(The following article by Andrew Martin was posted on the Chicago Tribune website on September 26.)
WASHINGTON — The Surface Transportation Board formally resolves its disputes in the Linda Morgan Room, a sleek space of blond-wood walls with television monitors hanging from the ceiling and a smiling portrait of Morgan, the federal agency’s first director, at the entrance.
This is the place where freight railroads and their customers battle over rates and service.
And where is Linda Morgan? She’s now a lobbyist for Union Pacific, one of only four major freight rail companies left in the country.
Railroad companies have found that Morgan’s room is a friendly place where, in recent years, they rarely lose.
“How would you like to try a case there?” asked Michael Grisso, executive director of the Alliance for Rail Competition, an advocacy group.
Deregulation of railroads has led to the sharp reduction in rail carriers and severely limited options of some shippers. Large swaths of the country, notably the Great Plains, are served by only one railroad and often are referred to as “captive shippers.” The Surface Transportation Board is supposed to make sure railroads don’t unfairly overcharge those areas where there is so little competition.
Shippers, including farmers, say they are routinely gouged–an allegation recently supported by a preliminary report by the Government Accountability Office–and that the board has done little to stop it.
Shippers lose most of their cases of late before the board, and they also are discouraged from filing complaints in the first place. The filing fee is $140,600 and the cost of litigating a case averages about $3 million–and those cases typically drag on for more than three years, according to the GAO and the board’s records.
Though the board put out guidelines in 1997 to simplify the process for small shippers, only one such case has been filed.
Complainants range from grain farmers and chemical companies to paper manufacturers and utilities. Shippers said they understand that railroads need to charge higher prices to pick up freight in out-of-the-way locales. But while the law mandates reasonable rates for captive shippers, critics say railroads are essentially unconstrained in what they charge because the Surface Transportation Board is so weak.
“We put this little tissue paper in front of the railroads, and the railroads just eat these people up,” said Robert Szabo, executive director of Consumers United for Rail Equity, another group that is pushing for tougher regulation of railroads.
In many instances, the additional freight costs are simply passed along to consumers.
Straight to the ratepayers
In Lafayette, La., for instance, the city gets about 60 percent of its electricity from a power plant that receives regular shipments of coal by rail from Wyoming. Though there are competitive tracks along 1,500 miles of the route, the last 19 miles are controlled by Union Pacific, which will only offer the city a rate based on the entire 1,519-mile route.
“Thus, by this simple strategy, we are not able to gain access to the competitive transportation alternative that is otherwise available to us for [1,500] miles of our movement,” the utility said. “We estimate that we are paying $6 million too much annually–which flows through to the ratepayers in our city.”
Finnish paper company UPM says it costs about the same to ship paper from Finland to a customer in central Indiana–a 5,000-mile trip by ship to the East Coast and along competitive freight rails to Indiana–as it does to ship it 900 miles along a captive rail line from its plant in Minnesota.
“We could be shipping more there if it wasn’t for the logistics,” said Joe Maher, general manager of UPM’s Minnesota plant.
Farmers in the Great Plains don’t have such choices. In Beach, N.D., a tiny town on the Montana border, farmers said there aren’t enough trucks to haul all their wheat, so they are dependent on the one rail line that runs through town, the Burlington Northern Santa Fe.
As much as one-third of the money a farmer receives for a bushel of wheat is paid to Burlington Northern to ship it by rail to either Minneapolis or the West Coast. To remain competitive with wheat from elsewhere, farmers simply absorb those costs, they said.
“These guys have a monopoly, and they are sticking it to us,” said farmer Gary Farstveet.
Sen. Conrad Burns (R-Mont.) has introduced legislation that would make it easier for shippers to challenge cases before the Surface Transportation Board. To date, he said, the railroads have refused to meet with him to discuss ways to address complaints of captive shippers.
“If we don’t get the STB into a position where they can get tough, then we might as well go back to reregulation,” Burns said. “We didn’t set this up to watch a monopoly.”
In response, Edward Hamberger, president of the Association of American Railroads, said captive shippers (he prefers “single-served shippers”) are complaining about the laws of supply and demand.
“The bottom line is that some people pay more than others,” he said. “That’s the way the whole economy works.”
Board defends its actions
The Surface Transportation Board would respond only to questions in writing. In an eight-page response, the board stated that railroads are allowed to charge captive shippers more than shippers with transportation alternatives. Even so, board officials noted that overall rates have declined since deregulation in 1980.
As for the process of adjudicating complaints, the board said it is reviewing its procedures for complaints filed by large and small shippers to reduce the cost and complexity of those cases.
The board noted that in the 11 years since its creation, the record is nearly even: Railroads, 7, Shippers, 6. In the last five years, however, railroads have won six of nine cases.
The board conceded that former board members and staff attorneys had gone to work for the railroads, but it noted that a former board member from its predecessor agency, the Interstate Commerce Commission, became head of a shipper organization. And Hamberger noted that his industry’s customers–including the agriculture, chemical and coal lobbies–are just as powerful as the railroads in Washington, if not more so.
Morgan disputed the notion that the railroads and the board are too close. While she was chairwoman, she said, she “made decisions that the railroads didn’t like, believe me.”
As for the name of the hearing room, given her current position as a railroad lobbyist, Morgan said the room was named after her as a gesture of thanks from employees.
The railroads have historically exerted tremendous influence in Washington, and that remains a fact today.
Consider the links in the White House alone: Vice President Dick Cheney is a former board member of Union Pacific; former White House Chief of Staff Andrew Card now sits on the railroad’s board; and Treasury Secretary John Snow was chief executive at CSX before President Bush appointed him.
The railroads are generous contributors to congressional campaigns and rank among the top sponsors of congressional junkets to such destinations as Palm Springs and Pebble Beach, Calif., and Jackson Hole, Wyo.
CSX, one of the major railroads, owns the luxurious Greenbrier Resort in West Virginia, a favorite getaway for members of Congress.
The three members of the Surface Transportation Board are appointed by the White House and confirmed by the Senate. They, too, have historically enjoyed a close relationship with the railroads.
Just as Morgan left to become a railroad lobbyist, so did her successor. Roger Nober, chairman of the board from 2002 until 2006, is a Washington lobbyist for Burlington Northern Santa Fe Railway.
Nober’s chief of staff, John Scheib, left the board to work as in-house counsel at Norfolk Southern railway, while Dennis Starks, a board lawyer, went to work for the railroad trade group, the Association of American Railroads.
The staff of the Surface Transportation Board, meanwhile, is filled with employees with ties to the railroads, including Ray Atkins, a former railroad lawyer, who is now associate general counsel.
In its response, the Surface Transportation Board said: “The agency looks for qualified employees wherever it can find them. Because some STB positions require an in-depth understanding of railroad operations and technology, it is not surprising that many . . . have some rail industry background, although we should point out that at least one of our [analysts] comes from a shipper background.”
Even when the shippers prevail in cases against the railroads, their victories can seem hollow. Tom Wilcox, who represented the Public Service Company of Colorado, said the board ordered Burlington Northern Santa Fe to charge his client less: Instead of charging the utility 3 1/2 times its costs, the board ruled that Burlington Northern could charge 2 1/2 times its costs.
“The client wasn’t turning cartwheels over this,” Wilcox said.
Farmers complain they are a lower priority for the railroads than the more lucrative business provided by coal and shipping containers. Though railroads must provide “reasonable service on reasonable request,” farmers complain that they often are stuck with the worst service and highest rates.
The GAO noted that rail rates for grain had increased through 2004 and that 39 percent of the grain originating out of Montana was charged more than three times the railroad’s variable costs of providing the service.
Co-op in a corner
The problems are evident at the Beach Cooperative Grain Co. in North Dakota, where manager Paul Lautenschlager explained that they are located far from the two destination terminals for grain, Minneapolis and Washington state. Though trucking is cheaper than sending the grain by rail, there aren’t enough trucks available, so farmers are dependent upon Burlington Northern, he said.
“We’re the farthest from anywhere. We couldn’t be any further,” he said. “How else am I going to get it there?”
In 1996, at the behest of the railroad, the cooperative spent $2 million to update its facilities so it could load 52-car trains with grain, Lautenschlager said. Now, Burlington Northern is pushing the co-op to update again to accommodate more-efficient 110-car trains, which would cost $3 million.
Kevin Kaufman, group vice president for agriculture products for Burlington Northern Santa Fe, said the 110-car trains have been a boon to farmers because the lower costs from transportation have been passed along. The problems at the Beach elevator have more to do with consolidation as grain elevators become more efficient, rather than the railroads, he said.
Regardless, Farstveet, the Beach farmer, argued that the railroads are taking advantage of the lack of competition and make nearly as much hauling wheat for a few days a year as the farmers do growing it.
“It makes us so damn mad, and there’s nothing we can do about it,” he said.