at the STB for only a year (its acting chairman only since January), Miller demonstrated in-depth subject knowledge, was not intimidated by some lawmaker questions that seemed intended to intimidate, and appeared absolutely at ease. She has an extensive background in state administration, including serving as secretary of transportation in the administrations of two Kansas governors of different political parties. Her testimony was in contrast to a somewhat halting performance by former STB Chairman Dan Elliott May 6 at a Senate confirmation hearing as part of his attempt to return as chairman. Elliott seemed not to be in command of the subject matter at that hearing.

Also testifying before the House Rail Subcommittee May 13 was American Short Line and Regional Railroad Association President Linda Darr, who said that “many of the economic freedoms and regulatory flexibility embodied in [the Staggers Rail Act] allowed the railroads to save light density branch lines rather than abandon them. In creating the modern-day short line industry, the Staggers Act ensured that huge areas of rural and small town America would stay connected to that national railroad network.

“For the small businesses and farmers in those areas,” Darr said, “our ability to take a 25-car train 50 miles to the nearest Class I interchange is just as important as the Class I’s ability to attach that block of traffic to a 100-car train and move it across the country. Tens of thousands of rail customers cannot make the journey across the country without Class I railroad service. But they can’t start that journey without short line service.” Saying short lines reinvest as much as 30% of their annual revenue in infrastructure renewal, expansion and maintenance, Darr asked the subcommittee to support an extension of a federal tax credit for the short line industry (not major railroads) that helps leverage that investment.

A note on full disclosure. Professor Mayo, who co-authored a recent paper in support of the Staggers Rail Act, revealed in the paper that partial funding for the research—“but neither directives nor directions”—was provided by the Association of American Railroads. He did not reveal that financial support while testifying. Gallamore, whose op-ed in The Hill newspaper identified him as “a former government policy administrator and nationally recognized expert on railway and intermodal economics, technology and safety,” did not indicate in the op-ed that for much of his career he was employed by Union Pacific.

The full testimonies of the people mentioned in this blog are available for download. See below.