WASHINGTON — More regulatory oversight is needed to keep rail volumes from shifting to trucks and limiting the railroads’ growth potential, rail customers have told the Surface Transportation Board.
Their testimony, along with that of railroads, unions, industry consultants and others has been filed with STB ahead of a two-day hearing at the agency next week over concerns about the railroads’ ability to continue to grow their business.
“The deteriorating rail service members have experienced for decades makes it exceedingly difficult for shippers to do business with railroads as they are at risk of losing customers if they cannot provide them with reliable shipments,” said Richard Erstad, VP and general counsel for chemical manufacturer Hawkins Inc., in comments filed on behalf of the Alliance for Chemical Distribution. “This is even more impactful for small rail customers who can have their entire operation disrupted if just one car is severely delayed.”
Such factors, Erstad stated, contribute to “shippers being reluctant to utilize freight rail and more willing to use trucking because of its far superior reliability despite its worse safety record.”
The Private Railcar Food and Beverage Association (PRFBA), whose members include major rail shippers such as Frito-Lay, a division of PepsiCo (NASDAQ: PEP), Kraft Heinz (NASDAQ: KHC) and Molson Coors (NYSE: TAP), contends that the Class 1 railroads’ use of precision scheduled railroading eliminated lanes, which in turn reduced rail carriers’ available capacity (and volume along with it), while reducing service to the association’s members.
“This reduction in capacity and service by the railroads forced many shippers to increase the volume they shipped over the road,” asserted attorney Daniel Elliott with GKG Law, representing PRFBA.
“Over the period of the last five or six years, truck volume has increased while rail volume has continued to decline. Still, today many shippers have limited options in working with the railroads. [The railroads] claim their services have improved, and they have marginally, but obviously because they eliminated volume, hence congestion, hence the need for employees and equipment, but still with higher rates to their remaining shippers.”
Profits over growth?
To highlight its concerns about the railroads’ ability to grow market share, the STB cited statistics compiled by the Federal Reserve of St. Louis showing a steady decline in carload traffic over the past 20 years, including a 28% drop in the past decade.
At the same time, since 2004, the rate of annual price increases for rail shipping nearly doubled to 3.8%, railcar technology company Hum Industrial Technology stated in comments filed with the STB.
“What is notable is that with each downturn in freight volumes, the freight that did come back shifted from rail to truck,” commented Hum CEO Byron Porter, a former grain shipper. “When shippers who had the luxury to pick modes were given the chance to reevaluate their supply chains, they specifically chose trucks.”
Porter maintains that the railroads are “structurally incapable of switching to a growth strategy” mostly because of Wall Street expectations. “Class 1 railroads are held accountable for their ability to deliver inflation-plus pricing while minimizing expenses. Growth is not expected, so it is not rewarded.”
Railroads warn of overreach
The Association of American Railroads, which lobbies on behalf of the industry, pushed back hard on the rail-customer relationships and strategy assertions outlined by shippers and third parties.
“There isn’t a railroad out there that doesn’t want to move more freight tomorrow than it moved today, and to be sure, there will be a tremendous amount of freight available in the future for railroads to move,” the AAR stated in its comments.
The association emphasized that railroads plan to secure as much as possible of the 27% increase in total U.S. freight movements by 2040, as estimated by the Federal Highway Administration, through service enhancements and continued investments back into their networks.
Moreover, it’s government policy – not railroad economics – that will limit the rails’ ability to grow and reclaim market share from trucking, the AAR warned.
One example is the Barstow International Gateway, a $1.5 billion intermodal facility planned by BNSF (NYSE: BRK-B) to help speed ocean containers inland from West Coast ports for domestic distribution. BNSF estimates the project will eliminate thousands of truck miles from California’s highways and cut carbon emissions.
However, the project will not be feasible, according to BNSF, if the California Air Resource Board’s proposed in-use locomotive rule is enacted. The rule would require all locomotives manufactured after 2035 that travel though the state of California be zero-emission – effectively banning the operation in California of locomotives that are more than 23 years old.
“Put simply, if this regulation is allowed to take effect, it would likely be fatal to our Barstow project,” the railroad stated in comments to the STB.
The AAR also cited an uneven modal playing field within the U.S. Department of Transportation, which is looking to develop and promote automation in the trucking industry while staving off such policies in the rail sector.
“Truck competition could intensify further if federal truck size and weight limits were relaxed, allowing motor carriers to increase capacity without significant additional costs,” the AAR stated. “This could make all-highway transportation relatively cheaper, potentially challenging railroads further.”
But shippers told the STB that more regulatory oversight will be needed to keep railroad market power in check, which they say will lead ultimately to more freight moving over the rails.
“We can do this through the elimination of exempt commodities and greater regulation of contract moves, and by addressing the true meaning of the railroads’ common carrier obligations,” PRFBA stated.
“If the railroads could work with shippers, by providing good service, user-friendly alternatives, and competitive pricing, this nation’s rail networks would immediately see increased volumes.”