Transportation:

Thompson Hine's Moreno gives shipper's perspective on rail infrastructure, rate issues

While the U.S. freight railroad industry is pushing Congress to allocate more money for infrastructure improvements, it is also facing criticism for charging shippers unreasonably high rates. During today's OnPoint, Jeff Moreno, a partner in the transportation group of Thompson Hine, gives the shipper's perspective on some of the biggest issues facing the rail industry, including infrastructure improvements, capacity and rate increases. In his practice, Moreno has represented large and small shipper interests, including DuPont. He discusses the key policy decisions that will be made on transportation infrastructure in the coming months and gives his take on whether or not railroads can keep pace with rising demand.

Transcript

Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. Our guest today is Jeff Moreno, a partner in the transportation group of Thompson Hine. Jeff has represented large and small shipper interests in his practice. Jeff, thanks for being here.

Jeff Moreno: Thank you for having me, Monica.

Monica Trauzzi: Jeff, something we're hearing a lot about on the campaign trail is improving the nation's transportation infrastructure and the rail industry is in full focus when it comes to this issue. How key are the policy and infrastructure decisions that are going to be made in the next couple of years to the future of the rail industry and the future of shippers that rely on the rail industry?

Jeff Moreno: I think it's going to be critically important for our entire country. The industry itself is experiencing a significant capacity constraint when it comes to infrastructure today. And no matter what estimates or projections you look at, we do not have the capacity in our country, either rail industry or highways, to handle the projected increase in traffic, which is going to have significant ramifications for our economy if we don't address this and get ahead of the curve.

Monica Trauzzi: What does this all mean for shippers? How are shippers, because I know that you've represented shippers, how are they being impacted by the strain on capacity?

Jeff Moreno: The most immediate effect that we are seeing now is rates, particularly on the rail side. If you are a bulk shipper in particular and have very few competitive options, you are seeing your rate increases significantly over the last four or five years, ranging anywhere from 10 percent a year to, in some cases, we're seeing rate increases over 100 percent.

Monica Trauzzi: So, does that really add up if there are rate increases but there aren't improvements being made to infrastructure? Why does the rail industry work differently than other industries? Other industries, demand goes up, prices go up, they put more money into improvements.

Jeff Moreno: That's the problem that most shippers are facing here, is, particularly when you're talking about bulk commodities, grain, coal, chemicals, steel, they have very few options other than to go by rail, particularly over longer distances. And what has happened in this country is that we, through mergers, since 1980, we're now down to essentially duopolies in the eastern/western United States, two railroads. And very few shippers have access to more than one railroad. Therefore, there's no competition from rail. What little competition there is comes from trucks, but trucks do not provide a lot of effective competition on bulk commodities, particularly at longer distances. And with rising fuel costs, trucks are becoming even less competitive. So what we have is an industry, such as the roads, which have high capital costs, high barriers to entry which prevent new competitors from entering into the market and, therefore, bringing down rates.

Monica Trauzzi: So, can the rail industry keep up with rising demands? And I know you'll answer that from the shipper's perspective.

Jeff Moreno: I think the rail industry is fully capable of keeping up with rising demand. The concern that shippers have is does the rail industry have adequate incentives to keep up with rising demands? When you have a monopolistic industry that for the first time in 100 years is experiencing capacity constraints and, therefore, now has marketing leverage to raise rates significantly, what incentive do they have to add sufficient capacity that's going to bring those rates back down?

Monica Trauzzi: They say that they need more support from the government looking at some policy options relating to that. Should the government be assisting here in getting the infrastructure to a place where capacity or demand can be met?

Jeff Moreno: Well, the rail industry has proposed legislation in Congress that could give them an investment tax credit. And on a conceptual level, the shipping community does not oppose such legislation, but such legislation has to be considered in the context of the competitive structure that exists in the rail industry today. And shippers' competition issues need to be addressed, together with the investment tax credit issues. I think if we can get some sort of collaborative effort to address both our concerns as shippers and the railroad's concerns for infrastructure, I think we would all be on the same page.

Monica Trauzzi: A few months ago the Surface Transportation Board ruled that CSX was charging unreasonably high rates. You represent DuPont in your practice, talk about what that decision means for future rate cases and where the controversy over rate increases goes from here after the ruling.

Jeff Moreno: Sure, the DuPont cases were the first cases brought under what the STB calls it small rate case standards. The board has had large rate case standards in place for decades, but those standards are so complex and the evidence required and the time required are so costly, we're talking up to $4 million to litigate a case over perhaps three years to get a decision. Most shippers, like chemical shippers, such as DuPont, don't have the volume of traffic or the repetitive nature of this traffic in order to take advantage of the large rate cases. These new small rules were designed to help shippers like DuPont and many who have similar shipping patterns. And what we've seen, and I think significance of the STB's decisions in the DuPont cases, is that there is a willingness of the board and there is now a procedure in place that shippers, like DuPont, can use to obtain rate reductions when the increases are so high. Now, it's an imperfect system though. The rate reductions that DuPont received are still at levels that are considered to be excessively high, because these simpler standards tend to produce rates at a higher level than say the large case standards would produce. But nevertheless, the fact that there were significant rate reductions and rate reductions that were sufficient, more than offset the cost of the litigation. That shows that there is some relief out there for the shipping community.

Monica Trauzzi: So, are we going to see a slew of rate cases come about?

Jeff Moreno: That's an interesting question. I think we're going to see some more, but I don't think the floodgates are necessarily going to open. What you would hope would happen is that as more decisions come out and we see some more predictability in the standards, that both the shippers and the railroads would begin to understand what their exposure is in these types of cases and they will negotiate to that middle ground without having to litigate. But I think there will be some more cases before we get to that point.

Monica Trauzzi: Prior to the congressional August recess, the rail industry had this huge PR push touting rail as the future of transportation in a carbon constrained world. Do you think that PR push had anything to do with this negative attention that the rail industry has been receiving because of high rates? Is there any link between the two?

Jeff Moreno: Tangentially there is. I think the rail industry's PR push has a twofold objective. One is to support their investment tax credit and the other is to head off legislative proposals that the shipping community has out there to address the competition issues.

Monica Trauzzi: You mentioned the trucking industry earlier. How much of a competition exists between the trucking industry and the rail industry and do the shippers sort of get stuck in the middle there?

Jeff Moreno: The level of competition depends on the commodity you're moving and the distance you're moving. There are certain areas, short-distance trucks tend to be more economical; longer distance is rail intensity and more economical. We are seeing a certain amount of cooperation between the trucking industry and the rail industry when it comes to intermodal transportation because you start off on truck, you go on rail and then you end up on a truck. But there is also a certain amount of tension between the two industries as well, particularly with the trucking wanting longer and heavier trailers, which the rail industry opposes as being unsafe. And clearly, the unspoken rationale for the rail industry's opposal is that the more trucks can haul, the more efficient they become and the more competitive they become relative to rail.

Monica Trauzzi: And we're going to be talking to the trucking industry in the coming week, so it will be interesting to get their perspective as well. Before I let you go I wanted to just talk about hazardous materials, because I know that that's another issue that's facing shippers in the rail industry. The rail industry basically wants less liability for what's being shipped. Shippers say they don't really have control over what's being shipped. Who needs to take the blame for issues with hazardous materials?

Jeff Moreno: The issue here is the real industry is concerned about hauling what we call particularly toxic inhalation hazards, TIH materials, and that's like chlorine and hydrous ammonia. These are materials that are essential to our economy and you look around this room and virtually everything in this room as a chlorine base in it, for example. But if there's an accidental release of these materials, there can be significant liability. We saw accidents in Graniteville about three years ago. And the rail industry is concerned that they're required to haul these materials, but yet they're exposed to liability if there's an accident. So, therefore, they would like to have some liability caps, but recent efforts have been attempted to shift that liability to their customers, the shipping community, by requiring indemnification from the shipper of the railroad in the event of an accident. And the shipping community is adamantly opposed to that because they have no control over this material. Once they hand their car over to the railroad, how the railroad handles it is totally out of the shipper's control, so no shipper wants to be held liable for the negligence of the railroad if the accident is caused due to some failure of the rail industry to maintain its track or some human error. And that, I think, is another issue.

Monica Trauzzi: It sounds like both have a strong case though.

Jeff Moreno: There certainly are arguments that are going both ways, but the fact of the matter is you cannot isolate the liability issue from the competition issues and the rate issues. And if you are going to for example have a reduction in liability, you need a corresponding reduction in rates, for example, which the railroads are charging to cover their liability risk. And I think you also have to ask, at the end of the day, whether this liability risk is as significant as the rail industry claims it to be. Because the accidents that have occurred have occurred on usually rural areas at high speeds and there are no incidents, for example, in urban areas where you have signaled track and you're traveling at lower speeds, that the risk is nearly as great as the rail industry suggests it might be.

Monica Trauzzi: OK, we're going to end it there. Jeff, thanks for being here.

Jeff Moreno: Thank you.

Monica Trauzzi: And thanks for watching. We will see you back here tomorrow.

[End of Audio]

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