AMENDING RAILROAD DEREGULATION

As Congress moves toward the public sale of Conrail, a debate has bubbled up over whether other changes in railroad law should be attached to the privatization bill or whether a clean Conrail bill should be reported out of the House.

Contrary to railroad industry assertions that efforts to amend the Staggers Act are driven by narrow special interests, a uniquely broad-based coalition of consumer groups, farm interests, large industrial shippers, coal producers, regulators and utilities is supporting refinements in the act.Over a hundred members of the House have cosponsored the original piece of legislation (the Consumer Rail Equity Act) and a compromise recently has been laid on the table. The changes are largely procedural, but for shippers, consumers and communities who have found it almost impossible to win at the Interstate Commerce Commission, they are important.

Rail rates are not subject to any regulation unless the shipper can prove that he is captive (market dominant) and that the rate he is paying exceeds 180 percent of the variable costs of providing the service. These provisions guarantee that the railroads will have tremendous latitude in their ability to engage in what is called differential pricing - the ability to earn a higher rate of profit on some commodities than on others.

The proposed amendments would not change either of these fundamental principles of the Staggers Act.

For those who originate shipments, however, market dominance would be defined strictly in terms of transportation competition. At present, a coal shipper, for example, can be required to prove that he cannot make the same sale by shipping coal from another mine (geographic competition), or make an equivalent sale by shipping a different commodity (product competition).

These tests provide an insurmountable barrier to many shippers who deserve to have access to the protections of the Staggers Act. Plain old competition - the availability of a transportation alternative - would be the standard for these shippers.

Once inside the door, the shipper can challenge specific rates. In a process unique to the Interstate Commerce Commission, the shipper bears the burden of proving whether it is reasonable. In virtually all cases heard by other regulatory agencies, the party that collects the rates bears the burden of proof. Electricity, gas and telephone companies at the state and federal levels, not consumers, must prove that rates are reasonable.

The proposed amendment would continue to allow railroads to collect rates up front and would preserve the 180 percent threshold. However, it would require the railroads to bear the burden of proving the rates are reasonable, if they are revenue adequate or the shipper can show that he is paying a disproportionate share of the railroad's costs.

The Staggers Act also guaranteed that rail rates would keep up with inflation. The ICC implements this by calculating an index called the rail cost adjustment factor. Until recently the ICC would let rates go up, but never down and it continues to refuse to adjust the index for productivity.

The refusal to adjust for productivity guarantees that consumers will be overcharged because rates do not reflect actual costs. Even in deciding to let the index go down, the ICC refused to take a realistic approach. It created an accounting procedure in which rates would be held above a certain level, allowing railroads to collect more than it was costing them to provide service. The railroads would hold the money and not raise rates as much at some future, unspecified date. This creates an interest-free loan from consumers to railroads.

The proposed amendments would simply let rates go up and down as a real, productivity adjusted rail cost index does.

At present some commodities have been exempted from regulation by the ICC. Such commodities are judged to have competitive transportation markets. Yet, the laws that protect consumers and businesses in such markets - the antitrust laws - are inoperative because of antitrust exemptions, which railroads received back around the turn of the century.

These shippers have fallen into a black hole of railroad law. They are not regulated because they have been exempted, but they cannot protect themselves with antitrust law because the regulatory agency exists. The proposed amendments would give them antitrust relief.

A similar problem exists for shippers of raw agricultural commodities who were supposed to be protected from abusive contracting practices because the manipulation of rail rates can literally determine which farmers and which grain elevators stay in business. Yet, the current rules require an agricultural shipper to prove that he will be substantially damaged by a contract, without being able to find out what is in it. A compromise is called second-tier disclosure, which gives sufficient information to determine whether there is potential damage without revealing the terms of the contract in detail.

Reform of railroad regulation began over a decade ago with the passage of the 4R Act. A decade of deregulation has produced anomalies between existing laws and pointed up problems in the implementation of specific aspects of current law. Mid-course corrections that impose common sense on the ICC in a limited number of areas, including revenue adequacy, competitive access, intrastate rates and abandonment proceedings, will restore the balance between shipper needs and the railroads' needs.

In some cases the Interstate Commerce Commission lacks the legal authority to address the problem; in others it has proven incapable of doing so.

The Staggers Act and the act that created Conrail were passed almost simultaneously and in many respects they went hand in hand. A bill that privatizes Conrail and makes these compromise amendments to the Staggers Act will close out a decade of successful regulatory and organizational reform in the industry.

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