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COMPETITION IN THE RAILROAD INDUSTRY
EASTERN FUEL BUYERS CONFERENCE
May 6, 1997
Williamsburg, VA
By
Christopher A. Mills
RAIL-TO-RAIL COMPETITION IS DECREASING
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Rail Industry Consolidations
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Inadequate regulatory protection of captive shippers from increasing rail
market power (the "Bottleneck Rate Cases")
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Deregulation of the electric utility industry
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The result: shipper calls for "open rail access" legislation
Rail Industry Consolidations
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Rail mergers are resulting in a significant concentration of market
power in the hands of a few huge rail systems
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As a result of BN/Santa Fe and UP/SP, two railroads now control virtually
all coal transportation in the West
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Source competition among western coal-producing regions has been eliminated
for all practical purposes
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Conrail will soon disappear as a separate entity, producing a similar
situation in the east -- and possibly leading to the creation of two giant
transcontinental railroads
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The likely result: rate increases for captive shippers to help the railroads
recover the premiums they are paying to buy each other
THE CSX/NS CARVE-UP OF CONRAIL
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A different animal from other rail mergers due to politics (concept of
increased competition interjected for first time)
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Some coal producers and shippers will benefit; however, the extent
to which CSX and MS will compete with each other in jointly-served terminal
areas is unclear (the devil is in the details)
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Most utility power plants that are now captive to Conrail will remain
captive to either NS (in most cases) or CSX
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Competitors should not decide how Conrail should be divided up and
which markets and shippers will get increased competition
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Captive shippers should not have to bear the $4 billion premium over book
value being paid for Conrail
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Procedural schedule
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Application filed in mid-June
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Notification of intent to participate due 45 days after application
filed (late July)
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Comments, protests, requests for conditions due 120 days after application
filed (mid October)
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Final STB decision due 255 to 300 days after application filed (late February
to mid-April 1998)
STB REGULATION OF THE RAIL INDUSTRY
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STB regulation does not provide adequate protection against the increasing
concentration of rail market power
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Regulation is irrelevant for shippers who have competitive options, but
it is the only protection many captive utility coal shippers have from
monopoly rail pricing
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Two basic forms of STB regulation: competitive-access regulation and maximum-rate
regulation
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To win a competitive-access case, a shipper must show that a carrier has
foreclosed a more efficient route or otherwise acted anti-competitively;
the availability of lower rates is not enough
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Bringing a maximum-rate case is a last resort, especially after the STB's
recent decision in the Bottleneck cases
THE BOTTLENECK CASES
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Examples of bottleneck situations
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Bottlenecks are becoming increasingly important due to rail mergers
Principal STB Holdings in the Bottleneck Cases
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Where the involved carriers offer only origin-to-destination common carrier
rates, the shipper's only maximum rate remedy is to challenge the origin-to-destination
rate
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Shippers can't challenge railroad agreements on where interline traffic
should be interchanged
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A shipper can seek STB prescription of a bottleneck segment rate only if
it first enters into a contract with another carrier over the competitive)
(non-bottleneck) segment
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If the bottleneck destination carrier also serves the origin, the shipper
must first demonstrate it is entitled to competitive-access relief
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If the bottleneck destination carrier does not also serve the proposed
origin, then the shipper need not demonstrate entitlement to competitive
access relief to obtain a prescribed bottleneck rate (but it must still
have a contract in advance with the origin carrier)
LEGISLATIVE INITIATIVES TO INCREASE COMPETITION WITHIN THE RAIL
INDUSTRY
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Shipper calls for legislatively-mandated additional rail-to-rail competition
(which may include various forms of open access) are being driven by the
increasing consolidation in the rail industry and the Bottleneck decision
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Deregulation of the electric utility industry is also a factor; if electric
rates and service are to be subject to competition, why shouldn't a major
cost input also be subject to competition?
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Open rail access is being actively discussed on a number of fronts
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Alliance for Rail Competition (ARC)
POSSIBLE LEGISLATIVE SOLUTIONS BEING STUDIED BY ARC
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Increased physical access
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Trackage rights limited to bottleneck line segments
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Trackage rights on all lines
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Complete separation of ownership and operation of rail lines (similar to
unbundling of transmission and generation in the electric industry)
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Increased economic access
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Unqualified availability of maximum-rate relief for transportation over
bottleneck line segments
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Shipper right to route traffic over any reasonable interchange
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Simplification of maximum-rate cases (eliminate 180% jurisdictional-threshold
ceiling, product/geographic competition)
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Full application of the antitrust laws to the rail industry (including
Justice Department approval for rail mergers)
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