SURFACE REFLECTIONS BY LAWRENCE H KAUFMAN: MANY SHIPPERS FEAR DEREGULATION OF RAILROADS

SURFACE REFLECTIONS BY LAWRENCE H KAUFMAN: MANY SHIPPERS FEAR DEREGULATION OF RAILROADS

My column of Nov. 9, in which I suggested that perhaps it's time to sunset the Surface Transportation Board and complete the job of deregulating the railroads, brought forth some interesting and thoughtful comments from readers. Several expressed fears of how railroads would behave if deregulation came to pass. At the risk of offending those who took the time to share their thoughts, it appears to me that in many cases they were demonstrating the mind-set that needs to be eliminated if railroads and their customers are to devise a mutually satisfactory relationship.

A long-time Washington lawyer who represents shippers now but has represented carriers in the past, writes: 'The question is not so much whether the STB should be eliminated but rather on what terms. Are the railroads prepared to submit themselves to the antitrust laws and the staff of the Antitrust Division of the Department of Justice?'It's not only their mergers that by virtue of the STB are immunized from DOJ scrutiny, it also is their surviving rate agreements, such as the one by which uniform per diem rates were established, and the surviving pooling agreements, such as TTX (the railroad-owned car leasing company.) Are they willing to submit themselves to the provisions of the Federal Trade Commission, including its prohibitions against unfair and discriminatory pricing, avoided now because of the STB? What about the Carmack amendment (which federalizes carrier liability for customers' property)? Are the railroads prepared to have state courts adjudicate their freight loss and damage claims?

'You can bet your life that the railroads will join the bandwagon to abolish the STB, but only if a broad preemption provision is enacted.'

His concerns are valid. Having known a few railroad lawyers in my time, I'd be surprised if they didn't seek just the preemptions he fears. I'll go further: Deregulation is to railroad lawyers as tort reform is to trial lawyers. They'll try to fight it any way they can.

Another shipper lawyer wrote: 'Railroads are franchised monopolies that have a duty to serve the public, and the government can't give someone a monopoly and then not police them. As Thoreau said in Walden, 'We do not ride on the railroad. It rides upon us.' The Supreme Court has later ruled that railroads, like utilities, stand in the shoes of the public and are therefore public servants. May it ever be thus.'

While some customers are captive to a railroad, railroads are not a monopoly. If they were, they wouldn't have lost their high-value traffic to other modes when the government regulated them as public utilities with a monopoly franchise. Saying it is so doesn't make it so.

A shipper raised other questions. 'Do you think shippers would trade open access for elimination of the STB? Would the railroads go along? If so, how would one keep the No. 2 carrier interested? Could the railroads work out equitable/agreeable division on competitive moves (bottlenecks)? Would the legislation spell out terms for elimination/sale of branch lines? Would the government fund a program for local purchase of the unwanted lines? This could be quite a debate, with the usual political minefield and boondoggles along with economic booby traps.' Finally, he asked, 'Wonder how labor would come out?'

Again, the questions and the concerns that trigger them are legitimate. They were raised in 1979 and 1980 when Congress was considering what became the Staggers Rail Act. That measure was pronounced dead several times as it worked its way through the legislative thicket. Railroads nearly killed it. Shippers nearly killed it. Ultimately, it survived because each side realized that the regulatory status quo benefited neither. Sophisticated shippers understood that only if railroads were substantially deregulated and able to earn an adequate return on capital would they be able to provide the service that shippers required. And a fragile railroad coalition reluctantly agreed to give up collective rate-making and other protections in order to gain individual rate-making freedom.

Congress wrote in protections for the captive shipper, but charged the Interstate Commerce Commission, now the STB, with advancing the national rail policy. This is at the root of the current warfare between carriers, their customers, the STB, and Congress. The STB consistently has interpreted the law to favor railroads even when it clearly was not providing equity to complaining shippers. In almost every case, the agency has been upheld by the courts, and they probably will continue to do so.

Despite a 'friendly' agency, however, railroads are not giving their customers the kind of service they want, nor are they making a decent return on investment. Railroads have lost nearly half their market capitalization in the last year and a half. As was the case in the 1970s, low stock values inhibit railroads from raising the new capital that is necessary to improving service.

One railroader responded to last week's column, saying: 'I think there's a lot to be said for eliminating the STB and going under antitrust. When there were literally dozens of major railroads and three-quarters of all freight required movement over multiple railroads, there probably was justification for excluding railroads from antitrust. There is much less reason today. But I doubt if shippers would buy into any change, unless some form of open access accompanied it. And how do you accomplish that without a regulatory system? Maybe there's a way, but no one has found it yet.'

So, we have protagonists that fear the future perhaps more than they dislike the present. Many railroad executives fear that further reform would be worse than a failed system that protects them from market forces. And rail customers, fearing the economic power of truly deregulated railroads, seek even more regulation even though they know it has failed them as much as it has failed the carriers.

Both sides should heed the thoughtful words of an executive of a major rail customer. 'I think that most would agree that the (rail) industry is at a cross-roads,' he wrote. 'Service issues have not been resolved and market capitalizations have collapsed. There are few costs left to cut and the demand to 'find' revenues continues to be a struggle. It is, therefore, no surprise that the industry would be in a soul searching mode and that traditional business drivers would be under close scrutiny.'