Railroad Pricing Power is starting to be tested in Congress

Implications: A Senate bill involving railroad regulatory matters, S.772 introduced on March 6, 2007, was recently approved by the Judiciary Committee and sent to the full Senate for consideration. Ostensibly, the bill would give other government agencies some regulatory control over railroad mergers, which would short circuit the lasses faire approach of the Surface Transportation Board (STB) since it evolved from the former Interstate Commerce Commission (ICC). If this is all the bill contained, it would probably benefit railroad stock holders by handcuffing management on future mergers; but there are other provisions regarding freight rates which are really the reason d’etre for the legislation.

Analysis:  

The Staggers Act of 1980 freed the railroads from much of the regulatory oversight and the restrictions on freight rates that had been imposed on them since the passage of the Interstate Commerce Act of 1887. It was not until just a few years ago however, that the railroads were able to take advantage of the pricing power contained in the 1980 legislation. Until the railroad mergers during the late 1990s created just two main Eastern and two main Western carriers, inter-company competition kept rail rates in check and shipper complaints limited to service issues. The ready acceptance by shippers of higher freight rates after diesel fuel prices surged in 2004 might have been a signal to railroad marketing managers that times had changed.

Track capacities have also been viewed differently since 2004. Prior to then, railroads seem to always have enough capacity to add one more car are even one more train to a traffic corridor. Marketing managers priced their freight rates on the traditional “cost and value-added” basis, with some commodities being very profitable and some only marginally so. With the recognition of the constraints on capacity, freight rates are now being adjusted so that all commodities contribute their fair share to the bottom line. There is a growing backlash from railroad shippers regarding these adjustments.

Which brings us to S.772, which is an attempt to give shippers more power to challenge rates set by their serving carriers. The bill will not necessarily reregulate the railroad industry, but it will give the railroads a reason to review future freight rate increases and will possibly cost them additional legal expenses to fight recent increases. It is difficult to say if the legislation will be passed; a critical mass of shipper protests does not yet seem to have formed against the industry. But railroad executives must be looking at the Congress and wondering how long their Pricing Power will remain unfettered.