Lessons from NARS 2009

Posted by Andy Cummings
on Monday, June 8, 2009

In any political debate, you tend to hear the loudest voices above all the rest. This is an obvious point, but I have a reason for making it. Two weeks ago I attended the North American Rail Shippers conference in Chicago, a gathering that brought in major rail shippers and senior railroad management from all seven Class Is alike. Among the speakers were the following:

• Craig Boroughf, director of transportation of U.S. Gypsum, which ships some 10,000 carloads of Sheetrock annually.

• Jim Young, chairman of Union Pacific.

• Daniel Mull, executive vice president of sales and marketing for ArcelorMittal USA, the country's largest steelmaker.

• Mike McClellan, vice-president of intermodal and automotive marketing for Norfolk Southern.

• Charles D. "Chip" Nottingham, vice chairman of the Surface Transportation Board.

The list goes on to include the chief marketing officer for every U.S. and Canada-based Class I, plus Ferromex, and a slew of other major carload rail shippers across the country. The fact that this group of people met amicably and had a productive discussion, completely free of raised voices, tells you a lot about the true nature of the rate reregulation debate. Hint: It's not simmering as hot as some would have you believe. Further, shippers are not crying out in unison for reregulation.

Of the shippers that presented at the conference, just one openly embraced some form of increased rate regulation, either through the legal system or through reciprocal switching agreements. But even he talked about how successful rail shipment has been for his company (LyondellBasell, a major plastics shipper), and largely embraced the industry.

I'll end on this point: Shippers who favor increased rate regulation have come up with some compelling examples of captive shippers who are paying more for freight service because they have no good alternative to a single railroad. Thus, certain shippers are subsidizing certain other shippers by paying higher rates. Railroads have to take that criticism seriously. On the other hand, railroads still don't earn their cost of capital, which tells me that rates overall, far from being too high, are in fact too low. The current system may benefit shippers with competitive options more than it benefits captive shippers. But if Congress takes steps to push back on rising rail rates, it will eliminate the incentive that investors have to sink their money into railroads. That kind of disinvestment would kill the railroads' ability to invest in new infrastructure, and the result will be more trucks on public roads, more congestion, more pollution, and higher taxes.

In other words, if policy-makers are going to change the status quo, they'd better have a decent alternative to it ready to put into place. Simply taking steps to reduce railroad rates without somehow offsetting that lost income would be devastating.

To leave a comment you must be a member of our community.
Login to your account now, or register for an account to start participating.
No one has commented yet.