Why Congress Should Investigate the STB

Why Congress Should Investigate the STB

Copyright 2006, Traffic World, Inc.

Nobel-prize winning economist Milton Friedman enjoyed four-letter words - especially those beginning with the letter "f."

His favorites were "fair" and "free." "Fair" is flawed, Friedman said, as it is in the eyes of the beholder. "Free" conveys the efficiency of market transactions governed only by supply and demand.

Surely free markets - the objective of the 1980 Staggers Rail Act - are what freight railroads advocate and defend forcefully over flawed "fair" regulation. A century of well-intentioned regulation nearly drove the rail industry to financial ruin while stifling price and service innovation.

So why the tumultuous squabble between railroads and captive shippers who lack effective transport alternatives such as truck or barge? Railroads say captive shippers yearn for the moribund days of regulation. Captive shippers deny they promote re-regulation.

The core of the squabble is the numbers "two" and "three." Two competitors (duopoly) beat monopoly; but three competitors provide greater insulation against collusion - such as winks-and-nods that discourage capacity expansion and keep prices artificially high.

That is why captive coal shippers support third competitor Dakota, Minnesota & Eastern hauling low-sulfur coal from Wyoming''s Powder River Basin in competition with the existing BNSF and Union Pacific duopoly.

A recent revelation that Union Pacific holds a right of first refusal in a sale, should DM&E fail in its expansion, caused DM&E and UP to say approval of a sale would require approval of the Surface Transportation Board - the agency former National Coal Association President Carl Bagge called "a wholly owned subsidiary of the Association of American Railroads."

STB appointees often are seen as being pre-approved by politically powerful railroads. Not since 1955 has someone with shipper ties been confirmed by the Senate to regulate railroads. Many STB senior staff were recruited from railroads. And railroads routinely hire to lucrative posts regulators whose voting patterns favored railroads.

Captive shippers sense an STB mindset that the nation is best served by two balanced transcontinental (Eastern seaboard to Pacific coast) rail behemoths, which bodes poorly for survival of independent third competitors.

Another shipper complaint is the STB permits railroads to maintain a monopoly on long-haul routes by not quoting rates between a sole-served origin or destination and a competitor''s nearby track.

The STB has failed to devise a process acceptable to small shippers to challenge rail rate reasonableness without having to hock the factory and spend $3 million on experts and attorneys. And when coal (large) shippers won several rate challenges after spending up to $5 million on experts and attorneys, the STB changed the rules of engagement.

Intuitively appealing is elimination of all rail regulation - placing railroads fully under the antitrust laws and allowing courts to determine if their pricing and routing actions restrain trade.

Not so fast. Eliminate the STB and there goes the railroads'' common carrier obligation, meaning railroads could cherry-pick lucrative traffic with abandon. The DM&E''s unrealized two-decade quest to reach its goal is evidence that barriers to entry are substantial. And without regulation, there goes federal pre-emption, which could allow localities to cause substantial mischief in routing of hazardous materials.

With new congressional leadership, there is hope on top of reason to investigate meticulously the grievances of captive shippers and qualifications of regulators to ensure no thumbs are on the regulatory scales. Congress also should investigate what role the STB might play in the sale of railroads to foreign entities.

There exist few prohibitions against foreign entities buying U.S. railroads. Assuming a foreign entity did not own another transport company, its sole hurdle would be the Committee on Foreign Investments in the U.S., chaired by the Treasury secretary.

-- The previous secretary, former CSX chairman John Snow, advocated - along with President Bush - selling terminals at U.S. ports to a Middle East government-owned entity.

-- Will Middle East oil money - or unregulated offshore hedge funds - seek to buy U.S. railroads? China, poised to become the world''s largest economy, is awash in greenbacks. Traffic World recently reported a Chinese official''s disdain for the condition of U.S. infrastructure. How better to fix up than first to buy-up?

Shouldn''t Congress be concerned?

Wilner, director of public relations at the United Transportation Union, is a former chief of staff to an STB vice chairman, former rail official and former associate editor of Traffic World. The views expressed here are entirely his own.