Railroaded II: How Regulation Has Stifled Railway Shipping Competition

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Oil cars

The oil boom has pushed other commodities in North Dakota to a halt.

The lack of competition for rail services has become a critical problem for American industry, as more than three-quarters of US rail stations are now served by just one major rail company. (Check out Railroaded Part I here.) The lack of alternative service providers is one of the reasons the 1,000 rail-car wait to get everything from grain to steel out of North Dakota and to ports, customers and markets has gotten so bad.

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As oil and natural gas shipments have increased in the Dakotas, the single major railroads serving smaller communities have fallen behind. The Burlington Northern Santa Fe Railway, which is the only game in town in some parts of rural North Dakota, is lagging by 1,336 cars. If commodities sellers are lucky enough to live in an area where the Canadian Pacific also operates, the backlog with their cars is a little less than a thousand.

Producers of large loads of grain, steel or other heavy commodities shipped in bulk can’t simply turn to trucking or shipping their products by air freight because of the much higher fuel costs those forms of transportation bring. According to the Association of American Railroads (AAR), rail companies can now move one ton of freight 476 miles on one gallon of diesel fuel. However, these increases in productivity have coincided with sharp increases in rail rates and declining service performance.

There were 26 Class I rail companies in 1980; now, four corporations control more than 90 percent of the market. According to AAR data, rates spiked 94.8 percent from 2002 to 2012, which outpaces increases in inflation and truck rates by about a factor of three. What led to this consolidation? In 1980 Congress passed the Staggers Railroad Act. Its goals were to promote effective competition between rail companies, maintain reasonable rates where there is an absence of effective competition, and provide expeditious resolution of all proceedings.

Yet in the decades since, freight competition has shrunk, not expanded. The Surface Transportation Board, the federal regulator in charge of the nation’s freight railways, has not exactly been expeditious when it comes to resolving the line and rail care shortage.

For a case in point, a $403 million proposed rail line jointly owned by BNSF Railway, Arch Coal, Inc. and candy-industry billionaire Forrest Mars, Jr. was planned for Wyoming two years ago. If built, the Tongue River Railroad would open a path to new mines in the Powder River Basin along the Montana-Wyoming border – home to one of the largest coal reserves in the world with enough coal to supply about 40 percent of the fuel burned in the nation.

The STB was scheduled to approve or deny the plan back in July. What happened? The decision was tabled. The STB said it will take until next April to complete its draft analysis of the Tongue River Railroad. That’s the second significant delay in work originally scheduled for completion last year that was to be entirely privately funded. It is now two years behind its original permitting schedule.

STB spokesman Dennis Watson told the Washington Times the decision to bump back the schedule on the railroad study was made to accommodate the “intense interest” in the project. The additional time will give all sides a chance to make their views known, he said.

That same month a broad coalition of industries that depend on rail transportation including steel, agribusiness, coal and even cement sent a letter to the members of the Senate subcommittee that oversees the STB, in support of reforms that would increase competition among railroad companies and make the STB a more effective and efficient regulatory body.

 Continued in Part 3 here.

Comments (3)

  1. Mark Edwards says:

    I love the idea of increasing rail use to move our goods throughout the country, and to ports so our goods can be exported. I am completely against the Tongue River Railroad because the coal that will be dug up will not be used here in America but sent to Asia. I feel that we should keep our own coal stockpiled and dramatically increase renewable energy projects to at least make a small dent in our reliance on foreign oil for energy. We can stop terrorism by not sending so much of our hard earned money to countries in the middle east and they will be forced to reform and will not have the money to support terrorist.

    1. Jeff Yoders says:

      Excellent points, Mark, thanks for commenting. There is certainly a legitimate case to be made for not approving the TRR or asking for substantial changes to how the coal is used. I believe what’s most bothersome to shippers and planners is that in cases like this, rather than the STB rejecting the project or asking for changes, the members have simply refused to make a ruling on it. Two years into the STB’s process, there is a great deal of information out there on the pros and cons of the TRR, yet the STB’s reason for the latest delay was to let more voices be heard.

  2. Chris Blumberg says:

    I’m sorry, but you are wrong on less competition being the reason why there are issues.

    The cost increases for rates has stayed directly proportional to the costs associated with freight moving, which is tracked. On top of this Truckers are directly subsidized by the highway system, which is federal/state/county owned and doesn’t pay any taxes. On top of this the US highway fund will be bankrupt this year because it hasn’t been collecting enough taxes to pay for itself for more then a decade. We have already had to transfer 15 billion to it this year from the US general fund, and will likely have to transfer another 15 billion this year alone just to keep it solvent. However, railroads pay taxes on all of the land they own, including the tracks.

    The Real problem is the massive increased prices in diesel have pushed more businesses to choose rail over trucking. You can see this in the total number carloads handled yearly has been rising about 3-5% per year since 2008. All of this extra volume on the tracks unexpectedly has created massive congestion just like rush hour traffic on the highways causes congestion.

    On top of this Oil trains in the US which has become a big part of traffic with the oil shale are required to travel at 50mph as the maximum. Regular freight trains can travel from 65-80 mph as the maximum in most conditions. Since most lines are single tracked, and only major corridors double tracked these creates huge bottlenecks due to freight trains getting stuck behind freight trains.

    You can this in Total weekly carloads and average speed.
    Click on All trains average Speed
    Click on total cars on line.

    BNSF is handling almost 40,000 more train cars per WEEK then it did 100 weeks ago, which is roughly 350 more trains. You can see all the Class I’s have increased just as dramatically. At the same time the average speed has dropped from ~27 to ~21 in 100 weeks, and used to be above 30 in 2008.

    The Class I railroads have been investing almost 20% of their revenue per yer to add tracks and upgrade their fleet. This compared to roughly 3 to 4% reinvestment in other industries, so the railroads aren’t being greedy and simply paying their CEO’s millions either. This year will be a record investment of nearly 20 billion being spent on locomotives, cars, and track. More and more companies are wanting to shift to rail, with the spike in diesel prices, and trucking costing nearly 10 times the cost per ton-mile. Yet it simply won’t be enough, they would need to be spending 60 to 100 billion a year on new track and equipment for a decade to really solve the congestion.

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