A debate over regulatory oversight of American railroads is heating up in Washington. A study report (pdf) from the Senate’s Committee on Commerce, Science, and Transportation has found that major railroads are now financially stable and enjoy substantial pricing power. In light of improved conditions since the enactment of railroad deregulation in 1980, the report suggests that railroads should be under greater scrutiny in terms of pricing particularly as it relates to practices such as charging captive shippers higher rates than other shippers. The study has drawn a sharp rebuke from the Association of American Railroads.
Berkshire’s Purchase of BNSF Cited as Sign of Robust Health
The committee report alleges that railroads falsely claim that the provisions of the 1980 Staggers Rail Act are necessary to ensure the financial viability of the industry. As evidence, the report cites Berkshire Hathaway’s acquisition of Burlington Northern Santa Fe as a sign that the industry is enjoying financial prosperity:
The companies’ strong financial performance has attracted billions of new investment dollars, including the unprecedented $34 billion dollar purchase of the BNSF railroad by Berkshire Hathaway, the operating company of the investor Warren Buffett. Buffett predicts that BNSF and the other large Class I railroads will show steady and certain growth over the coming decades.
The report claims that industry objections to increased regulation have no merit based on the financial strength of the Class I Railroads:
“In spite of the obvious financial strength of the Class I railroads, their industry association, the Association of American Railroads (AAR), continues to tell Congress and the Surface Transportation Board (STB) that the freight rail industry is not yet financially stable and is not yet capable of meeting its capital needs without the differential pricing powers the Staggers Act gave the railroads in 1980. As the rail industry continues to operate profitably and to aggressively exercise its pricing power, these claims need to be more carefully scrutinized.”
“Profits and Efficiency are not Dirty Words”
The industry disagrees with the committee study and claims that the regulatory regime introduced in 1980 has allowed companies to reinvest in rail systems. The following quote is from the AAR Press Release referenced earlier in this article:
“We vehemently disagree that there is a need to roll back the successes achieved since the 1980 Staggers Act. The vision held by Congressional Democrats and President Carter 30 years ago – allowing railroads to succeed or fail in the marketplace – has resulted in railroads becoming a true American success story. Imposing new Washington regulations will undermine railroads’ ability to sustain the private investments in the nation’s rail network that provides hundreds of thousands of American jobs, and the foundation for both freight and passenger rail.
The report makes profits and corporate efficiency sound like dirty words. The reality is the railroad industry’s return to financial health has resulted in private capital – not taxpayer dollars – getting turned back into building and maintaining the nation’s rail network. Even during the worst recession in 80 years, America’s freight railroads have kept investing, spending $21.8 billion of their own private capital in 2008 and $20.2 billion in 2009 to build, maintain and modernize the nation’s 140,000-mile rail network that serves both passengers and freight.”
An Interesting Piece of Trivia …
One interesting piece of trivia regarding this situation involves the history of railroad regulation dating back to the Interstate Commerce Act of 1887. The 1980 Staggers Rail Act set aside provisions dating back of the 1887 Act that prohibited price discrimination by railroads against smaller shippers. One of the main targets of the 1887 Act was Standard Oil run by John D. Rockefeller Sr. Standard Oil gained dominance, in part, by leveraging a system of railroad rebates that allowed the company to ship oil at advantageous rates not available to smaller competitors.
The 1887 Interstate Commerce Act was not entirely effective in leveling the playing field according to Titan, Ron Chernow’s excellent biography of John D. Rockefeller Sr. While Standard Oil claimed that it was in compliance with the law, accounting gimmicks were used to disguise rebates (page 293) and the old ways of doing business quickly returned.
Fast forward to current times. Who is the main proponent of revisiting the 1980 Staggers Rail Act and presumably resurrecting regulations from the 1887 Interstate Commerce Act? None other than West Virginia Senator Jay Rockefeller, great-grandson of John D. Rockefeller Sr. While likely of radically different political persuasions, Sen. Rockefeller and his great-grandfather both now have a history of taking on the railroads, albeit in very different ways.
Disclosure: The author of this article owns shares of Berkshire Hathaway.