Lingering issue from Conrail breakup

Lingering issue from Conrail breakup

When the Surface Transportation Board approved the breakup of Conrail, it agreed to let the former government-owned railroad continue to operate as a switching railroad for CSX and Norfolk Southern in and around Philadelphia, Detroit and New York-Northern New Jersey.

Now shippers, short-line railroads and government agencies say the 5-year-old plan isn't working. They say NS and CSX aren't competing in the "shared-asset areas" because Conrail isn't allowed to sell their services. Unless Conrail can market its own services, the critics say, there won't be effective competition for business in these areas.

In fact, the current structure encourages the railroads to market business outside the shared-asset areas, not within them, according to the North Jersey Transportation Planning Authority. This "may be an impediment to providing a strong rail marketing approach by the two Class 1 parents," the planning authority told the STB at a hearing.

NS and CSX insist the concept is working. Les Passa, vice president of strategic planning at CSX who spoke for Conrail at an April 2 hearing in Trenton, N.J., said that the shared-asset operation "has been a success."

Passa said the shared-asset areas have a strong safety record, operations are fluid, traffic is growing and new markets have been opened. He said intermodal traffic increased 55 percent in Detroit, 4 percent in North Jersey-New York, and 2 percent in South Jersey-Philadelphia between 2000 and 2003. Carload volume in the shared-asset areas grew more than 3 percent between 2001 and 2003.

David Brown, general manager for Norfolk Southern's northern region, said 22 percent of the railroad's UPS traffic is handled over shared-asset track, and that a current streak of 181 days without a service failure represented the "longest railroad failure-free streak in UPS history."

Some customers agreed that Conrail is doing its job. "Service is adequate for the most part," said Michael Klein, president of Mars Industries, a Detroit metal recycler. Because Conrail operates as a local switcher, Klein said, "problems can be solved quickly." And because Conrail has access to both NS and CSX, "we can reach more markets at competitive freight rates."

But the New Jersey authority said small and midsize rail customers tell another story. "Class One railroads are quoting additional prices of $250 to $260 for handling traffic into and through the terminals of the shared-access areas," violating assurances from NS and CSX under the merger agreement, the authority said. "By making separate and visible additional charges in rate quotes to new customers . . . the railroads are encouraging these businesses to establish distribution centers outside of the region and move the cargo by truck to final market."

The New Jersey authority accused NS of encouraging existing customers to relocate their New Jersey operations to Pennsylvania, where they would be served exclusively by NS. "Obviously, this business approach threatens to reduce economic development opportunities in our region, reduces the incentive of regional freight operators to divert traffic from truck to rail and potentially destabilizes the viability of the shared-access areas," the group said.

SMS Rail Service, a short line, said "few, if any" of the claimed benefits of the Conrail split have been realized. "If there were meaningful competition between them, the cost savings they had projected would have resulted in rate reductions offered as inducement to keep shippers in the area," said SMS representative Fritz Kahn.

Critics say the railroads also have failed to produce the rail business they promised. Philadelphia Industrial Development Corp. says the railroads sold less than half of the $35 million of new business they had projected, for instance. "While we are delighted with the CSX and NS private shipper contract commitments, they total far less than promised," the development agency said.

The competition and investment problems inherent in Conrail's structure can be overcome only if Conrail is allowed to market shared-asset operations and quote rates, the New Jersey planning agency said. Shared-asset areas "could develop new markets and customers that could be profitably bid on and served by both Class 1 parents," which would "provide incentive to the Class 1 parents to make adequate investments."

But such a change may be too drastic. "Certainly it would be contrary to the provisions of the agreement between NS and CSX," Kahn said. "The whole premise of the shared-asset areas was that pricing functions be retained by the owning companies. Theoretically the board could enter such an order, but it's not likely to."

Instead, Kahn said the two railroads should more aggressively market the shared-access areas. "They've been encouraging industries to move out of areas to relocate on lines in nearby states that only one or the other of them can serve. Certainly the board could impose requirements that have the effect of keeping freight from moving off the rails and over the highways."