The Surface Transportation Board could be poised to mandate shipper-friendly regulations aimed at incentivizing Class I railroads to improve rail service, which has deteriorated in recent months.
Mandating some form of reciprocal switching, in which shippers are granted access to a nearby competing rail network under certain situations, could be something the board will act upon later this year. Reciprocal switching is one of the more contentious issues facing the board, with shippers largely in favor of the measure and railroads and other logistics stakeholders against it or skeptical of it.
“By making rate relief easier to obtain… [that] will incentivize the railroads and shippers to reach their own [service] agreements,” STB Chairman Marty Oberman told congressional leaders last Thursday. Oberman and the four other board members were testifying at a hearing on STB reauthorization before the congressional subcommittee on railroads, pipelines and hazardous materials. That subcommittee is part of the U.S. House Committee on Transportation & Infrastructure.
While the Staggers Act of 1980 removed many of the government regulations that may have hindered the freight rail industry from growing, the last 40 years have seen a lot of consolidation, Oberman stated.
“In my view, the pendulum has swung too far,” and the Staggers Act has created an environment that has led to regional monopolies as well as duopolities for the eastern and western U.S. and that has incentivized the railroads to cut resources, he said.
“I don’t care what your OR is but you have to have decent service,” Oberman added, referring to a railroad’s operating ratio. The Class I railroads had been seeking to reduce OR in order to demonstrate that the company is showing increasing profitability. The deployment of precision scheduled railroading (PSR), an approach that seeks to streamline operations, has been viewed by some as a key way to reduce OR.
In addition to potentially mandating some form of reciprocal switching, the board could also require first-mile and last-mile data from the railroads. STB has already begun to seek some of that data now through emergency orders it recently announced in response to deteriorating rail service.
However, two larger responses have also been mentioned as possible remedies to improve freight rail service. The first is redefining the common carrier obligation so that the language isn’t so vague.
The common carrier obligation has been defined by the federal government as “statutory duty of railroads to provide ‘transportation or service on reasonable request.’”
“That really is the topic of the day, in my view,” Oberman said, adding that STB has the authority to make the language more specific.
But the challenge in redefining the common carrier obligation “has been a task. I’ve been struggling with it,” Oberman continued, because there are so many variables on how shippers and customers get rail service, and it has been a challenge to come up with rulemaking language that would be enforceable in court and would cover a variety of situations.
Oberman said in response to a question posed by committee Chairman and Rep. Peter DeFazio, D-Ore., that the board would be willing to work with the House committee on revising the language for the common carrier obligation.
Could Congress or the White House intervene to improve rail service?
The other larger response to Class I rail service problems is to target what has been viewed as the origins of the freight rail industry’s rush to profitability: short-term investors and activist investors. Some have argued that the influence of these investors also extends to other industries, such as the airline industry.
“The broad economic forces that Chairman DeFazio spoke of are really matters of such fundamental business policy in this country. They’re beyond what this board was set up to do, and you wouldn’t want our board to be telling Wall Street how to behave,” Oberman said, adding that the issue of activist investors and the influence of short-term investors lies within the realm of congressional action.
Although the hearing’s subject was to address STB reauthorization, the majority of the hearing was about deteriorating rail service and the board’s role in addressing rail service issues. The STB was created as an independent agency in 1996 to address rail service and rate issues as well as industry mergers and acquisitions. Congress reauthorized the board in 2015, expanding it from three members to five.
Some congressional leaders have questioned whether the board should have more regulatory power, but others have contended that STB’s existing purview is already adequate given that freight railroads don’t handle a majority of the nation’s freight.
“When broadly looking at a potential STB reauthorization, we must carefully and deliberately examine the board’s needs to ensure that any proposals have a positive long-term impact on the STB’s operations, and we must not interfere with a slowdown or distract from the STB’s current duties and their abundant workload,” said subcommittee ranking member Rick Crawford, R-Ark.
DeFazio, who is not seeking another term, was more blunt: “Your testimony asks for virtually nothing from this committee, suggesting that you have all the powers you need. Well, if that’s true — and I’m not sure it is — then use them. Use them!
“Some will argue it’s a free market problem. It will be resolved by the markets. But that doesn’t work with duopolies or monopolies. It does not work. In fact, that’s the reason you exist. That’s the whole reason you exist,” to make the freight rail system work better, DeFazio said.
DeFazio added that the White House economic adviser is determining whether an executive order addressing rail service should be made.
Oberman said he hoped the recent orders requiring four Class I railroads to submit recovery plans and supporting data will help improve rail service. The board is also hoping to rule soon on a proposed plan to make it easier for shippers and customers to get an emergency order from STB that would require a freight railroad to take immediate action.
“I know the spotlight is on them. This hearing’s helped. Our hearings [in late April] helped,” Oberman said.