Matt Rose’s warning comes true
Railroads become a target for regulators
The railroad industry’s chickens have come home to roost. Before he retired in 2019, BNSF Railway Executive Chairman Matt Rose warned that the other Class I railroads were inviting regulatory risk by adopting Precision Scheduled Railroading, reducing service, and demarketing some types of traffic in pursuit of higher profits. “We have this common-carrier obligation to provide freight service to all customers in all markets,” Rose told an industry conference in January 2019. “And what we’re doing in PSR is we’re redefining what we’re willing to accept in the freight railroad industry on certain lanes. And I really do believe we’re going to get in a lot of trouble by doing that.
“When you start redefining markets,” Rose added, “I think then the federal policy makers will look at this, and quite frankly, they will not be happy with us.”
Well, guess what: New Surface Transportation Board Chairman Martin J. Oberman is not happy with railroads. He questions whether the Class I systems are shirking their common-carrier obligations due to pressure from Wall Street. “I have wondered ... whether the combination of the reductions in workforce, the interruptions in service, the demarketing all implicate the common-carrier obligation that railroads have and have had really since the beginning of the railroad industry,” Oberman told the Midwest Association of Rail Shippers in July. “And it’s something that I continue to focus my attention on.”
Oberman said he fully supports the White House’s call for increased competition in the rail industry. The Biden administration’s July 9 executive order, which aims to limit the dominance of large corporations across the economy, dovetails with efforts already under way at the STB. “There are just many, many parts of the country ... where there’s just not real effective competition among rail carriers,” Oberman says.
The STB chief says his agency will take a look at hot-button issues like reciprocal switching, lifting exemptions on the regulation of certain commodities, and ways to more easily settle rate disputes. Reciprocal switching, which allows sole-served shippers to seek access to another nearby railroad via interchange, has been on the board’s back burner since 2016. U.S. railroads vigorously oppose the reciprocal switching, calling it forced access. But Oberman wants action. “I have talked about it a lot. And it’s not just talk,” he says. “The concept of more competition ... is something very high on my list of concerns, and I hope we will be able to move forward in some fashion in that area.”
We don’t know what shape regulatory reform may take. The devil is always in the details. But it’s clear that Oberman is likely to get the ball rolling — and that the Class I railroads won’t like it much.
“I am frequently reminded by my friends in the railroad industry that we should butt out and the market should regulate rates and service. And I agree. I think the market should regulate rates and service,” Oberman says. “But ... for that to happen there has to be a market. And so to me, it is far better if we have more competition in the shipping and freight industry so we don’t have to get involved.”
Yet just nine days later Oberman asked all of the Class I railroads to provide information about congestion at their international intermodal terminals, where containers were stacking up faster than shippers could receive them due to pandemic-related factors largely beyond the railroads’ control. The rub? Intermodal isn’t even among the commodities the STB regulates.
It’s unclear whether the Big Is Bad mood in Washington may affect the proposed Canadian National-Kansas City Southern merger, the first between Class I systems in two decades. CN and KCS have broad shipper support for their deal, and that’s important. But obviously talk of reducing railroads’ market dominance does not help a merger’s prospects of winning regulatory approval.
The STB has become more activist in the past couple of years and has increased its scrutiny of all sorts of transactions, from CSX Transportation’s proposed acquisition of New England regional Pan Am Railways to Canadian National’s sale of former Wisconsin Central branches to shortline operator Watco.
If railroads have been downplaying the threat of onerous regulations — and ignoring Rose’s prescient warning — then Oberman’s comments should serve as a wake-up call. There’s a new sheriff in town.
“MORE COMPETITION ... IS SOMETHING VERY HIGH ON MY LIST OF CONCERNS.” - MARTIN J. OBERMAN, STB