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 TESTIMONY BEFORE THE SURFACE TRANSPORTATION BOARD STB EX PARTE NO. 575 REVIEW OF RAIL ACCESS AND COMPETITION ISSUES APRIL 2, 1998 INTRODUCTION/BACKGROUND The Society of the Plastics Industry, Inc. (SPI) is pleased to participate in this hearing which the Surface Transportation Board (STB or the Board) has convened at the request of Sen. John McCain (R-AZ) and Sen. Kay Bailey Hutchison (R-TX) regarding rail access and competitiveness issues in the United States. SPI is the national trade association of the plastics industry, with over 2,000 members nationwide. SPI represents every facet of this industry, the manufacturers of plastics raw materials, products, machinery and molds, which directly and indirectly employs over 2.3 million workers in the U.S. This is nearly two percent of the U.S. workforce. At the outset, SPI wishes to thank both Senators for their leadership in urging the Board to convene this hearing about a matter of critical importance to this industry. This comes at a time when the country is realizing the profound effects of a continued stream of mergers and acquisitions in the rail industry, and bearing witness to chaotic and disrupted rail service. INDUSTRY ECONOMICS In order to comprehend and appreciate the concerns of the plastics industry in the matter of rail access and competition, it is imperative to understand the background of this robust industry and its heavy reliance on competitive and viable rail transportation. The plastics industry is a very large part of the United States economy. This is illustrated by the following figures: >> The U.S. plastics
industry directly employs more than 1.3 million workers; The plastics industry is substantial in size and makes a strong economic contribution to the national and global economies. ECONOMICS OF TRANSPORTATION What must also be noted at the outset is that an effective and competitive rail system that is able to serve the U.S. shipping community is a key factor enabling the plastics industry to significantly contribute to the U.S. economy. A healthy rail system is, quite simply, the lifeblood of the plastics industry and the gateway to our markets. This dependence on rail becomes ever more apparent by examining the economics of transporting plastics raw materials. 1. Transportation is the second highest cost component of plastics production, up to a full 20% of the cost of finished raw materials production; 2. Approximately 80-85% of all raw materials are shipped by rail; of that percentage, about 75% of the shippers are captive - that is, singularly served by one railroad; 3. Currently, 80
billion pounds of plastics raw materials are shipped each year The very fiber of the plastics industry necessitates heavy reliance on rail transportation. To ship by truck would require 3.5 to 4 hopper truckloads to replace a single hopper car of resin, thus introducing over 1.5 million trucks on our nation's highways annually. The cost would double, and in some cases, be up to four times higher than transporting by rail. So, too, barge transportation is not the panacea. Few raw material companies are located on a waterway and even fewer downstream facilities are located in close proximity to a waterway to be able to receive raw materials by barge. Even if the geographic obstacle were removed, there are other problems associated with barge transport, such as preserving the integrity of the product, multiple handlings of the product, etc. Therefore, the plastics industry is a very rail dependent industry -- and a very concerned industry. LACK OF COMPETITION IN THE RAIL INDUSTRY It should be noted that the plastics industry is no different than any other, that is, we are strong business competitors. While we look to compete on a level playing field -- each and every business day, that playing field is often defined not by plastics shippers and their competitors, but by the rail carrier servicing a shipper's facility. In other words, the playing field is only level against other similarly disadvantaged captive shippers, and not at all level against shippers with competitive options. If, however, a facility is captive to one railroad at the point of origin or destination - the rates can be from 15 - 60% higher than a competitor's plant served by more than one railroad. As a shipper, you must ask yourself the inevitable question: when does the time come when fewer choices equal less competition, a return to monopolistic behavior, less service and higher costs? Madam Chair, the plastics industry believes that time has come. Throughout the 1980s and into the 1990s, there has been a very consistent cadence that has eroded shippers' opportunities and alternatives in the public policy arena, making us, at best, sidelined to a position of mere inconsequence unable to help shape our own economic future. It is this very issue that we believe is at the heart of today's policy debate. In large segments of the railroad industry, railroads simply do not have to effectively compete with one another for freight traffic and they do not. And, as spelled out earlier, for the plastics industry, there simply is no effective transportation alternative. The gravity of this situation cannot be over emphasized. To better explain, the Staggers Act of 1980 stripped away the burdensome regulations that encumbered the railroads, and left in place a regulatory infrastructure intended to protect captive shippers. A by-product of this regulatory policy change was further consolidation in the rail industry. The numbers tell the story: * In 1980 - there
were 41 Class I railroads; The lack of competitive alternatives is at the very core of shippers' concerns. Without competition driving the rail industry, we have little hope but to expect more of the same: * Fewer choices
means less competition; This is not the type of business environment the plastics industry, or any other industry, is allowed to enjoy. Why should the railroads be any different? RAIL FREIGHT RATES AND COMPETITION IN THE POST-STAGGERS ERA In the recent past, the Association of American Railroads (AAR) and the Surface Transportation Board (STB) have been claiming that rail freight rates have fallen drastically since the passage of the Staggers Act in 1980. In fact, declining revenue per ton-mile is a trend that began decades before the Staggers Act, and is certainly not a phenomenon that can, or should, be attributed to this law. Revenue per ton-mile is driven by a complex set of factors, such as length of haul, shipment size, etc., which can, in combination, produce reductions in revenue per ton-mile even when the freight rate structure is otherwise unchanged or even rising. Revenue per ton-mile for the chemicals industry, however, has increased while having the second-largest share of total revenue for the railroad. Another important factor respecting rail revenue is investment by shippers. Since 1981, shippers have supplied 77 percent of all new freight cars at a cost of nearing $20 billion. Furthermore, short line railroads are taking up much of the slack from the Class I railroads that have abandoned costly switching, pickup and delivery services. Therefore, the full cost of rail transportation is not included in any calculation based upon revenues directly received by railroads. Another factor that has contributed to the decline in revenue per ton-mile is the structural changes since the passage of the Staggers Act. The shipping community uses unit trains more widely. Unit trains have always had lower costs and revenues per ton-mile than non-unit train movements. Intermodal traffic has grown dramatically, generally at rates below or only marginally above cost. Also, shipments moving longer distances have lower costs than shorter haul movements. Therefore, by "growing" the cheaper freight traffic faster than other categories, the average revenue per ton-mile has declined. But the important point to note is that this decline is not linked directly to a change in rates. In addition, fuel prices have dropped, saving the industry upwards of $3.5 billion annually. It is also no secret that today it takes computers and code as much as fossil fuel to move locomotives and railcars. New and innovative software packages have helped the railroads realize better and more efficient economies. Locomotive management systems will offer visual computing workstations to locomotive managers. Easier methods to deploy software are also being implemented across the rail network. All of these factors combine to allow the railroads to operate more efficiently. Better products are being produced, by way of locomotives, and as a result, less maintenance is required. To summarize, the rail industry is advancing technologically, better methods of operation are being utilized and efficiencies actualized. A result of all of this is a reduction in cost, some of which flows through to the customer. Customers receiving intermodal or intramodal alternatives receive the disproportionate benefit. Regulatory policy appears to have little, if any, role in this calculation. COMPETITION MUST BE INFUSED INTO THE RAIL INDUSTRY The railroads enjoy a business environment unavailable to the plastics industry or any other industry. So why hasn't the shipping community been more vocal in speaking out against this egregious abuse? Capital investment and being captive to a single railroad are two compelling reasons. Railroads have the power to determine a company's market access and customer performance. And for those companies that publicly criticize their carrier, retribution can be severe. Make no mistake; retribution from the railroads is real. And, this does not hearken back to the turn of the century at a time when the robber barons ruled the day. This is a very real concern today. Without competition, the shipper is left with little recourse but to accept the service and rates offered by a particular rail carrier. How can the railroads get away with this? One answer lies in the March 11th issue of Chemical Week magazine. Half a dozen companies, including some of those who were first to blow the whistle on the Union Pacific rail service crisis last Spring, will no longer talk with reporters. Why? It is difficult not to draw the conclusion that "they are afraid to risk worsening relations with their monopoly railroad." In the midst of chaos, it is hard to prove whether further service decline is a part of the problem, or due to railroad retaliation. This is further reinforced in the March 30th issue of Fortune magazine. The magazine notes: "Numerous shippers interviewed for this story declined to criticize {the railroad} publicly, for fear the railroad would punish them with higher rates in the future." If only competitive alternatives existed, the shippers, rather than the railroads, could determine their own playing field. What other service industry in this country is allowed to skew the playing field in such a blatant and profound fashion? It is this very atmosphere that prompted one railroad executive to respond to a shipper's request for competitive rates by saying: "If they want a competitive rate, let them build their own railroad." How we got to this point becomes increasingly evident when you examine the long list of decisions rendered by the Interstate Commerce Commission, and more recently the Surface Transportation Board. These decisions have individually eroded, and collectively abolished, any competitive balance from the Staggers Rail Act of 1980. For example, the ICC turned the market dominance test from a readily applied test of dependence upon rail service to an anti-trust inquiry into the shipper's market; The ICC has read the statutory standard of furthering competition out of the power to order reciprocal switching; the Board in the "bottleneck" rulings declined to allow shippers to seek competitive rates and service offerings where available; and, the Board has imposed filing fees which are confiscatory and limit shipper access to the Agency, to name but a few. Once again, without competition, there is absolutely no incentive to keep rates down, service up and deliveries on time. What force is available to a shipper to challenge an unfair rate? Precious little, given the years required and the dollars needed to contest a rate. In following, very few cases have been contested. The rate complaint process, used predominantly by utilities shipping unit-trains, does not afford any meaningful relief to non-coal shippers. One railroad executive conceded that railroads set prices based on what alternatives their customers have. For the plastics industry with no alternatives is it any wonder that premium rates are paid, while service is less than tolerable. The following examples better illustrate this point. There is nothing to preclude one carrier from charging the same rate (i.e., $5,000) for the final ten mile leg of a transcontinental trip as did the originating carrier that hauled the shipment from the Gulf Coast area. Another shipper reported that the second carrier would haul a shipment, originating in the Gulf Coast, the last 45 miles for a rate that was four times higher than the long haul rate from the Gulf Coast. The policy infrastructure put in place by the Staggers Act that was intended to protect captive shippers has disappeared. Shippers do not have any effective forum for airing grievances. Efforts by the shipper community to substitute market competition for rate regulation has been largely ignored by the agency charged with promoting competition and protecting captive shippers against abusive rates and practices. The statutory protections for captive shippers from the otherwise unchecked market power of the railroads have, through policies and decisions adopted by the ICC/STB since 1980, largely been voided. What we are left with is a system that is incapable of protecting shippers, in which rail rates are left unchecked, and market forces and antitrust laws cannot be brought to bear. It is an industry which is subject to constraint only for those commodities that can efficiently be moved by other modes. For many commodities, plastics particularly, movement by other modes is inefficient at best, and generally infeasible in most cases. SOLUTION What then is the
solution for shippers? SPI also believes that any solution must incorporate the following principles as fundamental to a competitive rail environment. It is upon these tenets that we will benchmark any proposed future solutions. 1. Competition, by definition, means having more than one railroad competing for the same business. * Head to head rail
competition is the key driver for innovation, service improvements and
pricing. Without it, there remains little incentive to improve, and no
marketplace constraints to control pricing and service levels; 2. Railroad-owned routes is the strongly preferred method to provide effective competition. * Railroads must
have effective market access in order to compete; 3. Railroads must have access to the available rail infrastructure (origin, destination, storage and bulk transfer facilities). * Terminal access
is essential if a railroad is to effectively compete for haulage; 4. Railroads should not be exempted from the Sherman anti-trust laws. Future rail mergers should be subject to the same high public standard as mergers in other industries. SUMMARY To look at how far we must go to regain a healthy and efficient rail system, one needs only to remember that in 1861, then President-elect Abraham Lincoln traveled, by train, from Illinois to Washington, D.C., in two days. Few would question the ability of any manifest-based train in the country too match the speed or efficiency of that trip. It does not seem too much to ask the railroads to return to the efficiencies they had over one hundred years ago. If you step back and look at the ongoing rail service crisis that the shipping community has had to endure, the realized losses in dollars running into the millions and tens of millions for individual companies, the jobs that have been lost, the companies that have closed their doors, the perilous course on which this could place the U.S. economy, you have to ask yourself, how much longer can this be allowed to continue? The time for piecemeal solutions is long past. The need for change is all too apparent that overall change is necessitated. As Fortune magazine recently stated, "American railroads are too important to be left in the hands of an out-of-touch regulatory system." More
Public Policy: Environment
. Worker Safety . Transportation
. Codes and Standards . Food,
Drug,and Cosmetic Packaging . International
Trade
. Other Issues
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 © Copyright 2003 The Society of the Plastics Industry.
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