Railroad Access and Competition Issues
Prepared for Members and Committees of Congress
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.
Legislation has been introduced in the 110th Congress that would overrule regulatory decisions
preventing shippers from gaining access to a second railroad—The Railroad Competition and
Service Improvement Act of 2007 (S. 953, introduced by Senator John Rockefeller and H.R.
2125, introduced by Representative James Oberstar). This proposal would markedly 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.
Introduc tion ..................................................................................................................................... 1
Competitive Access Issues and Legislation.....................................................................................3
Bottlenecks ................................................................................................................................ 4
Bottlenecks and Railroad Mergers......................................................................................5
Terminal Switching Arrangements............................................................................................7
Railroad Industry Views................................................................................................................10
An Issue for Congress or the STB?................................................................................................11
Figure 1. A Bottleneck Situation.....................................................................................................4
Figure 2. Bottlenecks and Railroad Mergers...................................................................................6
Author Contact Information..........................................................................................................14
Over the last decade, Class I railroads have consolidated and, particularly in the past two years, 1
have achieved higher profitability. The present, mostly deregulated, railway regime was designed
during a period when railways were in financial peril. Beginning in the late 1970s, as part of a
fundamental change in philosophy that affected the regulation of all modes of transportation,
Congress gave railroads more flexibility to set rates and negotiate confidential contracts with their
customers. Some Members of Congress believe that the present, mostly deregulated regime needs
to be revised to provide more balance for the interests of those rail customers who are served by
only one railroad. A major point of contention is whether current railroad industry practices
should be changed to provide these customers (referred to as “captive shippers”) with more
Captive rail shippers have been frustrated with what they perceive as poor rail service and
exorbitant rail rates. These shippers often cannot ship their product economically by truck
because of the bulk quantity or long distance of their shipments and do not have viable access to a
navigable waterway to ship by barge. Captive shippers claim that the railroad serving them acts
like a monopoly—charging excessively high rates and providing less service than they require.
Captive rail shippers are a minority of all rail customers (by one estimate, accounting for 15% to 2
However, the captive shipper issue has wider economic implications than just the question of a
division of revenue between captive shippers and the railroads. The captive shipper problem
raises an important policy question for Congress: could more rail-to-rail competition lead to a
more robust and efficient railroad system or could it undermine it by discouraging investment in
This report provides background on the current railroad regulatory regime. It then examines the
three main points of contention between railroads and their captive customers: “bottlenecks,”
“paper barriers” (also known as “interchange commitments”), and “terminal switching
arrangements.” It discusses legislation addressing these issues as well as shipper and railroad
points of view. The last section of the report discusses the implications of injecting more rail-to-3
rail competition into the industry.
1 The Association of American Railroads categorizes railroads based on annual revenues. Class I railroads had revenue
of at least $289.4 million in 2004, regional railroads operate at least 350 route-miles and/or had revenues of at least $40
million but below the Class I threshold, and local railroads operate less than 350 route-miles and had revenues of less
than $40 million per year. In this report, the terms Class I and main line railroad are used interchangeably while the
term short-line railroad is used to mean both regional and local railroads.
2 An estimate by the former chairman of the Surface Transportation Board (STB) is that about 80% of rail customers
are served by only one railroad, but that because most of these customers can also ship by other modes, only about 15%
to 20% of all rail movements would be judged captive by the STB. Oral testimony of STB Chairman Roger Nober,
House Committee on Transportation and Infrastructure, Subcommittee on Railroads, Status of Railroad Economic
Regulation, March 31, 2004, p. 10.
3 Captive shippers also seek changes in the regulatory process for determining the reasonableness of rail rates but
generally view greater rail-to-rail competition as a more effective means of addressing both rail rate and rail service
The last major changes to U.S. law governing rail economic regulation were the Railroad
Revitalization and Regulatory Reform Act of 1976 (the so-called “4R Act,” P.L. 94-210; 90 Stat.
31) and the Staggers Rail Act of 1980 (P.L. 96-448; 94 Stat. 1898). At that time, there was a
widely held view that the U.S. railroads were in a severe and prolonged period of financial
decline, and that much of that decline was the result of strict federal regulation of railroad
activities. Railroad deregulation was part of a larger movement toward deregulation of all modes
of transportation in the late 1970s and early 1980s. Before 1976, the Interstate Commerce
Commission (ICC) reviewed almost all rail rates to determine whether they were reasonable and
rail shippers were given wide latitude in selecting the routes over which their shipments would
travel and the railroad companies that would participate in their traffic. The 4R Act was mostly
about restructuring the Northeast railroads and creating Conrail, as well as subsidizing branch
lines, but one provision exempted, for the first time, railroad traffic from regulation if the
regulation was deemed by the ICC to be an undue burden to commerce and served no useful 4
purpose. The 4R Act also introduced the concept of “market dominance,” which the act describes
as the “absence of effective competition from other carriers or modes of transportation, for the
traffic or movement to which the rate applies.” The act directed the ICC to establish standards and 5
procedures for determining when a railroad possesses market dominance over a route. The
Staggers Act greatly advanced the movement toward railroad deregulation by granting railroads
more freedom to set rates and enter into confidential contracts with their customers. Rates
negotiated under contract are not subject to regulatory review on the assumption that a contract 6
reflects shipper and railroad agreement. However, rates published in tariffs and rates for captive
traffic are still subject to regulatory oversight.
The Interstate Commerce Commission Termination Act of 1995 (P.L. 104-88; 109 Stat. 803)
abolished the ICC and replaced it with the Surface Transportation Board (Board or STB). The
ICC Termination Act eliminated many of the functions of the ICC but transferred its remaining
functions to the STB. The STB is bipartisan and decisionally independent from, but 7
organizationally housed within, the U.S. Department of Transportation (DOT). The ICC
Termination Act left largely intact the regulatory framework that governs captive rail shipper
issues. Authorization of the STB expired September 30, 1998, but the agency continues to
function through annual appropriations. The most notable issue associated with possible
reauthorization of the Board, and the major reason for it not being reauthorized, is the captive rail
Competition and railroad revenue adequacy figure prominently in national railroad policy. As
stated in the Staggers Act and amended by the ICC Termination Act of 1995 (P.L. 104-88; 109
Stat. 803), in regulating the railroad industry, it is the policy of the United States Government “to
allow, to the maximum extent possible, competition and the demand for service to establish
reasonable rates...” and “to minimize the need for Federal regulatory control over the rail
4 Section 207 of P.L. 94-210.
5 Section 202 of P.L. 94-210.
6 49 USC 10709(c). (About 70% of rail tonnage moved under contract in 2004 according to the GAO report cited
above, p. 24.)
7 The three Board members are nominated by the President and confirmed by the Senate. The Chairman is appointed by
transportation system and to require fair and expeditious regulatory decisions when regulation is 8
required....” The law also states a goal “to promote a safe and efficient rail transportation system
by allowing rail carriers to earn adequate revenues, as determined by the Board” (the STB
conducts an annual evaluation to determine railroad revenue adequacy based on established
standards and procedures). The U.S. Department of Transportation (DOT), sharing the view of
most observers, believes that the Staggers Act has been “profoundly successful,” noting that
today the railroads are financially healthy, productivity is high, the industry’s infrastructure has 9
been modernized, and shippers have benefitted from lower average rates. A GAO study also
notes that the rail industry’s health has improved since Staggers but finds that while rates have
declined, “they have not done so uniformly, and rates for some commodities are significantly 10
higher than rates for others.” The GAO study notes that “the extent of captivity appears to be
dropping, but the percentage of industry traffic traveling at rates substantially over the statutory
threshold for rate relief has increased from about four percent of tonnage in 1985 to about six 11
percent of tonnage in 2004.” The GAO states that “these findings may reflect reasonable
economic practices by the railroads in an environment of excess demand, or they may indicate a 12
possible abuse of market power.”
The extent that a rail customer should have access to a second, potentially competing railroad is
referred to as “competitive access” (shippers sometimes use the term “open access” and railroads
use the term “forced access”). Unlike highways, waterways, and airways, which are publicly
owned and over which carriers within these respective modes compete against each other for
freight or passengers, railways are privately owned and each railroad has exclusive access to its
rights-of-way. However, while railroads generally have exclusive access to their rights-of-way,
they do share their rights-of-way with other railroads in circumstances where they find it is
mutually beneficial to do so. For instance, if two railroads own parallel track in a relatively light
traffic area, they may agree to abandon one track and share the other to reduce maintenance costs.
Or, in a dense traffic lane, they may agree to designate each track for one direction (i.e., a west-
bound track and an east-bound track) to increase train fluidity through the area. However, neither
of these situations involves granting access to each other’s customers.
In other situations, the STB has required railroads to share track, including access to potential
customers on a route, as a condition for approving a merger. For instance, as a condition for
approving the merger between Union Pacific (UP) and Southern Pacific (SP) in 1996, the STB
granted the BNSF and other railroads trackage rights over about 4,000 miles of track because
otherwise the merger would have reduced the number of railroads serving certain shippers from 13
two to one. In the case of the breakup of Conrail in 1997, the two acquiring railroads, Norfolk
8 See 49 U.S.C. 10101.
9 Written testimony of Jeffrey N. Shane, Under Secretary for Policy, U.S. DOT, STB hearing, Rail Capacity and
Infrastructure Improvements, STB Ex Parte No. 671, April 11, 2007.
10 GAO, Freight Railroads: Industry Health Has Improved, but Concerns about Competition and Capacity Should be
Addressed, GAO-07-94, October 2006, p. 3.
11 Ibid., p. 19.
12 Ibid., p. 3.
13 Trackage rights are the authority granted to one railroad to use the tracks of another railroad for a fee.
Southern (NS) and CSX, share some of the lines and terminals of the former railroad.14 Other
merger remedies include “switching arrangements” where one carrier transports the railcars of a
competing carrier at origin or destination for a fee and “terminal access areas” where the terminal
owning railroad allows trains from a competing railroad to use the terminal for a fee. While these
track sharing circumstances are not uncommon, neither are they universal.
Legislation has been introduced in the 110th Congress that would allow shippers significantly
more access to competing railroads—The Railroad Competition and Service Improvement Act of
2007 (S. 953, introduced by Senator John Rockefeller and H.R. 2125, introduced by
Representative James Oberstar). Among other provisions, this legislation addresses three
contentious issues between captive shippers and the railroads: “bottlenecks,” “paper barriers,”
and “terminal switching arrangements.”
A bottleneck refers to a situation where only one railroad has track serving a particular origin or
destination but where another railroad also owns track that parallels at least a portion of the route
between the same origin and destination. This situation is most easily explained with a diagram.
Figure 1. A Bottleneck Situation
In the diagram above, the bottleneck portion of the route between origin A and destination C is
the rail segment from A to B because only one railroad, Railroad X, has track between these two
points. The non-bottleneck portion of the route is from points B to C because two railroads have
track between these two points. Under existing practice, Railroad X, the bottleneck carrier, can
exclusively serve all traffic from origin A to destination C by insisting on only offering a through
rate from A to C even though Railroad X could potentially interchange traffic with Railroad Y at
point B. By only offering through rates, Railroad X prevents Railroad Y from competing for the
through traffic between points A and C.
Bottleneck rate practices were affirmed by the STB in December 1996 in its ruling on three coal 15
rate cases brought by several utilities. The STB ruled that railroads did not have to “short-haul”
14 For details of this arrangement, see http://www.conrail.com/Freight.htm.
15 Central Power & Light Co. v. Southern Pacific Transp. Co., 1 STB 1059 (1996) (“Bottleneck I”), modified in part, 2
themselves by offering rates on only a portion of a route if they could serve the entire route. The
Board cited the section of statute that states that a rail carrier may establish “any rate for 16
transportation or service.” The Board decided that a railroad only has to offer a rate on the one
route the railroad deems most efficient for handling the cargo. A railroad does not have to offer
rates for any alternative routes that the shipper requests. The STB did establish an exception to
this ruling. If a shipper has already entered into a contract with the non-bottleneck carrier for the
non-bottleneck portion of the route (in other words, in the diagram above, a contract with
Railroad Y for the movement between points B and C), then the bottleneck railroad (Railroad X)
must in fact segment the route and offer a separate rate for the bottleneck (short-haul) portion of
the shipment. In practice, however, the non-bottleneck railroad generally has not entered into a
contract with a shipper under these circumstances.
H.R. 2125 and S. 953 would require railroads to provide a rate on any bottleneck segment of a
route. Thus, in Figure 1 above, a shipper located at origin A could require railroad X to quote
rates from both A to B and from B to C. It could also seek a rate from railroad Y from point B to
C. If the shipper chose railroad Y to carry its traffic from B to C, railroad X would be required to
interchange the traffic at point B.
In 1970, there were 71 Class I railroads in the United States. Today there are seven (two of which
are Canadian railroads with U.S. subsidiaries). Captive shippers contend that the consolidation of
the railroad industry has led to more bottleneck situations in the nation’s rail network. Railroads
contend that the number of captive shippers has remained about the same throughout the merger
process. They assert that this is because the STB has required railroads to share access to track as
a condition for approving a merger in those instances where the merger would otherwise result in
captive traffic (as described above).
In addition to these merger remedies, railroads also contend that recent mergers have not resulted
in more captive shippers because most mergers since 1980 have been “end-to-end” consolidations
rather than mergers between neighboring railroads with parallel track. In an effort to exploit their
comparative advantage (long-distance movement of freight), the Class I railroads have sought
mergers with their interline partners, that is, with a railroad whose route network begins at the end
point of their route network. By reducing the amount of interchanging between interline railroads,
railroads believe that a merged railroad can better streamline its operations. In 1970, the average 17
length of haul for a Class I rail shipment was 515 miles. Today it is more than 860 miles. In
addition to focusing on long-distance freight, the Class I carriers are deploying longer trains,
utilizing bigger railcars, and trying to operate these trains, to the greatest extent possible, so that
all the cars in the train have the same origin and destination (“through-blocking”). By reducing
the amount of car switching that is required between a given origin and destination, the railroad
can simplify its operation, reduce costs, and improve transit time reliability. The railroads argue
that these benefits are passed on to shippers in the form of lower rates and improved service, and
consequently, rail mergers benefit their customers also.
STB 235 (1997) (“Bottleneck II”), aff’d sub nom. MidAmerican Energy Co. v. STB, 169 F.3d 1099 (8th Cir. 1999),
cert. denied, 528 U.S. 950 (1999).
16 49 USC 10701(c).
17 AAR, Railroad Facts, 2004 edition, p. 36.
However, even end-to-end rail mergers can result in bottlenecks. The diagram below illustrates
how a bottleneck situation might arise as the result of an end-to-end rail merger, in this case a
merger between Railroad X and Railroad Z.
Figure 2. Bottlenecks and Railroad Mergers
Beginning in the 1970s and accelerating during the 1980s, the Class I railroads consolidated their
network by concentrating traffic over their trunk lines while abandoning their lighter-density,
feeder lines. Since 1980, Class I railroads have shed about 66,000 route-miles. While some of
these light-density lines have been abandoned, many of them have been sold (or more often
leased) to short-line railroads. Today, 550 short line railroads operate 50,000 route-miles, which
represent about 29% of the nation’s rail network. It is estimated that short-line railroads originate
or terminate about one in four carloads moved by Class I railroads. Especially in agricultural
states, short-line railroads perform a gathering function, linking mostly rural shippers to high-
volume Class I main lines.
Typically, when a Class I railroad sells or leases a track segment to a short-line railroad, the Class
I railroad offers a much lower price (maybe lower rent or no rent) if the short-line agrees to
interchange all of the existing traffic on the line with the selling railroad. These selling
arrangements are referred to as “paper barriers.” Under these arrangements, the main line railroad
can ensure that it will maintain the traffic (and the freight revenues) that the feeder line generated
on its main line network. It is also purportedly the case that potential short-line operators simply
do not have the finances necessary to buy the line outright at fair market value, so the selling
18 The railroad industry prefers the term “interchange commitments.”
railroad uses an interchange commitment to recover the line’s fair market value. New traffic that
the short-line is able to generate after the sale, either by finding new customers or additional
cargo from existing customers that previously moved by non-rail modes, may not be subject to 19
this interline restriction.
H.R. 2125 and S. 953 would disallow interchange commitments between a Class I railroad and a
Class II or III railroad as part of a rail line sale and it would disallow charging higher per car
interchange rates for Class II or III railroads to interchange traffic with a railroad other than the
selling railroad. Captive shippers support eliminating paper barriers because they view it as a
means for increasing rail-to-rail competition. They further argue that in an era of tight rail
capacity, where certain segments are prone to delays, it is simply bad public policy to not allow
shippers to utilize all potential routing options.
Short-line railroads contend that banning paper barriers would negatively affect their potential
customers because it would discourage Class I railroads from selling the lines in question for fear
of losing freight revenue to a competing main line railroad. Because Class I railroads typically
view the line in question as less profitable, they are reluctant to reinvest in the line, leaving those
customers located on the line with inferior rail service. Short-lines argue that these rail customers
could receive much better service if the line was under their management. Most agree that short-
line railroads have a good track record for improving service because their customers are central 20
to the viability of their enterprise, rather than being marginal contributors.
Railroads often interchange traffic with one another at terminals located at the end points of their
network, when a shipment’s origin and destination traverses more than one railroad’s network.
This type of interchange can be viewed as an operating partnership among two or more railroads
that is necessary to complete an interline movement. By statute, an origin railroad and a 21
destination railroad are required to provide a physical connection with each other’s network.
Another kind of interchange is when a railroad interchanges cargo at terminals within its network
with a competing railroad that offers an alternative route to the same destination. The interchange
may also involve use of the owning railroad’s tracks outside the terminal area for a reasonable
distance. Under existing practice, this type of interchange generally occurs only on certain
segments of rail routings because the STB required it as a condition for approving a merger
transaction, as mentioned above. Although the law allows the STB to order terminal
interswitching if the Board finds it to be practicable and in the public interest, or necessary to 22
provide competitive rail service, the STB will only order such interswitching if it finds anti-
19 As per STB Ex-Parte 575, 1998, the Class I railroads and short-line railroads have formed a Railway Industry
Working Group to address a common set of issues in interline agreements between Class I railroads and short-line
20 For further railroad and shipper views on paper barriers, see STB hearing, Review of Rail Access and Competition
Issues - Renewed Petition of the Western Coal Traffic League, STB Ex Parte No. 575, July 27, 2006. Written testimony
and a video recording of this hearing is available on the STB’s website: http://www.stb.dot.gov. On Oct. 30, 2007, the
STB announced proposed regulations requiring railroads to identify any interchange commitment when they seek STB
authorization for a rail line sale or lease.
21 49 USC 10703.
22 49 USC 11102.
competitive conduct.23 Only if a railroad has used its market powers to extract unreasonable terms
on through movements, or if it has used its monopoly position to disregard the shipper’s needs by
rendering inadequate service, will the Board force terminal interchanges between railroads.
H.R. 2125 and S. 953 states that the Board shall require railroads to interchange traffic, if
practicable and in the public interest, and would not require that anti-competitive practices first be
proven. Captive shippers support this change because they assert that proving anti-competitive
conduct by a railroad is excessively onerous. To date, no shipper has succeeded in proving that a
terminal owning railroad has engaged in anti-competitive conduct.
The railroads argue that the above proposed change in the law would severely thwart their efforts
to streamline their operations. If the law were to require more interchanging of traffic among
railroads, the railroads claim that this will increase delays at switching yards, increase cargo
handling costs, and therefore make them less competitive relative to other modes. They also
contend that if the STB were to require mandatory access to railroad track and terminals, the
Board would be put in a position of having to assess the reasonableness of track access charges,
thus opening up an entire new area of rail price regulation. The net result, railroads contend,
would be more regulation, not more competition.
Captive rail shippers often supply the nation’s basic industries with raw materials, such as coal,
chemicals, grain, and construction materials. About 70% of the nation’s coal, which generates
over half of the nation’s electricity, is delivered by rail. According to one report, an electric utility
in Arkansas was forced to switch to more expensive natural gas, in part, because the railroad 24
could not deliver coal to its power plants on time. And some utilities have even begun to import
coal from South America or Indonesia, at least in part, to lessen their dependence on what they
perceive as overpriced and unreliable rail service. Likewise, railroads haul about 40% of the
nation’s grain. Grain producers have complained about railroads not providing them with enough
hopper cars at harvest time to move their product to market. In an attempt to resolve this problem,
many grain producers purchased their own fleet of hopper cars, but now they complain that 25
railroads do not provide the locomotives and crew to move their cars. They contend that poor
and expensive rail service is driving their customers to overseas sources of grain.
The dispute between railroads and their captive customers is long-standing, pre-dating
deregulation, but the dispute has recently been exacerbated by record demand for rail service and
higher rail rates. Additional indicators of railroad market power that captive shippers point to are
the railroads return to public pricing and the manner in which they have recently assessed fuel
surcharges. With some of their customers, railroads have returned to a system of utilizing public
tariff rates rather than entering into confidential contracts with these customers. These customers
complain that public pricing allows the railroads to raise prices with little warning and, since
23 See Midtec Paper Corp. v. Chicago & N.W. Transp. Co., 3 ICC 2d 171 (1986), aff’d sub nom. Midtec Paper Corp. v.
United States, 857 F.2d 1487 (D.C. Cir. 1988).
24 “As Utilities Seek More Coal, Railroads Struggle to Deliver,” Wall Street Journal, March 15, 2006, p. A1.
25 Written testimony of National Association of Wheat Growers, Senate Committee on Commerce, Science, and
Transportation, Subcommittee on Surface Transportation and Merchant Marine, Economics, Service, and Capacity in
the Freight Railroad Industry, June 21, 2006.
there are likely only two railroads serving a particular region, provides opportunity for price
signaling between the railroads. Shippers have also complained about railroads using recent
spikes in fuel prices to pad their freight bills by basing their fuel surcharges on a simple
percentage of the freight bill rather than basing it on the actual (or estimated) amount of fuel
burned for a particular shipment. The STB investigated this practice and in January 2007 directed 26
the railroads to change their fuel surcharge method to reflect actual costs.
In addition to the captive shipper groups that represent coal, chemical, and grain shippers,27 some
other shipper groups also believe that more rail-to-rail competition is needed in the rail industry.
The National Industrial Transportation League (NITL), which represents a wide diversity of
shippers and carriers, supports a reversal of the STB’s existing “bottleneck” decisions and a 28
lowering of the STB’s barriers to reciprocal switching. The NITL argues that,
Competition drives efficiencies and innovation. It leads to a fundamental shift in thinking,
away from a static and ultimately counterproductive effort to protect a “franchise,” toward a
positive effort to grow business opportunities and eliminate costs. Competition promotes
cooperation between transportation providers and their customers as both become partners in
an effort to eliminate inefficiencies and improve their market opportunities. The result of 29
these efforts is increased demand for the service—that is, growth.
However, other rail customers do not support the captive shipper legislative agenda. Intermodal
rail customers (that utilize the railroads to haul freight in shipping containers and truck-trailers)
are more likely to view greater investment in rail infrastructure as a more effective remedy to
tight rail capacity and rail service problems. For instance, UPS (one of the railroads’ largest
intermodal customers) supports the concept of creating a federal rail trust fund to accelerate the
pace of rail infrastructure expansion. Ocean container lines and intermodal truckers stress the
importance of maintaining a regulatory environment that does not impede the railroads’ ability to
reinvest in their infrastructure. Some intermodal shipper groups, like the Waterfront Coalition, the
Intermodal Association of North America, the National Retail Federation, the Retail Industry
Leaders Association, and the American Apparel and Footwear Association support a 25% rail 30
investment tax credit legislative proposal. These rail customers may be concerned that if the
captive shippers’ legislative proposals are adopted, more rail resources, already in tight supply,
will be shifted toward serving captive customers at the expense of serving the fast growing
intermodal segment of the industry.
While captive shippers have been the most vocal about railroad market power and alleged poor
rail service, tight rail capacity and higher rates have prompted some intermodal customers to also
express concern on these matters. For instance, UPS stated at an STB hearing on rail capacity, 31
“Are we captive? No. Are we constructively captive? Yes.” UPS also stated that while it views
26 see STB Ex Parte No. 661, Rail Fuel Surcharges, January 25, 2007.
27 These groups include the Western Coal Traffic League, National Grain and Feed Association, American Chemistry
Council, Consumers United for Rail Equity, and the Alliance for Rail Competition.
28 Written testimony of NITL, STB hearing, The 25th Anniversary of the Staggers Rail Act of 1980: A Review and Look
Ahead, STB Ex Parte No. 658, October 12, 2005.
29 Written testimony of NITL, House Transportation and Infrastructure Committee, Subcommittee on Railroads, The
Status of the Surface Transportation Board and Railroad Economic Regulation, March 31, 2004.
30 The Freight Rail Infrastructure Capacity Expansion Act of 2007, S. 1125, introduced by Senator Trent Lott and H.R.
2116, introduced by Representative Kendrick Meek.
31 Oral testimony of Thomas F. Jensen, Vice President UPS at STB hearing, Rail Capacity and Infrastructure
the railroads as partners in moving UPS freight, it is dissatisfied with the overall level of rail
service, the slow pace at which railroads adopt technological innovations that could help address
service shortcomings, and the railroads’ annual spending on infrastructure improvements. Ocean
container lines, which rely on railroads extensively to move their containers between U.S. ports
and distant inland destinations and origins, reportedly are experiencing railroad rate increases of
30% to 40%, with one shipping line executive noting that railroads have “immense bargaining
power” because of their “virtual duopoly in each half of the country,” while a container shipper
notes that railroads “can almost dictate this [the rate increase]” because “we don’t have anywhere 32
else to go.” The rationing of intermodal rail service at West Coast ports in 2004, in which two
railroads limited the number of marine containers they would accept on a daily basis at these 33
ports, is another indication of railroad market power, according to some observers. The largest
trucking firms, which utilize the railroads for line-haul movement of their trailers on their busiest
traffic lanes, have also expressed disappointment with rail service and note that they have shifted 34
more of their trailers back to the highway mode because of inconsistent rail service. Although
intermodal shippers theoretically have the option of shifting to the truck mode, increases in fuel 35
prices and insurance rates, truck driver shortages, and new hours-of-service rules for truck
drivers means that large volume intermodal shippers like UPS, ocean container lines, and even
large trucking firms cannot realistically shift their long-distance freight to the truck mode without
“pricing-out” a significant portion of their customer base.
Rather than being indications of excessive market power, the railroads argue that their recent
pricing and investment strategies are rational responses to changing economic circumstances.
They argue the shift from a rail market with excess capacity to a rail market with excess demand
dictates price increases and a preference by the railroads for shorter term contracts or, in some
cases, public pricing. The railroads note that many of the contracts that recently expired were
negotiated many years ago when the railroads had excess capacity and thus were eager to sign
Railroads argue that rail infrastructure is a fixed and long term (30 to 40 years) investment and
thus they must be confident that a demand increase is going to be sustained over the long-term
and is not a temporary phenomenon, before making additional investments. Recent coal delivery
problems and the allocation of train service at West Coast ports in 2004 were the result of an
unexpected surge in traffic in these rail markets, they contend. They note that their supply chain
partners, like coal producers and public utilities, also face a need to upgrade and modernize their
train loading or unloading equipment to handle more reliably larger amounts of coal. Steamship
lines and terminal operators also play a role in the container supply chain—a shortage of
dockworker labor was a significant contributing factor to the backlog of container operations that
occurred at West Coast ports in 2004. As for grain delivery issues, railroads view this market as
Requirements, STB Ex Parte No. 671, April 11, 2007.
32 William Armbruster, “Power Play,” Journal of Commerce, November 27, 2006, p. 26.
33 John Gallagher, “Peak Service, Peak Prices,” Traffic World, August 16, 2004, p. 26.
34 See, for example, John D. Schulz, “Lofgren On Rail: ‘Disappointing’” Traffic World, August 23, 2004, p. 11.
35 Per ton of cargo, trucking is much more fuel intensive than rail.
especially volatile—not only in the size of the harvest each year but in the destinations that grain
producers may want to ship to from year to year. As the U.S. DOT has stated on rail capacity and
infrastructure requirements, “The bottom line on any rail expansion is the requirement by
investors for an adequate return on that investment. The industry appears to be making capacity-
enhancing investments at a responsible pace, but is unlikely to invest to meet what it observes as 36
The railroads assert that they are expending enormous resources to improve their asset base,
adopting new technology to increase railroad efficiency and safety, and entering into innovative
collaborations with one another to offer better service. The Association of American Railroads
(AAR) reports that Class I railroads typically spend 40 cents out of every revenue dollar on 37
capital and maintenance expenses related to infrastructure and equipment. A sample of
infrastructure expansion projects cited by railroads in 2007 includes double- or triple-tracking
about 40 miles of BNSF’s southern transcontinental route, double-tracking more than 60 miles on
Union Pacific’s (UP) Sunset Corridor, and adding 60 miles of third or fourth track to the Powder
River Basin joint line in Wyoming that both these railroads share. CSX is adding capacity on its
lines between Chicago and Florida and between Albany and New York, and Norfolk Southern
Railway and Kansas City Southern Railway are improving capacity on the “Meridian Speedway”
between Meridian, MS and Shreveport, LA. In addition, the industry is hiring thousands of new
employees and adding hundreds of locomotives. The railroads are testing new train control
technology and new braking systems that will increase safety but also increase the train capacity
of existing track. Eastern and western railroads are partnering to offer faster service for coast to
coast shipments. For example, CSX and UP offer an “Express Lane” service from the Pacific
Northwest to New York to haul fruits and vegetables. UP and NS partnered to cut 150 miles off a
route between Los Angeles and the Southeast, and UP and Canadian Pacific Railway (CP)
improved their interchange of export grain shipments in Idaho by streamlining the customs
Railroads also note that they compete with trucks and barges for much of their traffic base and
they believe that these modes have an unfair advantage. While railroads by and large finance their
own infrastructure and pay property taxes on it, taxpayers pay for most of the locks, dams, and
dredging that barges rely on, and the heaviest trucks, in the view of railroads, are cross-subsidized
by lighter vehicles in the provision of highway infrastructure.
Captive shippers contend that the STB is biased in favor of the railroads in interpreting statute
and thus believe legislative change is needed to overrule certain Board decisions. However, they
note that the STB could, under its existing authority, give greater weight to competition as
opposed to railroad revenue adequacy in interpreting the Staggers Act. For instance, they note that
the STB modified rail merger rules in 2001 to require that future rail merger applicants
demonstrate how the proposed merger would enhance competition rather than merely preserve
competition through such means as terminal switching arrangements, trackage rights, and
36 Written testimony of Jeffrey Shane, Under Secretary for Policy, U.S. DOT, STB hearing: Rail Capacity and
Infrastructure Requirements, Ex Parte No. 671, April 4, 2007.
37 Statement of Craig Rockey, Association of American Railroads to the National Surface Transportation Policy and
Revenue Study Commission, March 19, 2007.
eliminating restrictions on interchanges with short-line railroads, among other measures.38 Other
shippers note that the STB could, under its existing authority, assist captive shippers by 39
establishing, monitoring, and publishing railroad service performance metrics. By shining the
spotlight on poor service, these shippers believe railroads would improve their performance.
In 1998, the Senate Commerce Committee sent a letter to the STB asking it to hold hearings and
consider written comments on the subject of railroad competition issues. Hearings were held, and
the STB also directed the railroads to arrange meetings with shippers to see if they could mutually 40
identify certain measures that would facilitate greater railroad access where needed. Neither the
hearings nor the meetings produced any clear policy direction and the STB Chairman at that time
reported to the Senate Commerce Committee that rail competition policy would be more
appropriately established by Congress, than the more administratively focused STB:
The differences between the railroads and the shippers on the Board’s competitive access
rules are fundamental, and they raise basic policy issues—concerning the appropriate role of
competition, differential pricing, and how railroads earn revenues and structure their
services—that are more appropriately resolved by Congress than by an administrative 41
Although the captive shipper debate has continued for over two decades, some believe changing
economic circumstances have recast the debate. Captive shippers assert that the recently
improved financial health of the railroad industry warrants a reexamination of the goals of
railroad policy as stated in the Staggers Act. They contend that existing interpretations of the
statute are based on precedents established in an outdated era of excess rail capacity. With
segments of the rail network now experiencing congestion, captive shippers argue that, as a
matter of public policy, rail shippers should be given greater latitude to reroute their traffic to less
capacity-constrained routes. The railroads counter that the unprecedented demand for their
services requires them to shift from a strategy of shedding underutilized capacity to one of
financing an expanded rail network. Determining how much intramodal rail competition is 42
optimal is central to striking the appropriate balance between these two objectives.
The railroads believe that the kind of increased rail-to-rail competition captive shippers seek 43
would be harmful to the financial health of their industry. If railroads are forced to share their
38 see STB Ex Parte No. 582 (Sub-No. 1), Major Rail Consolidation Procedures, June 11, 2001. No Class I railroads
have sought a merger under the new procedures.
39 In response to a GAO recommendation, the STB hired an economic consulting firm to conduct a study on the current
state of competition in the railroad industry that is expected to be completed in the Fall of 2008. See STB press release
no. 07-31, dated Sept. 13, 2007.
40 see STB Ex Parte No. 575, Review of Rail Access and Competition Issues, hearings held April 2 and 3, 1998.
41 Letter dated December 21, 1998 from the Honorable Linda Morgan, Chairman, Surface Transportation Board, to the
Honorable John McCain and the Honorable Kay Bailey Hutchison.
42 Further information on shipper and railroad views on this issue is available from an STB public hearing, “The 25th
Anniversary of the Staggers Rail Act of 1980: A Review and Look Ahead,” Ex Parte 658, October 19, 2005. Written
testimony and an audio recording of the hearing is available at http://www.stb.dot.gov.
43 For further discussion of the railroad industry’s point of view, see Richard A. Allen, “Rail Access in the 21st Century:
A Rail Attorney’s Perspective,” Journal of Transportation Law, Logistics, and Policy, vol. 70, no. 2, 2003, p. 192.
right-of-ways with other railroads, even at compensatory rates, they argue, it would undermine
their incentive to reinvest in their infrastructure. For example, they assert that the Dakota,
Minnesota, and Eastern Railroad (DM&E) would never have undertaken its effort to build a third 44
rail line into the Powder River Basin if it were required to share that line with competitors. The
railroads argue that if they are not able to price their service based on the demand for rail service,
they will not be able to recover their costs, and eventually could require government subsidies to
continue operating. Furthermore, they assert that just as few U.S. cities are able to support two
major league baseball teams, not every shipper can sustain the services of two railroads. In other
words, even if a bottleneck shipper were to gain access to a second railroad, that shipper may not
generate enough business to attract more than one railroad’s investment in the physical facilities
necessary to serve that customer.
On the other side of the issue, captive shippers believe that increased competition is the means for 45
improving railroad financial health. They argue that competition spurs efficiency and innovation
and creates a sense of urgency. In the words of one industry observer, “The culture of large freight
railroads is one that is slow to change and has never been known to have keen market
sensitivity.... Adequate railroad competition could add to railroad efficiency, but more 46
importantly, could provide the needed sensitivity to shipper needs.” Proponents of competition
criticize the railroads’ position as relying on a static economic model that fails to recognize the
financial benefits that increased competition generates. They assert that competition leads to more
responsive service, which leads to more rail traffic and an emphasis on eliminating unnecessary
costs, which leads to price reductions that stimulate more demand for rail service, which would
lead to more railroad revenue. In short, achieving railroad financial viability and satisfying
railroad customers are, in this view, two sides of the same coin.
Increasing competition among railroads could, in the view of some, result in a reduced
geographic scope of the rail network that serves only higher margin customers. This view was
articulated by Linda Morgan, a former chairwoman of the STB:
The shape and condition of the rail system that open access would produce is a significant
issue that was not resolved at the hearings. The shippers assume that the replacement of
differential pricing by purely competitive pricing would reduce the rates paid by shippers.
The railroads, by contrast, would argue that, because their traffic base would shrink, the rates
paid by those shippers that would continue to receive service would actually increase, even
as overall revenues received by railroads would decline, because the overall traffic base from
which costs would be recovered would be reduced. More specifically, carriers could be
expected to seek to maintain an adequate rate of return by cutting their costs, which could
include the shedding of unprofitable lines. Thus, it is quite possible that open access would
produce a smaller rail system (although not necessarily a degraded one) that would serve
fewer and a different mix of customers than are served today, with different types of, and
possibly more efficient but more selectively provided, service. We leave open for public
discussion the issue of whether that type of a rail system, which might not serve shippers of
44 The Powder River Basin is the Nation’s largest source of coal, responsible for the fuel that generates about 20% of
the nation’s electricity. The most productive part of the basin is currently served by two railroads.
45 For further discussion of the shipper’s point of view, see Nicholas J. DiMichael, “Rail Access in the 21st Century: A
Shipper Attorney’s Perspective,” Journal of Transportation Law, Logistics, and Policy, vol. 70, no. 2, 2003, p. 175.
46 Written testimony of Harvey A. Levine, Senate Committee on Commerce, Science, and Transportation,
Subcommittee on Surface Transportation and Merchant Marine, Oversight Hearing on the State of the Railroad
Industry, May 9, 2001.
less desirable traffic, would better serve the interest of shippers, labor, and the public 47
Another view is that multiple railroads operating over the same rail line will actually increase the
cost of railroad operations, thus increasing the price of railroad services to all rail shippers. This 48
view was suggested by a study funded by the Federal Railroad Administration:
Arguments advocating competitive policies in the rail industry generally highlight the
textbook advantages of competition over monopoly of a larger sum of consumer and
producer surplus due to a restriction on output by monopoly. However, the advantages are
only so clear when the costs of providing services are the same for competitive or monopoly
firms. In cases where there are substantial economies of scale and scope in the production (as
there appears to be in the rail industry), competition can increase the costs of resources used
in production, potentially reducing societal welfare.
All agree that the nation needs a robust and efficient railroad system. Its inherent advantage in
hauling large volumes of heavy freight long distances is especially beneficial during periods of
high fuel prices, rising trade volumes, and growing demand for raw material transport. Whether
elimination of the captive shipper problem would be detrimental or beneficial to maintaining a
strong and vibrant railroad system is disputed among stakeholders as well as outside observers.
Specialist in Transportation Policy
47 STB Ex Parte No. 575, Review of Rail Access and Competition Issues. Decided April 16, 1998, at footnote 3.
48 John Bitzan, Ph.D. North Dakota State University, “Railroad Cost Conditions - Implications for Policy,” May 10,
2000, p. v. Available at http://www.fra.dot.gov/downloads%5Cpolicy%5Crr_costs.pdf. (Viewed August 1, 2007.)