Hearings Planned on Rail Competition

The Surface Transportation Board (STB), the agency which regulates railroads, plans to hold public hearings in May to study how freight-rail regulations could be changed to increase competition. The proposed changes would make it easier for shippers to challenge rates and gain easier access to alternative railroads, increase competitive access to shippers’ facilities by other railroads, and limit the ability of larger railroads to enforce interchange commitments.

Unlike most other industries, railroads are not subject to the Sherman or Clayton Acts. Rather, the STB regulates mergers and competitive conduct. The STB has allowed the industry to become increasingly concentrated, and over the past decade rates have increased substantially. Shippers have complained that these increases result from a lack of competition among the railroads. The industry has responded that the higher rates contributed to the revival of its financial health. Moreover, the industry argues that it has high fixed costs and requires the higher rates to invest in maintaining and expanding its infrastructure.

The hearings proposed by the STB will primarily address three areas related to competition. First is the bottleneck issue, which arises when part of a route can be served by only one carrier even though large sections of the route can be served by several carriers. Of particular concern are “captive shippers,” those with only one railroad at their origin or destination.

Second is the related question of competitive access, when the STB requires a railroad to allow its competitors to use its facilities to reach a shipper. Under current rules, the STB may require a railroad to allow its competitors to move shipments over its tracks to serve captive shippers, but only if the captive shipper can show that the railroad has used its market power to charge excessive prices. The STB will consider whether it should more readily order competitive access.

Finally, the STB will address “interchange commitments.” These commitments generally arise when a large railroad sells a line to a small, short-line railroad. Such sales often include a contractual requirement that prohibits the short-line railroad from routing traffic to the selling railroad’s competitors.

The hearings will explore the use and availability of alternative routes, the use of competitor facilities and the rack, the financial health of the railway industry and the role the financial health of a carrier should play in determining the price for access to a route. After the hearings, the STB will consider whether it should change its policies towards competitive access and interchange commitments.

Allison I. Holt, a Senior Economist, specializes in empirical microeconomics and has extensive consulting experience, including analysis of antitrust matters and calculation of damages.