EVANSTON, Ill. — The Surface Transportation Board, which regulates the nation’s rail industry, ought to make competition among the railroads its “guiding light,” according to one of the board’s newest members, who also believes shippers “have very little bargaining power” with freight haulers.
And while Class I railroads easily garner the nation’s attention, the importance of short lines to the U.S. rail economy should not be overlooked, says Martin Oberman, one of two STB board members who joined the agency at the beginning of 2019.
The outspoken Oberman’s comments are sure to raise eyebrows with some in the railroad industry, and he acknowledges that.
“The short lines, for the most part, are much more entrepreneurial, much more customer-oriented, and they are much hungrier for business (than the Class Is), in my view,” Oberman says. “And they also don’t cause us as nearly as many headaches.”
Oberman spoke recently at a meeting of the Northwestern University Transportation Center’s Sandhouse Rail Group, focusing on what he has experienced and learned during 10 months of service.
Oberman and Vice Chairman Patrick J. Fuchs were sworn in January to serve on the board of the STB, created in 1995 to replace the Interstate Commerce Commission.
Oberman was widely considered a reformer when he served on Chicago’s City Council from 1975 to 1987. This reputation led to his appointment to Metra’s board of directors by former Chicago Mayor Rahm Emanuel in 2013, he acknowledges. At that time, Metra was still reeling from years of scandal and controversy. Oberman became chairman the following year and served until the end of 2016.
An attorney, Oberman admits he knew little about the freight railroad industry before taking the post, and is still “a novice.” But he considers himself a “professional question-asker” not averse to doing the homework to learn as much as possible, and quickly, about the STB’s duties.
“That’s sometimes the role I play at the STB, much to the staff’s consternation,” says Oberman, adding that he has had long educational discussions with staff attorneys and economists to better understand the agency’s regulatory role.
Oberman also credits advice from Norman Carlson, a longtime railroad consultant who now serves as Metra’s chairman.
“What I found about the railroad industry … is that about half the time I ask a question about why are we doing it this way, there’s a good answer,” Oberman says. “And the other half of the time is, ‘We don’t know why we do it that way. That’s the way we’ve always done it.’ ”
Oberman’s comments focused on several topics:
The importance of short lines
Of the 143,000 miles of railroad lines in the U.S., short lines operate on about one-third and fill an important role often overshadowed by the seven Class I railroads, Oberman says.
Short lines, which at last count total 603, are “absolutely crucial, and also they are a lot more fun to interact with,” Oberman said. He recalled meeting with one shortline owner whose railroad is only a few miles long. “He was the owner, and the engineer, and the switchman, and the maintenance guy,” Oberman says. “He loved being a railroad owner and he was quite good at it.”
Oberman says he was impressed by how short lines are trying to expand their service. One operator in Florida recently told Oberman that he only has two customers but would double his business with a third. “ ‘I am hungry. I will do anything to get a third customer,’ ” Oberman quoted the operator as saying, adding, “I don’t hear that from the Class 1s.”
The role of the STB, regulation and shippers
“The economics of the railroad industry are extraordinarily complicated,” Oberman says, Products ranging from grain to automobiles to chlorine may be hauled on any given train, and every product is subject to different pricing.
“Trying to understand what the real economics are and figuring out how the rates should be managed is really a mind-twister,” he says. “Except for intermodal and a handful of other areas, generally speaking, I think shippers have very little bargaining power these days.
“Some railroads would be very unhappy for me to say that, but I haven’t exactly shied away from that observation. I think it’s really empirical if you look at what’s going on out there. Railroads don’t agree, I can tell you.”
China and foreign ownership
Oberman referred to last month’s decision by the board to allow Toronto’s Brookfield Asset Management and its Singapore-based investment partner to acquire Genesee & Wyoming, a holding company with more than 100 U.S. short lines, for $8.4 billion.
Brookfield and G&W sought to have the transaction exempt from board review, as typically happens when a non-railroad company buys a railroad. The board agreed, but Oberman, in a separate opinion, questioned “whether transactions of this magnitude were contemplated when the class exemption regulations were adopted.”
In this case, the Canadian and Singapore ownership is “fairly benign,” but Oberman says he was concerned about the ramifications if it was China that had wanted to buy the company.
“I would be very troubled about turning that much of the freight network over to some potentially unfriendly foreign power,” Oberman says. “It’s not really our role to stand in the way of foreign investors, but it is our role to protect the freight network. And so it just caused me some concerns.”
Profits and infrastructure
Oberman says a major mandate of the board is to “make sure the railroads have enough money to keep their infrastructure up.” But railroads, like all corporations, are coming under increasing demands from Wall Street to be more profitable.
“The railroads are spending millions of dollars on stock buybacks,” Oberman says. “I’m not anti-corporate. Stock buybacks have a role. But this is, as I said, a regulated industry. (And) when a shipper comes in to complain to (the STB) that he can’t afford the rates — are they charging the rates to keep the rails and ties in good shape or are they charging the rates for stock buybacks? We’re not mandated to protect the stock buybacks.”
On STB as advocate for competition
Oberman acknowledges that he is a liberal and is “not afraid of government.” But he “wouldn’t be the person to tell somebody how to run their business.”
Oberman says, “My answer is, to as best we can, make sure there’s competition in the marketplace and let the market forces determine it. Even that is a big challenge, because there’s so many places where you physically can’t have real competition. … But there are many places where you could have competition and where, if possible, that ought to be our guiding light.
“…And even when we make a decision, and we have some pending now, that involve the potential for increasing competition, I have the distinct impression that the Class 1s, despite the game they talk, don’t really want to compete. And even if you said, no, there’s a customer there that’s dual-served, what’s really going on is, you don’t mess with my territory and I won’t mess with your territory. And they of course deny it.”
Oberman says he’s getting “up in years” (in his 70s) and that he doesn’t plan on changing careers again. “But it could be that some railroads might have it in mind for me, so I don’t know.”
