Mar 15 2001

OPENING STATEMENT FOR HEARING ON RAIL COMPETITION AND MOBILITY ISSUES

 U.S. Senator Richard C. Shelby (R-AL), Chairman of the Senate Transportation Appropriations Subcommittee, today chaired a hearing on rail competition and mobility issues:

"After holding a number of hearings on the commercial airline industry and a first hearing on the freight rail industry last year, it's fair to say that I am very interested in competition. I am a staunch advocate for deregulation. Accordingly, I have an unrelenting faith that free markets, through the pricing mechanism, will bring about the optimal allocation of resources and maximize economic growth. These benefits won't be realized, however, without robust competition. That is why I believe the transportation system _ not to mention our economy as a whole _ is best served by rigorous and frequent inspection of the competitive nature of various transportation industries with a vigilant pursuit of policies that promote competition."

"Deregulation will not succeed without healthy competition between the carriers. Without competition, firms lose innovation and dynamism and instead become preoccupied with protecting what they have, maximizing revenues from customers without improving service, and often seeking regulatory blessing to further isolate them from competitive pressures. That is not competition. That, my friends, is a sign of an industry in decay. Transportation services are too vital to the American economy, to the American way of life, to our quality of life, to our national security, and to our international competitiveness to allow our transportation industries and infrastructure to stagnate and deteriorate.

"Most, if not all, legislation that becomes law reflects compromise that is inherent to American system of government. Consequently, many efforts to deregulate end up only partially deregulating an industry. There are numerous examples of this: the airlines, savings and loans, and more recently electricity in California. The problem is that deregulating part, but not all, of a market does not bring all the benefits of a free market and therefore does not necessarily make things better for consumers. So it is for freight rail. It is clear that the Staggers Act has not benefitted some shippers _ the captive ones who have fewer transportation options or lack genuine rail-to-rail competition. Sometimes it is as important to insure adequate competition as it is to pursue deregulation.

"That is one of the reasons why I wanted to have this hearing on rail competition and mobility today. Although I understand and appreciate that the ability to engage in `differential pricing' is important to the rail industry's financial health, I would like to better understand why the rail industry feels that it needs to keep so many of its customers "hostage" to a single railroad in order to engage in differential pricing.

"Like the railroads, companies in other industries engage in differential pricing and consider it critical to success, and again like the railroads, companies in these other industries are characterized by a high proportion of fixed and capital costs. Movie theaters charge less for matinees than for evening showings and give discounts to children and senior citizens. Phone companies offer long-distance service at different rates depending on time-of-day or customer monthly call volume. Hotel rates vary for weekdays and weekend stays and for high-demand events such as the Super Bowl or conventions. Unlike the railroads, however, companies in these other industries compete with each other. They are not allowed by the Federal government to maintain monopoly control over particular customers. Companies in some of the other industries I mention thrive in competitive markets, so I don't believe that free and open competition will undermine the ability of railroads to charge differential rates. But competition will ensure that the optimal level of rates is achieved _ a rate that raises sufficient revenue to continue capital investment programs and provides efficient service to its customers.

"I also want to better understand why a shipper who orders a unit train of chemicals has to talk with a "chemical" salesman from a railroad, while, if the same shipper wants to ship a unit train of milk or molasses or grain, he has to talk with the salesman for that product and pay a different rate _ even if the entire shipment is headed to roughly the same location. I think the reason is that railroads compete with other modes of transportation, but the railroads do not compete enough with each other. This practice has the result of alienating customers, focusing the salesmen more on maximizing revenues than on servicing customers, and discouraging cost efficiencies within the railroad.

"The problem isn't that railroads have an incentive to antagonize or gouge some of their customers, but rather that the railroads lack an incentive NOT to antagonize or gouge some of their customers. That comes from not enough competition between the railroads.

"When each of the railroad companies testifying here today came to the Hill to quell opposition to their individual mergers, they stressed the resulting service improvements that would come from each merger. In fact, at one of my first hearings as subcommittee chairman, Norfolk Southern Chairman and CEO David Goode [GUUD] testified that the proposed CSX/Norfolk Southern buyout of Conrail was a "pro-competitive proposal" that would bring "the benefits of better service ... to shippers throughout the United States" and that "there will be a blossoming of competition, the likes of which the Northeast has not experienced in decades."

"I hate to break the bad news, but I'm not hearing from any shippers about how service has improved or how overwhelmed they are with competitive alternatives. Neither have I heard of any new service awards being presented to the railroads nor any management consulting firms touting railroad customer service practices as a model to improve any other industry _ except maybe the airlines.

"In some ways, the railroads and the airlines are uniquely similar. They both have substantial, if not insurmountable, barriers to entry for new competitors, they have both moved from rate regulation to an economically deregulated environment, both industries are currently more focused on merging and expanding their "network franchises," both are increasingly focused on maximizing revenues from customers rather than working with customers to meet and grow their businesses, and they only compete with others in their industries in either a non-price manner (frequent flyer programs), or when they absolutely have to.

"Now, I know that many railroads and airlines will say that Congress should not `re-regulate' them. I agree. Let me repeat that and say it really slowly for some of their lobbyists here today: I have no interest in re-regulation. But if the railroads want to be re-regulated, they should just keep doing what they are doing.

"You won't hear me in support of open access, but you might hear of my support for policies to enhance rail competition as an alternative to rail re-regulation. The problem with crying `re-regulation' whenever someone expresses an interest in the health of competition in an industry is that, when the real re-regulators come along, you may look back fondly at some of the suggestions made by a free-market advocate like this Senator."