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FULL OF SCRAP Fewer and fewer options for shippers tied to the tracks

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Railing at the railroads by scrapyard managers is fairly common, dependent as they are on those carriers for shipments to steel mills and ports.

How to secure better service and lower rates isn't always self-evident, as the Institute of Scrap Recycling Industries (ISRI) has discovered. When ISRI last wrestled with the matter, putting out a policy statement at a 2007 board meeting, it endorsed certain approaches but refrained from backing specific bills in Congress.

"We know what the problems are. We don't necessarily know what the magic bullet is," William Johnson, ISRI's director of political affairs, said recently. "The worst thing to do is to cause the railroads more problems trying to fix something."

ISRI's wish list More rail cars, getting them scheduled and routed more efficiently, increased infrastructure spending and "removing the anti-competitive protections afforded to the railroads."

A significant piece of the picture is that intermodal containers have become the focus of the rail industry. That means less attention is paid to gondola cars used to move steel scrap, and such shippers can't threaten to go elsewhere with their business.

As the North American Alliance of Automobile Manufacturers put it "Intermodal has the most competitive alternatives for transportation services, which creates a healthy commercial pricing environment for global shippers." But for customers needing specialized rail cars, the automakers said, "commercial rates may be leveraged due to the captivity of those customers, to subsidize the capital investment in more competitive 'franchises' on the railroad."

The railroads therefore must be prodded to resist "putting undue economic pressure on those commodity shippers (that are) captive to the railroad through geography, specialized equipment needs or scope of volume," the auto alliance said.

The type of rail car used for steel scrap has become an increasing headache. "Much of the current fleet of gondola cars is old and slated for retirement in the next several years, with little or no replacement by the railroads," ISRI told the Surface Transportation Board (STB) last year. "The current shortage of railroad-owned gondola cars is likely to worsen."

So should the government play a role to influence the pace and direction of railroads' capital improvements?

Some shipper coalitions have called for a special investment tax credit for rail carriers.

Regional initiatives of this sort do exist. Serious proposals in Texas and Illinois would include public funding to improve rail freight capacity. A public-private road and rail plan in Texas calls for a corridor from Mexico to the Oklahoma border. A plan for the Chicago area would upgrade four rail transportation corridors for freight movement, with a fifth earmarked for passenger traffic, including the elimination of highway-level grade crossings.

ISRI isn't seeking government dollars for rail investment. The group's October 2007 policy statement instead asked Congress to create incentives for railroads to speed improvements in track and infrastructure. ISRI also called for the removal of "anti-competitive protections afforded to the railroads." How that might play out is debatable.

"The captive shipper problem raises an important policy question for Congress," said John Frittelli of the Congressional Research Service. "Could more rail-to-rail competition lead to a more robust and efficient railroad system or could it undermine it by discouraging investment in rail infrastructure?"

Example If a carrier has 300 miles of track going in a shipper's intended direction but the shipper wants it handed off after 50 miles to a competing railroad with a cheaper rate or better service, should the shipper have the right to insist on the alternate pathway?

Johnson said the lack of route choice sometimes means a scrap shipment is unnecessarily stuck in a switching yard for a day or two until the controlling carrier has a train available heading to the right destination. "When it sits there doing nothing, it costs as much as if it were moving," he said.

The current system also cramps what short-line railroads can do. Typically, they are committed by contract to accept the routing and rates of the adjacent major carrier. The larger railroad might still own the short line's leased track, but even if that's not the case the sale terms that established the short line might have restricted its autonomy. "Paper barrier" is the regulatory jargon for this sort of issue.

How much of an impact would result from letting shippers play railroads off against one another is difficult to guess. The eastern states are dominated by two carriers, CSX Corp. and Norfolk Southern Corp., while the western states are served by another pair, Burlington Northern Santa Fe Railway Co. and Union Pacific Railroad Co. Even if the rulebook were rewritten to foster competition, the vigor of the contest might be in doubt.

A former STB chairwoman, Linda J. Morgan, once warned that a highly competitive pricing structure would favor those customers that could be served most cheaply while providing the highest volumes. She probably had in mind intermodal, coal and grain. A likely outcome would be "a smaller rail system that would serve fewer and a different mix of customers than are served today," she wrote. Her thrust was that non-core customers are likely to be worse off if they try to reshape the system.

That opinion might cut both ways, since she was the first STB chair from 1996 to 2002. Some shipper lobbyists say the STB has dealt more gently with railroads than Congress intended.

Morgan, a 15-year congressional staffer before her STB stint, later joined the board of directors of Canadian Pacific Railway Ltd. She is a partner and the lead transportation attorney at Covington & Burling LLP in Washington, and shows up in a current STB docket as Union Pacific's attorney.


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