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Thursday, February 4, 2010

Railroad Access and Competition Issues

John Frittelli
Specialist in Transportation Policy

Some bulk shippers, particularly those that are served by, or, in the view of some, "are captive to," one railroad, are extremely frustrated with what they perceive as poor rail service and exorbitant rail rates. "Captive shippers" claim that the railroad serving them acts like a monopoly—charging excessively high rates and providing less service than they require. Beginning in the late 1970s, Congress gave railroads flexibility to set rates and to enter into confidential contracts with their customers. Over the last decade, large railroads have consolidated and, particularly in the past two years, have achieved higher profitability. Some Members of Congress believe that the present, mostly deregulated, regime needs to be revised to provide more weight for the interests of "captive shippers." A major point of contention is whether current railroad industry practices should be changed to provide "captive shippers" with more railroad routing options. 

The Surface Transportation Board Reauthorization Act of 2009 (S. 2889) and bills reported by the Senate and House Judiciary Committees (S. 146 and H.R. 233) would change current railroad practices to allow "captive shippers" more access to competing railroads by addressing "bottlenecks," "paper barriers," and "terminal switching arrangements." A bottleneck refers to a situation in which only one railroad serves a particular origin or destination but a competing railroad provides parallel track over at least a portion of the route. Currently, the bottleneck carrier is not required to interchange traffic with the competing carrier, but captive shippers seek legislative or regulatory change requiring the bottleneck carrier to do so. Paper barriers are contractual agreements between a large railroad selling or leasing a less profitable route segment to a smaller railroad. The agreement typically requires the smaller railroad to interchange all of its traffic with the large railroad, even if it has access to another railroad's network. These agreements are a means of reducing the up-front sale or lease price while enabling the selling railroad to still recover the full value of the route over time. Terminal switching refers to interchanging traffic between competing railroads wherever a terminal provides the possibility to do so. Currently, railroads interchange traffic at terminals only where they find it mutually beneficial to do so. 

One issue for Congress is balancing the railroads' ability to earn revenue sufficient to reward shareholders, as well as maintain and improve its network, and the need of captive shippers for reasonable rates and adequate service. However, the captive shipper issue has wider economic implications than just the question of a division of revenue between railroads and their captive customers. Higher fuel prices, congestion on certain segments of the interstate highway system, and rising domestic and international trade volumes are driving shippers to demand more rail capacity. Freight revenues are a significant means of financing rail capacity because the railroads receive negligible public financing. Therefore, a larger policy question is how a legislated solution to the "captive shipper" problem would affect the development of a more robust and efficient railroad system. 

Date of Report: January 29, 2010
Number of Pages: 18
Order Number: RL34117
Price: $29.95

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