Unlocking Free-Market Competition with Freight Rail Reform
By ChrisJahn, President, The Fertilizer Institute
Like other industries critical to our state and nation, Florida’s fertilizer industry needs reliable and cost-effective freight rail service to meet the demands of its customers. The freight rail system is indispensable to both the nation’s and specifically Florida’s economy. In 2013, freight railroad in Florida moved nearly 88.7 million tons of freight,[1] exporting bulk commodities like fertilizer, timber, and agricultural products out of the state and bringing commodities like cars, coal, and machinery into the state.[2] The fertilizer industry, which mines about 50% of the phosphate rock used nationwide and about 15% globally,[3] ships more freight by rail than any other commodity in Florida, nearly as many rail tons as the second and third most-shipped commodities combined.[4]
We understand the importance of a well-run and affordable freight rail system, and its potential to energize Florida’s economy.
Unfortunately, that’s not what our state – or the rest of the nation – has now.
Outdated federal regulations have given rise to a virtual government-supported monopoly on freight rail service that is raising prices and putting the brakes on economic growth and job creation. The freight rail system is broken, with delayed delivery of fertilizer shipments to farmers, and ongoing challenges for shippers of other goods in and out of Florida, including timber, agricultural products, cars, coal, and machinery.[5]
Derailing Competition
An examination of a close to 40-year old piece of federal legislation provides some insight into how our current rail system is both anti-competitive and in need of reform.
The Staggers Rail Act, passed by Congress in 1980, had two goals: to create economically successful railroads and maintain free-market competition. It was well-intentioned, deregulating the struggling railroad industry and paving the way for more mergers and acquisitions. But what in the days of the Carter Administration looked like a way to ensure a competitive and fair market has now devolved into a tool of federal protectionism.
Over the years, rail-to-rail competition declined substantially, from 31 Class I carriers in 1981 to just seven today. Four of these dominate the entire industry, with each maintaining near-monopolistic control over quadrants of the United States. [6]
As a result, most rail customers have access to only one freight carrier serving either their location of operations or their customer’s location. They are “captive” shippers, forced to confront the realities of textbook monopoly power and market dominance. An absence of effective competition from other rail carriers or modes of transportation forces the shipper to accept whatever rate the railroad company dictates in order to transport its goods.
It is the definition of a Hobson’s choice, essentially “take it or leave it” – and the “leave it” option would mean goods never make it to market. This lack of competition has resulted in excessive rates and unreliable service, with minimal incentive for the railroads to meet the needs of their customers.
Captive shippers, lacking free-market alternatives, pay significantly more to ship goods to market than those with competitive choices. In Florida, more than 90 percent of all freight rail stations are captive to a single major railroad. It comes as no surprise, then, that freight rail rates have increased at three times the rate of inflation over the past 15 years.
When no competitive options are available, rail customers are deprived of efficient ways to address problems with rates and service. There is no real recourse if rates skyrocket, if service is unacceptable, if the trains don’t run on time. But there are real consequences for businesses and consumers when shipping rates are unreasonably expensive or products don’t arrive where they are needed, when they are needed.
Sensible Solutions
Reforms can and would bring more market-based forces to this challenge. The Surface Transportation Board (STB) is essential to reforming the freight rail system, removing bureaucratic barriers and increasing free-market competition. Two specific proposals that would help accomplish this include competitive switching and rate benchmarking.
Current STB rules state that a captive shipper cannot move its freight between lines during transit; it must follow a route created solely by the railroad that started the journey, regardless of other more affordable and efficient options available along the way. The STB’s proposed competitive switching rules would allow the shipper to request that railroad transfer its freight to another railroad at a nearby interchange. This would allow the shipper to choose the rail carrier with the most competitive rates and more reliable service.
Competitive switching is similar to market-based policies that cut red tape and promote competition in such networks as telecommunications, broadband, and interstate pipelines. Rail customers should be able to enjoy the same benefits.
Additional reforms are needed to assist rail shippers that still lack competitive transportation options. Currently, captive rail rates are regulated under a standard that requires shippers to hypothesize how much it would cost to build and operate a brand-new railroad to compete with the existing railroad. This process takes years to complete and costs millions of dollars.
Competitive rate benchmarking, a statistical concept leveraged by business and other regulatory agencies, would offer a market-based approach to STB rate reviews. Using benchmarking methodology, captive shippers would compare their rates to “benchmark” rates for competitive rail traffic for similar shipments. The STB would judge the reasonableness of rates based on real-world data in competitive markets – rather than hypothetical information currently required.
Railroads would still set rates in competitive markets, but a captive shipper could challenge a rate that is drastically higher than its competitive benchmark. The STB would decide what rates would be reasonable for the railroad to still be financially strong and economically competitive.
In today’s era of big data, it makes no sense to continue using an overly complex and burdensome evaluation method that was developed almost four decades ago. Rate benchmarking would significantly decrease the cost in time and money it now takes for shippers to try to address unreasonable rates set by near-monopolies and compounded by the current bureaucratic standards.
Conclusion
It is clear that the fertilizer industry plays a critical role in U.S. and global agriculture. It is just as clear that the industry depends on a freight rail system that must be updated if American farmers are going to able to continue to feed our nation and the world.
In a properly functioning free market, the forces of supply and demand would effectively set economically sound rail rates that benefit both the shipper and the railroad company. To unlock these market forces, we must eliminate outdated regulations at the Surface Transportation Board that shield railroads from competing with each other as we simplify costly and bureaucratic government procedures.
Competition is the foundation of the free enterprise system and it is what helps drive innovation and cost-savings throughout our economy. The STB understands that the marketplace is preferable to regulatory oversight, which is why it is pursuing reforms that are in accordance with a statutory mandate that directs the Board to ensure effective competition among rail carriers.
Policy solutions exist, and the antiquated regulations of the 20th century can and should be modernized to reflect the realities of 21st century innovation, technology, and competitive environments. Enacting those reforms will require an appropriately-staffed STB, which currently counts three vacancies among the five seats on its Board. By nominating and confirming appointees who are ready to set aside the status quo, we can get our nation’s freight rail system on the right track for American businesses and consumers.
[3] Florida Industrial and Phosphate Research Institute, “Phosphate and How Florida Was Formed”
[4] Association of American Railroads, “Freight Railroads in Florida”, July 2014
[5] Office of Demographic Research, “Return on Investment for the Department of Transportation’s Work Program”, (December 2016): 20
[6] U.S. Department of Justice’s Economist Analysis Group, “The Economics of Railroad"Captive Shipper" Legislation”, January 2010
