Issue Brief

Rail Competition and Antitrust Enforcement

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Summary

Electric utilities rely on rail transportation to move the vast majority of coal from mine mouths to power plants. Many coal-burning electric utilities have no choice but to receive coal shipments from only one rail carrier, and thus are subject to monopolistic behavior. As a result, these rail customers are unable to negotiate the terms of their rail transportation in an open and competitive market. These “captive” rail customers are charged higher rail rates while customers with more than one viable transportation option pay lower, competitively priced rates. Over the past several years, rail customers also have experienced numerous service and reliability problems, with no relief.

The American Public Power Association (Association or APPA) and its members have been active in proceedings at the Surface Transportation Board (STB or Board) on issues important to captive shippers. While these proceedings could result in some regulatory improvements, legislative remedies are still required to enhance competitive transportation and improve rail customer protection mechanisms and enforcement implemented by the STB. Absent congressional action, electric utilities and the communities they serve will continue to be subject to unnecessarily higher rates and poorer service for coal transportation. In recent Congresses, the Association has supported bills that would have placed the railroads under antitrust law and reformed the STB. APPA continues to support such efforts.
 

Background

Thirty percent of the nation’s electricity is generated from coal, the vast majority of which is transported by rail. A substantial amount of that coal has only one option for railroad transportation for at least a portion of its shipment. Thus, a large amount of the coal used to generate electricity in the U.S. is “captive” to a single railroad for transportation. The transportation costs for shipping that coal reflect the monopoly power of the carrier, and are therefore frequently unreasonably high. While public power’s interests relate to the movement of coal, this issue is by no means restricted to coal shippers. A variety of shippers, from farmers to chemical manufacturers to defense contractors, have experienced these same problems.

The monopoly power of the railroads over captive shippers has grown dramatically in the last 36 years. Since 1980, the industry has been reduced from 42 major carriers to five, with 95 percent of the market share dominated by four carriers. In 1995, Congress abolished the Interstate Commerce Commission and gave the newly created STB authority over the rail industry for mergers, rate and service disputes, and construction, operation, and/or abandonment of railroad lines. Since its creation, the STB has failed to use the legal and regulatory mechanisms at its disposal to protect rail customers from monopolistic practices by railroads. As a result, many rail customers have simply foregone filing rate cases at the STB due to the low probability of success, as well as the high costs of filing and litigation. These problems can be resolved by reforms to the STB process and by subjecting railroads to the major provisions of two major federal antitrust laws, the Sherman Act and Clayton Act. Railroads are uniquely exempt from the nation’s antitrust laws for mergers, consolidations, acquisitions, and pooling arrangements approved by the STB. These exemptions give railroads immunity from lawsuits filed by state attorneys general, the Department of Justice, and private citizens. These exemptions have allowed for a wide range of anticompetitive rail industry practices.

Congressional Action

On December 18, 2015, President Obama signed into law S. 808, the Surface Transportation Reauthorization Act of 2015 (PL 114-110). This was the first time that the STB had been reauthorized since 1998. APPA, along with the Freight Rail Customers Alliance (FRCA), of which the Association is a member, was heavily involved in the bill’s development and passage. The law set timelines for rate reviews to ensure the STB decides on relief cases in a timelier fashion; expanded voluntary arbitration procedures addressing rate and service disputes; authorized the STB to initiate investigations on matters other than rate cases; and improved the STB’s structure and decision-making processes by expanding the board membership from three to five—which allows board members to talk with one another without prior public hearing notice.

To the shipper community’s disappointment, implementation of S. 808 has been slow. In cover notes accompanying the STB’s first and second quarter status reports of 2017 to Congress, Acting Chairman Ann Begeman said the Board had postponed action on important rulemaking decisions until there are five Board members. In a July 11, 2017, letter, FRCA and the Western Coal Traffic League (WCTL) asked Senate Commerce, Science, & Transportation Committee Chairman John Thune (R-SD) and Ranking Member Bill Nelson (D-FL) to urge the STB to not further delay its consideration of pending proceedings of major consequence to rail shippers, arguing that S. 808 directed the STB to speed up, not slow down, its consideration of pending cases and proceedings. Senators Tammy Baldwin (D-WI), Al Franken (D-MN), and Amy Klobuchar (D-MN) echoed FRCA’s concerns and requests in a letter to Acting Chair Begeman on July 31, 2017. Unfortunately, the STB lost the necessary quorum to do business when Board Vice Chair Daniel Elliott left on September 30, 2017. Nevertheless, Congress included language in the fiscal year 2018 omnibus appropriations bill that became law in March 2018 expressing concerns over STB delays in pending proceedings and encouraging a full complement of Board members to be expeditiously nominated and confirmed. It also encouraged the STB to provide a timely, efficient, and decisive regulatory process. In March 2018, President Trump nominated Ann Begeman to be chairman of the STB and Patrick Fuchs and Michelle Schultz as STB members. Fuchs and Schultz were approved by the Senate Commerce Committee by voice vote on April 25; a full Senate vote on their nominations has not yet been scheduled.

On May 26, 2017, Senator Baldwin introduced S. 1233, the Rail Shipper Fairness Act of 2017. The legislation builds upon the reforms to the STB made by Congress when it reauthorized the Board in 2015 and is similar to legislation Senator Baldwin introduced in the 114th Congress. The bill would improve the STB’s existing processes when determining rate reasonableness, recognize that a carrier still has market dominance under a duopoly, and allow competitive switching within 100 miles. It would also require fuel surcharges imposed by the rail carrier to be directly accounted for by changes to the carrier’s actual fuel prices, remove the statutory revenue adequacy test,1 and cap the railroad cost of equity for regulatory costing purposes at a reasonable level. APPA and FRCA support S. 1233.

Regulatory Action

The Association makes its voice heard on regulatory issues at the STB via its membership in FRCA. Through FRCA, APPA is participating in several pending rulemakings, including:2

  • Docket No. EP 711 (Sub-No.1), Reciprocal Switching;
  • Docket No. EP 724 (Sub-No. 4), Final Rule on Rail Service Issues-Performance Data Reporting; Issued in November 2016, the rule includes several suggestions raised by FRCA and other shippers, including making permanent the interim weekly reporting requirements that have been in place since October 2014 (a result of the 2013-2014 service crisis). This final rule became effective on January 29, 2017, and the initial reporting date was February 28, 2017;
  • Docket No. EP 731, Notice of Proposed Rulemaking, Rules Relating to Board-Initiated Investigations; and
  • Docket No. EP 733, Notice of Proposed Rulemaking, Expediting Rate Cases

American Public Power Association Position

APPA supports continued congressional oversight of the STB, particularly its implementation of the important reforms enacted as part of the STB Reauthorization Act (PL 114-10). The Association also supports S. 1233, the Rail Shipper Fairness Act of 2017. Finally, the Association supports removing antitrust exemptions for the railroad industry and encourages the STB to take actions using its existing authorities that will assist rail-dependent shippers.


1 STB’s determination of revenue adequacy is based on its calculation of the average cost of capital to the freight rail industry, compared to an individual carrier’s rate of return on net investment. It is used to determine whether a railroad has achieved a rate of return on investments used to provide railroad service that is at least equal to the average cost of that capital investment. The current revenue adequacy test uses book value, or the actual amount in invested assets, including improvements and minus depreciation.

2 Other than the final rule on data reporting, it is unknown when the STB will take additional actions on these matters.