By Donna Harman
President & CEO
The Hill, Feb 21, 2017
Forest and paper product manufacturers rely on America’s railroads to move raw materials to mills and finished products to customers. Nearly 60 million tons of wood, pulp and paper products made that journey in 2015, according to the American Association of Railroads. The U.S. Surface Transportation Board (STB), which has regulatory oversight of rail rates and service, has initiated proceedings to revise outdated regulatory exemptions, enhance rail competition through reciprocal switching agreements and improve its procedures used to challenge unreasonably high rail rates. Implementing those reforms will go a long way toward supporting our industry’s needs for more cost-effective, efficient and competitive rail service.
In March 2016, the Board proposed to eliminate certain outdated commodity exemptions in a rulemaking proceeding. Although forest and paper products were not included in the proposal, the American Forest & Paper Association (AF&PA) has formally requested that exemptions adopted more than 25 years ago for these products also be revoked, and we filed comments and evidence to support revocation.
History tells the story of our industry’s evolving needs and underscores why we hope the STB is taking our request seriously. More than 25 years have passed since the STB exempted our industry’s rail shipments from its oversight. At that time, the rail industry was financially weak and highly regulated. The exemptions benefitted our industry by removing certain pricing and administrative burdens which allowed the railroads to compete more effectively with trucks.
That picture, however, has changed dramatically. Today, the rail industry is highly concentrated and extremely profitable. More than 40 Class I railroads that existed in 1980 have consolidated to just seven, with the four largest railroads handling 90 percent of the nation’s freight rail traffic. One third of forest products facilities have access to just one rail carrier, leaving our industry with limited rail competition. In the ten year period 2004-2014, rail rates for our industry increased by 91 percent, although the rate of inflation as measured by the Consumer Price Index increased by 25.3 percent and long-haul trucking rates a similar amount of 25.7 percent.
According to an analysis by Escalation Consultants comparing rail shipments of forest and paper products in 1989 and 2014, our industry has been subjected to a substantial increase in railroad market power. Specifically, during that period, while the volume of rail shipments decreased, there was a 550 percent increase in the number of shipments priced above the legal threshold that must be met for a shipper to challenge the reasonableness of rail rates before the STB.
Moreover, in 1995 Congress adopted the ICC Termination Act and permanently lifted pricing and administrative burdens for non-exempt commodities. Thus, the benefits derived from the original exemptions for our industry evaporated. Today, there are only disadvantages to our exempt status, since we have no direct recourse to the STB when forest products and paper companies encounter poor rail service or exorbitant rates. In order to provide our industry with the same access to the STB provided to other non-exempt industries, the STB should grant our request to remove the forest products and paper exemptions.
AF&PA is watching other proceedings at the STB, including the Board’s rulemaking that would modify its existing reciprocal switching rules to enhance rail-to-rail competition. This commonsense reform would allow rail customers to request to move their freight to another major railroad at a nearby interchange for an appropriate fee – a routine practice in Canada for more than a century where railroads have thrived.
The Board is also seeking to improve its procedures for resolving challenges to rail rates that are permitted in markets lacking competitive transportation options. Currently, large Stand Alone Cost rate cases take an average of three and half years and more than $5 million to litigate before the STB. Many rail customers cannot afford such cases which operate as an unacceptable regulatory hurdle. The exploration of reforms to improve the STB’s rate review process also has our support.
Updating outdated policies by revoking the forest products industry’s commodity exemption, allowing competitive switching and simplifying the rate review process would level the playing field for our industry. With 900,000 employees in large and small communities across 45 states, our companies are the face of American manufacturing, account for 4 percent of total U.S. manufacturing GDP and meet an annual payroll of $50 billion dollars. We deserve access to the same tools other rail shippers currently enjoy to help our industry stay competitive.
We commend the STB for recognizing that America’s freight rail policies need fresh review. It’s fair to say that the reforms currently under consideration could not come soon enough.