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UNITED STATES Eye-to-eye with a runaway engine racing down the tracks

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A showdown between the steel and railroad industries is under way.

It begins with a House Transportation and Infrastructure Committee hearing. The central question is whether the railroad industry, which was deregulated 27 years ago during a period of financial crisis, has grown too consolidated and too powerful. As a result of deregulation, the number of Class I railroad companies serving North America has dwindled from 40 in 1980 to just seven today.

Steel producers forced to rely solely on Class I railroads have been particularly impacted by deregulation, according to the Steel Manufacturers Association (SMA). Those "captive shippers," in industry jargon, have long complained about the lack of competition, deteriorating service and rising prices. On average, rail rates are up 5 to 8 percent from a year ago, the SMA said, and the increases are even more dramatic for captive shippers, with some citing increases as high as 50 percent.

"These rising transportation costs are a real concern for steelmakers," said Adam Parr, manager of public policy for the SMA, which is leading the charge to break what it says is a monopoly on rail service by Class I railroads.

The complaints of shippers have mostly fallen on deaf ears in the past, but steel manufacturers have reason to believe that things could be different this time around. Democrats, who are typically more sympathetic to shippers' viewpoint, now control Congress, and Rep. James Oberstar (D., Minn.), a member of the House Steel Caucus, is chairman of the Transportation and Infrastructure Committee. The Sept. 20 committee hearing marks the beginning of Oberstar's push to get his railroad competition bill, H.R.2125, through the committee and perhaps to the House floor.

Oberstar, a congressional veteran who actually voted in favor of the Staggers Rail Act that deregulated the industry 27 years ago, said that legislation has been successful in helping railroads recover from their previous crisis. Industry rates of return that hovered in the 1- to 2-percent range in the 1970s were between 6 and 9 percent in the 1990s. Today, U.S. railroads account for 42 percent of intercity freight ton-miles, more than any other mode of transportation.

The unprecedented consolidation of the railroad industry following deregulation has resulted in entire states and industries becoming dependent on a single Class I railroad. "These captive shippers are charged rates so much above competitive rates that they cannot compete in world markets," Oberstar said in a recent speech.

Oberstar said that if it wasn't for the roughly 300 new lower-cost, short-line railroads that have been created in the past two decades, which account for about one-third of the nation's freight rail network, "thousands of our nation's farmers and small businessmen would have no access to markets."

The railroad industry claims that Oberstar is trying to re-regulate the industry, and that doing so would hinder railroad infrastructure investment, resulting in more traffic congestion on already crowded highways. The railroads also claim that average rail rates have declined by more than half on an inflation-adjusted basis since deregulation.

"The rail industry is strong, competitive and thriving because Congress wisely chose to get out of the railroad business in 1980 by allowing railroads to operate like market-focused businesses," said Edward R. Hamberger, president and chief executive officer of the Association of American Railroads.

Oberstar insists that his bill will not re-regulate the industry, but reduce impediments to competition that adversely affect rail customers. He accused the Class I railroads of launching a campaign to scare the short-line railroads into opposing the bill. "One provision in my bill will specifically help short-line railroads and shippers by eliminating artificially created paper barriers, which require a short-line railroad to deliver all or most of its traffic to the Class I railroad that originally owned the short line," he said. "Those paper barriers are an impediment to competition. There is a persuasive case that they actually prevent short-line railroads from earning more revenue."

Meanwhile, steel producers say they understand that they risk retribution by coming out too sternly against railroads. But given the failure of the Surface Transportation Board to act on their behalf, the SMA says shippers have no other option but to push for legislative remedies.

"The SMA has no interest in bashing the railroads unnecessarily or in having an adversarial relationship," Parr said. "Steelmakers are dependent upon efficient and reliable rail service, and we are pleased to see the renewed health and vitality of the major North American railroads. We are, however, concerned with the lack of competition that exists in the current system, and the deteriorating service, coupled with increasing rates, that has resulted."


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