A Switch on the Tracks: Railroads Roar Ahead

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Railroads Raise the Roof

Staff Writer Frank Ahrens talks with Norfolk Southern engineer Bob Billingsley about expanding a Norfolk Southern tunnel in southwest Virginia to make way for double-stacked railcar containers. The railroad industry is enjoying a building boom as soaring diesel prices and a changing global market drive freight back to the rails.

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Seven railways control nearly all of the freight shipped in the United States. In the West, they are, from largest to smallest by track mileage, Union Pacific, BNSF, Canadian Pacific/Soo Line and Kansas City Southern. In the East, they are Norfolk Southern, CSX and the Canadian National/Grand Trunk lines. Most of them have extensive expansions planned or underway.

The companies are attracting the attention of big-money investors, such as Berkshire Hathaway Chairman Warren E. Buffett, who sees a future in the Industrial Age behemoths. Buffett, a Washington Post Co. director, began loading up on shares of BNSF last year and is now its largest shareholder, with more than 18 percent of its outstanding stock.

The industry estimates it will take $148 billion in expansion to carry the amount of traffic anticipated by 2035. Of that, the railroad companies will contribute $96 billion, said the industry's trade group. The rest would have to come from the federal government and the states.

The railroads argue that more trains mean fewer trucks on the road and less air pollution, public benefits that the public should help pay for. Further, the railroads could not achieve the profits they say Wall Street demands without government subsidies. The railroads seek a tax credit, backed by Sen. Kent Conrad (D-N.D.), that would help them expand further.

Meanwhile, the railroad industry's long-standing antitrust exemption has attracted the attention of lawmakers. They seek to eliminate the exemption and closely examine the rates railroads charge to haul freight, which the industry says would cripple its expansion at a critical time.

The railroads' rate structure has also drawn the ire of some of their customers: Nearly 30 antitrust lawsuits have been filed against major railroads in recent months, including one by agri-giant Archer Daniels Midland last month, alleging collusion and price-fixing.

For some lawmakers and advocacy groups, today's rail industry recalls that of the late 1800s, when the only ceiling on rates was the limit of a rail baron's avarice. The railroads say today's rates are reasonable and reflect something the industry has not had in decades: pricing power.

"Customers had gotten used to rates going down all those years, and all of the sudden, they're not anymore," Norfolk Southern vice president James A. Hixon said in an interview. "They don't like it."

Sen. John D. Rockefeller IV (D-W.Va.), whose state depends on trains carrying coal, introduced a bill last year that the railroad industry derides as the "Reregulation Act."

The legislation, which has not been scheduled for a floor vote, would allow shippers to easily challenge railroad rates at the Surface Transportation Board, which regulates the rail industry. Now, some shippers say, they have almost no recourse if they think the railroads are gouging them.

"It's a byzantine system, and it's rigged against the shippers," said Robert Szabo, executive director of Consumers United for Rail Equity, a coalition of shippers who say that the railroads' monopoly pricing structure raises the cost of consumer goods.

The railroads "have been in a seller's market since 2004," said Szabo, whose group backs Rockefeller's legislation.

Sen. Herb Kohl (D-Wis.) introduced a bill last year that would remove the railroads' antitrust exemption. Unlike other industries, the Department of Justice cannot block a merger between rail companies, and the STB has been criticized for siding too often with the industry.

"Competition has virtually gone away," Kohl said in an interview. His bill has not been scheduled for a floor vote. "They have carved up the country, and each [railroad] controls its vast area."

Sen. Byron L. Dorgan (D-N.D.), a co-sponsor of both bills, cites an example: The railroads charge four times as much to ship a carload of grain from Bismarck, N.D., to Minneapolis as they do to ship it from Minneapolis to Chicago, although the distances are about equal. The reason: Shippers have only one choice of railroad out of Bismarck.

The railroad industry calls it "differential pricing," and "it occurs every day in the airline industry," said Edward R. Hamberger, president of the railroad trade group.