Rails Could Lose Last Antitrust Immunity

March 11, 2009
The Railroad Antitrust Enforcement Act would eliminate the last antitrust immunities railroads have.

There are still many steps before it could become law, but the Railroad Antitrust Enforcement Act of 2009, introduced by Senator Herbert Kohl (D-WI) is expected to pass and be signed into law if it gets to the floor of Congress. The law would give more responsibility for rail mergers to the Dept. of Justice and, say industry sources, could lead to more law suits.

The bill was reported by the Senate Judiciary Committee on the same day the Association of American Railroads (AAR) released its current rail traffic report indicating February 2009 US carload traffic fell 14.5% compared to February 2008. Rail intermodal traffic fell 18.7%.

“Obviously, it’s still a very difficult economic environment out there for railroads and their customers,” said John T. Gray, AAR senior vice president. “Time will tell how quickly the economy recovers. In the meantime, we’re hopeful that policymakers focus on growing the nation’s rail networks so more people and more goods can move by rail.”

Against this backdrop, the office of Herbert Kohl (D-WI) said the senator introduced the bill “in response to concerns that freight railroads are abusing their dominant market power and raising rates for those who rely on them to ship dozens of vital commodities, including coal and agricultural products.” The announcement out of the Senator's office continued, saying, “Over the last 20 years, railroad industry consolidation has reached the point where only four class I railroads provide over 90% of the nation’s rail transportation.”

In many cases the ordinary protections of antitrust law are unavailable to these captive shippers—instead, the railroads are protected by a series of exemptions from the normal rules of antitrust law to which all other industries must abide.

Railroad mergers and acquisitions are exempt from antitrust law and are reviewed solely by the Surface Transportation Board, according to Kohl. Railroads that engage in collective ratemaking are also exempt from antitrust law, and Kohl’s bill would eliminate these antitrust exemptions by allowing the federal government, state attorneys general and private parties to file suit to enjoin anti-competitive mergers and acquisitions. “It will restore the review of these mergers to the agencies where they belong–the Justice Department’s Antitrust Division and the Federal Trade Commission,” said Kohl, “and it will eliminate the antitrust exemption for railroad collective rate making.”

Reacting to the news, the AAR said the bill “will impose confusing, overlapping regulatory schemes.” At the same time Kohl's bill is being discussed, the Senate Commerce Committee is developing legislation that would subject railroads to more economic regulation by the Surface Transportation Board (STB), said AAR.

“We face two disparate schemes that spell nothing but confusion for the railroads and those charged with enforcing the regulations,” said Edward R Hamberger, president and CEO of the AAR. “Congress should be promoting poicies that help jumpstart the economy and regain consumer confidence, not overburden an industry that stands ready to get America back on track,” he continued.

Hamberger pointed out that all railroad practices exempt from antitrust laws are subject to STB jurisdiction. “Eliminating the railroads' exemptions would not fill any void in the law. It would, however, create a scenario where multiple agencies have overlapping authority over railroads,” he said.

“The antitrust exemption bill hasn't passed yet, but it probably will,” said William Greene, Morgan Stanley Research. “The bill would need to come to a vote on the Senate floor and then be reconciled with any bill that comes out of the House. Therefore, the final version could differ materially from the current version, which is itself incomplete. We believe the bill has a high likelihood of ultimate passage.”

Greene says the bill would have minimal impact on pricing. “Under the proposed bill, rate cases will still run through the STB. The DOJ has no say over how much a railroad can charge to move freight. There is nothing illegal about having captive customers, and most captive customers are under contract, which could suggest more limited legal options. So, we don't see the proposed bill as having a meaningful impact on rail pricing.”

“There is little evidence of collusion or price fixing,” said Greene. “Many politicians claim rails are overcharging and abusing monopolistic powers, particularly on fuel. We disagree, but under this proposed bill, it is possible we see increased lawsuits against rails in which shippers claim antitrust violations. Even if these antitrust suits prove baseless, there is the risk rails could face higher legal fees if carriers are forced to fight more anti-trust cases.”

John Larkin, Stifel Nicolaus, notes, “Under the current limited antitrust exemption, shippers can not sue railroads over rates. Instead, shippers are allowed to appeal rate cases to the STB. Passage of the Railroad Antitrust Enforcement Act into law would result in the Department of Justice, in addition to the STB, having authority over railroad mergers and "captive" shippers having the added ability to sue railroads under antitrust laws,” he continued.

Larkin cautioned, “The bill could result in shippers suing the same railroads in multiple jurisdictions, essentially creating an atmosphere where railroads (and perhaps shippers too) are spending more money and resources on rate cases. Another possible outcome of the Justice Department overseeing "captive" shipper cases is that it could result in a streamlined process for shippers to contest rate cases. We view any potentially streamlined process as a risk to rail pricing because the current rate appeal process, which goes through the STB, is expensive and time consuming. Most rail shippers do not spend enough on rail transportation to justify risking $2 million-$3 million to contest a rate case,” he observed.

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