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12/16/2009



Rail News: Rail Industry Trends

Upon further review(s): A diary of a week's worth of dissecting the STB reauthorization bill draft - by Tony Hatch


What a difference a week can make, as independent transportation analyst Tony Hatch points out in his idiosyncratic take on the evolution of the Senate Commerce, Science & Transportation Committee’s draft version — and his/the industry’s perception of same — of the Surface Transportation Reauthorization Act of 2009. His thoughts follow.

Day One: First Impressions
After secret and intensive negotiation through the summer and fall months, and into early winter, the Senate Commerce Committee finally released a draft version of the long-awaited bill (the Surface Transportation Board Reauthorization Act of 2009) on Dec. 9 — which appears at first glance to be, lo and behold, a true compromise between the positions staked out by the railroads and the Association of American Railroads and those shipper groups that long have looked for re-regulation (among them, Consumers United for Rail Equity).

Following the full release early next week, the next key date is markup on Dec. 17. Key points include:

• the antitrust portion has not yet been included (and, recall was the subject of bitter infighting between Democratic adherents of the bill in the spring; I do not expect major changes in this regard, but it is likely that Sen. Kohl is holding out for something);
• an expanded Surface Transportation Board itself (from three to five commissioners and, one assumes, staff);
• and most important and confusing (at least initially), increased access. The Journal of Commerce reported: “The measure proposes to overturn some railroad practices that hold some customers captive to a single rail line, both at terminals where other carriers connect and on long-stance routes, but [and this is my emphasis] empowers the STB to decide what types of rates railroads could charge when giving their shippers access to a competitor” — with the latter being the critical point: for allowed (forced) competitive access on so-called bottleneck cases rails will get compensated.

At first blush, and assuming the bill passes sometime in 2010, it appears to be a relatively small price to pay for removing this long-standing sword of Damocles (the threat of full re-regulation) for some extended period of time.

The bill, it seems, also would allow the rails back into the good graces of the federal government, which for its part has been waiting for a reason to welcome the freight railroads as part of the long-term solution to a series of public problems (infrastructure deficits, aversion to huge tax increases, fuel shortages, carbon, etc.) — joining their passenger-rail cousins (especially those of the high-speed variety) as the new "golden boys" of transport. This could mean dollars — for starters, in the upcoming reauthorization of what was once called the “highway bill”(SAFETEA-LU), the $450-$500 billion pot that could include funds for a host of rail and intermodal projects, including the heretofore "unfunded mandate" of positive train control.

A Couple of Days Later and Upon Reflection ... Not So Fast
Well, the devil is always in the details. Sources now tell me that the details in the SCC draft version on the 9th were NOT the ones the rails thought they had agreed upon when they left their offices earlier that evening.

On the surface, and as interpreted initially by me (and, clearly, the market as a whole), the draft is viewed as a compromise that ends the threat of greater regulation (and the decade-long overhang on rail stock prices), allowing all of us to move on to greater possible funding rewards, etc.

While we can “guesstimate” on the amount of traffic subject to regulation — initially, about 20-plus percent, more in the East, although those percentages could double as the idea of “legacy contracts” gets reversed and shippers let contracts expire so they can work under a more favorable tariff regime — anyone outside of the railroad costing departments who claims to have full or truly even partial EPS/EBITDA estimates of the impact is making a claim he or she can’t support.

Nonetheless, it does appear that there are some things I think, upon reflection, that I have glossed over. For example: Much of the enforcement of changes to “bottleneck” (access) enforcement was vague, and the antitrust provisions had yet to be included and, thus, could lead to a renewal of that fight that I thought the rails had already decisively won in late spring. As one long-time rail observer wrote to me regarding the latter: “The antitrust portion still is critically important — would you want 12 citizens to determine your fate? I prefer the professionals of STB myself, which is also why Congress gave the ICC, and now STB, the authority to administer the antitrust laws as they affect railroads.”

So: Which is it — peace pipe or war drums? The current draft bill is, as I am led to believe by folks close to but not directly in the flurry of conference calls (the "Cone of Silence" is still in effect), not acceptable as written. It doesn't leave enough (rate/return) guarantees on those bottleneck (access) give-backs the rails have been told to yield on. Meanwhile, SCC staff appears to have limited room for compromise before the markup on Dec. 17, which means the industry will need to get the (committee) members to tell the chairman the bill isn't ready for a vote. SCC staff and Sen. Rockefeller won’t like that; under this scenario, the rails would begin to count votes to take him on. I believe the rails would have the vote, but this wouldn’t be the “peace-in-the-valley” scenario many of us originally envisioned.

The result: It appears we’ll have to hang on for what seems to be shaping up as a wild ride this week.

Light at the End of the Weekend Tunnel
Word began to trickle out of Washington this past weekend that a slew of changes to what was increasingly understood as an unpalatable re-regulatory rail bill out of the Senate Commerce Committee — enough changes, perhaps, to be considered an entirely new bill.

If this turns out to be the case, and sources assure me that it is, it would be a rare, blessed holiday event: an honest reappraisal of the impact of the original bill on an industry just now re-emerging from the impacts of 20th century regulation in time to be of greater service to the economy — and, given infrastructure, energy, efficiency and emissions issues, the nation.

Apparently, enough has changed in the bill that it just might warrant the rails putting away the war drums in favor of the pipes of peace. Caveat: Unlike last week’s original draft, I have not seen this one. And, as I stressed earlier, the devil is in the details (How much traffic is truly affected? What are the contributions of this traffic segment versus that one?) But we were able to discern the additions of access and complexity — the latter, as longtime railroader and former NS exec Jim McClellan says, just at a time when the rails, and the economy, must be at their most nimble. So: The changes in the new bill appear to be helpful in a variety of areas. The new bill:

• Defines the STB's decisions under law, with court oversight;
• Retains a larger STB with five commissioners from three and a doubled budget;
• Retains limits to future “paper barriers” between Class Is and short lines, but made existing ones less easy to change;
• Retains binding arbitration, terminal access abilities and STB investigative powers, but all with significantly tightened — and apparently reasonable — provisions;
• Requires that bottleneck changes (or increased access/competition) now must take under consideration “other shippers” and the “overall rail network,” thereby binding the network together and not restructuring traffic to aid one at the expense of all; and
• Improves the ability of carriers to recoup charges if access over their system occurs — “no free lunch.”

In sum, it appears that the changes over the weekend that the rails and I would assume their labor brethren fought for over the weekend recognized the importance of, and the bill’s impact on, the entire railway network (vs. parochial demands, not to mention the complexity of the network — and that all rail shippers (including those who benefit from differential pricing like intermodal customers) share that network. Small changes to satisfy one small piece can have big repercussions elsewhere.

Overall, the revised SCC bill seems like a big change, yet one the rails can live with. If so, as my incorrect first glance at the original STB reauthorization bill suggested, all stakeholders might be able to move beyond the re-reg issue with all the good things that implies.

More to come, post-bill markup. …


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