By Anita Meier, The Capital Times
May 12, 2006

Utilities Lead Charge Vs. Railroads
State Groups Claim Monopolistic Costs

Several Wisconsin industries have banded together to try to persuade Congress to lift the railroad industry's antitrust exemption because of what they say are unreasonably high freight hauling rates and poor service.

John Sumi, a spokesman for Badger-CURE (Customers United for Rail Equity), said the group has contacted the Wisconsin congressional delegation and received support from several members. Reps. Mark Green, R-Green Bay, and Tammy Baldwin, D-Madison, sponsored a bill last year that would end the exemption, but the bill stalled.

The exemption movement started with complaints from electric utilities that high prices were being charged for delivery of low-sulfur coal from the West. Companies from the paper, lumber, packaging, metal and agriculture industries have since climbed aboard.

"It is clear that Wisconsin cannot thrive without dependable and economically reasonable rail service," the Badger-CURE coalition wrote to members of Congress. 

"Since the railroad industry was deregulated, the industry has consolidated from over 40 major railroads into seven -- with four of those now handling 90 percent of our nation's total rail traffic. The lack of adequate competition in the railroad industry has led to declining service standards, increased unreliability of shipments, and unreasonably high rates for many of the state's most important industries."

Robert Szabo, a spokesman for a national CURE group, alleged in an interview in Madison that "railroads are dividing territory and not competing. There is no incentive to provide enough capacity to reduce their pricing power."

The state and national CURE groups contend that the federal Surface Transportation Board, which is part of the U.S. Transportation Department, has failed to perform its duty of protecting "captive customers" served by only one railroad from unreasonably high rates and poor service standards.

"The outgoing chairman of the STB testified to Congress that bringing a rate case before the STB typically costs a rail customer $2 million to $3 million and takes a minimum of two years to prosecute," Badger-CURE wrote.

The state Public Service Commission has opened an investigation into the rate and service issue and its effect on electricity generation and costs.

"We are doing an overall investigation as to what we can do as a state to impact the high cost of natural gas and coal, which is a substantial driver of production of electricity in Wisconsin," said Linda Barth, a spokeswoman for the PSC. "We are asking stakeholders and utilities to send information on impacts they are feeling from rail costs and problems with shipments."

Additionally, the PSC and the state Department of Agriculture, Trade and Consumer Protection sent a statement to the STB in April urging the board to "use its authority to protect rail customers and consumers" and "to reform monopolistic railroad practices, curb recent dramatic price increases, and ensure reliable service at just and reasonable rates."

"Almost 25 percent of railroad freight in 2004 involved the delivery of coal. Wisconsin utilities burned 24.76 million tons of coal at an estimated cost of over $541 million," the letter said. "Wisconsin produces about 60 percent of its electricity from coal, most of which comes from the Powder River Basin in Montana and Wyoming and the Appalachian region. There are only two railroad companies available to ship coal from these areas.

"Without reliable coal transportation, utilities must conserve their coal inventories, using higher priced natural gas-fired generation to produce electricity, adding to the cost of energy in Wisconsin. Last year, Wisconsin utilities incurred nearly $50 million in costs associated with reduced shipment from Wyoming, the result of a train derailment and resulting rail maintenance."

A spokesman for the Surface Transportation Board did not respond to a question about criticisms of the board. But the STB conducted a hearing Thursday regarding fuel surcharges charged by railroads. And Tom White, a spokesman for the Association of American Railroads, had plenty to say in defense of the railroad industry.

"From 1981, when railroads were partly deregulated, to 2004, the average rail rates for moving coal declined by 33 percent, while average electric rates increased by 35 percent. So when utilities start pointing fingers, maybe they ought to look in a mirror," White said.

Prior to that deregulation, more than 20 percent of the railroad industry went into bankruptcy, accident rates were soaring and freight rates were rising faster than inflation, according to White.

He conceded that freight rate increases occurred in 2005, a year for which the association does not yet have data.

"At the same time utilities are making these claims, they are asking railroads to invest billions of dollars to increase capacity," White said. "There is a disconnect. If you restrict our rates we won't have those billions to invest. And Wall Street has said that if you do this to the railroads, investment capital will dry up."

He also complained that for years utilities were putting billions into natural gas use and reducing coal use, but now that natural gas prices have soared, they expect railroads to suddenly be able to meet increased coal demand.

"You can't immediately increase capacity. Right now, all of the freight car builders have back orders into next year," White said. "We have been hiring full blast for the last two years. For the first time in six decades, the number of people employed by the railroads has increased. But it takes about six months of training before a new employee can start, and we had a wave of retirements early in this decade."

Railroads have put more money into capital improvements than any industry -- an average of 18 percent of revenues over 10 years, according to White.

"This year railroads are putting a record $8.3 billion into capital improvements including adding freight cars, locomotives, increasing track capacity and upgrading signal systems," he said.

The two railroads that serve the Powder River Basin coal country have announced plans to do more triple tracking and quadruple tracking in some areas, he added. "Demand has increased and they see a long-term demand," White said.

Szabo contended that some utilities and ethanol businesses have had to buy or lease additional rail cars, but White said there is no requirement to do so, though those that do lease or buy get lower rates. The share of cars owned by leasing companies and shippers has increased because customers have seen it is in their best interest to invest in cars because railroads to do not have enough capital to cover everything, White added.

"We are making a concerted effort to increase our capacity so we can handle more freight of all kinds and we want all of that business. But it takes time to resolve these capacity issues," he said. "Track costs $2 million a mile, new locomotives cost more than $2 million each and freight cars start at $50,000."